Liquidators’ powers to obtain documents and information clarified

The High Court has held that liquidators’ powers to obtain documents and information can be exercised even if discovery for the same or similar documents is on foot, but that those powers have only limited extraterritorial effect.

Background

The applicants were the liquidators of two New Zealand companies in receivership and liquidation. They sought orders under s 266 of the Companies Act 1993 that two United States companies comply with requirements under ss 239AG and 261 to produce documents and information about the New Zealand companies.¹

The Court had granted the liquidators leave under r 6.28 of the High Court Rules 2016 to serve their application on the United States companies.

The United States companies had entered into loan facility agreements with the New Zealand companies. One of the United States companies had become a shareholder of one of the New Zealand companies. But the United States companies argued that the liquidators’ application should be dismissed because the relevant statutory provisions have no effect against overseas creditors and shareholders of companies in liquidation.

The United States companies also argued that the liquidators’ application was incomplete and misleading, and that the Court should not have granted them leave to serve it. The liquidators had not disclosed that, in a parallel proceeding, they had applied for discovery orders for some of the same documents they sought in the present proceeding. For that reason, the United States companies said, there was no serious issue to be tried in the s 266 proceeding.

Challenge to grant of leave

The Court considered that liquidators’ applications for orders to comply with requirements under ss 239AG and 261 should not be considered meritless simply because the relevant liquidator had also applied for discovery of the same information.

In coming to that view, the Court stressed that applications to enforce compliance with requirements under the Companies Act proceed on a different basis to discovery applications under the High Court Rules. The former turns on liquidators’ and the Court’s powers under the Companies Act; the latter on issues of relevance and proportionality. There was no reason in principle that a liquidator should not be able concurrently to pursue both avenues.

Other findings on this point were that while the liquidators should have disclosed their existing application for discovery orders, their failure to do so did not mean that the leave had been incorrectly granted as:

the material sought in the s 266 application extended beyond that sought in the discovery application; and
at the time the liquidators brought the s 266 application there was no guarantee that they would succeed in their discovery application.

Limited extraterritorial effect

The Court noted that s 261 gives liquidators an inquisitorial power, the effect of which is to reduce the courts’ involvement in liquidation procedures. The provision therefore ought not to be given an over-expansive reading.

It observed that, as previously recognised by the New Zealand Supreme Court,² New Zealand statutes are presumed not to have extraterritorial effect. It found nothing in the express language of ss 261 or 266, or elsewhere in the Companies Act, to indicate that Parliament intended to depart from that principle here.

The question was therefore whether that intention was necessarily to be implied.

The Court said that the liquidators’ application turned on whether s 261 (as opposed to s 266) had extraterritorial effect. If it did, it would follow that a court would have jurisdiction under s 266 to enforce compliance with a s 261 notice. But the Court found that the liquidators had not pointed to any feature of that provision that indicated Parliament intended it to have extraterritorial application. The liquidators’ arguments had instead focussed on why s 261 should apply in light of the facts of the case. Those facts were not relevant to the extraterritoriality question, which was purely a matter of statutory interpretation.

Courts had previously held that s 261 could have effect against overseas directors or former directors. But, the Court noted, they had done so because those people had voluntarily assumed duties in relation to the company in liquidation. The same rationale did not apply to shareholders, creditors or other people with information about the business or affairs of the company.

While there were good policy reasons for liquidators’ powers under s 261 to have general extraterritorial effect (including to facilitate liquidators carrying out their function and role), the Court considered the lack of judicial involvement in a liquidator’s exercise of s 261 powers was a “compelling factor telling against those powers having extraterritorial application”. So, the Court said, even though it would be effective and efficient to allow liquidators to obtain documents of the company from overseas parties, it was not clear that Parliament intended that result. The presumption against legislation having extraterritorial effect is strong and must be clearly displaced by express words or necessary implication.

Finally, the Court emphasised that liquidators may obtain foreign courts’ assistance by other means—including, where available, by bringing proceedings pursuant to the UNCITRAL Model Law on Cross-Border Insolvency in the relevant jurisdiction. Considered in that context, the merits of New Zealand’s domestic insolvency legislation having extraterritorial effect are appropriately matters for Parliament.

The Court concluded that s 261, and consequently s 266, did not have extraterritorial effect against a person who is not a director or former director of a New Zealand company in liquidation.

Chapman Tripp comment

The decision is notable in two key respects.

First, as a matter of practice and procedure, it confirms that, even if liquidators have sought or obtained discovery orders in respect of certain documents, they may legitimately seek the same documents pursuant to their statutory powers. There is no requirement that liquidators commit to one or the other course of action.

Liquidators considering their options should, however, be aware that they must not use a document other than for the purposes of the proceeding in which it was discovered.³ It will be necessary, then, for liquidators to use s 261 if they wish to obtain documents for the general purposes of the liquidation.

Second, the Court has (for the first time) grappled with the difficult issue of s 261’s application to overseas parties other than directors or former directors of the company in liquidation. It gave thorough and persuasive reasons for its conclusion that Parliament did not intend that provision to apply extraterritorially. As the Court observed, however, there are compelling reasons that the provision should so apply. This is a point that the Law Commission could usefully consider should the much called-for review of New Zealand’s companies legislation proceed.

Until that happens, liquidators should be aware of the constraints they will face in seeking documents and information from overseas parties.

1. Grant v Arena Alceon NZ Credit Partners LLC [2023] NZHC 3048.
2. Poynter v Commerce Commission [2010] NZSC 38, [2010] 3 NZLR 300.
3. High Court Rules 2016, r 8.30.

Our thanks to Louis Norton for his assistance in preparing this article.