EZIPAINT LIMITED (IN LIQUIDATION) & ORS v PETERS HOLDINGS TRUSTEE LIMITED [2017] NZHC 3139

EZIPAINT LIMITED (IN LIQUIDATION) & ORS v PETERS HOLDINGS TRUSTEE LIMITED [2017] NZHC 3139 [14 December 2017]IN THE HIGH COURT OF NEW ZEALANDHAMILTON REGISTRYI TE KŌTI MATUA O AOTEAROAKIRIKIRIROA ROHECIV-2017-419-40[2017] NZHC 3139BETWEEN EZIPAINT LIMITED (INLIQUIDATION)First PlaintiffMALCOLM GRANT HOLLIS ANDWENDY ANN SOMERVILLE (ASLIQUIDATORS OF EZIPAINT LIMITEDSecond PlaintiffAND PETERS HOLDINGS TRUSTEELIMITEDDefendantHearing: 9 November 2017Appearances: Mr P Cornege for PlaintiffsMr C F J Reid for DefendantJudgment: 14 December 2017JUDGMENT OF ASSOCIATE JUDGE J P DOOGUEThis judgment was delivered by me on14.12.17 at 3.30 pm, pursuant toRule 11.5 of the High Court Rules.Registrar/Deputy RegistrarDate[1] The plaintiffs in this case are a company which was placed into liquidation on 13 July 2015, the first plaintiff, and the liquidators of that company, the second plaintiff.[2] The first plaintiff, which I will refer to as Ezipaint, seeks an order liquidating the defendant.1 Ezipaint's sole director, Mr Peters, is also the sole director of thedefendant. The defendant is the corporate trustee of a trust known as the ChristopherPeter Family Trust ("CPFT"). The defendant trustee is the majority shareholder inEzipaint.[3] After the liquidators took possession of the documents and accounts of Ezipaint, they discovered that in the annual accounts for the year ended 31 March 2014 the defendant was shown as owing a current account debt to Ezipaint of $61,037.[4] The liquidators then took action on the part of Ezipaint to call up the debt for $61,037, proceeding by way of a statutory demand addressed to the defendant.2 The defendant did not comply with the statutory demand. The defendant, in fact, did not take any steps to set the statutory demand aside.3[5] The defendant now disputes that the debt is owing. It also disputes a number of other aspects of the plaintiff's claim including the validity of the statutorydemand.[6] The liquidator's case is that the failure on the part of the defendant to takesteps to set aside the statutory demand has significance at two levels. First, it is said that by failing to apply to successfully set aside the statutory demand, the defendant is not now able to dispute the existence of the debt. Secondly, because there is an expired statutory demand, a presumption of insolvency arises against the defendantpursuant to s 287(a) of the Companies Act 1993 ("the Act").1 Companies Act 1993, s 241(4).2 Pursuant to s 289 of the Companies Act.3 Pursuant to s 290 of the Companies Act.[7] Only if the debt is proven to be owed will the Court need to consider some contentions which the plaintiffs have made, including that the statutory demand is valid and that a presumption of insolvency has arisen.Does the defendant owe a debt to Ezipaint?[8] The first point that needs to be dealt with is the contention that the plaintiffs make that the defendant has failed to adequately explain its failure to respond to the statutory demand, and that therefore the Court should not permit the defendant to dispute the debt.[9] The contention is based upon cases including Investment Enterprises Ltd v Private Sale Co Ltd.4 Reference was also made to Balmoral Marketing Ltd v Karapiro Spa Ltd.5[10] These lines of authority are, however, no longer regarded as good law. InYan v Mainzeal Property and Construction Ltd (in rec and in liq), the Court of Appeal said:6[62] As Associate Judge Bell pointed out in Grant v Lotus Gardens Ltd, a company is not prevented from showing that indebtedness is disputed even if it has failed to apply to set aside a statutory demand under s 290. In such a case, the failure of the debtor to apply to set aside the statutory demand means that the creditor is entitled to rely on the presumption of insolvency under s 287(a) of the Act and the onus falls upon the debtor to establish that there is a genuine and substantial dispute as to its liability to pay. The mere assertion of a dispute is not sufficient to rebut the presumption. Cogent evidence, short of actual proof that the debt is not payable, is required. We note that a company seeking to dispute a debt that is not the subject of the statutory demand does not have the ability to apply to set aside the debt and must therefore take other steps to dispute the debt.(Citations omitted)[11] Therefore, the fact that the defendant failed to apply to set aside the statutory demand does not prevent it from disputing the existence of the debt at the point where the Court is hearing an opposed application for liquidation.4 Investment Enterprises Limited v Private Sale Co Ltd (1997) 10 PRNZ 282 (HC).5 Balmoral Marketing Ltd v Karapiro Spa Ltd HC Auckland CIV-2005-404-6396, 3 October 2006 per Abbott AJ.6 Yan v Mainzeal Property and Construction Limited (in rec and in liq) 2014 NZCA 190.[12] But, as noted above, the plaintiffs can rely on the presumption of insolvency under s 287(a) of the Act. The defendant must prove that there is a genuine and substantial dispute as to the existence of the debt.[13] The plaintiffs sought to establish the indebtedness of the defendant by referring to the fact that the accounts of Ezipaint showed that the defendant owed $61,037 on current account. After the dispute between the parties arose about whether the claimed debt was owing, the defendant, through the agency of Mr Peters, arranged for a different chartered accountant to carry out a review of the accounts which had been prepared by Ezipaint and the defendant's originalaccountant. The new accountant, Mr Davidson, has given an affidavit in these proceedings. When he carried out his review, Mr Davidson says that he encountered inconsistent accounting of the advance between the defendant and Ezipaint, despite the financial statements being prepared by the same chartered accountant in each year. He also noted that the accounts of the defendant show that the defendant as trustee had made distributions from the trust to Ezipaint when that company was not a valid beneficiary of the trust. Mr Davidson then said the following:Based on the information I was provided, the Trust 'paid' $23,286 indistributions to Chris Peters over and above the net income of the Trust; andthe Trust 'paid' distributions totalling $96,084 to Ezipaint when Ezipaint wasnot a valid beneficiary of the Trust. When the distributions are restated in line with the Trust Deed, the original loan of $61,037 owing from the Trust to Ezipaint becomes a loan of $35,047 owing from Ezipaint to the Trust.[14] The way that Mr Davidson has treated the two transactions is to off-set them to arrive at a net balance which he said is owed by Ezipaint to the trust, rather than there being a debt the other way around of $61,037.[15] It is not disputed for the plaintiffs that Ezipaint was not a beneficiary of the trust. Mr Cornegé said:4.2 It is correct that Ezipaint is not a beneficiary of the Trust. However, this simply means that Mr Peters authorised the distributions in breach of Trust. This does not justify Mr Davidson treating the distributions as shareholder advances when that was not the basis on which they were paid to, or received by, Ezipaint.4.3 Mr Peters must have been aware of the way in which the distributions were being treated. He was a director of both Ezipaintand the defendant. As noted above, he signed tax returns confirming the debt. Indeed, Mr Mundy deposes that based on the information provided by Mr Peters, the 2014 accounts for Ezipaint and the Trust are correct.4.4 Mr Peters benefitted from the way in which the distributions were treated. Because of the distributions, the Trust did not record a profit in 2012, 2013, or 2014.4.5 Conversely, despite treating the distributions as income, Ezipaint recorded a modest profit in 2012, a loss in 2013, and a profit in 2014.4.6 Even if the Trust's financial statements can be restated, this cannotaffect Ezipaint's accounts. The distributions were received asincome. Tax was paid on that basis. There was, plainly, no agreement that the funds would discharge the debt (or that any surplus would be repaid).4.7 Mr Peters cannot now, some three to five years later, attempt to restate the accounts in circumstances where he will be the principalbeneficiary of that restatement. As noted above, the Trust's only real asset is Mr Peters' beneficiary loan.(Citations omitted)[16] The plaintiffs do not, therefore, dispute that the distributions were actually made by the trust defendant to a non-beneficiary. It is correct that Mr Cornegé contends that because Mr Peters was a director of both Ezipaint and the defendant, his actions in signing the relevant accounts amounted to a confirmation that the debt of $61,037 was in fact payable by the defendant to the plaintiff. His position is thateven if the trust's accounts can be re-stated in the way that Mr Davidson has suggested, this cannot affect Ezipaint's accounts. He refers to the fact that thedistributions were received as income and that tax was paid on them.Principles[17] The relevant principles were summarised by Associate Judge Faire in South Waikato Precision Engineering Ltd v Ahu Developments Ltd as follows:7(a) A winding up order will not be made where there is a genuine and substantial dispute as to the existence of a debt such that it would be an abuse of the process of the Court to order a winding up;7 South Waikato Precision Engineering Ltd v Ahu Developments Ltd HC Auckland CIV-2008-404- 970, 10 December 2008 at [22].(b) In such circumstances, the dispute, if genuine and substantially disputed, should be resolved through action commenced in the ordinary way and not in the Companies Court;(c) The assessment of whether there is a genuine and substantial dispute is made on the material before the Court at the time and not on the hypothesis that some other material, which has not been produced might, nonetheless be available;(d) The governing consideration is whether proceeding with an application savours of unfairness or undue pressure.[18] The Court of Appeal endorsed these principles in Yan v Mainzeal Property and Construction Ltd (in rec and in liq).8[19] I shall adopt the foregoing statement of principles as applicable to the present case.The existence of a debt - discussionThe effect of the change of the accounts[20] The defendant in this case approached matters on the basis that the accounts, which were the evidence of the debt owing by the defendant to the plaintiff, had been drawn up in error. The position of the defendant was that there could be no objection to recasting the accounts to correct the error.[21] I accept that there can be no objection in principle to accounts being changed in this way. If a bona fide mistake has been discovered, then obviously the accounts must be reviewed to ensure that they represent a fair and accurate position of thecompany's finances.[22] However, the question is whether the accounts actually did mistakenly reflectthe reality of the company's arrangements or whether, instead, the defendant is nowseeking to restructure the substantive arrangements which underline the accounts.[23] Little, if any, argument was addressed to me by the defendant on this issue. The approach that was adopted was, in effect, that all that was necessary in order to8 Yan v Mainzeal Property Construction Ltd (in rec and in liq), above n 6, at [62].decide the central issue about whether there was a debt owing from the defendant to Ezipaint was to look at the restructured accounts and that they would be conclusive. I do not consider that such an over-simplified approach is sufficient. There is a need to engage in at least some analysis of the way in which the original transaction came about and the grounds upon which it could be impeached.The arrangements between the corporate groups and the trust[24] There is no dispute that in this case the Peters group of entities structured matters in such a way that there was a distribution of excess income made from the defendant to the first plaintiff. It is not disputed that the first plaintiff was not an eligible beneficiary for such a distribution. The beneficiaries of the trust were Mr Peters and his partner, who were described as the "primary beneficiaries", with the "final beneficiaries" being their children.[25] The way in which the defendant claims that the debt owing to Ezipaint was extinguished was by entry in the accounts. The arrangements were in two parts. The substantive effect of the first part was that there was an assignment of a chose in action from the defendant/trustee. The property in question was the entitlement to recover from the trust a proportion of the profits which the trust had earned. The trustee, which held the legal entitlement to the property of the trust, and was authorised to distribute that property, purportedly assigned it to Ezipaint. Ezipaint acquired a chose in action in the form of a debt which, the defendant assumed, could be enforced against the trust. Whether the claim was enforceable is not entirely clear. Ezipaint was simply a volunteer who received the assignment, apparently without consideration. The second part of the transaction occurred when Ezipaint assigned the right to claim in respect of the profits of the trust back to the trustee.[26] A result of these arrangements was, it is claimed, the extinguishment of a debt which Ezipaint owed to the defendant.[27] There would seem to be little doubt that when Mr Peters and his accountant contrived to move property from the trustee defendant to the first plaintiff, their actions meant that the defendant as trustee acted in breach of its obligations to conform to the trust deed.[28] It would plainly be open to the first plaintiff, just as it would be to any party who had received property to which it was not entitled, to agree to return it to its rightful owner. That is what Mr Peters sought to achieve when he instructed his new accountant, Mr Davidson, to recast the accounts accordingly.[29] On its face, this is enough to defeat the claim of the first plaintiff that it remains a creditor of the defendant. There would seem to be no issue that Mr Peters had the necessary capacity as director and shareholder of the plaintiff and the defendant to bring about such a situation.[30] It is arguable that the second part of the transaction was a gift from Ezipaint to the defendant in the form of a release of debt. A transaction of this kind would not seem to provide a defence to the defendant. The liquidators who are now in control of Ezipaint would be entitled to insist that the debt that arose from the original assignment was not expunged by the second stage of the transaction, which involved Mr Peters and the accountant restating the accounts of the defendant and Ezipaint.[31] It is possible that the plaintiff could alternatively seek the reversal of all, or part of, the arrangements if they could demonstrate that this was a case where the purpose of the transaction reversing the debt owed by the defendant to the plaintiff was to defraud the creditors of the defendant.9[32] As Tipping J remarked in Regal Castings Ltd v Lightbody:10[86] In this context an intent to defraud creditors means an intent toprejudice a creditor or creditors by creating or increasing a risk that they will not be paid or will be hindered or delayed in receiving payment. Intent to defraud [under s 60 of the Property Law Act 2007] does not require proof of actual dishonesty. Section 60(3) provides that the reach of the section does not extend to any estate or interest in property alienated to a purchaser in good faith, not having at the date of the alienation notice of the intention todefraud creditors [33] In the circumstances of this case, the decision which was reached by Mr Peters as a director of Ezipaint may arguably have been for the purposes of9 That is to say, a proceeding brought pursuant to subpt 6 of pt 6 of the Property Law Act 2007.10 Regal Castings Ltd v Lightbody [2008] NZSC 87, [2009] 2 NZLR 433.defeating the claim that the liquidators of easy paint might have otherwise had against the defendant.[34] So far as the defendant is concerned, the position is a little less clear. It is arguable that the original decision to make a distribution to Ezipaint amounted to an exercise of a power ultra vires.11[35] I complete this part of the discussion by also considering the possibility that the actions of the defendant trustee, in apparently cooperating in the reversal of the transaction which gave rise to a debt owed to it in the first place by the first plaintiff, may also be able to be attacked. That is because, it could be argued, the power of the trustee had not been exercised for a valid purpose – that purpose being judged from the perspective of the necessity that the trustee act with fidelity to the trust instrument under which he has been appointed and for the benefit of the beneficiaries.12[36] Further, the possibility exists that the actions of the trustee were ultra vires. It may be that in taking the step of releasing the debt which was owed to the trust by Ezipaint, the trustee may have acted in breach of its obligations or without authority. Given that Mr Peters was the sole human agent of the two parties involved in the transaction, it is a possibility that the transactions would be set aside. At the least, there must also be the possibility of a claim against Mr Peters personally for breach of the trust obligations.[37] However, if the first stage of the transaction – the transfer of the debt from the trustees to Ezipaint – can be vitiated, that would mean that the liquidators of Ezipaint would not have a claim at all. The plaintiff would therefore be no further ahead.[38] The problem in coming to a clear conclusion on the issues essentially results from the nature of liquidation proceedings, which are not generally an adequate11 See discussion in Jeff Kenny "Trustees Powers" in Andrew Butler (ed) Equity and Trusts in NewZealand (2nd ed, Thomson Reuters, Wellington, 2009) 161 at 165.12 Duke of Portland v Topham (1864) 11 ER 1242 (HL).vehicle by means of which to explore issues of any complexity that may arise about whether there is a debt in existence or not.[39] My conclusion is that, after examining the issues surrounding this transaction, a liquidation order would not be permissible. It is not a suitable subject for discussion having regard to the principles stated at paragraph [17] of this judgment.Conclusion[40] For those reasons, I consider that the application for an order appointing liquidators to the defendant ought to be dismissed and there will be an order accordingly.[41] The parties should confer on the question of costs and, if they are not able to agree, file memoranda not exceeding 6 pages on each side within 15 working days._____________J.P. DoogueAssociate Judge