Crown Asset Management Limited v Dunvegan Seadown Limited

[2013] NZHC 3483

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV-2013-476-000283 [2013] NZHC 3483

BETWEEN  CROWN ASSET MANAGEMENT LIMITED

Plaintiff

ANDDUNVEGAN SEADOWN LIMITED Defendant

Hearing:                   16 December 2013

Appearances:           J Toebes for Plaintiff/Applicant

J E Bayley Defendant/Respondent

Judgment:                19 December 2013

JUDGMENT OF ASSOCIATE JUDGE OSBORNE

as to application for liquidation

Introduction

[1]      This is an application to wind up Dunvegan Seadown Limited (Dunvegan) in relation to a loan of $16,688,546.79 (the loan).

[2]      Dunvegan in defence raises a single issue – whether there is still a debt owing to the plaintiff in relation to the loan.  Dunvegan says that the debt under the loan was extinguished and that the plaintiff is therefore not a creditor of Dunvegan.

Background

[3]      Lachie  McLeod,  (Mr  McLeod)  was  a  key  employee  within  a  group  of companies established by the late Allan Hubbard (Mr Hubbard) of which South Canterbury Finance Limited (SCF) was perhaps the most well known.

CROWN ASSET MANAGEMENT LIMITED v DUNVEGAN SEADOWN LIMITED [2013] NZHC 3483 [19

December 2013]

[4]      In  2007  Mr  Hubbard  offered  Mr  McLeod  (and  other  key  employees) assistance in buying shares in SCF’s parent company, Southbury Group Limited (SGL).

[5]      In  December 2007  Mr McLeod  arranged  to  borrow from  SCS  and  SGL jointly.  Mr McLeod formed the defendant Dunvegan as the vehicle for purchase and the borrower of the funds.   A term loan agreement was executed.   Mr and Mrs McLeod as trustees of their family trust guaranteed the loan obligations.  The loan was to be repaid on the earlier of 31 August 2012 or within 24 months of Mr McLeod’s ceasing to be a holder of office in SCF or SGL.

[6]      The loan balance by 31 March 2009 was down to $15,371,790.

[7]      In  2009  issues  arose  between  Mr  McLeod  and  SCF  in  relation  to  Mr McLeod’s employment  and other aspects of the relationship.   A settlement was negotiated.   Around 25 November 2009 Mr McLeod and SCF signed what was entitled  “Proposed  Terms  of  Settlement”  (the  Settlement  Agreement).     The Settlement Agreement contained a Clause 7 referring to a “share transfer”.   It is common ground that this referred to a share transfer to be executed transferring the SGL shares held by Dunvegan. The clause reads –

Share  transfer  from  LJM  to  be  held  for  a  Superannuation  Scheme  or otherwise as directors of South Canterbury Finance Ltd determine.  An acknowledgement that there is no liability on the part of LJM and Sarah Paige McLeod for debt ie no assets no liability.

[8]      The next day, 26 November 2009, SCF and Mr McLeod executed a Record of Settlement under the Employment Relations Act 2000 (Employment Settlement). The Employment Settlement was expressed to be final.  Clause 2 reads:

This agreement is a full and final settlement of all matters between the parties, including any payment which the applicant may have been entitled to under the terms of the conditions of his employment.

[9]      Clause  3  of  the  Employment  Settlement  provided  that  Mr  McLeod’s employment relationship would terminate with effect from 28 February 2009.  In the meantime Mr McLeod ceased to be Chief Executive Officer of SCF on 30 November

2009.

[10]     In November 2009, Dunvegan signed and delivered to SCF a share transfer in respect of Dunvegan’s SGL shares.

[11]     SCF subsequently encountered financial difficulties going into receivership and liquidation.

[12]     On 1  June 2012  all  right,  title and  interest  in  SCF was  assigned  to  the plaintiff, Crown Asset Management Limited (Crown).

[13]     Around  1  June  2012  notice  was  given  to  Dunvegan  that  SCF’s  loan

agreement with Dunvegan had been assigned to Crown.

[14]     Correspondence  between  the  solicitors  ensured.    Rhodes  &  Co.,  for  Mr McLeod asserted that the liability under the loan had been fully satisfied.  Rhodes & Co attached a Memorandum of Mr Hubbard dated 21 September 2009 entitled “Re Southbury Group Ltd” in which Mr Hubbard provided his calculation of the worth of SGL,  and  a  consequential  valuation  of  various  shareholdings  in  SGL.     The “McLeod” shareholding which I take to be a reference to Dunvegan was put at

$15,750,000.   This compared with what Mr Hubbard recorded as the outstanding loan balance (at 30 June 2009) of $15,099,270.

[15]     In August 2012 SGL was put into liquidation, with its shares appearing to now be worthless.    In  November 2012  Crown  issued a demand on  Mr & Mrs McLeod as guarantors under the loan agreement.

[16]     Further correspondence ensued between the solicitors as to that demand, with Rhodes   &   Co.,   again   asserting   that   the   loan   had   been   compromised   and extinguished.  Rhodes & Co also noted that the SGL shares had been transferred in accordance with the Settlement Agreement.

The jurisdiction to put a company into liquidation

[17]     Crown invokes s 241(2)(c)(iv) Companies Act 1993.  The Court may on the application of a creditor appoint a liquidator.

[18]     Section 241 of the Act provides the grounds on which the Court may appoint a liquidator.  Those include when the defendant company is unable to pay its debts (s

241(4)) and when it is just and equitable that the company be put into liquidation (s

241(4)).

[19]     In a case such as this, the apparently single line of defence – the subject debt has been extinguished or repaid – contains two elements, namely that the debt has indeed been extinguished and that the erstwhile creditor no longer is a creditor.

[20]     Where such a defence is raised, a winding up order will not be made if there is a genuine and substantive dispute as to the continuing existence of the debt such that it would be an abuse of the process of the Court to order a winding up.  Such disputes should be resolved through ordinary actions and not in the Companies

Court.1

Is there a genuine and substantial dispute as the existence of the debt?

The summarised positions of the parties

[21]     I will first summarise the competing positions of Crown and Dunvegan as to whether or not the debt under the loan agreement remains.

[22]     For  Crown,  Mr  Toebes  says  that  the  Clause  7  (Settlement  Agreement) exclusion of liability is expressly and clearly limited to Mr & Mrs McLeod and that the words in clause 7 used should be given their ordinary meaning in the context of the contract in which they appear.  Mr Toebes invites the Court to reject the evidence adduced by Dunvegan from lawyers involved in the settlement as the evidence goes beyond establishing the circumstances in which the Settlement Agreements were entered into and instead speaks of individuals’ intentions.

[23]     For Dunvegan, Mr Bayley approaches Clause 7 from two perspectives, both interpretation and rectification.   He says that it is clear that something has gone

wrong with the wording in Clause 7.   (Mr Bayley says the impression of the drafting

1      South Waikato Precision Engineering Ltd v Ahu Development Limited HC Auckland CIV-2008-

404-970, 10 December 2008 per Associate Judge Faire at [22].

is exemplified by the draftman’s provison) that the share transfer was to come from “LJM” meaning Mr McLeod.  It was Dunvegan as the legal owner of the shares who would be transferring the shares.  Mr Bayley submits that as a matter of construction Clause 7 read as a whole, including the reference to “no assets no liability” must be read to mean that the parties were extinguishing entirely the debt under the loan agreement.

[24]     Alternatively,  Mr  Bayley  submits  that  there  is  a  good  argument  for rectification in this case based on what a Court at trial would hold to be the common intention of the parties if the Court finds as a matter of interpretation they did not correctly express it in the Settlement Agreement.

Clause 7 itself

[25]     For convenience I set out again Clause 7 of the Settlement Agreement –

Share  transfer  from  LJM  to  be  held  for  a  Superannuation  Scheme  or otherwise as directors of South Canterbury Finance Ltd determine.  An acknowledgement that there is no liability on the part of LJM and Sarah Paige McLeod for the debt ie no assets no liability.

The construction of clause 7

[26]     First, it is at least arguable that the Settlement Agreement was prepared and executed in some haste.  Edward Sullivan is a retired solicitor who was a director of SCF and acted for Mr Hubbard in coming to arrangements with Mr McLeod over Mr McLeod’s departure.  He deposes that on his recollection the Settlement Agreement was drafted in haste just prior to the Annual General Meeting of SCF.  Mr Sullivan says that the agreement could have been “better worded”.  Mr Sullivan’s evidence as to haste is reinforced by the form of the Settlement Agreement itself.   Although typed, it was executed while still headed “Proposed Terms of Settlement”, with no time taken  to  have a  finalised  copy typed  up  incorporating several  handwritten alterations and additions.

[27]     Secondly, objectively it appears that there was an intended balance to Clause

7.  The SCF directors were by clause 7 to secure for SCF (or its nominee) the return

of Dunvegan’s SGL shares.  Mr Hubbard, who was centrally involved for SCF, had

recently assessed Dunvegan’s shares as being worth more than the loan relating to them.2     On Mr McLeod’s side, SCF was to provide an acknowledgement of no continuing liability.   The structure of  Clause 7  appears to  be in  balance if  the McLeod interests are transferring to SCF’s nominee the SGL shares without cash payment from SCF or its nominee and the debt under the loan agreement is in return extinguished.  It is at least arguably an unlikely commercial outcome if Mr McLeod

is taken by Clause 7 to have committed Dunvegan to transferring the SGL shares without Dunvegan itself being released from a liability to pay back to SCF the sum it paid (through the loan arrangement) to buy the shares.  It is arguable either that there is ambiguity in Clause 7 or that something has gone wrong with the wording of Clause 7.  Dunvegan has a tenable argument on the basis that Clause 7 released from liability not only Mr & Mrs McLeod from liability but also their interests.

[28]     Mr Toebes at one point appeared to try to tackle the unlikelihood of Mr McLeod’s apparently gratuitous surrender of the SGL shares through Clause 7.  In his written synopsis Mr Toebes said –

The Shares remain registered in the ownership of the defendant company as at the date of commencement of appointment of liquidators to Southbury Group Limited on 21 August 2012 and any handing over of share transfer was not relevant.   The defendant company is still registered owner of the shares and has the debt.

[29]     The uncontradicted evidence of Robert Vincent, a solicitor who acted for Dunvegan in relation to the relevant transactions, is that the share transfer required under  Clause  7  was  signed  by  Dunvegan  and  was  handed  to  Mr  Hubbard  in November 2009.   Mr McLeod arranged what he was required by the Settlement Agreement to arrange.    From Mr McLeod’s point of view, SCF was from the end of November 2009 free to deal with the SGL shares in whatever way SCF saw fit.  The fact that SCF did not at the time dispose of the SGL shares for value and that SGL subsequently went into liquidation is irrelevant in this context.

[30]     I turn then to the second leg of Clause 7, namely what the McLeod interests received.

2 See above at [14].

[31]     It is common ground that Dunvegan was incorporated to be a single asset owning company, that is to say to be the owner of the SGL shares.  The guarantee by family  trustees  of  Dunvegan’s  obligations  under  the  loan  agreement  expressly limited the trustees’ liability to the value of the assets of the trust.

[32]     In an apparent attempt to link that arrangement directly to the wording of Clause  7,  Mr  Toebes  described  the  limitation  of  liability  in  the  guarantee arrangement as a “no assets no liability” provision.  Later in his written submissions, in discussing Clause 7, Mr Toebes noted –

The Proposed Terms of Settlement (paragraph 7) clearly refers, and refers only, to the liability of John Lachie McLeod and Sarah Paige McLeod for debt and the expression “no assets no liability” reflects the limitation of liability provisions for them as guarantors in the Term Loan Agreement.

[33]     It is at least arguable that it does not make commercial sense for Mr McLeod to have had spelt out in the second sentence of Clause 7 a statement as to rights which the guarantors already had.   The guarantors would have known that one of them (Mr McLeod) was causing Dunvegan to  part with the SGL shares whose purchase was the very reason for the loan they guaranteed.

[34]     What  would  arguably  make  commercial  sense  is  to  read  the  Clause  7 reference to  “LJM”  at  two  points  as  being a  reference to  Mr McLeod  and  his interests.   Such an interpretation would reflect the factual position relating to the share  transfer,  namely  that  it  would  have  to  come  from  one  of  Mr  McLeod’s interests, namely Dunvegan.   Once that share transfer was in place it then made sense for there to  be  an acknowledgement  of  no  liability not  only for Mr  and Mrs McLeod  but  also,  through  the  identical  reference  to  “LJM”  in  the  second sentence, for Mr McLeod’s interests.

[35]     These are not expressed as findings of interpretation.  They are recognitions that there is a genuine and substantial dispute as to the correct interpretation of Clause 7.

Post-contract conduct

[36]     For Dunvegan, Mr Bayley submitted that the interpretation which I have found arguable is reinforced by reason of some post-contract conduct.   As it is strictly unnecessary that I make any finding in relation to the post-contract conduct. I record briefly the point involved.

[37]    Rhodes & Co provided to Crown’s solicitors the financial statements of Dunvegan for 2011 and 2012.  The 2011 statements give also the comparable 2010 figures.  Dunvegan’s assets in those years are shown as no longer including the SGL shares.  Dunvegan’s  liabilities are shown as no longer including the SGL/SCF loan.

[38]     When  I  observed  to  Mr  Bayley  that  the  state  of  Dunvegan’s  accounts involves (in a contractual setting) the unilateral decisions and actions of Dunvegan, Mr Bayley observed correctly that a bilateral view of post-contract litigation would require access to the accounts of SCF and SGL for the relevant period, neither of which the plaintiff has produced.

[39]     Notwithstanding some unsettled issues as to the admissibility of post-contract conduct in New Zealand,3 it is likely that if such evidence is to be taken into account it will be the evidence of the conduct of both parties to the contract rather than of one party alone.

[40]     The  evidence  as  it  stands  (only  Dunvegan  having  produced  financial statements in evidence) makes it unlikely that the Court would be assisted by the analysis of post-contract conduct.    But with additional discovery and/or interrogatories in the context of the trial of an ordinary proceeding, counsel for Dunvegan may be able to reinforce by reference to all parties’ financial statements

its contention as to the correct construction of Clause 7.

3      Gibbons Holdings Ltd v Wholesale Distributors Ltd [2007] NZSC 37, [2008] 1 NZLR 277.

Leek and Moorlands Building Society v Clark4

[41]     Mr Toebes in the course of his oral submissions referred to the decision of the English Court of Appeal in Leek and Moorlands Building Society v Clark.   Mr Toebes referred to the decision as authority for the proposition that the release by one of the joint parties to a contract is not effective to surrender the joint parties’ interest.

[42]     Mr Toebes recognised that the principle invoked as applicable had not been raised in his written synopsis and that the defendant was not on notice as to the taking of the point.  Mr Toebes observed that he had only just been able to locate the decision.

[43]     Mr Bayley did not seek an adjournment of the hearing to meet the new point taken by Mr Toebes.  I indicated that I would be reserving my decision and would be carefully considering the Leek and Moorlands decision in any event.  In the context of the hearing, Mr Bayley was able to briefly digest the Court of Appeal judgment and to make one specific submission.   He submitted that, having regard to Mr Hubbard’s central role for both SGL and SCF in matters relating to Mr and Mrs McLeod and Dunvegan, that it will be open to Dunvegan to explore at trial the authority of Mr Hubbard and SCF to commit SGL to a resolution.  The reference in Clause 7 to an acknowledgement “that there is no liability …” arguably makes sense only if there is to be no liability vis a vis either of the joint obligees.

[44]     The fact that authority to bind will be a relevant issue even on the facts of cases such as Leek and Moorlands is evident in the judgment of the Court read by Somervell LJ where his Lordship observed towards the end of his judgment:5

It is also to be noted that in that case [In re Viola’s Indenture of Lease] the court was asked to infer an authority in the husband to act on behalf of his wife.  It declined to do so.  In the present case there is an express finding of absence of authority.

[45]     I accept that there is force in Mr Bayley’s submission that the Court should not proceed upon the basis of an assumption as to a lack of authority when there has

not  been  any  interlocutory  exchange  such  as  comprehensive  discovery  and/or

4      Leek and Moorlands Building Society v Clark [1952] 2 QB 788 (CA).

5      At 794.

interrogatories, as one would expect in relation to a civil proceeding.  There is no evidence to suggest that those representing Dunvegan have had access to all the relevant  documents  of  SGL  and  SCF  which  might  inform  the  extent  of  any discussion between those organisations prior to the settlement agreement of late- November 2009.

[46]     I further note that there is in evidence a memorandum from Mr Hubbard to the directors of SCF dated 23 November 2009.  At one point in that memorandum Mr Hubbard records that:

The other directors earlier agreed to have these shares [in SGL] transferred to a Superannuation Fund.

This is a reference to the fact that directors other than Mr McLeod held shares in

SGL.

[47]     Now that the existence or absence of an authority to settle may be in issue, the discussion in Mr Hubbard’s memorandum suggests that any authorisation of SCF and Mr Hubbard may be properly informed only by more extensive discovery (that is in relation to other shareholder/directors) than will have occurred to date.

[48]     I have now considered the Leek and Moorlands case.  The case involved a leasehold interest in a dwelling house.  A husband and wife were the joint lessees. The head-note to the Queen’s Bench report accurately summarises the key finding of the Court of Appeal  -

Held affirming the decision of the county court judge, that in the absence of express words in the lease, or of authority, one of two joint lessees cannot surrender rights held jointly before the full period of the lease has run, and the wife was not estopped from asserting her rights as joint tenant.

[49]     The nature of a tenant’s jointly-held lease interest is of a distinctly different kind to the nature of a creditor’s jointly-held interest in a debt.  In the case of the lease, both tenants have a continuing right of occupation through the term of the lease (unless, as Somervell LJ observed in Leek and Moorlands, the lease expressly provides otherwise or one of the joint tenants authorises the other to surrender joint rights).

[50]     In relation to a debt, the payment of a debt to one of a number of joint creditors discharges a debt owed to them jointly.6

[51]     Moreover, accord and satisfaction (that is to say other than through cash payment of the exact debt) is available to the debtor.7   In the leading American text, Corbin on Contracts, the authors observe in their discussion in relation to partners and other joint obligees:8

Generally it has been held that a partner or other joint obligee has power to discharge the obligor by assenting in good faith to an accord and satisfaction or by joining in a composition with other creditors.

(footnotes omitted)

[52]     The  acceptance  of  property  such  as  shares  in  satisfaction  of  a  debt  is illustrated in the judgment of Judge M D Robinson in the New Zealand District Court case of Findlayson v Norrie9  in which the Court found there had been an accord of satisfaction.

[53]     It is unnecessary that I determine whether there has been an accord and satisfaction in this case.  The very late raising of the “absence of authority” point by Mr Toebes means that the defendant in this liquidation proceeding has not had the opportunity to explore the factual issues which may be relevant.  It is enough in the present context that there is a substantial and genuine dispute argument available to Dunvegan as to whether or not SGL, as co-obligee of SCF, is bound by SCF’s agreement, through Clause 7, that “there is no liability on the part of LJM… for

debt”.

6      H G Beale (ed) Chitty on Contracts: Volume 1: General Principles (31st ed, Sweet and Maxwell, London, 2012) at [21.050], referring to amongst others Wallace v Kelsall (1840) 7 M.&W. 264 and Barrett v Universal Island Records Ltd [2006] EWHC 1009.

7      At [21-053] and [22-012].

8      John E Murray Junior and Joseph M Perillo (ed) Corbin on Contracts: Revised Edition (Revised edition, Matthew Bender & Co, Newark and San Francisco, 2007) at [52.15], where the authors

give as an example the case of Cober v Connolly, 20 Cal. 2d 777, 128 P.2d 519 (1942) in which

a husband and wife executed a promissory note to three obligees for a certain debt.  Later one of the  obligees  accepted  printing  services  in  satisfaction of  the  debt.    The  Court  recognised provisions in the California Civil Code (2006) as resting on a concept of agency law whereby one co-payee acts as agent for the other co-payees in accepting payment.

9      Findlayson v Norrie [1995] DCR 709.

Rectification

[54]   Given that there is a genuine and substantial dispute as to the correct interpretation of Clause 7, it follows that in a civil trial a Court may find in favour of Dunvegan’s construction of Clause 7.

[55]     It therefore becomes unnecessary to consider further the evidence which the Court has received from Dunvegan in relation to the possibility that there was a “common intention” reached between the parties but not accurately recorded in the Settlement Agreement.

[56]     I  accept  Mr  Toebes’s  submissions  that  evidence  of  intention  will  not generally be received in relation to matters of interpretation.   In relation to a rectification pleading, on the other hand, the Court will be entitled to hear evidence as to any oral discussion which resulted in oral agreement unreflected in the written document.

[57]     Mr Toebes made a repeated reference to the fact that Mr McLeod has not given  evidence  in  this  proceeding,  instead  leaving  it  to  the  Timaru  solicitors involved.   If the outcome of this proceeding had come to turn on the rectification argument, I might have taken an unfavourable view of the lack of evidence from Mr McLeod.    However,  in  relation  to  what  has  become  an  exercise  centrally focussed on what is genuinely and substantially arguable as to the interpretation of Clause 7, that is a matter which as Mr Toebes (somewhat ironically in the circumstances)   submitted   must   turn   principally   on   the   recorded   documents themselves  and  on  any  relevant  background.    Mr  McLeod’s  evidence  was  not required for that consideration.

Outcome

[58]     I find that there is a genuine and substantial dispute as to the existence of the debt alleged by Crown in this case.  Equally, Crown therefore has not satisfied me that it is a creditor.

[59]     The appropriate proceeding in which Crown should seek to establish both the continuing existence of the debt and therefore its status as creditor is through an ordinary proceeding.

[60]     In the light of my findings it makes no difference that Crown relied not only the failure of Dunvegan to meets its debt but also on the “just and equitable” ground for winding up.   This case is principally about a party which considers itself a creditor and the party who would thereby be the debtor.  It would not be a suitable case in which to exercise the just and equitable jurisdiction even had Crown satisfied me Crown is a creditor under a loan agreement which continues in force.

Costs

[61]     Counsel accepted that costs should follow the event on a 2B basis.

Orders

[62]     I order –

i.     The plaintiff’s claim is dismissed.

1. The plaintiff is to pay the defendant’s costs on a 2B basis together with

   disbursements to be fixed by the Registrar.

Associate Judge Osborne

Solicitors:

JTLaw, Wellington for Plaintiff/Applicant

Rhodes & Co, Christchurch for Defendant/Respondent