Russell McVeagh v NZ Future Forest Products Limited

[2022] NZHC 777

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2021-404-002421

[2022] NZHC 777

BETWEEN

RUSSELL MCVEAGH

Plaintiff

AND

NZ FUTURE FOREST PRODUCTS LIMITED

Defendant

Hearing:

On the papers

Counsel:

K M Massey for Plaintiff

B P Henry and A R Kenwright for Defendant

Judgment:

13 April 2022

JUDGMENT OF ASSOCIATE JUDGE P J ANDREW

This judgment was delivered by Associate Judge Andrew on 13 April 2022 at 12 noon

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

Date ………………………….

RUSSELL MCVEAGH v NZ FUTURE FOREST PRODUCTS LTD [2022] NZHC 777 [13 April 2022]

Introduction

[1]        These are liquidation proceedings. The plaintiff contends that the defendant company has failed to comply with a statutory demand which was issued for unpaid legal services.

[2]        The defendant makes an interlocutory application to restrain the advertising of the proceedings. It also seeks an order that the Court file be kept sealed and the contents of the affidavit of Mr David Henry and any further affidavits on behalf of the defendant be suppressed until further order of the Court.

[3]        The defendant contends that Mr Henry, its managing director, is currently working on a confidential transaction which will result in the defendant’s ability to pay the debt owed to the plaintiff and the remaining creditors. This is described throughout the documentation filed with the Court as the “potential transaction” or “confidential transaction”.

[4]        The critical issue I must determine is whether the defendant has established that continuing with the proceedings and the advertising of it at this stage savours of unfairness or undue pressure.

Background facts

[5]        The proceedings were filed on 9 December 2021. The current interlocutory applications were filed on 22 December 2021. Since then, there has been some negotiation between the parties seeking to resolve the advertising issue.

[6]        The interlocutory application seeking to restrain advertising is expressed in bald terms; it does not seek a restraint pending the substantive hearing or further order of the Court.

[7]        The first affidavit of Mr David Henry filed in support of the application, sworn 22 December 2021, stated that Mr Henry, in his personal capacity, was working on a transaction that would allow him to pay all the creditors of the defendant. Mr Henry said that the amounts owing to the creditors are in aggregate significantly greater than

that owed to the plaintiff. Mr Henry contended that the negative publicity which would undoubtedly occur following any advertisement of the proceedings would, he believes, result in the irrevocable loss of the transaction which he is undertaking.

[8]        The plaintiff was subsequently informed by counsel for the defendant that the potential transaction was anticipated by Mr David Henry to be completed by the end of February 2022.

[9]        In its Notice of Opposition to the restraining application, the plaintiff indicated that it was prepared to consent to the restraining of advertising until after 7 March 2022, provided that further information as to the potential transaction was provided by way of a memorandum of counsel by the defendant. The plaintiff says that this would then have enabled the restraining application to have been dealt with by consent.

[10]      On 18 February 2022, the defendant proposed a delayed timetable for the determination of the restraining application including vacating the hearing scheduled for 25 February 2022 and arranging a two-hour hearing to deal with the restraining application after mid-March 2022.

[11]      The plaintiff informed the defendant that it was not prepared to proceed on that basis and invited the defendant to agree that the restraining application be dealt with by consent (as previously discussed) or on a timetable to a decision on the papers as set out below.

[12]The parties agreed to the matters being determined on the papers.

[13]      In a second affidavit sworn 11 March 2022, Mr Henry (in reply) stated that the “final part of the transaction” will be completed “in the next few weeks” and “I anticipate the defendant will be able to settle the debt with creditors by late March 2022”.

[14]      In her written submissions of 22 March 2022, counsel for the plaintiff submitted that the Court should make orders that the respondent not advertise the proceedings until the later of 15 April 2022 or one week prior to the hearing of its

liquidation application. That was based in part on the indication from Mr Henry in his affidavit in reply that the potential transaction was due to be completed by the end of March 2022.

[15]      By joint memorandum of counsel dated 30 March 2022, the parties by consent sought timetabling orders leading to a substantive hearing, including a direction that the hearing date be allocated for the first available date after 2 May 2022.1

[16]      As at 5 April 2022, the plaintiff has not received either full or partial repayment of the outstanding debt owed to it.

[17]      On 5 April 2022, counsel for the defendant filed and served a further memorandum updating the plaintiff and the Court on the status of the “confidential transaction”. The memorandum advises that the defendant “anticipates that the transaction will be fully settled within the next ten weeks and payment will be made to the plaintiff”.

Relevant legal principles

[18]Rule 31.11 of the High Court Rules reads:

Power to stay liquidation proceedings

(1)        If an application for putting a company into liquidation is made under rule 31.3, the defendant company, or, with the leave of the court, any creditor or shareholder of that company or the Registrar of Companies, may, within 5 working days after the date of the service of the statement of claim on the defendant company, apply to the court –

(a)for an order restraining publication of an advertisement required by rule 31.9 or any other information relating to that statement of claim; and

(b)for an order staying any further proceedings in relation to the liquidation.

(2)        The court must treat an application under subclause (1) as if it were an application for an interim injunction and, if it makes the order sought, it may do so on whatever terms the court thinks just.

(3)The inherent jurisdiction of the court is not limited by this rule.

1      A hearing date has since been allocated for 25 July 2022.

[19]      In Taxi Trucks Ltd v Nicholson,2 the Court of Appeal held that it has long been settled that the Court may, under its inherent jurisdiction, restrain or stay winding-up proceedings that are an abuse of the court’s process. It held that a general winding-up order will not be made where there is a genuine dispute; but this is not an inflexible rule. The governing consideration can only be where the presenting or proceeding with an application savours of unfairness or undue pressure and whether that stigma attaches to an application must depend on the particular facts.3

[20]      It is a serious matter to stay winding-up proceedings so the decision to do so is never made lightly. The onus is on the applicant and it is normally necessary to demonstrate something more than the balance of convenience considerations which are usually considered on an application for interim injunction.4

Analysis and decision

[21]      The defendant does not dispute that the debt, the subject of the statutory demand, is due and owing. Likewise, there is no dispute that there has been a failure to meet the statutory demand. The plaintiff is thus entitled to rely upon the presumption in s 287 of the Companies Act 1993.

[22]      This case is therefore somewhat unusual because the defendant does not rely on the conventional ground of there being a genuine dispute about the debt. Rather, it is contended that the advertising of the proceedings at this stage savours of unfairness or undue pressure because it would likely jeopardise a valuable commercial transaction the defendant company is currently working on, which will result in payment to the plaintiff. In essence, the defendant seeks further time to complete the transaction and to meet its obligations to the plaintiff.

[23]      In his second affidavit of 11 March 2022, Mr Henry provides the following account of the potential transaction:

The transaction involves the sale of assets of the defendant company for $1.8 million. These assets are intellectual property and/or based on agreements that

2      Taxi Trucks Ltd v Nicholson [1989] 2 NZLR 297, (1989) 1 PRNZ 390 (CA) at 3.

3      Taxi Trucks Ltd v Nicholson, above n 2, at 4, citing Exchange Finance Co Ltd v. Lemmington Holdings Ltd [1984] 2 NZLR 242 at 8.

4      Nemesis Holdings Ltd v North Harbour Industrial Holdings Ltd (1989) 1 PRNZ 379 at 385.

will terminate with liquidation. I am working with the intended purchaser and its investor who are funding the purchase with NZ$10 million as part of the purchaser’s equity strategy.

The transaction is with a conservative Japanese corporate, which is one of the top five global Japanese trading houses.

[24]In his first affidavit of 22 December 2021, Mr Henry states:

The scale of publicity and media interest surrounding anything to do with my family name, has been proven to be disproportionate to the actual underlying events occurring in multiple instances over the past 24 months. The negative publicity which will undoubtedly occur following the advertisement of this proceeding will, I believe, result in the irrevocable loss of the transaction which I am undertaking.

[25]      The defendant argues that it would be unjust and unfair to proceed with the advertisement where the consequences are inevitable detrimental publicity on a large scale. It is contended that should the potential transaction be lost following advertisement of the proceedings, there will be no value remaining in the assets of the company once it is put into liquidation. The plaintiffs, it is claimed, will not be likely to receive payment in a liquidation.

[26]      In his first and third affidavit (sworn 21 March 2022), Mr Henry refers to the liquidation of a related company, Kinleith Land & Infrastructure Ltd, and that company’s unsuccessful application for a restraint of advertising on the same grounds as this application. Mr Henry claims that as a direct result of the negative publicity that advertisement of proceedings gave rise to, a transaction which Kinleith Land & Infrastructure Ltd was finalising and worth some $2.5 million was terminated by the other party to the transaction. Mr Henry argues that the same irrevocable loss will likely occur in this case. In his third affidavit, Mr Henry has attached a copy of the liquidator’s second report in the Kinleith Land & Infrastructure Ltd liquidation.

[27]      The case law makes it clear that the governing consideration is unfairness or undue pressure. That is the threshold the defendant must establish.

[28]      It is important to focus on the steps the plaintiff has taken in its prosecution of these proceedings. It cannot be disputed that the plaintiff has acted responsibly and with restraint in agreeing to delay the advertising. It has, in my view, already given

the defendant a fair and reasonable opportunity to complete the potential transaction. In substance, that is what the defendant is seeking.

[29]      Having received advice from the defendant that the potential transaction would settle in February 2022, the plaintiff, in January 2022, offered to restrain itself from advertising the proceedings until 7 March 2022. In its submissions of 22 March 2022, the plaintiff has proposed that the Court make orders that it not advertise the proceedings until the later of 15 April 2022 or one week prior to the hearing of its liquidation application.

[30]      Against that background the defendant, in its latest memorandum before the Court, now advises that the potential transaction “will be fully settled within the next ten weeks” and “payment will then be made to the plaintiff”. In that memorandum the defendant advises that the transaction “is progressing as expected” but that there have been delays caused by COVID-19 restrictions preventing the parties from travelling to complete the agreement.

[31]      These circumstances do not, in my view, give rise to a serious issue that proceeding with the application would savour of unfairness or undue pressure. The debts at issue relate to services performed by the plaintiff between June 2019 and May 2020. The defendant has been on notice for some considerable time now (through both letters of demand of August 2020 and the statutory demand of October 2021) that it has unmet legal obligations to the plaintiff. The plaintiff has given it fair and reasonable opportunity to make payment but now faces yet further delay without any meaningful explanation for such delay apart from glib references to COVID-19 and an inability to travel. Those factors must have been at play since the liquidation proceedings were filed and have not previously been referred to by the defendant when it gave assurances that the potential transaction would be completed by mid-March 2022 and then by the end of March 2022.

[32]      It is also notable that the defendant has not provided any significant detail about the potential transaction. There is no correspondence or documentation from the Japanese “corporate”, said to be negotiating with the defendant to purchase assets of the defendant company. In the second memorandum dated 5 April 2022, counsel

for the defendant submitted that it has not provided detailed information on the transaction because of concerns that the plaintiff would not keep it secure. However, in my view, this is a red herring. There are procedures available if there is a genuine concern about the ability of another party to keep documents confidential and secure.

[33]      Under r 31.11(2) the Court is required to treat an application to restrain advertising as if it were an application for an interim injunction. However, I find that the defendant has not established that there is a serious issue to be tried. Apart from the assertions Mr Henry makes about the potential transaction, no accounting or financial records have been provided about the solvency or otherwise of the defendant. In particular, there is no credible financial data provided that could establish that if the potential transaction is successful, through a sale of the company’s assets, that it would be in a position to meet payment of all its outstanding debt. The defendant has thus failed to establish that there is a serious issue to be tried as to whether it is solvent or has the potential to be, following the sale.

[34]      As Wallace J held in Nemesis Holdings Ltd,5 it is a serious matter to stay winding-up proceedings so that a decision to do so is never made lightly. In this case the defendant has simply failed to provide the necessary evidential basis for the orders that it seeks.

[35]      Mr Henry’s reference to the liquidation of the related company Kinleith Land & Infrastructure Ltd does not provide any real support for the restraining application. The liquidator’s report attached to his affidavit does not support Mr Henry’s claim that the failure to restrain advertising resulted in a similar confidential and potential transaction falling over, thus jeopardising the position of all creditors. Furthermore, I note that in the liquidation proceedings relating to Kinleith Land & Infrastructure Ltd liquidation proceedings, the Court granted that company an adjournment to give it time to complete negotiations with the third party.6 Despite the adjournment being granted, Kinleith Land & Infrastructure Ltd was unable to conclude the contract and was placed in liquidation. Rather than provide support for the defendant’s position,

5      Nemesis Holdings Ltd v North Harbour Industrial Holdings Ltd, above n 4, at 385.

6      See Minute of Sussock AJ in McKay Ltd v Kinleith Land & Infrastructure Ltd CIV-2021-488-034, dated 21 June 2021. At [6] Sussock AJ notes that the name of that third party was also not disclosed for reasons of commercial sensitivity.

the circumstances of Kinleith Land & Infrastructure Ltd tend instead to suggest that there is merit to the plaintiff’s substantive claims.

[36]      Finally, I note that the substantive hearing has been scheduled for 25 July 2022. The terms of any order that the plaintiff would agree to would result in the plaintiff agreeing not to advertise until a week before that hearing, namely not until 18 July 2022. In reality, that gives the defendant further time to conclude the potential transaction and amounts to the further ten weeks of time that the defendant seeks.

[37]      I conclude, therefore, that the defendant has failed to establish the necessary unfairness or undue pressure, as well as any serious issue to be tried. Accordingly, the application for an order restraining advertisement of the proceedings is dismissed.

[38]      As to the application that the Court file be kept sealed and that the contents of Mr Henry’s affidavits be suppressed, that application suffers from the same fundamental problem, namely an insufficient evidential foundation to justify the order sought. As already noted, there is not a great amount of detail in Mr Henry’s affidavits and the Japanese company with whom he is said to be negotiating with is not named. I accept there is some reference to the value of the company’s assets, but on the face of the affidavits it is difficult to see that they contain anything truly confidential such that there should be an order for suppression. Mr David Henry has already been in the public domain recently in association with the liquidation of Kinleith Land & Infrastructure Ltd. Beyond the assertions he makes that the potential transaction might not succeed, there is very little real evidence of any prejudice that might arise were the affidavit evidence not suppressed.

[39]      I therefore dismiss the second application, namely for an order suppressing the evidence.

Result

[40]      The defendant’s interlocutory application to restrain advertising and for an order that the Court file be kept sealed and the contents of the defendant’s affidavits suppressed, are both dismissed.

[41]      As proposed by the plaintiff, I order that the plaintiff is not to advertise the proceedings until 18 July 2022, being one week prior to the hearing of the liquidation application.

[42]      As to costs, having succeeded, I am of the preliminary view that the plaintiff is entitled to costs on a 2B basis plus disbursements. If the parties cannot reach agreement, then memoranda (no more than three pages) are to be filed and served within 14 days.

Associate Judge P J Andrew