BETWEENTHE COMMISSIONER OF INLAND REVENUEPlaintiffANDBRAK BURNS LIMITEDDefendant

[2023] NZHC 2472

IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY

I TE KŌTI MATUA O AOTEAROA KIRIKIRIROA ROHE

CIV-2023-419-41

[2023] NZHC 2472

UNDER

the Companies Act 1993

IN THE MATTER OF

The Liquidation of BRAK BURNS LIMITED

BETWEEN

THE COMMISSIONER OF INLAND REVENUE

Plaintiff

AND

BRAK BURNS LIMITED

Defendant

Hearing:	4 September 2023
Counsel:	C D Walmsley for the Commissioner of Inland Revenue J Taylor for the Defendant
Judgment:	5 September 2023

JUDGMENT OF ASSOCIATE JUDGE BRITTAIN

This judgment was delivered by me on 5 September 2023 at 2.15 pm, pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar Date:

Solicitors/Counsel:

Brookfields Lawyers, Auckland Bytalus Legal, Hamilton

Inland Revenue Legal Services, Hamilton

THE COMMISSIONER OF INLAND REVENUE v BRAK BURNS LTD [2023] NZHC 2472

[5 September 2023]

Introduction

[1]        In this proceeding, the Commissioner of Inland Revenue (the Commissioner) seeks an order placing the defendant, Brak Burns Limited (Brak Burns), into liquidation.

[2]        The proceeding was originally commenced by Service Foods Limited (Service Foods) as plaintiff on 7 February 2023. Service Foods served a statutory demand on Brak Burns for $30,696.77 (the statutory demand). Brak Burns did not satisfy the demand.

[3]        The   liquidation   proceeding   was   advertised   by   Service    Foods    in The Waikato Times on 28 February 2023, and in the New Zealand Gazette on 1 March 2023. On 3 March 2023, the Commissioner filed an appearance in support of the proceeding.

[4]        On 10 May 2023, counsel for Service Foods filed a memorandum confirming that Service Foods no longer wished to pursue the liquidation proceeding and seeking leave to discontinue. On 15 May 2023, I made an order substituting the Commissioner as plaintiff.

[5]        The debt owed by Brak Burns to the Commissioner now stands at $743,451. Another creditor of Brak Burns, Safe Store Limited, has filed a separate liquidation proceeding based on a debt of $10,474.89, which has been adjourned pending the outcome of this proceeding.

Background

[6]        Brak Burns was formerly known as Burgered Restaurants Auckland Limited. It leased premises in Grey Lynn, Auckland. Brak Burns fell into dispute with its landlord regarding the interpretation of a clause in the lease, and whether Brak Burns had the right to an abatement of rent because of Government imposed restrictions resulting from Covid-19.

[7]        The landlord sought to recover outstanding rent and outgoings for the period from December 2021 to February 2022, by serving a statutory demand on Brak Burns under s 287 of the Companies Act 1993 (the Act). The demand claimed approximately

$42,000.

[8]        Brak Burns successfully applied to set the demand aside. On 3 August 2022, Gendall J held that it was reasonably arguable that the terms of the lease entitled Brak Burns to an abatement of rent, and the parties were obliged to refer their dispute to arbitration under the dispute resolution clause in the lease.1

[9]        At some point before 9 February 2023, the landlord cancelled the lease and re- entered the premises.

[10]      Murray Athol Osmond is the sole director of Brak Burns. Mr Osmond provided the affidavit evidence in support of Brak Burns’ defence in this proceeding. Mr Osmond describes himself as a “caretaker” director, and that his role is to “see through the problems caused by the landlord’s actions.” Mr Osmond says that Brak Burns ceased trading in June 2022.

[11]      Mr Osmond asserts that the landlord was not entitled to cancel the lease, and that the wrongful cancellation has caused Brak Burns to suffer losses of more than

$1,000,000. He says that he instructed Brak Burns’ solicitors to engage in settlement discussions with the landlord’s solicitors, but by 8 March 2023 it was apparent that Brak Burns might not be able to reach a settlement with the landlord, and it would be necessary to issue a proceeding.

[12]      In Mr Osmond’s affidavit sworn on 14 April 2023, he stated that Brak Burns’ solicitors were finalising the proceeding against the landlord, which was likely to include an application for summary judgment, and it was expected that the proceeding would be filed within two weeks. No such proceeding has been filed.

[13]      Mr Osmond is also the sole director of Minem Finance Ltd. He says that Minem Finance has advanced $254,000 to Brak Burns, since Mr Osmond became a

1      Burgered Restaurants Auckland Ltd v Chunilal [2022] NZHC 1903.

director of Brak Burns. He says that these advances are secured by a “security covering all present and after acquired property.” Mr Osmond has produced a copy of the financing statement registered on the Personal Properties Security Register, dated 9 February 2022. Mr Osmond has not produced a copy of the security agreement.

[14]      Mr Osmond asserts that Brak Burns has assigned its cause of action against the landlord to Minem Finance.  Mr Osmond has produced a copy of a document dated  9 February 2023 which purports to record the terms of an assignment. The document is  unsigned.  The  assignment  document  records  the  conflict   of  interests   that Mr Osmond has, as a director of both parties.

[15]      The assignment document records an absolute assignment of the cause of action for consideration of $25,000, by way of reduction in the debt owed by Brak Burns to Minem Finance. In addition, the assignment document records that the fruits of the litigation will be shared equally by Brak Burns and Minem Finance.

[16]      Brak Burns has produced scant evidence regarding its financial position. No financial statements have been produced. No evidence regarding other secured or unsecured creditors has been produced.

[17]      Brak Burns’ sole ground of defence is that the Court should exercise its discretion, and not put Brak Bruns into liquidation, to enable pursuit of the claim against its former landlord, which will produce sufficient funds to pay all creditors.

Legal principles

[18]      It is well understood that s 241(4) of the Act confers on the Court a discretion to put a company into liquidation when the company is unable to pay its debts. In this case, there is a presumption of insolvency under ss 287 to 290 of the Act, because Brak Burns failed to comply with the statutory demand.

[19]      Generally, the creditors of a company are entitled to a liquidation order where a company is clearly insolvent, and the Court is reluctant to allow an insolvent

company  to  continue to trade.2    The discretion to decline to put a company into liquidation is exercised sparingly.3

[20]      The existence of a viable claim by a defendant company against a third party is a factor which can be taken into account when the Court exercises its discretion under s 241 (4) of the Act.4 The considerations are similar to those that apply when the same ground is advanced in support of an application to set aside a statutory demand.

[21]      In Coljon Ltd v Riccarton Construction Ltd,5 Lang J held that there may occasionally be a good and sufficient reason for staying liquidation proceedings to allow a defendant to pursue collateral litigation. When this ground is advanced, the Court may assess whether the defendant company’s claim has a reasonable chance of success in the near term.6

Analysis

[22]      Brak Burns is insolvent. The debts owed to the Commissioner and Safe Store total $753,925. The starting point is that the Commissioner is entitled to a liquidation order unless there are reasons to exercise the statutory discretion in Brak Burns’ favour.

[23]      There is no evidence before the Court which would allow even a perfunctory assessment of the merit of the potential claim by Brak Burns against its former landlord. No proceeding has been issued, so there is no prospect of a resolution of that claim in the near term.

[24]      Even if Brak Burns’ retained rights under the purported assignment document are treated as a chose in action, the value is minimal given that:

2      Bank of New Zealand Ltd v Rada Corp Ltd [1989] 1 NZLR 750 (CA).

3      Chesterfields Preschools Ltd (in liq) v The Commissioner of Inland Revenue [2020] NZCA 686 at [101].

4      Accident Compensation Corporation v Newbury Racing & Breeding Ltd [2015] NZHC 663 at [72] to [75].

5      Coljon Ltd v Riccarton Construction Ltd HC Christchurch CIV-2010-409-848, 9 November 2010, Lang J.

6      Kroon v Westpac Bank Corporation HC Auckland CIV-2006-404-4720, 24 April 2007, Associate Judge Doogue.

(a)the value of the claim that has been assigned is questionable, and at most approximately $1,000,000;

(b)it would be necessary to discount the present value of the chose in action given the uncertainties involved in the litigation.

(c)Brak Burns has only a right to 50 % of the net recovery;

[25]      The purported assignment of the cause of action by Brak Burns to Minem Finance points strongly towards the need for a liquidation order, for two reasons.

[26]      First, if the assignment is valid then an order putting Brak Burns into liquidation will not hinder pursuit of the cause of action, which will have vested in Minem Finance. Any proceeds of the litigation paid to Brak Burns can be distributed by a liquidator according to the priorities set out in the Act.

[27]      Secondly, and more importantly, the purported assignment itself raises issues under the Act:

(a)whether the purported assignment was an insolvent transaction, voidable under s 292 of the Act;

(b)whether the purported assignment was a transaction at an undervalue, in breach of s 297 or s 298 of the Act.

[28]      A liquidator can review the security agreement between Brak Burns and Minem Finance, and in particular:

(a)whether any charge purportedly granted by Brak Burns to Minem Finance is voidable under s 293 of the Act;

(b)whether any charge purportedly granted by Brak Burns to Minem Finance can be set aside under s 299 of the Act.

[29]      The interests of the defendant’s creditors are best served by the appointment of a liquidator. The liquidator can objectively determine whether the cause of action by Brak Burns against its former landlord is worth pursuing. The liquidator can determine whether the purported assignment of the cause of action to Minem Finance should be impugned under the Act.

[30]      There are no grounds that support an exercise of the discretion in favour of Brak Burns.

Orders

[31]      Brak Burns Limited is placed into liquidation. The order is timed at 2.15 pm on the date of this judgment.

[32]The Official Assignee is appointed liquidator.

[33]      The plaintiff is entitled to costs against the defendant of $6,824 and disbursements of $782.61.

Associate Judge Brittain