The case arose in the liquidation of two Auckland-based property development companies (the Borrowers). Prior to their liquidation, the Borrowers had borrowed funds from a US company, Arena Alceon NZ Credit Partners, LLC (Arena). Security for the loans was held by Arena’s trustee, Queastor Advisors, LLC (Queastor). Arena also became a minority shareholder of one of the Borrowers. After defaulting on the loans, the Borrowers were placed into receivership by Arena and Queastor, and later into administration and then liquidation.
As part of their investigations into the affairs of the Borrowers, the liquidators issued notices under section 261 of the Companies Act to Arena and Queastor to deliver documents to enable the liquidators to verify the level of secured debt. The liquidator considered that Arena and Queastor failed to provide sufficient information, and applied to the High Court for an order under section 266(1) of the Act that Arena and Queastor comply with the section 261 notices.
Arena and Questor protested the jurisdiction of the Court to make orders against them. They argued that sections 261 and 266 of the Act do not have extraterritorial effect against a company’s shareholder or creditor situated overseas.
Whether the Court has jurisdiction to make an order under section 266(1) turns on whether section 261 has extraterritorial effect. If it does not, then section 266 is not engaged.
As a starting point, the Court said that statutes are presumed not to have extraterritorial effect. The presumption is strong and must be clearly displaced by express words or by necessary implication considering the purpose of the Act.2
The Court found that there is nothing express in sections 261 or 266, or elsewhere in the Act, indicating that Parliament intended the powers conferred in those sections to have extraterritorial effect. Therefore, the question was whether such an intention is necessarily implied.3
The Court ruled that it was irrelevant to its interpretation of section 261 that Arena and Queastor were allegedly closely involved in the affairs of the Borrowers, or that they made payments directly to contractors undertaking the development during the receivership of the Borrowers. Nor was it relevant that Arena was a shareholder of one of the Borrowers, or that the parties had elected New Zealand law to govern their contractual relationship.4
The Court held that, in contrast to a director, a shareholder does not assume duties to the company when they acquire shares. Shareholders have limited rights against, and liabilities to, the company which are generally constrained to whatever rights attach to the shares. They are not responsible for the company, and do not control its business or operations. Further, creditors do not consent to undertaking any obligations under the Act, and they do not have responsibility to the company.5
The Court therefore concluded that while the Act has extraterritorial effect on directors given their assumption of duties under the Act, the same cannot be said for shareholders, creditors, or other people who merely know something about the business or affairs of the company.6
Accordingly, sections 261 and 266(1) of the Act do not have extraterritorial effect against a person who is not a director or former director of a New Zealand company in liquidation. A liquidator seeking documents from shareholders or creditors situated overseas will therefore need to consider whether there are other means by which they can obtain those documents.
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