IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2014-404-003163 [2015] NZHC 413

BETWEEN	STEGGALL NUTRITION PTY
LIMITED Applicant	

AND	
LLOYD JAMES HAYWARD and JEFFREY PHILIP MELTZER as liquidators of South Pacific Brands Limited (In Liquidation) Respondents	

Hearing:	3 March 2015	

Appearances:	
D D Vincent for Applicant
C A Murphy for Respondents	

Judgment:	
10 March 2015	

JUDGMENT OF ASSOCIATE JUDGE OSBORNE
as to inspection of liquidated company records

A creditor’s application to inspect the records of the company in liquidation

[1]       South Pacific Brands Ltd (SPB) is in liquidation.  Lloyd Hayward and Jeffrey

Meltzer have been its liquidators.

[2]       A creditor, Steggall Nutrition Pty Ltd (Steggall), applies under s 256(1)(a)(ii) Companies Act 1993 for an order permitting Steggall to inspect records of SPB. SPB’s liquidators oppose the application.   If an order of inspection is made, the liquidators  ask  that  the  Court  imposes  conditions  to  protect  the  commercial sensitivity of some documents.

What Steggall wants to inspect

[3]       Steggall seeks an order permitting it to inspect:

STEGGALL NUTRITION PTY LIMITED v HAYWARD [2015] NZHC 413 [10 March 2015]

(a)       a copy of the sale and purchase agreement and all attachments relating to any asset of SPB sold to Davies Foods (2006) Limited (Davies) and businesses and any contingent contract/agreements SPB or any related company or any director of those companies has with any member of the Davies Foods group of companies or businesses.  Such documents to be without any redaction;

(b)       a copy of SPB’s secured creditor debt security documentation and all related settlement statements such documents to be without any redaction; and

(c)       a copy of any 2014 SPB financial performance statements including any trial balance, balance sheet, such documents to be without any redaction  including  the  2013  comparative detail  (if  any) on  those documents.

[4]        The requested inspection was explained for Steggall by Mr Vincent in his written synopsis in this way:

The Applicant wishes to inspect the company records in order to assess for itself the sale and purchase agreement with [Davies], the amount of funds received, how it was allocated on receipt and why such a large number of creditors remain unpaid.  It does not expect to receive any distribution from the liquidators so wishes to assess what other options it has to recover what it is owed.

[5]       Mr Vincent accepted, notwithstanding the formal application to inspect the sale agreement in unredacted form, that commercial sensitivity issues raised by SPB are required to be addressed, in relation to any order of inspection, by appropriate conditions.

Inspection under s 256(1)(a)(ii) Companies Act 1993

The statutory provision

[6]       Section 256(1)(a)(ii) Companies Act provides:

256	Duties in relation to accounts

(1)	Subject to subsection (2) of this section, 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)	…

(ii)	If the Court so orders, a creditor or shareholder;

The principles

[7]	The judgment of the Court of Appeal in Levin v Lawrence establishes the following principles in relation to the threshold test under s 256:1

(a)       The default or starting position is that there is no inspection in the absence of the Court order, but there is also no presumption against ordering inspection.2

(b)       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.3

(c)       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 something might turn up.4

(d)       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

1	Levin v Lawrence [2013] NZCA 394.
2	At [27].
3	At [53](a).
4	At [53](b).

investigate  this  area,  or  declined  to  say  whether  it  had  been investigated, the s 256(1)(a)(ii) threshold would be crossed.5

[8]       The Court of Appeal recognised that these principles constitute an elaboration of a “good reason” test enunciated by Toogood J in the same case at first instance:6

[56]      That is not to say that there should be a high threshold for permitting inspection,  but  there  must be  some  good  reason  for  the  Court  to  order inspection in circumstances where the statutory scheme does not ordinarily permit it. The test of “good reason” does not require any further elaboration; whether the Court will exercise its discretion to order access to the records will depend on the particular circumstances of each case.

[9]       The Court of Appeal saw little difference between “good reason” and “just”

as expressions of the threshold test.7

[10]     Finally, the Court of Appeal upheld Toogood J’s conclusion that a Court, in dealing with a s 256(1)(a)(ii) application, should have regard to any prejudice caused by inspection – as a factor but not the sole criterion – in the exercise of the discretion to make an order.8

Factual background

[11]     SPB manufactured and marketed beverages.  Its directors were Steven Shaw and  Andrew  Smith  whose  interests  also  held  all  SPB’s  shares.    At  a  so  far unidentified point before 21 April 2014 (but established by the liquidators as being April and September 2013), SPB became insolvent.

[12]     On 28 January 2014, SPB through Messrs Shaw and Smith as its directors, entered into an agreement to sell SPB’s assets to Davies for $2,600,000.  The sale was not disclosed at the time to SPB’s suppliers.  The sale was settled on 31 March
2014.

[13]     SPB was placed in voluntary liquidation by its shareholders on 21 May 2014.

5	At [53](c).
6	At [53], citing Levin v Lawrence [2012] NZHC 1452.
7	Levin v Lawrence, above n 1, at [52].
8	At [60]–[61].

[14]     In their Second Report dated 18 February 2015, the liquidators summarised the consequences of the company trading on and of the sale process in this way:

By the date of liquidation, Company creditors were owed a total of $1.8 million (including the liability to Energy Products Limited, a related company).   During the period when the Company failed the balance sheet solvency test, but continued to trade, the level of total creditor indebtedness was reduced by $3.7 million (creditor debts as at March 2013 were $5.5 million).

The material reduction in the level of creditors (some 67% of total indebtedness) was achieved by the Company continuing to trade and arranging an orderly sale of its business inventory and notably its active brands.  The sale of inventory and brands realised a significant sum which was applied toward creditor indebtedness.

[15]     The liquidator’s First Report, written on the day of the liquidation (21 May

2014), provides further information about SPB’s financial circumstances in the first

quarter of 2014.  It states:

Events Leading to Appointment

The company underwent a process of sale of its business which ultimately was successful and the sale settled 31 March 2014.   The company had expected the sale price and profitable trading leading up to the settlement of the sale to enable the company’s creditors to be paid however poor trading results across February & March 2014 and an unexpected inventory write down leading up to settlement have resulted in a shortfall.

[16]     It is to be inferred that the information in the paragraph just quoted was included by the liquidators in their report from what Messrs Shaw & Smith had said as directors, since the 21 May 2014 report goes on to record that:

The Liquidators will examine the company’s available books and records and conduct a brief review of the company’s affairs.

(emphasis added)

[17]     The liquidators’ reports indicate that SPB no longer had secured creditors by the time of its liquidation.  Evidence has not been provided as to exactly what was paid to creditors claiming security or to what entities it was paid.   Nor is there evidence as to payments made to unsecured creditors during the period in which the company traded or continued trading while insolvent.

[18]     During the period of its insolvency, SPB purchased products from Steggall. It purchased goods at a cost of $22,574.65, invoiced on 13 February 2014 and delivered on 14 February 2014, with payment due on 13 March 2014.  Steggall has received no payment whatsoever for the goods and remains an unsecured creditor for the full sum.

[19]     In their First Report the liquidators observed that it was unlikely that there would be a distribution to creditors.  They proposed pursuant to s 245 Companies Act to dispense with a meeting of creditors.

[20]     Steggall promptly filed its proof of debt and called for a meeting of creditors, with meetings subsequently being held on 8 and 27 August 2014.

[21]     In the meantime, Steggall learned that payments had been made before SPB’s liquidation to ASB Bank and to some entities related to Messrs Shaw and Smith, all on the basis that they held securities.  By their subsequent Second Report (dated 18
February 2015), the liquidators have now confirmed that three parties related to

Messrs Shaw and Smith were the recipients of debt repayments.

[22]     Steggall, which is an Australian based company, had Chris Sanson, as its agent, pursue enquiries of the liquidators.  The liquidators took the position (which appears to be correct in terms of s 254(1)(a)(ii) of the Act) that it was not for them to provide any documents for inspection without order of the Court.   Mr Sanson repeatedly took issue with that position and asked for copies of documents.  On 25
June 2014, he wrote to the liquidators, recording this request:

Please produce copies of:

a)   The relative sale and purchase agreement and the settlement statement you refer to.

b)   All the ASB bank’s loan documentation including but not limited to, the debenture, any chattel security, and any collateral security such as mortgages over any real estate.  I should tell you there is no record of any charge on the PPSR to the ASB in respect of SPB.

c)   The ASB bank’s settlement statement/s for the $2.3m as set out in your email.

d)   All  of  the  “secured  shareholders  loans”  documentation  including settlement statement/s but not limited to, the debenture, any chattel security, and any security in favour of the shareholders.

e)   Full  detail  including  of  how  the  “$300,000”  payment  in  favour  of “secured shareholders loans” is worked out and justified in hindsight by you.

[23]     The liquidators maintained their position that they were unable to provide inspection of documents to a creditor without order of the Court.  Further exchanges occurred around that issue.

[24]     On 7 July 2014, Mr Hayward (as one of the liquidators) stated to Mr Sanson in an email:

If  you  apply  for  a  court  order  the  liquidators  will  not  oppose  your application, we can confirm that for the Court if that is required.

[25]     The liquidators’ approach to a Court order changed shortly afterwards.  In a letter dated 18 July 2014, Mr Hayward wrote directly to Mr Steggall.  Mr Hayward recorded that the liquidators had been led to query whether Mr Sanson’s persistent interest in accessing to SPB’s materials included wider motivations, the liquidators understanding that Mr Sanson is associated with an entity which competes directly with Davies (as purchaser of SPB’s business).   Mr Hayward stated that neither Steggall  nor  Mr  Sanson  had  identified  any  grounds  on  which  the  ability  or willingness  of the liquidators  to  properly discharge their role could  sensibly be questioned.  Mr Hayward recorded an intention to now oppose any application for an inspection  order.    He said  that  in  such an  event  the liquidators  would  seek  an immediate order for security for costs, because the liquidators were of the view that they could properly carry out all necessary and appropriate investigations.

[26]     In the meantime, on Mr Sanson’s urgings, the liquidators called a creditors’ meeting to consider a motion that a Liquidation Committee be elected.  At an initial meeting on 8 August 2014, the motion was defeated.   It had emerged that Energy Products Ltd (EPL) had come forward as a creditor of SPB although it had not been listed as a creditor by Messrs Shaw and Smith.  It transpired that EPL is owned and controlled  by  Messrs  Shaw  and  Smith.    The  EPL debt  has  subsequently  been investigated by the liquidators in a preliminary way, with some evidence found to

support it.  However the liquidators have not fully investigated the debt as Messrs Smith and Shaw have subsequently indicated that EPL will not claim a share in any distribution, rendering further analysis of the debt irrelevant.   In  the meantime, however,  EPL voted  at  the  creditors’ meeting  against  the  motion  to  appoint  a liquidation committee, and its vote was determinative.

[27]     However, a second creditors’ meeting was convened on 27 August 2014 resulting in the election of a Liquidation Committee.   Mr Sanson failed in an endeavour to become a member of that committee.

[28]     Mr Hayward has deposed that he viewed Mr Sanson’s interest in relation to the Liquidation Committee as being motivated by an intention/desire to obtain access to SPB’s records without having to make an application to the Court.   It appears clear from the coincidence of Mr Sanson’s efforts to have a meeting called for the purpose  of  voting  on  a  Liquidation  Committee  and  the  liquidators’ change  of position, in deciding to oppose any Court order, that the conduct of Mr Sanson as Steggall’s agent had become a major factor in the liquidators’ approach.

This application and the liquidators’ opposition

[29]     Steggall filed its application in this proceeding on 2 December 2014.

[30]     Before the proceeding was filed, Mr Vincent forwarded a copy of the drafted documents to the liquidators.   The liquidators decided to formally oppose the application.  Mr Hayward has deposed as to the liquidators’ principal concerns at that time and identified the following four in particular:

(a)	confidentiality obligations owed to Davies under the sale agreement;

(b)	Mr Sanson’s role as Steggall’s agent when Mr Sanson is a competitor

of Davies;

(c)	unfairness to other SPB creditors in asking the liquidation to bear the costs burden of steps for the benefit of one creditor only; and

(d)	the need for security for costs on any application.

[31]     In response to Steggall’s letter before action, the liquidators had counsel (Ms Murphy) reply to Mr Vincent.  Ms Murphy recorded that the application, if pursued, would be opposed on six grounds being:

(a)      the liquidators have experience and competence to complete any necessary investigation;

(b)       a   properly   constituted   Liquidation   Committee   is   interested   in overseeing the liquidators’ activities (the three members on the Committee   representing   $287,000   of   debt,   as   compared   with Steggall’s $22,574.65);

(c)	an	investigation	by   Steggall	would	duplicate	the	liquidators’

considerations, adding costs to the liquidation;

(d)      Steggall had not indicated an intention to serve Davies with the application although Davies would likely be impacted by any order;

(e)       the draft application did not satisfactorily address the costs of access, with preparation of records having to be carefully and closely supervised.  The interests of other creditors in avoiding unnecessary expenditure and the potential for Davies to claim damages for breach of confidentiality need be protected by adequate Court directions; and

(f)	Steggall needed to provide security for the costs application.

The liquidators’ notice of opposition

[32]     The liquidators filed a notice of opposition.

[33]    The notice initially included (in addition to grounds of opposition) two applications, one for security for costs and one for directions as to service on Davies and on Messrs Smith and Shaw as affected parties.   Ms Murphy confirmed at the

hearing that neither application is pursued.  The parties have informally dealt with security for costs between themselves; Davies has provided a letter as to its position which has been produced by Mr Hayward.  Messrs Smith and Shaw were provided with copies of the proceeding but have elected to take no steps.

[34]     The liquidators in the balance of the notice of opposition set out grounds of opposition which reflect those identified in Ms Murphy’s letter.

[35]     However, the notice also recorded:

The liquidators do not, in principle [sic], object to a creditor obtaining access to Company records provided that:

(a)        There is no prejudicial effect on the company and its other creditors;
and

(b)        Any costs of access are met by the petitioning creditor.

[36]     I was informed at the hearing that counsel then engaged in discussions not only as to the provision of security but also as to terms relating to confidentiality which might attach to any order of inspection.   Similarly, the liquidators obtained from Davies a statement as to its position in relation to inspection of documents including the sale and purchase agreement and SPB’s financial records, Davies being “agreeable”   to   inspection   but   subject   to   redactions   of   what   it   viewed   as commercially sensitive information.

The liquidators’ position through written submissions

[37]     Ms Murphy, in her written synopsis, identified “the five principal reasons” which caused the liquidators to oppose the application.   She explained that  the liquidators:

… would ordinarily take minimal issue with a creditor wanting to pursue its own lines of enquiry at its own cost, in this instance the proposed access creates risk for the Company, its other creditors and the liquidators.

[38]     Significantly, Ms Murphy then recorded:

The liquidators are content to be guided by the Court in respect of access but submit that it is essential that all relevant matters be taken into account.

[39]      I asked Ms Murphy to explain this position further at the start of the hearing. I indicated that the invitation for “Court guidance” did not sit squarely with the formal opposition.  The submissions did not refer to any abiding of outcome but in its terms “invited guidance”.  I suggested to Ms Murphy that her submission could be taken  to  indicate that,  notwithstanding  the  formal  opposition,  the  liquidators intended the Court to view them as adopting a “relatively neutral position”.  A way of expressing that relatively neutral position would be to say that, provided the threshold requirements under s 256(1)(a)(ii) of the Act are found to be met, the liquidators will accept the Court’s dismissal or, if granting the application, the conditions upon any order of inspection.   Ms Murphy accepted that summary as accurately stating the liquidators’ position on this application.

The issues for determination

[40]     The issues for determination fall into two groups.

[41]     First is whether Steggall has met the threshold test under s 256(1)(a)(ii) of the

Act.

[42]     Secondly,  should  the Court  determine that  there  is  good  reason  to  order access, the liquidators identify a number of matters which they say should be addressed by conditions attaching to any order for inspection.

Issue 1 – has the threshold test under s 256(1)(a)(ii) of the Act been met?

[43]     In  terms  of  the  judgment  in  Levin  v  Lawrence,  the  Court  of  Appeal’s minimum  requirement  is  that  an  applicant  must  put  forward  some  persuasive, tangible or concrete reason why inspection should be granted.9

[44]     In examining whether there is a tangible or persuasive reason for inspection, it is helpful to identify what about the conduct of SPB has caused Steggall concern.

[45]     The conduct of SPB which directly affected Steggall was SPB’s purchase of goods from Steggall in early 2014.  At the time SPB was insolvent.  It had a month

9	Levin v Lawrence, above n 1, at [53](c).

earlier entered into an  agreement to sell its business with the consequence that approximately two weeks after its invoice became due for payment it would no longer have income from trading.  These matters were not disclosed to Steggall at the time SPB purchased its product.  Equally, SPB did not disclose to Steggall that the amount to come from the proceeds of sale would be sufficient to pay secured creditors only (including parties related to SPB’s directors/shareholders).  Unsecured creditors would be left unpaid. That would include businesses, such as Steggall, who became creditors while SPB was purchasing stock with a distinct likelihood that it would not be in a position to pay the debt incurred or at least to pay it in full.

[46]     The circumstances raise a number of obvious and legitimate concerns for a creditor such as Steggall. They include:

(a)       Messrs Smith and Shaw had apparently decided to have SPB trade on while insolvent from a date which may have been as early as April
2013, but no later than September 2013.

(b)       Through the trading on, the secured creditors (which include Messrs Shaw and Smith or their interests, for unspecified sums) had been fully repaid, while fresh, unsecured debt was incurred with apparently little or no prospect of payment.

(c)       The basis upon which Messrs Shaw and Smith seek to justify their decision to trade on cannot be meaningfully tested by Steggall or by this Court on the evidence adduced.  The absence of testing arises in two ways:

(i)        In their Second Report the liquidators state that SPB reduced its debt by $3,700,000  at the start of the insolvent trading period (from $5,500,000 at the start to $1,800,000 at liquidation) but there is no evidence as to what the unpaid debt would  have  been  through  an  earlier  market  sale  of  the business.

(ii)      Messrs Smith and Shaw explained to the liquidators at the time of liquidation that SPB’s failure to clear all its debt had two causes, namely “poor sales in January to March 2014” and “an unexpected  stock  write  off”.    But  no  evidence  has  been adduced to indicate whether the directors’ earlier expectations in these regards were realistic and reasonable.

[47]     Steggall’s concerns in this case have a much sounder foundation than those of the applicants in Levin v Lawrence.  In that case, Mr Levin was seeking inspection of records of Waterman Buildings Supplies Limited (in liq).  But the courts found he already would or should have had access to the same records of trading between Waterman and the company of which Mr Levin was liquidator as Waterman’s liquidators had.  Despite his access to such material, Mr Levin had been unable to identify any aspect of concern in the relationship which might justify an order for inspection.  Counsel appearing for him conceded that Mr Levin had no basis beyond
suspicion  for  applying  for  inspection.10      In  short,  Mr  Levin  was  looking  for  a

transaction, he was not looking at a transaction.  It was, as both Toogood J and the

Court of Appeal found, both mere suspicion and a fishing expedition.11

[48]     By contrast, the course of conduct on the part of SPB’s directors which is deserving of investigation is clearly identified.   Although the liquidators have attacked the motivation of Steggall’s agent, Mr Sanson, the Court has no reason to doubt the genuineness of Steggall’s concerns.  Equally, they are tangible concerns.

[49]     In her written synopsis of submissions, Ms Murphy articulated amongst the five  principal  reasons  of  the  liquidators’  opposition  one  which  related  to  the threshold test.  Ms Murphy identified that ground of opposition as being:

Steggall  has  not  identified  any  issue  regarding  Company  or  director activities which has not already been examined or will be examined by experienced liquidators completing their usual investigations in conjunction with an independently appointed Liquidation Committee.

10	At [55]-[56].
11	Levin v Lawrence, above n 6, at [56]-[58].

[50]     In Levin v Lawrence, the Court of Appeal gave two examples of when the s 264(1)(a)(ii) threshold would be crossed in relation to a creditor’s genuine concerns about an aspect of a company’s affairs.12     First is where a liquidator declines to investigate the aspect.  The second is where he or she declines to say whether the aspect has been investigated.13   The two examples given might be said to involve a dereliction of liquidators’ duties.  The Court of Appeal was giving examples.  It did not suggest  that  the two  situations were an  exhaustive list  of good  reasons  for inspection.

[51]     The Court of Appeal’s approach in Levin v Lawrence reflects the Court’s recognition that, except in unusual circumstances amounting to material omission or the like, the courts (and the community) look to professionally qualified liquidators for the diligent and efficient investigation of the affairs of companies in liquidation. But that properly respectful approach is not a charter for liquidators through which the Court and affected creditors are required to accept without demur every conclusion of a liquidator.  Where there is a s 256(1)(a)(ii) application it is proper to consider the soundness of reasons given by a liquidator for a conclusion that no further investigation is required.

[52]     If  some  significant,  material  consideration  has  been  omitted,  and  the creditors’ concerns appear tangible, such may be a further example of good reason to allow a creditor to inspect the relevant records.

[53]     What, then, have the liquidators explained of their investigations in this case? Mr  Hayward  provided  all  the  evidence  of  the  liquidators.     In  relation  to investigations he deposed:

5.         Upon our appointment, I undertook the usual steps for gathering records, ascertaining assets and compiling a list of creditors.  I also commenced investigations of the Company’s affairs including as to:

5.1	The status of secured creditors;

5.2	The value obtained from the sale of assets pre-liquidation;

5.3	The distribution of the sale proceeds;

12	Levin v Lawrence, above n 1, at [53](c), summarised at [7](d) above.
13	At [53](c).

5.4	Consideration of proofs of debts filed by creditors;

5.5	Directors’ duties; and

5.6	Insolvent trading.

6.         These investigations are ongoing but, to date, I have not discovered any issue which would warrant the commencement of a formal claim either on behalf of the Company or by us in our capacity as liquidators.

Interaction with the applicant

7.         In or around late June 2014 (shortly after we had been appointed) I received  the  first  communication  from  Christopher  Alexander Sanson (Mr Sanson).  Mr Sanson is not a creditor of the Company but purported to represent an Australian based creditor, namely the applicant.

8.         Mr Sanson quickly made clear that he took issue with the manner in which the directors had operated the Company and on or about 26
June 2014 he demanded that I hand over the Company records and
information so that he could satisfy himself of the validity of the
Company’s pre-liquidation dealings.

[54]      Mr  Hayward  does  not,  in  his  sworn  evidence,  provide  his  reasoning  in relation to any of the issues raised by Steggall.

[55]     Mr Hayward’s First Report was in evidence.  But having been written at the time of liquidation (before the liquidators had examined the company’s available books and records let alone investigated any issues arising) that Report does not provide any information as to the reasoning of conclusions later reached through subsequent investigation.

[56]     On the other hand, the liquidators’ Second Report dated 18 February 2015, and filed in the Companies Office shortly before this hearing, is before me by agreement.  In that report, Mr Hayward helpfully sets out three areas of investigation undertaken by the liquidators being in relation to:

(a)	Reckless trading.

(b)	The validity of securities held by related parties. (c)	The validity of the EPL debt.

[57]     Although Steggall initially sought documents, in addition to those relating to the  possibility  of  reckless  trading,  also  those  relating  to  the  allegedly  secured creditors and to EPL.  As Mr Vincent, for Steggall, accepted the investigations and conclusions recorded by the liquidators into the secured debts and EPL debt cut across any need for inspection of those records to be pursued.

[58]     This leaves the Court to focus on the reckless trading issues.

[59]     In his Second Report, Mr Hayward recorded this:

Reckless Trading

1          To establish reckless trading under section 135 Companies Act 1993 we must be in a position to show that a director or directors:

a.   Agreed to the business of the Company being carried on in a manner likely to create a substantial risk of serious loss to the Company’s creditors; or

b.   Caused or allowed the business of the Company to be carried on in a manner likely to create a substantial risk of serious loss to the Company’s creditors.

2          Establishing a breach of the Companies Act 1993 involves a two- step process: (1) ascertaining the timing of the Company’s insolvency; and (2) assessing the actions taken by director(s) after that point and the impact of the same on creditors.

3          Our  review  of  the  Company’s  financial  position  in  the  months leading up to its formal liquidation suggest that the Company would have failed the balance sheet solvency test at some point between April and September 2013.

4          The  Company  was  liquidated  on  21  May  2014.    The  issue  is therefore whether the continued trading of the Company between say around mid-2013 and May 2014 was likely to (or did) create a substantial risk of serious loss to the Company’s creditors.

5          By the date of the liquidation, Company creditors were owed a total of $1.8 million (including the liability to Energy Products Limited, a related company).  During the period when the Company failed the balance sheet solvency test, but continued to trade, the level of total creditor indebtedness was reduced by $3.7 million (creditor debts as at March 2013 were $5.5 million).

6          The material reduction in the level of creditors (some 67% of total indebtedness) was achieved by the Company continuing to trade and arranging an orderly sale of its business inventory and notably its active  brands.     The  sale  of  inventory  and  brands  realised  a significant sum which was applied toward creditor indebtedness.

7          The failure to clear creditor indebtedness in whole following the sale appears to be due to poor sales in January to March 2014 and an unexpected stock write off.  Unless it could be demonstrated that the directors’ belief that that sale proceeds would in fact clear creditor debts  was  unreasonable  or  unfounded,  their  actions  in  trading through to achieve the sale appears to fall short of the level of conduct required to establish reckless trading.

8          In the circumstances, we consider it unlikely that a court would hold that the Company’s directors acted in a reckless manner and/or that they contributed to creditor losses by continuing to trade the Company after mid-2013.   Instead, it appears that the decision to continue trading allowed the Company to retain value in its asset base and achieve a market rate when those assets were sold.  In our experience, it is unlikely that the same returns would have been achieved if the assets had been sold via the liquidation process.

9          For the above reasons, we have concluded that a claim for reckless trading is unlikely to succeed and that there is little chance that an order  would  be  obtained  that  the  Company’s  directors  must contribute to the assets of the Company.

Discussion

[60]     In the light of the Second Report, I find there are three good reasons to allow

Steggall and its advisers to inspect the relevant records.

[61]     First, the liquidators’ global focus is on “creditors” and on the reduction of “creditor indebtedness”.14 This broad focus may lose sight of the interests of unsecured creditors.  If the trading of the directors was likely to create a substantial risk of serious loss for the unsecured creditors as a group, remedies may lie.  In this case, the directors’ decision to trade on through insolvency saw the entire debt to unsecured creditors paid, while the company incurred fresh debt to unsecured creditors who have not been paid. According to Mr Hayward, the apparent benefit of trading  on  lay  in  what  he  describes  as  a  “material  reduction  in  the  level  of creditors”.15     But such reductions did not apply to unsecured creditors.  Analysis of the interests of the unsecured creditors and the impact of the trading upon them is omitted from the liquidators’ report.

[62]     Secondly, there is no provided analysis of the likely realisation achievable

had the company’s business been marketed for sale at the time SPB was becoming

14	See, for example, Mr Hayward’s paragraph [5], above at [59].
15	Mr Hayward’s paragraph [6], above at [59].

insolvent on a balance sheet basis.  The nearest Mr Hayward comes in the report to a comparison between what was achieved at the end and what may have been achieved at the start is his concluding sentence in his paragraph [8] which I repeat:

In our experience, it is unlikely that the same returns would have been achieved if the assets had been sold via the liquidation process.

[63]     That is, in its terms, not an indication of analysis of the likely return from the financial records of SPB available to the liquidators but is rather a statement based on  Mr  Hayward’s  general  experience  of  liquidations.    It  also  assumes  that  the directors of the company who were prepared to trade on while insolvent for six months or more would not have been able and prepared to arrange funding lines for a short period in mid-2013 to put the business, still trading, on the market, and without the stigma of a liquidation process.  The liquidators do not provide any comment on what the financial information available to them (but not to Steggall or the Court) indicated was realistically achievable on that scenario.

[64]     Thirdly, the liquidators pick up again (as Mr Hayward had in the First Report published at the point of liquidation) the directors’ own explanation for their failure to achieve a full clearance of debt through trading on.   In his  First Report, Mr Hayward cited the directors’ two-fold explanation (poor trading results in the first quarter of 2014 and an unexpected inventory write-down).  In the Second Report, the first sentence of Mr Hayward’s paragraph [7] essentially reproduces that explanation
as the apparent cause of the failure to clear indebtedness.16   Mr Hayward follows that

observation with the recognition that reckless trading would not be established “unless it could be demonstrated that the directors’ belief that the sale proceeds would in fact clear creditor debts was unreasonable or unfounded”.   The report contains no suggestion that the soundness of the directors’ belief has in fact been investigated.  One obvious source for analysis of whether the directors’ expectations were either realistic or reasonable lies in the financial information which Steggall seeks to inspect.   Mr Hayward’s subsequent conclusion, namely that in the circumstances the liquidators consider it unlikely that the Court would hold that
SPB’s directors acted in a reckless manner or contributed to creditor losses, does not

16	Above at [59].

logically follow.17     That is because Mr Hayward’s own report indicates that no conclusion has been reached as to whether the directors’ expectation of clearing debts was unreasonable or unfounded.

Conclusion

[65]     There is substance in the issues raised by Steggall in relation to the possibility of reckless trading.   There are tangible concerns.   Beyond those identified by the liquidators, there are further matters that reasonably invite further analysis and investigation by someone prepared to incur the time and expense.   The time and expense involved in investigating the concerns raised by Steggall have clearly been of concern to the liquidators when balancing the interests of other creditors.

[66]     My conclusion (that there is good reason to allow Steggall to inspect) does not stem  from  any finding of dereliction  of the liquidators’ duties  as  might  be suggested by the Court of Appeal’s two examples in Levin v Lawrence.  Rather, it recognises that there are additional lines of enquiry which might inform a different decision as to the prospects of remedies in relation to reckless trading. As Steggall is apparently prepared, in the first place, to incur the cost of analysis and investigation, it becomes “just” (to adopt the other test recognised by the Court of Appeal) to give Steggall the opportunity to carry out its own investigation upon inspection of SPB’s
relevant records.18

Relevance of the Liquidation Committee

[67]     The liquidators have put some emphasis upon the fact that they have been assisted by a Liquidation Committee.  Indeed, in her submissions as I have quoted, Ms Murphy identified its involvement in the principal ground of opposition.19    In suggesting that there is no good reason to inspect existed, she invoked the fact that investigation had been or would be carried out in conjunction with the Liquidation Committee.  At the hearing, Ms Murphy went so far as to state that the Liquidation Committee supported the liquidators’ conclusions as to the unavailability of any
remedies in relation to reckless trading.

17	Above at [59], Mr Hayward’s paragraph [8].
18	Levin v Lawrence, above n 1, at [52].
19	Above at [49].

[68]   The involvement of the Liquidation Committee does not cut across my conclusion that there is good reason for Steggall to inspect documents. Although Ms Murphy correctly noted that the Liquidation Committee represents the interests of creditors as a whole, and that the members of the Committee account for a far larger total sum of debt than Steggall does, there is no evidence as to whether there is a similarity of interest between the Committee’s members and that of Steggall (apart from all being unsecured creditors).  Steggall has been repaid none of its debt.  There is no evidence before me as to what other trading creditors may have been paid during the period before liquidation.  Creditors with different experiences of trading and payment may legitimately have very different views of the worth of further investigation.

[69]     Furthermore,  the  only  direct  reference  I  have  as  to  the  view  of  the Liquidation Committee is contained in Mr Hayward’s Second Report.  That report contains a statement that the Liquidation Committee has been fully apprised on “the matter” and agreed with the steps taken by the liquidators.  But as Mr Vincent noted, that  statement  occurs  in  the  part  of  the  report  headed  and  dealing  with  the liquidators’ approach to “access to litigation records”.  In that section of the Report, Mr Hayward had recorded that the liquidators want the Court to impose suitable restriction on inspection so as to minimise risk to the company as further claimed. The passage goes on to state that the liquidators, with concern as to the significant costs arising, have seen no option but to oppose inspection without proper terms. Although the primary position of the liquidators on this application has been to formally oppose the application, the course which the Liquidation Committee was agreeing to was that there be opposition to any inspection without proper terms to protect SPB.  In short, to the extent the Liquidation Committee’s position is known, it is a position which recognises that, with proper conditions, inspection might occur.

Conditions of inspection

The initial disagreements

[70]     It  is  apparent  that  the  parties,  through  responsible  discussions  between counsel, both before and after this application was issued, sought to identify conditions  which  might  make  inspection  acceptable  to  both  parties.    For  some

months, those discussions appear to have simply gone backwards and forwards.  But remarkably, on the eve of this hearing, there was virtually no distance between the parties on what the conditions should apply if inspection were ordered.

Resolved issues as to conditions

[71]     A number of issues have been fully resolved:

(a)	Mr Sanson would not be involved in any inspection.

(b)       Inspection would be limited, on undertakings of confidentiality and the subsequent return of inspected documents, to the legal representatives and experts assisting Steggall in relation to these matters and to Mr Jack Steggall himself.

(c)       The sale and purchase agreement would be included in the inspection materials   but   subject   to   redactions   to   protect   the   commercial sensitivity for Davies.

(d)	SPB’s statement of financial position covering the 2013 and 2014

years would be available for inspection unredacted.

(e)       At  least  some  aspects  of  SPB’s  financial  performance  statements would be available for inspection, but with parts having commercial sensitivity for Davies redacted.

Conditions to be ruled upon

[72]     There are two possible areas of redaction of material on which the Court needs to rule:

(a)	The sale and purchase agreement

Davies  identified  seven  sections  of  the  agreement  for  sale  and purchase in relation to which they sought redaction on account of commercial sensitivity.   Six of these sections are not in dispute as

Steggall accepts their redaction.   Davies seeks the redaction of one further section being cl 4.2 of the agreement which relates to satisfaction  of  the  purchase  price.     It  is  common  ground  that remaining portions of the sale and purchase agreement will provide information as to matters such as the purchase consideration.   Mr Vincent, for Steggall, opposes a condition which allows redaction of the contractual provision for satisfaction of the purchase price as such a provision may impact on the true value of consideration. Notwithstanding the logic of Mr Vincent’s point, Ms Murphy was not in a position, understandably, to provide the liquidators’ consent given that they had been the conduit for Davies’ request for redaction of that clause.

The appropriate course is that the Court makes a ruling on whether there be redaction of cl 4.2.  Having received a copy of the agreement for sale and purchase from Ms Murphy, I do not consider that there is sufficient   commercial   sensitivity   (from   Davies’   viewpoint)   to outweigh the importance of Steggall’s being able to fully assess the true value of consideration under the agreement, for which purpose inspection of cl 4.2 is required.

I will therefore not be permitting the liquidators to redact cl 4.2. (b)	Financial performance statements
Davies has sought redaction of any information in financial performance statements which “contain commercially sensitive information with respect to margins and pricing”.

As none of that financial information has been provided to the Court in any form, it is not possible now to impose any conditions as to redaction. As tentatively discussed with Ms Murphy at the conclusion of the hearing, I will be making a direction that Ms Murphy file a memorandum   with   an   unredacted   version   of   each   document

comprising financial performance statements together with her proposal for a version in which she has redacted such material as directly  relates  to  margins  and  pricing.     I  deliberately  draw  a distinction between material which directly relates to margins and pricing and any material which has only an indirect relationship.

Costs – the costs of Steggall’s investigation

[73]     A  concern  of  the  liquidators,  expressed  more  than  once,  was  to  avoid duplicated costs of investigation.

[74]     Steggall has not in fact sought any order in relation to its costs of inspecting documents and in due course carrying out investigations if warranted.   There is nothing for the Court to address in this regard.

Costs – the liquidators’ costs in making inspection available

[75]     Mr Vincent indicated that Steggall accepts that the liquidators, as a condition of inspection, should be permitted to recover from Steggall the reasonable administrative costs of assembling the information for inspection and of providing it in redacted form.  Given the express directions which will be contained in the order, I do not contemplate that there will be anything other than a modest sum in this regard.   Leave will be reserved to apply for the fixing of reasonable costs and disbursements in the event of disagreement.

The costs of this application

[76]     Counsel were unable to agree on the incidence of costs in the event I were to

grant Steggall’s application with conditions.

[77]     In  Steggall’s  originating  application,  it  recorded  that  it  sought  costs  and

disbursements.

[78]     At the hearing, Mr Vincent indicated that Steggall was prepared to view the appropriate outcome as being that costs lie where they fall.

[79]     For the liquidators, Ms Murphy sought an award of costs (on a 2B basis) and disbursements.   She observed that the plain meaning of s 256(1)(a)(ii) is that a creditor has to obtain inspection of documents through applying to Court (and not through the liquidators’ voluntary delivery).  Ms Murphy notes that the process of working through what might otherwise have eventuated as an agreed process was significantly complicated by Steggall’s decision to engage Mr Sanson as its agent in dealings with the liquidators.  It is an inescapable conclusion from the contemporary documents that Mr Sanson’s involvement (while involving an assiduous pursuit of possible lines of investigation) brought with it complications which compromised the prospects of agreed terms of inspection.

[80]     On balance, I am not persuaded that it would be just to award the liquidators the costs of this proceeding.  Steggall has been the successful party and would have had some justification for at least some award of costs in  its favour.   The just outcome, I am satisfied, is that costs lie where they fall.

Orders

[81]     I order:

(a)       Lloyd James Hayward and Jeffrey Philip Meltzer (the liquidators), as liquidators  of  South  Pacific  Brands  Limited  (in  liquidation)  shall within 15 working days permit the following documents to be inspected by Steggall Nutrition Pty Limited, namely:

(i)	the agreement for sale and purchase between South Pacific

Brands Limited and Davies Foods (2006) Limited; and

(ii)	documents setting out the financial position or “balance sheet”

position of South Pacific Brands Ltd in 2013 and 2014. PROVIDED THAT:
(1)	the inspection by Steggall Nutrition Pty Limited shall be limited to those whom it retains as its legal and

expert advisers in relation to issues arising from the liquidation of South Pacific Brands Limited and to Jack Steggall; and

(2)      the  liquidators  shall  redact  from  the  copy  of  the agreement for sale and purchase to be inspected the following provisions namely:

	clause 5.2;

	Schedule 6,

	Schedule 7,

	Schedule 9;

	Schedule 10; and

	the  Information  Memorandum  attached  to  the disclosure letter at Schedule 12.

(b)       On a date to be appointed by the Court,  the liquidators of South Pacific Brands Ltd (in liquidation) shall provide for inspection by Steggall Nutrition Pty Limited documents setting out the financial performance of South Pacific Brands Ltd in 2013 and 2014.

PROVIDED THAT:

(i)        counsel for the liquidators shall first, within five working days, submit  to  the Court  by memorandum  the financial performance documents in two schedules, the first to contain unredacted versions of the financial performance documents and the second to contain counsels’ proposals as to any redactions on account of the commercial sensitivity for Davies

Foods (2006) Limited in specific relationship to margins and pricing;

(ii)      in such memorandum counsel for the liquidators shall either confirm that the liquidators will be in a position, upon the Court giving a Supplementary Judgment in relation to the proposed   redactions,   to   provide   inspection   to   Steggall Nutrition Pty Limited within 10 working days thereafter (or, if not, identify what reasonable period); and

(iii)    the same limitations upon the persons who may complete inspection as apply at [81](a)(1) will apply to the financial performance documents.

(c)       In relation to the provision of documents ordered to be made available for   inspection,   Steggall   Nutrition   Pty   Limited   shall   pay   the liquidators’ reasonable costs and disbursements which shall include their reasonable administrative costs  charged  at  their normal  rates applicable on a liquidation and their actual and reasonable solicitor/client costs in relation to, from today, complying with these orders for inspection and any supplementary orders, including in relation to the redaction of material and the filing of the Memorandum directed at [81](b)(i) above (with leave to either party to apply for determination by the Court of any unagreed item).

(d)       Save to the extent ordered at (c) above, there is no order as to the costs and disbursements of and associated with the application.

Associate Judge Osborne

Solicitors:
Thomas Dewar Sziranyi Letts, Lower Hutt
Gregory Simon Law, Auckland