LMLW Limited v Armstrong Murray
[2017] NZHC 2635
•27 October 2017
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA
TE WHANGANUI-Ā-TARA ROHE
CIV-2017-485-614 [2017] NZHC 2635
BETWEEN LMLW LIMITED
Plaintiff/Applicant
AND
ARMSTRONG MURRAY Defendant/Respondent
Hearing: 19 October 2017 Counsel:
C M Stevens for Plaintiff/Applicant
S R Ryland for Defendant/RespondentJudgment:
27 October 2017
JUDGMENT OF THOMAS J (Application for summary judgment)
Introduction
[1] Between August 2011 and March 2014, the plaintiff, LMLW Limited (LMLW), lent over $3 million and contributed a modest amount of share capital to help establish 15 Jetts Gym franchises. Each franchise was then owned by a separate Impact Fitness company. LMLW took a 70 per cent shareholding in each of those
15 Impact Fitness companies. NZ Fitness Impact Holdings Ltd, owned by NZ Fitness Holdings Ltd, the Claire Attard Trust and the Attard Family Trust (all together referred to as the Attard interests), held the balance. Claire Attard managed the gyms. The defendant, a law firm (Armstrong Murray), acts for Ms Attard and the Attard interests.
[2] Part of the loan was repaid and LMLW relinquished ownership in eight of the
15 Impact Fitness companies, continuing to hold a 70 per cent share in the remaining
LMLW LIMITED v ARMSTRONG MURRAY [2017] NZHC 2635 [27 October 2017]
seven. In October 2014, the then outstanding debt of $2,318,420 plus interest was recorded as owing to LMLW from the Impact Fitness companies. The debt was guaranteed by Ms Attard personally.
[3] When the debt was not repaid in full as required, LMLW commenced enforcement action. A sale of the remaining companies was then arranged, on settlement of which cash was to be paid for the entire debt due to LMLW plus LMLW’s indemnity costs of enforcement. By agreement, $500,000 of the sale price was retained in Armstrong Murray’s trust account pursuant to an undertaking given by Armstrong Murray in a letter dated 8 March 2017 (the Undertaking).
[4] LMLW claims the sum due under the Undertaking, $500,000 plus interest (the Retention), has been properly demanded and Armstrong Murray has, in breach of the Undertaking, refused to pay the Retention to it. LMLW seeks summary judgment.
[5] Armstrong Murray has refused to pay the Retention to LMLW on the basis it is not properly due pursuant to the Undertaking. It now says it will abide the Court’s decision. Despite this, Armstrong Murray has applied to the Court for a stay of the proceeding on the basis of the right to interplead pursuant to the High Court Rules
2016.1 Armstrong Murray maintains both LMLW and Ms Attard have adverse
claims on the $500,000 and Ms Attard should be joined to the proceedings so the dispute between her and LMLW can be properly determined.
[6] Counsel for Ms Attard has advised the Court Ms Attard considers she has no role to play except if the Court is unable to decide via summary judgment whether the Undertaking can be called upon. Ms Attard therefore has taken no steps in
relation to the interpleader application.
1 High Court Rules 2016, rr 4.58 and 4.63.
Issues
[7] Armstrong Murray has filed a notice of opposition to the application for summary judgment, claiming it has a defence to the claim and the matter is not suitable for summary judgment as questions of fact are involved.
[8] Simply put, the issue is whether Armstrong Murray has a defence to the claim. The outcome of that consideration will dictate the position on the interpleader application.
Background
[9] LMLW, various Impact Fitness companies, various NZ Fitness companies, Ms Attard and Michael McCombie, sole director of LMLW, entered into a heads of agreement dated 28 October 2014. The heads of agreement recorded the debt owed to LMLW as $2,318,420 with interest accruing at a rate of seven per cent per annum (the Debt). The Debt was guaranteed personally by Ms Attard. The balance of the Debt was to be repaid on 9 December 2016.
[10] At some stage Mr McCombie was involved in discussions as to whether he would be prepared to take some Impact Fitness Group tax losses as part payment of the Debt. There is some dispute about what exactly was said during these discussions, some of which included Shaun Nixon, who appears to have an interest in at least some of the Jetts Gym franchises or entities associated with them and also acts as accountant to the Attard interests. Nevertheless, it is agreed that the topic of LMLW taking some form of repayment by way of tax losses was discussed, including by the parties’ lawyers.
[11] Ms Attard successfully concluded a group sale of the various Jetts Gym businesses so that she was in a position to repay the balance to LMLW. By this stage LMLW had, through its lawyers, served a notice of demand for the Debt. As a result, Ms Attard approached Mr McCombie to conclude an agreement to settle the Debt. Eventually agreement was reached, providing for the sale of LMLW’s shareholdings in the seven Impact Fitness companies directly to the group purchaser and full repayment of the Debt to LMLW.
[12] Correspondence between the lawyers began with a letter dated 1 February
2017 from Armstrong Murray to LMLW’s lawyers, Brandons, noting that Armstrong Murray’s client suggested “an alternative path to settlement” including that LMLW accepted accrued tax losses by way of a transfer of shares not then owned by LMLW in some of the companies.
[13] Brandons responded on 2 February 2017, commenting on that proposal as follows:
There seem to be many impediments to offsetting accrued tax losses. Our client has, however, asked us to seek further information from you and to comment on your proposal. All tax loss offset arrangements would necessarily have to include the following:
(a) Payment of any interest which does not have a matching sum for accrued tax loss offset.
(b) Any offset for tax losses to only be valued at 25 cents in the dollar due to the time delay before they could be utilised.
(c) Formal documentation which presumably would include additional items.
(d) Review and approval of the proposal by our client’s professionals.
(e) Claire and her trust would need to indemnify our client against any undisclosed liabilities and represent that the companies assigned are clean, have completed all appropriate processes and accounts under the law and that all representations made are correct.
(f) Financial accounts for the relevant companies to be prepared at your client’s cost in a timely manner after the sale, and be provided to our client for approval.
(g) Confirmation that Claire and the entities associated with her will write off all the non-third party debts and not take any action to recover them.
(h) Pay the third party creditors now, or from settlement, rather than leaving them for our client to pay.
[14] Mr McCombie wrote to Brandons setting out the basis for valuing tax losses, incorrectly assuming a benefit to him of 30 cents in the dollar.2
[15] On 27 February 2017, Brandons wrote to Armstrong Murray saying inter alia:
2 It seems the correct assumption should have been 25 cents in the dollar.
4.On a “without prejudice” basis our client requires payment of the full sum above plus accrued interest but is prepared to consider that up to $400,000 of the full sum could be set-off by a transfer of
$400,000 to our client company or nominee. Due to the uncertainty surrounding this, the equivalent sum of $400,000 would have to be
retained in the Armstrong Murray trust account, for a period of three
months, during which LMLW is to receive confirmation to its satisfaction that:
· It can utilise fully the tax losses,
· The companies being transferred are clean and undertakings are received from Claire Attard and her trusts that they are clean,
· LMLW’s accountant would also need to be reasonably satisfied as to this and will therefore need full cooperation from Claire as to the background, confirmed by undertaking,
· Claire Attard to take responsibility for completing financial statements for the subject companies in a timely manner at her own cost after the sale and when the clubs are no longer operational;
· Claire Attard to pay all non-Attard creditors out of the settlement of the sale of the clubs and to take responsibility for payment of all accounting costs.
· The subject companies have met all their financial, compliance and statutory obligations.
If any or all of the above are not satisfied then, at its option, LMLW
is to have the $400,000 held in trust released to it absolutely.
[16] On 6 March 2017, Mr McCombie met his then accountant who had been his accountant for 20 years. She advised she was unable to meet his accounting needs and recommended he engage other accountants.
[17] On the same day, Brandons wrote to Armstrong Murray saying:
4.As regards paragraph 4 of our 27 February letter and your feedback on paragraph 4 in your 3 March letter we comment on each of your numbered points as follows:
1. Agreed.
2.There needs to be a time limit for the transfer of the shares as it needs to be completed in sufficient time before the three month period at the end of which LMLW receives the necessary confirmations.
3.Again the cooperation with our client’s accountant necessitates that the financial statements for the relevant companies need to be prepared within a three month period and also within sufficient time that our client’s accountants
have three to four weeks to review them. What is still missing is a warranty that there are a minimum of
$600,000.00 worth of tax losses. If there are less than
$600,000.00 of tax losses then the $500,000.00 agreed set- out is reduced proportionately.
[18] Armstrong Murray provided a draft undertaking to Brandons on 7 March
2017.
[19] The Undertaking was given on 8 March 2017 as follows:
You have sought minor amendments to our undertakings. In respect of those undertakings that required amendment, we now undertake that upon the anticipated remittance of funds from DLA Piper early next week we will:
1.immediately pay the sum of $500,000.00 into a ledger in our trust account on interest bearing deposit in the name of LMLW Limited until the earlier of the expiry of the period of three months (in which case the sum will be paid to LMLW), or when LMLW Limited (acting reasonably) instructs that the funds shall be disbursed (with net accrued interest) either:
a. To Claire Attard (or a related entity of Claire Attard) in full;
or
b. To LMLW Limited in full; or
c. To Claire Attard (or a related entity of Claire Attard) and
LMLW Limited in certain proportions (if there are less than
$600,000.00 worth of usable tax losses), on the basis that the sum payable to LMLW would be calculated as follows:
500,000 – ((Actual value of losses / 600,000.00) x 500,000),
with the balance thereafter being paid to Claire Attard (or a related entity of Claire Attard).
[20] Mr McCombie then engaged Pricewaterhouse Coopers (PWC) to provide accounting services to LMLW using Christopher Leatham, a partner who specialises in property tax matters.
[21] On 6 June 2017, Armstrong Murray sent the information regarding tax losses to Brandons. On 9 June 2017, Mr Leatham wrote to Mr McCombie advising him as follows:
You have asked us to confirm whether and how your group of entities can use the circa $2m of tax losses that we understand are available from the Impact Fitness Group.
Tax profits and losses can be offset between companies with 66% or more common shareholding as long as the offsets are made by the due date for filing tax returns. We understand LMLW Trust owns 70% of the shares in the Impact Fitness Group, and therefore the tax losses are available to offset against any profits in any other companies in which LMLW Trust owns at least 66% of the shares. This is Parsley Properties Limited and Marsden View Investments Limited in your group.
As you know, we are in the process of finalising the tax position for your group for the year ended 31 March 2017. This draft position shows little or no taxable profit in these entities as a result of their activities having ceased in prior years. Therefore you have no ability to benefit from the $2m Impact Fitness tax losses in your group.
The losses could only be used in future if Parsley or Marsden start other business activities and make at least $2m of profits in these.
[22] As a result, on 9 June 2017 Brandons wrote to Armstrong Murray, but omitted to attach Mr Leatham’s letter. Brandons wrote as follows:
1.… Regretfully, pwc have advised that as the other companies in our client’s group will make no or little taxable profit for the year ended
31 March 2017, there is no ability to benefit from the $2 million
Impact Fitness tax losses.
2.Because the tax losses are not usable, we are instructed to require that the $500,000.00 being held on retention together with net accrued interest be paid to LMLW Limited in full. For that purpose we enclose a copy of our trust account deposit slip …
[23] Armstrong Murray responded, expressing their and their client’s “affront” and that their client’s position was she was entitled to payment of the full Retention pursuant to “the agreement”. Furthermore, tax losses were available and of benefit, there was no requirement losses had to be immediately useable, and that was why the losses were transferred at the discounted rate of 25 cents in the dollar.
[24] Brandons replied on 15 June 2017 explaining the position in more detail but
again omitting to attach Mr Leatham’s letter:
2.The tax losses are not usable because the Impact Fitness companies concerned do not have at least 66% common shareholding with any active entity in Mr McCombie’s group of companies. He therefore has no obvious ability to use them either now or in the future without a significant and unforeseeable change in circumstances.
3.It is not a case of needing to wait for group profits to accumulate to be set off in future – but a case of the losses not being able to be used at all.
4.This matter has been taken extremely seriously and accounting advice has been received from PwC on the usability of the losses. The PwC partner involved has offered to talk directly to you if that is helpful in your understanding.
[25] Armstrong Murray responded on 16 June 2017 to the effect, having taken
instructions, their client fundamentally disagreed with LMLW’s position, saying:
Our client’s responsibility in this matter was to prove that there were losses available in the Impact Fitness companies, and that they are able to be used. Our client has done that.
Our client’s accounting advice is that there are a number of options available to your client that could result in your client or entities associated with your client enjoying the use and benefit of those losses. How exactly your client does that is up to them. Our client has done what is required of them. As such, we expect that the funds held in our trust account are to be disbursed to our client upon the presentation of executed share transfer forms for all companies, which have now been prepared.
[26] Brandons replied on 21 June 2017 saying that whether or not the losses were to be utilised was not a matter for Armstrong Murray’s client to decide and there was no requirement on LMLW to carry out a restructure in order to utilise the losses.
[27] Armstrong Murray then contended it was clear PWC had been provided deficient instructions and their instructions again were that the funds were not to be paid to LMLW.
[28] Mr Nixon was clearly copied into the correspondence and, on 29 June 2017, wrote to Armstrong Murray saying, “all we had to do was prove that the losses were available to the Impact Fitness companies”. He then referred to a conversation he maintained he had held earlier with Mr McCombie to the effect Mr McCombie represented he was happy that the losses were able to be utilised in the future and clearly understood he may need to restructure some of his business activities.
[29] Mr Leatham’s letter to LMLW was finally sent to Armstrong Murray on
20 July 2017, demanding repayment, failing which proceedings were to be issued.
Affidavits
[30] Affidavit evidence has been filed from Michael McCombie (x3), Francis Gradwell from Brandons (x2), Christopher Leatham (x2), Claire Attard, Shaun Nixon, and John Armstrong, Christopher Davis and Andrew Reeder, all from Armstrong Murray.
[31] Mr Leatham’s first affirmation explained his first priorities were to fully analyse and understand Mr McCombie’s business structures which required a significant amount of work as many of his group’s returns had not been filed. Over
80 returns had to be prepared and filed with the Inland Revenue Department, covering the period 2011 to 2017. As a result, he said, he had a thorough understanding of all the entities in the group and the various inter-relationships.
[32] Mr Leatham detailed the instructions given to him by Mr McCombie and that Mr McCombie thought he may be able to transfer income from one entity to the Impact Fitness companies and therefore use up tax losses and reduce his tax liabilities. He said:
After reviewing Mike’s group’s structure we have determined that it cannot use the Impact Fitness tax losses in his current (or foreseeable) circumstances. …
In fact, for the year ended 31 March 2017, while Mike’s group has tax to pay, he has other substantial (millions of dollars of) tax losses in his group that could not be used (ie the Impact Fitness losses are not the only tax losses that Mike has not been able to benefit from). This is tax inefficient for Mike and is a function of his structure built up in an ad hoc way over many years. However, it demonstrates that Mike does not have the ideal setup from a tax perspective as he would use all these tax losses if he could. …
… Even if the tax losses are valid, Mike would not be able to use them and therefore the work on confirming they are valid is currently not relevant to him, LMLW Limited or his group.
[33] Mr Leatham also said Mr Nixon’s suggestions as to how Mr McCombie might be able to restructure his tax affairs to use the tax losses involving a sale of a property within the group or adding a company to be a beneficiary of one of Mr McCombie’s trusts would not work. Both options were likely to result in tax liabilities for Mr McCombie and/or be viewed as aggressive from a tax risk perspective. Mr Leatham was of the opinion Mr Nixon had not given any useful
suggestions which would allow Mr McCombie to use the tax losses in the group and he was not aware of any ways to achieve this within acceptable risk parameters.
[34] In his second affirmation, Mr Leatham essentially repeated that opinion, saying:
… there aren’t any foreseeable circumstances, based on LMLW’s and Mike McCombie’s current structure and business activities, that the losses could be used at all (i.e. including over the next few years at least). There is no way around this without a significant change in circumstances or taking on tax cost and / or tax risk. I expand on the latter points subsequently.
… The tax losses could only be offset against other companies for which at least 66% of the shares were held by the LMLW trust at the time the tax losses were incurred. There are little or no such profits available.
… The issue is that restructuring Mike’s assets to try to use the Impact Fitness companies tax losses would create tax liabilities and/or tax risk for Mike, and we could not recommend he go down that route.
… What actually would have made no commercial sense was for Mike to accept taking tax losses he did not know that he could utilise (especially when he had $500,000 cash held at Armstrong Murray). He engaged PwC and specifically me as a partner of PwC and a tax expert to review his structure and tax position to see if he could utilise the tax losses. This was part of Mike’s stated process of considering whether to take the tax losses as opposed to the cash.
Is there a defence to the claim?
Summary judgment principles
[35] The principles of summary judgment are well-known. In essence, the plaintiff must satisfy the Court there is no defence to the claim. The following is widely recognised as encapsulating the essential points:3
[26] The principles are well settled. The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried. The Court must be left without any real doubt or uncertainty. The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated. The Court will not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not accept uncritically evidence that is inherently lacking in credibility, as for example where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponent, or is inherently improbable. In the end the Court’s assessment of
3 Krukziener v Hanover Finance Ltd [2008] NZCA 187, [2010] NZAR 307 (citations omitted).
the evidence is a matter of judgment. The Court may take a robust and realistic approach where the facts warrant it.
[36] This case concerns an undertaking given by Armstrong Murray, lawyers and officers of the Court. In respect of lawyers’ undertakings, the Court of Appeal has observed:4
[47] … the law has always regarded it as important that practitioners honour their undertakings. This is reflected in r 6.07 of the Code of Professional Conduct then in force. Practitioners and their clients depend upon such undertakings in the everyday conduct of legal and business affairs. It is vital that any such undertakings are scrupulously adhered to.
[37] An undertaking should be read sensibly and in light of the commercial context in which it is given.5 While an undertaking must be clear in its terms before it can be enforced, the words of Fisher J are particularly apt when he said:6
(g) In construing the meaning of such an undertaking it will generally be assumed that the undertaking was intended to facilitate the successful completion of an essentially commercial dealing. It should not normally be construed in any technical or legalistic fashion but rather by reference to the evident substance and intention.
Analysis
[38] Armstrong Murray’s refusal to pay the Retention to LMLW is because it does not consider LMLW has acted reasonably in instructing that the Retention should be disbursed to it in full. Specifically, that Mr McCombie had previously acknowledged there would be a delay before the losses could be used and Armstrong Murray was not satisfied from the correspondence with Brandons that LMLW was acting reasonably with respect to the usability of the tax losses.
[39] At the hearing, counsel for Armstrong Murray seemed to indicate that the information provided during the summary judgment process might establish LMLW was acting reasonably in requiring payment of the Retention. However, she then said reference by Mr Leatham to there being “little or no profit” suggests the tax
losses could have been used to some extent.
4 W v Auckland Standards Committee 3 of the New Zealand Law Society [2012] NZCA 401, [2012] NZAR 1071 (citations omitted).
5 Commissioner of Inland Revenue v Bhanabhai [2007] 2 NZLR 478 (CA) at [42].
6 Australian Guarantee Corp (NZ) Ltd v East Brewster Urquhart & Partners [1990] 2 NZLR 167 (HC) at 171.
[40] Armstrong Murray’s position is the Undertaking needs to be interpreted in its commercial context, that all the evidence needs to be tested by cross-examination and the matter is not suitable for summary judgment. There was also a suggestion that independent expert tax evidence would be required.
[41] The Undertaking requires payment of the Retention to be made on the earlier of two events. I will put to one side the three-month provision and focus on the second limb because it was that limb LMLW used when requesting payment of the Retention. That limb requires LMLW to be “acting reasonably” in its instructions that the Retention is to be disbursed. The Retention is to be paid either to Ms Attard in full, LMLW in full, or a combination of them with a calculation in respect of the value of the tax losses if there are less than $600,000 worth of usable tax losses.
[42] The inquiry is therefore whether, in making the demand, LMLW was acting reasonably. The evidence must be considered in the following context:
(a) Mr McCombie took independent tax advice from a highly reputable international firm of accountants. The partner concerned specialises in property tax matters.
(b)The tax advice was given in the context of just having prepared and filed over 80 returns for the LMLW group with the IRD for the period
2011 to 2017. There can be no doubt Mr Leatham had a thorough understanding of all entities in the group.
(c) The conclusion was the LMLW group cannot use the tax losses in current or foreseeable circumstances, including over the next few years at least.
(d)The group has substantial tax losses available to it to be used in any event.
(e) Mr Leatham is not aware of any ways to achieve use of the tax losses in the group within acceptable risk parameters.
[43] The upside of being able to use the tax losses was no more than $100,000. Suggestions, therefore, that Mr McCombie should restructure his business or purchase another commercial property in that context is not credible. This is all in the wider context of the Undertaking acknowledging that LMLW could require repayment to it in full and act reasonably in doing so.
[44] It cannot be credibly suggested that all that needed to be demonstrated was that the tax losses were available. Taken to its logical conclusion, this would require LMLW to agree to forego repayment of $500,000 in return for tax losses which potentially LMLW would never be able to utilise. This extreme position is in fact the current situation for which the defendants argue.
[45] The second limb of the Undertaking is absolutely clear. Provided it has acted reasonably, LMLW is entitled to request payment of the whole Retention to LMLW. The obligation is to act reasonably. The obligation is not to prove unequivocally that the tax losses cannot be used at some far-off time in the future, or to engage in restructure and shoulder unacceptably high risk in order to use them.
[46] The commercial context reinforces that interpretation. The Retention was part of repayment of the Debt and there is no dispute about that. The Undertaking was given in the context of settlement of how that Debt would be repaid where Ms Attard faced potential bankruptcy if she were unable to repay it. LMLW was to consider tax losses but was not obliged to take them.
[47] Viewed in that context, it cannot be said LMLW did not act reasonably in requiring payment of the Retention to it.
[48] All Armstrong Murray can offer as a reason for failing to comply with the Undertaking is reliance on their client’s instructions and those of her accountant who also seems to have some involvement with the Attard interests. He cannot be considered to be independent. He also purports to give evidence of negotiations. Furthermore, he has no knowledge of LMLW or Mr McCombie’s related business entities. Considered in those circumstances, it is improper that Armstrong Murray has failed to comply with the Undertaking. The best which might be said in its
favour is it would have been more helpful had Mr Leatham’s letter of advice been
provided at the time payment of the Retention was first requested.
[49] All this can be concluded even without considering the first limb of the Undertaking which, on its face, would entitle LMLW to require payment of the Retention in full after three months in any event. Armstrong Murray contends that part of the Undertaking does not mean what it says. Given the contra proferentem rule, plus the way in which solicitors’ undertakings are to be interpreted, they may have some difficulty advancing this proposition. However, given the self-evident position as outlined above, there is no need to investigate this aspect further.
Result
[50] For the reasons given, I am satisfied there is no defence to the claim and summary judgment is awarded to the plaintiff.
[51] In the circumstances, the interpleader application needs no further consideration.
[52] Costs are awarded to the plaintiff. Any application for increased or indemnity costs will be dealt with on the papers. If agreement cannot be reached, a memorandum is required within 28 days, with any response 14 days thereafter.
Thomas J
Solicitors:
Skinner Law, Wellington for Plaintiff/Applicant
Wotton Kearney, Wellington for Defendant/Respondent
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