Australia and New Zealand Banking Group v Hottsie Anne Company Ltd [2009] TOSC 5; CV 97-2009 (8 June 2009)

IN THE SUPREME COURT OF TONGA
CIVIL JURISDICTION
NUKU’ALOFA REGISTRY CV 97 of 2009

BETWEEN:

AUSTRALIA & NEW ZEALAND BANKING GROUP
Applicant

AND:

HOTTSIE ANNE COMPANY LIMITED
Respondent

BEFORE THE HON. CHIEF JUSTICE FORD

Counsel: Mr R. Stephenson for the Applicant and
Mr D. Corbett for the Respondent

Date of Chambers hearing: 13 May 2009.
Date of Oral Ruling: 13 May 2009.

APPLICATIONS AND SUMMARY OF ORAL RULING (CHAMBERS)

THE APPLICATIONS BEFORE THE COURT

[1] The applicant filed an application on 4 May 2009 for an order pursuant to section 250 of the Companies Act 1995 that the respondent be put into liquidation by the appointment of a liquidator. The grounds for the application were that the respondent was unable to pay its debts within terms of section 296 of the Companies Act 1995 in that it had failed to comply with a statutory notice of demand under section 298 of the Act for payment of the sum of $1,216,321.44 which notice had expired on 15 April 2009.

[2] The application was referred through to me on 7 May 2009 and I was actually in the process of making the order sought when the Deputy Registrar brought through to my Chambers an application filed by the respondent that same day for a stay of the liquidation proceedings pursuant to section 256 (a) and (b) of the Companies Act 1995. I then made an order which was issued the following day that both applications would be heard in Chambers at 9 a.m. on Tuesday 12 May 2009. On 11 May 2009 I issued a further order confirming that counsel would be given the opportunity to cross-examine on the affidavits if required.

[3] At the Chambers hearing on 12 May 2009, Mr Stephenson turned up for the applicant Bank but there was no appearance on behalf of the respondent. I, therefore, proceeded to make and issue an order that same day placing the respondent in liquidation by the appointment of Christine 'Uta'atu of 'Uta'atu Associates, Accountants, Nuku'alofa, as liquidator.

[4] The next development came on the afternoon of 12 May when the respondent filed an urgent application for an order pursuant to section 259 of the Companies Act terminating the liquidation. Counsel for the respondent deposed in a supporting affidavit that he "innocently and mistakenly" thought that the hearing that morning was going to be in open court instead of in Chambers. I, therefore, made an immediate order that both applications, i.e. the section 256 application and the section 259 application (if necessary) would be heard the following morning, 13 May, in my Chambers at 9 a.m.

[5] At the hearing on 13 May I heard oral argument from Mr Corbett for the respondent and Mr Stephenson for the applicant bank. I then gave an oral ruling with reasons dismissing the respondent's application for a restraining order under section 256 but I adjourned the application under section 259 for an order terminating the liquidation until 19 June 2009. At the same time I ordered the liquidator to furnish a report to the court by 17 June 2009 pursuant to section 259(3) and I gave leave to the respondent, at Mr Corbett's request, to file an affidavit from the majority shareholder in the USA in connection with the section 259 application.

[6] On 27 May 2009 the respondent filed a notice of appeal against the orders made in Chambers on 12 and 13 May 2009. Given that development I will now attempt to summarise for the Court of Appeal the reasons for my oral ruling in Chambers on 13 May 2009.

SUMMARY OF REASONS FOR RULING

[7] Section 256 of the Companies Act 1995 provides:

"256. At any time after the making of an application to the Court under section 250(2)(c) to appoint a liquidator of the company and before a liquidator is appointed, the company or any creditor or shareholder of the company may -

(a) in the case of any application or proceeding against the company that is pending in the Court or Court of Appeal, apply to the Court or Court of Appeal, as the case may be, for a stay of the application or proceeding; and

(b) in the case of any other application or proceeding pending against the company in any court, apply to the Court to restrain the application or proceeding --

and the Court or Court of Appeal, as the case may be, may stay or restrain the application or proceeding on such terms and as it thinks fit."

[8] One of the points made by Mr Stephenson was that there was no application or proceeding against the company in terms of subsection (b) of section 256 apart from the application to appoint a liquidator. Given my other conclusions I did not find it necessary to rule on whether that application alone satisfied the criteria in subsection (b).

[9] The thrust of Mr Corbett's submissions on behalf of the respondent were that the respondent company, Hottsie Anne Company Ltd, was solvent. To understand the basis for the submission it is necessary to refer to the structure of the company. The shareholders are a Ms Kava who resides in the United States and her three daughters. Ms Kava holds 70% of the shares and the daughters, aged 18, 16 and 8 years respectively, hold 10% each. The company was run in Tonga by Ms Kava's de facto partner, Mr Kitekei'aho, who was the father of the couple's three daughters. Ms Kava and Mr Kitekei'aho were the directors of the company. Mr Kitekei'aho was not a shareholder but he was entitled to 20% of the profits. The company appears to have been established in about 2002 with the object of taking over the operations of what was formerly Davinas Bar and Nightclub in Vuna Road.

[10] The company accepted that Mr Kitekei'aho had been given specific authority pursuant to powers of attorney back in September and December 2002 to sign all papers in regard to the registration of the respondent company and to take out what it referred to as an "initial loan" of $155,000 from the ANZ Bank to assist in the purchase the Davina Bar but it denied that he had any authority from the shareholders to take out any subsequent loans with the applicant bank. The respondent contended that the loans over and above the initial loan did not bind the company because no further power of attorney had been issued by Ms Kava; that the loan documentation failed to comply with certain provisions in the Companies Act and that the applicant bank was negligent in approving the subsequent loans "without the authority and consent of the respondent and beyond the ability of the respondent to ever pay such huge loans."

[11] An affidavit dated 11 May 2009 was filed in support of the respondent's application by Francis Ngutau aka Francis Kolo. Mr Kolo deposed that at a meeting of the shareholders held on 24 November 2008 it was resolved that Mr Kitekei'aho be removed as a director, company secretary and treasurer of the company and that he (Mr Kolo) be appointed in his place.

[12] The Court has a discretion when it comes to making a restraining order under section 256. The striking feature about this case is that there is nothing before the court to indicate that the shareholders in the USA took any interest in the operation of the company in Tonga until towards the end of 2008. Mr Kolo deposed that Ms Kava "made numerous inquiries from overseas about the operation of the business but to no avail" but there is no affidavit from Ms Kava before the court and there is simply no documentation whatever before me confirming any such inquiries.

[13] It is not clear as to how or why the shares were apportioned in the way they were but the establishment of the company was obviously a family arrangement and I have no doubt that until his removal from office at the end of 2008 Mr Kitekei'aho was the driving force in the establishment and operation of the company. He was the eyes and ears of the company. Effectively, he was the company in Tonga. The bank was entitled to rely upon him. Through their acquiescence the shareholders back in the United States effectively ratified and condoned all steps taken by Mr Kitekei'aho on the company's behalf.

[14] It is public knowledge that some years ago the respondent company was involved in civil litigation when proceedings were issued against it by the Waterfront Lodge which is located along Vuna Road next door to the Hottsie Anne Bar. There is a narrow roadway between the two establishments. The Waterfront brought a successful action in nuisance and a permanent injunction was issued against the Hottsie Anne requiring it to restrict the noise level from its nightclub operations. I issued a lengthy judgment in the case which is freely available. The point about that case and its relevance to the present application is that Mr Kitekei'aho controlled entirely the proceedings in relation to the respondent and gave the court an undertaking on behalf of the company. Not a word was heard from Ms Kava.

[15] The reality is that the company is now hopelessly insolvent. Ms Kava may well have a cause of action against Mr Kitekei'aho but the point is that she permitted him to have the sole running of the company in Tonga. There appear to be no other creditors of the company apart from the ANZ bank. I am satisfied that the bank throughout has acted in good faith on the instructions and directions of Mr Kitekei'aho who, for her part, Ms Kava was content to leave in charge.

[16] For the reasons mentioned, I am not satisfied that there is a genuine and substantial dispute over the debt and the respondent has failed to persuade me that it is in the interests of justice to stay the appointment of a liquidator. The application for an order pursuant to section 256 (b) of the Companies Act is, therefore, dismissed.

NUKU'ALOFA: 8 JUNE 2009

CHIEF JUSTICE