Onestop Projects Limited (in liquidation) v Corin

[2022] NZHC 2824

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2021-404-001030

[2022] NZHC 2824

UNDER

High Court Rules 2016 and Companies Act 1993

IN THE MATTER OF

An application to set aside judgment and stay of execution

BETWEEN

ONESTOP PROJECTS LIMITED (IN LIQUIDATION)

First Plaintiff

DAMIEN GRANT
Second Plaintiff

AND

ANTHONY RONALD DAMIAN CORIN

First Defendant

VIVIENNE CORIN

Second Defendant

Hearing:	17 October 2022
Appearances:	B D Gustafson and K A Cocks for Plaintiffs P J Napier and M G Orange for Defendants
Judgment:	31 October 2022

JUDGMENT OF ASSOCIATE JUDGE P J ANDREW

This judgment was delivered by Associate Judge Andrew on 31 October 2022 at 1.00 pm

pursuant to r 11.5 of the High Court Rules Registrar / Deputy Registrar

Date………………………………

ONESTOP PROJECTS LTD (IN LIQ) v CORIN [2022] NZHC 2824 [31 October 2022]

Introduction

[1]    Mr Anthony Corin1 is a director and shareholder of Onestop Projects Ltd (in liquidation).2 In November 2021, Onestop Projects and its liquidator, Mr Grant,3 obtained a formal proof judgment against Mr and Ms Corin for an overdrawn company current account. The judgment debt is $237,932.23, plus interest pursuant to s 10 of the Interest on Money Claims Act 2016 and costs.4

[2]    An endorsed copy of the proceedings was sent by email to the solicitor for the defendants. However, the Corins say that they had no knowledge of the proceedings until after the default judgment had been sealed. They now seek an order pursuant to rr 15.10 and 6.1 of the High Court Rules 2016 setting aside the default judgment.

[3]    The Corins say that the judgment was irregularly obtained because service had not been effected and that there has been a miscarriage of justice.

[4]In addressing the central issue of miscarriage of justice, I need to address:

(a)Was the judgment irregularly obtained because service had not been effected in accordance with r 6.7 (agreement in writing to method of service)?

(b)Do the defendants have a substantial ground of defence?

Factual background

[5]    Onestop Projects operated as a project management business before being placed into liquidation in August 2018.

[6]    In December 2018, the liquidator, Mr Grant, wrote to Accounting Plus Solutions Ltd (the firm he believed prepared the company’s financial accounts)

1      The first defendant.

2      Onestop Projects.

3      The second plaintiff.

4      Onestop Projects Ltd (in liq) v Corin [2021] NZHC 3170.

requesting the financial accounts of the company. That same day the accountants provided to Mr Grant the financial accounts for the year ending 2016.

[7]On 14 January 2019, Mr Grant wrote to Mr Corin demanding the sum of

$237,932.23 for what was claimed to be an overdrawn current account with the company (based on the analysis carried out by Mr Grant).

[8]    On 28 May 2019, Mr Grant wrote to Ms Vivienne Corin demanding the sum of $138,653.08 for what was claimed to be her overdrawn current account with the company. A further letter of demand was sent to Ms Corin in June 2019.

[9]    On 14 June 2019, Mr Grant received a letter from the solicitor for the Corins contending that the payments made to Ms Corin were in fact drawings  made by    Mr Corin, paid to his former wife, and that they were approved by all of the directors of the company at the relevant time. Mr Grant, through his counsel, responded in August 2020, contending that there was no evidence to support the assertion that the payments made had board approval as required by s 161 of the Companies Act 1993.

[10]   In May 2021, Mr Grant, and on behalf of the company, filed proceedings against the defendants for their respective overdrawn current accounts and, alternatively, against the second defendant, Ms Corin, for receiving payments from the company in breach of s 298 of the Companies Act 1993.

[11]   On 17 June 2021, the solicitor for the plaintiffs sent to the solicitor for the defendants by email the endorsed notice of proceeding, statement of claim and the liquidator’s current analysis documents. That email stated:

If you could confirm service on behalf of Anthony and Vivienne Corin, that would be appreciated. Alternatively we may [engage] process servers to serve the defendants personally, the cost of which would be claimed by us.

Any questions, please let me know.

[12]On 30 June 2021, the solicitor for the defendants replied as follows:

In reference to the subject matter, I confirm that I am authorised to accept service on behalf of Anthony Corin and Vivienne Corin, only in relation to these proceedings.

[13]   On 24 November 2021, Downs J gave judgment (formal proof judgment) against the first defendant, Mr Corin, in the sum of $237,932.23 plus interest pursuant to s 10 of the Interest on Money Claims Act 2016 and costs.

[14]   It was not until June 2022 that Mr Grant first gained access to Onestop Projects’ Xero accounting system (which included the company’s general ledger records). That Xero system had been taken and used by another company, Longevity Developments Ltd,5 after Onestop Projects’ liquidation. Mr Corin was a director and beneficially owned LDL. Mr Grant was ultimately given access to the Xero accounting platform by LDL’s liquidators.

[15]   Based on the relatively recent analysis of the company’s Xero accounts (and subsequent to the default judgment), the plaintiffs now say that Mr Corin has an overdrawn current account of $165,660.07. They seek an order amending the judgment sum so that it correctly records the amount of the overdrawn current account. The plaintiffs note that they had originally chosen the 2016 financial statements as the starting point of their analysis because all prior investigative steps indicated that they were the final set of financial accounts prepared for the company. They further note that the company’s Xero accounts appear to have been re-purposed to function as the Xero accounts for LDL.

Relevant legal principles

[16]Rule 15.10 of the High Court Rules reads:

Judgment may be set aside or varied

Any judgment obtained by default under rule 15.7, 15.8 or 15.9 may be set aside or varied by the court on such terms as it thinks just, if it appears to the court that there has been, or may have been, a miscarriage of justice.

5      LDL.

[17]   The discretion under r 15.10 is unfettered but is guided by three well- established considerations:6

(a)Whether the defendant has a substantial ground of defence;

(b)Whether the delay is reasonably explained; and

(c)Whether the plaintiff will suffer irreparable injury if the judgment is set aside.

Analysis and decision

Issue (a) – Was the judgment irregularly obtained?

[18]   In EA v Rennie Cox Lawyers,7 the Court of Appeal held that where a judgment has been irregularly obtained, there will almost always be a miscarriage of justice such that the judgment should be set aside without considering the merits. The Court further held, however, that this is not an inflexible rule to be applied in every case.8

[19]   The plaintiffs say that the proceedings were properly served in accordance with r 6.7 of the High Court Rules, and therefore the judgment was not irregularly obtained. Rule 6.7 reads:

Service under agreement

Service by a method agreed to in writing by a party is sufficient service on that party.

[20]   The critical issue to address is whether the defendants agreed in writing to the method of serving their solicitor by email with the endorsed proceedings in June 2021.

[21]   In contending that the proceedings were validly served, the plaintiffs rely upon the email from the defendants’ solicitor dated 30 June 2021, in which the solicitor confirmed that he was authorised to accept service on behalf of Mr and Ms Corin. The plaintiffs note that the email to which the proceedings were attached followed a chain

6      Russell v Cox [1983] NZLR 654 (CA); see also Pioneer Farms Ltd v Stoddart [2012] NZHC 3114 at [22].

7      EA v Rennie Cox Lawyers [2018] NZCA 33, [2018] 3 NZLR 202.

8      EA v Rennie Cox Lawyers, above n 7, at [18].

of correspondence between the respective solicitors in relation to the plaintiffs’ demand for the overdrawn current account. They say that as a matter of inference and common sense there was clear agreement by the solicitors for the defendants that the email sent on 17 June 2021 constituted effective service.

[22]   In his affidavits, the solicitor for the defendants says that while he confirmed he was authorised to accept service, it was his expectation and understanding that he would be served in the ordinary event with hard copies of the proceedings. He says he did not agree to accept service of documents by email and says that a search of his computer records discloses no record of him receiving the proceedings by email on 30 June 2021. In his second affidavit, responding to the evidence of the plaintiffs, he repeats that he envisaged that he would receive hard copies of the documents delivered to his office. He says that he did not turn his mind to the claim against the defendants again until learning of the default judgment having been obtained against them.

[23]   There is some merit to the plaintiffs’ submission that as a matter of inference and common sense, service was effected by email, being a method agreed to in writing by the defendants’ solicitors. However, the better view is that there is a degree of ambiguity and that service was not effected; the requirements of r 6.7 were not met because there is a degree of uncertainty as to the agreed method.

[24]   Rule 6.7 is to be interpreted and applied having regard to the essential purpose of service. The Court of Appeal has held that the requirement for formal service of an application on the person against whom it is made is fundamental.9 The jurisdiction of the Court to enter a money judgment against a person is dependent on service on that person of the proceedings in an appropriate form and as a matter of basic principles of natural justice it is essential that the person be given proper notice of the claim against them.10

[25]   I agree with the submission of Mr Napier that both parties’ solicitors were at fault. Steps should have been taken, consistent with the requirements of r 6.7, to clarify whether the original email of 17 June 2021 had been accepted as valid service.

9      Bassett-Burr v BPE Trustees (No 1) Ltd [2020] NZCA 457, (2020) 25 PRNZ 509 at [12].

10     Bassett-Burr v BPE Trustees (No 1) Ltd, above n 9, at [12].

Ultimately, the fundamental purpose of service, namely to bring the proceedings to the attention of the party against whom the application was made, was not achieved. There is no dispute that the defendants did not know of the proceedings and that their solicitor took no steps to bring them to their attention until after default judgment had been entered. The proposition that the defendants might have a remedy against their solicitor is not, in the circumstances, an attractive one.

[26]   I find that the proceedings were not properly served in accordance with the High Court Rules and that the judgment was accordingly irregularly obtained. In the circumstances, there has been a miscarriage of justice. This is not a case where the irregularity in service was minor or inconsequential.11

[27]   In case I am wrong in that conclusion, I now turn to address the merits of the defendants’ claim.

Issue (b) – Substantial defence

[28]   As Downs J held in his formal proof judgment,12 a company may authorise the payment of remuneration to a director, but unsurprisingly, this must be properly documented.13

In Mizeen Painters Ltd (in liq) v Tapusoa, Muir J stated:14

In the absence of an explanation, drawings must be treated as advances from the company to the shareholders that are repayable on demand. They remain as repayable advances unless and until a company resolution classifies them otherwise. When the company’s accounting records provide no explanation for the drawings in the shareholders current account, they must be treated as advances from the company to the shareholder. The onus is on the defendants as directors and fiduciaries of the company to account to it for funds and establish the legitimacy of any funds taken from the company; in other words, to explain what has become of company property in their hands.

[29]As further held by Downs J:15

11     See EA v Rennie Cox Lawyers, above n 7, at [18].

12     Onestop Projects Ltd (in liq) v Corin, above n 4, at [6].

13     Companies Act 1993, s 161.

14     Mizeen Painters Ltd (in liq) v Tapusoa [2015] NZHC 826, [2016] NZAR 423 at [25], cited with approval by the Court of Appeal in Monnery v Covendium Ltd (in liq) [2020] NZCA 345.

15     Onestop Projects Ltd (in liq) v Corin, above n 4, at [7].

What this means is this: in the absence of contrary evidence, drawings on a current account constitute a debt owed by the shareholder to the company; a debt repayable on demand.16

[30]   In contending they have a substantial ground of defence, the defendants say that the monies the plaintiffs allege to be loans were in fact payment of salary to    Mr Corin. They also say that the liquidator has miscalculated the payments, including a failure to recognise reimbursement of expenses incurred for the benefit of the company.

[31]   The defendants have filed an affidavit of an independent expert accountant to support their position. Her analysis is based on a copy of the financial statements for Onestop Projects for the year ended 31 March 2017, which she understands were prepared by Accounting Plus Solutions Ltd. The defendants’ expert accountant concludes that rather than Mr Corin owing Onestop Projects $237,932.23, the company in fact owes Mr Corin $32,441.55.

[32]   The plaintiffs submit that I can safely disregard the defendants’ expert evidence; the only reliable evidence is that of the liquidator and the plaintiffs’ accountant, who had access (eventually) to the company’s Xero’s accounts. They are the primary accounting records. They submit that the defendants’ accountant has not been given access to the Xero accounts and is therefore in no position to say whether the unsigned financial statements for the year ended 31 March 2017 are accurate or not, and wrongly assumes that they have been prepared by Accounting Plus Solutions Ltd. They say that her evidence expressly contradicts advice from Accounting Plus Solutions Ltd that it only prepared accounts for the company in 2015 and 2016, based on the Xero accounts, and that subsequently its access to Xero was removed. The plaintiffs have also filed an affidavit from Mr Ede, one of Onestop Projects’ directors, disavowing the defendants’ contention that he signed the financial statements for the company for the year ended 31 March 2017.

[33]   The plaintiffs further challenge, in the circumstances of this case, the defendants’ accountant’s contention that it is “common” for amounts to be coded to an

16     Monnery v Convendium Ltd (in liq), above n 14; Kelstworural Ltd (in liq) v Mounsey-Ross [2019] NZHC 752.

account for ease of reference and then re-classified at year end to the correct code, either by the client or the client’s external accountant. The plaintiffs point to entries in the Xero accounts which record what they say appear to be regular salary payments to Mr Corin throughout 2016 and 2017. The plaintiffs’ accountant has taken those drawings into account in reaching the amended sum claimed of $165,660.07.

[34]   The law is clear that the onus is on the defendants to satisfy the Court that there is a substantial defence17 and, as noted above, in the absence of evidence to the contrary, drawings in the shareholder’s current account are a debt owed by the shareholder to the company repayable on demand.18

[35]   The critical issue for me to address is whether the defendants have discharged the burden of establishing an arguable substantive defence. That issue is to be addressed in circumstances where the liquidator, because of the apparent steps taken by Mr Corin, has had difficulty accessing the primary accounting records of the company.

[36]   Mr Corin has provided no real explanation as to why the Xero accounts have only recently been made available to the liquidator. I note that he has previously been interviewed by the liquidator. Mr Corin has also failed to provide a full explanation about the status of the financial statements for the year ended 31 March 2017, including who prepared those documents and why his own accounting experts have not had access to the Xero accounts. If, as he contends, the company’s primary accounting system (i.e. Xero) is corrupted and cannot be relied on, it would appear that he must have some responsibility, if not prime responsibility, for that fact.

[37]   There are undoubtedly some troubling aspects to the defendants’ case. However, despite my misgivings, I find that the defendants have established (just) that there is an arguable substantive defence. In particular, the defendants’ independent expert accountant has in two affidavits provided a credible basis for challenging the original and the amended calculation of the liquidator. I am not in the position at this summary stage to resolve the issue as to the status of the 2017 draft statements

17     Pioneer Farms Ltd v Stoddart, above n 6, at [24].

18     Monnery v Convendium Ltd (in liq), above n 14, at [34].

including who they were prepared by and whether they were in fact approved and signed by Mr Ede as director. Likewise, I cannot determine whether the Xero accounts have been corrupted as alleged. These matters will have to be resolved at trial where it is likely that Mr Corin’s explanations will face close scrutiny.

Issue (c) – Miscarriage of justice

[38]   I am satisfied that any delay by the defendants in challenging the plaintiffs’ claims has been reasonably explained. It is clear from my analysis above that the defendants did not receive notice of the proceedings until after default judgment had been entered. They then took immediate steps to challenge that judgment.

[39]   I accept that the plaintiffs will suffer some injury if the judgment is set aside. However, the threshold of irreparable injury is not made out. The plaintiffs still have the opportunity of proving their case and, in any event, now seek an amended and reduced amount.19

[40]   I conclude that the defendants have established a miscarriage of justice and in the circumstances the judgment should be set aside. The requirements of r 15.10 have been made out.

Result

[41]   The defendants’ application to set aside the formal proof judgment of this Court of 24 November 2021 is granted. That judgment is set aside.

[42]   As to costs, I fix costs on a 2B basis plus disbursements and in favour of the defendants. However, I order that payment of those costs by the plaintiffs to the defendants is to be deferred pending the judgment of the trial Judge. It will be a matter for the trial Judge, but my preliminary assessment at this stage is that if the plaintiffs are successful then the defendants should not be entitled to costs on this interlocutory application.20

19     See Pure Pacifika Ltd v NZ Natural Dairy Ltd [2013] NZHC 2870 at [21]–[24].

20     See Liew v Chen HC Auckland CIV-2005-404-2531, 12 August 2005, where similar (but not identical) costs issues arose.

[43]   I further direct that the proceedings are to be called in the Chambers List on Friday, 25 November 2022 at 2.15 pm.21 In the interim, the parties should discuss a timetable for the exchange of amended pleadings.

Associate Judge P J Andrew

21     In light of the claims of Mr Corin, it may well be that an order for discovery against him should  be made. That is a matter the parties will need to consider and address at the Chambers List conference.