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Hottsie Anne Co Ltd v Australia and New Zealand Banking Group [2009] TOLawRp 44; [2009] Tonga LR 353 (10 July 2009)

IN THE COURT OF APPEAL OF TONGA
Court of Appeal, Nuku'alofa

AC 22/2009

Hottsie Anne Co Ltd

v

Australia and New Zealand Banking Group

Burchett, Salmon, and Moore JJ
6 and 7 July 2009; 10 July 2009

Practice and procedure – leave to appeal against interlocutory order – discretionary interlocutory application – leave refused

On 12 and 13 May 2009 the Supreme Court ordered that Hottsie Anne Company Limited ("the Company") be placed into liquidation. This was pursuant to an application by the ANZ Banking Group Limited ("Respondent") after a Statutory Demand under the Companies Act 1995 was served on the Company and went unanswered. The debt claimed by the Respondent was for the sum of $1,215,000 and arose through various loan advances made to the Company. The Chief Justice then made an order appointing a liquidator. Later the same day the Company filed an application in the Supreme Court for an order setting aside the order appointing a liquidator. The Company applied for leave to appeal against an interlocutory order that dismissed an application to stay an application for the appointment of a liquidator to the Company.

Held:

1. The Company had an application to set aside the order appointing the liquidator which had not yet been heard and determined. The issues the Court identified could be ventilated fully in the hearing of that application. [This was heard in Kava v Australia and New Zealand Banking Group Limited [2009] Tonga LR 420]

2. The Court did not consider that the grant of leave was warranted given that the dismissal of the Company's stay application was a discretionary interlocutory judgment concerning a matter of practice and procedure. Accordingly leave was refused.

Case considered:

Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc [1981] HCA 39; (1981) 148 CLR 170

Statute considered:

Companies Act 1995

Counsel for the appellant : Mr Tu'utafaiva
Counsel for the respondent : Mr Stephenson

Judgment

[1] This is an application for leave to appeal by Hottsie Anne Co Ltd ("the Company") against an interlocutory order dismissing an application to stay an application for the appointment of a liquidator to the Company. For reasons that will be apparent from this judgment it has been necessary to decide this matter with some urgency.

[2] It is desirable first to set out some of the background which is mostly uncontentious. The Company was incorporated in 2002. Shortly after its incorporation, it borrowed $155,000 from the Australia and New Zealand Banking Group Ltd ("the Bank"). Further amounts were lent to the Company (though there is an issue about whether the person who obtained these loans had authority to do so - a matter discussed shortly) by a variety of means (loans and other facilities) in April 2004, August 2007, March 2008 and August 2008. By August 2008 its apparent indebtedness exceeded $1 million. It appears the Company failed to repay amounts due under the loans and other facilities and the Bank asserted a right to demand payment of all amounts outstanding. The demand was not met and the Bank served a statutory demand for the amount outstanding on or about 24 March 2009. The statutory demand was made pursuant to section 298 of the Companies Act 1995 ("the Act"). The demand was not complied with within the date specified in the notice, namely by 15 April 2009.

[3] On 4 May 2009 the Bank filed an application in the Supreme Court pursuant to section 250 of the Act seeking the appointment of a liquidator ("the Bank's liquidation application"). On or about 6 May 2009 the Company filed an application in the Supreme Court pursuant to section 256 of the Act seeking an order staying the Bank's liquidation application ("the Company's stay application"). On or about 8 May 2009 the Company filed an application in the Supreme Court to set aside the statutory demand. Having regard to the terms of section 298 of the Act, that application was plainly incompetent as it was made more than 10 working days after the date of the service of the demand. Both the Bank's liquidation application and the Company's stay application were listed before Ford CJ on 12 May 2009. The Bank appeared but the Company did not. The Chief Justice then made an order appointing a liquidator. Later the same day the Company filed an application in the Supreme Court for an order setting aside the order appointing a liquidator.

[4] On 13 May 2009 the Chief Justice heard the matter and made an order dismissing the Company's stay application and stood over for further hearing (to 19 June 2009 though it has been further adjourned sine die) the Company's application to set aside the order appointing a liquidator. In considering this matter, we assume that the Chief Justice was, understandably (because the order appointing a liquidator had been made ex parte and the Company proffered an explanation for its non-appearance), proceeding on the basis that if he had been persuaded that the Company's stay application should succeed he would have either stayed or set aside pro tem the order he had made the previous day appointing the liquidator and stayed the Bank's liquidation application at least until the Company had fully prosecuted its application for the termination of the liquidation. On that basis (and on that assumption) the Court could have later decided finally whether the Company should be put into liquidation or not in the Company's application to set aside the order appointing a liquidator.

[5] It is necessary to refer to the background from a slightly different perspective, namely events concerning the administration of the company since its incorporation. In evidence before the Chief Justice on 12 May 2009 was an affidavit of Francis Kolo who, at the time of swearing the affidavit, was a director of the Company, its Secretary and its Treasurer. Four things of significance emerge from that affidavit. The first, and most significant, is that when the Company was initially incorporated, it had as a director Mr Kitekei'aho who, on behalf of the Company, secured the original loan in 2002 from the Bank. However the evidence about how this occurred is important. In a letter dated 30 December 2002, Ms Kava (describing herself as the proprietor of the Company – she then held and presently holds 70% of the shares) wrote to the Bank indicating that Mr Kitekei'aho had been given a Power of Attorney to sign papers to secure a loan for the Company of $170,000. The loan was to assist with the purchase of Davinas Bar and Restaurant which from that time to the present, was the essence of the company's business (though the premises at which the business was conducted were, we apprehend, extensively renovated recently using, it appears, funds provided by the Bank).

[6] The second thing to be gleaned from the affidavit is that in Mr Kolo's opinion the company was solvent (at least in accounting terms) in the short term but not in the long-term taking into account the Company's liability to the Bank and its obligation to service the debt. Mr Kolo has accounting qualifications and his views and the case against the Bank was supported by a report from an Australian accountant annexed to the Company's stay application filed on 6 May 2009. In the period 1 July 2008 to 30 April 2009 the Company (apart from abnormals involving the write off of old buildings) was operating at essentially break even (its operating loss was approximately $20,000 on a turnover of over $150,000). The third thing is that of the funds borrowed from the Bank in 2008 a significant portion (approximately $850,000) was transferred overseas and not used for the Company's purposes. The fourth is that Mr Kitekei'aho was removed as a director in November 2008, and replaced by Mr Kolo. This affidavit, we were informed, was not tested at the hearing on 13 May 2009 as Mr Kolo did not make himself available for cross-examination.

[7] Section 189 of the Act deals with the question of who has authority to bind a company. If, by law, the obligations being assumed by the company have to be by deed, then section 189(1) identifies who may sign the deed. That subsection does not authorise a director alone to sign the document unless they have a power of attorney as provided by section 190. In that case the director would be a person authorised to sign by virtue of section 189(1)(a)(iv). In these proceedings we are not in a position to express a view about whether any or all the instruments signed by Mr Kitekei'aho had
to be by way of deed, though we note that in fact at least one of the recent security documents signed by Mr Kitekei'aho on behalf of the Company, was a deed. We note (as mentioned earlier) that the evidence, as it presently stands, indicates that the initial loan in 2002 was obtained in circumstances where Mr Kitekei'aho had a power of attorney. While that evidence may not be conclusive, it may sustain an inference that without a power of attorney, Mr Kitekei'aho otherwise did not have authority to sign the loan documentation (to the extent that it had to be by deed) including the mortgage documents in the subsequent dealings between the Bank and the Company.

[8] It is true that section 189 also authorises a person who has express or implied authority to assume in writing, obligations required by law to be in writing and assume either in writing or orally other obligations. However the expression "under the company's express or implied authority" in section 189(1)(b) and (c) may operate in circumstances where the person apparently acting on behalf of the company has (apart from circumstances of express authority) implied authority but not in circumstances where the person only has apparent or ostensible authority. They are conceptually different. A managing director (which appears to be the position of Mr Kitekei'aho (or a position akin to his position)) can pledge the company's credit and give security over the company's property in the course of normal trading activities but he cannot secure finance outside the ordinary course of conducting the company's day to day business: see generally Ford, Austin and Ramsay: Principles of Corporations Law, 10th edition at 13.070. At 13.120 the learned authors discuss how actual authority can be implied from acquiescence. We are not in a position to express a view about whether Mr Kitekei'aho had implied authority to enter the loan arrangements beyond those entered into in 2002. But having regard to the significant increases in the loans in the last 12 months or so and the fact that, at least on the evidence of Mr Kolo, significant amounts of the loan funds may have been misappropriated, there may be an argument that Mr Kitekei'aho had no implied authority.

[9] If that were so, it might be necessary then to consider, in relation to the Bank's entitlement to enforce the loans, the operation of section 22 of the Act. Somewhat simplified, that section prevents a company from asserting against a third party that an act was not done on behalf of the company because of matters internal to the company. However this protection for third parties is subject to an important qualification. Section 22(1) contains a proviso to the effect, possibly relevant to the present case, that the protection otherwise afforded by the section is lost if the third party knew or ought to have known because of the relationship to the company, knowledge of the relevant matter internal to the company. It is unnecessary, in this matter, to consider in detail the scope and operation of this section. It is sufficient to note that if it might otherwise operate to the benefit of the Bank in the present proceedings, then a real issue may arise about whether the proviso operates to prevent reliance by the Bank on the signature of Mr Kitekei'aho because of the letter of 30 December 2002 to the Bank referred to earlier (at [5] above) and the inference that might be drawn from it.

[10] These matters appear not to have been given detailed consideration by the Chief Justice when dismissing the Company's stay application. His Honour was able to draw upon knowledge gained from other proceedings to conclude (in reasons published on 8 June 2009) that Mr Kitekei'aho was the eyes and ears of the Company and effectively was the Company in Tonga. While this may well be true, reliance on experience from another proceeding may not have been appropriate but, more importantly, may have distracted attention from some of these legal issues sought to be raised by the Company. Indeed there were other legal issues concerning the internal management of the Company (referable to section 128) possibly relevant to the question of whether the Company was liable to the Bank for the full amount claimed. It may also well be true, as his Honour observed, that the Company was hopelessly insolvent though that conclusion may have involved an assumption (which may prove to be correct but it may not) that the Company was liable to the Bank for the full amount claimed. However if it is not, then the question of solvency is likely to take on an entirely different complexion. Because of the opening words of section 296 of the Act it appears to be open to an allegedly insolvent company in an application to have a liquidator appointed, to prove that it is able to pay its debts and challenge contestable debts notwithstanding its failure to comply with a statutory demand. Again, this is a matter about which we do not have to express a concluded view.

[11] It is unnecessary to express a concluded view about the issue discussed in the preceding paragraph and other legal issues discussed earlier because ultimately the refusal of the stay order was a matter of practice and procedure involving the exercise of a discretion. Appeal courts have traditionally been very reluctant to grant leave to appeal against discretionary interlocutory rulings or judgements which concern matters of practice and procedure : see, for example, Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc [1981] HCA 39; (1981) 148 CLR 170 at 177. In the present case, the Company has an application to set aside the order appointing the liquidator which has not yet been heard and determined. We assume it will be heard shortly and indeed it is highly desirable that this be so. The issues we have touched upon can be ventilated fully in the hearing of that application. However we do not think this is a case warranting the grant of leave given that the dismissal of the Company's stay application was a discretionary interlocutory judgment concerning a matter of practice and procedure. Accordingly leave is refused.

The costs of the application for leave should be costs in the application to set aside the appointment of the liquidator.