Khurana Trustee Limited v Castle Backpacker K Road Limited
[2020] NZHC 3192
•4 December 2020
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV 2019-404-000049
[2020] NZHC 3192
UNDER Part 16 of the Companies Act 1993 IN THE MATTER OF
the liquidation of CASTLE BACKPACKER K ROAD LIMITED
BETWEEN
KHURANA TRUSTEE LIMITED
Plaintiff
AND
CASTLE BACKPACKER K ROAD LIMITED
Defendant
Hearing: 4 September 2020 Appearances:
M M Gunawan & R Qin for the Plaintiff S R J Hamilton for the Defendant
Judgment:
4 December 2020
JUDGMENT OF VAN BOHEMEN J
This judgment was delivered by me on 4 December 2020 at 10.30am Pursuant to Rule 11.5 of the High Court Rules
…………………………
Registrar/Deputy Registrar
Solicitors/Counsel:
Patel Nand Legal, Auckland
Southern Cross Chambers, Auckland Pidgeon Law, Auckland
KHURANA TRUSTEE LIMITED v CASTLE BACKPACKER K ROAD LIMITED [2020] NZHC 3192 [4
December 2020]
Introduction
[1] The defendant, Castle Backpacker K Road Ltd (Castle), applies for leave to file out of time a statement of defence to the proceeding brought by Khurana Trustee Ltd (Khurana), as trustee of the Khurana Family Trust (Trust), to put Castle into liquidation. Castle also applies to stay or strike out Khurana’s proceeding.
[2] Khurana applied for Castle to be put into liquidation on the grounds that Castle failed to make a payment of $10,000 in accordance with a loan agreement between Khurana and Castle and then failed, within the required 10-day period, to apply to set aside a statutory demand made by Khurana to pay in full the amount of the loan, being
$170,000, plus interest and legal costs.
[3] Castle says it never received any money under the loan agreement and that a company associated with the Trust is in breach of warranties it gave when selling Castle the business in a transaction to which the loan agreement is related.
Relevant background
Purchase of backpacker business
[4] On 25 July 2019, Manvinder Singh entered into an agreement with Flash Packer NZ Ltd (Flash Packer) for the sale and purchase of a backpacker accommodation business at 145 Karangahape Road, Auckland. (Agreement for Sale and Purchase).
[5]On the front page of the Agreement for Sale and Purchase it was stated that:
(a)The total purchase price was $285,000, comprised of tangible assets of
$150,000, intangible assets of $134,500, and stock in trade of $500; and
(b)The deposit was $40,000, with a handwritten notation “$245,000 Balance of settlement.”
[6] Handwritten on the front page of the Agreement for Sale and Purchase was the notation:
Further term sale
Vendor finance $170,000 as per Schedul 18
[7] On the signature page of the agreement for sale and purchase, in the box headed “Further terms of sale”, the following terms were recorded in handwriting:
18Vendor is leaving three months rent as a holiday period of amount
$27870; purchaser will pay rent start from 1st of August.
19Vendor is leaving $2,130 of amount for COC. Purchaser is undertaking of COC.
20Balance Settlement Amount is $45,000 and $170,000 Vendor finance.
21Vendor finance for $170,000 plus total interest of $10,000 with 18 months instalments security of 1st interests of Vendor.
22First instalment will start from 15 of October 2019.
[8] The Agreement for Sale and Purchase was otherwise in the standard form of the Auckland District Law Society (Fourth Edition). Clause 6 of the Agreement set out the Vendor’s warranties and undertakings as follows:
6.1The vendor warrants and undertakes that as at the date of this agreement the vendor has not:
(1)received any notice or demand and has no knowledge of any requisition or other outstanding requirement:
(a)from any local or government authority or other statutory body; or
(b)…
…
which adversely affects the business or the premises and which has not been disclosed in writing to the purchaser; … .
Settlement of purchase of business of Flash Packer
[9] The purchase of the Flash Packer business was settled by Castle on 21 August 2019. A settlement statement of that date prepared by Flash Packer’s solicitors, Patel Nand Legal, and sent to Castle’s solicitors, Pidgeon Law, recorded that the purchase price was $285,000, made up of tangible assets of $150,000, intangible assets of
$134,500, and stock of $500. Against that amount, the settlement statement recorded:
Term Loan Advance from Khurana Family Trust $170,000.00
Credit for Deed of Assignment documentation $431.25 Rental Credit to Purchaser for September and October $18,580.00 COC Credit to Purchaser $2,130.00 Amount required as balance of settlement $53,858.75 $285,000.00
[10] Castle do not deny that the purchase of the business was completed in accordance with the agreement for sale and purchase.
[11] Under the purchase, Castle acquired the lease of the premises which Flash Packer assigned to Castle by a Deed of Assignment of Lease dated 3 September 2019. The Deed of Lease, dated 4 February 2019, was guaranteed by Sunil Kumar, the sole director and shareholder of Flash Packer.
Loan agreement between the Trust and Castle
[12] Also on 21 August 2019, the Trust and Castle entered into a term loan agreement (Loan Agreement).
[13]The Schedule to the Loan Agreement stated that:
(a)The principal sum was $170,000;
(b)The term expiry date was 18 months; and
(c)The principal plus interest was payable in equal monthly repayments of
$10,000, with the first payment to be made on 15 October 2019.
[14] The Loan Agreement was guaranteed by Castle’s two directors, Manvinder Singh and Akshat Rajvanshi.
Auckland Council advises Castle of requirement to obtain building consent
[15] By letter dated 15 October 2019, the Auckland Council advised Castle that the accommodation at 147 Karangahape Road had not been consented for use as sleeping accommodation under the Building Act 2004. It is not disputed that the letter was in
connection with the premises that Castle had acquired under the Sale and Purchase Agreement, despite the address being given as 147 Karangahape Road.1
[16] The letter said that because the premises had previously been used as a retail/office space, a notification of change in activity was required under the Building Act because that Act’s requirements for sleeping accommodation were different from those for office/retail space.
[17] The letter noted that the Council had issued a Notice to Fix to Auckland Flash Backpackers earlier that year and that, because the previous owners had not complied with the notice, the obligation to comply with the legislation was on Castle.
Castle fails to pay first instalment due under Loan Agreement
[18] The letter from the Council was dated and received on 15 October 2019, the date Castle’s first instalment for repayment of the Loan Agreement fell due.
[19] Castle did not pay the instalment. Counsel for Castle acknowledges that the payment was not made because of the letter received from the Council.
Khurana issues statutory demand
[20] On 4 November 2019, Patel Nand Legal on behalf of Khurana issued Castle with a statutory demand for payment of $170,000.00 plus interest and costs for enforcement.
The lawyers engage
[21] By letter dated 14 November 2019, Pidgeon Law wrote to Patel Nand Legal referring to the warranties in cl 6.1 of the Agreement for Sale and Purchase and to the letter of 15 October 2019 that Castle had received from the Auckland Council.
[22]Among other things, the letter stated that:
1 It appears from the affidavit sworn by Akshat Rajvanshi on 10 June 2020 that the address of the backpackers hostel is 145-151 Karangahape Road.
(a)Patel Nand Legal’s client had breached the warranty in cl 6.1 of the Agreement for Sale and Purchase and had engaged in misleading and deceptive conduct in breach of s 9 of the Fair Trading Act 1986;
(b)Castle intended to seek orders for cancellation of the Agreement for Sale and Purchase and a refund of the purchase price, losses and costs under the Contract and Commercial Law Act 2017 (CCL Act); and
(c)The statutory demand was defective because it referred to a loan that was never advanced to Castle.
[23] By email dated 18 November 2019, Mr Ron Qin of Patel Nand Legal replied, noting that he was acting for the Trust and that the dispute in the Pidgeon Law letter concerned Flash Packer, which was represented by Mr Gunawan at Patel Nand Legal. The letter stated:
The loan agreement was entered into between your client and the Khurana Family Trust, which is a completely different legal entity and has no bearing in your client’s purchase of the business other than funding your client’s purchase with a loan.
[24] The letter took issue with the challenge to the statutory demand, reserved the Trust’s rights with respect to repayment of the loan, including the option of winding up Castle in order to enforce the loan.
[25] Further exchanges of correspondence between the lawyers did not advance matters.
The present proceeding
[26] On 16 January 2020, Khurana commenced the proceeding on behalf of the Trust by filing a statement of claim in accordance with s 241 of the Companies Act 1993 and r 31.3 of the High Court Rules 2016. In accordance with r 31.5 of the High Court Rules, a notice of proceeding and an affidavit sworn by Preeti Kinra Khurana were filed in support.
[27]Castle was served with the proceeding on 11 February 2020.
[28] In accordance with r 31.11 of the High Court Rules, Castle had five working days, i.e. until 18 February 2020, to apply for orders restraining publication of the advertisement required by r 31.9 and to stay the proceeding. Castle did not apply for any order within that timeframe.
[29] In accordance with r 31.17 of the High Court Rules, Castle had 10 working days, i.e. until 25 February 2020, in which to file a statement of defence. Castle did not file a statement of defence within that timeframe.
[30] The proceeding was set down for a first call on 25 March 2020, but that call was vacated because of the COVID-19 lockdown and rescheduled for 22 May 2020.
[31] On 18 May 2020, Castle filed its application for leave to file a statement of defence out of time and to strike out the proceeding, together with an affidavit in support sworn on 15 May 2020 by Mr Rajvanshi, one of Castle’s directors.
[32] By minute dated 22 May 2020, Smith AJ decided that, in view of the difficulties under which counsel and the parties had been operating during the pandemic, the appropriate course was to allocate time to hear Castle’s application. Smith AJ set down Castle’s application for hearing on 4 September 2020 and made timetable directions.
[33]On 23 June 2020, Khurana filed its notice of opposition to Castle’s application.
[34] I heard Castle’s application on 4 September 2020. At the end of the hearing, I gave leave to Mr Hamilton, counsel for Castle, to file a memorandum responding to some of the detailed criticisms of Castle’s financial information made by Mr Gunawan, counsel for Khurana, and for Mr Gunawan to reply if he wished.
[35] In the event, both counsel filed more than one memorandum and Mr Rajvanshi filed a further affidavit, as I discuss below.
Relevant legal principles
[36] The power to grant an extension of time is discretionary.2 Where a defendant seeks an extension of time to file a defence, the Court requires that it produce material of substance to justify the exercise of the discretion or, in other words, a proper foundation.3
[37] As Osborne AJ observed in Hurunui Estate (2002) Ltd v Hurunui Hotel (2004) Ltd, liquidation proceedings should not be protracted for procedural reasons because the rules of Court are designed to assist the speedy resolution of such proceedings.4 The defendant, as a threshold requirement, must establish that it has on the documents filed an arguable defence.5
[38] As to the factors relevant to the exercise of the Court’s discretion, Osborne AJ said in Body Corporate 62870 v Health Distributors (Holdings) Ltd:6
[7] If [the threshold] test is satisfied, there are a number of factors which the Court may consider relevant. I adopt those as identified in Hurunui Estate (2002) Ltd v Hurunui Hotel (2004) Ltd:
(a)The period of the defendant’s delay and any explanation for it.
(b)The insolvency of the defendant which may cause it to waste funds on a defence which might more properly be handled by a proof of debt before the company’s liquidator.
(c)Prejudice caused to the [plaintiff] through extension of time (but with consequential costs usually able to be addressed by the imposition of conditions).
[8] Ultimately the Court’s exercise of its discretion is informed by the overall justice of the case.
2 Day v Ost (No. 2) Ltd [1974] 1 NZLR 714 (SC) per O'Regan J at 717; Ratnam vCumarasany [1965] 1 WLR 8 per Lord Guest at 12.
3 Day v Ost (No 2), above n 2; Hurunui Estate (2002) Ltd v Hurunui Hotel (2004) Ltd [2015] NZHC 1152 at [9]; Matthew Mini Coaches Ltd (in liq) v Scotch Myst Ltd [2019] NZHC 3015 at [22].
4 Above n 3, at [10].
5 Hurunui Estate (2002) Ltd v Hurunui Hotel (2004) Ltd, above n 3, at [10]-[11].
6 Body Corporate 62870 v Health Distributors (Holdings) Ltd [2018] NZHC 1717 at [7], citing
Hurunui Estate, above n 3.
The questions for consideration
[39]In the light of the above principles, the questions for consideration are:
(a)Does Castle have an arguable defence?
(b)What was the length of the delay and what were the reasons for it?
(c)Is Castle solvent?
(d)Is there any prejudice to Khurana from an extension of time?
(e)Where does the overall justice of the case lie?
Analysis
[40] Before addressing the above questions, it is appropriate to record the commercial realities that underlie a dispute that both parties have approached from narrow, technical perspectives.
[41] It was apparent at the hearing and was acknowledged by Mr Hamilton, counsel for Castle, that the core of this dispute is that, at the date the first instalment of the loan from the Trust fell due, Castle learned that there was an outstanding Notice to Fix the premises Castle had taken over from Flash Packer under the Agreement for Sale and Purchase. Castle’s assertion that that Flash Packer is in breach of the warranties in cl 6.1 of the Agreement in respect of that Notice would appear to have some force. Castle’s difficulty is that Flash Packer has been put into liquidation so Castle’s prospects of recovery against Flash Packer are limited. Instead, Castle has declined to accept any obligation to make repayments under its Loan Agreement with the Trust, which, Castle says, is related to Flash Packer.
[42] The connection between Flash Packer and the Trust is apparent from the fact that the Trust agreed to advance the “Vendor” funding envisaged in the Agreement for
Sale and Purchase and from the fact that Flash Packer, Khurana, Mr Kumar and Ms Khurana all have the same address.7
[43] At the conclusion of the hearing, I said the parties ought to exercise some common sense and try to resolve their differences. It appears from correspondence annexed to a memorandum filed after the hearing by Mr Hamilton that Castle made some effort to achieve a settlement but was unsuccessful.
[44] As a consequence, the Court must decide Castle’s application by reference to the positions advanced by the parties.
Does Castle have an arguable defence?
[45] As Osborne AJ observed, whether Castle has an arguable defence is the threshold question that must first be satisfied before looking at the other factors he identified in Hurunui Estate and Health Distributors.
Castle’s claim that it did not receive the money
[46] Castle’s primary defence is that it did not receive any funds from the Trust so cannot be held liable for any repayment. Castle takes that position even though it is not in dispute that the Agreement for Sale and Purchase settled and there is no claim by Flash Packer or its liquidator that Castle short-paid the purchase price by $170,000.
[47] I infer that Castle’s defence is a response to Khurana’s position that Khurana had nothing to do with the Agreement for Sale and Purchase.
[48] Mr Hamilton submits that there are three alternative ways Khurana could have advanced the funds under the Loan Agreement. One is a transfer of the funds directly to Castle and or to Castle’s solicitors. Another is an advance to the Trust’s solicitors to be called upon as part of the settlement of the purchase. There is no evidence that either of these courses were taken.
7 See extracts from Companies Register generated in 15 May 2020 for Flash Packer and Khurana annexed to affidavit of Akshat Rajvanshi sworn on 20 May 2020.
[49] Mr Hamilton says the third possibility, that it was an implied term in the Loan Agreement that the “short payment” of $170,000 upon settlement of the Agreement for Sale and Purchase represented the advance of the loan, was not pleaded by Khurana and, in any event, would not satisfy the test for an implied term. Mr Hamilton does not say why.
[50] While no pleading of implied term is made in Khurana’s statement of claim or its notice of opposition to Castle’s application, Mr Qin put the proposition of an implied term in an email to Mr Hamilton and Pidgeon law on 6 July 2020. Mr Gunawan put the same proposition in his submissions.
Was there an implied term and, if so, what was it?
[51] In Mr Gunawan’s submission, there are three possible alternatives for an implied term:8
(a)Pursuant to an implied agreement made between Castle and Flash Packer at the time of settlement, Flash Packer agreed to set off the loan amount from the purchase price in consideration for Castle agreeing to pay the loan amount to the Trust on the terms in the loan agreement; or
(b)Pursuant to an instruction from Castle, the Trust agreed, as agent for Castle, to satisfy the amount Castle owed to Flash Packer under the Agreement for Sale and Purchase. In consideration, Castle agreed to pay the loan amount to the Trust on the terms in the loan agreement; or
(c)Pursuant to an implied agreement made between Castle and Flash Packer at the time of settlement, Flash Packer assigned the vendor finance debt under the Agreement for Sale and Purchase to the Trust and the parties agreed that the terms of the vendor finance would be those in the Loan Agreement.
8 I have simplified and adapted the formulation of the alternatives as they were set out in the submissions and email.
[52] When pressed by the Court to make a choice, Mr Gunawan opted for the first alternative.
[53] As Mr Gunawan acknowledges, the test for determining whether a term can be implied was set out by Lord Simon of Glaisdale on behalf of the Privy Council in BP Refinery (Westernport) Pty Ltd v Shire of Hastings:9
… for a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give efficacy to the business contract so that no term will be applied if the contract is effective without it; (3) it must be so obvious that “it goes without saying”; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.
[54] I am not satisfied that any of the alternatives offered by Mr Gunawan comes close to satisfying these requirements.
[55] The first alternative posits an implied variation to the Agreement for Sale and Purchase and an implied term of the Loan Agreement between Castle and the Trust.
[56] The second alternative posits Castle instructing the Trust to satisfy Castle’s obligation to Flash Packer by acting as Castle’s agent. It would appear that this would be an implied term of the Loan Agreement between Castle and the Trust because the relevant actors are Castle and the Trust. It rather distorts reality, however, to suggest Castle could instruct the Trust.
[57] Like the first alternative, the third alternative posits an implied variation to the Agreement for Sale and Purchase and an implied term of the Loan Agreement between Castle and the Trust.
[58] The fact Mr Gunawan offered three alternatives for the implied term highlights the difficulty of satisfying the third BP Refinery requirement, namely that the term to be implied is so obvious that it goes without saying. Nor do any of the alternatives meet the fourth requirement of being capable of clear expression. Indeed, considerable editing was required, particularly of the second alternative, to understand what the alternatives were.
9 BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 16 ALR 363, at 376.
[59] Even if the inquiry is limited to the first alternative, there is an element of artificiality of the proposition advanced on behalf of Khurana. It posits Castle as a primary actor in two parallel transactions without explaining the relationship between Flash Packer and Khurana.
[60] A more obvious and simple construction of events is that the principals behind Flash Packer and the Trust, namely Mr Kumar and Ms Khurana, decided to advance the funds that Flash Packer had committed to making available to Castle via the Trust rather than Flash Packer, and Castle was content with that arrangement. However, that would be an arrangement principally between Flash Packer and the Trust, rather than between Castle and either Flash Packer or the Trust.
[61] If there was such an arrangement between the Trust and Flash Packer, no evidence of that arrangement has been offered by Khurana, particularly in relation to how or whether the Trust and Flash Packer accounted for their ends of the transaction. As a consequence, the Court does not have an adequate basis upon which to reach any firm conclusion about the arrangement, let alone to imply a term that binds Castle.
[62] For these reasons, I accept that Castle has an arguable defence, even if I also consider that there is some artificiality in the defence, just as there is in the propositions advanced by Khurana.
What was the length of the delay and what were the reasons for it?
[63] The delay between the expiry of the period for filing a defence on 25 February 2020 and Castle’s filing of its application for an extension of time on 18 May 2020 was approximately 10 weeks. However, from 25 March to 27 April 2020, New Zealand was under Level 4 lockdown under the COVID-19 emergency, and the Courts were effectively closed except for non-urgent business. That period was preceded and followed by periods of Level 3 lockdown - from 23 to 25 March 2020 and from 27 April to 13 May 2020, where Court business and commercial activities were significantly constrained. In these circumstances, I consider it appropriate to exclude the periods of Level 3 and Level 4 lockdown from consideration, and to focus on the period 11 February 2020, when the proceeding was served, to 23 March 2020, when Level 3 lockdown commenced. That is a period of just under six weeks.
[64] In affidavits sworn on 15 May 2020 and 10 June 2020, Mr Rajvanshi does not provide any reason for Castle’s failure to file a statement of defence within the required timeframe but says that the correspondence between the solicitors following the statutory demand meant that Khurana could have been in no doubt about Castle’s rejection of Khurana’s claim that Castle was in default.
[65] That may be so. That does not, however, explain why Castle did not file a defence, particularly when it was receiving legal advice at the time.
[66] In an affidavit sworn on 15 September 2020 and filed after the hearing on 4 September 2020, Mr Rajvanshi says he was aware in February 2020 that Mr Kumar was in discussions with the Auckland Council to obtain a certificate of acceptance for the change of use of the Karangahape Road premises. Mr Rajvanshi says that he did not file a defence because he relied on Mr Kumar to obtain the certificate of acceptance and if the certificate had been obtained, his intention was to settle the debt. In support of this position, Mr Rajvanshi exhibits a file note of a meeting on 24 February 2020 between Auckland Council officers and Mr Kumar concerning the obtaining of a certificate of compliance and the building consent required to remedy the Notice to Fix.
[67] In a memorandum dated 17 September 2020, Mr Gunawan submits that Mr Rajvanshi’s affidavit of 15 September 2020, which also addresses Castle’s solvency, is inadmissible in its entirety and that to admit this evidence would be prejudicial to Khurana which had not had an opportunity to respond to the evidence or to cross examine on it. In a memorandum dated 18 September 2020, Mr Hamilton points out that leave was not sought to cross examine any of the deponents who swore affidavits and that Mr Gunawan does not assert that the evidence is incorrect or offer contrary evidence in reply.
[68] Section 98 of the Evidence Act 2006 provides that a party may not offer further evidence in a proceeding after closing that party’s case without the permission of the Judge, and the Judge may not grant that permission in a civil proceeding if to do so would cause any unfairness to another party that could not be remedied by an adjournment or costs or both.
[69] In the present case, I am satisfied that permission should be granted to Mr Rajvanshi to adduce the evidence in his affidavit of 15 September 2020 and that to do so would not result in unfairness to Khurana. It is in the interests of justice for the Court to understand why Castle did not comply with the Court’s Rules and file a defence. It is not prejudicial to Khurana’s interests for the Court to have this information, even if the information should have been provided sooner. The lack of timeliness can be addressed in costs.
[70] I am also satisfied that it is not prejudicial to Khurana’s interests for Mr Rajvanshi to provide the further information about Castle’s financial position contained in the affidavit. That information responds to criticisms of Castle’s financial position by Mr Gunawan at the hearing on 4 September 2020 at which Mr Gunawan invited the Court to draw inferences about Castle’s solvency. It was because Castle had not had the opportunity to take instructions on some of those criticisms that I gave leave to Mr Hamilton to file a memorandum after the hearing. It is appropriate that Mr Rajvanshi provided the factual basis for that response.
[71] Mr Rajvanshi’s affidavit of 15 September 2020 confirms that the delay in filing a defence was linked to the dispute over the Notice to Fix and associated issues and efforts to resolve that dispute. It confirms that the dispute between Khurana and Castle extends beyond the failure to respond to a statutory demand and the alleged insolvency of Castle. It also indicates that some of the principals behind the entities engaged in that dispute – namely Mr Kumar and Mr Rajvanshi – were trying to resolve the dispute during the period when Castle should have filed its statement of defence and in the ensuing weeks before the COVID-19 lockdown.
[72] In these circumstances, I consider that Castle’s failure to file a defence in February or to seek leave for an extension of time before the Level 3 lockdown began was understandable, if unwise. However, once the period of the COVID-19 lockdowns is excluded, the delay was five weeks and any prejudice from that delay was overtaken by the adjournment of the first call of the proceeding because of the lockdown.
Is Castle solvent?
[73] In accordance with s 287(a) of the Companies Act, unless the contrary is proven, Castle is presumed to be unable to pay its debts because it failed to comply with the statutory demand made by Khurana on 4 November 2019.
[74] In accordance with s 241 of the Companies Act, the provision under which Khurana applied to have Castle put into liquidation, the Court may appoint a liquidator if it is satisfied that the company is unable to pay its debts.
[75] As Doogue AJ observed in Commissioner of Inland Revenue v F B Duvall Ltd, s 241 is concerned with the debts of a defendant generally and not with any specific debt.10 In that regard, the “cash-flow” test of solvency, based on the ability of a company to pay its debts as they become due in the normal course of business as set out in s 4(1)(a) of the Companies Act, is the test that counts, rather than the “balance sheet” test of whether the value of a company’s assets exceeds the value of its liabilities, as set out in s 4(1)(b).11
[76] As Doogue AJ also observed, it is open to a defendant to rebut the presumption of insolvency.12 The Associate Judge emphasised, however, that solvency is not established by showing that a defendant can pay one of its creditors or by bald assertions by company officers that the company can pay its debts. The Court requires current financial statements and additional sworn commentary as may be necessary to give the full picture.13
[77] The evidence Castle has put forward to rebut the presumption of insolvency is contained principally in Mr Rajvanshi’s affidavit of 10 June 2020 and management accounts prepared by Mr Gurinder Singh of NZ Tax Services Ltd which were exhibited to the affidavit.
10 Commissioner of Inland Revenue v F B Duvall Ltd (2010) 10 NZCLC 264,455, (2009) 24 NZTC 23,135 at [9].
11 Ibid, at [10].
12 At [13].
13 At [14]-[16].
[78] In his affidavit, Mr Rajvanshi explained that the management accounts prepared by Mr Singh were the first management accounts prepared for Castle, which was incorporated in May 2019 and began trading in October 2019 following settlement of the Sale and Purchase Agreement with Flash Packer. That is, the management accounts covered only the first eight months of Castle’s operation.
[79] According to Mr Rajvanshi, over that period, Castle had a net trading surplus of $24,625 once expenses of $107,354 were deducted from income of $131,979. Those figures were supported by the management accounts. The figures took into account the COVID-19 wage subsidy of $11,230 received from the Government as well as rent relief that Castle received from its landlord in April because of the COVID-19 emergency.
[80] In addition, Mr Rajvanshi exhibited correspondence from Castle’s landlord and its three principal trade creditors, Genesis Energy, Vodofone New Zealand and Belmont Linen, confirming that Castle had no outstanding debts and they had no issues with Castle’s credit history.
[81] Khurana challenges the financial information put forward by Mr Rajvanshi and the management accounts on a number of bases, including that the management accounts are hearsay and should not be admitted, the management accounts are substantially incomplete and, in any event, the financial information provided by Castle does not establish Castle’s solvency.
Hearsay objection
[82] Mr Gunawan submits that the management accounts are hearsay because they have been prepared by Mr Singh who has not been called to give evidence, Mr Gunawan accepts that the accounts come within the definition of “business record” in s16(1) of the Evidence Act and, in accordance with s 19 of that Act, are admissible if one of the considerations in s 19(1) has been made out.14 Mr Gunawan submits that
14 Section 19(1) of the Evidence Act provides:
A hearsay statement contained in a business record is admissible if—
none of those considerations has been made out, given the fact that Mr Singh is the regular accountant for Castle and prepared the accounts only a matter of days before Mr Rajvanshi swore the affidavit to which the accounts were exhibited and should have been available.
[83] Mr Gunawan is correct that the accounts should more properly have been put forward in an affidavit sworn by Mr Singh. However, the accounts stand or fall in their own terms. Given that consideration, as well as the fact that Mr Gunawan raised this objection at the hearing in September 2020 about an affidavit sworn three months earlier, I am satisfied that undue delay or expense would have been caused by requiring Mr Singh to give evidence and admit the accounts as business records in accordance with s 19(1)(c) of the Evidence Act.
Are the management accounts substantially incomplete?
[84] Mr Gunawan submits that the management accounts were “substantially incomplete” for failing to provide the policies and accompanying notes referred to at various places in the accounts. However, Darren Nair, a chartered accountant who gave evidence in support of Khurana, criticises the accounts for including unnecessary and irrelevant information such as disclaimers and statements regarding the compilation of the accounts which are more usually included in annual financial statements rather than management accounts. These are the disclaimers to which Mr Gunawan refers as indicating the omission of relevant information. If, according to Khurana’s own expert, the disclaimers should not have been included, there can be no complaint that information referred to in the disclaimers was not included.
(a) the person who supplied the information used for the composition of the record is unavailable as a witness; or
(b) the Judge considers no useful purpose would be served by requiring that person to be a witness as that person cannot reasonably be expected (having regard to the time that has elapsed since he or she supplied the information and to all the other circumstances of the case) to recollect the matters dealt with in the information he or she supplied; or
(c) the Judge considers that undue expense or delay would be caused if that person were required to be a witness.
Khurana’s other challenges to Castle’s financial information
[85] Mr Gunawan makes detailed criticisms of the accounts in order to impugn their credibility, including with regard to the absence of Council rates in Castle’s outgoings and an unexplained overdraft facility as indicated by an entry of overdraft interest of
$1.00. In doing so, Mr Gunawan invites the Court to undertake a far more searching analysis of the company’s accounts than is required or appropriate in the High Court in order to decide whether Castle has provided enough information to rebut the statutory presumption of insolvency.
[86] Mr Nair’s criticisms of the financial information provided by Castle were more appropriately high level. Mr Nair did not challenge the validity of the figures in the management accounts. Rather, he said Castle had failed to provide the most important information needed to assess a company’s solvency, namely its balance sheet, which would reflect whether the value of its assets was greater than the value of its liabilities. That opinion, however, stands in some contrast to the observation of Doogue AJ in F B Duvall that cash flow rather than balance sheet solvency is the test that counts where, as here, it is asserted that a company cannot pay its bills.
[87] Mr Nair said that other information required to determine the solvency of a company included the latest cash-flow forecast statement, bank statements for the previous six months, analysed lists of trade creditors and trade debtors, and lists of assets of and claims against the company. Mr Nair also noted that the management accounts made no provision for repayment of interest or principal on the loan from the Trust.
[88] Despite those omissions, Mr Nair’s conclusion was cautious, namely that there was insufficient information which would enable him “… to state with confidence that the company is in a solvent position.”
[89] Having regard to the fact that Castle is a new company and began operations in October 2019 and, at least at the time Mr Rajvanshi swore his affidavit in June 2020, did not have any other financial information other than the management accounts prepared by Mr Singh, I accept that those accounts, supplemented by Mr Rajvanshi’s affidavit, are the best available information as to Castle’s ability to pay its debts as
they become due in the normal course of business and, therefore, as to its solvency on a cash flow basis. That information shows that Castle has been able to pay its debts as they fell due, albeit with the assistance of the COVID-19 wage subsidy and rent relief.
[90] I have taken account of the criticisms made by Mr Nair. However, some of those criticisms were focused on balance sheet solvency which, as noted, is of lesser relevance in assessing whether a company can pay its bills as they fall due. A number of the other documents that Mr Nair said should have been available, were also more relevant to balance sheet cash flow. In addition, Mr Nair did not challenge the validity of the management accounts and reached a cautious conclusion as to whether there was sufficient information to enable him to conclude with confidence that Castle was solvent.
[91] Mr Gunawan’s most substantive criticisms are that the accounts do not show any provision for repayment of the loan and there is no information to show whether there may be sums owing to shareholders which could defeat any claim by the Trust, particularly having regard to the increase in the company’s bank balance evidenced in an exhibit to Mr Rajvanshi’s first affidavit.
[92] As Mr Gunawan submits, the Court of Appeal confirmed in Yan v Mainzeal Property and Construction Ltd that the fact a debt is disputed does not extinguish the liability of the company to pay for the sum in dispute.15 However, the Court also held that where there is a genuine dispute over the existence of the debt, the creditor will not generally be permitted to proceed on the basis of the disputed debt alone and will not be able to rely on the presumption of insolvency.16
[93] It is not necessary for me to decide whether the debt in relation to the Loan Agreement is a genuinely disputed debt and excluded from consideration when assessing whether Castle has rebutted the presumption of insolvency.
15 Yan v Mainzeal Property and Construction Ltd [2104] NZCA 190 at [70]-[71].
16 At [72].
[94] Mr Rajvanshi has confirmed, in his affidavit sworn on 15 September 2020, that the increase in Castle’s bank balance is the result of advances made by himself and his business partner, Mr Singh, whom I take to be Manvinder Singh as referred to at paragraph 2 of Mr Rajvanshi’s affidavit of 15 May 2020. Mr Rajvanshi also provides evidence of a settlement offer Castle made to Khurana under which Castle would put the amount of the loan into its solicitor’s trust account pending resolution of the wider dispute between the principals involved. That supports the evidence of the company’s bank balance that Castle has sufficient funds to pay the sum in dispute if it is found liable under the Loan Agreement. Any risk that those funds might be disbursed to those who advanced the funds to the detriment of Khurana is offset by the fact that Mr Rajvanshi and Mr Manvinder Singh have personally guaranteed the loan under the Loan Agreement so are liable regardless.
[95] Given these considerations I am satisfied that Castle has provided sufficient information to establish that it is able to pay its debts as they become due in the normal course of business and that the risk of Castle not being able to pay the sum due under the Loan Agreement, if it is held liable for that sum, is adequately mitigated.
[96] For these reasons, I am satisfied that Castle has rebutted the presumption of insolvency, albeit by a bare margin, having regard to the evidence of Mr Nair and some of the criticisms made by Mr Gunawan. However, as Osborne AJ observed in Hurunui Estates, the weight of authority supports viewing a defendant’s insolvency as an important, but not decisive, factor against the exercise of the discretion.17 Given the circumstances of this case, even if I had not been satisfied that Castle has rebutted the presumption of insolvency, I would not have regarded that as the determining factor in deciding whether to exercise my discretion as to whether to grant leave to Castle.
Is there prejudice to Khurana from an extension of time?
[97] The only prejudice to Khurana asserted by Mr Gunawan is that Khurana has to pay the costs of litigating its claim and that the risk that Castle’s assets will be depleted
17 Above n 3, at [13], citing 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).
in contesting Khurana’s claim. Those are costs and risks that arise from bringing the claim in the first place and do not constitute significant prejudice.
Where does the overall justice of the case lie?
[98] I am satisfied the overall interests of justice lie in granting leave to Castle to file its statement of defence. Once the COVID-19 lockdown is excluded from consideration, the effective delay in filing the defence was five weeks. Such prejudice as might have arisen from that delay was overtaken by the lockdown delays.
[99] As I have found, Castle does have an arguable defence, albeit on the somewhat artificial basis that both sides have approached the issue, and Castle has rebutted the statutory presumption of insolvency, albeit by a bare margin.
[100] The other significant consideration is that the principals behind Khurana have sought to use statutory and Court processes to enforce, on a narrow technical basis, the debt they say is owed by Castle but appear unwilling to address the wider issues that arise in relation to the circumstances in which the debt was incurred. On the one hand, they provide no explanation of how a Trust said to be separate from Flash Packer took on that company’s obligations to Castle yet argue that Castle is bound by that arrangement. On the other hand, they insist on legal form to enforce the debt against Castle while denying any responsibility for the apparent failure by Flash Packer to discharge its warranties under the Agreement for Sale and Purchase.
[101] At the end of the day, it may be that legal form and statutory processes will determine the result but at this stage of the proceeding, I am satisfied that it is in the overall interests of justice for Castle to be able to file its defence.
Castle’s strike out application
[102] Neither counsel addressed me on Castle’s application to stay or strike out Khurana’s proceeding to put Castle into liquidation and I make no decision on that application.
Result
[103] I grant the defendant, Castle Backpacker K Road Ltd, leave to file out of time a statement of defence to the proceeding brought by the plaintiff, Khurana Trustee Ltd, as trustee of the Khurana Family Trust, to put the defendant into liquidation.
Costs
[104] Castle is entitled to costs on a 2B basis. For Mr Hamilton’s guidance, I see no basis at this stage for Castle to be awarded indemnity or increased costs when it is the party that failed to file its defence within the timeframes specified in the High Court Rules.
[105] If the parties are unable to agree costs, counsel for Castle may file a memorandum of no more than five pages by 22 January 2021. Counsel for Khurana may file a memorandum in reply of no more than five pages by 19 February 2021.
G J van Bohemen J
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