Groves v Tssn Ltd ((in Liquidation)) Hc Wn

• Jurisdiction: New Zealand
• Judge: Mackenzie J
• Judgment Date: 17 September 2012
• Neutral Citation: [2012] NZHC 2402
• Docket Number: CIV-2011-485-2643
• Court: High Court
• Date: 17 September 2012

BETWEEN

Elliot Munro Groves

Applicant

and

TSSN Limited (in Liquidation)

Respondent

[2012] NZHC 2402

CIV-2011-485-2643

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

Application under s386A Companies Act 1993 “CA”) (director of failed company must not be director of phoenix company) for permission to be a director and manager of a phoenix company — applicant had been in breach of s386A CA for several months and relied on s386E CA (exception in relation to non-dormant phoenix company known by pre-liquidation name of failed company for at least 12 months before liquidation) — whether permission could be granted retrospectively — whether assets of failed company were sold to phoenix company at undervalue — whether application should have been made under Part 18 High Court Rules “HCR” (applications in equity and under statutes) instead of r19.5 HCR (Court may permit proceeding to be commenced by originating application).

Counsel:

K P Sullivan for Appellant

K J Crossland for Respondent

RESERVED JUDGMENT OF Mackenzie J

Table of Contents

Introduction	[1]
Background	[5]
The legislation	[9]
The timing of this application.	[12]
The procedure for the application	[20]
The grounds of the application	[26]
The purposes of the phoenix company provisions	[27]
The transaction between the failed company and the phoenix company	[53]
The application of the test	[58]
Result	[72]

Introduction

1 This is an application for an order under s 386A of the Companies Act 1993 (the Act) granting the applicant permission to be a director and manager of Stepping Stones Nursery Ltd, a “phoenix company” within the definition in s 386B of the Act.

2 The broad effect of the phoenix company provisions, s 386A to 386F of the Act, is to prohibit a person who has been a director of a company which has been placed in liquidation at a time when it was unable to pay its due debts (a failed company) from being a director of, or directly or indirectly involved in the management of a company which is known by the pre-liquidation name of the failed company or a similar name (a phoenix company), for a period of five years after the liquidation of the failed company.

3 The permission of the Court is required in this case because Mr Groves was a director of TSSN Limited (in liquidation), a “failed company” in terms of the definition in s 386B, and has at all times since its incorporation been a director of the phoenix company.

4 The phoenix company provisions were inserted by the Companies Amendment Act 2006, with effect from 1 November 2007. According to counsel's researches, this is the first contested application to the Court for permission under s 386A. The only case which counsel could find on the section involved an uncontested application. 1

Background

5 The company now called TSSN Limited was formed in June 1989. From December 1992 until June 2010, its name was The Stepping Stones Nursery Limited. I refer to it as “TSSN”, or “the failed company”. Its shareholders and directors were the applicant Elliot Munro Groves and his brother Peter William Groves. I will refer to them as Elliot and Peter. TSSN carried on a nursery business, growing and selling deciduous ornamental trees primarily for export. TSSN carried out business

profitably until about early 2007. Its resources were stretched when it acquired the business of Duncan and Davies, a long established nursery business, in March 2006. Soon after, its business suffered a major setback from significant declines in its North American and Western European markets following theglobal financial crisis of 2008. TSSN incurred significant losses, particularly in the financial years ended October 2008 and October 2009

6 In late 2009, 2 TSSN's bank, ASB, withdrew support. The directors and shareholders tried to refinance the company, but their proposal was rejected by all of the financial institutions they approached. They were then put in touch with a company which specialised in providing turnaround financial assistance for companies like TSSN. That company was Touchstone Capital Partners Ltd (Touchstone) whose chairman is Mr Bruce McCallum, previously a chartered accountant with experience in dealing with financially distressed companies.

7 Touchstone agreed to become involved. In about January 2010, it purchased the debt owed to ASB, at a significant discount to its face value. Touchstone then negotiated the terms of purchase of the business and assets of TSSN, and of a number of other entities related to Elliot and Peter, which owned the core operating assets of the business. A heads of agreement was entered into, dated 18 May 2010. That was followed by a sale and purchase agreement dated 9 December 2010. A new company, Stepping Stones Nursery Limited, (“the phoenix company”) was formed. Touchstoneheld 60 per cent of the ordinary shares and Peter and Elliot held 40 per cent. Those shareholder groups each had the right to appoint two directors. Touchstone also held preference shares, and had board control through the chairman's casting vote. The phoenix company purchased the business of TSSN as a going concern, with effect from 1 June 2010.

8 TSSN was placed in liquidation, on the application of the Commissioner of Inland Revenue, on 17 May 2011.

The legislation

9 Sections 368A and 368B provide as follows:

386A Director of failed company must not be director, etc, of phoenix company with same or substantially similar name

• (1) Except with the permission of the Court, or unless 1 of the exceptions in sections 386D to 386F applies, a director of a failed company must not, for a period of 5 years after the date of commencement of the liquidation of the failed company,-

  • (a) be a director of a phoenix company; or

  • (b) directly or indirectly be concerned in or take part in the promotion, formation, or management of a phoenix company; or

  • (c) directly or indirectly be concerned in or take part in the carrying on of a business that has the same name as the failed company's pre-liquidation name or a similar name.

• (2) A person who contravenes subsection (1) commits an offence and is liable on conviction on indictment to the penalty set out in section 373(4).

386B Definitions for purpose of phoenix company provisions

• (1) In sections 386A to 386F,-

  director of a failed company means a person who was a director of a failed company at any time in the period of 12 months before the commencement of its liquidation, and director of the failed company has a corresponding meaning

  failed company means a company that was placed in liquidation at a time when it was unable to pay its due debts

  phoenix company means, in relation to a failed company, a company that, at any time before, or within 5 years after, the commencement of the liquidation of the failed company, is known by a name that is also-

  • (a) a pre-liquidation name of the failed company; or

  • (b) a similar name

  pre-liquidation name means any name (including any trading name) of a failed company in the 12 months before the commencement of that company's liquidation

  similar name means a name that is so similar to a preliquidation name of a failed company as to suggest an association with that company.

• (2) For the purposes of sections 386A to 386F, a company is known by a name if that name is its registered name or if it carries on business, or carries on a part of its business, under that name.

10 As the foregoing brief statement of the background makes clear, TSSN is a “failed company” as defined in s 368B(1). Until 4 June 2010 (that is, within 12 months before the commencement of its liquidation) its name was The Stepping Stones Nursery Ltd. The new company, Stepping Stones Nursery Ltd, accordingly falls within the definition of “phoenix company” in s 386B. The applicant, Elliot, is a director of the failed company. The prohibition in s 386A(1) applies to him. He was a director of both TSSN and Stepping Stones Nursery Ltd on the date of liquidation. On that date, s 386A became applicable.

11 There are three exceptions referred to in s 386A. Two of these, in ss 386D and 386F, are not relevant in this case. The third exception, in s 386E, was potentially relevant. That provides:

386E Exception for temporary period while application for exemption is made

• (1) A person does not contravene a prohibition in section 386A for the temporary period set out in subsection (2) if that person applies to the Court within 5 working days after the commencement of the liquidation of the failed company for an order exempting that person from the prohibition in question.

• (2) The temporary period in subsection (1) is the period beginning on the date of the commencement of the liquidation of the failed company and ending on the earlier of-

  • (a) the close of 6 weeks after the commencement of liquidation; and

  • (b) the date on which the Court makes an order of exemption.

The timing of this application

12 In his first affidavit, Elliot said that he became aware of the possible application of s 386A sometime in June 2011. Mr McCallum also said, in his first affidavit, that he became aware of the existence of s 386A sometime in June 2011. The liquidator of TSSN, Mr Blanchett, in his first affidavit in opposition, questioned that evidence. He produced the earlier e-mail exchange set out below. In their affidavits in response, Elliot acknowledges that e-mail exchange, while Mr McCallum confirms the content of his earlier affidavit without specific reference to this point.

13 The e-mail exchange establishes that Mr McCallum sent an e-mail to both Elliot and Peter on 19 May 2011 in these terms:

I received notice of the liquidation of TSSN today (as I think you both did...