Urgent Interim Relief: Interim Liquidation
Company liquidations most often arise in two contexts: first, where a company’s solvency is at issue; and secondly, where there is a dispute between a company's shareholders as to the control of the company's affairs. While liquidation proceedings are generally more efficient than ordinary civil proceedings,[1] issues of urgency may nevertheless arise. For example, the company’s assets may be at risk of dissipation, or their value may be rapidly diminishing and in need of intervening action. In such cases, the Court has the power to appoint an interim liquidator(s) to manage the company's affairs, and to serve as the Court’s ‘watchdog’[2] pending the determination of the substantive liquidation proceeding.
The Statutory Context and the relevant High Court Rules
Section 246(1) of the Companies Act 1993 empowers the High Court to appoint an interim liquidator “if it is satisfied that it is necessary or expedient for the purpose of maintaining the value of assets owned or managed by the company”. This power is only available if a substantive liquidation application, filed under part 31 of the High Court Rules 2016, is before the Court.[3]
That leads to consideration of the High Court Rules. Rule 31.23 provides that when a liquidation proceeding has been commenced under part 31, “the plaintiff and any person entitled to apply to the court for appointment of a liquidator under section 241(2)(c) of the Companies Act 1993 may apply to the court for appointment of an interim liquidator.” The cross-reference to s 241(2)(c) gives standing to, amongst other persons, directors, shareholders and creditors of the company. Theoretically, this means that another creditor, or a concerned director of the company, may apply for the appointment of an interim liquidator even if they have not commenced the liquidation proceeding.
Section 241(1) allows the Court to appoint either a “named person” or the Official Assignee for the relevant district. It obviously makes sense for the applicant to name the insolvency practitioner who they contemplate would undertake the substantive liquidation (should the liquidation proceeding ultimately succeed). As is noted in the checklist below, a consent to act should be filed together with the interim liquidation application.
Criteria for appointment of an interim liquidator
As noted above, the overarching statutory test is that the appointment is “necessary or expedient for the purpose of maintaining the value of the assets owned or managed by the company.” This test has been supplemented by the case law. It has been held that there are “three main preconditions” for an interim liquidation application: (a) valid winding up application (which is a requirement of the Act and High Court Rules in any event); (b) the application “will in all probability succeed”; and (c) the circumstances must be not merely urgent, but also justify the appointment of an interim liquidator.”[4]
A further three factors have been recognised as particularly important: (a) whether the company’s assets are in jeopardy; (b) whether the status quo should be maintained; and (b) whether the interests of creditors are safeguarded.[5]
In sum, the applicant must put forward a strong case that the liquidation application will succeed and convince the Court that there is a good reason, relating to the value of the company’s assets, why control of the company ought not be left with the directors in the meantime.
[1] It is, for example, rare for there to be discovery. Evidence is given by affidavit and cross-examination of deponents is uncommon. The prescribed timeframes are abridged; a defendant company only had 10 working days to file a statement of defence (per r 31.17 of the High Court Rules).
[2] To adopt the term used by Wylie J in Raph Engle Concepts Ltd v SCL Industries Ltd Partnership [2013] NZHC 2732 at [39].
[3] As is noted in the checklist below, this means that a statement of claim, a notice of proceeding and a verifying affidavit must be filed prior to, or contemporaneously with, the filing of an application for the appointment of an interim liquidator.
[4] See for example Protea Group Management Services LLC t/a International Aviation Support v Pacific Aerospace Limited [2021] NZHC 158 at [15], citing Raph Engle Concepts Ltd HC Christchurch CIV-2001-409-541, 11 May 2012.
[5] See for example Smith v Ecolibrium Biologicals Ltd [2022] NZHC 1642 at [9], citing Truck & Trailer Holdings Ltd v Skelly Holdings Ltd HC Christchurch CIV-2012-409-541, 11 May 2012 at [35].