Commissioner of Inland Revenue v Wright
[2013] NZHC 476
•1 March 2013
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2012-404-5449 [2013] NZHC 476
BETWEEN COMMISSIONER OF INLAND REVENUE
Plaintiff
ANDHADLEY JOHN WRIGHT Defendant
Hearing: 1 March 2013
Appearances: A H J Commons for the Defendant, in support
W P Cathcart and F F Nizam for the Plaintiff, to oppose
Judgment: 1 March 2013
ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL
Solicitors:
Hornabrook Macdonald (Mark Hornabrook), Auckland, for Defendant
Email: [email protected]
Meredith Connell, P O Box 2213 Auckland 1140, for Commissioner
Email: [email protected]
Copy for:
Andrew H J Commons, P O Box 1804 Auckland 1140 for Defendant
Email: [email protected]
COMMISSIONER OF INLAND REVENUE V WRIGHT HC AK CIV-2012-404-5449 [1 March 2013]
[1] In this proceeding the Commissioner of Inland Revenue sues Mr Hadley
Wright under the phoenix company provisions of the Companies Act 1993 for
$1,170,383.78, a sum for which Mr Wright is allegedly liable as a relevant debt owed by a phoenix company called Wire By Design Ltd.
[2] Among other things in his statement of defence, Mr Wright says that the Crown owes Wire By Design Ltd more than $1,170,383.78. That indebtedness is said to be for compensation payable under the Public Works Act 1981. Wire By Design Ltd has issued a proceeding in this court.1 That proceeding is part of its pursuit of compensation under the Public Works Act. It has also started a claim before the Land Valuation Tribunal, which is on hold awaiting the outcome of its
High Court proceeding.
[3] Mr Wright applies for a stay of this proceeding under r 10.12, until the claim by Wire By Design Ltd has been heard or, alternatively, for leave to join the Attorney-General on behalf of Land Information New Zealand. The Commissioner opposes.
Background
[4] For the background I draw largely on the parties’ pleadings. There are large areas where the facts are not in dispute.
[5] Mr Wright was a director of Faulkner Collins Ltd. That company carried on a manufacturing business at premises at 142 Stoddard Road, Mt Roskill, Auckland. Faulkner Collins Ltd had been incorporated back in 1931. It leased the premises at
142 Stoddard Road. Mr Wright was sole director of Faulkner Collins Ltd in the years up to November 2010.
[6] On 22 November 2010, Faulkner Collins Ltd sold its business and assets to
Wire By Design Ltd for a purchase price of $3,585,503.95. Among the assets
1 Wire By Design Ltd (In Rec and In Liq) v Attorney-General (Minister of Land Information)
HC Auckland CIV-2012-404-1491.
transferred were the goodwill of the business, the benefit and exclusive use of the name Faulkner Collins, the assignment of Faulkner Collins’ interest as lessee in the premises at 142 Stoddard Road, and the benefit of all legal, statutory and other rights from the relocation claimed against the Crown under the Public Works Act 1981 in respect of the premises at 142 Stoddard Road.
[7] As to claims under the Public Works Act, the New Zealand Transport Authority wanted to assume control of the land at 142 Stoddard Road because it was required for the extension of State Highway 20 to Waterview. The Crown had already obtained the freehold interest in the property. I am advised that negotiations as to the Crown’s taking the land and paying compensation had been under way between the Crown and Faulkner Collins Ltd for some years before 2010. While the construction of the motorway was undertaken by the New Zealand Transport Agency, the part of the Crown responsible for taking land under the Public Works Act is Land Information New Zealand.
[8] Mr Wright signed the agreement of 22 November 2010 on behalf of both Faulkner Collins Ltd and Wire By Design Ltd. On the next day, 23 November 2010, Faulkner Collins Ltd went into receivership. On 24 November 2010 the company went into liquidation. The Commissioner says that when Faulkner Collins Ltd went into liquidation on 24 November 2010 it owed the Commissioner taxes of
$2,099,637.53. The statement of claim contains a schedule of the unpaid taxes. It is notable that the amount owing for PAYE is in excess of $1.2m and the amount owed for goods and service tax is approximately $650,000.
[9] The Commissioner’s case under s 386C of the Companies Act is that after acquiring the business of Faulkner Collins Ltd, Wire By Design Ltd continued that business as if there had been little or no change in the underlying business or management. The Commissioner says that Wire By Design Ltd traded under the name “Faulkner Collins”, manufactured and marketed the same products, serviced the same clients and promoted itself relying on the history of Faulkner Collins Ltd. It used the same suppliers and took on many of the Faulkner Collins staff. It used a logo similar to that used by Faulkner Collins Ltd. The Commissioner says that Wire
By Design Ltd fell into arrears in payment of taxes. The Commissioner applied to the court for Wire By Design Ltd to be put into liquidation.
[10] Associate Judge Sargisson made a liquidation order on 9 May 2012. At the date that the company was ordered to be put into liquidation, Wire By Design Ltd owed the Commissioner taxes totalling $1,170,383.78. Again, amongst those taxes it is notable that PAYE amounted to some $777,000 and goods and services tax amounted to $280,000.
[11] The Commissioner sues Mr Wright under s 386C of the Companies Act 1993:
386C Liability for debts of phoenix company
(1) A person who contravenes section 386A(1)(a) or (b) is personally liable for all of the relevant debts of the phoenix company.
(2) A person (A) who is involved in the management of a phoenix company is personally liable for all of the relevant debts of the company if—
(a) in the management of the company A acts or is willing to act on instructions given by another person (B); and
(b) at that time A knows that B is contravening section
386A(1)(a) or (b) in relation to the company. (3) In this section, relevant debts—
(a) in subsection (1), means the debts and liabilities incurred by the phoenix company during the period when the person liable was involved in the management of the company and the phoenix company was known by a pre-liquidation name of the failed company or a similar name:
(b) in subsection (2), means the debts and liabilities incurred by the phoenix company during the period when A was acting or was willing to act on the instructions of B and the phoenix company was known by a pre-liquidation name of the failed company or a similar name.
(4) Liability under this section is joint and several.
(5) For the purposes of this section, a person who, as a person involved in the management of a company, has at any time acted on instructions given by a person who he or she knew at the time to be in contravention of section 386A is presumed, unless the contrary is shown, to have been willing at any later time to act on any instructions given by that person.
[12] The Commissioner says that Faulkner Collins Ltd is a failed company within the definition under s 386B(1).2 Faulkner Collins Ltd was unable to pay its debts on liquidation. Mr Wright was a director of that failed company in the 12 months before the start of the liquidation. He was also a director and was concerned with or took part in the formation, promotion and management of Wire By Design Ltd within five years of Faulkner Collins Ltd going into liquidation. Accordingly, the
Commissioner’s case is that Wire By Design Ltd is a phoenix company of Faulkner
Collins Ltd, within the definition under s 386B(1).
[13] Mr Wright did not have the court’s permission to be a director involved in the management of Wire By Design Ltd. The taxes incurred by Wire By Design Ltd are relevant debts incurred while Mr Wright was a director and involved in the management of Wire By Design Ltd under s 386C(3). The Commissioner accordingly says that the claim comes squarely within s 386C and Mr Wright is personally liable for the unpaid taxes incurred during his management of the company.
[14] Now for the claim by Wire By Design Ltd. Before the company was put into liquidation, receivers were appointed. The creditor appointing the receivers was a company associated with Mr Wright. It held a general security agreement. The receivers have caused Wire By Design Ltd to take a proceeding against the Crown in respect of its claim for compensation under the Public Works Act. The proceeding was filed in March 2012. It has been given a fixture for 10 days in November 2013.3
In that proceeding Wire By Design Ltd says that at some time before 22 November
2010 the Crown had acquired the freehold interest in the land in Stoddard Road under the Public Works Act. Faulkner Collins Ltd and the Crown had tried to negotiate a compensation agreement but had not reached agreement. In those negotiations with Faulkner Collins Ltd the Crown had identified replacement premises in Onehunga as suitable premises to which the business of Faulkner Collins
Ltd could be located following the Crown acquiring the Stoddard Road property.
2 See definition of “failed company” in Companies Act 1993, s 386B(1).
3 Wire By Design Ltd (In Rec and In Liq) v Attorney-General (Minister of Land Information)
HC Auckland CIV-2012-404-1491.
[15] On 5 November 2010 the Crown gave notice to Faulkner Collins Ltd of its intention to terminate the lease and re-enter the land for non-payment of rent, but on
16 November 2010 the Crown advised Faulkner Collins Ltd that the Crown would not terminate the lease by re-entry but would acquire the land compulsorily under the Public Works Act. The Crown did that by a proclamation published in the Gazette. Under that proclamation the Crown took the leasehold interest in the land at Stoddard Road to vest in the Crown from 16 December 2010.
[16] On 1 December 2010 Wire By Design Ltd signed a compensation agreement which the Crown had tendered to it for signing. The Crown, in turn, signed that agreement on 20 December 2010. Wire By Design Ltd says that there were vitiating factors that affect its entry into that contract. It alleges, variously, undue influence, unconscionable bargain and duress. Its statement of claim also seeks rectification of the compensation agreement. It also alleges a failure by the Crown to take proper steps in regard to an electrical installation installed at the replacement premises.
[17] I have taken that from the copy of the statement of claim included as an attachment to Mr Wright’s statement of defence in this proceeding. In submissions today, Mr Commons also outlined further heads of claim which Wire By Design Ltd proposes to make against the Crown. These grounds are based on arguments as to implied terms, misrepresentation and breach of the Fair Trading Act 1986. Mr Commons submitted that if Wire By Design Ltd succeeded on those parts of its proposed claim against the Crown, that would result in immediate financial relief to Wire By Design Ltd. On the other hand, as it is presently pleaded, the proceeding will not result in an immediate award of compensation to Wire By Design Ltd. It will simply mean that the claim in the Land Valuation Tribunal would later go to a hearing, with compensation to be assessed under the compensation provisions of the Public Works Act instead of in accordance with the provisions of the compensation agreement. Wire By Design Ltd does not want to be held to the compensation agreement because it says that parts of that agreement restrict its right to seek full compensation under the Public Works Act. Today, Mr Commons has referred to certain documentary evidence which is said to support the claim by Wire By Design Ltd.
[18] By way of balance, Mr Gasson, an engineer with the New Zealand Transport Agency, has provided an affidavit setting out the Crown’s side of the story. He shows that the Crown strongly disputes the claim made by Wire By Design Ltd. He goes so far as to say that, far from Wire By Design Ltd not having been compensated in full, the Crown itself is a creditor of Wire By Design Ltd because of betterment and contamination obligations.
[19] Correspondingly, Mr Wright is equally adamant in rejecting the contentions of the Crown. In particular, he attributes the downfall of Wire By Design Ltd to the inaction or delay by the Crown in transferring its business from the Stoddard Road premises to the replacement premises in Onehunga, and says that brought about the downfall of Wire By Design Ltd.
[20] Paragraph 21 of the Commissioner’s statement of claim pleads the indebtedness of Wire By Design Ltd to the Commissioner for taxes. Mr Wright’s statement of defence contains the following pleading:
21. In relation to paragraph 21:
21.1At the time of being placed into liquidation, the Crown owed Wire By Design Limited a sum in excess of $1,170,383.78, such sum including those items of tax pleaded in paragraph 21 of the plaintiff’s claim (Wire By Design’s claim).
21.2Wire By Design’s claim is being pursued in the High Court of New Zealand, Auckland Registry: CIV-2012-404-1491 – Wire By Design Limited (In Receivership & In Liquidation) v The Attorney-General on Behalf of the Minister of Land Information New Zealand. A copy of Wire By Design’s claim in CIV-2012-404-1491 is annexed and marked Schedule 1.
21.3In addition to Wire By Design’s claim, Wire By Design has an outstanding GST credit in the sum of $282,160.77 as per its good and services tax return dated 17 March 2011, full particulars of which have already been provided to the Inland Revenue Department.
21.4 As a result of matters pleaded in subparagraphs 21.1 21.3 Wire By
Design Limited is not indebted to the plaintiff.
21.5. Except as expressly admitted, he denies paragraph 21.
[21] Given that Mr Wright is running a defence that Wire By Design Ltd is not indebted to the Crown by reason of its compensation claim, Mr Wright seeks an
order staying this proceeding until the proceeding under CIV-2012-404-1491 has been resolved. He has applied under r 10.12 of the High Court Rules:
10.12 When order may be made
The court may order that 2 or more proceedings be consolidated on terms it thinks just, or may order them to be tried at the same time or one immediately after another, or may order any of them to be stayed until after the determination of any other of them, if the court is satisfied—
(a) that some common question of law or fact arises in both or all of them; or
(b) that the rights to relief claimed therein are in respect of or arise out of—
(i) the same event; or
(ii) the same transaction; or
(iii) the same event and the same transaction; or
(iv) the same series of events; or
(v) the same series of transactions; or
(vi) the same series of events and the same series of transactions;
or
(c) that for some other reason it is desirable to make an order under this rule.
[22] The proposal for the Attorney-General to be joined as a third party is advanced only as an alternative, in case the stay application fails.
[23] The Commissioner opposes. She says:
(a) The claim by Wire By Design Ltd is irrelevant to Mr Wright’s liability
to the Commissioner in this proceeding.
(b)There are no common questions of fact and there is no common question of law.
(c) The rights of relief stem from different events.
(d)If the claim by Wire By Design Ltd did succeed in the other proceeding either in whole or in part, that would not necessarily result in the Commissioner recovering the outstanding taxes owing in this proceeding.
(e) There is no risk of duplication of proceedings or of inconsistent findings if a stay of this proceeding is not granted.
(f) A stay of this proceeding until the other proceeding is determined would lead to unnecessary delay.
(g)The circumstances relating to the fair and just disposal of this proceeding do not favour a stay.
[24] The Commissioner advances full submissions in support of those grounds.
Is there a common thread between the two proceedings?
[25] In cases under r 10.12, there is invariably some degree of linkage between one proceeding and another. In Lawrence Riverside Ltd v Colliers International New Zealand Ltd,4 Associate Judge Gendall used the term “common thread”.5 To see whether there is any basis for the relief sought by Mr Wright, it is helpful to enquire whether there is a “common thread” between the Commissioner’s claim under s 386C and the proceeding by Wire By Design Ltd against the Crown.
[26] For this case, in establishing whether there is a common thread, it is helpful to have regard to three matters:
(a) Secondary liability under s 386C;
(b) The nature of the Crown’s liability; and
(c) Insolvency set-off under s 310 of the Companies Act.
4 Lawrence Riverside Ltd v Colliers International New Zealand Ltd HC Auckland
CIV-2011-404-1486, 30 June 2011, Associate Judge Gendall.
5 At [18].
[27] It will then be necessary to see how these three matters are related in this proceeding and whether they then establish a common thread between the two proceedings.
Secondary liability under s 386C
[28] When a person faces a claim under s 386C, the court can find them personally liable for all of the relevant debts of the defendant’s company. The liable person’s debt can be co-extensive with the indebtedness of the phoenix company. A person who is sued under s 386C is not liable for debts beyond those incurred by the phoenix company and which are relevant under the section. That means that a person facing a claim under s 386C(1) or (2) is in a position of secondary liability. The company is the primary debtor but the creditor is also entitled to look to the person sued under s 386C as also being liable for debts incurred by the company.
[29] Secondary liability occurs under guarantees – that is, the guarantor carries liability for a debt incurred by the primary debtor – but secondary liability is not limited to guarantees. For example, a tenant under a leasehold interest may assign the tenancy and the assignee may fail to pay rent. The assignee would be the primary debtor for the non-payment of the rent but the landlord may also be entitled to look to the assignor for payment as well. The assignor has secondary liability for non-payment of the rent even though the assignee is the primary debtor.
[30] A person who has secondary liability cannot normally resist the claims of the creditor by asserting that the creditor ought to look first to the primary debtor. Usually the reason why the creditor looks to the person with secondary liability is because the primary debtor is not worth pursuing. A person with secondary liability can require the creditor to bring into account any payments received from the primary debtor. More importantly for this case, it is also open to the person with secondary liability to show that the primary debtor is not in fact indebted to the creditor or that the primary debtor’s liability to the creditor is not for as much as the creditor has maintained. That means that the person with secondary liability is entitled to raise any defence that the primary debtor could have raised if the creditor had sued the primary debtor. The defences that a primary debtor may be able to raise
in opposition to a claim by a creditor include matters of set-off, if those matters of set-off could be raised in defence of a claim by the creditor against the primary debtor. If a creditor’s claim would fail or be reduced because the primary debtor can establish a set-off, the person with secondary liability can also resist the claim on the same grounds. That is because the liability of the person with secondary liability is not more extensive than that of the primary debtor.
[31] With s 386C(1) and (2), Parliament imposed secondary liability for the relevant debts of a phoenix company, and left it open to the person sued to show that the company was not indebted to the creditor. With secondary liability the person sued is able to invoke any set-off available to the phoenix company.
Crown liability
[32] Section 12(1) of the Crown Proceedings Act 1950 provides that in civil proceedings brought by or against the Crown, the Crown has the same rights and liabilities as proceedings between subject and subject. That is, of course, subject to provisions within the Crown Proceedings Act and also other legislation. Relevantly for this case s 9 of the Companies Act 1993 provides that that Act binds the Crown.
[33] Accordingly, when the Crown sues under s 386C of the Companies Act the person sued is entitled to raise against the Crown all defences which the defendant could raise against any other creditor. A defence of set-off is available against the Crown in the same way as a defence of set-off is available against any other creditor subject, of course, to any other legislation providing otherwise.
[34] The Crown is one and indivisible. Authority for that proposition is found in Town Investments Ltd v Department of the Environment.6 That has, in turn, been followed in New Zealand in7 Ministry of Fisheries v Vu8 and Hall v Attorney-
General.9 Accordingly, subject to any legislation providing otherwise, a claim
6 Town Investments Ltd v Department of the Environment [1978] AC 359 (HL) at 381 per Lord
Diplock, and at 400, per Lord Simon of Glaisdale.
7 Commissioner of Inland Revenue v Medical Council of New Zealand [1997] 2 NZLR 297 (CA)
at 327 per Keith J.
8 Ministry of Fisheries v Vu [2010] NZCA 469; [2011] NZAR 114 at [38].
9 Hall v Attorney-General [2012] NZHC 3615 at [121], per Duffy J.
brought by one government department may be met with a claim that the defendant has claimed against another government department that can be raised by way of set- off. The fact that there are claims in respect of different government departments does not prevent a set-off claim because government departments are simply arms of the one body, the Crown.
[35] Having said that, it is necessary immediately to emphasise the qualification that the right to raise a set-off in respect of claims by different government departments is subject to legislative restrictions. The most relevant one is r 5.61 of the High Court Rules. Rule 5.61(1) is a rule of procedure. It is a “pay now argue later” provision. If the Crown brings proceedings for the recovery of taxes, duties or penalties, any defence that a defendant might want to raise by way of set-off and any counterclaim that the defendant might want to bring must instead be brought by way of an independent proceeding. Similarly, under r 5.61(3) claims in respect of different government departments cannot be brought except by leave of the court. I emphasise that r 5.61 is a rule of procedure and does not affect the substantive rights of the parties. It must therefore yield to any provision which does affect substantive rights of the parties.
Insolvency set-off under s 310 of the Companies Act
[36] Section 310 is the insolvency set-off provision in company liquidations. Subsection (1) says:
310 Mutual credit and set-off
(1) Where there have been mutual credits, mutual debts, or other mutual dealings between a company and a person who seeks or, but for the operation of this section, would seek to have a claim admitted in the liquidation of the company,—
(a) An account must be taken of what is due from the one party to the other in respect of those credits, debts, or dealings; and
(b) An amount due from one party must be set off against an amount due from the other party; and
(c) Only the balance of the account may be claimed in the liquidation, or is payable to the company, as the case may be.
[37] The requirements for set-off under s 310 are generally these:
(a) The claims of a creditor against the insolvent company must be provable in the liquidation.
(b)Each of the claims must have been incurred before the commencement of the liquidation. However, it is not necessary to show that those claims have fallen due or have been quantified before the liquidator is appointed.
(c) Each of the claims must be reducible to a money claim; only then can an account be taken.
(d)There must be mutuality between the parties so that in relation to the claim that is sought to be set-off there are only two parties (both debtor and creditor of the other) and that each claimant is acting in its own right, that is they are both beneficial owners of the debt or other claim and are liable personally.
(e) None of the claims on which the set-off is sought to be exercised has been incurred during the prescribed period at a time when the creditor had reason to suspect that the company was unable to pay its debts as they fell due.10
[38] It is also relevant to take account of the principles of insolvency set-off described by Lord Hoffman in Stein v Blake.11 Insolvency set-off operates automatically as at the date of liquidation. It is self-executing and does not require the liquidator or the creditor to exercise it. Set-off is deemed to extinguish each of the parties’ cross-claims on the date the liquidation commences. Whereas legal set- off under the Statutes of Set-Off addresses questions of procedure and cash-flow,
insolvency set-off affects the substantive rights of the parties by enabling the
bankrupt’s creditor to use his indebtedness to the bankrupt as a form of security.
10 Lindsay Hampton and Others (eds) Insolvency Law and Practice (online looseleaf ed, Brookers)
at [310.03].
11 Stein v Blake [1996] 1 AC 243 (HL).
On that point it has been common to cite the dictum of Parke B in Forster v Wilson,12 that the purpose of insolvency set-off is “to do substantial justice between the parties”. The effect of insolvency set-off is that whereas before liquidation there were debts going either way between the parties, upon liquidation a net balance is struck so that the two debts are reduced to one.
[39] Disputed questions of set-off may arise in the course of a liquidation. They may arise under the court’s supervision of the liquidation, as in applications under s 284 to confirm, reverse or modify decisions of the liquidation, or when the liquidator seeks directions from the court. They may also arise as a substantive issue in proceedings by the company which have been allowed to run under s 248 of the Companies Act. But once a company has gone into liquidation, questions of set-off are governed by s 310, that is the insolvency set-off rules, not by other rules of procedure that apply between solvent parties. “Pay now argue later” provisions are simply procedural rules allowing one party to preserve its cash-flow while deferring the time for the other party to run its arguments against the creditor. Such provisions have no place in a liquidation when the net indebtedness has to be struck as at the date of liquidation. Accordingly, the “pay now argue later” effect of r 5.61 does not apply. It is necessary to establish the net indebtedness of a company with a creditor where there are claims going both ways under s 310. That is, “pay now argue later”
provisions yield to insolvency set-off.13
Bringing these matters together
[40] The English courts have established that insolvency set-off applies when the Crown is both a creditor and a debtor of a company in liquidation, even when different government departments are the creditor and the debtor. That applies also when a claim is for unpaid tax. Cases that illustrate this are Re D H Curtis (Builders) Ltd, Re Cushla Ltd, Re Unit 2 Windows Ltd and Secretary of State for
Trade and Industry v Frid.14 Those cases were decided under English insolvency
12 Forster v Wilson (1843) 12 M & W 191 at 204.
13 Commissioner of Inland Revenue v The Fishing Co Ltd (2012) NZCCLR 5 (HC).
14 Re D H Curtis (Builders) Ltd [1978] 1 Ch 162 (Ch); Re Cushla Ltd [1979] 3 All ER 415 (Ch); Re Unit 2 Windows Ltd [1985] 1 WLR 1383 (Ch) and Secretary of State for Trade and Industry v Frid [2004] 2 AC 506 (HL).
set-off provisions. Those provisions are in the same terms as the insolvency set-off provisions under New Zealand law including s 310 of the Companies Act and s 254 of the Insolvency Act 2006.
[41] The Commissioner’s claim for unpaid taxes and the claim by Wire By Design Ltd for compensation under the Public Works Act come within s 310 of the Companies Act as mutual dealings, following these English cases. The company’s indebtedness for taxes can be set off against its claim for compensation to establish a net balance. If Wire By Design Ltd is successful in its claim for compensation under the Public Works Act and its claim exceeds the taxes it owes the Commissioner of Inland Revenue, the Crown would be entitled to deduct from its compensation payment the amount of the taxes due to the Commissioner. That will be to the advantage of the Crown. It will be in a better position than if it had to pay the full amount of compensation to the company in liquidation and then take a pro rata dividend with other creditors. In establishing the net indebtedness between the Crown and Wire By Design Ltd, “pay now argue later” provisions such as r 5.61 of the High Court Rules have no application.
[42] For this proceeding it will be necessary to establish the net balance between Wire By Design Ltd and the Crown because, as a person with secondary liability, Mr Wright cannot be liable for more than the company’s indebtedness to the Crown. He is also entitled to raise against the Crown all those matters of insolvency set-off which the company would be entitled to raise in reduction of the Crown’s claim in the liquidation. I regard paragraph 21 of the statement of defence in this proceeding as having raised that defence.
[43] Having said that, I need to refer to an argument by Mr Cathcart that there are no mutual dealings in this case because Mr Wright is jointly and severally liable under s 369C(4). I also refer to an English decision, Archer Structures Ltd v Griffiths.15 In that case a company director was sued under s 217 of the English Insolvency Act 1986, a provision which corresponds with s 386C of our Companies Act. The director argued that the phoenix company had a set-off against the creditor
and he invoked those set-offs. The judge in the English court rejected that defence.
15 Archer Structures Ltd v Griffiths [2004] 1 BCLC 201.
She held that he was liable for the full amount of the creditor’s debt and was not entitled to take into account the company’s claim against the creditor. She relied on joint and several liability under the English section.
[44] Derham on The Law of Set-Off16 takes issue with that case. He points out17 that it had the effect that the creditor would be paid twice, once as a consequence of the cancellation of its liability to the company through set-off, and a second time by the defendant. I note also that Derham generally considers that insolvency set-off may be available to debtors where there are joint and several debtors.18
[45] In this case, if Mr Wright were held not to be allowed to raise the compensation in his defence to the Commissioner’s claim against him, there is the risk that the Crown would have double recovery. On any payment of compensation to Wire By Design Ltd, the Crown would be entitled to deduct the taxes payable to the Commissioner, yet it would also be able to recover the amount of the taxes from Mr Wright. That would amount to double recovery. Once that was put to Mr Cathcart, he conceded the point.
[46] Accordingly, I find that Mr Wright can properly raise the insolvency set-off argument by way of defence to the Commissioner’s claim against him. Once that is accepted, it can be seen that there is a common thread between the Commissioner’s claim against Mr Wright and the claim by Wire By Design Ltd against the Crown.
[47] Mr Commons also deployed other arguments in support of his application, but it seems to me that once the effect of s 310 is appreciated then the common thread between the two proceedings becomes clear and it is not necessary to go into other arguments developed by Mr Commons.
[48] I only propose to take this decision up to this point of establishing there is a common thread. At this stage I do not propose to order a stay. Before I make any
further decisions on the application by the defendant, it would be proper to also take
16 Rory Derham: Derham on The Law of Set-Off (4th ed, Oxford University Press, new York,
2010).
17 At [12.22].
18 At [12.21].
into account anything that the defendant in the proceeding 1491 that is, the Crown would have to say. I note that the Crown is represented by the Crown Law Office, whereas in this case the Commissioner is represented by the Crown Solicitor in Auckland. It would be appropriate to hear from the Crown before any further directions are given.
[49] Having established that there is a common thread, I appreciate that there is the risk of inefficiency if the issue of compensation in this proceeding were to be heard by one judge, and then the same issues were to be traversed in the other proceeding by another judge. There could be the risk of inconsistent findings. It would also put the parties to unnecessary duplication of work. Clearly there must be room for arranging matters so that duplication can be avoided.
[50] On the other hand, I am also conscious that a stay of proceeding may not be as short as Mr Commons would have me accept. He seeks a stay only until proceeding 1491 has been heard. I am not confident that the matter can be held off as short as that. If Wire By Design Ltd succeeds in 1491 on its existing pleadings, but is unsuccessful on its claims for misrepresentation and breach of implied terms, and does not obtain any monetary relief against the Crown in that proceeding, then matters may have to await the determination of the Land Valuation Tribunal. That could be a long wait. I could understand the Commissioner’s impatience with the process.
[51] It is sufficient today if I indicate the common thread and invite the parties to confer and also to confer with the Crown Law Office as to the most efficient way forward. Without intending to bind the parties to anything, I am interested in proposals which might allow useful business to be done on this proceeding whereby other issues might be able to be determined, while leaving the s 310 issue to be held in abeyance pending the outcome of the Public Works Act compensation issues.
[52] Accordingly, I direct the Registrar to arrange a telephone case management conference. Notice of the telephone case management conference is to go not only to the parties in this case but also to the parties in 1491. One hour should be set aside for the conference. It will be a telephone conference because the Crown is
represented by Wellington counsel. I urge the parties to exchange proposals beforehand.
[53] I direct Mr Commons to file a memorandum for the conference 5 working days before the conference, and I direct the Commissioner and the Crown to file a memorandum for the conference 3 working days before the conference. What I am interested in hearing is a way forward which can ensure the just, speedy and inexpensive determination of both proceedings.
.................................................
Associate Judge R M Bell