Dorchester Capital Limited v Kaw Holdings Limited HC Rotorua CIV 2011-463-000386 [2011] NZHC 1438 (4 October 2011)

Last Updated: 11 November 2011

IN THE HIGH COURT OF NEW ZEALAND ROTORUA REGISTRY

_{CIV 2011-463-000386}

BETWEEN DORCHESTER CAPITAL LIMITED Plaintiff

AND KAW HOLDINGS LIMITED Defendant

Hearing: 4 October 2011

Appearances: J E Buxton for the Plaintiff and for Burgess partnership, creditor in support

M L Brown, Inland Revenue Department, creditor in support

E J Werry for the Defendant

Judgment: 4 October 2011

ORAL JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSEN

Solicitors/Counsel:

B Vautier, Glaister Ennor, Auckland – [e-mail] / [e-mail]

M Brown, IRD, Hamilton - [e-mail]

E Werry, Barrister, Auckland – [e-mail] / [e-mail]

DORCHESTER CAPITAL LIMITED V KAW HOLDINGS LIMITED HC ROT CIV 2011-463-000386 4

October 2011

[1] KAW has filed a defence to Dorchester‟s liquidation application. The application relies upon there being cause for its failure to respond to the statutory demand served upon it.

[2] Dorchester owns 10 unit titles of 24 comprised in the property at 300 Lake Terrace, Taupo. It is a member of the 300 Lake Terrace Body Corporate 373817 (body corporate). The body corporate contracted with KAW by a written management agreement to manage the property owned by the body corporate members situated at 300 Lake Terrace, Taupo, for a monthly fee of $3,565.92 plus GST.

[3] The statutory demand claimed KAW is indebted to Dorchester in the sum of

$23,817.06 for rentals due and owing for four months rentals between December

2010 and April 2011 totalling $23,817.06. [4] KAW‟s defence is:

(a) It contracted with the body corporate by a written management agreement to manage the property for a monthly fee.

(b) That that fee has not been paid and as a result the sum of $73,012.23 is owed to it plus contractual interest. It says it has issued proceedings against the body corporate seeking recovery of that sum; that Dorchester is a member of the body corporate and claims if it is liable to pay the body corporate‟s debt then the plaintiff may be liable to be levied for the entire amount due to it by the body corporate. Alternatively it says it is entitled to a set off in an amount which exceeds its debt due to the body corporate. It calculates that the amount payable to the body corporate that would be payable to Dorchester is $30,421.76 (being ten twenty fourths of the amount it claims from the body corporate), which exceeds the amount claimed by Dorchester from it.

[5] KAW claims Dorchester owed it an obligation not to unlawfully interfere with its contract with the body corporate; that Dorchester breached that obligation (along with other unit holders) by instructing the body corporate not to pay the monthly management fees now claimed by KAW to be due, knowing that the failure of the body corporate to make those payments would impact on KAW‟s ability to meet its obligations to the body corporate.

[6] The affidavits of Ms St George, a director of KAW depose:

(a) That KAW purchased the management rights and management unit for the 300 Lake Terrace Apartment Motel complex in Taupo at a cost of $950,000 (being $600,000 for the manager‟s unit and $350,000 for the management rights). She said the body corporate contracted for KAW to provide management for its members for a monthly fee payable in advance. She said the management of the apartments primarily related to marketing, letting of units, cleaning, rent collecting and disbursement of income to owners on a monthly basis.

(b) She asserts the body corporate has failed to pay any of the monthly fees since April 2010; that on 15 April 2010 KAW served a „Notice of Default and Letter of Demand‟ regarding outstanding fees, and says to-date this has not been rectified.

(c) That on 28 December 2010 a further demand for payment was made on the body corporate by the barrister KAW had engaged; that the body corporate‟s failure to meet its obligations to KAW has caused continued financial hardship resulting in difficulty in meeting obligations to debtors in a timely manner.

(d) As to the statutory demand served upon KAW, that the debt has not been paid because of the position taken by the unit title holders through the body corporate.

(e) That on 27 June 2011 KAW issued proceedings against the body corporate in the Taupo District Court seeking recovery of the amount of the unpaid management fees. These Ms St George says are calculated for 9 months from January through to September 2010 (with GST at 12.5 per cent) and from October 2010 through to June

2011 (with GST calculated at 15 per cent).

(f) That in the body corporate‟s notice of response to KAW‟s proceeding in the District Court, the body corporate advised that the reason given for not making the management payments to KAW was because [the body corporate] had been requested not to do so by the owners due to the fact that some owners had outstanding rental monies due to them by KAW. Ms St George says that if the outstanding monies due were paid to KAW then the rental payments due to Dorchester and other unit holders would be satisfied in full.

(g) That the Inland Revenue‟s support was filed on 23 September 2011; its claim was made up primarily of default GST assessments plus penalties and fees; that KAW has now filed returns which show the IRD owes it $33,130.67.

[7] It is clear, at least it is to be inferred that there are other issues between KAW and the body corporate. No details have been provided of these. Counsel for Dorchester submitted that there was a general lack of evidence before the Court relating to KAW‟s claim against the body corporate. Further, “it is apparent there was the bona fida dispute between those parties which is not related to this application”.

Plaintiff ’s case

[8] In submissions filed in support of the liquidation application, counsel for Dorchester relies upon the presumption of insolvency provided by s 287 of the Companies Act 1993 i.e. that a company is presumed to be unable to pay its debts if it has failed to comply with the statutory demand. In that outcome counsel submits

the onus is on a defendant company to show that it is solvent. In this case it claims KAW has failed to adduce any evidence that might provide a fair and accurate view as to its financial position. It notes that other parties have filed appearances in support of the liquidation application claiming that KAW is indebted to them for amounts totalling in excess of $87,000. Of that sum an amount of about $6,300 is claimed as due by another unit holder. The balance is claimed to be due to the Inland Revenue Department.

[9] Dorchester‟s position is that KAW‟s claim of an entitlement to a set off is not made against it but rather against the body corporate; that KAW did not even issue proceedings against the body corporate until a month after it was served with the Dorchester‟s statutory demand, a delay it claims is not explained. Counsel for Dorchester submits there is a general lack of evidence before the Court relating to KAW‟s claim against the body corporate and provides a lack of evidence to support an allegation of unlawful interference by Dorchester with KAW‟s contract with the body corporate. Dorchester says it does not control the body corporate and does not hold a majority position because it is the owner of only 10 unit titles out of a total of

24. Finally, it is submitted for Dorchester that KAW has not adduced any evidence to establish it is solvent.

Considerations

[10] Defences to liquidation claims seldom focus upon issues of solvency alone. The statutory demand process triggers considerations of solvency and if a statutory demand is unmet, insolvency is presumed. But, it is a process that is not based upon proof of an entitlement to a payment due. Rather, it provides a means of a prompt outcome if the core of the debt is not disputed, i.e. because of a failure by a debtor company to pay the sum that is said to be due from it. Defended liquidation applications are usually about questions of whether or not the payment claimed, and identified in the statutory demand, is due.

[11] This case is one of those. Dorchester‟s position is that KAW‟s dispute lies

with the body corporate and not with it. The submission ignores the dispute KAW

has with the body corporate, the voting power of which lies significantly with

Dorchester.

[12] Dorchester says it does not have a majority of strength in the body corporate. Superficially that may appear to be so but one of the creditors supporting the liquidation application is another unit owner. Between that owner and Dorchester there are 11 of 24 votes i.e. just one short of a 50 per cent vote and two short of a majority vote to determine the outcome of the body corporate‟s direction. Furthermore, it is clear that the body corporate has determined that the management contract payments due to KAW should not be paid.

Conclusions

[13] There is much more to this dispute between Dorchester and KAW than is apparent from KAW‟s failure to satisfy the statutory demand. Superficially I consider it involves a dispute between Dorchester and KAW. In reality it involves a wider issue between and the body corporate, of which Dorchester is a significant part. The Court has no knowledge of the dimensions of that dispute but can assume they relate to claims of dissatisfaction about KAW‟s performance pursuant to its management agreement with the body corporate. No conclusions can be drawn from it regarding the rights and wrongs of that dispute. That is yet to be determined by the District Court.

[14] The Court can infer that KAW is insolvent but that is not sufficient in the circumstances to conclude it does not have arguable defence to its liability to meet payment of Dorchester‟s demand due to the argument that its inability to pay has been caused by the body corporate‟s failure to pay management fees due to it.

[15] Although Dorchester does not have a majority vote in the body corporate‟s decision process its influence is nonetheless significant. The decision by the body corporate to refuse to pay management fees is supported by Dorchester and as well other unit holders of a number sufficient to direct the body corporate‟s decision in that regard.

[16] This dispute with Dorchester has wider dimensions. The liability of the body corporate was to meet payment of the management fee without deduction, reservation or set off on any account whatsoever. Yet, the management fees have been unpaid for a lengthy period and in that time KAW has failed to meet its monthly fee obligations to unit holders.

[17] An appropriate case for refusing a liquidation order is where there is a genuine contest as to liability when failure to pay may not amount to evidence of insolvency. In this case KAW alleges unlawful interference by Dorchester in the body corporate‟s decision not to pay the monthly management fees due. The amount involved (insofar as it affects Dorchester‟s share of the monthly management fees unpaid) exceeds the amount of Dorchester‟s claim against KAW).

[18] Whilst the claims by Ms St George of unlawful interference are denied, they are largely unaddressed by KAW‟s reply evidence. Dorchester seems content to claim that it does not have the power of a majority vote with the body corporate.

Summary

[19] On the evidence available to the Court there appears to be an arguable defence to a claim of unpaid rentals due to unit holders, of which Dorchester is one. Dorchester‟s claim relies upon its position as a unit holder. It appears clear that the unit holders as a body have issues with KAW‟s management performance. Those issues should be resolved before KAW‟s liability to Dorchester is determined.

Judgment

[20] Dorchester‟s proceeding is dismissed.

[21] Costs are to be reserved, to be fixed, if requested but only in the outcome of the resolution of the broader issues between Dorchester, KAW and the body

_corporate.

Associate Judge Christiansen