Privacy prevails – a liquidator's power to examine not a gateway to private information
The Court of Appeal has confirmed that the powers of examination under the Companies Act 1993 (Act) cannot be used to access private financial information to determine the judgment-worthiness of a director.
The decision is consistent with a line of authority in New Zealand which narrows the scope of the powers under sections 261 and 266 to access to information which relates to the "affairs of the company". The Court's approach aligns with that taken in the United Kingdom, but creates a divergence between New Zealand and Australian decisions.
Liquidators should not despair however. The Court of Appeal has left it open to parties to argue that a request for personal information can be made under section 261, where the purpose of that request is to establish a tracing claim where directors appear to have misappropriated company assets. Liquidators are also not without usual remedies, such as freezing orders, where there are concerns about dissipation of assets.
Mr Ellis was a director of Wenztro Co-operation Limited. Wenztro was placed into voluntary liquidation in 2012. The (appellant) liquidators were subsequently appointed in February 2016.
Proceedings were issued against Mr Ellis and other former directors of Wenztro seeking recovery of the sum of $773,000 (or some other sum ascertained by the Court). However, the liquidators had concerns that Mr Ellis had (or would) dissipate his assets to defeat any judgment award. Accordingly, the liquidators sought disclosure of personal financial information from Mr Ellis utilising their powers under section 261 of the Act. This information was refused by Mr Ellis on the basis that the liquidators did not have the requisite statutory authority to require disclosure. The liquidators sought Court assistance under section 266 of the Act. Section 266 provides the Court with jurisdiction to obtain information from and examine a specific class of persons, which included Mr Ellis as a former director of the company. The information sought by the liquidators included personal tax returns, bank statements, documents evidencing his assets and personal liabilities (liabilities over $10,000) and information about his trusts (including any in which he was a beneficiary or trustee with the power to appoint).
The High Court declined to assist and to make the orders sought.
Court of Appeal
The key issue in the Court of Appeal was whether the High Court had jurisdiction under the Act to require Mr Ellis to disclose privately-held personal financial information about his personal means, to establish judgment-worthiness. The issue was novel, and had not been tested in the New Zealand courts previously.
The Court of Appeal noted that in the usual course, parties in litigation would not have access to the opposing party's financial information (unless it was put into issue as part of the litigation). Some information was also afforded statutory protection, such as tax information protected under the Tax Administration Act, and other personal information protected by the Privacy Act 1993. Certain other information however, could be ascertained from public sources such as the Companies Office Register and Land Information New Zealand. Because of the statutory protections, absent Mr Ellis's co-operation, the requested information could not be obtained unless the Court ordered the disclosure under section 266 of the Act.
266 Powers of court
- The court may, on the application of the liquidator, order a person who has failed to comply with a requirement of the liquidator under section 261 to comply with that requirement.
- The court may, on the application of the liquidator, order a person to whom section 261 applies to:
a. attend before the court and be examined on oath or affirmation by the court or the liquidator or a barrister or solicitor 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.
The Court of Appeal reviewed repealed provisions under the Companies Act 1955, noting that the apparent purpose of the Act was to facilitate access to property and information directly related to the affairs of the company in liquidation. The Court of Appeal declined to expand on this "as a gateway into private financial information" which might be relevant to the realisable value of a potential cause of action. The Court did not consider that the amendment to the current regime from the 1955 Act, which included a right to obtain information without recourse to Court under s 261, expanded on the previous rights to disclosure, stating that the change was to improve efficiency.
Reviewing the New Zealand case law, the Court of Appeal acknowledged that previous authorities showed some support for the use of section 261 and 266 of the Act to obtain proof of elements of a claim against an examinee. However those cases focussed on the exercise of the Court's discretion, as opposed to jurisdiction.
Counsel for the liquidators relied heavily on cases in Australia, where the Courts have been more amenable to utilisation of the Corporations Act 2001 (Cth) to require disclosure. For example, the Courts in Australia have employed a broad definition which appears to have enabled liquidators to seek personal tax returns, copies of personal bank statements, and statements of assets and liabilities. In at least one case, however, it has been acknowledged that a liquidator’s request for information about a defendant’s judgment worthiness can be drafted so widely as to be oppressive.
The Court discussed authorities in the United Kingdom, which had considered provisions in the legislation (from which the New Zealand provisions had been derived).
The Court of Appeal recognised that in the United Kingdom, it was accepted that liquidators were entitled to rely on the statutory process of disclosure, to request information so that they could progress a winding up in a cost efficient manner, including where recovery action was contemplated, and this position had been approved by the New Zealand courts.
However, the Court of Appeal also noted that in the United Kingdom, the above principle had not been extended to permit interpretation of the statutory provisions to allow examination of a prospective defendant on his or her ability to meet a judgment sum. Like the New Zealand courts, the principle has been extended in the UK to permit examination on matters relevant to a prospective claim, but that had been done on the basis that liquidators are strangers to the company's affairs, and do not have the information relevant to proof of the company's claim. Generally, the English courts appeared reluctant to compel the disclosure of information solely related to proof of claims the liquidators are bringing against the person being examined.
The Court of Appeal referred to the underlying requirement to balance the interests of liquidators in gathering relevant information, and those being examined from unfair, vexatious and oppressive examination.
The Court of Appeal determined that:
As a matter of interpretation, having regard to the purpose of part 16 of the Act, the phrase "any matter relating to the … affairs of the company” is limited to information about the company’s management, accounts, and the handling of its business affairs including its assets and liabilities. The Court of Appeal was not satisfied that information about a former director's financial position could be construed as "any matter relating to the company's affairs".
The absence of any specific reference in either ss 266 or 261 to disclosure of private financial information supported the argument that parliament intended to restrict the jurisdiction to records and information properly relating to the affairs of the company
A company is distinct from its shareholders, employees and directors. There was no proper basis for conflating the affairs of the latter with the former. If parliament had intended to enable liquidators to collect private financial information, one would have expected a clear indication on the face of the Act.
The plain purpose of the examination powers under sections 261 or s 261 is to enable the liquidator to determine whether there is a sufficient evidential basis for a claim to recover assets of the company from a third party or parties. Express words would be required before the provisions could be read as extending to the financial worth of a defendant.
Section 266 did not authorise the obtaining of Mr Ellis' private financial information.
Although the Court of Appeal recognised that it was desirable to achieve uniformity with Australia, the Court declined to follow the approach of the Australian courts. In doing so, the Court of Appeal noted that the reasoning of the cases in Australia (particularly Grosvenor) was based on earlier decisions in the English Courts, which were not directly related to a right to cross examine on a prospective party's judgment worthiness, and did not address the jurisdictional question of whether such powers permitted an enquiry into private financial information to ascertain judgment worthiness.
As a matter of policy, the Court of Appeal discussed the privacy protections afforded to individuals by virtue of the Privacy Act, New Zealand Bill of Rights and the development of the law of tort to protect certain invasions of privacy. The Court considered that these protections supported a more restricted interpretation being taken; adopting a broader interpretation provided liquidators (and creditors) with coercive powers of investigation into the details of private financial information without any logical or necessary relationship to the affairs of the company. The broader interpretation would contradict parliament's intention to protect the reasonable expectation to privacy of certain information, and would cut across privacy values explicitly provided for in the Bill of Rights.
Finally, the Court of Appeal noted the difference in approach between the English and Australian Courts. Although the legislative regime was similar in both jurisdictions, the discretion exercised by the Courts in each jurisdiction had been exercised differently. Rather than assessing the exercise of the discretion, the Court of Appeal preferred to approach the issue as one of jurisdiction, which provided greater commercial certainty.
In concluding the above, the Court left it open for further consideration as to whether s 261(2) of the Act could be used to examine the personal affairs of a person in an equitable tracing claim, for example, where there was a claim for misappropriation of company funds.
Anthony Harper comment
The Court of Appeal's decision is consistent with the approach taken by the Courts in relation to requests for disclosure of information and records in a liquidation. The decision balances the interests of both parties, but does not unfortunately provide any assistance to liquidators who are often faced with limited funding when assessing prospective claims. As pointed out by the Court, Liquidators are not without remedy where there is evidence of dissipation; however freezing order applications are difficult and can be expensive.
Helpfully, the Court of Appeal has not closed the door on the issue of whether section 261 can be used in the context of a tracing claim where there is suspected misappropriation of a company's wealth.