Aorangi Securities Limited (in statutory management) v Emerald Shores Limited [2012] NZHC 1491 (28 June 2012)

Last Updated: 17 July 2012

IN THE HIGH COURT OF NEW ZEALAND TIMARU REGISTRY

CIV-2011-476-000527 [2012] NZHC 1491

BETWEEN AORANGI SECURITIES LIMITED (IN STATUTORY MANAGEMENT) Plaintiff

AND EMERALD SHORES LIMITED Defendant

Hearing: 6 June 2012 (Heard at Timaru)

Appearances: F B Barton and G Cooper for Plaintiff

P J Morgan, QC for Defendant

Judgment: 28 June 2012

JUDGMENT OF ASSOCIATE JUDGE OSBORNE [as to company liquidation application]

Introduction

[1] The plaintiff (“Aorangi”) applies for an order putting the defendant

(“Emerald Shores”) into liquidation. Aorangi maintains that Emerald Shores owes it

$2,481,881.62. In this proceeding Aorangi relies primarily on an unsatisfied statutory demand giving rise to the presumption that Emerald Shores is insolvent. Emerald Shores does not suggest it is solvent and Mr Morgan Q.C. has fairly conceded that it is insolvent.

[2] The central issue for the Court to determine in this proceeding is whether Aorangi has established that there is a debt owing by Emerald Shores and consequently whether Aorangi is a creditor for the purpose of a liquidation application. To determine these issues requires an examination of the financial

_{workings of Emerald Shores since its incorporation in November 2001.}

AORANGI SECURITIES LIMITED (IN STATUTORY MANAGEMENT) V EMERALD SHORES LIMITED HC TIM CIV-2011-476-000527 [28 June 2012]

Emerald Shores – its basic constitutional details

[3] Emerald Shores was incorporated on 16 November 2001.

[4] From incorporation all its shares have been owned by Strathallan Nominee Company Limited, a nominee company associated with RSM Law (formerly Raymond Sullivan McGlashan), solicitors of Timaru.

[5] The directors of Emerald Shores at incorporation were Allan John Hubbard and Edward Oral Sullivan, the latter at the time a partner of Raymond Sullivan McGlashan. In 2002 there were appointed two further directors (Mr White and Mr Rolleston) who ceased to be directors respectively in 2009 and 2004. On 24

September 2010 Peter John Cameron was appointed a director. On 6 October 2010, Mr Sullivan ceased to be a director. Mr Cameron became the sole director when Mr Hubbard died in a car accident on 2 September 2011.

Aorangi and Mr Hubbard

[6] Aorangi was a company associated with Mr Hubbard. It took funds from investors and lent them. It was placed in statutory management on 20 June 2010 and has remained in statutory management.

[7] Mr Hubbard and his wife were themselves placed in statutory management at the same time as Aorangi (and seven charitable trusts associated with Mr Hubbard). The statutory management of Mr and Mrs Hubbard came to an end on 3 November

2011 and 13 November 2011 respectively.

A brief history of Emerald Shores and the Papamoa subdivision

[8] For this litigation, the statutory managers have largely had to rely on the documentary record. While Mr Hubbard was still alive, the statutory managers received information from him also. That led them to pursue payment from Emerald Shores through correspondence with solicitors acting for Emerald Shores and Mr Cameron.

[9] One of the statutory managers, Trevor Thornton, has provided the narrative background of evidence for Aorangi. The Court also has evidence from Mr Cameron and immediately before the hearing a brief affidavit from Mr Sullivan.

[10] From that collective body of information emerges the following

understanding of Emerald Shores’ history.

[11] Mr Cameron and Mr Hubbard had known each other for some ten years before 2001, having been involved together successfully in two earlier property developments. Mr Hubbard or his interests had acted as financiers.

[12] In 2001 Mr Cameron became aware of a subdivision at Papamoa which was for mortgagee sale. He obtained contracts to buy two parcels of land at $350,000 and $1,400,000.

[13] Mr Cameron approached Mr Hubbard in relation to the venture. Mr Cameron has produced a letter (with minutes attached) from Mr Sullivan dated 15 November

2001. (These documents represent the only contemporary correspondence and minutes produced in evidence as emanating from Mr Sullivan between 2001 and

2010).

[14] The 14 November 2001 meeting produced agreements that –

(a) Emerald Shores was to be incorporated to be the subdivision purchaser;

(b) The shareholding entitlements would be 60 percent South Canterbury Finance Limited (associated with Mr Hubbard) and 40 percent Mr Cameron, with all the shares to be held initially by Strathallan Nominee Company Limited;

(c) Mr Hubbard and Mr Cameron were to be directors of Emerald Shores.

[15] Mr Sullivan immediately provided a consent form for Mr Cameron’s

directorship, which Mr Cameron signed and returned to Mr Sullivan. Mr Sullivan

was not then registered as a director. It is a mystery why this was not actioned as Mr Sullivan has not given evidence on this point. What did happen was that Mr Hubbard and Mr Sullivan were registered as directors. Subsequent financial statements, as prepared by Mr Hubbard’s accountancy firm, Hubbard Churcher & Co, repeatedly (and correctly in terms of the Companies Register) show Mr Hubbard and Mr Sullivan as directors. Mr Cameron’s evidence is that he did not receive those annual financial statements. Mr Cameron said he was not made aware of the subsequent appointment of Mr White and Mr Rolleston as directors. Mr Cameron says that he pestered Mr Hubbard for copies of the financial statements for years but that Mr Hubbard’s invariable response was that “he would get on to it”, “he was sorting it out” and statements of that kind. Mr Cameron says that because he trusted Mr Hubbard he allowed the situation to drift despite his belief that he was a director and was entitled to all such information. He says that he eventually, in 2010 became so irritated by the situation that he travelled to Timaru, met with Mr Hubbard, discovered the true position relating to the directorship and was appointed a director the following day. Mr Cameron says that he took these steps in 2010 at a time when it first came to his attention that it was now being suggested that Emerald Shores owed a lot of money to Hubbard Entities.

[16] Emerald Shores operated with a division of effort by the parties along the lines anticipated. Mr Cameron got on with the subdivision. He was responsible for dealing with development costs. He would approve invoices and forward them to Mr Hubbard for processing and payment. Mr Cameron was also responsible for sales.

[17] Mr Hubbard was left to make the financing arrangements and to attend to the books. At their 14 November 2001 meeting the parties had discussed the concept of South Canterbury Finance Limited obtaining bank finance on a first mortgage and South Canterbury’s main role being as guarantor to ensure the cost of debt servicing was kept as low as possible. The details of any advance were to be determined later. The evidence is that Mr Cameron subsequently took no part in financing, leaving those matters to Mr Hubbard. Mr Cameron’s evidence is that he also had no knowledge even of bank statements as he did not need to access them, trusting Mr Hubbard.

[18] The subdivision in the meantime proceeded in stages. Schedules produced

_{by Mr Cameron indicate that:}

Stage 1 (sales of $436,500) was completed and sold in 2002;

Stage 2 (sales of $1,842,500) was completed and sold in 2003;

_{Stage 3A (sales of $3,640,000) was completed and sold through 2003-2005.}

That left what was described as Stage 3B which appears to have been affected by the downturn associated with the global financial crisis. Twenty one lots were associated with Stage 3B. Four sales were achieved by 30 April 2010.

[19] The sense of irritation which Mr Cameron expressed he had by 2010 at the lack of information coming from Mr Hubbard coincides more or less with an increasing impact from the financial downturn upon Emerald Shores’ sales. Given Mr Cameron’s evidence that his appointment as director occurred the day after his meeting with Mr Hubbard, then these discussions (taking place in October 2010), come some three months after Aorangi and Mr Hubbard were placed in statutory management. Because of the situation with Mr Hubbard, Mr Cameron was then left to raise money for the progression of the subdivision. He did so – from Basecorp Finance Limited – in November 2010, with that mortgage loan subsequently repaid in October 2011.

[20] Emerald Shores’ final step with the remaining subdivision sections then took place in October 2011 when as sole director of Emerald Shores Mr Cameron caused its remaining eleven sections to be transferred to a new company, Emerald Shores (2011) Limited in what the plaintiff says was plainly a “hive down”.

Emerald Shores’ debt to Aorangi

Introduction to the evidence

[21] For Aorangi, Mr Cooper suggested that the most reliable starting point for consideration of the indebtedness of Emerald Shores should lie in the contemporary documentary records. I agree. For some nine years, Mr Cameron chose to absent himself from the most fundamental financial dealings of Emerald Shores. He mainly puts this down to his trust of Mr Hubbard. He thereby placed himself in no better position than the Court now is to determine from the documentary record what in fact occurred.

[22] The other person who might have been expected to have known the details of any significant borrowing which Emerald Shores incurred was Edward Sullivan, as the lawyer who attended the initial meeting, arranged the structuring and registration of the company, and had himself registered with Mr Hubbard as one of its directors. He remained a director until 6 October 2010. Unfortunately, it is Mr Sullivan’s deposed position that he knows very little about Emerald Shores’ affairs. In a letter under RSM Law letterhead on 12 April 2012, Mr Sullivan explained what files and documents were held by RSM Law but went on to add the following:

Please note: that notwithstanding requests of A J Hubbard throughout his lifetime, we have not ever seen accounts for Emerald Shores Limited prepared by Hubbard Churcher & Co and/or A J Hubbard. We have not been in control of the finances. We have attended to sales, settled those sales and accounted for the funds to A J Hubbard. We have no knowledge of any intermeddling of affairs between Aorangi Securities and Emerald Shores Limited and/or any other matters. These were clearly in the hands of Hubbard Churcher & Co/ A J Hubbard.

[23] Mr Sullivan shortly before this hearing provided an affidavit for Emerald Shores in response to allegations made as to Emerald Shores’ indebtedness in the evidence of Trevor Thornton, one of the statutory managers. In his evidence Mr Sullivan deposes that:

(a) he was not aware of advances made to Emerald Shores as alleged by

Mr Thornton;

(b) he was not aware of an advance of $4,800,000 made on 25 June 2007;

(c) he was not aware of alleged payments recorded in the books of

Aorangi and of Emerald Shores.

[24] I will come shortly to the evidence as to the indebtedness of Emerald Shores. At this point it is sufficient to note that Mr Sullivan as a director of Emerald Shores for some nine years was entitled and had a duty to insist upon full information relating to the affairs of Emerald Shores but apparently did not so insist. His views as to what might or might not have been going on within Emerald Shores in that nine year period can count for little.

[25] I turn to the documentary evidence.

A payment of $4,800,000 by Aorangi to Emerald Shores

[26] The general ledger of Aorangi records a payment of $4,800,000 to Emerald Shores on 25 June 2007. The Bank of New Zealand print out of Emerald Shores’ current account on that date records the receipt of that sum by Emerald Shores.

[27] For the same date, 25 June 2007, there exist cheque butt records in Mr Hubbard’s handwriting recording payments to South Canterbury Finance of a sum in the region of $4,712,000 (final figures indecipherable) recorded to be in relation to “a loan” (and apparently in relation to the principal). On the same date a separate payment is made to South Canterbury Finance on account of interest ($54,154.11).

[28] These all represent actual payments and not simply journal transactions. Mr Cooper invites the Court to draw the inference that Aorangi was advancing funds to Emerald Shores to enable Emerald Shores to repay loan finance.

[29] Mr Cooper refers also to the financial statements prepared by Hubbard Churcher & Co for Emerald Shores through the period from 2006. The financial statements are before the Court as part of the documentary record relating to Emerald Shores. Some care must be taken in relation to these statements as it is clear from the evidence of Mr Cameron and of Mr Sullivan that those individuals

were not involved with the accounts and did not see them at the time. From the point of view of Emerald Shores, only Mr Hubbard as director appears to have been involved with the statements. That said, they represent the statements of Emerald Shores as prepared by Mr Hubbard’s accountancy firm and have relevance particularly for the purposes of cross-checking other evidence.

[30] In the case of the 25 June 2007 payment to Emerald Shores, the statement of financial position in the 2007 account shows this:

2007 2006

$ $

LIABILITIES

CURRENT LIABILITIES

Accounts Payable 119,791 11,245

Bank of New Zealand - 1,116,537

Total Current Liabilities 119,791 1,127,782

NON CURRENT LIABILITIES

Loan: Aorangi Securities Ltd 4,806,247 - Loan: South Canterbury Finance Ltd - 2,900,000

4,806,247 2,900,000

[31] Mr Cooper submits, and I accept, that the 2007 statement of financial position indicates:

(a) By 30 June 2007 South Canterbury Finance Limited had been recorded as a creditor of Emerald Shores for $2,900,000 (non current liability).

(b) By the same date, the Bank of New Zealand was a current creditor for

$1,116,537.

(c) Those two debts were replaced in the 2007 year by a debt to Aorangi for $4,806,247.

[32] What appears to have happened was that Aorangi’s payment of $4,800,000 to Emerald Shores on 25 June 2007 was used to discharge (through South Canterbury Finance) Aorangi’s liability to South Canterbury Finance for both principal

($2,900,000) plus interest and to repay the Bank of New Zealand ($1,116,537 plus interest).

[33] There is no documentary explanation in evidence of the $2,900,000 loan repaid to South Canterbury Finance save that it is known that Emerald Shores had needed at least $1,750,000 for the purchase of land under its initial two contracts. Precisely how the additional debt (both to South Canterbury Finance and through current account to the Bank of New Zealand) built up between 2001 and 2006 is not demonstrated by the documentary evidence. Interest would have been accruing on the borrowings. Debt would have been accruing through lots development costs. Receipts from sales of Stage 1 lots do not appear to have started coming in until May

2002 and then continued to February 2003. Given that the sales of the much larger Stage 2 subdivision (24 lots) began being settled (apart from one settlement in December 2002) in March 2003, it is probable that the finance costs and development costs in the period December 2001 to March 2003 very substantially exceeded receipts.

[34] What is clear from the documentary record is that on 25 June 2007 Aorangi received real money for refinancing purposes and repaid real money to South Canterbury Finance (apparently for both South Canterbury Finance and the Bank of New Zealand).

Increases to the $4,800,000 indebtedness

[35] The financial statements of Emerald Shores in the following years indicate that the loan from Aorangi increased to $5,356,000 by 30 June 2008 and to

$6,267,215 by 30 June 2009. In the same years, other of Mr Hubbard’s interests (variously recorded as “Southbury Group Limited” and “A J Hubbard” himself) became recorded as non-current creditors for $316,000.

[36] Unlike the position relating to the 25 June 2007 advance, the Court has no bank statements or cheque butt records to explain the increase ($4,800,000 to

$6,267,215) of lending by Aorangi to Emerald Shores.

[37] The Aorangi general ledger does record through this period regular and substantial payments of interest, which are reflected in the bank account statements of Emerald Shores. While Aorangi’s general ledger indicates arithmetically how the

$4,800,000 increased to $6,267,215, it is not possible in the absence of documentary evidence relating to the terms of the loan to identify whether the loan was increasing because Emerald Shores was not keeping up with interest payments or because Aorangi was funding additional development costs or both.

Reductions of indebtedness

[38] Two significant reductions of the recorded debt occur in 2009. The Aorangi general ledger shows a reduction by journal entry on 1 July 2009 of $2,267,215 (reducing the debt to $4,000,000) and a reduction by journal entry of $1,267,215 (leaving a balance of $2,832,785.00).

[39] There are in evidence copies of Mr Hubbard’s handwritten journals relating to these two reductions. They represent journal entries without any actual payment. The effect of the journal entries is that the recorded liability of Emerald Shores for the two amounts was transferred to Mr Hubbard personally.

[40] Also in evidence are the draft financial statements for Emerald Shores for the year ended 30 June 2010. The statement of financial position records the debt to Mr Hubbard personally as now $3,850,430, (up from $316,000 the previous year, which increase appears to reflect largely the two sums in the journal entries). The debt to Aorangi is recorded as having reduced from $6,267,215 to $2,481,882.

[41] The $2,481,882 balance figure is influenced by two further actual payments in reduction. The first is recorded in Aorangi’s general ledger on 3 December 2009. It is reflected in a record of payment in Emerald Shores’ bank statement for the same date. (Through the schedule of purchase agreements which Mr Cameron put in evidence, this payment can be related directly to a receipt from purchasers of a section in the stage 3B subdivision which was settled on 2 December 2009).

[42] The second further payment by Emerald Shores of $160,000 on 11 May 2010 is also evidenced by both the Aorangi general ledger and by Emerald Shores’ bank statement (and can be related to the settlement of a further sale in the Stage 3B subdivision).

[43] With other interest debits and interest payments, the closing balance of Aorangi’s general ledger for Emerald Shores stood at $2,414,834.62 at 13 June 2010. With additional debts it rose to $2,481,881.62 at 30 June 2010.

[44] There have been no payments of principal or interest since 13 June 2010.

The balance of indebtedness

[45] The statutory managers of Emerald Shores have calculated the balance of Emerald Shores’ indebtedness at $2,481,881.62 and have issued a statutory demand and this proceeding on that basis. I find on the balance of probabilities on the evidence before me that was the balance of indebtedness. Even were one to ignore the $1,467,215 by which the $4,800,000 debt figure was increased on the books (to

$6,267,215), the credit to Emerald Shores since the $4,800,000 advance totalling

$3,534,430 (above [38]), would still leave a debt of $1,265,570 (ie $4,800,000 less

$3,534,430). On any view, a significant unpaid balance of debt would remain. Aorangi would still be a creditor of Emerald Shores.

Questioning of Emerald Shores’ debt

The defence generally

[46] In response to Aorangi’s allegation that Emerald Shores is indebted to Aorangi in the sum of $2,418,881.62, Emerald Shores in its amended Statement of Defence asserted:

(a) There was no oral or written agreement made by its director in relation to a sum of $4,800,000 and no money was properly or validly advanced in this amount to the Defendant.

(b) There was no proper or valid increase in borrowings to $6,267,215 by the Defendant.

(c) There was as a consequence no proper or valid agreement or requirement to pay any interest.

(d) There was also therefore no default.

[47] For Emerald Shores, the written submissions filed by Mr Morgan in advance of the hearing commenced with the proposition that the evidence did not establish any actual borrowing by Emerald Shores (of $4,800,000) around 25 June 2007. That submission was somewhat overtaken by the availability shortly before the hearing by the production of Emerald Shores’ relevant bank statements which clearly established the receipt of the $4,800,000 funds on 25 June 2007.

[48] Mr Morgan’s submissions in relation to the level of debt at the hearing therefore involved a greater focus on other issues arising in relation to the level of the debt.

[49] Before moving to those matters, I note this. Mr Morgan’s written submissions had also developed (which was not abandoned) the proposition that it was inconceivable that Mr Cameron (“effectively Mr Hubbard’s business partner in this venture”) and Mr Sullivan (“a director of both Emerald Shores and Strathallan Nominees”) could not have known about the alleged advances and the alleged indebtedness if it existed. For the reasons I have already explored, the making of advances by Mr Hubbard or his interests was entirely conceivable because the venture was structured from the outset on the basis that South Canterbury Finance at least would be involved. It is also entirely conceivable that Mr Hubbard went ahead with further advances and rearrangements without either Mr Cameron or Mr Sullivan knowing. When it came to the governance of Emerald Shores, the evidence is that both Mr Cameron and Mr Sullivan were effectively missing in action. Their lack of knowledge of advances simply points to their lack of knowledge and not to an absence of advances. Mr Sullivan’s evidence contains the suggestion that an advance of $4,800,000 was not required on 25 June 2007 because all of the physical

construction on the subdivision had been completed by that time. I infer that Mr Sullivan for some reason overlooked the possibility that the advance in June 2007 represented refinancing of existing debt.

The profitability of the subdivision

[50] In his evidence in opposition to the application, Mr Cameron said that there was no need for Emerald Shores to have been borrowing money. (I took his evidence to be referring to the need for borrowing after an initial period of development – Emerald Shores plainly had to borrow for the land purchases and for the initial subdivision costs).

[51] Mr Cameron deposed that the subdivision was a valuable and profitable venture. He produced a series of spreadsheets. The first set showed the Lots sold in the four stages of development. His record shows that Stages 1, 2 and 3A produced gross sale proceeds of $5,919,000 by early 2007. In 2009/2010 Stage 3B produced an additional $1,545,000 of gross sales (with 17 Lots yet to be sold).

[52] In the last page of the spreadsheet, Mr Cameron recorded development costs by reference to the stages of the subdivision. These recorded various items of costs which Mr Cameron administered including works construction and various fees. Mr Cameron says he knows that there would have been other expenses including rates, interest on borrowings, and marketing costs. There are also other headings in his spreadsheet such as in relation to engineer’s fees, which are provided for but have no costs against them, but which must have been incurred. Mr Cameron says in his evidence that additional costs such as rates and marketing should not have been a major cost over the entire period of the development. He does not say the same in relation to interest or indeed in relation to the fees of professionals such as engineers, lawyers and accountants.

[53] I note also that Mr Cameron’s approach to profit appears to be largely based on a gross profit approach. He does not, for instance, address management fees. The Court does not have evidence as to what Mr Cameron and Mr Hubbard themselves (or by their related entities) took out of Emerald Shores in its earliest

years. Through the financial statements the Court does have the figures from 1 July

2005 ($150,000 each) and from 1 July 2006 ($200,000 each). Mr Cameron has not deposed to what he and Mr Hubbard received. The record indicates that he and Mr Hubbard collectively received $700,000 in just the two years before the June 2007 payment was made by Aorangi. It appears very likely that management fees were paid in earlier years and that these would bring the total paid by way of management fees to a sum significantly over $1,000,000.

[54] In the circumstances, I do not find Mr Cameron’s analysis particularly helpful. He says that items such as rates and marketing should not have been a “major cost” but offers no guidance to the Court as to likely figures. There is no indication at all as to the general extent or likely figures for professional fees such as those of engineers, accountants and lawyers. In relation to those matters the absence of actual figures is understandable as Mr Cameron would not have had access to the prime records, but the Court would have expected some degree of reconstruction, particularly having regard to Mr Cameron’s experience in development and in this project in particular. Perhaps more significantly, Emerald Shores offers no evidence as to the likely level of interest costs, which could have been guestimated with some degree of accuracy.

[55] Despite Mr Cameron’s stated position as to the profitability of the subdivision, there is no evidence, between March 2005 (the date of the last Stage 3A sale) and May 2009 (the date of the first Stage 3B sale) to suggest that he called on Mr Hubbard for a distribution of profit.

[56] The Court is not in a position to draw the conclusion which Mr Cameron invites, namely that this was in its earlier stages a profitable subdivision which should have cleared its costs by the early part of 2005.

[57] Accordingly, the need for $4,800,000 of borrowings in June 2007, which Mr

Cameron describes as “inconceivable”, appears on the record to be fully conceivable.

[58] I am satisfied on the balance of probabilities, for the reasons discussed, that Emerald Shores’ core indebtedness arising from a $4,800,000 advance flowed from an actual payment and not from something in the nature of a journal entry.

[59] Mr Morgan submitted nevertheless that Mr Hubbard seemed to have been able to create and to extinguish indebtedness by the stroke of a pen.

[60] I now refer to certain transactions which appear on the Aorangi general ledger which Mr Morgan submitted suggest the creation of indebtedness by the stroke of a pen.

[61] Mr Morgan began with a transaction in late December 2007 (some six months after the June 2007 payment of $4,800,000). The ledger on that day identifies a receipt by Aorangi of $5,300,000 on 31 December 2007. Five months later, on 30 May 2008, the general ledger identifies a payment back to Emerald Shores in the same sum of $5,300,000. The coding of these in the general ledger is as actual payments rather than journal entries but (unlike the case of the $4,800,000) the Court does not have evidence of the prime records of this transaction.

[62] A further ledger entry on 18 August 2008 records the receipt by Aorangi of

$5,300,000, followed by a payment back to Emerald Shores of $5,800,000 on 8

December 2008. Again, the Court does not have the prime records for those transactions which in the Aorangi general ledger appear as actual payments rather than as journal entries.

[63] In the absence of prime records I am not in a position to draw reliable conclusions as I have in relation to the $4,800,000 transaction. Any attempt to understand why these transactions occurred would be speculative. The fact that there were these transactions from late 2007 to late 2008, which do not have immediate explanations on the evidence, does not detract from the conclusions I have reached on the evidence as to earlier transactions.

[64] Furthermore, the transactions in question are in one case fiscally neutral, and in the other case involve increased “debt” of $500,000. That does not come close to extinguishing the debt and removing Aorangi’s status as a creditor.

The absence of agreement to pay interest

[65] For Emerald Shores it was pleaded that there was no agreement or requirement to pay interest (as a consequence of there being no agreement as to the underlying debt). Mr Morgan did not develop this ground of defence in his submissions in response to the written submissions filed for Aorangi.

[66] On the evidence Emerald Shores must clearly have agreed expressly or impliedly to the charging of interest. Mr Cameron’s evidence is that Mr Hubbard’s role in Emerald Shores was to be as financier. At the first meeting the specifically discussed vehicle was South Canterbury Finance Limited, with a core loan from the Bank of New Zealand likely. Objectively there can have been no reasonable expectation other than that interest would be charged at a rate to cover either what South Canterbury Finance was paying to a bank or what South Canterbury Finance reasonably charged on its own advances. This conclusion is inevitable on the evidence given Mr Cameron’s confirmation that the minutes taken by Mr Sullivan of the meeting on 14 November 2001 accurately record what took place. Those minutes record that Allan Hubbard agreed that he would apply to a bank for maximum first mortgage finance with South Canterbury Finance guaranteed to reduce the cost of debt servicing and that South Canterbury Finance would provide the balance of the funds required. The minutes record that all expenses of South Canterbury Finance would be met.

[67] In short there was agreement at the outset as to the payment of interest on borrowings from or through the Hubbard interests.

[68] It was a further pleading in Emerald Shores’ statement of defence that “there was also therefore no default”. It appeared that, as with the interest pleading, this pleading primarily flowed from the proposition that there was no underlying debt.

[69] Nevertheless, to meet the pleading Mr Cooper for Aorangi developed submissions to the effect that a loan is, if silent as to repayment, repayable on demand. Mr Cooper referred to three cases, including DFC New Zealand Ltd v McKenzie,[1] in support of that principle. I adopt that line of authority.

[70] An alternative argument as to the debt not being yet repayable was contained in Emerald Shores’ amended defence to the amended statement of claim which Aorangi filed. In that pleading Emerald Shores asserted:

The funding for the joint venture was originally arranged by Mr Hubbard on terms that required the development and disposal of the asset (or part thereof) to trigger any repayment for funds advanced personally by Mr Hubbard (or part thereof as settlements allowed) but only after secured borrowing.

And Emerald Shores further asserted:

That the Plaintiff, if actually owed money (which is denied) is estopped from proceeding until the final disposal of the developed asset under the terms of the joint venture arrangement and a proper accounting is completed.

[71] In his written submissions for Aorangi, Mr Cooper submitted that the authorities establish that where a loan is for a term undefined by a specific period of time but by reference to a future event – such as the borrower’s getting back on its feet or disposing of its assets – there will come a time (being at the expiry of a

_{reasonable period) when the loan becomes repayable on demand.}

[72] In particular, Mr Cooper referred to the judgment of this Court in Morris v Hetaraka.[2] In that case the plaintiffs asserted that the loan in question was for a six- month term. The defendants contended that the loan was made not for a six month term but “until such time as it could be said they were back on their feet”. His Honour found that the “back on their feet” term was not established on the evidence.[3] Allan J went on to find that even had the “back on their feet” term existed, the loan would then be treated as being made for an undefined term, which the law treats as a loan repayable on demand.[4] His Honour accordingly found that the loans were repayable either at the expiration of six months or upon demand.

[73] In the event, Mr Morgan did not develop submissions on this point.

[74] I find that when advances were initially made by Aorangi they were advances repayable on demand.

[75] The alternative argument suggested by Emerald Shores’ pleadings is that events subsequent to the making of the Aorangi advance created an estoppel which precluded Aorangi from demanding repayment until final disposal of the “developed asset”.

[76] Again, Mr Morgan did not develop submissions on this point and I deal with it briefly.

[77] I have found (contrary to Emerald Shores’ pleadings) that Emerald Shores was indebted to Aorangi and that the debt had not been fully repaid. Any discussions or protests which Mr Cameron made to Mr Hubbard in 2010 do not alter the fact that the debt existed. Mr Cameron in his evidence makes no allegation of any express or otherwise clear representation by Mr Hubbard or Aorangi that the debt would not be collected until a later event. Furthermore, from 20 June 2010 Aorangi was under the management of the statutory managers and not Mr Hubbard. Mr Cameron’s decision

_{in November 2010 to obtain further finance from Basecorp Finance Ltd was an}

understandable step in the interests of Emerald Shores and would have been at least arguably consistent with his estoppel argument against Aorangi. But when in October 2011 Mr Cameron undertook a hive down of the remaining assets of Emerald Shores to Emerald Shores (2011) Ltd, thereby stripping Emerald Shores of its remaining real assets, he would have brought to an end any claim Emerald Shores may have had in equity to force Aorangi to wait further for its money.

[78] I accordingly find that Emerald Shores’ debt to Aorangi was and remained

repayable upon demand.

[79] Aorangi was therefore entitled to issue its statutory demand on 26 July 2011. [80] Emerald Shores’ failure to meet the statutory demand created the statutory

presumption of insolvency.

Emerald Shores’ insolvency

[81] Emerald Shores has presented no evidence to rebut the statutory presumption of insolvency. I therefore find for that reason that it is insolvent.

[82] The draft financial statements for the year ended 30 June 2010 are before the Court and also establish that Emerald Shores is insolvent on a balance sheet test, its total liabilities exceeding its total assets. Mr Morgan for Emerald Shores accepted that that was the position. I therefore would have found if necessary on the evidence, as well as by reason of the statutory presumption, that Emerald Shores is insolvent.

[83] Of further relevance to Emerald Shores’ insolvency is the loan agreement which it entered into with Emerald Shores (2011) Limited on 5 October 2011. This loan agreement represented vendor finance by which Emerald Shores (2011) Limited was able to purchase Emerald Shores’ remaining sections. Emerald Shores (2011) Limited provided no guarantees in relation to the loan. The loan agreement refers to a “first ranking charge on the ADLS form for PPSR” but there is no evidence a security was in fact finalised or that Emerald Shores (2011) Limited is of any

substance (other than its new land holdings). Emerald Shores may have converted its equity in the remaining sections into an unsecured loan. The loan does not have to be repaid until 5 October 2014. Mr Cameron is the director who has signed the loan agreement on behalf of both Emerald Shores and Emerald Shores (2011) Limited.

[84] While Mr Cameron has explained in his evidence the need for this arrangement (the new mortgagee not wanting to be involved in financing a company associated with Mr Hubbard), the new arrangement means that Emerald Shores has no control over any further income until October 2014, while at the same time facing continuing interest charges.

[85] These considerations go not only to a consideration of the insolvency of Emerald Shores. They also suggest that the order of liquidation, sought by Aorangi, should be made promptly so that there can be an early assessment by liquidators as to whether or not the loan agreement between Emerald Shores and Emerald Shores (2011) Limited should, in the interests of Emerald Shores’ creditors, be the subject of notice or application under the Companies Act 1993.

Other matters

[86] My findings in relation to the matters discussed above lead to my conclusion that Emerald Shores should be put into liquidation and that that should occur now.

[87] By reason of the conclusions I have reached on the above matters, it is strictly unnecessary to reach conclusions on a number of other arguments or matters of background which were developed in the course of submissions. I will deal with them very briefly.

November 2010 advance loan from Basecorp Finance Ltd

[88] In the evidence of the statutory managers, Mr Thornton referred to the loan which Mr Cameron obtained from Basecorp Finance in November 2010 (for a priority amount of $1,000,000). Mr Thornton noted that Aorangi had not been repaid

from the money raised although the mortgage would have increased Emerald Shores’ liabilities further. Mr Cameron has explained the need for the Basecorp Finance loan, which was to progress the subdivision through a house and land package for which further funding was required. Given Mr Hubbard’s situation by that time and the lack of access which Hubbard interests had to further funding, the steps taken by Mr Cameron were logical and might well be seen as being in the best interests of Emerald Shores. In the present context nothing turns on the fact that the Basecorp Finance monies were not used to repay Aorangi. That was not the purpose of obtaining them.

Aorangi’s pursuit of Emerald Shores

[89] Anderson Lloyd, as the solicitors instructed by the statutory managers, wrote their first letter of demand (for payment of $2,481,881.62) on 22 June 2011. (The same letter also demanded payment of $3,850,430 to Mr Hubbard (in statutory management).

[90] Correspondence ensued between solicitors with Emerald Shores in that period changing from its initial solicitor to RSM Law.

[91] Mr Cooper for Aorangi placed reliance on items of Emerald Shores’ correspondence through this period which he submitted were in the nature of admissions of liability for debt. Mr Cameron has given alternative explanations of what is to be taken out of the correspondence. There are aspects of Emerald Shores’ correspondence through this period which do point to an acceptance that a debt was owed. In the letters, Emerald Shores sought Aorangi’s forbearance while Emerald Shores was taking steps to realise its assets in the interests of obtaining the “best possible outcome for all concerned”. I would not have found that a debt existed on the basis of this correspondence alone but it is clearly consistent with the findings I have made on the financial evidence.

[92] That said, Emerald Shores was making its requests for forbearance and further time from July 2011 to September 2011. The fact that Emerald Shores, in the following month (November 2011) disposed of all its remaining sections to Emerald

Shores (2011) Limited underlines the appropriateness of having liquidators take

control of Emerald Shores’ realisations from this point.

Costs

[93] Counsel addressed me on costs at the conclusion of oral submissions. It was accepted that this was a case where costs should follow the event and that they should be on a 2B basis, without certificate for second counsel but with a certificate for the reasonable travelling costs of counsel.

Orders

[94] There is an order for liquidation.

[95] Kenneth Peter Brown and Paul Thomas Manning are appointed liquidators. [96] Their remuneration is approved in accordance with their certificate dated 6

June 2012, subject to s 284 Companies Act 1993.

[97] The liquidators are allowed to exercise their powers individually, pursuant to s 242 Companies Act 1993.

[98] The defendant is to pay costs on a 2B basis, together with disbursements to be fixed by the Registrar (including a certificate for the reasonable travelling costs of senior counsel for the plaintiff).

[99] This order is timed at 3.30 pm.

Solicitors:

Anderson Lloyd - Email: [e-mail]

Niilsen Law - Email: [e-mail]

Mr P J Morgan QC - Email: pjmorgan@thackeray chambers.co.nz

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[1] DFC New Zealand Ltd v McKenzie [1993] 2 NZLR 576 (HC) at 582; see also Lauder v Lauder HC Rotorua CIV-2003-463-000107, 23 April 2004 at [29] and Harper v Brown HC Hamilton CP88-86, 19 November 1987 at [5].
[2] _{Morris v Hetaraka HC Hamilton CIV-2008-419-1607, 27 February 2009.}
[3] _{Ibid, at [35].}

[4] Ibid, at [36], adopting Chitty on Contracts (30th ed, Sweet & Maxwell, London, 2008) at [38-

247] and referring also to Harper v Brown and Lauder v Lauder (above, n1).