THE COMMISSIONER OF INLAND REVENUE V BLACKMORE TRUST LIMITED HC WN CIV-2010-485-2001

THE COMMISSIONER OF INLAND REVENUE V BLACKMORE TRUST LIMITED HC WN CIV-2010-485- 2001 19 July 2011IN THE HIGH COURT OF NEW ZEALANDWELLINGTON REGISTRYCIV-2010-485-2001IN THE MATTER OF the Companies Act 1993BETWEEN THE COMMISSIONER OF INLANDREVENUEPlaintiffAND BLACKMORE TRUST LIMITEDDefendantHearing: 19 July 2011(Heard at Wellington)Counsel: A.J. York - Counsel for PlaintiffS. Kellett - Counsel for DefendantJudgment: 19 July 2011 at 4:30 PMJUDGMENT OF ASSOCIATE JUDGE D.I. GENDALLThis judgment was delivered by Associate Judge Gendall on 19 July 2011 at 4.30 pm under r 11.5 of the High Court Rules.Solicitors: Inland Revenue Department, PO Box 1462, WellingtonIzard Weston, Solicitors, PO Box 5348, WellingtonIntroduction[1] Before the Court is an application to place the defendant company into liquidation. The application relates to an undisputed debt owing to the plaintiff for GST, PAYE, KiwiSaver Employer deductions and Student Loan Employee deductions (plus interest and costs) amounting now to a total sum of $1,404,418.91.[2] The present proceeding is based upon a statutory demand which was served upon the defendant company over ten months ago on 9 September 2010. That statutory demand claimed the sum of $1,103,765.16 for outstanding taxation interest and penalties owing at that time.[3] The defendant company did not respond to that statutory demand.[4] The present proceeding was then filed by the plaintiff on 13 October 2010 and served upon the defendant company on 18 October 2010.[5] Advertising of the present liquidation application took place in the Dominion Post newspaper on 8 June 2011 and in the New Zealand Gazette on 9 June 2011.[6] The defendant company is the owner and proprietor of a commercial building in Central Wellington known as the James Smith building. This building is partially tenanted and has substantial mortgages as I understand it to ANZ Bank, St Lawrence (in receivership) and FM Custodians as trustee of First Mortgage Trust.[7] As I understand the position, the defendant also has contingent creditors outstanding with Westpac Bank (under a guarantee) and a secured creditor GE Finance involving vehicle finance. Unsecured creditors I am told represent the Commissioner of Inland Revenue for something over $1.4 million now and other unsecured creditors for professional services of about $120,000.00.[8] No statement of defence or Notice of Opposition to the present liquidation application have been filed by the defendant company.[9] Instead, the following material has been filed in this Court on behalf of the defendant:(a) On 21 June 2011 a Memorandum from counsel for the defendant which sought, at that stage, a one month adjournment of this matter toallow the defendant to put in place a "rescue package";(b) On 18 July 2011 an affidavit from Mr David John Blackmore (Mr Blackmore) a director of the defendant, effectively requesting a further adjournment of this matter for another period (of 8 weeks) from that date; and(c) On 19 July 2011 a further affidavit from Mr Blackmore dated 19 July 2011 again setting out certain information and requesting a further adjournment for some two months.[10] In all the material placed before the Court by the defendant company, including the two affidavits of Mr Blackmore, however, there are no verified details of the financial or asset and liability position of the company. At the hearing before me, Mr Kellett, counsel for the defendant company (after consultation with Mr Blackmore who was present at the hearing) confirmed the sole asset of the defendant company was the James Smith building property and he claimed it had an October 2010 Colliers valuation of $21.5 million on the basis that it was valued as a "going concern". The valuation, however, he said contained a rider that the valuation itselfwould be reduced to something between $11 million and $13 million for a "fire sale" of the property.[11] So far as liabilities of the defendant company were concerned, Mr Kellett confirmed today after discussion with Mr Blackmore that these liabilities totalled $15.6 million (which included the $120,000.00 for unsecured creditors for work carried out on the building but still unpaid). I am unclear, however, as to whether the $1.4 million debt outstanding to the plaintiff Commissioner of Inland Revenue was also included in this total $15.6 million liability figure.[12] What is clear to me, however, is that none of these figures were in any way verified nor was there any evidence placed before the Court as to the true financial position of the defendant company. They were provided orally in submissions by Mr Kellett, and only after a specific request from the Court for this information.[13] The thrust of the defendant company's approach before me instead was simply to request a further adjournment of this matter for a further eight weeks to enable it first, to hopefully conclude leases of certain unlet areas of the James Smith building, secondly, to obtain an indicative offer of finance from a leading bank and thirdly, to thus satisfy the requirements of a "rescue package" financier who MrBlackmore had mentioned in his affidavits it is hoped would provide third partylending to clear the plaintiff's current debt.[14] On all of this, Ms York for the plaintiff argued that the plaintiff had no faithwhatsoever in the ability of the defendant company to conclude the "rescue package"which it had floated. The plaintiff, she said, took the strong view that in the circumstances here, to uphold the integrity of the taxation system, given that the defendant company had not even kept up with its current taxation obligations to date, a prompt liquidation was required. Ms York contended that there was nothing new in the two recent affidavits provided by Mr Blackmore which would persuade the plaintiff to allow yet another adjournment of this matter, a matter which has a long history.[15] On these aspects, counsel noted that a Settlement Agreement which seems to have been reached between the parties in February 2010, had provided for a substantial remission of the taxation interest and penalties amount due from the defendant company down to a total sum I understand of $500,000.00. Of this sum, $150,000.00 was to be paid at the time with the balance paid at the rate of $5,000.00 per month. Despite this Settlement Agreement reached after these proceedings were issued, it is clear that the defendant company failed to make any payments under the settlement, and the plaintiff Commissioner indicates that it had no choice but to cancel this agreement for non-performance which it has done.[16] On this, Mr Kellett for the defendant company contended that the company'sfailure to comply with the Settlement Agreement was caused by difficulties it encountered with its third mortgagee and completion of security arrangements to make the required payments. There is no independent verification before the Court of this aspect, however, and I need to say, at this point, that it must be presumed that the defendant company, before entering into the Settlement Agreement, would have made every endeavour to make back-up arrangements to find the $150,000.00upfront payment at least, given the fact that this arrangement could only be considered as a highly attractive one from the defendant's perspective. I say this,given that over half the taxation debt was being remitted and time payment terms were agreed.[17] Turning now to the substantive legal position, s 241(4)(a) allows the Court toplace a company into liquidation if "the company is unable to pay its debts". Section287(a) contains a rebuttable presumption that a company is unable to pay its debts if it has failed to comply with a statutory demand. That is clearly the case in the present proceeding before me.[18] Notwithstanding this, s 241 Companies Act 1993 gives the Court a discretion to appoint a liquidator notwithstanding that the prerequisites for liquidation are satisfied.[19] In addressing the Court's decision to refuse an order for liquidation under s 241 Companies Act 1993, it is clear from the authorities that this jurisdiction is to be exercised sparingly. As Brookers Company and Securities Law at CA 241.04 notes: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 a 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 entitledto 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 affairsand as acting as a guardian of the interests of the unsecured creditors:[20] In the present proceedings there is no dispute as to the debt outstanding. It is substantial and has been outstanding for quite some time. The jurisdiction for the making of an order to place the defendant company into liquidation is established Mr Kellett for the defendant did not suggest otherwise.[21] Instead, from the submissions of Mr Kellett on behalf of the defendant it is clear that what is suggested on its behalf is that it should be allowed further time toput in place what is described as the "rescue package" to eventually clear the plaintiff's debt.[22] Any further adjournment of this matter is strongly opposed by the plaintiff however.[23] A long history of adjournments has occurred in these proceedings. This is the seventh or eighth call of this matter. There can be little doubt here that this proceeding has had adjournments beyond what is usual for liquidation cases.[24] In the past the Courts have often expressed the view that it is not appropriate for lengthy adjournments of liquidation and insolvency proceedings to occur because of the prejudicial affect on creditors. A liquidation commences on the day on which the liquidator is appointed by the operation of s 241(5) Companies Act 1993. The avoidance provisions contained in that Act (Section 292 dealing with insolvent transactions having a prejudicial effect, s 293 relating to voidable charges, s 297 relating to transactions at an undervalue, s 298 relating to transactions for inadequate or excessive consideration and s 310 dealing with mutual credits and set-off) have a trigger or start date for the period that can be reviewed being the date when a liquidator is appointed. It is clear, therefore, that any delay in the disposal of an application for the appointment of a liquidator under s 241 Companies Act 1993 haspotential prejudice to a liquidator's ability to make a recovery in appropriate cases.[25] In the present case, it is undisputed that the defendant company continues to trade and no doubt is incurring additional debt. Before me, Mr Kellett for the defendant confirmed that the company continues to have three employees and to trade in the sense that all rental revenue from leases of those parts of the James Smith building which are tenanted (after deduction of expenses) is banked into a"locked box" account with the ANZ Bank as first mortgagee. Up to now, as Iunderstand it, this has included amounts for PAYE and other taxation due from the defendant on a continuing basis.[26] Today, 19 July 2011, Mr Kellett for the defendant did offer to the plaintiff a bank cheque for approximately $5,000.00 to meet outstanding current PAYE due from the company I understand for the months of May and June 2011. This was rejected by the plaintiff however. Unpaid PAYE dates back to 2008 and GST to 2007.[27] Of concern also to the Court, must be the fact that the defendant company continues to trade at present and no doubt is building up further debts which can only have a prejudicial impact upon existing creditors. On this aspect, Mr Kellett before me endeavoured to suggest that some arrangement could be reached whereby the ANZ Bank would agree to ongoing future PAYE payments to the plaintiff comingfrom the "locked box" account but this of course did not address other questions of accruing taxation and other unsecured debts incurred by the defendant.[28] Turning now to consider the defendant company's financial position, as Ihave noted above, there is no verified evidence before me as to this aspect. MrKellett's submission was that the company's sole asset being the James Smith building had a "going concern" valuation of $21.5 million with liabilities totalling$15.6 million. This valuation, however, was not before the Court. In any event, Mr Kellett, to his credit, did acknowledge that the Colliers valuation showed a "fire sale" valuation for the building of between $11 million and $13 million. Given theposition in which the defendant company finds itself at present, it is difficult to escape the conclusion that the present value of the building (on the basis of the present circumstances and given that a significant part of the building appears to be vacant) a present value of the building in the $11-13 million vicinity is likely to be reasonably accurate. This being the case then, with acknowledged liabilities (again unverified by any independent evidence) of some $15.6 million, the defendant company clearly has liabilities exceeding assets.[29] Of particular concern also in this case must be the substantial amounts outstanding for PAYE tax deductions and KiwiSaver deductions for the company dating as far back as 2008. These are effectively trust monies which were presumably wrongly applied by the company for its own purposes.[30] Given these aspects, and the fact that the defendant has had over ten months since the statutory demand from the plaintiff was served upon it to make "rescue"arrangements (and leaving on one side the fact that it enjoyed the significant benefit of a substantial settlement arrangement reached with the plaintiff in February 2011 on which it repeatedly defaulted) in my view the only conclusion which can be reached is that the company is insolvent, is really facing a hopeless position and should be placed into liquidation. There is no evidence before the Court to dispute inany real way the basis upon which the present application rests, namely that the defendant company is unable to pay its debts. And, as I have noted above there is certainly no evidence before me and particularly from any independent verifiedsource as to the defendant company's financial position. All this must of course leave the Court in a position of some concern as to the arrangements suggested to justify a further adjournment. Of concern here must also be the fact that there is no verified evidence of any kind before the Court outlining the financial position of the defendant and its ability to meet its current debts whilst continuing to trade.[31] Accordingly, for the above reasons, I conclude that a further adjournment of this long-standing matter is not justified and the interests of all parties are best served by my making an order placing the defendant into liquidation and appointing liquidators.[32] Orders are now made as follows:(a) An order is made placing the defendant company into liquidation.(b) John Howard Ross Fisk and Jeremy Michael Morley (who have filed a Consent to Act as Liquidators) are appointed liquidators.(c) Costs are awarded to the plaintiff on a 2B basis together with disbursements as fixed by the Registrar.(d) An order is made approving the liquidators' rates of remuneration inaccordance with the affidavit of Jeremy Michael Morley filed herein dated 11 February 2011 subject to s 284 of the 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 4.30 pm today, 19 July 2011.'Associate Judge D.I. Gendall'