Design Electronics Ltd v Lookman
[2019] NZHC 2400
•23 September 2019
IN THE HIGH COURT OF NEW ZEALAND NELSON REGISTRY
I TE KŌTI MATUA O AOTEAROA WHAKATŪ ROHE
CIV-2019-442-00035
[2019] NZHC 2400
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 LTD as
Trustees of the LOOKMAN FAMILY TRUST
Respondents
Hearing: 16 September 2019 Appearances:
S J Jamieson for Applicant
G M Downing for Respondents
Judgment:
23 September 2019
JUDGMENT OF ASSOCIATE JUDGE LESTER
This judgment was delivered by me on 23 September 2019 at 3.30pm pursuant to Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar 23 September 2019
DESIGN ELECTRONICS LTD v LOOKMAN [2019] NZHC 2400 [23 September 2019]
[1] Design Electronics Ltd (“DEL”) applies to set aside a statutory demand issued by the Lookman Family Trust (“LFT”) which demands the sum of $1,855,794.50 described as being “the amount due and payable for the repayment of the principal and interest under an investment and shareholder agreement dated 14 December 2016”. Of the sum demanded, $35,794.50 is interest.
[2] This is the third proceeding between the parties to come before this Court in about 18 months. All the proceedings concern a document titled “Investment and Shareholding Agreement 14 December 2016”.
[3] The background is summarised in two paragraphs from Associate Judge Matthews decision of 2 May 2018:1
[12] On 14 December 2016 the parties entered an agreement titled “Investment and Shareholding Agreement 14 December 2016.” The agreement was for a term of five years “unless terminated earlier in accordance with its conditions”. It recorded that the Lookman trustees would advance $2,100,000 “on a reimbursement model” to Design Electronics from the date of an earlier promissory note issued on 8 May 2016. The funds were to be interest free for a period of one year from the date of the first advance, after which interest would be charged at 10 per cent per annum payable monthly. The document is expressed to be the entire agreement between the parties in relation to its subject matter, replacing and extinguishing all prior agreements, draft agreements, arrangements, undertakings or collateral contracts of any nature made by the parties, whether oral or written, in relation to such subject-matter.
[13] …
[14] The Lookman trustees have advanced $1,820,000 pursuant to this agreement. The security to be given to the Lookman trustees was “security over SenSys IP” the name SenSys being the defined name of Design Electronics in this agreement. A personal guarantee was also to be given to the Lookman trustees from the director of Design Electronics, Mr Warwick Jones.
[4] At issue in the 2 May 2018 judgment was whether the amount advanced by LFT was repayable on demand. Associate Judge Matthews concluded that DEL had established an arguable case that the advances made by LFT were not repayable on demand. LFT had issued a statutory demand for its advance of $1.82 million based on the debt being repayable on demand. The demand was not responded to and
1 Lookman v Design Electronics Ltd [2018] NZHC 904.
liquidation proceedings were issued. Those liquidation proceedings were stayed by Associate Judge Matthews given the finding by the Judge that I have referred to.
[5] LFT has issued a further statutory demand as recorded above. The context in which the new demand was issued is that the Investment and Shareholding Agreement conferred upon LFT an option exercisable up to 8 May 2019 whereby LFT could convert its debt to equity. LFT did not exercise that option and on 8 May 2019 had its solicitor write to DEL’s solicitor as follows:
This letter constitutes notice from Lookman Family Trust to Design Electronics Limited of cancellation of the 14 December 2016 Investment and Shareholder Agreement between the parties, on the basis of repudiation by Design Electronics Limited. Design Electronics Limited has breached its obligations under the Agreement by failing to provide the documentation and information required, failing to provide electronic access, failing to meet monthly, failing to comply with the High Court specific performance orders, and failing to pay interest when due.
The letter then went on to make demand for the amounts that were later claimed in the statutory demand.
[6]The reference to the High Court’s specific performance orders in the extract at
[5] is to orders made by Associate Judge Matthews in a separate proceeding between the parties which his Honour determined on 18 December 2018.2
[7] In the specific performance proceeding LFT sought orders requiring DEL to comply with terms of the Investment and Shareholding Agreement relating to the provision of records and access to DEL’s electronic accounting system. His Honour made the following orders:
[49] I am satisfied that the Court should enter summary judgment for the Lookman Trust on part of its claim by making orders for specific performance in the following terms:
(a)Design Electronics Ltd will forthwith provide access to the Lookman Family Trust to its electronic accounting system and records from 1 August 2017 and will continue to provide such access.
(b)Design Electronics Ltd will comply in every respect with the obligations imposed on it by clause 10 of the agreement between it and the Lookman Family Trust dated 14 December 2016. All
2 Lookman v Design Electronics Ltd [2018] NZHC 3396.
information required by that clause to be made available will include information for the period August 2017 to the end of the month before the first meeting following this judgment.
[8] Clause 10 of the Agreement (being the Investment and Shareholding Agreement) referred to in the second order set out above required:
Each month a meeting will be held on the 6th working day of the month. Date subject to change by prior agreement. The meeting is to provide information and be a focus for an overall view of the company, and to document agreements. Minutes will be recorded at the meetings and goals and decisions will be documented and prior meeting minutes discussed.
[9] Accordingly, the letter of cancellation relied on an asserted failure by DEL to comply with the above orders and to pay interest when due. LFT takes the view that, it having cancelled the Investment and Shareholder Agreement, its advance (which Associate Judge Matthews held was arguably for a term of five years) became due and payable upon LFT cancellation.
[10] DEL denies that it is in breach of its obligations, albeit the evidence of Mr Jones, the director of DEL, is minimal at best. Mr Jones says:
In any event, DEL denies that it has repudiated the agreement and should LFT file proceedings for breach of contract (which is the proper form for this issue to be raised) these will be defended by DEL.
[11] LFT gives detailed evidence of the breaches relied on and had DEL wished to defend its application on the basis that there was a reasonably arguable basis that it was not in breach, then it needed to engage with the detail of the breaches set out in LFT’s affidavit.
[12] The principal ground of opposition relied on by DEL is that the cancellation of the Agreement, assuming a valid cancellation, did not of itself make the advance due and payable.
[13] Before I turn to that ground of opposition there is a second issue touched on in Ms Jamieson’s (for DEL) letter of 22 May 2019 which relates to the fact that the matters said to amount to breaches of the Agreement by DEL are matters that are subject to the specific performance orders made by Associate Judge Matthews.
Ms Jamieson’s letter of 22 May 2019 responded to the letter of cancellation referred to at [5] above. Ms Jamieson’s letter passed on her client’s instructions that it had provided substantial information to LFT and said:
You did not bring the matter back before the High Court, so it could only be assumed that your client was content with the information that was provided.
Impact of specific performance order on ability to cancel
[14] Once a contract is subject to an order for specific performance the contract comes under the supervision of the Court that made the order.3
The preponderance of authority is that once an order for specific performance has been made, the contract is then under the control of the Court and only the Court can put an end to it.
[15] While there has been some academic criticism of the rule, the present state of the law is that a party with the benefit of a specific performance order cannot unilaterally cancel the contract ordered to be performed without bringing an application on notice.4 No application seeking to discharge the specific performance order or asking the Court to put an end to the contract was made in the proceeding in which the orders were made and nor could such an application be made in this proceeding given the statutory demand was issued on the assumption that the contract had been cancelled.5 The pre-condition for the cancellation of a contract where an order for specific performance has been made was not satisfied by LFT. It is therefore at least reasonably arguable that LFT’s cancellation was invalid meaning that its demand cannot stand on its own case. The demand cannot stand given the prior finding of Associate Judge Matthews that LFT’s advance was at least arguably for a five year term and it is only upon the cancellation of the agreement that LFT says that the five year term no longer applies.
DEL’s principal argument
[16]This is summarised at [12] above.
3 Alexander v Gitmans CA11/04, 17 June 2004 at [21], and see the detailed review of the authorities by Associate Judge Osborne as he then was in Pegasus Town Ltd v Wong (2010) 11 NZCPR 524.
4 Pegasus Town Ltd v Wong, above n 3, at [7] – [9].
5 Pegasus Town Ltd v Wong, above n 3, at [13] – [18].
[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.
[19] I cannot accept Mr Downing’s argument. DEL is not under an obligation to repay the debt – that is to perform the contract 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.6 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.7 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
6 Brown v Langwoods Photo Stores Ltd [1991] 1 NZLR 173.
7 Garratt v Ikeda [2002] 1 NZLR 577 at [20].
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 LFT 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.
Costs
[24] Mr Downing sought costs on behalf of his client, even in the event that the statutory demand was set aside. He did so as it is common ground that the amount of interest contained in the demand was due and payable and unpaid at the time the demand was issued.
[25] Accordingly, Mr Downing submitted that even if his arguments were not accepted in respect of the principal sum that nonetheless the demand was valid in respect of the interest. The interest was apparently only paid on 13 September 2019 and even then, it was not clear on the day this application was heard that it had been paid in clear funds, Mr Downing’s firm receiving an amount into their trust account paid direct by DEL.
[26] Ms Jamieson sought costs on behalf of her client if the application was set aside on the grounds that the real contest between the parties was always in respect of the principal amount of the advance and not the interest. Her submission was that the demand would be set aside because the amount of the demand so overstated the amount due that if the only amount outstanding was the $35,000 of interest, the demand would have been set aside but for that amount.
[27] The application to set aside the balance of the demand for $1.82 million having being granted means that in substance the applicant had succeeded. The substance of the case was always about the $1.82 million in principal which LFT sought to recover.
[28] Accordingly, there will be an award of costs in favour of DEL on a 2B basis together with disbursements as fixed by the Registrar, including counsel’s reasonable travel expenses. I decline Ms Jamieson’s application for an uplift in part upon the basis that the interest due as at the date of the statutory demand was apparently only paid on the last working day before the hearing on 16 September 2019, together with further interest that has accrued since May. Accordingly, I do not allow an uplift as the statutory demand was valid as to part, but only a very small part of the total amount claimed.
Associate Judge Lester
Solicitors:
Tavendale & Partners, Christchurch G M Downing, Nelson
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