Body Corporate 62870 v Health Distributors (Holdings) Ltd
[2018] NZHC 1717
•11 July 2018
IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY
I TE KŌTI MATUA O AOTEAROA KIRIKIRIROA ROHE
CIV-2018-419-000093
[2018] NZHC 1717
UNDER the Companies Act 1993 BETWEEN
BODY CORPORATE 62870
Plaintiff
AND
HEALTH DISTRIBUTORS (HOLDINGS) LIMITED
Defendant
Hearing: (by telephone conference) 11 July 2018 Appearances:
J J Pietras for Plaintiff (Respondent)
B Cullen and Z T Mora for Defendant (Applicant)
Judgment:
11 July 2018
JUDGMENT OF ASSOCIATE JUDGE OSBORNE
[on application for extension of time or stay]
Introduction
[1] In this proceeding Body Corporate 62870 (the Body Corporate) seeks an order putting Health Distributors (Holdings) Limited (HDHL) into liquidation.
[2] HDHL applies for orders either extending the time to file a statement of defence or staying the proceeding.
The background
[3]The relevant events can be summarised as follows:
BODY CORPORATE 62870 v HEALTH DISTRIBUTORS (HOLDINGS) LIMITED [2018] NZHC 1717 [11
July 2018]
(a)The Body Corporate (of an industrial complex with 20 units) from time to time sets levies payable by unit owners.
(b)HDHL has not paid levies in respect of its two units since 1 April 2013.
(c)HDHL took issue with the amount of levies raised through 2012 and 2013, when the Body Corporate built up a substantial surplus of funds, HDHL asserting that the levies went beyond what was required for long term maintenance.
(d)The Body Corporate sought an order against HDHL for its levies for the period from 1 July 2013 to 1 April 2015.
(e)On 14 August 2015 the Tenancy Tribunal, following a defended hearing, made an order that HDHL pay to the Body Corporate outstanding levies of $21,510.99 together with collection costs of $880 (a total of $22,390.99).
(f)HDHL filed an appeal in relation to the 14 August 2015 Order.
(g)The appeal was scheduled for a hearing on 21 July 2016.
(h)HDHL was, in relation to the pending appeal hearing, advised by Gibson Sheat, following which HDHL on 20 July 2016 filed a discontinuance of the appeal.
(i)The Body Corporate then commenced a proceeding in the Tenancy Tribunal for recovery of levies for the period October 2015 to June 2016.
(j)On 1 November 2016 the Tenancy Tribunal, following a defended hearing, made an order that HDHL pay to the Body Corporate outstanding levies of $7899.06 together with collection costs of $1524 (a total of $9423.06).
(k)At the same time the Tenancy Tribunal dismissed an application by HDHL for orders that the Body Corporate:
(i)Circulate its proposed resolution for auditing of the Body Corporate’s accounts to all unit owners, with a requirement that votes be cast within 20 days; and
(ii)Circulate to all unit owners a copy of the unit owners’ legal representative’s letters dated 26 July 2016 and 2 August 2016.
(l)HDHL on 15 November 2016 filed an appeal in relation to the 1 November 2016 Order.
(m)On 13 April 2017 Judge Tompkins (dealing with the appeal on the papers) noted that the appeal could not proceed “due to discontinuance filed the day before the appeal hearing on 21/7/17”. (His Honour has since issued a further explanation of his 13 April 2017 decision, stating that the appeal could not proceed as the appeal was between the same parties and in substance raised the same or substantially the same issues as raised in the earlier proceeding).
(n)On 19 February 2018 the Body Corporate served HDHL with a statutory demand in relation to the sums ordered (by the Tenancy Tribunal) to be paid together with interest on those sums.1
(o)HDHL did not meet the requirements of the statutory demand and on 5 March 2018 it was presumed that HDHL was unable to pay its debts.2
(p)Upon the issuing of this proceeding, HDHL was served with the proceeding at its registered office (an accountancy firm) on 13 April 2018 but HDHL’s director (Michael Chu) deposes that he did not receive the documents from the accountants until 19 April 2018.
1 Under s 289 Companies Act 1993.
2 Companies Act 1993, s 287(a).
(q)On 23 April 2018 Mr Chu purported to file on behalf of the defendant a statement of defence in this proceeding containing bare denials of the Body Corporate’s material allegations as to indebtedness and insolvency.
(r)At the first call of this proceeding on 28 May 2018 the Court struck out the defence as evasive and as a document filed by a person not permitted under the Rules to file documents. The Court adjourned the proceeding to permit the filing of any formal application for extension of time.
Extension of time
[4] In its application, HDHL invokes the discretion which the Court has to extend the time for taking of a step under rr 1.19, 31.20 and 31.22(1)(a) High Court Rules. HDHL relies also on the inherent jurisdiction of the Court although the Court’s approach is similar whichever jurisdiction is invoked.3
[5] I adopt, in relation to the Court’s discretionary power, what I said in Hurunui Estate (2002) Ltd v Hurunui Hotel (2004) Ltd:4
[9] The power to extend time under the above rules is discretionary. Where a defendant applies for an extension of time to file a defence, the Court requires that the defendant produce material of substance to justify the exercise of the discretion or, in other words, a proper foundation.
[10] Liquidation proceedings in particular should not be protracted for procedural reasons as the rules of Court are designed to assist the speedy resolution of such proceedings. As observed by the Supreme Court of Victoria:
“The company — if it seeks to oppose its being wound up — is under a duty properly and fully to prepare its case so that it may be presented without there being a need for a series of adjournments to enable it to reach that point. … the rules … operate in this context.”
[11] The defendant, as a threshold requirement, must establish that it has on the documents filed an arguable defence.
(Footnotes and references omitted)
3 Hurunui Estate (2002) Ltd v Hurunui Hotel (2004) Ltd [2015] NZHC 1152 at [4].
4 Above n 3 at [9] – [11].
[6] Thus the threshold test is whether the defendant has an arguable defence, which it intends to pursue.
[7] If that test is satisfied, there are a number of factors which the Court may consider relevant. I adopt those as identified in Hurunui Estate (2002) Ltd v Hurunui Hotel (2004) Ltd:5
(a)The period of the defendant’s delay and any explanation for it.
(b)The insolvency of the defendant which may cause it to waste funds on a defence which might more properly be handled by a proof of debt before the company’s liquidator.
(c)Prejudice caused to the defendant through extension of time (but with consequential costs usually able to be addressed by the imposition of conditions).
[8] Ultimately the Court’s exercise of its discretion is informed by the overall justice of the case.
The threshold test – an arguable case
[9] In relation to the debt owing on the 14 August 2015 Order ($22,380.99 plus interest), the defendant has exhausted its appeal rights (through appealing and then discontinuing the appeal). Since the discontinuance almost two years ago (on 20 July 2016), the evidence indicates that HDHL has not taken any further step to challenge that order. The draft statement of defence which Mr Chu has exhibited to his affidavit makes reference to steps taken by HDHL to have the appeal from the 1 November 2016 order reactivated but it makes no reference to HDHL’s intention or steps towards challenging the 14 August 2015 Order.
5 Above n 3 at [12] to [15].
[10] The highest it has been put for HDHL is in Mr Mora’s submissions. Mr Mora adverted to the possibility that the District Court might set aside the 1 November 2016 Order and submitted that the 14 August 2015 Order was made on the same factual basis and could therefore be “removed” on judicial review.
[11] At the heart of the threshold requirement as to an arguable defence is that a party not only has an arguable defence but it is one which the party genuinely intends to pursue. It is for the party applying for leave to provide a proper basis in evidence that that is so. Here HDHL’s wish to defend this proceeding is inextricably interwoven with its stated intention to pursue the setting aside of the Tenancy Tribunal Orders. Although HDHL’s position is that it wishes to defend the proceeding, it in fact accepts that there are (through the Tenancy Tribunal Orders) debts due and owing which it has not paid. In that sense although HDHL’s first application is to enable it to defend the proceeding, the substance of the issues HDHL raises might suggest the stronger focus would be on a stay – that is a stay permitting it time to seek the overturn of both orders.
[12] HDHL’s evidence indicates a lack of focus or any intent concerning the first order. Even the way in which the possibility of challenge was identified for HDHL through Mr Mora’s submissions, it appears to be a highly-conditioned intent – if HDHL were to succeed on its appeal from the second order it might then pursue in this Court an application for judicial review of the first order.
[13] On the evidence, there is also substantial reason to infer that HDHL, through Mr Chu, is prepared to pursue appeal arguments for tactical or delay reasons. The filing of the discontinuance of the appeal from 14 August 2018 Order on the day before the appeal hearing suggests either a tactical/delaying aspect to the appeal or a late recognition that the appeal was unmeritorious (or both).
[14] In his affidavit Mr Chu has explained the discontinuance by reference to the importance he was placing at that time on obtaining a full independent audit of the Body Corporate accounts. He deposes:
After discussion with Gibson Sheat, Counsel for HDHL at that time, HDHL discontinued the appeal by Notice of Discontinuance dated 20 July 2016, to enter into settlement negotiations with the Body Corporate. I was under the impression that if HDHL was unable to settle with the Body Corporate, then the appeal could be re-initiated.
[15] Significantly Mr Chu does not state that he received any advice from Gibson Sheat as to the potential “re-initiating” of the appeal. I attach no evidential weight to “the impression” which Mr Chu states he was under – its source is unattributed. In any event, the failure in the following two years to take any step to “re-initiate” the appeal, despite Mr Chu’s having ongoing issues with the Body Corporate in relation to the non-payment of levies, casts serious doubt on the basis of Mr Chu’s “impression” and on any serious intent on the part of HDHL either to seek to reactivate the appeal or to pursue other remedies. The situation is not dissimilar in relation to Judge Tompkins’ rejection of the second appeal in April 2017 – after HDHL became aware of that rejection in May 2017 it did little or nothing to challenge Judge Tompkins’ ruling – instead I have heard oral submissions today apparently developed for the hearing, as to why Judge Tompkins’ decision was wrong.
[16] Mr Cullen and Mr Mora, for HDHL, invite the Court to focus on Mr Chu’s detailed evidence as to the steps he has taken since the first Tenancy Tribunal order to try to obtain (outside judicial processes) the Body Corporate’s involvement in an audit and review process. They submit that those efforts, by a layman working through his issues, serve to explain a failure to seek from an appropriate Court a reversal of the debt created by the 14 August 2015 Order.
[17] On the evidence viewed as a whole I am unable to conclude that Mr Chu (despite to date not pursuing the avenues of legal recourse which were open to him) conscientiously intends to have issues so resolved now. The time used up to date in the Body Corporate’s attempts to recover the levies has clearly suited Mr Chu. While other members of the Body Corporate have met their levies and enabled the Body Corporate to function, HDHL has not contributed any amount at all to ongoing expenses in relation to which levies have been voted upon and agreed. Mr Chu made generalised statements that the excessive levies which occurred in the period to 31 March 2013 (and are recognised as such by the Body Corporate’s deponent, Earl Thomson) may have continued to be excessive thereafter in the periods to which
the Tenancy Tribunal Order relate. But Mr Chu has provided no documentary evidence to support those bare assertions.
[18] HDHL’s two units have remained unoccupied through this period, not producing income. HDHL has an increasing situation of negative equity, to the extent of $591,307 as at 31 March 2018. It has covered its increasing losses by ever- increasing debt to its parent company (also controlled by Mr and Mrs Chu). It has clearly suited Mr Chu’s purposes that the issues have continued to run on, unresolved, without HDHL paying anything to the Body Corporate.
[19] The recent judgment of the Court of Appeal in Manchester Securities Ltd v Body Corporate 172108 involved, like this case, a matter of contributions levied by a body corporate which were not met by a unit owner.6 The case involved an application to set aside the body corporate’s statutory demand for the contributions. The Court found that there both a genuine and substantial dispute and persuasive grounds for a set-off or counterclaim.7 But the Court exercised the residual discretion to refuse to set the statutory demand aside – one reason lay in the applicant’s past behaviour, which was characterised as “dilatory” and “prevaricating”. Both those epithets apply here.
[20] HDHL has not satisfied the Court that it conscientiously intends to take through to a concluded hearing in a court of competent jurisdiction any of the arguments which Mr Chu identifies.
[21] On this basis HDHL as applicant for extension has not satisfied the threshold test.
[22] As the sum ordered to be paid under the first order constitutes a debt due, with the consequence that the Body Corporate is a creditor entitled to apply for HDHL’s liquidation, HDHL’s challenge to other aspects of the total debt does not need to be considered further.8
6 Manchester Securities Ltd v Body Corporate 172108 [2018] NZCA 190.
7 Above n 6 at [19] – the judgment focuses on contributions which mostly related to very substantial costs of remediation. Issues relating to ordinary levies – dealt with at [63] – [66] – did not affect the outcome.
8 See Fresh Cut Flowers Wholesalers Ltd v Living and Giving Gift Co Ltd (2001) 16 PRNZ 173.
Relevant factors
[23] Given the conclusion reached on the threshold test, it is unnecessary to determine the application by reference to the Court’s consideration of relevant factors. I therefore limit further observations to two important aspects of HDHL’s situation.
[24] HDHL is presumed to be insolvent because it failed to meet the requirements of the statutory demand. As recognised in Hurunui Estate (2002) Ltd v Hurunui Hotel (2004) Ltd, the insolvency of the defendant is an important consideration. In some cases it may not be decisive but it is a strong factor against the exercise of the discretion.9 A proper concern for the Court is that an insolvent company might waste funds on the defence of a case which might, more properly, handled by a proof of debt before the Company’s liquidator.10
[25] Mr Chu has directly addressed matters relating to the solvency of HDHL in his affidavit. Responsibly he does not positively assert that HDHL is solvent, recognising that it has very substantial negative equity ($591,307 as at 31 March 2018). What Mr Chu emphasises, however, is that it is an advance of $783.616 from its parent company which causes HDHL’s negative equity position. Mr Chu deposes that he and his wife control the parent company both as shareholders and directors.
[26] It is clear, notwithstanding Mr Chu’s evidence, that HDHL has been and remains insolvent. It cannot pay on a day to day basis the levies due to the Body Corporate. As further time passes, and HDHL’s units continue to be unoccupied, further debt will accrue. The non-payment of levies in recent years has meant that the need for HDHL to go further into debt has been abated.
[27] In the event the threshold test had been established in this case, the insolvency of the defendant would count strongly against granting an extension of the time to file a defence in this case.
9 Above n 3 at [13].
10 Maximum Internet Ltd v Net Stream Internet Ltd HC Hamilton CIV-2004-419-694, 13 August 2004 at [8].
[28] The application also suffers from the perspective of the overall justice. In terms of tribunal and court processes the Body Corporate has acted responsibly and diligently. Its application for an order liquidating HDHL has come somewhat later than it might have because the Body Corporate first obtained a charging order against the titles to HDHL’s two units only to find that the cross-guaranteed debt of HDHL’s parent to the BNZ (over $2 million) would have entitled the BNZ to sell up HDHL’s two units (valued on HDHL’s financial statements at $243,378) leaving HDHL without any assets.
[29] In the context of this application HDHL has not made any proposal whereby security would be provided for unpaid levies, the costs which would become payable if any further litigation on the part of HDHL were to be unsuccessful, or indeed the costs of this application (seeking indulgence) itself. It is clear that all that the Body Corporate in the future would be unable to recover such costs.
[30] In the event that HDHL had made out the threshold test for extension, the overall justice would have weighed strongly against granting the application.
Outcome on application for extension of time
[31]HDHL’s application for an extension of time will not be granted.
Application for stay
[32] In their submissions Mr Cullen and Mr Mora accepted that in the circumstances of this case the factors which the Court would take into account on a stay application are those which I have identified above in relation to the extension of time. The stay application fails for the same reasons.
Orders
[33]I order:
(a)The defendant’s interlocutory application dated 6 July 2018 is dismissed.
(b)The costs of the application are reserved, to be determined when the substantive proceeding is determined.
(c)The plaintiff’s application is adjourned for hearing at 10.00 am 12 July 2018.
Associate Judge Osborne
Solicitors:
ARL Lawyers, Lower Hutt McCaw Lewis, Hamilton
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