AAM Limited v Exotica Enterprise Limited

[2017] NZHC 3033

IN THE HIGH COURT OF NEW ZEALAND

AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV2016-404-002850 [2017] NZHC 3033

BETWEEN

AAM LIMITED

First Plaintiff

MUMTAJ YUNUS AGARBATTIWALA Second Plaintiff

AND

EXOTICA ENTERPRISE LIMITED First Defendant

DARIUS KARANI Second Defendant

MANUKA MASTERS LIMITED Third Defendant

Hearing:	5 December 2017
Appearances:	G Blanchard QC for the Plaintiffs L Ponniah for the Defendants
Judgment:	8 December 2017

JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSEN

This judgment was delivered by me on

08.12.17 at 11:30am, pursuant to

Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date……………

AAM LIMITED and M Y AGARBATTIWALA v EXOTICA ENTERPRISE LTD, D KARANI AND MANUKA MASTERS LIMITED [2017] NZHC 3033 [8 December 2017]

[1]      This judgment rules upon the application of the plaintiffs for the defendants to provide particular discovery.

[2]      The parties’ proceeding concerns issues that have arisen since the second plaintiff (Ms Agarbattiwala) entered into an agreement to buy the business of the first defendant Exotica Enterprise Limited (EEL).  EEL’s shareholding was held by Mr Karani (the second defendant) and Mrs Karani, his wife, equally. The third defendant Manuka Masters Limited (MML) is a company 50 per cent owned by Mrs Karani. MML was incorporated to conduct business affairs post sale of the EEL business.

[3]      The parties’ agreement was dated 1 September 2015 (the agreement). It related to, it is claimed, a food and beverage retail, wholesale and export business operating from premises in Flatbush, Auckland.  The plaintiffs claim the business traded under two names “Exotica Enterprise” and “New From Zealand”.

[4]      The agreed purchase price was $475,000 plus GST. On 2 September 2015 Ms Agarbattiwala and Mr Karani, on behalf of EEL, signed a Memorandum of Understanding (MOU) in relation to the agreement.

[5]      The vendor named in the MOU was “New From Zealand” although there is no company of that name.  The MOU stated that Ms Agarbattiwala would be receiving the name, trademarks and intellectual property associated with “New From Zealand” and all intellectual property and the brand “Exotica Enterprise” would remain the property of Mr Karani.

[6]      While neither the MOU nor the agreement made it clear, it is the plaintiffs’ interpretation of those documents that it was intended that EEL or Mr Karani or both would be the vendors.

[7]      Ms Agarbattiwala nominated the first plaintiff (AAM) to settle the agreement on 16 September 2015.   From that date, AAM commenced operating the business under the name of “New From Zealand”.

[8]      The plaintiffs say the purchase of the business was a disaster and in its first year of business it made a loss of $133,713 upon a turnover of only $363,843.

Statement of claim

[9]      The plaintiffs’ claims include, inter alia:

(a)      A breach of a restraint of trade by continuing to sell through MML food and beverages which were the same or similar to those sold through EEL.

(b)      They breached the agreement by failing to obtain for the plaintiffs’

certain distribution rights that they were required to.

(c)      They breached the plaintiffs’ sole distribution rights as recorded in the MOU by selling EEL products to parties other than the plaintiffs in New Zealand and India.

(d)They  breached  the  turnover  warranty  that  the  business  sold  had achieved a turnover of $1,184,848 excluding GST in the year ended 31

March 2015 and that although this figure is contained in the EEL

accounts for that year, the plaintiffs allege that figure is incorrect.

(e)      They breached s 9 of the Fair Trading Act 1986 by continuing after they sold the business to include references to the Flatbush premises as the business address and thereby misled and deceived customers and potential customers of the defendants.

Statement of defence

[10]     The defendants case is that Mr Karani was not a party to the agreement and the agreement did not include the sale and purchase of EEL’s wholesale and distribution business. They say:

(a)      The  business  sold  was  the  “Gift  Shop  Manukau  honey  food  and beverage & wines products from New Zealand” with limited distribution rights.

(b)That the turnover warranty referred to was for  EEL of which the business sold was only a part.

(c)      That the plaintiffs were bound to take all necessary steps to maintain working relationships with suppliers.

(d)That the only sole distribution rights sold under the agreement were in respect of EEL’s products and that the details of those distribution rights were recorded in the MOU.

(e)       They deny that the business owned by EEL only ever traded as “New

From Zealand”.

(f)      They admit that during negotiations, EEL/Mr Karani provided Ms Agarbattiwala and her accountant with a copy of EEL’s most recent annual accounts, but say that was on the understanding that those accounts were for EEL, of which the business was only a part.

[11]     The defendants have counterclaimed for:

(a)       Stock of about $23K not paid for.

(b)      The sum of $125,000 being the balance of the purchase price due.

[12]     In reply, the plaintiffs assert that they purchased all of EEL’s business except for the brand “Exotica Enterprise”.   They reassert claims that the parties to the agreement included EEL, Mr Karani and Ms Agarbattiwala and/or nominee.

[13]     In essence the dispute focusses upon claims about the extent of EEL’s business that was by the parties’ agreement and the MOU, sold to AAM and Ms Agarbattiwala.

Plaintiffs’ application for particular discovery

[14]     Ms Agarbattiwala says her application for further discovery was filed because she received little financial information during the usual proceeding discovery process.  She reports being advised by counsel and an expert accountant (Mr Lazelle) that the financial information was fundamental to quantum aspects of her claim.  She says she also expected to receive copies of electronic communications between Mr Karani and his wife, for Mrs Karani was “heavily involved in the running of the business in question and the sale of the business to the plaintiffs”.

[15]     Mr  Lazelle  deposes  having  provided  specialist  forensic  accounting  and litigation support services for more than 20 years. He confirmed that he assisted with the letter that set out in detail to the defendants’ solicitors what further discovery was required.  In his opinion all of the documents sought by the interlocutory application are relevant in assessing the quantum of the plaintiffs’ losses.

[16]     The application contains a Schedule detailing items sought to be discovered and which it says relates to:

(a)       Core financial and taxation information commonly held by persons carrying out business.

(b)      Business communications of the sort one would expect between Mr

Karani and his wife Mrs Karani.

[17]     It is the plaintiffs position that:

(a)       Those documents should have been discovered under the discovery order made on 15 March 2017.

(b)The documents in question have been requested but no substantive response has been received.

(c)      They have sought expert accounting advice for which this information is central to core matters in dispute namely the accuracy of representations made and the quantum of loss.

[18]     The discovery sought includes financial statements, income tax and GST returns of EEL for the years 31 March 2013 to 31 March 2017.   It also seeks the financial statements of MML for the years 31 March 2015 and 31 March 2017.

[19]     Also sought are:

(a)      All  financial  reports,  management  accounts  and  financial  analysis relating to EEL that can be used to distinguish sales and gross profit on the part of the business that the defendants claim was sold under the agreement, from the sales and gross profit of that part of the business that the defendants claim was not.

(b)Those documents that can be used to determine the sales and gross profits achieved in relation to the sale of products of each of the suppliers to the business sold, and those documents which can be used to determine the sale and gross profit achieved in relation to the sale of the products of each of those suppliers, and the sale and purchase records in relation to all products of each of those suppliers.

[20]     Likewise, similar records clearly identified are requested in relation to the business of MML.

[21]     Also sought are all financial reports and financial analysis relating to EEL prepared for the purpose of the sale of the business and from Link Business Broking Limited and any other broker to which information financial or otherwise was provided by the defendants including all relevant letters and electronic communications and including any emails, text messages and instant  messaging between the Mr Karani and Mrs Karani.

[22]     Mr and Mrs Karani’s tax returns for 31 March 2013 to 31 March 2017 were requested to enable Mr Lazelle to verify the figures contained in the EEL and MML financial accounts.

[23]     The focus of the application is about EEL and Mr Karani having directly or indirectly carried on businesses which were the same or similar to that sold to AAM; or failing to obtain certain distribution rights of products for sale; or by breach, it is claimed of the turnover warranty; and by continuing to include references to the business in its own separate operations with the intention to mislead customers about where the plaintiffs’ product could be purchased elsewhere.

Opposition to application

[24]     On the morning of the hearing of this application, the Court received a second affidavit from Mr Karani by which he states:

2.Since my last affidavit I have searched for documents the Plaintiffs seeks and have had a meeting with Exotica Enterprise Ltd’s (EEL) accountant.  Although we still believe that many of the documents sought in the Plaintiff’s application for further  discovery are not relevant, we have decided that it is not worth the cost and expense of a hearing just to oppose the Plaintiffs application, except in relation to the request for documents relating to my wife’s and my personal financial affairs that are private and confidential and in respect of Manuka Master Ltd (apart from any sales and purchase documents.)

[25]     Mr Karani deposes:

(a)      He agrees to discover the annual financial statements of EEL for the years 31/03/13 until 31/03/17.

(b)Likewise, that the income tax and GST returns for EEL for those years would be provided.

(c)      That the annual financial statements of MML for the period 31/03/15 would be provided but not those for 31/03/16 and 31/03/17 because they “are not relevant”, and for that reason the defendants will not agree to discover any income tax or GST returns for MML in those years.

(d)The income tax returns of Mr and Mrs Karani would not be provided because the defendants say the GST returns and tax returns of the respective companies are sufficient for the purpose of verifying the accuracy of the company’s financial accounts.

(e)      Regarding the plaintiffs’ request for all financial reports, management accounts and financial analysis relating to EEL that can be used to distinguish sales and gross profit of that part of the business the defendants say was sold, from that part of the business the defendants say was not sold, the defendants say that all sales and income information is handed to their accountants every two months from which GST returns are prepared and lodged and that apart from the annual financial accounts and the GST and income tax returns, EEL does not have any other financial reports, management accounts and financial analysis documents.

(f)      It is agreed that EEL and MML will discover all documentation relating to the sale of products on the products list and sales to suppliers on the suppliers list, and of all EEL products in New Zealand which the defendants say together with the financial statement, GST and income tax returns for the period in which the turnover warranty was given, should be sufficient to determine the sales and gross profit in relation to the sale of products of each of the suppliers.

(g)Regarding the request for all financial reports, management accounts, financial analysis and other documents relating to MML that could be used to determine the sales and gross profit achieved in relation to the sale of products for the years 31/03/13 to 31/03/17, the defendants say they did not and have not sold or distributed in New Zealand any of the products on the products list or on the suppliers list identified by the plaintiffs.

(h)The defendants agree to provide all sale and purchase records of EEL and of MML in relation to all products of each of the suppliers, for the years 31/03/16 and 31/03/17.

(i)Regarding the request for all business plans, budgets and banking proposals of EEL for the years 31/03/13 to 31/03/17, the defendants explain they have none of these nor does EEL have any bank loans or bank finance and there are no documents in this category to discover.

(j)Likewise regarding MML and for the same reason there is nothing to discover apart from annual financial statements and GST and income tax returns.

(k)The defendants agree to provide all financial reports and financial analysis relating to EEL that was prepared for the sale of the business.

Considerations

[26]     It is the defendants position, inter alia:

(a)      Ms Agarbattiwala was aware that the turnover warranty did not relate solely to the retail business, and the defendants say the purchase price was not negotiated or determined by reference to the turnover amount listed in the agreement.

(b)That MML did not and does not sell or distribute to New Zealand any of the products the plaintiffs claim they became entitled to.

(c)      There is no justification or relevance for an intrusion into the personal affairs of Mr and Mrs Karani.

[27]     The late affidavit filed on behalf of the defendants identified categories of documents that it was claimed did not exist.  This prompted Mr Blanchard to seek an order of the Court requiring the production of underlying documents including sales invoices and receipts, purchase order invoices and receipts for the period 2013 to 2017

for EEL and for MML. As counsel noted these would not have to be listed individually but can be bulk listed and provided for inspection.  Obviously this would require a considerable effort on behalf of the plaintiffs to view and analyse those documents. At the same time the defendants will be relieved of that responsibility.

[28]     The plaintiffs want all annual financial statements of EEL for each of the 2013 to 2017 financial years and, of MML for the 2015 to 2017 financial years.

[29]     The individual tax returns of Mr and Mrs Karani will, Mr Blanchard submits, assist by providing another source of documents from which to investigate the extent if any of income received and from where.

[30]     It is clear there is a degree of suspicion associated with the formation of MML

following the sale of the EEL business.

[31]     The defendants position is that relevant financial accounts should be all that is required to be disclosed.   They strongly oppose providing details of personal tax returns.  They maintain that they have provided all relevant documents relating to the affairs of the two companies that should assist the plaintiffs in their purpose i.e. to verify turnover, gross profit and to show whether there had been a breach of the trading restraint or the selling of product that the plaintiffs had an exclusive right to sell in New Zealand and India. The defendants believe sales records should be sufficient for the plaintiffs’ purposes and if that information will not be available from the personal tax returns.

Conclusions

[32]     The central issue between the parties concerns a claim of a breach of warranty. But, that is one only of many causes of action pleaded.

[33]     The Court appreciates the concerns of Mr and Mrs Karani personally regarding disclosure of their tax returns. However, and subject to sufficient confidentiality being preserved, the Court agrees they should be discovered because they will provide a

means of crosscheck. Also, and as Mr Lazelle has deposed there is proper purpose in seeing these.

[34]     The Court does not accept there is any reason not to require the further discovery sought, subject to it being available.

Orders

[35]     The Court directs the following discovery be provided by or on behalf of the defendants:

(a)       The annual financial statements of EEL for the years 2013, 2014, 2016 and 2017.

(b)      The income tax and GST returns of EEL for the years 2013 to 2017.

(c)       All  sales  invoices  and  receipts  and  purchase  orders,  invoices  and receipts for EEL for the years 2013 to 2017.

(d)      The annual financial statements of MML for the years 2016 and 2017.

(e)       The income tax and GST returns of MML for the years 2016 to 2017.

(f)       All  sales  invoices  and  receipts  and  purchase  orders,  invoices  and receipts for MML for the years 2016 and 2017.

(g)The income tax returns of Darius and Homai Karani for the years 2013 to 2017.

[Years = Financial years]

[36]     The income tax returns of Mr and Mrs Karani for the years 2013 to 2017 are for viewing by Mr Lazelle alone and are not otherwise to be disclosed to the plaintiffs. Those documents are to be returned directly to the defendants’ counsel when no longer required by Mr Lazelle.

[37]     Any  further  directions  in  regard  to  these  documents  can  be  sought  by memorandum filed with the Court.

[38]     This application became necessary because of the insufficiency of discovery provided initially.  It is appropriate therefore for costs to be awarded to the applicant

on a 2B basis.

Associate Judge Christiansen