Design Electronics Limited v Lookman
[2020] NZHC 3036
•17 November 2020
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 loan was for five years. Evidence at a trial on whether the advances are now due would deal with each of the above questions on interpretation which emerge from the wording of the document, leaving the Court to establish its true meaning.
[26] It follows that Design Electronics has established an arguable case that the advances made by the Lookman Trustees are not repayable on demand.
1 Lookman v Design Electronics Ltd [2018] NZHC 904.
[7] The trustees later commenced proceedings and sought summary judgment for orders for specific performance requiring DEL to provide the information it was obliged to provide on a monthly basis in a timely way.
[8] In a judgment dated 18 December 2018 Associate Judge Matthews granted the trustees’ application for summary judgment.2
[9] The Trustees having secured an order for specific performance, when, in their assessment, DEL did not comply with its contractual obligations in relation to the provision of information, they asserted that DEL had repudiated the contract, purported to cancel the same and served a statutory demand for the outstanding balance. DEL applied for an order setting aside the statutory demand.
[10] In a judgment dated 23 September 2019, Associate Judge Lester concluded – as Associate Judge Matthews had done in the earlier proceeding – that the trustees’ statutory demand should be set aside because DEL had an arguable defence to the claim on which the statutory demand was based.3 His Honour’s reasoning is captured in paragraphs [17]–[23] of the judgment as follows:
[17] The effect of cancellation is set out in s 42 of the Contract and Commercial Law Act 2017 (“the Act”) which provides:
(1)When a contract is cancelled, the following provisions apply:
(a)to the extent that the contract remains unperformed at the time of the cancellation, no party is obliged or entitled to perform it further:
(b)to the extent that the contract has been performed at the time of the cancellation, no party is, by reason only of the cancellation, divested of any property transferred or money paid under the contract.
[18] LFT does not rely on a term of the Agreement to maintain the validity of its demand with Mr Downing’s submissions, stating: “we are not relying on the terms of the contract now”. LFT says its right to recover under s 42(3) or s 43(3)(a) of the Act is so clear cut as to be a fait accompli so much so that I can treat the amount claimed as being a debt due. Mr Downing emphasises that the amount claimed is not unliquidated – the amount being fixed by the sum advanced.
2 Lookman v Design Electronics Limited [2018] NZHC 3396.
3 Design Electronics Ltd v Lookman [2019] NZHC 2400.
[19] I cannot accept Mr Downing’s argument. DEL is not under an obligation to repay the debt – that is to perform the contact further by virtue of s 42(1). At that point, unless and until DEL has been ordered to pay either damages or a payment under s 43(3) no debt is owed by DEL to LFT.
[20] A debt which has fallen due for payment before cancellation but has not been paid at cancellation remains payable following cancellation. That rule is not applicable in the present case because of the finding by Associate Judge Matthews that it is arguable that the advance was intended to be for a five year term.
[21] LFT did not have an “unconditionally accrued right” to be repaid at the time of cancellation. Cancellation of itself did not create such a right for LFT where one did not previously exist. The Agreement between the parties does not have a provision making the advance repayable on cancellation. In the absence of such provision, cancellation of itself did not make the loan which was arguably for a five year term immediately due and payable. In other words, cancellation did not without more improve LFT’s position by converting what was arguably an advance for a five year term to an advance repayable upon demand.
[22] LFT, as a result of the application of s 42 of the Act, was obliged to seek relief under s 43 or seek damages. Section 43 confers a wide power on the Court to grant relief following cancellation. That LFT has the ability to seek relief under s 43 of the Act or damages does not mean that there is a presently due and payable debt that it can demand by way of a statutory demand. That position does not change because LDT believes its right to relief is clear cut.
[23] Accordingly, it follows that the application by DEL to set aside the statutory demand must be granted.
[11] The trustees then issued proceedings for an order setting aside the orders for specific performance in their favour and for an order cancelling the contract.
[12] That application was dealt with by Associate Judge Lester in a judgment dated 21 May 2020.4 His Honour made the orders sought setting aside the orders for specific performance. However, the Judge refused to make an order cancelling the contract, as his Honour did not consider DEL’s non-provision of information without more entitled the trustees to cancel.
[13] Seemingly in response to Associate Judge Lester’s observations in that judgment, the trustees have now taken the following steps:
4 Lookman v Design Electronics Limited [2020] NZHC 1066
(a)On 29 June 2020 they gave notice purporting to make time of the essence in terms of the provision of the information to be provided by DEL;
(b)When, in their assessment, DEL did not provide the information which
– it is common ground – was due on 9 June 2020, the trustees through their solicitors gave notice cancelling the contract;
(c)Then, on 28 July 2020, the trustees served their statutory demand.
[14]On 10 August 2020 DEL commenced this proceeding.
[15] For present purposes, DEL accepts that the trustees legitimately cancelled the contract.
[16] It is against that background that the issue identified at [1] arises. The issue is simply whether, upon cancellation, the debt that the trustees are owed by DEL became payable.
[17] As counsel submitted, surprisingly, there is no authority that addresses this point authoritatively.
[18] However, it appears to me that the position is straightforward. The cancellation of a contract for breach does not result in the contract being treated as void ab initio. Cancellation applies only to the future rights and obligations of the parties, that is to say their rights and obligations following cancellation.
[19] So, s 42(1)(a) provides that to the extent that the parties’ contractual obligations are unperformed as at the date of cancellation they are relieved of those obligations. And, s 42(1)(b) provides that to the extent that those obligations are performed cancellation does not necessitate their being unwound. The idea then is that cancellation freezes the position.
[20] Obviously, there are any number of circumstances in which that might operate unfairly to one or either or both parties. That is where ss 42(2), 42(3) and 43 become
relevant. Section 42(2) provides that ss 42(1)(a) and (b) are subject to what follows. Section 42(3) provides that nothing in s 42 is to operate so as to disentitle a party to recover damages for misrepresentation, or repudiation or breach of the contract, and s 43 confers on the Court a range of powers to grant relief following cancellation which are considerably wider than the formerly available common law remedies.
[21] The conclusion reached by Associate Judge Lester in his September 2019 decision was that it was at least arguable that the cancellation of the contract did not give rise to an automatic right – as it may well have done at common law – on the part of the trustees to treat the loan monies outstanding as repayable immediately; rather, that the trustees would have to seek and obtain an order under s 43 entitling them to recover those monies prior to the expiry of the term of the contract.
[22] For DEL, Ms Jamieson contended that the position was entirely clear from s 42(1)(b) and in particular the final part of the sentence in that clause which says that, to the extent that a contract has been performed as at the date of cancellation “… no party is, by reason only of the cancellation, divested of any property transferred or money paid under the contract”. Thus, the argument goes, the monies lent by the trustees to DEL constituted property transferred or money paid under the contract and that merely by reason of cancellation DEL could not be divested of the same, but rather that the trustees would have to obtain a Court order to that effect.
[23] It appears to me that there may be alternative contentions. For example if the focus is on s 42(1)(a) (as opposed to s 42(1)(b)) the obligation on the part of the trustees to lend the money they have lent until December 2021 might be regarded as an ongoing obligation which was unperformed as at the date of cancellation and it might be said that the trustees are by reason of the cancellation no longer obliged to perform it further and DEL is no longer entitled to expect it to be performed.
[24] However, in the end, like Associate Judge Lester, I take the view that it is at least arguable that cancellation in itself does not have the effect of turning a debt repayable at a future date into a debt payable immediately (unless of course the contract so provides, which this contract does not).
[25] In short I am satisfied that DEL has an arguable defence to the claim namely that the debt which is the subject matter of the trustees’ statutory demand was not and has never been a current debt, and will not be unless and until the trustees do what Associate Judge Lester indicated they needed to do and obtain an order to that effect.
[26] For those reasons, I make the order sought by DEL setting aside the trustees’ statutory demand.
[27] As to costs, DEL seeks an uplift of 50% on 2B scale costs in accordance with r 14.6 of the High Court Rules 2016. Its grounds for doing so are:
(a)Two Judges have already ruled that the amount demanded is not repayable on demand, and the trustees need to seek either relief under s 43 or damages; and
(b)It wrote to counsel for the trustees inviting them to withdraw the statutory demand to no avail.
[28] Taking or pursuing an unnecessary step or an argument that lacks merit is a ground for increased costs.5 Ms Jamieson referred me to two cases where an uplift of 50% on scale costs was ordered in circumstances where one party had issued a statutory demand despite correspondence asserting on credible grounds that there was a dispute or counterclaim.6
[29] I agree that this issue had in many ways already been resolved. It was clear – especially from Associate Judge Lester’s September 2019 judgment – that unless DEL has been ordered to pay either damages or a payment under s 43, there was no debt owed to the trustees. The fact DEL wrote to MMP lawyers on 31 July 2020 inviting them to withdraw the statutory demand in light of Associate Judge Lester’s decision confirms that the trustee’s solicitors were on notice – albeit from the opposing side – that their argument lacked merit or that the statutory demand was inappropriate.
5 High Court Rules, r 14.6(3)(b)(ii).
6 Four Avenues Property Group Limited v Higgs Construction Limited [2016] NZHC 1202 and
Summer Construction Limited v Bakker HC WN CIV-2006-485-1499, 10 November 2006.
[30] In these circumstances I consider an increased costs award to be appropriate. The applicant will have its costs on a 2B basis with an uplift of 50 per cent, together with such disbursements as may be allowed by the Registrar.
Associate Judge Johnston
Solicitors:
Tavendale and Partners, Christchurch for applicant McFadden McMeeken Phillips, Nelson for respondents
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