COMMISSIONER OF INLAND REVENUE v PROPELLOR PROPERTY SERVICES LTD [2022] NZHC 2856

COMMISSIONER OF INLAND REVENUE v PROPELLOR PROPERTY SERVICES LTD [2022] NZHC 2856[2 November 2022]IN THE HIGH COURT OF NEW ZEALANDCHRISTCHURCH REGISTRYI TE KŌTI MATUA O AOTEAROAŌTAUTAHI ROHECIV-2022-409-000209[2022] NZHC 2856BETWEEN THE COMMISSIONER OF INLANDREVENUEPlaintiffAND PROPELLOR PROPERTY SERVICESLIMITEDDefendantsCIV-2022-409-000207BETWEEN THE COMMISSIONER OF INLANDREVENUEPlaintiffAND METROPOLIS DESIGN LIMITEDDefendantHearing: 31 October 2022Counsel: G McGillivray for PlaintiffJ Watson for DefendantsJudgment: 2 November 2022JUDGMENT OF ASSOCIATE JUDGE PAULSENThis judgment was delivered by me on 2 November 2022 at 2.30 pmpursuant to Rule 11.5 of the High Court RulesRegistrar/Deputy RegistrarDate:[1] There are before the Court applications by the Commissioner of InlandRevenue to put Propellor Property Services Ltd and Metropolis Design Ltd intoliquidation. This judgment concerns applications by the companies for adjournmentof the applications which is opposed by the Commissioner.[2] Propellor Property Services Ltd and Metropolis Design Ltd are relatedcompanies.[3] These proceedings were commenced on 19 May 2022. The orders putting thecompanies into liquidation are sought under s 241(4)(a) of the Companies Act 1993on the basis the companies are unable to pay their debts, both having failed to complywith statutory demands served upon them by the Commissioner in respect of unpaidtaxes.[4] The companies have not filed statements of defence. They do not dispute theyare indebted to the Commissioner for unpaid taxes. As a result of the companieshaving recently complied with their obligation to file returns, the amounts owing tothe Commissioner are $363,941.52 in the case of Propellor Property Services Ltd, and$179,183.06 in the case of Metropolis Design Ltd.[5] There is no dispute that the Commissioner has made out the statutory groundsfor the making of orders for liquidation.[6] The Commissioner's applications first came before the Court on 15 September2022. Although the companies had not filed any papers in opposition, counselappeared for the companies and applied for adjournments to allow for settlement oftheir liabilities to the Commissioner.[7] Associate Judge Lester granted adjournments to 27 October 2022 on thefollowing basis:(a) the companies were to file all outstanding tax returns;(b) an amount of $180,000, held in the trust account of Davidson Legal,would be paid to the Commissioner in part satisfaction of the debts; and(c) a property at 370 Papanui Road, Christchurch was being sold at auctionon 6 October 2022 and before the next call a solicitor's undertakingwould be provided to pay the debts owing to the Commissioner uponsettlement of the sale.[8] When the applications came before me on 27 October 2022, I was advised thatthe companies had filed their outstanding tax returns, but the other conditions uponwhich Associate Judge Lester had granted the adjournments had not been met. Thiswas because the Papanui Road property did not sell at auction but continued to bemarketed for sale, and there is a dispute concerning the money held in the trust accountof Davidson Legal which prevents its disbursement. The companies' counsel soughta further adjournment of at least two months to work through these issues.[9] The Commissioner opposed any further adjournments and sought immediateorders for liquidation.[10] I was not prepared to either make liquidation orders or to grant a lengthyadjournment in the absence of evidence as to the companies' financial circumstances.I adjourned the applications until 1 November 2022 to allow the companies to fileaffidavit evidence setting those out.[11] An affidavit of Nicolette Louise Connors has been filed on behalf of thecompanies. She describes herself as the principal of the companies and sets out theirproposals to pay the Commissioner and attaches copies of the companies' financialaccounts to 31 March 2022.The adjournment application[12] At the hearing on 1 November 2022, Mr Watson referred to the content ofMs Connors' affidavit and again applied for an adjournment of the applications to atleast 23 December 2022. The adjournments are sought on the bases the companies aresolvent, are taking reasonable steps to pay the Commissioner and there is a realisticprospect that given sufficient time, payment in full will be made.[13] Ms McGillivray advised that the Commissioner's position remainsunchanged and orders for liquidation are sought.Relevant principles[14] The starting point is that the Commissioner has satisfied the statutoryrequirements for obtaining orders for liquidation and is prima facie entitled to theorders sought. As noted in Brookers Insolvency Law and Practice:1Normally, if the relevant statutory requirements have been met, the personmaking the application is entitled to his or her order for the company'sliquidation; "the insolvency policy of the companies legislation is clear: (1)insolvency results in winding up; and (2) insolvency is proved by inability toestablish a substantial dispute over the debt or by way of cross claim";(Baragwanath J in Commissioner of Inland Revenue v Chester TrusteeServices Ltd [2003] 1 NZLR 395 (CA) as quoted (with approval) by the Courtof Appeal in Commissioner of Inland Revenue v Newmarket Trustees Ltd[2012] NZCA 351, [2012] 3 NZLR 207).[15] The Court will be reluctant to grant adjournments of liquidation proceedingswhere there is no doubt as to a defendant company's inability to pay its debts. It isnot, however, unusual for short adjournments to be granted where time is required toenable a proposal to be investigated for the payment of a company's creditors.[16] Here, the companies have each already been granted one adjournment onconditions which they did not satisfy. The question for me is whether, in the exerciseof my discretion, further adjournments should be granted. In making that assessmentI must determine what the interests of justice require in all the circumstances, takinginto account the interests of the companies, the Commissioner and other creditors,along with any public policy considerations that may be engaged.[17] I am not prepared to grant the companies a further adjournment for thefollowing reasons:(a) the companies' proposal to pay the Commissioner is unsatisfactory, inthat it does not provide sufficient assurance of payment of the debts and1 Brookers Insolvency Law & Practice (looseleaf ed, Thomson Reuters) at [CA241.04].would not provide payment to the Commissioner within a reasonabletimeframe in any event;(b) the companies are unable to pay their debts and are insolvent; and(c) there are public policy considerations that weigh in favour of makingorders for liquidation now.The companies' proposal[18] The companies have had since at least May 2022, when these proceedings werecommenced, to make satisfactory arrangements with the Commissioner. Not onlyhave they not made such arrangements, but it was only since the last hearing that theyfiled up to date tax returns.[19] The companies wish to continue to trade but it is not suggested that they willbe able to settle their debts from their trading activities. In large measure, theirintention is that payment will be made from the proceeds of sale of assets of thirdparties, and specifically from:(a) funds held in the trust account of Davidson Legal;(b) the sale of the Papanui Road property and, now, another property atGrace Street, Orakei; and(c) the sale of stock of Metropolis Design Ltd said to be valued in excessof $400,000.[20] There is $227,844.30 held in Davidson Legal's trust account. Davidson Legalholds the funds as stakeholder. This is money retained upon the sale of the businessof a company called Metropolis Property Management Ltd. It is not the money of thecompanies. There is a dispute in relation to the money which has prevented it frombeing disbursed. There is nothing before me from which an assessment can be madeas to what portion, if any, of the amount held by Davidson Legal will ultimately bereleased and available for payment to the Commissioner, or when that might occur.[21] The Papanui Road and Grace Street properties are owned by the trustees of thePrimrose Hill Trust. It is said there is substantial equity in the properties. The trusteeshave provided an undertaking to market and sell them, with a settlement date no laterthan six months from 22 December 2022, and pay $576,029 to the Commissionertowards the outstanding tax liability of the companies.[22] There is presently no buyer for either property. The Papanui Road propertyhas already been marketed and put up for auction but no sale was achieved. Iunderstand the reserve was not reached indicating that the price expectations may notbe realistic. While there is said to be equity in these properties, the evidence does notsatisfy me that is necessarily the case. There are no registered valuations of theproperties and while I have been provided with balances owed to the Bank of NewZealand under two Housing Terms Loans in respect of the properties, I do not knowwhat other amounts are secured under the Bank's mortgages. This is important as theundertaking that the trustees have given is not personal to them and limited to the valueof the assets of the Primrose Hill Trust.[23] As far as the wholesale stock of Metropolis Design Ltd is concerned, while thecompany is said to be making arrangements to sell the stock, it has already had monthsto do so and there is no suggestion that the proceeds of sale will be sufficient to clearthe companies' debts.[24] Had the position advanced for the companies been that if the Commissionerwas not paid by 23 December 2022 orders for liquidation were inevitable, there wouldhave been more force to the argument that a further and final adjournment should begranted, but that is not what is being proposed. Ms Connors foreshadows thepossibility that sales of the Papanui Road and Grace Street properties might not beachieved until March 2023 and I note, also, the trustees' undertaking anticipates thepossibility that settlement of any sales could be up to six months from the date anagreement for sale and purchase agreement is entered into. If an adjournment wasgranted to 23 December as has been requested, it is inevitable that further (and possiblyseveral) adjournments will be sought.The companies cannot pay their debts[25] While Ms Connors says the companies are not insolvent, she provides noexplanation for that assertion. On a cash flow basis her evidence is plainly not correct.The companies have not been paying their tax liabilities for some time and there is apresumption they are unable to pay their debts given their failure to comply with theCommissioner's statutory demands. I note also from its financial accounts, thatMetropolis Design Ltd has been trading at a loss in both the 2021 and 2022 years. Inthe present context of applications to liquidate companies under s 241(4)(a) of theCompanies Act, "it is the cash flow test that counts".2Public Policy[26] There are several public policy considerations that are relevant. First,liquidation applications should be determined expeditiously, and it is undesirable incircumstances where it is clear companies cannot pay their debts that the Court grantthem adjournments enabling them to continue to trade for extended periods. Thatcreates obvious risk to the party applying to liquidate, other creditors, and parties whomay subsequently deal with the company. Second, it is in the public interest that thereshould be a proper level of scrutiny in relation to insolvent companies conducted by aliquidator as an officer of the Court. Third, the companies have a history of failing tocomply with their tax obligations. I accept Ms McGillivray's submission that theCourt should, in a case like this, act in a manner that maintains the integrity of the taxsystem.[27] Balancing these factors, and in the exercise of my discretion, I am notsatisfied it is appropriate to grant any further adjournments. There being no defencesfiled to the applications, and no other matters raised for opposing them, orders forliquidation shall be made.2 Brookers Insolvency Law & Practice, above n 1, at [CA241.03(1)] citing Re Tweeds Garages Ltd[1962] Ch 406 (Ch).Result[28] In respect of Metropolis Design Ltd:(a) there shall be an order for liquidation and Elizabeth Helen Keene andLuke Norman are appointed liquidators;(b) the liquidators' remuneration is approved in accordance with theconsent of Elizabeth Helen Keene and Luke Norman dated 8 September2022, subject to s 284 of the Companies Act 1993;(c) the liquidators are allowed to exercise their powers individuallypursuant to s 242 of the Companies Act 1993;(d) there shall be costs to the Commissioner, in the sum of $930.75 plusdisbursements as fixed by the Registrar; and(e) the order is timed at 2.30 pm on 2 November 2022.[29] In respect of Propellor Property Services Ltd:(a) there shall be an order for liquidation and Elizabeth Helen Keene andLuke Norman are appointed liquidators;(b) the liquidators' remuneration is approved in accordance with theconsent of Elizabeth Helen Keene and Luke Norman dated8 September 2022, subject to s 284 of the Companies Act 1993;(c) the liquidators are allowed to exercise their powers individuallypursuant to s 242 of the Companies Act 1993;(d) there shall be costs to the Commissioner in the sum of $766.50 plusdisbursements as fixed by the Registrar; and(e) the order is timed at 2.30 pm on 2 November 2022._______________________O G PaulsenAssociate JudgeSolicitors:The Commissioner of Inland Revenue, Legal Services, ChristchurchSteindle Williams Legal, Auckland