CASH FOR SCRAP LIMITED V AUCKLAND REGIONAL COUNCIL HC AK CIV 2006-404-005501

CASH FOR SCRAP LIMITED V AUCKLAND REGIONAL COUNCIL HC AK CIV 2006-404-005501 21 December 2007IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV 2006-404-005501UNDER the Companies Act 1993 IN THE MATTER OF an application pursuant to s 290 of the Act to set aside a statutory demand issued by Manukau City Council at Manukau City BETWEEN CASH FOR SCRAP LIMITED Applicant AND AUCKLAND REGIONAL COUNCIL RespondentCIV 2006-404-005499AND BETWEEN CASH FOR SCRAP LIMITED Applicant AND MANUKAU CITY COUNCIL Respondent Hearing: 30 January 2007 Counsel: A D Banbrook for applicant N Malarao / C Knight for Auckland Regional Council D J Neutze / J Bain for Manukau City Council Judgment: 21 December 2007JUDGMENT OF ASSOCIATE JUDGE ABBOTTThis judgment was delivered by me on 21 December at 4pm pursuant to Rule 540(4) of the High Court Rules.Registrar/ Deputy RegistrarSolicitors: C K Lyon, PO Box 99872, Newmarket for applicant Meredith Connell, PO Box 2213, Auckland for Auckland Regional Council Brookfields, PO Box 240, Auckland for Manukau City Council[1] Cash for Scrap Limited (CFS) has applied to set aside separate statutory demands served on it by Auckland Regional Council (ARC), and Manukau City Council (MCC). [2] In each case the demands seek payment of costs awarded against CFS by the Environment Court. The costs orders were in respect of separate unsuccessful applications by CFS. The former application named MCC and ARC as respondents. The applications were heard together with two other related applications as they all related to CFS's use of its scrap metal yard in Bairds Road, Otara. Separate costs awards were made following dismissal of CFS's application. The parties have agreed that the applications to set aside the statutory demands issued in respect of those orders should be heard together. [3] CFS does not dispute that the costs orders are outstanding. It applies to have the demands set aside on the grounds that it has an appeal pending to the Court of Appeal in respect of the declaration proceedings, it has substantial counter-claims against both councils, and that it is solvent. [4] The councils oppose the application. They say that the costs judgments were not appealed but in any event an appeal does not automatically result in a stay. They also say that CFS has failed to establish an evidential basis for its alleged counter-claims for its claim to be solvent. In any event they say the Court should exercise its discretion not to set aside the demand in the circumstances of the case. [5] The issues that the Court will therefore have to decide on this application are: a) Whether CFS has a fairly arguable basis for counter-claims against each of the respondents; b) Whether CFS has demonstrated a prima facie case of solvency; c) Even if CFS has established an arguable case, whether the Court should decline to exercise its discretion.Background[6] CFS carried on business as a metal recycler in Bairds Road, Otara from the time of its incorporation in or about September 2000. [7] At all material times since commencing its business there has been an issue between CFS and the respondent councils as to whether CFS's activities complied with the District Plan. [8] The councils also formed the view that the site and an adjoining waterway were being polluted by CFS's activities, and took steps in the Environment Court to prevent that continuing. That was the start of what is now a very long running history of litigation between the parties. [9] In December 2002 the Environment Court made enforcement orders against CFS, William Victor George Conway (Mr Conway), Carol Margaret Down (Ms Down), and an associated company, Millennium Investments Limited (MIL). Mr Conway was not an officer or shareholder of the company but had previously operated the business in his own right and has since been described by the Environment Court as the alter ego of CFS. Ms Down is the sole shareholder and director of CFS and MIL, which at material times owned the property on which the business was being conducted. Mr Conway and Ms Down are personal as well as business partners. [10] The enforcement orders made in December 2002 required CFS and the other parties to cease their scrap metal business at 11 Bairds Road until measures were taken to prevent pollution and resource consents were obtained. Notwithstanding those orders CFS continued to operate its business from 11 Bairds Road, and expanded on to an adjoining site. This led to yet further litigation including prosecutions of CFS, Mr Conway and MIL for breaches of the Resource Management Act 1991. All three pleaded guilty at the start of trial in November 2003. Their sentences were confirmed by the Court of Appeal in November 2004.[11] In November 2005 two applications by CFS (and a cross application by the ARC) came before the Environment Court. CFS sought a declaration that its use of the sites at 11 and 13 Bairds Road for its scrap metal business was a permitted use or alternatively an existing use under the District Plan. It also sought changes to, or cancellation of, the enforcement orders made in December 2002. The MCC was the respondent to the application in respect of use rights. The ARC was the respondent to the application to vary or cancel the enforcement orders. The ARC cross-applied for orders enabling it to implement the enforcement orders made in December 2002. Those applications, and a further related application by a consultant for CFS, were heard together. The Environment Court gave its decision on 6 December 2005 finding that CFS's activities were not and had never been permitted or existing uses at 11 or 13 Bairds Road, declining its application to change or cancel the enforcement orders and declining the minor application by CFS's consultant. The Court granted orders to enable to ARC to implement the enforcement orders in respect of 11 Bairds Road. Costs were reserved. [12] On 21 March 2006 CFS was ordered to pay costs in respect of the 2005 Environment Court proceedings of $24,000 to the ARC and $40,000 to the MCC. [13] CFS, Mr Conway, Ms Down and MIL appealed the Environment Court's decision of 6 December 2005. That appeal was filed before the costs orders were made. The appeal was amended prior to hearing, but was not extended to cover the costs orders. The appeal was struck out by this Court on 18 September 2006. [14] In the meantime, on 30 August 2006 both ARC and MCC served statutory demands requiring payment of the costs ordered in March 2006. CFS filed its applications to set aside those statutory demands on the grounds that it had appealed the Environment Court judgment, that the judgment was the subject of a stay, the orders would inevitably be quashed if the appeal succeeded, and CFS had counter- claims. It said that it would be unjust to allow liquidation proceedings to continue as that would preclude it exercising its legal rights.[15] The applications were amended shortly before hearing. By that time the appeal to this Court had been dismissed but an appeal to the Court of Appeal against that decision had been filed, and the stay on the Environment Court judgment had been lifted (the Bairds Road site was no longer being used). In the application in respect of the ARC's demand, it extended its grounds by relying specifically on a counter-claim for defamation filed in this Court in August 2006. It extended its grounds in respect of the demand by MCC by relying specifically on a counter-claim filed in October 2006 seeking damages for negligent mis-statement by council officers. In both amended applications, CFS also added the ground that it was solvent.Applicable principles[16] CFS brings its application under s 290 of the Companies Act 1993. The relevant parts of that section read:290 Court may set aside statutory demand(1) The Court may, on the application of the company, set aside a statutory demand. . (4) The Court may grant an application to set aside a statutory demand if it is satisfied that— (a) There is a substantial dispute whether or not the debt is owing or is due; or (b) The company appears to have a counterclaim, set-off, or cross- demand and the amount specified in the demand less the amount of the counterclaim, set-off, or cross-demand is less than the prescribed amount; or (c) The demand ought to be set aside on other grounds. .[17] There is no dispute over the principles which the Court applies in addressing the discretion under this section. The principles that are relevant to the present application:a) The onus is on the applicant to show a fairly arguable basis for saying that it is not liable for the amount demanded, or for any counter claim or set off being pursued, or any other ground relied upon for resisting the demand: Eastgate Real Estate Limited v Walker (2001) 15 PRNZ 308; b) This onus requires the applicant to show that any counter-claim is bona fide arguable (Rennie v Prospect Resources Limited HC Greymouth M14/95 3 November 1995 Tipping J). A mere assertion of a counter-claim or set off is insufficient. The applicant must be able to point to evidence before the Court that it has a real basis for its claim: Covington Railways Limited v Uni-Accommodation Limited[2001] 1 NZLR 272,275. There must be some material short of proof to back up the counter-claim: Te Uenga Limited v R Kendall & Co Limited HC Auckland M286/IM99 11 May 1999 Master Faire; c) The demand must be set aside pursuant to s 290(4)(c) if the recipient satisfies the Court that it is solvent: Medisys Limited v Getinge Castle Limited HC Auckland M1426/00 9 February 2001 Master Kennedy-Grant; Rocklands Park Limited v Logan Samuel Limited(2004) 9 NZCLC 263,535.Is there a dispute?[18] CFS concedes that the costs judgment has not been appealed, and must stand. Its counsel argues that the order will be set aside if its appeal to the Court of Appeal is successful. Counsel for the respondents say that this is not necessarily so. It is a factor which may be able to be taken into account under the third limb of s 290(4), but it does not raise a substantial dispute under s 290(4)(1)(a).Has CFS shown an arguable case for its counter-claims?[19] This is the first substantial ground for this application. Although the councils take a similar approach to this ground, they also raise matters relating to the individual counter-claims which will also need to be addressed. [20] CFS has two claims pending against the ARC. The first was filed in July 2006 (Court No. CIV 2006-404-004270). In it, CFS made claims of abuse of public office, intentional affliction of economic damage by unlawful means, and abuse of process all arising out of the steps that the council took against it (and its associated company and plaintiff, MIL) in relation to the Bairds Road sites. Loss of revenue of more than $15 million, compensation for damage to the Bairds Road property and exemplary damages were sought. Although this claim was put forward by Mr Conway (in his second affidavit in support of this application) as the counter-claim being relied upon, counsel did not rely upon it other than in respect of a possible further cause of action. This further cause of action was said to arise out of a decision in this Court in November 2006 quashing committal proceedings that had been heard in the District Court in 2005. Counsel's reason not to rely on the original claim was no doubt because it was the subject of an application to strike-out which had not been determined at the time of this hearing. It has been determined since. The causes of action were in large part struck out on the basis that key factual allegations on which the plaintiffs needed to succeed had already been determined against them, although they were given leave to file an amended statement of claim on aspects which might still be arguable if re-pleaded. [21] The second claim against the ARC, and the one on which CFS specifically relies in this application, is a claim for damages for defamation in relation to statements made to a television company ahead of ARC's entry on to the Bairds Road site in 2006, and for trespass in respect of that entry. CFS seeks general and aggravated damages in sums substantially in excess of the costs order, and special damages of nearly $1.5 million for alleged loss of business. The ARC denies any defamation, and says that its entry on to the premises was a legitimate exercise of powers under the orders made by the Environment Court in December 2005. It acknowledges that members of its staff spoke to the television company but says thatall statements made were true. In support of its defence it relies on the history of this matter, including the findings in various judgments given to that point. In particular it refers to guilty pleas entered on indictable charges laid under the Resource Management Act 1991 against Mr Conway, CFS and MIL and comments made by the Court of Appeal in November 2004 when dismissing appeals against sentences imposed: R v Conway & Ors CA234/04 8 November 2004:[71] . This was a serious case, involving persistent offending over a lengthy period with significant environmental damage to important waterways. In addition, Mr Conway and the two companies deliberately flouted the authority of both the Council and the Environment Court while continuing their unlawful activities. Even now relevant resource consents have not been obtained, yet the business continues from the site.[22] The claim that has been filed against the MCC is equally contentious. CFS alleges that Mr Conway was given negligent advice about the use of the site in 1994. It says that it relied on that advice in setting up its business in 2000, and claims in excess of $15,000,000 as damages for alleged loss of business revenue, $221,100 for relocation costs, and loss of value of the site in the sum of $650,000. MCC points to several matters which it says makes this claim unsustainable on its face. First, the statement was made to Mr Conway, rather than to CFS (which had not been incorporated at that time). Secondly, there could be no reliance as the council had written to Mr Conway in 1999 informing him of the correct position and the need for a resource consent. Thirdly, any loss suffered as a consequence of the original statement would have been suffered by Mr Conway rather than CFS. Fourthly, it was difficult to see how the claim could not be time barred. [23] Counsel for CFS argued, in effect, that the detailed pleading of these claims was sufficient in itself to demonstrate an arguable case. There is no question that the claims have been pleaded in considerable detail. Counsel for the respondent councils both say, in effect, that pleadings amount to no more than an assertion, and that CFS has failed to provide material to support the pleadings which are, on their own, far from compelling. [24] The Court of Appeal considered what an applicant has to show to establish a set off in Covington Railways Limited v Uni-Accommodation Limited. I see no reason not to apply the same considerations to a claim for a counter-claim. The firstpoint made by the Court of Appeal was that Covington had not quantified its claims. The demands in Covington were for revenue short-falls and outgoings under guarantees given by Covington to Uni-Accommodation in respect of residential units developed by Covington and leased by Uni-Accommodation. Covington argued that it had an equitable set off arising out of alleged misrepresentation by Uni- Accommodation and breach of covenants in the leases. The Master hearing Covington's application to set aside the demand decided that Covington had not sufficiently demonstrated the existence of its claimed equitable set off. The Court of Appeal held that Covington had not established a proper foundation for a claim to set off on either misrepresentation or breach of covenant. In coming to that view it examined evidence given by Covington. In respect of the allegation of misrepresentation, it said that it was no more than speculation on Covington's behalf. In respect of the breach of covenant it found there was no evidence independently given of any of the matters related to the allegations made, in particular in relation to an allegation that Uni-Accommodation had been responsible for a failure of students to take up accommodation. There was no evidence of students reacting negatively to "the allegedly invasive nature of UAL's standard application form". [25] The respondents also relied on Te Uenga Limited v R Kendall & Co Limitedwhere a counter-claim was raised as a ground for resisting payment of undisputed invoices. There were no proceedings filed in respect of the counter-claim, and it was not quantified in the evidence before the Court. Master Faire found that the material placed before him was insufficient evidence of a foundation for the alleged counter-claim. [26] In the present case the counter-claims have been filed. The statements of claim have extensive particulars. Mr Conway has referred to the counter-claims in his evidence in support of the application, but only in brief narrative paragraphs summarising the nature of the pleaded counter-claim. He does not explicitly verify the allegations in the statement of claim (as he would be required to do in a summary judgment application), nor provide any independent documentary support for the matters pleaded.[27] In some cases that may be sufficient, but set against the lengthy history of litigation, including Court judgments in the case, I find it insufficient. This is particularly so in that ARC's Group Manager, Mr Evans, in an affidavit in opposition to the application, pointed out that CFS had given no evidence independent of the views of Mr Conway and other persons associated with CFS, that might support either of the two proceedings against the ARC, and pointed to the various contrary findings on material facts in the Environment Court's substantive judgment and other judgments. In addition, there is no evidence addressing the matters of defence raised in the other claims (the defamation proceeding against the ARC and the negligent statement proceeding against MCC). Nor has there been any evidence to support the quantum of those claims. [28] The insufficiency of pleading alone in this case is borne out by the fact and outcome of the ARC's strike-out application, to which I have already referred. The detail of that pleading (running to 52 pages) did not prevent strike-out of the majority of the proceeding. The potential further cause of action arising out of the quashed committal proceeding has not been pleaded, nor spelt out in evidence. [29] I accept the respondents' submissions that CFS's claims raise complex issues which will be difficult to prove, and that quantum will be even more difficult. In all the circumstances I am not satisfied as to the likelihood that there will ultimately be any sum awarded on those claims greater than the sums being demanded.Has CFS shown it is solvent?[30] CFS produced management accounts for the six month period to 30 September 2006, a forecast for the following six month period (to 31 March 2007) and a balance sheet as at 30 September 2006 in support of its claim that it was solvent. Those accounts were prepared by a Mr Moorhead, described as the Company Manager and Financial Controller for CFS. Mr Moorhead contended that CFS had made a net profit of $227,468.24 for the six months to 30 September 2006, was forecast to return a similar profit for the next six months, and had total shareholders' funds or equity of $381,601.62.[31] Those accounts were reviewed by a Chartered Accountant, Mr L R Campbell, who was asked by MCC to do so and provide expert opinion on the solvency of CFS based on those accounts. Mr Campbell questioned the value of the management accounts in assessing solvency. He pointed out that Mr Moorhead did not appear to be a qualified accountant, and that there were no notes which explained the basis on which the statements had been prepared. He identified four specific issues over the statement of financial performance, including the lack of any apparent provision for tax and whether the orders for costs now demanded had been brought in as an expense. As to the balance sheet he questioned whether all current liabilities had been included (having regard to securities registered against CFS), noted that there was no provision for taxation as a current liability, queried the level of accounts payable, and queried the inclusion of land as an asset given that CFS is not registered as the owner of any land. He concluded that CFS was not liquid having regard to current liabilities of $226,817.47 (without allowing anything for the likely income tax) as against one liquid asset being cash on hand of $27,632.33. He also commented that he could not ascertain whether there might be any related party transactions and, if so, whether they had been valued appropriately. For these reasons he expressed the view that the financial statements provided by Mr Moorhead might not accurately reflect CFS's true financial position. In his view the information could not be relied on to establish its solvency. [32] Mr Moorhead responded to Mr Campbell's affidavit, and other evidence in relation to land ownership, in a second affidavit filed shortly before the hearing. He contended that the land at 11 Bairds Road was held by Ms Down on trust for CFS. He acknowledged that the accounts were management accounts only, with full financial accounts to be prepared at the conclusion of the financial year. At that time taxation accruals would be included. He said that an item for "environmental costs" represented the cost of site works and fines paid in relation to prior litigation (which leaves open what provision, if any, has been made for outstanding cost orders such as those demanded). He asserts that all liabilities were brought into account, and says that accounts payable were fully represented by stock (which was a substantially greater figure at the time of his affidavit). He said that Mr Campbell's conclusions as to solvency were not valid, and by way of illustrating the point annexed financial statements for the years 2004 and 2005 showing net profit in 2004of nearly $135,000, and in 2005 of just over $330,000. He said that net profit for 2006 was estimated to be in excess of $390,000. [33] The test for solvency is set out in s 4(1) of the Companies Act 1993:4 Meaning of "solvency test"(1) For the purposes of this Act, a company satisfies the solvency test if— (a) The company is able to pay its debts as they become due in the normal course of business; and (b) The value of the company's assets is greater than the value of its liabilities, including contingent liabilities.[34] To establish that it is solvent CFS must satisfy both limbs of the solvency test: Rocklands Park Limited v Logan Samuel Limited. It must show that it is able to meet its debts as they become due in the normal course of business, and that the value of its assets exceeds the value of its liabilities. [35] On the face of the management accounts, and its financial history as evidenced by the financial statements for 2004 and 2005, CFS would appear to have established on-going profitability. However, that is not necessarily the same as its liquidity or ability to pay its debts as they fall due. [36] Mr Moorhead acknowledges that the accounts have all been prepared "in- house". There is no independent verification of them as having been submitted and accepted for tax return purposes. There is no suggestion that they have been reviewed and confirmed by an independent qualified accountant. Mr Moorhead gives no evidence as to his accounting or financial experience and qualifications, particularly as to his knowledge of proper accounting practice. Mr Campbell has done so, and has expressed doubt as to the reliability of these accounts for the purposes of assessing solvency. [37] Mr Moorhead's evidence in his second affidavit does not adequately answer Mr Campbell's reservations, in my view. Indeed, he confirms that the management accounts do not include tax accruals. He appears to acknowledge that outstanding liabilities for costs have not been included in these management accounts. Counselfor MCC provided a summary of outstanding Court costs in the sum of $153,228.05. There is no suggestion that any costs' orders have been stayed. The accounts as at 30 September 2006 show that there was only $27,632.33 in hand to meet those costs. [38] It was open to CFS to pay the amount of the demands into Court, or otherwise provide security for them. That would have been a clear answer in relation to its ability to pay. It has done neither. [39] CFS has also failed to persuade me that its balance sheet is accurate. It has included value for 11 Bairds Road as an asset. Mr Moorhead acknowledges that that property is in the legal ownership of Ms Down. He asserts that Ms Down holds it on trust, but provides no evidence of that trust. Nor does Ms Down provide any affidavit to that effect. This in itself raises unanswered questions as to the reliability of the accounts. [40] Taking all matters into account, I find that CFS has not demonstrated an arguable case for solvency.The exercise of the Court's discretion[41] The Court has a wide discretion under s 290. It can decline an application to set aside even if an applicant meets one of the threshold requirements. However, that will only be in rare cases, where there are strong grounds for doing so:Primary Health Remuera v Avoca Residential Construction Limited (2004) 9 NZCLC 263,647. The discretion has been exercised against an applicant even where an arguable case for a counter-claim for damages for breach of terms of a lease was found: Sunglass Hut NZ Limited v Amtrust Pacific Properties LimitedHC Auckland M1710/02 24 June 2003 Master Lang. [42] I take the view that the history of this matter, the nature of the sum being demanded (unpaid Court orders), and the views expressed in several judgments to date as to the underlying merits of the matter generally, make this one of the rare cases where the Court should not exercise its discretion even if CFS had satisfied me about its counter-claims.[43] Dicta in Primary Health Remuera v Avoca Residential Construction Limitedsuggest that the discretion is not available where the applicant has made out an arguable case for solvency (which is in keeping with the rationale that if an applicant is solvent a statutory demand should not be allowed to stand so as to create a presumption that the applicant is unable to pay due debts). However, given the lack of cogency of the evidence as to solvency I would see no difficulty with declining to exercise the discretion to set aside in this case. It is of course open to CFS to present improved evidence as to solvency if applications for liquidation follow. [44] The final matter to address briefly is the ground set out in the applications, but not advanced in counsel's submissions, that allowing the statutory demand to stand, and liquidation to proceed, will render any appeal rights and counter-claim rights nugatory. It will of course be open to any liquidator appointed to continue with the appeal or any of the claims if there is merit to them. In light of the history of this dispute there may be justification for the view that there is merit in having them reviewed by an independent and objective party such as the liquidator. Finally, even if the liquidator did not choose to pursue them, that does not preclude Mr Conway or Ms Down making arrangements with the liquidator to take up those rights.Decision[45] The applications for orders setting aside the statutory demands issued by the ARC and the MCC are dismissed. [46] I make an order pursuant to s 291(1)(a) of the Companies Act 1993 that Cash For Scrap Limited pay the sums demanded ($24,000 by the Auckland Regional Council and $40,000 by Manukau City Council) within fifteen working days. In default of payment these creditors may make an application to put the company into liquidation.Costs[47] All parties sought costs if successful. I see no reason why costs should not follow the event. I make an order that Cash for Scrap Limited pay each of the respondent councils costs of and incidental to their respective applications on a 2B basis with disbursements as fixed by the Registrar._________________________Associate Judge Abbott