Property Ventures Investments Ltd v Commissioner of Inland Revenue [2010] NZCA 217; (2010) 24 NZTC 24,283 (28 May 2010)

Last Updated: 16 January 2012

IN THE COURT OF APPEAL OF NEW ZEALAND

CA234/2010

[2010] NZCA 217

BETWEEN PROPERTY VENTURES INVESTMENTS LIMITED
First Applicant

AND FM 3 LIMITED
Second Applicant

AND FM 1 LIMITED
Third Applicant

AND THE COMMISSIONER OF INLAND REVENUE
Respondent

Hearing: 18 May 2010

Court: Arnold, Ellen France and Baragwanath JJ

Counsel: K W Clay for Applicants
P H Courtney for Respondent

Judgment: 28 May 2010 at 4 pm

JUDGMENT OF THE COURT

1. The application for a stay is declined.
2. The applicants must pay the respondent costs for a standard application on a band A basis and usual disbursements.
   

REASONS OF THE COURT
(Given by Arnold J)

Introduction

[1] This is an application for a stay of liquidation proceedings brought by the Commissioner of Inland Revenue in respect of the applicant companies in the High Court at Christchurch. The Commissioner wishes to pursue the liquidation proceedings following the applicants’ unsuccessful application under s 236 of the Companies Act 1993 to the High Court for approval of compromises of their tax debts (which the Commissioner opposed).[1] The applicants have appealed against Panckhurst J’s refusal to approve the compromises, and sought a stay of the liquidation proceedings until the appeal is determined. Panckhurst J refused to grant a stay,[2] hence the present application.

Background

[2] Each of the applicant companies is a wholly owned subsidiary of Property Ventures Ltd (PVL), a company associated with Mr David Henderson. He is, or has been, a director of each.
[3] The applicant companies owned commercial properties in Christchurch. On 1 August 2008 the Christchurch City Council entered into agreements to purchase these properties. The total purchase price was $16,171,875, including GST of $1,297,375. On that same day Mr Henderson incorporated ILR Holdings Ltd (ILR). ILR had two shareholders – Mr Henderson, who held all the voting rights, and a company, which was entitled to capital distributions and dividends. A deed of assignment of debt was entered into between PVL and ILR on 4 August 2008. The debts of the three applicants were assigned to ILR and they entered into mortgages and security arrangements in favour of ILR. PVL also transferred the majority shareholding in each of the applicants to ILR.
[4] The transaction with the Council was settled on 8 August 2008. From the proceeds, the applicants paid $11.71 million to discharge mortgages over the properties, $1 million to PVL and $3.2 million to ILR as partial repayment of the mortgages held by ILR. The result was that the proceeds (including the sum on account of GST) were expended by about 14 August 2008.
[5] The applicants did not meet their GST liabilities when they fell due. The amount ultimately involved was approximately $1.7 million (plus interest and penalties). Accordingly, in July 2009, the Commissioner issued statutory demands for this amount. When these demands were not met, the Commissioner filed liquidation proceedings.
[6] The applicants applied for a stay of the proceedings so that a compromise proposal could be put to the Commissioner pursuant to Part 14 of the Companies Act 1993. Notice of a creditors’ meeting was given. However, the Commissioner raised some concerns about the status of the creditors and as a result the meeting did not proceed. Rather, the applicants applied to the High Court under s 236 for approval of the proposed compromises.

Proposed compromises

[7] The major creditors of each of the applicants were ILR and the Commissioner. As at November 2009, the total owed to the Commissioner by the three companies on account of GST (including interest and penalties) was almost $2.4 million. None of the applicants was trading. The effect of the compromises offered was that the Commissioner would be paid a total of $1 million by way of monthly instalments over a five year period. Mr Henderson proposed that a company which he controls but is not related to the applicants, Hotel So Corporation Ltd, would guarantee the monthly payments to the Commissioner.

High Court decisions

(i) The compromises

3. Panckhurst J first noted that there was a difference between counsel as to the appropriate test to be applied. However, the Judge took the view that the formulation of the test was not determinative and, on any approach, approval should not be given. His reasons were:[3]

(a) The compromise affected only one creditor, the Commissioner, and he was strongly opposed to it;

(b) There were no good reasons for not liquidating the applicant companies;

(c) There were strong reasons which favoured the liquidation of the applicant companies, in particular the desirability of an independent investigation into their affairs; and

(d) It was by no means clear that Hotel So had the ability to meet any guarantee it gave, and it was difficult to understand how giving such a guarantee could be in its best interests.

(ii) The stay

5. In declining the application for a stay, Panckhurst J noted first that there had been no explanation from the applicants as to why they had not paid the GST when it fell due.[4] He then reiterated why he had refused to approve the compromises, as follows:[5]

Three matters most influenced me. The first was the Commissioner’s firm opposition to the proposals, he being the sole affected creditor. The second was the absence of any apparent commercial rationale for the proposals. The third matter was an associated public policy concern that the affairs of these companies do indeed require investigation.

6. The Judge concluded:[6]

In the present context I consider that these same factors are necessarily determinative as to the end result [of the stay application]. I am very doubtful as to the merits and indeed the bona fides of the foreshadowed appeals. In my view the public interest requires that the liquidation proceedings take their course. Further, I consider that delay, even pending disposal of appeals to the Court of Appeal, is simply not justified.

Principles to be applied on stay application

8. The application for stay is brought under r 12(3) of the Court of Appeal (Civil) Rules 2005. In deciding whether to stay proceedings, the Court must “weigh all of the factors in the balance between the right of a successful litigant to have the fruits of a judgment and the need to preserve the position in case the appeal is successful”.[7] Non-exhaustive factors to be taken into account in balancing the competing interests are:[8]

(a) Whether the appeal may be rendered nugatory by the lack of a stay;

(b) The bona fides of the applicant as to the prosecution of the appeal;

(c) Whether the successful party will be injuriously affected by the stay;

(d) The effect on third parties;

(e) The novelty and importance of questions involved;

(f) The public interest in the proceeding; and

(g) The overall balance of convenience.

While the apparent strength of the appeal is not one of the listed factors, Heath J treated it as an additional factor in Body Corporate No 188529 v North Shore City Council (No 6).[9]

This case

[12] Like Panckhurst J, we consider that the application for a stay should be declined. We do so largely for the same reasons.
[13] First, we have serious doubts about the bona fides of the applicants in pursuing the appeal. The applicants received substantial amounts on account of GST from the Christchurch City Council. They paid them away for their own purposes, leaving themselves with no capacity to meet their GST obligations when they fell due. They have not even attempted to offer an explanation for this conduct.[10]
[14] Second, we consider that there is a strong public interest in having an independent inquiry into the affairs of the applicant companies, sooner rather than later.
[15] Third, while we accept that there may be an issue as to the correct test to be applied where a compromise is sought which will affect only one creditor, we do not consider that there is any material difference in the application of the different tests to the facts of this case. The application for approval of the compromise could not succeed whatever test was adopted. As we understand it, this is what the Judge found, and we think he was right.
[16] Fourth, we accept that if a stay is not granted, the appeals may be abandoned. But, as Mrs Courtney said, that is not necessarily so, and even if it were, it would not be a determinative consideration, particularly given our view that the appeal has little prospect of success.
[17] Finally, we consider that there is force in Mrs Courtney’s submission that the applicant companies do not have positions to preserve. None of them is trading, none has any employees and all appear to be insolvent, or close to it.

Decision

[18] Accordingly, we decline the application for a stay. The Commissioner is entitled to costs for a standard application on a band A basis and usual disbursements.

Solicitors:
Cousins and Associates, Christchurch for Applicants
Crown Law Office, Wellington for Respondent

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[1] Property Ventures Investments Ltd v Commissioner of Inland Revenue HC Christchurch CIV-2009-409-1854, 24 February 2010 [compromise decision].

[2] Property Ventures Investments Ltd v Commissioner of Inland Revenue HC Christchurch CIV-2009-409-1854, 22 March 2010 [stay decision].

3. [3] Compromise decision, at [35].
4. [4]Stay decision, at [13].
5. [5]At [15].
6. [6]At [16].
7. [7] Duncan v Osborne Buildings Ltd (1992) 6 PRNZ 85 (CA) at 87.
8. [8] Dymocks Franchise Systems (NSW) Pty Ltd v Bilgola Enterprises Ltd (1999) 13 PRNZ 48 (CA) at [9].

[9] Body Corporate No 188529 v North Shore City Council (No 6) HC Auckland CIV-2004-404-3230, 11 February 2009.

[10] Compromise decision, at [14].