(Given by French J)
Introduction
[1] Mr Wikeley was served with a bankruptcy notice by the respondents. The respondents had obtained a judgment against him and wanted to enforce it. Mr Wikeley applied to the High Court to have the bankruptcy notice set aside on the ground that he had a cross claim against the judgment debt. His application was heard by Associate Judge Bell. The Judge dismissed the application.[1] Mr Wikeley now appeals that decision.
[2] The key issues raised by the appeal are as follows:
(a) Does Mr Wikeleys professed cross claim satisfy the elements of an equitable set-off “ in particular, is there a sufficient degree of interdependence between the cross claim and the respondents judgment debt, as required by the case law?
(b) Was the Associate Judge correct to find that: (i) it was a foregone conclusion the respondents would obtain relief under the oppressed minority shareholder provisions of the Companies Act 1993; and (ii) this was a complete answer to Mr Wikeleys cross claim argument?
(c) Was the professed cross claim genuinely triable?
Background
[3] The respondents are trustees of the Genset Trust. One of the trustees, Mr Jacomb, was a friend and business associate of Mr Wikeley.
[4] At the centre of the dispute between the parties is a company, Edel Metals Group Ltd (Edel Metals). Edel Metals was incorporated on 18 November 2008 to invest in a Chilean mineral processing operation that Mr Wikeley had promoted to Mr Jacomb.
[5] Edel Metals issued 100 million shares with a face value of $1 each. Of the 100 million shares, 23,750,000 were issued to the respondents. The remaining shares (76,250,000) were issued to Geier Ltd. Geier Ltd held the shares on a bare trust for Mr Wikeley and interests associated with Mr Wikeley.
[6] Neither the respondents nor Geier Ltd paid for the shares they received.
[7] At the time the company was incorporated, the directors were Mr Jacomb and Mr Wikeleys accountant, a Mr Gibson.
[8] Between 15 December 2008 and 27 May 2009, the respondents advanced a total of USD 1,500,060 to Edel Metals by way of loan. Mr Wikeley gave the respondents a personal guarantee for half of the loan.
[9] The mining venture was unsuccessful and Edel Metals failed to repay the respondents advances. It was ultimately struck off the companies register for failing to file a return.
[10] On 3 June 2010, the respondents issued proceedings against Mr Wikeley in the High Court seeking payment under the guarantee. For some reason, the case was not heard until November 2012. On 10 April 2013, Kós J gave judgment in favour of the respondents for USD 862,534.50.[2] That decision has never been appealed.
[11] In the meantime, on 8 January 2013 (after the hearing in the High Court but before Kós J delivered his decision), Edel Metals was restored to the companies register at the instigation of Mr Wikeley.
[12] Then Mr Wikeley and or his interests took the following actions:
On 18 January 2013 Geier Ltd transferred one share in Edel Metals to Mr Wikeley.
In March 2013 Mr Wikeley was appointed a director of Edel Metals and Mr Jacombs directorship was terminated.
On 15 April 2013 Mr Gibsons directorship of Edel Metals was terminated.
On 16 April 2013 Mr Wikeley as director signed a notice to the shareholders advising that the Board had resolved to:
(i) issue 200 million new shares to a new investor for $0.01 per share in order to provide the company with working capital and satisfy the solvency test under the Companies Act; and
(ii) offer a further 200 million new shares to the existing shareholders at an issue price of $0.01 per share.
The notice was accompanied by a special resolution of the shareholders excluding the respondents. The resolution approved the issue of 200 million new shares to the new investor and recorded that these shares would rank pari passu with all existing ordinary shares.
On 16 April 2013, 200 million shares were issued to the new investor, a company under the effective control of Mr Wikeley called Sundome Enterprises Ltd (Sundome). Sundome became the new majority shareholder of Edel Metals.
Later in April 2013 Sundome paid $20,000 to Edel Metals for the shares.
Sundome appointed a Ms Lan Zhu to be a director of Edel Metals.
The respondents not having taken up the offer relating to the additional 200 million new shares, those shares were distributed to the other shareholders (all interests associated with Mr Wikeley) at $0.01 per share.
On 22 April 2013, Edel Metals gave notice to the original shareholders (the respondents and Geier Ltd) requiring payment of the unpaid share capital within 14 days. The notice was signed by Mr Wikeley and Ms Zhu. In response, the respondents served a minority buy-out notice on Edel Metals under s 111 of the Companies Act. There is no evidence Edel Metals complied with the notice.
[13] On 13 August 2013, the respondents filed a bankruptcy notice based on the judgment they had obtained against Mr Wikeley from Kós J. Mr Wikeley then filed an application to have the bankruptcy notice set aside.
[14] Finally in this recital of the background facts, we record that after the Associate Judge had issued his decision the directors of Edel Metals purported to revoke the previous call for unpaid share capital and resolve that a new call would be made for $0.25 per initial share (instead of $1 per share). That is, notice would be given requiring only part of the share capital to be paid. The respondents were duly served with a notice requiring them to pay $5,937,500 and in January 2014 Edel Metals issued proceedings in the High Court against the respondents seeking recovery of that amount.
The decision of the Associate Judge
[15] In the High Court, Mr Wikeley argued that the bankruptcy notice should be set aside because the principal debtor whose loan debt he had personally guaranteed (Edel Metals) had a valid claim of set-off (the unpaid share capital) against the respondents that far exceeded the amount of the loan debt. The set-off was tantamount to payment and the loan debt had therefore been effectively extinguished.
[16] It was submitted that in those circumstances, the bankruptcy notice was an abuse of process which the Court should set aside in the exercise of its inherent jurisdiction. Alternatively it was argued that s 17 of the Insolvency Act 2006 applied.[3] Under s 17(1)(d), it is a proper ground for setting aside a bankruptcy notice if the judgment debtor satisfies the court that they have a cross claim against the creditor. Section 17 constitutes a statutory exception to the general common law rule that a judgment debtor cannot use a cross claim acquired after judgment to prevent or delay the judgment creditor from enjoying the benefit of their judgment.[4]
[17] Section 17(7) relevantly defines œcross claim? for this purpose as meaning a counterclaim, set-off or cross demand that is equal to, or greater than, the judgment debt and that the debtor could not use as a defence in the action or proceeding in which the judgment was obtained.
[18] The Associate Judge said he accepted that the matters raised by Mr Wikeley were capable of constituting an equitable set-off and therefore of coming within the statutory definition of a cross claim. He also accepted Mr Wikeley did not have to prove the cross claim was watertight. It was sufficient for him to show it was a œgenuine triable claim?.[5]
[19] However, in the view of the Judge, Mr Wikeley did not have a genuine triable claim. The Judge described the steps taken by Edel Metals under the direction of Mr Wikeley from January 2013 onwards as an œengineering of a call on shares? and œa device? to defeat the respondents rights under their judgment.[6] The relevant resolutions had been passed by Mr Wikeley without consulting the respondents and were clearly calculated to be to their detriment. In those circumstances, the Judge found that what had happened was oppression of a minority shareholder and that it was a œforegone conclusion? the respondents would obtain full relief under s 174 of the Companies Act.[7]
[20] The Judge accordingly dismissed the application to set the bankruptcy notice aside. In a subsequent decision, the Judge also refused to grant a stay of the bankruptcy proceedings pending this appeal.[8]
Arguments on appeal
[21] The arguments focused on three issues.
[22] The first was whether Mr Wikeleys asserted cross claim satisfies the requirements of an equitable set-off, as the Associate Judge assumed.
[23] As regards this issue, it was common ground that:
(a) The Associate Judge was correct to find that no legal set-off was available to Mr Wikeley.
(b) If Mr Wikeley does have an available cross claim, it must be an equitable set-off. No other type of cross claim is applicable.
(c) A guarantor (Mr Wikeley) may call in aid a set-off available to the principal debtor (Edel Metals).[9] To put it another way, the fact that Mr Wikeley is seeking to rely on a claim that is between Edel Metals and the respondents, as opposed to himself and the respondents, does not of itself preclude an equitable set-off.
(d) In accordance with the usual requirements of an equitable set-off, the guarantor must still however establish that the claim and cross claim are interdependent such that it would be unjust to give judgement on one without bringing the other into account.
[24] Where counsel disagreed was whether on the facts of this case there was sufficient interdependence between the two claims (that is, between the guarantee of the loan debt and the unpaid call on the shares).
[25] The second issue was whether, in allowing the bankruptcy notice to stand despite also finding that the matters raised by Mr Wikeley came within the scope of set-off under s 17(7) of the Insolvency Act, the Associate Judge wrongly arrogated to himself a residual discretion and so misapplied Sharma v ANZ Banking Group (NZ) Ltd.[10]
[26] The third issue was whether, having regard to the available evidence, the Associate Judge was entitled to find it was inevitable the Court would give relief to the respondents under s 174 of the Companies Act and as a consequence to find the matters raised by Mr Wikeley were not genuinely triable.
Interlocutory applications
[27] Before turning to the merits of the appeal, it is necessary for us to address three interlocutory applications.
[28] The first is an application made by Mr Wikeley for leave to amend the grounds of appeal by adding a new ground. The new ground is an assertion that the Associate Judge breached the rules of natural justice by relying on evidence in an affidavit that had been filed without notice and that Mr Wikeley had never seen. The affidavit had been filed by the respondents in support of an application for directions as to service. It was mentioned by the Associate Judge in the decision under appeal to support a comment that Geier Ltd would be unable to meet the call on its shares.
[29] The new ground was not raised until after the Registrar allocated a hearing date for the appeal and accordingly Mr Wikeley requires leave to be able to amend the notice of appeal.[11]
[30] The respondents initially opposed the application but at the hearing counsel advised us that it could be granted by consent and accordingly leave was granted.
[31] The second application was an application by Mr Wikeley to adduce further evidence regarding the proceedings Edel Metals has recently filed against the respondents for part of the unpaid share capital.[12]
[32] Again, the respondents initially opposed this application but withdrew their opposition at the hearing. We duly granted the application and received the evidence.
[33] The third application is an application by the respondents for an extension of time to file and serve a memorandum setting out an alternative ground on which to support the judgment, namely that the professed cross claim could not qualify as an equitable set-off because the claim and cross claim were not sufficiently interdependent. This was an issue not addressed by the Associate Judge.[13]
[34] Under r 33 of the Court of Appeal (Civil) Rules 2005, the respondents were required to file the memorandum within 10 working days after the date on which the notice of appeal was served on them. Due to oversight this was not done, hence the need for an application for an extension of time.
[35] Mr Wikeley filed a notice of opposition but at the hearing counsel advised that he would abide the decision of the Court. We are satisfied the application should be granted. The proposed additional ground comes within the scope of the High Court pleadings, it raises a seriously arguable issue and the delay has not prejudiced Mr Wikeley. The arguments were signalled in the respondents submissions filed in advance of the hearing so did not come as a surprise.
Analysis
[36] At this juncture it is convenient to set out the relevant text of s 17 of the Insolvency Act in more detail:
17 Failure to comply with bankruptcy notice
(1) A debtor commits an act of bankruptcy if”
(a) a creditor has obtained a final judgment or a final order against the debtor for any amount; and
(b) execution of the judgment or order has not been halted by a court; and
(c) the debtor has been served with a bankruptcy notice; and
(d) the debtor has not, within the time limit specified in subsection (4),”
(i) complied with the requirements of the notice; or
(ii) satisfied the court that he or she has a cross claim against the creditor.
...
(7) In subsection (1)(d)(ii), cross claim means a counterclaim, set-off, or cross demand that”
(a) is equal to, or greater than, the judgment debt or the amount that the debtor has been ordered to pay; and
(b) the debtor could not use as a defence in the action or proceedings in which the judgment or the order, as the case may be, was obtained.
[37] As the Associate Judge recognised, the leading New Zealand authority on cross claims in the context of bankruptcy is the decision of this Court in Sharma v ANZ Banking Group (NZ) Ltd. In Sharma, the Court articulated two important propositions regarding the interpretation of the predecessor to s 17(7).
[38] The first was that if a debtor does satisfy the court that he has a counterclaim, set-off or cross demand that equals or exceeds the judgment debt and could not be set up in the action in which the judgment was obtained, then the result is there is no relevant act of bankruptcy. The court is not endowed with any discretion to allow the bankruptcy notice to stand.
[39] The second proposition was that in order to so satisfy the court, the debtor must establish that the cross claim is a genuine triable claim. The words œgenuine? and œtriable? require the debtor to demonstrate that he has a claim of true substance that he genuinely proposes to pursue.
[40] The requirement that the asserted cross claim be a genuine triable claim is an overarching requirement that applies to all three types of cross claims under s 17(7), namely counterclaims, set-offs and cross demands.
[41] The Associate Judge found that Mr Wikeleys cross claim was not a genuine triable claim because the respondents would be able to obtain relief under s 174 of the Companies Act. We have reached the same conclusion as the Associate Judge but for a different reason.
[42] In our assessment, it is not necessary to consider s 174.
[43] The call-up of the shares had its origins in an elaborate and highly contrived series of events engineered by Mr Wikeley. On the face of it, the steps he took commencing in January 2013 are suggestive of bad faith and impropriety, impacting on the validity of the call-up. The steps taken call for an explanation from Mr Wikeley, but other than saying the company needed to give itself more working capital, none has been forthcoming. We refer in particular to the artificial inflating of the shareholding and the highly questionable shareholders resolution that shares issued at $0.01 per share would rank pari passu with existing shares of $1 each. We note that Edel Metals constitution mandated a share price of $1 and that the Sundome shares were issued in breach of the respondents pre-emptive rights. Other dubious aspects include the restoration of the company to the companies register at the behest of a person who was neither a shareholder nor a director at the time,[14] the transfer of the one share to Mr Wikeley in breach of the company constitution, and the removal of Mr Jacomb as a director.
[44] We are mindful that at this stage not all the evidence about the unpaid share capital is before the Court, a point strongly emphasised by Mr Sorrell. However, as Sharma makes clear, the onus is on Mr Wikeley to satisfy the Court that his claim is genuine and triable. In the absence of any explanation about the events detailed above, we cannot be so satisfied.
[45] Had it been necessary, we would also have found that in any event the two claims were not sufficiently interdependent so as to satisfy the requirements of an equitable set-off.
[46] The test to be applied is whether the cross claim:[15]
... so affects the plaintiffs claim that it would be unjust to allow the plaintiff to have judgment without bringing the cross-claim to account. The link must be such that the two are in effect interdependent, judgment on one cannot fairly be given without regard to the other, the defendants claim calls into question or impeaches the plaintiffs demand.
[47] We accept Mr Ingram QCs submission that by nature and timing the two claims are not sufficiently linked. The loan was advanced in 2008 and 2009 in a series of tranches and was to be repaid within 18 months. The call on the shares was not made until several years later, after both parties had allowed the company to be struck off the register for failing to file a return. Further, repayment of the loan was not dependent on the call. The loan could have been repaid by Edel Metals without the call had the company and its subsidiary succeeded in the Chilean venture.
[48] We note too as regards the equities of the situation that Mr Wikeley being made bankrupt will not prejudice the prosecution of the proceedings Edel Metals has commenced against the respondents.
[49] Finally, we turn to the issue of whether the Associate Judge breached the rules of natural justice by referring to a without notice affidavit in support of his observation that œit would be naive to believe that Geier Ltd would be good to meet the call on its shares?.[16] We are satisfied that if there was a breach of natural justice, it was not material and had no bearing on the outcome. The decision did not depend on the solvency of Geier Ltd. Further, there was in any event other evidence on which the Judge could have relied to support his observation. In his own affidavit, Mr Wikeley stated that Geier Ltd could not pay the unpaid capital and that he was proposing to put it into liquidation. Other complaints that the affidavit filed without notice contained arguably without prejudice communications were not substantiated.
[50] Because of the view we have taken, it is unnecessary for us to consider the arguments relating to the application of s 174 and whether the Judge wrongly arrogated to himself a residual discretion contrary to the first proposition in Sharma.
Conclusion
[51] We are satisfied the Associate Judge was correct to find that Mr Wikeleys professed cross claim was not a genuine triable claim and that the bankruptcy notice should stand.
[52] The appeal is accordingly dismissed.
[53] As regards costs, it was accepted by counsel that costs relating to the appeal should follow the event and be calculated as for a standard appeal on a band A basis. Mr Sorrell, however, also submitted that regardless of the outcome the appellant should be awarded costs on the respondents application for leave to support the judgment on other grounds. We disagree. It was an application that should not in our view have been opposed. The costs of the three interlocutory applications shall lie where they fall.
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[1] Jacomb v Wikeley [2013] NZHC 3034.
[2] Jacomb v Wikeley [2013] NZHC 707.
[3] Mr Wikeley also sought a stay under s 38 of the Insolvency Act 2006. The Associate Judge, however, found that it was not necessary to consider s 38 because the matters to be determined turned on the cross claim issues under s 17 and the inherent jurisdiction. That approach was not challenged on appeal.
[4] Whyte v OBrien [1824] EngR 258; (1824) 1 Sim and St 551, 57 ER 218 (Ch).
[5] Jacomb v Wikeley, above n 1, at [26].
[6] At [43].
[7] At [43].
[8] Jacomb v Wikeley [2013] NZHC 3368.
[9] Relying on Hamilton Ice Arena Ltd v Perry Developments Ltd [2002] 1 NZLR 309 (CA).
[10] Sharma v ANZ Banking Group (NZ) Ltd (1992) 6 PRNZ 386 (CA).
[11] Court of Appeal (Civil) Rules 2005, r 34(2)(a).
[12] Rule 45.
[13] A second alternative ground, based on evidence of the existence of an agreement that no call on the shares would ever be made, was abandoned at the hearing.
[14] Contrary to s 328(2) of the Companies Act 1993.
[15] Grant v New Zealand Motor Corp Ltd [1989] 1 NZLR 8 (CA) at 12“13.
[16] Jacomb v Wikeley, above n 1, at [42].