DB Breweries Ltd v Hyndman
[2012] NZHC 2897
•5 November 2012
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IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV 2010-409-001408 [2012] NZHC 2897
BETWEEN DB BREWERIES LIMITED Plaintiff
ANDIAN BRUCE HYNDMAN Defendant
Hearing: 29 October 2012
Counsel: H A Evens and D R Weatherley for the Plaintiff
J Moss for the Defendant
Judgment: 5 November 2012
[RESERVED] JUDGMENT OF WYLIE J
This judgment was delivered by Justice Wylie
On 5 November 2012 at 12.00 pm
Pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Date:
Distribution:
HA Evans: [email protected]
D R Weatherley: [email protected]J Moss: [email protected]
DB BREWERIES LIMITED V HYNDMAN HC CHCH CIV 2010-409-001408 [5 November 2012]
Introduction
[1] These proceedings were commenced by way of summary judgment as long ago as 30 June 2010. They have not been finally resolved, and even now, the substantive issue — quantum — is not before the Court. Rather, three questions are posed for determination as preliminary questions of law.
[2] The questions are as follows:
(a) Did the receivers have the power or legal authority to sell the businesses of three debtor companies in one lot?;
(b)Depending on the answer to the first question, can the receivers now pursue the defendant, Mr Hyndman, if he did not agree to the inclusion of the company with which he is associated into the bundle for sale?;
(c) Depending on the answer to the first two questions, what is the legal test as to apportionment of the proceeds of sale that the receivers were obliged to follow, or alternatively, did they have a discretion?
[3] These questions were posed by Fogarty J in a minute issued on 4 October
2012. Leave was reserved to the parties to apply to refine the questions of law, or to add additional questions. They did not take advantage of that opportunity.
Background
[4] In order to understand the questions posed, it is necessary to briefly traverse the factual background.
[5] Mr Hyndman was a director of, and a 49 per cent shareholder in, Fish and Chip Shop Limited (“FCS”). He had two co-directors, a Mr David Henderson and a Mr Brenton Hunt. Mr Henderson, through an associated entity, owned the balance of the shares in the company.
[6] Mr Henderson and Mr Hunt were also directors of three other companies, Yellow Cross Brewing Company Limited (“YCB”), Edward J Swartz Entertainment Inc Limited (“EJS”) and Minx Limited (“Minx”). Mr Henderson and Mr Hunt, either directly, or through other entities associated with them, owned the shares in EJS. Mr Henderson owned the shares in YCB and in Minx. Mr Hyndman had no interest in YCB, EJS or Minx. Nor was he a director or officer of those companies.
[7] The plaintiff, DB Breweries Limited (“DB”), lent monies to each of the companies. The loans provided capital to the companies, to assist them with the development of bars that they owned. Although FCS owned only one bar, between them, the three companies owned six bars in total. They were all in relatively close proximity. Each of the companies entered into a loan and marketing services agreement with DB. Relevantly:
(a) FCS’s loan and marketing services agreement provided for two loans, one of $160,000 and the other of $150,000, each repayable on different repayment terms and dates. The agreement was dated
19 February 2008.
(b) YCB’s loan and marketing services agreement was dated 3 September
2007. It provided for one loan of $500,000, payable over five years, with repayments to be made on the anniversary of the date of the advance.
(c) EJS’s loan and marketing services agreement provided for three loans of $160,000, $40,000 and $100,000, on different repayment terms. The agreement was dated 11 October 2007.
[8] Mr Hyndman personally guaranteed the borrowing of FCS under its loan and marketing services agreement, but he was not a party to the agreements entered into by the other companies.
[9] On 18 July 2008, a deed of cross-guarantee and indemnity was entered into by the four companies in favour of DB. Mr Henderson and Mr Hunt executed the deed as directors of all four companies. Mr Hyndman did not sign the deed.
[10] In June 2009, the various companies fell into arrears. DB issued demands, including a demand against FCS dated 2 June 2009. A further demand was made on FCS on 30 July 2009, and on the same day, DB appointed a Mr Hollis and a Mr Noone as receivers of FCS. Messrs Hollis and Noone were also appointed as receivers of both YCB and EJS. DB did not appoint receivers for Minx.
[11] There was a separate deed of appointment for FCS.
[12] The receivers’ first report for the period 30 July 2009 to 30 September 2009 was issued on 30 September 2009. One report was issued covering all three companies in receivership. It recorded that YCB had preferential creditors, secured creditors and other creditors, and that the claims against it totalled $6,385,183. This figure included the total indebtedness of all three companies to DB — said to be
$1,117,189 — and it was not broken down on a company by company basis. EJS had preferential and general creditors, whose claims totalled $1,526,374 (excluding its indebtedness to DB). FCS had no preferential creditors. It had limited general creditors, and its liabilities (excluding its indebtedness to DB) totalled only
$109,399.
[13] The receivers traded the three businesses through until 15 December 2009. They did not deal with the trading receipts generated by each company on an individual basis. Rather, they pooled the income. Total sales generated by all three companies over the period totalled $1,937,928.
[14] On 15 December 2009, the receivers sold the businesses of the three companies in one sale to a single purchaser. The sale of the businesses generated total funds of $1,826,992. No prior valuation of each business was obtained. The sale proceeds were pooled.
[15] Total receipts from the three companies on a collective basis were
$4,257,672. Liabilities were pooled. Total payments made by the receivers against the liabilities of the companies totalled $4,257,673. This included a payment to DB of $585,812.
[16] No attempt was made to treat the individual companies separately, or to itemise on a company by company basis, either the monies received, or the monies paid out.
[17] DB considered that there were still monies outstanding and owing to it. It filed an interlocutory application seeking summary judgment and a statement of claim against the directors of the companies in receivership, including Mr Hyndman, as a director of FCS. Significantly, DB did not seek to recover the total shortfall it alleged was owing to it from Mr Hyndman. Rather, it based its pleading against him only on the FCS debt. It alleged as follows:
(a) that Mr Hyndman, along with the other two defendants, was a director of FCS;
(b)that FCS entered into the development, loan and marketing services agreement with DB;
(c) that the agreement contained various loan and guarantee terms, and that, inter alia, Mr Hyndman executed the agreement as a guarantor;
(d)that DB advanced the sum of $310,000 to FCS pursuant to the agreement;
(e) that FCS defaulted under the agreement;
(f) that DB made demand for the outstanding arrears on 30 July 2009, and that on the same day, it appointed receivers of FCS;
(g)that as a result of FCS’s breaches, the principal sum, together with all interest in respect of the loans became due and payable to DB;
(h)that by letter dated 18 May 2010, DB demanded from each of the defendants, including Mr Hyndman, the sum of $196,635.10, “being the amount due and owing under the FCS agreement (including the FCS loans)”, and
(i)that the other defendants and Mr Hyndman had refused or failed to pay.
Judgment was sought in the sum of $196,635.10, together with interest at the contractual rate of 11.2 per cent from 18 May 2010 down to the date of judgment.
[18] A notice of opposition and a relatively bald statement of defence was filed on behalf of Mr Hyndman. He denied that the sum of $196,635.10 remained owing to DB, but otherwise admitted the allegations made against him.
[19] A timetable order was made to bring the application on for hearing, and a date was fixed. That fixture was lost as a result of the Christchurch earthquakes.
[20] Ultimately, Mr Henderson was adjudicated bankrupt and Mr Hunt concluded a settlement with DB. Mr Hyndman became the sole defendant in the proceeding. He agreed to judgment being entered against him in relation to liability. He disputed, however, the quantum of DB’s claim against him.
[21] A three-day fixture was allocated to deal with quantum, due to commence on
29 October 2012. There were difficulties first with discovery and then with the time allocated for the hearing. Only three days were available, but given the number of witnesses the parties were proposing to call, it seemed likely that the hearing would take five days.
[22] On 4 October 2012, the matter came before Fogarty J by way of telephone conference. He observed that the parties were anticipating a reasonably long trial of up to five days with expert evidence. Fogarty J considered that there were three primary issues that needed to be determined prior to the substantive trial as to
quantum. To this end, he directed that the fixture should remain in place, but that its purpose would be to resolve the questions that I have set out above.
[23] Fogarty J clearly considered that resolution of the three questions posed might avoid the need for a substantive hearing. Unfortunately, that now seems unlikely to be the case. Rather, the hearing before me threw up the issue of whether or not DB can belatedly claim the total shortfall from Mr Hyndman, and not simply such part of the shortfall as can be attributed to FCS. The parties were not in a position to argue that issue. Mr Evans accepted that an amendment to DB’s pleadings would be necessary and that leave would be required. While he did not concede that DB cannot recover the total shortfall from Mr Hyndman, he was content that I should deal with the three questions posed on the basis of the pleadings as they stand, and in the circumstances, I have done so.
Submissions
[24] Detailed and careful submissions were filed by counsel for both parties.
[25] Mr Evans for DB submitted that the contractual relationship between the various parties was key to the issues which require determination:
(a) In relation to the first question, Mr Evans noted that the loan and marketing services agreement required FCS to provide an all obligations general security agreement over its present and future assets to DB, the personal guarantees of its directors, and a deed of waiver and continuance over its chattels located at its premises. He took me through the various provisions contained in the documents and submitted that the powers given to the receivers in the present case did permit them to pool the assets of the three companies in receivership. He noted further that the security given to DB extended to choses in action, and contractual rights, and submitted that, as a consequence, the receivers of FCS were possessed of its rights against YCB and EJS under the cross-guarantee. He argued that DB was entitled to FCS’s right of subrogation to take the assets of the other
two companies for itself if it was called upon to pay their debts pursuant to the cross-guarantee. As a consequence, he argued that the documents in place between the parties contemplated the pooling of assets.
(b)In relation to the second question, Mr Evans submitted that the words of the guarantee were paramount. He noted that Mr Hyndman was liable as a principal debtor. He noted that, inter alia, the guarantee provided that Mr Hyndman’s obligations as guarantor were not released by anything by which a guarantor would have been released if he had been liable as a surety only, and that, as a consequence, the pooling of the assets by the receivers did not serve to discharge Mr Hyndman from his liability as a guarantor, and that it was irrelevant that his consent was not sought.
(c) In relation to the third question, Mr Evans referred to a clause in the general terms forming part of the general security agreement, and submitted that DB had an absolute discretion to determine how any sum paid or otherwise credited to FCS was to be appropriated. He advised that DB was proposing two alternative methodologies for apportionment, either on the basis of each companies’ trading results during the receivership, or alternatively, on the basis of each companies’ proportion of the total debt owed to DB. He submitted that either of these methodologies was appropriate, and that there was no proper basis for Mr Hyndman to impugn either methodology, or to substitute one of his own.
[26] Mr Moss for Mr Hyndman relied not only on the documents, but also on the
Receiverships Act 1993 and the general law:
(a) In relation to the first question, Mr Moss submitted that there is no contractual power or legal authority permitting the receivers to sell the businesses of the three companies in one lot, or to globally pool the companies’ income, proceeds of sale, costs of receivership, and
liabilities. He referred to various provisions contained in the Receiverships Act, and to the agreements between the parties. He conceded that the receivers could sell the assets of each of the individual companies collectively to one party, but only if the relevant obligations contained in the security document and in the Receiverships Act were met. He submitted that each company’s assets had to be sold at an individual value, and that separate accounting was required in relation to each receivership.
(b)In relation to the second question, Mr Moss noted that Mr Hyndman’s consent to the pooling of the assets of the various companies for sale was not sought. He argued that it is impossible to now trace the proceeds of sale attributable to FCS, and that where a debt cannot be identified, it cannot be owed.
(c) In relation to the third question, Mr Moss submitted that there is no principled legal basis on which the apportionment proposed by DB can stand.
[27] Both counsel agreed that if the receivers were not permitted to pool the assets of the three companies for the purposes of sale, it is not necessary to answer questions 2 and 3.
Analysis
[28] A receiver is a person appointed to protect rights or to collect and protect property over which a security has been given.1 Normally, the security agreement in place between the creditor and the debtor will give the secured creditor the right to appoint a receiver in defined circumstances. The receiver will then usually be the
agent of the grantor (the debtor company).2
1 Laws of New Zealand Receivers at [1].
2 Receiverships Act 1993, s 6(3)
[29] In this country, the law relating to receivers is largely set out in the Receiverships Act 1993. A receiver has the powers and authorities expressly or impliedly conferred by the deed or agreement under which the appointment was made,3 and he or she may, inter alia, manage the property in receivership.4 While there is no express power conferred on a receiver by the Act permitting him or her to sell the assets of the debtor company, there will almost invariably be an express
power of sale conferred by the security documentation under which the appointment is made, and in any event, it seems likely that the sale of assets in the ordinary course of business is authorised as an incident of the express statutory power to manage the property in receivership.5
[30] In the present case, there was an express power of sale in the general terms attaching to the general security agreement. The issue is whether or not that express power of sale and other provisions in the documentation expressly or impliedly permitted the receivers appointed by DB to pool the assets of FCS with the assets of YCB and EJS for the purpose of sale, to sell these as one lot. I start by considering the security documentation in place between the parties, and then go on to consider the Receiverships Act.
The Security Documentation
[31] As noted, the loan and marketing services agreement between DB, FCS and Mr Hyndman as guarantor, was dated 19 February 2008. It recorded that DB and FCS were to work together to promote and sell DB products, and that to assist in offering service of the optimum quality, DB agreed to lend certain funds to FCS. The two loan advances, one of $160,000 and one of $150,000 were identified. It was recorded that the security was an all obligations general security agreement, personal guarantees from Messrs Henderson, Hunt and Hyndman, and a deed or waiver and
continuance over FCS’s chattels, located on its premises.
3 Ibid, s 14(i).
4 Ibid, s 14(2)(c).
5 P Blanchard and M Gedye, Private Receivers of Companies in New Zealand (3rd ed, LexisNexis, Wellington, 2008) at [10.12]].
[32] The guarantee was contained in cl 15 of sch 3 of the loan and marketing services agreement. Pursuant to the guarantee, Mr Hyndman guaranteed to DB the due and punctual performance and observance by FCS of its various obligations. He accepted that his obligations as guarantor were principal obligations and not obligations merely as a surety. He accepted that the guarantee constituted an unlimited, unconditional and continuing guarantee, and that it was irrevocable, and remained in full force and effect until all of the obligations under the loan and marketing services agreement had been performed, and all monies owing under the agreement had been fully paid.
[33] As required by the loan and marketing services agreement, FCS entered into a general security agreement. It was also dated 19 February 2008 (the document records that it is dated 19 February 2007, but it was common ground that this date is in error). It recorded that DB was granted a security interest over all of FCS’s present and after acquired property. FCS secured in favour of DB all “secured moneys” provided to it by DB “now and in the future”. Clause E of the general security agreement provided that Messrs Henderson, Hunt and Hyndman covenant with DB as provided in the general terms.
[34] The general security agreement incorporated a memorandum registered pursuant to s 155A of the Land Transfer Act 1952 under number 2007/4240. The general terms were contained in that memorandum. The words “secured moneys” were defined to include all monies which were “now or at any time in the future” owing by FCS as the party granting the security. They also included all monies owing in respect of any guarantee provided by FCS in favour of DB. The general terms also provided that any receiver or receivers appointed by DB as the security holder were to have specific powers. They could, for example, take possession of FCS’s “collateral” and carry on its business. Specifically, cl 25(c)(v) provided that the receivers could “sell all or any part or parts of that collateral in such manner and on such terms and conditions as the receiver thinks fit”. It was expressly recorded that the powers described in the general terms did not limit the powers given to the receiver by the Receiverships Act 1993.
[35] Mr Evans suggested that cl 25(c)(v) conferred the requisite power on the receivers to pool the assets. He argued that it conferred a broad and unfettered discretion, and that it extended to permit the receivers to sell the assets of FCS in receivership, on a pooled basis, together with the assets of YCB and EJS.
[36] I do not accept this submission:
(a) First, the general terms are incorporated into FCS’s security documentation. They do not, of themselves, extend to other companies in receivership. The general terms are confined to the contracting parties identified in the general security agreement.
(b)Secondly, to the extent that there is any doubt, the clause has to be read restrictively against DB, and any ambiguity has to be resolved in favour of Mr Hyndman as the guarantor.
(c) Thirdly, cl 25(c)(v) has to be read in the overall context of the general terms as a whole. In this regard, cl 25(g) provided that the net proceeds of any realisation or sale had to be applied by the receiver first in payment of costs, then in payment of preferential claims, then in payment of secured monies, and only then, could any surplus be paid to those entitled. It follows that the receivers were not permitted to apply the net proceeds of realisation of FCS’s assets, YCB’s assets and EJS’s assets, to meet costs payable by YCB or EJS, or to meet preferential claims owing by those companies, but not FCS. Clause 25(g) impliedly negatives any suggestion that the assets of companies in receivership can be pooled for the purposes of sale, because it precludes the net proceeds arising from a pooled sale being applied, on a pooled basis, to meet the liabilities of all of the companies whose assets had been sold.
[37] Mr Evans also argued that FCS’s assets secured in favour of DB extended to accounts receivable, including choses in action that were, or that at any time in the future, would be due and owing to it. He submitted that this meant that the receivers
of FCS, stood possessed of FCS’s rights against YCB and EJS under the cross-guarantee. He argued that FCS as a guarantor was entitled to have recourse to the assets of its co-sureties, and that that entitlement was a chose in action, and that it was part of a property over which FCS had granted security. He submitted that when the receivers were appointed, they succeeded to this chose in action, and that the “liabilities and assets of the respective companies were effectively pooled by virtue of the execution of the cross-guarantee”.
[38] I do not consider that this argument stands close analysis.
[39] A right of subrogation in favour of FCS could only arise if FCS met its obligations under the cross-guarantee.6 Here, there is no suggestion that FCS did meet the obligations of YCB or EJS pursuant to the cross-guarantee. Moreover, any rights FCS might have had under the cross-guarantee if it met its obligations, would not give it the right to bundle up the assets of its co-guarantors and treat all of the companies as one. The receivers could assume no better right than FCS.
[40] For these reasons, I do not consider that the security documentation in place between the parties either expressly or impliedly gave the receivers the right to pool the assets of FCS with the assets of YCB and EJS for the purposes of sale.
[41] I now turn to the Receiverships Act.
Receiverships Act 1993
[42] This Act applies to receivers appointed after the Act came into force. It is not a code and in many respects, it restates the common law.
[43] The Act provides that a receiver must exercise his or her powers in good faith and for a proper purpose.7 A receiver must also exercise his or her powers in a
manner he or she believes on reasonable grounds to be in the best interests of the
6 Royal Bank of Canada v Dickson (1973) 33 DLR (3D) 332; Bofinger & Anor v Kingsway
Group Ltd & Ors [2009] HCA 44, (2009) 260 ALR 71 at [4].
7 Receiverships Act 1993, s 18(1).
person in whose interests he or she was appointed. However, to the extent that it is consistent with these obligations, a receiver must also:
…exercise his or her powers with reasonable regard to the interests of—
(a) the grantor; and
(b) persons claiming, through the grantor, interests in the property in receivership; and
(c) unsecured creditors of the grantor; and
(d) sureties who may be called upon to fulfil obligations of the grantor.8
[44] Relevantly, the Act sets out a receiver’s duties when selling property.
Section 19 provides as follows:
A receiver who exercises a power of sale of property in receivership owes a duty to—
(a) the grantor; and
(b) persons claiming, through the grantor, interests in the property in receivership; and
(c) unsecured creditors of the grantor; and
(d) sureties who may be called upon to fulfil obligations of the grantor—
to obtain the best price reasonably obtainable as at the time of sale.
[45] The Act also places specific duties on receivers in relation to monies they receive relating to the property in receivership. Section 21 provides:
A receiver must keep money relating to the property in receivership separate from other money received in the course of, but not relating to, the receivership and from other money held by or under the control of the receiver.
[46] Similarly, s 22 provides as follows:
22 Accounting records
(1) A receiver must at all times keep accounting records that correctly record and explain the receipts, expenditure, and other transactions relating to the property in receivership.
8 Ibid, s 18(2).
(2) The accounting records must be retained for not less than 6 years after the receivership ends.
[47] It is noteworthy that the Receiverships Act does not make express provision for pooling. This can be contrasted with the regime for liquidations and administrations. Section 217 of the Companies Act 1993, applying to liquidations, provides that application can be made to the Court to pool the assets of related companies in limited circumstances. Sections 239AY, 239AEQ, 239AET, 239AEU,
239AEV, and 239AEW contain similar provisions in relation to administrations. Pooling is permitted by the Court only in limited circumstances, for example, where the companies are related, and it is necessary and just to pierce the corporate veil.9 It may be just to pierce the corporate veil where the companies have been trading in effect as one, or where it is not clear which assets the companies own, or where the creditors are the same between the various companies, or where a liquidation may be less successful if the companies were liquidated separately.
[48] In my view, the absence of such provisions in the Receiverships Act is telling.
[49] Further, the obligation placed on receivers to keep monies separate,10 and to prepare accounting records relating to the property in receivership, in my view, preclude any argument that pooling is allowed.
[50] Both ss 21 and 22 refer to money or transactions relating to “the property in receivership”. Those words are defined to mean property in respect of which a receiver has been appointed.11
[51] Here, Messrs Noone and Hollis were appointed as receivers of FCS. There was a separate deed of appointment in that regard. The property in receivership is the property of FCS which is secured by the security documentation, and in respect of which they have been appointed. The appointment does not extend to the property of YCB or EJS. It does not matter that YCB and EJS are also in
receivership, and that Messrs Noone and Hollis are their receivers. They have been
9 See for example, Mountfort v Tasman Pacific Airlines of NZ Ltd [2006] 1 NZLR 104.
10 Receiverships Act 1993, s 21.
11 Ibid, s 2.
separately appointed as receivers of these companies. There is a clear statutory obligation to keep monies relating to the property of FCS (in receivership) separate from other monies not relating to the receivership of FCS, and from other monies held by or under the control of the receivers of FCS. Separate accounting records are required to be kept, and the reports prepared by the receivers should have related solely to the receivership of FCS. The various statutory provisions in this regard compel the conclusion that the assets of the companies could not be pooled and sold in one lot.
[52] It is not clear as to whether or not parties can contract out of the provisions of the Receiverships Act. There is no express provision in this regard — although the tenor of the Act suggests that contracting out is not permitted. In any event, the security documents here in issue between the parties did not purport to do so. Rather, they recorded that the powers described in the security documentation did
not limit the powers given to receivers by the Act.12
[53] In my judgment, the Receiverships Act compels the conclusion that the receivers did not have the power or legal authority to sell the businesses of FCS, YCB and EJS in one lot as they have done in this case. If they considered that it might have been advantageous to sell the businesses together, and that doing so was consonant with their obligation under ss 18 and 19 of the Act, they should first have sought the agreement of the persons interested in the various companies, and obtained separate valuations of the businesses of each company. They should have committed themselves to dividing the proceeds of sale pro rata in accordance with the valuations received, and to applying the pro rata share of each company only to paying off the individual liabilities of that company. If the receivers had any doubt as to how they could best fulfil their duties, they should have applied to the Court for directions under s 34 of the Act.
[54] Given that my answer to question (a) is no, it is not necessary for me to go on and deal with questions (b) and (c), and I decline to do so.
12 General Terms and Conditions, cl 25(b).
Further Conduct of Proceedings
[55] The parties need time to consider their respective positions as a result of this judgment.
[56] I direct that the matter is to be placed in the appropriate case management list before the Duty Judge on the next available date, which is more than 15 working days after the date of this judgment. The Court will then expect that the parties to advise how they propose progressing issues from this point.
[57] The present hearing was not at the instigation of either party. Costs are reserved. They can be dealt with when and if the substantive matter proceeds to
hearing.
Wylie J
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