Exterior Building Care Goleman Limited v Air Fluid Otao Limited
[2014] NZHC 887
•1 May 2014
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV-2013-409-000046 [2014] NZHC 887
BETWEEN EXTERIOR BUILDING CARE
GOLEMAN LIMITED Plaintiff
AND
AIR FLUID OTAGO LIMITED Defendant
Hearing: 28 April 2014 Appearances:
D A Webb and R G McRae for Plaintiff
D Tobin for Defendant Company in Liquidation
J Guest for Liquidator of Defendant Company
T Laing - Liquidator in PersonJudgment:
1 May 2014
REASONS FOR DECISION OF GENDALL J
Introduction
[1] Before the Court on 28 February was an application brought by the plaintiff pursuant to s 248(1)(c) Companies Act 1993 seeking an order granting leave to the plaintiff to continue this proceeding against the defendant company now known as AFO Industrial Limited (In Liquidation) (the defendant company)which was placed into voluntary liquidation by its shareholders on 11 March 2014.
[2] At the hearing of this matter on 28 April 2014, having heard argument and submissions from counsel for the plaintiff, counsel for the liquidator and counsel for the defendant, I granted the application. An order was made therefore granting leave to the plaintiff to continue this proceeding against the defendant company.
[3] In doing so I indicated that my reasons for this decision would follow. I now set out those reasons.
EXTERIOR BUILDING CARE GOLEMAN LIMITED v AIR FLUID OTAGO LIMITED [2014] NZHC 887 [1
May 2014]
[4] As I have noted above the present application is brought under s 248(1)(c) Companies Act 1993 (“the Act”) which states:
248 Effect of commencement of liquidation
(1) With effect from the commencement of the liquidation of a company,—
…
(c) unless the liquidator agrees or the court orders otherwise, a person must not—
(i) commence or continue legal proceedings against the company or in relation to its property; or
(ii) exercise or enforce, or continue to exercise or enforce, a right or remedy over or against property of the company…
[5] Addressing this provision Brookers Insolvency Law And Practice at para
CA248.03(2) states:
(2) Leave to proceed
The factors relevant to the exercise of the Court's discretion under s
248 turn on whether:
• Any circumstances exist which render it necessary that the legal proceedings should continue; or
• The plaintiff’s claim is not one that can easily be dealt with in the liquidation.
For examples, see: Body Corporate 81381 v Trebe NZ Ltd (in liq)
13/5/03, Master Gendall, HC Wellington CIV-2003-485-332; Century
Mercantile Co v Auckland Provincial Fruit growers’ Co-op Soc Ltd [1921] NZLR 272; and Loyal Ltd v Standard Tobacco Co Ltd (in liq) [1935] NZLR
83.
For examples of the application of this principle in different circumstances, see: Re Ahead Group Ltd 11/8/00, Williams J, HC Auckland M2027-SW99; Pacific Produce Co Ltd v Franklin Co-op Growers Ltd (in liq) [1969] NZLR 65; Re Mitchell Ltd (1914) 16 GLR 541; and Hall v Old Talargoch Lead Mining Co (1876) 3 Ch D 749.
The leading recent authority concerning the granting of leave under s 248 is Fisher v Isbey (1999) 13 PRNZ 182, where Master Faire
summarised the factors that have weighed with the Court in other cases
concerning the exercise of the discretion to allow proceedings to continue. His Honour’s conclusions on the relevant principles to be applied were as
follows:
(a) The Court has a discretion whether to grant leave. It is a cardinal principle that there must be equality among various creditors, and the bringing of proceedings should not produce a comparative advantage to any particular creditor: Steel & Tube Co of NZ Ltd v JBL Construction Ltd [1973] 2
NZLR 30; Langley Constructions (Brixham) Ltd v Wells
[1969] 1 WLR 503; [1969] 2 All ER 46.
(b) The assets of a company should not be dissipated in wasteful litigation, particularly if there is a more convenient method for determining the claim. The onus is on the party seeking leave to satisfy the Court that leave should be given: McPhail v Durbridge Developments Ltd (in liq) (1998)
8 NZCLC 261,610.
(c) The Court must determine whether it is appropriate for the creditor’s claims to be proved in the liquidation, or whether
leave should be given to allow the claims to be established
by way of civil proceedings: Pacific Produce Co Ltd v Franklin Co-op Growers Ltd (in liq) [1969] NZLR 65; Loyal Ltd v Standard Tobacco Co Ltd (in liq) [1935] NZLR 83.
(d) The appropriate test is that the Court be satisfied that the proposed claim is not clearly unsustainable. The Court
should not examine the merits of the case: Bristol & West BS
v Trustee [1998] 1 BCLC 485. See also Body Corporate
81381 v Trebe NZ Ltd (in liq) 13/5/03, Master Gendall, HC Wellington CIV-2003-485-332; Sieradzki v Kahikatea Mfg
Ltd (in liq) 15/3/00, Potter J, HC Auckland M54-SW/00;
Hook v Gulf Harbour Development Ltd (in liq) 23/11/05, Associate Judge Doogue, HC Auckland CIV-2002-404-
1931.
Examples of a clearly unsustainable claim include one that is statute barred (by virtue of the provisions of the Limitation Act 1950) or a claim that would not survive a strike out application. In the absence of these types of circumstances, the focus is not on the merits of the case, but on whether legal proceedings are the most convenient and cost effective way in which the creditor’s claim can be established: Trinity Foundation (Services No 1) Ltd v Downey (2005) 9 NZCLC 263,917, cited by Associate Judge Abbott in Bastin Enterprises Ltd v Graham 4/11/09, Associate Judge Abbott, HC Auckland CIV-2008-404-4443, at [27].
In Birchall v Project Works Construction Ltd (in liq) (2004)
9 NZCLC 263,547, the Court noted that the principles in Fisher v Isbey are not exhaustive. In Birchall, Frater J accepted that the following two factors are also relevant to an exercise of discretion under s 248(1)(c), namely:
(e) Leave under s 248(1)(c) will usually be declined if the proceedings sought to be commenced, even if successful, are
likely to be fruitless: Johnson v CBD Real Estate Ltd (in liq)
(1999) 14 PRNZ 320, at p 322. See also IH Wedding & Sons
Ltd v Buy-Sell Realty NZ Ltd 27/11/08, Allan J, HC Auckland CIV-2008-404-5502.
(f) Delay by the applicant: McPhail v Durbridge Developments
Ltd (in liq) (1998) 8 NZCLC 261,610.
[6] In the present case Mr Guest counsel for the liquidator confirmed that the liquidator opposes the present application for leave.
[7] Mr Tobin, counsel for the defendant company prior to its being placed into liquidation, indicated that he has no instructions to either oppose or support the present application.
[8] So far as the liquidator’s opposition is concerned, as I understand the arguments advanced by Mr Guest, the grounds of opposition are principally as follows:
(a) That the liquidator, who has only been relatively recently appointed, does not have all the necessary information nor the funds available to enable him to take an active part in the proceeding at the forthcoming hearing scheduled for 26 May 2014, and any defences of the defendant company to the plaintiff’s claim cannot therefore be properly considered.
(b) The liquidator has no funds and currently is unable to say whether the company has any assets or ability to satisfy any judgment which may be given against it.
(c) Fundamentally, the issue of whether a debt is owed by the defendant company to the plaintiff or not and the quantum of that debt are matters that the liquidator should be given time to properly consider when a proof of debt form is filed. That has not as yet occurred.
Background
[9] This proceeding involves a number of issues arising out of a construction contract between the plaintiff and a third party to provide specialist advice and equipment to mitigate the risk of rock fall on a Canterbury access road resulting from the recent earthquakes in this area.
[10] The plaintiff and the defendant company had entered into a contract under which the defendant company agreed to provide to the plaintiff:
(a) Expert advice in respect of the remedial work under the construction contract; and
(b) Plant and materials to carry out the construction contract.
[11] That occurred in what the plaintiff contends was an inadequate, improper and negligent way. As a result, the plaintiff brought this proceeding against the defendant company and alleged it had:
(a) Provided negligent advice;
(b) Provided plant and materials for the construction contract that were not fit for purpose and/or were not of an acceptable quality;
(c) Failed to deliver plant and materials in a prompt manner in the time stipulated in the contract and as agreed between the parties; and
(d) Engaged in misleading and deceptive conduct to the prejudice of the plaintiff.
[12] The plaintiff in an amended pleading claims an award of damages of
$385,488.55 plus interest. The defendant company has filed a statement of defence and also a counter claim in which it seeks something under $200,000. This is said to be for alleged unpaid rental for certain plant leased to the plaintiff and for the return of that plant and for an unpaid purchase amount for an additional item of plant.
[13] This proceeding was commenced by the plaintiff with an initial statement of claim filed on 14 June 2013. Right up to March 2014 it was opposed by the defendant company.
[14] On 11 March 2014 the defendant company was placed into voluntary liquidation by its shareholders. Mr Trevor Laing (Mr Laing) was appointed as liquidator.
[15] Mr Laing has confirmed that he does not agree to the continuation of the present proceeding against the defendant company in liquidation and further that he formally opposes the plaintiff’s present application for leave to continue the proceeding under s 248(1)(c) Companies Act 1993.
[16] As I understand the position, discussions have taken place between the liquidator and his counsel Mr Guest and the plaintiff to ascertain whether the liquidator would accept a proof of debt claim from the plaintiff pursuant to s 248
Companies Act 1993. Mr Guest says the liquidator has indicated he is not able to accept such a claim at this point as he maintains he has insufficient information before him to show that the claim is justified.
[17] As recently as 17 April 2014 the liquidator has advised for the first time that the defendant company has two previously undisclosed creditors in addition to any debt that may be owing to the plaintiff. These other creditors are:
(a) The A & G Andrews Family Trust – a party related to the directors of the defendant - $327,015.14.
(b) The Inland Revenue Department - $15,066.34.
[18] It seems also that earlier in April 2014, following a request by the plaintiff, Mr Laing did indicate he would resign as liquidator of the company in favour of Shepherd Dunphy who the plaintiff proposed, only to change this position on
17 April 2014 when he said that he would not voluntarily resign.
[19] Recently, the plaintiff says it has sought to discuss with the liquidator directly the resolution of its claim against the defendant including its concerns over the recent transfer of the defendant company’s assets to a new company operated by the directors shortly prior to liquidation. The plaintiff maintains that no tangible response has been provided by the liquidator to these enquiries.
[20] By letter of 8 April 2014 however it does seem that the liquidator has confirmed that he will not determine the substantive proceeding between the plaintiff
and the defendant company nor will he accept a quantum valuation of the plaintiff’s claim for liquidation purposes.
[21] That being the case, the plaintiff says that, if the scheduled hearing in this Court of the plaintiff’s claim does not take place on 26 May 2014 and that hearing is abandoned, there will be no realistic prospect of the substantive proceeding being resolved by Court judgment. Effectively this will mean the plaintiff will be denied the opportunity to have its claim in the liquidation formally resolved.
[22] The plaintiff says if the hearing in this Court is abandoned its only realistic option will be to try to negotiate its claim with the liquidator without the prospect of a hearing to incentivise expediency and reasonableness. The delay involved it is said might also provide an opportunity for the removal of additional assets from the plaintiff’s reach.
[23] On these aspects, it is useful to note that other than a small debt owing to the Inland Revenue Department, the liquidator has confirmed that the only debt other than the plaintiff’s claim owing by the defendant company is to a closely related party – that is the directors’ family trust and the debt is said to total some $327,000. In terms of whether there is a possibility of prejudice to other creditors of the defendant company if this proceeding continues, the only other principal debt said to be due is from that related party. As clearly interested parties here, it is always open to the members of that related trust to fund a defence by the liquidator if they so choose.
[24] The plaintiffs contend also that the defendant company has hastily transferred assets here to the new company formed by the directors in transactions immediately prior to it being placed into liquidation. This was done it was said purely because the defendant company was facing the present claim, for a claim suggesting substantial liability for allegedly defective behaviour under the contract with the plaintiff. Subsequently the plaintiff claims that shareholders and directors of the defendant company have simply continued in business using the new company with a similar name, later having decided themselves to place the defendant company into
liquidation. Given all these matters, the plaintiff contends there would be a total injustice in this case if its present claim was not to be properly heard by this Court.
[25] This is even more so, according to the plaintiff, given that the directors of the defendant company who made these decisions and claim to be major creditors of the defendant pursuant to their family trust, are arguably the most culpable parties in this whole matter. The plaintiff contends that it must make sense for the Court first, to deal with the issue of the defendant company’s liability to the plaintiff and secondly, once the outcome of that claim is known, to deal with enforcement issues against that company, the new company (to which its business has been transferred), and the directors personally.
[26] I accept here first, that the plaintiff’s claim against the defendant company is not clearly unsustainable and secondly, that considerable time has elapsed and expense been incurred to reach this point, with a trial date only some four weeks away.
[27] Whilst the usual position upon liquidation of a company is that proceedings will be stayed and the liquidator given the first opportunity to resolve creditors’ claims under s 248(1) Companies Act 1993, in the present case in my view the interests of justice require that this approach should be departed from. I am satisfied there will be no breach here of the principle of equality amongst creditors as outlined
in Fisher v Isbey1 if the present proceeding continues, and indeed the pool of
available assets for all creditors might well be increased. In particular, I reach the conclusion that the present application should be granted for the following additional reasons:
(a) This proceeding will ascertain any liability of the defendant company to the plaintiff, and it is a necessary prerequisite to the pursuit of assets that were allegedly dissipated prior to the liquidation.
(b) There are few other real creditors and therefore there is no wider prejudice or preference given to the plaintiff here over other creditors.
1 Fisher v Isbey [1999] 13 PRNZ 182.
(c) The plaintiff has said it is currently drafting further pleadings which will seek to draw other parties into this proceeding, and their liability will rest on the liability of the defendant company.
(d) The defendant purportedly has few or no assets and therefore it cannot be said that to continue this litigation would dissipate or waste assets that should be distributed to creditors.
(e) This is not a claim which can easily be dealt with by the liquidator.
The liquidator has not yet signalled whether:
(i) He accepts this claim and abandons the counterclaim; or
(ii) He accepts this claim, reduced by the counterclaim; or
(iii) He intends to seek recovery of the assets of the defendant company which have been wrongly dissipated.
(f) The plaintiff says there are assets which may be pursued and therefore this litigation will not be fruitless.
[28] I conclude therefore that if the matter which is before this Court does not proceed, the plaintiff would be significantly prejudiced. This would thwart any action for recovery by the plaintiff of a debt it alleges is due to it. In addition potentially this would make considerably more difficult the investigation of what is said to be dissipation of the defendant company’s assets and if this is ultimately shown to have occurred, it must be a matter of considerable concern.
[29] For all these reasons the plaintiff’s application for leave to continue this proceeding against the defendant under s 248(1)(c) Companies Act 1993 succeeds. The order to this effect made on 28 April 2014 noted at [2] above is confirmed.
...................................................
Gendall J
Solicitors:
Lane Neave, Christchurch
Rodgers Law, Dunedin
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