COMMISSIONER OF INLAND REVENUE v OHIWA DEVELOPMENTS LIMITED [2014] NZHC 1726

COMMISSIONER OF INLAND REVENUE v OHIWA DEVELOPMENTS LIMITED [2014] NZHC 1726 [22 July 2014]IN THE HIGH COURT OF NEW ZEALANDTAURANGA REGISTRYCIV-2013-470-593[2014] NZHC 1726IN THE MATTER OF the Companies Act 1993BETWEEN COMMISSIONER OF INLANDREVENUEPlaintiffAND OHIWA DEVELOPMENTS LIMITEDDefendantHearing: 22 July 2014Appearances: P J Broczek for CommissionerG C McArthur for Ohiwa Developments LtdJudgment: 22 July 2014ORAL JUDGMENT OF ASSOCIATE JUDGE BELLSolicitors:Inland Revenue Department (P J Broczek), Hamilton, for PlaintiffJ K Hamilton, Tauranga, for DefendantCounsel:G C McArthur, Tauranga[1] This is one of the hearings of the Commissioner's application that OhiwaDevelopments Ltd be put into liquidation. The matter has been called a number of times. There have been a number of adjournments. When the matter was called on 29 May 2014, I granted an adjournment to 21 July 2014 with a warning that it was a final adjournment and if the matter was not sorted by then a liquidation order would be made.[2] Matters had not been resolved by 21 July 2014. There was, however, another development. I was advised that the company has gone into administration under Part 15A of the Companies Act 1993. The company has taken the position that the interests of creditors would be better served by it going into administration under Part 15A than by it going into liquidation under Part 16. I have to consider whether I should accept that submission.[3] The Commissioner of Inland Revenue is owed GST by Ohiwa Developments Ltd, a property development company. The GST became payable first in November 2012 and more GST became payable in May 2013. The Commissioner served a statutory demand on Ohiwa Developments Ltd on 25 September 2013. The amount demanded was $69,800. Today, Mr Broczek for the Commissioner says that with interest and penalties the amount owing is in the order of $100,000.[4] The company did not comply with the statutory demand. The Commissioner filed a liquidation application on 25 November 2013. The application was served on 11 December 2013. The date of service is significant. It is the start of the period within which steps may be taken by the company to avoid liquidation. The company has 10 working days in which to file a statement of defence.1 Within that time the shareholders can make an effective resolution to put the company into liquidation.2The company may also appoint an administrator under Part 15A.3 Ohiwa Developments Ltd took none of those steps.1 High Court Rules, r 31.17.2 Companies Act 1993, s 241AA(2).3 Companies Act 1993, s 239I(4).[5] The first call of the application was in February 2014. The company asked for time in which to carry out refinancing which would allow it to pay theCommissioner's debt. The matter was adjourned until 28 April for that to be done.[6] On 28 April 2014 the company asked for a further adjournment. Mr McArthur's submission outlined that the refinancing exercise was rather complex. That was because Ohiwa Developments Ltd had given a guarantee of obligations owed by other entities associated with Mr William Ferguson Taylor, the man behind Ohiwa. To allow the refinancing to occur it was necessary to release Ohiwa Developments Ltd from its obligations under the guarantee. A property of Mr Taylor in Selwyn Street, Tauranga, was security for a loan to the SBS Bank. New arrangements were required which would allow SBS to be repaid in part, with fresh finance to be arranged. Further time was sought to carry out what was thought to be a complex refinancing job. The prospect held out was that once that refinancing was carried out, the Commissioner would be paid. I granted the adjournment.[7] The matter was called again in May 2014. Although Ohiwa Developments had been freed from the guarantee, I was told there were new difficulties, apparently because the Bank of New Zealand, which had taken a mortgage as security, would not allow the Selwyn Street property to be used as security for any other creditor. The prospect was nevertheless held out that another way through the problems could be found. I adjourned the matter to 21 July but that was on the basis that it should be a final opportunity. I granted that adjournment against the opposition of the Commissioner but in the expectation that the company's indebtedness to the InlandRevenue could be addressed. I took the view that if a short adjournment would allow the company to rid itself of its debt to the Commissioner, that would be preferable to putting the company into liquidation.[8] When the matter was called on 21 July 2014, I was advised that the company had gone into administration. The company relied on this fact to seek leave to file a statement of defence. At that stage a statement of defence had been placed on the court file out of time, although the court had not granted leave under r 31.20 of the High Court Rules. There was, however, no evidence as to the appointment of theadministrator. I directed a hearing today. In that time, both parties have been able to provide evidence. Both counsel have prepared helpful submissions.[9] The Commissioner's evidence identifies two properties owned by Ohiwa Developments Ltd. The first is at 29B Harrisfield Drive, Hairini, Tauranga. It is said to have a rateable value of $90,000. It is described as a vacant residential lot. LINZ records show that it is subject to a registered mortgage in favour of J K Hamilton Trustee Company (2009) Ltd. That is a lawyer's trustee company which holds themortgage on trust for Edgecumbe Holdings Ltd, another Taylor entity. The mortgage is for $113,000.[10] The second property is at 21 Hayward Court, Te Puke. It is said to have a rateable value of $83,000 and is also a vacant residential property. It is subject to a registered mortgage in favour of the TSB Bank Ltd.[11] Mr Taylor, the director of Ohiwa Developments Ltd, has provided a lengthier affidavit. He identifies Ohiwa Developments Ltd's creditors. There are two creditors associated with Mr Taylor. The first is the Real Cool Partnership, which was owed $1,134,399, as recorded in the partnership's financial statements for theyear ending 31 March 2013. The second is the Taylor Family Trust which was owed $927,506 as at 31 March 2011. Apparently fresh financial statements for the Taylor Family Trust have not been prepared since.[12] Apart from those Taylor interests, there are external creditors – $15,000 owed to Dean Nettlingham, an engineer; $1,500 owed to consultants, Shrimpton Lipinski, and approximately $1,200 for rates.[13] Ohiwa Developments Ltd had carried on business in property development. It had sold all sections in its last development at Harrisfield Drive except the last one. The unsold property is said to have difficulties for development because of geotechnical issues. Mr Taylor says that these difficulties are surmountable.[14] Mr Taylor says that in addition to its property development business, Ohiwa Developments Ltd has a management role. It provides management services for theReal Cool Partnership, for which if receives remuneration currently said to be $10,000 per month. Ohiwa Developments Ltd is contracted to a company called Cold Storage Tauranga Ltd, which leases a coolstore at Mount Maunganui from the Real Cool Partnership. The owners of Cold Storage Tauranga Ltd are the partners of the Real Cool Partnership Ltd. They are the Taylor Family Trust and a trust established for charitable purposes.[15] The business of Cold Storage Tauranga Ltd suffered a downturn, particularly as a result of a major customer, Sanfords Ltd, cutting back on the stock held in the cold storage facility at Mount Maunganui.[16] The upshot is that Ohiwa Developments Ltd has two properties, both mortgaged to the hilt. The company owes significant debts – in the order of $2.2m, of which over 90 per cent is owed to entities associated with Mr Taylor.[17] Against that background, belatedly, Mr Taylor struck on the idea that administration would be a way for Ohiwa Developments Ltd to get out of its financial difficulties. His proposal is that the income from the management contract would provide a fund from which creditors can be paid off over time. That will lead to a better outcome for creditors than an immediate order for liquidation. Another possibility he sees is that the section at Harrisfield Drive could be sold after the geotechnical issues have been addressed and a house has been constructed.[18] Mr Taylor could not arrange for the company itself to appoint an administrator because the time allowed under s 239I had expired. Mr Taylor noted that a secured creditor could place the company into administration.4 There is, however, a qualification to that. The secured creditor must have a charge over thewhole of the company's assets, or substantially the whole.5 The problem for Mr Taylor was that there were two mortgagees holding security over sections of roughly equal value. Mr Taylor addressed that by arranging an agreement under which Ohiwa Developments Ltd sold the Te Puke property to his family trust. That4 Companies Act, s 239K.5 Section 239K(1).agreement was entered into on 14 July 2014 - before the appointment of the administrator.[19] Ohiwa submits that following that sale it no longer has an interest in the Te Puke property. Its sole asset is the Harrisfield Drive property at Hairini and there is only one mortgagee of that property, Edgecumbe Holdings Ltd.[20] For the Commissioner, Mr Broczek submits that there is no evidence that the mortgagee of the Te Puke property, the TSB bank, had consented to the transfer. As a result, in his submission, there is another significant asset over which Edgecumbe Holdings Ltd, as secured creditor, does not have a charge. For this decision, I accept that by entering into an unconditional agreement to transfer the Te Puke property to the Taylor family trust, albeit subject to the mortgage in favour of the TSB bank, Ohiwa Developments Ltd has effectively disposed of the property so that it cannot be counted as one of its assets for the purpose of s 239K(1) of the Companies Act. Although it remained registered proprietor pending completion of the sale, it held the property on trust for its purchaser.6[21] The administrator was appointed on 17 July 2014. Edgecumbe Holdings Ltd, as secured creditor, made the appointment. The administrator is Mr Kenneth Brown. He is a Tauranga insolvency practitioner. There is no suggestion that he would not be an appropriate person to be appointed an administrator of Ohiwa Developments Ltd. Mr Taylor deposes that he has had no prior dealings with Mr Brown. I accept that Mr Brown is competent and independent.[22] The position now is that the liquidation application has been pending since 2013. There is a late proposal that instead of the company being put into liquidation it should address its insolvency problems through administration.[23] It is appropriate to outline how the provisions of the Companies Act bear on that matter. Section 239A states the purpose of administration:6 D W McMorland Sale of Land (3rd ed, Cathcart Trust, Auckland, 2011) at [10.05]-[10.06].The objects of this Part are to provide for the business, property, and affairs of an insolvent company, or a company that may in the future become insolvent, to be administered in a way that—(a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or(b) if it is not possible for the company or its business to continue in existence, results in a better return for the company's creditors and shareholders than would result from an immediate liquidation of the company.[24] Liquidation and administration are alternatives for addressing a company'sinsolvency. A company in liquidation can go into administration, but if it does so the liquidation is suspended.7 Similarly, if the company is in administration the court can make an order that the company go into liquidation.8 Similarly, creditors at a watershed meeting can resolve that the company go into liquidation.9 The liquidation ends the administration.10 The two cannot run together.[25] Section 239ABE provides that a proceeding against a company must not be begun or continued when a company is in administration, except with theadministrator's written consent or with the permission of the court. Mr McArthuraccepts that that does not stand in the way of a liquidation application under subpart 11 of Part 15A of the Companies Act. That subpart deals with the interface between administration and liquidation.[26] Section 239ABV provides:The court may adjourn an application under section 241(2)(c) for the appointment of a liquidator of a company in administration if the court issatisfied that it is in the interests of the company's creditors for the companyto continue in administration rather than be placed in liquidation.Both sides accept that that is the key provision which I must consider.7 Companies Act, s 239AC.8 Section 239ABU(a).9 Section 239ABU(b).10 Section 239ABX.[27] Counsel referred to relevant cases under the Australian provisions equivalent to s 239ABV. In Deputy Commissioner of Taxation v Choice Design Homes Pty Ltd, Young J said that the questions for the Court are:11(1) Is the company insolvent? (2) Is the company salvageable? (3) Is the proposed salvation in the interests of creditors? and (4) Is the proposed salvation in the public interest?[28] In Lubavitch Mazal v Yeshiva Properties No 1, Austin J said that three advantages of liquidations that may be of importance are these:12(1) in a liquidation the claims of creditors are treated equally and rateably;(2) liquidation is a better environment than voluntary administration for the pursuit of recoveries on behalf of the companies; and(3) in a situation where creditors are in dispute, it is preferable for that dispute to be worked through in a liquidation.[29] The Commissioner also referred to Deputy Commissioner of Taxation: Re First Netcom Pty Ltd and Creevey v Deputy Commissioner of Taxation13 for the submission that mere optimistic speculation is not enough, there must be a proper basis for reaching a conclusion that creditors would be better off under administration. The First Netcom decision is also authority for the proposition that it would generally be easier to obtain an adjournment before the watershed meeting when creditors would have the opportunity to make the decision themselves.[30] I now consider how to exercise the discretion under s 239ABV. In deciding that, if I find in favour of the company I will also grant the company leave under r 31.20 to file a statement of defence out of time. I regard the question of filing a statement of defence as secondary, the primary issue being whether an adjournment should be granted to allow the administration to proceed.[31] The creditors are in two groups: those associated with Mr Taylor and the external creditors. It is important to make that distinction in considering how an administration might proceed. The fact that creditors are divided between those with11 Deputy Commissioner of Taxation v Choice Design Homes Pty Ltd [1999] NSWSC 589 at [6].12 Lubavitch Mazal v Yeshiva Properties No 1 [2003] NSWSC 535 at [121].13 Deputy Commissioner of Taxation: Re First Netcom Pty Ltd [2000] NSWSC 1045, (2001) 19 ACLC 324 and Creevey v Deputy Commissioner of Taxation (1996) 19 ACSR 456 (QCA).interests related to the shareholders and external creditors has been considered to be a relevant factor in Australia.14[32] The administrator will be required to call a first meeting of creditors15 and a watershed meeting.16 The purpose of the watershed meeting will be to consider how the administration of the company should continue. A successful watershed meeting will result in the company and creditors entering into a deed of company arrangement. All creditors will rank equally in a watershed meeting. That means that the Taylor interests will be able to dominate the meeting.[33] It is because they will be able to dominate the meeting that I do not consider it necessary to wait for the watershed meeting to see what creditors might decide. I should be able to take a view now, because matters are not going to change once a watershed meeting takes place. If the administration is to continue, Mr Taylor will be able to dictate the terms of any deed of company arrangement because his interests will prevail over other creditors.[34] I assess the Taylor interests separately from the external creditors. If the company is put into liquidation the management arrangement with Cold Storage Tauranga Ltd would come to an end. Despite this, that arrangement, apparently an informal one, will mean that some other Taylor entity can be put in place to provide the required management services. The fact that Ohiwa has been inserted as the management entity seems to have served a commercial purpose. As a property developer it has been provided with some cash flow. There may be tax advantages, because there are losses that can be set off against earnings. But, even allowing for that, I see little disadvantage to the Taylor interests. They will be able to insert some other entity which will derive income from management of the Cold Storage company.[35] The question is, instead, whether there is any benefit for external creditors in this arrangement. Amongst the external creditors, the Commissioner dominates. The others are relatively small. Without meaning to belittle their status as creditors,14 Travel World Travel Service Pty Ltd v Rose Grisbrook Pty Ltd (1996) 792 FCA 1.15 Companies Act, s 239AN.16 Section 239AT.they are rats and mice creditors. The Commissioner has taken a commercial decision that she will not wait for payment. She is impatient with proposals to be paid off over time. She would rather have finality, notwithstanding the prospect of some payment in the future. On this, Mr Broczek emphasises the point in the First Netcomcase that mere optimistic speculation is not enough.[36] For present purposes I will assume that something more concrete may be put into place. Mr McArthur held out the prospect that with increased use of the Cold Storage facility at Mount Maunganui, income could even improve. Even allowing for that, the external creditors are relatively small against the Taylor interests. Time for payment would be protracted. If the major creditor amongst the external creditors decides that she is not prepared to wait any longer and would rather have finality now, that is a commercial decision which that creditor is entitled to take. It is not for this court to override that decision.[37] The position I have come to is that I ought to give more weight to the external creditors than to the Taylor interests. That is because the Taylor interests would be relatively indifferent to whether the company goes into liquidation or into administration. If money does not flow into Ohiwa from the management arrangements, that money can be diverted to other Taylor interests. Knowing that, the external creditors still press for liquidation. I should accede to that. The point I have reached is that there can be little benefit in adjourning this matter to await the outcome of a watershed meeting because the result would not change.[38] I am of the view that the matter should not be put off longer. The company has been given plenty of opportunity in which to try to reach arrangements with its creditors. The proposal for administration is very much a late play. It is not a proposal which has found favour with the major external creditor. In these circumstances I decline the application for an adjournment under s 239ABV.[39] I make an order for liquidation. The time of the order is 4:48pm.[40] Mr Broczek has provided a certificate showing that the company's debt nowstands at $100,002.99. I appoint Mr Blanchett and Mr McCloy liquidators of OhiwaDevelopments Ltd. I approve their rates of remuneration on the normal terms. I award the Commissioner costs in the sum of $5,174.00 and, in addition, the costs for a half-day hearing on 22 July 2014. I approve disbursements of $1,140.41.Addendum[41] After I gave my decision, Mr McArthur said that he wanted to preserve the right to appeal against my decision. He asked for a stay immediately under r 12 of the Court of Appeal (Civil) Rules. The right to appeal against a decision of this court is important. If possible, the court should be careful not to stifle a right of appeal. In the case of liquidation orders, there are complications. Once the company goes into liquidation, any right of appeal of the company can be exercised only by the liquidators. Under s 248 of the Companies Act, on liquidation directors lose most of their powers including the power to bring proceedings on behalf of the company. In my experience, it is rare for liquidators to appeal against orders under which they are appointed. I regard the possibility that the liquidators might appeal against my order as speculative and not to be taken seriously.[42] The way around this is to appoint another person to the proceeding who may bring the appeal. The appropriate person to instal as a party to the proceeding is Mr Taylor. He is a director of the company. The liquidation order has affected him in his capacity as director because it has cut down his powers as a director.[43] Mr McArthur needs time to take instructions from Mr Taylor about this. I allow Mr Taylor to be joined as a defendant to this proceeding so as to allow him to appeal against the liquidation order. Mr Taylor will be joined as a party within the next 10 working days when he files in court a document recording that he consents to be so joined.[44] I also direct that the liquidation order is not to be sealed for a further10 working days. That is to provide Mr Taylor time in which to consider whether there should be an appeal against the liquidation order. That is also to set some time before the liquidators enter upon their duties. After the 10 working days, it will need to be established whether there should be some kind of stay pending the appeal.The 10 working days give Mr Taylor and his lawyers time to consider whether to apply for interim relief.[45] I reserve leave generally to apply for any consequential directions. If there is to be an appeal and relief pending appeal is sought, arrangements should be made for a prompt hearing of any application. In particular, as I will not be available, counsel should be prepared to attend a hearing in some centre other than Tauranga, such as Rotorua, Hamilton or Auckland.Associate Judge Bell