New Zealand: Insolvency update - April 2018

Interim liquidation order made on Pickwick basis

Reserve Bank of New Zealand v CBL Insurance Limited [2018] NZHC 264

This decision is notable for the fact that the hearing involved proceeding on a Pickwick basis – a practice whereby the respondent to an ex parte application is invited to appear at the hearing without the need to file written submissions.

The Reserve Bank of New Zealand (RBNZ), the designated prudential supervisor of insurers, successfully obtained an order to have an interim liquidator appointed for CBL Insurance Limited (CBLI), pending the outcome of substantive liquidation proceedings. The affidavit filed in support of the application recorded RBNZ's view that CBLI had breached the 100% solvency margin required to be maintained by it under the Insurance (Prudential Supervision) Act 2010, along with statutory directions made by RBNZ in respect of payments made to overseas recipients.

The application was heard by Courtney J on a Pickwick basis, with counsel for RBNZ attending by telephone and filing a memorandum and affidavit in support, and counsel for CBIL attending in person. Her Honour remarked that counsel for CBIL had been given an appropriate opportunity to respond, within the constraints of the Pickwick process, and that she was satisfied the statutory criteria for an interim order had been met. An appointment of interim liquidators was, therefore, the proper course to take.

Know what you're getting into – personal guarantees carry risk

B&F Papers v NZPC Holdings [2018] NZHC 35

As a term of an agreement entered into between B&F Papers Limited (B&F) and NZPC Holdings Ltd (NZPC) in 2006, the defendant director, Mr McCormack, signed a personal guarantee of NZPC's debts to B&F. B&F supplied NZPC under the agreement without problem until early 2011. At this point NZPC started to fall behind on its payments. A payment plan for delayed payment was agreed in February 2013. Mr McCormack subsequently resigned as a director of NZPC in March 2013.

Following a pattern of sporadic payments, B&F lost patience with NZPC and in 2015 commenced proceedings against Mr McCormack to recover the outstanding amount by virtue of his personal guarantee. The High Court found that Mr McCormack was liable under the personal guarantee.

The High Court did not accept Mr McCormack's argument that B&F had released him from his guarantee by way of a discussion had between him and a representative of B&F shortly after he resigned his directorship. Rather, the Judge considered that Mr McCormack had convinced himself, at the time or subsequently, that the words used in that conversation meant he was released from ongoing liability. The Court also rejected Mr McCormack's contention that the payment plan had materially varied the principal contract so as to render the guarantee ineffective, and that additional payments made by NZPC under other agreements should be applied as against the guarantee.

As the Court itself noted, the takeaway point is that care needs to be taken in providing a personal guarantee when involved in a business. It can be difficult to escape personal liability under such a guarantee, even when no longer involved in the business.

No liquidation where debt disputed

Ezipaint Limited (in liq) v Peters Holdings Trustee Limited [2017] NZHC 3139

This case is a good reminder that a court will not enter a liquidation order where there are genuine grounds to believe that a debt is disputed, regardless of whether a defendant debtor has applied to have a statutory demand set aside.

The liquidators of Ezipaint Limited (Ezipaint) served a statutory demand on the defendant. The defendant did not comply with the demand, nor did it take any steps to set the statutory demand aside. Ezipaint applied for liquidation, at which time the defendant disputed that the debt was in fact owing, and sought to challenge the validity of the statutory demand.

Associate Judge Doogue observed that the fact that the defendant had failed to apply to set aside the statutory demand did not prevent it from disputing the existence of the debt at the point where the Court was hearing an opposed application for liquidation. However, given the presumption of insolvency due to non-compliance with a statutory demand under s 287(a) of the Insolvency Act, the defendant had the onus of proving that there was a genuine and substantial dispute as to the existence of the debt. On the facts, his Honour considered that the defendant had discharged this onus: the parties to the litigation had shared many human agents and it was arguable that certain transactions between them had been made ultra vires. Liquidation proceedings were not an adequate vehicle to explore such complex issues and the liquidation application was dismissed.

Statutory demand set aside on appeal

Confident Trustee Limited v Garden and Trees Ltd [2017] NZCA 578

Confident Trustee Limited (CTL) entered into a contract with Garden and Trees Limited (Garden and Trees) for Garden and Trees to clear a site prior to earthworks for a residential subdivision development. CTL claimed that the work was running behind schedule so it engaged another contractor to assist, at which point Garden and Trees unilaterally left the site. This was disputed by Garden and Trees, who claimed that it was effectively dismissed by CTL.

Garden and Trees sent an invoice to CTL for work carried out and, when this went unpaid, issued a statutory demand requiring payment of the outstanding amount. Somewhat surprisingly, in the High Court Associate Judge Christiansen refused to set aside the demand, although it was clear there was a factual dispute between the parties about the circumstances in which the contract came to an end.

CTL appealed. The Court of Appeal considered that CTL had raised a genuine and substantial dispute that the debt in question was outstanding: there were significant material conflicts of evidence between the parties, as well as further issues in respect of the quantum of damages claimed and inherent in the claim itself. Accordingly, both the High Court judgment and the statutory demand were set aside.

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Related articles

Debtor delays – strategic considerations on debtor appeal
Insolvency update - voidable transactions and payments made by third parties

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