Commissioner of Inland Revenue v Propellor Property Services Limited
[2022] NZHC 2856
•2 November 2022
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE
CIV-2022-409-000209
[2022] NZHC 2856
BETWEEN THE COMMISSIONER OF INLAND REVENUE
Plaintiff
AND
PROPELLOR PROPERTY SERVICES LIMITED
Defendants
CIV-2022-409-000207 BETWEEN
THE COMMISSIONER OF INLAND REVENUE
Plaintiff
AND
METROPOLIS DESIGN LIMITED
Defendant
Hearing: 31 October 2022 Counsel:
G McGillivray for Plaintiff J Watson for Defendants
Judgment:
2 November 2022
JUDGMENT OF ASSOCIATE JUDGE PAULSEN
This judgment was delivered by me on 2 November 2022 at 2.30 pm pursuant to Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar Date:
COMMISSIONER OF INLAND REVENUE v PROPELLOR PROPERTY SERVICES LTD [2022] NZHC 2856
[2 November 2022]
[1] There are before the Court applications by the Commissioner of Inland Revenue to put Propellor Property Services Ltd and Metropolis Design Ltd into liquidation. This judgment concerns applications by the companies for adjournment of the applications which is opposed by the Commissioner.
[2] Propellor Property Services Ltd and Metropolis Design Ltd are related companies.
[3] These proceedings were commenced on 19 May 2022. The orders putting the companies into liquidation are sought under s 241(4)(a) of the Companies Act 1993 on the basis the companies are unable to pay their debts, both having failed to comply with statutory demands served upon them by the Commissioner in respect of unpaid taxes.
[4] The companies have not filed statements of defence. They do not dispute they are indebted to the Commissioner for unpaid taxes. As a result of the companies having recently complied with their obligation to file returns, the amounts owing to the Commissioner are $363,941.52 in the case of Propellor Property Services Ltd, and
$179,183.06 in the case of Metropolis Design Ltd.
[5] There is no dispute that the Commissioner has made out the statutory grounds for the making of orders for liquidation.
[6] The Commissioner’s applications first came before the Court on 15 September 2022. Although the companies had not filed any papers in opposition, counsel appeared for the companies and applied for adjournments to allow for settlement of their liabilities to the Commissioner.
[7] Associate Judge Lester granted adjournments to 27 October 2022 on the following basis:
(a)the companies were to file all outstanding tax returns;
(b)an amount of $180,000, held in the trust account of Davidson Legal, would be paid to the Commissioner in part satisfaction of the debts; and
(c)a property at 370 Papanui Road, Christchurch was being sold at auction on 6 October 2022 and before the next call a solicitor’s undertaking would be provided to pay the debts owing to the Commissioner upon settlement of the sale.
[8] When the applications came before me on 27 October 2022, I was advised that the companies had filed their outstanding tax returns, but the other conditions upon which Associate Judge Lester had granted the adjournments had not been met. This was because the Papanui Road property did not sell at auction but continued to be marketed for sale, and there is a dispute concerning the money held in the trust account of Davidson Legal which prevents its disbursement. The companies’ counsel sought a further adjournment of at least two months to work through these issues.
[9] The Commissioner opposed any further adjournments and sought immediate orders for liquidation.
[10] I was not prepared to either make liquidation orders or to grant a lengthy adjournment in the absence of evidence as to the companies’ financial circumstances. I adjourned the applications until 1 November 2022 to allow the companies to file affidavit evidence setting those out.
[11] An affidavit of Nicolette Louise Connors has been filed on behalf of the companies. She describes herself as the principal of the companies and sets out their proposals to pay the Commissioner and attaches copies of the companies’ financial accounts to 31 March 2022.
The adjournment application
[12] At the hearing on 1 November 2022, Mr Watson referred to the content of Ms Connors’ affidavit and again applied for an adjournment of the applications to at least 23 December 2022. The adjournments are sought on the bases the companies are solvent, are taking reasonable steps to pay the Commissioner and there is a realistic prospect that given sufficient time, payment in full will be made.
[13] Ms McGillivray advised that the Commissioner’s position remains unchanged and orders for liquidation are sought.
Relevant principles
[14] The starting point is that the Commissioner has satisfied the statutory requirements for obtaining orders for liquidation and is prima facie entitled to the orders sought. As noted in Brookers Insolvency Law and Practice:1
Normally, if the relevant statutory requirements have been met, the person making the application is entitled to his or her order for the company’s liquidation; “…the insolvency policy of the companies legislation is clear: (1) insolvency results in winding up; and (2) insolvency is proved by inability to establish a substantial dispute over the debt or by way of cross claim”; (Baragwanath J in Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395 (CA) as quoted (with approval) by the Court of Appeal in Commissioner of Inland Revenue v Newmarket Trustees Ltd [2012] NZCA 351, [2012] 3 NZLR 207).
[15] The Court will be reluctant to grant adjournments of liquidation proceedings where there is no doubt as to a defendant company's inability to pay its debts. It is not, however, unusual for short adjournments to be granted where time is required to enable a proposal to be investigated for the payment of a company's creditors.
[16] Here, the companies have each already been granted one adjournment on conditions which they did not satisfy. The question for me is whether, in the exercise of my discretion, further adjournments should be granted. In making that assessment I must determine what the interests of justice require in all the circumstances, taking into account the interests of the companies, the Commissioner and other creditors, along with any public policy considerations that may be engaged.
[17] I am not prepared to grant the companies a further adjournment for the following reasons:
(a)the companies’ proposal to pay the Commissioner is unsatisfactory, in that it does not provide sufficient assurance of payment of the debts and
1 Brookers Insolvency Law & Practice (looseleaf ed, Thomson Reuters) at [CA241.04].
would not provide payment to the Commissioner within a reasonable timeframe in any event;
(b)the companies are unable to pay their debts and are insolvent; and
(c)there are public policy considerations that weigh in favour of making orders for liquidation now.
The companies’ proposal
[18] The companies have had since at least May 2022, when these proceedings were commenced, to make satisfactory arrangements with the Commissioner. Not only have they not made such arrangements, but it was only since the last hearing that they filed up to date tax returns.
[19] The companies wish to continue to trade but it is not suggested that they will be able to settle their debts from their trading activities. In large measure, their intention is that payment will be made from the proceeds of sale of assets of third parties, and specifically from:
(a)funds held in the trust account of Davidson Legal;
(b)the sale of the Papanui Road property and, now, another property at Grace Street, Orakei; and
(c)the sale of stock of Metropolis Design Ltd said to be valued in excess of $400,000.
[20] There is $227,844.30 held in Davidson Legal’s trust account. Davidson Legal holds the funds as stakeholder. This is money retained upon the sale of the business of a company called Metropolis Property Management Ltd. It is not the money of the companies. There is a dispute in relation to the money which has prevented it from being disbursed. There is nothing before me from which an assessment can be made as to what portion, if any, of the amount held by Davidson Legal will ultimately be released and available for payment to the Commissioner, or when that might occur.
[21] The Papanui Road and Grace Street properties are owned by the trustees of the Primrose Hill Trust. It is said there is substantial equity in the properties. The trustees have provided an undertaking to market and sell them, with a settlement date no later than six months from 22 December 2022, and pay $576,029 to the Commissioner towards the outstanding tax liability of the companies.
[22] There is presently no buyer for either property. The Papanui Road property has already been marketed and put up for auction but no sale was achieved. I understand the reserve was not reached indicating that the price expectations may not be realistic. While there is said to be equity in these properties, the evidence does not satisfy me that is necessarily the case. There are no registered valuations of the properties and while I have been provided with balances owed to the Bank of New Zealand under two Housing Terms Loans in respect of the properties, I do not know what other amounts are secured under the Bank’s mortgages. This is important as the undertaking that the trustees have given is not personal to them and limited to the value of the assets of the Primrose Hill Trust.
[23] As far as the wholesale stock of Metropolis Design Ltd is concerned, while the company is said to be making arrangements to sell the stock, it has already had months to do so and there is no suggestion that the proceeds of sale will be sufficient to clear the companies’ debts.
[24] Had the position advanced for the companies been that if the Commissioner was not paid by 23 December 2022 orders for liquidation were inevitable, there would have been more force to the argument that a further and final adjournment should be granted, but that is not what is being proposed. Ms Connors foreshadows the possibility that sales of the Papanui Road and Grace Street properties might not be achieved until March 2023 and I note, also, the trustees’ undertaking anticipates the possibility that settlement of any sales could be up to six months from the date an agreement for sale and purchase agreement is entered into. If an adjournment was granted to 23 December as has been requested, it is inevitable that further (and possibly several) adjournments will be sought.
The companies cannot pay their debts
[25] While Ms Connors says the companies are not insolvent, she provides no explanation for that assertion. On a cash flow basis her evidence is plainly not correct. The companies have not been paying their tax liabilities for some time and there is a presumption they are unable to pay their debts given their failure to comply with the Commissioner's statutory demands. I note also from its financial accounts, that Metropolis Design Ltd has been trading at a loss in both the 2021 and 2022 years. In the present context of applications to liquidate companies under s 241(4)(a) of the Companies Act, “it is the cash flow test that counts”.2
Public Policy
[26] There are several public policy considerations that are relevant. First, liquidation applications should be determined expeditiously, and it is undesirable in circumstances where it is clear companies cannot pay their debts that the Court grant them adjournments enabling them to continue to trade for extended periods. That creates obvious risk to the party applying to liquidate, other creditors, and parties who may subsequently deal with the company. Second, it is in the public interest that there should be a proper level of scrutiny in relation to insolvent companies conducted by a liquidator as an officer of the Court. Third, the companies have a history of failing to comply with their tax obligations. I accept Ms McGillivray’s submission that the Court should, in a case like this, act in a manner that maintains the integrity of the tax system.
[27] Balancing these factors, and in the exercise of my discretion, I am not satisfied it is appropriate to grant any further adjournments. There being no defences filed to the applications, and no other matters raised for opposing them, orders for liquidation shall be made.
2 Brookers Insolvency Law & Practice, above n 1, at [CA241.03(1)] citing Re Tweeds Garages Ltd
[1962] Ch 406 (Ch).
Result
[28]In respect of Metropolis Design Ltd:
(a)there shall be an order for liquidation and Elizabeth Helen Keene and Luke Norman are appointed liquidators;
(b)the liquidators’ remuneration is approved in accordance with the consent of Elizabeth Helen Keene and Luke Norman dated 8 September 2022, subject to s 284 of the Companies Act 1993;
(c)the liquidators are allowed to exercise their powers individually pursuant to s 242 of the Companies Act 1993;
(d)there shall be costs to the Commissioner, in the sum of $930.75 plus disbursements as fixed by the Registrar; and
(e)the order is timed at 2.30 pm on 2 November 2022.
[29]In respect of Propellor Property Services Ltd:
(a)there shall be an order for liquidation and Elizabeth Helen Keene and Luke Norman are appointed liquidators;
(b)the liquidators’ remuneration is approved in accordance with the consent of Elizabeth Helen Keene and Luke Norman dated 8 September 2022, subject to s 284 of the Companies Act 1993;
(c)the liquidators are allowed to exercise their powers individually pursuant to s 242 of the Companies Act 1993;
(d)there shall be costs to the Commissioner in the sum of $766.50 plus disbursements as fixed by the Registrar; and
(e)the order is timed at 2.30 pm on 2 November 2022.
O G Paulsen Associate Judge
Solicitors:
The Commissioner of Inland Revenue, Legal Services, Christchurch Steindle Williams Legal, Auckland
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