THE COMMISSIONER OF INLAND REVENUE V HOBBS ROSE LTD HC HAM CIV 2010-419-000027

THE COMMISSIONER OF INLAND REVENUE V HOBBS ROSE LTD HC HAM CIV 2010-419-000027 21 July 2010IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY CIV 2010-419-000027IN THE MATTER OF of the Companies Act 1993 BETWEEN THE COMMISSIONER OF INLAND REVENUE Plaintiff AND HOBBS ROSE LIMITED, PREVIOUSLY HOBBS SMITH LIMITED Defendant Hearing: 21 July 2010 Counsel: A Murphy for plaintiff GW O'Brien for defendant Judgment: 21 July 2010 at 2:44pm(ORAL) JUDGMENT OF ASSOCIATE JUDGE FAIRE [on application for order putting defendant company into liquidation]Solicitors: Inland Revenue Department, PO Box 432, Hamilton for plaintiff Garth O'Brien & Associates, PO Box 79 Te Awamutu for defendant[1] The plaintiff seeks an order putting the defendant into liquidation. The application is based on the non-compliance by the defendant with the service of a statutory demand under the Companies Act 1993, s289 which sought payment of $81,479.14. The plaintiff relies, therefore, on ss 241(4)(a) and 287 and alleges that the defendant is unable to pay its debts. [2] The defendant applies for orders pursuant to r 31.11 staying this proceeding and restraining advertising. The application pleads solvency and irreparable damage to the defendant if the application is advertised. [3] The plaintiff opposes the application. He advances the following: a) The debt is not disputed; and b) Prior arrangements to settle the debt have not been complied with. [4] The debt due to the plaintiff is for unpaid PAYE deductions, GST, Kiwisaver Employee Deductions, Student Loan Employer Deductions and Income Tax payments. The defendant accepts that the amount claimed is due and owing. [5] The reason given for the application, in the words of the defendant's director, and I quote from his affidavit at paragraph 3:Like most small businesses in New Zealand we have been suffering the lack of payment of accounts and this has affected our cash flow."Then, later in his affidavit at paragraph 10:Given that the Company is stretched financially by the current financial conditions publication of an advertisement relating to the proceedings or any other information in relation to the liquidation may cause irreparable prejudice to the Company and will cause even more financial hardship to the Company as clients will lose confidence in the company and not pay their accounts.[6] Counsel for the defendant responsibly advises that: a) The company has ceased trading; andb) A second proceeding seeking an order appointing a liquidator has been advertised. [7] Whilst the initial plaintiff in that proceeding has been paid, a substitution has occurred for a much larger sum and that is still proceeding. [8] Mr O'Brien, counsel for the defendant, seeks time to collect in moneys due to the defendant with a view to making payment. [9] It is appropriate that I briefly refer to the applicable principles on an application under r 31.11 of the High Court Rules. Rule 31.11 of the High Court Rules empowers the court to make an order restraining publication of any advertisement required by the rules or any other information relating to that statement of claim and staying any further proceedings in relation to the liquidation. Subrule (2) requires the court to deal with such an application as if it were an application for an interim injunction and provides that if the court makes an order as sought, it may make it on such terms as the court thinks fit. The rule further provides that nothing in it shall limit the inherent jurisdiction of the court. [10] The general principles applicable in respect of an application for an order retraining advertising and staying a winding up application were referred to in Taxi Trucks Ltd v Nicholson.1 That decision referred to the earlier decision in Exchange Finance Co Ltd v Lemington Holdings Ltd2 and to the decisions in Bateman Television Limited (in liq) & Anor v Coleridge Finance Company Ltd.3 The principles were confirmed also in Edge Computers Ltd v Colonial Enterprises Ltd.4[11] From those authorities I extract the following specific principles: 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 be1 Taxi Trucks Ltd v Nicholson [1989] 2 NZLR 297 (CA).2 Exchange Finance Co Ltd v Lemmington Holdings Ltd [1984] 2 NZLR 242 (CA).3 Bateman Television Ltd (in liquidation) & Anor v Coleridge Finance Co Ltd [1971] NZLR 929 (CA); [1971] NZLR 297 (PC).4 Edge Computers Ltd v Colonial Enterprises Ltd 9 PRNZ 621.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 any 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; e) The rule directs the court to deal with the application as if it were an application for an interim injunction; f) The rule enables the court to impose terms on any order it makes; [12] The circumstances outlined disclose that the defendant is insolvent. The Companies Act 1993, s 4(1) provides:4 Meaning of "solvency test" (1) For the purposes of this Act, a company satisfies the solvency test if— (a) The company is able to pay its debts as they become due in the normal course of business; and (b) The value of the company's assets is greater than the value of its liabilities, including contingent liabilities.[13] This defendant is not able to pay its debts as they become due in the ordinary course of business. [14] The defendant's statement of financial position as of 31 December 2009 discloses net assets over liabilities of $153,855.00. However, $143,100.00 isrecorded as goodwill. That provision must be doubtful in view of the fact that the company is no longer trading. [15] The company's largest assets are its sundry debtors which were recorded at $312,904.00 as at 31 December 2009. 80.1 per cent of that figure represents debtors who are three months overdue. [16] The company, in reality, fails on both aspects of the solvency test prescribed by the Companies Act 1993, s 4(1). [17] I am not satisfied that a liquidator would be less successful than the company's officers in recovering the sundry debtors.Orders[18] I therefore conclude that there is no justification for the orders sought. The application is therefore dismissed. [19] Adjourned to today's date is the substantive proceeding. In view of the order I have just made I adjourn the substantive proceeding to the companies list at 10:45am on 16 August 2010. That will provide sufficient time for the application to be advertised.Costs[20] The plaintiff has been successful in opposing this application and is entitled to costs. I order that the defendant pay the plaintiff's costs based on Category 2 Band B of the High Court Rules together with disbursements as fixed by the Registrar. _____________________ JA Faire Associate Judge