Coastal Scaffolding Ltd v Coghlan
[2016] NZHC 751
•19 April 2016
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2016-404-42 [2016] NZHC 751
UNDER the Companies Act 1993, section 290 BETWEEN
COASTAL SCAFFOLDING LIMITED Applicant
AND
BRENDAN COGHLAN Respondent
Hearing: 19 April 2016 Appearances:
J M Skinner for Applicant
A Gilchrist for RespondentJudgment:
19 April 2016
ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL
Solicitors:
Skinners Lsaw, Mairangai Bay, Auckland, for Applicant
Anthony Thomas, Mangawhai Heads, for Respondent
Counsel:
A Gilchrist, Auckland, for Respondent
COASTAL SCAFFOLDING LIMITED v COGHLAN [2016] NZHC 751 [19 April 2016]
[1] Coastal Scaffolding applies under s 290 of the Companies Act 1993 to set aside a statutory demand by Mr Coghlan. There are two grounds:
(a) that there is a substantial dispute whether or not the debt is owing, and
(b) “other grounds” under s 290(4)(c) of the Companies Act.
In his statutory demand under s 289 of the Companies Act Mr Coghlan has required payment of $$237,638 “being repayment of advances made by the creditor to the company as recorded in the accounts of the company”.
[2] Coastal Scaffolding Ltd has a related company, All Safe Scaffolding Ltd. They are in the scaffolding business. All Safe Scaffolding is the operating company. Coastal Scaffolding Ltd owns the plant and equipment. Until February 2015, Mr Coghlan had interests in both companies. He was a director and shareholder of Coastal Scaffolding Ltd. He resigned as director on 23 February 2015 and transferred his shares in the company to Elaine Magill, the mother of his former partner. He also disposed of his shareholding in All Safe Scaffolding. While he was a shareholder of Coastal Scaffolding Ltd he made advances to the company, as did other shareholders. His case is that he called up his advances and when the company did not pay he served the statutory demand.
[3] In its application, Coastal Scaffolding Ltd says that there is a substantial dispute whether or not the debt specified in the demand is due. The amount claimed was based on draft accounts which had not been finalised or approved by a director of the company. There has been a dispute for some time regarding Mr Coghlan’s exit from Coastal Scaffolding Ltd. The dispute goes to funds payable to Mr Coghlan and to his actions as a director of the company. Even if the amount is due, repayment or liquidation would be unjust because the company is solvent and in a growth phase. The statutory demand is also said to place unfair pressure on the company and is accordingly an abuse of process.
[4] The purpose of a demand under s 289 of the Companies Act is to create a presumption of insolvency if the company served with the demand does not comply with it within the 15 working days of service. The presumption of insolvency arises under s 287(a) of the Companies Act. That presumption can be rebutted.
[5] There are, however, cases where it would be unjust to allow the presumption of insolvency to arise on non-compliance with the demand. The general purpose of s
290 is to allow statutory demands to be set aside when it would be unjust for non- compliance with the demand to give rise to the presumption. Section 290(4) sets out particular grounds where it would be unjust for the presumption of insolvency to arise. The discretion under s 290 is accordingly limited to the question whether the statutory demand ought to stand so that non-compliance with it will give rise to the insolvency presumption. That is a relatively confined discretion. I make that point because on a liquidation application the court has a wider discretion. At the stage of a liquidation application where the discretion is exercised, the court may have to take into account competing considerations: not only the interests of the creditors seeking the liquidation of the company but also the interests of other stakeholders, including shareholders and other creditors who see benefits in the company not going into liquidation. I mention that to make it clear that on this application I am only concerned to exercise the discretion under s 290(4) of the Companies Act. I am not required to predetermine how a liquidation application might be decided.
[6] On an application under s 290(4)(a), the onus is on the applicant to show a substantial dispute. Mere assertion of a dispute is not enough. The applicant has to show a fairly arguable basis for the dispute. The court does not resolve disputed questions of fact on affidavits, and it does not decide the substantive merits of the dispute. If there is a genuine dispute, it should be more properly decided in other proceedings.
[7] As for the “other grounds” provision in s 290(4)(c), I follow the approach of
the English Court of Appeal in Re a Debtor (No.1 of 1987) where Nicholls LJ said in
respect of the English Insolvency Rules 1986 which has a similar “other grounds”
provision:1
The circumstances which normally will be required before a court can be satisfied that the demand ought to be set aside are circumstances which would make it unjust for the statutory demand to give rise to those consequences in the particular case. The court’s intervention is called for to prevent that injustice.
Nicholls LJ was there referring to the injustice of the presumption of insolvency arising.
Minor irregularities
[8] Before the substantive issues, there are some minor irregularities to be noted. [9] In the statutory demand Mr Coghlan’s surname is misspelt “Coughlin.” It
is a minor irregularity. Coastal Scaffolding Ltd was not misled by the incorrect spelling and did not raise the point. It does not give it a ground to set aside the statutory demand.
[10] The amount in the statutory demand is $237,638. The financial statements that Mr Coghlan relied on showed the amount in his current account as $235,840. To the extent that he overstated the amount, I similarly do not regard that as invalidating the demand.
Adjustment to amount claimed
[11] Mr Coghlan gets the amount in his demand from annual financial statements of Coastal Scaffolding Ltd. He begins with the financial statements for the company for the year ended 31 March 2014. These have been prepared by an independent accountant, Mr Rogers. The company had apparently used Mr Rogers as its accountant for a number of years - he says, for the last 15 years. A copy of those accounts was put in evidence and shows them as having been approved by the
directors. There is a schedule of shareholders’ current accounts. The amount
1 Re a Debtor (No.1 of 1987) [1989] 1 WLR 271 (CA) at 276.
showed owing to Mr Coghlan as at 31 March 2014 is $262,975. The total
shareholders’ current accounts come to $505,788.
[12] Mr Rogers also prepared accounts for the year ended 31 March 2015. This was after Mr Coghlan had resigned as director and transferred his shares. The copy of the accounts put in evidence prepared by Mr Rogers does not appear to have been approved by the directors. The accounts show an opening balance for Mr Coghlan of $262,975, cash drawings of $27,145, leaving a balance of $235,840. The total shareholders’ current accounts come to $436,154. Mr Rogers says that he provided the accounts in about May 2015 to show to the directors of Coastal Scaffolding Ltd and the shareholders. He did not receive any comments or queries about them and no one queried the accuracy of the accounts he prepared.
[13] Coastal Scaffolding Ltd has since instructed new accountants. Mr Hill, an accountant instructed by Coastal Scaffolding Ltd, has sworn an affidavit. He clearly has considered the accounts prepared by Mr Rogers and whether there should be any adjustments. In paragraph 16 of his affidavit he says:
I note in my workings what I consider is owing to Mr Coghlan. The amount of $211,252 is less than what is claimed in the statutory demand. The reason for the difference in value is that no allowance has been made for an overdrawn current account relating to All Safe. All Safe acquired shares in Coastal from Wayne Martin who had an overdrawn current account. This current account was not repaid by Wayne Martin; the name of the current account was simply changed to All Safe. As this liability does not appear in the financial statements of All Safe, it is completely appropriate to assume that the remaining shareholders assume their respective portions of the liability.
[14] Mr Coghlan has not engaged with the merits of the point taken by Mr Hill. Instead, pragmatically, he accepts the adjustment by Mr Hill. His case now is that for the purpose of this application the undisputed amount of his shareholder’s current account is $211,252. For Coastal Scaffolding Ltd, Mr Skinner accepted that there could be no argument with that approach.
[15] Aside from that one adjustment identified by Mr Hill, there is no evidence to cast any doubt on the amount of Mr Coghlan’s shareholder’s current account. I accordingly accept that there cannot be any dispute that the amount of his account
is $211,252. That finding does not stand in the way of Mr Coghlan in other proceedings taking issue with the adjustment proposed by Mr Hill.
Mr Coghlan’s standing
[16] Coastal Scaffolding Ltd queries Mr Coghlan’s standing as a creditor to enforce payment of his shareholder’s current account. It takes the point that Mr Coghlan is no longer a shareholder of the company, having transferred his shares to Mrs Magill. The submission seemed to be that the transfer of the shares also involved a transfer of the debt in the shareholders’ current account.
[17] The shares and the shareholder’s current account are distinct assets. A transfer of the shares does not by itself amount to a transfer of the debt constituted by the shareholder’s current account. There would ordinarily be two assignments: one, the transfer of the shares, the other the transfer of the current account debt. There is nothing in the evidence to show that the shareholder’s current account, as opposed to the shares, has been transferred. If there had been an assignment of the shareholder’s current account, that would not bind Coastal Scaffolding Ltd unless it had actual knowledge of the assignment. Under s 51 of the Property Law Act 2007, unless the debtor has actual knowledge of the assignment, payment of the debt to the assignor discharges the debt to the extent of the payment made. In the absence of any evidence of assignment and in the absence of any evidence of notice of an assignment having been given to Coastal Scaffolding Ltd, Coastal Scaffolding Ltd remains liable for the debt to Mr Coghlan. He is still entitled to enforce his rights under his shareholder’s current account even though he may have disposed of his shares.
The call up of the debt
[18] Coastal Scaffolding Ltd disputed that Mr Coghlan was entitled to call up his shareholder’s current account. Mr Scheib, Coastal Scaffolding Ltd’s director, put the matter this way in his evidence (at para 5 on p 55 of the bundle of documents):
It is also important to note that even though Brendan claims that the amount is owing, this does not mean that the amount was due. There is no
documentation that I have signed that sets out that Brendan must be paid the amount on demand regardless of what Mr Rogers says in the accounts. We set this company up with the long term in mind. I have sunk all my efforts into Coastal and All Safe, and it was certainly not on the understanding with Brendan that we could just whip our money out when we felt like it. The company is not in a position presently to pay the amount to Brendan without it jeopardising the future viability in the company. Brendan knows that this was the case and he also knows it was never part of the plan or agreed that we could simply demand the money back at a moments notice.
[19] Mr Skinner referred to Associate Judge Matthews’ decision in Hydro
Developments Ltd v Coll.2 In particular, this:
[47] … the shareholders elected to fund their venture by provision of their personal services without immediate reward, and by cash advances. They did not elect to fund it through banking accommodation. Whether a bank advance would have been available, and if so whether it would have been repayable upon demand or not, is not known, but by electing to fund the venture themselves the shareholders put themselves in the position where they could agree the level of financial security which the company would enjoy. If the advances they made were repayable upon demand to a company with no funds to its credit, they would necessarily have placed the company’s ongoing viability in a vulnerable position: any shareholder could at any time by calling up advances either place the shareholders in a position where they had to come up with the sum demanded themselves or place the company into a position where it would go into liquidation thereby terminating the intended and potentially profitable long-term venture.
[20] Against that, Mr Gilchrist for Mr Coghlan referred to the Court of Appeal’s decision in United Homes (1988) Ltd v Workman.3 That was another case where a shareholder had served a statutory demand requiring payment of a current account. Arguments similar to those by Coastal Scaffolding Ltd were put forward in that case to resist the statutory demand. The company attempted to argue that there was an agreement that shareholders would leave money in and would not be able to call it up on demand except with the agreement of all the directors and shareholders. The Court of Appeal found that the evidence was not sufficient to establish an arguable
case for such an express agreement. It noted that there may be understandings between shareholders in small privately-owned companies that money would be left in, but it held that something more was required for there to be a binding agreement
that would prevent a shareholder drawing funds out on demand. The Court said:
2 Hydro Developments Ltd v Coll HC Greymouth CIV-2012-418-33, 19 July 2012 at [46] - [48].
3 United Homes (1988) Ltd v Workman [2001] 3 NZLR 447 (CA) at [32]-[39].
[37] There is of course some force in the inferences invited from commercial factors such as the desirability and parity of shareholder advance levels the need to retain funds for cash-flow and solvency practices, and to meet institutional requirements.
[38] On the other hand, contrary inferences are open as to commercial likelihoods. It does not seem particularly likely that a shareholder would bind itself on some open-ended basis to leave in all advances including even allocated profits, unless all other shareholders agreed to drawings being made. Voluntary restraint is one thing. Acceptance of such a severe legal impediment is quite another.
[39] It seems to us quite clear that any restraint upon withdrawing the counterclaim/shareholders’ term funds (and the item has both labels) developed as a matter of understanding short of actual legal obligation. The question of legal obligation is not the subject of any identified clear agreement of a binding character. It is not the Court’s job to construct one from nothing.
[21] This case is similar. When I put to Mr Skinner what the agreement would be if there were not a contractual entitlement to withdraw funds on demand, Mr Skinner submitted that funds could be withdrawn on a managed payments basis. Such a term is obviously quite uncertain and would be unenforceable in practice. That vagueness points to the difficulty that Coastal Scaffolding has in contending that there is a term other than the one that normally applies in a case of shareholders’ current accounts – that they are repayable upon demand.
[22] The shareholders’ accounts in this case are all shown as current liabilities in the financial statements. The normal position is that shareholders’ current accounts are repayable upon demand. There is evidence that drawings were made on current accounts in earlier years. It is not possible on the material in this case to construct the terms of any agreement that would prevent Mr Coghlan exercising the normal right to call up his current account. Such advances by shareholders are, of their nature, short-term funding. There may be an expectation that they will be left in long-term. But that is simply a matter of expectation. For the reasons given by the Court of Appeal, it is not possible to impose severe legal impediments on the right of a shareholder to withdraw funds on demand in the absence of evidence as to such an agreement.
[23] I find that Mr Coghlan did effectively call up the advances. His lawyer sent a letter on 21 December 2015 addressed to the registered office of Coastal Scaffolding Ltd. The letter said:
In the event that payment is not made by Tuesday 22 December 2015 enforcement action will commence without further notice.
[24] The lawyer (not Mr Gilchrist) was good to his word. He signed the statutory demand on 22 December 2015, and it was served on the registered office of Coastal Scaffolding Ltd on 23 December 2015. That was the last working day of 2015. The company had 10 working days in which to make an application under s 290 of the Companies Act. The definition of “working days” under the Companies Act is different from the definition under the High Court Rules. It is a shorter over the Christmas period. Only the period from 25 December to 2 January is excluded from
the legal definition of “working days”.4
[25] Impressively, Coastal Scaffolding Ltd managed to file and serve its application within the tight time limit. That must have required urgent efforts by Coastal Scaffolding Ltd and its lawyer to deal with an application within very tight time-frames when they ought more properly to have spent their time on Christmas activities and taking a well-earned rest, as do most other people in this country.
[26] The point reached now is that Mr Coghlan was a creditor for the shareholders’ current account. He was entitled to call up the debt, and he did so effectively. There is no dispute as to the debt once it is limited to $211,252.00.
Other grounds
[27] At this point, Coastal Scaffolding Ltd says that even if the debt is upheld the statutory demand ought not to stand. It is relying on other grounds under s 290(4)(c) of the Companies Act. Here, the company complains of the hardship that would be caused if the statutory demand were allowed to stand. It has given evidence suggesting that if there were a liquidation of the company, shareholders would not
receive their current account balances in full. On a liquidation there would be a
4 Companies Act 1993, s 2, definition of “working day”.
short-fall for unsecured creditors. It regards Mr Coghlan’s actions as short-sighted and putting unfair pressure on the company. Enforcement of the debt would be detrimental not only to its own interests and the interests of other shareholders but also for Mr Coghlan himself.
[28] Those submissions are matters that can be properly put before the court in a defended application under s 241 for the company to be put into liquidation on the ground that it is unable to pay its debts. It is plainly arguable for Coastal Scaffolding Ltd that on a liquidation application it may be able to show that it is in the interests of everyone including Mr Coghlan that the company not be put into liquidation but that it be allowed to continue trading (it says that it is trading solvently) with a view to shareholders accounts being reduced over time.
[29] An application to set aside a statutory demand is not the place to consider the merits of those arguments. The statutory demand can be allowed to stand without any injustice to the company. That may establish insolvency, but the merits of the company trading or being put into liquidation are better considered at the liquidation stage, once there is an established insolvency. Those considerations should not stand in the way of Mr Coghlan establishing by his statutory demand whether the company is able to pay its debts or not. Accordingly I also dismiss the ground under s
290(4)(c).
Outcome
[30] I find against Coastal Scaffolding Ltd on both the grounds it has relied on. The statutory demand is set aside except for the amount of $211,252. The precedent for such an adjusted approach is the United Homes decision.
[31] There are two matters left:
(a) What orders to make under s 291 of the Companies Act; and
(b) Costs.
[32] Mr Gilchrist submitted that if the application failed, an appropriate time for complying with the statutory demand is 15 working days. I accordingly make an order under s 291 of the Companies Act requiring Coastal Scaffolding Ltd to pay Mr Coghlan the sum of $211,252 by 11 May 2016. In default of payment, Mr Coghlan may begin a liquidation application.
[33] As for costs, I commented before on the service of the statutory demand on the last business day of 2015. The courts have given repeated warnings against misuse of the statutory demand procedure. That is usually in context of using the statutory demand to create unfair pressure, often in the context of disputed liabilities. However, I regard the timing of the statutory demand as clearly inappropriate in this case. It put improper pressure on Coastal Scaffolding Ltd. It was plainly unfair for Mr Coghlan’s lawyers to serve the statutory demand immediately before Christmas, which would limit the company’s ability to respond meaningfully to the demand. It was a calculated attempt to try to catch Coastal Scaffolding Ltd out. In my view, such steps are heavy-handed and ought to be discouraged. The way I can indicate my disapproval of the service of the statutory demand is to make no order for costs. I decline to make any order for costs under r 14.7(g) of the High Court Rules.
………………………............
Associate Judge R M Bell
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