Commissioner of Inland Revenue v Wire By Design Limited [2012] NZHC 857 (1 May 2012)

Last Updated: 18 May 2012

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2011-404-004468 [2012] NZHC 857

BETWEEN THE COMMISSIONER OF INLAND REVENUE

Plaintiff

AND WIRE BY DESIGN LIMITED Defendant

CIV-2011-404-005958

AND BETWEEN FAULKNER COLLINS LIMITED (IN RECEIVERSHIP AND IN LIQUIDATION Plaintiff

AND WIRE BY DESIGN LIMITED Defendant

Hearing: 5 March 2012

Counsel: S L Law for the Plaintiff in Proceeding CIV-2011-404-004468

R B Hucker for the Plaintiff in Proceedings CIV-2011-404-005958

A H J Commons for the Defendant in Both Proceedings

Judgment: 1 May 2012

RESERVED JUDGMENT OF ASSOCIATE JUDGE SARGISSON (Company Liquidation)

This judgment was delivered by me on 1 May 2012 at 3 pm pursuant to

Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar

Date ..........................

Counsel: A H J Commons P O Box 1804 Shortland Street, Auckland 1140 for the Defendants in Both Proceedings

Solicitors: S L Law for the Plaintiff in Proceedings CIV 2011-404-004468

Hucker and Associates P O Box 3843 Shortland Street Auckland 1140 for the

_{Plaintiff in Proceedings CIV-2011-404-005958}

THE COMMISSIONER OF INLAND REVENUE V WIRE BY DESIGN LIMITED HC AK CIV-2011-404-

004468 [1 May 2012]

[1] These two proceedings were called together. In each the plaintiff seeks an order for the liquidation of Wire By Design Limited (WBD).

[2] The Commissioner’s application concerns WBD’s debt of about $960K owed in respect of unpaid child support employer deductions, Kiwi Saver employee deductions, PAYE, student loan deductions, specified super contributions, fringe benefit tax and GST.

[3] Faulkner Collins Ltd’s application relies upon WBD’s failure to pay a debt of

$24,074.56 owed in respect of a plant lease agreement.

[4] WBD does not dispute the claim of Faulkner Collins. It does dispute the claim by the Commissioner in that though it admits an overall tax debt due it claims it is not insolvent or unable to pay its debts and asserts it has a counterclaim or set off in the sum of $282,160.77 due to it as a GST refund.

[5] The applications of the Commissioner and Faulkner Collins were called together and heard by me on 5 March 2012. Upon the hearing of these applications, Mr Commons counsel for WBD applied for and was granted leave to withdraw.

[6] Mr Wright, a director of WBD then sought and was granted leave to address matters on its behalf.

Issues

[7] They are:

(a) Whether WBD is solvent.

(b) If it is not whether the Court ought to exercise its discretion not to order liquidation because WBD may be due a refund from the Commissioner or compensation in respect of its claim under the Public Works Act 1981 against the Crown.

(c) In the event of an order for liquidation, who should be appointed as liquidator.

Insolvency

[8] The statutory demands were not met. Because of that fact and the other evidence put before the Court it is clear WBD is insolvent. Mr Wright did not dispute this. He said however that he anticipated that all debts would be cleared when a claim for compensation by WBD against the Crown was resolved. Also WBD relies upon the refund it says is due from the Commissioner.

[9] The compensation claim concerns land acquired by the Crown from WBD for road purposes under the Public Works Act 1991. The property was originally owned by Faulkner Collins whose business interest and interest in the claim had been acquired by WBD. WBD and the Crown entered into an agreement governing rights to compensation but a dispute has arisen between the parties. Apparently the dispute concerns argument about whether the agreement ought to be set aside on the basis of duress, unconscionable bargain and undue influence. For present purposes the Court will assume WBD has the ability to advance argument even though it was not a party to the original agreement.

[10] Mr Wright is hopeful of a favourable outcome in that dispute but acknowledges that any litigation outcome will be expensive and take some time. It is clear there is no certainty as to the outcome of the claim. Mr Wright thinks it might be worth $2M. WBD’s accountant deposes the successful claim could net hundreds of thousands of dollars, though he accepts that the claim raises some debatable issues and does not expect all of the heads of claim to be recovered. Implicit in his evidence is that there could be insufficient to cover WBD’s debts to the Commissioner. On my enquiry Mr Wright accepted that to be the case but he says the debt would be reduced sufficiently to enable WBD to secure funding to pay off the balance.

GST refund

[11] It is clear the amount claimed by WBD to be due is significantly less than the amount acknowledged by WBD to be owed to the Commissioner.

Summary of matters in opposition to application for liquidation

[12] The clear evidence is that WBD is insolvent. It does not dispute the claims of the Commissioner or of Faulkner Collins. It says that with the GST refund due and in the outcome of its Public Works Act dispute it will be able to meet all debts due though the amount may be insufficient to cover the debts it has indicated that funding will be available to cover the shortfall. WBD says that meanwhile it is able to meet its trading debts as they fall due and is doing so.

[13] It is clear that High Court Rule 5.61 prevents WBD from raising claims of set off or counterclaim in proceedings brought by the Crown for recovery of taxes due. In any event there is too much uncertainty over the compensation claim for there be an assurance of the availability of funds in due course to meet creditor claims. In due course it will be a matter for the appointed liquidator to determine whether there is value in pursuing the claim.

[14] There is no defence available to either application for liquidation.

Who should be appointed liquidator?

[15] The Commissioner has filed a consent on behalf of chartered accountant Colin Thomas McCloy, and insolvency practitioner, Craig Alexander Sanson, both of PricewaterhouseCoopers as liquidators.

[16] Messrs McCloy and Sanson are also the liquidators appointed to Faulkner Collins. Their appointment as liquidators of WBD is opposed by the receivers of Faulkner Collins.

[17] Materially, s 280(1) of the Companies Act 1993 provides:

(1) Unless the Court orders otherwise, none of the following persons may be appointed or act as a liquidator as a company:

...

(cb) a person who has, or whose firm has, within the two years immediately before the commencement of the liquidation, had a continuing business relationship (other than through the provision of banking or financial services) with the company, its majority shareholder, or any of its directors or any of its secured creditors...

...

(1A) Subsection (1)... (cb) does not apply if all the creditors consent to the appointment of the person in question.

[18] In this case the receivers do not consent to the appointment of Mr McCloy and Mr Sanson as liquidators of WBD. Accordingly they may not be appointed unless the Court orders otherwise.

[19] The receivers Mr McCloy and Mr Sanson are highly experienced professionals. No dispute is taken of claims on behalf of Messrs McCloy and Sanson that they will act independently and without favour in dealing with the claims of creditors.

[20] In their consent for appointment as liquidators in this case Messrs McCloy and Sanson disclosed, for the purpose of s 280(1)(cb) that they have a continuing business relationship with the following parties who have registered security interests on the Personal Property Securities Register:

(a) The receivers of Faulkner Collins, who have a collateral security interest over specified goods of WBD;

(b) Fletcher Steel Limited, which has a collateral security interest over all present and after acquired personal property and specified goods of WBD. Fletcher Steel is part of the Fletcher Group of Companies. PricewaterhouseCoopers provides tax and interest advice to the Fletcher group of companies;

(c) Leasing Solutions Limited, which has a collateral security business over specified goods of WBD. PricewaterhouseCoopers provides assurance and advisory services to Leasing Solutions Limited;

(d) Onesource Group Limited, which has a collateral security interest over all present and after acquired personal property of the defendant. PricewaterhouseCoopers provides tax services to Onesource Group Limited. Apparently

[21] The following facts are also relevant for the present purposes:

(a) Tawil Holdings Limited owns 100 per cent of the shares in Faulkner Collins and in WBD, and therefore Faulkner Collins and WBD are related companies;

(b) Faulkner Collins entered into receivership on 23 November 2010 and Messrs Rea and Sargison of Gerry Ray Partners were appointed receivers; it was Tawil that placed Faulkner Collins into receivership;

(c) A day later on 24 November 2010 Faulkner Collins went into liquidation and Messrs Burns and Agnew were appointed liquidators until on 15 August 2011 they retired and from which time Messrs McCloy and Sanson were appointed liquidators of Faulkner Collins. It is clear that, as liquidators of Faulkner Collins, Messrs McCloy and Sanson have a detailed knowledge of Faulkner Collins and the other companies associated with it and the transactions entered into by and between them.

[22] The purpose of the limitation in s 280(cb) excluding persons having a continuing business relationship with the company to be liquidated is to ensure there is no risk to the objectives of independence and ability to carry out the work being compromised. But it is not only about the experience or the ability of the prospective appointees. It is also about whether or not the appearance of independence will be lacking if the appointment is made. In this case the Court is of

the view that the appearance of independence will be lacking if Mr McCloy and Mr Sanson are appointed. They do have a continuing business association with a number of the secured creditors who “may” have an interest in the defendant’s assets; they may have to make determinations about competing claims and assets.

[23] The evidence is that WBD has only recently commenced trading after acquiring the business of Faulkner Collins. Previously in this judgment reference was made WBD’s expectations of a GST refund but also in connection with a compensation claim that may have featured in the deal for the acquisition by WBD of FLC’s business. This situation will cause difficulty for Messrs McCloy and Sanson whose appointment is being promoted upon the Commissioner’s application for liquidation.

Summary

[24] Weighing up all considerations it seems to the Court there is too much at risk for the good reputation of Messrs McCloy and Sanson because of the inevitable perception that their independence would be at risk. Accordingly the application for their appointment is declined.

Other matters

[25] Some time has elapsed since this matter was heard. In the circumstances I

propose adjourning the matter for call in the Companies List at 10:45am on 9 May

2012 at which time the order for liquidation will be made. Meanwhile there is an opportunity available to the Commissioner to obtain the consent of another appointee, or for the Commissioner and the receivers of WBD to consult regarding

_{an appropriate substitute appointee.}

Associate Judge Sargisson