Australian
drinks supplier Steggall Nutrition obtained High Court permission to access
records held by liquidators of insolvent company South Pacific Brands after
alleging directors of South Pacific ripped off creditors by trading insolvent
long enough to pay favoured creditors and then quietly sold off remaining
assets in a deal allegedly unfavourable to unsecured creditors.
Auckland insolvency
specialists Lloyd Hayward and Jeff Meltzer were appointed liquidators of South
Pacific Brands Ltd after the company was put into liquidation by shareholders
in May 2014. South Pacific was owned and
managed by Steven Shaw and Andrew Smith.
On liquidation, Steggall was
left unpaid, owed some $22,500 for goods supplied the previous February. Steggall learnt from the liquidators’ report
that South Pacific had been trading insolvent since about mid-2013 and during
that time company indebtedness was reduced by 67%: a reduction of indebtedness
by $3.7 million. The liquidators decided
not to pursue directors for reckless trading.
The directors when winding down the business achieved returns which were
as good as if not better than that any a liquidator could achieve, the
liquidators surmised in a written report to creditors.
Steggall was annoyed. South Pacific got hold of Steggall’s goods
valued at $22,500 at a time when the company was committed to selling off all
remaining stock in a bulk deal. Steggall
said it was becoming an unsecured creditor when money coming in would be used
to pay South Pacific’s secured creditors including secured debt owed to three
different interests associated with South Pacific’s owners, leaving nothing for
unsecured creditors.
The High Court was told
Steggall asked the liquidators for access to South Pacific’s records. In particular it wanted to see the company’s
financial statements, details of those claiming to be secured creditors and the
contract for sale of remaining stock.
Liquidators are not obliged to release company records. Mr Hayward said the Companies Act required
Steggall to get a High Court order for the release.
To pre-empt the cost of a High
Court application, Steggall as a creditor demanded the liquidators call a
creditors’ meeting to have a liquidation committee appointed. Designed to assist a liquidator, members of a
liquidation committee can have access to company records. An initial creditors meeting in early August
2014 resolved not to appoint a liquidation committee. This result was achieved with the votes of a
previously undisclosed creditor; a creditor owned and controlled by South
Pacific’s directors. At a second
creditors meeting three weeks later, a liquidation committee was appointed but
Steggall was outvoted in its attempts to become a member.
In the High Court, Associate
Judge Osborne ruled Steggall was entitled to inspect specified documents held
by the liquidators because there had been a failure to make a full investigation
of the manner in which South Pacific directors sold down company assets. Evidence indicated that the liquidators
accepted uncritically the directors’ narrative of what had happened and why it
had happened; that a shortfall for creditors resulted from “poor trading
results across February and March 2014 and an unexpected inventory write down”.
Judge Osborne said there are additional
lines of enquiry which might lead to a different conclusion regarding potential
liability for reckless trading. Steggall
indicated a willingness to bear the initial costs of such an investigation.
His Honour imposed
restrictions, ordering that only Steggall’s legal and accounting advisers could
inspect selected company records: South Pacific’s financial statements for the
2013 and 2014 years; limited information from South Pacific’s management
accounts; and the contract for the final sell-down of South Pacific’s assets
(with some deletions for reasons of commercial confidentiality but with the
contract price not to be deleted).
Steggall
Nutrition v. Hayward – High Court (10.3.15)
15.016