Industrial Group Ltd v Bakker
[2011] NZCA 142
•11 April 2011
| IN THE COURT OF APPEAL OF NEW ZEALAND |
| CA263/2010 [2011] NZCA 142 |
| BETWEEN INDUSTRIAL GROUP LIMITED |
| AND JAN DIRK BAKKER |
| AND PAMELA MARJORIE BAKKER |
| Hearing: 30 March 2011 |
| Court: Stevens, Keane and Fogarty JJ |
| Counsel: G Illingworth QC and G J Thwaite for Appellant |
| Judgment: 11 April 2011 at 11.30 am |
JUDGMENT OF THE COURT
AAppeal allowed.
B The statutory demands are set aside.
CThe appellant is entitled to costs from the respondents in this Court for a standard appeal on a band A basis plus the usual disbursements. The order for costs in the High Court in favour of the respondents is quashed. The appellant is entitled to costs in the High Court together with any disbursements to be approved by the Registrar. If the parties cannot agree on costs in the High Court, they are to be fixed by the Associate Judge.
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REASONS OF THE COURT
(Given by Fogarty J)
Introduction
By a reserved judgment of the High Court (Associate Judge Bell)[1] the appellant, Industrial Group Ltd (IGL), has been ordered to pay AU$1,310,000 to the respondents (Mr and Mrs Bakker), failing which they can apply to put IGL into liquidation. This order arose out of two statutory demands by the respondents based upon their rights as vendors of shares of their business, Adelaide Bag and Packaging Pty Ltd (Adbag), to a wholly owned subsidiary of IGL, Unibag Pty Ltd (Unibag). The decision of the High Court arose out of an application by IGL to set aside these two statutory demands. Associate Judge Bell stayed the decision, so as not to prejudice the appeal.[2]
[1]Industrial Group Ltd v Bakker HC Auckland CIV-2009-404-6432, 12 April 2010.
[2]Industrial Group Ltd v Bakker HC Auckland CIV-2009-404-6432, 31 May 2010.
The share sale agreement followed due diligence conducted between IGL, the Bakkers and other smaller shareholders. It is apparent from the due diligence questionnaire, questions and answers, which are scheduled to the contract, that the consideration for the shares was based on forecasts of future net profits before tax (NPBT). This is reinforced by the fact that the purchase price is subject to adjustment where the company’s NPBT were less than the target NPBT.
The Adbag business performed very poorly after the sale. The target NPBT for the five financial years following the sale totalled $2,742,000. The actual NPBT totals AU$182,126, or 6.6 per cent of the projected NPBT.
Although the agreement provided for some adjustment of price on failure to meet NPBT projections the adjustment in no measure reflected the actual performance. Mr and Mrs Bakker made statutory demands in reliance on the contract. IGL responded with a motion to set aside the demand. It also commenced proceedings in New Zealand seeking to be relieved from liability and pursuing damages against Mr and Mrs Bakker.
There is a standard agreement for sale of shares of a business as a going concern between the vendor shareholders and Unibag. This is itself a complicated document on the subject of warranties, price and the prospects of set off of consideration for payments in respect of breach of warranty. As we have already noted, the due diligence conducted by IGL, which is named in the questionnaire, which forms part of the contract, is integrated into the warranties. This is also standard documentation but complex nonetheless. The documentation is further complicated, however, by the execution of a Deed of Assumption of liability by IGL for the purchase price obligations of Unibag and releasing Unibag from those obligations. All are subject to the law of South Australia.
Associate Judge Bell’s reasoning was complicated by the complexity of the documentation and the interrelationship between the Deed of Assumption and the Share Sale Agreement.
Although Associate Judge Bell found IGL had shown an arguable case that Mr Bakker’s profit forecasts induced it to enter into the Deed of Assumption and that IGL has a claim in damages against the Bakkers for misrepresentation under the law of South Australia, he concluded that IGL was not entitled to have the demands set aside as it could not bring itself within the formula of s 290(4)(b) of the Companies Act 1993, which provides:
290 Court may set aside statutory demand
…
(4) The Court may grant an application to set aside a statutory demand if it is satisfied that—
…
(b) The company appears to have a counterclaim, set-off, or cross-demand and the amount specified in the demand less the amount of the counterclaim, set-off, or cross-demand is less than the prescribed amount; or …
(Emphasis added.)
(The prescribed amount is NZ$1,000.)
The legal, factual and interpretation issues that Associate Judge Bell carefully and comprehensively analysed in his judgment do not fall to be examined in this Court. This is so because of new evidence. It is appropriate to note, however, that Mr Illingworth QC for IGL acknowledged the assistance that Associate Judge Bell’s dissection of the issues gave to the parties. As a consequence of Associate Judge Bell’s analysis, IGL has discontinued its proceedings in New Zealand and commenced proceedings in South Australia.
The statement of claim filed in the Supreme Court of South Australia does plead a representation by Mr Bakker on behalf of himself and his wife that the departure of Mr Scanlan, a former employee of Adbag, would not adversely affect Adbag’s financial performance. It also pleads that at the time Mr and Mrs Bakker both knew that Mr Scanlan had commenced his own business and was actively soliciting Adbag’s employees and customers. It also pleads that these representations were in fact untrue, incomplete, inaccurate, misleading and deceptive. And, more broadly, that Mr and Mrs Bakker did not genuinely believe the forecast profits. The causes of action include misleading and deceptive conduct in trade.
We were told from the bar by Mr Illingworth that the pleadings included an allegation of deceit in the light of new evidence. The present pleadings do not expressly plead deceit or fraud. Mr Illingworth has since advised that the present pleadings in South Australia were drawn before the fresh evidence was discovered by a recently appointed Adbag employee named Mr Bramintya, and that they will be amended.
Application to admit fresh evidence
There was an opposed application to admit new evidence in this Court. There was a direction that the application be dealt with at the hearing of the appeal. Having heard from both counsel, we granted the application during the hearing, with reasons to be given in this judgment.
By r 45 of the Court of Appeal (Civil) Rules 2005 the Court may grant leave to admit further evidence. This can be fresh evidence which could not, with reasonable diligence, have been produced at the hearing of the application to set aside the demands.[3]
[3] See Erceg v Balenia Ltd [2008] NZCA 535 at [15].
In the course of the due diligence process Mr Bakker had disclosed to IGL that an employee had left the business, but expressed the view that his departure did not have a material effect on its value. The departure of the employee is not mentioned in the responses to the due diligence questionnaire. Neither is the fact that he had an employee loan, nor that he had sold his shares before he left. The circumstances of the employee’s departure are relevant to various warranty claims, as well as a likely claim in deceit, to be discussed below.
There is a dispute from the affidavits as to whether Mr Bakker went so far as to name the person. But he is Mr Scanlan. He is now a competitor of Adbag. As the profitability of Adbag fell away post the sale, IGL say that his activities were used by Mr Bakker as a principal reason for the sluggish performance by Adbag.
After delivery of Associate Judge Bell’s judgment an employee of Adbag in Adelaide located some documents and papers giving, it was argued, fresh light on the significance of Mr Scanlan. A Mr Bramintya, the finance and administration manager of Adbag since 15 March 2010, had been directed by the general manager to undertake and research why the business was doing so poorly. Amongst other things he located a budget for the 2003/2004 year which showed that Mr Scanlan had the biggest sales budget at over $1,500,000. Mr Bakker had a lesser budget. Mr Bramintya then tracked down documents relating to the employment of Mr Scanlan, finding them outside the offices of Adbag in a remote part of the business premises. They included two letters, one dated 6 April 2000 from Mr Jan Bakker to Mr Scanlan and countersigned by Mr Scanlan, which amounted to an agreement. The second was a letter dated 1 June 2000 from the general manager to Mr Scanlan detailing a loan. The letter of 6 April includes these statements:
For the past five years in particular Barry Allenby, you and I [Mr Bakker] have led the company to new levels of turnover and profit growth.
…
You are very important to both Adelaide Bag and Packaging and to me personally.
…
From our discussion I know you are considering selling your shares in Adelaide Bag and Packaging to retire a personal debt. I will be very disappointed if you do sell your shares. I believe your ownership in this company is very important to the company psyche and is a key element of its success.
There then followed new terms of contract including a profit bonus of 5 per cent of the financial year profit of the company. There followed on 1 June a loan to Mr Scanlan from the company of $70,000.
We do not know precisely when Mr Scanlan left Adbag but it was obviously shortly before the sale on 2 November 2004. The due diligence process commenced during the course of 2004. As noted, Mr Scanlan is figuring in the sales budget for the financial year 2003/2004.
The application to admit new evidence was opposed, on the ground that there had been disclosure of the departure of Mr Scanlan and, more significantly, the letters could with reasonable diligence have been produced to the High Court as Unibag and IGL had had access to all of Adbag’s records for some years.
In a further affidavit by Mr Bramintya, he explained that at Adbag’s premises there is a small room used for administration purposes where employee records are kept. But the documents he found were not located in that room. Adbag’s premises comprise a factory and warehouse complex with approximately 30,000 square feet. In the course of his search in different parts of the warehouse he found three pallets each stacked with storage boxes. He had opened all the boxes looking for business records. On a pallet in a corner of the warehouse furtherest from the clerk’s office he found an office containing documents relating to Adbag’s operations. Inside the box he discovered the two items of correspondence and the sales budgets which he referred to in his first affidavit.
Since reading Mr Bakker’s affidavit saying that Adbag had access to the documentation and could have found this out with reasonable diligence Mr Bramintya searched the clerk’s office and located the file relating to Mr Scanlan. That file did not contain any of the documents that he discovered in the box at the furtherest end of the warehouse.
We are satisfied that this new evidence should be admitted as fresh evidence. It could not, with reasonable diligence, have been found before the hearing before Associate Judge Bell. In that regard we keep in mind the swift track nature of the proceeding.
Furthermore, we are satisfied that the documents and where they were found provide an arguable basis for IGL to sue Mr Bakker in deceit. There is a genuine and substantial dispute, by way of claim to recover all payments made on account of purchase, as well as other damages. Any finding of deceit would eliminate the complexity of the issues caused by the documentation of the agreement for sale and purchase followed by the Deed of Assumption. For if deceit is established Mr Bakker, and likely Mrs Bakker, would not be able to rely on the contract documentation in any way, as “fraud unravels all”.[4]
The test in s 290(4) Companies Act
[4]HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6, [2003] 1 All ER (Comm) 349 at [15] per Lord Bingham of Cornhill.
We are satisfied that IGL appears to have a counterclaim against Mr and Mrs Bakker. The counterclaim will exceed the amounts specified in the demand, as it would extend to the whole of the purchase price, of which the demands are only a part.
We note that the statutory scheme is for applications to set aside statutory demands to be a summary proceeding. The application must be made within 10 working days of the date of service of the demand: s 290(2)(a). No extension of time may be given: s 290(3). It follows that it would be unusual for the High Court to engage in detailed analysis of the merit of any counterclaim, set off or cross demand. The section calls for a prompt judgment as to whether there is a genuine and substantial dispute. It is not the task of the Court to resolve the dispute. The test may be compared with the principles developed in cognate fields such as applications to remove caveats, leave to appeal an arbitrator’s award and opposition to summary judgment.[5]
[5] See United Homes (1988) Ltd v Workman [2001] 3 NZLR 447(CA) at [34].
The approach required by the “appearance” test in s 290 is a review with a low threshold. The tight time constraints distinguish the s 290 discretion from that to be exercised on, say, a summary judgment application, where the presence of complex legal issues is not necessarily a bar to a remedy. As with leave to appeal an arbitrator’s award, the hearing should, in the normal course, be short and to the point, and the judgment likewise.
Accordingly, the appeal is allowed. The whole of the High Court judgment, including the costs order, is set aside. The result is that the statutory demands are set aside.
The appellant is entitled to costs from the respondents in this Court for a standard appeal on a band A basis plus the usual disbursements. The appellant is also entitled to costs in the High Court together with disbursements approved by the Registrar. If the parties cannot agree on costs in the High Court, they are to be fixed by the Associate Judge.
Solicitors:
Lowndes Associates, Auckland, for Appellant
Brookfields, Auckland, for Respondents
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