N7630

PAPUA NEW GUINEA
[IN THE NATIONAL COURT OF JUSTICE]

MP (COMM) 44 of 2017

IN THE MATTER OF THE
COMPANIES ACT 1997

AND:
IN MATTER OF HELA OPENE
INVESTMENT LIMITED
(IN LIQUIDATION)

Waigani: Hartshorn J
2018: 9th & 27th September

COMPANY LAW – liquidation - Application to terminate a liquidation – s. 300(1) and (2) Companies Act 1977

Cases Cited:

Wep Kilip & In the Matter of Kamsi Trading Limited (2005) SC784
Nathaniel Poya v. Rex Paki (2008) N3535 
In re Cakara Alam (PNG) Limited (2009) N4054

Counsel:

Mr. C. Zazeng, for the Liquidator
Mr. E. Waifaf, for Mr. E. Awali, Director and Shareholder

Oral decision delivered on
27th September, 2018

1. HARTSHORN J: This is a decision on an application to terminate the liquidation of Hela Opene Investment Limited (In Liquidation) (company). The company was placed into liquidation on 21st June 2018. This application is made pursuant to s. 300(1) and (2) Companies Act 1997. It is made by Mr. Eka Petrus Awali, the sole director and shareholder of the company. 

2. The application is supported by the liquidator of the company Mr. Andrew Pini, the creditors of the company and Mr. Awali.

3. Mr. Awali submits that the application to terminate the liquidation should be granted as amongst others:

a)	he has cooperated with the liquidator in the course of the liquidator’s conduct of the liquidation;

b)	he has agreed to settle all of the debts of the company by way of instalment to which all of the creditors and the liquidator have agreed;

c)	the factors in respect of which this court has to be satisfied before an application to 	terminate a liquidation will be granted have all been met. Those factors are detailed in Wep Kilip & In the matter of Kamsi Trading Limited (2005) SC784 and In re Cakara Alam (PNG) Limited (2009) N4054;

d)	the liquidator has given evidence in support of the application. 

Law

4.      Section 300(1) Companies Act confers upon this court the discretion to terminate the liquidation of a company if it is satisfied that it is just and equitable to do so.  Some factors for consideration in determining such an application were detailed by Lay J. in Wep Kilip & In the Matter of Kamsi Trading Limited (supra) following a review of English, Australian and New Zealand authorities. They are that:

a)	notice of the application should have been given to all creditors and contributories;

b)	the nature and extent of the creditors must be shown and whether all debts have been or will be discharged should be ascertained;

c)	the attitude of creditors, contributories and the liquidator should be ascertained;

d)	the current trading position and general solvency of the company should be 	demonstrated, solvency being of significance;
 
e)	any non-compliance by directors with their statutory duties should be explained;

f)	the background and circumstances that led to the order of the liquidation being made should be considered;

g)	the nature of the business carried on should be demonstrated and whether the conduct 	of the company was in anyway contrary to commercial morality or public interest should be considered.

Consideration

5. I consider first, the general solvency of the company. The liquidator in his final report and accounts, records that the company was placed into liquidation as it was unable to pay a judgment debt and interest in the total sum of K872,409.27. The company failed to meet the solvency test and its debts in the ordinary course of business. The company has no assets. A search has revealed that the company does not own any real property or motor vehicles and no funds are held by commercial banks in the name of the company. There are some old debts owed to the company of about K1.2 million, but these are unrecoverable. 

6. As to liabilities, the company owes K1,445,334.16 to unsecured creditors and K1.1 million to Bank of South Pacific (BSP), a secured creditor. The liquidator states that there are no assets available to retire the debts of the company.

Proposed repayment plan 

7. The liquidator states that if the liquidation is terminated it is proposed that a net deficit of K1,295,334.16 will be paid by Mr. Awali and the company. 

8. The liquidator recommends that this court approve the termination of the liquidation so that Mr. Awali can use his own resources, resume the operations of the company and pay the balance of the debts owed to approved creditors under the signed Agreement that is in evidence (Agreement). 

9. From a perusal of the agreement, entitled Deed for a Scheme of Arrangement, it is clear that a Scheme of Arrangement is proposed pursuant to Part XV Companies Act. The application before this court however, is for the termination of the liquidation and not for the approval of a scheme of arrangement. The Agreement is therefore considered in the context of the application for termination of liquidation. 
	
10. From a perusal of paragraph 5 of the Agreement, it is apparent that the unsecured debts of the company will not be paid in full until at least 30th April 2019 when an amount of K600,000 shall be paid. The total amount of the debt to be paid under the Agreement is K1,489,634.00.

11. In regard to the question of the solvency of a company in request of which an application to terminate its liquidation is made, I respectfully reproduce the following message of Gabi J in the case of Nathaniel Poya v. Rex Paki (2008) N3535 at [11]:

“11. Solvency is an important consideration in an application to terminate liquidation. The question is whether the company meets the solvency test. There are 2 requirements: First, the company must be able to pay its creditors as the debts fall due. Second, assets must exceed liabilities. Both requirements must be met before a company is said to be solvent (see In the matter of an application by Agmark Pacific Ltd and James Sinton Spence Liquidator of Sepik Coffee J. V. Ltd (In Liquidation) (2007) N3223). Quite clearly the company does not meet the solvency test because it cannot pay creditors as the debts fall due. In Agmark Pacific Ltd and James Sinton Spence (supra), His Honour Lay J. said:

“Solvency is of significance when a stay of proceedings in the winding up is sought:  In Re a Rivate Company (1935) NZL a 120 and Re Mascot Home Furnishes Pty Ltd (1970) VR 593, 598.  In that case solvency is used in the sense of assets exceeding liabilities, but…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 be 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…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.” ”

12. I adopt and apply the views expressed by His Honour in that case.

13. Mr. Awali’s counsel placed significant reliance upon my decision in In re Cakara Alam (PNG) Ltd (supra) in which I permitted a termination of a liquidation in circumstances where creditors were paid pursuant to repayment agreements and a director’s undertaking. In that case, however, Cakara Alam (PNG) Ltd had assets of over K7.1 million and I was satisfied that it was solvent. In this instance, the company is clearly insolvent and there is no prospect of it becoming solvent unless a contract with the National Airport Corporation (NAC) proceeds. This NAC contract was entered into after the liquidation of the company, by Mr. Awali, without the consent of the liquidator. The liquidator has deposed that the Agreement will fail if the NAC contract does not proceed. 

14. As to the creditors and the liquidator giving agreement to the proposed termination, this is 
understandable given the state of the company. The proposed termination on the basis of the   
Agreement is the only scenario that may result in the unsecured creditors being paid. This 
court however, has to consider other factors including amongst others, potential creditors and 
the public interest.

15. In circumstances where the company is clearly insolvent and has no assets, that unsecured creditors will not be paid in full until at least 30th April 2019, that the success of the Agreement to pay creditors depends on a contract not consented to by the liquidator and in respect of which he reserves the right to disclaim, and for the reasons detailed by Lay J. in Agmark Pacific Ltd (supra), I am not satisfied that it is just and equitable to terminate the liquidation of the company. 

16. I also mention that in my view, it is not in the public interest and conveys the wrong impression to the business and commercial community, that a company that is clearly insolvent, should be placed into liquidation and then permitted to be taken out of liquidation so that it may benefit from a contract, albeit incorrectly entered into, and when its creditors will not be paid in full until at least seven months. Further, it is also not in the public interest to allow a company to trade again in circumstances where immediately it will be trading while not meeting the solvency test and is likely to expose its director to the allegation of allowing a company to trade whilst insolvent. 

17. In the circumstances, the relief sought should be refused. Given this, it is not necessary to consider the other submissions of counsel. 

Orders

18. The court orders that:

a)	The application to terminate the liquidation of Hela Opene Investment Limited (In Liquidation) is refused;

b)	Each of the parties shall pay their own costs of and incidental to the notice of motion filed 21st September 2018;

c)	Time is abridged.
_________________________________________________________________________
O’Briens Lawyers: Lawyers for the Liquidator                                                               
Edward Waifaf Lawyers: Lawyers for Mr. E. Awali, Director and Shareholder