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High Court of New Zealand Decisions |
IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY
CIV2007-404-2490
UNDER THE COMPANIES ACT 1993
BETWEEN VICTORIA
STREET APARTMENTS
LIMITED, A DULY INCORPORATED
COMPANY HAVING ITS REGISTERED
OFFICE AT 12 POLO PRICE DRIVE,
ALFRISTON ROAD, MANUKAU,
PROPERTY
DEVELOPER
Plaintiff
AND IAN ROBERT
MCKAY AND CRAIG
TREVOR MCKAY, AS TRUSTEES OF
THE OTIS FAMILY TRUST, PROPERTY
DEVELOPERS OF AUCKLAND
Defendants
Hearing: 23 November 2007
Counsel: E J Werry for Plaintiff
D W Grove for Defendant
Judgment: 17 March 2008 at 3.30 pm
RESERVED JUDGEMENT OF ASSOCIATE JUDGE SARGISSON
This judgment was delivered by Associate Judge Sargisson on 17 March 2008 at 3.30 pm pursuant to
Rule 540(4) of the High Court Rules
Registrar/Deputy Registrar
Date .............................
Solicitors:
Ganda & Associates, PO Box 27227, Mt Roskill, Auckland
Morgan Coakle, PO Box
114, Auckland
VICTORIA STREET APARTMENTS LIMITED V I R MCKAY AND C T MCKAY HC AK CIV2007-404-
2490 17 March 2008
[1] The
plaintiff, Victoria Street Apartments Limited, applies under s 290 of the
Companies Act 1993 to set aside two statutory demands.
The application is
supported by an affidavit from Mr Sharma, the sole director and shareholder of
Victoria.
[2] The
defendants, Mr Ian McKay and Mr Craig McKay, served the demands on
Victoria in their capacity as trustees of the Otis Family Trust.
They oppose
Victoria's application. Mr Ian McKay has filed affidavit evidence in opposition.
Otis has also filed an affidavit
sworn by a Mr Watt.
[3] The two demands relate to distinct sums arising out of separate transactions.
The first statutory demand
seeks payment of $376,250. This amount comprises
$350,000, said to remain outstanding from a principal advance by Otis of $400,000,
plus interest. The second statutory demand seeks payment of $73,000 plus interest.
The defendants claim that this amount is outstanding
under an arrangement where
Victoria was to pay Otis a commission for services relating to the sale of apartments.
[4] In broad
terms, the question for determination is whether Victoria has raised
an arguable case that it does not owe the amount claimed in
each demand. If it has,
then the demands should be set aside, and the parties' disputes should go to trial in
the usual way.
Background
[5] The defendants' first demand arises out of a payment of $400,000 Otis made
on 2 October 2003 to Victoria, which Victoria
acknowledges that it received. It is
common ground that the money originated from a company called Point of
Difference Ltd which
received it as a GST refund on or about 2 October 2003, and
that Point of Difference then paid the money to Otis and Otis paid it
to Victoria.
However, the parties have quite different positions about the basis on which Otis
received the money and whether or
not Otis was the owner of the money when it
advanced it to Victoria.
[6] The defendants' position is that Otis was the owner
of the money and its
advance to Victoria was a loan, $50,000 of which Victoria repaid to Otis on 31
October 2003. They allege the
remaining $350,000 is owed by Victoria.
[7] The defendants say the background is that Point of Difference was repaying
part of a $900,000 debt it owed to Otis as a guarantor of a loan
that Mr McKay had
made on behalf of Otis to a third company, Carpark 80 Limited. They allege the net
result was that Otis owned the
$400,000 which it advanced to Victoria as a loan and
not as an advance on Point of Difference's behalf.
[8] Victoria admits
that Point of Difference was liable for Carpark's debts of
about $900,000 under a guarantee. However, Victoria maintains Point of
Difference's $400,000 payment was not made for the purpose of reducing those
debts. It alleges that Otis was merely a conduit for
Point of Difference's paying the
money on to Victoria for the benefit of Mr Watt whose family trust was the sole
shareholder of Point
of Difference. Victoria claims that Mr Watt instructed Mr
Sharma, who was at that time the director of Point of Difference, to arrange
these
transactions in order that he could draw down the money as he needed it and that
Victoria was to act in effect as a bank.
[9] In support, Mr Sharma deposes that he was appointed as a director of Point of
Difference in substitution for Mr Watt when
the latter was adjudicated bankrupt in
July 2001 and that he always as acted on Mr Watt's instruction. He claims that he is
not sure
of Mr Watt's motive for wanting the money out of Point of Difference's
account, and that he does not know why Mr Watt wanted Otis
to be used as a
conduit. At the same time however he contends at the time of the transaction Mr
Watt was still an undischarged bankrupt
and was worried that a particular creditor
might make a claim on the money.
[10] As for the alleged repayment of $50,000 Victoria
acknowledges that it
advanced $50,000 to Otis on 31 October 2003 but denies that the payment was in
reduction of its own alleged
debt. Mr Sharma deposes that he was simply told that
Mr Ian McKay needed some money, and he advanced the money on Mr Watt's
instructions.
[11] The defendants' second demand, for $73,000 plus interest, arises out of an
agreement with Otis for the payment of commission
on the sale of apartments in
Wellington.
[12] Victoria had entered into an agreement for sale and purchase with a trust
named
Treasury Trust No. 1 to purchase the apartments. Treasury Trust was the
developer. Its trustee was Treasury Technology Distribution
Limited. Mr Ian McKay
was a director of Treasury Technology, and apparently very much in control of
Treasury Trust, as well as Otis.
[13] Under the terms of the agreement for sale and purchase, it was agreed that
Victoria would buy and on-sell the individual
apartments and that Victoria would
pay the purchase price to Treasury Trust out of the proceeds of the sales of the
individual apartments.
[14] Under the terms of the commission agreement Otis was to provide services in
relation to the advertising, promotion, and
sale of the apartments. In return, Victoria
was to pay Otis a commission of 10% for each apartment that sold unconditionally
for
an amount above the valuation that the parties had obtained.
[15] All the apartments were sold. Three of the apartments, units
1, 2 and 61,
were sold to the defendants in their capacities as trustees for Otis. Units 1 and 2
together sold for $650,000 and Unit
61 had a sale price of $337,500 including GST.
On 10 January 2006, Otis rendered an invoice to Victoria for its commission of
$108,560
plus GST ($121,992.20).
[16] Victoria admits that the commission due to Otis was, with one small
qualification, the amount the
invoice claimed. It says the amount was miscalculated
and should have been $105,217.50 plus GST. However it contends that it has
fulfilled its obligations in respect of the commission. It says it had an agreement
with Otis that allowed it to pay the commission
it owed to Otis by way of two set-
offs.
[17] In support of its contention, Victoria alleges that Otis paid only $150,000,
plus
a further $37,500 to cover GST, towards the purchase price of $337,500 for
Unit 61. It says that Otis and Victoria agreed that the balance of the purchase price
on
Unit 61 would be offset by commission of $48,226.06 owing to Otis and by the
amount of $101,837.60 which Victoria paid the Treasury
Trust claimed as late
settlement interest for late payment of the deposit. Victoria alleges it is now entitled
in turn to a credit
from Otis for the late settlement interest it paid to Treasury Trust.
[18] The basis of the alleged credit is that the payment
of late settlement interest
to Treasury Trust was an overpayment, as the Treasury Trust was only entitled to
claim interest up to
26 February 2004 (rather than 6 November 2006). Therefore, the
late repayment interest due was only $19,890.41, and the difference
between the sum
paid and the interest due more than covers the remainder of the commission claimed
by Otis. Victoria alleges that
it agreed to pay the interest because Mr McKay advised
Victoria that it was protected by a deed of acknowledgement and undertaking
whereby Treasury Trust agreed to indemnify Victoria and its directors for all costs,
claims and debts arising out of the arrangement.
[19] The defendants do not accept there has been any miscalculation in the
commission, but they accept the first of the set-offs
Victoria claims. That set-off
amounts to $48,228.06. They do not accept the second of the set-offs for the
remaining balance of $73,766.13,
(claimed as $73,000 in the second statutory
demand). This is the amount the defendants seek in their second statutory demand.
They
reject Victoria's contention that the balance was offset, by agreement with
Otis, against an overpayment of interest to Treasury
Trust. They counter that Otis
and Treasury Trust are distinct entities and that Victoria dealt separately with the
two. The defendants
submit that Otis is not a party to the indemnity agreement
between Treasury Trust and Victoria.
Relevant principles
[20] In
order to have the statutory demands set aside, Victoria must demonstrate to
the Court that there is a substantial dispute as to whether
or not the debt is owed or is
due. The test to be applied is set out in Fletcher Homes Limited v Ellis HC AK
M471/99 23 July 1999.
In that case the principles applicable to applications of the
present kind are stated as follows:
a) The onus is on
the applicant to show a fairly arguable basis upon
which it is not liable for the amount claimed.
b)
The mere assertion that a dispute exists is insufficient some sort of
material short of proof, which backs up the
claim that the amount is in
dispute, is required; and
c) If material is available, then the dispute
should be tried elsewhere and
not on an application to set aside a statutory demand.
[21] The standard of proof
required is proof sufficient to establish an arguable
case: Queen City Residential Limited v Patterson Co-Partners Architects (No.
2)
(1995) 7 NZCLC 260,936.
[22] In order to succeed the applicant must demonstrate that the dispute which it
raises is genuine: see Taxi Trucks Limited
v Nicholson [1989] 2 NZLR 297 at 299
where the Court stated:
The applicant must show a genuine and substantial dispute as to the
existence of the
debt, and that it would be unfair as it usually would be to
allow that dispute to be resolved by the Companies Court rather
than by
action commenced in the usual way.
The issues
[23] The following key issues arise:
a) Has Victoria
raised a genuine and substantial argument that the
$400,000 Otis transferred to it was a transfer on behalf of Point
of
Difference?
b) Has Victoria raised a genuine and substantial argument that its late
interest payment to Treasury Trust sets off the remaining commission
it owed to Otis?
Discussion
The first statutory
demand
[24] I am satisfied, albeit by a fine margin, that Victoria has established an
arguable case that the $400,000 Otis transferred
to it was an advance on behalf of
Point of Difference to Victoria for Mr Watt's use, as opposed to a loan to Victoria.
The dispute
is one that should be resolved by an action commenced in the usual way.
My reasons follow.
[25] There is no written agreement
evidencing the nature of the advance of the
$400,000 that Mr Sharma made on behalf of Point of Difference to Otis.
[26] The sheer
amount of the alleged advance is significant and ordinarily trustees
would be expected to insist that such an advance be documented
so that the essential
terms were recorded and signed by the party charged with repayment and interest
obligations. There is no reliable
indication that the parties recorded such terms or
that such terms were even agreed. This suggests that the absence of a written
agreement cannot simply be dismissed as a factor lacking in any evidential value as
Mr McKay suggests.
[27] Mr Sharma says Mr
McKay would have adopted his usual practice of
documenting the loan if indeed the advance had been a loan. Mr Sharma pointed to
loan
documentation for the $900,000 advance between Mr McKay and Carpark to
illustrate his point. Mr McKay counters that some loans made
by his companies
were documented and some were not. To illustrate his contention, he deposed that
one of his companies served a statutory
demand on one of Mr Sharma's companies
in 2005 in respect of a $50,000 loan that was not documented and that Mr Sharma
sent a reply
confirming that payment would be made. Whoever is right is not
something I can determine in the context of this proceeding. Neither
side's evidence
is conclusive. In the case of Mr McKay's evidence about his practice, it was made
by way of rebuttal evidence with
no opportunity for reply and the documents he
produced in support do not confirm one way or another what his practice was.
Further,
on the evidence as it stands it is difficult to accept that Mr McKay would not
as a matter of practice see that a $900,00 loan
warranted documenting but a
$400,000 did not.
[28] In any event, to the extent that the documents Mr McKay produced about the
$50,000 loan made in 2005 show something about the parties' dealings, they show
that Mr Sharma willingly accepted responsibility
for the particular $50,000. His
willingness to accept liability in that instance is, if anything, a factor that supports
the need
to take a cautious view in the present instance.
[29] There are also other factors that point to the need for caution and that
it
would not be prudent to rush to the conclusion that the $400,000 payment was a
loan.
[30] Victoria's cashbook shows the $400,000
as a credit in the name of Point of
Difference. Mr Sharma alleges that corresponding debits not only record that
Victoria no longer
has any of the $400,000 left, but that much of it was paid out
immediately to Mr Watt's other companies. He alleges that
such companies
included Pannive Nominees Limited and Mathison Holdings Limited, which each
received $50,000 on the same day as Victoria
received the $400,000. He says a
further $147,500 was paid to Point of Difference's mortgagee. Mr McKay on the
other hand argues that the cashbook records
the $400,000 being paid to Victoria on 2
October 2003 and that most of the $400,000 was disbursed by Victoria within four
days. He
says this contradicts Mr Sharma's assertion that his companies had no need
for the monies loaned, and that the cashbook entry showing
the $400,000 as a credit
to Point of Difference is simply wrong. However he does not dispute directly that
Pannive and Mathison were
Mr Watt's companies and were recipients of some of the
money. His own evidence also notes, when commenting on the cashbook, that
the
payments Victoria made at this time included the payment of $147,500.00 to Point of
Difference's mortgagee.
[31] In his
later rebuttal affidavit, Mr McKay places a different slant on the
$147,500.00. He said it was paid "purportedly" to Point of Difference's
mortgagee
and that what Mr Sharma failed to disclose was that the sum was paid either to
himself or one of his family trusts. He
annexed a hand-written document allegedly
prepared by Mr Sharma as evidence in support. The document does not show
conclusively
whether the money was advanced to the mortgagee of Point of
Difference or to Mr Sharma or his family trusts. It shows a payment of
$147,500 in
the context of a running balance but it does not show the parties involved.
[32] The net result is that the cashbook
lends some support for Mr Sharma's
contentions.
[33] Mr Sharma's allegations also receive some support from a statement of
account
that both sides rely on.
[34] Each says the other prepared the statement. It was produced as an exhibit to
Mr Sharma's affidavit
in reply, and Mr McKay responded to it in his evidence in
rebuttal. Mr Sharma claims that Mr McKay prepared the statement as a record
of
debts of Mr Watt and Point of Difference to Otis. He infers that when reading the
statement it is to be remembered that in the
dealings between Mr McKay and Mr
Watt the two individuals referred to themselves interchangeably with their
companies and trusts.
He says the statement, which is headed "reg's debts," relates
to the $900,000 advance made to Carpark, which was one of Mr Watt's
companies,
and shows the various repayments Carpark, Mr Watt and Point of Difference made.
He points out that the statement contains
no record of a $400,000 repayment to Otis
or Mr McKay in October 2003, when Mr McKay claims Point of Difference made
the repayment
to Otis. He argues that if there had been such a repayment it would be
shown together with the other repayments on page 2 of the
schedule.
[35] Mr McKay does not disagree that the statement of account does not show the
alleged $400,000 payment. He counters
that Mr Sharma prepared the statement, and
in effect, seeks to discredit its reliability. However, the documentary evidence Mr
McKay
produced in support is far from conclusive. It includes a letter Mr McKay
says he wrote and sent to Mr Sharma on 24 June 2006. The
letter is addressed to Mr
Sharma and Mr Watt, and the contents when read together with the statement of
account suggest the possibility
that the statement was indeed prepared by Mr
McKay. The third paragraph of the letter contains a reference to the statement. The
reference reads:
Note, I have excluded the disputed $20,000 which Manu claim[s] to
have paid me out
of Suisse proceeds.
[36] The exclusion is found on in the text on page 2 of the statement of account
where repayments made in
October 2003 are recorded. It reads:
Note I have ignored the proposed payment from Manu to me $20,000
from Suisse settlement.
[37] Significantly, the letter also contains a comment from Mr McKay about the
disputed $20,000
which points to the possibility of his being used as a conduit. He
says:
...I enclose a fax whereby Manu asked me
to sign a transfer of
$20,000 to Australian Investments back in June 2003. I know little of
why this was done but perhaps he has transferred the money
from one
to the other and used me as the conduit???
Best we arrange a time to catch up to discuss.
[38] This and other evidence point to a complex relationship between Mr Sharma,
Mr McKay, and Mr Watt where ongoing business
dealings occurred between them
during the course of Mr Watt's bankruptcy. There is more than a hint of the
possibility that Mr McKay
of Otis was used as a conduit for reasons related to Mr
Watt's bankruptcy.
[39] Mr McKay points to certain evidence that he
says shows conclusively that
Victoria's claims are wrong. In reality the evidence points to state of unresolved
contradiction between
the two sides. An example is a letter Mr McKay produced to
show that the $50,000 that Victoria paid to Otis on 31 October 2003 was
indeed a
loan repayment. He alleged that Victoria made the payment in response to an
unchallenged demand for payment of an instalment.
He alleges he faxed the letter to
Mr Sharma on 31 October 2003. The letter does not contain a fax record proving it
was sent to Mr
Sharma, but Mr McKay produced a telephone record in an attempt to
prove the letter was faxed. The record, on its face, does not relate
to the letter.
Further, it was not produced until Mr McKay filed an affidavit in rebuttal to which
there was no opportunity for response.
As the evidence presently stands I am unable
to safely treat the telephone record as conclusive evidence that the letter of demand
as opposed to some other document was sent. Nor can I safely treat the letter of
demand as a contemporaneous document that is conclusive
of the existence of the
alleged loan.
[40] Another example of evidence that Mr McKay relied on as conclusive was a
statement
Mr Sharma made about entries in the statement of account that record
certain repayments from an entity called Suisse. Counsel for
Mr McKay described
the statement as a fatal concession. The statement reads:
[A]s evident from the second page Mr McKay
shows various "repayments"
and some further advances. The payments described as "suisse payments"
are from a company
called Suisse International Ltd, which was a company
owned by Mr Watt's trust ... I was sole director of that company from
Mr
Watt's bankruptcy in 2001 until November 2005. The payments made by
Suisse International Ltd were, as in the case
of POD, made to Mr McKay, or
to any interest of his at the direction of Mr Watt. The payments were
reducing Mr Watt's,
or Carpark 80's indebtedness to Mr McKay.
[41] I am unable to see how an admission that money that was repaid by Suisse
on behalf
of Carpark shows that Point of Difference's advance of $400,000 to Otis
which was not recorded in the statement, was a payment of
Carpark's debt.
[42] In the final review I am satisfied that there is a real dispute about the nature
of the $400,000 advance
and that only a trial can get to the bottom of the factual
issues and disputes. I am reinforced in that view when I consider what
appear to be
entangled arrangements involving Mr Sharma, Mr McKay and Mr Watt and the
various interests of each. Without discovery
and cross-examination taking place, I
could not be confident of getting to the bottom of the matters in dispute so as to
justify
a decision at this stage in Otis' favour. I simply cannot be sure that Otis was
not merely a conduit for the monies Point of Difference
advanced.
[43] I am mindful that Mr Sharma's own contentions are largely unsupported by
the kind of documentary evidence that
one would normally expect to see and that
they raise issues of questionable dealings between himself and others. They also
require
the court to accept that as a director of Point of Difference that he did not
understand what his responsibilities were. Significantly,
the claim he seeks to resist
involves transactions that have on their face some of the hallmarks of a loan
repayment called up under the guarantee and a subsequent loan
advance. Ordinarily,
it would be odd that Otis would simply agree to act as a conduit for $400,000 when
the payer owed it $900,000
under a guarantee.
[44] However, I am satisfied that there is enough in the evidence to raise serious
questions about the purpose
of the payment of the $400,000 made to Victoria. I
cannot dismiss safely the possibility that there was in fact a single transaction
involving the use of Otis as a conduit that was designed by Mr Watt as a devise for
his own purposes and agreed to by Mr Sharma and
Mr McKay. I do not overlook
that Mr Watt has given evidence denying that he instructed Mr Sharma to advance
Point of Difference's
money through Otis, to Victoria, for his use. However, Mr
Watt does not deny in any direct way other claims about the money being
used to
pay his companies or Point of Difference's mortgagee. Nor does Mr Watt deny Mr
Sharma's more general assertion that he was
substituted for Mr Watt as director of
Point of Difference when Mr Watt was adjudicated bankrupt and that as a matter of
routine
he acted on Mr Watt's instructions. How far Mr Watt and Mr Sharma took
this arrangement and whether it explains what actually happened
cannot be
determined in the current proceeding.
[45] The prudent course is to grant the application to set aside the first statutory
demand and to require the dispute to go to trial.
The second statutory demand
[46] Victoria's contention that the commission
was miscalculated by
approximately $3000 is answered in Mr McKay's evidence in reply and is supported
by the documents produced
in evidence. There is no real dispute that the
commission was miscalculated. That brings me to the real issue in relation
to the
second statutory demand.
[47] The issue is whether Victoria has a genuinely arguable claim that it has
already paid the
remaining balance of the commission it owed to Otis, by way of an
agreed set-off in the form of a payment of late interest to Treasury
Trust.
[48] Otis claims that Victoria's argument in this respect is fundamentally flawed.
Counsel submitted that even if there
was an overpayment of late interest to Treasury
Trust, any claim for over payment by way of indemnity is a claim properly made
against
Treasury Trust and not Otis. The defendants refer to Altius v Citizius HC AK
M86/02 M9/02 31 May 2002 as authority that Victoria's
claims against third parties
do not provide grounds to set aside the statutory demands.
[49] Victoria relies on Mr Sharma's
evidence to overcome this difficulty. Mr
Sharma deposes that in his dealings with Mr McKay it was always on the basis that
Mr McKay
was one and the same as his various corporate entities and that he dealt
with his various entities as if one. He pointed out the
Mr McKay himself says in his
evidence that although the loan agreement recording the $900,000 advance to
Carpark states that the
lender is himself, the lender was in fact the Otis Family Trust.
He argues that this is a sufficient basis to treat Treasury Trust
and Otis as one, when
dealing with the claimed set-off for overpaid interest.
[50] The difficulty with Mr Sharma's contention
is that Victoria was somehow
entitled to look to Otis for the set-off, when his own evidence is that Victoria made
the payment on
the basis of an agreed indemnity being available from Treasury
Trust. His own evidence contradicts his claim that there was an agreement
with Otis
that it would allow the alleged set-off. If Victoria has a right of indemnity as appears
to be the case, then it may pursue
Treasury Trust, but that does not relieve it of its
obligation to pay the agreed commission to Otis.
[51] In these circumstances,
I do not accept that Victoria has raised a genuine and
substantial argument about its liability for the balance of commission to
Otis.
Result
[52] In the case of the first statutory demand, I make an order setting aside the
statutory demand.
[53] In the case of the
second statutory demand Victoria has not satisfied me that
it has an agreed set-off that extinguishes the sum claimed in the statutory
demand.
Based on the material before the court, there are no reasons why the amount of the
demand should not be paid.
[54]
The appropriate course to follow is expressly provided for in s 291(1)(a) of
the Companies Act 1993. The court may order the payment
of the debt within a
specified period and direct further that in default of the payment the creditor may
make an application to put
the company into liquidation. Accordingly, I order as
follows:
a) Victoria is to pay the sum of $73,000 by Friday 25
April 2008.
b) In default of payment by that date, the defendants may make
application to put Victoria
into liquidation under s 291(1)(a) of the
Act.
[55] On the question of interest claimed in the second statutory
demand, leave is
reserved to Otis to file and serve a memorandum if it considers there is a basis for a
further or an amended order
as to the interest claimed. The memorandum is to be
filed and served not later than 25 March 2008. In the event a memorandum is filed
by that date, the case is to be re-listed for further hearing, and further orders if
appropriate, on 11 April 2008 at 11.45am.
Costs
[56] Despite the defendants' partial success on its application I am not minded to
make any award of costs, given that
it has failed on a substantial part of its
application. Costs will therefore lie where they fall.
___________________________
Associate Judge Sargisson
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