PROPERTY VENTURES INVESTMENTS LIMITED V FM 3 LTD & ORS HC CHCH CIV 2009-409-001854

PROPERTY VENTURES INVESTMENTS LIMITED V FM 3 LTD & ORS HC CHCH CIV 2009-409-001854 24 February 2010IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY CIV 2009-409-001854IN THE MATTER OF the Companies Act 1993 BETWEEN PROPERTY VENTURES INVESTMENTS LIMITED ApplicantCIV 2009-409-001855FM 3 LIMITED ApplicantCIV 2009-409-001856FM 1 LIMITED Applicant AND THE COMMISSIONER OF INLAND REVENUE Respondent Hearing: 9 February 2010 Counsel: K W Clay for Applicants K L Clark QC and P H Courtney for Respondent Judgment: 24 February 2010JUDGMENT OF PANCKHURST JIntroduction[1] These are three applications pursuant to s236 of the Companies Act 1993 whereby orders are sought that compromises shall be binding on the companies and, in particular, on the Commissioner of Inland Revenue. Although there are significant differences in relation to the background circumstances and the compromise proposals themselves, these proceedings nonetheless have much in common with similar proceedings issued by Atlas Food & Beverage Limited and three of its subsidiary companies in which orders pursuant to s236 were likewise sought (CIV-2009-409-1342, CIV-2009-409-1696, CIV-2009-409-1697, CIV-2009- 409-1698).[2] This judgment is a companion decision to that to be delivered contemporaneously in relation to Atlas and others.The background[3] Each of the applicant companies is a wholly owned subsidiary of Property Ventures Limited, a company formed in 1997. All or most of the shares in the company are held by other companies in the Henderson group and Mr David Henderson is a director of the company. [4] Property Ventures Investments Limited was incorporated in 2004 (albeit under a different name) and at all times Mr Henderson has been a director of the company. [5] In 2005 FM 3 Limited was formed under a different name with Mr Henderson named as one of the company's two directors. FM 1 Limited was incorporated in 2006 also under a different name and Mr Henderson was identified as one of two directors of the company. [6] Each of the three companies owned commercial property in central Christchurch. On 1 August 2008 the companies entered into sale and purchase agreements with the Christchurch City Council to sell these properties. The sale prices were:Property Ventures Investments $4,000,000 + GST (if any) FM 3 $4,900,000 + GST (if any) FM 1 $5,475,000 + GST (if any)[7] That same day a new company was incorporated, ILR Holdings Limited, with Mr Henderson as its sole director. He holds all the shares in the company which carry voting rights, whereas the other shareholder (a company) has the entitlement to receive all capital distributions or dividends. [8] On 4 August 2008 a deed of assignment of debt was entered into between the parent company Property Ventures and the new company ILR Holdings wherebycurrent account debts of the applicant companies owned by Property Ventures were assigned to ILR Holdings. The current accounts assigned were:Property Ventures Investments $8,530,000 FM 3 $2,000,000 FM 1 $1,700,000Contemporaneously the three applicant companies entered into mortgages and general security agreements in favour of ILR Holdings. [9] Also on 4 August 2008 Property Ventures transferred to ILR Holdings a majority shareholding in each of the three applicant companies (51% in relation to Property Ventures Investments and FM 3 and 100% in relation to FM 1). [10] On 8 August 2008 the applicant companies settled their respective sale agreements with the Christchurch City Council. The amounts received were:Property Ventures Investments $4,000,000 + GST of $500,000, $4,500,000 FM 3 $4,900,000 + GST of $612,500, $5,512,500 FM 1 $5,475,000 + GST of $684,375, $6,159,375 __________ Total received $16,171,875 __________[11] Contemporaneous with the settlements a sum of $11.71m was paid to mortgagees who held registered securities against the titles to the various properties. Between 8 August and 14 August 2008 the applicant companies paid out a further sum totalling $4,246,547, being $1m to the former parent company Property Ventures and the balance to ILR Holdings. The payments were partial repayments of the still unregistered mortgages granted a few days earlier to ILR Holdings, or were made in accordance with payment authorities signed by Mr Henderson as a director of the applicants. In the result the total net sale proceeds (after sales expenses) was expended by about 14 August 2008. [12] The applicant companies filed GST returns on 29 October 2008 in which GST liabilities were self-assessed as follows:Property Ventures Investments $490,352FM 3 $609,682 FM 1 $679,534Payment of the GST liabilities did not occur. [13] This brief summary of the events of August - October 2008 is taken from an affidavit sworn by Mr Fraser Hawkins, an investigator with the Inland Revenue Department. His affidavit analyses what occurred at the time of the three property sales and exhibits to the affidavit confirm that analysis. His affidavit also records the penalties and interest which have accrued on the core GST debts since 2008. In light of GST returns filed to June 2009 Mr Hawkins also concluded that neither FM 3 nor FM 1 had been involved in any business activity after August 2008. The GST returns disclosed a similar pattern in relation to Property Ventures Investments, save that the company disclosed an isolated sale in its May 2009 return to a value of $225,000. Otherwise, there was nothing to indicate that this company was still trading. [14] Mr Henderson has sworn three affidavits in these proceedings, two in support of an application to restrain advertising of the liquidation proceedings brought by the Commissioner and one in support of the s236 applications made by the applicant companies. The affidavits do not comment upon events in August 2008, nor explain why the sums received from the City Council were not used to meet the companies' GST liabilities as they fell due. Mr Henderson describes FM 3 and FM 1 as single asset companies and he further deposes that each of the applicants have "no assets". [15] In July 2009 the Commissioner issued statutory demands seeking payment of the sums then due on account of outstanding GST, penalties and interest. In August 2009 liquidation proceedings were filed against the applicants. [16] The applicants promptly applied for orders restraining advertising of the liquidation proceedings and staying their prosecution, so that a compromise proposal could be put to creditors. Statements of defence were also filed on a similar basis.The compromise proposals[17] The initial intention was to obtain a compromise with creditors under Part 14 of the Companies Act 1993. Notice was given of a creditors' meeting to be held on 16 October 2009. With reference to the Commissioner the documentation recorded a total amount due from the three applicants of about $2.3m including penalties and interest (and proposed payment of a total sum of $96,000 at $4,000 per month over a period of two years) in final satisfaction of the final debt. [18] On 12 October 2009 Mr Hawkins wrote to Mr Henderson pointing out a number of concerns about the compromise proposals, including that the Commissioner was shown as a preferred creditor for his entire debt (whereas he was an unsecured creditor for penalties and interest) and suggesting that in several respects the classes of creditors appeared to be inappropriately drawn. On 15 October the applicants' solicitors responded to the effect that the concerns raised needed to be addressed and that the creditors' meeting would not proceed the following day. The meeting did not proceed. [19] On 2 November the applicants indicated that they no longer intended to promote Part 14 compromises, but would instead apply to the Court for approval of the compromises under Part 15 of the Act. [20] The change of events was of concern to the Commissioner. On 5 November, after hearing submissions from counsel, I made directions with reference to a hearing on 1 December to determine whether an agreed restraint upon advertising of the liquidation proceedings would continue in existence. Also a direction was made that the companies' applications pursuant to s236 be filed by 26 November. The hearing of such applications was scheduled for 9 February 2010. [21] Following the hearing on 1 December the restraint on advertising was lifted. [22] The s236 applications were ultimately filed on 11 December. The supporting affidavit sworn by Mr Henderson detailed the compromise proposals. Creditors were not divided into classes. The creditors' list for Property Ventures Investmentsshowed five creditors with debts totalling almost $8m. The major creditors were ILR Holdings, $7,191,455 and the Commissioner, $671,099. Mr Henderson deposed that ILR Holdings and two further creditors had agreed not to participate in the compromise or to take action against Property Ventures Investments while the proposal was in force. With reference to a fourth creditor (owed $5,713) Mr Henderson explained that this was a costs award pertaining to litigation currently before the Supreme Court. If required, the debt would be met by the parent company, Property Ventures. Therefore, the compromise proposal only affected the Commissioner who it was proposed should receive $275,500 by 60 consecutive monthly payments of $4,591.67 in final satisfaction of the Commissioner's total debt. The proposal was made on "the basis that no further interest or penalties would accrue on the debt". [23] In relation to FM 3 and FM 1 the creditors' lists showed only the Commissioner and ILR Holdings. As with Property Ventures Investments, the further two proposals only affect the Commissioner and are similar in nature to the proposal described above. In aggregate the three proposals contemplate:Debt * Monthly (60) Total Payments Payments Property Ventures $671,099 $4,591 $275,500 Investments FM 3 $815,319 $5,710 $342,600 FM 1 $909,210 $6,365 $381,900 __________ _______ __________ Totals $2,395,628 $16,666 $1,000,000 __________ _______ __________ * the Commissioner's debt inclusive of penalties and interest to Nov 2009In round figures the proposal contemplates payment of about 42% of the Commissioner's debt as at 2009 spread over a five year period. [24] With reference to payment of the $1,000,000 Mr Henderson deposes that Hotel So Corporation Limited is willing to provide a guarantee to the Commissioner in relation to the monthly payments in a form satisfactory to him, or as otherwise approved by this Court. Evidence adduced in the related proceedings concerningAtlas and its subsidiaries concerning the capacity of Hotel So to make monthly payments is adopted, and relied upon, by Mr Henderson in support of the present three proposals. I note that the four proposals pertaining to the Atlas group companies contemplate a total monthly payment of $21,500 by Hotel So, or $258,000 per annum. If all seven proposals were approved Hotel So would be in the position of guaranteeing total monthly payments of $38,166, or payment of $457,992 per annum.The arguments of counselSubmissions for the applicant companies[25] After reference to the relevant principles (to which I will return shortly) Mr Clay advanced composite submissions in support of the three proposals, which may be summarised as follows: (a) that it was appropriate for the applicants to proceed under Part 15 because the opposition of the Commissioner to the proposals precluded the possibility of a creditors' compromise under Part 14 and, hence, it was appropriate invoke s236; (b) that in the event of the liquidation of the three companies the Commissioner will receive nothing, since the companies have no assets; whereas in terms of the proposals the Commissioner stands to receive $1,000,000 towards satisfaction of the total debt over a five year period; (c) that the Commissioner's opposition to the proposals is at odds with his statutory duty under s6A(3) of the Tax Administration Act 1994 to collect over time the highest net revenue that is practicable within the law having regard to the resources available to him; (d) that from the perspective of the Property Ventures group as a whole there is a legitimate commercial rationale behind the three proposals in that the reputation of the group will profit from this endeavour to make payment of a significant proportion of the Commissioner's debt, and(e) the argument that the making of liquidation orders will provide the opportunity for the affairs of the companies to be properly investigated is misplaced, both because any wrongdoing by the directors is denied and because the Commissioner has ample statutory powers under the Tax Administration Act 1994 and/or Income Tax Act 2007 to enable proper inquiries to be made. [26] Mr Clay also made submissions by way of challenge to several of the grounds of opposition relied upon by the Commissioner. To the extent necessary, I shall refer to these later.The Commissioner's arguments[27] Mrs Clark QC strongly opposed the three applications on a wide-ranging basis. Her submissions included the following major propositions: (a) that the proposals were misconceived to the extent that they envisaged that this Court could approve a compromise on terms including that penalties and use of money interest would not accrue during the term of the compromises; (b) that the events of August 2008 indicated a cynical disbursement of GST amounts which should have been earmarked to meet the applicants' GST liabilities when they fell due; (c) that the manner in which the compromise proposals were presented and advanced by the applicant companies was "untidy" and instilled no confidence that the proposed obligations in favour of the Commissioner would be met over an extended term; (d) that the proposal to pay $1,000,000 over a five year timeframe represented payment of only a modest proportion of the core debt (about 62%) if payment in full eventuated; (e) that the proposal was subject to an unacceptable level of commercial uncertainty surrounding the ability of Hotel So to make monthly payments over such an extended timeframe;(f) that Mr Henderson is the controlling hand in relation to the compromise proposals (he being a, or the sole, director of all the relevant companies) and that the tax compliance record of companies subject to his control is such as to occasion concern over his pivotal role in relation to the compromises; (g) that the Commissioner's opposition to the proposals was based on reasonable grounds and that such opposition was of itself a sufficient basis for this Court to reach the view that approval of the compromise proposals was inappropriate; (h) that the facts of the case raised public policy considerations, in that each proposal contemplated the ongoing existence of an insolvent company with no recent trading history and no legitimate interest to protect and this posed a risk to the commercial community, and (i) that the affairs of the three applicant companies and the actions of their directors in and about August 2008 warranted investigation and this was best able to be achieved through the making of liquidation orders and the appointment of liquidators.Analysis: should the compromise proposals be approved?Appropriate test[28] A difference emerged between counsel concerning the test to be applied. While it was common ground that Weatherston v Waltus Property Investments Ltd[2001] 2 NZLR 103 (CA) is the leading authority on the test to be applied under s236, Mrs Clark argued that the present case was one where the test suggested inSuspended Ceilings (Wellington) Limited v CIR (1997) 8 NZCLC 261,318 (CA) was apposite. In the majority judgment of Henry and Keith JJ reservations were expressed about application of the time honoured test in the context of s236, given that jurisdiction to approve a compromise under the section is not dependent upon prior creditor approval of the compromise. The joint judgment at 261,321 contained this:We are inclined to the view that an applicant under s236 should at least satisfy the Court that it would be unreasonable not to make the order sought.[29] Thomas J in a separate judgment also expressed concern as to the appropriateness of the intelligent and honest business person test where there was no division between creditors, some in favour of the compromise and others dissentient. He found it difficult to posit a satisfactory new test, but at 261,324 expressed the view that it would be "exceptionally rare" for the Court to approve a compromise which bound a single creditor to accept proposals to which he was opposed. [30] The gist of Mrs Clark's argument was that these observations from the Court of Appeal judgments should be applied in the present case, because it too concerned the Commissioner as the sole party affected by the proposals. Counsel embraced both the suggestion that an applicant must demonstrate it would be unreasonable not to approve the compromise and Thomas J's observation that it would be exceptionally rare for a solitary dissentient creditor to have a compromise forced upon him. Mrs Clark noted that McGrath J in delivering the Court's decision inWaltus said at [34] that:The higher test of commercial reasonableness suggested by the majority inSuspended Ceilings may not be pertinent beyond its particular context.This was to confine rather than disagree with the majority suggestion. [31] I agree that the test of the intelligent and honest business person is less apt where there is no need for competing interests to be balanced – typically a majority of creditors in favour of the compromise but also a dissentient minority. That said, I think that the test as described in Waltus is robust enough to meet the requirements of the present case, as well as those of the more typical case where there are competing interests. Waltus adopted the intelligent and honest business person test supplemented by consideration of whether the arrangement is fair and equitable. It is likely to be the case that where only a solitary creditor is affected by the proposed compromise fairness and equitable considerations will have a particular part to play. Certainly, I consider, there is weight in the concern expressed in Suspended Ceilingsthat an applicant will require a substantial case where the one and only affected creditor opposes the proposal.[32] Mrs Clark also placed reliance upon two decisions of this Court decided shortly before the 1993 Act came into force. The first was Re Primacq Holdings Limited (1991) 5 NZCLC 66,999 (HC). The case concerned a complex scheme of compromise which had the capacity to affect multiple creditors. There was a division of view between a majority of creditors who were attracted to the promise of some cash benefit if the compromise was approved, and a minority who wished the company to be wound up and its affairs investigated. Wylie J, after reference to both English and Australian cases, held that even where the four tests laid down in Re C M Banks Limited [1944] NZLR 248 (SC) were met there remained a residual discretion for the Court to refuse approval in the wider public interest. [33] And, in Re El Pollo NZ Limited [1990] 1 NZLR 356 (HC) Henry J declined an application for a direction to summons a meeting of creditors to consider a scheme of arrangement, because he considered that the scheme was not appropriate for the Court's approval, even if creditors voted in favour of it. Henry J found that the duty of the Court extended to public policy considerations. Because El Pollo was hopelessly insolvent, not trading and unlikely to be able to do so within the foreseeable future, he considered it contrary to public policy to allow the company's continued existence where it could without restriction resume trading and incur further liabilities. At 359 Henry J inferred that "the dominant purpose behind the scheme (was) to provide some benefit to the major shareholder ... rather than to advance the present interests of the company in any real and positive fashion."Should these compromise proposals be approved?[34] I have formed a clear view that these proposals should not be approved, essentially because it would not be fair and equitable to do so. I have also been influenced by the wider public policy considerations raised by Mrs Clark. In general terms I find several of the arguments advanced on behalf of the Commissioner unanswerable. [35] The following matters, in combination, most influence me: (a) Where a solitary creditor is affected by a compromise and it is proposed that he should receive only a proportion of his debt, Iconsider that there would need to be highly persuasive considerations in favour of the applicant company continuing in existence before approval would be appropriate. (b) Here, I do not consider that there are any good reasons for not liquidating the applicant companies, let alone positive persuasive reasons to the contrary. The rationale or reasons advanced for making the present applications I find unpersuasive. (c) In my view the affairs of the applicant companies warrant investigation and I am satisfied that this may be best achieved upon the making of liquidation orders. (d) Although, as I found in the proceedings relating to Atlas and its subsidiary companies, Hotel So may be in a position to fund the proposed significant monthly payments, this must remain a matter of commercial uncertainty given the timeframe involved, the vagaries of the hotel industry and also the elusive motivation which underpins this compromise initiative. [36] I do not find it necessary to consider the argument concerning whether the Court may approve a compromise, a term of which is that further penalties and interest will not accrue in relation to the GST debt during the term of the compromise. While I am doubtful that the Court can go that far, there is simply no need for me to consider this question.Result[37] For the reasons given: (a) the s236 applications are dismissed, and (b) I direct that the liquidation proceedings against Property Ventures Investments, FM 3 and FM 1 be listed for hearing before Associate Judge Osborne on 15 March 2010 at 10.00 am. [38] Costs, if sought, may be the subject of a memorandum.___________________________________________________________________Solicitors: Kevin Clay Barrister, Christchurch for Applicants Crown Law, Wellington for Respondent