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Miller v Friendly Islands Fishing [2002] TOLawRp 53; [2002] Tonga LR 358 (9 December 2002)

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

C 507/02

Miller

v

Friendly Islands Fishing anors

Ford J
5, 6 December 2002; 9 December 2002

Company law – petition for liquidation – opposed – court appointed a liquidator

The petitioner, Edward Miller, was a significant shareholder and investor in Friendly Islands Fishing Co Ltd ("the company"). He sought orders that the company be wound up and a liquidator appointed. The second respondent, Mr David Donley, former Managing Director of the company claimed that "El Nino" was the principal reason for the collapse in 2002 of the first respondent company. He attributed 70% to the problems associated with El Nino and the associated lack of fish, 20-30% to "infighting" and 5% to inadequate management performance. Mr Donley opposed the petition and stated in his Notice of Opposition that a liquidation was not in the best interests of the company or its shareholders and the best prospect of recovery for all parties, including the petitioner, lay in the appointment of an administrator.

Held:

1. The petitioner established each of the three grounds upon which he based his petition. They gave rise to serious questions about the company's affairs which a liquidator might well decide to investigate further. It was for the liquidator to determine whether or not it was appropriate to make further inquiries, not only into these issues but into any of the other allegations advanced in support of the petition. Upon proper inquiry the complaints may or may not be found to have substance.

2. The court made an order under section 250 of the Companies Act 1995 that placed the company in liquidation and appointed Kim Scott Thompson of Hamilton, New Zealand, as liquidator. The liquidation of the company commenced immediately.

3. The court ordered that the petitioner's costs of the winding up proceeding down to 21 November 2002 (the date when the receivers withdrew their opposition) were to be paid by the company. Costs since that date, including the costs associated with the hearing, were awarded against the second respondent. In each case the costs were to be taxed.

Cases considered:

Allebart Pty Ltd, Re [1971] 1 NSWLR 24

Practice Direction No. 4 of 1992

Statutes considered:

Civil Law Act (Cap 25)

Companies Act 1995

Insolvency Act 1986 (UK)

Counsel for petitioner: Mr Stanton
Counsel for second respondent: Mr Garrett

Judgment

Background

"El Nino", the court was told, was the principal reason for what was described by counsel as the "calamitous collapse" in 2002 of the first respondent company. When asked to express all the reasons in percentage terms, the second respondent, Mr David Donley, former Managing Director of Friendly Islands Fishing Co Ltd, told the court that he attributed 70% to the problems associated with El Nino and the associated lack of fish, 20-30% to "infighting" and 5% to inadequate management performance. The present proceeding can be seen as a "spin-off" from the "infighting" factor.

The petitioner, Edward Miller, is a significant shareholder and investor in Friendly Islands Fishing Co Ltd ("the company"). He seeks orders that the company be wound up and a liquidator appointed. His petition is opposed by Mr Donley who states in his Notice of Opposition that, "a liquidation is not in the best interests of the company or its shareholders and the best prospect of recovery for all parties – including the petitioner – lies in the appointment of an administrator."

Mr Miller is a 60-year-old shipwright residing in Auckland, New Zealand. He has never been a director of the company although he agreed that at times he was "the company man in New Zealand" and he was very much involved in the New Zealand purchase of at least one of the company's fishing vessels. Mr Miller is alleged to be on one side of what was referred to during the hearing as the "infighting" – Mr Donley is alleged to be the person on the other side. It is clear from the evidence that the antagonism, bordering on hostility, between Donley and Miller is deep-seated and firmly entrenched. They deny any malice but each makes vitriolic allegations against the other, many of which were canvassed in evidence before me.

Mr Donley obviously resented what he saw as Mr Miller's attempts to interfere in his management of the company. Mr Miller, for his part, deposed that he had no confidence in Mr Donley or his management of the company and he saw him as imperilling the position of its shareholders and investors.

There has been earlier litigation between the parties when in about July 2001 Mr Miller sought orders under the Companies Act 1995 allowing him access to various information and documentation relating to the company's affairs. The court was told that that litigation had been settled.

The petition and hearing

On 29 July 2002 Mr Miller filed a petition seeking to have the company wound up. The application cited numerous grounds but through an amended petition filed subsequently and counsel's oral submissions to the court, the grounds relied upon have been clarified and reduced to those provided for in section 250(4)(a), (b) and (d) of the Companies Act 1995 which read as follows:

"250(4). The court may appoint a liquidator if it is satisfied that –

(a) the company is unable to pay its debts;

(b) the company or the board has persistently or seriously failed to comply with this Act;

(c) ...

(d) it is just and equitable that the company be put into liquidation."

The first development after service of the petition was the filing by the company and Mr Donley of an application to stay publication of the winding up petition. Mr Donley filed a supporting affidavit dated 5 August 2002 in which he deposed that Mr Miller's petition was "an attempt to cause the company harm." He went on in paragraphs 3 and 4 of his affidavit to swear:

"3. The company is able to pay its debt (sic) when it falls due.

4. No creditor of the company has indicated that it is concerned enough to attempt to wind up the company."

Mr Donley was cross-examined aggressively by Mr Stanton over the contents of paragraph 3, in particular, and it was put to him that his statement was a deliberate lie to mislead the court because he knew he had creditors which, as counsel put it, "were snapping at his heels" because the company was unable to pay their outstanding accounts. Mr Donley denied any falsehood and claimed that, at that stage, the company was able to pay its debts because he was having regular meetings with the banks and they were still supporting the business.

There were only two directors of the company -- Mr Donley and Mr Koli Kakala. On 29 August 2002 they met and resolved that the company was unable to pay its debts as and when they fell due. The company's bankers -- Westpac Bank of Tonga and the Tonga Development Bank accepted the resolution as the company's declaration of insolvency and on 5 September 2002 they acted jointly and proceeded to appoint Mr Bruce Sutton and Mr Robert Cohen of KPMG, Fiji, as receivers pursuant to registered debentures held by the banks. At the same time, the two banks sought and obtained leave to become parties in this proceeding and they, along with the receivers, filed formal notices opposing the winding up petition.

Significantly, affidavits were filed on behalf of the banks deposing that until they were able to receive a first report from the receivers they, "were not in a position to ascertain the true status of affairs of the company", nor was it possible to determine whether the best option was to simply realise the assets or try and allow the company to trade its way out of debt through "official management".

The receivers duly reported to the banks in a lengthy letter dated 6 October 2002. A copy of the report was made available to the court and to all counsel. It showed that the company's indebtedness to the banks at that stage was in excess of $3.5 million and it had other liabilities totalling $510,995.42.

On 30 October the petitioner filed an application for an urgent fixture. That application was heard on 1 November 2002. The court indicated that it would be possible to hear the petition during the following week but the suggested date did not suit counsel. A firm fixture was, therefore, made for four days commencing on 5 December 2002.

On 18 November the banks withdrew their opposition to the winding up petition and on 21 November the receivers followed suit. Counsel for Mr Donley, however, gave notice that his client was not withdrawing his opposition and so the hearing duly proceeded on 5 December. It occupied two days.

The evidence

The documentation filed in the proceeding is now voluminous. It was agreed that the hearing would proceed on the affidavit evidence but the deponents could be required for cross-examination. As it turned out, only Messrs Donley and Miller were called to give oral evidence and a representative for the receivers also appeared under subpoena.

I do not propose to refer to all the allegations and counter allegations covered in evidence but there were several matters counsel focused on in the course of the hearing which can probably fairly be described as the petitioner's principal concerns and they require special mention. I hasten to add, however, that they are by no means all the concerns deposed to in the various affidavits or touched upon in oral evidence.

1. Coral Kingdom Co Ltd

Coral Kingdom was incorporated on 18 September 2001. It is apparently in the business of exporting live tropical fish to the USA. The original shareholding is shown in an exhibit as:

David Donley 2000 shares

Marea Donley 4000 shares

Koli Moa Kakala 2000 shares

Friendly Islands Fishing Co Ltd 2000 shares.

Mr Donley said that the company's shares were transferred to his wife on 25 January 2002 and, although the evidence is not clear, it would appear that his own shareholding was also transferred to his wife leaving the present shareholders as:

Marea Donley 8000 shares

Koli Moa Kaka 2000 shares.

Mr Miller alleges that Coral Kingdom was set up using funds from the company without any proper accounting records. He produced invoices from E.M. Jones Ltd indicating that payments had been made by company cheque for the purchase of equipment for Coral Kingdom. A liquidator, Mr Miller argues, would have power to trace the various funding transactions to find out whether the transactions were properly authorised and the funds properly accounted for.

Mr Donley's response was to produce a director's resolution dated 1 December 2000 in which the company agreed to make funds of up to $150,000 available to develop the business of coral farming. The directors disclosed their personal interest in the new Coral Kingdom company. Mr Donley went on to depose that his wife, Marea, sold their house in New Zealand and repaid the $150,000 owed by Coral Kingdom to the company from the proceeds and she advanced the company an additional sum of $137,000. Mr Donley also produced a company resolution dated 15 August 2001 which recorded that, in consideration for repayment of the debt then owed by the company to his wife, the company would transfer to Mrs Donley the vessel "Marango Bay". Mr Donley said that the ship had previously ran aground and at that stage it was "only worth perhaps $25,000". When it was put to him in cross-examination that the Marango Bay could not have been transferred to Mrs Donley because the company had previously given a floating debenture over the vessel to the banks, Mr Donley said that he thought it had been taken off the banks' books, "but obviously, the paperwork had not been done".

To add to the confusion, the certificate of registration for the vessel was produced and it shows the registration to be in the name of Sailosi Taunaholo who is another minority shareholder in the company. He has filed an affidavit supporting Mr Miller's application for a winding up order.

2. The insurance payment

On 31 October 2002, Mr John Bath from theTonga Development Bank and Mr David Larkham from Westpac Bank of Tonga swore simultaneous affidavits confirming that the "Marango Bay" formed part of the company's loan securities and that the banks had "recently been advised by the company's directors" that the insurance proceeds of over $100,000 paid out after the grounding of the Marango Bay, "had been drawn by the petitioner in New Zealand" without the knowledge or consent of the banks.

This was a serious allegation against Mr Miller and he responded swiftly by filing an affidavit attaching a computer-generated letter dated 11 January 2000 which he had received from Mr Donley containing detailed instructions of the various payments he was required to make to creditors in New Zealand from out of the proceeds of the insurance claim. When the letter was put to Mr Donley in cross-examination, he admitted that it had been written on his office computer but he denied all knowledge of its contents. He was unable to suggest who would have written the letter in his name but he said that it had not come from him.

Mr Stanton noted that, in any event, the insurance proceeds had been paid out at the end of 1999 and the affidavits, sworn on 31 October 2002, deposed that the directors had only "recently" advised the banks of the position. Counsel submitted rhetorically, if there was any substance in the allegations, why had it taken the directors so long to make the disclosure to the banks?

3. Annual meetings and audits

The evidence is that no auditor had ever been appointed to the company, which had operated since 1998, and the company has never had an annual meeting or produced annual returns or audited accounts.

4. Resolution book

Prior to the hearing, the petitioner served a subpoena upon the receivers requiring them to produce various documentation including annual returns and certain resolutions and notices. A representative for the receivers gave evidence and he said that although he had made a thorough search, with one exception, he had been unable to locate any of the requested documentation.

Mr Donley explained to the court that on 2 February 2002 the company's office had been broken into, the computer had been smashed and it was impossible to recover data. He said that a number of files were taken from the office including the company resolution book. The police had been called.

5. Statement of affairs

The receivers in their report to the banks dated 4 October 2002 advised:

"The directors have not yet provided us with the Statement of Affairs required by the receivers and managers, which was technically due on 19 September 2002."

The court was told that the statement of affairs has still not been provided.

6. Company's current status

Although it appears that the receivers were able to carry on the company's fishing operations for a period, that is no longer the situation. The court was advised from the Bar that the company's six boats are now all tied up at the wharf and the company is no longer trading. Mr Garrett advised that the staff have not been dismissed but they have been put on leave without pay.

Findings

Against that background I have reached the firm view that the petitioner has established each of the three grounds upon which he has based his petition. I have deliberately refrained from expressing any findings in relation to the matters itemised under the various headings above. I have listed them because they are relevant examples of the factual allegations the petitioner has been able to rely upon. They give rise to serious questions about the company's affairs which a liquidator might well decide to investigate further. It will be up to the liquidator to determine whether or not it is appropriate to make further inquiries, not only into these issues but into any of the other allegations advanced in support of the petition. Upon proper inquiry the complaints may or may not be found to have substance.

Whilst a liquidator's principal duties are to take possession of and to protect the assets and then to realise and apply the proceeds amongst the creditors and shareholders, he also has wide powers of investigation. Street J in Re Allebart Pty Ltd [1971] 1 NSWLR 24 said:

"A court winding up involves more than a mere realisation of the assets and distribution of proceeds. The [liquidator] has ... responsibilities to investigate past activities connected with the company, and, in appropriate cases, to initiate such further proceedings, civil or criminal, connected therewith as the circumstances may dictate. It is his duty to discover not only breaches of the Companies Act, but also conduct falling short of the requisite standards of commercial morality."

Halsbury 4th ed Vol 7(2) para 1566 states:

"As an officer of the court, the liquidator in a winding up by the court must maintain an even and impartial hand between all the individuals whose interests are involved in the winding up. It is his duty to the whole body of creditors, the whole body of shareholders, and to the court to make himself thoroughly acquainted with the Company's affairs, and to suppress or conceal nothing coming to his knowledge in the course of his investigation which is material to ascertain the exact truth ..."

Although I have concluded that the petitioner has established the grounds for the principal relief he seeks, the court still has a discretion in the matter and it is in this context that I turn now to consider Mr Donley's proposal for the appointment of an administrator pursuant to the (English) Insolvency Act 1986. Mr Garrett submitted that the administrator could be charged with conducting the investigations requested by the petitioner in his petition.

In response, Mr Stanton submitted that the provisions in the English Act sought to be relied upon have no application in Tonga and he observed that, in any event, had ongoing trading by an administrator been a realistic option for the company then one would have expected the receivers to still be conducting the fishing business instead of having the vessels tied up at the wharf. There is a good deal of substance in both of Mr Stanton's submissions.

Mr Garrett submitted that the (English) Insolvency Act 1986 had been held to apply in Tonga. He did not elaborate or cite any authority for this proposition. I am aware of Practice Direction No. 4 of 1992 which confirmed the application of Parts IX to XI of the English Act but those provisions deal with bankruptcy petitions against individuals only. The provisions relating to company insolvencies and the appointment of administrators is contained in Part II of the English Act and I am unaware of any previous decision of this Court which has held that Part II has any application in Tonga.

Under the Civil Law Act (Cap 25) English statutes of general application apply in Tonga only in so far as no other provision has been made by or under any Act in force in the Kingdom. The Companies Act 1995 contains provisions dealing with company insolvencies. There is no need, in my view, to have resort to the English legislation.

I would add this. Even had I been persuaded that the English provisions relating to the appointment of an administrator have application in the Kingdom, I certainly would not have been prepared to hold that it was appropriate, in the circumstances of the present case, to invoke them so as to deprive the petitioner of the statutory remedies he is rightfully entitled to call into operation under the Tonga Companies Act.

Also relevant to the exercise of the court's discretion, particularly when a petitioner relies upon the "just and equitable" clause, is the question of good faith. Mr Garrett alleged that Mr Miller had not come to court with clean hands. No doubt acting on instructions, he put a number of different allegations to Mr Miller in cross-examination designed to advance this submission. In turn Mr Miller denied the various propositions put to him – some of his denials were quite vehement. The court can only act on proven evidence – not unsubstantiated allegations. Without adducing evidence in support of the propositions alleged, the court cannot give them any weight whatsoever. One allegation, for example, was that in exchange for payment of some of his legal costs incurred in connecting with this petition, Mr Miller had reached an agreement with the banks whereby he would take no legal action against them in future. Mr Miller strongly denied the proposition and the matter was left at that. No one from the Bank, however, was called to contradict him.

The orders

The liquidator nominated by the petitioner is Mr Kim Thompson, a chartered accountant practising in Hamilton, New Zealand, who specialises in liquidations and receiverships. Mr Thompson has filed an affidavit which satisfies the court that he has the proper qualifications and experience to take on the task. He has also given his formal consent to act pursuant to section 291 of the Companies Act.

I, accordingly, make an order under section 250 of the Companies Act 1955 placing the company in liquidation and appointing Kim Scott Thompson of Hamilton, New Zealand, as liquidator. The liquidation of the company shall commence immediately.

Costs

The petitioner seeks full costs against Mr Donley. As a successful litigant he is entitled to costs but I am not persuaded that the justice of the case requires Mr Donley to bear the full burden of a costs order. Up until mid-November he was only one of four parties opposing the petition. I suspect that his determination to oppose the liquidation until the very end was an understandable but misguided last ditch effort to try and salvage the company and perhaps save the jobs of its numerous employees. The reality is that it is too late for any such dramatic rescue. In Mr Stanton's words, the company today is a "corporate corpse".

I order that the petitioner's costs of the winding up proceeding down to 21 November 2002 (the date when the receivers withdrew their opposition) are to be paid by the company. Costs since that date, including the costs associated with the hearing, are awarded against the second respondent. In each case the costs are to be taxed.