POLPERRO CORPORATION LTD V INTERNATIONAL MARINE SERVICES LTD HC AK CIV-2006-404-2390

POLPERRO CORPORATION LTD V INTERNATIONAL MARINE SERVICES LTD HC AK CIV-2006-404- 2390 16 July 2007IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV-2006-404-2390IN THE MATTER OF the Companies Act 1993 BETWEEN POLPERRO CORPORATION LIMITED Plaintiff AND INTERNATIONAL MARINE SERVICES LIMITED Defendant Hearing: 21 and 26 June 2007 Appearances: Mr D Hughes and Ms S Stead for plaintiff Mr J Shaw for defendant Judgment: 16 July 2007 at 3 p.m.JUDGMENT OF ASSOCIATE JUDGE J P DOOGUEThis judgment was delivered by me on16.07.07 at 3 p.m, pursuant to Rule 540(4) of the High Court Rules. Registrar/Deputy Registrar DateCounsel: Sarah-Lee Stead/Daniel Hughes, Kensington Swan, Private Bag 92101, Auckland Mr J Shaw, International Marine Services Ltd, 6 Jellicoe Street, Viaduct Harbour, AucklandBackground[1] The plaintiff Polperro Corporation Limited ("Polperro") has brought the present proceeding under Part IV of the High Court Rules seeking relief under of the Companies Act 1993. In particular, Polperro seeks an order that it not be bound by the creditors' compromise entered into by the defendant, International Marine Services Limited ("IMS") with its creditors on 11 April 2006. [2] There was substantial agreement concerning matters of background to this case. The following statement of the background is taken from the submissions of counsel for the plaintiff and the defendant. [3] The starting point for this dispute is that the plaintiff, Polperro, leased property to the defendant, IMS. The plaintiff says that IMS owes it for unpaid rent. [4] Following a hearing on 23 and 24 August 2005, Polperro was awarded judgment in the District Court against IMS for unpaid rent, interest and costs totalling $21,232.88 pursuant to a monthly tenancy agreement. [5] IMS appealed the District Court decision and Polperro cross-appealed. On 24 February 2006 the appeal came for hearing before Harrison J but shortly after the commencement of the hearing, a settlement was reached whereby IMS agreed to pay to Polperro the sum of $25,232.88 on or before 10 March 2006. [6] IMS breached settlement by failing to pay the sum and, accordingly, Polperro served a statutory demand on IMS for the unpaid settlement amount on 16 March 2006. [7] On 3 April 2006 IMS issued a notice of meeting of creditors proposing a compromise with its unsecured creditors as follows:"IMS proposes to pay each of its unsecured creditors ten (10) cents in the dollar for each dollar owed by IMS to its creditors in full and final settlement of all amounts owed by IMS to its unsecured creditors."[8] The Proposal contained a list of creditors which disclosed there was one secured creditor and three other unsecured creditors, namely: a. Guardian Capital Investments Limited ("Guardian") – secured; b. Smartships Limited ("Smartships") – unsecured; c. John Harrhy Consulting Limited ("JHC") – unsecured; and d. NTNZ Limited ("NTNZ") – unsecured. [9] Polperro took the view that, with the exception of Polperro, all of IMS's creditors were closely linked to IMS through both shareholdings and personal connections. Polperro's solicitors wrote to IMS raising concerns over the legitimacy of the Proposal. [10] On 10 April 2006 the defendant replied to the plaintiff's solicitors stating: a. That the meeting had been called and would continue as scheduled; b. The defendant also noted that it had received the postal vote of the plaintiff to be exercised at the meeting of creditors against the proposed compromise and that this would be duly presented at the meeting of creditors; c. That notice of the outcome of the meeting of creditors would be sent to all creditors of the defendant within 5 working days of the conclusion of the meeting; d. That the defendant has two registered security instruments against it which would take precedence ahead of the unsecured creditors; e. The defendant had been able to sell most of its fixed assets at book value; f. That the secured creditor had agreed to allow for these monies to be distributed amongst the unsecured creditors of the defendant if the compromise was adopted; g. That if the defendant was put into liquidation it is unlikely that there would be any payment for the unsecured creditors of the defendant. [11] The meeting of creditors was held on 11 April 2006. With the exception of the plaintiff, all unsecured creditors were represented at the meeting. There were no further concerns voiced by the plaintiff. The meeting proceeded as follows: a. Proxy and postal votes were noted (including the postal vote of the plaintiff against the proposed compromise); b. The proposed compromise was outlined; c. The reasons for the proposed compromise were outlined;d. An explanation was given as to the different creditors of the defendant and their various debentures; e. The consent of the secured creditor was noted; f. Various queries of the unsecured creditors were addressed when made; g. The proposed compromise was put forward to vote on by the unsecured creditors; h. The votes on the proposed compromise were 18 votes against(Polperro Corporation Limited), 82 votes for (NTNZ Limited (1), John Harrhy Consulting Limited (18), Smartships Limited (73)). i. The proposed compromise was adopted and was binding on all unsecured creditors in accordance with the Companies Act 1993. [12] On 15 April 2006 the defendant informed the solicitors for the plaintiff of the outcome of the meeting of creditors and, given the adoption of the compromise, called for the discontinuance of the liquidation proceedings issued against the defendant. The defendant queried the concerns of the plaintiff and offered counsel to meet to discuss concerns of the plaintiff. [13] The payment of the compromise was made to all unsecured creditors on or about 20 April 2006. A cheque for the amount of $2,523.20 was received by the plaintiff on 21 April 2006. [14] On 24 April 2006 the plaintiff informed the defendant that it would not discontinue liquidation proceedings and that application would be made by the plaintiff to the Court that it not be bound by the compromise. [15] In due course the plaintiff issued proceedings to challenge the compromise pursuant to s 232 of the Companies Act 1993.Issues[16] In order to understand the plaintiff's challenge to the compromise it is necessary, first, to set out two of the relevant sections of the Companies Act 1993. Section 239 provides:229 Notice of proposed compromise(1) The proponent must compile, in relation to each class of creditors of the company, a list of creditors known to the proponent who would be affected by the proposed compromise, setting out— (a) The amount owing or estimated to be owing to each of them; and (b) The number of votes which each of them is entitled to cast on a resolution approving the compromise. (2) The proponent must give to each known creditor, the company, any receiver or liquidator, and deliver to the Registrar for registration, — (a) Notice in accordance with Schedule 5 to this Act of the intention to hold a meeting of creditors, or any 2 or more classes of creditors, for the purpose of voting on the resolution; and (b) A statement— (i) Containing the name and address of the proponent and the capacity in which the proponent is acting; and (ii) Containing the address and telephone number to which inquiries may be directed during normal business hours; and (iii) Setting out the terms of the proposed compromise and the reasons for it; and (iv) Setting out the reasonably foreseeable consequences for creditors of the company of the compromise being approved; and (v) Setting out the extent of any interest of a director in the proposed compromise; and (vi) Explaining that the proposed compromise and any amendment to it proposed at a meeting of creditors or any classes of creditors will be binding on all creditors, or on all creditors of that class, if approved in accordance with section 230 of this Act; and (vii) Containing details of any procedure proposed as part of the proposed compromise for varying the compromise following its approval; and (c) A copy of the list or lists of creditors referred to in subsection (1) of this section.[17] S 232 provides:232 Powers of Court(1) On the application of the proponent or the company, the Courtmay— (a) Give directions in relation to a procedural requirement imposed by this Part of this Act, or waive or vary any such requirement, if satisfied that it would be just to do so; or (b) Order that, during a period specified in the order, beginning not earlier than the date on which notice was given of the proposed compromise and ending not later than 10 working days after the date on which notice was given of the result of the voting on it, — (i) Proceedings in relation to a debt owing by the company be stayed; or (ii) A creditor refrain from taking any other measure to enforce payment of a debt owing by the company. (2) Nothing in subsection (1)(b) of this section affects the right of a secured creditor during that period to take possession of, realise, or otherwise deal with, property of the company over which that creditor has a charge. (3) If the Court is satisfied, on the application of a creditor of a company who was entitled to vote on a compromise that— (a) Insufficient notice of the meeting or of the matter required to be notified under section 229 of this Act was given to that creditor; or (b) There was some other material irregularity in obtaining approval of the compromise; or (c) In the case of a creditor who voted against the compromise, the compromise is unfairly prejudicial to that creditor, or to the class of creditors to which that creditor belongs, — the Court may order that the creditor is not bound by the compromise or make such other order as it thinks fit. (4) An application under subsection (3) of this section must be made not later than 10 working days after the date on which notice of the result of the voting was given to the creditor.[18] It is s 232(3)(b) and (c) that are of particular relevance to the present application. [19] Initially the defendant asserted that the plaintiff had not complied with the time limit for commencing proceedings and was therefore barred from bringing the present application. However, after further examination of the point at the hearingbefore me, Mr Shaw abandoned it, it being apparent that the plaintiff had in fact commenced proceedings within time.Plaintiff's submissions[20] Polperro made three submissions in support of the application, namely that:a) There was a material irregularity in obtaining approval of the Compromise because the proposal failed to disclose the extent of any interest of IMS' sole director, Wayne Shaw, in the compromise as required by section 229(2)(b)(v) of the Act; b) The Compromise was unfairly prejudicial to Polperro because it was nothing more than a sham designed to avoid payment in full to Polperro; and c) Polperro should not be bound by the Compromise because it belongs to a different class of creditors to the other unsecured creditors entitled to vote on the Compromise.[21] As the case progressed, and following the amendment which I granted leave to the plaintiff to make to its claim, the plaintiff's case focused on the circumstances in which IMS allegedly incurred debt to Smartships Limited ("Smartships"). The plaintiff's submissions in final form, were as follows:Smartships Limited ("Smartships") voted (sic) in the compromise is not bona fides and accordingly, Smartships was not entitled to vote in the Creditors Compromise put to creditors by the defendant company. Section 232(3)(c) grants the Court jurisdiction to order that a creditor is not bound by a compromise or make such order as the Court thinks fit where a creditor who has voted against a compromise has been unfairly prejudiced. It is the submission of the plaintiff that it has been unfairly prejudiced by the compromise because the largest of the unsecured creditors, Smartships, who held 73% of the votes, was not entitled to vote on the compromise. The defendant company is not indebted to Smartships.[22] The plaintiff submitted that the compromise ought to be set aside on either the grounds in s 232 (b) or (c), for the reason that the alleged invoicing arrangement was a sham, and that the debt which the defendant allegedly owed to Smartships was fictitious.[23] In order to appreciate the submissions made by the plaintiff it is necessary to say a little more about the background. [24] One of the creditors that voted in favour of the proposal was, as I have noted in paragraph nine, Smartships. Without Smartships support for the compromise, the necessary percentage required of 75% of the creditors would not have been attained. [25] After the commencement of these proceedings Mr W Shaw gave an affidavit on behalf of IMS, of which he was a director. That affidavit was filed to support the opposition to Polperro's application for an order that it not be bound by the compromise with the creditors. In that affidavit Mr Shaw said this concerning the Smartships debt:Smartships Limited ("Smartships")28. The amount of $101,013.75 is owed by IMS to Smartships. This amount is owed for design and drawing work undertaken by Smartships on behalf of IMS. A copy of the purchase order from IMS to Smartships and credit invoice from Smarthsips (sic) to IMS is annexed to this affidavit and marked Exhibit "F". IMS had not paid this amount to Smartships as at the date of the meeting of creditors.[26] The annexure to Mr Shaw's affidavit was a purchase order dated 27 September 2005. Addressed by IMS to Smartships and containing the following text: Description Amount GST 30/09/03 (To IMS as agent for SABA) S 22m Blast Freezer for Fish Pacific Limited S Design and Stability/Draughting / MSA Plan Approvals/Documentation & Review $ 89,790.00 Your Invoice 2206 Freight: $ 0.00 S CODE RATE GST SALE AMOUNT GST: $ 11,223.75 S 12.5% $11,223.75 $89,790.00 Total Amount: $101,013.75 Amount Applied $ 0.00 Balance Due: $101,013.75 [27] There was no dispute between the parties that the references to "IMS" were to the defendant and SABA was Saba Yachts Limited ("Saba"). [28] The plaintiff's counsel, Mr Hughes, launched a concerted attack on the bona fides of the asserted debt. He referred, first, to evidence that the plaintiff had adduced of proceedings involving Saba and a company called Fish Pacific Limited which were heard in the District Court and were subsequently the subject of an appeal heard by Winklemann J in which judgment was issued 21 November 2006. In summary, those proceedings involved a dispute between Fish Pacific Limited as the intended purchaser of a 22 foot tuna fishing boat which was to be constructed by Saba. When Fish Pacific Limited entered into the agreement for construction of the tuna boat it paid a deposit of $97,154.75 to Saba. Fish Pacific Limited then cancelled the agreement on the grounds of non-performance and sued Saba for the return of its deposit of $97,154.75. In that proceeding Saba claimed that its agent,Smartships, had undertaken work to the value of $101,013.75. It produced an invoice from Smartships dated 30 September 2003 for this amount. At the proceedings in the District Court Mr Hughes pointed out that this was the exact amount that allegedly was the subject of the debt allegedly owing by IMS to Smartships. There was therefore a separate claim in respect of this debt but between quite distinct parties from those who had taken proceedings against each other in the District Court. On appeal in those proceedings Winkelmann J upheld the finding of the District Court that Saba failed because there is no proof that Saba intended to pay the amounts allegedly owing to Smartships and in the course of doing so she noted the close relationship between Saba / Smartships and Mr Wayne Shaw and a Mr John Harrhy. Mr Harrhy was at all material times a director of Smartships. [29] The evidence given before the District Court was placed before me in the present hearing. Mr W Shaw gave evidence in the District Court. Mr Hughes submitted, and counsel for IMS did not refute, that at no time in those proceedings was it ever suggested that IMS owed Smartships the amount claimed. It was inconsistent with that approach for IMS to now claim that it owed Smartships the amount claimed. [30] Mr Hughes next noted that in the purchase order dated 27 September 2005, which I have made reference to above, IMS was said to be the agent for Saba in commissioning Smartships to do work on the tuna boat. Mr Hughes said given that circumstance, IMS would not have any liability as agent: the only liability would be between IMS's principal, Saba and Smartships. I accept that that submission is correct. [31] To add to the doubts about the validity of any debt IMS owed to Smartships, Mr Hughes also referred to the fact that on 30 September 2003, Smartships had invoiced Saba directly for the sum of $101,013.75. This he justifiably submitted, was inconsistent with IMS owing the debt to Smartships. [32] Mr Wayne Shaw gave what appears to have been yet a further explanation as to how IMS became indebted to Smartships in his evidence before me. Mr Shaw said that IMS had "put together a project" for the construction of the tuna ship forFish Pacific Limited. It then "took the project to Saba Yachts Limited for the construction of that project". In order to get the project started drawings, calculations and other documentation had to be prepared so IMS got Smartships who are a ship design company to carry out that work and:IMS at that time guaranteed the payment for that to Smartships Limited and said though that it would be all part of the project and so therefore they should invoice Saba Yachts Limited for that work first as they would be receiving payments for the project.[33] Mr Hughes also said that the chronology was significant. First, he pointed out that on 24 August 2005 Polperro successfully sued IMS in the District Court for unpaid rent and obtained judgment for $21,232.88. A month later IMS produced the work order dated 27 September 2005. The work that Smartships had carried out was completed at least before September 2003. And yet, IMS purported to issue a purchase order for the work two years later in September 2005. What is more, that purchase order contained a reference to Smartships's pre-existing invoice from Smartships to Saba of 30 September 2003, invoice number "2206". [34] In all of these circumstances Mr Hughes submitted that having lost out to Polperro in the District Court, IMS began to position itself so as to defeat Polperro's claim. It did this by procuring Smartships to invoice it, and then arranging a compromise with creditors at which Polperro would be outvoted by interests friendly to Mr Shaw and IMS. [35] The plaintiff's submission was that if Smartships did not have the status of creditor at the time when IMS took into account its vote for the purpose of determining whether there was a binding compromise, then the Court could order that the creditor was not bound by the compromise because there had been a material irregularity in obtaining approval of the compromise or the compromise was unfairly prejudicial to Polperro.Is the Court empowered to enquire into whether a particular party who voted on the compromise was a creditor?[36] Mr Shaw, for IMS, submitted to me that in proceedings under s 232 I could not enquire into the issue of whether or not a party who had voted in support of the compromise had standing as a "creditor". He said that that would have to be determined "at a prior stage". I understand that his submission was to the effect that separate proceedings would first have to be taken to determine that issue. He was not able to elaborate on that submission as to what type of proceedings should be taken. [37] In my judgment, the Court is required to determine all necessary factual matters to enable it to decide the question before it. That question is whether an order ought to be made that the plaintiff is not bound by the compromise with creditors. There are three grounds on which the Court can make such an order. At this stage I am concerned with only two, those specified in sub-paragraphs (b) and (c) of 232(3). [38] Before I deal with the issue of whether I am able to enquire into whether in the course of determining an application under s 232 I am required to enquire if the debt was in fact owing, I propose to make brief observations about the process by which binding compromises are recognised under Part 14.The scheme of Part 14[39] The overall scheme of Part 14 is that the creditors of the company have the power to enter into a binding compromise without any need for the approval of the Court. If a particular creditor is dissatisfied with the compromise, then, in a number of circumstances that creditor can apply to the Court for an order that he/she is not bound by the compromise. [40] The starting point therefore is that a compromise is binding without any requirement that it first have been approved by the Court. The Court can makeorders however in specific situations setting aside a compromise which has been previously entered into. Any intervention by the Court is after the event. [41] It must be borne in mind that the mechanism provided by s 229 can have the effect of compelling a minority creditor to accept a reduction in the amount of the indebtedness owed to it by the company. The Court should be guided by the pronouncement made in a different, but related, context, by Bowen LJ in Re Alabama, New Orleans, Texas and Pacific Junction Railway Co [1891] 1 Ch 213, 245:"It is in my judgment desirable to call attention to this section, and to the extreme care which ought to be brought to bear upon the holding of meetings under it. It enables a compromise to be forced upon the outside creditors by a majority of the body, or upon a class of the outside creditors by a majority of that class. It would be most unjust to bind creditors or classes of creditors by the decision of three-fourths in value of those who attend a particular meeting, unless you have secured that the meeting shall adequately represent the entire body."[42] That differs from this in that it was concerned with the Court's approval of a creditor's compromise. [43] The legislation which Re Alabama was concerned with required the sanction of the Court in order to be binding. In applying for such sanction, some of the creditors objected. They did so on the grounds that the Court did not have the jurisdiction to impose the will of the majority on the minority, and on the basis that the terms of the compromise were not reasonable. The Court dismissed the first objection, saying they would consider whether the class of creditors was fairly represented but would not refuse to sanction the will of the majority in adopting a reasonable compromise. The compromise in this case was just that, and was sanctioned by the Court. [44] Nonetheless, s 232(3) shows that the Court will intervene where it has been established that majority creditors have not complied in significant respects with the statutory provisions of the Part 14: Te Runanga o Ngai Tahu v Glenharrow Holdings Ltd 12 August 2005 CH Christchurch, CIV 2005-409-15, Chisholm J, although that application failed on the facts.[45] The Part 14 procedure gives statutory force to the will of a majority of creditors. In principle, the existence or non-existence of such a majority, goes to the very heart of the question of whether Part 14 has been complied with. For that reason, unless there was a compelling argument to the contrary, the Court ought to enquire into whether there was a genuine majority of creditors in favour of a compromise. In carrying out that enquiry, the Court may have to examine a specific debt on which a creditor's entitlement to vote is founded, and, if necessary, to determine that it was illusory; that it was a mere invention. [46] The fact that in calculating whether or not there is a majority of creditors in favour of a proposal the promoters took into account a non-existent debt, must be a "material irregularity" within the meaning of s 232(3)(b). That is to say, there was non-compliance with the statutory provisions governing the approval of the compromise and that non-compliance had a significant effect on the process of obtaining approval for the compromise. Alternatively, I would conclude that where a compromise was entered into in the circumstances that I have been speaking of, the compromise could justly be described as "unfairly prejudicial" to the creditor. There is no doubt that it would be unfair because the compromise would not be one that was justified by the statutory procedures outlined in Part 14. The fact that it forced an unwilling creditor to accept a reduction in the amount of his or her indebtedness would qualify as a being "prejudicial" to that creditor. [47] In my view there are no counter-arguments which would persuade me that the Court should not enquire into the propriety of the questioned debt.Summary[48] I accept that the question of whether a debt was actually owing is a matter of central importance which the Court is required to consider when hearing an application under s 232 of the Companies Act 1993 to make an order that the creditor is not bound by the compromise. The compromise will bind the company if 75% of the creditors assent to it. If less than 75% of the creditors do not agree, then the compromise will not have binding effect. Where the Court is able toaffirmatively conclude that one of the debts, which was taken into account when calculating whether 75% or more of the creditors approved the compromise, is not in fact owing, then the compromise cannot survive.Was Smartships a creditor?Factual basis for Smartship's entitlement to vote as creditor[49] Was then Smartships a creditor of the defendant at the time that the list was compiled? In my view, the answer to that question must be in the negative. In making my determination I have taken into account the evidence which Mr Wayne Shaw, a director of the defendant, gave before me, which included his affidavit and also his cross-examination before me. In the usual way, I have also had regard to contemporaneous documents and the business background generally of the alleged transaction. [50] Dealing first with the documentation, it seems clear that the very debt that Smartships claims under the compromise was the subject of an invoice which it rendered to a company called Saba dated 30 September 2003. It became apparent to me in the course of evidence that this invoice related to work done with respect to a tuna ship which was to be constructed for Fish Pacific Limited. There has been other litigation involving this alleged debt. Fish Pacific Limited, having entered into a contract with Saba to construct their tuna ships, paid a deposit of $97,154.75 to Saba. Later Fish Pacific Limited cancelled the agreement and sought the return of the deposit. By way of defence, Saba claimed that Smartships as its agent had undertaken work to the value of $101,013.75. Saba therefore claimed in that litigation that it was owed the same amount for the same work that Smartships now claims from IMS. That claim was rejected in the District Court in a judgment which Winklemann J upheld on appeal. The conclusions reached in that litigation are not of course binding on IMS which was not a party to those proceedings. The litigation is however informative as to the background in which this debt allegedly came into existence. [51] It cannot be overlooked that there is a close relationship between the various companies, Saba, Smartships and IMS, and the directors of those companies.[52] The debt, which IMS said it owed to Smartships, was confirmed by only one piece of documentary evidence, a purchase order. That purchase order purportedly emanated from IMS and was directed to Smartships. It made clear, though, that the work, which was ordered, related to the contract for Fish Pacific's Limited construction of a fishing vessel with Saba. Mr Wayne Shaw was cross-examined concerning this before me. Mr Hughes put to him that IMS's involvement was as Saba's agent. Mr Shaw's response was illuminating:IMS put together a project for the construction of a ship for Fish Pacific Limited, it then took the project to Saba Yachts Limited for the construction of that project. For the project to start drawings and calc and other documentation had to be prepared in so IMS got Smartships Limited who are a ship design company to carry out that work – IMS at that time guaranteed the payment for that to Smartships Limited and said though that it would be all part of the project and so therefore they should invoice Saba Yachts Limited for that work first as they would be receiving payments for the project. But Saba Yachts Limited paid Smartships Limited for that work? Saba Yachts Limited didn't pay Smartships Limited as I understand it for the work Mr Shaw Ive put in front of you notes of evidence and a judgment from J Winkleman – the evidence in that case I should rather say in that case Saba Yachts Limited tried to retain a deposit from Fish Pacific Limited because it had paid Smartships Limited the amount of $101,013.75 ? My understanding is that Smartships Limited were owed that money by Saba Yachts Limited Can you explain to me who did the work ? Smartships Limited did the work that referred to in invoice So how did IMS come to be indebted to Smartships Limited ? IMS put together the project for the construction of a vessel for Fish Pacific Limited for the project to go ahead drawings and designs and details had to be produced so that Saba Yachts Limited could construct the vessel IMS asked Smartships Limited to carry out those designs and drawings as per the invoice that's been provided but IMS went as guarantor for that work and so that's why IMS was in indebted.[53] From these various sources, it may be concluded that IMS did not contract with Smartships Limited to carry out the work on the basis that IMS would be liable under the contract to pay for the work. [54] It was suggested, as the extract from the evidence set out in paragraph [52], makes plain, that the liability arose by way of IMS guaranteeing Saba's obligation to SSL. [55] There are some problems with that analysis. [56] In the first place, I do consider that the evidence establishes that there was an oral agreement to guarantee. No particulars were provided as to when and with whom the guarantee was entered into. No information was provided about the consideration that might have supported such a guarantee. S 2 of the Contracts Enforcement Act 1956 provides:2 Proof of contracts relating to land and to guarantees (1) This section applies to— (a) Every contract for the sale of land: (b) Every contract to enter into any disposition of land, being a disposition that is required by any enactment to be made by deed or instrument or in writing or to be proved by writing: (c) Every contract to enter into any mortgage or charge on land: (d) Every contract by any person to answer to another person for the debt, default, or liability of a third person. (2) No contract to which this section applies shall be enforceable by action unless the contract or some memorandum or note thereof is in writing and is signed by the party to be charged therewith or by some other person lawfully authorised by him. (3) Nothing in this section shall— (a) Apply to any sale of land by order of the [High Court] or through the Registrar of that Court: (b) Apply to any alienation of Maori land by a Maori, being an alienation that is required by the Maori Affairs Act 1953 to beconfirmed by the Maori Land Court, or to any sale of Maori land by order of that Court: (c) Affect the operation of the law relating to part performance.[57] Further, the alleged arrangement is inconsistent with the issuing of the purchase order I set out at paragraph [26] of my judgment. That document presents matters on the basis that IMS is a party to the contract for the supply of services by Smartships and a debtor to Smartships rather than a guarantor of Saba's indebtedness to Smartships. [58] Further, the alleged guarantee was not in writing and is unenforceable because of the provisions of the Contracts Enforcement Act 1956. [59] Mr Shaw attempted to argue that any difficulty with absence of a written memorandum could be got round by invoking the doctrine of part performance. He did not say what such acts were. [60] But in my understanding that doctrine applies only to contracts for the sale of land: Actionstrength v Inglen Gobain Ute Glass UK Limited [2003] 2 All ER, 615,623. [61] As Lord Hoffman pointed out, in his judgment, where there have been qualifying acts of part performance the duty to perform is equitable rather than one that arises out of contract: paragraph 24. A party seeks a remedy which is justified on the footing that he having performed his obligations, "the equities", (to adopt the expression used by the Earl of Selborne LC in Maddison v Alderson (1883) 8 Applicant Cas 467, 475) justify the Court in assisting the party who has executed his/her obligations under the contract. It is not a case of enforcing an executory contract: Maddison p 475. As Lord Hoffman put it, at paragraph 24:The Statute [of Frauds] and the doctrine of part performance could co-exist in this way because contracts for the sale of land almost always start by being executory on both sides and usually remain executory until completed by mutual performance.[62] But in this case, what happened was that Smartships provided services to Saba. Contemporary documents show that this work was done in 2003. Much later, in September 2005, IMS issued the sales order. Mr Hughes described this as a request for Smartships to invoice IMS. If the basis of IMS's liability to Smartships arose from a guarantee, then, in the absence of other evidence, it must be assumed that the guarantee came into existence at about the time of the purchase order, namely in September 2005. But that was long after Smartships had done the work for Saba – some two years later. Whatever work Saba did is most unlikely to have been in return for a contractual promise to guarantee. It did the work long before Smartships agreed to accept liability as a guarantor. The work done by Smartships cannot be seen as being in performance of any contractual obligation that existed between Polperro and IMS. [63] My conclusions are that the alleged guarantee did not in fact exist. If I am wrong about that, it is in any event unenforceable because oral and the agreement is not saved by the doctrine of part performance. I consider in the next part of this judgment how the second conclusion impacts upon IMS's status as creditor.Was Smartships a "creditor" within the meaning of s 227?[64] The next issue concerns the question of whether or not Smartships was a creditor. In my view it was not. Section 227 of the Act defines "creditor" as follows:[Creditor includes— (a) A person who, in a liquidation, would be entitled to claim in accordance with section 303 of this Act that a debt is owing to that person by the company; and (b) A secured creditor:][65] By s 303 it is provided:303 Admissible claims(1) Subject to subsection (2) of this section, a debt or liability, present or future, certain or contingent, whether it is an ascertained debt or a liability for damages, may be admitted as a claim against a company in liquidation. (2) Fines, monetary penalties, and costs to which section 308 of this Act applies are not claims that may be admitted against a company in liquidation.][66] The New Zealand commentaries such as Morrison assume that the position is that only legally enforceable claims are to be admitted under s 303, although they cite no New Zealand authority for the proposition: see Brooker's Insolvency Law CA 303.03; Morison's Company Law 60.10. [67] One English authority that is mentioned in the texts is Government of India, Ministry of Finance (Revenue Division) v Taylor and Anor [1955] AC 491. In that case, the Government of India claimed to be owed taxes by a company registered in the United Kingdom. It sought to participate in a liquidation in the English Courts.The claim was opposed on the grounds that courts of one nation would not enforce claims brought to recover taxes rendered by another sovereign state. Such claims are unenforceable. The House of Lords in its decision stated that a party whose claim is not legally enforceable is not relevantly a creditor whose claim a liquidator is entitled to recognise. [68] In his speech Viscount Simonds said at 509:I conceive that it is the duty of the liquidator to discharge out of the assets in his hands those claims which are legally enforceable, and to hand over any surplus to the contributories. I find no words which vest in him a discretion to meet claims which are not legally enforceable. It will be remembered that, so far as is relevant for this purpose, the law is the same whether the winding-up is voluntary or by the Court, whether the company is solvent or insolvent, and that an additional purpose of winding-up is to secure that creditors who have enforceable claims shall be treated equally, subject only to the priorities for which the statute [that is the statute under consideration in that case] provides. It would be a strange result if it were found that the statute introduced a new category of creditors to compete with those who alone, apart from it, could enforce their claims.[69] As a matter of principle, I respectfully consider that the reasoning inGovernment of India is correct. If the liquidator was not restricted to legally enforceable claims then an individual who could not enforce a debt beforeliquidation, could do so afterwards. The purported creditor would therefore gain a potential remedy in liquidation that they would not otherwise have. The result would follow that a party claiming on the basis of an oral guarantee would not legally be able to enforce the claim prior to liquidation, but would be able to use it as the basis for a claim against the company once it was in liquidation. [70] That being so, if the oral guarantee which IMS allegedly gave to Smartships is not enforceable at law, then Smartships was not a "creditor" to the extent that it relied on that guarantee, and was not entitled to vote on the compromise.Conclusion[71] My conclusion is that the Court is authorised and required to enquire into whether Smartships was at the material time a creditor of IMS. Having carried out that enquiry, I conclude that Smartships was not a creditor as that term as defined in s 303 of the Companies Act 1993. Further, the fact that Smartships as a non- qualified creditor, voted on the compromise was a "material irregularity" or alternatively, being based upon, inter alia, the counting of a vote from an unqualified creditor, the resulting compromise was "unfairly prejudicial" to Polperro – within the meaning of s 232 of the Act. That being so, the Court has a discretion whether or not to make an order that Polperro is not bound by the compromise. In my view such an order ought to be made. IMS did not refer me to any countervailing considerations that would justify me in not exercising my discretion. Creditors in the position of Polperro are entitled to the Courts protection because they are vulnerable to misuse of the compromise mechanism contained in Part 14 of the Act. In circumstance where I have affirmatively concluded that there was no basis for the compromise, it would be wrong for the proceedings to conclude on any basis other than that Polperro is entitled to regard itself as free from the compromise and able to enforce its debt to its full extent against IMS. [72] I order that the plaintiff is not bound by the compromise of creditors entered into 11 April 2006.[73] I hope that Counsel will come to an agreement on the matter of costs. If they cannot, they should file brief memoranda within 14 days of the date of this judgment and I shall make orders. _____________ J.P. Doogue Associate Judge