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High Court of New Zealand Decisions |
Last Updated: 15 May 2014
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV-2013-409-001447 [2014] NZHC 801
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UNDER
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Section 290 of the Companies Act 1993
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BETWEEN
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RFD FINANCE LIMITED Applicant
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AND
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SOL MANAGEMENT LIMITED (in liquidation)
Respondent
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Hearing:
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7 April 2014
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Appearances:
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J Moss for Applicant
K P Sullivan for Respondent
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Judgment:
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16 April 2014
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JUDGMENT OF ASSOCIATE JUDGE OSBORNE
as to setting aside any statutory demand
Table of Entities
Groups of Companies
“The FTG group” – a group of companies closely associated
with Mr Henderson, generally owned by the FTG No 2 Trust,
of which Mr and Mrs
Henderson are discretionary beneficiaries.
“The PVL group” – a group of companies closely associated
with Mr Henderson before his bankruptcy, generally subsidiaries
of or related to
Property Ventures Ltd (in liquidation) (PVL).
Individual companies
“Dweller” – Dweller Limited, part of the PVL
group.
RFD FINANCE LIMITED v SOL MANAGEMENT LIMITED (in liquidation) [2014] NZHC 801 [16 April
2014]
“GP 96” – GP 96 Limited, part of the FTG group.
“Living Space” – Living Space Properties Ltd, part of the FTG group. “PVL" – Property Ventures Limited (in liquidation).
“RFD” – RFD Finance Limited, part of the FTG group. “Sol” - Sol Management Limited, part of the PVL group. “Tomanovich” – Tomanovich Holdings Limited, part of the FTG group.
Individual persons
“Mr Henderson” – David Ian Henderson, formerly shareholder of PVL and formerly director of various companies in the PVL and FTG groups, adjudicated bankrupt on
29 November 2010.
“Mr Hyndman” – Ian Bruce Hyndman, director since Mr
Henderson’s bankruptcy of various companies including
RFD and
Sol.
“Mr O’Connell” – Stephen Andrew O’Connell,
chartered accountant, providing expert evidence as
to accounting
transactions.
“Mr Patel” – Rajkumar Patel, in 2013 RFD’s accounts
manager, (previously as employee of Dweller) the accounts
administrator for the
PVL group.
“Mr Smith” – Grant William Smith, solicitor, formerly a
partner of Cousins & Associates, now a director of Canterbury
Legal Services
Ltd, acted for RFD and other companies in the PVL and FTG groups.
“Mr Walker” – Robert Bruce Walker, chartered accountant, liquidator of a number of companies in the PVL group including PVL and Sol.
A statutory demand
[1] This proceeding is about a statutory demand. Sol, by
its liquidator
Mr Walker, served a demand for $80,000 on RFD. The demand
identifies the
$80,000 as being:
... monies advanced to you by Sol ...
[2] The transaction which is the subject of this proceeding is a
payment which Sol made from its bank account on 17 September
2010 to Cousins
& Associates for the credit of RFD.
[3] RFD applies for an order setting aside the demand. The application
identified two grounds:
(a) There is a substantial dispute as to whether or not the $80,000 is
owing or due by RFD to Sol;
(b) Mr Walker had no authority to issue the demand on behalf of Sol
because he had no right to sign the shareholder resolution
placing Sol in
liquidation and appointing himself as liquidator.
A transaction is woefully documented
[4] Section 194 Companies Act 1993 as it stood at the time of the
Sol/RFD
transaction1 provided:
194 Accounting records to be kept
(1) The board of a company must cause accounting records to be kept
that—
(a) Correctly record and explain the transactions of the
company; and
(b) Will at any time enable the financial position of the company to be
determined with reasonable accuracy; and
1 Section 194 Companies Act was subsequently amended by s 30 Financial Reporting
(Amendments to Other Enactments) Act5 2013 (2013 No 102).
(c) Will enable the directors to ensure that the financial
statements of the company comply with section 10 of the
Financial Reporting Act
1993 and any group financial statements comply with section 13 of that Act;
and
(d) Will enable the financial statements of the company to be readily
and properly audited.
(2) Without limiting subsection (1) of this section, the accounting
records must contain—
(a) Entries of money received and spent each day and the
matters to which it relates:
(b) ...
[5] The records of a company must “speak for themselves”,
as explained by Tomkins J in relation to the equivalent
provision under the
Companies Act 1955, in Maloc Construction Ltd (in liq) v
Chadwick:2
Instead of defining accounting records, the scheme of the section
is to require the company to keep whatever records in
whatever form as may be
necessary to achieve the objectives specified in the four paragraphs of subs
(1).
...
The records must speak for themselves. They must, without more, do or enable
to be done, the matters spelt out in the four paragraphs
of subs (1). It does
not avail a company to say, as was said here, that those objectives could be
achieved by reference to the accounting
records available, plus further
information and explanations that can be furnished by a company officer or
employee.
The records themselves do not have to show the financial position of the
company. They must be such that they will, at any time, enable
that position to
be determined. This requirement is not complied with if the company keeps only
basic accounting records such as
cheque books, deposit books, bank statements,
invoices and the like. It may be that using such basic records an accountant
could
construct further records that would enable the financial position of the
company to be determined. But the section requires that
this basic accounting
information should be assembled and recorded in such a way that the record
itself will not only enable the
financial position to be determined, but will
enable that to be done at any time ...
[6] Mr Walker identified the 17 September 2010 payment made by Sol
because it was referred to in Sol’s bank statement
for the September
period. The relevant page of the statement is reproduced as Schedule A to this
judgment. Although there was
2 Maloc Construction Ltd (in liq) v Chadwick (1986) 3 NZCLC 99,794; at 99,802.
the ability for Sol to include in relation to the payment to Cousins &
Associates particulars, code and reference, none of those
three matters was
entered.
[7] The documents which Mr Walker obtained as liquidator
included Sol’s general ledger. The relevant entry
on 17
September 2010 for the Sol/RFD transaction can be represented in formal
accounting notation in this way:
Dr Trust account $80,000
Cr Cash $80,000
[8] There was a further journal entry on 17 September 2010,
showing a transaction of $135,216 as between Sol and
Dweller. I will return
to that journal entry at [40].
[9] Upon the liquidation of Sol, the bank statement and the general
ledger represented the documents of Sol relating to the transaction
and obtained
by Mr Walker.
[10] No annual financial statements were prepared for Sol for the 2011
financial year. It was subsequently put into liquidation
on 10 February
2012.
[11] There is before the Court a further contemporary document relating
to the transaction. RFD was at the time a client of Cousins
& Associates
(now Canterbury Legal Services Ltd). There is a file statement from Canterbury
Legal Services’ trust account
for RFD which records the receipt of the
$80,000 into the trust account for the client’s credit in this
way:
Date Description Credits
17 Sep 10 From SOL Management 80,000.00
[12] The person who made the 17 September 2010 entry in the Canterbury Legal Services Ltd trust account did not record the nature of the transaction. Mr Smith of Canterbury Legal Services who filed an affidavit in support of this setting aside
application deposed that there were no instructions as to the legal nature of
the transaction in question.
[13] Mr Walker has found no other record kept by Sol which would
establish the nature of the transaction around the time it was
entered into.
Nor has any of the four deponents who have provided evidence on behalf of RFD,
produced a copy of any additional Sol
records.
RFD’s witnesses’ explanation of the Sol/RFD
transaction
[14] Four deponents of fact have provided affidavits for RFD.
[15] First, Mr Hyndman provided a brief affidavit. While he is now
director of RFD, he had no real involvement with RFD at the
time of the Sol/RFD
transaction and he looked to Mr Patel and Mr Henderson to give the relevant
evidence. Mr Henderson then provides
the main affidavit as to factual matters
for RFD. He explains the RFD transaction and to context. Mr Patel more
briefly speaks
of his recollection in a way which is corroborative of Mr
Henderson’s evidence. Mr Smith provided brief evidence in relation
to the
Cousins & Associates’ trust account ledger entry to which I have
referred.
[16] I am here focussed on the factual nature of the transaction and its
context. I therefore do not at this point deal with
the evidence of Mr
O’Connell whose affidavit for RFD was provided as expert
evidence.
[17] The key RFD witnesses as to the broader context are Mr Henderson
and
Mr Patel.
[18] RFD’s case is encapsulated in one sentence in the affidavit of
Mr Patel who deposes:
The sum of $80,000 was lent by Tomanovich to [RFD] who in turn lent it to GP
96 Limited to complete the purchase of the Living Space
Properties business at
Christchurch.
[19] In parallel with Mr Patel’s evidence, Mr Henderson
deposes that the
17 September 2010 transactions were:
... simply [Tomanovich] providing some of the proceeds of its settlement with
QLDC to [RFD] which in turn lent that money to GP 96
Limited to complete the
purchase of the [Living Space] business ...
Mr Henderson deposes that the sum received by RFD from Sol was not
Sol’s money in the first place; Sol’s bank account
was simply being
used because there were no other bank accounts to use at the time; the money was
not Sol’s; and Sol did not
have any assets or any claim to those
funds.
[20] The more detailed sequence of transactions identified by RFD’s
witnesses is as follows:
Date Event
2010 The PVL group is in financial trouble
23 July 2010 GP 96 enters into an agreement to purchase for
$80,000 the accommodation business of Living Space
27 July 2010 PVL put into liquidation (stayed pending appeal) Later - 2010 Sol’s bank account remains open
16 September 2010 Tomanovich and Queenstown Lakes District Council (QLDC)
enter agreement as to vesting of land, with QLDC to
pay Tomanovich $150,000 plus
GST
16 September 2010 Tomanovich directs QLDC to pay the $150,000 plus
GST as follows:
• $33,533.95 to the bank account of Property
Finance Securities Ltd
• $135,216.05 to Sol’s bank account
17 September 2010 QLDC pays $135,216.05 to Sol’s bank account
17 September 2010 Sol pays $80,000 into Cousins &
Associates’ trust account for the credit of RFD
17 September 2010 Cousins & Associates debits Sol’s trust
account and credits RFD’s trust account in the sum of
$80,000
17 September 2010 Cousins & Associates debits RFD’s trust
account and credits GP 96’s trust account in the sum
of $80,000, notating
the transaction as “loan”
17 September 2010 Cousins & Associates debits GP 96’s trust account and credits Living Spaces’s trust account in the sum of
$80,000
17 September 2010 RFD as lender, GP 96 as borrower, and Living Space as guarantor enter into a term loan agreement for
$80,000 repayable 17 September 2015
The jurisdiction to set aside a statutory demand – the
principles
[21] 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.
[22] For the purposes of this hearing I adopt as a general approach to
the exercise of this jurisdiction these four principles
–
[23] The residual discretion under s 290(4)(c) - whereby the Court finds that the demand ought to be set aside on other grounds – is one which enables the Court to do justice between the parties. As Tipping J indicated in Commissioner of Inland Revenue v Chester Trustee Services Ltd,4 the exercise of the discretion comes down to the 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 occur.
Application of the principles
Identification of RFD’s dispute as to the existence of the
debt
[24] Sol’s demand, as explained by Mr Walker, proceeded on the
basis that Sol’s money, held in its bank account, was
advanced to
RFD.
[25] RFD’s case is that the $80,000 was not owned by Sol, either legally or equitably. It was Tomanovich which owned the money pursuant to a contract with
QLDC. Tomanovich advanced the money to RFD, which in turn advanced
the
3 For this formulation of the applicable principles, I acknowledge the editors of Brookers
Company and Securities Law, ch 290.02(1).
4 Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395.
money to GP 96 to complete the purchase of the Living Space business.
Sol’s bank account was used because Sol had a bank account
unlike other
“Henderson” companies.
[26] For RFD, Mr Moss submitted that one appropriate terminology for what
was done was that Sol was at all times acting under
the direction of Tomanovich
in relation to Tomanovich’s money and Sol simply paid to
Tomanovich’s money to RFD to Tomanovich’s
direction.
[27] A similar way of putting RFD’s proposition is to describe the
use of Sol’s bank account as a mere conduit for
the payment of money which
belonged to others. On the basis that RFD acquired no ownership of the money and
the money remained Tomanovich’s
when it was in Sol’s bank account,
RFD disputes the central proposition of Sol’s statutory demand, namely
that the payment
of the $80,000 constituted an advance by Sol to
RFD.
[28] The Court of Appeal in its recent judgment in Grant v Lotus
Gardens Ltd5 recognised that the facts of a particular payment
may establish that a recipient of funds was “just a conduit to pay
them”6 to another party. The Court distinguished conduit
cases from those in which the party receiving the funds is a trustee, and the
recipient
is the Trust.7
Has RFD provided material short of proof to support the
dispute?
[29] For the reasons I now set out, I conclude that RFD has provided
material short of proof to support its dispute.
[30] In reaching this conclusion, I recognise a sense of frustration that the liquidator of a company such as Sol will experience when the banking records of the company show the company parting with money without apparent consideration and
the company’s accounting records do not contain information which
would explain
5 Grant v Lotus Gardens Ltd [2014] NZCA 127. For a statutory demand case in which the Court concluded that the respondent may have been a mere conduit, and may not have been the owner of the “advanced” money, see Victoria Street Apartments Ltd v McKay HC Auckland, CIV-
2007-404-2490 17 March 2008, per Associate Judge Sargisson at [5], [38] and [42].
6 At [47].
7 At [47], especially at fn 54, citing Rea v Russell [2012] NZCA 536 as a trust case.
the transaction as anything other than an advance. But the recipient company
(RFD in this case) is entitled in this jurisdiction
to point to a genuine and
substantial dispute as to whether it is indebted to Sol. RFD is entitled to
apply for an order setting
aside any statutory demand issued in relation to the
transaction on that basis. This is so even when there was some relationship
between, and common control over, the paying and receiving
companies.
[31] In finding that there is a genuine and substantial dispute as to the
existence of the debt claimed by Sol, I take into account
the
following:
• The Sol/RFD transaction was not expressly recorded as an advance
between those entities
• Tomanovich was entitled to receive from QLDC the $168,750 paid by
QLDC
on 17 September 2010
• Tomanovich was entitled to direct QLDC how to pay the $168,750
which it did by directing two tranches of payment, one to
Sol’s bank
account and one to another’s bank account
• The notation of the trust account entry of Cousins &
Associates for Sol’s payment of $80,000 does not expressly
refer to
the payment being an advance (either by Sol or another)
• An $80,000 advance was formally documented as a term loan
agreement between RFD and GP 96
• Tomanovich, RFD and GP 96 lay within the FTG group, whereas RFD
was within the PVL group.
[32] There is then the narrative evidence of both Mr Henderson and Mr Patel. That evidence (the key paragraphs of which are set out at [18] and [19] above) reinforces the various matters identified in the preceding paragraph.
[33] The combination of these matters might reasonably at trial
lead to a conclusion that the legal character of the
Sol/RFD transaction was
not an advance or loan between Sol and RFD.
Matters asserted by Sol as counting against RFD’s
dispute
[34] Mr Sullivan submitted that nothing in the admissible evidence cuts
across the right of Sol to demand repayment of the money
it paid to RFD. In
reaching that conclusion Mr Sullivan relied on the following matters as answers
(either singly or collectively)
to RFD’s assertion of a
dispute.
(1) The fact that the $80,000 was held by Sol in its bank
account
[35] Mr Sullivan submits that because Sol had the money in its bank
account it had the primary legal title to the money and is
therefore the party
with the primary right to recover the money, whether or not some other party
such as Tomanovich “can assert
some claim”. I find that the
evidence of Mr Henderson and Mr Patel might, if accepted, reasonably lead a
trial judge to the
conclusion that there was in place an agreement or
arrangement between all the relevant parties whereby Sol was a mere conduit for
transfer of Tomanovich’s money to others. The right of recovery may
arguably be with Tomanovich and not with Sol.
(2) Period of operation of company bank accounts
[36] The main witnesses of fact for RFD – Mr Henderson and Mr Patel – deposed that the 17 September 2010 transaction involved a loan from Tomanovich to RFD and then from RFD to GP 96. They supported that position by asserting a recollection that Westpac had closed all the bank accounts of the PVL companies except for the bank account of Sol. Mr Henderson referred to the closure as having occurred during 2010 after the PVL group fell into financial trouble. Mr Patel recollected that the Sol account remained open until about December 2010. Before the hearing Mr Sullivan, for Mr Walker, gave notice requiring Mr Patel and Mr Henderson for cross-examination. Mr Walker provided a copy of an email sent by Mr Patel to Mr Henderson and others on 12 January 2011 to which Mr Patel
attached a sample letter dated 10 January 2011 from a Manager at Westpac and
stated:
Looks like he’s closing all our Westpac accounts. I’ve got the
same letter for these companies ...
Mr Patel identified seven companies including Tomanovich and Sol.
[37] The 2011 correspondence was produced by Mr Walker in additional oral
evidence at the hearing.
[38] Mr Sullivan submitted that the Westpac correspondence raised issues
as to the accuracy of the evidence of Mr Patel and Mr
Henderson.
[39] Mr Henderson was cross-examined at the hearing. While Mr
Sullivan suggested to Mr Henderson that the 2011 correspondence
indicated that
Tomanovich must have had a bank account through to early 2011, Mr Henderson gave
evidence that he did not think that
to be the case. When pressed, Mr Henderson
stated that:
My statement, sir, is that I don’t know. I don’t think so. If I
had to make a call I would say it didn’t. I would
say it had no bank
account, Mr Sullivan.
Mr Henderson explained that Tomanovich had been put into liquidation in late
2009 and had remained in liquidation until March 2010.
[40] The single item of 2011 correspondence produced by Mr Sullivan and the cross-examination of Mr Henderson falls short of establishing clearly that Tomanovich at all relevant times had a bank account which it could have used to receive and process the QLDC money if it wanted. There remains a reasonable possibility that at a trial RFD would be able to establish that Tomanovich lacked a bank account through which to pass the QLDC monies. This conclusion is reinforced by the fact that Westpac itself must retain sufficient records to be able to categorically establish the periods in which various bank accounts were opened and the dates on which they were closed. Such reliable information is not before the Court and its absence reinforces the uncertainty of the information actually before the Court.
(3) Equitable estoppel
[41] Mr Sullivan submitted that it is evident from the records of Sol and
the various companies controlled by Mr Henderson that
their affairs were
intermingled to a degree which makes it nearly impossible to disentangle them,
particularly when records have
either not been kept or have been kept but
withheld. Mr Sullivan submitted that RFD is precluded by the doctrine
of equitable
estoppel from “changing its accounting position” so
as to say that there was an arrangement with Tomanovich which negates
the right
of Sol to recover the money. Mr Sullivan described this as a “subsidiary
point” but one which feeds into
the main opposition that there is no main
ground of opposition that there is no substantial dispute.
[42] Whether advanced as a subsidiary or principal argument, I have had to consider the argument on its merits. Mr Sullivan referred to the decision in Holmfirth Ltd v Hoyl,8 as an example of an originating application to set aside a statutory demand in which the doctrine of equitable estoppel was applied. I understood Mr Sullivan to be suggesting that although the elements required to be proved in relation to equitable estoppel will often mean that the issue is unsuitable for determination short of trial, there will be cases where the outcome is so clear that a conclusion may be reached based on equitable estoppel in a statutory demand
context. I view Holmfirth as a very different case from the present. The equitable estoppel arose at a different level. In this case, Sol would be asking the Court to conclude that a dispute is not open to RFD because Mr Walker as liquidator of Sol has been led by the documentation (or lack thereof) to conclude that it held the right to recover the $80,000. In Holmfirth, the issue was not as to the identification of the party entitled to recover. The issue was whether the entitled party was estopped from recovering a debt for a defined period. There were carefully drafted documents evidencing an expectation of deferred repayment. The evidence in this case, and the nature of issues such as the unambiguity of representations, reliance and unconscionability which the Court would have to rule on, do not lend themselves to determination in the statutory demand context. The Court cannot be satisfied that the
outcome in relation to all elements of equitable estoppel will so
clearly be in favour
8 Holmfirth Ltd v Hoyl HC Christchurch CIV 2011-409-1698, 5 July 2012.
of Sol that RFD can immediately be said to have no substantial dispute over a
claimed estoppel.
(4) The Dweller documentation
[43] In their initial evidence as to the background to the 17 September
2010 transactions, neither Mr Henderson nor Mr Patel
referred to any involvement
of Dweller (other than that Mr Patel explained that, at the time he was accounts
administrator for the
PVL group, he was directly employed by Dweller). Mr Patel
described Dweller as a company incorporated to undertake
a
number of administrative tasks as well as employing staff previously employed
by PVL.
[44] When Mr Walker filed his further affidavit evidence, he exhibited an abstract from Sol’s general ledger. It showed Sol’s transactions that day. Mr Walker referred also to another journal entry showing an advance of the $135,216 (received from QLDC) by Sol to Dweller, narrated as “advance”. Although Mr Walker is the liquidator of Dweller as well as of Sol, he has been unable to access Dweller’s computerised accounting records, which may have been corrupted. In his additional evidence, Mr Walker deposed that he considered it likely, from what was recorded in Sol’s journal entries, that Tomanovich had been indebted to Dweller and that the
$135,216 was journalled to Dweller in repayment of that
indebtedness.
[45] Mr Henderson filed reply evidence. He deposed that he had been
director of both Dweller and Sol throughout the relevant
period and that no debt
had accrued between the two in that period.
[46] There is no factual evidence beyond that in relation to
any level of indebtedness between Sol and Dweller. The
journal entry
reference to “advance” is not further explained.
[47] In a third affidavit Mr Walker states that he considers it no longer open to Mr Henderson to belatedly claim that accounting he was responsible for was blatantly incorrect.
[48] RFD’s expert witness, Mr O’Connell opined that the
evidence relating to Dweller is irrelevant (he explaining
that that is because
in his view the use of Sol’s bank account on 17 September 2010 payment was
as a “clearing account”
only). Mr O’Connell did not proffer an
opinion as to the meaning or rationale of the Sol journal entry referring to
Dweller
and an “advance”.
[49] For reasons parallel to my discussion in relation to
equitable estoppel, Mr Walker’s conclusion that Mr Henderson
ought to be
bound by the record keeping of the various companies cannot apply at least in
this statutory context. The journal entries
in relation to Dweller are another
confusing and unsatisfactory aspect of the records of the various companies, but
cannot be conclusive
in this context.
Further evidence of RFD’s expert witness
[50] RFD called evidence from Mr O’Connell as to the nature of the
Sol/RFD transaction. His evidence mainly related to
an opinion that the Sol
bank account had been operated as a “clearing account”.
[51] By reason of the conclusions I have reached as to the factual
dispute, it is unnecessary that I reach additional conclusions
in relation to Mr
O’Connell’s evidence. Parts of his evidence which appeared to
state his opinion could more appropriately
be considered restatements of the
evidence of the factual witnesses. In that sense his conclusions are more
correctly to be regarded
as the assumptions which he had taken into account in
giving his evidence. Whether his reference to Sol’s bank account
functioning
as a “clearing account” is an apt description and
whether it further advances the argument that RFD did not have a debt
to Sol are
issues which I leave, if necessary, for a trial judge.
The standing of the liquidator
[52] As a second ground of its application, RFD asserted that the demand ought to be set aside (“on the other grounds” in terms of s 289(1)(c) Companies Act) because Mr Walker as liquidator had no authority to pass a shareholder’s resolution to put Sol into liquidation, and thereby to appoint himself liquidator of Sol. The argument is that as liquidator, and therefore a creature of statute, Mr Walker’s powers are limited
to those provided in the legislation. Mr Moss noted the provisions of the
Sixth Schedule of the Companies Act. He submitted that those provisions do not
empower the liquidator to have the company in liquidation pass a
shareholder’s
resolution to put a company whose shares it owns into
liquidation.
[53] This proposition was rejected by Sol on the primary ground that any
issue taken with Mr Walker’s authority is a collateral
issue insufficient
to justify setting aside the statutory demand. Mr Sullivan noted that RFD does
not under s 250(2) Companies Act fall within the classes of those with standing
to apply for termination of a liquidation. Mr Sullivan relies also on reg 36
Companies
Act 1993 Liquidation Regulations 1994 which provides:
No defect or irregularity in the appoint of a liquidator shall invalidate any
act done by him or her in good faith.
Mr Sullivan submits that reg 36 precludes the challenge presented by
RFD.
[54] Mr Moss submitted that even were reg 36 strictly applicable to the
liquidation of Sol, the Court should exercise its jurisdiction
under s 290(4)(c)
Companies Act to set aside “on other grounds” the statutory
demand.
[55] I record these as matters advanced by counsel. Having
reached the conclusion, for other reasons, that the statutory
demand should be
set aside, I refrain from determining the application by reference to the
standing of the liquidator.
The evidence of Mr Patel – leave to use3
[56] Mr Patel’s evidence was filed on 20 August 2013.
[57] Thereafter Mr Walker filed three affidavits between 11 September
2013 and
27 November 2013.
[58] The hearing was initially to proceed on 12 December 2013 but had to be adjourned to accommodate Sol’s filing of further evidence late before the hearing.
[59] The hearing was adjourned to a date after Easter 2013. The date of
7 April
2014 was subsequently allocated.
[60] On 31 March 2014 Mr Sullivan gave notice to Mr Moss that Mr Patel
was required for cross-examination.
[61] Rule 9.74 High Court Rules permits a notice for cross-examination to
be given up to three working days before the day fixed
for the hearing. The
respondent met that deadline by a short margin.
[62] It transpired that although Mr Patel was still employed by Dweller
when he swore his affidavit in August 2013, he had since
left the company and
left New Zealand. Attempts made by Mr Moss to locate him and contact him
overseas in the short time left before
the hearing failed.
[63] Pursuant to r 9.74(3) Mr Sullivan objected to the use of Mr
Patel’s affidavit as evidence at the hearing. Mr Sullivan
noted that Mr
Patel was a long-serving employee of PVL and the Henderson companies.
He submitted that whether notifying
the other party a week or two earlier
would have made any difference to Mr Patel’s availability is unknown. Mr
Sullivan stated
that if Mr Patel had been cross-examined he would have been
cross-examined for only 15 minutes.
[64] In the circumstances I am satisfied that this is a case in which
leave is appropriately granted to RFD to use the evidence
of Mr Patel. I am
satisfied in particular that there are exceptional circumstances which
warrant that outcome. They are:
(1) This application has taken a considerable time to come to a hearing,
partly because of delays caused by Sol.
(2) It was open to Sol to give notice requiring cross-examination of Mr Patel at a much earlier point including at the point when the previous adjournment was granted.
(3) RFD may not have experienced the impossibility of calling Mr Patel if
the hearing had proceeded as initially allocated in November
2013.
(4) While Mr Patel’s evidence cannot be described as
“routine”,9 the substance of Mr Patel’s evidence
reflects to a large extent the evidence of Mr Henderson, who was cross-examined
on the
matters which would have been put to Mr Patel.
[65] I grant leave to RFD to use Mr Patel’s evidence.
Costs
The primary principle
[66] While costs are always at the discretion of the Court,10
the primary principle under r 14.2(a) means that costs follow the event.
In this case RFD, as the party succeeding on its application,
would normally
have its costs.
The competing submissions
[67] RFD applies for “increased costs” pursuant to r 14.6(3)
High Court Rules.
[68] Sol submits that there should either be no order as to costs or that
any costs awarded to RFD should be substantially reduced.
Sol’s submissions
[69] Mr Sullivan relies principally on two matters in submitting that
costs should lie where they fall or should be substantially
reduced.
[70] First, Mr Sullivan notes what I have recognised as the woeful state of records kept by the various companies. Those involved with the companies on both sides (and Mr Henderson and others were so involved) failed to keep records which comprehensively and accurately described the nature of the Sol/RFD transaction.
Had they kept good records, those who came to have subsequent control of
the
9 The alternative test for granting leave under r 9.74(3).
10 Rule 14.1(1) High Court Rules.
companies such as Sol for the benefit of creditors and members would have
been able to readily recognise the nature of transactions
and to make reliable
decisions. The liquidator took such records as existed and acted in a manner
which was consistent with those
records.
[71] Secondly, Mr Sullivan refers to correspondence which took place between counsel shortly before the initially allocated hearing date. In late-November 2013
Mr Walker instructed Mr Sullivan to withdraw the statutory demand on the
basis that the application for an order setting aside the
demand be withdrawn
and that costs lie where they fall. The offer was made without prejudice except
as to costs. The offer was
rejected by RFD. Mr Moss responded that 2B costs on
all steps to that point were appropriate. Agreement was not reached between
the
parties on withdrawal and the litigation proceeded to its recent
hearing.
Submissions for RFD
[72] Mr Moss’s submissions may be considered in three
parts.
[73] First, Mr Moss submitted that the statutory demand procedure was
wholly inappropriate for the sum demanded in this case as
there was a dispute as
to the debt. As I have found for RFD on the basis of a substantial dispute,
costs would normally follow the
event. But a full application of r 14.2(a)
would ignore the reasonableness of the liquidator’s actions in initially
relying
upon the records when making demand for Sol. To a large extent those
involved with Sol and RFD brought the present application
upon themselves. The
first point at which Mr Walker as liquidator of Sol could realistically reassess
his inference that a debt
existed was when RFD’s verified evidence was
available. That was when the initial hearing was pending. The factual disputes
raised in particular by Mr Patel and Mr Henderson then became known to Mr Walker
and his counsel.
[74] Secondly, Mr Moss seeks to draw a distinction between costs incurred up to the initially allocated hearing and those afterwards. Mr Moss submits that up to November 2013 costs should be on a 2B basis but thereafter costs should be on a “solicitor/client” basis. In terms of the High Court Rules a “solicitor/client” basis would mean indemnity costs under r 14.6(4). Elsewhere in his submissions Mr Moss
had suggested that the award should be of “increased costs”, the
lesser concept available under r 14.6(3).
[75] Mr Moss submits that a higher level of costs should be awarded for
the latter period of the litigation because the dispute
had then been clearly
identified. He submits that the late requirement of witnesses for
cross-examination and the very late production
of the Patel January 2011 email
constituted unreasonable conduct on the part of Sol as respondent. Mr Moss did
not specifically
refer to a limb of either r 14.6(3) or (4) on which he was
relying.
[76] The most relevant limb of the Rules is r 14.6(3)(b). That rule
allows the Court to order increased costs if the party opposing
costs has
contributed unnecessarily to the time or expense of the proceeding or a step in
it by (amongst other things) pursuing an
unnecessary step or an argument which
lacks merit.
[77] I am not satisfied in this case that that finding should be made
against Sol. While I have found in favour of RFD that there
is a genuine
dispute, the manner in which those responsible for Sol and RFD kept their
contemporaneous records did not render Sol’s
position totally
unmeritorious. The finding I have made is simply that RFD has established a
genuine and substantial dispute as
to the existence of any debt to
Sol.
[78] Thirdly, Mr Moss refers to the way Sol conducted its response to this litigation. Mr Moss notes for instance delays which led to the adjournment of the initially allocated hearing, as a result of which the Court at the time awarded RFD
$500 for the costs of the adjournment. I do not view those interlocutory matters as impacting on the award of costs which should be made upon the outcome of this proceeding. In the course of this litigation I have adopted the approach mandated by r 14.8 High Court Rules whereby interlocutory costs are to be dealt with (in the absence of special reasons to the contrary) at the time the interlocutory application is determined. Where they were not so resolved, I have left them to be dealt with in the ordinary way upon the outcome of the application.
Conclusion as to costs
[79] It is just that (apart from previously ordered costs)
the costs and disbursements up to and including 28
November 2013 lie where
they fall.
[80] For the period after 28 November 2013 it is just that RFD has its costs
on a
2B basis, together with reasonable disbursements and together with the reasonable fees of Mr O’Connell limited to the preparation of his second affidavit sworn
17 January 2014 and his attendance at the hearing.
Orders
[81] I order:
(1) The statutory demand issued by Sol Management Limited
(in liquidation) on 30 July 2013 is set aside.
(2) The respondent is to pay to the applicant the applicant’s costs in relation to attendances after 29 November 2013 on a 2B basis, together with disbursements to be fixed by the Registrar and together with the reasonable expert witness’s fees of Stephen O’Connell incurred in preparing an affidavit dated 17 January 2014 and in attending court on
7 April 2014, with leave reserved to counsel to file memoranda as to the
approval of Mr O’Connell’s fee if there is any
disagreement.
(3) The applicant is to provide to the respondent within 10 working days an itemised account of Mr O’Connell’s fees as referred to in [80](2) with an attachment setting out the time recorded on the identified
attendances and the charge-out rates adopted in the fee
calculation.
Solicitors:
Ngaire Smith Lawyer, Christchurch for Applicant. Counsel: J Moss, Christchurch.
Luke Cunningham Clere, Wellington for Respondent. Counsel: K P Sullivan, Barrister, Wellington.
Associate Judge Osborne
Schedule 1
RFD FINANCE LIMITED v SOL MANAGEMENT LIMITED (in liquidation) [2014] NZHC 801 [16 April 2014]
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