Liquidators cannot examine directors to obtain private financial information on which to judge their worth as prospective defendants.
This position was reinforced by the Court of Appeal in a recent decision.
The liquidators applied to the Court for an order requiring a director to provide personal tax returns, bank statements, loan documents, a list of assets, and trust information so that they could assess the potential financial benefit of pursuing the director for an alleged breach of directors' duties.
The question before the Court of Appeal was whether the Court's powers under section 266 could be used for this purpose. The Court found that:
- the disclosure provisions in the Companies Act (sections 261 and 266) are restricted to matters "relating to the business, accounts, or affairs of the company"
- information about a director's personal financial position cannot be construed as a matter relating to the company's affairs, and
- any intention to harmonise New Zealand's commercial law with Australia's did not override the fact that our Court lacks jurisdiction to order examination of a prospective defendant on their judgment worthiness.
Separately, the Court considered the matter through the lens of the Privacy Act 1993. It found that reasonable expectations of privacy underpin the usual information-gathering powers available to litigants and that, even if it was within its power to order disclosure, it would have refused to exercise its discretion out of privacy concerns.
A particular consideration was that, if the application were allowed, the liquidators would be free to conduct an examination of the director's private information at a creditors' meeting.
Chapman Tripp comments
The decision clarifies that the liquidators' powers to examine cannot be exercised to determine whether it would be financially sensible to pursue litigation against a prospective defendant. The purpose of the powers is limited to determining whether there is sufficient evidential basis for claim to recover assets of the company.
The Court left open question of whether liquidators may examine private information for the purpose of following or tracing assets of the company. The Court's high level view was that such an examination may be recognised as relating to the affairs of the company.
Of course, what constitutes private information is not clear cut. The Court was not required to deal with this issue here, but we expect it can become the subject of a dispute.
It is worth noting that the decision is the second in two years where the Court rejected the Australian approach to insolvency law. In Timberworld v Levin  NZCA 111 the Court rejected the peak-indebtedness rule, criticising the Australian approach as not being based in legal principle.
The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.