In Johnson Price Holdings Ltd v Norris[1], the liquidator arranged with the landlord of the liquidated business to continue its lease while he tried to sell the liquidated business as a going concern. The parties agreed via email that “the landlord would rank in priority with the liquidator” for the rent.
The liquidator failed to find a buyer and indicated that there would be insufficient funds realised in the liquidation to meet this rental obligation. The landlord sued the liquidator for the rental arrears. The liquidator’s position was that the landlord would receive an equal distribution with the liquidator only once the liquidator received any remuneration. Furthermore, he contracted in the name of the company, and had no personal liability.
The District Court first noted the case of Re Circuit Developments Limited, ex parte Mortimer[2], which is established authority that when a liquidator remains in possession or agrees to remain in possession of rented properties, the liquidator is acting to dispose of assets and premises to the advantage of creditors and so the rental falls as an expense properly incurred by the liquidator in carrying out their duties and exercising their powers.
The Court then examined the specific agreement reached, applying basic contractual principles. As the correspondence between the parties did not clearly contract out of the priority regime under the Companies Act, the priority regime was applicable, and any outstanding rental is a cost of the liquidation. Following on from Mortimer, the expenses and fees incurred by a liquidator have priority over their remuneration.[3]
However, it was found more likely than not that the defendant was in a position to pay the debt owing to the defendant when it fell due, but he had chosen not to and preferred other creditors. In those circumstances, it was considered appropriate to attribute personal liability on the liquidator and award judgment to the plaintiff.[4]
On appeal, the High Court held that it was not in dispute that the liquidator assumed an obligation to the landlord for valuable consideration. On that basis, obligation to pay rent, while being an expense the liquidator incurred in the liquidation, was also a personal obligation, and it was the liquidator’s decision to assume that liability.[5] This decision was upheld by the Court of Appeal in declining to grant leave for appeal.[6] The Court of Appeal looked unfavourably at the fact that the liquidator made an assurance which he did not honour, and without which the landlord would not have extended the lease.
This case shows that while outstanding rent is an expense properly incurred during liquidation, an agreement between the liquidator and landlord could result in a finding that the liquidator assumed personal liability for the rental.
[1] Johnson Price Holdings Ltd v Norris DC Nelson CIV-2009-042-543, 12 October 2011.
[2] Re Circuit Developments Limited, ex parte Mortimer [1981] 2 NZLR 243.
[3] At [58].
[4] At [74].
[5] Norris v Johnson Price Holdings Ltd [2012] NZHC 370 at [10].
[6] Norris v Johnson Price Holdings Ltd [2012] NZCA 541.
