Body Corporate 68792 v Luxe One Limited
[2020] NZHC 1396
•22 June 2020
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE
CIV-2019-485-516
[2020] NZHC 1396
UNDER The Companies Act 1993 IN THE MATTER
of Gateway Holding Company No. 2 Limited
BETWEEN
BODY CORPORATE 68792
Plaintiff
AND
WAKEFIELD PROPERTY LIMITED
(formerly GATEWAY HOLDING COMPANY NO. 2 LIMITED)
Defendant
CIV-2019-485-517 UNDER
of the Companies Act 1993
IN THE MATTER
of Luxe One Limited
BETWEEN
BODY CORPORATE 68792
Plaintiff
AND
LUXE ONE LIMITED
Defendant
Hearing: 12 June 2020 Appearances:
G Dewar for Body Corporate 68792 in both proceedings
No appearance for Wakefield Property Ltd in CIV-2019-485-516 C LaHatte for Luxe One Ltd in CIV-2019-485-517
Judgment:
22 June 2020
JUDGMENT OF ASSOCIATE JUDGE JOHNSTON
BODY CORPORATE 68792 v WAKEFIELD PROPERTY LIMITED (formerly GATEWAY HOLDING COMPANY NO. 2 LIMITED) [2020] NZHC 1396 [22 June 2020]
This judgment was delivered by me on 22 June 2020 at 2.45 pm, pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar Date:
Introduction, background and issues for determination
[1] These are both winding up proceedings. They arise out of parallel factual situations. They can be dealt with together.
[2] The plaintiff in both cases is Body Corporate 68792 (the Body Corporate). Its Administrator is Mr Tony Gambitsis. The Body Corporate is the entity with responsibility pursuant to the Unit Titles Act 2010 for a block of flats in Lower Hutt. The defendant in CIV-2019-485-516, Wakefield Property Ltd (formerly Gateway Holding Company No. 2 Ltd) (Gateway), is the unit title holder of unit 7. The defendant in CIV-2019-485-517, Luxe One Ltd (Luxe), is the unit title holder of unit 5.
[3] It is common ground that body corporate levies payable to the Body Corporate by Gateway and Luxe have not been paid.
[4] On 18 July 2019, the Body Corporate served on both Gateway and Luxe statutory demands pursuant to s 289 of the Companies Act 1993 demanding the payment of the levies that were outstanding as at that date. The demand served on Gateway was for levies totalling $42,332.32. The demand served on Luxe was for levies totalling $61,323.
[5] Gateway did not respond to the statutory demand served on it and has taken no formal step in this proceeding. In a memorandum filed and served on 29 May 2020 by Mr J Dallas, who was formerly instructed as the solicitor for both Gateway and Luxe, he informed the Court that on 13 May 2020 Gateway was placed in receivership. Mr Dallas made it clear in his memorandum that he did not have instructions from the receivers
[6] Within the fifteen working day period during which it was obliged to respond to the statutory demand served on it, Luxe’s then director, Mr Michael Kooiman,
emailed the Administrator saying that the company was electing to “secure or compound for [the debt] to the reasonable satisfaction of the Body Corporate”; that, as at August 2016, the company’s unit had been valued at $750,000; that it was currently encumbered by a first mortgage security securing indebtedness of $332,000; that the company’s equity in the property was therefore approximately $418,000; and offered second mortgage security over the property for the amount of the statutory demand. Solicitors acting for the Administrator replied on 14 August 2019 (after the expiry of the 15 working day period) saying that the Administrator had “diligently explored the offer … presented”; had “obtained market values for the property”; that “the values obtained indicated that there is no equity in the [property]”; and accordingly that Luxe’s “offer [was] declined”.
[7] The Body Corporate commenced both of these proceedings on 26 August 2019.
[8] For various reasons which it is unnecessary to go into here, but which in part at least are related to the current COVID-19 pandemic, the progress of these proceedings has been delayed. They were originally listed for call on 8 October 2019, but have been adjourned no fewer than five times. When they were last called on 2 June 2020, I set them down to be heard today.
[9] Over that time, a number of joint and individual memoranda were received by the Court. These were primarily concerned with the adjournment of the proceedings. However, Mr Dallas helpfully identified the bases upon which the Body Corporate’s application in respect of Luxe would be defended:
(a)that Luxe had offered second mortgage security for the debt and that the Body Corporate had not acted reasonably in refusing to accept its offer;
(b)that the Body Corporate already holds security in the nature of a charge over Luxe’s unit by reason of the operation of the Unit Titles Act and is therefore a secured creditor precluding the making of a winding up order unless the amount of its claim exceeds the value of its security by at least $1,000;
(c)that a firm of solicitors was holding sufficient funds to pay the debt.
[10] On 29 May 2020 Luxe filed and served a statement of defence and an affidavit sworn by Mr Kooiman, generally in support of those three defences.
Gateway (CIV-2019-485-516)
[11] Gateway having taken no formal step, and not having been represented at the hearing, the Body Corporate’s application for an order winding the company up is unopposed.
[12] The Body Corporate has established that Gateway committed an act of insolvency by failing to respond to the statutory demand, prima facie entitling the Body Corporate to an order for the appointment of liquidators pursuant to s 241 of the Companies Act.
[13] If it is correct that receivers have been appointed over Gateway’s business, then that would provide a second ground upon which the Body Corporate might seek an order winding the company up under the same section.
[14] I am satisfied that the Body Corporate has otherwise met the requirements of the Act entitling it to such an order. Whilst the usual affidavit evidence as to service of the statutory demand and the originating documentation in this proceeding has not been filed, during the time that he held instructions from Gateway, Mr Dallas acknowledged service on the company’s behalf.
[15] There will be an order pursuant to s 241 of the Companies Act appointing Iain Bruce Shephard and Jessica Jane Kellow as liquidators over Wakefield Property Ltd on the terms set out in their consent to act. The Liquidators will have power to act jointly or severally pursuant to s 242 of the Companies Act. The Body Corporate will have its costs of and incidental to this application on a 2B basis together with such disbursements as may be allowed by the Registrar.
[16] That order is made as at the time and on the date recorded at the commencement of this judgment.
Luxe (CIV-2019-485-517)
Leave to defend
[17] At the commencement of his submissions for the Body Corporate, Mr Dewar drew my attention to the fact that Luxe’s statement of defence and affidavit in support had been field and served out of time, that is to say outside the 10-day working period provided for in r 31.17 of the High Court Rules 2016. He mentioned this Court’s judgment in Weller v Newton Taxation Ltd1 in which it was said that the rule reflects a strict requirement and very good reasons need to be shown for late filing if the defendant is to be heard.
[18] Mr Dewar did not press this point strongly. The “very good reason” found to exist in Weller was that the plaintiff knew all along that the case would be defended and acquiesced in the delay. There is a sense in which the same might be said here. In any event, I allowed the argument to proceed and both Mr Dewar and Mr LaHatte focussed on the substantive defences. To the extent that it was necessary to do so, I gave Luxe leave to defend the proceeding notwithstanding the late filing of its defence.
The Response to the Body Corporate’s statutory demand
[19] Statutory demands are provided for in s 289 of the Companies Act. Materially, they must:
… require the company to pay the debt, or enter into a compromise under Part 14, or otherwise compound with the creditor, or give a charge over its property to secure payment of the debt, to the reasonable satisfaction of the creditor, within 15 working days of the date of service, or such longer period as the court may order.
[20] The Body Corporate’s statutory demand in this case complied with those requirements.
[21] As already described, Luxe’s response was to offer second mortgage security over its unit for the amount of the claim.
1 Weller v Newton Taxation Ltd [1995] 8 PRNZ.
[22] The way in which it went about doing so was informal, to say the very least. Mr Kooiman simply asserted that the company’s unit had a market value of at least
$750,000, that its indebtedness secured over the property by way of first mortgage was
$332,000, and therefore that there was ample equity in the property to secure the amount of the outstanding levies. No supporting documentation was included and no narrative argument in support of the proposal offered.
[23] The Body Corporate’s response was equally informal. The Administrator asserted that he had carried out his own investigation, and concluded, contrary to Luxe’s assertion, that the company had no equity in the property and rejected the proposal.
[24] The question is whether in such circumstances Luxe is entitled to maintain that it complied with the statutory demand.
[25]Surprisingly, there is next to no jurisprudence on this point.
[26] As Associate Judge Gendall (as he then was) said in Cooper Horticulture Ltd v Crasborn Packing Ltd2 and Cooper Horticulture Ltd v Apollo Fruit Ltd,3 the reference to the provision of security in statutory demands is a reference to the obligation in s 289 on the part of a claimant to give the company in question an opportunity to offer security for the amount of the debt.
[27] Having had the benefit of submissions from both Mr Dewer and Mr LaHatte, it appears to me that the issue reduces itself to whether, in rejecting Luxe’s proposal, Mr Gambitsis acted reasonably.
[28] Mr Dewar contended that the onus rested on Luxe to establish that the rejection was unreasonable. As I understood his argument, Mr LaHatte accepted that. In any event, both focussed less on the steps taken by Mr Gambitsis and more on the question of whether Luxe’s proposal was a viable one.
2 Cooper Horticulture Ltd v Crasborn Packing Ltd (unreported) (CIV-2006-441-17) HC, Napier Registry, Gendall AJ, 24 March 2006.
3 Cooper Horticulture Ltd v Apollo Fruit Ltd (unreported) (CIV-2006-441-18) HC, Napier Registry, Gendall AJ, 24 March 2006.
[29] Both in the contemporaneous correspondence and in his affidavit evidence, Mr Gambitsis says that he looked into the proposal thoroughly and reached the conclusion that Luxe had no equity in its unit and that any security it gave would be worthless (my words rather than his). There is certainly nothing in the evidence contradicting this, and Mr LaHatte did not attempt to contend that there was.
[30] On the contrary, as Mr Dewar pointed out, such evidence as there is lends strongly to support the conclusion reached by Mr Gambitsis. Mr Kooiman, in his email of 6 August 2019 had asserted that the unit was encumbered by one mortgage securing indebtedness of $332,000. In his affidavit sworn on 11 June 2020 Mr Gambitsis produced a copy of the certificate of title demonstrating that from as early as 24 March 2017 there were three mortgages registered against the title, two by a company called F M Custodians Ltd and one by a company called Fico Finance Ltd (subsequently transferred to a company called Eastlight Asset Trading No. 3 Ltd). In his affidavit in reply dated 12 June 2020 and filed and served on the morning of the hearing, Mr Kooiman said that the Fico Finance/Eastlight Asset Trading mortgage originally secured indebtedness of $390,000. On its face this contradicts what Mr Kooiman told the Administrator in his original email both as to the number of charges and the amount of debt secured, all of which would have been clear to the Administrator on a cursory examination at the time.
[31] On the basis of that evidence it is difficult to imagine Mr Gambitsis reaching any other conclusion than the one that he did.
[32] I reject Luxe’s contention that Mr Gambitsis’ rejection of its proposal was unreasonable.
[33] Having regard to the apparent lack of authority in this area, it is appropriate to make some general observations as to the obligations of a creditor dealing with a proposal by a debtor to provide security in response to a statutory demand.
[34] The obvious analogy is with a landlord asked to consent to an assignment of a lease under s 226 of the Property Law Act 2007. In that context, the landlord cannot withhold consent unreasonably.4 The courts have said that the question whether a
4 Property Law Act 2007, s 226(2)(a).
landlord’s refusal to consent is reasonable should be assessed objectively from the perspective of a reasonable landlord.5 This assessment will be context and fact specific.6 The onus of proving that consent has been unreasonably withheld is on the tenant.7
[35] It follows that a tenant in one context and a debtor in another will have to point to evidence indicating that consent of the landlord or creditor was unreasonably withheld.
[36]In this case Luxe has been unable to do so.
[37] However, it is not difficult to imagine situations in which a creditor might be held to have withheld consent unreasonably. The situation that comes to mind most readily is a creditor determined to wind up a debtor company refusing consent not because the proposal is not viable but for the ulterior purpose of effecting retribution. That, in my view, would be unreasonable on his, her or its part.8 So too would the refusal of consent not because the security offered was inadequate but because the creditor did not wish to become a charge holder.
[38] I consider this approach to be supported by the words used in s 289. Parliament, by the addition of the words “to the reasonable satisfaction of the creditor”, clearly envisaged that creditors should give genuine consideration to a proposal of security by a debtor and not refuse any such request without proper reasons for doing so.
Whether the Body Corporate is a secured creditor
[39] On behalf of Luxe it is argued that because, under s 147 of the Unit Titles Act, a body corporate owed levies by a unit title holder is entitled to refuse to provide a certificate which is necessary for the transfer of the property by the unit title holder
5 See for example BP Oil New Zealand v Ports of Auckland (2003) 4 NZ ConvC 193,719 [2004] 2 NZLR 208 at [167] and Challenger International (New Zealand) Ltd v AMP New Zealand Office Waterfront Tower Ltd [2003] BCL 428 at [26].
6 See International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd [1986] Ch 513 at 521; [1986] 1 All ER 321 at 326 (CA).
7 BP Oil New Zealand v Ports of Auckland, above n5, at [167].
8 In the landlord-tenant context, a landlord will be taken to have acted unreasonably if a refusal is based on grounds unrelated to the relationship created between the parties under the lease. See Ashworth Frazer Ltd v Gloucester City Council [2001] 1 WLR 2180.
(or a mortgagee) and thus prevent the transfer of the relevant unit until such time as the outstanding levies are paid, the body corporate is a charge holder.
[40] In my view, s 147 does not create a charge. It does not give a body corporate a right of recourse against a unit holder’s property in order to recover indebtedness (as for example a mortgage would do). Such a right is the fundamental characteristic of a security.9 At most it is a negative statutory right to withhold the provision of a certificate which in most, if not every, case will prevent the unit title holder or anyone else from transferring the unit whilst the levies remain unpaid. I reject the argument advanced on behalf of Luxe that s 147 of the Unit Titles Act creates a charge.
Solvency
[41] The final argument advanced on behalf of Luxe is that its solicitors, or, rather, a firm of solicitors with which it has some connection, hold funds in relation to litigation to which Luxe is apparently not a party sufficient to pay the outstanding levies. I am taking it that this is an argument to the effect that the company is not insolvent.
[42] The first point is that, other than an assertion made on Luxe’s behalf, there is no evidence before the Court that this is the position.
[43] A party seeking to establish its solvency for the purposes of inviting the court to exercise its discretion not to put the company into liquidation and appoint liquidators notwithstanding its failure to respond to a statutory demand will usually put in evidence as to its overall financial position, invariably in the form of its most recent financial statements (together with any necessary updating financial material), and an assessment from an independent accountant as to both its balance sheet and cashflow positions.
[44]Luxe has not done anything of the sort.
[45] For that reason alone I would not be prepared to accept such evidence as there is to the effect that the company is solvent.
9 See the discussion in Goode on Commercial Law (5th ed) at 22.15–22.55.
[46] There is a further point. The real question is the company’s ability to pay its debts as they fall due, and lack of financial wherewithal is only one reason why a company may not be able to do so. Another is that the company is simply refusing to do so.
[47] In this case, the fact that the company says that it has the wherewithal to pay the outstanding levies but has not done so tends to suggest that for some unexplained reason those responsible for the governance or management of the company have made a decision that the company will not pay its debts. That of course would mean that the company was unable to do so.
[48] For those reasons, I do not accept either that the company is solvent, or that the company is able to pay its debts.
Conclusion
[49] There will be an order pursuant to s 241 of the Companies Act appointing Iain Bruce Shephard and Jessica Jane Kellow as liquidators over Luxe One Ltd on the terms set out in their (undated) consent to act. The liquidators will have power to act jointly or severally pursuant to s 242 of the Companies Act. The Body Corporate will have its costs of and incidental to this application on a 2B basis together with such disbursements as may be allowed by the Registrar.
[50] That order is made as at the time and date recorded at the commencement of this judgment.
Associate Judge Johnston
Solicitors:
Thomas Dewar Sziranyi Letts, Lower Hutt for plaintiffs J D Dallas Law, Wellington for the defendants
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