By Robin McDonnell and Karole Cuddihy From Maples and Calder

In Lewis Holdings Limited & Others v. Steel and Tube Holdings Limited,1 the High Court of New Zealand made an order requiring a parent company to contribute to the debts of a subsidiary which was in liquidation. The decision is of interest to Irish practitioners because there has been an absence of case law concerning a comparable Irish provision (section 140 of the Companies Act, 1990), which was modelled on a previous iteration of the New Zealand provision dealing with the pooling of assets of related companies (section 271 of the New Zealand Companies Act, 1993).

The Plaintiff was the owner of a particular property which was the subject of a perpetually renewable ground lease. The lessee at the time the Plaintiff purchased the property was Stube Industries Limited (“SIL”), a wholly owned subsidiary of the Defendant.

The history of the matter was that from approximately 1990, although the property was leased to SIL, the Defendant parent company occupied the property under an informal sub-lease from SIL, which from that time onwards had no employees. The property was effectively managed by the Defendant. In 1996, 1997 and again in 2003 the Defendant paid for decontamination works which had to be carried out on the property on behalf of SIL. The ground lease was due to expire on 1 December 2009 but was in fact deemed to have been renewed in 2009 due to a failure to serve the necessary notice to the Plaintiff that SIL did not wish to accept a renewal of the lease. Following the renewal, the Defendant parent company continued to pay the rent on the property as it had done previously until 2013.

In May 2013 the directors of the Defendant recommended that SIL be put into liquidation following a decision to cease providing financial support to SIL and noting that the directors of SIL had made unsuccessful efforts to exit SIL from the lease. SIL was put into liquidation by a shareholders’ resolution. The liquidators disclaimed the lease as onerous property under section 269 of the New Zealand Companies Act, 1993 leading the Plaintiff to file a proof of debt in SIL’s liquidation.

The Plaintiff and the liquidators claimed that the Defendant company should be ordered to pay to the liquidators the whole of the sum of the Plaintiff’s claim in the liquidation. The Judge, MacKenzie J., noted that Ireland was the only country other than New Zealand in the common law world which had a statutory provision allowing for the making of contribution orders against related companies.

MacKenzie J. noted that the two competing principles at issue were:

(a) the separate legal identity of companies and the right of commercial enterprises to run their businesses through subsidiary and related companies as they see fit; and

(b) the mischief that can result from an unyielding application of separate corporate identity.

The Judge held that an unyielding application of the principle of separate corporate entity would defy the legislative policy behind the provisions, and the rationale for the principle of separate corporate entity is to enable a business to be carried on by a separate legal entity so as not to expose the shareholders to the liabilities which the business may incur. It was inherent in this rationale that the company must be not only a separate legal entity but also a “separate commercial entity”, and that its business will not be carried on in such a way that this company is not a mere “front” or “façade” for business actually carried on by others.

The New Zealand Companies Act sets out certain criteria to be considered by the court in considering whether to make a contribution order, which were as follows:

(a) The extent to which the Defendant took part in the management of the subsidiary

MacKenzie J. held that the Court must consider whether the directors of SIL had acted in that capacity or rather as senior employees of the Defendant. The two directors of SIL were also the CEO and CFO of the Defendant. The Judge held that the Defendant carried on the affairs of the business as a single unit “through divisions rather than through subsidiaries”. A number of findings buttressed this opinion:

(i) The directors did not distinguish between the best interests of SIL and the Defendant. Their obligation was to oversee the conduct of SIL’s business, rather than simply manage it as an integrated part of the business of the Defendant. The directors were acting in their capacity as CEO and CFO of the Defendant.
(ii) SIL did not have the financial capacity to continue to trade separately. If it were to be treated as a separate entity, there would have had to have been legal arrangements to ensure its support, but none were put in place.

(iii) SIL had no employees of its own. All work on its behalf was done by employees of the Defendant. Many steps taken on its behalf were done on the Defendant’s letterhead and the Defendant oversaw the administration of the lease, the renewal of the lease and the attempts to find a buyer for SIL’s leasehold interest.
(iv) The accounting treatments which had been put in place were also relevant. MacKenzie J. noted that there was a degree of financial intermingling; SIL had no separate bank account; and all payments and receipts for SIL were made through the Defendant. The rent invoices for the property were addressed to the Defendant at the Defendant’s request.

The Court concluded that there was no evidence of exercise of management functions independent of the Defendant to any material extent.

(b) The conduct of the Defendant towards the Plaintiff as a creditor of the subsidiary

The Judge noted that this was not a case where a creditor was confused as to the entity with which it was contracting. Rather, the Defendant’s conduct between 2003 and 2013 indicated that it stood behind SIL. SIL’s directors should have considered whether it was capable of incurring the obligation to pay the rent from its own resources but this was not done. No special resolution had been passed as would have been necessary under the New Zealand Companies Act.

(c) The extent to which the circumstances that gave rise to the liquidation were attributable to the actions of the Defendant

This factor distinguishes the New Zealand legislation from its Irish counterpart. In New Zealand, the extent to which the circumstances giving rise to the liquidation may be attributed to the defendant is a factor to be taken into account, whereas under the Irish provision, the court is expressly prohibited from making a contribution order unless the court is satisfied that that the circumstances giving rise to the liquidation are attributable to the actions or omission of the related company.

In this case, the Defendant had ceased funding SIL and then caused the necessary resolution to be passed appointing a liquidator. SIL could not continue following the withdrawal of funding. MacKenzie J. held that the liquidation of SIL was entirely attributable to the actions of the Defendant.

The case is interesting therefore from the Irish perspective, because the circumstances (as determined by MacKenzie J.) met the Irish legislation’s criteria for the making of a contribution order.

(d) Such other matters as the Court thinks fit

Under this heading, MacKenzie J. addressed a number of other factors. One which is worth noting is that the Judge commented that the Defendant was a publicly listed company which “ought to have known better”. The Judge commented that a failure to observe those requirements cannot readily be ignored or excused where the company concerned is the subsidiary of a publicly listed company. The implication appears to be that a publicly listed company (or group holding company) may be given less sympathy than a small private corporate group.

Furthermore, MacKenzie J. held that there should be no “circularity” as regards the making of a contribution order and the receipt of a payment by the same party as a creditor in the liquidation. Therefore, the Judge ordered that the contribution it was ordering the Defendant to make must be limited solely to the claim being made in the liquidation by the Plaintiff. This was to prevent any portion of the amount of the contribution being returned to the Defendant in the liquidation.

Conclusion

This decision is of some interest to Irish insolvency practitioners because New Zealand is the only other jurisdiction in the common law world with a statutory provision which is comparable to section 140 of the Companies Act 1990. There has been a dearth of Irish case law on this unusual insolvency provision, but the circumstances of the Lewis Holdings Limited case met the key requirement in the Irish legislation that the circumstances giving rise to the liquidation must be found to be attributable to the actions of the party against which a contribution order is sought.