In re South Pacific Fertilizers Ltd [2014] FJHC 65; Winding Up Case 4.2012 (14 February 2014)

IN THE HIGH COURT OF FIJI AT LABASA

Winding Up Case No. 4 of 2012

IN THE MATTER OF SOUTH PACIFIC FERTILIZERS LIMITED
a limited liability company having its registered office at Waterfront, Lautoka

AND:

IN THE MATTER
of the Companies Act

Appearances: Mr. Mohammed Sakim as the proprietor of the Petitioner in person.
Mr. P Sharma of R Patel Lawyers for South Pacific Fertilizers Limited the alleged debtor.

RULING

Introduction

By a Winding Up Petition dated the 5 September 2012 the Petitioning Creditor, Sakim's Digging Services petitioned the Court for the winding of the South Pacific Fertilizer Limited. It was alleged by the petitioner that it had served the debtor with a Section 221 notice in which it demanded from the debtor the sum of $5000:00. The said sum according to the petitioner was owed to him as a performance bond money paid in respect of a contract of services rendered to the debtor. That no payment being made after the prescribed 21 days the said Sakims Digging Services then issued a petition to wind up the company.

Background

The background to the action was that the Petitioner was hired by the South Pacific Fertilizer Limited (hereinafter refered to as the Company) to cart fertilizer to farmers in the Seaqaqa District in Vanua Levu in June of 2007. For this purpose they then entered into a two year agreement ending on the 31 March 2009. The Petitioner was required, as per the agreement to pay a Performance Bond (hereinafter referred to as the Bond) of $5000:00 to the Company during the period of the contract. On the 26th January 2009 the Petitioner in writing advised the Company that it had limited its liability and the new entity would now be known as Sakim's Digging Services Limited". When this agreement expired the parties negotiated another agreement for a further two years to expire on the 31st March 2011. The performance bond paid in the initial agreement would now be transferred or applied to the new agreement.

When the petitioner Sakims Digging Services Ltd breached the terms of this latter agreement the respondent debtor company terminated the agreement and the petitioner's bond of $5,000:00 forfeited. When the petitioning creditor's attempts to have its performance bond reimbursed were unsuccessful it then served the company with a section 221 notice and thereafter filed this petition to wind up the company. The debt was no doubt disputed. The respondent debtor raised as one of the issues to be determined was whether the performance bond was a debt for the purposes of a winding up petition. This issue will be discussed later.

The Submissions

At the conclusion of the hearing the parties were requested to file their submissions and this ruling is based on the oral and written submissions.

The Petitioner

The petitioner submitted firstly that when the Company failed to or neglected to refund the sum of $5,000:00 bond monies after repeated phone calls and a demand notice it had to file a petition to wind up the company. The second point submitted by the petitioner is that the first agreement was between Sakims Digging Services, now the petitioner, and the Company and that this agreement expired on 31st March 2009 and for which the performance bond was paid. The second agreement is between Sakims Digging Services Limited and the Company and in which no $5,000:00 performance bond was to be paid. These are two different entities entering into two different agreements. The third point submitted is that the Company's contention that the performance bond was reimbursed to Sakim's Digging Services is false as no bond was reimbursed. The petitioner concludes that it has met all the requirement of the winding up rules and therefore if the company is solvent it should pay the debt or if it is not solvent it should be wound up.

The Company

The company filed a very well written and researched submission on the factual and legal aspects which needs to be determined in a winding up petition and I thank them for making the Court's task easier in this regard.

1. The Debt is disputed.

The first point raised by the Company is that the debt was disputed by them from the very beginning. In the company's affidavit in reply deposed by Mr. Asween Nischal Ram on the 25 September 2012 it annexed a letter written to the petitioner indicating that the debt is disputed and that the dispute could only be resolved through oral evidence. The petitioner chose to wind up the company instead. In this regard the company is of the view that the winding up petition is being used to force a debtor to pay a disputed debt and is thus an abuse of process.

2. Can the Petitioner bring the action

The second point raised by the company is that the petitioner has no standing to bring the action. This is so because the petitioner has not furnished any document to state that it exists as a legal entity, that is, Sakims Digging Services does not exist and therefore it could not bring this action. If it does exist then it has assigned the bond money the subject of the debt to Sakims Digging Services Limited. This means that Sakims Digging Services Limited is the only legal entity which could institute the action. This is the position when on the 26 January 2009 Sakims Digging Services advised the Company that it had limited its liability and is now known as Sakims Digging Services Limited.

3. The Company is solvent

The third point raised by the company is simply that it is solvent and is able to pay its debt and it has refused to pay the alleged debt because it disputes it.

4. Non-compliance with Rule 25 of the Companies Act.

The fifth point submitted by the company is that the winding up petition and the affidavit verifying it did not comply with rule 25 of the Companies Act Winding Up Rules. In the company's view the affidavit must be sworn and filed within 4 days after the petition is presented and not at the same time. This rule is mandatory. Apart from the above the company submits that the affidavit is defective in that it does not contain any evidence that the petitioner is a legal entity which could sue, it does not provide any evidence of debt and does not enclose a copy of the section 221 notice.

The sixth point raised by the company is that neither the affidavit verifying the petition or the amended affidavit verifying the petition comply with the requirement of rule 25 of the Winding Up Rules because they are not prima facie evidence of the contents of the petition.

Determination

1. The Debt

Perhaps it is appropriate to first consider the issue raised by the Company regarding the debt. It submitted that the debt was disputed by them from the beginning as was deposed in the affidavit in reply of Asween Nischal Ram and that oral evidence needed to be adduced to resolve it. It is common ground that what is in dispute is that of a refund or non-refund of the sum of $5,000:00 paid by the petitioner as the performance bond.

The question I feel which ought to be first answered is whether the non-payment of the performance bond is a debt for the purposes of a winding up petition. A debt is said to be a sum of money due from one person to another. The 4th Edition of Stroud's Judicial Dictionary defines a debt as a sum payable in respect of a liquidated money demand, recoverable by action". The definition further states that the word debt can but seldom be construed to include damages for breach of covenant". From the above it is safe to say that a debt for the purposes of a winding up petition has to be proved by an action, (to recover the debt) and that subsequent to that the Company is unable to pay (presumably after being given notice). It is precisely because of the above that attempts to recover a debt through a winding up action will invariably fail.

The second part of the above definition that a debt is seldom construed to include damages for breach of contract, merely clarifies the need to prove the sum claimed before it becomes a debt enforceable under a winding up petition. A performance bond in my view falls within this category, it is a contract to deliver fertilizer. It is an undertaking from the Contractor (petitioner) guaranteeing the performance of the services or obligations under the contract. The bond is conditional in that it guarantees the performance of the services. Where as in this instance the bond is paid by the Contractor and not by a third party the Contractor himself is guaranteeing that he will perform the services required and failure to perform will result in forfeiture of the bond. The Contractor therefore must first prove that he has performed the services before he could demand the refund of the bond paid. It was in fact the non-performance of the services by the Contractor/petitioner which gave rise to the dispute regarding the performance bond. I am therefore of the view that the performance bond is not yet a liquidated debt until the contractual issues are first determined, only then can it became a debt. I am therefore in agreement with the alleged Debtor i.e. the Company that this issue should be determined first and that oral evidence need to be adduced to resolve it.

2. Can the Petitioner bring the action?

The second point made by the Company is that the petitioner is not a legal entity and therefore could not initiate any legal action. It is trite law that an entity must have a legal standing to be able to sue and be sued in its own capacity. The petitioner "Sakim's Digging Services" filed the petition on 5 September 2012 and the petition states that:-

The Humble Petition of Sakim's Digging Services incorporated under the Laws of Fiji Islands whose principal place of business is at the Public Employees Union Building, Main Street, Labasa, showeth as follows:

By the petitioner's own letter to the Company dated 26 January 2009 it advised the Company that it had 'limited its liability' and that it is now known as Sakim's Digging Services Limited. Sakim's Digging Services Limited was then incorporated on the 1st February 2008. In other words Sakim's Digging Services no longer exist as a legal entity. I agree with the Company's view that in order for Sakim's Digging Services Limited to have been incorporated, Sakims Digging Services must have ceased business operation.

Even if the entity Sakim's Digging Services was incorporated at the time of the petition it still could not petition for the winding up of the Company for the simple reason that it is not yet a judgement creditor. Only if the petitioner has proved the debt will it be able to petition for a winding up.

The Halsbury's Laws of England (4th Edition, Volume 6 paragraph 1038) states that:

"A winding up order cannot be obtained by a person claiming un-liquidated damages, his proper course being to change the claim for damages into a judgment and thus make himself a creditor... his proper course being to obtain judgment in an action against the company and then petition"

4. The Company is solvent.

The Company further states that notwithstanding the above it is solvent and is able to pay its debt. The petitioner knew after it had served the section 221 notice that the debt is disputed. By letter dated 21 July 2011 the Company's Lawyers wrote to the petitioner informing him of the need to resolve the dispute about the debt first, the fact that they will oppose a winding up petition and that they will vigorously defend the action. The petitioner chose otherwise. The fact that the Company did not comply with the section 221 notice, but chose rather to inform the petitioner that the debt is disputed does not make the objection to the notice, a non-compliance entitling the petitioner to petition for a winding up action.

5. Non-Compliance of rule 25 of the Companies Act.

The Company's fifth point is that the petitioner failed to comply with rules in the filing of the petition on the following matters:-

(i). The winding up petition was advertised on the Fiji Sun before it was served on the Company. The advertisement appeared in the Fiji Sun newspaper on the 8th September 2012 and the petition served on the 21 September. The affidavit of service of the petition confirms that it was served on the above date. The Company in response to the likely effect such an advertisement may do the Company's reputation advertised in the same paper five days later advising the public that it is a solvent company is able to pay its debt and will oppose the winding up petition. Rules 23 & 24 regarding the service and advertisement of petition in a newspaper or gazette is clear only in the fact that the advertisement be made at least seven (7) days before the hearing of the petition but it is in my view mischievous to let the whole world know of the action before it is known to the petitioned. More often than not the date of hearing on the petition as stated on the document may change due to lack of service and it is prudent that where the debt is disputed advertising of the petition may do more harm then good.

(ii). The Company was further of the view that the Rule 25 of the winding up rules is mandatory in that the affidavit verifying the petition should have been served within four (4) days after the presentation of the petition. This rule states:-

"Every petition shall be verified by an affidavit, which shall be sworn by the petitioner, or by 1 of the petitioners if more that 1, or, where the petition is presented by a corporation, by a director, secretary or other principal officer thereof, and shall be sworn and filed within 4 days after the petition is presented any such affidavit shall be prima facie evidence of the contents of the petition".

The Company submits that the failure to comply with this rule makes the affidavit verifying irregular and therefore the petition should be struck out. This submission has not considered the discretionary or directory power of the Court to enlarge or abridge the time appointed by the rules under Rule 201. In any event Rule 25 does not prevent the petitioner from filing the affidavit verifying the petition at the same time as the petition. Rule 201 states that:-
The court may, in any case in which it sees fit, extend or abridge the time appointed by these Rules or fixed by any order of the court for doing any act or taking any proceeding.

Warrington J in African Farms Ltd. [1906] UKLawRpCh 43; [1906] 1 Ch 640 at 642 in considering rule 29(identical to our Rule 25) of the English counterpart stated the following:-

".....I have also spoken respecting the matter to Buckley J.... to whom the company business has been assigned. He has pointed out to me and I in turn now desire to point out that rule 29 does state what is to be the result of non-compliance with its provisions. The rule does not say that the petition in that case to fail. The rule is merely directory..."

Although the time for filing the affidavit verifying the petition in New Zealand is seven (7) days instead of four (4), a similar Rule exists and a parallel interpretation was also adopted and applied. Re Bond Motors Ltd [1976] 1 NZLR 368 per Somers J (HC).

His Lordship Justice Singh in American Diesel Ltd –v- Olympic Fiji Limited Lautoka High Court Bankruptcy and winding –up cause No: HBF 028/2004 (unrep), where the company argued that the since the affidavit verifying petition was not filed within the mandatory 4 days, the petition should be dismissed. In dismissing the objection, His Lordship noted that although the Rule is expressed in a mandatory form it is not so interpreted. His Lordship, extended the time under Rule 201. Apart from the extension or abridging of time for the filing of the affidavit verifying the petition the Court has other discretionary powers regarding the invalidation of documents due to defects or irregularity available under Rule 202. This Rule states:-

(1) No proceedings under the Act or these Rules shall be invalid by reason of any formal defect or any irregularity, unless the court before which any objection is made to the proceedings is of opinion that substantial injustice has been caused by the defect or irregularity and that the injustice cannot be remedied by any order of that court.

(2) No defect or irregularity in the appointment of the official receiver or of the appointment or election of a liquidator or member of a committee of inspection shall invalidate any act done by him in good faith.

It appears from the above that the rules are very flexible regarding the dismissal of winding up petitions. The fact that no proceedings under the Act or Rules could be invalidated by reason of any formal defect or irregularity unless the Court is of the opinion that substantial injustice has been caused by the irregularity (if such irregularity could not be remedied) casts a wide net over what petitions could be dismissed.

In American Diesel Ltd –v- Olympic Fiji Limited (supra) instead of striking out the petition Justice Singh exercised his discretion and extended the time for filing the affidavit verifying the petition. Although Rule 201 does not prescribe the procedure or how the Court were to exercise this discretion to extend time the rule may be read in conjunction with Rule 202 at least in so far as to consider the issue of substantial injustice as a consequence of the irregularity or defect. This could be done in chambers by oral application or by motion if necessary. This appears to be the case under Rule 201 notwithstanding the requirement in Rule 7 as the discretion exercised is wide enough provided there is no substantial injustice.

Although Rule 25 is expressed in a mandatory term, the word 'shall' has not been so interpreted but is considered directory and the direction given is exercised with the discretion available under Rule 201 when read in conjunction with Rule 202. As a result the submission by the Company that the defect in not filing the affidavit verifying the petition within the 4 days prescribed under Rule 25 should not be accepted and the irregularity can be cured by an exercise of courts discretion under Rule 201.

There are however many other irregularities or defects, which clearly raises the issue of substantial injustice and which could lead to the petition being struck out. These have already been discussed above.

Conclusion

From the above reasons the following conclusion is therefore appropriate.
That notwithstanding that the petitioner has not breached rule 25 of the Winding-Up Rules it has yet to put itself in a position to be a genuine creditor sufficient for it to petition the Company to be wound up. It follows that the petitioner is to first prove the debt by another action before it could further petition and that the filing of the petition could be seen as mischievous under these circumstances. The application to wind up the Company is therefore refused with cost which is summarily assessed at $2000:00.

Orders

I therefore make the following orders:-

1. The Petition to Wind Up the Company is refused;

2. The Petitioner to pay $2,000:00 costs to the Company.

14th February 2014.

H ROBINSON
Master, Labasa High Court.