Kim Industries Limited, In Re (No 2) [2000] FJLawRp 46; [2000] 1 FLR 184 (18 August 2000)

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Winding up - whether petitioner at hearing confined to grounds set out in petition and affidavit or can rely on further evidence - whether viva voce evidence admissible in open court - Companies (Winding Up) Rules 28(1), 29, 30, 31(1), 31(2), Companies Act ss220, 221.

The company objected variously to the petition and forms used in the winding up process. After issuing a ruling and hearing further argument from counsel for the supporting creditors, a second preliminary ruling was issued.

Held - (1) It is important in a 'just and equitable' petition that the debtor company know what allegations it has to meet but an allegation of insolvency is wide enough to encompass deeming insolvency of failing to meet s221 demand.

(2) For a court to consider an allegation whether directors' discretion had been exercised improperly, or paid themselves certain salaries, it should have been alleged in the petition.

(3) No formal notice need be given of evidence to be adduced at hearing of petition, as pleadings occur through the petition.

(4) Any admissible evidence can be adduced as long as it is relevant to the pleadings of the creditor's petition, Viva voce evidence of non-payment from supporting creditors or through counsel's submissions is admissible as evidence of insolvency.

(5) A winding up petition cannot be used as an expedited and shortened trial procedure for action for debt, but must be proved in open court, including evidence from supporting creditors.

Cases referred to in judgment
Cons Investment Corporation of Fiji Ltd v Offshore Oil N.L. SC 939/83 6 April, 1984

Adish K. Narayan for the Petitioning Creditor
Samuel Ram for the respondent Company
Rajesh Ronald Gordon for 2 Supporting Creditors [Lautoka Engineering Ltd. and Reddy’s Tyres]

Since delivering a preliminary ruling in this matter on July 7 2000, I have heard further argument by way of preliminary objection to the Winding Up proceedings. These objections fall into three categories.

1. Is the Petitioner at the hearing confined to the grounds set out in its petition and affidavit?

On 17 December 1999 a Winding Up petition was filed at Court by the Petitioner's solicitors. It was filed with an affidavit which simply verified the Petition, but otherwise provided no further particulars of the allegations contained in the petition. A Memorandum of Due Compliance pursuant to Rule 28(1) of the Companies (Winding Up) Rules Cap. 247 was also filed by the Petitioner on 19 January 2000. Notice of the hearing of the Petition on 4 February 2000 was advertised in the Fiji Times on 18 December 1999. No doubt in response to that announcement creditors gave notice to the Petitioner and to the Court of their intention to appear in support of the Petition. Those creditors were:

	Debts Owing F$
1. Lautoka Engineering Limited	557.20
2. Appal Sami Reddy T/A Reddy's Tyres Autosales and Service Centre	17,530.46
3. Carpenters Fiji Limited	14,588.25
4. Mobil Oil Fiji	15,790.02

Further Affidavits were filed, one from the Petitioner and two from the Respondent Company.

Section 220 of the Companies Act provides for winding up by the Court in 7 instances. Two of these are relevant here:

(f) the court is of opinion that it is just and equitable that the company should be wound up;"

Persons intending to appear on the hearing of a petition are required to serve on the Petitioner a Notice in compliance with Form 13 of such intention [Rule 29]. However there is no requirement to serve such notice on the Respondent debtor company. The Petitioner then compiles a list of such persons on Form 13 and files this with the Court on the day of the hearing [Rule 30]. Again, there is no requirement to serve this list on the Respondent debtor Company. The Respondent comes into possession of particulars of unpaid debts through the Court.

In this petition the petitioner urges on the court two grounds for seeking a Winding Up order:

9. That in the circumstances it is just and equitable that the Company should be wound up.

"the words 'just and equitable' are very wide in their scope, and I cannot say that they are incapable of embracing a case where the director is far more active in the company's affairs than the other."

This case was about two brothers running two related companies, which fell on hard times. The brother who brought the petition did so under three heads of complaint. First it was said a new bank account was opened without consultation in the other brother's name only, secondly there had been a refusal to employ the petitioning brother in the retail business following his loss of employment upon closure of the wholesale business, and thirdly there were fears that the brother remaining would run the company for his own benefit. Under "just and equitable" these were the heads of complaint set out in the petition. Megarry J. said (at 927f):

"...but I do not think that he can rely on any new on any new head not fairly covered by his petition."

In Re Cuthbert Cooper and Sons Ltd. [1937] 1 Ch. 392 the founding father of a business had died leaving five sons his shares in the company. Two sons as sole directors amongst other things refused to register the transfers of the shares to the three younger sons. Many allegations were brought up as to why the court should make a Winding Up order upon the ground that it was "just and equitable" to do so. At 399 Simonds J. said:

"For the purpose of determining whether the petition should be granted or not, it is necessary for me to look at the allegations in the petition, and I do not propose to travel beyond them."

Although there was an allegation that the debtors had consistently declined to register the petitioners as members, the petition it would appear, had not gone on to allege that the directors discretion has been exercised improperly. For this impropriety to have been considered by the court, it should have been alleged in the petition.

Similarly on the allegation that the directors had paid themselves certain salaries, Simonds J. (at 400) said:

"but there is not the allegation, much less the proof, that the certain salaries which were paid, and in addition the bonuses, were excessive, or were paid in ill faith."

"It appeared to me to be plain as the matter went on that it must be confined to the allegations in the petition, and therefore I did not allow Mr Harman to go outside it and cross examine the witnesses on matters which were not of substantive allegations in the petition. Accordingly it rests on the allegations in the petition, and such evidence as I have heard."

In Re Lundie Bros Ltd. [1965] 2 All ER 692 where the petitioner also alleged that it would be just and equitable to wind up the company, Plowman J. at 699 said:

"Parenthetically, there is here a point which I think that I should mention. It was suggested in the course of argument that it was really the evidence and not the allegations in the petition which was of importance in this matter. I entirely dissent from the proposition. It seems to me that it would be wrong for the court to travel outside the allegations in the petition, particularly in a case of this sort where the petition is based on the proposition that the respondents to it have been guilty of some oppression or some lack of probity."

In expressing approval for this approach in Re Fildes Bros. Ltd. (supra) Megarry J. went on to say at 928b:

"in cases in which there are no normal pleadings, it seems to me important those who oppose a winding up should know, in time to prepare their case, what are the allegations that they have to meet. In after a petition has been presented the petitioner wishes to broaden his attack, let him first amend his petition."

It is said for the Respondent Debtor Company that the petition only pleads non-compliance with a statutory demand. It does not plead insolvency based on the debts of the supporting creditors. Section 220 provides for only one circumstances concerning debt as a ground for winding up.

That is contained in section 220(e), namely that "the company is unable to pay its debts." Because the petition pleads the facts of the omission to attend to the statutory demand and does not plead the facts of individual debts, details of which were subsequently filed at court, it does not mean that the petitioner is precluded from relying on such evidence in support of the allegation on insolvency or inability to pay debts. Bare statements of the individual debts are provided in the Notices of Intention to appear in support.

I conclude that the petitioner is confined to the allegations set out in its petition, and that the facts as pleaded in the petition are wide enough to include general insolvency as well as the deeming insolvency of failing to meet the section 221 demand. The head of complaint here is "insolvency". In a petition based on "just an equitable" considerations it is necessary for the Respondent to know more, namely, on which battlefield he must resist the petition. He needs to know the heads of complaint, as afflicted the brothers in the In re Fildes Brothers case (supra), for such heads can be of infinite variety. In contrast preparation for meeting an allegation of insolvency it's Directors and accountants. They will know which debt remains outstanding and which is disputed. I find the petition as pleased adequate to put the respondent on sufficient notice as to what it has to meet in court.

2. What formal notice has to be given of evidence to be adduced at the winding up hearing?

The simple answer to this question is 'none'. Notice of pleadings occurs through the petition.

The petition is verified by affidavit. Affidavits in opposition to a petition are to be filed within 7 days of the date on which the affidavit verifying the petition is filed [Rule 31(1)]. An affidavit in reply can then be filed within three days thereafter [Rule 31(2)]. To this extent the Respondent gains more particulars of the petition and adequate notice of evidence relied on by the petitioner. In some instances inspection and discovery can be ordered as happened in Bateman Television Limited & Anor. v Coleridge Finance Co. Ltd. [1969] NZLR 794.

In Adams & Co. v. Lyceum Theatres Ltd. [1992] W.L.D. 176 (South Africa) it was held in a petition which relied on failure to pay a statutory demand as well as inability to pay debts, that it was not necessary to set out the grounds of the company's inability to pay its debts.

3. Is viva voce evidence admissible from the supporting creditors at the hearing of the petition?

At the hearing of the petition any admissible evidence can be adduced so long as it is relevant to the pleadings of the petition. The hearing is the hearing of the allegations contained in the petitioner's petition. It is not a hearing of the Supporting Creditor's petition. But evidence of non-payment of other debts such as those due to the Supporting Creditors as they became due, is admissible as evidence of insolvency on the present petitioner's petition. Creditors in support can through their counsel address the make a Winding Up order. Additionally creditors may be called themselves by the petitioner as witnesses or they may call viva voce evidence themselves in support. It may be that, apart from the statutory demand, there was not at the time of the presentation of the petition, an inability on the part of the Respondent to pay its debts. However it is open to a court to consider other evidence subsequent to such presentation see Syd. Mannix Pty. Ltd. v. Leserv Constructions Pty. Ltd. [1971] 1 NSWLR 788:

"it seems to me that the failure to meet the demand during this period was part of a continued history of failure, all of which added up to evidence of an inability to pay debts" (per Jacobs J.A. at 791c).

Although winding up proceedings often proceed on affidavit evidence alone, viva voce evidence is admissible. Prior to its revocation in 1997 [LN21/97] Rule 5(1)(a) provided that the hearing of the petition was to be a provided that the hearing of the petition was to be a proceeding in open court. Now the proceeding would only move into open court if there were to be viva voce evidence taken. Where the issue is whether or not the debt is disputed on substantial grounds (Stonegate Securities Ltd. v. Gregory [1980] 1 All ER 241) witnesses may need be examined and cross examined. The court chose to receive extensive viva voce evidence in the Bateman and Fildes Bros. case (supra). After all, the affidavit verifying as evidence has limited status. Lindley J. in In Re Gold Mines (1883) 23 Ch. 210 at 214 said:

"The petition is presented by a person who alleges that he is creditor of the Company, and in support of the petition there is the ordinary statutory affidavit, the object of prescribing which is to prevent the abuse of putting upon the file long affidavits in support of the petition which may turn out to be unnecessary. The statutory affidavit strictly is no proof of anything. It is hearsay as to almost everything alleged in it, but it is sufficient to require an answer."

Under Rule 25 there is no requirement for the affidavit verifying to be served on the Respondent, only that it shall be sworn and filed (see In Re M.B. Coogan Ltd. [1953] NZLR 582 at 584). Although regarded as prima facie evidence of the facts of the petition the affidavit verifying has been referred to a amounting to "nothing" Re Western Benefit Building Society [1864] EngR 143; (1864) 33 Beav. 368; 55 ER 409.

Once it is clear the winding up petition is opposed, it is for the petitioner to marshall its evidence for the open court hearing. If the Respondent claims the debt is disputed on substantial grounds, the petitioner will have to satisfy the court that there is no bona fide dispute in law of that order. In effect the court can only act on what is proved before it (Fildes Bros). If it does not, the petition proceedings cannot be used as an expedited and shortened trial procedure for an action for debt. (Investment Corporation of Fiji Ltd. v. Offshore Oil N.L. (unreported) Supreme Court Civil Action 939/83 6^th April 1984 at 10. In Re Lympne Investments Ltd. (1972) 1 WLR 523 at 527D, the affidavits and exhibits were substantial, and the facts complex. Additionally there were allegations of fraud. All of these factors made proceeding by way of petition unsuitable.

I rule that viva voce evidence is admissible at the hearing of the petition, including that from the supporting creditors.

Fiji Law Reports

Kim Industries Limited, In Re (No 2) [2000] FJLawRp 46; [2000] 1 FLR 184 (18 August 2000)