Redline NZ Limited v Conveyor Technology Limited
[2016] NZHC 1083
•23 May 2016
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV-2016-409-000153 [2016] NZHC 1083
UNDER the Companies Act 1993 IN THE MATTER
of an application to set aside a statutory demand
BETWEEN
REDLINE N.Z. LIMITED Applicant
AND
CONVEYOR TECHNOLOGY LIMITED Respondent
Hearing: 19 May 2016 Appearances:
R J Hopkins and K M Kendrick for Applicant
P A Cowey and A J Summerlee for RespondentJudgment:
23 May 2016
JUDGMENT OF ASSOCIATE JUDGE OSBORNE
on setting aside application
Introduction
[1] The applicant (Redline) is a civil contractor. It had a contract from mid-2015 to install irrigation water infrastructure for a Ngāi Tahu company. The respondent (Conveyor) became a sub-contractor to Redline in 2015 having quoted on the items and work required in the pump stations.
[2] Conveyor rendered invoices to Redline from 2015 to early 2016. A number were paid in 2015. A number were not paid.
[3] On 29 February 2016, Conveyor served on Redline a statutory demand (the demand) for $104,645.16 under s 289 Companies Act 1993 (the Act) in relation to
invoices dating from November 2015 to January 2016.
REDLINE N.Z. LIMITED v CONVEYOR TECHNOLOGY LIMITED [2016] NZHC 1083 [23 May 2016]
The setting aside application
[4] Redline made application for an order setting aside the demand. Its
application was supported by an affidavit of Max Shaw, Redline’s director.
[5] Conveyor filed a notice of opposition. Affidavits in opposition were completed by John Dowers (a director of Conveyor) and by Jeffrey Denley (an irrigation consultant, who until January 2016 had been Redline’s manager of the irrigation project).
[6] Subsequently, on 18 April 2016, Conveyor had filed proceedings for the liquidation of Redline, upon the basis that the time limit for meeting an undisputed portion of the demand expired. That application has its first hearing on 2 June 2016.
Applications to set aside a statutory demand
The statutory jurisdiction
[7] Under s 290 of the Act the Court may, on the application of the company, set aside a statutory demand.
[8] The relevant jurisdiction invoked by Redline is that provided by s 290(4)(a) of the Act whereby an application may be granted if the Court is satisfied that there is a substantial dispute whether or not the debt is owing or is due.
The Court’s additional powers on an application to set aside a statutory demand –
s 291 of the Act
[9] For Conveyor, Mr Cowey has invited the Court forthwith to make an order under s 241(4) of the Act forthwith putting Redline into liquidation.
[10] Section 291(1) of the Act relevantly provides:
291Additional powers of court on application to set aside statutory demand
(1) If, on the hearing of an application under section 290, the court is satisfied that there is a debt due by the company to the creditor that
is not the subject of a substantial dispute, or is not subject to a counterclaim, set-off, or cross-demand, the court may—
…
(b) dismiss the application and forthwith make an order under section 241(4) putting the company into liquidation,—
on the ground that the company is unable to pay its debts.
[11] Redline’s application was for hearing on 19 May 2016.
[12] On the eve of the hearing, and by reason of matters which I will come to, Mr Cowey filed a memorandum in which he put Redline on notice that he would be asking on the following day that the Court proceed to hear the application and make a liquidation order under s 291(1)(b) of the Act (“the company is unable to pay its debts”).
The threshold test
[13] Section 291(1) of the Act concludes with a threshold test, namely that the company is unable to pay its debts.
[14] Those words in s 291(1) are identical to the threshold test for the more usual liquidation order made under s 241(4)(a) of the Act (that “the company is unable to pay its debts”).
The discretion
[15] I am unaware of any decision of the Court of Appeal before 2012 in which the s 291 jurisdiction was discussed.
[16] There was suggestion in some High Court judgments, including one of my own, that immediate liquidation orders would generally not be granted unless the
company was effectively moribund.1 In another judgment, Associate Judge Bell recognised that it would not be wise to circumscribe the kinds of cases appropriate for immediate liquidation under s 291(1)(b), his Honour noting that that he was conscious of two kinds of cases, namely where the company is moribund and those where the creditors’ interests are in such peril that the need to give urgent relief takes priority.2
[17] In Norman v ANZ National Bank Ltd,3 the Court of Appeal heard and dismissed an appeal from Associate Judge Christiansen’s judgment in Aotearoa Kiwifruit Export Ltd v ANZ National Bank Ltd.4
[18] The Associate Judge, having dismissed a company’s application for an order setting aside a statutory demand (for $1,281,161.63) immediately made an order or liquidation under s 291(1)(b). His Honour was satisfied that the company was unable to pay its debts and was therefore insolvent.5 The company’s director, Mr Norman, was subsequently added as a party to enable an appeal to be pursued against the liquidation order.6
[19] The Court of Appeal was called upon to consider whether some direction should be given to the High Court as to how the powers under s 291(1) of the Act should be exercised. After setting out the relevant provisions of the section, Venning J (delivering the judgment of the Court) continued:
[43] The section provides for a discretion. The discretion must be exercised in the circumstances of the particular case before the Court. Other than to observe the discretion need not be limited to cases where the company is “moribund”, as referred to by Associate Judge Bell, it is neither appropriate nor necessary for this Court to provide any general direction about the matter.
1 Aotearoa Kiwifruit Export Ltd v ANZ National Bank Ltd HC Tauranga CIV-2011-470-697, 3
February 2012; followed in Gibbston Downs Wines Ltd v Property Ventures Ltd (in rec and in liq) [2012] NZHC 3592.
2 239 Queen Street Developments Ltd v Watts & Hughes Construction Ltd [2012] NZHC 1791 at
[17].
3 Norman v ANZ National Bank Ltd [2012] NZCA 356, (2012) 21 PRNZ 261.
4 Aotearoa Kiwifruit Export Ltd v ANZ National Bank Ltd HC Tauranga CIV-2011-470-697, 7
October 2011.
5 At [9] – [11].
6 With Aotearoa Kiwifruit Export Ltd v ANZ National Bank Ltd, above n 1 – hence the heading to
the appeal judgment being “Norman v ANZ National Bank Ltd”.
[44] In the present case Mr Norman’s own evidence confirmed that, while the company’s name had cultural significance, the company did not have any significant assets and was not in a position to act as guarantor for any indebtedness. In the circumstances it was open for Associate Judge Christiansen to conclude that no purpose would be served by providing a period of time for AKE to pay the sum due under the demand before ANZ could apply to place AKE into liquidation. The Judge was entitled to exercise his discretion in the way he did.
[45] The only other consideration was the claim that other growers might be interested in moneys held by the company. But that claim can be properly dealt with by the liquidator during the course of the liquidation.
[20] Accordingly, in considering whether to apply s 291 in a case of the present nature, it is unnecessary and inappropriate to proceed on the basis that the case must fit within a required category, such as that of a moribund company. Such cases are to be viewed as examples, but not the only possible examples, of the exercise of a discretion. If the threshold is established, the discretion is unfettered but is to be exercised in a principled manner.
Application of s 291(1) to Redline
Redline’s debt to Conveyor
[21] Conveyor’s demand (for $104,645.16) is based on unpaid invoices from as early as November 2015, the last of which was due for payment on 20 February
2016.
[22] Although Redline’s notice of application is expressly in relation to the demand as a whole, both the grounds of notice and Redline’s evidence make it clear that $24,426.00 of the debt was acknowledged to be due and owing at the time of the demand. Mr Shaw on 14 March 2016 swore that “this [$24,426.00] will be paid today”.
[23] In addition to the expressly undisputed $24,426.00, there are other components of the $104,645.16 total which Mr Shaw, in his affidavit for Redline, put not into a “disputed” category but into a “queried” category. These total $38,740.05. Redline has raised no actual dispute in relation to these items. Mr Shaw simply recorded that he was arranging “a formal valuation of the items”. No such “valuation” has since been filed.
[24] In addition to the “queried” invoices, Mr Shaw identified three invoices totalling $8,111.86, for which he said Redline has no record of receipt. Conveyor has since provided copies of the invoices. Mr Shaw has not since filed further evidence as to any dispute over this $8,111.86.
[25] On Mr Shaw’s evidence, this left five invoices which Mr Shaw classified as
“disputed”. The total value of the disputed portion of these invoices was $33,304.00.
Continued non-payment by Redline
[26] Redline did not make payment of the $24,426 on 14 March 2016 as Mr Shaw swore was occurring.
[27] Nor did Redline make payment of the $24,426 by the 15 working day deadline (21 March 2016) applicable under s 289(2) of the Act. Indeed, it had still not paid that sum at the time of the hearing of the setting aside application on 19
May 2016.
[28] Nor has Redline filed reply evidence to explain the reason for continuing non-payment of undisputed debt.
Intervening agreement
[29] Ms Hopkins, for Redline, explained the absence of reply evidence from Redline, and the absence of evidence as to the reasons for continuing non-payment of undisputed debt, on the basis of an intervening agreement reached between the parties.
[30] On 11 May 2016 (eight days before this hearing), a conditional agreement was reached between the parties through an email exchange. Redline offered that day to pay to Conveyor $117,978.66 in cleared funds. The figure comprised the full sum demanded by Conveyor together with an agreed sum for costs and disbursements. The payment was to be made by noon (New Zealand time) on 16
May 2016. For its part, Redline was to refrain from advertising its liquidation
proceeding unless the agreed $117,978.66 funds were received by noon, 16 May
2016.
[31] The 16 May 2016 deadline occurred three days before this hearing. Redline did not achieve the payment of cleared funds to Conveyor by that date. The intervening agreement therefore came to an end.
[32] In her submissions, Ms Hopkins explained that Redline’s focus, from the time of the intervening agreement on 11 May 2016, turned to effecting the settlement. The need to file reply evidence was apparently not a focus.
[33] I am informed by counsel that from 16 May 2016 there has been correspondence as to what may have become of a payment of $117,978.66 which Mr Shaw has told Ms Hopkins was arranged to be transferred from an Australian bank. It is common ground, however, that by the time of the hearing (19 May 2016) cleared funds had still not been received by Conveyor.
Redline’s inability to pay debts – s 287(a) Companies Act
The presumption of insolvency
[34] Through its failure to comply with the statutory demand, at least as to the undisputed $24,426, Redline is presumed to be unable to pay its debts.7
Redline’s failure to demonstrate a genuine and substantial dispute
[35] In relation to the invoices which Mr Shaw described as “queried” (totalling
$38,740.05) and those for which Mr Shaw said Redline had no record of receipt (totalling $8,111.86), Redline has not provided the “material short of proof” required to support an applicant’s claim that a debt is disputed. This reflects the facts that Mr Shaw’s affidavit contained something in the nature of a reservation of position rather than the raising of dispute and that Redline has not filed reply evidence or evidence
updating any further research or enquiries which Redline made.
7 Companies Act 1993, s 287(a).
Redline’s recognition of the debt
[36] After Redline had done what was required by way of an originating application to bring a dispute into Court, Redline chose to enter into the intervening agreement with Conveyor on 11 May 2016, by which Redline agreed to pay as demanded the whole $104,645.16 together with Conveyor’s costs and disbursements. Ms Hopkins emphasised that Redline had entered the intervening agreement on a “without prejudice” basis, meaning that Redline’s agreement was without admission of liability. Whatever tag was applied by Redline to the settlement, the fact remains that it entered a settlement requiring it to pay the full demand plus costs. This provides further evidence, beyond the concessions in Mr Shaw’s evidence, that Redline’s debt to Conveyor was substantially undisputed. Through Redline’s failure to subsequently make payment under the intervening agreement, there is evidence that Redline did not have that ability.
Other indications of Redline’s inability to pay its debts
[37] Conveyor’s evidence was from its director, John Dowers, and from Jeffrey
Denley.
[38] Mr Denley, from his time as a Redline employee, deposed that his salary payments in 2015 were frequently late. He exhibits records he has obtained from the Inland Revenue Department which appear to indicate that Redline has not made PAYE and KiwiSaver payments on Mr Denley’s account after October 2015. Mr Denley refers to conversations which he has had with personnel from three contractors – he relays what they have said to him as to debts owed by Redline. He also deals in detail with the substance of the claims covered by the statutory demand.
[39] I treat Mr Denley’s evidence as to his employment payments, particularly as it has not been replied to, as further evidence of Redline’s inability to pay its debts as they fell due. I disregard the hearsay evidence in relation to other contractors, who have not given evidence.
[40] In addition to these matters, Mr Cowey referred to a second liquidation proceeding against Redline,8 which is also due to be heard on 3 June 2016.9 I called for the Court file. The file contains affidavit evidence as to the service on 26
February 2016 by Asmuss South Island Ltd upon Redline of a statutory demand for
$48,828.95 which went unmet. Asmuss commenced its liquidation proceeding on 12
April 2016, as a creditor still for $48,828.95. The allegations in the statement of claim were verified by Asmuss’s director. On 19 May 2016, the Court received from the creditor notice of an intended discontinuance. This file evidences the existence of a debt which was still owing in May 2016, with satisfaction of that particular creditor’s debt apparently occurring some time between the filing of the proceeding (12 April 2016) and the notice of intended discontinuance (19 May 2016). These matters collectively tend to support the reliability of the presumption of Redline’s insolvency and other evidence of insolvency. Debts have not been paid as they fell due. The reasonable inference is that that situation arose from an inability of Redline to meet all its due debts from cash flow.
[41] The further inference which is reasonably available from the events in the Asmuss v Redline litigation is that Redline may be satisfying the debts it owes to some creditors while not achieving a similar discharge of the debts owed to others.
Application of s 291(1) Companies Act 1993
The threshold test
[42] The threshold test under s 291(1) of the Act is satisfied. Redline is unable to pay its debts.
[43] The present case is unusual in that Redline’s application on a literal reading affects the entire statutory demand. But, when the application is read with the grounds stated and the affidavit evidence, Redline does not pursue a setting aside of the entire statutory demand. To that extent, the application must be dismissed in part. The Court’s jurisdiction under s 291(1) – to make an immediate order of
liquidation – is available.
8 Asmuss South Island Ltd v Redline N.Z. Ltd CIV-2016-409-239.
9 The same date as the first hearing of Conveyor Technology Ltd v Redline N.Z. Ltd CIV-2016-
409-265.
The discretion
[44] For Redline, Ms Hopkins referred to several decisions (to which I have referred at [16] – [19] above) in which the exercise of the discretion under s 291(1)(b) was discussed in relation to “moribund companies”.
[45] However, as is clear from the judgment of the Court of Appeal in Norman v ANZ National Bank Ltd, the discretion under s 291(1)(b) is not to be fettered by regard to a recognised category of appropriate situation such as that of the “moribund company”.10
[46] Redline has not provided any positive evidence of its solvency or ability to pay its debts. The single reference to solvency in Mr Shaw’s affidavit was his concluding paragraph which reads:
Solvency of Redline
34.The reason Redline has not paid the CTL invoices is due to sorting out the issues above and is not due to an inability to pay.
[47] The evidence to which I have referred, and which undermines that bare assertion, has not been replied to.
[48] On the evidence, Redline is unable to pay its debts. In the case of Conveyor, a creditor through having as sub-contractor supplied services and equipment to Redline, the undisputed debt has gone unpaid for months. There have been broken commitments to payment even while the debt has been pursued through the formal procedures of the Act. The fact that one of the commitments has been broken renders false that which has been said by Redline’s director on oath in this proceeding. All this points to an extremity of problems faced by Redline – otherwise the broken commitments in recent months are inexplicable.
[49] These matters point to Redline’s assets being in jeopardy and the rights of its
creditors being prejudiced. The unknown amounts which Redline may have been receiving and may yet receive from its own debtors are capable of being utilised by a
10 Norman v ANZ National Bank Ltd, above, n 3.
company under financial stress to advantage some creditors over others. The fate of the Asmuss litigation reinforces this assessment of jeopardy and prejudice.
[50] There is strong reason on these grounds to grant Conveyor’s request for an
immediate order of liquidation.
[51] I take into account also that it is clear that Redline and its legal advisors have been conscious that delay inherent in the Court’s usual liquidation procedures might be utilised by Redline to achieve a settlement on terms acceptable to Redline.
[52] In the email sent by Ms Hopkins to Mr Cowey as part of the exchange which led to the intervening agreement of 11 May 2016, Ms Hopkins recorded:
Please see below which has been sent to your client. My client has asked me to emphasis [sic] this offer is withdrawn if the advertising proceeds this week.
Our instructions are to defend the application on the basis that our client is not insolvent if settlement cannot be reached on this matter. On a recent application to liquidate that we were involved in, we had to wait two months for a defended hearing date. Therefore this arrangement is very much in your client’s interest if CTL wants to receive prompt payment.
[53] In short, Redline has been aware of its apparent ability, through the nature of liquidation procedures, to defer payment if the payment is not accepted on Redline’s terms.
[54] Against these matters, I balance the draconian nature of an immediate order of liquidation. But that of itself is insufficient to lead to a different conclusion having regard to the evidence of insolvency, the jeopardy to company assets and the risk to creditors. The company has had a lengthy period in which to put its financial house in order and has apparently in that time resolved its indebtedness to another creditor but not to Conveyor. Outstanding creditors are entitled to protection.
[55] The final matter I consider relates to a degree of surprise for Redline in facing an application for immediate liquidation on the first hearing date. A lack of advance warning that an application for immediate liquidation will be made has previously been recognised by this Court as a factor against making an order for
immediate liquidation. In Bristol Forestry Venture Ltd v Commissioner of Inland Revenue, Associate Judge Faire saw the lack of advance warning as perhaps a reason why no evidence was produced by the two company applicants as to relevant matters.11
[56] In this case, I am satisfied that prior notification was handled appropriately by Mr Cowey for Conveyor, albeit on the eve of the hearing. Mr Cowey then put the Court and Redline on notice of the intended application. There was limited opportunity for longer notice because the extended period which Redline had obtained for payment (until noon on Monday, 16 May 2016) had passed, unmet, only two days before the notice was given. When company debtors avail themselves of the setting aside procedures under the Act, they do so with the risk that the statutory procedure of immediate liquidation may become available under s 291(1)(b). It was for Redline, when it obtained its extended date for payment, to ensure that its house was in order, both in relation to the promised payment and, in the event of continued default, in relation to the outcome of the setting aside application.
[57] This is not a case in which short notice of an application for immediate liquidation should lead to a different outcome than would otherwise be appropriate.
Appropriate outcome
[58] The appropriate outcome is that there be an order for immediate liquidation. At the time this judgment is being delivered (some four days after the hearing), it is to be inferred from the absence of further memoranda filed by counsel that such banking transactions as were intended by Redline in Australia have even today still not resulted in a discharge of Redline’s indebtedness to Conveyor.
[59] Mr Cowey submitted that an alternative to the Court’s making an order of liquidation which immediately spoke would be for the Court to make an order which would take effect upon the expiry of a given period of say 48 hours. Counsel might then be able to file in the interim a joint memorandum if Conveyor ceased to be a
creditor of Redline. The usually appropriate course is that a liquidation order speak
11 Bristol Forestry Venture Ltd v Commissioner of Inland Revenue [2013] NZHC 2384, (2013) 26
NZTC 21-031 at [57](b).
immediately. This judgment has been reserved for a time following the hearing. I do not consider it appropriate to depart from the usual course that a judgment should speak immediately. The Court has no evidential basis for believing that some error in the banking system, rather than Redline’s insolvency, has cut across Redline’s completion of the intervening agreement.
Costs
[60] It is appropriate that costs be reserved.
Orders
[61] I order:
(a) The application dated 14 March 2016 is dismissed to the extent that the application encompasses $63,229.30 of the payment demanded by Conveyor Technology Ltd;
(b) Redline N.Z. Ltd is put into liquidation;
(c) Lynda Smart and Geoff Brown are appointed liquidators pursuant to their consents dated 19 May 2016;
(d) This order is timed at 4.45 pm; and
(e) The costs of the application are reserved.
Associate Judge Osborne
Solicitors:
Lane Neave, Christchurch
Parry Field, Christchurch
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