Mainzeal Property and Construction Limited (in receivership and in liquidation) v Richina Global Real Estate Limited [2014] NZHC 387 (6 March 2014)

Last Updated: 12 April 2014

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2013-404-3047 [2014] NZHC 387

UNDER The Companies Act 1993

BETWEEN MAINZEAL P ROPERTY AND CONSTRUCTION LIMITED (IN RECEIVERSHIP AND IN LIQUIDATION)

Plaintiff

AND RICHINA GLOBAL REAL ESTATE LIMITED

First Defendant

RICHARD CILIANG YAN Second Defendant

Hearing: 4 March 2014

Counsel: Z G Kennedy & M D Pascariu for Plaintiffs

D Chisholm QC and C I Hadlee for RGREL and Mr Yan

Judgment: 6 March 2014

_{JUDGMENT OF BROWN J}

This judgment was delivered by me on 6 March 2014 at 4 pm, pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Solicitors: Minter Ellison Rudd Watts, Auckland

Lee Salmon Long, Auckland

Russell McVeagh, Auckland

Counsel: D J Chisholm QC, Auckland

MAINZEAL PROPERTY AND CONSTRUCTION LTD (IN RECEIVERSHIP AND IN LIQUIDATION) v

RICHINA GLOBAL REAL ESTATE LTD [2014] NZHC 387 [6 March 2014]

Introduction

[1] On 27 February 2014 I issued a judgment¹ in which I made an order under s 241 of the Companies Act 1993 (“the Act”) for the liquidation of the first defendant “RGREL”. A notice of appeal to the Court of Appeal has been filed in relation to the

_{order for liquidation at [97] of the judgment.}

[2] The second defendant (“Mr Yan”) seeks an order staying the execution of the

_{liquidation order. The grounds for the stay include the following:}

(a) Without a stay, appeal rights will be rendered nugatory;

(b) As RGREL has undertaken not to deal with its assets pending resolution of this matter and arrangements are in the process of being made to pay the only undisputed debt owed by RGREL, the plaintiff will not be injuriously affected by a stay of the order which would merely preserve the status quo pending determination of the appeal;

(c) The liquidators of Mainzeal should never have been appointed liquidators of RGREL by reason of their conflict of interest in also acting as liquidators of Mainzeal; and

(d) There are no third parties who would be affected by a stay of the order as RGREL has no other external creditors.

[3] The application is opposed by the plaintiff. It first challenges the jurisdiction to make an order for a stay of execution of an order for liquidation. Alternatively it contends that if there is jurisdiction to do so, the Court should decline to order a stay.

Is there jurisdiction to stay an order for liquidation?

[4] Mr Kennedy’s argument was founded squarely on the statutory scheme and the nature of an order for liquidation. In summary he contended:

¹ Mainzeal Property and Construction Ltd (in receivership and in liquidation) v Richina Global

Real Estate Ltd [2014] NZHC 277.

(a) An order for the appointment of liquidators to a company takes effect immediately pursuant to s 241(5) of the Act;

(b) Consistent with s 241(5), rr 31.29 to 31.32 also anticipate that an order for liquidation of a company is to take effect immediately; under r 31.29(1) the registrar must inform the liquidator of the appointment on the same day; and

(c) In light of the statutory scheme, the order for liquidation is immediate in effect and it is conceptually flawed to contend that the Court could now intervene to stay the executed order; the current application is not one to stay a proceeding which is extant or an order which is executory in nature.

[5] With reference to the authorities cited for Mr Yan, Mr Kennedy submitted that the issue of the jurisdiction to grant a stay of an order for liquidation was assumed and not argued.²

[6] In response Mr Chisholm QC contended that s 241(5) has little relevance. Every High Court judgment takes effect immediately after it has been sealed. Taking the example of a simple money judgment which can be immediately enforced, it was submitted that the fact that a judgment creditor may have already commenced steps to enforce the judgment does not mean that the order has been “executed”. Mr Yan’s application was for a stay of execution pending appeal under r 12(3)(a) of the Court of Appeal (Civil) Rules 2005 (“the 2005 Rules”), not under r 31.11 of the High Court Rules which concerns liquidation proceedings prior to judgment.

[7] Alternatively, if the order was not susceptible to an order for stay under r 12(3)(a), Mr Yan sought the grant of interim relief under r 12(3)(b).

² Commissioner of Inland Revenue v Central Equipment Co Ltd (2007) 23 NZTC 21,243 (HC);

Commissioner of Inland Revenue v Property Ventures Ltd (in receivership) (2010) 24 NZTC

24,419 (HC); Manawatu Greyhound Racing Club Incorporated v New Zealand Greyhound Racing Association Inc [2012] NZCA 1; Forward Plastics Ltd v NZ Distilled Water Ltd [2012] NZHC 1503.

Discussion

[8] There appears to be no authority directly on point. However the distinction between executory and executed orders in the context of stays of proceedings has been addressed in two High Court judgments.

[9] In Willowford Family Trust v Christchurch City Council³ an order had been made pursuant to s 12 of the Bylaws Act 1910 that the Council’s bylaw, as it related to the location of brothels in Christchurch, be quashed. Panckhurst J concluded that the Court had no jurisdiction to grant a stay pending appeal, observing:⁴

... It is one thing to stay a proceeding which is extant, or to stay an order which is executory in nature, but the present declaration became operative when it was made. To contemplate the revival at this point of a bylaw which I have found to be invalid impresses me as conceptually wrong.

[10] That approach was followed in Independent Fisheries Ltd v Minister for Canterbury Earthquake Recovery⁵ where an appeal was lodged against a decision which set aside chapters that had been inserted into the Regional Policy Statement by the Minister. Holding that there was no jurisdiction to grant a stay, Chisholm J considered that there was no execution of a judgment that the Court could stay or prevent. The judgment under appeal was non-executory whereas a stay must have prospective application, applying to matters or things that must be done or attended to in the future.⁶

[11] While those two decisions involve very different subject matter from the present case, I consider that the principle they recognise is applicable in the circumstances of an order for liquidation of a company. Part 16 of the Act commences with a group of sections under the subheading “The process of liquidation” which detail various steps which are required to be taken as part of the

_{liquidation. They include sections stipulating that the court must record in the order}

³ _{Willowford Family Trust v Christchurch City Council [2006] 1 NZLR 791 (HC).}

⁴ _{At [22].}

⁵ Independent Fisheries Ltd v Minister for Canterbury Earthquake Recovery [2012] NZHC 1909, [2012] NZAR 785.

⁶ The authorities relied on by the appellant were distinguished by Chisholm J, namely Fullers Bay of Islands Ltd v Otehei Bay Holdings Ltd HC Auckland CIV-2009-404-7207, 2 November 2010; Area One Consortium Ltd v Treaty of Waitangi Fisheries Commission (1993) 7 PRNZ 200 (HC); Avowal Administrative Attorneys Ltd v The District Court at North Shore (2009) 24 NZTC

23,486 (HC).

not only the date but also the time at which the order was made: ss 241(5)⁷ and

_246(5).

[12] I do not consider that it would be consistent with the statutory scheme for a court to make an order which halts the liquidation process or in effect rewinds the making of the order for liquidation. I consider that any mitigating or holding steps which need to be taken in the interim, pending the determination of an appeal against the order for liquidation, can be achieved by orders under ss 284 or 246(3), that is

_{within the context of the liquidation process itself.}

[13] Although there does not appear to be authority abroad directly on point, the judgment of Plowman J in In re A and B C Chewing Gum⁸ is useful in explaining the rationale for the (then apparently invariable) practice of declining applications for stay of orders for winding up:⁹

As I understand it, the position is this. First of all, as a matter of jurisdiction it is quite clear that I have jurisdiction to grant a stay, because the Act says so. It says I can grant a stay on proof to my satisfaction that the proceedings ought to be stayed. But then there is the question of practice, and as a matter of practice a stay is never granted. The only exception that I think is known to the department is where I myself once went wrong in In re Westbourne Galleries Ltd. [1970] 1 W.L.R. 1378, and not having been alerted to the position, and not knowing it before, I granted a stay, with precisely what consequences nobody has ever told me. But there are very good reasons for the practice of never ordering a stay, and they are these: as soon as a winding up order has been made the Official Receiver has to ascertain first of all the assets at the date of the order; secondly, the assets at the date of the presentation of the petition, having regard to the possible repercussions of section 227 of the Act of 1948; and thirdly, the liabilities of the company at the date of the order, so that he can find out who the preferential creditors are, and also the unsecured creditors.

Supposing there is an appeal and the winding up order is ultimately affirmed by the Court of Appeal, and there has been a stay, his ability to discover all these things is very seriously hampered: it makes it very difficult for him, possibly a year later, to ascertain what the position was at different times a year previously. But assuming a stay is not granted, if the business is being carried on at a profit, as I understand this business now is, no additional harm is done by refusing a stay. As I understand it, if the Official Receiver is given an indemnity, say by the Coakley brothers, who are running this business, he will allow it to be carried on, and the Coakley brothers, in this case, could be appointed special managers and carry on the business as they

⁷ _{Form C 12 as provided for in r 31.31(1).}

⁸ _{In re A and B C Chewing Gum [1975] 1 WLR 579 (Ch).}

⁹ At 592

have been doing. If the business is being carried on at a profit, creditors of the business, after the date of the winding up order, would be paid in priority to the unsecured creditors at the date of the order as part of the expenses of the winding up. Then, if the appeal is allowed, the business is handed back as a going concern, it has not suffered any loss. Of course, if the business can only be carried on at a loss–it should not be carried on at all.

Those, I think, are really the reasons why, in practice, a stay is not granted–a profitable business can be carried on as it was before and handed back as a going concern if the appeal is allowed. If it is not allowed then, of course, cadit quaestio.

[14] The good reasons for the practice of never granting a stay seem to have found favour with Roth J in In the matter of BLV Realty II Limited.¹⁰ However the approach in England may be in the course of transition for I note that in Credit Lucky Ltd v National Crime Agency¹¹ Barling J considered that there was little force in the proposition that the Court should not grant a stay of the winding up simply because it is not the practice of the Court to do so on the ground that an appeal is pending in another court. His Honour observed that if the jurisdiction existed (which was not disputed) then it must be exercised judicially without reference to any fettering as a

_{result of past practice.}

[15] In Australia the jurisdiction to grant a stay of a winding up order appears to be accepted. The earlier authorities are reviewed in the judgment of Muirhead AJ in Arafura Finance Corporation Pty Ltd v Kooba Pty Ltd where his Honour concluded in this way: ¹²

Various principles (some in apparent conflict) emerge from these authorities

– the manner in which they are expressed inevitably being governed to some extent by the nature of litigation in issue and the factual and historical background to the application for stay. I accept that the restricted approach of Plowman J referred to earlier in these reasons has not been adhered to in this country, albeit I consider there are sound reasons for cautious examination of such applications in liquidation matters.

[16] Even in the overseas authorities, the point taken by the plaintiff here does not appear to have been ventilated. The trend of authority appears to be to recognise the

_{jurisdiction to grant a stay of a winding up but to exercise it sparingly.}

¹⁰ _{In the matter of BLV Realty II Limited [2010] EWHC 1791 (Ch).}

¹¹ _{Credit Lucky Ltd v National Crime Agency [2014] EWHC 83 (Ch).}

¹² Arafura Finance Corporation Pty Ltd v Kooba Pty Ltd [1987] NTSC 64 at [11].

[17] That trend notwithstanding, given the executed nature of an order for liquidation under the Act and the statutory process which follows such an order, I am persuaded by Mr Kennedy’s submission that there is no jurisdiction under r 12(3)(a) to make an order for a stay of execution of an order for liquidation.

[18] For the avoidance of doubt I am referring to the jurisdiction to grant the particular “kind of relief sought” (i.e. a stay of execution of the order for liquidation) as recognised in the quote from Garthwaite v Garthwaite¹³ cited with approval in Commissioner of Inland Revenue v Redcliffe Forestry Venture Ltd.¹⁴

[19] Plainly the High Court and the Court of Appeal have the jurisdiction (in the general sense of the term) conferred by r 12(3)(a). Indeed (although I did not hear argument on it) the High Court presumably has inherent jurisdiction to stay a proceeding. However in the circumstances of an executed order, as in Willowford and Independent Fisheries, the jurisdiction is not exercisable. It is in that sense that I find there is an absence of jurisdiction to make the order sought.

[20] In my view the appropriate way to fashion protective or other orders in a case such as the present, where the liquidation process has commenced, is by orders under s 284. I view the making of such orders as part and parcel of the liquidation process and I do not consider that “interim relief” as envisaged by r 12(3)(b) is apt for that process. Indeed I would also hold that the Court has no parallel jurisdiction to grant interim relief under that rule in the context of an order for liquidation.

[21] Are orders under s 284 required in this case? A matter upon which Mr Chisholm placed emphasis is the extant application by RGREL to set aside the pooling orders that were obtained by the plaintiff in CIV-2013-404-1624 (“the Pooling Orders Proceeding”). In the Pooling Orders Proceeding the plaintiff sought and obtained by formal proof an order requiring RGREL to contribute $15,150,847

_{to Mainzeal and $5,786,606.77 to KFL.}

¹³ _{Garthwaite v Garthwaite [1964] P 356 (CA) at 387.}

¹⁴ Commissioner of Inland Revenue v Redcliffe Forestry Venture Ltd [2012] NZSC 94, [2013]

1 NZLR 804 at [25]. This has also been adopted as the accepted definition of jurisdiction in Butterworths New Zealand Law Dictionary, see Peter Spiller Butterworths New Zealand Law Dictionary (7^th ed, Lexis Nexis, Wellington, 2011) at 163.

[22] RGREL has alleged that the plaintiff acted improperly in obtaining the pooling orders which resulted in RGREL being unrepresented at the hearing and the matter proceeding by way of formal proof. Mr Chisholm contended that, based on their past conduct and positions taken, it is anticipated that the liquidators of RGREL will seek to abandon the application to have the pooling orders set aside, thereby leaving a liability for RGREL in excess of $20 million.

[23] In the circumstances I consider it appropriate to make and I do make an order under s 284 that pending the determination of the appeal against my judgment the liquidators of RGREL are not to abandon or compromise the extant application to set aside the pooling orders.

[24] RGREL is a holding company only. It has no bank accounts. There appears to be no evidence that it is engaging in trading activities that would be prejudiced by the liquidation.

[25] However Mr Chisholm argues forcefully that Mainzeal’s liquidators should not have access to information sourced from RGREL’s records with the risk that such

_{information would be used for the benefit of other companies of which they are the}

_{liquidators, citing ANZ National Bank v Sheahan and Lock.}¹⁵

_{Annexed to his}

submissions was a copy of a letter dated 4 March 2014 from Mr Bethell, as liquidator of RGREL, to Mr Yan requiring the production of financial records

_{including the server on which the records are saved.}

[26] In response Mr Kennedy maintains that one of the accepted objectives of the liquidation process is to identify the causes of a company’s failure. In his submission RGREL has been the focal point of the restructuring of the wider Mainzeal group and the legitimacy of that restructuring is directly questioned by Mainzeal’s liquidators. He says that the Court is entitled to expect that the liquidators will observe their professional responsibilities so far as the confidentiality

_{of individual companies’ affairs are concerned.}

¹⁵ ANZ National Bank v Sheahan and Lock [2012] NZHC 3037, [2013] 1 NZLR 674.

[27] In the circumstances of the present case I do not consider that any additional order under s 284 is required.

[28] In the event that I am wrong in my views on the issue of jurisdiction I proceed to consider the application for a stay in accordance with the established principles that apply generally.

Principles to be applied on a stay application

[29] In determining whether or not to grant a stay application brought under r 12(3) of the 2005 Rules, the Court must weigh the factors “in the balance” between the successful litigant’s rights to the freeze of a judgment and “the need to preserve the position in case the appeal is successful”.¹⁶

[30] Factors to be taken into account in the balancing exercise include:¹⁷

(a) Whether the appeal may be rendered nugatory by the lack of a stay; (b) The bona fides of the applicant as to the prosecution of the appeal;

(c) Whether the successful party would be injuriously affected by the stay;

(d) The effect on third parties;

(e) The novelty and importance of questions involved; (f) The public interest in the proceeding; and

_{(g) The overall balance of convenience.}

¹⁶ Duncan v Osborne Building Ltd (1992) 6 PRNZ 85 (CA) at 87; Keung v GBR Investment Ltd [2010] NZCA 396, [2012] NZAR 17 at [11]. I note that in Keung the application for a stay was in respect of the costs order but not the order for liquidation.

¹⁷ Dymocks Franchise Systems (NSW) Pty Ltd v Bilgola Enterprises Ltd (1999) 13 PRNZ 48 (HC)

at [9]; Keung, above n 16, at [11].

[31] Keung noted that, although that list does not include the apparent strength of the appeal, that has been treated as an additional factor.¹⁸

Discussion

[32] I received detailed submissions on the application of those principles to the facts of this case. At the commencement of the hearing I asked Mr Kennedy whether the liquidators of RGREL were prepared to give an undertaking that they would not abandon or compromise the extant application to set aside the pooling orders. As I understood their position, the liquidators would have been prepared to give such an undertaking but only on the condition that Mr Yan agreed to make fulsome compliance with the request for RGREL’s financial records. It was apparent that Mr Yan would not agree to that course. Hence, at least as I understood their final position, an unqualified undertaking from the liquidators of RGREL was not available.

[33] The absence of such an undertaking preserving the position concerning the application to set aside the pooling orders results in factors (a) and (c) above lying in Mr Yan’s favour. So far as other factors are concerned, I accept the bona fides of Mr Yan as to the prosecution of the appeal. The appeal has already been filed and Mr Chisholm advises that he is exploring the possibility of the matter being placed on the Court of Appeal’s fast track with a hearing possibly within the next two to three months.

[34] In his affidavit dated 27 February 2014 in support of the application Mr Yan confirms that the balance of the foreign exchange debt owing to Mainzeal in the sum of $289,923.67 will be paid within 10 working days. He also confirms that the debts to two additional external creditors have been settled and that RGREL has been released from any liability in respect of them.

[35] He further states that RGREL has undertaken not to deal with its assets pending resolution of the appeal. There was an element of confusion on this point.

_{The plaintiff’s position was that an undertaking not to deal with property was given}

¹⁸ At [11].

by RGREL to Mainzeal under the standstill deed dated 19 September 2013 but that the deed has since expired and hence the undertaking is no longer in force.

[36] Mr Chisholm maintained that the undertaking continued as asserted in ground (d)(i) of the interlocutory application seeking the stay. He drew attention to the joint memorandum of counsel dated 3 October 2013 which, having stated that an undertaking given by Isola continued in force on its terms, stated that RGREL “will give an identical undertaking to that given by Isola to Mainzeal, the Registrar of Companies and KFL”. However as I understood Mr Kennedy’s position, that identical undertaking had not in fact been given. I address this matter below.

[37] Finally, with reference to the other factors, I consider that the appeal does involve important (but not novel) questions about the proper application of the law concerning liquidation proceedings and in that sense there is an element of public interest in the appeal. I do not consider that it is productive to opine on the issue of the apparent strength of the appeal although I recognise that the point about the actual or perceived conflict of interest of the liquidators in being liquidators of the same companies may merit further consideration.

[38] Weighing all those factors, if I had ruled that the Court had jurisdiction to grant a stay, I would conclude that an order for a stay of proceedings pending appeal would be appropriate in this case. However I would have only granted such an order on the condition that (for the avoidance of doubt) Mr Yan provide an undertaking on his and RGREL’s behalf that no assets, funds or choses of action of RGREL would be disposed of, dealt with or any step taken to diminish their value, pending the determination of the appeal.

Orders

[39] For the reasons in [4] to [20] above, the application for an order for a stay of execution of the order for liquidation of RGREL and for interim relief is declined.

[40] An order is made under s 284 that, pending the determination of the appeal against my judgment, the liquidators of RGREL are not to abandon or compromise the extant application to set aside the pooling orders.

[41] Leave is reserved to apply for further orders if necessary under s 284.

[42] The plaintiff having succeeded is entitled to costs calculated by reference to an interlocutory application on a 2B basis.

Brown J