7 Security Limited (in liquidation) v McIsaac

[2024] NZHC 1610

IN THE HIGH COURT OF NEW ZEALAND ROTORUA REGISTRY

I TE KŌTI MATUA O AOTEAROA

TE ROTORUA-NUI-A-KAHUMATAMOMOE ROHE

CIV-2024-463-27

[2024] NZHC 1610

BETWEEN

7 SECURITY LIMITED (IN LIQUIDATION)

Plaintiff

AND

MELISSA URSULA McISAAC

Defendant

Callover:	11 June 2024 [and subsequently dealt with on the papers]
Appearances:	Kevin Sullivan/Michael Bale for the Plaintiff No appearance for/of the Defendant
Judgment:	19 June 2024

JUDGMENT OF ASSOCIATE JUDGE C B TAYLOR

[Application for summary judgment]

This judgment was delivered by me on 19 June 2024 at 3:00pm

pursuant to Rule 11.5 of the High Court Rules

…………………………. Registrar/Deputy Registrar

Solicitors:

WCM Legal (Michael Bale), Wellington, for the Plaintiff

Copy for:

Kevin Sullivan, Port Nicholson Chambers, Wellington, for the Plaintiff

7 SECURITY LIMITED v McISAAC [2024] NZHC 1610 [19 June 2024]

Introduction

[1]    The plaintiff, 7 Security Ltd (In Liquidation) (7 Security), has applied by interlocutory application for summary judgment for the following orders:

(a)granting summary judgment against the defendant, Melissa Ursula McIsaac (Ms McIsaac), for the sum of $276,280; and

(b)interest on the judgment sum, calculated under the Interest on Money Claims Act 2016 from 19 September 2021, the date the demand was made, down to the date of payment.

Background

[2]    The  application  for  summary  judgment  arises  out  of  the  liquidation  of  7 Security, which was placed in liquidation on 11 May 2021 by shareholders resolution. Mr John Scutter was appointed the sole liquidator.

[3]Ms McIsaac was the sole shareholder and director of 7 Security.

[4]Mr Scutter has sworn an affidavit where he deposes as follows:

(a)there were very few financial records  provided  by  Ms  McIsaac for 7 Security;

(b)the bank records that Mr Scutter obtained showed that Ms McIsaac had paid herself drawings from 7 Security, without properly accounting for them. He deposes that $276,280 was paid to Ms McIsaac between May 2019 and May 2021 in the two years prior to the liquidation;

(c)there were no resolutions or remuneration certificates in 7 Security’s records and the effect of Ms McIsaac taking drawings in this way means that she has overdrawn her current account;

(d)under s 161 of the Companies Act 1993 Ms McIsaac, as the sole director, should have signed the certificate/statement that the remuneration was fair to the company and also entered the remuneration in the interests register. None of these records have been completed and as a result the drawings are treated as drawings on her current account with the company.

[5]    Mr Scutter deposes that on 19 September 2021 he contacted Ms McIsaac asking her to repay the $276,280 owing to 7 Security, or provide reasons why she ought not be held liable for the debt. He deposes that Ms McIsaac did not provide any substantive response despite multiple attempts being made by him between October 2021 and June 2023 to contact Ms McIsaac.

[6]    Mr Scutter deposes that 7 Security is insolvent, with creditor claims amounting to $284,250.78, which have been lodged in the liquidation. He deposes that there are no tangible assets of 7 Security and the only two assets being cash on hand of

$38,011.69  and  receivables  of  $50,635.58  as  at  the  date  of  liquidation,  and  Ms McIsaac’s overdrawn current account of $276,280.

[7]    Mr Scutter deposes that while Ms McIsaac would have been entitled to some remuneration as a working director of 7 Security, the amount that Ms McIsaac could claim as fair remuneration under s 161 of the Act is  an  amount available after        7 Security had ensured all known creditors have been paid or sufficient funds are held to pay creditors. He deposes that as this is not the case the amounts paid to herself have been unfair to the company.

Hearing on 11 June 2024

[8]    The matter was called before the Court at 11:45am on 11 June 2024. There was no appearance by Ms McIsaac and she had not filed any submissions or evidence in relation to the proceedings.

[9]The proceedings were dealt with on the papers following the callover in Court.

Grounds on which the orders are sought

[10]The grounds on which the orders are sought are, in summary, that:

(a)the shareholders current account was overdrawn by $276,280 and the shareholder current account is repayable on demand. Ms McIsaac has failed to pay the outstanding demand as requested;

(b)to the extent the advances to Ms McIsaac were intended to represent fair remuneration for services as a director, the requirements of s 161 of the Companies  Act  1993  have  not  been  complied  with,  and  Ms McIsaac is liable to 7 Security for the amount of the payments, pursuant to s 161(5) of the Act.

Legal principles

[11]Rule 12.2(1) of the High Court Rules 2016 provides:

12.2 Judgment when there is no defence or when no cause of action can succeed.

(1)The court may give judgment against a defendant if the plaintiff  satisfies the court that the defendant has no defence to a cause of action in the statement of claim or to a particular part of any such cause of action.

[12]   The relevant principles governing a summary judgment application are well established:1

The principles are well settled. The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried: Pemberton v Chappell. The Court must be left without any real doubt or uncertainty. The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated: MacLean v Stewart. The Court will not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not accept uncritically evidence that is inherently lacking in credibility, as for example where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponent or is inherently improbable: Eng Mee Yong v Letchumanan. In the end the Court’s assessment of the evidence is a matter of judgment. The

1      Krukziener v Hanover Finance Ltd [2008] NZCA 187, [2010] NZAR 307 at [26] (citations omitted).

Court may take a robust and realistic approach where the facts warrant it:

Bilbie Dymock Corp Ltd v Patel.

[13]The wording of r 12.2 “may give judgment” indicates a residual discretion.

Having regard to the various authorities, the position appears to be as follows:2

(a)The discretion implied by the use of the word “may” is to be restrictively applied. In a great majority of cases, once the court is satisfied the defendant has no defence, there is no room for the exercise of discretion.

(b)The residual discretion may be invoked to avoid oppression or injustice to the defendant where:

(i)The proceeding involves the actions or possible liability of a third party which is not before the court;

(ii)The proceedings are such that the opportunity should be given to allow discovery or other interlocutory applications to be concluded;

(iii)The circumstances of the case disclose very unusual features, the presence of which leads the court to conclude that the entry of summary judgment would be oppressive or unjust; or

(iv)The combination of complex issues of fact and law justify the dismissal of the application for summary judgment, either as a matter of discretion or because the court cannot be satisfied that the defendant has no defence.

(c)Even where the court is not satisfied that a defence has been made out, in exceptional circumstances the application may be adjourned to allow for other processes to be followed.

Analysis

[14]   Mr Sullivan, for 7 Security, submits that the Court of Appeal decision in Monnery v Convendium Limited (In Liquidation) is relevant, where the Court of Appeal considered the applicability of summary judgment to an overdrawn current account and upheld the summary judgment in the High Court finding:3

[24] A shareholder current account will be shown as overdrawn if the shareholder is indebted to the company. That will occur, for example as the Judge observed, when drawings are taken by shareholders in the hope that when the company prospers those drawings will be able to be repaid out of distributions from the company.

2      Andrew Beck and others (eds) McGechan on Procedure (online ed, Thomson Reuters) at [HR12.2.11].

3      Monnery v Convendium Limited (In Liquidation) (2020) 25 PRNZ 417.

…

[34] In response, Mr Chisholm emphasised the well-settled principle that, absent explanation, advances made on a shareholder current account are a due debt owed by the shareholder to the company repayable on demand, citing in particular Mizeen Painters Ltd (in liq) v Tapusoa where Muir J said:

[25] In the absence of an explanation, drawings must be treated as advances from the company to the shareholders that are repayable on demand. They remain as repayable advances unless and until a company resolution classifies them otherwise. When the company’s accounting records provide no explanation for the drawings in the shareholders current account they must be treated as advances from the company to the shareholders. The onus is on the defendants as directors and fiduciaries of the company to account to it for funds and establish the legitimacy of any funds taken from the company; in other words, to explain what has become of company property in their hands. [Footnotes omitted]

[43] Irrespective of what arrangements Mr Monnery  considers  that  he made concerning his liability to repay remuneration which he received in lieu of salary, the trustees as the shareholder are liable to repay the deficit in the Family Trust’s shareholder current account.

[15]   Mr Sullivan submits that Ms McIsaac is in the same position as in the Monnery decision, as the payments to her have created an overdrawn current account. He submits that absent another explanation and evidence from her, they are a debt due and owing by her to 7 Security, and one that the liquidator is entitled to pursue on a summary judgment basis.

Result

[16]   Having considered the submissions of counsel, I am of the view that summary judgment should be granted in favour of 7 Security as sought.

Orders

[17]I make the following orders:

(a)summary judgment is granted against Ms McIsaac in the sum of

$276,280; and

(b)Ms McIsaac is to pay interest on the judgment sum pursuant to the Interest on Money Claims Act 2016 from 19 September 2021 to the date payment of the judgment sum is made;

(c)Costs on a 2B basis, plus disbursements as fixed by the Registrar are awarded to 7 Security.

…………………………….. Associate Judge Taylor