Design Electronics Limited v Lookman - [2020] NZHC 3036

IN THE HIGH COURT OF NEW ZEALAND NELSON REGISTRY

I TE KŌTI MATUA O AOTEAROA WHAKATŪ ROHE

CIV-2020-442-32

[2020] NZHC 3036

UNDER section 290 of the Companies Act 1993

IN THE MATTER OF

an application to set aside a statutory demand

BETWEEN

DESIGN ELECTRONICS LIMITED

Applicant

AND

MICHAEL ANDREW LOOKMAN and 187 BRIDGE TRUSTEES 53 LIMITED as

trustees of the Lookman Family Trust Respondents

Hearing: 9 November 2020

Appearances:

S Jamieson for applicant

G Downing for respondents

Judgment:

17 November 2020

JUDGMENT OF ASSOCIATE JUDGE JOHNSTON

[1] The issue raised by this application pursuant to s 290 of the Companies Act 1993 for an order setting aside a statutory demand is whether, in the context of a loan for a fixed term, where the agreement does not provide for early termination, or for the consequences of early cancellation by the lender for cause, such a cancellation gives rise to a debt entitling the lender to immediate repayment of the outstanding debt.

[2] The background is largely uncontroversial. On 14 December 2016 the trustees of the Lookman Family Trust and Design Electronics Ltd (DEL) – a start-up technology company - entered into an agreement that they called an “Investment and

DESIGN ELECTRONICS LIMITED v LOOKMAN [2020] NZHC 3036 [17 November 2020]

Shareholding Agreement”. The parties did not have the benefit of legal advice in the preparation of the agreement. They prepared the agreement themselves. Pursuant to this agreement the trustees agreed to lend and DEL agreed to borrow up to $2.1 million for a term of five years ending in December 2021. In the result, a total of $1.820 million was advanced by the trustees to DEL pursuant to the agreement.

[3]Clause 3 of the agreement provided as follows:

Investing and Shareholding Agreement (Agreement) commences on the commencement date will continue for a period of 5 years unless terminated earlier in accordance with its conditions.

[4]Almost from the outset the parties’ arrangements have been fraught.

[5] In March 2018, the trustees applied for an order appointing an interim liquidator to DEL. This application was predicated on the legitimacy of the trustees’ demand for repayment of the monies advanced to DEL, and their contention that the outstanding balance of the loan was repayable on demand.

[6] Associate Judge Matthews dealt with the trustees’ application in a judgment dated 2 May 2018.1 His Honour refused to make the order sought. The Judge concluded that DEL had an arguable case that the debt was not repayable on demand. Having reviewed the leading authorities as to when debts are repayable on demand, and analysed the provisions of this agreement in the light of those principles, the Judge concluded that:

[25] … Arguably the advances were for a period of five years, being the express term of the agreement, subject to their being converted to share capital at the option of the trustees. The description of the advances being made on a reimbursement model is obscure and may support or detract from the prospect that the…

Grounds of appeal

[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.

[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.

[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.

Consideration

[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.

[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.

Continue reading Design Electronics Limited v Lookman

Details

AGLC: Design Electronics Limited v Lookman [2020] NZHC 3036
Case: [2020] NZHC 3036
Decision Date: 17 November 2020

CaseChat Overview and Summary

Design Electronics Limited (DEL) sought to set aside a statutory demand issued by the trustees of the Lookman Family Trust (the Trustees) seeking repayment of the balance of a loan advanced to DEL. The dispute centred on whether the cancellation of a loan agreement resulted in the debt becoming payable immediately. The High Court found in favour of DEL, holding that the cancellation of the contract did not automatically make the debt payable immediately. The court held that the Trustees would need to seek relief under s 43 of the Contract and Commercial Law Act 2017 to recover the outstanding monies.

The legal issue was whether the cancellation of a loan agreement, which did not provide for early termination or the consequences of such an event, resulted in an immediate obligation to repay the outstanding debt. The court considered the effect of s 42 of the Contract and Commercial Law Act 2017, which provides that cancellation applies only to the future rights and obligations of the parties. The court found that the cancellation of the contract did not result in the debt becoming immediately payable, and that the Trustees would need to seek relief under s 43 of the Act to recover the outstanding monies. The court also found that the Trustees' statutory demand was inappropriate, given previous rulings that the debt was not repayable on demand.

The court granted DEL's application to set aside the statutory demand, and awarded DEL its costs on a 2B basis with an uplift of 50 per cent, together with such disbursements as may be allowed by the Registrar. The court held that the Trustees' pursuit of the statutory demand was an unnecessary step, given previous rulings on the matter and correspondence from DEL's solicitors to the Trustees' solicitors asserting on credible grounds that there was a dispute or counterclaim.

Orders