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In re Spence [2007] PGNC 64; N3223 (17 August 2007)

N3223

PAPUA NEW GUINEA
[IN THE NATIONAL COURT OF JUSTICE]

MP 752 and 753 of 2006

BETWEEN

IN THE MATTER OF
THE COMPANIES ACT 1997

and

IN THE MATTER OF AN APPLICATION
BY JAMES SINTON SPENCE LIQUIDATOR OF
SEPIK COFFEE J. V. LIMITED
(IN LIQUIDATION) (1-41026)

AND IN THE MATTER OF AN APPLICATION
BY AGMARK PACIFIC LTD (1-3621) AND
JAMES SINTON SPENCE LIQUIDATOR OF
SEPIK COFFEE J. V. LIMITED
(IN LIQUIDATION) (1-41026)

Kokopo: Lay J.
2007: 2 July
17 August

CIVIL - Companies Act - s300 - application to terminate liquidation - liquidator's application - company not meeting solvency test - no support from directors - no direct evidence of key financial support - no explanation of previous trading failure - no detail of future management control - continuing grounds for presentation of a petition to wind up.

PNG Cases Cited

SC 784 Wep Kilip, Kamsi Trading Ltd and Liquidator Hugh Mosley

Overseas Cases Cited

In Re a Private Company [1935] NZGazLawRp 17; (1935) NZLR 120
Re Mascot Home Furnishes Pty Ltd [1970] VicRp 78; (1970) VR 593
Re: Calgary and Edmonton land Co Limited (In liq) (1975) 1 WLR 355
Re Data Homes Pty Ltd [1971] 1 NSWLR 338
Mercy v Wanari [2000] NSWSC 756
City Realty (Holdings) Ltd v Investment Finance Corporation Limited (In rec) (1990) 5 NZ CLC
Arlen Plastics Ltd v Eden Electroplaters Limited HC AK M35/92 26 June 1992
El-Fahkri, in the matter of Elfah Pty Ltd [2002] HCA 1469
Commissioner of Inland Revenue v Eden Electroplaters Limited [2006] NZHC 1439

References

Companies Act 1997

Facts

The shareholders of the company, Agmark Pacific Ltd and Sepik Growers Ltd, placed the company in liquidation in December 2005. The liquidator now applies by Companies Act s 300 to terminate liquidation. The key grounds of support are that (a), Agmark Pacific Ltd has agreed to forgive a debt of K2,075,036 upon termination of the liquidation, (b) the forgiven debt turns a negative asset position of K1,046,205 into a positive asset position of K1,211,685, (c) Sepik Growers Ltd will buy Agmark Pacific Ltd's shareholding in the company for K1,500,000 which money is available, removing previous shareholder tension, (d) the company will seek a Rural Bank loan of K600,000 providing working capital to pay off debts of essential service providers and to re-enter the coffee buying business, (e) there will be a projected cash surplus at the end of 12 months trading estimated at K2,000,000.

Held

1. 1. There is no direct evidence that Agmark Pacific Ltd has agreed to forgive its debt. The evidence comes from the liquidator, not the shareholder companies, and is strictly hearsay;
   
2. 2. There is no evidence that the Rural Development Bank has approved a loan of K600, 000, whether contingent on termination of the liquidation or not;
   
3. 3. Solvency is an important consideration in an application to terminate a liquidation. The company does not meet the solvency test in that it cannot pay its creditors as they fall due and will not meet the solvency test even after the Agmark Pacific Ltd loan is forgiven and the Rural Development Bank loan obtained;
   
4. 4. There is no evidence that the directors support the application. This is an important consideration. The directors could become liable for future debt of the company under s.348 of the Companies Act if an order is made under s 300(1) while the company does not meet the solvency test, the company trades on and is then put into liquidation again;
   
5. 5. It would be a rare case where the court was prepared to make an order under s.300(1) while the company did not meet the solvency test, in circumstances enabling a creditor to petition at any time after the order was made to again place the company in liquidation.
   

Counsel

D. Lidgett, for the Plaintiff

10 August, 2007

1. LAY J.: Sepik Coffee J. V. Limited ("the company") made an operating loss of K 2, 075, 036 in 2005 and was placed in liquidation by special resolution of its shareholders on 17 December 2005. The liquidator now makes application in proceedings MP 752 of 2006 for termination of the liquidation pursuant to Section 300 of the Companies Act and for an order modifying the liquidator's reporting responsibilities under Section 307 (1) of the Companies Act; and in proceedings MP 753 2006 with Agmark Pacific Ltd applies for approval to transfer the latter's shares in the company to Sepik Growers Ltd.

2. Prior to being placed in liquidation the company was involved in the businesses of buying and selling coffee, cocoa vanilla, copra trading, hardware, joinery construction, trucking, metal fabricating, and general workshop.

3. Accounts prepared by the liquidator to 31 December 2006 disclose net liabilities of K1,046,205. Under terms of an agreement said by the liquidator to have been made between Agmark Pacific Ltd and Sepik Growers Ltd, the two shareholders of the company, Agmark Pacific Ltd is said to have agreed to forgive a loan due from the company to it in the sum of K 2,257,890. The effect on the balance sheet of the giving the loan is to change a net liability position to a net asset position of K1, 211, 685. The liquidator has expressed the view that if the entire property portfolio was revalued to current values the net asset position would exceed K2 million. The agreement between Sepik Growers Ltd and Agmark Pacific Ltd is said to be contingent upon termination of the liquidation.

4. Also contingent on the liquidation is an agreement between Sepik Growers Ltd and Agmark Pacific Ltd whereby Sepik Growers Ltd will purchase all of Agmark Pacific Ltd's shareholding in Sepik Coffee Growers J. V. Limited for K1.5 million, which amount has been provided to Sepik Growers Ltd by the State through the Provincial Government and is currently held by the liquidator in his trust account.

5. Some aspects of the accounting need to be dealt with in more detail. Trade and other creditors in the 31 December 2006 Balance Sheet includes K934, 945 for taxation and there is a further provision for taxation of K 111, 550, making a total provision for tax of K 1, 046, 495. The evidence is that Sepik Growers Ltd has reached a compromise with Internal Revenue Commission for the company to pay by instalments "the current established debt of approximately K1.3 million". This means that the balance sheet is approximately K300, 000 worse off than the accounts disclose, but still with a generous margin of assets over liabilities, once the Agmark Pacific Ltd debt is forgiven.

6. After the provisions for taxation the company still has more than K400,000 in trade and other creditors not paid and it currently has no significant cash at bank. The liquidator points out that if unprofitable branches of the company's business are abandoned, that would leave the opportunity to sell assets to generate working capital. However that proposal is not part of this application.

7. The Liquidator engaged Leslie Wungen & Associates, to prepare a business plan and cash flow for the company projected for 12 months. Mr Wungen has expressed the opinion that:

1. if the company obtained a Rural Development Bank loan of K600 000 and;
   
2. repaid essential service providers accounts preferentially in the sum of K227,815.04;
   

100. traded under the business plan for 12 months:
     

the company could generate a cash surplus of K2 million.

8. All of the creditors were served with notice of the liquidator's intention to make this application, accompanied by an invitation to appear on the return date if they oppose the granting of the applications. Apart from Internal Revenue Commission, who initially objected and whose debt has been compromised as described above at paragraph 5, no creditor has appeared in opposition to the application. The notice to creditors fairly set out that "... Sepik Growers Ltd, has organised for an injection of a limited amount of working capital into the company which will allow the company to trade profitably, but not to simultaneously repay all creditors."

9. Companies Act Section 291(1) provides as follows:

"(1) a company may be put into liquidation by the appointment of a named person as liquidator of a company;

(3) The court may appoint a liquidator when it is satisfied that-

(a) the company is unable to pay its debts as they become due in the ordinary course of business;..."

10. Companies Act section 300 provides:

300. Court may terminate liquidation.

(1) The Court may, at any time after the appointment of a liquidator of a company, if it is satisfied that it is just and equitable to do so, make an order terminating the liquidation of the company.

(2) An application under this section may be made by the liquidator, or a director or shareholder of the company, or any other entitled person, or a creditor of the company, or the Registrar.

(3) The Court may require the liquidator of the company to furnish a report to the Court with respect to any facts or matters relevant to the application.

(4) The Court may, on making an order under Subsection (1), or at any time thereafter, make such other order as it thinks fit in connection with the termination of the liquidation.

(5) Where the Court makes an order under this section, the person who applied for the order shall, within one month after the order was made, submit a certified copy of the order to the Registrar for registration.

(6) Where the Court makes an order under Subsection (1) the company ceases to be in liquidation and the liquidator ceases to hold office with effect on and from the making of the order or such other date as may be specified in the order.

(7) Every person who fails to comply with Subsection (5) commits an offence and is liable on conviction to the penalty set out in Section 413(2).

11. In SC 784 Wep Kilip, Kamsi Trading Ltd and Liquidator Hugh Mosley, I found the following matters relevant to the question of whether or not it was just and equitable to terminate liquidation:

4. whether the contributors and creditors had been served with the application;
   
5. the nature and extent of all the creditors;
   
6. whether all of the debts have been or will be discharged;
   
7. the attitude of creditors, contributories and the liquidator;
   
8. the current trading position of the company and its general solvency should be demonstrated;
   
9. any non-compliance by directors with their statutory duties should be fully explained with all reasons and circumstances;
   
10. the general background which led to the winding up should be explained;
    
11. the nature of the business carried on by the company should be demonstrated;
    

50. whether in anyway, the conduct of the company was contrary to commercial morality or the public interest.
    

12. Several aspects of this application concern me:

13. The liquidator, said in evidence that the company would be solvent upon Agmark Pacific Ltd forgiving its debt. In general terms it might be appropriate to say that the company is solvent if its assets exceed its liabilities. However under the Companies Act the important question is, does the company meet the solvency test. That test has two criteria, both of which must be met, to be able to meet creditors as they fall due and secondly that assets exceed liabilities. Quite clearly the company does not meet the test because it cannot pay creditors as the debts fall due, and it would not be able to do so until well into its first trading year, if it achieved the business plan projections. While that situation exists a ground for presentation of a petition to wind up under Section 291 (3) (a) exists. For that reason I consider that many of the observations which judges have made in relation to insolvent companies apply to companies which cannot pay their debts as they fall due, even if on the asset test they are solvent;
    
14. on the business plan proposed by Mr Wungen certain creditors will receive a preference, when under the liquidation they are protected from that except for secured creditors and statutory preferences. This is not an overriding concern because creditors have had the opportunity to oppose the application and have not done so;
    
15. whether or not the company can meet the second leg of the solvency test, assets exceeding liabilities, very much depends upon Agmark Pacific Ltd forgiving its loan, but the agreement by which that is to occur upon termination of the liquidation has not been placed before the court. The court is asked to take on faith that there is such an agreement. There is no evidence from the parties to that agreement. There is the slimmest inference in Mr Nightingale's evidence filed in support of the application for approval of transfer of the shares. The evidence given by the liquidator is strictly hearsay. John Alman, Administrator East Sepik Provincial Government, has given evidence, but he has not disclosed that he is an officer of the company or an officer of its shareholder Sepik Growers Ltd. He is simply a person who has worked closely with the executive of the company.
    
16. Solvency is of significance when a stay of proceedings in the winding up is sought: In Re a Private Company (1935) NZL a 120 and Re Mascot Home Furnishes Pty Ltd [1970] VicRp 78; (1970) VR 593, 598. In that case solvency is used in the sense of assets exceeding liabilities, but for the reason mentioned in paragraph (a) solvency in the sense of being able to pay debts as they fall due is also a significant factor. If I make an order under s 300(1), the company is licensed to go out and incur more debts. Indeed, there is the danger that new creditors could take the view that the company is sound and able to pay its debts as they fall due because the Court has discharged it from liquidation. The duty of the court extends beyond the existing creditors, to potential new creditors. If the company is allowed to trade again while being unable to pay its creditors as they fall due, it is potentially liable to being placed into liquidation again. New creditors would not be aware, that after liquidator's fees, employee entitlements, costs of a compromise and land rates there is a very large preferential debt due to Internal Revenue Commission pursuant to Schedule 9 (4) (b) of the Companies Act and that the Goods and Services Tax Act s 86(2) (b), which will rank before all unsecured creditors. The court is likely to be concerned if the proposal to terminate the liquidation preserves the existing debt, but defers payment, particularly where the deferment has no enforceable status. See the remarks of Street J. at first instance in Re Data Homes Pty Ltd [1971] 1 NSWLR 338 at 341. If the company fails again, recovery by the new creditors may be prejudiced by the existing debts: see Mercy v Wanari [2000] NSWSC 756 at para.47;
    
17. whether the company has any capital to trade is contingent upon a successful application to the Rural Development Bank and there is no evidence that the application has been approved, whether or not contingent on the success of this application;
    
18. there is only a vague explanation, referring to shareholder tensions, as to how the company was allowed to trade while not meeting its statutory obligations to the Internal Revenue Commission. There is no information on future management arrangements, apart from the interim arrangement of Leslie Wungen and Co providing management and a suggestion by the liquidator that the company was in talks with some experienced coffee traders; and thus no reason why the court should accept that the company will not revert to its previous trading habits of running businesses which are not profitable and not paying its statutory obligations to the State.
    
19. I also consider it a significant factor against the application that the directors of the company have not joined in supporting it. It would be a serious consideration for the directors, that if they remain directors after the company was removed from liquidation, while it was not able to meet the solvency test, they could become personally liable for debts subsequently incurred by the company pursuant to the provisions of Companies Act Section 348, if it was again placed in liquidation. I note no details of proposed board changes on the departure of Agmark are provided.
    
20. Evidence of the liquidator refers on several occasions to the evidence of Mr Fred Bulu, chairman of Sepik Growers Ltd, which evidence does not appear to have been filed, and thus there is no evidence from that shareholder of its approval of the proposed sale of shares nor of the proposed termination of the liquidation.
    

13. In Re: Calgary and Edmonton land Co Limited (In liq) (1975) 1 WLR 355, 358-359 Megarry J. said that there is a clear onus on the applicant to make out a positive case. I do not think a positive case has been made out. A possible case that the company will in the future meet the solvency test has been made out. But the case does not convince me that this will in fact happen. I do not think that the court would be doing right by the public, by letting a company go back out to the marketplace to trade which cannot pay its debts as they fall due.

14. Termination of liquidation or a stay of liquidation of an insolvent company has been granted where the company did not intend to trade further: City Realty (Holdings) Ltd v Investment Finance Corporation Limited (In rec) (1990) 5 NZ CLC, or did not intend to trade until all of the creditors were paid: Arlen Plastics Ltd v Eden Electroplaters Limited HC AK M 35/92 26 June 1992, and see also El-Fahkri, in the matter of Elfah Pty Ltd [2002] HCA 1469, or where "all of the present creditors, other than the related entity, will either be paid or will have arrangements made which will protect their position": Commissioner of Inland Revenue v Eden Electroplaters Limited [2006] NZHC 1439 at [41]. However, as a general rule the court will not exercise its discretion in such a way as to have "the consequences of permitting an insolvent company to go forth again into the community": Re Data Homes [1971] 1 NSWLR 338.

15. In my view it would be rare circumstances indeed where the court would make an order under Section 300 (1) in circumstances where an unpaid creditor could shortly thereafter make an application to put the company back into liquidation, which is the case here while the company does not meet the solvency test and there is no binding arrangement between the existing creditors. And I consider that is the determinative factor in this case.

16. The application has some sound commercial base for a compromise with the creditors, which might be made binding on the creditors. The court could well take a different view of the application to terminate the liquidation if the application was one to terminate the liquidation in favour of a compromise with the creditors which was to be binding on them.

17. I stand both matters over until 24 August 2007. If by then there is no indication that it is intended to amend the application to terminate the liquidation and bring it before the court again, I intend to dismiss it.
_______________________________

Warner Shand Lawyers: Lawyers for the Applicant Liquidator.