de Alwis v Luvit Foods International Ltd HC Auckland CIV-2002-404-1944
[2007] NZHC 1748
•23 May 2007
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2002-404-1944
BETWEEN VICTOR DE ALWIS First Plaintiff AND
M E AND H V DE ALWIS
Second Plaintiff
AND
JOHN WAH KUM Third Plaintiff
AND
CONNIE FAY LING KUM
Fourth Plaintiff
AND
MARSHA ADRIENNE TAI PING TAN Fifth Plaintiff
AND
PETER THUTT PITT WEE
Sixth Plaintiff
AND
PAUL SENG POH KHOR Seventh Plaintiff
AND
LUVIT FOODS INTERNATIONAL
LIMITED
First Defendant
Hearing:
15 May 2007
Appearances: G J Kohler for Plaintiffs
No appearance for Defendants
Judgment: 23 May 2007 at 12:30 pm
RESERVED JUDGMENT OF COURTNEY J
This judgment was delivered by Justice Courtney on 23 May 2007 at 12:30 pm
pursuant to r 540(4) of the High Court Rules
Registrar / Deputy Registrar
Date………………………..
DE ALWIS & ORS V LUVIT FOODS HC AK CIV-2002-404-1944 23 May 2007
ANDCREAN FOOK SEONG AKA JAMES CREAN
Second Defendant
ANDTENNET INTERNATIONAL LIMITED Third Defendant
Solicitors:
Counsel:
Morton Tee & Co, P 0 Box 331-133, Takapuna
Fax: (09) 489-7117
G J Kohler, P 0 Box 4338, Shortland Street Auckland
Fax: (09) 307-1572
Introduction
[1] Between March 2000 and September 2001 the plaintiffs invested a total of
$1.68m in the first defendant, Luvit Foods International (Luvit). Mr Chean, the second defendant, was the sole director and shareholder of Luvit. The investments were made on the strength of various representations made orally by Mr Chean and contained in an Information Memorandum. The plaintiffs have sued Mr Chean, Luvit and a related company, Tennet International Limited (Tennet), seeking a refund of their investments.
[2] The trial of this proceeding was to begin Monday 30 April 2007. However, late on the preceding Friday afternoon Mr Chean declared himself bankrupt. On
30 April 2007 the solicitor who had been acting for all the defendants was given leave to withdraw because he had no instructions. The plaintiffs wish to obtain judgment by formal proof against Mr Chean and Luvit (but not Tennet) and I heard evidence from the plaintiffs and their expert accountant witness.
Leave to continue proceeding against Mr Chean
[3] As a result of Mr Chean’s bankruptcy the plaintiffs need leave to continue the proceedings, as s 32 Insolvency Act 1967 provides:
Effect of adjudication on court proceedings
Subject to s 55 of the Apprenticeship Act 1983 upon an adjudication being advertised, all proceedings to recover any debt provable in the bankruptcy shall be stayed, but the Court may on application by any creditor or any person interested, allow any proceedings commenced to be continued on such terms and conditions as it thinks just.
[4] Section 32 clearly confers a wide discretion on the Court to be exercised according to the justice of the case. There are few cases in New Zealand in which leave has been sought under s 32. In Saimei v McKay & Ors HC AK CP543/96, however, Patterson J considered the principles that applied under the comparable UK legislation (see Bristol and West Building Society v Trustee of the Property of Back
[1998] 1 BCLC 485) and in New Zealand cases decided in relation to the predecessor to s 248(1)(c) Companies Act 1993. From those cases Patterson J identified what he referred to as principles but are probably better regarded as factors relevant to the exercise of the discretion.
[5] For the purposes of this case the relevant factors are:
•The need to ensure that the orderly administration of the bankruptcy is not affected and that there is no prejudice to other creditors;
• The claim should not be unsustainable;
•Whether the claim sought to be proceeded with is more suited to determination by action rather than the lodgings of proofs of debt in the bankruptcy;
•If there is no prospect of the plaintiff benefiting financially if leave were to be granted then that would count against leave being granted. The rationale for this seemed to be that if leave is given to continue with the proceeding there will be an inevitable claim on the legal aid funds to be met by the taxpayer;
[6] In the present case, I should start by noting that the Official Assignee has consented to leave being granted. I therefore assume that the Official Assignee does not regard the proceeding as one that would impede the orderly administration of the estate.
[7] I have also had the benefit of hearing evidence from each of the plaintiffs and an accountant as to the alleged misrepresentations and the lack of any reasonable basis for them. I am satisfied that the claim has merit. In addition, it is clearly one that is more suitably determined by a judgment than placing on the Official Assignee the burden of determining the proofs of debt.
[8] The extent of the estate is unknown, though the plaintiffs have expressed the belief that Mr Chean has either attempted to or has successfully disposed of assets either within New Zealand or overseas. So there may be some prospect of the plaintiffs recovering.
[9] I consider that the justice of this case requires that the plaintiffs be entitled to continue the proceeding against Mr Chean and therefore grant leave under s 32.
Claims under the Fair Trading Act 1986
Mr Chean and Luvit
[10] Mr Chean was the sole shareholder and director of Instant Wok International Limited, which manufactured frozen Asian food. He claimed to have patented a new form of maufacturing frozen Asian food that ensured a uniquely fresh appearance and taste and could be used in restaurants to allow for a “chef-less” kitchen, as well as being sold through supermarkets. The company did, in fact, secure some contracts, including with Woolworths Supermarket and Denny’s restaurants.
[11] In 1999 Mr Chean incorporated Luvit Foods which acquired all the shares in Instant Wok. Luvit’s majority shareholder was Tennet, which was also controlled by Mr Chean. Mr Chean then set about attracting investment in Luvit Foods for the stated purpose of expanding the business. The plaintiffs were either already friends or acquaintances of Mr Chean or introduced through such people. The plaintiffs have claimed against both Mr Chean and Luvit under s 9 and ss 13 and 15-18 Fair Trading Act 1986.
[12] There can be no doubt that misrepresentations were made by Mr Chean on behalf of Luvit and that Luvit was in trade for the purposes of the FTA. However, judgment is also sought against Mr Chean on the basis that he personally made the representations and was not a mere conduit for Luvit. The evidence was very clear that Mr Chean had spoken about his personal involvement in the development of Instant Wok, his personal ownership of the patents connected with the methods of
preparation, his personal willingness to give Luvit and the new investors the use of some of those patents and he made statements about Luvit’s financial performance and expected performance that went well beyond merely passing on information on behalf of the company. Significantly, financial statements for either Instant Wok or Luvit were never made available.
[13] It was abundantly clear from the evidence that the investors viewed Mr Chean as far more than a mere conduit. I am satisfied that he encouraged them to rely on him at a personal level. I am satisfied that Mr Chean conducted the negotiations with the potential investors in a way that results in personal responsibility for any misleading and deceptive conduct.
Alleged representations: first – fifth plaintiffs
[14] In February 2000 Mr Chean held a meeting of potential investors at Instant Wok’s factory. Those who attended included Mr de Alwis, the first plaintiff, Mr and Mrs Kum, the third and fourth plaintiffs, and Ms Tan, the fifth plaintiff. At the meeting Mr Chean spoke about the history of the Instant Wok business and talked about his plans to expand Luvit Foods into the international market. Mr Kum recalled Mr Chean explaining at some length the concept of his frozen Asian-style food produced through patented methods, some of which he would allow Luvit Foods to have free use of.
[15] Mr Chean distributed an Information Memorandum which contained similar statements about the history of Instant Wok and the plans for expansion. It also contained financial information. In particular:
a) There were sales projections for the year ending 31 January 2001 which showed various customers (including Dennys and Woolworths) and three projections, “optimistic”, “realistic” and “pessimistic”. The realistic projection was $4m in sales for the year ending 31 January
2001 including $1m to Dennys and $.3m to Woolworths;
b) At the foot of the page containing the sales projections was the statement:
Based on historical results and trends, a $700-$800,000 turnover should still result in a profit to the company. Since existing business and contracts currently being finalised will result in a significantly greater turnover, a healthy “margin of safety” is believed to exist.
c) The projected result for Luvit for the year enidng 31 January 2001 was a profit before tax of $778,567;
d)Another page of the Information Memorandum, headed “Introduce new shareholders” contained a diagram which explained process by which new shareholders would be introduced to Luvit Foods. The new shareholder shown in the diagram was called “AY” syndicate and some of the plaintiffs recalled Mr Chean explaining that, initially, he had been negotiating with “AY” syndicate but that negotiations had foundered because the syndicate was too greedy. However, that page included in the diagram the statement to the effect that Luvit had fixed assets and stock worth more than $1m;
e) Luvit’s projected turnover for the year ending 31 March 2001
$4,005,000;
f) Luvit’s projections for NZ supermarket sales was at least $360,000;
g) Luvit’s projections for Australian supermarket sales was at least
A$9000,000 with a projected gross profit margin of 40%;
h) Instant Wok would have projected sales figures for Woolworths of
$700,000 per annum with a minimum achievable figure of $350,000 per annum and a projected gross profit margin of 40%;
i) That sales to Denny’s had been $50,000 for the month of operation and had a mimimum achievable sales target of $1m per annum with a projected gross profit margin of 40%
j) Instant Wok would have sales to Happy Days of $8,000 for the first month and minimum achievable sales for the following 12 months of
$200,000 and a projected gross profit margin of 40%;
k)Sales to Taiwan and Japan were projected for the following 12 months to be $990,000 with a projected gross profit margin of 30% per annum.
[16] The plaintiffs who were present at that meeting gave evidence about statements that Mr Chean made. Although some of them empahsised different things, it was clear that Mr Chean made various representations, including particularly:
a) Instant Wok had been making a clear profit of around $200,000 after tax for the past few years;
b) The profit projections in the Information Memorandum were based on the profit that Instant Wok had already achieved and could comfortably achieve for the future without expansion;
c) Instant Wok had no outstanding creditors;
d) Luvit was only selling 30% of its shares;
e) The capital being sought would be used for the expansion of the business both in NZ and overseas.
[17] The fifth plaintiff, Ms Tan, purchased the shares using her father’s money and as trustee for him. She gave evidence of having gone to the meeting in February
2000 with her uncle, Mr Madrigal. Later she relayed to her father the oral representations that Mr Chean had made. Mr Madrigal had taken a copy of the Information Memorandum with him and also spoke to her father about the possibility of investment.
[18] Ms Tan sought to produce a brief of evidence signed by her father, who lives permanently in Malaysia. In his brief Mr Tan described the discussions he has had with Mr Madrigal and Ms Tan following their meeting at Instant Wok. Mr Tan had personally met Mr Chean in about April 2000, at which time he had received a copy of the prospectus himself and an explanation from Mr Chean about Luvit’s business plans and representations as to the profitability of the business. After that meeting the balance of $50,000 was paid.
[19] In August 2000 Mr Tan attended a meeting with Mr Chean and Mr and Mrs Kum at which Mr Chean sought more new capital from them to continue the expansion of the company. Mr Chean followed up this request in early 2001 and in April 2001 Mr Tan visited Auckland again and met Mr Chean and as a result of the discussions purchased a further 500,000 shares.
[20] Mr Kohler sought to have Mr Tan’s brief admitted pursuant to s 3 Evidence Amendment Act 1980 which permits the admission of documentary hearsay evidence where the maker of the statement had personal knowledge of the matters dealt with and undue delay or expense would be caused by obtaining his evidence.
[21] Mr Tan had arranged to be present for the trial of this matter on 30 April
2007. However, when Mr Chean declared himself bankrupt on the previous Friday he cancelled those arrangements (as he had done on the two previous occasions when trial dates had been adjourned). By then, his written brief had already been provided to the defendants. Mr Kohler submitted that it would be unduly expensive to require Mr Tan to come from Malaysia for the purposes of a formal proof hearing. Given the nature of the evidence, which largely corroborates what would otherwise be inferred from Ms Tan’s evidence, I accept that submission and allow Mr Tan’s evidence to be adduced by way of his written brief given in evidence by Ms Tan.
Alleged representations to sixth plaintiff
[22] Mr Wee was introduced to Mr Chean in late 1999 or early 2000 through a mutual friend. He went to a meeting at Luvit Foods factory shop in Pakuranga in May or June 2000. Mr Chean talked to him about the frozen Asian food concept,
how he had invented a special wok capable of producing the meals and freezing them quickly and efficiently and that all his inventions were patented.
[23] Mr Wee recalled representations of the kind described by the other plaintiffs i.e. that Instant Wok had contracts with Dennys, Happy Days and Woolworths, that the annual turnover of Instant Wok was estimated at $800,000 and had been turning out a clear profit of more than $200,000 per annum in recent years. The plan was to sell 30% of Luvit’s shares to new investors at 10 cents per share and that the money brought in through new investment would be used to expand the business. Mr Chean gave Mr Wee a copy of the February Information Memorandum and went through the document with him talking about the diagrams and the projections.
Alleged representations to seventh plaintiff
[24] Mr Khor was introduced to Mr Chean in mid-2000 and went to a meeting in June or July 2000 at the Instant Wok factory shop. Mr Chean talked to him about the patented process he had developed and that, even without expansion, Instant Wok was making a net profit of $200,000 a year. Mr Khor went to another meeting at Luvit Foods in August 2000 at which a copy of the February Information Memorandum was handed out. Mr Khor read through the memorandum and was impressed by the sales and profit projections.
Later representations
[25] In late 2000 Mr Chean sought more capital from some of the investors. Mr de Alwis gave evidence that Mr Chean asked him, Mr Wee, Mr Kum and Mr Khor to invest more capital because the company was expanding fast and more money was needed for the purchase of more production machinery and staff costs. Mr de Alwis introduced relatives to Mr Chean and eventually he and his sister and brother-in-law agreed to buy more shares with Mr de Alwis holding his relatives’ money and shares on trust for them because they lived overseas. At the end of December 2000 Mr Chean gave Mr de Alwis an Information Memorandum called “Luvit Foods of the World Memorandum January 2001”. He wanted Mr de Alwis to use the document to encourage investment from family and friends.
[26] Mr Kum confirmed Mr de Alwis’s recollection of being asked for further capital investment for the purpose of expansion. He recalled Mr Chean saying how much the shares had increased in value.
Investments
[27] On the strength of the Information Memorandum and Mr Chean’s statements the plaintiffs purchased shares in Luvit. The shares that they purchased were purchased from Tennet, the existing majority shareholder controlled by Mr Chean. The share purchases were:
a) Mr de Alwis purchased 3.6 million shares for $360,000 paid for as follows:
• 14 March 2000 - $100,000
• 10 May 2000 - $50,000
• 23 August 2000 - $50,000
• 14 December 2000 - $60,000
• 30 January 2001 - $5,700
• 2 February 2001 - $4,300
• 9 February 2001 - $4,200
• 8 February 2001 - $5,800
• 12 February 2001 - $80,000
b) Mrs de Alwis purchased 900,000 shares for $90,000 paid for as follows:
• 28 August 2001 - $50,000
• 14 December 2001 - $40,000
c) Mr Kum purchased 1.8 million shares for $180,000 paid for as follows:
• 6 March 2000 - $80,000
• 12 April 2000 - $20,000
• 19 March 2001 - $80,000
d) Mrs Kum purchased 3,060,000 for $306,000 paid for as follows:
• 12 April 2000 - $60,000
• 28 April 2000 - $40,000
• 1 August 2000 - $50,000
• 19 March 2001 - $20,000
• 18 May 2001 - $40,000
• 30 May 2001 - $60,000
e) Ms Tan purchased 1.5 million shares for $150,000 paid for as follows:
• 7 March 2000 - $50,000
• 9 May 2000 - $50,000
• 30 March 2001 $50,000
f) Mr Wee purchased 4.86 million shares for $576,000 paid for as follows:
• 28 July 2000 - $50,000
• 31 July 2000 - $20,000
• 9 April 2001 - $56,000
• 6 June 2001 - $300,000
• 27 September 2001 - $150,000
g) Mr Khor purchased 180,000 for $18,000 paid for as follows:
• 11 August 2000 - $10,000
• 30 March 2001 - $8,000
• The representations were false.
Representations false
[28] Mr Weber, an experienced chartered accountant gave evidence. He had examined various financial records for Instant Wok and Luvit Foods, including unaudited financial statements for Instant Wok for the financial years 1997 to 2000, Instant Wok’s interim accounts as at 31 December 1999 and a copy of the full trial balance as at 29 February 2000. He had examined the monthly cashbook summaries for Luvit Foods, unaudited financial statements for Luvit Foods for the financial years 2000 and 2001 and audited financial statements for the years 2002-2004.
[29] He gave evidence that none of the representations as to fact was true and there was no reasonable basis for the projections. In particular:
a) There was no reasonable basis for the representation that Luvit’s sales were realistically projected to be in excess of $4m for the year ended
31 January 2001. Luvit’s actual sales for the year to 31 March 2001 were $729,000 (18% of what the “realistic” projection was);
b) There was no basis for the representation that sales of $700-800,000 would result in a profit to Luvit because neither Luvit nor Instant Wok had ever achieved sales of more than $700,000. To the contrary, apart from a $22,000 profit in 1997 the companies had a history of losses which were growing year on year;
c) There was no basis for the projected result for Luvit for the year ended 31 March 2001 of a profit before tax of $778,567. On historical performance Luvit was never likely to achieve such profits and a projection of this at this level was simply unrealistic;
d)The representation that Luvit had fixed assets and stock worth more than $1m was untrue. Even after re-valuation of plant, fixed assets and stock were only valued in the company’s books at approximately
$724,000;
e) The representation that Luvit had achieved a net profit in excess of
$200,000 for the past several years was untrue Mr Weber had already commented on Luvit’s loss-making history since 1998 and the fact that the losses had been increasing annually. Luvit never recorded a profit of more than $22,000;
f) The representation that shares were being sold to provide a strong capital base to enable national and international expansion was untrue. Little of the $750,000 paid was used for this purpose. Instead it was used by Tennet to pay up its own capital obligations and by Luvit to repay the shareholder loan account to Tennet and to cover ongoing losses. Tennet made a profit of $675,000 on the sale of its shares and the capital injection of $630,000 was used to cover the accumulated
losses of Luvit and Instant Wok which, by 31 March 2001, totalled
about $230,000.
Loss
[30] All of the plaintiffs were consistent that, had they known the true position they would not have invested any of their money. The true position was so substantially different from that represented that I have no difficulty accepting that evidence. The amount invested represents the loss to the plaintiffs caused by the misrepresentations.
Securities Act 1978
[31] Claims are also made under s 37(6) Securities Act 1978 on the basis that the shares ought not have been offered to the plaintiffs without a registered prospectus complying with the Act and that in the absence of such a prospectus the allotment of security is void and of no effect.
[32] Section 33 Securities Act 1978 provides:
(1) No securities shall be offered to the public for subscription, by or on behalf of an issuer, unless -
(a) The offer is made in, or accompanied by, an authorised advertisement that is an investment statement that complies with this Act and regulations; or
(b) The offer is made in an authorised advertisement that is not an investment statement; or
(c) The offer is made in, or accompanied by, a registered prospectus that complies with this Act and regulations.
[33] Under s 3:
(1) Any reference in this Act to an offer of securities to the public shall be construed as including -
(a) A reference to offering the securities to any section of the public, however selected…
(2) None of the following offers shall constitute an offer of securities to the public:
(a) An offer of securities made to any or all of the following persons only:
(i) …
(iii) Any other person who in all the circumstances can properly be regarded as having been selected otherwise than as a member of the public...
[34] I note that the statement of defence to the third amended statement of claim specifically put in issue whether the offer to purchase shares was made to the public so as to require a prospectus. I was not addressed on this point in submissions.
[35] The purpose of the relevant provisions in the Securities Act is the protection of those members of the public who might be participating in the purchase of securities. The purpose was described by Richardson J in re AIC Merchant Finance Limited [1990] 2 NZLR 385 at 391 as follows:
The pattern of the Securities Act and the sanctions it imposes make it plain that the broad statutory goal is to facilitate the raising of capital by securing the timely disclosure of relevant information to prospective subscribers for securities. In that way the Act is aimed at the protection of investors. That aim is achieved by regulating the conduct of issuers of securities and by providing sanctions for infringement by those issuers and their officers.
[36] In Securities Commission v Kiwi Co-operative Dairies Limited [1995] 3
NZLR 26 the Court of Appeal considered the meaning of the “close business associates” exception and concluded that:
…The legislature must have regarded persons so defined [as close business associates] as a class sufficiently closely connected on a personal basis with the issuer that the assumption could be made that they would each have sufficient relevant knowledge of their relative’s affairs or the means of readily obtaining that knowledge.
[37] In this case, it is perfectly clear that none of the plaintiffs enjoyed a relationship with Mr Chean that comes anywhere near this description. None of the plaintiffs had known Mr Chean prior to late 1999 or early 2000. Apart from their investment in Luvit none had other business dealings with him. There was no close personal relationship between them. While the plaintiffs had all been introduced to Mr Chean by friends or acquaintances the connection falls well short of that required
by s 3(2). As a result, Luvit was required to comply with s 33 and ensure that its offer was accompanied by a registered prospectus.
[38] Section 37 provides:
(1) No allotment of a security offered to the public for subscription shall be made unless at the time of the subscription for the security there was a registered prospectus relating to the security…
(4) Any allotment made in contravention of the provisions of this section shall be invalid and of no effect.
(5) Where subscriptions for securities are received by or on behalf of an issuer but, by virtue of this section, the securities may not be alloted, or for any reason the securities are not alloted, the issuer shall ensure that…
(b) The subscriptions, together with such interest (if any) as has been earned thereon are repaid to the subscribers as soon as reasonably practicable.
(6) If any subscriptions to which this section applies are not so repaid within two months after the date on which the subscriptions were received by or on behalf of the issuer (or, in any case to which subsection (2) of this section applies, within five months after the date of the registered prospectus) the issuer and all directors thereof shall be jointly and severally liable to repay the subscriptions, together with interest at a rate prescribed from time to time by regulations made under this Act from the date on which the subscriptions were received by or on behalf of the issuer:
provided that a director shall not be so liable if he or she proves that the default in the repayment of the subscriptions was not due to any misconduct or negligence on his or her part.
[39] It was clear from the evidence that there was no registered prospectus supplied in relation to the offer to sell shares in Luvit. The pleading refers only to ss 33, 37 and 39 and I therefore treat the claim as being one for relief under s 37(6). The plaintiffs are entitled to judgment against both Luvit and Mr Chean under that section in the amount of their investments.
Conclusion
[40] I am satisfied on the evidence adduced by the plaintiffs that:
a) Through its Information Memorandum Luvit made misrepresentations about its past profitability, the basis for its projections and the purpose for which capital payments received from investors would be put;
b) Mr Chean made oral misrepresentations and also adopted the misrepresentations contained in the Information Memorandum about the past profitability of Luvit and Instant Wok, the basis for the projections and the use to which investment monies would be put;
c) These misrepresentations amounted to misleading and deceptive conduct for the purposes of the FTA and caused a loss to the plaintiffs to the extent of their respective investments in Luvit.
[41] In respect of the claim under the Securities Act 1978 I find that:
a) There was an offer of securities to the public;
b) Luvit was obliged to provide a registered prospectus in respect of the offer and its failure to do so has resulted in the allotment of the shares being void;
c) Both Luvit and Mr Chean are jointly and severally liable to repay the amount of the investment monies to the plaintiffs.
[42] There will be judgment as follows:
a) For the first plaintiff in the sum of $360,000;
b) For the second plaintiffs in the sum of $90,000;
c) For the third plaintiff in the sum of $180,000; d) For the fourth plaintiff in the sum of $306,000; e) For the fifth plaintiff in the sum of $150,000;
f) For the sixth plaintiff in the sum of $576,000;
g) For the seventh plaintiff in the sum of $18,000.
[43] The plaintiffs are entitled to interest at the relevant Judicature Act 1908 rates in respect of the Fair Trading Act claim, namely 11% from the various dates of payment down to 31 July 2002 and 7.5% thereafter. Interest in respect of the Securities Act 1978 claim runs at 10% pursuant to the Securities Regulations 1983.
[44] Mr Weber had provided a calculation of interest on the Judicature Act rates down to 30 April 2006, however Mr Kohler advised me that he would be able to file a memorandum containing an updated interest calculation down to the date of judgment, including a calculation at the rate prescribed by the Securities Regulations
1983. Mr Kohler also asked that he be permitted to address the issue of costs in a memorandum following the judgment. I therefore direct that there be a memorandum filed on behalf of the plaintiffs addressing the issue of both costs and
interest by 5 pm Friday 1 June 2007.
P Courtney J
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