New Zealand Tiny Homes (Tiny Homes) fell victim to liquidation on 15 November 2022. After its incorporation in 2020 this was a short, but most certainly not sweet, business affair for its director James Cameron of New Plymouth.
The liquidation of Tiny Homes was said to be linked to the liquidation of Tiny Town Projects Limited (Tiny Town) which was also liquidated on 15 November 2022, another of Mr Cameron’s companies incorporated in 2017.
Tiny Town and Tiny Homes were related companies. Tiny Homes held the intellectual property for the creation of building small properties in New Zealand, whereas Tiny Town was the company that actually attended to the building of these properties
The business of Tiny Homes and Tiny Town
Tiny Homes and Tiny Town were in the business of building small properties for consumers in New Zealand. The size of these properties allowed for a far more accessible fixed purchase price for home buyers.
At the time of liquidation of Tiny Homes and Tiny Town, there were a number of these homes that were virtually completed. The only hurdle being procedural matters of gaining compliance before title in the property could pass from Tiny Town to the purchaser.
It is important to note that each of these homes was customised and built on the purchaser’s instructions. A sale and purchase agreement was signed for each home and payment of the purchase price was paid to Tiny Town in instalments.
The first liquidator’s report of Tiny Town that the issues stemming from COVID-19, a spike in building costs and supply chain issues impacted the company’s ability to ‘fulfil fixed price contracts.’ This inability to fufil fixed price contracts led to both Tiny Town and Tiny Homes demise.
The liquidation
In November 2022, Tiny Town was placed into liquidation. At the point of liquidation there were 6 homes that were partially completed. Of the 6 purchasers of these homes, 3 had paid the full purchase price of their respective homes and were awaiting small changes to be made to be issued a code of compliance before the homes could be delivered. The remaining 3 purchasers had homes that were 40%-50% complete.
The first liquidators report for Tiny Town showed the company had very few assets, bar the 6 homes in question.
The liquidators filed proceedings in the High Court seeking directions on how to best deal with the 6 homes.
The proceedings
The case of Manginness v Tiny Town Projects Limited (In Liquidation) [2023] NZHC 494 (the Proceeding) was heard before Venning J on 20 February 2023 with the judgment being delivered on 14 March 2023.
One of the issues to be decided in the Proceeding was whether the 3 fully paid purchasers were entitled to take ownership of the homes, or whether they belonged to Tiny Town. There were also issues raised in relation to the Personal Property Securities Act 1993 (PPSA) as to whether an equitable lien was granted over all 6 homes.
When does property pass?
The first issue was whether property in the homes had passed to the 3 fully paid purchasers. Counsel for the purchasers argued that as the purchase price had been paid in full, the homes should pass to the purchasers. Counsel argued the compliance certificate should not be the decisive factor as in the liquidator’s evidence it was accepted delivery of the homes would occur when full payment was made, not when the compliance certificate was issued.
Venning J rejected this argument, stating that, property will only pass when the homes are ‘in a deliverable state.’ Venning J defined the deliverable state as when the compliance certificate was issued.
It was concluded on the first issue that property in the homes had not passed to the purchasers.
An equitable lien
Counsel for the purchasers argued that even though there was uncertainty on the property passing, that under section 53 of the PPSA the purchasers had an interest in the homes, whether by way of an equitable lien or a constructive trust.
An equitable lien is a form of equity which the Court can grant to give an indemnity or priority over other creditors. On the other hand, a constructive trust is a trust created whereby one person holds property for the benefit of another, it prevents someone holding property from unjustly benefitting from the holding of that property.
Venning J considered that section 53 of the PPSA did not apply here. However, His Honour’s view was different on the topic of an equitable lien. It was argued by counsel for the purchasers that an equitable lien should be granted to all purchasers over the homes based on the extent of money paid to Tiny Town by them.
A key argument is that these homes were identifiable to each purchaser, and had been built to their specifications. Counsel for the purchasers argued that “the purchasers’ equitable lien confirmed their in rem rights in the tiny homes that trumped any competing claim in the liquidation.”
Venning J submitted this was a difficult issue to ascertain based on the facts of this case. His Honour laid weight on the fact these homes were specified to each purchaser and could not reasonably have been sold by the liquidators to other parties. Venning J concluded there was an equitable lien over the 6 homes.
The next issue was whether the lien was subject to the PPSA, to which Venning J referred to it as being excluded under section 23(b) of the PPSA. His Honour’s full conclusion was “I conclude that the individual purchasers are entitled to equitable liens for the extent of the value of the purchase moneys paid by them and that their equitable liens sit outside and are not affected by the provisions of the PPSA.”
The result of the judgment was that the purchasers of the 6 homes were entitled to an equitable lien against the homes to the extent of the purchase moneys paid by them.
Summary
This judgment has been described as ‘ground-breaking’ and that certainly is the case. This judgment will change the way assets in liquidation are dealt with. The judgment gives rights to the purchasers in a situation where in the normal course of the liquidation it would be common for them to lose their assets.
This decision plays on the fairness of the justice system and emphasises the importance of natural justice in a situation where typically there really are no winners. Although it is arguable this ruling is to the disadvantage of other unsecured creditors in the liquidation, it is weighed on the balance of taking away homes from 6 individuals who in some cases may have been left homeless without this judgment.
The judgment will cast a positive light on the prospects of recovery in liquidations for some creditors, showing them the law of equity can assist in certain circumstances. However, it also results in some doubt for secured creditors whose position is ultimately worsened if equity prevails.
In this case it seems as If on the balance the correct decision was made, however this may not always be the case. If you require assistance on your position as a creditor in a liquidation or want some further information on your rights please do not hesitate to contact us for a free no obligation discussion.
Our lawyers at Norling Law can discuss the outcome of this case as part of our no obligation legal consultation. To book a free 30-minute consultation please click this link
If a creditor has served liquidation proceedings on your company, you may want to consider placing the company into liquidation before the matter is brought before the court and the court appoints a liquidator chosen by that creditor. In doing this, the company’s shareholders have the chance to appoint a liquidator (usually referred to as a voluntary liquidation) who could act more favourably towards them as opposed to the creditors throughout the course of the liquidation. Section 241AA of the Companies Act 1993 (“the CA”) forces companies to act quickly when considering this option. Creditors can bypass and replace the shareholder appointed liquidator with one who would act more favourably towards their interests. However, they too must act quickly.
Purpose of section 241AA
Under section 241AA of the CA, a company has 10 working days to appoint its own liquidator from the date when it was served with liquidation proceedings from a creditor. The 10 working-day provision in section 241AA(2)(a) pushes companies to take quick action to move into voluntary liquidation if appropriate. It also prevents a company from deferring voluntary liquidation until shortly before the court is due to consider the liquidation application, which can lead to excessive costs for the creditor.
In 2020, section 241AA(2) was amended and section 241AA(2)(b) was introduced to allow for the company shareholders to appoint a liquidator after the 10working day limit if the creditor that brought the liquidation proceedings consents to the appointment. This also assists in avoiding any unnecessary costs as the creditor may agree with the appointment of the liquidator suggested by the company shareholders.
The shareholder appointed liquidator
A company can place itself into liquidation by the passing of a special resolution of its shareholders (granted it is within 10 working days of being served liquidation proceedings from a creditor). Passing a special resolution requires 75% of all shareholders that are entitled to vote on the matter to then vote in favour of the resolution. A shareholder resolution is not required to be passed if the consent of the petitioning creditor to the appointment has been given.
If the shareholders appoint a liquidator, there is a perception that the liquidator is more likely to act in the interests of the shareholders as opposed to one appointed by the creditor. Although this is not true to every situation, it is still a strong trend in insolvency.
For example, a liquidator will have a contact network of lawyers and accountants. If a lawyer has a client that intends to place their company into liquidation, they will recommend a liquidator that would tend to act in the interests of shareholders. This would be a liquidator who is less likely to pursue areas such as an overdrawn current account or breach of director’s duties.
In many cases the shareholder appointed liquidator will typically remain appointed. Creditors do have an opportunity to replace them, however.
The creditor appointed liquidator
Creditors must act quickly to replace a liquidator if they are concerned by one appointed by the shareholders. In this circumstance, the most cost-effective way to achieve this is by passing a resolution to replace the liquidator at an initial creditors’ meeting.
The process to calling a creditors’ meeting is as follows:
The liquidator must give notice of the creditors’ meeting to every known creditor (see section 243 of the CA).
If the liquidator has decided not to call a meeting, they must give notice to the creditors advising that no meeting will be held and provide reasons for this (see section 245 of the CA).
If a creditor wishes for a creditors’ meeting to be held, the creditor must notify the liquidator in writing within 10 working days of the liquidators’ notice to dispense with a creditors’ meeting (also under section 245 of the CA).
The timeframes to call a creditors’ meeting are critical. If a creditor fails to notify within the statutory timeframes, the opportunity to attempt to replace the liquidator is lost.
A resolution to replace the liquidator may be put forward by a creditor at the creditors’ meeting and, if passed, the proposed liquidator will become the new liquidator of the company. The majority in number and value of the creditors voting must vote in favour of the resolution for it to succeed.
In many cases the creditors will be unsuccessful in replacing liquidators who have been appointed by the shareholders. The number of steps in the replacement process and the amount of lobbying of fellow creditors to vote in favour of the resolution to replace the liquidator can sometimes be too tall of a task.
Conclusion
If the perception of the favourable liquidator is legitimate, we suggest following our recommendations above to appoint a liquidator who will act more favourably toward your interests. As a word of caution, please note that although these perceptions exist, sometimes it can merely be a perception.
Whether it be creditors or shareholders that we act for, we encourage our clients to investigate a liquidator and their history to see if they are likely to act in the best interests of our clients. A liquidator’s reputation can be investigated either by publicly searching through judicial decisions or discussing with one of our insolvency experts.
If you require our legal assistance, please contact us for a no obligation discussion.
Benjamin Franklin once said that “by failing to prepare, you are preparing to fail.”
While it is true that there is no way to guarantee success in a legal proceeding, Norling Law advocates that meticulous preparation is the only way to put forward your client’s best chance of succeeding in their case. But what happens when proceedings are brought prematurely, without adequate preparation?
A recent case that Norling Law acted in demonstrates this. In Another Orange Service Centre Limited (In Liquidation) v Vincent [2021] NZHC 2135, the liquidator of the Another Orange Service Centre Limited (In Liquidation) (the Company), Mr Noyce, brought a claim against the sole director and shareholder of the Company, Mrs Vincent. The claim was for repayment of the Company’s shareholder current account, which had allegedly been overdrawn by $914,612 at the point of liquidation. The claim was brought via summary judgment application in the High Court.
The claim
Prior to its liquidation, the Company operated a motor vehicle repair shop. Mrs Vincent withdrew sums of money from the Company’s account, in her role as a shareholder. When the Company went into liquidation, the liquidator investigated the books of the Company. When calculating the claimed amount, he added payments that had been made from the Company’s bank account to Mrs Vincent’s personal bank account, and what appeared to be payments of Mrs Vincent’s non-business-related expenses by the Company.
The liquidator claimed that he had assessed the Company’s records and could not locate any evidence that Mrs Vincent complied with the requirements of s 161 of the Companies Act 1993 when she made these payments. As such, the payments were presumed to be personal drawings, and therefore repayable on demand.
For an in-depth discussion on s 161 of the Companies Act 1993, see an earlier article that Norling Law published, here. In summary, where payments are not recorded under the requirements of s 161, the payments retain a status as advances or drawings that are repayable on demand. The director or shareholder that withdraws the sums becomes personally liable to repay those monies to the company, unless they demonstrate that the payments were fair to the company.
Summary judgment
In a summary judgment application, the applicant must prove that the respondent has no arguable defence to the claim. That is, that there is no real question to be tried. The Court must be left without any real doubt or uncertainty that the application ought to be granted. As soon as there are disputed facts and the dispute is genuine, a judge will not usually engage in granting summary judgment.
In this case, the onus was on the liquidator to prove that Mrs Vincent had withdrawn the claimed sums as personal withdrawals, and at the very least, that she did not comply with the requirements of s 161.
There is more to a dispute than what is first disclosed
Prior to the commencement of the proceedings, the liquidator wrote to Mrs Vincent on 25 March 2021, attaching his nearly 900-page analysis of the Company’s accounts. He requested that Mrs Vincent review and identify any incorrectly allocated payments to her, by 29 March 2021, just 4 days later.
Norling Law was engaged at the point Mrs Vincent received the 25 March 2021 letter. However, there was no response from the liquidator when Norling Law requested further time so that it could properly analyse the information that the liquidator had provided.
On 30 April 2021, the liquidator made a demand for full payment of $914,612 from Mrs Vincent. Shortly after this, summary judgment proceedings were commenced in the High Court. This was just over one month after the first demand to Mrs Vincent was made.
Upon filing the claim, the liquidator filed a supporting affidavit. However, he did not exhibit in this affidavit the Excel Workbooks (containing his analysis), or the source documents upon which the analysis was based. The liquidator filed draft financial accounts from the Company but provided very little detail of the methodology he adopted to distinguish personal and business expenses. He explained that providing this information would require more than 900 pages of his accounting analysis.
Further, the liquidator did not provide these source documents or analysis in his second affidavit. This is surprising as Mr Turner, an independent expert for Mrs Vincent, had challenged the validity of the liquidator’s assessment for Mrs Vincent’s liability on several bases. As noted by Associate Judge Paulsen, the liquidator’s response to Mr Turner’s evidence was ‘superficial’. Further, Associate Judge Paulsen said that in circumstances where the applicant’s claim is founded upon the liquidator’s analysis, it is to be expected that all of that would be provided.
On behalf of Mrs Vincent, Norling Law argued that the applicant failed to produce sufficient evidence to establish the claim, and consequently, that Mrs Vincent had an arguable defence to liability against the whole sum.
Associate Judge Paulsen was not satisfied that the liquidator had calculated the sum owing correctly. It was noted that a decision could not be made in the absence of evidence.
Furthermore, the liquidator was found to have not given his evidence in compliance with rule 9.43(2) High Court Rules 2016, and the code of conduct for expert witnesses. His Honour found that on the evidence provided by Mrs Vincent, Mr Turner and Mr Noyce, a large portion of the sum claimed must have been drawings, however, the exact amount could not be determined. Consequently, Associate Judge Paulsen entered judgment for the liquidator against Mrs Vincent as to liability but found that quantum could only be determined following a further hearing and there was no immediate obligation to pay any amount.
Discussion
The difficulty with this case is that there was little evidence before the court to make a judgment from. Associate Judge Paulsen had no choice but to divide the issues into liability and quantum as there was no way that quantum could be decided. It is this writer’s observation that if this matter had been pursued as a standard proceeding, both parties would have had more time to file and respond to evidence. Accordingly, the outcome could have been vastly different.
While the liquidator had the onus of submitting evidence to prove their case, Associate Judge Paulsen thought that both parties had ample time to file further evidence from the beginning of the proceedings until the time it was heard before him.
Our thoughts
In summary, Norling Law believes that this case was not suitable for summary judgment, as the evidence to succeed in the application was not put before the court. We submit that it is an inefficient use of resources to have progressed the matter through this path, without meticulous preparation having taken place. We believe that it would have been more efficient to have this case heard in full through ordinary proceedings from the beginning.
While liability has been found, quantum is yet to be decided.
With more time, and meticulous preparation, who knows, the liquidator may have walked away with more than partial success.
The High Court has clarified the scope of directions under s 284(1)(a) of the Companies Act (the Act).
Liquidators are considered officers of the Court and operate under the Court’s supervision. Pursuant to s 284(1)(a) of the Act, a liquidator may apply to the Court for directions in relation to any matter arising in connection with the liquidation. Generally, if a liquidator has obtained directions from the Court, they will have immunity from claims when following those directions.
In Dalton v Mackley, the liquidators applied for directions under s 284(1)(a) of the Act, specifically, they requested directions that certain assets set out in a purchase order are owned by the company and delivered to the company by the respondent.
In this case, the liquidators say that the company owned the assets. They say that they were transferred from Mr Mackley to the company.
Mr Mackley disagreed. He said that the assets were not actually transferred as the transaction never completed.
As such, the ownership of the assets were in dispute.
Despite this dispute, the liquidators sought directions from the Court, declaring the assets to be owned by company in liquidation.
This essentially asks the Court to provide judgment, to determine ownership of the assets. Norling Law acted on this matter. It was our submission that it was inappropriate for the proceeding to be commenced under s284 of the Act. This is because s 284 of the Act is about either supervising liquidators or providing them with directions.
It is not about determining substantive property or contractual rights.
Where substantive rights are to be determined, a proper, full process is required. A process that will allow for:
Proper pleading;
The opportunity for discovery.
The opportunity to interrogate.
The opportunity to cross examine witnesses.
It was our view that this shortcut is inappropriate.
Relevant Law
A handy starting point is the section itself:
S 284 Court supervision of liquidation
(1) On the application of the liquidator, a liquidation committee, or, with the leave of the court, a creditor, shareholder, other entitled person, or director of a company in liquidation, the court may—
(a) give directions in relation to any matter arising in connection with the liquidation:
(b) confirm, reverse, or modify an act or decision of the liquidator:
(c) order an audit of the accounts of the liquidation:
(d) order the liquidator to produce the accounts and records of the liquidation for audit and to provide the auditor with such information concerning the conduct of the liquidation as the auditor requests:
(e) in respect of any period, review or fix the remuneration of the liquidator at a level which is reasonable in the circumstances:
(f) to the extent that an amount retained by the liquidator as remuneration is found by the court to be unreasonable in the circumstances, order the liquidator to refund the amount:
(g) declare whether or not the liquidator was validly appointed or validly assumed custody or control of property:
(h) make an order concerning the retention or the disposition of the accounts and records of the liquidation or of the company.
(2) The powers given by subsection (1) are in addition to any other powers a court may exercise in its jurisdiction relating to liquidators under this Part, and may be exercised in relation to a matter occurring either before or after the commencement of the liquidation, or the removal of the company from the New Zealand register, and whether or not the liquidator has ceased to act as liquidator when the application or the order is made.
(3) Subject to subsection (4), a liquidator who has—
(a) obtained a direction of a court with respect to a matter connected with the exercise of the powers or functions of liquidator; and
(b) acted in accordance with the direction—
is entitled to rely on having so acted as a defence to a claim in relation to anything done or not done in accordance with the direction.
(4) A court may, on the application of any person, order that, by reason of the circumstances in which a direction was obtained under subsection (1), the liquidator does not have the protection given by subsection (3).
Discussion
The purpose of s 284(1)(a) was considered by Associate Judge Paulsen in Dalton v Mackley in depth, stating that, prima facie, the Court had the power to make a wide variety of orders in its supervisory jurisdiction over liquidators.
This was the first fully reasoned consideration of s 284(1)(a) in this context in New Zealand.
Despite s 284(1)(a)’s broad wording, the Associate Judge confirmed the purpose and wording of the section, that is, to allow for expedient proceedings without particularised pleadings, or where there are no significant factual disputes.
Paulsen AJ further states that the text of s 284 and other indications provided by the Companies Act do not support the interpretation of making binding orders in the nature of judgments, rather, they support the view that the proper subject of directions should be confined to the manner in which a liquidation should be carried out under the control of the liquidator.
Further, Paulsen AJ considered s 284(3) of the Act, stating that the protection offered by the provision was concerned with the proper discharge of a liquidator’s functions, and that the protection was offered against allegations of breach of duty by creditors and shareholders. Accordingly, in the present scenario, it would not be of much use.
As there had been relatively little discussion as to the scope of the type of directions that can be sought under s 284(1)(a) in New Zealand, we referred his honour to Australian provisions under the corresponding legislation.
The position in Australian Courts is unambiguous. It has a long history.
The Australian position did not enable the Court to make binding orders in the nature of judgments when asked for directions by a liquidator.
The Associate Judge found comfort in relying more heavily on Australian authorities, noting that Kelly (Liquidator), in the matter of Halifax Investment Services Pty Ltd (in liq) v Loo (Kelly v Loo) was heard concurrently with Re Halifax New Zealand Ltd (in liq) v Loo, in the Federal Court of Australia and the High Court of New Zealand respectively, with the Federal Court emphasising the desirability in a consistency of approach between the two jurisdictions.
Our Comments
It is unfortunate that this matter needed to be litigated. It is of a modest amount.
In our practice, we see countless examples of modest claims being pursued by liquidators in the hopes of shaking money out of inexperienced or under resourced litigants. It can be tough for counterparts of liquidators to succeed given the resource imbalance.
This case demonstrates the risk to liquidators in taking short cuts. Sometimes those who take short cuts get cut short.
We welcome this clarification by the High Court, as this issue had not been previously examined in depth. We trust that this will ensure a clear boundary for liquidators moving forward.
Please refer to our People for more information on who we are, our experience, and how we can help you.
A liquidation is the means by which a company’s assets are collected and distributed to its creditors in a set scheme of priorities. Both the shareholders and creditors of a company can put it into liquidation through different methods.
When a company is liquidated, a vast amount of discretion is conferred upon the liquidator or liquidators. Their primary duty is to realise the assets for the highest price possible to pay out creditors. However, liquidators are not under any strict duty to litigate potential breaches of director duties.
Accordingly, sometimes there is a big difference in steps taken by a shareholder appointed liquidator (being a liquidator appointed by the shareholders of a company) and a creditor appointed liquidator (being a liquidator appointment by the creditors of a company).
The below case study is an example of creditors replacing a shareholder appointed liquidator with a liquidator of their choice in the hopes of receiving a better outcome.
The following is a case study on steps we have taken for clients. If we can be of assistance to you, take advantage of our FREE 30-minute Legal Consultation.
Case Study
Originally, Norling Law was engaged to act for multiple creditors (“the Creditors”) of Vijay Holdings Limited (“the Company”) and was instructed to resolve a dispute regarding the payment of a debt from the Company to those creditors. Norling Law had previously made demands and taken steps to realise the debts for the Creditors.
Unknown to the Creditors and after demands were made, on 6 November 2020 at 11:00am, the shareholders placed the Company into liquidation. Daran Nair and Heiko Draht of Greenlane Chartered Accountants (“the Original Liquidators”) were appointed, jointly and severally, as liquidators of the Company.
Norling Law advised the Creditors that in general, shareholder appointed liquidators can be seen as “friendly” to the Company as they have been appointed by the owners of the Company (being the shareholders) and were also unlikely to pursue and litigate claims due to not being under any statutory obligation to do so.
Norling Law advised the Creditors that a creditor appointed liquidator would likely be more aggressive in examining the conduct of the Company and its directors, potentially resulting in more recoveries for the creditors of the Company.
Ordinarily, liquidators of a company must call a meeting of the creditors of the company in liquidation for the purpose of resolving whether to confirm the appointment of the liquidator or to appoint another liquidator (s 243(1)(a) Companies Act 1993 (“the Act”)).
The Original Liquidators did not call a meeting of the creditors but rather, pursuant to s 245 of the Act, provided notice to creditors to dispense with the meeting of creditors.
Subsequently, pursuant to s 314(2) of the Act, Norling Law made a request to the Original Liquidators to call a meeting of creditors for the purpose of voting on the replacement of the Original Liquidators, for a creditor appointed liquidator.
In response, Norling Law wrote to the Original Liquidators stating that the Creditors intended to exercise their right to request that the Original Liquidators call a creditors’ meeting as per the Creditors’ s245(1)(b)(iii) of the Act right for the purpose of reviewing the Original Liquidators’ appointment and to vote on whether they shall be replaced with another liquidator.
On 7 December 2020, the Original Liquidators provided notice to all creditors of the Company that the meeting would be convened on 17 December 2020 at 2:00 pm via postal ballot only, with a postal voting form that had to be submitted by 15 December 2020 at 2:00 pm. This meant that there would be no in-person meeting and all votes had to be sent to a third party who chaired the meeting by this date.
Norling Law had 8 days to persuade the creditors of the Company to vote out the Original Liquidators.
Norling Law achieved this by individually contacting and talking to credit managers, directors, and accounts teams throughout the country, explaining the differences between a shareholder appointed liquidator and a creditor appointed liquidator.
On 17 December 2020, Norling Law received confirmation that its preferred liquidator, Gregory John Sherriff of Waterstone Insolvency was voted in, replacing the Original Liquidators. 93.33% of the number of creditors and 98.58% of the value of creditors voted to replace the Original Liquidators.
Norling Law trusts that Mr. Sherriff and Waterstone will fully investigate the Company’s affairs and the directors’ conduct with scrutiny.
Norling Law considers that this will produce the best possible results for the Creditors.
Please refer to our People for more information on who we are, our experience, and how we can help you.
A statutory demand is a mechanism created by legislation, the Companies Act 1993 (“the Act”). It enables creditors to enforce overdue payment from indebted companies. The debtor company’s failure to comply with the issued statutory demand could result in the liquidation of the debtor company.
The Court of Appeal in Pioneer Insurance Company Ltd v White Heron Motor Lodge Ltd [2009] NZCCLR 14 stated that there are two main purposes of a statutory demand:
The main purpose is to obtain payment of the debt.
The secondary purpose is to prove that the debtor company cannot pay their debts for the purposes of liquidation proceedings.
A statutory demand is a common way pursuant to which liquidation proceedings are started and brought to the High Court; a failure to pay or set aside a validly issued statutory demand creates a presumption of the company’s insolvency (s 287(a) of the Act).
Due to severe consequences that it can cause, a statutory demand should not be used carelessly or vexatiously.
Requirements for issuance of statutory demand
For the creditor to be able to issue a statutory demand, the statutory demand must (s 289(2) of the Act):
Be in respect of a debt that is due and is not less than $1,000.00; and
Be in writing; and
Be served on the debtor company; and
Require the debtor company to pay the debt, or enter into a compromise under Part 14, or otherwise compound with the creditor, or give a charge over its property to secure payment of the debt, to the reasonable satisfaction of the creditor, within 15 working days of the date of service, or such longer period as the court may order.
The service of the statutory demand on the defendant company must also comply with the rules of service contained under the Act.
Abuse of Process
The Courts have made it clear that creditors should not be criticised for utilising a statutory demand as a method of debt collection, however, the process should not be abused. The Court of Appeal in Link Electrosystems v GPC Electronics (New Zealand) Ltd (2007) has explicitly stated that a statutory demand should not be used “oppressively as a debt collection device”. A statutory demand should not be used to threaten a company with liquidation if the requirements have not been met for issuing the statutory demand in the first place.
A statutory demand should not be used where there is a genuine and substantial dispute as to the debt. Doing so will likely be seen as an abuse process.
It is a good practice that a statutory demand is issued by the creditor’s lawyer, rather than the creditor personally or their debt collection agency. This is because it is generally expected of lawyers to ensure that the required pre-requisitions for the issuance of the statutory demand are satisfied.
Subsequently, it is recommended to consult a lawyer before considering your options and whether or not to issue a statutory demand is the right process for your company, as there can be risks associated with improperly using the process. For example, a Court may penalise a creditor by awarding increased costs in relation to setting aside the statutory demand if it deems that the statutory demand was improperly issued.
Setting aside a statutory demand
If your company has been served with a statutory demand, then you should consult a specialist lawyer immediately; time is of the essence in determining your options. The Act has strict timelines for companies that have been issued with a statutory demand.
If the debt is not disputed by the debtor company, most commonly recommended option is to either pay the debt or enter into a payment arrangement with the creditor.
If obligation to pay the debt is disputed by the debtor company, there is an option to make an application to Court to seek that the statutory demand is set aside. There are three primary grounds under s 290(4) of the Act that allow the court to set a statutory demand aside:
There is a substantial dispute whether or not the debt is owing or is due; or
The debtor company appears to have a counterclaim, set-off, or cross-demand, and the amount specified in the demand (less the amount of the counterclaim, set-off, or cross-demand) is less than $1,000.00; or
The demand ought to be set aside on other grounds.
The grounds for seeking the setting aside of the statutory demand in High Court will be addressed in more details below.
It should be noted that any application to set aside a statutory demand must be made within 10 working days of the date of service of the statutory demand, and also served on the creditor within 10 working days of the date of service of the statutory demand. This is a strict requirement, and no extension of time may be given. However, at the hearing of the application, a court may extend the time for compliance with the statutory demand (e.g. payment of amount owing).
Otherwise, if the statutory demand has procedural defects (these procedural requirements are located in s 289(2) of the Act and above), it could be considered invalid and/or can be set aside.
If the statutory demand is neither satisfied, nor an application to Court is made for the setting aside of the statutory demand within the prescribed timeframe, by operation of the Act, the debtor company would be presumed to be insolvent, and the creditor would be entitled to make an application to Court to seek liquidation of the debtor company.
Disputed Debt
In the event that the debt is genuinely disputed, a statutory demand should not be issued in the first place.
If a statutory demand has been issued on a disputed debt, the Court will have to decide whether there is a credible or fairly arguable basis that the debt is not owing. The assessment is conducted on the basis of the material presented to Court. Where there is a genuine dispute, the dispute should be addressed in an ordinary proceeding, and not in the liquidation Court.
It is worth noting that if the debt had been genuinely disputed prior to the issue of the statutory demand, and the statutory demand was made despite the dispute, there may be an increased award of costs in favour of the party setting aside the statutory demand.
Set off, counter claim, or cross demand
If the debtor company can show that there is a set-off or a counter claim that appears to exist against the creditor that would reduce the amount owing to be under $1,000.00, then a Court may set aside the demand. If the claim against the creditor is a liquidated or undisputed amount, then it is likely the demand will be set aside with minimal issues. If the claim against the issuer is for an unliquidated amount or disputed, the debtor company must demonstrate sufficient evidence showing that it has a real basis for the claimed set-off or counter claim.
Other grounds
If the Court is satisfied that the creditor’s prima facie entitlement to liquidate the company is outweighed by some factor making it plainly unjust for the liquidation to occur, then the Court has the discretion to set aside the statutory demand (Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395 (CA)). Generally, this would include grounds such as preventing the abuse of the statutory demand process and/or preventing substantial injustice. It is less common to see this section invoked.
Conclusion
If you have received a statutory demand, the time to act is now. Due to the strict timelines of the Act, it is imperative to consult a lawyer as soon as possible. Failure to serve an application to set aside the statutory demand when faced with a validly issued statutory demand can lead to a company’s liquidation extremely quickly.
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