Working Concepts Limited v Carlos Concepts Limited (in liquidation)
[2013] NZHC 3061
•27 November 2013
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2013-485-7306 [2013] NZHC 3061
UNDER Section 290 of the Companies Act 1993
BETWEEN WORKING CONCEPTS LIMITED Applicant
ANDCARLOS CONCEPTS LIMITED (IN LIQUIDATION)
Respondent
Hearing: 27 November 2013
Appearances: S M O'Sullivan for Applicant
G J Toebes for Respondent
Judgment: 27 November 2013
ORAL JUDGMENT OF ASSOCIATE JUDGE BELL
Solicitors: DLA Phillips Fox (S M O’Sullivan/E Coburn) Wellington, for Applicant
JT Law (Justin Toebes) Wellington, for Respondent
WORKING CONCEPTS LIMITED v CARLOS CONCEPTS LIMITED (IN LIQ) [2013] NZHC 3061 [27 September 2013]
[1] Working Concepts Ltd has applied under s 290 of the Companies Act 1993 to set aside two statutory demands served on it by Carlos Concepts Ltd (In Liquidation). In both cases Working Concepts Ltd says that the debts in the demands are the subject of genuine and substantial disputes.
[2] The first statutory demand is for $20,979.00 said to be “the amount recorded as due to the creditor in the financial statements to 31 March 2009”. The second demand, for $38,579, is said to be “the increase in the debit balance of the current account due to the creditor as a result of an erroneous transaction crediting the debtor’s current account”.
[3] If a statutory demand is allowed to stand, then non-compliance with the statutory demand gives rise to a presumption that the company served with the demand is insolvent. That presumption of insolvency can then be used in a later application for the company to be put into liquidation on the grounds that it is unable to pay its debts. If a company genuinely disputes its liability to the debt in the demand, it would not be just to allow the presumption of insolvency to arise. Accordingly under s 290(4)(a) of the Companies Act, the statutory demand may be set aside if the debt is subject to a substantial dispute.
[4] In Link Electro Systems Ltd v GPC Electronics (NZ) Ltd1 the Court of Appeal set out well-established principles for applications under s 290(4)(a). The company is required to show that:
there is arguably a genuine and substantial dispute as to the existence of a debt;
the mere assertion of a dispute is not sufficient. Some material – short of proof – is required to support the claim that the debt is in dispute;
if such material is available, the dispute should normally be resolved other than by means of proceeding by way of statutory demand;
1 Link Electro Systems Ltd v GPC Electronics (NZ) Ltd [2007] NZCA 501, (2007) 18 PRNZ 946 at [17].
it is routinely difficult to resolve disputed questions of fact on affidavit evidence alone – more obviously so when issues of credibility arise; and
it needs to be kept in mind throughout, that the task for the judge is not to resolve the actual dispute, but to determine whether there is a substantial dispute whether or not the debt is due.
[5] As that case shows, the court may be able to arrive at a conclusion that a debt is not subject to a substantial dispute, even though reaching that conclusion may involve some analysis of factual and legal issues.
[6] In this case, while there are two statutory demands claiming separate debts, there is a common background to them. Mr Robert Cummins is the man behind both Working Concepts Ltd and Carlos Concepts Ltd. He is the sole shareholder and the director of Working Concepts Ltd. Carlos Concepts Ltd is a wholly-owned subsidiary of Working Concepts Ltd. It is one of a number of single purpose development companies which Mr Cummins established to carry out property development projects in Flatbush, Manukau, Auckland. Mr Cummins refers to developments at 124 Stancombe Road, 126 Stancombe Road, 128 Stancombe Road,
130 Stancombe Road, and Carlos Drive.
[7] Carlos Concepts Ltd was established to develop 42 residential apartment units at 124 Stancombe Road, Flatbush. He says that the development started in December 2004 and was completed in 2007. Initially, Working Concepts Ltd funded the development until such time as Carlos Concepts Ltd was able to obtain development finance from a financier – in this case that was Marac. He says that the development was not profitable but it was completed to the point where all units were sold by 2007. That included four units transferred to Working Concepts Ltd to reduce indebtedness for current account advances.
[8] Mr Cummins says that he gave instructions to the accountants for Working Concepts Ltd and Carlos Concepts Ltd to reduce the balance sheet of Carlos Concepts Ltd to a nil position so that the company could file final tax returns and cease trading. He says that is the process he had undertaken with two other subsidiary companies, Stancombe Concepts Ltd and Bishop Lenihan Concepts Ltd.
It seems that if no third parties had been affected and all tax issues had been addressed, that could have been a straightforward process.
[9] In the event, however, the matter was not as straightforward as Mr Cummins might have hoped. That was because Carlos Concepts Ltd faced a liability to a third party. That was a Mrs Kobza. She had paid a deposit to buy one of the units from Carlos Concepts Ltd under an agreement of February 2005. Mr Cummins says that she had tried to cancel the agreement in May 2005. The ground she gave was that Carlos Concepts Ltd had allegedly failed to notify her of the issue of the relevant land use consent by 31 March 2005. Carlos Concepts Ltd refused to accept her cancellation. Mr Cummins says that the relevant consent had in fact issued on
3 March 2005.
[10] Mrs Kobza issued summary judgment proceedings in the Auckland District Court to recover her deposit. Her summary judgment application was dismissed in May 2007. Mrs Kobza lived in Poland. Carlos Concepts Ltd obtained an order for security for costs against her and the proceedings were stayed pending payment. On that state of affairs, Mr Cummins believed that her claim would languish. However Mrs Kobza proved him wrong. She took her claim against Carlos Concepts Ltd to a hearing and she was successful in obtaining a judgment against Carlos Concepts Ltd for $55,132 including costs and interest. That judgment was given on 26 June 2008. Following that, Mrs Kobza applied for Carlos Concepts Ltd to be put into liquidation. The company was put into liquidation with the liquidators appointed on
17 August 2009.
[11] Mr Cummins had always assumed that Carlos Concepts Ltd would be able to defend Mrs Kobza’s claim successfully. Accordingly he had not made any provision for her claim in the accounts. He says that without making any allowance for Mrs Kobza’s claim, the total net indebtedness of Carlos Concepts Ltd for the year ending 31 March 2008 was $1,411,987.67. He identifies that as made up of three components:
(a) net liabilities of $89,358.43;
(b) net inter-company debt of $318,291.53 and
(c) owing to Working Concepts Ltd on current account - $1,004,337.71. [12] He says that he gave instructions for that indebtedness to be reduced to a nil
balance. The way he decided to achieve that was for Carlos Concepts Ltd to charge Working Concepts Ltd a finance fee. He has put in evidence an invoice from Carlos Concepts Ltd to Working Concepts Ltd for a finance fee in the sum of $1,432,129. There is a tax invoice. GST is said to be zero rated. The charge is for “finance fee payable in connection with the arrangement and guarantee of group funding facilities as agreed”.
[13] It is clear from the evidence that the aim of this charge was to reduce Carlos Concepts Ltd’s balance sheet to a nil balance. In other words the exercise was really one of debt reduction. I explored with Mr O’Sullivan the fact that there would also be a tax effect from reducing the debt in this way. That is, the fee of $1,432,129 would be income in the hands of Carlos Concepts Ltd but it would not be subject to tax because the company had accumulated losses against which that income could be set. Correspondingly, the charge of $1,432,129 would be deductible as an expense incurred by Working Concepts Ltd and could be applied against its income when assessing its tax liabilities.
[14] There is a reference in the evidence to Mr Cummins’s companies being subject to investigation and audit by the Inland Revenue. I am aware that there are special rules for allowing tax losses incurred by one company to be claimed against income incurred by another company. In effect the charging of the fee is a form of subvention payment. It does not appear that this way of structuring the matter in this case has caused concern to the Inland Revenue.
[15] I make those findings because they are an important background to assessing the matters raised for the first statutory demand.
[16] Mr Cummins further explained that when the 2008 accounts were prepared for Carlos Concepts Ltd, inter-company balances had been assigned to Working
Concepts Ltd but there remained net liabilities in the balance sheet. Rather than matters being brought to a nil balance, the net position in the accounts showed that Working Concepts Ltd was indebted to Carlos Concepts Ltd in the sum of
$94,960.81.
[17] Mr Cummins has not put in evidence the final 2008 accounts, but he relies on
the “last year” parts of the 2009 accounts to indicate what had been set out in the
2008 accounts.
[18] If matters had stayed as recorded in the 2008 accounts, then the liquidators would be entitled to claim $94,960.81 from Working Concepts Ltd. However, that is not the position shown in the 2009 financial statements. In his reply affidavit, Mr Cummins says that he did not finally approve the 2009 financial statements. What has been put in evidence is said to be only the draft financial statements. If the
2009 financial statements are not to be accepted, then the position for Working Concepts Ltd would be that the 2008 financial statements would stand. When I put that to Mr O’Sullivan, he said that the matter should be dealt with on the basis of the
2009 statements rather than the 2008 statements.
[19] It is the 2009 financial statements that have given rise to the statutory demands. The balance sheet at 31 March 2009 shows, as an asset of the company, the sum of $20,979 owed by Working Concepts Ltd. That is the debt the subject of the first statutory demand.
[20] In reducing the liability of Working Concepts Ltd from $94,960.81 to
$20,979, the accountants have made a number of adjustments. The 2008 accounts had shown a GST liability of Carlos Concepts Ltd in the sum of $39,916. The accountants made a deduction for the sum of $38,579, an adjusted GST figure, by recording that that debt had now been assigned over to Working Concepts Ltd. The liquidators say that Working Concepts Ltd is liable for the $20,979 being the amount shown in the balance sheet as at March 2009, and that the transfer of the liability for GST can be ignored because the GST liability never came home to roost.
[21] For this hearing the balance sheet for the year ending 31 March 2009 can be treated as a final financial statement. It was prepared by accountants instructed by Mr Cummins. Those accountants also acted for Working Concepts Ltd. They were prepared when Mr Cummins was a director of both companies, when both companies were under his effective control. That means that while he was a director of both companies he was able to arrange transactions between both companies. The financial statements can be referred to as identifying the transactions that were entered into between the two companies. Mr Cummins retained that power to effect the transactions between the companies up until the time when Carlos Concepts Ltd went into liquidation. Of course, once the company went into liquidation then the liquidators took effective control of the company and he lost his power as director to make any changes to transactions between the companies.
[22] Working Concepts Ltd protests that it should not be held to the amount of the company’s indebtedness shown in the balance sheet. However, that balance sheet records the effect of the transactions that had been entered into between Carlos Concepts Ltd and Working Concepts Ltd. If Working Concepts Ltd wishes to set aside that liability, it must find some ground in law for saying that it is not bound. Although it was not addressed in the hearing today, at one stage Mr Cummins contended with the liquidators that Working Concepts Ltd was entitled to charge Carlos Concepts Ltd interest. The liquidators had an effective answer to that – the accounting records show that throughout Working Concepts Ltd had made advances to Carlos Concepts Ltd on an interest-free basis. There is now no basis for re-writing the record to claim interest retrospectively.
[23] Instead, Mr O’Sullivan mounted alternative arguments to challenge the
indebtedness:
(a) the matter could be rectified under the Contractual Mistakes Act 1977, and
(b) there was a total failure of consideration.
[24] The particular contract which Mr O’Sullivan says can be attacked under the Contractual Mistakes Act is the finance fee for $1,432,129 charged under the invoice of 31 March 2008. The mistake alleged is that that fee was intended to bring the balance sheet of Carlos Concepts Ltd to a nil balance. Charging that fee did not achieve that effect. As a mistake, perhaps it is not so much a mistake as to the existing state of affairs as they were in March 2008 because Mrs Kobza only succeeded in her claim later. Instead an expectation was not quite achieved. Nevertheless, for the purpose of argument I will assume that there was a relevant mistake under s 6(a) of the Contractual Mistakes Act. It would be a mistake within s
6(a)(ii) because both parties were influenced in their decisions to enter the contract by the same mistake. That is apparent because Mr Cummins was a director of both companies and the accountants prepared accounts for both parties. Therefore, it was the same mistaken belief that operated on both parties to the transaction.
[25] The part of Mr O’Sullivan’s argument that I cannot accept is that the relevant
mistake comes within s 6(b):
The mistake or mistakes, as the case may be, resulted at the time of the contract –
(i) In a substantially unequal exchange of values; or
(ii) In the conferment of a benefit, or an imposition or inclusion of an obligation, which was, in all the circumstances, a benefit or obligation substantially disproportionate to the consideration therefor ...
[26] The way that Mr O’Sullivan’s argument ran was that the finance fee was largely illusory. The narration on the invoice did not in fact have much relation to reality. It is important to recognise that there was a proper commercial purpose which the parties intended to achieve with this finance fee. It was intended to be a means of reducing the indebtedness of Carlos Concepts Ltd to Working Concepts Ltd and it seems to have been the most tax-efficient way of achieving that purpose.
[27] What happened, in the event, was that Working Concepts Ltd overshot the mark in that it ended up having a liability to Carlos Concepts Ltd of $20,979 even
after adjustments had been made to the original $94,960.81 of indebtedness. That difference of nearly $21,000 against a total liability of $1.42m seems to be a slight over-shooting of the mark. It is, in reality, relatively trivial when compared with the commercial objects that were to be achieved. Setting aside the finance fee would in fact cause a drastic change: not only to the debts that could be proved in the liquidation of Carlos Concepts Ltd but also to the tax position of Working Concepts Ltd. While there has been a slight overshooting of the target aimed for, it does not amount to something disproportionate or substantially unequal under s 6(b) of the Contractual Mistakes Act. The overshooting is not so great as to qualify for relief under s 6.
Total failure of consideration
[28] For total failure of consideration, Mr O’Sullivan invokes principles of unjust enrichment. It is necessary to add a qualification to general claims of unjust enrichment. As a general principle in restitution, where there is a subsisting contract, the provisions of the contract govern the relations between the parties. Those provisions and the rules of contract law will generally displace any claims that might be available in restitution. Restitutionary claims tend to become available once the contract is displaced, for example, when it is set aside or when there has been a total failure of consideration or where there has been a cancellation.
[29] It is the total failure of consideration aspect that Mr O’Sullivan has focused on here. When regard is had to the commercial purpose of the transaction I do not accept that there has been a total failure of consideration. Again, the aim was to achieve debt reduction, and that has been achieved. It was achieved in a way which would have tax advantages and those tax advantages seem to have been achieved as well. Viewed in that light, while the target was not completely achieved, there is enough consideration given to satisfy what the parties set out to achieve when the finance fee was charged.
[30] Accordingly, I conclude that Working Concepts Ltd has not raised a substantial dispute as to its liability for the sum of $20,979 in the first statutory demand.
The demand for $38,579
[31] Mr Cummins has put in evidence the accountants’ working papers showing the adjustments that were made for the shareholder loan between Working Concepts Ltd and Carlos Concepts Ltd. They show the opening balance of $94,960.81. They show various adjustments, including for inter-entity transactions. They also show transfers of closing balances. That includes the entry of $38,579.44 for GST. There is an entry for “GST payable” and below that “subtotal - taken over by WCL”. That indicates that liabilities and assets that have been held by Carlos Concepts Ltd were now assigned to Working Concepts Ltd. It is, of course, not possible to transfer the burden of a debt. Instead, what happens under a transfer of the burden of a debt is that the transferee assumes the obligation to answer for the transferor’s liability under that debt. In other words, I regard this transaction as an arrangement whereby Working Concepts Ltd would indemnify Carlos Concepts Ltd for the identified GST liability. There is no suggestion that the accountants were incorrect in making an allowance for a GST liability. However, what has transpired is that the Inland Revenue never made a demand on Carlos Concepts Ltd for that GST sum. I understand the liquidators to be saying that as the liability never matured then there ought to be an adjustment to the accounts so that the transfer of $38,579.44 shown in the accountants’ working papers, and which was carried into effect in the 2009 accounts, ought now to be set aside.
[32] The accountants tried to characterise this as an erroneous entry, but the matter has to be looked at from a legal point of view. I regard the matter shown in the accountants’ working papers as being an effective legal transaction in the form of a contract of indemnity. That means that if it is to be undone, there must be some legal basis for undoing it. In other words, the liquidators would have to show that there is some basis in law for looking past this transaction and setting it aside. Mr O’Sullivan identified in his written submissions that as Carlos Concepts Ltd is in liquidation, one possible avenue is by proceeding under s 297 of the Companies Act
1993. He did that to make the point that the court cannot make a determination under s 297 in the course of a setting-aside application but that it is a matter that ought to be determined separately and that is by a separate proceeding.
[33] A claim that the $38,579.44 ought to be paid back by Working Concepts Ltd is a restitutionary claim. That restitutionary claim requires that the contract of indemnity be put to one side in some way. The Court of Appeal has indicated that on occasions a restitutionary claim can give rise to a debt for the purposes of s 289 of the Companies Act 1993. In OPC Managed Rehab Ltd v Accident Compensation
Corporation,2 the Court of Appeal noted that not every claim for restitution could
give rise to a statutory demand. The Court of Appeal said:3
The complexities which may be inherent in an action for money had and received in many circumstances may mean that recourse to the statutory demand procedure will not be appropriate. But that is no different to the situation where the circumstances allegedly giving rise to a debt in contract are complex. In principle, where a payer has a clear entitlement to reimbursement of an amount overpaid to a recipient in an action for money had and received, it may have recourse to the statutory demand process if it is otherwise appropriate to do so.
The OPC case was a relatively straightforward case. The Accident Compensation
Corporation had made over-payments to OPC.
[34] There are, however, other cases where restitutionary claims have been held not to give rise to a statutory demand. A case I have in mind is Magson’s Hardware Ltd v Concepts 124 Ltd.4 The reason why I am aware of that case is twofold – first, Concepts 124 Ltd is another of Mr Cummins’s companies used for property developments in Flatbush and second, I was the judge whose decision was overturned. I had held that pressure amounting to economic duress had been applied to Concepts 124 Ltd to induce payments of $20,000. The payments of $20,000 had been made under an agreement, but I held that the agreement could be set aside for
economic duress. The Court of Appeal, in very strong terms, indicated that establishing whether there has been economic duress is a fact-specific matter which was inappropriate for a statutory demand. Bearing that guidance in mind, if I were to embark on an enquiry into the adjustment for $38,579.44, I would have to make an enquiry into the merits of the transaction. That would require me to establish
under s 297 whether there has been adequate consideration. But that is not a matter
2 OPC Managed Rehab Ltd v Accident Compensation Corporation [2006] 1 NZLR 778 (CA).
3 At [55].
4 Magson’s Hardware Ltd v Concepts 124 Ltd [2011] NZCA 559.
I can undertake in the context of an application to set aside under s 290. It would have to be the subject of a separate proceeding.
[35] Accordingly, I hold that for the purpose of its application under s 290
Working Concepts Ltd has established that any adjustment on account of $38,579.44 ought to be the subject of a separate proceeding as liability is subject to a genuine and substantial dispute. It is inappropriate that it should be the subject of a statutory demand.
Outcome
[36] I make these orders:
(a) I uphold the statutory demand for $20,979. (b) I set aside the statutory demand for $38,579.
(c) Within 10 working days Working Concepts Ltd is to pay Carlos Concepts Ltd (in liquidation) the sum of $20,979 less the order for costs made in the previous setting-aside application (CIV-2013-485-
5628). If there is any doubt as to the amount to be paid, counsel may file memoranda.
(d)If Working Concepts Ltd does not pay that amount, under s 291 of the Companies Act 1993 it will be assumed to be unable to pay its debts on any later liquidation application.
Costs
[37] I have heard the parties on costs. The starting point is that the parties have had equal success in that one demand has been upheld and the other one has been struck out. So that is a draw. In the light of a draw there will be no order for costs. Mr O’Sullivan advances another matter. He says that there had been a Calderbank offer. He says that the Calderbank offer was to pay $20,979 in full and final settlement. Mr Toebes makes the point that if he had accepted that offer the
liquidators would give away the opportunity to attack the transaction involving the transfer of the $38,579 for the GST liability. In the event, as it has happened the liquidators still retain the right to make a claim under s 297 of the Companies Act
1993 for that matter. To that extent the principles on which costs are decided on Calderbank offers do not in my view apply here because the liquidators have still retained a benefit out of this proceeding which they would not have had if they had accepted the Calderbank offer.
[38] Accordingly, my decision is that there will be no order for costs on this application.
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Associate Judge R M Bell
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