Mosaic Enterprises Limited v Mosaic Enterprises Limited
[2018] NZHC 692
•17 April 2018
IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY
I TE KŌTI MATUA O AOTEAROA TAURANGA MOANA ROHE
CIV-2018-470-000054
[2018] NZHC 692
BETWEEN MOSAIC ENTERPRISES LIMITED
Plaintiff
AND
MOSAIC ENTERPRISES LIMITED
First Defendant
AND
TREVOR BOONE
Second Defendant
Hearing: 13 April 2018 Appearances:
R Sussock for the Plaintiff
K Glover for the First and Second Defendants
Judgment:
17 April 2018
REASONS FOR DECISION OF ASSOCIATE JUDGE ANDREW
This judgment was delivered by me on 17 April 2018 at 12:00 pm Pursuant to Rule 11.5 High Court Rules
Registrar/Deputy Registrar
Solicitors: Lowndes Jordan, Auckland – [email protected]
Counsel: K Glover, Barrister, Auckland – [email protected]
MOSAIC ENTERPRISES LIMITED v MOSAIC ENTERPRISES LIMITED & ANOR [2018] NZHC 692 [17
April 2018]
[1] By Minute dated 16 April 2018 I declined the plaintiff’s application pursuant to s 246(1) of the Companies Act 1993 for the appointment of interim liquidators. This decision contains the reasons for that decision.
Introduction
[2] The plaintiff company, (Mosaic), is an insurance technology company in the early stages of developing mobile applications and digital service platforms for travel, health, and life insurers. It commissioned software developers to assist in the development of the necessary software. The company claims copyright in the software. Some payments have been made to the developers for their services but a dispute has arisen over fees and the scope and functionality of the software.
[3] The company says that the developers have been withholding the source code for the software, preventing the company from having access to it. This has meant that the company cannot meet its contractual obligations to several large insurance companies.
[4] The company makes an application pursuant to s 246(1) of the Companies Act 1993 for the appointment of interim liquidators on an urgent basis. It says that interim appointment is necessary or expedient to protect the principal asset of the company, namely the software. The company is insolvent. As a result of the dispute with the developers the company is not able to generate cash flow, access its principal asset or retain or attract further funding. It cannot pay its debts as they fall due.
[5] The company is both the plaintiff and the original defendant to the proceeding. The company was not able to be put into liquidation by shareholders’ resolution because a 75 percent majority is required and the developers’ shareholding is more than 25 percent. The decision to file the liquidation proceedings and to seek the appointment of interim liquidators was a unanimous decision of the directors.
[6] The critical issue I must determine is whether it is necessary or expedient for the purpose of maintaining the value of the software for interim liquidators to be
appointed now or whether the proper approach is to allow the status quo to continue pending the substantive liquidation proceedings.
[7] The application is opposed by the second defendant, Mr Trevor Boone, a shareholder and one of the developers. The developers’ shares in the company are held by a company called Tesserae Limited which has one shareholding showing on the Companies Office Register, held by Trevor Boone.
The application
[8] The plaintiff made an application for interim orders on an ex parte basis. I declined to deal with the matter on that basis but directed that the solicitors for the developer shareholders should be served with the proceedings and the matter set down for argument before me on Friday 13 April 2018.
[9] Mr Glover, on behalf of the developer shareholders filed a memorandum with the Court dated 12 April 2018. His clients opposed the making of interim orders. Mr Glover also appeared at the hearing representing Mr Boone and spoke to a notice of opposition filed on his behalf.
[10] At the hearing I joined Mr Boone to the proceedings as a second defendant. There was no opposition by the plaintiff.
Relevant legal principles
[11]Section 246(1) of the Companies Act 1993 provides as follows:
246 Interim liquidator
(1) If an application has been made to the Court for an order that a company be put into liquidation, the Court may, if it is satisfied that it is necessary or expedient for the purpose of maintaining the value of assets owned or managed by the company, appoint a named person, or an Official Assignee for a named district, as interim liquidator.
[12] In Raph Engle Concepts Ltd v SCL Industries Ltd Partnership,1 Wylie J held that:
The words “necessary” and “expedient” are alternatives. The word “expedient” has been considered to import a low threshold of convenience or desirability. I refer to Carter Holt Harvey Ltd v Timbalock New Zealand Ltd,2 where Chisholm J noted as follows:
An indication of the s 246 threshold is provided by the use in that section of the word “expedient” as an alternative to the word “necessary”. In its usual sense that word “expedient” means “fitting, suitable, desirable or convenient” thereby conveying a relatively low threshold. It is sufficient if can be satisfied that it is expedient for an interim liquidator to be appointed for the purpose of maintaining the value of the defendant’s assets.
[13] In Truck & Trailer Holdings Ltd v Skelly Holdings Ltd,3 Associate Judge Osborne summarised the relevant principles as follows:
[7] Beyond the statutory criteria it has been recognised that there are three main pre-conditions to an interim liquidation:
(i) There must be a valid winding-up application underway.
(ii) The application will in all probability succeed.
(iii) The circumstances must be not merely urgent, but also justify the appointment of an interim liquidator.
[8] The Court has recognised as three important factors:
(a) Whether the company assets are in jeopardy.
(b) Whether the status quo should be maintained.
(c) Whether the interests of creditors are safeguarded.
[9] These various formulations are ways of measuring whether necessity or expediency are established. They are a “litmus test”, not exhaustive.
Background
[14] The financial position of the company as at 31 March 2018 is shown on the balance sheet attached as a schedule to the statement of claim. The total current
1 Raph Engle Concepts Ltd v SCL Industries Ltd Partnership [2013] NZHC 2732 at [28].
2 Carter Holt Harvey Ltd v Timbalock New Zealand Ltd (1997) 11 PRNZ 435 (HC).
3 Truck & Trailer Holdings Ltd v Skelly Holdings Ltd HC Christchurch CIV 2012-409-541, 11 May 2012.
liabilities of the company ($507,385.68) exceed the total assets of the company ($206,991.42) by more than $300,000 with the total cash available in the bank being only $16,351.73.
[15] The software commissioned from the developers included a website, associated databases, and code. Mosaic says that because of the developers having withheld the source code, it has had to close down the website.
[16] The developers contest the company’s claim under s 21 of the Copyright Act 1994 to ownership of the software. The amount said to be owing to the developers is also in dispute. They claim it is in the range of $820,000. The net assets on the balance sheet of the company include $741,616 for “developer shareholder advances due”.
[17] The solicitors for the plaintiff wrote to the developers on 2 March 2018 claiming ownership in the software code under the Copyright Act 1994 and demanding that all code be immediately provided and that full access to the database be granted immediately to persons specified by Mosaic. The letter records that the board of Mosaic has met and unanimously confirmed that the company has no intention of selling or disposing of any code to anyone, including the contractual counter-parties.
[18] The letter further stated that Mosaic urgently needs to check the functionality of the software, the site and all code. The letter stated that unless the demands were met, the company would be forced to seek injunctive relief.
[19] CreateIP, solicitors for the developer shareholders, responded to the company’s letter on 9 March 2018. They asked for clarification of the company’s position as to:
(a)The amounts which the developers have invoiced to Mosaic; and
(b)The amount which the company says it has paid to each of the developers including the date of each payment. The letter noted that in principle the developers are prepared to release the code for the site to Mosaic following payment by Mosaic for the work which has been undertaken. As an interim step, they confirmed their preparedness to
release the code as at 29 February 2016 to Mosaic, without prejudice to their claims for work done since that date. They otherwise rejected the company’s demands.
[20] A statement of claim and proceedings for putting the company into liquidation was filed on 6 April 2018.
The case for the plaintiff
[21] Ms Sussock for the plaintiff contends that the requirements under s 246 are made out and that the Court should exercise its discretion to appoint interim liquidators as soon as reasonably practicable. An application to place the company in liquidation has been filed, and the application is likely to succeed because the company “is clearly unable to pay its debts and is unable to trade to recover that position”. It is said the situation is urgent because the longer the source code is withheld by the developers, the greater the risk that the value of the company will be destroyed. Ms Sussock emphasised that the ongoing inability of the company to access the source code is placing it at risk of breaching its obligations to the insurance companies with which it has contracted and potentially insurance regulatory requirements.
[22] The plaintiff says that there is no value in the principal asset of the company, namely the software, without access to it in a timely fashion. The product should have been ready in March 2017 and further delay will destroy or seriously diminish any value that it has. Ms Sussock submits there is an urgent need for interim liquidators to make an assessment about whether interim injunction proceedings should be taken against the developers. It is not an action that could be taken by the current management because of the company’s insolvent position. Ms Sussock argued that there is an immediate need for the company to act now so as to give confidence to the relatively small industry that it is acting responsibly to protect its principal asset. This is a matter of reputation. If liquidators are appointed now, then there is the possibility, it is contended, of some of the insurance contracts being resurrected.
[23] Ms Sussock further argues that it is in the interests of all creditors, including the developers, for a liquidator to take over and to act as the watchdog. She relies on
the decision of Wylie J in Raph Engle Concepts Ltd v SCL Industries Ltd Partnership
where his Honour held:4
An interim liquidator will be able to act as a watchdog, on behalf of the Court, and on behalf of all creditors, to ensure that the defendant’s assets are protected for the benefit of all creditors. They will be able to maintain the status quo, and if necessary, seek orders from the Court to stop any dealing with the assets they consider inappropriate or detrimental to the creditors as a whole.
[24] Counsel also referred to a number of decisions appointing interim liquidators where the company’s assets were at risk of being removed or destroyed. She accepted that the assets in this case that are said to being withheld are software, rather than physical assets, but submitted that the same approach should be taken and interim liquidators appointed to recover and protect those assets.
[25] Ms Sussock also relied on the decision of Associate Judge Gendall in Apostolakis v Cafe Italiano Wellington Ltd5 where there was an irreparable breakdown between co-directors and co-shareholders. In that case the Judge, following the decision of Carter Holt Harvey v Timbalock New Zealand Ltd, held that the word “expedient” in s 246 of the Companies Act 1993 suggests a relatively low threshold.6
The opposition by Mr Trevor Boone
[26] Mr Glover filed a notice of opposition dated 13 April 2018. The document is said to be filed on behalf of both Mr Trevor Boone and Tesserae Limited. At the hearing, Mr Glover was able to obtain instructions from Mr Boone and the hearing proceeded on the basis that he was the party opposing the plaintiff’s application.
[27]The grounds of the opposition are as follows:
(a)There is no urgency in the appointment of liquidators;
4 Raph Engle Concepts Ltd v SCL Industries Ltd Partnership, above n 1, at [39].
5 Apostolakis v Cafe Italiano Wellington Ltd CIV-2011-485-583, 1 April 2011.
6 At [15].
(b)The appointment of interim liquidators is an extraordinary step available only where there is a concern (normally on the part of creditors) that those associated with the company will otherwise dissipate its assets, not to enable claims against third parties;
(c)The appointment of interim liquidators is not necessary for the purpose of maintaining the value of the assets owned by the company since:
(i)There is a genuine dispute over whether or not the software at issue is owned by the company; and
(ii)There is no suggestion that the developers will destroy the software;
(iii)The software is not in jeopardy;
(iv)It is open to the company, with the support of its shareholders to take the actions which it is proposed that the liquidators will take.
[28] Mr Glover further contended that the interests of creditors are already protected, in that the primary creditor, Partners Life, holds a general security interest over the assets of the company.
[29] Mr Glover argued that the software code in dispute is the fruit of his clients’ labour and keeping access to it is the best chance of their getting paid. He argued that the directors want access to the software code but do not want to pay for it. They are not prepared to put up their own money to institute the necessary litigation and appointment of liquidators at this stage would likely prejudice the resurrection of any insurance contracts. This would be “game over”. Mr Glover’s clients are concerned that ultimately the software may be sold at a knock-down price to a new company associated with the same directors as Mosaic’s.
[30] Mr Glover appeared at short notice to oppose the application. There was no affidavit evidence in support of the opposition. In the circumstances there was some inevitable evidence from the bar. However, in my view nothing turns on that.
Analysis and decision
[31] It is clear that there is a valid winding-up application underway. I also accept that there is a good chance that it will succeed. The critical issue, however, is whether the circumstances here are truly urgent and justify the appointment of an interim liquidator. Should the Court make orders at this stage or allow the status quo to continue with the substantive liquidation proceedings continuing in the ordinary way?
[32] Despite the well-presented arguments of Ms Sussock I am not persuaded that to decline the application at this stage and allow the proceedings to continue in the normal way, will make any appreciable difference to the critical issue of the value and protection of the assets, and in particular the software. I understand that the substantive liquidation proceedings are likely to be heard in six weeks’ time.
[33]I accordingly decline the application for the interim appointment of liquidators.
[34] While it may ultimately be in the interests of all creditors, including the developer shareholders, for liquidators to take over and act as a “watchdog”, that in my view, is an issue that can properly be determined at the substantive hearing without the need for interim appointment.
[35] As Mr Glover submitted, there is no suggestion that the software will be destroyed by the developers and in any event there is a dispute over its ownership. This is not a conventional case where the applicant is a creditor who can establish that the assets of the company are in jeopardy because they are at risk of being dissipated and/or transferred to other entities. There is no real evidence here that a further delay of six weeks will seriously erode the value of the software or prejudice any future liquidators taking steps to regain access to it. The company can of course advise its clients that steps have been taken to protect its assets by instituting liquidation
proceedings, so that legal action to regain access to the software code may still be a real possibility.
[36] The evidence before me suggests that the developer shareholders as a whole, are the largest creditors. They of course oppose interim appointment. It is well recognised that the appointment of an interim liquidator is a significant step; to a large degree it amounts to a pre-judgement on the winding-up application itself.7 The proper course is in my view to decline the application at this stage and allow all relevant issues to be addressed at the substantive hearing.
Result
[37]The application for the interim appointment of liquidators is declined.
[38] Pursuant to r 5.1(5) I also grant the consent application to have the proceedings transferred from Tauranga to the Auckland Court. Both counsel are based in Auckland as well as many of the relevant parties. The company has only very recently moved its registered office to Tauranga.
[39] My preliminary view is that having succeeded with his opposition, the second defendant should be awarded costs and disbursements on a 2B basis. If there is a valid objection to that assessment, then memoranda are to be filed within five working days.
Associate Judge Andrew
7 Elders Pastoral v New Zealand Ostriches Ltd HC Rotorua M 2-99 8 February 1999, and referred to at para 16.11 of Heath and Whale: Insolvency Law in New Zealand, 2nd Edition.
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