Dargaville Farms Limited v Webster
[2017] NZHC 1790
•1 August 2017
IN THE HIGH COURT OF NEW ZEALAND WHANGAREI REGISTRY
CIV-2017-488-55 [2017] NZHC 1790
BETWEEN DARGAVILLE FARMS LIMITED
Applicant
AND
DAVID BASIL WEBSTER AND FRANCIS KIM WEBSTER Respondents
Hearing: 19 July 2017 Appearances:
Suzanne L Robertson QC for the Applicant
S J Davies-Colley for the RespondentsJudgment:
1 August 2017
JUDGMENT OF ASSOCIATE JUDGE R M BELL
This judgment was delivered by me on 1 August 2017 at 11:30am
pursuant to Rule 11.5 of the High Court Rules
………………………………………………….
Registrar/Deputy Registrar
Solicitors:
Speakman Law (Peter Speakman), Auckland, for the Applicant
Webb Ross McNab Kilpatrick (Simon Davies-Colley), Whangarei, for the RespondentsCopy for:
Suzanne L Robertson QC, Auckland, for the Respondents
DARGAVILLE FARMS LIMITED v DAVID BASIL WEBSTER AND FRANCIS KIM WEBSTER [2017] NZHC 1790 [1 August 2017]
[1] Dargaville Farms Ltd applies under s 290(4)(b) of the Companies Act 1993 to set aside the Websters’ statutory demand for $726,229.00. It says that it has counterclaims against them for more than their debt. The Websters’ debt is based on my judgment of 15 March 2017 in Webster v Li.1 I found for the Websters that Dargaville Farms Ltd was liable to repay their shareholders’ advances of
$699,800.00. There is overlap between the earlier proceeding and this one.
Setting aside under s 290
[2] There is a rebuttable presumption of insolvency under s 287(a) of the Companies Act if a company served with a demand under s 289 does not comply with it within 15 working days of service. That may be used in a liquidation application to prove that a company cannot pay its debts. There are, however, cases where it would be unjust to allow the presumption of insolvency to arise on non- compliance with the demand.
[3] The general purpose of s 290 is to allow the court to set aside statutory demands. Section 290(4) sets out one general and two particular grounds where it would be unjust for the presumption of insolvency to arise. Under s 290(4) the court decides whether the statutory demand ought to stand so that non-compliance with it will give rise to the insolvency presumption. That is a relatively confined discretion. On a liquidation application, the court has a wider discretion. At that stage, the court may have to take into account competing considerations: not only the interests of the creditors seeking the liquidation of the company but also the interests of other stakeholders, including shareholders and other creditors who see benefits in the company not going into liquidation. In an application under s 290, the court is not required to pre-determine how a liquidation application may be decided.
[4] Under s 290(4)(b) a demand may be set aside if the company has a counterclaim, set-off, cross-demand and the amount in the demand less the amount
of the cross-demand is less than $1,000.00. It is helpful to compare this with the
1 Webster v Li [2017] NZHC 479.
application of insolvency set-off under s 310 of the Companies Act. Insolvency set- off arises on liquidation when there have been mutual dealings between a creditor and a company. The set-off is substantive, not procedural. It is self-executing and mandatory.2 Contracting out is not permitted.3 The set-off establishes a new net balance, which replaces the earlier claim and cross-claim. The set-off applies to all claims that may be made in a liquidation, including contingent claims.4 A creditor’s claim may be extinguished if the company’s cross-claim against it is for a greater sum. The effect of insolvency set-off may be a relevant consideration when the court hears a liquidation application.5 Section 290(4)(b) can be seen as anticipating the effect of insolvency set-off. If on liquidation there will not be a net indebtedness to the creditor so that its claim will not be recognised, it should not be allowed to use non-compliance with the statutory demand to create a presumption of insolvency. Nevertheless there are differences. The power to set aside under s 290(4)(b) is discretionary, not mandatory. In some cases “pay now/argue later” considerations have prevailed over the effect of liquidation.6 While “counterclaim, set-off, cross- demand” is to be given broad scope, it does not apply to claims that are not actionable, such as purely contingent claims.
[5] A company faced with an incontestable liability may be tempted to put up spurious, speculative or nebulous allegations to defeat a statutory demand. To counter this, the law requires the company to show a real basis for the company’s case with evidence. It cannot rely on assertion alone, but must show clear and
persuasive grounds.7 It is not however required to prove its case fully. In one
respect a higher standard of proof is required. Where there are allegations of fraud or other reprehensible conduct, it is necessary to show a prima facie case. That is not a special rule for applications under s 290(4)(b) but applies generally. In Schmidt v
Pepper New Zealand (Custodians) Ltd, a caveat case, the Court of Appeal said:8
2 See Lord Hoffman’s exposition in Stein v Blake [1996] AC 243 (HL) at 251-255.
3 National Westminster Bank Ltd v Halesowen Presswork & Assemblies Ltd [1972] AC 785 (HL);
Rendell v Doors & Doors Ltd (in liq) [1975] 2 NZLR 191 (SC) at 197.
4 Companies Act 1993, s 313.
5 Re Bayoil SA [1999] 1 WLR 147 (CA); Commissioner of Inland Revenue v The Fishing
Company Ltd [2012] NZCCLR 5 (HC).
6 Volcanic Investments Ltd v Dempsey Civil Contractors Ltd (2005) 18 PRNZ 97 (HC); Browns
Real Estate Ltd v Grand Lakes Properties Ltd [2010] NZCA 425, (2010) 20 PRNZ 141.
7 Covington Railways Ltd v Uni-Accommodation Ltd [2001] 1 NZLR 272 (CA) at 274-275.
8 Schmidt v Pepper New Zealand (Custodians) Ltd [2012] NZCA 565.
[15] Allegations of fraud or dishonesty are very serious. They must be pleaded with care and particularity. As the authors of Bullen & Leake & Jacobs Precedents of Pleadings emphasise, counsel must not draft any originating process or pleading containing an allegation of fraud unless they have reasonably credible material which, as it stands, establishes a prima facie case of fraud – that is, material of such a character which would lead to the conclusion that serious allegations could properly be based upon it. Fraud cannot be left to be inferred from the facts – fraudulent conduct must be distinctly alleged and as distinctly proved. General allegations, however strong the words may be appear to be, are insufficient to amount to a proper allegation of fraud.
(Emphasis added)
In the context of a proceeding aimed at setting aside a judgment obtained by fraud the Supreme Court said:9
The plaintiff’s claim of fraud must be one that is fully and precisely pleaded and particularised and of sufficient apparent cogency that it should go to trial.
(Emphasis added)
Its judgment recognised that a claim that did not meet these requirements may be struck out.
[6] A statutory demand may be set aside in part. If a company establishes a substantial dispute under s 290(4)(a) as to only part of a debt, the demand will be set aside only to the extent of the disputed portion. In United Homes (1988) Ltd v Workman,10 the companies established that there were genuine disputes for only parts of the debts claimed in the statutory demands. The Court of Appeal made an order for partial setting-aside of the statutory demands. Similarly under s 290(4)(b) a counterclaim for an amount less than the debt in the demand with a deduction for the prescribed amount does not mean that the setting aside application fails
absolutely, but that the amount in the demand may be reduced to allow for the cross-
demand. Associate Judge Sargisson’s decision in Carpet Plus (2003) Ltd v A Team
Flooring Specialists Ltd is an example.11 Some creditors recognise that by making
9 Commissioner of Inland Revenue v Redcliffe Forestry Venture Ltd [2012] NZSC 94, [2013] 1
NZLR 804 at [33].
10 United Homes (1988) v Workman [2001] 3 NZLR 447 (CA).
11 Carpet Plus 2003 Ltd v A Team Flooring Specialist Ltd HC Auckland CIV-2008-404-4725,
19 January 2009.
express allowance for disputed counterclaims in their demands, so that the company knows that it is required to pay only the undisputed balance.
Background
[7] In 2015 Mr and Mrs Webster owned three dairy farms in the Dargaville area indirectly through three companies: at Mititai Road, Waiotira owned by Clear Ridge Station Ltd; at Bee Bush Road, Arapohoe owned by Beejay Stud Ltd; and at Arapohue Road, Aropohue owned by Ridgeview Farms Ltd. Each company ran an operating dairy farm with dairy company shares, livestock, plant and equipment. Some of the plant and equipment was owned by other companies. There was also a dry stock operation. The farms all needed significant infrastructure upgrades, including races and effluent systems. Recently the companies had been prosecuted for effluent discharges under the Resource Management Act and had been fined heavily.
[8] Mr Li Liang Ren is Chinese but has lived in New Zealand since 1995. He is an Auckland businessman. He has forest and farm investments, but has no practical knowledge of dairy farming. In late 2015 the Websters and Mr Li negotiated the sale and purchase of the farms. The Websters were keen to maintain a connection and have on-going management of the farms. Likewise, Mr Li was apparently not to be involved in the day-to-day management of the farms – clearly in the light of his lack of experience in dairy farming.
[9] On 10 December 2015 Mr Webster sent Mr Li a five-year budget and projection of capital spending over the next 18 months. The document included livestock figures as at that date: 4,460 head – 2,850 cows, 580 rising 2-year-old heifers, 730 rising 1-year-old heifers, and 300 rising 1-year-old bulls.
[10] Through several agreements, the Websters sold the farms.12 There was a
“Confidential Terms of Offer” of 11 December 2015. The parties are Mr Li (or nominee) and “the Webster Group” – defined as Mr Webster and Mrs Webster as
12 Some are not relevant for this case, such as an offer letter of 11 December 2015 and an agreement for the purchase of farm plant and machinery.
trustees of their family trust, Beejay Stud Ltd, Ridgeview Farms Ltd and Clear Ridge Station Ltd. Mr Li was to pay $17 million. That was to be applied as to $11 million to the purchase of the farm properties, $3.3 million for the purchase of dairy company shares, and $2.7 million for a 70 per cent shareholding in a new company to be formed. The Websters were to advance $1 million for a 30 per cent shareholding in that company. That company was to use $3.7 million to buy the livestock, plant and equipment on the three farms. Mr Li would lease the farm properties to the new company for an initial term of five years, at a fixed rental per grazeable hectare. The lessee was to be responsible for fertiliser, weed control, plant maintenance, race maintenance and fence maintenance. The farms were to be maintained to the standard of rural leases in the district. Mr Li would own the dairy company shares, and the dividends would be paid to him, but he would instruct the dairy company to pay 100 per cent of the milk payments to the new company. Mr and Mrs Webster were to manage the day-to-day running of the farms for five years, unless otherwise agreed and to be reviewed in five years.
[11] The confidential terms of offer included these:
(3) In consideration of advancing the minimum sum ($17 million) Li purchases the following assets from the Webster group and/or pay the following amounts:
…
(iii) $2,700,000 for a 70% shareholding in a company (“the Lessee Company”) to be formed. $1,000,000 for the remaining 30% of the shares in the Lessee Company will be issued to David Basil Webster (David) and Frances Kim Webster (Kim) or an entity nominated by them in return for payment of the Webster sum ($1 million) to the lessee company. The lessee company (using the amounts received by Li and David and Kim) is to purchase on the settlement date all the livestock presently owned by Webster Group at value of $3,700,000 plus GST (if any)
…
(7) David and Kim Webster will manage day-to-day activity and running of the farm properties with an annual budget to be agreed by the board of the lessee company. Annual salaries will be paid:
(i) to David in the amount of $120,000 per annum; (ii) to Kim in the amount of $50,000 per annum;
for five years, unless otherwise agreed, and reviewed in five years.
[12] The farm properties were sold without vendor warranties. The agreement recorded that Mr Li had been advised that the farm will be required to invest approximately $1,800,000 into the farm infrastructure over the next 18 months.
[13] On 21 December 2015, Dargaville Farms Ltd was incorporated. That is the lessee company in cl 3(iii) of the confidential terms of offer. Mr Li holds 800 shares in Dargaville Farms Ltd. Webster Family Management Ltd holds 200 shares. Webster Family Management Ltd is a company established by the Websters. In addition to holding shares in Dargaville Farms Ltd, it was the vehicle through which the Websters provided management services to Dargaville Farms Ltd.
[14] The change from a 70/30 per cent shareholding in the initial agreement to
80/20 per cent shareholding came about because the Websters could not come up with $1 million. They could contribute only $700,000. This change led to a Deed of Agreement for the Sale and Purchase of Shares dated 22 January 2016. The parties to that agreement dated 22 January 2016 are Mr Li as vendor, Mr and Mrs Webster as purchasers, and Dargaville Farms Ltd as the company. That agreement provided for Mr Li to sell 200 ordinary shares in the company to the Websters, recorded advances to be made by both Mr Li and the Websters to the company.
[15] The agreement provides that the purchasers may nominate a nominee to complete the purchase of the agreement. Title to the shares was taken in the name of Webster Family Management Ltd. That agreement was the basis for the Websters’ claim in their successful summary judgment proceeding, but it has less relevance for this proceeding.
[16] Under three agreements dated 22 January 2016 Dargaville Farms Ltd purchased livestock. Clear Ridge Station Ltd sold Dargaville Farms Ltd 1,965 head for $1,347,750.40 plus GST. Ridge View Farms Ltd sold Dargaville Farms Ltd
1,387 head for $947,842.02 plus GST. Beejay Stud Ltd sold Dargaville Farms Ltd
1,135 head for $843,057.58. Altogether Dargaville Farms Ltd bought 4,487 head of stock for $3,138,650. Under each agreement payment and delivery were
interdependent. The transactions settled on 29 January 2016. At the time, no one did a stock count to make sure that Dargaville Farms Ltd received 4,487 head.
[17] In my judgment of 15 March 2017 on the Websters’ summary judgment
application, I noted these relationships established at the end of January 2016:13
(a) Mr Li and Webster Family Management Ltd are shareholders of Dargaville Farms Ltd and all three are bound by the deed of agreement for the sale and purchase of shares at 22 January 2016.
(b)Mr and Mrs Webster personally made advances to the company – that was a creditor/debtor relationship.
(c) Mr Li made advances to the company, but through his family trust.
That is also a creditor/debtor relationship. The provisions of the deed of agreement for sale and purchase of the shares which refer to Mr Li’s advances refer equally to the advances he made through his family trust. The family trust appears to be no more than a vehicle he used to make advances..14
(d) Mr Li and Mr Webster are both directors of Dargaville Farms Ltd.
Each owed the company duties as directors under the Companies Act, at common law and at equity.
(e) Mr and Mrs Webster provided management services to Dargaville Farms Ltd through their company, Webster Family Management Ltd, an independent contractor. There was no employment relationship.
(f) Dargaville Farms Ltd leased the farms from Mr Li’s family trust.
That was a landlord/tenant relationship.
[18] For this case, Dargaville Farms Ltd does not accept that the management contract was exclusively with Webster Family Management Ltd. It contends that the
13 Above n 1, at [23].
Websters personally were parties to that contract. It also contends that Mr and Mrs Webster are contractually bound to it for the sale of livestock owned by Clear Ridge Station Ltd, Ridgeview Farms Ltd and Beejay Stud Ltd.
[19] Matters did not work out between Mr Li and the Websters. He lost confidence in them. Mr Li alleges that the Websters short delivered cattle on settlement, after settlement they sold stock without accounting for the proceeds and mismanaged the farms. On their side the Websters point to Mr Li’s inexperience in dairy farming, the fall in the dairy pay-out during 2016 and his alleged unwillingness to invest further funds into the farming operation. Each side rejects the other’s grievances.
[20] On 22 June 2016 Dargaville Farms Ltd gave notice to Webster Family Management Ltd cancelling the management contract. On 22 July 2017 Mr Li gave written notice of a shareholders’ meeting of Dargaville Farms Ltd to be held in Auckland on 10 August 2016. At the meeting, which the Websters did not attend, Mr Webster was removed as a director of Dargaville Farms Ltd, another director was appointed and the company gave a general security agreement to secure advances made by Mr Li’s trust. In response the Websters cancelled the deed of agreement for the sale and purchase of shares, called up their shareholder’s advances and successfully applied for summary judgment, resulting in the judgment for
$726,229.00 against Dargaville Farms Ltd.15
Preliminary matters
[21] There is no contest as to Dargaville Farms Ltd’s liability under my judgment. Dargaville Farms Ltd has not appealed against that decision. It has not applied for a stay of execution. In that decision I said:16
[53] … Mr Li has not pleaded any set-offs – and I have not been required to take into account any set-off arguments in this case. But through Mr Harte the defendants have indicated an intention to bring separate proceedings against the Websters. He referred to potential counterclaims. Mr Li and Dargaville Farms Ltd remain free to bring separate proceedings against the Websters or against Webster Farm
15 Webster v Li, above n 1.
Management Ltd for any remedies that Mr Li and Dargaville Farms Ltd consider they might have. The fact that they were not raised as defences to the application for summary judgment does not bar them from running separate proceedings for them. The entry of summary judgment against them on this application does not bar them from bringing their own separate proceedings against the Websters on a later occasion.
Dargaville Farms Ltd did not raise in defence of the Websters’ claim for summary judgment the matters it relies on for its cross-claim under s 290(4)(b). Perhaps it could have run them, but it was not required to do so. It is not an abuse of process for it to raise its cross-demands now, even if they might have been grounds for equitable set-off in the earlier proceeding.
[22] Dargaville Farms Ltd has had changes of representation, but that is irrelevant to deciding the merits of its application to set aside the statutory demand.
[23] The earlier proceeding was called on 1 May 2017 for further case management conference directions after the summary judgment decision. At that call counsel instructed for Dargaville Farms Ltd indicated that the company accepted its liability under the judgment and that payment would be made. While that counts against Dargaville Farms Ltd, it is not conclusive. A company is entitled to take further advice and, in light of that advice, to assert cross-demands, even if it had not made them before. The Websters do not claim any prejudice arising out of the submission of counsel on 1 May.
Dargaville Farms Ltd’s cross-demands
[24] In May 2017, Dargaville Farms Ltd and Mr Li started their own proceeding against the Websters – CIV-2017-488-53. There are four causes of action: breach of agreement for sale of livestock, inducing breach of contract, breach of management agreement and contractual misrepresentation. Dargaville Farms Ltd is the plaintiff for the first three causes of action and Mr Li is the plaintiff for the fourth. For this case, Dargaville Farms Ltd relies upon the three causes of action and also maintains that Websters are liable in conversion for sale of livestock after settlement.
[25] Dargaville Farms Ltd’s cross-demands are based on three complaints:
(a) Between 11 December 2015 and 29 January 2016 the Websters wrongly sold livestock that Beejay Stud Ltd, Clear Ridge Station Ltd and Ridgeview Farms Ltd were to supply to it;
(b)after 29 January 2016 the Websters sold livestock without accounting to it for the proceeds; and
(c) their management of the farms was sub-standard and resulted in livestock losses.
[26] For the period before 29 January 2016, it says that Clear Ridge Station Ltd made these sales of livestock, which were not shown in NAIT records17:
(a) 16 December 2015 184 bulls (b) 22 December 2015 19 cows (c) 17 January 2016 10 cows (d) 20 January 2016 11 bulls (e) 20 January 2016 12 cows
(f) 22 January 2016 24 bulls
260 bulls and cows
The Websters do not deny the sales but deny any liability for them. They say that their son, Jonathan, arranged the sales, as he was managing that farm. The evidence for Dargaville Farms Ltd includes a statement by another farmer that he dealt with Mr Webster, not his son, in arranging the purchase of 89 bulls sold on 16 December. The other sales are recorded on AFFCO letterhead animal status declarations, each of
them showing Jonathan as the person in charge.
17 Under the National Animal Identification and Tracing Act 2012, there are requirements to have a person in charge of animals, to identify animals and to declare their movements, deaths and losses.
[27] For the period after 29 January 2016, Dargaville Farms Ltd says that there was a sale of 11 cows in February 2016 but it has no record of receiving the proceeds of sale. It also relies on cows being sent to the works for slaughter as follows:
(a) 21 July 2016 26 cows and 2 heifers (b) 12 August 2016 28 cows and 3 heifers (c) 22 August 2016 48 cows and 11 heifers
(d) 12 October 2016 16 cows
Total: 118 cows and 16 heifers
Dargaville Farms Ltd acknowledges that it was paid for these but says that the loss was attributable to poor farm management by the Websters.
[28] Mr Li is suspicious that Beejay Stud Ltd and Ridgeview Farms Ltd also sold livestock between 11 December 2015 and 29 January 2016, but he offers no evidence in support. That part of his case is only speculative, as is his suspicion that the Websters made other sales after 29 January.
Sales of livestock before 29 January 2016
[29] The issue here is whether Dargaville Farms Ltd has a claim for breach of contract against the Websters for the sale of livestock by Clear Ridge Station Ltd before 29 January 2016. Under its contract with Clear Ridge Station Ltd, Dargaville Farms Ltd was to receive 1,965 head of stock.
[30] Before dealing with the contractual aspects, I note the difficulty with establishing livestock numbers. As already mentioned, there was no tally of livestock on that farm on settlement on 29 January 2016. There were stock counts on all the farms later. Mr Donald McKenzie, a livestock representative with Carrfields Livestock, carried out a tally on all the farms in May 2016, finding that the total number was 4,003 head of stock which he valued at $3,075,078.
He counted stock in paddocks where there were small mobs. He moved the larger mobs from one paddock to another carrying out a tally at the gate. His count cannot be conclusive as to the numbers at settlement, because it took place in May, some three-and-a-half months later. Ms Jodi Hawken, a field assistant with Livestock Improvement Corporation, carried out a herd audit on all farms in August 2016. She counted 3,085 head. She did not count bulls. There is evidence that a number of bulls were culled. This evidence as to later stock counts is not conclusive in determining the number of livestock present on the Clear Ridge Station farm on
29 January 2016. Dargaville Farms Ltd says that Ms Hawken’s stock count is to be preferred because she was able to identify each animal whereas Mr McKenzie could not be certain that he was not double counting cattle – the Websters could have moved animals from one farm to another. Establishing how many head of stock passed to Dargaville Farms Ltd on settlement is a trial issue, which is likely to require careful examination of livestock records, sale and purchase records and trucking invoices and to have regard to births and deaths.
[31] Notwithstanding that difficulty it is arguable for Dargaville Farms Ltd that it received less than 4487 head on settlement. The budget Mr Webster sent to Mr Li on
10 December 2015 said that there were 4,460 head. The 260 sold by Clear Ridge Station is arguably a deduction from the 4,460 Mr Webster had indicated were present on all three farms. The Websters do not give any evidence as to replacements. Dargaville Farms Ltd may have a claim that it received less than the
1,965 which Clear Ridge Station Ltd undertook to sell. That, however, is a claim against Clear Ridge Station Ltd. The question is whether Dargaville Farms Ltd has a claim against the Websters for breach of contract in addition to any against Clear Ridge Station Ltd.
[32] Dargaville Farms Ltd submits that it was the beneficiary of the promise in clause 3(iii) of the confidential terms of offer. It can enforce the promise that it would take “all livestock presently owned by Webster Group” against the Websters as they were parties to that promise, being part of the Webster Group. Dargaville Farms Ltd relies on the Contracts (Privity) Act 1982, s 4 in particular:
Deeds or contracts for the benefit of third parties
4Where a promise contained in a deed or contract confers, or purports to confer, a benefit on a person, designated by name, description, or reference to a class, who is not a party to the deed or contract (whether or not the person is in existence at the time when the deed or contract is made), the promisor shall be under an obligation, enforceable at the suit of that person, to perform that promise:
provided that this section shall not apply to a promise which, on the proper construction of the deed or contract, is not intended to create, in respect of the benefit, an obligation enforceable at the suit of that person.
(Emphasis added)
The words in brackets are significant because at the date of the Confidential Terms of Offer Dargaville Farms Ltd had not been incorporated. The benefit it claims under the agreement is that it was to take title to “all the livestock presently owned by the Webster Group” which includes all livestock owned by Clear Ridge Station Ltd. The Websters reject that interpretation. They submit that they were entitled to deal in livestock up to the settlement date, just as any other business sold as a going concern trades until it changes hands.
[33] Dargaville Farms Ltd cannot claim the benefit of the promise in clause 3(iii). That is a qualified promise. It does not take all livestock unconditionally – it is required to purchase them. It had to spend $3,700,000 plus GST on livestock and farm machinery. That is a contractual obligation. We are dealing with a contract purportedly made for a company before incorporation. Section 182 of the Companies Act 1993 applies:
182 Pre-incorporation contracts may be ratified
(1) In this section and in sections 183 to 185, the term pre- incorporation contract means—
(a) a contract purporting to be made by a company before its incorporation; or
(b) a contract made by a person on behalf of a company before and in contemplation of its incorporation.
(2) Notwithstanding any enactment or rule of law, a pre-incorporation contract may be ratified within such period as may be specified in the contract, or if no period is specified, then within a reasonable
time after the incorporation of the company in the name of which, or on behalf of which, it has been made.
(3) A contract that is ratified is as valid and enforceable as if the company had been a party to the contract when it was made.
(4) A pre-incorporation contract may be ratified by a company in the same manner as a contract may be entered into on behalf of a company under section 180.
(5) Notwithstanding the Contracts (Privity) Act 1982, if a pre-incorporation contract has not been ratified by a company, or validated by the court under section 184, the company may not enforce it or take the benefit of it.
[34] Relevantly, s 182(5) does not allow the Websters to rely on the Contracts (Privity) Act 1982. Accordingly, for Dargaville Farms Ltd to enforce any benefits under cl 3(iii), it had to ratify the contract. Otherwise it cannot sue on it.
[35] The agreements for sale and purchase of livestock between Dargaville Farms Ltd and Clear Ridge Station Ltd and the other companies do not purport to ratify the confidential terms of offer of 11 December 2015. They are new agreements, each with a single seller, under which Dargaville Farms Ltd bought specified numbers of cattle on each farm (instead of “all livestock presently owned by the Webster Group”) for prices totalling $3,138,650 (not $3,700,000 for livestock and farm machinery). The Websters are not parties to these agreements and cannot be sued for breaching them. Dargaville Farms Ltd has not ratified any agreement with Mr and Mrs Webster personally under which they are contractually bound to sell a given quantity of cattle from Clear Ridge Station Ltd. Accordingly, Dargaville Farms Ltd does not have a claim against Mr and Mrs Webster for breach of any agreement for the sale of livestock. That does not mean that Dargaville Farms Ltd may not have a claim against Clear Ridge Station Ltd. Conceivably, if Clear Ridge Station Ltd breached its agreement by short delivery of cattle, it may in turn have a remedy against Mr and Mrs Webster for breach of directors’ duties. But Dargaville Farms Ltd has not established that it has a claim directly against the Websters. It cannot sue the Websters for breach of any duty they owe Clear Ridge Station Ltd as its directors.
Inducing breach of contract
[36] Dargaville Farms Ltd alleges that Mr and Mrs Webster are liable in tort for inducing breaches of contract by reason of the short supply of livestock and the sales of livestock before 29 January 2016. These are said to be breaches of contract which Dargaville Farms Ltd was entitled to enforce. As already noted, the only contracts for the sale and purchase of livestock which Dargaville Farms Ltd may enforce are those made on 22 January 2016. For this part of the decision it is arguable for Dargaville Farms Ltd that Clear Ridge Station did not deliver all the 1,965 head it undertook to supply.
[37] The current leading case on the tort is OBG Ltd v Allan.18 Lord Hoffmann said of the elements of the tort:19
To be liable for inducing breach of contract, you must know that you are inducing a breach of contract. It is not enough that you know that you are procuring an act which, as a matter of law or construction of the contract, is a breach. You must actually realize that it will have this effect. Nor does it matter that you ought reasonably to have done so…
In Emerald Construction Co Ltd v Lowthian … union officials threatened a building contractor with a strike unless he terminated a subcontract for the supply of labour. The defendants obviously knew that there was a contract— they wanted it terminated—but the court found that they did not know its terms and, in particular, how soon it could be terminated. Lord Denning MR said…:
“Even if they did not know the actual terms of the contract, but had the means of knowledge—which they deliberately disregarded—that would be enough. Like the man who turns a blind eye. So here, if the officers deliberately sought to get this contract terminated, heedless of its terms, regardless whether it was terminated by breach or not, they would do wrong. For it is unlawful for a third person to procure a breach of contract knowingly, or recklessly, indifferent whether it is a breach or not.”
…
This statement of the law has since been followed in many cases and, so far as I am aware, has not given rise to any difficulty. It is in accordance with the general principle of law that a conscious decision not to inquire into the existence of a fact is in many cases treated as equivalent to knowledge of that fact.
…
18 OBG Ltd v Allan [2007] UKHL 21, [2008] 1 AC 1.
19 At [39]-[44].
The next question is what counts as an intention to procure a breach of contract. It is necessary for this purpose to distinguish between ends, means and consequences. If someone knowingly causes a breach of contract, it does not normally matter that it is the means by which he intends to achieve some further end or even that he would rather have been able to achieve that end without causing a breach… On the other hand, if the breach of contract is neither an end in itself nor a means to an end, but merely a foreseeable consequence, then in my opinion it cannot for this purpose be said to have been intended.
…
I think that one cannot be liable for inducing a breach unless there has been a breach. No secondary liability without primary liability.
[38] The Law of Torts in New Zealand derives these ingredients from the case:20
(a) There must be a legally enforceable contract in existence.
(b)The defendant must have engaged in conduct which in fact induced a breach of the contract.
(c) The defendant must have known that his or her conduct would induce the breach.
(d) The defendant’s conduct inducing the contract must have caused loss
or damage to the plaintiff.
(e) The defence of justification may arise.
[39] As Dargaville Farms Ltd is not a party to and did not ratify the confidential terms of offer, it cannot sue for breach of that agreement. It likewise cannot sue anyone for accessory liability in procuring a breach of that contract. As a party to the livestock sales agreements of 22 January 2016, it can sue for breaches of them after the agreements were made. It is arguable that Clear Ridge Station Ltd breached
its agreement with Dargaville Farms Ltd on 29 January 2016 by short supply.
20 Stephen Todd (ed) The Law of Torts in New Zealand (7th ed, Thomson Reuters, Wellington,
2016) at 13.2.01. The Court of Appeal accepted this formulation in Diver v Loktronic Industries
Ltd [2012] NZCA 131, [2012] 2 NZLR 388 at [30].
[40] For the mental elements of the tort, as Lord Hoffmann pointed out in OBG Ltd v Allan, it is not sufficient that the Websters ought to have realised that by causing Clear Ridge Station Ltd to agree to sell more stock than it had, they were inducing a breach of contract. Proof of actual knowledge is required. But that is a trial issue. Even then it is unlikely that Dargaville Farms Ltd will have direct evidence of the Websters’ knowledge and intentions. It may have no more than circumstantial evidence. At this stage the sales in [26] make a case based on circumstantial evidence arguable.
[41] As to conduct, it is arguable for Dargaville Farms Ltd that causing a company to enter into a contract which it cannot perform because the agent making the contract has disabled the company from performing completely is conduct by the agent that induces a breach of contract. That is, conduct before the contract is made may be considered, if all other elements of the tort are made out. All the sales in paragraph [26] above may count, not just the last on 22 January when the agreement was made, because the herd size had already been reduced before the agreement. This does not fit within the paradigm of procuring a breach of an existing contract – an existing contract capable of being performed which the tortfeasor intentionally arranges to be broken. But arranging matters so that as from the time of agreement a party will breach it also seems to count as procuring a breach.
[42] There is however an agency aspect. The alleged tortious conduct by the Websters was their actions as directors of Clear Ridge Station Ltd in making an agreement on its behalf to sell more cows than it held or could deliver. The question is whether they can incur personal liability to Dargaville Farms Ltd by causing Clear Ridge Station Ltd to enter into a contract they know it will breach. In general an employee or officer of a company does not incur personal liability for inducing an employer or the company (as the case may be) to break a contract. In Said v Butt
McCardie J said:21
But the servant who causes a breach of his master’s contract with a third person seems to stand in a wholly different position. He is not a stranger. He is the alter ego of his employer. In such a case it is the master himself, by his agent, breaking the contract he has made, and in my view an action against the agent under the Lumley v Gye principle must therefore fail, just
21 Said v Butt [1920] 3 KB 497 at 505-506.
as it would fail if brought against the master himself for wrongly procuring a breach of his own contract.
[43]
Similarly in Thomson (DC) & Co Ltd v Deakin Lord Evershed MR said:22
I have referred to cases where the intervener procured or persuaded a
servant. The difficulty of carrying the matter so far may be to some extent
illustrated by considering what would be the position of the servant, if he were persuaded to do something within the terms of his contract but (to his
knowledge) directed to procuring a breach of his master's contract. For in
such case a claim might be said to arise not only against the intervener but also against the servant. As was pointed out by Mr. Gardiner, so long as the
servant acted within the scope of his authority, the master would be
responsible for the act of the servant; in other words the servant's acts would be the master's acts, and the curious situation would then result that the master would be inducing a breach of his own contract. Quite plainly, he could not be sued both for breach of contract and also for inducing his own breach — in the latter event the damages being at large. So much, I think, emerged from the case of Said v. Butt, which was approved by this court in the case of G. Scammell & Nephew Ld. v. Hurley.
[44]
That also applies to directors.23 The Court of Appeal has accepted this.
In
Winchester International (NZ) Ltd v Cropmark Seeds Ltd CA 226/04 it said:24
But it is not every tort of intention that carries liability for the director in addition to that of the company. In Said v Butt [1920] 3 KB 497 McCardie J held that where a company breaches a contract the company employee whose conduct within the scope of employment is ascribed to the company is not usually personally liable for inducing breach of that contract. The decision was followed by Salmond J in Henderson v Kane [1924] NZLR
1073 and also in Canada, Australia and the United States: see Root Quality Pty Ltd v Root Control Pty Ltd (2000) 177 ALR 231, 263 per Finkelstein J. The position will be otherwise where the conduct is performed for the purpose of injuring another: Root Quality at 268. In Lord Steyn's phrase, the result must achieve practical justice.
[45] Dargaville Farms Ltd accepts the principle but says that it does not apply because the Websters were arguably acting in bad faith and not in the interests of the Clear Ridge Station Ltd. In Thomson (DC) & Co Ltd v Deakin Lord Evershed MR recognised that exception. Dargaville Farms Ltd cited Cook Strait Skyferry Ltd v Dennis Thompson International Ltd.25 That was a pleadings decision, where the
director of a company acting as an agent for the plaintiff was alleged to have
22 Thomson (DC) & Co Ltd v Deakin [1952] Ch 646 (CA) at 680.
23 Peter Watts Directors’ Powers and Duties (2nd ed, LexisNexis, Wellington 2015) at 13.3.
24 Winchester International (NZ) Ltd v Cropmark Seeds Ltd CA 226/04, 5 December 2005 at [55].
See also Diver v Loktronic Industries Ltd [2014] NZCA 457 at [133].
25 Cook Strait Skyferry Ltd v Dennis Thompson International Ltd [1993] 2 NZLR 72 (HC).
arranged a secret commission. The claim against him for inducing breach of contract was not struck out. This case is distinguishable. The Websters may be criticised for bad management in causing Clear Ridge Station Ltd to make a contract to sell more cattle than it could deliver and exposing it to a claim for breach of contract, but that does not take their conduct into the exception. If the Websters had made sure that the company sold only the number of cattle in its ownership, Mr Li is likely to have negotiated for a lower price. The livestock sales agreements show that the prices were calculated by fixing values for classes of cattle. By overpromising the numbers to be supplied the Websters got a higher price for the company. That was conduct within their roles as directors, even if it was shabby. Dargaville Farms Ltd does not have claim against the Websters for inducing breach of contract.
The conversion claim for the sale of cows in February 2016
[46] Mr Li has included in his evidence an extract from an animal status declaration book for Clear Ridge Station Ltd, showing a sale of 11 mixed age Friesian cows in February 2016. He says that there is no record of this sale or the receipt of any proceeds of sale in the accounts of Dargaville Farms Ltd. In response, Mrs Webster says:
The sale of all stock after the settlement date was carried out in Dargaville
Farms Limited’s name and proceeds processed to that company’s account.
The extract from the book Mr Li relies on shows the owner as “Dargaville Farms” and the destination of the cows as AFFCO. Jonathan Webster is named as the person in charge. There is nothing to show that the sale of these cows to AFFCO was unauthorised. Such a supply was in the ordinary course of business of Dargaville Farms Ltd. The Websters were managing the farming operation and could send cattle to the works.
[47] The real complaint is that the Websters misappropriated the proceeds of sale. That is an embezzlement allegation and as such is very serious. Mr Li has only asserted that the Websters did not account for the proceeds but he has not given any evidence in support. It should be possible to show some proof. Bank statements showing the company’s receipts are an obvious starting point. Records from AFFCO
would also help. Dargaville Farms Ltd has included AFFCO buyer-created tax invoices to prove other parts of its case. These record the customer, the property the animals came from, the buyer, the carrier, livestock details and payment arrangements, including method of payment and the bank account for payment. AFFCO records for 11 cows supplied in February 2016 are likely to be relevant. In the absence of any evidence except Mr Li’s assertion, Dargaville Farms Ltd has not given sufficient evidence for a prima case of embezzlement by the Websters. It has not proved a cross-demand for this matter.
[48] I accept that an application under s 290 to set aside a statutory demand must be made within a tight timeframe. Not all the evidence may be assembled within the ten working days for filing an application. But it is open to an applicant to provide further evidence after it has filed its application. Timetabling directions can accommodate that. An example of late evidence proving fraud is the Court of
Appeal’s decision in Industrial Group Ltd v Bakker.26
The mismanagement claim
[49] On 22 June 2016 Mr Li as director of Dargaville Farms Ltd gave notice to Webster Family Management Ltd terminating the management contract immediately. From that time on, the Websters no longer had any part in managing any of the farms. Dargaville Farms Ltd alleges mismanagement by the Websters. Mr Li says that the condition of the livestock on the farms was unacceptable. The animals suffered malnourishment, lameness, mastitis and stress. Mr Li, of course, is not qualified to give an informed opinion of these matters as he is inexperienced in dairy farming including animal husbandry. But a neighbour who lives next door to the Clear Ridge Station supports him. She has relevant animal husbandry qualifications and experience. She gives anecdotal evidence of poor animal husbandry on Clear Ridge Station.
[50] The farm manager who replaced the Websters in managing first the Clear
Ridge farm and later the Ridgeview farm says that when he took over the livestock were in appalling condition. He considered leaving the position as the extremely
26 Industrial Group Ltd v Bakker [2011] NZCA 297.
poor condition and the deaths of so many cows upset him greatly. The condition of the animals was worse than anything he had experienced and the number of stock deaths exceeded anything he had known before. He was concerned about his potential liability under the Animal Welfare Act 1999.
[51] The Websters take issue with that. They contend that livestock deaths were within acceptable numbers. They say that Mr Li was reluctant to make the financial investment required and that had been signalled in their budget forecast of December
2015. They criticise him for cutting back on expenditure, reducing staff and cancelling grazing leases. Those aspects go only to show that the issue of the Websters’ farm management is contentious, but it does not provide any clear-cut grounds for rejecting the case for Dargaville Farms Ltd. Obviously the Websters have arguable defences, but Dargaville Farms Ltd has raised an issue capable of serious consideration. Its case is that because some stock were in such poor condition they were sent to the works for slaughter: 134 cattle, 118 cows and 16 heifers. It claims for loss of production from these animals.
[52] The Websters say that they are not personally liable for these losses because they provided their management services through their company, Webster Family Management Ltd. They put in evidence an invoice for the company. They point out that Dargaville Farms Ltd terminated the contract with the company, not with them personally. On the other hand, Dargaville Farms Ltd points to the confidential terms of offer, cl 7, under which Mr and Mrs Webster undertook to manage the day-to-day activity and running of the farms and there were specific rates of remuneration for each of them.
[53] It may be arguable for the Websters that that contractual arrangement was varied so that they were replaced by Webster Family Management Ltd as the only entity dealing with Dargaville Farms Ltd under the farm management contract. But the argument is not conclusive. While Dargaville Farms Ltd paid Webster Family Management Ltd’s invoices, that may have been only because the Websters nominated their company as the payee.
[54] Aside from any contractual claim, Dargaville Farms Ltd has an arguable concurrent claim against the Websters in tort for negligence. It is well-established that in a special relationship involving the provision of services, there is a duty of care in tort. An assumption of responsibility may readily be found. The existence of a contract is no bar.27 There is a possible objection for the Websters that they were no more than directors of their company and did not personally assume responsibility. That relies on the Court of Appeal’s decision in Trevor Ivory Ltd v Anderson.28 But there are factors here that make it possible for Dargaville Farms Ltd to contend otherwise. Under cl 7 of the confidential terms of offer, the Websters personally undertook to provide management services. The clause fixed rates of remuneration for them personally. Webster Family Management Ltd could not have arranged for alternative managers for the farms without cutting across the
arrangements in the confidential terms of offer. Their assumption of responsibility under cl 7 arguably survived the incorporation of Webster Family Management Ltd. There is a reasonably arguable claim against them in negligence for not maintaining proper standards of animal husbandry leading to the loss of the animals sent to the works.
[55] There are two aspects to possible damages for Dargaville Farms Ltd: (a) Loss of value; and
(b) Loss of production.
[56] AFFCO paid $106,654.10 net of GST for the animals sent to the works. That is a slight overestimate because one of the AFFCO invoices is not complete. Not all the deductions for the invoice are shown. Against that Dargaville Farms Ltd has not shown the transport costs. For the values of the animals if they had been in good condition, I take representative values from those given by Mr McKenzie, who carried out the livestock count in May 2016. These are higher than those the parties adopted in the livestock sales agreements. I take $1100 per head for cows and $500
per head for heifers, a total of $137,800. That gives a loss of value of $31,146.
27 Henderson v Merrett Syndicates Ltd [1995] 2 AC 145 (HL).
28 Trevor Ivory Ltd v Anderson [1992] 2 NZLR 517 (CA).
[57] For loss of production, Dargaville Farms Ltd claims for lost payout from the time the stock were sent to the works for the rest of the season ending May 2017. I do not accept that approach. It had the opportunity to buy replacements at the start of the 2016-2017 season. With the drop in the payout in 2016, it is unlikely that prices for cattle rose. Any loss of production for the 2017 season is a loss that Dargaville Farms Ltd could avoid. Instead I assume that none of the cows produced from February 2016 to the end of that season. Spring calvers would have been dried out by the end of April at the latest. There is no indication of any autumn calvers. While they would have produced in the later part of the period they would not have supplied in the earlier part. I have made no allowance for heifers.
[58] Mr Li has provided some data from which it is possible to make a partial estimate of lost revenue. In the season ending 31 May 2016 Northland average milk production per cow was 322 kg of milk solids or 32.2 kg per milking month per cow
– 3799.6 kg for 118 cows. He has given the dairy company’s payout for each month.
The calculation is:
Feb 2016 3799.6 kg @ $4.15 per kg $15,768.34 March 2016 3799.6 kg @ $3.90
$14,818.44
April 2016 3799.6 kg @ $3.90
$14,818.44
Total
$45,405.22
[59] This is very rough and ready. Any farm consultant with more data would come up with a much better result. But I can only work with the available information. I am aware from practice that claims for lost dairy production are very hard to prove, particularly given the many variables involved. The Websters will object to my not having made any allowance for variable costs saved. In the hearing I suggested that might be only for extra electricity saved in the shed, but Mr Davies- Colley said that there would others. I have no figures to work on. Equally the assumption of no production at all from any of the cows is generous. On the other hand there is no allowance for carrying the animals to the works. I am concerned only to set the limit to the arguable elements of the claim for mismanagement.
[60] The sum of the two heads of loss is $76,551.22. I round that up to $77,000. As that is the limit of Dargaville Farms Ltd’s arguable cross-demand, it has no reason to object to paying the balance of the amount in the statutory demand:
$649,229.
Outcome
[61] The statutory demand is substantially upheld, except for the arguable cross- demand which may be up to $77,000. Dargaville Farms Ltd is required to pay the balance. There is nothing in the circumstances of this case to require an immediate liquidation order. I make these orders:
(a) I set aside the statutory demand except for the amount of $649,229.
(b) I order Dargaville Farms Ltd to pay the Websters $649,229 by
22 August 2017. If it does not pay, the Websters may begin an application for Dargaville Farms Ltd to be put into liquidation.
(c) Dargaville Farms Ltd is to pay the Websters costs on the application because the demand has on the whole been upheld. If the parties cannot agree costs, memoranda may be filed and I shall decide costs on the papers.
……………………………………
Associate Judge R M Bell
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