In re Friendly Island Fishing Company Ltd (in liquidation) [2003] TOLawRp 45; [2003] Tonga LR 327 (4 December 2003)

IN THE SUPREME COURT OF TONGA
Supreme Court, Nuku'alofa

CV 671/2003

In re Friendly Island Fishing Company Limited (in liquidation)

Ford J
14 November 2003; 4 December 2003

Company law – liquidation – liquidator should not have to justify the documentation requested

Friendly Island Fishing Company Ltd ("the Company") was wound up by the court on 9 December 2002. On the same day the applicant, Kim Scott Thompson of Hamilton New Zealand, was appointed liquidator. On 20 October 2003, the liquidator, through Mr William Edwards, a local law practitioner, gave formal Notice under section 270 of the Companies Act 1995 which required the General Manager of each respondent bank to produce the documentation listed in the schedule to the Notice and to attend before the liquidator for examination on oath. The documentation was to be produced on Monday 3 November and the examination on oath was scheduled to take place a week later on 10 November at the Dateline Hotel, Nuku'alofa. The liquidator received no response to the Notices and so, on 5 November, Mr Edwards again wrote to the respondents giving them a further opportunity to produce the documents failing which he would seek appropriate court orders. On that same day Mr Edwards received a letter from Ms Tapueluelu. The letter was actually dated 29 October and it was not clear why it was not served on Mr Edwards until 5 November. Ms Tapueluelu advised that she had been instructed to act for both Banks. A separate letter was sent to Mr Edwards on 5 November from Mr Matoto, Managing Director of the Tonga Development Bank, also confirming that Ms Tapueluelu had been instructed by his bank in the matter. Ms Tapueluelu's response to the Notice was that all the company documents were in the possession of the receivers and under section 270, documents requested which were not the property of the company, need not be made available to the liquidator. Counsel also indicated that the General Manager and Managing Director of the Banks had little involvement in the matter. On 12 November the liquidator filed an application for an order pursuant to section 275 of the Companies Act 1995 that the court order the respondents to produce the documents. The court heard argument on 14 November and it was agreed that the respondents would produce to the liquidator the documentation they were prepared to disclose at 2 pm that same afternoon and, after carrying out inspection, the liquidator could then come back to the court, if necessary, for further directions. The documents produced did not satisfy the liquidator and so the liquidator produced and filed a third affidavit on 17 November that listed the documentation that had been made available by the respondents and described the inspection as "disappointing". He went on to describe the categories of documentation he still required from the Banks. On 26 November Ms Tapueluelu filed a Memorandum but made no specific reference to the documentation listed. Instead, it set out the respondents' response to the liquidator's original Notice for Examination dated 20 October 2003. The position taken by the respondents was that they would make available to the liquidator only those documents that were critical to the liquidator's present purpose.

Held:

1. That respondents' position was not a valid ground of objection. It was not for the liquidator to have to justify to proposed examinees the merits of his investigatory work. Section 275 was to be given a broad interpretation. The section did not fetter the liquidator in such a way that he was entitled to have access only to documentation which was "critical" to his present purpose.

2. The court made formal orders that required the respective respondents to produce to the liquidator all books, records or documents that related to the business, accounts or affairs of the Company which were in their respective possession or control. In particular, production was required of each respondent's files for the Company including internal bank correspondence and file notes; correspondence between the Company and any of the respondents' staff and any other correspondence held by the respondents relating to transactions between the Company and any related entity; internal bank accounting records relating to the Company (copies if the originals are unavailable); and correspondence between the respective respondents and the Company's solicitors, accountants and any consultants retained from time to time by the Company such as valuers, trade suppliers and entities whose intervention the Company had sought and who had written to the respondent on the Company's behalf.

3. An award of costs on an indemnity basis was rare but the court had complete discretion when it came to costs and the court was prepared to hear argument on the form a costs order should take. Therefore, if the parties were unable to reach agreement on costs the court would hear submissions in conjunction with the fixture for oral examinations.

Cases considered:

ANZ Banking Group (New Zealand) Ltd v Official Assignee (1988) 4 NZCLC 64,151

Bishopsgate Investment Management Ltd v Maxwell [1992] 2 All ER 856 Castle New Homes Ltd, Re [1979] 2 All ER 775

Cloverbay Ltd v BCCI [1991] 1 All ER 894

First Systems Ltd (in liquidation) v Peart (unreported) CP No 148SD/99 (judgment dated 12 July 2000)

Northrop Instruments & Systems Ltd, Re [1992] 2 NZLR 361

Pantmaenog Timber Company Ltd (in liquidation) Official Receiver, Re v Meade-King (A Firm) and ors [2003] UKHL 49

Statutes considered:

Companies Act 1995

Companies Act 1948 (UK)

Counsel for applicant: Mr Stanton
Counsel for second defendant: Ms Tapueluelu

Judgment

Friendly Island Fishing Company Ltd ("the Company") was wound up by the court on 9 December 2002. On the same day the applicant, Kim Scott Thompson of Hamilton New Zealand, was appointed liquidator.

On 20 October 2003, the liquidator, through Mr William Edwards, a local law practitioner, gave formal Notice under section 270 of the Companies Act 1995 requiring the General Manager of each respondent Bank to produce the documentation listed in the schedule to the Notice and to attend before the liquidator for examination on oath. The documentation was to be produced on Monday 3 November and the examination on oath was scheduled to take place a week later on 10 November at the Dateline Hotel, Nuku'alofa.

The liquidator has deposed that he received no response to the Notices and so, on 5 November, Mr Edwards again wrote to the respondents giving them a further opportunity to produce the documents failing which he would seek appropriate court orders.

A separate Notice under section 170 was also served by Mr Edwards on Mr John Bath, Manager Risk Management and Board Advisor to the Tonga Development Bank, requiring his attendance for examination on oath.

On that same day, 5 November, Mr Edwards received a letter from Ms Tapueluelu. The letter was actually dated 29 October and it is not clear from the documentation before the court why it was not served on Mr Edwards until 5 November. Although the letter was written on Westpac Bank of Tonga letterhead, Ms Tapueluelu advised that she had been instructed to act for both Banks and for Mr Bath. A separate letter was sent to Mr Edwards on 5 November from Mr Matoto, Managing Director of the Tonga Development Bank, also confirming that Ms Tapueluelu had been instructed by his Bank in the matter. Mr Matoto advised that Mr Bath was out of the country at the time and he would not be returning to Tonga until 12 November.

The essence of Ms Tapueluelu's response was that all the Company documents were in the possession of the Receivers and under section 270, documents requested which were not the property of the company, need not be made available to the liquidator. Counsel also indicated that the General Manager and Managing Director of the Banks had little involvement in the matter and, as Mr Bath was out of the country, "the attendance of all summoned employees of the Banks would be of little or no value at all."

The next development in the case came with the filing on 12 November by the liquidator of an application for an order pursuant to section 275 of the Companies Act 1995. The wording of both sections 270 and 275 is virtually identical to the equivalent provisions in the New Zealand Companies Act. Section 270 gives the liquidator power to obtain documents and to conduct examinations on oath. Section 275 then provides that the court may order a person who has failed to comply with the requirements of the liquidator under section 270 to:

"(a) attend before the Court and be examined on oath or affirmation by the Court or the liquidator or a law practitioner acting on behalf of the liquidator on any matter relating to the business, accounts or affairs of the company;

(b) produce any books, records or documents relating to the business, accounts or affairs of the company in that person's possession or under that person's control."

In his affidavit in support of his application for court orders, the liquidator requested an urgent hearing. In the circumstances, I considered the liquidator's ex parte approach to the court and his request for urgency to be entirely appropriate. I issued an order on 13 November requiring the respondents to attend before me the following morning to produce the documentation required by the liquidator and to be examined on oath by counsel on behalf of the liquidator. In order to accommodate the applicant's urgent request, it was necessary for the court to interrupt a jury manslaughter trial.

On the afternoon of 13 November, counsel for the respondents filed an application to stay execution of the court order requiring the respondents to attend court the following morning upon the grounds that they had not been heard and the liquidator's request was "too broad, unreliable and unfair." I heard argument on the application on the morning of Friday 14 November. I made it known to counsel for the respondents that I was less than impressed over the seemingly cavalier way in which the Banks had reacted to the liquidator's formal notice under the Companies Act. I reminded counsel that the powers given to liquidator under section 270 were designed to assist him in carrying out his functions under the Companies Act as quickly and effectively as possible and I noted that the applicant had made a special trip to Tonga for the express purpose of obtaining the material and other information he was entitled to receive under the Act.

In response, Ms Tapueluelu submitted that there was a New Zealand authority which supported the stand taken by the respondents and, in this regard, she referred the court to the judgment of Master Anne Gambrill in First Systems Ltd (in liquidation) v Peart (unreported) CP No 148SD/99 (judgment dated 12 July 2000).

Ms Tapueluelu also proceeded to challenge Mr Stanton's standing as counsel on the grounds that he had acted for the aggrieved minority shareholder in the successful winding up application. She submitted that the liquidator should have appointed an "independent barrister" to act for him. I dealt with that point immediately. No authority was cited in support of the submission and no facts were advanced to show any obvious conflict of interest. In this jurisdiction, a party has the right to instruct counsel of his choice. Although the court has an inherent jurisdiction to prevent a barrister acting as counsel in a case where he has, or appears to have, a conflict of interest, a proper factual basis needs to be established before the court will intervene. Nothing of that nature was put forward in the present case and I, therefore, rejected the submission.

After listening to further submissions and granting a short adjournment to enable counsel to take instructions, it was agreed that the respondents would produce to the liquidator the documentation they were prepared to disclose at 2 pm that same afternoon and, after carrying out inspection, the liquidator could then come back to the court, if necessary, for further directions. The court was hopeful that a full disclosure would be made and that would be the end of the matter. Unfortunately, such was not to be.

Mr Stanton contends the production made by the respondents that particular Friday afternoon was "both a mockery and a regrettable, if not unwitting defiance of the court order" and, in terms of what was produced, "it bordered on contempt." The liquidator produced and filed a third affidavit listing the documentation that had been made available by the respondents and he described the inspection as "disappointing". He went on to depose:

"7. Leaving aside whatever may be in the custody of the Receiver it is in my opinion as a liquidator now practising in excess of 20 years that it is incredible that both respondents have in their files such a paucity of material."

In paragraph 8 of that same affidavit, the liquidator proceeded to describe the categories of documentation he still requires from the Banks. He refers to them as:

(a) the files for each respondent of the Company including internal bank correspondence and file notes;

(b) correspondence between the Company and the respondents' staff and such correspondence as exists and relates to transactions between the Company and any related entity;

(c) internal bank accounting records of the Company, copies if the originals are not available;

(d) correspondence with the Company's solicitors, accountants and such other consultants as were retained from time to time, such as valuers, trade suppliers and entities whose intervention the Company had sought and who had written to the Banks on the Company's behalf;

(e) copies of banking agreements between the respondents and the Company.

The liquidator's third affidavit was filed on 17 November. On 21 November the court ordered counsel for the respondents to file a memorandum clarifying the Bank's position in relation to the specific documentation described in paragraph 8. On 26 November Ms Tapueluelu filed a Memorandum but, surprisingly, it made no specific reference to the documentation listed in paragraph 8. Instead, it set out the respondents' response to the itemised documentation requested in the liquidator's original Notice for Examination dated 20 October 2003.

The liquidator's original "Notice for Examination" was perhaps overly detailed. The first page consisted of comprehensive definitions of certain terms and then there followed a further two pages of itemised documentation. The definition of two of the terms in the notice actually differs slightly from the definitions given in the Companies Act. I question the wisdom of going into so much detail in a section 270 notice. A more "user-friendly" notice probably would have been conducive of a more co-operative response.

Be that as it may, I did not find the Memorandum in response of 26 November to be particularly helpful. One of the objects of the inspection ordered for 2 pm on 14 November was to enable the liquidator to ascertain exactly what the Banks were prepared to disclose so that, if a further approach to the court was going to be necessary, his demands could be more focused. The documentation categorised in paragraph 8 of the liquidator's third affidavit appeared to satisfy this objective. It is not clear, therefore, why counsel for the respondents did not simply confine her response to the documents described in that paragraph.

Before considering further the respondents' Memorandum in response, I want to make some general observations about the obvious frustrations the liquidator has experienced in his dealings with the respondents to date. In his second affidavit sworn on 13 November 2003, the liquidator attached as an exhibit a copy of an email which he had sent to both respondents as long ago as 28 January 2003 saying that he was going to be in Tonga the following week and he sought access to the Banks' files. He said that the Banks refused him access. That evidence was unchallenged. It is not clear why the liquidator did not simply seek a court order at that point in time.

In all events, the liquidator now deposes that the need for him to obtain access to the documents and to conduct examinations on oath is "on account of the lack of records and documents despite inquiries and searches conducted to date." He goes on to say:

"4. The examination is required in my opinion because I am desirous of ascertaining what was the cause of the company's collapse and more particularly because I see a need to investigate matters concerning the activities of the former directors and officers of the company."

The liquidator refers specifically to concerns he has about a company called Coral Kingdom Ltd which he says, was set up using Company funds and against which the imposition of a constructive trust together with tracing may be sought depending upon the result of his inquiries. He also expresses concern that no action has been taken to date against the two directors of the company, David Donley and Koli Kakala, over guarantees they had given to the respondents in respect of the Company's indebtedness. Finally, he noted that the sale of the Company's fishing fleet, the subject of fixed charges, had "again fallen through with no prospect of sale imminent."

These are obviously perfectly proper matters for the liquidator to investigate. I recall some of the topics being touched upon in evidence before me at the hearing of the winding up application.

Referring to the equivalent provision to section 275 in the (UK) Companies Act 1948, Slade J in Re Castle New Homes Ltd [1979] 2 All ER 775, 791 said:

"It is common ground that in considering whether to make an order under section 268, great weight is to be given to the views of the liquidator, who will have detailed knowledge of the problems that exist in relation to the affairs of the company and the information required."

Earlier (p.780) His Honour had said:

". . . section 268 of the Companies Act 1948 is a section intended to confer on the court an extraordinary power exercised usually, but not exclusively, at the instance of the liquidator to summon witnesses before (him) and to examine them under oath and require them to produce documents for the purpose of obtaining information about the conduct of the company's affairs. It is required because the liquidator usually takes office as a stranger to relevant events . . . The purpose of the section is not merely confined to obtaining general information about the company's affairs, but it may be used to discover facts and documents relating to specific claims against specific persons which the liquidator has in contemplation; it is of itself no bar to the making of an order that the liquidator may have commenced or may be about to commence proceedings against the proposed witness or someone connected with him."

In Cloverbay Ltd v BCCI [1991] 1 All ER 894, 899, Sir Nicholas Browne-Wilkinson V.C. stressed that the court, in the exercise of its discretion in a case of this nature, is required to afford "great weight" to a person such as a liquidator who, as an officer of the court, has a detailed knowledge of all the circumstances of the company. The learned Vice-Chancellor went on in his judgment to liken an order for production of documents to an order advancing the time of discovery if an action ensues: "The liquidator is getting no more than any other litigant would get, save that he is getting it earlier."

In ANZ Banking Group (New Zealand) Ltd v Official Assignee (1988) 4 NZCLC 64,151; at 64,158, Eichelbaum J traversed the authorities and noted that the legislative intent required a broad rather than a restrictive interpretation of the section so as to enable the liquidator to obtain sufficient access to available information for him to properly discharge his duties.

Again, in Re Northrop Instruments & Systems Ltd [1992] 2 NZLR 361, McGechan J also reviewed the authorities noting in particular the class of case where a liquidator has already determined to embark upon litigation and through an examination seeks "to improve his already sufficient position or is bringing pressure to bear for some ulterior purpose." His Honour said that in such a case the court needs to go through a balancing exercise in order to determine the question and degree of unfairness involved. On the facts before him, McGechan J. held that the liquidator was not embarking on some "mere fishing expedition" but he was carrying out a bona fide investigation with a view to reaching an informed decision as to whether to proceed further.

The authorities also show the need to bear in mind that there is a significant public interest element involved in the exercise of the liquidator's functions. This was alluded to by McGechan J. in Northrop where His Honour noted that the public interest favoured early ascertainment of the facts by a liquidator. In a similar vein, Dillon LJ in Bishopsgate Investment Management Ltd v Maxwell [1992] 2 All ER 856 at 876 recognised that dishonesty or malpractice on the part of company directors was a matter of public concern and there was a public interest in putting it right -- see also in this regard Re Pantmaenog Timber Company Ltd (in liquidation) Official Receiver v Meade-King (A Firm) and ors [2003] UKHL 49, 82.

I have no doubt that there is a significant public interest in the liquidation of the Company in the present case. The evidence at the winding up hearing was that the Company had debts and liabilities in excess of $4 million. It was probably the largest fishing company in the Kingdom and it had a large number of employees. Mr Stanton now submits: "The liquidator is investigating the largest corporate delinquency in Tonga's history for a private corporation. It was in no small part attributable to the conduct of the directors. The liquidator is entitled, if not duty-bound, to attempt to reconstruct the knowledge of the company and in order to do this he must be afforded access to the Banks' files and documents . . ."

Against that background, I again turn to consider the liquidator's request for production of the documents listed in paragraph 8 of his third affidavit.

I have no difficulty in accepting the liquidator's good faith and in concluding that the investigation he is attempting to carry out is both genuine and urgent. It is of concern to the court that the task is taking so long to finalise. On the face of it, all the documents identified in some way relate to the business, accounts or affairs of the company and, as such, fall within the broad category of documentation to be disclosed under section 275(2)(b) of the Act.

It appears from the Memorandum filed in response that the position taken by the respondents is that they will make available to the liquidator only those documents that, in counsel's words, are "critical to the liquidator's present purpose. The liquidator needs to specify the particular purpose of his current investigations in order to gauge the relevant documents."

That response, quite simply, is not a valid ground of objection. It is not for the liquidator to have to justify to proposed examinees the merits of his investigatory work. Section 275 is to be given a broad interpretation. The section does not fetter the liquidator in such a way that he is entitled to have access only to documentation which is "critical" to his present purpose.

As noted earlier, counsel for the respondents seeks to rely on Master Gambrill's judgment in the First Systems case. She refers to that authority as "the benchmark" for the purposes of her response but, except in one possible respect, I fail to see how that decision assists her.

Mr Stanton noted that in First Systems, litigation was already on foot when the liquidator sought the court orders but, more significantly, counsel submitted that the learned Master did, in any event, order production of all the documents which conform to the categories of documentation identified in paragraph 8 of the liquidator's third affidavit. In this regard, Mr Stanton referred the court to the following passage from Master Gambrill's judgment:

"These are all companies that have been identified and the files should be available. He (counsel for the bank) sets out a list of documents on the files. He says that it includes internal bank correspondence and file notes. In my view they should be available to the liquidator up to the date of liquidation.

Secondly, correspondence between customers and bank staff pre-liquidation. If they relate to the named companies, the liquidator should be entitled to them. Thirdly, internal bank accounting records. The liquidator should be entitled to the three companies' accounts. Fourthly, correspondence with several solicitors including solicitors for Mr and Mrs Peart, solicitors for the liquidator's, solicitors for the bank and solicitors for the customers pre-liquidation. It is the bank's responsibility to handle these files separately. The liquidator is entitled to everything relating to the companies up to the date of liquidation (not Mr and Mrs Peart individually unless referring to these companies). Fifthly, correspondence with the liquidator's of the plaintiff and Peart Holdings Ltd. They are post liquidation and I doubt if they are relevant or need to be disclosed. Sixthly, copies of banking agreements between the bank and its customers. These are critical and should be disclosed up to the date of liquidation. It says also that the bank will have stored electronically or on microfiche, bank statements in respect of the accounts for the customers identified. The liquidators are entitled to access the records of those accounts. They have attempted to do so by meeting a bank officer. This opportunity has been declined. In my view this material, as identified, should be made available." (Emphasis added by counsel)

I agree with Mr Stanton's analysis of that particular passage from the judgment. I do not consider that it supports the stand taken by the respondents in the case before me.

There is one area where the respondents do seem to be able to derive support from Master Gambrill's decision and that is in their objection to production of "post-liquidation" documentation. It is not clear, however, whether there is any issue over post-liquidation material in the present case. In paragraph 13 of his written submissions, Mr Stanton specifically states, "leaving aside post-liquidation references . . ." That remark would seem to indicate that post-liquidation documents are not in contention. If there is any issue in this regard, however, I am prepared to hear further argument on it. At this stage, I merely make the observation that if the disclosure process can properly be likened to an advanced form of discovery, as was the description used by Vice-Chancellor Brown-Wilkinson in the Cloverbay case, then it may be difficult to justify the nondisclosure of relevant post-liquidation documentation. The general principles of discovery are well settled. Litigants are required to discover all relevant documents whenever they may come into a party's possession.

In accordance with the foregoing statements of principle, I now make formal orders requiring the respective respondents to produce to the liquidator all books, records or documents relating to the business, accounts or affairs of the Company which are in their respective possession or control. In particular, production is required of:

(a) each respondent's files for the Company including internal bank correspondence and file notes;

(b) correspondence between the Company and any of the respondents' staff and any other correspondence held by the respondents relating to transactions between the Company and any related entity.

(c) internal bank accounting records relating to the Company (copies if the originals are unavailable);

(d) correspondence between the respective respondents and the Company's solicitors, accountants and any consultants retained from time to time by the Company such as valuers, trade suppliers and entities whose intervention the Company had sought and who had written to the respondent on the Company's behalf.

Counsel are to liaise as to a convenient date for production and inspection of the material in question. In this regard, reference is made to the proposed timetabling in paragraph 28 of Mr Stanton's written submissions which seems sensible.

In addition, assuming that oral examinations will still be required, I invite counsel for the applicant to advise the Chief Registrar of the court of a date convenient to the liquidator on or after 26 January 2004 for such examinations to take place and orders for oral examination of the appropriate Bank officers will be issued accordingly.

Finally, there is the question of costs. The applicant has succeeded and is entitled to costs Mr Stanton seeks an order on an "indemnity basis". He submits:

". . . costs must follow and are sought on an indemnity basis because of the flagrant flouting of the order when one looks at the ridiculous reasons that have been advanced in support of the resistance to production."

I take it that in referring to costs on an indemnity basis, counsel is proposing an award of costs on a solicitor and own client bases which generally would give an entitlement to all costs incurred except in so far as they are of an unreasonable amount or have been unreasonably incurred.

Such an award is rare but the court does have a complete discretion when it comes to costs and I am prepared to hear argument on the form such order should take in the instant case. If, therefore, the parties are unable to reach agreement on costs I will hear submissions in conjunction with the fixture for oral examinations.