West End Road Nominee Limited v Atmore HC Auckland CIV 2007-404-003488

[2008] NZHC 2562

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2007-404-003488

IN THE MATTER OF     THE COMPANIES ACT 1993

BETWEEN  WEST END ROAD NOMINEE LIMITED Applicant

ANDROBERT GRAEME ATMORE Respondent

Hearing:         17 October 2007

and by memoranda dated 26 October 2007,
16 November 2007 and 20 November 2007

Counsel:         M R Colthart for applicant

D E Smyth for respondent

Judgment:      5 September 2008  at 4:30pm

JUDGMENT OF ASSOCIATE JUDGE ABBOTT

This judgment was delivered by me on 5 September 2008 at 4:30pm pursuant to Rule 540(4) of the High Court Rules.

Registrar/Deputy Registrar

Solicitors:

Knight Coldicutt, Private Box 106214, Auckland 1143 for applicant

Stephen McDonald Law, PO Box 26686, Greenlane, Auckland 1344 for respondent

WEST END ROAD NOMINEE LIMITED V  ATMORE HC AK CIV 2007-404-003488 5 September 2008

[1]      West End Road Nominee Limited (West End) applies to set aside a statutory demand issued by Robert Graeme Atmore (Robert Atmore) seeking payment of

$122,193.91.  The sum demanded is claimed to be the balance due of a loan made to West End in 2002.   Robert Atmore says the loan was to help fund West End’s purchase of land in West End Road, Herne Bay, Auckland, on which West End subsequently constructed four apartments.

[2]      West End says that the statutory demand should be set aside on two grounds. First, it says that it no longer has any effect because time for compliance with the demand was not extended and the statutory time frame for bringing a liquidation proceeding based on it has expired.   Secondly it contends that there is a genuine dispute as to whether there was a loan (and therefore whether any debt is owing or due) and as to whether it is recoverable (due to lack of disclosure under the Credits Contracts Act 1981).

[3]      The respondent argues there are no grounds to set aside.   It says that the demand remains effective, both because West End did not challenge extension at the time of the first call of the application and because the Court has power in any event to extend time.   He also says that West End there is no genuine and substantial dispute as to the existence of the loan (or its terms), and that disclosure under the Credits Contracts Act is not required.

Background

[4]      The only evidence before the Court is a short affidavit by West End’s director Robert Daniel McEwan (Daniel McEwan) and an affidavit by the respondent’s son, Graeme Kenneth Atmore (Graeme Atmore).  The following facts are largely drawn from the affidavit of Graeme Atmore.  With the exception of evidence he gives as to the existence and terms of the loan, G K Atmore’s evidence is not challenged.

[5]      The dispute arises out of a property development in West End Road, Herne Bay, Auckland.  West End was incorporated specifically for the development as bare trustee for (initially) three beneficiaries of the project.   They were Kelly McEwan (son of Daniel McEwan) with a 50% interest, and Daniel McEwan and Graeme Atmore with a 25% interest each.   Kelly McEwan (son of Daniel McEwan) was West End’s sole director and shareholder. Some time after inception of the project, a fourth beneficiary (Jeremy Northcott) took a 12.5% interest, reducing Kelly McEwan’s interest to 37.5%.  As a consequence Jeremy Northcott acquired a half interest in one of Kelly McEwan’s two apartments.  The beneficiaries entered into documents under which they agreed to provide the necessary cash contributions for the project, and to indemnify West End as required, in return for which each 25% interest was to receive one of the four apartments in the development.

[6]      West End purchased the land in October 2002.  Graeme Atmore who was a practising solicitor at the time, acted for West End on the purchase of the land.  He may also have acted for West End on other matters, but there is no clear evidence of that.   The deposit was funded by the beneficiaries.   The majority of the purchase price was borrowed from a bank, but there was a shortfall which had to be funded. Graeme Atmore says this was the purpose of the loan made by Robert Atmore.

[7]      The four apartments were constructed, and separate titles were issued in June

2006.    After  completion  of  the  project,  Kelly  McEwan  prepared  spreadsheets showing the total cost, and allocating it between beneficiaries.  Those spreadsheets referred to money owed to Robert Atmore (described as “Graemes Dad”).

[8]      Graeme Atmore had two meetings with Daniel and Kelly McEwan to discuss payment of the balance said to be due to his father.   In addition on 20 December

2006  he  sent  an  email  to  Kelly  and  Daniel  McEwan  referring  to  some  advice received from Kelly that Daniel was expecting a GST refund (said to be greater than the sum shown on the August spreadsheet as being due by Daniel) and seeking confirmation that “[that] money would be used to repay Dad’s loan”.

[9]      On 26 January 2007 counsel for Robert Atmore wrote to West End setting out his instructions as to the existence and terms of the loan and seeking repayment of the sum identified in the August 2006 spreadsheet together with ongoing interest.

[10]     Robert Atmore issued the statutory demand on 31 May 2007.  It was served on West End that day.

[11]     The following day Kelly McEwan’s  resignation as director of West End (dated 31 May 2007) was registered in the Companies Office, together with notice of appointment of Daniel McEwan (who thus became its sole director).

[12]     On 15 June 2007 West End’s counsel wrote to Robert Atmore’s counsel confirming that he had instructions to act on an application to set aside, and stating:

“In the meantime, I confirm that West End’s position is that it does not acknowledge the loan was advanced, and it has no record (other than your demand letter) of the terms of the alleged advance or any such matter”.

[13]     West End’s application to set aside was filed the next working day.

Grounds for setting aside

[14]     The Court’s power to set aside a statutory demand is to be found in s 290 of the Companies Act 1993.  The relevant parts of that section read.

290      Court may set aside statutory demand

(1)The  Court  may,  on  the  application  of  the  company,  set  aside  a statutory demand.

(2)       The application must be—

(a)      Made within 10 working days of the date of service of the demand; and

(b)Served on the creditor within 10 working days of the date of service of the demand.

(3)No  extension  of  time  may  be  given  for  making  or  serving  an application to have a statutory demand set aside, but, at the hearing

of the application, the Court may extend the time for compliance with the statutory demand.

(4)The Court may grant an application to set aside a statutory demand if it is satisfied that—

(a)here is a substantial dispute whether or not the debt is owing or is due; or

…

(c)       The demand ought to be set aside on other grounds.

Is the demand stale?

[15]     West End’s first ground for setting aside was that the respondent could no longer rely on the demand because time for compliance with it expired on 22 June

2007, and any liquidation proceeding based on it had to be brought by 3 August

2007: s 288(1) Companies Act 1993.  Counsel submitted that the respondent had not sought an extension of time either ahead of or at the first call of this application on

17 August 2007, and Court could not extend time retrospectively under s 290(3).

[16]     Counsel for the respondent submitted first that West End was estopped from arguing that the demand was stale by reason of having appeared (on behalf of both parties) and sought a defended hearing for its application after the demand was alleged to have expired.  Secondly, he submitted that there was no bar to the Court making an order extending time for compliance with the application (as distinct from extending time for making the application to set aside).   He also pointed out that there  was  nothing  to  prevent  the  respondent  from  proving  insolvency  by  other means.

[17]     The demand was issued under s 289 of the Companies Act 1993, which requires the recipient company to satisfy the demand within 15 working days of service.   The demand was served on 31 May 2007.   The 15 days for compliance expired on 22 June 2007.

[18]     A company which fails to comply with a statutory demand is presumed to be unable to pay its debts:  s 287 of the Companies Act 1993.  That is a basis for the

party serving the demand to apply for appointment of a liquidator:   s 241(4)(a) Companies Act 1993.

[19]     Section 287 is expressly subject to s 288 of the Act.  The relevant parts of that section, for the purposes of this application are:

288     Evidence and other matters

(1)On an application to the Court for an order that a company be put into liquidation, evidence of failure to comply with a statutory demand is not admissible as evidence that a company is unable to pay its debts unless the application is made within 30 working days after the last date for compliance with the demand.

(2)Section 287 of this Act does not prevent proof by other means that a company is unable to pay its debts.

…

[20]     Counsel were unable to refer me to any authority where this point had been raised on an application to set aside a demand.   However, they referred me to Indiana Publications Limited v World Commerce NZ Limited (HC AKL 2006-404-

1022, 6 June 2006, Associate Judge Faire) where a request for extension of time was made in the course of an application for liquidation.  In that case the application for liquidation was filed after the 30 working day period prescribed by s 288 of the Act. Associate Judge Faire rejected the submission of counsel for the plaintiff that he could retrospectively extend time for compliance with the demand (and hence defer the 30 working day period within which the deeming provision operated) under s

289(2)(d) of the Act.  That section prescribes the formal requirements of a notice, including the need to require payment within 15 working days of service “or such longer period as the Court may order”.

[21]     Associate  Judge  Faire  contrasted  the  application  before  him  with  an application for extension under s 290(3) of the Act.  He said that the Court’s power to extend time was limited to circumstances where an application to set aside had been filed and was being heard:

[11]     By contrast, the power to extend time for compliance given by s 290 is directed specifically at a demand which complies with the definition in s 289 and

has  already  been  served.     The  power  to  extend  time  arises  in  the  special circumstances which arise where an application to set aside has been filed and, in fact, is being heard.  It is limited to that specific circumstance.

[22]     The power to extend time is, in effect, a practical recognition that it will not always be possible to determine an application to set aside within the statutory time frames.    It  is  open  to  either  party  to  seek  the  extension  for  differing  reasons depending on the outcome of the application to set aside (the company to avoid the operation  of  the  presumption  and  the  creditor  to  be  able  to  proceed  with  an application to liquidate based on the demand).

[23]     I do not consider it a question of giving retrospective effect.  In my view the Act gives the Court power to extend time up to the point that the application is determined.

[24]     Having come to this view of the Court’s power to extend time, I do not need to  consider  the  respondent’s  second  argument,  that  West  End  is  estopped  from raising this issue.   I comment, however, that there is no evidence before me to support an estoppel but the circumstances do justify an order extending time.

Is there a genuine dispute

[25]     The principles which the Court applies when deciding whether or not to exercise its discretion under s 290 have been traversed in many cases, and are not in dispute on this application.  The principles which I will apply can be summarised as:

a)       It is for the applicant to show a reasonably arguable basis for the existence of a genuine and substantial dispute as to the existence of the debt:   Queen City Residential Limited v Patterson Co-Partners Architects Ltd [1995] 3 NZLR 307, United Homes (1988) Limited v Workman [2001] 3 NZLR 447, 451-452.

b)The applicant must do more than merely assert that a dispute exists.  It must  provide  material,  short  of  proof,   to   support   that   claim:

Eventmakers International Limited v Pratney Productions Limited and Zebra Xing Limited (HC HAM CIV 2006-419-411, 4 August 2006, Associate Judge Faire).

c)       If  the  applicant  can  show  a  reasonable  case  for  a  genuine  and substantial dispute, the statutory demand and liquidation procedures are inappropriate to resolve that dispute:   Taxi Trucks Limited v Nicholson [1989] 2 NZLR 297, 299.

d)Where there is a dispute on facts, the Court will not attempt to resolve them in a summary way, particularly where there may be issues of credibility.   However, a Court is not required to accept uncritically any or every allegation of a dispute of fact:   Eng Mee Yong v Letchumanan  [1980] AC 331, 341. The Court has to establish whether the assertion made passes the threshold of credibility: Pemberton v Chappell [1987] 1 NZLR 1, 3; Orrell v Midas Interior Design Group Limited (1991) 4 PRNZ 608, 613 (CA).

[26]     West End raises three matters which are said to call into question whether the debt is owing or due.  The first is that there is no credible evidence of the loan.  The second is that even if it can be said that there was a loan, there is no admissible evidence as to terms of the loan.  The third is that any loan required disclosure under the Credit Contracts Act 1981, and that disclosure has not been given.  I will deal with each in turn.

Evidence of the existence of the loan

[27]     There is nothing in West End’s argument that the respondent has not proved the loan.    Counsel for West End based this submission on the lack of contemporaneous documentation of the loan.  However, Graeme Atmore’s evidence is that it was agreed orally.   He says that Kelly McEwan informed him that there would be a shortfall in funds to complete purchase of the land, and that he suggested an approach to his father, Robert Atmore, for the shortfall.   He says that Kelly McEwan agreed to that approach and proposed terms for the loan.  Graeme Atmore

says that he took these terms to his father who accepted them and advanced the funds to West End by credit to its ledger in the trust account of Graeme Atmore’s firm.

[28]     Although  the  provenance  of  the  document  is  disputed,  Graeme  Atmore produced  in evidence  a  summary of  his  trust  account  ledger  (in  the  form  of  a statement) in respect of the purchase.  It shows two sums totalling $164,000 being deposited by Robert Atmore to the credit of West End on the date of settlement of the purchase of the land (4 October 2002).

[29]     West End did not reply to the evidence by Graeme Atmore.  It contends that there is a dispute arising out of Daniel McEwan’s earlier affidavit in support of West End’s application.  It is important to note, however, that Daniel McEwan does not expressly state that there was no loan.  He merely says that he was not aware of it at the time it was made.  His position was summarised in the following evidence:

“Unless and until the respondent is able to provide … evidence [supporting it], the applicant does not accept liability for the alleged loan, and does not acknowledge the alleged terms on which the advance was made”.

[30]     There is ample evidence to support a finding of a loan in the following:

a)       The  ledger  statement  prepared  on  18  July 2007  and  produced  by

Graeme Atmore, concerning the purchase of the land.

b)The spreadsheets sent by Kelly McEwan to Graeme  Atmore after completion of the project in 2006.

[31]     Counsel for West End submitted that the ledger statement should be rejected as it was not a contemporaneous document (it was obviously prepared for inclusion in Graeme Atmore’s affidavit).  However Graeme Atmore refers to it as a true copy of his firm’s records in relation to the purchase, and it is headed as being a ledger statement for the period from 22 May 2002 to 18 July 2007.   I accept that it is a record of transactions in West End’s trust account in relation to the purchase of the land.

[32]     The post-completion spreadsheets, and accompanying correspondence, also clearly evidence the existence of a loan:

a)       On 21 July 2006 Kelly McEwan sent Graeme Atmore a spreadsheet described as “draft Westend washup”, showing the total cost of the project allocated between the four beneficiaries, by reference to the units  they  were  receiving.      It   showed   an   unpaid   balance   of

$284,101.66, of which $234,636.63 was shown alongside the entry

“Graemes Dad”.

b)        On 22 August 2006 Kelly McEwan sent Graeme Atmore and Jeremy

Northcott a further spreadsheet under cover of an email which read:

Subject: Westend

Graeme’s Dad is half paid and there are a few small bills. Graeme is Paid up

Kelly Is paid up

Kelly and Jeremy owe a little

Dan owes the balance. Graeme,

I need to work with Dan for a repayment schedule.  Will try

and get another 60k ASAP.  It is due to us. ….

c)       The spreadsheet sent with the email of 22 August 2006 was in the same format  as  the  one  sent  the  previous  month.    It  showed  the balance to pay as $135,072.12, of which $113,424.24 was attributed to “Graemes Dad”.  The amount due from Daniel McEwan was stated to be $123,434.57.

[33]     These spreadsheets, and the email, were created by West End’s director at the time.  They have not been challenged, nor has West End attempted to refute Graeme Atmore’s evidence of his attempts to secure repayment for his father.  West End did not challenge the existence of the loan until after issue of the statutory demand.

[34]     I am satisfied that Robert Atmore did lend West End $164,000 on 4 October

2002 to enable it to complete purchase of the land at West End Road.

Evidence of the terms of the loans

[35]     The second alleged aspect of dispute concerns the terms of the loan.  Counsel for West End submitted that there was no admissible evidence of the interest rate or term.   He argued that Graeme Atmore’s evidence of his discussion with Kelly McEwan about the terms of the loan was inadmissible as hearsay.  He also took issue with a document produced by Graeme Atmore headed “R G Atmore Loan” as failing to show its authorship.   He argued that the subsequent demand letters, setting out terms of the alleged loan, did not constitute evidence of the loan term.

[36]     I do not accept counsel’s contention that I should reject either the direct evidence of Graeme Atmore or the document headed “R G Atmore Loan”.  Graeme Atmore is entitled to give evidence of statements  made to  him  by West  End’s director.  I accept that the document headed “R G Atmore Loan” does not reveal the author on its face, but Graeme Atmore states in his affidavit that Kelly McEwan prepared it, and that it records the break down of Robert Atmore’s loan.   It is completely consistent with all the other evidence given by Mr Atmore.  It shows the date of the advance at 4 October 2002, and sets a calculation of interest through to

21 August 2006, the date before the second spreadsheet was sent to Graeme Atmore by Kelly McEwan.   It shows the same balance of loan as the August spreadsheet. Again I take into account that West End has not filed any evidence in answer to Graeme Atmore’s affidavit.  I infer that Kelly McEwan has continuing contact with Daniel McEwan (as well as the two of them being father and son, there is evidence that they have other joint commercial activities, and Kelly McEwan remains the sole shareholder of West End).  If Kelly McEwan disputed Graeme Atmore’s statements, it would have been a simple matter to have filed an affidavit in reply, to that effect. West End’s evidence goes no further than saying, in effect, “prove it”.

[37]     I am satisfied that the loan was on the terms stated by Graeme Atmore, namely that it was repayable on or before date of issue of titles for the apartment, and pending repayment was to carry interest at 10% per annum compounding.

Disclosure under the Credit contracts Act 1981

[38]     The third and last ground for an alleged dispute is that there has been no disclosure under the Credit Contracts Act 1981.   This ground was not raised until counsel’s synopsis of submissions, which were provided only on the morning of the hearing.   I gave leave to counsel to advance the argument, but reserved leave to counsel for the respondent to file further submissions by memorandum, and for counsel for West End to file a reply.  They did so.

[39]     Counsel for West End submitted that this was a controlled credit contract pursuant to s 15(1)(b) of the Credit Contracts Act 1981 by reason of the fact that the parties were introduced by Graeme Atmore as “a paid adviser”.     It is common ground that Graeme Atmore acted as West End’s solicitor on the purchase of the land.

[40]     Section 2 of the Act defines a paid adviser as:

(1)       In this Act, unless the context otherwise requires,-

...

Paid adviser means a person who, in respect of a credit contract, acts for reward as an adviser to, or as a trustee, nominee, or agent of, one or more of the parties to the contract; but does not include a person who is an employee of one or more of the parties:

[41]     Graeme Atmore clearly had dual roles at the time of the loan (he was both acting as a shareholder or investor in the project and as solicitor for West End, at least in respect of the purchase of the land).  Counsel for West End submitted that it was at least arguable that he (Graeme Atmore) was acting as a paid adviser, so that the loan was unenforceable until proper disclosure had been made.

[42]     The  purpose  of  the  definition  has  been  described  as  being  to  require disclosure where the circumstances of the credit contract are sufficient for a creditor to seek advice from a professional adviser:  Gault on Commercial Law at CC2.29.04.

The purpose of the definition is to ensure that, where a credit contract is arrived at in circumstances which are sufficiently formal for a creditor to seek  advice  from  a  professional,  the  disclosure  provisions  should  be

complied with.   Furthermore, where a person has received professional advice, he or she (or the adviser) will be aware of the disclosure provisions and will therefore be able to comply with them.

[43]     Thus in O’Connor v Heaslip [1989] 1 NZLR 632, 638 the Court found that a land agent who introduced the parties, and who was paid a commission for the transaction by the defendant was a paid adviser. In Freedom Homes Limited v Reelick (1993) 5 TCLR 283 the Court found that an accountant who prepared an agreement (in the sense that he recorded what the parties had said) was not a paid adviser.   The Court considered it relevant that he was entitled to charge for his attendance (though he did not in fact do so) but that his advice was not sought.  In other words, he did not act as an adviser.

[44]     It is unclear whether Graeme Atmore was acting as West End’s solicitor or as an investor when he first raised the prospect of a loan with Kelly McEwan, and then when he raised the matter with his father.  However, on the authorities put to me, I come to the view that to be a paid adviser Graeme Atmore had both to be acting for reward, and as an adviser, in the transaction.   There is nothing in the evidence to suggest that he was acting as a paid adviser to either of the parties in respect of this loan.   Further, the tenor of the transaction clearly lacked the element of formality referred to by the learned authors of Gault on Commercial Law as underlying the purpose of the definition.

[45]     I find that Graeme Atmore did not act as a paid adviser to either of the parties to the loan arrangement and, for that reason, the loan was not a controlled credit contract requiring disclosure.  This basis for dispute falls away accordingly.

Application under s 291 of the Companies Act 1993

[46]     Counsel for the respondent argued that this was an appropriate case for an order under s 291(1)(b) of the Companies Act 1993 where the Court should make an order putting West End into liquidation forthwith.   He referred to the undisputed evidence by Mr Atmore that West End was a bare trustee, and that its inability to pay the debt seems to have arisen solely as a result of Daniel McEwan’s failure to pay his share of construction costs pursuant to the original indemnity arrangement.

[47]     Counsel for West End did not address this point in his submissions.   The evidence by Graeme Atmore is clear that it was a special purpose company, incorporated purely for this development.   It is now more than 2 years since the development  was  complete.  West  End  has  not  challenged  Graeme  Atmore’s evidence that it was acting as a bare trustee, with its beneficiaries indemnifying it on any obligation.  In the somewhat unusual circumstances of the case I accept that this is an appropriate case to exercise my discretion under s 291(1)(b), but deferring the time on which that order is to take effect to allow West End a final opportunity to meet the debt.

Decision

[48]     West End has not satisfied me that there is a genuine and substantial dispute over the debt claimed under the statutory demand.   The application to set aside is dismissed.

[49]     I make an order pursuant to s 291(1)(b) of the Companies Act 1993 that West End be placed in liquidation on the ground that it is unable to pay its debts, but direct that that order is not to take effect until 4:00pm on 26 September 2008.   Leave is reserved to either party to apply by memorandum for recall of this order in the event that the debt is paid by 5:00pm on 25 September 2008, or they come to an arrangement for its payment.

[50]     The respondent is entitled to costs on this application on a 2B basis.

Associate Judge Abbott