DWA Limited v Enersave Products Limited

[2012] NZHC 2888

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV-2012-409-001190 [2012] NZHC 2888

BETWEEN  DWA LIMITED Plaintiff

ANDENERSAVE PRODUCTS LIMITED Defendant

Hearing:         31 October 2012

(Heard at Christchurch)

Appearances: G D Jones and S Goodwin for Plaintiff

H A Evans and S G Graham for Defendant

Judgment:      31 October 2012

ORALJUDGMENT OF ASSOCIATE JUDGE OSBORNE [as to liquidation of company]

[1]      The plaintiff (“DWA”) seeks an order putting the defendant (“Enersave”) into

liquidation.

[2]      Enersave’s statement of defence denies that it is unable to pay its debts, but that issue was not truly in contention at this hearing.  The real issue at the hearing was whether Enersave has sufficiently established a set off or counterclaim so as to justify my refusing in the Court’s discretion to wind Enersave up, despite Enersave’s insolvency.

Background

[3]      DWA lent Enersave $400,000 as vendor loan when Enersave purchased the

Enersave business in 2011.  The loan was to be fully repaid on 1 December 2011. Enersave did not repay it.

DWA LIMITED V ENERSAVE PRODUCTS LIMITED HC CHCH CIV-2012-409-001190 [31 October 2012]

[4]      DWA issued  a  statutory  demand  approximately  a  week  later.    Enersave applied to this Court to set aside the statutory demand.   It asserted a set off or counterclaim, which I have referred to, submitting that it came within $1,000 of or exceeded the DWA demand.

[5]      By my judgment of 10 May 2012,[1]  I dismissed the application for an order

setting aside DWA’s statutory demand.

[1] Enersave Products Ltd v DWA Ltd HC Christchurch CIV-2011-409-002658.

[6]      Ms Hopkins, who appeared for Enersave on the application, had in a written submission quantified a cross-claim at $416,681.35.

[7]      For the purposes  of determining the setting aside application,  I assumed (without deciding) that certain arguments of Enersave were indeed arguable.   The hearing focussed on the adequacy of the assumptions and calculations made as to the quantification of a cross-claim.  Ms Hopkins, in the course of her oral submissions, had to recognise some difficulties.  In my judgment I analysed the components of the quantification.  I  was  driven  to  the  inevitable  conclusion  that  the  counterclaim assessed by Ms Hopkins on revised calculations would not exceed the sum referred

to in DWA’s statutory demand, and would fall short by many thousand dollars.[2]

[2] Ibid at [17].

[8]      It was common ground between counsel that in assessing a potential cross- claim,  the Court  will  look  for appropriate particulars  and  a reasonable level  of detailed substantiation.   That was also common ground between counsel at this hearing.   Mr Jones and Mr Evans further accepted the formulation in Nemisis Holdings Ltd v North Harbour Industrial Holdings Ltd[3] that on a winding up application a defendant is required to establish a strong prima facie case of the existence of a genuine dispute on substantial grounds, or show that there are clear

and persuasive grounds for a stay.

[3] Nemisis Holdings Ltd v North Harbour Industrial Holdings Ltd  (1989) 1 PRNZ 379 per Wallace J at 385.

[9]      In my 10 May 2012 judgment, I granted Enersave an additional ten days in which to satisfy the statutory demand.  It did not do so.  Nor did it pay the costs and disbursements which were awarded.

[10]     DWA filed in June 2012 an application for an order putting Enersave into liquidation.

[11]     The application was met by Enersave by both a defence and an interlocutory application for a stay.  Interim arrangements were entered into between the parties. For convenience both matters (the stay and the substantive proceeding) were adjourned to a hearing today.

The intervening summary judgment application

[12]     Repayment of the $400,000 loan had been guaranteed by persons associated with  Enersave,  including  a  Mr  and  Mrs  Gillam  to  whom  I will  return.    DWA commenced  a  proceeding,  with  a  summary  judgment  application,  against  those parties in March 2012.  By his judgment of 27 July 2012,[4] Associate Judge Matthews found it appropriate to adjourn the application pending release of the judgment of the Court in this proceeding.  His Honour accepted the argument for the defendants that if Enersave establishes an arguable defence then the other defendants will be entitled to avail themselves of that defence.

The Enersave defence in this proceeding

[4] DWA Ltd v Gillam HC Christchurch CIV-2012-409-000440, 27 July 2012.

[13]     The Enersave defence, based on set off, is expressed almost identically in this proceeding as in the application to set aside the statutory demand.   In particular, under a heading “Affirmative defence – set off”, Enersave in this case pleads:

The plaintiff and defendant are parties to the agreement referred to at paragraph 4 of the plaintiff’s statement of claim which relates to the acquisition of the plaintiff’s business (Enersave Products).

Particulars

(a)       Pursuant  to  the  agreement,  the  plaintiff  undertook  to  do  the following:

(i)        Maintain a turnover and profitability of the business at the levels applicable at the date of the agreement but having regard to normal seasonal fluctuations.

(ii)      Maintain stocks and stores at such levels as are reasonable and sufficient for the normal conduct of the business; and

(iii)      Promptly notify the defendant of any events or change in circumstances likely to be adverse to the business or the assets or likely to be material to the defendant in its intended carrying on of the business.

(b)      Pursuant to the agreement the plaintiff warranted:

(i)        All information relating to the business, which is or might be material for the proper evaluation of the financial condition of the business and the trading prospects of the defendant in the business has been fully and accurately disclosed to the defendant in a manner which would not mislead a reasonable purchaser as to the state of the business or affect the defendant’s assessment of the appropriate price to be paid for the business; and

(ii)      It was not aware of any material circumstances which had not been disclosed in writing to the defendant prior to the date of the agreement and which might reasonably be expected to affect materially and adversely the financial position, profitability or prospects of the business.

(c)       In breach of the undertaking and warranties in the agreement, the plaintiff:

(i)       ordered  excessive  amounts  of  stock  prior  to  settlement,

despite  its  acknowledgement  that  it  considered  “circa”

$600,000 to be the appropriate stock levels and the defendant’s working capital ratios were adversely impacted by high stock holding levels;

(ii)      failed to disclose that much of the stock in hand or on order at the time of settlement was slow moving or obsolete;

(iii)     failed to disclose the stock turnover levels claim in the information memorandum were unachievable based on the amount of stock in hand or on order at the time of the settlement; and

(iv)      failed to disclose prior to settlement its employees had failed to pursue on sales leads and quotes valued at approximately

$3,000,000.

[14]     The virtually identical pleading in the application to set aside the statutory demand is set out at [3] of my 10 May 2012 judgment.

[15]     The fresh aspect of Enersave’s pleading in the present case is a concluding

paragraph which reads:

10.      As a result of the plaintiff’s breach of undertaking and warranties in

the agreement, the defendant has suffered a loss yet to be quantified.

[16]     This pleading of Enersave was filed on 6 July 2012.  Enersave subsequently filed affidavits in defence as recently as 26 October 2012.   The set off remained unquantified up to and at this hearing.

New material

[17]     Since the statutory demand hearing, Karen Gillam has become the managing director of Enersave and has had the effective day-to-day control of the company.  It is she who has sworn the primary evidence affidavit for Enersave in its defence.  Her ex-husband, Mr Mark Gillam, was the managing director of Enersave at the time of the setting aside application, gave the principal evidence and has since resigned for health  reasons.    Mr  Evans  has,  in  his  submissions,  explained  that  the  marital situation and particularly Mr Gillam’s health situation had a major impact on the ability of the Gillams to deal with some aspects of Enersave’s defence.  Nothing in the decision I made today or the reasons for it are to be taken by Mr and Mrs Gillam as any way minimising the Court’s appreciation of the fact that they have been through difficult times personally.

[18]     Mrs Gillam’s affidavit in opposition raises substantially the same range of

issues as raised on behalf of Enersave by Mr Gillam in the statutory demand context.

[19]     When I pressed Mr Evans at today’s hearing to identify what was new in Enersave’s  evidence,  but  was  not  available at  the date of the statutory demand hearing,  Mr  Evans  took  me  to  some  passages  in  Mrs  Gillam’s  affidavit.    For example, he took me to paragraphs 18, 19 and 20 which read:

18.I confirm that I have physically looked at the stock that we have on hand as at 24 October 2012 and have then compared that with the stock on hand on 20 May 2011. Annexed and marked “A” is a stock list dated 20 May 2011.   Stock Code 10078, refers to some thermostats with built-in sensors.  On 20 May 2011 there were 364 and they were all old stock – dated 2004 and 2006.  We have only sold 7 in the last 17 months and we still have 357 out of the original

364.

19.Stock Code 10092 relates to some thermostats.   They are all old, dating back to 2004.  Likewise, stock number 10094 shows that we have sold only 16 of these sensors from the original 205 in stock. These are dated 2008.

20.The problem with both of these items is that because the stock is so old, a number of the items that we have sold (of which there have been very few) are being returned to us because they are faulty.

[20]     As will be seen, those paragraphs provide some examples of stock which are asserted   by   Enersave   to   be   obsolete,   in   line   with   previous   allegations. Quantification, though, is again lacking.   There is also no attempt to demonstrate with regard to the bulk of the stock purchased that the same obsolescence issue arises.  There is, in the evidence, no extrapolation of figures to take set offs to any particular sum.

[21]     The set off is unquantified.  Isolated examples cannot reliably be taken by the Court as leading to any accurate overall conclusion.   In other words, the overall position is the same today as it was in May.

[22]     In her narrative affidavit, Mrs Gillam also referred to documentary exhibits with regard to some thermostats and commented on the out-of-date character of a significant number of thermostats.  But, again, she did so in an unquantified way (in terms of value), which does not allow the Court to draw reliable extrapolations.

[23]     There were aspects of Mrs Gillam’s evidence which were plainly hearsay.  To the extent the Court under the Evidence Act might consider hearsay evidence, Mrs Gillam failed to establish fundamental aspects of the source and reliability of hearsay which would be required.  I would have disregarded this evidence but, as it is, that particular evidence does not advance Enersave’s case given the other difficulties with it.

[24]     Finally, Enersave adduced additional evidence from Malcolm Hollis, who is known to this Court as  an insolvency specialist.   He was brought  in  to advise Enersave’s main financier, a secured financier.  Mr Hollis gives evidence as to Mrs Gillam’s apparent business competence, the achievability of her forecasts and her “turn around strategies”, neither of which were provided in evidence.   Mr Hollis deposes that he believes that Enersave is a viable business.

[25]     Mr Hollis concludes with two specific comments relevant in an insolvency context:

The primary issue that faces the business is whether it can be allowed time to manage its creditors.   If the business is properly managed, over time it should be able to generate profits from which to pay creditors.

Should creditors instead not be prepared to accept delayed payment or compromise their debt, as a last result Heartland will appoint me as receiver of the business.   Appointment documents have been prepared.  Invariably, this will result will likely result in less being available to creditors than if they agree to compromise their debts.

[26]     The thrust of Mr Hollis’s concluding evidence is that there is commercial reason to allow Enersave to trade out.  But underlying the evidence is a recognition that Enersave has not been able to pay its creditors its debts as they fall due.

The Court’s approach to rulings on statutory demands

[27]     Mr Jones put the legal aspect of his submissions in relation to the 10 May

2012 judgment on the statutory demand in terms of the doctrine of issue estoppel.  I was not attracted to an analysis that tried to come within that doctrine.   This was partly because, although such an application is brought as an originating application, it has some of the qualities of an interlocutory application.  It also is made at a time where all the evidence may not necessarily be in.  That said, there remains in the context of the legislative regime surrounding the corporate insolvency process, very good  reason  for  approaching  the  liquidation  hearing  with  some  parallel  to  the doctrine of issue estoppel.  The matter has been well dealt with in two judgments of

Master Venning in Investment Enterprises Ltd v Private Sale Co Ltd[5]  and in the

[5] Investment Enterprises Ltd v Private Sale Co Ltd (1997) 10 PRNZ 282

Commissioner of Inland Revenue v Carswell Investment Co Ltd.[6]    The first was an oral judgment which dealt with the situation of an unsuccessful statutory demand challenge at two brief points in the judgment.[7]   The second was a reserved judgment in which his Honour said this:

[6] Commissioner of Inland Revenue v Carswell Investment Co Ltd 20 NZTC, 17523 at [22].

[7] At 283-284.

[22] A Court may refuse to consider a defence raised on an application for liquidation based on a genuine dispute if the company has unsuccessfully made an application to set aside the statutory demand or if the company has failed to take steps to apply to set aside the statutory demand. However, while  the  Court  will  not  readily  allow  a  defendant  who  has  failed  to challenge a statutory demand (or a fortiori a defendant who has already unsuccessfully challenged a statutory demand) another opportunity to raise a dispute  at  the  hearing  of  a  liquidation  proceeding,  the  Court  retains  an overall discretion and if the application is seen as an abuse of process or unfair to the defendant the order for liquidation may be declined in the exercise  of  the  Court's  overall  discretion:  Investment  Enterprises  Ltd  v Private Sale Co Ltd 10 PRNZ 282; CIR v Abbatis Properties Ltd (2000) 19

NZTC 15,858.

[28]     I respectfully adopt both sets of passages from those decisions as stating the appropriate approach for this Court to adopt where a defendant has pursued unsuccessful applications to set aside a statutory demand.   Ultimately the Court retains its overall discretion to deal with situations of abuse of process or clear injustice.  But the procedures which the Court generally adopts must also observe the reasonable requirements of justice for creditors who have successfully defended the integrity of the statutory demand which they served at the start of the process.

[29]     I am not persuaded that such new aspects of evidence as the defendants sought to bear in this case should lead me to depart from the general approach outlined in Investment Enterprises Ltd v Private Sale Co Ltd and Commissioner of Inland Revenue v Carswell Investment Co Ltd.

Ultimate lack of quantification

[30]     I took the step this morning of adjourning the proceeding to a point later in the afternoon to enable Mr Evans to see whether a quantification of a set off claim

could on the evidence adduced be reasonably put forward so as to justify the Court’s

exercise of discretion against liquidation in this case.   Mr Evans has responsibly accepted, following the adjournment, that he is not able to put to the Court a reasonably quantified figure which would equate to, let alone come close to, the outstanding debt.   Mr Evans has emphasised the difficulties which have faced Mr and Mrs Gillam in being able to deal with all the issues that have confronted them and, in particular in this context, in completing an analysis and quantification of any set off claim.  Those difficulties cannot on the evidence assist Enersave.  Mr and Mrs Gillam accepted loan finance from DWA.   DWA is entitled, in the absence of a clearly established set off, to the repayment of its loan.  Enersave, in liquidation, will still be able to pursue any valid claim.  Equally, if Mr Hollis’s prognosis proves to be correct and a receiver is appointed, the receiver will be in a position to pursue any valid claim.

Adjournment

[31]     One aspect of the advertising of this application has not occurred by virtue of the sensible interim arrangements reached by the parties.  The Court is therefore not in a position to proceed with an order of liquidation today.  Advertising has to be completed.  In making the orders that I am now about to make, I am mindful of the purposes of advertising which include to allow other creditors to take a position for or against the winding up.    I am  conscious of what Mr Hollis has  said in his evidence.  Any other creditors of this defendant should understand that, if they have had knowledge of this proceeding to date, the Court is unlikely to favourably receive any opposition filed by such creditor as it could have been put forward for today’s hearing.

Orders

[32]     I order:

(a)       The defendant’s application for a stay is dismissed;

(b)There is a declaration that the plaintiff is entitled to judgment as to liquidation of the defendant subject only to the completion of advertising on the adjourned hearing of this application;

(c)       This proceeding, divorced of the stay application, is adjourned to the

List at 10.00 am, 13 November 2012.

(d)The defendant is to pay to the plaintiff (with no certificate for second counsel) the costs of this proceeding to date on a 2B basis, together with disbursements to be fixed by the Registrar.   The costs of this proceeding after today are reserved.

Associate Judge Osborne

Solicitors:

Lane Neave, PO Box 13149, Christchurch

Young Hunter, PO Box 929, Christchurch 8140