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National Court of Papua New Guinea |
PAPUA NEW GUINEA
[IN THE NATIONAL COURT OF JUSTICE]
MP NO. 6 OF 2021
IN THE MATTER OF THE COMPANIES ACT 1997
AND:
IN THE MATTER OF VITIS INDUSTRIES LTD (1-47820)
Waigani: Tamade AJ
2022: 3rd June; 21st October
COMPANY LAW – statutory demand – company unable to pay debt as they fall due – assets must exceed liabilities – requirements to be declared solvent – debt disputed by company – Company Act 1997 – s 291 and 335
COMPANY LAW – liquidation – solvency test – abuse of debt recovery process by petitioner – Company Act 1997 – s 352 and 353
Cases Cited:
Papua New Guinean Cases
Poya v Paki [2008] PGNC 182; N3535
In re Spence [2007] PGNC 64; N3223
Platinum PNG Ltd, In re [2019] PGNC 397; N8159
In the matter of Commercial Pacific Lumber Exports Pty Ltd [1971] PGSC 54
In the Matter of The Companies Act (Ch 146); In the Matter of Paradise Property and Development Pty Ltd trading as Paradise Real Estate [1994] PGNC 36; N1279
Papua New Guinea Harbours Board v Chris Textiles Ltd [2005] PGNC 102; N2855
In re International Construction PNG Ltd [2007] PGNC 151; N3337
Pacific Rim Constructors - Singapore PTE Ltd v Huala Hire & Construction Ltd [2012] PGNC 45; N4710
Overseas Cases
Rees v Bank of NSW [1964] HCA 47; (1964) 111 CLR 210
Sandell v Porter [1966] HCA 28; (1966) 115 CLR 666
Counsel:
Ms. Belinda Sinen, for the Petitioner
Mr. Adrian. M. Kup, for the Respondent
21st October, 2022
1. TAMADE AJ: This is a decision on the Petition filed by the Petitioner, Remington Technology Limited seeking to wind up the company, Vitis Industries Limited (Vitis), and also seeking that Mr. Michael Mayberry of DFK Mayberry Chartered Accountants be appointed as the Liquidator pursuant to sections 291(2)(c) and 291(3)(a) of the Companies Act 1997.
2. It is the Petitioner’s claim that Vitis Industries Limited is indebted to it in the sum of K225 778.56 for unpaid invoices dated 27 July 2020, 31 August 2020, and 28 September 2020. The invoices are for printing consumables, parts, labour, and what the Petitioner says is preventative maintenance provided by the Petitioner to Vitis pursuant to a Service Agreement entered on or around April of 2020 between the parties.
3. The Petitioner has claimed that after numerous demands and requests for Vitis to pay its debt, Vitis refused to settle its debt, and therefore the Petitioner proceeded to serve a Statutory Demand on Vitis on 21 April 2021 pursuant to section 337(2)(b) of the Companies Act. Vitis, therefore, had a period of one month to settle the said debt in the sum of K225 778.56 from 21 April 2021 up until 21 May 2021 and or alternatively apply to the Court to set aside the Statutory demand within this time.
4. After 21 May 2021, the debt still remained due and owing and the Statutory Demand was not set aside therefore the Petitioner has filed these proceedings to wind up Vitis Industries Limited.
5. On 12 August 2021, Vitis filed an application to dismiss the Petition for being an abuse of process of the Court as Vitis maintained that the proceedings should have proceeded by way of a Writ of Summons as Vitis had outrightly disputed the invoices raised by the Petitioner and the sum claimed as a debt against it. On 21 December 2021, the Court ruled that Vitis had invoked the wrong jurisdiction of the Court as it should have applied pursuant to the provisions of the Companies Act to set aside the Statutory Demand and that it had abused the lawful process by relying on the National Court Rules to dismiss the Petition.
6. Vitis in this case is arguing that it is able to pay its debt as they become due in the ordinary course of business and that it is unjust and inequitable for the Court to appoint a liquidator to manage the affairs of the company when the company is solvent.
The question for the Court to determine in this case is whether Vitis should be wound up or put in to liquidation for failing to comply with a Statutory demand served on the company.
7. Section 291 of the Companies Act is in the following terms with the applicable provisions underlined;
291. COMMENCEMENT OF LIQUIDATION.
(1) A company may be put into liquidation by the appointment as liquidator of a named person.
(2) A liquidator may be appointed by–
(a) special resolution of those shareholders entitled to vote and voting on the question; or
(b) the board of the company on the occurrence of an event specified in the constitution; or
(c) the Court, on the application of the company, or a director or shareholder, or other entitled person, or a creditor of the company
(including any contingent or prospective creditor), or the Registrar.
(3) The Court may appoint a liquidator where it is satisfied that–
(a) the company is unable to pay its debts as they become due in the ordinary course of business; or
(b) the company or the board has persistently or seriously failed to comply with this Act; or
(c) the company does not comply with Section 11; or
(d) it is just and equitable that the company be put into liquidation.
(4) The liquidation of a company commences on the date on which the liquidator is appointed.
8. Vitis is arguing in this case that the Court must first and foremost determine whether Vitis is solvent and thereby it is able to pay its debt as they become due in the ordinary course of business and whether it is just and equitable to put Vitis into liquidation.
9. I take it from the arguments from counsels that there is no issue that a Statutory demand was served on Vitis Industries Limited pursuant to section 337 and section 432 of the Companies Act and that Vitis has not acted in accordance with the Statutory demand to pay up the debt due and owing.
10. There is also no issue that Vitis had not filed an application to set aside the Statutory Demand within one month as is required under section 336(1) of the Companies Act.
The Solvency Test
11. The fundamental question to determine in this case is whether Vitis is solvent within the meaning of the Companies Act.
12. Section 4(1) of the Companies Act is in the following terms:
4. MEANING OF “SOLVENCY TEST”.
(1) For the purposes of this Act, a company satisfies the solvency test where–
(a) the company is able to pay its debts as they become due in the ordinary course of business; and
(b) the value of the company’s assets is greater than the value of its liabilities, including contingent liabilities.
13. Both requirements under section 4(1)(a) and (b) therefore must be met before a company is put into liquidation. The Court said this in the case of Poya v Paki[1] that:
“Solvency is an important consideration in an application to terminate liquidation. The question is whether the company meets the solvency test. There are 2 requirements: First, the company must be able to pay its creditors as the debts fall due. Second, assets must exceed liabilities. Both requirements must be met before a company is said to be solvent (see In the matter of an application by Agmark Pacific Ltd and James Sinton Spence Liquidator of Sepik Coffee J. V. Ltd (In Liquidation) (2007) (N3223).
14. The meaning of Inability to Pay Debts is as stated in section 335 of the Companies Act as:
335. MEANING OF “INABILITY TO PAY DEBTS”.
Unless the contrary is proved, and subject to Section 336, a company is presumed to be unable to pay its debts as they become due in the ordinary course of business where–
(a) the company has failed to comply with a statutory demand; or
(b) execution issued against the company in respect of a judgment debt has been returned unsatisfied in whole or in part; or
(c) a person entitled to a charge over all or substantially all of the property of the company has appointed a receiver under the
instrument creating the charge; or
(d) a compromise between a company and its creditors has been put to a vote in accordance with Part XV but has not been approved.
15. It is Ms. Sinen’s argument that as Vitis is unable to pay its debt as and when the debt falls due in failing to comply with the Statutory Demand, it has not met the solvency test notwithstanding whether its assets exceed its liabilities.[2] Ms. Sinen has also relied on the case of Platinum PNG Ltd[3] where His Honour Justice Anis considered a similar case in regard to a company being unable to meet it’s debt as and when they become due in the ordinary course of their business. His Honour found on the first limb of the solvency test the following:
“15. And the failure by the respondent to comply with the statutory demand means that it is presumed, pursuant to section 335 of the Companies Act, that the respondent is unable to pay its debts as they become due in the ordinary course of business. I find that to be the case herein.
16. With the said presumption now established to my satisfaction by the petitioner, the burden of proof, in my view, shall shift to the respondent to prove otherwise. That is, the respondent should prove to my satisfaction that it is in fact able to pay its debts as they become due in the ordinary course of business”.
16. I agree with His Honour’s decision in part that there exists a presumption that because Vitis was unable to meet the Statutory Demand and pay up the debt within the prescribed time, it was unable to pay its debt. His Honour in the Platinum case found that the debt owing in that matter was outstanding for 4 years and 3 months even though the Respondent, in that case, had argued that it had assets to the tune of K3.3 million. His Honour said this:
The respondent also argues that it has assets that are worth K3.3 million, namely, the estimated value of its 20 allotments at the Kennedy Estates. I find this argument misconceived. Let me explain. Having valuable assets cannot itself be a valuable consideration under section 291(3)(a) of the Companies Act. In other words, it cannot be a relevant consideration to test one’s ability to pay one’s debts as and when they fall due in the ordinary course of business.”
17. Mr. Kup on the other hand argues that the Court should also consider the second limb of the test whether a company’s assets exceed its’ liabilities. This follows the solvency test requirements in section 4 (1) of the Companies Act that both criteria must be met together.
18. Section 4(2) of the Companies Act is in the following term:
2) Without limiting Sections 50 and 53(3), in determining for the purposes of this Act (other than Sections 234 and 235 which relate to amalgamations) whether the value of a company’s assets is greater than the value of its liabilities, including contingent liabilities, the directors–
(a) shall have regard to–
(i) the most recent financial statements of the company that comply with Section 179; and
(ii) all other circumstances that the directors know or ought to know affect, or may affect, the value of the company’s assets
and the value of its liabilities, including its contingent liabilities; and
(b) may rely on valuations of assets or estimates of liabilities that are reasonable in the circumstances.
19. The Supreme Court in the case of In the matter of Commercial Pacific Lumber Exports Pty Ltd[4] referred to the case of Rees v Bank of NSW[5] wherein the High Court in Australia said this:
It is quite true that a trader, to remain solvent, does not need to have ready cash by him to cover his commitments as they fall for payment, and that in determining whether he can pay his debts as they become due regard must be had to his realizable assets. The extent to which their existence will prevent a conclusion of insolvency will depend on a number of surrounding circumstances, one of which must be the nature of the assets and in the case of a trader, the nature of his business. Here the company's business was the sale of foodstuffs through a number of retail outlets. The asset whose value was said to negative a conclusion of insolvency, or at any rate to obviate the suspicion of it, was its trading stock of foodstuffs. In the ordinary course of the company's business, this asset was not available to be realized except by means of retail sales through its various shops. It is possible, of course, in a business such as that of the company for excess stocks to be realized otherwise than through the channels of the company's retail business: but, although there had been an abortive negotiation for a total takeover of the company's business, no proposal to realize surplus stock by some bulk disposal for cash was in contemplation.
20. I also adopt the following principle from the Supreme Court in In the matter of Commercial Pacific Lumber Exports Pty Ltd[6] in referring to Sandell v Porter[7]:
...Insolvency is expressed in s. 95 as an inability to pay debts as they fall due out of the debtor's own money. But the debtor's own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time - relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor's financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor's inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency. Whether that state of his affairs has arrived is a question for the Court...”
21. I am therefore of the view that the question of whether a company should be put into liquidation is for the Court to consider whether a company meets the solvency test in section 4(1) of the Companies Act should include the following:
22. In this case before me, I find that the presumption in section 335 of the Companies Act does exist but is negated by the fact that Vitis vehemently disputes the debt owing and puts forth evidence to say that its assets exceed its liability, and it has been making profit in excess of K12 million in 2020. Mr. Kup submits that a presumption that a company is unable to pay its debt as and when it falls due in the ordinary course of its business does not mean that it is insolvent.
23. Mr. Kup has relied on the case of In the Matter of The Companies Act (Ch 146); In the Matter of Paradise Property and Development Pty Ltd trading as Paradise Real[8] for the proposition that the refusal of a company to pay a debt where it substantially disputes a debt should not equate to the company’s deemed inability to pay the debt within the course of its business. This proposition is supported in the case of Papua New Guinea Harbours Board v Chris Textiles Ltd[9] where the Court said:
I adopt the principles of fairness which Kirriwom, J did adopt in Labu Holdings Limited v. Gaman Holdings Ltd (MP 324 of 2003) unnumbered and unreported, 8th June 2004 at p.6 of the Court’s judgment in referring to that principle established in Processed Sand Pty Ltd v. Thiess Contractors Pty Ltd (1983) ACLR 956 per Waddell, J at p.961, which was cited by Kapi, DCJ (as he then was) in. In the Matter of Paradise Property and Development Pty Ltd t/a Paradise Real Estate [1994] PNGLR 286:
"if a notice of demand is given for a sum, part of which is genuinely disputed on substantial grounds, an omission on the part of the company to pay any amount in response to the demand will not give rise to a deemed inability to pay its debts" (my own emphasis).”
24. Justice Hartshorn in the case of In re International Construction PNG Ltd[10] also stated that an allegation of an inability to pay a debt must be proven by evidence and found that the Respondent in that matter acknowledged that it had owed the Petitioner a large sum but took no action to make good on the debt and the Court found that it was unable to pay it’s debt.
25. In a case where a debt is substantially in dispute, Statutory demands have been held to be set aside[11] and I accept these submissions from Mr Kup of the Respondent.
26. In reading the Affidavits of Vikki Mosin, Sergey Mosin of the Respondent Company, and Justine Kieseker of the Petitioner it appears that the debt the Petitioner claims as owing is in regard to a printing machine described as a Konica Minolta Accurio Label 190. The Respondents state that they were offered to purchase the machine outright for the price of K1 297 435.70 (inclusive of GST) and or to purchase the machine overtime with a service agreement. The Respondent states that it purchased the machine outright however they were surprised to receive invoices from the Petitioner in the total sum of K225 778.56 being for what they say is the cost of printing in the sum of K21 per page of printing whereas they have outrightly purchased the machine.
27. I find in this matter, a substantial dispute as to the debt owed by Vitis as there seems to be a disagreement on the terms of the purchase of the machine described as a Konica Minolta Accurio Label 190, the legality of the agreement relating to the purchase of the machine whether the responsible officer in Vitis had the authority to bind the company as to the purchase of the machine and the veracity of the work or the costs incurred in the invoices.
28. Vitis has also strenuously argued that it took a substantial dispute over this debt however whilst it was still trying to clarify the debt and attempting to get to the bottom of the invoices raised by the Petitioner, the Petitioner proceeded to Court by way of issuing a Statutory Demand and seeking to put Vitis into liquidation when the debt is substantially disputed.
29. I find that in the evidence of Sergey Mosin, Vitis has a total valued assets of K100 968 294 and liabilities of K31 902 681. Vitis is therefore solvent within the meaning of section 4(1) of the Companies Act that even though it did not comply with a Statutory Demand served by the Petitioner, it can not be deemed as unable to pay its’ debt as they become due in the ordinary course of its business as it has cash or fluidity and it had assets that can be converted to meet the debt however it substantially disputes the alleged debt from the Petitioner and therefore refused to pay.
30. Based on the substantial dispute over this debt and the fact that Vitis is able to meet its debt as and when they become due as passing the solvency test, it is therefore unjust and inequitable pursuant to section 291(3)(d) of the Companies Act to put Vitis into liquidation.
31. A claim for winding up of Vitis pursuant to section 291(3) of the Companies Act is therefore refused.
Has the Petitioner acted appropriately to bring this proceedings for the winding up of Vitis?
32. I am of the view that the Petitioner has used this debt recovery method of issuing a Statutory Demand and attempting to wind up Vitis as punitive in nature to push Vitis into a wall with no room to move so to speak so it can be compelled to pay up the full debt without any question as to the challenge to the debt. This to my mind is an abuse of process.
33. The Petitioner will end up below the list of creditors as an unsecured creditor pursuant to section 352 of the Companies Act where a secured creditor who has a more secured debt in terms of a lien or charge over an asset pursuant to section 353 of the Companies Act however the exercise of putting Vitis into Liquidation may be futile if the Liquidator takes issue with the debt on the issues now raised by Vitis.
34. It is on this basis that I will order costs punitively as against the Petitioner to be on a solicitor-client basis.
35. This is a more suitable matter to be mediated upon pursuant to the ADR Rules and parties are to take this into account.
36. The Court, therefore, makes the following orders:
Orders accordingly.
_____________________________________________________________
Pacific Legal Group Lawyers: Lawyers for the Petitioner
Vitis Industries Limited Inhouse Counsel: Lawyers for the Respondent
[1] [2008] PGNC 182; N3535 (8 December 2008)
[2] In re Spence [2007] PGNC 64; N3223 (17 August 2007)
[3] [2019] PGNC 397; N8159 (17 December 2019)
[4] [1971] PGSC 54 (2 June 1971)
[5] [1964] HCA 47; (1964) 111 CLR 210 (14 August 1964) at paragraph 7.
[6] Supra N4
[7] [1966] HCA 28; (1966) 115 CLR 666 (13 May 1966) at paragraph 15.
[8] [1994] PGNC 36; N1279 (14 December 1994)
[9] [2005] PGNC 102; N2855 (31 May 2005)
[10] [2007] PGNC 151; N3337 (19 November 2007)
[11] Pacific Rim Constructors - Singapore PTE Ltd v Huala Hire & Construction Ltd [2012] PGNC 45; N4710 (20 June 2012)
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