GLASSEY & ASSOCIATES LTD v TAKANINI SURGERY LTD [2021] NZHC 511

GLASSEY & ASSOCIATES LTD v TAKANINI SURGERY LTD [2021] NZHC 511 [15 March 2021]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2020-404-001774[2021] NZHC 511UNDER The Companies Act 1993BETWEEN GLASSEY & ASSOCIATES LIMITEDPlaintiffAND TAKANINI SURGERY LIMITEDDefendantHearing: 24 February 2021Appearances: N G Lawrence for PlaintiffJ Burt for DefendantJudgment: 15 March 2021JUDGMENT OF ASSOCIATE JUDGE P J ANDREWIntroduction[1] Glassey & Associates Ltd (GAL) is a one-third shareholder in the defendantcompany, Takanini Surgery Ltd (TSL). GAL seeks an order placing TSL in liquidationpursuant to s 241 of the Companies Act 1993 (the Act).[2] TSL was incorporated to operate a general practitioners' medical clinic inTakanini. It is no longer trading. TSL failed to comply with a statutory demand issuedby GAL requiring TSL to repay a shareholders' advance of $101,013.75.[3] In opposing liquidation, TSL contends that GAL has failed to establish thatTSL is unable to pay its debts and that, as a matter of discretion, it would not be justand equitable that TSL be put into liquidation.Factual background[4] TSL was incorporated on 3 May 2019. Its incorporating shareholders in equalshares were the plaintiff, GAL, Arohanui Medical Services Ltd (AMSL) and RemaniLtd (RL).[5] GAL is owned by Dr Sarah Glassey; AMSL is owned by Dr Choony (Luc)Wee; and RL is owned by Dr Anitha Nair, Nair & Associates Trustee Co Ltd andRamesh Nair.[6] The directors of TSL on incorporation were Dr Glassey, Dr Nair and Dr Wee.[7] The TSL medical practice operated out of a commercial property owned byGateway Medical Ltd (GML). GML was incorporated on 26 June 2017 and had thesame shareholders as TSL, except Dr Nair's one-third share was owned by herpersonally and not by RL. Drs Glassey, Nair and Wee were also directors of GML.[8] In essence, therefore, Drs Nair, Wee and Glassey began the medical practice inTakanini as equal shareholders and directors. There was no formal documentation oftheir shareholderdirector relationships.[9] The Takanini medical practice opened in August 2019. Dr Glassey was theprimary doctor at the practice. Drs Nair and Wee had other medical practices inKaraka and Pokeno.[10] From 15 August 2019 to 20 March 2020, GAL advanced $101,013.75 to TSLby way of shareholders' advances.[11] Shortly after opening the Takanini practice, Drs Nair and Wee obtained advicefrom lawyers and signed a shareholders' agreement between their respective entities.Dr Glassey says that it was only upon seeing invoices from the lawyers in TSL'saccounts a number of months later that she became aware of what had happened. Shesays she was deliberately excluded from these arrangements.[12] Dr Glassey (through GAL) ceased providing medical services at the Takaninipractice in March 2020, about the same time as New Zealand went into COVID-19lockdown. She says by that time it had become untenable for her to remain at theTakanini practice given what she says was a deterioration of her relationship with DrsNair and Wee.[13] GAL served a statutory demand on the defendant for $101,013.75 on 22 May2020.[14] TSL failed to comply with the requirements of the statutory demand.[15] On 26 May 2020, Dr Glassey was removed as a director of TSL.[16] Between July 2020 and October 2020, Drs Wee and Nair transferred thebusiness of TSL to another company owned by them (and which does not include DrGlassey or GAL).[17] As per her comment on 22 September 2020, GAL filed this application to putTSL into liquidation.Relevant legal principles[18] In a creditors' application for liquidation relying on inability to pay debts (asthe case here) there are three main questions:1(a) Is the plaintiff a creditor?(b) Is the defendant insolvent?(c) How should the Court exercise its residual discretion?[19] TSL takes issue with all three limbs of that test.[20] Section 287(a) of the Act provides that a company is presumed to be unable topay its debts if it has failed to comply with a statutory demand.Analysis and decision[21] I address first the question of whether the defendant company, TSL, isinsolvent. That is the principal ground of TSL's defence.(a) Is the defendant insolvent?[22] Section 287 creates a rebuttable presumption. The critical issue is whether TSLhas provided evidence that provides a reasonable basis for the Court to ultimatelyconclude that it has established, on the balance of probabilities, that it is solvent.2[23] GAL has provided clear, probative evidence that TSL is insolvent; it is unableto pay its debts. This includes bank accounts, financial statements and expertevidence. In particular:(a) TSL's financial statements for the year ended 31 March 2020 showedthat TSL made a loss of $177,803 that financial year. TSL has admitted1 Cable Price (NZ) Ltd v Taimona Haulage Ltd [2016] NZHC 828.2 CIR v Volcanic Investments Ltd HC Auckland, 14 February 2007, Doogue AJ CIV-2006-404-5253.that it made a loss. GAL's shareholder advances have been recorded inthose financial statements as a company debt;(b) Mr Lester Gouwland, chartered accountant, has given expert evidenceexpressing the view that TSL is insolvent and unable to pay its debts.Mr Gouwland has examined TSL's financial statements. He notes thatthere is nothing in the financial statements to indicate that theshareholder advances are anything other than repayable on demand.There is clear evidence in the TSL bank statements that the companyhas ceased trading and no longer has an income from which to pay itsdebts. As at 20 January 2020, there was only $678.57 in the company'sbank account;(c) The defendant's directors, Dr Wee and Nair, have admitted that thebusiness TSL was set up to run, namely the Takanini medical practice,has been transferred to another company owned by them. Thisconfirms that TSL has ceased trading;(d) The last capitation payment from Pro Care to TSL was on 17 September2020 (capitation being the Ministry of Health distribution of funds toclinics based on patient population, namely number and decile) whichconfirms and is entirely consistent with the patients now beingregistered under another entity;(e) Correspondence from Dr Wee in March 2020 expressly states, "At therate we are going, we are not financially sustainable." That email alsocontains a clear acknowledgement by both Drs Wee and Nair that theirbusiness relationship with GAL and Dr Glassey was at an end.[24] In contending that TSL is not insolvent and that GAL is not a creditor, TSLsubmits that there was an oral agreement between the joint venture parties that thefunds advanced by the shareholders would be repaid only once TSL was in a positionto pay them, namely when it had become profitable and that in the meantime none ofthe shareholders could therefore require repayment. It is contended that the onlypotential liabilities of the company are the shareholder contributions which are thesubject of the dispute between the parties in these proceedings. It is argued that thedraft balance sheet as at 31 March 2020 discloses that, excluding the shareholdercontributions, TSL had total liabilities of only $43,765 and positive net equity of$126,915.[25] Mr Burt also submitted that even on the plaintiff's own argument, theshareholder advances are only payable on demand. To date, neither of the two othershareholders has made demand for repayment of their advances and accordingly,cannot properly be regarded as liabilities of the company. This is said to leave a netasset position of $25,902. It is acknowledged that there was a loss for the year ended31 March 2020, but Mr Burt referred to the evidence of some $45,083 of recoverablefixed assets and cash assets of $124,892. He also relied on the evidence of Dr Weethat since 31 March 2020 TSL's third-party creditors have been paid.[26] Those submissions are no doubt an attempt to try and rebut the statutorypresumption under s 287. However, TSL has not provided any expert evidence tocounter the clear and unequivocal expert view of Mr Gouwland. All three shareholderadvances are recorded as liabilities in the most recent financial statements and where,as here, the defendant company needs to rebut the presumption of insolvency, a failureto provide expert evidence or any further financial documentation, is inadequate. Asnoted above, Mr Gouwland is of the view that there is nothing in the financialstatements he has seen to indicate that all of the shareholder advances should properlybe regarded as liabilities. That is the clear and unequivocal way in which they arepresented in the financial statements before me. I also note that it is not disputed thatthe defendant is not trading and that it has very minimal funds in its bank account. Itdid not challenge the statutory demand. Furthermore, there is no evidencecontradicting the clear evidence from Drs Wee and Nair that they recognise that thecompany is simply no longer financially sustainable.[27] In all the circumstances, I conclude that TSL has failed to rebut thepresumption of insolvency and that the plaintiff has clearly established that thecompany is unable to pay its debts.(b) Is GAL, the plaintiff, a creditor?[28] It is clear that a winding up order will not be made where there is a genuineand substantial dispute as to the existence of a debt such that it would be an abuse ofthe process of the Court to order a winding up.3[29] In relation to this issue of whether the plaintiff was a creditor (normally thefirst question) I note that TSL admits at paragraph [3] of its statement of defence thatit owes GAL the amount demanded in the statutory demand. GAL is therefore primafacie a creditor.[30] However, TSL contends that while a debt is owed to the plaintiff that debt isnot due and payable. It says there is a genuine and substantial dispute about whetherthe shareholder parties entered into an oral agreement that they could not withdrawtheir shareholder advances until TSL was in a position to pay them (ie, until TSL hadbecome profitable). The principal evidence in support of the existence of thecontended oral agreement that of Drs Wee and Nair.[31] Beyond the mere say so of Drs Wee and Nair, there is very little probativeevidence to support the claim for this oral agreement. It is not disputed that the partiesagreed to hold an equal number of shares, to contribute equally to both the costs ofsetting up the practice and the costs of running the practice and to share equally in theprofits generated by the business. Likewise, it seems undisputed that they reachedagreement that if any of the principals provided medical services as part of TSL'sbusiness, he or she would be remunerated for those services. However, agreement onthose matters provides no support for the alleged oral agreement as to when theshareholder funds would become payable.[32] Mr Burt contended that the draft shareholders' agreement, being the documentdrafted by Franklin Law, on instructions from Drs Wee and Nair, contains a clauseentitled "shareholder advances" which specifically provides for a "non-withdrawalperiod". From this, it is submitted that it is "clear evidence" that some limitation on3 Yan v Mainzeal Property & Construction Ltd (in receivership and in liquidation) [2014] NZCA190 at [61] citing Bateman Television Ltd (in liq) v Coleridge Finance Co Ltd [1971] UKPC 929(PC) at 932.the shareholders' ability to demand repayment of their contributions had been incontemplation. I find, however, that that submission does not in fact assist TSL.[33] TSL has not challenged Dr Glassey's evidence that she was not aware of or hadseen the draft shareholders' agreement drafted by Franklin Law until after she had seenthe invoices from those lawyers in the defendant company's accounts in 2020. DrGlassey had nothing to with that draft shareholders' agreement and it cannot thereforeprovide any basis from which it can be inferred that she, as a critical party, had incontemplation some limitation on the shareholders' ability to demand repayment.[34] Dr Wee may be correct to point out in his affidavit that it makes no commercialsense that shareholders would have agreed to commit substantial funds (in excess of$300,000 as at 31 March 2020) without the security of the term which TSL says wasagreed between the shareholders. It is argued that no rational shareholder would investa significant sum of money in a company if there were a risk that another shareholdercould cause the company to become insolvent instantly at any time, either due to achange in the shareholders' circumstances or on a whim.[35] While there is some merit in that contention, it provides very tenuous supportfor the claimed oral agreement in this case. Here, there are real questions about thecommercial sense of both failing to record these important matters in writing (as aformal agreement), and, at a very early stage in the life of the business, excluding DrGlassey, a significant shareholder, in the process of instructing lawyers to draft ashareholders' agreement. If Dr Wee really would not have agreed to go into businesswith Dr Glassey without including such a term in their arrangement, it makes no sensethat he did not insist upon such a term being recorded in writing and the partiesentering into an enforceable agreement to that effect.[36] As Mr Lawrence submitted, the fact that RL and AMSL (Dr Wee and Dr Nair)entered into their own shareholders' agreement in November 2019, only a matter ofmonths after the Takanini practice opened, clearly does suggest that there was noshareholders' agreement (or at least no agreement on this critical issue of repayment)for TSL prior to that point.[37] I also reject Mr Burt's submission that an obligation by TSL to repay GALwould require a contribution by GAL of an equivalent amount. Mr Burt contendedthat if TSL had insufficient funds to repay GAL, the shareholders are obliged tocontribute those funds. However, and as Mr Lawrence submitted, no shareholder of alimited liability company is under any obligation to meet the liabilities of that companybeyond the provision of their share capital, and irrespective of whether or not thecompany is able to meet its debts as they fall due.4 The contention that there wouldbe no financial benefit to GAL in demanding repayment, even if it were entitled to doso, lacks merit.[38] The test I must apply is whether there is a genuine and substantial dispute. Ifind that the evidence is insufficient and does not reach that threshold.[39] Even if I am wrong in concluding that there is no genuine and substantialdispute as to the debt at issue, I would find, in the circumstances of this case, thatwhere the company has ceased trading and is presumptively insolvent, that a disputeas to this particular debt is not a relevant dispute that could operate as a proper basisfor declining to order the winding up of the company.[40] I agree with the conclusion of Christiansen AJ in Darby v EBT Worldwide Ltd,5where a similar argument was made by the director of the defendant company thatpursuant to an agreement (a written agreement in that case) between the parties,payment of the disputed debt was not yet payable. Christiansen AJ held that if thecompany was still trading there would be some merit in an argument that until a profitwas returned, no payment had to be made to the plaintiff. His Honour reasoned thatif the company has ceased to trade the plaintiff should be able to demand repayment.He concluded:[12] Accordingly, any contractual clause that provided that a shareholderlender was not to be repaid until a company traded profitably could not applyin the circumstance where the company ceased trading totally. The contractis silent on what is to happen on those circumstances. The Court couldproperly imply a term therefore to the effect that if a company ceased trading,the assets of the company would be called in, and at that point the creditorspaid with any balance being distributed to the shareholders in accordance with4 Soloman v A Soloman & Co Ltd [1897] AC 22 (HL).5 Darby v EBT Worldwide Ltd HC Auckland CIV-2004-404-2758, 15 October 2004.their shareholding. Therefore, if it is established that the monies are due andowing and in the absence of the company having the ability to pay thecompany should be wound up.[41] I agree with Mr Lawrence, for the plaintiff, that the position of the plaintiffhere is even stronger than that of Darby. Here, TSL admits it is not trading and theonly evidence of a shareholders' agreement containing the disputed term is the oralevidence of Drs Wee and Nair. There is simply no evidence at all in this case (andassuming the oral agreement contended for is made out) as to what provisions, if any,should apply if a company should cease to trade and before it became profitable.[42] It is not necessary for me to deal with the alternative contention advanced byGAL that it is a contingent creditor pursuant to s 288(5) of the Act.(c) Discretion – just and equitable grounds[43] It is clear that a liquidator should normally be appointed if one of the availablestatutory grounds is made out. The discretion to refuse to put a company intoliquidation is to be sparingly exercised.6[44] TSL contends:(a) As at 31 March 2020, TSL had accumulated losses of $177,803. Thoselosses may be off-set against future income, so as to reduce income taxpayable by TSL. The benefit to TSL is approximately $50,000 or$16,500 per shareholder. Those losses would become whollyunavailable if TSL were put into liquidation.(b) Counsel for GAL has specifically raised an alternative avenue by whichit could pursue any remedy to which it may be entitled. Mr Lawrenceadvised that he has been instructed to prepare proceedings against DrsWee and Nair under s 174 of the Act. ;6 90 Nine Ltd v Luxury Rentals NZ Ltd [2019] NZCA 424, (2019) 24 PRNZ 638, where the Courtof Appeal quoted with approval the approach of the High Court in Feltex Carpets Ltd (in rec) vN&I Investments Ltd (2006) 3 NZCCLR 714 at [38].(c) There is consequently nothing to be gained by putting TSL intoliquidation.[45] I reject each of those submissions. There is no probative evidence before theCourt that TSL will have any future income of sufficient substance to realise thebenefit of the accumulated losses. Mr Burt submitted that given the pattern of DrsWee and Nair establishing practices previously, the defendant company might be usedas a vehicle to run a practice in the future and therefore be able to use the tax losses.However, there was no evidence from Drs Wee and Nair of any intention to do so. AsMr Lawrence submitted, Drs Wee and Nair have already "grandfathered" TSL'sbusiness to another company owned by them and that does not include Dr Glassey orGAL.[46] I accept in principle that the courts have on occasions recognised theavailability of an alternative remedy as a valid basis on which to decline an order forliquidation.7 However, the defendant company here has ceased trading and it isdifficult to see the benefit to any party in investing significant resources in resolvinginternal company disputes when the company is in any event insolvent. Theavailability of another possible remedy clearly does not outweigh the reasons forputting this company into liquidation.[47] For all these reasons, I find that the plaintiff, GAL, has established all threegrounds necessary for the making of an order placing the defendant company intoliquidation.Result[48] I make an order placing the defendant company, Takanini Surgery Ltd, intoliquidation.[49] I appoint Mr Steven Khov and Mr Kieran Jones as liquidators. The terms andconditions of their appointment and their rates of remuneration are as set out in theirconsent to act dated 22 February 2021.7 See, for example, Jenkins v Supscaf Ltd [2006] 3 NZLR 264 at 283.[50] My orders are timed at 3.00 pm on 15 March 2021.[51] I award costs to the plaintiff on a 2B basis in the total sum of $11,233, plusdisbursements as sought in the sum of $1,118 (as calculated and set out in counsel'smemorandum as to costs dated 24 February 2021).__________________________Associate Judge P J Andrew