Dexter Holdings Limited v Dunder Holdings Limited [2014] NZHC 593 (28 March 2014)

Last Updated: 10 April 2014

IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY

CIV-2013-419-713 [2014] NZHC 593

BETWEEN DEXTER HOLDINGS LIMITED Plaintiff

AND DUNDER HOLDINGS LIMITED Defendant

Hearing: 5 March 2014

Appearances: Mr K Bond for Plaintiff

Mr P Gorringe for Defendant

Judgment: 28 March 2014

_{JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE}

This judgment was delivered by me on

28.03.14 at 3 pm, pursuant to

Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

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

DEXTER HOLDINGS LIMITED v DUNDER HOLDINGS LIMITED [2014] NZHC 593 [28 March 2014]

Background

[1] This proceeding started life as an application which the Commissioner of Inland Revenue (“the Commissioner”) brought seeking a Court order to place the defendant company into liquidation. When the Commissioner elected not to proceed, the High Court made an order on 11 November 2013 to substitute the Commissioner with the present plaintiff who appeared in support of the Commissioner pursuant to rr 31.24 and 31.25 of the High Court Rules.

[2] Dexter Holdings Limited, the plaintiff, now seeks an order that the defendant be placed into liquidation. The plaintiff seeks a liquidation order on the basis that it is a creditor of the defendant and that the defendant is unable to pay its debts. The plaintiff’s claim that it is a creditor is based upon a costs order made in favour of the plaintiff in the sum of $4,512, with the order being made in the Hamilton High Court on 16 August 2010.

[3] I interpolate to say that the dispute involved relations who are members of the Hodge family. Mr Graeme Hodge is the sole director of the defendant and another company, 101 Holdings Limited. Mr David Hodge and Mr Grant Flett are the directors of the plaintiff. A further party, Mr Mark Hodge, is mentioned in the documents but his involvement is not clear.

[4] The defendant in its statement of defence admits that a costs order was made in favour of the plaintiff on 16 August 2010, that order having been made in proceeding CIV-2010-419-01. The defendant opposes the application for a liquidation order and submits that it has a set-off available to it in the form of an earlier costs judgment which was made on 14 December 2007 directing costs of

$12,427.38 to be paid from the plaintiff to the defendant, 101 Holdings Limited and

Mark Hodge (“the 2007 costs order”).

[5] The plaintiff answers this contention by arguing that while there was no doubt that the 2007 costs order was made as the defendant states, the liability under that order was extinguished by the parties signing a heads of agreement (“HoA”) on

17 July 2009.

[6] The defendant argues that the 2007 costs order was not intended by the parties to come within the terms of the HoA and that therefore it survived the agreement’s execution.

[7] Mr Gorringe for the defendant submitted that:

3. This order then was a settled liability, for at least $4,142.46, by [the plaintiff] to [the defendant]. Both companies, through their respective human agents, as parties to the HoA, were bound by that Agreement. The point of HoA, however, is that it settles differences/disputes among the various individuals and entities. It was not to disturb existing, fixed obligations.

4. Thus in Recitals we see:

“b) Various disputes have arisen between the parties and have been ongoing for substantial time; that such disputes interfere with the proper conduct and execution of the parties’ responsibilities arising under their different capacities;

c) The parties wish to finally, fully and completely settle all the differences between them and come to an as complete as possible separation between them.”

And in paragraph 2:

“2. They have agreed on the following terms to finally settle all matters between:

WINDMILL PROPERTY/DEXTER HOLDINGS Ltd/Dunder Holdings Ltd”

5. The settlement is to be read in the context of the Recitals. It was thus not a settlement to extinguish an existing obligation, especially one fixed by Court Order and therefore beyond dispute. If it had been intended that this debt was to be covered by the Agreement, an express provision to that effect would be expected: that is, to make it clear that, though not a dispute, nevertheless the liability was included as part of the settlement.

[8] It was Mr Bond’s contention that the HoA settled all of the outstanding issues between the various parties at the date when it was signed, including the plaintiff, defendant, 101 Holdings Limited and Mr Mark Hodge. The HoA was signed by Messers Flett, David Hodge and Graeme Hodge.

[9] There is no dispute that the defendant was a party to the HoA and that the

2007 costs debt was incurred prior to the date when the HoA was executed.

[10] The preamble to the HoA needs to be set out in full:

Considering that:

(a) The parties in their different capacities are involved in a complicated constellation of trusts, companies and other holdings of property and business arrangements;

(b) Various disputes have arisen between the parties and have been ongoing for substantial time; that such disputes interfere with the proper conduct and execution of the parties’ responsibilities arising under their different capacities;

(c) The parties wish to finally, fully and completely settle all the differences between them and come to an as complete as possible separation between them, always considering the best interest of those for whom they hold as trustees in respect of the assets to which that is relevant;

(d) The parties wish to confirm and agree that they will not in the future take any action on whatever ground, against one another in any court or otherwise, in respect of any of the properties, companies and other entities involved in this agreement;

Hereby declare, acknowledge and agree that:

1. The following representation of the current statement of affairs is correct to the best of their knowledge;

2. They have agreed on the following terms to finally settle all matters between:

[11] Against this background and in response to the submission for the defendant, Mr Bond submitted that the HoA was clear that all issues between the parties were settled with effect from the signing of the HoA. The HoA did not exclude any issues from settlement and the wording used was very wide. Emphasis was placed on the words “fully, finally and completely”. It is submitted that this wording signals that the parties’ clear intention was to separate their interests entirely.

[12] Mr Gorringe for the defendant further contended that the 2007 costs order was not a matter that was in dispute. The argument was simply that because there had been an order determining the amount of costs in the earlier caveat proceedings and an order had been made requiring the plaintiffs to pay that amount, then there

could be no dispute. In Mr Graeme Hodge’s affidavit, he contended that the mediation out of which the HoA arose was intended to resolve all matters encompassed by the pleadings in the substantive proceeding between the parties. In this way it was argued that the HoA was restricted to issues arising in the pleadings between the parties that were then in existence. It did not include costs orders made in other proceedings.

[13] Mr Graeme Hodge expresses the subjective understanding that:

7. The purpose of the mediation was not to resolve existing fixed debts owned by any party to any other. Instead, the objective was to seek an agreement to enable disposition of the substantial proceeding and avoid the need for trial.

[14] Mr Graeme Hodge does not, for example, say that the parties inadvertently excluded the costs order from the agreement for the reason that they had overlooked it. The 2007 costs order arose from litigation that was concerned with part of the property which was connected to the acrimonious relationship which the parties were attempting to terminate. In this context and having regard to the avowed intention of the parties to “finally settle all matters between” them, in my view, the 2007 costs order was intended to be included in the settlement.

[15] I consider that the defendant is placing an unjustifiably narrow interpretation on the wording of the HoA. It is significant, in my view that the parties were obviously attempting to settle “all matters” between them. There was a division of property and there was agreement as to payment of sums of money. I asked Mr Gorringe what purpose there could have been in exempting from a HoA the earlier costs order. There is no intrinsic aspect of a costs order that would suggest it would call for separate treatment. It was simply one of a number of liabilities, obligations and rights that comprise the matters over which the parties were and had been disputing.

[16] I agree with the position that the plaintiff takes. The HoA was not confined just to matters that were in contention in the extant Court proceedings,¹ although

_{they were included as well. The HoA also included the earlier caveat proceeding in}

¹ That is CIVs 2005-419-1034, 2006-419-232 and 2007-419-375.

relation to which there was still costs outstanding in terms of the judgment of Judge

Faire dated 14 December 2007.²

[17] In case I am wrong in the foregoing conclusion, I will consider briefly the question of whether, if the HoA had not extinguished the 2007 costs award, that the costs award remains available to the defendant to apply by way of set-off against the debt which is the basis of the application for an order liquidating the defendant.

[18] I would accept that if the 2007 costs order was not affected by the HoA, then subject to the matters which follow, in theory it would be available to set-off the debt upon which the plaintiff relies. Given that there is no dispute that such a costs order was made and that it has never been repaid, the defendant would be able to demonstrate that its debt wholly or partly offsets the debt upon which the plaintiff bases the liquidation application.

[19] If the 2007 costs order that the defendant claims survived the HoA is still a viable debt, then it would give rise to a set-off, to the extent which, if it equalled or exceeded the debt which is the basis for the liquidation claim, would set it off and would mean that the plaintiff did not in fact have the required status of a creditor within the meaning of s 241(2)(c) of the Companies Act 1993. This position was explained in the case of Stonegate Securities Ltd v Gregory, a case of the English

Court of Appeal.³ In that case the issue was whether certain events had taken place

upon which the claimed debt was contingent. Buckley LJ in his judgment made the following remarks:⁴

Ungoed-Thomas J put the matter thus in the case of Mann v Goldstein in

[1968] 1 WLR 1091, 1098-1099:

For my part, I would prefer to rest the jurisdiction directly on the comparatively simple propositions that a creditor's petition can only be presented by a creditor, that the winding up jurisdiction is not for the purpose of deciding a disputed debt (that is, disputed on substantial and not insubstantial grounds), since until a creditor is established as a creditor he is not entitled to present the petition and has no locus standi in the Companies Court; and that, therefore, to invoke the winding up jurisdiction when the debt is disputed (that is, on substantial grounds) or

² _{That is CIV 2007-419-00950.}

³ _{Stonegate Securities Ltd v Gregory [1979] EWCA Civ J1005-4, [1980] Ch 576.}

⁴ At 579-580.

after it has become clear that it is so disputed is an abuse of the process of the court.

I gratefully adopt the whole of that statement, although I think it could equally well have ended at the reference to want of locus standi. In my opinion a petition founded on a debt which is disputed in good faith and on substantial grounds is demurrable for the reason that the petitioner is not a creditor of the company within the meaning of section 224 (1) at all, and the question whether he is or is not a creditor of the company is not appropriate for adjudication in winding up proceedings.

[20] The dictum in that case was not limited to the circumstances of where the contingency upon which a debt was to become due and owing had occurred. It is apparent that the remarks of his Lordship were intended to extend to any case where the debt is disputed in good faith and on substantial grounds. The same considerations are applicable in a case where a debtor is able to establish that he has a set-off or that there are substantial grounds for supposing that he does. In such a case the plaintiff does not have the requisite standing of a “creditor”.

[21] However for reasons given earlier, I do not accept that the liability under the

2007 costs order in favour of the defendant survived the execution of the HoA.

[22] The next issue concerns mutuality in set-off and whether the defendant is able to take advantage of the debt because it is one of three parties in whose favour the 2007 costs order was made.

[23] Rule 14.14 of the High Court Rules provide that unless the Court otherwise directs, liability under a costs order is joint and several. There is no dispute that this was also the position with respect to the 2007 costs order. If that is the case, then it is necessary to examine whether one who has a joint and several debt can rely on set- off as a defence in a case that is brought against it individually.

[24] The subject is dealt with in Halsbury’s Law of England where the following

passage appears:⁵

672. Debt due to or by the complainant jointly with others

A joint debt and a several debt cannot be set-off against each other. Thus in an action for a debt due from the defendant to the claimant

⁵ Halsbury’s Law of England (5th ed, 2009) vol 11 Civil Procedure at [672] (footnotes omitted).

separately, the defendant cannot set-off a debt due from the claimant jointly with others, who are not co-claimants in the action. However he may set-off a debt due from the claimant severally as well as jointly with the others.

[25] That being the case, leaving the HoA aside, it would seem open for the defendant in this case to set-off the debt owed to the plaintiff using a joint and several debt due from the plaintiff.

Is the defendant insolvent?

[26] Under s 241(4)(a) of the Companies Act, before the Court can make an order for the liquidation of the defendant company it is required to be satisfied that the company is unable to pay its debts.

[27] In the defendant’s statement of defence, it:

States that it is actually in credit with the Commissioner of Inland Revenue; Denies that it owes money to McPherson Goodwin Surveyors Limited,

claiming that this debt is paid in part and that the balance is “in dispute”; and

Denies that it is insolvent and says that it has sufficient cash in its bank account to pay the 2010 costs award.

[28] The defendant has not adduced any evidence to support these allegations nor provided any particulars of the alleged dispute in relation to the McPherson Goodwin Surveyors Limited’s debt. I shall refer to the McPherson Goodwin debt further below.

[29] The plaintiff seeks to rely upon the service of a statutory demand which the predecessor plaintiff, the Commissioner, served upon the defendant. The plaintiff pleads in its statement of claim that the defendant failed to comply with the statutory demand and therefore seeks to invoke the presumption in s 287 of the Companies Act.

[30] For the defendant, Mr Gorringe submitted that the plaintiff could not in any circumstance rely upon a statutory demand of another party. Secondly, that because the Commissioner had told the Court it would not be proceeding as plaintiff (which lead to the substitution with the present plaintiff), the Court could infer that the debt

to the Commissioner had been paid off by the defendant and that this was a good answer to the statutory demand point.

[31] The plaintiff submitted that it could rely upon the statutory demand. Mr Bond made the good point that having regard to the timeframes within which a substituted plaintiff must file a statement of claim, that is within five working days of the order for substitution, it would not be possible for a plaintiff to serve its own statutory demand and wait for the expiry period before issuing the statement of claim.

[32] I do not accept the submissions that Mr Gorringe has made. First, there is no requirement that a plaintiff must rely upon a statutory demand that the plaintiff has served itself. Secondly, the point that Mr Bond makes is a good one and in the absence of any direct or inferred statutory intention to disallow the plaintiff from relying upon another party’s statutory demand, I consider that the points that he makes are telling ones. If the plaintiff, instead of relying upon another party’s statutory demand, was required to serve its own then the substitution procedure contained in rr 31.24 and 31.25 of the High Court Rules would be largely deprived of effect.

[33] I next deal with the contention that the fact that the Commissioner has not proceeded somehow demonstrates solvency. I disagree. My reasons are first that the presumption of insolvency which arises under s 287 of the Companies Act when a company does not respond to a statutory demand is not somehow displaced even if the amount demanded in the statutory demand has been paid. From the date of default forward, the company is rebuttably deemed to be insolvent. Of course, the company can produce evidence showing that notwithstanding the default under the statutory demand the company is solvent at the time of the hearing of the liquidation proceeding. The burden of proof rests on the company to establish solvency in those circumstances.

[34] For the defendant it was further submitted that the fact that the Commissioner had elected not to proceed with its claim for a liquidation order gave rise to an

inference that its debt had been paid and that led to a further inference that the company was therefore able to pay its debts.

[35] There is no evidence that payment has actually occurred. I agree that on the basis that the Commissioner has decided not to take any further action on the liquidation proceeding which she commenced, one possible inference is that the debt has been repaid. But it may also be a case where an accommodation has been reached with the Commissioner. That sometimes happens in the case of insolvent companies. On other occasions the Commissioner may accept a notice of proposed adjustment which could lead to a re-assessment of the taxpayer’s position with the earlier determination being replaced by a later one. However, none of this displaces the possibility that the company may indeed have been insolvent as the non-response to the statutory demand suggested. Finally, payment of one creditor does not establish solvency generally. It is possible for an insolvent creditor which is fighting a rearguard action to attempt to buy off the creditor who represents the most immediate danger of obtaining a liquidation order. In such circumstances, it could not reasonably be contended that the Court will thereby be satisfied about the solvency of the company.

[36] Mr Bond was critical of the lack of evidence about the solvency of the defendant company. He submitted:

Dunder has done nothing more than allege in its statement of defence that it has sufficient cash in the bank to pay the 2010 Costs Award. That allegation has not been supported by any evidence whatsoever given that Graeme Hodge’s affidavit is silent on the issue of solvency. There is not even a bare assertion (as was held to be insufficient in Foundation Security) that Dunder is solvent.

[37] I agree that there is no evidence to establish that the defendant is in credit with the Commissioner. In fact there is no evidence at all of solvency.

[38] As the realities of the case compelled the defendant to do, Mr Gorringe accepted that there was no evidence. He submitted:

It is accepted that it would have been preferable for the Defendant to have produced either the funds to meet the Plaintiff’s claim or a set of financial

statements to demonstrate solvency. However, the sum in issue is small and for that reason the Court may assume solvency as a reasonable conclusion.

[39] I do not consider that because the amount of the debt is small that the Court can make any assumptions that the defendant will be able to pay it.

[40] So far as the debt that is claimed by McPherson Goodwin is concerned, I do not consider that there is evidence which establishes that it is one of the unpaid creditors which the defendant has failed to pay. At this point there is simply an assertion by the plaintiff that it is a creditor. Given that this is the case, the McPherson Goodwin debt can be ignored for present purposes. But even if that allowance is made, there is still the question of the presumption of insolvency for the defendant to surmount.

[41] So far as the lack of cogent evidence about solvency is concerned I repeat my concurrence⁶ with the judgment of Master Kennedy-Grant in Concept Manufacturing Ltd v Concept Lighting Ltd:⁷

[12] I would express the view obiter that it is advisable for a party wishing to obtain stay and restraint orders on the ground of solvency to exhibit up-to-date or, at least, recent accounts substantiating the claim of solvency as well as paying the amount due to an acceptable stakeholder.

[42] There is no such evidence before the Court in this case.

[43] Mr Gorringe requested that in the event that I considered the grounds for a liquidation order were made out that I should give the defendant time to make payment of the amount of the debt upon which the application proceeded. I will grant leave to the defendant to make payment within 10 working days of the date of this judgment. The proceeding is to be listed in the next available liquidation list at Hamilton which is on 31 March 2014.

[44] Counsel should confer on the matter of costs. If they are unable to agree I

_{shall hear counsel at the next mention of the proceeding.}

⁶ Foundation Securities (NZ) Ltd v Direct Labour Services Ltd HC Auckland CIV-2006-404-4391, 1

_{February 2007.}

⁷ Concept Manufacturing Ltd v Concept Lighting Ltd HC Auckland MNO 896-IMOO, 6 July 2000.

J.P. Doogue

Associate Judge