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National Court of Papua New Guinea |
PAPUA NEW GUINEA
[IN THE NATIONAL COURT OF JUSTICE]
OS NO. 773 OF 2003
IN THE MATTER OF COMPANIES ACT 1997
AND
IN THE MATTER OF AN APPLICATIONUNDER S.300 COMPANIES ACT
BETWEEN:
WESLEY HUI
Plaintiff
AND:
KENMORE LIMITED trading as ATLAS STEEL (PNG) LTD
Respondent
Lae: Gabi, J
2004: 15 September
2006: 15 November
PRACTICE & PROCEDURE – S.300 of the Companies Act – Application for termination of liquidation – Considerations for termination of liquidation not set out under the Act – Factors for enquiry into whether termination "just and equitable" – Application refused on the basis that company insolvent, applicant failed to co-operate with liquidator, creditors have not consented to the application and conduct of company contrary to corporate morality and public interest.
Cases Cited:
Wep Kilip & Kamsi Trading Limited v Hugh Mosley 2005 (SC 784)
Counsel:
P. Parkop, for the applicant
D. Poka, for the liquidator
RULING
15 November 2006
1. GABI, J: This is an application to terminate the liquidation of the company pursuant to section 300 of the Companies Act.
Background:
2. The brief facts are that on or about 10 and 11 July 2003, Jimm Trading Limited (JTL) was ordered to be liquidated. The Court appointed Messrs Robert Southwell and David Wardley as liquidators in the proceedings MP No. 37 of 2002 and MP No. 500 of 2002 respectively. It appears that another liquidation order was granted on 24 May, 2002 in a separate proceeding whereby Mr David Wardley was appointed liquidator. That order was stayed pending the hearing and determination of the application for leave to appeal by the applicant in SCA No. 47 of 2002.
3. The appointment of Mr Southwell was published in the POST COURIER on 7 and 11 August, 2003. The creditors were called on to lodge their claims no later than 11 September, 2003. On 1 September, 2003, the notice of appointment was filed with the Registrar of Companies.
4. On 28 July 2004, an order for stay of the liquidation was granted.
5. By an Originating Summons filed on 22 December, 2003, the plaintiff seeks the following orders:
"1. A declaration that sufficient grounds exist for the Court to find that it is just and equitable to terminate the liquidation of Jimm Trading Ltd, ordered on the 10th July 2003.
6. The applicant relies on the following affidavits: affidavit of Wesley Hui sworn on 2 December and filed on 22 December 2003; affidavit of Jeffrey Szeto sworn on 2 December and filed on 22 December 2003; affidavit of Canisius Karingu sworn on 11 December and filed on 22 December 2003; affidavit of Canisius Karingu sworn on 27 April and filed on 15 June 2004; affidavit of Hans Peter Kochannak sworn on 14 May and filed on 15 June 2004; affidavit of Wesley Hui sworn on 4 June and filed on 15 June 2004; affidavit of Canisius Karingu sworn on 26 August and filed on 8 September 2004; affidavit of Jeffrey Szeto sworn on 7 September and filed on 8 September 2004; and affidavit of Wesley Hui sworn on 8 September and filed on 9 September 2004.
7. In reply, the liquidator filed four (4) affidavits: affidavit of Robert Southwell sworn and filed on 14 July 2004; affidavit of David Poka sworn and filed on 14 July 2004; affidavit of Robert Southwell sworn on 24 August and filed on 27 August 2004; and affidavit of David Poka sworn and filed on 14 September 2004.
Evidence:
8. Evidence filed in support of the application suggested that in 2001, JTL commenced legal action against the Bank of South Pacific (the bank) in proceedings WS No. 308 of 2001. In January 2002, the Privatization Commission (PC) consented to an order for JTL to restrain the bank from acting on the power of sale and writ of possession over the properties of JTL. The bank appealed against the order in SCA 8 of 2002. In July 2002, in SCA 100 of 2001, Chief Justice Amet granted an order for execution of the writ of possession over the properties of JTL. On or about 17 July 2002, the bank seized all the assets and documents of JTL. The seizure of the assets, documents and properties of JTL effectively shut down the entire operation of the company and therefore prevented it from paying its creditors. The applicant, who is the Managing director, a contributory, a shareholder, a creditor and an employee of JTL, claims that JTL was paying its creditors and was making successful attempts to repay all the creditors prior to the seizure.
9. The bank seized the assets, goods and equipment (including vehicles) and sold them to TST Trading for K300,000. The vehicles were given away to Armour Guard Security as costs for towing and storing of the respective vehicles and equipment. On 28 March 2003 in SCA 8 of 2002, Justice Sakora ruled that the consent order was in force until such time the appeal in SCA 8 of 2002 was heard. Accordingly, His Honour granted orders to JTL declaring that the bank had no legal rights to seize the assets and that they should return the assets seized. On 24 November 2003, the liquidator consented to the discharge of the Order of 28 March 2003 after obtaining legal advice. The reasons for the discharge were that the liquidator has not been able to locate or recover any assets of the company. Secondly, the liquidator had no funds and so agreed or consented to the discharge so as to allow the bank to search for the assets of JTL.
10. The six monthly report for the period 13 July 2003 to 14 January 2004 filed by the liquidator showed that the company had assets worth K19,251,063 and K9,679,815 worth of liabilities. In the same report, the liquidator reported that no assets were recovered, no expenses incurred and no work done. The bank did not apply and register itself as a creditor in the liquidation proceedings MP No. 500 of 2002 and MP No. 37 of 2002.
11. By a letter dated 8 August 2003 from the liquidator, the Commissioner General was advised of the liquidation of JTL. At the time of notice, JTL had (and still has) an amount of K1,427,538.06 outstanding in salary and wages taxes not remitted to the Internal Revenue Commission (IRC) and company taxes not paid. On 28 October 2003, a letter was sent to the liquidator informing him of the debt in taxes of JTL owing to the State. The application for termination is supported by IRC so that assets can be re-couped and re-sold to recover the debt due to the State. The applicant alleges that the liquidator is in breach of s.269(3) of the Income Tax Act in that he part with the assets of the company without the leave of the Commissioner General. Section 269(3) requires assets to be held back to cover liability of debts owing as taxes under the Income Tax Act and the liquidator is to pay the amount owing as taxes. The assets of the company have been sold off by the bank under the mortgage agreement between JTL and bank.
12. The applicant further alleges that the liquidator failed to comply with certain provisions of the Companies Act. First, the liquidator failed to prepare a report containing the prescribed details, including a statement of the company’s affairs, proposal for conducting the liquidation and the estimated date of completion within one (1) month of his appointment (s.305(2)(c)(ii)). Secondly, the liquidator failed to prepare and send to every known creditors and shareholders a six monthly report (s.305 (2)(d)). Finally, the liquidator failed to file the Notice of Appointment in Form 39 with the Registrar within seven (7) days of his appointment (s.305 (2) (b)). Even though a six (6) monthly report was filed, it was defective for the following reasons:
(i) It was filed on 21 February 2004 which was 33 days outside of the period required under s.305(2)(d);
(ii) The six (6) month period expired on 10th February 2004; and
(iii) The report states that the liquidator was appointed on 13 July 2003 when in fact he was appointed on 10 July 2003.
13. The liquidator opposes the application. The liquidator’s evidence is that he obtained legal advice which indicated that the bank had legal power to obtain assets under its charge. The company had no funds which could be used to obtain the assets and the agreement with the bank provided a way to collect those assets. It is the liquidator’s responsibility to obtain the assets of the company and the advice received indicated that assets of the company were covered by the equitable charge held by the bank where the liquidator may be able to obtain those assets for the benefit of the priority creditors being the wage employees, IRC and government debts. The liquidator has requested the applicant to advise of books and records in his possession which may identify assets which should be pursued and to date, no advice has been received.
14. The liquidator alleges that the applicant has despite the liquidation order withdrawn funds from the company’s bank account. He has never indicated or proposed a scheme for payment or benefit of the creditors. He has advised the liquidator that he would not fund any legal matters which were outstanding at the date of liquidation. The liquidator has refused to call a meeting because he has no funds to do so.
15. The IRC’s letter dated 28 October 2003, indicates that reconciliation of statements of earnings for group tax is outstanding for the 1999, 2000, 2001 and 2002 years. In addition, the company has not met its tax obligations for a number of years. Training levy returns have not been lodged for years 1998 to 2002 and VAT returns from December 2000 to 2002 have not been lodged as well. Completion of the outstanding VAT returns is doubtful where the Companies books and records have not been located.
16. The liquidator consented to discharge the order in SCA No. 8 of 2002 on legal advice. He would receive a commission of K20,000.00 in respect to assets recovered by the bank. This would allow the liquidator to locate assets of the company and complete investigation of the financial affairs of the company.
17. The liquidator says that he complied with the Income Tax Act and has advised the IRC of his appointment and obtained advice in respect to outstanding matters. However, due to unavailability of records, the outstanding returns cannot be completed. The former directors including the applicant have failed to complete the outstanding returns (Income Tax Returns, Group Tax Returns, Training Levy Returns and VAT Returns). The directors of the company including the applicant have not co-operated with the liquidator in supplying information and records and have not assisted in the discovery of assets.
18. The liquidator further alleges that all the advice received by him indicates that the company has an excess of liabilities over assets, especially debts owed to the Papua New Guinea Government for Group Tax and Assessed Tax. Amounts are also due to employees and trade creditors. The company was insolvent at the time it was put into liquidation on 10 July 2003 and has remained insolvent since. In addition, he denies that he has not complied with the Companies Act.
The Law:
19. Section 300 of the Companies Act 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)." (Emphasis added)
20. Section 300(1) confers on the Court discretion to terminate the liquidation of the company after the appointment of a liquidator. The liquidation may be terminated upon an application by the liquidator, a director or a shareholder, any other entitled person, the Registrar of companies or a creditor (sec 300(2)). The Court must be satisfied that it is "just and equitable" to do so. The effect of the order is that 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 (sec 300(6)). The considerations for termination of the liquidation are not set out under the Companies Act. One has to look at the Case law in jurisdictions with similar legislation to ascertain the factors that may be taken into account in the exercise of the discretion.
Just and Equitable:
21. In Wep Kilip & Kamsi Trading Limited v Hugh Mosley 2005 (SC 784), His Honour, Mr. Justice Lay reviewed the Australian, English and New Zealand authorities and held that the factors to be taken into account in determining whether it is just and equitable to terminate the liquidation include the following: (a) whether the creditors and contributories had been served with the application; (b) the nature and extent of the creditors and whether all of the debts have been or will be discharged; (c) the attitude of creditors, contributories and the liquidator; (d) the current trading position of the company and its general solvency should be demonstrated; (e) any non compliance by directors with their statutory duties should be fully explained with all reasons and circumstances; (f) the general background which led to the winding up should be explained; and (g) the nature of the business carried on by the company should be demonstrated and whether in any way the conduct of the company was contrary to commercial morality or public interest.
22. In that case, the applicant sought to stay the order of the National Court refusing an application to terminate the liquidation of the second appellant, which was commenced in December 2002. The application was refused on the basis that the applicants failed to demonstrate that the company was solvent, or that all the creditors had been paid, or that the shareholders agreed. Secondly, the liquidator had not been paid. Finally, the company had not paid tax or lodged returns to the Commissioner of Internal Revenue or the Registrar of Companies. His Honour said:
"Of course, our Companies Act provides that the liquidator and not the company has custody and control of the assets. Nevertheless I consider that the creditors have sufficient interest in the assets of a company in liquidation to have an opportunity to voice their attitude if it is proposed to put those assets back into control of the company before all those creditors have been paid. If the creditors have not given their consent, then they should be served with the notice of intention to make the application. Without the views of the creditors, it would be very difficult for the Court to ascertain whether or not it was just and equitable to terminate the liquidation; except where it is clearly demonstrated that the assets far exceed the liabilities and that cash resources are sufficient to pay all creditors."
23. At this juncture, I wish to briefly comment on the allegation by the applicant that Messrs Robert Southwell and David Wardley have breached certain provisions of the Companies Act. Mr Canisius Karingu set these out in his affidavit dated 27 April 2004 and urged the Court to terminate both liquidators. I find no evidentiary basis for that allegation and as such, refuse the suggestion to terminate. If, on the other hand the allegation were true, it would be just one of many factors that I would take into account in determining whether to terminate the liquidation. In any event, this is an application for termination of the liquidation, not the liquidators.
24. In this case, there is no evidence that the creditors have been served with or consent to the application for termination of the liquidation. It is imperative that all creditors consent to the application. Secondly, there is no material before the Court to demonstrate that JTL is solvent and that it would be able to pay its debts as they fall due after termination of the liquidation. The evidence is that the seizure of the assets by the bank pursuant to the order to execute the writ of possession effectively shut down the operations of JTL and it has no more assets which could be realised to pay the liquidator or the creditors. In fact, the applicant concedes that the only asset of JTL is the order of SCA 8 of 2002. The applicant claims that the seizure is illegal and if the liquidation were terminated, he would pursue the enforcement of the order by fighting the bank to have the assets returned so that the creditors could be paid. I have serious misgivings about that suggestion on the grounds that the order in SCA 8 of 2002 has been discharged and that the assets have been disposed of and title transferred. Thirdly, the applicant has failed to co-operate with the liquidator to provide information and records and to assist in the discovery of assets and liabilities of the company and has not devised a scheme for the payment or benefit of the creditors. He has withdrawn funds from the company’s bank account after the liquidation of the company. In addition, he has stated to Mr Robert Southwell that he would not fund any legal action by the liquidator. Fourthly, there is evidence from the liquidator that JTL has an excess of liabilities over assets especially debts owed to the State for Group Tax and Assessed Tax. Monies are also owed to employees and trade creditors. This corroborates the evidence of the applicant that there are no more assets that may be realised to pay the creditors. I accept the liquidator’s evidence that JTL has an excess of liabilities over assets. Finally, the evidence before the Court which is not denied by the applicant is that JTL has not paid taxes, nor filed tax returns for a number of years. I consider non-payment of taxes as a conduct contrary to corporate morality and public interest. JTL has traded to the detriment of corporate morality and the interest of the public generally. The public interest must be protected. Companies should not be allowed to operate in such a way that members of the public may be put at risk. It is not in the interest of the public to allow JTL to go forth into the world of commerce again.
25. For those reasons, I find that it is not just and equitable to stop the liquidation. Accordingly, I dismiss the application with costs to be agreed if not to be taxed.
_________________________________
Powes Parkop Lawyers: Lawyers for the applicant
Pryke & Jansen Lawyers: Lawyers for the respondent
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URL: http://www.paclii.org/pg/cases/PGNC/2006/126.html