New Zealand Credit Law Bulletin - Vol 4, No 2, February 2004
A free, plain English review of recent law and items of interest for creditors, produced by Hattaway & Associates Ltd, Credit Consultants. To subscribe send a blank email to: nz-bulletin-join@mailman.hattaways.com
Plain language disclaimer:
This bulletin is not legal advice. Do not make decisions on legal matters based on a brief commentary. Instead, get professional legal advice.
In this issue:
- Apparently solvent company goes into voluntary liquidation before case heard - now what?
Liquidator makes life difficult for creditor - Sticky dispute over monthly payments almost results in appointment of a liquidator
Jacobsen Creative Solutions Ltd v Mapei Spa (M967/02; HC, Akld; 5/2/03) - Judge says company shouldn't use stat demand to resolve accounting confusion
But it seems to have worked - most of the debt was sorted out - If you are running a company but you’re not the liquidator, that must make you a …director!
Liquidators' appointment was defective but they were still allowed to sue lawyers for negligence - Liability under the MVD Fidelity Fund
An example of how the system works.
1. Apparently solvent company goes into voluntary liquidation before case heard - now what?
Hoggart v Richworth Properties Ltd (M146-IM03; HC, Akld; 31/3/03)
In August 2002 the Hoggarts sued Richworth Properties Ltd under the provisions of the Credit Contracts Act 1981. The dispute concerned a series of events involving loans by Richworth and the transfer of properties. The date of the hearing for summary judgment was set for 10 December. In the meantime Richworth was placed into voluntary liquidation although the directors certified that “the company [was] able to pay its debts”.
Mr Whaley was appointed liquidator. On Whaley’s advice Richworth’s solicitor wrote to the court pointing out that under s 248 of the Companies Act 1993, no-one can continue any legal proceedings against the company without the consent of the liquidator or the leave of the court and Whaley had not given his consent.
This prompted the Hoggarts to write to Whaley requesting more information about the circumstances in which Richworth had gone into liquidation. In particular they were worried that the assets of Richworth had been purchased by another company in which the son of one of Richworth’s directors was a director and shareholder. They later informed Whaley that they believed he was forcing them to make an application to the court to continue their action by refusing to consent to the litigation going ahead.
Whaley replied by saying that he would not consent to the litigation going ahead. He suggested that the appropriate way to recover the debt the Hoggarts said they were owed was by filing a proof of debt with him.
The Hoggarts did just that but in early February 2003 Whaley rejected the proof of debt. This led to the current action -- the Hoggarts applying for leave from the court to continue with the initial proceedings they had begun the previous August.
Whaley did not appear at the hearing as he said he did not wish to incur further expenses related to it but he still continued to oppose the Hoggart’s application. The court however, was in no doubt that the matter should be heard. The Hoggarts' allegations should be determined in a civil proceeding rather than in the context of examining the liquidator’s decision to reject the proof of debt.
This meant that the Hoggarts were free to continue to sue Richworth. The court also said that Whaley “must have known that the likelihood of the plaintiffs’ proof of debt being accepted was virtually non-existent” and that an application for leave to proceed would be likely to succeed. “In all of the circumstances the liquidator would have been well advised to have given his consent to the continuation of the proceeding at an early stage”. The liquidator was ordered to pay the Hoggart’s costs.
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2. Sticky dispute over monthly payments almost results in appointment of a liquidator
Jacobsen Creative Solutions Ltd v Mapei Spa (M967/02; HC, Akld; 5/2/03)
Jacobsen Creative Solutions Ltd distributes interior and exterior floor and wall products. Mapei Spa is an international company, headquartered in Italy, which regards itself as a world leader in adhesives for floor and wall coverings.
In 1998 Jacobsens entered into an exclusive supply agreement with Mapei Spa. Towards the end of 2001 Mapei indicated that exclusive supply for 2002 would be maintained as long as an annual purchase figure of $1.5 million was accepted. If the purchase figure was not met “on any given month” a meeting would be called to discuss the situation. Should the figure not be met for a period of three months, Mapei would be free to appoint additional distributors.
In March 2003 Mapei informed Jacobsens that they were substantially below target for January and February. They said that to get back on target Jacobsen would have to purchase $241,192.13 worth of Mapei products in March. In response Jacobsens explained that January and February were quiet months in NZ but they were matching sales made in January and February the previous year. Jacobsens also offered meet to discuss the situation. Mapei continued to insist that Jacobsen would have to purchase the target amount.
Jacobsens then wrote to Mapei making clear that they believed that the exclusivity agreement was on the basis of a minimum annual purchase requirement. It did not mean that Jacobsens had to meet a minimum monthly purchase requirement equal to one-twelfth of the annual requirement. A meeting was arranged to discuss the issues but never took place. The meeting was called off by Mapei who then cancelled the exclusive agreement and issued a statutory demand for the amounts ‘outstanding’ due to the ‘under purchases’ in January and February.
Jacobsens counterclaimed. They said there was no requirement to meet monthly figures and before any decision was to be made there had to be a meeting between the parties. The judge said that "the statutory demand jurisdiction certainly is not the appropriate place where [this dispute] can be determined. Unfortunately that conclusion is not decisive of this application." [Editor's note: It's not entirely clear to us why he felt this couldn't be decisive.]
Jacobsen's also said they had a set-off claim against Mapei for lost sales, unsaleable stock and the cost of establishing a replacement brand. However, a company which has failed to comply with a statutory demand is presumed to be unable to pay its debts. Jacobsens had to do more than just assert they had a set-off – they had to show a real basis for their claim. They couldn't do this. The set-off claim consisted of estimates where the liability and the amounts were in dispute and they would remain that way until the litigation over the exclusivity agreement was resolved.
The court conceded however, that Jacobsens had at least an arguable case for a set-off. Importantly, this meant that the court could pursue other ways to set aside the statutory demand (s.290(4)(c)). The purpose of a statutory demand is to appoint a liquidator when a company is unable to pay its debts. Jacobsens’ evidence about its business turnover showed that it could pay its debts. Jacobsens also offered to provide a bond as security for any money due to Mapei pending resolution of the dispute over the exclusivity agreement.
This meant that the court could order that once an appropriate bond had been deposited, the demand would be set aside. That would allow the two companies to continue to argue the merits of their case concerning the exclusivity agreement.
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3. Judge says company shouldn't use stat demand to resolve accounting confusion
Lockheed Ltd v Tikitere Springs Estate Ltd (Unreported, Akld; M1969-im01, 8 March 2002)
Lockheed Ltd was in the business of managing project aspects of building contracts. Tikitere Springs Estate Ltd (TSE) was the owner/developer of the Tikitere Springs Spa and Resort Hotel at Tikitere, near Rotorua. TSE contracted Lockheed to manage construction on the site of the Hotel and Spa. The third player was Stanley Construction Limited which had a sub-contract to do concreting work as part of the construction of the hotel.
In theory, TSE would pay Lockheed for work done and Lockheed would pass it on to Stanley. When Stanley was not paid for its work, it took commenced winding up action against both Stanley and TSE.
TSE, in turn, issued a statutory demand on Lockheed. An application to set this aside is the subject of this hearing. While the matter was before the court, $38,745.02 was paid to Stanley. Lockheed kept $12,859.52 as retention monies.
At the same time TSE was claiming that Lockheed owed it $56,143.81, based on invoices issued under the agency agreement between them. The court indicated that the whole mess was crying out for a full accounting between Lockheed and TSE. It was apparent that there was a counterclaim, set-off or cross-demand which exceeded the retention monies. On that basis TSE's demand against Lockheed was set aide.
The court pointed out that the statutory demand procedure was “quite inappropriate” for trying to determine the accounting situation between companies in dispute. Apparently, under the threat of liquidation from Stanley’s statutory demand, TSE had issued its own demand on Lockheed as a way of collecting money in order to pay Stanley and remain in business. It had apparently done so “without any regard at all for the unresolved issues between itself and [Lockheed]”. For this reason, TSE was ordered to pay costs.
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4. If you are running a company but you’re not the liquidator, that must make you a …director!
Brand Hospitality Ltd v Minter Ellison Rudd Watts (2003) 9 NZCLC 263,197
Brand Hospitality Ltd (BHL) used Rudd Watts & Stone (now known as Minter Ellison Rudd Watts) as its lawyers. BHL entered into an agreement with the Wainuiomata Licensing Trust (WLT) to purchase WLT’s liquor licensing business. WLT was also to provide funding, which included the transfer of a property known as the Fitzroy Complex. It turned out that WLT had no authority to transfer the property and it never happened. This reduced the funds available to BHL’s creditors and later BHL went in to liquidation.
The circumstances surrounding the apparent liquidation of BHL remained confused but it had been clear by October 1989 that BHL was insolvent and its stock was being seized by creditors. Mr Kiddle and Mr McGregor were supposedly appointed as liquidators of BHL. The next day all the remaining directors of BHL resigned, and no replacement directors were appointed. Since then no-one else had any role in the management of BHL other than Kiddle and McGregor, who began to wind-up its affairs.
BHL sued Rudd Watts for losses of $345,000.00 resulting from the failed WLT deal. BHL argued that Rudd Watts should have known of the limitations on the power of WLT and was negligent in not structuring arrangements in a way that would have been within those powers.
Rudd Watts applied to have BHL’s claim struck out. The lawyers said that when the proceedings were filed, BHL had not been validly placed into liquidation. They also said the supposed liquidators had been aware for 2 ½ years that they had not been validly appointed. That left the question of whether Kiddle and McGregor were qualified to even bring the claim. Rudd Watts argued that to continue to sue them in these circumstances was an abuse of the process of the courts.
BHL pointed out that in August 2002 a special resolution had been passed asserting that the company was in liquidation from that point. The resolution also ratified the actions of Kiddle and McGregor and the legal action against Rudd Watts. BHL also maintained that only somebody within the company, and not an “outsider” like Rudd Watts, could try to avoid a claim because of some irregularities in the management of the company.
The judge said it was well recognised that proceedings which had been begun on behalf of a company without authority could be later ratified by the company. He said that if BHL had not been in liquidation when McGregor and Kiddle were appointed liquidators, then they must have been occupying the position of directors of BHL, as there were no other persons in that position.
This meant that Kiddle and McGregor had the appropriate authority to act against Rudd Watts. It followed that BHL’s claim was not an abuse of the process of the court and it was allowed to proceed.
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5. Liability under the MVD Fidelity Fund
Motor Vehicle Dealers Institute Inc v Moores Service Station Ltd [2003] NZCA 139
The Milners were the owners and directors of Moores Service Station, a motor vehicle dealership in Paeroa. They employed Marc Day as a car salesman. Late in 1998 the Milners moved the dealership to 1057 Great North Road, Auckland where it was licensed to trade under the name of “Five Star Auto Court”.
Around the same time Five Star entered into an agreement to sell the business to Day and his partner. The agreement allowed Day to operate the business under Five Star’s motor vehicle dealers’ licence for a two year period from the beginning of 1999.
In mid-1999 the dealership moved again to 3013 Great North Road. About a year later Mr Trial placed his vehicle with Five Star for sale on a “sell on behalf of” basis. The transaction was arranged through Day.
In August 2000 Milner applied to the Motor Vehicle Dealers Licensing Board to have Day registered as the person who would personally supervise, manage and control the conduct of Five Star’s business. The Board granted approval for Day to do so for a period of one month pending final determination.
During this one month period Trial’s car was sold. The vehicle offer and sale agreement was completed in the name of Five Star and the change of ownership from Trial to the purchaser was registered on 15 September 2000.
The proceeds of the sale amounted to $38,500 but Trial was not paid. He made a claim on the Motor Vehicle Dealers Fidelity Guarantee Fund alleging that Five Star had breached its obligations under s.59 of the Motor Vehicle Dealers Act 1975. The Committee of Management of the fund accepted Trial’s claim and paid him. The Motor Vehicle Dealers’ Institute (MVDI) then issued a statutory demand for $38,500 against Five Star to try and recover the money.
Five Star argued however, that Trial had been dealing with Day personally and not with the company. The judge agreed and explained that a motor vehicle dealer’s licence could not be transferred to another person. This meant that the contracts entered into by Day (the supposed transferee) had been entered into by an unlicensed dealer and therefore, there was no entitlement to bring a claim against the Fund which only covers licensed dealers. The summary judgment was set aside but the MVDI appealed.
The Court of Appeal determined that as Day was not a licensed motor vehicle dealer he could not enter into a transaction in the name of Five Star on his own behalf. He had Milner’s express authority to operate Five Star’s business under its motor vehicle dealer’s licence. This made Day an agent of Five Star. Significantly, all the legal documentation clearly established that Trial’s contract was with Five Star. This meant that there was no basis on which the statutory demand of the MVDI could be set aside. Five Star was ordered to pay the $38,500 to the MVDI and also had to pay the MVDI’s court costs of $3,000 plus other disbursements.
