Hydro Developments Limited v Coll
[2012] NZHC 1839
•19 July 2012
IN THE HIGH COURT OF NEW ZEALAND GREYMOUTH REGISTRY
CIV-2012-418-000033 [2012] NZHC 1839
BETWEEN HYDRO DEVELOPMENTS LIMITED Plaintiff
ANDCHRISTOPHER JOHN COLL First Defendant
ANDCHRIS J COLL SURVEYING LIMITED Second Defendant
Hearing: 5 July 2012
Appearances: C A Levermore and R Gordon for Plaintiff
O Peers for Defendants
Judgment: 19 July 2012
RESERVED JUDGMENT OF ASSOCIATE JUDGE MATTHEWS
[1] The first defendant (Mr Coll) is a shareholder in the plaintiff (Hydro), and on
2 March 2012 issued a demand against it requiring payment of the sum of $193,290
representing a sum to the credit of his shareholders’ advance account.
[2] Mr Coll is a surveyor and practises through the second defendant. On the same day the second defendant issued a demand under s 289 for payment of the sum
of $40,882.77 said to be owing for professional services undertaken for Hydro.
Solicitors:
Minter Ellison Rudd Watts, Wellington. [email protected] [email protected]
Buddle Findlay, Christchurch. [email protected] / [email protected]
HYDRO DEVELOPMENTS LIMITED V CHRISTOPHER JOHN COLL HC GRY CIV-2012-418-000033 [19
July 2012]
[3] Hydro seeks an order setting aside the statutory demand by Mr Coll. The second defendant has withdrawn its demand.
[4] Mr Coll opposes the application. It is his position that the sum claimed is owing and is due, and is properly the subject of a statutory demand under s 289 of the Companies Act 1993. Hydro therefore relies on s 290 which provides that a court may set aside a statutory demand if there is a substantial dispute whether or not the debt is owing or is due. The issue in this case is whether the sum demanded by Mr Coll is due; if it is the demand cannot be set aside, if it is not the demand cannot stand.
[5] The test to be applied is whether the Court is satisfied that there is a substantial dispute as alleged. The approach the Court should take is summarised in Industrial Group Ltd v Bakker.1
[24] [Section 290(4)] calls for a prompt judgment as to whether there is a genuine and substantial dispute. It is not the task of the Court to resolve the dispute. The test may be compared with the principles developed in cognate fields such as applications to remove caveats, leave to appeal an arbitrator’s award and opposition to summary judgment (see United Homes (1998) Ltd v Workman [2001]
3 NZLR 447 (CA) at [34]).
[25] The approach required by the “appearance” test in s 290 is a review with a low threshold. The tight time constraints distinguish the s 290 discretion from that to be exercised on, say, a summary judgment application, where the presence of complex legal issues is not necessarily a bar to a remedy. As with leave to appeal an arbitrator’s award, the hearing should, in the normal course, be short and to the point, and the judgment likewise.
[6] Further guidance on the approach the Court should take may be found in the following cases:
(a) Denize Farms Ltd v Spotburn Farms Ltd (in liq):2
[13] The effect of s 290 is that it requires an applicant seeking to set aside a statutory demand to place before the Court information which, while not being required to carry the Court to the point where it is able
1 Industrial Group Ltd v Bakker (2011) 20 PRNZ 413 (CA).
2 Denize Farms Ltd v Spotburn Farms Ltd (in liq) HC Auckland CIV-2011-404-5374,
16 December 2011.
to conclude that the information is correct, at least has the appearance of sufficient reliability that it can be said that a Court dealing with the matter could accept the account given as being correct.
(b) Freemont Design & Construction Ltd v W Stevenson & Sons Ltd:3
[8] A Court is not required to accept uncritically any or every disputed fact ... However the Court will not reject even dubious affidavit evidence, even though there must be suspicion of good faith of the deponent if there is an essential core of complaint that [supports] a defence. In essence, the inquiry is whether or not the assertion made passes the threshold of credibility ...
(c) Androcles Investments Ltd v Highway Publications Ltd:4
[6] ... [I]f issues of credibility arise then the Court cannot resolve those issues on the affidavit evidence unless, of course, the situation is that contemplated by Eng Mee Yong v Letchumanan [1980] AC 33 [sic], 341 where the evidence is contrary to contemporaneous documents or earlier statements of the party.
[7] The issue in this case will be resolved by considering the factual material before the Court, in light of these principles.
Facts
[8] Mr Coll is a director of Hydro. His family trust owns 25 percent of the shares. Hydro was incorporated in 2001 by Mr Coll and Anthony Black who also remains a director and shareholder (via his family trust). Mr Coll had identified an opportunity for hydro electric power generation in the Buller region. Hydro was incorporated to investigate the exploitation of this opportunity.
[9] In 2007 Mr John Easther was engaged to project manage the company’s concept. Initially focussed on the Mangatini River Catchment, the focus of the company had by then shifted to the Stockton Plateau Hydro Scheme. In 2008 he became a shareholder and director. He has now assumed the role of managing director. Mr Black, Mr Easther and Mr Coll have all advanced substantial (but
unequal) funds to Hydro. All are shown in Hydro’s 2011 accounts as credit balances
3 Freemont Design & Construction Ltd v W Stevenson & Sons Ltd HC Auckland
CIV-2005-404-4807, 20 April 2006.
4 Androcles Investments Ltd v Highway Publications Ltd HC Christchurch M 455/00,
14 February 2001.
in their respective “shareholder advance” accounts, which in turn are shown as
current liabilities in the balance sheet.
[10] There is a separate but related proceeding between the parties, Coll v Hydro Developments Limited and Easther, CIV-2012-409-879. This is an application by Mr Coll under s 174 of the Companies Act by which he seeks relief as a minority shareholder. In his first amended statement of claim filed on 2 July, Mr Coll seeks a declaration that the affairs of Hydro Developments have been conducted in a manner which is oppressive and/or unfairly discriminatory and/or unfairly prejudicial to him and to his family trust. He seeks orders requiring the defendants to purchase their shares at fair value, payment of compensation in relation to certain alleged adjustments in the plaintiff’s shareholdings, and repayment of shareholders’ advances and other moneys owed to Mr Coll.
[11] The first amended statement of claim specifically cites the formal demands for payment of the advance account balances which are in issue in the present proceeding.
[12] In paragraph 49 of the first amended statement of claim, the plaintiffs give particulars of the conduct which is said to be a foundation for relief under s 174. The first element is a proposed share issue resolution, and of current relevance is the particular pleaded that the share issue does not involve the injection of any cash to be utilised for the purpose of repaying Mr Coll’s shareholder advance account. The second element raises specific issues with the asset transfer proposed under the special resolution, including an allegation that the transfer “would have significantly prejudiced the first plaintiff’s ability to recover the shareholder advances owed to him”. Finally, under the sixth element of the particulars it is said that the actions of the other directors depart from the plaintiffs’ legitimate expectations and understanding as to the nature of their investment and participation in Hydro.
[13] It is plain that the wish of Mr Coll to be repaid the sum standing to his credit in his shareholder advance account forms a material part of the relief sought in the s 174 proceeding, and alleged adverse effects on the prospect of that being achieved form a material part of the conduct to be scrutinised in that proceeding. There are
injunctions in place, as a result of applications in that proceeding, to hold the present situation for the time being.
[14] Resolution of the issue on this application requires a finding on whether there is, arguably, a dispute over whether the advance account balance is repayable upon demand. Therefore, the issuing of the statutory demand and the continued opposition to the application to set it aside can be seen as an attempt to achieve resolution of one of the issues in the s 174 proceeding, by invoking the s 289 process. The issues the Court is required to determine on this application could as well have been determined in the broader context of the more extensive disputes raised in the s 174 proceeding. The s 174 proceeding was commenced well after this proceeding, so the issue of this proceeding was not a deliberate attempt to take a shortcut through at least some of the issues in the s 174 proceeding. Nonetheless, maintaining the position that there is no arguable defence to the statutory demand in this proceeding, has that effect.
[15] Hydro was set up to be a “start-up company” as it is described in the evidence. It was not set up with any significant capital. The intention of its founders was that they would provide services to the company without payment, to move it towards an ultimate goal of obtaining all necessary rights and consents for a hydro- powered generation facility. After some time it was necessary for cash to be advanced to the company to meet its expenses. These increased as time went on, but so did the company’s achievements. It seems that it is now at a point where development of a generation facility is likely to eventuate. The means by which that could occur remain uncertain, and apparently the subject of considerable activity. For Hydro to undertake this project itself would require it to find funding estimated at between $230m and $250m, or possibly more. Other larger participants in the electricity market have expressed interest in involvement from time to time but there is no definite plan in place at this point. That said, it is clear that the rights and consents held by Hydro have a significant value, a point that has been reached by the efforts and contributions of time, skill and money of its shareholders and directors.
[16] It is the position of Hydro and its directors other than Mr Coll that at all times
there has been an “understanding” or an “agreement” that shareholders’ advances
would not be paid until, and unless, a point in the progress of the company towards fruition of its aspirations is reached (and if not reached, the advances would not be repaid at all). This point was described in various ways by witnesses who swore affidavits for Hydro.
[17] I briefly summarise these:
Mr A R Black, Director:
There is an existing agreement in place between HDL’s shareholders that payment of any such sums claimed, i.e. on their advance accounts, would not actually be payable until either the sale or any restructuring of the company. The sums in issue are not actually debts in the true sense of the word, but rather are venture capital advanced by the first defendant as a shareholder and his company – just as I and the other shareholders have also advanced venture capital to HDL.
Mr Easther:
[A]ll advances have been made on the understanding that shareholders will not be repaid until HDL is successful in attracting an investor with the capacity to achieve financial closure for construction of the Project ... The understanding has been fundamental to the operation of HDL and management of the Project. At each stage of HDL’s development, the Board has discussed the risk of taking the next step and the likelihood that all advances will be lost. Each shareholder has made advances on the basis that they can bear total loss. That is still the case and will remain so until such time as HDL achieves financial closure for the construction of the Project.
Mr Charles Kidson:
Like Mr Coll and his family interests, I am one of the foundation shareholders in HDL. Ever since the incorporation of HDL in 2001, it has always been understood and agreed by all shareholders that their cash advances and/or in-kind contributions to the benefit of the company were investments – and would only be repaid if/when the company’s hydro- electric project was successful. Mr Coll’s evidence that there was never any such agreement is simply wrong.
Mr Matthew Kidson:
HDL’s affairs have always been conducted on the agreed basis that shareholders’ investments – be they cash advances made or professional time invested – would only be repaid upon the success of the company’s hydro-electric project (or “financial close” as it was often described). The first time I learned of any position by Mr and Mrs Coll to the contrary was the letter dated 1 March 2012 by their solicitors, Buddle Findlay, to HDL. This was followed the very next day (2 March 2012) by the two statutory demands in issue.
Mr Currie:
As accountant and company secretary for HDL since its incorporation, I have been privy to numerous meetings, telephone calls and emails between the directors and shareholders of the company. As a result, I have a very good understanding and factual knowledge of the underlying nature and purpose of the company. It is with this background knowledge and understanding that I have maintained HDL’s financial accounts, prepared its annual reports, etc. In undertaking this work for HDL, I have always adhered to my understanding of the guiding agreement between HDL’s shareholders – which is that each of the shareholders was investing money in the company to enable it to progress its intended hydro-electricity project. If the venture was successful then either there would be a return from dividends in a hydro generation company, or a large investor would purchase the company and at that stage shareholders would realise a return on their investment.
[18] This may be contrasted with the evidence of Mr Coll. In his first affidavit he said:
I reject any suggestion that the professional services provided to HDL [Hydro] by CJCSL [the second defendant] were subject to an understanding between HDL’s shareholders that payment would not be forthcoming until HDL was successful in bringing the Stockton Plateau hydro scheme to fruition. I refer to my further comments in paragraphs 10 to 15 below. While CJCSL has, in the past, been prepared to defer calling for payment of the invoices rendered to HDL, this was on a purely gratuitous basis and it was subject to CJCSL observing that all shareholders were working together with a common objective to both advance and protect each others’ investment in the Stockton Plateau hydro scheme.
[19] Mr Coll followed this passage with an expression of his concerns about certain steps Hydro intends to implement, which in his view will seriously harm the second defendant’s position as a creditor. These are, of course, the same concerns that are the subject of the s 174 proceeding.
[20] The invoices of the second defendant referred to in this passage are the invoices which were the subject of the second statutory demand which has now been withdrawn. Nonetheless, other invoices by the second defendant form part of the sum standing to the credit of Mr Coll in his shareholder’s account, to the extent of around $45,000. As this firm has undertaken work for Hydro and billed it, the invoices have been treated as shareholder advances in Hydro’s accounts, rather than as current expenses which Hydro would pay. The remainder of the total now
claimed comprises cash advances to the company by Mr Coll ($133,000) and interest. On the subject of these advances, Mr Coll, in his first affidavit, said:
12. At paragraph 4 of Mr Easther’s affidavit sworn 16 March 2012, he asserts that there was an “understanding” that the sums advanced to HDL by the shareholders and their related entities would not be repaid until the company was successful in attracting a major investor to advance the Stockton Plateau hydro scheme, and if the company could not attract an investor, the sums may not be repayable in part or whole.
13. I reject the assertion at paragraph 4 of Mr Easther’s affidavit. Notably, Mr Easther has not provided any documentation recording such alleged “understanding” or any other corroborative evidence. There is no such documentation or other corroborative evidence because there has never been any such understanding. There has never been a shareholders’ agreement to such effect. I have, in the past, been prepared to grant indulgences to HDL in terms of allowing my advance account to accumulate in lieu of payment. However, this was always tied to an appreciation on my part that the shareholders were working together with common expectations, and that the value of my investment in HDL was secure.
Mr Coll went on to refer again to recent steps by HDL which he maintains compromise his ability to recover his advance account.
[21] In his second affidavit Mr Coll said:
10. I do not accept the statements made by Ant Black and John Easther to the effect that professional services and funding provided to HDL was in the nature of “venture” or “risk” capital. This does not reflect the treatment of shareholder funding in HDL’s company accounts. I have never before heard the phrase “venture” or “risk” capital used before in relation to HDL. I acknowledge that the funds introduced by the shareholders (except John Easther) were funds “at risk” but only in the sense that HDL has never earned revenue and, up until recently, had little to no asset value. Up until recently our expectation was that HDL would sell the consents (and DoC land rights) and another entity would construct the project.
11. We (the Coll shareholders) introduced funds into HDL, and provided professional services to HDL through CJCSL, knowing that the company was trading off the goodwill of the other shareholders. If, at any time, any of the shareholders was not prepared to continue to fund the company then they would either need to be bought out, or the company would fail. That is the risk we understood we were taking. But there was never any agreement or understanding such as is now suggested on behalf of the plaintiff.
12. The first time I saw any formal reference to the understanding or agreement now alleged on behalf of HDL was in the Board papers
prepared by John [Easther] and circulated ahead of the 7 March 2012
directors’ meeting ...
Mr Coll went on to say that this reference was after the service of his statutory demands.
[22] There are a number of other references to this issue in the evidence of the witnesses but the summary I have given is sufficient to show that there is a conflict of evidence between Mr Coll and the other directors, and the company accountant.
[23] Mr Peers acknowledged that the Court cannot resolve issues of credibility on affidavit evidence, unless the situation is that contemplated in Eng Mee Yong v Letchumanan,5 where the evidence is contrary to contemporaneous documents or earlier statements of the parties.6 Mr Peers, however, drew attention to a passage in Eng Mee Yong where Lord Diplock emphasised that a Judge is not bound:7
to accept uncritically, as raising a dispute of fact which calls for further investigation, every statement on an affidavit however equivocal, lacking in precision, inconsistent with undisputed contemporary documents or other statements by the same deponent, or inherently improbable in itself it may be.
[24] Mr Peers pointed out that there is no contemporary documentation evidencing an agreement and no evidence about who made the agreement, or when or where; further, he submitted there are discrepancies between the accounts of the witnesses for the plaintiff on whether there is an agreement or understanding and, if so, its terms. He submitted that the evidence of Mr Easther varies between his two affidavits. In the first he said that:
... any such sums advanced by them or their related entities could not be repaid until the company was successful in attracting a major investor to advance the Stockton Plateau Hydro Scheme, and if the company could not attract an investor, the sums may not be repayable in part or whole.
5 Eng Mee Yong v Letchumanan [1980] AC 331.
6 Androcles Investments Ltd v Highway Publications Ltd HC Christchurch M 455/00,
14 February 2001.
7 Eng Mee Yong v Letchumanan, above n 5, at 341.
[25] In his second affidavit, however, Mr Easther said:
As explained in my first affidavit, all advances have been made on the understanding that shareholders will not be repaid until HDL is successful in attracting an investor with the capacity to achieve financial closure for construction of the Project. In this affidavit, I refer to that agreement as “the understanding”.
[26] Mr Peers then referred to the passage from Mr Black’s evidence cited above and noted his reference to payment being deferred “until either the sale or any restructuring of the company”, and later to repayment only being “on final success of the Project” – i.e. in the final “wash-up”.
[27] Next Mr Peers drew attention to the treatment of the advances in the company’s balance sheet as current liabilities. Apart from the passage cited above, Mr Currie, the company’s accountant, gave further evidence on this issue. He said that cash was required on a sporadic basis, and provided by the shareholders on an ad hoc basis when Hydro needed to pay for services. The contributions were simply credited to shareholder advance accounts, to record them. He then said:
... it is the agreement of the shareholders that dictates what may then occur in respect of any repayment of the figures appearing on the face of the statement. The statement does not dictate what the shareholders have agreed.
[28] Mr Currie then went on to point out that in the accounts, under the heading “Current Liabilities”, there is a further entry for “Payables and Accruals”. He said this entry was shown as separate from shareholder advance accounts in order to reflect the difference between Hydro’s normal trade creditors and its shareholders’ advances. This was because Hydro’s obligations to its shareholders in respect of their advances were not the same as its obligations to trade creditors.
[29] Mr Currie then levelled various criticisms at the evidence given on behalf of the plaintiff by Mr P J Munro, a chartered accountant, independent of all the parties, and thus as an expert. In his affidavit he said that he regards the question of whether the shareholder advance accounts represent amounts repayable on demand as a legal issue, resolution of which will determine whether the accounting treatment adopted by the company in its financial statements was correct.
[30] My understanding of financial accounts differs, as does Mr Currie’s. By definition, accounts are prepared in order to set out an account of financial transactions which have occurred. Where advances have been made, the accounts record them. Accounting standards require accounts to differentiate between advances with a term, and advances that are current. More evidence would be needed to establish the correct terminology to describe advances of the character which Hydro maintains the shareholder advances have in this case. On Hydro’s view, they are not current, but neither are they contributions to equity, and they do not have a set term.
[31] I do not seek to diminish in any way the quality of Mr Munro’s evidence by quoting only the final paragraph of his affidavit, but it does demonstrate the difficulty for the Court in drawing any conclusions from the accounting treatments of the shareholder advances:
Generally speaking, I am of the view that it would be a reasonable starting point to assume that a shareholder current account disclosed as a current liability in an entity’s financial statements would represent a liability repayable on demand, or within the next 12 months. Certainly, this would be the presumption in the absence of clear documentary evidence to the contrary.
[32] Mr Munro chose to couch his expression of opinion in very qualified terms. I accept that statement as far as it goes. But the case for Hydro here is that whatever the assumption may be about an entry of the type in question, a significant body of evidence suggests that the position was such that the assumption identified by Mr Munro would not, in this case, remain after an examination of that factual material.
[33] For these reasons I draw no support one way or the other from the entries in the annual accounts.
[34] Returning therefore to the conflicting evidence in relation to when shareholder advances might be called up, Mr Peers relied on a number of cases to support a proposition that the uncertainty of the evidence for Hydro was fatal to its
application. I start with Stone-Weir Fine Lodges Ltd v Stone.8 This case involved a statutory demand calling up a current account. It was said for the company that there was an understanding or a belief on the part of other shareholders that advances were to remain with the company for a term of five years based on the company taking some time to achieve profitability. There was no documentation recording the terms on which shareholder advances were made or were to be repayable. The Court said:9
With respect to that evidence, it is quite apparent in my view that at most it is evidence of an understanding or expectation that Mr Weir took from discussions he had with Mr Stone, but it falls significantly short of establishing any binding agreement between the parties as to the shareholder advances being for a minimum of 5 years. ... There is no evidence of agreement as to term. There is simply no proper evidence in that affidavit of the agreement the applicant purports to rely on.
[35] Further, the Judge said:10
There may well have been an expectation on the parties’ behalf that the venture would be for a medium to long term, but again that begs the question of whether there was an agreement between the parties that, specifically in relation to the substantial shareholder advances, the advances were to be repaid other than on demand.
[36] In United Homes (1988) Ltd v Workman,11 a minority shareholder issued a statutory demand for repayment of his current account and the company applied to set it aside. The Court of Appeal said:
[18] Mr Grant deposed initially in the case of each company that “there was a clear express agreement between shareholders that shareholders would not be entitled to draw from these funds [‘shareholders’ term funds’] without the express agreement of all other shareholders”. No particulars were given of the date, personnel involved, or other circumstances of that asserted “clear express agreement”. No documentary substantiation was produced. Following denial by Mr A L Workman of the existence of “any such agreement” Mr Grant deposed “there was clear agreement and understanding that one shareholder could not alone immediately draw out that shareholder’s term funds”. Mr Grant noted there were three “good commercial reasons” for that situation: (i) shareholders wished to maintain parity in term funds; (ii) shareholders appreciated the company relied on the funds for cashflow and solvency purposes; and (iii) consistency with a covenant in a loan agreement between Westpac and Paradise Shores Ltd, a member of the group, not to withdraw shareholders’ funds without consent.
8 Stone-Weir Fine Lodges Ltd v Stone (1999) 13 PRNZ 214 (HC).
9 Ibid, at 216.
10 Ibid, at 217.
11 United Homes 1988 Ltd v Workman [2001] 3 NZLR 447 (CA).
[37] Later in the judgment the Court said:
[38] On the other hand, contrary inferences are open as to commercial likelihoods. It does not seem particularly likely that a shareholder would bind itself on some open-ended basis to leave in all advances, including even allocated profits, unless all other shareholders agreed to drawings being made. Voluntary restraint is one thing. Acceptance of such a severe legal impediment is quite another.
[39] It seems to us quite clear that any restraint upon withdrawing the current account/shareholders’ term funds (and the item has both labels) developed as a matter of understanding short of actual legal obligation. The question of legal obligation is not the subject of any identified clear agreement of a binding character. It is not the Court’s job to construct one from nothing.
[38] Finally, Mr Peers cited Rocklands Park Ltd v Logan Samuel Ltd:12
[64] In the present case I accept that all the shareholders proceeded, initially at least, on the basis that they would not require repayment of their advances. I consider, however, that, as in the United Homes and Stone-Weir cases, the evidence falls short of establishing that a binding and enforceable agreement was ever arguably reached. Forbearance from requiring the loans to be repaid was therefore a matter of voluntary restraint or acceptance rather than compliance with a legal obligation. I also accept Mr Commons’ submission that the evidence of the shareholders is as to their “belief” or “understanding” of the situation, and that it does not support the submission that they entered into a binding agreement. The differing versions of the alleged agreement are testament in themselves to the fact that the parties were never ad idem regarding the exact terms of the agreement either.
[39] Mr Peers submitted that this case falls squarely within these dicta: there had been voluntary restraint, no acceptance of an impediment to demanding repayment, no agreement amounting to a legal obligation, and different versions of the alleged agreement or understanding by the witnesses for Hydro.
[40] Mr Gordon, however, relied on more than the statements of the witnesses for Hydro. First, he noted elements of the context in which the advances to the company were made, pointing out that Hydro only had shareholders’ funding available to develop its proposed business which was a speculative venture without initial
substance. He suggested that funding in this circumstance is not unusual, and each
12 Rocklands Park Ltd v Logan Samuel Ltd (2004) 9 NZCLC 263,535.
shareholder knew that he could receive a significant return or could entirely lose his investment.
[41] Mr Gordon submitted that the agreement and understanding described by Hydro’s witnesses was also common sense, as no shareholder would advance funds if he could not rely on other shareholders leaving their moneys in, and not putting the company in jeopardy by demanding repayment. No repayments have in fact been made nor (until now) sought, and all advances in cash or by way of services have been used to promote the purposes of the company. No surplus funds have been, or are, held. On the other hands the funds are not locked in indefinitely. The company is moving forward and the shareholders will enjoy significant returns if success is achieved. That was a point described in the evidence as “financial close”, the point at which shareholders’ advances would be repaid. A final element of context relied on by Mr Gordon is that Mr Coll has not taken any issue with his investments in Hydro since its inception in 1998.
[42] Mr Gordon then submitted that Mr Coll’s own evidence has, as he put it, wavered. In his affidavit sworn in March he emphatically denied any understanding that his advances were not repayable. However, in his affidavit in June he acknowledged that the funds were “at risk” but confined this to their lack of revenue earning and the lack of any asset value for which repayment might be made. He acknowledged that those who made advances knew that the company was trading off the goodwill of the other shareholders and then said:
If, at any time, any of the shareholders was not prepared to continue to fund the company then they would either need to be bought out, or the company would fail. That is the risk we understood we were taking.
[43] Mr Gordon submitted this shows that Mr Coll acknowledges a level of understanding or agreement between the shareholders, though in different terms from their understanding.
[44] Mr Gordon then submitted that the withdrawal of one of the statutory demands has some significance. That demand related to certain invoices for services by Mr Coll’s company. After it was issued, and these proceedings followed, emails were identified which showed clear agreement that those invoices would be treated
as shareholders’ advances. Although no emails have been produced which show any agreement to treat the remaining invoices, which form part of the statutory demand now under consideration, in the same way, that is in fact how they have been treated for years, never as invoices for immediate payment.
Discussion
[45] In my opinion a sufficient evidentiary foundation has been laid to show that there is a substantial dispute on whether or not the sum claimed in the statutory demand is due, for the following reasons.
[46] First, there is a clear conflict on the evidence between Mr Coll and the other directors. I acknowledge that on a line by line analysis of the affidavits of the latter, there are discernible differences in their positions and the exact point at which the advances might be repayable is lacking in clarity. However, all the directors were engaged in a common purpose and the time at which that purpose might be attained, if at all, could never be predicted with any degree of precision. Nor could the exact nature of an acceptable outcome for Hydro be predicted. It could be by way of introduction of new shareholder funds by an investor with sufficient financial strength to bolster the company’s balance sheet and take the project through to conclusion. It could be by way of sale of the company’s assets, which have been built up by obtaining rights and consents over a number of years and which now have a significant value. Equally, it could be by some other completely different means. All, however, would be productive of a financial position which would reward the shareholders and directors for their efforts not only by realising the value of their shares but also by returning to them their shareholder advances, either by conversion into shares or in cash. This is not a company where but one outcome was intended or possible. Different descriptions of the point at which financial closure for the current shareholders might be reached were, in my view, to be expected. The evidence led for the plaintiff must in my view be seen in this light.
[47] Secondly, the shareholders elected to fund their venture by provision of their personal services without immediate reward, and by cash advances. They did not elect to fund it through banking accommodation. Whether a bank advance would
have been available, and if so whether it would have been repayable upon demand or not, is not known, but by electing to fund the venture themselves the shareholders put themselves in the position where they could agree the level of financial security which the company would enjoy. If the advances they made were repayable upon demand, to a company with no funds to its credit, they would necessarily have placed the company’s ongoing viability in a vulnerable position: any shareholder could at any time, by calling up advances, either place the shareholders in a position where they had to come up with the sum demanded themselves, or place the company into a position where it would go into liquidation, thereby terminating the intended and potentially profitable long-term venture. For the purposes of determining whether there is an arguable defence to this demand for repayment, I find that a sufficient evidentiary basis has been laid for a conclusion that this is inherently unlikely to have been the position. I acknowledge that a different outcome might be established under trial scrutiny of evidence, but the facts surrounding the operation of this company for the last decade or so sufficiently support the conclusion I have reached at this point.
[48] Thirdly, although I have taken into account the dicta I have cited from Stone- Weir, United Homes and Rocklands Park, those were observations on the facts in those cases. They serve to emphasise the need to scrutinise with care the evidence given in cases where there is no contemporaneous documentary record of an alleged agreement or understanding. Nothing in my conclusions should be seen as suggesting a lower level of scrutiny is appropriate. I have, however, been mindful throughout of the observations of the Court of Appeal in Industrial Group Ltd, above at [5], and the dicta in Denize Farms Ltd, Freemont Design & Construction Ltd and Androcles Investments Ltd, above at [6].
Outcome
[49] The statutory demand dated 2 March 2012 is set aside.
[50] Mr Gordon submitted that if this should be the outcome of the case, costs should be awarded to the plaintiff with a 50 percent increase on scale 2B, based on r 14.6(3) High Court Rules. This provides that a court may award increased costs if
a party has taken or pursued an unnecessary step or an argument that lacks merit. Mr
Peers submitted that should he be unsuccessful costs should be on scale.
[51] In numerous cases this Court has stated, indeed repeatedly, that it is inappropriate to issue a demand under s 289 where it is known that there is a substantial dispute over whether a debt is owing, or whether it is due. Mr Coll’s decision to issue a statutory demand in this case followed promptly a decision of the directors over the future course of the company with which he did not agree. A short while later, faced with opposition to his demand that he be repaid his advances, he brought proceedings under s 174 and an application for injunctive relief pending resolution of his claim at trial. That proceeding called for scrutiny of the conduct of the company which will be far broader and deeper than its mere refusal – or apparent inability – to repay Mr Coll his advances, but the fact that his advances are tied up in the Company’s affairs is one of the factors upon which he relies. As noted part of the relief sought is an order for repayment of those advances. Viewing the pleading as a whole, it sets out a range of matters on which Mr Coll disagrees with the actions taken by the other directors. If the allegations are right there is a substantial breakdown of the relationship between the directors and shareholders evidenced by widespread disagreement. This is also evidenced by the affidavits filed in this proceeding.
[52] In my view once Mr Coll decided to proceed with his application under s 174 he had reached the point where his statutory demand should have been withdrawn. Arguably, he should have known that repayment of his advances would be trenchantly opposed before he issued his demands, but I will give him the benefit of the doubt on that. Whilst I accept Mr Peers’ submission that there is no reason in law why a statutory demand cannot be issued for return of a shareholder’s advance, in the context of an application under s 174, the appropriateness or otherwise of issuing a statutory demand, or seeking to uphold one, is judged on the factual position. On the facts here Mr Coll had, by that point, identified a plethora of matters on which he disagreed with his fellow directors, and they with him. He also knew, by virtue of the evidence filed by the plaintiff on this application, that his fellow directors and shareholders, and even the company’s accountant, strongly
disagreed with his version of the facts. That was a point at which opposition to this application should have ceased.
[53] I have no hesitation in finding, therefore, that from that point on the defendants in this application have unnecessarily opposed the application and that it is appropriate to award an increase in costs. Little, if any, cost was saved by the second demand being withdrawn before the fixture. In my view the plaintiff’s request for a 50 percent increase is excessive, though it may have been appropriate had the s 174 proceeding preceded this one. I award costs to the plaintiff on scale
2B plus 25 percent, together with disbursements as agreed or, if necessary, fixed by
the Registrar.
J G Matthews
Associate Judge
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