Ultra Developments Ltd v Ultra Projects Ltd
[2014] NZHC 1998
•22 August 2014
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2014-485-4136 [2014] NZHC 1998
UNDER THE COMPANIES ACT 1993 BETWEEN
ULTRA DEVELOPMENTS LIMITED Plaintiff
AND
ULTRA PROJECTS LIMITED Defendant
Hearing: 30 June 2014 Counsel:
G W D Manktelow for Plaintiff
J C Corry for DefendantJudgment:
22 August 2014
RESERVED JUDGMENT OF ASSOCIATE JUDGE SMITH
Introduction
[1] The plaintiff Ultra Developments Limited (Developments) applies to set aside a statutory demand served on it by the defendant Ultra Projects Limited (Projects). The statutory demand, dated 20 March 2013, claims a total of
$228,363.22, being an amount said to be due for cash advances made to Developments by Projects. The alleged cash advances are set out in a schedule attached to the statutory demand.
[2] Developments and Projects are related companies. Mr Stephen Pack is the sole director of Developments and was a director of Projects. Projects is now in liquidation, Mr Ian Caddis having been appointed liquidator on 7 October 2013.
[3] When Mr Caddis was appointed liquidator, no financial statements for
Projects or Developments had been completed for any year after 31 March 2008. All
ULTRA DEVELOPMENTS LIMITED v ULTRA PROJECTS LIMITED [2014] NZHC 1998 [22 August 2014]
of the payments claimed in the statutory demand occurred after that date. No tax return had been filed for the subsequent period by either Developments or Projects.
[4] The schedule attached to the statutory demand sets out the following details of the cash advances allegedly made by Projects to Developments:
ADVANCE ACCOUNT Ultra Developments Limited
…
Ledger Reports Banklink 1/4/2008 to 31/03/2012
650/000 Ultra Developments $3,293.95
650/002 Drawings Ultra Developments $26,086.27
981/002 Capital Mortgage $61,000.00
981/003 South Canterbury Finance $65,983.00
Payments from JAG T/A Apr 12 to Nov 12
8 payts to Capital Mortgage @ $9000 $72,000.00
$228,363.22
The Evidence
[5] In an affidavit filed in support of Developments’ application, Mr Pack denied that any of the claimed cash advances are due and owing to Projects. He gave the following account in respect of each of the claimed advances:
Claim for $3,293.95
[6] Mr Pack said that the statutory demand was the first that he had heard of this debt, which is claimed to have been incurred by Developments somewhere in the period between 1 April 2008 and 31 March 2012. He said it was difficult to respond in those circumstances, given that no particulars have been provided. He disputed that this claimed debt is owing.
Claim for $26,086.27
[7] Again, Mr Pack complained that inadequate particulars had been provided as to when this alleged debt was incurred. He disputed that the amount is owing.
Claim for $61,000
[8] Mr Pack accepted that this sum had been paid by Projects to Developments. He deposed that the payment was part of an agreement between those two companies whereby Projects paid Developments the $61,000 on the basis that the accruing loss would be claimed by Projects for tax purposes. He contended that Projects has had the benefit of that tax advantage as part of the arrangement between the two companies, and that the $61,000 was not a debt repayable upon demand, or on any other basis. It was simply a mutually beneficial transaction between Developments and Projects.
Claim for $65,983
[9] Mr Pack’s evidence was that part of this sum was paid pursuant to the same contract between Projects and Developments whereby Projects paid Developments sums of money in return for which Projects would be able to claim the accruing loss for tax purposes. He deposed that Projects did claim that loss for tax purposes, and that the relevant (unspecified) part of the $65,983 was not an advance repayable on demand or on any other basis. Mr Pack said that the other part of the $65,983 was paid to South Canterbury Finance (SCF) in partial satisfaction of Projects’ own indebtedness to SCF.
Claim for $72,000
[10] Mr Pack’s evidence was that this payment was again part of a contract between Developments and Projects, under which the $72,000 was paid by Projects to Developments and Projects would claim that sum as a tax loss. Mr Pack stated that the sum was not repayable.
[11] While Mr Pack said that he was unable to provide any information on the alleged advances of $3,293.95 and $26,086.27, he expressed the strong suspicion
that those sums were also part of tax planning arrangements that took place between
Developments and Projects on the advice of the companies’ accountant.
[12] In his first affidavit in opposition, Mr Caddis said that he provided details of the claimed advances of $3,793.95 and $26,086.27 to Mr Pack on 10 October 2010. The $3,293.95 advance was shown as a debit in a ledger report forming part of Projects’ financial records, for “storage rental for Wainui tools on site”. The date of the debit was 6 July 2010. The ledger report shows that the claim for $26,086.27 was made up of a total of thirteen individual items, debited between 28 April 2008 and 26 April 2010. The bulk of the individual payments comprised a number of payments of interest on a mortgage to Palmerston North Finance, a payment of
$6,245 made on 17 July 2008 described as “Capital Mortgage Income payment”, a payment of $5,589.19 on 16 May 2008 being “interest to mortgage with TEA Custodians”, and a payment of $6,122.76 made on 12 June 2008 described as “Mortgage interest repayment”.
[13] Mr Caddis gave evidence of a meeting he had with Mr Pack at Mr Pack’s offices on 7 October 2013. During this meeting, he first saw (on Mr Pack’s computer screen) the electronic “Banklink Ledger Report for the period 1 April 2008 to 31 March 2012” which was referred to in the schedule attached to the statutory demand. Mr Caddis stated that the banklink ledger report which he saw on Mr Pack’s computer screen displayed the details of the $3,293.95 and $26,086.27 claims which have just been described. Mr Caddis also referred to other discussions he had had with Mr Pack. He said that there had never been any suggestion from Mr Pack during these discussions that there was any kind of dispute – Developments’ liability to Projects for the claimed payments was never challenged. When Mr Caddis asked Mr Pack when Projects could expect to receive the money from Developments, Mr Pack replied that the reason for the non-payment was that Developments lacked the necessary funds.
[14] In a reply affidavit, Mr Pack denied Mr Caddis’ version of these events. Mr Pack referred to the fact that Projects had served an earlier statutory demand on Developments in October 2013, that demand being limited to the first two alleged cash advances which are now being claimed (i.e. the $3,293.95 and the $26,086.27).
Mr Pack said that Mr Caddis never followed up on the October statutory demand, the reason being that, following service of that demand, he met with Mr Caddis and explained to him why those debts were disputed.
[15] Turning to the alleged cash advances of $61,000 and $72,000, Mr Caddis stated that he had carefully searched through Projects’ records and served notices under s 261 of The Companies Act 1993 (the Act) without finding anything suggesting that these claimed loans were not repayable by Developments. Specifically, Mr Caddis said that he had found no evidence of any agreement between Projects and Developments that the payments were part of a tax arrangement between the two companies and were not repayable by Developments to Projects. He found no record or resolution of Projects recording any such arrangement. Mr Caddis concluded that Mr Pack was mistaken in his assertion that Projects had claimed part of the alleged advances as a loss for tax purposes.
[16] Mr Caddis found no evidence of any loan from SCF to Projects. He stated that Projects does not appear to own any interest in any real property, and nor does it appear to own any vehicle for which a loan might have been secured from SCF (Mr Pack told him on 7 October 2013 that all of the vehicles were personally owned).
[17] Projects filed an affidavit by Leigh Johnston, a chartered accountant whose firm had acted as accountants for both Developments and Projects. Mr Johnston confirmed that the latest financial accounts completed for Projects were for the year ended 31 March 2008. Those accounts were only completed and signed off by Mr Pack on 14 May 2013. Included in the notes to the March 2008 financial statements for Projects there was reference to related party advances to Developments, with the notation “capital and interest are payable on demand”.
[18] Mr Johnston denied ever giving advice to Mr Pack that loans made by Projects to Developments could be treated as not repayable. He acknowledged that on a number of occasions he did discuss with Mr Pack the use of tax loss offsets between commonly owned companies such as Projects and Developments. In his affidavit, Mr Johnston explained that tax loss offsets enable a loss incurred by one of
the companies to be used to offset the equivalent amount of profit derived by the other company in the same tax year. He stated that the only alternative to the tax loss offset procedure is the use of a “subvention payment” between the profit and loss companies in the group. However there is a one year “post balance date” time restriction which did not allow the use of this option for the companies in the group of which Projects and Developments formed part.
[19] Mr Johnston’s evidence was that, as financial statements have not been completed for either Projects or Developments since 2008, the relevant profits or losses in those years are not ascertainable. In his opinion, none of the transactions involving the alleged advances of $61,000, $65,983 and $72,000 could have been subvention payments, and none of them were discussed with him in the general context of taking advantage of tax losses within the group. He said that they were all inter-company transactions of the same kind as those referred to in the 2008 financial accounts for Projects as “repayable on demand”.
[20] In response to Mr Johnston’s affidavit, Mr Pack maintained the position that Mr Johnston did give him tax advice on numerous occasions. He asserted that the reason that no financial statements were prepared by Mr Johnston’s firm since the March 2008 year, was that Projects owed Mr Johnston’s firm money, and the firm was not prepared to complete the financial statements until it had been paid. He contended that there had been “considerable discussion” between Mr Johnston, himself, and Karen Russell, one of the accountants employed by Mr Johnston’s firm, concerning how to document what had been agreed between Projects and Developments regarding the writing off of inter-company advances against tax losses.
[21] Mr Pack also referred in his reply affidavit to a residential property at 75
Meremere Street, Wainuiomata. The property is owned by Developments. Although Developments owned the property, the rent paid by tenants between 2009 and 2012 was, accordingly to Mr Pack, paid into Projects’ bank account. With his reply affidavit, he produced a copy of the certificate of title to this property, and copies of Projects’ bank account with the ANZ Bank covering the period between 24
December 2009 and 6 August 2012. The bank statements show a number of deposits
described as “Rent 75 Meremere”. Mr Pack said that these bank statements did not cover the entire period, as they were the only ones he had access to. He estimated the total of such payments received by Projects, to which he says Developments was entitled, at a figure in excess of $40,000. He went on to contend that, if he had been given access to the records of both Projects and Developments, he would have been able to find other monies where Projects had benefitted at the expense of Developments which would need to be taken into account. However he gave no detail of the amount of any such payments, or the purposes for which they were allegedly made.
[22] Evidence in opposition to the application was also provided by Ms Raylene Cummins, an accountant working with Mr Caddis in the liquidation of Projects. Ms Cummins gave evidence that she has searched all of the records made available to her from several sources, including parties to whom notices under ss 261 and 266 of the Act had been given, but had not been able to locate evidence of any agreement relating to tax arrangements between Developments and Projects of the kind which Mr Pack says was made. She said that she has examined the tax returns for Projects and Developments for the 31 March 2008 year, with financial statements attached. In both cases the notes forming part of the financial statements recorded an advance between Developments and Projects, in which the interest rate was set annually by the lender. Capital and interest were said to be payable on demand. Both returns also included notes stating: “No debts have been written off between the entities”.
[23] Ms Cummins concluded from her investigations that each of the claimed advances had been made by Projects to or for the benefit of Developments. She provided detailed evidence on each of the advances of $61,000, $65,983 and
$72,000.
[24] Referring to the advance of $61,000, Ms Cummins deposed that the total was made up of seven separate payments, one by bank cheque or direct transfer, and the remaining six made from the trust account of JAG Legal, a law firm which acted for Projects. The payments were made between 23 August 2011 and 27 March 2012,
and all were made in discharge of obligations owed by Developments on loans taken out by it to acquire certain Wainuiomata land in 2006.
[25] Turning to the claimed advance of $65,983, the accounting records available to Ms Cummins showed seven payments of Projects’ funds to SCF. Two of these payments, for $10,000 and $48,000, were paid out of the JAG Legal trust account. They were initially coded by Projects to “drawings” in its books, but the entries were later journaled by Mr Johnston’s firm to show them as payments made to SCF. Ms Cummins found no record of any money coming into Projects’ bank account from SCF or any company subsequently amalgamated with SCF. There was an advance of $28,191.12 on 12 March 2007 by SCF to Developments, but Ms Cummins found no record of that advance having being deposited into any account of Projects. A further advance of $24,000 was made by SCF to Developments on 12 July 2007. Again, no part of that advance was deposited into any account of Projects. In Projects’ books, Ms Cummins found three debit items coded in the Ledger to Palmerston North Finance (a company which was later amalgamated with SCF) between 10 February 2010 and 26 April 2010, each described as “…interest payment for Wainuiomata…”. When Mr Johnston’s firm queried why these payments were shown as having been made by Projects when the SCF advance had been made to Developments, Mr Pack responded on 18 April 2013 “this was to Ultra Projects for working capital and car loan”. However, it appears that the car is question was owned personally by Mr Pack.
[26] Turning to the claimed advance of $72,000, Ms Cummins’ evidence was that the payment related to part of a mortgage loan from Capital Mortgage Income Trust for the purchase of Developments’ property at Meremere Street, Wainuiomata. Although (on Mr Pack’s instructions) the $72,000 was paid from Projects’ trust account with JAG Legal, it was paid in partial discharge of Developments’ obligations, and as between Projects and Developments, Developments was the beneficiary.
[27] Mr Pack did not challenge Ms Cummins’ evidence in his reply affidavit.
[28] An accountant, Susan Wylde, provided an affidavit for Developments. She stated that her firm has been instructed to prepare financial statements for Developments for the years 31 March 2010 and following. She said that it was anticipated that, when further information came to hand from Developments, the outstanding income tax returns and amended GST returns would be filed with the Inland Revenue Department. At that point, the financial position of Developments could be ascertained.
[29] Ms Wylde deposed that Developments is still an active company, which owns three properties in Wainuiomata.
[30] Mr Pack provided a further affidavit on the morning of the hearing. He confirmed that Developments owns three properties in Wainuiomata that are presently being marketed for sale. They are all bare sections, but one of them is the subject of a resource consent application for a retirement village. The only outstanding matter on the resource consent application was said to be the provision of a geotechnical report.
[31] Mr Pack further deposed that, when the agreement was entered into between Projects and Developments concerning the tax offsets, he was required by the Inland Revenue Department to give undertakings on behalf of Projects that these tax offsets would in fact be carried out. He stated that he has endeavoured to obtain confirmation of that from the Inland Revenue Department, but the department replied that he would need to have Mr Caddis’ consent before it supplied the requested information. Mr Pack deposed to his “firm impression from the Inland Revenue Department” that they have on their file information directly relevant to the undertakings and to the debts now claimed by Projects. He stated that Karen Russell was the accountant at Mr Johnston’s firm dealing with Developments’ file when the undertakings were given. Neither side filed an affidavit from Ms Russell.
[32] Mr Pack provided with his 30 June affidavit a copy of an advisory letter from the Inland Revenue Department dated 22 May 2014 addressed to Developments. The letter related to Developments’ financial year ended 31 March 2009, and noted that Developments’ total available losses at that date were $168,852.86. The letter
referred to a “loss transferred” of $95,000, leaving total losses carried forward to the March 2010 year of $73,852.86. Similar advisory letters to Developments relating to the March 2007 and March 2008 financial years were also produced. The advisory letter relating to the March 2008 financial year showed a loss transferred of $94,868. There was no similar “loss transferred” figure shown in the advisory letter relating to the March 2007 year. The letters recorded that no subvention payments had been made in any of the three years covered by the advisory letters. The losses transferred were said to be offsets.
[33] Mr Pack deposed in his 30 June affidavit that once all Developments’ returns have been filed, that will materially impact in a most positive fashion on the affairs of Developments.
Further Evidence Received After the Hearing
[34] At the conclusion of the hearing on 30 June, I indicated that, because substantial new matter appeared to have been included in Mr Pack’s 30 June affidavit, I would allow Projects an opportunity to file an affidavit in reply. I also invited counsel to make a joint approach to the Commissioner of Inland Revenue to see if the Commissioner held any clarifying documents relating to the alleged agreement between Developments and Projects relating to tax offsets. Counsel were invited to submit a joint memorandum by 7 July 2014 advising whether any further information received from the Commissioner could be put before the court by consent.
[35] I duly received a joint memorandum from counsel, attaching a copy of a letter to the Commissioner dated 1 July 2014. The text of the letter had been agreed by both counsel before it was sent. The joint memorandum also attached a reply from the Commissioner dated 4 July 2014. In that reply, the Commissioner advised that she holds no record of any agreement between Projects and Developments concerning tax offsets between the two companies under which Mr Pack was required to give undertakings on behalf of Projects that the tax loss offsets would in fact be carried out. The Commissioner has no record of any such undertaking in respect of any of the financial years ended March 2010, 2011, 2012, 2013, or 2014.
[36] The Commissioner’s letter referred to the Commissioner’s Standard Practice Statement on loss offset elections between group companies (SPS 05/12 – loss offset elections between group companies, February 2006), and noted that there is no mention in this SPS that undertakings or agreements are required for a company within a group to claim tax loss offsets.
[37] In a further affidavit sworn on 7 July 2014, Mr Caddis deposed that he had carried out some investigations on the three properties owned by Developments in Wainuiomata. One of them was on the market for $95,000, and another on the market for $105,000. The third property was the section for which resource consent for a retirement village had been sought. Mr Caddis’ check with the Hutt City Council elicited the information that an engineering report had been filed by a firm of engineers on Developments’ behalf on 13 May 2014. The report addressed a number of matters which the Council had raised in a letter dated
28 March 2012, and noted the writer’s understanding that the geotechnical report was no longer required prior to the processing of the application, but would be a condition of any resource consent which might be granted.
Legal principles – applications to set aside statutory demands
[38] Section 290(4) of the Companies Act provides as follows:
The court may grant an application to set aside a statutory demand if it is satisfied that—
(a) There is a substantial dispute whether or not the debt is owing or is due;
or
(b) The company appears to have a counterclaim, set-off, or cross-demand and the amount specified in the demand less the amount of the counterclaim, set-off, or cross-demand is less than the prescribed amount; or
(c) The demand ought to be set aside on other grounds.
[39] The principles applicable to such applications are well established:
(a) The applicant must show there is arguable a genuine and substantial dispute as to the existence of the debt. The task for the Court is not to
resolve the dispute but to determine whether there is a substantial dispute that the debt is due.
(b)The mere assertion that a dispute exists is not sufficient. Material, short of proof, is required to support the claim that the debt is disputed.
(c) If such material is available, the dispute should normally be resolved other than by means of proceedings in the Companies Court.
(d)An applicant must establish that any counterclaim or cross-demand is reasonably arguable in all the circumstances. The obligation is not to prove the actual claim…
(e) It is not usually possible to resolve disputed questions of fact on affidavit evidence alone, particularly when issues of credibility arise1.
[40] However a conflict in the evidence on its own, does not necessarily mean that a setting aside application cannot succeed. A court is not required to accept uncritically any or every disputed fact.2
Legal principles – tax offsets and subvention payments
[41] Tax loss offsets between companies in the same group are governed by Part IC of the Income Tax Act 2007. A “tax loss offset” can be made by election: the company within the group with the available tax loss (company A) simply notifies the Commissioner under s IC 9 that it makes the tax loss available to company B.3
The other means by which one company within a group may pass the benefit of an
available tax loss to another company within the group, is by making a subvention payment. A subvention payment is a payment made by one company within the
1 Brookers Companies and Securities Law, Volume 1, at [CA 290.02(1)], referred to in Greys
Avenue Investments Ltd v Harbour Construction Ltd HC Auckland CIV-2009-404-002026, 12
June 2009 at [8].
2 Eng Mee Yong v Letchumanann [1980] AC 331 at 341, applied in the context of a setting aside application in Freemont Design & Construction Ltd v W Stevenson & Sons Ltd, HC Auckland CIV-2005-404-4807, 20 April 2006 at [8].
3 Income Tax Act 2007, s IC 5(2)(a).
group (the profit-making company) to a loss-making company within the group. Under s 1C 5(2)(b), the subvention payment must be made pursuant to an agreement between the two companies.
[42] If a company within a group made no taxable profit within a relevant year, it cannot make either a subvention payment or obtain the benefit of a tax loss offset.4
Any payment could not be greater than the paying company’s profit in the relevant year. Any subvention payment made by the profit-making company within the group, cannot be greater than the amount of the tax losses (including tax losses carried forward from earlier years) of the loss-making company.5 The amount of the subvention payment is deducted from the taxable income of the profit-making company, and deducted from the tax losses account (including accumulated losses) of the loss-making company.
Discussion
[43] In the end, there was no serious question that the amounts listed in the schedule to the statutory demand were indeed cash movements from Projects to or for the benefit of Developments. A tax offset election would not have required any movement of cash from Projects to Developments – it would have been a simple matter of the loss-making company (presumed to be Developments, although there is no evidence of the profitability or otherwise of Developments during the period within which the relevant payments were made) notifying the Commissioner that it elected to make some or all of its accumulated tax losses available to the profit- making company. So if the substantial payments which Mr Pack says were made as part of a tax planning exercise carried out by the two companies, it would appear that
they would have to qualify as subvention payments.6
[44] The first difficulty with the argument that the three substantial payments were (partly or in full) subvention payments made by Projects to Developments, is that a subvention payment must be the subject of an agreement. While Mr Pack asserts
that there was an agreement, that assertion is not corroborated by any company
4 Income Tax Act 2007, s IC (8)1.
5 Section IC (8)(2).
6 Section IC 5.
minute or resolution of Projects, and it is not supported by the evidence of Mr Johnston. If the payments were in fact made as subvention payments, one would have expected Mr Johnston’s firm to have been aware of it. While Mr Pack says that Ms Russell was the accountant dealing with the two companies’ affairs during the relevant period, it seems highly improbable that a qualified chartered accountant would not have documented in some way any subvention payment agreement which may have been made. I accept Mr Corry’s submission that nothing appears to have been done to meet the requirements of s IC 5 of the Income Tax Act to effect a subvention payment.
[45] Nor is there any evidence that Projects made a profit in any of the years ended 2010, 2011, 2012 and 2013. No financial statements have been completed or tax returns filed, and nowhere in his evidence did Mr Pack state that profits had been made. Even without access (in recent times) to Projects’ financial records, Mr Pack must surely have known, and been able to say in his affidavits, whether or not Projects operated profitably in the years between March 31 2009 and March 31
2013. Furthermore, s IC 9 of the Income Tax Act requires that a subvention payment must have been made no later than the “extended return date”, being the latest date for which time may be extended under the Tax Administration Act 1994, s 37(5). That is within 12 months of the end of the relevant tax year, although the Commissioner has a discretion to allow further time. There is no evidence before the court of any relevant applications for time extensions.
[46] The advisory letters from the Inland Revenue Department in respect of the financial years ended March 2007, 2008 and 2009 do not show that any subvention payments were made in those years. Indeed, the opposite is the case: the letters say that no subvention payments were received by Developments in any of those years. There were losses of $94,868 and $95,000 shown as “transferred” in each of the March 2008 and March 2009 years, but as no subvention payments were received in those years those losses were presumably transferred to Projects by way of offset election made by Developments.
[47] In her evidence, Ms Cummins identified the source of the funds paid out by
Projects to or on behalf of Developments which make up the amounts claimed in the
statutory demand. She said that the funds were paid to Projects by its major client at the time, Cable Price Corporation Ltd, and paid on by Projects to Developments’ creditors, or on behalf of Developments by JAG Legal. Her searches of Projects’ files revealed no record of a tax loss offset agreement of the kind to which Mr Pack referred in his evidence. Related party loans as between Projects and Developments were recorded in Projects’ financial statements for the year ended 31 March 2008 as repayable loans. Mr Pack did not explain why those inter-company advances were apparently not also treated as part of the tax offset arrangements to which he referred in his affidavits.
[48] In respect of the advance of $61,000, Ms Cummins’ evidence is clear that the seven payments which made up the $61,000 were payments relating to an existing mortgage over the Wainuiomata land owned by Developments. That evidence was not challenged by Mr Pack. Similarly, the $72,000 advance related to part of the mortgage over the Wainuiomata land owned by Developments. On the signed instruction of Mr Pack, these funds were paid by JAG Legal from Projects’ trust account with the law firm.
[49] In respect of the advances totalling $65,903, Mr Pack contended that part of that sum was paid pursuant to the alleged agreement between Projects and Developments under which Projects would be able to claim the accruing loss for tax purposes. The other part of the advance was, on Mr Pack’s evidence, a payment made by Projects in respect of its own indebtedness to SCF. Ms Cummins could find no record of any indebtedness of Projects to SCF: she found no record of any money coming into Projects’ bank account from SCF or from any company subsequently amalgamated with SCF. On the other hand she found copies of loan documents showing that there had been advances from SCF to Developments in 2007, totalling
$52,191.12.
[50] Consistent with that, there were three debit items in Projects’ ledger dated between February 2010 and April 2010, for interest payments on the SCF loan relating to the Wainuiomata land owned by Developments. These payments were queried at the time by Projects’ then accountants, and Mr Pack responded on 18
April 2013 advising that the loan shown in Projects’ March 2008 accounts as having
been made by SCF was an advance to Projects “for working capital and car loan”. But as noted above, Ms Cummins was unable to find any record of funds coming into Projects from SCF, and her inquiries elicited the information that the only relevant vehicle was personally owned by Mr Pack.
[51] Mr Pack has not challenged any of Ms Cummins’ evidence, and I am satisfied that she has sufficiently proved that the advances listed in the schedule to the statutory demand were made by Projects to or for the benefit of Developments. I am not satisfied that Developments has raised a serious question that there was some agreement between it and Projects that the payments made by Projects to or for the benefit of Developments would not have to be repaid. There is only Mr Pack’s word for the existence of such an agreement which, of its very nature, would have been one of which Developments’ accountants could be expected to have been aware. No supporting evidence was provided by Developments’ accountants, and the letter obtained (after the hearing) from the Inland Revenue Department provided no support for the existence of the claimed arrangements.
[52] In my view, the claim that such an arrangement existed does not go beyond the mere assertion that a dispute exists, and that is insufficient to meet the test of “a genuine and substantial dispute as to the existence of the debt”. I am not prepared to set aside the statutory demand on the basis of any alleged “tax offset” agreement between Projects and Developments.
[53] The one genuinely arguable dispute raised by Developments relates to the receipt by Projects of rent payments made between 2009 and 2012 by tenants occupying properties owned by Developments. With his second affidavit, Mr Pack estimated the total amount of such payments at a figure in excess of $40,000. At the hearing Mr Corry accepted that, for the purposes of the present application only, a right to set that $40,000 off against monies owing by Developments to Projects should be regarded as genuinely arguable. In accordance with that concession, I find that there is a genuine and substantial dispute over $40,000 of the amount claimed. The statutory demand is set aside to that extent, and upheld in respect of the balance of $188,363.22.
The Application for Orders Under s 291 of the Act
[54] Projects seeks an order under s 291(1) of the Act putting Developments into liquidation immediately. Mr Corry acknowledged that the court has a discretion in making such orders.7 The Court of Appeal in Norman considered it neither appropriate nor necessary to provide any direction about the Court’s exercise of the discretion. On the facts of the case, the decision of the Associate Judge to put the company into liquidation under s 291(1)(b) was upheld. The company did not have any significant assets, and it had been open to the Associate Judge in the circumstances to conclude that no purpose would be served by providing a period of
time for the company to pay the sum due under the demand before the creditor could apply to put it into liquidation.
[55] In this case, Developments does own assets, and there appears to be at least some prospect that one of the pieces of land which it owns may be suitable for development as a retirement village. On the evidence which is presently available, I am not in a position to conclude that no useful purpose would be served by requiring Projects to file a separate liquidation proceeding in the event that Developments does not promptly pay the $188,363.22 which I have found to be payable under the statutory demand. I take into account that other creditors of Developments have had no opportunity to be heard at this point, and they may take a different view on the question of whether the interests of creditors generally will be best served by a liquidation order. While Mr Corry submitted that the sales of the properties could just as well be effected by a liquidator of Developments, and that no business is likely to be lost if there is an immediate liquidation, it seems equally true that there is very little scope for further damage to be done to the interests of the general body of creditors of Developments if the liquidation process is left to take its ordinary course. As Mr Corry noted in his submissions, there is no evidence of any dissipation of assets by Developments, nor that it is carrying on any business activity beyond marketing three properties for sale. I decline to make an immediate order for
the liquidation of Developments.
7 Norman v ANZ National Bank Ltd [2012] NZCA 356, (2012) 21 PRNZ 241 at [43].
[56] I think it is appropriate, however, to make an order under s 291(1)(a) that Developments pay the $188,363.22 within a specified period, and that, in default of payment, Projects may make an application to put Developments into liquidation. No order has been made under s 290(3) extending the time for Developments to comply with the statutory demand, and the period of 30 working days prescribed in s 288 of the Act within which a creditor must commence a liquidation claim on the basis of failure to comply with the demand has now expired. It would be pointless to require Projects to issue another statutory demand, and in those circumstances I order under s 291(1)(a) that Developments is to pay the sum of $188,363.22 within seven days of the date of this judgment, and that, in default of payment, Projects may make an application to put Developments into liquidation.
[57] Projects is entitled to costs, which are awarded on a scale 2B basis, plus disbursements as fixed by the registrar.
Summary of Orders
[58] The orders made are as follows:
(a) The statutory demand is set aside to the extent of $40,000. It is upheld in respect of the balance claimed of $188,363.22.
(b)Developments is ordered to pay the sum of $188,363.22 to Projects within 7 days of the date of this judgment. In default of payment within that period, Projects may make an application to put Developments into liquidation.
(c) Developments is ordered to pay costs on a scale 2B basis, plus disbursements as fixed by the registrar.
Solicitors:
G W D Manktelow, Lower Hutt for plaintiff
J C Corry, Lower Hutt for defendant
Associate Judge Smith
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