Luv & Remo Limited v Shivram Limited (in receivership and liquidation)
[2014] NZHC 3147
•10 December 2014
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2014-404-001724 [2014] NZHC 3147
IN THE MATTER of s 290 of the Companies Act 1993 BETWEEN
LUV & REMO LIMITED Applicant
AND
SHIVRAM LIMITED (in receivership and liquidation)
Respondent
CIV-2014-404-001725
IN THE MATTER of s 290 of the Companies Act 1993
BETWEEN PAGE 68 LIMITED Applicant
ANDSHIVRAM LIMITED (in receivership and liquidation)
Respondent
Hearing: 2 December 2014 Counsel:
P Dalkie for Applicants
P Sills for RespondentJudgment:
10 December 2014
JUDGMENT OF ASHER J
This judgment was delivered by me on Wednesday, 10 December 2014 at 4pm pursuant to r 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Solicitors/Counsel: McDonald Law, Auckland. P Dalkie, Auckland.
Hornabrook Macdonald Lawyers, Auckland. P Sills, Auckland.
LUV & REMO LTD v SHIVRAM LIMITED (in receivership and liquidation) [2014] NZHC 3147 [10 December
2014]
Introduction
[1] The respondent, Shivram Ltd (in receivership and in liquidation) (“Shivram”), has issued statutory demands against each of the applicants, Luv & Remo Ltd and Page 68 Ltd, for the recovery of monthly fees arising under the terms of franchise agreements where the applicants were franchisees and the respondent the master franchisor.
[2] The applicants have applied under s 290 of the Companies Act 1993 to set aside those statutory demands. They do so on the basis that there is a genuine dispute, and that they both have a set-off arising from the improper use of marketing fees. They do not contest the respondent’s claim that, but for the claimed set-offs, the franchise and marketing fees claimed would be owing.
[3] The parties have produced little by way of evidence. There is a three page affidavit in support of the application from Gishern Naidoo, a former director of Page 68 Ltd, an 18 paragraph affidavit in response from one of the receivers, and a six paragraph affidavit in reply from Mr Naidoo.
[4] The receivers have no direct knowledge of the matters at issue, but have formed the view that the set-off claims are without merit.
Background
[5] Shivram had the master franchise agreement in New Zealand for the “Nando’s” chain of food stores. The master franchise agreement enabled Shivram to franchise the Nando’s brand in New Zealand. Mr Naidoo’s affidavit discloses that Shivram was placed into receivership on 29 November 2013, and placed into liquidation on 21 March 2014.
[6] Shivram and the two applicants were parties to an original franchise agreement. In 2011 a dispute developed between Shivram and the applicants regarding the arrangements for marketing activities and the related calculation of marketing fees and royalties payable under the franchise agreement. The parties settled this dispute by way of a deed of settlement dated 17 August 2011, and the
franchise continued. The current franchise agreement with Page 68 Ltd is dated
21 June 2011, and I understand there is an agreement on similar terms with Luv &
Remo Ltd (the “franchise agreements”).
[7] Shivram’s claims for non-payment of franchise and marketing fees under the franchise agreements relate to fees owing since 28 November 2013, and go through to invoices dated 5 May 2014. Thus, the period covered by the claims that are the subject of this application falls largely within the period of the receivership, save for perhaps a few weeks in November 2013.
[8] The statutory demands claim the sums of $56,689.63 from Luv & Remo Ltd and $19,595.02 from Page 68 Ltd. These sums are referred to very generally as “being unpaid amounts due to Shivram pursuant to a franchise agreement …”.
[9] The originating application to set aside the statutory demands claims that there is a genuine dispute with respect to the debt which the respondent was well aware of, but does not articulate the nature of the dispute.
[10] Mr Naidoo’s affidavit does not set out the details of the dispute. He says that there has been an ongoing dispute with Shivram about the marketing fees, which has been raised many times by the applicants’ lawyers with Shivram. He says:
It relates to the fact that under each franchise agreement franchisees were required to pay marketing fees to the franchisor. The franchisor invoiced franchisees monthly for the marketing fees. However, the franchisor never spent the money paid over to it on marketing.
[11] He goes on to assert that there is provision to seek an audit of the marketing accounts in the agreement, and that such audits had been sought, but had not been forthcoming. He states that the applicants did not sue because there were rumours that Shivram was under financial pressure. Rather the applicants referred their claims in relation to the marketing fees to the Serious Fraud Office. However, nothing has come of that. He went on:
It was decided that rather than run the risk of throwing good money after bad and suing for the return of the marketing fees, each franchisee (Luv & Remo Limited and Page 68 Limited) would simply not pay the franchise fees. This is what each did.
[12] Thus he says, when Shivram was placed into receivership, both the applicants ceased paying franchise fees. This resulted in an exchange of correspondence on the topic beginning with a letter to the receivers from his lawyer dated 9 January 2014. That letter asserts that although the marketing fees had been paid, the money had not been expended on advertising by the franchisor in accordance with the franchise agreement. The letter asserts that total advertising fees paid have been approximately $190,000.
[13] In his affidavit Mr Naidoo refers to another dispute which was not pursued by Mr Dalkie, who presented submissions on behalf of the applicants. However, Mr Dalkie did pursue another issue that was raised in Mr Naidoo’s affidavit in reply. He asserted in his affidavit in reply that Shivram gave Luv & Remo Ltd an option to purchase a Nando’s franchise in the central city area, and that Luv & Remo Ltd paid the option price of $31,625 including GST for this, but Shivram sold the francise to a third party. This caused Luv & Remo Ltd to lose the opportunity of working in a new franchise territory and caused the loss of the sum paid.
[14] The receivers’ affidavit is short and general and it seems that the receivers do not have a detailed knowledge of how Shivram was managed.
[15] Under s 290(4) of the Companies Act, a Court may grant an application to set aside a statutory demand if it is satisfied that there is a substantial dispute whether or not the debt is owing or is due, or where 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.1
[16] The challenge to the statutory demands is undoubtedly based on equitable set-off. If Shivram had seriously breached its contractual obligations in relation to marketing the Nando’s franchise, Shivram was in breach of its obligations under a contract which gave rise to the claim on which it relied. If this was established, then
the applicants could well have an equitable set-off.2 This general proposition was
1 The prescribed amount is $1,000: reg 5 of the Companies Act 1993 Liquidation Regulations
1994.
2 Grant v NZMC Ltd [1989] 1 NZLR 8 (CA) at 12–13.
not contested by Mr Sills for Shivram. However, it is clear that a right of equitable set-off may be contractually excluded expressly or by clear implication.3
[17] Mr Sills put forward two arguments in response to the claim of set-off:
(a) There was no credible claim put forward by the applicants to support its claim of breach of the marketing obligations.
(b) There was an express contractual exclusion of such a set-off.
[18] Approach
[19] The approach to the issue of whether a statutory demand should be set aside when there is a contested debt was summarised in Covington Railways Ltd v Uni- Accommodation Ltd.4 Having discussed a situation where there are liquidated sums
each way, Blanchard J observed:5
It is more difficult if, on the applicant’s side, there is an indisputable liquidated sum, but the other party’s claim is for an unliquidated sum with liability and/or quantum in dispute. Then, in order to impeach the statutory demand and overcome the presumption in s 287(a) that the company is unable to pay its debts when it has failed to comply with the demand, it must be able to do more than merely assert that there is an available set-off. It must be able to point to evidence before the Court showing that it has a real basis for the claimed set-off and that accordingly the applicant’s claim to be a creditor is, to the extent of the set-off, seriously in doubt. In the words of Buckley LJ in Bryanston Finance Ltd v De Vries (No 2) [1976] Ch 63 at p
78, it must show that there are “clear and persuasive grounds” for the set-off claim. Where this can be done, the party who has issued the statutory
demand against the company will be shown to be using the statutory demand
and liquidation procedures improperly because there is a “genuine and substantial dispute” about the net amount of the company’s indebtedness (Taxi Trucks Ltd v Nicholson [1989] 2 NZLR 297 at p 299). The dispute should then be resolved in the ordinary way – except as to any undisputed balance – rather than upon the hearing of a liquidation application.
Is there a credible claim of set-off?
[20] The applicants have a sound platform for alleging a breach of a marketing obligation in terms of there being clear obligations placed on Shivram in this regard
3 Grant v NZMC Ltd, above n 2, at 13.
4 Covington Railways Ltd v Uni-Accommodation Ltd [2001] 1 NZLR 272 (CA).
5 At 274–275.
in the franchise agreements. The current franchise agreements require Nando’s to manage a marketing fund for the purpose of marketing and promoting Nando’s’ stores;6 utilise monies held in the marketing fund for the purposes of promoting and marketing Nando’s’ stores and products;7 expend the contributions in the year, or in
the year following the year in which the contributions were made;8 prepare an annual
statement of the funds, receipts and expenses for the last financial year of the marketing fund;9 and procure an annual financial statement that is audited annually.10
[21] However, the problem faced by the applicants is that they have put forward no evidence at all of any breach of these obligations, save for a bald allegation that the money has not been spent on marketing. The issue of marketing fees was originally raised in email exchanges in June 2011 which included a request in writing for an audit of the marketing fees on 27 June 2011. As a response to that query Shivram agreed by a solicitor’s letter of 15 July 2011 to some set-offs of marketing fees by the applicants. It was agreed between the parties that there should be a meeting between them and their advisers to discuss a resolution of matters.
[22] In the meantime, Shivram required full compliance of the payment obligations by the applicants in relation to franchise fees and marketing fees. This was followed by the settlement agreement exhibited to Mr Naidoo’s reply affidavit.
[23] There is little explanation given as to how the settlement was reached. It is dated 17 August 2011 and presumably constituted a resolution of the various disputes. There is then no further exchange shown in the documents between the parties until a letter of 9 January 2014 from Mr Dalkie to the receivers of Shivram. It is stated in that letter that there has been a failure to spend money on advertising, and that Mr Dalkie was instructed to bring proceedings to recover the amounts paid for advertising fees since 2010, together with other claims.
[24] The response from Mr Hooker, the lawyer acting for the receiver, rejected the claim in relation to the advertising fees and pointed out that the complaints made to
6 Clause 10.1.
7 Clause 10.3.
8 Clause 10.7.
9 Clause 10.9.
10 Clause 10.10.
the Serious Fraud Office were dismissed by that office after detailed inquiries. It noted that the applicants were in breach of their obligation to pay franchise fees and stated that formal steps would be taken if payments were not brought up to date.
[25] There is exhibited to Mr Naidoo’s affidavit what appears to be part of a letter in response rejecting the receivers’ position. The applicants took no steps to bring the threatened proceedings and continued not to pay franchise fees or marketing fees.
[26] In these circumstances it is impossible to discern how and to what extent, if at all, Shivram has been in breach of its marketing obligations and whether there is an equitable set-off. It is understandable that the applicants might not have details of the holding and disposal of marketing fees by Shivram, as those details would not be under the applicants’ control. However, if there was a failure on Shivram’s part to meet its obligations to hold the marketing money and use it for marketing, it could be expected that there would have been some evidence of inadequate advertising or marketing by Shivram. No such evidence has been put to the Court. There is simply no basis for accepting a bald assertion of breach, when there is no evidence of such breach.
[27] Moreover, even if there has been some failure by Shivram to meet its requirements in relation to marketing, the applicants have not put forward any evidence showing that they have suffered any loss as a consequence, save for the fact that they paid marketing fees.
[28] Further, there is no satisfactory explanation as to why, if these long term breaches have been going on, the applicants entered into a deed of settlement in
2011, and have since then taken no steps to bring proceedings in relation to the marketing fees. Mr Naidoo’s explanation that he knew Shivram was going through financial difficulties and hence tried to get the money other ways is not sufficient, as it could be expected that a genuine belief that there was no marketing would have provoked a proactive reaction.
[29] Therefore, the applicants have not pointed to any evidence showing that there is a real basis for the claimed set-off. Far from the grounds being clear and persuasive, they are not discernible, save in broad and unsubstantiated outline.
[30] A second basis for set-off was briefly alluded to by Mr Dalkie towards the end of his submissions. This was not a point that Mr Naidoo referred to at all in his original affidavit. However, in his affidavit in reply, Mr Naidoo stated:
Under the deed Nando’s through Shivram Limited gave a right or option to purchase another Nando’s franchise in the central city area. Luv & Remo Limited took up the option, and paid the option price of $31,625.00 including GST.
On a date unknown to me, but during the receivership of Shivram Limited, the same franchise territory for which Luv & Remo Limited paid $31,625.00 was sold by the receiver for $70,000.00. That was a sale in breach of the rights obtained and purchased by Luv & Remo Limited causing not only the loss of opportunity that came with the new franchise territory, but the loss of the money paid over back in 2011, namely, $31,625.00. We only found out about the sale well after it had happened.
[31] This being an affidavit in reply, it is understandable that there has been no response filed on the part of the receivers. It may be difficult in any event to obtain instructions at such late notice, given that the original owners would appear to be no longer involved.
[32] On its face this claim lacks credibility. If such a claim existed it could be expected that there would have been a document trail showing demands for the payment of the $31,625. None is provided. It could be expected it would have been referred to in Mr Naidoo’s original affidavit. It was not. Indeed, this claim is not alluded to in any of the solicitors’ exchanges exhibited to the affidavits. It could be expected that there would have been immediate protests if an option price of $31,625 was paid, and then the franchise was sold to another person. No date is given for the alleged payment. No evidence is provided showing that the actual payment was made.
[33] In these circumstances the applicants have again failed to set out clear and persuasive grounds for the claimed set-off. An unsupported claim raised in this cavalier fashion in an affidavit in reply is unpersuasive.
[34] Therefore I am not satisfied that the company appears to have a set-off under s 290(4).
No set-off clause
[35] There is also another reason why the applications to set aside the statutory demands must fail. In the deed of settlement it is stated:
4.5 The Naidoo Franchisees acknowledges that nothing in this Deed shall prejudice Shivram’s rights in any way in relation to any breach of the Existing Franchise Agreement or the New Franchise Agreement which occurs after the date of this Deed and acknowledge that they shall at all times and without exception:
(a) Pay all amounts of Royalties and Monthly Marketing Fees under both the Existing Franchise Agreement and the New Franchise Agreement to Shivram on time when due, without set-off or deduction, and in full accordance with clauses 3.3 and 15 of the respective franchise agreements;
…
[36] The franchise agreements which preceded the deed of settlement did not contain no set-off clauses. However, this deed of settlement most unambiguously does, and it applies expressly to the royalties and monthly marketing fees that are now being withheld. No set-off clauses are inserted for a purpose. They ensure that when a party is providing a service in respect of which payments are due on a regular basis, those payments must be made without deduction, even where there may be a set-off counterclaim. Understandably parties organise their affairs on the basis that payments will be made, and a failure to make those payments can have serious practical consequences. A no set-off clause provides an important contractual promise of continuity of payment if a dispute arises.
[37] The effect of such a clause is not draconian, because it does not in any way preclude a party from bringing separate substantive proceedings in respect of the claim that might otherwise give rise to the set-off. The party who has the right to set-off is therefore not without remedy. What the party cannot do is to not pay what it is contractually obliged to; instead, it must sue.
[38] The Courts give effect to such clauses. It was stated in Browns Real Estate
Ltd v Grand Lakes Properties Ltd:11
… the efficacy of a no set-off contractual provision would be undermined if statutory demands could be set aside on the basis of a set-off, counterclaim or cross-demand a commercial party had by contract expressly agreed could not be raised. In such a situation, there seems no reason in principle why statutory demands and bankruptcy notices should not be available as debt enforcement measures when, as was conceded by Browns, other enforcement measures would be (including summary judgment).
[39] For this reason also, the applicants are not able to raise set-off as an answer to the statutory demand.
The receivership
[40] Mr Sills argued that even if he failed on these arguments as to why the applicants could not seek to set aside the statutory demand under s 290 of the Companies Act, the applicants could not raise this set-off against the receivers. He relied on Felt & Textiles of New Zealand Ltd v R Hubrick Ltd (in receivership) for the proposition that when a receiver sells an asset to a creditor who then seeks to set- off a pre-receivership debt owed by the company, the creditor is deemed to know of the receivership and therefore that it was acquiring an asset which was charged to the
secured creditor.12
[41] This issue was not fully argued by both counsel, and I do not need to determine it as the applicants have succeeded in any event. I would observe that on its face there are some difficulties in the argument, given that the most of the marketing and franchise fee debt that is the subject of the statutory demand became payable after the receivers had been appointed, and it is clear that a good part of the marketing fees that it is claimed were not properly applied, were paid after that receivership. However, I accept also that the full amount of the marketing fees is
less than the full amount claimed.
11 Browns Real Estate Ltd v Grand Lakes Properties Ltd [2010] NZCA 425, (2010) 20 PRNZ 141 at [16].
12 Felt & Textiles of New Zealand Ltd v R Hubrick Ltd (in rec) [1968] NZLR 716 (SC).
Conclusion
[42] No evidence showing that there is a real basis for the claimed set-off has been provided by the applicants. There does not appear to be a genuine substantial dispute that would warrant the Court exercising its power to set aside the statutory demands.
[43] Moreover, the 2011 settlement agreement contains a no set-off clause that applies to the present set-off claims. This clause means the defences raised which are by way of set-off cannot be put forward as an answer to the obligation to pay the franchise and marketing fees under the franchise agreements. If there are claims that Shivram failed to comply with its obligations under the franchise agreements these claims have to be pursued by separate action, and not by unilateral deduction.
[44] For these two reasons the applications are dismissed.
Result
[45] The applications in both proceedings for orders under s 290 of the Companies
Act setting aside the statutory demands are dismissed.
Costs
[46] The respondent has been successful and costs should follow the event. The applicants are to pay the costs of the respondent on a 2B basis together with reasonable disbursements.
……………………………..
Asher J
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