O'Keefe v Mairangi Properties Limited

[2013] NZHC 411

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2011-404-7388 [2013] NZHC 411

IN THE MATTER OF     the Companies Act 1993

BETWEEN  CAROL MARY O'KEEFE AND JOHN FRANCIS O'KEEFE

Plaintiffs

ANDMAIRANGI PROPERTIES LIMITED Defendant

Hearing:         23 October 2012

Counsel:         G Thwaite for Plaintiffs

M Fisher and L Hui for Defendant

Judgment:      5 March 2013

RESERVED JUDGMENT OF ASSOCIATE JUDGE SARGISSON (Restraint/stay application)

Solicitors:

Gregory J Thwaite, P O Box 6239, Wellesley Street, Auckland

Castle/Brown, P O Box 9670, Newmarket, Auckland

O'KEEFE V MAIRANGI PROPERTIES LIMITED HC AK CIV-2011-404-7388 [5 March 2013]

Introduction

[1]      In this proceeding Mrs Carol O’Keefe and her husband John O’Keefe, seek an order placing the defendant, Mairangi Properties Limited, into liquidation.  They claim they are prospective creditors of Mairangi under s 241(2) of the Companies Act 1993 and that Mairangi should be wound up to enable the liquidator to take such steps as are necessary to safeguard their interests and those of others whom they say may be prospective creditors in the same position as themselves.

[2]      For their status to bring the liquidation application as prospective creditors the O’Keefes rely on a claim that they have brought in the District Court in connection with a buy-back transaction in which they parted with the ownership of their house.  The claim, made against Mairangi and its directors, a Mr Davies and a Mr Shortt, is allocated a date for a defended trial in the District Court in April. Broadly speaking the O’Keefes claim alleges that the buy-back transaction is “bad” for want of disclosure and because of oppression, and that they should be entitled to the reopening of the buy-back  agreement, plus the return of their house  and/or

damages.1 The O’Keefes contend the claim is a bona fide and tenable claim.

[3]      The O’Keefes argue the necessary statutory grounds exist for a liquidation order under s 241(4). They base their application on the grounds set out in subsection (4)(a), (b) and (d) - insolvency, persistent and serious breaches of the Act, and the just and equitable ground.2  In support of their  primary ground - the insolvency ground, they have alleged that Mairangi has a substantial debt to Westpac that it cannot repay. The O’Keefes have also applied for the appointment of an interim

liquidator.

[4]      Mairangi opposes the orders that the O’Keefes seek.  Its position is that the

O’Keefes are not its prospective creditors and have no status to bring an application for its liquidation, and that in any event that they have not established any statutory

1 In their claim the O’Keefes seek declaratory relief, damages and an order directing the re-transfer of the property. It relies on various causes of action alleging breaches of contract, breaches of obligations under the statutory regime regulating buy-back agreements, breaches of the Companies Act 1993 and conspiracy.

2 In relation to the insolvency ground in subsection 241(4)(a), the O’Keefes are required to apply for

leave under s 288(5) to apply to appoint a liquidator, and they do so.

ground for liquidation, nor shown any basis to suppose that any material purpose would be achieved by its liquidation.

[5]      Mairangi has also made an application for orders to restrain advertising and stay the liquidation proceedings under High Court Rule 31.11.   Such orders were made by consent on an interim basis when the liquidation application first came before the Court and continue in effect pending further order.

[6]      Putting aside momentarily the application for the appointment of an interim liquidator, which was given little attention in counsel’s submissions, the issues that counsel have raised for determination are essentially threefold:

a)        Whether  the  plaintiffs  have  established  their  status  to  bring  the liquidation proceeding as prospective creditors?

b)Whether the plaintiffs have also established a statutory ground or grounds for an order placing the defendant into liquidation?

c)        If  any  such  ground  is  established,  whether  there  are  persuasive grounds why the Court should or should not exercise its discretion to make such order?

Background

[7]      Mairangi is the beneficial owner of the residential property at 70 Hillside Road, Mt Wellington. The property is registered in the name of Mr Shortt.   He acknowledges  that  he  acquired  the  property  and  holds  it  as  a  bare  trustee  for Mairangi.

[8]      The Hillside property has been the O’Keefes’ home for many years.  They

relinquished ownership of it in 2002, when it was acquired from them for $120,000 by Mr Davies, who immediately transferred it to Mr Shortt.3   Mr Davies acquired the

3 The transfer to Mr Davies was pursuant to an agreement dated 27 March 2002.  Though the named

purchaser is “the Winslow Trust or Nominee” the actual transferee was Mr Davies.

property on Mairangi’s behalf with the intention of Mairangi’s selling it back to the O’Keefes for $160,000 by long term agreement for sale and purchase.  It is common ground that the O’Keefes’ sale to Mr Davies occurred because of their financial difficulties and was subject to their retaining the right of occupation pending their repurchase under the long term agreement.

[9]      As was the case with the O’Keefes’ agreement to sell the property, the long term agreement was entered into on 27 March 2002.  It names Mairangi as vendor and provides for payment of a $2,000 deposit, the balance of the purchase price of

$158,000 by 1300 instalments of $312.27 payable weekly over a term of 25 years, and interest at the rate of 9.26 per cent per annum. It also provides that:

a)        There  is  to  be  a  weekly  contribution  of  $31.92  for  rates  and insurance.4

b)Default interest is payable in the event of delay in the payment of instalments.

c)       Mairangi  has  a  right  to  terminate  the  agreement,  forfeiting  all instalments made, in the event that any instalment is twenty-one days in arrears and the O’Keefes fail to remedy the default within fourteen days after written notice is given to them.5

d)The O’Keefes have a right of early settlement, subject to conditions. (Such conditions have the effect of transferring any liabilities to them that Mairangi may have on early repayment of its own mortgage against the property).

e)       Mairangi has the right to assign the agreement and to mortgage the property as security for borrowings that do not exceed the amount of

4  Mr Davies deposes that the instalment amount was $344.19 made up of principal and interest of

$312.27 plus a contribution to rates and insurance of $31.92, the breakdown being $23.08 for rates and $8.85 for insurance.

5 Clause 26.

the value of the property as determined by a registered valuer less the

payments made by the O’Keefes “on account of the purchase price”.6

[10] The parties do not dispute that these arrangements amount to a ‘buy-back’ transaction and that the transaction was a credit contract under the now repealed Credit Contracts Act 1981. Pursuant to the transitional provisions of the Credit Contracts and Consumer Finance Act 2003 the buy-back transaction is subject to the disclosure requirements of the 1981 Act but is otherwise subject to the 2003 Act.7

[11]     The O’Keefes contend that the only disclosure document they received was a document entitled “DISCLOSURE REQUIREMENTS” which set out the following:

1.FULL NAME AND FULL ADDRESS OF EACH CREDITOR Mairangi Properties Ltd

P O Box 47735

Ponsonby

2.        AMOUNT OF CREDIT:  $158,000.00

3.        TOTAL COST OF CREDIT excluding Interest:           $NIL

4.        FINANCIAL RATE: 9.26% PER ANNUM

In calculating Items 3 and 4 above the Creditor has assumed that the Debtor will not exercise any right or option of early repayment of the whole of the amount of credit or any part thereof.

5.        PAYMENTS REQUIRED

The amounts, number and frequency of payments in the due dates thereof (as ascertained at the date of the preparation on of this Disclosure):

See attached schedules

6.The place where payments are to be made: C/- Parker Murray & Co

Chartered Accountants

81 Remuera Road, Remuera

Auckland

7.        The terms of the contract not disclosed in items 1 to 5 of this Disclosure

(other than terms implied by law) are the terms contained in the attached

6 Clauses 29 and 30.

7 Credit Contracts and Consumer Finance Act 2003, ss 141-143.  Counsel for Mairangi submits that there are no applicable disclosure requirements. I reject the submission.

Agreement.    The  payments  disclosed  in  item  5  of  this  Disclosure  may change during the term as a result of review of the interest rate payable and in the event of such review the payments will be recalculated.

[12]     The O’Keefes acknowledge that they consulted a lawyer for the purpose of advising them before they entered in the buy-back transaction.

[13]     On 23 April 2002, shortly after the O’Keefes signed the long term agreement, Mr Davies advised them that the “banks are still playing around with the interest rates and we may have to make adjustment before we lodge the Auto payment with your bank”. Subsequently, Mr Davies advised that the amount of the weekly instalments was increased from $344.19 (inclusive of the required contribution to rates and insurance) to $350 per week.

[14]     On 8 May 2002, both transfers to Mr Davies and Mr Shortt were registered and the O’Keefes’ mortgage was discharged. A new mortgage was given by Mr Shortt against the property in favour of Bank of New Zealand.  There is no dispute that the amount this mortgage secured never exceeded the permissible limit under the long term agreement.

Arrears and termination

[15]     The O’Keefes’ weekly payments of $350 began in early May 2002 and were regular until August 2003.  Mairangi says thereafter payments became irregular, and that  the  O’Keefes  were  warned  on  a  number  of  occasions  that  they  risked termination of the long-term agreement and their right to buy-back.

[16]     On  12  December  2004  Mr  Davies  threatened  to  cancel  the  long  term agreement if arrears from 20 September 2004 were not paid. He also threatened to back date default interest “to the beginning of the contract”. On 16 December he advised that there were arrears of $4,200 and indicated that if the O’Keefes paid

$3,500 in a lump sum Mairangi would “smooth out” payment of the balance.

[17]     Mairangi contends that by September 2007 the O’Keefes were seriously in default and that it cancelled the long term agreement by letter of 19 September 2007 pursuant to its right of termination, and so forfeited the instalments that the O’Keefes

had made.  The letter of cancellation advises of instalments amounting to $82,250 and arrears of $85,230.  As well as giving notice of termination, the letter invites the O’Keefes to enter into a rental agreement for the Hillside property for $275 a week as a means to assure them of continuing occupation. Mairangi contends that this was consistent with a standard tenancy agreement that it says the parties had signed as a “back-up” to the long-term agreement. It says that though some rent has since been paid, payments have been inadequate and irregular.

[18]     Bank of New Zealand’s mortgage was discharged in April 2008. Mr Shortt deposes that at that time the amount secured against the Hillside property stood at just under $82,000. Mr Shortt then borrowed funds from Westpac of around $2.3 million against the property and other properties that he held as Mairangi’s trustee. Mairangi  contends  that  from  the  inception  of  the  Westpac  mortgage,  such borrowings were always for and on behalf of Mairangi for its property development at Mangawhai and that Mairangi did not exceed the permissible mortgage limits set out in the long term agreement as the buy-back arrangement had been validly terminated and was of no effect.

[19]     There is some dispute about Mairangi’s contentions. The O’Keefes claim that the mortgage to Westpac was given without their knowledge or authority and in breach of the long term agreement which they do not accept was validly cancelled. They say they became aware of the Westpac mortgage when they were contacted by Westpac’s agent in 2011 about the possibility of a mortgagee sale. They also say they discovered at this time that Mairangi was involved in some thirty buy-back transactions.  They claim that all of the properties were put at risk because Mr Shortt was  in  financial  difficulty.    Though  Mairangi  does  not  concede  all  of  these allegations it is common ground that Westpac began mortgagee sale processes, and Mairangi and its directors entered into negotiations with Westpac in an endeavour to avert mortgagee sales.

[20]     It is Mairangi’s position that despite such disputes the O’Keefes could never be its creditors. Mr Davies deposes that as at December 2011 the O’Keefes should have paid $172,098.23 in instalments “assuming no default”.   He says they paid instalments of approximately $155,750. He contends that as there were defaults the

amount of shortfall was in fact greater than the difference of $16,348 but even taking that sum and applying the normal interest rate, there would be an additional sum for arrears of interest of $29,271 making a total shortfall of $45,618.

[21]     The O’Keefes’ position is that in fact they paid all that they were required to pay if not always strictly on time. They say from July 2003 Mairangi consistently misrepresented the state of their account and exaggerated their liability and that they had difficulty understanding what Mairangi’s position was. They acknowledge that they were behind in payments in 2004 but point out that they paid a ‘catch-up’ payment of $3,500 and had a ‘smooth out’ agreement as agreed by Mairangi.  They say that they have since then “always made payments down to the present day”.  The O’Keefes claim that if they were in arrears at the time Mairangi decided to cancel the long term agreement the arrears would have been very small at that time.   Mrs O’Keefe says that if they had been told the correct position they might have had a chance of dealing with any arrears.

[22]     Counsel for the O’Keefes points to various correspondence in support which includes statements from Mr Davies that in October 2003 the arrears are $5,346, on

1 July 2004 the arrears are $12,894, and on 10 July 2004 they are $24,458.  Counsel

also points to a letter that the O’Keefes’ budgeting adviser sent to Mairangi on the 23

July 2004 advising that they had made all payments to date.

[23]     The O’Keefes also contend that Mairangi’s conduct from the inception of the buy-back arrangements fell short of what they could reasonably expect in respect of disclosure. They contend that they were not  given proper disclosure when they entered into the long term agreement or when the amount of the weekly instalment was changed.  They say that they did not receive personal notice of the cancellation in 2007 as required by clause 26 of the long-term agreement. They argue that Mr Davies purported to cancel in 2004 but Mairangi gave no disclosure on its purported reinstatement.

[24]     Over  the  period  July  2007  to  December  2009  the  O’Keefes  say  they

attempted to negotiate a solution with Mairangi and pressed their view that there had

been no valid cancellation long term agreement.  Their attempts fell on stony ground and they commenced their District Court proceeding on 9 December 2009.

[25]     The O’Keefes commenced their liquidation application in this Court on the

17 November 2011. They have also placed a caveat on the title to Hillside property.

Adjournment

[26]     On 26 April 2012 I adjourned the O’Keefes’ liquidation application until 8

June 2012.   Relevantly, the adjournment was made on the O’Keefes’ application. The reason they gave for seeking the adjournment was that Westpac had agreed to allow Mairangi the opportunity to conduct a managed sell-down of eight of its properties.  It was the O’Keefes’ position (which Mairangi did not demur from) that:

a)     Though  the  sale  of  the  properties  would  not  enable  Mairangi  to completely repay the debt to Westpac, it would enable Mairangi to secure funding to meet the shortfall and to restructure and regularise its debt position.

b)A negotiated outcome to this proceeding was possible if the Westpac debt was resolved in this way.

c)     Failing a negotiated outcome their claim in the District Court could proceed in the meantime and their claim to be creditors could be determined by the outcome of that proceeding.

[27]     The position taken by the O’Keefes recognised implicitly, if not expressly, that there was a realistic prospect that Mairangi’s solvency would be put beyond any possible challenge by the restructuring and that there was little or nothing to be gained in the meantime by liquidating Mairangi.

[28]     Though counsel for Mairangi initially opposed the adjournment and sought to have the liquidation application struck out, she advised that upon reflection, she concurred with the application for an adjournment.

[29]     Counsel for both sides requested that the interim order restraining advertising and staying the proceeding continue.    Counsel subsequently filed a joint memorandum on 9 May 2012 stating that “it would secure the just, speedy and expeditious  resolution  of  the  proceeding  if  [the  hearing]  were  to  be  called  for mention on the first available date after 6 July 2012”.

[30]     In a minute dated 20 July 2012, I adjourned the applications by consent until

23  October  2012  to  allow  the  parties  further  time  for  negotiations  and  to  file updating evidence in the event that a negotiated outcome remained elusive.

[31]     By 25 October 2012 Mairangi had completed the property sales. It repaid the bulk of the Westpac debt from the proceeds and the shortfall from funding that it secured from another lender.   However, efforts to resolve the dispute between the parties over the buy-back  arrangement  and  to reach  a negotiated outcome  have failed.

[32]     In these circumstances the O’Keefes now seek an order for liquidation, or alternatively an order appointing an interim liquidator pending advertising of their application and a consequential order dismissing the company’s restraint and stay application.

Legal principles

Companies Act 1993

[33]     A prospective creditor may apply to the Court to appoint a liquidator under s

241(2)(c)(iv) of the Companies Act 1993.   Section 241 relevantly provides:

241     Commencement of liquidation

(1)      A company  may  be  put  into  liquidation  by  the  appointment  as liquidator of a named person or of an Official Assignee for a named district.

(2)      A liquidator may be appointed by—

...

(c)      the Court, on the application of—

...

(iv)     a creditor (including any contingent or prospective creditor); or

...

(4)       The Court may appoint a liquidator if it is satisfied that—

(a)      The company is unable to pay its debts; or

(b)      The company or the board has persistently or seriously failed to comply with this Act; or

(c)      The company does not comply with section 10 of this Act; or

(d)      It  is  just  and  equitable  that  the  company  be  put  into liquidation.

[34]     A prospective creditor is a person in respect “of whom there is a real prospect of being a creditor.”8   Venning J discussed the meaning of a prospective creditor in Island View Estates Ltd (in liq) v Mainline Contracting Ltd:9

[11]      Prospective creditors are those who, at the time of the hearing of the liquidation proceedings, are creditors of debts which will certainly become due in the future: Stonegate Securities v Gregory [1980] 1 All ER 241. But the category of prospective creditors also includes a person in respect of whom there is a real prospect of their becoming a creditor of the company in the future, in other words a true prospective creditor: Re Austral Group Investments Management Ltd [1993] 2 NZLR 692. A person with a bona fide unliquidated claim against the company will be such a prospective creditor. Whether they are a creditor or not, and in what sum, will be dependent on either admission by the company or judgment.

[35]     Section 288(5) requires prospective creditors to obtain leave of the Court if they wish to apply to put a company into liquidation for being unable to pay its debts under s 241(4)(a).   Such leave will only be granted if the Court is satisfied that a prima facie case has been made that the company is unable to pay its debts:

288    Evidence and other matters

...

(5)     An application to the Court for an order that a company be put into liquidation on the ground that it is unable to pay its debts may be made by a contingent or prospective creditor only with the leave of the Court; and the Court may give such leave, with or without conditions, only if it is satisfied that a prima facie

8  McHugh v Austral Investment Group Ltd [1993] 2 NZLR 692.

9   HC Auckland CIV-2008-404-3840, 5 February 2010.

case has been made out that the company is unable to pay its debts.10

Discussion

[36]     For the reasons I come to presently I am satisfied that on the evidence before me the O’Keefes have established their status to bring the proceeding as prospective creditors but that it remains for them to establish a statutory ground for an order placing Mairangi into liquidation and to demonstrate persuasive reasons why the discretion to do make such order should be exercised.  As they have not done so, the application for liquidation must fail.

[37]     I begin with the O’Keefes’ status.

Status to bring the proceeding - are the O’Keefes prospective creditors?

[38]     The onus is on the O’Keefes to demonstrate that they are persons who have a real prospect of becoming creditors. Their prospects of becoming creditors turn on their having a real prospect of success in their District Court proceeding.

[39]     If the buy-back transaction has not been unlawfully terminated (whether for non disclosure or oppression) the following outcomes are possible:

a)        The O’Keefes would arguably be in credit for instalments paid, and it

would be for Mairangi to establish a case for relief;11 or

b)The Court will have the power to award damages to the O’Keefes by reopening the buy-back arrangement. The Court may also order that the Hillside property be transferred back.

[40]     The first turns on the finding of non disclosure and the second on the finding of oppression.

10    Section 288(5) applies only to subsection s 241(4)(a). Prospective creditors do not need to obtain leave of the Court if they apply to put a company into liquidation under subsections 241(4)(b) and (d).

11    Credit Contracts Act 1981, s 31-32, Credit Contracts and Consumer Finance Act 2003, s 143(1).

Oppression

[41]     Though   counsel   for   the   O’Keefes   focused   primarily   on   disclosure shortcomings,  he  made  it  clear  that  their  case  is  based  in  the  alternative  on oppression. I turn first to oppression.

[42]     I am satisfied on the evidence presently before the Court that there is an arguable case for oppression.

[43]     Oppression is defined by s 118 as “oppressive, harsh, unjustly burdensome, unconscionable, or in breach of reasonable standards of commercial practice.”12  It includes oppressive behaviour in the enforcement of the contract.

[44]     The leading definition of oppression is from Italia Holding (Properties) Ltd v

Lonsdale Holdings (Auckland) Ltd: 13

...in my view, something more than an inquiry into whether a particular contract is advantageous or disadvantageous from the point of view of the party applying must certainly be intended. The word "oppressive" clearly connotes that some real detriment or hardship is involved. The word "harsh" is indicative of something of the same nature. The phrase "unjustly burdensome" clearly shows, for example, that the fact that the performance of the contract is difficult for the party applying is insufficient. Injustice must be shown to exist as well. The word "unconscionable" is of course the same word as was used in the Moneylenders Act and there are numerous decisions showing that that word was interpreted as requiring something more than an inquiry into whether a contract was fair or unfair to one party or the other. The final phrase, "in contravention of reasonable standards of commercial practice" is admittedly a wide ranging concept and embraces something that was not included in the previous legislation. It surely in my view,   however,   requires   something   more   than   a   simply   uninformed conclusion as to what is fair or unfair from the standpoint of commercial dealings. Except in the plainest of cases I would consider that some evidence as to what the standards of commercial practice are relative to the particular type of contract under consideration would be necessary before the Court could conclude that those standards were contravened in the particular case. It would be difficult to argue in my view that an applicant under the Credit Contracts Act could succeed in having a credit contract set aside by setting up facts which would have been insufficient to enable a person in an unequal

12    Credit Contract and Consumer Finance Act 2003, s 118.

13    Italia Holdings (Properties) Ltd v Lonsdale Holdings (Auckland) Ltd [1984] 2 NZLR 1 per Vautier

J at 15-16. This definition remains apposite under the new Act as per Bartle v GE Custodians

[2010] 1 NZLR 802 (SC).

bargaining situation to have a contract entered into by him set aside on equitable grounds.

[45]     If a contract is exercised in an oppressive way it may be challenged even where the contract itself is not oppressive.14

[46]     On the face of the evidence it appears that:

a)        There are discrepancies with the arrears claimed in letters from Mr

Davies to the O’Keefes.15

b)Such arrears seemingly do not align with the statement of accounts produced by the O’Keefes that appears to be Mairangi’s actual record.16

c)       Furthermore Mr Davies’ letter indicating when default interest was imposed  is  not  reflective  of  the  accounts.  The  letter  advises  that default interest would be imposed from 1 July 2004, yet the accounts suggest it was imposed from 10 June 2002.

d)The  statement  of  account  raises  other  unanswered  questions.  It suggests that the interest was compounded, as the unpaid interest was

added  to  the principal  to  which  future interest  was  then charged,

14    Robinson v United Building Soc HC Dunedin CP35/87, 7 June 1987; Shotter v Westpac Banking

Corp [1988] 2 NZLR 316.

15    Some claims for arrears are set out in the following table.

Date  Arrears Claimed by Letter     Arrears on Accounts

31st October 2003  $5,346*  $2,831

1st July 2004  $12,894**  $15,677

10th July 2004  $24,485  $16,213

16th December 2004  $4,200***  $24,328

19th September 2007  $85,230  $63,893

* The letter advised that default interest was not being charged. The accounts show that default interest was charged as of 10 June 2002.

**The letter advised that default interest was starting.
***It was advised that they were six weeks in arrears (a balance of $4,200) and that if they made a payment of

$3,500, the creditor would ‘smooth out future payments to catch up’. No reference was made to further arrears.

16    See above table.

though the contract does not explicitly provide for it. Compounding interest charges can be considered to be oppressive in such circumstances.17

e)       Mr Davies’ threat in 2004 to be entitled to backdate default interest to the ‘beginning of the contract’ seems unsupported by any relevant contractual right and is arguably at odds with Mairangi’s own case that payments were regular until August 2003.

[47]     Mairangi has provided little by way of evidence or submission to explain the apparent discrepancies in the advised arrears or the way it approached the issue of interest. These matters call for explanation. Why, for instance, were arrears said to be $12,894 on 1 July 2004 and almost double that amount a week later? In these circumstances  I  cannot  rule  out  the  possibility  that  Mairangi’s  advice  to  the O’Keefes was wrong or seriously confusing or misleading and that it may therefore have disadvantaged the O’Keefes as Mrs O’Keefe claims. Arguably such advice is in contravention of reasonable standards of practice, and thus is oppressive.

Disclosure

[48]     Counsel for the O’Keefes argues that there were defects with both initial disclosure and modification disclosure. It is enough to note with respect to the latter that there was no demonstration of a new contract.

[49]     It is also unnecessary to consider issues about initial disclosure in detail, given the findings I have made on the issue of oppression. It is sufficient to note that counsel raised three issues and to comment briefly on those issues. The three issues are:

a)        A lack of a proper address.

b)        The place and dates for payment;

17    Associated Telerad Servicing Co Ltd v NZI Finance Ltd [1984] 2 NZLR 19 (CA); Greenhithe

Cove Subdivision Ltd v Westpac Banking Corp Ltd  HC Auckland M1971/90, 7 December 1992.

c)        Calculation and disclosure of the total cost of credit.

[50]     The first issue relies on the disclosure of a PO Box rather than a physical address. This argument appears to lack any real merit.

[51]     The second issue refers to a lack of disclosure in regard to both dates and place of payment. If there is a shred of substance to this argument it seems negated by the O’Keefes’ own claim that regular weekly payments were made via their budgeting service to Mairangi.

[52]     Turning to the last issue concerning the total cost of credit,18  at first glance the disclosure document in evidence raises some doubts about the adequacy of the disclosure. I am troubled by the “nil” cost of credit that the document records. It looks odd when compared with the statement of account that has been produced in evidence, and I question how it could be right when it does not refer to one obvious component- that being rates and insurance. Water rates may be another component that should be mentioned.  However both sides paid scant attention to the complex statutory provisions that are relevant to these issues and I decline to make any findings on it.

Is there a complete answer?

[53]     Counsel for Mairangi submits that whatever the position as to oppression, non-disclosure and the lawfulness of Mairangi’s termination of the agreement, the O’Keefes could not be creditors. Even assuming they succeed on these issues he submits that Mairangi would almost certainly have a set-off for instalments and additional  interest  owed  under  the long  term  agreement  that  would  exceed  any damages that could be awarded.

[54]     This may turn out to be the case but the submission is conclusory.  It rather begs the question as to what relief the District Court would order if liability is established.   That  will  involve judicial  discretion  and  will  turn  substantially on

disputed factual questions that have yet to be determined.

18    Credit Contracts and Consumer Finance Act 2003, s 5.

[55]     The  submission  is  not  therefore  a  complete  answer.  I  am  satisfied  the O’Keefes are persons of whom there is a real prospect of becoming creditors. However, I am not satisfied that the O’Keefes have established statutory grounds for the appointment of a liquidator.  I now turn then to my reasons for this finding.

Statutory grounds for the appointment of a liquidator?

[56]     The  O’Keefes  bear  the  onus  of  proving  a  statutory  ground  for  the appointment of a liquidator.

[57]     Counsel for the O’Keefes submits that the failed attempts to negotiate a solution over many months led to their commencing their action in the District Court and that the liquidation application “was only filed when the defendant’s financial problems became known.”

[58]     The  financial  problems  concerned  Mairangi’s  difficulty  in  servicing  the Westpac  advance  that  Mr  Shortt  had  taken  out  on  its  behalf,  but  as  counsel recognises, Mairangi has now satisfied its obligations to Westpac. Nevertheless, he argues Mairangi continues to be indebted for a sum in the region of $220,000 to the assignee of the unpaid balance of the Westpac debt and that it cannot be assumed Mairangi  is  solvent.  Counsel  also  says  that  given  the  action  and  inaction  of Mairangi’s directors, there is a fair argument that Mairangi should be liquidated to protect the rights of the O’Keefes and up to 20 other parties involved in buy-back transactions. He argues that grounds for liquidation are made out, if not on the insolvency ground, then on the other grounds.

First ground

[59]     I deal first with the insolvency ground under section 241(4)(a) – that the company is unable to pay its debts. This ground relies on the debt to Westpac. Westpac has been fully repaid from the proceeds of Mairangi’s property sales and from funds advanced by a third party upon the assignment of its interest in the balance of the debt.   The third party says that there are no outstanding payments. There  is  no  evidence  that  contradicts  this  contention.  The  fact  that  there  is  a

remaining debt of some $200,000 or more to the third party as a result of the assignment and refinancing does not equate to a state of insolvency.

[60]     Taking the evidence, such as it is, the O’Keefes have not demonstrated a prima facie case that Mairangi is unable to pay its debts to Westpac or the third party assignee.

[61]     The result is twofold. I am satisfied that there is no case for granting leave under s 228(5) and that the Court is not empowered to make an order liquidating Mairangi on the insolvency ground.

Second ground

[62]     The O’Keefes’ second ground relies on s 241(4)(b) - that Mairangi or its directors  have  persistently  or  seriously  breached  the  Companies  Act.  Counsel submits such breaches occurred as Mairangi’s directors:

a)      Removed the Hillside property from the company’s control by transferring it to Mr Shortt to “enrich him” and to enable him to borrow against it from Westpac;

b)Allowed Mr Shortt to encumber the property with the Westpac loan in breach of the limits allowed under the long term agreement; and

c)        Allowed him to fund the loan from their instalments.

[63]     Counsel for the O’Keefes submits that this arrangement amounted to ongoing and  serious  breaches  of  Mairangi’s  and  the directors’ obligations  under specific sections of the Companies Act. He argues it points to a lack of good faith, reckless conduct and negligence under sections 131,133, and 135 to 137, designed to thwart any claim the O’Keefes might bring against Mairangi.

[64]     I am not persuaded on the evidence that the factual basis for serious and persistent breaches of the Act is made out.  Mairangi’s evidence is that Mr Shortt’s interest in the Hillside property is as bare trustee. Mr Shortt explained that the

Westpac loan was for Mairangi’s benefit to further its development venture. When ultimately properties had to be sold, the objective was to safeguard the future of the company and preserve its asset base. He points out, to further this point, that the directors have invested a further $300,000 in the company. Viewed in this light, I accept  it  is  arguable  that  the  directors’ actions  were  designed  not  to  strip  the company of its assets or to put the Hillside property beyond reach, but to secure its financial viability. At the same time, there is no dispute that Mr Shortt did encumber the property in excess of the limits allowed by the long term agreement. That does not  necessarily  mean  however  that  Mairangi  was  in  breach  of  the  long  term agreement and I am unwilling to make that finding. Such a finding would be conclusory. Whether or not Mairangi was in breach begs a number of questions including whether the agreement had been validly cancelled and was no longer operative. This is a matter of dispute that cannot be resolved on the evidence before me. It is a matter for determination in the District Court proceeding.

[65]     Taking into account all of the above, I am not satisfied that I can make determinative findings on the nature and purpose of the asset holding arrangement as the  O’Keefes  seek.  The  result  is  that  they  have  not  demonstrated  that  the arrangement  involves  persistent  or  serious  breaches  of  the  Companies  Act  as claimed.

[66]     I am satisfied therefore that the Court is not empowered to order liquidation on this ground.

Third ground

[67]     The plaintiffs’ third ground is that it is just and equitable to place Mairangi into liquidation.

[68]     Counsel for the O’Keefes’ submissions are broadly twofold. First, he says their interest or objective is to ensure preservation of Mairangi’s assets and to safeguard the possibility that Mairangi can pay damages or return their home to them if  their  claim  in  the  District  Court  is  successful.  Counsel  submits  that  the appointment of a liquidator would be an appropriate way of achieving that objective

which  he  adds  may  also  be  shared  by  others.  It  would  mean  “an  orderly administration of defendant can be achieved with due regard for the plaintiffs’ contractual  rights,  the  rights  of  other  parties  to  buy-back  agreements  and  the liabilities of people involved in defendant”. There is, he contends, also the added advantage that the liquidators would have the option of assessing the O’Keefes’

claim or letting it go to court.19

[69]     Secondly, counsel submits that there is good reason to conclude that there is a need for intervention to secure Mairangi’s assets.  Essentially, the O’Keefes’ factual basis for this submission is the same as the basis for the argument under s 241(4)(b). Counsel submits that this is a case where “the assets are held outside the company allegedly in trust for the company” and that “it has ceased to function as a bona fide entity, and the corporate shield protects no substance.”

[70]     I  accept  that  a  prospective  creditor  with  claims  for  damages  (whether liquidated or un-liquidated) could have a genuine interest in liquidation on the basis that a company is dissipating its assets, or that there is other good reason including reasons of justice and equity.20

[71]     However as I have found, the factual concerns that the O’Keefes rely on are placed in question by Mairangi’s evidence (that the Hillside property is held in trust for  Mairangi,  that  Mairangi  is  no  longer  in  debt  to  Westpac,  and  Mairangi’s remaining debt has been refinanced). Relevantly, even assuming that the long term agreement has not been validly cancelled and that it remains on foot, the agreement allows limited borrowing and there is no evidence to suggest the allowable limit is presently exceeded.   It is by no means clear therefore that the assets are being dissipated. I am not persuaded that the O’Keefes have established that Mairangi is attempting to put beyond reach the Hillside property or other assets that would mean it was unable to satisfy an order for the return of the property or to meet an order for damages  should  they  succeed  in  obtaining  such  order  in  their  District  Court

proceeding.

19    Counsel for the O’Keefes submit that their position is that they may repurchase the home for

$4,250 having paid principal of $155,750.

20    Re Austral Group Investment Management Ltd 2 NZLR 692, per Holland J.

[72]     As  against  O’Keefes’  contentions,  an  order  for  liquidation  on  just  and

equitable grounds should be seen as something of a last resort.21

[73]     It is by no means clear what other good reasons there might be for liquidating the company at this stage or that it is necessary.

[74]     Other factors that weigh against liquidation include:

a)        There is no suggestion any creditor or other person desires liquidation.

The plaintiffs claim there are 29 other owners possibly in the same position as themselves but there is no evidence from them.

b)The District Court proceeding is due to be heard shortly.   In the meantime, the O’Keefes have caveated the title, which Mairangi has not challenged.

c)       The serious effect of liquidation on the company that is trading which has yet to be proved liable on the O’Keefes’ claim.

[75]     I am also concerned that counsel gave little or no attention to the possibility of the O’Keefes seeking injunctive relief to prevent dissipation of assets pending the outcome of the District Court case. That may be an application that more appropriately meets the O’Keefes’ underlying concern.

[76]     The following quote from the text Brookers Companies and Securities Law is apposite:22

In  the  past, if the Courts believed  a remedy other than liquidation  was reasonably available to the applicants, it would decline to order liquidation: s

220(2) unamended 1955 Act;  Re Gerard Nouvelle Cuisine Ltd  (1981) 1

NZCLC 95,016. Although this is no longer a requirement under the Act, it is likely that the Courts will regard the question of whether the applicants are

acting unreasonably in seeking liquidation rather than another remedy, as a

factor in evaluating whether liquidation would be just and equitable.

21   Marryatt v PC Home Hire Ltd [2002] 9 NZCLC 263,033, followed by The Orthodontic Centre

Ltd v M D Courtney Orthodontics Ltd HC Palmerston North CIV-2006-454-238, 14 September

2007, Gendall J.

22    At [CA171.01] (online looseleaf ed, Brookers).

[77]     For all these reasons I am not satisfied that just and equitable grounds for liquidation have been made out.

Conclusion and Result

[78]     The  insolvency  application  is  in  my  view  misconceived.     Ultimately, Mairangi is not demonstrably insolvent and the O’Keefes have not made out another statutory ground for an order for liquidation. There is no basis that would warrant the Court’s exercising its discretion to order liquidation.

[79]     The result is that the O’Keefes’ application to appoint a liquidator under subsections 241(4)(a), (b) and (d) of the Companies Act cannot succeed and it is dismissed.   There is, in the circumstances, no need to assess the application to appoint an interim liquidator.23    Equally, there is no need to consider further Mairangi’s application for an order to restrain advertising and stay the liquidation proceedings under High Court Rule 31.11.

[80]     Ordinarily  Mairangi  would  be  entitled  to  costs  on  a  2B  basis  plus disbursements.  However, as there was an indication at the hearing that the O’Keefes are legally-aided I should defer making any order for costs without hearing further from the parties. Without wanting to express any definitive view on the matter but to assist the parties I note that I am not presently satisfied that there are exceptional circumstances that would warrant an order for costs against the O’Keefes if they are legally aided.  If costs are sought any memorandum is to be filed and served within 5 working days failing which costs will lie where they fall.   There is to be strict

compliance.

Associate Judge Sargisson

23    The pre-conditions of such an application were discussed by Venning J in Eden Crescent Ltd (in liquidation) v First City Trust No 2 Ltd (2006) 3 NZCCLR 456 and are that:

a)     an application must be made to the Court for an order the company be put into liquidation;
b)     there must be a likelihood that the application to liquidate will succeed;

c)    there must exist a need for interim control.