Body Corporate 172108 v Manchester Securities Ltd
[2020] NZHC 198
•19 February 2020
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE
CIV-2018-485-225
[2020] NZHC 198
BETWEEN BODY CORPORATE 172108
Plaintiff
AND
MANCHESTER SECURITIES LIMITED
Defendant
Hearing: 10 December 2019 Counsel:
J B Orpin-Dowell and T J Allan for plaintiff M C Harris and H E McQueen for defendant
R J Cummins (given leave to make submissions in his capacity as the shareholder and director of the defendant)
Judgment:
19 February 2020
Reissued:
28 February 2020
JUDGMENT OF ASSOCIATE JUDGE JOHNSTON
Introduction and background
[1] This is a winding up proceeding in which the plaintiff, Body Corporate 172108 (BC 172108), seeks an order for the appointment of a liquidator over the defendant, Manchester Securities Ltd (Manchester).
[2] Litigation between the parties has now been ongoing for more than 10 years. The factual background is complex and has already been recorded in detail in a series of judgments in this Court and the Court of Appeal. A relatively brief summary will suffice here:
BODY CORPORATE 172108 v MANCHESTER SECURITIES LIMITED [2020] NZHC 198
[19 February 2020]
(a)BC 172108 is the Body Corporate for Hobson Apartments, a 12-storey apartment block in Hobson Street in Auckland;
(b)The ownership arrangements for levels 1–11 inclusive are orthodox with BC 172108 owning common areas including the external walls and the unit title holders owning their apartments;
(c)Level 12 is different. As I understand the position, other than such things as stairwells and lift shafts, Manchester owns everything above level 11. This reflects the fact that level 12 was constructed separately, after the rest of the building;
(d)By late 2009 it had become apparent that the building was not weathertight and that extensive remedial work was necessary to all levels;
(e)BC 172108 proposed a scheme for the building’s remediation pursuant to s 48 of the Unit Titles Act 1972 (repealed);
(f)Given the unusual ownership arrangements, a key issue was the contribution if any to be made by Manchester to the cost of remedial work to the common areas on levels 1–11. BC 172108 contended that Manchester should contribute 11.88 per cent of this cost, that being the percentage of the total building area reflected by level 12. Manchester contended that as it would have to shoulder full responsibility for remedial work on level 12 it should not be expected to contribute to the cost of such work on common areas below that;
(g)The parties were unable to resolve this issue, and BC 172108 commenced proceedings in this Court;
(h)There followed a series of defended hearings and Heath J issued several judgments, the last in August 2010.1 His Honour ultimately approved a scheme that required Manchester to carry the cost of remedial work to level 12 and contribute to the cost of remedial work on the common areas of levels 1–11. The latter obligation was capped at 11.88 per cent of the total costs of remedial work to the building;
(i)Inevitably, there were delays and substantial cost escalations;
(j)In March 2013 BC 172108 applied for an order varying the scheme;
(k)In March 2017 Fogarty J issued a judgment granting BC 172108’s application, effectively removing the cap on Manchester’s obligations to contribute to the repairs on levels 1–11;2
(l)Fogarty J concluded that as at the date of his judgment Manchester was liable to pay a minimum of $321,264.79 plus GST, and ordered Manchester to pay that amount as an interim payment;
(m)Manchester appealed Fogarty J’s judgment. In November 2017 the Court of Appeal dismissed this appeal;3
(n)Manchester applied for leave to appeal to the Supreme Court. In March 2018 the Supreme Court dismissed this application;4
(o)BC 172108 then served statutory demands on Manchester pursuant to s 290(1) of the Companies Act. Whilst I am given to understand that a number of such demands were served, only two have featured in this litigation. In the first BC 172108 demanded payment of the judgment debt of $321,264.79 and body corporate levies then said to be payable.
1 Body Corporate 172108 v Meader HC Auckland CIV-2009-404-6868, 3 March 2010; Body Corporate 172108 v Meader HC Auckland CIV-2009-404-6868, 19 August 2010; and Body Corporate 172108 v Meader HC Auckland CIV-2009-404-6868, 31 August 2010.
2 Body Corporate 172108 v Manchester Securities Ltd [2017] NZHC 329.
3 Manchester Securities Ltd v Body Corporate 172108 [2017] NZCA 527, (2017) 19 NZCPR 65.
4 Manchester Securities Ltd v Body Corporate 172108 [2018] NZSC 19.
In the second the company demanded payment of further body corporate levies that had become payable after the date of the first demand;
(p)Manchester applied to set aside the first statutory demand. In February 2018 its application was dismissed by this Court;5
(q)Manchester appealed from that decision. In June 2018 the Court of Appeal dismissed this appeal;6
(r)In the meantime, Manchester had initiated an arbitration directed at quantifying claims it says it has that should be netted off against any indebtedness it has to BC 172108;
(s)Manchester then applied for a stay of BC 172108’s winding up proceeding pursuant to art 8(1) of sch 1 to the Arbitration Act 1996 on the basis that the issues in the winding up proceeding were the subject of arbitral proceedings;
(t)In December 2018 this Court dismissed that application;7
(u)Manchester appealed from that judgment. In September 2019 the Court of Appeal dismissed this appeal;8
(v)I heard BC 172108’s application to wind up Manchester on 10 December 2019.
[3] BC 172108’s application for an order winding up Manchester is made pursuant to s 241(4)(a) of the Companies Act, which provides that the Court may appoint a liquidator — in other words, wind the company up — if it is satisfied that the company is “unable to pay its debts”.
5 Manchester Securities Ltd v Body Corporate 172108 [2018] NZHC 169.
6 Manchester Securities Ltd v Body Corporate 172108 [2018] NZCA 190, [2018] 2 NZLR 455.
7 Body Corporate 172108 v Manchester Securities Ltd [2018] NZHC 3307.
8 Manchester Securities Ltd v Body Corporate 172108 [2019] NZCA 408.
[4] Counsel were on common ground in submitting that the three essential questions to be determined are:
(a)Is BC 172108 a creditor of Manchester?
(b)If so, is Manchester unable to pay its debts?
(c)If so, should the Court exercise its residual discretion to decline to make an order winding Manchester up?
Is BC 172108 a creditor of Manchester?
[5]There is no contest on this point.
[6] Since Fogarty J’s judgment in November 2017, BC 172108 has been a judgment creditor of Manchester. Moreover, this Court and the Court of Appeal have emphasised on several occasions since then that the judgment debt is payable immediately, irrespective of any claim that Manchester may say it has against BC 172108.
Is Manchester unable to pay its debts?
[7] The phrase “unable to pay its debts” is of course derived from s 241(4)(a) of the Companies Act.
[8] The law is clear that the focus is not balance sheet but cashflow solvency. To employ language developed under slightly different wording in the Companies Acts of 1908 and 1955, but still applicable under the 1993 legislation, the essential enquiry is whether the defendant’s financial position is such as to enable it to meet current obligations as they fall due.
[9] In the vast majority of winding up proceedings this is established via a statutory presumption of insolvency. The plaintiff will serve a statutory demand pursuant to s 289 of the Companies Act. If the defendant fails to comply with that demand, s 287 provides that prima facie the defendant’s insolvency is to be presumed.
BC 172108 accepts that there are complications around whether it is able to establish presumptive insolvency in this case, but it is unnecessary to resolve that issue.
[10] That is not the only way in which a plaintiff can establish that a defendant is unable to pay its debts.
[11]It may do so by any other admissible and probative evidence.
[12] As Mr Orpin-Dowell submits, even in the absence of a statutory presumption, Manchester’s failure to comply with the statutory demands served on it, the first based as is on a judgment debt, is some evidence of insolvency.
[13] Manchester’s affidavit evidence and the submissions made by both Mr Harris and Mr Cummings, in his capacity as the company’s shareholder, contain several assertions to the effect that Manchester is able to pay its debts.
[14] However, that assertion is predicated on the assumption that assessing Manchester’s financial position for the purposes of determining whether it is able to pay its debts requires the Court to bring to account Manchester’s alleged counterclaim which, it is said, exceeds the amount of the judgment debt.
[15]In my view, there are fundamental difficulties with that contention.
[16] First, what the Court is being asked to do is to treat existing obligations including a judgment debt payable immediately, in respect of which Manchester has now been in default for well over a year, and a disputed arbitral claim for an unliquidated amount of damages, as having comparable status in assessing Manchester’s current cashflow position.
[17] Second, Mr Cummings’ evidence contradicts Manchester’s claim to solvency. Here is what he says:
Manchester faces competing demands under the scheme and the judgments. While the judgements have held that Manchester should make payment “immediately”, Manchester has been under a concurrent Court-ordered obligation to continue and complete the repairs for which it is responsible under the scheme. Manchester does not have the cash on hand to pay the
judgment sum and would have to borrow further in order to do so. Its ability to complete the repairs is entirely dependent on its ability to borrow.
…
Manchester cannot increase its borrowing further in order to pay the disputed debt to the Body Corporate. In purely practical terms, this would seriously jeopardise Manchester’s ability to borrow further in order to complete the remediation of level 12.
[18] In other words, within its current resources, Manchester can meet its ongoing obligations in relation to remedial work on level 12 or discharge its obligations to BC 172108. But it cannot do both. And, it cannot or will not raise — through capital or debt financing — additional resources to do so.
[19] Given that both categories of obligations are current, in my judgement, that leads inexorably to the conclusion that Manchester cannot pay its debts. I do not see that any other conclusion is seriously open.
[20] In this regard, I record that BC 172108’s evidence in support of its application includes an affidavit sworn by Mr David Vance, an experienced accountant, who has analysed Manchester’s financial position and reached just that conclusion. The only criticism levelled at Mr Vance’s evidence by Mr Harris and Mr Cummings is the transparently circular one that he has not taken Manchester’s counterclaim into account.
[21] Both Mr Harris and Mr Cummings in their submissions contended that it would be “commercially unrealistic” to assess Manchester’s cashflow solvency having regard to the company’s obligations to BC 172108 without also having regard to Manchester’s claim. In advancing this argument they rely on observations made by the Court of Appeal in Yan v Mainzeal Property and Construction Ltd (in rec and liq) to the effect that in assessing cashflow solvency or the ability of a defendant to pay its debts the court is obliged to take a “commercially realistic approach”.9 Contrary to the submissions of Mr Harris and Mr Cummings, it appears to me to be commercially unrealistic to bring to account in assessing the company’s present solvency a disputed
9 Yan v Mainzeal Property and Construction Ltd (in rec and liq) [2014] NZCA 190 at [58]-[60].
arbitral claim for an unliquidated amount that Manchester may or may not be successful in prosecuting at some point in the future.
[22] There is a further point. In his insightful judgment in Forward Plastics Ltd v NZ Distilled Water Ltd, Associate Judge Bell explained that there is more than one sense in which a company may be unable to pay its debts.10 Certainly it may be unable to do so because it lacks the current wherewithal. But, equally, it may be that, as a corporation, which can only act through human agents, it may be unable to do so because its directors or officers are not prepared to authorise payment.
[23] As submitted on BC 172108’s behalf by Mr Orpin-Dowell, even if the position were that Manchester did have or could secure sufficient resources to pay what it owes BC 172108 whilst at the same time meeting its other obligations, it appears from Mr Cummings’ evidence that it is unable to do so because he, as the company’s Managing Director, will not authorise or facilitate payment. In this sense too, Mr Orpin-Dowell submits, the company is unable to pay its debts. On the evidence, that argument appears to me to be unanswerable.
[24] That, in my view, is sufficient to dispose of the threshold issues under s 241(4)(a) of the Companies Act. In short, I am satisfied on the evidence that BC 172108 is a creditor of Manchester and that Manchester is unable to pay its debts, and therefore that it is open to the Court to appoint a liquidator.
Should the Court exercise its discretion to decline to make an order winding Manchester up?
[25] The Court has an overarching discretion as to whether or not to make such an order. The discretion to refuse to wind up a company is, however, to be sparingly exercised if one of the available grounds has been made out by the party seeking the appointment of a liquidator.11
10 Forward Plastics Ltd v NZ Distilled Water Ltd [2012] NZHC 1383 at [41].
11 See Feltex Carpets Ltd v N&I Investments Ltd (2006) 3 NZCCLR 714 at [38], as approved in
90 Nine Ltd v Luxury Rentals NZ Ltd [2019] NZCA 424 at [16].
[26] Earlier judgments in this litigation have contained criticism of Manchester. In my view, it is not unfair to say that the company has consistently ignored very direct orders made by this Court and the Court of Appeal and that its behaviour verges on contemptuous. However, the Court must of course exercise its discretion on a principled basis, having regard to proper considerations. It would be wrong to allow concerns relating to Manchester’s past conduct to influence the outcome.
[27] In Yan v Mainzeal Property and Construction Ltd the Court of Appeal identified the principles which apply to the exercise of a discretion under s 241(1)(a) in these terms:12
(a)A winding up order will not be made where there is a genuine and substantial dispute as to the existence of a debt such that it would be an abuse of the process of the Court to order a winding up;
(b)In such circumstances, the dispute, if genuinely and substantially disputed, should be resolved through action commenced in the ordinary way and not in the Companies Court;
(c)The assessment of whether there is a genuine and substantial dispute is made on the material before the Court at the time and not on the hypothesis that some other material, has not been produced might, nonetheless be available;
(d)The governing consideration is whether proceeding with an application savours the unfairness or undue pressure.
[28] The existence of a counterclaim that might give rise to a right of set-off to an amount that equals or exceeds the amount of the creditor’s debt — even one that has not been regarded as sufficient to result in a statutory demand being set aside — is a matter that the Court will consider in the exercise of its discretion, though the defendant will need to show that there are clear and persuasive grounds to prevent the Court from appointing a liquidator.13
[29] In its July 2019 judgment in this litigation the Court of Appeal observed that “the existence of an unverified and unliquidated set-off” need not preclude liquidation,
12 Yan v Mainzeal Property and Construction Ltd (in rec and in liq), above n 9, at [61].
13 In Heron’s Flight Ltd v NZ Properties International Ltd [2012] 1 NZLR 424 (HC) at [41] Associate Judge Bell accepted that the “clear and persuasive” grounds test was applicable when the Court is considering the merits of a counterclaim in a defended liquidation application.
even if it is possible that when accounts are taken the liquidator will establish that the Body Corporate is not a net creditor.14
[30] That relatively guarded language no doubt reflects another principle enunciated in Commissioner of Inland Revenue v The Fishing Company to the effect that if an order winding up a company is bound to be futile then that will count against it being made:15
If the insolvent set-off under s 310 results in their being no net indebtedness to the Commissioner, then putting the company into liquidation may be futile. The company would stop operating, the staff would be thrown out of work and assets would be realised to meet the costs of the liquidation.
[31] In their submissions, Mr Harris and Mr Cummings adopted subtly different approaches in submitting that in the circumstances of this case the Court should decline to make the order sought by BC 172108 winding up Manchester. However, their arguments both ultimately focussed on Manchester’s counterclaim.
[32] Both this Court and the Court of Appeal (and the arbitrator in the arbitral proceeding, I am told) have accepted that Manchester has an arguable claim of one sort or another which if successful may alter the balance of indebtedness as between the parties. I too accept that. Of course, however vehemently the merits of the claim are advanced in argument at this stage, it remains a contested claim for an unliquidated amount that may or may not be successful in whole or in part.
[33] In what amounts to a development of that argument, Mr Harris and Mr Cummings emphasised that if the Court were to appoint a liquidator over Manchester then in terms of s 310 of the Companies Act the liquidator would be obliged to have regard to Manchester’s alleged claim. If the liquidator were to reach the conclusion that Manchester’s claim was meritorious then he or she would be entitled to pursue the claim with a view to netting off of the amount of that claim against the judgment debt and any additional amount due to BC 172108. This in effect is an argument that the winding up of the company may be futile.
14 Manchester Securities v Body Corporate 172108, above n 8, at [36].
15 Commissioner of Inland Revenue v Fishing Company [2012] NZCCLR 5 (HC) at [27].
[34] I am prepared to accept that those factors weigh in favour of the Court exercising its discretion to decline to make an order.
[35] However, the view I take is that those considerations are outweighed by what appears to me to be a more compelling factor.
[36] In my judgement, the most critical factor the Court must consider in exercising its discretion is the prospect of risk to creditors of an insolvent company being permitted to go on trading.
[37] The reality is that if the Court were to decline to make an order winding up Manchester at this point, the merits of Manchester’s claim would not be resolved for some considerable time. The remedial work on level 12 remains incomplete, and the evidence did not persuade me that it will be completed any time soon.
[38] In the meantime, as already said, the position on Manchester’s own evidence is that selected existing creditors will be out of pocket — either Manchester will continue to fund the remedial work with the result that all creditors other than BC 172108 will be paid and BC 172108 (and therefore the unit title holders on levels 1-11 of the building) will remain unpaid, or, unlikely as this may seem, Manchester will have a change of heart, refrain from incurring any ongoing liabilities in respect of remedial work on level 12 and pay BC 172108 what it owes that company. Mr Cumming’s evidence is clear that the company cannot or will not do both.
[39] Thus it appears to me that if Manchester is not wound up the risks for one group of creditors or another will only escalate.
[40] Additionally, to this point, BC 172108 has elected to use winding up proceedings as an enforcement mechanism. If, in the end, the Court declines to wind Manchester up, then BC 172108 has other enforcement mechanisms open to it (for example seeking a charging order over Manchester’s assets). It is not difficult to see that were BC 172108 to exercise such remedies here that would involve significant risk for BC 172108, the unit title holders and any other creditors.
[41] For those reasons, and on balance, the view I take is that it would be inappropriate for the Court to exercise its discretion to refrain from making the order sought.
[42] There is no risk-free option here, and I accept the point made by both Mr Harris and Mr Cummings that an order winding up Manchester will have potentially detrimental consequences for a range of people. Accordingly, in the orders I propose to make, I intend to offer the company a final opportunity to meet its obligations to BC 172108 (and through BC 172108 the other unit holders).
Orders
[43]I make the following orders:
(a)An order pursuant to s 241 of the Companies Act 1993 appointing Christopher Carey McCullagh and Stephen Mark Lawrence jointly as liquidators of Manchester Securities Ltd, on the terms set out in their consent to act dated 6 December 2019;
(b)The order in (a) above will come into force at 4.00 pm on Wednesday 11 March 2020, unless Manchester Securities Ltd has by then paid to Body Corporate 172108:
(i)The amount of the judgment debt payable pursuant to this Court’s judgment in Body Corporate 172108 v Manchester Securities Ltd,16 $321,264.79, together with interest calculated pursuant to the Judicature Act 1908 (repealed) or the Interest on Money Claims Act 2016;
(ii)The amount of any body corporate levies rendered by Body Corporate 172108 to Manchester Securities Ltd due and payable as at the date of this judgment together with any interest
16 Body Corporate 172108 v Manchester Securities Ltd, above n 2.
properly claimable by Body Corporate 172108 in respect of the same; and
(iii)The amount of all costs awards made by this Court, the Court of Appeal and the Supreme Court in favour of Body Corporate 172108 against Manchester Securities Ltd in the litigation referred to in this judgment.
[44] I have not heard from counsel as to costs, and I reserve these. If counsel are unable to settle costs, as I would expect them to do, they may file and serve memoranda and I will deal with them on the papers.
Associate Judge Johnston
Solicitors:
Grove Darlow & Partners, Auckland for plaintiff Gilbert Walker, Auckland for defendant
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