Young & Associates Limited v Ruscoe [2012] NZHC 1438 (27 June 2012)

Last Updated: 6 July 2012

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

CIV-2012-485-65 [2012] NZHC 1438

UNDER the Companies Act 1993

IN THE MATTER OF Optimisationz Limited (in liquidation) BETWEEN YOUNG & ASSOCIATES LIMITED

Plaintiff

AND DAVID IAN RUSCOE AND RICHARD GRANT SIMPSON

Defendants

Hearing: 22 June 2012

Counsel: C J Tennet and K R Smith for Plaintiff

S R Sparksman and S H Backhouse for Defendants

Judgment: 27 June 2012

In accordance with r 11.5, I direct the Registrar to endorse this judgment with the delivery time of 11.00am on the 27th June 2012.

_{JUDGMENT OF WILLIAMS J}

Solicitors:

C J Tennet, Barrister, Wellington

Kensington Swan, Wellington

YOUNG & ASSOCIATES LIMITED V DAVID IAN RUSCOE AND RICHARD GRANT SIMPSON HC WN CIV-2012-485-65 [27 June 2012]

[1] The plaintiff seeks an order removing the defendants as liquidators of Optimisationz Limited (Optimisationz). It says that the liquidators have not been sufficiently vigorous in pursuing the shareholders of that company in relation to the shareholders’ current account deficit of $364,778. They accuse the defendants of being “friendly” to the shareholders.

[2] The plaintiff wants the defendants replaced by Michael Morley and John Fisk in whom they presumably repose greater trust.

[3] The plaintiff acted as accountant for Optimisationz and, at the date of liquidation, was owed $13,944.32 of which $1,394.43 was recognised as a preferential claim and subsequently paid out. The Commissioner of Inland Revenue is a creditor to a much larger extent. IRD held preferential claims totalling $8,607 and unsecured claims of $176,582. The Commissioner made no appearance, but in a memorandum filed by the manager of legal and technical services, the Commissioner lent his support to the application. There are no other creditors.

[4] Four matters were of particular concern to the plaintiff in terms of the way in which the defendants carried out their functions as liquidators. They were:

(a) The liquidators settled their claims against the shareholders Brett Annan and Christine Millar, their family trust, and a related company (ProjectIQ Limited), on terms that were too favourable to the shareholders. The settlement deed records that the shareholders and the trust together owed $563,622 to Optimisationz but this debt was settled for the sum of $96,000 payable in 48 monthly instalments of $2,000.

(b) The settlement failed to take into account the future earning capacity of Mr Annan, a consulting contractor to Greenstone (NZ) Limited. The argument was that while the economical outlook may be grim at present, that would not always be New Zealand’s case, and the liquidators should have provided for the possibility of greater

contribution from Mr Annan in the future. A similar submission was made with respect to Ms Millar, though the plaintiff admitted having less knowledge of her circumstances.

(c) Mr Annan and Ms Millar had extracted $728,000 in capital distributions from the family trust in 2008 and 2009, made possible through the refinancing of the family home. The plaintiff argued that there was no evidence that the liquidators had attempted to trace this money.

(d) A valuation in July 2008 set the value of the family home at

$1.6 million leaving ample equity for a 100 per cent payout.

[5] For the defendants, it was argued that they had made sound decisions for the benefit of creditors in the circumstances of this case. They argued:

(a) the settlement complained of led to Mr Annan and Ms Millar committing to repayment of 54 per cent of the company’s indebtedness to its remaining creditors without incurring the significant cost involved in litigation;

(b) Mr Annan’s future earning capacity was too contingent to provide a sound basis for recovery in the here and now;

(c) Mr Annan and Ms Millar had provided statutory declarations of their financial positions and had taken the advice of independent budget advisors approved by the liquidators when the liquidators agreed an affordable settlement sum and repayment schedule;

(d) the family home carried over $1.1 million in debt and the current rating valuation set the value of the house and land at only $840,000.

[6] This application is made pursuant to s 284(1)(b) of the Companies Act. That section provides that with leave, a creditor can apply for this court to “confirm, reverse, or modify an act or decision of the liquidator.”

[7] The leading case is Commissioner of Inland Revenue v Hulst[1]. The facts in that case were similar to the present case. The company in liquidation (Any Way Ltd) owned land. Secured creditors were Duthie Whyte Nominees Ltd as first mortgagee and Redline Holdings Ltd as second mortgagee. The IRD was an unsecured creditor. It was owed $123,000. Redline moved in and purchased the land for $35,000. This effectively meant IRD would receive nothing. IRD applied under s 284(1)(b) to reverse the transaction. Morris J refused the application. After traversing the leading authorities, he set the bar high for interference by the court:

The Court will not interfere with a liquidator’s decision unless there is a fraud where it can be demonstrated this discretion has not been exercised bona fide or unless he has acted in a way in which no reasonable liquidator would have acted: Leon f York-O-Matic Ltd [1976] 1 LWR 1450, Re Peters; Ex parte Lloyd (1882) 47 LT 64 at p 65.

In considering whether to interfere with a liquidator’s act or decision, the Court will not interfere with matters relating to day to day administration or with the exercise in good faith of the liquidator’s discretionary powers, or hold a liquidator accountable for an error of judgment: Re a Debtor [1949] 1

Ch 236, Yeomans v Walker (1986) 5 NSWLR 378; and, in particular, Re Equity Funds of Australia (1976) 2 ACLR 238 at p 239 where Bowen CJ states:

“The question arises, under Section 279, as to the circumstances in which the Court will reverse the act or decision complained of. It was submitted that the Court would not do so unless the Liquidator’s decision in the circumstances was so absurd that no reasonable man could arrive at it. Authority was cited for this test ... Indeed, the Courts consistently have been reluctant to interfere where the issue involved was whether, in some business or commercial sense, a liquidator had acted prudently. The Courts have used expressions in relation to this type of appeal indicating that they are reluctant to interfere and will do so only if it appears that the Liquidator’s decision is unreasonable. The Court will not interfere simply because its opinion might differ from that of the Liquidator.”

[8] Thus, decisions made by the liquidators reasonably and in good faith are most unlikely to be overturned by the courts. One can see why this would be so. The courts are not well placed to perform the functions undertaken by liquidators in real time and in the real world. Serious and obvious lapses in judgment on the part of liquidators must be shown before the courts will interfere.

[9] I note also the decision of Dunn J of the Queensland Supreme Court in Burnells Pty Ltd v Walsh[2] in which the Judge suggests that liquidators need to take proper advice when making decisions requiring consideration of matters outside their expertise. That case related to a sale at an alleged undervalue. The Judge said:

Similarly, in my opinion, a trustee or liquidator who exercises his powers in good faith, having taken proper advice, is not answerable to a creditor or a contributory even if the creditor or contributory is disposed to challenge the judgment of the liquidator... (my emphasis)

[10] I do not see that there is anything in the arguments relating to future earning power or the funds earlier dispersed by the trust to Mr Annan and Ms Millar. In a judgement-laden decision, the liquidators were entitled to treat future income earning capacity as too contingent. The defendants received statutory declarations and Mr Annan and Ms Millar obtained the assistance of budget advisors. The liquidators say they could and did use information gleaned from those processes in making their decisions. In addition, the capital distributions from the trust were made by independent trustees of the family trust, and in accordance with the terms of the trust deed. There was, the liquidators said, no basis upon which to conclude that Mr Annan and Ms Millar had spirited money away beyond their reach.

[11] The house valuation issue requires more careful consideration. There was, after all, a house valuation of $1.6 million which, if it accurately reflected the market, would see all creditors fully paid out. Should the defendants have obtained a valuation before settling for a lesser sum?

[12] Although a proper valuation might have provided the liquidators with greater assurance as to the path they had chosen, I do not consider that the standards in Hulst or Burnells have been breached. The following factors are significant in that respect:

(a) the valuation was old and, significantly, prior to the current downturn in Wellington house prices;

(b) the level of debt on the property was such that only a very good price

– close to the 2008 valuation – would have produced a full payout to creditors;

(c) in the context of a mortgagee sale, such a price was unlikely to be achieved;

(d) there was a very real possibility that any attempt to sell this property would be throwing good money after bad;

(e) in the circumstances, it was for the liquidators to decide whether a bird in the hand was better than two in the bush.

[13] For completeness, I note that the defendants agreed at the conclusion of the hearing to provide Mr Annan’s statutory declaration to the plaintiff. I have considered submissions made by both parties in that respect following release of the declarations. I am not satisfied that the financial information disclosed and submissions made require me to come to a different conclusion to that already reached.

_{[14] The application is dismissed and costs are reserved.}

Williams J

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[1] Commissioner of Inland Revenue v Hulst (2000) 19 NZTC 15,693 (HC).

[2] Burnells Pty Ltd v Walsh [1979] Qd.R 440 (SC) at 442.