Accident Compensation Corporation v Newbury Racing & Breeding Limited
[2015] NZHC 663
•2 April 2015
IN THE HIGH COURTOF NEW ZEALAND PALMERSTON NORTH REGISTRY
CIV-2014-454-88 [2015] NZHC 663
IN THE MATTER OF The Companies Act 1993 BETWEEN
ACCIDENT COMPENSATION CORPORATION
Plaintiff
AND
NEWBURY RACING & BREEDING LIMITED
Defendant
CIV-2013-454-286
IN THE MATTER OF The Companies Act 1993
BETWEEN THE COMMISSIONER OF INLAND REVENUE
Plaintiff
ANDNEWBURY RACING & BREEDING LIMITED
Defendant
Hearing: 20 February 2015 Counsel:
P Drummond for Plaintiff in proceeding CIV-2014-454-88
L Stothart for Plaintiff in proceeding CIV-2013-454-286
J Tannahill for Defendant in both proceedingsJudgment:
2 April 2015
JUDGMENT OF ASSOCIATE JUDGE SMITH
[1] The defendant in these proceedings (Newbury) applies for orders staying liquidation claims brought against it by the Commissioner of Inland Revenue (the
Commissioner) and the Accident Compensation Corporation (the ACC).
ACCIDENT COMPENSATION CORPORATION v NEWBURY RACING & BREEDING LIMITED [2015] NZHC 663 [2 April 2015]
Background
[2] The Commissioner’s liquidation claim was filed in May 2013, and Newbury filed a statement of defence to the claim on 27 May 2013. Newbury denied that it would be just and equitable to make a liquidation order, in the light of a substantial claim it had against a local firm of solicitors which, if successful, would provide more than sufficient funds to cover the debt owing to the Commissioner.1
[3] Newbury is named as one of the two plaintiffs in the claim against the local solicitors (which I will call the FR Claim). The other plaintiff is Newbury’s sole director, and majority shareholder, Mr Jeffrey Lynds. The FR Claim was filed as long ago as 2007. It remains unresolved.
[4] The Commissioner’s liquidation claim was called in Court for the first time on 13 June 2013, and Newbury sought and obtained a number of adjournments after that date to allow it sufficient time to settle the FR Claim.
[5] Late in 2013, the FR Claim was allocated a fixture for May 2014. Associate Judge Matthews directed that the Commissioner’s liquidation claim would be heard in August 2014, no doubt expecting that the FR Claim would by then have been heard, or would have been settled.
[6] The hearing of the FR Claim did not proceed as scheduled in May 2014. The hearing was adjourned. As at the date of this judgment no new fixture has yet been allocated for the hearing.
[7] The ACC filed its liquidation claim against Newbury in July 2014. The statement of claim referred to a debt of $143,451.18. That sum was said to be owing in respect of employer and shareholder levies, together with accrued penalties and interest. Newbury filed a statement of defence, again referring to the FR Claim. The statement of defence pleaded that the parties to the FR Claim were then in “advanced stages of negotiation towards settlement”. Newbury asked the Court to exercise its
residual discretion against the making of a liquidation order.
1 In its statement of defence, Newbury pleads that it is a party to proceedings against the firm of solicitors, in which it claims a sum in excess of $3 million.
[8] In an affidavit sworn in the ACC’s proceeding on 20 October 2014, Mr Lynds states that most of the debt owing to the ACC is historical, going back to about 2006. He says that over the intervening years he has personally sought to negotiate with the ACC’s solicitors to make arrangements for Newbury to catch up on its indebtedness. Sometimes however, because of difficulties within Newbury, financial arrangements which Mr Lynds believed would be available were not kept. As he put it, “there was never any intention to default, but cashflow was not always guaranteed and payments such as those arranged with ACC could not always be met”.
[9] Newbury’s indebtedness to the ACC now exceeds $150,000, and that
indebtedness continued to increase after the ACC commenced its liquidation claim.
[10] The ACC’s liquidation claim was called before me in the list on
18 September 2014. At the hearing, counsel for Newbury made an oral application for an order restraining advertising of the liquidation application.2 He submitted that settlement of the FR Claim could be jeopardised if the liquidation claim were advertised.3
[11] On 24 October 2014, I declined Newbury’s application for an order restraining advertising of the ACC claim, and adjourned its application for an order staying the substantive liquidation claim to 20 February 2015. I directed that if the stay application were refused I would proceed immediately to deal with the ACC’s liquidation claim.
[12] I made similar directions in the Commissioner’s liquidation proceeding – an application by Newbury for a stay of the proceeding was set down for hearing on
20 February 2015, with the stay application and liquidation claim in the ACC’s proceeding. The stay application in the Commissioner’s proceeding was also set down on the basis that I would proceed to deal with the liquidation claim
immediately if the stay application was refused.
2 High Court Rules, r 31.11.
3 By agreement between the parties, the Commissioner’s liquidation claim had not then been advertised.
[13] By minute issued on 24 October 2014 in the ACC proceeding, I directed Newbury to file an affidavit not later than 13 February 2015, setting out an updated statement of its assets and liabilities, including a list of creditors and amounts owing. The affidavit was also to explain the funding position in the FR Claim, and in particular whether or not the anticipated external funding would continue to be available to a liquidator in the event of an order being made putting the defendant into liquidation.
[14] By affidavit sworn on 5 January 2015, Mr Lynds advised that Newbury’s creditors (apart from the Commissioner and the ACC) remained content to await the outcome of the FR Claim. He stated that Newbury was then still trading, with most of its current trade creditors up to date. Newbury’s shareholders were said to remain committed to provide funding to ensure that Newbury’s obligations would continue to be met.
[15] Newbury did not provide an updated list of its creditors, and the amounts owing to each of them, although that information had been provided in an affidavit sworn by Mr Lynds on 23 August 2013 in the Commissioner’s liquidation proceeding. As at 30 June 2013, Newbury’s total assets were shown in its financial statements at $1,059,336. Total creditors were shown at $3,634,897, leaving a shortfall of $2,575,561 between assets and liabilities. One creditor, the estate of BT Meo, was then owed $2,154,067, including interest accrued to 30 June 2013. The Meo estate holds security for its debt in the form of a debenture over all of Newbury’s assets.
[16] On the question of the availability of continued funding for the FR Claim in the event of Newbury being put into liquidation, Mr Lynds says that while his son has now undertaken to fund the proceeding, he does not think his son would be comfortable continuing to provide funding if a liquidator were appointed to Newbury. The risk that the funding would not be recovered if Newbury were placed in liquidation would likely be considered too high.
Newbury’s submissions in support of its stay applications
[17] Newbury does not dispute that the debts owing to the Commissioner and the
ACC are due and owing. It acknowledges that it is insolvent.
[18] It says that allowing the liquidation claims to proceed would result in unfairness or undue pressure on Newbury, because it would be deprived of the opportunity to prosecute a substantial damages claim (the FR Claim) which in the near term has a reasonable chance of success. It says that if the FR Claim is successful it will enable Newbury to pay all of its creditors in full.
[19] Mr Lynds produced a copy of an opinion from senior counsel acting for Newbury in the FR Claim, dated 12 November 2014. Counsel noted in his opinion that, although some complicated legal issues were involved, the plaintiffs (Newbury and Mr Lynds) had good prospects of success with their case. Counsel recorded, however, that he had not seen the defence evidence, so his assessment of the prospects of success might change (although he doubted that would occur). Counsel also mentioned in the letter that another Queen’s Counsel who had some detailed knowledge of the case agreed with his assessment of the situation.
[20] Newbury submits that a liquidation order will not result in any return to the Commissioner or the ACC, because the debt owing to Newbury’s sole secured creditor, the estate of Brendan Meo, exceeds Newbury’s assets.
[21] Given that state of affairs, Newbury says that the majority of its creditors have taken the view that allowing it to prosecute the FR Claim presents the most likely avenue of recovery of their debts. The Commissioner and the ACC are the only parties presently pursuing recovery of the debts owed to them by Newbury.
[22] Newbury acknowledges that there have been delays in the FR Claim coming to trial. It says that the delays have been primarily caused by funding issues which have now been resolved. While no new fixture has been allocated for the hearing of the FR Claim, a telephone conference in that proceeding has been scheduled for 14
April 2015, and it is hoped that the Court will allocate a fixture at that conference for the hearing of the FR claim.
[23] In his oral submissions, Mr Tannahill abandoned a submission that the Commissioner and the ACC, by failing to file replies to Newbury’s affirmative defences, must be taken to have admitted that it would not be just or equitable to make liquidation orders. Mr Tannahill also acknowledged in his oral submissions that the making of a liquidation order might not necessarily result in the abandonment of Newbury’s claims in the FR Claim. It would presumably be up to the liquidators to make an assessment of the claim’s merits, and pursue the claim to a
hearing if funding could be arranged.4
The Commissioner’s submissions
[24] Mr Stothart submits that there is no longer any justification for staying the liquidation claim. The FR Claim has been on foot for more than seven years and is yet to be set down for trial. There is no certainty as to the outcome of the FR Claim, if it ever goes to trial, and Newbury’s non-compliant behaviour remains a risk to the Commissioner as a creditor. Instalment arrangements made between the parties have not been adhered to by Newbury, and the Commissioner has little confidence that Newbury will maintain future compliance. Newbury’s total indebtedness has now risen to $306,434.32, and part of the debt goes back as far as 2005. Newbury has not been meeting its current tax obligations.
[25] In those circumstances, Mr Stothart submits that the appointment of a liquidator would be beneficial to Newbury’s creditors. He refers to the decision of Associate Judge Doogue in Commissioner of Inland Revenue v Sargam Foods Ltd, in which the Associate Judge noted that “the appointment of a liquidator would ensure that the decision to proceed with the litigation would be arrived at on a detached and objective basis”.5 In the event of liquidation, the liquidators could pursue the
FR Claim if, in their opinion, it was “worth powder and shot”.6
4 It appears that security for the defendant’s costs in the FR Claim would not be an issue. Security has already provided by way of a bank bond.
5 Commissioner of Inland Revenue v Sargam Foods Ltd HC Auckland CIV-2012-404-6512, 16
May 2013 at [17],
6 Citing Lang J in Coljon Ltd v Riccarton Construction Ltd HC Christchurch CIV-2010-409-848,
9 November 2010 at [27].
The ACC’s submissions
[26] Mr Drummond submits that the discretion of the Court to order a stay of liquidation proceedings is to be exercised sparingly. The critical question is whether proceeding with the liquidation claim amounts to placing undue pressure on the debtor company, or is otherwise unfair. He submits that the interests of other creditors of Newbury is not a relevant consideration on the stay issue, which is concerned primarily with the impact of the liquidation claim on Newbury. The facts in this case do not sit comfortably within the Court’s inherent jurisdiction to order a stay.
[27] The ACC is not in the position of an ordinary insurer who can withdraw cover if an insured fails to pay premiums: it has a statutory obligation to continue to provide cover for Newbury. Mr Drummond submits that it would be wrong for Newbury to continue to enjoy the benefits of cover without paying the premiums.
[28] As for Newbury’s prosecution of the FR Claim, Mr Drummond points to the fact that the claim, commenced in 2007, now seems unlikely to come to trial until either the end of 2015 or into 2016. And even if a fixture is allocated, that may not provide finality. In those circumstances, it would be wrong for the Court to order a stay which would in effect remain for an indefinite period.
[29] In effect, Newbury is asking the ACC and the Commissioner to buy into the FR Claim, which Newbury has elected to fund in preference to paying its own creditors.
[30] If Newbury’s application for a stay is acceded to, other debtors will be encouraged to seek to delay proper liquidation claims brought against them on the basis of alleged claims against third parties.
Newbury’s submissions in reply
[31] Mr Tannahill acknowledged in his submissions in support of the stay applications that Newbury should cease trading if it is unable to meet its ongoing responsibilities to the Commissioner and the ACC. In the course of his submissions
in reply, he advised me that he had just received instruction that such had already occurred – Newbury in fact ceased trading with effect from 31 December 2014. He advised me of his instruction that financial statements for the period to 30 June 2014 had just been completed. Those financial statements were not produced in evidence.
[32] It appeared from Mr Tannahill’s reply submissions that the intention is for Mr Lynds to either personally carry on the business previously conducted by Newbury, or that some other company associated with Mr Lynds will acquire the business.
Discussion and conclusions on the stay applications
Legal principles
[33] Rule 31.11 of the High Court Rules provides:
31.11 Power to stay liquidation proceedings
(1) If an application for putting a company into liquidation is made under rule 31.3, the defendant company, or, with the leave of the court, any creditor or shareholder of that company or the Registrar of Companies, may, within 5 working days after the date of the service of the statement of claim on the defendant company, apply to the court—
…
(b) for an order staying any further proceedings in relation to the liquidation.
(2) The court must treat an application under subclause (1) as if it were an application for an interim injunction and, if it makes the order sought, it may do so on whatever terms the court thinks just.
(3) The inherent jurisdiction of the court is not limited by this rule.
[34] I accept Newbury’s submission that there is no inflexible rule governing the
exercise of the Court’s discretion to grant a stay. The governing consideration is
whether the proceedings suggest unfairness or undue pressure.7
7 Nemisis Holdings Ltd v North Harbour Industrial Holdings Ltd (1989) 1 PRNZ 379 (HC) at
385.
[35] In Nemisis Holdings Ltd v North Harbour Industrial Holdings Ltd, Wallace J noted that it is a serious matter to stay winding up proceedings, so the decision to do so is never made lightly. The onus is on the applicant, and it is normally necessary to demonstrate “something more” than the balance of convenience considerations which are usually considered on an application for interim injunction. If the defendant company has had an opportunity to file appropriate affidavits, such defendant is required to establish a strong prima facie case of the existence of a genuine dispute on substantial grounds, or show that there are clear and persuasive
grounds for a stay.8
[36] We are not here concerned with any dispute about whether the debts are owing. The particular unfairness or undue pressure which Newbury says will result if liquidation orders are made, is that Newbury will be deprived of the opportunity to prosecute the FR Claim.
[37] In Commissioner of Inland Revenue v Sargam Foods Ltd, the defendant company applied for an order staying liquidation proceedings which had been brought against it.9 The defendant was presumptively insolvent, having failed to comply with a statutory demand which had been served on it. The principal basis for the stay application was that the defendant wished to pursue a claim it had commenced against its insurer in 2009. The defendant contended that the making of
a liquidation order would result in the claim against the insurer not being pursued by the liquidator. It argued that there would be a miscarriage of justice if it were put into liquidation and its legitimate claim for indemnity from its insurer was lost.
[38] The claim against the insurer was said to be worth at least $1 million, and the defendant argued that great hardship would be caused if it were unable to prosecute its claim to a successful conclusion. As in this case, the defendant claimed that if the damages claim were successfully completed, there would be adequate funds to pay creditors, including the plaintiff.
[39] Associate Judge Doogue found that if a liquidator were to be appointed, there would be a high probability that, if appropriate funding could be provided from outside sources, the claim against the insurance company would continue.10 His Honour noted that if the claim against the insurer were to progress, funds would have to be introduced from outside sources in any event. Furthermore, the defendant company was not trading, so the case was not one where a liquidation would lead to the dispersal of the means of production which the defendant would require if it were to resume manufacturing operations. The Associate Judge concluded in those
circumstances that liquidation would not cause any excessive or undue hardship to the defendant, because there was no doubt that with the making of the appropriate arrangements the insurance claim would be able to be brought to a conclusion. His Honour referred to the judgment of Lang J in Coljon Ltd v Riccarton Construction Ltd, where the Judge noted that there may occasionally be a good and sufficient reason for staying liquidation proceedings to allow a defendant to pursue collateral
litigation, but there was no such reason apparent in the case before him. 11 The
liquidator could still carry on the litigation if it was considered meritorious and worth powder and shot.
[40] In Sargam Foods Ltd, Associate Judge Dooge noted that the balancing of the interests between the various parties was likely to be achieved in a more objective way when a party who did not have anything at stake personally in the decision (to pursue the third party claim against the insurer) was making that decision. The Associate Judge considered that that was the benefit achieved by appointing a liquidator.12
[41] Associate Judge Doogue saw no unfairness to the defendant, or undue pressure being placed upon it, in the plaintiff pursuing the liquidation claim. If the claim against the insurer could be continued by a liquidator, any issue about unfairness could not be sustained, and with that factor removed all that was left was a case involving an undisputed debt which had not been paid by a defendant who
was presumptively insolvent. No irreparable harm would likely be done if a stay
10 At [14].
11 Coljon Ltd v Riccarton Construction Ltd, above n 6.
12 Commissioner of Inland Revenue v Sargam Foods Ltd, above n 5, at [7].
were not granted. In those circumstances, the defendant had failed to demonstrate “something more” than the balance of convenience considerations usually considered on interim injunction applications.
[42] In another decision of Associate Judge Doogue, Kroon v Westpac Bank Corporation,13 the bank and Auckland Finance Ltd were pursuing Mr Kroon, a property developer, for payment of debts in excess of $5 million. They issued bankruptcy proceedings against him. Mr Kroon argued that he had a very strong negligence case against valuers who had valued a failed property development, and that if he was successful in those proceedings the judgment creditors would be paid. He applied for a stay of the bankruptcy proceedings, inter alia for the purpose of allowing him to pursue his claim against the valuers. He expressed his apprehension
that, should he be bankrupted, the Official Assignee would not be interested in pursuing the claim against the valuers, and he did not expect that a third party who was prepared to fund his claim against the valuers would be interested in continuing to fund the claim if he was bankrupt. Counsel for Mr Kroon argued that the only way the creditors would obtain recovery would be through the pursuit of the litigation against the valuers.
[43] Associate Judge Doogue considered that the existence of the claim against the valuers was not a sufficient ground to stay or dismiss the application for adjudication. There were very substantial amounts of money involved in the case, and it could be a long time before the claim against the valuers was concluded. As for the strength of Mr Kroon’s claim against the valuers, the Associate Judge expressed the view that the starting point should be that it will rarely be the case that the Court will be deflected from adjudicating a debtor bankrupt on the basis that the debtor has a claim against a third party. It will be for the debtor to show that there is some proper ground to suppose that the claim is a viable one and that the result of
the litigation will not be long delayed.14
[44] The Associate Judge considered that it was not for the Court to carry out a
detailed critique of Mr Kroon’s claim, but that some regard should be had to its
merits, even if only to make a judgment about whether the claim would be straightforward or complex, and whether it would be resolved in the near term or could take a long time to conclude. The more difficult it was for the Court to assess the prospects of success, the more likely the Court would decide that the potential claim is a factor that should persuade the Court to stay its hand.15
[45] The question Associate Judge Doogue considered most relevant, therefore, was whether Mr Kroon’s claim was one that had a reasonable chance of success in the near term. If that question could be answered affirmatively, then in the circumstances of the case fairness would require that he be given a chance to pursue the claim. If the Court could not confidently place the claim in the “reasonable chance of success within the near term” category, then other factors might outweigh the importance of the claim against the third party. Such other factors would include the fact that in circumstances in which the debtor has committed an act of bankruptcy it is not normally in the public interest that there should be significant delays in the Court making orders which will bring the debtor’s affairs under the
control of the Official Assignee.16 After weighing the various factors, Mr Kroon’s
stay application was dismissed, and an adjudication order was made.
[46] Newbury referred to a number of other bankruptcy cases where the debtor had successfully sought a stay of the proceeding to allow it to pursue a claim against a third party. In Re Burford, the debtor had a claim against his former solicitors for negligence.17 He contended that, if the claim were successful, it would enable him to pay the debt that he owed with interest and costs. He had not yet commenced the third party claim, but there was evidence that the former solicitors did not deny negligence: the issue was whether or not the negligent advice had been causative of loss. Master Kennedy-Grant considered that the debtor had an arguable claim
against the former solicitors, and noted that the Court would, in appropriate cases, adjourn a bankruptcy petition to await the outcome of the debtor’s third party litigation.18 In the result, the Master exercised his discretion in favour of the debtor
and dismissed the petition. It appears that Mr Burford’s claim against his former
15 At [85].
16 At [87].
17 Re Burford HC Tauranga B. 7/95, 24 October 1995
solicitors was only one of a number of factors considered by the Master in reaching that decision.
[47] Mr Tannahill also referred to the decision of Associate Judge Gendall in Re Laverty.19 In that case, the debtors argued that the Court should refuse an adjudication order because they had a good claim against a firm of solicitors in respect of alleged negligent legal advice. Legal aid had been granted for them to pursue the case. The debtors submitted that to bankrupt them at this stage would be grossly unfair when another avenue with good prospects of success was available.
His Honour referred to a passage in Brookers Insolvency Law to the effect that outstanding undetermined claims against third parties by judgment debtors are on their face insufficient reason to obtain dismissal or stay of bankruptcy proceedings, in situations where sufficient funds would be provided to meet petitioner’s debt only if the claims were successful.20 The Associate Judge noted that that was not the position in the case before him, however, as there was more than sufficient equity in a house property owned by Mr Laverty and Ms Laverty to meet the petitioner’s debt. Any suggestion that there was no realistic prospect of the claim against the solicitors
being heard for a long time could be met by normal case management processes, given that the proceeding had been commenced some six years previously.
[48] The Associate Judge was satisfied that it would not be in the interests of justice, or in the broad public interest, for him to exercise his discretion to make an adjudication order.
[49] Newbury referred to two other authorities in which the Court has ordered a halt of bankruptcy proceedings, in circumstances where the debtors had outstanding unresolved claims against third parties. The first of these cases was Falls Road Properties Ltd v Fletcher.21 The decision of Peters J in that case was given on
16 April 2012, and the trial of the debtor’s third party claim was scheduled to
commence only a little over one month later. Peters J noted that the defendant in the
Fletchers’ third party proceeding was apparently not disputing liability, and that the
19 Re Laverty HC Napier CIV-2005-441-652, 9 June 2006.
20 At [34], citing Brookers Insolvency Law & Practice (online looseleaf ed, Thomson Reuters) at
[IA 26.09].
21 Falls Road Properties Ltd v Fletcher [2012] NZHC 698.
issues for trial would be limited to quantum. Her Honour cited Kroon v Westpac Banking Corporation Ltd as authority for the proposition that a judgment debtor’s claim against a third party may be a matter which warrants a stay of bankruptcy proceedings against the debtor. There did not appear to be any pressing need for the judgment creditor to have an adjudication order immediately, and the imminent trial of the third party claim, and the fact that the Fletchers’ claim appeared to have
substance, were the critical matters.22
[50] In Gwyer v Westpac New Zealand Ltd, the debtor opposed adjudication on the grounds that he had a claim against a third party which would yield sufficient funds to clear the creditor’s judgment.23 Courtney J also referred to Kroon, for the proposition that the existence of a third party claim may be a matter which will justify the exercise of the Court’s discretion to order a halt to a creditor’s bankruptcy application under s 38 of the Insolvency Act 2006, though that will rarely be the
case. In general, bankruptcy proceedings ought to be completed within a reasonable period.24
[51] The Judge noted that there had been an implicit acknowledgement of the existence of the debt owed to Mr Gwyer, and that if he were entitled to be paid the loan together with interest it would be enough for him to clear or significantly reduce the Westpac judgment debt.25 While he had taken no steps to commence proceedings to recover the loan, his claim was to be canvassed at a scheduled conference in the Family Court. In a short judgment, the Judge concluded that the circumstances justified an order halting the adjudication proceeding until further order of the Court, at least pending the outcome of the Family Court conference.
Application of those principles in this case
[52] Senior counsel has provided an opinion stating that the FR Claim has a good prospect of success, although when he provided that opinion he had not seen the defence evidence, and his assessment must understandably be qualified to that
extent. I have also been provided with a copy of a brief of evidence prepared for the
22 At [11].
23 Gwyer v Westpac New Zealand Ltd [2013] NZHC 257.
24 At [2].
25 At [7].
FR Claim by Mr Greenwood, a senior solicitor practising in a Wellington law firm. Mr Greenwood expresses the opinion that the defendant solicitors should have ensured that both clients (Mr Lynds and another client of the law firm, with whom Mr Lynds had entered into a partnership) were separately advised on the relevant loan, and should then have ceased to act further for either client. On the issues which his brief addresses, Mr Greenwood appears to support the view that the FR Claim has a reasonable prospect of success.
[53] In light of the advice of senior counsel and the evidence of Mr Greenwood, I can accept for the limited purpose of this proceeding that the FR Claim has reasonable prospects of success. But there is one striking feature about it: although Newbury is named as a co-plaintiff in the fifth amended statement of claim (a copy of which was provided by Mr Lynds with his 19 November 2014 affidavit), the claim for relief contains no claim for damages (or other relief) by Newbury. The claim for relief (damages of $5,555,000, interest and costs) is made only by Mr Lynds as first plaintiff, no doubt reflecting the fact that the only breaches which are alleged are breaches of duties said to have been owed by the law firm to Mr Lynds personally.
[54] Mr Tannahill did not address this point in his submissions.
[55] It thus appears that the making of a liquidation order would not affect the continued prosecution of the FR Claim at all: Mr Lynds, who is the only party seeking relief in the FR Claim, will be perfectly free to continue to prosecute the claim.
[56] It may be that Mr Lynds intends to make available to Newbury’s creditors whatever he might recover personally in the FR Claim. But that is not suggested by Newbury’s statements of defence,26 and it seems inconsistent with the undertaking given to the Court by Mr Lynds on behalf of Newbury (in Mr Lynds’
19 November 2014 affidavit) “that any recovery [Newbury] makes in the FR Claim
will be used to satisfy the debts owed to [Newbury’s] creditors.”
[57] I do not know whether this undertaking was provided on the basis of some earlier pleading in the FR Claim, in which Newbury did make a damages claim. But
26 They say that Newbury itself has a claim against the solicitors for a sum in excess of $3 million.
on the face of it, the undertaking appears to be empty. Newbury will not make any recovery in the FR Claim if it is seeking no relief against the solicitors.
[58] On the issue of delay in getting the FR Claim heard, I accept Newbury’s submission that the proceeding has been complex, and that there have been funding difficulties which are now resolved. It seems likely that a trial date will very shortly be allocated, and in those circumstances I would not have been inclined to reject the stay application solely on account of the additional delays which have occurred since the 2014 fixture for the FR Claim was vacated. But if there are other factors pointing against the granting of the stay applications, those other factors must be considered in the balancing exercise which is to be undertaken. Any substantial further delays, considered with those other factors, may be fatal to the stay applications. As Associate Judge Doogue noted in Kroon, it is not in the public interest that there should be significant delays in the Court making orders which will bring the affairs of a defendant who has committed an act of bankruptcy under the
control of the Official Assignee (or in this case, liquidators).27
[59] Even if the intention is that Mr Lynds will make available any recovery he may make in the FR Claim to Newbury’s creditors, I have nothing before me which would allow me to assess the quantum of any judgment which might be obtained. I am told that the total claim figure of approximately $5.5 million is supported by a Deloitte report, but I have not been provided with a copy of the report (it is said to be privileged), and nor have I been provided with a copy of the law firm’s statement of defence. For example, if it were the case that the real value of the FR Claim were only, say, $2.1 million, the entire proceeds of the claim would go to the Meo estate as the secured creditor, and there would be nothing for unsecured creditors anyway. Accordingly, I accept that while the claim might have good prospects of success and might even be favourably settled within a few months, I have insufficient evidence before me to conclude that the “good prospects” of success are sufficient on their own to justify the stay orders which are sought.
[60] It seems to me that the critical issue in this case is that there is no apparent reason why the FR Claim will not proceed regardless of whether Newbury is put into
27 Kroon v Westpac Bank Corporation, above n 13, at [87].
liquidation. Funding is now in place, and there appears to be nothing to prevent Mr Lynds from running the case to trial. If the claims made in the FR Claim are in truth Mr Lynds’ claims, and Newbury’s real interest in FR Claim is only that it will or may be entitled to look to Mr Lynds for reimbursement (for example, if it has discharged or assisted in discharging personal liabilities owed by Mr Lynds to others), the interests of unsecured creditors might well be better served by the appointment of a liquidator to Newbury. A liquidator would be obliged to pursue any such reimbursement claim in the interests of Newbury’s unsecured creditors, and in those circumstances Mr Lynds would have a greater incentive to vigorously pursue the FR Claim.
[61] If Newbury has no rights against Mr Lynds, and Mr Lynds’ motivation for making available any recoveries in the FR Claim to Newbury’s creditors is simply “to do the right thing” by those creditors, it is hard to see why the appointment of a liquidator to Newbury would affect that attitude. The claim that Mr Lynds’ son would be unlikely to wish to fund Newbury’s claims in the FR Claim if Newbury is in liquidation is not persuasive in circumstances where the relief sought in the proceeding is not sought by Newbury but by Mr Lynds himself.
[62] Nor have I been provided with any information on the basis on which the litigation funding costs are being provided by Mr Lynds’ son. For example, they may be subject to a trust, under which the solicitors are entitled to apply the funds only for the particular purpose of prosecuting the FR Claim.
[63] If the only matter relied upon in support of the applications for stay is that unfairness will result if Newbury is unable to pursue the FR Claim, I clearly needed to be satisfied (i) that Newbury has a reasonable claim in the FR Claim, and (ii) that Newbury would not be able to pursue the claim in the event of a liquidator being appointed. The onus of proving unfairness or undue pressure is on Newbury, and it has not satisfied me on either of those points.
[64] In summary, Newbury is not seeking any relief in the FR Claim, which Mr Lynds will be free to continue, with the funding from his son. And if Mr Lynds’ son is prepared to fund the proceeding on the basis that his father will pay all proceeds
from the FR Claim to Newbury’s creditors, it is not clear why Newbury’s liquidation should cause him to reconsider his views. If and to the extent that the party being funded is his father, the liquidator of Newbury would presumably have no interest in the litigation funding. And even if Newbury does have some financial stake in the outcome of the FR Claim (the nature of which has not been made clear), the liquidators of Newbury would presumably have every incentive to work out an arrangement with Mr Lynds’ son to ensure that the funding remained available to pursue a large claim which senior counsel has advised has good prospects of success.
[65] A further factor pointing against the grant of a stay is that Newbury is no longer trading. As in Sargam Foods Ltd, I do not need to further consider the improvement of the creditors’ position if Newbury is allowed to continue trading.
[66] Having regard to the foregoing matters, Newbury has failed to persuade me that there would be any unfairness or undue pressure placed upon it if I allow the liquidation claims to proceed. It has for a number of years failed to pay its tax liabilities and ACC levies, and it has failed to keep arrangements it has made with the ACC. It appears to have been putting its limited resources into the pursuit of the FR Claim, at the expense of meeting its responsibilities to the plaintiffs. There is nothing unfair in the plaintiffs pursuing their liquidation claims in those circumstances, nor anything savouring of undue pressure by the plaintiffs.
[67] As a final matter, I accept Mr Drummond’s submission that the Court should be careful in acceding to stay applications based on claims that the debtor will be deprived of the opportunity to pursue a good third party claim. While there will be occasions when the granting of a stay will be appropriate in such circumstances, the starting point (as Associate Judge Doogue noted in Kroon) will be that the Court will rarely be deflected from making an adjudication order on the basis that the debtor has a claim against a third party.
[68] For the foregoing reasons, Newbury’s stay applications are dismissed.
The liquidation claims
[69] As noted above, Newbury does not dispute that it is presumed insolvent as a result of its failure to comply with the statutory demands. It does not suggest that there is a genuine dispute over any substantial part of either of the plaintiffs’ claims. It relies on the Court’s discretion under s 241(4) of the Companies Act 1993 to decline to make a liquidation order. The sole ground put forward by Newbury in support of its submission that the Court should exercise its discretion against the making of a liquidation order, is that a liquidation order will deprive Newbury of the opportunity to prosecute the FR Claim.
[70] The only issue for the Court to determine is whether Newbury has shown that the above circumstances justify the exercise of the Court’s discretion against liquidation. Newbury relies primarily on the submissions made by it on the stay applications.
[71] Newbury acknowledges that the fact that a majority of creditors may oppose a winding up claim is not, in itself, sufficient to compel the Court to decline the order. It is for the opposing creditors to show there are reasons why the winding up order should not be made. The Court will have regard to all the circumstances relevant to the company and its operations, including the reasons for and against the
making of a winding up order, and the interests of other creditors.28
[72] Counsel for Newbury was unable to find any authorities which have considered the exercise of the discretion to liquidate where the defendant company relies on extant third party litigation. It relies on its submissions in support of the stay applications, submitting that the same considerations which were said to justify a stay are also applicable to the exercise of the Court’s discretion to make a liquidation order.
[73] Newbury submits that the debts owing to the Commissioner and to the ACC
are relatively minor when considered against Newbury’s total indebtedness. The
28 In Re Thames Freightlines Ltd(in rec) (1981) NZCLC 98,112 at 2, as amended by Associate Judge Osborne in Commissioner of Inland Revenue v Property Ventures (in rec) (No 2) (2010) 24 NZTC 24,403 at [46].
majority of Newbury’s creditors comprise the Meo estate, and debts owed to family, friends, shareholders and associated interests. Those creditors are content to await the outcome of the FR Claim. Newbury submits that the Court must have regard to the wishes of the majority of the creditors, and is bound to have regard to the value of the debts on each side. It says that the wishes of minority creditors should not override the wishes of the majority.
[74] In answer to the suggestion that Mr Lynds could carry on the FR Claim in his personal capacity if Newbury is liquidated, Newbury submits that the discretion is concerned with the consequences of liquidation for Newbury, not for Mr Lynds. It repeats the submission that if Newbury is liquidated it will lose the opportunity to prosecute the FR Claim to a successful conclusion.29
[75] I see nothing new in these submissions which would point to any other conclusion than the one I have reached on the stay applications. The essential point is that I have not been satisfied on the evidence that Newbury will lose the ability to pursue a valuable claim (the FR Claim). The situation appears to be closest to that considered by Associate Judge Doogue in Sargam Foods Ltd, where the Associate Judge was not satisfied that the third party claim could not be pursued if a
liquidation order were made.30 Furthermore, the fifth amended statement of claim in
the FR Claim proceeding shows that the alleged breaches of fiduciary obligation are said to be breaches owed to Mr Lynds, not to Newbury. The relief sought is sought only by Mr Lynds.
[76] There are other factors which suggest that it is appropriate that a liquidation order be made without further delay. The debts go back many years, and from time to time Newbury has failed to honour agreements reached with the plaintiffs allowing it further time to meet its liabilities. In the meantime, Newbury appears to have been putting its resources into the FR Claim. That may have appeared to be a sensible thing to do, particularly given the advice received by Newbury that the claim has good prospects of success. But the evidence suggests that Newbury has
been insolvent for quite some time, and if the FR Claim was really being pursued for
29 Although in his oral submissions, Mr Tannahill acknowledged that this might not necessarily be the case.
30 Commissioner of Inland Revenue v Sargam Foods Ltd, above n 5.
the benefit of Newbury’s creditors (and they were being asked on that basis to wait for payment of their debts) one would have thought that they should at least have been consulted. I note in that regard that as long ago as 4 September 2013 Newbury was apparently contemplating putting a proposal to its creditors under pt 14 of the Companies Act 1993.31 For whatever reason, it never did so.
[77] The fact that Newbury appears to have been trading while insolvent for a considerable period of time also raises the possibility that there may be transactions which should properly be investigated by liquidators.
[78] Having regard to those considerations I presently see no basis why a liquidation order should not now be made. However, Newbury asks that if I dismiss its stay applications, I should refrain from making a liquidation order for a short period to enable it to consider its position. It refers in support to the judgment of Master Kennedy-Grant in Camanda Boy Ptd Ltd v Brerton Downs Osteriches Ltd.32
In that case, the Master refused the defendant company’s application for orders
restraining advertising and staying the plaintiff ’s liquidation claim, but granted a temporary restraint and stay for a fortnight to enable the defendant to review its position in the light of the Master’s decision, and decide how to react to it. The Master described that as a “somewhat unusual course”. There is very little in the judgment to explain why the Master decided to grant the temporary stay; I surmise that it may have been considered necessary to preserve the defendant’s right to appeal the Court’s decision to decline the stay application.
[79] I accept that if there is an issue of that sort it is appropriate that the defendant should have a short period of time to take advice on this decision, and to take such steps as it may consider appropriate in response to it. I accordingly adjourn the plaintiffs’ liquidation claims for hearing at 10am on 15 April 2015. That hearing is to take place in Wellington, with leave reserved to counsel to participate by audio-
visual link if they wish to do so. Any request for the hearing to be conducted by
31 Memorandum of counsel in the Commissioner’s liquidation claim dated 4 September 2013, at
[12].
32 Camanda Boy Ptd Ltd v Brerton Downs Osteriches Ltd HC Rotorua M No. 349/97,
21 May 1997.
audio-visual link should be made to the registrar in Palmerston North by not later than 10 April 2015.
Orders
(a) Newbury’s applications to stay the liquidation claims filed by the
Commissioner and the ACC are dismissed.
(b)Newbury is to pay costs to the Commissioner and to the ACC on the stay applications, on a 2B basis, together with disbursements as fixed by the Registrar.
(c) The liquidation claims are adjourned for hearing in the Wellington registry of this Court on Wednesday 15 April 2015 at 10am. Counsel may request that they be permitted to participate in that hearing by audio-visual link. Any such request is to be made to the registrar in Palmerston North by not later than Friday 10 April 2015.
Associate Judge Smith
Solicitors:
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