Beware of breach of mandate

The Supreme Court case of Westpac New Zealand Limited v MAP & Associates Limited held that there is only one basis on which a bank can defend itself against a claim for breach of mandate.  That is, if the bank could establish that it would have incurred liability for dishonestly assisting in a breach of trust (or other wrongful conduct) by acting on its customer's instructions.  A suspicion or belief that it would have incurred liability, even on reasonable grounds, is not a sufficient defence.

This decision was based on both policy grounds and authority.  The Court found that policy meant the bank must bear any loss occasioned by declining to act on its customer's instructions, given that no liability would actually have attached to the bank for doing so.  Furthermore, this area of the law had been regarded as settled since 1868, when an English House of Lords decision ruled that, in the first instance, banks should ordinarily honour their customers' instructions, and that only very limited exceptions from this rule were appropriate. 

See Court decision here.

Calculating mortgagee's priority amounts under deed of priority

In our October 2010 insolvency legal update, we reviewed the case of South Canterbury Finance Ltd v Nielsen, where the Court found in favour of second mortgagee, SCF, on the interpretation of a deed of priority.  That case was appealed successfully to the Court of Appeal by the first mortgagee, ASB.  This update provides a brief review of the Court of Appeal's reasoning.

The question for the Court was at what point in time the provisions of the deed of priority became operative.  SCF argued that that the deed was intended to regulate the amount ASB and SCF were to receive from the sale of the land, whether the sale was a voluntary sale initiated by the mortgagor, or was a sale pursuant to the exercise of the power of sale by one of the mortgagees.  ASB argued that the deed was intended to regulate priorities as between itself and SCF only where the sale has occurred in exercise of a contractual or statutory power of sale.

The Court of Appeal found in favour of ASB as first mortgagee.  It noted, "The Deed must be read within its commercial and legal context. That is the context within which the parties understood and intended it should operate. Viewed in this context, we are satisfied that the Deed is to be construed as regulating payment of the proceeds of sale flowing from a forced sale."

We await news of whether the decision will be appealed. 

See Court decision here.

Interpretation of subordination clause

In Capital + Merchant Finance Limited (in receivership) v Vision Securities Limited (in receivership) our Wellington commercial litigation team was successful in the Court of Appeal on a defendant's summary judgment application involving the interpretation of a subordination clause in a Security Trust Deed (Deed).

Capital + Merchant Finance Limited (in receivership) (CMF) and Vision Securities Limited (in receivership) (Vision) advanced substantial sums of money to a property developer, Education Holdings Limited (Education).  CMF held security for those advances on trust for Vision and itself.  The Deed governed the agreement between the lenders and provided that the debt owed to CMF by Education was subordinated to that owed to Vision.  Therefore, any payment "in respect of" any subordinated indebtedness was to be held on trust by CMF for Vision until its senior indebtedness was paid in full.  The Deed also provided that any assignment of the subordinated indebtedness was prohibited without the consent of Vision.

A mortgagee sale left Vision with a shortfall and CMF with nothing.  CMF assigned its subordinated indebtedness to a third party, Honk.  Vision made demand for the sale proceeds of the assignment under the subordination clause in the Deed.  Vision argued that CMF had to apply the proceeds of sale in reduction of the amount owed by Education to Vision being the senior indebtedness.

The Court of Appeal did not agree.  The Court held that if the assignment proceeds were caught by the subordination clause a commercial absurdity would result.  CMF would be left with neither debt, nor sale proceeds, while Education, having done nothing, would receive the benefit of the application of the sale proceeds in reduction of the debt owed by it to Vision.  Education would receive a windfall.  The true intention of the clause was to ensure CMF was unable to retain the benefit of any payment made to it by or on behalf of Education for the purpose of reducing the subordinated indebtedness.  CMF was required to account to Vision in order to preserve Vision's rights to prior payment of the senior indebtedness.  The capital payment to CMF did not reduce the subordinated indebtedness and, as such, Vision's right to priority was preserved. 

The proceeding was therefore struck out.

See Court decision here.

Account receivable defined

Burns & Agnew v Commissioner of the Inland Revenue and Strategic Finance Limited (in rec) concerned a dispute between a secured creditor and the IRD (as a preferential creditor) in respect of certain funds received by the liquidators of Takapuna Procurement Limited (TPL).  The liquidators applied to the High Court for directions as to the application of those funds and this required the Court to undertake an analysis of the concept of an "account receivable" for the purposes of determining whether such funds could be applied to satisfy preferential claims under the Seventh Schedule of the Companies Act ahead of the claim(s) of secured creditors.  Whilst the case concerned a company in liquidation, the judgment will be equally relevant for the purposes of determining the extent to which preferential claims rank in priority to the claims of secured creditors in the context of receiverships.

Part of the funds in dispute were the proceeds of a GST refund that the IRD had paid to TPL after the liquidation started without realising that the liquidated company had outstanding GST debts.  The Court (applying the rule established in Re Conlon (1874) 9 Ch App 609 (CA)) found that as the liquidators were officers of the court, who are required to act in accordance with the highest standards, it would be unfair and unconscionable for the liquidators to retain the GST refund, when it was a form of windfall that been paid to TPL in error.

On the question of whether the balance of the disputed funds constituted an "account receivable", the Court found that, consistent with the definition given to the term under the Personal Property Securities Act (Act), the term "account receivable" refers to any monetary obligation owed to the company whatsoever (with limited exceptions for chattel paper, investment securities, negotiable instruments and those interests which are excluded from the scope of the Act).  In so finding the Court considered that the 2008 decision of Commissioner of the Inland Revenue v Northshore Taverns (in liq) (2008) 23 NZTC 22,074, which held that the term "account receivable" was substantially the same as the concept of "book debts" or ordinary trading debts, was wrong.  The Court concluded that all the funds in dispute were "accounts receivable" for the purposes of the Seventh Schedule and were accordingly available for distribution to the IRD as preferential creditor ahead of the secured claim of Strategic Finance.

The Court also confirmed that an "account receivable" will only be available to meet the claims of preferential creditors under the Seventh Schedule when the relevant "monetary obligation" was owed to the company at the time that the receivership or liquidation commenced.  For example, the debt arising from the sale of non-inventory assets on credit terms by a receiver or liquidator would not constitute an "account receivable" for the purposes of the Seventh Schedule because the relevant monetary obligation arises after appointment.  In contrast any unpaid proceeds of the sale of the same asset by the company prior to an appointment would give rise to an account receivable to which the preferential creditor regime would apply.

Overall the effect of the decision is to increase the scope of potential funds that may be available for application to preferential creditors in priority to secured or other unsecured claims.

See Court decision here.

Voidable transactions - a broad interpretation

Managh v Morrison and Ors involved an application by a liquidator to set aside a transaction pursuant to section 292 of the Companies Act 1993.  Approximately one year before liquidation the company assigned causes of action against a firm of solicitors and a real estate agent to a trust associated with the company's director. 

At the time of the assignment the trust was a creditor of the company (but only for a small amount).  Upon the company's liquidation, the liquidator contended that the assignment was voidable as it enabled the trust to receive more than it would have received in the liquidation.  It was not disputed that the company was insolvent at the time of the assignment, and its only assets of significance were the causes of action. The issue was whether the transaction enabled the trust to receive more towards satisfaction of its debt than it would have received, or would have been likely to receive, in the company's liquidation. 

The trust argued this requirement could not be met because the liquidator could not show that the trust would receive a net return from the assignment.  The Court rejected this argument and held that the assignment was a voidable transaction.  The Court said that the term "enable" in section 292 requires only that the creditor is given the means to improve its position over that of other creditors, not that it will necessarily succeed in doing so.  It went on to hold that the evidence disclosed support for the claims that were the subject of the assignment and that there was sufficient substance in the claims to conclude that the trust would be likely to receive more from the litigation than it would have received in the liquidation.  The assignment was set aside.  

See Court decision here.

Offer of tea and Easter buns not wrongful detention

Hay & McNab v ANZ National Bank Ltd involved an application by Mr Hay and Mr McNab for a writ of Habeas Corpus (an application challenging the legality of a person's detention).  The application was brought following Mr Hay's and Mr McNab's alleged detention by ANZ for approximately three hours (during which time they were fed tea and Easter buns in a manner that was "all very civilised").  It was claimed that while Mr Hay and Mr McNab were "detained", ANZ conducted a mortgagee sale of a property owned by a company in which Mr Hay is a shareholder and of which Mr McNab is the managing director.  Mr Hay and Mr McNab also asserted that the Bank had failed to account to Mr Hay for his share of the net sale proceeds, which amounted to a restraint on Mr McNab's and Mr Hay's liberty.

In support of the application, Mr McNab and Mr Hay raised arguments as to the failure of ANZ to obtain valid Overseas Investment Office approval for the sale of the property, and perceived inadequacies in the legislative provisions which led to the amalgamation of ANZ's constituent predecessors into the present entity.

Having regard to the fact that Mr Hay and Mr McNab were no longer "detained" by ANZ (having been free to walk into the Court room), the Judge observed that he was "unable to identify a causal nexus between perceived inadequacies in the establishment of the Bank, the civilised provision of tea and Easter buns, and the liberty of the applicants."  Accordingly, Mr Hay and Mr McNab's application was dismissed. 

See Court decision here.

Company administration - a limitation on the casting vote

In Grant v Commissioner of Inland Revenue, the Court of Appeal took little time to uphold a High Court decision that a deed of company arrangement (DOCA) under Part 15A of the Companies Act 1993 was void. 

At the creditors meeting, the DOCA had been approved by the majority of creditors in number. Nevertheless, this did not constitute 75% of creditors in value. Mr Grant, as chair of a creditors' meeting, purported to exercise a casting vote in favour of the DOCA in order for it to be approved.  

The Court held that the statutory scheme allowed for the use of a casting vote by the chair only when there was a deadlock in numbers for and against the resolution, and not to make up a shortfall in relation to the value of the creditors voting.  The Court stated that, despite some overall similarities with the Australian scheme, it was evident that Parliament had not opted to incorporate the technical provisions found there in relation to deadlock-breaking.

It is understood that a further appeal is contemplated. 

See Court decision here.

Creditors are not required to accept proposals of "no practical advantage"

In the High Court decision of Herbert v Allied Nationwide Finance Limited & Others, the Court declined to approve a creditor's proposal under the Insolvency Act 2006 on the grounds that the terms were not reasonable and not calculated to benefit the general body of creditors. 

Mr Herbert had debts of approximately $29 million.  Under his (and his wife's) proposals, a sum of $10,000 was to be distributed to all creditors, being approximately 0.016 cents in the dollar.  Mr Herbert also proposed to continue to meet the mortgage payments on his family home, valued at approximately two million dollars.

In declining the proposal, the Court described this return as being of no practical advantage to the creditors, and held that the opposing creditors should not be constrained to accept a proposal of this kind.  Further, due to the large scale of losses in the case, it was found that there was a public interest in scrutiny by the Official Assignee of Mr Herbert's affairs.  The Court noted that the global financial crisis could not be given as a complete reason for the failure of property developments.  The Court also said that the preference given by Mr Herbert to secured creditors (the ongoing mortgage payments) was unsatisfactory.  In light of these factors, and particularly the small amount which would be returned to creditors, both proposals were declined. 

See Court decision here.

Delay tactics unsuccessful in staving off liquidation

In The Commissioner of Inland Revenue v Blackmore Trust Ltd, Blackmore tried to stave off liquidation for the sum of $1.4 million owed to the IRD.  After six or seven adjournments, Blackmore finally put evidence before the Court (albeit through its lawyer, rather than by affidavit) claiming that its liabilities totalled $15.6 million, and its sole asset, the James Smith building in the Wellington CBD, was valued at $21.5 million as a going concern, or $11 million - $13 million in a "fire sale".

The Court held that it was too little, too late, and ordered that Blackmore be liquidated.  Blackmore had had 10 months from service of the statutory demand in which to put a "rescue package" together.  Any further delay would prejudice a liquidator's ability to "start the clock" and make recovery under the Companies Act, and no verified (by affidavit) evidence had been put before the Court to suggest that the company was not in a "hopeless position".

See Court decision here.

Active co-operation from United Kingdom courts in cross-border insolvency

The recent English decision in the Australian liquidation, New Cap Reinsurance Corpn Ltd (in liquidation) and another v Grant and others (available here), has further opened up the possibility for New Zealand insolvency proceedings to be recognised and enforced in the United Kingdom.  

The liquidators for an Australian reinsurance company, New Cap Reinsurance Corporation Limited (New Cap), had successfully brought an action in the New South Wales Supreme Court against two Lloyd's syndicates (Syndicates) determining that payments made by New Cap to the Syndicates were voidable transactions under Australian insolvency laws.  As the Syndicates were based in the United Kingdom and refused to accept the jurisdiction of the Supreme Court, the Court issued a letter of request to the UK High Court asking them to uphold the NSW judgment and order the Syndicates to return the payments.  The High Court found in favour of the liquidators and the Syndicates appealed.

The Court of Appeal held:

• Both the Foreign Judgments (Reciprocal Enforcement) Act 1993 (UK) – which provides for the enforcement of foreign money judgments – and the Order extending the application of that Act to Australian apply to bankruptcy and corporate insolvency proceedings.  However, that does not exclude section 426 of the Insolvency Act 1986 (UK).  In particular, section 426 can be used to seek assistance with a view to the enforcement of a money judgment issued in foreign insolvency proceedings, including through a local order to enforce a foreign judgment for the payment of money made in insolvency proceedings.
• Section 426 is a discretionary provision.  However, the Court cited Rubin v Eurofinance SA for the principle that "the jurisdiction of the court conducting, or supervising, the unitary insolvency proceeding in the court of the bankrupt's domicile should receive recognition world-wide, and at any rate in the English courts".  In that context, the Court upheld the High Court's exercise of its discretion and dismissed the appeal.

This decision may be helpful to Australian and New Zealand insolvency officials in two ways.  First, it recognises alternative methods of obtaining assistance from the UK courts in relation to foreign insolvency proceedings.  Second, it provides further support for the principle of modified universalism recognised by Lord Hoffmann in HIH Insurance and Cambridge – i.e. that "ideally, bankruptcy proceedings should have universal application" and "[t]here should be a single bankruptcy in which all creditors are entitled and required to prove".  It therefore indicates that the UK courts will be willing and able to recognise and assist New Zealand insolvency officials in relation to primary insolvency proceedings brought in New Zealand.

Leave to appeal this case (and Rubin v Eurofinance SA) has been granted.  As always, we will keep you posted on these developments.

Court can order solicitor to disclose client's contact details (UK)

The English High Court has held that when a client is in contempt of court and in breach of disclosure orders, the Court can order the client's solicitors to reveal the client's contacts details, even when those details are given in confidence.

In JSC BTA Bank v Solodchenko & Ors, JSC BTA Bank applied for disclosure of information about Mr Shalabayev by his solicitors, Clyde & Co.  Mr Shalabayev was a defendant in an action by JSC BTA Bank attempting to recover proceeds of AAA- rated investment bonds worth US$209 million, which the Bank claimed had been fraudulently misappropriated.  Mr Shalabayev was in breach of disclosure orders and had been found guilty of continuing contempt of court.

The High Court of England and Wales ordered Clyde & Co to disclose all past and present contact details they held for Mr Shalabayev, although they did not order the disclosure of Mr Shalabayev's financial information.

In making the order for disclosure of Mr Shalabayev's contact details, the High Court held that although they had jurisdiction to order disclosure, courts should respect express conditions of confidentiality as far as possible.  Confidentiality in this case was overridden by the strong public interest in ensuring obedience with court orders, and the fact that disclosure would help trace the assets subject to the freezing order.

The High Court dismissed the application by Clyde & Co for disclosure of Mr Shalabayev's financial information, because this information was likely to be privileged and, if granted, would inhibit Mr Shalabayev's right to seek legal advice. 

See Court decision here.

Liquidator's power to enter funding arrangements (Australia)

Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2011] FACFC 89 concerned the powers of liquidators in Australia.  In 2009, joint liquidators were appointed to Octaviar Limited (Octaviar) and Octaviar Administration (Funder).  Fortress claimed to be a secured creditor of Octaviar under a charge, and was owed approximately $71 million.  The liquidators arranged for Octaviar and the Funder to enter into funding agreements that provided for the Funder to fund an investigation into the actions of Fortress and to commence litigation against Fortress.

As the Funder was in liquidation, an application was made to the Court for approval of the funding agreements.  This was granted at first instance, with the judge noting that the power of liquidators to enter into funding agreements was well accepted.  Fortress applied for leave to appeal this decision, claiming that the approval meant that the value of Fortress's security would be diminished.  On appeal, the Court found that Australian legislation did not support the provision of litigation funding by a liquidator to an entirely unrelated litigant, when that litigation was undertaken simply on the prospect of obtaining a monetary benefit.

In New Zealand, several High Court cases have recognised that funding arrangements may be made by liquidators.  However, the Courts suggest that liquidators should seek to have these approved by the Court under sections 260A or 284 of the Companies Act 1993.

See Court decision here.

Trustees' right to indemnification from trust property (Australia)

In Saker, in the matter of Great Southern Managers Australia Ltd (Receivers and Managers Appointed) (in liquidation), the plaintiffs were the liquidators of Great Southern Managers of Australia Limited (GSMAL). 

GSMAL owned a pine plantation under a managed investment scheme.  The pine plantation was damaged by a fire.  GSMAL was indemnified by its insurer for the loss caused by the fire.  GSMAL distributed those funds to investors who had suffered a direct loss as a result of the fire.  However, under the constitution of the investment scheme, GSMAL was required to distribute the insurance proceeds to all investors, not just those investors who had suffered a direct loss.  As a result, GSMAL had to contribute approximately AUS$190,000 to the scheme to cover payments to the remaining investors. 

The liquidators sought a determination as to whether GSMAL had a right to retain money from the scheme to cover the amounts it had contributed from its own funds.  The Federal Court of Australia held that, although the distribution was contrary to the scheme's constitution, the mistake was not unreasonable or dishonest.  As a result, it would be inequitable to restrain GSMAL from being reimbursed or indemnified for the payments it made into the scheme's account from its own funds. 

See Court decision here.

Removal of company administrators (UK)

In Finnerty v Clark the appellants were the sole shareholders and substantial unsecured creditors of St George's Property Services (London) Ltd (St George).  The respondents were administrators of St George.  The High Court decision was reviewed in our December 2010 insolvency legal update.

The appellants sought an order under the UK Insolvency Act that the administrators be removed because they refused to challenge the default rate of the loan to St George.  The appellants believed that the default rate on the loan was an unenforceable penalty or an extortionate credit transaction.

The Court of Appeal refused to remove the administrators.  It held that the administrators acted independently and there were no grounds for criticising their decision not to initiate proceedings.  The Court noted that the fact that a different administrator may have come to a different decision was not a sufficient ground for removal of an administrator. 

See Court decision here.

Bankrupt receives a three year extension to bankruptcy period

In Official Assignee v Spencer, Mr Spencer's bankruptcy period was extended from three to six years due to his conduct and failure to comply with his obligations under the Insolvency Act 1967 (Act).  

Mr Spencer was adjudicated bankrupt for the second time in August 2007 and was due to be discharged from bankruptcy in 2010.  However, the Official Assignee objected to Mr Spencer's discharge and asked the Court to exercise its discretion and decline to order the discharge.

The relevant factors the Court examined were the interests of the bankrupt, the interests of the creditors, the public interest, commercial morality, the conduct of the bankrupt and the general public interest that a bankruptcy should not endure indefinitely. 

The Court found that Mr Spencer's conduct and failure to comply with his obligations under the Act had consistently delayed the Assignee in carrying out their obligations and created further and unnecessary expense.  As a result, the Court denied Mr Spencer's discharge order, extending the term of his bankruptcy by a further three years to July 2013.

See Court decision here.

This article is provided for general information purposes only and not as legal advice.  For further information, please contact a member of our insolvency law team - David Perry, Scott Barker, Laura O'Gorman, Michael Dineen, Willie Palmer, Gene Turner, Jan Etwell, Scott Abel, Susan Rowe, David Broadmore, Myles O'Brien, and Kelly Paterson.