High Court allows plaintiff to continue breach of contract case, despite defendant's liquidation

The High Court has permitted a company to continue a breach of contract case against another company, even though the defendant has been placed in liquidation.

In Mockingbird Properties Limited v Jhim Homes Limited [2023] NZHC 737, Mockingbird Properties Limited owns a property in Papakura, Auckland which was listed for sale by auction. The defendant Jhim Homes Limited, through its sole director Lashman Jhim, agreed to purchase the property for $1,108,000 with a settlement date of 9 March 2020. However, Jhim Homes failed to settle on the settlement date, and the parties eventually cancelled the agreement.

Mockingbird then relisted the property for auction and sold it to a third party for $730,000. The company also sued Jhim Homes for breach of contract and Lasham Jhim for inducing the breach of contract. However, Jhim Homes was subsequently placed into liquidation by shareholders' resolution. The plaintiff sought leave to continue the summary judgment proceeding against Jhim Homes.

The High Court noted that the Companies Act 1993 states that continuing legal proceedings is generally not permitted once the liquidation of a company has commenced unless the liquidator agrees or the court orders otherwise. In determining whether to grant leave, the court will consider whether the plaintiff's claim cannot be easily dealt with in liquidation or whether any circumstances require the legal proceedings to continue. Considerations include:

• whether the proceeding will produce an advantage to a particular creditor over other creditors;
• whether the assets of the company in liquidation will be dissipated in wasteful litigation, particularly if there is a more convenient method for determining the claim;
• the amount and seriousness of the claim, the degree and complexity of legal and factual issues, and if proceedings have already been commenced, the stage they have reached;
• whether the liquidator is likely to require the claim to be proved, finds it difficult to determine, and, accordingly, rejects it.

The court emphasised that it should decline to grant leave for an unsustainable, fruitless proceeding. However, the court found that leave should be granted in this case because the claim is "not clearly unsustainable" as the liquidator has accepted the plaintiff's proof of debt filed in liquidation, and the proceeding will not place the plaintiff at an advantage over other creditors. The liquidator's responsible position also meant that the assets of the company in liquidation would not be wasted in litigation. The court also noted that the interrelated nature of the claims against the defendants made the Jhim Homes' breach a necessary prerequisite for the lawsuit against its director, Lashman Jhim. Even though Jhim Homes was placed into liquidation by shareholders' resolution, the proceeding was not likely fruitless.

Accordingly, the court granted leave for Mockingbird to continue the proceeding against Jhim Homes.