Melanesian Mission Trust Board v Fenton Projects Limited
[2019] NZHC 2949
•12 November 2019
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2019-404-001044
[2019] NZHC 2949
BETWEEN MELANESIAN MISSION TRUST BOARD
Plaintiff
AND
FENTON PROJECTS LIMITED
Defendant
Hearing: 6 November 2019 Appearances:
J Marcetic and R J West for Plaintiff J I Taylor for Defendant
Judgment:
12 November 2019
JUDGMENT OF ASSOCIATE JUDGE P J ANDREW
MELANESIAN MISSION TRUST BOARD v FENTON PROJECTS LTD [2019] NZHC 2949 [12 November 2019]
Introduction
[1] The plaintiff, the Melanesian Mission Trust Board (the Trust Board), applies to put the defendant company, Fenton Projects Ltd (Fenton), into liquidation pursuant to s 241 of the Companies Act 1993 (the 1993 Act).
[2] Fenton is liable to the Trust Board for unpaid rent, legal fees and interest owed under a lease. The Trust Board served a statutory demand on Fenton in respect of that debt ($409,354). Fenton did not comply with the statutory demand and did not seek to set it aside.
[3] Fenton accepts that the Trust Board is a creditor (although there is an issue as to the level of the debt) and that it is unable to pay its debts. There is no dispute that it is an insolvent corporate trustee company.
[4] Fenton defends the proceedings on the basis that the Court should exercise its residual discretion to refuse the application because:
(a)A portion of the debt may cease to exist as it is ‘temporary’ in the sense that it is subject to adjustment;
(b)Fenton has a complete indemnity for the debt from another party;
(c)Fenton has rights of contribution against three others;
(d)The Trust Board is not seeking to recover against a primary debtor and the Trust Board’s conduct is relevant;
(e)There will be no prejudice to the Trust Board if liquidation is refused; and
(f)There would be prejudice to Fenton and a related trust if liquidation is granted.
Factual background
[5] On 17 September 2004, the Trust Board and Marlborough House Ltd (now Carlton Gore Holdings Ltd) (CGHL), entered into a Deed of Lease in respect of
the land at 77 Carlton Gore Road (the lease). The rent was $220,000 plus GST per annum.
[6]There have been two assignments under the lease:
(a)On 6 August 2007, CGHL assigned its interest in the lease to Fenton by way of a Deed of Covenant. Clause 2 of that Deed provided that the assignment did not alter CGHL’s liability as a prior lessee under the lease; and
(b)On 23 August 2016, Fenton assigned its interest in the lease to Blossom 5 Ltd (Blossom) by way of a Deed of Covenant. Clause 2 of that Deed provided that the assignment did not alter CGHL or Fenton’s liability as prior lessees under the lease.
[7]The assignments under the lease can be illustrated as follows:
| ||||
Assignment by Deed of Covenant dated 6 August 2007
Assignment by Deed of Covenant dated 23 August 2016
[8] Under the 23 August 2016 Deed of Covenant, Fenton is liable for Blossom’s unpaid rent.
[9] While Fenton was the lessee, the rent remained $220,000 plus GST per annum. Mr Gapes, a director of Fenton, guaranteed Fenton’s obligations under the lease.
[10] The lease was assigned by Fenton to Blossom via Mr Huang as nominee. The rent remained at $220,000 plus GST per annum until 7 June 2018. Mr Huang guaranteed Blossom’s obligations.
[11] Fenton, Mr Gapes and CGHL remained liable for performance of their obligations under the lease but had a statutory indemnity from Blossom under s 242 of the Property Law Act 2007.
[12] On 7 June 2018, the Trust Board issued a notice of market rent to Blossom, assessing the rent (for the purposes of a rent review) at $596,700 plus GST per annum. Blossom has disputed this figure. Clause 3.2 of the lease provides:
Notwithstanding that the Lessee may dispute the Lessor’s notice of the current market rent, pending determination of the current market rent either by negotiation or arbitration provided for herein the Lessee shall pay an annual rent for the Land at the current market rent set out in the Lessor’s notice from the particular review date subject always to adjustment between the parties once determination by negotiation or arbitration is completed.
[13]Blossom has not paid the increased rent and has underpaid the existing rent.
[14] On 22 November 2018, the solicitors for the Trust Board wrote to Fenton notifying it that Blossom was in arrears of $141,545.17 and that the Trust Board was reserving its right to pursue Fenton for that amount.
[15] Mr Gapes met with representatives of the Trust Board in December 2018 to discuss Blossom’s rent default and what Fenton might do to assist the Trust Board.
[16] On 18 April 2018, the solicitors for the Trust Board served on Mr Gapes a letter of demand in respect of the rent arrears under the lease, which by that time had accrued to $409,354.
[17] On 18 April 2019, the Trust Board served a statutory demand on Fenton in respect of the rent arrears and in the sum of $409,354. Fenton had previously failed to meet demands for payment.
[18] Fenton failed to comply with the statutory demand within the required time frame. The Trust Board then commenced these liquidation proceedings.
[19]As at 1 September 2019, the unpaid rent arrears total $731,456.50.
[20] In September 2019, CGHL was placed into liquidation on the application of the Trust Board.
[21] On 14 October 2019, Fenton filed proceedings in this Court against Blossom, Mr Huang and CGHL seeking declarations of indemnity and rights of contribution.
Relevant legal principles
[22] Section 241(4)(a) of the 1993 Act provides that a court may appoint a liquidator if it is satisfied that the defendant company is unable to pay its debts.
[23] Section 287 provides that a company is presumed to be unable to pay its debts if the company has failed to comply with a statutory demand.
[24] There are three criteria to assess when considering an application for liquidation relying on inability to pay debts:1
(a)Is the plaintiff a creditor?
(b)Is the defendant insolvent?
1 Cable Price (NZ) Ltd v Taimoana Haulage Ltd [2016] NZHC 828 at [2].
(c)How should the Court’s residual discretion be exercised?
[25] While the Court retains the discretion not to order liquidation, the general policy that insolvent companies should be put into liquidation is not to be departed from lightly. The normal rule is that if the relevant requirements have been met, the applicant is entitled to an order for the company’s liquidation.2 The Court of Appeal has held that:3
… the insolvency policy of the companies legislation is clear: (1) insolvency results in winding up; and (2) insolvency is proved by inability to establish a substantial dispute over the debt or by way of cross-claim.
[26] There must be some other factor which outweighs the prima facie entitlement of the creditor to an order putting the insolvent company into liquidation; the ground advanced by the insolvent company must be sufficiently compelling to overcome the general policy of the Act with regard to insolvent companies.4
Analysis and decision
[27] As noted above, Fenton acknowledges that it is insolvent and that the Trust Board is a creditor. The sole issue to be determined is the exercise of the residual discretion. Are the grounds advanced by Fenton, as the insolvent company, sufficiently compelling to overcome the general policy of the 1993 Act with regard to insolvent companies?5
[28] I address, in turn, each of the grounds. There is some inevitable overlap between them and I deal with them under four categories.
The temporary nature of the debt (or at least part of it)
[29] Fenton contends that a large proportion of the debt on which the application is based may be temporary. Clause 3.2 of the lease provides that the current market rent
2 Insolvency Law & Practice (online looseleaf ed, Thomson Reuters) at [CA241.04].
3 Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395 (CA) at [45]; and Commissioner of Inland Revenue v Newmarket Trustees Ltd [2012] NZCA 351, [2012] NZLR 207 at [65].
4 Commissioner of Inland Revenue v Chester Trustee Services Ltd, above n 3, at [3].
5 At [3].
notified by the lessor becomes the rent payable pending determination of the rent by negotiation or arbitration.
[30] This is then subject to an adjustment once the arbitration negotiation over that rent has been completed. The increase from $220,000 to $596,000 plus GST per annum is obviously significant. Fenton says it has not been privy to what Blossom alleges the rent is. However, it must be less than that alleged by the Trust Board.
[31] In these circumstances, Fenton says that the debt on which the application is based is likely to be reduced.
[32] However, I find that this ground is not a good reason for exercising my discretion not to make an order for liquidation. While Blossom has contested the increased rental rate stated in the notice of market rent, rent remains due and payable under cl 3.2 of the lease at the current market rate, subject to a wash-up once the ongoing rent is finally determined. Furthermore, as Mr Marcetic, for the Trust Board, submitted, the fact the debt may be subject to an adjustment, does not prevent liquidation orders being made. A dispute as to only part of a debt does not prevent a plaintiff from proceeding with a liquidation claim and is not sufficient to justify a stay.6
[33]In any event, there can be no dispute that Fenton is liable for a minimum of
$188,770.35, regardless of the outcome of the rent review. Indeed, Fenton does not dispute that contention. The lease at cl 3.5 provides that the new rent must be no less than the previous rent. The previous rent under the lease was $63,250 per annual quarter ($55,000 + GST). Even if the new rent is the same as the previous rent, Fenton would be liable for a total sum of $188,770.35.
[34] Accordingly, Fenton’s failure to pay even that reduced sum (not disputed) provides a sufficient basis for liquidation orders.
[35] I reject the submission of Mr Taylor, for Fenton, that the decision of Associate Judge Osborne in Commissioner of Inland Revenue v Tannadyce Investments Ltd
6 Nemesis Holdings Ltd v North Harbour Industrial Holdings Ltd (1989) 1 PRNZ 379 (HC) at 385.
provides support for Fenton’s position.7 There is no risk, in this case, of the Court proceeding on an incorrect premise when, even if there is a reduction in rent as a result of the review, there will still be a substantial undisputed sum that is owing. By contrast, in Tannadyce, there was a risk that the debt at issue (unpaid tax) might be overturned on judicial review, and that was the basis for the Court declining to order liquidation.
Fenton’s statutory and common law indemnity and other rights of contribution
[36] Fenton is jointly and severally liable for the debt question together with CGHL, Mr Huang and Blossom. As against Blossom, Fenton has a complete indemnity under s 242(1)(c) of the Property Law Act which provides that every assignment of a lease contains an implied covenant that the assignee will indemnify the assignor, and anyone claiming through the assignor, against all claims and expenses for the non-payment of the rent or the breach of any other covenant under the lease.
[37] In reliance on s 242, Fenton says it is entitled to a complete indemnity and that is the basis upon which it has issued proceedings against Blossom (among the other guarantors).
[38] Fenton says that it would be very unfair for it to be denied the opportunity to pursue its claims for indemnity and contribution in advance of any liquidation order. The primary debtor is Blossom, which remains in possession as lessee and continues to receive the ground rentals that can obviously be used to pay the outstanding rent. Fenton, not a party to the rent review arbitration process, believes it is caught in the middle of what is essentially a rent review dispute and there are a number of legitimate avenues open to the Trust Board to recover its debt without involving Fenton, essentially a minor player. CGHL has been placed into liquidation already, and Fenton believes that CGHL has substantial funds held in term deposits that might be available to the Trust Board to meet payment of the debt.
7 Commissioner of Inland Revenue v Tannadyce Investments Ltd (2010) 24 NZTC 24,068 (HC).
[39] However, I reject this ground as a basis for declining to make an order for liquidation. That Fenton’s liability for the debt is joint and several with CGHL and Blossom is not a valid defence to a liquidation application.
[40] Where a lessee is severally liable with an assignee for a breach, the lessor may sue either the lessee or the assignee, or both at the same time.8 A lessee cannot require that the lessor first exhausts the lessee’s remedy against a defaulting lessee.9
[41] I accept that Fenton might have a statutory indemnity from Blossom for its acts or omissions as an assignee (s 242). However, that section does not restrict the lessor’s ability to enforce the lease against the original lessee or any of the assignees. Indeed, Fenton must discharge its liability to the Trust Board before seeking contribution from Blossom.10
[42] I agree with the submission of Mr Marcetic that the plaintiff can pursue whoever it chooses where all the parties are jointly and severally liable and it does not generally have to account or explain to the Court its reasons for doing so. If that were the case, then there is a risk that hearings of this sort might end up as multiple party hearings with disputes as to who ought to pay first.
[43] I also note that the proceedings brought in this Court by Fenton were not filed until a very late stage, namely in October 2019. The statutory demand was issued in April 2019 and the liquidation proceedings filed in early June 2019. No adequate explanation has been provided for the delay and, in any event, Fenton is insolvent, and it is difficult to see how it could finance the litigation. If Fenton is placed in liquidation, a liquidator could elect to proceed with the contribution and indemnity proceedings.
[44] I accept the submission of Mr Taylor that Fenton, in its High Court contribution and indemnity proceedings, seeks a declaration that it is entitled to indemnity and that,
8 Norwich Union Life Insurance Society v Low Profile Fashions Ltd [1992] 1 EGLR 86 (CA) at 88 as cited in GW Hinde and others Principles of Real Property Law (2nd ed, LexisNexis, Wellington, 2014) at [11.195(a)], n 11.
9 Norwich Union Life Insurance Society v Low Profile Fashions Ltd, above n 8.
10 See McKerrow v Tattle (1905) 25 NZLR 881 (SC).
in equity, it is entitled to do so without first having satisfied the debt. There is support for that proposition in the decision McKerrow v Tattle.11 However, that does not mean that there is good reason to decline liquidation or to defer making any orders pending determination of the contribution and indemnity proceedings.
The conduct of the Trust Board
[45] Fenton says that the Trust Board, while legally entitled to pursue any guarantor, is acting in a heavy-handed and unjust manner. Fenton says the Trust Board is pursuing it for some ulterior motive because:
(a)The Trust Board does not benefit from liquidation;
(b)It is not seeking liquidation for altruistic public good reasons (having not taken the same action against Blossom);
(c)It is seeking to liquidate without giving Fenton a chance to recover its indemnity, which would see the Trust Board paid (subject to Blossom’s solvency); and
(d)There does not appear to be any other commercial reason why the Trust Board would so forcefully pursue Fenton.
[46] However, I reject the contention that the Trust Board has been acting improperly or for some “ulterior motive” such that good reason has been established for not making a liquidation order. There is no disqualifying conduct by the Trust Board.
[47] As Mr Marcetic submitted, Fenton has been given ample opportunity to seek contribution from the other parties since it was served with the Trust Board’s demands, but it waited until October 2019 to do so — and the Trust Board cannot be said to have acted with undue haste or pressure in pursuing Fenton. Furthermore, as noted above,
11 McKerrow v Tattle, above n 10.
the insolvency of Fenton must give rise to real questions about its capacity and willingness to pursue its High Court proceedings for indemnity.
[48] Equally, the contention that “nothing will come of the liquidation” must be rejected. As Baragwanath J held in Commissioner of Inland Revenue v Chester Trustee Services Ltd:12
[55] An exercise of discretion under s 290(4)(c) must take account of the wishes of any outstanding creditor. To relieve the company and its officers of liability to close examination of their affairs and conduct is a course not lightly to be taken. Perverse incentives would be created if the Court were too readily prepared to accept an argument that “nothing will come of the liquidation” …
[56] Further, encouragement of arguments for stay where both debt and insolvency are undisputed would run counter to the policy of para (e) of the long title to the Companies Act. For these reasons, in point of company law such applications are to be kept within narrow bounds.
[49] In Commissioner of Inland Revenue v Newmarket, the Court of Appeal held that its earlier decision in Chester Trustee Services Ltd related to the exercise of a discretion under s 290(4)(c) of the 1993 Act, but nevertheless the approach is equally applicable to the exercise of the discretion under s 241(4).13
[50] In the circumstances, I can understand why Mr Gapes may have some sense of unfairness on the basis that the primary debtor, Blossom, and possibly Mr Huang (enjoying the benefits of the lease and receiving ground rental income) ought to be pursued as a matter of priority and that Fenton is being unfairly singled out. However, as I have already noted, the plaintiff has the right to elect which party it pursues, and Fenton does not and cannot deny that it is jointly and severally liable. I do not see that, in the circumstances here, the Trust Board is required to explain why it has not taken further action against Blossom beyond issuing a statutory demand.
Weighing the prejudices
[51] Fenton acts as a corporate trustee and contends that the liquidation will only complicate that position. It says it will be prejudiced by a liquidation order and that there will be no real prejudice to the Trust Board if I decline to order liquidation at this
12 Commissioner of Inland Revenue v Chester Trustee Services Ltd, above n 3.
13 Commissioner of Inland Revenue v Newmarket, above n 3, at [65].
stage. Fenton says that, in fact, the Trust Board will likely benefit from Fenton’s proceedings against Blossom for indemnification as the Trust Board does not have to incur the costs of pursuing Blossom directly.
[52] Again, however, I find that these factors do not provide good reason for my declining to make an order for liquidation. The inevitable prejudice and inconvenience to Fenton is far from decisive. As the Court of Appeal held in Commissioner of Inland Revenue v Newmarket, an insolvent trustee company should as a general rule almost invariably be put into liquidation.14 That enables the Court to ensure that the trust is properly administered either by the liquidator or a replacement trustee.15 An insolvent trustee company, like a bankrupt trustee, will normally be considered unfit to be a trustee.16 Fenton has not established a proper basis for displacing the general rule.
Conclusion
[53] I find that none of the grounds advanced by Fenton, whether considered on their own or collectively, provide good reason for my declining to make an order placing the company into liquidation. Fenton has failed to overcome the general policy of the 1993 Act with regard to insolvent companies and to displace the general rule that an insolvent trustee company should invariably be put into liquidation.
[54] I therefore conclude, and on the basis that all three relevant criteria have been made out, that I should make an order for liquidation. There is no basis for either staying the Trust Board’s application or adjourning it pending the outcome of Fenton’s High Court proceedings against Blossom.
[55] I note that the proceedings have already been advertised and the Court has received a certificate of unpaid debt from the solicitor for the Trust Board dated 6 November 2019.
[56] I adjourn the proceedings to the Liquidation List before me on Friday, 15 November 2019 at 10.00 am for the making of an order for liquidation in open court
14 At [75].
15 At [75].
16 At [69].
and for the appointment of a liquidator. The Trust Board will, of course, need to obtain consent to act from a proposed liquidator.
[57]I also find that the plaintiff Trust Board is entitled to costs and on a 2B basis.
Associate Judge P J Andrew
0
3
0