Queensland Maintenance Services (NZ) Limited v Queensland Maintenance Services (Pty) Limited (in liquidation)
[2015] NZHC 450
•13 March 2015
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV2014-404-002828 [2015] NZHC 450
BETWEEN QUEENSLAND MAINTENANCE
SERVICES (NZ) LIMITED Applicant
AND
QUEENSLAND MAINTENANCE SERVICES (PTY) LIMITED (IN LIQUIDATION)
Respondent
Hearing: 11 March 2015 Appearances:
R Edwards for the Applicant
A W Johnson for the RespondentJudgment:
13 March 2015
JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSEN
This judgment was delivered by me on
13.03.15 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 (IN LIQUIDATION) [2015] NZHC 450 [13 March 2015]
Background
[1] The applicant applies to set aside the respondent’s statutory demand served
on 15 October 2014.
[2] The applicant claims there is a substantial dispute about whether the debt is owed and says it is seriously arguable the applicant’s financial records may not accurately record payments made in reduction of the alleged debt, and/or loans made by the applicant to the respondent which may form the basis of a set off, counterclaim or cross demand as against any debt that may be due.
[3] The applicant and respondent are part of the same group of companies that provided services to the ABC Learning Group of companies in Australia and New Zealand before the ABC Group went into receivership in 2008.
[4] Mr Lucas and Mr Shannon were appointed liquidators to the respondent on 8
August 2012. On 15 October 2014 the respondent’s statutory demand was served. It recorded an amount of AU $607,718.60 due as:
… being the amount owed by the debtor to the creditor pursuant to intercompany loans as recorded in the financial statements of the two companies, with the amount being calculated up to 6 June 2014 (principal loan of AU $495,640.90 plus accrued interest from the date of the loan at the rate of 6 per cent per annum.
The applicant’s claims of there being a genuine and substantial dispute
[5] The applicant says there was no loan agreement between the parties; that there is nothing in writing recording the terms of such, indicating the purpose of the loan, dates of repayments, interest rates to apply, and what is to happen in the event of default.
[6] The applicant says the transactions which are said to underpin the alleged loan have been reconstructed from financial records attached in Mr Lucas’ affidavits. The applicant says there are inconsistencies and discrepancies in these financial records which cast doubt on the composition of the alleged debt and the accuracy of the financial records that the liquidators rely upon.
[7] Ms Edwards, counsel for the applicant has helpfully provided an analysis of
the respondent’s debt claim as shown below:
Date Description NZD
[AUD]
Balance 19 May 08 Advance $1,107,284.73
[$900,000]
$1,107,284.73 21 Jul 08 Advance $635.00
[$500]
15 Oct 08 Repayment ($1,000,000)
[$876,107.05]
$107,919.73 30 June 09 Management Fee $140,535.87
[$111,492.14]
$248,455.60 23 Feb 10 Advance $833.54
[648.30]
$249,289.14 30 Jun 10 Interest Charge $14,924.20 $264,213.34 30 Jun 10 Management Fee $145,127.68 $409,341.02 31 Dec 10 Cancellation of
promissory note
(Playgrounds 2)$220,000 $629,341.02 30 Jun 11
30 Jun 12
30 Jun 13
$629,341.02
[$495,640.90]
[8] Ms Edwards has carefully reviewed the contents of this analysis by reference to the affidavit evidence of various officers of both companies. Her purpose is highlight discrepancies or to raise issue regarding the quality of the respondent’s evidence. In particular Ms Edwards has identified claims of discrepancies between the financial statements of both parties. Some of those issues identified include:
(a) Mr Lucas for the respondent deposes that the debt includes a sum of AU $2,560.49 apparently advanced on 18 August 2011, but that sum is not reflected in the balances recorded for either company since.
(b) Mr Lucas deposes a payment was made of AU $768.20 on 17 August
2009 but that payment is not reflected in the accounts of either company.
(c) The applicant’s financial accounts show a balance due of NZ
$629,341.02 as at 30 June 2011, but the respondent’s balance sheet for
31 May 2011 shows the alleged loan balance as AU $332,043 and did not show the AUD figure of $495,640.90 [= to NZ $629,341.02] until December 2011.
[9] Ms Edwards’ review of the evidence suggests discrepancies may be due to inaccuracies in financial records. She submits there are serious doubts raised about the transactions which are said to constitute the debt due which cannot be resolved on the affidavit evidence alone.
[10] There are other aspects of the respondent’s claim which Ms Edwards submits requires further scrutiny. Those include claims that the advances were an investment not a loan, that claims for payment of management fees should not properly comprise part of the loan balance claimed to be due, and that there is insufficient evidence to support the claim that an advance of NZ $220,000 in respect of the Playground (NZ) 2 transaction should form part of the claim of a loan due.
Investment not a loan
[11] Ms Edward submits that the initial advance made on 19 May 2008 of NZ
$1,107,285 was an investment and not a loan, because:
(a) The document recording the nature of the transaction described it as “maintaining participation in its investment (QMS NZ)” i.e. its purpose was to ensure that the applicant did not face liquidity issues.
(b)Because it was an investment and not a loan, the relevant transfer pricing rules in Australia did not apply.
(c) Treating intercompany transactions as investments and not loans is consistent with references in the audited financial statements for the respondent for the year ended 30 June 2010.
(d)There are no foreign exchange adjustments reflected in the accounts which would have been expected in a loan transaction between the two companies operating with different functional currencies.
[12] Ms Edwards submits therefore that the balance due after the repayment of AU $900,000 on October 2008 should have been recorded as a loss on the investment.
Management fees
[13] The advances for management fees comprise similar sums advanced in 2009 and 2010. The evidence is that these fees were for the services of the respondents’ Mr Zullo and Mr Gallagher.
[14] Ms Edwards queries why management fees should be charged in 2009 and
2010 and not in other years. The applicant had been trading since 2003 and Mr Zullo was its director from inception and Mr Gallagher was the chief financial officer for group of companies since September 2007 until his death in 2013. Ms Edwards submits it is seriously arguable that the management fees for these years should just have been recorded as part of the internal working papers of the company, rather than in the financial accounts.
Playgrounds (NZ) 2 transaction
[15] The applicant purchased Playgrounds 2 Limited shares. Part of the purchase price was a promissory note provided for $220,000. The respondent says the promissory note was cancelled in exchange for an increase in the loan owed to it by the applicant. Ms Edwards submits there is only one document disclosed in respect of that transaction which appears to be an intercompany transaction involving the
applicant, the respondent, a company called Alkimia Property Development Pty
Limited, and Playgrounds 2 (NZ) Limited.
[16] A transaction occurred on 31 December 2010 but was not reflected in the respondent’s accounts until December 2011. At that time the evidence is the respondent transferred its shareholding in the applicant to Damlor as recorded in a deed dated 22 November 2011. Ms Edwards says the evidence is uncertain about when in fact this occurred. She submits further enquiry is needed regarding this transaction and says the advance needs to be understood in the context of intercompany transactions, the conversion of intercompany debt to equity, and the subsequent sale of respondent’s shares in the applicant to Damlor. She submits there are genuine and substantial questions in this transaction that should be subject to further enquiry.
Interest
[17] Ms Edwards says that the interest component of the overall debt is AU $112,077.70 which, she calculates, represents approximately 23 per cent of the principal sum said to be due. She submits there is a substantial dispute about whether interest should be charged when:
(a) There was no loan agreement or other documents recording an agreement that interest should be charged.
(b) The respondent’s 2008 financial statements record the alleged “loan”
as being interest free.
(c) The first and only time interest was charged was in the 30 June 2010 financial statements.
(d)The original letters of demand from the liquidators did not include an interest component.
(e) The liquidators did not include an interest component.
(f) The liquidators for the respondent had retrospectively charged interest on all advances made after 1 July 2010 and that is consistent with the financial records of both companies which do not record any interest component in 2010.
Summary of case for applicant
[18] Ms Edwards submits there needs to be a proper consideration of the substance of transactions and that this cannot be done without hearing Mr Zullo’s evidence and permitting cross-examination upon that evidence. Mr Zullo may have signed off on accounts that provide information supporting the basis of the liquidator’s claims but Mr Zullo says he did so, on advice from Mr Gallager that he should. Mr Gallager was responsible for the accounts of the applicant and the respondent and while references were made in those to a loan there was no agreement in writing which provides for repayment date or the payment of interest, or what should occur in the event of default. Therefore a reconstruction is needed for the evidence is quite clear that at one stage the initial advance of AU $900,000 was intended as an investment and not a loan.
[19] Mr Whimp, a director of Harris Black Chartered Accountants of Brisbane confirms his company has provided accounting services for the respondent until the date of liquidation. He has provided a file note dated 9 April 2010 concerning the accounting period to 30 June 2009, that refers to the payment of AU $900,000 to the applicant and noted that the reference in relevant accounts refers to that advance as loans between the parties but that the nature of the transaction was that of the respondent “maintaining the participation of its investment” in the applicant; that the applicant was struggling with cash flow due to major financial difficulties endured by its major customer, causing liquidity issues. It is recorded that it was under these conditions that the respondent forwarded the original funds to the applicant.
[20] The file note concludes:
The forwarded funds are in the nature of maintenance of an investment and not a loan.
[21] Ms Edwards submits this information must highlight an element of uncertainty about what constitutes the loans for the clear evidence is that in respect of two minor amounts (the aforementioned sums of AU $2,560 and AU $768) these are now accepted as not comprising any part of a debt due to the respondent.
[22] Ms Edwards submits the Harris Black file note is the only document which talks about the purpose or substance of the advance. Mr Whimp deposes that he would have expected to see foreign exchange adjustments recorded in the accounts of either entity if the amount in question was indeed a loan.
[23] Ms Edwards questions why was there a commitment for payment of management fees in two years only when the commitment to management in those two years was no different than any other year when management fees have not been charged. Mr Whimp refers to the evidence supporting claims of the liquidators that work was performed for charges made and commented that he believed the evidence comprised work notes prepared by Mr Gallagher. Mr Whimp says in his experience calculations of management services undertaken are “typically performed for internal management purposes only and should not necessarily form part of the company’s final accounts”.
[24] Regarding claims of a debt due in connection with the issue of a promissory note there is contained in a Harris Black a file note dated 23 January 2012 which refers to the conversion of an intercompany loan to equity. Ms Edward submits therefore that the transaction was not a straightforward share purchase and it involves companies other than the respondent and the applicant; and therefore a better understanding of the promissory note transaction ought to be sought.
[25] Regarding the claim for interest, Ms Edwards submits it must be a matter of more than mere curiosity that for the financial years 2011 – 2013 no record is retained of interest charged in those years.
The case for a claim of a debt due in the amount contained in the statutory demand
[26] Mr Johnson for the respondent submits there is significant evidence to support proof of claims of a debt that is clearly evident from the applicant’s own records and those confirm that a balance of the original advance together with management fees have not been paid. A general ledger record for the year ending 30
June 2008 recorded the advance as a loan as did the respondent’s contemporary bank
statement. A bank statement six months later recorded the repayment of NZ
$100,000,000.
[27] A general ledger record for the year ended 30 June 2009 records a loan of NZ
$635 for stock paid for on behalf of the applicant. The transaction is described as a loan.
[28] In the upshot Mr Johnson submits the clear evidence is of an unpaid loan of
$107,919 as at 15 October 2008. To this ought to be added unpaid management fees to constitute a total debt owing at 30 June 2009 of $248,455. Regarding the Harris Black file note dated 9 April 2010 and its reference to the funds being in the nature of maintenance of an investment and not a loan, Mr Johnson submits it is a reference only to the unpaid balance of the original advance, and does not refer to management fees.
[29] Notwithstanding the file note Mr Johnson submits the clear evidence is that neither applicant nor respondent acted upon the apparent recommendation that the unpaid balance not be treated as a loan. The later audited financial statements for the applicant for the year ending 30 June 2009 refer to a total debt of $248,456 including reference to management services fees. Those accounts were signed off on behalf of the board by the director Mr Zullo.
[30] At 30 June 2010 the balance had increased to $409,341 including interest charges of $14,924 together with management fees of $145,127.68.
[31] Evidence supporting claims of those amounts is provided by bank statements, contemporary schedules providing calculations of the amounts in question and by the applicant’s own audited financial statements.
[32] By the 30 June 2011 the loan balance has increased to $629,341.02 because of an intercompany share transaction whereby part of the share price payable was supported by a promissory note which was subsequently cancelled in exchange for an increase in the loan owed to the respondent by the applicant. Evidence of that account is supported by a file note of Harris Black that refers to the loan created as a result of the share sale, the promissory note assignment and cancellation of that promissory note.
[33] Audited financial statements for the year ended 30 June 2011 record that interest is applied to the outstanding loan at a rate of 6 per cent. That same page of those statements records there were no management fees for that year.
[34] Those accounts too were signed on behalf of the board by Mr Zullo.
[35] It is clear that in those annual accounts of the applicant when no interest charged was made, that it was noted nevertheless that the applicant’s loan was subject to the payment of interest at 6 per cent. Regarding the promissory note transaction debt the evidence is clear that Harris Black had concerns regarding how the transaction ought to be described. The clear evidence of those accounts is that with the cancellation of the promissory note the amount thereby due became a loan and was added to the existing loan due by the applicant.
[36] A balance sheet prepared by Mr Whimp for the purpose of evidence he provided to an Australian Federal Court enquiry identified the respondent’s loan to the applicant in that same amount identified in the applicant’s 2010 annual accounts. Mr Whimp has sworn evidence to an Australian Court that that was the extent of the indebtedness due at that time; and that as at 3 January 2012 the applicant’s debt to the respondent, including the debt arising from the cancellation of the promissory note, amounted to AU $495,641 [NZ $629,341]. The 30 June 2012 accounts for the
applicant confirm that although no interest was paid, there was a liability for interest to be payable at 6 per cent per annum. Mr Zullo signed off on those accounts also.
Conclusions
[37] In their calculation of the amount claimed from the applicant the liquidators have charged interest at 6 per cent for the three years since the payment of interest was accounted for and charged in the annual accounts.
[38] Whilst it is submitted there is a lack of an appropriate document identifying an agreement to repay, the lack of such a document can be explained by the intercompany relationship that prevailed at the time. Mr Zullo controlled both entities. Each year he signed off annual accounts clearly identifying an amount of a loan due and payable and of a nominal liability for the payment of interest.
[39] In the Court’s view there is somewhat modest evidence supporting claims that the debt was not a loan but an investment. By contrast the documentation says the transactions contain a loan. Also if it was an investment one asks why it did not involve a share capital change.
[40] Although an accountant commented on 9 April 2010 that the matter ought to be treated as an investment and not a loan, the clear evidence is that since that time the initial advance has since always been treated as a loan.
[41] Ms Edwards challenges the claim for management damages on the basis that a proper enquiry ought to be made regarding why those charges occurred during a two year period only. On the other hand it is clear those fees contain careful calculations and were signed off by Mr Zullo.
[42] Also in his recent examination in the Australian Federal Court Mr Zullo commented that in relation to those management fees the respondent was charging that the respondent should have charged those fees (inter alia to the applicant) for many years when it did not. Directly, he claimed that additional fees ought to have been charged.
[43] In this case challenges have been made about the accuracy of the total amount claimed by the statutory demand.
[44] Ms Edwards submits there is a serious dispute with the entire amount claimed such that it would be unjust for the respondent to proceed only on the back of a statutory demand. The Court should, counsel submits, consider there are sufficient issues raised about the existence of a loan obligation and about liability for management fees such that the Court should entertain issue disposal by reference to ordinary proceeding process.
[45] Mr Zullo’s evidence in support of the applicant’s case suggests there are numerous discrepancies with the records kept by Mr Gallager and that therefore those records may not be accurate. He queries why management fees were not charged in other years. He says that when signing the accounts he did so relying upon Mr Gallagher’s assurance that they were accurate.
[46] On the other hand he has recently deposed to the Australian Federal Court additional management fees ought to have been charged to the applicant.
[47] The Court is satisfied regarding the integrity of the record maintained by the respondent to support claims of the debt due to it. Whilst, there is authority for discharging the statutory demand in circumstances where the claim of a debt due may vary significantly from available evidence to prove the extent of that debt, no such consideration arises in this case.
Judgment
[48] The application to set aside the statutory demand is dismissed.
[49] The applicant is to pay costs on a 2B basis together with disbursements approved by the Registrar.
Associate Judge Christiansen
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