Saiteysmcmahon Property Limited v Morning Star Enterprises Limited HC Auckland CIV 2007-404-006632

[2008] NZHC 2405

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2007-404-006632

UNDER  the Companies Act 1993

BETWEEN  SAITEYSMCMAHON PROPERTY LIMITED

Plaintiff

ANDMORNING STAR ENTERPRISES LIMITED

Defendant

Hearing:         7 July 2008

Appearances: M T Davies/G Anderson for Plaintiff

T Herbert/ F Darlow for Defendant

Judgment:      9 July 2008 at 4.30 pm

JUDGMENT OF ASSOCIATE JUDGE ROBINSON

This judgment was delivered by me on 9 July 2008 at 4.30 pm pursuant to Rule 540(4) of the High Court Rules.

Registrar/Deputy Registrar

Solicitors:           Meredith Connell, PO Box 2213, Auckland

LeeSalmonLong, PO Box 2026, Shortland St, Auckland

SAITEYSMCMAHON PROPERTY LIMITED V MORNING STAR ENTERPRISES LIMITED HC AK CIV

2007-404-006632  9 July 2008

[1]      The plaintiff applies for an order that the defendant be put into liquidation on the ground that the defendant is unable to pay its debts. In opposing the application the defendant concedes being unable to pay its debts but claims there to be circumstances which would justify the court in refusing the plaintiff’s application or adjourning the application for six months by which time it is hoped the defendant should be able to pay the amount owing to the plaintiff.

[2]      The defendant owes the plaintiff $137,077.80 pursuant to a judgment of the District Court dated 1 June 2007. Although the defendant appealed from that judgment, the plaintiff on 24 August 2007 arranged for a statutory demand to be served on the defendant requiring payment of the amount owing under the judgment within 15 working days.

[3]      The defendant within the required time applied for an order setting aside the statutory demand and stay of execution of the judgment.

[4]      On 17 October 2007, both the defendant’s appeal from the decision of the District Court entering judgment in favour of the plaintiff for the sum of $137,077.80 and the defendant’s application to set aside the statutory demand requiring the defendant to pay that amount were dismissed but the time for the defendant to satisfy the statutory demand was extended until 5pm on 24 October 2007.

[5]      On the 29 October 2007 the plaintiff issued these proceedings seeking an order winding up the defendant. On the issue of these proceedings, the defendant applied for an order restraining advertising or other publication of the proceedings. That  application  to  stay  publication  of  these  proceedings  was  dismissed  on  30

November 2007.

[6]      The proceedings for an order putting the defendant company into liquidation came on for hearing on the 14 February 2008. As the proceedings were defended, the proceedings were adjourned for a half day fixture on 7 July 2008.

[7]      The defendant applied to the Court of Appeal for leave to appeal the decision of the High Court dismissing its appeal from the decision of the District Court. The

defendant’s application for leave to appeal came on for hearing on 4 March 2008 when that application was dismissed and an order made requiring the defendant to pay the plaintiff’s costs on a solicitor and client basis.

[8]      In a letter of the 2 July 2008 from the defendant’s solicitor’s to the plaintiff’s solicitor’s it is acknowledged that the defendant is in fact insolvent. Enclosed with that letter is the defendant’s statement of accounts and balance sheet for the year ended 31 March 2007. Those statements disclose a deficit of $3,872,281 which includes an item under investment impairment of $3, 465,000. Included in the assets of the defendant, are shares in Morning Star (St Lukes Garden Apartments) Limited. For the year ended 31 March 2006 those shares were valued at $3,465,000. For the year ended 31 March 2007, the shares have no value.

[9]      In the notes accompanying the accounts, the accountants who prepared the accounts have the following comments relating to shares in Morning Star (St Lukes Garden Apartments) Limited:

Shares in Morning Star (St Lukes Garden Apartments) Limited were purchased  by  the  Company  in  the  2006  income  year  at  the  registered valuation of $3,465,000. Due to events occurring since the time of purchase of the shares, as the date of signing of these accounts, it is not expected that the investment in Morning Star (St Lukes Garden Apartments) Limited is recoverable. The investment represents 99 ordinary shares which is 99% of the share capital of this company. The results of this company have not been included in these financial statements. An intercompany loan of $26,500 has also been written off during the year.

[10]     According to the evidence of Mr Morgenstern, who is the sole director and shareholder of the defendant, Morning Star (St Lukes Garden Apartments) Limited (St Lukes) is developing an apartment complex at St Lukes Road, Auckland. Mr Morgenstern is also a director of St Lukes. The development consists of some 281 units of which 235 units appear to be sold with the purchasers in possession. On 20

November 2002  and 29 March 2004, St  Lukes obtained resource  consent for a comprehensive development of 281 apartments, 616 square metres of office space and 493 carparks at 51A St Lukes Road, St Lukes, Auckland. In 2007 St Lukes applied to the Auckland City for retrospective consent to a change in the mix of two and three bedroom apartments and a range of sundry matters.

[11]     According  to  the  report  prepared  for  the  meeting  of  Auckland  City  to consider the application for retrospective consent, the residential development had been substantially constructed with work halted on two half constructed buildings being blocks G and H. Blocks G and H each consist of five apartments. The report noted that the site development, particularly with regard to blocks G and H was not in accordance with the existing consents. The report also recorded that St Lukes, upon granting of the variation consent application, will either rectify the problem or bring a separate application for approval of the alterations to the development.

[12]     Auckland City granted St Luke’s application for retrospective consent on 23

April 2008. The decision granting retrospective consent is subject to an appeal to the Environment Court by eight parties including St Lukes Garden Apartments, Progressive Society Incorporated and St Lukes Sandringham Environmental Protection Society Incorporated. The appeal has not been heard.

[13]     Counsel for the defendants contends that if the consents are confirmed by the Environment Court and the development is completed, the shares of the defendant in St Lukes will become valuable and provide assets which will result in the plaintiff being paid. Consequently, the court should either  refuse the plaintiff’s  claim or adjourn the proceedings to await the outcome of the appeal to the Environment Court in the hope that the appeal is unsuccessful, resulting in the St Lukes project proceeding which will result in the shares of the defendant in St Lukes being of value.

[14]     Counsel for the defendant points out that if the plaintiff proceeds and obtains an order putting the defendant company into liquidation, this will provide grounds for the secured creditors of St Lukes appointing a receiver which could jeopardise the St Lukes development.

[15]     St Lukes owes in the region of $13,000,000 to its bankers. This funding has been provided for the purpose of the St Lukes development. The defendant and St Lukes have agreed with St Luke’s bankers that interest on the $13,000,000 which at present is not being paid, should be capitalised. Although there is no direct evidence as to the rate of interest being charged by the banks, assuming a rate of 9% per

annum  the  interest  is  accruing  on  a  capital  sum  of  $13,000,000  at  the  rate  of

$1,170,000 per annum or $97,500 per month. The arrangement with the bank to capitalise the interest results in an increase of the bank’s secured debt by $97,500 per month and a reduction of the amount available to unsecured creditors of a similar amount should St Lukes go into liquidation.

[16]     I  accept  that  in  appropriate  cases  the  court  has  the  power  to  refuse  an application   to   place   an   insolvent   company   into   liquidation.   As   stated   by Baragwanath J in Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395 at 408, para 48:

But like any statutory discretion, that conferred by s  290(4)(c)  must  be exercised in conformity with the purposes of the measure by which it is conferred. Use of the exceptional power must be confined to cases which clearly justify departure from the fundamental principle that insolvency should bring the end of a company’s existence.

[17]     Factors which the court should take into account include the wishes of other creditors. In this respect, in Re JRS Garage Limited [1961] NZLR 632 at p 632 the court stated:

Where a majority of the creditors of a company oppose the winding up of the company then, even though it is established that the company is unable to pay its debts, the Court should give effect to the wishes of the majority unless the petitioning creditor can give some valid reason why effect should not be given to those wishes.

[18]     A claim by a creditor to put a company into liquidation is brought on behalf of all creditors. Thus when the creditors disagree on whether the company should be put into liquidation, the court must give some weight to the wishes of the majority and in an appropriate case refuse to grant an order putting the company into liquidation. In the present circumstances, there is no evidence of any opposition to the plaintiff’s application by other creditors. In such a case there must be very cogent reasons for the court to refuse the application.

[19]     The reason advanced by the defendant in justifying refusing the application is that the defendant may realise sufficient from the St Lukes development to enable the plaintiff to be paid. On the evidence produced by the defendant, such a successful outcome for the plaintiff cannot be guaranteed. The appeal against the granting of

retrospective consent to the development may be successful which will be disastrous for the defendant and St Lukes.

[20]    Even if the appeal is not successful and St Lukes can proceed with its development, there is no evidence from which the court can conclude that the development will be a financial success. As already pointed out capitalised interest increases St Lukes debt by at least $1,170, 000 per annum. St Lukes must also pay for  the  completion  of  the  development  and  sell  the  units  on  what  is  clearly  a depressed market. In the absence of any reliable information from St Lukes as to its financial ability to complete the development, the court cannot conclude that the development will be a financial success.

[21]     At present St Lukes may not be able to satisfy the test as to its solvency set forth in s 4 Companies Act 1993. It clearly cannot pay its interest whenever interest falls due. Consequently there are good grounds for concluding it cannot pay its debts as those debts become due in the normal course of business. At present part way through a development that may not be able to be completed, could result in the value of its assets being less than the value of its debts. If that is indeed the situation a director who agreed to the company trading, could be trading recklessly in terms of s 35 as the company is trading in a manner likely to create a substantial risk of serious loss to the company’s creditors. It would not be appropriate therefore to decline to liquidate the defendant gambling on the chance that St Lukes continuing to trade will result in a profit having regard to the commercial risks involved and the fact that a director allowing the company to trade in such circumstances could be guilty of reckless trading.

[22]     The appointment of an independent liquidator will enable the inter-company transactions to be investigated. Inappropriate inter-company transactions could be set aside. Delays in the appointment of a liquidator could provide the defendant with an unfair advantage in that such delays could prevent the liquidator from setting aside certain transactions. As stated by Baragwanath J in CIR v Chester Trustee Services Ltd at p 409, para 55:

An exercise of discretion under s 290(4)(c) must take account of the wishes of  any  outstanding  creditor.  To  relieve  the  company  and  its  officers  of

liability to close examination of their affairs and conduct is a course not lightly to be taken. Perverse incentives would be created if the Court were too readily prepared to accept an argument that “nothing will come of the liquidation”.

[23]     There are items in the accounts of the defendant for the year ended 31 March

2007 which do require further investigation. By way of example Whitford Ranch Ltd appears as an asset in the accounts for the 31 March 2006 valued at $782,900 whereas for year ended 31 March 2007 that asset is valued at nil. The notes to the account indicate that the advance was assigned to Newmarket Carpark Ltd to offset the liability to Newmarket Carpark Ltd. The notes state the advance was at face value and a balance of $66,590 was written off considered to be unrecoverable.

[24]     In the circumstances, I am satisfied that the plaintiff is entitled to an order winding up the defendant. Such order is accordingly made. Stephanie Beth Jeffreys and Timothy Wilson Downes are appointed liquidators. The order is timed for 4.30 pm on 9 July 2008.

[25]     The plaintiff is entitled to costs. The plaintiff seeks costs on an indemnity basis.  In  the  judgment  declining  leave  to  appeal  from  the  District  Court,  the defendant was ordered to pay the plaintiff’s reasonable solicitor and client costs. A similar order was made on the dismissal of the defendant’s application for leave to appeal to the Court of Appeal. I am satisfied that for the reasons given in those decisions the plaintiff is entitled to its reasonable costs on a solicitor and client basis

with disbursements as fixed by the Registrar.

Associate Judge Robinson