While this is a niche question, this situation came before both the High Court and Court of Appeal recently.
A group of companies (Claymark Group) was placed into receivership in December 2019. The business and assets were sold in mid-2020, and the GSA holder was repaid circa $61m, leaving an unpaid portion of $2m. The receivers reported in February 2021 that there were minimal residual assets to realise. In February 2022 they reported that there were no further assets to realise, and in August 2022 they anticipated retiring after attending to the final matters of the receivership.
The holding company was placed into liquidation in December 2022, and the liquidators appointed themselves as liquidators of its subsidiary companies, by way of shareholder resolution as the shares where wholly owned by the parent company.
The GSA holder claimed that its general security over the assets of the companies extended to the shares in the subsidiaries, and the receivers held the right to appoint liquidators to the subsidiaries, not the liquidators, as it had not surrendered its security as per section 305 of the Companies Act 1993 (the Act).
Proceedings were filed in the High Court under section 284 of the Act to determine the validity of the liquidators’ appointment, and it was determined that:
- the terms of the GSA granted the secured creditor the exclusive right exercise power over the companies’ shares, and the company had surrendered any right to “deal with” the shares upon the appointment of the receivers; and
- the liquidators had no “power” to exercise rights over the shares without the GSA holder’s consent, meaning the rights solely belonged to the receivers.
As a result, the appointment of the liquidators to the subsidiaries was determined to be invalid by the High Court.
This was successfully appealed in the Court of Appeal. It was determined that the liquidators had been validly appointed to the subsidiary companies, as they were able to exercise power over the shares in the subsidiary companies to appoint themselves as liquidators.
The Court determined the following:
- The secured property under the GSA included the shares in the subsidiary companies, and the receivers were entitled to exercise and enforce all of the holding company’s rights in respect of the shares, but the assets themselves did not vest in the receivers.
- The appointment of the liquidators over the holding company did not affect the rights of the GSA holder as a secured creditor to possess and deal with the shares in the subsidiaries unless the charge was surrendered or otherwise affected under the procedures under section 305 of the Act.
- As determined in section 254 of the Act and Gibbston Downs Wines Ltd v Property Ventures Ltd (in rec and in liq)[1] there is a residual discretion for liquidators to take steps to realise assets subject to a charge. However, this discretion only arises in certain circumstances, and it is a discretion, not an obligation. This would not be available where the liquidator has no good reason to intervene (such as an improper purpose to generate fees for the liquidator) or where the liquidator would be officiously intervening without good reason in a realisation with resultant increased costs for the liquidation.
- In the event where a secured creditor indicates it will take no further steps to realise the asset but has not surrendered the charge using the section 305 mechanism, intervention may be justified by the liquidator.
- In any event, the intervention by the liquidator based on section 254 cannot be an action that prejudices the legitimate interests of the security holder; being in relation to the secured creditor’s recovery of its debt.
- In this situation, the liquidators had not “officiously” intermeddled with the GSA holder’s security over the shares as it was common ground between the receivers/GSA holder and the shareholder/liquidators that liquidators should now be appointed to the subsidiaries.
- The receivers’ legitimate purpose in dealing with the company’s assets (including the shareholdings) for the purpose of obtaining repayment of the GSA holder’s debt had been achieved to the extent possible, and the liquidator’s actions of exercising the powers over the shares to place the subsidiaries into liquidation could not prejudice the receivers/GSA holder’s legitimate interests in dealing with the assets to achieve realisation.
- Therefore, the appointment of the liquidators was valid.
Full judgment Grant & Anor v Bank of New Zealand [2024] NZCA 108
[1] Gibbston Downs Wines Ltd v Property Ventures Ltd (in rec and in liq) [2013] NZCA 546.
