Foresters Buildings Limited v Gormack [2013] NZHC 1882 (26 July 2013)

Last Updated: 14 August 2013

IN THE HIGH COURT OF NEW ZEALAND TIMARU REGISTRY

CIV-2013-476-000176 [2013] NZHC 1882

BETWEEN	FORESTERS BUILDINGS LIMITED Applicant
AND	AMANDA JANE GORMACK, NIGEL JAMES GORMACK and ANTHONY THOMAS MCCLEARY as trustees of the STRATHEYRE TRUST Respondent

Hearing:	15 July 2013
Appearances:	A R McRae for Applicants H C Matthews for Respondents
Judgment:	26 July 2013

JUDGMENT OF ASSOCIATE JUDGE OSBORNE

_{as to application to set aside statutory demand}

Introduction

[1] This case concerns a statutory demand served upon a property-owning company by one of its shareholders. The demand relates to an undisputed shareholder advance.

[2] The applicant says that the demand should be set aside as an abuse of process, as injustice would result if the demand was followed by a liquidation of the applicant.

[3] The application requires a consideration of the Court’s jurisdiction to set aside a statutory demand on the residual grounds available under, firstly, the particular circumstances surrounding the shareholder advance and, secondly,

_{s 290(4)(c) Companies Act 1993.}

FORESTERS BUILDINGS LIMITED v GORMACK & Ors [2013] NZHC 1882 [26 July 2013]

The background

An accounting partnership arranges its premises

[4] HC Partners LP (“HC”) is the present form of a long-established Timaru firm of chartered accountants.

[5] At some point, the then partners agreed upon a not uncommon arrangement in relation to business premises from which they would operate. They arranged the formation of the applicant, Foresters Buildings Limited (“Foresters”). Foresters acquired a number of properties, both in Timaru and Waimate. The family trusts of the partners became the equal shareholders in Foresters. Relations of the partners became the directors of Foresters.

[6] The properties purchased by Foresters were funded by bank debt, an advance from HC and shareholder advances by the seven shareholders.

[7] The second named respondent, Nigel Gormack, was until 31 January 2012 a partner of HC. His family trust is a shareholder in Foresters and a creditor of Foresters through a shareholders advance of $191,315 (precisely the same amount as the other six shareholder advances).

The financial position of Foresters

[8] It is common ground that Foresters’ revenue is sufficient to enable it to meet

its outgoings, Foresters having generated an after tax profit of $67,841 in the year to

31 March 2012.

[9] Foresters would therefore pass a cash flow test of solvency.

[10] The same clarity does not apply to solvency tested on a balance sheet approach. For the reasons which follow, the evidence adduced does not satisfy me either that Foresters is solvent or that it is insolvent on a balance sheet basis. There is simply insufficient evidence in a summary context to be satisfied either way on the balance of probabilities.

[11] The primary evidence for Foresters was from Paul Wolffenbuttel, a partner in HC, and a trustee of one of the family trusts which is a shareholder in Foresters. Mr Wolffenbuttel does not depose in direct terms either that Foresters is solvent or insolvent in a balance sheet sense. He expressly deals with the cash flow sense, in that he deposes that Foresters is in a position to meet its outgoings from income.

[12] Relevantly to a balance sheet approach, Mr Wolffenbuttel deposes:

Based on the most recent financial statements to 31 March 2012 the applicant would have a deficit of $674,084 if it were able to sell its properties for the values recorded in the financial statements and if it then repaid the BNZ bank mortgage, all other recorded obligations and the shareholder advances.

Based on the position recorded as at 31 March 2012, the shares in the applicant would be worthless and each shareholder would only be able to recover $95,017 of the total liability recorded as owing to each of them of

$191,315 – ie. each shareholder would suffer a loss of $96,298 on their recorded shareholder advance.

The actual potential recovery for all shareholders is reliant on what would realistically be achieved from the sale of the various properties after providing for real estate fees, taxation obligations, all creditors and other obligations. In addition to this the BNZ mortgage would need to be repaid and the remaining balance would then be available for shareholders to share equally.

Given the recent concerns related to earthquake strengthening obligations it is not at all clear that the values recorded in the financial statements to

31 March 2012 will be able to be achieved if the properties were sold.

[13] Mr Matthews appeared for the respondents as trustees of the Stratheyre Trust (“Stratheyre”). In his submissions, Mr Matthews characterised Mr Wolffenbuttel’s evidence as to the financial position of Foresters as being in “careful” terms. I accept that description as appropriate. Mr Wolffenbuttel appears to have deliberately refrained from stating a belief as to whether Forester’s assets exceed or are less than its liabilities.

[14] In this regard, there was something of a disconnect between Mr Wolffenbuttel’s actual evidence and the evidence of four other deponents with interests in Foresters. Those deponents filed affidavits less than two weeks before this hearing. They did not purport to be reply affidavits, but their admission was not opposed by Stratheyre. The four affidavits are materially identical. Their purpose,

as indicated in the submissions of Mr McRae for Foresters, was to place on record the support of the other unsecured creditors to Foresters’ application for an order setting aside the statutory demand.

[15] In each of the affidavits, the other shareholders state:

For the reasons as identified by Mr Wolffenbuttel if the company were to be liquidated and the assets realised, all unsecured creditors would receive significantly less than their recorded advance or “loan”.

[16] I have said there is a disconnect between the affidavits because Mr Wolffenbuttel does not in fact state that there will be such a shortfall or loss. Rather, he was careful to state that losses would be suffered if the properties were to be sold for particular values. I therefore cannot treat the supporting shareholders’ affidavits as adding anything to the evidence as to whether there is a state of balance sheet insolvency or not.

[17] Mr Wolffenbuttel used as the basis of his evidence as to the financial position of Foresters the financial statements to 31 March 2012. (I note that at the date he swore his affidavit, namely 15 April 2013, a further financial year had intervened. Mr Wolffenbuttel does not speak about the year to 31 March 2013) Foresters’ 31

March 2012 financial statements took as the figures for fixed assets the rateable valuation figures rather than any current market valuations provided by registered valuers. If the rating valuation used by Foresters in both 2011 and 2012 were an accurate valuation, it would drive a conclusion that by 2011 at the latest Foresters had a shareholders’ equity deficit to the extent of $741,925.

[18] That may be contrasted with the (positive) shareholders’ equity recorded in Foresters’ financial statements to 31 March 2011, namely $2,147,579. Examination of the accounts indicates that a component of the apparent change of financial position was a decision of those responsible for the accounts to write down the value of fixed assets from $2,794,738 to $1,839,000.

[19] Nigel Gormack has provided the evidence for Stratheyre. He refers to registered valuation evidence obtained by Foresters. Carter Valuations Limited were asked to value Foresters’s buildings as at 19 April 2010, firstly on the basis of

existing tenancies (which they had) and, secondly, in relation to two of the properties, on the basis of vacant possession (which was not their current state). Mr Gormack produces the April valuations.

[20] Mr Gormack also produces a memorandum sent by Duncan Brand of HC to the directors of Foresters on 6 December 2010. The memorandum explains that Carter Valuations Limited has provided a further valuation of Foresters’ buildings on a vacant possession basis as at 1 December 2010 in a total sum of $2,255,000.00. The memorandum is headed “Re: Value of Te Tua Charitable Trust’s Shareholding”. Mr Gormack explains the need for that valuation as having stemmed from the relationship between one of the shareholders (the Te Tua Trust) and the Hubbard family, Allan Hubbard having been placed in Statutory Management. A valuation would be required if the statutory manager sought to recover the value of the trust’s interest in Foresters. The email purported to demonstrate, using the vacant possession valuations, that a substantial write-down of the trust’s shareholding, from the values given in Foresters’s books, would be required.

[21] In his evidence, Mr Gormack suggests that the Carter valuations (based on the existing tenancies) were a more reliable starting point for the assessment of the value of the shares in Foresters.

[22] Referring to the Te Tua valuation exercise Mr Wolffenbuttel had in his initial affidavit deposed –

It should be noted that that the respondent through one of its trustees Mr Nigel Gormack was fully supportive of a prior proposal to recognise a reduction in value of the investment by a fellow shareholder when an approach was made by that shareholder to sell their investment to the remaining shareholders. The current position now taken appears not to recognise that a reduction in value may be appropriate.

In that instance the statutory manager for the Te Tua Charitable Trust made initial enquiry regarding the sale of its shares and shareholder loan to the remaining shareholders. At that point an estimation of price was prepared that involved an independent valuation and recorded adjustments for current market value, minority interest and sale costs. At that time Mr Gormack was fully supportive of the calculation methodology.

[23] When Mr Gormack gave his opposition evidence partly in response to the evidence by Mr Wolfenbuttel, Mr Wolfenbuttel did not file any reply evidence.

[24] I find that the evidence of Mr Wolfenbuttel as I quoted it is to some extent incomplete. The motivation of the Foresters’s directors (with the exception of the “Hubbard” director) in December 2010 is obvious – namely to put a case to the Hubbard statutory manager which would justify buying out the Te Tua interests at the lowest price reasonably attainable. As Mr Wolfenbuttel must have appreciated, the use of a valuation based on vacant possession might not address the true value of the properties or therefore the true value of the shares. This conclusion is reinforced by the fact that Mr Wolfenbuttel, when the comments in his affidavit were challenged by Mr Gormack, did not file reply evidence.

[25] In his evidence, Mr Wolfenbuttel had suggested one further circumstance which might affect the value of the properties. He stated –

Given the recent concerns related to earthquake strengthening obligations it is not at all clear that the values recorded in the financial statements to

31 March 2012 will be able to be achieved if the properties were sold.

[26] In his evidence in opposition Mr Gormack exhibited the actual seismic evaluations obtained for the 39 – 45 George Street properties. One (built in 1992) has a new building standard of greater than 100%. The other (strengthened in 1992) has a new building standard of 68%. Both being greater than 33% there are at present no strengthening measures required by the Timaru District Council.

[27] Mr Wolfenbuttel did not reply to this evidence as to the two buildings which represent at least 75% of Foresters’s total value of property holdings. While Mr Wolffenbuttel deposes that it is not at all clear that the 31 March 2012 financial statement values will be able to be achieved if the property is sold, there is no basis by reference to any evidence to conclude that such values will not be achieved in relation to the main properties.

[28] Mr Gormack, for fullness, referred to the results of the seismic evaluation of the other George Street property owned by Foresters. That building was assessed as

18.5% of the New Building Standard, with upgrading required within 15 years in stated circumstances. Mr Wolfenbuttel did not reply to this evidence. Again, there is no evidence on which the Court can conclude what impact, if any, the assessment of

the seismic evaluation of that property might have on realisable value. Furthermore, as one property in the portfolio it represents less than 20% of the total value.

[29] Drawing these matters together, the Court had no evidential basis upon which to conclude that Foresters does not have positive shareholder equity or, put another way, is not solvent in a balance sheet sense. Foresters, if it had wished to, could have obtained an produced up-to-date valuation evidence both in relation to property values and share values but has chosen not to produce such evidence. It is not entitled to ask the Court, absent an evidential foundation, to guess what the true position is.

Foresters’s constitution

[30] The third basis of Foresters’s abuse of process application is that the statutory demand is said to circumvent an entirely suitable mechanism set out in the company constitution for the orderly transfer of shares and advances and for recognising fair value.

[31] Mr McRae, for Foresters, submitted that the appropriate course for Stratheyre, if it wanted to exit its investment in Foresters, would have been to follow the process provided in the constitution for the sale of shares and shareholder advances. The constitution is in the form produced and copyrighted by CCH New Zealand Ltd in 2007.

[32] Mr McRae then correctly referred to cl 11 of the constitution which is a provision which applies to a shareholder wishing to sell shares. Mr McRae notes that cl 11.4 provides a mechanism to determine “fair value” where the transferor and transferee do not agree upon price. Clause 11.1(1) states –

Clause 11 acknowledges the partnership nature of the company and aims to protect shareholders’ relationships by giving them a right of pre-emption should any of their number wish to sell shares.

[33] The ensuing provisions of cl 11 deal with the shares of the selling shareholder.

[34] Mr Matthews submitted that the assertion that Stratheyre has in some way adopted the wrong procedure by issuing a statutory demand for its debt is misconceived. I agree.

[35] The constitution, and in particular cl 11, deals with the interests of each shareholder in its shares as shareholder. Nothing in the constitution purports to deal with the interests of any of them as creditor. The constitution does not provide a mechanism for recovery of shareholder advances or any other debt. Such might normally be expected to be covered, if it had been covered, through a shareholders’ agreement. There is no suggestion that there was a separate shareholders’ agreement in this case.

Setting aside a statutory demand - the principles

[36] The Court’s jurisdiction to set aside a statutory demand is contained in s 290

Companies Act, and I refer specifically to the basis upon which the Court may grant an application as contained in s 290(4) which reads:

290 Court may set aside statutory demand

...

(4) The Court may grant an application to set aside a statutory demand if it is satisfied that—

(a) There is a substantial dispute whether or not the debt is owing or is due; or

(b) The company appears to have a counterclaim, set-off, or cross-demand and the amount specified in the demand less the amount of the counterclaim, set-off, or cross- demand is less than the prescribed amount; or

(c) The demand ought to be set aside on other grounds.

The grounds of application in this case

[37] Foresters’ initially pleaded powers of application were:

(a) This is a substantial dispute as to whether or not the debt specified in the demand is owing or due;

(b) The application is an abuse of process.

[38] The second ground was expanded upon by Mr McRae as involving three propositions:

(i) it would result in substantial injustice to other unsecured creditors; (ii) it was executed in an unreasonable timeframe;

(iii) it circumvents an entirely reasonable mechanism set out in the company constitution for the orderly transfer of shares and advances, and for recognising fair value.

[39] For the hearing, Foresters has abandoned the first initial ground of application to the effect that there was a substantial dispute as to whether or not the debt claimed was owing (under s 290(4)(a)).

[40] Foresters has at no point asserted that it has a cross-claim which would avail it under s 290(4)(b).

[41] The sole jurisdiction therefore relied upon by Foresters is that under s

290(4)(c), whereby the Court finds that the demand ought to be set aside on other grounds. Foresters says the discretion should be exercised in this case because the issuing of the statutory demand is an abuse of process. Section 2901(4)(c) may be invoked to prevent an abuse of the statutory demand process1.

[42] As Tipping J observed in Commissioner of Inland Revenue v Chester Trustee Services Limited, all cases involving s 290(4)(c) come down to a Court’s judgment as to whether the creditor’s prima facie entitlement to liquidate the company is outweighed by some factor making it plainly unjust for liquidation to ensue.2 The

_{statutory discretion must be exercised as an exceptional power and confined to cases}

1 Commissioner of Inland Revenue v Chester Trustee Services Limited [2003] 1 NZLR 395 (CA)

_{per Baragwanath J at [60].}

2 At [1] and [3] per Tipping J

which clearly justify departure from the fundamental principle under the Companies

Act, which requires that insolvency should bring the end of a company’s existence.3

[43] In Chester Trustee Services, Baragwanath J implicitly adopted the observations in two earlier High Court decisions, stating:4

[46] Turning to the construction of s 290(4)(c) I note the observation of Wild J in Applefields Ltd v Trustees Executors and Agency Co of New Zealand Ltd (1999) 13 PRNZ 387 at p 392 endorsing a series of Masters’ decisions, saying:

Sensibly, they have not made any attempt to define or limit what might constitute (‘other grounds’).

Master Venning at 17,730, para [33], citing this passage, stated that:

Each case must turn on its facts.

[44] Baragwanath J refers with approval to the discussion of the exercise of discretion in McPherson’s Law of Company Liquidation,5 in which it was stated in the then current edition that one of the few circumstances in which an unpaid creditor might be refused a liquidation order is where the winding up is opposed by other creditors.6 The Court of Appeal expanded upon its discussion of the McPherson commentary:

[58] Moreover, as is noted in The Law of Company Liquidation at para [47] above, the wishes of the majority of creditors may require a statutory demand to be set aside. Halsbury’s Laws of England 4th edition, 1996, 7(3) states at paragraph 2240:

A creditor who cannot obtain payment is entitled as of right as against the company to a winding-up order, but this is subject to the court’s power on the hearing of the petition to give effect to the wishes of a majority of the creditors on the question whether a winding-up order should be made . ...

Where the company is not in voluntary liquidation, and the only fact which emerges is that the company is insolvent, opposing creditors must give reasons for their opposition, even if they represent the majority in number and value, for the court to take their opposition seriously.

Where the company is insolvent, the wishes of the creditors only are regarded. In the case of creditors of different classes, the interest of

3 _{At [48] per Baragwanath J.}

4 _{At [46] per Baragwanath J.}

5 _{MacPherson’s Law of Company Liquidation (3}rd _{ed, The Law Book Company 1987) at 61-62;}

_{see now McPherson’s Law of Company Liquidation (5}th _{ed, The Lawbook Co, 2010) at [3.1430].}

6 Commissioner of Inland Revenue v Chester Trustee Services Limited above n 1, at [47].

the class particularly affected must be primarily considered. Thus, on the question of winding up a company whose assets are entirely covered by debentures, the wishes of the unsecured creditors must be regarded in preference to those of the secured creditors. The creditors who are only partly secured and share the class interest of unsecured creditors in protecting or increasing the value of the company’s assets are, however, entitled to the same consideration, in respect of the unsecured portion of their debt, as wholly unsecured creditors. The wishes of creditors will be given weight only if they have reasons which relate to their position as creditors, and are not motivated by collateral purposes.

[59] Thus, the well-founded opposition of a majority of creditors to the winding up of the company may justify the Court in setting aside the statutory demand notwithstanding the ordinary rule.

Thus, the Court’s look for a “well-founded opposition” and an absence of collateral purpose. There is an emphasis upon the Court’s discretion through the words “may justify”.7

[45] My final observation as to the applicable principles is to remind myself that before a statutory demand is set aside the Court must be satisfied that one of the limbs of s 290(4) is made out (my emphasis).

Foresters’ submissions as to abuse of process

Injustice to other creditors because of agreed parity

[46] Mr McRae invites the Court to focus on the use to which Stratheyre seeks to put the statutory demand process. Referring to Baragwanath J’s observations as to abuse of process in Chester Trustee Services, Mr McRae submits that the statutory demand is being used for a process not contemplated by the Companies Act. 8 He submits that in this case a majority of shareholders will be substantially disadvantaged if the statutory demand is not set aside. He submits that the interest of one unsecured creditor (Stratheyre) will be preferred over the interests of the other unsecured creditors (the other shareholders in Foresters), and that this would run counter to an historical approach generally agreed between the shareholders of equal

_{funding and equal entitlement to benefit.}

7. See also Re P & J Macrae Limited [1961] 1 All ER 302; Re Restaurant Chevron Limited [1963] NZLR 225.

8 Commissioner of Inland Revenue v Chester Trustee Services Limited, above n 1, at [60].

[47] Mr McRae cites Rocklands Park Limited v Logan Samuel Limited9 as illustrative. A statutory demand was issued by one shareholder, where it would have:10

completely undermined the previously recognised parity between shareholders.

Master Lang concluded that the Court would have been justified in setting aside the demand on that ground.

[48] The decision in Rocklands Park Limited must be approached with care. Mr McRae concedes that the observations of Master Lang, upon which he primarily relies,11 are obiter. The ground on which the demand was actually set aside was that

Rocklands had established its solvency.12 To the extent Master Lang indicated that it

was likely that he would have held for Rocklands also on the basis of a previously recognised parity between shareholders, that was because (as His Honour stated at [75] of the judgment) there was sufficient to establish a substantial dispute as to whether demand could be made at that point for repayment.

[49] In the present case, Foresters, before the hearing of the application commenced, conceded that there was no substantial dispute that the debt is owing and due. That is sufficient to dispose of any analogy with the circumstances in Rocklands Park Ltd v Logan Samuel Ltd.

[50] I turn to consider the reliance which Foresters put upon what Mr McRae described in his submissions as “the general historical agreed approach of both equal funding and entitlement to benefit”.

[51] The foundation for that submission comes from the evidence of

_{Mr Wolffenbuttel, who said in his affidavit:}

9 _{Rocklands Park Limited v Logan Samuel Limited (2004) 9 NZCLC 263,535 (HC).}

10 _{At [75].}

11 _{At [73]-[75].}

12. At [34]. This ground has been subsequently authoritatively recognised as not being sufficient of itself to justify setting aside. See AMC Construction Ltd v Frews Contracting Ltd [2008] NZCA

389 at [7] and Gill Construction Co Ltd v Butler HC Wellington CIV-2009-406-203, 2

November 2009.

The respondent is one of seven shareholders in the applicant each of whom owns an equivalent shareholding and each of whom has made an equivalent advance.

Although there is no formal shareholder agreement, it has always been the expectation of all shareholders that the investment be funded by each shareholder in equal proportions. The applicant has never been disproportionately funded by shareholders and it is the clear expectation on issues of shares to any new shareholder that all shareholders be treated equally in terms of funds required to be advanced and any resulting entitlement to benefit.

[52] Mr Wolffenbuttel refers to a memorandum which Mr Gormack wrote to his partners at HC Partners in December 2011, notifying them of his resignation effective 31 January 2012. In the memorandum, Mr Gormack addressed a number of matters. The first two are not relevant here – these were in relation to the debtors and the current account of the HC Accounting Partnership. The fourth was also irrelevant – it was in relation to the staff of the accounting partnership.

[53] Mr Wolffenbuttel notes that in the memorandum Mr Gormack indicates he was comfortable with the fact that shareholders would not receive any distribution of profits or capital unless there was unanimous support for such action. Mr Gormack further proposed a mechanism to determine fair value for his exit, which was substantially in accordance with that set out in the company constitution. Mr Wolffenbuttel in his evidence suggests that if Stratheyre had wanted to exit its investment completely, then its appropriate course would have been to follow the constitution for sale of shares and (I am quoting) “shareholder advance”. It appears to me that Mr Wolffenbuttel was endeavouring to portray Mr Gormack’s approach as in some way accepting the concept of a general understanding that the repayment (or possibly writing off) of Foresters’ debt to Stratheyre would somehow be part of Stratheyre’s sale of its shares to the existing shareholders. That is not in fact what Mr Gormack addressed in his memorandum. The memorandum was addressing the shareholding itself.

[54] The language, both of Mr Wolffenbuttel and of the other trustee/shareholders, is of an expectation of equal funding. They do not dispute that there was a common understanding of commitment to a particular outcome, let alone agreement on that. All the deponents for Foresters acknowledge that there was “no formal shareholder

agreement”, but none identifies specific terms of any agreement (whether formal or

informal).

[55] The expectation of equality of treatment stated by all deponents for Foresters is understandable against a background that the shareholding family trusts were those of the families of partners of HC Partners. Nothing in the evidence of any of them indicates why the expectation to which they refer would be pertinent to a situation in which Mr Gormack ceased to be a partner of HC Partners on 31 January

2012. What if the Court were approaching matters in terms of the implied terms of the contract (which is not in fact the exercise involved)? The Court would not then find any necessary implication or requirements of business efficacy to justify requiring Mr Gormack and his co-trustees to continue to fund the property owning venture, both as shareholder and as creditor. Even if there were an underlying agreement and such an implied term was available (which I do not find), the requirement to leave funds in would come to an end within a reasonable period after Mr Gormack left the partnership in January 2012. Such reasonable period would have expired well within the year after that event. Stratheyre did not issue its statutory demand for close to 14 months afterwards.

[56] I do not find that substantial injustice will be caused to other unsecured

creditors of Foresters through Stratheyre’s reliance on its statutory demand.

Injustice to creditors whether agreed parity or not

[57] On the evidence as I have reviewed it, Foresters as applicant has not established either that it is insolvent or that it is solvent. I will therefore consider the appropriate outcome on two different scenarios.

What if it transpires that Foresters is solvent?

[58] If Foresters is solvent, the wishes of other creditors, even a majority, do not come into play. The rationale of the Court’s respect for the wishes of other creditors in the same class arises where they will be receiving proportionate payment out of a company’s resources insufficient to meet its full obligations to creditors. Where a

solvent company is failing to meet its debts no individual creditor, as a general rule, can be heard to say that another creditor should fall in line with the majority.

[59] In such a situation, there is no injustice or unfairness in Foresters having to repay the Stratheyre’s advance at its full value. The shares would have, as Mr Matthews submits, a positive value. The Court notes and accepts Mr Matthews’ indication that the trust will on repayment of its advance transfer its shares (implicitly in accordance with pre-emption rights under the constitution) for a nil value.

What if it transpires that Foresters is insolvent?

[60] I put to one side, for the moment, the question of the motives of the other creditors/shareholders. I examine first whether those other creditors have established “good reason” for supporting the setting aside of the statutory demand. Analysis of the quality of the reasons can be appropriately considered, as Mr Matthews submitted, by reference to the reasons identified in McPherson’s Law of Company Liquidation as those which have in the past justified the opposition of a majority of creditors to a winding up. Mr McRae for Foresters did not suggest that these were an inappropriate checklist of grounds. The three grounds identified in McPherson are:

(1) (The reason most commonly advanced.) That the creditors have a “fair, possible and reasonable chance” of obtaining payments of their debts without having to resort to a winding up.13 Into this consideration fall examples such as a company expected to recover after a period of depression; a company engaged in litigation with a prospect of success; a company working through a proposed compromise of scheme of reconstruction or a company whose

business is about to be sold as a going concern.

(2) Absence of assets, there being little point in winding up a company which has no assets (a consideration to be approached cautiously

13 McPherson’s Law of Company Liquidation (2010), above n 5, at [3.1450].

opposition).14

(3) Where a voluntary liquidation of the company is in progress (because there may be practical and less expense aspects to a voluntary winding up).15

[61] As to the first (prospect of payment), I accept Mr Matthews’ submission that there is no sufficient evidence to support a proposition that there is a prospect of Foresters repaying the debt to Stratheyre, at least within the foreseeable future. Foresters has provided no evidence of any steps (of the kind exemplified in the McPherson commentary) intended to produce the funds to repay debt. Indeed, there is an inference to be drawn from the evidence of Mr Wolffenbuttel and others that the HC Partners and their families, having been content to advance funds to Foresters for the purposes of property ownership and leasing to (inter alia) HC Partners, should be content simply to leave their advances in the company indefinitely. Against such an approach, there is no apparent prospect that Stratheyre will receive back its advance if it is not allowed to act upon a statutory demand. Despite Mr McRae’s submission concerning the constitution, there is no avenue through the constitution for Stratheyre to enforce repayment of its debt, the invoked

provisions of the constitution applying only to realisation of shareholdings.16

[62] As to the second consideration (absence of assets) that is clearly not a factor in this case. Foresters has substantial assets which, in the event that Foresters is liquidated, the liquidator will have the responsibility to realise to the best advantage to the company and its creditors.

_{[63] The third situation (voluntary liquidation in progress) does not apply.}

14 _{At [3.1460].}

15 _{At [3.1470].}

16 See discussion on the constitution above at [30]-[35].

The timeframe of the statutory demand

[64] Foresters’ second (“abuse”) proposition is that the issuing of a statutory demand so soon after an informal demand rendered the statutory demand either ineffective or an abuse of process.

[65] Foresters relies upon a letter written by Stratheyre’s solicitor on 20 March

2013. The solicitor’s letter concerned both the amount owing to Mr Gormack on current account as a partner of HC Partners, and the amount owing to Stratheyre for its shareholder advance to Foresters. In the letter, the solicitor asks (amongst other things) for confirmation by 22 March 2013 that the shareholder advance will be repaid by 20 April 2013. The letter states that if the debt is not repaid by that date then a notice of demand will be given to Foresters.

[66] Mr Brand responded to the informal demand via email on 25 March 2013, in which he stated:

We acknowledge receipt of your letter 20 March.

Our priority (as will be Nigels) is to complete our clients 2012 income tax returns. We will reply to your letter after Easter.

[67] Of course, by 25 March, the 22 March deadline for confirmation had passed.

[68] Mr McRae described Mr Brand’s email as a response in which Foresters sought an extension to revert. He submitted that when the statutory demand was issued three days later (still 23 days from the date of required payment), the time period allowed was insufficient for Foresters to verify and accept or reject the amounts claimed.

[69] This ground of alleged ineffectiveness or abuse of process has no foundation. First, Foresters through Mr Brand did not give the requested confirmation by

22 March 2013, or at all. Secondly, Mr McRae’s characterisation of Mr Brand’s letter as “seeking an extension to revert” is not strictly accurate – what Mr Brand said in essence was that Foresters had a higher priority (in relation to its own tax affairs) than attending to the debt owed to Stratheyre. Thirdly, when Stratheyre

statutory period of 10 working days, to require payment within 15 working days.

[70] Mr McRae’s characterisation of that time period as “insufficient for Foresters to verify and accept or reject the amounts claimed” is not supported by any evidence filed. Mr Wolffenbuttel’s detailed evidence suggests that there has never been any issue as to the quantum of the debt to Stratheyre. There is a strong implication in the evidence filed by Mr Wolffenbuttel and by the shareholders/creditors who support Foresters in this application that the demand was always going to be challenged (albeit for other reasons).

[71] It will be rarely, if ever, that a statutory demand which provides at least the statutory minimum period for payment (let alone something longer) could be properly set aside as an abuse of process by reason of time pressure alone. As it is, Foresters has provided no evidence to support the suggestion that further time would have made any difference.

[72] I find that the period of 15 working days provided in the statutory demand was not only more than the statutory minimum but was also, having regard to the factual background, reasonable on any factual assessment.

The availability of a constitutional process

[73] For the reasons I have already explored, I find unjustified this third criticism

of Stratheyre’s issuing of a statutory demand.

[74] The provisions of Foresters’ constitution (particularly clause 11) for the pre- emptive sale and purchase of shares would not address Stratheyre’s debt. It is not accurate to describe the constitutional provisions for sale of shares as “the appropriate course of action” for recovery of the debt. Stratheyre was entitled to pursue the debt through statutory avenues that relate specifically to debts.

[75] On Foresters’ own evidence, Foresters’ “only appropriate course” argument is especially without merit. The true value of Foresters’ properties and the true state of shareholders’ equity has, through this application, been the subject of controversy

between the parties already. The constitution would entail, in the event of difference as to value between the parties, a process which would take time and would involve significant expense, with the potential appointment and payment of an expert to certify fair value. Under the constitutional regime, months could go by before a sale was completed, assuming existing shareholders exercised their pre-emptive rights. Nothing in those circumstances points to the share transfer process as being an appropriate way in which to bring repayment of the debt to Stratheyre to a conclusion.

[76] The suggestion of the share sale process being a more appropriate process for resolution of Stratheyre’s advance also ignores a reality. Stratheyre had already accepted, through the indication previously given by its solicitor and now confirmed by Mr Matthews, namely that Stratheyre was prepared to transfer its shareholding at nil value if its debt is repaid in full. When Mr Matthews made this point in his submissions, Mr McRae did not reply to it. Mr McRae did not suggest any good reason why a Court would expect a shareholder to invoke a share sale process as some form of indirect process for recovering a debt which is indisputably owed to the shareholder when the shareholder did not expect the process to produce any significant sale proceeds.

Conclusion

[77] Foresters has failed to satisfy the Court that the statutory demand issued by Stratheyre ought to be set aside on grounds other than those specified in s 290(4)(a) and (b) of the Act. The application must be dismissed.

[78] Should the application be dismissed, Mr Matthews indicated that Stratheyre would not oppose the Court’s stipulating a period of 15 working days for payment of the debt. I consider such a period appropriate given that the creditor initially chose to stipulate 15 working days as the period for repayment.

[79] Both counsel accepted that costs should follow the event in relation to this application, and that the costs should be on a 2B basis.

Orders

[80] I order:

(1) The application dated 14 April 2013 is dismissed.

(2) The period specified under the respondent’s statutory demand for payment of the debt is extended to 15 August 2013. Failing payment by that date, the respondent may file an application for an order that Foresters be put into liquidation.

(3) The applicant is to pay the respondents’ cost of the application on a

2B basis, together with disbursements to be fixed by the Registrar. I

certify for the reasonable travel and accommodation expenses of counsel for the respondent.

Associate Judge Osborne

Solicitors:

Gresson Dorman & Co, Timaru

White Fox & Jones, Christchurch

Copy to:

A J and N J Gormack, Timaru

A T McCleary, Timaru