Heron's Flight Ltd v NZ Properties International Ltd

JurisdictionNew Zealand
CourtHigh Court
JudgeBell
Judgment Date07 February 2011
Neutral Citation[2011] NZHC 136
Docket NumberCIV-2010-404-005878
Date07 February 2011

[2011] NZHC 136

IN THE HIGH COURT OF NEW ZEALAND

AUCKLAND REGISTRY

CIV-2010-404-005878

And Under the Companies Act 1993

Between
Heron's Flight Ltd
Plaintiff
and
NZ Properties International Ltd
Defendant
Counsel:

J M McBride for Plaintiff

D G Collecutt for Defendant

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.

Held: Non-compliance with a statutory demand was not a ground under s241(4) CA (commencement of liquidation). Rather it gave rise to a presumption under s287(1) CA (meaning of “inability to pay debts”) that the company was unable to pay its debts. Non-compliance with a statutory demand was a matter of evidence only. The statement of claim was amended to include the plea that NZ Properties was unable to pay its debts.

In respect of the non-compliance with the statutory demand, Heron had established a presumption that NZ Properties was insolvent. NZ Properties had not rebutted that presumption with its assertions that its assets exceeded its liabilities, as the evidence only showed balance sheet solvency, not cash flow solvency.

NZ Properties claim for commission was strong enough to qualify as a cross-demand under s290(4)(b) CA. The fact that NZ Properties had not applied to set-aside the statutory demand under s290(4) CA was not fatal.

Consideration given to authorities that suggested a failure to apply to set aside a statutory demand under s 290 may prevent a company later raising matters, which could have been raised in an application under s 290, except in exceptional circumstances. The CA specifies in s287 that the consequence of not applying to set aside a statutory demand is that a presumption of insolvency arises. The Act does not provide any other consequences and if Parliament had intended further consequences, it would have specified them in the statute. There was no need to add a gloss to the words of the statute. The gloss added by these cases purports to set up an estoppel based on res non judicata.

A company faced with a statutory demand had a number of lines of defence open to it. Which line was taken,” depended on tactical or practical considerations. Not applying to set-aside the statutory demand did not stand in the way of NZ Properties raising its cross-demand.

As a general proposition, Heron was correct to argue it was entitled to enforce an order for costs now and should not have its payment deferred while NZ Properties pursued its cross-demand. However, the “pay now, argue later” approach did not necessarily apply when the Court was required to consider whether to make an order placing a company in liquidation, due to the effect of s310(1) CA (mutual credit and set-off). In this case, the cross-demand by NZ Properties could be set-off against its liability for costs. The claim for commission came with within mutual credits/debts. On an order placing NZ Properties into liquidation, s310 CA would create one debt between the parties and NZ Properties had a clear and persuasive case that Heron would owe it the balance of the commission.

NZ Properties had established proper grounds that under s310 Heron would not be a creditor of the company and as there were no other creditors pressing for a winding-up order, it was inappropriate to place the company into liquidation,

Application dismissed.

JUDGMENT OF ASSOCIATE JUDGE Bell

1

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.

2

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.

3

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.

Procedural matters
4

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.

5

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.

6

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.

7

I deal with the case on the basis that the plaintiff is alleging that the defendant is insolvent.

8

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.

9

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.

10

This is an appropriate case to extend time for filing a statement of defence under rr 1. 19 and 31.20 for these reasons:

  • (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.

  • (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.

  • (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.

11

Accordingly, I...

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