YAN v MAINZEAL PROPERTY AND CONSTRUCTION LIMITED (IN RECEIVERSHIP AND IN LIQUIDATION) CA105/2014 [2014] NZCA 190

YAN v MAINZEAL PROPERTY AND CONSTRUCTION LIMITED (IN RECEIVERSHIP AND IN LIQUIDATION) CA105/2014 [2014] NZCA 190 [20 May 2014]IN THE COURT OF APPEAL OF NEW ZEALANDCA105/2014[2014] NZCA 190BETWEEN RICHARD CILIANG YANAppellantAND MAINZEAL PROPERTY ANDCONSTRUCTION LIMITED (INRECEIVERSHIP AND INLIQUIDATION)First RespondentRICHINA GLOBAL REAL ESTATELIMITED (IN LIQUIDATION)Second RespondentCA157/2014BETWEEN MAINZEAL PROPERTY ANDCONSTRUCTION LIMITED (INRECEIVERSHIP AND INLIQUIDATION)First AppellantKING FACADE LIMITED(PREVIOUSLY KNOWN AS RICHINALAND LIMITED (IN LIQUIDATION)Second AppellantAND ISOLA VINEYARDS LIMITED(PREVIOUSLY KNOWN AS WAIHEKEVINEYARDS LIMITED)RespondentHearing: 16 April 2014Court: Randerson, Harrison and French JJCounsel: D J Chisholm QC, T P Mullins and C J Hadlee for Appellant inCA105/2014 and Respondent in CA157/2014Z G Kennedy and M D Pascariu for Respondents inCA105/2014 and Appellants in CA157/2014Judgment: 20 May 2014 at 2:15 pmReissued: 30 May 2014Effective dateof Judgment: 20 May 2014JUDGMENT OF THE COURTA The appeal in CA105/2014 is allowed. The order made in the High Court putting Richina Global Real Estate Ltd into liquidation is set aside.B The appeal in CA157/2014 is dismissed.C Mr Yan is entitled to one set of costs against Mainzeal Property and Construction Ltd (in rec and in liq) and King Facade Ltd (in liq) for a standard appeal on a Band A basis, together with usual disbursements in relation to both appeals.D We certify for second counsel.E Costs in the High Court are, in the absence of agreement between the parties, to be fixed in that Court.____________________________________________________________________REASONS OF THE COURT(Given by Randerson J)Table of ContentsPara NoIntroductionThe issuesRGRELIsolaThe statutory frameworkThe facts and the Judge's findingsThe group structure as at 31 December 2011The restructuring and other transactions in 2012[1][9][9][11][16][22][22][26]The RGREL demandsIsolaThe effect of the 2012 restructuring transactions on theKFL debt claimed from IsolaThe pooling ordersPrinciplesTest for solvencyDisputed debtsDiscussionRGRELRGREL – conclusionsIsolaIsola – conclusionsResult[29][41][46][54][58][58][61][75][75][78][88][96][99]Introduction[1] These two appeals arise from the financial collapse of Mainzeal Property and Construction Ltd and associated companies in February 2013 resulting in substantial losses.[2] Mainzeal Property and Construction Ltd (Mainzeal) had operated as a property and construction company since the late 1960s. From 2004 until December 2012, Mainzeal was owned by Richina Global Real Estate Ltd (RGREL) whose ultimate shareholder is Richina Holdings (BVI) Ltd, a company incorporated in the British Virgin Islands and controlled by the appellant, Mr Yan. During this period, Mr Yan provided financial and other support to Mainzeal through his Richina interests.[3] Mainzeal encountered financial difficulties in 2012 and, in December that year, RGREL sold its Mainzeal shares to Mainzeal Group Ltd (MGL). Changes of directors followed with the result that Mr Yan and a Mr Gomm ultimately became the sole directors of Mainzeal and Mr Yan became the sole director of MGL.[4] Pricewaterhouse Coopers were appointed as receivers of Mainzeal on 6 February 2013 under the terms of a security held by the Bank of New Zealand. Then, on 28 February 2013, Messrs A J Bethell, B Mayo-Smith and S J Tubbs of BDO were appointed liquidators of Mainzeal as well as most of the other companies in the Mainzeal group. We will refer to the liquidators as the BDO liquidators unlessotherwise stated. They were appointed by special resolution of the controlling shareholders of the companies under s 241(2)(a) of the Companies Act 1993 (the Act).[5] Liquidators were not appointed for RGREL or for another company in the group, Isola Vineyards Ltd (Isola).[6] Following the issue of statutory demands under the Act, the liquidators of Mainzeal and another group company, King Facade Ltd (KFL), applied to the High Court for orders putting RGREL and Isola into liquidation.[7] On 27 February 2014, Brown J made an order putting RGREL into liquidation and appointing BDO as liquidators for the company.1 The Judge declined to make an order putting Isola into liquidation.[8] In consequence, Mr Yan has appealed against the liquidation order for RGREL and the liquidators have separately appealed against the refusal of an order putting Isola into liquidation.2The issuesRGREL[9] The Judge held that a presumption of insolvency arose under s 287(a) of theAct through RGREL's failure to comply with a statutory demand and that RGRELhad failed to discharge the obligation to rebut the presumption by proving that it wasable to pay its debts. There were no grounds to exercise the Court's discretion todecline to put the company into liquidation.[10] Mr Yan challenges these findings on appeal and raises a further issue in relation to the appointment of the BDO liquidators for RGREL, contending that they have a conflict of interest.1 Mainzeal Property and Construction Ltd (in rec and in liq) v Richina Global Real Estate Ltd[2014] NZHC 277.2 On 21 March 2014, this Court declined Mr Yan's application for a stay of the High Court orderin respect of RGREL: Yan v Mainzeal Property and Construction Ltd (in rec and in liq) [2014] NZCA 86.Isola[11] Demands were made on Isola by both Mainzeal and KFL. The Judge found that KFL could rely on the presumption of insolvency created by Isola's failure tocomply with the statutory demand issued by Mainzeal. Isola had not rebutted the presumption of insolvency but, notwithstanding, it was appropriate to exercise theCourt's discretion under s 241(4) of the Act to decline to make an order putting Isola into liquidation.[12] On appeal, the KFL liquidators challenge the decision of the High Court declining to put Isola into liquidation. Isola supports the judgment on the grounds stated therein but has also issued a notice under r 33 of the Court of Appeal (Civil) Rules 2005 supporting the judgment on other grounds. In particular, it is submitted that the Judge was wrong to find that Isola had not rebutted the presumption ofinsolvency. Isola also challenges KFL's standing to seek Isola's liquidation on the grounds that KFL was not a creditor of the company.[13] Soon after the statutory demands were made, RGREL and Isola signalled through their lawyers that there were disputes as to whether certain debts relied upon were payable. We will refer to these in more detail below but one of the key points made on behalf of the two companies was that there had been substantial changes made to the incidence of inter-company debts as a result of the restructuring of these debts in 2012.[14] Accordingly, a principal issue to be determined is the extent to which disputed debts may be taken into account in assessing the ability of a company to pay its debts and in considering the exercise of discretion in relation to the making of a liquidation order.[15] Although the relevant statutory provisions are reasonably well known, we set these out before outlining the facts.The statutory framework[16] A company may be put into liquidation under s 241 of the Act by a variety of means. For present purposes, the applications were made by the BDO liquidators representing Mainzeal and KFL in their capacities as creditors of RGREL and Isola. The applications were made under s 241(2)(c)(iv) of the Act, in terms of which a creditor (including any contingent or prospective creditor) may apply to have a company put into liquidation. An application by a contingent or prospective creditor requires the leave of the court under s 288(5).[17] Section 241(4) sets out the grounds upon which the court may appoint a liquidator. Here, reliance was placed on subs (4)(a):(4) The court may appoint a liquidator if it is satisfied that—(a) the company is unable to pay its debts;[18] Proof that a company is unable to pay its debts may take a variety of forms. In practice, creditors most commonly issue a statutory demand to the debtor company under s 289 of the Act requiring a due debt to be paid or secured within 15 working days of the service of the demand or such longer time as the court may allow.3 If the debt remains unpaid or not secured at the expiry of that period, the creditor may, subject to s 288(1), rely on the presumption under s 287 which relevantly provides:287 Meaning of "inability to pay debts"Unless the contrary is proved, and subject to section 288 of this Act, a company is presumed to be unable to pay its debts if—(a) the company has failed to comply with a statutory demand; or...[19] So far as it is relevant, s 288 of the Act provides:288 Evidence and other matters(1) On an application to the court for an order that a company be put into liquidation, evidence of failure to comply with a statutory3 Companies Act 1993, s 289(2).demand is not admissible as evidence that a company is unable to pay its debts unless the application is made within 30 working days after the last date for compliance with the demand.(2) Section 287 of this Act does not prevent proof by other means that a company is unable to pay its debts.(4) In determining whether a company is unable to pay its debts, its contingent or prospective liabilities may be taken into account.(5) An application to the court for an order that a company be put into liquidation on the ground that it is unable to pay its debts may be made by a contingent or prospective creditor only with the leave of the court; and the court may give such leave, with or without conditions, only if it is satisfied that a prima facie case has been made out that the company is unable to pay its debts.[20] A company receiving a statutory demand may apply under s 290 of the Act for an order setting aside the demand. Under s 290(4) of the Act:(4) The court may grant an application to set aside a statutory demand if it is satisfied that—(a) there is a substantial dispute whether or not the debt is owing or is due; or(b) the company appears to have a counterclaim, set-off, or cross-demand and the amount specified in the demand less the amount of the counterclaim, set-off, or cross-demand is less than the prescribed amount; or(c) the demand ought to be set aside on other grounds.[21] In the present case, neither RGREL nor Isola applied to set aside the demands made against them. In consequence, it is accepted that the liquidators were entitled to rely on the statutory presumption of insolvency under s 287. It is common ground that the onus then rested upon RGREL and Isola to rebut the presumption by showing they could pay their debts. Even if the presumption is not rebutted, the court retains a discretion not to make a liquidation order.The facts and the Judge's findingsThe group structure as at 31 December 2011[22] RGREL's audited financial statements for the year ended 31 December 2011show that at that time, RGREL (ultimately owned by Mr Yan's foreign-based Richina companies) was the parent company of a number of subsidiaries including Mainzeal and KFL. The financial statements also show that RGREL was a related party to a number of other companies by virtue of their common ultimate shareholders. One of the related parties was Waiheke Vineyards Ltd (later Isola). RGREL was central to the New Zealand operations of the group since its principal function was to provide funding for the group.[23] Significantly for present purposes, the financial statements show that Isola owed $5,687,031 to RGREL as at 31 December 2011. This inter-company balance, along with others, arose as part of the funding arrangements for the working capital and ongoing operations of the group.[24] As at 31 December 2011, KFL's debtors' ledger recorded that Isola owedapproximately $4.409 million to KFL. Part of this debt related to sums paid by KFL for the acquisition of a property at Waiheke Island by Isola.[25] Mr Yan was a director of all relevant companies in the group and we acceptMr Kennedy's submission on behalf of the liquidators that he was in effectivecontrol of all the relevant companies. In particular, the financial statements record that RGREL had the power to govern the financial and operating policies of itssubsidiaries. We do not overlook Mr Yan's evidence that there were independentmembers on the Mainzeal board until December 2012, but effective control remained with Mr Yan as shareholder. It is evident that, at relevant times, Mainzeal and KFL were dependent on funding and other support provided by Mr Yan through his Richina interests.The restructuring and other transactions in 2012[26] There were two restructurings of the business of the group involving RGREL and Isola as well as other companies. The first was in the period January to July 2012 and the second in December 2012. Further restructuring was intended but did not occur, presumably due to the financial collapse of the group in February 2013.[27] The restructuring transactions had major impacts on the inter-company indebtedness of members of the group. In particular:$2.095 million of Isola's debt to KFL of $4.409 million was assumed by RGREL; andA debt owed by RGREL to Mainzeal was reduced by approximately $15.151 million.[28] On their face, these transactions were for the benefit of RGREL and Isola at the cost of Mainzeal and KFL. We will refer later to the detail of these transactions which did not emerge with supporting documentary evidence until September 2013, after the liquidation proceedings against RGREL and Isola had been launched.The RGREL demands[29] The following demands were made against RGREL:On 28 March 2013, Mainzeal's receivers served a statutory demand for $136,862.15 on the basis of an inter-company debt recorded as being owed by RGREL to Mainzeal.On 7 May 2013, KFL's liquidators served a statutory demand onRGREL for $5.787 million (the balance of an inter-company debtrecorded in KFL's books as at 31 December 2012).On 8 July 2013, Mainzeal's receivers served a further statutory demandon RGREL for $579,847.35 relating to a payment of that sum paid by Mainzeal to the Bank of New Zealand on behalf of RGREL for foreign exchange losses (Forex losses).[30] In relation to the first demand for $136,862.15, RGREL's solicitor disputed the company's liability to meet the demand by email dated 5 April 2013. RGRELcontended that, by reason of certain payments made on behalf of Mainzeal, there was no sum owing by RGREL to Mainzeal. Rather, Mainzeal owed some $45,000 to RGREL.[31] Mainzeal's receivers were not satisfied with this explanation, pointing to alack of documentation. Although the receivers were twice asked on behalf of RGREL not to issue liquidation proceedings, no undertaking to that effect was given.[32] In the absence of further documentation and the failure of RGREL to apply to set aside the statutory demand within the prescribed 10 working day period under the Act, the Mainzeal receivers served liquidation proceedings on RGREL on 6 June 2013 based on the demand for $136,862.15.[33] It was not until shortly before the liquidation proceedings were heard by the High Court in December 2013 that RGREL provided bank statements to the Mainzeal receivers supporting their contention that no money was owed to Mainzeal on inter-company account. The receivers' representative, Mr McCloy, acknowledgedin cross-examination in the High Court that, having received the bank statements, he was satisfied the debt was not owed.[34] The Judge recorded that RGREL did not dispute that the failure to pay the amount of the first statutory demand or to apply to set it aside had the consequence that RGREL was presumed to be unable to pay its debts by virtue of s 287(a) of the Act.4[35] That finding is not disputed on appeal but Mr Chisholm QC on behalf of Mr Yan submitted that the Mainzeal receivers were guilty of an abuse of process in issuing the liquidation proceedings in June 2013 despite the prompt notification of the existence of a dispute. We are not persuaded by that submission. The mere assertion of a dispute is not a sufficient response by a debtor faced with a formal statutory demand under the Act. If the recipient of the demand has a defence, then it4 Mainzeal, above n 1, at [44].is incumbent on the recipient to promptly produce proper proof of the defence and, if necessary, to apply under s 290 to have the demand set aside if it wishes to avoid the presumption of insolvency under s 287.[36] RGREL was advised by a solicitor during this period and must be taken to have been aware of its legal obligations. It did not provide adequate documentation nor apply to set aside the demand prior to the issue of the liquidation proceedings. Although it is accepted there were discussions between the parties during this period, no undertaking was given by or on behalf of the Mainzeal receivers not to issue liquidation proceedings. In hindsight, Mr Yan acknowledged that he ought to have taken the relevant steps provided for under the Act.[37] Only half of the Forex debt of $579,847.35 that RGREL owed to Mainzeal remained outstanding at the time of the liquidation hearing. RGREL did not dispute that the Forex debt was due but maintained it was sufficiently secured by funds held on its behalf by the solicitors for the Mainzeal receivers, Russell McVeagh.[38] The Judge correctly found that no separate presumption of insolvency arose through failure to meet the Forex demand.5 This followed because, although RGREL did not apply to set aside the demand, Mainzeal did not amend its statement of claim to include the Forex debt until after the 30 day period under s 288(1). However, RGREL does not dispute that the presumption of insolvency arising from non-compliance with the first statutory demand still applies. The undisputed evidence is that, in consequence of the sale of a property owned by another company in the group (200 Vic Ltd), a balance of $699,773.93 was held by Russell McVeagh on trust for Isola as at 20 November 2013.6 On three occasions between 9 October 2013 and 8 November 2013, Isola directed the receivers to pay the amount of theForex debt to Mainzeal's receivers. They agreed to pay only half the sum due($289,923.67) leaving a balance owing of the same amount. The explanation given by the Mainzeal receivers was that they wished to await the outcome of theliquidation proceedings before acting on Isola's payment directions. We wereadvised that the receivers had concern over some residual contingent liabilities for5 At [45].6 A slightly higher sum had been held by Russell McVeagh since late September 2013.which they might later be found responsible. RGREL acknowledges that the balance remaining in Russell McVeagh's trust account remained subject to an undertaking byIsola not to deal with its assets pending resolution of disputes.[39] In summary, as at the date of the liquidation hearing in the High Court, RGREL still owed $289,923.67 to Mainzeal on the Forex debt but contended thereremained sufficient funds in Russell McVeagh's trust account to cover this debt.Mr McCloy acknowledged in cross-examination that this debt was effectively secured and had been since April 2013. Nevertheless, the Judge found that the fact that another related entity was prepared to assume responsibility to discharge the debt did not establish that the party legally liable for the debt was able to pay its debts.7 Rather, the fact that RGREL needed to ask Isola to pay the debt on its behalf pointed to the conclusion that RGREL was unable to pay its debts. The Judge considered that the same point applied in relation to other companies in the wider group. In particular, the Judge noted that another company, Richina Pacific Ltd(RPL) had confirmed cashflow support for RGREL and that RPL's financialstatements had been produced. The Judge did not consider that this evidence demonstrated that RGREL was able to pay its debts. These findings are challenged on appeal by RGREL and we return to them later.[40] The Judge was not satisfied that RGREL had discharged the burden of proving that it was able to pay its debts so as to rebut the presumption of insolvency which arose consequent upon non-compliance with the first statutory demand.8 He went on to find that there were no valid grounds to decline to make an order putting RGREL into liquidation.Isola[41] Two demands were made upon Isola. The first was a statutory demand by the Mainzeal receivers. The second was a non-statutory demand by the KFL liquidators. We deal with each in turn.7 At [48].8 At [49].[42] On 7 March 2013, the Mainzeal receivers served a demand on Isola for $2,478,164.95 being the recorded amount of inter-company debt at 31 December 2012. This sum was available from funds totalling $4.15 million paid to the Mainzeal receivers in April 2013 from the proceeds of sale of the property owned by 200 Vic Ltd whose obligations were guaranteed by Isola. The Judge found that from the date of the payment made on 15 November 2013, Mainzeal ceased to be a creditor of Isola.9 That finding is not disputed.[43] On 13 August 2013, the KFL liquidators sent a letter to Isola demanding the sum of $4,409,661.39 allegedly owing by Isola, being the sum recorded in KFL'sinter-company balances ledger as at 31 December 2011. This was the non-statutory demand.[44] On 20 August 2013, Isola's solicitors wrote to KFL's solicitors contendingthat no sum was owing due to the restructuring transactions that had taken place in 2012. We have referred briefly to these already and will shortly set out the details. However, to complete the narrative, on 18 October 2013 KFL was named as a second plaintiff in an amended statement of claim seeking the liquidation of Isola.10[45] Although the KFL demand was non-statutory, the Judge found that the presumption of insolvency arising from the failure by Isola to meet the demand by Mainzeal of 7 March 2013 continued to apply.11 The later payment of the 7 March 2013 demand did not, of itself, constitute proof that Isola was able to pay its debts. The presumption arising from the failure to comply with the demand of 7 March 2013 remained for the benefit of substituting creditors unless and until Isola rebutted the presumption of insolvency by proving that it was able to pay its debts. These conclusions are not disputed.The effect of the 2012 restructuring transactions on the KFL debt claimed from Isola[46] It was contended for Isola that the effect of the transactions in 2012 was toextinguish Isola's liability of approximately $4.409 million to KFL as at9 At [56].10 This followed the issue of liquidation proceedings on 13 May 2013 against Isola by the Mainzeal receivers based on the failure to pay the demand of 7 March 2013.11 At [81]–[83].31 December 2011. It was said that this debt due by Isola was assumed by RGREL. It was also contended that a further result of the transactions in 2012 was that the debt from RGREL to Mainzeal was reduced by approximately $15.151 million.[47] In an affidavit sworn on 16 October 2013, the BDO liquidator Mr Bethell said that the demand made on Isola on 13 August 2013 for $4.409 million was made because, despite requests of Mr Yan, the liquidators were not provided with any supporting documents for the extinguishment of the debt. Subsequently, he said, additional documents were produced by Mr Yan in affirmations dated 3 and 6 September 2013. Mr Bethell then deposed:The documents belatedly provided by Mr Yan purport to show that the $4.410m debt owed by [Isola] to KFL was extinguished on the basis of the following transactions:(a) on 1 January 2012, an acknowledgement by KFL of a debt of $2.640m to Richina Building Limited (RBL);(b) on 1 January 2012, an assignment of $2.447m of that debt to RBL to [Isola];(c) a purported set-off of the assigned debt of $2.447m against [Isola's]liability to KFL of $4.410m with the residual debt of $2.095m being acknowledged as owing by [Isola] to KFL on 31 July 2012; and(d) an "assignment" on 31 July 2012 of the residual debt of $2.095m by [Isola] to RGREL together with an "assumption" of that debt byRGREL.[48] Mr Yan provided an essentially similar description of the transactions in an affirmation dated 18 September 2013.[49] A feature of the restructuring of the inter-company indebtedness was a"template" transaction with accompanying documentation that provided for thepostponement of debt on an interest-free basis for 10 years from 1 January 2012 with the repayment obligation being expressly conditional upon the profitability of the company assuming the debt.[50] In the transaction at issue, the liquidators do not accept that Isola could legitimately offset the $2.447 million debt owed by KFL12 when KFL appeared to be12 The set-off is referred to above at [47].insolvent at the time and the loan by RBL to KFL was based on the uncommercial terms described in the template transactions. They say it does not make sense that KFL, a company in financial difficulty, would relinquish the ability to call uponIsola's current liability in exchange for a debt not payable for 10 years from 1 January 2012 without interest and subject to KFL's profitability.[51] Concluding that the set-off involved in these transactions was not available either at law, equity or under statute, the KFL liquidators made the demand against Isola claiming the debt of $2.447 million which Isola claimed was subject to set-off.[52] The Judge said that if the amount claimed by KFL was a debt owed by Isola, his conclusion would be that Isola was not able to pay its debts.13 He went on to note that the KFL debt was strongly contested both factually and legally. The validity of the transactions which lay at the heart of the question whether Isola owed a debt to KFL involved quite complex matters that might require cross-examination. He considered that a resolution of the issue was ill-suited to determination in the liquidation proceedings.14[53] Despite these concerns, the Judge was left in a state of doubt as to the ability of Isola to meet its debts. Bearing in mind the onus of proof, Brown J found that Isola had not discharged the burden of demonstrating it could pay its debts.15However, he exercised his discretion not to put Isola into liquidation in the circumstances.16The pooling orders[54] Given the complex interrelationships between companies in the group, the BDO liquidators obtained, by way of formal proof on 25 June 2013, orders under s 271 of the Act that:1713 At [87].14 At [90].15 At [92].16 At [93]–[96].17 Bethell v Mainzeal Property and Construction Ltd (in rec and in liq) [2013] NZHC 1556.RGREL was to contribute $15,150,847 to the liquidation of Mainzeal and $5,786,606.77 to the liquidation of KFL; andIsola was to contribute $2,478,165 to the liquidation of Mainzeal.[55] On 3 September 2013, RGREL and Isola applied to set aside the pooling orders. That application has not been heard by the High Court pending resolution of these appeals.[56] The parties agreed not to rely upon the orders obtained under s 271 for the purposes of the liquidation proceedings now under appeal. However, it was agreed that reliance could nevertheless be made on the evidence filed in respect of the application for the pooling orders.[57] Although the BDO liquidators have not yet formulated their defence to the application to set aside the pooling orders, it is evident that the validity of the restructuring transactions and the impact on inter-company indebtedness will be central to the dispute to be determined.18 The liquidators contend that if the variousliabilities between Mainzeal/KFL and Isola/RGREL had not been "netted off",significant funds could flow to Mainzeal and KFL and to their unsecured creditors who, we are advised, are owed over $100 million.PrinciplesTest for solvency[58] The Judge recorded that it was common ground that the test for insolvency is whether the company is able to meet its current financial demands including from assets currently realisable.19 The Judge cited Re Tweeds Garages Ltd for the proposition that the applicable test was one of cashflow rather than a balance sheet approach:2018 Brown J noted that the BDO liquidators may rely on various provisions of the Companies Act including ss 292–296 (voidable transactions); ss 297–298 (transactions at undervalue or with excessive or inadequate consideration); and s 301 (repayment or contribution to the assets of a company).19 At [12].20 Re Tweeds Garages Ltd [1962] Ch 406 (CHD) at 410.In such [cases where a company is unable to meet the current demands on it] it is useless to say that if its assets are realised there will be ample to pay 20s in the pound: this is not the test. The company may be at the same time insolvent and wealthy. It may have wealth locked up in investments not presently realisable; but although this may be so, yet if it had not assets available to meet its current liabilities it is commercially insolvent and may be wound up.[59] The test is one of solvency, not liquidity. A temporary lack of liquidity may not equate to insolvency if the debtor is able to realise assets or borrow funds within a relatively short time frame in order to meet its liabilities as they fall due. As it wasput by Barwick CJ in the High Court of Australia's decision Sandell v Porter:21 the debtor's own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realisation by sale or by mortgage or pledge of his assets within a relatively short time – relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor's financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor's inability, utilising such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency.[60] In Sandell v Porter, the Court was dealing with legislation referring to the ability of the debtor to meet liabilities from "his own moneys". There is no longerany such limitation in the relevant provisions of the Act. Nevertheless, the authorities recognise that the solvency of the company requires consideration of debts currently due or falling due within a relatively short time. As Barwick CJ emphasised in Sandell v Porter, the issue of solvency requires consideration of thedebtor's entire financial position. A realistic commercial approach to the assessmentis required.Disputed debts[61] It has long been established that, as a general rule, an order to put a company into liquidation will not be made where the application is founded upon a debt that is genuinely disputed. To apply to wind up a company in such circumstances is regarded as an abuse of the court's process: Bateman Television Ltd (in liq) v21 Sandell v Porter (1966) 115 CLR 666 at 670.Coleridge Finance Co Ltd.22 In such cases, the court has an inherent jurisdiction to prevent such an abuse of process. But the court also has power to consider disputed debts in the context of an opposed application for liquidation or upon applications for orders restraining advertising and staying proceedings.23 The relevant principles were recently summarised by Associate Judge Faire (now Faire J) in South Waikato Precision Engineering Ltd v Ahu Developments Ltd in these terms:24(a) A winding up order will not be made where there is a genuine and substantial dispute as to the existence of a debt such that it would be an abuse of the process of the Court to order a winding up;(b) In such circumstances, the dispute, if genuine and substantially disputed, should be resolved through action commenced in the ordinary way and not in the Companies Court;(c) The assessment of whether there is a genuine and substantial dispute is made on the material before the Court at the time and not on the hypothesis that some other material, which has not been produced might, nonetheless be available;(d) The governing consideration is whether proceeding with an application savours of unfairness or undue pressure.[62] Similar views were expressed by this Court in Link Electrosystems Ltd v GPC Electronics (NZ) Ltd.25 We endorse the principles summarised in the South Waikato Precision Engineering Ltd case.[63] Most of the recent authorities have arisen in the context of applications to set aside statutory demands. But, as Associate Judge Bell pointed out in Grant v Lotus Gardens Ltd, a company is not prevented from showing that indebtedness is disputed even if it has failed to apply to set aside a statutory demand under s 290.26 In such a case, the failure of the debtor to apply to set aside the statutory demand means that the creditor is entitled to rely on the presumption of insolvency under s 287(a) of the Act and the onus falls upon the debtor to establish that there is a genuine and22 Bateman Television Ltd (in liq) v Coleridge Finance Co Ltd [1971] NZLR 929 (PC) at 932.23 Exchange Finance Co Ltd v Lemmington Holdings Ltd [1984] 2 NZLR 242 (CA) at 245; Taxi Trucks Ltd v Nicholson [1989] 2 NZLR 297 (CA) at 299.24 South Waikato Precision Engineering Ltd v Ahu Developments Ltd HC Auckland CIV-2008- 404-970, 10 December 2008 at [22].25 Link Electrosystems Ltd v GPC Electronics (NZ) Ltd [2007] NZCA 501, (2007) 18 PRNZ 946 (CA) at [16]–[17].26 Grant v Lotus Gardens Ltd [2013] NZHC 1135 at [92]. An appeal against this decision was allowed by this Court but the proposition at issue does not appear to have been challenged:Grant v Lotus Gardens Ltd [2014] NZCA 127.substantial dispute as to its liability to pay. The mere assertion of a dispute is not sufficient to rebut the presumption. Cogent evidence, short of actual proof that the debt is not payable, is required.27 We note that a company seeking to dispute a debt that is not the subject of the statutory demand does not have the ability to apply to set aside the debt and must therefore take other steps to dispute the debt.[64] While these principles are uncontroversial so far as they relate to the debt which is the subject of the statutory demand, what is the position where there are other disputed debts not subject to the statutory demand? Is a debtor faced with a presumption of insolvency required to demonstrate it can pay such a debt if it is ultimately found liable to pay it?[65] For example, in the present case, the BDO liquidators referred to the debt of $15.15 million claimed by Mainzeal against RGREL in the pooling application. While acknowledging that liability for this sum is disputed by reason of the 2012 restructuring of inter-company debts, Mr Kennedy submitted that, in assessing the overall solvency of RGREL, the court was entitled to take into account, at least as acontingent or prospective debt, RGREL's liability to pay this sum should the court ultimately determine that the amount is due.[66] Mr Kennedy contended that the court was entitled to consider the ability of RGREL to pay other debts including those genuinely disputed. He pointed out that the court was entitled under s 288(4) to take into account contingent or prospective liabilities in determining whether a company is unable to pay its debts. On that footing, the court may take into account the ability of the company to pay the disputed debt should the court later find that the company was required to pay. The weight to be attached to this would be a matter for the court in all the circumstances of the case.[67] In contrast, Mr Chisholm submitted that a debt which was genuinely and substantially disputed should be excluded from consideration. The effect of the dispute was that the debt was no longer due. He went so far as to submit that a27 Duffill Watts Ltd v Mogans Homes Ltd [2010] NZCCLR 1 (HC) at [28] and Link Electrosystems Ltd v GPC Electronics (NZ) Ltd, above n 25, at [17].creditor whose debt was in substantial dispute ceased to be a creditor. He submittedthat the inquiry into the company's solvency should focus on its ability to pay current and undisputed debts.[68] We do not accept the proposition that the mere existence of a substantial dispute in respect of a debt means that the debt is no longer due or that the party claiming it is no longer a creditor. A creditor is defined by s 240(1) of the Act to be a person who, in a liquidation, would be entitled to claim, in accordance with s 303, a debt owing to that person by the company. In terms of s 303, 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.[69] The existence of a genuine and substantial dispute does not extinguish the liability of the debtor to pay the amount in dispute. Generally, in the liquidationcontext, its effect will be to postpone the debtor's liability to pay until the dispute isdetermined. This recognises the proposition that, in general, it would be an abuse of process to put a company into liquidation on the basis of a debt that is in substantial dispute.[70] If the debtor is ultimately required to pay the amount claimed, then the debt must be paid or otherwise secured to the satisfaction of the creditor or, ultimately, to the satisfaction of the court. If, on the other hand, the dispute is resolved in favour of the debtor, then the liability of the debtor to pay the amount claimed is extinguished.[71] It follows in our view that, in the case of a debt that is substantially disputed, the claimant retains the status of a creditor, until the dispute is resolved in favour of the debtor.28 We note that an argument that a dispute over a debt meant that the claimant lost his status as a creditor was rejected by Panckhurst J in Commissioner of Inland Revenue v Atlas Food and Beverage Ltd.2928 Commissioner of Inland Revenue v Atlas Food and Beverage Ltd (2010) 10 NZCLC 264,777 (HC).29 Commissioner of Inland Revenue v Atlas Food and Beverage Ltd, above n 28, at [21].[72] This conclusion is consistent with the statutory scheme. The existence of a substantially disputed debt does not mean that the inquiry into the ability of the debtor company to pay its debts is at an end or that the initiating creditor may not proceed with an application to put the company into liquidation. It simply means that the creditor will not generally be permitted to proceed on the basis of the disputed debt alone and will not be able to rely on the presumption of insolvency under s 287 of the Act. The ability of a company to pay its debts requires an overall assessment of its liabilities measured against the resources available to it in order to meet those liabilities when due.[73] While we do not accept the proposition that the creditor loses its status as such where there is a substantial dispute over the relevant debt, it does not follow that a debt which the creditor alleges is currently payable becomes a contingent or prospective debt in terms of the Act pending resolution of the dispute. Rather, as we have found, liability to pay the debt in the context of liquidation proceedings is effectively postponed until the resolution of the dispute.[74] We would not rule out the possibility that, in some circumstances, the court could consider the ability of the debtor to meet a disputed debt if the debtor is ultimately found liable to pay. But the weight to be attached to this factor is a matter for the court in all the circumstances of the case. It must also be kept firmly in mind that the court will not generally make a liquidation order if the debts relied upon are found to be in substantial dispute and not suitable for resolution in the liquidation list. That is so whether or not the disputed debts are the subject of the statutory demand. We do not see any material distinction in this respect.DiscussionRGREL[75] We summarise the points Mr Chisholm made in support of his submission that the Judge was wrong to find that RGREL should be put into liquidation:The Mainzeal receiver Mr McCloy ultimately accepted at the hearing of the liquidation proceedings in the High Court that the amount ofthe original demand made on RGREL for $136,862.15 was not a debt due to Mainzeal.The amount of the second statutory demand for the Forex debt of $289,923.67 was effectively secured by the funds held in the Russell McVeagh trust account on behalf of RGREL but at the direction of Isola and, in any event, this debt was paid shortly after the High Court hearing.Any other debts claimed were the subject of genuine and substantial dispute.RGREL was not trading nor incurring any further debt.RGREL had entered into standstill agreements with the liquidators and had also undertaken not to deal with any of its assets pending resolution of the disputes.The Judge was wrong to conclude that the fact that RGREL needed torely on Isola and RPL to meet RGREL's debts supported theconclusion that RGREL was unable to pay its own debts.[76] In supporting the High Court judgment, Mr Kennedy summarised the debts at issue in the High Court proceedings:The debt of $136,862.15 owed to Mainzeal.The Forex debt of $289,923.67 owed to Mainzeal.The sum of $5,786,606.77 owed by RGREL to KFL.$3.375 million owed by RGREL to Swiss Re.The amount of Mainzeal's claim against RGREL in the pooling order application amounting to $15,150,847.[77] Mr Kennedy also emphasised the absence of any recent or adequateinformation about RGREL's assets and liabilities. Apart from audited financialstatements for the year ended 31 December 2011, the only other evidence produced were pro forma and unaudited accounts for the year ended 31 March 2012. There were, he submitted, similar inadequacies in the evidence produced to show that the overseas-based Richina company could support RGREL and Isola.RGREL – conclusions[78] Two of the debts referred to by Mr Kennedy may be excluded from consideration at the outset. By the time of the hearing in the High Court, the Mainzeal receiver had accepted that the sum claimed of $136,862.15 was not owed to Mainzeal by RGREL. Secondly, the debt owed by RGREL to Swiss Re of $3.375 million was settled during the High Court hearing.[79] As to the Forex debt of $289,923.67, Mr Kennedy acknowledged there weresufficient funds to pay this debt held to Isola's credit in the Russell McVeagh trust account from about April 2013. We also accept that Isola had directed the Mainzeal receivers to utilise this sum to pay the amount due. For reasons which we consider to be proper at the time, the receivers declined to pay all of the debt due but paidonly half of it. In view of Mr McCloy's acknowledgement that the amount due toMainzeal was effectively secured by April 2013, we consider this sum ought to be excluded from consideration. It was paid in full soon after the hearing in the High Court.[80] In respect of the sum of $5,786,606.77 owed by RGREL to KFL, Mr Yan acknowledged this debt was owing. However, he contends it was offset for two reasons. First, he claims there was a funding arrangement between Mainzeal and Richina Pacific (China) Investments Ltd (CHC) under which CHC would provide materials, labour and services to Mainzeal. CHC would offset the value of these benefits against any sums Mainzeal owed to Richina New Zealand entities, including RGREL. Secondly, Mr Yan says that the amount claimed by KFL is not due, since, by virtue of the various rearrangements of inter-company debt, the sum is not due for payment until 31 July 2022. We accept there is a genuine and substantial disputeabout RGREL's current liability to pay this sum.[81] The facts relating to RGREL are most unusual. The debts relied upon by the liquidators to support the statutory demands have been found to be not due or to be secured by funds held in the Russell McVeagh trust account. The remaining debts relied upon by the liquidators of Mainzeal and KFL we find to be substantially and genuinely disputed. There is no evidence of any other debts due by RGREL and the company is no longer trading. The company has also given a formal undertaking to the High Court that its assets will not be removed, dissipated, or otherwise dealt with pending final resolution of the claims made by the receivers and liquidators against it.30 The parties agree that the resolution of the disputed debts is not suitable for determination in the liquidation list.[82] While we accept Mr Kennedy's submission that RGREL has fallen short ofestablishing that it has the ability to pay the disputed debts should it be found in due course to be liable to pay them, we agree with Mr Chisholm that it was premature to make a liquidation order before the disputes were determined. If RGREL is successful in establishing it is not liable to pay the disputed debts, then there is nothing further to be recovered from RGREL by the liquidators or any other creditors. In those circumstances, RGREL's ability to pay is irrelevant. If, on theother hand, RGREL is found to be liable, then if it cannot promptly pay or secure the debt by whatever means are available to it, an order for liquidation would no doubt be the likely outcome.[83] The short point is that, at this stage, there are no undisputed debts due by RGREL upon which a liquidation order could properly be made. To do so would be unfair in terms of the well established principles we have outlined above and would amount to an abuse of process.[84] Mr Kennedy acknowledged that the liquidators will be entitled to discovery of documents against RGREL and that the liquidators will not be unduly disadvantaged in the resolution of the disputed debt issue in the context of RGREL'sapplication to set aside the pooling orders.30 Consent orders including these undertakings were made by Venning J on 3 October 2013:Mainzeal Property and Construction Ltd (in rec and in liq) v Richina Global Real Estate LtdCIV-2013-404-3047, 3 October 2013 and Mainzeal Property and Construction Ltd (in rec and liq) v Isola Vineyards Ltd CIV-2013-404-2317, 3 October 2013.[85] For completeness, we deal with two further points made by Mr Kennedy. First, he referred to an unexplained reference in the evidence to standby letters of credit in the material disclosed by RGREL. We are satisfied that, given the advertising of the liquidation proceedings, any claimants for these sums would have emerged by now. Secondly, the Judge relied in part on a statement by a Mr McPherson, a chartered accountant, on behalf of the Registrar of Companies thathe understood RGREL was "hopelessly insolvent" and that an investigation into itsaffairs was required. In the absence of any cogent evidence supporting this statement we do not attach weight to it. We understand that the Registrar did not appear at the hearing of the liquidation application.[86] Finally, we do not share the Judge's view that the fact that RGREL had torely on Isola and the Richina parent companies for support tends to suggest it cannot pay its debts. It is common for companies to require funding support from related companies in a group or from shareholders. However, on the view we take of this matter, the point is not material.[87] Given our conclusions, the issue of any actual or potential conflict in the appointment of the BDO liquidators for RGREL does not arise.Isola[88] The first issue raised in the Isola appeal relates to whether KFL had standingto apply to put Isola into liquidation. Mr Chisholm's submission on this point wasbased on the contention that KFL ceased to have the status of a creditor since the KFL debt was disputed. For the reasons already discussed in relation to RGREL, we are satisfied that KFL retained its status as a creditor of Isola notwithstanding the dispute over the debt KFL claimed to be due from Isola.[89] The next question is whether the Judge erred in declining to put Isola into liquidation.[90] By the time of the liquidation hearing, Mainzeal's statutory demand againstIsola served on 7 March 2013 for $2,478,164.95 had been fully paid from theproceeds of sale of the assets of 200 Vic Ltd. The Judge found that, from that time, Mainzeal ceased to be a creditor of Isola. That finding is not challenged.[91] The second (non-statutory) demand against Isola was issued on 13 August2013 by KFL's liquidators for approximately $4.409 million. When Isola did notmeet this demand, KFL joined Isola's liquidation proceedings as a plaintiff in respectof $2.447 million, being part of the debt the subject of the demand. The claim for $4.409 million against Isola was based on records showing an inter-company debt for that sum in favour of Richina Land Ltd (later KFL) as at 31 December 2011.Isola's defence to this claim is that, as a result of the restructurings of debt in 2012,the amount due was reduced to nil because RGREL assumed liability for the Isola debt to KFL.31 We accept there is a substantial dispute about the debt KFL claims from Isola which will depend on the judgment of the High Court about the validity of the restructuring transactions.[92] Mr Kennedy also pointed to an inter-company balance of $7.9 million payable by Isola to RGREL in consequence of the restructurings of debt in 2022.Isola's position is that payment of this sum is not due until 2022 in terms of thedocumentation executed in 2012. Even then, according to Isola, the debt iscontingent upon Isola's profitability.[93] As we understand it, the existence of any obligation by Isola to RGREL for this sum will depend upon the validity of the restructuring transactions undertaken in 2012 as to which there is genuine and substantial dispute.[94] There are no other liabilities of Isola. While there is some uncertainty as tothe value of Isola's current assets they are said to include:a remaining parcel of land valued in excess of $1 million (this is said to be subject to a Bank of New Zealand mortgage but without any specific debt attached to that mortgage);3231 See our discussion above. at [46]–[53]32 We were told that the secured debt due by Mainzeal to the Bank of New Zealand of some $11 million has been satisfied and no further claim by the Bank has emerged.wine stock worth approximately $1 million (subject to a dispute with a purchaser);cash of approximately $141,000 remaining in the Russell McVeagh trust account; andpotential rights to subrogation and contribution.[95] Mr Yan asserts that Isola is ready, willing and able to meet any contingent liabilities Isola may have but none has emerged.Isola – conclusions[96] As noted, the Judge was left in a state of doubt as to whether Isola had the ability to meet its debts. Accordingly, he found that Isola had not discharged the obligation to rebut the presumption of insolvency resulting from the failure to meet the initial statutory demand within the relevant time limit. He concluded, however, that it was not appropriate, as a matter of discretion, to make a liquidation order.[97] We agree with the conclusion of the Judge but for slightly different reasons. The Mainzeal debt had been paid prior to the liquidation proceedings and the debt the subject of the KFL demand was the subject of a genuine and substantial dispute not suitable for determination in the liquidation list. It would not have been proper to make a liquidation order on the basis of that disputed debt. The only remaining debt of any substance was the contingent obligation to RGREL payable some eight years hence. The nature and any extent of any such obligation by Isola would bedependent upon the court's determination of the validity of the 2012 inter-company transactions. As in the case of RGREL, Isola gave an undertaking to the Court not to dissipate, remove or otherwise deal with its assets pending resolution of the disputes at issue.33[98] While we accept that there were inadequacies in Isola's evidence to support its assertion that it had the capacity to meet the disputed liabilities should it33 Subject to any necessary payment to maintain Isola's vineyard assets.ultimately be found liable to pay them, we agree with the Judge that a liquidation order was not appropriate in the circumstances.Result[99] The appeal in CA105/2014 is allowed. The order made in the High Court putting Richina Global Real Estate Ltd into liquidation is set aside.[100] The appeal in CA157/2014 is dismissed.[101] Mr Yan is entitled to one set of costs against Mainzeal Property and Construction Ltd (in rec and in liq) and King Facade Ltd (in liq) as for a standard appeal on a Band A basis, together with usual disbursements in relation to both appeals.[102] We certify for second counsel.[103] Costs in the High Court, in the absence of agreement between the parties, are to be fixed in that Court.Solicitors:Lee Salmon Long, Auckland for Appellant in CA105/2014 and Respondent in CA157/2014Minter Ellison Rudd Watts, Auckland for Respondents in CA105/2014 and Appellants in CA157/2014