Glassey & Associates Limited v Takanini Surgery Limited
[2021] NZHC 511
•15 March 2021
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2020-404-001774
[2021] NZHC 511
UNDER The Companies Act 1993 BETWEEN
GLASSEY & ASSOCIATES LIMITED
Plaintiff
AND
TAKANINI SURGERY LIMITED
Defendant
Hearing: 24 February 2021 Appearances:
N G Lawrence for Plaintiff J Burt for Defendant
Judgment:
15 March 2021
JUDGMENT OF ASSOCIATE JUDGE P J ANDREW
GLASSEY & ASSOCIATES LTD v TAKANINI SURGERY LTD [2021] NZHC 511 [15 March 2021]
Introduction
[1] Glassey & Associates Ltd (GAL) is a one-third shareholder in the defendant company, Takanini Surgery Ltd (TSL). GAL seeks an order placing TSL in liquidation pursuant to s 241 of the Companies Act 1993 (the Act).
[2] TSL was incorporated to operate a general practitioners’ medical clinic in Takanini. It is no longer trading. TSL failed to comply with a statutory demand issued by GAL requiring TSL to repay a shareholders’ advance of $101,013.75.
[3] In opposing liquidation, TSL contends that GAL has failed to establish that TSL is unable to pay its debts and that, as a matter of discretion, it would not be just and equitable that TSL be put into liquidation.
Factual background
[4] TSL was incorporated on 3 May 2019. Its incorporating shareholders in equal shares were the plaintiff, GAL, Arohanui Medical Services Ltd (AMSL) and Remani Ltd (RL).
[5] GAL is owned by Dr Sarah Glassey; AMSL is owned by Dr Choony (Luc) Wee; and RL is owned by Dr Anitha Nair, Nair & Associates Trustee Co Ltd and Ramesh Nair.
[6]The directors of TSL on incorporation were Dr Glassey, Dr Nair and Dr Wee.
[7] The TSL medical practice operated out of a commercial property owned by Gateway Medical Ltd (GML). GML was incorporated on 26 June 2017 and had the same shareholders as TSL, except Dr Nair’s one-third share was owned by her personally and not by RL. Drs Glassey, Nair and Wee were also directors of GML.
[8] In essence, therefore, Drs Nair, Wee and Glassey began the medical practice in Takanini as equal shareholders and directors. There was no formal documentation of their shareholderdirector relationships.
[9] The Takanini medical practice opened in August 2019. Dr Glassey was the primary doctor at the practice. Drs Nair and Wee had other medical practices in Karaka and Pokeno.
[10] From 15 August 2019 to 20 March 2020, GAL advanced $101,013.75 to TSL by way of shareholders’ advances.
[11] Shortly after opening the Takanini practice, Drs Nair and Wee obtained advice from lawyers and signed a shareholders’ agreement between their respective entities. Dr Glassey says that it was only upon seeing invoices from the lawyers in TSL’s accounts a number of months later that she became aware of what had happened. She says she was deliberately excluded from these arrangements.
[12] Dr Glassey (through GAL) ceased providing medical services at the Takanini practice in March 2020, about the same time as New Zealand went into COVID-19 lockdown. She says by that time it had become untenable for her to remain at the Takanini practice given what she says was a deterioration of her relationship with Drs Nair and Wee.
[13] GAL served a statutory demand on the defendant for $101,013.75 on 22 May 2020.
[14]TSL failed to comply with the requirements of the statutory demand.
[15]On 26 May 2020, Dr Glassey was removed as a director of TSL.
[16] Between July 2020 and October 2020, Drs Wee and Nair transferred the business of TSL to another company owned by them (and which does not include Dr Glassey or GAL).
[17] As per her comment on 22 September 2020, GAL filed this application to put TSL into liquidation.
Relevant legal principles
[18] In a creditors’ application for liquidation relying on inability to pay debts (as the case here) there are three main questions:1
(a)Is the plaintiff a creditor?
(b)Is the defendant insolvent?
(c)How should the Court exercise its residual discretion?
[19]TSL takes issue with all three limbs of that test.
[20] Section 287(a) of the Act provides that a company is presumed to be unable to pay its debts if it has failed to comply with a statutory demand.
Analysis and decision
[21] I address first the question of whether the defendant company, TSL, is insolvent. That is the principal ground of TSL’s defence.
(a)Is the defendant insolvent?
[22] Section 287 creates a rebuttable presumption. The critical issue is whether TSL has provided evidence that provides a reasonable basis for the Court to ultimately conclude that it has established, on the balance of probabilities, that it is solvent.2
[23] GAL has provided clear, probative evidence that TSL is insolvent; it is unable to pay its debts. This includes bank accounts, financial statements and expert evidence. In particular:
(a)TSL’s financial statements for the year ended 31 March 2020 showed that TSL made a loss of $177,803 that financial year. TSL has admitted
1 Cable Price (NZ) Ltd v Taimona Haulage Ltd [2016] NZHC 828.
2 CIR v Volcanic Investments Ltd HC Auckland, 14 February 2007, Doogue AJ CIV-2006-404-5253.
that it made a loss. GAL’s shareholder advances have been recorded in those financial statements as a company debt;
(b)Mr Lester Gouwland, chartered accountant, has given expert evidence expressing the view that TSL is insolvent and unable to pay its debts. Mr Gouwland has examined TSL’s financial statements. He notes that there is nothing in the financial statements to indicate that the shareholder advances are anything other than repayable on demand. There is clear evidence in the TSL bank statements that the company has ceased trading and no longer has an income from which to pay its debts. As at 20 January 2020, there was only $678.57 in the company’s bank account;
(c)The defendant’s directors, Dr Wee and Nair, have admitted that the business TSL was set up to run, namely the Takanini medical practice, has been transferred to another company owned by them. This confirms that TSL has ceased trading;
(d)The last capitation payment from Pro Care to TSL was on 17 September 2020 (capitation being the Ministry of Health distribution of funds to clinics based on patient population, namely number and decile) which confirms and is entirely consistent with the patients now being registered under another entity;
(e)Correspondence from Dr Wee in March 2020 expressly states, “At the rate we are going, we are not financially sustainable.” That email also contains a clear acknowledgement by both Drs Wee and Nair that their business relationship with GAL and Dr Glassey was at an end.
[24] In contending that TSL is not insolvent and that GAL is not a creditor, TSL submits that there was an oral agreement between the joint venture parties that the funds advanced by the shareholders would be repaid only once TSL was in a position to pay them, namely when it had become profitable and that in the meantime none of the shareholders could therefore require repayment. It is contended that the only
potential liabilities of the company are the shareholder contributions which are the subject of the dispute between the parties in these proceedings. It is argued that the draft balance sheet as at 31 March 2020 discloses that, excluding the shareholder contributions, TSL had total liabilities of only $43,765 and positive net equity of
$126,915.
[25] Mr Burt also submitted that even on the plaintiff’s own argument, the shareholder advances are only payable on demand. To date, neither of the two other shareholders has made demand for repayment of their advances and accordingly, cannot properly be regarded as liabilities of the company. This is said to leave a net asset position of $25,902. It is acknowledged that there was a loss for the year ended 31 March 2020, but Mr Burt referred to the evidence of some $45,083 of recoverable fixed assets and cash assets of $124,892. He also relied on the evidence of Dr Wee that since 31 March 2020 TSL’s third-party creditors have been paid.
[26] Those submissions are no doubt an attempt to try and rebut the statutory presumption under s 287. However, TSL has not provided any expert evidence to counter the clear and unequivocal expert view of Mr Gouwland. All three shareholder advances are recorded as liabilities in the most recent financial statements and where, as here, the defendant company needs to rebut the presumption of insolvency, a failure to provide expert evidence or any further financial documentation, is inadequate. As noted above, Mr Gouwland is of the view that there is nothing in the financial statements he has seen to indicate that all of the shareholder advances should properly be regarded as liabilities. That is the clear and unequivocal way in which they are presented in the financial statements before me. I also note that it is not disputed that the defendant is not trading and that it has very minimal funds in its bank account. It did not challenge the statutory demand. Furthermore, there is no evidence contradicting the clear evidence from Drs Wee and Nair that they recognise that the company is simply no longer financially sustainable.
[27] In all the circumstances, I conclude that TSL has failed to rebut the presumption of insolvency and that the plaintiff has clearly established that the company is unable to pay its debts.
(b)Is GAL, the plaintiff, a creditor?
[28] It is clear that a winding up order will not be made where there is a genuine and substantial dispute as to the existence of a debt such that it would be an abuse of the process of the Court to order a winding up.3
[29] In relation to this issue of whether the plaintiff was a creditor (normally the first question) I note that TSL admits at paragraph [3] of its statement of defence that it owes GAL the amount demanded in the statutory demand. GAL is therefore prima facie a creditor.
[30] However, TSL contends that while a debt is owed to the plaintiff that debt is not due and payable. It says there is a genuine and substantial dispute about whether the shareholder parties entered into an oral agreement that they could not withdraw their shareholder advances until TSL was in a position to pay them (ie, until TSL had become profitable). The principal evidence in support of the existence of the contended oral agreement that of Drs Wee and Nair.
[31] Beyond the mere say so of Drs Wee and Nair, there is very little probative evidence to support the claim for this oral agreement. It is not disputed that the parties agreed to hold an equal number of shares, to contribute equally to both the costs of setting up the practice and the costs of running the practice and to share equally in the profits generated by the business. Likewise, it seems undisputed that they reached agreement that if any of the principals provided medical services as part of TSL’s business, he or she would be remunerated for those services. However, agreement on those matters provides no support for the alleged oral agreement as to when the shareholder funds would become payable.
[32] Mr Burt contended that the draft shareholders’ agreement, being the document drafted by Franklin Law, on instructions from Drs Wee and Nair, contains a clause entitled “shareholder advances” which specifically provides for a “non-withdrawal period”. From this, it is submitted that it is “clear evidence” that some limitation on
3 Yan v Mainzeal Property & Construction Ltd (in receivership and in liquidation) [2014] NZCA 190 at [61] citing Bateman Television Ltd (in liq) v Coleridge Finance Co Ltd [1971] UKPC 929 (PC) at 932.
the shareholders’ ability to demand repayment of their contributions had been in contemplation. I find, however, that that submission does not in fact assist TSL.
[33] TSL has not challenged Dr Glassey’s evidence that she was not aware of or had seen the draft shareholders’ agreement drafted by Franklin Law until after she had seen the invoices from those lawyers in the defendant company’s accounts in 2020. Dr Glassey had nothing to with that draft shareholders’ agreement and it cannot therefore provide any basis from which it can be inferred that she, as a critical party, had in contemplation some limitation on the shareholders’ ability to demand repayment.
[34] Dr Wee may be correct to point out in his affidavit that it makes no commercial sense that shareholders would have agreed to commit substantial funds (in excess of
$300,000 as at 31 March 2020) without the security of the term which TSL says was agreed between the shareholders. It is argued that no rational shareholder would invest a significant sum of money in a company if there were a risk that another shareholder could cause the company to become insolvent instantly at any time, either due to a change in the shareholders’ circumstances or on a whim.
[35] While there is some merit in that contention, it provides very tenuous support for the claimed oral agreement in this case. Here, there are real questions about the commercial sense of both failing to record these important matters in writing (as a formal agreement), and, at a very early stage in the life of the business, excluding Dr Glassey, a significant shareholder, in the process of instructing lawyers to draft a shareholders’ agreement. If Dr Wee really would not have agreed to go into business with Dr Glassey without including such a term in their arrangement, it makes no sense that he did not insist upon such a term being recorded in writing and the parties entering into an enforceable agreement to that effect.
[36] As Mr Lawrence submitted, the fact that RL and AMSL (Dr Wee and Dr Nair) entered into their own shareholders’ agreement in November 2019, only a matter of months after the Takanini practice opened, clearly does suggest that there was no shareholders’ agreement (or at least no agreement on this critical issue of repayment) for TSL prior to that point.
[37] I also reject Mr Burt’s submission that an obligation by TSL to repay GAL would require a contribution by GAL of an equivalent amount. Mr Burt contended that if TSL had insufficient funds to repay GAL, the shareholders are obliged to contribute those funds. However, and as Mr Lawrence submitted, no shareholder of a limited liability company is under any obligation to meet the liabilities of that company beyond the provision of their share capital, and irrespective of whether or not the company is able to meet its debts as they fall due.4 The contention that there would be no financial benefit to GAL in demanding repayment, even if it were entitled to do so, lacks merit.
[38] The test I must apply is whether there is a genuine and substantial dispute. I find that the evidence is insufficient and does not reach that threshold.
[39] Even if I am wrong in concluding that there is no genuine and substantial dispute as to the debt at issue, I would find, in the circumstances of this case, that where the company has ceased trading and is presumptively insolvent, that a dispute as to this particular debt is not a relevant dispute that could operate as a proper basis for declining to order the winding up of the company.
[40] I agree with the conclusion of Christiansen AJ in Darby v EBT Worldwide Ltd,5 where a similar argument was made by the director of the defendant company that pursuant to an agreement (a written agreement in that case) between the parties, payment of the disputed debt was not yet payable. Christiansen AJ held that if the company was still trading there would be some merit in an argument that until a profit was returned, no payment had to be made to the plaintiff. His Honour reasoned that if the company has ceased to trade the plaintiff should be able to demand repayment. He concluded:
[12] Accordingly, any contractual clause that provided that a shareholder lender was not to be repaid until a company traded profitably could not apply in the circumstance where the company ceased trading totally. The contract is silent on what is to happen on those circumstances. The Court could properly imply a term therefore to the effect that if a company ceased trading, the assets of the company would be called in, and at that point the creditors paid with any balance being distributed to the shareholders in accordance with
4 Soloman v A Soloman & Co Ltd [1897] AC 22 (HL).
5 Darby v EBT Worldwide Ltd HC Auckland CIV-2004-404-2758, 15 October 2004.
their shareholding. Therefore, if it is established that the monies are due and owing and in the absence of the company having the ability to pay the company should be wound up.
[41] I agree with Mr Lawrence, for the plaintiff, that the position of the plaintiff here is even stronger than that of Darby. Here, TSL admits it is not trading and the only evidence of a shareholders’ agreement containing the disputed term is the oral evidence of Drs Wee and Nair. There is simply no evidence at all in this case (and assuming the oral agreement contended for is made out) as to what provisions, if any, should apply if a company should cease to trade and before it became profitable.
[42] It is not necessary for me to deal with the alternative contention advanced by GAL that it is a contingent creditor pursuant to s 288(5) of the Act.
(c)Discretion – just and equitable grounds
[43] It is clear that a liquidator should normally be appointed if one of the available statutory grounds is made out. The discretion to refuse to put a company into liquidation is to be sparingly exercised.6
[44]TSL contends:
(a)As at 31 March 2020, TSL had accumulated losses of $177,803. Those losses may be off-set against future income, so as to reduce income tax payable by TSL. The benefit to TSL is approximately $50,000 or
$16,500 per shareholder. Those losses would become wholly unavailable if TSL were put into liquidation.
(b)Counsel for GAL has specifically raised an alternative avenue by which it could pursue any remedy to which it may be entitled. Mr Lawrence advised that he has been instructed to prepare proceedings against Drs Wee and Nair under s 174 of the Act. ;
6 90 Nine Ltd v Luxury Rentals NZ Ltd [2019] NZCA 424, (2019) 24 PRNZ 638, where the Court of Appeal quoted with approval the approach of the High Court in Feltex Carpets Ltd (in rec) v N&I Investments Ltd (2006) 3 NZCCLR 714 at [38].
(c)There is consequently nothing to be gained by putting TSL into liquidation.
[45] I reject each of those submissions. There is no probative evidence before the Court that TSL will have any future income of sufficient substance to realise the benefit of the accumulated losses. Mr Burt submitted that given the pattern of Drs Wee and Nair establishing practices previously, the defendant company might be used as a vehicle to run a practice in the future and therefore be able to use the tax losses. However, there was no evidence from Drs Wee and Nair of any intention to do so. As Mr Lawrence submitted, Drs Wee and Nair have already “grandfathered” TSL’s business to another company owned by them and that does not include Dr Glassey or GAL.
[46] I accept in principle that the courts have on occasions recognised the availability of an alternative remedy as a valid basis on which to decline an order for liquidation.7 However, the defendant company here has ceased trading and it is difficult to see the benefit to any party in investing significant resources in resolving internal company disputes when the company is in any event insolvent. The availability of another possible remedy clearly does not outweigh the reasons for putting this company into liquidation.
[47] For all these reasons, I find that the plaintiff, GAL, has established all three grounds necessary for the making of an order placing the defendant company into liquidation.
Result
[48] I make an order placing the defendant company, Takanini Surgery Ltd, into liquidation.
[49] I appoint Mr Steven Khov and Mr Kieran Jones as liquidators. The terms and conditions of their appointment and their rates of remuneration are as set out in their consent to act dated 22 February 2021.
7 See, for example, Jenkins v Supscaf Ltd [2006] 3 NZLR 264 at 283.
[50]My orders are timed at 3.00 pm on 15 March 2021.
[51] I award costs to the plaintiff on a 2B basis in the total sum of $11,233, plus disbursements as sought in the sum of $1,118 (as calculated and set out in counsel’s memorandum as to costs dated 24 February 2021).
Associate Judge P J Andrew
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