Justice Heath issued a sweeping judgment last month limiting the ability of liquidators to examine witnesses and seek documents. In the decision, ANZ National Bank Ltd v Sheahan and Lock [2012] NZHC 3037, the Court also:

  • ruled that the liquidators had misused an examination transcript;
  • found that even voluntary-appointed liquidators are officers of the Court and subject to the Court's supervisory jurisdiction;
  • considered the ability of an overseas liquidator to examine a witness in New Zealand; and
  • ruled that witnesses may not be able to seek payment of their legal costs in responding to a liquidator's examination notice.

Background

The litigation concerned Cedenco NZ and Cedenco AU, which were processors and distributors of fruit and vegetable products. In 2009, ANZ NZ appointed receivers to Cedenco NZ, and ANZ AU appointed receivers to Cedenco AU. The receivers continued to trade and ultimately sold the companies' businesses and assets for significant sums. As a result, all secured and unsecured creditors were paid in full, with a surplus available for distribution to shareholders.

The liquidators, Messrs Sheahan and Lock, were subsequently appointed to Cedenco NZ by shareholder resolution. They were also appointed to Cedenco AU. The liquidators are based in Australia, and have charged their Australian rates for the liquidation of Cedenco NZ, at NZ$1,045 per hour (including GST).

Although it was the receivers who traded and sold the business, the liquidators of Cedenco NZ charged fees and expenses of NZ$2,393,719 plus GST for the first 21 months of the liquidation. Because all creditors have been paid in full, no creditor has sought to review the liquidators' fees. In addition, there is no shareholder oversight, because of a dispute in the United States over who owns the shares. As a result, the liquidation has not been subject to the usual checks and balances.

Liquidators' powers to examine witnesses and obtain documents

The liquidators of Cedenco NZ issued notices under s 261 of the Companies Act, seeking documents from ANZ and seeking to examine an ANZ bank officer, Ms Dekker. ANZ and Ms Dekker were both represented by Bell Gully.

In response to the notices, ANZ produced certain documents, but said that it would not produce internal bank documents. Likewise, Ms Dekker appeared for an examination, but did not answer questions seeking internal bank information.

The liquidators applied to the Court for orders seeking the internal bank documents and that Ms Dekker be required to answer questions seeking internal bank information.

Justice Heath refused to make the orders sought by the liquidators. Most significantly, he held that under s 261, a liquidator may only require delivery of documents “of the company” – that is, documents that belong to the company in liquidation. The liquidator cannot require delivery of a third party's own documents. Instead, a liquidator must first obtain a court order under s 266 before he or she can require the production of documents belonging to a third party.

Further, Justice Heath refused to make an order for the production of internal bank documents or for a further examination of Ms Dekker under s 266, ruling that “the factors weighing against examination far exceed these in favour”. He ruled that:

  • the liquidators were acting for an ulterior purpose and oppressively to ANZ and Ms Dekker;
  • no benefit could flow to the creditors of Cedenco NZ, who had been paid in full; and
  • the liquidators had failed to identify any subject for examination that would benefit Cedenco NZ.

His Honour further observed that ordinarily, where creditors have been paid and liquidators' costs are “spiralling upwards”, it would be appropriate to terminate the liquidation.

Liquidators' misuse of Ms Dekker's transcript

After taking Ms Dekker's examination in the liquidation of Cedenco NZ, the liquidators provided the transcript to themselves in their capacity as the liquidators of Cedenco AU, to use in Australian court proceedings for a purpose extraneous to the New Zealand liquidation.

Because the liquidators had acknowledged that the examination was private, Justice Heath ruled that this use of the transcript in Australia amounted to misconduct by the liquidators. His Honour issued a declaration that the liquidators had acted improperly.

More generally, however, His Honour observed that the prohibition on the publication of an examination transcript in the Companies Act 1955 was not carried through into the 1993 Act. Justice Heath said that this meant that liquidators and witnesses must make “individualised arrangements” in advance as to the use to which the transcript and exhibits may later be put.

His Honour further said that if a liquidator nominates “distribution to anyone”, it is open to the witness to decline to attend the examination and let the liquidator apply for directions under s 266. That approach provides an incentive for all parties to “take a responsible approach”, because of the unnecessary costs of a s 266 application.

Witnesses' ability to seek payment of their costs

ANZ and Ms Dekker sought an order for the payment of their legal costs by the liquidators, under s 261(5). That section allows the Court to order the payment of “reasonable remuneration and travelling and other expenses” to certain people complying with a notice under s 261(3).

His Honour ruled that s 261(5) only applies to the human being required to comply with s 261(3), and that ANZ therefore could not claim its costs.

His Honour also ruled that the Court will usually not consider authorising the payment of remuneration until after the examination has taken place. Justice Heath further said that the purpose of the provision is to protect a self-employed person from losing earnings while assisting the liquidator, or to protect an employee who has to take leave to assist the liquidator. It was not to reimburse an employer for remuneration paid to an employee while an employee is attending an examination.

In addition, Justice Heath said that the term “travelling and other expenses” does not include legal costs, and that ANZ and Ms Dekker could not claim their legal costs in complying with the notices because ANZ elected to incur those costs “for its own benefit”.

Examinations under the Model Law

In their capacity as the liquidators of Cedenco AU, Messrs Sheahan and Lock sought to rely on the Model Law on Cross-border Insolvency to examine Ms Dekker. Justice Heath's decision was the first New Zealand case to consider the issue after full argument.

Justice Heath referred to many of the same factors that apply to an examination by a New Zealand liquidator under the Companies Act, and concluded that the competing considerations are “finely balanced”. He therefore sought further evidence as to whether the AU liquidators would be entitled to examine Ms Dekker if she were resident in Australia, on the basis that it would be wrong in principle to allow an Australian liquidator to examine in New Zealand in circumstances where it would not be permitted in Australia.

All liquidators are officers of the Court

Finally, the liquidators argued that because the Cedenco NZ liquidations were commenced voluntarily, the liquidators are not officers of the Court and cannot be sanctioned for breach of their duties as officers of the Court.

Before the 1993 Act, if was clear that voluntarily-appointed liquidators were not officers of the Court. However, Justice Heath ruled that the 1993 Act discarded the various liquidation regimes and replaced them with a single liquidation process, with all liquidators on an equal footing. As a result, His Honour ruled that the Court has an inherent jurisdiction to supervise all liquidators, however appointed, in a manner akin to the Court's supervision of one of its officers.

Indeed, as Justice Heath observed, liquidators appointed at the behest of shareholders are more likely to require greater supervision, because in many cases they are seen as the appointor's protectors.

The Court's ruling will therefore provide a powerful precedent for creditors and others seeking to review the actions of a “friendly” liquidator appointed by the shareholders of a company.