Liquidation: Steggall Nutrition v. Hayward

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

Fraud: Reynolds v. Calvert

Reclassifying accounting entries to fraudulently disguise a $740,000 advance by failed Otago property company James Developments Ltd to a family trust set up by its controlling shareholder Chris James was brazenly admitted when he then challenged the company’s liquidator ability to sue.  James argued the money was not recoverable, it was statute-barred.

The High Court was told Mr James controlled James Developments.  Through a family trust, he borrowed $740,000 from his company in October 2006 to build a substantial family home at Jacks Point, in Queenstown.  For his company, this loan was an asset – money to be received in the future.  For trustees of the trust, this was a liability - money to be repaid in the future.

The future arrived when James Developments went into liquidation in July 2009.  Evidence was given that in the days prior to liquidation Mr James met with his professional advisers to deal with the ticklish question of the company’s $740,000 advance.  A liquidator would be expected to call in the loan promptly.  A lengthy company resolution with accompanying narrative was signed by Mr James stating the $740,000 advance was not a loan, it was the repayment of monies previously advanced to the company by himself and interests associated with him.  On the strength of this resolution, Mr James’ accountant Mr Todd Miller then reclassified the transaction in the financial statements of James Developments from a loan to repayment of earlier advances.  At the court hearing, two lawyers present at the meeting said they had no recollection of discussions about the proposed reclassification.  Justice Dunningham said Mr Miller who drafted the resolution knew it was factually inaccurate. 

While the company went into liquidation in July 2009, Mr Grant Reynolds was not appointed liquidator until November 2010.  He replaced prior liquidators who resigned.  The court was told Mr Reynolds had considerable difficulty getting explanations from Mr Miller about company transactions.  Responses were dilatory, often sparse to the point of obscurity and sometimes evasive. Both Mr Miller and Mr James were formally interviewed by the liquidator in May 2012.  The following month, Mr Reynolds advised the trustees that he did not accept the “reclassification” as being valid and demanded repayment to James Developments Ltd of the $740,000 advance.  Litigation followed.  Mr James family trust acknowledged the reclassification was a fiction, but said it was too late to recover the money.  Loans not recovered within six years of falling due are statute barred: the Limitation Act prohibits any action for recovery.  The $740,000 loan was made in October 2006.  The family trust argued time ran out in October 2012 and the liquidator could no longer sue.  Justice Dunningham ruled the advance was an on demand loan.  Liability for repayment does not arise until demand is made.  Her Honour further ruled that since the reclassification amounted to a fraud, time does not start running until the liquidator could reasonably have been expected to discover the fraud.  She said the fraud was actually identified in June 2012 when Mr Reynolds formally interviewed the accountant, Mr Miller, and the fraud was not reasonably discoverable before January 2011 when Mr Reynolds was having trouble reconciling the conflicting financial information available.  She ruled the six year time limit did not start running until January 2011.  The liquidator took legal action within that time.

Trustees of the family trust were ordered to repay $740,000 to James Developments Ltd.  Mr Chris James is not a trustee of his family trust.

Mr James, as director of James Developments Ltd, was held to be in breach of his duties to the company by orchestrating the fraud.  No damages were ordered.  The company had not suffered a loss; the accounting entries had been reversed and the loan was to be repaid.

Reynolds v. Calvert – High Court (9.03.15)

15.015

Blue Chip: Bryers v. Official Assignee

Blue Chip promoter Mark Bryers has been discharged from bankruptcy but is prohibited from running any business in New Zealand until 2022 after opposition to his discharge by the Official Assignee.  The Insolvency Service had wanted a lifetime ban.

Mr Bryers created the Blue Chip investment scheme inviting retail investors to finance apartment developments.  The Blue Chip empire of seventy one companies went into liquidation in 2011 with losses of some $310 million.  Mr Bryers personally owed $150 million.  He was bankrupted in October 2009.  Insolvency Service inquiries found that personal assets previously owned by Mr Bryers were tied up in a trust.  The only asset available was a tax refund of $113,166.

In the normal course of events, restrictions on bankruptcy end after three years.  In the interim Mr Bryers was convicted of offences under the Financial Reporting Act and the Companies Act which saw him prohibited from managing any company for five years.  He served a sentence of 75 hours community work and paid a $37,490 fine.

The High Court was told Mr Bryers spent much of the last five years living in Australia.  A bankrupt cannot leave New Zealand without the Official Assignee’s consent.  Mr Bryers was given consent.  But the Insolvency Service was critical that Mr Bryers appeared to be managing a business in Australia while bankrupt.  There was evidence of unsuccessful attempts to replicate a Blue Chip-style business across the Tasman.  It was alleged Mr Bryers has an ongoing management role within an Australian company: Talos.  In New Zealand, the Insolvency Act forbids any undischarged bankrupt from carrying on a business without the consent of the Official Assignee.  Judge Doogue ruled that New Zealand insolvency legislation does not have extra-territorial effect: it only applies to activities carried on in New Zealand.  Mr Bryers was not in breach of New Zealand law by managing a business in Australia, but His Honour said Mr Bryer’s activities in Australia were relevant in deciding whether he should be discharged from bankruptcy in New Zealand.     

The court was told Mr Bryers is working under the name of Mark Ryan while holding a senior management role within Talos.  Mr Bryers claimed he was simply a consultant to the company.  Judge Doogue said he was plainly not a consultant, but was discharging management functions within Talos.  It was not of trivial importance, His Honour said, that Mr Bryers worked under an assumed name in Australia.  Neither Talos nor Mr Bryers wanted it to get out that he was a person with an undesireable business history in New Zealand.

Judge Doogue ruled that Mr Bryers does represent a continuing commercial risk to New Zealand investors.  He discharged Mr Bryers from bankruptcy but prohibited him from running any business in New Zealand for a further period of seven years.

Bryers v. Official Assignee – High Court (6.03.15)

15.018

Parking: Nelson City v. Stanton

Life on the open road has its pleasures but not for Nelson City Council when a gypsy lifestyle comes to town and parking restrictions are ignored.  Council got riled when unpaid parking fines exceeded $8800.  The High Court has sent on to the Court of Appeal questions of whether local authorities are justified in seeking court injunctions to enforce bylaws when there is a prosecution regime in place to enforce these rules.

Mr Stanton enjoys life on the road with his horse and cart.  The High Court was told he often frequents Nelson City, stopping in the city centre soliciting donations from the public.  He refuses to pay the required fee on metered parking spaces.  He ignores the time limits on unmetered spaces.  When prosecuted, his arguments that parking laws were in breach of his rights of freedom under the Bill of Rights Act and that car parking restrictions applied only to cars not horses did not succeed.  He refused to do community service ordered for non-payment of parking fines and was imprisoned for contempt.

Nelson City obtained an injunction in the District Court prohibiting Mr Stanton from breaching the City’s parking bylaws.  The High Court quashed the injunction: questioning whether local authorities should use injunctions to enforce bylaws in situations where a penalty regime already exists; whether an injunction serves any useful purpose when the penalty regime is being ignored in any event; and whether an injunction is appropriate where behaviour complained of is intermittent and periodic, rather than continual. 

Next stop: the Court of Appeal.

Nelson City v. Stanton – High Court (6.03.15)

15.014

Land: Dempsey v. Howe

A former Barfoot & Thompson real estate agent was ordered to pay net damages of nearly $194,000 after defaulting on a speculative $5.5 million purchase of an Auckland seaside property.  This after the Court of Appeal ruled he was entitled to credit for the $360,000 gain made on resale when vendors dealt with his breach of contract by finding another buyer fourteen months later.

Real estate agent Paul Dempsey took a bold punt in March 2010 when he signed up to buy 28 Ronaki Road, Mission Bay in Auckland’s eastern suburbs.  He was promising to pay $5.5 million.  Settlement was to be in 12 months time.  Mr Dempsey had plans to build three premium apartments on the 2.3 hectare site.  He had an agreement in principle with a building company that it would join him in a joint venture for the project.  In the end, the project fell through and Mr Dempsey defaulted on his purchase.

The High Court was told that Ronaki Road’s owners, a family trust called the Roidon Trust, elected not to cancel the contract when Mr Dempsey defaulted.  The contract was left running, with penalty interest at 12.5 per cent accumulating at $1,746 per day, while both Mr Dempsey and the Trust actively searched for a new buyer.  One year on, Mr Dempsey had an Asian buyer interested at $5.85 million but this was conditional on the Trust releasing him from liability under his earlier contract.  The Trust refused and this deal fell through.  Two months later, the Trust sold to a different Asian buyer for $5.86 million.  Litigation followed between the Trust and Mr Dempsey to determine damages payable for his breach of contract.

The High Court said the Trust could keep the deposit paid by Mr Dempsey and recover interest for his failing to settle: a total of $258,100.

In the Court of Appeal, Mr Dempsey was held entitled to a credit for the $360,000 gain made by the Trust on resale.  Their contract had never been brought to an end; it had just run on.  This meant Mr Dempsey still had an entitlement to Ronaki Road unless and until the Trust had formally demanded a final settlement and this had been ignored.  The value of his entitlement was the gain made on resale.  But deducted from this were costs of the second sale, amounting (in round figures) to $295,600: being agents commission ($141,500); property maintenance costs ($30,600); legal costs ($47,100) and demolition costs ($76,400).  It was agreed that demolishing the existing house did improve prospects of a resale.  The house was badly run down.

Dempsey v. Howe – Court of Appeal (5.03.15), High Court (5.09.13)

15.013