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High Court of New Zealand Decisions |
Last Updated: 28 June 2018
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IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
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CIV-2018-404-527
[2018] NZHC 1460 |
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IN THE MATTER
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of Section 290 of the Companies Act 1993
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BETWEEN
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GLW GROUP LIMITED
Applicant
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AND
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AFI MANAGEMENT PTY LIMITED
Respondent
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Hearing:
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8 June 2018
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Counsel:
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DW Grove for applicant
TJ Shiels QC for respondent
MD O'Brien QC for Lepionka & Company Investments Ltd (interested
party)
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Judgment:
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19 June 2018
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JUDGMENT OF FITZGERALD J
[As to application to set aside statutory demand]
This judgment was delivered by me on 19 June 2018 at 2:30 pm pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date...............
Solicitors: Foy & Halse, Auckland (G Halse)
Downie Stewart, Dunedin (P Hubbard) Bell Gully, Auckland (M Ollivier)
GLW Group Limited v AFI Management Pty Limited [2018] NZHC 1460 [19 June 2018]
[1] GLW Group Ltd (“GLW”) is insolvent. It has likely been insolvent for some years. It owes AFI Management Pty Ltd (“AFI”) substantial sums of money, which are secured by AFI’s second mortgage over a development property owned by GLW in the Hawkes Bay. The first mortgagee (in possession) is Lepionka & Company Investment Ltd (“LCIL”). As matters presently stand, GLW also owes LCIL substantial sums of money under the first mortgage.
[2] In March 2018, AFI issued a statutory demand against GLW, in the sum of approximately AUD 4.1 million.1 GLW applies to set aside the statutory demand. Mr Grove, counsel for GLW, confirmed that (despite indications to the contrary in GLW’s evidence filed on the application), GLW does not suggest there is a substantial dispute whether the debt is due and owing. Nor it is suggested GLW has a counterclaim, set-off or cross-demand for the purposes of s 290(4)(b) of the Companies Act 1993 (“Act”). Rather, GLW says that, pursuant to s 290(4)(c), the demand ought to be set aside “on other grounds”. In short, GLW says that if it is successful in appeal and other proceedings against LCIL, there are likely to be sufficient funds to pay the sum demanded by AFI, as well some funds being available to GLW also.
[3] Unsurprisingly, AFI opposes the statutory demand being set aside. It says it is highly unlikely, if not impossible, that sufficient funds will be available through any successful appeal, or any other litigation upon which GLW relies, to pay the full debt due to AFI. Rather, AFI says it is able to come to a commercial arrangement now with another party to recover at least part of its debt, but GLW’s present position is preventing that arrangement.
[4] As well as opposing GLW’s application to set aside the statutory demand, AFI also seeks an order pursuant to s 291(1)(b) of the Act immediately putting GLW into liquidation. AFI says that given there is no doubt GLW is insolvent, there is no purpose to be served by delaying an inevitable order for liquidation.
[5] LCIL appeared at the hearing supporting AFI’s application to liquidate GLW.
Context to present application and the evidence
[6] The background to GLW’s application is lengthy and somewhat convoluted. In short, however, in 2015, each of GLW and AFI commenced proceedings against LCIL (as mortgagee in possession), alleging LCIL breached its duties as mortgagee. While the two proceedings were separate, they were case-managed and heard together by me in 2017 (the “LCIL proceedings”). In my judgment of 14 December 2017, I found that LCIL had breached some of its duties as mortgagee, including that it had exercised its power of sale for an improper purpose.2 However, I declined to set aside the exercise of its power of sale, and confined GLW’s remedy to damages.
[7] GLW has appealed that and other aspects of my judgment. AFI has not appealed. While GLW has taken a dilatory approach to the pursuit of its appeal, as at the date of this judgment, it seems that the case on appeal has been or is soon to be filed, after which a two-day fixture will be allocated. As noted, GLW says that if its appeal is successful, or it is successful in a damages hearing in this Court consequent upon my earlier findings in the LCIL proceedings, sufficient funds will be available to meet the amount demanded by AFI. GLW also says that if LCIL’s exercise of its power of sale is set aside by the Court of Appeal (rather than its remedy sounding in damages), it has a buyer ready and waiting to purchase the balance of the Hawkes Bay property for NZD 4.5 million.
GLW’s evidence in support of its application to set aside
[8] GLW filed one affidavit in support of its application to set aside, by Mr Garth Paterson, GLW’s former director. Mr Paterson was GLW’s sole director at the time the funds which are the subject of the statutory demand were advanced by AFI to GLW (and related entities). Mr Paterson is an undischarged bankrupt in both Australia and New Zealand. Mr Paterson states that given his extensive background knowledge to this matter, and that GLW’s now sole director, his former wife, Ms O'Neil, lives in Sydney, he is authorised to swear his affidavit in support of GLW’s application. It is plain to the Court that despite his position as an undischarged bankrupt, Mr Paterson continues to have close involvement with all GLW’s activities and decisions.
2 AFI Management Pty Ltd v Lepionka & Co Investments Ltd [2017] NZHC 3116.
[9] Mr Paterson gives evidence of what he says was an agreement reached between himself and AFI’s principal, Mr David Johnson, on 1 March 2018 that GLW would be able to settle its New Zealand debt with AFI for $1.6 million, and debts owed to AFI by an Australian entity associated with Mr Paterson in the sum of $2.7 million.3 The Australian debts are secured by a mortgage over a Sydney property owned by the Australian entity. Mr Paterson says that he was advised that given there was “cross- connection” between the two loan agreements relating to the New Zealand and Australian borrowings, it was important for both debts to be settled at the same time.
[10] Mr Paterson gives his views about the development potential of the Sydney property, the prospects of a joint venture with another entity and funds being advanced in that regard. However, there are no documents or other materials supporting Mr Paterson’s evidence in this regard. Mr Paterson says he subsequently advised Mr Johnson that it would be a few weeks until settlement of both the New Zealand and Australian borrowings occurred, and Mr Johnson said that although he accepted the sums to settle the debts, as soon as settlement could occur the better. Self- evidently, given AFI’s issue of the statutory demand, the New Zealand and Australian debts were not settled at that time.
[11] Mr Paterson says that in a subsequent discussion with Mr Johnson a few days later, Mr Johnson informed him that LCIL was willing to purchase AFI’s second mortgage over the Hawkes Bay property, but it was a pre-condition of the offer that AFI issue a statutory demand against GLW, so a liquidator could be appointed and potentially put an end to GLW’s litigation against LCIL in the High Court and Court of Appeal.
[12] Mr Paterson gives evidence of further “behind the scenes” discussions between himself and Mr Johnson about AFI accepting a lesser sum in settlement of its debt and AFI’s separate dealings with LCIL. Mr Paterson says that the short point is that he has agreed with AFI that the New Zealand debt would be settled for $1.6 million. Mr Paterson says that GLW has funding available to it, from a third party, to make the payment to AFI. He says the only reason the agreed amount cannot be paid is because
a condition of that funding is that the LCIL mortgage is also redeemed, by way of a cash sum of the amount due under the mortgage being paid into Court, and LCIL being removed as mortgagee (and presumably replaced as first mortgagee by GLW’s funder). I interpolate to note that I heard an application by GLW to bring about that very result by way of orders for interim relief pending determination of its appeal. I dismissed GLW’s application, as the relief it sought was not interim, nor was it necessary to protect its position pending the determination of its appeal.4 GLW’s application also sought to relitigate aspects of my substantive judgment in the LCIL proceedings, in which I found that GLW’s right to redeem the LCIL mortgage had come to an end on 7 April 2015 (when LCIL exercised its power of sale).
AFI’s evidence in opposition
[13] Mr Johnson of AFI swore an affidavit in opposition to the application to set aside the statutory demand. He details the history of AFI’s lending to GLW and related entities, which commenced in 2010. Mr Johnson explains his frustration at delays in getting the loans properly documented, and the subsequent entry by GLW and AFI into a loan agreement in July 2014. The parties agreed and recorded in the loan agreement that the sum then owed by GLW to AFI was AUD 4,109,280 (the amount claimed in the statutory demand). GLW also granted AFI a mortgage over GLW’s Hawkes Bay property to secure those sums — AFI’s second mortgage referred to above.
[14] The amount said to be owed by AFI to GLW under the 2014 loan agreement includes a sum of AUD 195,000, which had earlier been paid by AFI to 502 Glenmore Road Pty Ltd (“Glenmore”). This is the Australian entity associated with Mr Paterson and referred to at [9] above. Mr Johnson explains how Glenmore granted AFI a mortgage over a Sydney property and, as a result, AFI advanced a further AUD 1.775 million to Glenmore to pay out the first mortgagee over the Glenmore property. Other than the mortgage granted to AFI by Glenmore, however, there is no separate loan agreement between AFI and Glenmore.
[15] Mr Johnson explains that the only “overlap” between the New Zealand loan agreement and the Australian mortgage given by Glenmore is the AUD 195,000.
4 AFI Management Pty Ltd v Lepionka & Co Investments Ltd [2018] NZHC 586.
[16] Mr Johnson says that the sums secured by the Australian mortgage were due for repayment on 1 September 2014. Those sums have not been paid. Nor have any amounts due for repayment under the New Zealand loan agreement been paid. The New Zealand loans were due to be repaid by GLW by 14 October 2014. Under the New Zealand loan agreement, outstanding sums attract penalty interest of 25 per cent per annum, compounding monthly, and actual costs. Mr Johnson says that by 20 April 2018, the debt set out in the statutory demand had increased to approximately AUD 4.33 million (or NZD 4.44 million).5 Mr Shiels QC, counsel for AFI, notes that for simplicity, the statutory demand does not include penalty interest which has accrued on the outstanding sums since October 2014. If it did, the sums demanded would be very significantly higher, said to be in the region of NZD 8 million or more.
[17] Mr Johnson says that since at least early 2015, it has been apparent to AFI that it was extremely unlikely it would recover all moneys owed to it by entities associated with Mr Paterson, including GLW. He says that as a result, AFI has consistently looked for commercial and pragmatic outcomes that would avoid expensive and uncertain litigation. This has included potential outcomes with GLW, other potential investors introduced by GLW, LCIL and other related entities. Mr Johnson states that “AFI continues to consider that a commercial and pragmatic resolution of these matters is in the best interests of all parties”.
[18] Mr Johnson disputes there was an agreement between himself and GLW on 1 March 2018, at least in the terms suggested by Mr Paterson or that, in any event, any such agreement remains on foot. I pause to note that Mr Paterson annexes to his affidavit in reply two emails dated 1 March 2018 from Mr Johnson to Mr Paterson.6 In his first email, Mr Johnson refers to a potential settlement he was offered in July 2017 for NZD 2.8 million, which required GLW to stop the litigation. That resolution obviously did not come about. Mr Johnson goes on in his email to urge Mr Paterson to stop the litigation on foot with LCIL, so that an overall settlement can be reached.
[19] In his second email, Mr Johnson again urges Mr Paterson to end GLW’s litigation, through which Mr Johnson says GLW “gambles” with AFI’s money rather than its own. Mr Johnson states:
Lepionka has now offered $1.6 million and we hope that can be negotiated up but if you can get me the $1.6 million now I will take it. By now I mean the money or an acceptable commitment within the next week.
[20] Mr Johnson concluded his second email to Mr Paterson by saying “Please please please get me off the hook of this path of destruction.”
[21] In his affidavit, Mr Johnson also addresses the alleged agreement with Mr Paterson (GLW) on 1 March 2018:
On 1 March 2018, I emailed Mr Paterson asking him to stop the appeal of Justice Fitzgerald’s High Court decision so that a settlement could be facilitated. I pointed out to him that any further court proceedings would lead to much more cost which would inevitably come from AFI’s interest in the property not GLW’s. I said it would be unfair for him to continue to allow that, and that I could enter into a commercial settlement with LCIL if he would stop the appeal. I did however give him an opportunity to match the deal so that he could appeal and gamble with his money, and not AFI’s.
[22] Mr Johnson does not directly respond to Mr Paterson’s evidence as to the further discussion between the two men a few days later, concerning a potential commercial arrangement between AFI and LCIL and set out at [11] above.
[23] Mr Johnson further accepts that on 12 March 2018, he emailed Mr Paterson stating that AFI would accept NZD 1.6 million to settle the New Zealand loan agreement and AUD 2.7 million to settle the Australian mortgage, but that they needed to be settled within a week.
[24] While there is further evidence of ongoing discussions between Mr Paterson and Mr Johnson, Mr Grove confirmed at the hearing that GLW does not suggest any agreement to settle the New Zealand loan agreement debt for NZD 1.6 million remains on foot. That is an appropriate concession. On any view of the evidence, even if a binding agreement had been entered into between AFI and GLW on 1 March 2018 (and it is not clear how Mr Paterson can bind GLW in any event; he is not a director
of GLW and is an undischarged bankrupt), any such agreement was not performed. GLW did not pay AFI the NZD 1.6 million within a week.
[25] Ultimately, Mr Johnson concludes his evidence as follows:
AFI is in a position where it can reach a commercial deal with another party to salvage something from the mess it has been placed in by Mr Paterson and GLW. Mr Paterson and GLW refuse to facilitate this. On any view of the outcome of the High Court hearing, there is no equity for GLW. While it is entitled to appeal, I do not accept that AFI is required to wait for payment of its undisputed debt just because GLW hopes for a successful appeal outcome.
GLW’s evidence in reply
[26] Mr Paterson filed an affidavit in reply. Much of it exceeds evidence properly in reply, and again traverses various matters in issue (and determined) in the LCIL proceedings. It also speaks to negotiations between GLW and AFI, and the possible deals that may or may not have been open to GLW and AFI at any given time. These do not advance matters, however, at least in terms of what I must decide on GLW’s present application. Much of the affidavit also addresses LCIL’s actions as first mortgagee, about which Mr Paterson was, and clearly remains, personally vexed.
[27] Mr Paterson also suggests that AFI’s second mortgage is only over certain aspects of the Hawkes Bay property. He does not explain how that is so. The contents of the loan agreement between AFI and GLW, and associated mortgage documents, do not bear that out. However, I do not make any formal findings in that regard (despite Mr Shiels’ request that I do). Those matters are not relevant to the issues I must determine on GLW’s application.
The proper approach to s 290(4)(c) of the Act
[28] As noted, GLW’s application to set aside the statutory demand is based on there being “other grounds” to set it aside, pursuant to s 290(4)(c) of the Act.
[29] The leading authority on s 290(4)(c) is Commissioner of Inland Revenue v Chester Trustee Services Ltd.7
7 Commissioner of Inland Revenue v Chester Trustee Services Ltd [2002] NZCA 258; [2003] 1 NZLR 395 (CA).
[30] In that case, the Master in the High Court had set aside a statutory demand on “other grounds,” on the basis that, among other matters, there was a realistic prospect of the company trading in the future. The Court of Appeal allowed the creditor’s appeal and overturned the decision to set aside. In doing so, both Tipping and Baragwanath JJ made a number of important observations as to the purpose and operation of s 290(4)(c).8
[31] Tipping J stated the following:9
I agree that if the company upon which the demand is served cannot show a substantial dispute concerning the debt, or that it has a qualifying cross-claim, the creditor is prima facie entitled to have the company put into liquidation. The creditor is not, however, entitled to liquidation as of right ... To take that view would not be consistent with Parliament’s direction that there can be other grounds upon which the statutory demand may be set aside. Hence Parliament has contemplated that it may in some circumstances be inappropriate for a company which is undoubtedly insolvent to be placed in liquidation. ...
...
[3] That said, I agree with Baragwanath J that the general policy of the Act that insolvent companies should be put into liquidation, if a creditor seeks such an order, should not be departed from lightly. To justify such departure there must be some other factor, be it policy, principle or simply the justice of the particular case, which outweighs the prima facie entitlement of the creditor to an order putting the insolvent company into liquidation. If the focus is on the justice of the particular case the discretion must always be exercised on a principled basis and not on some ad hoc perception of what individual justice might require. All cases involving s 290(4)(c) must in the end come down to a judgment by the Court as to whether the creditor’s prima facie entitlement is outweighed by some factor or factors making it plainly unjust for liquidation to ensue. The ground advanced by the insolvent company must be sufficiently compelling to overcome the general policy of the Act with regard to insolvent companies.
(Emphasis added)
[32] On the facts before the Court, Tipping J observed that it is not plainly unjust to place the company “in liquidation if it, or its backers, are unable or unwilling to pay the debt owed to the creditor.”10 His Honour went on to state:11
9 At [1] and [3].
10 At [4].
11 At [4].
The privilege of being able to continue operating with limited liability should not lightly be afforded to an insolvent company if a creditor wishes to put it into liquidation and there is no countervailing wish on the part of other creditors to avoid liquidation.
[33] Baragwanath J adopted a similar approach. He also referred to the “condition” of the privilege of engaging in business activities with limited liability, namely that the company be able to pay its debts as they fall due. Examining the structure and content of the relevant provisions of the Act, Baragwanath J stated that:12
... like any statutory discretion, that conferred by s 290(4)(c) must be exercised in conformity with the purposes of the measure by which it is conferred. Use of the exceptional power must be confined to cases which clearly justify departure from the fundamental principle that insolvency should bring the end of a company’s existence.
(Emphasis added)
[34] Finally, Baragwanath J stated that:
[60] It will also be legitimate for the court to use s 290(4)(c) to prevent an abuse of the statutory demand process. Where a statutory demand is being used for a purpose that is not contemplated by the Companies Act it will be appropriate for the court to set aside the demand, notwithstanding the company’s insolvency.
[35] Relevantly for later aspects of this judgment, it is important to note that the Court’s observations in Commissioner of Inland Revenue v Chester Trustee Services Ltd were directed to an application to set aside a statutory demand under s 290(4)(c), and not an application to put the relevant company into liquidation forthwith under s 291(1)(b).
The parties’ submissions
[36] GLW does not dispute that it is presently insolvent. Mr Grove quite properly acknowledged that to be the case.
[37] GLW’s primary submission is that it is appropriate to set aside the statutory demand to enable GLW to pursue its appeal and/or its damages claim in the LCIL
12 At [48].
proceedings, which it believes will ultimately allow AFI to be repaid. GLW points in particular to the fact that, subject to its appeal being successful, including on the basis that existing sale and purchase contracts over the Hawkes Bay property are set aside, there is an unconditional offer to purchase the balance of the property for NZD 4.5 million plus GST. If that arrangement came about, GLW submits it would have sufficient funds to pay the amount sought by the statutory demand.
[38] Conversely, GLW notes that if it is put into liquidation, while in theory the liquidator might continue the company’s appeal and/or its damages claim in this Court, the reality is that those claims will be abandoned. GLW accordingly submits there is very real prejudice to it, and indeed AFI, if the statutory demand is not set aside, given the appeal may result in a much larger “pot” being available from which to meet AFI’s debt.
[39] GLW also submits that it is not trading in any capacity other than in relation to the LCIL proceedings, and therefore does not pose any broader threat to the commercial community through its ongoing existence. It notes there is no suggestion at this time that there are specific transactions that require investigation through the clawback provisions. GLW accordingly submits that:
The only practical outcome from liquidating the company now, prior to the appeal being concluded and the claim for damages quantified in the High Court, will be to end those proceedings. [It is submitted] that these grounds are sufficiently compelling to overcome the general principles relating to the purpose of liquidating companies.
[40] GLW notes that AFI has delayed commencing liquidation proceedings until now, despite the debt being due and owing to it for some years. As such, it says there is no real prejudice to it by a further delay of some months, while the appeal and/or damages hearings take place.
[41] Finally, in response to AFI’s evidence that if GLW is put into liquidation, there is scope for AFI to enter into a commercial arrangement with another party by which AFI will recover at least some of its debt, Mr Grove poses a rhetorical question: why should GLW be put into liquidation, simply to enable AFI reach a deal with another party?
AFI’s position
[42] Mr Shiels says it is for AFI, and not GLW, to form a view of what is in AFI’s best interests. AFI says it is not prepared to wait any longer to be paid by GLW, and it does not wish to rely on the outcome of speculative litigation by GLW, in the hope GLW might in the future be able to repay some of its debt. AFI says that as a significant creditor of GLW, it is entitled to the presumption that an insolvent company will be put into liquidation. It says it does not have to show that GLW is an ongoing threat to the commercial community, or that there are particular transactions which need to be investigated by a liquidator. It further says that despite GLW not trading generally, it is plainly incurring more costs, including the costs of this and related litigation, which reduces the pot available to satisfy AFI’s debt, while in parallel its debt gets larger.
[43] AFI submits that on any realistic view, even if GLW’s appeal or damages hearing were successful, there is simply no equity remaining in the underlying property for GLW. And, with more time that passes, there is less equity available for AFI.
[44] AFI also submits that the mere fact GLW’s appeal may come to an end if it were liquidated is not a sufficient ground to set aside the statutory demand. Rather, any liquidator will examine these matters and form an independent view as to whether it is appropriate for GLW to continue down that path. Mr Shiels notes that any liquidator would need to take into account GLW’s shareholder’s views, including as to the merits of the appeal to be heard. AFI therefore says its right to what it is owed should not be overcome by GLW’s, or more accurately, Mr Paterson’s, desire to pursue its appeal against LCIL.
Discussion
[45] I have reached the view that GLW has failed by some margin to meet the threshold required to set aside a statutory demand on other grounds, pursuant to s 290(4)(c) of the Act.
[46] First, there is no dispute GLW is insolvent. Mr Paterson purports to suggest otherwise in his affidavits filed in support of GLW’s application. However, this is on the misguided basis that GLW might come into some funds at some future point, depending on a number of contingencies occurring. As noted, Mr Grove quite properly accepts that GLW is presently insolvent.
[47] Second, the debt is substantial and is not in dispute. It has been outstanding for a number of years, and continues to increase over time. The present case is therefore very different to instances where a relatively minor debt is due and owing, which, for particular reasons, cannot immediately be paid.
[48] Third, there is no clear and certain pathway to the debt being repaid, in the short to medium term. Were there such a pathway, AFI would presumably not be willing to compromise its debt for a much lesser amount, through a commercial settlement. Further, I am sceptical of GLW’s (or perhaps more accurately, Mr Paterson’s) view that as a result of the appeal and the damages hearing, there will be substantial sums remaining even for GLW, once the amounts properly due and owing to LCIL and AFI have been repaid. No independent or detailed analysis was provided by GLW on this application as to how this might come about.
[49] Fourth, and as the Court of Appeal made clear in Commissioner of Inland Revenue v Chester Trustee Services Ltd, I must take into account the wishes of creditors.13 AFI, as one of if not the most significant of GLW’s creditors,14 clearly wants GLW to be put into liquidation. It sees that approach as the only realistic pathway to recovering any sums from the situation in which it now finds itself. Conversely, GLW has advanced no evidence of any other creditor who wants GLW to continue trading. I therefore proceed on the basis there is none.
[50] Fifth, I am not satisfied that the possibility, or even probability, that GLW’s appeal and any damages hearing might be rendered nugatory by liquidation means there is real injustice for GLW, at least which outweighs the clear presumption that an insolvent company ought to be put into liquidation. A similar point was considered by
13 At [55].
14 Once accrued penalty interest since October 2014 is taken into account.
Associate Judge Osborne in Walker v Castlereagh Properties Ltd.15 While that case concerned an application to stay liquidation proceedings which had been triggered by a failure to pay a costs award, pending an appeal of the substantive judgment in respect of which the costs award had been made, the applicant in that case similarly submitted that a stay ought to be granted given liquidation could render its appeal nugatory. Associate Judge Osborne noted that a liquidation would not, strictly speaking, render the company’s appeal nugatory. In theory at least, a liquidator funded by Castlereagh, or its backers, could still decide to pursue the appeal. Associate Judge Osborne observed that:16
... If, in recognition of its insolvency, Castlereagh is placed in liquidation, the liquidator will make decisions for Castlereagh in the same way as its director does currently. When analysed, the nub of Mr Moss’s concerns is that a liquidator, acting in the best interests of Castlereagh, may reach a different conclusion to its current director, by deciding not to pursue an appeal. Or, if of the view there is merit in the appeal, the liquidator may insist on an assured line of funding before proceeding. Mr Moss has noted in his submissions that a liquidator might elect to retain more expensive legal assistance than Castlereagh and Ms Buxton have had to date. A consequence may be that those asked to fund an appeal may not be prepared to do so.
[76] In either event (that is, a liquidator deciding against appeal or a liquidator insisting on funds for an appeal, but not being funded and therefore abandoning the appeal), the appeal rights become “nugatory” not directly because of the refusal of stay but through the decision of the liquidator on behalf of the company or the failure of those who might fund the appeal to do so.
[51] I respectfully agree with the Judge’s observations, and similar conclusions apply here. As a preliminary point, AFI’s debt exists independently of GLW’s litigation against LCIL. Further, if GLW’s appeal has merit, and more importantly, if the consequences of a successful appeal are the desirous financial outcomes which Mr Paterson predicts, than a liquidator may well be prepared to continue the appeal process. That may be particularly so if GLW, or any backers it might have, is prepared to fund the liquidator’s course of action. Plainly GLW has, or anticipates having, funds to pursue its appeal if it is not put into liquidation. Presumably those funds could be offered up to a liquidator to continue the appeal, despite GLW’s liquidation.
15 Walker v Castlereagh Properties Ltd [2015] NZHC 907, [2015] NZAR 944.
16 At [75].
[52] Finally, I do not consider the statutory demand to have been issued by AFI for an improper purpose.
[53] AFI’s purpose in issuing the statutory demand is with a view to GLW being put into liquidation. Through that process, AFI anticipates that it might recover at least part of its debt. LCIL, who has not issued the statutory demand, presumably also sees benefits from GLW’s liquidation, given it is presently embroiled in ongoing litigation with GLW.
[54] There has been some debate whether the only proper purpose of a statutory demand is as a precursor to liquidation, or whether it can also extend to being used to recover a debt. Successive Court of Appeal decisions have observed that the latter is a permitted purpose.17 The Court of Appeal has again, very recently, confirmed this.18
[55] In this case, AFI’s purpose in issuing the statutory demand is as a precursor to GLW’s liquidation. Even on a narrow view of the purpose of statutory demands, that is a legitimate purpose. And even if AFI’s predominant purpose in issuing the statutory demand was to recover its debt, then the Court of Appeal has made it clear that that is also a proper purpose.
[56] The mere fact a creditor sees benefits flowing from a debtor’s ultimate liquidation does not mean a statutory demand has been improperly issued. Nor is that the case when other parties see benefits flowing from liquidation. Indeed, the very reason a creditor issues a statutory demand with a view to subsequently applying to put the debtor into liquidation is presumably because the creditor views that course as preferable to simply continuing to wait for the debtor to pay. Further, if the end result of liquidation is litigation in which the insolvent company is involved being rendered nugatory, then as Associate Osborne observed, that is not because of the liquidation itself; rather it is a consequence of an independent decision taken by the liquidator.
17 See, for example, Laywood v Holmes Construction Wellington Ltd [2009] NZCA 35, [2009] 2 NZLR 243 at [62]; Magsons Hardware Ltd v Concepts 124 Ltd [2011] NZCA 559 at [38]; AMC Construction Ltd v Frews Contracting Ltd [2008] NZCA 389, (2008) 19 PRNZ 13 at [7]; Browns Real Estate Ltd v Grand Lakes Properties Ltd [2010] NZCA 425, (2010) 20 PRNZ 141 at [16].
18 Manchester Securities Ltd v Body Corporate 172108 [2018] NZCA 190 at [34].
[57] Accordingly, I return to Mr Grove’s rhetorical question, namely: why should GLW be put into liquidation to enable AFI to enter into an arrangement with LCIL? The question I must resolve, however, is why should GLW, which is insolvent and unable to pay its debts, not be put into liquidation? In my view, any injustice to GLW from its application to set aside being declined does not clearly outweigh the prima facie right of a creditor to have an insolvent company put into liquidation.
[58] GLW’s application to set aside the statutory demand is accordingly dismissed.
AFI’s application to put GLW into liquidation forthwith
[59] The further and what I consider to be more difficult issue is AFI’s application pursuant to s 291(1)(b) of the Act that, when dismissing GLW’s application to set aside the statutory demand, I should forthwith place GLW into liquidation.
Approach
[60] Applications under s 291(1)(b) involve the exercise of discretion. Historically, there had been a view that the discretion was reserved for certain types of cases, and in particular, where the company in issue was clearly moribund.
[61] In Norman v ANZ National Bank Ltd, in the High Court Associate Judge Bell sought guidance from the Court of Appeal on the proper exercise of the discretion under s 291(1)(b).19 However, other than observing that the discretion must be exercised in the circumstances of the particular case before the court and it need not be limited to cases where the company is “moribund,” the Court of Appeal did not consider it appropriate or necessary to provide any general direction about the matter.20
[62] Researches reveal that it remains relatively uncommon for an order to be made putting a company into liquidation at the same time as dismissing an application to set aside a statutory demand. Rather, the more usual course is for liquidation proceedings to follow the ordinary procedure. In Norman v ANZ National Bank, the Associate Judge had made an order putting the company into immediate liquidation. The Court
19 See Norman v ANZ National Bank Ltd [2012] NZCA 356 at [41].
20 At [43].
of Appeal noted that the company did not have any significant assets and concluded that it had been open to the Associate Judge to have concluded that no purpose would be served by providing a period of time for the company to pay the sum due under the demand, before ANZ could apply to place it into liquidation.21
[63] Since the Court of Appeal’s decision in Norman, there have been several decisions of Associate Judges in which applications under s 291(1)(b) have been considered. For example, in Ultra Developments Ltd v Ultra Projects Ltd, Associate Judge Smith declined to make an order that the company be put into liquidation forthwith.22 The Judge noted that the company owned assets and there appeared to be at least some prospect that one of the pieces of land it owned may have development potential. Associate Judge Smith therefore concluded that on the evidence available to him, he was not able to conclude that no useful purpose would be served by requiring the creditor to file a separate liquidation proceeding if the company failed to pay the amount due under the statutory demand. The Judge also took into account that other creditors who had not had an opportunity to be heard at that point might take a different view of the question whether the interests of creditors generally would be best served by a liquidation order. Associate Judge Smith also noted that there was very little scope for damage to be done to the interests of the general body of creditors of the company if the liquidation process was left to take its ordinary course. For example, there was no evidence of any dissipation of assets, nor that the company was carrying on any business activity beyond marketing three properties for sale.
[64] In Redline NZ Ltd v Conveyor Technology Ltd, Associate Judge Osborne surveyed the historic approach to applications under s 291(1)(b).23 The Judge noted that earlier instances in which orders had been made under s 291(1)(b) included where the company was moribund, or where creditors’ interests were in such peril that the need to give urgent relief took priority. However, the Judge expressly noted it was “unnecessary and inappropriate to proceed on the basis that the case must fit within a required category, such as that of a moribund company.”24 Rather, if the threshold of
21 At [44].
22 Ultra Developments Ltd v Ultra Projects Ltd [2014] NZHC 1998 at [54]–[55].
23 Redline NZ Ltd v Conveyor Technology Ltd [2016] NZHC 1083 at [15]–[20].
24 At [20].
insolvency is established, the discretion under s 291(1)(b) is unfettered, but is to be exercised in a principled way.25 I respectfully agree.
[65] In Redline itself, Associate Judge Osborne held that the threshold test had been met, given Redline was unable to pay its debts. He noted the undisputed debt had gone unpaid for months, and there had been broken commitments to payment, even while the debt had been pursued through the formal procedures of the Act. He considered all such evidence pointed “to an extremity of problems faced by Redline”.26 The Judge noted that that evidence pointed to Redline’s assets being in jeopardy and the rights of creditors being prejudiced. These was said to be “strong reason” to grant the request for an immediate order of liquidation.27
[66] Against those matters, Associate Judge Osborne balanced “the draconian nature of an immediate order of liquidation”, though noting that that in and of itself was insufficient to lead to a different conclusion, having regard to the evidence of insolvency, the jeopardy to company assets and the risk to creditors.28 Given that prior, albeit short, notice had been given to the company of the application to put it into liquidation, Associate Judge Osborne ordered immediate liquidation.
[67] The final case to which I was referred was Brookside Residential Properties Ltd v Commissioner of Inland Revenue.29 In that case, Associate Judge Osborne accepted the company was clearly insolvent and had been so throughout the period since the statutory demand was issued. Ultimately, the company did not oppose the dismissal of its application to set aside the statutory demand. The two issues remaining were the costs of the application and whether to make an immediate order of liquidation.
[68] The company sought six months’ time to pursue a subdivision of property. But it had not adduced evidence as to the prospects of effecting a successful subdivision in that time-period. Further, evidence was provided as to secured creditors who were
25 At [20].
26 At [48].
27 At [50].
28 At [54].
29 Brookside Residential Properties Ltd v Commissioner of Inland Revenue [2017] NZHC 424.
not heard on the application, and valuation evidence in relation to land. On the evidence, Associate Judge Osborne noted that the Commissioner asked the Court “to use its rarely invoked power” to order immediate liquidation.30 Having reviewed earlier authorities, the Judge was satisfied that the case before him was so unusual and its circumstances so demanding of liquidation, that there ought to be an immediate order. Associate Judge Osborne concluded:
[21] There is not a compelling basis to cut across the Commissioner’s wish to have liquidators now control this insolvent company’s assets when the company itself has apparently been unable to make substantial progress in relation to its unsecured debt in the seven month period since the Commissioner’s demand was issued. Mr Currie’s contrary submission points to the benefit for the Commissioner should there be a successful subdivision. But the benefit is not supported by evidence which would enable either the Commissioner or this Court to reality-check the assessments being made by people such as the applicant’s director and the persons intended to be involved in the subdivision. Similarly, in the absence of evidence, the Court cannot assess the likelihood that the 13 pre-sales which are central to the proposal for adjournment will come to (profitable) fruition.
Discussion
[69] AFI says there is no reason why a liquidation should not take place forthwith, given GLW is hopelessly insolvent and the position is highly unlikely to change.
[70] Mr Grove confirmed the grounds advanced by GLW in opposition to an order for immediate liquidation are the same as those advanced in support of its application to set aside the statutory demand.
[71] Having carefully considered the evidence and the authorities in relation to s 291(1)(b), I have decided (albeit by a fine margin) not to make an order for immediate liquidation.
[72] First, I accept GLW is insolvent. That is not in dispute. Further, it seems reasonably unlikely that further grounds or clear evidence will be advance by GLW to resist any subsequent application for liquidation. For example, and as Associate Judge Osborne noted in Brookside Residential Properties, proper evidence of solvency in the short term is required, as a “reality-check” to the high-level and hopeful observations
30 At [17].
of those associated with the insolvent company.31 In one sense, therefore, declining an order could be said to defer the inevitable.
[73] However, balanced against this is what I consider to be a lengthy delay on AFI’s part in issuing its statutory demand. As Mr Johnson for AFI confirms, GLW has not repaid anything to AFI under its various loan arrangements. Despite this, AFI has not sought to enforce its debt in the intervening years. While it did issue a statutory demand in 2016, which GLW did not apply to set aside, AFI did not take steps to liquidate GLW at that time. Therefore, a further short period while the liquidation process runs its ordinary course could not be said to seriously prejudice AFI.
[74] Nor is there any evidence there is any imminent or real threat to creditors, such as dissipation of assets, if the liquidation process were to progress in the ordinary way. It is correct GLW will be incurring costs (primarily legal costs) in pursuing its present appeal, but legal costs have been incurred for some years. There is therefore no new, fresh, or significant prejudice from the ordinary course being adopted.
[75] Finally, GLW has had some financial backers in the past. For that reason, while it seems unlikely, it cannot be ruled out altogether that it might be put in funds to meet the demand set out in AFI’s statutory demand. Again, while that seems unlikely, given there are no clear and pressing reasons for immediate liquidation, I consider it appropriate to provide GLW with a final opportunity to secure such funding.
[76] There will accordingly be a short period of time within which GLW will be permitted to pay the debt as set out in the statutory demand, before AFI may apply to put GLW in liquidation. Given my view that the case for GLW to be given any further time is marginal, I will make an order that GLW be given five working days from the date of this judgment to pay the amount owing under the statutory demand. Absent such payment, AFI will be entitled to immediately apply for GLW’s liquidation.
Orders
[77] There are accordingly orders in the following terms:
31 At [21].
(a) GLW’s application to set aside AFI’s statutory demand is dismissed.
(b) GLW has 5 working days from the date of this judgment within which to pay the amount set out in AFI’s statutory demand.
(c) In default of payment in accordance with the preceding order, AFI may make an application to put GLW into liquidation.
[78] The Registry is directed to return this file to the insolvency list where, going forward, it is to be case managed in that list in the ordinary way.
Costs
[79] I can see no reason why GLW ought not to pay the costs of its application on a scale 2B basis, together with disbursements as fixed by the Registrar.
[80] In the event either party takes a different view, and agreement between them proves impossible, memoranda may be filed within 10 working days of the date of this judgment. Absent such memoranda being filed within that timeframe, there is an order in terms of paragraph [79].
Fitzgerald J
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URL: http://www.nzlii.org/nz/cases/NZHC/2018/1460.html