BODY CORPORATE 68792 v WAKEFIELD PROPERTY LIMITED (formerly GATEWAY HOLDING COMPANY NO. 2 LIMITED) [2020] NZHC 1396

BODY CORPORATE 68792 v WAKEFIELD PROPERTY LIMITED (formerly GATEWAY HOLDINGCOMPANY NO. 2 LIMITED) [2020] NZHC 1396 [22 June 2020]IN THE HIGH COURT OF NEW ZEALANDWELLINGTON REGISTRYI TE KŌTI MATUA O AOTEAROATE WHANGANUI-A-TARA ROHECIV-2019-485-516[2020] NZHC 1396UNDER The Companies Act 1993IN THE MATTER of Gateway Holding Company No. 2LimitedBETWEEN BODY CORPORATE 68792PlaintiffAND WAKEFIELD PROPERTY LIMITED(formerly GATEWAY HOLDINGCOMPANY NO. 2 LIMITED)DefendantCIV-2019-485-517UNDER of the Companies Act 1993IN THE MATTER of Luxe One LimitedBETWEEN BODY CORPORATE 68792PlaintiffAND LUXE ONE LIMITEDDefendantHearing: 12 June 2020Appearances: G Dewar for Body Corporate 68792 in both proceedingsNo appearance for Wakefield Property Ltd in CIV-2019-485-516C LaHatte for Luxe One Ltd in CIV-2019-485-517Judgment: 22 June 2020JUDGMENT OF ASSOCIATE JUDGE JOHNSTONThis judgment was delivered by me on 22 June 2020 at 2.45 pm,pursuant to r 11.5 of the High Court RulesRegistrar/Deputy RegistrarDate:Introduction, background and issues for determination[1] These are both winding up proceedings. They arise out of parallel factualsituations. They can be dealt with together.[2] The plaintiff in both cases is Body Corporate 68792 (the Body Corporate). ItsAdministrator is Mr Tony Gambitsis. The Body Corporate is the entity withresponsibility pursuant to the Unit Titles Act 2010 for a block of flats in Lower Hutt.The defendant in CIV-2019-485-516, Wakefield Property Ltd (formerly GatewayHolding Company No. 2 Ltd) (Gateway), is the unit title holder of unit 7. Thedefendant in CIV-2019-485-517, Luxe One Ltd (Luxe), is the unit title holder of unit 5.[3] It is common ground that body corporate levies payable to the Body Corporateby Gateway and Luxe have not been paid.[4] On 18 July 2019, the Body Corporate served on both Gateway and Luxestatutory demands pursuant to s 289 of the Companies Act 1993 demanding thepayment of the levies that were outstanding as at that date. The demand served onGateway was for levies totalling $42,332.32. The demand served on Luxe was forlevies totalling $61,323.[5] Gateway did not respond to the statutory demand served on it and has taken noformal step in this proceeding. In a memorandum filed and served on 29 May 2020by Mr J Dallas, who was formerly instructed as the solicitor for both Gateway andLuxe, he informed the Court that on 13 May 2020 Gateway was placed in receivership.Mr Dallas made it clear in his memorandum that he did not have instructions from thereceivers[6] Within the fifteen working day period during which it was obliged to respondto the statutory demand served on it, Luxe's then director, Mr Michael Kooiman,emailed the Administrator saying that the company was electing to "secure orcompound for [the debt] to the reasonable satisfaction of the Body Corporate"; that,as at August 2016, the company's unit had been valued at $750,000; that it wascurrently encumbered by a first mortgage security securing indebtedness of $332,000;that the company's equity in the property was therefore approximately $418,000; andoffered second mortgage security over the property for the amount of the statutorydemand. Solicitors acting for the Administrator replied on 14 August 2019 (after theexpiry of the 15 working day period) saying that the Administrator had "diligentlyexplored the offer presented"; had "obtained market values for the property"; that"the values obtained indicated that there is no equity in the [property]"; andaccordingly that Luxe's "offer [was] declined".[7] The Body Corporate commenced both of these proceedings on 26 August2019.[8] For various reasons which it is unnecessary to go into here, but which in partat least are related to the current COVID-19 pandemic, the progress of theseproceedings has been delayed. They were originally listed for call on 8 October 2019,but have been adjourned no fewer than five times. When they were last called on2 June 2020, I set them down to be heard today.[9] Over that time, a number of joint and individual memoranda were received bythe Court. These were primarily concerned with the adjournment of the proceedings.However, Mr Dallas helpfully identified the bases upon which the Body Corporate'sapplication in respect of Luxe would be defended:(a) that Luxe had offered second mortgage security for the debt and thatthe Body Corporate had not acted reasonably in refusing to accept itsoffer;(b) that the Body Corporate already holds security in the nature of a chargeover Luxe's unit by reason of the operation of the Unit Titles Act and istherefore a secured creditor precluding the making of a winding uporder unless the amount of its claim exceeds the value of its security byat least $1,000;(c) that a firm of solicitors was holding sufficient funds to pay the debt.[10] On 29 May 2020 Luxe filed and served a statement of defence and an affidavitsworn by Mr Kooiman, generally in support of those three defences.Gateway (CIV-2019-485-516)[11] Gateway having taken no formal step, and not having been represented at thehearing, the Body Corporate's application for an order winding the company up isunopposed.[12] The Body Corporate has established that Gateway committed an act ofinsolvency by failing to respond to the statutory demand, prima facie entitling theBody Corporate to an order for the appointment of liquidators pursuant to s 241 of theCompanies Act.[13] If it is correct that receivers have been appointed over Gateway's business, thenthat would provide a second ground upon which the Body Corporate might seek anorder winding the company up under the same section.[14] I am satisfied that the Body Corporate has otherwise met the requirements ofthe Act entitling it to such an order. Whilst the usual affidavit evidence as to serviceof the statutory demand and the originating documentation in this proceeding has notbeen filed, during the time that he held instructions from Gateway, Mr Dallasacknowledged service on the company's behalf.[15] There will be an order pursuant to s 241 of the Companies Act appointingIain Bruce Shephard and Jessica Jane Kellow as liquidators over Wakefield PropertyLtd on the terms set out in their consent to act. The Liquidators will have power to actjointly or severally pursuant to s 242 of the Companies Act. The Body Corporate willhave its costs of and incidental to this application on a 2B basis together with suchdisbursements as may be allowed by the Registrar.[16] That order is made as at the time and on the date recorded at thecommencement of this judgment.Luxe (CIV-2019-485-517)Leave to defend[17] At the commencement of his submissions for the Body Corporate, Mr Dewardrew my attention to the fact that Luxe's statement of defence and affidavit in supporthad been field and served out of time, that is to say outside the 10-day working periodprovided for in r 31.17 of the High Court Rules 2016. He mentioned this Court'sjudgment in Weller v Newton Taxation Ltd1 in which it was said that the rule reflects astrict requirement and very good reasons need to be shown for late filing if thedefendant is to be heard.[18] Mr Dewar did not press this point strongly. The "very good reason" found toexist in Weller was that the plaintiff knew all along that the case would be defendedand acquiesced in the delay. There is a sense in which the same might be said here.In any event, I allowed the argument to proceed and both Mr Dewar and Mr LaHattefocussed on the substantive defences. To the extent that it was necessary to do so, Igave Luxe leave to defend the proceeding notwithstanding the late filing of its defence.The Response to the Body Corporate's statutory demand[19] Statutory demands are provided for in s 289 of the Companies Act. Materially,they must: require the company to pay the debt, or enter into a compromise underPart 14, or otherwise compound with the creditor, or give a charge over itsproperty to secure payment of the debt, to the reasonable satisfaction of thecreditor, within 15 working days of the date of service, or such longer periodas the court may order.[20] The Body Corporate's statutory demand in this case complied with thoserequirements.[21] As already described, Luxe's response was to offer second mortgage securityover its unit for the amount of the claim.1 Weller v Newton Taxation Ltd [1995] 8 PRNZ.[22] The way in which it went about doing so was informal, to say the very least.Mr Kooiman simply asserted that the company's unit had a market value of at least$750,000, that its indebtedness secured over the property by way of first mortgage was$332,000, and therefore that there was ample equity in the property to secure theamount of the outstanding levies. No supporting documentation was included and nonarrative argument in support of the proposal offered.[23] The Body Corporate's response was equally informal. The Administratorasserted that he had carried out his own investigation, and concluded, contrary toLuxe's assertion, that the company had no equity in the property and rejected theproposal.[24] The question is whether in such circumstances Luxe is entitled to maintain thatit complied with the statutory demand.[25] Surprisingly, there is next to no jurisprudence on this point.[26] As Associate Judge Gendall (as he then was) said in Cooper Horticulture Ltdv Crasborn Packing Ltd2 and Cooper Horticulture Ltd v Apollo Fruit Ltd,3 thereference to the provision of security in statutory demands is a reference to theobligation in s 289 on the part of a claimant to give the company in question anopportunity to offer security for the amount of the debt.[27] Having had the benefit of submissions from both Mr Dewer and Mr LaHatte,it appears to me that the issue reduces itself to whether, in rejecting Luxe's proposal,Mr Gambitsis acted reasonably.[28] Mr Dewar contended that the onus rested on Luxe to establish that the rejectionwas unreasonable. As I understood his argument, Mr LaHatte accepted that. In anyevent, both focussed less on the steps taken by Mr Gambitsis and more on the questionof whether Luxe's proposal was a viable one.2 Cooper Horticulture Ltd v Crasborn Packing Ltd (unreported) (CIV-2006-441-17) HC,Napier Registry, Gendall AJ, 24 March 2006.3 Cooper Horticulture Ltd v Apollo Fruit Ltd (unreported) (CIV-2006-441-18) HC, Napier Registry,Gendall AJ, 24 March 2006.[29] Both in the contemporaneous correspondence and in his affidavit evidence,Mr Gambitsis says that he looked into the proposal thoroughly and reached theconclusion that Luxe had no equity in its unit and that any security it gave would beworthless (my words rather than his). There is certainly nothing in the evidencecontradicting this, and Mr LaHatte did not attempt to contend that there was.[30] On the contrary, as Mr Dewar pointed out, such evidence as there is lendsstrongly to support the conclusion reached by Mr Gambitsis. Mr Kooiman, in hisemail of 6 August 2019 had asserted that the unit was encumbered by one mortgagesecuring indebtedness of $332,000. In his affidavit sworn on 11 June 2020Mr Gambitsis produced a copy of the certificate of title demonstrating that from asearly as 24 March 2017 there were three mortgages registered against the title, two bya company called F M Custodians Ltd and one by a company called Fico Finance Ltd(subsequently transferred to a company called Eastlight Asset Trading No. 3 Ltd). Inhis affidavit in reply dated 12 June 2020 and filed and served on the morning of thehearing, Mr Kooiman said that the Fico Finance/Eastlight Asset Trading mortgageoriginally secured indebtedness of $390,000. On its face this contradicts whatMr Kooiman told the Administrator in his original email both as to the number ofcharges and the amount of debt secured, all of which would have been clear to theAdministrator on a cursory examination at the time.[31] On the basis of that evidence it is difficult to imagine Mr Gambitsis reachingany other conclusion than the one that he did.[32] I reject Luxe's contention that Mr Gambitsis' rejection of its proposal wasunreasonable.[33] Having regard to the apparent lack of authority in this area, it is appropriate tomake some general observations as to the obligations of a creditor dealing with aproposal by a debtor to provide security in response to a statutory demand.[34] The obvious analogy is with a landlord asked to consent to an assignment of alease under s 226 of the Property Law Act 2007. In that context, the landlord cannotwithhold consent unreasonably.4 The courts have said that the question whether a4 Property Law Act 2007, s 226(2)(a).landlord's refusal to consent is reasonable should be assessed objectively from theperspective of a reasonable landlord.5 This assessment will be context and factspecific.6 The onus of proving that consent has been unreasonably withheld is on thetenant.7[35] It follows that a tenant in one context and a debtor in another will have to pointto evidence indicating that consent of the landlord or creditor was unreasonablywithheld.[36] In this case Luxe has been unable to do so.[37] However, it is not difficult to imagine situations in which a creditor might beheld to have withheld consent unreasonably. The situation that comes to mind mostreadily is a creditor determined to wind up a debtor company refusing consent notbecause the proposal is not viable but for the ulterior purpose of effecting retribution.That, in my view, would be unreasonable on his, her or its part.8 So too would therefusal of consent not because the security offered was inadequate but because thecreditor did not wish to become a charge holder.[38] I consider this approach to be supported by the words used in s 289.Parliament, by the addition of the words "to the reasonable satisfaction of the creditor",clearly envisaged that creditors should give genuine consideration to a proposal ofsecurity by a debtor and not refuse any such request without proper reasons for doingso.Whether the Body Corporate is a secured creditor[39] On behalf of Luxe it is argued that because, under s 147 of the Unit Titles Act,a body corporate owed levies by a unit title holder is entitled to refuse to provide acertificate which is necessary for the transfer of the property by the unit title holder5 See for example BP Oil New Zealand v Ports of Auckland (2003) 4 NZ ConvC 193,719 [2004] 2NZLR 208 at [167] and Challenger International (New Zealand) Ltd v AMP New Zealand OfficeWaterfront Tower Ltd [2003] BCL 428 at [26].6 See International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd [1986] Ch 513 at521; [1986] 1 All ER 321 at 326 (CA).7 BP Oil New Zealand v Ports of Auckland, above n5, at [167].8 In the landlord-tenant context, a landlord will be taken to have acted unreasonably if a refusal isbased on grounds unrelated to the relationship created between the parties under the lease. SeeAshworth Frazer Ltd v Gloucester City Council [2001] 1 WLR 2180.(or a mortgagee) and thus prevent the transfer of the relevant unit until such time asthe outstanding levies are paid, the body corporate is a charge holder.[40] In my view, s 147 does not create a charge. It does not give a body corporatea right of recourse against a unit holder's property in order to recover indebtedness (asfor example a mortgage would do). Such a right is the fundamental characteristic ofa security.9 At most it is a negative statutory right to withhold the provision of acertificate which in most, if not every, case will prevent the unit title holder or anyoneelse from transferring the unit whilst the levies remain unpaid. I reject the argumentadvanced on behalf of Luxe that s 147 of the Unit Titles Act creates a charge.Solvency[41] The final argument advanced on behalf of Luxe is that its solicitors, or, rather,a firm of solicitors with which it has some connection, hold funds in relation tolitigation to which Luxe is apparently not a party sufficient to pay the outstandinglevies. I am taking it that this is an argument to the effect that the company is notinsolvent.[42] The first point is that, other than an assertion made on Luxe's behalf, there isno evidence before the Court that this is the position.[43] A party seeking to establish its solvency for the purposes of inviting the courtto exercise its discretion not to put the company into liquidation and appointliquidators notwithstanding its failure to respond to a statutory demand will usuallyput in evidence as to its overall financial position, invariably in the form of its mostrecent financial statements (together with any necessary updating financial material),and an assessment from an independent accountant as to both its balance sheet andcashflow positions.[44] Luxe has not done anything of the sort.[45] For that reason alone I would not be prepared to accept such evidence as thereis to the effect that the company is solvent.9 See the discussion in Goode on Commercial Law (5th ed) at 22.15–22.55.[46] There is a further point. The real question is the company's ability to pay itsdebts as they fall due, and lack of financial wherewithal is only one reason why acompany may not be able to do so. Another is that the company is simply refusing todo so.[47] In this case, the fact that the company says that it has the wherewithal to paythe outstanding levies but has not done so tends to suggest that for some unexplainedreason those responsible for the governance or management of the company havemade a decision that the company will not pay its debts. That of course would meanthat the company was unable to do so.[48] For those reasons, I do not accept either that the company is solvent, or that thecompany is able to pay its debts.Conclusion[49] There will be an order pursuant to s 241 of the Companies Act appointingIain Bruce Shephard and Jessica Jane Kellow as liquidators over Luxe One Ltd on theterms set out in their (undated) consent to act. The liquidators will have power to actjointly or severally pursuant to s 242 of the Companies Act. The Body Corporate willhave its costs of and incidental to this application on a 2B basis together with suchdisbursements as may be allowed by the Registrar.[50] That order is made as at the time and date recorded at the commencement ofthis judgment.Associate Judge JohnstonSolicitors:Thomas Dewar Sziranyi Letts, Lower Hutt for plaintiffsJ D Dallas Law, Wellington for the defendants