Re Trading Company (Solomons) Ltd [1983] SBHC 28; [1983] SILR 180 (6 September 1983)

[1983] SILR 180

IN THE HIGH COURT OF SOLOMON ISLANDS

Civil Case No. 48 of 1983

RE TRADING COMPANY (SOLOMONS) LIMITED

High Court of Solomon Islands
(Daly C.J.)
Civil Case No. 48 of 1983

6th September 1983

Company - winding up - appointment of provisional liquidator - principle of - practice - affidavit evidence - approach to - s226 Companies Act.

Facts:

A Petition was presented for the winding up of a company. The Company brought an action against the Petitioner claiming damages. The Petitioner applied for the appointment of a provisional liquidator. The company opposed the appointment.

Held:

Section 226 of the Companies Act provided the court with an unfettered discretion as to appointment. The questions to be asked were first had the Petitioner made out a good prima facie case for winding upon the hearing of the Petition? In this case that question was subdivided into -

(a) Has the Petitioner established a good prima facie case of its entitlement to present the Petition as a creditor; and

(b) Has the Petitioner established a good prima case that on the hearing a winding up order be made?

As the claim in the action by the company would not extinguish the debt of the Petitioner then the answer to (a) was yes. After examination of the solvency of the company the answer to question (b) was also found to be yes.

It must then be asked, whether in the circumstances of the case it is right for the provisional liquidator to be appointed? On the facts a case had been made out and the provisional liquidator would be appointed. In so finding the court could consider whether affidavits were of such plausibility as to be worth of credibility.

Cases considered:

Re Union Accident Insurance Co. (1972) 1 All E.R. 1105
Eng Mee Yong - v - Letchumanan (1980) A.C. 331
Re Club Mediterranean Pty Ltd (1975) 11 S.A.S.R. 481

For Petitioner: R. Dowsett and F. Waleilia
For Company: D. Draydon and A. Nori

Daly CJ: In this matter a Winding - up Petition was presented upon 25th May 1983 seeking that Trading Company (Solomons) Limited (“the Company”) be wound up by the Court. The Petitioner is Queensland Independent Wholesalers Limited (“the Petitioner”) who claimed in the Petition that the Company was indebted to lot in the sum of $A552, 793.62. As we shall see, this indebtedness is disputed by the Company. The Petition goes on to allege (para 13) that the Company is insolvent and unable to pay its debts and in the circumstances it is just and equitable that the Company should be wound - up.

On the 1st June 1983 as a result of an ex parte application by the Company, the Petitioner was restrained by injunction from advertising the Petition for seven days. That injunction has not been renewed to the present date.

On 8th June 1983 a writ was issued by the Company against the Petitioner claiming damages for breach of an agreement said to subsist between the parties. The writ is in fact indorsed as a claim for specific performance as well as damages but the Statement of Claim filed on the same day only claims damages. I shall call those proceedings “the action”.

In these present proceedings this court has before it a Summons and a Notice of Motion relating to the Winding - up Petition. The Summons was taken out by the Petitioner on the 25th August 1983 and seeks the appointment of a Provisional Liquidator. The Notice of Motion was taken out by the Company on the 29th July 1983 and seeks a further interim injunction to restrain advertisement of the Petition. It. is agreed by both parties that I should deal with the Summons first as, if the Court decides to appoint a provisional liquidator, then an injunction in the terms sought would no longer be desirable.

Section 226 of the Companies Act (Cap 66) provides as follows: -

“226 (1) Subject to the provisions of this section, the court may appoint a liquidator provisionally at any time after the presentation of a winding – up petition.

(2) The appointment or a provisional liquidator may be made at any time before the making of a winding - up order, and either the official receiver or any other fit person may be appointed.

(3) Where a liquidator is provisionally appointed by the court, the court may, limit and restrict his powers by the order appointing him.”

This section gives, as can be seen, an unfettered discretion. However similar provisions in legislation elsewhere have been considered by the courts and these decisions are helpful in indicating the approach to be adopted in exercise of the discretion. In Re Union Accident Insurance Company (1972) 1 All E.R. 1105 Plowman J of the English Chancery Division considered an appointment under the terms of section 238 of the Companies Act 1948 upon which our section 226 is clearly based. A submission was made that there must be “special circumstances” before an appointment could be made and these were such things as “danger to the assets on proof of insolvency, or the fact that the Petition was undefended”. Of this submission Plowman J said (at page 1109): -

“I am not prepared to accept that those examples of cases in which the provisional liquidator would be appointed are the only cases in which an appointment may be made. There is no such limitation in s. 238 of the Companies Act 1948, which confers a quite general power on the court to appoint a provisional liquidator and depending on the circumstances of each particular case, there may be other matters which may be relevant, such as the public interest which is a matter to which I will refer again in a moment or two.”

Later the learned judge continued (at page 1110): -

“There are two matters though, which seem to be relevant for me to consider. The first is whether the department has made out a good prima facie case for a winding - up at the hearing of the petition. Any views I express about the matter now are of course provisional only because I am not trying the petition at the present time. If the department has not made out a good prima facie case for a winding - up order I then clearly I think it would not be right to appoint a provisional liquidator. On the other hand, if the department has made out a good prima facie case for a, winding - up order then the second matter for my consideration arises, namely, whether in the circumstances of this case it is right that a provisional liquidator should have been appointed.”

I should refer to one further passage in this valuable, judgment before turning to the issue in this case. At pages 1109 and 1110 Plowman J says: -

“I have been supplied with a good deal of evidence in this case and a lot of figures, but I do not propose to investigate the facts and figures in any great detail. In particular I do not propose to decide whether the necessary margin of solvency exists at the present time or not. It seems to me that that is a matter which will have to be decided on the hearing of the petition and almost certainly only after there has been cross examination on the affidavits which have been put in.”

I too have heard a good deal of evidence on affidavit and, indeed some cross examination. There are conflicts in this evidence, some of which it will be necessary for me to consider. However where possible I would at this preliminary stage prefer to reach no firm conclusion and any view I offer is provisional insofar as I am not at this stage hearing the Petition itself or the action. However that does not mean that I will be unable to reach some such provisional views on the material before me. As Lord Diplock said in Eng Mee Yong v. Letchumanan (P.C) (1980) A.C. 331 at page 341: -

“Although in the normal way it is not appropriate for a judge to attempt to resolve conflicts of evidence on affidavit, this does not mean that he is bound to accept uncritically as raising a dispute of fact which calls for further investigation, every statement on an affidavit however equivocal, lacking in precision, inconsistent with undisputed contemporary documents or other statements by the same deponent or inherently improbable in itself it may be. In making such order on the application as he “may think just” the Judge is vested with a discretion which he must exercise judicially. It is for him to determine in the first instance whether statements contained in affidavits that are relied upon as raising a conflict of evidence upon a relevant fact have sufficient prima facie plausibility to merit further investigation as to their truth.”

I take, then, the two matters adumbrated by Plowman J.

First has the Petitioner made out a good prima facie case for a winding - up at the hearing of the Petition. In this case there are two subdivisions of this question:

(a) Has the Petitioner established a good prima facie case of its entitlement to present the petition? In other words has it established a good prima facie case that it is a creditor within the terms of section 212 of the Companies Act? and

(b) Has the Petitioner made out a good prima facie case that on the hearing of the Petition a winding - up order will be made on the ground that the Company is unable to pay its debts (section 210(e) of the Companies Act) or that it is just and equitable that the Company should be wound up (section 210 (f) of the Companies Act)?

In relation to (a) the Petitioner relies upon a debt of $A552, 793.62 for goods sold and delivered. Without going into details it seems to this court that the fact that an initial debt of that magnitude was incurred by the Company in that way has never been seriously disputed. What is said is that this debt has been extinguished by agreement or alternatively that the claim for damages set out in the action must be offset against it.

There are really two aspects to this submission on the part of the Company in relation to the extinction of the debt by agreement or by setoff. First, it goes to the status of the Company as a creditor (the matter with which I am immediately concerned). Second, it goes to the exercise of the discretion of the Court in making the winding - up order. The basis of the latter is that it would be an improper use of winding - up proceedings to compel a solvent company to pay a disputed debt. Thus the second aspect of the matter cannot be separated from a general and provisional consideration of the solvency of the Company, the nature of the original debt, the claim in the action and the nature of the dispute. I shall therefore leave it to my consideration of sub question (b).

To return to the first aspect; the status of the Petitioner. Accepting, as I do, that a prima facie case has been made out as to the initial existence of that debt, I then turn to the way it has been said to be extinguished. This was done, submits the Company, in an agreement reached on or about 23rd February 1983 which was recorded in a letter dated 25th February 1983 from Solicitors to the petitioner to the Solicitor for the Company (Exh. A: D. Gubbay 27th May 1983 - this notation means the affidavit of the named person filed upon the day given). I should add that there was a suggestion by counsel for the Company that there were oral variations to that agreement. I also observe that the Petitioner disputes that there was any “agreement” in the contractual sense at all. Be that as it may, it is clear on the face of it (para. 1 of page 3 of the letter of 25th February 1983; that there was still going to a substantial amount owing to the Petitioner and this was conceded in the body of the affidavit (D. Gubbay 27 May 1983 para 11: although a different amount). I find prima facie that the debt would not have been extinguished by the agreement even if it were contractually binding, about which I express no view at this stage.

Nor would it be extinguished by success in the claim for damages in this action which, as pleaded amounts to S.I.$95,500.00. Even if liability is incurred for matters in D. Butler 29th August 1983, the total claimed amounts to some $161,000.00 which still leaves a substantial amount outstanding. In my judgment, then, the Petitioner has made out a good prima facie case that it is a creditor.

To turn now to sub question (b) that is whether the Petitioner has made out a good prima facie case for winding up on the hearing of the petition. Both the grounds alleged must be seen against the background of the solvency of the Company, about which I have heard something, and considered in the light of the general discretion vested in the court on the hearing of the Petition. The Petition alleges (para 8) that the accounts as at 31st July 1982, show that the Company incurred a loss of $A306, 876.00. In the nine months thereafter the Petition states that the Company incurred a loss of $A40, OOO.00. These matters are not disputed. Nor is it disputed that as alleged in the Petition (para 12) the Company granted 2nd mortgages on real estate to Shell Company of Australia Limited, which is owed an amount in the vicinity of $300,000.00 in or about March, 1983. It is also accepted that a debt is owed to Seagram Wines and Spirits Company Limited of $A2,494.23 which is about to be paid and that there was a debt to Jodag International Pty Ltd of $45,000.00 of which $18000 has been paid on 24th June 1983. The Company intended that the balance would be paid on 31st August 1983.

Then there is the meeting of 13th May 1983, the minutes of which are Exhibit A to N.B. Roberts. It is accepted, albeit as a pessimistic view and resulting from an untimely presentation of a petition, that the figures for the financial Position of the Company worked out at the meeting showed a deficiency of $200,000.00 and that an estimation, again pessimistic, was made that on liquidation the Company’s unsecured creditors would only receive 10 cents in the dollar. On 16th May 1983 Mr Gubbay, the Chairman of the Company wrote (letter contained in telex Exh. B to V.G. Senescall 30th August 1983) to the Petitioner concerning “outstanding sums remaining unpaid”. He referred to a principal sum of $500.000.00 and of “first repayments” of SI$250,000.00. He then wrote of the remainder as “a long term debt for a period of eight years” and gave monthly instalments of -

“(A) $30,000 to Shell Oil commission

(B) $24. 000 NBSI principal

(C) $24,000 QIW”

On 6th June 1983, on instructions, the Solicitor for the Company was requesting a delay of three months in advertisement of the Petition “when we seek finance to liquidate our account with you” and offering certain conditions one of which was” financial control to be transferred to company accountants". None of these matters are in dispute. They give the background of the financial position of the Company against which the Petition and the order which may be made on hearing must be seen.

I turn now to what is said to be the agreement of 25th February, 1983 as that is the basis upon which the debt to the Petitioner is disputed. The approach to be adopted is set out in The Law of Company Liquidation by B.H. McPherson Q.C. (as he then was) 2nd Edition at pages 57 and 58 where the learned author writes: -

“Apart from the single difference noted, the test for determining whether a debt is bona fide disputed appears to be the same whether the question arises in relation to a statutory demand or, in the course of applying the general discretionary rule. Obviously a bare allegation by the company that a dispute exists cannot be allowed to deprive a creditor of the remedy which the statute confers on him, and it is not even sufficient to show that those in control of the company honestly, though foolishly, believe that a real defence to the claim exists if in fact that belief has not been substantiated by taking competent legal advice. In short, the dispute must be genuine or bona fide, both in the sense that it must be honestly believed to exist by those who allege it, and in the sense that the belief must be based on reasonable or substantial grounds.

It is, of course, impossible to predict in advance precisely what will constitute a “substantial” ground, but a suggested test is that there must be “so much doubt and question about the liability to pay the debt as that the court sees there is a question to be decided”, or, in the words of Sir George Jessel, the duty of a company which claims to dispute a debt is a duty” to bring forward a prima facie case which satisfies the court that there is something to be tried” The burden is therefore somewhat heavier than that resting upon a defendant who seeks leave to defend an action begun by specially endorsed writ for in this case leave is always granted unless there is clearly no real question to be decided. Whether there is in fact a substantial ground for the dispute depends upon the evidence, which the court will examine, but there are a few matters which deserve specific mention.”

In the subsequent paragraph when the learned author deals with set-off and counterclaim the learned author writes: -

“But although neither of them is a complete answer to the petition, it seems settled that, where it can be shown that the alleged set - off or counterclaim is based on a substantial ground, the court will, by analogy with the case of a debt which is bona fide disputed, refuse to make a winding - up order in the exercise of its discretion.”

These passages must all be read as subject to the earlier passage dealing with the general principles which reads as follows at p. 56): -

“But the principle reason is that a winding - up petition is not to be used for the improper purpose of compelling a solvent company to pay a disputed debt which would certainly be discharged as soon as the company’s liability was clearly shown to exist.

It follows that the principle has no application where the company is proved to be insolvent and a fortiori where it is the amount merely, and not the existence, of the debt which is disputed.”

I have said that the agreement alleged as the basis of the dispute is said to be contained in a letter of 25th February, 1983 between solicitors to the parties. I have also stated that there are said to be oral variations of that agreement. I should add that the Indorsement of the writ in the action pleads as well a contract entered into 16th March 1983 which can only refer to Exh. C to D. Gubbay 27th May 1983 which established the Company’s No.3 account, with the National Bank of Solomon Islands, a matter to which I must return.

There has been considerable evidence about the alleged agreement and steps taken pursuant to it. Again I am reluctant to deal in detail with that evidence at this stage. The Company contends there was a binding contract in law that a joint venture would be set up between the parties and that by withdrawing from that agreement the Petitioner is in breach for which it must pay damages. No one would suggest that specific performance is a viable remedy at this stage. The Petitioner submits first, that there was no contract binding in law between the parties but merely proposals; second that if, as indeed is pleaded in paragraph 4 of the Statement of Claim in the action, that agreement would be implemented only if the National Investment Council approved, that approval has never been forthcoming; third, that the agreement could be implemented only with Monetary Authority approval, that approval has never been forthcoming: fourth, that the only remedy available in any event to the Company is for damages, and those damages amount to less than the debt claimed by the Petitioner.

There is then a dispute between the parties about the effect of these, to use a neutral term, dealings between the parties. My task is to assess on a provisional basis whether the court on the hearing of the Petition will categorize this dispute as genuine and bona fide bearing in mind that it is for the Company at that stage “to bring forward a prima facie case which satisfies the court there is something to be tried.”

Having considered the nature of the dispute against the background which I have set out as to the Company’s position, I have reached the conclusion that a strong prima facie case has been made out by the Petitioner that on hearing of the petition an order for winding up would be made on the ground that the Company is unable to pay its debts. In those circumstances I need not consider the claim that an order should be made at that hearing under section 210(f) (that it is just and equitable that the Company should be wound up).

I turn now to the second matter for consideration referred to by Plowman J in Union Accident Insurance Co. Ltd (ab. cit), that is, whether in the circumstances of this case it is right that a provisional liquidator be appointed? I have already referred to the passage in that case in which the learned judge refers to some of the circumstances in which it is proper to make the appointment. I also refer to the following passage in the judgment of Bright J in Re Club Mediterranean Pty Ltd (1975) 11 S.A.S.R. 481 at p. 484 as set out on page 84 of MacPherson (ab. cit): -

“Where the petitioning creditor makes the application and the company opposes it the court must come to a conclusion as to the degree of urgency and of need established by the petitioning creditor and the balance of convenience. The circumstances will vary. Sometimes the company may be continuing to trade at a loss or to incur further liabilities. Sometimes assets may require to be protected from dissipation or from seizure or encumbrance. Sometimes the right of the company to assets or the right to exercise an option, enforce a contract, reject a claim or otherwise to act for the apparent benefit of the company may be in issue and the issue may need to be resolved or carried forward or rights may need to be protected as a matter of urgency.”

The Petitioner relies upon a number of aspects of the matter to submit that a case is made out here for appointment of a provisional liquidator.

First, it is said that the Company is paying debts (Seagrams and Jodag) and has created a charge (in favour Shell Company) in circumstances where these may be preferences if insolvency is established. Failure to make immediate appointment may, it is suggested, create difficulties of recovery of such preferential payments, and provide difficulties in relation to setting aside of the charge. It is also suggested that from these facts it may reasonably be inferred that further preferential payments or charges may be made or granted in future. In this respect, counsel refers to the judgment of Bright J when he says: -

“Sometimes assets may require to be protected from dissipation or from seizure or encumbrance.”

In my judgment looking at all the facts, there is force in this submission that there is a ground for concern with the present way in which assets of the Company are being handled.

Second, it is said, and not disputed, that the Company has failed to lodge statutory returns since the one for the year ended 31 July 1980. On any view this is a serious default in a statutory obligation and even more serious in the case of company which, according to undisputed evidence, was, in the year ending 31st July 1982, trading at a substantial loss.

Third, it is submitted that there have been dealings with the No. 3 account which should lead the court to the conclusion that the person at present managing the Company, Mr D. Gubbay is prepared to act without scruple, in his dealings with creditors and funds coming into possession of the Company. Again this is a matter about which there is a dispute upon the evidence. However in view of the strong terms used by counsel for the Petitioner and the importance of this aspect of the matter it is necessary for me to reach some view on that evidence, albeit provisional. The No. 3 account was set up in accordance with a document of the 16th March 1983 (Exh. C. to D.J. Gubbay 27th May, 1983).

To understand that document it is necessary to consider the background. The Company’s debt to the Petitioner was secured by a Bill of Sale dated 4th October 1982 over the “consumable stock in trade” of the Company (Exh. A: V.G. Senescall 25 August 1983). Due to delays in negotiations the Petitioner decided to enter into Possession under this Bill of Sale and therefore took the necessary steps to do so. A telex was sent on the 9th March 1983 explaining the basis upon which this entry into possession was to proceed (Exh. B: D. J. Gubbay 27th May 1983). Basically it was that the Company would sell the stock as agents for the Petitioner and amounts realized would be deposited in an account upon which the signatory would be an accountant, Mr Bowles, who would hold the funds in trust for the Petitioner. A stock take was, of course necessary and this was to be the basis of the proposed sale of stock to the joint venture about which I have said something earlier. In his affidavit of 27th May 1983 (para 19) D. Gubbay states that the Company “agreed with the proposed interim arrangement and in accordance with Proposal 4 in the said telex it went ahead to open a separate account into which the proceeds of sale were being paid”. Paragraph 4 of the telex deals with the Bank account, the funds in which were to be held in trust of the Petitioner.

However when the agreement on the 16th March 1983 was signed in relation to the No.3 account, the signatories were to be the accountant and either Mr Gubbay or the accountant of the Company. The agreement also records that this account was to be ‘completely separate’ from the other accounts of the Company and separate accounts were to be kept to ensure that all sums from the sale of stock received after 14th March 1983 were to be kept in that account. In his affidavit filed on 27th May 1983 but sworn on 26th May 1983 Mr Gubbay deposed (para 21) that “at present the proceeds from all stock sale of the Respondent are being paid into this new bank account in accordance with the agreement”.

But what Mr Gubbay did not say in that affidavit was, first, that on 12th May he, as chairman of the Company, had changed the signatories of the account to himself and two other members of the staff of the Company and second, that on the 25th, May 1983 the day before he swore the affidavit, he had transferred from the No. 3 account, then standing at $89,610, the sum of $85.000 to other accounts of the Company. This transfer was done without any reference to the Petitioner or the Accountant acting as signatory on the account in accordance with the earlier agreement. So much is not disputed. (There is a dispute about whether the accountant had expressed “lack of prerogative” over the account but on any view he was not told of this large transfer).

What is said on the part of the Company is that this No.3 account was an account of the Company which was created with a view to the joint venture and once that joint venture fell through there was no need for the account any more and funds in the No.3 account could be used in the Company’s day to day business. Hence the transfer of the $85,000 and the subsequent transfer of a further total of $21.000 Mr Gubbay has given evidence on this aspect of the case.

I must say that looking at the undisputed documents, the undisputed parts of the minutes of the meeting of 13th May, 1983 where reference is made to $80,000 in the No.3 account (page 5) the undisputed contents of the letter of 16th May 1983 (Exh.B:V.G. Senescall 30th August 1983) where reference is made to stock realization (paragraphs 7 to 23 and paragraph 30). I have no hesitation in recording that in my judgement, to use the words of Lord Diplock in Eng Mee Yong (ab. cit), the statements made by Gubbay in his affidavit of 30th August 1983 and in his oral evidence about these transactions with No.3 account do not have sufficient prima facie plausibility to merit further investigation as to their truth. On his own material alone Mr Gubbay has proved himself to be inconsistent and equivocal.

Other matters of conflict in relation to this transaction were raised and, insofar as I have been able to do so on the affidavits before me. I have considered them. In my judgment those conflicts are such that either they affect the issue little one way or the other or that they are part of the implausible assertions which do not merit further investigation. They do not affect my prime conclusion on this aspect of the matter which is that I find that Mr Gubbay and, hence the Company has produced no plausible explanation for what, prima facie, is a taking of control of money and subsequent dealing with it in breach of the terms of a clear agreement with another person in a situation when the Company must have been aware that that person was endeavouring to protect its position in relation to a debt owed by the Company.

I therefore find that I am satisfied on the material before me that the three factual situations on which the Petitioner relies are made out. The question then is, are these facts such as to establish special circumstances which show a degree of urgency and need sufficient to require this court to appoint a provisional liquidator? In my judgment they are. They show dealings with assets in a way which may put considerable difficulties in the way of a liquidator when appointed: they show disregard for statutory obligations; they reveal a management which acts unscrupulously in dealing with money without plausible explanation. Seen against the financial position to which I have referred earlier in this judgment the only way to safeguard the position pending the hearing of the Petition, is, in my judgment, the immediate appointment of a provisional liquidator under section 226(1) of the Companies Act and I so order.

As I make that order, as counsel for the Company indicated, it is not necessary for me to consider the, Motion for an injunction which is, I understand it, not pursued.

Pursuant to section 226(3) of the Act I may put limitations and restrictions on the powers of the liquidator. My present view is to give him the usual powers of taking possession of the assets and carrying on the business of the Company pending the determination of the application. I also consider that he should be given power to settle a list of contributories and provisionally admit or reject creditor’s proofs of debts. On these matters I shall hear the parties.