Adaptable Solutions Ltd v Toon
[2017] NZHC 753
•20 April 2017
IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY
CIV-2016-404-001468
[2017] NZHC 753
BETWEEN ADAPTABLE SOLUTIONS LIMITED
Applicant
AND
VICTORIA TOON AS LIQUIDATOR OF KOORB CONSULTING (1999)
LIMITED
respondent
Hearing: 25 October 2016 Appearances:
A Holmes and A Steel for Applicant R Hollyman for the Respondent
Judgment:
20 April 2017
JUDGMENT OF ASSOCIATE JUDGE SARGISSON
This judgment was delivered by me on 20 April 2017 at 10.00 a.m. pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date.......................................
Solicitors:
Hudson Gavin Martin, Auckland Stainton Chellew, Auckland
R J Hollyman, Auckland
ADAPTABLE SOLUTIONS LTD v TOON [2017] NZHC 753 [20 April 2017]
A J B Holmes / A J Steel, Auckland
[1] Koorb Consulting Ltd is in voluntary and solvent liquidation. Adaptable Solutions Ltd claims to be owed a substantial debt by Koorb, and seeks leave under s 284 Companies Act 1993 to apply for an order to reverse (or modify) the decision of Koorb’s liquidator partially rejecting Adaptable’s proof of debt. Ms Toon, the liquidator, opposes the application.
[2] The alleged debt relates to a sale and purchase transaction in 2015 between Adaptable and Koorb.
[3] Upon learning of Koorb’s liquidation, Adaptable filed a proof of debt to the tune of $183,103.94 in respect of claims arising from the sale and purchase agreement. Ms Toon has accepted part of Adaptable’s claim ($9,237.73), but rejected the balance.
[4] For reasons I will turn to presently, I consider that Adaptable has put forward an arguable case that justifies the granting of leave under s 284 to permit Adaptable to commence a proceeding against Ms Toon seeking an order reversing or modifying the decision complained of. There is insufficient evidence before the Court, however, to decide the substance of the dispute in this present application.
Background
[5] Adaptable and Koorb are both software companies. Adaptable developed a business selling, implementing and supporting resold Axapta software, now known as Microsoft Dynamics AX, as well as several add-on modules.
[6] In early 2015, Adaptable began looking for ways to sell or restructure its business. Discussions began with Koorb in May, and after considerable back-and-forth between the companies, a sale and purchase agreement was finalised on 26 June 2015.
[7] This agreement is analysed in more detail later. But in brief, Adaptable sold to Koorb a division of Adaptable’s business called the “AX Business”; and Koorb agreed to make “Earn-out payments” to Adaptable for revenue earned for a 12-month period.
[8] Shortly after the agreement was signed, the parties developed an informal “work around” transitional arrangement for work that Koorb would eventually provide under the agreement, but was not then in a position to provide. Essentially, Adaptable would perform the work for AX customers and invoice Koorb at standard customer rates, and Koorb would then invoice the customer. Adaptable provided three invoices to Koorb under this arrangement.
[9] In late September 2015, Koorb agreed to on-sell the AX Business to a third party, UXC Eclipse. As this was prior to the expiry of Koorb’s 12-month obligation to make monthly Earn-out Payments, the on-sale triggered a provision to the effect that an accelerated Earn-out payment became due immediately or on demand. Koorb and Adaptable could not agree on the calculation of the Earn-out payment. Disputes arose.
[10] The issues in dispute were two-fold. Essentially, they boil down to differences in contractual interpretation over the sale and purchase agreement, and the “work around” transitional side-agreement.
[11] On the first issue, the interpretational dispute is whether is the “Earn-out Payments” provision covers revenue earned from add-on products DF and ZAP. (DF is an extension to the Microsoft AX system, and the ZAP software integrates with the Microsoft AX system.) Adaptable considered that the provision did cover DF and ZAP. From August to November 2015, Koorb initially made three Earn-out Payments which included DF and ZAP revenue, along with revenue from another add-on, Atlas. However, after the disputes arose, Koorb contended that these payments had been in error, and from then on, Koorb made deductions from its Earn-out Payments in respect of ZAP and DF revenue.
[12] On the second issue of the “work-around” side-agreement, Adaptable said that the Earn-out Payment should include revenue from AX customers transferred to Koorb, for which Adaptable provided services under the “work around” arrangements and invoiced Koorb. Koorb contended that the “work around” arrangement was separate from the Earn-out Payments, and that Koorb had previously excluded these amounts with no objection from Adaptable.
[13] On 11 February 2016, Koorb was placed into voluntary and solvent liquidation by its shareholders. Ms Toon was appointed liquidator. On 3 May 2016, Adaptable filed a proof of debt for $181,094.53 plus accrued interest from 13 January 2016 to that date of $2,009.41.
[14] After taking legal advice, Ms Toon then wrote to Adaptable on 26 May 2016 advising it that she accepted part of Adaptable’s claim ($9,237.73) but declined the balance ($173,866.21). On 14 June 2016, Ms Toon tendered payment of a further
$536.42 in interest which she had omitted to allow on Adaptable’s claim.
[15] On 20 June 2016 a director of Adaptable wrote to Ms Toon setting out his concerns at the process she had followed. He did not receive a response. Adaptable subsequently applied to the Court for leave to proceed with an application under s 284(1) Companies Act, which I am now required to decide.
Legal framework
[16] Section 284(1) makes it clear that Adaptable must first seek the leave of the Court before applying for orders under that section:
284 Court supervision of liquidation
(1) On the application of the liquidator, a liquidation committee, or, with the leave of the court, a creditor, shareholder, other entitled person, or director of a company in liquidation, the court may—
...
(b) confirm, reverse, or modify an act or decision of the liquidator:
...
(emphasis added)
[17] Section 284(1) functions as a “filtering mechanism”1 and the court as a gatekeeper before an application for orders can be made.2 The court attempts to strike a balance between protecting the rights of meritorious claimants, while also ensuring
1 Trinity Foundation (Services No 1) Ltd v Downey HC Auckland CIV-2010-404-3180, 18 August 2005 at [21].
2 Manifest Capital Management Pty Ltd v Lawrence HC Auckland CIV 2010-404-7741, 20 December 2011 at [7].
that a liquidated company’s assets are not “frittered away as a result of claims that are unlikely to succeed”.3
[18] Both parties have agreed that the correct test to be applied in determining whether to grant leave under s 284(1) was that set out by Lang AJ (as he then was) in Trinity Foundation (Services No 1) Ltd v Downey.4 The Judge held that a creditor seeking leave under s 284 must show it has an arguable case, and in order to grant leave, the Court must be satisfied that:
(a)The applicant’s claim has a credible factual basis; and
(b)There is a reasonable likelihood that, if the claim is established, the Court will disturb the act or decision in question.
[19] This second step acknowledges that liquidators should remain free to undertake their duties in a cost effective and efficient manner, without their every decision being challenged. In general, the Court will be slow to interfere with a liquidator’s day-to- day administration, or the bona fide exercise of its discretion.5 The Court is likely to interfere only if the decision of a liquidator is found to be “wrong or unreasonable”.6
[20] It is apparent that this two-part test requires the Court to consider the “likely merits of the application” and thus to examine the parties’ respective positions to the level of detail appropriate in an interlocutory application.7
[21] I turn now to the first limb of the test. Whether there is a credible factual basis to Adaptable’s claim turns on the two contractual interpretational questions concerning Koorb’s obligations under the Earn-out Payment provision, and the transitional side- agreement. These questions are addressed in the analysis that follows.
3 At [22].
4 At [21].
5 Trinity Foundation (Services No 1) Ltd v Downey (2005) 9 NZCLC 263,917 (HC) at [17]-[20];
CIR v Hulst; CIR v Oriana Finance Ltd (2000) 19 NZTC 15,693 at [25].
6 Trinity Foundation (Services No 1) Ltd v Downey above n 1 at [31]. The “wrong or unreasonable” criterion was also referred to in Registrar of Companies v Body Corporate 307730 [2013] NZCA 659, [2014] 2 NZLR 623 at [4].
7 Official Assignee v Norris [2012] NZHC 961 at [18].
The scope of the Earn-out Payment provision
[22] Adaptable submits that according to the plain words of the agreement, the Earn-out Payment applies to all revenue derived from the AX Business division, which provided sales, consulting, support and other services to its customers.
[23] Therefore, in reliance on this interpretation, Adaptable argues that Koorb has failed to pay to Adaptable:
(a)$102,650, being margin on licence sales revenue (annualised pursuant to the formula set out in cl 3.3) from two existing customers of the AX Business, namely:
(i)Sale of a licence to use DF to SIMX; and
(ii)Sale of a licence to use ZAP software to Metro Glass.
(b)$16,080.12, being margin on maintenance income (annualised pursuant to the formula set out in cl 3.3) from three AX Business Contracts, namely:
(i)Maintenance of the DF extension for SIMX, provided by the AX business;
(ii)Maintenance of the DF extension for Delmaine, provided by the AX business; and
(iii)Maintenance of the ZAP software for Metro Glass, provided by the AX business.
Terms of the Agreement
[24] The starting point in any contractual analysis is the relevant terms of the agreement itself.8 These are set out below.
[25] Koorb was obligated to pay the Earn-out Payments under cl 3.1 of the agreement, which sets out the purchase price of the agreement for the AX Business as follows:
The Purchase Price for the AX Business is:
(a)the net book value of the AX Equipment as at the Completion Date (as agreed by the parties by the Condition Date); plus
(b)Goodwill, comprising $150,000 in cash plus the Earn-out Payment.
[26]Clause 3.2 of the agreement set out how the purchase price was to be paid:
The Purchase Price will be paid as follows:
(a)on the Completion Date Koorb will pay to Adaptable $150,000 in cleared funds,
(b)(subject to clause 3.3) on the 25th of each month, starting on 25th August 2015 and ending on 25th July 2016, Koorb will pay to Adaptable the instalment of the Earn-out Payment derived in the immediately preceding calendar month;
(c)when making a payment under paragraph (b) Koorb will provide to Adaptable with such information as Adaptable may reasonably require to enable Adaptable to verify each instalment of the Earn-out Payment.
[27]The Earn-Out Payment is defined in clause 1 of the agreement as follows:
Earn-out Payment means a sum equal to the following revenue earned by Koorb from the AX Business in the 12 months from the Completion Date:9
(a)100% of the margin on licence sales to existing customers and customers named in the AX Prospect List originated after the Completion Date,
(b)20% of all services revenue derived from the AX Business Contracts and customers named in the AX Prospect List, and
(c)100% of the margin on all maintenance income derived from the AX Business Contracts and customers named in the AX Prospect List
8 Firm Pl 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 at [63].
9 The Completion Date is defined in clause 1 of the agreement as 3 July 2015.
[28]“AX Business” is defined in cl 1:
AX Business means the division of Adaptable that provides sales, consulting, support and other services in relation to the Microsoft Dynamics AX Software.
[29] In this case, Koorb on-sold the business before the end of the 12 month period throughout which it was to pay monthly Earn-out Payments to Adaptable. It therefore triggered cl 3.3 which relevantly provides that:
If Koorb resells all or part of the AX Business before payment of the last instalment under clause 3.2(b), Koorb will immediately, and on demand, pay to Adaptable the balance of the Earn-out Payment, calculated by multiplying
(1) the average of the instalments of the Earn-out Payment that have already been paid to Adaptable, by (2) the number of instalments that have not been paid.
[30] I cannot agree with Adaptable that the proper interpretation is plain on a simple reading of the contractual terms. Though it is certainly arguable, it is not obvious whether the wording “in relation to the Microsoft Dynamics AX Software” in the definition of AX Business encompasses add-ons or extensions to AX software. The Earn-out Payment provision and the remainder of the agreement do not clarify this ambiguity.
[31] In submissions, both parties relied heavily on the broader contractual context to bolster their respective interpretations of the objective intention of the parties. While this is certainly a permissible tool in contractual interpretation,10 it does indicate that the interpretational dispute cannot be resolved through a simple reading of the text.
Broader contractual context
[32] Concerning pre-contractual negotiations, Adaptable submits that while Adaptable’s early Information Memorandum set out the AX and ZAP/BI divisions as separate, it was subsequently agreed at a meeting on 22 June 2015 that because the ZAP/BI Business was so small, it was not worth separating from the AX Business. (Koorb has a different account of this meeting; it says that Koorb did not agree to incorporate ZAP income into its offer.)
10 Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444 at [27].
[33] On the other hand, Ms Toon submits that pre-contractual negotiations indicate that Koorb only intended to purchase the AX Business component of the Adaptable business which did not include ZAP or DF. She points to the following evidence:
(a)An Information Memorandum presented by Adaptable directors to Koorb directors at a meeting on 18 May 2015. The Information Memorandum stated that Adaptable operated as four distinct divisions: AX related software and services; SL related software and services; CRM related software and services; BI and Infrastructure related services. Ms Toon says this suggests that AX and ZAP are distinct, standalone business divisions within Adaptable.
(b)When Koorb sought clarification as to what was included in the AX division, Adaptable responded by sending summary spreadsheets which divided up the income of the four business divisions and set out which third party products were treated as part of the AX division. ZAP and DF were not included among those third party products.
(c)Koorb made its offer to Adaptable on that basis, and the covering email stated that “This proposal is only for the AX component of the Adaptable business and does not include BI (ZAP), Demand Forecaster, Dynamics SL or CRM.”
[34] Adaptable also submits that its interpretation is supported by post-contractual conduct: Koorb itself accepted that it was required to pay Adaptable for revenue related to license sales and service/maintenance revenue relating to other “add-on” products sold by the AX Business (such as ATLAS and RF Smart). It made payments in relation to those add-on products. Koorb initially also included ZAP and DF in its Earn-out calculations, before later seeking to correct what it now describes as an “error”.
Summary
[35] It remains unclear whether the revenue from license sales and maintenance income in relation to ZAP and DF is covered by the Earn-out Payment provision. However, there is enough to suggest that Adaptable’s reading of the text, in light of the extrinsic evidence and in particular Koorb’s post-contract payments, is at least arguable.
The work-around arrangements
[36] The “work around” arrangement appears to be a side contract entered into by Adaptable and Koorb, of which there is little documentary evidence. The parties differ as to whether the work performed by Adaptable for the AX contacts and invoiced to Koorb meant that revenue was “earned by Koorb”. In other words, there is disagreement over whether this work fell within the scope of the Earn-out Payment provision.
[37] According to Adaptable, Ms Toon and Adaptable reached an agreement in July 2016 that Adaptable would continue to provide licences and maintenance services for existing customers and AX Business Contracts for an interim period until Koorb was able to service those customers itself.
[38] Adaptable contends that the parties did not agree that revenue from those licence and maintenance services would be excluded from the Earn-out Payments. Although Adaptable carried out the work and invoiced Koorb, it was incorrect to say that Koorb did not earn any revenue from that work. Koorb may not have earned any margin or profit, but that is irrelevant to its contractual obligation to pay 20 per cent of all services revenue derived from the AX Business Contracts. As for the licence sales and maintenance income, this was work that was carried out by Adaptable on behalf of Koorb, at Koorb’s request.
[39] Therefore, when annualised pursuant to the formula in cl 3.3, Adaptable says that Koorb is required to pay $51,371.25, being margin on licence sales revenue, service revenue and maintenance service income for existing customers and AX Business Contracts.
[40] Ms Toon says that under the “work around” arrangements, Adaptable invoiced Koorb (at the full client rate) and Koorb then invoiced the client, as this was administratively simpler for the client. However, both Koorb and Adaptable treated these invoices separately from the Earn-out Payments (referring in particular to the email from Adaptable director Mr Cox). This was revenue earned by Adaptable, not Koorb, and therefore outside the definition of the Earn-out Payments.
[41] I am less persuaded by the merits of Adaptable’s claim regarding the “work around” arrangement. However, I do not think that this arrangement can be treated in isolation from the first issue, and I am therefore reluctant to exclude the possibility that Adaptable has an arguable case.
Is there a reasonable likelihood the Court will disturb the decision?
[42] Relevant here is Adaptable’s submission that Ms Toon’s decision-making process was seriously flawed. In particular, Adaptable contends that:
(a)Ms Toon relied on a wrong interpretation of the agreement, one which was inconsistent with the plain meaning of the words in the agreement and relies entirely on pre-contractual documents selected for her by Koorb shareholder-directors. She had selective regard to and placed undue weight on pre-contractual correspondence and conduct (including the subjective views of Koorb’s directors).
(b)She made a peremptory decision to reject the claim without obtaining all relevant information, examining witnesses, or acting in an independent and impartial manner.
(i)She sought advice only from legal advisers previously appointed by Koorb’s director-shareholders, and information only from Koorb’s director-shareholders.
(ii)She did not carry out any independent investigation, review any other company documents, or request to interview anybody.
(c)She did not seek documents from Adaptable and gave Adaptable no opportunity to comment on the selected non-contractual documents that she relied on for her interpretation of the agreement.
[43] Ms Toon responds by saying that she took time to consider the relevant material held by the company in liquidation. She considered the claim carefully, seeking further information from Koorb and taking legal advice on the materials. There was no obligation to revert to Adaptable in the circumstances.
[44] Ms Toon further says that Adaptable’s response to her decision has provided no new evidence or information. She met later with the directors of Adaptable on a without prejudice basis to discuss their proof of debt. She reviewed specific material provided to her, but that material did not change her assessment.
[45] Ms Toon says that she discharged the obligation she owed to other actual and prospective creditors and also to shareholders to realise the company’s assets in a reasonable, proportionate and efficient manner.
[46] I am inclined to agree with Ms Toon. Based on the evidence before me, I would not describe Ms Toon’s decision as peremptory. Unlike Manifest Capital Management Pty Ltd v Lawrence,11 this is not a case where the liquidator arrived at a decision in an unreasonable and peremptory fashion, and without first obtaining all the relevant information. That, however, is not determinative.
[47] It is not necessary for Adaptable to prove that the liquidator’s process was defective before the Court can exercise its discretion to grant leave. The overall question, it is worth reminding ourselves, is whether there is an arguable case that should be allowed to proceed.
[48] I consider that there is enough in Adaptable’s evidence to meet this threshold. On the material before me, it is unsafe for me to conclusively determine the two contractual interpretation questions at issue in this case. Doing so would require an
11 Manifest Capital Management Pty Ltd v Lawrence, above n 2.
in-depth forensic examination that is not possible or appropriate in this interlocutory application.
[49] However, I am satisfied that Adaptable has at least an arguable case for its reading of a fairly ambiguous text in light of the relevant extrinsic material. I am also cognisant that Koorb, as a voluntarily liquidated company, may still have sufficient assets to pay Adaptable if the debts are proven. This provides a further discretionary factor weighing against preventing the matter from proceeding further.
Conclusion and orders
[50] On this basis I am satisfied that Adaptable should be granted leave to have its claim for orders determined by the Court. Therefore its application for leave to commence proceedings and make the necessary application for that purpose is granted.
[51] As costs follow the event under the statutory regime, Adaptable is entitled to costs on a 2B basis plus disbursements. I order accordingly.
Associate Judge Sargisson
3
1
0