Foote v Keltern Stud Limited

[2012] NZHC 3407

IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY

CIV-2012-441-497 [2012] NZHC 3407

BETWEEN  SUSANNE JANE FOOTE AND STUART DAVID FOOTE AS TRUSTEES OF THE FOOTE FAMILY TRUST

Plaintiffs

ANDKELTERN STUD LIMITED Defendant

Hearing:         13 December 2012 (Heard at Napier)

Counsel:         J. Bates - Counsel for Plaintiff

N. Russell - Counsel for Defendant

Judgment:      13 December 2012

ORAL JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALL

Solicitors: Gresson Grayson, Solicitors, PO Box 1045, Hastings

Chen Palmer Public and Employment Law Specialists, PO Box 2160, Wellington 6140

SJ FOOTE AND SD FOOTE AS TRUSTEES OF THE FOOTE FAMILY TRUST V KELTERN STUD LIMITED HC NAP CIV-2012-441-497 [13 December 2012]

Introduction

[1]      This proceeding involves a company known as Keltern Stud Limited (the defendant company).

[2]      The defendant company was formed many years ago (certainly at some time prior to 2000) by members of the Kelt family.

[3]      Prior to his death in 2000, as I understand the position, a 50% shareholding in the defendant company was owned by Mr G.R. Kelt senior (Mr Kelt senior) who is the father of the first-named plaintiff Suzanne Jane Foote (Ms Foote) and her brother David Andrew James Kelt (Mr Sam Kelt).  Prior to 2000, Mr Sam Kelt owned the remaining 50% shareholding in the defendant company.

[4]      Following the death of the late Mr Kelt senior, Ms Foote acquired effectively by inheritance his 50% shareholding in the defendant company.   In addition, as I understand the position, about that time the late Mr Kelt senior and Mr Sam Kelt as shareholders in the defendant company had made advances to the company each totalling  $313,213.00.    I  believe  these  amounts  at  the  time  were  shown  in  the accounts of the defendant company as shareholders’ loans.

[5]      Following  her  acquisition  of  the  shares  and  shareholders’  loan  in  the defendant  company, in  about 2000 Ms  Foote became a director along with her brother Mr Sam Kelt.   They continued as directors until Ms Foote resigned I understand in about 2010.

[6]      Ms Foote’s 50% shareholding in the capital of the defendant company is now held by the plaintiffs as trustees of the Foote Family Trust.

[7]      From all accounts, in the recent past Ms Foote and her brother Mr Sam Kelt have fallen out in a major way.   Certainly, so far as the defendant company is concerned, as family member shareholders they have become estranged from each other.  Both counsel who appeared before me today have acknowledged that this is the case.

[8]      Perhaps as a result of this, the current proceeding is before this Court.  This represents an application by Ms Foote and her husband as trustees of the plaintiff family trust to place the defendant company into liquidation.   The application is brought upon the basis of an unsatisfied statutory demand issued by the plaintiffs on

17 July 2012 requiring repayment of the $313,213.00 shareholders’ loan advance by

the defendant company.

[9]      The defendant company did not respond to this statutory demand when it was served with it on 17 July 2012.

[10]     Liquidation proceedings were then issued by the plaintiffs on 15 August 2012 and served on the defendant company on 16 August 2012.   Advertising of those proceedings took place in both the New Zealand Gazette and the Dominion Post newspaper on 30 August 2012.

[11]     All of the matters I have noted above are by way of general introduction and background to the issue which is before me today.

[12]     This is an application by the defendant company to seek leave to file out of time a statement of defence to the liquidation application brought against it.

[13]     Also before me today is effectively the liquidation application itself.

[14]     The leave application is necessary because the statement of defence which the defendant company is endeavouring to file here was presented out of time in terms of the time limits prescribed by the High Court Rules.  That application for leave itself was filed on 14 September 2012.   It has been opposed by Notice of Opposition filed by the plaintiffs on 19 September 2012.

[15]     It is appropriate here first to turn to consider the application for leave to extend the time for filing of the statement of defence and I now do so.

Application for Leave

[16]     That application asserts the following grounds:

(a)       The  defendant  company  is  not  liable  for  the  debt  alleged  by the plaintiffs.

(b)       The defendant company is solvent.

(c)       The defendant company has a reasonable excuse for not filing and serving its statement of defence.

[17]     Rule 31.20 High Court Rule states that a person who is entitled to file a statement of defence in a liquidation proceeding such as the present one, but who does not file it within the time prescribed, may not appear unless the Court orders an extension of time permitting that occurrence.

[18]     Rule 31.22 High Court Rules provides for the filing of an application for an extension of time.

[19]    The general principles to be considered upon an application to grant an extension of time include the following:

(a)       An applicant must demonstrate an arguable defence.

(b)If an applicant is unable to pay its debts then due, it may mitigate against the granting of leave.

(c)       Considerations of justice will apply.

(d)      An explanation for the delay needs to be provided.

(e)       An applicant must demonstrate a convincing reason for the granting of leave, a lack of prejudice and justification for the indulgence.

Is the defendant liable for the debt alleged by the plaintiffs, that is does it have a demonstrable and arguable defence?

[20]     As I understand the position advanced for the defendant company it is a simple one.  This is that the debt of $313,213.00 alleged by the plaintiffs to be due is not  a  shareholders’  loan  advance  to  the  defendant  company  but  is,  in  fact, shareholder funds.  As such, it represents equity in the defendant company and not a debt owed to the plaintiffs.  Hence the demand for repayment of this sum as a debt is inappropriate.

[21]     As to this, Mr Sam Kelt has provided by way of affidavit evidence to the Court, draft statements to the effect that this $313,213.00 does in fact represent shareholder  funds  and  not  repayable  loans  to  the  defendant  company.    He  has annexed to his affidavit evidence draft financial accounts for the defendant company for the years ending 2011 and 2012 which purport to show not only the $313,213.00 contribution from the plaintiffs (which was originally provided by his father pre

2000) but also the $313,213.00 contribution from himself as shareholders’ equity and not loans to the defendant company.

[22]     In response, the plaintiffs contend that this allegation on the part of Mr Sam Kelt is unsupportable to the extent that the previous financial accounts for the defendant company prior to 2010 consistently showed these amounts as shareholder loans and not equity funds.  The plaintiffs maintain that these draft accounts for 2011 and 2012 have not been verified or audited in any sense and are really matters concocted by Ms Foote’s brother.

[23]     At this point, it is difficult for the Court on the material before it to make any definitive ruling with regard to this aspect.   Certainly, this is a matter whereby, if indeed  these  amounts  were  shown  for  some  years  as  shareholder  loans  in  the financial accounts of the defendant company (which presumably were certified by the directors at the time which would have included Ms Foote and Mr Sam Kelt) what has happened to change that position now.  There may, however, be some ready explanation for this and at this point the Court obviously has little idea over what may have truly been envisaged throughout by these family members.

[24]     On balance therefore I find that it cannot be said here that the defendant

company has no arguable defence to the claim against it by Ms Foote’s Trust.

Is the defendant solvent?

[25]     On this aspect, Mr Sam Kelt asserts at para [11] of his affidavit dated 14

September 2012 that the defendant company is solvent and is able to pay its debts as they fall due.   He makes this latter statement in his words “on the basis that I continue to fund the company.  I have continued to invest in the company and have made (and continue to make) funds available to ensure that it meets its payments”.

[26]     From the draft financial accounts before the Court it would appear the current balance of this additional funding from Mr Sam Kelt may well be something approaching $500,000.00.

[27]     All this is hotly disputed by the plaintiffs.  It does appear to me, however, on the material which is before the Court that Mr Sam Kelt has contributed to the defendant company significant additional funds, presumably by way of shareholders’ loan or equity introduction.

[28]     The   present   liquidation   application   relating   to   the   alleged   debt   of

$313,213.00 is supported by one other creditor of the defendant company, a substantial creditor Crown Asset Management Limited which is said to be owed

$1,447,619.66.  It has filed an appearance in support.

[29]     The draft  accounts  for the  year ending 2012  attached to  Mr Sam  Kelt’s affidavit, also however on their face claim that the assets of the defendant company exceed its liabilities.  Whilst further detail as to the verifiable value of the defendant company’s assets may well be required here, that is not before the Court at this point.

[30]     Accordingly, I am not able to find definitively at this point that the defendant company indeed is presently insolvent such that it is urgent for an order to be made to place it into liquidation for the protection of its creditors and the general public.

Would granting the defendant’s leave application be in the general interests of

justice?

[31]     In my view the overall justice of this matter requires that the Court should grant leave in this case.  The material before the Court provided both on the part of the plaintiffs and the defendant company is reasonably voluminous.   It has been suggested that this is illustrative of the need for the Court to properly consider all the available  material  before  making  a  determination  on  the  dispute  between  these related parties.

[32]     On the question of delay in filing the defendant  company’s statement of defence here, Mr Sam Kelt has endeavoured to explain this at paras 13-15 of his initial  affidavit.    This  notes  that  at  the  operative  time  the  relationship  between himself and his sister was difficult to say the least and it does seem that there were attempts made to arrange meetings in an endeavour to negotiate a resolution of the problems.  But this it seems did not occur and time passed.

[33]     Whilst these matters do not provide an excuse for the delay involved, I am mindful that in this case we are dealing with a family situation.  This may well have lulled the defendant company into some false sense of security that any strict time limits imposed for responses would be waived.

[34]     Certainly, the plaintiffs have taken a rather different approach in their strong opposition to the present application for leave to file the statement of defence out of time.  Nevertheless, in my view the defendant company’s application should not be disqualified here on the basis of a suggested failure to provide a reasonable excuse for the delay in question.

Is there a convincing reason for the granting of leave, and is there a lack of prejudice and justification for the indulgence sought?

[35]     Here, it is clear the defendant seeks an indulgence in this application for leave to bring its defence out of time.  Notwithstanding this, as I see it the present liquidation application before the Court in the words of Mr Bates, counsel for the

plaintiffs at para 2.3(c) of his submissions to me dated 13 December 2012 involves the following:

This is a family company involving family member shareholders estranged from each  other.     The  genesis  of  that  estrangement  is  the  serious  and  presently unanswered questions the Foote family have over the apparent mismanagement by Mr Sam Kelt of its affairs.

[36]     It  is  these  unexplained  issues  as  to  the  management  of  the  defendant company which Mr Bates in response to a question from me today, says have driven the current proceeding.  Mr Bates advanced a further submission before me however that beyond the dispute between family members here, there is a public interest in the defendant company being liquidated now and the Court should take a realistic and robust approach concerning this.

[37]     Mr Bates did acknowledge, however, that although the grounds advanced in the liquidation application are notionally non-payment by the defendant company of the shareholders’ loan debt, the situation the Court faces is one similar to that which prevailed in Vujnovich v Vujnovich [1989] 3 NZLR 513 whereby there has been a major and fundamental breakdown in the relationship between the shareholders in this company such that it is just and equitable for an order to be made to place the defendant company into liquidation. It remains to be shown however that this will prove to be the case ultimately.

[38]     Thus, for the Court, to reach a judgment on that aspect, or indeed on whether or not both the defendant company is insolvent and the amount claimed by the plaintiffs represents a proper debt due, requires in my view that the Court have before it all the proper and available evidence on both sides.

[39]     The impact of the plaintiffs’ opposition to the present leave application is in essence a contention that the Court should have before it only the evidence from the plaintiffs  when  making  a  decision  on  such  an  enquiry.    As  I  see  it,  that  is inappropriate here.

[40]     For all these reasons it will be apparent that the application by the defendant company for leave to file its statement of defence out of time must succeed.

[41]     An order to this effect is made.

[42]     The Court therefore is considering the present liquidation application, is to take into account the defendant company’s defence to the application together with the affidavits in support by Mr Sam Kelt.

[43]     That liquidation application now is to be time-tabled towards a hearing.  The plaintiffs should also have an opportunity to provide any further and reply evidence they may wish to the evidence of Mr Sam Kelt.

[44]     I now make the following directions therefore:

(a)      The Registrar is directed to liaise with counsel for the plaintiffs and counsel for the defendant company to set the plaintiffs’ liquidation application down for hearing (1/2 day is allowed) at the first available and suitable date.

(b)The plaintiffs are to have a period of 15 working days from today to file and serve any additional affidavit evidence they may wish in support of their application and in reply to the evidence of Mr Sam Kelt.

(c)      The defendant company is to have a further period of 10 working days from that date to file and serve any affidavit evidence they may wish strictly in reply.

(d)The provisions of r 7.39 regarding filing of synopses of submissions in advance for that hearing are to apply.

PostScript

[45]     It will be apparent, given my present decision granting leave to the defendant company for the late filing of its statement of defence here, that the liquidation application before the Court is simply adjourned to be heard at the hearing date referred to in para [44](a) above.

[46]     In the meantime, costs with respect to the present application are reserved.  I say this however noting that the impact of this decision is to grant a significant indulgence to the defendant company here.

[47]     In addition, at the conclusion of matters today, Mr Bates indicated that he intended to file an amended statement of claim to plead an additional ground for the liquidation order the plaintiffs seek.  This is to plead just and equitable grounds to justify a liquidation order.

[48]     Leave is now granted to the plaintiffs to file and serve such an amended statement of claim as outlined above.

[49]      If this occurs, then an order is now made that there is no need or requirement for the plaintiffs to additionally re-advertise this liquidation proceeding.

[50]     The amended statement of claim referred to above is to be filed and served within 10 working days of today.  Any statement of defence to that amended statement of claim is to be filed and served within a further 10 working days of that date.

‘Associate Judge D.I. Gendall’