NDP 2010 Limited v RD2 International Limited
[2012] NZHC 959
•8 May 2012
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2011-404-006549 [2012] NZHC 959
BETWEEN NDP 2010 LIMITED Applicant
ANDRD2 INTERNATIONAL LIMITED Respondent
Hearing: 23 January 2012
Counsel: J Frampton for Applicant
A Hansen for Respondent
Judgment: 8 May 2012
RESERVED JUDGMENT OF ASSOCIATE JUDGE SARGISSON (Setting aside Statutory Demand)
This judgment was delivered by me on 8 May 2012 at 4.45 pm pursuant to
Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar
Date ..........................
Solicitors:
White Fox & Jones, PO Box 1353, Christchurch
Heimsath Alexander, PO Box 105884, Auckland City 1143
NDP 2010 LIMITED V RD2 INTERNATIONAL LIMITED HC AK CIV-2011-404-006549 [8 May 2012]
Introduction
[1] The applicant, NDP 2010 Limited, applies for an order under s 290 of the Companies Act 1993 setting aside a statutory demand. The statutory demand, served by RD2 International Limited on 5 October 2011, claims:
(a) Payment of NZ$330,803.21 and US$123,671.08, plus interest, for the supply of fruit concentrate to a company related to NDP 2010 (Natural Dairy Products Limited); and that
(b)NDP 2010 is liable for the payment of those sums under a “contract entered into with the creditor on 18 February 2011.”
[2] NDP 2010 disputes the existence of such a contract. It readily accepts that RD2 is owed the money claimed but applies to set aside the statutory demand on the ground that the debt is owed solely by Natural Dairy Products Limited. Though NDP 2010 and RD2 discussed payment of the debt, NDP 2010 says that there was no concluded agreement that it would assume liability.
[3] The application is opposed.
[4] It seems no order was made extending the time for compliance with the statutory demand when the application was first before the Court on 9 November
2011. But agreement to such an order is implicit in the way the parties have proceeded. Plainly such an order would have been made but for the parties’ oversight, and should now be made. I proceed on that basis and make an order that the time for compliance is extended to the date of this judgment.
Background
[5] NDP 2010 is an asset-holding company and is part of a group of companies referred to as the Natural Dairy Products Group. As a key issue in this case is the identity of the debtor, it is necessary to traverse the corporate history of NDP 2010 and the Group.
[6] The Group traded through Natural Dairy Products of New Zealand Limited until August 2007. After a lacuna in activity, the Group began trading again on 9
April 2008 through Natural Dairy Products Limited. The majority of the shares in that company were held by an asset-holding company, Natural Dairy Products (2007) Limited. Despite this change in trading companies, RD2 continued to make out its invoices to Natural Dairy Products New Zealand Limited.
[7] Around August 2010, Natural Dairy Products (2007) Limited and Natural Dairy Products Limited ran into financial difficulties. The directors decided to recapitalise. Two new companies, NDP 2010 and NDP Trading Limited, were incorporated on 24 November 2010 for this purpose. Natural Dairy Products (2007) Limited sold its assets to NDP 2010 and NDP Trading Limited allegedly took over trading on 1 January 2011. NDP Trading Limited is wholly owned by NDP 2010. Despite no longer holding assets or trading, Natural Dairy Products (2007) Limited and Natural Dairy Products Limited both remain on the Companies Register.
[8] The debt which is the subject of this dispute arose out of the supply by RD2 of a large amount of products to Natural Dairy Products Limited between July and December 2010. In its evidence, RD2 says that at a meeting on 6 October 2010, Mr Thornton (managing director of companies in the Group) assured it that any outstanding invoices would be paid and that, following the recapitalisation, the new business would pay all debts both old and new. This meeting was followed up by an email dated 8 October 2010 sent by Mr Thornton to Mr Honiss, director of RD2, which discussed that there were two groups of potential shareholders undertaking due diligence. Mr Thornton stated:
...As we discussed there are three steps we are pursuing:
1. Surviving “due – diligence”...
2. Getting an agreement formally signed... We would like to think we could have an agreement with the new shareholders signed between the 20th and 30th of October.
3. Addressing the outstanding balance once the capital is received. Once we receive the new capital we will be able to make a very substantial payment towards our account. At this point it is likely to be $300k. This will leave a core debt in the region of $300k ish that we will need time to extinguish. Our plan is for an extra $40- $50k per month to be paid to
you, as soon as our factory is producing the budgeted product, this would be over and above the monthly account due for product received.
When the new business is running we have strong earnings projections in both juice and ice cream, and will be producing a strong cash flow which will allow us to become a good customer of RD2’s as opposed to the tardy customer we are now. We intend to work with you into the future, and like elephants – we have long memories, and will support those who supported us when we needed help.
We are grateful [for] your patience, and acutely aware of the pressure we are causing you. The information given above is given in good faith, however it may alter in terms of dates and the like, depending on circumstances.
[9] It appears that RD2 did not receive any payments for the outstanding balance as at 8 October 2010. Further correspondence took place in October discussing due diligence, the timing of repayments and possible interest payments.
[10] The supply, it seems, continued to Natural Dairy Products Limited after the incorporation of the two new companies, and until December 2010. It appears that RD2 made no supplies to the Group in January 2011, but a letter Mr Thornton sent on 1 February 2011 to RD2 suggests that supply resumed at some point in February
2011, with goods then invoiced to NDP Trading Limited. That letter informed RD2 that the recapitalisation scheme was now complete, stated that “the liabilities of Natural Dairy Products 2007 Limited remain with that company,” proposed a “repayment schedule,” and stated that “the new company will pay for new supplies within 14 days of receipt”.
[11] On 10 February 2011, Mr Honiss and Mr Thornton discussed the terms of repayment by telephone. Six days later Mr Honiss sent a follow-up email to Mr Thornton summarising the outcome of those discussions:
Hi Brent
Please find below a summary of the discussion and agreement with RD2 from our telephone discussion at 1.30 pm on the 10th Feb.
General
− Both parties have a willingness to continue the business relationship.
− ND has been loyal to RD2 and acknowledged the support of RD2. In return RD2 have supported ND with continued supply of juice
concentrates.
− Brent gave a forecast of intended volumes going forward. Requirements were indicated as:150 – 200 drums Apple/month
60 – 70 drums FCOJ/month
Other juices at similar levels (mango, pineapple, blackcurrant, etc).
− RD2 made a request for more formal forecasting so as to allow uninterrupted supply. This is to be provided by ND monthly.
Financial
− RD2 advised that there was [an] urgent need to agree on a repayment plan for the funds remaining outstanding as of 08 Feb.
It was discussed that the USD was to be paid from the proceeds of the NZI insurance claim (about $130,000) and the balance of about
USD 60,000 was to be paid on or before 04 April 2011. RD2
requesting that ND assign the [proceeds] of this insurance across to
RD2.ND was to push NZI via their broker for an urgent settlement.
There was outstanding to RD2, as at 08 Feb 2011 about NZD
$339,000 for various goods supplied to ND. This is being reconciled by Martin. Of this $276,454 was to be placed against a repayment plan with $50,000 paid to RD2 each month starting 01 July 2011 with the final payment of $26,454 being paid on or before 01 Dec
2011.
Interest will be charged at 12% per annum on the outstanding amount. Interest is paid monthly on a separate invoice.
The balance outstanding against the ND account will be bought fully up to date by 28th Feb 2011.
− RD2 will establish NDP Trading as a new account. NDP Trading is a
100% subsidiary of NDP (2010) Ltd.
− NDP (2010) Limited will guarantee to RD2 the debt of ND
− RD2 will invoice all future business with NDP TradingRD2 are to receive written purchase orders from NDP Trading for each release.
Terms of trade will be payment due up to 14 days from date of release of goods from store
RD2 will set a new maximum credit limit of $100,000 to NDP Trading while the parties are operating under this repayment
agreement. If this limit is reached inside the 14 day terms then
payment will be required prior to new order being released.
Invoices are to be sent prompt by e-mail by RD2 to NDP Trading for each release.
− NDP (2010) Ltd is finalising [its] new banking agreement and covenants
and part of this requirement is to have an agreed raw material supply arrangement in place.
− RD2 would require that NDP Trading agree to RD2 being the exclusive
supplier of fruit juice concentrate raw materials to the business while the repayment agreement is in place.
[12] This email then requested Mr Thornton to review it and “advise if this is a fair summary of our discussion and agreement”. It is Mr Thornton’s response email
dated 18 February 2011 that RD2 relies upon in its statutory demand for the terms of the contract said to have been entered into. That response email states:
Many thanks for the summary below. I have recorded in red the issues that require changes or noting or further discussion, below. Once these have been addressed then I am keen to get the letter of agreement drawn up. We have placed an order with you today, and have just realised $71,862 into your account...
[13] The comments in red made by Mr Thornton on the return copy of Mr Honiss’
email are identified in italics below:
Hi Brent
Please find below a summary of the discussion and agreement with RD2 from our telephone discussion at 1.30 pm on the 10th Feb.
General
− Both parties have a willingness to continue the business relationship.
− ND has been loyal to RD2 and acknowledged the support of RD2. In return RD2 have supported ND with continued supply of juice
concentrates.
− Brent gave a forecast of intended volumes going forward. Requirements were indicated as:150 – 200 drums Apple/month
60 – 70 drums FCOJ/month
Other juices at similar levels (mango, pineapple, blackcurrant, etc).
− RD2 made a request for more formal forecasting so as to allow uninterrupted supply. This is to be provided by ND monthly.
Agree. BT
Financial
− RD2 advised that there was [an] urgent need to agree on a repayment plan for the funds remaining outstanding as of 08 Feb.
It was discussed that the USD was to be paid from the proceeds of the NZI insurance claim (about $130,000) and the balance of about USD 60,000 was to be paid on or before 04 April 2011. RD2
requested that ND assign the [proceeds] of this insurance across to
RD2. We are required to retain this claim as NDP’s. The proceeds will be paid to RD2. We met with BNZ and they are also becoming involved with NZI to get this paid out. At this point the problem is with Cunningham Lindsay the Assessors who are simply unable to cope with the volume of claims. We are requesting an urgent part payment, which will be paid to RD2 as above.
ND was to push NZI via their broker for an urgent settlement. See above
There was outstanding to RD2, as at 08 Feb 2011 about NZD
$339,000 for various goods supplied to ND. This is being reconciled by Martin. Of this $276,454 was to be placed against a repayment plan with $50,000 paid to RD2 each month starting 01 July 2011
with the final payment of $26,454 being paid on or before 01 Dec
2011. This is probably correct but subject to an [sic] verification by
Martin and George.
Interest will be charged at 12% per annum on the outstanding amount. Interest is paid monthly on a separate invoice. Agreed.
The balance outstanding against the ND account will be bought fully up to date by 28th Feb 2011. ??
− RD2 will establish NDP Trading as a new account. NDP Trading is a
100% subsidiary of NDP (2010) Ltd.
− NDP (2010) Limited will guarantee to RD2 the debt of ND Agree
− RD2 will invoice all future business with NDP Trading
RD2 are to receive written purchase orders from NDP Trading for each release. Agreed
Terms of trade will be payment due up to 14 days from date of release of goods from store. Agreed
RD2 will set a new maximum credit limit of $100,000 to NDP Trading while the parties are operating under this repayment agreement. If this limit is reached inside the 14 day terms then
payment will be required prior to new order being released. I am
unsure if this is realistic, and just need to talk [through] with GB, as this $ amount was not discussed?
Invoices are to be sent prompt by e-mail by RD2 to NDP Trading for each release. Correct
− NDP (2010) Ltd is finalising its new banking agreement and covenants and part of this requirement is to have an agreed raw material supply
arrangement in place. Correct
− RD2 would require that NDP Trading agree to RD2 being the exclusive supplier of fruit juice concentrate raw materials to the business while the
repayment agreement is in place. Correct, it is my intention that RD2 will remain our sole supplier even when the payment plan is completed.
[14] Mr Thornton added the final comment that “we will confirm on [Tuesday afternoon]”. It is Mr Thornton’s evidence that the parties had an understanding that if an agreement was reached it would need to be documented in a formal written agreement.
[15] Further correspondence occurred in June and August 2011, communicating NDP’s “financial difficulties”. Pertinently, an email dated 2 June 2011 included Mr Thornton’s statement that:
...we are now working on a capital repayment of your outstanding debts in full. We have made good progress and expect to have this formalized by the end of this month, and paid down in July.
We would then like to formalize the most appropriate relationship going forward...
[16] An email dated 12 August 2011 from Mr Thornton stated:
Following receipt of your last email George and I have been working on a constructive way to repay your outstanding account.
We have not yet completed this plan.
1. We intend repaying this money before Dec 2011, as in the earlier proposal.
2. We will pay $5,000 each Friday,( additional to and solely towards the overdue debt,) [sic] from the first of September as an interim measure.
3. We expect to be able to put the plan to you in the next two weeks for your agreement. This will then allow us to make a couple of large payments to clear the overdue monies.
...
I appreciate your support and understand your frustrations, and fully intend resolving this matter happily for both parties.
[17] RD2 ceased all supply in September 2011. It appears that invoices for goods supplied to NDP Trading Limited between February and September 2011 had been paid for on time. However, as the debts incurred between July and December 2010 remained outstanding, RD2 served NDP 2010 with a statutory demand on 5 October
2011.
Legal principles
[18] Relevantly, s 290(4)(a) of the Companies Act 1993 states:
(4) The Court may grant an application to set aside a statutory demand if it is satisfied that—
(a) There is a substantial dispute whether or not the debt is owing or is due...
[19] The principles applicable to the exercise of the discretion to set aside under s
290 were set out by Associate Judge Faire in Fletcher Homes Ltd v Ellis:[1]
[1] Fletcher Homes Ltd v Ellis HC Auckland M471im99, 23 July 1999 at [31].
a)The onus is on the applicant to show a fairly arguable basis upon which it is not liable for the amount claimed.
b)Mere assertion that a dispute exists is insufficient. Some sort of material short of proof which backs up the claim that the amount is in dispute is required.
c)If material is available then the dispute should be tried elsewhere and not on application to set aside a statutory demand.
[citations omitted]
[20] It is not usually possible to resolve disputed questions of fact on affidavit evidence alone, particularly where issues of creditability arise.[2]
Issues for determination
[2] North Harbour Equine Hospital Ltd v DK Little Corporate Trustee Ltd HC Auckland CIV-2006-
404-7585, 19 February 2007 at [17].
[21] The issue on which this application turns is whether there is a genuine dispute about the existence of the 18 February contract that RD2’s statutory demand expressly relies upon and therefore a dispute as to the identity of the principal debtor.
[22] If there is a genuine dispute, then NDP 2010 will be entitled to an order that the demand should be set aside, leaving the dispute to be resolved by a civil proceeding in the usual way.
[23] For present purposes it is for NDP 2010 to establish that there is a real dispute as to the existence of the alleged contract identifying it as the debtor for the sum demanded.
Discussion
Is the existence of the alleged contract a matter of genuine dispute?
[24] Counsel for NDP 2010’s submissions in support of its position that there was
no contract as the statutory demand alleges are essentially these:
(a) NDP 2010’s statement in its letter dated 1 February 2011 that the liabilities of Natural Dairy Products 2007 Limited remain with that company made clear it had no intention of assuming liability and
although that letter proposed a repayment plan, that proposal was
made without any suggestion that it was itself assuming responsibility for the debts;
(b)As NDP 2010’s email of 18 February 2010 shows, some contractual terms had not been agreed to and therefore there was no contract. For instance, RD2 wanted the Group to assign the proceeds of an insurance claim to it, but this was not agreed to;
(c) No formal written agreement was ever produced. NDP 2010’s evidence is that it would not have entered into any contract without giving all directors the opportunity to approve it. That never happened;
(d)The correspondence of June and August 2011 does not refer to any agreement having been reached in February 2011; rather, the correspondence demonstrates that an agreement was still being negotiated;
(e) Any discussions surrounding NDP 2010’s giving a guarantee were limited to its guaranteeing NDP Trading Limited, and though a guarantee was referred to in the February correspondence, the word “agree” was used in Mr Thornton’s response email dated 18 February
2011. “Agree” was coloured in red, thus clearly identifying that the guarantee was a matter that required changes, noting or further discussion.
[25] Counsel submits that on this basis the question whether or not NDP 2010 became contractually bound to assume liability for supplies to Natural Dairy Products Limited’s debts and therefore whether the debtor remains Natural Dairy Products Limited as the company that ordered the goods supplied is genuinely contentious.
[26] In response, counsel for RD2’s submissions are essentially threefold. Firstly,
that an agreement that NDP 2010 would assume liability for Natural Dairy Products
Limited did exist: such agreement is, counsel argues, evidenced by the emails dated
16 and 18 February 2011, and the fact that the parties continued to do business.
[27] Secondly, counsel submits, RD2 agreed to continue to supply the Group with goods on the condition that, after the restructuring of the Group, the debt would be repaid by NDP 2010. RD2 says that the fact that it stopped supplying goods to NDP
2010’s trading company, NDP Trading Limited, despite their meeting the cost of that supply points to the existence of an agreement that NDP 2010 would assume liability for outstanding debts and that such agreement had been breached.
[28] Thirdly, in respect of the lack of formality of the alleged agreement, counsel submits that the evidence shows that RD2’s four-year relationship with the Group was characterised by a loose approach to such arrangements. For example, invoices continued to be addressed to Natural Dairy Products New Zealand Limited after that company ceased trading and orders were in fact made by subsequent trading companies.
[29] I agree with counsel for NDP 2010 that the existence of the contract RD2 relies on, and therefore whether NDP 2010 has assumed liability, is genuinely contentious. I am satisfied that it is reasonably arguable that NDP 2010’s email dated 18 February 2011 did not give rise to a binding agreement as alleged in the demand, and that there is a real issue to be tried.
[30] The comments coloured in red in the email (to identify matters that required changes, noting or further discussion) cast doubt on whether the parties had reached agreement on crucial matters, including the terms of a possible repayment plan, the existence of a guarantee, the payment of interest and the assignment of an insurance claim. Confirmation was, according to that email, to be made the following Tuesday afternoon. Such doubts are reinforced by subsequent correspondence, which indicates that a repayment plan had still not been finally agreed. There is also a lack of clarity, at least without further evidence, as to which company Mr Honiss and Mr Thornton were referring to in their various references to “ND”.
[31] On this basis, the circumstances are such that the position NDP 2010 contends for is tenable; the “non-existence” of a contract made on 18 February is arguable. I conclude therefore, that NDP 2010 has discharged its onus of demonstrating a fairly arguable case that it is not the debtor. The statutory demand must be set aside accordingly, subject to an exercise of the Court’s discretion which I discuss below.
[32] For completeness, I note that NDP 2010 also makes two other broad submissions to counter any suggestion that as to its giving of a guarantee and or being bound by assurances that pre-date its incorporation. NDP 2010 contends that:
(a) The substance of RD2’s demand is an alleged contract of guarantee, but that any discussions surrounding its giving a guarantee were limited to its guaranteeing NDP Trading Limited. Further, that though a guarantee was referred to in the February correspondence the word “agree” as used in Mr Thornton’s response dated 18 February 2011 was coloured in red and thus the guarantee was identified as a matter that required changes, noting or further discussion. Finally, the purported agreement that RD2 relies on does not fulfil the formal requirements of the Property Law Act 2007 and the Electronic Signatures Act 2002;
(b) Any assurances made by Mr Thornton prior to NDP 2010’s
incorporation are not binding on it. Materially, any discussions on 6
October 2010 that outstanding invoices would be paid by the new business could not bind NDP 2010 as that conversation would have taken place before its incorporation.
[33] As RD2’s statutory demand does not rely on any contract of guarantee or “pre-incorporation” agreements (whether because of ratification or otherwise) it is unnecessary to deal with these submissions except in so far as they are raised by counsel for RD2 at the hearing as matters going to the Court’s discretion.
Residual Discretion
[34] RD2 submits (though without conceding) that if the Court decides that there is a substantial dispute as to the debt owing or due, it should nevertheless exercise its residual discretion under s 290 not to set aside the statutory demand. In support of this, RD2 submits that:
(a) A review of the evidence suggests that the Group failed to identify the liable company with precision or has been intentionally vague, at various times alleging that different entities are liable. It failed for four years to advise RD2 that its invoices, made out to Natural Dairy Products of New Zealand Limited, were made out to the wrong entity.
(b)The Group, through Mr Thornton, represented that payment would be made after recapitalisation. Recapitalisation was then carried out in such a manner that none of the entities it alleges owe the debt have any assets or income to satisfy the debt.
(c) The Group restructured itself with RD2’s knowledge. It must have known that RD2 would not have sat on its right to pursue recovery if it believed there was any risk that the debt would not be paid.
(d)Unless the Court’s discretion is exercised, the Group may escape liability for a debt and such outcome would condone NDP 2010’s actions and lead to an unfair result.
[35] The submission touches on factors that may yet provide RD2 with a remedy, but I cannot safely rely on them to uphold the statutory demand any more than I can on the ground set out in the demand.
[36] Without wishing to be seen as expressing a view on either side’s position, RD2 may yet have a claim against NDP 2010 based on the contract it alleges, or for ratification of Mr Thornton’s apparent promise of 8 October 2010 that the new companies would take on responsibility for the debt upon recapitalisation. Such
ratification may possibly be inferred from aspects of the parties’ conduct after NDP
2010’s incorporation in November 2010, not the least significant being the basis on which RD2 was invited in October 2010 to make ongoing supply. If such an inference is to be made it may be that there was valid ratification that is enforceable against NDP 2010 as if it had been incorporated and a party to the agreement when it
was made.[3]
[3] Companies Act 1993, s 182(2)
[37] Conceivably, other possibilities may be that Mr Thornton is liable as agent to the company prior to and in contemplation of its incorporation or that discretionary relief is available by way of validation of contract under s 184. The fact that terms of repayment were under discussion as late as February 2011 may not be fatal to a claim that there was agreement between Mr Thornton or National Dairy Products Ltd on the one hand and RD2 on the other and may not expugn agreement (if any) that was reached in October 2010.
[38] However, if indeed such claims are arguable they must be left for another occasion. Understandably, such claims are not relied on in the statutory demand or developed in submissions as they involve disputes of fact and the exercise of discretions that cannot be dealt with in the context of this insolvency proceeding. If pursued, they ought to be raised by statement of claim in the ordinary way.
Result
[39] For the reasons discussed, I am satisfied that the basis for the statutory demand is open to dispute though there may yet be grounds for a finding of liability in an ordinary action. It follows that I am obliged to set aside the statutory demand and I order accordingly.
[40] Costs follow the event under the statutory costs regime. NPD 2010 is, as the successful party, entitled to costs on a 2B basis plus disbursements as fixed by the
Registrar.
Associate Judge Sargisson
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