New Zealand Credit Law Bulletin - Vol 3, No 1, January 2003
A free, plain English review of recent law and items of interest for creditors, produced by Hattaway & Associates Ltd, Credit Consultants. To subscribe send a blank email to: nz-bulletin-join@mailman.hattaways.com
Plain language disclaimer:
This bulletin is not legal advice. Do not make decisions on legal matters based on a brief commentary. Instead, get professional legal advice.
In this issue:
- Don't misuse the the statutory demand procedure!
A statutory demand was issued when there was clearly a genuine dispute over the debt. - Winding up a corporate trustee when the trust doesn't pay
The debtor argued that the court should set aside the statutory demand "on other grounds". - Does GST have priority over repayment to mortgagees?
An unsatisfied mortgagee argued that mortgage repayments had priority over GST payments. - A very, very late appeal against a decision of the Official Assignee
The debtor did not like the Assignee's decision but waited a considerable period before reacting. - Creditors beware - changing the contract lets the guarantor off the hook
Guarantor sought to avoid $530,000 claim, arguing non-consent to a significant variation of the guarantee. - The Hattaways' Reminder Limerick Competition
Yes, you read it right. Come up with a limerick reminder. Make your debtors smile and win a $300 bottle of Australia's finest red wine, Grange Hermitage, in the process. (Then invite us to help you
1. Don't misuse the the statutory demand procedure!
Isolare Investments Ltd v Fetherston (Unrep. High Court, Auckland Registry, M1042IM02, 17 October 2002)
Isolare Investments Ltd had entered into an agreement with Mr and Mrs Fetherston under which Isolare would place $463,000 at the disposal of the Fetherstons. The Fetherstons issued a statutory demand, under s 289 of the Companies Act 1993, against Isolare for a failure to carry out this agreement.
Isolare had in fact placed, at the disposal of the Fetherstons, $573,000 by depositing it in their solicitor's trust account. Those funds were used by the Fetherstons to repay debts.
Once Isolare received the statutory demand they contacted the Fetherstons stating that there was clearly no basis to the alleged debt. They invited the Fetherstons to withdraw the demand. They did not. On 22 August 2002 Isolare applied to have the demand set aside. On the morning of the hearing, the Fetherstons acknowledged that there was a genuine dispute and the statutory demand was set aside by consent.
A statutory demand is the start of the process of winding up a company. A company which fails to comply with a statutory demand is presumed to be insolvent and can then be wound up. The party that receives a demand must show that a genuine dispute exists, and a failure to do this may result in it being immediately wound up. For this reason a creditor must not issue a statutory demand when they are aware of a genuine dispute. Creditors must take steps to ascertain whether in fact there is a genuine dispute before they choose to issue a statutory demand.
The Master said, "I am satisfied that the respondents were advised in no uncertain terms that the debt was the subject of a genuine dispute and in fact they must have been aware that summary judgment proceedings had either been instituted against them or were about to be instituted against them by the applicant when they served the demand. In those circumstances the demand can be seen as an improper use of the statutory demand procedure to apply some form of leverage or pressure on the applicant."
The demand was set aside and costs were awarded in favour of Isolare.
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2. Winding up a corporate trustee when the trust doesn't pay
Commissioner of Inland Revenue v Chester Trustee Services Ltd [2002] NZCA 258 (14 October 2002)
Chester was a limited liability company which provided trustee services for more than 30 trusts. Two of the trusts sold some land and incurred a Goods and Services Tax (GST) debt of $34,546.57. As trustee, Chester was liable. The CIR issued a statutory demand and Chester failed to pay. (Presumably the trusts had no assets to reimburse the trustee, though this isn't stated in the case.)
Chester resigned as trustee of the two trusts concerned and tried to set aside the statutory demand to avoid being put into liquidation. The most important issue in this situation was when a statutory demand can be set aside "on other grounds" under s290(4)(c) of the companies Act 1993. In the High Court, the Master considered that the demand ought to be set aside "on other grounds", namely that there was no realistic prospect of Chester's trading in the future and that if Chester were placed in liquidation it would have to resign in relation to all other trusteeships which would be a very complicated and expensive task for a liquidator.
The CIR appealed. In the Court of Appeal, Baragwanath J and Tipping J both agreed that it was not the place of the court to create an exhaustive list of circumstances where a statutory demand could be set aside "on other grounds." The court, they said, should not limit the discretion it has been given in any way.
Baragwanath J stated five presently accepted reasons where a statutory demand may be set aside. They were, (1) the applicant's debt amounts to less than the statutory minimum; (2) the debt is genuinely disputed by the company; (3) the company has satisfied the applicant's debt; (4) winding up is opposed by other creditors; and (5) the company is in the process of being wound up voluntarily. It was also said that a statutory demand could be rightfully set aside if the process
was being abused by a creditor.
Tipping J said "[I]t is generally inappropriate for an insolvent company to continue to act as trustee. The price of Chester's ability to do so should be payment of its debt. I do not regard it as plainly unjust to place Chester in liquidation if it, or its backers, are unable or unwilling to pay the debt owed to the creditor."
By unanimous decision the court decided that Chester had failed to show sufficient reason as to why the statutory demand should be set aside "on other grounds". The CIR's appeal was therefore allowed and Chester was placed in liquidation.
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3. Does GST have priority over repayment to mortgagees?
Commissioner of Inland Revenue v Edgewater Motel Ltd & Anor [2002] NZCA 293 (18 November 2002)
Westwood Meadows Development Ltd had mortgaged a property to Bellman Holdings Ltd as first mortgagee and Edgewater Motel Ltd as second mortgagee. Westwood failed to pay, so Bellman exercised its power of sale as mortgagee. The property was sold for the sum of $1,057,500.
Of that, $117,500 was paid as Goods and Services Tax ("GST") to the Inland Revenue Department ("IRD"). The remaining $940,000 was applied to the debt owing to Bellman which in fact left him $12,666 short of the total debt owing to him as first mortgagee. Edgewater, being second mortgagee received nothing.
However, Edgewater took a case against the IRD to the High Court arguing that the mortgagee debt had priority over any GST payments. The High Court agreed, saying that it would make sense for Westwood to be held liable to account for GST only if there was a surplus after repaying the mortgages. That decision meant that Bellman was to be paid in full and Edgewater was to get the balance of the sale. The IRD would miss out.
However, the Commissioner of Inland Revenue appealed and won in the Court of Appeal. Under s 104 of the Land Transfer Act 1952, the proceeds of the mortgagee sale are first to be applied to any costs that arise during the course of the sale. The court found that GST is a tax on a particular sale and thus that GST is an expense resulting from the sale. What that meant is that the GST Act in imposing a tax on the sale transaction, creates an expense of sale which ranks ahead of any mortgage debt owing to Bellman and/or Edgewater.
The payment of $117,500 to the IRD was approved and Edgewater had to pay the IRD's costs in bringing an appeal.
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4. A very, very late appeal against a decision of the Official Assignee
Stephen Gilbert Anderson v The Official Assignee [2002] NZCA 82 (24 April 2002)
Mr Anderson fell into arrears on his mortgage payments. He petitioned for bankruptcy. The Official Assignee was appointed to exercise control over Mr Anderson's affairs under the Insolvency Act 1967.
The Assignee gave up Anderson's claim to farm property. The farm was sold by the mortgagees at auction shortly afterward. Mr Anderson claimed that the Assignee should not have disclaimed the interest in the farm and should have sued the mortgagees. He applied, on 16 October 2001, for an extension of time to bring an appeal to the High Court against the Assignee's actions. The claim against the Assignee was brought under s 86 of the Insolvency Act 1967, which states that a bankrupt or any other creditor may appeal against any act or decision of the Assignee within 21 days of that act or decision. This application was immediately denied. Mr Anderson appealed to the Court of Appeal.
The appeal was heard on 24 April 2002. The Court of Appeal agreed with the High Court and denied Mr Anderson's appeal.
Mr Anderson was always going to be fighting an up-hill battle. Here's why...The Assignee's acts had taken place in June 1988. Mr Anderson's application was more than 13 years out of time! The Court could not reasonably justify such an extreme extension of time.
The court stated that "Mr Anderson's appeal must be, and is, dismissed." He was also ordered to pay costs.
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5. Creditors beware - changing the contract lets the guarantor off the hook
Overton Holdings Ltd v Owens Properties Ltd [2002] NZCA 260 (24 October 2002)
On 25 March 1987 Kenson Realty Ltd was granted a 12 year lease over a commercial property in Wainuiomata. Owens Properties Ltd gave a guarantee in respect of the obligations of Kenson under the lease agreement.
In January 1997 Overton Holdings Ltd bought the property. In March 1997 Overton and Kenson entered into a deed under which there were two significant changes made to the insurance arrangements. From that point on the insurance was to be arranged by Kenson, instead of Overton, and the insurance was to be for indemnity value rather than replacement value. Owens were not informed of either of these changes.
In October 1998 Kenson vacated the premises, and on 6 December 1998 fire caused substantial damage to the property. Iit turned out that Kenson had failed to ensure that the building was properly insured. Further damage was caused by vandals between that time and the end of the lease on 5 March 1999. The matter went to arbitration and Kenson (now in liquidation) was found to be liable to pay $528,954.72. Overton sought this amount under the guarantee from Owens.
Owens' arguments in defence were two-fold. First they argued that the variation of the insurance arrangement had the effect of releasing the guarantee, and alternatively, that the arbitration award was not enforceable against it.
There was a clause in the guarantee that said, effectively, that no variation to the lease would release the guarantor from liability. However, it is settled law that a variation of such an agreement, especially without the knowledge or consent of the guarantor, will operate to relieve the guarantor of any liability, unless they are clearly not placed in a worse position. Blanchard J decided that the clause did not apply to changes made to Overton's obligations.
In regard to the second line of defence, Blanchard J said, that the arbitration did not "involve" Owens even though it had agreed to be bound by the award under the lease agreement. Owens was not notified of the arbitration hearing and not given a chance to present a case. Blanchard J also suggested that the award may not be enforceable against Owens due to a breach of natural justice.
Owens was relieved of its obligations under the guarantee.
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6. The Hattaways' Reminder Limerick Competition
Final reminder my friend,
After this one it's court & the end,
If you don't pay it now,
We'll get it somehow,
Notice to sell we will send!
There was a debt chaser from Spain,
She chased them through hail, shine & rain,
When they told her "we're broke",
On laughter she'd choke,
As she let the pitbull off its chain
You promised to pay back your debt,
We haven't received payment yet,
Don't make us take action,
We want satisfaction,
What we want, we make sure we get!
We're not recommending you use these, but maybe you can do better. If you can make your debtors smile, you're half-way to getting paid. Our resident poet (and co-presenter of Psychology of Credit Management), Elke Meyer has been working on her limericks and these are three of her finest efforts. (You don't want to see her worst efforts.) Some entries have already been posted on our website, so click here and see what you're up against.
The limerick should ideally be in the form of a reminder to a customer (but we'll assess that liberally). Elke and Peter will judge them and the best will be posted on our website (anonymously if you're shy). The very best will receive a bottle of Grange Hermitage. If you like fine wine, get scribbling. This could be an easy competition to win!
