LIM V MORNING STAR (ST LUKES GARDEN APARTMENTS) LIMITED HC AK CIV 2009-404-3279

LIM V MORNING STAR (ST LUKES GARDEN APARTMENTS) LIMITED HC AK CIV 2009-404-3279 14 September 2009IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV 2009-404-3279UNDER the Companies Act 1993 BETWEEN DONG HWAN LIM AND SOON BOK YOO Plaintiffs AND MORNING STAR (ST LUKES GARDEN APARTMENTS) LIMITED Defendant Hearing: 14 September 2009 Counsel: M Keall for Plaintiffs T J Herbert for Defendants Judgment: 14 September 2009(ORAL) JUDGMENT OF HEATH JSolicitors: Heugh Kelly, PO Box 207, Wellsford Lee Salmon Long, PO Box 2026, Shortland Street, Auckland Counsel: M Keall, PO Box 6905, AucklandThe application[1] Mr Lim and Ms Yoo apply for an order putting Morning Star (St Lukes Garden Apartments) Ltd into liquidation. The application is opposed both by Morning Star and the secured creditor, Structured Finance NZ Ltd. The opposition is based on the ground that the Court ought to exercise its residual discretion to refuse the order sought. [2] Mr Lim and Ms Yoo are unsecured creditors of Morning Star. They obtained judgment in the District Court at Auckland on 2 April 2009, in the sum of $128,569.46, together with interest and costs. [3] A statutory demand was subsequently issued. The demand was not satisfied. The application to put Morning Star into liquidation followed. Not only is there the presumption of insolvency arising out of non-compliance with the statutory demand, but also Morning Star acknowledges it is, in fact, insolvent. Indeed, it acknowledges that there are no liquid assets available to it. [4] It is the impact of any order for liquidation on the secured creditor that forms the basis of the submission that the Court ought not to make a liquidation order.Background facts[5] Morning Star is the developer of a unit title complex situated in St Lukes' Road in Auckland. The development has been undertaken in two stages. Stage one has been completed. It involved the erection of blocks A to F. Stage two of the development involves the construction and sale of units in blocks G and H, together with some additional buildings. Some of that work has been undertaken but since 20 March 2008, construction has been halted by the absence of a necessary resource consent. [6] Arrangements were made to obtain that consent retrospectively, from the Auckland City Council. It appears that that consent is now available but fundingmechanisms to begin the construction work have not yet been finalised. Some 44 units and carparks in blocks G and H will be available for occupation and sale once constructed. [7] Mr Rollason, a director of Structured Finance, has deposed that stage 2 construction is expected to begin in October or November 2009. The whole construction process is estimated to take about 12 months. That would mean that units were available by October or November 2010. [8] Mr Rollason deposes that 15 of the 44 units in blocks G and H have been sold, unconditionally, off the plans. A further 11 conditional sales have been entered into. If all 44 units were sold at the current average price per unit of $375,000, an income of $16,500,000 would be expected. [9] Structured Finance has advanced development funds to Morning Star. It holds mortgages over the land comprised in the development. It also has a Security Agreement, dated 8 August 2008, which entitles it to appoint a receiver in the event of default on the part of Morning Star. [10] There is no evidence from a director of Morning Star as to the quantum of unsecured claims. Mr Rollason has given evidence that he believes that (excluding the judgment debt of Mr Lim and Ms Yoo) the total unsecured indebtedness is in the region of $500,000. None of the remaining unsecured creditors have appeared, either to support or to oppose the liquidation application. [11] Structured Finance has also entered into an arrangement with what has been called "a sister company", Fidelity Ltd. It appears that this arrangement allows Structured Finance to assign any or all any part of the debt payable by Morning Star to it. [12] As at 31 May 2009, Morning Star owed Fidelity $3,802,742.65. Structured Finance was owed $5,682,735.75. The total debt was $9,485,478.40. As a result of an agreement between Structured Finance and Morning Star, no interest will accrueon Structured Finance's portion of Morning Star's indebtedness. No such arrangement is deposed to in respect of the debt owed to Fidelity. [13] Mr Rollason's evidence is that, if Morning Star were liquidated, there will be no funds available to satisfy Mr Lim's and Ms Yoo's debt. He contends that the "only hope" they have of recovery is to accept an offer of one unit in the development made on behalf of the company and/or the secured creditor. The evidence relating to the most recent offer suggests that it was made on 3 September 2009 but only remained open until 5pm on 4 September 2009. I have serious reservations about the bona fides of an offer of that type. Nevertheless, I do not allow it to influence the decision I ultimately make. [14] Mr Rollason's concern is that if the company were placed in liquidation, any chance of the stage 2 construction being completed would be jeopardised because no bank is likely to make an advance to the company while it were in liquidation. For that reason he contends there is considerable detriment caused to Structured Finance and Fidelity if a liquidation order were made. [15] Mr Herbert, for both Morning Star and Structured Finance, has submitted that the absence of any other unsecured creditors in support of the application is a factor to be taken into account in determining whether the discretion should be exercised in favour of Morning Star and the secured creditors.The law[16] Section 241(1) of the Companies Act 1993 enables the Court to put a company into liquidation by the appointment of a named person as liquidator or the Official Assignee for a named district. A liquidator may be appointed on the application of a creditor. The ground on which the Court needs to be satisfied is that the company is unable to pay its debts. Those prerequisites are met. [17] I am not persuaded that this is a case in which Mr Lim and Ms Yoo should be deprived of their prima facie entitlement to a liquidation order. There are a number of factors that lean in their favour on that topic.[18] First, the primary rule is that an unsecured creditor who cannot be paid will be entitled to an order putting the company into liquidation, in the absence of good reason to the contrary. Tipping J, in Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395 (CA), at para [3], said "... that insolvent companies should be put into liquidation, if a creditor seeks such an order". He went on to say:[3] To justify such departure there must be some other factor, be it policy, principle or simply the justice of the particular case, which outweighs theprima facie entitlement of the creditor to an order putting the insolvent company into liquidation. If the focus is on the justice of the particular case the discretion must also always be exercised on a principled basis and not on some ad hoc perception of what individual justice might require. [19] In this case, a secured lender is the effective opponent to the application to put the company into liquidation. The secured lender has other remedies available to it: a) It could go into possession of the property as mortgagee and, if it did so, it would be entitled to complete the development in that capacity. b) It also has the ability to appoint a receiver, under cl 7.1 of the Security Agreement; c) It has the ability to make a payment to Mr Lim and Ms Yoo to satisfy their debt. It is difficult to see why, if the prospects of the development are so jeopardised by putting the company into liquidation, Structured Finance could not find the sum of approximately $128,000 to pay out Mr Lim and Ms Yoo. It has simply decided not to do that. [20] I see no other reasons that militate against the making of an order putting the company into liquidation. On that basis, I am prepared to make an order accordingly.Result[21] I make an order that Morning Star be put into liquidation. The Official Assignee at Auckland is appointed as its liquidator. The order is timed at 10.38am today. [22] On the question of costs this liquidation proceeding has been an effective contest between the unsecured debtor seeking the order and the secured creditor. I see no reason why the unsecured creditor should be put to the cost in circumstances where they are unlikely to be recovered, at least in the short term, by making an order solely against the company. [23] What I propose to do is order costs on a 2B basis together with disbursements, both to be fixed by the Registrar. Of those costs, an amount representing costs on a 1A basis shall be claimable against the company. The balance between those costs and costs calculated on a 2B basis shall be paid by Structured Finance to Mr Lim and Ms Yoo. All disbursements shall be paid by Structured Finance. _____________________________ P R Heath J