Marshall v Enola Holdings Limited [2012] NZHC 1565 (28 June 2012)

Last Updated: 5 July 2012

IN THE HIGH COURT OF NEW ZEALAND NELSON REGISTRY

CIV-2011-442-000476 [2012] NZHC 1565

UNDER the Companies Act 1993

IN THE MATTER OF an application for putting company into liquidation

BETWEEN JOHN MICHAEL MARSHALL, MARY CATHERINE MARSHALL, JENNY THERESE MARSHALL AND LEE MICHAEL CHRISTOPHER ROBINSON AS TRUSTEES OF THE MARSHALL FAMILY TRUST

Plaintiffs

AND ENOLA HOLDINGS LIMITED Defendant

Hearing: 27 June 2012

Appearances: A D Marsh for Plaintiffs

B M Nathan and S Galbreath for Defendant

Judgment: 28 June 2012

_{JUDGMENT OF ASSOCIATE JUDGE MATTHEWS}

[1] This is a defended application to wind up Enola Holdings Limited (Enola). The plaintiffs are the trustees of the John Marshall Family Trust. On 15 July 2011 they issued a statutory demand against the company. I was informed that settlement negotiations ensued. The case was not settled, nor was the statutory demand met but the consequent passing of time put the filing of a proceeding to wind up Enola outside the statutory time limit in s 288(1) of the Companies Act. A second demand was issued on 13 October 2011. The demand was not satisfied, nor was an

_{application made to set it aside. This proceeding was issued on 7 October 2011.}

JOHN MICHAEL MARSHALL, MARY CATHERINE MARSHALL, JENNY THERESE MARSHALL AND LEE MICHAEL CHRISTOPHER ROBINSON AS TRUSTEES OF THE MARSHALL FAMILY TRUST V ENOLA HOLDINGS LIMITED HC NEL CIV-2011-442-000476 [28 June 2012]

[2] In the statement of claim the plaintiffs plead that Enola is indebted to them in the sum of $97,876, pursuant to a loan agreement between the parties dated 30 June

2009. The expired statutory demand is then pleaded, and the plaintiffs then plead that Enola has neglected to pay the debt, enter a compromise or otherwise compound with the plaintiffs, or give a charge over its property to secure payment to the reasonable satisfaction of Enola, as required by the statutory demand.

[3] The statement of claim does not plead any of the grounds upon which the Court may appoint a liquidator, set out in s 241(4) of the Companies Act. The references throughout the document to the statutory demand, and to the provisions of s 289(2)(d), foreshadow an intention to rely on s 241(4)(a), which provides that a liquidator may be appointed if the Court is satisfied that the company is unable to pay its debts, and on the presumption that a company is unable to pay its debts if it has failed to comply with the statutory demand (s 287(a)). However, the document as filed does not specifically plead that the company is unable to pay its debts, the ground upon which the plaintiffs’ counsel informed me that it intends to rely.

[4] The same point arose in Heron’s Flight Ltd v NZ Properties International

Ltd,[1] in which Associate Judge Bell said:

[5] On an application that a company be put into liquidation, the applicant is required to specify in the statement of claim which of the four grounds in s 241(4) the applicant relies on. Where an applicant relies on s 241(4)(a), an appropriate pleading is to say that the company is unable to pay its debts. However, these exact words do not need to be used. Nevertheless, the pleading should contain express words to convey that inability to pay debts is the basis of the application.

[6] In this case, the plaintiff has pleaded that it served a statutory demand and has used the failure to comply with the statutory demand as the basis for the Court to make an order. It has not expressly pleaded insolvency as such. Non-compliance with a statutory demand is not one of the grounds provided under s 241(4) of the Companies Act. Instead, non-compliance with a statutory demand simply gives rise to a presumption under s 287(1) of the Companies Act that the company is unable to pay its debts. In other words, non-compliance with a statutory demand is matter of evidence only. The pleading of evidence is not the proper pleading of a ground for an application under s 241(4). Accordingly, the pleading of the statement of claim in this case is defective. For the Court to make an order, that pleading

first needs to be amended. The plaintiff sought leave to amend the statement of claim to include a plea that the defendant is unable to pay its debts. The defendant is not prejudiced. The statement of claim is amended accordingly.

[5] As in this case, I granted leave to the plaintiffs on the oral application of their counsel to amend the statement of claim to plead that Enola is unable to pay its debts.

[6] Enola filed a statement of defence, pleading three defences. First, that no advance had been made, or was intended to be made, secondly, that the loan agreement relied on by the plaintiffs to support their statutory demand was in fact entered not by the plaintiffs but by John Marshall in his personal capacity and thirdly, by clause 3.1 of the loan agreement a transfer of certain shares is provided as the sole remedy in the case of breach, thus preventing a demand for repayment in cash. Notably, the statement of defence did not plead that Enola was in fact solvent.

[7] The plaintiffs filed an affidavit from Mr Marshall in support of the claim, the defendant filed an affidavit from its director, Mr Dick in opposition, and the plaintiffs filed an affidavit in reply from Mr Marshall. Both sides gave notice of intention to cross-examine. In response to the request that the statement of claim be amended to specifically plead the inability of Enola to pay its debts, Mr Nathan indicated a wish to lead evidence from Mr Dick on this issue, now it was specifically pleaded. I granted leave accordingly.

[8] It was agreed between counsel at an early point in the proceedings that the application would not be advertised, and that Enola would pay a sum of money sufficient to meet the claim into an account until the resolution of this proceeding. It did so. In evidence Mr Dick said that the company does not have any debts, and that it is solvent. He was not cross-examined on this evidence, nor was any evidence led by the Marshall Family Trust to the contrary.

[9] Accordingly, on the evidence, the company is solvent. That being the case, it was clear at the close of evidence that the plaintiffs could not succeed. Enola does not have any debts, and has a sufficient cash resource to meet the debt alleged (though not accepted) in this proceeding. For that reason the claim is dismissed.

[10] Counsel for the Marshall Family Trust invited me to continue to hear argument in relation to the three pleaded defences and rule on them in any event. As the inevitable outcome of the case was beyond question on the evidence, I declined to do so.

Costs

[11] Although the plaintiffs have been unsuccessful, Mr Marsh nonetheless submitted that costs should lie where they fall. In support he pointed out that Enola had had two opportunities to apply to the Court to set aside the statutory demand on the basis of the defences pleaded in the statement of defence, had not done so, and had not responded to the notices by producing any information to demonstrate that Enola was able to pay its debts and was not insolvent. Had it done so this proceeding would not have been brought.

[12] Mr Marsh referred me to a decision of Associate Judge Abbott in ECZIW Fishing Ltd v Poseidon Pacific Ltd,[2] where at paragraph [22] his Honour said:

[22] Where a company has had opportunity to apply to set aside a statutory demand on the basis of a genuine and substantial dispute, but declines to do so, in the absence of some exceptional factor justifying the failure to apply, the court may decline to allow it to raise a dispute as a ground for resisting an order for liquidation. However, it is still a matter for the court’s discretion, to be considered on the facts of the particular case. The failure to apply to set aside will raise issues of credibility which will have a bearing on the existence of a genuine dispute.

[13] This statement of principle was cited in support of counsel’s proposition that the time to raise the issues raised in this proceeding was at the point when the statutory demands were served.

[14] Mr Nathan submitted that the documents produced to the Court show that the plaintiffs were on notice that the claim was disputed and that by lodging the sum of

$97,000 as security for the debt, to avoid advertising, Enola had demonstrated its solvency. At least from that point onwards, continuation of the proceeding was, as

_{he put it, unnecessary and undesirable.}

[15] In Heron’s Flight Ltd v NZ Properties International Ltd (above) Associate Judge Bell analysed the steps available to the recipient of a statutory notice ([21]- [27]). The consequence of not applying to set aside the statutory demand is to leave the company open to the consequences of the presumption of insolvency, but apart from that his Honour was of the view that all other procedural options remain open to the company.

[16] I prefer the approach of Associate Judge Bell, noting in particular his observation that the Companies Act does not provide any consequence to a company failing to apply to set aside a statutory demand, apart from the imposition of a presumption of insolvency. That presumption can, if appropriate, be dealt with on the application for a liquidation order, by the introduction of suitable evidence. Solvency is, of course, a complete defence to an application to liquidate a company on the ground that it is unable to pay its debts, as is the existence of a genuine dispute as to liability.

[17] It follows, therefore, that it was open to Enola to take the course it adopted in this case and raise the issue of its solvency when it did. A pleading of solvency with particulars would have been preferable and although the ability of Enola to pay its debts was not specifically pleaded in the statement of claim, reliance on that ground for a liquidation order was a reasonable inference from the document as it stood before amendment, and it was certainly open to the defendant to plead at the outset a positive defence of ability to pay its debts. Had it done so this proceeding might well have been terminated at an earlier date, with an appreciable saving of cost.

[18] Weighing up all factors, costs will lie where they fall despite the application having been dismissed.

J G Matthews

Associate Judge

Solicitors:

Saunders Robinson Brown, PO Box 39, Christchurch. [e-mail]

Duncan Cotterill, PO Box 827, Nelson. [e-mail]

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[1] Heron’s Flight Ltd v NZ Properties International Ltd CIV-2010-404-5878 HC Auckland,

7 February 2011.

[2] ECZIW Fishing Ltd v Poseidon Pacific Ltd CIV-2010-404-3192 HC Auckland, 11 April 2011.