Liquidators’ Powers: Successful application under section 266 of the Companies Act to examine former director

Liquidators have wide-ranging powers under the Companies Act 1993 (Companies Act), including the power to request directors, shareholders or any other relevant person to assist in the liquidation of a company. 

Where assistance is not forthcoming, a liquidator can apply to the court under section 266 of the Companies Act to obtain orders that a director be examined under oath or affirmation before the court by the liquidator (or counsel).  The recent High Court decision Fatupaito v Stewart [2021] NZHC 1679 sets out the two-limb enquiry courts undertake in respect of applications to examine directors under section 266.  We summarise the decision below.

Introduction

Eversons International Ltd (in liq) (Eversons) was set up to import and sell synthetic legal high products.  The profitability of the company plummeted following law changes making these products illegal.  Eversons went into liquidation in April 2018 owing the Commissioner of Inland Revenue (IRD) unpaid taxes in excess of $3.7m.  The liquidators discovered that Eversons’ only significant “assets” were unknown overseas investments, supposedly valued at more than $6.5m. 

Having limited (if any) access to documentation setting out the nature or amount of the overseas investments, and following a number of requests for information, the liquidators exercised their powers under section 261 of the Companies Act to obtain assistance from Eversons’ sole shareholder and director, Evan Kerry Stewart (Mr Stewart). 

The liquidators summonsed Mr Stewart to attend an examination and requested he provide all company books and records under section 261.  Mr Stewart advised he was no longer in possession of the company’s books and at the examination that same month, failed to provide any meaningful information to the liquidators.  

The liquidators applied to the High Court for orders under section 266 of the Companies Act that Mr Stewart be examined before the Court and be compelled to produce Eversons’ records (as he had been requested to do under section 261).  Mr Stewart opposed the section 266 application on the basis that orders sought were:

• Unnecessary, as he said he had complied with the information requests and the liquidator could utilise the usual tools available under the High Court Rules (i.e., discovery and interrogatories) to obtain further information; and
• Oppressive, in circumstances where the liquidator had separately commenced proceedings.

Jurisdiction to order examination of directors

A court has jurisdiction to make an order under s 266 Companies Act requiring a person be examined under oath before it provided that:

• The person a liquidator is applying to examine falls within section 261(2) (which includes, but is not limited to, a director or former director, a shareholder and a company employee); and
• The matters the person will be examined on matters relate to the affairs of the company.

The Court determined that it was not barred from making an order under section 266 simply because a liquidator has issued or is contemplating issuing proceedings against the proposed examinee.  Courts must draw a distinction between applications to examine a director (or other person) in respect of the company’s affairs, (which can properly be the subject of a section 266 order), and applications to examine a person in respect of private information, such as a director’s financial positon (which cannot).

In this case, the Court concluded it did have jurisdiction on the basis that:

• Mr Stewart, as Eversons’ sole shareholder and director, was a person the Court could properly order to produce documents in his possession or control to assist the liquidator; and
• The matters the liquidator wished to examine Mr Stewart in respect of (whether the company had overseas assets that could be recovered and the value of any such assets) were plainly matters relating to the affairs of the company.

Exercise of discretion

As to factors favouring the Court exercising its discretion to make the orders sought, counsel for the liquidators referred the Judge to the liquidators’ primary duty under section 253(a) of the Companies Act, to realise and distribute the company’s assets to creditors in a reasonable and efficient manner.  The relevant factors a court will consider in exercising its discretion include:

• Whether the requirement of the liquidator is reasonably necessary for the discharge of his or her functions and duties;
• Whether the requirement of the liquidator would impose unnecessary and unreasonable burdens on the person the subject of the liquidator’s notice (mere inconvenience or additional work is not however sufficient reason to validly oppose the liquidator’s application);
• The alternative legal procedures which are available to the liquidator (bearing in mind that pre-trial discovery is now firmly part of the litigation process);
• The nature of the proposed proceedings (if any are contemplated) and whether the person concerned would be made more vulnerable to future claims as a result;
• Whether the person the subject of the notice or the proposed order is a former officer or employee of the company or someone else who has provided services to the company; and
• The nature and significance of the information sought and the public interest in the information.

In exercising its jurisdiction, the Court made the orders sought on the basis that it was satisfied:

• Mr Stewart had not cooperated with the liquidators’ requests; the orders were therefore necessary for the liquidators to fulfil their duties under section 253(a);
• The tools under the High Court Rules are not a suitable substitute for cross-examination under section 266 because they are defined and limited by the scope of the pleadings in the separate proceedings, which Mr Stewart had applied to strike out;
• The transactions occurred in or around 2014 and further delay could prejudice the liquidators prospects of locating, realising and distributing the overseas investments; and
• It was not clear whether the record of examination could or would be admitted as evidence in the proceedings, and in any event, the liquidators agreed to provide an undertaking that they would not rely on the record of examination in the proceedings for the purposes of the limitation defence.

Our comment

This case provides helpful guidance as to the two limbs of the court’s enquiry, first as to its jurisdiction under section 266 and second, as to how it should exercise its discretion in the circumstances.

This decision demonstrates that liquidators can require assistance from directors to recover company assets even if separate proceedings are on foot (or will be issued) against a director in respect of related matters, as is often the case in liquidations.

If you have any questions about this judgment or any insolvency matters, please get in touch with our Insolvency Team or your usual contact at Hesketh Henry.

Disclaimer:  The information contained in this article is current at the date of publishing and is of a general nature.  It should be used as a guide only and not as a substitute for obtaining legal advice.  Specific legal advice should be sought where required.