DIAMOND MILK FORMULAS LIMITED v T.K (HONG KONG) LIMITED (IN RECEIVERSHIP) [2017] NZHC 774

DIAMOND MILK FORMULAS LIMITED v T.K (HONG KONG) LIMITED (IN RECEIVERSHIP) [2017]NZHC 774 [26 April 2017]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2016-404-1077[2017] NZHC 774BETWEEN DIAMOND MILK FORMULASLIMITEDPlaintiffAND T.K (HONG KONG) LIMITED (INRECEIVERSHIP)DefendantHearing: 20 March 2017Appearances: Ms S Wroe for Plaintiff/RespondentMr R Hucker and Ms R Selby for Defendant/ApplicantJudgment: 26 April 2017JUDGMENT OF ASSOCIATE JUDGE J P DOOGUEThis judgment was delivered by me on26.04.17 at 3.30 pm, pursuant toRule 11.5 of the High Court Rules.Registrar/Deputy RegistrarDate[1] In this proceeding, the plaintiff is seeking an order placing the defendant intoliquidation pursuant to s 241(4)(a) of the Companies Act 1993 ("the Act"). Theproceeding came before the Court as a result of the defendant seeking an ordergranting leave to file a statement of defence outside the time limits prescribed by r31.17 of the High Court Rules ("HCR"). That rule requires a statement of defence tobe filed within 10 working days after the date on which the statement of claim wasserved on the person filing the statement of defence.[2] Despite the company being in receivership, the directors of the company, whoappear to have authority necessary for the purpose, decided that a statement of defenceought to be filed.[3] On 4 November 2016, I gave a judgment ("the decision") in which I declinedleave to file a defence out of time.1 The grounds for that decision were that:a) The defendant is insolvent;b) The defendant has not put forward a satisfactory explanation for failureto file a statement of defence in time;c) Prejudice would result to the plaintiff if leave were granted to file adefence.[4] I also concluded that the defendant had an arguable defence on the question ofwhether a force majeure clause applied. It was not necessary for the Court to resolvequestions of fact to determine whether an event had occurred which would trigger theforce majeure clause, namely the change of certain import restrictions imposed by thePeoples Republic of China to which products manufactured by the defendant wereintended to be sent. There were other issues of fact and law which would be requiredto be determined in order to decide whether the force majeure clause applied.[5] The defendant has filed an appeal against the decision.1 TK (Hong Kong) Ltd v Diamond Milk Formulas Ltd [2016] NZHC 2642.[6] The proceeding was subsequently called in a liquidation list in December 2016in the course of a busy list day. I have no recollection of my discussions with counselon that day, but they advise me that their expectation was that a minute was to beissued, which never in fact occurred.[7] In due course, I set a day for the matter to be called before me again but thatdate, after it had been allocated, became unavailable. On 24 February 2017, I directedthat the matter be called again on 24 April 2017. With regard to the latter date, MrHucker for the defendant orally applied for a stay of proceedings. I concluded that theapplication could not be disposed of without allocation of a fixture and, in due course,a fixture was allocated for 20 March 2017. This judgment follows from that fixture.[8] At the hearing on 20 March 2017, the defendant again sought orders based onthe oral application for stay. Memorandum had been filed by each party.[9] The essential aspects of the argument that Mr Hucker put before me were asfollows. He noted that Ms Wroe, counsel for the plaintiff, had pressed the Court for amention of the proceeding so that orders could be made for the liquidation of thedefendant on the basis that this was an undefended proceeding and all documentswhich the plaintiff was required to place before the Court had been provided.Mr Hucker referred to the statement of claim and the allegation in it that the defendantcompany was indebted to the plaintiff in the sum of $402,960. The statement of claimalso contained an allegation that the plaintiff had served a statutory demand on thedefendant on 4 April 2016, which the defendant company had neglected to complywith by failing to pay the amount stated in the demand. The statement of claim thenrecited that, as a result of the defendant company's failure to comply with the demandnotice, the defendant company was therefore presumed to be unable to pay its debtsin accordance with s 287(1)(a) of the Act.[10] It was the contention of the defendant's counsel that, because of the terms ofmy decision refusing leave to file a statement of defence out of time, it was not opento the plaintiff to maintain a plea that the defendant was indebted to the plaintiff. Inabbreviated form, the argument was that the Court had concluded that there was anarguable defence available to the defendant arising out of the force majeure provisionof the contract. If the force majeure provision applied, then the defendant would beexcused from making any payment and therefore would not be a debtor of the plaintiff.[11] Ms Wroe submitted that the Court ought not to entertain submissions from thedefendant: that the defendant had no rights of audience because it had failed to file astatement of defence. Ms Wroe relied upon r 31.20 of the HCR, which provides:If a person who is entitled to file a statement of defence or anappearance in a proceeding commenced by the filing of a statement ofclaim under rule 31.3 fails to file a statement of defence or anappearance within the time prescribed, that person must not, withoutan order for extension of time granted on application made under rule31.22 or the special leave of the court, be allowed to appear at thehearing of the proceeding.[12] She said that it was clear that the Court should not hear the defendant incircumstances where no statement of defence had been filed and there was no groundto grant special leave to do so. She further submitted that the granting of special leavewas not only unjustified, in that no grounds were established for such an exceptionalindulgence to be extended to the defendant, but to do so would unjustly impede anunpaid creditor of the plaintiff to bring the proceedings to a prompt conclusion.[13] It was Mr Hucker's contention that the plaintiff could not conscientiouslyclaim that it was a creditor of the defendant. That followed, he submitted, from myconclusion on the leave hearing that the defendant had an arguable defence.[14] However, as Ms Wroe pointed out, in order to obtain leave the defendant,having regard to the view that I took of the law, had to negotiate several "gateways".2The defendant had to show that it had a substantial defence available to it; it had todemonstrate that there were good reasons why it had not filed a statement of defencewithin the time prescribed by the HCR and it also had to demonstrate it was notinsolvent. As Ms Wroe pointed out, the defendant was able to demonstrate that it hadan arguable defence, but it failed on the other points.2 Ms Wroe did not actually state the matter in those terms but that captures the effect of what shesaid.[15] I consider that the contentions that Ms Wroe puts forward are sound. Thedefendant, in order to obtain leave, had to satisfy not one but three requirements. Thefact that it was only able to establish one meant that leave was declined.[16] Because the defendant was not granted leave, it is not now "allowed to appearat the hearing of the proceeding", as per r 31.20 of the HCR. It is not now claimed,for example, that there has been a change of circumstances which would justify theCourt hearing the defendant further.[17] Mr Hucker contended that it would be contrary to "natural justice" if the Courtdeclined to hear his client now that the plaintiff wishes to proceed with the making ofa liquidation order. He primarily rested that conclusion upon s 27 of the New ZealandBill of Rights Act 1990 ("NZBORA"). It was his submission that the High CourtRules ought to be interpreted consistently with s 27 of the NZBORA. Mr Huckeraccepted that that contention was subject to the "justified limitations" provision in s 5of the NZBORA. Section 5 provides that the rights and freedoms contained in theNZBORA are subject to reasonable limits prescribed by law "as can be demonstrablyjustified in a free and democratic society".[18] In my view, the right of audience before a Court is properly the subject of somelimitations in the form of time limits within which a statement of defence is to be filed.The defendants do not have an unrestricted right to access to the Court. Their rightsare conditional upon their complying with the law as to time limits. It is not open tothe defendant to contend that the restrictions contained in the High Court Rulesrepresent unreasonable limits on the particular right of natural justice.[19] Mr Hucker put forward a further submission, which I understand to be to theeffect that it is necessary for the Court to grant leave for the defendant to be heard.Otherwise, there is an alleged risk that the plaintiff will improperly obtain a liquidationorder. The submission which Mr Hucker made was based upon the premise that theplaintiff was not able to conscientiously claim that the defendant was a debtor, in lightof the conclusion that I set out in my judgment on leave to file a statement of defence.33 TK (Hong Kong) Ltd v Diamond Milk Formulas Ltd, above n 1. This was to the effect that therewas an arguable defence available to the defendant, centring on the existence of the force majeure[20] Ms Wroe, in response, pointed out that the Court of Appeal held in Yan vMainzeal Property and Construction Ltd (in rec and in liq) that where there was asubstantially disputed debt, the creditor did not lose the status of creditor.4 Its statuswas suspended until the dispute was resolved in favour of the debtor.[21] I consider, however, that the key to understanding the correct position in thiscase turns on the concept of a "substantial dispute". Nevertheless, what is meant bythe term "substantially disputed" debt must be set in its context.[22] The context in which this matter came before the Court was that the defendantclaimed that, although out of time for filing a defence, it had an arguable defence. TheCourt was therefore assessing at a preliminary stage whether there was anyjustification for allowing the defendant to raise these issues at a defended hearing. Itwas not required to decide whether the defendant's contentions were correct or not.They had to be matters that were not so unarguable that it would be an abuse of theproceedings of the Court to permit the defendant to put them forward. By acceptingthe point that there was an argument that reached this low threshold, the Court was notstating a conclusion that the defendant had a defence which the plaintiff could notovercome.[23] It was always open to the Judge, who might end up hearing the potentialsubstantive proceeding, to conclude that, notwithstanding the fact that the defendantsatisfied the threshold test I have mentioned, it turned out that on closer examinationat a defended substantive hearing the matters put forward by the defendant did notnegate the plaintiff's claim.[24] Once a defendant has lost the entitlement to file a defence in the proceeding,it becomes impossible for it to contend that the debt is substantially disputed. That isto say the dispute must be one that the Court is required to resolve.[25] If the interpretation that I have adopted is correct, it will still be necessary forthe Court to be satisfied that the defendant has failed to pay an outstanding debt to theclause.4 Yan v Mainzeal Property and Construction Ltd (in rec and in liq) [2014] NZCA 190 at [71]following.plaintiff before it can make a liquidation order. As per r 31.21 of the HCR, the Courtis required to examine the evidence which the plaintiff puts forward, including theaffidavit verifying the statement of claim and any certificate of debt signed by counselfor the plaintiff. The Court hearing the substantive liquidation proceeding would notbe deflected from making an order for liquidation on the grounds that a Judge at anearlier stage in the proceedings indicated that the defendant had an arguable defence.The conclusion expressed by the Judge at the earlier stage becomes irrelevant because,in the circumstances, the way matters have developed means that the Court will notbe inquiring into whether that defence is capable of negating indebtedness on the partof the defendant to the plaintiff.[26] What must be emphasised is that the Court has never said that the defendant isnot indebted to the plaintiff. All that the Court said was that the defendant had anarguable defence which may or may not succeed if the matter goes to trial. However,because the defendant has not complied with the pre-requisites of the matter going totrial, that point is never going to be resolved. Therefore, the existence or non-existenceof the substantial ground of defence is no longer relevant.[27] As an alternative or additional remedy, Mr Hucker sought a stay of theliquidation proceeding until the Court of Appeal is able to consider the appeal whichthe defendant has brought from my judgment given on 4 November 2016.5[28] One of the requirements for a stay is that, if a stay is not ordered, then thefruits of the appeal which the appellant brings will be rendered nugatory. In this case,the company is in receivership and is insolvent. The question that arises is whatdetriment the appellant will suffer if the liquidation is not stayed pending the hearingof the appeal. Mr Hucker candidly told me that the principal objective is to ensurethat the directors remain in control of the company and therefore, assuming asuccessful outcome of the appeal, would be able to maintain control of the liquidationfor winding up and would be able to file a defence. If a liquidator is now to beappointed, there is little reason to suppose, Mr Hucker contended, that he or she would5 TK (Hong Kong) Ltd v Diamond Milk Formulas Ltd, above n 1.be interested in progressing the appeal to the Court of Appeal. I accept that that is sogiven that the company is obviously insolvent.[29] There is no evidence, in my view, which would justify a conclusion that thecompany would suffer substantial detriment unless a stay were to be granted pendingthe outcome of the appeal. There is no evidence demonstrating that there would beany advantages in deferring a liquidation while the appeal is heard, because there isno substantial advantage to be obtained from the company remaining in existence.[30] Mr Hucker also asserted that the Court has always assumed jurisdiction torestrain liquidation proceedings that are an abuse of the Court's process, in cases suchas Taxi Trucks Ltd v Nicholson.6 I do not consider that this is a case where theliquidation processes are being used too oppressively. The only justification that thecompany would have for seeking a stay is for reasons related to the appeal.Consideration of the Taxi Trucks case does not assist the process of deciding whethera stay pending appeal ought to be granted.[31] For all of the foregoing reasons, I consider that a stay ought to be refused.[32] The solicitor for the plaintiff filed a certificate as to unpaid debt on 9 December2016. In that certificate, Ms Wroe certified that the debt in the statement of claim wasoutstanding. That sum, as I have already mentioned, was $402,960. I have no reasonto doubt that that circumstance has changed. I would assume and expect that Ms Wroewould tell the Court if there was a material change of the matters certified in December2016. By material change, I mean a circumstance where the defendant company is nolonger indebted to the plaintiff. Apart from that consideration, the pleadings in thestatement of claim have been verified by affidavit. Again, I would expect that, if theaffidavit no longer correctly stated the position because there had been a change ofcircumstances, counsel would have said so.[33] I conclude that the plaintiff has proved all the matters that it is required to inorder to be entitled to an order placing the company into liquidation pursuant to s241(4)(a) of the Act. While the power to liquidate is discretionary, there do not appear6 Taxi Trucks Ltd v Nicholson [1989] 2 NZLR 297 at 299.to me to be any discretionary reasons in this case why the Court should not make anorder.[34] I therefore order that the company is to be placed into liquidation. CraigAndrew Young will be appointed liquidator. The order is to lie in Court until theRegistrar has sighted a consent signed by Mr Young for appointment as a liquidator.The date and time of this order is that of the date and time when this judgment isissued.[35] The parties should confer on the issue of costs and, if unable to agree, shouldfile memoranda not exceeding 4 pages on each side within 10 working days of thisjudgment._____________J.P. DoogueAssociate Judge