Cummins v Body Corporate 172108
[2021] NZCA 145
•29 April 2021 at 10.30 am
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| IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA |
| CA238/2020 [2021] NZCA 145 |
| BETWEEN | ROBERT JAMES CUMMINS |
| AND | BODY CORPORATE 172108 |
| Hearing: | 3 November 2020 |
Court: | Clifford, Woolford and Mander JJ |
Counsel: | K P Sullivan for Appellant |
Judgment: | 29 April 2021 at 10.30 am |
JUDGMENT OF THE COURT
AThe appeal is dismissed.
BThe appellant must pay the first respondent costs for a standard appeal on a band A basis and usual disbursements.
____________________________________________________________________
REASONS OF THE COURT
(Given by Clifford J)
Introduction
Manchester Securities Ltd (Manchester), the second respondent, was placed in liquidation by order of the High Court at Wellington on 19 February 2020 on the application of the first respondent, Body Corporate 172108.[1] Mr Cummins appeals that decision. He does so with leave: Mr Cummins is the sole shareholder and director of Manchester.
Background
[1]Body Corporate 172108 v Manchester Securities Ltd [2020] NZHC 198 [Judgment under appeal].
This appeal continues a dispute which has, since 2010, been before various courts on numerous occasions. This Court itself has already set out the background to this dispute in some detail on no fewer than three occasions.[2] In those circumstances, the following, relatively brief, summary will suffice.
[2]Manchester Securities Ltd v Body Corporate 172108 [2017] NZCA 527, (2017) 19 NZCPR 65 [Variation appeal]; Manchester Securities Ltd v Body Corporate 172108 [2018] NZCA 190, [2018] 3 NZLR 455 [Statutory demand appeal]; and Manchester Securities Ltd v Body Corporate 172108 [2019] NZCA 408 [Stay appeal].
Body Corporate 172108 (the Body Corporate) is the body corporate of the unit title property known as Hobson Apartments, 196 Hobson Street Auckland. In the first of its three earlier judgments (the Variation Appeal) this Court described Hobson Apartments as follows:
[5] Hobson Apartments is a 12 storey unit title development in Central Auckland with an unusual feature. The exterior of levels 1–11 is common property owned by the Body Corporate but not the exterior of the 12th floor. Almost all of the 12th floor is private property owned by Manchester. This came about because the 12th floor which is aesthetically and physically different from the rest of the building was constructed separately after the rest of the building had been completed. The 12th floor has a penthouse, Unit 12A, which covers the entire floor. The only common property on the 12th floor comprises the lift and stairwell shafts, ducts and a small recessed area at the rear on the eastern side.
[6] Unit 12A is the largest and most valuable unit in the complex. The ownership interest or unit entitlement of unit 12A is 11.88 per cent.[3]
[3]This includes both the principal unit 12A and the associated accessory unit, a carpark.
Manchester, as the trustee of Mr Cumming’s trading trust, owns Unit 12A.
Hobson Apartments is a leaky building. In 2010 the Body Corporate sought court sanction to empower it to carry out repairs to individual units, including 12A, as well as common property. The Body Corporate proposed a scheme in line with standard unit title principles: that is the Body Corporate would contract for the repairs, with each unit holder paying for the repairs required to its separate property and contributing its unit entitlement of the cost of repairing the common property.
Manchester was the only unit holder to oppose the scheme. Manchester considered Unit 12A was in a far better condition than the rest of Hobson Apartments. Manchester was also mindful of the limited extent of the common property on level 12. Accordingly, Manchester was unwilling to contribute to repair of common property, on the floors below level 12. It wanted to repair Unit 12A, and the common property on level 12, independently of the Body Corporate.
The scheme eventually sanctioned by the High Court provided for Manchester to repair level 12 (individual and common property) pursuant to a separate contract, and the Body Corporate would repair levels 1 to 11 (individual and common property).[4] Manchester’s total liability would be limited to its unit entitlement (11.88 per cent) of the overall cost of repairing Hobson Apartments (common and separate property) as incurred (i) by the Body Corporate under its level 1 to 11 contract and (ii) by Manchester itself under its level 12 contract. That approach was based on the then current estimate that the total cost of all repairs would be $6,250,000, comprising $5,750,000 for levels 1 to 11 and $500,000 for level 12. Manchester’s unit entitlement liability (11.8 per cent of $6,250,000) would be $742,500. Manchester would therefore, in addition to paying the $500,000 to repair level 12, be liable to contribute $242,500 to the costs of repairing levels 1 to 11.[5]
[4]See Body Corporate 172108 v Meader (No 2 & 3) (2010) 12 NZCPR 181 at 195.
[5]See Body Corporate 172108 v Manchester Securities Ltd [2017] NZHC 329 [Variation judgment] at [23] and [26]–[27].
Things did not go according to plan. By 2017:
(a)Manchester had made little, if any, progress on the repair of level 12. Level 12 was not in the condition initially assumed and the estimated costs of its repairs were continuing to increase: by June 2012 to around $1.1 m,[6] and by early 2016 to around $2.30 m.[7]
(b)The Body Corporate had completed the repair of common levels 1 to 11 at a final cost of $8,131,002.55.[8]
(c)Manchester had not paid any amount levied by the Body Corporate for the level 1 to 11 common property repairs. Its view was that, as the cost of repairing level 12 was now greater than its, capped, 11.88 per cent contribution to total costs, the Body Corporate owed it money.[9]
[6]Variation judgment, above n 5, at [86].
[7]At [82].
[8]At [80].
[9]At [31] and [39].
Against that background, the Body Corporate applied to the High Court to amend the scheme by the removal of the special Manchester payment arrangements, so as to revert to the standard approach of separate liability for separate property, and unit entitlement liability for common property. Fogarty J was in no doubt that justice, and the scheme of the Act properly understood, required such an amendment.[10]
[10]At [69].
Thus, Manchester was to pay the full cost of repairing its separate property on level 12. The cost to repair the common property on level 12 would be met by all unitholders (Manchester included) pro rata their unit entitlements. Finally, Manchester would also be liable for its unit entitlement share of the repair costs for the levels 1 to 11 common property.
Fogarty J realised, however, that in making those changes he needed to address the financial position at the time they would take effect. The evidence was, the Judge accepted, that the repair of the common property on levels 1 to 11 had cost $4,320,266 and that the cost estimate for the repair of the common property on level 12 was, at that point, $217,865.20.[11]
[11]At [149]–[151].
On the basis the Judge reasoned:[12]
(a)Manchester owed the Body Corporate $513,247.60 for common property repairs (11.88 per cent of $4,320,266).
(b)Manchester’s unit entitlement liability for estimated level 12 common property costs was $25,882.90 (11.88 per cent of $217,865.20), meaning other unit owners’ liability to reimburse Manchester was $191,982.81.
[12]At [149]–[153].
In those circumstances the Judge was prepared to allow Manchester a credit for that amount “if only to encourage immediate compliance by Manchester with this Court’s order to the benefit of all the other unit holders”, so that Manchester could be said to owe the Body Corporate — as things then stood[13] — $321,264.79.[14]
[13]Notionally, as Manchester was then yet to incur level 12 common property repair costs.
[14]At [154]–[155].
The Judge summarised the effect of his decision amending the scheme in the following way:
[157] The effect of that order is [to] set aside the limit of 11.88 per cent and to reinstate the policy of the Act. Second, as indicated in paragraph [146], I order Manchester to pay to the Body Corporate for the benefit of the unit holders of levels 1 to 11 the sum of $321,264.79 (plus GST) as a provisional sum. That sum [is] to be adjusted upon completion of remediation of the property on level 12 to the extent that the Maddren[15] figure of $217,865.20 varies.
(Footnote added.)
[15]The engineer whose evidence for Manchester the Judge had accepted.
Manchester unsuccessfully appealed Fogarty J’s judgment varying the scheme to this Court.[16] Notwithstanding, Manchester has never paid the amount Fogarty J in 2017 ordered to be paid immediately. Nor has it since then paid levies to the Body Corporate. Nor are its repairs to level 12 complete: even now that remains an elusive prospect.
[16]Variation appeal, above n 2.
Since the decision of this Court dismissing Manchester’s appeal against Fogarty J’s variation judgment, the Body Corporate has sought to enforce the payment of that judgment debt: first, by way of statutory demand,[17] then by the filing of an application for winding up,[18] and finally at the hearing of that application.[19]
[17]Manchester Securities Ltd v Body Corporate 172108 [2018] NZHC 169 [Statutory demand judgment]; and Statutory demand appeal, above n 2.
[18]Body Corporate 172108 v Manchester Securities Ltd [2018] NZHC 3307 [Stay judgment]; and Stay appeal, above n 2.
[19]Judgment under appeal, above n 1.
Manchester has, unsuccessfully, resisted each of those enforcement steps. It has based that unsuccessful opposition — as it based its opposition to the Body Corporate’s application to amend the scheme and as Mr Cummins bases this appeal — on what is said to be the significance of rights of set-off Manchester has against the Body Corporate’s claim for the payment of the 2017 judgment debt, and of arbitral rights as regards its dispute with the Body Corporate. In doing so Manchester points to its rights under paragraphs 10.3 and 21.2 in particular of the scheme which, as relevant, provides as follows:
10. Allocation of Costs
10.1 Where Repairs can be identified with a specific Unit, the Cost of such Repairs shall be borne by the Owner or Owners of that Unit.
10.2 Where Repairs are carried out to Common Property, the provisions of the Act shall apply.
10.3 Subject to any specific provision to the contrary in this scheme, where repairs involve both Units and Common Property, the Cost of such Repairs shall to the extent possible be apportioned to each Owner on the basis of that owner’s legal title to part of the Building.
21.Specific arrangement with Manchester Securities Ltd in respect of level 12
…
21.2… The costs in respect of project management consultants or other construction-related advisors that Manchester contends provide a benefit to all individual proprietors (other than Manchester) or the body corporate shall be made available in writing, together with supporting documentation to the secretary of the body corporate. Any dispute about whether benefit is provided to all individual proprietors (other than Manchester) or the body corporate shall be determined under the dispute resolution provisions of this Scheme.
On each of those occasions Manchester has in effect said that, by the time it finishes the repairs to level 12, the costs it is entitled to pass on to other unit holders via the Body Corporate pursuant to either or both of cls 10.3 and 21.2 will be greater than the amount it was required to pay by Fogarty J back in 2017, together with interest.
Moreover if — as appears likely in the circumstances — there is disagreement between the Body Corporate and it about the amount of those costs, it has rights to arbitrate that dispute. Until those rights have been exhausted, the amount owing will not have been settled.
In dismissing that argument on each of those occasions the High Court, and this Court on appeal, have recognised the potential significance of the existence of rights of set-off, and associated dispute resolution provisions, for enforcement proceedings for the recovery of a judgment debt, including by way of liquidation. That is, the general principle that to enforce a genuinely disputed debt, including by liquidation or by bankruptcy, may constitute an abuse of process.[20]
[20]Re Bayoil SA [1999] 1 WLR 147 (CA) at 156.
Manchester first sought to engage that general principle when it applied to the High Court to set aside the statutory demand the Body Corporate, as its first step in enforcement, issued against Manchester. Failure by a company to pay a statutory demand creates a presumption of that company’s insolvency, rendering it liable to liquidation by the court.[21]
[21]Companies Act 1993, ss 241(4)(a) and 287(a).
Reflecting the general principle, s 290 of the Companies Act 1993 as relevant provides:
290 Court may set aside statutory demand
(1) The court may, on the application of the company, set aside a statutory demand.
…
(4) The court may grant an application to set aside a statutory demand if it is satisfied that—
(a)there is a substantial dispute whether or not the debt is owing or is due; or
(b)the company appears to have a counterclaim, set-off, or cross-demand and the amount specified in the demand less the amount of the counterclaim, set-off, or cross-demand is less than the prescribed amount; or
(c)the demand ought to be set aside on other grounds.
…
(Emphasis added.)
In terms of subs (4) there was no dispute that the judgment debt was itself owing and due. So Manchester relied on s 290(4)(b), namely its right under the varied scheme to recover from the Body Corporate the other unitholders’ share of repairs to the common property on level 12, to invoke the discretionary remedy of the grant of a stay.
In Yan v Mainzeal Property and Construction Ltd (in receivership and in liquidation) this Court acknowledged the possibility of a set-off may evidence a genuine and substantial dispute as to liability to pay a debt on which a petitioning creditor would — albeit in the absence of a statutory demand for that debt having been made — seek to base an application for liquidation.[22] Likewise, in Covington Railways Ltd v Uni-Accommodation Ltd this Court acknowledged that a company the subject of a liquidation application based on a statutory demand for an undisputed debt may nevertheless be able to show that it has a claim against the applicant creditor which reduces the net balance owing to the creditor or even off-sets it altogether.[23] Where both sums were liquidated, the Court went on to explain, a simple arithmetical exercise was involved. Where the company debt said to base the relevant set-off was an unliquidated sum, with liability and/or quantum in dispute, then:[24]
… [I]n order to impeach the statutory demand and overcome the presumption in s 287(a) that the company is unable to pay its debts when it has failed to comply with the demand, it must be able to do more than merely assert that there is an available set-off. It must be able to point to evidence before the Court showing that it has a real basis for the claimed set-off and that accordingly the applicant’s claim to be a creditor is, to the extent of the set‑off, seriously in doubt.
The Court went on to refer to the words of Buckley LJ in Bryanston Finance Ltd v de Vries (No 2) that the company must show there are “clear and persuasive grounds” for the set-off claim.[25]
[22]Yan v Mainzeal Property and Construction Ltd (in receivership and in liquidation) [2014] NZCA 190 at [80] [Mainzeal].
[23]Covington Railways Ltd v Uni-Accommodation Ltd [2001] 1 NZLR 272 at [11].
[24]At [11].
[25]Bryanston Finance Ltd v de Vries (No 2) [1976] Ch 63 at 78.
In the Statutory Demand Appeal this Court accepted that the circumstances of Manchester’s right of contribution met the test of “clear and persuasive grounds” for the claimed set-off.[26] Nevertheless, it agreed with the Body Corporate that the circumstances as between it and Manchester were such as to constitute one of those “rare cases” where the Court would decline to exercise the discretion to set aside the statutory demand.[27] It did so for a range of reasons, which we now summarise:[28]
(a)Fogarty J had clearly required Manchester to pay immediately. It had refused to do so. In the Variation Appeal, this Court had confirmed the order required the debt to be paid immediately. The application to set aside was, accordingly, an attempt to relitigate matters already decided.
(b)The Body Corporate’s levies to recover common costs were for the benefit of all unit holders. Manchester’s refusal to pay was unfair as it required other unit holders to bear an unfair burden of the cost of the remediation scheme.
(c)Pursuant to the scheme itself owners were not entitled to withhold levy payments on the basis that the matter was in the process of dispute resolution. The obligation to pay levies under the scheme was special and they should be paid at once, whether or not there was a dispute. That had been the finding of the High Court in relation to an earlier claim for levies.[29]
(d)It was too early for there to be an arbitration, as the costs of the repair of level 12 had not been finalised. Moreover, Manchester had provided a poor level of detail of its cross claim.
(e)Manchester’s conduct had been fairly categorised by the courts previously as “dilatory” and “prevaricating”. Manchester, the courts had found, had to take the “lion’s share of the blame” for the ongoing dispute.[30] That conduct was another reason to decline to exercise the court’s discretion to set aside the statutory demand.
(f)Any rights of arbitration did not affect the amount of, or the “immediate payment” terms of, the judgment debt.
[26]Statutory demand appeal, above n 2, at [42]–[43].
[27]At [49].
[28]See Statutory demand appeal, above n 2, at [52]–[62].
[29]Manchester Securities Ltd v Body Corporate 172108 [2013] NZHC 177 at [39].
[30]Variation appeal, above n 2, at [44].
Following Manchester’s unsuccessful attempt to set aside the Body Corporate’s statutory demands, the Body Corporate then applied to liquidate Manchester. Manchester’s response was to seek a stay of that application from the High Court. It did so again on the basis of the general principle, this time to the extent it can be said to be reflected in s 310 of the Companies Act.
Section 310 — as relevant — provides:
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.
Associate Judge Johnston, describing Manchester’s proceeding as “a bold application”, declined the requested stay.[31] In doing so the Associate Judge in effect found that the earlier decisions of this Court in the Variation and Statutory Demand appeals provided the reasons to decline the application. Manchester again appealed.
[31]Stay judgment, above n 18, at [11] and [19].
Leave to appeal was granted on two issues:[32]
(a)Was Manchester entitled to a mandatory stay of proceedings pursuant to art 8, sch (1) of the Arbitration Act 1996?
(b)Were ordinary levies payable on a “pay now argue later” basis?
[32]Stay appeal, above n 2, at [3].
In the Stay Appeal this Court concluded that Manchester’s application for stay was simply a collateral challenge to the earlier findings of the Court that arbitration about a set-off claim did not affect Manchester’s obligation to pay immediately.[33] More particularly, the enforcement of the statutory demand was not and should not be subject to arbitration about Manchester’s set-off claims particularly the application was therefore an abuse of process. In dismissing the appeal, this Court awarded indemnity costs to the Body Corporate.[34]
The challenged High Court decision
[33]At [24]–[30].
[34]At [39]–[40].
The Body Corporate’s substantive application to liquidate Manchester came before Associate Judge Johnston in the High Court at Wellington in December 2019.[35] Manchester defended that application, once again by reference to its set-off claim and s 310 of the Companies Act. Manchester argued that, because of that right of set-off, that it was not insolvent. But, even if it was, the Court should decline the Body Corporate’s application because of the significance of the mandatory nature of that set-off.
[35]Judgment under appeal, above n 1.
On the question of solvency, the Judge first noted Mr Cummins’ own evidence that Manchester did not have the cash on hand to pay the judgment sum and could not increase its borrowing — given its needs to pay for repairs to level 12 — to do so. On that basis, the Judge concluded:[36]
Contrary to the submissions of [Manchester] it appears to me to be commercially unrealistic to bring to account in assessing the company’s present solvency a disputed arbitral claim for an unliquidated amount that Manchester may or may not be successful in prosecuting at some point in the future.
[36]At [21].
Then on the question of whether, given that conclusion, Manchester should be placed in liquidation, the Judge recognised that if the liquidator reached the conclusion that Manchester’s claim of set-off was meritorious, he or she would be entitled to pursue that claim with a view to netting off its amount against the judgment debt and any other amounts due to the Body Corporate. Whilst that was a factor that weighed in favour of the court exercising its discretion to decline to place Manchester in liquidation, the most critical factor counting against that decision was the prospect of risk to creditors of an insolvent company being permitted to go on trading.[37] Moreover, if Manchester were not wound up the Body Corporate had other enforcement mechanisms — for example seeking a charging order over Manchester’s assets.[38] Were the Body Corporate to exercise such remedies, the Judge was of the view that would involve significant risk for it, the other unit title holders and any other creditors.[39]
[37]At [33]–[39].
[38]At [40].
[39]At [42].
Recognising the significance of placing Manchester in liquidation the Judge, however, allowed Manchester 20 days to pay the judgment debt: if it did not do so, it would be placed in liquidation forthwith.[40]
[40]At [43].
Manchester did not do so. Hence this appeal.
This appeal
On appeal, Mr Sullivan advanced the arguments made in the High Court for Manchester, and by Mr Cummins in support, on Manchester’s unsuccessful opposition to the Body Corporate’s liquidation applications. Mr Sullivan relied on this Court’s earlier recognition (in the Stay Appeal) of the existence of a “clear and persuasive” right of set-off. Given that, and authorities in the enforcement and liquidation context such as Mainzeal and Covington Railways, the Judge had been wrong in concluding Manchester was insolvent and wrong again when he declined to exercise his discretion not to put Manchester into liquidation.
The Judge had accepted, Mr Sullivan argued, the arguments for Manchester and Mr Cummins that the effect of mandatory set-off under s 310 would be likely to render liquidation futile. That should have resulted in the exercise of the discretion not to liquidate. The Judge had gone on, wrongly, to base his decision to order liquidation on a wrong factor, namely the risk of loss to other creditors. There were, Mr Sullivan submitted, no other creditors as Manchester was by then simply the retired corporate trustee of the Manchester Securities Trading Trust and, as we understood the argument, Manchester was, as the registered proprietor of Unit 12, simply a bare nominee for the current trustee of that trust, that is Mr Cummins.
More generally, Mr Sullivan emphasised the difference between the context provided by s 310, and that which had applied in the Variation, Statutory Demand and Stay Appeals. This Court’s criticisms of Manchester, and its adverse findings against Manchester in those judgments, could not be determinative of this appeal.
For the Body Corporate, Mr Orpin-Dowell emphasised two matters.
First, and as regards the Associate Judge’s decision as to the insolvency of Manchester, the significance of previous decisions of the High Court and this Court rejecting Manchester’s arguments, as to the significance of its right of set-off, for its obligation to pay the judgment debt. The Associate Judge was right, accordingly, when he rejected Mr Cummins’s arguments that Manchester was not insolvent by reference to that same consideration.
Secondly, the Judge’s decision declining to exercise his discretion not to put Manchester in liquidation could not be said to be wrong. Rather, it was a principled and commercially realistic decision in line with the approach taken by this Court in the earlier appeals.
Analysis
Given the long history of this matter, it is important to keep some basic facts in mind:
(a)Fogarty J released his judgment allowing the Body Corporate’s variation application on 3 March 2017 now almost four years ago. Manchester failed to pay that judgment debt when it fell due. That failure continues.
(b)The courts have consistently upheld the Body Corporate’s right to the payment of that debt and rejected Manchester’s arguments — based on the set-off rights at issue here — at each step.
(c)That set-off right is an unliquidated, contingent, asset: it is by reference to that asset that Manchester, against its own evidence and its failure to pay, argues that it is not insolvent and should not be liquidated.
(d)As the Courts have said on many occasions, it is necessary in this area of the law to take a commercially, realistic approach.[41] The reason for that is, we think, fairly obvious particularly where resort to what might be called ‘balance sheet solvency’ is used to resist enforcement, including by way of liquidation, in the face of cashflow insolvency. The principal definition of insolvency is an inability to pay one’s debts as they fall due. Where the consequences of that insolvency are resisted — by reference to balance sheet assets and their potential realisation — the need for a commercially realistic approach is even more important where the assets are, as here, contingent and unliquidated.
[41]See for example, Mainzeal, above n 22, at [60], citing Sandell v Porter (1966) 115 CLR 666 at 670.
In our view, those considerations have underpinned the approach taken by the courts to date in this dispute and should also guide this judgment.
Given the previous decisions of this Court, we do not consider it can realistically be argued the Associate Judge was wrong to find that Manchester was insolvent. In our view, that contention was effectively rejected most recently in this Court’s decision on the Stay Appeal. That is, Manchester’s ongoing failure to pay the judgment debt as ordered by Fogarty J — either because of an inability to borrow to do so or because Mr Cummins as Manchester’s “controller” was simply not prepared to do so — evidences insolvency.
The real issue here is whether, given Manchester’s statutory right of set-off and the provisions of s 310, the High Court was in error when it granted the Body Corporate’s application to liquidate Manchester.
That the Court has a discretion not to place an insolvent company in liquidation is clear. Reflecting the equitable origins of the insolvency jurisdiction, the power to liquidate is explicitly discretionary. Section 241(4) of the Companies Act provides:
(4)The court may appoint a liquidator if it is satisfied that—
(a) the company is unable to pay its debts; or
(b) the company or the board has persistently or seriously failed to comply with this Act; or
(ba) the company, or 1 or more of its directors or shareholders, has intentionally provided the Registrar with inaccurate information; or
(bb) the company, or 1 or more of its directors or shareholders, has in a persistent or serious way failed to comply with duties relating to the company—
(i) under this Act; or
(ii) under the Financial Reporting Act 1993 while in force, except that this subparagraph does not apply after 5 years have elapsed after this subparagraph came into force; or
(c) the company does not comply with section 10; or
(d) it is just and equitable that the company be put into liquidation.
(Emphasis added.)
Given this Court’s analysis to date of the balance, in these circumstances, of the overall equity involved in the application of the general principle (as to the significance of a contested debt) it would perhaps be surprising if at this point a different answer, that is one favouring Manchester, could be reached. But, in this appeal in arguing the Judge had been wrong in reaching the contrary conclusion Mr Sullivan for Mr Cummins placed considerable emphasis on the particular characteristics of the set-off called for by s 310, including its mandatory nature. Those issues have not thus far been explicitly considered by this Court. To address Mr Cummins’ appeal it is therefore necessary to consider the rules relating to set-off generally, as well as the particular provisions of s 310 as that section applies in the context of a liquidation.
It has to be said, at the outset, that the principles of statutory, equitable, and insolvency set-off, and their interrelationship, are not straight forward. That said, the following extract from the judgment of this Court in Grant v NZMC Ltd helpfully summarises the general position:[42]
The origins of the present law enabling a defendant to plead a set-off in diminution or extinction of a plaintiff’s claim are found in statutes, the common law, and the jurisdiction exercised by the Court of Chancery. The Statutes of Set-off, 2 Geo II, c 22 (1729) and 8 Geo II, c 24 (1735), permitted the set-off of mutual debts and were accordingly confined to liquidated claims. They are in force in New Zealand: see eg Popular Homes Ltd v Circuit Developments Ltd [1979] 2 NZLR 642, 655. … Equity would restrain an action or execution of judgment at law or allow a set-off where it would be inequitable or unconscionable to allow the plaintiff to proceed without bringing to account some claim by the defendant which was sufficiently linked to that made by the plaintiff. That equitable right was not limited to liquidated cross-claims but extended to unliquidated claims for damages: Lord Cawdor v Lewis (1835) 1 Y & C Ex 427; Piggott v Williams (1821) 6 Madd 95.
[42]Grant v NZMC Ltd [1989] 1 NZLR 8 at 11.
Statutory, or legal, set-off and equitable set-off are different beasts. In Stein v Blake Lord Hoffmann explained legal set-off in the following way:[43]
Legal set-off does not affect the substantive rights of the parties against each other, at any rate until both causes of action have been merged in a judgment of the court. It addresses questions of procedure and cash-flow. As a matter of procedure, it enables a defendant to require his cross-claim (even if based upon a wholly different subject matter) be tried together with the plaintiff’s claim instead of having to be the subject of a separate action. In this way it ensures that judgment will be given simultaneously on claim and cross-claim and thereby relieves the defendant from having to find the cash to satisfy a judgment in favour of the plaintiff (or, in the 18th century, go to a debtor’s prison) before his cross-claim has been determined.
…
Legal set-off is confined to debts which at the time when the defence of set-off is filed were due and payable and either liquidated or in sums capable of ascertainment without valuation or estimation.
[43]Stein v Blake [1996] AC 243 at 251.
Grant v NZMC related to a defence based on a right of equitable set off. The Court explained the right of equitable set-off in the following way:[44]
The principle is, we think, clear. The defendant may set-off a cross-claim which so affects the plaintiff’s claim that it would be unjust to allow the plaintiff to have judgment without bringing the cross-claim to account. The link must be such that the two are in effect interdependent: judgment on one cannot fairly be given without regard to the other; the defendant’s claim calls into question or impeaches the plaintiff’s demand. It is neither necessary, nor decisive, that claim and cross-claim arise out of the same contract.
[44]Grant v NZMC, above n 42, at 12–13.
As can be seen, therefore, and outside the insolvency context, Manchester — faced with an action by the Body Corporate to recover its debt — would not be able to raise a legal set-off based on its unliquidated, contingent claims for contribution. Rather, it would need to rely on the defence of equitable set-off. The judgments against Manchester in this dispute thus far make it plain that such a claim would be unlikely to succeed.[45] Of course, outside that context, Manchester could not bring a claim against the Body Corporate, its claim remaining a mere contingency.
[45]While the courts’ previous judgments on this issue have found that there was a basis for the claimed set-off to impeach the statutory demands (in terms of Covington, above n 23, and Bryanston, above n 25) they have not gone as far to say that, at that time, the balance of the equities lay in Manchester’s favour. More importantly, those findings are not determinative now that liquidation has already been ordered.
Turning then to s 310.
In general terms, and now with some elaboration in other sections — including s 310 itself, s 302 of the Companies Act incorporates the rules of personal bankruptcy, as those rules relate to the rights of secured and unsecured creditors, to claims by creditors and to the valuation of annuities and future and contingent liabilities, into the law relating to the liquidation of insolvent companies. The set-off recognised and mandated by s 310 has long been a feature of those rules.
In Forster v Wilson, bankruptcy set off was described in the following terms:[46]
The right of set-off in bankruptcy does not appear to rest on the same principle as the right of set-off between solvent parties. The latter is given by the statutes of set-off (2 Geo. 2, c. 22, s. 13, and 8 Geo. 2, c. 24, s. 4) to prevent cross actions; and if the defendant could sue the plaintiff for a debt due to him not in his representative character, he might set it off under these statutes in an action by a plaintiff suing in his individual character also; though the plaintiff or defendant might claim their respective debts as a trustee for a third person. If the debts were legal debts due to each in his own right, it would be sufficient. But, under the bankrupt statutes, the mutual credit clause has not been so construed. The object of this clause (originally introduced in a temporary act, 4 & 5 Anne, c. 17, continued by 5 Geo. 2, c. 30, and now re-enacted by the 6 Geo 4, c. 16) is not to avoid cross actions, for none would lie against assignees, and one against the bankrupt would be unavailing, but to do substantial justice between the parties, where a debt is really due from the bankrupt to the debtor to his estate; …
[46]Forster v Wilson (1843) 12 M & W 191 at 203–204.
The concept of “substantial justice”, at least from the perspective of — as is the case here — a solvent creditor who is also a debtor of the bankrupt has been described as being based on the view that where credit has been given by two companies to each other, the advent of liquidation in respect of one of them should not result in the solvent other being left with a mere right of proof, with continuing liability to pay its debts to the insolvent party in full.[47]
[47]Andrew R Keay The Law of Company Liquidation (4th ed, Sweet & Maxwell, London, 2018) at [12-035], citing Morris v Agrichemicals Ltd [1996] BCC 204 (CA) at 209.
Other commentators proffer a different explanation. They suggest the section provides a preference to a creditor of an insolvent company who is also a debtor of that company over other creditors who are not debtors of the company.[48] Derham explains:
(a)Upon liquidation, the right of set-off acts as an exception to the pari passu rule, which would normally operate to allocate a proportionate share of an insolvent company’s remaining funds to each of its creditors.
(b)Instead, the creditor does not need to pay the gross amount of what it owes the insolvent company. It, in effect, recoups, or perhaps more accurately receives credit for, 100 per cent of that amount. It would still either pay (if still indebted) or receive cents on the dollar for (if it is owed more by the company) the excess. But they are preferred against all other creditors because they “receive” 100 per cent up to the amount of their debt, instead of cents on the dollar like the rest of the company’s creditors. In this way, the creditor’s debt acts as security for its credit.[49]
[48]Rory Derham The Law of Set-Off (Oxford, Oxford University Press, 2010) at 297–298.
[49]Stein v Blake, above n 43, at 251.
At the same time, however, requiring recognition of the bankrupt’s claim can be seen as preserving as between creditors the pari passu scheme of distribution. As the court in Sovereign Life Assurance Company v Dodd recognised:[50]
The right of set-off depends on the existence of a debt due to the defendant, and the fact of his debtor being a bankrupt does not prevent the set-off arising, though it prevents his obtaining in the bankruptcy more than his share of the assets; the whole debt is still in existence.
That is, it prevents a solvent creditor from proving for the full amount of the bankrupt’s debt to it, when in fact a lessor amount is — after recognition of set-off — actually owing, and in that way improving its pro rata claim for the remaining assets (if any) of the bankrupt available to creditors.
[50]Sovereign Life Assurance Company v Dodd [1892] 2 QB 573 at 577–578 [Sovereign Life].
The position is perhaps better understood by considering the effect of s 310 on what would otherwise have been the availability of legal and equitable set-off respectively for a creditor of the insolvent company who is also a debtor of that company.
Where the mutual dealings have resulted in liquidated amounts owing on both sides, it would not appear s 310 makes any particular difference. That is, as importantly recognised in Sovereign Life, in the case of liquidated debts the insolvency would not preclude the creditor/debtor from resisting the liquidator’s claim where the liquidator chose to pursue the creditor/debtor for the full amount owing by it to the company in liquidation.[51] Whilst the right of set-off does provide a benefit, that benefit is not therefore due to the existence of s 310.
[51]Sovereign Life, above n 50, at 578 per Lord Esher MR, 582 per Bowen LJ, and 585 per Kay LJ.
We therefore respectfully disagree with Manchester’s submission by reference to the Associate Judge’s oral decision in Concrete Structures (NZ) Ltd v NMHB Ltd.[52] In that case, the Judge said that, absent s 310, a liquidator could claim against a creditor/debtor and that creditor “would not be able to resist the claim on the ground of its own countervailing claim”.[53] In our view, in terms of the effect of commencement of liquidation, that is an error.[54]
[52]Concrete Structures (NZ) Ltd v NMHB Ltd [2019] NZHC 268.
[53]At [21].
[54]See Companies Act 1993, s 248.
Where the insolvent company is owed a liquidated debt, and the creditor/debtor’s claim is for an unliquidated or contingent claim, absent s 310 the creditor/debtor would be relying on its right of equitable set-off.[55] That is a discretionary remedy. By contrast, s 310 requires the liquidator to value that contingency and recognise it as a credit due from the insolvent company to that creditor/debtor. There would only appear to be a clear benefit for the creditor/debtor from the operation of s 310 where, but for s 310, creditor/debtor’s claim would not attract the benefit of equitable set-off. Whether or not that benefit can be seen as a preference over other creditors is, with respect, less obvious.
[55]See for example, Aquamarine (Christchurch) Ltd v De Vere (1979) 1 BCR 229.
Finally, where the insolvent company’s claim which the liquidator has the benefit of is itself contingent, then there is more than a little uncertainty as to whether or not s 310 applies. The position in England was, until relatively recently, that it did not. The reasoning was that to “accelerate” the insolvent company’s claim against its
creditor/debtor would be unfair to that party.[56] The absence of there being any power for the liquidator to value the insolvent company’s contingent claim (as contrasted with the express power and indeed requirement to value the contingent claim of the creditor/debtor) was seen as supporting that proposition. As Lord Hoffmann noted in Stein v Blake:[57]
…[T]he winding up of the estate of a bankrupt or an insolvent company cannot always wait until all possible contingencies have happened and all the actual or potential liabilities which existed at the bankruptcy date have been quantified. Therefore the law adopts a second technique, which is to make an estimation of the value of the claim.[58]
… This enables the trustee to quantify a creditor’s contingent or unascertained claim, for the purposes of set-off or proof, in a way which will enable the trustee safely to distribute the estate, even if subsequent events show that the claim was worth more. There is no similar machinery for quantifying contingent or unascertained claims against the creditor, because it would be unfair upon him to have his liability to pay advanced merely because the trustee wants to wind up the bankrupt’s estate.
[56]Kirstin Van Zwieten Goode on Principles of Corporate Insolvency Law (5th ed, Sweet & Maxwell, London, 2018) at [9–38].
[57]Stein v Blake, above n 43, at 252–253 (footnote added).
[58]In the New Zealand context, see Companies Act 1993, s 307.
Our understanding is that English law has recently been explicitly amended to include contingent claims of an insolvent company in insolvency set-off and has given the liquidator the power to value those claims to achieve that.[59] That point has not, as best as we are aware, been considered in New Zealand.
[59]See Insolvency (England and Wales) Rules 2016, r 14.25(5), and Goode on Principles of Corporate Insolvency Law, above n 56, at [9–38].
What all this shows in our view is that the High Court was not in error when it declined to exercise its discretion not to liquidate the insolvent Manchester by reason of the possible significance in these circumstances of insolvency set-off.
We acknowledge that the Judge’s reference to possible risks for other creditors may have been misplaced. We also have some difficulty with the Judge’s reference to the risks involved with other enforcement remedies the Body Corporate may have. But in our view, and in light of all that has gone on and notwithstanding the mandatory nature of liquidation set-off called for by s 310, the Judge did not err. In fact, we are of the view his was the commercially sensible and realistic, and the principled, approach to take.
Here, the contractual basis for a possible set-off claim can be found in cls 10.3 and 21.2 of the amended scheme. But, other than that, there is little if any evidence of the quantum of the unliquidated debt represented by the set-off. The affidavits filed by Body Corporate for the purposes of the hearing before the Associate Judge confirm the continuing reality both of the complexity and length of the “remediation” works on level 12 and the complexities of the overall legal relationship between the Body Corporate and Manchester.
In Bayoil SA the English Court of Appeal affirmed the principle that where a debt on which a liquidation is based is genuinely disputed, as established by evidence, it would be an abuse of process to liquidate on the basis of that debt in the situation where the debt on which the petition is based is not disputed, but there is an alleged cross-claim.[60] In doing so, and in summarising its reasoning, the Court said:[61]
Having held that the company had a genuine and serious counterclaim in the arbitration, which it had been unable to litigate, in an amount exceeding the amount of Seawind’s debt, the judge ought to have asked himself whether there were special circumstances which made it inappropriate for the petition to be dismissed or stayed.
[60]Re Bayoil SA, above n 20.
[61]At 155.
That is, the counterclaim was for a known amount. Here, notwithstanding affidavit evidence as to the overall amounts spent by Manchester on the level 12 “remediation”, to date the proportion of those amounts which may properly be claimed under has not yet been established. Contrary to Mr Sullivan’s written (outline) submission, it is not accurate to say the Body Corporate does not dispute that Manchester’s set-off amounts under cl 21.2 are more than its claim in liquidation. Moreover, there are here in our view “special circumstances” of the kind that — even if that were not the case — would have made it inappropriate to defer the petition. Those special circumstances are the circumstances and history of this matter since Fogarty J ordered the payment of the judgment debt.
Taken overall, if anything the uncertainties surrounding the significance of liquidation set-off increase as time passes, rather than reduce. It will be for the liquidator to determine their approach to the asset of Manchester (such as it is after the recent rearrangements by Mr Cummins — which were not at all well explained to us — of the nature of the arrangements between Manchester and himself) represented by Manchester’s interests in level 12.
Given the history of this matter, whether the liquidator sees those interests as being of any particular benefit to the liquidation is something we would not wish to comment on.
For all those reasons, we dismiss Mr Cummins’ appeal.
Result
The appeal is dismissed.
Costs
The appellant must pay the first respondent costs for a standard appeal on a band A basis and usual disbursements.
Solicitors:
Core Legal Ltd, Masterton for Appellant
Grove Darlow & Partners, Auckland for Respondents
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