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In re Ba Provincial Holding Company Ltd [2011] FJHC 432; HBF32.2009; HBE2.2010 (12 August 2011)

IN THE HIGH COURT OF FIJI
WESTERN DIVISION AT LAUTOKA

BANKRUPTCY & WINDING UP CAUSES
HBF 32 of 2009 & HBE 2 of 2010

IN THE MATTER OF
BA PROVINCIAL HOLDING COMPANY LIMITED
a duly incorporated company having its registered office at
Rogorogoivuda House, Tavewa Avenue, Lautoka, Fiji.

AND

IN THE MATTER OF THE COMPANIES ACT, 1983.

Before : Master Anare Tuilevuka

Solicitors : Mishra Prakash & Associates for the Petitioner in HBF 32 of 2009
Neil Shivam Lawyers for the Petitioner in HBE 02 of 2010.

Date of Ruling : 12 August 2011

RULING

INTRODUCTION

[1]. Below are my reasons for the winding up order I granted in Court on 09 August 2011 against Ba Provincial Holdings Company Limited ("BPHCL").

[2]. There are two winding up petitions before me against BPHCL. BPHCL does not dispute the debts. The main question that arises is whether or not BPHCL is insolvent and unable to pay its debt? In particular, the question is – what factors should the court consider in assessing whether or not BPHCL is insolvent?

THE PETITIONS

[3]. The first petition was filed on 28 September 2009 by Mishra Prakash & Associates on behalf of Chandra Lok. This is Winding Up Petition 32 of 2009. The second was filed on 25 January 2010 by Neil Shivam Lawyers on behalf of Vodafone Fiji Ltd. This is Winding Up Petition HBE 2 of 2010.

[4]. Both petitions allege that it is just and equitable to wind up BPHCL because it is insolvent and unable to pay its debt having neglected to respond to the respective Notice of Demand and Notice of Intention to Wind Up issued by both creditors against the company.

[5]. No issue is raised about the validity or otherwise of these notices. Nor is any issue raised about the verifying affidavits filed in respect of each petition or the memorandum of due compliance filed in each proceeding.

DEBT ALLEGED

[6]. Vodafone's petition alleges a debt of $4,502.87 being charges for the use by the company of mobile phone number 9907296 and 9907298 plus $2,043.20 being fees for premature termination of agreement.

[7]. Chandra Lok's petition alleges a debt of $22,899.69 that BPHCL owes him.

ADMISSION OF DEBT

[8]. BPHCL did file an affidavit in opposition initially in the Chandra Lok petition. That affidavit did not contain a bona fide dispute of the debt.

[9]. In any event, BPHCL was to subsequently admit to the debt. Its admission is evidenced by its initiating an arrangement with Chandra Lok and Vodafone to settle the debts. This is recorded in the Chandra Lok proceedings (see below) and in the Vodafone proceedings (see below). It is further evidenced by an affidavit of Ravulolo Draunibaka sworn and filed on 09 August 2011 (see further below).

Record of Chandra Lok Proceedings

[10]. The records show that BPHCL did in fact enter into an arrangement with Lok and the supporting creditors namely Islands Electric Limited ("IEL") and Sigatoka Builders Limited ("SBL") to settle their debts[1].

[11]. The court records for 24 November 2009 and 29 January 2010 show that following a BPHCL initiative, the company entered into an arrangement with Chandra Lok and IEL to settle their respective debts by an agreed schedule of payment. That arrangement would see that both debts were paid off by a stipulated deadline.

[12]. BPHCL however was to struggle to keep up with that commitment. Mr. Qoro is on record from the bar table that the company did try to secure a bank loan to finance these debts.

[13]. Nothing has happened on that front (see court records for 03 August 2010 and 26 October 2010).

[14]. Mr. Vuataki, who appeared for Mr. Qoro on 27 April 2011 and 30 May 2011, is also on record from the bar table that a BPHCL shareholder's meeting had resolved to raise further funds through a shareholding restructuring.

[15]. How this was to happen or when it happened (if it ever did happen) was never put formally in evidence in an affidavit form.

[16]. Below I set out the record of court proceedings in HBE 32 of 2009.

Record of Vodafone Proceedings

[17]. The records for HBE 02 of 2010 also show that BPHCL did acknowledge the Vodafone debt and had entered into an arrangement to settle it.

HBF 35 of 2008

[18]. For the record, a winding up petition against BPHCL was filed in 2008 by Sigatoka Builders Limited, namely Winding Up Petition HBF 35 of 2008. This petition was later withdrawn after the parties settled by a Deed of Settlement dated 12 March 2009. A reference to this is in the record of the Chandra Lok court proceedings for 18 March 2011 (see paragraph 10 above).

[19]. By that Deed, BPHCL accepted and acknowledged the debt of $72,445.63 in respect of various air conditioning units supplied, installed, and serviced by SBL at the Office Building for the Ministry of Health in Lautoka. Furthermore, the Deed records BPHCL's acknowledgement of its indebtedness to SBL for the additional sum of $282,581.11 in respect of the construction of a new office block for the Ministry of Health in Lautoka.

[20]. Under the Deed, BPHCL was to settle the debt by 31 December 2010 by a stipulated monthly installment. However, the debt has been settled in part only with a balance of $223,081.11 remaining as of 5 August 2011 - according to the affidavit of Ravulolo Draunibaka (see below).

[21]. It was this unpaid amount that prompted SBL to file a Notice of Intention to Appear in Support of Winding Up Petition in both HBE 02 of 2010 and in HBE 32 of 2009.

NOTICES OF INTENTION TO APPEAR IN SUPPORT OF WINDING UP PETITION

[22]. Below, I set out all the Notices filed in both HBE 32 of 2009 and HBE 02 of 2010.

RAVULOLO DARUNIBAKA'S AFFIDAVIT FILED ON 09 AUGUST 2011

[23]. Mr. Qoro did file today without leave an affidavit of Ravulolo Draunibaka. Draunibaka's affidavit deposes that BPHCL is in the process of paying off all its creditors. The Affidavit deposes as follows:

1. I am one of the Managers of Ba Provincial Company Limited and I have been authorized by it to depose this my affidavit on its behalf.
   
2. So far, the Respondent has made the total payment of $29,500 to the Petitioner's Solicitors, Messrs Mishra Prakash & Associates (annexed herewith and marked "RD1" are true copies of Payment Schedule to Mishra Prakash and Associates.
   
3. Arrangements have been made with Island Electric Wholesalers for payment of $3000 per month to them. Annexed herewith and marked "RD2 is a true copy of the said agreement dated 14th April 2011.
   
4. Further, the Respondent Company has also made arrangement with other creditors for payment of debts. Out of the 2.7 million debt, the Respondent Company has paid more than $1.5 million to all its creditors between 2009 and 2011. So far, the Company has a debt of more than $1.1 million and is in a position to pay its debt. Annexed herewith and marked RD3 is a true copy of the said Respondent Company Creditors payment record as at 5th August 2011.
   

(my emphasis)

[24]. Annexure RD3 is a schedule setting out a list of BPHCL's creditors, the amount owed to each creditor in 2009, the payments made in 2009 and 2010, and the balance owing as at 05 August 2011. The annexure lists a total of 64 (sixty four) creditors including the 7 listed in paragraph 22 above and the two petitioning creditors, Vodafone Fiji Limited and Chandra Lok.

[25]. FIRCA (Vat) appears on the list and is owed a total of $1,059,032.43 (one million and fifty nine thousand and thirty two dollars and fourty three cents). Of this amount, FIRCA (Vat) has recovered vide a garnishee order a substantial amount. As of 05 August 2011, the debt to FIRCA (Vat) has dropped considerably to $295,430.40.

[26]. FIRCA (PAYE) is also amongst the list of creditors. It is owed a sum of $12,145.64 of which nothing has been recovered to date. I note also that the Fiji National Provident Fund was owed a total of $64,680.44 of which debt a balance of $42,416.62 is owing as at 05 August 2011.

[27]. I observe that each debt itemized in Annexure RD3 was incurred from or before 2009. Mr. Qoro had submitted on one occasion in court from the bar table that these debts were incurred by the previous management of BPHCL.

PROVING SOLVENCY

[28]. The purpose behind Draunibaka's last affidavit and in particular Annexure RD3, is to show to this court that out of the total debt of $2,738,281.69 (two million seven hundred and thirty eight thousand and two hundred and eighty one dollars and sixty nine cents) that BPHCL owed to its 64 creditors in 2009, BPHCL has settled a substantial sum with only $1,153,236.56 (one million one hundred and fifty three thousand two hundred and thirty six dollars and fifty six cents) balance owing.

[29]. I cannot accept Annexure RD3 as evidence that the company is solvent and able to pay its debts. On the contrary, the information in that document – in my view - only confirms that BPHCL is commercially insolvent (see further paragraphs 30 to 43 below).

ANALYSIS

[30]. As stated, the only issue to consider is whether or not BPHCL is solvent and is able to pay its debts.

[31]. The starting point is section 220 (e)) and section 221(a) and (b) of the Companies Act (1983). Section 220 (e) states that a company may be wound up if it is unable to pay its debt. Section 221 sets out three situations when a company may be deemed to be unable to pay its debt.

Definition of inability to pay debts

221. A company shall be deemed to be unable to pay its debts-

(a) if a creditor, by assignment or otherwise, to whom the company is indebted in a sum exceeding $100 then due has served on the company, by leaving it at the registered office of the company, a demand under his hand requiring the company to pay the sum so due and the company has, for 3 weeks thereafter; neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor; or

(b) if execution or other process issued on a judgment, decree or order of any court in favour of a creditor of the company is returned unsatisfied in whole or in part; or

(c) if it is proved to the satisfaction of the court that the company is unable to pay its debts, and, in determining whether a company is unable to pay its debts, the court shall take into account the contingent and prospective liabilities of the company.

[32]. In In re Comsol Fiji Ltd [2009] FJHC 77; HBE0048.2007L (25 March 2009), Master Udit recorded the following observations about the scope of section 221.

It is a deeming provision. That is if a company owes debt of at least $100, and a demand is made but the company neglects to pay the same within 3 weeks of the date of demand, a presumption of inability to pay arises. But it is a presumption which can be rebutted. (my emphasis)

Hence, when a demand is made the company must act swiftly to dispute the debt or pay the same in order to negate the imposition of the said presumption. Furthermore, if the company opts to dispute the debt it must do so on substantial grounds.

[33]. Hence, a company must act swiftly upon being served with a demand to settle the debt in order to rebut the presumption of insolvency.

[34]. Draunibaka's affidavit asserts that BPHCL is solvent and is able to pay its debts. He appears to make that assertion based on the fact that out of the total debt of $2,738,281.69 that BPHCL owed to its 64 creditors in 2009, BPHCL has settled a substantial sum with only $1,153,236.56 balance owing (see paragraph [24] above).

[35]. As to what solvency test Draunibaka uses – is unclear. Certainly, from a cash flow test perspective (i.e. whether BPHCL is able to pay its debts as they become due) it is hard to accept that BPHCL is solvent considering its persisting state of indebtedness and the time that has lapsed.

[36]. From a net assets test perspective (i.e. that the value of its assets is greater than the value of its liabilities including the debts alleged in the petitions), it is also hard to accept that BPHCL is solvent considering the time that has already lapsed without BPHCL taking any action to procure cash by realizing any of its assets by sale – and also considering the amount of debt outstanding.

[37]. Having said that, there is no evidence before me as to what assets BPHCL might have.

[38]. In Re National Funds Assurance Co. (1876), 24 W.R. 1066; 10 Digest 1080 and Re European Life Assurance Society (1869), L. R. [1869] UKLawRpEq 195; 9 Eq. 122; 10 Digest 819, 5335[2] are authority that a company (other than a life assurance company) may be wound up on the ground of inability to pay its debt when it is commercially insolvent,
[39]. In >Sandell v Porter & Anor (1966) 115 C.L.R. 666,, the Australian High Court - though dealing with a case of a personal bankruptcy and not a winding up of a corporation, defined "insolvency" in terms of the Bankruptcy Act then in force in Australia in terms which highlight certain factors which may be heedful in the particular circumstances of this case before me. The headnote to that case states as follows:

Insolvency is expressed in s.96 of the Bankruptcy Act 1924-1960 (Cth) is an inability to pay debts as they fall due out of the debtor's own moneys. But the debtor's own moneys which he can procure by realization by sale or by mortgagee or pledge of his assets within a relatively short time – relative to the nature and amount of the debts and to the circumstances, including the nature of the business of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor's financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor's inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency. Whether that state of his affairs has arrived is a question for the Court and not one as to which expert evidence may be given in terms, though no doubt experts may speak as to the likelihood of any of the debtor's assets or capacities yielding ready cash in sufficient time to meet the debts as they fall due.

[40]. Having noted the above, I reiterate that BPHCL has not put before me any evidence of what the total value of its assets is, let alone that it exceeds the total value of its liabilities.

[41]. It is also hard to say that what BPHCL is facing is a situation of temporary liquidity, again, considering the time that has already lapsed.

[42]. It is also difficult to say that BPHCL would be able to procure cash in a relatively short time by realization of its assets by sale or by mortgage or pledge to pay off its debts. BPHCL's inability to obtain a bank loan (see paragraph 12 above) speaks for itself.

[43]. In Court today, Mr. Qoro again sought further time to allow BPHCL to pay off its creditors. How it will do so is not explained. I am not inclined to grant any further adjournment firstly, because I am satisfied that BPHCL is insolvent and secondly, because to grant more time to an insolvent company to pay off its creditors one by one considering the history of this case would offend the principles that govern the winding up process.

[44]. On that latter point, one of the underlying principles that govern the winding up process is to put into effect a mechanism of collective execution against the assets of an insolvent company for the benefit of all creditors. In other words, it is to allow for an equitable and fair distribution of the assets of the debtor company amongst its creditors. In re Bostels Ltd (1968) Ch. 346 at 353 (cited in In the Matter of Chaz Lumber Limited, Supreme Court of Fiji, 1985 Volume 31 FLR at page 55, Pennycuick J, in dealing with the principles governing the substitution of a supporting creditor as petitioner, observed that the rule allowing substitution operates to reduce costs and to conserve the assets of the Company, because the remedy of winding up:

enures for the benefit of the creditors as a whole and the costs of the petition fall upon the assets available for distribution amongst the creditors as a whole

[45]. In In the Matter of Chaz, the Cullinan J said as follows:

Ultimately therefore, rule 32 operates not so much for the convenience of a supporting creditor as in the interests of all creditors as a whole.

[46]. Section 225 of the Companies Act (Cap 247) also espouses the same underlying principles in forbidding the disposition of property of a company once a winding up has begun.

[47]. Section 225 states as follows:

Avoidance of dispositions of property, etc. after commencement of winding-up

225. In a winding-up by the court, any disposition of the property of the company, including things in action, and any transfer of shares, or alteration in the status of the members of the company, made after the commencement of the winding-up, shall, unless the court otherwise orders, be void.

[48]. Grower's Principles of Modern Company Law, 4th ed. 1979 states that:

Winding up is deemed to commence not when the order is made, but when the petition is presented........

[49]. Section 227(2) of the Companies Act (Cap 247) states as follows:

...the winding up of a company by the court shall be deemed to commence at the time of the presentation of the petition for the winding up.

[50]. When the above authorities and sections of the Companies Act (Cap 247) are read together, what emerges clearly - in my view - is the principle that, once a winding up petition is presented in court, it would be improper for a company with many creditors such as BPHCL to engage in any scheme of settlement debt which prioritises some creditors over others. To do so would simply violate the underlying aim of preserving the assets of the company for the benefit of creditors as a whole. In my view, such a practice may also violate section 225 of the Companies Act as the settlement of the debt of one creditor in preference over others may well amount to a "disposition" within the contemplation of the section.

[51]. What makes a winding up order even more imperative in the circumstances of this case is that the Fiji National Provident Fund and FIRCA are amongst the list of acknowledged-creditors that are listed in Annexure RD3 of Draunibaka's affidavit.

[52]. Any further adjournment as requested by Mr. Qoro, would potentially undermine the priority that these entities enjoy under the preferential payment scheme of section 312 of the Companies Act.

[53]. Section 312 of the Companies Act states as follows:

Preferential payments

312.-(1) Notwithstanding the provisions of any other written law, in the winding-up of a company, there shall be paid in priority to all other debts-

(a) all Crown taxes and local rates due from the company at the relevant date and having become due and payable within 12 months next before that date, not exceeding in the whole 1 year's assessment and all Crown taxes legally withheld by the company from payments made by it to employees, members, and others;

(b) all Crown rents not more than 1 year in arrear;

(c) all wages or salary (whether or not earned wholly or in part by way of commission) of any clerk or servant (not being a director) in respect of services rendered to the company during 4 months next before the relevant date and all wages (whether payable for time or for piece work) of any workman or labourer in respect of services so rendered;

(d) unless the company is being wound up voluntarily merely for the purposes of reconstruction or amalgamation with another company, or unless the company has, at the commencement of the winding-up, under any contract with insurers, rights capable of being transferred to and vested in the workman, all amounts due in respect of any compensation or liability for compensation under the Workmen's Compensation Act, being amounts which have accrued before the relevant date;

(Cap. 94.)

(e) unless the company is being wound up voluntarily merely for the purposes of reconstruction or amalgamation with another company, all amounts due in respect of contributions payable during the period of 12 months immediately preceding the relevant date by the company as the employer of any person under the Fiji National Provident Fund Act.

(Cap. 219.)

CONCLUSION

[54]. I grant order in terms of both petitions and accordingly order that the company, namely BA PROVINCIAL HOLDINGS COMPANY LIMITED, be wound up by this Court under the provisions of the Companies Act, 1983.

........................................
Anare Tuilevuka
Master

At Lautoka
12 August 2011

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^[1] see records for 29 January 2010 and 18 March 2011.

^[2] See reference to these cases in Halsbury’s Laws of England , 1949 Edition, Volume 5 at page 607.

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