THE COMMISSIONER OF INLAND REVENUE V VOLCANIC INVESTMENTS LIMITED HC AK CIV 2006-404-5253

THE COMMISSIONER OF INLAND REVENUE V VOLCANIC INVESTMENTS LIMITED HC AK CIV 2006-404-5253 14 February 2007IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV 2006-404-5253UNDER The Companies Act 1993 IN THE MATTER OF an application to put a company into liquidation BETWEEN THE COMMISSIONER OF INLAND REVENUE Plaintiff AND VOLCANIC INVESTMENTS LIMITED Defendant Hearing: 24 January 2007 Appearances: T Molloy for plaintiff M Locke for defendant Judgment: 14 February 2007 at 11 a.m.JUDGMENT OF ASSOCIATE JUDGE J P DOOGUEThis judgment was delivered by me on14.02.2007 at 11 a.m. pursuant to Rule 540(4) of the High Court Rules. Registrar/Deputy Registrar DateSolicitors: S J Eisdell Moore, Crown Solicitor, P O Box 2213, Auckland Lovegroves, P O Box 90915, AucklandBackground[1] The plaintiff seeks an order that the defendant be placed in liquidation on the grounds that the defendant is unable to pay its debts. On 21 July 2006 the plaintiff served a notice of statutory demand on the defendant company demanding payment of $231,097.60. The particulars of calculation provided in the notice stated that the amount payable arose from goods and services tax levied between 31 December 2004 and 30 April 2005 and income tax for the period 31 March 2004 to 31 March 2005. The exact dates when the GST and the income tax became payable were not disclosed. But plainly the amounts became payable to the plaintiff around mid-2005. By virtue of s 23 of the Act, the defendant owed a statutory debt to the Commissioner of Inland Revenue of some $231,097 from then on. [2] On 30 August 2006 the plaintiff filed a statement of claim for putting the company into liquidation. The statement of claim asserted that a figure of $232,770.79 was owed. This was an increased figure. The statement of claim asserted that the figure was arrived at by addition of further taxes and penalties that had accrued, less than the abandonment of an amount of $2,710.38 due to a GST credit transfer which had occurred since the demand was issued. [3] The statement of claim referred to the fact that a statutory demand had been served on the defendant which the defendant had failed or neglected to comply with. An order was sought that the company be put into liquidation by Court. [4] The statement of claim and notice of proceeding were served on the defendant on 11 September 2006. The hearing date inserted in the notice of proceeding was 9 November 2006. On 9 November 2006 Mr Locke appeared for the defendant notwithstanding that no statement of defence had been filed. On the previous day, 8 November 2006 the defendant had filed an application for leave to file statement of defence out of time. The grounds set out in the application were these:1. That the time for filing a statement of defence pursuant to r 700Q of the High Court Rules has expired.2. That the defendant has a good and arguable defence which if the defendant is not able to raise will result in a miscarriage of justice.[5] Because the proceeding was served on 11 September 2006, service of a statement of defence was required by 26 September 2006. Therefore a period of approximately six weeks elapsed before the defendant filed an application for leave to file a statement of defence out of time. [6] A Mr Ramanathan, who is an accountant for the defendant gave an affidavit in support of the application for leave to file the statement of defence out of time. He averred that there was no debt owing by the defendant to the plaintiff. He said that when regard is had to the overall account between the plaintiff and defendant, it is the plaintiff which owes the defendant not the other way around. The balance owing to the defendant, Mr Ramanathan says, is $28,471.75 together with interest on that sum. His method of calculation took into account GST and income tax returns, payments and notices of assessment made, and interest and penalties imposed – he said. Mr Ramanathan annexed to his affidavit various goods and services tax returns, notices of assessment and a detailed calculation showing how he arrived at the figures of $28,471.75. He also said that the company was not insolvent. His affidavit should be quoted exactly:12. The defendant is not insolvent it is a substantial property development company owning substantial assets and having substantial income.[7] No details were provided of the assets and liabilities or income and outgoings position of the company. [8] A Mr S Kelly who is a director of the defendant company also gave an affidavit. Mr Kelly's affidavit was sworn 8 November 2006. He also said that there was no debt owing by the defendant to the plaintiff. He generally supported what Mr Ramanathan said and also agreed with Mr Ramanathan's calculation that there was a balance of $28,471 owing from the plaintiff to the defendant. On the question of the delay in taking steps to defend the proceedings, Mr Kelly said that while he and Mr Ramanathan were well aware in general terms of the position of the account between the plaintiff and the defendant: it has taken a lot of time to collect together the relevant information and to carry out a reconciliation of the precise position between the plaintiff and the defendant. 6. Ascertaining the precise position has taken much longer than anticipated, and has resulted in the defendant's counsel only receiving instruction with regard to a statement of defence and affidavit in opposition within the last day or so.[9] On the question of solvency he said:7. The defendant is not insolvent it is a substantial property development company owning substantial assets and having substantial income.[10] The plaintiff filed an affidavit from a Mr Saini sworn 18 January 2007 in opposition. Mr Saini is an investigations officer employed by the department. He said that he had carried out an investigation involving the defendant's GST up to 30 September 2005 and for various other periods. The investigation for the period ending 30 September 2005 (he does not say when the period begins) was almost complete, and a final decision apparently concerning whether or not the GST matter would be reopened was to be made in March 2007. He said that until that investigation has been completed he could not conclusively say one way or the other what "the outcome will be". In paragraph 7 of his affidavit he said:Presently there are serious concerns about the defendant's entitlement to the refund being claimed in the GST period ended 30 September 2005. The claim relates to the purchase of an undeveloped section of land. The defendant purchased the land on 15 September 2005 from an associated company Grafton Ridge Limited. That company in turn had purchased it from another associated company, Hump O Kelly Limited, the day before, namely 14 September 2005. Hump O Kelly Limited had in turn purchased it from another associated company, Central Strata Management Limited on 11 August 2005. There seems to be an element of artificiality about the transactions and issues surrounding avoidance are being investigated.[11] No affidavits other than those to which I have made reference have been filed in the proceeding.Principles and rules[12] The relevant High Court Rule reads as follows:700T Effect of failure to file statement of defence or appearanceWhere any person, being a person who is entitled to file a statement of defence or an appearance in a proceeding commenced by the filing of a statement of claim pursuant to rule 700C, fails to file a statement of defence or an appearance within the time prescribed by these Rules, that person shall not, without an order for extension of time granted on application made under rule 700V or the special leave of the Court, be allowed to appear on the hearing of the proceeding.[13] The commentary in McGechan on Procedure says, (at HCR700T.4):In respect of a defendant company leave to file a statement of defence out of time should not be granted unless the company can show on the papers an arguable basis upon which it is not liable for the amount claimed. Even if there was an arguable defence, leave should not be granted if the defendant company is insolvent: Fresh Cut Flower Wholesalers Ltd v Living and Giving Gift Company Ltd (2001) 16 PRNZ 173 (HC).[14] I interpolate that in the Fresh Cut decision, Paterson J said, at page 178:There is a further issue which mitigates against giving leave in this case. It is clearly apparent, nothwithstanding [a witness's statement] that the Living Co has been, and is possibly still, insolvent. In his first affidavit, [the witness] made a bland assertion, namely "the defendant company is solvent and able to pay its debts". The onus in establishing this rested with the Living Co. It was endeavouring to obtain an indulgence by establishing solvency. It produced no evidence initially in support of this assertion. Bland assertions do not establish solvency."[15] The passage in McGechan continues:An applicant for special leave must demonstrate a convincing reason for special leave to be granted, a lack of prejudice, and a justification for what is an indulgence to be granted outside the provisions of the Rules: Sayer v Capital Aviation Ltd (1993) 6 PRNZ 401.[16] In addition to the judgment and the commentary just cited, I propose as well to be guided by the decision of Mosaed v Roy Turner Ski Shop Limited HC Wang M63-92 10 December 1992. In that case the application was for leave to file a statement of defence. The Master, as he then was, said at page 1:In default of guidance from the Rules or from authority, this Court proposes to deal with the application much as any other application for leave to participate in a proceeding is dealt with, namely by deciding whether there is an arguable defence disclosed on the papers. If there is then leave should be granted in order that the merits of the matter may be investigated. If not then leave should be denied in order that the Court's proceedings will not be protracted by an unmeritorious defence. That is especially the position in winding-up cases which are a code unto themselves and are to be concluded as soon as reasonably practicable.[17] In Orme v Parkway Investments Limited HC HAM M149-00 7 March 2001 Master Faire, as he then was, after agreeing with the statement of principle contained within Mosaed v Roy Turner Ski Shop Limited that an applicant must demonstrate an arguable defence on the papers before the Court will make an order for extension of time to file a statement of defence, went on to say at [16]:In addition the inquiry will always require an examination of where the justice of the case will lie. In this respect it is not dissimilar to an application to set aside a judgment regularly obtained. I need not repeat the approach approved by the Court of Appeal to such applications in Russell v Cox[1983] NZLR 654. It is appropriate, however, that I add that in addition to demonstrating that the defendant has arguable defence, the defendant should provide a reasonable explanation for the delay.[18] It is also useful to consider what the purpose of the rule is. It is designed to ensure that litigation proceeds efficiently - an objective which was identified in the Court of Appeal judgment of Elders Pastoral Limited v Douglas Leonard Hazard and Ors (8 April 1987, CA 48/87) Those objectives are particularly important in liquidation cases. There is a public interest in having the Court determine as quickly as is consonant with the justice of the case, whether a company is insolvent and requires to be placed in liquidation. Companies which continue trading while insolvent pose risks for the community generally, and the business sector in particular. The Court should only permit a company to file statements of defence outside the time limits prescribed in the Rules where there is good reason to do so, in the circumstances of the case. [19] However, pursuit of the objective of prompt and efficient disposition of proceedings must not come at the price of injustice to one of the parties.An arguable defence?[20] The defendant intended to mount a defence that while it might owe the Commissioner the sum of $231,097.60, it ought to be able to set off against that amount a claimed GST credit which accrued during the GST period ended 30 September 2005. The problem is that a set off is not available, as Mr Molloy pointed out, because of the provisions of rule 146 of the High Court Rules. That being so,the defendant is not able to establish an arguable case that the plaintiff does not have the status of a creditor. [21] In my view the defendant has failed to clear the first hurdle of establishing an arguable defence. That being so, it is not necessary to go on and consider whether there has been a reasonable explanation for the delay in bringing forward a statement of defence.Solvency[22] The next issue concerns that of solvency, which is relevant to the granting of leave due to the need for efficiency in liquidation proceedings. The plaintiff having served a statutory demand which has gone unanswered and which has not been set aside, the defendant will be presumed at the hearing of this matter to be insolvent unless the contrary is proved: Section 287 the Companies Act 1993. It is incumbent upon a defendant in such a position to provide evidence which would provide a reasonable basis for Court to ultimately conclude that the debtor had established, on the balance of probabilities, that he was solvent. [23] A useful guide to what is required is to be found in the remarks of Master Kennedy-Grant in his oral judgment in Concept Manufacturing Limited v Concept Lighting Limited AK HC M No. 896-IM00 6 July 2000:I would express the view obiter that it is advisable for a party wishing to obtain stay and restraint orders on the ground of solvency to exhibit up-to- date or, at least, recent accounts substantiating the claim of solvency as well as paying the amount due to an acceptable stakeholder.[24] Bland claims that the company is solvent will not suffice. I have to say that no adequate evidence has been produced to the Court on the matter of solvency. The evidence of Mr Ramanathan that I have set out in paragraph [6] does not suffice. Similar criticisms can be made of Mr Kelly's deposition which I have quoted at paragraph [8]. It is not enough for employees and shareholders of a company simply to aver that the company is solvent.[25] Mr Locke told me that by the time he received instructions to act it was too late to produce evidence of solvency. There was nothing, of course, to prevent the defendant seeking additional time to file such evidence prior to the hearing scheduled before me for 24 January 2007. Obviously the deponents for the defendant recognised that insolvency was in issue, and that was the reason why they deposed that in their view, the company was solvent. [26] Mr Locke sought to persuade me that the fact that the Commissioner has not ruled out the possibility that a credit might ultimately be recognised as owing to the taxpayer meant that it would be unjust for the Court dealing with this matter to exercise its discretion to make an order placing the company in liquidation. I do not agree. I would not accept as a matter of principle that a company which owes a debt should be able to stave off liquidation proceedings because it has a hope or expectation that in due course such a credit may accrue in its favour. [27] In my view the defendant's application for leave to file a statement of defence must be dismissed and I make an order accordingly. The appropriate course from this point is that the matter should be listed in my next liquidation list 1st March 2007 at 10am at which time the application for liquidation order will proceed on an undefended basis.Costs[28] The matter of costs is reserved and will be disposed of 1 st March 2007.Postscript[29] While this judgment was awaiting my signature, I received a memorandum from Mr Locke with an accompanying bundle of materials. A very substantial affidavit bearing on issues of the solvency of the defendant company accompanied the memorandum from counsel. [30] In his memorandum, Mr Locke said that during the hearing he made an oral application for a further opportunity to file evidence as to solvency, prior to theCourt determining the application for leave or the application for liquidation of the company. [31] He said that the oral application had not yet been determined and that it was helpful to the Court to have further information as to solvency. [32] I am not prepared to entertain the further material. I do not have any recollection of leaving an oral application to adduce further evidence unresolved but had I turned my mind to that application before the conclusion of the hearing I would have declined to have accept the further evidence. Both of the main deponents for Volcanic made reference to the matter of solvency. It was plain the matter that was relevant to the application, in their minds. Notwithstanding that they did not adduce any helpful evidence on the point. [33] The usual position must be that the parties must file their evidence prior to the hearing of a fixture. Timetable orders and other matters are designed to ensure that evidence is all in prior to the fixture. As well, it will only be in rare cases where a case has been heard that the Court will reopen evidence to permit fresh evidence to put in, to permit evidence in reply and presumably evidence in opposition to be adduced and then to convene a further hearing to hear submissions on that evidence. While I do not rule out the possibility that a Court might make such an order in an appropriate case, I can see no reason why such an unusual approach should be taken here. I decline to consider the additional material which has been proffered by the defendant. _____________ J.P. Doogue Associate Judge