In re IHJ Advertising (Fiji) Ltd [1991] FJHC 40; Hbe0075j.1990s (12 June 1991)

IN THE HIGH COURT OF FIJI
At Suva
Civil Jurisdiction

WINDING-UP CAUSE NO. 75 OF 1990

IN THE MATTER OF IHJ ADVERTISING (FIJI) LIMITED

and

IN THE MATTER OF THE COMPANIES
ACT 1983 (CAP. 216)

Mr. V. Parmanandam for the Petitioner
Mr. J. Singh for the Company

JUDGMENT

This is an application by the petitioner a former employee of IHJ Advertising (Fiji) Ltd. (hereafter referred to as 'the company') for an order winding-up the company on the principal ground that the company is unable to pay its debts.

The following is a brief chronological account of the case thus far so far as can be gathered from the papers placed before the court and from counsel's submissions:

In early 1988 the company was incorporated with the petitioner appointed as its first managing director for a term of 3 years. Then in December 1989 a "successor" was appointed to manage the company. Thereafter there appears to have been an exchange of letters between solicitors acting for both parties culminating in an 'unprosecuted' demand notice dated the 2nd of April, 1990 and a letter from the company's solicitors claiming that there is a "... genuine dispute between the parties".

This was followed by a second replacement notice dated the 20th of June, 1990 in which the petitioner demanded payment from the company of a sum of $47,739.55 ".... being the amount due and owing by you in respect of services rendered to you ... ". The company responded to this later notice by issuing on the 10th of July 1990 (i.e. 20 days later) out of the High Court an originating motion seeking a declaration that the petitioner's demand was "invalid and improperly issued" and an ex-parte summons for an injunction restraining the petitioner from advertising (not presenting) any petition to wind up the company. Both applications were supported by a single affidavit sworn by the company's then general manager in which he deposed that the company was not indebted to the petitioner as claimed in the demand notice.

An interim injunction was granted by Byrne J. on the 10th of July 1990 and this was extended by Palmer J. on the 24th of August 1990. A week later on the 31st of August the petitioner's counsel moved inter partes to discharge the injunction on the ground that the company had neglected to pay the amount demanded in the petitioner's notice and had not registered any protest (presumably with the petitioner) in respect of the monies claimed within the 21 days given in the notice. The company in its affidavit opposing the motion again deposed through its general manager that the debt was genuinely disputed; that it was able to and had paid all debts that it considered was rightly owed and due; and that its good reputation and standing in the industry would be seriously damaged by allowing the petition to be advertised.

On the 12th of October 1990 the petitioner's motion to discharge was heard by Jayaratne J. and in a ruling delivered on the 17th of December, 1990 the company's injunction was discharged. I have had the benefit of perusing the ruling and am satisfied that it was properly and strictly confined to the issue then before my learned brother, namely, whether or not the petition for winding-up could be stopped and not whether the winding-up order itself should be made.

There being no further procedural obstacles to the petitioner, on the 20th of December 1990 counsel for the petitioner presented a Petition to Wind-up the company at the High Court registry and this was duly issued and served on the company on the same date. It was also publicly advertised in the Fiji Times and the Fiji Republic Gazette on the 21st of December, 1990 and 11th of January 1991, respectively. The petition was verified by the affidavit of the petitioner sworn on the 19th of December, 1990 and filed on the 28th.

In entering opposition to the Petition in the affidavit of its general manager dated the 14th of January 1991, the company annexed a "Heads of Agreement" document which purports to be an employment contract between the petitioner and the company and in which the following clauses dealing with the petitioner's remuneration appears:

"2. SALARY shall be F$48,000 per year and subject to review annually.

3. THE MANAGING DIRECTOR may form his salary "package" totalling F48,000 provided that the total liability to the Company does not exceed its normal tax liability under Clause 2 hereof. "

The general manager deposed to the company's understanding of the clauses and avers that the company's records revealed that the petitioner in fact over-paid himself by a sum of $17,698.03. There has been no response to this most recent affidavit of the company from the petitioner although the Companies Rules clearly permits one.

In his submissions at the hearing of the Petition learned counsel for the petitioner relied on paragraph (a) of Section 221 of the Companies Act 1983 (hereinafter referred to as "the Act") as providing the sole basis for the assertion in the petition that the company is 'unable to pay its debts'.

Counsel submits the relevant demand under the petitioner's hand is dated the 20th of June 1990 and was served on the same date at the registered office of the company. Thereafter the statutory period of 3 weeks expired and in the absence of any protest or payment by the company, counsel submits the statutory presumption arises and the company is deemed unable to pay its debts and ought to be wound up by the court in the absence of clear proof of its solvency.

Learned counsel for the company on the other hand asserts that the company has consistently denied any indebtedness to the petitioner in its written correspondence in the matter and in its affidavits filed in C.A. No: 237 of 1990 in which it successfully sought and obtained on the 10th of July 1990 an interim injunction preventing the advertisement of the petition and although the injunction was subsequently dissolved in a ruling delivered by Jayaratne J. on the 17th of December 1990, nevertheless counsel submits the ruling itself recognised that "........ the amount, alleged to be still outstanding as a debt to the Defendant (i.e. the petitioner) is denied by the Plaintiff" (i.e. the company).

Furthermore counsel for the company submits the debt being a contested or disputed one the petitioner has failed to satisfy a condition precedent to the issuance of the statutory demand notice, namely, that he was a "creditor" of the company at the time. In the circumstances counsel submits the petitioner lacks the necessary locus standi to bring this petition which in the event is an abuse of process.

Clearly resolution of these contrary submissions requires a closer examination of the provisions of paragraph (a) of Section 221 of the Act.

Section 221(a) is in the following terms:

"221. A company shall be deemed to be unable to pay its debts -

(a) if a creditor, by assignment or otherwise, to whom the company is indebted in a sum exceeding one hundred dollars then due has served on the company, by leaving it at the registered office of the Company, a demand under his hand requiring the Company to pay the sum due and the Company has for three weeks thereafter neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor;"

To begin with it must be noted that Section 221 is drafted as a "deeming" provision. Of such a provision Lord Radcliffe said in St. Aubyn v. A-G [1951] UKHL 3; (1952) A.C. 15 at p. 53:

"The word 'deemed' is used a great deal in modern legislation. Sometimes it is used to impose for the purposes of a statute an artificial construction of a word or phrase that would not otherwise prevail. Sometimes it is used to put beyond doubt a particular construction that might otherwise be uncertain. Sometimes it is used to give a comprehensive description that includes what is obvious, what is uncertain and what is, in the ordinary sense, impossible."

For my part having carefully considered the terms of paragraph (a) and mindful of the disjunctive co-existence of paragraphs (b) and (c) in Section 221 I am driven to the conclusion that paragraph (a) is an illustration of the first sense of the use of the word "deemed" identified in the above passage in so far as it imposes for the purposes of Section 220(e) of the Act an artificial construction of the phrase "unable to pay its debts" that would not otherwise prevail.

It is patently clear to this court that the mere failure to pay a demand does not inexorably lead one to the inevitable conclusion that the company which so failed to pay the demand is therefore "unable to pay its debts", a fortiori where the very existence of the debt is bona fide disputed on substantial grounds.

Be that as it may the first 'element' in the paragraph which falls to be examined begins:

"(a) If a creditor, by assignment or otherwise, to whom the company is indebted in a sum exceeding one hundred dollars then due has served on the company ........ a demand under his hand requiring the company to pay the sum due ......."

In my view a 'creditor' within the contemplation of the paragraph must be a person to whom the company 'is (presently) indebted' in respect of a liquidated sum which exceeds the statutory minimum amount and the debt is 'then due' at the time when demand for payment was made on the company.

It is equally clear that where there is a serious and fundamental dispute on substantial ground as to the very 'indebtedness' of the company or over whether or not the debt is due then the continued hearing of the petition will largely depend on the nature and extent of the dispute and the evidence that might be required to be adduced in the matter.

Not withstanding that there is a well-settled rule of practice that a winding-up petition is both an inconvenient and unsuitable procedure in which to try the issue of a disputed debt except in the simplest of cases.

This was recognised as long ago as 1864 when Turner L.J. said in In re Catholic Publishing and Book Selling Co. 139 RR 54 at p. 57:

"I think that applications of this kind by creditors whose debts are bona fide disputed are not to be encouraged. I do not say that the legislature has not given the Court power to decide upon a winding-up petition the question whether a debt which the Company disputes is owing or not, but I think that such an application is a most inconvenient mode of trying that question and where there is a bona fide dispute as to the existence of the debt, and the case turns upon the question whether there is a debt, I think the Court would do well to adjourn the petition until the existence of the debt is established."

More recently in an oft-cited passage in his judgment in Mann v. Goldstein (1968) 1 WLR 1091 Ungoed-Thomas J. said of the Court's jurisdiction to make an order winding up a company, at p. 1098:

"For my part, I would prefer to rest the jurisdiction directly on the comparatively simple propositions that a creditor's petition can only be presented by a creditor, that the winding-up jurisdiction is not for the purpose of deciding a disputed debt (that is disputed on substantial and not insubstantial grounds), since, until a creditor is established as a creditor he is not entitled to present the petition and has no locus standi in the Companies Court; and that, therefore, to involve the winding-up jurisdiction when the debt is disputed (that is, on substantial grounds) or after it has become clear that it is so disputed is an abuse of the process of the court."

In similar vein Buckley L.J. in Stonegate Securities v. Gregory (1980) 1 Ch.D. (CA) 576 said at p. 579:

"If the creditor petitions in respect of a debt which he claims to be presently due, and that claim is undisputed, the petition proceeds to hearing and adjudication in the normal way; but if the company in good faith and on substantial grounds disputes any liability in respect of the alleged debt, the petition will be dismissed .... That is because a winding up petition is not a legitimate means of seeking to enforce payment of a debt which is bona fide disputed."

The remaining 'limb' in paragraph (a) which requires consideration is in the following terms:

".... the Company has for three weeks thereafter neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor."

These words were considered by Sir G. Jessel MR in In re London and Paris Banking Corporation (1874) 19 LR Eq. 444 where in dismissing a petition for the winding-up of the company the learned judge said of an identically-worded provision, at p. 446:

"It is very obvious, on reading that enactment, that the word 'neglected' is not necessarily equivalent to the word 'omitted'. Negligence is a term which is well known to the law. Negligence in paying a debt on demand, as I understand it, is omitting to pay without reasonable excuse. Mere omission by itself does not amount to negligence. Therefore I should hold, upon the words of the statute, that where a debt is bona fide disputed by the debtor, ..... then in that case he has not neglected to pay, and is not within the wording of the statute."

In similar vein and more recently Megarry J. in Re Lympne Investments Ltd. (1972) 2 All E.R. 385 in dismissing the winding-up petition before him in that case, said at p. 389:

"In the context of a notice requiring a person to do some act, I do not see how it can be said that the person 'neglects' to do that act if the reason for not doing it is a genuine and strenuous contention based on substantial grounds, that the person is not liable to do the act at all. If there is liability, a failure to discharge that liability may well be 'neglect' whether it is due to inadvertence or obstinacy or dilatoriness; but a challenge to liability is a challenge to the foundation on which any contention of 'neglect' in relation to the obligation must rest."

From the foregoing it is plain that a court faced with a contested winding-up petition must ask itself the question: "Does the company in good faith and on substantial grounds dispute liability?"

In this regard it is important to bear in mind in this case that it is the very existence (not the quantum) of the debt that is being disputed and equally that a bare denial of indebtedness is not sufficient to defeat the statutory presumption raised by compliance with Section 221(a) of the Companies Act.

At the outset I must say that the affidavits filed in the action do not disclose the entirety of the matters in dispute between the parties.

For instance, the petitioner's 'successor' was appointed and took office almost a year before the petitioner's contract of employment was due to expire. Why this was necessary is nowhere disclosed in any of the papers but if the company's solicitor's letter of 20th April 1990 is anything to go by then the petitioner's pre-mature termination occurred without notice and in less than amicable circumstances.

Furthermore the petitioner's 'Without Prejudice' particularised claim which was annexed to his Section 221(a) demand notice whilst indicating an annual salary figure of $48,000 nevertheless represents that the petitioner has received only $78,679.72 which is almost $26,000 short of his salary entitlement. Clearly on this score alone there will need to be the taking of an account between the parties.

All of this is underscored by the clear difference in interpretation as to the meaning and effect of the remuneration clauses in the "Heads of Agreement" executed between the parties which in turn may not be a complete document in itself.

I am satisfied from the affidavits before me that there exists a genuine dispute between the parties as to the existence of the debt on which the petitioner founded his demand notice.

Additionally I am satisfied that the paucity of evidence before the court and the extent and nature of the dispute between the parties is such that it could not be satisfactorily resolved in the present proceedings.

As was said by Megarry J. in Re Lympne Investments Ltd. (op.cit) at p. 388:

"A real dispute, turning to a substantial extent on disputed questions of fact which require viva voce evidence, and involving charges of fraud or near fraud, cannot properly be decided on petition."

Accordingly this petition must fail and is dismissed with costs to the company to be taxed if not agreed.

(D.V. Fatiaki)
JUDGE

At Suva,
12th June, 1991.

HBE0075J.90S