Queensland Maintenance Services (NZ) Limited v Queensland Maintenance Services Pty Limited
[2015] NZHC 1419
•23 June 2015
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2015-404-000717 [2015] NZHC 1419
BETWEEN QUEENSLAND MAINTENANCE
SERVICES (NZ) LIMITED Applicant
AND
QUEENSLAND MAINTENANCE SERVICES PTY LIMITED Respondent
Hearing: 22 July 2015 Appearances:
D Salmon for the Applicant
A Johnson for RespondentJudgment:
23 June 2015
JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSEN
This judgment was delivered by me on
23.06.15 at 4:30pm, pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
QUEENSLAND MAINTENANCE SERVICES (NZ) LIMITED v QUEENSLAND MAINTENANCE SERVICES PTY LIMITED [2015] NZHC 1419 [23 June 2015]
Background
[1] The respondent has applied to liquidate the applicant. The applicant has applied to stay the liquidation proceedings and to restrain publication of the liquidation application.
[2] On 30 March 2015 I dismissed the applicant’s application to set aside the respondent’s statutory demand.
[3] On 10 April 2015 the applicant filed an appeal of my judgment.
[4] On 21 April 2015 I recalled my judgment to extend the time for compliance by the applicant with the statutory demand.
[5] On 21 April 2015 the applicant filed its stay and restraint applications. It is the applicant’s case that its appeal of my judgment is being pursued expeditiously. Also there is an extant tax claim and ongoing investigations in Australia which the applicant says may affect the respondent’s status as a creditor. Counsel submits there will be no prejudice suffered if a stay is granted and that the pursuit of liquidation in the circumstances savours of unfairness and undue pressure.
[6] The applicant seeks an order staying the proceedings pending determination of the Australian tax claim, or at least pending the determination of the appeal of my judgment.
[7] The respondent and applicant are part of the same group of companies in New Zealand and Australia. Mr Frank Zullo is a director of both and of a number of other entities in the group.
[8] The companies provided services to the ABC Learning Group of companies in Australia and in New Zealand until the ABC Group went into receivership in
2008. The respondent continued to provide services to the ABC companies in receivership until served with notices of assessment by the Australian Tax Office (ATO) claiming approximately $28M in unpaid tax, penalties and interest.
[9] Then, Mr Zullo appointed Messrs Lucas and Shannon administrators to the respondent on 3 January 2012. On 8 August 2012 the creditor’s voted to liquidate the respondent.
[10] Prior to administration, the respondent issued a substantive challenge to the ATO’s notices of assessment. These have yet to be heard. Counsel for the applicant submits that if successful it may result in the respondent being brought out of liquidation and if the applicant is found to owe money to the respondent then it may be forgiven by the respondent. This is the reason the applicant seeks a stay pending determination of the tax claim.
[11] Counsel for the applicant informs that the liquidators are undertaking extensive examinations and investigations into various transactions entered into by the respondent. These include investigations concerning transactions with the applicant. They also involve extensive questioning of Mr Zullo.
[12] On 15 October 2014 the respondent served its statutory demand seeking payment by the applicant of AU$607,718.60.
[13] The applicant’s application to set aside the statutory demand on the grounds
that there was a substantial dispute as to the debt or on “other grounds” under s
290(4) of the Companies Act 1993 (CA), was dismissed by me.
[14] Since, the applicant has filed its notice of appeal to the Court of Appeal and has paid security for costs and has filed and served its case on appeal.
Legal principles
[15] The application for stay of execution pending hearing of the appeal is made pursuant to Rule 12(3) of the Court of Appeal (Civil) Rules 2005.
[16] The application is also made pursuant to HCR 31.11 which provides specifically for a stay of liquidation proceedings and restraint of advertising.
[17] Counsel agree about factors relevant to the Court’s exercise of discretion under both r 12(3) and HCR 31.11. In this case they are dealt with under the following headings:
(a) Prejudice to applicant. (b) Prejudice to respondent. (c) Effect on third parties.
(d) Strength and bona fides of appeal. (e) Unfairness and undue pressure.
(f) Overall justice of the case.
Prejudice to applicant
[18] The applicant asserts that liquidation of the applicant prior to the determination of the ATO tax claim affecting the respondent, or of the applicant’s appeal will severely prejudice it. It says amended notices of assessment and the resultant tax liability were the catalyst for the appointment of administrators, and also for the decision of the creditors to wind the company up. The creditors’ votes for liquidation contained a dollar value of approximately $27M and of that amount
$23M was voted by ATO in favour of liquidation of the respondent.
[19] The applicant says the respondent’s challenge to those assessments is yet to be heard. The applicant says in the three years since the challenge has not been progressed in any substantive way; that this notwithstanding they have merit and real prospects of success says Mr Zullo. If successful the respondent would be taken out of liquidation and if it was found the applicant did owe money to the respondent then Mr Zullo would waive the debt in order to save the applicant from liquidation.
[20] Therefore counsel submits the very status of the respondent as a creditor is uncertain and shall continue to be so until the respondent’s tax claim is finally determined.
Prejudice to respondent
[21] Counsel submits the respondent will suffer little or no prejudice if the stay is granted. Counsel submits the allegations by Mr Lucas regarding Mr Zullo’s transfer of assets from the applicant to other entities controlled by Mr Zullo are unsubstantiated, irrelevant and defamatory. Counsel says those allegations have been the subject of extensive questioning of Mr Zullo at the hands of the liquidator’s lawyers, and that the answers and explanations given by Mr Zullo regarding these transactions are not referred to at all in Mr Lucas’ opposition affidavit. For that reason it is submitted the lack of independence and balance in Mr Lucas’ affidavit in this respect savours of unfairness towards Mr Zullo personally.
[22] Also and with respect to claims Mr Zullo is dissipating assets he has now provided an assurance that he will not deal with the applicant pending determination of the tax claim.
[23] To the extent those concerns relate to transactions that have already occurred, the respondent’s rights are now preserved by virtue of the filing of the liquidation application because of the specified and restricted periods in force due to relevant CA provisions.
Effect on third parties
[24] The applicant says there will be no harm to its creditors if a stay is granted because those creditors are related entities controlled by Mr Zullo. On the other hand the liquidation of the applicant would reflect negatively on Mr Zullo and may have a flow-on affect on those other companies of his operating in New Zealand. Counsel submits there is no real effect on the creditors of the respondent from granting a stay because those creditors are more likely to recover funds from the tax proceedings than in pursuing the liquidation of the applicant.
Strength and bona fides of appeal
[25] Counsel reports the appeal is being pursued expeditiously and security has been paid and the case on appeal has been filed. Therefore the appeal is not being run as a delaying tactic. Nor it says are their arguments being pursued frivolous or meritless. Regarding the decision being appealed it is submitted the High Court erred in failing to find a “substantial dispute” as the applicant had submitted there was; and in failing to find that there were “other grounds” which justified setting aside the statutory demand. The Court, counsel submits placed too much reliance upon the fact that Mr Zullo signed the accounts in circumstances the Court considered countered claims that the applicant owed loan monies to the respondent.
[26] In summary counsel submits that uncertainties, discrepancies and inconsistencies in the transactions underpinning the debt should be thoroughly investigated in the context of an ordinary proceeding when discovery and cross examination are available to all parties.
Unfairness/undue pressure
[27] Counsel advises that throughout and to the present time the liquidators are still investigating dealings between the two companies. In that regard Mr Zullo has been examined on five occasions. Also the liquidators have issued a summons relating to transactions between the companies which summons is yet to be heard.
Overall justice of the case
[28] Counsel submits the overall justice weighs in favour of the stay; and to the extent that there is any prejudice to the respondent then this is outweighed by the prejudice to the applicant facing liquidation prior to determination of the tax case and prior to the determination of its appeal.
Considerations
Prejudice to the applicant
[29] In response to the applicant’s claim that the respondent has available to it a substantive challenge to an ATO assessment, the liquidator reports there is currently no ongoing application for a review or challenge to the ATO assessment and that it is not certain whether such a challenge will ever occur in the future. Mr Lucas reports the liquidators are currently considering the merits of applying for a review. Mr Lucas firmly refutes the claims suggesting the liquidators have been ordered to commence a review and have been ordered to commence proceedings.
[30] Counsel for the respondent points out that what the Federal Court has ordered is that any such right to appeal is not to be abandoned, discontinued or settled without the approval of the Court.
[31] Counsel submits therefore there is no reasonable basis to stay the liquidation proceeding pending determination of an ATO review for there is no certainty there will be any such application for a review.
[32] Also, Mr Zullo deposed on oath in Australia that the applicant had in fact ceased trading and that it had no real property or other assets and is being “shut down”. Counsel for the respondent submits that if that is the case then there would not appear to be any prejudice at all if the applicant was placed into liquidation.
[33] Concerning claims that the applicant’s appeal would be rendered nugatory, counsel for the respondent submits that the liquidation of the applicant would not necessarily mean the appeal would come to an end because it is likely that Mr Zullo would be prepared to fund the liquidator. Then the appeal could continue. Further, if the appeal was successful then an application could be made to take the applicant out of liquidation. Also, counsel suggests it is available to the applicant to file a statement of defence to the liquidation application.
Prejudice to respondent
[34] Interest continues to accumulate on the debt at the rate of 6 per cent per annum. Meanwhile neither debt nor interest is being paid.
[35] The respondent has concerns that assets are being removed from the applicant.
[36] The evidence is that on 17 March 2014 the respondent made demand upon the applicant in relation to the inter-company debt; that within weeks after the demand, properties owned by applicant were transferred to Zullo holdings (NZ) Limited of which Mr Zullo is the sole director.
[37] Enquiries indicate those properties have been transferred to another company controlled by Mr Zullo whereby the first transferee is now registered as mortgagee for the value in that second transfer. The respondent says there is no information in the company accounts indicating money or consideration having been received by the applicant for these transactions.
[38] The liquidators speculate that there may be other assets of which they are not aware but may discover upon a proper investigation. Mr Lucas commented by reference to examples provided on his perception of Mr Zullo’s practice of disposing of assets of companies in distress.
Effect on third parties
[39] Suggestions that Mr Zullo’s reputation may be at risk if the applicant is liquidated, may be dismissed, submits respondent’s counsel because Mr Zullo is a director of the respondent company in liquidation with a creditor shortfall exceeding
$20M – a factor that counsel submits must already be known by the business community in New Zealand.
Strength and bona fides of appeal
[40] It is not in dispute the appeal has been pursued expeditiously, but no date for the appeal has been allocated as yet.
[41] Respondent’s counsel submits the merits of appeal are not strong, even though the reliability of records evidencing claims of a loan owed by the applicant
may contain discrepancies, and despite there being no written agreement evidencing the loan because:
(a) The Court had evidence to show exactly how the debt was calculated.
(b)Mr Zullo on a number of occasions confirmed the accuracy of the financial statements which acknowledged the debt.
(c) Mr Zullo confirmed the debt in Australia by way of his verifying report.
(d)The debt was verified under oath by Mr Whimp for the respondent, in proceedings in Australia against the ATO.
(e) Most of the debt is management fees, the basis for existence of which was confirmed by Mr Zullo under cross examination in Australia.
(f) The requirement for payment of interest of 6 per cent was confirmed by the applicant’s financial accounts.
Unfairness and undue pressure
[42] The applicant says the liquidators are continuing investigations in Australia and that the result of those ought to be known before conclusions are drawn or that liquidation of the applicant occurs. Mr Lucas says however investigations in relation to the debt owed by the applicant have concluded; that the ongoing investigations in Australia do not relate to the applicant.
[43] Respondent’s counsel submits there is no suggestion the applicant has a counterclaim against the respondent. Rather the situation is that the respondent says it is owed money and the applicant says it does not owe the respondent any money. In short, that is all this dispute is about.
Overall justice of the case
[44] Counsel for the respondent submits little weight be put on any inconvenience to Mr Zullo, and notes there is no suggestion of a counterclaim by the applicant. Therefore counsel submits the overall justice of the case favours a non-granting of a stay.
Conclusions
[45] The applicant’s appeal of my judgment is ready to proceed. Only a hearing date needs to be provided. In that regard counsel confirms he is available for the allocation of a short notice fixture. Counsel believes an appeal hearing will not take any longer than two hours.
[46] The Court accepts the applicant has committed itself to the prosecution of its appeal.
[47] Whilst it is clear the applicant no longer trades it says it has no debt and its only creditors, in Mr Zullo’s control, are not at risk. Regarding claims that Mr Zullo arranged the transfer of properties owned by the applicant Mr Zullo has responded with his explanation for these transactions. Further, and as counsel for the applicant submits, there is no risk to potential creditors because the liquidation application has been filed and the protection provisions of the CA will ensure creditor’s rights will be preserved.
[48] Counsel submits the reality is that if the applicant is put into liquidation, that the appeal of my decision will no longer be pursued.
[49] Counsel submits the applicant will be more greatly affected than the respondent; that rights of third parties are now preserved; that considerations of fairness should favour the applicant because it is earnestly pursuing an appeal, and that the overall justice of the case should favour the applicant because no one is at risk if there is any delay with the hearing of the appeal.
[50] However, the Court has some issues with that account of matters. If, as Mr Zullo has deposed the applicant has no assets and is not trading then what advantage remains for any purpose in resisting an order for liquidation.
[51] Mr Lucas deposed that the liquidators of the respondent have not filed an application for review. The matter is under consideration still but he notes a number of obstacles ahead. Not the least of these would be the significant costs involved. Mr Lucas’ calculates that even if the respondent was totally successful with its review the respondent would still be without sufficient funds to satisfy unsecured creditor claims in full - indeed that the shortfall would still be significant, and by the Court’s calculation not less than $2.5M.
[52] In our present case the liquidation process is being pursued because of the applicant’s failure to pay the respondent’s statutory demand. In that outcome a presumption of insolvency arises without the requirement of further proof of a debt being due. That does not mean and nor in this case does it preclude a challenge at the liquidation hearing by a defendant of there being a debt owing.
[53] In this case it is still open to the applicant to file a statement of defence – in effect to be able to satisfy the Court on balance that there is no debt.
[54] What then could be the purpose of pursuing the applicant’s appeal? In the outcome if the appeal was granted then it would be because my judgment incorrectly concluded there was insufficient evidence of a substantial dispute. The Court of Appeal’s decision is unlikely to conclude that no debt was owed by the applicant but rather that it would have to be a question for determination in the ordinary proceedings course. If that occurred then the respondent could no longer rely upon its statutory demand which in turn would bring an end to the present liquidation application proceedings and to any protection presently provided to creditors by the relevant CA provisions.
[55] The purpose of this Court of course is not to consider those outcomes but to focus on competing claims of prejudice, upon the affect upon others and having regard to principles of fairness and justice. Of significance in that regard is the
evidence of Mr Lucas, the respondent’s liquidator, and Mr Zullo the director of both the applicant and respondent. In that consideration of things the Court considers the balance favours the respondent.
[56] Evidence regarding the applicant’s financial situation is unclear. Mr Zullo says the plaintiff has no creditors save for those he controls and therefore there is no prejudice to others. However, the applicant’s financial accounts for the year ended
30 June 2013 show fixed assets comprising land and buildings to be worth more than
$4.75M. Current liabilities totalled about $808,000 of which about $786,000 was owed to the respondent. Noncurrent liabilities comprise a loan of $415,000 to Westpac Bank.
[57] It appeared then that the applicant had significant value contained in its land and building assets.
[58] Mr Lucas deposes his enquiries have determined that in April 2014 the applicant sold its two New Zealand properties to Zullo Holdings (NZ) Limited. This occurred shortly after the respondent served its first payment demand on 17 March
2014.
[59] Mr Zullo comments upon what he considers to be an invitation to draw an adverse inference. He disputes any impropriety and says the transaction “had been in the pipeline for at least three years”. Mr Zullo has provided his account of what happened in that regard.
[60] Of concern to the Court at this time is the fact that there is evidence the applicant no longer has assets but there is no evidence regarding what happened to the value in those properties transferred from the applicant to another of Mr Zullo’s companies.
[61] It is the respondent’s concern that this situation may be similar to factors affecting the transfer of properties from the respondent at times of financial constraint. In that regard Mr Lucas has provided evidence of transactions affecting the respondent suggesting a transfer of assets out of reach of creditors.
[62] Considerations of actively pursuing rights of appeal and of ensuring creditors’ claims are not prejudiced by delays caused before an appeal is heard are significant factors for consideration. At best that is all the applicant could hope for, for the Court would not be prepared to stay a proceeding beyond that until such time as a review of ATO assessments was considered – when such a review has not yet been filed.
[63] The applicant says it is not trading and has no value. If that is so it will not be able to satisfy any debt that may be due to the respondent. What is of interest to the Court is why the applicant has no value when less than one year before it transferred properties to other entities its net asset value was close to $4.5M.
[64] In this case there are circumstances beyond the usual considerations of balancing of interests to suggest a liquidation proceeding should not be delayed nor that publication of that proceeding be restrained even though an appeal was pending. Even if the applicant is unsuccessful with its appeal it retains the means to file a defence to the liquidation application.
Result
[65] The applications for stay of proceeding and for restraint of advertising are refused.
[66] Costs are awarded to the respondent on a 2B basis together with disbursements as approved.
Associate Judge Christiansen
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