Menzies v Vaycay Trading Limited

[2020] NZHC 618

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2019-404-000935

[2020] NZHC 618

BETWEEN

CAROLYN JOY MENZIES

Plaintiff

AND

VAYCAY TRADING LIMITED

First Defendant

LEONARD BOURTON

Second Defendant

Hearing:

21 October 2019

Counsel:

J Burt for the Plaintiff

D Bennington for Second Defendant

Judgment:

24 March 2020

Reissued:

9 April 2020

REISSUED JUDGMENT OF ASSOCIATE JUDGE SARGISSON

This judgment was delivered by me on 9 April 2020 at 1.00 p.m. pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar Date.......................................

Solicitors:

MacDonald Lewis Law, Auckland Duncan Cotterill, Auckland

J Burt, Auckland

MENZIES v VAYCAY TRADING LTD [2020] NZHC 618 [9 April 2020]

Introduction

[1]    The plaintiff, Carolyn Menzies, is the sole director of the first defendant, Vaycay Trading Ltd. She holds half of the shares in Vaycay. The second defendant, Leonard Bourton, holds the other half of the shares.

[2]    Vaycay ceased to trade in December 2017. Ms Menzies seeks an order under the Companies Act 1993 placing Vaycay into liquidation on the grounds that:

(a)Vaycay is unable to pay its debts (s 241(4)(a)); and/or

(b)It is just and equitable that Vaycay be put into liquidation (s 241(4)(d)).

[3]    Mr Bourton opposes the application. Instead, he seeks an order under s 174 that Ms Menzies sell her shares in Vaycay at fair value to Vaycay. He also says that:

(a)He is prepared to introduce funds into the company to trade it out of insolvency if Ms Menzies is removed as the director; and

(b)He has the support of a majority of creditors and hopes they will agree to arrangement compromising their debt or the time for its payment.

Background

[4]    In January 2015, Vaycay was incorporated under the Companies Act. From August 2015 to June 2017, Ms Menzies and Mr Bourton had a domestic relationship and lived together. In June 2017, Mr Bourton moved out. Since then, the relationship between the two deteriorated. Vaycay ceased trading in December 2017.

[5]    On 5 November 2018, the Family Court granted Ms Menzies’ application for a temporary protection order against Mr Bourton. On 8 April 2019, a final protection order was granted against Mr Bourton.

[6]    On 17 May 2019, Ms Menzies filed a statement of claim seeking an order placing Vaycay into liquidation. Mr Bourton opposed the application, filing a statement of defence on 17 July 2019. A hearing was scheduled for 21 October 2019.

[7]    Ms Menzies served a notice to cross-examine defence witnesses, all of whom were creditors of Vaycay.  Three working days’ notice was given in accordance with r 9.74 of the High Court Rules 2016. However, on 18 October 2019, Mr Bourton filed a memorandum for adjournment of the 21 October 2019 hearing on the basis that only one of the deponents would be available for cross-examination. Most of the deponents live on the South Island and one was overseas at the time. Accordingly, three working days was not sufficient to enable the deponents to reschedule their commitments.

[8]    On 21 October 2019, the matter was ultimately resolved on the basis that the deponents’ evidence would stand without the need for cross-examination. The matter was heard, and I reserved my decision. The parties agreed that I should not issue the decision immediately, to give Mr Bourton an opportunity to pull together a creditor’s compromise. I directed the parties to update the Court via memoranda.

[9]    On 1 November 2019, the parties filed updating memoranda to advise the Court of the outcome of discussion between the parties regarding settlement. In short, there was little advance on a potential negotiated resolution. Consequently, a judgment was sought. Mr Bourton requested leave to file a memorandum as to costs.

Legal framework

[10]   Section 241 of the Companies Act provides that the Court may put a company into liquidation by appointment of a liquidation for various reasons, including where the Court is satisfied that the company is unable to pay its debts1 or that it is just and equitable that the company be put into liquidation.2

[11]   A liquidator may be appointed by the Court on application of persons listed in s 241(2), which includes a director or shareholder. Presently, Ms Menzies, the sole director and half-share shareholder of Vaycay, brings the application for liquidation.

1      Companies Act 1993, s 241(4)(a).

2      Section 241(4)(d).

[12]   First, in relation to s 241(4)(a), in the vast majority of winding up proceedings, a company’s inability to pay its debts is established via a statutory presumption of insolvency. The plaintiff will serve a statutory demand pursuant to s 289 and, if the defendant company fails to comply with that demand, s 287 provides that the company is to be presumed insolvent. However, that is not the only way in which a plaintiff can establish that a defendant company is unable to pay its debts. It may do so by any other admissible and probative evidence pursuant to s 288(2).

[13]   Secondly, in relation to s 241(4)(d), it is just and equitable for the Court to put a company into liquidation if there is an impasse or deadlock in management of the company’s affairs, or “frustration by internal discord”.3 Equally, a breakdown in trust or confidence,4 including irretrievable breakdown of personal relationships, may suffice.5 Notably, the circumstances leading to the breakdown need not be limited to those affecting an applicant for liquidation in his or her capacity as shareholder — “there is room in company law for recognition of the fact that behind [a company], or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure”.6 However, the courts have been reluctant to order winding up of a company on just and equitable grounds where a remedy other than liquidation is reasonably available.

[14]   Nevertheless, a decision to put a company into liquidation is ultimately at the discretion of the Court.7

Discussion

[15]First, I consider that Vaycay is unable to pay its debts for the following reasons:

(a)It ceased trade in December 2017. Ms Menzies deposes that its debts exceed $800,000 and that it substantially exceeds its assets. Whilst

3      Sea Management Singapore Pte Ltd v Professional Service Brokers Ltd [2012] NZHC 13 at [3].

4      Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 (HL); and Hawkes v Cuddy, Re Neath Rugby Ltd [2007] EWHC 2999 (Ch) at [222]–[228]. See also Jenkins v Supscaf Ltd [2006] 3 NZLR 264 (HC); and GBR Investment Ltd v Goose Bay Ranch Holdings Ltd [2010] NZCCLR 11 (HC).

5      Jaycue Investments Ltd (in liq) v J Fox Developments Ltd HC Auckland M952/95, 2 April 1996; and Strachan v Denbigh Property Ltd (2011) 10 NZCLC 264,813 (HC) at [29].

6      Ebrahimi v Westbourne Galleries Ltd, above n 4, at 379.

7      Jenkins v Supscaf Ltd, above n 4, at [134].

Mr Bourton, in his statement of defence, challenges this, he has adduced no evidence to contradict it. Ms Menzies further deposes that Vaycay has no assets other than debts owed by the shareholders, that recovery of the full amount of each debt is unlikely, and that even full recovery of those debts would be insufficient to pay all of Vaycay’s debts. Lloyd Gallagher, whom Vaycay engaged to assist it on commercial matters, gives evidence to similar effect.

(b)Mr Bourton, in his affidavit, appears to accept Vaycay’s insolvency. He says some of Vaycay’s creditors are seeking payment from Ms Menzies under personal guarantees given by her. There is sense in the submission on Ms Menzies’ behalf that it is implausible that she would not cause Vaycay to satisfy those debts if the company were able.

(c)Whilst Mr Bourton says there are cattle (assets) belonging to Vaycay on a farm in Southland, there is no evidence of such. Mr Bourton has not provided, either to Ms Menzies or to Vaycay’s agents, details of those cattle or their location, to enable Vaycay to realise those cattle. Furthermore, Ms Menzies says that the cattle belong to StockCo Ltd due to the nature of the finance facility provided to Vaycay. Mr Bourton has failed to provide information regarding the cattle even to StockCo. In any event, Ms Menzies says that recovery (valued at $227,000) would be insufficient to discharge the debts owed to Vaycay’s creditors.

[16]   Secondly, I consider that it is just and equitable to put Vaycay into liquidation for the following reasons:

(a)There has clearly  been  a  breakdown  between  the  shareholders.  Ms Menzies has a protection order against Mr Bourton. She deposes that, “I cannot work with Leonard. I fear him and have a protection order in place for a reason. I cannot trust him to operate any business or handle any funds.” Even Mr Bourton acknowledges that his working relationship with Ms Menzies “has come to an acrimonious end” and that they are unable to work together in the best interests of Vaycay.

(b)This breakdown is evident in Mr Bourton’s refusal to provide Vaycay’s duly authorised agent, its solicitor, Arran Hunt, with access to Vaycay’s own account records. Mr Hunt deposes that Mr Bourton is “actively preventing”  Vaycay’s financial  accounts  for  the  year  ended  31 March 2017 being provided to Vaycay’s agents. Similarly, despite allegedly knowing the whereabouts of assets of substantial value to Vaycay (the cattle), Mr Bourton has failed to disclose that information to Vaycay, its agents or StockCo, which retains the title to those assets.

(c)There are also concerns regarding significant discrepancies between the financial accounts provided to Vaycay by Brett Knock for the year ended 31 March 2017 and those annexed to an affidavit sworn by    Mr Bourton for the purpose of Family Court proceedings. With the exception of the figure for opening stock in 2016, none of the amounts in the profit and loss account attached to Mr Bourton’s affidavit matches those in the profit and loss account provided to Vaycay.

[17]   Thirdly, I turn to the issue of whether I should exercise my discretion in putting Vaycay into liquidation. Mr Bourton says that an alternative remedy is available under s 174, namely an order compulsorily divesting Ms Menzies of her shares and an attempt by Mr Bourton to extricate Vaycay from financial difficulty through agreements to be reached with the company’s creditors for some accommodation. In the end, however, I consider that Vaycay should be put into liquidation because:

(a)It is not clear that the alternative remedy under s 174 would be a better option than putting the company into liquidation. Despite being given ample time to do so, Mr Bourton has not reached any agreement in principle with Vaycay’s creditors nor has he put forward the details of any proposal which may be considered likely to be reasonably acceptable by Vaycay’s creditors. Furthermore, no timeframe for entering into these arrangements or for payment of any agreed amount has been indicated. Indeed, counsel for Mr Bourton, in the submissions dated 21 October 2019, acknowledged that “[t]he workout offer is still

vague”. In the updating memorandum of 1 November 2019, counsel again acknowledged that the proposal was still vague at that point.

(b)Even if the Court were to accept that an alternative remedy was available under s 174 and a better option than liquidation on the basis of just and equitable grounds, s 174 does not guard against liquidation on the grounds of the company’s inability to pay its debts.

(c)While Mr Bourton says he will introduce funds into Vaycay, he has not particularised his proposal. Ms Menzies says Mr Bourton was bankrupt when Vaycay was incorporated in 2015 and was not discharged until July 2016. As a result, she says, he is unlikely to have assets of significant value that would enable him to introduce the substantial funds required by Vaycay.

Result

[18]For the above reasons, I order that:

(a)The first defendant, Vaycay Trading Ltd, be put into liquidation;

(b)Christopher Carey McCullagh and Stephen Mark Lawrence, insolvency practitioners of Auckland, are appointed as liquidators;

(c)The rates of remuneration of the liquidators and staff working under their supervision and control are fixed at the rates set out in the liquidators’ consent dated 18 October 2019;

(d)The liquidators are to apply to the court at the conclusion of the liquidation for approval of their overall remuneration;

(e)These orders are timed at midday on 9 April 2020.

[19]   The statutory costs regime provides that costs ordinarily follow the event. The plaintiff, Ms Menzies, therefore has a prima facie entitlement to costs on a 2B basis. However, the Court has an overall discretion in the matter. I have the memorandum as to costs already filed by Mr Bourton. If the plaintiff wishes to file a memorandum in rely she has until has 20 April 2020 to do so.

Associate Judge Sargisson