Sol Trustees Limited v Giles Civil Limited
[2014] NZHC 2008
•22 August 2014
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2014-404-000299
CIV-2014-404-000459 [2014] NZHC 2008
BETWEEN SOL TRUSTEES LIMITED
Applicant
AND
GILES CIVIL LIMITED Respondent
Hearing: 14 August 2014 Appearances:
B P Molloy/R Kirwan Jones for the Applicant
D Hughes/E E Cowle for the RespondentJudgment:
22 August 2014
JUDGMENT OF ASSOCIATE JUDGE OSBORNE (as to stay of proceedings pending appeal)
Background – two statutory demands were not set aside
[1] The applicant Sol Trustees Limited (Sol) filed applications to set aside the two statutory demands (totalling $972,948.98) served on behalf of the respondent Giles Civil Limited (Giles). The demands related to payment for work undertaken pursuant to construction contracts.
[2] The applications were heard on 5 May 2014 and a judgment issued on 4
August 2014.1 Associate Judge Sargisson declined the applications to set aside the statutory demands. Her Honour held that the time for compliance with both statutory demands was extended to 15 working days from the date of the judgment,
25 August 2014.
1 Sol Trustees Ltd v Giles Civil Ltd [2014] NZHC 1813.
SOL TRUSTEES LIMITED v GILES CIVIL LIMITED [2014] NZHC 2008 [22 August 2014]
This application
[3] On 7 August 2014 Sol filed an application for orders: (a) staying execution of the judgment; and
(b)prohibiting any liquidation proceedings brought in reliance on the judgment.
[4] Sol noted that it was filing an appeal against the judgment. Sol asserted that if the stay is not granted the appeal will be rendered nugatory. Since the hearing, the Registrar has been notified that Sol has filed its appeal.
Sol’s evidence on the application
[5] In an affidavit in support John Hamilton, the director of Sol, deposed that Sol and Giles were principal and head-contractor respectively to a construction contract at Okura and that Giles agreed to complete the required civil works by May 2013 but failed to do this. Instead Giles did not complete the works until January 2014 causing Sol losses as a result of the delays.
[6] Mr Hamilton deposes that all lots of the subdivision were presold with the contracts unconditional. To date 11 of the 34 lots have settled, with one more due to settle on 15 August 2014. He anticipated that the balance would settle between September 2014 and February 2015.
[7] By reference to a financial report of Brendan Lyne, a forensic accountant, Mr Hamilton says it was anticipated that after repayment of creditors there would be a surplus of more than $600,000 which takes into account Giles originally demanded the sum of $872,000. Mr Hamilton had instructed his solicitors to provide an undertaking to retain any surplus funds pending resolution of the parties’ dispute.
[8] Mr Hamilton deposes that Sol is currently engaged in arbitral proceedings with Giles in which it seeks approximately $1,675,000 in damages for late completion of the subdivision. Mr Hamilton says the arbitration claim is more
expansive than Giles’ claims in the present proceeding which are limited to Sol’s
preliminary liability under the payment claim regime.
[9] Mr Hamilton says that if execution of the judgment is not stayed then Sol may not be able to satisfy the immediate demand and it could be liquidated. He asserts that if this were to occur Sol’s right to appeal would be rendered nugatory. Further, if Sol ever liquidated, it would not be able to continue the arbitration which Mr Hamilton believes would resolve all outstanding claims between the parties.
[10] Mr Molloy confirmed in Court that Sol irrevocably authorises its solicitors (Haigh Lyon) to act on the sale of all remaining lots and to deal with proceeds of sale in accordance with the agreement set out in a Haigh Lyon letter dated 25 February
2014.
Giles’ evidence in opposition
[11] In opposition to the stay application, a financial critique of Sol’s financial
evidence was provided by David Vance, a forensic accountant. He states that:
(a) He is independent of the parties, having had no previous dealings with them.
(b)He has been asked to provide an independent opinion on the solvency of Sol.
(c) To better assess claims of a projected net asset value of $692,000 it would be relevant to know what the net assets value was now.
(d)Sol’s financial information does not disclose what the forecast profit will be between now and the completion of the subdivision when it is important to have an understanding of the sensitivity of the possible outcomes.
(e) Sol’s net asset position is substantially underpinned by a related party debt owed to Sol that very often related party debts hide losses, non- collectible assets, or unfairly valued assets.
(f) Notwithstanding a history of delays the financial forecast would have been done on the assumption that the development would have been completed as planned.
(g)Too little information is provided to enable a good understanding of the GST position which may in turn impact upon projections of profit.
[12] Mr Vance says he is not able to conclude whether Sol is solvent or insolvent because there is insufficient information provided to allow him to form a firm opinion and he is not left with any comfort that Sol’s solvency position has been sufficiently answered.
[13] Joseph Coombe, a director of Giles, has also sworn an affidavit in opposition to the stay application. Mr Coombe says two further statutory demands have been served upon Sol, one for $74,889.65 in respect of further payment claims, and the other for $14,001 for costs awarded by Judge Sargisson. Giles has advised Sol it would consent to the orders sought provided the total sum (now $1,061,839.63) was paid to Giles’ solicitors’ trust account.
[14] Mr Coombe says Giles’ primary reason for opposing the application derives from Sol’s apparent inability to meet Giles’ debts. He believes that the remaining titles for transfer to purchasers are the only assets or property Sol holds and that to allow Sol to finalise the remaining sales and transfer the titles, following which the proceeds would be quickly disposed of, puts Giles at risk of losing its only chance of getting paid. Mr Coombe says Mr Hamilton, the director and sole shareholder of Sol, has previously been a director of nine failed companies, all of which have been placed into liquidation by shareholder resolution, and that the total combined loss of those companies is over $8 million.
[15] Mr Coombe challenges the reliability of Mr Lyne’s financial report. He says Sol’s damages claims do not make reference to the 18 December 2013 decision by the engineer to the contract, Michael Lee, on Sol’s claim for damages and Giles’ claims for variations and extensions of time. Indeed it appears that Mr Lee as engineer considered Giles was entitled to accumulate extensions of time of 139 days and therefore that any claim by Sol for damages as a result of delays would arise only beyond that period.
[16] It is Giles’ position, in respect of Sol’s claims for compensation in the arbitral proceedings, that those are unfounded.
[17] Mr Coombe says that the arbitration proceeding has been stayed until
24 September 2014 to enable Giles to write to Sol setting out the respects in which it considers that the claim which has been filed is inadequate.
[18] Regarding Sol’s undertaking to retain any surplus funds from the completion of the subdivision pending resolution of the parties’ dispute, Mr Coombe says this does not provide any comfort for those funds will only be retained after payments of mortgage debt, subdivision and Council costs, GST, general creditors, and costs of sale. Further, he notes that the availability of those funds is contingent on a surplus being achieved which is itself dependent on completion of the subdivision, issue of title, and sales of all the lots. Mr Coombe says Sol’s financial evidence makes no provision for additional costs in the event that sale of the lots is delayed or frustrated for any reason. From this, he says it is clear that Giles is at the end of the line of a long list of other creditors, whose debts Sol intends to meet as a priority, which is unsatisfactory in terms of Giles’ interests.
Sol’s reply evidence
[19] In reply Mr Hamilton deposes that if Sol is placed in liquidation then Giles’ position will not improved. He says his solicitors have now provided an undertaking to hold the surplus of the sale proceeds; that there are secured creditors; but that the appointment of a liquidator prior to the hearing of the appeal and the arbitration would most likely result in the secured creditor appointing a receiver. He observes
that this would add additional liquidation costs and would reduce funds available to unsecured creditors.
[20] In relation to the number of companies of which he was a director/shareholder which were placed in liquidation, Mr Hamilton says those were related to projects with Bridgecorp, Dominion Finance and North South Finance which were cross guaranteed.
[21] As to the parties’ dispute, Mr Hamilton says Giles undertook to complete the works within 20 weeks. Sol was dissatisfied with the engineer’s decision to allow extensions of time despite applications for extensions being made months out of time. Partly for that reason Sol has now pursued the arbitration proceeding. Mr Hamilton considers that Giles has acted to frustrate the arbitration by not cooperating with the appointment of an arbitrator and by refusing to contribute to the arbitrator’s costs. Mr Hamilton believes that, provided the process is not delayed any further, the arbitration could be completed within three to four months.
[22] Mr Hamilton identifies Sol’s anticipated grounds of appeal from the judgment as being that Associate Judge Sargisson’s judgment was based on three incorrect findings or conclusions, namely that:
(a) Giles did not understand Sol’s position regarding the amount payable to Giles.
(b)The payment of $230,000 to Giles by Sol invalidated Sol’s payment schedules.
(c) Sol’s payment schedules did not satisfy the requirements of the
Construction Contracts Act.
[23] Mr Molloy confirmed that Mr Hamilton’s three identified grounds of appeal
remain the intended grounds of appeal.
Stay jurisdiction
Source of jurisdiction
[24] Jurisdiction for stay of judgment exists through r 20.10(2) – (3) High Court
Rules, which provide:
20.10 Stay of proceedings
(1) An appeal does not operate as a stay—
(a) of the proceedings appealed against; or
(b) of enforcement of any judgment or order appealed against. (2) Despite subclause (1), the decision-maker or the court may, on
application, do any 1 or more of the following pending
determination of an appeal:
(a) order a stay of proceedings in relation to the decision appealed against:
(b) order a stay of enforcement of any judgment or order appealed against:
(c) grant any interim relief.
(3) An order made or relief granted under subclause (2) may—
(a) relate to enforcement of the whole of a judgment or order or to a particular form of enforcement:
(b) be subject to any conditions for the giving of security the decision-maker or the court thinks just.
[25] If Giles were to commence a liquidation proceeding, the Court’s power to stay that proceeding pursuant to r 31.11 High Court Rules (and/or in the Court’s related inherent jurisdiction) would become available to Sol.
Principles applicable to the exercise of the r 20.10 jurisdiction
[26] The Court’s jurisdiction under r 20.10 involves a balancing exercise, the
essential nature of which is set out in the decision of the Court of Appeal delivered
by Gault J in Duncan v Osborne Buildings Ltd2 in which the Court said:3
In applications of this kind it is necessary carefully to weigh all of the factors in the balance between the right of a successful litigant to have the fruits of a judgment and the need to preserve the position in case the appeal is successful. Often it is possible to secure an intermediate position by conditions or undertakings and each case must be determined on its own circumstances.
[27] The factors which the Courts conventionally address in assessing the balance of interest include:
(a) If no stay is granted will the applicants' right of appeal be rendered nugatory?
(b) The bona fides of the applicants as to the prosecution of the appeal. (c) Will the successful party be injuriously affected by the stay?
(d) The effect on third parties.
(e) The novelty and importance of the question involved: (f) The public interest in the proceedings.
(g) The overall balance of convenience.4
[28] The apparent strength of an appeal may be an additional factor.5
Relevance of the Construction Contracts Act – the “pay now, argue later” regime
[29] The present application relates to the Court’s refusal to set aside the two
statutory demands issued in reliance on the “pay now, argue later” regime of the
Construction Contracts Act 2002 (CCA).
2 Duncan v Osborne Buildings Ltd (1992) 6 PRNZ 85 (CA).
3 At 87, adopted in Dymocks Franchise Systems (NSW) Pty Ltd v Bilgola Enterprises Ltd (1999)
13 PRNZ 48 (HC) at [8] per Hammond J, aff ’d (1999) 13 PRNZ 48 (CA).
4 Dymocks, above n 3, at [9].
5 Keung v GBR Investments Ltd [2010] NZCA 396, [2012] NZAR 17 at [11].
[30] The Court of Appeal in Laywood v Holmes Construction Wellington Ltd6 recognised that if a statutory demand for a construction contract debt (being an important enforcement mechanism) could be set aside on the basis of a cross- demand, it would create similar problems to that which led to the enactment of the CCA.7
[31] Mr Hughes for Giles referred to two decisions which involved liquidation proceedings for construction contract debts.
Gill Construction Ltd v Butler
[32] In Gill Construction Ltd v Butler,8 Mr Butler as builder obtained an adjudication in his favour on an invoice. He issued a statutory demand. When Gill did not satisfy the demand Mr Butler made an application for liquidation. Gill sought a stay of the liquidation proceeding. Gill wished to pursue a counterclaim for the full amount of the adjudicated sum. Gill also relied on evidence as to its solvency. It was prepared to pay the disputed sum into a solicitor’s trust account.
[33] Mallon J dismissed the application holding:
(a) Gill had been required since the adjudication to pay the adjudicated sum.9
(b) It was not an answer for Gill to put the money aside.10
(c) Gill’s solvency was not a basis for setting aside the statutory demand
or staying the liquidation proceeding.11
6 Laywood v Holmes Construction Wellington Ltd [2009] NZCA 35, [2009] 2 NZLR 243.
7 At [55] – [64].
8 Gill Construction Co Ltd v Butler [2010] 2 NZLR 229 (HC).
9 At [21].
Yun Corporation Ltd v YQT Ltd
[34] In Yun Corporation Ltd v YQT Ltd,12 YQT was a building firm for which Yun undertook subcontract work. Yun obtained an adjudication in its favour on a final claim. YQT pursued a largely unsuccessful judicial review application in relation to the adjudication. Yun then issued a statutory demand for the slightly reduced sum and the costs awarded on the judicial review application. When YQT did not satisfy the demand Yun made an application for liquidation. YQT applied for a stay of the liquidation proceedings, and gave notice to Yun referring the (substantive) dispute over the adjudication to arbitration (with an arbitrator subsequently appointed and a hearing scheduled to commence four months after the stay hearing). YQT paid the sum demanded into its solicitor’s trust account, with those solicitors then paying the costs award component to Yun but continuing to hold the (amended) adjudication sum.
[35] Associate Judge Abbott had to determine three issues which were:13
a)whether solvency on its own is sufficient to justify a stay and whether the payment into the solicitors’ trust account is sufficient as evidence of YQT’s solvency;
b)whether the “pay now, argue later” philosophy underlying the Construction Contracts Act is an inflexible rule or whether it is sufficient for a payer to provide security in lieu of payment in appropriate circumstances; and
c)whether YQT has established that Yun’s pursuit of the liquidation proceeding in this case has elements of unfairness or undue pressure which warrant exercise of the Court’s discretion to stay.
[36] On the first issue – solvency – His Honour found that it was appropriate (but not determinative) to take into account evidence of solvency, although solvency of itself is unlikely to justify a stay.14
[37] On the second issue – whether provision of security may count against the
inflexible application of the “pay now, argue later” regime – Judge Abbott held that the regime did not create an inflexible rule. Relief (through a stay) could be granted
12 Yun Corporation Ltd v YQT Ltd HC Auckland CIV-2009-404-7656, 26 February 2010.
13 At [17].
14 At [25] and [43].
where there was “a real risk of irretrievable prejudice”.15 His Honour observed that Mallon J in Gill Construction did not appear to have been referred to the authorities16 which led His Honour to his conclusion that flexibility of relief remained. His Honour also considered that the facts of Gill were important involving as they did:17
(a) A comparatively small debt;
(b) A challenge by way of a counterclaim rather than a challenge as to the
debt’s very existence;
(c) Gill’s earlier failure to challenge the determination; (d) Mr Butler’s evidence as to his facing bankruptcy.
[38] On the third issue as defined by the Associate Judge – sufficient unfairness that there would be a real risk of undue pressure – His Honour found that there would be a real risk of irretrievable prejudice if a stay were not ordered, creating unfairness.18 His Honour granted the application for a stay on terms as to undertakings as to payment.
Discussion of the Construction Contracts Act regime
[39] There is some overlap in the fundamental approaches in Gill Construction and in Yun Corporation Ltd. Yet there is a significant difference in the respective conclusions as to the flexibility or inflexibility with which the Court should consider the stay jurisdiction when the case flows from a contract governed by the CCA.
[40] The starting point on this particular application is r 20.10 itself. The Rule does not purport to create exhaustive considerations. Hammond J in Dymocks expressly recognised the non-exhaustive nature of any list of considerations.
Particularly in the light of the authorities reviewed by Associate Judge Abbott in Yun
15 At [44]. See also at [34].
16 At [33], the authorities being reviewed at [29] – [32] of Associate Judge Abbott’s judgment.
Corporation Ltd, I recognise that it is inappropriate to effectively shut the door on a stay application simply because the underlying debt attracts the “pay now, argue later” regime of the CCA. That said, it is not only appropriate but, important, that a Court, in considering an application for a stay, takes full account of the “pay now, argue later” philosophy of the CCA.
[41] In doing so, I in turn have regard to the considerations which gave rise to that philosophy within the CCA. Those considerations were explained by Harrison J in Willis Trust Co Ltd v Green:19
[The CCA] was enacted following a series of high profile financial collapses in the construction industry in the 1980s and 1990s, causing substantial and widespread losses. ... [It] was designed to protect a contractor through a mechanism for ensuring the benefit of cashflow for work done on a project, thereby transferring financial risk to the developer. The scheme of the Act is to provide interim or provisional relief while the parties work through other, more formal, dispute resolution procedures.
[42] When the Court balances the competing interests of the parties in a case based on a construction contract debt, the special nature of the debt is in play as it would be for instance if a statutory demand were issued based on a promissory note. The correct emphasis of Giles upon the “pay now, argue later” regime of the CCA can appropriately be considered in relation to Hammond J’s third consideration in Dymocks, namely whether the successful party will be injuriously affected by a stay. A party entitled to be “paid now”, with the other party to “argue later”, is entitled to have the Court give significant weight to the cash flow entitlement identified by Harrison J in Willis Trust Co Ltd v Green. I consider the issue in that context, below.
The balancing of respective interests
[43] Adopting the approach of the Court of Appeal in Duncan v Osborne Building Ltd, I turn to weigh all of the factors in the balance. In doing so, I have regard to the recognition by Gault J in that case20 that it is often possible to secure an intermediate position by conditions or undertakings and that each case must be determined on its
own circumstances.
19 Willis Trust Co Ltd v Green HC Auckland CIV-2006-404-809, 25 May 2006 at [20]. This passage was adopted by the Court of Appeal in Rees v Firth [2011] NZCA 668, [2012] 1 NZLR
408 at [25].
20 Duncan v Osborne Building Ltd, above n 2, at 87.
1 Will Sol’s appeal be rendered nugatory by the lack of a stay?
[44] The effect of Associate Judge Sargisson’s judgment is that Giles’ two statutory demands remain in force and that Sol will be presumed unable to pay its debts if it does not pay the total sum of $972,948.98 by 25 August 2014.21
[45] In reaching that conclusion, Her Honour found that Sol had not provided valid payment schedules for the two payment claims.22 Thereby the “sudden death” regime of the CCA meant that Sol was required to pay in the interim what had been claimed, whatever the merits.23 Accordingly, Sol was found to be not entitled to seek to establish a substantial dispute as to the sums claimed in the two statutory demands.24
[46] The judgment, although a judgment in relation to the setting aside of statutory demands, is akin to a judgment that a debt is due and owing (albeit on an interim basis). It followed from Her Honour’s finding that Sol did not issue valid payment schedules in response to Giles’ payment claims. It is that finding which Sol intends to appeal. In that sense this case is in the category of those identified by Associate Judge Abbott in Yun Corporation Ltd25 in which the aggrieved party is contesting the debt’s existence rather than trying to advance a cross-claim.
[47] Giles has chosen not to pursue an execution path. It is not by charging order or similar process directly seeking the payment which may come through execution of a judgment. Instead, by issuing statutory demands, it initiates steps towards the liquidation of Sol under the Companies Act 1993.
[48] The business of Sol has been the Okura subdivision (for which Giles provided its services) and the sale of the subdivided lots. The evidence establishes that the sale of 11 lots has been previously settled; that the settlement of one further
sale was imminent at the time of this hearing; and that the remaining sales are to be
21 Sol Trustees Ltd v Giles Civil Ltd, above n 1 at [44]–[45].
22 At [42].
23 At [24].
settled between September 2014 and February 2015. The exact date of the later settlements is dependent on when titles issue, expected within the next few weeks.
[49] Sol has very substantial secured debt owed to two financiers which rank ahead of unsecured creditors such as Giles.
[50] Mr Hamilton nonetheless anticipates, in reliance upon the financial reports of Mr Lyne, that as the remaining sales are completed and finance debts repaid there will flow sufficient proceeds of sale to clear Giles’ present claims (if they have to be cleared) and to leave a surplus (“more than $600,000”).
[51] On the financial evidence produced, Sol is not in a cash-flow position to meet the statutory demands if it has to now. What Mr Hamilton’s evidence indicates at its highest is that following the process of realisation of remaining lots the debts to unsecured creditors such as Sol may be met.
[52] Having produced Mr Lyne’s reports and spoken generally to this background, Mr Hamilton unsurprisingly noted that Sol may not be able to satisfy the immediate demands and could be liquidated.
[53] In his evidence in opposition Mr Coombe equally unsurprisingly explained that the primary reason that Giles opposes the present stay application is that Sol has substantial concerns around Sol’s solvency and Sol’s ability to meet the debt due to Giles. Mr Coombe refers to the “likelihood of Sol going into liquidation prior to resolution of this dispute”. Mr Coombe says his concern is substantiated by Mr Hamilton’s recognition that if there is no stay Sol may be unable to satisfy the immediate demand and could be liquidated. The effect of all this evidence (from both sides) is to recognise the probability that Sol will be unable to satisfy the two statutory demands and, with the presumption of insolvency which will then arise, Giles will be able to have Sol put into liquidation.
[54] In his submissions for Giles, Mr Hughes seized on Mr Hamilton’s wording that Sol “may not be able to satisfy the immediate demands” as not establishing the probability of liquidation if the High Court judgment is not stayed. While the use of
the word “may” semantically might suggest a low level of possibility, the evidence as a whole (on both sides) establishes the probability as I have recorded it.
[55] What the evidence indicates is likely to happen if the High Court judgment is not stayed is:
(a) Sol will not be able to pay to Giles by 21 August 2014 the
$972,948.98 covered by the statutory demands (or the larger of the amounts claimed in the two further statutory demands);
(b) Giles is then likely to apply for an order putting Sol into liquidation;
(c) in three or four months’ time, when such application is heard, Sol is likely to be put into liquidation as being unable to prove its solvency (still at that time failing the cash flow test of solvency if not the balance sheet test).
It may be considered unlikely that a liquidator would pursue an appeal in relation to the setting aside of statutory demands which have in the meantime led to an order of liquidation.
[56] In his submissions, Mr Hughes explored the possibility in line with some authorities that Sol might be permitted to pay the demanded monies to a solicitor’s trust account rather than immediately to Giles. This “fallback” position for Giles had been reflected in its notice of opposition in which it was stated:
[Sol’s] right to appeal will not be rendered nugatory if it provides security
for the debt.
But that ground of opposition assumes, contrary to the evidence, that Sol is in a position now to pay across $972,948.98 (or more) whether it is paid to Giles directly or into a solicitor’s trust account. Giles, in terms of its opposition, was not offering to accept some form of security over land. The fact that any such security would rank after the security held by two significant financiers is in itself indicative of the probable consequences if a stay is not ordered.
[57] Sol’s appeal rights are likely to be rendered nugatory if a stay is not ordered.
2 Does Sol intend to prosecute an appeal on a bona fide basis?
[58] The High Court judgment was delivered on 4 August 2014, leaving Sol with
15 working days in which to comply with the statutory demands.
[59] Sol filed this stay application on 7 August 2014 as a matter of urgency. At that point Mr Hamilton stated simply that Sol’s solicitors had been instructed to pursue an appeal against the judgment. In his evidence in opposition, Mr Coombe noted the lack of information as to the grounds of appeal and commented that Giles could not see that the appeal was based on any merit.
[60] Mr Hamilton dealt with the basis of the appeal in more detail in his affidavit in reply. He set out the anticipated grounds of appeal as I have recorded them. Mr Hamilton also dealt with what he referred to as the merits of Sol’s situation.
[61] The specific consideration I am here addressing is as to the bona fides of the prosecution of the appeal and not the merits of the appeal.
[62] There is no reason on the evidence to doubt Sol’s bona fides in the filing and prosecution of an appeal. There was a real issue before the Court in the statutory demand hearing, namely as to whether Sol by its documents had adequately conveyed its response to Giles’ payment claims so as to constitute payment schedules. The matters which Sol intends to pursue on appeal were the very matters argued (albeit unsuccessfully) on the setting aside application.
[63] Mr Molloy, for Sol, accepts that in the event a stay is ordered it is appropriate that it be on terms as to the expeditious prosecution of the appeal.
[64] I am satisfied that Sol intends to pursue this appeal for the genuine purpose of overturning the High Court judgment.
3 Will Giles be injuriously affected by the stay?
[65] In its grounds of opposition, Giles identified two aspects of prejudice flowing from a stay, namely the inability to recover the demanded sum because Sol is of questionable solvency and may be put into liquidation with no return to creditors and, secondly, any delay in the commencement of a liquidation proceeding would alter on the relation-back period.
[66] I deal first with the immediate impact on prospects of recovery. The context is the set of steps which Giles is taking towards the liquidation of Sol. If there is no stay, Giles may well be at the point of having Sol put into liquidation in three or four months’ time. If a stay is not granted, an urgent appeal hearing might result in a judgment before Christmas 2014 or possibly thereafter. On the evidence, the proceeds of sale in the meantime will have been flowing in the first place for the benefit of the two secured creditors. Sol’s undertaking as to surplus proceeds means that any surplus thereafter will have been held secure.
[67] An order of liquidation will mark the commencement of a liquidation process. Liquidators will be appointed, will have to investigate the circumstances of Sol and the contractual commitments it has entered into, and will follow through a process of realisation. The probability is that such a process will not be faster than realisations in the ordinary course of business. It may well be slower. The likelihood is also that additional costs will be incurred through the costs of the liquidation process.
[68] This conclusion is reinforced by the state of securities granted by Sol over its land. Faced with Sol’s imminent liquidation, at least one secured creditor is likely to appoint a receiver, adding to the immediate administration costs which Sol would be incurring and adding another layer of complexity and potential delay if both receivership and liquidation take place. Additionally, in relation to one creditor which has a cross-guarantee and indemnity provided by both Sol and a related company, there is the distinct possibility that liquidation steps would trigger the activation of the cross-guarantee with the consequence that Sol would become liable for the debts of the other company as well as its own.
[69] If the focus of consideration of any injurious effect upon Giles is in terms of the likely financial recovery, it is probable that, with appropriate undertakings of Sol and its solicitors in place, the trading on of Sol is likely to produce at least equal if not better recovery for all unsecured creditors (including Giles).
[70] The concern expressed by Mr Coombe – that allowing Sol to finalise sales will prejudice Giles by allowing proceeds to be disposed of elsewhere – is not borne out by the evidence as to secured creditors and the undertaking provided by Sol.
[71] These various circumstances point strongly towards the conclusion that the prevention of steps to liquidate Sol is likely to improve the prospects of recovery for unsecured creditors (including Giles).
[72] I recognise that there will nevertheless arise, if there is to be a stay of the High Court judgment, a significant impact on Giles inasmuch as Sol is likely to pursue its appeal and to pursue also the arbitration which has been commenced. Both counsel recognised that the likelihood is that a liquidator would not continue to pursue the appeal and might well not pursue the arbitration. That would be an ideal outcome for Giles which would no longer bear the costs of those two proceedings and would not be exposed to further litigation risk in either.
[73] I recognise that situation as an impact on Giles which I must take into consideration.
[74] The second way in which Giles contends it would be injuriously affected by any stay is because the relation-back period depends on the date on which a liquidation proceeding is commenced.
[75] Mr Molloy recognised that as a legitimate concern of Giles. He therefore conceded that, if a stay is ordered, an appropriate mechanism by which Giles’ interests could be protected would be a condition that the stay would come into effect only after the period for compliance with the statutory demands had expired and Giles had had the opportunity to commence a liquidation proceeding. For his
part, Mr Hughes responsibly accepted that such a term of any stay would deal with
what would otherwise be the “relation-back problem”.
4, 5 and 6 Effect on third parties/novelty and importance/public interest
[76] Neither Mr Molloy nor Mr Hughes suggested that there were any special considerations to be taken into account in terms of impact on third parties, novelty and importance of the question involved, or public interest in the proceeding.
7 Strength of the appeal
[77] I assume for the purposes of this discussion that the Court may have regard to the apparent strength of an appeal.26 Because of the urgent way in which this application has come before me, I have had the benefit neither of seeing the detailed grounds of appeal as finalised for Sol nor the grounds of opposition as Giles will enunciate them. Nor have counsel placed before me the written synopses of argument which were filed for the purposes of the hearing before Associate Judge Sargisson. I do not have the material before me to reach an informed view of the comparative strengths and weaknesses of the arguments. The appropriate view
of the appeal, on the information before me, is to regard it as having points which are capable of appeal but no more than that.
8 The overall balance of convenience
[78] Where an appellant has been required to pay a money sum adjudged by the first instance Court to be due and owing, any sum paid over pursuant to the judgment will generally be capable of being repaid by the respondent should that be required as a result of a successful appeal (if there is any doubt as to the respondent’s later ability to repay, such can be dealt with by arrangements or orders for the safekeeping of the funds paid over). These issues will arise where the party successful at first instance pursues or threatens execution of the money judgment.
[79] The situation confronting the director of Sol in this case is different. Giles seeks not payment through execution of the judgment but pursues steps towards the
liquidation of Sol, which Giles itself appears to doubt will produce net proceeds for unsecured creditors. Giles pursues liquidation in relation to what is, by the regime of the CCA, an interim debt. Yet the liquidation of Sol if it results is likely for two reasons to become permanent. First, there is the triggering effect that a failure to meet a statutory demand is likely to have on secured creditors, with the additional costs and delay of administration by the processes of receivership and liquidation. Secondly, there is a substantial unlikelihood that a liquidator (let alone a receiver) would embark upon the time and cost of pursuing Sol’s appeal rights or arbitration proceeding.
[80] If there is to be no stay in this proceeding that would suggest that Giles’ rights under the CCA to (interim) cashflow entitlements may be weighed as more appropriately protected than Sol’s appeal rights.
[81] I do not consider that great weight can be placed by Giles on the fact that if a stay is not granted Giles will face, for the time being, the continuation and subsequent hearing of the appeal. That is in the nature of the process under consideration. Giles has its rights of security on the appeal, including its right to seek an increased amount of security.27
[82] I take into account the fact that Giles, if a stay is not ordered, will face not only the appeal but also the arbitration proceeding. In other words, Giles will have the further costs (and risk) of the arbitration proceeding at a time when it would otherwise have had the potential to obtain an order putting Sol into liquidation. But on the facts of this case, this situation cannot significantly assist Giles. The evidence establishes that Sol promptly pursued the dispute mechanisms and arbitration provisions of the contract. There is Mr Hamilton’s evidence that Giles has not co- operated, leaving Sol to invoke the unilateral procedure for appointment of an arbitrator. This culminated in the arbitrator’s ruling in May 2014 that he had been validly appointed. Giles has yet to file a reply to Sol’s claim in the arbitration. Following the statutory demand hearing before Associate Judge Sargisson in May
2014, Giles obtained a stay of the arbitration with no further steps to be taken before
24 September 2014. The arbitrator recorded:
I recognise that this moratorium will be disappointing to [Sol]. From my perspective, since the first steps were taken by [Sol] to engage the dispute resolution mechanisms…it has proceeded with diligence.
[83] The fact that the arbitration is (albeit with a present moratorium) running on into September 2014, should not in the context of this application be counted against Sol. With earlier, engaged co-operation of the parties the arbitration could have been substantially progressed if not completed by now.
[84] To the extent that Giles, upon a stay of the High Court judgment being granted, faces continuing costs of the arbitration proceeding, its position is also capable of being significantly protected by an appropriate order for security for costs in the arbitration.
[85] I must take into account the absence of any payment by Sol of the claimed
$972,948.98 into a secure place such as a solicitor’s trust account. By its notice of opposition, Giles did not advance the proposition that the $972,948.98 should be paid directly to it. Rather, Giles asserted:
The overall balance of convenience lies in the Court ordering that [Sol] must pay the full amount claimed into the trust account of [Giles] solicitor, pending resolution of the dispute.
[86] I recognise that the concept of a payment into a solicitor’s trust account is precisely the “intermediate” position which the Court of Appeal in Duncan v Osborne Buildings Ltd28 recognised as securing the balance between the rights of a successful litigant and the need to preserve the other side’s position in case an appeal is successful.
[87] Ultimately, each case must turn on its own circumstances and on an assessment of relevant factors as identified particularly in Dymocks.
[88] The reality is that in this case the refusal of the stay is likely to be followed by liquidation proceedings and an order liquidating Sol. On the other hand, a stay would have the effect of cutting across one of the primary enforcement weapons open to a creditor such as Giles, namely the liquidation process.
[89] Mr Molloy sought to meet the legitimate concerns of Giles as to a degree of protection during the period of any stay. He recognised that the Court, if granting a stay, might appropriately make the stay subject to at least five conditions. They were:
(a) Sol’s expeditious pursuit of its appeal;
(b) Sol’s payment of the costs and disbursements awarded by the High
Court judgment;
(c) The Court’s noting of Sol’s irrevocable authority in relation to the conveyancing and proceeds of the sale of remaining lots (as recorded above at [10]);
(d)A prohibition, pending the outcome of the appeal, on Sol’s meeting the costs and disbursements of Sol’s appeal and arbitration from funds or assets of Sol;
(e) The stay of the High Court judgment would come into effect on the
11th working day after Giles’ service upon Sol of an application for
liquidation.29
[90] This is a case in which the balancing exercise required under r 20.10 is fine. However, I am satisfied that the balance of convenience and overall justice, is slightly in favour of a stay, if the stay is accompanied by the appropriate conditions
identified. I adopt the terminology of Associate Judge Abbott in Yun Corporation
29 Companies Act 1993, s 241AA(2) provides that the shareholders or board of a company may appoint a liquidator after service on the company of a liquidation application only if they make such appointment within 10 working days – Mr Molloy accepted that if a stay were to be granted it should come into effect only after the 10 working day period had expired.
Ltd.30 I find that there would be, if no stay were granted, sufficient unfairness and undue pressure in the pursuit of liquidation to warrant the exercise of the Court’s discretion to stay.
[91] In reaching this conclusion, I have considered an alternative approach addressed by Mr Hughes in his oral submissions, namely to dismiss the stay application, thereby leaving Sol (if it chose to do so) to seek a stay of the liquidation proceeding (under r 31.11 High Court Rules) or to defend the liquidation proceeding itself once issued upon the basis that the Court should not in its discretion order liquidation. I am not satisfied that there is sound reason to effectively defer to a later day and a later proceeding a decision as to a stay. The just, speedy, and inexpensive
approach31 to these issues is to deal with the substance of the application now. The
parties have provided their evidence and their argument on this application and it is appropriate, having regard to my assessment of the balance, that I deal with the application now.
Costs
[92] I will be reserving costs. The application has involved something in the nature of the seeking of an indulgence. Rather than awarding costs at this point, it may be more appropriate to deal with costs either on the basis that they will lie where they fall or that they will follow the event in the sense that they will follow the outcome of the appeal. Counsel and the parties should seek to resolve the appropriate direction or outcome of costs by agreement if possible.
Orders
[93] I order:
(a) There will be a stay of the judgment in Sol Trustees Limited v Giles
Civil Limited [2014] NZHC 1813 on condition that:
30 Yun Corporation Ltd, above n 12, at [44].
31 In accordance with the objective of the High Court Rules, r 1.2.
(i)The stay will come into effect at 9.00 am on the 11th working day after the service of an application of Giles Civil Limited for an order liquidating Sol Trustees Limited;
(ii)The Court notes and accepts the irrevocable authority given by Sol Trustees Limited to Haigh Lyon to act on the sale of all remaining lots in its Okura subdivision and to deal with the proceeds of sale in accordance with an undertaking recorded in a letter of Haigh Lyon dated 25 February 2014;
(iii)Sol Trustees Limited shall pay to Giles Civil Limited (without prejudice to its right of recovery following any successful appeal) the costs and disbursements awarded to Giles Civil Limited in Sol Trustees Limited v Giles Civil Limited [2014] NZHC 1813 within 10 working days;
(iv)Sol Trustees Limited shall diligently file and pursue its proposed appeal against the judgment in Sol Trustees Limited v Giles Civil Limited [2014] NZHC 1813;
(v)The Board of Sol Trustees Limited, during the period of the stay, shall neither meet from the funds of Sol Trustees Limited nor debit to Sol Trustees Limited the costs or disbursements of either Sol’s proposed appeal or the arbitration proceeding between Sol Trustees Limited and Giles Civil Limited;
(vi)In the event that there is any breach by Sol Trustees Limited of condition (iii) or (iv) above, leave is reserved to Giles Civil Limited to file a Memorandum (and supporting evidence if necessary) as to the breach of conditions, whereupon the Court will consider the immediate rescission of this stay order.
(b) Costs are reserved.
(c) I reserve leave to the parties in this proceeding to seek such additional orders in this proceeding as may be appropriate having regard to the subject-matter of the subsequent proceeding in Sol Trustees Ltd v
Giles Civil Ltd, CIV-2014-404-2047.
Solicitors:
Haigh Lyon, AucklandKensington Swan, Auckland
Associate Judge Osborne
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