Waterstone has recently been involved in some precedent setting litigation in the Court of Appeal.
The appeal court has ruled that current and former directors are obligated to provide books and records to the appointed receivers.
The company
Bassett 43 was a company undertaking a potential hotel development project in Auckland CBD on Hobson Street. When the project failed the secured lender & GSA holder appointed Damien Grant of Waterstone as receiver. The director of the company is Andrew Montgomerie.
We commenced investigations with a view to understanding what recoveries options were available. The company owned a property on Hobson Street (with significant secured debt to first and second mortgage holders). There were also related party transactions that we were investigating where funds were withdrawn from Bassett and transferred to other Montgomerie entities.
Given the potential shortfall to our appointer we wanted to investigate the company affairs and assets fully to ensure we could get the best possible recoveries.
The investigation
Receivers have certain powers to request and inspect the companies’ records. This is because to undertake their functions they need to be able to assess the affairs of the companies they are appointed to understand the asset and liability position and can also run companies in receivership while a recovery plan is devised. Without information this is very difficult to do and often directors will refuse to provide information or co-operate with the receivers.
Mr Montgomerie was issued multiple notices for information and records. Unfortunately, he did not comply and was then adjudicated bankrupt in December 2020 with our requests outstanding.
The law
Section 12 of the Receiverships Act 1993 (the Act) has an obligation for the debtor company and director of debtor company to provide the receivers all books, records, and information relating to the property in receivership under their control
Section 14 of the Act empowers receivers to inspect books or documents that relate to the property in receivership under the control of third parties (i.e. not the company or director).
Section 34 of the Act allows receivers to apply to Court for directions on any matter in connection with the performance of the functions of the receiver. In Whitley v Ribble [2017] NZHC 1884 in a similar case where receivers were seeking documents, Justice Moore held that this section enabled the court to make an order that the director deliver up company documents and he did so.
This case
With the law and cases in mind, we filed an application under s12, 14 and s34 seeking an order that Mr Montgomerie provide the books and records. Our application in the High Court was unsuccessful (Grant v Montgomerie [2021] NZHC 2389). Justice Powell decided that there was no jurisdiction to make an order under s12, s14 or s34 as to order the provision of the documents would be akin to ordering Mr Montgomerie to act as a director again and be a breach of his prohibition due to the bankruptcy. The judge also held that there was no jurisdiction under s34 (despite the earlier decision in Whitley).
This practically left us with no ability to obtain the company records from the person who manged its affairs (the director) and was a harsh precedent for receivers seeking information needed to do their jobs. Directors could bankrupt themselves to avoid assisting receivers or simply resign as this may not have been captured.
Naturally we appealed.
The appeal was heard in October 2022, and we were successful. In Grant v Montgomerie [2022] NZCA 483 the Court of Appeal in a judgement given by Justice Goddard disagreed with the interpretation of director in the High Court. Usefully (for receivers) this has been interpreted to include current and former directors [12].
The judgment also examines the purpose of the legislation and why receivers require information. This practical analysis supports their reasoning for allowing the appeal and is a common-sense approach that supports making the law work in practice.
The judgment also clarifies the decision in Whitley in that there was no jurisdiction to make the orders for provision for information under s34, and that s12 was the appropriate section for orders.
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Waterstone
Waterstone is known for pursuing matters to Court and setting precedent. This is useful to practitioners and the industry at large in adding to the body of case law and assisting to determine tricky insolvency and other legal questions.
Please get in touch with our team for any insolvency related questions at enquiries@waterstone.co.nz or 0800CLOSED.
