Morrison v GK Accounting (Albany) Limited

[2014] NZHC 2813

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2014-404-002971 [2014] NZHC 2813

IN THE MATTER

of the Companies Act 1993

IN THE MATTER OF

an application to liquidate GK ACCOUNTING (ALBANY) LIMITED

BETWEEN

GORDON MORRISON First Plaintiff

BALDEEP SINGH Second Plaintiff

AND

GK ACCOUNTING (ALBANY) LIMITED

Defendant

Hearing:	7 November 2014
Appearances:	Mr Hucker for Plaintiffs (on papers)
Judgment:	12 November 2014

JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE

This judgment was delivered by me on

12.11.14 at 4.30 pm, pursuant to

Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date……………

MORRISON v GK ACCOUNTING (ALBANY) LIMITED [2014] NZHC 2813 [12 November 2014]

[1]      Because this matter has come before me for consideration late in the day , I will restrict myself to giving brief reasons why I earlier made an order for the appointment of interim liquidators to the defendant company, GK Accounting (Albany) Limited.   The order of the Court was issued late in the afternoon on 7

November and these reasons explain why the Court made the order in question.

Background

[2]      The application for appointment of interim liquidator is supported by an affidavit  which  was  filed  by  Mr  Baldeep  Singh,  the  second  plaintiff  to  the proceeding.  Mr Singh deposes that he is a director and shareholder of SBG Holdings Limited which is the sole shareholder of the defendant company.   He is also a creditor of the defendant company.  Mr Gordan Morrison, who is the other plaintiff, is also a creditor of the defendant company.

The application

[3]      Section 246 of the Companies Act 1993 provides the jurisdiction in relation to the appointment of an interim liquidator. Relevantly, s 246(1) provides:

246      Interim liquidator

If an application has been made to the Court for an order that a company be put into liquidation, the Court may, if it is satisfied that it is necessary or expedient for the purpose of maintaining the value of  assets  owned  or  managed  by  the  company,  appoint  a  named person,  or  an  Official Assignee  for  a  named  district,  as  interim liquidator.

[4]      Rule 31.23 of the High Court Rules is also relevant:

31.23 Power to appoint interim liquidator

(1)       When a proceeding for putting a company into liquidation has been commenced under rule 31.3, the plaintiff and any person entitled to apply to the court for the appointment of a liquidator  under  section  241(2)(c)  of  the  Companies Act

1993  may  apply  to  the  court  for  the  appointment  of  an interim liquidator.

(2)       If the court is satisfied, upon proof by affidavit, that there is sufficient   ground   for   the   appointment   of   an   interim liquidator, it may make the appointment, and may limit the rights and powers of the interim liquidator in any manner it thinks just.

[5]      The  first  underlying  consideration  in  relation  to  an  interim  liquidation application is whether there is a likelihood that the liquidation application itself will succeed or, put another way, whether the plaintiffs have a good prima facie case for liquidation. That consideration is clearly satisfied in this case for the reasons that follow later in this judgment.

[6]      The threshold  requirement  of “expediency”  in  s  246(1),  being  a broader concept than that of “necessity”, will often be the one on which a successful application is made.

[7]      I respectfully adopt the observations of Chisholm J in Carter Holt Harvey Ltd v Timbalok New Zealand Ltd where His Honour observed:1

In its usual sense that word “expedient” means “fitting, suitable, desirable or convenient” thereby conveying a relatively low threshold. It is sufficient if I can be satisfied that it is expedient for an interim liquidator to be appointed for the purpose of maintaining the value of the defendant's assets.

[8]      There is authority in Elders Pastoral Holdings Ltd v NZ Ostriches Ltd for the proposition that the Court should adopt a cautious approach in deciding whether the Court is satisfied that the statutory criteria has been met, given that appointment of an interim liquidator is a “major interruption into the company’s business and, to a large degree, amounts to a pre-judgment on the winding up application itself.”2

[9]      Rather than express matters in terms of “caution”, I would view the matters which weighed on Williams J as being quite simply matters to be taken into consideration  in  determining  whether  the  “expediency”  threshold  is  established. There should not be an effective fettering of the considerations leading to the Court's

determination of “expediency”.

1      Carter Holt Harvey Ltd v Timbalok New Zealand Ltd (1997) 11 PRNZ 435 at 438.

2      Elders Pastoral Holdings Ltd v New Zealand Ostriches Ltd HC Rotorua M2/99; M3/99, M4/99,

8 February 1999 at 6 per Williams J.

[10]      Mr Hucker submitted and  I accept  that  the leading case on  whether  an appointment of an interim liquidator is justified is Robert Bryce & Co Ltd v Chicken

& Food Distributors Ltd.   The High Court held that the following factors were relevant:3

(a)         Whether the company’s assets are in jeopardy;

(b)         Whether the status quo should be maintained; and

(c)         Whether the interests of creditors are safeguarded.

These considerations are not to be considered an exhaustive list.  According to the High Court in Shen v An Ying International Finance Ltd the considerations in Robert Bryce is to be considered “as a framework for analysis”:4

They should not be regarded as stating exhaustively relevant considerations. If any other criteria were to exist that impact upon the need to maintain value of the company’s assets pending determination of the substantive liquidation proceeding, they too ought to be taken into account. The weight to be given to each factor will vary from case to case.

The circumstances of the present case

[11]     The  Court  has  jurisdiction  to  make  the  order  sought  because  in  fact  a substantive application for a liquidation order has been filed.

[12]     In essence the position of the two plaintiffs is that they have paid off a debt of the defendant company owed to ASB Bank.  The plaintiffs provided a guarantee and indemnity to the ASB Bank to support loan advances to the defendant company. The  plaintiffs  are  each  entitled  to  recover  from  the  company  the  amount  of

$114,167.00 which they respectively paid to ASB Bank.   I consider that it is also established that they have made demand for repayment of those amounts but the defendant company has neglected or failed to make the payment to them that it is

required to make.

3      Robert Bryce & Co Ltd v Chicken & Food Distributors Ltd (1990) 5 NZCLC 66,648.

4      Shen v An Ying International Finance Ltd HC Auckland CIV 2006-404-3088, 28 July 2006 at [15]

per Heath J.

[13]     The company is under the control of a person called Mr Galpin who is apparently in control of the day to day operation of the company’s accountancy business.

[14]     There is evidence as well that the defendant company is insolvent.  The two plaintiffs, who are chartered accountants, have analysed parts of the business records that have come into their possession and have concluded that when the accounts are subjected to necessary and proper adjustments, they show that the company is insolvent  on  a  balance  sheet  and  income  basis.    The  current  year  loss  of  the company, according to the affidavit which has been filed by the second plaintiff, was

$190,261.  The net assets are in deficit in a sum of $477,715.47.

[15]     Further, evidence from the tax agent who attends to payments of accounts to the Inland Revenue Department (“IRD”) for the defendant company establishes that at least on a provisional basis, the Court should assume that the company is in arrears  of  payment  with  the  IRD.    There  is  also  credible  evidence  that  when necessary adjustments are made to certain aspects of the company’s accounts, amended returns will have to be made to the IRD and that there could be penalties added to the amount which is owed.  The tax agent also has provided information that  having  made  an  arrangement  with  the  IRD,  the  company has  defaulted  in making payments under that arrangement.  It currently owes GST of $73,087.08 and over $32,516.91 of PAYE tax.   The tax agent concluded that in his opinion, the “company director is trading recklessly and most likely insolvently”.

[16]     A director of the defendant company, Mr Sarsfield has confirmed that the company is unable to pay its due debts.  Mr Sarsfield expressed the view in an email dated 30 October 2014 that the company “is insolvent by any reasonable measure, and has been for some time”.   Mr Sarsfield referred to the work done by the tax agent  and  said  that  “the tax  situation  is  only a small  proportion  of the overall deficit”.

[17]     Mr Singh further deposes that the main asset of the business is the accounting client base of the defendant company and its debtors which on the basis “of the figures of turnover generated would be valued at around $100,000”.   Mr Singh is

concerned that the company will become further insolvent and accumulate further debts that it cannot pay.

[18]     In this case, there is reason to suppose that an interim liquidator is required to be appointed to take control of the assets of the defendant company in order to preserve its assets and to ensure that they are disposed of in accordance with the applicable provisions of the Companies Act in the likely event of liquidation being ordered.

[19]     The reasons for coming to the view expressed in the preceding paragraph are multifold.  First, there is also evidence that Mr Galpin may be diverting property of the company to his own personal use and there is no assurance that that property could ever be recovered from him.  Mr Singh has put forward plausible evidence that Mr Galpin set up his own consulting company and diverted funds from the defendant company to the consulting company. Further, it is alleged that Mr Galpin used the defendant company’s premises to also run his own consulting company.  Mr Singh deposes that he is also concerned about a loan advance from the defendant company to T & S Trustees (No 1) Limited for $401,889.09.  Mr Galpin is the sole director and shareholder of that company.

[20]     Mr Singh further deposes that there have been other doubtful transactions. He gives examples, such as that the company’s making repayments for a personal loan of Mr Galpin.  In addition, other payments received by the company cannot be traced and a payment was made to Asset Fire and Flood Restore Limited for work that Mr Singh considers has not been carried out for the defendant company.

[21]     There  is  also  evidence  that  Mr  Galpin  has  taken  drawings  from  SBG Holdings Limited, the holding company, which are far in excess of those taken by the plaintiffs and, Mr Singh alleges, in excess of an agreement which Mr Galpin and the two plaintiffs had  between themselves.   Mr Singh deposes Mr Galpin took money out of SBG Holdings Limited for private expenditure, expensing loan or shareholder advance costs and crediting debtors that the defendant company had not received money from.  I appreciate that SBG Holdings limited is a separate company from the defendant company.   Nonetheless, this evidence is consistent with other

evidence that directly applies to the defendant company and supports the allegations of the plaintiffs that Mr Galpin is conducting himself in a way that contravenes his responsibilities as a director of the defendant company and which shows a disregard of his responsibilities to the shareholders of the defendant company.

[22]     I stress that the view expressed in this paragraph is a provisional one only.  I have heard only one side of the matter.  Mr Galpin may be able to provide in the fullness of time a satisfactory explanation of the transactions which the plaintiffs have criticised in the Court papers which they have filed in support of the present application.

[23]     More generally, I note that the plaintiffs have already obtained injunctive relief against Mr Galpin in September of this year to prevent him from issuing further shares in the company which would have the effect of diluting the value of the shares.   The truth or otherwise of that allegation is not the point that is of relevance in this proceeding.  It does however show that the Court has on an earlier occasion had grounds for concern about the way in which Mr Galpin was carrying on the affairs of the company.

Result

[24]     For  all  of  those  reasons,  I  am  satisfied  that  the  order  sought  for  the appointment of an interim liquidator ought to be granted.  Jeffrey Philip Meltzer and Michael Lamacraft are appointed jointly and severally as interim liquidators of the defendant company.  They will have the powers and authorities set out in paragraph

1(b) of the without notice application for appointment of interim liquidator dated 3

November 2014.

[25]     It  is  important  that  this  judgment  and  the  without  notice  application, supporting affidavit of Mr Singh and the memorandum of submissions which were submitted to the Court in support of the application should be served promptly together with a copy of the order on the defendant company and each of the shareholders of the defendant.  Such service shall take place not later than 5 pm on

14 November 2014.

J.P. Doogue

Associate Judge