WestCity NZ Pty v Fox Ears Limited
[2023] NZHC 1720
•5 July 2023
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2022-404-839
[2023] NZHC 1720
UNDER the Companies Act 1993 IN THE MATTER
of an application for the liquidation of a company
BETWEEN
WESTCITY NZ PTY LIMITED & WESTCITY NZ NOMINEES PTY LIMITED
Plaintiffs
AND
FOX EARS LIMITED
Defendant
Hearing: 26 April 2023 Appearances:
MA Keil for the Plaintiff
N Jiang, director granted leave to appear for the Defendant
Judgment:
5 July 2023
JUDGMENT OF ASSOCIATE JUDGE SUSSOCK
This judgment was delivered by me on 5 July 2023 at 4 pm pursuant to r 11.5 of the High Court Rules Registrar/Deputy Registrar
Solicitors/Counsel:
Keil & Associates, Auckland MA Keil, Auckland
WESTCITY NZ PTY LIMITED & ORS v FOX EARS LIMITED [2023] NZHC 1720 [5 July 2023]
Introduction and background
[1] The plaintiffs seek an order appointing liquidators to the defendant company following the failure by the defendant company to comply with a statutory demand for
$235,593.55 for unpaid rent in respect of a shop in WestCity Shopping Centre.
[2] The plaintiff relies on the statutory presumption of insolvency arising under ss 287(a) and 289 of the Companies Act 1993 following the failure by the defendant company to comply with a statutory demand.
[3] The defendant did not apply to set aside the statutory demand but defends the liquidation proceedings on the basis that the debt that is the subject of the demand is not owed because the defendant surrendered its lease at the time it vacated the shop.
[4] I set out the factual background and legal principles below before considering whether to exercise my discretion to appoint liquidators.
Factual background
[5] Ms Jiang is the sole director and shareholder of Fox Ears Ltd (Fox Ears). Fox Ears leased a shop space at WestCity Shopping Centre from WestCity NZ Pty Ltd and WestCity NZ Nominees Pty Ltd (together, WestCity) and traded as Health 2000 WestCity for several years. Fox Ears signed a new agreement to lease on 11 May 2019 for a term of 7 years at a rent of $97,000 per annum.
[6] On 31 October 2019, Ms Jiang emailed Colliers International Real Estate Management Limited (Colliers), who represented WestCity, to say that she was very sorry but she could not make the shop work anymore as it was not making any money. Ms Jiang advised that she had decided to move to Australia and that she had informed the Health 2000 Support Office. The email further advised that she was planning to close the store on 30 November 2019. Colliers' response included the following:
To cease trading and close your store on this date would be a wilful breach of lease … Any failure to comply with the terms of the lease is likely to result in the lessor taking legal action through their solicitors.
[7] Colliers’ email finished by suggesting an initial meeting on 6 November 2019 to discuss the matter further.
[8] Ms Jiang responded on the same day saying that she was in the process of obtaining instructions from Health 2000’s Head Office and that she would then contact Colliers for a meeting. Ms Jiang said that she would of course keep the shop open and running during the normal trading hours in the meantime.
[9] Ms Larissa Keil, the current centre manager of WestCity Shopping Centre, gives evidence that “in compliance with WestCity’s obligation to mitigate its loss” WestCity entered into a lease for a 15-month term with Health 2000 Retail Ltd from 2 December 2019. A copy of the Health 2000 Retail Ltd lease is annexed to Ms Keil’s affidavit. This is consistent with Ms Jiang’s evidence that the Health 2000 Head Office entered into a lease that followed directly on from Fox Ears vacating the premises on 1 December 2019.
[10] Ms Jiang’s evidence is that the content of the lease agreement entered into between WestCity and Health 2000’s Head Office was not disclosed to her at the time. This is not disputed by WestCity in its evidence.
[11] Ms Jiang says that after Health 2000 Head Office had taken over the store, she communicated with Colliers “immediately and repeatedly” about surrendering the lease as early as 16 December 2019, with correspondence from both herself and her then lawyer, Dennis Chan of Righteous Law. An example of the correspondence is attached to Ms Jiang’s affidavit but her evidence is that there were other emails. Ms Keil attached further correspondence to her affidavit in reply. I set out the correspondence included in the evidence below.
[12] The first of the emails is on 16 December 2019 and is from Richard Tonga at Colliers on 16 December 2019 and says:
Hi Nancy,
I will need formal written confirmation advising how you plan to proceed with regards to the Fox Ears Limited, Health 2000, lease.
Please confirm urgently.
[13]Ms Jiang emailed back the same day saying:
Hi Richard,
My understanding is that for the same shop/location, Colliers have since signed a new lease with another company, so could I please ask the landlord to surrender our current lease please?
[14] On 16 January 2020, Ms Jiang’s lawyer at the time, Mr Chan from Righteous Law, emailed Richard Tonga at Colliers and asked for Mr Tonga to:
…kindly advise whether you would require us to prepare the deed of surrender of lease or whether the landlord and/or their solicitor has a particular form for execution
[15] Mr Chan followed up on 22 January 2020 asking for Mr Tonga to kindly provide a response to their earlier email. Mr Tonga replied on 22 January 2020 saying their solicitors would be in touch shortly.
[16] On 23 January 2020, Colliers issued an invoice for one day’s rent, being the rent for 1 December 2019. The invoice was for $305.61 and is headed “vacating tenant”.
[17] Ms Jiang responded on 24 January 2020 following receipt of the invoice saying that her lawyer is talking to WestCity’s lawyer about the outstanding balances.
[18] On 4 February 2020, Fox Ears’ lawyer at the time, Mr Chan, followed up on Mr Tonga’s response on 22 January 2020 asking for an indicative timeframe for their solicitors to reply saying Fox Ears would like to have matters resolved as soon as possible. There was no reply so Mr Chan again followed up on 12 March 2020 asking for any indication on the status of the above matter.
[19] On 13 March 2020 Mr Tonga advised that it was currently with their solicitors who would be in touch shortly. The email asked Mr Chan to advise if there was a proposal from Fox Ears and said Mr Tonga would forward it to their solicitor if there was.
[20]On 8 January 2021 Mr Chan sent a further email saying:
We have yet to hear from your solicitors, we understand that the premises have already been leased to another tenant and our client seeks the return of the rental bond now.
[21]Mr Tonga replied on the same day saying:
We did not receive any proposal from you on behalf of your clients. The matter is still with our solicitors as your clients did not honour the terms of the lease they signed.
[22]Mr Chan replied again on the same day:
Per our prior correspondences below, we were awaiting contact from your solicitor with respect to this matter. Are you able to have your solicitors contact us so we may resolve this matter expediently.
We have instructions to request the return of the rental bond paid, our client has advised us that the premises have been leased to a third party already.
[23] There is no further correspondence in response annexed to Ms Keil or Ms Jiang’s affidavits after these dates.
[24] It is not in dispute that Health 2000 Retail Ltd vacated the premises on 1 March 2021.
[25] The shop was occupied by a community gallery for a further period from 25 March 2021 but WestCity’s evidence is that no rent was paid during this period.
[26] On 28 February 2022, more than two years after Fox Ears had last received an invoice in respect of the lease, Colliers emailed two invoices to Ms Jiang, saying only “Fjnd attached 2 recharge legal invoices for payment”.
[27] Ms Jiang emailed Colliers on the same day asking what the invoices were for. A solicitor from DLA Piper responded saying that the invoices had been issued pursuant to cl 13.1.3 of Fox Ears’ lease for shop 233 in WestCity shopping centre and explained that the invoices relate to expenses that WestCity incurred following Fox Ears’ breach of lease. In addition, the email said that WestCity had instructed DLA Piper to send a letter of demand to recover the amount outstanding, which they had sent to Mr Chan, the lawyer that they had dealt with previously for Fox Ears. A copy of the letter of demand for $721,946.87 plus GST together with the associated
enclosures was attached “again for [Ms Jiang’s] reference”. DLA Piper’s email records that WestCity had not yet received payment of the outstanding amount and that since it was overdue, WestCity was considering its options including bringing a claim against Ms Jiang to recover the amount demanded. In addition, the email records that WestCity would not be returning the security deposit as the amount had already been drawn down to cover unpaid rent and operating expenses, with the email attaching Fox Ears’ statement of account to confirm this.
[28] The letter of demand attached to DLA Piper’s email alleges that Fox Ears remains liable for the losses suffered by the landlord as a result of Fox Ears’ breach of lease until the lease expiry date of 18 May 2026. The loss is quantified as of 19 January 2022 at $721,946.87 plus GST, with a table set out in the letter as to how this sum was calculated. The letter of demand continues that unless payment of the outstanding sum is received by 18 February 2022, WestCity may commence legal proceedings against Fox Ears and/or its guarantors to recover the outstanding sum and in respect of Fox Ears’ repudiation of the lease. I record that there do not appear to be any guarantors of Fox Ears’ lease from the copy of Fox Ears’ lease in evidence.
[29] There appears to be no further correspondence between the parties until a statutory demand was served on Ms Jiang on 19 April 2022 seeking $235,593.55 (including GST). The demand was not served under cover of a letter from WestCity or its solicitors but states that, as at 31 March 2022, Fox Ears is indebted to WestCity in the sum of $235,593.55. The statutory demand attached an invoice for the amount of the statutory demand dated 14 April 2022 and with a due date of 14 April 2022, together with a breakdown of the arrears in rent included in the statutory demand. The breakdown records that the security deposit of $23,805.90 had been credited against the alleged arrears, as had the rental payments made by Health 2000 Retail Ltd between 2 December 2019 and 1 March 2021 of $96,585.20.
[30] The amount set out in the statutory demand was not paid, nor was any application to set the statutory demand aside filed by Ms Jiang.
[31] There is no dispute that the defendant company does not have any funds, including funds to pay a lawyer. However, Ms Jiang submits liquidators do not need
to be appointed because Fox Ears does not owe any money other than the amount claimed by WestCity which is disputed. Ms Jiang does not want Fox Ears to be liquidated because she wishes to utilise its tax losses, as her evidence is that this will allow her to repay loans owed to her family. Ms Jiang was unable to find a lawyer to act for her on a pro bono basis despite considerable effort. I therefore granted leave to Ms Jiang to represent the company in the exceptional circumstances of this case (unopposed by WestCity).
Defending liquidation proceedings — legal principles
[32] A court may dismiss or stay a liquidation proceeding where the debt on which the liquidation proceeding is based is the subject of a genuine and substantial dispute. In South Waikato Precision Engineering Ltd v Ahu Developments Ltd, Associate Judge Faire referred to the decision Bateman Television Ltd (in liq) v Coleridge Finance Company Ltd,1 where “the Privy Council referred to the general rule that no order will be made on a petition founded on a debt which is genuinely disputed”.2 The Privy Council held in that case that to apply to wind up a company in such a circumstance is an abuse of the Court’s process, and the Court has an inherent jurisdiction to prevent such an abuse of process.3
[33] In South Waikato, Associate Judge Faire then summarised the following principles from the authorities:4
(a)a winding up order will not be made where there is a genuine and substantial dispute as to the existence of a debt such that it would be an abuse of the process of the Court to order a winding up;
(b)in such circumstances, the dispute, if genuine and substantially disputed, should be resolved through action commenced in the ordinary way and not in the Companies Court;
1 Bateman Television Ltd (in liq) v Coleridge Finance Company Ltd [1971] NZLR 929 (PC)
2 South Waikato Precision Engineering Ltd v Ahu Developments Ltd HC Auckland CIV-2008-404- 000970, 10 December 2008 at [21].
3 Bateman Television Ltd (in liq) v Coleridge Finance Company Ltd, above n 1, as referred to in
South Waikato Precision Engineering Ltd v Ahu Developments Ltd, above n 2, at [21].
4 At [22].
(c)the assessment of whether there is a genuine and substantial dispute is made on the material before the Court at the time and not on the hypothesis that some other material, which has not been produced might, nonetheless be available; and
(d)the governing consideration is whether proceeding with an application savours of unfairness or undue pressure.
[34] The failure to apply to set aside a statutory demand is not fatal to the defence of the liquidation proceedings but, in addition to giving rise to the presumption of insolvency if the company does not comply with the statutory demand, it may be a relevant factor as to whether the dispute is genuine.5
[35] Fox Ears says that WestCity accepted the surrender of Fox Ears’ lease on 2 December 2019 when it entered into the lease with Health 2000’s Head Office, or at the latest on 31 March 2020 when a statement of Fox Ears’ account applying the security deposit was described as “Lease Surrender Health 2000”.
[36] In order to determine whether there is a genuine and substantial dispute in respect of whether the lease was surrendered, I briefly set out the legal principles relating to surrender.
Surrender of lease – legal principles
[37] As set out in Hinde McMorland & Sim Land Law in New Zealand, a lease is determined by surrender when the lessee yields up the estate to the immediate lessor.6 Surrender may be either express or by operation of law. There was no express surrender here so surrender by operation of law, or implied surrender as it is sometimes called, needs to be considered.
5 Heron’s Flight Ltd v NZ Properties International Ltd [2012] 1 NZLR 424 (HC) at [22], [23], [25],
[26] and [27].
6 DW McMorland and others Hinde McMorland & Sim Land Law in New Zealand (online ed, LexisNexis) at [11.261].
[38] The plaintiff relies on Lee v IAL Investments Ltd where Lang J set out the principles as follows:7
[22] As both counsel acknowledge, the concept of implied surrender, or surrender by operation of law, is well established in the law of landlord and tenant. When a lessor of premises re-lets those premises to a third party, this will usually constitute an implied surrender of the lease to a surrender by operation of law. The principle goes back to the principles enunciated in Walls v Atcheson,8 an authority cited by Penlington J in the following passage in Wildeboer:9
The effect of a reletting by the landlord after the tenant has quit the premises was dealt with as far back as in Walls v Atcheson (1826) 3 Bing 462; 130 ER 591. That case is the authority for the proposition which is stated in 27(1) Halsbury 4 ed., para 527:
“If … after the tenant has quitted the premises, the landlord relets them to another tenant who goes into occupation, a surrender is effected from the time of reletting, unless the landlord gives notice to the tenant that the reletting is on his account.”
[23]The requirements for surrender in this context were discussed in
Benjamin v Wareham Associates (NZ) Ltd, in which McGechan J said:10
Surrender by operation of law takes place through delivery of possession by lessee, and acceptance of possession by the lessor, with intention on both sides thereby to determine the lease. The process often is said to be based upon reciprocal estoppels by representation, whether by word or conduct: eg Steve Christenson and Co v Furs and Fashions (1971) NZLR 129, 133. There is no need for express words of surrender, but conduct must take place in a context of mutual intention. An intention by lessee alone to surrender the lease is not sufficient. Return of keys by a lessee is not sufficient in itself. There must be associated conduct on the part of the lessor, in relation to receipt of keys, establishing acceptance the lease concerned is at an end. Questions of fact, and within that degree, inevitably arise. The onus of proof rests on a lessee seeking to establish acceptance by the lessor the lease is surrendered: Relvok Properties Limited v Dixon (1972) 25 P&CR 1, 5, 6. Equivocal conduct will not suffice. Thus merely attempting to relet (Oastler v Henderson (1877) 2 QBD 575); entry to carry out necessary repairs; occasional use of parts; or change of locks for security reasons (Relvok Properties Limited v Dixon supra), have been regarded as not in themselves amounting to surrender by operation of law where the lessor's intention was to keep the lease on foot meantime. By contrast, an actual reletting to another lessee who goes into occupation amounts to acceptance of surrender, effective from the time of such reletting, unless the latter is expressed to be on the lessee's account.
7 Lee v AIL Investments Ltd [2017] NZHC 661, (2017) 18 NZCPR 234.
8 Walls v Atcheson (1826) 3 Bing 462, 130 ER 591.
9 Wildeboer v Carter, (1995) 3 NZ ConvC 192,022 (HC) at 192,025-192,026.
10 Benjamin v Wareham Associates (NZ) Ltd (1990) 1 NZ ConvC 190,638 (HC) at 190,642.
[24] As this passage demonstrates, the principles relating to implied surrender rest on notions of reciprocal estoppels by representation. Furthermore, as McGechan J put it, conduct must take place in a context of mutual intention. An intention to surrender by one party alone is not sufficient. Both parties must intend the lease to be at an end. Viewed objectively, the actions of both parties must be such that each is estopped from denying the continued existence of the lease. Not surprisingly, the issue of whether or not a lease has been surrendered will often be a question of fact and degree.
Is there a genuine and substantial dispute that there was an implied surrender of Fox Ears’ lease?
[39] The plaintiff says the fact that Ms Jiang and her solicitor continued to request a confirmation of surrender or that a deed of surrender be drafted must mean that surrender was not accepted. However, the correspondence, actions taken, and other documents suggest WestCity did accept the surrender (or that at least there is a genuine and substantial dispute as to whether it did).
[40] Ms Keil’s evidence for WestCity is that if WestCity had released Fox Ears from its lease obligations, then WestCity would have signed a deed of release in favour of Fox Ears or clearly communicated this. Counsel for WestCity says that, to the contrary, the correspondence from WestCity records that it would hold Fox Ears liable until the end of the lease. However, the correspondence referred to by Ms Keil is the first email sent on 5 November 2019 following the first advice from Ms Jiang that she was going to vacate the premises. Following that email, there was then correspondence from Ms Jiang saying that she was waiting on instructions from Health 2000 Head Office, after which a separate lease was entered into with Health 2000 Head Office.
[41] The factors that Lang J considered relevant in Lee v AIL Investments Ltd included whether the new occupier had negotiated the terms on which a new lease might be granted or had proceeded throughout on the basis that it was to take an assignment of the original lessee’s interest under the existing lease.11 In Lee v AIL Investments Ltd, the original lessee vacated the premises after it agreed to assign its interest as lessee under the existing lease to the new occupier.12 The lessor permitted the new occupier to occupy the premises on the same basis. Lang J held
11 Lee v AIL Investments Ltd, above n 7, at [28].
12 At [27].
therefore that there was no mutual intention that the lease would have come to an end when the original lessee vacated the premises. Lang J held that it was noteworthy that the lessor and the new occupier never negotiated the terms on which a new lease might be granted and that instead both proceeded throughout on the basis that the new occupier was to take an assignment of the original lessee’s interest as lessee under the existing lease.13
[42] Fox Ears’ position, however, is clearly distinguishable because Health 2000 Retail Ltd did not take an assignment of Fox Ears’ lease. Instead, it entered into a new lease itself, a copy of which is in evidence. Ms Jiang said in evidence that she was not involved in the negotiations between the plaintiffs and Health 2000 Head Office and did not see a copy of the lease at the time. No evidence was filed by WestCity disputing this.
[43] Counsel for WestCity refers to the terms of Health 2000 Retail Ltd’s lease as including a special condition that the new lease to Health 2000 Retail Ltd is subject to the existing lease held by Fox Ears being repudiated by Fox Ears and the shop being abandoned by Fox Ears with an express reservation of rights by WestCity. But there is undisputed evidence that Fox Ears was not aware of these or any other terms of the lease between WestCity and Health 2000 Retail Ltd.
[44] After the lease was entered into with Health 2000 Retail Ltd on 28 November 2019, the centre manager at the time emailed Ms Jiang stating he would need formal written confirmation from her advising how she planned to proceed with regards to the lease. Ms Jiang replied: “My understanding is that for the same shop/location, Colliers have since signed a new lease with another company, so could I please ask the landlord to surrender our current lease please?”
[45] Following further correspondence as set out above in the factual background, an invoice was sent to Ms Jiang on 23 January 2020 for one days’ rent in December 2019. Ms Jiang sent an email following receipt of the invoice saying her lawyer was talking to WestCity’s lawyer about the outstanding balances.
13 Lee v AIL Investments Ltd, above n 7, at [28].
[46] Ms Jiang’s lawyer at the time had emailed Colliers on 16 January 2020 asking whether Colliers required them to prepare a dead of surrender of lease or whether the landlord and their solicitor had a particular form of execution. There was no response from Colliers saying there could be no surrender. Instead the correspondence appears to focus on whether Fox Ears’ rental bond would be refunded.
[47] There is then no further correspondence in evidence until the letter of demand sent to Mr Chan dated 19 January 2022 demanding payment of $721,715.98 plus GST. This is despite the fact that the lease with Health 2000 Retail Ltd came to an end on March 2021 and WestCity then allowed a community gallery to occupy the shop rent without paying rent with no further communication with Fox Ears. As Ms Jiang says in an email to counsel for WestCity on 26 September 2022, if WestCity had not agreed to a surrender of the lease, why was Fox Ears not even consulted regarding the occupation of the shop by the gallery.
[48] In addition, there is an entry in Colliers’ statement of account for Fox Ears on 31 March 2020 headed “Lease Surrender Health 2000” with Fox Ears’ security deposit applied to bring the account to zero. This supports the position that both parties were proceeding on the basis that the lease had been surrendered. Ms Keil explains this entry as a mistake, but the entry is consistent with the correspondence and actions taken at the time.
[49] In these circumstances, I have no hesitation in finding that there is a genuine and substantial dispute in relation to the debt on which the statutory demand relies. It would therefore be an abuse of process for WestCity to succeed in its application to appoint liquidators.
[50] I record that I do not consider that it would be appropriate instead for the liquidation proceedings to be stayed and directions made requiring Fox Ears to bring proceedings to determine the dispute. As this is a liquidation proceeding, I do not reach a final view on whether there is implied surrender but the fact that WestCity did not dispute Ms Jiang’s evidence for Fox Ears, that neither she nor Fox Ears were involved in, or aware of, the terms of the lease being entered into with Health 2000 Retail Ltd, together with the correspondence at the time and the entry on
the statement of account would appear to make it difficult for WestCity to establish that the lease was ongoing.
Result
[51] The plaintiff’s application to appoint liquidators to the defendant company is dismissed.
Costs
[52] As Ms Jiang was granted leave to represent the company because of its inability to instruct a lawyer, and so is essentially in the position of a litigant in-person, costs are not payable to the defendant company. Disbursements may be claimed, such as filing fees, costs of photocopying and so forth. I ask the parties to confer and make every effort to agree costs. If that is not possible, memoranda of no more than 2 pages excluding schedules (remembering only disbursements are claimable) may be filed on behalf of the defendant within 20 working days and the plaintiff a further 10 working days following. Costs will then be determined on the papers.
Associate Judge Sussock
2