Can notices issued under s 261 of the Companies Act 1993 be served outside New Zealand?
The Court of Appeal has clarified the extent to which a notice issued under s 261 of the Companies Act 1993, and the powers of the Court under s 266, apply beyond the territory of New Zealand. The Court has found that the provisions do have extra-territorial effect to the extent that they apply to a person located overseas who has a sufficiently substantial connection with the activities of a company in New Zealand to justify the assertion of jurisdiction by the New Zealand authorities. That is a bit of a convoluted way of saying that, if a person does enough to submit to New Zealand jurisdiction, then they can be served with a notice under s 261. However, the Court of Appeal did not delve into the practicalities of enforcing the notices on overseas entities. It seems to us that the practicalities of enforcement could give rise to a myriad of hurdles, and in many cases, make enforcement impossible.
What happened?
The case of Grant v Arena Alceon NZ Credit Partners LLC [2024] NZCA 366 concerned the liquidation of a property development company, Ormiston Rise Limited and its subsidiary Ormiston Rise Development Limited. The Ormiston companies were involved in the development of 727 residential units. In order to fund the development, the Ormiston companies entered into a financing agreement with Arena Alceon NZ Credit Partners LLC. The total funding under the agreement was $340 million. Arena also held 19.5% of the shares in Ormiston Rise. Quaestor Advisors LLC held a GSA over the assets of Ormiston Rise, and a mortgage over the land.
Ormiston Rise went into default, and in April 2021, Quaestor appointed receivers. The receivers continued the development so as to preserve value, and Arena agreed to provide a further $30 million. Of this, some $6 million was paid to third parties as “preservation advances” which were said to have preserved the value of the secured property.
In August 2021 Arena and Quaestor advised that the total level of debt was nearly $180 million. A sale of the development was conducted by public tender, and an entity associated with Arena purchased the property for $198 million. Arena was then paid $178 million.
In September and December 2021, the Ormiston companies were placed into liquidation.
The liquidators issued notices on Arena and Quaestor pursuant to ss 239AG and 261 of the Companies Act 1993 requiring them to provide information about the affairs of the Ormiston companies. The liquidators were particularly interested in the “preservation advances”. Arena and Quaestor challenged those notices on the basis that those provisions of the Companies Act did not have extra territorial effect. The High Court upheld the protest to jurisdiction. The liquidators appealed.
The decision
The Court of Appeal held that, in the circumstances of this case, s 261 did have extraterritorial effect by way of necessary implication. Otherwise, Quaestor and Arena, as persons connected to the insolvent companies, could avoid those sections simply by leaving the country.
The question was the extent to which the sections applied extraterritorially. That question can be answered by looking at the extent of the connection of the recipient with the activities of the company in liquidation. It is a question of whether the recipient had submitted to be within the reach of the provisions because of their sufficiently substantial connection with the activities of the company.
In this case, Arena and Quaestor had a substantial connection with the Ormiston companies, such that they must be taken to have accepted the New Zealand authorities, including the jurisdiction under s 261. The basis for this connection was:
1. They had both engaged in significant business activities within New Zealand.
2. Arena was a minority shareholder of Ormiston Rise.
3. Under the funding agreement, the New Zealand Courts had exclusive jurisdiction to deal with disputes.
4. When the development did not proceed as planned, Quaestor appointed receivers in New Zealand.
5. The receivers then sold the development, and paid Arena a substantial portion of what was owed.
6. Arena and Quaestor filed proofs of debt in the administration of Ormiston Rise.
The Court found that there was a substantial connection between the activities of Arena and Quaestor and the activities of the companies. A key deciding factor was that the funding agreements specified that New Zealand law and the New Zealand Courts had jurisdiction.
The Court accepted that this potentially allowed the Companies Act to have a broad application, but considered that to be justified. Any unjustified exercise of a liquidator’s powers could be addressed in an application under s 266, a review of the liquidator’s powers under s 284, and, apparently taking things to an extreme position, in the defence of any criminal proceedings.
While the decision in this case appears to be uncontroversial, it may have the effect of making large overseas entities consider more closely the ramifications of jurisdiction clauses in New Zealand contracts. Furthermore, the practicalities of enforcing the orders served overseas, which would seem to be inevitably fraught, were not considered by the Court of Appeal.
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