Walker v Gibbston Water Services Limited [2013] NZHC 2933 (7 November 2013)

Last Updated: 17 March 2014

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV-2012-409-002834 [2013] NZHC 2933

UNDER Section 284 of the Companies Act 1993

IN THE MATTER of Gibbston Water Holdings Limited (in liquidation)

BETWEEN ROBERT BRUCE WALKER as liquidator of Gibbston Water Holdings Limited Applicant

AND GIBBSTON WATER SERVICES LTD First Respondent

AND CASTLEREAGH PROPERTIES LTD Second Respondent

AND KRISTINA LOUISE BUXTON Third Respondent

AND CANTERBURY LEGAL SERVICES LTD Fourth Respondent

Hearing: 16 September 2013

Appearances: K Sullivan for Applicant

J Moss for Respondents

Judgment: 7 November 2013

JUDGMENT OF ASSOCIATE JUDGE OSBORNE

_{on liquidator's Companies Act applications}

WALKER v GIBBSTON WATER SERVICES LTD [2013] NZHC 2933 [7 November 2013]

Castlereagh – Castlereagh Properties Ltd

CLS – Canterbury Legal Services Ltd

Equitable – Equitable Property Holding Ltd

FTG - FTG Trustee Services Ltd

Mr Henderson – David Ian Henderson

Mr Smith – Grant Smith of Canterbury Legal Services Ltd

Mr Walker – the liquidator – Robert Bruce Walker as liquidator of Gibbston

_{Water Holdings Ltd}

RFD – RFD Investments Ltd (in receivership and in liquidation) Water Holdings – Gibbston Water Holdings Ltd

Ms Buxton – Kristina Louise Buxton

Water Services – Gibbston Water Services Ltd

Mr Marshall – Denis William Anson Marshall as director of Gibbston Water

Services Ltd

[1] Robert Walker, as liquidator of Gibbston Water Holdings Ltd, seeks a number of orders and directions relating to that and other companies.

[2] A focus of the various parties’ concerns originally lay in water rights granted by the Otago Regional Council to Gibbston Water Services Ltd.

[3] Consequently, transactions involving Water Holdings and Water Services have come to the liquidator’s attention. His application as filed would require the Court to consider those transactions in detail.

[4] The nature of issues raised by the respondents by cross-application¹ led counsel to agree to having the competing applications initially heard on the basis of a series of questions:

A: Was the liquidation of Water Holdings valid?

(i) Was RFD Investments Ltd the shareholder of Water Holdings at the time of a shareholders’ resolution to place Water Holdings in liquidation?

(ii) Did the receivers of RFD validly exercise a right over the

Water Holdings shares when making the resolution? B: If the liquidation of Water Holdings was valid:

(i) Was Canterbury Legal Services Ltd’s fee note to Water Holdings for legal services on the transfer of Water Services’ shares from Water Holdings to Castlereagh Properties Ltd

_valid?

¹ See below [32]–[33].

(ii) If so, should the liquidator have called a creditors’ meeting on the appointment and/or is he compelled to call a meeting now at the request of CLS?

Factual background

[5] The water rights are held by Water Services. Water Services, with a number of the companies relevant to this proceeding, was associated with David Ian Henderson as part of or connected to his Property Ventures group. Other companies so connected were Water Holdings, Castlereagh, RFD (now in receivership and liquidation) and FTG Trustee Services Ltd.

[6] The entire shareholding in Water Services was held by Water Holdings. Until

2010, the entire shareholding in Water Holdings was in turn held by RFD.

[7] In February 2007, RFD had granted to Equitable Property Holding Ltd a general security over the assets of Water Holdings, which included RFD’s shareholdings.

[8] In breach of the general security agreement, RFD in March 2010 transferred its shares in Water Holdings to FTG. Soon afterwards RFD was placed in receivership (18 June 2010) and in liquidation (8 November 2010).

[9] RFD’s receivers took steps to recover for RFD the shares in Water Holdings. Kristina Buxton (Mr Henderson’s partner) as the director of FTG reached agreement with the RFD receivers to re-transfer the shares to RFD. She executed a share transfer dated 29 September 2011.

[10] In the meantime, however, on 24 August 2011, Water Holdings had divested itself of its shareholding in Water Services by transferring those shares to Castlereagh for $1. This was done without the knowledge of the RFD receivers. The transfer agreement was executed for Water Holdings by Ms Buxton as its director and by Ian Hyndman, a business associate of Mr Henderson, who had taken Mr Henderson’s place as director of Castlereagh. Castlereagh is in turn 100 percent owned by FTG.

[11] In October 2011, the RFD receivers took the next step in their recovery arrangements. On 10 October 2011 they resolved on behalf of RFD (now as the sole shareholder in Water Holdings) to put Water Holdings into liquidation, appointing Mr Walker as the liquidator.

[12] CLS is a firm of solicitors practising in Christchurch. Grant Smith is a director of CLS. Mr Walker, on his appointment as liquidator of Water Holdings, was aware that Mr Smith and CLS had acted for Water Holdings.

[13] Mr Walker immediately gave Mr Smith a notice under s 261 Companies Act

1993 requiring Mr Smith to provide specified information and material in relation to

Water Holdings.

[14] Mr Smith provided to Mr Walker a CLS file relating to Water Holdings. Mr Walker located on it a copy of the 24 August 2011 agreement whereby Water Holdings had transferred its Water Services shares to Castlereagh for $1. The CLS file contained also an invoice addressed by CLS to Water Holdings dated 13

September 2011. It related to “Sale of Shares” and was for $969.45.

[15] Mr Walker gave notice to Ms Buxton (as director of Water Holdings) that (pursuant to s 141(1) Companies Act 1993) he was avoiding the 24 August 2011 agreement. Mr Walker sent a parallel notice to Mr Hyndman, the director of Castlereagh.

[16] On 14 October 2011, Mr Walker placed an advertisement of the liquidation of

Water Holdings in the Press newspaper. The notice to creditors fixed 18 November

2011 as the date by which creditors were to make their claim.

[17] On 19 October 2011, CLS through Mr Smith wrote to Mr Walker to state that CLS was a creditor of Water Holdings. Mr Smith said he looked forward to receiving the notice of the meeting (of creditors) required under s 243(1)(a) Companies Act 1993.

[18] On 4 November 2011, Mr Walker prepared his first report of the liquidation of Water Holdings, which he filed in the Companies Office. Mr Walker recorded, having regard to the assets and liabilities and various other matters, that he was dispensing with the meeting of creditors pursuant to his entitlement under s 245

Companies Act 1993. He stated that:

... the assets available for realization are of an uncertain nature and value and I think a meeting to confirm my appointment would be a waste of resources and money.

_{[19] On 20 December 2011, CLS through Mr Smith wrote to Mr Walker stating:}

CLS had been instructed by Ms Buxton and Castlereagh to respond to Mr

_{Walker’s October correspondence.}

As the CLS bill had not been settled, Mr Walker had not complied with s

_{243 Companies Act so as to confirm his appointment.}

Ms Buxton would therefore not be responding any further to

_{correspondence until “that takes place”.}

Castlereagh did not accept that Mr Walker was entitled to cancel the (24

_{August 2011) agreement.}

[20] On 23 December 2011, Mr Walker made arrangements in relation to Water

_{Services. In particular –}

He obtained from Denis Marshall Mr Marshall’s consent to appointment

_{as a director of Water Services.}

Mr Walker, as liquidator of Water Holdings (now the holder of Water

Services’ shares), executed resolutions appointing Mr Marshall director of Water Services and removing Ms Buxton from such office.

[21] On 10 January 2012, Mr Walker wrote to CLS. Mr Walker recorded that he did not consider CLS to be a creditor of Water Holdings. He referred to difficulties

he had experienced in obtaining cooperation from Ms Buxton in relation to relevant documentation. He asserted that CLS had failed to make a claim (proving its alleged debts) in accordance with s 304 Companies Act. He stated that it was unconscionable of CLS to purport to charge Water Holdings $969.45 in relation to a transaction for which Water Holdings was to receive $1. He referred to aspects of CLS’ conduct which he considered did not meet the requirements of the Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules 2008.

[22] On 16 January 2012, Mr Smith of CLS sent an email to Mr Marshall. In the email, Mr Smith asserted that:

Mr Walker had no authority to act further (in relation to Water Holdings)

as Mr Walker had not conducted a meeting as required under s 243

_{Companies Act; and}

even if Mr Walker’s appointment were confirmed, the purported

_{avoidance of the 24 August 2011 agreement was ineffective.}

[23] On 17 January 2012, CLS through Mr Smith wrote to Mr Walker. In the

_{letter, Mr Smith:}

asserted that Mr Walker had not in relation to Water Holdings met his obligations under s 243 Companies Act 1993 when dispensing with the

_{creditors’ meeting;}

attached a claim form completed in the name of CLS for $969.45;

stated that even if Mr Walker’s appointment were confirmed, the

_{avoidance of the 24 August 2011 agreement was a nullity.}

The liquidator’s evidence

[24] Mr Walker filed affirmations in support of his application. They deal with the factual background as I have summarised it.

[25] Additionally, Mr Marshall as director of Water Services provided an affirmation in which he recorded why landowners with connections to the potable water scheme involved with the water rights want matters relating to the water rights to be resolved and therefore support Mr Walker in this litigation.

[26] Simon Thorn, one of the receivers of RFD’s assets and undertakings, provided an affidavit in support of Mr Walker’s application. He referred to the legal action and other steps taken by the receivers to recover for RFD the shares in Water Holdings. He referred to the decision of the receivers, under the general security agreement and appointment deed, to appoint Mr Walker liquidator of Water Holdings.

[27] In particular, the receivers rely on clause 7.4 in the general security agreement granted by RFD in 2007 which dealt with receivers’ powers, providing:

Receivers Powers: Subject to compliance with any specific statutory requirements ... a receiver appointed by [Equitable Life Insurance Company Limited] has the full power to

Do all things in relation to [RFD’s] assets and in relation to [RFD’s] business that [RFD] could or might ... do, and on the same basis as if the receiver had absolute ownership of all [RFD’s] assets, and carried on [RFD’s] business for the receivers own benefit.

[28] Mr Thorn also exhibited a letter dated 20 December 2010 from Insolvency Management Ltd (the company of Wayne Deuchrass and Ian Nellies, the liquidators of RFD) to Mr Thorn in which Mr Deuchrass recorded:

The Liquidators consent to allow the Receivers to act as the agent of [RFD] and continue its business operations pursuant to Section 31(2) of the Receiverships Act 1993.

The orders sought in Mr Walker’s application

[29] Mr Walker applied for orders under s 284 Companies Act.

[30] The orders or directions sought were:

1.1 Confirming the decision of the liquidator to void the sale and purchase agreement between Gibbston Water Holdings Ltd (in

liquidation) (GWHL) and Castlereagh Properties Limited dated 24

August 2011.

1.2 Directing that GWHL is 100% shareholder of Gibbston Water Services Limited (GWSL) with the share register of GWSL to be updated to record this.

1.3 That the respondents provide all records, documentation and information in their possession or control that relate to the affairs of GWHL and/or relate to any transactions pertaining to the granting of a security interest over the water rights of GWSL and any underlying obligation and debts of GWSL.

1.4 Confirming that Denis William Anson Marshall was validly appointed as sole director of GWSL by the liquidator on 23

December 2011.

1.5 That the liquidator is entitled to reject the proof of debt filed by the fourth respondent and/or has validly dispensed with the holding of a meeting of creditors.

1.6 Alternatively to 1.5, that the liquidator is directed [sic] call a meeting of creditors pursuant to section 243(1) of the Companies Act 1993 and whether the creditor’s claim of the fourth respondent is to be admitted for voting purposes.

1.7 For the costs of and incidental to this application.

[31] All four respondents (including CLS) filed a single notice of opposition through Mr Smith of CLS. I will return to the detailed grounds of opposition but summarise the four principal grounds of opposition:

(a) The liquidation of Water Holdings was invalid.

(b) If the liquidation of Water Holdings is found to be valid, the liquidator has breached his duty to convene a meeting of creditors, remains under a duty to do so, and having regard to the status of CLS as a creditor of Water Holdings, has yet to be confirmed as liquidator.

(c) The 24 August 2011 agreement between Water Holdings and

Castlereagh remains in full force and effect.

(d) The appointment of Mr Marshall as director of Water Services is invalid and Ms Buxton remains the sole director of both Water Holdings and Water Services.

The cross application

[32] The notice of opposition filed by the respondents sought the dismissal of Mr Walker’s application in its entirety but also sought other orders in the nature of cross- applications. Notwithstanding the informality of the cross-applications, the parties agreed in the interests of resolution to have the hearing proceed on the basis that there were both applications and cross-applications before the Court.

[33] The respondents’ cross-applications are for the following orders:

(a) That the liquidation of Water Holdings be declared invalid and Water

Holdings restored to its former status.

(b) That (alternatively) Mr Walker be ordered to call a meeting of creditors pursuant either to s 243(1)(a) or s 314 Companies Act 1993.

(c) That CLS be recognised as a creditor of Water Holdings with voting rights at the creditors’ meeting to confirm the appointment of Mr Walker as liquidator of Water Holdings.

(d) That the record of the Companies Office in respect of the director and shareholder of Water Services as they currently stand be confirmed as correct.

The respondents’ evidence

[34] The respondents filed three affidavits in opposition. The relevant contents of those affidavits can conveniently be dealt with in my following discussion of the issues.

Reply evidence

[35] Mr Walker filed an affirmation in reply. It is properly characterised as “in reply” as in the affidavit Mr Walker responds to passages in each of the three affidavits filed for the respondents and to assertions contained in the notice of opposition.

[36] At the hearing, I reserved to Mr Sullivan (for Mr Walker) an opportunity to seek leave to adduce further evidence on a specific issue relating to the share register of RFD. The additional evidence (a second affidavit of Mr Thorn) was subsequently submitted. By a ruling on 20 September 2013,² I granted Mr Walker leave to adduce Mr Thorn’s additional affidavit. I will return to the content of that evidence in discussing the issue as to the validity of the liquidation of Water Holdings.

Was the liquidation of Water Holdings valid?

[37] In October 2011, the receivers of RFD, on behalf of RFD, resolved to put

Water Holdings into liquidation and appointed Mr Walker as liquidator.

[38] The respondents challenge the validity of the liquidation. They raised two particular grounds. In particular,

(a) they denied that RFD was the shareholder of Water Holdings at the time the shareholder resolution was made, thereby rendering the resolution and the liquidation invalid; and

(b) they asserted that the receivers of RFD had unlawfully exercised a right over the shares of Water Holdings without authority or power to do so.

[39] As Mr Walker’s application is based on his position and steps subsequently taken as liquidator, the respondents assert that Mr Walker’s applications must fail.

Was RFD the shareholder of Water Holdings at the time of the shareholder resolution?

[40] Mr Moss in his submissions explained that this issue was raised primarily upon the basis that the liquidator bore the burden of proving the validity of his appointment. For reasons which follow, I do not need to determine the issue on the

_{burden of proof. I do not assume that Mr Moss’s submission as to where the burden}

² Walker v Gibbston Water Services Ltd [2013] NZHC 2474.

lay was necessarily correct, however, as the presumption of regularity³ may apply to the appointment.

[41] The evidence now before the Court clearly establishes that RFD became the shareholder of all the shares in Water Holdings, registered as such on the share register of Water Holdings, no later than 29 September 2011. Mr Thorn’s additional affidavit, filed by leave pursuant to my ruling of 20 September 2013, attaches the relevant documents as apparently prepared either by Ms Buxton or CLS (or both) and forwarded to the receivers’ solicitors on 30 September 2011.

[42] Mr Walker’s appointment as liquidator was made by RFD as shareholder

pursuant to s 241(2)(a) Companies Act.

[43] By s 96 of the Act, the term “shareholder” means:

(a) A person whose name is entered in the share register as the holder for the time being of one or more shares in the company.

[44] Accordingly, RFD had the status of shareholder when it made the resolution on 10 October 2011 to put Water Holdings into liquidation.

[45] Faced with the newly admitted evidence, Mr Moss filed a brief memorandum (pursuant to leave reserved) in which he recorded that the respondents had no further evidence to provide in light of the additional affidavit of Mr Thorn.

The authority of the receivers of RFD

[46] Mr Moss alternatively submitted that the receivers were acting outside their powers in dealing with RFD’s shares when they created the shareholder’s resolution putting Water Holdings into liquidation.

[47] Mr Moss framed the issue as being whether or not a chargeholder can deal with the charged property in any manner it sees fit and without notifying or obtaining

_{the consent of the liquidator.}

3. The presumption of regularity being contained in the old maxim – Omnia praesumuntur rite et solemniter esse acta, donec probetur in contrarium.

[48] Pursuant to the general security agreement granted by RFD to Equitable,⁴ the receivers appointed by Equitable were expressly empowered to do all things in relation to RFD’s assets which RFD itself could do. In other words, to the extent RFD had powers as a shareholder, it gave the receivers those same powers.

[49] In Mr Moss’s submission, the liquidation affected the receivers’ rights to

exercise such powers.

[50] The starting point is RFD’s power as shareholder of Water Holdings to

resolve to put Water Holdings into liquidation.⁵

[51] As I have found, RFD had the status of shareholder in Water Holdings at 10

October 2011 when the resolution was made.

[52] Pursuant to the receivers’ powers clause in RFD’s general security agreement,⁶ the sweeping powers granted to the receivers encompassed the receivers’ doing all things in relation to RFD’s assets which RFD itself could do.

The effect of liquidation

[53] Before the enactment of the Receiverships Act 1993, liquidation had at least two drastic effects on a receivership. First the receivers were no longer able to carry on the business of the company as a going concern. Secondly, the receivers’ right to represent the company as its agent terminated with the liquidation.⁷ The enactment of s 31 Receiverships Act 1993 changed that. In particular s 31(2) of the Act provides:

31 Powers of receiver on liquidation or bankruptcy

(1) ...

(2) A receiver holding office in respect of property referred to in subsection (1) of this section may act as the agent of the grantor only—

⁴ _{Clause 7.4 of the deed, as quoted above at [27].}

⁵ _{A power granted by s 241(2)(a) Companies Act – see above at [42].}

⁶ _{See above at [27].}

⁷ See the commentary in Peter Blanchard and Michael Gedye Private Receivers of Companies in

New Zealand, (LexisNexis, Wellington, 2008) at [12.04].

(a) With the approval of the Court; or

(b) With the written consent of the liquidator or the Official

Assignee, as the case may be.

[54] Mr Moss submits that the receivers required the consent of the liquidator of RFD to the passage of any shareholders’ resolution. Mr Moss acknowledges the right of a secured creditor (Equitable) to take possession of and deal with property of RFD (in this case, shares) over which the charge applied.⁸ But he invokes the provisions of s 248 Companies Act, which deal with the commencement of liquidation. Under s 248(1)(c)(ii) of the Act, the exercise or enforcement of rights or remedies against property of the company in liquidation is precluded. Section

248(2) provides an exemption, protecting the interests of secured creditors as follows:

Subsection (1) of this section does not affect the right of a secured creditor, subject to section 305 of this Act, to take possession of, and realise or otherwise deal with, property of the company over which that creditor has a charge.

[55] Mr Moss focussed his submissions on the inter-relationship between s 248 and s 305 of the Act.

[56] Mr Moss developed a relatively complex submission partly based on absurd results which he submitted may occur where both a liquidator and receivers are taking steps to realise assets. He submitted that the concept, under s 248(2), of “taking possession of property of the company” imposes a positive obligation on a chargeholder to do something to take possession of the property. Implicit in the legislation, he submitted, is an obligation upon such a chargeholder to give notice to or seek the consent of the liquidator (who otherwise has the custody and control of all the company’s assets).

[57] Mr Moss did not cite authority for the duty which he submits is implied in the legislation. There is no basis to superimpose such a duty upon the express terms of

_{the legislation.}

⁸ See s 248(1) Companies Act 1993.

[58] If the validity of the receivers’ resolution turned on Equitable’s rights as secured creditor to deal with RFD’s property (including RFD’s shares in Water Holdings), it would be irrelevant whether the liquidator had consented to or received notification of the steps being taken by the receivers. As it is, it was not Equitable as secured creditor which dealt with the RFD shares in Water Holdings. The resolution passed was the resolution of RFD Investments Ltd (in receivership and in liquidation). Mr Thorn, the joint receiver, expressly executed the resolution “for RFD Investments Ltd”.

[59] Accordingly, the receivers were purporting to act, as they were entitled to under s 31(2) Receiverships Act, as the agent of RFD as grantor of the security. The receivers required therefore neither the approval of the Court nor the written consent of the liquidator.

[60] Mr Thorn deposed that the receivers had obtained the liquidators’ consent to continue to act as the agents of RFD. He exhibited a letter dated 20 September 2010 from the liquidators in which it was stated:

The Liquidators consent to allow the Receivers to act as the agent of the company and continue its business operations pursuant to section 31 (2) of the Receiverships Act 1993.

[61] Mr Moss submitted that the liquidator’s letter did not constitute a consent to the receivers’ completing a shareholder’s resolution on behalf of RFD. He relied upon evidence filed by Warwick Deuchrass, one of the liquidators of RFD. Mr Deuchrass had deposed:

In my experience it is not uncommon for this consent we provided in the letter dated 20 December 2010 to be granted when a company is in liquidation and receivership. It is intended to allow the receivers to continue to trade the company on a day to day basis, normally in circumstances where they have already been trading the company prior to the liquidation.

[62] Although Mr Deuchrass does not expressly state that the liquidators had not consented to the share resolution, that is clearly the thrust of Mr Deuchrass’s evidence both in the paragraph I have quoted and generally in his affidavit. Speaking to Mr Deuchrass’s evidence, Mr Moss submitted that it must be correct that the liquidators have not consented. He submitted that a generic letter such as Mr

Deuchrass’s letter is intended to reflect the industry practice of allowing receivers to carry on the day to day business of a company. He suggested that it would hardly satisfy the policy reasons behind the legislation to allow the receivers upon the basis of such a general authority “to do as [they] pleased with the property of the company”.

[63] I do not accept what Mr Deuchrass suggested implicitly in his evidence, namely that his 20 December 2010 letter was in some way a limited consent for the receivers to act as agent of RFD. The consent was expressly provided with reference to s 31(2) Receiverships Act. The terminology used (to allow the receivers to act as the agent of the company) is the direct terminology of s 31(2) of the Act. The additional words “as continue [the company’s] business operations” do not limit the scope of the agency. The natural meaning of the additional words used by the liquidators (in relation to continuing business operations) is that the continuing of business operations is an aspect of the agency being consented to.

[64] I do not find Mr Deuchrass’s reference to the intention behind the letter as of

_assistance.

First, the letter was clearly intended to be a document in the nature of an authorisation which the receivers would be able to show to the world in order to indicate that they had the continuing rights of agency permitted under s 31(2) of the Act. In such circumstances, the introduction of evidence of subjective intention to read down the plain meaning of the words is no more acceptable for this document than it would be for a contractual document. The document has all the importance of, if not more

_{importance than, a contractual document.}

Secondly, the intention behind the document could be relevant only if it were the common intention of both parties. Mr Deuchrass does not provide the evidential basis for that as he states simply that “it is intended...”. If the reference as Mr Moss’s submissions suggested was intended to be to an industry practice, there is not a proper foundation to establish an industry practice.

[65] Accordingly, the consent given by the liquidators to the receivers on

20 December 2010 to act as agents of RFD pursuant to s 31(2) Receiverships Act encompassed the receivers’ execution of the shareholder’s resolution.

The proof of debt of CLS

[66] Mr Smith sent to Mr Walker on 17 January 2012 a proof of debt for the CLS’

bill of $969.45.

[67] Mr Walker as liquidator asserts that the proof of debt was not submitted within time and fell to be rejected on that basis alone. He takes the further position, as communicated to Mr Smith on 10 January 2012, that as liquidator he did not consider CLS to be a creditor of Water Holdings.

[68] By the application now before the Court, Mr Walker seeks orders or directions confirming that he was entitled to reject the proof of debt on two grounds. First, he says that it was out of time and he was entitled to reject it on that basis. Secondly, he says that it was appropriate for him, given the circumstances in which CLS had acted on the transaction, to reject CLS’s fee note and to leave CLS with its rights to pursue a claim by ordinary proceeding if it chose. I will consider those contentions in reverse order.

The basis of CLS’ claimed fee

[69] The fee note of CLS is addressed to Water Holdings and expressly relates to the sale of shares. There is no other narrative in the fee note itself to explain the attendances or the calculation of the fee itself. Mr Smith deposes that in July 2011 he received instructions from Water Holdings to act on the sale of its Water Services shares to Castlereagh. Mr Smith says he opened and had control of the file. He exhibits a work in progress report which indicates that he and another solicitor spent

3.4 hours on the file with $813 representing the time recorded on the work in progress report. Mr Smith says that the work was carried out in August and September 2011 and the fee note issued on 13 September 2011. Mr Smith deposes that the fee was not paid and remains outstanding.

The considerations which weighed with the liquidator

[70] Shortly before Mr Walker received from Mr Smith the proof of debt (which Mr Walker treated as out of time), Mr Walker had explained to Mr Smith why he did not consider CLS a creditor of Water Holdings. That was done in Mr Walker’s 10

January 2012 letter.

[71] Mr Walker was responding to a letter written by CLS on 20 December 2011. In that letter, Mr Smith was writing as solicitor for both Ms Buxton and Castlereagh. He explained why Ms Buxton had not met requests by the liquidator for documents. Mr Smith asserted that, because the CLS bill had not been settled, the Companies Act process for confirmation of the appointment of a liquidator had not been completed.

[72] In his 10 January 2012 letter, Mr Walker referred to Mr Smith’s letter and

stated that a series of concerns arose.

[73] First, Mr Walker identified Ms Buxton’s failure to deliver documents and dealt with that.

[74] Secondly, Mr Walker turned to the role of CLS. He made a number of observations as to the role of CLS before concluding that CLS was not a creditor of

_{Water Holdings. The (summarised) points Mr Walker made were:}

Mr Walker had experienced inaccurate trust account records from CLS

_previously.

CLS had not provided in advance the fee information required by r 3.4

Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules.

A charge of $969.45 was unconscionable when no prior information had

_{been forwarded and the transaction had a total consideration of $1.00.}

CLS had been in breach of the conflicting duties under r 6.1 in acting for

both parties to the agreement when the interests of at least one party to

_{the agreement were not attended to properly.}

The services rendered by CLS were such as to cause significant costs to

_{Water Holdings through the cost of subsequent unravelling.}

[75] In his submissions, Mr Sullivan described the most fundamental concerns raised by the liquidator as being those relating to the conflict of interest issues. He noted, given the consideration of $1.00, a lack of any apparent benefit in the transaction for Water Holdings. He submitted that the liquidator was correct in concluding that there was an apparent breach of r 6.1 relating to conflicting duties. The two clients involved have ended up becoming at least potentially affected by a liquidator’s decision to avoid a transaction in circumstances where the grounds for avoidance were compelling if not irresistible.

[76] On this basis, Mr Sullivan submits that the liquidator was entitled to reject the proof of debt on substantive grounds as well as the ground as to lateness of filing.

[77] The relevant evidence for the respondents came from both Mr Smith and Ms Buxton. Mr Smith gave the evidence as to his instructions and the work undertaken as I have summarised it. He then turned to Mr Walker’s criticisms. His responses (summarised) included:

Value of work undertaken

(a) Mr Smith noted that the charging approach adopted based on hourly rates recorded is a common method of charging in New Zealand. The

$1.00 consideration in the sale and purchase document cannot be determinative in terms of the principles of charging.

Absence of terms of engagement

(b) Mr Smith deposed that CLS acted for a number of companies within the FTG group (including Water Holdings) and acted for those companies on the same terms of retainer, of which Ms Buxton, Water

Holdings, and FTG were all well aware. (Ms Buxton confirmed this in her affidavit).

Conflict of interest

(c) Mr Smith responded to the criticism of his firm’s conflict of interest in

this way:

Ms Buxton as the director of [Water Holdings] and FTG was providing all of the instructions and nominated Castlereagh as the transferee of the shares. FTG appointed Mr Ian Hyndman as the director of Castlereagh, and both FTG and Mr Hyndman consented to the transfer and knew that we were acting. No issues were raised at the time nor to present.

Moreover, there could be no conflict because Castlereagh was receiving shares for just $1.00 and was thus receiving something, even worthless shares, for nothing. Further, there was no liability attached to the shareholdings that Castlereagh was receiving.

Mr Smith previously explained his “worthless shares” statement in

this way:

My instructions were that the shares were being sold to Castlereagh for just $1.00 because the shares had no value. GWS owns the potable water supply in the Gibbston Valley just outside of Queenstown. The water supply does not generate an income and is run as a non profit company in order to provide water to those properties in the area that sign up for it.

I also note that at the time of the transaction, I was advised that pursuant to a General Security Agreement, GWS owed approximately $1.1m to Secured Finance Limited and Secured Lending Limited.

Discussion

[78] The context in which this liquidator’s decision-making is to be considered is that CLS wants the Court to require that CLS’s proof of debt be accepted so that CLS can vote at a creditor’s meeting. Mr Walker, as the liquidator for the time being, is in the nature of a gate-keeper of the interests of all creditors. Appropriately, he must consider not merely whether a particular fee has been charged for services rendered. He should consider also whether there are any circumstances which should cut across this company (now in liquidation) having to accept liability for the

alleged debt without CLS obtaining a civil judgment. The liquidator stands not as a judge of finality but, as I have said, as a gatekeeper for the time being.

[79] This approach is reinforced by the authorities which indicate that a liquidator is not precluded from investigating the nature of the claim or the grounds on which it is based merely because the creditor holds a judgment in respect of the claim. The authors of Brookers Insolvency Law & Practice⁹ refer correctly to the English decision in Re Home and Colonial Insurance Co Ltd.¹⁰

[80] The appropriate course for a liquidator to follow in such cases was the subject of consideration by both the High Court and the Court of Appeal in Pacific Produce Co Ltd v Franklin Co-operative Growers Ltd (in liq).¹¹ The claimant asserted that the company owed a debt for losses on an onion contract. Hardie Boys J in the High Court dismissed a notice of motion for the Court to reverse or vary the decision of the liquidator to reject the proof of debt. In the Court of Appeal, North P (delivering

the leading judgment) observed that the only way the real loss could be determined in the absence of a liquidator being prepared to compromise the claim (a course still open to him) was for the claimant to seek leave under the Companies Act to commence proceedings to determine the questions in issue. In other words, the Court of Appeal recognised that the liquidator might either recognise the sum referred to in the proof of claim as the true quantum of loss and accept it. Alternatively, the liquidator might compromise the figure claimed and effectively settle the amount of the claim in that way. Finally, the liquidator might elect to leave the claimant to prove the claim by an ordinary proceeding (with leave).

[81] The position in Australian states appears to be the same. I refer to McPherson’s Law of Company Liquidation¹² where the author records, with reference to Australian decisions, that a liquidator is not estopped from considering

_{the admissibility of a proof of debt even where that has arisen from a judgment}

⁹ _{Brookers Insolvency Law & Practice (online ed) at [CA 304.02(1)].}

¹⁰ _{Re Home and Colonial Insurance Co Ltd [1930] 1 Ch 102.}

¹¹ Pacific Produce Co Ltd v Franklin Co-operative Growers Ltd (in liq) [1968] NZLR 521 (HC);

_{Pacific Produce Co Ltd v Franklin Co-operative Growers Ltd (in liq) [1969] NZLR 65 (CA).}

¹² Andrew Keay McPherson’s Law of Company Liquidation (2^nd ed, Sweet & Maxwell, London,

2009) at [12.036].

against the company and to which the company subjected itself.¹³ As the author explains, if a liquidator were estopped from doing so a company could allow a number of judgments to be obtained by default against it by directors and other associates of the company. The liquidator is entitled where there may be suggestion of fraud, collusion or miscarriage of justice to consider going behind a judgment when examining the proof of debt.¹⁴

Conflict of interest in this case

[82] CLS has the burden of proving that the liquidator’s refusal to accept its proof

of claim was wrong.¹⁵

[83] It is clear that the liquidator of Water Holdings had a central and legitimate concern as to the way in which the fee of CLS was incurred.

[84] Water Holdings held assets, namely its shares in Water Services (and indirectly that company’s interest in the water rights). Ms Buxton was directly involved in meeting the RFD receivers’ demand for transfer of the Water Holdings shares back to RFD. She would have appreciated that a perceived benefit of such transfer to the receivers was the control of the Water Services shares and thereby ownership of the water rights. Ms Buxton would also have appreciated that the receivers would see commercial benefits in what they were acquiring as justifying the cost of the steps which they took to get her to re-transfer the shares.

[85] One month before Ms Buxton executed the transfer back of the Water Holdings shares, she denuded Water Holdings of its indirect control of the water rights by having Water Holdings transfer the Water Services shares to the related Henderson company, Castlereagh.

[86] The liquidator’s position is that Mr Smith acted in a position in a conflict of

_{interest when CLS acted for both Water Holdings and Castlereagh in the transfer of}

¹³ The text referring to the decisions in Re Quatrovision Pty Ltd (in liq) [1982] 1 NSWLR 95 at

_{102 and Direct Acceptance Investments Pty Ltd v Blackwell (1995) 17 ACSR 89 at 92.}

¹⁴ _{McPherson’s Law of Company Liquidation, above n 12, at [12.036], fn 388.}

¹⁵ Pacific Produce Co Ltd v Franklin Co-operative Growers Ltd (in liq) [1969] NZLR 65 (CA) at

68 per North P.

the Water Services shares. From the perspective of Water Holdings, the liquidator says that CLS should have refused to act in the transaction in the absence of prior informed consent. If CLS had complied with the requirements of the Lawyers: Conduct and Client Care Rules, it is the liquidator’s position that both clients would have been referred out pursuant to r 6.1.2.

[87] Water Holdings held directly and indirectly property interests (the Water Services shares and the water rights) which were of value even if the amount of recovery ultimately to be obtained was speculative and debatable. Rule 6 Lawyers: Conduct and Client Care Rules imposes upon the lawyer the duty to protect and promote the interests of the client to the exclusion of the interests of third parties. The interests of Water Holdings in relation to its assets included either the preservation of the assets or their realisation for full commercial value. There appears to have been no contemporaneous record or explanation kept of why directors involved on each side of the Water Holdings/Castlereagh transaction assessed the value of the Water Services shares as a nominal $1.00.

[88] I turn to consider the subsequent explanation of the transaction as offered by

Mr Smith and Ms Buxton in their evidence on this application.

[89] First, Mr Smith asserts that there was “consent” by both Water Holdings and

Castlereagh. Specifically, Mr Smith deposes:

... Ms Buxton as the director of GWHL and FTG was providing all of the instructions and nominated Castlereagh as the transferee of the shares. FTG appointed Mr Ian Hyndman as the director of Castlereagh, and both FTG and Mr Hyndman consented to the transfer and knew that we were acting. No issues were raised at the time nor to present.

[90] In her affidavit, Ms Buxton does not deal with the issue of consenting to CLS’s acting for both vendor and purchaser. The only passage in which she refers to the concept of “consent” is in these terms:

As a director of GWHL and a director of FTG which is a shareholder of GWHL and Castlereagh Properties Limited (“Castlereagh”) I approved the transaction. FTG also appointed Mr Hyndman as director of Castlereagh and he consents to the transfer. There was no liability attached to the shares and so Castlereagh could only benefit from the transfer.

[91] Ms Buxton’s evidence does not deal with the concept of a lawyer obtaining the prior informed consent of both parties to act for both. When Ms Buxton uses the term “consent”, it is in relation to the parties’ transaction. That there was such agreement (by the two parties to the transaction) is obvious but that agreement has nothing to do with the consent required under the Lawyers: Conduct and Client Care Rules.

[92] I infer from the absence of any evidence from Ms Buxton as to a discussion by her solicitors as to the requirements of prior informed consent to acting for both parties that no such discussion occurred. Had it occurred, reference would have been made in her affidavit.

[93] My conclusion is reinforced by what Mr Smith deposed.¹⁶ His evidence, although unclear on the point, is largely to the same effect as I find Ms Buxton’s. Mr Smith’s reference to the concept of consent is that “Mr Hyndman consented to the transfer”, again making the same (irrelevant) point as Ms Buxton. Mr Smith then adds that Mr Hyndman “knew that we were acting”. Mr Smith’s evidence does not touch on the type of information required before the prior informed consent of both parties could be obtained. The fact that Mr Smith concludes his paragraph with the statement that “no issues were raised at the time nor to present” overlooks the requirement that the obtaining of prior informed consent requires a positive response (“informed consent”) from the clients rather than (passive) inaction.

[94] The evidence accordingly establishes on the balance of probabilities that CLS did not obtain the prior informed consent of both parties before acting on the proposed sale of the Water Services shares.

[95] That fact alone, against the undisputed factual background in this case, is sufficient to justify the liquidator’s refusal to regard the CLS claim as a valid claim in the liquidation.

[96] Following the liquidator’s refusal to accept the CLS claim, CLS has its right to seek to establish its entitlement to payment in the ordinary way. It may do so in

¹⁶ See above at [77].

the Disputes Tribunal which will determine any dispute according to the substantial merits and justice of the case,¹⁷ or CLS might pursue its fee in the District Court. In that event the almost inevitable consequence is that Water Holdings will file a complaint as to the bill of costs under s 132(2) Lawyers and Conveyancers Act. In such event, a Standards Committee would have power to reduce (either wholly or partly) the CLS fee.¹⁸ Having regard to the failure of CLS to obtain the prior informed consent of both parties to act, there is a distinct prospect that a Standards Committee would find in favour of Water Holdings on such a complaint.

[97] It is not an answer for CLS to suggest that it was encumbent upon the liquidator to first lodge a complaint under the Lawyers and Conveyancers Act. The economics of such a step in relation to fees and disbursements of $969.45 would have been wholly lacking and not in the interests of the creditors of Water Holdings. The appropriate course was for the liquidator to reject the claim and to leave CLS to its ordinary remedies if CLS chooses to pursue them.

[98] By reason of CLS’ failure to obtain prior informed consent, it becomes strictly unnecessary to consider a secondary level of justification of the sale of Water Services shares, as argued by the deponents for the respondents. That argument becomes irrelevant and I will therefore deal with it briefly.

The respondents’ argument that the Water Services’ shares were valueless

[99] In their affidavits, Mr Smith and Ms Buxton sought to explain why the Water Services shares were sold by Water Holdings to Castlereagh for the nominal $1.00. Mr Smith explained that his instructions were that the shares were being sold at

$1.00 because the shares had no value. Ms Buxton refers to Water Services’s ownership of the potable water supply in the Gibbston Valley. She deposes that Water Services had been run as a “non-profit company” for the residents of Gibbston Valley who wished to take water from the potable supply. She notes that Water

_{Services did not generate an income and had been run at a loss for many years.}

¹⁷ _{Disputes Tribunals Act 1988, s 18(6).}

¹⁸ Lawyers and Conveyancers Act 2006, s 156(1)(f).

[100] The evidence adduced by the respondents falls far short of establishing that the Water Services shares had no value on the market. The very fact that the related parties went to some trouble to effect the transfer while Ms Buxton was also occupied completing the re-transfer of the Water Holdings shares suggests that those controlling Castlereagh saw a real benefit in taking the shares. As it is, the respondent’s evidence addresses the concept of “value” only in terms of cashflow for the time being. No evidence has been provided to the Court as to the existence or absence of an underlying value in the water rights. It is not for the Court to speculate that there was and is none.

[101] To the extent that the respondents assert that there was no value in the Water Services shares, I accordingly find such assertion unproved. The argument can therefore not be used by the respondents to suggest that even with prior informed consent or a referral of both parties to independent solicitors the same transaction would have occurred.

Lateness of filing of the CLS’s proof of debt

[102] As the liquidator was entitled to reject the CLS proof of debt for the reasons I have given it is unnecessary to address the alternative ground, namely that CLS did not file a proof in time.

Outcome

[103] I find that the liquidator was entitled to reject the proof of claim of CLS.

[104] As a consequence, CLS lacks the status of creditor in relation to either a meeting of creditors which might have been called by the liquidator or the liquidator’s decision to dispense with a meeting of creditors.

Remaining applications of the liquidator

[105] The liquidator’s notice of application included four applications which I have

not dealt with in this judgment. That has arisen through agreement between the

parties. Pursuant to that arrangement, in the orders I make, the proceeding will be adjourned in relation to those four applications.

[106] Otherwise, the liquidator is entitled to the orders he seeks pursuant to the Court’s supervision of a liquidation under s 284 Companies Act 1993. The orders I will make are as directions under s 284(1)(a) and as confirmation in terms of s 284(1)(b).

Orders

[107] I order:

(a) Robert Bruce Walker as liquidator of Gibbston Water Holdings Ltd was entitled to reject the proof of claim filed by Canterbury Legal Services Ltd and has validly dispensed with the holding of a meeting of the creditors of Gibbston Water Holdings Ltd;

(b) The costs of the proceeding to date are reserved, with the parties if unable to agree on incidence and amount to file memoranda (no more than four pages);

(c) The proceeding in relation to the orders and directions sought in [1.1]–[1.4] of the liquidator’s application is adjourned for mention in the Companies List at Christchurch at 10.00 am, 5 December 2013, with leave to counsel to request an earlier telephone conference if appropriate.

Solicitors:

DLA Phillips Fox, Wellington for Applicant

Counsel: K P Sullivan, Barrister, Wellington

J Moss, Barrister, Christchurch for Respondents