Body Corporate 379933 v Form Property Group Limited [2015] NZHC 154 (12 February 2015)

Last Updated: 15 April 2015

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2013-404-003302 [2015] NZHC 154

BETWEEN	BODY CORPORATE 379933 Plaintiff
AND	FORM PROPERTY GROUP LIMITED Defendant

Hearing:	28 July 2014
Appearances:	S Price and R K Bergin for the Plaintiff T J P Bowler for the Defendant
Judgment:	12 February 2015

_{JUDGMENT OF ASSOCIATE JUDGE SARGISSON}

This judgment was delivered by me on 12 February 2015 at 4.30 p.m. pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date.......................................

Solicitors: Minter Ellison Rudd Watts, Auckland

_{Neilsons, Auckland}

BODY CORPORATE 379933 v FORM PROPERTY GROUP LIMITED [2015] NZHC 154 [12 February 2015]

Introduction

[1] The plaintiff is Body Corporate 379933. It oversees the property at

160 Grafton Road, Auckland, which comprises a unit title development. The defendant, Form Property Group Ltd (Form Property), is a member of the Body Corporate. It owns two commercial units at the property.

[2] The Body Corporate has applied for an order under s 241(4)(a) of the Companies Act 1993 to place Form Property into liquidation on the ground that Form Property is unable to pay its debts as they fall due. It is the third such application that the Body Corporate has made against Form Property.

[3] Form Property opposes the current application, just as it opposed the two previous applications. Before turning to the current application and the grounds of opposition it is necessary to refer briefly to the previous applications.

The previous applications

[4] The first application was made in a proceeding that the Body Corporate commenced in 28 November 2012. It was based on Form Property’s failure to comply with a statutory demand for unpaid levies and related collection costs. It was struck out on 22 February 2013 after Form Property paid the amount of the demand plus the costs of the proceeding assessed on a 2B basis plus disbursements pursuant to undertakings given to the Court on 8 February 2013. The total amount paid by way of costs and disbursements was $13,860.52.

[5] The second application was made at the commencement of this proceeding on 21 June 2013, and was based on Form Property’s failure to comply with a statutory demand dated 16 May 2013 for $5,032.85 in debt collection costs. The Body Corporate claimed this was the shortfall in debt collection costs that was not included in the amount covered by the undertaking, and that it had an entitlement to the shortfall under the Unit Titles Act 2010.

[6] Form Property eventually paid the amount of the shortfall demanded. In a judgment dated 25 October 2013 Associate Judge Christiansen ordered Form Property to pay the costs and disbursements of the proceeding on a 2B basis, totalling $11,295.31. The Body Corporate issued statutory demands on 6 November

2013 and again on 23 December 2013 for those costs and disbursements.

The current application

[7] This third application was filed on 19 February 2014 when the Body Corporate reappeared as plaintiff in this proceeding pursuant to an order for substitution. The application relies on Form Property’s inability to pay its debts; and for the purpose of proving such inability, on Form Property’s failure to comply with the statutory demand of 23 December 2013. The Body Corporate relies on the consequential presumption of insolvency that arose pursuant to s 287(a) of the

Companies Act.¹

[8] In the application the Body Corporate also makes the claim that Form Property is liable to it for sums in addition to the unpaid costs of $11,295.31. The claimed sums are:

(a) $11,794.62 for levies that were due for payment on 28 February 2014 and were invoiced on 10 February 2014; and

(b) $44,801.91 for an entitlement under the Unit Titles Act to the legal fees incurred by the Body Corporate in the period between 30 April

2013 and 29 October 2013 for “steps to recover ... the reasonable costs” of collecting levies that were payable by Form Property.

(c) $9,405.68 for further legal fees that the Body Corporate has incurred in the period between 29 October 2013 and 30 January 2014 for steps

_{to recover the reasonable costs of collecting such levies. Again the}

¹ During the course of the hearing of the application counsel for the Body Corporate made clear that it proceeds on the basis of the statutory presumption of insolvency under s 287(a) of the Companies Act 1993.

Body Corporate says it is entitled to such fees under the Unit Titles

Act.

[9] Though the Body Corporate acknowledges that the legal fees to which it is allegedly entitled under the Unit Titles Act have never been the subject of a statutory demand, it nevertheless argues that it has provided sufficient particulars in evidence of these additional costs to support its claim of entitlement.

[10] It further contends that the statutory presumption that Form Property is unable to pay its debts stands, and that it should be entitled to claim in the liquidation for these legal fees as a debt due.

Form Property’s position

[11] Form Property has denied liability for payment for each sum set out in the Body Corporate’s application on the basis of a claimed counterclaim for $88,956.97 for loss of rent it suffered as a result of the failure by the Body Corporate to fulfil its obligations to maintain the property at Grafton Road. Additionally, it challenges the claims for additional legal costs on the basis that the Body Corporate has no entitlement to such costs, and in the alternative that such costs are not reasonable.

[12] Since it filed its documents in opposition to an order for liquidation, Form Property has backed away from its all-encompassing denial of liability in respect of the costs and disbursements ordered on 29 October 2013 by paying the ordered sum on 16 April 2014. Though indications have been given of Form Property’s possible intention to pay the levies that became due for payment on 28 February 2014, payment has not eventuated; and such indications have all been given in qualified terms that maintain the denial of liability for these levies on the basis of the asserted counterclaim.

[13] Form Property also continues to maintain it has no liability for the legal fees that the Body Corporate claims as debts under the Unit Titles Act. Instead it contends that the appropriate means of determining its liability for any additional costs is in a civil proceeding brought in the usual way. In such a proceeding the

Body Corporate’s entitlement to additional costs may be tested and its counterclaim

can be pursued.

Legal principles relating to solvency and counterclaim

[14] The application for an order for liquidation is made under s 241(4)(a) of the Companies Act, which allows the Court to appoint a liquidator if it is satisfied that the company is unable to pay its debts. The decision to appoint a liquidator to a company ultimately lies in the discretion of the Court. If the Court is satisfied that the company is insolvent, it retains the discretion not to make a liquidation order.²

[15] A failure by a company to comply with or set aside a statutory demand served on it raises a presumption that the company is unable to pay its debts.³ This presumption is rebuttable, but this rebuttal requires more than bland assertions that the company is solvent.

[16] The debtor company is not prevented from disputing its indebtedness at a liquidation hearing where it has not complied with a statutory demand.⁴ In such a case, the Body Corporate, as the creditor, is entitled to rely on the presumption of insolvency under s 287(a), and the onus falls on Form Property, as debtor, to establish that there is a genuine and substantial dispute as to its liability.⁵ Cogent

evidence, short of actual proof that the debt is not payable, is required.⁶

[17] The Court of Appeal has outlined the standard a company must meet when asserting a counterclaim or set-off in a defended liquidation proceeding in Covington Railways Ltd v Uni Accommodation Ltd, as follows:⁷

[a defendant alleging a cross-claim] must be able to point to evidence before the Court showing that it has a real basis for the claimed set-off and that accordingly, the applicant’s claim to be a creditor is, to the extent of the set- off, seriously in doubt. In the words of Buckley LJ in Brian Stone Finance

² _{Yan v Mainzeal Property and Construction Ltd [2014] NZCA 190 at [21].}

³ _{Companies Act 1993, s 287(a).}

4. Grant v Lotus Gardens Ltd [2013] NZHC 1135 at [42], approved in Yan v Mainzeal Property and Construction Ltd at [63].

⁵ _{Yan v Mainzeal Property and Construction Ltd at [63].}

⁶ _{Yan v Mainzeal Property and Construction Ltd at [63].}

⁷ Covington Railways Ltd v Uni Accommodation Ltd [2000] NZCA 230; [2001] 1 NZLR 272 at 274.

Ltd v De Vries (No 2) [1976] Ch 63, 78, it must show that there are “clear and persuasive grounds” for the set-off claim. Where this can be done, the party who has issued the statutory demand against the company will be shown to be using the statutory demand in liquidation procedures improperly because there is a ‘genuine and substantial dispute’ about the net amount of the company's indebtedness Taxi Trucks Ltd v Nicholson [1989] 2 NZLR

297, 299). The dispute should then be resolved in the ordinary way — except as to any undisputed balance, rather than upon the hearing of a liquidation

application.

[18] The High Court has adopted this test in the context of alleged set-offs and counterclaims in defended liquidation applications.⁸

[19] Generally, a counterclaim relied upon for the purpose of rebutting the presumption of insolvency will be rejected where it fails to provide quality evidence that goes beyond assertion, or when the claim is merely speculative, and there is conflicting evidence regarding the existence and quantum of the counterclaim.⁹

Issues for determination

[20] It is not in dispute that Form Property is presumed insolvent due to its failure to comply with or to set aside the statutory demand made on 23 December 2013 for court-ordered costs of $11,295.31. It is also not in dispute that the presumption will continue to stand notwithstanding that those costs have now been paid, as payment of the debt demanded in a statutory demand does not extinguish the presumption of

insolvency once it has arisen.¹⁰

[21] To rebut the presumption Form Property must overcome two hurdles:

(a) The first hurdle is in respect of the unpaid levies totalling $11,794.62.

Form Property must show that it has a real basis for its counterclaim to the extent of these levies, as it gives no other reason for resisting

_{payment of the levies.}

⁸ _{Heron’s Flight Ltd v NZ Properties International Ltd [2011] NZHC 136; [2012] 1 NZLR 424 at [19].}

⁹ _{Yan v Mainzeal Property and Construction Ltd at [63].}

¹⁰ Heron’s Flight Ltd v NZ Properties International Ltd, above n 8.

(b) The second hurdle is in respect of the compensation the Body Corporate claims for various legal fees under the Unit Titles Act. Form Property must show either that it has a real basis for its counterclaim to the extent of the quantum of these fees; or in the alternative that it has a real basis for its contention that is not liable to compensate the Body Corporate for those fees.

[22] Form Property’s counterclaim and its challenge to liability must in each case be made on real and substantial grounds that are genuinely arguable.¹¹

Discussion

[23] The question is whether Form Property has established that it has substantial and genuinely arguable grounds to assert that it has a counterclaim for $88,956.97 against the Body Corporate. The Body Corporate strongly disputes the elements of the counterclaim, which Form Property says are as follows:

(a) That the Body Corporate has breached its duties under s 138 of the Unit Titles Act, which oblige the Body Corporate to repair and maintain common property and any infrastructure that serves more than one unit. Specifically, the particular breaches Form Property asserts are:

(i) Failure to maintain the service elevator;

(ii) Failure to maintain the fire alarm on Level 3;

(iii) Failure to ensure Form Property’s unit had a power

connection;

_{(iv) Failure to ensure there is no water ingress to the building.}

¹¹ Covington Railways Ltd v Uni Accommodation Ltd [2000] NZCA 230; [2001] 1 NZLR 272 at 274.

[24] Form Property’s submissions did not elaborate further on the context in

which these alleged breaches occurred.

[25] I accept the Body Corporate’s argument that Form Property has not identified any viable, arguable cause of action against it under s 138. My reasons may be stated briefly:

(a) There is a marked absence of evidence of any assessment of the state of the units from any building consultant or other suitably qualified person or any relevant regulatory authority, to suggest that the Body Corporate has failed to fulfil its maintenance obligations under the Unit Titles Act or the rules of the Body Corporate. The evidence about the claimed breaches is mere assertion.

(b) Form Property’s assertions of a counterclaim have been made over the course of defending the current liquidation application, but there is no indication that it has seriously prosecuted any claim, or indeed taken any steps at all in respect of any claim. Were the alleged breaches so serious as to cause the significant loss claimed, one would expect evidence of steps taken by Form Property to litigate the counterclaim by now, if there was indeed a genuine claim.

[26] If Form Property holds a genuine belief that it has a real counterclaim, its directors may pursue it with the liquidators at a later time, but it is not, in my finding, a sufficient reason to defer an order for liquidation.

[27] It follows that the presumption of insolvency which arose due to

Form Property’s failure to comply with or set aside the statutory demand of

23 December 2013 stands. There are no other discretionary factors that might justify refusing an order for liquidation. Form Property purports to have significant assets that it could realise if necessary, but nothing has materialised. There has been ample time for it to realise any such assets.

[28] The issue of solvency requires consideration of the debtor’s entire financial

position.¹² A realistic commercial approach to the assessment is required.¹³

[29] Form Property has a history of failing to pay levies, statutory demands and court-ordered costs until the eleventh hour, or not at all. In respect of the present application it has failed to act on its own indications that it will pay the overdue levies. On more than one occasion it has waited to seek adjournments until the eleventh hour. The time has come when the Court must recognise Form Property’s inability to pay debts as they become due.

[30] For these reasons, Form Property should be placed into liquidation.

Body Corporate’s entitlement to debts claimed in current application for

liquidation

[31] Given my finding that Form Property should be placed into liquidation, it is not necessary to determine the question of the Body Corporate’s entitlement to compensation for the legal fees it claims in its application at this stage. I also do not wish to make observations that may be taken as determinative of any entitlements the Body Corporate may have under s 124 and s 127 of the Unit Titles Act. That requires a careful analysis of those provisions, and the purpose for which the legal fees were incurred (and if indeed there is an entitlement to compensation for the legal fees, a determination of the amount that would be reasonable).

Result

[32] I make an order placing the defendant, Form Property Group Limited, into liquidation. I appoint as liquidators Tony Leonard Maginness and Boris van Delden.

[33] The defendant is to pay 2B costs to the plaintiff, plus disbursements as fixed by the Registrar.

¹² _{Yan v Mainzeal Property and Construction Ltd (in rec and liq) [2014] NZCA 190 at [60].}

¹³ Yan v Mainzeal Property and Construction Ltd (in rec and liq) [2014] NZCA 190 at [60].

[34] Remuneration of liquidators:

(a) The rates of remuneration of the liquidators and staff working under their supervision and control are fixed at the rates set out in the liquidators consent to act.

(b) The liquidators are to apply at the conclusion of the liquidation, for approval of their overall remuneration.

[35] These orders are timed at 4.20 pm on 12 February 2015.

[36] Leave is reserved to seek other orders as to costs, provided any memorandum for that purpose is filed and served within 10 working days.

Associate Judge Sargisson