Heron's Flight Ltd v NZ Properties International Ltd
| Jurisdiction | New Zealand |
| Judge | Bell |
| Judgment Date | 07 February 2011 |
| Neutral Citation | [2011] NZHC 136 |
| Docket Number | CIV-2010-404-005878 |
| Court | High Court |
| Date | 07 February 2011 |
And Under the Companies Act 1993
[2011] NZHC 136
CIV-2010-404-005878
IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY
Application to place the defendant into liquidation on the basis of an unpaid statutory demand concerning a Court of Appeal costs order — proceedings concerned sale of a property and commission — whether defendant had an arguable defence — relevance of “pay now, argue later argument to applications to place a company into liquidation — cross demands and set off under s290 (Court may set aside statutory demand) and s310 Companies Act 1993 (mutual credit and set-off) — procedural defects in pleading with regard to non-compliance with statutory demand under s241 Companies Act 1993 (meaning of “inability to pay debts”) — relevance of defendant's failure to apply to set aside the statutory demand.
J M McBride for Plaintiff
D G Collecutt for Defendant
JUDGMENT OF ASSOCIATE JUDGE Bell
Heron's Flight Ltd applies for an order that NZ Properties Ltd be put into liquidation. Heron's Flight is a creditor of NZ Properties International Ltd for $9,600 under a costs order of the Court of Appeal dated 25 June 2010. It served a statutory demand under s 289 of the Companies Act on the registered office of NZ Properties Ltd but NZ Properties Ltd did not comply with that demand.
The proceeding is opposed by the defendant and by its shareholder, Janine Ann Wallace. They admit that the defendant is liable for the costs order but say that it has a cross-demand for $67,500, being commission payable under an agreement Herons Flight entered into for the sale of its business in February 2009. They also say that the plaintiff is insolvent, and that the defendant's own assets exceed its liabilities. They say the Court should not exercise its discretion to order the defendant to be put into liquidation.
The plaintiff's case in essence is that it is entitled to immediate payment of the costs ordered by the Court of Appeal and the cross-demand raised by NZ Properties International Ltd ought not to affect the Court's decision on the liquidation application.
There are two preliminary procedural matters. The first is a pleading point. Section 241(4) of the Companies Act provides four grounds for the Court to make an order appointing a liquidator. One of those grounds is that the company is unable to pay its debts.
On an application that a company be put into liquidation, the applicant is required to specify in the statement of claim which of the four grounds in s 241(4) the applicant relies on. Where an applicant relies on s 241(4)(a), an appropriate pleading is to say that the company is unable to pay its debts. However, these exact words do not need to be used. Nevertheless, the pleading should contain express words to convey that inability to pay debts is the basis of the application.
In this case, the plaintiff has pleaded that it served a statutory demand and has used the failure to comply with the statutory demand as the basis for the Court to make an order. It has not expressly pleaded insolvency as such. Non-compliance with a statutory demand is not one of the grounds provided under s 241(4) of the Companies Act. Instead, non-compliance with a statutory demand simply gives rise to a presumption under s 287(1) of the Companies Act that the company is unable to pay its debts. In other words, non-compliance with a statutory demand is matter of evidence only. The pleading of evidence is not the proper pleading of a ground for an application under s 241(4). Accordingly, the pleading of the statement of claim in this case is defective. For the Court to make an order, that pleading first needs to be amended. The plaintiff sought leave to amend the statement of claim to include a plea that the defendant is unable to pay its debts. The defendant is not prejudiced. The statement of claim is amended accordingly.
I deal with the case on the basis that the plaintiff is alleging that the defendant is insolvent.
Second, the plaintiff takes the point that the defendant's statement of claim was filed out of time. It was filed two days late. The plaintiff says that the defendant needs leave to file its statement of defence and opposed the grant of leave. It accepts that it is not prejudiced by the late filing but says that is not the test. It refers to the judgment of Paterson J in Fresh Cut Flower Wholesales Ltd v The Living and Giving Gift Co Ltd (2001) 16 PRNZ 173 at [9]:
With respect, I adopt the principles applied by the Masters. First, leave should not be granted unless the applicant can show on the papers an arguable basis upon which it is not liable for the amount claimed. Further, in my view, even if there is an arguable defence, leave should not be granted if the applicant is insolvent.
That passage needs to be read in context. The test applied by Paterson J was relevant to the particular matters in issue for him. The other cases of Masters which Paterson J was referring to appear to include Sayer v Capital Aviation (1993) 6 PRNZ 401, Mosaed v Roy Turn Ski Shop Ltd HC Wanganui M63/92, 10 December 1992, Master Williams QC, Orme v Parkway Investments HC Hamilton M149/00, Master Faire 7 May 2001, Sports Plus Australia Pty Ltd v Sports Plus Ltd, Master Gambrill HC Auckland M1333/96, 3 December 1996. Although each case turned on its own facts, a consistent principle running through them was that the party seeking leave to extend time for filing a defence had to show an arguable basis for defending the proceeding. Indeed, I note that McGechan quotes the Fresh Cut Flower decision as authority for the proposition that leave will not be granted to file out of time unless an arguable defence can be shown on the papers: see McGechan on Procedure HR31.17.01.
This is an appropriate case to extend time for filing a statement of defence under rr 1.19 and 31.20 for these reasons:
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(a) The defendant has an arguable defence. I consider the merits of the defence below and find for the defendant. However, even if I had found for the plaintiff, the cross-demand raised by the defendant is still a matter that could be properly raised as requiring the Court's consideration on the liquidation application.
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(b) The defendant's shareholder was entitled to file a statement of defence and did so in time. The Court should consider the issues raised by her. It would not make sense to refuse to consider the same issues when raised by the defendant.
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(c) The plaintiff needed leave from the Court to put its case in order. It would be unreasonably harsh to refuse leave to the defendant to put its case in order when there is no prejudice to the plaintiff.
Accordingly, I extend time to the defendant to file its statement of defence.
Heron's Flight Ltd obtained its costs order on a successful appeal from a decision of Associate Judge Doogue. Associate Judge Doogue heard an application by Heron's Flight Ltd to set aside a statutory demand issued by NZ Properties International Ltd demanding payment of the sum of $67,500, said to be owing by way of commission on the sale of the Heron's Flight business at Matakana. The purchaser was International Xin Hua Wines Ltd, a company with Chinese ownership. An agreement for sale and purchase was signed. It was conditional on due diligence by the purchaser. Mr. Peter Lowndes, a barrister, gave notice that the purchaser was satisfied with the due diligence. The matter in issue was whether the purchaser authorised Mr Lowndes to give that notice. Associate Judge Doogue held that Mr Lowndes had ostensible authority to give that notice and dismissed Heron's Flight Ltd's application to set aside the statutory demand. Heron's Flight Ltd's appeal was successful. The Court of Appeal held that on the material before him, there was not enough evidence to allow Associate Judge Doogue to conclude that Mr Lowndes had ostensible authority to give the notice.
The Court of Appeal held that the merits of the claim by NZ Properties International Ltd should go to a substantive hearing. It recognised that at that hearing, NZ Properties International Ltd may establish that Mr Lowndes did have the authority to give the notice declaring the agreement unconditional.
The Court of Appeal's order for costs is a final order. There has been no appeal against the order. There is no stay of execution.
The defendant's director says that the assets of the defendant substantially exceed its liabilities. Her affidavit lists three book debts of about $800,000, said to be due to it, including its claim of $67,500 alleged against Heron's Flight Ltd. Another book debt is for commission claimed against the shareholders of Heron's Flight on the sale of the land of the vineyard. That claim is subject to similar arguments as the defendant's claim against Heron's Flight. There is no evidence to allow the Court to assess the strength of the third claim. The liabilities it records are income tax and GST due on the book debts, legal costs, plus the liability under the costs order of the Court of Appeal. But that evidence only goes to show balance sheet solvency. It does not establish cash flow solvency. There is no evidence that the defendant holds funds from which it could pay the order for costs. In cases such as this, cash flow insolvency is sufficient to establish insolvency, allowing the Court to make an order for winding-up. The authority frequently cited for this is the judgment of Plowman J in Re Tweeds Garages Ltd [1962] Ch 406:
In such cases it is useless to say that if its assets are realised there will be ample to pay 20...
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