Island View Estates Ltd ((in Liquidation)) v Mainline Contracting Ltd

• Jurisdiction: New Zealand
• Judge: Venning J
• Judgment Date: 05 February 2010
• Neutral Citation: [2010] NZHC 29
• Docket Number: CIV-2008-404-003840
• Court: High Court
• Date: 05 February 2010

In the Matter of the Companies Act 1993

Between

Island View Estates Limited (In Liquidation)

Plaintiff

and

Mainline Contracting Limited

Defendant

[2010] NZHC 29

CIV-2008-404-003840

IN THE HIGH COURT OF NEW ZEALAND

AUCKLAND REGISTRY

Application for order company in liquidation on grounds it was insolvent or alternatively, that it was just and equitable to do so. No statutory demand had been issued as the liquidators considered that, it was clear the company was unable to pay its debts — whether applicant was a prospective or contingent creditor — whether a claim for a liquidated sum said to be immediately due and owing, was a prospective claim.

Appearances:

R B Hucker and L F A Yaqub for Plaintiff

C T Patterson for Defendant

JUDGMENT OF Venning J

Introduction

1 Island View seeks an order placing Mainline into liquidation. It says that Mainline is insolvent or, in the alternative that it would be just and equitable to liquidate it. Mainline opposes the application.

Background

2 Island View was placed into liquidation by special resolution of its shareholders on 21 April 2006. At that time the shareholders were members of the Buxton family, and Simon John Buxton was its director. Formerly, until February 2006, Mrs Susan Buxton had been Island View's director. The shares in Mainline are held in the name of another member of the Buxton family and, as at the date of Island View's liquidation Mrs Susan Buxton was also Mainline's sole director. Simon Buxton was appointed sole director of Mainline in her place on 1 April 2007. At all material times for this proceeding Mrs Buxton was the sole director of both Island View Estates and Mainline.

3 Island View was a property development company. Mainline was a construction company. Island View owned land at Leigh that it was subdividing and selling.

4 Most of the subdivided lots were sold direct to third parties. However, in the case of lots 7 and 31, Island View agreed to sell the land to Mainline. After the agreements for sale and purchase were made, but before settlement, Island View and Mainline entered construction contracts. Houses were constructed on lots 7 and 13 by Mainline pursuant to the construction contracts. Mainline charged Island View for the construction costs of the houses but when the houses were completed the land, complete with the houses, was transferred to Mainline. When the properties were on-sold to third parties Mainline retained the proceeds of sale and benefits of not only the land but the added value of the houses.

5 Following Island View's liquidation, Mr Buxton filed a proof of debt with the liquidators on behalf of Mainline. He claimed Island View had not paid all the money it owed Mainline under the construction contracts. As a consequence, the liquidators investigated the relationship between Island View and Mainline in more detail. They conducted interviews with both Mr and Mrs Buxton. The liquidators concluded that rather than Island View owing money to Mainline, it was Mainline that was substantially indebted to Island View. Fundamental to that conclusion is the liquidators' opinion that Island View received nothing in exchange for the payments it had made to Mainline in relation to the construction of the houses on lots 7 and 31 by Mainline, so that, not only did Island View not owe Mainline anything further under the construction contracts, Island View was entitled to repayment of the money paid under the construction contracts.

6 Following their investigation, the liquidators of Island View rejected Mainline's proof of debt and instead demanded payment from Mainline for the money they considered Mainline owned Island View. Mainline did not accept the liquidators' findings. The liquidators then issued these proceedings seeking the liquidation of Mainline on the grounds it was insolvent and on the related just and equitable ground. Island View did not issue a statutory demand. The liquidators took the view that, on the basis of the interviews conducted with Mr Buxton as the director of Mainline at the time of the interview, it was clear Mainline was unable to pay its debts. The liquidators considered that it was thus unnecessary to rely on the failure to pay a statutory demand as proof of insolvency.

Jurisdiction

7 Mr Patterson submitted that Island View had no standing to bring these proceedings under s 241(2)(c)(iv) of the Companies Act 1993 as, in his submission, it could not be said to be either a creditor or a contingent creditor. He submitted at most it might be a prospective creditor but it could not meet that test either as its claim did not have any real prospect of success: Re Austral Group Investment Management Ltd [1993] 2 NZLR 692; Automatic Parking Coupons Ltd v Time Ticket International Ltd (1997) 10 PRNZ 600.

8 Mr Patterson also referred to s 288(5) of the Act which provides that where a contingent or prospective creditor seeks to have a company placed into liquidation on the ground that it is unable to pay its debts the application requires leave of the Court. He noted that no application for leave had been made in this case.

9 As leave has not been obtained Mr Patterson submitted that even if it were a prospective creditor, Island View could not rely on Mainline's inability to pay its debts (which was not accepted) as a ground to liquidate and, absent a finding of inability to pay its debts, it could not succeed on the just and equitable grounds either. While not conceding the point, Mr Hucker accepted that if his primary submission, that because of the debt Mainline owned Island View, Mainline was unable to pay its debts, failed then it would be difficult to make out the just and equitable ground standing alone.

10 The first issue is whether Mr Patterson is right to categorise Island View as, at best, a prospective creditor. A contingent creditor is one towards whom, under an existing obligation, the company may or will become subject to a present liability on the happening of some future event or at some future date: Re William Hockley Ltd [1962] 2 All ER 111. Island View's claim against Mainline is not based on the happening of some future event or some future date being reached. It is not a contingent creditor.

11 Prospective creditors are those who, at the time of the hearing of the liquidation proceedings, are creditors of debts which will certainly become due in the future: Stonegate Securities v Gregory [1980] 1 All ER 241. But the category of prospective creditors also includes a person in respect of whom there is a real prospect of their becoming a creditor of the company in the future, in other words a true prospective creditor: Re Austral Group Investments Management Ltd. A person with a bona fide unliquidated claim against the company will be such a prospective creditor. Whether they are a creditor or not, and in what sum, will be dependent on either admission by the company or judgment.

12 However where, as in this case, the claim is for a liquidated sum said to be immediately due and owing, the claim is not a prospective one. Island View's claim is of that nature. The debt Island View relies on to support the claim that Mainline is unable to pay its debts is based on a liquidated claim for the money it has paid to Mainline under the construction contracts but for which it says it has received no consideration. Put another way, Island View's claim is for money had and received based on a total failure of consideration. If Island View's submission is correct then it is a creditor. The nature of the debt claimed by Island View is neither contingent nor prospective. If the Court finds Island View's claim established, or that there can be no bona fide or substantial dispute the debt is owing, that is merely confirmation of Island View's status as creditor.

13 If Mr Patterson's submissions were taken to their logical conclusion, the result would be that, absent a judgment or admission of the debt by the company, any person claiming a liquidated debt against a company could only ever be, at best, a prospective creditor who would require leave of the Court to commence liquidation proceedings where the liquidation proceedings are based on the company's inability to pay its debts. In the present case Island View claims a liquidated sum, namely the balance due to it of the monies paid by it to Mainline under the construction contracts.

14 Even in the case of a liquidated demand there will often be an argument whether the debt is owed. The issue of whether there is a genuine bona fide dispute as to whether the defendant company is indebted to the plaintiff creditor is usually resolved at the statutory demand stage. If the demand is opposed the Court will determine the issue. The result of such a hearing on that issue however, is not a judgment for the sum in issue. The outcome is a finding whether there is a bona fide or substantial dispute the debt is owed. If there is no such dispute, then, if the defendant company fails to pay within such further time that may be permitted, it is deemed to be unable to pay its debts and is at risk of being liquidated on the ground of insolvency. The plaintiff could have followed that procedure in this case but as noted, on the basis of admissions by Mr Buxton as director of Mainline the liquidators consider it is clear Mainline is unable to pay its debts. The difficulty with that approach is that it has left resolution of Mainline's challenge to the debt claimed by Island View to the substantive liquidation hearing. With the benefit of hindsight, given the nature of the claim, perhaps Island View should have pursued the issue of a statutory demand. Generally the liquidation hearing itself will not be an appropriate venue for determining...