Hurunui Estate (2002) Ltd v Hurunui Hotel (2004) Ltd
[2015] NZHC 1152
•27 May 2015
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV-2015-409-000175 [2015] NZHC 1152
BETWEEN HURUNUI ESTATE (2002) LIMITED
Plaintiff
AND
HURUNUI HOTEL (2004) LIMITED Defendant
Hearing: 15 May 2015 Appearances:
J Moss for Applicant (Defendant)
A N Riches for Respondent (Plaintiff)N M Robson for Cold-Aire Refrigeration Ltd, a creditor in support (Attendance excused)
Judgment:
27 May 2015
JUDGMENT OF ASSOCIATE JUDGE OSBORNE ON APPLICATION FOR EXTENSION OF TIME (REASONS JUDGMENT)
Introduction
[1] For reasons of exigency, I delivered an outcome judgment on 25 May 2015 and recorded that my reasons would follow.1 This is my reasons judgment.
[2] The relevant set of events can be summarised as follows:
(a) On 5 March 2015, the plaintiff obtained judgment for $43,430.71 against the defendant, upon formal proof, in the District Court.
(b)On 10 March 2015, the plaintiff served on the defendant a statutory demand which the defendant failed to meet.
1 Hurunui Estate (2002) Ltd v Hurunui Hotel (2004) Ltd [2015] NZHC 1131.
HURUNUI ESTATE (2002) LIMITED v HURUNUI HOTEL (2004) LIMITED [2015] NZHC 1152 [27 May
2015]
(c) On 2 April 2015, the plaintiff issued this proceeding for an order putting the defendant into liquidation, the plaintiff’s application to be heard on 14 May 2015.
(d)On 13 May 2015, shortly after 4.30 pm on the eve of the hearing, the defendant filed an application for leave to file a statement of defence out of time.
(e) On 14 May 2015, when the proceeding was called in the List, Mr Riches for the plaintiff indicated that the application would be opposed.
[3] I heard argument on the leave application the following day and this judgment follows.
Extension of time
[4] In its application, Mr Moss for the defendant invoked the discretion which the Court has to extend the time for the taking of a step under rr 1.19, 31.20 and
31.22(a) of the High Court Rules. Mr Moss relies also upon the inherent jurisdiction of the Court, although he accepts the Court’s approach is similar whichever jurisdiction is invoked.
The provisions of the High Court Rules
[5] As noted by Mr Moss, there are a number of rules found in the High Court
Rules which are relevant to this proceeding. These are set out below.
[6] Rule 1.19 provides:
1.19 Extending and shortening time
(1) The court may, in its discretion, extend or shorten the time appointed by these rules, or fixed by any order, for doing any act or taking any proceeding or any step in a proceeding, on such terms (if any) as the court thinks just.
(2) The court may order an extension of time although the application for the extension is not made until after the expiration of the time appointed or fixed.
[7] Rule 31.20 provides:
31.20 Effect of failure to file statement of defence or appearance
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.
[8] Rule 31.22 relevantly provides:
31.22 Interlocutory applications
(1) When a proceeding is commenced under rule 31.3, [that is, as an application to put a company into liquidation by statement of claim], an interlocutory application (unless made with the leave of the court) may not be made to the court before the date of hearing specified in the notice of proceeding served with that statement of claim unless it is—
(a) an application for an extension or abridgement of time; or
…
(2) …
(3) The inherent jurisdiction of the court is not limited by this rule.
Discretionary power of the Court
[9] The power to extend time under the above rules is discretionary.2 Where a defendant applies for an extension of time to file a defence, the Court requires that the defendant produce material of substance to justify the exercise of the discretion3
or, in other words, a proper foundation.4
2 Day v Ost (No. 2) Ltd [1974] 1 NZLR 714 (SC) per O’Regan J at 717; Ratnam v Cumarasany
[1965] 1 WLR 8 per Lord Guest at 12.
3 Day v Ost (No. 2) Ltd and Ratnam v Cumarasany, above n 2.
4 Platinum Direct Ltd v Micheel Ltd [2014] NZHC 125 at [3].
[10] Liquidation proceedings in particular should not be protracted for procedural reasons as the rules of Court are designed to assist the speedy resolution of such proceedings.5 As observed by the Supreme Court of Victoria:6
The company – if it seeks to oppose its being wound up – is under a duty properly and fully to prepare its case so that it may be presented without there being a need for a series of adjournments to enable it to reach that point. …the rules … operate in this context.
[11] The defendant, as a threshold requirement, must establish that it has on the documents filed an arguable defence.7
Relevant factors
[12] The defendant’s delay is relevant, both as to its time and as to any explanation for it. The Court may be required to weigh the reasonableness of any explanation provided by the defendant against any inordinate aspect of delay.
[13] The insolvency of the defendant is also a consideration. Although it was observed in Fresh Cut Flowers Wholesalers Ltd v Living and Giving Gift Co Ltd that special leave to be heard should not be granted if the defendant is insolvent,8 the weight of authority supports viewing a defendant’s insolvency as an important, but not decisive, factor against the exercise of the discretion.9 As Associate Judge Faire explained in Maximum Internet Ltd v Net Stream Internet Ltd, a concern of the Court is that an insolvent company should not waste funds on the defence of a case which might, more properly, be handled by a proof of debt before the company’s
liquidator.10
5 Re Property Growth Securities Ltd (1991) 4 ACSR 783.
6 At 791.
7 Fresh Cut Flowers Wholesalers Ltd v Living and Giving Gift Co Ltd (2001) 16 PRNZ 173;
General Mortgage Nominees Ltd v Scenic Development Ltd HC Christchurch CIV-2003-409-
2222.
8 Fresh Cut Flowers Wholesalers Ltd v Living and Giving Gift Co Ltd¸ above n 7, at [9]; cited in
Auckland City Council v Centro Construction Ltd HC Auckland CIV-2008-404-7696, 25 March
2009.
9 See Maximum Internet Ltd v Net Stream Internet Ltd HC Hamilton CIV-2004-419-694, 13
August 2004 at [8]; Heron’s Flight Ltd v NZ Properties International Ltd [2012] 1 NZLR 424 (HC).
10 Maximum Internet Ltd v Net Stream Internet Ltd, above n 9, at [8].
[14] The Court will take into account any prejudice that would be caused to the plaintiff through extension of time, such as where an extension might cut across a plaintiff’s limitation defence.11 Where, on the other hand, potential prejudice may lie in the plaintiff’s bearing of costs, the Court may be able to address those aspects of prejudice by imposing conditions as to payment of costs when granting an extension.
[15] Alongside these factors, the Court will of course have regard to any particular facts which inform the justice of the case. The Court will then come to consider finally where the overall justice of the application lies.12
Chronology
[16] I set out relevant events as identified by counsel:
·23 September 2002 - Roger Strong, Nola Strong and Amelia Simpson (the owners) lease the Hurunui Hotel to another party, as lessee, the lessee covenanting (inter alia) to promote and encourage the sale of Hurunui Stables Wine;
· 30 June 2004 – Defendant becomes lessee by assignment;
· Subsequently – Issues over defendant’s performance of lease obligations
resulting in liquidation proceedings;13
·2013 – Owners and defendant submit lease issues to arbitration before P F Whiteside QC;
· 5 December 2013 – Defendant’s arbitration claim dismissed for want of
prosecution;
· 15 September 2014 – Owners’ arbitration counterclaim alleging breach of
lessee’s covenant in relation to Hurunui Stables Wine dismissed because
11 General Mortgage Nominees Ltd v Scenic Development Ltd, above n 7, at [10].
12 At [10] and [17].
13 Hurunui Hotel (2004) Ltd v Strong [2013] NZHC 883; Strong v Hurunui Hotel (2004) Ltd
[2013] NZHC 1924.
Hurunui Estate (2002) Ltd (the plaintiff in this proceeding) not a party to the arbitration;
· 2 September 2014 – Plaintiff sues defendant in relation to breach of
Hurunui Stables Wine covenant;
·Unknown date – District Court proceeding set down for formal proof hearing in absence of defence by defendant;
·3 March 2015 – Owners file originating application against defendant seeking orders for possession of the hotel and cancellation of the lease for breach of injunction in relation to redecoration of the hotel (contained in the arbitrator’s award of 15 September 2014);
·5 March 2015 – Plaintiff obtains formal proof judgment against defendant totalling (including interest and costs) $43,430.71;
·10 March 2015 – Plaintiff serves statutory demand for payment of judgment debt upon defendant;
·24 March 2015 – Expiry of time for defendant to file notice of opposition to originating application;
·2 & 8 April 2015 – Plaintiff commences this proceeding and serves the defendant;
·14 April 2015 – Defendant files application for leave to file opposition out of time, notice of opposition but no evidence in opposition;
·15 April 2015 – Court makes timetable directions in relation to originating application;
· 22 April 2015 – Expiry of time for defendant’s defence;
· 28 April 2015 – Hearing of defendant’s application for leave to oppose
the originating application;
· 29 April 2015 – Court grants leave to defendant on condition that:14
o defendant pays $6,634.60 to the owners, by 4 May 2015, (representing rent arrears);
o defendant pays all rent due under the lease to 11 May 2015 by 11
May 2015; and
o the Court sets the originating application down for hearing on 26
May 2015;
·Early May 2015 – Defendant makes payment of approximately $13,000 to bring rent up to date;
·13 May 2015 – Defendant files in this proceeding an application for leave to file its defence out of time together with affidavit in support and statement of defence;
·14 May 2015 – Defendant makes payment of $11,800 to reimburse owners for insurance premium paid by owners;
· 14 May 2015 – The hearing date of this proceeding, when defendant’s
leave application was adjourned to 15 May 2015 for hearing;
·15 May 2015 – Defendant files in District Court application to set aside the District Court judgment;
· 15 May 2015 – Hearing of defendant’s leave application in this
proceeding.
14 Strong v Hurunui Hotel (2004) Ltd [2015] NZHC 869 at [10].
Consideration of Relevant Factors
An Arguable Defence?
[17] The defendant’s position is affected by the formal proof judgment which the plaintiff obtained in the District Court. The defendant, therefore, needs to demonstrate that it would have had an arguable defence to the wine covenant breach claim and that it now has a realistic prospect of obtaining a District Court order setting aside the formal proof judgment. Counsel did not suggest that the assessment of what is arguable would differ in either context. However, Mr Riches, for the plaintiff, submits that the defendant’s delay in relation to its appeal against the District Court judgment (which now requires leave) counts against the prospect of the setting aside of the judgment.
[18] I was informed by counsel that at the arbitration before Mr Whiteside the facts relating to the sale of Hurunui Stables Wine were extensively explored in the evidence before the relevance of all that material fell away when the arbitrator accepted (which is now unchallenged) that the owners were the incorrect claimant.
[19] In his affidavit for the defendant, Travis Cooper, the defendant’s director, deposes that the arguments surrounding the Wine Covenant were well argued at the arbitration and that it was clear that the defendant’s claim on the facts was weak at best. Mr Cooper deposes:
The defendant never refused to sell the wine through a promotional display in the Hotel. It was the plaintiff who refused to restock the wine and then to provide it on a consignment basis to the defendant and which caused the display to be removed.
[20] Mr Moss has also explained in submissions that the defendant also had a defence to part of the quantum of the claim by reason of the applicable limitation period. The calculation of the lease covenant breach claim was based on the period from 2005 meaning, on Mr Moss’s submission, that the defendant would have had a defence in relation to alleged losses in the first two years.
[21] Leaving aside the limitation issue, the central factual issues are likely to turn significantly on credibility findings. Mr Cooper’s explanation of the defence is not implausible. I find it arguable.
[22] It is then necessary to consider whether it is likely that the District Court will grant leave to the defendant to pursue, out of time, the setting aside of the District Court judgment. This will involve the District Court considering the explanation of delay of the defendant’s failure to defend the District Court claim and its delay in pursuing the setting aside of the District Court judgment.
[23] The defendant’s explanation of delay in relation to the District Court proceedings and its explanation of delay in relation to this liquidation proceeding turns on the same circumstances. I will, therefore, deal at this point with the explanation for delay as a whole.
Reason for delay
[24] In summary, what Mr Cooper deposes is this:
(a) The defendant has been fighting various actions of the plaintiff and the owners, including the lengthy arbitration proceedings and the service of the Property Law Act 2007 notice.
(b)A key issue in the Property Law Act proceedings is a dispute between the owners and the defendant as to the meaning of a redecoration covenant, the precise meaning of which is not determined by the arbitrators.
(c) Mr Cooper deposes that the defendant will do what is required by way of redecoration once the requirement is known.
(d)While dealing with the Property Law Act proceeding, the defendant has been trying to bring up to date legal costs owed to Mr Moss from the August 2014 arbitration hearing. The defendant was unable to
instruct Mr Moss for the time being while it arranged funds for his payment.
(e) When the defendant came into sufficient funds in April, Mr Moss was, in terms of his time, able to accept instructions in relation to some matters but not all.
(f) The defendant wanted Mr Moss in particular to act given his background knowledge of the defendant and the lease.
(g)Mr Cooper’s uncle died in early April and Mr Cooper was heavily involved in organisation relating to the funeral (at the time this proceeding was served).
[25] It is not possible against this background to conclude that the District Court will find the defendant’s failure to defend the District Court claim inexcusable. The defendant’s financial circumstances at the time appear to provide a tenable explanation for the defendant’s failure. The defendant is not required to establish that the District Court will probably grant leave and set aside the formal proof judgment. It is sufficient that there is a tenable basis on the evidence for the defendant to seek such orders of the District Court. I find that there is.
[26] If the District Court makes an order setting aside the formal proof judgment, the defendant will, at that point, have an arguable defence to the liquidation claim inasmuch as the plaintiff will no longer have the status of creditor.15
The reasonableness of explanation of defendant’s delay in this proceeding
[27] There is a close parallel between the defendant’s delay of steps in this
proceeding and its failure to defend the District Court proceeding. Both relate to the
defendant’s financial positions at the time.
15 The basis upon which the plaintiff applies for a liquidation order is that it is a creditor with standing under s 241(2)(c)(iv) of the Companies Act 1993.
[28] As the parties moved into the March/April 2015 period, the key period in relation to this proceeding, it is apparent (on Mr Cooper’s evidence) that the defendant was just getting back to a point of being able to instruct Mr Moss while assembling sufficient funds to bring up to date rent arrears and maintain other current payment obligations (notably, in short, the payment of the insurance premium).
[29] Arguably, the least satisfactory aspect of the defendant’s conduct in this particular proceeding was its failure to file a defence until the eve of the hearing. Mr Moss notes that it is not unusual in this jurisdiction for leave to be granted to defend when the documents are filed very close to the hearing date. Such is not infrequently the case when, as here, an application to set aside a judgment is involved. The judgment debtor is then faced with the drafting of two sets of documents in two proceedings. As here, the defendant’s practical situation may be complicated by it only recently achieving a financial ability to retain counsel.
[30] In the circumstances, I find there is, by a fine margin, a reasonable explanation for the defendant’s delay in this proceeding. This was not a proceeding in which there was a long period between the expiry of the time for defence and the hearing. The delay involved (12 working days) cannot, in the circumstances, be described as inordinate.
The defendant’s insolvency
[31] For the plaintiff, Mr Riches notes that the defendant is presumed to be insolvent through its failure to meet the statutory demand. Furthermore, Mr Cooper does not depose that the defendant is solvent, nor does he give any detailed evidence to support a paragraph in the proposed statement of defence in which there is a bare denial that the defendant is insolvent.
[32] What the defendant has produced, through Mr Cooper, is evidence of a potential sale of the hotel business to an unrelated party. Mr Cooper has exhibited an agreement for sale and purchase dated 21 April 2015 by which possession would be given on 30 June 2015. Mr Moss recognises that the defendant faces the hurdle of obtaining the owner’s consent to assignment of the lease. It is a significant hurdle
given the history of the defendant’s performance and the fundamental issue raised by the Property Law Act proceedings which are shortly to be heard. But what the existence of the agreement for sale and purchase does indicate is the possibility that significant value remains in the lease (with seven and a half years to run) assuming it is not forfeited.
[33] I respectfully adopt the approach of Associate Judge Faire in Maximum Internet Limited v Net Stream Internet Limited to the effect that the defendant’s insolvency is an important, but not decisive, factor against the exercise of the discretion.16
[34] I, therefore, view the defendant’s presumed insolvency as an important factor against the grant of leave in this case. But its significance as a factor is diminished by what I find to be a real prospect that the District Court judgment may be set aside in its entirety, and the plaintiff ceasing to be an (overdue) creditor of the defendant.
[35] A second creditor appeared in support of the application. Cold-Aire Refrigeration Limited claims to be a creditor in the sum of $7314.90. Pursuant to its application, I will be separately making an order joining Cold-Aire as a plaintiff. If there is a body of debt (including the debt to Cold-Aire) which the defendant cannot meet, then Cold-Aire will be able, in relatively short order, to obtain an order of liquidation.
Prejudice to plaintiff through extension of time
[36] Mr Riches, for the plaintiff, did not point to any particular prejudice which would flow from the extension of time in relation to this proceeding. There is, for instance, no particular limitation issue in relation to the proceeding itself which would impact on the plaintiff’s rights.
[37] At the heart of Mr Riches’ submissions against the granting of leave, he identified what he described as the defendant’s “wilful disregard for all process”. He
identified, in particular, five failures of the defendant:
16 Maximum Internet Limited v Net Stream Internet Limited, at n 9.
(a) The failure to appear in the District Court.
(b) The failure to respond to the statutory demand.
(c) The failure to apply in a timely way to set aside the District Court judgment.
(d) The failure to file a timely defence to the liquidation application.
(e) The failure to file a timely opposition to the originating application for possession.
[38] Mr Moss, in the course of his submissions, understandably anticipated that Mr Riches would submit that “enough is enough”. That is, in effect, what Mr Riches submitted.
[39] While in a broader sense Mr Riches’ submissions amounted to an invitation to the Court to consider “prejudice” as it affects the opposite party which properly follows procedures only to be confronted with successful applications for indulgence by the other. This is not a prejudice which arises in the context of the particular proceeding itself by reference to the extension of time in relation to the proceeding. As a consideration it perhaps falls to be considered more appropriately under the heading of overall justice.
[40] The Court cannot disregard the fact that the granting of indulgences, even if accompanied with a requirement to pay costs, will inevitably still leave the other party with some commercial disruption and potentially unrecovered costs (if only management time). If an indulgence is granted to the defendant in this proceeding, the defendant will have to accept that any further indulgence is unlikely to be granted.
[41] I finally have regard to the assessment of Nation J in Strong v Hurunui Hotel
(2004) Ltd being the judgment by which the defendant was granted leave to file out
of time its Notice of Opposition in the Property Law Act case.17 His Honour granted leave on parallel submissions as to delay and prejudice. The effect of that judgment is that the parties will be making submissions and will receive judgment on whether the lease is to be forfeited. As Mr Moss submits, if the defendant is not granted a stay and is therefore unable to defend this liquidation proceeding, its claim for relief against forfeiture will be rendered nugatory. As a company in liquidation it will not be entitled to a continuation of the lease. These considerations weigh in favour of the grant of leave.
Overall Justice
[42] I have dealt immediately above with what I consider to be the most significant considerations in this case relating to overall justice. Those matters still leave the defendant’s application somewhat imbalanced. The defendant seeks an indulgence but comes to the Court as a party which has had to repeatedly seek indulgences.
[43] I find that the overall justice is in favour of granting leave to the defendant but on terms which ensure that the immediate costs associated with the granting of the indulgence are met by the defendant and ensure, to the extent possible, that the plaintiff is financially protected for the period of the stay. Those considerations can be accommodated by the conditions I impose.
Order made
[44] Pursuant to my earlier judgment18 I confirm that the following orders have been made (with the time specified at [44](d)(i) speaking from 25 May 2015):
(a) the time for the filing of the defendant’s defence is extended to
13 May 2015;
(b)the defendant’s statement of defence dated 13 May 2015 shall be treated as filed and served on that date;
17 Strong v Hurunui Hotel (2004) Ltd, above n 14.
18 Hurunui Estate (2002) Limited v Hurunui Hotel (2004) Limited [2015] NZHC 1131.
(c) the defendant is to pay to the plaintiff the plaintiff’s costs and disbursements of the hearing of the application for extension of time, such costs fixed on a 2B basis and disbursements (if any) to be fixed by the Registrar;
(d) as conditions of the extension of time, the defendant shall:
(i)within 10 working days pay to the Registrar of either the High Court or the Christchurch District Court the judgment debt in CIV-2014-009-1925, together with interest to the date of such a payment, to be held pending the outcome of the defendant’s application to the District Court for leave to apply for the setting aside of the said judgment and (if leave is granted) the hearing of the setting aside application; and
(ii)diligently pursue to hearing the District Court proceeding (including by strictly observing all timetable directions); and
(iii)observe the covenants and other obligations of the lease dated 23 September 2002;
(e) the proceeding is to be called in the list at 10.00 am 28 May 2015.
Associate Judge Osborne
Solicitors:
Saunders & Co, Christchurch
Ngaire Smith Lawyer, Christchurch
Counsel: J Moss, Barrister, Christchurch
Copy to: N M Robson, Barrister, Christchurch
5
5
1