IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2018-404-2024 [2018] NZHC 2583

UNDER	Part 19 of the High Court Rules and sections
255,257 and 284(1)(a) of the Companies Act
1993	

IN THE MATTER	
of an application concerning FORESTLANDS (NO. 2) LIMITED (IN LIQUIDATION)

FORESTLANDS (NO. 3) LIMITED (IN LIQUIDATION)

FORESTLANDS (NO. 4) LIMITED (IN LIQUIDATION)

FORESTLANDS (NO. 5) LIMITED (IN LIQUIDATION)
/Cont…	

Hearing:	On the papers	

Appearances:	
D T Broadmore and L A O'Gorman for the Applicants	

Judgment:	
3 October 2018	

JUDGMENT OF ASSOCIATE JUDGE SMITH

This judgment was delivered by me on 3 October 2018 at 9.30am, pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Solicitors / Counsel:
Buddle Findlay, Auckland

FORESTLANDS, EX PARTE JACKSON [2018] NZHC 2583 [3 October 2018]

FORESTLANDS (NO. 6) LIMITED (IN LIQUIDATION)

FORESTLANDS (NO. 7) LIMITED (IN LIQUIDATION)

FORESTLANDS (NO. 8) LIMITED (IN LIQUIDATION)

FORESTLANDS (NO. 9) LIMITED (IN LIQUIDATION)

FORESTLANDS (NO. 10) LIMITED (IN LIQUIDATION)

FORESTLANDS (NO. 11) LIMITED (IN LIQUIDATION)

FORESTLANDS (NO. 12) LIMITED (IN LIQUIDATION)

FORESTLANDS (NO. 14) LIMITED (IN LIQUIDATION)

FORESTLANDS (NO. 15) LIMITED (IN LIQUIDATION)

FORESTLANDS (NO. 16) LIMITED (IN LIQUIDATION)

FORESTLANDS (NO. 17) LIMITED (IN LIQUIDATION)

FORESTLANDS (NO. 18) LIMITED (IN LIQUIDATION)

FORESTLANDS (NO. 19) LIMITED (IN LIQUIDATION)

FORESTLANDS (NO. 20) LIMITED (IN LIQUIDATION)

AND

IN THE MATTER	of an application by NEALE JACKSON and GRANT ROBERT GRAHAM Applicants

[1]       The  applicants,  Mr Neale  Jackson  and  Mr Grant  Robert  Graham  (the liquidators), were appointed liquidators of the Forestlands companies listed above (collectively "the Forestland entities"), on 6 September 2018.  They now apply for directions as to the manner in which they may serve liquidators' reports and other documents on the creditors and shareholders of the Forestlands entities.  They apply separately for leave to bring their application as a "without notice" originating application under Part 19 of the High Court Rules.

Background

[2]       Each of the Forestlands entities was incorporated to own land and develop forests on the land.  Each entity issued a prospectus for non-voting "B" shares, and a total of over 17,000 B shares were issued to subscribers in the Forestlands entities. Because some shareholders have shares in more than one of the Forestlands entities, the liquidators reckon that the total number of shareholders in all of the Forestlands entities is approximately 4,600.

[3]       The Forestlands entities were put into liquidation on the application of the

Financial Markets Authority.

[4]       According to Mr Jackson's affidavit, the Forestlands entities are not insolvent. There will be funds for distribution to subscribing shareholders, and the liquidators' primary role will be to scrutinise the deductions made from the sale of the Forestland entities' assets, to assess creditors' claims, and make distributions to shareholders.

[5]       Based on his experience with similar sized liquidations and his knowledge of the Forestlands entitles, Mr Jackson anticipates that the liquidations are likely to be reasonably complex, and will require a reasonable period of time to complete.

Liquidators' reports – the statutory requirements

[6]       Under  the  Companies Act  1993  (the Act),  liquidators  have  the  reporting obligations (relevant to this application) that are set out in ss 255(2)(c)(ii) and (d), and in s 257(1) of the Act.

[7]       Section 255(2)(c)(ii)  is  concerned  with  the  liquidator's  first  report.    The liquidator is required to prepare and send to every known creditor, every shareholder, and the Registrar for registration:

(a)       a report containing the statement of the company's affairs, proposals for conducting the liquidation, and, if practicable, the estimated date of its completion; and

(b)       a notice explaining the right of the creditor or shareholder to require the liquidator to call a meeting of creditors under s 314 of the Act; and

(c)       the  list  of  creditors  the  liquidators  are  required  to  prepare  under s 255(2)(c)(i).

[8]       The liquidators' obligations under s 255(2)(c)(ii) are required (in this case) to be discharged within 25 working days of the liquidators' appointment.  That is, by
11 October 2018.

[9]       Section 255(2)(d) is concerned with subsequent liquidators' reports. It requires a liquidator within 20 working days of the end of each period of six months following the date of commencement of the liquidation, to prepare and send to every known creditor and every shareholder, and to the Registrar for registration, a report –

(i)	on the conduct of the liquidation during the preceding six months; and

(ii)      of any further proposals which the liquidator has for completing the liquidation.

[10]     Section 257  of  the Act  deals  with  a  liquidators'  duties  in  relation  to  the provision of a final report and accounts.  Section 257(1) provides:

(1)	As soon as practicable after completing his or her duties in relation to the liquidation, the liquidator of a company must—

(a)	prepare and send to every creditor whose claim has been admitted and every shareholder—

(i)       the final report and statement of realisation and distribution in respect of the liquidation; and

(ii)	a statement that—

(A)       all known assets have been disclaimed, or realised,  or  distributed without realisation; and

(B)       all   proceeds   of   realisation   have   been distributed; and

(C)	the company is ready to be removed from the
New Zealand register; and

(iii)      a summary of the applicable grounds on which the creditor or shareholder may object to the removal of the company from the New Zealand register under section 321:

(b)	send  or  deliver  copies  of  the  documents  referred  to  in paragraph (a) to the Registrar for registration.

[11]     Section 391 of the Act deals with the manner in which notices, statements, reports, accounts, or other documents are to be sent to a shareholder or creditor who is a natural person.  The methods of delivery provided for in s 391 include personal delivery, posting to the person's address, or sending the document by facsimile.

[12]     Section 391 does make provision for the sending of documents to a shareholder or creditor by electronic means, but only where the shareholder or creditor has notified the company that he or she wishes to receive documents by electronic means.1

The Court's power to modify a liquidator's reporting obligations

[13]     On the application of a liquidator, the Court may exempt the liquidator from compliance with the provisions relating to the first report and/or the six-monthly reports required by s 255(2)(c)(ii) and s 255(2)(d).2  The Court also has power, on the liquidator's   application,   to   modify   the   application   of   s 255(2)(c)(ii)   and/or

1	Companies Act 1993, s 391(3A)-(3C).
2	Companies Act 1993, s 255(4)(a).

s 255(2)(d).3     In either case, a modifying order can be made on such terms and conditions as the Court thinks fit.

[14]     Section 257(2) of the Act contains a similar power for the Court, on the application of a liquidator, to exempt or modify the requirements of s 257(1), on such terms and conditions as the Court thinks fit.

The liquidators' concerns with the discharge of their reporting obligations in this case

[15]     Mr Jackson says that he and Mr Graham have not yet formed a view on whether they will prepare separate liquidators' reports for each of the Forestlands entities, or consolidated liquidators' reports for all of the Forestlands entities.  If they were to prepare separate liquidators' reports, approximately 9,000 liquidators' reports would need to be sent to shareholders on each reporting date, because the shareholders who hold shares in more than one of the Forestlands entities would be sent more than one report. If the liquidators elected to prepare consolidated reports, they would need to be sent to approximately 4,600 shareholders.

[16]     Of the total 4,600 shareholders, Mr Jackson says that nearly all are individuals;

only 42 of the shareholders are companies.

[17]     Mr Jackson estimates the cost of posting 9,000 liquidators' reports to the shareholders at approximately $17,000 plus GST on each occasion.  If consolidated liquidators' reports were posted, the estimated cost would be approximately $8,500 plus GST on each occasion.  If (as anticipated) the liquidations prove to be lengthy, the costs will become significant, and will reduce the pool of funds available to be distributed to the shareholders.

[18]     The liquidators' proposal is to save those costs by making the reports available to shareholders, where possible, by email.  The liquidators and their staff have so far identified email addresses for approximately 700 shareholders, and they have approximately  3,000  unread  emails  that  have  been  sent  by  shareholders  to  the

3	Companies Act 1993, s 255(4)(b).

Forestlands entities. Once those emails have been reviewed, there should be numerous further email addresses to which liquidators' reports could be sent.

[19]     The liquidators propose that the most efficient way to send emails to the shareholders and creditors would be to send an email with a link to a website where the reports could be readily downloaded.  Providing the reports in that manner would avoid the risk that the liquidators' reports may prove to be too large to be received by whatever email service provider a shareholder or creditor might be using. Also, where a creditor or shareholder has an interest in several Forestlands entities, that creditor or shareholder could access copies of the relevant liquidators' reports, avoiding the additional administration and cost of determining which creditors and shareholders should be receiving which particular reports.

The specific orders sought

[20]     As noted, the liquidators make a procedural application, seeking leave to make their substantive application by originating application on a "without notice" basis.

[21]     In their substantive application, the liquidators ask for the following orders:

1(a)      That the requirements under ss 255(c)(ii) and (d) and 257(1) of the Companies Act 1993 ("Act") relating to the sending of the liquidators' reports and all  other documents required to be sent under those sections (together, the "Liquidators' Reports"), be modified such that where the [liquidators] hold an email address for a creditor or shareholder of [any of] the [Forestlands entities]:

(i)         the [liquidators] are not required to send that creditor or shareholder the Liquidators' Reports; and

(ii)       if the [liquidators] do not send that creditor or shareholder the Liquidators' Reports, the [liquidators] must send that creditor or shareholder an email with a link to a website where copies of the Liquidators' Reports can be downloaded.

(b)        That, where the [liquidators] hold an email address for a creditor or shareholder of [any of] the [Forestlands entities] the [liquidators] are permitted to send any other documents or correspondence to those creditors and shareholders by electronic means, in addition to all other methods permitted by the Act.

(c)      That the Liquidators' Reports be uploaded to the website of KordaMentha at https://www.kordamentha.com/ as soon as practicable after they have been prepared.

(d)        That the applications and sealed orders in this proceeding be sent to every known creditor and shareholder of [each of] the [Forestlands entities] at the same time and in the same manner (as modified by 1(a) above) as the documents listed in s 255(2)(c)(ii) of the Act.

(e)        That any creditor or shareholder of [any of] the [Forestlands entities] is granted leave to apply to the Court within 15 working days of such service referred to in 1(d) above to modify or discharge these orders on appropriate notice being given to the [liquidators].

(f)        That leave is reserved for the [liquidators] to apply further in respect of any ancillary orders.

(g)        That the applicants' solicitor-client costs of this application be an expense incurred by the [liquidators] in carrying out their duties as liquidators.

Discussion and orders

The procedural application

[22]     I am satisfied that it is appropriate to make an order granting leave to the liquidators to commence the proceeding by way of originating application.  Under r 19.5, the Court may permit any proceeding not otherwise covered by Part 19 of the High Court Rules to be commenced by originating application, where the interests of justice so require. Also, s 284(1)(a) of the Act enables a liquidator to seek directions from the Court in relation to any matter arising in connection with a liquidation.

[23]     In this case, the matter in issue is how the liquidators are to discharge their statutory obligation to communicate their reports and other documents to thousands of people. That issue is appropriately determined on affidavit evidence, without the need for a formal statement of claim (as would be required if the proceedings was commenced under Part 18 of the High Court Rules, which would be the applicable Part of the Rules if no orders were made).  I am satisfied that it is in the interests of justice for the substantive application to be made by originating application under Part 19.

[24]     The liquidators ask that the substantive application be dealt with on a "without notice" basis, relying on r 7.46 of the High Court Rules, which permits a Judge to deal with an application without notice only if the Judge is satisfied that requiring the application to proceed on notice would cause undue delay or prejudice, the application

affects only the applicant, the application relates to a routine matter, or the interests of justice require the application to be determined without serving the notice of application.

[25]     Counsel submit that it is appropriate to make the substantive application without notice, for the following reasons.  First, the liquidators have only 25 working days from the date of liquidation to provide their first report under s 255(2)(c)(ii). Secondly, personal service of the application on a significant number of shareholders would add substantial and unnecessary expense to the liquidation.   Thirdly, the liquidators propose that notice will be given to the shareholders and creditors after the orders are made, with leave reserved to them to apply to discharge or vary the orders. In all of those circumstances, the liquidators submit that the interests of justice require that the orders be made without notice.

[26]     I accept those submissions.  The liquidators' first report is due by 11 October

2018, and it is impracticable for the liquidators to serve all of the shareholders and creditors, with time for them to be heard, if they wish, before that date.  I also accept that requiring notification would add unjustified additional expense to the liquidations.

[27]     For those reasons, I grant permission to the liquidators to commence their substantive application by way of originating application, to be dealt with on a "without notice" basis.

The substantive application

[28]     Counsel referred to FCS Loans Ltd (in liq) v Fisk, a case in which Associate Judge Gendall dealt with an application under s 255(2)(d) of the Act exempting the liquidators from sending reports to every preference shareholder of the company in liquidation.4    There were 3,141 preference shareholders, and the likely direct cash costs of any further mail-out to them would be approximately $4,700 plus GST for each six-monthly report. The evidence was that the liquidation of the company would be complex and would take considerable time.

4	FCS Loans Ltd (in liq) v Fisk [2013] NZHC 1190.

[29]     Associate Judge Gendall considered that the costs of supplying the six-monthly reports to the preference shareholders would be out of proportion to any benefit those preference shareholders would receive. Also, any particular shareholder who wished to view the six-monthly report could do so by searching the website of the Registrar of Companies or the website of the liquidators' firm.

[30]     Counsel also referred to the judgment of Associate Judge Gendall in Perpetual Trust Ltd v Strategic Finance Ltd (In Receivership).5     Again, orders were made exempting the liquidators of the defendant from compliance with their obligation to prepare and send to every known preferential shareholder, reports on the conduct of the liquidation.   The evidence showed that there were at least 1,367 preferential shareholders,  and  the  liquidators  estimated  that  the  direct  cost  of  posting  each six-monthly report to the preferential shareholders would be about $6,000, including
$1,500 for postage.  The liquidators did not expect there would be sufficient funds to make a distribution to preferential shareholders, and it appeared that it would take several years before the liquidation could be completed.  The Associate Judge made orders that the reports be posted on the liquidators' website and on the Companies Office website.

[31]     The Associate Judge in Perpetual Trust Ltd considered that the large number of preferential shareholders, and the fact that they were highly unlikely to achieve any dividend in the liquidation, justified a departure from the standard requirement of six-monthly reporting to preferential shareholders. His Honour referred to the cost of providing the six-monthly reports, noting that it would be out of proportion to any benefit the shareholders might receive from the reports being mailed to them.

[32]     While this case is different in one respect, namely that the Forestlands entities appear to be solvent, I am satisfied that the orders sought are appropriate, and will result in a small saving for creditors without undermining what I apprehend to be the purpose of the provisions of the Act that require liquidators' reports to be sent to shareholders and creditors (in the manner prescribed by s 391), namely to keep them advised of the way the liquidation is being conducted.  The compelling ground for

5	Perpetual	Trust	Ltd	v	Strategic	Finance	Ltd	(In	Receivership)	HC   Wellington, CIV-2010-485-1085, 27 July 2010.

making the orders sought is the number of reports that would have to be sent, every six months, if the orders sought (or orders similar to them) are not made, and the cost of posting those reports. There are over 4,500 shareholders, and posting the reports to all of them would represent, over time, a not insubstantial cost, not only in postage
costs but also in administrative time for the liquidators' staff.  Given the likely costs savings if the proposed orders are made, I think the questions are whether the making of the orders would be contrary to any purpose in the Act, and whether any shareholder or creditor is likely to be disadvantaged or prejudiced if the orders sought are made.

[33]     First,  the  relevant  parts  of  the Act  (being  the  ss 255  and  257  reporting requirements and the mode of giving notice to individuals prescribed by s 391) will not in my view be undermined if orders are made as sought.   The notification provisions in s 391 allow for service by post, and it seems to me that what will be lost if the orders sought are made will be the shareholder's or creditor's entitlement to receive the reports and other documents in hard copy. I accept that may be a negative factor for a few shareholders, but I think it is outweighed by the cost and inconvenience of sending so many reports by post.  In saying that, I bear in mind that the proposed notification by email will only apply in respect of shareholders and creditors who have already been communicating by email with the liquidators or with one or more of the Forestlands entities.   Where the liquidators do not have email addresses, notice will have to be given in accordance with s 391.

[34]     Leave will be given to any affected creditor or shareholder to apply to the Court within 15 working days of service of these orders, to modify or discharge these orders, on giving appropriate notice to the liquidators.  And if the liquidators perceive any difficulty in implementing the notification regime, leave will also be reserved to them to apply for further orders. Those orders will in my view sufficiently mitigate any risk of unforeseen disadvantage or prejudice to any creditor or shareholder

[35]     For all of those reasons, I make orders in terms of the application, as set out in paragraph [21], 1(a)-(f) of this judgment.

[36]     On the question of costs, I note that in Perpetual Trust Ltd Associate Judge

Gendall awarded costs on a 2B basis, while in FCS Loans Ltd His Honour called for

memoranda "if costs are in issue here".  For my own part, I doubt that a costs order is necessary.  On the face of it, the costs of the applications appear to be costs incurred by the liquidators in the conduct of the liquidations, just as costs incurred by a liquidator in pursuing a debt owed to the company by a third party would be (or the liquidator's costs of obtaining legal advice on a matter arising in the course of a liquidation would be).  However, it may be that there is a relevant distinction to be drawn here between the companies and the liquidators in their personal capacities, and I would be grateful for a short submission from counsel on the point if an order for costs  is  considered  necessary.   Any  costs  memorandum  should  be  filed  within
15 working days.

Associate Judge Smith