Morton-Jones v Rodney Management Limited (in liquidation)
[2017] NZHC 125
•13 February 2017
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2015-404-001982 [2017] NZHC 125
UNDER the Companies Act 1993 BETWEEN
ALAN STUART MORTON-JONES Applicant
AND
RODNEY MANAGEMENT LIMITED (IN LIQUIDATION)
First Respondent
AND
GRAND TETON INVESTMENTS LIMITED (IN LIQUIDATION) Second Respondent
AND
THE COMMISSIONER OF INLAND REVENUE
Third Respondent
Hearing: 11 August 2016 Appearances:
P Kennelly for Applicant
R Sena for First Respondent
A J Johnson for Second Respondent
C Van Der Merwe for Third RespondentJudgment:
13 February 2017
JUDGMENT OF ASSOCIATE JUDGE SARGISSON
This judgment was delivered by me on 13 February 2017 at 11.00 a.m. pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date....................................... Solicitors / Counsel:
Martelli McKegg, Auckland Kennelly Law, Auckland Inland Revenue, Auckland
MORTON-JONES v RODNEY MANAGEMENT LTD (IN LIQUIDATION) [2017] NZHC 125 [13 February 2017]
[1] Mr Morton-Jones has filed an application for an order under s 250 of the
Companies Act 1993 terminating the liquidation of Rodney Management Limited.1
Mr Morton-Jones, as a director and shareholder of Rodney, has the necessary status to make the application.2
[2] Under s 250(1) the Court has the discretion to make an order terminating the liquidation of a company any time after the appointment of a liquidator of a company “if it is satisfied that it is just and equitable to do so”.3
[3] On the fairest reading of the applicant’s arguments, there appear to be two primary grounds for the applicant’s contention that it would be just and equitable to terminate Rodney’s liquidation, which I will address in turn. The applicant contends that:
(a) the liquidation order is impugned by concerns as to procedural unfairness or abuse of process; and
(b) all Rodney’s creditors have been paid in full.
[4] At it currently stands, the only party that opposes the application is the second respondent, Grand Teton Investment Limited (in liquidation), whose liquidators are Craig Samson and David Bridgeman of PwC. Their claim, that Grand Teton is an unpaid creditor of Rodney, lies at the heart of this case.
[5] For reasons I will come to presently the applicant has failed to satisfy me that there are sufficient grounds for the exercise of the Court’s discretion to terminate a
liquidation order that was validly made.
1 This matter was adjourned part-heard on 19 May 2016 to allow the applicant time to file further evidence. The defended hearing was completed before me on 15 August 2016.
2 Companies Act 1993, s 250(2)(c).
3 Section 250(1).
[6] Rodney was placed into liquidation by the Court on 26 February 2016 on the application of the Commissioner of Inland Revenue.
[7] The Commissioner’s application was first called on 9 October 2015 and then again on 15 December, when it was adjourned to 26 February 2016 to allow Rodney the opportunity to discuss a payment proposal with Inland Revenue to pay its outstanding GST debt by instalments. The adjournment was made on the applicant’s request when he appeared by leave for Rodney on 15 December.
[8] Rodney did not make the agreed instalment for February, and when the Commissioner’s application came back before the Court on 26 February there was no appearance for Rodney. The Commissioner sought and obtained an order appointing the Official Assignee as liquidator.
The exercise of discretion – relevant principles
[9] The overarching question is whether the Court should exercise its discretion under s 250 to terminate the liquidation. This discretion is broad. In Foundation Securities (NZ) Ltd v Direct Labour Services Ltd (in liquidation) [2008] NZCCLR 1, Cooper J cautioned against limiting this discretion to a discrete
set of criteria.4
[10] The case law on s 250 has consistently held that the court should withhold the exercise of its jurisdiction to terminate a liquidation unless it is satisfied of all the following matters:5
(a) All the creditors have been paid in full or satisfactory provision has been made for them to be paid or they have consented; and
4 Foundation Securities (NZ) Ltd v Direct Labour Services Ltd (in liquidation) [2008] NZCCLR 1 [21].
5 Lynne Taylor and Grant Slevin The Law of Insolvency in New Zealand (Thomson Reuters, 2016)
at [30.1.1]. The first three considerations are laid out in Re Bell Block Lumber Ltd (in liq) (1992)
6 NZCLC 67,690. The consideration of public interest was added by Gallen J in Canterbury
Squid Company Ltd v Southwest Fishery Ltd HC Wanganui M31/93, 24 August 1993.
(b) The liquidator’s costs have been paid or secured; and
(c) The shareholders have given their consent or would be in no worse position than if the liquidation had proceeded to its conclusion.
(d) The termination of the liquidation is in the public interest.
[11] If the Court is not satisfied of these matters, the Court will not terminate a liquidation order unless the applicant can show there are exceptional circumstances which warrant the making of the order.6
Procedural unfairness
[12] I address first the applicant’s claims of procedural fairness in relation to the making of the liquidation order. The applicant has not attempted to fit these claims within the framework established by the s 250 case law, but I accept that there will be cases where procedural unfairness might well qualify as ‘exceptional circumstances’ warranting the exercise of the Court’s discretion. The question is whether the procedural concerns that the applicant relies upon make it more equitable and just for the Court to exercise its discretion in his favour.
[13] The applicant contends first that he was not aware that the liquidation application had been listed for 26 February 2016, the date when the liquidation order was made. In support, the applicant notes that he received no reply when he wrote to Inland Revenue before the hearing.
[14] A difficulty with the applicant’s contention is that he cannot have been unaware of the adjournment to 26 February. The minute I made on the Court file at the hearing on 15 December records that Mr Morton-Jones appeared on that day, when the Commissioner’s application was adjourned to 26 February 2016. The real position is that it was unwise of him not to appear in circumstances where he had not received a response from Inland Revenue to his letter, and he took the risk that an order would be made.
[15] Secondly, the applicant argues that it would be unjust to treat the non-payment of the February instalment as a breach of the company’s obligations to pay its GST debt to the Commissioner in accordance with the payment plan that had been agreed with the Commissioner following the court hearing on 15 December. This is because of the particular circumstances relating to the non-payment.
[16] It is not in dispute that Rodney agreed upon a payment arrangement with Inland Revenue for the payment of its GST debt by monthly instalments. The second of these was due before the hearing on 26 February, but had not been paid by this time.
[17] The applicant deposes that Rodney did not pay the instalment because he realised that Rodney was entitled to a GST refund which would off-set the second instalment and also off-set a substantial part of the debt. He wrote to Inland Revenue about this matter in February. After receiving no reply, the applicant says he assumed there was no issue with his assessment of the situation.
[18] The applicant’s assessment is problematic. Rodney’s obligation under the agreement was to pay each and every instalment. The agreement expressly states that no GST credits could be applied in payment of any of the outstanding instalments, unless those credits were verified (which is not the case here).
[19] Even if the applicant’s assessment of Rodney’s original GST liability had validity, using GST credits in lieu of paying down the company’s tax debt was not covered under the instalment agreement. Without a clear indication from Inland Revenue, it was not open to the applicant to assume that Rodney would not be held to its obligation to meet the entire instalment. However, the evidence for Inland Revenue clearly indicates there was a continuing obligation to pay the February instalment.
[20] This Court has found previously that even were a liquidation order to be “tainted by some error” this would not necessarily be decisive; the Court still has discretion to withhold a termination.7 In this case, however, the arguments raised by
the applicant clearly do not rise to the level of procedural unfairness. This is quite simply not a case where there is any argument that the company should never have been placed into liquidation. In sum, these two arguments do not make me more sympathetic towards exercising the Court’s discretion to terminate the liquidation. The liquidation order was validly made, and it is in that context that this case must be decided.
The creditors
[21] The applicant, on Rodney’s behalf, has now made proper arrangements with the Commissioner and the Official Assignee. Counsel for the Commissioner confirms that the Commissioner’s formal opposition to an order for termination has been withdrawn and that all outstanding and current tax debts have been paid. Counsel for the Official Assignee advises that the Assignee has agreed to abide by the Court’s decision on the issue of termination as the Assignee has not yet investigated the debt claimed by Grand Teton. (He advises that if an order is made to terminate the liquidation, the Official Assignee will treat the Court’s finding as conclusive; and if no such order is made, the Official Assignee will investigate the claim). Counsel also confirms that monies from the applicant have been placed in trust to cover the Assignee’s costs to date. The Official Assignee reports that there is an unpaid debt to Bank of New Zealand, but that BNZ has taken no steps to lodge a proof of debt or to appear in these proceedings.
[22] The only remaining issue then is the claim made on behalf of Grand Teton by its liquidators.
The Grand Teton issue
[23] The liquidators for Grand Teton continue to oppose the application on the grounds that Grand Teton is a creditor of Rodney (a related company). The liquidators have lodged a proof of claim with the Official Assignee. They contend that it is appropriate for the Official Assignee to complete her investigations on behalf of the remaining creditor before any termination order can be made.
[24] At issue is a transaction between Grand Teton and Rodney for the sale and purchase of Grand Teton’s property to Rodney, and the question of whether Rodney has satisfied the entire purchase price or still owes $265,000 to Grand Teton. The pertinent facts are as follows.
[25] The applicant and his wife are the sole directors and shareholders of both Grand Teton and Rodney. Grand Teton was a family company which owned a property at 51 Florence Avenue, Orewa. The property derived income from companies which Mr and Mrs Morton-Jones were directors and shareholders of.
[26] In late 2015, Grand Teton sold the property to Rodney for $1.275 million. Settlement took place on 11 December and the property was transferred to Rodney.
[27] On 15 December 2015, shortly after the transfer, Grand Teton was placed into liquidation.
[28] It is not in dispute that at the time of settlement there was a registered first mortgage on the title to the property which secured an advance of $900,000 from a finance company, R M Financing Limited. The balance owing on that advance was repaid from the sale proceeds.
[29] The applicant says that there was also an unregistered mortgage of the property that had to be cleared on settlement of the sale. He contends that this mortgage was in favour of himself and his wife for the purpose of securing monies that they had lent to Grand Teton, and that the mortgage was cleared on settlement. He accepts that money did not change hands for this purpose between Rodney and Grand Teton. But his essential contention is that Rodney was credited with payment of the balance of the purchase price, and that Grand Teton applied the credit in satisfaction of the secured debt it owed to the Morton-Jones in order to release the equitable mortgage.
[30] It is the existence of the equitable mortgage, and the debt it is said to relate to, that lies at the heart of this dispute. The liquidators say the balance of the
purchase price remains unpaid and that there was no such mortgage in favour of the applicant and his wife.
The dispute
[31] The liquidators for Grand Teton provide good reason for questioning the validity of the equitable mortgage. In particular, the evidence supporting the unregistered mortgage was created by the applicant himself and was only provided at the eleventh hour, as reply evidence in the current application.
[32] It is also somewhat remarkable (though possibly explicable) that North Harbour Law, who on the applicant’s evidence acted for him in relation to the unregistered mortgage, appears not to have opened a file for Grand Teton in relation to the unregistered mortgage. Equally surprising is that the reconciliation statement provided by North Harbour Law on the settlement of the sale does not refer to the unregistered mortgage. There is also no objective or independent evidence of any consideration advanced to Grand Teton in return for the mortgage; nor is there a satisfactory explanation for why the mortgage was not registered.
Resolution of the dispute
[33] I do not propose to weigh determinatively on the merits of this dispute. As Rodney contends that Grand Teton is not a creditor, it is for Rodney to demonstrate that. He accepts that the onus has shifted now that Rodney is in liquidation, and that it is no longer enough to show that there is an arguable dispute about the debt and whether it was secured by the claimed mortgage. It suffices, then, to say that Grand Teton’s position is plainly arguable. Without saying anything determinative about the merits of the case, it is readily apparent that there is a tenable argument that Grand Teton is a creditor, and the applicant has failed to discharge its evidentiary onus.
[34] These proceedings are not the right forum for adjudicating the dispute. It would be a different matter if Grand Teton’s claim was vexatious or palpably untenable. Then the Court could dismiss the claim and, all else being the same,
proceed with terminating the liquidation on the grounds that all (genuine) creditors had been paid in full. But this is not the case here.
Where should the dispute be resolved?
[35] In these circumstances, the key question is what the right context is for resolving the dispute. Should Rodney be established so it can be sued by Grand Teton or, in the alternative, is the issue better left for the Official Assignee in the liquidation context? For the reasons that follow, I think the latter is more appropriate in this instance.
[36] The considerations outlined in Re Bell Block Lumber Ltd (in liq) (1992) 6 NZCLC 67,690 have not been met. The applicant has not satisfied me that Rodney has paid off all of its debts to a party (Grand Teton) which may well be a genuine creditor. In the liquidation context, there are adequate mechanisms for a creditor to establish that its claim is genuine; and also for the interests of the directors and shareholders to challenge a decision to accept a claim which they do not consider genuine. In this case the Court should be slow to interfere with that process where there is a party (Grand Teton) with an apparently strong claim to being a genuine creditor.
[37] It may be too strong to say that re-establishing Rodney would clearly involve a breach of commercial morality.8 However, there are still important public interest factors to be considered. As the Court found in Bunting v Buchanan [2012] NZHC 766:9
It would send the wrong message to the commercial community to allow companies to be put into and then withdrawn from liquidation for the convenience of shareholders, regardless of what steps may be taken to address the interests of creditors.
[38] The point can be made more forcefully. The liquidation order was validly made and the Official Assignee has been granted the statutory role and has sufficient
authority to investigate these kinds of issues of disputed debt. There is no reason to
8 Bunting v Buchanan [2012] NZHC 766, above n 6, at [60]. Compare Foundation Securities (NZ) Ltd, above n 4.
9 Bunting, above n 6, at [60](a).
doubt the Official Assignee would not carry out its role with the required diligence, objectivity and independence. For the Court to re-establish Rodney only for it to be sued over one disputed debt would absolve the Official Assignee of the statutory responsibilities placed on the Official Assignee’s office. It would turn inside-out the statutory regime which deals with resolving disputes of debt for companies in liquidation. It is in the public interest that the integrity of this regime be upheld.
[39] For these reasons, I consider it appropriate to leave the substance of the dispute over Grand Teton for the Official Assignee, following the formal processes laid out in the statutory regime. If the applicant is unhappy with the dispute’s resolution, there are formal processes for challenging it under s 284 of the Companies Act 1993. If the dispute is resolved in the applicant’s favour, the applicant will have the opportunity again to be taken out of liquidation.
[40] As precedent, the applicant relies on Tai Ping Trading Co Ltd v Regina Enterprises Ltd HC Auckland CIV-2009-404-7754, 29 March 2010.10 This is another case where all the liquidators’ costs had been paid and there remained only one disputed debt. The Court ordered the termination of the liquidation. This can be distinguished, however, on the grounds that in Tai Ping Trading Co Ltd there was an arrangement that the amount in dispute be held in trust pending the outcome of legal proceedings to determine matters associated with the disputed debt.11 No such arrangement is present in this case. As there is no proposal to provide security for the claimed debt, this case does not persuade me to change my reasoning outlined above.
Result
[41] The application for an order terminating the liquidation of Rodney
Management Limited is declined.
10 Tai Ping Trading Co Ltd v Regina Enterprises Ltd HC Auckland CIV-2009-404-7754, 29 March
2010.
11 At [12]-[13].
[42] As costs follow the event, the second respondent is entitled to costs. Costs are awarded against the applicant on a 2B basis plus disbursements as fixed by the
Registrar.
Associate Judge Sargisson
1