90 NINE LIMITED v LUXURY RENTALS NZ LIMITED [2019] NZCA 424

90 NINE LIMITED v LUXURY RENTALS NZ LIMITED [2019] NZCA 424 [11 September 2019]IN THE COURT OF APPEAL OF NEW ZEALANDI TE KŌTI PĪRA O AOTEAROACA126/2019[2019] NZCA 424BETWEEN 90 NINE LIMITEDAppellantAND LUXURY RENTALS NZ LIMITEDRespondentHearing: 22 August 2019Court: Brown, Simon France and Dunningham JJCounsel: B J Norling and A Cherkashina for AppellantNo appearance for RespondentJudgment: 11 September 2019 at 4.00 pmJUDGMENT OF THE COURTA The appeal is allowed.B The proceeding is remitted to the High Court for further hearing.C The respondent must pay costs to the appellant for a standard appeal ona band A basis and usual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by Brown J)Introduction[1] The appellant, 90 Nine Ltd, appeals from a decision of Associate Judge Bell1dismissing an application for a liquidation order sought on the ground of the failureby Luxury Rentals NZ Limited (the respondent) to make payment in response toa statutory demand for a debt of $1,000.2 Given the amount of indebtedness theAssociate Judge considered that a liquidation order was disproportionate. The issueon appeal is whether that was a proper basis for the exercise of the discretion ins 241(4) of the Companies Act 1993 (the Act).Relevant facts[2] The background to the claim is recited in the statement of claim as follows:• In or around October 2016, Pure SEO Limited provided Search EngineMarketing and other services to the [respondent].• The [respondent] was indebted to Pure SEO Limited for the receipt ofservices from Pure SEO Limited.• The [respondent] failed to pay its debt to Pure SEO Limited when it wasdue.• On or around 19 January 2018, a settlement was approved by the DisputesTribunal at Auckland that the [respondent] would pay Pure SEO Limited$1,000.00 (including GST) ("the Debt") on or before 10 February 2018 infull and final settlement of all matters between the parties.• The [respondent] failed to pay the Debt on or before 10 February 2018.• On 19 October 2018, Pure SEO Limited assigned the Debt to the[appellant].[3] On 1 November 2018 the appellant served on the respondent at its registeredoffice a statutory demand for the amount of the debt. The respondent having failed totake any of the steps outlined in the statutory demand, on 19 December 2018 theappellant filed a statement of claim seeking an order for liquidation.1 90 Nine Ltd v Luxury Rentals NZ Ltd HC Auckland CIV-2018-404-2795, 1 March 2019.2 A statutory demand under s 289 of the Companies Act 1993 may not be made in respect of a debtless than the prescribed amount in reg 5 of the Companies Act 1993 Liquidation Regulations 1994,currently $1,000.The High Court decision[4] The application was called in the High Court at Auckland on 1 March 2019.The Associate Judge issued a minute which, after noting the relevant facts andobserving that he had not been informed what the consideration for the assignmentwas, stated:3[3] 90 Nine Ltd has provided a consent by an insolvency practitioner toact as liquidator. A range of charge-out rates was provided with the consent.The liquidator proposes that he will charge out at $500 an hour, the lowestcharge-out rate being $145 an hour.[4] I understand from Mr Everitt that the plaintiff has served a statutorydemand and has taken this liquidation proceeding, but has taken no other stepsfor the collection of the debt barring several letters of demand. I am notsatisfied that this is an appropriate case to make a liquidation order. I regardliquidation of a company for a $1,000 debt as disproportionate. It only needstwo hours work by the liquidator for the amount of the debt to be consumedby the cost of liquidation. I challenged Mr Everitt on the total costs of theliquidation. I consider applications by liquidators for approval of theirremuneration on a regular basis. It is a long time since I have been asked toapprove remuneration for a liquidation for less than $10,000. Mr Everittcontends that this company can be wound up for $5,000. Even so, that cost isdisproportionate, given the amount of the debt.[5] I regard liquidation as disproportionate given the indebtedness.I dismiss the application. The plaintiff should take other steps to recover thedebt.Grounds of appeal[5] The grounds of appeal in the notice of appeal were extensive but in summaryit was contended that the exercise of the discretion involved an error of principle bythe Associate Judge in considering the proportionality of the liquidation costs to theindebtedness and finding that other debt recovery steps should instead be pursued.[6] The discretion was also challenged on the grounds that the Associate Judgeerred:- By taking into account and/or giving excessive weight to the followingirrelevant considerations:(i) The potential costs of the liquidation of the respondent.3 90 Nine Ltd v Luxury Rentals NZ Ltd, above n 1.(ii) That the potential costs of the liquidation would outweigh theamount of the debt.- By failing to take into account and/or giving insufficient weight to thefollowing relevant considerations:(i) That the level of the debt relied on by the appellant was at theprescribed amount as set out in regulation 5 of the CompaniesAct 1993 Liquidation Regulations 1994 to issue a valid statutorydemand resulting in a statutory presumption of an inability to paydebts.Appellant's argument[7] Mr Norling's written submissions for the appellant carefully reviewed thestatutory framework4 drawing attention to the fact that the long title to the Act includesthe objective of providing "straightforward and fair procedures" for realising anddistributing the assets of insolvent companies. He also reviewed the relevantauthorities some of which we refer to in our discussion below. He accepted that it iswell established that, even when all the statutory prerequisites for a liquidation orderare satisfied, the court reserves the right to refuse to put a company into liquidation.However he contended that the general rule is that where those requirements have beenmet the applicant is presumptively entitled to an order.[8] While unable despite research to find any indication in the legislative materialsas to whether Parliament intended the prescribed amount in the Companies Act 1993Liquidation Regulations 19945 to also prescribe the minimum amount of debt forwhich a liquidation order would be appropriate, Mr Norling argued that was the plainmeaning of the legislative framework. He submitted that an unsatisfied statutorydemand is the most common mechanism in New Zealand by which companies'inability to pay debts is established. If Parliament intended that a liquidation orderwas not appropriate for the prescribed $1,000 amount then a validly issued statutorydemand for that amount would have no practical purpose.[9] Mr Norling contended that frequently a creditor will be unable to assess theproportionality of a liquidator's fees to the debt at the point of the commencement ofliquidation proceedings. A liquidator's fees may well be zero given that the liquidator4 In particular ss 241, 287 and 289 of the Companies Act.5 See above n 2.can only receive fees if there are recoveries in the liquidation. It was submitted thata requirement to attempt alternative debt collection options instead of seekinga liquidation order would simply have the effect of increasing the creditor's costs andcreating delays. It was said that such alternatives are uneconomic, unavailable or notpractical in many cases. The effect would be that the procedure for procuringliquidation would become less "straightforward".[10] Mr Norling also submitted that it is in the public interest that insolventcompanies are investigated and precluded from further trading, which is achievedthrough liquidation. An outcome where creditors owed small amounts are left with nopractical enforcement options would have devasting consequences on smallbusinesses in New Zealand who operate on a high volume of small trades.The prospect of liquidation acts as a sword of Damocles with the consequence that theissue of a statutory demand is an effective debt collection tool in New Zealand.The utility of that remedy would be substantially undermined if the perception in themarket was that notwithstanding a failure to comply with the demand a liquidationorder might be declined.Discussion[11] The nature of the discretion in s 241(4) and the general policy of the Act in thatcontext was made clear by this Court in Commissioner of Inland Revenue v NewmarketTrustees Ltd:6[65] While the decision of this Court in Commissioner of Inland Revenuev Chester Trustee Services Ltd related to the exercise of the discretion unders 290(4)(c) of the Companies Act, we consider that its approach is equallyapplicable to the exercise of the discretion under s 241(4). We do not agreewith the Associate Judge that the decision is distinguishable. This is clearfrom the language of Tipping and Baragwanath JJ. Tipping J held: the general policy of the (Companies) Act that insolventcompanies should be put into liquidation, if a creditor seeks suchan order, should not be departed from lightly. To justify suchdeparture there must be some other factor, be it policy, principleor simply the justice of the particular case, which outweighs theprima facie entitlement of the creditor to an order putting theinsolvent company into liquidation. If the focus is on the justice6 Commissioner of Inland Revenue v Newmarket Trustees Ltd [2012] NZCA 351, [2012] 3 NZLR207 (footnotes omitted).of a particular case, the discretion must always be exercised on aprincipled basis and not on some ad hoc conception of whatindividual justice might require. All cases involving s 290(4)(c)must in the end come down to a judgment by the Court as towhether the creditor's prima facie entitlement is outweighed bysome factor or factors making it plainly unjust for liquidation toensue. The ground advanced by the insolvent company must besufficiently compelling to overcome the general policy of the Actwith regard to insolvent companies.Baragwanath J held: the insolvency policy of the companies legislation is clear: (1)insolvency results in winding up; and (2) insolvency is proved byinability to establish a substantial dispute over the debt or by wayof cross-claim.[12] In the High Court in Newmarket Trustees Associate Judge Bell had similarlyto the present case reached the view that the company should not be put into liquidationfor reasons which included the absence of any benefit from the requisite expenditure.7As he explained:[66] It is also helpful to consider the possible conduct and cost of theliquidation. When an assetless taxpayer is put into liquidation on theCommissioner's application, the Commissioner pays the liquidators'remuneration. Where it is clear that the company has no assets and there is noneed for further inquiries and investigation, I am advised that the liquidators'remuneration is typically in the range of $4,000 to $8,000. In this case I cannotsee any benefit to the Commissioner in spending this money on a liquidation.[67] If there were other creditors and there were assets to be realised anddistributed, the amounts of unpaid taxes the Commissioner proves for couldbe very important in the liquidation. [68] On the exercise of the ultimate discretion, the insolvency of thedefendant carries considerable weight. If there were no other factors, therewould be an order for liquidation. However, in the circumstances of this case,I cannot see that any benefit would arise from ordering the defendant intoliquidation. There are no assets held by the company that could be madeavailable for creditors. The only potential line of inquiry is to pursue thesurpluses from the sales of trust properties. The Commissioner does not relyon that as requiring liquidation in this case. The costs arising from thecompany going into liquidation and the lack of benefit outweigh theinsolvency factor. The company should not be put into liquidation.[69] I have come to this decision on the particular facts of this case.Insolvency law is a mix of principle and pragmatism. The Companies Act isto be used in a practical way. It does not require liquidation when that willnot serve any useful purpose.7 Commissioner of Inland Revenue v Newmarket Trustees Ltd (2011) 25 NZTC 20-030 (HC).[13] The Associate Judge there noted that when a company apparently holds noassets it may be appropriate to make a winding-up order to allow the affairs of thecompany to be investigated,8 referring to the observation of Chilwell J in Re RobertRaymond Associates Ltd:9Justice in this case requires that creditors who cannot get paid by an obviouslyinsolvent company should be given the opportunity of having the Company'saffairs investigated by a liquidator.[14] In Newmarket Trustees the Commissioner acknowledged that there had beenno conduct on the part of the directors which could lay a foundation for claims againstthem for breach of their duties as directors.10 Given that the Commissioner did notpress for investigation as a ground for the liquidation order, Associate Judge Bell couldnot see that putting the company into liquidation would usefully open up any lines ofinquiry or give trust creditors any remedies not already available as a result of thebankruptcy of an individual who had been a co-trustee with Newmarket Trustees.11[15] However a more cautious approach was signalled by Rodney Hansen J inFeltex Carpets Ltd v N&I Investments Ltd:12A liquidator should normally be appointed if one of the available grounds ismade out. The discretion to refuse to put a company into liquidation is to besparingly exercised Even if it is unlikely that there will be any assetsavailable for distribution to unsecured creditors, the Court regards theliquidator as serving useful functions in the investigation of the company'saffairs and acting as a guardian of the interests of unsecured creditors —(see Re Marlborough Sealink Ltd (1986) 3 NZCLC 99,501 and WestgoldFinance Ltd v Pan Pacific Cameras Ltd (High Court, Christchurch, M 644/8811 May 1989, Master Hansen).[16] We endorse the approach in Feltex Carpets. If a creditor elects to seek torecover a debt from a company by utilising the statutory demand process and thedebtor fails to respond, then the creditor has the "standing"13 to apply to wind up thecompany. There may be cases where one might wonder at the economic rationality of8 At [41].9 Re Robert Raymond Associates Ltd SC Auckland M371/74, 5 June 1975 at 15.10 Commissioner of Inland Revenue v Newmarket Trustees Ltd, above n 7, at [40].11 At [47].12 Feltex Carpets Ltd v N&I Investments Ltd (2006) 3 NZCCLR 714 at [38].13 The term adopted in Pink Pages Publications Ltd v Team Communications Ltd [1986] 2 NZLR704 (HC) at 714.doing so. However, subject to what we say below, that need not be the concern of thecourt presented with the creditor's application.[17] It is for the creditor and the liquidator to exercise the prudential judgement asto whether the cost of pursuing the matter is outweighed by the prospect of the debtultimately being recovered. And as Mr Norling pointed out, in many cases that is notsomething which creditors or their legal advisers are able to accurately assess inadvance of the liquidation. For example, until the liquidator has access to thecompany's accounts, the liquidator will not be able to ascertain whether shareholders'current accounts are overdrawn.[18] Mr Norling acknowledged that there will be instances where it will beuneconomic to continue with the liquidation. The present case would appear to be oneexample. This Court has the benefit of some further information about the respondentwhich was not available to the Associate Judge. Upon the filing of the appeal theRegistry of this Court wrote to Gilligan Rowe & Associates LP Ltd which was therespondent's registered address in New Zealand enclosing a notice of appeal andinquiring whether its address was the correct address to which correspondence shouldbe addressed.[19] On 17 June 2019 this Court received a letter from Skeates Law Ltd advisingthat it acted for Gilligan Rowe & Associates LP Ltd and confirmed that that company'sbusiness premises was the registered office and address for service for the respondent.The letter further advised that Skeates Law Ltd had historically acted for Adam Bsisou,the sole director of the respondent and its shareholder. The letter stated:We can confirm that neither [Gillian Rowe & Associates LP Ltd] nor ourselveshave any instructions from [the respondent] nor its director or shareholder. Wealso believe that the company is insolvent with no assets.We also confirm that the sole director has emigrated from New Zealand andwe understand that he has no plans to return or to instruct us, [Gillian Rowe& Associates LP Ltd], or any other party in respect of this matter.[20] However this appeal is pursued as a matter of principle. Mr Norling advisedfrom the Bar there have been applications for substantially larger sums than the debtin this case in which applications for winding up have been dismissed in the exerciseof the court's discretion by reference to the proportionality ground. He submitted thatthe decision under appeal creates substantial uncertainty for creditors and theirlawyers. Creditors ought to have a clear understanding about how they may enforcedebts and the threshold quantum that is appropriate.[21] It is possible that the Associate Judge may have had in contemplationa scenario where the court's processes might be used in a manner that was seen as anabuse, for example where substantial work was undertaken by liquidators to recoverfunds which are simply expended in the reimbursement of the fees charged.However proceedings by liquidators, for example under ss 299 and 301 of the Act, aremade to the High Court which thereby has some oversight of the litigation.Furthermore the court has the powers of supervision of a liquidation conferred bys 284 and may at any time on application make an order under s 250 terminating theliquidation of the company if it is satisfied that it is just and equitable to do so.Furthermore, instead of the liquidator proposed by the applicant, the court might preferto appoint the Official Assignee as liquidator in which event s 254 would apply.14Hence the prospect of the court's processes being successfully rorted seems remote.[22] We consider that there is considerable merit in Mr Norling's point that theutility of the statutory demand process would be substantially undermined if corporatedebtors perceived that such demands could be ignored with comparative impunity.Hence creditors must have available to them the ability to obtain liquidation orderswhen there is a failure to respond to a demand. Consequently we consider that theissue of proportionality between the amount of indebtedness and the deployment of anapplication to wind up a debtor company is one for the creditor and liquidator.Absent the prospect of an abuse of the court's processes, the issue of proportionalityis not a relevant consideration for the court in the determination of the application.As the Associate Judge relied on this factor in dismissing the application and becausewe do not consider there is evidence that this proceeding is an abuse of the court'sprocesses, the appeal must be allowed.14 Section 254 of the Companies Act provides that if a company has no assets available fordistribution to its creditors and the Official Assignee is the liquidator of the company, the OfficialAssignee will not be required without the consent of the relevant Minister to carry out any duty orexercise any power in connection with the liquidation if, to do so, would or would be likely toinvolve incurring any expense.[23] The appellant did not seek a winding-up order but rather an order quashing the"order dismissing the liquidation application" and a direction that the matter beremitted to the High Court to make such orders as to the appointment of a liquidatoror other orders as considered appropriate. The reason for that request was thatsubsequent to the commencement of this appeal the respondent was removed from theCompanies Register as a consequence of it having failed to file its annual return.Therefore in order to obtain an order for liquidation it would be necessary for thematter to be remitted to the High Court so that an order for reinstatement of therespondent to the register could be made.[24] In those circumstances we allow the appeal and we remit the matter to theHigh Court for further hearing of the application.Result[25] The appeal is allowed.[26] The proceeding is remitted to the High Court for further hearing.[27] The respondent must pay costs to the appellant for a standard appeal on a bandA basis and usual disbursements.Solicitors:Norling Law Ltd, Auckland for Appellant