In re Dalgro (SI) Ltd [1997] SBHC 43; HC-CC 176 of 1997 (1 August 1997)

HIGH COURT OF SOLOMON ISLANDS

Civil Case No. 176 of 1997

ter">IN THE MATTER OF DALGRO (SI) LIMITED

AND

IN THE MATTER OF THE COMPANIES ACT (CCT (Cap.66)

Before: Lungole-Awich, J

Hearing: 29 July 1997 - Judgment: 1 August 1997

Counsel: J Sullivan for the Petitiop>

JUDGMENT

LUNGOLE-AWICH, J:

The Grounds for Petition: Dalgro (SI) Limited, to which I shall refer as Dalgro, has petitioned the court for order to wind-up. It has also asked for appointment of a provisional liquidator. The mode of winding-up petitioned for is not clear. The facts averred in the petition, upon which the order to wind up is sought, are short and clear so far. I summarise them here: Dalgro contracted with Success Company Limited, to which I shall refer as Success, to carry out timber harvesting work on land that Success had concession over. Success has the licence to harvest and export timber from the land. It was a term in the contract that the sums of money due to Dalgro for work done by it would be specified in letters of credit opened at a local bank when timber logs were being exported and that the proceeds of the letters of credit to that extent would be paid directly to Dalgro. It is said that Dalgro carried out harvesting work early this year and, in May, Success exported 4,095.145m3 of timber logs and collected the whole payment including the sums due to Dalgro. The sums due to Dalgro are said to total US$345,190.64, estimated to be SB$1,278,483.00. Despite demand, Success has not paid the sum to Dalgro. It is said, that has resulted in Dalgro being unable to pay its debts when they fall due. 40% of the shares in Dalgro are held by a Mr. H. H. B. Dettke who is the managing director of Success, another 40% by a Mr. R. Douglas and 20% by K. E. Douglas. The difficulties faced by Dalgro led to a meeting of the members of Dalgro on 24.7.1997. It was an effort to resolve the question of payment to Dalgro. The question was not resolved and members unanimously passed resolution that if by noon of 28.7.1997 Mr. Dettke had not accepted offer by the other two members to buy off his shares in Dalgro or will have not made acceptable counter offer, application would be made to the, "High Court for appointment of Provisional Liquidator." This petition was filed and presented to court as the result of Mr. Dettke having failed to meet the conditions in the resolution. A letter written by his solicitor, dated 28.7.1997 asked for extension of time by 14 days before petition would be filed at court. The request was not accepted, Dalgro proceeded and filed the petition on 29.7.1997.

The Law of Winding-up Company

I mentioned at the opening of this judgment that it is not clear what mode of winding-up the company has petitioned for. In Solomon Islands winding-up a limited company is done in three ways set out in section 203 of Companies Act, Cap. 66 of the Laws of Solomon Islands. The section provides:

"PART V

WINDING UP

(I) PRELIMINARY

Modes of Winding Up

203. (1) The winding up of a company may be either

(a) by the court; or

(b) voluntary; or

(c) subject to the supervision of the court."

The provisions are taken from Companies Act, 1948 of England. In some countries, for example New Zealand, mode (c) has been dropped from recent legislations. That in fact reflects the practice, because even in voluntary winding-up, supervision by court is common, especially in creditors' voluntary winding-up. The New Zealand legislation, section 210 of its Companies Act provides that winding-up of a company may be either

(1) by the court;

(2) voluntary, which may be either;

(a) a members' voluntary winding-up or

(b) a creditors' voluntary winding-up.

The reasons for winding-up in Solomon Islands are stated in sections, 210 for winding-up by court, and 260 for voluntary winding-up.

I set them out here

"210. A company may be wound up by the court if

(a) the company has by special resolution resolved that the company be wound up by the court:

(b) default is made in delivering the statutory report to the registrar or in holding the statutory meeting:

(c) the company does not commence its business within a year from its incorporation or suspends its business for a whole year;

(d) the number of members is reduced, in the case of a private company, below two, or, in the case of any other company, below seven: (e) the company is unable to pay its debt;

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

(III) VOLUNTARY WINDING UP

Resolutions for, and Commencement of, Voluntary Winding up

260. (1) A company may be wound up voluntarily

(a) when the period, if any, fixed for the duration of the company by the articles expires, or the event, if any, occurs, on the occurrence of which the articles provide that the company is to be dissolved, and the company in general meeting has passed a resolution requiring the company to be wound up voluntarily;

(b) if the company resolves by special resolution that the company be wound up voluntarily;

(c) if the company resolves by extraordinary resolution to the effect that it cannot by reason of its liabilities continue its business, and that it is advisable to wind-up."

In paragraph 12 of the petition, it is averred that because of the diversion of the sum of US$345,190.64, Dalgro is unable to pay its debt, in paragraph 16 that the company cannot continue to trade when it knows that further debts incurred may not be paid, in paragraph 17 that in the circumstances it is just and equitable that the company be wound-up, and in paragraph 13 that members have met and unanimously resolved that, "application be made to the High Court to appoint a Provisional Liquidator." The averments in paragraphs 12,13, 16 and 17 taken together would be grounds for petitioning for voluntary winding-up under section 260(1)(c) because they may be understood to state that the company has resolved by extraordinary resolution that by reason of its liabilities it cannot continue its business and that it is advisable to windup. Averment in paragraph 13 is not at all specific; it does not state whether the resolution was a special resolution or an extraordinary one. If it was a special resolution then that in itself is sufficient ground under section 260(1)(b) for winding-up by the court and also sufficient for voluntary winding-up. No reason need be coupled with the special resolution. If it was an extraordinary resolution then if it is shown that the extraordinary resolution was to the effect that by reasons of Dalgro's liabilities it cannot continue its business and it is reasonable to wind it up, then the winding-up is a voluntary one.

The ambiguity in what the petition asks for is compounded when one looks at the prayers which are:

"A. That Dalgro (SI) Limited may be wound up by the court under the provisions of the Companies Act (cap.66). B. That such other order may be made in the premises as shall be just."

It would appear that prayer A asks for winding-up by court under section 210(a), the mode of winding-up commonly referred to as compulsory winding up, but in the totality of the wording of the petition it can also mean that it asks for voluntary winding-up under section 260(1)(b) or (c). That will have to be made clear.

The Law on Appointment of Provisional Liquidator

The petition was filed together with a notice of motion application asking for order that, a named Provisional Liquidator, Mr. Wayne Frederick Morris, be appointed and be allowed powers, in addition to statutory powers to carry on the business of Dalgro, that advertisement of the petition be waived and that requirement for security be waived, and costs. Appointment of a provisional liquidator is the subject of section 226, which is only applicable to winding-up by Court. The section is in subpart (ii) of part V of the Act, headed, "WINDING-UP BY THE COURT". Rule 23 of the Companies (Winding-up) Rules confirms. In the case of voluntary winding-up the relevant sections, 267 and 268 in the case of members' voluntary winding-up or 276, 278 and 279 in the case of creditors' voluntary winding-up, do not provide for appointment of liquidators provisionally; the sections provide for members and or creditors to appoint liquidator straight away in either a general meeting or in the meeting of creditors preceding the filing of petition for voluntary winding-up. I see no good reason for not providing for appointment of provisional liquidator in voluntary winding-up. It may have been assumed that in voluntary winding-up, a process which is always commenced by agreement or at least substantial agreement, members and directors, and or creditors would have agreed on a liquidator to take responsibility for safe custody and preservation of the assets of the company straight away, when the petition is to be filed at court. It is possible, however, that agreement may be reached on petitioning for winding-up, but not on the question of appointing a liquidator straight away. In that event the court could be asked to make a short term appointment.

The company's urgent need at the time of petitioning was to obtain order for appointment of a provisional liquidator. From the petition it seems a dead-lock had occurred or was likely to occur. The difficulty is that it is not certain from the petition that the company has asked for winding-up by court as opposed to voluntary winding- up or winding-up supervised by court. It is important to know because the court has to decide whether a sustainable case for compulsory winding-up has been disclosed in the petition and the accompanying affidavit in order to consider appointment of a provisional liquidator. I have not been able to find decided cases in Solomon Islands on the point. In Re a Company [1974] 1 All ER 256, a case decided in England, the court refused to appoint a provisional liquidator on the mere fact that a petition had been presented. The petitioner founded his case on a sum that a court had ordered in another case between the parties, that the company was to deposit in court. The sum was proved not to be a sum in judgment for the petitioner. The court went on to strike out the petition at that stage as there was no debt that the company could be said to be unable to pay. A provisional liquidator could not be appointed on such a baseless petition. In an earlier case in England, Re Union Insurance Company Limited [1972] 1 All ER 1105, the court categorically stated that there are two conditions to be met. The first was that the petition must disclose a prima facie case, the second was that there were circumstances that require that a provisional liquidator ought to be appointed. The circumstances were not limited. The fact that the petition was not opposed was one of them. In the case, a prima facie case was established because it was shown that the company could not meet the level of solvency required of insurance companies by statute. The circumstance in the case that required that a provisional liquidator ought to be appointed was the interest of the public in the fact that sums retained by brokers amounting to a large sum of £300,000 be collected from them. A provisional liquidator was correctly appointed. It seems to me that the petitioner in this case wants to keep all its options in winding-up under sections 210 and 260 open. It certainly will have to change and be specific by the time the petition is argued in full in court for final determination because the procedures in liquidating and distributing of assets are different in the three modes of winding-up. Liquidator, creditors and contributories will need to know which mode and therefore which procedure will be applicable.

A completely baseless petition cannot be foundation for the court to appoint a provisional liquidator. The consequence to business, of appointing a liquidator, even if only a provisional one, is often ruinous to the good will of the business. The court is therefore to act cautiously so as to avoid a baseless petition causing ruin to business. At the meeting held on 24.7.1997 a resolution to appoint a provisional liquidator was passed. The relevant part of the minutes reads:

"Keith Douglas upon advice by Bill White moved the motion that:

In the absence of agreement between the shareholders by Monday 28/7/97 noon, that application be made to the High Court to appoint a provisional liquidator to the Company.

The motion was voted on and was unanimously carried."

The minutes are silent on several material questions. Were members advised as to whether the motion being moved was for a special or extraordinary resolution, and for which mode of winding-up? By what authority was Mr. Sullivan, described as legal adviser, the chairman of the meeting? Had the required notices of the meeting and of the kind of resolution been given or was there waiver? Nonetheless a resolution was passed unanimously. May be there are satisfactory answers to the questions; they will have to be answered by proof. The resolution would more than satisfy the requirement of three quarters majority for special or extraordinary resolutions as defined by section 135. If the resolution was a valid one, it would commence the steps to be taken to bring about winding-up whether by court or voluntarily. Whatever the mode of winding-up was intended by the averments in paragraphs 12,13, 16 and 17, the combined effect is that Dalgro's funds are depleted and it is not in a position to meet its debts. Dalgro's only hope of meeting its liabilities is in Success paying to it the US$345,190.64 said to be owed to Dalgro. Its business involves very expensive overheads; it would be inadvisable for the management to continue doing business and incurring large overheads without prospects of paying. There are good grounds for passing special resolution authorising petitioning for winding-up by court or for voluntary winding-up or even for passing extraordinary resolution for voluntary winding-up. The grounds are sufficient for the court to consider the question of appointing a provisional liquidator at this stage, although I think that at the final hearing the petitioner will have to satisfy the court that measures other than winding-up cannot resolve the difficulty faced by the petitioner. The good grounds which now make prima facie case will have to be satisfactorily proved and the particular mode of winding-up selected. One of the facts to be proved is that the meeting of 24.7.1997 was properly convened and conducted. The fact that the resolution was a unanimous one has been an important consideration; perhaps the picture would have been different had the petition been opposed. The fact that a large sum is said to be owed by one member said to be a director is circumstance in the case that calls for appointment of a provisional liquidator to pursue the claim more vigorously than one would expect the co-directors would do.

Appointment of a provisional liquidator may be viewed as a step provisionally winding-up a company because the provisional liquidator takes charge of the assets of the company and may attend to businesses that are consistent with winding-up. His powers are more or less those of a full liquidator; the difference is that he acts with reservation because the order to wind-up will have not been made yet. In some jurisdiction the process is actually called provisional liquidation. In my view the phrase describes accurately what I may call the inchoate stage leading to winding-up, and could appropriately be used to describe it.

Filed with the petition to wind-up is, consent of a Mr. Wayne Frederick Morris to act as liquidator. The petitioner has asked for appointment of Mr. Morris as provisional liquidator. That was not a subject of discussion at the meeting of 24.7.1997. The petitioner says that its application is based on the fact that there are only about two professional accounting firms of international repute in Honiara and that Mr. Morris is in one of the firms and has the professional qualification and the necessary experience. A liquidator agreed on by resolution for voluntary winding-up is usually accepted by court at the making of the order for winding-up. In winding-up by court the views of creditors and members are taken. The reasons given by the petitioner are good reasons and I should act upon them, but I must mention one important aspect of this petition.

The petition is for voluntary winding-up although winding-up by court has not been excluded. In my view the facts disclosed in the petition show that it is a creditors' voluntary winding-up or at least the process of winding-up, if ordered, and stated to be voluntary winding-up, will progress in that direction. The petitioner has categorically stated in paragraphs 12 and 16 that it is unable to pay its debts, not just that it is likely not to pay its debts, or expressions to that effect. If that fact had come to the attention of creditors they would probably have considered applying for winding-up by court under section 210. It appears to me that the petitioner should have elected to present petition for creditors' voluntary winding-up. They would have called a meeting of creditors to be held on 23.7.1997, the day before the meeting of members of Dalgro. Creditors would have been informed of the state of affairs in the company and would have been informed that they could nominate a liquidator. The meeting of members would have also been asked to nominate a liquidator. In short sections 275 to 282 would have been complied with. Views of creditors would be available to court. If the nominee of creditors was the same as that of members the court would simply confirm the nominee otherwise the nominee of the creditors would be appointed.

Security from Liquidator

The question of security from the liquidator for the proper performance of the duties of his office also occupied my mind. It is important in a country like Solomon Islands where most professionals are expatriates, some of whom after naturalising keep active contact with their former homes. Some are known to have gone back after several years. The advisable thing in those circumstances is to require security. I have, nonetheless in this case decided that I shall not require security for the period of adjournment up to the full hearing of the petition. I, however, suggest that the question be given thought by members of the company and creditors and that on the adjourned date counsel address the court on the issue and in particular on the kind of security they expect a person suggested as liquidator will be able to provide.

Orders Extracted

The order that the court makes are:

1. The petition of Dalgro (SI) Limited is granted and the company is placed under the control of a Provisional Liquidator.

2. Mr. Wayne Frederick Morris is appointed Provisional Liquidator, until the date of hearing to determine whether the order for liquidation, that is of winding-up is to be made; the hearing will be on 3.9 1.997

3. No security is required of Mr. Morris at this stage, but may be necessary in future. In case order for winding-up is made, counsel are to address court further on the question of security and in particular on the type of security a suggested liquidator will be able to provide.

4. The Provisional Liquidator is to call a meeting of creditors immediately, in any case not later than 7 (seven) days from the making of this order for the purpose of:

4.1 informing them of this order.

4.2 advising them about the state of affairs of the company.

4.3 advising them of the date of hearing for determining whether final order for winding-up is to be made

4.4 deciding his remuneration and recommending to court.

4.5 advising them that they are free to nominate a different liquidator in which case Mr. Morris will inform the court

4.6 to discuss matters considered relevant by creditors and to report to court.

5. The Provisional Liquidator is to file report of the meeting in paragraph 4.

6. The Provisional Liquidator is to call a meeting of members of the company to inform them of this order and to discuss matters considered relevant and to report the matters discussed to court.

7. The hearing to determine whether final order for winding-up is to be made shall be on 3.9.1997 at 9.00 am.

8. Provisional Liquidator is authorised to take measures to preserve and enhance the assets of the company and to carry on only business transactions that are consistent with winding-up; he may apply to court for direction and for authorisation to carry on any transaction not necessary for winding-up.

9. The order not be advertised until after 14 days have elapsed and the petition need not be advertised until 14 days before the hearing date.

10. Costs of this application and of the Provisional Liquidator to be charged to the company, in the event that order for winding-up is not made in the end, otherwise the costs will be costs in winding-up.

Dated this 1st day of August 1997

At the High Court Honiara

Sam Lungole-Awich,
Judge