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Sunset Rentals Ltd (In Liquidation), In re [2020] PGNC 260; N8500 (15 September 2020)

N8500

PAPUA NEW GUINEA
[IN THE NATIONAL COURT OF JUSTICE]


MP NO.27 OF 2018


IN THE MATTER OF THE COMPANIES ACT 1997


AND:
IN THE MATTER OF SUNSET RENTALS LIMITED (In Liquidation)


Waigani: David, J
2020: 9th & 15th September


COMPANY LAW – liquidation - application to terminate a liquidation – whether it is just and equitable to do so – Court’s power discretionary - Companies Act 1997, Section 300(1) and (2) – application refused.


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
Re Mosbi Glass and Aluminium Ltd (2012) N4925
Re Piunde Ltd (2015) N6656
Re Hela Opene Investment Ltd (in Liquidation) (2018) N7630


Counsel:


Alice Kimbu, for the Applicant
Soa Gor, for the Liquidator


RULING

15th September, 2020


  1. DAVID, J: INTRODUCTION: This is a ruling on an application to terminate the liquidation of Sunset Rentals Limited (In Liquidation) (the company) made pursuant to Section 300(1) and (2) of the Companies Act 1997. The company was put into liquidation on 13 June 2019 by order of the Court (liquidation order) on the application of Pacific View Apartments Limited, a creditor of the company, by the appointment of David Guinn as the liquidator (liquidator) pursuant to Section 291 of the Companies Act 1997. The application is made by Mrs Sainimili Suvewa Gubon who is now the sole shareholder and director of the company.
  2. An application for an interim injunction to restrain Pacific View Apartments Limited and the liquidator from giving effect to the liquidation order was abandoned at the hearing.
  3. The liquidator opposes the application.

EVIDENCE


4. The application is supported by the affidavit of Mrs. Gubon sworn and filed on 7 September 2020.


5. The liquidator has not filed an affidavit to support his position.


SUBMISSIONS


6. Ms. Kimbu for the applicant submits that the application to terminate the liquidation should be granted as:


  1. The debt in the sum of K44,742.83 owing to Pacific View Apartments Limited pursuant to a default judgment entered in favour of Pacific View Apartments Limited in proceedings WS No.7 of 2007, Pacific View Apartments Limited v Sunset Rentals Limited on 19 February 2018 and claimed in the petition filed in these proceedings has been paid in full;
  2. Mrs. Gubon was on 12 February 2019 granted Letters of Administration over the estate of her late husband, Dr. Florian Gubon and has since successfully applied to change the records at the Investment Promotion Authority (IPA) and since 5 August 2019 is now the sole shareholder and director of the company;
  3. As the debt was paid in full, the liquidation should be terminated to allow the company to carry on its business and be managed by the applicant;
  4. The applicant has served the application on Pacific View Apartments Limited, the only creditor she was aware of after the petition was filed and prosecuted, but has not received any response to ascertain its position on the application;
  5. The appeal against the liquidation order was pursued in the Supreme Court in SCA 83 of 2019, Sunset Rentals Limited v Pacific View Apartments Limited over the application to terminate the liquidation filed on 8 July 2019 as the applicant was not a shareholder or director of the company at the material time; and
  6. There was no evidence before the Court to show that body corporate levies were accumulating.

7. Ms. Kimbu argued that in the circumstances, it was just and equitable to grant the application and terminate the liquidation.


8. Mr. Gor for the Liquidator submits that the application should be refused and dismissed as:


  1. It was a clear abuse of the process of the Court as a similar application pursued by way of notice of motion filed on 8 July 2019 was withdrawn on 17 July 2019 favouring prosecution of an appeal in the Supreme Court, SCA 83 of 2019, challenging the order for liquidation which has since been dismissed;
  2. the applicant has failed to serve the application on all creditors;
  3. the applicant has failed to demonstrate that the company is able to pay the body corporate levies charged by Pacific View Apartments Limited in connection with the two units the company owns as and when they become due in the ordinary course of business and the body corporate levies continue to accumulate;
  4. the applicant has failed to demonstrate that it is solvent;
  5. the applicant has failed to demonstrate that the liquidator and Pacific View Apartments Limited support the application.

LAW


9. Section 300 of the Companies Act 1997 gives the Court power to terminate a liquidation and it states:


“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).”


10. An application for termination of the liquidation of a company under Section 300 may be made by the liquidator or a director or a shareholder of the company or any other entitled person or a creditor of the company or the Registrar of Companies.


11. Section 300(1) grants the court a discretion to terminate the liquidation of a company if it is satisfied that it is just and equitable to do so. The exercise of the discretion in deciding whether it is just and equitable to terminate the liquidation of a company must be based on proper principles or grounds.


12. Some of the factors to be taken into consideration in exercising the discretion were suggested by Lay, J in Wep Kilip & In the Matter of Kamsi Trading Limited (2005) SC784 following a review of English, Australian and New Zealand authorities and these are:


  1. Whether notice of the application has been given to all creditors and contributories.
  2. The nature and extent of the creditors must be shown and whether all debts have been or will be discharged should be ascertained.
  3. The attitude of creditors, contributories and the liquidator should be ascertained.
  4. The current trading position and general solvency of the company should be demonstrated.
  5. Any non-compliance by directors with their statutory duties should be fully explained with all reasons and circumstances.
  6. The general background which led to the order of the liquidation being made should be explained.
  7. 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.

13. These factors were considered and applied in Nathaniel Poya v Rex Paki (2008) N3535, In re Cakara Alam (PNG) Limited (2009) N4054, Re Mosbi Glass and Aluminium Ltd (2012) N4925, Re Piunde Ltd (2015) N6656, and Re Hela Opene Investment Ltd (in Liquidation) (2018) N7630.


14.. I will adopt and apply these factors in determining this application.


CONSIDERATION


Notice of application to creditors and contributories


15. The application in this case is made by a director and a shareholder of the company pursuant to Section 300(2).


14. Apart from Pacific View Apartments Limited who instituted these proceedings as a creditor of the company, there is no evidence before the Court to demonstrate who the other creditors or contributories, if any, of the company are.


15. The applicant has submitted that she has served the application on Pacific View Apartments Limited, the only creditor she was aware of after the petition was filed and prosecuted, but states that she has not received any response to ascertain its position on the application. There is no evidence before the Court to support the submission. That is something that militates against the grant of the application.


Nature and extent of creditors and ability to pay debts


16. It is not disputed that the company owns two units described as Units 902 and 904A at the Pacific View Apartments situated upon Allotment 1 Section 84 Matirogo, State Lease Volume 27 Folio 6613, Pruth Street, 2 Mile Hill, NCD facilitated by the acquisition of certain number of shares in the capital of Pacific View Apartments Limited. It is also not seriously disputed that body corporate levies are payable, but the details are not in evidence before the Court. There may be tax liabilities to meet with the Internal Revenue Commission, but the details as to whether they have been or are being met are not before the Court.


17. As the application is made without the support of the liquidator, the onus is on the applicant to demonstrate and ascertain the true nature and extent of the creditors and whether all debts including body corporate levies have been or will be discharged. It is not disputed that the debt giving rise to these proceedings being brought in the sum of K44,742.83 has been paid in full, but the applicant is required to do more to meet this requirement and she has failed. This militates against the grant of the application.


Attitude of creditors, contributories and liquidator


18. The attitude of Pacific View Apartments Limited is not known. The liquidator opposes the application. This militates against the grant of the application.


Current trading position and general solvency of the company


19. The current trading position and general solvency of the company would have been better clarified by the liquidator. Unfortunately, the liquidator has not produced any evidence to shed some light on the matter.


20. The “solvency test” has the meaning set out in Section 4 of the Companies Act 1997: see Section 2, Companies Act 1997.


21. Section 4(1) actually sets out the test, but it is instructive to state below the whole of Section 4:


“4. Meaning of "solvency test".


(1) For the purposes of this Act, a company satisfies the solvency test where—

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

(b) the value of the company's assets is greater than the value of its liabilities, including contingent liabilities.

(2) Without limiting Sections 50 and 53(3), in determining for the purposes of this Act (other than Sections 234 and 235 which relate to amalgamations) whether the value of a company's assets is greater than the value of its liabilities, including contingent liabilities, the directors—

(a) shall have regard to—

(i) the most recent financial statements of the company that comply with Section 179; and

(ii) all other circumstances that the directors know or ought to know affect, or may affect, the value of the company's assets and the value of its liabilities, including its contingent liabilities; and

(b) may rely on valuations of assets or estimates of liabilities that are reasonable in the circumstances.

(3) Without limiting Sections 234 and 235, in determining for the purposes of this Act whether the value of an amalgamated company's assets will be greater than the value of its liabilities, including contingent liabilities, the directors of each amalgamating company—

(a) shall have regard to—

(i) financial statements that comply with Section 179 and that are prepared as if the amalgamation had become effective; and

(ii) all other circumstances that the directors know or ought to know would affect, or may affect, the value of the amalgamated company's assets and the value of its liabilities, including contingent liabilities; and

(b) may rely on valuations of assets or estimates of liabilities that are reasonable in the circumstances.

(4) In determining, for the purposes of this Act, the value of a contingent liability, account may be taken of—

(a) the likelihood of the contingency occurring; and

(b) any claim the company is entitled to make and can reasonably expect to be met to reduce or extinguish the contingent liability.”


22. Gabi J in Nathaniel Poya v Rex Paki (2008) N3535 in addressing the issue of the solvency of a company in the context of an application to terminate the liquidation of a company made the following observations at paragraph 11 of the judgment:


“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] VicRp 78; (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 s300 (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 s86(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.” ”


23. I apply the solvency test and the observations of Gabi, J in Nathaniel Poya v Rex Paki (2008) N3535 in the following manner.


24. A valuation was carried out on units 902 and 904A referred to as Executive Apartments by a registered valuer from LJ Hooker, Port Moresby on 20 November 2007 at the request of ANZ Banking Group (PNG) Limited and the Valuation Report dated 20 November 2007 gives the total market value of both units at K1,420,000.00.


25. Another valuation was carried out by Pacific Services & Engineering Limited on 20 February 2017. The market value of both units was assessed at K2,550,000.00.


26. The applicant states that the total value of both units exhibited by the two valuation reports far exceeds the total body corporate levies due and owing and the judgment debt claimed in the petition has been paid in full.


28. I am satisfied that on the evidence available before the Court, the total value of both units 902 and 904A at the Pacific View Apartments exceeds K2 million.


29. I have considered the approach taken by Hartshorn, J in In re Cakara Alam (PNG) Limited (2009) N4054 where Cakara Alam (PNG) Limited was found to be solvent as it had assets valued at over K7.1 million and from profit and loss statements received by the liquidator, it was forecast that it would trade profitably and that a significant amount of about K458,000.00 would remain following payment of all ascertained admitted creditors. Apart from the information on the value of units 902 and 904A, no profit and loss statement or other financial or business records have been produced in evidence to demonstrate or forecast that the company will trade profitably. In addition, there is little or no evidence to show that the company is able to pay its debts as they become due in the ordinary course of business and in the absence of evidence on liabilities including contingent liabilities, I am unable to find that the value of the company's assets is greater than the value of its liabilities, including contingent liabilities.


30. In the circumstances, I find that the applicant’s evidence falls short of meeting the solvency test. This militates against granting the application.


Non-compliance by directors with statutory duties


31. The applicant became the sole shareholder and director of the company on 5 August 2019 following the filing of an appeal on 2 July 2019 against the decision granting the liquidation order and more particularly after the liquidation order was rendered inoperative by an order of the Supreme Court on 3 July 2019 and subsequently stayed by the Supreme Court on 1 August 2019. There is no evidence of non-compliance by the applicant with statutory duties. This favours the grant of the application.


Circumstances leading to making of liquidation order


32. The debt in the sum of K44,742.83 owing to Pacific View Apartments Limited on account of outstanding body corporate levies pursuant to a default judgment entered in favour of Pacific View Apartments Limited in proceedings WS No.7 of 2007, Pacific View Apartments Limited v Sunset Rentals Limited on 19 February 2018 and claimed in the petition filed in these proceedings based on which the liquidation order was made has been paid in full. This favours the grant of the application.


Nature of the business


33. On the evidence available, the true nature of the company’s business is unknown. The Company Extract issued as at 30 September 2019 under the heading “General Details – Business Activity” indicates “Other”. The onus was on the applicant to disclose details of the nature of the company’s business. Given that, it is uncertain as to how the company will generate income to pay its debts as they become due in the ordinary course of business and will not assist in determining the company’s prospect of becoming solvent. This militates against granting the application.


CONCLUSION


34. Except for two, all other factors to be considered in the exercise of the Court’s discretion have been considered against the grant of the application. Clearly, the applicant has rushed to the Court on the misconception that as the debt, the subject of the petition and the liquidation order, was fully paid, the application for termination of the liquidation of the company would be granted as of right as it were or automatically. The evidence brought to support the application is inadequate. In the circumstances, I am not satisfied that it is just and equitable to terminate the liquidation of the company at this juncture. Given that, it was not necessary to consider the issue of abuse of process of the Court raised by the liquidator at the outset, but it suffices to say that the argument has no merit.


ORDER


35. The orders of the Court are:


  1. The application to terminate the liquidation of Sunset Rentals Limited (In Liquidation) is refused;
  2. The parties shall pay their own costs of and incidental to the application moved pursuant to notice of motion filed on 7 September 2020.

3. Time is abridged.
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________________________________________________________________
Kimbu & Associates: Lawyers for the Applicant
Fiocco & Nutley: Lawyers for the Liquidator

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