The Supreme Court confirms that overseas companies may be required to provide information to administrators and liquidators.
The Delaware-registered companies that financed the Ormiston Rise property development in Flat Bush will have to give up books, documents and other information relevant to Ormiston Rise Ltd (the company behind the development, now in liquidation), after the Supreme Court affirmed the decision of the Court of Appeal.
During liquidation of a company, the more you know about the affairs of the company prior to the liquidation, the better. Investigation is key. And the law reflects this. S 261 of the Companies Act (the Act) enables a liquidator (together with s 239AG of the Act for an administrator) to require directors, shareholders and other persons to provide documents and information as the liquidator requires.
But we live in the age of globalisation. Sometimes the directors, shareholders or other people who hold the information reside overseas. What happens then? Can a New Zealand liquidator or administrator use s 261 beyond the New Zealand jurisdiction?
Well, they can if that overseas person is a director of a New Zealand company. That has already been held in Re International Direct Ltd (in liq)[1]
But what if a liquidator/administrator needs information from someone overseas who is not a director, such as a shareholder or creditor?
The Supreme Court has just approved the decision of the Court of Appeal in Grant & Botterill v Arena Alceon NZ Credit Partners LLC, which declared that, in certain circumstances liquidators and administrators in NZ can request information from overseas people other than directors. Namely, this will come down to whether the overseas people (or the companies they represent) are “closely related” to the New Zealand companies relevant to the liquidation or administration.
Background
Ormiston Rise Ltd, was incorporated in 2018. Its purpose was to undertake substantial residential projects in Flatbush, Auckland, with plans to develop 727 units.
In February 2020, Ormiston Rise Ltd entered into a 34-million-dollar financing agreement with Arena, a U.S financing company that came to own 19.5% of Ormiston Rise Ltd. The agreement was secured by a general security agreement and a mortgage, which were held in a security trust by another U.S company – Quaestor. Arena and Quaestor are themselves connected; the Managing Director of Arena, John Felletter, is also the President of Quaestor.
On 28 April 2021, Arena made demand on Ormiston Rise citing an unremedied event of default, and Arena and Quaestor appointed receivers.
By this time, construction had started on all stages of the development. To raise the money needed to continue the project, Ormiston Rise and Arena entered into a receivership facility agreement. Ormiston also sold some of the land in the development. This land went to yet another company related to Arena, The Neighbourhood South Ltd.
But this did not save Ormiston Rise. In September, they went into liquidation and Waterstone’s Damien Grant and Adam Botterill were appointed liquidators.
Arena and Questor filed a proof of debt of $3,658,007.62. But then refused to provide further information when requested by the liquidators.
Between August 2021 and February 2022, Waterstone issued Arena and Quaestor with notices under ss 239AG and 261 of the Act, requiring them to deliver documents, records, and information relating to Ormiston Rise.
Waterstone then requested to serve the documents requiring information overseas. This was granted and the documents were served. Arena and Quaestor then filed appearances protesting the jurisdiction of the NZ courts on the grounds that the statutory powers relied upon did not have extra-territorial effect. And so, the question was taken to the courts. Does a liquidator’s (and administrator’s) statutory power to require a director, shareholder or any other person to provide information, extend to shareholders and other persons overseas?
In the Courts
In the High Court, Associate Judge Gardiner followed the precedents set in New Zealand. Which only allowed extraterritorial requests for information under s 261 for overseas directors and former directors.
Whether to extend this power was a question of statutory interpretation; whether the language of the statute indicated that parliaments intention was for the subsection to apply extra-territorially. Under Poynter v Commerce Commission[2] statutes are not intended to have extra-territorial effect unless this is expressed or arises as a matter of necessity.
The reason the power had been extended to directors was due to their having voluntarily accepted such an obligation by becoming directors (amongst other onerous obligations). But the Associate Judge Gardiner did not find any such expression or necessity of extra-territoriality for others.
But the higher Courts took a different view. The Court of Appeal considered it unlikely that only some subsections have extraterritorial application with respect to named recipients of a liquidator’s or administrator’s notice. They did see such a necessity, and now the Supreme Court has agreed. An overseas company, the Supreme Court explained, should not be able to enjoy the benefits of conducting business in New Zealand, whilst escaping the responsibilities and obligations that New Zealand businesses face. Overseas companies cannot have their cake and eat it too.
Therefore, the new test for whether a party (other than a director) can be required to provide information to a liquidator or administrator is whether the overseas person has a sufficiently substantial connection with the activities of a company in New Zealand to justify the assertion of jurisdiction. This is the “close connection test”.
What is a close connection?
The close connection test less a test than a principle of international law. The principle states that a domestic court can assert extraterritorial jurisdiction over a third party when there is a substantial and bona fide connection between the matter within the court’s jurisdiction and the third party.
In this case, the New Zealand courts found the following indications that both Quaestor and Arena had such a substantial connection to Ormiston Rise Ltd and the liquidation:
– Both Arena and Quaestor were involved in substantial business activities in New Zealand.
– Arena owned 19.5% of the total shares in Ormiston Rise.
– After Ormiston defaulted on its agreements, Quaestor appointed receivers in New Zealand.
– The agreements specified that the New Zealand Courts had exclusive jurisdiction over any disputes or issues that may arise.
– When the receivers sold the development, they paid Arena a significant portion of the outstanding debt.
– Arena and Quaestor submitted proofs of debt during the administration of Ormiston Rise.
Conclusion
The Supreme Court’s decision in Grant & Botterill v Arena Alceon NZ Credit Partners LLC marks a significant development in New Zealand’s legal framework for liquidations and administrations involving overseas parties. The ruling affirms that liquidators and administrators can request information from foreign shareholders or creditors, provided they have a “close connection” to the New Zealand company in liquidation or administration. This new “close connection test” expands the reach of the Companies Act, ensuring that foreign entities conducting substantial business within New Zealand are accountable in the liquidation or administration process. The decision reinforces the notion that businesses cannot benefit from operating in New Zealand without also being subject to their legal responsibilities within this jurisdiction.
[1] Re International Direct Ltd (in liq) HC Wellington CIV-2006-485-2020,17 November 2006.
[2] Poynter v Commerce Commission [2010] NZSC 38, [2010] 3 NZLR 300.
