Prima Technologies Ltd (in liq) v Prima Tech USA Inc HC Auckland CIV 2010-404-1116

[2010] NZHC 1797

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2010-404-001116

UNDER  the Companies Act 1993

BETWEEN  PRIMA TECHNOLOGIES LTD (IN LIQ) First Plaintiff

ANDDARAN NAIR Second Plaintiff

ANDPRIMA TECH USA INC First Defendant

AND  KMQ INC

Second Defendant

ANDKIMBERLEY QUINN Third Defendant

Hearing:         7 October 2010

Appearances: D Smyth for Plaintiffs

S McAnally and B Hojabri for Defendants

Judgment:      7 October 2010

ORAL JUDGMENT OF ASSOCIATE JUDGE BELL

Solicitors/Counsel:

McDonald Law, PO Box 28624, Remuera, Auckland

Keegan Alexander, PO Box 999, Auckland

D E Smyth, PO Box 105270 Auckland

PRIMA TECHNOLOGIES LTD (IN LIQ) AND ANOR V PRIMA TECH USA INC AND ORS HC AK CIV-

2010-404-001116  7 October 2010

[1]      The defendants apply for orders that the first plaintiff pay security for costs and for a stay of proceeding until the security is given.  They also seek an order that the claim against the third defendant be struck out.

[2]      The plaintiff, Prima Technologies Ltd (in liq), is a New Zealand company which was incorporated in June 2000 and went into liquidation by shareholders’ resolution on 27 July 2007.  The shareholders of the plaintiff are the third defendant, Mr Quinn, and Mr Tom Hogan.  Mr Quinn is the sole director of the company.  The second plaintiff is the current liquidator of the first plaintiff.

[3]      Prima Tech USA Inc was a North Carolina corporation.   It dealt in animal health  products.    It  was  established  in  October  1996.    Its  president  was  Mr Kimberley Quinn.   KMQ Inc is another North Carolina corporation established in July 1998.  In January 2007, the first defendant and the second defendant merged, with the surviving entity being KMQ Inc.

[4]      At this point, it is necessary to record a matter submitted by Mr McAnally for the defendants.  He said that under North Carolina law, the effect of the merger is that the first and second defendants became one and that KMQ Inc succeeded to the assets of Prima Tech USA Inc and also is liable for the debts of Prima Tech USA Inc.  That means that effectively Prima Tech USA Inc has gone out of existence and the proceeding need not continue against it.  The proceeding will continue without Prima Tech USA Inc being cited as the first defendant.  The defendants will not be able to contend later that the effect of the merger is different from that submitted by Mr McAnally.

[5]      Mr Quinn is president of the second defendant.  He is a United States citizen living in North Carolina.   Prime Technologies Ltd was established to conduct the operations of Prima Tech USA Inc in New Zealand.

[6]      It appears that KMQ Inc continues to operate using the trade name Prima

Tech USA.

[7]      The background to the litigation is that another United States corporation, Kiwi Marketing Inc, took an assignment of a contract between Kiwi Enterprises Inc, also an American corporation, and Prima Technologies Ltd.   Under this contract, commission was allegedly payable to Kiwi Enterprises Inc, and through the assignment  to  Kiwi  Marketing  Inc.     Kiwi  Marketing  Inc  made  a  claim  for commission payments said to be in the order of US$109,000.   It also alleged a claim of  US$678,000  for  loss  of  earnings  as  a  result  of  wrongful  termination  of  the contract.  The president of Kiwi Marketing Inc is a Mr C J McGregor.

[8]      It  appears  that  the  contract  between  Kiwi  Enterprises  Inc  and  Prima Technologies Ltd provided for arbitration of disputes.  An arbitrator was appointed on  26  July 2007.    It  was  the  next  day that  Prima  Technologies  Ltd  went  into liquidation by a shareholder resolution.   On 20 July 2007, as director of Prima Technologies Ltd, Mr Quinn signed a certificate under the Companies Act as to the solvency of the company.  As this proceeding has demonstrated, that certificate was quite inaccurate.

[9]      The liquidator appointed by the shareholders was a Mr R W Hargrave, an Auckland accountant.  The plaintiffs portray Mr Hargrave as a tame liquidator.  The evidence suggests that he did not treat the matter as an insolvent liquidation.  He did reject proofs of debt submitted by Kiwi Marketing Inc.  Kiwi Marketing Inc had to apply to this Court for orders under the Companies Act for leave to continue the arbitration against Prima Technologies Ltd while it was in liquidation, and also sought  an  order  under  s  284(1)(b)  of  the  Companies  Act  1993  requiring  the liquidator to accept its proof of debt.  That application came before Associate Judge Faire.    In  his  decision,  he  gave  leave  to  Kiwi  Marketing  Inc  to  continue  the arbitration and adjourned the application to reverse the liquidator’s rejection of the proof of debt.   That arbitration has not been continued. Instead, there has been a change of liquidator.   The second plaintiff in this proceeding has succeeded Mr Hargrave as liquidator.  This proceeding has followed.

[10]     The original statement of claim in this proceeding contained two causes of action. The first was a claim for some NZ$365,000 against Prima Tech USA Inc which  the  liquidator  says  is  the  balance  of  a  trading  account  between  Prima

Technologies Ltd and Prime Tech USA Inc.   The liquidator relied on company records and also carried out his own reconciliation payments and invoices.

[11]     The second cause of action turns on intellectual property rights.  It appears that the United States companies transferred to Prima Technologies Ltd certain intellectual  property  rights.    These  included  Australian  and  United  States  trade marks, United States, European and New Zealand patent applications, and possibly a New Zealand design application.  Mr McAnally says that there was an intention that all the intellectual property would be transferred to Prima Technologies Ltd.   Just how many property rights were transferred is not at this stage completely clear. Prima Tech USA Inc had all its intellectual property rights valued by a Georgia- based asset valuer.  The effective date of valuation was July 2001.  He said that at July 2001 the intellectual property had a value of US$2.7 million.  It is pertinent to note that, in his valuation, he noted the expiry date of various intellectual property rights. None of them expired later than July 2021.   These were  depreciating assets.

[12]     The financial statements of Prima Technologies Ltd were prepared by Staples

& Rodway, New Zealand accountants.   They showed that the intellectual property rights  held  by  Prima  Technologies  Ltd  had  a  New Zealand  book  value  of NZ$5,234,235.   The accounts do not show any depreciation of this book value figure.  Mr  Quinn  suggests  that  the  New Zealand  dollar  figure  represents  the New Zealand dollar equivalent of the valuation by the United States valuer of the intellectual property rights.  I am not sure that I can share that assumption.  That may put an unduly low value on the New Zealand dollar at the relevant time of valuation.

[13]     However,  what  is  significant  is  that  in  early  January  2007,  intellectual property rights held by Prima Technologies Ltd were transferred to KMQ Inc.  It is necessary here to record another concession made by Mr McAnally.   That is that KMQ Inc was the recipient of the intellectual property rights formerly held by Prima Technologies Ltd.   That is relevant to the application for strike-out.   The second cause of action is under s 298 of the Companies Act and alleges that KMQ Inc and Mr Quinn were the recipients of the intellectual property.  It is now clear, in the light of the concession made by Mr McAnally on behalf of both these defendants, that the only recipient was KMQ Inc.   So far as the allegations under s 298 are directed

against the third defendant, Mr Quinn, they are not properly founded, and those allegations against Mr Quinn are struck out.   The defendants will not be able to contend later that KMQ Inc did not receive the intellectual property rights from Prima Technologies Ltd.

[14]     The defendants say that the intellectual property rights transferred in early

2007 were applied to satisfy the indebtedness of Prima Technologies Ltd to Prima Tech  USA  Inc  and  to  Quinn  Finance  Trust,  a  trust  associated  with  the  third defendant. The balance sheet for Prima Technologies Ltd at 31 December 2006 shows long term liabilities to Prima Tech USA of approximately $2,601,000 and to Quinn Finance Trust of $1,050,000. On my calculations, Prima Technologies Ltd’s indebtedness to Prima Tech USA Inc and Quinn Finance Trust totals $3,650,409.78.

[15]     The liquidator is the plaintiff for the second cause of action under s 298 of the Companies Act.  The liquidator says that the transfer of the intellectual property in satisfaction of the debt was at an undervalue.   He is relying on the book value figure of $5,234,235 to say that the intellectual property transferred was worth more than the indebtedness of $3,650,000.  He says that the transaction comes within s 298 of the Companies Act 1993 as having been made within the specified period of three years before liquidation, and was in favour of another company that was controlled by a director of Prima Technologies Ltd, that director being Mr Quinn.

[16]     The liquidator claims NZ$5,234,235.00 in his second cause of action.  That figure is optimistic.

The application for security for costs

[17]     The application is made under r 5.45 of the High Court Rules:

5.45     Order for security of costs

(1)       Subclause (2) applies if a Judge is satisfied, on the application of a defendant,—

(a)       that a plaintiff—

(i)        is resident out of New Zealand; or

(ii)       is a corporation incorporated outside New Zealand; or

(iii)      is a subsidiary (within the meaning of section 5 of the Companies

Act 1993) of a corporation incorporated outside New Zealand; or

(b)that there is reason to believe that a plaintiff will be unable to pay the costs of the defendant if the plaintiff is unsuccessful in the plaintiff's proceeding.

(2)       A Judge may, if the Judge thinks it is just in all the circumstances, order the giving of security for costs.

(3)       An order under subclause (2)—

(a)requires the plaintiff or plaintiffs against whom the order is made to give security for costs as directed for a sum that the Judge considers sufficient—

(i)        by paying that sum into court; or

(ii)       by giving, to the satisfaction of the Judge or the Registrar, security for that sum; and

(b)       may stay the proceeding until the sum is paid or the security given.

(4)       A Judge may treat a plaintiff as being resident out of New Zealand even though the plaintiff is temporarily resident in New Zealand.

(5)       A Judge may make an order under subclause (2) even if the defendant has taken a step in the proceeding before applying for security.

(6)       References in this rule to a plaintiff and defendant are references to the person (however described on the record) who, because of a document filed in the proceeding (for example, a counterclaim), is in the position of plaintiff or defendant.

[18]     An application under r 5.45 involves these steps:

a)        Has the applicant satisfied the Court of the threshold under r 5.45(1)?

b)        How is the discretion under r 5.45(2) to be exercised?

c)        What amount should security for costs be fixed at?

d)       Should a stay be ordered?

The threshold

[19]     There is clear evidence that Prima Technologies  Ltd is in liquidation, is insolvent, and has no assets out of which an order for costs against the defendants could be satisfied.  However, there is no evidence that the liquidator himself, also a plaintiff, will not be able to satisfy an order for costs.  That aspect, however, is not

relevant to the threshold test under r 5.45(1)(b).  The Court has to be satisfied that a plaintiff will be unable to pay the costs, if that plaintiff is unsuccessful in its proceeding.  For  that  purpose,  the  ability of  other  plaintiffs  to  pay  costs  is  not relevant.

Exercise of the discretion

[20]     On the exercise of the discretion the decision of the Court of Appeal in A S McLachlan v MEL Network Ltd (2002) 16 PRNZ 747 provides useful guidance:

[13]     Rule 60(1)(b) High Court Rules provides that where the Court is satisfied, on the application of a defendant, that there is reason to believe that the plaintiff will be unable to pay costs if unsuccessful, “the Court may, if it thinks fit in all the circumstances, order the giving of security for costs”. Whether or not to order security and, if so, the quantum are discretionary. They are matters for the Judge if he or she thinks fit in all the circumstances. The discretion is not to be fettered by constructing “principles” from the facts of previous cases.

[14]      While  collections  of  authorities  such  as  that  in  the  judgment  of Master Williams in Nikau Holdings Ltd v BNZ (1992) 5 PRNZ 430, can be of assistance, they cannot substitute for a careful assessment of the circumstances of the particular case.  It is not a matter of going through a checklist of so-called principles.  That creates a risk that a factor accorded weight in a particular case will be given disproportionate weight, or even treated as a requirement for the making or refusing of an order, in quite different circumstances.

[15]      The rule itself contemplates an order for security where the plaintiff will be unable to meet an adverse award of costs.   That must be taken as contemplating also  that  an  order  for  substantial  security  may,  in  effect, prevent the plaintiff from pursuing the claim.   An order having that effect should be made only after careful consideration and in a case in which the claim has little chance of success.   Access to the Courts for a genuine plaintiff is not lightly to be denied.

[16]     Of course, the interests of defendants must also be weighed.  They must be protected against being drawn into unjustified litigation, particularly where it is over-complicated and unnecessarily protracted.

[21]    In short, the Court must weigh competing interests.   On the one hand, defendants ought not to be oppressed by litigants who will not be subject to the discipline of costs being awarded if their claim is unsuccessful.  On the other hand, litigants with meritorious claims ought not to be deprived of the opportunity of pursuing their claim in court by onerous security requirements.

Merits

[22]     Decisions on the exercise of the discretion have noted that applications for security for costs are ordinarily made at an early stage of the proceeding when it may be difficult to gauge the strength of a plaintiff’s claim.

[23]     So far as the first cause of action is concerned, the liquidator says that he has examined  the  financial  records  of  Prima  Technologies  Ltd  and  has  reconciled invoices issued by Prima Technologies Ltd to Prima Tech USA Inc, and taken into account payments against invoices to produce a balance of account.   He has also relied on the accounts prepared by Staples Rodway.   Those accounts have been signed by Mr Quinn, as director of Prima Technologies Ltd.  Mr Smyth also makes the point that, because of the overseas ownership of Prima Technologies Ltd, these financial statements had to be lodged with the Companies Office, which carries an extra responsibility.

[24]     The defendants say the matter may require further investigation.  However, what the defendants said was not particularly impressive in terms of suggesting that the plaintiffs would have too many difficulties in at least proving the trading debt. What, however, might loom large at the hearing is the value of the intellectual property rights.

[25]     KMQ Inc, which could otherwise prove as creditor for $2.6 million, might contend that the value of the intellectual property rights transferred is significantly less than the book value figure.  Therefore, it might be able to argue that, when set- off is applied under s 310 of the Companies Act, it remains a creditor, and that might be used to reduce the indebtedness between Prima Technologies Ltd and Prima Tech USA Inc/KMQ Inc.   In other words, I see a linkage between the first and second causes of action because of the common element of valuing the intellectual property rights transferred in January 2007.

[26]     At this stage, it is too early to gauge just how strong the claim under s 298 of the Companies Act will be.   Certainly, the book value put on the rights by the New Zealand accountants is an indicator as to value, but against that I note the

failure to depreciate the assets, when some depreciation would be required given the limited life of intellectual property rights.  Beyond that, it is speculative, but there is this factor to be taken into account.   The transaction involving the transfer of the rights took place in January 2007, apparently at a time when Kiwi Marketing Inc had made  its  claim  known,  and  when  Prima  Technologies  Ltd  was  clearly  facing financial difficulties.  The taking of these assets in reduction of debt is the kind of transaction which can come within s 292 of the Companies Act, and there is at least the air of this transaction being intended to have a preferential effect.

[27]   The question of preferential effect is also marked by the way that the indebtedness of Prima Tech USA Inc and Quinn Financial Trust was treated in the books of Prima Technologies Ltd.  They were said to be convertible notes to secure the debt.  It is apparent there was not an actual security put in place, but it may be that Quinn Financial Trust and Prima Tech USA Incs’ positions as holders of convertible notes may be subordinate to that of Kiwi Marketing Inc as an unsecured trade creditor.  It is only a preliminary observation and something that needs to be clarified further, but it does suggest that there is something in the claim under s 298 of the Companies Act for the transfer being at an under-value and intended to have preferential effect.  Certainly it is not a claim that can be dismissed out of hand at this stage.   It is a claim which a liquidator ought properly to pursue and seek a determination.

[28]     What is also worrying about the transaction is that the liquidator contacted the lawyers who acted on the transaction, A J Park Law.  Apparently A J Park Law have refused to hand over their records relating to the transaction, claiming privilege and indicating therefore that these documents are not available to the liquidator, even though he is a liquidator of a company that is a party to the transaction.   This unwillingness to waive privilege by the second defendant and to prevent open disclosure of the transaction adds to the suspicion surrounding this transaction.

Funding of litigation

[29]     This litigation is clearly being funded by Mr McGregor through his company, Kiwi Marketing Inc.   It is relevant that the liquidator in person is a party to this

proceeding.  A liquidator is the plaintiff in a claim under s 298.  The liquidator is a New Zealand resident and there is no evidence to suggest that he will not be good for an  order  for  costs.    I  assume  that  as  a  prudent  liquidator,  he  has  obtained  an indemnity for any liabilities he may incur in the conduct of the litigation, including any liability for costs. The presence of a plaintiff in New Zealand, not shown to be insolvent, must give some assurance that any order for costs in favour of the defendants would be effectively enforceable in New Zealand.

[30]     That leads to the point that the liquidator is not a plaintiff in the other causes of  action.    I  invited  Mr  Smyth  to  take  instructions  whether  the  liquidator  was prepared to carry liability, not only for the cause of action where he is sole plaintiff, but also for the cause of action where Prima Technologies Ltd is the plaintiff.  In the time available, Mr Smyth was unable to obtain instructions.  However, I regard the ability of  the  liquidator  to  answer  to  an  award  of  costs  as  being  an  important protection for the defendants in this case.  I will condition my order on the liquidator being prepared to accept that liability.

Proceeding by liquidator

[31]     The next factor is that there is a traditional reluctance to require liquidators to give security for costs.  From the authorities cited for the defendants, it appears that while that rule was relatively inflexible in the past, increasingly in recent years it has been somewhat relaxed.   Nevertheless, the Court’s reluctance is based on the fact that liquidators ought not to be inhibited by security for costs requirements from bringing proceedings to maximise returns for the benefit of all creditors, and to ensure that people are not prevented by their impecuniosity from taking action.   I find that those factors are relevant here.

Conduct of the defendants

[32]     What has struck me in reading the evidence in this case is that there has been a consistent course of obstruction by the defendants to prevent Kiwi Marketing Inc from pursuing its claim to obtain recovery.  Kiwi Marketing Inc took proper steps to

go to arbitration, only to have the arbitration aborted by Prima Technologies Ltd being put into liquidation.  If Prima Technologies Ltd did have a proper defence to the claim, I would have expected it to front up at the arbitration by giving evidence and showing that it had a good defence.  The liquidator has apparently accepted the proof of debt to the extent of the claim for commission, while reserving his position on the claim for damages.

[33]     There was also the transfer of intellectual property to KMQ Inc, apparently preferential. Further, once Prima Technologies Ltd was in liquidation, the liquidator appointed for a solvent liquidation opposed the continuation of the arbitration.  That was needless obstruction.

[34]     Then there has been the failure by KMQ Inc, first of all, to disclose the fact that it had become the sole merged entity that had taken over the assets of Prima Tech USA Inc, and also the refusal to disclose documentation relating to the transfer of the assets.  Clearly, there was a calculated course by the North Carolina entities to slow and obstruct Kiwi Marketing Inc from trying to pursue recovery.

[35]     In the context of all that conduct, for the defendants to then put up a further obstruction by way of security for costs would, in my view, be unduly oppressive, and stand in the way of Kiwi Marketing Inc’s efforts to pursue recovery of its commission.

[36]     In my view, the liquidator ought to be able to pursue the claims without being required to put up security for costs, so long as the liquidator himself is prepared to undergo personal liability for any order for costs that might be incurred on any of the causes of action made in this proceeding.  That balance would secure a fair outcome for both parties.

[37]     Having made that determination, it is not necessary for me to move on to the other matters.  In case the matter is taken further, the defendants’ proposal was that the security for costs be set at $40,000, to be paid on a staged basis with an order for stay.  Mr McAnally placed before me a calculation showing costs on a 2B scale in the order of $50,000.  Mr Smyth did not take serious issue with that.  Mr McAnally’s

calculation did not take into account what seemed to me would be fairly heavy disbursements that might be incurred in a case like this.  There could be very heavy expenses incurred with evidence having to be obtained from the United States, and also with obtaining valuation evidence on intellectual property rights.  So if I were minded to order security, I regard Mr McAnally’s proposals of $20,000 put up now and $20,000 at a later stage as being reasonable.

[38]     If the liquidator is unwilling to accept the condition I have imposed regarding personal liability, then the defendants are at liberty to bring this matter on for hearing again and I will reconsider the matter.

[39]     With that reservation, I dismiss the application for security for costs.

[40]     I also record that, in anticipation of this application, the plaintiff has filed an amended statement of claim.  The amended statement of claim still shows Mr Quinn as a defendant to the second cause of action under s 298 of the Companies Act.  I direct that Mr Quinn be struck out under that cause of action as a defendant with that cause of action remaining alive only against KMQ Inc.   The new cause of action alleges breaches of duty by Mr Quinn under the Companies Act.

[41]     I have heard counsel on costs.   Mr Smyth suggested that the result was something of a draw and Mr McAnally did not suggest otherwise.   In these circumstances, I make no order as to costs.

[42]     I give further directions.

Pleadings

[43]     The   plaintiffs are not required to replead the amended statement of claim. Instead, the amended statement of claim is to be read with any references to the third defendant in the second cause of action deleted.  The defendants are to file and serve a statement of defence by 13 October 2010.

Discovery

[44]     All parties are to file and serve affidavits of documents by 30 November

2010.

Inspection of documents

[45]     All parties are to complete inspection of documents before Christmas 2010.

Intellectual property valuations

[46]     The   intellectual   property   rights   which   were   transferred   by   Prima Technologies Ltd to KMQ Inc in January 2007 are to be valued by expert valuers.  In the first instance, the defendants are to obtain a valuation which they are to supply to the plaintiffs before Christmas 2010.   The plaintiffs are to obtain their own valuation, which is to be completed and supplied to the defendants before the end of February 2011.

[47]     There  will  be  a  case  management  conference  during  March  2011.    The purpose of the conference is to review compliance with these directions, and then to give directions for a judicial settlement conference.  In particular, the defendants will be expected to give the Court assistance on how a judicial settlement conference can take place effectively with the participation of their clients who are based in North

Carolina.

R M Bell

Associate Judge