Commissioner of Inland Revenue v Sargam Foods Ltd
[2013] NZHC 1121
•16 May 2013
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2012-404-6512 [2013] NZHC 1121
UNDER The Companies Act 1993
BETWEEN THE COMMISSIONER OF INLAND REVENUE
Plaintiff
ANDSARGAM FOODS LTD Defendant
Hearing: 9 May 2013
Appearances: C Van der Merwe for Plaintiff
Mr R Connell for Defendant
Judgment: 16 May 2013
JUDGMENT OF ASSOCIATE JUDGE DOOGUE
This judgment was delivered by me on
16.05.13 at 4 pm, pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
Counsel:
Inland Revenue Department, Manukau, Auckland – [email protected]
Connell & Connell, Auckland - Mr R Connell - [email protected]
THE COMMISSIONER OF INLAND REVENUE V SARGAM FOODS LTD HC AK CIV-2012-404-6512 [16
May 2013]
Background chronology
[1] The defendant company was in the business of manufacturing Indian foodstuffs. It operated out of a factory in West Auckland. In November 2008 a fire destroyed the premises and the manufacturing equipment of the defendant. The company has not resumed operations. Following the fire it made a claim on its insurer for material damage and business interruption losses. The insurance company declined the claim. Apparently, it did so on the grounds that there had been a material misstatement in the loss of profits claimed which the defendant submitted to it. Subsequently it added a further ground as a reason for declining cover which was that the claim was a result of self-induced arson.
[2] In 2009 the company issued proceedings against the insurance company in this Court.[1]
[1] CIV 2009-404-3246.
[3] A prosecution was brought against Mr V K Naiker, a director of the company, alleging that he had been criminally involved in the fire which destroyed the premises.
[4] Because of the pending criminal proceedings, a decision was apparently made that the civil proceeding ought to be adjourned until after criminal proceedings which had been brought against Mr V K Naiker has been dealt with. I am told that the criminal proceeding will not be dealt with until November of this year.
[5] In the meantime the plaintiff served a statutory demand on the defendant on 3
September 2012 which was based on claims for unpaid PAYE and GST. Subsequently it issued the present proceeding in December 2012 seeking an order for winding up of the defendant company. The company is stated to be indebted to the Commissioner in the sum of $95,232.59.
[6] The plaintiff pleads that the defendant company is presumed to be insolvent and unable to pay its debts and it is just and equitable that it be wound up. The
allegation concerning insolvency is based upon the unsatisfied statutory demand which was served on 3 September 2012. There is no dispute that the statutory demand was served or that it expired without being satisfied.
[7] The defendant company does not dispute the debt with Mr Naiker deposing as follows:
In the event that [the defendant] is successful against NZI there will be more than sufficient funds to repay the Inland Revenue in full the amount of its claim which I do not dispute.
[8] The defendant has filed a notice of application to restrain advertising and for a stay of proceedings pursuant to rr 31.9 and 31.11 of the High Court Rules. The grounds upon which the application is made are:
i)The granting of an order for liquidation would result in the claim of the defendant not being pursued by the liquidator;
ii) The proceedings are an abuse of the Court process;
iii)The defendant is not trading and no additional losses are being incurred by the defendant;
iv) If the defendant is successful the plaintiff will be paid in full;
v)That the proceedings are intended to be unfair or put pressure on the Company or its directors and shareholders;
vi)That it would be a miscarriage of justice if the company was put into liquidation and its legitimate claim for indemnity from its insurer was lost.
[9] The application is opposed essentially on the grounds that there is no dispute that the amount of tax is owing, that the defendant company has terminated business operations and is dormant for all practical purposes, and the following additional grounds:
6. The applicant has not provided any evidence that it is solvent;
7.The applicant company is failing to pass on trust monies (PAYE) to the Crown;
8.Advertising the liquidation proceedings will not harm the business ... [or] the recovery possibilities of any outstanding claims due to the company.
9. The process of liquidation may actually see recovery of this debt.
[10] I notice that reference is made to the question of the company being solvent. The application which was brought did not actually claim that the company was solvent. In any case, in my view the company is plainly not solvent. There are contentions advanced in an affidavit filed by the company accountant that a profitable part of the business has been hived off to an associated company and that part of the business is still operating profitably. That evidence does not address the question of the defendant’s solvency. Affidavit evidence also asserts that the company was formerly solvent. The question is whether it is presently solvent and given the presumption of insolvency that arises pursuant to s 287 of the Companies Act when a statutory demand is not complied with, it is incumbent upon the company to prove solvency. For the reasons I have just set out, it has failed to do so and nothing further needs to be said on the subject of insolvency.
[11] Evidence has been provided that the company has expended great efforts in preparing its claim against the insurance company and of the concerns of those associated with the company that if a liquidation order is made it will not be possible to proceed with the claim. It is said that the damages claim is at least $1,000,000 and great hardship would be caused if the company was unable to prosecute its claim to a successful conclusion. It is further asserted for the company that if the damages claim is successfully completed there will be adequate funds to pay creditors including the plaintiff.
Evaluation
[12] Essentially, the applicant defendant seeks an order to restrain the plaintiff from exercising a statutory entitlement to apply for the liquidation of the defendant. There is no dispute that the plaintiff has the necessary status of creditor to entitle it to seek the liquidation order pursuant to s 341 of the Companies Act 1993. Nor is it
disputed that the company was served with a statutory demand which expired without being met. It also follows that the company cannot dispute that it is presumptively insolvent.
[13] The points of substance which the application raises are these:
a) the question of whether the making of the liquidation order would have the effect of ending any prospect of the company recovering against its insurer and, if that is the fact, whether that fact should influence the Court to grant the stay of proceedings;
b)sub-issues arising from point “a)” whether the Court should enquire into the question of whether the IRD’s own interests would be better served by stopping the liquidation process so as to allow a claim against the insurance company to be brought to what is hopefully a successful conclusion from the perspective of the defendant;
c) whether the liquidation proceedings are intended to place unfair pressure on the company and those associated with it.
The insurance claim
[14] The plaintiff submits that if the liquidator were to be appointed, there would be a high probability that if appropriate funding could be provided from outside sources, the claim against the insurance company would continue. I accept that submission. If the claim is to progress, funds will have to be introduced from outside sources in any event. The applicant does not say that there are other good reasons for keeping the company on foot. It is not trading. It would appear that its plant and equipment were lost in the fire and so it is not a case where a liquidation would lead to the dispersal of the means of production which the company would require if it were to resume manufacturing operations. My conclusion is that liquidation would not cause any excessive or unusual hardship to the company because there is no doubt that with the making of the appropriate arrangements the insurance claim would be able to be brought to a conclusion. I respectfully agree
with the remarks of Lang J in the judgment in Coljon Limited v Riccarton Construction Limited.[2] In that case the defendant company stated that a liquidator should not be appointed as there was concurrent litigation with a third party, the Commissioner of Inland Revenue, which if successful would pay all the outstanding debts of the defendant company. At paragraph [27] of the judgment Lang J stated:
[2] Coljon Limited v Riccarton Construction Limited HC Christchurch CIV-2010-409-848, 9 November
2010.
Counsel for Coljon also points out that when it struck out Riccarton
Construction’s appeal the Court of Appeal had this to say:
“Secondly, Riccarton is trying to preserve its position in relation to collateral litigation. There may occasionally be a good and sufficient reason for such a stance. But there is no such reason here. The liquidator could still carry on that litigation, if he considered it meritorious, and worth powder and shot. ”
(emphasis added)
[15] Then, at paragraph [28]:
I acknowledge the desire of Riccarton Construction to continue in existence to see the proceeding with the Commissioner of Inland Revenue through to a positive conclusion. In the end, however, and as the Court of Appeal observed, that is a matter that can be undertaken by the liquidator. ... For this reason I do not consider that the continuation of the appeal is a factor that ought to justify the withholding of an order placing the company in liquidation.
[16] The points that are made concerning the effect of the appointment of a liquidator are not actually as favourable to the position of the defendant as Mr Connell’s submissions would have it. Whether litigation is brought by a liquidator or by the directors/shareholders of the company, funding has to be found to pay for legal costs, the fees of expert witnesses and court filing fees etc. It is wrong to present the position on the basis that because the liquidator will not proceed with the case unless proper funding is secured, that that has a decisive negative impact upon the chances that the civil case will be brought to trial. Mr Naiker’s family is going to have to find funding, in any event.
[17] In fact, the appointment of a liquidator would ensure that the decision to proceed with the litigation would be arrived at on a detached and objective basis
having regard to the economic realities of the situation. It would in fact reduce the risk that existing creditors would find that any assets are dissipated upon unpromising litigation and the future liabilities that that will bring in its train, instead of meeting their claims. That does not mean that based upon the evidence presently available it would be fair or just to dismiss the pending civil claim as not having prospects of success. The issue is rather that the balancing of the interests between the various parties is likely to be achieved in a more objective way when a party who does not have anything at stake personally in the decision is making it. That is the benefit that appointment of a liquidator would bring.
Unfair pressure
[18] I deal next with the point concerning the allegation that the liquidation proceedings are intended to place unfair pressure on the defendant.
[19] It is no doubt the view of those associated with the defendant company that it would be unfair if their company were not to be able to continue with its claim because of the liquidation proceedings. I do not discern any other ground for finding unfairness. Having regard to my conclusion that the claim against the insurance company would be able to continue if a liquidator were to be appointed, the point about unfairness cannot be sustained. When that factor is removed from consideration, what is left is a case where an undisputed debt has not been paid and the company is presumptively insolvent. There can be nothing unfair about liquidation proceedings which arise from such a set of facts.
[20] I deal with a subsidiary point at this stage in the judgment, which has to do with the make-up of the debt which is owed to the Commissioner. Mr Connell emphasised that a substantial component of the debt is interest upon interest. That is true as far as it goes but it is also the case, as Mr Van der Merwe pointed out, that the core tax is approximately $50,000 which is not a trivial sum. Further, that sum comprises, in part, not just money that was owed by way of a debt, but money which the company held on trust pursuant to the PAYE scheme.
Would the plaintiff be better off not seeking liquidation and allowing the insurance claim to proceed?
[21] The next point concerns the submission that the plaintiff would be better off if it stayed its hand to permit the insurance claim to proceed. I do not accept that it is the Court’s position to question the decisions which the IRD makes in respect of cases of this kind. There may be exceptional cases where the Court would intervene. If there were some evidence of vindictiveness on the part of certain officials in the Inland Revenue, to take an example, the Court might well consider that the proceedings were being conducted for an improper or collateral purpose. There is nothing to indicate that that state of affairs exists here. Quite apart from anything else, the plaintiff may have formed a judgement that if the liquidation is to proceed, there is a possibility that the claim will proceed in any case which would in turn open the way to the plaintiff’s debt being repaid. I do not mention this to justify the position of the plaintiff but just to point out to the defendant that relevant facts might not all point in the direction which it believes they do. In addition to the matter I just mentioned, it is well-known that creditors may be actuated by different considerations in seeking liquidation. These may include the fact that appointment of a liquidator may lead to necessary enquiries into the affairs of the company being carried out. My conclusion is that there is no substance to the ground put forward for the Court ordering a stay because of unfair pressure.
Application for stay
[22] The Court is required to approach the matter in the same way that it would approach an application for interim injunction.[3] That would seem to require the Court to at least have regard to issues such as whether irreparable harm will be done if the order is not granted.
[3] High Court Rules, r 31.11(2).
[23] Even if the question of the fees of the professional litigation advisors which I mentioned in paragraph [16] is put to one side, and the balancing exercise is carried out without reference to them, the result must be that the application for a restraining
order is dismissed. The principle which is generally regarded as applicable is that
which Wallace J set out in Nemisis Holdings Limited v North Harbour Industrial
Holdings Limited:[4]
It is a serious matter to stay winding-up proceedings, so the decision to do so is never made lightly. The onus is on the applicant and it is normally necessary to demonstrate “something more” than the balance of convenience considerations which are usually considered on an application for interim injunction. If the defendant company has had an opportunity to file appropriate affidavits, such defendant is required to establish a strong prima facie case of the existence of a genuine dispute on substantial grounds, or show that there are clear and persuasive grounds for a stay.
[4] Nemisis Holdings Limited v North Harbour Industrial Holdings Limited (1989) 1 PRNZ 379 (HC) at
385.
[24] The harm that is suggested that will result in this case is the loss of any practical prospect of continuing with the compensation claim against the insurance company. I do not consider that that it follows that if liquidators are appointed that the insurance claim will not proceed.
Conclusion
[25] For the foregoing reasons, the application for stay is declined.
Stay of advertising
[26] The applicant did not submit that even if a stay of the winding up proceedings was declined, nonetheless I should go on to consider whether advertising ought to be restrained. I will deal with the issue briefly, though.
[27] Advertising of the application to liquidate in this company is unlikely to have any practical effect on the key issue which is whether the insurance claim will be
able to continue. In order for that to be done, there will have to be agreements with funders from outside the company. In the light of those considerations, there is no reason why the usual course of requiring advertising should not be followed in this
case.
Orders
[28] The application is dismissed. The parties should confer on the question of costs and if they are unable to agree they are to file memoranda not exceeding four
pages on each side within 21 days of the date of this judgment.
J.P. Doogue
Associate Judge
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