Houston v Oldco Pti Limited HC Auckland CIV 2010-404-1924

[2010] NZHC 1527

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2010-404-001924

BETWEEN  PHILIP ERIC HOUSTON Plaintiff

ANDOLDCO PTI LIMITED Defendant

Hearing:         11 August 2010

Appearances: L Herzog for the Plaintiff

D T Broadmore for the Defendant

Judgment:      12 August 2010

JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSEN

This judgment was delivered by me on

12.08.10 at 4:30pm, pursuant to

Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date……………

Solicitors/Counsel:

David John Spencer, Spencer Legal, Auckland – [email protected]

L Herzog, Barrister, Auckland – [email protected]

S Barker, D Broadmore, Buddle Findlay, Wellington – [email protected]

PHILIP ERIC HOUSTON V OLDCO PTI LIMITED HC AK CIV 2010-404-001924  12 August 2010

[1]      The plaintiff (Mr Houston) has applied for an order for the liquidation of the defendant (Oldco).  Oldco has applied for leave to file a statement of defence.  The leave application is necessary because the statement of defence was presented one day short of the time prescribed by the High Court Rules.

[2]      That application asserts:

(a)     There is a genuine and substantial dispute; and

(b)     There is a reasonable explanation for the delay.

[3]      The Court has directed that the leave application be heard together with the application for liquidation.

Leave application

[4]      Rule 31.20 states that a person who is entitled to file a statement of defence but who does not file it within the time prescribed may not appear unless the Court orders an extension of time permitting that appearance.

[5]      Rule 31.22 provides for the filing of an application for an extension of time.

[6]      Principles to be considered upon an application to grant an extension of time include:

(a)     An applicant must demonstrate and arguable defence;

(b)If the applicant is unable to pay its debts when due that may mitigate against the granting of leave;

(c)     Considerations of justice will apply;

(d)     A reasonable 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.

Explanation for delay

[7]      This has been provided by an affidavit from Mr Harlowe a solicitor in the liquidation department of Buddle Findlay, Auckland, solicitors for the applicant.  Mr Harlowe advises he was responsible for liaising with counsel during the preparation of Oldco’s statement of defence.  He deposes the liquidation application was filed and served on 30 March 2010.  As a result and following the intervention of Easter Oldco’s statement of defence was required to be filed by 15 April 2010.  Instead it was filed the following day.

[8]      Mr Harlowe deposes the delay was not due to any wrongdoing or neglect on the part of Oldco.   Rather, the statement of defence was filed one day late due to counsel’s miscalculation of the due date.

[9]      Mr Harlowe notes Mr Houston’s statement of claim records it as having been filed by Heather Quinn, solicitor for the plaintiff.  Further, the notice of proceeding purports to have been signed by Ms Quinn as solicitor for the plaintiff.  In fact, as email correspondence between Buddle Findlay and Ms Quinn reveals, she asserts she has never been instructed in the matter and she had not instructed  Mr Herzog, counsel for the plaintiff.   Mr Harlowe believes Mr Houston’s proceeding was commenced without a solicitor’s warrant of authority.

[10]     The Court is satisfied that a reasonable explanation has been given for the delay in the late filing of Oldco’s statement of defence.

Whether insolvency is an absolute bar to the grant of leave

[11]     Mr Herzog submits insolvency is an absolute bar to the grant of leave, relying upon Fresh Cut Flower Wholesalers Ltd v Living and Giving Gift Co Ltd [1]  where Paterson J at para [9] noted:

First, leave should not be granted unless the applicant can show on the papers an arguable basis upon which he is not liable for the amount claimed. Further in my view, even if there is an arguable defence, leave should not be granted if the applicant is insolvent.

[1] 2001 (16 PRNZ) 173

[12]     Mr Herzog submits that even if Oldco has an arguable defence leave should not be granted if the applicant is insolvent.

[13]     I do not agree that insolvency provides absolute bar to a leave application.  It would indeed be surprising bearing in mind the wide discretion available to the Court upon such an application.  Good reasons may exist for permitting a company to continue to function.  The majority of creditors may support that purpose if there was a likelihood of an increased return for them.   Courts are concerned about the wastage of an insolvent company’s funds if it continues for no proper purpose.  The affect of such wastage usually would be to reduce the size of the pool available for distribution to creditors.   In this case Oldco’s major creditor, ANZ National Bank (ANZ), is funding it for the purpose of pursuing a claim against Mr Houston who the bank claims is responsible for Oldco’s insolvency.

[14]     Whilst ANZ is prepared to continue to fund that exercise and provided no other creditor is affected by that purpose save for Mr Houston whose claim against Oldco is disputed then it is arguable no proper purpose arguably exists to refuse leave to oppose the order for liquidation.

Oldco has an arguable defence to the claim for the appointment of a liquidator

[15]     It  is  appropriate  to  deal  with  this  aspect  of  the  leave  application  in conjunction  with  Mr  Houston’s  liquidation  application.    Considerations  of  an arguable defence are subsumed to the question of whether or not a liquidator ought to be appointed.

Some principles governing an appointment

[16]     Section 241(4) of the Companies Act 1993 (the Act) authorises the Court to appoint a liquidator in certain circumstances.   Usually such applications for the appointment  of  a  liquidator  are  made  by a  creditor  who  has  a  claim  against  a company.   Considerations of that application, if opposed, have regard to mutual dealings and claims of set off.  Even if grounds for liquidation are established the Court has an unfettered discretion as to whether or not a liquidation order should be

made. [2]    The specific principles for consideration are set out in Maximum Internet

[2] In re Thames Freightliners Ltd (in rec) (1981) NZCLC 95-012

Limited v Net Stream Internet Limited [3], as follows:

[3] HC Hamilton CIV 2004-419-694, 12 August 2004 at [11], Associate Judge Faire

(a)A winding up order will not be made where there is a genuine and substantial dispute as to the existence of the debt such that it would be an abuse of the process of the Court to order a winding up.

(b)In  such  circumstances,  the  dispute,  if  genuine  and  substantially disputed,  should  be  resolved  through  action  commenced  in  the ordinary way and not in the Companies Court.

(c)     The assessment of whether there is a genuine and substantial dispute is made on the material before the Court at the time and not on the hypothesis that some other material, which has not been produced might, nonetheless be available.

(d)The   governing   consideration   is   whether   proceeding   with   an application savours of unfairness or undue pressure.

[17]    To establish a genuine dispute, a defendant must show a strong prima face case for the existence of such. [4]

[4] Pink Pages Publications Ltd v Team Communications Ltd [1986] 2NZLR 704, 711

[18]    A failure to apply to set aside a statutory demand can cast doubt on the genuineness of the dispute sought to be raised.   That inference is not so readily available if a defendant communicates grounds for opposition promptly after being served with the demand.   Also, it may be appropriate for the Court to have consideration  to  the  wishes  of  the  majority of  creditors  if  those  are  to  oppose liquidation.

(a)     Mr Houston served a statutory demand on Oldco for $502,958.30, on 8

February 2010;

(b)On 19 February 2010 and within the ten working days period Oldco’s solicitors wrote to Mr Houston’s solicitors claiming the statutory demand was an abuse of process because the Employment Relations Authority’s (ERA) determination upon which it was based, was subject to a challenge;

(c)     ANZ is Oldco’s largest creditor.   It was owed $26M as at October

2007.  Oldco has no assets other than its claims against Mr Houston.

Background

[20]     Oldco was incorporated in April 1999.  Mr Houston was the sole director of Oldco from August 2001 until 17 December 2004.  The sole shareholder of Oldco is the Houston family trust.  Mr Houston is a trustee of that trust.  At all times prior to June 2004 Mr Houston was employed by Oldco as group chief executive officer to perform the duties of a chief executive for Oldco and other related companies that were part of the Pacific Travel Group (the Group).

[21]     In April 2004 the Group’s bank, ANZ appointed PricewaterhouseCoopers to review the Group’s financial position.   Following that appointment, there were significant changes in the structure and senior management of the Group.

[22]     On   17   December   2004   ANZ   placed   the   Houston   family  trust   into receivership.   Mr Chatfield was appointed the receiver.   He requested that Mr Houston resign from all involvement with Oldco and the Group, as a condition of ANZ providing further financial support.

[23]     On  that  same  day  Mr  Waller  of  PricewaterhouseCoopers  replaced  Mr

Houston as the sole director of Oldco.

[25]     In March 2005 Mr Houston lodged an employment relationship problem with the ERA.  He claims he was unjustifiably dismissed from his employment, without notice of prior discussion.  Oldco claimed he was not dismissed but chose to resign.

[26]     On 20 June 2007 the ERA issued a determination in which it found that Mr Houston  had  been  unjustifiably  dismissed.    It  concluded  Mr  Houston  had  not resigned as an employee and it awarded him payment of holiday pay, reimbursement expenses and 18 months remuneration totalling about $500,000.

[27]     On 18 July 2007 Oldco filed a statement of claim in the Employment Court challenging the determination of the ERA claiming that determination was wrong. Successive amended statements of claim were filed in July 2008 and January 2009. Mr Houston is defending the challenge.  By its challenge Oldco claims:

(a)That it did not dismiss Mr Houston for redundancy nor for any other reasons; that Mr Houston resigned from both his role as a director and his role as an employee; and alternatively;

(b)If Mr Houston was dismissed, the dismissal was justified; and alternatively;

(c)Mr Houston contributed to the termination of his employment such that its remedy should be reduced to nil on the basis that he failed in his duties and obligations to Oldco and was guilty of serious misconduct.

[28]     Upon that challenge Oldco have been ordered to pay security for costs to Mr

Houston.  Security has been paid.

[29]     In support of its challenge Oldco claims that since the determination of the

ERA, it has located further documents which it considers establishes that:

(a)Mr Houston knew it was a very firm condition of ANZ that he could not continue as either a director or employee;

(b)     He was not entitled to the number of days annual leave for which the

ERA awarded payment to him.

[30]     On 6 August 2008 Oldco filed a statement of problem with the ERA in which it was suing Mr Houston for damages for breaches of his employment contract.  In March 2009 Oldco’s claims for damages was removed from the ERA and transferred to the Employment Court.  In its claim Oldco was seeking damages of approximately

$11.6M for losses claimed as a consequence of various alleged breaches of his employment agreement.  Particulars of those are well known to the parties and there is no need for these to be traversed here.  Also, they are not new they having initially being raised by Oldco’s statement of reply to Mr Houston’s initial application to the ERA in 2005.

[31]     On 25 August 2008 and upon Mr Houston’s application the Employment Court issued a compliance order against Oldco to pay the costs fixed upon Oldco’s application in 2006 for suppression orders.  Those costs have not since been paid.

[32]     When  after  the  statutory  demand  was  served  on  8  February  2010  and following which Oldco’s solicitor’s wrote claiming it was an abuse of process, Oldco on 4 March 2010 applied to the ERA for a stay of its determination.  An affidavit dated 19 May 2010 by Mr McCloy of PricewaterhouseCoopers and the director of Oldco since 2008 advised the reasons for the stay application being filed:

(a)After  Mr  Houston  had  applied  in  2007  for  a  compliance  order  to enforce the 2007 ERA determination his solicitor subsequently wrote to the   ERA   on   16   October   2007   requesting   that   the   compliance application “be put on hold”, pending the outcome of settlement discussions;

(b)    Since, the compliance order application has remained and has not been determined;

(c)That Oldco understood from this that Mr Houston accepted that further steps  to  enforce  the  2007  determination  should  not  be  attempted pending the Employment Court’s determination of Oldco’s challenge;

(d)That had Mr Houston attempted further steps to enforce the 2007 determination, Oldco would immediately have applied for a stay.

[33]     On 29 April 2010 the Employment Court granted the stay, subject to payment into Court by 5 May 2010 of the total amount that the ERA ordered Oldco to pay to Mr Houston.

[34]     In his judgment dated 29 April 2010 upon the stay application Judge Perkins noted:

(a)     Oldco was “clearly hopelessly insolvent”.

(b)Oldco’s litigation was being funded by its major secured creditor, ANZ, a fact freely conceded by Oldco.

(c)That  counsel  for  Oldco  agreed  that  if  Oldco  was  unsuccessful  in respect of its challenge and its claim for damages then it would be unable to meet its liabilities owing to Mr Houston and would hide behind the insolvency so that Mr Houston would in effect get nothing.

(d)Mr Houston would be substantially affected by a stay because he could not take steps to enforce the determinations and costs awards and meantime would be left having to incur further costs.

(e)     The overall balance of convenience weighted heavily in favor of Mr

Houston.

[35]     In the outcome and although the application for stay was granted albeit upon terms of payment, Oldco did not make any payment into Court and as a result the stay did not take effect.

[36]     On 29 June 2010 the parties attended an Employment Court teleconference call over.  At that time a five day fixture beginning 21 February 2011 was tentatively scheduled.  That fixture will determine Oldco’s challenge to the ERA determination, and Oldco’s damages claims against Mr Houston.   In that outcome Mr Houston’s application for a compliance order will also be determined.

Considerations

[37] viewp	Mr oints, (a)	Herzog  approached  the  issue  of  liquidation  from  two  alternative namely: Because Oldco was “hopelessly insolvent” it should be liquidated even
though Mr Houston would receive nothing in that outcome.   Public interest considerations would expect a liquidation outcome;
(b)	Alternatively, liquidation ought to be stayed  until issues before the Employment Court have been determined but upon the basis that Judge
Perkins was prepared to grant a stay, namely by the deposit into trust of the amount awarded by the ERA.

[38]     Judge Perkins concern understandably addressed the outcome whereby Mr Houston would receive nothing even if the Employment Court upheld the ERA determination and rejected Oldco’s damages claims.  Also Mr Houston has not been paid costs awarded to him in the past and faces further and significant costs in funding his position before the Employment Court.

[39]     This is not I think a case where it is appropriate to order payment of around

$500,000 as a form of insurance if Mr Houston succeeds in the outcome.  The merits of the Oldco case are not capable of assessment at this time, but they have been particularised to a significant extent already.   A great deal of research has been undertaken to calculate the losses attributed to Mr Houston.  As I noted earlier in this judgment Oldco’s liquidation applications involved an investigation of mutual dealings and claims of set off.  If no purpose can be served to benefit Mr Houston (and he is the only person directly affected) – save to hope that Oldco’s claims would not then be pursued any further, then there is no reason for a liquidation order to be made.

[40]     I do not consider the matter is one of requiring the judgment sum to be held in trust for payment in the outcome.  Rather Mr Houston’s concerns about costs can be met by an order for security being made.   Obviously Oldco cannot meet any

payment for security but ANZ would have to.  I would assume that any security for costs application would seek to ensure that all of Mr Houston’s costs, including those unpaid already, are met in the event of a favourable outcome.  Also the Court is able to award costs to be payable by ANZ in the outcome.

[41]     Sometimes it is appropriate in these cases to make an assessment of the prospects of success of any set off claim.  I earlier noted this could not be done here. What is clear, is that a genuine dispute exists between the parties and in the near future  that  will  likely  be  resolved  by  the  Employment  Court  determination. Whatever that outcome, Oldco will almost certainly be placed into liquidation promptly.  Its existence would no longer serve any purpose for anyone.

The hearing as a result

[42]     The application for liquidation is dismissed.  Oldco are entitled to their costs on a 2B basis but they are to be paid in the resolution of the Employment Court proceedings.

Associate Judge Christiansen