COMMISSIONER OF INLAND REVENUE V F B DUVALL LIMITED HC AK CIV 2007-404-2708

COMMISSIONER OF INLAND REVENUE V F B DUVALL LIMITED HC AK CIV 2007-404-2708 13 November 2008IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV 2007-404-2708UNDER The Companies Act 1993 BETWEEN COMMISSIONER OF INLAND REVENUE Plaintiff AND F B DUVALL LIMITED Defendant Hearing: 1 October 2008 Appearances: Mr Wood for Plaintiff Mr S R G Judd for Defendant Judgment: 13 November 2008 at 2 p.m.JUDGMENT OF ASSOCIATE JUDGE DOOGUEThis judgment was delivered by me on13.11.08 at 2 pm, pursuant to Rule 540(4) of the High Court Rules. Registrar/Deputy Registrar DateSolicitors:Meredith Connell Solicitors, P O Box 2213, Auckland Mr S R G Judd, P O Box 3320, AucklandBackground[1] The plaintiff served a statutory demand on the defendant 9 March 2007 requiring payment of the sum of $29,295.07. [2] The background to the serving of the statutory demand is set out in an earlier judgment that I gave in these proceedings 18 February 2008. As my earlier judgment indicated, the liquidation proceedings that followed upon the non- compliance with the statutory demand are related to a wide-ranging and long- running dispute between the plaintiff and the defendant over certain tax avoidance devices that the defendant promoted. The efficacy of those devices was tested in a series of cases. The debt claimed is based upon an assessment of GST that the plaintiff made. That determination is unable to be challenged. [3] The effect of my judgment given in February of this year was to dismiss an application under Rule 700K of the High Court Rules seeking orders restraining publication of any advertisement and staying the liquidation proceedings that the plaintiff had brought against the company. As a result, the proceedings have continued and the defendant has filed a statement of defence to the plaintiff's claim for an order appointing liquidators. Essentially the defendant opposes the making of liquidation orders on two grounds. [4] The first ground is that Mr Russell, who is associated with the defendant company, has deposed in an affidavit of 13 August 2008 that he has obtained a bank cheque made out to the Ministry of Justice for the full amount of $30,076.23 claimed by the plaintiff in the statement of claim. Mr Russell deposed:I confirm that the defendant will hold this cheque pending the outcome of these proceedings. The defendant is able to pay the debt claimed by the plaintiff but has chosen not to do so because the plaintiff owes substantially more money to the defendant than the amount claimed by the plaintiff.[5] This statement discloses the two bases upon which the defendant opposes the making of an order. It says that it is holding the equivalent of cash sufficient to pay the debt which the plaintiff pleads is owed in the statement of claim. Second, the defendant has attempted to lay the ground for a submission that the Court should inany event not exercise the jurisdiction to appoint liquidators because while it may be indebted to the plaintiff, the plaintiff is potentially indebted in much greater sums to the defendant. [6] As to the first ground, the plaintiff does not dispute that the defendant is holding funds which are sufficient to pay the debt which is claimed to be owing in the statement of claim.Solvency[7] The defendant's case proceeded on the basis that it could succeed in having a statutory demand set aside by establishing solvency. Mr Wood did not contest that such a course was open to the defendant. Without necessarily endorsing the correctness of that approach, I shall proceed on the basis that if the applicant is able to rebut the inference of insolvency that arises from service of a statutory demand, then the statutory demand can be set aside. [8] The plaintiff's claim is based upon s 241(4)(a) which provides as follows:241 Commencement of liquidation (1) A company may be put into liquidation by the appointment as liquidator of a named person or of an Official Assignee for a named district. [(2) A liquidator may be appointed by— . (c) the Court, on the application of— .. (iv) a creditor (including any contingent or prospective creditor); or (4) The Court may appoint a liquidator if it is satisfied that— (a) The company is unable to pay its debts; or .[9] Section 241 is concerned with the debts of the defendant generally and not with any specific debt. [10] The concept of ability to pay debts is discussed in Brookers Insolvency Law & Practice at CA241.03, in which the following extract which correctly sets out the law:The "cash flow" test of solvency, based on the ability of a company to pay its debts, must be contrasted with the "balance sheet" test of solvency which is concerned with whether the value of a company's assets exceeds the value of its liabilities. In determining whether the liquidation of a company can be justified under s 241(4)(a), it is the cash flow test that counts. This point was addressed by Plowman J (at p 410; p 40) in Re Tweeds Garages Ltd [1962] Ch 406; [1962] 2 WLR 38: "In such [cases where a company is unable to meet the current demands on it] it is useless to say that if its assets are realised there will be ample to pay 20s in the pound: this is not the test. A company may be at the same time insolvent and wealthy. It may have wealth locked up in investments not presently realisable; but although this be so, yet if it have not assets available to meet its current liabilities it is commercially insolvent and may be wound up."[11] A creditor is able to invoke the assistance of s 287 in appropriate cases. That section, of course, provides as follows:287 Meaning of "inability to pay debts" Unless the contrary is proved, and subject to section 288 of this Act, a company is presumed to be unable to pay its debts if— (a) The company has failed to comply with a statutory demand; or ..[12] It is undisputed that the company failed to comply with a statutory demand in this case. That being so it is presumed 'unless the contrary is proved' to be unable to pay its debts. [13] It is, of course, open to the defendant to overcome the presumption. The means that it has adopted to do so in this case are as follows. Mr Russell deposed that the defendant has filed copies of its accounts with the plaintiff, that the last set of accounts that were supplied to the plaintiff showed total shareholders funds of'$5,224,434.00' as at 31 March 2006 and that the defendant had obtained a bank cheque which it would have necessarily used to pay the plaintiff's claim. [14] Dealing first with the cheque, in my view it does not prove solvency. In the context of the companies legislation, the solvency of the company is concerned with whether the company is able to pay its debts generally. The need to establish solvency is not discharged by showing that the defendant can pay one of its creditors. [15] Nor is the other information that I have referred to adequate to overcome the presumption of insolvency that arises from the unsatisfied s 289 statutory demand. Bald assertions by the company's officers that the company can pay its debts are not sufficient. This has been commented on routinely by Judges of this Court. The issue is one for the Court to decide and the opinions of company officers are not probative of the issue. [16] Frequently, companies establish solvency by adducing current financial statements for the company and providing such additional sworn commentary on those accounts as may be necessary to give the full picture. This type of evidence is always helpful. But it is not sufficient for a defendant to selectively quote from a set of accounts in the way that Mr Russell has. I accept his deposition that the company's accounts show that shareholders' funds of $5,000,000 or more but whether or not the accounts give a fair and accurate view of the company's financial position is another question. The shareholders' funds may include assets in the form of debts owed by other parties, which are unlikely to be recovered or concerning which there is a question mark. It is impossible for the Court to tell because the defendant has chosen not to provide it with the information that would enable it to make a judgment on the issue. [17] Before I leave this aspect of the case, I observe that it is frequently a matter of surprise to the Court that a company in the position of the defendant, which is required to prove solvency, advances sketchy material which is inadequate to the task.[18] In summary, I do not accept that the defendant has overcome the presumption established by s 287 of the Companies Act 1993.Discretion not to appoint liquidators[19] The next issue is raised by Mr Judd's submission that the Court has discretion to decline to make an order appointing liquidators, even if the company is insolvent. Mr Judd's submissions were essentially that, because of the complicated and extensive unresolved issues between the defendant and the plaintiff regarding GST, it is fairly arguable for the defendant that the Commissioner owes it a very large amount of GST – up to $300,000 as Mr Judd submitted to me. He said that if this was correct then a miscarriage of justice would result if the Court ordered the liquidation of the defendant because of a debt of only $30,000. [20] I am not going to try to disentangle the complicated arguments each way on this matter that the parties put to me at the hearing. That is for the following reason. Even if the Commissioner ought to carry out an all-embracing assessment of the GST position of the defendant and even assuming that having done so it would be found that there was a balance owing of some $300,000 for GST to the defendant, that does not assist the defendant in these proceedings. The fact is that no such assessment has been carried out. Mr Judd says that the defendant now accepts that it will have to take judicial review proceedings against the Commissioner to force the Commissioner to carry out assessments. [21] For the Commissioner, Mr Wood drew my attention to Rules 146(1) and (2) of the High Court Rules. He made this submission:4.3. In these circumstances Rule 146(1) and (2) of the High Court Rules creates an absolute prohibition against the defendant attempting to counterclaim or establish a set-off against the debt claimed. Rule 146(1) and (2) provide: "(1) In any proceeding by the Crown for the recovery of taxes, duties, or penalties, no defendant shall be entitled to avail himself of any set-off or counterclaim; (2) In any proceeding of any other nature by the Crown, no defendant shall be entitled to avail himself of any set-off or counterclaim arising out of a right or claim to payment in respect of any taxes, duties, or penalties."[22] What the defendant is attempting to do in this case is squarely caught by r 146(2). [23] To return to the point of the exercise of the Court's discretion, I am of the view that the Court would not be justified in exercising its discretion in the way that Mr Judd has suggested it should. To do so would be to subvert the objective of Rule 146. Whatever the extent of the discretion to decline to make an order appointing liquidators, it would seem to me not to extend as far as outflanking the express prohibition contained in the High Court Rules to which I have made reference. [24] To summarise therefore, the company is insolvent in the sense that it is unable to pay its debts and there is no discretionary reason why I should not make an order for the appointment of liquidators. [25] However Mr Judd submitted that in the event that I came to such a conclusion the company should be given an opportunity to make the payment sought before the Court proceeded to making an order for appointment of liquidators. He referred me to the decision of Associate Judge Faire in CIR v Ron West Motors (Otahuhu) Ltd (2008) 23 NZTC 21,835 where the Judge, faced with a similar issue, at paragraph [37]directed as follows:Accordingly, to avoid the making of an order placing the company into liquidation and appointing a liquidator there must be paid the sum of $59,978.69. It would, of course, be sensible if Counsel could agree on the question of costs although I indicate in this judgment that the outstanding costs issue would not justify my appointing a liquidator if they had not been paid. The defendant must realise that at the adjournment hearing, if the sum of $59,978.69 has not been paid and Counsel for the plaintiff certify that fact to me, an order will be made placing the defendant company into liquidation and appointing David Stewart Vance and Henry David Levin as liquidators.[26] Mr Wood did not disagree that such an approach would be appropriate in the circumstances of this case. I therefore adjourn this proceeding until my next liquidation list on 5 December 2008 at 10.45 a.m. for further mention. _____________ J.P. Doogue Associate Judge