Annik Investments Limited (in liquidation) v Prospective Investments Ltd
[2016] NZHC 957
•12 May 2016
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2015-404-2835 [2016] NZHC 957
UNDER The Companies Act 1993 BETWEEN
ANNIK INVESTMENTS LIMITED (IN LIQUIDATION)
Plaintiff
AND
PROSPECTIVE INVESTMENTS LTD Defendant
Hearing: 18 April 2016 Appearances:
Mr D Grove for Plaintiff
Mr D G Collecutt for DefendantJudgment:
12 May 2016
JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE
This judgment was delivered by me on
12.05.16 at 4 pm, pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
ANNIK INVESTMENTS LIMITED (IN LIQUIDATION) v PROSPECTIVE INVESTMENTS LTD [2016] NZHC 957 [12 May 2016]
[1] The plaintiff, Annik Investments Ltd (in liquidation) (“AIL”) applies for an order liquidating Prospective Investments Ltd (“Prospective”). The application is opposed.
[2] The issues which the court is required to consider are set out below.
The case for the plaintiff liquidator
[3] Mr Edwards and Mrs Forbes-Edwards were directors and shareholders of both AIL and Prospective. At the same time, they were also the sole trustees of the Edwards-Forbes Family Trust (“the Trust”).
[4] The liquidator is seeking to recover a debt which is shown in the accounts for AIL for the year ending 31 March 2012 as owing by Prospective to AIL in the sum of $532,783.1
[5] Mrs Forbes-Edwards, who is the sole deponent on behalf of the defendant, however relies upon financial accounts for the year ending 31 March 2014 in which the debt no longer appears.2
[6] Although Mrs Forbes-Edwards asserts that she has attempted to locate source accounting documents to show the background to the original accounts, the liquidator claims that she has not advised where those records are located or, if they no longer exist, when they were disposed of.
[7] One of the problems that the liquidator has faced in dealing with this alleged debt is the absence of detailed records relating to it. Mr Edwards has apparently advised Mr Greer, the liquidator of AIL, that prior to the Edwards placing that company into liquidation he uplifted all of the files relating to AIL from the company’s former solicitors, Ganda & Associates. Mr Edwards went on to explain that he took files that were over seven years old and burned them in an incinerator.
He said that the balance of the files were in his garage when a leak or flood occurred.
1 Bundle p. 40
2 Bundle p. 19
The files were damaged and he subsequently disposed of them.3 Fortunately, Mr Greer was able to obtain some records from AIL’s previous accountants, Skipper Lay & Associates (“SLA”). An IRD investigation had been undertaken into AIL in
2011.
[8] Mrs Forbes-Edwards asserts that:
(a) The reference in the 2012 accounts to Prospective being a debtor of AIL may have been incorrect and has subsequently been corrected by the company’s accountants in the subsequent accounts for the company.
(b)There was no material advance of funds from the plaintiff to the defendant in the six years prior to these proceedings being issued.
(c) The original references in the old accounts were based on events which occurred more than six years prior to the liquidation proceedings being issued.
[9] Prospective was at some point removed from the Companies Register for failing to file annual returns. The liquidator of AIL successfully applied to have Prospective restored to the Companies Register and this occurred on 21 December
2011.4
[10] In a letter from SLA to the IRD dated 21 December 2011, the accountants stated that $33,829 of interest had been charged on the loan made by Annik to Prospective.5 The liquidator relies upon this statement as showing that the loan was not only acknowledged but the Edwards agreed to pay interest on the loan. Importantly, he says, when these admissions were made Mr Edwards and
Mrs Forbes-Edwards were the sole directors of both AIL and Prospective.
3 Mr Greer Affidavit paragraphs 6, 7 and 8, Bundle p. 27 and Mr Edwards’ letter Bundle p. 49.
4 Mr Greer affidavit paragraph 12, Bundle p. 29.
5 Bundle p. 51 at paragraph 53, p. 53. At [3].
[11] In an email from SLA to Mrs Forbes-Edwards on 19 December 2011 there are discussions about the dealings between AIL and Prospective.6 Mrs McLeay sets out the basis of the Edwards’ operations of AIL and Prospective. She notes:
They [apparently the Edwards] note that Annik has, in the period pre and post 2003 purchased and sold properties and the IRD believe Annik has not put these transactions through their books. They will therefore not have returned as income the gains on the sale of those properties.
Since 2003 Annik entered into a series of transactions with Prospective Investments Limited whereby Annik would purchase a property, Prospective would place a caveat over the property, Annik would hold on to the property for three (or four) years, Annik would sell the property to Prospective and at immediately the same time, Prospective would sell the property to a third party.
[12] On the following page page Mrs McLeay states:
I note that Prospective Investments is in the process of being struck off from the Companies Register but I believe it is possibly due to the annual company return not being filed as opposed to the appropriate channels and procedures being followed. In any event, this will not stop the IRD’s enquiries and they will have this company resurrected if necessary. I also note there is a loan from Annik to Prospective – so if Prospective is liquidated the forgiveness of this loan will be income to it.
[13] The liquidator also recovered evidence concerning the issue of interest on the loan in the form of a letter from SLA to the IRD dated 8 May 2012.7
[14] Mr Greer has located journal entries for the year ending 31 March 2013 in the SLA records.8 In those records, the loan is recorded at that time as being increased to $785,254.41. The debt was removed from the books with the note “clear Prospective Investments balance – company struck off”.9
[15] Mr Greer confirms that that the total amount owed to creditors of AIL is
$431,097.95, excluding secured creditors. His view is that there is a claim by
6 Bundle p. 76.
7 Bundle p. 79 at p. 80. There is a section specifically headed “Loan to Prospective Investments
Limited”. Refer also to appendix 2 setting out the interest calculations through to 31 March
2010. By that time, the loan from Prospective to Annik had in fact increased to $739,085.76.
Prospective against the Trust regarding a very substantial property in Drury. The basis of the claim is set out in a draft statement of claim.10
[16] The Drury property was purchased by AIL on or about 28 February 2003. On
22 September 2004 AIL transferred the property to Prospective. On 13 October
2004 Prospective transferred the property to the Trust.
[17] In relation to the transfer of the property from Prospective to the Trust, a number of requests have been made for documentation demonstrating that consideration was paid. The liquidator asserts (and there does not seem to be a denial of this in the evidence filed by the defendant) that the Edwards have failed to
comply with that request.11
[18] Mr Greer produced a file note from the SLA records regarding a discussion with Mrs Forbes-Edwards. This is dated 22 August 2013.12 This file note talks about the issue of how the Trust paid for the property when it was brought from AIL.
[19] In addition, Mrs Forbes-Edwards was previously examined in this Court. In that evidence Mrs Forbes-Edwards said that the Trust had never traded, never earned any income and never filed any tax returns. Mr Greer considers that based on Mrs Forbes-Edwards’ evidence and the failure of the trustees to provide documentation showing consideration was paid, it appears that the Trust obtained ownership of the Drury property without making any payment.13
[20] Counsel for the liquidator also made reference to a judgment of this Court issued on 16 March 2016 in which Wylie J dealt with an application for a freezing order made by AIL over the assets of the Edwards-Forbes Family Trust. Wylie J noted as follows:
[111] First, it seems clear that the Edwards have taken a cavalier attitude to the obligations owed to the Inland Revenue Department. AIL, which the Edwards control, did not pay tax on its property investments. The Edwards themselves have never filed tax returns, claiming that
10 Bundle p. 158.
11 Mr Greer affidavit paragraph 27, bundle, p. 31.
they had never earned any income. This begs the question of how they funded their lifestyle.
[112] Secondly, it appears from the affidavits that substantial sums of money have been transferred out of AIL so the Edwards could purchase substantial chattels for their personal use in the house at MacWhinney Drive. It also seems that money from AIL was also used to fund major development of the house and grounds.
[113] Thirdly, Mr Edwards is elderly. He is a bankrupt and a Superannuitant. He has asserted that he owns nothing, and that he cannot pay his creditors.
…
[115] Fifthly, it is a matter of concern that relevant financial documentation has been destroyed by Mr Edwards. Formal requests were made by the liquidator of Mr Edwards for delivery of documentation pursuant to s. 261 of the Companies Act 1993. Mr Edwards responded saying that he did not hold any files or records belonging to AIL. He said that in March 2015 he uplifted AIL’s files from its solicitors. He said that he took the step because he was considering placing the company in liquidation and he wanted to have the company files on hand to answer any queries the liquidator might have. He claimed he went through the files and noted that quite a few were over seven years old. He said that he did not have to keep those files and that he destroyed them by burning them in his garden incinerator. He asserted that more recent files were stored in his garage and that, in April / May 2015, the garage flooded because the roof leaked. He said that the file boxes and files were completely damages and that he had no option thereafter but to destroy the same. Understandably the liquidator is suspicious as to these assertions, given the importance of the documents and given what the liquidator claims to have subsequently discovered.
…
[118] In my judgment, taking all of these matters in the round, there is a risk of dissipation. The evidence suggests that the Edwards have repeatedly manipulated financial matters for their own advantage. A prudent and sensible man or woman would be concerned that the Edwards might seek to use the property at MacWhinney Drive, or the net proceeds of sale in the event that the property is sold, for their own advantage.
[21] Counsel for the liquidator submitted that, given the evidence referred to above, the Edwards’ operation of Prospective necessitates a thorough investigation by a liquidator. Reference was made to the judgment of this court in Re Ocean
Shipping Limited (in liquidation), where Fisher J noted:14
14 Re Ocean Shipping Limited (in liquidation) HC Auckland M348/96, 16 July 1996.
It does seem to me, however, that there is a very strong presumption that the creditors of a failed company are entitled to a full and thorough investigation of the financial history and status of the company. That is especially the case where they are prepared to fund the exercise. Ocean Shipping had been denied that opportunity in the present case. It may that at the end of the day, as Mr Bougogne alleges, the further investigation will prove fruitless but for my part I would be very slow to see a creditor denied at least the opportunity.
[22] Mr Grove submitted that in opposing these liquidation proceedings that is exactly what the Edwards are attempting to do; that is, prevent an investigation as to their operation and trading of Prospective.
The issues
[23] The following issues arise for consideration in this case.
(a) Has the plaintiff established on the balance of probabilities that the defendant is indebted to it?
(b)Is the advance statute barred? This involves the following subsidiary questions:
(i)When did the cause of action which the plaintiff sues on come into existence? This involves the question of whether any loan was due and owing right from when it was made or whether the debt was not payable until a demand had been made.
(ii)If the debt came into existence more than six years prior to the commencement of the liquidation proceedings, and would otherwise be limitation-barred, is the plaintiff able to overcome a limitation defence on the ground:
(1)that there was an acknowledgement of the debt which caused time to start running again; or
(2)that the debt was fraudulently concealed with the result that time did not start running until it was reasonably
discoverable that there was a cause of action available to the plaintiff?
(c) Is it just and equitable that the defendant be liquidated on the grounds appearing in section 241(4)(d) of the Companies Act 1993 because of the directors’ failure to keep proper records for the company and make the returns that it was required to make?
Is the plaintiff a creditor of the defendant?
[24] There is no doubt that Annik transferred the Drury property to the defendant. It would be quite unsurprising if there was a debt generated as a result of that transaction which the defendant owed to the plaintiff.
[25] When SLA began acting for the Edwards they contacted Mr Allen Hawkins, who had at an earlier stage acted for Prospective. SLA were making enquiries from Mr Hawkins concerning such a debt. Their email to Mr Hawkins on 14 April 2011 stated:
We hold for Annik Investments Limited a balance sheet, profit and loss statement, and fixed asset schedule for the 2008 at (sic) 2009 financial years. Is it possible that you hold a complete set of accounts for those years that also includes a title page, statement of disclaimer, and notes to the accounts. I also note in the accounts that there is a large inter-company loan to [the defendant]. What does this loan relate to? What did [the defendants] do in terms of its taxable business activity? Are income tax returns required to be filed for this entity.
[26] Mr Hawkins replied on 16 April:
I don’t now hold any further Annik paperwork. Robin Edwards was in to see me last week and I gave him the archived box to deliver to you but the things that you are looking for are not in there. Prospective is still attached to my tax agency. It is inactive and I will continue to file nil returns until I drop it off. Prospective was in property similar to Annik and the intercompany arose simply by funds transfer between the two companies.
[27] It is to be observed that the explanation that Mr Hawkins gave for the indebtedness is rather different than that which the liquidator puts forward. The liquidator considers that the loan came into existence at the time when the plaintiff transferred the property to the defendant which occurred in 2004. The significance
of this exchange is that Mr Hawkins did not assert that there was no such loan. He gave an explanation as to why there was such a loan. I observe, though, that in Mr Hawkins’ belief the origin of the loan was rather different from that which the plaintiff asserts.
[28] A further contemporaneous document which Mr Grove for the plaintiff referred me to and which he said was evidence that assisted the plaintiff’s case was a letter which SLA wrote to the Inland Revenue Department on 22 December 2011.15
The background to that letter being written to the IRD was that the department had embarked upon an investigation of the plaintiff’s affairs. That letter makes reference to the fact that in the 2010 financial statements an item of $33,829 in the interest section of the statements was:
Charged on the loan made by Annik to Prospective Investments Limited. In both cases the interest has been calculated with reference to the Inland Revenue’s prescribed rate of interest for the year.
[29] There is no other “loan” that the letter could have been referring to other than the one which is the subject of the present proceedings.
[30] Further reference was made to the Prospective loan where it is said that:16
Interest is being charged on the loan amount in the 2010 accounts (and the calculation schedule is attached as an appendix). It does not appear that interest has been earned on this loan in prior years.
The client is advised that they are unsure of the transaction giving rise to the loan to Prospective Investments Limited and will revert when they have clarification around this from their previous advisor.
[31] The next document in chronological order that is put forward as having relevance is an email that Ms McLeay of SLA sent to Mrs Forbes-Edwards on 19
December 2011. The email makes reference to the fact that the IRD have
investigated Annik’s property transactions. The email went on to note:
They (IRD) note that Annik, has in the period pre and post 2003 purchased and sold properties and IRD believe Annik has not put these transactions through their books. They will therefore not have returned as income the gains on the sale of those properties.
·Since 2003, Annik entered into a series of transactions with Prospective Investments Limited whereby Annik would purchase a property. Prospective would place a caveat over the property, Annik would hold onto the property for three (or four) years, Annik would sell the property to Prospective and at immediately the same time, Prospective would sell the property to a third party.
[32] Mr Collecutt for the respondent made a number of points about the communications that SLA had sent and received concerning the affairs of Annik. Essentially he said that whatever the position might be with respect to Annik the communications are not evidence about transactions involving the defendant. Further, it was his contention that the accountants at SLA did not have an indepth understanding of the background of the transactions that occurred in some of these years which occurred at a time when a different accountant was representing the Edwards’ companies. Further, he noted the fact that “the client” had advised Skipper Lay that they were unsure of the transaction giving rise to the loan to Prospective Investments Limited.
Assessment of evidence
[33] With respect to the statement of his client’s case which Mr Collecutt has made concerning these matters, I do not consider that his client’s contentions are realistic. These two companies (and other entities) were owned by Mr and Mrs Edwards. The accounts which SLA drew extend back as far as 2009. The fact that they show a debt owing from Prospective to Annik as far back as 2009 either reflects instructions that were given to SLA to prepare accounts showing that fact or alternatively the SLA accounts have adopted the position stated in accounts prepared by their predecessors as accountants acting for the Edwards and their companies. There are references to this debt, adjusted to reflect the addition of interest, in the years 2009, 2010, 2011 and 2012. It is clear that Skipper Lay consulted in detail with the Edwards. There is detail given about how they used their cars for the
purposes of the business, for example.17 It is also clear that the accounts which SLA
prepared were based on books that were kept by Mrs Forbes-Edwards.18 The level of detail that was provided is illustrated by the records that were kept about a meeting that was held in the Hyatt Hotel and likewise “a business luncheon … held
at Cotter House Remuera”. In each case SLA had detailed instructions, which must have come from the Edwards, right down to whom the individuals were who attended the functions. Further, there is the fact that Ms McLeay from SLA referred in detail to the communications she had received from the IRD concerning the investigation in the email of 19 December 2011 to Mrs Forbes-Edwards.
[34] In my view it is idle for Mrs Forbes-Edwards as a director of the defendant to assert that the evidence contained in the accounts that were prepared by SLA showing the lender/borrower relationship between the two companies is somehow of doubtful validity so far as the defendant is concerned. Equally I reject any submission that the evidence of a debt owing from the defendant to the plaintiff was somehow a concoction which was arranged in order to appease the IRD. As I understand the argument, Mr Collecutt says that when making disclosures to the IRD in the course of the investigation the Edwards were effectively trying to negotiate and they might have been prepared to concede certain matters in order to come to a successful negotiated outcome with the IRD. However I do not accept, in the absence of any explicit evidence, that the instructions which SLA were given to prepare adjusted accounts went so far as to involve them in preparing untrue accounts simply in order to reach a successful negotiated agreement with the Inland Revenue.
[35] I have mentioned the remark by the accountants in correspondence with the IRD that the Edwards did not remember what the transaction involving Prospective was. That is a different matter from saying that a transaction which gave rise to a debt being owed by Prospective to the plaintiff did not occur.
[36] The general position that Mrs Forbes-Edwards has taken is that the events in question took place a long time ago and because of the absence of records it is impossible to comment on the truth or otherwise of the plaintiff’s assertions that a debt is owing from the defendant.
[37] In my view the only relevance that Ms Forbes-Edwards’ lack of familiarity with the case would have, if it were true, is that she does not have any useful evidence to offer on the subject and therefore the Court is restricted to consideration
of the evidence which the plaintiff puts forward and the inferences that can fairly be drawn from that evidence.
[38] The net result is that I consider the plaintiff has proved on the balance of probabilities that there is a debt owing to the plaintiff which is not less than $532,783 in amount.19
Limitation
[39] The statement of defence sets out as an alternative defence the following:
7.If there was an amount owed (“the alleged debt”) to the plaintiff (which is denied) then the defendant’s liability to the plaintiff arose, and the act or omission on which the plaintiff’s claim is based occurred, at least six years prior to the date on which this claim was filed.
[40] As I noted earlier in this judgment, the liquidator takes the view that the debt came into existence in 2004.
[41] The next question is when the limitation period began to run on the principal advance. That will be influential in deciding the question of whether the debt upon which the plaintiff bases his liquidation proceeding was statute barred when those proceedings were commenced on 25 November 2015.
[42] It is common ground in this case that the limitation period applicable is six years.
[43] The next issue is to determine from what date the limitation period commences.
On demand advance
[44] One of the difficulties is that very little is known about the terms of the advance from the plaintiff to the defendant. It is able to be inferred from the evidence that such an advance was made but little detail of the terms on which the advance was made is evident from the documentation provided to the Court. Given
that that is the case, the position would seem to be that in the absence of a fixed term, the advance must have been made on demand. If that conclusion is correct, then it is necessary to analyse how an advance on demand is to be treated in relation to the period of six years prescribed by the Limitation Act 1950. In DFC NZ Limited v MacKenzie Tipping J stated that the way in which the common law approached
such matters was as follows:20
It has been the law for centuries that if the contract of loan is silent about repayment the lender’s right to repayment arises at the time the money is advanced and time for limitation purposes commences to run forthwith. The same applies when the obligation to pay is expressed simply as being “on demand”.
In such a case no demand is necessary and the cause of action arises at the outset on the implied promises to repay[.]
[45] The position therefore is that time began to run on the instant advance from when it is presumed to have been made, that is in 2004. Unless the advance can be viewed as not subject to the six year limitation period because of some other provision of the Limitation Act 1950 or otherwise, then the plaintiff will be too late.
[46] Mr Grove drew attention to the fact that in this case there was no suggestion that any formal loan agreement had ever been entered into. He also noted that the advance was listed as a non-current asset in the financial statements where it was set out under the heading of non-current investments. In those circumstances, he submitted that it must have been intended that there would be a demand before the amount of the advance would become payable.
[47] I do not consider that the conclusion that Mr Grove contends for follows from the premises that he has set out. The authorities to which brief mention has already been made in this judgment make it clear that a loan of any kind, whether it is current in the sense of being due for repayment within 12 months, or for a longer term, is impliedly repayable from the time of the advance. There is no need to imply that a demand is necessary before liability will arise.
Acknowledgement
[48] Sections 25(4) and 26 of the Limitation Act 1950 provided:
25 Fresh accrual of action on acknowledgment or part payment
…
(4) Where any right of action has accrued to recover any debt or other liquidated pecuniary claim, or any claim to the personal estate of a deceased person or to any share or interest therein, and the person liable or accountable therefore acknowledges the claim or makes any payment in respect thereof, the right shall be deemed to have accrued on and not before the date of the acknowledgment or the last payment:
Provided that a payment of a part of the rent or interest due at any time shall not extend the period for claiming the remainder then due, but any payment of interest shall be treated as a payment in respect of the principal debt.
26 Formal provisions as to acknowledgments and part payments
(1) Every such acknowledgment as aforesaid shall be in writing and signed by the person making the acknowledgment.
(2) Any such acknowledgment or payment as aforesaid may be made by the agent of the person by whom it is required to be made under the last preceding section, and shall be made to the person, or to an agent of the person, whose title or claim is being acknowledged or, as the case may be, in respect of whose claim the payment is being made.
(…)
[49] The case for the plaintiff was that the fact that a debt was included in the accounts of the plaintiff provided the necessary acknowledgement of an indebtedness for the amount of principal which was presumptively advanced in 2004.
[50] In Anchorage Management Ltd v Oldham Master Venning stated the position in the following terms:21
Mr Ruge submitted that the accounts could not amount to an acknowledgement as s26 was specific and contemplated a particular document being the acknowledgement. In most cases that will, of course, be the case. However in principle I see no reason why accounts, prepared for one purpose but otherwise satisfying the requirements of the Act, could not
also amount to an acknowledgement for the purpose of s26 as well. In each case it will be a matter of construction.
In the present case I see no reason in principle why accounts recording a principal debt and interest thereon, signed by the defendant or the defendant’s agent, and made available to the plaintiff or the plaintiff’s agent could not in itself amount to an acknowledgement for the purposes of s26, even if the formal wording “acknowledgement” is not included within the documentation. That is a view approved by the Privy Council in Consolidated Agencies Ltd v Bertram Ltd [1965] AC 470, and the English Court of Appeal in Jones v Bellgrove Properties Ltd [1949] 2 KB 700.
The difficulty in the present case is that it is unclear whether the accounts were signed either by the defendant trustees or by accountants acting as their agents. If signed by either that would be sufficient to satisfy that aspect of s26.
Mr Tait invited me to take judicial notice of the fact that trustees’ accounts are commonly signed either by the trustees or the accountants preparing the accounts for the trustees. I am not prepared to do so. That may be common practice, but equally often accounts will not be signed for a variety of reasons. On the other hand, Mr Ruge referred to a copy set of accounts referred to and annexed to an earlier affidavit in these proceedings. That copy set are not signed. In my view that is not conclusive. The matter should be capable of resolution. If necessary the application will have to be adjourned part heard pending discovery and inspection of the relevant sets of accounts. If necessary further evidence on this point, which should be uncontested, can be led: McVeigh v A-G [1995] 1 NZLR 558.
[51] The problem for the plaintiff, Mr Collecutt submitted, was that the same difficulty was present in this case in that the putative acknowledgement appeared not in a document of the defendant but in the financial statements of the plaintiff. Further, any statements which the accountants, SLA, might have made, even if made with the required authority as an agent, were made on behalf of the plaintiff and not the defendant.
[52] Mr Grove drew attention to the fact that the directors who signed the accounts of the plaintiff were also the directors of the defendant, which was the party which would have to have made the acknowledgment if the provisions of s 4 of the Limitation Act are not to bar the claim.
[53] Mr Collecutt referred to the authority of Vuletic v Contributory Mortgage Nominees Limited.22 In that case, Chambers J delivering the judgment of the Court of Appeal stated:23
No one disputes that it is possible for a person to sign a contract once but in a dual capacity. But there is a presumption that, if the signer purports to sign on behalf of a company or another, he or she is signing only in that capacity. Such presumption may be displaced by clear words within the contract or by extrinsic evidence from which may be inferred the signer’s intention when affixing his or her signature.
Analysis
[54] The conclusions that I have reached may now be briefly set out.
[55] The issue of extrinsic evidence has arisen in cases where directors of a company put their signature to a document by way of execution of the document on behalf of the company of which they are directors. If the document also contains a personal guarantee, then their signatures as directors can be relied upon as evidencing that the directors sign in their personal capacity as well, which is necessary in order for the guarantee to be valid. That point was considered in the
Court of Appeal decision in Doughty-Pratt Group Limited v Perry Castle.24 In that
case evidence was given that the two persons executing a deed of lease on behalf of the company understood that in signing the deed they were also giving a personal guarantee and that they were “comfortable” with doing so.
[56] That case is rather different from the present. The accounts which the Edwards signed were those of the plaintiff and not the defendant. While I have previously agreed that inferences can be drawn from the Edwards signing the plaintiff’s accounts that they must have understood and intended that there would be a counter-part obligation on the part of the defendant, that is not the same thing as their signature amounting to an acknowledgement for the purposes of the Limitation Act. A statement in the accounts of the plaintiff cannot be viewed as an “acknowledgement” on the defendant’s part. That impossibility is not cured by the
fact that the Edwards happened also to be the directors of the defendant. There is
22 Vuletic v Contributory Mortgage Nominees Limited (2006) 7 NZCPR 552 (CA).
23 At [13].
24 Doughty-Pratt Group Limited v Perry Castle (1995) 6 TCLR 354 (CA) at 361.
simply nothing in the text of the accounts which would indicate on its face that not only did they state the financial position of the plaintiff but that they were intended to serve the additional purpose of amounting to an acknowledgement of an obligation that might otherwise have been statute barred because of the provisions of the Limitation Act.
Conclusion
[57] Subject to what follows in this judgment, I do not consider that it is open to the plaintiff to avoid a limitation defence on the grounds that there has been an acknowledgement of the kind contemplated by ss 25 and 26 of the Limitation Act.
Fraudulent concealment
[58] If contrary to the submissions that the plaintiff put to the forefront of its argument, the claim against the defendant is outside the six year period provided in s 28 of the Limitation Act, the plaintiff alternatively submits that the running of time was deferred because there was fraudulent concealment on the part of the defendant through its directors.
[59] The case for the liquidators is that the Edwards exercised the position that they were in as the controlling figures in regard to both the defendant and the plaintiff to ensure that a claim which would have been available to the plaintiff was concealed. That claim was to recover the advances that the defendant owed to the plaintiff.
[60] However, the only evidence in regard to which there is the foundation for a claim of suppression is the evidence about the missing accounts. That is, the plaintiff must be asserting that the Edwards concealed material evidence by destroying company documents including accounts when they were seven years or more old and secondly by not retaining documents including statements of account which did not fall within the former category. These were the documents that Mrs Forbes-Edwards claims were subject to flooding in the basement of the directors’ house.
[61] Mr Greer was appointed as the liquidator of the plaintiff on 29 July 2015. It would seem likely that the documents that are in dispute in regard to this aspect of the case had already been destroyed by then.
[62] It would seem that the essence of the suspension of time pursuant to s 28 is justified on the broad basis that it would be inequitable for a party to be permitted to invoke the limitation defence where he/she contributed to the claimant not issuing proceedings timeously because of ignorance about the existence of a claim. The effect of s 28 is described in the following extract from Laws of New Zealand:25
302. Concealed fraud in equity.
The equitable doctrine of concealed fraud did not apply unless the existence of the cause of action was concealed by fraud, whether or not the cause of action was in some way itself based on fraud. The equitable doctrine was applied where the defendant, by concealing the cause of action, had used the statute to accomplish a fraud. The equitable doctrine may be applied in those cases, where the statutory provisions relating to concealed fraud, do not apply.
[63] The discussion in Laws of New Zealand continues at [304]:
A defendant is not to be deprived of a statutory limitation defence on broad grounds of conscience or unfairness.
There is no fraudulent concealment unless there is non-disclosure in breach of a legal or equitable duty of disclosure. The breach of duty must be wilful and the person in breach of the duty must be shown to have been aware of the essential facts constituting the cause of action.
Passive non-disclosure is not "fraudulent concealment" unless there is a duty of disclosure, whether a fiduciary duty arising from the relations of the parties, or a duty arising from a contract.4
[64] The Edwards were directors of the plaintiff company. They owed fiduciary obligations to that company. The directors were subject to a proscription on profiting at the expense of the plaintiff. It would appear however that they have done just that. They transferred a property belonging to the plaintiff to the defendant without recovering any price therefore. That enabled the property to be transferred
on to a family trust of the Edwards, apparently also without cost. Alternatively, this
25 Laws of New Zealand Limitation of Civil Proceedings at [302] (footnotes omitted).
overall result was achieved by the directors failing to ensure that the debt remained recoverable notwithstanding the passage of time.
[65] The fraud which enabled this to happen, according to the plaintiff, was the actions of the Edwards in destroying, or permitting the destruction of, financial statements and other documents belonging to the defendant.
[66] So far as the defendant company is concerned, in this context, the actions of the Edwards would have been motivated by a concern to ensure that the plaintiff (and perhaps other claimants) would not be able to bring any claims against the company. I have no doubt that if there has been fraud in this regard on the part of the Edwards, it is attributable to the defendant company itself.
[67] A blanket determination to destroy all records over seven years old would be quite indefensible where the company had entered into a property sale transaction that fell within this time limit, particularly if the loss of the documents disabled the company from taking steps to enforce any remaining unexecuted aspects of the transaction such as the payment of the price.
[68] The difficulty that the plaintiff faces is establishing that the loss of records (which is the event that is presumably alleged to have been the fraudulent conduct on the part of the defendant that is relevant) was actually deliberate and for dishonest purposes.
[69] The explanation which Mr Edwards provided to the liquidator claimed that partly the documents were destroyed as a deliberate act and partly by accident when some of them which were stored in the residence of Mr and Mrs Edwards were flooded. Unfortunately, there is no proof that there was included in the former category documents which, if retained, would have alerted the liquidator to the need to timeously issue proceedings against the defendant. The same comment can be made about the second category but with the additional observation that the explanation that Mrs Forbes-Edwards has given could be true. She was not cross- examined on the statements that she made in her affidavit.
[70] Given that the conduct alleged against her is essentially that of dishonesty, cogent evidence would be called for to prove that the suspicions of the liquidator are correct.26
[71] Further, it is an open question whether, even assuming the Edwards behaved fraudulently, that caused the concealment of a cause of action arising from the transfer of the Drury property to the defendant.
[72] In the end, there has been no proof that the existence of the cause of action was concealed by the fraudulent suppression of documents in the possession of the defendant. I do not therefore consider that the provisions of s 28 of the Limitation Act assist the plaintiff.
Other grounds for the liquidation
[73] A further ground upon which the liquidation of the defendant is sought is the provision in s 241(4)(bb) of the Companies Act. This ground is raised in an indirect way in that the plaintiff pleads that:
7. It is just and equitable to liquidate the company given that:
(a) the directors failed to comply with the Companies Act 1993 and this resulted in the company being struck off the Company’s (sic) register[.]
[74] Section 241(4)(bb) has the effect that a persistent or serious failure to comply with the Companies Act is a separate stand-alone ground justifying the appointment of a liquidator. It is not a subcategory of the just and equitable ground for winding up which is contained in subsection (4)(d). That subsection states that the court may wind up the company because it is just and equitable that the company be put into liquidation.
[75] The just and equitable grounds for liquidation have been described in one textbook as embracing the following subcategories of grounds:27
26 See the authorities referred to in Halsbury's Laws of England , Volume Civil Procedure (2015), paragraph 708
27 Brookers Insolvency Law & Practice (online looseleaf ed, Thomson Reuters) at [CA241.03(4)].
(a) where grounds exist that would justify the dissolution of the partnership;
(b) the company is deadlocked;
(c) the substratum of the company is gone;
(d)there is a lack of confidence in the conduct and management of the company;
(e) there has been oppressive conduct (which may also be a ground for liquidation pursuant to s 174).
[76] I shall treat the ground of application as being made pursuant to subs (4)(bb) which requires, inter-alia, persistent or serious failure to comply with duties relating to the company under the Companies Act or under the Financial Reporting Act 1993.
[77] The evidence which is put forward in support of this ground seems to be limited to a statement which was made by the accountant representing the plaintiff in its dealings with the IRD during the course of the investigation which was carried out into the plaintiff’s affairs. In a communication which she sent to the Edwards, the accountant, Ms McLeay, said:
I note that Prospective Investments is in the process of being struck off from the Companies Register but I believe it is possibly due to the annual company return not being filed as opposed to the appropriate channels and procedures being followed. In any event, this will not stop the IRD’s enquiries and they will have this company resurrected if necessary. I also note there is a loan from Annik to Prospective – so if Prospective is liquidated the forgiveness of this loan will be income to it.
[78] I do not regard the evidence as being sufficient to establish that there has been persistent failure to comply with the Act. There was little or no argument on this aspect of the case. However, my own research has led me to a decision of this court in Northern Crest Investments Limited where a liquidation was sought on the
same ground that is relied on in the present case.28 The Judge rejected the application in essence for the grounds that appear in the following paragraph:
35.In these circumstances it is inappropriate to describe the late filing of the 2008 accounts as a “persistent” failure. Nor in light of the explanation of difficulties encountered in Canada appropriately be described as a serious failure which term is more consistent with wilful, unjustified and frequent breach.
[79] I agree with respect. In the present case the evidence does not establish a serious or persistent failure to comply with the requirements of the Act and this is not a ground upon which the court would be justified in directing a liquidation.
Costs
[80] The parties should confer on the question of costs. If they are unable to agree they should file memoranda not exceeding five pages on each side within 10
working days of the date of this judgment.
J.P. Doogue
Associate Judge
28 Registrar of Companies v Northern Crest Investments Ltd HC Auckland CIV-2009-404-802, 8
June 2009.
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