J v Police HC Hamilton CRI 2005-419-70

[2008] NZHC 11

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2007-404-003241

UNDER  The Companies Act 1993

IN THE MATTER OF     proceeding for putting company into liquidation

BETWEEN  LAKE VIEW GOLF CLUB INCORPORATED AND THE LAKE VIEW GOLF AND COUNTRY CLUB INCORPORATED

Plaintiffs

ANDLAKE VIEW GOLF RESORT LIMITED Defendant

Hearing:         23 January 2008

Appearances: Ms Kai Fong for plaintiffs

Mr Sanderson for defendant

Judgment:      23 January 2008

ORAL JUDGMENT OF ASSOCIATE JUDGE DOOGUE

Counsel:

McKechnie Quirke & Lewis, Rotorua - by facsimile: Fax: [phone]

Brookfields, P O Box 240, Auckland - by facsimile:  379 9350

LAKE VIEW GOLF CLUB INC & ANOR V LAKE VIEW GOLF RESORT LTD HC AK CIV 2007-404-

003241  23 January 2008

[1]      The plaintiff as a substituted creditor plaintiff filed a statement of claim in the Rotorua Registry in October of 2007.  That followed an order be made by Associate Judge Abbott substituting the present plaintiffs in the place of the earlier plaintiff Redco NZ Limited.  The plaintiff claimed that the defendant company was indebted to it.  The plaintiff relied upon the unmet statutory demand which Redco had served on the defendant company.  The statutory demand which Redco served was issued on  27  March  2007.    The  circumstances  behind  the  substitution  of  the  present plaintiffs were that the defendant paid out Redco he no longer had the status of a creditor entitling it to continue with seeking an order for the appointment of liquidators in regard to the defendant.

[2]      The plaintiff said in particular that it had entered into an agreement that the defendants would pay the plaintiffs $20,000 per month in advance for maintenance of a golf club course at Rotorua commencing in March 2007.  It further alleged that the defendant company had paid only the $20,000 instalments due 1 March and 1

April 2007 but thereafter had not made any further payment.  The plaintiff alleged at paragraph six of the statement of claim that a total amount of $120,000 was owing to them by the defendant.

[3]      In its statement of defence the defendant said, at paragraph five, that it denied entering into an agreement for the $20,000 per month maintenance payments to be made in advance and it went on to say:

(a)  any alleged agreement failed for certainty as the duration of the alleged golf club maintenance payments was not stipulated; and

(b) Alternatively, any alleged agreement provided as a term that both parties would review, on a quarterly basis, the quantum of any proposed golf club maintenance payments.  No such review occurred and until a review occurs not further payments are payable under any agreement.

[4]      In its statement of defence the defendant said that it admitted that it had made a $40,000 payment to the plaintiffs in April 2007.  It said that there was a substantial dispute whether the plaintiffs alleged debt was owing or due and it denied that it was

indebted in the sum $120,000 to the plaintiffs.  The defendant also made reference to the fact that the parties had referred their dispute to arbitration.

Background

[5]      The genesis of the arrangements between the parties was that the plaintiffs entered into an agreement to sell a golf course that they owned to the defendant company.  As part of the sale arrangements the defendant executed a memorandum of encumbrance which was registered against the title to the land comprising the golf course.  By the memorandum the defendant accepted responsibility for maintaining the golf  course to  an  international  standard.    Further  if  the  defendant  failed  to maintain the course to the required standard the club was entitled to maintain the course itself and in that event would be entitled to be reimbursed by the defendant for the expenses incurred.

[6]      During 2007 the parties’ solicitors exchanged correspondence which related to the fact that the defendant was not meeting its obligation to maintain the golf course.  The circumstance in which that came about was that a third party, which the defendant  relied upon to carry out the  golf  course  maintenance,  had  apparently breached its obligations to the defendant.  During the exchange of correspondence between the solicitors, those acting for the plaintiffs made reference to the fact that the maintenance was not being carried out and proposed (and this appears in the letter from McKechnie Quirke and Lewis to Brookfields  26 March 2007) as follows:

(h)Payments: because of the past situation that has arisen and because of what it perceived by our clients of a lack of funding (sic) as I see, we think the only forward, even if only on a interim basis (say for the  next  six  months),  is  for  funding  plan  to  be  put  into  place whereby there is paid to (the plaintiffs) a monthly sum and there is little reason for it to vary from the $20,000 proposed, for the months of March and onwards.  An amount of this (sic) will immediately be needed to reimburse the wages paid, payment for supplies etc that have not been meet by Traditional Golf Design Limited and which had to be meet for the reasons set out.  We have asked our client to prepare full figures to 31 March, that is the end of this month, and then further discussions can be held about the matter.   Our client feels that such a sum may also enable the work required referred to in (f) above to be done.

[7]      It will be apparent that there had been an earlier proposal from the solicitors for the plaintiff that a sum of $20,000 per month would be the approximate amount required to keep up the maintenance on the golf course.

[8]      The letter I have just quoted duly reached Bookfields who replied 28 March

2007.  So far as relevant, the reply stated:

2.In respect of the maintenance, our client is happy to take your clients interim proposal that it prepays $20,000 towards the maintenance cost into your clients account (sic), subject to adjustment either way on  a  regular  basis.    Please  send  us  your  client’s  bank  account number so that our client can arrange the payment.   We would be obliged if  you  could  send  us  your  clients  full  accounting  to  31

March in accordance with your letter as soon as possible, at which point there can be further discussions about the interim arrangement

as suggested in your letters.

[9]      In  the  following  month  a  sum  of  $40,000  representing  two  months instalments  of  $20,000  was  paid  to  the  plaintiffs.    No  further  payments  were received.

[10]     A Mr Mihinui provided an affidavit on behalf of the plaintiff.   He is the president of the two plaintiff organisations.   There was annexed to his affidavit a running account showing what had been spent by the plaintiffs in maintaining the golf course.  That account spanned the period 20 February 2007 down to May 2007. Included in the account was the item of $40,000 which the defendant had paid for which the defendant was duly given credit.   That left a deficiency owing to the plaintiffs of $22,577.58.   Certain deductions were required to be made from that figure so that the net amount owing which the clubs had paid for maintenance but which had not been reimbursed was $14,791.58.

[11]     It will be apparent from the background that I have set out that the plaintiffs would be entitled to either sue on the agreement for the monthly instalments but if that was not available to them there was another route by which they could establish liability on the part of the defendant and that was the provisions of the deed of encumbrance which entitled them to recover from the defendant the costs incurred in carrying out maintenance.  Against that background I now consider the issues that arise for consideration.

What was the agreement?

[12]     In  my  view  it  is  clear  that  the  plaintiffs  and  defendant  agreed  that  the defendant would pay $20,000 in advance per month.   It was also expected that at some point there would be a review of the arrangement.  Whether that meant that the parties might on review abrogate their arrangement or replace it with some other arrangement or vary it I do not know.  I do not need to come to a concluded view on that matter.   Alternatively  the  ‘review’  may simply have meant  reconciling the amounts which the defendant paid against the amounts of expenditure which the plaintiffs had incurred.  However I return to the grounds set out in the statement of defence which says that in any case the alleged agreement failed for uncertainty as the duration of the alleged golf club maintenance payments was not stipulated.

[13]     I do not agree that the absence of a stated duration of the agreement has the effect which the defendant contends for.  Where a contract is of continuing duration the issue that arises is whether one party has a right of termination on reasonable notice.   Agreements of indefinite duration are not for that reason alone void for uncertainty: V Powerco Limited v Gore District Council [1997] 1 NZLR 537 at 551.

[14]     The second point that is taken by the defendant in the statement of defence is that there would be a review on a quarterly basis and until such a review occurs no further payments are payable under any agreement.  I do not find that proposition to be a persuasive one but I do not need to decide the point because even if that proposition  is  accepted  the  defendant  was  committed  to  paying  a  quarter’s instalment,  that is three months payments, but it has paid only two.  It is admittedly therefore in deficit under the arrangement to make the payments in terms of the agreed schedule.

[15]     Alternatively, if the arrangements reached in the exchange of correspondence are void, the defendant is indebted to the plaintiffs under the deed of encumbrance on the basis which I set out in the previous section of this judgment.

[16]     In my view therefore the plaintiffs are creditors of the defendant and have the necessary   standing   to   bring   these   proceedings   seeking   the   appointment   of liquidators.

Solvency

[17]     Mr Sanderson submitted to me that the plaintiffs could not rely upon the unsatisfied statutory demand which Redco NZ Limited served on the defendant 27

March 2007.  That was, he said, because the liability which was the subject of the statutory demand had since been meet.  However, the terms of the statutory demand require that it be meet within 15 working days and it was not disputed that the defendant had not discharged the claim set out in the statutory demand within that time period.  Therefore the statutory presumption came into effect notwithstanding that the defendant later paid off the debt which was the subject of the statutory demand.  That being so by virtue of section 287 of the Act the company is presumed but not deemed to be unable to pay its debts.

[18]     In his affidavit, Mr Yune said:

The defendant company is not unable to pay its debts.  It is the proprietor of the golf course.   The golf course was purchased by the Lake View Golf Resort $15,000,000 (sic).  It is anticipated that the value of the course has appreciated since the date of the purchase.

[19]     He went on to say that the defendant had chosen not to pay the money to the plaintiff as it “generally disputes” whether or not the plaintiff’s alleged debt is due and owing.  I assume that Mr Yune intended to say that the defendant “genuinely” disputed the claimed debt.

[20]     In the first place the deposition by Mr Yune is quite unsatisfactory and does not offset the presumption raised by s 287.   Something more than a generalised unparticularised, uncorroborated assertion that the company is able to pay its debts is required.   The reference to the capital value of the golf course is not an answer either.  I refer to the following passage from the commentary to s 287 in Morrison on Company Law:

The “cash flow” test of solvency, based on the ability of a company to pay its debts, must be contrasted with the “balance sheet” test of solvency which is concerned with whether the value of a company’s assets exceeds the value of its liabilities. In determining whether the liquidation of a company can be justified under s 241(4)(a), it is the cash flow test that counts. This point was addressed by Plowman J (at p 410; p 40) in Re Tweeds Garages Ltd [1962] Ch 406; [1962] 2 WLR 38:

“In such [cases where a company is unable to meet the current demands on it] it is useless to say that if its assets are realised there will be ample to pay

20s in the pound: this is not the test. A company may be at the same time insolvent and wealthy. It may have wealth locked up in investments not

presently realisable; but although this be so, yet if it have not assets available to meet its current liabilities it is commercially insolvent and may be wound

up.”

I respectfully adopt the above passage from Morrison and the dictum of Plowman J

contained in it.

[21]     In addition, as Ms Kai Fong pointed out, the property can only be used as a golf course and it is subject to onerous covenants.  It is therefore by no means clear that the asset, even if it does have a high capital value, can be readily liquidated to meet the defendant’s debts.  In my view the company is insolvent.

Genuine and substantial dispute

[22]     I have already set out the basis upon which the defendant is indebted to the plaintiffs.  Mr Sanderson reiterated the oft-heard plea by debtor companies that the winding up procedure is not to be used for the purposes of debt collection.  I am not sure that that really advances matters.   If a creditor appearing before the Court is owed a debt and has established that the defendant company is insolvent then it is entitled to the appointment of a liquidator, no less so, because the defendant may say that all that the company is trying to do is collect a debt.  I agree that in liquidation proceedings the focus must be on the solvency of the company and if the company is not insolvent the Court cannot invoke the liquidation proceedings of the Act in order to compel a  defendant  to  pay a  debt  which  it  appears  to  owe.    But  given  my conclusions set out elsewhere in this judgment the necessary preconditions for the exercise of the jurisdiction to appoint liquidators are made out.

[23]     The only matters that remain are discretionary ones. Under this heading that Mr Sanderson referred me to the fact that the plaintiffs had sought to invoke the arbitration mechanism contained in the deed of encumbrance in order to get some finality on the issue of the golf course maintenance.   However I do agree that by invoking the arbitration mechanisms contained in their agreement the company made some irrevocable election to turn its back upon Court proceedings seeking the appointment  of  liquidators.    Beyond  that  it  is  difficult  to  see  what  relevance reference to arbitration has.   Mr Sanderson did not develop his submissions any further in this regard.  I understand that he submitted that the fact that an arbitration had been supported his general submission that there was a genuine dispute between the parties.  But a company can go to arbitration in order to enforce an undisputed liability as much as it can go to arbitration to get resolution of a cloudy contractual situation where it is unclear whether any liability is owed.  In other words involving arbitration is equivocal when it comes to considering whether a genuine and substantial  dispute  exists.    I  do  not  believe  that  in  this  case  the  reference  to arbitration helps the defendant.

Conclusion

[24]     My conclusion is that the company is unable to pay its debts and that the Court has the power to appoint a liquidator.  I see no discretionary reasons why the Courts should not exercise its power to do so.  There will accordingly be an order placing the company into liquidation.  Alistair James Gibson of Rotorua, Chartered Accountant is appointed liquidator.   The plaintiffs will have costs on a 2B basis.

This order is made at 5.06 pm on 23 January 2008.

J.P. Doogue

Associate Judge