Chorus New Zealand Limited v Creative Development Solutions Limited

[2020] NZHC 3119

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE

CIV-2020-485-553

[2020] NZHC 3119

BETWEEN

CHORUS NEW ZEALAND LIMITED

Plaintiff

AND

CREATIVE DEVELOPMENT SOLUTIONS LIMITED

Defendant

Hearing:	17 November 2020
Appearances:	S Quilliam-Mayne for plaintiff M Wigley for the defendant
Judgment:	25 November 2020

JUDGMENT OF ASSOCIATE JUDGE JOHNSTON

[1]    The judgment debtor, Creative Development Solutions Ltd, sued the judgment creditor, Chorus New Zealand Ltd. Dobson J heard the case over several days in September 2019. The claim was dismissed. Chorus has appealed. Its appeal was apparently heard by the Court of Appeal last month. Both counsel speculated on when a judgment may be delivered, but I do not think it would be appropriate to make any assumption about that, other than to say that there is at least a prospect of it being delivered in the relatively near future.

[2]    In the meantime, on 9 October 2020, Chorus commenced winding up proceedings against Creative. The basis for this proceeding is a series of costs awards made in Chorus’ favour in connection with the primary proceeding – an interlocutory costs award following a dispute concerning discovery; the costs award made by Dobson J following his Honour’s dismissal of the claim; and a costs award that I made

CHORUS NEW ZEALAND LIMITED v CREATIVE DEVELOPMENT SOLUTIONS LIMITED [2020] NZHC 3119 [25 November 2020]

following the dismissal of an application by Creative for an order setting aside Chorus’ statutory demand.

[3]    The amount in issue is approximately $86,000. In the course of this submission Mr Wigley described this as a modest amount. In the scheme of things, it probably is. I will come back to this. Creative does not deny these judgment debts. What it asks, through its shareholders who are themselves creditors who are owed approximately

$450,000, is that the Court exercise its discretion against making the winding up order sought by Chorus pending the outcome of its appeal against Dobson J’s judgment.

[4]    The argument advanced by Mr Wigley on behalf of the company and its shareholders is straightforward. He submits that unless the Court exercises its discretion and declines to make a winding up order before the outcome of Creative’s appeal is known, then a successful appeal will be meaningless. He emphasises that the liquidation process is likely to involve substantial cost but more importantly if the company were wound up now then even if its appeal were to be successful it would not be able to recover from the reputational damage.

[5]There is no doubt some force in what Mr Wigley says.

[6]    Ms Quilliam-Mayne for Chorus responds to this submission with a series of points that I will attempt to summarise:

(a)She makes the preliminary point that whilst the notice of opposition may have been filed and served on 12 November 2020 (three working days prior to the hearing), the affidavit evidence in support of this was not filed and served until 16 November 2020 (the day prior to the hearing). This is a legitimate criticism. However, I put it to one side at this stage as I did not perceive Chorus to be prejudiced in any way;

(b)Ms Quilliam-Mayne then submits that the appropriate approach would have been for Creative (perhaps supported by the shareholders as creditors of the company) to have applied pursuant to r 20.10 for a stay of Chorus’ proceeding pending the receipt of the Court of Appeal’s

judgment. As she submits, this would have enabled the Court to scrutinise the merits of the company’s position. She submits that the company should not be able to avoid that scrutiny by effectively coat-tailing on an application made by the shareholders;

(c)Ms Quilliam-Mayne refers me to what has long been regarded as the leading authority in this area - the judgment of Greig J in In Re Thames Freightlines Ltd (in receivership) where his Honour said: 1

The principles which are applicable are well recognised and in the circumstances of these cases include the following:

1.The petitioning creditor is entitled ex debito justitiae to a winding up order.

2.There is an unfettered discretion as to whether a winding up order should be made.

3.The Court will have regard to the wishes of the majority of creditors and is bound to have regard to the value of the debts on each side.

4.The fact that a majority of creditors opposed the petition is not, in itself, sufficient to compel the Court to decline the order.

5.It is for the opposing creditors to show that there are reasons for a refusal of the winding up order.

6.The court will have regard to all the circumstances relevant to the company and its operations and among other things, the reasons for and against the winding up, the interests of other creditors and in the particular circumstances the weight to be attached to the opposition, in whole or in part, of the creditors.

7.The fact that the assets of the debtor company have been mortgaged to an amount equal to or in excess of the assets, or that the company has no assets is not sufficient in itself to justify refusal of the winding up order.

(d)She referred me also to the more recent judgment  of  Associate  Judge Osborne (as he was) in March Construction Company Ltd v

1      In Re Thames Freightlines Ltd (in rec) (1981) 1 NZCLC 88,112 (HC).

Te Anau Ventures Ltd2 where the Judge applied the Re Thames Freightlines principles and drew attention to other relevant authorities to which it is unnecessary to refer here;

(e)Finally, Ms Quilliam-Mayne points to the evidence contained in the affidavit filed in support of the application by the shareholders. As she says, it is clear from the financial material that Creative is insolvent from a balance sheet perspective, and is unable to pay its current debts, and that that has been the position for some time. It is also clear that at one level or another Creative is continuing to trade whilst insolvent;

[7]    In the end, the primary argument advanced on behalf of Chorus is that as the only external creditor it is prima facie entitled to the order it seeks – entitled ex debito justitiae as Greig J put it in In Re Thames Freightlines. Ms Quilliam-Mayne submitted that that entitlement should not be overridden by an informal application advanced at the last moment by the shareholders of the company whose status as internal creditors was of a different character from that of Chorus, especially where it was apparent that the company was trading whilst insolvent and thus presented a risk to the public.

[8]    In reply Mr Wigley acknowledged that the orthodox procedure in a case such as this would involve an application by the company for a stay, but submitted that there was nothing preventing other creditors – even internal creditors – from opposing the order, and I accept that that is correct.

[9]    Mr Wigley sought to distinguish March Construction, essentially on the basis that that was a contest between secured and unsecured creditors. Whilst that is certainly  correct,  I  do  not  see  it  as  a   relevant   distinction.   In   the   end, March Construction is no more and no less than an example of the application of the principles explained in In Re Thames Freightlines.

[10]   As to the criticism that the company was continuing to trade whilst insolvent thus exposing existing creditors – most particularly Chorus – and the public to ongoing

2      March Construction Company Ltd v Te Anau Ventures Ltd HC Christchurch CIV-2009-409-641, 7 September 2009.

risk, Mr Wigley indicated that he was in a position to offer an undertaking by the directors that the company would cease to trade altogether until such time as the Court of Appeal’s judgment was available (an indication subsequently confirmed in a follow-up memorandum after the hearing).

[11]   Finally, Mr Wigley returned to the primary theme described earlier. He emphasised that:

(a)the amount of money owed by Creative to Chorus was comparatively minor (especially having regard to the amount the company owed to its shareholders);

(b)the company did not have any other outstanding external debts;

(c)all the company and its shareholders and officers were seeking was breathing space pending the outcome of their appeal;

(d)if their appeal were to be successful then one likely outcome of that would be the reversal of the costs orders which are the subject matter of this proceeding; and

(e)if the company were wound up at this stage and was then successful in the appeal the victory would be worthless as there would be no business left.

[12]   The position adopted on behalf of the company by its shareholders and directors is perfectly understandable. However, the principles that guide insolvency law, and which were explained in In Re Thames Freightlines, are well settled. In my view, Chorus is entitled to the order it seeks and it seems to me that, when properly understood, all of the considerations that apply to the exercise of the Court’s discretion are against the shareholders. Whilst the Court is to have regard to the wishes of the majority of the creditors, as Mr Wigley himself acknowledged, there is a distinction between internal and external creditors, and it is the interests of external creditors that are likely to carry the day – they not having the same interest as internal creditors in

keeping the company afloat. Here, Chorus is the only external creditor. Whilst the company and its shareholders and officers have advanced a legitimate basis for their application, I do not accept that that should override the general principle that an unsatisfied external creditor of an insolvent concern is entitled to insist on a winding up order. That appears to me to particularly important where the evidence demonstrates – as it does here – that the company has been continuing to trade whilst insolvent and thus presenting an ongoing risk to the plaintiff creditor and a potential risk to the public. An undertaking of the sort that Mr Wigley proposes would alleviate those risks to some extent, but it would not do so entirely.

[13]   For those reasons I am not prepared to exercise the discretion in the way urged on the Court by Mr Wigley on behalf of Creative and its shareholders.

[14]   However, one factor which does seem to me  to be important is  that, as     Mr Wigley says, the amount of money here is not large. Whilst Mr Wigley advances that as a reason for the exercise of the Court’s discretion not to wind the company up, equally, it is a reason to think that the company’s shareholders who oppose a winding up might conclude that it is in their interests to raise that amount to pay the Chorus debt and avoid liquidation in that way. In order to assist them in that regard, I propose to make orders which will give them time to do just that.

[15]Against that background I make the following orders:

(a)There will be an order on the application of Chorus New Zealand Ltd for the appointment of liquidators over Creative Development Solutions Ltd. The liquidators will be Marcus James McMillan and Richard John Nacey  on  the  terms  of  their  consent  to  act  dated  11 November 2020. Chorus will have its costs on a 2B basis together with such disbursements as may be allowed by the Registrar, those costs and disbursements to be paid out of the assets of the company in liquidation.

(b)That order will come into force at 4.00 pm on 16 December 2020 unless, by that date, Creative Development Solutions has paid to

Chorus New Zealand Ltd the full amount of the judgment debts (less any amount already paid in reduction of the same) as set out in its statutory demand dated 2 June 2020 together with the costs and disbursements to which Chorus is entitled in relation to this proceeding.

Associate Judge Johnston

Solicitors:

Chapman Tripp, Wellington for plaintiff

Wigley and Company, Wellington for defendant