On 1 August the Court of Appeal (Court) upheld the High Court decision in Lewis Holdings Ltd v Steel & Tube Holdings Ltd  NZHC 3311, in which the court ordered that Steel & Tube Holdings Limited (STH), the holding company of Stube Industries Limited (Stube), was liable to pay, in its entirety, the claim of Lewis Holdings Limited (Lewis) – a creditor claiming in Stube’s liquidation.
This is the most recent authority on the granting of a pooling order, which may be made under s 271(1)(a) of the Companies Act 1993 (Act). Under this section the Court may order a parent company to pay to the liquidator of a subsidiary the whole or part of a claim made in the liquidation against the subsidiary. This provision has been rarely used in New Zealand due to such an order being an exception to the principle that a company is a legal entity in its own right and that, consequently, shareholders are only liable for the company’s debts to the extent of their shareholding.
The Steel & Tube case gives guidance on when it is just and equitable for the Court to order a solvent parent company to pay a claim made against its liquidated subsidiary.
Stube, by what appears to be oversight, was deemed to have renewed a 21 year lease from Lewis over a property in Mt Wellington. Following the renewal, STH looked at a number of potential uses for the land, each of which ultimately fell through. STH continued to pay the rent for which Stube was liable under the lease until Stube was placed into voluntary liquidation by STH in 2013.
Following this Lewis filed a proof of debt as the unpaid landlord. Lewis and the liquidators of Stube sought a pooling order in order to receive a contribution from STH for the rental payments in relation to the property, under section 271(1)(a) of the Act.
The High Court recognised that different companies in the same group often contain some form of common management function. Therefore, the courts must look for conduct which disentitles the separate legal existence of the subsidiary and whether the directors and employees recognised the separate legal personalities of the two entities (ie the business of a subsidiary cannot be a mere front for the business actually carried on by others).
“Just and equitable”
The High Court will grant a pooling order when it is “just and equitable” to do so. Steel & Tube confirmed that this test is informed by two competing policy considerations:
- respecting the separate corporate identity of the company in liquidation; and
- not allowing “mischief” which can result from the overly strict application of separate corporate identity.
The High Court applied the statutory criteria set out in s 272(1) to the facts of the case. These include three mandatory criteria (s 272(1)(a)-(c)) as well as a catchall provision (s 272(1)(d)).
Section 272(1)(a): The extent to which the related company took part in the management of the company in the liquidation.
Under this head the High Court was persuaded that:
- the actions of the directors of Stube (who were senior employees of STH) demonstrated that the STH group “acted as a single unit”, including:
- separate board meetings were held for Stube;
- many steps were undertaken by employees on the STH letterhead without the employee stating he or she was acting for Stube;
- Stube had no employees of its own, as all matters concerning Stube were dealt with by STH's employees; and
- there being no evidence that the directors managed Stube any differently from a division of STH;
- there being evidence of “financial intermingling” whereby receipts and payment for Stube were transacted through STH’s bank account and accounted for as STH’s transactions;
- while there was a provision in Stube’s constitution which enabled the directors to prefer STH’s interests, the High Court held that the directors were still required to consider Stube’s interests separately; and
- Stube did not obtain independent legal advice before entering a major transaction (the renewal of the lease).
Section 272(1)(b): The conduct of STH towards Lewis as a creditor of Stube
While Lewis knew Stube (not STH) was the lessee of the property, STH’s conduct (especially paying the rent and rates for Stube) was such as to indicate to Lewis that STH “stood behind Stube”. This conduct would reasonably lead Lewis to believe that Stube was not treated as a legal entity distinct from STH.
Section 272(1)(c): The extent to which the circumstances that gave rise to the liquidation of Stube are attributable to the actions of STH
The High Court held that the circumstances giving rise to the liquidation of Stube were attributable entirely to the actions of STH. STH had deliberately withdrawn its previously provided financial support, knowing that Stube had a long-term lease with Lewis.
Section 272(1)(d): Such other matters as the Court thinks fit
The High Court attached some weight to the submission that STH, as a publicly listed company, ought to have known better as to respecting legal requirements.
The High Court found the factors listed above meant it was just and equitable to order that STH pay Lewis’ claim to the liquidator (with the quantum to be determined later).
The High Court came to this decision on the basis that the parent company was entirely responsible for the management of its subsidiary, took full responsibility in its dealings with the creditor of the subsidiary and was entirely responsible for its subsidiary going into liquidation.
Court of Appeal
On 1 August 2016 the Court dismissed the appeal by STH against the conclusion that it was just and equitable to grant such an order. It agreed with the High Court’s observation that this would require balancing the two policy considerations noted above.
In particular it found that the absence of causation and detrimental reliance are not determinative of whether an order should be made.
Further, there is no requirement in section 271 to prove disentitling conduct, which would be an unjustified gloss on the criterion of ‘just and equitable’. The section requires consideration of the extent to which STH had participated in the management of Stube. As such, the capacity in which the persons are acting is what is to be considered, rather than whether they are acting in a disentitling manner. It found that the High Court had correctly focussed on the failure of the directors to distinguish between their duties to STH and those to Stube. The fact that section 271(1)(b) expressly included as a factor the extent to which the business were combined was not to mean that it was excluded from consideration under subsection (a).
Additionally, the Court found that no undue weight had been given to the fact that STH is a publicly listed company.
It also rejected the submission to have the quantum of the judgment reduced on the basis that Lewis had no responsibility for the loss it had sustained, including not seeking a guarantee from the parent, and that STH’s contributions to Stube in rent and remediation of the land were for its own benefit.
Implications going forward
Pooling orders, as observed by the court in Steel & Tube, tend to turn on their facts and generally rely on a ‘blurring’ of the identities of, and legal boundaries between, entities. Where those boundaries are maintained, the likelihood of a pooling order being granted is significantly reduced.
As such, a subsidiary’s interests must be kept distinct by ensuring that if there is to be a sharing of liabilities within the group, appropriate legal and accounting frameworks are put in place. Otherwise, there is the risk that a parent company will be held liable for the debts owed by its subsidiaries.
This publication is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice.