Yung v Trade Link Resources Limited HC Auckland CIV-2010-404-006950

[2011] NZHC 238

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2010-404-006950

UNDER  the Companies Act 1993

BETWEEN  CHAN MI LAN YUNG Plaintiff

ANDTRADE LINK RESOURCES LIMITED Defendant

Hearing:         9 March 2011

Appearances: Mr Stewart for Plaintiff

Mr Whale for the Defendant

Judgment:      22 March 2011 at 11:00 AM

JUDGMENT OF ASSOCIATE JUDGE DOOGUE

This judgment was delivered by me on

22.03.11 at 11 a.m., pursuant to

Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date……………

Solicitors:

Steindle Williams, Ponsonby, Auckland

Lowndes Associates, Auckland

YUNG V TRADE LINK RESOURCES LIMITED HC AK CIV-2010-404-006950 22 March 2011

[1]      The plaintiff served a statutory demand seeking payment of $638,252.00 from the defendant company on 7 September 2010.   When payment was not forthcoming, the plaintiff filed this proceeding on 20 October 2010 and served it on

22 October 2010.   In the statement of claim it was pleaded that the company was presumed to be insolvent and unable to pay its debts and that in the circumstances it was just and equitable that the company be placed in liquidation.

[2]      At some point the amount of the debt which the plaintiff claimed to be entitled to was conceded by the plaintiff to be a lesser sum of $371,710.

[3]      It is accepted that no statement of defence was filed within 10 working days. On the 17 February 2011, an application was filed for leave to file a statement of defence out of time.   I propose to adopt this statement of principles set out by Associate Judge Lang in Williams and Kettle Ltd v Rangiputa Stock Co Ltd[1]in a judgment delivered 14 June 2004.   That requires that the applicant for leave must establish a fairly arguable case, that the defendant should properly explain its failure

to file documents within the time provided by the rules and that any prejudice should be taken into account.

[1] Williams and Kettle v Rangiputa Stock Co Ltd HC Rotorua CIV-2004-463-515, 14 June 2004.

[4]      In addition, I propose to examine as well where the justice of the case lies:

Orme v Parkway Investments Ltd.[2]

[2] Orme v Parkway Investments Ltd HC Hamilton M149-00, 7 May 2001.

[5]      The  background  is  that  three  families  collaborated  in  incorporating  the defendant company which was to be the vehicle to be used for the acquisition of a commercial building at Auckland.   The building was purchased in 1993 or 1994. The building was shown as a fixed asset in the latest accounts for the company which were as at 31 March 2009.  It would seem that the price at which the building was purchased was about $1,200,000.  No current value is provided for the building.

[6]      The debt upon which the plaintiff sues is her proportionate share of the

shareholders’ current accounts with the company which total $1,376,632 which were

included in the 2008 and 2009 accounts as “current liabilities”.  I interpolate that Mr

Whale  told  me  that  this  advance  represented  “quasi-capital”.     That  is,  the shareholders he said advanced that amount of money to the company to finance the purchase of the building.  In that sense it was not a current liability, he said.  On the other hand, Mr Stewart said that there is no evidence of any arrangement that the money contributed by the plaintiff’s family was in the nature of capital.  Mr Stewart said that if what Mr Whale had submitted was correct, there was no certainty about when the plaintiff would be able to withdraw the money that it put into the company.

[7]      The defendant has filed a draft statement of defence which makes it clear that the proposed defences that it has available to it are: that it is not indebted to the plaintiff, and that it is not insolvent.

[8]      Mr Lo who gave evidence for the defendants said:

9.… The second amount is for $371,710 and represents funds that Ms Yung and her former husband advanced to the company at the time the company bought the property (the other two families advanced the same amount).   It was agreed that the families would fund the purchase, rather than obtaining bank funding.  This is not an amount that is currently due and payable.

[9]      I observe that no particulars have been provided of the asserted agreement. Mr Tsang, who is the plaintiff’s accountant, says that he is not aware of any shareholder agreement to say that the shareholders will not demand repayment of the shareholder advance.  He makes reference to the point that I have already noted that the shareholder current accounts are shown as current liabilities.   I bear in mind that the defendant must only show at this stage that it has an arguable defence.

[10]     The defendant also says that the company is solvent.   There is no current valuation available of the building.   Mr Lo states that he believes that the current market value of the property is well in excess of $3,000,000.  He does not state what he bases that opinion on and nor does he give any evidence of his qualifications for advancing such an opinion.  I regard this evidence as of no weight.

[11]     However Mr Whale pointed to the fact that the gross rents received by the company were some $391,511.   He says that given the cash flow strength of the company, an estimate of value in the region of $3,000,000 will not be out of the way.

I observe that that would require a yield of about 13 per cent on the gross rentals. That is not of much help in trying to assess the value of the building.  The best that I can do is to assume that the value of the building lies somewhere between the purchase price for which it was acquired in the early 90s, assume that there has been some inflationary increase in value and have broad regard to the yield figure mentioned.  On that very much broad brush approach I would have thought that an estimated value in the region of $2,000,000–$2,500,000 was arguable.

[12]     The statement of financial position shows that as at 31 March 2009 there was a net deficit of $1,833.00.   That figure is unaffected by whether the shareholders’ current accounts are shown as being current or term liabilities.  But it does assume the value of the building as at the depreciated value for which it has been entered into the statement of financial position of a little over $1,000,000.   If the figure adopted assumed that market value was at least $2,000,000, the company would have a balance sheet surplus.

[13]     It was Mr Whale’s position that although the company had an operating deficit of approximately $3,500 for the year ended 2009, that the figure was arrived at after directors’ and shareholders’ remuneration of approximately $273,000 was deducted.  In effect, he invited me to approach matters on the basis that the company has an asset position which would enable it to borrow to pay the debt owing to the plaintiff and for that reason, on a cash flow approach the company would be able to meet its liability to the plaintiff of $371,710 by arranging funding to that level.  Mr Stewart on the other hand reminded me that the fact that a company has a balance sheet surplus may only mean that a company may be at the same time insolvent but wealthy because it has its wealth locked up in investments not presently realisable:

Re Tweeds Garages Ltd.[3]

[3] Re Tweeds Garages Ltd [1962] 1 Ch 406 (Ch).

[14]     In deciding whether it is arguable that the company has the means to meet its debts, I consider that one has to take a practical and realistic approach.  It seems to me that if the value of the building was, say, $2,250,000, it would be possible for the company to give security up to that figure in order to secure the required borrowings

to pay out the plaintiff, namely, $371,710.  Again taking a practical view of matters,

assuming borrowing costs of say, 10 per cent, the income of the company would be sufficient to service such a loan.

[15]     The next issue is whether the defendant has properly explained its failure to file its statement of defence in the time required by the Rules.  Mr Lo in the affidavit that he gave on behalf of the company, said that the company did not respond to the statutory demand:

because all the directors were overseas until the end of September.  When we became aware of it, we disputed that the amount claimed was payable in full at that time and hoped to resolve matters informally.

Then:

following service of the liquidation application … the company similarly delayed filing any statement of defence, in the hope we could sort matters out between us without resorting to the formal court process.  We have been negotiating with [the plaintiff] to try and resolve this matter since then, and have paid her what could be said was due and owing to her.

[16]     It is not said, for example, that the defendant was misled into believing that so long as negotiations continued the plaintiff would withhold action and not rely upon the failure to take steps in the proceedings.  At the end of the day, all we know is that the company failed to file its statement of defence in time (having earlier failed to take steps to set the statutory demand aside) because it hoped that the proceedings would be unnecessary.  Proceedings involving presumptively insolvent companies (which is the status of this company, given that an unexpired statutory demand exists) are to be heard promptly.   Steps are therefore to be taken in accordance with the Rules.   However, there will be cases where because of an unexpected contingency, some event which is beyond the control of the defendant, or some misunderstanding occurring, steps were not taken in time.  In that case, it is appropriate for the Court to provide a dispensation.  In the present case, I am unable to discern any such explanation.  The other shareholders of the company apparently went overseas.   They say that they were still overseas when the statutory demand was served.   That is why no steps were apparently taken to apply to set aside the demand.  But they were not overseas when the liquidation claim was served.  Mr Lo contends that the shareholders were hoping to be able to resolve matters by negotiation.   That does not appear to me to be a reasonable explanation for not taking steps to file a defence given that the liquidation claim followed shortly after

service of the statutory demand.  The circumstances ought to have made the directors aware that the plaintiff was in earnest.

[17]     Looking at matters overall, the requirement of an arguable defence and a reasonable explanation as to why steps were not taken are cumulative ones.   The company having failed on the second, I do not consider that it can succeed on its present  application.    It  is  also  relevant  to  the  question  of  the  exercise  of  the discretion that I have to note that the company took no steps until the middle of February this year when it applied for leave to file a statement of defence out of time.   It is true that it appeared on 1 December 2010 but it had taken no steps to defend matters then and nor had it filed an application by the time the matter reached its second adjournment on 4 February 2011.  The company has plainly been tardy, in my view, without excuse.

[18]     The application is therefore dismissed; these proceedings are long overdue for resolution.  The proceeding is to be called again on 1 April 2011 at 10.45 a.m. On that occasion it will proceed as an undefended liquidation.

[19]     I will hear the parties as to costs on this application if they wish to be heard on 1 April 2011 at 10.45 a.m.

J.P. Doogue

Associate Judge