Lookman v Design Electronics Ltd

[2018] NZHC 904

PARAGRAPH [15] OF THE JUDGMENT OF THE COURT DATED 2 MAY 2018 WILL NOT BE PUBLISHED UNTIL FURTHER ORDER OF THE COURT.

PURSUANT TO r 5(2) OF THE SENIOR COURTS (ACCESS TO COURT DOCUMENTS) RULES 2017 NO PERSON SHALL HAVE ACCESS TO ANY AFFIDAVIT FILED ON THIS PROCEEDING UP TO THIS POINT [15 MAY 2018], NOR THE MEMORANDUM OF COUNSEL FOR THE PLAINTIFF DATED 15 MARCH 2018, WITHOUT THE PERMISSION OF A JUDGE.

IN THE HIGH COURT OF NEW ZEALAND NELSON REGISTRY

I TE KŌTI MATUA O AOTEAROA WHAKATŪ ROHE

CIV-2018-442-000006

[2018] NZHC 904

BETWEEN

MICHAEL ANDREW LOOKMAN and 187 BRIDGE TRUSTEES 53 LIMITED as

Trustees of the LOOKMAN FAMILY TRUST

Plaintiffs

AND

DESIGN ELECTRONICS LIMITED

Defendant

Hearing:	23 April 2018
Appearances:	G M Downing for Plaintiffs S J Jamieson for Defendant
Judgment:	2 May 2018
Reissued:	15 May 2018

JUDGMENT OF ASSOCIATE JUDGE MATTHEWS [REDACTED]

[Note: Suppression orders above - paragraph [15] redacted]

LOOKMAN & 187 BRIDGE TRUSTEES 53 LTD as Trustees of the LOOKMAN FAMILY TRUST v DESIGN ELECTRONICS LTD [2018] NZHC 904 [2 May 2018]

[1]    In this proceeding the plaintiffs, the Lookman trustees, apply for an order placing the defendant, Design Electronics Ltd (Design Electronics) into liquidation. Design Electronics is a start-up technology company which specialises in long-range, low-powered, sensing and measuring devices. The Lookman trustees advanced money to Design Electronics and have demanded its repayment by a notice under     s 289 of the Companies Act 1993. Design Electronics has not paid the monies demanded. It says they are not due.

[2]    On 8 March 2018 the Lookman trustees applied for appointment of an interim liquidator. That application was considered by Dunningham J but has not been set down for argument. It remains extant.

[3]    The Lookman trustees also applied for an order under r 31.11 of the High Court Rules 2016 restraining advertising. That application was made without notice. After considering it on the papers the Court made an order restraining advertising of the application for appointment of liquidators until further order of the Court. Reasons for the judgment were issued after the order was made, because it was necessary for the order to be considered urgently, and when those reasons were issued the Court also directed service of the application documents. This was duly attended to. There are now two applications before the Court. The first is by Design Electronics for an order staying this proceeding pending determination of a dispute between the Lookman trustees and Design Electronics in relation to whether the sum the Lookman trustees claim to be due and owing is in fact a debt repayable by Design Electronics on demand. The second (albeit brought by way of memorandum) is by the Lookman trustees for an order setting aside the stay which is already in place.

[4]    The Court retains an inherent jurisdiction to stay a winding-up proceeding. It has been described in the following terms:1

But the right to have a winding-up petition determined, being a right conferred by statute, ought not to be taken away except where the existence of that very statutory right itself is seriously challenged; that is, where the challenge can on appropriate grounds be made to the petitioning creditor’s status as such. If a challenge were allowed in circumstances short of this, the Court would in effect be refusing to give effect to the very right which the statute has conferred upon a creditor to have the petition itself considered.

1      Anglian Sales Ltd v South Pacific Manufacturing Co Ltd [1984] 2 NZLR 249 (CA) at 5.

[5]    To avoid liquidation, therefore, it is necessary for Design Electronics to show that the Lookman trustees do not have status as a petitioning creditor. As the Court of Appeal has also noted:2

… the insolvency policy of the companies legislation is clear:

1.Insolvency results in winding up; and

2.Insolvency is proved by inability to establish a substantial dispute over the debt or by way of cross-claim.

[6]    In this case the dispute between the parties is centred on whether a debt owing by Design Electronics to the Lookman trustees is due. There is no question the debt is owing. As noted above, the debt was demanded by a notice under s 289 of the Companies Act 1993, and no application was made to set aside that demand. Design Electronics could have applied to the Court to set aside this statutory demand under  s 290 of the Companies Act on the basis of there being a substantial dispute on whether the debt owing to the Lookman trustees is in fact due. The time to apply has passed but the Court retains a residual discretion at the present point in the liquidation process to consider the same issue. Had the Court been considering this issue on an application to set aside the demand under s 290, the approach of the Court would have been dictated by Industrial Group Ltd v Bakker.3 There the Court of Appeal said:

… the statutory scheme … for applications to set aside statutory demands [is] a summary proceeding … . The section calls for a prompt judgment as to whether there is a genuine and substantial dispute. … The test may be compared with the principles developed in cognate fields such as applications to remove caveats, [and] leave to appeal an arbitrator’s award. … 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.

[7]    This statement was reaffirmed by the Court of Appeal in AAI Ltd v 92 Lichfield Street Ltd (In rec and in liq).4

2      Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395 at [45] quoted with approval in Commissioner of Inland Revenue v Newmarket Trustees Ltd [2012] NZCA 351, [2012] NZLR 207.

3      Industrial Group Ltd v Bakker [2011] NZCA 142 at [24] and [25].

4      AAI Ltd v 92 Lichfield Street Ltd (In rec and in liq) [2015] NZCA 559 at [21].

[8]    There is no reason in principle why the Court should approach in a different way the question of whether or not there is a substantial dispute over whether a debt is due, on an application for liquidation. The point is the same: is there a genuine dispute? If there is not, a plaintiff seeking liquidation of a defendant company is entitled to the benefit of the statutory scheme for liquidation. If there is, the Court should stay the application until that dispute has been properly determined. It is for Design Electronics to establish an arguable case that this is a dispute of substance.

[9]    The application to restrain advertising, which was previously before the Court, was brought under r 31.11. The present application is brought under the same rule, though is broader in its ambit as an order is sought staying any further proceeding in relation to the liquidation. Rule 31.11(2) provides that the Court must treat an application under this rule as if it were an application for an interim injunction, and if it makes the order sought it may do so on whatever terms the Court thinks just.

[10]   On the application for an order restraining advertising, which was brought without notice, the Court found:5

[9] On the evidence before the Court I am satisfied that there is a serious question to be decided by the Court in relation to whether the principal sum is repayable upon demand and in relation to whether interest is paid.

[11]   Now the former of these issues is raised again, and the Court has the benefit of argument from counsel for the Lookman trustees and Design Electronics.

[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

5      Lookman v Design Electronics Ltd HC Nelson CIV-2018-442-000006, 6 March 2018.

agreements, arrangements, undertakings or collateral contracts of any nature made by the parties, whether oral or written, in relation to such subject-matter.

[13]   Notwithstanding the reference in the definition of the term of the agreement to it being terminated “earlier in accordance with its conditions” there is not in fact any condition expressly giving either party the right to terminate the agreement earlier than five years from its commencement.

[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.

[15] …

[16]              On the basis of these facts the Lookman trustees have formed the view, and submit to the Court, that Design Electronics is insolvent and ought to be wound up. Design Electronics, however, says it has paid substantial sums by way of interest to the Lookman trustees, and that the principal sum is not repayable upon demand. As Mr Jones puts it: “My understanding at the time that the Agreement was entered into was that this was an investment by the Plaintiff into the Defendant, a rapidly expanding start up business and that the Plaintiff’s investment would remain in the company for the term of the Agreement – five years – to fund growth and development”.

[17]              The Investment and Shareholding Agreement appears to have been drafted by the parties without legal advice or input. It is presented with the logo of Design Electronics on each page. The task of the Court is to examine, first, whether the contract plainly provides for repayment of the advances on demand. Even if it does, however, the Court may still consider evidence of the context of the agreement in recognition of the fact that in context the apparent plain meaning of a term in the contract may not in fact be its actual meaning. In this judgment it is not necessary to review the decisions which lay out the principles to be followed, beyond recording

that in Firm PI 1 Ltd v Zurich Australian Insurance Ltd t/a Zurich New Zealand,6 the Supreme Court referred principally to the approach to interpretation set out by Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society.7 It is clear from these decisions that the Court will examine extrinsic evidence: the first principle referred to by Lord Hoffmann is:8

Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

[18]              This principle, alone, is sufficient to show that interpretation of a contract is likely to be a matter for decision at trial when the true meaning of the contract is in issue.

[19]              A review of the agreement leaves, in my view, doubt over whether it was intended that advances made by the Lookman trustees would be repayable upon demand. The starting point is that the document does not expressly provide for repayment to be made upon demand. Nor, for that matter, does the document make any provision by way of a date, or state a circumstance when repayment would be made. Mr Downing therefore submits that the general principle recognised by Tipping J in DFC New Zealand Ltd v McKenzie will apply:9

It has been the law for centuries that if the contract of loan is silent about repayment the lender’s right to repayment arises at the time the money is advanced and time for limitation purposes commences to run forthwith.

[20]              Applying that principle, solely, Mr Downing would be correct in his submission that the trustees’ advances are due now, the right to repayment having arisen, but there are other aspects of the agreement which provide context for the lack of an express repayment term and may explain this omission.

6      Firm PI 1 Ltd v Zurich Australian Insurance Ltd t/a Zurich New Zealand [2014] NZSC 147, [2015] 1 NZLR 432 at [60].

7      Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL).

8      At 912.

9      DFC New Zealand Ltd v McKenzie [1993] 2 NZLR 576 at 582.

This principle has been cited with approval and applied in numerous cases since, for example

Reynolds v Calvert [2015] NZHC 400 at [59]; see also cases there cited.

[21]              The document is described as an “investment and shareholding agreement”. It provides that the monies being advanced by the Lookman trustees were “lent for the development and marketing of unique and modern sensing systems to markets in New Zealand and overseas”. Ms Jamieson for Design Electronics says this shows that Design Electronics is a “start-up business” and the advances were venture capital invested by the Lookman trustees on that basis. She notes that in his affidavit Mr M A Lookman describes the transaction as a “venture capital arrangement” for a start-up business,  the  monies  being  advanced  for  the  marketing  of   sensing  systems. Ms Jamieson says that in these circumstances it was not the expectation of the parties that the Lookman trustees could simply seek to withdraw their funds on short notice.

[22]              Some support for this proposition is given by the fact that the investment and shareholding agreement, true to its name, contains a provision for the trustees to have a right to purchase 51 per cent of the shareholding in the company for the sum of

$2,100,000, which is the stated maximum amount of the advances which would be made initially. The option to purchase subsists for three years from the date of the first advance on 8 May 2016. Thus, conversion of debt to equity was contemplated.

[23]              Another point is also relevant to this. As noted earlier, the investment and shareholding agreement is stated in clause 3 to: “continue for a period of five years unless terminated earlier in accordance with its conditions”. The document does not contain a condition which provides for early termination so, arguably, this means that the agreement will end if the trustees elect to take up a shareholding. This is bolstered by a provision in clause 9 that a new agreement, called a shareholders agreement will be prepared by the parties prior to any shareholding changes and/or share options being exercised.

[24]              Finally, the agreement provides: “Lender will advance funds of NSD2,100,000 in total on a reimbursement model …”. Nowhere in the document is the phrase “reimbursement model” defined, nor is there any evidence before the Court as to its generally accepted meaning in contracts of this kind. This leaves the Court with uncertainty on whether this is a provision invoking an industry practice in relation to funding of technology start-up companies such as Design Electronics. This phrase is unlikely to have been included if it did not have a meaning known to the parties.

[25]              The combined effect of these factors leads me to the conclusion that this is not a case where the principle enunciated in DFC necessarily applies.10 Arguably the advances were for a period of five years, being the express term of the agreement, subject to their being converted to share capital at the option of the trustees. The description of the advances being made on a reimbursement model is obscure and may support or detract from the prospect that the loan was for five years. Evidence at a trial on whether the advances are now due would deal with each of the above questions on interpretation which emerge from the wording of the document, leaving the Court to establish its true meaning.

[26]              It follows that Design Electronics has established an arguable case that the advances made by the Lookman trustees are not repayable upon demand.

[27]              Counsel did not specifically address the question of balance of convenience but in my opinion it clearly favours Design Electronics. Whilst the conduct of Design Electronics appears, on the limited material presently before the Court, to be inconsistent in some respects with its obligations under the agreement, it seems clear that Design Electronics does not have funds available at this point to repay the sum claimed and could not do so within the limited time given by the demand. Given that there is an arguable case that the sums demanded are not due, the balance of convenience must favour the status quo until that point is decided.

Outcome

[28]The present proceeding for the liquidation of Design Electronics is stayed.

[29]The stay of advertising is set aside, as being of no further effect.

[30]              The Lookman trustees will pay costs to Design Electronics on this application. Costs on the earlier application for a stay of advertising are reserved, as are costs on separate applications to the Court for appointment of interim liquidators. In my view, given the outcome of the present application, the position is that the Lookman trustees should pay costs on all these applications, but as costs on these have not been argued,

10     DFC New Zealand Ltd v McKenzie, above n 9.

they remain reserved as at present. If counsel are unable to agree memoranda may be filed within 10 working days.

J G Matthews Associate Judge

Solicitors:

McFadden McMeeken Phillips, Nelson Tavendale and Partners, Christchurch