OCR International Limited v Leighton

[2021] NZHC 3377

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2021-443-00012

[2021] NZHC 3377

UNDER

Companies Act 1993, s 290

IN THE MATTER OF

An application to set aside a statutory demand

BETWEEN

OCR INTERNATIONAL LIMITED

Applicant

AND

STEPHEN PHILIP LEIGHTON

Respondent

Hearing:

18 October 2021

Appearances:

J Long and P K J Roycroft for Applicant

Z G Kennedy and D M Kraitzick for Respondent

Judgment:

9 December 2021

JUDGMENT OF ASSOCIATE JUDGE P J ANDREW

This judgment was delivered by Associate Judge Andrew on 9 December 2021 at 4.00 pm

pursuant to r 11.5 of the High Court Rules Registrar / Deputy Registrar

Date……………………………

OCR INTERNATIONAL LTD v LEIGHTON [2021] NZHC 3377 [9 December 2021]

Introduction

[1]    OCR International Limited1 applies to set aside a statutory demand.2 It does not dispute that the debt is owing; only that it is due. The narrow issue for determination is the interpretation of two clauses in a repayment plan between the parties of July 2020. Under that repayment plan OCRI agreed to pay, by way of instalments, its undisputed debt to Mr Leighton, the respondent. The debt then due and owing totalled approximately £1.5 m.

[2]    OCRI acquired shares in Mr Leighton’s UK-based company, Has Bean Coffee Limited, in June 2018 for £6 m. The repayment plan restructured OCRI’s debt obligations to Mr Leighton for a deferred payment that was part of the purchase price and the repayment of a credit facility provided by Mr Leighton. The restructuring was brought about by the significant impact of COVID-19 on OCRI’s coffee business.

[3]    OCRI contends that it has a genuinely arguable claim that under the repayment plan it had a unilateral right to cease making further instalments because of ongoing financial difficulties owing to COVID-19 and that Mr Leighton cannot enforce his accrued enforcement rights until April 2022. Mr Leighton says that his contractual obligation not to seek to enforce his rights continues only so long as the repayments under the repayment plan continue to be met.

[4]    The issue I must determine is whether OCRI can establish the interpretation it contends for is genuinely and fairly arguable.

Factual background

[5]    OCRI has operated as a New Zealand-based parent company coffee business since 2011.

[6]    In 2018, OCRI sought to expand and, following a commercial negotiation, agreed to purchase all of the shares in Has Bean Coffee Ltd. OCRI was to pay the agreed purchase price of £6 m in several tranches: £4 m in cash and shares in OCRI

1      OCRI.

2      Companies Act 1993, s 290.

on settlement, with the remaining balance divided into two equal deferred payments of £1,084,297.89 due at the end of June 2019 and June 2020 respectively. The first of these deferred payments was paid. It is the second payment that is at issue.

[7]    From the beginning of 2020, restrictions imposed in response to COVID- significantly impacted OCRI’s business. Demand for wholesale coffee supplies declined, requiring the closure of its retail outlets and, in turn, causing significant disruption to the group’s revenue.

[8]    OCRI and Mr Leighton accordingly entered into negotiations about his repayment entitlements. This resulted in the signed repayment plan of 2 July 2020. The repayment schedule attached to the repayment plan provided for the last payment to be made to Mr Leighton in March 2022. The critical clauses of the repayment plan at issue are cls 3 and 4.3

[9]Clause 3 provides:

Consistent outperformance against the forecast and/or access to new loan facilities may enable additional repayments over and above those noted below. Accordingly, OCRI undertakes to formally review the plan each quarter, with a view to accelerating repayments if practicable. In the event such review gives rise to a potential downward adjustment, or cessations to one or more Repayments, one month’s notice will be provided before such change takes effect, and an updated Repayment Schedule provided.

[10]Clause 4 provides:

For so long as the Repayments under this plan continue to be met (or, if varied, as agreed in writing between the parties), Stephen Leighton will not seek to enforce his rights under the Credit Documents.

[11]   In November 2020, OCRI repaid the credit facility component of the debt (£450,000).

[12]   On 18 November 2020, Mr Leighton resigned from his employment and directorships of Has Bean Coffee Ltd and OCRI.

3      The document itself does not employ clause numbers. For ease of reference, however, I adopt the same approach as counsel of assigning each paragraph a sequential clause number.

[13]   Due to the worsening COVID-19 situation at the end of 2020, OCRI provided Mr Leighton with a “revised proposed payment plan” and one month’s notice of its intention to make interest-only payments in February and March 2021. The next day Mr Leighton agreed in writing to the changes to the repayment plan sought by OCRI. Under the revised repayment plan the final repayment was scheduled to be made in April 2022.

[14]   On 1 February 2021, Mathew  Downes,  CFO  of  OCRI,  sent  a  letter  to  Mr Leighton advising him that repayments under the revised repayment plan would cease save for the interest-only payment for February 2021. The letter states, “As soon as trading recovers to a point where we can confidently forecast a revised repayment plan, we will do so for your approval.”

[15]OCRI did not pay the interest-only payment of £8,786 on 1 March 2021.

[16]   On 3 March 2021, Mr Leighton formally served a statutory demand on OCRI in the sum of £983,530.

Relevant legal principles

Setting aside statutory demand

[17]Section 290 of the Companies Act 1993 relevantly provides:

Court may set aside statutory demand

(1)The court may, on the application of the company, set aside a statutory demand.

…

(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; or

(b)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; or

(c)the demand ought to be set aside on other grounds.

[18]   The general principles on an application to set aside a statutory demand under s 290(4)(a) are well settled:

(a)The onus is on the applicant to show there is “arguably a genuine and substantial dispute” as to whether the debt is owing or due.4 There need only be a “fairly arguable” basis on which it is not liable for the amount claimed.5 This is a question of fact to be determined in light of all the relevant circumstances.6

(b)The Court’s task is not to resolve the dispute, only to determine whether there exists a substantial dispute that the debt is owing or due.7

(c)Mere assertion a qualifying dispute exists is insufficient but only “some material short of proof” is required.8 Where this material is available, the dispute should normally be resolved first in ordinary proceedings, before any statutory demand is issued.9

(d)Finally, as on other summary applications, the Court must be cognisant of the features of the summary jurisdiction, including any disadvantage to applicants, and that it is distinct from the Court’s position in a full- blown trial.

Principles of contractual interpretation

[19]   There is no doubt as to the proper approach to contractual interpretation. It is an objective exercise and formed by the relevant background. In its judgment in Firm PI 1 Ltd v Zurich Australian Insurance Ltd, the Supreme Court put it in these terms:10

4      Link Electro Systems v GPC Electronics (NZ) Ltd [2007] NZCA 501, (2007) 18 PRNZ 946 at [17].

5      Alfex Doors & Windows Ltd v Alutech Windows & Doors Ltd (2001) 16 PRNZ 963 (CA) at [15];

United Homes (1998) Ltd v Workman [2001] 3 NZLR 447 (CA) at [27] and [32].

6      QDC Developments Ltd v Trustees of the Boss Properties Trust HC Wellington CIV-2010-485- 1761, 1 December 2010 at [7].

7      Confident Trustee Ltd v Garden & Trees Ltd [2017] NZCA 578 at [16](a); Link Electro Systems v GPC Electronics (NZ) Ltd, above n 4, at [17].

8      Link Electro Systems v GPC Electronics (NZ) Ltd, above n 4, at [17].

9      Confident Trustee Ltd v Garden & Trees Ltd, above n 7, at [16](c).

10     Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR. See also

Bathurst Resources Ltd v L & M Coal Holdings Ltd [2021] NZSC 85 at [43].

[60]       … the proper approach is an objective one, the aim being to ascertain “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.” This objective meaning is taken to be that which the parties intended. While there is no conceptual limit on what can be regarded as “background”, it has to be background that a reasonable person would regard as relevant. Accordingly, the context provided by the contract as a whole and any relevant background informs meaning.

[61]      The requirement that the reasonable person have all the back-ground knowledge known or reasonably available to the parties is a reflection of the fact that contractual language, like all language, must be interpreted within its overall context, broadly viewed. Contextual interpretation of contracts has a significant history in New Zealand, although for many years it was restricted to situations of ambiguity. More recently, however, it has been confirmed that purposive or contextual interpretation is not dependent on there being an ambiguity in the contractual language.

...

[63] While context is a necessary element of the interpretative process and the focus is on interpreting the document rather than particular words, the text remains centrally important. If the language at issue, construed in the context of the contract as a whole, has an ordinary and natural meaning, that will be a powerful, albeit not conclusive, indicator of what the parties meant. But the wider context may point to some interpretation other than the most obvious one and may also assist in determining the meaning intended in cases of ambiguity or uncertainty.

(footnotes omitted)

The parties’ positions

[20]The essential facts and the relevant legal principles are not in dispute.

[21]   As I noted at the outset, the discrete and narrow issue for determination relates to the proper meaning and construction, and relationship between, two clauses of the repayment plan. This includes cl 3, concerning cessation, and cl 4, concerning enforcement rights. The proper meaning and construction of these clauses determines the rights of the parties as to OCRI’s repayment obligations.

[22]   OCRI contends that under cl 3 it is entitled to unilaterally make a “downward adjustment” or “cessation” to one or more of the scheduled repayments under the repayment plan. It contends that on the ordinary and natural meaning, OCRI is not contractually obliged to meet the repayments under the repayment plan. OCRI

contends cl 3 simply obliges OCRI to give one month’s notice of any such inability and to undertake a review as to its financial position prior to any change.

[23]   It is common ground that cl 4 only requires Mr Leighton’s agreement to any updated repayment schedule and not to a duly notified cl 3 adjustment or cessation in scheduled repayments. The sole issue between the parties is the contractual effect of a unilateral decision by OCRI to reduce or cease any of the repayments.

[24]In that event, OCRI’s counsel contends that:

(a)Mr Leighton can only disagree with any proposed updated repayment schedule “provided he does so in good faith and with regards the underlying purpose of the Repayment Plan”.

(b)If the parties cannot agree on an updated repayment schedule, OCRI’s obligations take effect in accordance with its duly notified adjustment or cessation under cl 3 and its only obligation is to pay the total outstanding balance at the end of the most recently agreed repayment schedule’s term (ie, currently April 2022).

(c)Any failure to reach agreement on the repayment schedule does not entitle Mr Leighton to accelerate payments, demand adjusted or ceased payments or terminate the repayment plan. Consequently, and despite cl 4, Mr Leighton remains unable to enforce his rights under the credit document.

[25]   OCRI contends that cl 2 provides support for its interpretation of cl 3. Clause 2 states in material part:

Repayments under the plan remain contingent on current trading, the realization of future forecast cashflows and OCRI’s maintaining its ability to meet its obligations as they fall due (including to secured creditors). Future forecast cashflows are based on forward-looking assumptions, which reflect OCRI’s current best estimates and are subject to change. ...

[26]   Counsel for OCRI also submits that the broader contractual matrix and background, namely COVID-19, supports its position on interpretation. Relevantly, cl 1 provides the plan:

... has been formulated in response to discussion with Stephen Leighton and represents a maximum affordable but prudent position for OCRI in light of its available cash and the fundamental uncertainties created by the current pandemic.

[27]   Counsel for Mr Leighton contends that OCRI’s interpretation is directly contrary to the terms of cl 4. Clause 4 is directed to OCRI’s adherence to the terms of the repayment schedule last agreed by the parties (ie, in December 2020). That adherence is said to be a pre-condition to Mr Leighton’s agreement not to enforce his rights under the credit documents.

[28]   In addressing the critical issue of whether OCRI has established a genuine and substantial dispute, Mr Long, for OCRI, contended that the competing interpretations were both reasonably tenable. He contended that this interpretation issue is unsuitable for summary determination; the jurisdiction calls for short and swift hearings that are not to be converted into a full-blown trial.

Analysis

[29]   As noted above, the words of the agreement remain centrally important; it is the logical starting point. If the contract read as a whole has a natural and ordinary meaning, then that “will be a powerful, albeit not conclusive, indicator of what the parties meant.”11

[30]   The repayment plan is a relatively short and straightforward document. It consists of some six unnumbered paragraphs. I find that its natural and ordinary meaning provides clear support for Mr Leighton’s interpretation.

[31]It is useful to repeat the relevant effect of the clauses in sequence:

11     Firm PI 1 Ltd v Zurich Australian Insurance Ltd, above n 10, at [63].

(a)The document is headed “Debt repayment plan for Stephen Leighton (2 July 2020)”.

(b)Under cl 1, both parties acknowledge that the debt was due and owing to Mr Leighton. The clause provides that the repayment plan represents a maximum affordable but prudent position for OCRI in light of its available cash and fundamental pandemic-related uncertainties.

(c)It is evident from cl 2 that both parties acknowledged that OCRI was then unable to pay the debt given its cash reserves and the impact of COVID-19.

(d)Clause 3 provides that OCRI will undertake a quarterly review process with a view to accelerating repayments if practicable. In the event OCRI is unable to meet one or more repayments under the repayment schedule, it is to provide a month’s notice and submit an updated repayment schedule to Mr Leighton.

(e)Clause 4 records that “for so long as the Repayments under this plan continue to be met (or are varied as agreed) Stephen Leighton will not seek to enforce his rights under the credit document” (emphasis added).

[32]   The ordinary and natural meaning of the words in cls 3 and 4 does not support Mr Long’s submission that there is some arguably irreconcilable tension between these two clauses. In my view, it is clear from the text that in the event OCRI is unable to meet one or more payments under the repayment schedule, the parties have a month in which to negotiate the terms of an updated repayment schedule. If agreement is reached, the repayment plan as varied continues and Mr Leighton would be unable to exercise his enforcement rights under the credit documents for so long as OCRI complies with its obligations. On the other hand, if agreement cannot be reached, the repayment plan would come to an end and the parties then revert to the contractual position under the credit documents, which enable Mr Leighton to enforce payment of the debt in full.

[33]   I find that this is the only interpretation that is consistent with the repeated use of the word “plan” throughout the document, being a shorthand reference to the words “repayment plan” both in the heading in the document and in the repayment schedule. The consistent use of that term clearly supports the interpretation that the plan referred to in cl 4 is the same plan referred to in cl 1, the repayment schedule, and elsewhere in the document.

[34]   In its natural meaning, the stipulation that “one month’s notice will be provided before such change takes effect” in cl 3 does not obviate cl 4’s requirement for the parties’ written agreement to any variation. As Mr Kennedy, for Mr Leighton, submitted, it simply provides for a notice period to enable the parties to have sufficient time to explore whether a variation to the repayment schedule can be agreed, as was explained during the parties’ negotiations in July 2020.

[35]   I acknowledge the importance of cl 2 in providing context to the scheme of repayment. As Mr Long submitted, there is a clear acknowledgement that matters may change, owing to the turbulence of external circumstances. Equally, the broader contractual matrix of the parties negotiating the repayment plan in response to the COVID-19 crisis is an important factor. However, in my view, neither of those factors supports OCRI’s contention that it had a unilateral right to suspend all repayments with the legal consequence that Mr Leighton would be unable to enforce his accrued enforcement rights for the entirety of the term of the repayment plan. Clauses 3 and 4 can properly and plainly be read together as a coherent and commercial whole that recognises that OCRI might be unable to meet the repayments and provides a window of opportunity to address change of that kind. However, if the parties cannot then reach agreement, the status quo between them under the credit documents is restored. Mr Leighton is thus no longer restrained from pursuing his enforcement rights.

[36]   I reject Mr Long’s submission that Mr Leighton’s interpretation is not in accordance with business common sense or the purpose of the repayment plan, namely one premised on changeable cash flows, market performance and reviews and which confers a power to disagree on the respondent. On the contrary, Mr Leighton’s interpretation is a sound and sensible one: he agreed not to enforce the immediate payment of the undisputed debt so long as the repayments were made. However, if it

became clear that OCRI could not meet the repayments, he was free either to agree to further concessions by way of variation of the repayment plan or to revert to his accrued enforcement rights.

[37]   I acknowledge that Mr Leighton is not just a creditor, but also a shareholder of OCRI. This was, as Mr Long submitted, a businessmen’s deal and Mr Leighton may have been balancing competing interests. However,  consistent with those factors,  Mr Leighton was free to agree to further concessions provided, as cl 3 expressly contemplates, that he was given the necessary detail by way of an updated repayment schedule. In the circumstances, it makes no commercial common sense for OCRI to say that Mr Leighton is unable to enforce his accrued enforcement rights for the entirety of the term of the repayment plan irrespective of whether OCRI makes the repayments. I note that OCRI adopts this stance in circumstances where it has not provided an updated repayment schedule as clearly required by cl 3.

[38]   I acknowledge that cl 3 does not expressly state how or when any repayment schedule should be provided. It may be that a notice proposing a cessation of all repayments without further detail arguably constitutes an updated repayment schedule. However, that provides no answer to the question of whether OCRI has a unilateral right to reduce or cease any of the repayments.

[39]   I accept that the notice requirement in cl 3 is a safeguard for the parties so that any adjustments or cessations do not take any immediate effect. Again, however, while the notice itself may be issued on a unilateral basis, the fact that the notice is a safeguard does not mean that Mr Leighton cannot rely on his accrued enforcement rights if he does not agree with the proposed adjustment or cessation. I likewise reject Mr Long’s submission that any notice requirement would be superfluous if cl 4 required agreement between the parties as to any adjustments or cessation. I accept that an agreement can happen at any time, without any notice, but that does not alter the fact that the notice is, as Mr Long submitted, a safeguard.

[40]   Mr Long’s further submission that a failure to reach agreement on the repayment schedule (should it occur) does not entitle Mr Leighton to accelerate payments, is misconceived. Mr Leighton is not seeking to accelerate payments beyond

those agreed in the revised repayment plan of December 2020. Rather, he seeks to hold OCRI to those agreed contractual commitments and in reliance on his clear contractual rights, is entitled to rely on cl 4 for a reversion to the status quo. The debt is already due to Mr Leighton in full under the credit documents.

[41]   I also agree with Mr Kennedy’s submission that the parties’ exchange of email correspondence in July 2020 – over the same period the repayment plan was agreed – makes it clear that in the event that a payment is missed or adjusted without agreement, the intention was to fall back to the contractual position under the credit document. That email correspondence shows a common mutual understanding as to the meaning of the contract.12

[42]   The conduct of the parties in December 2020 when they negotiated and agreed on a revised repayment plan provides further support for Mr Leighton’s position. That conduct can properly be regarded as admissible subsequent conduct evidence in terms of the principles of contractual interpretation.13 It is conduct that goes to proving the objective intention of the parties. Consistent with their agreements of July 2020, a notice was issued by OCRI: a “revised proposed payment plan” with one month’s notice of his intention to make interest-only payments in February and March 2021. Mr Leighton then agreed in writing to the changes sought by OCRI. They then became operative as a variation as contemplated under cl 4. This post-contractual conduct reflects a clear mutual understanding of the repayment plan that is entirely consistent with Mr Leighton’s interpretation.

[43]   It may be that had solicitors drafted the repayment plan, they would not have used the words “take effect” in cl 3. However, construed in context, it is clear that it is not tenable to contend that they confer a right on OCRI to unilaterally vary the repayment schedule. On the contrary, they simply refer to the point in time when OCRI fails to meet the terms of the repayment schedule.

[44]   I reject Mr Long’s contention that an important live issue for trial would be the aims of the contract and that cross-examination might properly be directed at that

12     Bathurst Resources Ltd v L & M Coal Holdings Ltd, above n 10, at [76].

13     Bathurst Resources Ltd v L & M Coal Holdings Ltd, above n 10, at [89].

issue. As I have found, from the undisputed facts, objectively interpreted, the aims of the contract are clear and consistent with Mr Leighton’s position as not just a creditor but also a shareholder.

[45]   In conclusion on the critical interpretation issue, I find, as Mr Kennedy submitted, that OCRI’s position is strained and artificial. Its interpretation is contrary to both commercial common sense and the natural and ordinary meaning of the words. It requires additional terms to be implied into the repayment plan without a proper basis for doing so.

[46]   I find therefore that OCRI has failed to establish a genuine and substantial dispute as to whether or not the debt is due. The only tenable interpretation is that the debt is due and owing and there is no basis for setting aside the statutory demand. I acknowledge that I am operating in a summary jurisdiction and that my decision in substance resolves the substantive dispute. However, this is a clear case where the essential facts are not in dispute and the only tenable interpretation is that the debt at issue is both due and owing.14

[47]   I also reject OCRI’s alternative claim that the statutory demand should be set aside under s 290(4)(c) of the Companies Act on the grounds of “material misstatement” in the demand. For reasons given above, there was no material statement and the threshold in s 290(4)(c) of a substantial injustice has not been made out.

Result

[48]   I dismiss OCRI’s application to set aside the statutory demand. However, I extend time for complying with the statutory demand pursuant to s 290(3) of the Companies Act until 12 January 2022. That is a considerable indulgence to OCRI but in selecting that date I have taken into account the current COVID-19 circumstances (of particular relevance to these proceedings) and the imminent Christmas holiday period.

14 See Yandina Investments Ltd v ANZ National Bank Ltd [2013] NZCA 469; Watts & Hughes Construction Ltd v Complete Siteworks Co Ltd [2014] NZCA 564, (2014) 22 PRNZ 397; United Homes (1988) Ltd v Workman, above n 5.

[49]   I order that the applicant, OCR International Ltd, is to pay to Mr Stephen Leighton, the respondent, by 12 January 2022, the sum of £983,530.00, failing which Mr Leighton may apply to put OCRI into liquidation.

[50]   As to costs, having succeeded, I am of the preliminary view that the respondent, Mr Leighton, is entitled to costs and disbursements and on a 2B basis. If the parties cannot agree on costs, then memoranda (of no more than three pages’ length) are to be filed and served within 14 days.

Associate Judge P J Andrew