New Zealand Credit Law Bulletin - Vol 3, No 9, October 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:
- Company loses its “natural glow”
TV shopping company faces winding-up proceedings following certain decisions by off-shore parent company - Discovery of snooping overrides claim in statutory winding-up notice
Creditor breaches confidentiality and suffers the consequences by having winding-up application set aside - Vietnam veteran escapes bankruptcy
Circumstances of case meant that man avoided bankruptcy despite an initial case being made out by creditor - The domino effect - it's all about cashflow!
Circumstances of case meant that man avoided bankruptcy despite an initial case being made out by creditor - Liquidators make unjustified threats
Liquidator fails to file voidable transaction notice with court before serving it on company's creditor and subsequently has the notice set-aside
1. Company loses its “natural glow”
Hill v Quantum Global New Zealand, 18 July 2003, CIV 2003-404-3581, High Court Auckland, Harrison J
Quantum Global New Zealand Ltd (QGNZ) was in the business of promoting and selling consumer goods on TV. Some of its more famous products included Natural Glow and Fast Burner. Twenty percent of QGNZ was owned by Mr Ranchhod and Mr Hill. The rest of the company was owned by Mr Brian Fraidin through his company VI Holdings Ltd.
On 4 May 2001 QGNZ guaranteed a loan advance to VI by financier Foothill Capital Corporation of $5.875 million. This was secured by a first ranking debenture (or charge) over QGNZ’s assets. By March 2003 VI had defaulted on its obligations to pay back the debt. To address this problem VI (with Foothill’s consent) made arrangements to alter the terms of the loan agreement. One of the new terms was that the loan would be paid back by mid-2004, this was much sooner than the previous contract.
Hill and Ranchhod were not happy with the new contractual arrangements. Fraidin directed Hill and Ranchhod to sign the contract and when they declined he removed them from their directorship of the company. He replaced them with himself and a Mr Grandusky.
On 3 June Fraidin removed authority from Hill and Ranchhod to pay creditor's bills. By this time QGNZ had a number of statutory demands issued upon it by a number of creditors. Among the company's creditors were Ranchhod and Hill for outstanding wages owing to them. The two decided to apply to the court to have the company wound up and interim liquidators appointed.
To wind up the company and have interim liquidators appointed the court found that Hill and Ranchhod had to prove three things:
* The application to the Court to wind up the company was valid
* If there was a full hearing the application would probably succeed
* Interim control was necessary to protect the company’s assets
The court found that the first two proved were proved. In regard to the third point, the company tried to say that as a sum of money was being held by the High Court for creditors of QGNZ upon outcome of liquidation proceedings there was no need to protect the company's assets by appointment of an interim liquidator. However the court found that there were other assets the directors still controlled. The judge felt that these assets needed protecting and the best people to do so were interim liquidators. He thought there “was a risk Mr Fraidin would arrange for the funds to be removed from jurisdiction” based on the observation that Fraidin had done exactly that to QGNZ’s counterpart in Australia just before it went into liquidation last year. His reservations about Fraidin's conduct were further reinforced by Fraidin’s direction to stop paying creditors in July 2003.
The judge also felt that the company was by now a mere shell and close to death. This “took the sting out of the argument” that the appointment of interim liquidators would intrude on directors' powers and might interfere in the business of the company.
Harrison J pointed out that if Fraidin really was acting in good faith then upon an order appointing interim liquidators he would inject cash into the company to pay the company’s local debts and then apply for the order to be removed. To give him the opportunity to do this the order was postponed until the 28 July.
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2. Discovery of snooping overrides claim in statutory winding-up notice
Bates and Associates v Woolworths (NZ) Ltd,13 March 2003, Fisher J, Auckland Registry
In 1993 SecureNet began providing Woolworths with electronic security management services. Part of their business was screening e-mails coming into and leaving Woolworth’s email system so that Woolworths would not receive viruses, large attachments, spam or anything offensive. There was also a facility for Woolworths to ask SecureNet to intercept the mail of employees so it could be inspected.
In June 2001 Woolworths became dissatisfied with SecureNet and threatened to withdraw its business. To emphasise their concerns Woolworths also held up payments of some of SecureNet’s invoices.
Mr Bates (of SecureNet) decided to use the company’s expertise and find out what the reasons were for Woolworths withdrawing their business. To do this he intercepted all communications passing to and from certain key figures for just over two months. From these interceptions he printed a bundle of emails which he thought might be useful to him in his dispute with Woolworths. He did not tell Woolworths what he was doing.
On 24th May 2002, following the non-payment of its invoices, SecureNet issued a statutory winding up notice on Woolworths. Woolworths had not used SecureNet's services since 2 February 2002 and Mr Bates showed the intercepted emails to his lawyer in the hope that they could be used to force the restoration of the working relationship. In the event this move had the opposite effect.
Woolworths required discovery from SecureNet’s lawyer. (Discovery is where one party can obtain information held by the other party that is relevant to the action). The lawyer had to include the intercepted emails in the information disclosed. In response to these findings Woolworths issued a counterclaim for breach of an implied confidentiality term in its contract with SecureNet.
SecureNet then applied for an interim injunction to restrain Woolworths from carrying out the information services that SecureNet had previously provided for them. This would have the effect of allowing SecureNet to continue to provide this service to Woolworths
However the judge felt that this type of working relationship required a great deal of trust, and that trust had already been betrayed once by SecureNet. Therefore SecureNet’s interim injunction application was refused.
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3. Vietnam veteran escapes bankruptcy
Gibson, ex parte Gardiner 3 April 2003, Auckland High Court, Master Lang
Ms Gardiner and Mr Gibson were in a relationship with each other from 1992 until 1996. During this time Mr Gibson borrowed money from Ms Gardiner to invest in various ventures. Unfortunately they failed and Ms Gardiner’s money was lost.
In June 1994 Ms Gardiner and Mr Gibson signed a deed in which Mr Gardiner acknowledged that he owed Ms Gardiner $100,000. He agreed to pay her back in payments of $1,500 each but he only made four instalments.
In May 2001 Ms Gardiner issued summary judgment proceedings against Mr Gibson. Judgment was issued against him on 3 September 2001. On 11th September a bankruptcy notice was served on Mr Gibson requiring him to pay Ms Gardiner what he owed. His failure to comply, led to bankruptcy proceedings.
The court found that on the face of it Ms Gardiner had proven all elements necessary to give the court the jurisdiction to make the bankruptcy order. However Mr Gibson submitted that the circumstances of the case meant that the court ought to exercise its discretion against making him bankrupt.
The master noted that it is proper for the court to balance the concerns of the petitioner, other creditors, the debtor and the wider public interest.
The court found that this was not a case “where members of the public had suffered as a result of the unscrupulous or reckless business dealing of the debtor” because Mr Gibson and Ms Gardiner were in a close, personal relationship. The losses were from “discrete investments rather that a course of business dealings which had adverse effect on those in the business community”.
There was no evidence that showed Mr Gibson had assets other than some Italian clothes, a car worth $2,500 and some furniture. He had recently received an inheritance of $2,200 from his mother which he offered to Ms Gardiner as a token of goodwill. In terms of weekly income Mr Gibson was a Vietnam War veteran living off the War Disablement Pension and a Veteran’s Pension. He also received a small housing allowance.
In regards to other creditors Mr Gibson owed the ANZ Banking group $2,519.29 but this debt was not going to be enforced. He also owed Centurion Finance $9,303.53, Westpac Card Services $7,159.07, and $1,011 in parking and traffic fines but had reached agreements with all these creditors that would enable him to pay back these debts.
The master felt that there was no evidence that the Official Assignee would be able to recover anything for Mr Gibson’s creditors. Besides that, the creditors seemed quite content with the arrangements Mr Gibson had made to pay them back and an adjudication order would immediately sever those arrangements.
Finally Mr Gibson suffered from post traumatic stress disorder from the war and as a result he was unable to handle stress. His psychologist said that if an order was made against him it would be detrimental to his psychological wellbeing.
The master held that Mr Gibson had no way of satisfying the debt he owed Ms Gardiner. Further, if it was made, Ms Gardiner would lose the rights she currently had (as a judgment creditor) to examine Mr Gibson’s affairs and to levy execution against any assets which she found.
In light of the fact the debt was incurred in a close personal relationship for private transactions he did not think the commercial community would take any signal from the court not making an adjudicating order. The court accordingly set aside the bankruptcy application.
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4. The domino effect - it's all about cashflow!
Ginian Coy Ltd (in liq) v Glenvista Properties Ltd, 20 June 2003, Auckland High Court, Master Lang
In 1997 Ginian Coy Ltd were looking into buying a number of apartments from 15 related companies. (These companies shall be referred to as Glenvista Properties Ltd). At around the same time Ginian claimed and received a GST refund of $657,000. On 4 August 1997 Ginian entered into agreements of sale and purchase for the properties and used the full amount of the GST refunds as deposits for the various contracts. Settlement was to be on 1 May 2007.
Subsequently the Commissioner of Inland Revenue assessed the amount of the refunds and decided to challenge the claim. The Commissioner demanded that the full amount be repaid to the Inland Revenue. As Ginian had already spent the money it was unable to meet this request. Thus in July 2000 Ginian was put into liquidation due to its unpaid debts to the Inland Revenue.
Upon assessment of the company’s position the liquidator of Ginian took particular interest in the contracts for sale and purchase with Glenvista. In the meantime Glenvista cancelled the contract on the grounds that Ginian could not perform their obligation as they had been placed into liquidation. The liquidator challenged the validity of this cancellation and himself repudiated the contract. Consequently the liquidator sought to have the deposits repaid and the money recovered given back to Ginian's sole creditor the Commissioner. He commenced a test case against one of the Glenvista companies to ascertain whether or not he could issue the companies with statutory demands for all the deposit monies. The case came out in favour of the liquidator and he accordingly issued statutory demands to all the Glenvista companies.
Unfortunately Glenvista was also having a cashflow problem. They were unable to comply with the demands and refund the deposits. As a result the liquidator of Ginian commenced winding up proceedings against the Glenvista group of companies - funded by the Commissioner of Inland Revenue - and suggested that he should be appointed as liquidator of the Glenvista group as well.
During the case it became apparent that Glenvista viewed the proceedings as a conspiracy by the Commissioner to place them and related companies into liquidation so as to avoid future litigation and obligations. Glenvista was itself involved in litigation with the Commisioner. They were concerned that if they were wound up, their major creditor would become the Commissioner (due to the unpaid deposits which would then be owing to the Inland Revenue). The Commissioner would not fund the existing litigation against himself and thus the current litigation proceedings between Glenvista and the Commmsioner would be stopped upon liquidation.
The court noted these concerns however pointed out that Glenvista had forgotten the independence of the liquidator. Whilst it may be the Commissioner who will pay for any further litigation or winding-up proceedings it is the liquidators final choice as to whether or not these actions should be taken. If the liquidator decided to commence with the litigation currently underway between the Commissioner and Glenvista he had other sources he could turn to for funding of those proceedings.
The court ruled that Glenvista group should be placed into liquidation. However it did not allow Ginian’s liquidator to be the liquidator of the Glenvista group. This was not because the court doubted his ability to carry out his duties but because it doubted whether or not he would be able to “function free from suspicion on the part of [Glenvista’s directors] that he was acting under the influence of the Commissioner”.
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5. Liquidators make unjustified threats
In 2001 Cellufone Group Ltd went into liquidation. In December 2002 the liquidators served a notice on Minem Finance Ltd and Murray Osmond stating that they had been involved in voidable transactions and this transaction would be set aside unless they opposed the application within 20 working days. If they did nothing in response to this notice, then they would lose. The voidable transactions related to two paintings by prominent New Zealand artists- ‘Juggernaut’ by Des Robertshaw and ‘Mitre Peak’ by Peter Beadle.
In an insolvency the general principle is that all creditors should suffer equally. Therefore a creditor cannot get more than their share by removing an asset from the company just before it goes under. If they do this it can be known as a voidable transaction.
On December 11 2002 Minem and Osmond filed an application with the court seeking orders that the court lacked jurisdiction to deal with the matter and that the notice be set aside.
The notice of opposition filed on 12 March 2003 was the first the Court had officially heard on the whole matter from the liquidators. That is, when they served the initial notice on Minem and Osmond they had not by that stage (or in fact had since that time) filed the voidable transaction notice with the Court. Minem and Osmond pointed out that according to the requirements of the Companies Act in relation to voidable transaction notices (s292) the liquidators were supposed to file the notice with the Court before serving it on them.
The master noted that the requirements of s292 are sequential and mandatory. The voidable transaction notice must be filed with the court before service. “There is no point in a person applying for an order that a transaction not be set aside if the liquidator has not completed the conditions precedent to carrying into effect his desire that it not be set aside”. The master queried how a “true copy” of the notice filed in the Court be served upon the creditor if one was not filed in the first place. Therefore in short the notice which had been served on Minem and Osmond was of no effect and could be described as a “nullity”. Costs were awarded against the liquidators.
