Body Corporate 194481 v Mason

[2016] NZHC 2858

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2016-404-3001 [2016] NZHC 2858

UNDER	the Companies Act 1993
IN THE MATTER OF	AUCKLAND ALUMINIUM JOINERY LIMITED (In Liquidation)
BETWEEN	BODY CORPORATE 194481 Applicant
AND	KAREN BETTY MASON AND RACHAEL MASON-THOMAS Respondents

On thepapers:
Appearances:	J A McMillan/A Stuart for Applicant C A Murphy for Respondents
Judgment:	29 November 2016

JUDGMENT OF ASSOCIATE JUDGE R M BELL

This judgment was delivered by me on 29 November 2016 at 3:00pm

pursuant to Rule 11.5 of the High Court Rules

…………………………………………………….

Registrar/Deputy Registrar

Solicitors:

Kensington Swan (J A McMillan/A Stuart), Auckland, for Applicant
Gregory Simon Law, Auckland, for Respondents

Counsel:

Cathy Murphy, Auckland, for Respondents

BODY CORPORATE 194481 v MASON AND MASON-THOMAS [2016] NZHC 2858 [29 November 2016]

[1]      Auckland Aluminium Joinery Ltd held the Rylock franchise for aluminium joinery.  In 2011 defects were discovered in apartments in the Phoenix Gardens, a unit title complex in Grafton Road, Auckland.   Remedial work was carried out between September 2013 and March 2014.     Auckland Aluminium Joinery Ltd supplied and installed aluminium joinery and glazing as part of the remedial work. The body corporate for Phoenix Gardens says that there were defects in the remedial work, including with the aluminium joinery and glazing supplied by Auckland Aluminium Joinery Ltd.   The defects showed up apparently as early as April 2014. In February 2016, the body corporate instructed solicitors.  They began writing to Auckland Aluminium Joinery Ltd in February 2016.  Quantity surveyors instructed by the body corporate have estimated the total repair bill, including GST, consent and consultants’ fees, will be about $4.763m.

[2]      In  March  2016  Auckland  Aluminium Joinery Ltd  sold  its  business.   On

23 September 2016 the body corporate’s solicitors wrote to the company setting out the body corporate’s claims and enclosing a draft statement of claim.  On 6 October

2016 the shareholders resolved to put the company into liquidation.  The respondents are the liquidators.

[3]     The body corporate wants to inspect some of the records of Auckland Aluminium Joinery Ltd – those relating to the sales of assets, payment of liabilities, and insurance.   The body corporate has applied for an order under s 256 of the Companies Act 1993 to allow it to inspect those records.   It accepts that some documents may be privileged and it does not wish to inspect them.  It will pay the liquidators’ costs on providing the documents.

[4]      The body corporate needs leave under r 19.5 of the High Court Rules to proceed by originating application.   The substantive application is straightforward and  does  not  require  full  pleadings  or  the  more  extensive  steps  required  in  an ordinary proceeding.  Leave is granted accordingly.

[5]      The liquidators do not oppose the application.  They abide the decision of the court.  They have not consented under s 248(1)(c) of the Companies Act to the body

corporate beginning a proceeding against the company while it is in liquidation, but they accept that the body corporate is a contingent creditor whose claim is likely to require investigation.   They say that they have begun their own investigation into historical transactions of the company including the sale of the business in March

2016.  They object to disclosing any documents for which they or the company can claim privilege.

[6]      Section 256 of the Companies Act relevantly says:

(1) Subject to subsection (2), the liquidator of a company must–

(a)  keep accounts and records of the liquidation and permit those accounts and records, and the accounts and records in the company, to be inspected by–:

(i)  any  liquidation  committee  appointed  under  section  314, unless the liquidator believes on reasonable grounds that inspection would be prejudicial to the liquidation; and

(ii) if the court so orders, a creditor or shareholder …

[7]      In Levin v Lawrence Toogood J held that any creditor seeking inspection under s 256(1)(a)(ii) needed “good reason”.1   The Court of Appeal upheld that:2

[53]     … While no inflexible rules can or should be laid down, we think the “good reason” test can be elaborated to this extent:

(a)       Mere suspicion or assertion by a creditor that a liquidator has not undertaken – or is not undertaking – the liquidator’s statutory task properly is not sufficient.

(b)       It is not permissible for a creditor to apply merely in order to embark on a fishing expedition – in order to sift through the accounts and records of the liquidation to see if that might turn something up.

(c)       As a minimum, the applicant must put forward some persuasive, tangible or concrete reason why inspection should be granted.  An example might be where the creditor, from its own dealings with the company in liquidation, has a genuine concern about a particular aspect of the company’s affairs.   If the liquidator declined to investigate this area, or declined to say whether it had been investigated, we think the s 256(1)(a)(ii) threshold would be crossed.

1      Levin v Lawrence [2012] NZHC 1452 at [56].

2      Levin v Lawrence [2013] NZCA 394, (2013) 11 NZCLC 98-018.

[8]      The body corporate does not say that the liquidators are not undertaking their statutory tasks properly.   Indeed, it could not plausibly do so, given that the liquidation has only just started.   Instead, the body corporate is interested in its recovery options outside the liquidation.  It refers, in particular, to possible claims against the directors of Auckland Aluminium Joinery Ltd.   Presumably that might include claims for breach of the duty of care which the directors owe under the law of negligence (assuming that the Court of Appeal’s decision in Trevor Ivory Ltd v

Anderson is not an obstacle3) and claims for breach of directors’ duty actionable by a

creditor under s 301 of the Companies Act.   The body corporate also wants to investigate its recovery options against insurers under s 9 of the Law Reform Act

1936.

[9]      I accept that the body corporate has good reason to pursue matters on its own account.  It appears from the liquidators’ first report that they do not have enough funds to undertake extensive litigation.  Given that they would no doubt look to the body corporate for funding any proceedings on behalf of the company, there are advantages and efficiencies for both the body corporate and the liquidators in it making its own inquiries.  I am satisfied that the body corporate has good reason in this case.  I am assisted in that by two considerations.

[10]     First, so far as the insurance aspects are concerned, I have noted that in leaky building  litigation  where  a  defendant  goes  into  liquidation,  there  is  frequently co-operation between the other parties to the proceeding and liquidators in obtaining records to assist in establishing whether recovery is available under s 9 of the Law Reform Act 1936.

[11]     Second, as to the body corporate pursuing other claims, there is guidance from a cognate area, orders for pre-commencement discovery under r 8.20 of the High Court Rules.   The rule says:

(1)      This rule applies if it appears to a Judge that—

(a)       a person (the intending plaintiff) is or may be entitled to claim in the court relief against another person (the intended defendant) but that it is impossible or impracticable for the

3      Trevor Ivory Ltd v Anderson [1992] 2 NZLR 517 (CA).

intending  plaintiff  to  formulate  the  intending  plaintiff’s claim without reference to 1 or more documents or a group of documents; and

(b)        there are grounds to believe that the documents may be or may have been in the control of a person (the person) who may or may not be the intended defendant. …

[12]     Case law has established that on applications under r 8.20 three things must be established:4

(i)       that the intending plaintiff “is or may be entitled to claim in the

Court relief against another person” (the intended defendant).

(ii)       It is “impossible or impracticable” for the intending plaintiff  “to formulate his claim without reference to a document or class of documents”.

(iii)      There are grounds for belief those documents may be or have been in the possession of the person concerned.

[13]     While the body corporate has not said that it intends to seek leave to sue the company  under  s  248(1)(c)  of  the  Companies  Act,  it  is  investigating  possible recovery from other parties.  By analogy with r 8.20, it has grounds for believing that it may have a right of recovery against others.  Its request goes beyond fishing.

[14]     I am accordingly satisfied that the liquidators should allow inspection of the documents requested in the application subject to these conditions:

[a]      they are not required to make available for inspection documents for which they or the company can claim privilege;

[b]       the body corporate is to pay the liquidators’ actual and reasonable

costs of compiling and providing the documents; and

[c]      the body corporate is also to pay the liquidators’ scale costs on this application.   If the parties cannot agree costs, memoranda may be filed.

…………………………………………

Associate Judge R M Bell

4      Welgas Holdings Ltd v Petroleum Corp of NZ Ltd (1991) 3 PRNZ 33 (HC) at 40.