New Zealand Credit Law Bulletin - Vol 4, No 9, August 2004
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:
- Bob the Builder’s case - bank gets paid ahead of IRD
This decision has important implications for secured creditors – GST comes off the top if it’s a mortgagee sale but perhaps not if the debtor sells the property - Could the statutory demand stand when the agreed payment arrangement was being kept?
Another attempt to use a statutory demand to resolve messy dispute - Contractors argue valiantly to try to keep payment made by failed company
Argues that if not for payment, would have entered compromise with its own creditors - Who was the contract with?
If the debtor company believed they had a contract with somebody else, that’s enough of a dispute to set aside the statutory demand - Hard for a property developer to prove oppression in the case of a high risk high interest loan
35% penalty interest not considered oppressive - Owner/operator pays himself all the company’s "profit" as a salary and creditors miss out... or do they?
Prudent directors must make appropriate provision for potential liabilities - Statutory demand issued to force payment of GST on a property purchase
If you agree to pay the GST you actually have to pay it – and merely faxing documents doesn’t help! - Shareholders fall out over thoroughbred horses
Dispute resolved with the re-appointment of the liquidator as … the liquidator! - Can you recover your legal costs from a debtor company which pays the debt at the last moment?
It turns out that one rule applies for last minute payments on bankrupty petitions and another applies for winding up applications
1. Bob the Builder’s case - bank gets paid ahead of IRD
Rob Mitchell Builder Ltd (in liq) v The National Bank of New Zealand Ltd [2003] NZCA 276
Rob Mitchell Builder Ltd bought and sold land on which it erected or renovated homes. It was registered for GST purposes. Mitchells had agreed to sell one of its properties in Taylor’s Mistake, near Christchurch, for $430,000 inclusive of GST. The property was mortgaged to the National Bank for more than $430,000. The sale became unconditional on 2 April 2002 and on 3 April the real estate agent paid Mitchells the deposit.
Before Mitchells’ GST payment was due however, it was placed in liquidation. The liquidators completed the sale and the purchaser paid the balance on 1 May. Insufficient funds were available from the settlement to repay both the money owing to the National Bank under the first mortgage and also the GST component of the sale. The liquidators thought they had to pay the GST on the sale to the IRD but the National Bank claimed the entire proceeds of the sale. The liquidators agreed with the bank that the disputed amount of $47,777 would be held in trust until the GST issue was sorted out and applied to the High Court for directions.
The court said that a taxpayer’s liability for GST was calculated as the net figure due to the Crown after offsetting credits against output tax. For that reason GST on a sale of a property “cannot constitute a portion of the purchase price”. There was therefore, no trust for the Crown and the bank had a right to insist on full repayment. The practical situation was that, unless the bank had provided the necessary discharge of mortgage on terms acceptable to it, the sale of the property would not have settled. The judge went on to explain that the liability to pay GST in respect of the sale of the Taylor’s Mistake property arose on the supply of the goods (the land) on 3 April. As the liquidators had not been appointed until after that date they had no personal responsibility for GST incurred in relation to supplies provided before then and the GST payment could not be considered a necessary expense incurred in the course of the liquidation. The liquidators appealed.
The Court of Appeal however, agreed with the original findings. It confirmed that the supply giving rise to the liability to pay GST occurred before the liquidation. Liability for GST rested with Mitchells and was an unsecured debt in the liquidation. The liquidators had no personal liability for it.
As the entire proceeds were charged under the bank’s mortgage security, the liquidators were obliged to pay them to the bank. The bank, for its part had no obligation to pay GST from the money it received. The IRD’s only recourse was to prove in the liquidation as a preferential creditor.
This can be contrasted with the situation where a mortgagee sells land under a power of sale. In that case the IRD’s claim for payment of GST takes priority over the mortgagee’s right to recover the principal sum and interest under the mortgage. In the present situation of a sale by an insolvent company (Mitchells) before the appointment of a liquidator, the mortgagee will in practice obtain priority over the IRD. If the sale of a mortgaged property by a GST-registered person has been completed before liquidation, without payment of GST, the IRD only ranks as an unsecured (preferential) creditor, with no claim against the mortgagee (which will have received the proceeds from the mortgagor in terms of its security).
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2. Could the statutory demand stand when the agreed payment arrangement was being kept?
Aqua-Seal Ltd v MBT (New Zealand) Ltd (M198/03 CIV-2003-404-649; HC, Akld; 28 August 2003)
Aqua-Seal Ltd carries on business applying waterproofing and floor coatings. MBT (New Zealand) Limited manufactures and supplies products for flooring, waterproofing and coatings projects.
Aqua-Seal was contracted by Westfield Properties (NZ) Ltd to apply a coating to the car parking areas in Westfield’s Glenfield and West City shopping centres. In some areas it had to be waterproof because those areas formed the roof of the shops below. The coating also had to be able to withstand the wear and tear caused by cars driving over it. Aqua-Seal used an MBT product called Sonoguard but problems occurred at both of the Westfield sites. Aqua-Seal found that it had to apply far more Sonoguard than it was told would be necessary. This led to significant cost overruns.
Within a few months of the coating being laid, it began to delaminate and in areas it was no longer waterproof. A number of meetings were held between Aqua-Seal and MBT over these problems. MBT and Aqua-Seal agreed that Aqua-Seal would provide the labour but MBT would provide all the materials necessary to fix the coating at the Westfield projects. The efforts to rectify the problems were however, unsuccessful. Ultimately, Westfield terminated its contract with Aqua-Seal.
Aqua-Seal claimed $208,000 from MBT in respect of cost overruns and other claims relating to several projects. MBT agreed to credit $123,099.99 to Aqua-Seal’s account, deleted the interest and suspended the remaining $78,947. For its part, Aqua-Seal assigned to MBT retentions of $27,984.37 being held by Westfield from the Glenfield project. Aqua-Seal agreed to weekly payments of $200.00 to reduce the still outstanding debt. Aqua-Seal’s ability to do this was, however, dependent on MBT directing an agreed amount of work each month to Aqua-Seal.
Aqua-Seal kept weekly the payments up to date until MBT served a statutory demand on it for $148,227.14. Aqua-Seal applied to have the demand set aside under s.290(4) of the Companies Act 1993 because it said there was a genuine and substantial dispute over the debt and because they had counterclaims against MBT.
After reviewing the “substantial volume of evidence” and the “extensive … submissions of counsel” the judge said that Aqua-Seal had been meeting all of its obligations under the payment arrangements when MBT issued the demand. As MBT provided no evidence to support its claim that it had provided Aqua-Seal with extra work (and Aqua-Seal said that it hadn’t) the judge said that it was arguable that MBT could not call up the part of the debt which had been suspended. That meant that $74,400 was probably not due and owing when the demand was issued and so could not be included in the statutory demand.
The judge explained that as MBT’s accounts were inaccurate and didn’t properly reflect Aqua-Seal’s current account balance, a further $10,000 could be regarded as being genuinely in dispute.
Aqua-Seal had also claimed that MBT had continued to charge it for materials that were to be used for the remedial work on the Westfield projects. The judge accepted that MBT had agreed to provide those materials free of charge. He found it difficult however, to calculate exactly how much material should have been provided free because some of the materials sent to Aqua-Seal over the same period had been used on other jobs. This still meant that Aqua-Seal had shown that there was a real dispute over the remaining amount properly owing to MBT.
Aqua-Seal argued that it had substantial counter-claims against MBT including some of the remedial work which Westfield had arranged to be carried out by other contractors. Although the judge did not accept all of Aqua-Seal’s calculations he said it was clear that there was an arguable counterclaim which equalled or exceeded the indisputable balance of the amount claimed in the statutory demand.
The judge explained that, as it was “arguable that Aqua-Seal’s present predicament has been brought about through MBT’s defective product, it would be unfair … for MBT to attempt to recover its debt using the statutory demand procedure”. The demand was set aside.
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3. Contractors argue valiantly to try to keep payment made by failed company
Valley Fields Ltd (VFL) began in 1997 to develop a residential subdivision in Pukekohe. In mid-2000 VFL accepted the tender of Wayne Wood and his wife for soil removal and site development work. Their first invoice for initial work done was not paid until almost a month overdue. Wood issued a further invoice for $78,304.02 for the balance of the tender price together with charges for extra work. Again payment was late and initially only a part payment of $10,000 was received.
On 4 December2000 the Woods sent VFL a statutory demand for payment. VFL told the Woods that it had received another statutory demand for a large amount, but the creditor, McKenzie and Palma Limited, was willing to hold off letting VFL refinance and so pay its creditors, at least in part. Eventually, the Woods also agreed to withhold further action until later.
In December a fresh statutory demand was sent and in January VFL offered to pay $40,000. This was described as the best VFL could do. It was however, conditional on VFL securing write-offs of other debts and also required the Woods to withdraw their statutory demand and agree not to issue another one. The Woods accepted and confirmed that they were prepared to leave the balance of the debt outstanding until land sales had been completed by VFL.
In February 2001, VFL paid the $40,000. Then McKenzie and Palma applied for a winding-up order on VFL, which was granted on 6 September. In May 2002, the liquidator of VFL told the Woods that the $40,000 payment would be set aside as a voidable transaction under s.294 of the Companies Act 1993. A liquidator can claw back payments made just before a company goes bust. The rationale is that it’s not fair for one creditor to be paid while others miss out.
The Woods applied to have payment confirmed. They argued that the transaction had taken place in the ordinary course of business and that it had been made at a time when VFL was able to pay its due debts.
The court noted that the payment had been made within the restricted period but said that the liquidator had to show that the $40,000 payment enabled the Woods to receive more than they would have received in the liquidation. The court decided that the liquidator could not establish that. The payment was allowed to stand. The liquidator appealed.
The Court of Appeal expressed the opinion that the $40,000 payment had allowed the Woods to receive more than would have been the case in the liquidation. It explained that the extent of the claims made by VFL’s other unsecured creditors meant that there would not be any funds available for distribution to any unsecured creditors. This meant that the Woods had received a preferential payment. However, under s.296(3) of the Companies Act 1993, if the Woods had entered into the transaction in good faith and altered their position in the reasonable belief that the payment was valid, it would be inequitable for the court to order repayment.
The law says that in order to show that the Woods had altered their position in reliance of the payment of the $40,000 they had to have acted to their detriment on the strength of the insolvent company’s (VFL’s) payment.
The Woods claimed that they had lost a valuable alternative opportunity, as the $40,000 payment had been used to pay creditors when otherwise they would have tried to compromise with their creditors. If they had not done so, the Woods said they would have gone into bankruptcy. The court explained that it was clear that the Woods were in a difficult financial position when the payment was received. But the evidence did not indicate that they were about to try to negotiate a compromise with their creditors or file in bankruptcy. It also did not show that they had not done so because they had received the $40,000. This meant that there had been no change of position of the kind required. The appeal was allowed and the $40,000 was set aside.
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4. Who was the contract with?
Oma's Properties Ltd v Fireball Ltd (CIV-2003-404-741; M 282/03; HC, Akld; 31 July 2003)
Marcus Freudenmann came to New Zealand to set up a business supplying and installing hospitality items. He established Happyman’s Ltd (now called Fireball Ltd), imported a lot of brewery and restaurant/pizza equipment and set up the Happyman’s Bistro in Orewa.
Irene van Kuyk owned the Pillows Lodge backpackers establishment in Orewa. She was a director and shareholder of Oma’s Properties Ltd which wanted to start up an international foodcourt in the Ponsonby Road. In April 2002 a security document for $60,000 of equipment for the foodcourt was drawn up but never signed. It did not refer to Happymans Ltd and/or Fireball Ltd.
Applications for resource consent for the foodcourt held up completion of the development. Van Kuyk later agreed to pay $75,000 for the equipment. A lease was executed allowing the equipment to be stored in van Kuyk’s company’s property. The term of the lease ran “until payment of $75,000 to tenant. Should the date of payment exceed 20 September additional charges of $18,500 for planning and architectural services will be added”.
Freudenmann issued an invoice in October, on Happyman’s Ltd letterhead extending the date of payment to 4 November 2002. Over Christmas 2002-2003, van Kuyk took the equipment from storage and installed it in the foodcourt, although no payment was made to Freudenmann. Fireball Ltd issued a statutory demand on Oma’s Properties in March 2003 for the payment of $93,500. Oma’s Properties applied to have the statutory demand set aside.
Van Kuyk described that when she collected the equipment she found that it had rusted and was in a terrible mess. However, it was still taken and installed in the foodcourt. Van Kuyk also argued that there was no contract between Oma’s Properties and Fireball. Except for the October invoice none of the documentation referred to Fireball Ltd (or Happyman’s) as a contracting party. Freudenmann explained that he did not appreciate the legal significance of making a distinction between himself and the company. He pointed out that he was the sole director and shareholder of Happyman’s Ltd and had always had the authority to act on the company’s behalf and enter into contracts to sell the equipment.
The judge accepted this on the basis of what is known as the doctrine of the undisclosed principal. Where an agent, having authority to contract on behalf of another, makes the contract in his own name, concealing the fact that he is a mere representative, the doctrine allows either the agent, or the principal when discovered, to be sued. Plus either the agent or the principal may sue the other party to the contract. The doctrine however, does limit the operation of the contract only to the people or companies involved. That is, if an agent describes himself as the “owner” or “proprietor” of the subject matter of the contract, it means that the principal, whether disclosed or not, cannot sue or be sued.
Unfortunately for Freudenmann the evidence showed that it had been unclear who the owner of the equipment being sold was. So there was a dispute which needing resolving over the correct contracting parties. Under s.290(4)(a) of the Companies Act 1993 this allowed the statutory demand to be set aside because there was a substantial dispute whether or not the debt was owing or due.
There was also some confusion over the price and timing of the payments, and a possible breach of the sales contract in the claim that the equipment was rusty and unserviceable. All of this meant that a substantial dispute, which could only be resolved in other proceedings, clearly existed. The statutory demand was set aside.
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5. Hard for a property developer to prove oppression in the case of a high risk high interest loan
Basecorp Finance Ltd v Blackwell (CP 295-IM02; HC, Akld; 24 March 2003)
Basecorp is a financier operating in the North Island commercial finance market. In April 2001 it entered into a loan agreement with Larnop Investments Limited for $270,000 which was guaranteed by Maurice Blackwell. Blackwell signed the loan documents on his own behalf and on behalf of Larnop and the signatures were witnessed by Bogiatto, a lawyer who was apparently acting for both Blackwell and Larnop. The term loan agreement provided for interest at the rate of 23% per annum and had a default rate of 35% per annum. The term of the advance was to be six weeks. This meant that a single repayment of $290,000 was due on 1 June 2001. It was not paid.
In early October 2001, although Blackwell was in default under the first term loan agreement, Basecorp entered into a second loan agreement with Blackwell and Larnop. There were also a number of other parties to the second agreement including Verley Holdings Limited. Blackwell signed the second agreement on his own behalf as well as for Larnop and Verley. Once again the same lawyer acted for all three parties and witnessed each of their signatures.
The funds were advanced by way of internal ledger transactions within Basecorp and as a result, the amount outstanding under the first term loan agreement was repaid. The second agreement provided for interest at a rate of 17% and a default rate of 35% per annum. Two installments of interest were payable in November and December and a final payment of $338,379.37 was due on 12 January 2002. The two installments were paid, some days late, but the final payment was never made.
As part of the second agreement Basecorp obtained securities over a number of properties but it was not going to be able to realise the full amount outstanding by selling them. Basecorp applied for summary judgment against Blackwell for the total amount.
Blackwell raised a number of arguments in his defence. First, he said that he had never got the second loan; that is, it was never advanced to either him or his company. Secondly, he said that none of the costs of credit referred to in the first term loan agreement were referred to in the second loan agreement. Thirdly, he said that the finance rate in the first loan agreement was oppressive. Finally, he argued that Basecorp was exercising its rights under the agreement in an oppressive manner and that, as a result, the term loan agreement should be reopened under the provisions of the Credit Contracts Act 1981.
The court disagreed. It was irrelevant that the second loan had only been advanced by way of an internal ledger transaction. It was also clear that the costs of credit were outlined in the second loan documentation and so it was not feasible for Blackwell to now complain about those terms. The court was satisfied that Blackwell had been involved in the commercial property market for approximately 20 years. As the loans were short-term advances which involved an element of risk for the lender, the court was not surprised that the default interest rate was set at 35%. Given his business experience and the fact that Blackwell had not raised the question of the finance rate at the time he had signed the loans, he could not raise that as an issue now. Finally, as Blackwell could provide no evidence to support his contention that Basecorp was acting in an oppressive manner, the court could give no weight to that argument.
Summary judgment was granted against Blackwell for a total of $471,996.03, which included the accrued penalty interest.
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6. Owner/operator pays himself all the company’s "profit" as a salary and creditors miss out... or do they?
McCullagh v Gellert (M1807-SD00; HC Akld; 6 August 2002)
Murray Gellert and his wife were the only shareholders and directors of Gellert Developments Ltd which made and installed shop fittings. In 1992 they entered into an arrangement for sharing work and profits with Rex Harrison, who was a director of Shelving Construction Ltd. The relationship was rather casual and was never put in to writing.
In mid-1993, the arrangement between the Gellerts and Harrison ended in acrimonious circumstances. There was a dispute over the amount Gellert Developments owed to Shelving Construction. Shelving Construction sued Gellert Developments for half of the partnership profits from the preceding 18 months. Gellert Developments was found to be liable but the Gellerts refused to assist the inquiry to determine exactly how much it owed. Finally, in May 1998, judgment was entered in favor of Shelving Construction for $99,013.56, including interest.
In August 1998 Gellert Developments was put into liquidation and the Official Assignee appointed liquidator. Then in October, A J McCullagh was appointed liquidator in place of the OA. Late in 1999 McCullagh and Shelving Construction sued Murray Gellert under s.301 of the Companies Act 1993 for payment of the District Court judgment plus subsequent expenses paid in the liquidation. McCullagh argued that Gellert had misapplied the property of Gellert Developments and was guilty of reckless trading and breaches of the Companies Act provisions concerning directors’ remuneration (s.161). Section 161 says that the board of a company can authorise the payment of remuneration to a director only if it is “fair to the company” to do so. If not the recipient director becomes personally liable to repay it.
McCullagh’s complaints centred on the way the Gellerts were paying themselves. They were the “brains and hands” of Gellert Developments and any income and profit the company made was through their efforts. Typically the Gellerts took salaries which equaled the net profit before tax of the particular trading period. This was not unusual for an “owner/operator” business but McCullagh argued that the declared salaries were excessive and not in the best interests of the company.
The court decided that up until 1994 the salaries that the Gellerts had taken were not unreasonable for the work done. The salaries for the 1995 financial year were however, significantly different. Although the 1995 salary only covered the six months of the year up until Gellert Developments stopped trading, it had been paid at an annualised rate that was 38% higher than the highest salary paid in the preceding 3 years. Yet in the six months traded during the 1995 year sales were only 42% of the 1993 year and just over half the level for 1994. So there was no increased level of productivity which would have supported the significant increase in salaries. The court said that applying the previous procedure of calculating salaries for the six months worked could not be criticised in a company which was solvent and where there were no unpaid creditors. To the extent that the 1995 salaries exceeded what was reasonable however, the court said “the payment was in breach of duty and trust in relation to the company and its obligation to its creditors”.
The court also focused on an invoice showing $48,752.84 due to Shelving Construction. One year later the accounts payable for this amount was reversed, the entry being “Amount now not due to Harrison”. This impacted on the profit as well as the salaries for that year and illustrated how muddled the arrangements between the two companies were. The court explained that a reasonable and prudent director would have made some provision in the company accounts for this liability to Shelving Construction. The test was not what Gellert might have thought was reasonable to provide but what an ordinary prudent director could be expected to assess in all the circumstances. The court determined that given the trading activity and the issuing of invoices between the two companies, provision of around $62,000 should have been made for contingent liabilities.
This meant Gellert had acted in breach of his duty as a director in failing to make reasonable and prudent provision to cover those claims. The payment of the 1995 salaries had been at a level which placed at risk the solvency of Gellert Developments and was prejudicial to the interests of Shelving Construction as a creditor. Although Gellert had not engaged in any reckless trading, the breaches of his duties as a director meant he was found liable to pay $93,000 to the liquidator of Gellert Developments. That amount included 9 years worth of interest on the amount which had been denied to Gellert Developments to answer its creditor, Shelving Construction.
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7. Statutory demand issued to force payment of GST on a property purchase
Arzan Investments Ltd v Beresford Apartments Ltd (CIV-2003-404-2657; HC, Akld; 1 July 2003)
Early in 2003 Arzan Investments Ltd agreed to buy a property situated at 316 Blockhouse Bay Road, Auckland from Beresford Apartments Ltd for $640,000. The agreement for sale and purchase outlined that the purchase price was to be “plus GST (if any)”. The words “Refer Clause 16” were hand-written beside this and clause 16 said that “the parties acknowledge that no GST is payable … ”.
Later Beresford realised that there was no taxable activity being carried out on the property which meant that it might have to pay output tax on the sale. So Beresford sent an amended settlement statement to Arzan requiring payment of $80,000 for GST. This immediately led to a dispute which delayed settlement.
After a lot of negotiations Arzan agreed that it would not seek a GST refund from Inland Revenue and that it would pay any GST later found to be payable under the sale agreement. That allowed the sale to settle. Two weeks later Inland Revenue told Beresford that it had reassessed its GST return and Beresford now had to pay $80,000 GST. Beresford asked Arzan for it Arzan said the agreement did not oblige it to pay the GST and it refused to pay. Beresford issued a statutory demand on Arzan for payment which it sent to Arzan’s lawyers at 506 Dominion Road, Mt Eden.
Arzan applied to have the demand set aside. Arzan served this application on Beresford by faxing a copy to the solicitors acting for Beresford and sending the solicitors a hard copy through the document exchange. Arzan opposed the statutory demand as it said that the demand had not been validly served upon it and also because there was a genuine and substantial dispute in relation to its obligation to pay the GST. Beresford argued that Arzan’s application to set aside the the demand was itself invalid as it had not been properly served on Beresford.
A statutory demand must be served in accordance with s.388 of the Companies Act 1993. That section says that the demand can be served, amongst other things, by leaving the documents at the company’s registered office. Arzan argued that leaving the documents at its lawyer’s offices in Dominion Road was not effective service as Arzan’s registered office was PO Box 10018, Dominion Road, Mt Eden. The court said however, the records held at the Companies Office showed that in its annual returns, Arzan’s registered office was listed at the lawyer’s office, PO Box 10018, Dominion Road. The reference to the post office box number was irrelevant and the demand had been validly served.
Section 290 of the Companies Act says that an application to set aside a statutory demand must be served on the creditor within 10 working days of the date of the demand and no extension is possible. An application to set aside a statutory demand is a document which commences a legal proceeding. As such it can only be served on the opposing party in accordance with one of the methods in s.387 of the Act. That does not include fax transmissions. Arzan argued however, that the application had been served by fax in accordance with an agreement which the companies must be taken to have reached. Arzan said that because there had been so much correspondence over the sale agreement that had been sent to and fro by fax, it was permitted to infer that it was acceptable to continue to communicate with Beresford by fax. The court, however, was not persuaded.
The court explained that the previous correspondence related solely to the sale and the dispute which arose regarding GST. It did not relate in any way to the statutory demand. It said that more than a simple course of conduct needs to be demonstrated; what is required is a positive expression that the company which is to be served with the documents has agreed to receive legal proceedings in a particular way. The statutory demand also contained wording that indicated that “the address for service of Beresford Apartments Limited in this matter is … at the offices of its duly authorised agents”, and made no reference to fax transmission or posting through the document exchange. This meant that the application to set aside the statutory demand had not been validly served.
To cover everything the court went on to consider whether there was in fact, a genuine dispute over who was liable to pay the GST. The court determined that Arzan had agreed to pay $640,000 for the property. The hand-written note merely recorded the parties’ own view that the transaction was exempt from GST. In the event that GST was later found to be payable, however, they had also agreed that Arzan was to pay the GST in addition to the purchase price. This was put beyond doubt by the wording of the agreement over settlement which said that “if it subsequently transpires that GST is payable pursuant to the agreement then all the provisions of the agreement will apply and [Arzan] will pay the GST”.
So Arzan’s application stood no chance of success. It had not been properly served and no genuine and substantial dispute existed. Arzan was ordered to pay the $80,000 within 10 days or Beresford could file for Arzan’s liquidation.
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8. Shareholders fall out over thoroughbred horses
Campbell v Trinity Thoroughbred Lodge Ltd (M12/03; HC, Palm Nth; 10 April 2003)
Business matters at Trinity Thoroughbred Lodge Ltd had been unsettled for some time. Disputes had developed between the shareholders in the company, Maurice & Paula Campbell (who were the majority shareholders) and the Donnic Trust which was operated by Marie-Anne Molloy and her interests. Although it was opposed by Molloy, the Campbells eventually proceeded with a share recapitalisation of Trinity Lodge. After that Molloy was removed as a director.
<> Again against the wishes of Molloy and the Donnic Trust, Trinity Lodge was supposedly placed in liquidation by shareholders’ resolution at the end of 2002. Bernard Montgomerie was appointed as liquidator and acted in that capacity from the date of the resolution. The recapitalisation and the appointment of Montgomerie as liquidator were the subject of legal action by Molloy and the Donnic Trust.
There was a complete breakdown of relations between the shareholders.
Trinity Lodge was by now insolvent and had substantial debts. Montgomerie proposed selling three thoroughbred horses which were the remaining principal assets of the company. The Campbells obtained offers on the horses for the liquidator. The price for the horse “The World is Mine” and an unnamed filly was $152,000 + GST and “Thanksgiving” was to be sold to interests close to the Campbells for $58,000 + GST. Molloy objected to the sale of “Thanksgiving” as she had obtained an independent valuation of the horse at $120,000.
An impasse had been reached and the Campbells applied to the court for an order terminating the liquidation of the company under s.250 of the Companies Act 1993. At the same time the Campbells also applied to have interim liquidators appointed to the company under s.246. Molloy opposed the latter application as she felt a liquidator was not needed, particularly in view of the costs involved.
Section 250(1) says that the court has a discretion to terminate a liquidation if it is “just and equitable” to do so. As a result of the impasse between the shareholders of Trinity Lodge and in order to avoid any questions or later challenges to actions taken by Montgomerie as liquidator, the court ended the liquidation. The court then immediately considered the appointment of interim liquidators for the same company. Section 246 requires the applicant to show that a valid application for liquidation will probably succeed and that there is a need for interim control in the meantime.
The court said that the liquidation application would probably succeed given Trinity Lodge’s insolvency. The court also explained that with the earlier liquidation now ended, “it would be most unfortunate if matters with respect to the operation of the company’s business [were] left to the shareholders … given the impasse which has resulted between them”. It was in the interests of all the parties to have an interim liquidator appointed. This would enable an appointed expert third party to determine whether the offers for sale of the horses were reasonable or not. The liquidator has a duty to ensure that the best price is obtained. The court also fixed the rates of remuneration for the interim liquidator. As Montgomerie had already had considerable involvement in this company since his original purported appointment as liquidator he was appointed as interim liquidator. It is not recorded whether this eased the worries of the warring shareholders.
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9. Can you recover your legal costs from a debtor company which pays the debt at the last moment?
Contact 98FM Ltd v 89FM Ltd (M269/01; HC, Hamilton; 22 February 2002)
The Waikato radio station Contact 98 FM Ltd had been awarded costs of $2,735 against a competitor station, 89 FM Ltd, after a successful High Court action. 89 FM did not pay and Contact 98 FM sent them a statutory demand for the amount owed. 89 FM did not comply with the statutory demand either. This led Contact 98 FM to apply to the court, under s. 241(2)(c) of the Companies Act 1993, for 89 FM to be wound up and have a liquidator appointed.
89 FM was served over the liquidation proceedings on 29 October and two days later it paid the full amount - $2,735 - and apologised for the delay. Contact 98 FM acknowledged the receipt of the funds and offered to discontinue the liquidation proceedings. It also informed 89 FM that it was entitled to a further award of costs totalling $2,052.50. This was to cover the filing fees, and the court and legal costs of the liquidation proceedings. Once that was paid Contact FM said it would formally discontinue the liquidation proceedings.
The matter went before a judge. 89 FM opposed the awarding of further costs to Contact 98 FM. It said that if its first payment had not been considered a final settlement then it should have been returned. In any case, 89 FM argued, any later costs award should be reduced.
The judge outlined two apparently conflicting positions which were relevant to 89 FM’s arguments. First, in a bankruptcy petition, if the petitioning creditor accepts the money, he also accepts that he will not proceed further upon the petition and so cannot get any costs after receipt of the debt owing. By contrast, where a winding up application has been issued, as was the case here, the creditor was still entitled to have the application heard to obtain his costs. This was, the judge said, “a practice that now has pertained for some 127 years in relation to companies” and the previous principle (for bankruptcies) has generally not applied to winding up applications.
The payment of the debt had been made after the serving of proceedings and this meant the case was an appropriate case for costs. The judge explained however, that he would reduce the costs award as part of the delay in determining the award had been caused by Contact 98 FM itself. 89 FM was ordered to pay costs of $850.00.
