Auscow Dairy (NZ) Limited v New Zealand Dairy Processing Limited
[2020] NZHC 3129
•26 November 2020
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2019-404-000296
[2020] NZHC 3129
BETWEEN AUSCOW DAIRY (NZ) LIMITED
Plaintiff
AND
NEW ZEALAND DAIRY PROCESSING LIMITED
Defendant
Hearing: 8 June and 10 September 2020
(Further submissions received 10 October 2020)
Appearances:
J C La Hatte for the Plaintiff
No appearance by or on behalf of the Defendant
Judgment:
26 November 2020
JUDGMENT OF WOOLFORD J
[On application for formal proof]
This judgment was delivered by me on Thursday, 26 November 2020 at 12:30 pm pursuant to r 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Counsel: C La Hatte, Barrister, Auckland/Wellington
AUSCOW DAIRY (NZ) LIMITED v NEW ZEALAND DAIRY PROCESSING LIMITED [2020] NZHC 3129
[26 November 2020]
[1] On 21 February 2019, Auscow Dairy (NZ) Ltd (Auscow) issued proceedings in the form of a statement of claim against New Zealand Dairy Processing Ltd (NZDPL) claiming $2,133,628 plus interest for breach of a production management agreement dated 18 April 2014. NZDPL filed a statement of defence. Timetable orders were made. The claim was set down for a five day hearing on 8 June 2020.
[2] On 25 May 2020, Palmer J granted an application by counsel acting for NZDPL to withdraw on the basis that he had no instructions. On 2 June 2020, Lang J granted Auscow leave to proceed against NZDPL by way of formal proof. I heard from counsel for Auscow on 8 June 2020 and 10 September 2020. Further affidavit evidence and submissions were filed after each appearance.
[3]Auscow seeks a total of $4,011,470.48, comprised as follows:
Total claim $ Operating costs Rent 979,416.69 Opex 246,720.48 Salaries 1,696,491.08 Paymaster 6,716.00 Plant manager 203,057.75 Power 396,789.05 Gas 319,140.96 Others 29,769.03 Total operating costs 3,878,101.04 Less Cumulative commission/management fee 412,189.56 Add Paid B Chen (July 2014) 50,000.00 Paid W Shum (January 2015) 50,000.00 Add Auscow paid NZDPL outstanding invoices 445,559.00 Total 4,011,470.48
Factual background
[4] NZDPL operated a dairy proceeding plant in Tauranga. It entered into a production management agreement dated 18 April 2014 (the Agreement) with Auscow, under which Auscow was to be fully responsible for the production, operation, management and sales of the dairy factory. The Agreement is in the Chinese
language and was executed in Fuzhou, China. Its duration was for two years, commencing on 1 April 2014 and ending on 31 March 2016.
[5] Although a certified English translation of the Agreement has been provided, its terms remain uncertain. Neither of the persons who signed the Agreement have provided affidavit evidence. Nor is there any expert evidence as to proper interpretation of key clauses. Instead, Auscow relies on an email dated 15 June 2015 from an accountant employed by BDO Auckland, as to how the terms of the Agreement should work from an accounting perspective. The email is as follows:
I have gone through the two clauses from an accounting point of view and I have come up with my interpretation as to how I believe they should be working in practice, as follows:
I have put a snippet of the two clauses first – then elaborated on them below.
I believe there potentially has been a mix up of the words here. I’ll bullet point my understanding below:
· I believe “Production cost per carton” actually refers to “Management fee commission per carton”.
· Once the wording is updated, it insinuates to me that after all routine production and factory operating costs are taken into account, there will THEN be a management fee commission allocated against profits at a cost of 0.035 per carton manufactured.
· My understanding of this means all factory costs, being cost of goods sold and direct factory running costs. Take note here – profits from this exercise may not include Wages, factory lease, or any other costs that NZDPL has agreed they will be paying for themselves (clause 3.2 details NZDPL is to pay these themselves). Individual company admin costs may also not be included here, which is specific to Auscow only.
· From the management fee commission calculated (0.035 cents [sic] per carton) – 65% of the $0.035 per carton will be payable to NZDPL, and 35% of $0.035 will be payable to Auscow NZ as their portion of management fee commission.
· There is some key wording after “0.035 New Zealand Dollars” – which indicates this is a fee AFTER all the other costs have been taken into account. The parties that signed the agreement must have had some forecasted numbers to indicate that there would be capacity for the management fee commission calculated.
Based on the summary provided in 3.1 above, I believe that clause 3.5 is confirming how the remaining profits are to be allocated to the two parties after they have received their management fee commission.
· Income, less all production and factory operating costs, less the two management fee commission costs provided for NZDPL and Auscow NZ (totalling 0.035 per carton), then the remaining profit from there is to be split 35% NZDPL, and 65% Auscow.
· Again, I believe the production/factory operating costs doesn’t include the costs NZDPL has advised they will be paying for, nor does it provide for the two company’s separate administration costs which is relating to their own operation.
The agreement needs to be thought of in a practical way, and I understand that when it was drafted, it was solely on NZ operations and the factory that is based in NZ. I don’t believe the agreement was intended to interpret a complex way of calculating profits, being that both parties would have wanted something logical to follow.
Once 3.1 was clarified, you had to interpret 3.5 as the logical step in distributing the remaining profits once the management fee commission was taken off. There was no other clause in the agreement to detail what was going to happen with the remaining profits. And there is no support to say the management fee commission was going to use up the remaining profits left after production and factory operating costs. I don’t believe that NZDPL would allow Auscow to keep any remaining profits (after management fee commissions were allocated) to limit their own ability to generate further income from this business deal.
[6] Clauses 3.1 and 3.5 of the Agreement, to which the accountant refers, are part of “Article 3: Management Fee Commission and Apportionment”, which in its entirety reads:
3.1The production cost per carton will be calculated based on the routine production and operating costs of the Dairy Factory, and the amount of 0.035 New Zealand Dollars per carton will be collected on top of this basic cost. Of the management fee (it remains to be confirmed by an accounting firm whether this fee conforms to New Zealand taxation policies and regulations, and whether it involves a tax transfer, but such issues will not affect the commission percentage under this Agreement), 65% will be distributed to [NZDPL] and 35% will be distributed to [Auscow].
3.2Timing for apportionment of the management fee: Accounts shall be settled every six (6) months as of the commencement date of the term of production management.
3.3[NZDPL] and [Auscow] shall bear their own respective taxation liabilities arising from the apportionment of the management fee.
3.4Payment of the management fee: During the term of this Agreement and on the twenty-fifth (25th) day of each month, [Auscow] shall prepay to [NZDPL] the amount of One Hundred Fifty Thousand New Zealand Dollars (NZD150,000) into the account of [NZDPL]’s Dairy Factory (for payment of such routine expenses as the rent on the factory premises, employee salaries, and water and electricity costs (if
the factory employee salaries, water, electricity and coal expenses exceed the amount stipulated on the execution date of this Agreement, [Auscow] shall increase the payment based on the actual amount of the expenses. Of such payment, Fifty Thousand New Zealand Dollars (NZD50,000) will be paid directly into [NZDPL]’s designated bank account on the first day of each month, while the balance of the payment will remain in the New Zealand bank account that [NZDPL] sets up for [Auscow], to be managed by [Auscow] and used for payment of other production and operating expenses). The parties will calculate the production management fee in respect of the preceding six (6) months every six (6) months, refunding any over- payment and supplementing any short-payment. The parties agree that all costs arising in respect of the period from 1 July 2013 to 31 March 2014 shall be deemed establishment costs, and shall be shared by the parties out of the management fees over five (5) years. Settlement of such shared costs shall take place every six (6) months, the first settlement of account being on 1 December 2014.
3.5The parties agree that [NZDPL] shall be distributed 35% and [Auscow] shall be distributed 65% of the profits from sales of the products by [Auscow] to the China market. A comprehensive settlement of such distributions shall take place on the 31 March of each year.
[7] The difficulties with the BDO accountant’s advice include:
(a)She has apparently not had regard to other articles in the Agreement which specifically deal with operating costs and other relevant matters;
(b)She changes words in the Agreement to reach a conclusion as to the meaning of cl 3.1; and
(c)She refers to cl 3.2 as “detailing” NZDPL to pay for wages, factory lease and other costs when cl 3.2 does not appear to have this effect.
[8] In his detailed submissions, counsel for Auscow also acknowledges that the way in which the Agreement functioned in practice was, in some respects, different from its intended function. He annexes to his submissions a diagram explaining in general terms how the Agreement functioned in practice. The only affidavit evidence filed by Auscow was from Auscow’s accountant, who set out what she understood to be the division of costs under the Agreement.
Discussion
Operating costs ($3,878,101.04)
[9] Auscow alleges that NZDPL was liable for operating costs of $3,878,101.04 incurred between 1 April 2014 and 31 March 2016. Auscow relies on the BDO accountant’s understanding of the Agreement that NZDPL was solely responsible for all production and operating costs. Counsel submits that “[t]his was a practical interpretation of how the obligations under the agreement would function from an accounting perspective”.
[10] There are, however, other articles in the Agreement which appear to bear on the payment of operating costs. Article 5 states that Auscow “shall be fully responsible for the production, operation, management and sales of the Dairy Factory”.
[11] Article 7.8 is more specific. It provides that “all costs and liabilities of the Dairy Factory that arise from [Auscow]’s management activities shall be the responsibility of, and shall be resolved by [Auscow] without delay”.
[12]As to the payment of salaries, cl 8.4.1 provides:
With regards to new employees hired during the term of production management under this Agreement, [Auscow] shall enter into employment agreements with them in the name of [NZDPL] and shall also pay their salaries and any taxes and costs payable by employers in the name of [NZDPL].
[13] Clause 8.4.3 further provides:
The remuneration of all existing employees of [NZDPL] at the Dairy Factory, and the corresponding taxes and costs payable by the employer, that arise during the term of production management under this Agreement shall be borne by [Auscow].
[14] Clauses 4.5 and 5.7 refer to NZDPL’s bank account as being the “channel” for the payment of operating costs and gives Auscow the authority necessary to use the account, but the clauses do not make NZDPL liable to pay such costs.
[15] Counsel for Auscow did not refer to these clauses or the effect of these clauses in his submissions, but they must throw real doubt on the BDO accountant’s
interpretation relied upon by Auscow. Auscow paid for all operating costs for the two year period of the Agreement. It never received reimbursement, yet it continued to operate the factory and pay wages, rent, power, gas, operating expenses, et cetera. In an email dated 9 November 2015 (that is, after the advice from the BDO accountant that NZDPL was liable to pay the operating expenses), Auscow’s accountant wrote to the BDO accountant:
In terms of the payment we made on behalf [of] NZDPL, eg. Power, gas, etc., it showed as prepaid commission. I don’t believe that NZDPL will pay them back in the future. How to deal with it?
[16] I am therefore not satisfied, on the balance of probabilities, that NZDPL is liable for the sum of $3,878,101.04, being the operating costs of the dairy factory incurred over the two year period between 1 April 2014 and 31 March 2016.
Payments to B Chen and W Shum ($100,000)
[17] Auscow claims $100,000 for a $50,000 payment made to Mr Chen in July 2014 and a $50,000 payment made to Mr Shum in January 2015. Mr Shum is a director of NZDPL. There is no explanation of Mr Chen’s role. Auscow’s accountant explains the payments as follows:
On 18 February 2015, Walter Shum sent me an email requesting that I pay a
$50,000 management fee into his personal bank account as the NZDPL New Zealand account was still unavailable. … The payment was processed as requested. I understood that this payment reflects the $50,000 payment made to “W Shum” in the summary of total claim. I understand that Auscow claims repayment of this amount because Auscow was already paying the $50,000 management fee in the $150,000 monthly invoice so the $50,000 payment to Walter exceeded the amount in cl 3.4 and therefore was considered a debt. I have been unable to find the email trail for the $50,000 payment to B Chen in July 2014 as listed in the summary amount of the total claim, but I believe that this payment was the same as the payment to Walter and is therefore a debit to Auscow.
[18] Counsel submits that NZDPL’s obligation to reimburse Auscow for the sum of
$100,000 is contained in cl 10.4 of the Agreement, which provides:
[NZDPL] shall make reasonable arrangements to appropriately resolve any claims and debts incurred by [NZDPL] prior to commencement of the production management term, so that it will not be subject to any declaration of bankruptcy, liquidation, or cancellation of production or export qualifications during the term of production management. It shall ensure that
the assets and equipment of the Dairy Factory will not be subject to seizure, freezing or sale during the term of production management, and that [Auscow] will be able to use such assets and equipment for normal production. If an aforementioned situation occurs during the term of [Auscow]’s production management, [Auscow] shall immediately notify [NZDPL] in writing. If [NZDPL] instructs [Auscow] to resolve such situation on its behalf, [Auscow] shall promptly do as instructed, and shall pay any resultant costs as approved by [NZDPL] (since [NZDPL] is not on site to manage the situation); such costs shall then be deducted upon account settlement.
[19] Counsel submits that this clause means that NZDPL can instruct Auscow to pay debts on its behalf so long as Auscow informs NZDPL in writing of those debts and NZDPL confirms the amount to be paid. Here, counsel submits that NZDPL instructed Auscow to make the two $50,000 payments and confirmed that amount. There was no need for Auscow to inform NZDPL of the debts in writing prior to payment because the debts were created by NZDPL for NZDPL. Thus, counsel submits that NZDPL’s obligation to pay these sums arises under cl 10.4, the only difference in respect of that clause is that NZDPL created the debt for itself as opposed to with a creditor.
[20] I am again not satisfied, on the balance of probabilities, that NZDPL is liable to repay the sum of $100,000 to Auscow. Auscow’s accountant referred to an email from Mr Shum requesting payment of the $50,000 management fee into his personal bank account as the NZDPL New Zealand bank account was still unavailable. It is tolerably clear that this is a reference to the monthly management fee of $50,000 set out in clause 3.4 of the Agreement. As such, the sum of $50,000 was payable each month to NZDPL.
[21] In an email from Auscow’s accountant to the BDO accountant dated 18 May 2015, Auscow’s accountant explained the $50,000 management fee as follows:
Article 3.1 explains how to get $50,000 management fee. When NZDPL approached Auscow Dairy, NZDPL assured that if the factory can re-start its normal production, there will be about $0.035 saving compared to co-pack the product from the other company. Auscow used to have conversation with Open Country about the co-pack business. Open Country’s quote was $0.32 cents per pack (CIF and including packaging). Auscow calculated the price/pack according to the information provided by NZDPL. The unit price comes to about $0.24 (CIF excluding packaging – packaging, straws, glue are provided by the client. The total costs of packaging, straws and glue comes to about $0.05). As conclusion, if Auscow Dairy lease the plant from NZDPL, and pay NZDPL $50,000 per month for the use of its facilities, it is cheaper
than co-pack from Open Country – I attached the working sheet for your reference.
[22] Although Auscow’s accountant has been unable to find the email trail for the
$50,000 payment made to Mr Chen in July 2014, it is the same figure as later paid to Mr Shum. I infer that both sums were not intended to constitute a separate loan between the parties, but merely payment of the monthly management fee.
Payments on behalf of NZDPL ($445,559)
[23]Auscow claims the following sums which it says it paid on behalf of NZDPL:
$67,157.60 ACC $150,000.00 PAYE $20,305.78 Import fees $76,740.74 BDO fees $851.00 Bar code annual fee $19,202.74 Outstanding invoices $111,301.53 50 per cent establishment costs Total $445,559.39
[24]As to the ACC payments, Auscow’s accountant states:
NZDPL had outstanding Accident Compensation Corporation payments from 2010 – 2013. It is my understanding that NZDPL instructed Auscow to pay the $67,157.60 sum on its behalf, which is demonstrated in an email from Walter Shum to Robert Zhou on 3 December 2014, where Walter accepted that Auscow had paid the ACC fee when he demanded that the sum be reduced by the $50,000 management fee. Aforementioned, Auscow was already paying the $150,000 inclusive of the management fee per NZDPL’s invoice and therefore the ACC payment could not be reduced by that sum as requested by Walter, meaning that the full sum paid to ACC is still owed to Auscow.
[25] The email of 3 December 2014 is annexed to Auscow’s accountant’s affidavit. It is, however, in Chinese and no translation is provided. Mr Zhou is the operations manager for Auscow, but is not a director.
[26]As to the PAYE payments, Auscow’s accountant states:
NZDPL had overdue PAYE for the periods ended September 2012 through to November 2013 that it was unable to immediately pay in one lump sum. … On 21 April 2015, Robert Zhou writing on behalf of Auscow sent an email to Walter Shum and the directors of NZDPL offering two options to deal with NZDPL’s overdue tax, being either (1) NZDPL pays all outstanding debt within the 15 days or (2) NZDPL agrees that Auscow pay the outstanding amount on behalf of NZDPL and that the payment would then be offset by the management fee from May 2015 until the amount Auscow paid was cleared. Walter accepted the second option, that is for Auscow to pay the overdue PAYE on NZDPL’s behalf in an email to Robert on 24 April 2015.
[27] The email reads: “Consider the urgency of the matter, we hereby accepted the Option No 2 which pay by your company first and deduct from our monthly payment.”
[28]As to the import fees, Auscow’s accountant states:
I understand that NZDPL contacted Robert Zhou via email instructing NZDPL to return and pay all outstanding charges on shipping containers held by NZDPL. Robert provided NZDPL with Auscow’s account information and informed NZDPL that the costs amounts to approximately $21,000. I understand that this is the $20,305.78 sum included within the $445,559.39 outstanding invoice in the summary of total costs.
[29] Auscow’s accountant also confirms that Auscow was instructed to and made payments to BDO Accounting on NZDPL’s behalf without providing any substantive documentation. As to the remaining liabilities claimed, Auscow’s accountant states:
I was unable to locate the email trails containing NZDPL’s instructions to Auscow to pay the barcode annual fee, the outstanding invoice and the total advance payment as contained as part of the $445,559.39 outstanding invoice in the summary of costs. I believe NZDPL did instruct Auscow to make all of these payments on its behalf, which is reinforced when we discussed the payment of these costs on 22 June 2016 in a meeting between Walter Shum, Robert Zhou and I. Shortly after that meeting I completed an excel spread sheet listing the costs owed, which included the payments to BDO Accounting, and I highlighted the amounts confirmed at the meeting in green. I believe that Walter confirmed that Auscow would be reimbursed for these amounts.
[30] Contrary to the belief of Auscow’s accountant that Walter confirmed that Auscow would be reimbursed for these amounts, Mr Shum sent an email to her on 24 June 2016, two days after the meeting, in which he stated:
During the meeting, Auscow asked me to confirm several payments paid by your company. I am hereby to stress that accordingly to the Management Agreement clause 3.4, Auscow should pay in advance to us in the sum of NZ$150,000 monthly, which NZ$50,000 have to deposit to our designated
account. The above deposit was not be fully implemented monthly. NZDP can only treat that the payments made on our behalf (PAYE, ACC, import fees etc), is a deduction from the monthly payment of NZ$50,000 and does not constitute a separate loan between us.
[31] Counsel submits that NZDPL’s obligation to reimburse Auscow for the various payments made on its behalf is contained in cl 10.4 of the Agreement. NZDPL’s obligation is to reimburse Auscow as it acted according to instructions from NZDPL to make the various payments. Any request that the payments be reimbursed from NZDPL’s management fee does not negate NZDPL’s obligations to make reimbursement now. NZDPL and Auscow were unable to reconcile costs and expenses during the Agreement, meaning that Auscow was also unable to reimburse itself for the various payments from NZDPL’s management fee. Although the various figures were intended to be reconciled at six monthly intervals during the Agreement, the figures have now been reconciled and NZDPL still has an obligation to pay.
[32] Counsel further submits that NZDPL’s obligation to reimburse Auscow for 50 per cent of the establishment costs is contained in cl 3.4 of the Agreement. That clause provides that “all costs arising in respect of the period from 1 July 2013 to 31 March 2014 shall be deemed establishment costs, and shall be shared by the parties out of the management fees over five (5) years … Settlement of such shared costs will take place every six (6) months”. Auscow and NZDPL were unable to reconcile on the intended dates due to IRD issues and, instead, counsel submits that Auscow proceeded in good faith on the presumption that a reconciliation would occur at the end of the Agreement. Accordingly, NZDPL also has an obligation per cl 3.4 to reimburse Auscow for 50 per cent of the establishment costs.
[33] Auscow undoubtedly did make a number of substantial payments on behalf of NZDPL. From what evidence is now available, NZDPL requested Auscow to make the payments on the basis that Auscow would be reimbursed from NZDPL’s monthly management fee of $50,000. That is also made explicit in cl 3.4 relating to establishment costs.
[34] Counsel submits that the parties were unable to reconcile costs and expenses during the Agreement, meaning that Auscow was also unable to reimburse itself for the various payments from NZDPL’s management fee. Auscow has however not
provided any evidence that it made each and every monthly payment of $50,000 to NZDPL. In his email to Auscow’s accountant dated 24 June 2016, Mr Shum stated, “[t]he above deposit [$50,000] was not … fully implemented monthly”. It does seem the payments of $50,000 to Mr Chen in July 2014 and Mr Shum in January 2015 may have been the monthly management fee, but there is no evidence of other payments.
[35] In all the circumstances, I am not satisfied, on the balance of probabilities, that NZDPL is liable to reimburse Auscow for the payments made on its behalf when NZDPL instructed Auscow to pay on condition of repayment from the monthly management fee and there is no reconciliation of payments made between NZDPL and Auscow.
Result
[36] The application by Auscow for formal proof of its claim against NZDPL is dismissed.
Woolford J
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