Eagle v Petterson HC Auckland CIV 2011-404-7387 [2011] NZHC 1796 (16 December 2011)

Last Updated: 22 December 2011

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

_{CIV 2011-404-7387}

BETWEEN RYAN REGINALD EAGLE AND PETER JAMES GOTHARD

Applicants

AND DAVID ROSS PETTERSON Respondent

CIV 2011-404-7069

AND BETWEEN DAVID ROSS PETTERSON Applicant

AND PETER JAMES GOTHARD AND RYAN REGINALD EAGLE

First Respondents

AND COMMISSIONER OF INLAND REVENUE

Second Respondent

Hearing: 6 December 2011

Counsel: B Gustafson and M H L Morrison for Mr Petterson (liquidator)

M Kersey and S P Pope for Mr Gothard and Mr Eagle (receivers) No appearance for Commissioner of Inland Revenue (abiding decision)

Judgment: 16 December 2011

_{JUDGMENT OF HEATH J}

This judgment was delivered by me on 16 December 2011 at 4.00pm pursuant to Rule 11.5 of the High

Court Rules

_{Registrar/Deputy Registrar}

EAGLE AND GOTHARD V PETTERSON HC AK CIV 2011-404-7387 16 December 2011

Contents

Introduction [1] The applications [3] An introduction to the issues [7] The facts [16] The “apportionment” exercise

(a) The legislation [34]

(b) The submissions in outline [41] (c) Legal analysis [43] (d) Assessment of fair and equitable apportionment [55] Compliance with liquidator’s requests for books and records [61] Costs of the proceedings [72] Discovery [74] Result [75]

Introduction

[1] Section 30 of the Receiverships Act 19931 requires a receiver of a company to apply accounts receivable and inventory (or their proceeds) to meet (with some minor exceptions)2 preferential claims set out in Schedule 7 of the Companies Act

1993. The section applies only if, at the time the receiver was appointed, the company were not also in liquidation. It works well, in those circumstances.

[2] Problems arise if liquidation intervenes. The present dispute concerns:

(a) The right of receivers to remuneration and other expenses incurred in relation to the realisation of accounts receivable and inventory.

(b) Whether the receivers are entitled to claim remuneration and expenses in supplying information to the liquidator about the company’s general affairs and its financial position.

(c) The fund (or funds) that should bear the costs of the present applications.

1 _{Set out at para [34] below.}

2 Receiverships Act 1993, s 30(2)(c).

The applications

[3] Hurlstone Earthmoving Ltd (Hurlstone), River Island Shingle Company Ltd, Hayes Earthmoving Services Ltd and New Zealand Pollution Engineering Ltd were engaged in earthmoving and construction businesses. While incorporated in New Zealand, they also operated in Australia, and the Cook Islands. On 13 July 2011, GE Finance and Insurance (GE) appointed receivers (Messrs Eagle and Gothard of Ferrier Hodgson, a firm of insolvency practitioners in Sydney) of all four companies,

under the terms of general security agreements in its favour.3

[4] On 9 September 2011, this Court made an order putting Hurlstone into liquidation.4 The other three companies, all subsidiaries of Hurlstone, were each placed into liquidation on 26 September 2011 by special shareholders’ resolutions, initiated by the liquidator.5

[5] In order to resolve the disputes efficiently, both the receivers and the liquidator have sought directions from the Court.6 It is hoped that payments can be made to preferential creditors (who include former employees) before the Christmas vacation. While I would have preferred more time to consider the legal issues in more depth, that imperative requires a prompt decision.

[6] I address the issues by reference only to Hurlstone. I will hear counsel on the precise orders to be made later.7 That hearing will extend to any orders required in respect of the subsidiary companies, as a result of the general principles articulated in this judgment.

An introduction to the issues

[7] If a trading company becomes unable to pay its debts as they fall due, a state of insolvency exists. Unless the company’s business can be rescued, it is likely to be

3 _{See paras [16]–[19] below.}

4 _{Companies Act 1993, s 241(2)(c).}

5 _{Ibid, s 241(2)(a).}

6 The receivers’ application is brought under s 34 of the Receiverships Act 1993 and the liquidator’s

_{under s 261 of the Companies Act 1993.}

7 See paras [75] and [76] below.

made subject to a formal insolvency regime designed to realise its assets for the benefit of creditors. Two of the most common regimes used to achieve those ends are receivership and liquidation.

[8] Receivership is, primarily, a self-help remedy available to a secured creditor. Most often (and in this case) it is commenced by the appointment of a receiver under powers conferred contractually by a general security agreement. Usually, the contract provides that the receiver shall act as agent of the company. As a matter of law, most of the functions and powers of directors are suspended while the receivership subsists.8

[9] Liquidation is a collective regime in which assets are realised for the benefit of all creditors, in accordance with statutory priorities. All creditors who fall within a particular class have their claims paid rateably out of realised assets.9 In very general terms, the ranking of creditors is secured, preferential and unsecured.

[10] In the case of a liquidation, preferential payments are governed by ss 312 and

313 and Schedule 7 of the Companies Act 1993. In a receivership, s 30 adapts

Schedule 7 to fit the different nature of that regime.10

[11] Until the Personal Property Securities Act 1999 came into force, the most common method of financing a trading company was the debenture. Through that device, a financier could obtain a fixed charge over specific assets and a floating charge over others. The ―thinking behind the development of the floating charge was that compliance with the terms of a fixed charge on the company’s circulating

capital would paralyse its business‖.11

[12] The floating charge was capable of affording to a creditor, through a single instrument, an effective and comprehensive security over the entire undertaking of a

_{company, while leaving it free to deal with its assets and pay creditors in the ordinary}

8 _{See Paramount Acceptance Co Ltd v Souster [1981] 2 NZLR 38 (CA) at 43.}

9 This is known as the pari passu principle. Generally, see Attorney-General v McMillan & Lockwood Ltd [1991] 1 NZLR 53 (CA) at 58 and 61 (Richardson and Bisson JJ; Williamson J dissenting).

10 _{Receiverships Act 1993, s 30(3).}

11 Commissioner of Inland Revenue v Agnew [2002] 1 NZLR 30 (PC) at para [7].

course of business. As Lord Millett said, giving the advice of the Privy Council in Commissioner of Inland v Agnew, because ―the existence of a fixed charge would make it impossible for the company to carry on business in the ordinary way without the consent of the charge holder, it follows that its ability to do so without such consent is inconsistent with the fixed nature of the charge‖.12 Generally, preferential and unsecured creditors deal with a company on the basis that it has access to its circulating capital to meet current debts. That is the best rationale for preferential payments to be made out of assets that would, otherwise, be realised for the benefit

of secured creditors.

[13] The original version of s 30 applied to a receiver of a company, other than one in liquidation at the time of his or her appointment, who was appointed under either a floating charge or a fixed or specific charge that conferred a floating security at the time it was created. The floating charge met its demise when the Personal Property Securities Act came into force. That meant that a receiver’s obligation to pay preferential creditors had to be put on a different conceptual footing.

[14] The present version of s 30 obliges a receiver to pay preferential creditors out of two types of assets; accounts receivable and inventory. Those are assets that generally change over time and, typically, comprise the ―circulating capital‖ of the company to which the floating charge was directed.13 The new s 30 replaces the redundant language of the floating charge with a specific definition of the circulating capital to which it applies.14

[15] The most recent amendment to s 30 was made in consequence of the enactment of the Property Law Act 2007. Schedule 7 of that Act introduced a new s 30(2B) which governs the way in which a receiver’s remuneration or expenses is to

_{be apportioned as between accounts receivable or inventory (on the one hand) and}

12 Generally, see Re Yorkshire Wool Combers Association Ltd [1903] 2 Ch 284 (ChD and CA) at 288–

289 (Farwell J) and at 294 (Vaughan Williams LJ) 295–296 (Romer LJ) 297 (Cozens-Hardy LJ). Similar sentiments were expressed on appeal to the House of Lords (sub nom Illingworth v Houldsworth [1904] AC 355 (HL) at 357–358 (Earl Halsbury LC)).

13 _{See Agnew v Commissioner of Inland Revenue [2002] 1 NZLR 30 (PC) at paras [7] and [13].}

14 See Heath & Whale on Insolvency (LexisNexis, looseleaf ed) at para 14.63 (Associate Professor

Gedye).

other property secured by the security interest (on the other).15 There is no judicial authority on the interpretation of s 30(2B). There do not appear to be any publicly available documents to explain the purpose of this amendment. It seems likely that it was inserted as a convenient means of clarifying a receiver’s obligations under s 30, through a statutory vehicle that deals with some aspects of receiverships itself.

The facts

[16] On 6 November 2007, Hurlstone entered into a general security agreement with GE Finance and Insurance (GE). GE’s security interest was over all personal and non-personal property of Hurlstone. Those terms were defined in a manner that created a charge over the whole undertaking of Hurlstone, other than its land.

[17] The charge created by the agreement secured due and punctual payment of the moneys secured and Hurlstone’s performance of contractual obligations. An annexure to the general security agreement identified machinery in respect of which specific charges were granted. Clause 7 of the general security agreement gave GE the right to appoint a receiver over all or any of the secured property. The receiver was to act as the agent of the company. The receiver’s powers included the right to take possession, get in, manage and sell the secured property and to give receipts for money and other assets received.

[18] Before receivership, Mr Kelly (another partner of Ferrier Hodgson, in Sydney) had been engaged by GE to review the financial positions of companies within the Hurlstone group and to discuss management options with their directors. In the course of that assignment, Mr Kelly formed the view that the accounting systems of the companies were limited. In particular, no consistent policies were applied across the group. The information systems were not generating accurate management information.

[19] When receivers were appointed, on 13 July 2011, Hurlstone owed

$12,743,426.60 to GE. The Deed of Appointment entitled the receivers to

_{remuneration for their services, ―being an amount calculated at the rates normally}

15 Section 30(2B) is set out in para [34] below.

charged by the firm of which the Receivers are members for receiverships under general security agreements‖ and ―to reimbursement in respect of all reasonable legal costs, charges and expenses properly incurred by them in the exercise of their functions and powers on the terms of‖ the Deed of Appointment.

[20] Following appointment, the receivers undertook an extensive review of the company’s records to determine the true financial position. Some difficulty was encountered due to the absence of schedules of current or forecast contracts, assets by location or asset utilisation. That meant that considerable time was spent by the receivers in investigating the nature and collectable value of accounts receivable, inventory and other property of companies within the Hurlstone group. There were disputes over title to a number of assets. The intra-group arrangements were complex.

[21] Through delegated officers, the receivers took control of business premises in Auckland, Napier and New Plymouth. In addition, property and inventory were located at other sites; for example, Woodville and Taupo. Representatives of the receivers visited those sites to communicate with employees and to secure the assets.

[22] The majority of employees were made redundant immediately. Six were retained in the short term, to assist the receivers with the location of assets, finalising payroll and annual leave entitlements, recovery of debts and other statutory tasks. The contracts of each of those six employees have since been terminated.

[23] While the affairs of the companies were interconnected, the receivers endeavoured, to the best of their ability, to allocate time spent to the appropriate company, for remuneration purposes. They also set up systems to identify, for the purpose of an anticipated s 30(2B) apportionment exercise, tasks undertaken and amounts charged for work undertaken in respect of the accounts receivable and inventory.

[24] The evidence suggests a number of difficulties were encountered in collecting accounts.16 A good example are the debts allegedly owing by MacConnell Dowell

16 The liquidator does not accept that the accounting systems were as poor as the receivers contend.

Constructors Ltd (MacDow). Hurlstone was a party to a number of contracts with MacDow for work on various sites in New Zealand and one, the Avatiu Port redevelopment, in the Cook Islands. Due to disputes raised by MacDow, debts alleged to total nearly $630,000 have not yet been recovered.

[25] An illustration of the state of Hurlstone’s books comes from the receivers’

attempts to recover a debt from Ontrack Infrastructure Ltd (Ontrack). While, nearly

$640,000 was collected from Ontrack, the records inherited by the receivers from the company had shown the debt owing as $137,500. Had the records been taken at face value, almost $500,000 could have gone uncollected. Further analysis yielded a better result, from which preferential creditors will benefit.

[26] The liquidator, Mr Petterson, was appointed on 9 September 2011. He is based in Auckland. Mr Petterson has made a number of criticisms of the way in which the accounts receivable and inventory were collected and realised. Supported by evidence from Hurlstone’s former Chief Financial Officer, Mr Corliss, he queried whether the receivers could have obtained greater assistance from the company’s books and records than appears to have been the case.

[27] On the present applications, in the absence of cross-examination of witnesses, I cannot resolve differences of that type. I proceed, for present purposes, on the basis that the receivers’ evidence is accurate and that any questions about the amount of remuneration claimed can be resolved, ultimately, on an application by the liquidator to review the remuneration charged and to require any unreasonable

amount retained to be refunded.17

[28] The receivers lodged their first report to Hurlstone’s creditors with the

Registrar of Companies, on 12 September 2011.18 The proximity of that date to Mr

_{Petterson’s appointment is helpful, in assessing what had been done in the six}

He also questions whether the work actually undertaken was, objectively, necessary. See further para

_{[26] below.}

17 Receiverships Act 1993, s 34(2)(a) and (b). See also Re Roslea Path Ltd (in liq) HC Hamilton, CIV

2005-470-611, 17 December 2009. Arguably, though I express no view on this issue, the liquidator may also have a right to challenge (as a party chargeable, on behalf of preferential creditors) the relevant costs incurred by the receivers’ solicitors: s 132(2) of the Lawyers’ and Conveyancers’ Act

_2006.

18 Receiverships Act 1993, s 23.

months from the receivers’ appointment. The receivers described the property they were required to manage, in that report:

3. Particulars of the assets comprising the property in Receivership

_{Non Circulating Assets}

i. Plaint and Equipment – Since their appointment the Receivers have sought to locate and collect plant and equipment from various work sites situated throughout New Zealand and the Cook Islands. The majority of the Company’s equipment has now been located and will be sold via auction at the end of September 2011. Given the commercially sensitive nature of the auction the Receivers are unable to disclose any further information but can confirm that certain items of plant and equipment have been sold to date for an aggregate total of $869,565 plus GST. Please note that the sale price was reviewed by an independent valuer prior to finalisation.

ii. Fixtures, Fittings and IT Equipment – the majority of the fixtures, fittings and IT equipment were sold shortly after our appointment for

$19,425 plus GST. Please note that the sale price was reviewed by an independent valuer prior to finalisation.

iii. Leasehold improvements – this relates to capitalised expenditure incurred by the Company in relation to improvements made to various leasehold properties. No realisations are expected from this source.

...

[29] Further, the receivers summarised the secured, preferential and unsecured debts of Hurlstone:19

(a) Secured Creditors

GE Finance and Insurance 19,012,614

_{Other Secured Creditors 84,118}

_{Total Estimated Secured Creditors 19,096,732}

(b) Priority Creditors

Employee Claims 450,000

_{Inland Revenue Department 1,786,000}

Total Estimated Priority Creditors 2,236,000

(c) Unsecured Debts

3rd Party Unsecured Creditors 4,780,974

Related party Creditors 10,592,332

_{Total Estimated Unsecured Claims 15,373,306}20

[30] Mr Kelly has provided evidence on questions of remuneration and expenses. Two broad categories emerge. The first is the amount of remuneration and expenses incurred by the firm of whom the receivers are partners. The second are the fees and expenses charged by the solicitors instructed to act for the receivers, in New Zealand; Russell McVeagh, Auckland.

[31] Restricting the summary to Hurlstone, the amounts attributed to each category are:21

_{Ferrier Hodgson Russell McVeagh}

Accounts receivable and

_inventory

$151,856.31 $47,988.35

General administration

(calculated at 10% of total costs)

$37,505.04 $9617.29

Responding to liquidator’s

_requests

$36,689.23 $9007.67

[32] As to the costs of these proceedings, a further $49,819.98 has been incurred by Ferrier Hodgson and $50,316.35 by Russell McVeagh. Those amounts include

_{GST and have been calculated as at 16 November 2011.}

20 No costs (or anticipated costs) of realisation were included in the receivers’ estimated outcome

_statement.

21 Remuneration or expenses that have been incurred in Australian dollars have been converted to

New Zealand dollars, at the applicable exchange rate, on 16 November 2011.

[33] In calculating general administration expenses, the receivers have not included costs and expenses that can be tied specifically to the realisation of assets other than accounts receivable and inventory.

The “apportionment” exercise

(a) The legislation

[34] Section 30(1), (2), (2A) and (2B) provides:22

30 Preferential claims

(1) This section applies to a receiver of the property of a grantor that is a company, other than a company in liquidation at the time of the receiver's appointment, and who was appointed under a security agreement that created or provided for a security interest that—

(a) is over all or any part of the company's accounts receivable and inventory or all or any part of either of them; and

(b) is not a purchase money security interest that has been perfected at the time specified in section 74 of the Personal Property Securities Act 1999; and

(c) is not a security interest that has been perfected under the Personal Property Securities Act 1999 at the time of the receiver's appointment and that arises from the transfer of an account receivable for which new value is provided by the transferee for the acquisition of that account receivable (whether or not the transfer of the account receivable secures payment or performance of an obligation).

(2) A receiver to whom this section applies must apply accounts receivable and inventory that are subject to the security interest or their proceeds—

(a) first, to reimburse the receiver for his or her expenses and remuneration; and

(b) secondly, to pay the claims of any person who has—

(i) a purchase money security interest over all or any of those assets, that has been perfected at the time specified in section 74 of the Personal Property Securities Act 1999:

(ii) a security interest over all or any of those assets, that has been perfected under the Personal Property Securities Act 1999 at the time of the receiver's appointment and that arises from the transfer of an account receivable for which new value is provided by the transferee for the acquisition of that account receivable (whether or not the transfer of the account receivable secures payment or performance of an obligation); and

(c) thirdly, to pay preferential claims to the extent and in the order of priority specified in Schedule 7 (except clauses 1(1) and 2(1)(b)) of the Companies Act 1993.

(2A) The receiver must apply the accounts receivable and inventory as set out in subsection (2) before paying the claims of any person under a security interest, other than a security interest referred to in subsection (2)(b).

(2B) For the purposes of subsection (2)(a), if an amount of an expense or of remuneration—

(a) is payable partly in relation to the accounts receivable or inventory concerned and partly in relation to other property,—

(i) the amount must be fairly and equitably apportioned between the accounts receivable or inventory and the other property; and

(ii) the proportion relating to the accounts receivable or inventory must be taken into account; and

(iii) the proportion relating to the other property must be disregarded:

(b) is payable only in relation to property other than the accounts receivable or inventory concerned, the amount must be disregarded:

(c) is not payable in relation to any particular property, only a fair and equitable proportion of the amount must be taken into account.

[35] Those parts of Schedule 7 of the Companies Act 1993 that have been

_{exempted from the receivers’ obligation to pay preferential claims}23 _are:

23 See s 30(2)(c), set out at para [34] above.

Schedule 7 – Preferential claims

Priority of payments to preferential creditors

(1) The liquidator must first pay, in the order of priority in which they are listed,—

(a) the fees and expenses properly incurred by the liquidator in carrying out the duties and exercising the powers of the liquidator, and the remuneration of the liquidator; and

...

2. Conditions to priority of payments to preferential creditors

(1) The claims listed in each of subclauses (2), (3), (4), and (5) of clause

1—

...

(b) in so far as the assets of the company available for payment of those claims are insufficient to meet them,—

....

[36] Clause 2(2) of Schedule 7 makes it clear that the terms ―account receivable‖ and ―inventory‖ are intended to have the meanings ascribed to them by the Personal Property Securities Act 1999. Section 16 of the Act defines them:

Account receivable means a monetary obligation that is not evidenced by chattel paper, an investment security, or by a negotiable instrument, whether or not that obligation has been earned by performance:

Inventory means goods that are—

(a) Held by a person for sale or lease, or that have been leased by that person as lessor; or

(b) To be provided or have been provided under a contract for services; or

(c) Raw materials or work in progress; or

(d) Materials used or consumed in a business:

[37] In this case, there is no dispute about the categorisation of assets realised by the receivers. However, in some cases, it will be necessary to inquire into and ascertain whether any particular monetary obligation is an ―account receivable‖ or not; only an ―account receivable‖ as defined can be used to meet the preferential

claims. For example, is it an account receivable or chattel paper?24 Similarly, disputes might arise in other cases as to whether particular goods fall within the definition of ―inventory‖.

[38] In this case, s 30(1) is satisfied. Messrs Eagle and Gothard were appointed as receivers before liquidation intervened. The general security agreement under which they were appointed granted a security interest over (among other things) the company’s accounts receivable and inventory. The security agreement was neither a purchase money security interest nor a security interest that had been perfected before the receivers’ appointment, arising out of the transfer of an account receivable.

[39] Section 30(2) specifies the order in which the accounts receivable and inventory (or their proceeds) must be applied. After the receivers have reimbursed themselves for expenses and remuneration to which they are entitled under s 30, they are required to pay preferential claims ―to the extent and any order of priority specified in Schedule 7 (except cls 1(1) and 2(1)(b)) of the Companies Act 1993‖.25

In calculating remuneration and expenses, for the purposes of s 30(2)(a), the

receivers are required to apportion those costs ―fairly and equitably ... between the accounts receivable or inventory and the other property‖ secured by the charge.26

[40] Section 30(2B)(a)(i) identifies the apportionment to be made. Section

30(2B)(a)(ii) and (iii), (b) and (c)27 provides a framework for determining the apportionment.

(b) The submissions in outline

[41] Mr Gustafson, for the liquidator, submits that s 30(2B) should be given a narrow interpretation. He contends that the remuneration and expenses payable out

24 Heath & Whale on Insolvency (LexisNexis, looseleaf ed) at para 14.63 (Associate Professor

_{Gedye). See the definition of ―account receivable‖, set out at para [36] above.}

25 _{Receiverships Act 1993, s 30(2)(c).}

26 _{Receiverships Act 1993, s 30(2B)(a)(i).}

27 This provision came into force on 1 January 2008, when the Property Law Act 2007 commenced. For that reason, there is no discussion of it in the leading New Zealand text, Blanchard & Gedye, Private Receivers of Companies in New Zealand (LexisNexis, 2008). As the text states the law as at 1

January 2008, the provision is set out but there is no commentary on it: see paras 6.06 and 7.01.

of accounts receivable and inventory should be linked directly to the relevant item of property (eg a specific debt or item of inventory) and extend no further than salvage costs. To do otherwise, he submits, would throw onto the preferential creditors costs that ought properly to be borne by the secured creditor who has appointed the receivers.

[42] Mr Kersey, for the receivers, submits that a wider approach is required. He points to the use of phrases such as ―in relation to‖ and ―relating to‖ in s 30(2B) as supporting a contention that a broader range of costs ought to be borne by the fund otherwise available for preferential creditors.

(c) Legal analysis

[43] The underlying principle on which s 30(2B) is based is the need for a party for whose benefit particular work is undertaken to bear the cost involved. While the appointment of a receiver is undertaken by a secured creditor primarily for its own benefit, the legislation extends the receivers’ functions to matters of public interest,28 as well as the private interests of preferential creditors.

[44] The legislative direction to the receiver is that he or she must ―fairly and equitably‖ apportion any expense or remuneration ―between the accounts receivable or inventory and the other property‖.29 In doing so, the receiver must take into account the proportion that relates to the accounts receivable or inventory but must disregard the proportion that relates to other secured property.30 If an expense or remuneration is not payable in relation to any particular property, ―only a fair and equitable proportion of the amount must be taken into account‖.31

[45] Key phrases in s 30(2B) emphasise that the expenses or remuneration

claimed is that incurred ―in relation to‖ the accounts receivable or inventory

_{concerned. I agree with Mr Kersey that the phrase ―in relation to‖ is intended to}

28 For example, the need to prepare reports for registration with the Registrar of Companies (s 23

Receiverships Act 1993) and to report suspected offences against, among other things, the Crimes Act

_{1961 and the Companies Act 1993 (s 28 Receiverships Act 1993).}

29 _{Receiverships Act 1993, s 30(2B)(a)(i).}

30 _{Ibid, s 30(2B)(a)(ii) and (iii) and (b).}

31 Ibid, s 30(2B)(c).

enable a receiver to claim expenses and remuneration for more than just the salvage costs involved in realising a debt or a part of the company’s inventory.

[46] So far as accounts receivable are concerned, the expression ―in relation to‖ captures investigation of what debts are owing, an assessment as to their collectability, steps taken to collect and the distribution of proceeds. In the case of inventory, it will be necessary for the receivers to ascertain what inventory32 exists, to secure the property, to market the goods for sale in a manner consistent with the receiver’s duty to obtain the best price reasonably obtainable at the time of sale33 and to distribute the proceeds of sale. Differing degrees of work may be required: for example, in the case of perishable goods there will be a need to make quick commercial decisions.

[47] It has been suggested that the apportionment required by s 30(2B)(a) should be carried out in a manner akin to that determined by the Supreme Court of Victoria in Waters v Widdows.34 In that case, Nicholson J referred to a table tendered by an insolvency practitioner that categorised, as expenditure, (a) general administration expenses, (b) costs that are properly applicable to the realisation of assets subject to a fixed charged and (c) costs and expenses properly referable to the realisation of

assets produced by a floating charge. Nicholson J adopted the practitioner’s ―method

of approach‖:35

... to debit the costs and expenses set out in the second two columns [(b) and (c) above] directly to the funds concerned and to debit the costs and expenses set out in the first column [(a)] above pro rata against the two funds.

[48] Under the Waters v Widdow principle, assessed costs of realisation of assets subject to the fixed and floating charge are debited against those funds, whereas general administration expenses are shared pro rata. A point of difference is that

_{s 30(2B)(c) requires the general administration costs to be apportioned on a ―fair and}

32 _{As defined in s 16 of the Personal Property Securities Act 1999, set out at para [36] above.}

33 _{Receiverships Act 1993, s 19.}

34 Waters v Widdows [1984] VicRp 41; [1984] VR 503 (SC). See Heath & Whale on Insolvency (LexisNexis looseleaf, ed) at para 14.63 (Associate Professor Gedye). A similar suggestion is made in Blanchard & Gedye, Private Receivers of Companies in New Zealand (LexisNexis, 2008) at para 6.06.

35 Ibid, at 522. The Judge considered this approach was consistent with that articulated by Dixon J in Re Universal Distributing Co Ltd [1933] HCA 2; (1933) 48 CLR 171 (HCA) at 174. That was a case arising out of a liquidation, where the liquidator had realised assets on behalf of the debenture holders.

equitable basis‖. There is no requirement for that to be on a pro rata basis; though that could reflect the actual outcome of an apportionment in a particular case.

[49] All references are to ―accounts receivable‖ in s 30(2B). There are no references to an ―account receivable‖. ―Inventory‖ is a collective noun. The terminology suggests that the object of the provision is to enable a fair and equitable apportionment of remuneration and expenses to be made. A broad assessment of that type is inconsistent with a mechanical application of costs and expenses to individual debts or items of inventory.

[50] The cost to all creditors of requiring a receiver to prove, to the satisfaction of a liquidator or the Court, the remuneration and expenses directly referable to an individual debt or item of inventory does not sit easily with the general notion of an assessment of a fair and equitable apportionment. It seems to me that the Legislature intended a practical approach to be taken. There is an underlying expectation that receivers and liquidators will be able (readily) to reach agreement on an apportionment, so that distributions can be made to those creditors entitled to participate in the fund. That supports the need for a broad brush assessment, as opposed to a minute analysis. The rationale is also consistent with the need, should a Court be required to assist, for a summary determination that does not require extensive affidavit evidence or cross-examination.

[51] The goal of efficient administration, for both receiverships and liquidations, would be frustrated if a more adversarial resolution were required. The Court will have ample evidence to resolve the issue if a responsible approach (such as that taken in this case) were taken by receivers who, on a continuing basis, allocate remuneration and expenses to the categories to which s 30(2B) refers.

[52] The need for efficiency is confirmed by both contractual and statutory requirements. Secured creditors who appoint receivers expect them to act efficiently in the performance of their tasks. If they do not, they may not receive another appointment. Similarly, Parliament expects a liquidator to act in the same way. Section 253 of the Companies Act 1993 states:

253 Principal duty of liquidator

Subject to section 254 of this Act, the principal duty of a liquidator of a company is—

(a) To take possession of, protect, realise, and distribute the assets, or the proceeds of the realisation of the assets, of the company to its creditors in accordance with this Act; and

(b) If there are surplus assets remaining, to distribute them, or the proceeds of the realisation of the surplus assets, in accordance with section 313(4) of this Act—

in a reasonable and efficient manner. (my emphasis)

[53] The words ―to take possession of, protect, realise, and distribute‖, in s 253, provide added support for my view about the breadth of work for which a receiver may charge remuneration and seek reimbursement of expenses under s 30(2B).36

Section 253 is an appropriate analogy because, often, a liquidator performs the role of realising assets for the benefit of preferential creditors.

[54] I take the view that a broad assessment is required to determine the amount to be recovered by a receiver as recompense for the realisation of circulating assets that is undertaken for the benefit of preferential creditors. There can be no objection, in this case, to the way in which the receivers have itemised the nature of the work undertaken to identify and realise the accounts receivable and inventory. Their allocation of costs to each of the statutory funds37 was responsibly undertaken. There may be disputes about the reasonableness of the remuneration charged, but they are more appropriately resolved later.38

(d) Assessment of fair and equitable apportionment

[55] Mr Kelly has produced schedules of tasks undertaken in dealing with accounts receivable, inventory and general tasks. There are some tasks, in relation to circulating assets, that go beyond getting in accounts receivable and realising inventory. They are the costs associated with the receivers’ dealings with employees. I do not consider that they can properly be regarded as part of the tasks undertaken in

relation to accounts receivable and inventory. Rather, they fall within the general administration expenses that must be apportioned on a fair and equitable basis.39 An adjustment is required to put them into that category.

[56] The ―general tasks‖ involve dealing with company records and accounting information, attending to completion of statutory obligations (in particular, preparation and registration of a report to creditors), supervision and co-ordination of staff working on the administration and dealings with unsecured creditors. On reviewing the list of general tasks, there is nothing that I consider falls outside the scope of remuneration and expenses linked to tasks that are not directly referable to realisation of accounts receivable and inventory (on the one hand) and other property subject to the general security agreement (on the other).

[57] From the remuneration charged in relation to the accounts receivable,40 it is necessary to deduct costs associated with employee41 dealings. Some further adjustment is required to reflect the fact that the receivers are based in Sydney. While, appropriately, there has been no charge for trans-Tasman travel, the hourly

rates charged by practitioners in Sydney are likely to be higher than their counterparts in New Zealand. Further, because the receivers in Sydney are unlikely to have detailed knowledge of applicable law in New Zealand, it is also likely that the solicitors’ costs will be higher than would otherwise be incurred. Some adjustment is required in both respects. I assess that at $15,000, in respect of the costs involved in relation to accounts receivable and inventory. General costs are covered under the separate s 30(2B)(c) apportionment.

[58] My assessments should not be taken as approving the level of remuneration to which the receivers or their solicitors are entitled. Nor should they be taken as encouragement to seek review of the costs. I have not considered those issues. My task has been to make an assessment of the disclosed remuneration and expenses that are properly charged against accounts receivable and inventory.

[59] In relation to general tasks, it will be necessary to bring back into account the amount claimed for dealing with employees that I have disallowed from the accounts receivable and inventory category.42 In the absence of any specific evidence about the remuneration and expenses incurred for realisation of other assets subject to the general security agreement,43 I agree with the apportionment suggested by the receivers for this aspect of the remuneration and expenses charged. That means that

90% of the burden is borne by the secured creditor and the balance of 10% by the preferential fund.

[60] I will leave it to counsel to confer in relation to the amounts in respect of which orders will be required.44 They should also take into account the further adjustment required as a result of my conclusions on the receivers’ claim for remuneration in responding to the liquidators’ requests for documents.45

Compliance with liquidator’s requests for books and records

[61] When liquidation intervenes, a receiver will generally have custody and control of all books and records, including accounting records, of the company. Like receivers, a liquidator is obliged to prepare reports that must be lodged with the Registrar of Companies. The first report, for a liquidator appointed by the Court (as was the case with Hurlstone) must be lodged 25 working days after the liquidator’s

appointment, or such longer period as this Court may allow.46 This means that a

liquidator must obtain information from the receivers in order to comply with his or her statutory duty.

[62] Mr Petterson, through a legal adviser, requested a meeting with the solicitors for the receivers. Because the receivers were based in Sydney, it was not feasible (in the absence of funds available to the liquidator) to meet directly with them. A meeting was held, on 14 September 2011, at the solicitors’ office at which time a

_{discussion took place about the information required. Mr Petterson advised that it}

42 _{See para [55] above.}

43 Compare with the formula adopted in Waters v Widdows [1984] VicRp 41; [1984] VR 503 (SC) at 522; set out at para

_{[47] above.}

44 See the directions made in paras [75] and [76] below.

was required urgently, both to undertake investigations (to ensure no urgent attention was required) and to prepare the first statutory report. Following that meeting, information was supplied by Russell McVeagh in two tranches; one on 21 September

2011 and the other on 23 September 2011.

[63] Section 261 of the Companies Act 1993 confers powers on a liquidator to obtain documents and other information. For present purposes, s 261(1), (3) and (5) are relevant:

261 Power to obtain documents and information

(1) A liquidator may, from time to time, by notice in writing, require a director or shareholder of the company or any other person to deliver to the liquidator such books, records, or documents of the company in that person's possession or under that person's control as the liquidator requires.

...

(3) A person referred to in subsection (2) of this section may be required—

(a) To attend on the liquidator at such reasonable time or times and at such place as may be specified in the notice:

(b) To provide the liquidator with such information about the business, accounts, or affairs of the company as the liquidator requests:

(c) To be examined on oath or affirmation by the liquidator or by a barrister or solicitor acting on behalf of the liquidator on any matter relating to the business, accounts, or affairs of the company:

(d) Assist in the liquidation to the best of the person's ability.

...

(5) The Court may, on the application of the liquidator or a person referred to in paragraph (d) or paragraph (e) or paragraph (f) of subsection (2) of this section, not being an employee of the company, order that that person is entitled to receive reasonable remuneration and travelling and other expenses in complying with a requirement of the liquidator under subsection (3) of this section.

....

The receivers seek an order that they be paid remuneration and other expenses for providing this information to the liquidator. They do so in reliance on s 261(5).

[64] Section 261(1) confers on a liquidator the right, by notice in writing, to require any person to deliver to him or her ―such books, records, or documents of the company in that person’s possession or under that person’s control as the liquidator requires‖.47 Non-compliance with a liquidator’s notice has serious consequences for a receiver. Default in compliance with that requirement results in an offence, for which the defaulter is liable on conviction to a fine not exceeding $50,000 or a term of imprisonment not exceeding two years.48

[65] The sanction for non-compliance emphasises the importance attached to the provision of information required by a liquidator. That sanction is underscored by the restrictions on any person from whom documents are required by a liquidator to claim any lien over such documents.49

[66] Notwithstanding s 261, a receiver is not required to deliver books, records or documents required by a liquidator if the receiver requires them ―for the purpose of exercising any powers or functions as receiver in relation to property of a company in liquidation‖.50 In that situation, a liquidator may, from time to time, by notice in writing, require the receiver to make such documents available to the liquidator for inspection at any reasonable time and to provide the liquidator with copies of them.51

In return, a liquidator is required to pay the reasonable expenses (but not the remuneration) of the receiver in complying with his or her requirement to inspect or to copy.52

[67] It is now common ground that no written requirement was made under s 261(1). In those circumstances, the ability to seek remuneration or expenses is not available. Section 261(5) (the provision authorising an application to this Court for that purpose) is not engaged unless a written notice has been issued under s 261 and

_{the person has been summonsed for examination.}53 _{Neither of those things occurred.}

47 _{Companies Act 1993, s 261(1).}

48 _{Ibid, ss 261(6A) and 373(3)(a).}

49 Ibid, s 263(1). If the debt arises in relation to the provision of services to the company before the commencement of liquidation, a preferential debt is created to the extent of 10% of the total value of

_{the debt, up to a maximum amount of $2000: s 263(2).}

50 _{Ibid, s262(1).}

51 _{Ibid, s 262(2) and (3).}

52 _{Ibid, s 262(4).}

53 Ibid, s 261(3) and (5).

[68] In my view, there is no legal basis on which the receivers can seek remuneration or expenses from the liquidator to meet the cost of complying with the liquidators’ request. They did so in lieu of a formal requirement or the need to attend for examination. That represented courteous compliance with what is expected of receivers who are dealing with liquidators. The remuneration and expenses incurred remains part of the general administration costs of the receivership. While those costs are not recoverable under s 261(5), they should be added to the general administration costs and expenses that will be borne, as to 10%, by the preferential creditor fund.

[69] There is an allied issue on which I wish to comment. It concerns the place at which accounting records of a company must be kept. In this case, the receiver was agent of the company until intervention of liquidation.54 There is nothing to suggest obligations in relation to the place at which accounting records are kept are any different when a receiver controls a company, than when it is in the hands of its directors.

[70] Section 195(1) and (2) of the Companies Act 1993 provides:

195 Place accounting records to be kept

(1) A company need not keep its accounting records in New Zealand. (2) If the records are not kept in New Zealand,—

(a) The company must ensure that accounts and returns for the operations of the company that—

(i) Disclose with reasonable accuracy the financial position of the company at intervals not exceeding 6 months; and

(ii) Will enable the preparation in accordance with the Financial Reporting Act 1993 of the company's financial statements and any group financial statements and any other document required by this Act—

are sent to, and kept at, a place in New Zealand; and

(b) Notice of the place where—

(i) The accounting records; and

(ii) The accounts and returns required under paragraph

(a) of this subsection—

are kept, must be given to the Registrar.

[71] When receivers are based outside of New Zealand, there is a need to comply with s 195(2).

Costs of the proceedings

[72] Mr Kersey submits that all costs incurred in relation to these applications should be borne by the fund otherwise available for preferential creditors. He makes that submission on the basis that the need for the hearing derives from the liquidator’s concerns and the inequity of requiring the secured creditor to meet the costs.

[73] These applications have been brought to facilitate the efficient administration of both the receivership and the liquidation. The receivers’ claims have not been wholly successful. In my view, given the novel nature of the case and the need for judicial assistance in the interpretation of s 30(2B), it is appropriate for the receivership fund to bear all costs and disbursements incurred by the receivers and for the fund available to preferential creditors to bear the costs and disbursements incurred by the liquidator.

Discovery

[74] The liquidator applied for an order requiring the receivers to disclose more particular records of the time spent on particular tasks. Having regard to the way in which I have approached the question of a fair and equitable apportionment of remuneration and expenses, it is probably unnecessary to deal with this application. However, I will not dismiss it until I hear further from counsel. There may be some aspects of it that I need to consider before final orders can be made.55

Result

[75] I adjourn the applications for a hearing before me at 10am on 21 December

2011. At that time, I will hear from counsel on the precise orders required to give effect to my judgment. Submissions shall be directed to all four companies, using the findings contained in this judgment as a basis for the apportionment required for companies other than Hurlstone. I will also hear counsel on any aspects of the discovery application that remain live.

[76] Counsel shall file a joint memorandum by 3pm on 20 December 2011 indicating the orders that they seek and, if there were any difference between them, what the differing orders are. If counsel agree on the terms of the orders I shall deal with that formal part of the hearing on the papers, vacate the hearing and excuse appearances. Otherwise, I will make formal orders after the hearing.

[77] I am conscious that this judgment has been prepared under considerable time constraints. Therefore, if counsel consider that I have failed to deal with a material aspect of the case, they have leave to seek an urgent telephone conference, through the Registrar, before the hearing scheduled for 21 December 2011.

[78] I thank counsel for their considerable assistance in the way in which they prepared for the hearing at short notice and for the quality of their submissions.

_{P R Heath J}

Delivered at 4.00pm on 16 December 2011

Solicitors:

Lowndes Jordan, PO Box, 5966, Auckland Russell McVeagh, PO Box 8, Auckland Counsel:

B Gustafson, PO Box 1297, Shortland Street, Auckland