Advanced Creative Technologies Limited v D4 Cash Investors Limited
[2018] NZCA 379
•20 September 2018 at 10 am
| IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA |
| CA77/2018 [2018] NZCA 379 |
| BETWEEN | ADVANCED CREATIVE TECHNOLOGIES LIMITED |
| AND | D4 CASH INVESTORS LIMITED |
| Hearing: | 1 August 2018 |
Court: | Asher, Brewer and Thomas JJ |
Counsel: | A M Swan for Appellant |
Judgment: | 20 September 2018 at 10 am |
JUDGMENT OF THE COURT
AThe appeal is dismissed.
BThe respondent is to file and serve a memorandum regarding costs within 15 working days of the date of delivery of this judgment. The appellant is to file and serve a memorandum within 15 working days of the date of service of the respondent’s memorandum.
____________________________________________________________________
REASONS OF THE COURT
(Given by Brewer J)
Introduction
Justice Duffy decided[1] the appellant (ACTL) is liable to pay the respondent a debt arising from a loan agreement dated 17 August 2005 between ACTL as borrower and D4 Compression Ltd as lender (D4 Compression).[2] ACTL appeals the decision.
[1]D4 Cash Investors Ltd v Advanced Creative Technologies Ltd [2017] NZHC 3280.
[2]D4 Compression went into liquidation and the liquidator assigned the debt to the respondent.
Justice Duffy summarised ACTL’s case before her:
[3] ACTL disputes it owes the debt on the grounds: (a) the loan agreement is a sham because the parties never intended that D4 Compression would advance funds to ACTL or that ACTL would repay the loan; instead the loan agreement was only intended to give D4 Compression priority over any dividends that were paid; (b) the loan is unenforceable because funds were never advanced to ACTL under the loan agreement and so there is no consideration to support it; and (c) the parties agreed that the loan would not take effect until ACTL had received royalty payments, which never eventuated.
The Judge rejected these propositions, and found that the loan agreement meant what it said and was enforceable.[3] In his written submissions, Mr Swan for ACTL advises:
The appeal is now limited to the High Court findings that:
(i) The loan agreement was enforceable; and/or
(ii) D4 provided consideration to ACTL in respect of that loan agreement.
Background
[3]D4 Cash Investors Ltd v Advanced Creative Technologies Ltd, above n 1, at [104].
We can, for the purposes of this appeal, state the relevant background facts succinctly.
ACTL owns the intellectual property in computer software called the “Matariki Codex”. ACTL had been developing the software since the early 2000s and by 2005 needed more money to continue the development. It was decided that one aspect of the software, “data compression capability”, was readily able to be commercialised. So, D4 Compression was incorporated as a special purpose entity to raise money to commercialise the data compression capability. The investors who would provide the money for this would receive 20 per cent of the shares in D4 Compression. D4 Compression was to have an exclusive marketing licence.
Investors were found. In mid-2005 they paid between $290,000 and $300,000 into the trust account of ACTL’s solicitors, Martelli McKegg, for the benefit of D4 Compression. On 10 August 2005, Martelli McKegg transferred $290,000 to D4 Compression.
By mid-2006 D4 Compression had paid out approximately $260,000 of the funds it had received from the investors. More funds would be required. In July or August 2006,[4] the loan agreement was entered into. For reasons we will come to, it was backdated to 17 August 2005.
The loan agreement
[4]The witnesses could not provide an exact date, but this was the period.
The loan agreement has these relevant features:
(a)It is dated (in typing — not in handwriting) 17 August 2005.
(b)“Loan”:
… means the loan to be provided by the Lender to the Borrower pursuant to this Agreement having a maximum principal amount of $210,000 including GST or, as the context may require, the outstanding balance from time to time of such loan or such other amount as may be agreed upon by the Parties. The Loan will include all expenses charged to D4 Compression Ltd that the Parties agree are for the services of any person and expenses that are directly attributed to the commercialisation of the Matariki Codex for the Borrower during the Loan period.
(c)The definition of “Loan”:
(i)refers to money yet to be advanced;
(ii)refers to a maximum principal amount of $210,000, but this is not immutable due to the qualifier “or such other amount as may be agreed upon by the Parties”; and
(iii)stipulates the Loan will include expenses charged to D4 Compression “that the Parties agree are for the services of any person and expenses that are directly attributed to the commercialisation of the Matariki Codex for [ACTL] during the Loan period”.
(d)The term of the loan is 365 days “from the date of execution of this Agreement (or such later date as the Lender agrees in writing)” (the Repayment Date).[5]
(e)Interest is payable on the Repayment Date.[6]
(f)The intellectual property rights of ACTL are protected:[7]
Exclusion of Intellectual Property (IP): The Lender represents and warrants to the Borrower that, in any dispute that may arise regarding a breach or event of default of this agreement, the Lender will not make any claim as to title, in part or in full, or ownership of the ACTL IP in any form beyond that agreed to in the license agreement between D4 and ACTL, as a security or payment against any monies owed to D4 by ACTL.
[5]Clause 2.4.
[6]Clause 2.4(b).
[7]Clause 4.2.
The loan agreement was signed for and on behalf of D4 Compression by Mr Lust, a director of D4 Compression and also a director of ACTL. The signatory binding ACTL was Mr Wilson, one of its directors. The signatures of both men were witnessed by Mr Wright, a director of both ACTL and D4 Compression.
Issue on appeal
It is common ground that no money was advanced to ACTL by D4 Compression following the date of the actual signing of the loan agreement.
ACTL’s argument is that on its face the loan agreement relates to advances intended to be made, up to a limit of $210,000. It is only enforceable against ACTL if and when D4 Compression made the advances. Since no advances were made after the loan agreement was signed, there is nothing to enforce. If that is wrong, and the loan agreement relates to some money paid prior to the agreement being signed, then that would be past consideration and the loan agreement is still unenforceable.
The respondent’s position is that the loan agreement arose from a combination of:
(a)A recognition by ACTL that part of the money paid out by D4 Compression had gone to ACTL’s direct benefit and not for the purposes for which D4 Compression had been incorporated.
(b)A desire by ACTL to protect any vulnerability it might have to D4 Compression in respect of its intellectual property in Matariki Codex.
(c)A recognition that the investors might need to be approached for further funding.
(d)A desire by ACTL to keep the investors happy at a time when, although there had been some delay in developing the commercial potential of the data compression capability, it was anticipated by everyone that huge riches would soon be theirs. ACTL had effective control of D4 Compression through its shareholding and through the Board of Directors.[8] There was no commercial antagonism between the companies. This was a time of optimism.
[8]ACTL owned or controlled 80 per cent of D4 Compression’s shares. The investors were entitled to 20 per cent of the shares, but were not registered as shareholders until October 2006.
In short, the respondent submits the loan agreement means what it says. It was backdated deliberately so that the money paid out by D4 Compression from the $290,000 transferred from Martelli McKegg on 10 August 2005 would be covered by it. The loan agreement could also cover future advances and it provided ACTL protection for its intellectual property.
ACTL’s response, argued strongly before us by Mr Swan, is that the backdating of the loan agreement is irrelevant. The loan agreement can only take effect from the date it was actually signed (a date in July or August 2006):
So, the position of the appellant is this [the loan agreement] was for future funding and it did not incorporate anything to do with past money and it doesn’t say anything about it that it does anyway. Now, the main defence to the claim in the High Court by ACTL, or the appellant, was we don’t owe any money because you didn’t give us any money. That’s straightforward what the defence is.
The central issue on this appeal, therefore, is:
Was the loan agreement backdated so as to bring within its terms the monies paid out by D4 Compression from the $290,000 transferred from Martelli McKegg on 10 August 2005?
Justice Duffy’s decision
Justice Duffy analysed the evidence and decided to prefer the account of the respondent’s principal witness at the trial, Mr Ridgway, on the central issue:
[76] I see no reason to doubt the reliability and credibility of Mr Ridgway’s evidence that the Loan Agreement was executed to regularise misuse of the original funding from D4 Compression insofar as that funding was applied for purposes relevant to the Matariki Codex but beyond data compression capability. I find his evidence on this topic convincing and persuasive.
Justice Duffy held also:
(a)An advantage to ACTL in entering the loan agreement was the protection of its intellectual property.[9]
(b)A purpose of the agreement was to provide for future funding by the investors through D4 Compression.[10]
(c)There was a desire on the part of ACTL to keep the investors happy.[11]
[9]D4 Cash Investors Ltd v Advanced Creative Technologies Ltd, above n 1, at [87].
[10]At [60]–[64].
[11]At [61].
Justice Duffy summarised her findings:
[93] I consider the only plausible benefits were: (a) the Loan Agreement offered a better incentive to the D4 investors to provide additional funds to D4 Compression for it to lend to ACTL; (b) the Loan Agreement provided a means of regularising the expenditure of funds from D4 Compression that had been applied to meet costs outside of data compression capability; and (c) the Loan Agreement removed any risk for ACTL of D4 Compression claiming an interest in ACTL’s intellectual property in the Matariki Codex. I am also satisfied that those benefits were present at the time the Loan Agreement was executed. Accordingly, they provide sufficient consideration to support the Loan Agreement.
Approach on appeal
This is, of course, a general appeal. We have to reach our independent opinion on the issues raised by ACTL. In doing so, we will take into account any particular advantages enjoyed by Duffy J as trial Judge, such as those possessed by a trial judge in determining questions of fact, particularly where assessments of credibility and reliability are concerned.[12] ACTL ultimately bears the onus of persuading us to reach conclusions different to those reached by Duffy J.[13]
The central issue
[13]Green v Green, above n 12, at [30].
First, there is no suggestion the date of the loan agreement is a mistake. It was typed in and appears twice; on the fronting page and on the first operative page. No witness suggests the date is an error.
Second, given the backdating is deliberate, it is part of the loan agreement and the interpretation of the loan agreement must take it into account.
Mr Ridgway’s evidence on the backdating was summarised by Duffy J:
[45] In evidence Mr Ridgway said the purpose of the loan was to correct how funds of D4 Compression had been used from the outset to fund aspects of the development of the Matariki Codex that went beyond the terms of D4 Compression’s funding arrangement under the Capital Raising Term Sheet (the original funding arrangement). He identified various occasions when those funds were applied for other extraneous purposes.
[46] Mr Ridgway also said that at the time the Loan Agreement was actually executed, there was general consensus that the use of D4 Compression funds to date would be converted into a loan, which would be backdated to 17 August 2005. I take this consensus to be between the directors of ACTL and D4 Compression because at the time the D4 investors had no knowledge of the Loan Agreement, and, contrary to the provisions of the Capital Raising Term Sheet, they were not yet shareholders of D4 Compression. He said this step was taken with the intention of regularising what had hitherto been an irregular use by ACTL of funds received from D4 Compression.
The witnesses for ACTL accepted that in early to mid-2006, Mr Ridgway met with directors of D4 Compression (Messrs Lust, Wright and Wilson) and suggested the original funding arrangement which was intended to raise funds for the development of the data compression capability be converted into a loan to cover the monies expended on other costs. This was eventually accepted by the D4 Compression directors and the loan agreement was the result.
Mr Wright was a key witness for ACTL. He swore an affidavit in the liquidation of D4 Compression. In it he deposed:
25.Mike Ridgway put forward a proposal to the D4 Board that the amount of money used by D4 to that point be converted to and be described as a loan to ACTL.
26.The other Directors agreed to this. I queried the need for it. Mike Ridgway explained it was to provide the class B shareholders (the plaintiffs) with a sense of comfort that the funds were covered by way of a loan agreement but that ACTL owned 80% of the loan and it would never be called up in any event.
27.The loan agreement was actually formulated around March or April of 2006 but again in keeping with the theme of keeping relations good it was determined by the agreeing Directors to back date it to August of 2005.
At the trial, Mr Wright was cross-examined on this part of his affidavit:
Q.Just looking at paragraph 27, it gives common ground that the loan agreement was formulated as you say around March or April of 2006 but it was back dated to August 2005, agree with that?
A.Yes.
Q.Can we take it from that that the intention was to recognise that the advances that had been made from or the payments that had been made from 18 August 2005 and onwards would be captured by the loan agreement, it was intended that the loan agreement should cover those earlier payments?
A.Yes we were agreeing that the money that had been expended by D4 would be converted to a loan.
We have already noted that at the time the loan agreement was signed, and Mr Wright witnessed the signatures, he was a director of both ACTL and D4 Compression.
Mr Wright’s evidence on this point is in accordance with the evidence of Mr Lust who signed the loan agreement on behalf of D4 Compression. He was also a director of both D4 Compression and ACTL. Mr Lust’s evidence took the form of written affidavits prepared for the purposes of proceedings concerning the liquidation of D4 Compression. He did not give oral evidence in the present proceeding.
Mr Swan provided us with an agreed chronology. It shows that on 18 August 2005, eight days after Martelli McKegg transferred the $290,000 to D4 Compression, D4 Compression paid $63,562.50 to ACTL. The balance of the payments was made to third parties directly by D4 Compression in the period 1 September 2005 to 18 May 2006. The fact that the loan agreement was deliberately backdated to the day before the payment of the $63,562.50 adds considerable weight to the proposition that the loan agreement was intended to apply to the monies paid out by D4 Compression.
It is common ground that both ACTL and D4 Compression included in their respective balance sheets, the former as a liability and the latter as an asset, amounts referable to the loan agreement (the amounts differ from the total sum paid out by D4 Compression and that was apparently because interest was capitalised). Indeed, ACTL included the loan as a non-current liability in its unsigned financial accounts
for the year ending 31 March 2006. This supports the intentional backdating of the loan agreement and the reason for that.[14]
[14]ACTL also included the loan as a non-current liability in its unsigned financial statements for the years ending 31 March 2010, 31 March 2011 and 31 March 2012. ACTL recorded the loan as a non-current liability in the signed financial statements for the year ending 31 March 2009, the signatories being Mr Wright and Mr Lust.
Against this background, the answer to the central issue is “yes”. The loan agreement was backdated so as to bring within its terms the monies paid out by D4 Compression from the $290,000 transferred from Martelli McKegg on 10 August 2005. It is enforceable accordingly.
This finding is directly consistent with that part of the definition of “Loan” in the loan agreement which provides:
The Loan will include all expenses charged to D4 Compression Ltd that the Parties agree are for the services of any person and expenses that are directly attributed to the commercialisation of the Matariki Codex for the Borrower during the Loan period.
It is also directly consistent with an email sent by Mr Ridgway to the investors on 28 August 2006, not long after the loan agreement was signed:
In light of the unexpected delays and in consideration of the patience and support shown by the D4 shareholders, the ACTL Board have agreed to support two amendments to the current arrangement with the D4 shareholders.
Firstly, the funds used by D4 in preparing the Matariki codex applications for sale, meeting with potential customers, and preparation of contract materials are to be fully reimbursed to D4 by ACTL. This has been formalized by way of a loan agreement between the two companies the summary content of which is:
Term: 1+1 years
Interest rate 20%
Amount $250,000[[15]](Emphasis added.)
[15]The differences in term and amount from the loan agreement are explained by the need, given the backdating and the 365-day term, to at once extend the term by another year and to capitalise interest.
ACTL’s second ground of appeal, that the loan agreement was not supported by consideration, must also fail. Justice Duffy’s conclusions as to benefits[16] were clearly available to her on the evidence going to our answer to the central issue,[17] the wording of the loan agreement protecting the intellectual property right of ACTL, and the evidence of Mr Ridgway.
[16]Quoted above at [18].
[17]Discussed above at [20]–[30].
Justice Duffy had to respond to three affirmative defences. Our analysis has been more directly focused. We agree with the overall conclusions reached by Duffy J.
Result
The appeal is dismissed.
The respondent is entitled to costs. On Ms Ford’s indication that increased costs is an issue, the respondent is to file and serve a memorandum regarding costs within 15 working days of the date of delivery of this judgment. The appellant is to file and serve a memorandum within 15 working days of the date of service of the respondent’s memorandum.
Solicitors:
WebsterLaw, Auckland for Appellant
Cook Morris Quinn, Auckland for Respondent
at [16]–[17]; and Green v Green [2016] NZCA 486, [2017] 2 NZLR 321 at [31].
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