Beer Spot Limited v Payn
[2022] NZHC 1941
•8 August 2022
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV 2022-404-000363
[2022] NZHC 1941
UNDER The Companies Act 1993 AND
IN THE MATTER OF
an application to set aside a statutory demand
BETWEEN
THE BEER SPOT LIMITED
First Applicant
TBS HUAPAI LIMITED
Second ApplicantTBS MORNINGSIDE LIMITED
Third ApplicantAND
JASON PHILLIP LESTER PAYN
Respondent
Hearing: 1 August 2022 Appearances:
B J Upton for the Applicants S J Tee for the Respondent
Judgment:
8 August 2022
JUDGMENT OF VAN BOHEMEN J
This judgment was delivered by me on 8 August 2022 at 4.00pm Pursuant to Rule 11.5 of the High Court Rules
…………………………
Registrar/Deputy Registrar
Solicitors/Counsel:
Simpson Grierson, Auckland Morton Tee, Auckland
THE BEER SPOT LIMITED v PAYN [2022] NZHC 1941 [8 August 2022]
Introduction
[1] The applicants, The Beer Spot Ltd (The Beer Spot), TBS Huapai Ltd (Huapai) and TBS Morningside Ltd (Morningside), apply pursuant to s 290 of the Companies Act 1993 to set aside three statutory demands made by the respondent, Jason Payn, who is a director and shareholder of the three companies and was formerly an employee of The Beer Spot.
[2] The applicants say there is a substantial dispute as to whether the amounts in the statutory demands are debts owing to and payable on demand by Mr Payn. They say that the amounts claimed by Mr Payn are really capital rather than loans by Mr Payn to the companies. They also say that it was understood between Mr Payne and Mr Van Dam, the other principal shareholder in the companies, that the shareholders would not seek payment of funds held in their respective shareholders’ current accounts unless the companies had sufficient cash flow to cover the payments.
[3] The applicants also say the statutory demands have been made for tactical reasons in the context of discussions among shareholders to buy out Mr Payn, who has been dismissed as an employee of The Beer Spot. They also say Mr Payn’s demands for payment, which were made without notice, are inconsistent with Mr Payn’s duties as a director of the three companies and with the partnership nature of the enterprise as reflected in the constitution of The Beer Spot. For these reasons, the applicants say that, even if amounts claimed are debts owing to Mr Payn, the Court should set the statutory demands aside on “other grounds” as envisaged in s 290(4)(c) of the Companies Act.
[4] Lastly, the applicants say that, even if the amounts claimed are debts owing to Mr Payn and the statutory demands are not set aside on other grounds, the Court should extend the time for compliance with the statutory demands by six months.
[5] Mr Payn says it is plain from the companies’ financial statements, which have been approved by the companies’ directors and shareholders, that the amounts claimed are debts owing to him. The amounts are the balances of Mr Payn’s shareholders current accounts which are recorded as liabilities in the financial statements of the three companies. Mr Payn says the applicants have failed to discharge the
presumption that the amounts are debts owing and payable on demand. In particular, the applicants have failed to adduce any evidence of an agreement by the shareholders of the companies that funds held in shareholders current accounts should be treated other than debts due and payable to the shareholders.
[6] Mr Payn also denies that the statutory demands were made for tactical reasons and says that, following his dismissal as an employee of The Beer Spot, he has not had an income. In any event, he says the reasons for demanding payment of debts due and owing are irrelevant. He also says the applicants have already have five months to pay the demands and there is no reason to extend the period for payment any further.
Relevant background
[7] In March 2014, Mr Van Dam and Mr Payn founded The Beer Spot for the purpose of selling keg-fresh, independently brewed beer from around New Zealand. They each took and retain shareholdings of 45.45 per cent of the company. The remaining shareholdings of 4.55 per cent each were and are held by Ashton Welsh and Leading & Kerning Ltd, a company owned by Mr Welsh. The directors of The Beer Spot are Mr Payn and Adrian Wills.
[8] Mr Van Dam says the initial capital for The Beer Spot was provided by himself and Mr Payn but that in 2016 The Beer Spot obtained a loan from Westpac so that he and Mr Payn could withdraw their start-up capital from the Beer Spot to use for Huapai and Morningside. Mr Van Dam and Mr Payn both gave personal guarantees for repayment of the loan, which was secured by a mortgage over Mr Van Dam’s family home.
[9] Subsequently, Mr Van Dam and Mr Payn established Huapai and Morningside, in which they are each 50 per cent shareholders.1 Mr Van Dam and Mr Payn are the directors of Huapai. Mr Payn and Mr Wills are the directors of Morningside. The purpose of establishing these companies was to assess the feasibility of expanding The Beer Spot operation through franchising arrangements with third parties.
1 There are other related companies in The Beer Spot group, but they are not relevant to this application.
[10] Huapai and Morningside started operations in 2019. Mr Van Dam says that funds were drawn out of Huapai to cover the fitout costs for Morningside and that further bank loans and an overdraft facility, all secured against his family home, were also taken out to complete Morningside. Once opened in November 2019, Morningside became the flagship site for The Beer Spot brand.
[11] Tensions arose between Mr Van Dam and Mr Payn over the imbalance of additional capital each contributed to the new operations and to the use of Mr Van Dam’s home to secure additional funding. Mr Van Dam and Mr Payn discussed adjusting the balance of the shareholding in Huapai and Morningside, but nothing was agreed. Mr Van Dam used private money to pay off the bank loans and a new funding arrangement was put in place with Mr Payn’s agreement.
[12] However, the tensions between Mr Van Dam and Mr Payn continued and were exacerbated when Mr Payn refused to agree to the purchase of the Morningside site to secure its on-going use. Mr Van Dam then purchased the site on his own account and sought assurance that the rental payable by Morningside would be sufficient to meet the interest payments on the financing he had arranged.
[13] Because of the continuing disagreements, in November 2021, Mr Van Dam informed Mr Payn that he, in conjunction with Mr Welsh and Mr Wills, wished to buy out Mr Payn. They presented Mr Payn with an offer of $1.2 million, based on a valuation prepared by the companies’ accountants, Withers & Tang. Mr Payn counter- offered to sell his shareholding for $2.1 million. Mr Van Dam says Mr Payn declined to provide any details to support his counter-offer.
[14]In late February 2022, Mr Payn issued his three statutory demands.
The statutory demands and subsequent steps
[15] The three statutory demands are dated 25 February 2022. They were served on the applicants on 28 February 2022. The demands required payment, within 15 days of service, of:
(a)$80,300 by The Beer Spot;
(b)$37,790 by Huapai; and
(c)$53,472 by Morningside.
[16] On 10 March 2022, the applicants filed their application to set aside the statutory demands.
[17] On 8 April 2022, Associate Judge Taylor, by consent, extended the time for compliance with the statutory demands until further order of the Court.2
Relevant statutory provisions
[18] Section 289(1) of the Companies Act provides that a statutory demand is a demand by a creditor in respect of a debt owing by a company made in accordance with that section.
[19] Section 289(2) provides that a statutory demand must be in respect of a debt that is due.
[20] Section 290(4) provides that the Court may grant an application to set aside a statutory demand if it is satisfied that:
(a)there is a substantial dispute whether or not the debt is owing or is due; or
…
(c) the demand ought to be set aside on other grounds.
[21] Section 290(7) provides that an order under s 290 may be made subject to conditions.
Applicable principles
[22] The questions for consideration principally involve the application of s 290(4)(a). In AAI Ltd v 92 Lichfield Street Ltd, the Court of Appeal confirmed the
2 The Beer Spot Ltd v Payn Auckland HC CIV-2022-404-363 8 April 2022 (Minute of Associate Judge Taylor).
principles that apply to the exercise of the Court’s jurisdiction under s 290(4)(a);3 namely:
(a)The applicant must show there is arguably a genuine and substantial dispute as to the existence of the debt.
(b)The mere assertion that the dispute exists is not sufficient. Material short of proof is required to support the claim that the debt is disputed.
(c)If such material is available, the dispute should normally be resolved other than by means of proceedings in the Court’s Companies Act jurisdiction.
(d)It is not usually possible to resolve disputed questions of fact on affidavit evidence alone, particularly when issues of credibility arise.
[23]In AAI Ltd, the Court of Appeal also stated:
[22] It is important to keep in mind the words of the statute. What the applicant must show is that the dispute it raises has substance; the applicant must explain to the court what the dispute is; and the dispute so shown must be a real and not a fanciful or insubstantial dispute. The Court must bear in mind that it is operating in the summary jurisdiction, with the accompanying disadvantages that brings for any applicant. The Court must also keep in mind the requirement that what is intended to be a summary hearing should not be converted into a full-blown trial.
(footnotes omitted)
Questions for decision
[24] It is apparent from s 290(4) of the Companies Act, the application to set aside the statutory demands, Mr Payn’s notice of opposition and the submissions of counsel that the questions for decision are:
(a)Is there a substantial dispute about whether the amounts claimed in the statutory demands are owing or are due? In particular:
3 AAI Ltd v 92 Lichfield Street Ltd (in rec and in liq) [2015] NZCA 559, [2016] NZCCLR 18 at [19]. See also Confident Trustee Ltd v Garden and Trees Ltd [2017] NZCA 578 at [16] and Ecolibrium Biologicals Ltd v Biotelliga Holdings Ltd [2019] NZHC 2628 at [6].
(i)Are the funds in Mr Payn’s shareholder current accounts capital or loans?
(ii)Was there an agreement or understanding that the funds in the shareholder current accounts would be withdrawn only when the companies’ cash flow permitted?
(b)Should the statutory demands be set aside on other grounds?
(c)If the statutory demands are not set aside, should the Court order a further extension of the time for compliance?
Is there a substantial dispute about whether the amounts claimed are owing or due?
[25]There is no disagreement over the quantum of the demands made by Mr Payn.
[26] Mr Upton, counsel for the applicants, accepts that the amounts in the statutory demands are the balances stated in Mr Payn’s name under the heading “Shareholder Current Accounts” in the interim draft financial statements for the 10 months ending 31 January 2022. Those statements were prepared for the purposes of establishing the value of the companies for the buy-out discussions. With one adjustment to take account of drawings from Huapai made by Mr Payn after 31 March 2021, the amounts in the statutory demands are also the balances stated in Mr Payn’s name under the heading “Shareholder Current Accounts” in the finalised financial statements for the year ending 31 March 2021.
[27] Mr Tee, counsel for Mr Payn, says the statutory demands are based on the latter financial statements, which were approved by the directors and shareholders of the three companies.
[28] The questions on which the parties disagree are whether there is a substantial dispute as to:
(a)whether the funds in Mr Payn’s shareholder current accounts are capital or loans; and
(b)whether there was an agreement or understanding among the shareholders that the funds in the shareholder current accounts would only be drawn upon in circumstances when the cashflow in the companies permitted such withdrawal.
[29] The first question goes to whether the balances represent a debt to Mr Payn. The second question goes to whether, if there is such a debt, it is due.
Are the funds in Mr Payn’s shareholder current accounts capital or loans?
[30] Mr Upton accepts there is a presumption that a shareholder current account reflects a loan due to the shareholder if the account is in credit. However, he says the presumption can be rebutted. Mr Upton notes that in Jackson v Wynyard Group Ltd Associate Judge Bell, referring to the Court of Appeal in Mills v Dowdall,4 held that whether a shareholder advance is capital or a loan is a question of fact.5
[31] In his written submissions, Mr Upton says there are a number of “clear indications” that the contributions of all the shareholders to the three companies were “more in the nature of capital rather an on-demands loan”. Mr Upton says these indications are:
(a)The partnership aspect to the initial business relationship as reflected in the constitution of The Beer Spot;
(b)The start-up nature of the businesses;
(c)The underlying aim of developing a demonstrated successful franchise model which required shareholder contributions;
4 Mills v Dowdall [1983] NZLR 154 (CA) at 159 – 160.
5 Jackson v Wynyard Group Ltd (in liq) [2018] NZHC 1283 at [15].
(d)The fact drawings from The Beer Spot were put into Huapai and Morningside;
(e)The fact all drawings from any of the companies had been agreed and paid when the companies were in a position to do so from a cash-flow perspective;
(f)The fact that what is recorded in the shareholder current accounts in the case of The Beer Spot are paper profits created as a result of a change in the status of the company from “look through” to ordinary;
(g)All payments by Mr Payn to Huapai and Morningside are recorded as being “funds introduced” which runs contrary to the notion of an on- demand loan; and
(h)The surprise created by the demands which “came out of the blue.”
[32] In his oral submissions, Mr Upton did not pursue the argument about The Beer Spot’s change of status from being a “look through” company for tax purposes. Mr Upton now accepts that the dividends paid to Mr Payn as a result of that change of status were properly credited to Mr Payn’s shareholders current account for The Beer Spot and that tax was paid on those dividends from that account.
[33] Rather, Mr Upton took me to financial information compiled by Mr Tian of Withers & Tang, the companies’ accountants, in March 2022 for the benefit of Mr Van Dam, Mr Welsh and Mr Wills. That information outlined the shareholder current accounts for each shareholder in the companies’ financial statements, along with current accounts movements for Mr Payn’s accounts over the previous five years. Commentary on that information was provided in a covering email dated 8 March 2022 from Mr Tian to Mr Van Dam, Mr Welsh and Mr Wills.
[34] Mr Upton highlighted the fact that the financial information shows the following movements in Mr Payn’s shareholder current account for The Beer Spot:
(a) In 2018:
(i)an opening balance of $117,887; and
(ii)a credit of $70,169, against the entry “Capital Introduced”;
(b) In 2019:
(i)an opening balance of $188,056;
(ii)a credit of $137,998, against the entry “Dividends Received”; and
(iii)a debit of $221,969, against the entry “Drawings”;
(c)In 2021 and 2022, the balance of $80,300, which is the amount of the statutory demand to The Beer Spot.
[35] Mr Upton invited me to accept it is genuinely arguable these entries establish that the dividends received from The Beer Spots’ change from “look through” status in 2019 were entirely paid out in the drawings taken by Mr Payn that year so that the balance of $80,300 is made up of the capital introduced by Mr Payn in 2018 plus capital from the opening balance showing for 2018.
[36] Mr Upton also took me to other entries in the financial information compiled by Mr Tian which he says support his contention that funds provided by the shareholders to the companies were capital and not loans. For example, Mr Upton notes the use of the term “Capital” against an entry for the deposit of $10,000 into Mr Payn’s Morningside account which corresponds to the withdrawal of $10,000 from his The Beer Spot account.
Analysis
[37] A significant difficulty with Mr Upton’s submissions is that he is asking the Court to accept that his interpretation of the financial information compiled by Mr Tian and exhibited to Mr Van Dam’s affidavit is genuinely arguable. The applicants have not adduced any independent accounting evidence to support this
interpretation or even evidence from Withers & Tang that is directed to that interpretation. Mr Tian’s email highlights aspects of the financial information enclosed with it but not in the terms advanced by Mr Upton. Even the affidavits sworn by Mr Van Dam, who is not an accountant, do not go as far as the interpretation advanced by Mr Upton.
[38] Another difficulty is that there is no contemporaneous documentation that supports Mr Upton’s interpretation. While Mr Upton says the financial information is taken directly from the companies’ accounting records as maintained by Xero, the information is still a post-facto reconstruction of events.
[39] In addition, even on its own terms, the financial information does not fully support the interpretation Mr Upton advances. If it were the case that, but for the dividends received as a consequence of the change from “look through” status, the funds in Mr Payn’s shareholder current account are capital, that does not explain how Mr Payn was able to withdraw $221,969 when the dividend payment was only
$137,998. Furthermore, in his first affidavit Mr van Dam says that he and Mr Payn withdrew their initial capital contributions to The Beer Spot once they had arranged the loan from Westpac so they could invest in Huapai and Morningside. That itself suggests the two principal shareholders retained personal control over funds they advanced, even if it was called “Capital.” The funds were not assets of the company. The advances made to Huapai and Morningside could only have been for the benefit of Mr Van Dam and Mr Payn. They were not for the benefit of The Beer Spot which has no ownership interest in Huapai or Morningside.
[40] As Mr Tee submits, the simple and straightforward interpretation of how the funds in shareholder current accounts are to be characterised can be found in the companies’ financial statements for the financial years ending 31 March 2019, 2020 and 2021 which were approved by the directors and shareholders.
[41] In all of those financial statements, the shareholder current accounts are listed under “Liabilities.” There are no entries for capital under “Assets.” In addition, and as Mr Tee points out, the valuation of the companies prepared by Withers & Tang for the purpose of the buy-out discussions distinguished between the shareholders’ value
in the companies and the amounts in their current accounts. In these respects, the financial statements and the valuation prepared by the companies’ accountants support the conclusion that the funds in the shareholder current accounts are debts owed by the companies and are not capital.
[42] Further support for that conclusion can be found in the resolutions of the shareholders approving and adopting the companies’ financial statements for the year ending 31 March 2021. Each of the resolutions contains a paragraph stating:
5. THAT the above employee directors may withdraw from the company at any time, any amounts in part or in full of any credit balances current accounts held with the company.
[43] Mr Upton says that paragraphs cannot apply to Mr Payn, at least with respect to Huapai and Morningside, because he was not an employee of those companies. Even so, and whatever significance may be attached to the term “employee” in this context, the paragraphs confirm that the current accounts are not capital. If they were capital, it would be unlikely and possibly improper for shareholders to authorise directors to draw down the company’s assets “at any time” and, subject to the balances in the accounts, in any amount the directors considered appropriate.
[44] While the Court of Appeal in Mills v Dowdall held that whether a shareholder advance is capital or a loan is a question of fact, it also held that, while parties are free to choose whatever legal arrangements suit their purposes, the true character of their transactions must be ascertained by careful consideration of the legal arrangements entered into and carried out.6 Richardson J held that this consideration is not to be undertaken on the basis of an assessment of the broad substance of the transaction as measured by the results intended and achieved or of the overall consequences that would follow from an alternative course which they could have adopted had they chosen to do so.7 In a passage cited by Associate Judge Bell in Jackson v Wynyard Group Ltd,8 Richardson J went on to state:9
The forms adopted cannot be dismissed as mere machinery for effecting the purposes of the parties. It is the legal character of the transaction that is
6 Mills v Dowdall, above n 4 at 159.
7 At 159.
8 Jackson v Wynyard Group Ltd (in liq), above n 5, at [14].
9 Mills v Dowdall, above n 4 at 159.
actually entered into and the legal steps which are followed which are decisive.
[45] It is apparent from financial statements approved by the directors and the shareholders of the three companies that the form by which the shareholders themselves made funds available to the companies was by advances reflected in their current accounts and recorded as liabilities in those financial statements. In form and in legal character, the advances were loans and not capital. I do not accept, therefore, it is genuinely arguable that the advances were capital and not loans.
[46] None of the other considerations to which Mr Upton refers in his written submissions alter that assessment. Whatever the partnership nature of the enterprise
– a question I consider more fully below – I do not accept that it has any bearing on the nature of the funds in the balances in the shareholder current accounts. These and the other considerations to which Mr Upton refers invite an assessment of the broad substance of the transaction as measured by the results intended and achieved rather than an assessment of the legal nature of the transactions entered into. This is precisely the approach that Richardson J warned against in Mills v Dowdall.
[47] For these reasons, I conclude it is not genuinely arguable that the balances in Mr Payn’s shareholder current accounts are capital and not loans.
Was there an agreement or understanding that the funds would be withdrawn only when cash flow permitted?
[48] The question of whether there was an agreement or understanding that the funds in the Shareholders Current Accounts would be withdrawn only when the companies’ cash flow permitted such withdrawal has some parallels with the situation considered by the Court of Appeal in United Homes (1988) Ltd v Workman, to which Mr Tee and Mr Upton both referred.10
[49] In United Homes, there was a falling out between the Workmans and others involved in a group of companies that carried on business as developers. Mr Workman was removed as a director and excluded from the business. Mr Workman then issued
10 United Homes (1988) Ltd v Workman [2001] 3 NZLR 447 (CA).
statutory demands for the amounts shown as the balances in his shareholder accounts. In response, a director of the companies asserted that there was a clear express agreement among the shareholders that shareholders would not be entitled to draw on their accounts without the express agreement of all other shareholders.
[50] The Court of Appeal noted and did not disagree with the approach taken by the Master at first instance, namely that the companies were required to show a “fairly arguable basis” on which they were not liable on the demands.11 The Court of Appeal considered that it was at least fairly arguable that accounts for the year to 31 March 2000, which had not been signed or adopted by directors or shareholders, had not come into effect. The consequence was that it was at least fairly arguable that the Workmans were not owed the greater part of the indebtedness shown in those accounts.12 However, the Court accepted that there could be no dispute that the Workmans were owed the residual balances carried through from the 1999 accounts.13
[51] Importantly, the Court held that the companies asserting the existence of an agreement not to withdraw funds without shareholder consent bore the burden of proving a fairly arguable case as to the existence of such an agreement.14 It observed that if an agreement was clear and express, there should be no difficulty in identifying the date and place of, and the persons involved in, its making. There were no such details or any corroborating evidence from the other shareholding interests involved.15
[52] The Court of Appeal said it was clear that any restraint upon withdrawing funds from the shareholder accounts developed as a matter of understanding short of actual legal obligation. It said the question of legal obligation was not the subject of any identified clear agreement of a binding character and that it was not the Court’s job to construct one from nothing.16 Accordingly, the Court upheld the statutory demands in relation to the residual balances.17
11 At [27].
12 At [44].
13 At [45].
14 At [33].
15 At [35].
16 At [39].
17 At [47].
[53] As might be expected, Mr Tee put considerable emphasis on this decision. Mr Upton sought distinguish the decision, principally by reference to the different factual circumstances in the two situations. In particular, he pointed to the following considerations:
(a)The companies in United Homes were established developers, whereas The Beer Spot companies are of a start-up nature;
(b)In United Homes, Mr Workman was not a director when he sought payment;
(c)The Court in United Homes was limited to assessing the accounts at face value, whereas there is more detail here in terms of the analysis of the account transactions and the surrounding contextual narrative;
(d)The surrounding contextual narrative in this case shows a clear course of conduct relevant to the account in that the shareholders only drew down funds when cashflow permitted; and
(e)The constitution of The Beer Spot shows that all participants agree the business was in the nature of a partnership.
Analysis
[54] I am not persuaded that the fact the companies in United Homes were established developers as compared with the start-up nature of The Beer Spot companies or the fact that Mr Workman was no longer a director or the other considerations pointed to by Mr Upton provide any adequate basis for distinguishing the Court of Appeal’s decision. I deal below with the submission regarding the constitution of The Beer Spot.
[55] I accept, however, that United Homes is not on all fours with the present case. Much of that decision was addressed to the assertion of an existence of an express agreement among the shareholders not to draw on their accounts without the express
agreement of all. The Court of Appeal’s observations about how the existence of such an agreement should be capable of being established must be considered in that light.
[56] In the present case, there is no assertion of an express agreement. Rather, Mr Upton submits that an agreement can be implied from the conduct of Mr Van Dam and Mr Payn prior to the making of the statutory demands that they would draw on their current accounts only when the cashflow of the companies permitted such withdrawals. In that situation, the Court of Appeal’s observations about identifying the date and place of, and the persons involved in the making of an agreement have less relevance.
[57] I accept it may be possible to show it is genuinely arguable that shareholders in a company had reached an implied agreement not to draw on their current accounts except in certain circumstances. However, the fact of the agreement and its content would have to be clear and unequivocal, having regard to the considerations discussed by the Supreme Court in Bathurst Resources Ltd v L&M Coal Holdings Ltd for the identification of implied terms, including the conditions set out in BP Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of the Shire of Hastings.18 The evidence put forward by the applicants for the existence of such an implied agreement falls well short of meeting that standard.
[58] Mr van Dam says in his dealings with him, Mr Payn had always said they would grow the business through the start-up money and future earnings rather than personally backed borrowing. Mr Upton seeks to support that statement by inviting me to draw inferences from the amounts and pattern of withdrawals from the shareholders’ current accounts and deposits into Huapai and Morningside which, he says, are consistent with the asserted agreement.
[59] Whatever that evidence may amount to, I do not accept it is genuinely arguable the evidence establishes the existence of an agreement that is so obvious that “it goes without saying”, as discussed in BP Refinery. I accept the evidence indicates that,
18 Bathurst Resources Ltd v L&M Coal Holdings Ltd [2021] NZSC 85, [2021] 1 NZLR 696 at [116]; BP Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of the Shire of Hastings 91977) 180 CLR 266, (1977) 16 ALR 363 (PC) at 217.
when things were going well between Mr van Dam and Mr Payn, they were generally content to keep their funds in the business. It does not establish an agreement not to withdraw the funds or, if there were such an agreement, the conditions upon which any withdrawal was to be exercised. In addition, to the extent the evidence establishes a pattern of behaviour, the paragraphs in the three shareholders’ resolutions demonstrate that it was accepted that shareholders who were directors could withdraw their funds at any time. Those paragraphs effectively negate the existence of the implied agreement argued for by Mr Upton.
[60] For these reasons, I do not accept it is genuinely arguable there was an implied agreement that the funds in Mr Payn’s shareholders current accounts would be withdrawn only when cash flow permitted. Nor do I accept it is genuinely arguable there was an understanding to that effect, even allowing for the possibility that such an understanding may have legal effect.
Should the statutory demands be set aside on other grounds?
[61] Mr Upton submits that, even if the balances in Mr Payn’s shareholders current accounts are debts due and payable, the Court should exercise its discretion under s 290(4)(c) of the Companies Act to set aside the statutory demands. Mr Upton submits the demands are not consistent with the partnership arrangement of The Beer Spot enterprise as reflected in the constitution of The Beer Spot and are not consistent with Mr Payn’s duties as director of the three companies. He also refers to the tactical and surprise nature of the demands.
[62] Mr Upton refers to the Court of Appeal’s decision in Commissioner of Inland Revenue v Chester Trustee Services Ltd where Tipping J accepted that Courts have a general discretion under s 290(4)(c) and set out factors to be taken into account when consideration is given to the exercise of the discretion.19
19 Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395 (CA) at [1]
– [3].
Analysis
[63] Chester Trustee Services dealt with a very different set of circumstances from the present. There, a trustee company that had subsequently resigned as trustee of two trusts disputed its liability to pay GST incurred by the trusts. The Commissioner of Inland Revenue issued a statutory demand for payment of the GST as assessed and, following non-payment by the trustee company, applied to have the company put into liquidation. At that point the trustee company applied to have the statutory demand set aside.
[64] At first instance, the Master held that the trustee company was relieved of its liability to pay GST following its resignation as trustee and set aside the statutory demand under s 209(4)(a) of the Companies Act. The Master also held that, even if he was wrong with regard to the application of s 209(4)(a), the demand should be set aside under s 209(4(c) because there was no point in putting the trustee company into liquidation. The Commissioner appealed. The Court of Appeal disagreed with the Master on both points. It held that the trustee company was liable to pay the GST and that this was not an appropriate case for the exercise of the discretion under s 209(4)(c).
[65] Baragwanath J gave the principal judgment. With regard to s 209(4)(c), His Honour said:
[48] Section 290 serves a valuable purpose, allowing a truly disputed debt to be challenged or a cross-claim to be advanced by a more convenient procedure than that of application for interim injunction required under previous legislation. I accept that subs (4)(c) provides jurisdiction to the Court to set aside a statutory demand even though a company is unable to pay its debts and is therefore insolvent. But like any statutory discretion, that conferred by s 290(4)(c) must be exercised in conformity with the purposes of the measure by which it is conferred. Use of the exceptional power must be confined to cases which clearly justify departure from the fundamental principle that insolvency should bring the end of a company's existence.
[66]In a separate and short concurring judgment, Tipping J said:
[3] … I agree with Baragwanath J that the general policy of the Act that insolvent companies should be put into liquidation, if a creditor seeks such an order, should not be departed from lightly. To justify such departure there must be some other factor, be it policy, principle or simply the justice of the particular case, which outweighs the prima facie entitlement of the creditor to
an order putting the insolvent company into liquidation. If the focus is on the justice of the particular case the discretion must always be exercised on a principled basis and not on some ad hoc perception of what individual justice might require. All cases involving s 290(4)(c) must in the end come down to a judgment by the Court as to whether the creditor's prima facie entitlement is outweighed by some factor or factors making it plainly unjust for liquidation to ensue. The ground advanced by the insolvent company must be sufficiently compelling to overcome the general policy of the Act with regard to insolvent companies.
[67] Both extracts address the situation that has not yet arisen in the present case. There has been no application for The Beer Spot and the other two companies to be put into liquidation. If the demands are not set aside and are not paid, that step may follow. At present, however, there is no evidence of the companies’ ability to pay the demands other than Mr Upton’s assertions that the demands are value destroying. Mr van Dam’s affidavits address why he considers the demands should not have been made. He does not address the consequences for the companies if the demands are not set aside.
[68] Even so, I accept the considerations canvassed by Baragwanath and Tipping JJ are equally applicable to the current circumstances. Liquidation is the consequence of non-payment of a demand. Demands may be issued to enforce payments of debts. It is as much a general policy of the Companies Act that a company must pay its debts, including debts to shareholders, as it is that an insolvent company should be put into liquidation. That is apparent from the Title to the Companies Act which, among other things, provides that the Act is:
(c)to define the relationships between companies and their directors, shareholders, and creditors; and
(d)to encourage efficient and responsible management of companies by allowing directors a wide discretion in matters of business judgment while at the same time providing protection for shareholders and creditors against the abuse of management power;
[69] For these reasons, I accept that the considerations set out by Tipping J in Chester Trustee Services are applicable. It follows that, if I am to exercise the discretion in s 290(4)(c) to set aside the statutory demands, I must consider whether Mr Payn’s prima facie entitlement to be paid debts due and owing is outweighed by some factors making it plainly unjust to require the debts to be paid. The reasons must
be sufficiently compelling to overcome the general policy of the Act with regard to the payment by companies of their debts.
[70]The factors pointed to by Mr Upton are not so compelling.
[71] First, the submission that cl 11 of the constitution of The Beer Spot implies that partnership principles apply to the whole of the companies’ operations is wrong as a matter of construction and law. Clause 11 deals only with transfers of shares and provides for a right of pre-emptive purchase by existing shareholders. In its own terms, the clause acknowledges the partnership nature of the company with respect only to the transfer of shares. The clause does not extend partnership principles more generally. Even if it did, that would not be effective. Section 9 of the Partnership Law Act 2019 provides that the relationship between shareholders of a company registered under the Companies Act is not a partnership within the meaning of Partnership Law Act.
[72] Secondly, even it was arguable that a shareholder who is also a director may be in breach of their duties as director by demanding payment of monies in their shareholder current account, there is no evidence to support the implicit assertion that by demanding repayment, Mr Payn is endangering the solvency of the companies. As I have noted above, Mr Van Dam’s evidence does not address the solvency of the companies if the demands are not set aside.
[73] Thirdly, there is nothing in the Companies Act that requires a statutory demand to be subject to prior notice. The relevant considerations are whether there is a debt owing and due. If there is, a demand may issue, irrespective of any underlying purpose on the part of the issuer.
[74] Accordingly, I see no principled basis for exercising the discretion in s 290(4)(c) to set aside the statutory demands.
Should the Court order a further extension of the time for compliance?
[75] If the statutory demands are not set aside, the applicants seek a further six months for compliance. Mr Upton explains that the applicants considered it would
take that amount of time to negotiate the purchase of Mr Payn’s shareholding. The applicants still seek a six months’ extension despite the statement in Mr Tee’s written submissions that Mr Payn has decided not to sell his shares at present. Mr Upton says it would take that time to raise the necessary finance given current constraints on the hospitality industry because of continuing effects of the COVID-19 pandemic.
Discussion
[76] Even if Mr Payn was willing to sell his shares, I do not consider it reasonable to set the time for payment of the statutory demands by reference to that process. As is reflected in the financial statements prepared for the buy-out discussions, the value of the company and, therefore, the value of Mr Payn’s shares, are distinct from what is in his shareholder’s current accounts. The companies are obliged to pay Mr Payn what is in those accounts, irrespective of any sale process.
[77] The statutory presumption is that demands must be paid within 15 working days of service. Five months have now elapsed since Mr Payn’s demands were served. The applicants have had ample time to arrange the necessary finance. Despite their application to set aside the demands, they must have known that the application might not succeed – as their application for an extension of time suggests.
[78] Mr Payn is no longer employed by The Beer Spot. Mr Tee advises that he does not have other forms of income, although there is no evidence to that effect in Mr Payn’s affidavit. In any event, I do not consider it reasonable to require Mr Payn to wait a further six months to be paid money that is owed to him.
[79] For these reasons, I decline to extend time for compliance by a further six months. I consider that an extension of 30 working days should be more than adequate.
Result
[80] I dismiss the application to set aside the statutory demands made by Mr Payn to The Beer Spot Ltd, TBS Huapai Ltd and TBS Morningside Ltd on 28 February 2022.
[81] In accordance with s 290(7) of the Companies Act, I extend the time for compliance with the statutory demands to 16 September 2022.
Costs
[82] The application to set aside the statutory demands has been unsuccessful. Mr Payn is entitled to costs on a 2B basis.
[83] If the parties are unable to agree costs, they may submit memoranda of no more than 4 pages.
[84] Any memorandum on behalf of the Mr Payn should be submitted by 29 August 2022.
[85] Any memorandum on behalf of the applicants should be submitted by 12 September 2022.
G J van Bohemen J
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