ATLAS FOOD AND BEVERAGE LIMITED AND ORS V THE COMMISSIONER OF INLAND REVENUE HC CHCH CIV-2009-409-001342

ATLAS FOOD AND BEVERAGE LIMITED AND ORS V THE COMMISSIONER OF INLAND REVENUE HC CHCH CIV-2009-409-001342 22 March 2010IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY CIV-2009-409-001342IN THE MATTER OF the Companies Act 1993 BETWEEN ATLAS FOOD AND BEVERAGE LIMITED Applicant AND CHAR CHAR LIMITED Applicant (CIV-2009-409-001696) AND YELLOW CROSS BREWING COMPANY LIMITED (IN REC) Applicant (CIV-2009-409-001697) AND EDWARD J SCHWARTZ ENTERTAINMENT INC LIMITED (IN REC) Applicant (CIV-2009-409-001698) AND THE COMMISSIONER OF INLAND REVENUE RespondentCIV-2009-409-1854AND IN THE MATTER OF the Companies Act 1993 BETWEEN PROPERTY VENTURES INVESTMENTS LIMITED Applicant AND FM 3 LIMITED Applicant (CIV-2009-409-001855) AND FM 1 LIMITED Applicant (CIV-2009-409-001856) AND THE COMMISSIONER OF INLAND REVENUE Respondent Hearing: 22 March 2010 Counsel: A J Forbes QC and K W Clay for Applicants P H Courtney for Respondent Judgment: 22 March 2010ATLAS FOOD AND BEVERAGE LIMITED AND ORS V THE COMMISSIONER OF INLAND REVENUE HC CHCH CIV-2009-409-001342 22 March 2010ORAL JUDGMENT OF PANCKHURST JIntroduction[1] The seven applicant companies seek a stay in relation to two judgments delivered on 24 February last. Relevantly for present purposes the judgments refused applications which the companies had prosecuted seeking this Court's approval of compromises with creditors pursuant to s236 of the Companies Act 1993. Liquidation proceedings are pending against each company brought by the Commissioner. These have been adjourned to today in light of these stay applications. [2] The basis upon which stays are sought is that the companies intend to appeal to the Court of Appeal and to that end draft notices of appeal have been annexed to the submissions which were provided this morning. [3] The applications invoked r20.10(2)(a) of the High Court Rules. This, however, was a questionable approach and this is the first issue I shall consider.What is the appropriate rule?[4] Rule 20.10(1) is the basic rule which provides that the filing of an appeal does not stay a proceeding or for that matter stay enforcement of any judgment or order made in that proceeding. Sub-rule (2)(a) provides:Despite subclause (1), the decision-maker or the court may, on application do any one or more of the following pending determination of an appeal: (a) order a stay of proceedings in relation to the decision appealed against:[5] Mr Clay submitted that these words were wide enough to cover the present situation. I do not agree. A stay may be ordered "in relation to the decision appealed against" in terms of r20.10(2)(a), but here there is nothing which is susceptible of a stay. In short, the applications for approval of compromise were refused and that is that.[6] In my view the proper course is that which Mr Forbes QC invoked orally, namely reliance upon r31.11(1). This rule empowers the grant of a stay to restrain advertising in relation to a winding-up proceeding and to stay the proceeding itself, in relation to the relief sought, namely a liquidation order. This, it seems to me, is exactly what is sought by the applicant companies in the present case. Having failed to gain approval for their compromise proposals the downstream corollary of that refusal is that the Commissioner seeks to obtain orders in the liquidation proceedings. Hence I accept it is appropriate to consider the present stay applications in terms of r31.11. [7] However, the rule contemplates that a stay application will be made within five working days of service of the statement of claim. Obviously in this case that time limit has long passed. However counsel drew attention to r31.22(1)(a) which provides for the making of interlocutory applications in the context of liquidation proceedings. The general rule is that such applications may not be made save for certain defined exceptions. The first such exception is where a relevant abridgement or extension of time is sought. Hence, Mr Forbes also made oral application for an extension of time pursuant to r31.22(1)(a) seeking an extension to today for making the present stay applications. [8] In my view it is appropriate to consider the merits of the applications in light of these rules and I therefore propose to proceed on this basis. But this change is of some significance. The principles relevant to a stay pending appeal fall, in my view, to be applied against the background of the peculiar considerations which pertain to the stay of a liquidation proceeding. [9] In Anglian Sales Ltd v South Pacific Manufacturing Co Ltd 1984 2 NZLR 249 (CA) McMullin J said at 251-2:... the right to have a winding-up petition determined, being a right conferred by statute, ought not be taken away except where the existence of that very statutory right itself is seriously challenged; that is, where the challenge can on appropriate grounds be made to the petitioning creditor's status as such. If a challenge were allowed in circumstances short of this, the Court would in effect be refusing to give effect to the very right which the statute has conferred upon a creditor to have the petition itself considered. In bringing his petition the creditor is doing no more than asserting the right which the statute entitles him to do. In our opinion a creditor's right in this respectought not to rest simply on the balance of convenience considerations which may be relevant to an application for an interim injunction. Something more than that is required.The arguments for a stay[10] Mr Forbes made the submissions in support of the stay application sought by Atlas and its three subsidiaries, while Mr Clay made similar submissions on behalf of the three subsidiaries of Property Ventures Limited. I shall describe their respective submissions without differentiation, although separate consideration of the merits of each case will be required. [11] To my mind the submissions in support of the applications may be summarised as follows: (a) A sound commercial rationale exists for the applicant companies seeking approvals of the compromises, namely personal and reputational reasons, coupled in the case of Atlas and Char Char with a desire to continue trading and in the case of Yellow Cross and Schwartz a desire to prosecute claims against receivers pertaining to the sale of their business undertakings at an alleged undervalue. (b) That no specific matters have been identified as requiring investigation into the affairs of the companies by an independent liquidator. (c) That delay for the period of an appeal will not harm the interests of the Commissioner or of other affected parties; whereas the making of liquidation orders at this stage would render the intended appeals nugatory. (d) It is the intention of the companies to bring further s236 applications in an endeavour to meet the concerns identified in the previous judgments. (e) The companies have been voluntarily making payments to creditors in terms of the compromise proposals which were formulated for the purpose of the 2009 applications. (f) The companies will accept reasonable terms and conditions designed to guarantee the swift disposal of the present appeals.Arguments on behalf of the Commissioner[12] Some nine principal points were made in opposition to the stay applications. These were: (a) The companies have no commercial position to preserve in that they are assetless and not presently trading (save for Atlas and Char Char). (b) To the extent that the companies have actual or prospective claims to pursue such can be undertaken by a liquidator if that course is truly warranted. (c) The power of a liquidator will extend to making further applications for approval of compromises, given that s250 of the Act provides for the termination of a liquidation. (d) The Commissioner should not be restrained in the exercise of a statutory right to seek liquidation orders, particularly given that the debts are not disputed, nor the inability of the companies to pay such debts. (e) The grant of a stay would pose a threat to the commercial community because there would be nothing to stop the companies' entry into further trading transactions. (f) The bona fides of the companies in relation to the foreshadowed appeals is questionable in that the notices of appeal are still to be filed (although time does not expire until the end of this week) and because their actions "appear to be more in the interests of Mr Henderson than in the interests of the companies or their creditors", being a desire to frustrate investigation of the affairs of the companies. (g) This concern is further illustrated by the fact that the compromise proposals depend largely on Hotel So Limited providing funds to meet the various terms of the compromise when it is difficult to understand how Mr Henderson (as the director of Hotel So) can believe that provision of the money to unrelated companies is in Hotel So's best interests.(h) That the appeals challenge the exercise of a discretion and the prospects of success are insufficient to warrant the grant of a stay in favour of any of the companies. (i) The Commissioner is unaware of any payments being made on the faith of the previous compromise proposals (despite counsel for the applicants understanding to the contrary).The application of Property Ventures Investments, FM 3 and FM 1 for a stay[13] The liquidation proceedings against these three companies are based upon the non-payment of GST totalling almost $1.7m, before penalties and interest. The circumstances in which the GST was not paid, despite self-assessments of the amounts due by the three companies, were described in affidavit evidence from the Commissioner. Any contrary viewpoint was not explained on behalf of the three companies. [14] The compromise proposals contemplated payment of the Commissioner alone, but only in part. That is no other creditors were affected by the terms of the compromises. In brief, what was proposed was the payment of a sum of $1m over a period of five years in part satisfaction of the original debt of almost $1.7m. [15] As my judgment endeavoured to convey these applications for approval of the compromises failed by a very considerable margin. Three matters most influenced me. The first was the Commissioner's firm opposition to the proposals, he being the sole affected creditor. The second was the absence of any apparent commercial rationale for the proposals. The third matter was an associated public policy concern that the affairs of these companies do indeed require investigation. [16] In the present context I consider that these same factors are necessarily determinative as to the end result. I am very doubtful as to the merits and indeed the bona fides of the foreshadowed appeals. In my view the public interest requires that the liquidation proceedings take their course. Further, I consider that delay, even pending disposal of appeals to the Court of Appeal, is simply not justified.[17] For these reasons, which mirror the concerns expressed in the judgment in February, the applications for a stay in relation to the judgment affecting these three companies are refused.The application of Atlas and its subsidiaries[18] This application warrants separate consideration. To my mind the merits of the applications for approval of the compromise terms were less obvious in this case. In para [96] of the judgment I said this:For these reasons I am by no means satisfied that approval of the compromise proposals is appropriate in relation to any of the four companies. In general I am influenced by the inadequate manner in which the proposals have been promoted, the consequent uncertainty as to the true level of support for the proposals, the timeframe(s) over which payment is to be made, the security of payment particularly in the longer term, the pivotal position of Mr Henderson in relation to oversight of the proposals and the absence of any coherent rationale for the scheme of proposal as a whole.This was in the nature of a summary, which captured the flavour of the concerns which prompted the final decision. [19] The compromise proposals of these companies contemplate the payment of unsecured creditors in full. In relation to the Commissioner it is proposed that he will be paid both in his capacity as an unsecured creditor and as a preferential creditor, but not in relation to penalty and interest. This, I think, is a problem in relation to the compromise proposal and one which remains unresolved. [20] The timeframe for payment in terms of the proposals is lengthy being a period of several years. I remain concerned as to the ability to sustain the terms of payment in the long term. [21] On the other hand, if the proposals were to be brought to fruition, there would be significant benefits, particularly to unsecured creditors, while secured creditors remain outside the terms of the proposal and retain their rights under their securities. [22] Concerns remain on my part as to the underlying rationale for the compromise proposals, but there may be another perspective which is available inrelation to this aspect. I accept that absent a stay it does seem that the appeal rights of the four companies would in all probability be rendered nugatory. I also consider that a liquidator, should one be appointed, would probably be less likely to pursue claims on behalf of Yellow Cross and Schwartz as has been foreshadowed by those companies. [23] Generally I regard the Atlas companies to be in a somewhat different situation to the three subsidiaries of the Property Ventures group. But the observations of the Court of Appeal in the Anglian Sales Company have troubled me. These, however, were made in a different context. In that case (and others) courts had to consider the stay of a then winding-up petition sought on a permanent basis. Here a limited stay is sought pending appeals to the Court of Appeal. I still think a higher threshold is required before intervention to grant a stay in the liquidation context is appropriate. But, nonetheless, I conclude that the necessary threshold is met in this instance. [24] I therefore propose to grant stays in favour of the four Atlas companies.The terms of the stays[25] A stay of proceeding is granted in favour of each of the four applicant companies pending their respective appeals to the Court of Appeal. Such stay will be subject to the conditions: (a) that the companies will each prosecute their appeal with all possible expedition, (b) that this will include making application for a fixture in the Court of Appeal as soon as possible, and (c) that leave is reserved to the Commissioner (and the companies) to revert to me in the event that becomes necessary. [26] With reference to costs I propose to take a global view of matters. I conclude that one application on behalf of four companies has succeeded, and one on behalf of three companies has failed. Therefore I direct that costs should lie where they fall.[27] Given my decision that a stay was refused in relation to the Property Ventures subsidiaries, Mr Forbes made application for an interim stay in order that those companies may prosecute a further stay application directed to the Court of Appeal pursuant to the Court of Appeal rules. It is appropriate that the opportunity to obtain a stay in that Court be afforded and, accordingly, I grant an interim stay of proceedings in favour of Property Ventures Investments Limited, FM 3 and FM 1. The interim stay is to remain in place until a decision or further order of the Court of Appeal. Again, out of an excess of caution perhaps, I reserve leave for either party to revert to me concerning the interim stay, if necessary. ____________________________________________________________________Solicitors: Cousins & Associates, PO Box 22-115, Christchurch for Applicants (Counsel – Mr A J Forbes QC, PO Box 2929, Christchurch) Crown Law Office, PO Box 2858, Wellington 6140 for Respondent