Underground Technologies Limited (in liquidation) v Construction Contracts Limited

[2014] NZHC 203

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

CIV-2013-485-9117 [2014] NZHC 203

BETWEEN  UNDERGROUND TECHNOLOGIES LIMITED (IN LIQUIDATION) Applicant

ANDCONSTRUCTION CONTRACTS LIMITED

Respondent

Hearing:                   17 February 2014

Counsel:                  J Mason and A Shelton for applicant

J Johnson for Official Assignee
No appearance for creditors

Judgment:                17 February 2014

ORAL JUDGMENT OF ASSOCIATE JUDGE SMITH

[1]      Underground Technologies Limited (UTL) was placed in liquidation by order of  the  Court  dated  4 February 2014.    The  Official Assignee  at Wellington  was appointed liquidator.

[2]      On 10 February 2014, an application was filed in the name of UTL seeking certain orders.  Specifically, UTL sought an order of the Court staying the liquidation of the applicant until such time as an application for termination of the liquidation had been filed and decided by the Court.  Secondly, the application sought an order allowing the applicant to continue usual business operations until such time as the application for termination of the liquidation had been filed and decided by the Court.

[3]      Although the application has been made in the name of UTL, I will treat it as

an application made by UTL’s managing director, Roger Graeme MacDonald: of

UNDERGROUND TECHNOLOGIES LTD (IN LIQ) v CONSTRUCTION CONTRACTS LIMITED [2014] NZHC 203 [17 February 2014]

course, following the liquidation order, the affairs and conduct of UTL were in the hands of the Official Assignee.

[4]      Although on its face the application is an application for an injunction, it seems to me that it is more properly regarded as an application to stay the liquidation proceedings  under  the  Court’s  jurisdiction  in  respect  of  company  liquidations (Part 16 of the Companies Act 1993).

[5]      The grounds for the application include a claim that UTL did not receive notice  of  the  liquidation  proceedings,  and  that  UTL was  solvent  and  currently paying, or making provision to pay, all of its creditors.  The application stated that UTL intended to make an application to terminate the liquidation on 24 February

2014.

[6]      The application was supported by an affidavit sworn by UTL’s managing director, Roger Graeme MacDonald.  Some minor amendments to that affidavit were made in a further affidavit sworn on 11 February 2014.   The differences between those two affidavits need not concern us.

[7]      In his affidavit of 11 February 2014, Mr MacDonald said that he had not received notice of the liquidation proceedings, and had no knowledge whatsoever of the liquidation proceedings prior to becoming aware of them on the afternoon of

5 February 2014.  Mr MacDonald also contended that the plaintiff in the liquidation proceeding had failed to properly appraise the Court of the correct amount owing.

[8]      Mr MacDonald also stated that UTL was solvent, with $1.165 million of debt and $3.068 million of assets.   He stated that he was “currently paying or making provisions for all of UTL’s creditors to be paid”.

[9]      In his affidavit, Mr MacDonald anticipated that it would take approximately two weeks to gather sufficient information to support an application for termination in the liquidation, and that he intended to file such an application before 24 February

2014.

[10]     Mr MacDonald provided, in this affidavit, a general summary of the nature of the work carried out by UTL: he said that it carries out a wide range of underground pipeline  and  telecommunications  contracting  work  for  a  number  of  clients  who would be unduly prejudiced if the liquidation was not stayed.  Current projects were said to include a marae trust community water reticulation programme and various telecommunications  programmes  provided  for  the  benefit  of  rural  communities whose members rely on UTL to provide cost effective services and provide employment opportunities.  Mr MacDonald contended that the rural clients of UTL, and in particular Māori clients, would be significantly and prejudicially affected if UTL was put into liquidation, by way of loss of employment and because completion of the civil works programmes that UTL had  commenced  would be impossible without them having to secure significant additional funding.

[11]     A report  was  provided  on  the  application  by  the  Official  Assignee,  on

13 February 2014. Attached to the report were details of UTL’s financial position. A

section headed “Liabilities” noted that:

(a)      The Inland Revenue Department had  advised  the writer that UTL owed  the  Inland  Revenue  Department  approximately  $400,000  in GST, Kiwisaver employee and employer contributions, PAYE, student loan employee payments and superannuation contributions.  The tax debts were said to have been incurred since late 2012.

(b)      The author of the advice attached to the Official Assignee’s report also

noted that:

(i)        the GST payables listed on the pro forma balance sheet  as  being  ($232,836.11  –  refund)  does  not reflect the new information provided by the IRD; and

(ii)      given the new information in regard to the tax debts, the current liabilities of the company are approximately  $2.2 million  now  and  non-current liabilities of approximately $419,975 …

(c)       Accounts payable for UTL, as at a balance sheet dated 28 February

2014, totalled $919,940.77.  According to the report from the Official

Assignee, 98 per cent of that sum ($896,700.93) was debt which had been outstanding for over 90 days.

[12]     While taking no position for or against the application, the Official Assignee expressed the view that the company could not pay current liabilities out of current assets, and that a termination application would be unlikely to succeed without “an immediate and significant capital injection”.

[13]     The application came before Kós J on 13 February 2014, on an urgent basis. The Judge made the following orders:

Orders accordingly, on interim basis.  The application is to be heard finally on 17.2.2014 as listed.

[14]     The application came before me this morning.   In the course of the day, a modest  debt  owing  to  a  supporting  creditor,  Greenstone  Concrete  &  Asphalts Limited, was paid.  I was also advised that the plaintiff in the liquidation claim had been paid, and the plaintiff was not represented at today’s hearing.

[15]     A memorandum dated 14 February 2014 stated that two parties to a separate liquidation claim, which had been commenced against UTL under CIV-2014-485-

1266,  had  reached  a  settlement  with  UTL.    The  plaintiff  in  that  case,  Agru New Zealand Limited (with a claim of $22,662.98) (Agru) and Huerner Welding Technology Limited (with a claim of $1,863) (Huerner) had evidently reached agreement with UTL for payment over a period.  (Paragraph 4 of the memorandum filed on behalf of Agru and Huerner advised that those parties had entered into an agreement  with  UTL  whereby  payments  would  be  made,  and  that  providing payments were made pursuant to the agreement, no steps would be taken by Agru in respect of its liquidation proceedings.)

[16]     At today’s hearing, a further affidavit by Mr MacDonald was submitted.  In respect of Mr MacDonald’s claim that he had not received notice of the liquidation proceeding, Mr MacDonald acknowledged that UTL’s registered office was at the address (200 Willis Street, Wellington) where service of the proceeding had been effected, but he stated that the building houses a number of tenants, and that UTL

does not have any staff at its office at 200 Willis Street.  The main UTL depot and offices are in Auckland, and Mr MacDonald said that he spent most of his weekdays in Auckland.   He stated that he did not receive any of the  documents that had apparently been served on UTL.

[17]     Mr MacDonald went on to assert that UTL meets the “balance sheet” test of insolvency, and that he was currently paying, or entering into payment plans where agreed, with all of UTL’s creditors. As he put it:

UTL’s shareholders have advised me that they will this week inject sufficient funds to pay creditors who require immediate payment.

[18]     In respect of the information contained in the Official Assignee’s report of

13 February 2014, Mr MacDonald disputed some of the information provided.  He dealt in particular with a debt owed to Marac Finance Limited/Heartlands Bank of

$565,000,  pointing out  that  it  was  not  a debt  presently due.    He  reiterated his intention to file an application for termination of the liquidation.

[19]     Again, in relation to Inland Revenue Department matters, Mr MacDonald stated that UTL’s returns are being filed this week.  He said that UTL’s GST returns would show a return of approximately $300,000 due to UTL.

[20]     Mr MacDonald went on to “anticipate” that it would take another week to gather sufficient information to support an application for termination of the liquidation and to obtain shareholder funds to pay creditors that required immediate payment.

[21]     Attached  to  his  17 February  2014  affidavit,  Mr MacDonald  supplied  a schedule setting out details of UTL’s “Current & Completed Work”, “Tenders Submitted   –   Waiting   Decision”   and   “Work   &   Tenders   under   Pricing   and Negotiation”.    A  total  of  22  jobs  were  listed  under  the  heading  “Current  & Completed Work”, and the majority of the listed jobs show them as having been completed.  A total of eight jobs were shown under the heading “Tenders Submitted

– Waiting Decision”, and a further nine jobs listed under the “Work & Tenders under

Pricing and Negotiation” heading.

[22]     In her written submissions made today, Ms Mason noted that a significant amount   of  information   was   required   to   support   the  liquidation   termination application.  At paragraph 7 of her submissions, she noted that, if the applicant was unable to continue trading, a number of its clients would be significantly and unduly prejudiced.   No evidence was provided of any particular circumstances said to be likely to constitute significant and undue prejudice if the stay application is not granted.   Ms Mason also submitted that UTL’s employees would suffer hardship. Again, there was no evidence either of how many employees are employed by UTL, or their likely ability to find alternative employment.  Ms Mason also submitted that loss of employment would be suffered in the rural communities, which have been served by UTL, and that there would be an inability to complete civil works programmes if UTL could not continue trading as a result of the liquidation.  Again, there was nothing in the evidence by way of detail of the claimed impact on the rural communities.

[23]     In this case, it is clear that UTL has been, and was on 4 February 2014 when the liquidation order was made, insolvent.

[24]     Ms Mason accepts that the relevant insolvency test for the purposes of this application is the cashflow test, as held in Re Tweeds Garages Ltd,1 followed by the High Court in New Zealand in Commissioner of Inland Revenue v F B Duvall Ltd.2

Applying  the  cashflow  insolvency  test  in  this  case,  it  seems  to  me  to  be overwhelming that UTL has been trading in an insolvent position for some time. The most striking piece of evidence of that is the extraordinarily high percentage of UTL’s current liabilities which are in the 90 days and over category.  The “cashflow” insolvency is also evidenced by the instalment payment agreement reached with Agru,  and  the  existence  of  the  two  liquidation  claims,  each  supported  by  one creditor.

[25]     Against that background, it seems to me that there must be a very significant risk that if UTL is permitted to continue trading, its financial position will only

worsen.  Even assuming UTL is able to make satisfactory arrangements to pay off

1      Re Tweeds Garages Ltd [1962] Ch 406, [1962] 2 WLR 38.

2      Commissioner of Inland Revenue v F B Duvall Ltd (2009) 24 NZTC 23,135 (HC).

the 80 or so outstanding creditors (and it appears from Ms Mason’s submissions today that UTL will, or may be endeavouring to, arrange instalment payment agreements with those creditors), the risk must be significant that there will be quite some delay, even if the proposed application to terminate the liquidation is filed by

24 February 2014 as the applicant has signalled.  The simple position seems to me to be that UTL appears to have been trading for quite some time unprofitably, and there was nothing in the evidence which would suggest that that situation is likely to change over the period of possibly four to six weeks before any application to terminate the liquidation might be expected to be heard.

[26]     Against that, it is of course necessary to weigh the negative consequences for UTL if no stay is granted.   First, it seems to me that there would be nothing to prevent  the  shareholders  of  UTL making  arrangements  to  promptly  pay  UTL’s outstanding creditors, and then apply to terminate the liquidation.  Certainly, there would be some detriment to UTL if a stay were not granted, but in my view the evidence does not show that the detriment is sufficient to outweigh the significant risk that the company’s position may worsen if it is allowed to trade on.

[27]     While there may be some debate about the exact amount owing to the Inland Revenue Department for unpaid PAYE, it is a significant concern, weighing against the  grant  of  a stay,  that  payments  of  PAYE,  Kiwisaver  employer  contributions, student loan contributions and superannuation payments have apparently remained unpaid (in some cases at least since late 2012).  The apparent failure to file any GST returns  since  March  2013  (a  date  advised  orally  at  this  morning’s  hearing  by Ms Johnson from the Official Assignee’s office) is equally concerning.  In my view, these are matters which raise public interest issues going beyond the interests of the creditors, and they are considerations which militate in favour of the liquidation order being allowed to stand.  The failure to file statutory returns over a fairly long period  is  something  which  raises  such  public  interest  concerns,  and  it  may  be

appropriate that investigation of those matters be undertaken.3

3      See in that regard Re Telescriptor Syndicate Ltd [1903] 2 Ch 174.

[28]     Having regard to those considerations, I decline to order the stay, and the application is dismissed.

Associate Judge Smith

Solicitors:

Pacific Law Limited, Wellington for applicant

Insolvency and Trustee Service, Christchurch for Official Assignee
Carter Kirkland Morrison, Auckland for interested parties