FOG v FRIMLEY ESTATE LIMITED [2015] NZHC 2247

FOG v FRIMLEY ESTATE LIMITED [2015] NZHC 2247 [2 October 2015]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2015-404-001191[2015] NZHC 2247BETWEEN MARIANNE FOGPlaintiffAND FRIMLEY ESTATE LIMITEDDefendantHearing: 4 September 2015Appearances: R B Hucker for the PlaintiffE J Grove for the DefendantJudgment: 2 October 2015JUDGMENT OF ASSOCIATE JUDGE SARGISSONThis judgment was delivered by me on 2 October 2015 at 4.00 p.m.pursuant to Rule 11.5 of the High Court Rules.Registrar/Deputy RegistrarDate.......................................Solicitors:KP Legal, AucklandHucker & Associates, Auckland[1] Ms Fog has applied to have Frimley Estate Limited placed into liquidation.Ms Fog's application is made as a creditor under subsections 241(2)(c) and (4)(a) of the Companies Act 1993, which relevantly provide:(2) A liquidator may be appointed by—[](c) the court, on the application of—[](iv) a creditor (including any contingent or prospective creditor); or[](4) The court may appoint a liquidator if it is satisfied that—(a) the company is unable to pay its debts; or[][2] Frimley opposes the liquidation and has filed an application seeking a stay of proceedings under r 31.11 of the High Court Rules, as well as a stay on advertising.[3] It is too late to grant a stay of advertising. Ms Fog has already advertised in the New Zealand Herald. She placed that advertisement at the same time she filed the application to liquidate. She also made arrangements to advertise in the Gazette, which has proceeded because she was not asked to give any undertaking not to do so. The remaining issue, therefore, is whether there are grounds for a stay of proceedings in respect of the application for liquidation – whether on an interim or permanent basis.[4] For reasons I will come to, I am not satisfied that Frimley has established that there should be such a stay. My reasons can be stated fairly briefly. I begin by referring to the relevant background.Background[5] Ms Fog bought shares in Frimley. She did so because one of the directors, Stephen Duff, who was also her financial advisor, promoted it and invited people to acquire shares in it. Ms Fog was not given a registered prospectus. The Financial Markets Authority determined that some of the shareholders including Ms Fog were members of the public who should have been provided with a registered prospectus, and were not. The sale of shares to members of the public was invalid under s 37 ofthe Securities Act 1978 and Frimley was therefore required to repay the subscribers who were members of the public, and to pay interest on their subscriptions.[6] Litigation ensued in the High Court between Frimley and Ms Fog. This was because Frimley disputed whether it was obliged to repay Ms Fog, and it made an application for relief under s 37AH of the Securities Act. In that litigation Frimleyargued that Ms Fog was not "a member of the public" but rather a "close business associate" of Mr Duff. Asher J found that that was not the case; Ms Fog was amember of the public.1 Other key elements of his judgment were:(a) Frimley was not entitled to be relieved of its obligation to refundMs Fog's shares.(b) In addition to Ms Fog, one other investor was a member of the public. Therefore, a prospectus was required to be provided to them before their investments were made; because that had not occurred, they were entitled under s 37(6) to have their subscriptions refunded along with interest at a rate prescribed by regulations.[7] The result of those findings was that no relief would be granted to Frimley torelieve it of its statutory obligation to refund Ms Fog's investment and pay interest atthe prescribed annual rate of 10% per annum.[8] Justice Asher left open the question whether a limitation defence might be available to Frimley in future proceedings brought by Ms Fog. It is common ground that such a limitation defence could only be available in respect of the first of the sums invested by Ms Fog, around $99,000. It would not be available in respect of the second and third sums, which together amount to around $50,000.[9] Following receipt of Asher J's judgment, Ms Fog contacted Frimley seekingpayment for all three sums and statutory interest. Frimley declined to pay, and on 3 June 2015 Ms Fog filed her application seeking to place Frimley into liquidation. The application is not founded on the statutory presumption of1 Frimley Estate Ltd v Fog [2015] NZHC 1010, [2015] NZAR 1019.insolvency that arises under s 278(a) of the Companies Act in respect of a failure to comply with such a demand (there was no such demand). Rather, it relies on the procedure in s 241, meaning that Ms Fog must prove (without the benefit of the statutory presumption) that she is a creditor of Frimley and that Frimley is unable to pay its debts. Frimley countered, by filing its application for a stay of advertising and a stay of the proceeding[10] Ms Fog has, more recently, filed proceedings seeking summary judgment in debt for the three sums and statutory interest. She filed the proceeding on 26 August 2015. Though she has taken this step, she says that she unquestionably already has the status of a creditor, and is entitled to have her case for a liquidation order dealt with on its merits.The stay of proceedings application[11] Frimley does not challenge Ms Fog's case that it lacks resources to refund thethree sums she invested with statutory interest (this being the case whether on acashflow or assets basis). It is common ground that if it has to repay Ms Fog's entireinvestment plus statutory interest, it would indeed lack the resources to do so.[12] Rather, Frimley relies on three arguments:(a) First, Asher J's judgment is not sufficiently clear to establish eitherliability or quantum to the required standard as there is no judgment debt as such, and she is not therefore a creditor. Additionally, were Ms Fog to sue Frimley in debt it would have arguable defences in:(i) Limitation, in respect of the return of the first investment; and(ii) Joint statutory liability under s 37(6) of the Securities Act in respect of all three investments. This argument relies onFrimley's contention that Ms Fog should be treated as a director in a manner similar to that provided for under s 126 of the Companies Act 1993.(b) Secondly, Asher J's judgment (which concluded that Ms Fog was amember of the public and therefore entitled to the return of her investments, with interest) is under appeal to the Court of Appeal.(c) Thirdly, paying Ms Fog the debt would afford her priority or a privileged position compared to other investors, many or all of whom are in the same position as her.Analysis[13] Frimley may be correct in its submission that the orders made by Asher J donot amount to a judgment debt in Ms Fog's favour. In strict terms, there is no awardfor her in respect of a specific sum, but rather a refusal to grant relief to Frimley. Therefore, just as there is no statutory demand that could be the foundation for a presumption of insolvency, there is no judgment debt that could give rise to such a presumption in terms of s 287(b) of the Companies Act:287 Meaning of "inability to pay debts"Unless the contrary is proved, and subject to section 288 of this Act, a companyis presumed to be unable to pay its debts if—(a) The company has failed to comply with a statutory demand; or(b) Execution issued against the company in respect of a judgment debt has been returned unsatisfied in whole or in part; or[14] However, that alone is not a factor that contradicts her claim to status as a creditor, or that might put an end to an inquiry under s 241(4)(a), or justify a stay.[15] Materially, Asher J came to a clear conclusion that Frimley was liable to Ms Fog for the return of the investments with statutory interest subject to the possible limitation defences in any future enforcement proceeding, which could only apply in respect of the first investment. These findings as to Frimley's liability toMs Fog underpin His Honour's refusal to grant relief.[16] More than that, Frimley's application was for relief under s 37 of theSecurities Act, and as such it implicitly acknowledged the existence of a statutorydebt owed to Ms Fog which created the need for that relief. The application wasrefused. That seems to me to go a step beyond establishing Ms Fog's status as acreditor in terms of s 241. Putting aside momentarily Frimley's further contentions, Iam satisfied that she is entitled to say that Frimley's liability as a debtor is plain, andthat quantum is not a matter of genuine dispute. Not only is the amount of the statutory core debt obvious from Asher J's judgment (as is the entitlement to statutory interest on that debt), but the calculation of such interest involves merely a simple arithmetical calculation. There is therefore no mystery or uncertainty about quantum.[17] I turn then to Frimley's further arguments, and whether they are sufficient tocontradict these findings, or to justify a stay for some other reason. I begin with thedefences that Frimley contends it would have in relation to Ms Fog's proceeding indebt, before coming to the appeal and the priority issue that it also relies upon.[18] The grant of a stay of proceedings is discretionary. In order to receive one, Frimley must satisfy r 31.11 of the High Court Rules:31.11 Power to stay liquidation proceedings(1) If an application for putting a company into liquidation is made under rule 31.3, the defendant company, or, with the leave of the court, any creditor or shareholder of that company or the Registrar of Companies, may, within 5 working days after the date of the service of the statement of claim on the defendant company, apply to the court—(a) for an order restraining publication of an advertisement required by rule 31.9 or any other information relating to that statement of claim; and(b) for an order staying any further proceedings in relation to the liquidation.(2) The court must treat an application under subclause (1) as if it were an application for an interim injunction and, if it makes the order sought, it may do so on whatever terms the court thinks just.(3) The inherent jurisdiction of the court is not limited by this rule.[19] The principles governing such applications were summarised in NemisisHoldings Ltd v North Harbour Industrial Holdings Ltd:2a) The Court has an inherent jurisdiction to stay winding-up proceedings where the debt upon which such proceedings are founded is the subject of genuine dispute. In those circumstances the2 Nemisis Holdings Ltd v North Harbour Industrial Holdings Ltd (1989) 1 PRNZ 379 at 385.plaintiff cannot show it has the status of a creditor or that there has been neglect by the company to pay.b) The jurisdiction is an inherent one to prevent abuse of process. There is no inflexible rule.c) The governing consideration is whether the proceedings suggest unfairness or undue pressure.d) It is a serious matter to stay winding-up proceedings, so the decision to do so is never made lightly. The onus is on the applicant and it is normally necessary to demonstrate "something more" than the balance of convenience considerations which are usually considered on an application for interim injunction. If the defendant company has had an opportunity to file appropriate affidavits, such defendant is required to establish a strong prima facie case of the existence of a genuine dispute on substantial grounds, or show that there are clear and persuasive grounds for a stay.The defences of limitation and joint statutory liability[20] The limitation defence relies upon an argument under the Limitation Act 19503. It is essentially that any proceedings that Ms Fog might bring to recover her investment would be statute barred as her rights will have been in existence for more than six years. It is not in dispute that the defence could only give rise to a dispute about the first debt. It was raised by Frimley in support of its application for relief before Asher J, and it remains live. Asher J considered that there were viable arguments that Ms Fog was not time-barred but he did not consider it necessary to determine the issue:4Mr Hucker submitted that the limitation period may have only commenced to run when Ms Fog discovered all the relevant circumstances. He relied on s 23B of the Limitation Act 1950. He also submitted that the 2009 and 2010 allotments occurred within the relevant six year period. He argued that the subscriptions could be treated as trust property under s 21(1)(b) of the Limitation Act so that no limitation period was engaged and he argued that to the extent that repayment and/or compensation is treated as an action for account under s 4(2) of the Limitation Act, the filing of the relief application was an acknowledgement by Frimley for the purposes of s 25(4) of the Limitation Act.I do not consider it necessary to determine these limitation issues. Even if Ms Fog's claim is statute barred, this does not necessarily assist Mr Grove's argument as it undermines his contention that she has the ability to obtain a3 Since replaced by the Limitation Act 2010.4 Frimley Estate Ltd v Fog, above n 1, at [71]-[72].judgment against Frimley and stop its continued operation. If there is a limitation bar, then that is an issue that will have to be resolved in future proceedings. It does not directly arise here.[21] The onus of establishing that the defence supports a stay is Frimley's. I amnot persuaded it has discharged the onus. Asher J's reservations about the force ofthe limitation arguments do little or nothing to assist Frimley. Even putting those reservations aside the defence cannot be a strong argument for a stay:(a) It could not alone change Ms Fog's status as a creditor.5 As it relates only to the first debt, if successful, it would prevent her as a creditor from recovering that particular debt but it would have no effect on her right as a creditor to recover the remaining debts or on her status to make an application for an order for liquidation founded upon such debts.(b) Its relevance in the context of such an application would be essentially whether the quantum of the overall debt is the subject of a genuine dispute with the potential to undermine her proof on the question ofFrimley's insolvency.(c) Such a dispute may prove to have a decisive effect on the issue of the appropriateness of an order for liquidation but that is more properlyconsidered in the context of the fuller examination of Frimley'ssolvency that can occur in relation to the application for liquidation than in the context of the present stay application.(d) Further, the dispute may well be one that is suited to resolution in the context of the application for liquidation. That will be a question for the discretion of the Judge who hears the matter.6[22] I turn then to the joint statutory liability defence.5 See Law Commission Limitation Defences in Civil Proceedings (NZLC R6, 1988) at 16, AMP Finance NZ Ltd v Heaven CA151/97, 11 December 1997 at 5.6 Bateman Television Limited (in liquidation) v Coleridge Finance Company Limited[1971] NZLR 929.[23] Frimley contends that there is a tenable argument that Ms Fog was a pseudo-director or a deemed director for the purposes of her investments, and therefore on this basis, arguably, not a creditor. I am loath to accept this argument as showing the existence of a genuine dispute as to whether the return of any of the investment is owed, for these brief reasons:(a) Frimley has not given any good reason why this argument was not raised in its grounds for a stay, or by way of opposition to the liquidation application, and why it should now be permitted to raise it.(b) The argument appears weak, with little prospect of success:(i) Asher J found, as a matter of fact, that Ms Fog was poorly treated in respect of all three sums. He said such treatment"was a serious failure causing her serious prejudice".7 That statement, and indeed the judgment as a whole, which focuseson the disadvantage caused by Ms Fog's lack of knowledge as a result of being denied the prospectus, hardly suggests that Ms Fog should be clothed with the knowledge and control of the company that would be implied if she were somehow to be deemed to be a director. (Mr Grove concedes that she does not meet the requirements under s 126 of the Companies Act).(ii) There is no apparent reason why this argument was not raised in the proceedings before Asher J, but it seems to me it is one that properly belonged in that proceeding. If, indeed, there were evidence that Ms Fog had that level of knowledge, I consider that the rule in Henderson v Henderson might well apply, because Frimley had not presented its whole case before Asher J.8 The directorship argument would go beyond a simple statutory limitation on enforcement to undermine the basis for the original judgment. It might well amount to a collateral7 Frimley Estate v Fog, above n 1, at [51]8 Henderson v Henderson (1843) 67 ER 313, approved in Chamberlains v Lai [2007] 2 NZLR 7 (SC) at [71].attack on the foundations of the judgment of Asher J, such that the Court would be barred from considering it.[24] Putting aside momentarily that there is an appeal, Frimley has failed to raise any basis for its suggestion that the Court should put aside key factual findings, other than that it disagrees with them. That suggestion alone is not sufficient to support the contention that there is a tenable defence based on joint statutory liability. The result is that I am far from satisfied that the joint statutory liability defence could give rise to a tenable argument that the statutory debt owed to Ms Fog is the subject of a genuine dispute.[25] I turn then to Frimley's argument that as Asher J's judgment is under appeal,the appeal warrants a stay of the liquidation proceeding.Judgment currently under appeal[26] The power to stay the liquidation proceeding is discretionary, as r 31.11 makes clear.[27] Rule 12 of the Court of Appeal (Civil) Rules 2005, which is exercised concurrently by the Court of Appeal and the High Court, does not directly apply here, but is relevant by analogy because it makes it clear that there is no general presumption that judgments are automatically to be stayed pending appeal:912 Stay of proceedings and execution(1) None of the matters referred to in subclause (2) operate as—(a) a stay of a proceeding in which a decision was given; or(b) a stay of execution of that decision.(2) The matters are—(a) an application for leave to appeal; or(b) the giving of that leave; or(c) an appeal.(3) Pending the determination of an application for leave to appeal or an appeal, the court appealed from or the Court may, on application,—(a) order a stay of the proceeding in which the decision was given or a stay of the execution of the decision; or(b) grant any interim relief.(4) An order or a grant under subclause (3) may—9 Palmerston North City Council v Birch [2012] NZHC 3248 at [17].(a) relate to execution of the whole or part of the decision or to a particular form of execution:(b) be subject to any conditions that the court appealed from or the Court thinks fit, including conditions relating to security for costs.(5) If the court appealed from refuses to make an order under subclause (3), the Court may, on application, make an order under that subclause.(6) If the court appealed from makes an order under subclause (3), the Court may, on application, vary or rescind that order.(7) The Court may, at any time, vary or rescind an order made by it under this rule.[28] Rule 20.10 of the High Court Rules, which deals with stay of proceedings pending an appeal, is also helpful by analogy. The case law on that rule states that a party is entitled to the fruits of a judgment in its favour. As a result, the general position is that judgments are not to be stayed pending appeal unless the party appealing the judgment can persuade the Court that its appeal rights would be rendered nugatory.10 In deciding whether to exercise its discretion to stay proceedings, the Court will conduct a balancing exercise considering the respective position of each party.11 I bear those authorities in mind when exercising the test under r 31.11 as explained by Nemisis Holdings.[29] Frimley's appeal relies largely on a challenge to Asher J's factual finding that Ms Fog is a member of the public, and upon the related contention that there was no breach of the requirement for a prospectus under the Securities Act. In support of a stay, Frimley says that:(a) Its rights on appeal to pursue this argument would be rendered nugatory if it were placed into liquidation because:(i) Its secured creditors would likely appoint receivers to Frimley and take control of its assets (namely a large block of land known as the ADB Block) – in which case it would lose the opportunity to raise additional funds to repay all of its creditors and investors.10 Philip Morris (NZ) Ltd v Liggett & Myers Tobacco Co (NZ) Ltd [1977] 2 NZLR 41 (CA).11 Duncan v Osborne Buildings Ltd (1992) 6 PRNZ 85 (CA); Dymocks Franchise Systems (NSW) Pty Ltd v Bilgola Enterprises Ltd [1999] 3 NZLR 239, (1999) 13 PRNZ 48 (HC).(ii) It can, by rezoning and selling the land, raise more than enough funds to pay the debts secured against it, whereas receivers might not be minded to delay the sale and so raise additional funds.(b) There is no real risk of its financial position deteriorating if there is a delay.[30] These arguments invite the Court to place considerable weight uponFrimley's belief that its investors' expectations of a financial return outweighMs Fog's dubious rights as a creditor (as it refuses to accept she holds a status that is anything more than an investor). These arguments assume the likelihood of asuccessful challenge to key findings of fact in Asher J's judgment, but nothing thathas been put before me that suggests that these findings are other than well-founded, or that they are susceptible to being overturned. As a consequence it appears unlikely that, absent new evidence the Court of Appeal will interfere with them, and I can only conclude that the appeal has weak prospects of success. That must be afactor pointing in Ms Fog's favour in terms of the balancing exercise, and inallowing her to proceed to have her application for the appointment of a liquidator heard on its merits.[31] Further, if I refuse to grant a stay of the liquidation proceeding, it does not necessarily mean that Frimley will be placed into liquidation. That will be a strong possibility if Ms Fog can show that Frimley cannot pay its debts, but it is not an inevitability. If there is force in Frimley's arguments such that Ms Fog's positionshould not be favoured over that of investors, then that may sound in the orders that the Court in its discretion makes on the liquidation application.[32] Additionally, the question of whether there is no real risk of Frimley'sfinancial position deteriorating is one that I think needs to be weighed with the question of whether a liquidator should indeed be appointed to conserve assets for creditors, and that is properly assessed by the Judge who hears the liquidation application. The interest of investors in the first of these questions does notoutweigh the more general advantage as far as Ms Fog is concerned of a prompt hearing of that application.Priority or privilege[33] Frimley argues that if the hearing of the liquidation application is not stayed,that would place it in the position of having to pay Ms Fog's debt now, which will place her in a privileged position compared to other investors. The argument is similar to that raised in relation to the appeal. It tends, I think, to work against Frimley.[34] Frimley says that most of its investors are in a similar position to Ms Fog, such that their investments are potentially void. Any payment to Ms Fog would reduce the assets available to pay those other creditors, implicitly advantaging Ms Fog in comparison. Frimley should not, it says, be forced to prefer one creditor over another in order to avoid liquidation.[35] The issue with that argument, however, is that if Frimley owes all its investors a debt, and it has insufficient assets to pay all its investors – which seemsto me to be the only scenario in which its 'privilege' argument makes sense – then it would seem that Frimley is suggesting that it may not be able to pay all the debts it owes in full. That is precisely the situation in which liquidation, or at least a hearing on liquidation, should occur, as prescribed by s 241(4)(a).[36] Further, though Mr Grove said at the hearing that cash security may be available for the debt, he doubted that Frimley would be able to provide security for statutory interest at the rate of 10% per annum. If, as Mr Grove argues, Frimley is capable of paying its debts, Ms Fog will be unable to prove the contrary at the substantive hearing, and there will be no liquidation.[37] Whether or not Frimley must pay Ms Fog the debt she claims in full, if Frimley is insolvent then it seems to me very much arguable that the management and realisation of its assets will be best done by liquidators who will act in its creditors' and shareholders' best interests. On the other hand, if it transpires that thecurrent management is best placed to achieve the maximum return on Frimley's assets, or that Frimley's other arguments have more merit than they presently appearto, then the discretionary language of s 241 will allow this Court to decide not toliquidate. I am not, however, prepared to take Frimley's assertions to that effect on faith in the context of the present application.[38] I consider that the liquidation application has been properly made. It is not a question of applying unfair pressure. Frimley has, at this point, failed to show the strong prima facie case it is required to demonstrate in order to justify a stay of proceedings, nor even to show that the balance of convenience runs in its favour. On the contrary, Ms Fog has shown prima facie evidence that Frimley is unable to pay its debts. The requirements of rule 31.11 have not been met. In these circumstances, I cannot grant the applications for stay.Result[39] Frimley's application for a stay of the proceeding is declined.[40] The s 241 liquidation application is to go to a substantive hearing. It is to be listed in the Miscellaneous Companies List on 9 October 2015 at 11.45 am for the allocation of a fixture and such further timetable directions as may be required.[41] As costs follow the event, Ms Fog is entitled to costs on a 2B basis and disbursements as fixed by the Registrar._____________________Associate Judge Sargisson