Mainzeal Property and Construction Limited v Richina Global Real Estate Limited
[2014] NZHC 277
•27 February 2014
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2013-404-3047 [2014] NZHC 277
UNDER the Companies Act 1993
IN THE MATTER OF the liquidation of Richina Global Real
Estate Limited
BETWEEN MAINZEAL PROPERTY AND CONSTRUCTION LIMITED (IN RECEIVERSHIP AND IN LIQUIDATION)
Plaintiff
AND RICHINA GLOBAL REAL ESTATE LIMITED
First Defendant
RICHARD CILIANG YAN Second Defendant
Hearing: 2-3 December 2013
Counsel: Z G Kennedy & M D Pascariu for Plaintiffs
D J Chisholm QC and T Mullins for Defendants
M Kersey and S Vickers for Receivers of Mainzeal
Recalled: 27 February 2014
Reissued: 27 February 2014
JUDGMENT OF BROWN J
This judgment was delivered by me on 27 February 2014 at 4.30 pm, pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors: Minter Ellison Rudd Watts, Auckland
Lee Salmon Long, Auckland
Russell McVeagh, Auckland
Counsel: D J Chisholm QC, Auckland
MAINZEAL PROPERTY AND CONSTRUCTION LTD (IN RECEIVERSHIP AND IN LIQUIDATION) v
RICHINA GLOBAL REAL ESTATE LTD [2014] NZHC 277 [27 February 2014 ]
CIV-2013-404-2317
UNDER the Companies Act 1993
IN THE MATTER OF the liquidation of Isola Vineyards Limited
BETWEEN MAINZEAL PROPERTY AND CONSTRUCTION LIMITED (IN RECEIVERSHIP AND IN LIQUIDATION)
First Plaintiff
KING FACADE LIMITED (previously known as RICHINA LAND LIMITED) (IN LIQUIDATION)
Second Plaintiff
ANDISOLA VINEYARDS LIMITED (previously known as WAIHEKE VINEYARDS LIMITED) Defendant
Contents
Introduction ................................................................................................................[1] Material chronology ...................................................................................................[6] Legal principles ........................................................................................................[10] The statutory scheme................................................................................................[18] Claims against RGREL ............................................................................................[32] First statutory demand ..........................................................................................[32] Second statutory demand: foreign exchange losses .............................................[38] Does the s 287 presumption of insolvency apply? ...............................................[44] Has RGREL proved that it is able to pay its debts? .............................................[46] Should the Court’s discretion be exercised to decline an order for liquidation? .[51] Claims against Isola .................................................................................................[54] The Mainzeal debt ................................................................................................[54] The KFL debt .......................................................................................................[57]
A pleadings issue ..................................................................................................[64] Does the s 287 presumption of insolvency apply? ...............................................[75] Has Isola proved that it is able to pay its debts? ..................................................[84] Should the Court’s discretion be exercised to decline an order for liquidation? .[93] Orders .......................................................................................................................[97]
Introduction
[1] In these two proceedings, which were heard together, orders are sought under s 241 of the Companies Act 1993 (“the Act”) that the defendants be put into liquidation.
[2] The first proceeding in time (CIV-2013-404-2317) was commenced by the receivers of the plaintiff (“Mainzeal”) against Isola Vineyards Limited (“Isola”) by a statement of claim dated 6 May 2013. In or about 18 October 2013 the principal conduct of the proceedings was taken over by the liquidators of Mainzeal and on that day a further statement of claim was filed with King Facade Limited (“KFL”) added as second plaintiff.
[3] The second proceeding (CIV-2013-404-3047) was commenced by the receivers of Mainzeal against Richina Global Real Estate Ltd (“RGREL”) by a statement of claim dated 30 May 2013. On or about 18 October 2013 the liquidators of Mainzeal assumed the principal conduct of the proceeding and on that day an amended statement of claim was filed.
[4] Mainzeal, KFL, Isola and RGREL are all part of a wider group of companies, ultimately controlled by Mr Richard Yan, who was a director of most of the companies in the group. The relationship between the various entities is depicted in the diagram annexed to this judgment.
[5] In a third proceeding (CIV-2013-404-1024) commenced on 29 May 2013, the liquidators obtained on formal proof pooling orders which among other things required Isola and RGREL to contribute certain sums to the liquidation of the “pooled” companies. Although application has been made to set that judgment aside, the hearing of the current proceedings against Isola and RGREL proceeded on the footing that reliance could be placed on the evidence filed not only in those proceedings but also in the pooling proceeding. However Mainzeal and KFL agreed not to rely on the pooling orders themselves which have been made in the pooling order proceedings and which are the subject of the application to set aside.
Material chronology
[6] On 6 February 2013 Mr Colin McCloy and another were appointed receivers of Mainzeal by the Bank of New Zealand (“BNZ”). On 12 February 2013 Mr Andrew Bethell and others were appointed as joint and several liquidators of KFL and further appointed as liquidators of Mainzeal and 12 related companies on 28 February 2013. The liquidators’ appointments were made by special resolution of the controlling shareholders in accordance with s 241(2)(a) of the Act.
[7] The investigations of the receivers and liquidators revealed that there was a high level of intercompany borrowing and other transactions within the group. The receivers commenced action to recover those debts which included the service of statutory demands on RGREL and Isola.
[8] The two proceedings were brought in consequence of the failure by the defendants to make payment within the statutory timeframes of those statutory demands served by Mainzeal on the defendants. However the matters raised by the defendants in response involve consideration of a number of transactions.
[9] Hence it is convenient at the outset to record a brief chronology of the events to which reference will be made. In the chronology and throughout the judgment only dollar values are referred to: cents are deleted.
31 December 2011 KFL accounts record the intercompany position KFL/Isola as $4,409,661 owing.
Deed of acknowledgement of debt of loan by KFL to
Richina Building Ltd (“RBL”) for $2,640,109.84.
1 January 2012
Deed of assignment of loan from RBL to Isola of
$2,447,367.
31 July 2012 KFL accounts record the intercompany position KFL/Isola as $2,095,145 owing.
Deed of acknowledgement of loan by Isola of $2,095,145.
31 July 2012
31 December 2012
Deed of assignment of loan (liability to pay) to RGREL of
$2,095,145.
Deed of assumption of loan by RGREL of $2,095,145.
KFL accounts record the intercompany position KFL/Isola as nil. Intercompany position Mainzeal/RGREL $131,090 owing by RGREL.
6 February 2013 Mainzeal placed in receivership.
12 February 2013 KFL placed in liquidation by special resolution of shareholders.
28 February 2013 Liquidators appointed to Mainzeal and Mainzeal-related companies by special resolution under s 241(2)(a).
3 March 2013 Provisional liquidator appointed to RPL (a Bermudan company).
7 March 2013 Service of statutory demand by Mainzeal on Isola for
$2,478,164.
28 March 2013 Service of statutory demand by Mainzeal on RGREL for
$136,862.
Isola pays $4,150,000 to Mainzeal Receivers pursuant to a demand by BNZ in respect of a guarantee of 200 VIC.
5 April 2013
Email from RGREL’S solicitor (Mr Chan) disputing the
$136,862 debt.
15 April 2013 Liquidators of KFL serve demand on RGREL for
$5,786,606.
19 April 2013 RGREL’S solicitors dispute $5,786,606 debt to KFL.
24 April 2013 Liquidators of Mainzeal serve demand on RGREL for
$15,150,847.
13 May 2013 Proceeding 2317 served on Isola (“CIV 2317”).
29 May 2013 Liquidators file application for pooling orders.
6 June 2013 Proceeding 3047 served on RGREL (“CIV 3047”).
17 June 2013 Isola Standstill Deed entered into between receivers of
Mainzeal and Isola.
25 June 2013 Pooling orders obtained by formal proof.
8 July 2013 Receivers of Mainzeal serve statutory demand on RGREL
for $579,847.
19 July 2013 RGREL Standstill Deed entered into between RGREL, Mr Yan, and the Receivers of Mainzeal and KFL.
13August 2013 KFL liquidators make demand on Isola for $4,409,661. alleged to be due to KFL as an intercompany balance.
20 August 2013 Isola’s solicitors dispute $4,409,661. debt to KFL.
Application by Isola and RGREL to set aside pooling orders.
3 September 2013
Statement of defence by Isola in CIV/2317. Statement of defence by RGREL in CIV/3047.
9 October 2013 Isola directs that $579,847 sum claimed from RGREL be paid from surplus funds in Russell McVeagh trust account.
18 October 2013
1 November 2013
Liquidators of Mainzeal advise that they will assume principal conduct of both proceedings.
Further statement of claim adding KFL in CIV/2317 and alleging debt of Isola to KFL for $2.447m.
Amended statement of claim in CIV/3047. Statement of defence in CIV/2317.
Statement of defence in CIV/3047.
Legal principles
[10] The plaintiffs rely on ss 241, 287 and 288 of the Act, the material parts of which read:
241 Commencement of liquidation
(4) The court may appoint a liquidator if it is satisfied that—
(a) The company is unable to pay its debts;
...
287 Meaning of “inability to pay debts”
Unless the contrary is proved, and subject to section 288 of this Act, a company is presumed to be unable to pay its debts if—
(a) The company has failed to comply with a statutory demand; or
...
288 Evidence and other matters
(1) On an application to the Court for an order that a company be put into liquidation, evidence of failure to comply with a statutory demand is not admissible as evidence that a company is unable to pay its debts unless the application is made within 30 working days after the last date for compliance with the demand.
(2) Section 287 of this Act does not prevent proof by other means that a company is unable to pay its debts.
(3) Information or records acquired under section 178 of this Act or, if the Court so orders, under section 179 of this Act, may be received as evidence that a company is unable to pay its debts.
[11] The failure to comply with a statutory demand raises a rebuttable presumption that the company is unable to pay its debts.1 The onus is on the defendant to adduce
1 Silverpoint International Ltd v Wedding Earthmovers Ltd HC Auckland CIV-2007-404-104,
evidence to rebut that presumption. If the presumption is rebutted the onus shifts back to the applicant to prove insolvency.
[12] It was common ground between the parties that the test of insolvency is whether the company is able to meet its current financial demands including from assets currently realisable. The applicable test is the “cash flow” test as set out in Re Tweeds Garages Ltd:2
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. The company may be at the same time insolvent and wealthy. It may have wealth locked up in investments not presently realisable; but although this may be so, yet if it had not assets available to meet its current liabilities it is commercially insolvent and may be wound up.
[13] A substantial point of difference between the parties on the legal principles concerned the hurdle of proof which the defendant company must jump in order to rebut the presumption that it is unable to pay its debts. A significant number of authorities were cited which contained statements of the applicable legal principles, often with subtle differences in phraseology.
[14] The authorities relied upon by the plaintiffs included Foundation Securities (NZ) Ltd v Direct Labour Services Ltd3 where Associate Judge Doogue observed that the requirement to establish solvency means that a defendant ought to provide reasonably detailed information that is supported where appropriate by proper documentation. He noted that this is not a requirement of the Companies Act 1993 but is a normal requirement incumbent on a party seeking to prove something on the
balance of probabilities. Reliance was also placed on Duffill Watts Ltd v Mogans Homes Ltd4 where Allan J remarked that the evidence required to rebut the presumption must be “cogent”, the word emphasised in Mr Kennedy’s submissions for
the liquidators.
30 May 2007 at [76].
2 Re Tweeds Garages Ltd [1962] Ch 406 at 410. Cited with approval in Investment Enterprises Ltd v The Private Sale Co Ltd (1997) 10 PRNZ 282 (HC) at 285.
3 Foundation Securities (NZ) Ltd v Direct Labour Services Ltd HC Auckland CIV-2006-404-4391,
24 January 2007 at [26].
4 Duffill Watts Ltd v Mogans Homes Ltd [2010] NZCCLR 7 (HC) at [28].
[15] For the defendants Mr Chisholm QC submitted that the plaintiffs’ submissions as to the quality of the defendants’ evidence was wholly misconceived in the context of a liquidation application and ignored the true inquiry when disputed debts are in issue. He contended that the plaintiffs’ submission as to what amounts to “cogent” evidence suggests an extreme standard of proof given the defendants’ contention that accounting records, journals and bank statements supported Mr Yan’s evidence. He submitted that in a liquidation based on an inability to pay debts it is sufficient to show that the debt the subject of the application is subject to genuine dispute citing inter alia
Bateman Television Ltd (In liquidation) v Coleridge Finance Co Ltd,5 South Waikato
Precision Engineering Ltd v Ahu Developments Ltd6 and Grant v Lotus Gardens
Limited.7
[16] The defendants’ supplementary written opening submissions included the
following contention:
While earlier decisions suggested that a defendant may not be able to dispute a debt asserted in a statutory demand on a liquidation application unless an application to set aside the statutory demand was made (contrary to the mere resumption [sic] in s 287), recent authority reinforces that this is not correct.
Reliance was placed on Heron’s Flight v NZ Properties8 and Team Elevin v Stelen9 for the proposition.
[17] Helpful (or otherwise) as the various summaries of principles in the cited cases may be, in my view the resolution of the difference between the parties is to be found by reference directly to the current statutory scheme.
The statutory scheme
[18] Given the frequency of citation of Bateman, a useful starting point is s 218 of the former Companies Act 1955. It stated:
5 Bateman Television Ltd (In liquidation) v Coleridge Finance Co Ltd [1971] NZLR 929 (PC).
6 South Waikato Precision Engineering Ltd v Ahu Developments Ltd HC Auckland CIV-2008-404-
970, 10 December 2008 at [21]-[22].
7 Grant v Lotus Gardens Limited [2013] NZCCLR 16 (HC) at [90]-[91].
8 Heron’s Flight v NZ Properties [2012] 1 NZLR 424 (HC) at [23].
9 Team Elevin v Stelen HC Auckland CIV-2010-404-4447, 14 February 2011 at [4].
218 Definition of inability to pay debts —A company shall be deemed to be unable to pay its debts—
(a) If a creditor, by assignment or otherwise, to whom the company is indebted in a sum exceeding $100 then due, has served on the company, by leaving it at the registered office of the company, a demand under his hand (or under the hand of his agent thereunto lawfully authorised) requiring the company to pay the sum so due, and the company has for 3 weeks thereafter neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor; or
(b) If execution or other process issued on a judgment, decree, or order of any Court in favour of a creditor of the company is returned unsatisfied in whole or on part; or
(c) If it is proved to the satisfaction of the Court that the company is unable to pay its debts, and, in determining whether a company is unable to pay its debts, the Court shall take into account the contingent and prospective liabilities of the company.
[19] This was a deeming provision with the “deemed” outcome applicable not only to the statutory demand limb but also to limb (c). Significantly the decision in Bateman concerned s 218(c).
[20] The presumption in the current s 287 applies to the four circumstances in (a)- (d). The route to liquidation previously provided for in s 218(c) is not listed in s 287 but is preserved by s 288(2) of the current Act. Consequently no presumption currently applies in relation to the route to liquidation previously provided for in s 218(c).
[21] When a statutory demand is served, the company may apply to set it aside under s 290 which provides in material part:
290 Court may set aside statutory demand
(1) The Court may, on the application of the company, set aside a statutory demand.
(2) The application must be—
(a) Made within 10 working days of the date of service of the demand; and
(b) Served on the creditor within 10 working days of the date of service of the demand.
...
(4) The Court may grant an application to set aside a statutory demand if it is satisfied that—
(a) There is a substantial dispute whether or not the debt is owing or is due; or
(b) The company appears to have a counterclaim, set-off, or cross- demand and the amount specified in the demand less the amount of the counterclaim, set-off, or cross-demand is less than the prescribed amount; or
(c) The demand ought to be set aside on other grounds.
...
[22] The significance of s 290 in the statutory scheme was discussed by the Court of Appeal in AMC Construction Ltd v Frews Contracting Ltd.10 The catalyst was the company’s argument that the solvency of the company may be a good ground on which a statutory demand ought to be set aside under s 290(4)(c). The submission was made that the correct test in considering that ground is whether the company is arguably solvent. The Court of Appeal said:
[7] We would not wish to rule out the possibility that the solvency of the company might constitute a stand alone ground for setting aside a notice under para (c). However, we consider that such cases are likely to be extremely rare. If there is no dispute as to the company’s liability, so that para (a) or (b) cannot be invoked, it is difficult to imagine circumstances in which the company should be able to avoid paying a debt, merely by proving that it is able to pay that debt. If the debt is indisputably owing, then it should be paid. If the company simply refuses to pay, without good reason, it should not be able to avoid the statutory demand process by proving, at the statutory demand stage, that it is solvent. The demand should be allowed to proceed. If it is not met, and an application for liquidation is filed, in reliance on the presumption in s 287(a) that the company is unable to pay its debts, then the company will have an opportunity on the liquidation application to rebut the statutory presumption, which applies “unless the contrary is proved”. There might be circumstances in which it is appropriate to advance the inquiry as to solvency to the s 290 stage, but that would require some particular circumstance not present in this case.
...
[9] The second question relates to the standard of proof. If there may be rare cases in which the solvency of the company might constitute a stand alone ground under s 290(4)(c), the test which must be applied in such a case is whether the company is in fact solvent, not whether it is arguably solvent. The wording of the section makes it clear that different standards of proof are
10 AMC Construction Ltd v Frews Contracting Ltd [2008] NZCA 389, (2008) 19 PRNZ 13 at 15-16.
applicable under each of the paragraphs in s 290(4). The matters on which the Court must be satisfied are quite different. Under para (a) the question is whether there is a substantial dispute. What must be established is the existence of a substantial dispute, not that the debt is not due. Under para (b) the Court must be satisfied that the company appears to have a cross-claim. It is not required to decide whether that cross-claim would be successful. Under para (c), the Court must be satisfied that the demand ought to be set aside on other grounds. The grounds relied upon must be established to the level necessary to meet that threshold.
[10] To establish that a statutory demand ought to be set aside on the grounds of solvency it could not be sufficient to establish that the company was arguably solvent. Inability of a company to pay its debts constitutes a ground for appointment of a liquidator under s 241(4). The purpose of the demand procedure is to enable the creditor to take advantage of the statutory presumption in s 287, by which, if the demand is not met, the company is presumed to be unable to pay its debts. To rebut that presumption, the company must prove that it is able to pay its debts. Where neither of the grounds in s 290(4)(a) or (b) apply, a demand ought not to be set aside, so as to avoid an inquiry into the company’s solvency, solely on the grounds that the company is arguably solvent. To allow that would be to subvert the statutory process.
(emphasis added)
[23] As the Court of Appeal said, to rebut the s 287 presumption the company must prove that it is able to pay its debts.
[24] The defendants argue that “in liquidation based upon inability to pay debts, it is sufficient to show that the debt that is the subject of the application is subject to genuine dispute”. That may be so when application is made pursuant to s 288(2) where the applicant has the onus of establishing that the company is unable to pay its debts. However in the case of an application made in reliance on non-compliance with a statutory demand and in respect of which no application to set aside the demand has been made under s 290, the company will not be able to discharge the onus of showing that it is able to pay its debts simply because it shows that the debt, the subject of the statutory demand, is genuinely disputed.
[25] Of course in such a situation the court may elect to exercise its discretion to refuse to appoint a liquidator, a discretion which the plaintiff submits will be exercised sparingly. Team Elevin relied on by the defendant is such an example. Ellis J had
little difficulty in forming the view that from the defendant’s perspective the disputes
were genuine and concluded:11
[17] Accordingly I consider that notwithstanding SML’s failure to satisfy me that it is solvent, justice and equity do not, in the unusual circumstances of this case, require that company to be wound up. TEL’s application is declined accordingly. ...
[26] However that case is not authority for the defendants’ proposition recorded in [16] above. Nor do I consider that Heron’s Flight provides support for the defendants’ contention. In that case Associate Judge Bell considered certain authorities including Foundation Securities12 which suggested that a failure to apply to set aside a statutory demand under s 290 might prevent a company later raising matters which could have been raised in an application under s 290 except in exceptional circumstances. He said:13
[22] The Companies Act states the consequence of not applying to set aside a statutory demand under s 290. Under s 287, that consequence is that a presumption of insolvency arises if the company does not comply with the statutory demand. The Companies Act does not provide any other consequences. If Parliament had intended further consequences to arise, they would be set out in the statute. I see no reason to add a gloss to the words of the statute.
[23] The approach I prefer is that a company faced with a statutory demand has a number of lines of defence open to it. Which line is taken may turn on tactical or practical considerations (such as either the company instructed its lawyers in time to make an application under s 290). If it is served with a statutory demand, it may apply under s 290 to set the demand aside. If it does not apply or if its application is unsuccessful and it does not comply with the statutory demand, the rebuttable presumption of insolvency will arise. But it may take other steps as the proceeding develops. It might apply for an injunction to restrain the issue of a proceeding, as in Exchange Finance Co Ltd v Lemmington Holdings Ltd [1984] 2 NZLR 242 (CA). Or once the proceeding has issued, it might apply for a stay and restraint of advertising under r 31.11. Or again, it might elect simply to defend the proceeding on the merits. The fact that it has not applied to set aside a statutory demand does not stand in the way of it taking those other steps; save for this, it may be subject to the presumption of insolvency which it may have to rebut.
[27] On the face of it there is an inconsistency in [23] in as much that the fourth sentence records (correctly) that where there is non-compliance with the statutory
11 Team Elevin, above n 9, at [17].
12 Foundation Securities, above n 3 at [7].
13 Heron’s Flight, above n 8, at [22]-[23].
demand the rebuttable presumption of insolvency will arise whereas the final sentence
might be read as suggesting only that the presumption “may” apply.
[28] The correct position is as stated in the fourth sentence in [23] that if the statutory demand is not set aside on an application under s 290 then the presumption of insolvency will arise and, unless the court elects to exercise its discretion against making an order for liquidation, the defendant company will have to prove that it is able to pay its debts in order to successfully defeat an application for an order for liquidation.
[29] In Grant v Lotus Gardens Ltd which is cited by the defendants, Heron’s Flight is relied upon apparently in support of the proposition that a defendant company has a lesser burden to discharge. After reference to Bateman and South Waikato Engineering it is said:
[92] A company is not prevented from showing that the indebtedness is disputed, even if it has failed to apply to set aside a statutory demand under s 290 of the Companies Act: Heron’s Flight Ltd v NZ Properties International Ltd.
[93] In this case Lotus Gardens Ltd has done just enough to show that there is a genuine and substantial dispute whether Quantum Grow Ltd made the payments to it in the context of a creditor/debtor relationship, or whether Lotus Gardens Ltd simply received the payments as a conduit to forward the payments on to the Bank of New Zealand in the discharge of the indebtedness of Quantum Grow Ltd to the bank. ...
[94] As Lotus Gardens Ltd has done enough to show that there is a genuine and substantial dispute whether there was a transaction under s 292, because there was not the requisite creditor/debtor relationship between Quantum Grow Ltd and Lotus Gardens Ltd, the court should in any event not make an order putting Lotus Gardens Ltd into liquidation, but should leave the dispute to be tried in the normal way, that is, by an application under s 295 of the Companies Act.
[30] I quote [94] in order to recognise that the observations were made in a complex context involving other provisions of the Companies Act. However to the extent that the statement in [92] is at odds with my conclusion at [28] above, I respectfully disagree with the view that the s 287 presumption is discharged short of proving the defendant is able to pay its debts and merely by showing that there is a genuine and substantial dispute about the debt.
[31] It follows from that analysis that the questions to be addressed in relation to each of RGREL and Isola are:
(a) Does the s 287 presumption of insolvency apply?
(b) If so, have RGREL/Isola proved that they are able to pay their debts?
(c) If not, should the Court’s discretion be exercised to decline an order for
liquidation?
Claims against RGREL
First statutory demand
[32] On 28 March 2013 the receivers of Mainzeal served on RGREL a statutory demand seeking payment of $136,862.
[33] On 5 April 2013 the solicitor for RGREL sent an email to the receivers’
solicitors providing a “brief reconciliation” which it was claimed showed that there was a net balance owed by Mainzeal to RGREL. That reconciliation was as follows:
Richina Global Real Estate Limited
NZ$
Amount owing to Mainzeal as at 31 December 2012 131,090.35
Payment on behalf of Mainzeal not yet recognised (75,000.00) Note 1
Reimbursement of expenses paid on behalf of Mainzeal (101,091.67) Note 2
Adjusted amount owing to/(by) Mainzeal as at
31 December 2012 (45,001.32)
Note 1
Paid legal fee to Hesketh Henry on Mainzeal’s behalf. Please refer to credit card statement attached.
Note 2
November (NZ$51,887.13) and December 2012 (NZ$49,204.54) expenses paid by
Mainzeal on RGRE’s behalf were being reimbursed through Richina Finance on
4 December 2012 within the sum of $115,000 and 24 December 2012 within the sum of $115,887.
[34] RGREL did not apply to set aside the statutory demand within the
10 working day period or pay the amount of the alleged debt within the 15 working day period. The liquidation proceeding was duly issued by the receivers on 30 May
2013 within the prescribed 30 working day period.
[35] The position of the receivers was as stated at para 2.5 of the affidavit of
Colin McCloy dated 18 October 2013:
2.5In my view, the documents attached to Mr Chan’s email, annexed at “B” of the First RGRE Affirmation do not provide sufficient evidence that $45,001.32 was owed by MPCL to RGRE as asserted by Mr Yan:
(a) The credit card statement shows a $75,000 payment purportedly on MPCL’s behalf. It is not clear whose credit card statement this is. It is not evident that RGRE was the entity that made this payment or that the entity that made the payment was entitled to make the payment on RGRE’s behalf.
(b) It is not clear from the annexed journal entries that payments were made by Richina Finance to reimburse expenses paid by MPCL on RGRE’s behalf.
[36] RGREL’s response was provided in Mr Yan’s reply affirmation dated
15 November 2013:
4. ...
(a) The credit card is mine. I confirm that I paid Hesketh Henry solicitors $75,000 on my credit card in order to pay a legal fee invoice that had been rendered to MPCL (as MPCL had significant cash flow constraints at this time). The relevant Hesketh Henry invoice should be in MPCL’s records, so the liquidators/receivers ought to be able to locate it;
(b) I can confirm that as director of RGREL, I was authorised to pay the $75,000 sum on RGREL’s behalf in order to discharge MPCL’s liability to Hesketh Henry. Over the years, I have made many credit card payments for very significant sums on MPCL’s behalf, which were then subsequently reimbursed to me by either MPCL directly or by other Richina NZ group companies, so as to settle inter- company balances between MPCL and Richina NZ group entities (primarily RGREL). In this particular instance, RGREL reimbursed me the $75,000 in early 2013 following my actual payment of the credit bill on 7 February 2013. These transactions, except this particular one, are fully documented in MPCL’s accounting records. I made these
credit card payments on MPCL’s behalf because it helped to smooth MPCL’s cash flow. MPCL was cash-constrained for some time following the Vector Arena project, despite continuous support from the Richina group.
(c) As a director of Richina Finance Limited, I can confirm that the two payments shown on the BNZ transaction records for Richina Finance (annexed marked “A” to my 26 September affirmation) were payments made by Richina Finance Limited on RGREL’s behalf to reimburse MPCL for payments it had made on behalf of RGREL. As I have explained, Richina Finance made these repayments to MPCL on RGREL’s behalf because RGREL didn’t have its own bank account. The repayments made by Richina Finance would then be added to the inter-company balance between Richina Finance and RGREL.
[37] Mr McCloy was called for cross-examination at the commencement of the hearing. He explained that having reviewed the documentation supplied to him it was not clear that the payments received were on behalf of RGREL. The following exchange then took place:
Q: Well now that you’ve seen bank statements and now that we have Mr Yan’s uncontradicted evidence that the payments by Richina Finance were on behalf of RGREL do you accept that perhaps the position, the inter-company position, is in fact that $45,000 is owing to RGREL, not the other way around?
A: Well Mr Yan’s evidence with the bank account was only provided I think in the last couple of weeks so, um, but I’ll take him at his word, yes.
Second statutory demand: foreign exchange losses
[38] In his second affirmation dated 9 September 2013 Mr Yan explained the origins of certain foreign exchange losses in respect of which RGREL became liable to the BNZ. He explained that the contracts were in RGREL’s name but were in respect of loans for Mainzeal’s benefit. Mainzeal as guarantor was required to make payment to the BNZ in the sum of $579,847 and in turn the receivers of Mainzeal sought to recover that amount from RGREL. A statutory demand seeking that sum was served on RGREL by the receivers of Mainzeal on 8 July 2013.
[39] The first position taken on behalf of RGREL was as stated in Mr Yan’s
second affirmation of 9 September 2013:
10.In light of what has occurred, I do not consider that the sum claimed from RGREL is payable pursuant to the claimed rights of indemnity by MPCL. In this regard, the parties have acted since April 2013 on the basis that sums payable for the anticipated foreign exchange losses owed to Bank of New Zealand (BNZ), which give rise to the demand, would be met as necessary from the surplus flowing from the sale of the property of 200 Vic Limited (in rec and in liq) (200
Vic) at 200 Victoria Street or Isola’s assets (both 200 Vic and Isola also being guarantors). To the extent that rights of contribution or indemnity exist, Isola has more than sufficient assets to meet the foreign exchange losses.
[40] In response, in his affidavit of 18 October 2013, Mr McCloy recorded the position that Mainzeal as guarantor of RGREL had paid the amount of the debt arising out of the foreign exchange losses owed by RGREL to BNZ and he stated that he did not understand on what basis Mainzeal would not have a right to be indemnified by RGREL for that payment.
[41] In his reply affirmation of 29 October 2013 Mr Yan reiterated the position that while RGREL was the party liable for the foreign exchange losses (being the “borrower” on the loan account), the money that was provided from China which led to the foreign exchange losses was used by and for the benefit of Mainzeal.
[42] Isola requested Russell McVeagh to pay the amount of the foreign exchange losses from funds in their trust account held in terms of the Isola deed. Russell McVeagh agreed to pay half of that sum, $289,923 to Mainzeal in partial satisfaction of the claim against RGREL but refused to pay the entire sum.
[43] Mr Yan’s position recorded in his reply affirmation of 15 November 2013 was that the full $579,847 was available for payment of the claim made on RGREL and was then in Russell McVeagh’s trust account and that Isola had directed payment to be made from that trust account of the entire sum to Mainzeal in satisfaction of the debt.
Does the s 287 presumption of insolvency apply?
[44] RGREL did not dispute that the failure to pay the amount of the first statutory demand and the failure to apply to set it aside had the consequence that a
presumption of insolvency arose. Its case was that there was more than sufficient evidence to rebut that presumption.
[45] So far as the second statutory demand was concerned, although there was a failure to pay the sum demanded within the 15 working day period, the amended proceeding to include that claim was not issued by the liquidators until 18 October
2013 which was outside the prescribed 30 working day period.14 Accordingly it is
common ground that no distinct presumption of insolvency arose in consequence of that second statutory demand.
Has RGREL proved that it is able to pay its debts?
[46] The evidence of Mr Yan was unequivocal that the amount for which payment was sought in the first statutory demand was not in fact a debt at all. In the course of cross examination Mr McCloy was prepared to accept that position.
[47] The same cannot be said for the Forex debt. As acknowledged in the defendants’ submissions, the Forex debt is not disputed. However it was submitted that the debt could and should simply be satisfied from the funds that had been recovered from the sale of the Vic 200 property held by the receiver’s solicitors allegedly in trust on behalf of Isola. Indeed the submission was made that, given Isola’s preparedness to meet the Forex demand from the funds acknowledged to be available, it was difficult to understand why the receivers’ solicitors have refused to pay Mainzeal the remaining half of the sum sought under the Forex demand.
[48] However the fact that another entity (whether or not a related entity) is prepared to assume the responsibility to discharge a debt does not establish that the party legally liable for the debt is able to pay its debts. Indeed the fact that there is a need for RGREL to seek to have Isola pay the debt on RGREL’s behalf points to the conclusion that RGREL is unable to pay its debts. The same point applies in relation to other companies in the wider group.15 It was said that the Bermuda-based related
entity, Richina Pacific Ltd, had also confirmed cash flow support for RGREL and its
14 Section 288(1).
15 See [4] above and the diagram annexed to this judgment.
financial statements were produced to substantiate that entity’s balance sheet.
However that evidence does not demonstrate that RGREL is able to pay its debts.
[49] In these circumstances I am not satisfied that RGREL has discharged the burden of proving that it is able to pay its debts so as to rebut the presumption which arose consequent upon the non-compliance with the first statutory demand.
[50] So far as concerns the difference between the parties as to the quality of the evidence which is required from a defendant company in order to rebut the s 287 presumption,16 RGREL has failed to discharge the burden whether the lesser or more demanding standard is applied. However it is my view, given the requirement that a defendant company must prove that it is able to pay its debts in order to rebut the presumption, that the more stringent standard, referred to in the authorities cited in
[14], is the appropriate standard of proof.
Should the Court’s discretion be exercised to decline an order for liquidation?
[51] It is clear that the Court retains a discretion as to the making of a liquidation order.17 The plaintiffs contend that it is well established that such a discretion will be exercised sparingly, citing Bateman.18 RGREL counters that in Bateman there had been discovery and viva voce evidence such that that case was an exceptional circumstance. Counsel for RGREL were unable to find any reference in the judgment to the “sparing” exercise of jurisdiction to decline to appoint a liquidator.
[52] I proceed on the basis that the discretion is not fettered but that a defendant company would need to be able to advance arguments of substance in favour of the exercise of the discretion, given that it will have failed to discharge the onus of proving that it is unable to pay its debts.
[53] In the present case I cannot discern such arguments of substance. RGREL is a holding company. Subsequent to the 2012 restructuring it owes KFL $5,786,666
(which is the amount sought in the Pooling Order application). I further note that in
16 [13]-[15] above.
17 Section 241(1); Investment Enterprises Ltd v Private Sale Co Ltd, n 3 above.
18 In Foodwise Ltd v Yummy Tums Ltd HC Auckland CIV-2010-404-0511, 6 August 2010 at [13], the Court notes the discretion is to be exercised sparingly.
an affidavit dated 11 September 2013 Mr J R McPherson, a chartered account employed by the Registrar of Companies, recorded his understanding that RGREL was hopelessly insolvent. In short, RGREL having failed to discharge the onus of proving it is able to pay its debts, there are no circumstances apparent to me that would justify exercising the discretion to refrain from making an order for the liquidation of RGREL.
Claims against Isola
The Mainzeal debt
[54] As at 31 December 2012, Mainzeal’s records showed an intercompany debt owed by Isola in relation to what appeared to be trading expenses and wages paid by Mainzeal on behalf of Isola. The statutory demand served by the receivers of Mainzeal on 7 March 2013, for $2,478,164, was in respect of that intercompany debt.
[55] Isola did not apply to set aside the statutory demand within the 10 working day period and it failed to pay the amount of the alleged debt within the 15 working day period. The liquidation proceeding was duly issued by the receivers on 6 May
2013 within the prescribed 30 working day period.
[56] On 17 June 2013 the Isola standstill deed was executed between the receivers of Mainzeal and Isola. In that deed Isola confirmed that the amount of $2,478,164 was due and payable by Isola to Mainzeal and agreed to assign to Mainzeal that amount from proceeds derived by Isola from the sale of any property of 200 Vic Ltd. On 15 November 2013 Isola’s debt to Mainzeal of $2,478,164 was paid by agreement by the receivers from the proceeds of sale of the assets of 200 Vic Ltd. Consequently at that time Mainzeal ceased to be a creditor of Isola.
The KFL debt
[57] An analysis undertaken by the liquidators (displayed in chart form in the affidavit of Mr Andrew Bethell dated 29 May 2013) suggested that prior to a restructuring undertaken in January 2012 Isola owed an intercompany debt to KFL
of $4.410m. However as a result of that restructuring the only debt owed to KFL was by RGREL in the sum of $5.787m. As Mr Bethell stated (references to IVL are to Isola):
67.As at 31 December 2011, KFL’s ledger recorded that $4.490m was owing by IVL to it. Part of this related to sums paid by KFL for the acquisition of a property at Onetangi Road, Waiheke Island owned by IVL. ...
68. This $4.490m debt was “transferred” to RGREL in the January 2012
restructure as set out above.
69. The purported effect of this “transfer” was that IVL was no longer
indebted to KFL.
However Mr Bethell recorded that the liquidators could not identify from the companies’ records any formal agreements entered into by the various companies recording the transfer and/or assignments of the various intercompany debts.
[58] In paragraph 70 Mr Bethell referred to the RGREL debt as one of those which the receivers and liquidators were pursuing. In particular, reference was made to a statutory demand issued by KFL to RGREL dated 15 April 2013 for the sum of
$5.787m. The same paragraph made reference to the debt owed by Isola to Mainzeal in the sum of $2.478m.
[59] On 13 August 2013 the liquidators of Mainzeal made demand of Isola for payment of an amount of $4.409m owed by Isola to KFL. As Mr Bethell explained in his affidavit dated 16 October 2013:
19.At the time of the hearing on 20 June 2013, the purported extinguishment of IVL’s debt of $4.410m to KFL, as shown in KFL’S journals, was not supported by any valid documentation. I referred to this in my first affidavit at paragraphs 16 and 17.
20.The liquidators had on a number of occasions requested that Mr Yan provide the relevant supporting documentation relating to the adjustments of the intercompany balances summarised at paragraph
15 of my first affidavit. As time passed, and the liquidators were not provided with any supporting documentation for the extinguishment
of the $4.410m debt, we formed the view that these documents likely did not exist and made demand on 13 August 2013 against IVL for
payment of $4.410m. ...
21.Subsequently, some additional documentation was sent to our solicitors by IVL’s solicitors and was put in evidence by Mr Yan in his affirmations dated 3 September and 6 September 2013.
22.I note that these documents were not contained in KFL’s company records provided to us at the time we were appointed as liquidators despite our enquiries of MPCL staff and Mr Yan. I found this to be highly unusual given the significant adjustments which were made to the intercompany balances purportedly based on these documents.
23.The documents belatedly provided by Mr Yan purport to show that the $4.410m debt owed by IVL to KFL was extinguished on the basis of the following transactions:
(a) on 1 January 2012, an acknowledgement by KFL of a debt of $2.640m to Richina Building Limited (RBL);
(b) on 1 January 2012, an assignment of $2.447m of that debt to
RBL to IVL;
(c) a purported set-off of the assigned debt of $2.447m against
IVL’s liability to KFL of $4.410m with the residual debt of
$2.095m being acknowledged as owing by IVL to KFL on
31 July 2012; and
(d) an “assignment” on 31 July 2012 of the residual debt of
$2.095m by IVL to RGREL together with an “assumption”
of that debt by RGREL.
[60] The Isola version of events is explained in various documents. A convenient example is the affirmation of Mr Richard Yan of 18 September 2013:
6. ... I explain as follows:
(a) As at 1 January 2012, a transaction was entered into that reduced the $4,409,661.39 balance owed by Isola (then named “Waiheke Vineyards Limited”) to KFL by the sum of
$2,447,367.05. This occurred through Richina Building Limited assigning that balance (owed by KFL) to Isola. I annex true copies of:
(i) Deeds recording the loan from Richina Building
Limited to KFL and the assignment of
$2,447,367.05 of that loan to Isola ... and
(ii) Resolutions of Isola ... Richina Building Limited ... and KFL consenting to this assignment.
(b) The balance remaining after that transaction and other transactions between then and 31 July 2012 came to
$2,095,145.76.
(c) As at 31 July 2012, a transaction was entered into between
KFL, Isola and RGREL whereby KFL released Isola from
liability for the balance of $2,095,145.76 and RGREL
assumed liability for that balance. I annex ... true copies of:
(i) Deeds recording the $2,095,145.76 loan owed to
KFL being assigned to RGREL ...; and
(ii) Resolutions of RGREL ... Isola ... and KFL ... consenting to this assignment.
(d) The effect of the transactions above is that Isola is no longer liable to KFL at all.
[61] An essentially similar summary of events is recited in paragraph 6 of Isola’s
statement of defence to the second statement of claim by KFL.
[62] The reason why the liquidators did not accept this explanation was explained
in Mr Bethell’s affidavit of 16 October 2013:
24.The liquidators cannot see how IVL can set off the $2.447m debt owed by KFL to RBL, which was purportedly assigned to IVL, in circumstances where:
(a) The loan by RBL to KFL was, based on terms of the acknowledgment of loan between RLB and KFL dated
1 January 2012 (page 469 of Mr Yan’s Bundle), payable
“within 10 years from 1 January 2012” and repayment was expressly “subject to profitability” of KFL;
(b) At the time the acknowledgment of loan was purportedly entered into on 1 January 2012, KFL appears to have been insolvent and had net liabilities of $912,235. Annexed at page 290 of the Bundle is a summary of KFL’s balance sheet at 31 December 2011, which has been extracted from the spreadsheet of the restructuring entries that was referred to in my first affidavit and annexed at page 87 of the bundle; and
(c) KFL was never profitable from 1 January 2012 onwards, especially given that:
(i) KFL traded exclusively as subcontractor for MPCL
post its restructure in January 2012; and
(ii) As I understand from Mr Yan, a greater proportion of losses in 2012 incurred on projects carried out by KFL were allocated to KFL than would have been the case if KFL was trading with MPCL on arms- length terms.
25. For these reasons, the liquidators do not accept that the set-off by
IVL of the $2.447m receivable against the debt IVL owed to KFL
was valid. Accordingly, I believe that this amount remains due and owing by IVL to KFL.
[63] Following Isola’s failure to satisfy the 13 August 2013 demand (which was not a statutory demand) KFL purported to join the Isola proceeding as a plaintiff in respect of the amount of $2.447m being part of the debt the subject of the demand. KFL did so pursuant to the procedure provided by HCR 31.24(2) by filing a statement of claim in form C 1, a notice of proceeding in form C 3 and an affidavit of Mr Bethell in form C 4. Those documents were headed as being filed in the proceeding CIV-2013-404-2317.
A pleadings issue
[64] In relation to the KFL claim Isola raised a pleading point. It contended that the KFL statement of claim dated 18 October 2013 was defective in that it did not specifically plead Isola’s failure to satisfy the statutory demand served by the receivers of Mainzeal on Isola on 7 March 2013. Although Mr Kennedy took the position at the hearing that the pleadings were not defective in the manner contended, I directed that KFL should have leave to file an amended pleading (if it wished to do so) by 10 December 2013 with any response from Isola by
13 December 2013.
[65] The plaintiffs filed a memorandum dated 10 December 2013 which recited the pleadings history and drew attention to the pleading in paragraph 23 of the KFL statement of claim which was said to be in the following terms: “IVL was unable to pay its debts in terms of section 287 of the Companies Act 1993.”
[66] The plaintiffs submitted that KFL’s statement of claim did not purport to supplant Mainzeal’s existing statement of claim but was specifically described as a pleading by KFL alone. Consequently it was contended that there was no proper basis to support the suggestion that KFL’s statement of claim was defective and required amendment. No amended pleading was filed.
[67] In a memorandum in response dated 13 December 2013 Isola submitted that
KFL like any other litigant is required to plead the facts it relies on including any
statutory demand. It submitted that given the requirement to verify the allegations in the statement of claim in r 31.5(2) this pleading obligation is all the more important in liquidation proceedings. It drew attention to the observation in McGechan at HR
31.5.02 in respect of the verifying affidavit:19
The affidavit itself need not be lengthy but the statement of claim must be full and particularised. Where a statutory demand is relied on, particulars of the demand and failure to comply with it should be contained in the statement of claim and verified ...
[68] Consequently Isola argued that KFL’s failure to plead the non-compliance with the Mainzeal statutory demand meant that KFL could not subsequently rely on that statutory demand.
[69] In response to the plaintiffs’ contention as to the content of paragraph 23 of KFL’s statement of claim, Isola asserted that KFL had mis-stated its own pleading. It pointed out that KFL’s claim (at paragraphs 20-23) reads as follows:
20. On or about 13 August 2013, the Liquidators made demand on IVL
for payment of the amount of $4.409m.
21.On 26 August 2013, the Liquidators served the sealed pooling orders on IVL.
22. IVL has made no payment and has applied to set the Pooling Orders
Judgment aside.
23.In terms of section 287 of the Companies Act 1993 IVL is unable to pay its debts and therefore is insolvent.
[70] Isola’s point was that it was evident from the context of that pleading that the case which Isola had to meet was that, either as a consequence of the Pooling Orders judgment or as a consequence of Isola not responding to the liquidators’ letter of demand (which it noted was not a statutory demand), a statutory presumption of insolvency under s 287 arose. Consequently it was contended that KFL had put its case in reliance on a statutory presumption arising from circumstances that simply do not support that presumption.
[71] Paragraph 23 of the KFL statement of claim is in the terms as asserted by
Isola. Indeed save for the additional words “and therefore is insolvent”, paragraph
23 is in identical terms to the first sentence of paragraph 10 in the original Mainzeal statement of claim.
[72] On this issue it is helpful again to draw attention to the decision of Associate
Judge Bell in Heron’s Flight:20
[5] On an application that a company be put into liquidation, the applicant is required to specify in the statement of claim which of the four grounds in s 241(4) the applicant relies on. Where an applicant relies on s
241(4)(a), an appropriate pleading is to say that the company is unable to pay its debts. However, these exact words do not need to be used.
Nevertheless, the pleading should contain express words to convey that
inability to pay debts is the basis of the application.
[6] In this case, the plaintiff has pleaded that it served a statutory demand and has used the failure to comply with the statutory demand as the basis for the Court to make an order. It has not expressly pleaded insolvency as such. Non-compliance with a statutory demand is not one of the grounds provided under s 241(4) of the Companies Act. Instead, non-compliance with a statutory demand simply gives rise to a presumption under s 287(1) of the Companies Act that the company is unable to pay its debts. In other words, non-compliance with a statutory demand is matter of evidence only. The pleading of evidence is not the proper pleading of a ground for an application under s 241(4). Accordingly, the pleading of the statement of claim in this case is defective. For the Court to make an order, that pleading first needs to be amended. The plaintiff sought leave to amend the statement of claim to include a plea that the defendant is unable to pay its debts. The defendant is not prejudiced. The statement of claim is amended accordingly.
[73] I adopt the reasoning of Associate Judge Bell in Heron’s Flight. What is required to be pleaded is an allegation of insolvency. The KFL statement of claim does that in paragraph 23. The fact that in prior paragraphs it pleads matters of evidence does not, in my view, have the consequence that the pleading of insolvency in paragraph 23 is confined to the evidential circumstances recited in the immediately preceding paragraphs.
[74] I consider that, having pleaded that Isola is unable to pay its debts and is therefore insolvent and having specifically referred to s 287 of the Act (in a similar manner to paragraph 10 of the original statement of claim), it is open to KFL to rely
on the presumption of insolvency which arose from Isola’s failure to satisfy the statutory demand served on 7 March 2013. It is not necessary in those circumstances for KFL to specifically refer in its statement of claim to the fact of and the non- compliance by Isola with the Mainzeal statutory demand. Consequently I reject the pleading point raised by Isola.
Does the s 287 presumption of insolvency apply?
[75] The plaintiffs submitted that the failure to comply with the statutory demand served on Isola on 7 March 2013 gave rise to the presumption under s 287 that Isola was unable to pay its debts. Their position was that the presumption was not extinguished by the subsequent payment of the debt by Isola to Mainzeal outside the
15 working day statutory period.
[76] Reliance was placed upon the observations of Associate Judge Osborne in Strong v Hurunui Hotel (2004) Ltd.21 The plaintiffs and the defendant in that case were lessor and lessee respectively of hotel premises. A statutory demand was issued in respect of arrears of payments due under the lease. When the application for an order for liquidation was called the defendant had sufficient funds to pay the amount of the statutory demand but had fallen into further arrears of rent which were
the subject of a further statutory demand.
[77] In response to a submission by the defendant that leave to amend the claim should be refused because the original demanded sum had been paid in full and hence there was no ground for liquidation Associate Judge Osborne ruled:22
Mr Clay’s submission misses the point of the statutory demand process. By failing to pay the demanded sum within the statutory period, the defendant was presumed to be unable to pay its debts. The subsequent payment does not remove the presumption. Another creditor, if substituted, could have relied upon the presumption (even if the substituted creditor had not itself issued a statutory demand). The position of an amending plaintiff is no different.
[78] Isola advanced an argument similar to that in Strong emphasising that
Mainzeal had been paid in full and was no longer a creditor. In submitting that
21 Strong v Hurunui Hotel (2004) Ltd [2013] NZHC 1924.
22 At [23].
Strong does not assist KFL, Isola argued that the finding that payment of a statutory demand does not remove the statutory presumption was an obiter comment made in the context of an application to amend a statement of claim and which involved the existence of undisputed debts still due at the date of hearing.
[79] It was submitted that Strong went no further than Commissioner of Inland Revenue v Aotearoa Coolstores Ltd23 which held that in cases where undisputed debts continue to be incurred by a defendant company the plaintiff to whom those debts are owed continues to have standing as a creditor. By contrast it was submitted that Mainzeal now lacks the requisite standing given that Mainzeal is owed nothing by Isola and KFL can therefore only rely on its own pleading. Isola noted that a
similar approach was taken in Commissioner of Inland Revenue v The Fish & Chip Shop Ltd24 which endorsed the comment made at para HR 31.11.04 of McGechan on Procedure to the effect that:25
In a case where the full amount has been paid over as security, it is difficult to imagine a situation where liquidation would be justified.
[80] Counsel for Isola noted that that proposition was consistent with the McGechan commentary at HR 31.24.04 (dealing with substituted plaintiffs who seek to rely on the original statutory demand):26
The presumption of insolvency under a statutory demand may be rebutted by payment of a debt. It may therefore be dangerous for a substituted plaintiff to rely on the original plaintiff’s demand where the original plaintiff has decided not to proceed because its debt has been paid. The better course is for the substituted plaintiff to have also provided proof of insolvency of the debtor company. Thus, for example, if the substituted plaintiff had also served a demand, proof of both the service of the demand and non- compliance with it should also be given.
[81] On this issue I agree with the view of Associate Judge Osborne. The subsequent payment of a debt (beyond the statutory 15 working day period) does not of itself remove the s 287 presumption. Such a payment does not of itself constitute
proof that a defendant company is able to pay its debts.
23 Commissioner of Inland Revenue v Aotearoa Coolstores Ltd HC Palmerston North CIV-2008-
454-940, 5 October 2009 at [32].
24 Commissioner of Inland Revenue v The Fish & Chip Shop Ltd (2009) 19 PRNZ 757 (HC) at
[52]- [53].
25 McGechan on Procedure, above n 19, at [HRPt 31.11.04].
26 At [HRPt 31.24.04].
[82] It may well be the case that, where the debt has subsequently been paid and there are no additional creditors appearing in support of claims for other unpaid debts, then the burden of proving that the company is able to pay its debts may be discharged with relative ease. The position will plainly be different where there are other creditors seeking to be substituted as plaintiffs in the proceeding. I find
support for my view in EFS One Ltd v Merlot Homes Ltd27 where, having cited the
above passage in McGechan, Associate Judge Robinson then said:
I accept that in some circumstances a defendant could rely on payment of the debt forming the basis of an original plaintiff’s claim as a defence to a claim for its liquidation where a substituted plaintiff seeks to continue with the proceedings. However the fact that the defendant has paid one creditor namely the original plaintiff does not necessarily mean that the defendant is solvent and able to pay all its debts. It is possible that the defendant has preferred the claim by the original plaintiff because the original plaintiff’s debt forms the basis of the claim to liquidate the defendant but has been unable to pay other creditors.
I can see no good reason why the substituted plaintiff in this case needs to issue a further statutory demand simply because the defendant may have satisfied the statutory demand issued by the original plaintiff.
I therefore conclude that the substituted plaintiff can rely upon the statutory presumption of the defendant’s insolvency based on the defendant’s failure to comply with the statutory demand served on it by the original plaintiff.
[83] The presumption created by the failure to comply with the statutory demand (albeit the subject debt has since been paid) remains for the benefit of substituting creditors until the defendant company rebuts the presumption by proving that it is able to pay its debts. Consequently in the present case the presumption is not extinguished unless and until Isola proves that it is able to pay its debts.
Has Isola proved that it is able to pay its debts?
[84] Mr Chisholm’s first submission on behalf of Isola is that it is sufficient to defeat KFL’s application for Isola to demonstrate that there is a genuine dispute as to the debt claimed by KFL. For the reasons explained above at [24]-[28] I do not accept that proposition. Given my finding that the s 287 presumption continues to apply notwithstanding the payment by Isola of the amount specified in the Mainzeal statutory demand, it is necessary for Isola to prove that it is able to pay its debts.
[85] It was contended for Isola that it has a strong asset position. Evidence was given as to:
(a) Wine stock worth at least $1 million;
(b) A remaining parcel of land worth in excess of $1 million; and
(c) At least $400,000 in cash in Russell McVeagh’s Trust Account being the remnants of the proceeds from the sale of 200 Vic Ltd’s assets.
[86] For KFL it was pointed out that the wine stock is subject to a dispute and the land is subject to a mortgage to the BNZ. In KFL’s view the only asset available to repay the debt owed to KFL was the sum held by the receivers on Isola’s behalf which was insufficient to meet Isola’s liability to KFL.
[87] If the amount claimed by KFL is indeed a debt owed by Isola then on the basis of the evidence presented my assessment is that Isola is not able to pay its debts. However, as Mr Chisholm points out, Mainzeal having been paid, there is no creditor other than KFL. Furthermore the alleged KFL debt is hotly contested as a matter of factual and legal analysis. Because that debt is not itself the subject of a statutory demand then, as I understood Isola’s position, it is legitimate to scrutinise whether it truly is a debt as part of the analysis of whether Isola is able to pay its debts.
[88] I heard extensive submissions from both sides directed to the status of the transactions referred to in the extracts quoted at [59] and [60] above. As Mr Bethell’s evidence foreshadowed28 the liquidators viewed the matter as one of purported set-off and Mr Kennedy presented detailed submissions directed to the absence of any legal, insolvency or contractual set-off. For Isola Mr Chisholm contended that the issue is not one of set-off but rather an attempt by the liquidators to challenge in a collateral fashion documented historical transactions.
[89] He submitted that the liquidators had taken no steps under any of the relevant procedures29 to set aside or otherwise reverse the effect of the transactions to which Mr Yan had deposed. The essence of his argument is captured in paragraph 69 of his written submissions:
The real issue is whether those transactions that actually occurred may be set aside or avoided. However, no such relief has been sought by the liquidators, rather they argue that somehow the Court can omit any step of determining the liquidators’ claims for invalidity and arrive directly at the position that one of the transactions leaves an allegedly undisputed debt owing to KFL by Isola, when Isola had repaid it and KFL accepted repayment through the transactions being effected.
[90] The resolution of the dispute as to the validity of the transactions which lie at the heart of the question whether Isola owes a debt to KFL involves quite complex matters. At the least these are matters which might require cross-examination and are therefore ill-suited to determination in this proceeding. Indeed it may also be that other forms of proceeding need to be pursued as Mr Chisholm has suggested.
[91] Be that as it may, in the form that the matter comes before me Isola has the burden of proving that it is able to pay its debts. Speaking of the role of the burden of proof in In re B (Children)30 Lord Hoffmann said:
If a legal rule requires a fact to be proved (a “fact in issue”), a judge or jury must decide whether or not it happened. There is no room for a finding that it might have happened. The law operates a binary system in which the only values are zero and one. The fact either happened or it did not. If the tribunal is left in doubt, the doubt is resolved by a rule that one party or the other carries the burden of proof. If the party who bears the burden of proof fails to discharge it, a value of zero is returned and the fact is treated as not having happened. If he does discharge it, a value of one is returned and the fact is treated as having happened.
[92] In the present case I am left in doubt whether Isola is able to pay its debts. As
Isola bears the burden of proof consequent upon s 287 I find that Isola is not able to pay its debts.
29 Citing inter alia s 292-296 concerning voidable transactions and charges; ss 297-298 concerning transactions at undervalue or with excessive or inadequate consideration; and s 301 concerning repayment or contribution to the assets of a company.
30 In re B (Children) [2009] 1 AC 11 (HL) at [2].
Should the Court’s discretion be exercised to decline an order for liquidation?
[93] Notwithstanding Isola’s failure to discharge the burden of proof, for the reasons foreshadowed above this is a case where I consider that it is appropriate to exercise the s 241(4) discretion and to decline to make an order for the liquidation of Isola.
[94] There are several factors which influence my conclusion. Isola clearly has some assets but their value is uncertain. It has already taken steps to pay the debt owed to Mainzeal and a surplus is held in the receivers’ solicitors’ trust account. KFL is the only substituting creditor and there is a substantial contest involving questions of fact and law as to whether the KFL debt is owed.
[95] I have some sympathy for the argument advanced by Mr Chisholm referred to in [89] above. As I understand their position, the liquidators do not contend that the transactions in question were shams. But no recourse has been had to other forms of proceeding to test the validity of the transactions which the liquidators necessarily seek to impugn in order to rely on the KFL debt. However, because the KFL debt was not the subject of a statutory demand, the s 290 procedure could not avail Isola
in respect of the asserted KFL debt.31 Nevertheless, as I have held, the presumption
that Isola could not pay its debts continued notwithstanding that Isola had paid the Mainzeal debt and accordingly it was necessary for Isola to discharge the burden of proving that it could pay its debts.
[96] In that combination of circumstances I do not consider that it is appropriate to make an order for the liquidation of Isola and in the exercise of my discretion I decline to do so.
Orders
[97] I make an order for the liquidation of RGREL under s 241(4) on the ground that it is unable to pay its debts. I appoint Andrew James Bethell, Brian Mayo-Smith
31 In Investment Enterprises Ltd v Private Sale Co Ltd (above n 2) a liquidation order was declined in the Court’s discretion where the reason that the defendant company did not pursue an application to set aside the statutory demand was through oversight.
and Stephen Tubbs as the liquidators of RGREL. The order is made at 5 pm on
27 February 2014.
[98] Although Isola has not discharged the burden of proving that it is able to pay its debts, for the reasons given I exercise my discretion to decline to make an order for the liquidation of Isola.
[99] Leave is reserved to apply for any orders or directions consequential on the order in [97] and the decision in [98].
[100] In the event that costs are not able to be agreed, memoranda may be filed by the plaintiffs by 14 March 2014 and by the defendants by 28 March 2014.
Brown J
ANNEXURE
4
3
0