IN THE HIGH COURT OF FIJI AT LAUTOKA
CIVIL JURISDICTION

Companies (Winding Up) Proceedings
No. HBF No. 41 of 2010.

IN THE MATTER OF WESTERN CUSTOMS BROKERS (AIRPORT) LTD a limited liability company having its registered office at Nadi Airport.

AND

IN THE MATTER of the COMPANIES ACT (Cap 247).

Before: Anare Tuilevuka
Counsel Appearing: Mr. Faiz Khan of Faiz Khan Lawyers for the Petitioner & for Kooline Refrigeration (Lautoka) Ltd – a Supporting Creditor.
: Mr. A.K Narayan for Tubemakers & Roofmart (SP) Ltd – a Supporting Creditor.
: Mr. F. Koya on instructions of Iqbal Khan & Associates for the Respondent Company.

Date of Hearing: Tuesday 25 October 2011.
Date of Ruling: Thursday 27 October 2011.
(Written Ruling circulated on 02 November 2011)

RULING

INTRODUCTION

[1].	An issue has arisen in this case as to what extent, if at all, may a court stand over a winding up petition to allow a debtor company which has been served with a demand notice under section 221(a) of the Companies Act (Cap 247) and which admits to its indebtedness to the petitioner - a chance to trade itself out of its difficulties – or – even stay a winding up order for the same reason.

[2].	I am of the view that a court may indeed allow such a company time to get itself out of its difficulties, but these cases are exceptions rather than the rule. The rule, of course, is set out in sections 220(e) and 221(a) of the Companies Act (Cap 247). Its essence is captured by Gibbs J In Re Leonard Spencer Pty Ltd who echoed high authority in noting:

A creditor whose debt is undisputed and who cannot obtain payment is entitled ex debito justitiae [as a matter of right] to a winding up order.

[3].	However, the wording of section 220(e) suggests that even where the threshold requirements of section 221(a) are met, the court may still not order a winding up.

220. A company may be wound up by the court, if –

(e) the company is unable to pay its 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 some 3 weeks thereafter, neglected 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;

[4].	In this case before me, I did grant a Winding Up Order on 02 September 2011 against a company which was trading as a customs broker, on the petition of an importer that has had great difficulty recovering monies it had paid to the former, and which monies were misused by the former, in circumstances which has led even to the laying of a criminal charge against one of the directors of the former.

[5].	The customs broker now seeks to set aside that Winding Up Order. Aside from the technical issue of whether or not a winding up order can be "set aside", the substantive argument that drives the setting aside application is that, instead of granting the winding up order, the court could and should have exercised its discretion in standing over the winding up petition to allow the customs broker time to trade itself out of its difficulties and eventually settle the debt.

BACKGROUND

[6].	Western Customs Brokers (Airport) Limited ("WCBAL") was the customs broker in question. Bakels Fiji Limited is the importer concerned. WCBAL has now lost its Customs License because of events that happened which led to this winding up proceedings. 

[7].	Bakels had imported some goods to Fiji in two consignments. The first consignment came in September 2009. The second one came in December 2009. On both occasions, WCBAL acted as Bakel's customs agent. 

[8].	On 18 September and 18 December 2009, Bakels made two equal separate payments to WCBAL. These payments added up to $54,593.34. WCBAL was to have applied the payments towards clearing the VAT/fiscal duty on Bakel's consignments. This did not happen. Instead, on both occasions, WCBAL applied for and obtained a "pre-release" clearance of the consignment from Customs pursuant to section 31 of the Customs Act without paying FIRCA any of the monies that Bakels had paid it.

[9].	Under section 31, a proper officer may permit the unloading and delivery to an importer of certain classes of goods without entry, and upon payment of a small fee of $25.00 (twenty five dollars). 

[10].	Pre-release is usually allowed only in certain cases of special urgency on an undertaking to Customs by the importer that the necessary entry will be provided within 48 hours of the time of delivery. 

[11].	In this case, on both occasions, WCBAL sought and obtained pre-release clearance – after giving the required undertaking. It then promptly delivered the consignment to Bakels. It appears that Bakels took delivery of each consignment thinking that their respective VAT/fiscal duties had been cleared. In fact, Bakels was unaware of WCBAL's scheme until it received a 14-day Notice of Demand dated 30 June 2010 from Mr. Lorima Vosa of FIRCA – which Notice I reproduce in part below:

RE: OUTSTANDING DUTY LIABILITY

……………………………….
FIRCA investigations have revealed that the above duty liability may have already been paid by your Company to your Customs agent however; this payment has either not reached the Customs or the cheque payment by your Agent has been subsequently dishonored by the relevant Bank.

Consequently, your attention is drawn to the provisions of Section 153 and 154 of the Customs Act 1986 which provides that the importer of the goods is not relieved of any liability contained in the Customs laws which includes the payment of any duty levied on the goods. Any arrangement which may have existed as between your Company and the Customs Agent is a private matter between yourselves however, duties due and owing to the State is ultimately your responsibility as importer of the said good(s).

Therefore, please TAKE NOTICE that your Company is now given fourteen (14) days from the date of this letter to settle the outstanding dues which is a debt due to the State. A failure to do so may result in the enforcement of certain provisions of the Customs Act which includes the imposition of a lien against all goods that come under Customs control.	

[12].	Upon receiving the above Notice, Bakels promptly settled the outstanding VAT/duties with FIRCA. It then demanded from WCBAL reimbursement of the sum of $54,593.34. When WCBAL could not reimburse Bakels the monies upon demand, Bakel instituted Winding Up proceedings on the ground that WCBAL is insolvent. 

THE WINDING UP PROCEEDINGS

[13].	Bakels' Winding Up Petition was presented on 25 October 2010. No issue of compliance has been raised about the petition. Mr. Shalendra Prasad, the Managing Director of WCBAL swore an affidavit which was filed on 22 December 2010 (see paragraph 24 below). Mr. Mathew Allan's affidavit in reply was filed on 11 February 2011 (see paragraph 25 below). 

[14].	To this day, WCBAL has never disputed that it did receive the sum of $54,593.34 from Bakels to pay FIRCA. Nor has it ever disputed that it never did pay FIRCA the monies. On 04 April 2011, WCBAL - through Mr. Koya who appeared for Iqbal Khan & Associates – agreed to the following Terms of Settlement.

Terms of Settlement:

(i)	WCBAL to write 6 cheques postdated to end of each month from 30/04/11 to 30/09/11 to the sum of $9,999-00 each. 

(ii)	The post dated cheques are to be delivered to Faiz Khan Lawyers by Friday 08/04/11.

(iii)	The Petitioning Creditor may apply by giving one week's written notice.

(iv)	The case is adjourned to 05/10/11 for mention to see if debt is fully paid off.

[15].	However, WCBAL, could not honour the Terms of Settlement. 

[16].	It is common ground that WCBAL has since paid $7,000 into Faiz Khan Lawyer's Trust Accounts pursuant to the Terms of Settlement. The payments have not deterred Faiz Khan Lawyers from giving a notice on 10 August 2011. Pursuant to that, a Notice of Adjourned Hearing returnable 01 September 2011 was faxed on 12 August 2011 by the registry to both Messrs Koyas and Messrs Iqbal Khan & Associates. 

[17].	On 01 September 2011, Mr. Faiz Khan appeared for Bakels. Ms Vokanavanua, who was in court that day for other matters, was startled when the case was called out. On her insistence, I stood the matter down for a few minutes to allow her principal, Mr. Iqbal Khan, to appear. When he did not appear, I then stood the matter over to the next day, 02 September 2011, despite strong opposition from Mr. Faiz Khan. I did that to allow Ms Vokanavanua and/or Mr. Iqbal Khan to appear and explain WCBAL's non-compliance with the Terms of Settlement and to show cause why a Winding Up Order should not be granted. 

[18].	However, on 02 September 2011, neither Mr. Iqbal Khan nor Ms Vokanavanua appeared. I then granted the Winding Up Order, but only after hearing Mr. Faiz Khan formally prove the petition on all affidavits filed for and against it with particular emphasis on the fact that WCBAL had defaulted on the Terms of Settlement. 

[19].	In all the evidence before me, I agreed with Mr. Khan that WCBAL acknowledges the debt, but was having difficulty in finding a way to pay it off. I set out below (see paragraph 24) part of Shalendra Prasad's affidavit which justifies that conclusion.

APPLICATION TO SET ASIDE

[20].	It is the above winding up order which WCBAL – through Iqbal Khan & Associates - now seeks to set aside. At the hearing of the application, Mr. Koya appeared on instructions from Iqbal Khan & Associates. He relied on Order 2 Rule 2 of the High Court Rules. 

[21].	In her affidavit in support of the application to set aside, Ms. Vokanavanua explains the non-appearance of any counsel on 02 September as follows:

4. ..I informed my Principal about the matter which he advised me that Mr. Faiyaz Koya is handling the matter and not to worry much about it. He further informed me that Mr. Koya will appear on the matter on 2nd September 2011.

5. ..on the morning of 2nd September 2011, I called Mr. Koya and was assured by him that he was on his way to Lautoka High Court to appear in the above matter.

6. ..I did come to Court on 2nd September 2011 to look for Mr. Koya to make sure he appears as he would be well versed with the matter. Also I would not be a better position to comment on the case though on record.

[22].	Ms Vokanavanua's affidavit exhibits a letter dated 21 April 2011 from Shalendra Prasad to the Manager, Bakels Fiji Ltd. This, I reproduce in part below:

The Manager
Bakels Fiji Ltd
Waqadra Sub-Division
Nadi.

Dear Sir,
Re: Outstanding Dues

….Due to the downfall in our business and the major reason Licence being revoked it has taken a great impact on our business which we do not see in any way to honor the Courts agreed amount until and unless we get the Customs Licence back which we are doing our best to get it back.

As we have mentioned during our meeting that our company can only afford to pay $2000 maximum on the due dates and this figure we promise will increase once we get the Customs Licence back.

…………………..

Sir, Winding up of our business will not solve the issue but to consider our proposal and allow us time to pay. (my emphasis)

[23].	It appears that all that farce about who should have appeared in Court was a decoy. Again, from the material in the affidavits filed, it is obvious that the debt is undisputed. What WCBAL really wants is time to pay off the debt.
SHALENDRA PRASAD'S AFFIDAVIT

[24].	Shalendra Prasad's affidavit appears to say that WCBAL had applied Bakel's monies to settle the FIRCA accounts of some of its other customers who had not honored their "arrangement of payment". Prasad deposes as follows in paragraphs 3 to 18 of his affidavit.

3.	..the amount of $54,593.34 received from Messrs Bakels Fiji Ltd was for the payment of goods to FIRCA for clearance of the Petitioner's goods that arrived from overseas.	
4.	..my Company cleared the said goods and was delivered to the Petitioner's premises which was acknowledged by the Petitioner.	
5.	..the responsibility of paying the amount to FIRCA was for the Respondent Company to pay and not the Petitioner.	
6.	..I did inform the Revenue Manager, Lautoka of the progress of our Loan dated 3rd May, 2010 and pay the outstanding amount to FIRCA. Annexed hereto and marked with letter "SP1" is a copy of the said letter.
	
7.	..the said goods of two containers for which the Petitioner paid the amount of $54,593.35 had been delivered to them on the 21st day of September and 18th day of December, 2009 respectively. A copy of the said Delivery Docket is annexed hereto and marked "SP2".
	
8.	..attached is the Pre-release copy of the …….by FIRCA upon payment of Pre-Release fee $25.00 per container.
	
9.	..I did write to the Manager of the Petitioner by Letter dated 27th August, 2010 informing him of the progress towards our Loan with the Bank. A copy of the said letter is annexed hereto and marked "SP3".
	
10.	..on the 1st day of July, 2010, I email to Chief Executive Officer of FIRCA based at Headquarters, Suva in regards to appointment to see him as soon as I received a copy of letter from the Manager Mr. Henry Hawkins of the Petitioner. Annexed hereto and marked with letter "SP4" is a copy of the said letter.
	
11.	..I have not been informed of the outstanding amount in correspondence from the Manager of FIRCA, Lautoka nor the Chief Executive Officer Headquarters, Suva.
	
12.	..I wrote to the Chief Executive Officer of FIRCA on 9th July, 2010 explaining the reason for non-payment and possible appointment with him to discuss about our financial situation. A copy of the said letter is annexed hereto and marked with letter "SP5".
	
13.	..I wrote again to the Chief Executive Officer of FIRCA on the 2nd day of November, 2010 in regards to the proposal and a possible appointment to discuss further on the outstanding amount but did not receive any response.	
14.	..on the 22nd day of November 2010, I wrote again to the Chief Executive Officer of FIRCA explaining in detail the reason for non-payment and a possible appointment.	
15.	..the payments made by the Petitioner were deposited into the account of the Petitioner and not personally used for other purpose other than meeting of some cheques paid for other client which made it impossible to pay duty etc for the Petitioner at that particular time. Annexed hereto and marked with letter "SP6" is a copy of the Bank Statement.	
16.	..the Company has been facing financial difficulties due to some prominent customers not honouring their arrangement of payment and this has resulted in the above situation of not my company paying some duties for other clients who had supported the notice together with the Petitioner of Winging (sic) Up of my Company. 	
17.	..the Company is not insolvent and has capability of paying the duty as I have made application for loan by putting my vacant free lot valued at $40,000, my three bedroom house located at Balawa Estate valued at $320,000 and the Company Vehicles as a security.	
18.	...my Company has been in shipping business for the last twenty-five years (25) years and has employed fifteen (15) staffs and in this difficult situation, I have not made any staff redundant.

MATHEW ALLAN'S AFFIDAVIT IN REPLY

[25].	Allan's affidavit highlights that Prasad has never disputed that WCBAL did receive the sum of $54,593.34 from Bakels to be paid to FIRCA for clearance of VAT/Fiscal duties. As the importer, Bakels was ultimately responsible to FIRCA for the clearance of the outstanding VAT/fiscal duties. Accordingly, it has had to fork out another $54,593.34 upon the FIRCA-demand letter – although, Bakels remains out of pocket by the same amount to WBCAL. WBCAL has been attempting for some seven months to raise a loan to pay off its debt.

ANALYSIS

[26].	Order 2 Rules 1 and 2 of the High Court Rules state as follows:

1.-(1) Where, in beginning or purporting to begin any proceedings or at any stage in the course of or in connection with any proceedings, there has, by reason of anything done or left undone, been a failure to comply with the requirements of these Rules, whether in respect of time, place, manner, form or content or in any other respect, the failure shall be treated as an irregularity and shall not nullify the proceedings, any step taken in the proceedings, or any document, judgment or order therein.

(2) Subject to paragraph (3), the Court may, on the ground that there has been such a failure as is mentioned in paragraph (1), and on such terms as to costs or otherwise as it thinks just, set aside either wholly or in part the proceedings in which the failure occurred, any step taken in those proceedings or any document, judgment or order therein or exercise its powers under these Rules to allow such amendments (if any) to be made and to make such order (if any) dealing with the proceedings generally as it thinks fit.

[27].	The reference to these Rules is a red herring because the Rules are designed to ameliorate the harshness of nullifying proceedings where a party may have chosen a wrong procedure. Iqbal Khan & Associates seems to take the position that their non-attendance in Court on 02 September 2011 is an "irregularity" under Order 2 Rule 2 which should not be held against their client. 

[28].	The reality is that the Winding Up Order was granted on the merits of the petition and the affidavits filed in support of it. 

[29].	Also –I did specifically consider that WCBAL has never disputed the debt either in Prasad's or in Ms Vokanavanua's affidavit, and that WCBAL has never denied that it did not apply the monies paid to it in accordance with Bakels' instructions, but that it did use the money for purposes totally unrelated to Bakels or anyone to do with Bakels, and, that WCBAL has always accepted that it is indebted to Bakels for monies had and received, and, that WCBAL has been unable to settle the debt to this day. 

[30].	With all of the above in mind, this court would only have postponed the winding up order on 02 September 2011 and allow WCBAL time to trade itself out of its difficulties if evidence was shown that – in spite of all – WCBAL is able still to settle the debt. But even if such evidence was adduced, the court would still have to tread carefully in balancing this against the principle as enunciated by Gibbs CJ In Re Leonard Spencer Pty Ltd (see paragraph 2 above).

[31].	In Re Melbourne Carnivals Pty Ltd (No 1) the court acknowledged that those opposing a petition on the grounds that the company could trade out of its difficulties would probably be unable to displace the prima facie right of the petitioner to have the company wound up. This however, may depend on the facts of each case. In Re St Thomas's Dock Co, the Court stood over a petition for six months to allow the company the chance to become profitable.

[32].	In my view, where a company admits to its indebtedness but maintains that it is solvent, evidence of a positive cash flow status and an affidavit of assets and liabilities showing that its assets are worth more than its total liabilities - may well persuade any court to stand over a petition to allow a company a chance to trade itself out of its difficulties – or – even stay a winding up order for the same reason, where the appropriate application has been filed by a party who has locus under section 225 of the Companies Act (see below).

[33].	I must stress here that I do not say the above lightly, as I am well aware that a commercially insolvent company (i.e. one whose balance sheets show a large surplus of assets over its liabilities, but is unable to settle certain debts as they fall due) may still be wound up. Slade J in Re Capital Annuities Ltd [1978] 3 All ER 704, 718 cited the following passage from Buckley's Companies Act 13th Edn (1957), p. 460:

…..A company may be at the same time insolvent and wealthy. It may have wealth locked up in investments not presently realizable; but although this be so, yet if it have not assets available to meet its current liabilities it is commercially insolvent and may be wound up."

(my emphasis)

[34].	However, at the end of the day, it is still a matter of discretion for the court as to whether or not to grant a winding up order, as is evident from the use of the words "may be wound up" in the above passage and also in section 220 (see paragraph 3 above). 

[35].	The short point I make in all this discussion is this: in all the material evidence before me on 02 September 2011, any further adjournment to allow WCBAL's lawyers to sort themselves out would only delay the inevitable. Even if they were present in Court, they would have an uphill battle convincing me to stand over the winding up petition to allow WCBAL time to pay off the debt. All that Prasad appears to be saying in paragraph 17 of his affidavit (see paragraph 24 above) is that the total value of his personal assets is far greater than the value of WCBAL's debt to Bakels. But even so, it all rings hollow because Prasad was to later confirm by two letters he wrote to Bakels and which are exhibited to Alan's affidavit that his loan applications to Bank of Baroda and to BSP were both rejected. To date – Prasad has not realized his personal assets - either by sale, by mortgage or by pledge and the debt remains owing. 

[36].	In my view, Order 2 Rule 2 of the High Court Rules does not assist WCBAL at all. But having said that, section 252 of the Companies Act might be used to stay the winding up order which is already granted to allow WCBAL to trade itself out of its difficulties and settle the debt eventually. 

Power to stay winding-up

252.-(1) The court may, at any time after an order for winding-up, on the application either of the liquidator or the official receiver or any creditor or contributory, and on proof to the satisfaction of the court that all proceedings in relation to the winding-up ought to be stayed, make an order staying the proceedings, either altogether or for a limited time, on such terms and conditions as the court thinks fit.

(2) On any application under this section, the court may, before making an order, require the official receiver to furnish to the court a report with respect to any facts or matters which are in his opinion relevant to the application.

(3) A copy of every order made under this section shall forthwith be forwarded by the company, or otherwise as may be prescribed, to the registrar for registration.

[37].	However, a debtor company such as WCBAL does not have standing to apply for a stay under section 252. The application may only be made by a liquidator of the company, the official receiver or any creditor or contributory of the company. 

[38].	The underlying reason for this is explained by Pennycuick V.C. in Practice Note (Winding Up Order: Rescission)(No. 2) [1971] 1 W.L.R. 757.

After discussion with other judges of the Companies Court, I have the following further statement to make with regard to applications to discharge winding up orders: see Practice Note (Winding up Order: Rescission) [1971] 1. W.L.R. 4. Applications to rescind winding up orders will henceforward only be entertained if made (a) by a creditor, or (b) by a contributory, or (c) by the company jointly with a creditor or with a contributory. In the case of an unsuccessful application the costs of the petitioning creditor and of the supporting creditors will normally be ordered to be paid by the creditor or the contributory making or joining in the application. The reason for this direction is that if the costs of an unsuccessful application are made payable by the company, they fall unfairly on the general body of creditors. (my emphasis)

[39].	And even if a proper application had been made under section 252, I would only stay the winding up order to allow WCBAL to trade itself out its difficulties if there was real evidence before me that WCBAL might, after all, be in a position to settle its debt during the stay period. In this regard, evidence of a positive cash flow status, and an affidavit of assets and liabilities will be persuasive (see above). Megarry J in his Practice Note (Winding Up Order: Rescission)(No. 2) [1971] 1 W.L.R. 4 sets out the following which – in my view – is/are just as relevant in the balancing process under section 252:
In recent years, applications to rescind a winding up order before it has been drawn up have become increasingly common. Owing to the great increase in the number of such orders it often happens that some time elapses before the order can be drawn up. The making of the order, however, affects all creditors of the company, and gives the Official Receiver authority to act forthwith; and in the circumstances the inherent power of the court to revoke or vary an order at any time before it is perfected is one that ought to be exercised with great caution. Accordingly, although the matter is one for the discretion of the court in each case, application to rescind a winding up order will not normally be entertained by the court unless it is made within three or four days of the order, and is supported by an affidavit of assets and liabilities. If an application is made later than this, the affidavit should also establish the exceptional circumstances relied upon as justifying the application.

Cases in which the making of the order has not been opposed owing to some matter such as an error or misunderstanding in instructing counsel may, if the application is made promptly, still be dealt with on a statement by counsel of the circumstances; but apart from such cases, the court will normally require any application to be supported by affidavit.

In making this statement, I am speaking after consultation with the other judges of the Companies Court.

CONCLUSION

[40].	WCBAL is simply pleading for time to allow it to trade itself out of its difficulties so it can settle its debt. Order 2 Rule 2 of the High Court Rules cannot assist it for that purpose. A Winding Up Order however, may be stayed under section 252 of the Companies Act for the said purpose. But that application has to be made either by the Official Receiver, or any creditor or contributory of the company on satisfactory evidence of a positive cash flow status and on an affidavit of assets and liabilities showing that the company's assets are worth more than its total liabilities. 

[41].	I dismiss WCBAL's application to set aside the Winding Up Order. I also refuse the application for stay. Costs to Bakels which I summarily assess at $800-00 (eight hundred dollars).

Anare Tuilevuka
Master

At Lautoka.
02 November 2011.