Diamond Milk Formulas Limited v T K (Hong Kong) Limited (in receivership)
[2017] NZHC 774
•26 April 2017
IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY
CIV-2016-404-1077
[2017] NZHC 774
BETWEEN DIAMOND MILK FORMULAS LIMITED
Plaintiff
AND
T.K (HONG KONG) LIMITED (IN RECEIVERSHIP)
Defendant
Hearing: 20 March 2017 Appearances:
Ms S Wroe for Plaintiff/Respondent
Mr R Hucker and Ms R Selby for Defendant/Applicant
Judgment:
26 April 2017
JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE
This judgment was delivered by me on
26.04.17 at 3.30 pm, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
DIAMOND MILK FORMULAS LIMITED v T.K (HONG KONG) LIMITED (IN RECEIVERSHIP) [2017] NZHC 774 [26 April 2017]
[1] In this proceeding, the plaintiff is seeking an order placing the defendant into liquidation pursuant to s 241(4)(a) of the Companies Act 1993 (“the Act”). The proceeding came before the Court as a result of the defendant seeking an order granting leave to file a statement of defence outside the time limits prescribed by r
31.17 of the High Court Rules (“HCR”). That rule requires a statement of defence to be filed within 10 working days after the date on which the statement of claim was served on the person filing the statement of defence.
[2] Despite the company being in receivership, the directors of the company, who appear to have authority necessary for the purpose, decided that a statement of defence ought to be filed.
[3]On 4 November 2016, I gave a judgment (“the decision”) in which I declined
leave to file a defence out of time.1 The grounds for that decision were that:
a)The defendant is insolvent;
b)The defendant has not put forward a satisfactory explanation for failure to file a statement of defence in time;
c)Prejudice would result to the plaintiff if leave were granted to file a defence.
[4] I also concluded that the defendant had an arguable defence on the question of whether a force majeure clause applied. It was not necessary for the Court to resolve questions of fact to determine whether an event had occurred which would trigger the force majeure clause, namely the change of certain import restrictions imposed by the Peoples Republic of China to which products manufactured by the defendant were intended to be sent. There were other issues of fact and law which would be required to be determined in order to decide whether the force majeure clause applied.
[5]The defendant has filed an appeal against the decision.
1 TK (Hong Kong) Ltd v Diamond Milk Formulas Ltd [2016] NZHC 2642.
[6] The proceeding was subsequently called in a liquidation list in December 2016 in the course of a busy list day. I have no recollection of my discussions with counsel on that day, but they advise me that their expectation was that a minute was to be issued, which never in fact occurred.
[7] In due course, I set a day for the matter to be called before me again but that date, after it had been allocated, became unavailable. On 24 February 2017, I directed that the matter be called again on 24 April 2017. With regard to the latter date, Mr Hucker for the defendant orally applied for a stay of proceedings. I concluded that the application could not be disposed of without allocation of a fixture and, in due course, a fixture was allocated for 20 March 2017. This judgment follows from that fixture.
[8] At the hearing on 20 March 2017, the defendant again sought orders based on the oral application for stay. Memorandum had been filed by each party.
[9] The essential aspects of the argument that Mr Hucker put before me were as follows. He noted that Ms Wroe, counsel for the plaintiff, had pressed the Court for a mention of the proceeding so that orders could be made for the liquidation of the defendant on the basis that this was an undefended proceeding and all documents which the plaintiff was required to place before the Court had been provided. Mr Hucker referred to the statement of claim and the allegation in it that the defendant company was indebted to the plaintiff in the sum of $402,960. The statement of claim also contained an allegation that the plaintiff had served a statutory demand on the defendant on 4 April 2016, which the defendant company had neglected to comply with by failing to pay the amount stated in the demand. The statement of claim then recited that, as a result of the defendant company’s failure to comply with the demand notice, the defendant company was therefore presumed to be unable to pay its debts in accordance with s 287(1)(a) of the Act.
[10] It was the contention of the defendant’s counsel that, because of the terms of my decision refusing leave to file a statement of defence out of time, it was not open to the plaintiff to maintain a plea that the defendant was indebted to the plaintiff. In abbreviated form, the argument was that the Court had concluded that there was an arguable defence available to the defendant arising out of the force majeure provision
of the contract. If the force majeure provision applied, then the defendant would be excused from making any payment and therefore would not be a debtor of the plaintiff.
[11] Ms Wroe submitted that the Court ought not to entertain submissions from the defendant: that the defendant had no rights of audience because it had failed to file a statement of defence. Ms Wroe relied upon r 31.20 of the HCR, which provides:
If a person who is entitled to file a statement of defence or an appearance in a proceeding commenced by the filing of a statement of claim under rule 31.3 fails to file a statement of defence or an appearance within the time prescribed, that person must not, without an order for extension of time granted on application made under rule
31.22 or the special leave of the court, be allowed to appear at the hearing of the proceeding.
[12] She said that it was clear that the Court should not hear the defendant in circumstances where no statement of defence had been filed and there was no ground to grant special leave to do so. She further submitted that the granting of special leave was not only unjustified, in that no grounds were established for such an exceptional indulgence to be extended to the defendant, but to do so would unjustly impede an unpaid creditor of the plaintiff to bring the proceedings to a prompt conclusion.
[13] It was Mr Hucker’s contention that the plaintiff could not conscientiously claim that it was a creditor of the defendant. That followed, he submitted, from my conclusion on the leave hearing that the defendant had an arguable defence.
[14] However, as Ms Wroe pointed out, in order to obtain leave the defendant, having regard to the view that I took of the law, had to negotiate several “gateways”.2 The defendant had to show that it had a substantial defence available to it; it had to demonstrate that there were good reasons why it had not filed a statement of defence within the time prescribed by the HCR and it also had to demonstrate it was not insolvent. As Ms Wroe pointed out, the defendant was able to demonstrate that it had an arguable defence, but it failed on the other points.
2 Ms Wroe did not actually state the matter in those terms but that captures the effect of what she said.
[15] I consider that the contentions that Ms Wroe puts forward are sound. The defendant, in order to obtain leave, had to satisfy not one but three requirements. The fact that it was only able to establish one meant that leave was declined.
[16] Because the defendant was not granted leave, it is not now “allowed to appear at the hearing of the proceeding”, as per r 31.20 of the HCR. It is not now claimed, for example, that there has been a change of circumstances which would justify the Court hearing the defendant further.
[17] Mr Hucker contended that it would be contrary to “natural justice” if the Court declined to hear his client now that the plaintiff wishes to proceed with the making of a liquidation order. He primarily rested that conclusion upon s 27 of the New Zealand Bill of Rights Act 1990 (“NZBORA”). It was his submission that the High Court Rules ought to be interpreted consistently with s 27 of the NZBORA. Mr Hucker accepted that that contention was subject to the “justified limitations” provision in s 5 of the NZBORA. Section 5 provides that the rights and freedoms contained in the NZBORA are subject to reasonable limits prescribed by law “as can be demonstrably justified in a free and democratic society”.
[18] In my view, the right of audience before a Court is properly the subject of some limitations in the form of time limits within which a statement of defence is to be filed. The defendants do not have an unrestricted right to access to the Court. Their rights are conditional upon their complying with the law as to time limits. It is not open to the defendant to contend that the restrictions contained in the High Court Rules represent unreasonable limits on the particular right of natural justice.
[19] Mr Hucker put forward a further submission, which I understand to be to the effect that it is necessary for the Court to grant leave for the defendant to be heard. Otherwise, there is an alleged risk that the plaintiff will improperly obtain a liquidation order. The submission which Mr Hucker made was based upon the premise that the plaintiff was not able to conscientiously claim that the defendant was a debtor, in light of the conclusion that I set out in my judgment on leave to file a statement of defence.3
3 TK (Hong Kong) Ltd v Diamond Milk Formulas Ltd, above n 1. This was to the effect that there was an arguable defence available to the defendant, centring on the existence of the force majeure
[20] Ms Wroe, in response, pointed out that the Court of Appeal held in Yan v Mainzeal Property and Construction Ltd (in rec and in liq) that where there was a substantially disputed debt, the creditor did not lose the status of creditor.4 Its status was suspended until the dispute was resolved in favour of the debtor.
[21] I consider, however, that the key to understanding the correct position in this case turns on the concept of a “substantial dispute”. Nevertheless, what is meant by the term “substantially disputed” debt must be set in its context.
[22] The context in which this matter came before the Court was that the defendant claimed that, although out of time for filing a defence, it had an arguable defence. The Court was therefore assessing at a preliminary stage whether there was any justification for allowing the defendant to raise these issues at a defended hearing. It was not required to decide whether the defendant’s contentions were correct or not. They had to be matters that were not so unarguable that it would be an abuse of the proceedings of the Court to permit the defendant to put them forward. By accepting the point that there was an argument that reached this low threshold, the Court was not stating a conclusion that the defendant had a defence which the plaintiff could not overcome.
[23] It was always open to the Judge, who might end up hearing the potential substantive proceeding, to conclude that, notwithstanding the fact that the defendant satisfied the threshold test I have mentioned, it turned out that on closer examination at a defended substantive hearing the matters put forward by the defendant did not negate the plaintiff’s claim.
[24] Once a defendant has lost the entitlement to file a defence in the proceeding, it becomes impossible for it to contend that the debt is substantially disputed. That is to say the dispute must be one that the Court is required to resolve.
[25] If the interpretation that I have adopted is correct, it will still be necessary for the Court to be satisfied that the defendant has failed to pay an outstanding debt to the
clause.
4 Yan v Mainzeal Property and Construction Ltd (in rec and in liq) [2014] NZCA 190 at [71] following.
plaintiff before it can make a liquidation order. As per r 31.21 of the HCR, the Court is required to examine the evidence which the plaintiff puts forward, including the affidavit verifying the statement of claim and any certificate of debt signed by counsel for the plaintiff. The Court hearing the substantive liquidation proceeding would not be deflected from making an order for liquidation on the grounds that a Judge at an earlier stage in the proceedings indicated that the defendant had an arguable defence. The conclusion expressed by the Judge at the earlier stage becomes irrelevant because, in the circumstances, the way matters have developed means that the Court will not be inquiring into whether that defence is capable of negating indebtedness on the part of the defendant to the plaintiff.
[26] What must be emphasised is that the Court has never said that the defendant is not indebted to the plaintiff. All that the Court said was that the defendant had an arguable defence which may or may not succeed if the matter goes to trial. However, because the defendant has not complied with the pre-requisites of the matter going to trial, that point is never going to be resolved. Therefore, the existence or non-existence of the substantial ground of defence is no longer relevant.
[27] As an alternative or additional remedy, Mr Hucker sought a stay of the liquidation proceeding until the Court of Appeal is able to consider the appeal which the defendant has brought from my judgment given on 4 November 2016.5
[28] One of the requirements for a stay is that, if a stay is not ordered, then the fruits of the appeal which the appellant brings will be rendered nugatory. In this case, the company is in receivership and is insolvent. The question that arises is what detriment the appellant will suffer if the liquidation is not stayed pending the hearing of the appeal. Mr Hucker candidly told me that the principal objective is to ensure that the directors remain in control of the company and therefore, assuming a successful outcome of the appeal, would be able to maintain control of the liquidation for winding up and would be able to file a defence. If a liquidator is now to be appointed, there is little reason to suppose, Mr Hucker contended, that he or she would
5 TK (Hong Kong) Ltd v Diamond Milk Formulas Ltd, above n 1.
be interested in progressing the appeal to the Court of Appeal. I accept that that is so given that the company is obviously insolvent.
[29] There is no evidence, in my view, which would justify a conclusion that the company would suffer substantial detriment unless a stay were to be granted pending the outcome of the appeal. There is no evidence demonstrating that there would be any advantages in deferring a liquidation while the appeal is heard, because there is no substantial advantage to be obtained from the company remaining in existence.
[30] Mr Hucker also asserted that the Court has always assumed jurisdiction to restrain liquidation proceedings that are an abuse of the Court’s process, in cases such as Taxi Trucks Ltd v Nicholson.6 I do not consider that this is a case where the liquidation processes are being used too oppressively. The only justification that the company would have for seeking a stay is for reasons related to the appeal. Consideration of the Taxi Trucks case does not assist the process of deciding whether a stay pending appeal ought to be granted.
[31]For all of the foregoing reasons, I consider that a stay ought to be refused.
[32] The solicitor for the plaintiff filed a certificate as to unpaid debt on 9 December 2016. In that certificate, Ms Wroe certified that the debt in the statement of claim was outstanding. That sum, as I have already mentioned, was $402,960. I have no reason to doubt that that circumstance has changed. I would assume and expect that Ms Wroe would tell the Court if there was a material change of the matters certified in December 2016. By material change, I mean a circumstance where the defendant company is no longer indebted to the plaintiff. Apart from that consideration, the pleadings in the statement of claim have been verified by affidavit. Again, I would expect that, if the affidavit no longer correctly stated the position because there had been a change of circumstances, counsel would have said so.
[33] I conclude that the plaintiff has proved all the matters that it is required to in order to be entitled to an order placing the company into liquidation pursuant to s 241(4)(a) of the Act. While the power to liquidate is discretionary, there do not appear
6 Taxi Trucks Ltd v Nicholson [1989] 2 NZLR 297 at 299.
to me to be any discretionary reasons in this case why the Court should not make an order.
[34] I therefore order that the company is to be placed into liquidation. Craig Andrew Young will be appointed liquidator. The order is to lie in Court until the Registrar has sighted a consent signed by Mr Young for appointment as a liquidator. The date and time of this order is that of the date and time when this judgment is issued.
[35] The parties should confer on the issue of costs and, if unable to agree, should file memoranda not exceeding 4 pages on each side within 10 working days of this judgment.
J.P. Doogue
Associate Judge
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