Foodwise Limited v Yummy Tums Limited HC Auckland CIV 2010-404-511

[2010] NZHC 1425

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2010-404-511

BETWEEN  FOODWISE LIMITED Plaintiff

ANDYUMMY TUMS LIMITED Defendant

Hearing:         9 June 2010

Counsel:         M Phillipps for Plaintiff

No appearance for Defendant

Judgment:      6 August 2010 at 4.30 pm

RESERVED JUDGMENT OF ASSOCIATE JUDGE SARGISSON (Liquidation Application)

This judgment was delivered by me on 6 August 2010 at 4.30 pm pursuant to

Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar

Date ..........................

Solicitors:

Markwick Law, Auckland

FOODWISE LIMITED V YUMMY TUMS LIMITED HC AK CIV-2010-404-511  6 August 2010

Introduction

[1]      The plaintiff, Foodwise Limited, seeks an order to liquidate the defendant, Yummy Tums Limited, under s 241(4)(a) of the Companies Act 1993, which allows the Court in its discretion to appoint a liquidator where a defendant company is unable to pay its debts.

[2]      Foodwise seeks the order on the basis that Yummy Tums is presumed to be unable to pay its debts under s 287 of the Act as it has failed to comply with the statutory demand it served on Yummy Tums in February 2009 requiring payment of

$124,005.88, ($112,829.69 plus contractual interest at 15 per cent per annum), which is overdue under their contractual arrangements.  In its application Foodwise has also raised in support that:

[4]      By an order dated 9 December 2009 and sealed on 21 December

2009 the High Court at Auckland:

(a)Dismissed an application by the defendant company to set aside the statutory demand dated 5 February 2009; and

(b)Required the defendant company to pay the debt claimed in the statutory demand on 21 December 2009;

(c)Provided that in default of payment, the plaintiff may apply to place the defendant company into liquidation; and

(d)Ordered costs in favour of the plaintiff against the defendant company in the sum of $5,480.00.

[3]      Foodwise has provided affidavit evidence in the usual way verifying the grounds it relies on in support of its application.

[4]      It is not in dispute that Yummy Tums’ failure to comply with the statutory demand continues despite the abovementioned order that I made and which is contained in my judgment issued on 9 December 2009: see Yummy Tums Limited v Foodwise Limited CIV-2009-404-876 HC Auckland, 9 December 2009.   The circumstances giving rise to the order are set out in the judgment and need not be repeated here.

[5]      Yummy Tums has taken no steps to oppose the application for an order for liquidation.  The opposition that has been raised is made by Ms Frances Hume, in her capacity as shareholder under r 31.16(2) of the High Court Rules. She is a director and one of two principal shareholders of Yummy Tums’.  She accepts that Yummy Tums owes the sum demanded but opposes the application essentially on the grounds that:

a)       Foodwise engineered the financial demise of Yummy Tums’ business by:

i)putting a halt to the provision of credit in December 2008 and ceasing supply of food products, and

ii)simultaneously, misappropriating Yummy Tums’ business by manufacturing food products to Yummy Tums’ recipes, and selling the products to Yummy Tums’ former distributors, Deejays  Limited,  who  in  turn  sold  them  to  its  former customers.

b)The result was that Yummy Tums could not generate funds in order to pay the existing debt to Foodwise either from further trading or from selling its business.  Further, its entire business was destroyed and it could not salvage anything of value from it.

c)       Yummy Tums has a claim in the District Court for losses, yet to be quantified, that were caused by these wrongs.   It will be unable to pursue the claim if it is placed into liquidation. The claims is made in passing off and  for breach of confidence for copying Yummy Tums products and promoting them as  substitutes on the basis that they are the same as Yummy Tums product.

d)       In these circumstances an order at this stage would be unjust.

[6]      There is a paucity of evidence from Ms Hume to support the grounds of opposition. In her affidavit evidence she makes no real attempt to verify or substantiate them other than to refer to Yummy Tums’ having brought proceedings in the District Court and having discovered a series of emails that allegedly show that Foodwise and Deejays worked together to cut Yummy Tums out of the supply chain. She refers to such emails in her affidavit evidence and purports to produce one as an exhibit without actually doing so.

[7]      It is nevertheless not in dispute, as made clear by both sides at the hearing, that in about December 2008 Foodwise ceased supply for non-payment after Yummy Tums remained unable to meet repeated requests for payment and had been given notice of the probable consequences. Similarly, it was not in dispute that:

a)       Foodwise  was,  by  the  agreed  standard  terms  of  trade,  entitled  to cancel its supply of product if Yummy Tums did not meet those terms of trade and the regular payments required by them.

b)Yummy Tums introduced Deejays to Foodwise sometime in late 2008 when, faced with difficulty in paying its outstanding debt, it entered into discussions with Deejays with a view to exploring the possibility of the sale of its business to Deejays.   The discussions were unsuccessful.

c)       After it ceased supply to Yummy Tums, Foodwise commenced supply of similar products to Deejays.

[8]      Ms Hume submitted, without providing any evidential support, that Foodwise interfered with the sale of Deejays and that it entered into an arrangement during its due diligence on the possible sale.

[9]      Counsel for Foodwise indicated that its position was unchanged from that advanced at the hearing on Yummy Tums’ unsuccessful application to set aside the

statutory demand, but that given the paucity of evidence from Ms Hume it was not thought necessary to file fresh evidence to the same effect.  It is sufficient to note that he submitted that Deejays’ decision not to pursue the purchase of Yummy Tums’ business was entirely Deejay’s affair, and that Foodwise dealt directly with Deejays only after its own contractual arrangements with Yummy Tums had broken down entirely.  It maintains that the products it was supplying to Yummy Tums were of a generic kind in which there were no rights of ownership and there were no contractual constraints binding on it as far as manufacturing and sale are concerned.

[10]     For completeness it is also useful to note at the outset that at the hearing Ms Hume  accepted  that  Yummy  Tums  remains  unable  to  pay  the  debt  owed  to Foodwise.  Any claim it might have against Foodwise could not be a permanent bar to an order for liquidation unless the claim were to be successful in an amount that either exceeds or virtually equates to the amount of the statutory demand: see s

290(4)(b) of the Act.   (The net effect of that provision is that there must be an arguable counterclaim in debt that exceeds the debt that is the subject of the demand or when set off would leave a debt of $1,000 or less, so that the damages, when off- set, would extinguish or virtually extinguish the debt).  Ms Hume indicated that she was hoping for a short stay to allow Yummy Tums to quantify the losses and to proceed with the District Court proceeding.

[11]     In these last respects, Ms Hume contends that Yummy Tums does indeed have a good claim that is at least equivalent to the amount of the statutory demand. As was the case at the earlier hearing, there is however no evidence before me that shows any quantification of the amount of the claim that Yummy Tums relies on, or any such attempt at quantification.   There is evidence, in the form of an exhibit attached to Ms Hume’s affidavit evidence, from an accountant, but it falls well short of providing any assessment of the losses Yummy Tums claims. It asserts essentially that there must have been some losses.

The Law

[12]     The Court may make an order under s 241 of the Companies Act 1993 that a company be put into liquidation by the appointment of a liquidator on the application

of a creditor if it is satisfied that the company is unable to pay its debts.  Section 287 of the Act provides that unless the contrary is proved, a company is presumed to be unable to pay its debts if the company has failed to comply with a statutory demand.

[13]     The appointment of a liquidator is a matter of discretion and even if there are grounds for the appointment of a liquidator, the Court reserves the right to refuse to put a company into liquidation.    However, the Court will exercise this jurisdiction sparingly.  The normal rule is that if the relevant requirements have been met, the person making the application is entitled to an order for the company’s liquidation.

[14]     However,  the  Court  will  sometimes  stay the  liquidation  application.  The governing consideration is whether the proceedings savour of unfairness or undue pressure.  It is, however, a serious matter to stay winding up proceedings so that the decision to do so is never made lightly.   Where the debtor fails to demonstrate a strong prima facie defence to the primary debt, or an arguable counterclaim of equivalent value, it is difficult to conceive of any circumstances where a stay would be justified: see Leucadia National Corporation v Wilson Neill Ltd Auckland CP365/94, 12 July 1996 per Fisher J.

[15]     Normally, a defendant that has failed to apply to set aside a statutory demand in  time  will  not  be  permitted  to  raise  a  substantive  defence  at  the  subsequent litigation proceedings.  The statutory procedure is clear.  The onus is on a company in receipt of a statutory demand to follow that procedure and apply to set it aside. However, in rare cases the Court will hear and consider a substantive challenge to the  debt  that  provides  the  basis  for  the  proceeding,  even  at  the  stage  of  the liquidation proceeding: Investment Enterprises Ltd v The Private Sale Co Ltd (1997)

10 PRNZ 282 (HC).

[16]     I turn next then to consider the grounds raised by Ms Hume with these principles in mind.

Discussion

[17]     There  is  no  dispute  that  Yummy Tums  owes,  and  is  unable  to  pay,  the amount claimed in the statutory demand.  On the face of it, therefore, Foodwise can now expect that an order for liquidation will be made unless there is a counterclaim of equivalent value or there are sufficient discretionary factors sufficient to justify deferring the making of an order.

[18]     In support Ms Hume relies principally on the claim Yummy Tums has filed in the District Court as being a claim of equivalent value to its debt to Foodwise. As was the position with Yummy Tums’ application to set aside the statutory demand, there is no room on the evidence to find that there is an arguable counterclaim of equivalent value.

[19]     The position remains essentially as described in my earlier judgment:

[21]... it is unnecessary to determine the arguability of the various causes of action on which the counterclaim is based.  This is because even assuming  that  Yummy  Tums  were  able  to  show  that  it  has  an arguable counterclaim based on one or other of the four actions it claims to have, there is no evidence that indicates the counterclaim would be for the required minimum amount.  Yummy Tums’ alleged loss was advanced on the basis of the value of the business it says it would have been able to sell but for Foodwise’s conduct.  Ms Hume deposes that the business was worth far more than the amount of Foodwise’s statutory demand.  But there was no attempt to identify what that value might be, or to provide some confirmation of that value.  The Court has only Ms Hume’s assertion that the company had the kind of value she claims.   That does not go far enough to satisfy the proviso in s 290(4)(b).

[22]Indeed, as against Ms Hume’s assertion as to value, stand other factors that appear to belie the assertion.   Most significantly is Yummy Tums’ long outstanding and substantial debt, which it effectively funded by Foodwise’s indulgence.  The debt existed well before  the  occurrence  of  the  events  relied  on  in  support  of  the alleged counterclaim, and there is no indication that Yummy Tums is or was ever in a position to obtain other funding in order to clear the debt and manage its business so as to meet its debts to Foodwise in a timely way.   Indeed there is no hint of a suggestion that Yummy Tums had the ability to put other funding arrangements in place or to provide security for such funding.  There is also no indication that Yummy Tums had substantial fixed or other assets of value it could liquidate to meet the debt.   It appears it had goodwill but it is of unidentified value in the evidence. Nor is there any evidence of what it was seeking for its business or that it had any realistic prospect of

realising  that  amount.    Given  this  situation,  it  is  impossible  to identify any support in the evidence that quantifies the value the business had, or that confirms rather than counters the contention that the business was worth far more than the amount of Foodwise’s statutory demand.

[23]In  Datasouth  Holdings  Ltd  v  Melco  Sales  (NZ)  Ltd  HC  CHCH M41/96   17   May   1996,   the   Court   held   that   contingent   and unquantified counter-claims or set-offs cannot assist an applicant to set aside a statutory demand because under s 290(4)(b) the counter- claim or set-off must be quantified so the Court can determine whether the amount specified in the demand less the amount of the counter-claim or set-off is less than the prescribed amount. Likewise, in Alfex Doors and Windows Ltd v Alutech Windows and Doors Ltd (2001) 16 PRNZ 963, the Court of Appeal held that an unquantified claim for liquidated damages will not generally meet the generally accepted threshold of a “fairly arguable basis”.

[24]The first ground must therefore fail.   The alleged counterclaim is unquantified and there is no confirmation that it had a value that exceeded or came close to the undisputed debt Yummy Tums owes.

[20]     Therefore, even if it could be said that there might be a claim arising from events that occurred in or after late 2009, as the evidence lacks any particularisation of the alleged loss, a key element or threshold of a fairly arguable basis for the claim is not met.

[21]     That brings me to the question whether nevertheless there  are  any other circumstances to warrant an order, in the exercise of the Court’s discretion, to at least stay  the  liquidation  proceeding  pending  the  outcome  of  the  District  Court proceeding.  The answer to that question must in my assessment be in the negative. My brief reasons follow.

[22]     As the Court said in Leucadia, where the debtor fails to demonstrate that the debt is the subject of a substantial dispute or an arguable counterclaim of equivalent value, it is difficult to conceive of any circumstances where a stay would be justified. The governing consideration is unfairness or undue pressure. In a similar vein, in Commissioner of Inland Revenue v ChesterTrustee Services Limited [2003] 1 NZLR

393 (CA), Tipping J considered that in order to avoid liquidation the discretionary factors relied on must be sufficiently compelling to overcome the general policy of the Act.

[23]     Here,  the  evidence  falls  well  short  of  establishing  unfairness  or  undue pressure or other compelling reason. The unfairness Ms Hume relies on rests essentially on two contentions.   First, that Foodwise, together with Deejays, engineered the demise of Yummy Tums business to take the benefit of its product, and secondly that Yummy Tums will be unable to seek a remedy if it is put into liquidation.

[24]     There is however no evidence to support the allegation that there was any such arrangement between Foodwise and Deejays. That may be a result of the fact that Ms Hume has represented herself without legal assistance but whether or not that is the case, I must deal with the evidence that is before me. Put simply, there is no evidence beyond bare assertion to support the contention that Foodwise and Deejays arranged to cease supply to cut Yummy Tums out and to take advantage of its product recipes. Ms Hume submitted that there was damning material obtained on discovery in the District Court to support the contention, but if that material exists it was not put in evidence before this Court.  Nor can I find in the evidence anything beyond mere conjecture to support any of the other contentions that might conceivably found some cause of action.   There is for instance, no evidence that there was a realistic prospect of sale to Deejays or any other entity that might have gone ahead were it not for Foodwise’s interference or that any such sale could have realised sufficient funds to take Yummy Tums out of its state of insolvency.

[25]     Taking the evidence as it stands together with such facts as we agreed, the only real conclusions that are safe are that:

a)       There were agreed terms of trade that did not allow Yummy Tums to continue to rely on credit that it needed to continue in operation, and that Foodwise made repeated requests to Yummy Tums for payment and gave Yummy Tums considerable time to bring its debt down to levels  allowed  by the  terms  of  trade  but  Yummy Tums  failed  to comply with those requests.

b)Yummy Tums burnt its bridges with Foodwise and was in no position to source product from an alternative supplier or to trade its way out

of its difficulties. It was in that sense the author of its own misfortune and was in a state of insolvency well prior to the events of late 2008 and early 2009, which found the real basis for Yummy Tums’ complaint.

c)       Whether or not Yummy Tums might yet have a claim of some sort for passing off or other legal wrong is a matter it has as yet failed to show. What, if anything, such a claim might recover by way of damages for loss of a profitable business or the salvage value of an insolvent business is a matter of mere speculation.

d)If Ms Hume remains of the view that she can at some future stage show that Yummy Tums has a claim for the salvage value of the business or for the loss of a profitable business, then it remains open to her to seek the liquidator’s agreement or the Court’s leave to pursue the claim under s 248 of the Act.

[26]     Anything else Ms Hume has raised is nothing more than bare assertion.

[27]     In  the  circumstances  there  is  no  room  to  find  the  necessary  element  of unfairness or undue pressure to warrant the exercise of discretion that the Court referred to in Leucadia.

Result

[28]     The net result is that the only proper course is to place the affairs of the company in the hands of a liquidator who will bring a detached and professional approach to the realisation of Yummy Tums’ assets and its winding up.

[29]     I make orders:

a)        Placing Yummy Tums into liquidation;

b)Appointing as liquidator the Official Assignee (there being no request for the appointment of a particular liquidator);

c)        Awarding  costs  to  Foodwise  against  both  Yummy  Tums  and  Ms

Hume on a 2B basis plus disbursements to be fixed by the Registrar.

[30]     The date and time of the order is 6 August 2010 at 4.15 pm.

Associate Judge Sargisson