Trinity Foundation (Services No 1) Ltd v Downey [2006] NZCA 310; (2006) 3 NZCCLR 401 (15 November 2006)

Last Updated: 20 December 2011

IN THE COURT OF APPEAL OF NEW ZEALAND

CA193/05

BETWEEN TRINITY FOUNDATION (SERVICES NO 1) LIMITED
Appellant

AND KERRYN DOWNEY AND WILLIAM BLACK AS JOINT LIQUIDATORS OF CWF HOLDINGS LIMITED (IN LIQUIDATION) AS TRUSTEE OF THE CWF UNIT TRUST
Respondents

Hearing: 20 September 2006

Court: William Young P, O'Regan and Arnold JJ

Counsel: R B Stewart QC for Appellant
G P Curry and L J Turner for Respondent

Judgment: 15 November 2006 at 11am

JUDGMENT OF THE COURT

A The cross appeal by the respondents is dismissed.

2. The respondents are to pay the appellant costs of $2,500 together with usual disbursements.
   

REASONS OF THE COURT
(Given by William Young P)

Introduction

[1] In 1997, CWF Holdings Ltd entered into long term agreements with Trinity Foundation (Services No 1) Ltd under which it was to grow trees on land owned by Trinity in Southland. The forest is to be harvested in 2048. Under the agreements, CWF Holdings is to pay Trinity, until harvest, annual fees (of $50,000 per annum) as well as other outgoings and, when harvest occurs, a further $1.738b. It is, however, entitled to the proceeds of the sale of the forest once harvested.
[2] On 15 April 2005 CWF Holdings was placed in liquidation by a shareholders’ resolution and the present respondents, Messrs Kerryn Downey and William Black were appointed as liquidators.
[3] Messrs Downey and Black summoned a creditors meeting for 19 May 2005. On 11 May 2005 Trinity prepared a proof of debt (using the secured creditor’s form) in the sum of $178m. In the meantime, on 13 May 2005, Messrs Downey and Black, acting under s 269 of the Companies Act 1993, disclaimed the agreements. The proof of debt form prepared on 11 May was nonetheless lodged, in unamended form, on 16 May. At 4.47pm on 18 May 2005 Messrs Downey and Black rejected the proof of debt lodged by Trinity. On the following day the creditors’ meeting was held. Mr Downey, who chaired the meeting, did not recognise Trinity as a creditor and did not permit its proxy to vote. An impasse developed at the meeting and no resolutions were passed. The result is that Messrs Downey and Black remain the liquidators of CWF Holdings.
[4] Trinity applied to the High Court under s 284 of the Act for leave to apply for orders:

(a) reversing the liquidators’ decision to disclaim the forestry venture agreements;

(b) reversing the liquidators’ decision to reject Trinity’s claim in its entirety;

(c) reversing the liquidators’ decision to continue as CWF Holdings liquidators;

(d) reversing the liquidators’ decision at the meeting that no creditors committee was to be established; and
(e) directing the liquidators to summon a new meeting of creditors.
[5] In a judgment delivered on 18 August 2005 Associate Judge Lang dismissed the application for leave to challenge the disclaimer decision but granted Trinity leave as sought in all other respects.
[6] Trinity initially appealed against the Associate Judge’s refusal to grant it leave to challenge the disclaimer decision and Messrs Downey and Black challenged, by cross-appeal, the decision by the Associate Judge to grant leave in relation to the other issues. Trinity has now abandoned its appeal. So all that is before us is the cross-appeal.

The factual and legal background

[7] It is easiest to discuss the factual background to the case in conjunction with the relevant statutory provisions.
[8] CWF Holdings is associated with CanWest Media Works (NZ) Ltd which forms part of an international group, the parent of which is CanWest Global Communications Corp (a company listed on the Toronto and New York Stock Exchanges). The directors of CWF Holdings were closely associated with CanWest NZ. CWF Holdings is a trustee of the CWF Unit Trust, the beneficiaries of which are corporations based in the Caribbean which are part of the international CanWest group.
[9] Taxation considerations were a significant factor in the arrangements between Trinity and CWF Holdings. Leaving such considerations aside, the profitability of the forestry venture is dependent on the funds which will be obtained from the eventual sale of the forest. Given that CWF Holdings has now defaulted on its obligations under the agreements, Trinity will, in effect, step into its shoes pursuant to security arrangements. Whether this will result in a loss to Trinity will therefore depend on the realisations to be received in 2048 from the sale of the forest. The case has been conducted on the basis that those realisations will be approximately 90% of the $1.738b to be paid in 2048 so that Trinity will thus be out of pocket for 10% of that sum along with annual payments which CWF Holdings was committed to, but will not now be, making.
[10] A complicating feature of the case – and one to which we will revert – is that under the agreements, the liability of CWF Holdings to Trinity is limited to the assets it holds.
[11] It seems fair to infer that the ability of CWF Holdings to continue to participate in the forestry venture required the assistance of CanWest NZ. By April 2005 that assistance was no longer forthcoming; hence the decision to place CWF Holdings into liquidation.
[12] Messrs Downey and Black were appointed as liquidators by the sole shareholder of CWF Holdings acting pursuant to s 241(2)(a) of the Act.
[13] Messrs Downey and Black were required, by s 243 of the Act, to summon a meeting of the creditors. Under the Act, the creditors meeting provides an opportunity for the creditors to confirm or replace the liquidators chosen by the shareholders. As it turned out, Messrs Downey and Black were not replaced at the creditors meeting and thus continue in office until otherwise removed, see s 243(1)(a). The removal of a liquidator who is not prepared to resign requires a Court order under s 286.
[14] The proof of debt form prepared by Trinity on 11 May 2005 was premised on the assumption that the underlying agreements between Trinity and CWF Holdings were still in place. By the time the form was lodged (on 16 May 2005) that assumption was no longer correct because of the liquidators’ disclaimer of the agreements on 13 May 2005. That disclaimer was effected under s 269 which relevantly provides:

269 Power to disclaim onerous property

(1) Subject to section 270 of this Act, a liquidator may disclaim onerous property even though the liquidator has taken possession of it, tried to sell it, or otherwise exercised rights of ownership in relation to it.

(2) For the purposes of this section, onerous property—

(a) means—

(i) an unprofitable contract;

...

(3) A disclaimer under this section—

(a) brings to an end on and from the date of the disclaimer the rights, interests, and liabilities of the company in relation to the property disclaimed:

(b) does not, except so far as necessary to release the company from a liability, affect the rights or liabilities of any other person.

...

(5) A person suffering loss or damage as a result of a disclaimer under this section may—

(a) claim as a creditor of the company for the amount of the loss or damage, taking account of the effect of an order made by the Court under paragraph (b) of this subsection:

...

So the practical effect of the disclaimer was to transform what had previously been a claim based on the underlying agreements into a claim for damages.

[15] Under s 304 of the Act, claims by unsecured creditors are required to be made in the prescribed form and must, inter alia, contain full particulars of the claim. The liquidators are required as soon as possible either to admit or reject the claim in whole or in part and, if a liquidator rejects a claim in whole or in part, he or she must forthwith give notice in writing accordingly to the creditor.
[16] If the claim as lodged can be treated as being for damages, s 307 of the Act applies. This relevantly provides:

307 Claim not of an ascertained amount

(1) If a claim is subject to a contingency, or is for damages, or, if for some other reason, the amount of the claim is not certain, the liquidator may—

(a) Make an estimate of the amount of the claim; or

(b) Refer the matter to the Court for a decision on the amount of the claim.

(2) On the application of the liquidator, or of a claimant who is aggrieved by an estimate made by the liquidator, the Court shall determine the amount of the claim as it sees fit.

The liquidators did not invoke s 307 but rather simply rejected the claim outright.

[17] The voting of creditors at creditors’ meetings is addressed by regs 19 – 21 of the Companies Act 1993 Liquidation Regulations 1994. Most pertinent in the present context is reg 21:

21 Cases in which creditors may not vote-

A creditor shall not vote in respect of –

(a) Any claim that is subject to a contingency or that is for damages or that is, for some other reason, of an uncertain amount unless the value of the claim has been estimated by the liquidators or determined by the Court in accordance with s 307 of the Act ... .

[18] At the creditors meeting, Mr Downey as chairman recognised only three creditors, CanWest Int Communications Inc (for $1,118,060), Trinity Foundation Ltd (for $3,676) and Wrightson Forestry Services Ltd (for $751). Dr Garry Muir attended the meeting with proxies for Trinity Foundation and Wrightson Forestry Services (as well as for Trinity). Two lawyers from Russell McVeagh represented CanWest Int Communications. Because no resolution was able to command majority support (ie by both value and number), the meeting produced a stalemate.
[19] Finally, we note that s 284 of the Companies Act relevant provides:

284 Court supervision of liquidation

(1) On the application of the liquidator, a liquidation committee, or, with the leave of the Court, a creditor, shareholder, other entitled person, or director of a company in liquidation, the Court may—

(a) Give directions in relation to any matter arising in connection with the liquidation:

(b) Confirm, reverse, or modify an act or decision of the liquidator:

...

(2) The powers given by subsection (1) of this section are in addition to any other powers a Court may exercise in its jurisdiction relating to liquidators under this Part of this Act ... ..

The dynamics of the case

[20] Trinity’s concern is that the liquidation is presently under the control of liquidators appointed in effect by CanWest NZ and who are going to be looking to CanWest NZ for payment in relation to their fees. Trinity complains that, given this, the liquidators are unlikely to look critically at the actions of the directors of CWF Holdings, who themselves are closely associated with CanWest NZ. Its concerns have been enhanced by four other factors: the rejection, on the eve of the first creditors meeting, of its claim in its entirety; Mr Downey persisting with that meeting despite the obvious dispute as to Trinity’s claim; Messrs Downey and Black staying in office despite Trinity’s concern as to their impartiality; and the solicitors acting for Messrs Downey and Black in these proceedings being the same solicitors who have acted for CanWest NZ throughout.
[21] The first meeting of creditors was important because it provided the creditors with an opportunity to decide who the liquidators should be. As noted, the scheme of the legislation is that once the first meeting has concluded without the removal of the liquidators appointed by the shareholders, the position of those liquidators is entrenched.
[22] Messrs Downey and Black respond by noting that the claim lodged on 16 May 2005 was not in the right form and as well did not recognise the disclaimer. Once the contracts were disclaimed, Trinity no longer had a claim based on those contracts but rather a claim for damages to be assessed as at the date of disclaimer. Further, the claim for $178m, based primarily on the shortfall which will not occur until 2048, was grossly exaggerated because no attempt had been made to provide a net present value of that shortfall. They point to the necessity for the liquidators to act expeditiously. They say that they have carefully considered whether there is a claim by CWF Holdings against its former directors or other parties and are satisfied that there is no such claim. Trinity has never provided it with particulars of any such claim. Further and importantly, they note that the contractual arrangements associated with the forestry venture were carefully drafted so as to limit the liability of CWF Holdings to Trinity to the funds held by CWF Holdings as trustee of the unit trust. They say that the total funds held by CWF Holdings are approximately $12,000 and that therefore the maximum claim by Trinity against CWF Holdings is confined to $12,000.

The approach of the Associate Judge

[23] In his judgment, the Associate Judge discussed the factual background. He then discussed the principles which govern applications under s 284 by reference to Birchall v Project Works Construction Ltd (In liquidation) (2004) 9 NZCLC 263,547 (HC), Fisher v Isbey (1999) 13 PRNZ 182 (HC) and CIR v Hulst; CIR v Oriana Finance Ltd (2000) 19 NZTC 15,693 (HC) (and the cases referred to in the last of those judgments). The Associate Judge went on:

[21] I take the view that s 284 provides a filtering mechanism, and is designed to ensure that leave to challenge the acts and decisions of a liquidator is only given in appropriate cases. A creditor seeking leave under s 284 therefore needs to do more than merely demonstrate that its claim is sustainable. Instead, the creditor will need to show that it has an arguable case. In this context an arguable case will have two characteristics. First, it must have a credible factual basis. Secondly, there must be a reasonable likelihood that, if the claim is established, the Court will disturb the act or decision in question. The Court is likely to take this step only if the act or decision is unreasonable.

[22] If this standard is applied, the object of the legislation will be met, because truly meritorious claims will be granted leave. Leave will not be granted, however, in circumstances where, even if the claim is established, it is unlikely that the Court would interfere with the act or decision in question. In this way the section strikes a balance between preserving the rights of meritorious claimants, whilst at the same time ensuring that the assets of a company in liquidation are not frittered away as a result of claims that are unlikely to succeed.

[24] Having held that he would not grant leave to Trinity to challenge the disclaimer decision, the Associate Judge turned to discuss the other relief sought by Trinity.
[25] He accepted that the claim was submitted on the wrong form (in that Trinity used the secured creditors form) and that in any event it proceeded on the basis that the contracts were still on foot. He then went on:

[84] However, when Trinity’s actual claim is considered, it is arguably formulated in a manner that may not be too far off the mark. It can be viewed as proceeding on the basis that the total amount it could expect to receive by way of licence fees amounted to $1,785,395,813. The valuation of its security can also be viewed as being, in reality, Trinity’s estimate of the value of the forest in 2048 (ie the sum of $1,606,856,231). The claim then applies a ten per cent discount, presumably to reflect the fact that the claim is being presented now. The balance thereafter remaining, namely the sum of $178,595,832, forms the basis of Trinity’s claim as an unsecured creditor.

[85] Subject to verification of the likely value of the forest in 2048 and the validity of the discount that was applied, the claim can therefore arguably be viewed as roughly equating the loss that Trinity claims that it will suffer as a result of the disclaimer.

[86] The second factor to be considered is that, whilst Trinity may not have had an entitlement to bring a claim on the basis that it remained a secured creditor, it clearly had the right (as the liquidators have always acknowledged) to lodge a claim for any loss that it may have suffered as a result of the disclaimer. If the liquidators accept that Trinity has always had this entitlement, it is difficult to see why the claim was rejected in its entirety as soon as it was received.

[87] Mr Downey makes the valid point that it would not have been prudent for him, in accordance with his duties to all creditors, to accept a claim by an unsecured creditor for an amount of more than $178 million “without significantly more information as to how that figure had been calculated”. I agree. In particular, the likely value of the forest in 2048 and the validity of the discounting factor were important issues that could legitimately have been the subject of further enquiry and investigation by the liquidators.

[88] The problem is that the liquidators never sought further information from Trinity. Instead, they elected to reject the claim in its entirety without further enquiry, investigation or discussion.

[89] The liquidators’ decision to proceed in this way is surprising given the manner in which they had dealt with Trinity previously. On 28 April 2005 Trinity’s solicitors had written to the liquidators seeking their views in relation to several significant issues. This letter was, appropriately, the subject of a detailed response by the liquidators on 12 May 2005. Given that background, and given also the obvious importance of the claim to Trinity, it is very difficult to understand why the liquidators felt the need to reject Trinity’s claim within two days of receiving it, and without making any further enquiry of Trinity regarding the manner in which it had formulated its claim.

We note in passing that the analysis which is set out in [84] is not entirely right. The claim was put forward on the basis that the forestry realisations would be 90% of the amount payable by CWF Holdings. There was no element of discounting for the time value of money.

[26] The Associate Judge noted that the Court has the power under s 284(1) not only to reverse or confirm a liquidators’ decision but also to modify a decision. He considered that even if the Court concluded that the liquidators were correct to reject the claim in its original form, it would be open to the Court to modify the decision on the basis of evidence adduced at the hearing.
[27] He then went on:

[99] All of these matters persuade me that Trinity’s case is not misconceived or entirely without merit. In particular, the timing of the rejection of the claim was such that the Court may consider that the claim was not given the consideration it deserved before being rejected. Alternatively, the Court may consider that the liquidators ought to have sought further information from Trinity before finally deciding to reject the claim. There is also room for the view that in rejecting the claim so quickly the liquidators may have been motivated, in part at least, by reasons unrelated to its validity. Viewed from these perspectives, the decision to reject the claim in its entirety on 18 May 2005 could in my view arguably be described as unreasonable.

[100] I therefore consider that there is a reasonable likelihood that the liquidators’ decision to reject Trinity’s claim may be disturbed by the Court. On that basis Trinity has established an arguable case, and it should be granted leave to have this aspect of its claim heard.

[28] He addressed the issues in relation to the other relief sought by Trinity quite briefly:

[102] I am not sure that the Court would necessarily be inclined to make the orders that Trinity seeks. I am conscious, however, that these particular issues lie at the heart of Trinity’s sense of grievance regarding the manner in which the liquidators dealt with its claim. It is also likely that these issues will need to be re-visited by the liquidators (if not the Court) in the event that Trinity is able to establish its entitlement to lodge a claim in the liquidation.

[103] I have therefore concluded that it is appropriate that Trinity also be granted leave to have these questions considered by the Court as part and parcel of its argument in relation to the rejection of its claim.

Subsequent events

[29] Subsequently, a revised claim was lodged by Trinity and accepted in heavily modified form by Messrs Downey and Black. The basis of the reduction in the claim was twofold. First, they reduced the claim from approximately $178m to approximately $12m on the basis that $12m represents an appropriate present value figure of the assumed 2048 deficit and intermediate liabilities. Further, they reduced the claim to $12,000 (approximately) to recognise the limitation of liability in the contractual arrangements between CWF Holdings and Trinity. The funds available to CWF Holdings as trustee of the unit trust were only $12,000.
[30] Trinity has applied for orders under s 284 in relation to that decision, but has not directly resorted to the procedure available under s 307(2). Mr Stewart appears to have regarded leave under s 284 as a code in relation to claims against liquidators. That does not seem to us to be consistent with the language (and indeed purpose) of s 307(2). This issue, however, is no particular moment for the purposes of the present appeal.

Discussion

[31] Neither side sought to challenge the legal test the Associate Judge applied and we are accordingly content to approach the case on the basis that Trinity was required to show that it had an arguable case for relief. We also will the address the case on the basis that substantive relief should only be granted if the decisions of the liquidators in issue can be shown to have been wrong or unreasonable.
[32] The cross-appeal was put forward on the basis that Messrs Downey and Black could not accept Trinity’s claim, because it was not only on the wrong form but also advanced on the wrong basis. Mr Curry, who appeared for Messrs Downey and Black, argued that the liquidators were not required to make further inquiries of Trinity. He contended that Trinity’s assertion that CWF Holdings may have claims against its directors (or other parties associated with CanWest NZ) are unsubstantiated as Trinity has declined to provide particulars of those claims to the liquidators. He went on to assert:

Given the meagre assets currently held by [CWF Holdings], protracted litigation will only serve to consume [CWF Holdings]’s assets and delay the completion of the litigation.

Mr Curry referred to the doubts mentioned by the Associate Judge in [102] of his decision and maintained that the creditors meeting was conducted appropriately.

[33] In written submissions presented to the Court (with leave) after the hearing, Mr Curry developed these arguments and advanced others. He denied that there is any impropriety in CanWest providing the liquidators with an indemnity or that such indemnity could affect the obligations imposed on them under s 253 of the Companies Act. Any liquidator appointed at the instance of Trinity would have a similar indemnity (albeit from Trinity). He likewise denied that there was any impropriety in the actions of the liquidators to date. He urged us to re-assess the position in light of the events which have occurred since the judgment of the Associate Judge.
[34] In the course of oral argument, Mr Curry accepted that it would have been open to Messrs Downey and Black to have accepted the claim as being for damages. This was a sensible concession. The claim was dated prior to the disclaimer and the liquidators must have recognised this. In any event, at the time the claim was lodged, Trinity did not accept the validity of the disclaimer. So all in all, the form of the claim is not particularly surprising.
[35] We accept that Trinity’s formulation of its claim in May 2005 was casual and that it was likewise casual for Trinity to have lodged the originally prepared claim after the disclaimer decision without at least lodging an alternative claim for damages. We also agree that allowance for the time value of money should have been made. But the context provided by s 243(1) cannot be overlooked. That section obliged the liquidators to call a creditors meeting so that the creditors could confirm their appointment or appoint other liquidators. We consider that the operating assumption should be that the liquidators will do what they reasonably can to facilitate creditors being able to vote. Given s 307 we would have expected Messrs Downey and Black to have estimated the amount of the claim, or if they felt that that was too difficult, to have referred the matter to the Court for a decision. Although s 307 uses the word “may” and not “must”, the drafting appears to presuppose that the liquidator will take one or other of the prescribed steps. That this is so is supported by the scheme of regs 19-21 of the Regulations. Further, even if “may” does not mean “must”, we can see no obvious justification for Messrs Downey and Black not exercising one or other of the powers provided for. By simply rejecting the claim, the liquidators took it out of the power of Trinity to go direct to the Court under s 307(2). If the s 307 procedure had been adopted with the result that the amount of Trinity’s claim was to be resolved by the Court, there could have been no obvious basis upon for the liquidators to persist with (and conclude) the creditors meetings with Trinity’s voting entitlement undetermined.
[36] Against that background, it seems to us that Trinity has a credible basis for challenging the decision by Messrs Downey and Black to reject out of hand its initial claim.
[37] There remain awkward questions as to the extent to which Trinity should be recognised as a creditor. The key problem from Trinity’s point of view is that CWF Holdings’ liability to it is confined to the assets of the unit trust. If CWF Holdings has a substantial claim against the directors, this problem could be addressed by treating the value of that claim as an asset of the unit trust. But there are perhaps some elements of circularity which may prove problematic. For instance, it seems likely that the directors will seek to justify their actions (in terms of whether they breached their duties to CWF Holdings) by reference to CWF Holdings’ limited contractual exposure to Trinity. Quite how such an argument would be addressed in a claim against them by CWF Holdings is by no means clear. It follows that there will be difficulties in ascribing a value to Trinity’s claim for the purposes of the liquidation.
[38] We accept that Messrs Downey and Black have statutory duties under the Companies Act and likewise accept that it would be inappropriate to infer bias (or anything similar) from the fact that they have an indemnity from CanWest. But we are left with the view that their original actions in rejecting the claim out of hand and proceeding with the creditors’ meeting were arguably unreasonable. Messrs Downey and Black were perhaps unwise to instruct as their solicitors, the firm which has acted throughout for CanWest NZ. All in all it is not entirely surprising that Trinity should perceive them to be in CanWest’s camp and for this reason not wish to engage with them in terms of identifying and particularising possible claims against third parties which might augment the assets of CWF Holdings and thus address the problem identified in [38]. That such claims have yet to be identified does not, therefore, seem to us to be a controlling consideration at this preliminary stage of the exercise.
[39] In those circumstances it seems to us that each of the categories of relief identified by Trinity is sufficiently arguable to warrant the granting of leave.

Result

[40] In the circumstances the cross-appeal by the respondents is dismissed. The respondents are to pay the appellant a sum of $2,500 by way of costs, together with usual disbursements. The award of costs in favour of the appellant recognises the late abandonment of the appeal in relation to the disclaimer.

Solicitors:
Bradbury & Muir, Auckland for Appellant
Russell McVeagh, Auckland for Respondents