AMALGAMATION EFFECTIVE THOUGH ILLEGAL PROCESS USED
Selectrix Management Limited v Registrar of Companies and Commissioner of Inland Revenue (2005) 22 NZTC 19,181
The applicant company in this case sought to have its amalgamation with another company declared a nullity or invalid.
The case arose out of assessments made by the Commissioner of Inland Revenue against Selectrix. Those assessments disallowed to the company certain losses carried forward from trading in the early 1990s. The losses were disallowed because the Commissioner alleged that an amalgamation between Selectrix and another company conducted in 1996, led to a breach of shareholder continuity so that the losses were extinguished.
The amalgamation was undertaken using the short form amalgamation procedure under the Companies Act. That procedure was only legally available in a so-called “vertical amalgamation”, where a subsidiary was amalgamated into a parent, or in a so-called “horizontal amalgamation” where companies with common ownership were amalgamated into one.
An error was apparently made and it was assumed by the advisers acting for Selectrix that it and the amalgamating company were commonly owned. In fact that was not the case and the shares in the amalgamating company had been held by trusts which held no shares in Selectrix.
The company argued that the amalgamation was either a nullity on the basis that it was the product of an illegal process or that, if it was not a nullity, it should be declared invalid applying administrative principles akin to judicial review. The object of the exercise from the company’s point of view was to restore the amalgamating company to the register, reinstate a separation of the companies so that changes in their shareholdings were reversed, and thereby restore Selectrix’s losses.
The Court declined the company’s application and held that the amalgamation was legally effective.
The basis for its decision is that the amalgamation provisions did not require the Registrar to make any inquiries behind the documents presented to him for a short form amalgamation. If those documents accorded with the form required by the statute, then the Registrar’s actions in receiving them and certifying the amalgamation brought the amalgamation about, notwithstanding that the parties proffering the documents to the Registrar had no right to do so.
In the absence of any defect in the Registrar’s actions, once issued, the certificate of amalgamation was effective despite the process adopted by the amalgamating companies legally being unavailable to them.
In short, the Registrar was not required to satisfy himself that the short form amalgamation procedure was available to the companies. It was for them, their officers and their advisers to be satisfied that the amalgamation procedure adopted was the proper one. If any fault existed in an incorrect procedure having been followed, it lay with the officers of the company and their advisers.
An argument by the company that the Registrar’s actions were tainted by a misrepresentation of the situation which led to an unreasonable decision in administrative terms was also rejected by the Court. The misrepresentation as to fact was irrelevant to the role of the Registrar. Because he was not obliged to inquire as to the facts behind the documents presented to him, there was no basis on which the misrepresentation of common ownership could lead to an unreasonable decision that could be impugned on administrative law grounds.
The application for a declaration as to nullity failed and the Court also declined to exercise its discretionary jurisdiction to unseat the amalgamation on the basis of invalidity. The Court decided this part of the case on the basis that the public interest favoured preservation of the corporate record and that if consequences had arisen as a result of the ill-fated amalgamation, the parties concerned had a remedy by way of recourse to the third party responsible for the error. Because that was an alternative available remedy, the Court was disinclined to overturn the amalgamation and restore the tax losses.
This case establishes the Registrar’s role as the recipient of documents rather than an officer charged with inquiry into the origin and propriety of documents. Administrative action against the Registrar will be confined to his actions in that limited role. The Courts will not easily act if the result is that the public record of corporate dealings is undermined.
The case leaves, rather unsatisfactorily, the suggestion that an illegal process can be “perfected” by receipt and registration of documents by the Registrar. The case was advanced as a precursor to claims against the advisers who had acted in the amalgamation and in the context of those claims an appeal on these points was thought to involve too great a risk to be warranted.
© G D Clews 2005