Auckland Council v Forest Trustee Limited [2014] NZHC 3392 (22 December 2014)

Last Updated: 11 February 2015

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2014-404-001292 [2014] NZHC 3392

BETWEEN	AUCKLAND COUNCIL Plaintiff
AND	FOREST TRUSTEE LIMITED Defendant

Hearing:	5 September 2014
Appearances:	P Moodley for the Plaintiff No appearance for the Defendant P Mawhinney on own behalf in his capacity as shareholder
Judgment:	22 December 2014

_{JUDGMENT OF ASSOCIATE JUDGE SARGISSON}

This judgment was delivered by me on 22 December 2014 at 10.30 a.m. pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

_{Date.......................................}

Solicitors:

_{Brookfields, Auckland}

AUCKLAND COUNCIL v FOREST TRUSTEE LIMITED [2014] NZHC 3392 [22 December 2014]

Introduction

[1] Auckland Council applies for an order putting Forest Trustee Ltd into liquidation under s 241(4) of the Companies Act 1993. The basis of the application is Forest Trustee’s non-compliance with a statutory demand as evidence of insolvency under ss 287 and 288(1). The demand is based on an unpaid rates invoice dated

12 March 2014 that is addressed to Forest Trustee Ltd as ratepayer for the property at

131-149 Anzac Valley Road, Waitakere. The demand seeks $72,946.01 (for rates plus penalties) that the Council says it is owed in respect of the property.

[2] Forest Trustee was the registered proprietor for the property for the period from 21 October 2011 to 23 May 2014. Despite this, it has taken no formal steps in this proceeding since being served with the liquidation application and it was not represented at the hearing. However, Mr Mawhinney appeared. He is a shareholder and director of the company and he has filed a statement of defence in his capacity as shareholder and he advised that it is in that capacity that he appeared.

[3] The broad issue for determination is whether or not Mr Mawhinney has discharged the onus of demonstrating that there is a genuine and substantial dispute that Forest Trustee is not liable for the outstanding rates on the property. It is well established an order for liquidation will not be made where there is a genuine and substantial dispute as the existence of a debt such that it would be an abuse of the Court’s process to order liquidation. The governing consideration is whether the

proceeding brought by the Council savours of unfairness or undue pressure.¹ The

onus is on Mr Mawhinney to establish the existence of such a dispute. ²

[4] To demonstrate the existence of a genuine and substantial dispute as to the existence of the debt that the Council relies upon to establish Forest Trustee’s insolvency, Mr Mawhinney essentially raises for determination the following issues:

(a) Whether or not the rates invoice was improperly delivered, specifically whether it is contrary to s 136 of the Local Government

¹ South Waikato Precision Engineering Ltd v Ahu Developments Ltd HC Auckland at [22]; Yan v

_{Mainzeal Property and Construction Ltd at [61].}

² Yan v Mainzeal Property and Construction Ltd [2014] NZCA 190 at [63].

Act 2002 or a contempt of court to serve the rates invoice to a person while he or she is in court defending a criminal charge;

(b) Whether the Council made the statutory demand and/or liquidation application in breach of s 63 of the Local Government (Rating) Act

2002 and specifically:

(c) Whether the making of a statutory demand constitutes the commencement of proceedings in court; and (if it does) whether the statutory demand served on Forest Trustee was made for the recovery of rates as a debt, and/or

(d) Whether the court proceedings commenced by the liquidation application were for the recovery of rates as a debt; and

(e) Whether either set of “proceedings” was commenced prematurely; i.e.

within the “grace period” of four months allowed by s 63.

(f) Whether Forest Trustee is the party responsible for paying outstanding rates on the property, and specifically;

(i) What is a “ratepayer” under the Local Government (Rating) Act

2002;

(ii) Whether Forest Trustee was the ratepayer of the property for the period in which the outstanding rates and penalties accrued.

Discussion

Issue 1: Whether or not the rates invoice was improperly delivered and served

[5] It is common ground that on 25 March 2014 a Council representative served the rates invoice on Forest Trustee by handing it to Mr Mawhinney when he was at the Waitakere District Court. The invoice required payment of outstanding rates and penalties within 14 days.

[6] Mr Mawhinney says the service of the invoice was improper because it occurred when he was at court and while he was there in his capacity as a defendant in a criminal trial. He does not claim that the invoice was given to him during the actual hearing or when he was actually in court attending the hearing. He says it was given to him while on court premises.

[7] Section 136 of the Local Government (Rating) Act prescribes how a rates notice, including a rates invoice, must be sent to or served on the relevant person. The section does not place any restrictions upon the places a rates invoice may be served. The fact that Mr Mawhinney was at court on the day he was served in order to defend a criminal charge has no influence on the question of Council’s compliance with s 136. Service in such a way does not amount to a threat or harassment, nor does it put pressure on litigants, as Mr Mawhinney suggests. Accordingly, Mr Mawhinney has not demonstrated that the rates invoice was served and delivered improperly.

[8] I find therefore that there is no genuine dispute about Forest Trustee’s liability and therefore about its presumed insolvency based on this argument raised by Mr Mawhinney.

Issue 2: Whether the Council made the statutory demand and/or liquidation application in breach of s 63 of the Local Government (Rating) Act 2002.

[9] It is not in dispute that on 5 May this year, at which point Forest Trustee continued to be the registered proprietor of the property at 131-149 Anzac Valley Road, the Council served on Mr Mawhinney as director of Forest Trustee the statutory demand based on the above mentioned rates invoice. It is also not in dispute that Forest Trustee took no action on the demand, thereby giving rise to the

presumption of insolvency.³ It was on the basis of this presumption that the Council

applied to the Court on 28 May to put Forest Trustee into liquidation under s 241(4)

_{of the Companies Act 1993.}

³ Companies Act 1993, s 287(a).

[10] Mr Mawhinney’s disputes the Council’s ability to rely on that presumption, on the basis that the Council breached s 63 by making the statutory demand and by filing the liquidation application within the four month period after the rates and penalties are said to have became due under the invoice. Additionally, he argues that the purpose for which the Council took those steps to recover the unpaid rates as a debt, is also in breach of s 63.

[11] Relevantly, s 63 provides:

63 Legal proceedings to recover rates

(1) A local authority may commence proceedings in a court of competent jurisdiction to recover as a debt rates unpaid for 4 months after the due date for payment.

(2) In any proceedings under subsection (1), the local authority may recover any other unpaid rates in respect of the same rating unit if

the rates became due not earlier than 1 month before the proceedings were commenced.

(3) A court constituted under the District Courts Act 1947 has jurisdiction to hear and determine proceedings under this Act for the recovery of rates, whatever the amount of the debt involved.

[12] The questions that are raised for determination by Mr Mawhinney’s argument about s 63 are set out earlier at [4](b) of this judgment. I am satisfied that the answer to all of these questions is negative. I turn to my reasons, starting with the question whether the making of a statutory demand constitutes the commencement of proceedings in court; and (if it does), whether the statutory demand served on Forest Trustee was made for the recovery of rates as a debt:

(a) The Council did not commence court proceedings by making a statutory demand on Forest Trustee because the mere making of such a demand does not, of itself, mark the commencement of a court proceeding.

(b) A statutory demand is issued by a creditor and served directly on a debtor company, without any involvement of the Court. A proceeding in a court requires the Court to be aware of the parties’ identities and

the nature of the dispute between them.⁴ The Court does not have this information, nor any knowledge of the existence of a demand until one of the parties files a relevant application with the Court. Conversely, if the debtor complies with the demand, the Court would never become aware of this fact or the demand’s existence. It is an application to set aside a demand, or an application to liquidate the debtor presumed to be insolvent for failure to comply with a demand, that is the commencement of a proceeding in a court, not the making of the statutory demand itself.⁵ It is only once such a proceeding is

filed that a statutory demand becomes part of a court proceeding.⁶

(c) Thus the Council did not breach the four month time restraint required by s 63 when it simply made the demand on Forest Trustee pursuant to the authority given for such demands under s 289 of the Companies Act.

[13] In view of this finding, it is not necessary to discuss whether the demand was to recover rates as a debt. That need would arise only if the demand were found to constitute a proceeding in a court. However, in case my finding on that point is wrong, and the making of a demand is somehow to be deemed the commencement of a proceeding in court, I briefly set out why I consider, for the purpose of s 63, it could not be characterised as being to recover rates as a debt:

(a) A statutory demand is made for the overarching purpose of testing the solvency of a debtor by requiring it to take one of several allowable steps, only one of which is to pay the claimed debt.⁷ Should the

_{debtor not pay or comply with another allowable step, or should it fail}

⁴ High Court Rules, r 1.3 definitions of “plaintiff” and “defendant”; r 5.25(1) definition of

_{“proceeding”.}

⁵ Freemont Design & Construction Ltd v Natures View Joinery Ltd HC Hamilton CIV-2006-419-

_{269, 26 July 2006.}

⁶ Silverpoint International Ltd v Wedding Earthmovers Ltd HC Auckland CIV-2007-404-104-at

_[78].

⁷ Under s 289(2)(d) of the Companies Act 1993, the debtor is required for the purpose of compliance with a demand to pay the debt, enter into a compromise under Part 14, or otherwise compound with the creditor, give a charge over its property to secure payment of the debt, to the reasonable satisfaction of the creditor, within 15 working days of the date of service, or such longer period as the Court may order.

in the alternative to apply to set aside the demand, the creditor may proceed with an application to appoint a liquidator.⁸ The purpose of a statutory demand is not therefore the simple enforcement or recovery of a debt. Its purpose is altogether more extensive and to do with the potentially competing interests of the debtor’s body of creditors.

(b) The focus of s 63 is not obviously on restricting the rights of a creditor in dealing with an insolvent debtor, but rather on the use of simple debt proceedings to recover rates:

(i) It imposes a period of grace before the rating authority can resort to such proceedings, apparently recognising the multitude of reasons why a tardy but solvent ratepayer might fail to pay rates on time, and reflecting a policy of directing the rating authority not to rush to court proceedings but to look to other means of recovering rates first and to the sanction of penalties.

(ii) It contains nothing to indicate that the period of grace should be used to prevent the Council from testing whether late payment of rates is due to insolvency and Mr Mawhinney makes no suggestion to the contrary. He makes no submission as to what policy reasons or possible public interest there might be for that course, or indeed for limiting the right to seek the appointment of a liquidator of an insolvent ratepayer. Clear language would be required to infer a statutory intent to prevent a rating authority from using the statutory demand process for a four month period despite the existence of good reason to suspect rates remain unpaid by reason of insolvency - as where a raft of other creditors have made such demand for other debts owed by the ratepayer.

[14] As will be apparent from what I have said already, I also do not accept that the liquidation application constitutes court proceedings commenced for the recovery

_{of rates as a debt under s 63. Though the Council’s liquidation application is}

⁸ Companies Act 1993, s 241(4).

obviously a court proceeding, it is another matter to say that its purpose is to recover rates as a debt. I am satisfied that it is not, for these reasons:

(a) A liquidation application based on insolvency is not a mechanism for recovery of debt. Its purpose is to commence the process by which the company’s remaining assets (if any) will be shared and distributed to creditors and the company will be wound up.⁹

(b) Materially, as the Council’s liquidation application makes plain, it does not to seek an order of the court to fix a judgment sum for the recovery of unpaid rates. The relief it seeks is, as to be expected, for an order under s 241 to appoint a liquidator. It will be for the liquidator and not the court to determine how much of the claimed rates debt may be recovered in the liquidation.

[15] Given the above findings it is not necessary to consider the further question whether either set of proceedings was commenced prematurely; i.e. within the “grace period” of four months allowed by s 63. It is sufficient to observe that there is no genuine challenge to the legitimacy of the statutory demand or the liquidation proceeding on the basis of any breach of s 63, and no substance to the suggestion that such a breach has occurred to circumvent the four month period of grace imposed on simple debt collection proceedings or for the purpose of exerting undue pressure on a solvent company.

[16] I find that Mr Mawhinney’s arguments under s 63 do not give rise to any genuine dispute about Forest Trustee’s liability for the claimed rates and penalties, and therefore about its presumed insolvency.

Issue 3: Whether Forest Trustee is the ratepayer, and if so, whether it is the party responsible for paying outstanding rates on the property

[17] Mr Mawhinney disputes that Forest Trustee has the status of a ratepayer for the property in an attempt to show there is a genuine and substantial dispute about

⁹ Silverpoint International Ltd v Wedding Earthmovers Ltd, above n 6; Capital Construction Ltd v

the company’s responsibility for the rates. He seeks to discharge Forest Trustee’s prima facie liability for rates as the registered proprietor and ratepayer of the property, essentially on the grounds that the company sold the property in January 2012 (some two years or more before it ceased to be registered proprietor of the property) and held the property on trust for the new purchaser. Materially, the sale is not recorded on the certificate of title and, as Mr Mawhinney acknowledges in his submissions, Forest Trustee has occupied the property throughout the relevant period.

[18] Bearing in mind that Mr Mawhinney has the onus, the extent of the evidence before the Court that he relies on is sparse, and I find that it is not sufficient to demonstrate a basis on which Forest Trustee is arguably not the ratepayer or some other basis on which it can challenge its responsibility to pay the rates and penalties as invoiced. I rely on the following reasons:

(a) It is not disputed that Forest Trustee was the registered proprietor of the property throughout the relevant rating periods. Accordingly, the prima facie position is that Forest Trustee was the owner of the property pursuant to s 5 of the Local Government (Rating) Act.¹⁰

Under s 11, the owner of the property must be named as the ratepayer.

There is no suggestion from Mr Mawhinney that some other person or company other than Forest Trustee was nominated as the ratepayer for the property pursuant to s 31, which requires the owner to notify the Council if it wishes to transfer the responsibility for rates onto another person, such as a lessee or a purchaser. The rates invoice was addressed to Forest Trustee as the ratepayer, indicating that it is the one registered as such in the Council’s rating information database.

(b) Mr Mawhinney has not put forward any evidence that Forest Trustee ever invoked its right to object to being named as the ratepayer in the rating information database and in the rates records under ss 29 and

_{39 of the Act. This lends further support for the conclusion that there}

¹⁰ Section 5 defines “owner” as “the person who, whether jointly or separately, is seized or

is no basis for Mr Mawhinney’s argument that Forest Trustee is not

liable as a ratepayer for the rates invoice served on 25 March 2014.

(c) Mr Mawhinney has not argued that circumstances such as those in ss 61 and 62 exist in this case. Section 61 provides for situations where the ratepayer other than the owner defaults on rate payments, allowing the Council to then recover payment from the owner. If the owner is in default, the Council may recover the rates from a

mortgagee.¹¹ Even if it were the case that another became the

beneficial owner of the property as early as January 2012, and even if that other were named as the ratepayer with the Council, the Council could still recover unpaid rates and penalties from Forest Trustee as the registered proprietor and owner of the property. The giving up of the beneficial interest in the property therefore did not release Forest Trustee from its responsibility to pay the outstanding rates and penalties claimed in the invoice and incurred over the period of that other’s beneficial ownership.

(d) For the same reason, the letter dated 12 January 2012 addressed to a Mr Vesey requesting him to contact the Council regarding unpaid rates does not release Forest Trustee from the obligations of a registered proprietor and named ratepayer.

(e) Mr Mawhinney has not provided any authority or statutory provisions for the propositions that the obligations Forest Trustee incurred as the ratepayer, or for which the Council is entitled to look to it by reason of its legal ownership, have since been lifted. The fact is that Forest Trustee owes a debt that has not yet been paid by it or by someone else. Like any other debtor, Forest Trustee remains liable until the debt is repaid. The obligations on Forest Trustee are thus not lifted by the fact that since 23 May 2014 it is no longer the registered proprietor of the property. The Act imposes no obligation on the

_{Council to seek recovery of the outstanding rates only from those}

¹¹ Local Government (Rating) Act 2002, s 62.

persons currently registered on the title. If the Council does not receive payment of the unpaid rates from the new owner, it may seek to recover them from the previous owner, Forest Trustee.

[19] If Forest Trustee does not wish to pay the outstanding rates, s 61 affords it the opportunity to recover the debt from the person or company to whom it transferred the beneficial interest in the property. But that is a matter for Forest Trustee and it has no bearing on the issue of its liability or the presumption of its insolvency.

Conclusion

[20] Mr Mawhinney has failed to demonstrate that there is a genuine and substantial dispute about Forest Trustee’s liability for unpaid rates. Mr Mawhinney has also failed to show that the company is solvent. For these and the above reasons, an order to place Forest Trustee in liquidation is appropriate.

[21] The matter is adjourned to the liquidation list on 13 February 2015 at

10.45 am. If the debt is not paid before then, Mr Mawhinney must anticipate an

order for Forest Trustee’s liquidation.

[22] As costs follow the event, Mr Mawhinney is to pay costs to the Council on a

_{2B basis plus disbursement as fixed by the Registrar.}

Associate Judge Sargisson