New Zealand Credit Law Bulletin - Vol 4, No 5, April 2004
A free, plain English review of recent law and items of interest for creditors, produced by Hattaway & Associates Ltd, Credit Consultants. To subscribe send a blank email to: nz-bulletin-join@mailman.hattaways.com
Plain language disclaimer:
This bulletin is not legal advice. Do not make decisions on legal matters based on a brief commentary. Instead, get professional legal advice.
In this issue:
- Allegations of bias and corruption in Alexandra
A complicated saga of bankruptcy, altered cheques and a 1939 Buick - Failure to record the time of a liquidator’s appointment does not result in invalidity
Judges find no penalty for non-compliance with the Companies Act - Aggressive creditors of bankrupt investment company vote to have liquidators replaced
The courts have the discretion to follow the creditors’ request or can appoint someone else (including the Official - The perils of buying a business without legal advice
A lesson in making sure that the buyer and seller cover all the bases in their sales agreement - When brothers fall out
Did a debt begin to run when the partnership was dissolved or when the partner went bankrupt?
1. Allegations of bias and corruption in Alexandra
Official Assignee v Heenan (unrep., CP2/02; HC, Invercargill; 20 December 2002)
Official Assignee v Heenan (unrep., CP2/02; HC, Invercargill; 20 December 2002)
During 1998 Mr Heenan introduced Mrs Da Vella Gore to an investment proposal. Later, having decided to withdraw from the scheme, Gore received a cheque from Heenan which was postdated to 27 July but was then over-written to be postdated to 27 August. Heenan stopped payment of the cheque on 23 July and it was eventually dishonoured when presented by Gore’s son, Wayne.
Gore sued Heenan for payment on the cheque and associated damages. In April 2000 she was awarded a total of $41,823.21. Heenan unsuccessfully applied for a rehearing, claiming that judgment had been obtained against him by “improper” and “dishonest” practice. The judge pointed out that, whoever had altered the cheque, Heenan’s liability was not affected as he had stopped payment on it before the originally inserted date anyway. Gore then served a creditor’s petition to have Heenan declared bankrupt. By now Heenan was representing himself. He again argued that the date of the cheque had been forged or altered after it was given to Gore.
The court noted that this had already been dealt with and Heenan was adjudicated bankrupt on 11 December 2001. As part of finalising the bankrupt estate the Official Assignee tried to sell a 1939 Buick motor car that the OA believed formed part of that estate. Heenan however, claimed that the car belonged to a family trust. He took it away and refused to reveal its location. In May 2002 the court ordered Heenan to deliver the car to a representative of the OA to allow the ownership issue to be worked out. Heenan failed to do so and the OA sought to enforce the order. A sequestration order was made on 20 August and a date was set down to decide whether to commit Heenan for breaching a court order as well as to hear the counterclaims advanced by Heenan.
In support of his claims Heenan filed a multitude of documents, many of which the court found “difficult to follow”. Included among the documents was what appeared to be a copy of the trust deed creating the “Heenan Family Trust 1960”. This was regarded with “considerable scepticism”. A clause in the trust deed stated that:
“This HEENAN FAMILY TRUST 1960 is irrevocable and is outside the jurisdiction of the New Zealand District or High Courts.”
As the judge observed, neither of those Courts had came into existence until 1980. Heenan’s allegations covered a huge area including claims against Gore for perjury, extortion, altering the cheque, conspiracy to defeat justice and obtaining judgment in the District Court by fraudulent means; claims against her son for perjury, false declarations, attempting to illegally enforce the cheque, false pretences, extortion, altering the cheque, receiving and conspiracy; and claims against the OA and his staff for perjury and making false statements.
What Heenan was ultimately trying to get was a stay of proceedings, a stay of the sequestration order and a stay of the bankruptcy order, as well as leave to pursue a counterclaim for judgment by default against Gore with amongst other things, an order requiring the OA to pay $3 million into the court as security for costs. Heenan outlined his main concerns as a failure of the court system and the police to examine the alteration of the cheque which was the foundation of his bankruptcy. He also claimed that he had only discovered half-way through the trial that the cheque had been altered and that the court had not allowed him to investigate the matter at that time.
The court however, would not extend Heenan any more time, especially as his counterclaims looked like a full scale attempt to re-litigate Gore’s original claim against him and the bankruptcy adjudication. As a bankrupt person, Heenan’s property and powers (including the right to begin proceedings) had been vested in the OA when he was made bankrupt (under s. 42(1) of the Insolvency Act 1967). This meant that Heenan could not pursue his claims without the OA’s blessing or the leave of the court. There was also no reason to believe that the OA would be unable to pay Heenan's costs if he proved successful and so his application for security for costs was refused.
In the interests of being scrupulously fair however, the court declined to order Heenan’s arrest and committal as requested by the OA until all the circumstances surrounding the alteration of the cheque had been investigated. In order to do so the court adjourned the committal proceedings to give the OA time to recover possession of the original cheque. Once that was done a court-appointed document examination expert was to be directed to analyse the cheque.
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2. Failure to record the time of a liquidator’s appointment does not result in invalidity
Rodewald v Aqua-Agriculture Farms Ltd & ors [2002] NZCA 207
This case concerns an appeal that resulted from a situation that we reported in our bulletin in September 2002 (New Zealand Credit Management Law Bulletin – Vol. 2, No. 7). At that time four creditors of the liquidated company Nikau Enterprises Ltd, were in dispute with the liquidator over the setting aside of certain transactions as voidable preferences. Those creditors successfully argued that Mr Rodewald’s appointment as liquidator was invalid. This was because the shareholders had failed to record the time at which the special resolution appointing Rodewald was passed, as is required by ss. 241 and 241A of the Companies Act 1993.
This meant that even though Rodewald had been acting as the liquidator of Nikau for over two years, his appointment as liquidator was nullified. Because of the time that had elapsed since Rodewald’s “appointment” and the later appointment of any other liquidator, the new liquidator would be unable to claw back any of the disputed voidable preferences as the transactions would have occurred more that two years before the appointment of the new liquidator.
Rodewald appealed the original decision. Before the case came to court the four creditors reached a settlement with Rodewald. The Court of Appeal however, felt that the question raised by Rodewald’s appeal was important and could be important to the success of other liquidations. As a result the court decided to proceed with Rodewald’s appeal in order to clarify the situation.
It was determined that it was impractical for the wording of a special resolution appointing a liquidator to contain the time and date of appointment, as they would be unknown before the event. In fact, the court said that the wording of the provisions in the Companies Act indicates that there would be a sequence of events -- first the appointment of the liquidator and later the record of it. However, the making of the record may not happen immediately and may even be delayed by a day or two. In those circumstances the court decided that where a resolution had been validly passed, it was illogical to suggest that such decisions would later be no effect because the chairperson responsible for signing the minute had mistakenly omitted to record the operative time. Similarly, if the chairperson’s watch was inaccurate, that woulldn't invalidate the appointment.
The court was able to find support for its view by comparing the consequences of non-compliance with s. 241A to those of non-compliance with s. 282 (which requires the written consent of a liquidator to his appointment). Without the required written consent the appointment was to be “of no effect” but s. 241A does not contain any such sanction. The court believed that this was evidence that had Parliament “intended that non-compliance with s 241A was also to render an appointment of no effect, it would surely have said so”. The court went on to say that “the uncertainty and possibly dire consequences visited upon liquidators and creditors if the appointment were held invalid … would appear to be out of all proportion to any mischief which may come from a failure to include the time in the record”.
The meant that the court could declare that Rodewald was the validly appointed liquidator of Nikau Enterprises.
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3. Aggressive creditors of bankrupt investment company vote to have liquidators replaced
McPherson v Wespap Ltd (unrep., M 47/02 - M 48/02; HC, Rotorua; 16 April 2003)
Lakeland Wealth Creators Ltd was owned and operated by Mrs Margarite Papple. Wespap Ltd was jointly owned by Mr Papple and Ms West but Margarite was primarily responsible for running it. After incorporation the companies began accepting funds for investment.
Between September 2000 and September 2002 Lakeland received more than $11.6 million from investors and from commission receipts. Investments in Lakeland had a minimum value of $20,000. Most investments were for a one year period, with a first dividend (or profit payment) to be made after two months and a further 10% return to be paid in each month following. At the end of the investment the capital was to be repaid or rolled over into a new contract. The investments made through Wespap were larger, and profit was payable only on the return of the capital at the end of the term. Wespap received funds totalling $3.69 million.
On 11 September 2002 the Assistant Registrar of Companies in Auckland, John McPherson, successfully applied to have interim liquidators appointed for both Lakeland and Westpap. The Papples however, were less than co-operative and on occasions blatantly disregarded the instructions given to them by the interim liquidators. The interim liquidators did manage to determine that approximately 62% of the $11.6 million which Lakeland had received was used to fund profit payments. They could find no evidence of any funds being put into external investments. As for Wespap, $1.6 million was documented as being invested offshore but more than $1.3 million had been received by Wespap during a period when no further investments had been made.
Additionally, the interim liquidators worked out that $1.49 million had been transferred from Lakeland accounts to personal accounts operated by the Papples, one of which funded the purchase and construction of their house in Matipo Avenue, Rotorua. Other personal transactions using the company’s funds amounted to $769,000. The interim liquidators were unable to identify a further $2.1 million of expenditure because the record keeping was incomplete.
From the investigations it was clear that sums in excess of $16 million had passed through the bank accounts operated by the companies and that the Papples had breached the provisions of the Companies Act 1993 and the Financial Reporting Act 1993. The interim liquidators moved to protect the remaining assets and did manage to identify some, including various bank accounts and a solicitor’s trust account. They took possession of a motor vehicle and company furniture, fittings and office equipment. They lodged a caveat against a property in Stanley Drive, Rotorua which was purchased around August 2002 using funds held by Lakeland plus they also lodged a caveat against the Matipo Road property.
The Papples had been told to stop acting on behalf of the companies and that they were not to deal with any of the companies’ assets. That did not prevent Mr Papple flying to Switzerland in September 2002 to try to recover some of the funds invested even though he had no authority to do so. The Papples also continued to correspond with investors telling them that sufficient funds were available to repay all investors’ claims even though there was likely to be a significant shortfall.
The interim liquidators’ initial report indicated that both companies were insolvent (that is, unable to pay their debts as they fell due) and that there was little prospect of recovery of the funds which had been invested. This prompted McPherson to successfully apply to have the companies placed in liquidation and the interim liquidators appointed as liquidators in October 2002.
On 7 March 2003 separate creditors’ meetings were held for the creditors of each company. At the meetings the creditors decided by a large majority that they wanted the liquidators’ appointment to be terminated, to be replaced by Kim Thompson. Under the provisions of s 243(7) of the Companies Act 1993 the liquidators applied to the court to have Thompson appointed as the new liquidator. Section 243(7) gives the court an overriding discretion in the appointment of a liquidator. It can even refuse to appoint the nominee of the meeting of creditors and contributories as liquidator and can go as far as appoint a person not nominated by the meeting. The court’s decision must, however, be one that will best serve the interests of the persons concerned in the winding-up as well as taking the wider public interest into account.
In making its decision the court is required to consider the independence of the liquidator; his resources; the wishes of the creditors and contributories; the liquidator’s confidence and experience; and his familiarity with the background to the liquidation. In this instance the judge said that it “would not be an appropriate case to ignore the wishes of the creditors …Thompson has demonstrated that he is appropriately qualified and willing to shoulder the burden of the undoubted demands which these liquidations will bring. He has confirmed that he will bring a fair and impartial mind to this undertaking and that he will make the difficult decisions which will undoubtedly be asked of him in an informed and unbiased manner. In those circumstances I have no hesitation in concluding that the application should be granted”.
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4. The perils of buying a business without legal advice
GS International v Shaw (unrep., M1653-IM02; HC, Akld; 7 April 2003)
Shaw owned a distribution business. At the end of 2001 Holmes, one of GS International’s directors, entered negotiations with Shaw for the purchase of the business. They agreed a price of $202,000 to be paid in instalments. It was to be completed by April 2002. They didn't consult any lawyers.
In May 2002 they had another meeting. At the meeting Shaw made it clear that he believed the agreement also provided for him to be paid the value of the company’s debtors. He said he would cancel the contract if a satisfactory outcome was not worked out. In order to ensure Shaw’s goodwill plus the continued viability of the company he had purchased, Holmes decided it would be prudent to pay for the debtors. He offered to pay an extra $180,000 and the parties agreed on a payment plan to that effect.
It became clear that Shaw was not paying his business creditors. This caused difficulties for GS International as it was dealing with many of the same suppliers as Shaw was. These suppliers were now making GS International deal on cash terms rather than the credit terms previously agreed upon. Holmes later also alleged that Shaw was making disparaging comments about him in the business community. As Shaw was not paying his creditors with the money he was being paid, Holmes claimed he was in breach of their agreement. GS International refused to make any more payments from October 2002 onwards. This led Shaw to serve a statutory demand on GS International.
GS International relied on a number of grounds in its application to set aside the statutory demand. The first was that there was no consideration for the agreement in May to pay $180,000. The court felt however, that in giving up his right to cancel for misrepresentation Shaw was forgoing a valuable right and that this was adequate consideration for the $180,000.
GS International also contended that the agreement had been entered into under duress. The evidence showed however, that Holmes had not feet under pressure to enter the agreement. The judge found that Holmes had entered the agreement of May 2002 of his own free will.
Alternatively, GS International alleged that they were entitled to discontinue their payments because Shaw had breached an implied term of the agreement that he would use the payments he received to pay his outstanding creditors. The court explained that this “understanding” failed to meet the requirements of an implied term. In particular, it is a requirement that implied terms are only implied into a contract in order to give it business efficacy. That is, without the implied term the contract could no longer operate. Here the arrangement had worked from May until October with no problems and no issue had been raised regarding the efficacy of the arrangement.
Given that none of the grounds advanced by GS International could be supported the court concluded that no genuine dispute existed. This meant that the application to set aside the statutory demand was dismissed and GS International would have to pay up or risk being liquidated.
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5. When brothers fall out
Simon Anthony Holdgate v Official Assignee [2002] NZCA 66
Brothers, Andrew and Simon Holdgate, formed a property-owning partnership in 1983. The partnership ceased trading in June 1992 when its last remaining asset was sold.
In May 1992, independent of the partnership, Simon had loaned Andrew some money which was secured by an all obligations mortgage over a property owned by Andrew at Manurewa. Over the next few years Andrew and Simon’s relationship deteriorated. In 1996 Simon began proceedings against Andrew seeking to enforce his right as mortgagee and exercise his right of sale. Andrew reacted by applying to the High Court for an order restraining Simon from selling the property. Simon counter-claimed against Andrew for $81,469 with interest of 15% from 1 July 1992. He said that the debt arose out of the partnership.
Andrew was unsuccessful in stopping the sale of his property and it was sold in December 1996. After the proceeds of sale were distributed, Andrew still owed Simon $141,514.31 which included $48,880.81 interest that had accrued since 1992.
In 1997 Andrew went bankrupt and Simon lodged a proof of debt against him. Andrew appealed. The High Court judge distinguished between a debt owed by Andrew to the partnership and a debt owed directly from Andrew to Simon. The judge outlined the general rule that partners in a partnership are not to be considered as debtor and creditor amongst themselves until the partnership is wound up or until there is a binding settlement of the accounts. According to the High Court judge, the partnership had not dissolved until 1997 when Andrew had been adjudicated bankrupt. That meant that Andrew’s liability to Simon had not arisen in 1992 when the partnership stopped operations but only dated from 1997. This led the court to reduce the debt by deleting the interest amount. Simon appealed against this conclusion.
In the Court of Appeal the argument over the amount Andrew owed Simon came down to when the partnership was dissolved. Was it in 1992 when the property was sold and the partnership ceased to trade or was it in 1997 when Andrew was adjudicated bankrupt?
The Court of Appeal expressed strong reservations over the reasoning employed in the High Court. The court explained that it was not necessarily appropriate to infer that a partnership had been dissolved merely because it had stopped trading. The overall circumstances however, may be enough to infer that the partners had agreed that the partnership be dissolved. On the evidence in this case there was a strong inference that the partnership was to be dissolved in 1992. Business activity had ceased and the partnership’s sole remaining asset had been sold. There was also no evidence of partnership activity after 1992 other than the steps required to wind up a partnership.
In those circumstances Andrew's liability to pay interest on the monies secured depended not so much on whether the debt was characterised as a personal debt or a partnership debt, but on whether Andrew's indebtedness to Simon arose prior to Andrew's bankruptcy adjudication. If it had, then date the indebtedness arose was also important for that would mark the date on which the interest began to run. The judge therefore allowed the appeal which meant that the interest remained deleted. He also sent that case back to the High Court to make a final decision over the date when the partnership was actually dissolved. That would allow a correct calculation of the interest due as it meant that an accurate comparison of the date of dissolution of the partnership as compared to the date of adjudication of Andrew’s bankruptcy could be made.
