Bank of New Zealand v TPS Accounting Limited (in receivership) [2012] NZHC 899 (7 May 2012)

Last Updated: 21 May 2012

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

CIV 2012-485-68 [2012] NZHC 899

BETWEEN BANK OF NEW ZEALAND Plaintiff

AND TPS ACCOUNTING LIMITED (IN RECEIVERSHIP) (PREVIOUSLY KNOWN AS TAX PLANNING SERVICES LIMITED)

Defendant

Hearing: 2 May 2012

Counsel: G J Toebes for Plaintiff

B J Skinner and D I Rowley In Person (as shareholders, directors and creditors of the defendant company)

No appearance formally for the defendant company

Judgment: 7 May 2012

_{RESERVED JUDGMENT OF ASSOCIATE JUDGE D I GENDALL}

This judgment of Associate Judge Gendall was delivered on 7 May 2012 at 4.30pm pursuant to rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Solicitors:

_{J T Law, PO Box 25443, Wellington 6146}

BANK OF NEW ZEALAND v TPS ACCOUNTING LIMITED (IN RECEIVERSHIP) (PREVIOUSLY KNOWN AS TAX PLANNING SERVICES LIMITED) HC WN CIV 2012-485-68 [7 May 2012]

Introduction

[1] Before the Court is an application to place the defendant company into liquidation.

[2] The plaintiff Bank is a creditor of the defendant company to the extent now of around $570,000. Previously, on 25 August 2011 it had appointed receivers and managers of the company pursuant to a General Security Agreement dated

23 December 2009 granted in the Bank’s favour, and that receivership continues at

present.

[3] The grounds advanced by the plaintiff in support of its present application are that the defendant is insolvent and that it is just and equitable that liquidators be appointed.

[4] There is no formal opposition to the present application from the defendant company itself, nor was there any specific appearance at the hearing before me on behalf of the company.

[5] On 19 March 2012, however, Mr Barry James Skinner (Mr Skinner) and Mr David Ingram Rowley (Mr Rowley) filed in this Court “Appearances in Opposition to the Application for Putting the Defendant Company Into Liquidation”. In the case of Mr Skinner, he noted in his Appearance in Opposition that he is recorded as a trustee of the TPS Asset Trust which is a creditor of the defendant company to the extent of $439,500 and that Trust is also a shareholder holding

57,600 ordinary shares in the capital of the defendant. In these capacities he indicated that the present application to place the defendant company into liquidation was opposed.

[6] As to Mr Rowley, in his Appearance in Opposition, he noted that he was recorded as a trustee of the TPS Asset No. 2 Trust, which was a creditor of the defendant company to the extent of $12,500 and that Trust is also a shareholder holding 38,400 ordinary shares in the capital of the defendant. Mr Rowley

confirmed that he also opposed the application to place the defendant company into liquidation.

[7] Also before the Court is an affidavit sworn by Mr Rowley on 2 April 2012 which is stated to be “on behalf of the directors of TPS Accounting Limited (in receivership)”. Those directors are Mr Rowley and Mr Skinner.

[8] Finally, Mr Rowley and Mr Skinner have filed a “Memorandum from the Directors of the Defendant” dated 1 April 2012 this being for a call of this matter in the list on 2 April 2012 and a further Memorandum dated 1 May 2012.

[9] Confirmation of service of these proceedings on the defendant company (which occurred on 20 January 2012) is before the Courts. In addition, advertising of the liquidation application has been confirmed and took place in The Dominion Post newspaper on 9 February 2012 and in the New Zealand Gazette also on

9 February 2012.

[10] As I have noted above, there has been no formal position taken by the defendant company or any statement of defence or opposition filed by it in response to this application.

[11] Nevertheless, the position advanced by Mr Skinner and Mr Rowley as directors of the company and as trustees of the shareholding trusts who claim in addition to be creditors of the company, effectively amounts to an opposition to the present application.

Parties’ arguments and my decision

[12] The present liquidation application is brought pursuant to s 241(4)(a) Companies Act 1993 (the Act). This provision permits the Court to appoint a liquidator if it is satisfied that the defendant company in question is “unable to pay its debts”.

[13] Section 287(c) of the Act presumes a company which is in receivership to be unable to pay its debts. That is the case here, the defendant having been placed into receivership by the plaintiff on 25 August 2011.

[14] It is clear that s 287(c) of the Act does however provide that the presumption that a company is unable to pay its debts if a receiver has been appointed is rebuttable. But, insofar as this provision is concerned, Brookers Insolvency Law & Practice at para CA287.05 states in part:

Section 287(c) may in the future be used as a simple basis for a liquidation application in relation to a company that is already in receivership. In the absence of evidence of the company’s solvency a liquidator will usually be appointed.

[15] In the present proceeding it is clear that the defendant company remains in receivership. In addition, Mr Toebes, counsel for the plaintiff, provided at the hearing before me a certificate of unpaid debt dated 2 May 2012 which confirmed that a sum of $577,513.35 was due and unpaid by the defendant company as at that date. There was no dispute that this debt of over $577,000 was outstanding, that it was substantial and had been outstanding for quite some time.

[16] Notwithstanding this, Mr Skinner and Mr Rowley in their submissions before me contended that the presumption that the defendant was unable to pay its debts was able to be rebutted here as they argued the company was indeed solvent. As a result they submitted the jurisdiction for the making of an order to place the defendant into liquidation was not established.

[17] Alternatively it seems that, without specifically referring to the provision in question, Mr Skinner and Mr Rowley were seeking the exercise by the Court of its discretion under s 241 of the Act not to appoint a liquidator here even if the pre-requisites for liquidation were satisfied.

[18] In addressing this aspect as to the Court’s discretion to refuse an order for liquidation under s 241, it is clear from the authorities that this jurisdiction is one to be exercised sparingly. As Brookers Company and Securities Law at para CA241.04 notes:

CA241.04 Appointment of the liquidator – at Court’s discretion

Even if the applicant has standing to institute the liquidation process before the Court and it is found that the facts support one or other of the grounds for the appointment of a liquidator, the Court reserves the right to refuse to put a company into liquidation.

The Court will exercise this jurisdiction sparingly. The normal rule is that if the relevant requirements have been met, the person making the application is entitled to his or her order for the company’s liquidation. This is so even if it is shown that in the liquidation it is unlikely there will be any assets available for distribution to the unsecured creditors. In cases such as this, often the Court still regards the liquidator as serving useful functions in the investigation of the company’s affairs and as acting as a guardian of the interests of the unsecured creditors: Re Marlborough Sealink Ltd (1986) 3

NZCLC 99,501; Westgold Finance Ltd v Pan Pacific Cameras Ltd 11/5/89. Master Hansen, HC Christchurch M644/88; Re Feltex Carpets Ltd (in rec)

13/12/06, Hansen J, HC Auckland CIV-2006-404-6525;

CIV-2006-404-6792.

[19] Although it is not specifically stated, the basis of Mr Skinner and Mr Rowley’s opposition to the appointment of liquidators to the defendant company is essentially that the defendant has substantial assets and these are more than sufficient to see that in time the plaintiff Bank is repaid in full.

[20] In response to these contentions, the plaintiff’s position advanced before me is:

(a) the company would not actually be able to repay the Bank if it is not placed into liquidation as it is insolvent;

(b) the allegations made by Mr Skinner and Mr Rowley are not sufficient to displace the presumption of insolvency placed on the defendant by virtue of its receivership;

(c) those allegations do not provide a sufficient reason for the Court to exercise its discretion not to appoint liquidators; and

(d) in any event the allegations are not made out on the evidence filed by

Mr Skinner and Mr Rowley in these proceedings.

[21] The only evidence provided in opposition to this liquidation application is an affidavit of Mr Rowley dated 2 April 2012. By that affidavit Mr Rowley produces as an exhibit unaudited financial accounts for the company for the five month period up to 24 August 2011, the date before its receivership. Mr Rowley seems to acknowledge that he prepared the accounts and claims that “the Financial Accounts show that the company was solvent prior to receivership and with the majority of debtors still left to collect, remains solvent to this day”.

[22] Those financial accounts have not been prepared independently nor have they been audited, and they:

(a) are on the company’s letterhead and whilst not dated the implication from Mr Rowley’s affidavit appears to be that they were prepared after the commencement of the company’s receivership. It is unclear on what material or records they are based;

(b) record the defendant’s total assets as being $3,734,757 comprising in

the main:

(i) sundry debtors of $3,290,523; and

(ii) work in progress of $435,557.

[23] After deducting total liabilities of $1,722,392, the net assets of the defendant are said to total $2,012,365.

[24] Mr Rowley does attach to his affidavit an aged debtor’s print off for the defendant but no other evidence, and in particular no independent evidence of the company’s alleged solvency, is provided.

[25] Before me Mr Toebes, counsel for the plaintiff, contended that the defendant’s stated debtors and work in progress are a “myth” and the draft accounts up to 24 August 2011 produced by Mr Rowley are “crooked”. In amplification of this contention, Mr Toebes argued that the claimed debtors and work in progress were not real assets as they resulted from the “crooked” actions of the defendant

company by its directors Mr Skinner and Mr Rowley. He suggested that this is set out in the affidavit of Louise Adrienne Craig (Ms Craig) sworn 26 March 2012 produced in these proceedings. Ms Craig is a manager employee of the receivers appointed to the defendant and in essence she outlines in her affidavit the background to the company arrangements which were made as follows:

(a) the defendant company provided accounting services in relation to

preparation of clients’ GST returns and financial accounts;

(b) the company was GST registered on a payments basis so when it rendered invoices it would not have to show output tax on such invoices in its GST returns until it received payment from its client;

(c) most of its clients were registered for GST on an invoice basis, so when they received the invoice for services from the defendant, the client could legitimately claim an input tax deduction for the amount of the GST on the defendant’s invoice in its relevant GST return for that taxable period (and such GST returns were prepared and filed with the Inland Revenue Department by the defendant);

(d) if there was a resulting refund of GST, this was generally paid to the defendant by credit to one of its bank accounts;

(e) with the defendant on many occasions rendering very large invoices to its clients/customers, it thus allegedly enhanced the financial benefits to its clients (and possibly itself) of that disconnect of categories of GST registrations, irrespective of whether any services had been provided or not, and even if those services had been provided, regardless of the true value of those services;

(f) with the clients all the time never being expected to pay the defendant company’s invoices (on occasions they might not even have received them).

[26] This “evidence” advanced by Ms Craig on behalf of the plaintiff, as I said, has not been the subject of any cogent rebuttal by Mr Skinner or Mr Rowley or anyone else on behalf of the defendant company.

[27] Leaving this on one side for a moment, however, and turning to Mr Rowley’s claim in the financial accounts for the defendant up to 24 August 2012, that debtors and work in progress exceed $3.7 million, it is useful to turn to the evidence of Ms Craig in her concluding comments in her affidavit after para 38 that:

(a) “Despite extensive efforts by the receivers and Credit Consultants,

less than $100,000 (of the debtors) has or is likely to be collected”;

(b) “The amounts (the company) recorded as debtors in its financial records were significantly inflated and included amounts that had either been in dispute or represented invoices clients had never seen or approved of. This position was not a recent one. It seems to date back at least to 2009”;

(c) “We have informed the directors of the company of the difficulties

encountered in collection of the debtors and requested their input. On

2 December 2011 Mr Skinner and Mr Rowley met with Barry Jordan (one of the appointed receivers) and me and they undertook to follow up on various debtors. This was confirmed to them by email dated

6 December 2011, however to date no further progress has been

made”;

(d) “Based on information reported by Credit Consultants, I do not believe that there will be any further significant recoveries from debtors”; and

(e) “It is very unlikely any repayment will be made from the receivership

to the Bank of New Zealand”.

[28] Ms Craig’s 26 March 2012 affidavit outlines at some length steps the receivers and an external agent, Credit Consultants, have taken to collect the substantial debtors said to be due to the defendant. In doing so she notes that nearly all the debtors in question were well in excess of 90 days old and many were for groups of inter-related entities.

[29] She gives a range of examples of substantial disputes which many client “debtors” have raised with the receivers. These include claims by a number of debtors that they were charged for fictitious work, that taxation information was falsified, that mistaken invoices were rendered and that fraudulent activities were undertaken on behalf of the defendant.

[30] In response Mr Rowley in his affidavit in opposition deposes at [5]:

... the receiver was advised and well aware that the willingness of debtors to pay would be damaged by the receivership and ceasing to trade.

And at [6]

... it is interesting to note that a high percentage of debtors started to dispute their accounts after the receiver had ceased to trade the business.

[31] It would seem that Mr Rowley blames any difficulties encountered by the receivers in recovering the debts outstanding to the company on the fact that those receivers had been appointed and their decision to cease trading. However, even using the aged debtors list produced by Mr Rowley in his affidavit, some

$2.75 million of the $3.48 million recorded as debts owing to the company were over 90 days old as at the date of receivership. There has been little progress made by the receivers in recovering those or any other debts.

[32] Mr Toebes for the plaintiff contended that regardless of Mr Rowley’s unsupported assertions as to the recoverability of the company’s debtors, the receivers have encountered real difficulty recovering those debts. By way of contrast the debt owing to the plaintiff Bank on the other hand is not disputed and well overdue. Mr Toebes concludes by submitting again that the defendant is unable to pay its debts as they fall due and is both presumed to be and is actually insolvent.

[33] In reply Mr Rowley and Mr Skinner argue that there is no evidence before the Court that the financial accounts prepared for the company up to 24 August 2011 are “crooked” as Mr Toebes alleges. They claim in addition that the receivers are still pursuing some $2.1 million of the company’s debtors and that it is only because they have no or limited knowledge of the background to the invoices rendered to show how the debts were made up that they have been unable to answer the varied contentions advanced by clients to justify non payment.

[34] Mr Rowley and Mr Skinner argue that there is a workable vehicle available for the collection of the company’s debts and that is the current receivership. In their view this provides the best vehicle for collection of those debts and it should be allowed to continue.

[35] Also before me Mr Skinner appeared to submit that part of the difficulty experienced by the defendant resulted from a changed accounting system whereby the company had changed from an MYOB system to an Eclipse system in August 2010. However, no further information of any kind was provided to justify that claim. Mr Skinner went on to state, however, on another tack that he and Mr Rowley would like to be involved in providing explanations and answers to the various invoice queries received from clients as they believed the majority of the debts owing were, in fact, collectable. More on this aspect later.

[36] Two other matters need to be mentioned at this point.

[37] The first is the obvious fact that on the financial accounts for the company prepared by Mr Rowley the assets shown include only the sum of $200 in the bank, some $3.5 million of debtors and $475,000 as work in progress. The debts owing to the plaintiff Bank of around $500,000 had been outstanding then for some time and yet no steps had been taken by the company or its directors to either factor a range of the company’s debtors or to obtain an advance against those debtors which the defendants maintained were “good” to clear the defaulting bank loans. That in itself, in my view, might seem somewhat surprising.

[38] The second matter relates to the liabilities shown in those financial accounts. Those accounts showed under current liabilities internal creditors as at

24 August 2011 of $598,265 whereas the internal creditors, some five months earlier as at 31 March 2011, totalled $2,540,994. No explanation for the difference is provided.

[39] Before me Mr Toebes for the plaintiff went on to submit that the record keeping of Mr Rowley and Mr Skinner for the defendant, including the latest financial statements for the company produced in Mr Rowley’s affidavit, must be seen as inadequate and deceptive and contains material and substantial errors. He contended that the evidence showed that the directors failed to keep proper accounting records in terms of their duties under the Act , in particular, in that the amounts the defendant had recorded as debtors in its financial records were significantly inflated and included amounts that had either been entirely in dispute or represented invoices clients had never seen or approved of. On the basis of these “dubious” accounting practices, Mr Toebes contended that it was undesirable for control of the defendant to revert to its directors upon the retirement of the receivers. Therefore, he argued that, leaving aside the insolvency of the company which he maintained in any event was clear, it was just and equitable that liquidators should be appointed to the company now.

[40] In my view, there is some substance in these suggestions from Mr Toebes. The financial statements of the company and the other evidence which is before the Court, including that of the receivers who have had charge of the defendant since August 2011, in my view are somewhat revealing. I accept the evidence advanced for the plaintiff that even if the debtors’ figures in the accounts may not be manufactured or artificial, such that the accounts are “crooked” (and I can make no determination on this here), in any event there are unlikely to be any further significant recoveries even from “true” debtors as Ms Craig deposes on the last page of her 26 March 2012 affidavit.

[41] Further, there is also nothing which has been placed before the Court by way of independently verified evidence to suggest that the actual financial position of the defendant company is even remotely favourable, other than the bald and

unsubstantiated claims made by Mr Rowley in his 2 April 2012 affidavit. That affidavit, as noted, included his attempt at financial accounts for the defendant to

24 August 2011 but I cannot rely on these “accounts” as in my view they are entirely self-serving and hopelessly optimistic in light of the effectively uncontested evidence of Ms Craig noted above. It must follow, in my view, that the defendant here has done nothing to show that it is able to meet the debt outstanding to the plaintiff and accordingly that it is solvent.

[42] Finally, I note the submission advanced before me by Mr Skinner and Mr Rowley that the receivership of the defendant company should be allowed to continue so that further attempts can be made to collect the company’s debtors.

[43] As to this aspect, even if there may be some substance in the claims advanced by Mr Rowley and Mr Skinner that many of the defendant’s remaining debtors are “good” and are able to be collected, there is nothing to stop liquidators who might be appointed pursuing this avenue with the help of Mr Rowley and Mr Skinner. If the Court is to make an order liquidating the defendant company now, and if the liquidators in conjunction with Mr Skinner and Mr Rowley are successful in collecting a significant amount of these “debts”, then it is always open to Mr Rowley and Mr Skinner in their capacity as directors of the defendant to apply to the Court for an order terminating the liquidation pursuant to s 250 of the Act.

[44] Finally, for all the reasons outlined above, I conclude that in this case there is effectively no arguable defence to the plaintiff’s liquidation application. The contentions advanced by Mr Skinner and Mr Rowley that the company is solvent and has substantial collectable debtors, as I see it, are entirely unverified by independent evidence and highly dubious at best. Nor in my view is there anything before the Court which could allow it to exercise its discretion to refuse the present application. And finally, there may well turn out to be matters affecting the defendant company here which require some investigation by an appointed liquidator.

Conclusion

[45] Under all these circumstances therefore, I have no doubt that the appropriate course here is for an order to be made placing the defendant company into liquidation. The presumption that, as the company is presently in receivership, it is deemed to be unable to pay its debts and is insolvent, has not been rebutted here.

[46] A solicitor’s certificate confirming that the debt of some $577,513.35 due to

the plaintiff is still owing has been filed.

[47] For all these reasons the application before me succeeds. The following orders are now made:

(a) an order placing the defendant company TPS Accounting Limited (in receivership) previously known as Tax Planning Services Limited into liquidation;

(b) the Official Assignee is appointed liquidator;

(c) costs are awarded to the plaintiff on this application on a category 2B

basis together with disbursements as fixed by the Registrar;

_{(d) these orders are timed today, 7 May 2012 at 4.30pm.}

Associate Judge D I Gendall