THE COMMISSIONER OF INLAND REVENUE V AOTEAROA RESORTS LIMITED HC PMN CIV-2010-454-614

THE COMMISSIONER OF INLAND REVENUE V AOTEAROA RESORTS LIMITED HC PMN CIV-2010- 454-614 8 October 2010IN THE HIGH COURT OF NEW ZEALAND PALMERSTON NORTH REGISTRY CIV-2010-454-614IN THE MATTER OF the Companies Act 1993 BETWEEN THE COMMISSIONER OF INLAND REVENUE Plaintiff AND AOTEAROA RESORTS LIMITED Defendant Hearing: 7 October 2010 Appearances: P. Latimer - Counsel for Plaintiff K. Thurston - Director of Defendant Company Judgment: 8 October 2010 at 3.00 pmJUDGMENT OF ASSOCIATE JUDGE D.I. GENDALLThis judgment was delivered by Associate Judge Gendall on 8 October 2010 at 3.00 pm under r 11.5 of the High Court Rules.Solicitors: Inland Revenue Department, PO Box 1462, WellingtonIntroduction[1] Before the Court is an application by the plaintiff to have the defendant company placed into liquidation. [2] The application relates to an original debt of $339,448.87 claimed in the plaintiff's statement of claim for outstanding tax, penalties and interest. This was the subject of a statutory demand served on the defendant company on 30 June 2010. [3] No application to set-aside that statutory demand was made by the defendant. [4] As the defendant had neither paid the amount demanded within the 15 working day period specified in the statutory demand nor applied to set-aside the demand, a statutory presumption of insolvency on the part of the defendant arose in terms of s 287 Companies Act 1993. Under that section, the defendant company was presumed to be "unable to pay its debts" and thus the threshold ground for appointing a liquidator in terms of s 241(4)(a) was satisfied. [5] Subsequently, on 1 September 2010 the plaintiff filed its statement of claim in this proceeding seeking an order that the defendant be placed into liquidation. Service of the proceedings was effected on the defendant company on 14 September 2010 and advertising took place in the Manawatu Standard on 22 September 2010 and in the New Zealand Gazette on 23 September 2010. [6] No notice of opposition to the present application or statement of defence of any kind has been filed by the defendant.The 6 October 2010 Call[7] Instead, when the matter was called before me on 6 October 2010, Mr Ken Thurston ("Mr Thurston") a director of the defendant attended Court and sought leave to appear on behalf of the defendant company. Although the general rule is that a company, not being a natural person, can only present its case in Court through legal representation and must be represented by a barrister or solicitor, neverthelessthere is a residual discretion to allow lay representation in appropriate circumstancesRe: GJ Mannix Limited [1984] 1 NZLR 309 (CA). [8] Before me on 6 October 2010, there was no opposition from Mr Latimer who appeared as counsel for the plaintiff in this matter to Mr Thurston as its director being granted leave to appear for the defendant. Under all the circumstances, I was satisfied that the leave sought should be granted here, rather than the defendant company simply remaining unrepresented in this matter. On this aspect, it should be noted that Mr Isac, a Palmerston North counsel who was present in Court at the time (as he held instructions to appear for Mr Thurston on earlier bankruptcy proceedings issued against him personally) confirmed to the Court that he held no instructions to appear for the defendant company here. [9] As I have noted above, leave was granted for Mr Thurston to appear on behalf of the defendant company. The matter proceeded on this basis on 6 October 2010. [10] At this call, it appeared clear that the defendant company was not disputing the debt claimed by the plaintiff. It was also clear that there was no evidence of any kind before the Court as to the defendant's company's financial position, its solvency or its trading situation. [11] Mr Latimer for the plaintiff maintained that the defendant company clearly was insolvent failing the solvency test on both an asset and liability and cash flow basis being quite unable to pay its debts when due. [12] Over the opposition of Mr Latimer for the plaintiff, however, I adjourned this proceeding on 6 October 2010 to a formal hearing at 2.00 pm on 7 October 2010 for a final decision to be made. In a Minute I issued on 6 October 2010 Mr Thurston was specifically urged to obtain legal advice for the defendant company and directions were made that the defendant was to put before the Court properly authenticated material for a detailed consideration of this matter on 7 October 2010. I noted also in that minute that no formal opposition to the present liquidation application had been put before the Court.The Hearing on 7 October 2010[13] This proceeding was then called before me at 2.00 pm on 7 October 2010. At that time there was still no formal opposition or statement of defence to the present liquidation application before the Court. Instead Mr Thurston, who again appeared for the defendant company, handed up to the Court a one and a half page letter under his signature setting out what he said were certain details of his company group which included the present defendant. The letter was unsworn and not in affidavit form. In addition he attached the following documents: (a) A copy of a letter to the defendant dated 7 July 2010 from South Canterbury Finance confirming that their audited financial statements for the year ending 30 June 2010 show a total unpaid balance due from the defendant to that lender of $2,657,396.54 with a "loan maturity date" of 30 June 2010. (b) A copy Agreement to Lease dated 26 August 2010 from the defendant company as landlord to Whitcombe Holdings Limited as tenant. (c) A copy Agreement dated 28 September 2010 headed "Agreement to Acquire Capacity and Waste Water Pipe Line" between Manawatu District Council and Water Enviro Services Limited. (d) A copy letter dated 5 October 2010 from the defendant under the signature of Mr Thurston to the Inland Revenue Department enclosing a copy of that Pipeline Agreement and suggesting that the Department delay further proceedings on the basis of an ultimate payment to them from Water Enviro Services Limited. (e) Two unsigned pages of what appears to be a valuation of an 11.1258 hectare property owned by Aotearoa Coolstores Limited, the valuation being completed by Morgans Property Advisers.[14] At the outset I need to say that this material provided to the Court is entirely inadequate and quite unsatisfactory. As I understand it, Mr Thurston presents it as "evidence" in this matter. There is no affidavit accompanying the material, nor in my view is much of it of any particular relevance to present matters before the Court, relating as the present application does, to the defendant company Aotearoa Resorts Limited. [15] Notwithstanding this, I will endeavour to address this material in this judgment and also the oral arguments put to me by Mr Thurston on behalf of the defendant.Parties' Arguments and My Decision[16] As I have noted, the present liquidation application is brought pursuant to s 241(4)(a) Companies Act 1993. This provision permits the Court to appoint a liquidator if it is satisfied that the defendant company in question is "unable to pay its debts". And as I have noted above, s 287 Companies Act 1993 provides that a company is presumed to be unable to pay its debts if the company has failed to comply with a statutory demand. That is the case here. [17] In conducting a consideration of s 241 Companies Act 1993, Brookers Company & Securities Law Volume 1 at para CA241.04 notes the limited discretion the Court retains to refuse an order for liquidation once the initial grounds are established. At that paragraph the learned authors state:CA241.04 Appointment of the Liquidator – at Court's DiscretionEven if the applicant has standing to institute the liquidation process before the Court and it is found that the facts support one or other of the grounds for the appointment of the liquidator, the Court reserves the right to refuse to put a company into liquidation. The Court will exercise this jurisdiction sparingly. The normal rule is that if the relevant requirements have been met, the person making the application is entitled to his or her order for the company's liquidation. This is so even if it is shown that in the liquidation it is unlikely there will be any assets available for distribution to the unsecured creditors. In cases such as this, often the Court still regards the liquidator as serving useful functions in the investigation of the company's affairs and is acting as a guardian of the interests of the unsecured creditors..[18] At the outset here, Mr Thurston for the defendant appeared to raise a jurisdictional issue. This was a claim by him that the defendant company was notproperly served here with the present proceedings. [19] On this, an affidavit from Mr Paul Hatch a process server of Wanganui dated 16 September 2010 confirms that copies of the proceedings were served upon the defendant company on 14 September 2010. He deposes at para 2 of this affidavit:I served the documents on the defendant company at 89 Kawakawa Road, Feilding [the company registered office] at 2.15 pm on Tuesday, 14 September 2010. I served the documents on Karen Forrest, Office Manager. Karen Forrest freely accepted the document. I do not know her personally.[20] In response, Mr Thurston appeared to argue that Ms Karen Forrest ("Ms Forrest") was not an employee of Aotearoa Resorts Limited at the time, and therefore there was some defect in the service arrangements. [21] On this aspect, I note that the documents were served at the registered office of the company and more than this, were handed to an individual Ms Forrest. Significantly in my view, Ms Forrest attended Court with Mr Thurston at the hearing on 7 October 2010 and was referred to by Mr Thurston on several occasions then as someone who is assisting the defendant in putting together information for the Court. And, I note also that the original statutory demand in this matter was served personally on Mr Ken Thurston on 30 June 2010. [22] I reject Mr Thurston's contention that there are any inadequacies of service in this case. [23] Turning now to the debt in question claimed by the plaintiff here, this now appears to total $354,171.37. Significantly, it includes assessments for PAYE which date back to early 2008 totalling $194,617.14, assessments for KiwiSaver employer deductions dating back to late 2008 totalling $5,370.91 and assessments for GST dating back to late 2008 totalling $52,923.42. In addition there are certain other smaller assessments for Student Loan employer deductions, and Child Support employer deductions and significant amounts for penalties and interest. [24] Of, special concern here must be the fact that substantial amounts are due from the defendant for PAYE tax deductions and KiwiSaver employee deductionswhich were made from employees wage entitlements and carry a Trust nature. No explanation of any kind has been provided to the Court on behalf of the defendant company regarding these aspects. [25] Instead, Mr Thurston for the defendant argued that more time should be given to the defendant to settle the debt owing to the plaintiff first, from ongoing trading and secondly, from a loan advance which he says will be made available by a related company Water Enviro Services Limited. [26] On this, Mr Thurston's unsworn 7 October 2010 letter to the Court contends that in addition to the debt to the plaintiff the defendant has "outstanding payables" of $32,452.05 and "outstanding receivables" of $15,756.00. This, of course, ignores what I understand to be the mortgage position of the defendant. As to this, Mr Thurston in this letter states in one paragraph that currently the defendant has "lending of $2,672,396.00 with South Canterbury Finance and $450,000.00 with Midlands Mortgages". Mr Thurston then goes on to claim that "With the restructuring within our companies, on 6 December 2010 Aotearoa Resorts Limited lending position will be a facility of $1,819,297.00 with South Canterbury Finance and $450,000.00 with Midlands Mortgages". There is no explanation, however, as to how this might be carried out or achieved. [27] As best I can tell from the information provided by Mr Thurston to the Court, the defendant's current indebtedness therefore is $2,672,396.00 owing on mortgage to South Canterbury Finance, $450,000.00 owing to Midlands Mortgages, the present debt of $354,171.37 owing to the plaintiff and the sum of $32,452.05 described by Mr Thurston as "outstanding payables" due by the defendant. [28] So far as the defendant's asset position is concerned, Mr Thurston in his 7 October 2010 unsworn letter to the Court claims:Its (the defendant's) current assets registered valuations for Braxmere Fishing Lodge of $3.25 million and the hotel at $1.8 million.[29] He then goes on to state that:"Aotearoa Resorts Limited currently has a lease with Whitcombe Holdings Limited for $60,000.00 p.a. We are currently in negotiation in relation to the hotel and it is expected the hotel be leased.[30] It is assumed that the lease with Whitcombe Holdings Limited relates to the Braxmere Fishing Lodge. There is no independent verification of any kind as to the "registered valuations" which Mr Thurston claims for the Braxmere Fishing Lodge and the hotel which he says are owned by the defendant company. Instead the two pages of the Morgans Property Advisers valuation which he has provided to the Court appear to relate to an entirely different property owned by Aotearoa Coolstores Limited and not the defendant company. Its association with matters before me is entirely unclear. [31] I repeat that there are no financial accounts for the defendant before the Court and no independent verification of the values claimed for the defendant company's assets by Mr Thurston. All this is despite the clear directions made and confirmation provided to Mr Thurston on 6 October 2010 that appropriate verified evidence was needed to be before the Court as to the company's financial position and solvency by 7 October 2010. And significantly, when that direction was made in open Court on 6 October 2010, Mr Isac who had appeared that day for Mr Thurston personally on bankruptcy matters, indicated to the Court that he would have a discussion with his client to make clear the position which the defendant company was facing. Those matters seem effectively to have been ignored by the defendant. Instead Mr Thurston asks the Court to accept his entirely unverified one line assertion that the assets of the defendant represent the Braxmere Fishing Lodge at $3.25 million and the hotel at $1.8 million. Further, and in any event, Mr Thurston then goes on in his 7 October 2010 letter to address ongoing cash flow issues and he contends that the interest bills on the loan from South Canterbury Finance and from Midlands Mortgages total $149,658.00 p.a. It seems these are presently met only by lease rental of the Braxmere Fishing Lodge totalling $60,000.00. No evidence is provided as to where the growing shortfall in mortgage payments is addressed. Instead, Mr Thurston contends that Aotearoa Resorts Limited are currently in negotiation in relation to the hotel and "it is expected the hotel be leased". He then claims withoutany verification whatever that the lease on the hotel will provide rental of $114,000.00 p.a. [32] Mr Thurston purports to complete a calculation in his letter which deducts the total interest bill of $149,658.00 mentioned at para [31] above from total rental income of $174,000.00 to leave a "total surplus" of $24,342.00. This, however, does not address the outstanding debs owing by the defendant to other creditors nor the substantial debt to the plaintiff here. Nor does it deal in any way first, with other expenses or outgoings of the defendant such as accountancy fees, legal fees, salaries (if any), and other holding expenses for the company, or secondly, with the fact that at this point, there is no lease of the hotel and the defendant's annual mortgage interest shortfall on Mr Thurston's own figures alone is nearly $90,000.00. [33] In addition, there is no evidence before the Court that even if a hotel lease can be negotiated it will achieve a net rental for the defendant company of $114,000.00 p.a. [34] Even on Mr Thurston's claimed future cash flow figures, in my view there is no independent evidence before the Court to show that there is likely to be any surplus of income over expenses to meet its outstanding debts. [35] As I understand his arguments, Mr Thurston's next claim was that the defendant was in the process of entirely changing its operation from one involving the running of a hotel and fishing lodge to one of simply being a property owning company achieving commercial rental income. He went on to suggest that if the defendant was placed into liquidation:It would be particularly cruel on Whitcombe Holdings Limited (the tenant of Braxmere Lodge) their staff and families and for this reason, it is imperative that the IRD allow 60 days for full repayment with employment opportunities in the Turangi area not compromised".[36] The lease with Whitcombe Holdings Limited appears to have been signed on 26 August 2010. It is for a period of 3 years it seems from 1 September 2010 although the lease does appear to provide specifically for early termination "on 24 weeks written notice from either parties to terminate or review this lease". With thatprovision, the lease is effectively able to be terminated by landlord or tenant on about 6 months notice. In entering into this lease with a 24 weeks notice termination clause, the tenant Whitcombe Holdings Limited would have been fully aware of its potential vulnerability, and in any event the 24 week notice provision operates in favour of both the defendant as landlord and Whitcombe Holdings Limited as tenant. And, if the defendant company is placed into liquidation, the lease, if a favourable one, may well continue in any event, at the option of the liquidator. For these reasons there is little in this argument advanced by Mr Thurston and I reject it. [37] Next, Mr Thurston appeared to argue before me that funds totalling about $500,000.00 which he maintains are to come to Water Enviro Services Limited under its Pipeline Agreement with Manawatu District Council, will be provided by way of advance to the defendant company to settle the debts owing to the plaintiff and other creditors. On this aspect, it goes without saying that first, these funds, if they may eventuate will belong to Water Enviro Services Limited and if made available to the defendant will simply provide replacement indebtedness and not improve the defendant's ultimate net position. [38] Secondly, the evidence before the Court from the plaintiff shows that a floating security exists over the assets of Water Enviro Services Limited and there is therefore no guarantee that any funds would be available in any event from the Pipeline Agreement to pass to the defendant. [39] In addition, the Pipeline Agreement, which was only entered into a little over a week ago, is conditional for a period of 12 weeks on a wide range of matters to be satisfied at the behest of the Manawatu District Council. [40] In my view, there is absolutely no assurance on the evidence before the Court that this Pipeline Agreement will unquestionably proceed and that, if it does, that funds will be available for the defendant. [41] Finally and importantly, as I have noted above, there is no independent verified evidence before the Court of what assets the defendant company may ownand their real present value. Mr Thurston's assertions regarding these aspects are not supported in any way by independent evidence and cannot sway the Court here. [42] In the present case, the defendant does not dispute there is a substantial and long outstanding taxation debt owing to the plaintiff. This is not a case where the Court is called upon to decide whether there is a genuine dispute as to a debt so that it might be an abuse of process to order that the company be wound up. [43] For the reasons outlined above, I am quite satisfied that the jurisdiction for the making of an order placing the defendant company into liquidation is present in this case. In reality there was no suggestion from the defendant otherwise. All that was put forward on the defendant's behalf was that further time should be allowed to see if finance can be arranged to pay the plaintiff's debt. That debt has been long outstanding. The defendant, and Mr Thurston in particular who was served with the statutory demand on 30 June 2010, have been well aware for some considerable time that the plaintiff intended to take steps to place the company into liquidation. [44] A concern must arise if the defendant's continuing requests for further delay in meeting its obligations is entertained. Any delay in the disposal of an application for the appointment of a liquidator pursuant to the Court's powers under the Companies Act has potential prejudice to a range of parties. Liquidation commences on the day on which a liquidator is appointed by the operation of the Companies Act 1993 s 241(5). The avoidance provisions contained in s 292 Companies Act 1993 dealing with transactions having a prejudicial effect, s 293 dealing with voidable charges, s 297 dealing with transactions at an undervalue, s 298 dealing with transactions for inadequate or excessive consideration and s 310 dealing with mutual credits and set-off, have the trigger or start date for the period that can be reviewed as the date when a liquidator is appointed. [45] The Courts have long been concerned that liquidation proceedings are promptly disposed of. In the present case, the plaintiff is similarly anxious that this proceeding be dealt with without further delay. On Mr Thurston's own contentions for the defendant, there is at present a significant shortfall in the defendant company's ability to service its mortgage interest payments from the existing rentalit is receiving. And of concern must also be the fact that the South Canterbury Finance ($2.65 million) mortgage would seem to be overdue for repayment – it was due to be repaid on 30 June 2010 – see the 7 July 2010 letter from South Canterbury Finance noted at [13] above. [46] The effective defence advanced for the defendant is that further time should be made available to the defendant to see whether it is successful in obtaining advances of further funds from related parties to clear its overdue debts. I need to say that I have a real concern as to these suggested arrangements and in particular, whether there is a very real risk here that the defendant's position will worsen further in the future at the expense of its existing creditors.Conclusion[47] Under all the circumstances outlined above, I have no doubt that the appropriate course here is for an order to be made placing the defendant company into liquidation. It is clearly insolvent in that it is unable to pay its debts as they fall due, and it seems likely that it also fails to meet the balance sheet definition of solvency in that its liabilities are likely to exceed its assets. It is important in my view that the defendant company's affairs are placed into the hands of liquidators in order that such investigations as those liquidators consider may be appropriate are commenced without delay. [48] Consents to Act from Liquidators proposed by the plaintiff David Stuart Vance and Barry Phillip Jordan have been provided to the Court. [49] For all these reasons the application before me succeeds and the following orders are now made: (a) An order is made placing the defendant company Aotearoa Resorts Limited into liquidation. (b) David Stuart Vance and Barry Phillip Jordan are appointed liquidators.(c) Costs are awarded to the plaintiff on this application on a category 2B basis together with disbursements as fixed by the Registrar. (d) An order is made approving the liquidator's rates of remuneration in accordance with the affidavit of David Stuart Vance filed herein dated 29 September 2010 subject to s 284 Companies Act 1993. (e) A further order is made allowing the liquidators to exercise their powers individually pursuant to s 242 of the Companies Act 1993. (f) These orders are timed at 3.00 pm today, 8 October 2010.'Associate Judge D.I. Gendall'