Oteha Investments Limited v Baverstock Developments Limited (in liquidation)

[2013] NZHC 2252

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2013-404-003204 [2013] NZHC 2252

BETWEEN  OTEHA INVESTMENTS LIMITED Applicant

ANDBAVERSTOCK DEVELOPMENTS LIMITED (IN LIQUIDATION) Respondent

Hearing:                   16 August 2013

Appearances:           P F Chambers for applicant

R B Hucker for respondent

Judgment:                30 August 2013

JUDGMENT OF ASSOCIATE JUDGE ABBOTT

This judgment was delivered by me on 30 August 2013 at 5pm, pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date……………

Solicitors:

Henley-Smith Law, Auckland
Hucker & Associates, Auckland

Counsel:

P F Chambers, Barrister, Auckland

OTEHA INVESTMENTS LIMITED v BAVERSTOCK DEVELOPMENTS LIMITED [2013] NZHC 2252 [30

August 2013]

[1]      This  application  to  set  aside  a  statutory  demand  is  based  on  a  claimed entitlement for set-off as a consequence of a post-liquidation assignment of a debt. The sole issue for determination (other aspects having been resolved) is whether the applicant (the assignee of a debt due by the respondent) is entitled to set-off the assigned debt against the sum demanded, pursuant to s 310 of the Companies Act

1993 (the Act).

[2]      Although counsel for the applicant submitted that all the applicant needed to establish in this hearing was that there was an arguable case for a genuine dispute as to whether the debt was due and owing, the underlying issue can be determined on the present application (as a matter of law) as there is no dispute as to material facts.

Background

[3]      The respondent (Baverstock) was put into liquidation on 11 January 2010. Up to the date of its liquidation it was one of a group of related companies undertaking property developments.

[4]      The liquidators identified a number of advances (recorded in Baverstock’s

accounts)  made  by  Baverstock  to  related  companies,  including  an  advance  of

$85,869 made to the applicant (Oteha).  They made demand on Oteha for repayment of that advance, but subsequently withdrew that demand so that Oteha could pursue a claim against third parties in respect of one of its developments, and on the basis that Baverstock  had  a first charge against  any recovery made in that litigation. Baverstock reserved its right to pursue a further demand after 30 June 2012.

[5]      Oteha’s litigation was unsuccessful.  The liquidators made a further demand

on it on 18 June 2013 (again for $85,869, the sum owing at date of liquidation).

[6]      In the meantime (the dates are not before the Court) Baverstock, Oteha, Oteha’s managing director Mr Ellery, and other related entities incurred debts of approximately $93,000 with a solicitor in relation to the engagement of a barrister, Mr Clews.  On 14 November 2012, apparently as a consequence of the pressure from Mr Clews to clear this debt, and in consideration of a payment of $53,500 made to

him by Oteha, Mr Clews agreed to assign the Baverstock debt1  to Oteha, to settle (compromise) the remainder of the debts owed to him by the other debtors, and to seek no further payment in respect of any of the debts from Mr Ellery, from a co- director, or from the instructing solicitor.

[7]      When presented with the statutory demand, Oteha claimed that it had not been given credit for a sum of $25,000 already paid to the liquidators, and that it was entitled to set off the assigned debt against the balance.

[8]      The liquidators say that the sum of $25,000 allegedly paid in reduction of Oteha’s debt was advanced to them by Baverstock’s parent company towards costs of the liquidation.  Nevertheless they have agreed to accept that as a set-off against the sum demanded provided they receive an irrevocable direction to that effect.  Mr Ellery, a director of both the parent company and of Oteha, has given that direction in an affidavit filed in reply in this proceeding.  On that basis counsel for Baverstock accepted that the sum demanded could be reduced to $60,869.

[9]       The dispute over the demand is limited to the value of Baverstock’s debt in respect of Mr Clew’s fees ($52,055.81).  Oteha accepts that the balance of $8,813.19 is not in dispute. A cheque drawn on the trust account of Oteha’s solicitors has been given to the liquidators.   Counsel for Oteha advised in the hearing that this payment was from Oteha, and was made without any conditions. Counsel for Baverstock accepted that the sum demanded is reduced also by that amount, leaving in issue just the value of the assigned debt ($52,055.81).

The principles on an application to set aside

[10]     Section 290 of the Act gives the Court power to set aside a statutory demand, upon application, in the circumstances provided in s 290(4):

The court may grant an application to set aside a statutory demand if it is satisfied that—

(a)       there is a substantial dispute whether or not the debt is owing or is due; or

1 Stated in the schedule to the deed of assignment to be $52,055.81.

(b)       the  company  appears  to  have  a  counterclaim,  set-off,  or  cross- demand and the amount specified in the demand less the amount of the counterclaim, set-off, or cross-demand is less than the prescribed amount; or

(c)       the demand ought to be set aside on other grounds.

[11]     The principles that the Court applies in exercising the discretion under s

290(4) can be summarised as:2

(a)      The  applicant  must  show  that  there  is  arguably  a  genuine  and substantial dispute as to the existence of the debt.

(b)The mere assertion that a dispute exists is not sufficient. Material, short  of  proof,  is  required  to  support  the  claim  that  the  debt  is disputed.

(c)      If such material is available, the dispute should normally be resolved other than by means of proceedings in the Companies Court.

(d)An applicant must establish that any counterclaim or cross demand is reasonably arguable in all the circumstances.

(e)      It is not usually possible to resolve disputed questions of fact on affidavit evidence alone, particularly when issues of credibility arise.

[12]     In the present case there is no dispute over material facts.  The sole issue in the case is whether the undisputed amount of $52,055.81 is a debt owing or due. This in turn depends on whether the statutory set off under s 310 of the Act applies to the debt that Mr Clews assigned to Oteha after the liquidation.

The claim to set-off the assigned debt

[13]     Oteha contends that it is no longer indebted to Baverstock as the debt has been extinguished by operation of the mutual set-off provisions of s 310 of the Act as

a result of the assignment to it of Baverstock’s debt to Mr Clews.

2  North Harbour Equine Hospital Ltd v DK Little Corporate Trustee Ltd HC Auckland CIV-2006-

404-7585, 19 February 2007 at [17].

[14]     The relevant parts of s 310 section read:

310 Mutual credit and set-off

(1)       Where there have been mutual credits, mutual debts, or other mutual dealings between a company and a person who seeks or, but for the operation of this section, would seek to have a claim admitted in the liquidation of the company,—

(a)       an account must be taken of what is due from the one party to the other in respect of those credits, debts, or dealings; and

(b)       an amount due from one party must be set off against an amount due from the other party; and

(c)      only the balance of the account may be claimed in the liquidation, or is payable to the company, as the case may be.

(2)       A person,  other  than  a  related  person,  is  not  entitled  under  this section to claim the benefit of a set-off arising from—

(a)      a transaction made within the specified period, being a transaction by which the person gave credit to the company or the company gave credit to the person; or

(b)       the assignment within the specified period to that person of a debt owed by the company to another person—

unless the person proves that, at the time of the transaction or assignment, the person did not have reason to suspect that the company was unable to pay its debts as they became due.

(3)       A related person is not entitled under this section to claim the benefit of a set-off arising from—

(a)      a transaction made within the restricted period, being a transaction by which the related person gave credit to the company or the company gave credit to the related person; or

(b)       the assignment within the restricted period to that person of a debt owed by the company to another person—

unless the related person proves that, at the time of the transaction or assignment, the related person did not have reason to suspect that the company was unable to pay its debts as they became due.

....

(5)       In this section, related person means a related company and includes a director of the company in liquidation.

....

[15]     In essence, counsel for Oteha argued that s 310 applies if a mutuality of existing debts arises in the course of the liquidation.  He pointed to the fact that the debts were in existence at the date of liquidation, and the requisite mutuality arose as a result when Oteha acquired the debt in the post-liquidation assignment.   He submitted that s 310(1) could be construed to allow the necessary mutuality to arise after liquidation as the phrase “who seeks” is forward looking.  He contended that the  liquidators’  argument  for  mutuality  of  parties  and  interests  as  at  date  of liquidation placed too restrictive an interpretation on s 310(1), and the fact that the debt existed at date of liquidation was consistent with the purpose of s 310 if the mutuality of parties occurred before the liquidation was complete.  As I understood his argument, counsel also tried to support his interpretation by reference to the limitation  on set-off for  transactions  in  the specified or restricted  period  before

liquidation,3 contending that that left open the ability to set-off outside those periods

(whether before or after them).  He argued that this interpretation could be reconciled with the general principle of pari passu given that s 310 is an acknowledged exception to that principle.

[16]     Counsel also submitted that this interpretation of the section is supported by the decision of this Court in McCullough v Base Control Ltd (In Liq)4  where the Court permitted guarantors (shareholders in the company) who paid a guaranteed debt  after  liquidation  to  set-off  that  payment  against  a  debt  they  owed  to  the company, notwithstanding that the claim under the guarantee was a contingent obligation only at the date of liquidation.

[17]     The liquidators say that s 310 requires that a mutuality of parties and interests exist as at the date of liquidation.  They rely on the wording of the section and its interpretation by the Court of Appeal in Paganini v Official Assignee.5   In that case, landlords of the company agreed with the liquidators post-liquidation to buy assets and stock of the company. They were not allowed to set-off that purchase price against rent and other amounts owed to them under the lease.   Counsel for the liquidators in this present case submitted that there was no mutuality of debt and

parties at date of liquidation, so the effect of the assignment was that Oteha obtained

3 Companies Act 1993, ss 310 (2) and (3).

4 McCullough v Base Control Ltd (In Liq) HC Auckland CIV-2008-404-3375, 24 November 2008.

5 Paganini v Official Assignee CA308/98, 22 March 1999.

Mr Clew’s right to prove in the liquidation, but could not set off the company’s

obligations under the assigned debt against the purchase price.

Analysis

[18]     The facts that Mr Clews’s debt was admissible in the liquidation, was capable of assignment, and was assigned are not in issue.  The sole question is whether that debt can be set off for its full value.

[19]     The difference between  the parties turns  on  whether s  310  contemplates mutuality of debt and parties at the date of liquidation, or whether it is sufficient that the debts exist at that time and the element of mutuality can arise before the liquidation is complete.

[20]     In my view the answer to this question can be found in the decision of the Court of Appeal in Paganini.  Whilst it is true that that case turned on the fact that the off-setting debt did not arise until after liquidation, the Court of Appeal’s analysis of the section in terms of its wording, authorities and policy are equally applicable to this case:

(a)      The Court took the view6  that the opening words of s 310 “Where there have been” placed a temporal limit on the ability to set off to circumstances existing before the order of liquidation is made.  The Court noted that this temporal limit was inherent also in s 306(1) (requiring the amount of a claim to be ascertained as at date of commencement of the liquidation) and s 307 (providing that a claim for a contingent amount was not defeated because the value of the claim had still to be quantified).  The temporal limit was also said to be  emphasised  by the  prohibition  on  set  off  in  the  specified  and restricted periods leading up to liquidation, unless the claimant did not have reason to suspect insolvency, because those periods ran back from date of liquidation.   The Court of Appeal’s comments on the

latter point are apposite:7

6 At [6] and [7].

7 At [7].

It would be extraordinary if, against those careful limits on getting the benefit of a set off, the benefit could be obtained immediately after the liquidation when the party would not only have reason to suspect insolvency but would know it as a certainty.

(b)The  Court  accepted  authority  of Australian  and  United  Kingdom cases8 that the mutual transactions must occur before the liquidation9 and rejected any suggestion that the power that the landlords had at date of liquidation to require sale was a sufficient interest in that case because they had not exercised that power, and the power alone was not a debt or liability.10    The Court accepted that it was an essential aspect of the requirement of mutuality that it was to be in the same interests.11

(c)      Policy considerations also supported the requirement for mutuality to exist at date of liquidation:12

Were the landlords’ contention to succeed they would have a preference over other creditors (otherwise equally ranked) simply  because  after  the  liquidation  they  were  in  the strongest position to deal with the liquidator.   That would defeat the presumptively equal claims of those other creditors.  The equal sharing principle is a central feature of bankruptcy and liquidation law and administration and it would be surprising if it could be defeated in this way (eg Stotter v Ararimu Holdings [1994] 2 NZLR 655 CA).

[21]     The same considerations apply to the facts in this case:

(a)      The language of s 310(1) indicates mutuality at date of liquidation. At that time Oteha did not have a debt.

(b)Authorities require mutuality in the same interests.   This has been supported recently by the decision of this Court in Finnigan v He.13

8 Hiley v Peoples Prudential Assurance Co Ltd (1938) 60 CLR 468 and In re a Debtor [1956] 1 WLR

480.

9 At [11].
10 At [13].

11 At [15].
12 At [18].

13 Finnigan v He [2010] 2 NZLR 668 (HC) at [24].

On that basis Oteha’s argument that it was sufficient for the debt to

exist cannot succeed.  Oteha had to have the claim or debt.

(c)      Section 310 is an acknowledged exception to the general principle of pari passu.   However, there can be no policy consideration for extending the exception beyond the clear intent of the section, otherwise   (taking   the   present   fact   circumstances   by   way   of illustration) parties who did not have a debt prior to liquidation could actively look to improve their position vis-a-vis other creditors (with whom they would otherwise rank pari passu) by taking an assignment of the debt of another. They would be able to achieve this if they were in a sufficiently strong financial position to acquire the other debt, which may not be the case for all creditors.   In Trans Otway  Ltd v

Shephard14 the Supreme Court made it clear that the general policy of

insolvency law that obligations between a creditor and an insolvent were to be assessed on a net basis (recognised in s 310(1)) was qualified by subss (2) and (3):15

[17]      The reason for this qualification of the general rule in s 310(1) is to prevent a creditor from taking opportunistic advantage over other creditors by engineering a situation in which it also becomes a debtor of the company at a time when it must be taken to have appreciated the company’s insolvent position.  Derham comments that the qualification, which is of long standing, has the effect:

“...of discouraging dealings in debts owing by the bankrupt or the company, as the case may be, in a way that would negate the principle of a pari passu distribution of the bankrupt’s or the company’s property.” (footnotes omitted)

[22]     Counsel for Oteha sought to distinguish Paganini on the basis that it did not deal with a post-liquidation assignment.  I accept that that is so, but for the reasons I have given above I find that its overall approach is equally relevant to the present

case.

14 Trans Otway Ltd v Shephard [2005] NZSC 76, [2006] 2 NZLR 289 at [15] – [17].

15 At [17].

[23]     Similarly, I am not persuaded that the decision in McCullough helps Oteha. That case turned on the fact that the shareholders had a contingent claim as at date of liquidation.  The Court found that the fact that the claim was not quantified until it was paid did not preclude the set off:16

It is therefore no barrier to the appellants’ claim for a set-off that they had not become subrogated to the rights of the ASB until after the date of the liquidation.  As at the date of liquidation, they had a contingent claim by reason of their potential liability to the bank as guarantors.  Upon payment to the ASB it crystallised into a quantifiable claim.  It is common ground that in order to maintain a set-off, the appellants must be able to point to a claim in existence as at the date of liquidation but on the authorities, a contingent liability to satisfy, as guarantors, the liability of the company to the bank will suffice.

[24]     The requisite mutuality in terms of debt and parties as at date of liquidation existed in McCullough.  It does not exist in this case.

Decision

[25]     For the reasons I have given I find that Oteha does not have an arguable case for a genuine dispute as to the sum of $52,055.81 of the sum demanded.

[26]     I make the following orders:

(a)       The application to set aside the statutory demand is dismissed. (b)     Oteha is to comply with the demand within 10 working days.

[27]     Counsel were agreed that costs should follow the event, and on a scale 2B

basis.  I order accordingly that Oteha is to pay the liquidators’ costs on a scale 2B

basis, together with disbursements as fixed by the Registrar.

Associate Judge Abbott

16 McCullough v Base Control Ltd (In Liq), above n 4, at [42].