In the Mattter of Kamsi Trading Ltd (1-13612) [2005] PGSC 44; SC784 (6 May 2005)

SC784

PAPUA NEW GUINEA

[SUPREME COURT OF JUSTICE]

SCA NO. 35 OF 2005

WEP KILIP
First Appellant/Applicant

AND

IN THE MATTER OF KAMSI TRADING LIMITED (1-13612)
Second Appellant/ Applicant

AND

IN THE MATTER OF AN APPLICATION BY THE LIQUIDATOR, HUGH MOSLEY
Respondent

LAY J
PORT MORESBY
2005: 2nd and 6th May 2005

APPLICATION FOR A STAY OF NATIONAL COURT ORDER — single judge of the Supreme Court — Supreme Court Act s5(1)(b) & s19 — Supreme Court Rules O3 r2 — considerations for a stay.

Application for a stay of order refusing termination of liquidation—considerations for terminating a liquidation—Companies Act s300—factors for enquiry into whether termination "just and equitable".

Cases Cited:
Gary McHardy v Prosec Security and Communications Ltd t/a Protect Security SC645

Overseas Cases:
Calgary and Edmonton Land Co Ltd (1975) 1 All E.R. 1046;
El-Fahkri, in the matter of Elpah Pty. Ltd (In Liq) [2002] FCA 1469
Metledge v Bambakit Pty. Ltd; Manuel Koutsourais, Applicant [2005] NSWSC 160;
Re Warbler Pty Ltd (1982) 6 ACLR 526
Re South Barrule Slate Quarry Co (1869) 8 Eq 688;
Re Bank of Queensland Ltd (1870) 2 QSCR 113;
Krextile Holdings Pty Ltd v Widdows [1974] VicRp 83; [1974] VR 689;
Re Data Homes Pty Ltd [1971] 1 NSWLR 338;
In re a Private company [1935] NZGazLawRp 17; (1935) NZLR 120;
Re Mascot Home Furnishers Pty Ltd [1970] VicRp 78; (1970) VR 593;
Re Telescriptor Syndicate Ltd [1903] UKLawRpCh 65; [1903] 2 Ch 174;
Ayerst (Inspector of Taxes) v C & K (Construction) Ltd AC 167;
Buchler and Anor. (as joint liquidators of Leyland Daf Ltd) (Respondents) v Talbot and ANor. (as joint administrative receivers of Leyland Daf Ltd) and others (Appellants) and others [2004] UKHL 9

Counsel:
Mr. A. Furugi for the Applicant Appellant
Mr. I. Shepherd for the Respondent

Facts:

The Applicant Appellants sought to stay the order of the National Court refusing an application to terminate the liquidation of the Second Appellant, which was commenced in December 2002. The application was refused inter alia because the Applicants had not demonstrated that (a) the creditors had been paid or consented (b) the shareholders consented (c) the liquidator had been paid.

Held:

The factors set out in SC645 Gary McHardy v Prosec Security and Communications Limited trading as Protect Security were applied to determine whether or not to grant a stay. Those factors included (1) whether there was an error on the face of the record and (2) whether a preliminary examination showed an arguable case on the appeal. It was necessary to examine the principles applicable to the termination of a liquidation which is an enquiry into whether it was just and equitable to terminate the liquidation. Factors to consider include (a) whether the creditors and contributories had been served with the application; (b) the nature and extent of the creditors & whether all of the debts have been or will be discharged; (c) the attitude of creditors, contributories and the liquidator; (d) the current trading position of the company and its general solvency should be demonstrated; (e) any non compliance by directors with their statutory duties should be fully explained with all reasons and circumstances; (f) the general background which led to the winding up should be explained; (g) the nature of the business carried on by the company should be demonstrated and whether in any way the conduct of the company was contrary to commercial morality or the public interest.

It had not been demonstrated that the company was solvent, or that all of the creditors had been paid, or that the shareholders agreed. The liquidator had not been paid. The company had not paid tax or lodged returns to the Commissioner of Internal Revenue or the Registrar of Companies. There was no error on the face of the record. There did not appear to be any arguable case on the appeal. The balance of convenience and interests of justice did not favour granting a stay. Application refused.

The Applicant applies for a stay pursuant to s19 of the Supreme Court Act and O3 r2(b) of the Supreme Court Rules, of an order of the National Court dismissing an application to terminate the liquidation of the Second Appellant.

On 10th December 2002 a winding up order was made against the Second Appellant in respect of the petitioning creditor’s debt of K5,627.86. The debt was paid in full on 21st January 2003 to the lawyers for the petitioning creditor. An invitation for proofs of debt was issued which attracted claims totalling K309,498.54 excluding legal and liquidators fees. Unknown amounts may be due for group tax and income tax as the Second Appellant has never paid anything for these taxes. There is a claim by the liquidator for K107,000 in costs including legal costs. K290, 284.20 in claims have been paid, or rejected by the liquidator. The First Appellant, a director and shareholder of the Second Appellant, has not co-operated with the liquidator. He has not provided documents from which the Liquidator might calculate the amount due, if any, to the Commissioner of Taxation. The Liquidator has sold two trucks which were the property of the Second Appellant and at this time the First Appellant still refuses to give possession of one of the trucks to the purchaser.

Submissions

The Appellants submit that the First Appellant is struggling financially, that there are strong grounds for believing the appeal will succeed because the Liquidator did not acknowledge that the petitioners debt had been paid, there was no evidence that other creditors had entered appearances in the proceedings on the petition or sought to be substituted for the petitioning creditor, there was no liquidator’s report, the costs of the liquidator compared with the petitioning creditors debt is unjust, the Court should not have relied upon Re Calgary and Edmonton Land Co Ltd[1]("Re Calgary") because that case dealt with a stay not a termination; and it is not to the point that the Appellant’s wife and co-shareholder did not consent to the termination of the liquidation because s300(1) of the Companies Act is wide enough for a single shareholder to apply. The Order of the National Court causes hardship and inconvenience, its results in a breach of natural justice as assets of the company will continue to be sold after the petitioner’s debt has been paid off. The Liquidator’s costs are excessive and should be pursued by way of writ of summons. A stay will not jeopardise the Liquidator’s position.

The Respondent submitted that there was no evidence that the Second Appellant would be solvent if the liquidation was terminated; the petitioner’s debt was still an issue because it was paid to the petitioner after the liquidation commenced and constituted a preference. The affidavit of the liquidator which was before the judge in the National Court showed there were other debts beside that of the petitioner. Re Calgary was applicable to a stay or a termination and was authority for the proposition that it would not be granted unless (a) all creditors have been paid or consent (b) the liquidator has been paid (c) the shareholders agree. The prospects of obtaining leave are limited. There has been considerable delay in making the application, the liquidation order was made in December 2002 and this application has been instigated by the liquidator seeking to sell certain assets of the Second Appellant. There are little prospects of the appeal succeeding.

The Law

Supreme Court Act s19 provides that an appeal does not operate as a stay unless "otherwise ordered by the Supreme Court or a judge". Inferentially the Court or a judge may order a stay, and this is an exercise of the jurisdiction given by s5(1)(b) of the Supreme Court Act and O3 r2 of the Supreme Court Rules "to make an interim order to prevent prejudice to the claims of the parties." Some of the matters to be taken into account when considering an application for a stay are:

"...the judgment creditor is entitled to the benefits of the judgment. The other factors include the following:

Whether leave to appeal is required and whether it has been obtained;

Whether there has been any delay in making the application.

Possible hardship, inconvenience or prejudice to either party.

The nature of the judgment sought to be stayed.

The financial ability of the applicant.

Preliminary assessment about whether the Applicant has an arguable case on the proposed appeal.

Whether on the face of the record of the judgment there may be indicated apparent error of law or procedure.

The overall interest of justice.

Balance of convenience.

Whether damages would be sufficient remedy."[2]

A company may be placed into liquidation if it is insolvent, that is, it is unable to pay its debts as they fall due in the ordinary course of business.[3]

An application to terminate a liquidation can be made by the liquidator, a director or a shareholder, any other entitled person, the Registrar of companies or a creditor.[4] In some jurisdictions there is, or was in the past no provision for a termination of the winding up. What was available to an applicant was an order permanently staying the winding up. Re Calgary addresses such a situation. But since Re Calgary, even where legislation has introduced a power to terminate the winding up the factors mentioned in Re Calgary ( (a) whether the creditors have been paid or consent (b) that the liquidator has been paid (c) the shareholders agree) have continued to be considered relevant. See for example El-Fahkri, in the matter of Elfah Pty Ltd (in liq)[5] which was an application to terminate a winding up. His Honour observed that:

"In England it has been held that not only does it lie on those who seek a stay (there being no power to order a termination) to make out a sufficient case for it is also necessary for the applicant to "make out a case that carries conviction": In re Calgary and Edmonton Land Co Ltd (in liquidation) [1975] 1 WLR at 358-359. The position in Australia is not so strict. In cases such as Alexander v Cambridge Credit Corporation Ltd [1985] 2 NSWLR 685 and Aetna Properties Pty Ltd v G A Listing and Maintenance Pty Ltd (1994) 13 ACSR 422 it has been held that this court does not have to find special reasons for a stay or termination. But there must be some valid reason why it is appropriate to make the order rather than let the liquidation take its normal course...In addition to Megarry J's three factors, it is also necessary to consider the public interest. That is, the court must consider not only whether the stay or termination is for the benefit of creditors and members but also whether it is conducive or detrimental to commercial morality and to the interests of the public at large: see Re Telescriptor Syndicate Ltd [1903] UKLawRpCh 65; [1903] 2 Ch 174, 180; Chan v Austgrove Enterprises Pty Ltd [1993] 12 ACSR 427.

In that case an order was made to terminate the liquidation upon the applicants undertaking to instruct their solicitors to hold the sum of $20,000 in their trust account for the liquidator’s fees. It had been demonstrated to the court that the company had very substantial assets, the petitioning creditor’s debt was not a debt of the company, all creditors would be paid and the liquidator supported the application.

It is also useful to set out some factors for consideration mentioned by Barret J of the NSW Supreme Court Equity Division in the case of Metledge v Bambakit Pty Ltd; Manuel Koutsourais, Applicant[6]:

"The court may have regard to a range of factors. While not to be rigidly applied (Dubolo Pty Ltd v Codrington Investment Corporation Pty Ltd (1998) 26 ACSR 723), the list of criteria set out in the judgment of Master Lee QC in Re Warbler Pty Ltd (1982) 6 ACLR 526 provides useful guidance:

"1. The granting of a stay is a discretionary matter, and there is a clear onus on the applicant to make out a positive case for a stay: In Re: Calgary and Edmonton Land Co Ltd (In liq) (1975) 1 WLR 355 at pp 358-359 per Megarry J. See also sec. 243 of the Act [i.e, Companies Act 1961].

2. There must be service of notice of the application for a stay on all creditors and contributories, and proof of this; Re South Barrule Slate Quarry Co (1869) 8 Eq 688; Re Bank of Queensland Ltd (1870) 2 QSCR 113.

3. The nature and extent of the creditors must be shown, and whether or not all debts have been or will be discharged: Krextile Holdings Pty Ltd v Widdows (supra) [[1974] VR 689]; Re Data Homes Pty Ltd (supra) [1971] 1 NSWLR 338], Law of Company Liquidation (supra) at p 395.

4. The attitude of creditors, contributories and the liquidator is a relevant consideration: sec. 243(1), Calgary and Edmonton Land Co Ltd (supra).

5. The current trading position and general solvency of the company should be demonstrated. Solvency is of significance when a stay of proceedings in the winding-up is sought: In re a Private Company [1935] NZGazLawRp 17; (1935) NZLR 120; Re Mascot Home Furnishers Pty Ltd [1970] VicRp 78; (1970) VR 593 at p 598.

6. If there has been non-compliance by directors with their statutory duties as to the giving of information or furnishing a statement of affairs, a full explanation of the reasons and circumstances should be given: Re Telescriptor Syndicate Ltd (supra) [[1903] 2 Ch 174].

7. The general background and circumstances which led to the winding-up order should be explained: Krextile Holdings Pty Ltd v Widdows (supra).

8. The nature of the business carried on by the company should be demonstrated, and whether or not the conduct of the company was in any way contrary to ‘commercial morality’ or the ‘public interest’: Krextile Holdings Pty Ltd v Widdows (supra)."

The power of the Court in NSW is now set out in Section 482(1) of the Companies Act in the following terms, the other subsections replicating many of the provisions in our s300:

"At any time during the winding up of a company, the Court may, on application, make an order staying the winding up either indefinitely or for a limited time or terminating the winding up on a day specified in the order"

As to the need to serve creditors with the application for termination, s300(1) of the Companies Act provides:

"(1) The Court may, at any time after the appointment of a liquidator of a company, if it is satisfied that it is just and equitable to do so, make an order terminating the liquidation of the company."

The effect of a liquidation is provided by the Act in s298(1)(a)&(b):

"(1) With effect from the commencement of the liquidation of a company—

(a) the liquidator has custody and control of the company's assets; and

(b) the directors remain in office but cease to have powers, functions, or duties other than those required or permitted to be exercised by this Part; ..."

The nature of that possession of the assets has been described as a trust of all of the assets to discharge the company’s liabilities:

The winding up of a company is a form of collective execution by all its creditors against all its available assets. The resolution or order for winding up divests the company of the beneficial interest in its assets. They become a fund which the company thereafter holds in trust to discharge its liabilities: Ayerst (Inspector of Taxes) v C & K (Construction) Ltd [1976] AC 167. It is a special kind of trust because neither the creditors nor anyone else have a proprietary beneficial interest in the fund. The creditors have only a right to have the assets administered by the liquidator..."[7]

Of course, our Companies Act provides that the liquidator and not the company has custody and control of the assets. Nevertheless I consider that the creditors have sufficient interest in the assets of a company in liquidation to have an opportunity to voice their attitude if it is proposed to put those assets back into control of the company before all of those creditors have been paid. If the creditors have not given their consent, then they should be served with notice of intention to make the application. Without the views of the creditors it would be very difficult for the Court to ascertain whether or not it was just and equitable to terminate the liquidation; except where it is clearly demonstrated that the assets far exceed the liabilities and that cash resources are sufficient to pay all creditors.

Each of the other considerations mentioned by Master Lee QC in Re Warbler Pty Ltd and by Megarry J in Re Calgary are relevant considerations in the court’s enquiry into whether it is just and equitable that the liquidation be terminated and I adopt them to assist in consideration of that issue, as it affects the granting of a stay, that is whether the Applicants have demonstrated an arguable case on appeal or whether there is an error on the face of the record of the judgment.

This Case

Leave to appeal is required in this case. An application has been filed and is yet to be heard. The nature of the judgement to be stayed is the refusal by the National Court of the Appellants application to terminate the liquidation of the Second Appellant. Although the Application has been prompted by the liquidator's recent proposal to sell a specific asset, that is just another step in a liquidation which commenced in December 2002. There was therefore very substantial delay in bringing the application to the National Court, but there has been no appreciable delay in bringing this application.

The First Appellant has deposed to the fact that he is struggling financially. I infer that he is not in a position to put further capital into the Second Appellant.

In this case no material has been presented to the Court to demonstrate:

1. that the company would be solvent and able to pay its debts as they fall due upon termination of the liquidation. I do not accept the evidence that the petitioning creditors debt was the only debt of the Second Appellant. All that is before the Court as far as the assets are concerned is that the Second Appellant owned some trucks which the Liquidator sold and it owns some land which the Liquidator wishes to sell. As to the liabilities, the Appellants refer only to the petitioning creditors debt and do not set out in the ordinary and proper way the liabilities of the Second Appellant. No accounts have been produced. It is the statutory duty of the directors of a company to have prepared accounts for each financial year. Counsel for the Appellants conceded during argument that as the liquidation had commenced by a judicial finding that the Company was unable to pay its debts as they fell due, it was a fundamental issue for consideration on an application to terminate a liquidation, that the Company would be able to pay its debts as they fell due after termination of the liquidation. There is no material before the Court, nor was there before the National Court, from which such a conclusion could be drawn.
   
2. that the creditors, such as they are, have been served with or consent to the application;
   

100. that the First Appellant’s wife, a 50% shareholder of the Second Appellant, agrees to the application. It is true, as the Appellants submit, that s300 of the Companies Act 1997 is wide enough for a single shareholder to apply. But Re Calgary is not concerned with the making of the application; it is concerned with the granting of the application, as is this Court. It is an important consideration on an application of this nature, that the shareholders agree;
     

4. the Appellants really avoid the issue of the true nature and extent of the creditors by saying that there is no evidence of proofs of debt, and by withholding documents from the Liquidator from which he could make an independent assessment of the Second Appellants position. That the evidence before Justice Gabi as to the existence of other creditors was omitted from the material filed in this application and had to be provided by the Respondent, seems to be rather indicative of the Applicants attitude to creditors;
   
5. no explanation has been proffered as to why the First Appellant has not co-operated with the liquidator to provide information in accordance with his statutory duty to do so, and why he has not delivered the vehicle, sold by the Liquidator, to the purchaser;
   
6. the information on the background leading to the liquidation is sketchy, it does not give a full account of the manner in which the Second Appellant traded, it particularly gives no information with regard to the assertions by the Liquidator that the Second Appellant has not paid taxes, nor filed tax and company returns and this goes to the point of whether the Second Appellant has traded to the detriment of corporate morality, and in the circumstances whether it is in the interests of the public generally that the Second Appellant be allowed to go forth into the world of commerce again. I find that the evidence of the Liquidator that the Second Appellant has not paid taxes nor filed tax and company returns is against the exercise of the Courts discretion and against a finding that it is just and equitable to stop the liquidation.
   

For those reasons I do not consider that the Applicants have shown any apparent error on the face of the record of the judgment. For the same reasons my preliminary assessment of whether the Appellants have an arguable case on the proposed appeal is that none has been demonstrated.

To address all of the Applicants other submissions, first, counsel for the Appellants conceded during submissions that the submission regarding substitution of the petitioning creditor were irrelevant once the winding up order had been made. Second, that the order of the National Court causes hardship and inconvenience may be so, but only according to law. The precise details of what inconvenience and hardship were caused was not provided, other than to say that the First Appellant was struggling financially. There was no evidence that his situation would be relieved by termination of the liquidation. In any event, once the winding up order has been made the interests of the creditors and the public must prevail over those of the shareholders and directors. In respect of the submission that the Liquidators fees are excessive, there is evidence that at one stage the Liquidators fees were K30, 000 and there then arose an opportunity to terminate the liquidation, but the Appellants did not avail themselves of it. It is the non payment of those Liquidator’s fees and the First Appellant’s past and present failure to co-operate with the Liquidator which has extended the liquidation and has no doubt made it difficult for the Liquidator to complete a comprehensive and professional report of the Second Appellant’s true position.

That assets of the Second Appellant will continue to be sold after the petitioner’s debt has been paid is true. It is because the First Appellant’s actions have protracted the liquidation and consequently the costs have risen. The assertion that the Liquidator’s fees are excessive is a very ‘one eyed’ view of the facts. It isn’t a judgement which this Court is equipped to make because of the paucity of the information which the Appellants Application has put forward. Nor do I consider that it would be a relevant factor in the enquiry into whether it was just and equitable to terminate the liquidation, unless most of the other relevant factors were in favour of the Applicants. Liquidators fees are governed by ss324 and 325 of the Companies Act and any challenge to the Liquidator’s fees should be made by seeking an order under s324(2).

It is however pertinent to note that liquidators are senior members of the accountancy profession. They are appointed because of the confidence held in their ability to discharge the onerous and sometimes complex responsibilities cast upon them by the Companies Act and other legislation. They are therefore remunerated at rates appropriate to senior members of the profession and this can be very expensive if liquidation extends over a lengthy period. The fees can be minimized by the directors of the company in liquidation providing prompt and full co-operation with the liquidator with all of the information required of them by the Companies Act, so that in the shortest possible time:

1. the true position of the company can be ascertained; and,
   
2. assets are sold to pay the creditors and the liquidator.
   

It is regrettable that course was not adopted by the directors in this case.

In all of the circumstances of this application I consider that the overall interests of justice and the balance of convenience do not favour the Applicants.

I refuse the applicant for a stay.
______________________________________________________________
Lawyers for the Applicant Appellants : Furugi Lawyers
Lawyers for the Respondent : Blake Dawson Waldron

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^[1] (1975) 1 ALL E.R. 1046
^[2] SC645 Gary McHardy v Prosec Security and Communications Limited t/a Protect Security
^[3] Companies Act s.291(3)
^[4] Companies Act s300(2)
^[5] [ 2002] FCA 1469 Finkenstein J para’s 5 & 8
^[6] [2005] NSWSC 160 at para. 5

^[7] Buchler and another (as joint liquidators of Leyland Daf Limited) (Respondents) v. Talbot and another (as joint administrative receivers of Leyland Daf Limited) and others (Appellants) and others [2004] UKHL 9 per Lord Hoffman at para 28