NEWTON and DUNCAN COTTERILL NELSON TRUSTEES (2011) LIMITED AS TRUSTEES OF THE L NEWTON FAMILY TRUST v INFRATECH MINING LIMITED [2015] NZHC 1476

NEWTON and DUNCAN COTTERILL NELSON TRUSTEES (2011) LIMITED AS TRUSTEES OF THE L NEWTON FAMILY TRUST v INFRATECH MINING LIMITED [2015] NZHC 1476 [29 June 2015]IN THE HIGH COURT OF NEW ZEALANDNELSON REGISTRYCIV-2014-442-000074[2015] NZHC 1476UNDER the Companies Act 1993IN THE MATTER of s 284(1) of the Companies Act 1993and Part 30 of the High Court RulesJudicature Act 1908BETWEEN LINDSAY JOHN NEWTON ANDDUNCAN COTTERILL NELSONTRUSTEES (2011) LIMITED ASTRUSTEES OF THE L NEWTONFAMILY TRUSTPlaintiffsAND INFRATECH MINING LIMITEDDefendantHearing: 25 June 2015Appearances: P J Bellamy for PlaintiffsR J Cottle, director of the Defendant, with leaveJudgment: 29 June 2015JUDGMENT OF ASSOCIATE JUDGE MATTHEWS[1] The plaintiffs apply for an order placing the defendant company into liquidation. The application is opposed.[2] On 3 October 2014 the plaintiffs served on the defendant a demand for payment of the sum of $200,000, pursuant to s 289 of the Companies Act 1993. The demand has not been met, in whole or in part.[3] The sum claimed is comprised of the sum of $150,000 said by the plaintiffs to have been advanced to the defendant on 18 September 2012, and the sum of$50,000 said to have been advanced by the plaintiffs to the defendant on 7 August 2013.[4] Section 241 of the Companies Act provides that the Court may appoint a liquidator to a company if it is satisfied that the company is unable to pay its debts.1Section 287 defines inability to pay debts. It provides that unless the contrary is proved, a company is presumed to be unable to pay its debts in certain circumstances including where the company has failed to comply with a statutory demand. As a result, the defendant company is presumed to be unable to pay its debts and the Court may appoint a liquidator as a result.[5] In the statement of defence filed by the defendant it admits entering the written agreement dated 18 September 2012 on which the plaintiff relies, but it says that the purpose and intent of the agreement was to enable the plaintiffs to participate, by way of an equity contribution, in a gold mining exploration project in Columbia. It says there was an oral agreement that the sum of $150,000 referred to in the agreement would be "distributed to the plaintiffs" on finance being secured for the project to advance to a certain stage. Therefore it denies that the sum is repayable until that point. It pleads the same position in relation to the second sum claimed, $50,000.[6] Because the defendant did not apply to set aside the statutory demand issued by the plaintiffs, it did not take the opportunity to challenge the plaintiffs' claim thatthe sums were owing and due, when it first had the opportunity to do so.[7] The payment by the plaintiffs to the defendant of $150,000 on 18 September2012 was made pursuant to a document of that date described as a "short term loan agreement". After citing that the defendant is indebted to the plaintiffs for theamount of the loan of $150,000, and that both parties wish to formally record the terms of all borrowings, the agreement goes on to set out the terms on which the payment was made. It is necessary to set out those terms in full:1 Section 241(4)(a).1. ACKNOWLEDGEMENT OF THE LOAN1.1 The Borrower acknowledges that the Lender has lent to the Borrower the sum of $150,000.00 (one hundred and fifty thousand New Zealanddollars) (the "Loan"). The Loan was made to the Borrower on 18thSeptember 2012.1.2 The Borrower further acknowledges that the terms of this Loan Agreement are the terms upon which the Lender is prepared to continue to lend the Loan to the Borrower.2. REPAYMENT OF LOAN2.1 All moneys lent to the Borrower by the Lender including the Loan must be repaid by the Borrower to the Lender as follows:(a) on or before the 31st March 2012; or(b) upon any default by the Borrower; or(c) upon other event referred to in this Loan Agreement that entitles the Lender to require repayment of the Loan.2.2 The Borrower promises and undertakes to repay the Loan to the Lender as set out in this Clause 2. Any failure by the Borrower to comply with this clause is a breach of an essential term and notwithstanding anything in this Loan Agreement the whole of the Loan then owing becomes immediately due and payable.3. RIGHT TO REPAY EARLY3.1 Notwithstanding Clause 2, the Borrower may at any time repay the whole or any part of the Loan at any time even though no demand has been made for repayment and even though the term of the Loan has not expired.4. INTEREST4.1 No interest will be paid on the loan during the term of the loan.5. DEFAULT BY BORROWER5.1 If the Borrower defaults in paying any instalment of the Loan in accordance with Clause 2, or if the Borrower is declared bankrupt or becomes insolvent, then the Borrower is in default and the Lender may, notwithstanding anything elsewhere contained, by written demand require immediate repayment by the Borrower of the whole of the amount of the Loan or any balance outstanding.5.2 The written demand signed by the Lender may be served on theBorrower at the Borrower's last known address. A written demandmay be served by pre-paid post, and if served by post, will be deemed received 3 days after the date of posting. If served personally, the written demand will be deemed served on the date of personal service. A written demand may be served by facsimile. If sent by facsimile, it will be deemed received by the Borrower on the day after the day it has been sent by facsimile. A facsimile transmission sheet will be conclusive evidence of the written demand having been sent to that facsimile number.6. WHOLE AGREEMENT6.1 This Loan Agreement represents the whole agreement between the Lender and the Borrower concerning the lending to the Borrower ofthe Loan. All representations, understandings or prior agreements concerning the Loan are acknowledged as having been waived and of no force or effect whatsoever.7. SECURITY7.1 In consideration for granting this loan the borrower will provide the lender and/or assignees with 150,000 ordinary shares in the company of the borrower, Infratech Mining Limited.7.2 These shares will be issued to the lender and registered on the NZ Companies register website within 48 hours of the loan funds being received by the borrower.7.3 These shares will remain with the lender in perpetuity until sold or redeemed. The repayment of the loan will have no effect on the ownership of these shares.[8] The document is signed by Mr L Newton on behalf of the plaintiffs and by Mr R Cottle on behalf of the defendant, as its chief executive officer.[9] The second payment by the plaintiffs to the defendant on 7 August 2013, $50,000, was made pursuant to a similar agreement, of that date. The recitals are the same, and the operative clauses are also the same except that the later agreement includes an entitlement on the part of the plaintiffs to a bonus of 25 per cent at thetime of repayment "of this loan" and provides for interest to be paid "on the loan at maturity on the loan amount at the rate of 12 per cent per annum".[10] The plaintiffs rely on these documents as constituting loan agreements, entitling them to repayment on the dates stated in the agreements, save that in his affidavit in support of this application Mr L Newton says that the date of repayment specified in the first agreement, 31 March 2012, was intended to be 31 March 2013. I accept this is correct (it is not specifically challenged by Mr Cottle) because otherwise the date of repayment would be prior to the date of the document (18 September 2012). He also notes an error on the fourth page of the agreement where the date of execution is described as 23 June 2011. This should have been 18 September 2012, which is the date recorded at the top of the agreement and the date on which the payment to the defendant was made.[11] Both the short term loan agreements signed by Mr Newton for the plaintiffs and Mr Cottle for the defendant are absolutely clear in their terms: in each case the stipulated sum was lent to the defendant, and was to be repaid by a certain date, oron any default by the borrower. Nothing in the terminology in either agreement suggests that it is capable of bearing any other meaning. Each agreement is expressed to be the whole agreement between the parties, and each was prepared by the defendant.[12] Nonetheless, the defendant maintains that neither payment made by theplaintiffs was a loan, rather each was "nothing more than an arrangement to allow [the plaintiffs] to invest in the company in exchange for shares and to have his investment repaid at an early stage from the main project funding when that wasreceived". Mr Cottle says that to interpret the agreement the Court must look at thepurpose for which the funds were advanced and what he describes as the underlying intent of the agreement.[13] In interpreting a contract the Court may have regard to facts outside the terms of the written agreement, even when the words in issue appear to have a plain and unambiguous meaning, as here.2 Mr Cottle says that the purpose of the funds was to allow the defendant to make progress in its main project funding in accordance with a business plan, which was to fund the development of mining operations in Columbia. He says that although the payments were described as advances, this was because a substantial long term project funder would more readily agree to allowing a portion of its funding to be used by the defendant to repay short term debt, as opposed to returning capital contributions to shareholders. He says that there are also tax advantages for the defendant in structuring the payments as loans, instead of as share capital (though he does not say what). He says, however, that the reality was that the advances were share capital and are not repayable in accordance with the terms of the agreements, or at all, until the substantial investment funding referred to is received.[14] Mr Cottle says that the plaintiffs clearly understood that their funding was not by way of a conventional loan and that the only way it would be repaid was when project funding was received. To support this he filed affidavits from six other persons, who are said to be investors in the defendant as well, who confirm that this2 Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5; [2010] 2 NZLR 444 at [22] per Tipping J. See also McGrath J at [64] and Blanchard J at [4].was their understanding. However, that is not the understanding of the plaintiffs, according to Mr Newton. Nor is it the understanding of two other investors(members of Mr Newton's family) who also swore affidavits. I am not assisted bythe evidence of any of these witnesses in relation to their understanding of the transaction. Either they can be classed as statements of their subjective intentions when entering their respective agreements with the defendant, or they come perilously close to it. For this reason I have not taken them into account in reaching my decision in this case.[15] A number of documents, including documents emanating from the defendantand Mr Cottle, refer to the plaintiffs' funds as loans and are consistent with the plainterms of the written agreements. The first document is an email sent by Mr Cottle to existing investors in the defendant, including the plaintiffs. It was sent on 31 July 2013. Again, it is necessary to reproduce this document in full:Dear Shareholder,Further to my last update there have been some positive developments regarding the underwriting fees. MIKOR has committed to pay the $300,000 USD for the underwriting fees from the profits they are due on a major international transaction they are a party to (unrelated to us). Despite the target date of the completion of that transaction being 2nd July it has still not completed, mostly I understand, because of the sheer size of the transaction (multi billion dollars). Although I am advised it is still progressing and will eventually get done we simply cannot sit and wait for this so last week I made approaches to several investors for the $390,000 NZD ($300,000 USD) we need for this.The good news is that we have received a very good response. So far we have a total of $290,000 confirmed toward this and currently available to us. We now only need the remaining $100,000 NZD to make this happen. My reason in writing to you today is to ask if you know of anyone that may be prepared to invest this $100,000 with us for about 30 days. We would do it as a loan and provide 100,000 IML shares as security but in addition MIKOR will provide us with an insurance bond that will cover the full repayment of the underwriting costs in the event the funding fails to mature. This insurance is underwritten by Aviva Insurance who are a large public listed UK insurance company. http://www.aviva.com/. This insurance cover is issued within 7 days after we have paid the underwriting fees.We are very keen to get this done this week so if you know of anyone that can help with this or even a part of this (minimum of $25,000) please let me know. The $100,000 will [be] fully repaid from the first tranche of the funding which will be available to us in about 15 banking days after the underwriting fees are paid. The 100,000 IML shares will remain permanently with the investor/lender even after the loan is fully repaid.Please let me know if you have any ideas or inspirations?Regards,[16] It was on the basis of this email that the second payment of $50,000 was made by the plaintiffs to the defendant, a week later. There is no mention in this email of these funds being a subscription to the capital of the defendant. The email is plain in its terms. The moneys were required "for about 30 days" and would be aloan, with security.[17] Secondly, when Mr Newton was raising concerns with Mr Cottle about the sums that the plaintiffs and two other members of the Newton family had made to the defendant, Mr Cottle sent an email to him on 20 December 2013. It includes the following paragraphs:We calculate all the interest outstanding on your loan up to the 31st January 2014 to be $2,926.03.This just leaves the principal amount of your loan which we calculate to be $212,500.00. In addition to the interest payment above we are able to make payment of 10% of this principal amount which is a further $21,250.00.The total amount we are able to pay to you at this time is therefore $24,176.03.After this point the remaining principal amount to be paid to you is $191,250. We expect to be in a position to repay that to you in full later in January.[18] In response Mr Newton asked for a calculation of the interest figures provided by Mr Cottle. Mr Cottle responded:Everything is as per the loan documents we signed together. We are only just being able to make these payments and cannot afford to pay any penalties for late repayment, it (sic) that is what you were suggesting.You all get to keep the shares which were issued for these loans at not (sic) costs once the loans are repaid and they will yield excellent dividends over time.[19] Four hours before this last email was sent Mr Cottle sent an email to another person who had paid moneys to the company, Mr Cleary. I need not quote the entire email, only the following passages:However as of today, in the interim, they have agreed to release to us immediately $800,000 USD. This while not as good as $5m is a very positive start as a good will measure on their part. This will allow us to make some further payments on the mining licenses in Colombia and will allow us to pay all interest on all shareholder loans (up to end of January 2014) plus repay a small percentage of the principal on these loans. The balance of the loan principal and the repayment of the shareholder contributions will be paid out of the main funding when it is received later in January.I will writing to each of you, who has a shareholder loan, individually explaining exactly what the payment to you will be and the breakdown of that.[20] In contrast to these express references to the moneys paid by the plaintiffsbeing loans, no documents are produced to support Mr Cottle's contention that thepayments were contributions of share capital. Nor, in the affidavits affirmed and filed by Mr Cottle in support of his earlier application for an order restraining advertising of this application, and in opposition to this application, does he say that he told Mr Newton anything about the funds being share capital, though expressed for the reasons now given as advances. Mr Newton says this was not mentioned.[21] That leaves only Mr Cottle's evidence that the agreements are not what they appear to be. That evidence is manifestly at odds with the documents themselves and with the further documents to which I have referred. The Court is not required to accept uncritically evidence given in affidavits which is inconsistent with undisputed contemporary documents, particularly when those documents originate from the very person now giving the conflicting evidence.3[22] For these reasons I find that the payments of $150,000 and $50,000, by the plaintiffs to the defendant were loans made in accordance with the loan agreements executed in respect of them.[23] Mr Cottle maintains that the defendant is solvent. A set of accounts for the company as at 31 March 2014 comprises the most up to date statement of the company's financial position available to the Court. Mr Cottle says he prepared this document, based on an earlier set of accounts prepared by Ernst & Young as a3 Eng Mee Yong v Letchumanan [1980] AC 331 at 341E per Lord Diplock.template. One page, without a heading, but appearing to be a statement of financial position, lists three assets, cash of $11,015, property, plant and equipment at a figure of $35,989, and intangibles of $137,721, making total assets of $184,725. Trade creditors are disclosed in the sum of $25,698, and other loans and borrowings in the sum of $27,693, a total of $53,391.[24] When the plaintiffs' advances of $200,000 are added to this statement, thetotal liabilities amount to $253,391, almost $70,000 more than the total assets. There is ample evidence before the Court, too, that other investors in the defendant also made advances which should, on the analysis I have undertaken, be shown as liabilities.4 Even leaving those to one side, the company has a substantial excess of liabilities over assets.[25] As well, current liabilities disclosed on this statement, $53,391, exceed assets which might be readily realised, cash, property, plant and equipment. The company did not have funds, as at March 2014, to pay its trade creditors and the loans and borrowings of $27,693 in full.[26] Doubt is cast, too, over the entry described as "intangibles". This figure,$137,721, is said to represent the current value of three licences to mine in Columbia. However, the evidence produced by the defendant to support its contention that it actually owns the licences it claims to own is, at best, equivocal.The defendant's position is that it has rights to these licences, but that they cannot betransferred to it until further capital is raised for the intended mining operation. Mr Cottle says that the figures shown in the 2014 accounts represent moneys expended to date to obtain the licences, which he maintains can be shown as an asset. When pressed on whether or how this asset has any actual value, or could be realised, Mr Cottle was without explanation.[27] Further, as Mr Bellamy points out:(a) Mr Cottle says in his affidavit that there are heads of agreement to purchase the licences. Those heads of agreement are not produced.4 Documents produced by the defendant which are similar to those relied on by the plaintiffs record further loans of approximately $1,200,000.(b) The heads of agreement are said to have been assigned to the defendant, but the assignment is not produced.(c) Mr Cottle says there is a formal assignment of the licences themselves between the licence owners and the defendant. Whilst English versions of these are exhibited, these are unsigned.(d) The assignee in each case is, in any event, not the defendant but Infratech Mining Sucursal Columbia.[28] In response to the last two points Mr Cottle informs the Court that the assignment referred to in paragraph (c) was initially in Spanish, and the Spanish version is signed and in relation to paragraph (d), the Columbian company is in fact just a branch office of, and is therefore the same entity as, the defendant.[29] It was open to the defendant to produce the assignment in Spanish, together with a translation, so that these contentions could be substantiated. However, given the analysis of the figures in the 2014 accounts which I have just set out, there was an excess of liabilities over assets even if the benefit of the doubt is given to the defendant in relation to whether the defendant has an absolute right to the licences, and if so whether there is an appropriate accounting treatment in respect of them in the statement of financial position.[30] Finally, on 24 February 2014 Mr Cottle informed shareholders that thedefendant "has an urgent problem" and needs "about $7500" to pay for power and telephones "very short term".[31] I am satisfied the defendant was insolvent by 31 March 2014.[32] Mr Cottle says the defendant is "not currently trading as such, is in limbowhile raising the much need (sic) project funding". It is clear, however, that thereare real cash shortages. The defendant was occupying premises in Nelson, and has been evicted for non-payment of the rent. Mr Cottle says that the lease was in the name of a different company, so the rent is not a liability of the defendant. Doubt iscast on that by a letter he wrote to parties described as shareholders in April 2014. He said:In the meantime the company is extremely short of cash. We are behind in our office rent and have been given notice that we must pay all the outstanding balance by 11th August latest or we must move out on that date. We also have other urgent payment requirements therefore we have a shortfall of $50,000 at this time.[33] This email is from bob@infratechgroup.org, but so are other emails sent by Mr Cottle on behalf of the defendant. The email also refers to capital raising, and it seems unlikely that the reference to the company being extremely short of cash is a reference to any company other than the defendant.[34] There is further evidence that the company has remained insolvent since March 2014. On 8 November 2014 Mr Cottle wrote to shareholders seeking loans amounting to $10,000 for legal fees to oppose the present application. He says that the defendant "does not have the necessary funds to hand". Absent, however, is any evidence from the defendantto support its contention that it is solvent.[35] I am satisfied on the information before the Court that the defendant company is insolvent. I accept that its operations may, at the present, be in limbo, as Mr Cottle puts it, but I am satisfied that it has obligations to repay the plaintiffs, and no doubt others who entered similar agreements with it, the substantial sums of money received by way of loans.[36] Mr Cottle did not proffer any prospect of the defendant company paying the debt demanded under the notice which is the foundation for this application. The presumption that the company is unable to pay its debts has not been displaced, nor has any other ground been established on which the Court might decline the application for an order appointing a liquidator.Outcome[37] The defendant company is placed into liquidation. The Official Assignee is appointed as the liquidator.[38] The plaintiffs are entitled to costs on a 2B basis together with disbursements fixed by the Registrar.[39] This order is timed at 2.33 pm on Friday, 26 June 2015, the time of delivery of judgment, orally, in court._______________________J G MatthewsAssociate JudgeSolicitors:P L Law Limited, Nelson.C & F Legal Limited, Nelson.