Puxty v Ling HC Auckland CIV-2004-404-3713

[2005] NZHC 1225

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2004-404-3713

BETWEENKEITH EDWARD PUXTY AND VALMA MARY PUXTY

Plaintiff

ANDLEIGH LING, PO CHUEN PHILIP TSE AND TOKIKO ITO

Defendants

Hearing:         2, 3 and 18 February 2005 Appearances: Mr I Williams for plaintiffs

Mr J Ussher for first-named defendant Judgment:  18 February 2005 at 10.40 am

(ORAL) JUDGMENT OF ASSOCIATE JUDGE LANG

[re application for summary judgment]

[1]    Mr and Mrs Puxty were formerly the proprietors of a company called Imageworks Limited. That company was involved in commercial film processing and photo finishing.

[2]    In September 2003 Mr and Mrs Puxty entered into an agreement to sell the shares in the company to the three defendants in this proceeding.  The cash portion  of the purchase price amounted to approximately $442,000.

[3]    That sum was to be paid in five separate tranches. The defendants paid the first two tranches amounting to $160,000, but failed to make any further payments.

[4]    In this proceeding Mr and Mrs Puxty seek summary judgment against the three defendants in respect of the unpaid purchase price. Summary judgment has

PUXTY V LING, TSE AND ITO HC AK CIV-2004-404-3713 18 February 2005

already been entered against Mr Tse and Ms Ito, because they took no steps  to defend the proceeding. It is now necessary to determine whether  summary  judgment should also be entered against Ms Ling.

[5]    There is no dispute that the balance owing under the agreement for sale and purchase has never been paid. Ms Ling contends, however, that she has  cross- claims or counterclaims against Mr and Mrs Puxty and that it would be unjust for summary judgment to be entered against her without taking those claims into account.

[6]    Given that brief introduction it is now appropriate to refer to the principles I am required to apply in determining the application for summary judgment.

Relevant principles

[7]    Both counsel have reminded the Court that summary judgment will only be entered where “the plaintiff satisfies the Court that a defendant has no defence to a claim, the statement of claim or to a particular part of a claim”: see Pemberton v Chappell [1987] 1 NZLR 1 at 3 per Somers J and Bilbie Dymock Corporation Limited v Patel (1987) 1 PRNZ 84.

[8]    Although Pemberton v Chappell and Bilbie are authorities for the proposition that a robust approach is required, nevertheless the summary judgment procedure may be inappropriate where the ultimate determination turns on a judgment which can only be arrived at after a full hearing of the evidence: Westpac Banking Corporation v MM Kembla New Zealand Limited [2001] 2 NZLR 298 at 313 per Elias CJ.

[9]    Probably the most important authority in the context of the present case is Grant v NZMC Ltd [1989] 1 NZLR 8 (CA). In that case, the Court of Appeal set aside an order granting summary judgment because it took the view that the plaintiffs had not demonstrated that there was no arguable defence based on set-off. After discussing the distinction between set-off and counterclaim and the source of

rights of set-off at common law or in equity (at 11-12), Somers J, delivering the judgment of the Court, expressed the principle in the following terms:

But the administration of law and equity in one Court has inevitably meant that the two bodies of law have been much affected by each other. Over the years words such as “unconscionable” and “inequitable” have drawn closer to more objective concepts such as fair, reasonable, and just. Hanak v Green may evidence that trend. In that case to allow the cross-claim as a set-off was described as “fair” and to disallow it as “manifestly unjust”: see [1958] 2 QB at p 24.

The principle is, we think, clear. The defendant may set-off a cross- claim which so affects the plaintiff’s claim that it would be unjust to allow the plaintiff to have judgment without bringing the cross-claim to account. The link must be such that the two are in effect interdependent: judgment on one cannot fairly be given without regard to the other; the defendant’s claim calls into question or impeaches the plaintiff’s demand. It is neither necessary, nor  decisive, that the claim and cross-claim arise out of the same contract.

[10]   The principle has also been discussed in a number of other cases: see for example, M L Paynter Ltd v Ben Candy Investments Ltd [1987] 1 NZLR 25, Roberts Family Investments Ltd v Total Fitness Centre (Wellington) Ltd [1989] 1 NZLR 15, Tech Pacific (NZ) Ltd v Cheung (High Court, Auckland, HC106/92, 31 March 1993, Tompkins J), Shearer v Krammer (Court of Appeal, CA120/97, 22 September 1997, Richardson P, Henry and Elias JJ), Alstom New Zealand Ltd v Contact Energy Ltd (High Court, Wellington, CP160/01, 12 November 2001, Master Thomson) and Hamilton Ice Arena Ltd v Perry Developments Ltd [2002] 1 NZLR 309 (CA).

[11]   For the purposes of the present case I proceed on the basis that, if a sufficient evidential foundation for Ms Ling’s claims can be established, a defence in the nature of contractual or equitable set-off would arise.

[12]   I now turn to consider the factual background relevant to the claim and cross- claims.

Factual background

[13]   Mr and Mrs Puxty originally decided to sell their business in March 2003. Professional advice led them to believe that the business had a market value of approximately $800,000.

[14]   Before the business was placed on the open market, Mr Puxty discussed the proposed sale with Philip Tse, one of the defendants in this proceeding. Mr Tse is a freelance commercial photographer, and had been a client of the business for some years.

[15]   During these discussions Mr Tse indicated that he might know somebody who would be interested in buying the business. In May 2003, by which stage the business was formally on the market, Mr Tse introduced Mr and Mrs Puxty to Leigh Ling, the defendant with whom the present application is concerned.

[16]   At her initial meeting with Mr and Mrs Puxty Ms Ling expressed a desire to purchase the business, and she outlined the terms upon which she might be prepared to do so. One of these was that Mr Puxty would remain as an employee of the company for a period after the settlement of the sale. Although Mr Puxty was somewhat reluctant to do this, he eventually agreed to remain working in the business for a year from 1 July 2003.

[17]   After prolonged negotiations a formal written agreement was eventually drawn up and signed on 16 September 2003. By that stage the purchasers (Ms Ling, Mr Tse and his wife Tokiko Ito) had had access to the business records of the company and had carried out due diligence. The agreement was not conditional  upon any further investigation or enquiries being made by the purchasers.

[18]   An unusual feature of the arrangement was that, although the formal agreement was not signed until 16 September 2003, it provided for the defendants to take over the business as at 1 July 2003. The Puxtys had continued to run the business as if it was their own during the intervening period.

[19]   The purchasers agreed to take over responsibility for a hire purchase debt of approximately $300,000 owing in respect of one of the company’s machines. In addition they agreed to pay $442,179.96 in cash. That sum was to be paid  as follows:

i)$20,000 had already been paid by way of deposit.

ii)$140,000 was to be paid when the agreement was signed.

iii)$42,179.96 was to be paid for stock on 1 November 2003.

iv)$126,000 was to be paid on 1 December 2003.

v)$120,000 was to be paid on 30 January 2004.

[20]   The sum of $50,000 was to be deducted from the final tranche and held in the purchasers’ solicitor’s trust account until 30 June 2004. At that  time  a  final payment was to be made. This payment would include an adjustment  of  the purchase price according to an agreed formula based on the performance of the business between 1 July 2003 and 30 June 2004. The purchase price could be increased by up to $50,000 if the company achieved a specified profit, or it could be reduced by up to the same amount if the business failed to meet specified targets.

[21]   The purchasers were also required to provide a first-ranking security over the assets of the company for any part of the purchase price that remained outstanding.

[22]   The defendants paid the second tranche of $140,000 on 29 September 2003, 13 days late. The next two tranches, however, were never paid. As a result, the Puxtys appointed receivers under their security on 2 December 2003. The receivers re-sold the business, but ultimately the net amount realised by that sale did not reduce the amount owing under the agreement between the Puxtys and the defendants. There was in fact a small deficit of $846.25 owing at the end of the receivership.

[23]   In addition, the Puxtys were called upon by their landlord to pay rent in the sum of $4,385.58. That payment was the responsibility of the defendants, because it related to a period after the completion of the sale of the business to them.

[24]   In this proceeding the Puxtys seek to recover the sum of $237,411.79. This represents the balance of the purchase price owing under the agreement, together with the deficit remaining at the conclusion of the receivership. That sum also includes the rental paid to the landlord. Their claim proceeds on the basis that the purchase price has been reduced by $50,000 as a result of the inability of the purchasers to trade through to 30 June 2004.

The issues raised by Ms Ling

[25]   For the most part the factual matters raised by Ms Ling in the documents she has filed in opposition to the Puxtys’ claim do not come from her personal knowledge. She asserts that she was to be a “silent partner” in the joint venture, and that her principal role was to provide the necessary finance. She says that Mr Tse  had expertise in the field of photography, and that she relied on him for the technical expertise necessary to run the business. The factual matters raised in her affidavit stem mainly from discussions she says she has had with Mr Tse. As a result, the  most important parts of her evidence are hearsay.

[26]   Ms Ling encountered difficulties in having Mr Tse swear an affidavit on her behalf in opposition to the claim by Mr and Mrs Puxty. For that reason she obtained an order under r 509 of the High Court Rules directing Mr Tse to appear and be examined on oath when the application for summary judgment was heard. Mr Tse complied with that order, and gave evidence at the hearing on 2 February 2005. His evidence is therefore critical to the factual issues raised by Ms Ling. Before dealing with those issues, however, I wish to comment upon Ms Ling’s assertion that she was a “silent partner” in the running of the business.

Ms Ling’s role

[27]   I accept that Ms Ling may not have technical expertise in the field of commercial photography and film processing. The  evidence  demonstrates, however, that she played an active part in the acquisition of the business and in the strategic decisions that were made in the course thereof.

[28]   Mr Puxty’s evidence is to the effect that Ms Ling played a very full part in  the initial meetings that were held to discuss financial issues.

[29]   Mr Puxty’s evidence is supported by that of Mr Tse. Mr Tse explained that  he and his wife were unable to put any money into the business. Instead, they were each to receive 20 per cent of the shares in the company in consideration for managing the day to day operation of the business. Ms Ling  was to provide  all of the necessary funds to enable the business to be acquired.

[30]   Mr Tse’s evidence was to the effect that Ms Ling was fully involved in all of the important decisions that were made during the negotiations between July and September 2003. She alone also made decisions as to when, and to what extent, funds were to be provided in satisfaction of the purchase price.

[31]   Mr Tse said that he was not given any reason for Ms Ling’s reluctance to pay the final three tranches of the purchase price. He said only that he had seen a letter from the company’s solicitor to Mr Puxty’s solicitor to the effect that the company’s cashflow was “not that good”. Ms Ling’s refusal to pay the third and fourth tranches led to difficulties for Mr Tse because, not unnaturally, the atmosphere in the business became extremely tense as a result of the fact that the payments were not made.

[32]   The evidence of Mr Puxty and Mr Tse persuades me that Ms Ling’s role cannot fairly be described as that of a ‘silent partner’. Her involvement in the acquisition of the business was not passive in any real sense.  In fact, the impression I gained from the evidence of both Mr Puxty and Mr Tse was that Ms Ling was the driving force behind both the acquisition of the business and the events that have given rise to this proceeding.

The Cross-claims

[33]   The matters that are said by Ms Ling to give rise to cross-claims or counterclaims against Mr and Mrs Puxty are as follows:

a)A downturn in performance of the business after 1 July 2003.

b)Incorrect historical figures were given to the purchasers.

c)The misleading nature of the client list.

d)Poor work practices discovered after 1 July 2003.

e)Failure by Mr Puxty to hand over computer and financial records.

f)Failure by Mr Puxty to follow Mr Tse’s directions.

[34]   During his submissions Mr Ussher did not attempt to quantify the damages Ms Ling would seek against Mr and Mrs Puxty. He submitted, however, that they were likely to be at a level that would extinguish the outstanding balance of the purchase price.

[35]   Similarly, Mr Ussher did not particularise the precise legal bases upon which Ms Ling proposed to advance her claims. I infer, however, that the matters she has raised potentially give rise to claims based on misrepresentation, breach of implied terms of the agreement and misleading and/or deceptive conduct under the Fair Trading Act 1986.

[36]   I now turn to consider in further detail each of the claims advanced by Ms Ling.

(a)Downturn in performance of business after 1 July 2003

[37]   The agreement did not contain any warranty regarding the future turnover of the business. Mr Puxty deposes that he was not prepared to give any such warranty.

He says that this issue was “put to bed” by the clause in the agreement prescribing the manner in which the final tranche of the purchase price was to be adjusted in accordance with the performance of the business between 1 July 2003 and 30 June 2004.

[38]   As a result, Ms Ling cannot rely on any warranty, whether express or implied, that the business would achieve the projections provided to her by Mr and Mrs Puxty. Ms Ling deposes, however, that she has serious concerns that the turnover and net profit projections provided by Mr and Mrs Puxty were “seriously misleading”. She gives no basis for this assertion other than the fact that the performance of the business after 1 July 2003 did not meet the projections provided by Mr and Mrs Puxty.

[39]   Mr Puxty accepts that there was a downturn in the performance of the business after 1 July 2003. He attributes this to the continuing uncertainty regarding the future of the business because of the negotiations that dragged on into September 2003 and the failure of the defendants to pay the instalments of the purchase price on due date. Mr Puxty deposes that during this period he and his staff “could not concentrate on doing more than treading water in a business sense”.

[40]   At present there is insufficient material available to enable me to say that any arguable cause of action arises out of the downturn in performance of the business after 1 July 2003. I accept that the continuing uncertainty regarding the sale of the business may well have detracted from its performance during this period.

[41]   The terms of the agreement are also of some significance. The agreement expressly provided for the purchase price to be adjusted according to the performance of the business during its first year of operation under the stewardship of the defendants. The purchase price stood to be increased or decreased by

$50,000 depending on the performance of the business during that period.  In creating this formula the defendants must be taken to have accepted the risk that the business was likely to suffer a downturn when the change of ownership occurred. Any loss caused by such a downturn was to be compensated by a reduction in the final purchase price.

[42]   I am also left with the impression from Mr Tse’s evidence that any failure of the business to achieve its performance targets suited Ms Ling’s interests. His evidence is to the effect that when he raised his concern that the projected performance of the company appeared to be over-ambitious, he was told by Ms Ling that “I am talking too much because if Keith cannot achieve the sales figures then the buying price will be low”. This suggests that it suited Ms Ling’s purposes for the business not to achieve its budgeted turnover.

[43]   I have therefore reached the conclusion that, on the material presently available, the financial performance of the business during the period after 1 July 2003 does not give rise to an arguable cause of action against Mr and Mrs Puxty.

(b)Incorrect historical figures

[44]   Ms Ling contends that the figures given to the purchasers in relation to the historical turnover and profit of the business must have been incorrect.

[45]   In considering this allegation I take into account the fact that the defendants engaged in due diligence prior to signing the written agreement in September 2003. They engaged the services of an accountant to assist them and they sought, and were given, financial information by Mr and Mrs Puxty. Their investigation of the business at that time does not appear to have caused them to raise any issues regarding the state or accuracy of the company’s business records.

[46]   Ms Ling has adduced no new evidence to substantiate her assertion that the historical figures given to her by Mr and Mrs Puxty were incorrect in any way. On that basis it is difficult to see how it can be said that this particular cross-claim is arguable. Nevertheless, at the conclusion of the hearing on 3 February 2005 I  granted Mr and Mrs Puxty leave to file further affidavits to answer this particular allegation.

[47]   Mr and Mrs Puxty subsequently filed two further affidavits, one by Mrs Puxty and one by the plaintiffs’ accountant, Mr Johnston. These affidavits confirm the following principal points:

a)The sales figures contained in the GST returns filed in respect of the business accurately reflect the banking and income records of the business.

b)The historical turnover figures supplied by Mr and Mrs Puxty to Ms Ling accord broadly with, but slightly understate, the turnover disclosed in the GST returns filed by the business.

[48]   The slight difference between the turnover figures supplied by Mr and Mrs Puxty and those contained in the GST returns can be explained by the fact that the GST returns were prepared on a payments basis, whilst the historical figures were prepared on an invoice basis. The difference between the two figures  is,  however, de minimis and in fact favours the plaintiffs. The GST returns record that for the years ended 31 March 2002 and 2003 the business achieved sales of $637,512 and

$965,046 (both GST inclusive) respectively. The historical figures given to the purchasers record that the business achieved sales of $633,211 in the 2002  year  and

$958,667 (both also GST inclusive) in the 2003 year. As a result, the business actually achieved a slightly larger turnover during both years than was shown in the figures given to the purchasers.

[49]   These matters persuade me that, on the evidence presently available, no arguable cross-claim exists in relation to the historical figures provided to the purchasers by Mr and Mrs Puxty.

(c)Misleading nature of client list

[50]   Ms Ling claims that the client list that was provided prior to the purchase of the business was misleading in material respects. She says that the list disclosed that the business had several high profile clients, including BMW and TVNZ. She says that it has now transpired that those customers had not placed very much business with the company prior to the purchase and that very little was provided thereafter. As a result, she claims that Mr and Mrs Puxty engaged in misleading or deceptive conduct in relation to the client list.

[51]   This assertion is refuted by Mr Puxty. He deposes that each client on the client list placed business with the company during the period from September 1998 to June 2003. He points out, however, that many commercial clients would only use the company for specific purposes. By way of example, TVNZ would  place business with the company at the start of a new season or during a staff change. Similarly, BMW might use the company’s services when it was launching a new model motor vehicle.

[52]   Mr Puxty confirms, however, that BMW (through Veritas communications) placed business with the company worth $5,366.82 during the period from 1 July 2003 to 1 December 2003. It then placed business worth $3,982.51 between 1 December 2003 and 30 April 2004. In the case of TVNZ, Mr Puxty says that that company was billed $25,590.48 between 1 July 2003 and 1 December 2003. It then provided the company with business worth $17,800.91 between 1 December 2003 and 30 April 2004.

[53]   On Mr Puxty’s evidence there would seem to be no basis for any cross-claim arising in relation to misleading or deceptive conduct associated with the client list. Both TVNZ and BMW appear to have provided the business with a reasonably significant amount of work after 1 July 2003.

[54]   Mr Tse’s evidence on this point is also instructive. When asked whether he had certain expectations in respect of key clients, he said that he did not discuss with Mr Puxty how much the key customers could provide by way of business. This was because “in this industry they can come and go and also it very much depends on what sort of projects a customer is doing at that time”. When he was asked whether he had concerns about the level of business provided by TVNZ, he said that he did not need to worry about how much business TVNZ was going to provide. His main concern was that TVNZ remained as a client, because if it remained as client “other people will say ‘Yeah Imageworks working for big company’ and those small companies will come and we can see there will be a big order”.

[55]   Mr Tse’s evidence therefore supports Mr Puxty’s evidence to the extent that the amount of business placed by key clients such as TVNZ and BMW would vary

according to their business needs from time to time. Mr Tse’s principal concern also appears to have been to retain the key customers on the books because of the image that this would portray to other customers. He does not appear to have been concerned regarding the actual level of business placed with the company by BMW and TVNZ.

[56]   Having regard to these matters I am not satisfied that Ms Ling has raised an arguable cross-claim in relation to the conduct of Mr and Mrs Puxty in respect of the client list.

(d)Poor work practices discovered after 1 July 2003

[57]Ms Ling’s evidence on this point is as follows.

10.Philip explained that in his view the business had been represented, prior to purchase, as a professional processing lab, but after the purchase it became apparent to him (as a professional photographer) that things were not in his view run very well. He gave an example of checking proofs (if that was the term he used) at a  window instead of under professional and consistent lighting, which meant that on a dull day it was not possible to check properly. I know nothing of the technical side of photography so I may have got the terminology incorrect but the gist of what he said was that not everything was done in a professional way. I did not bother to take notes because Philip had promised to provide us with a full written account which could be turned into an affidavit.

11.Another example he gave was that negatives were cleaned by simply waving them in the air instead of (as he expected) by using an airgun.

[58]   These issues appear to be relatively trivial, and could have been corrected by the defendants after they took over the running of the business. At that point they  had the necessary authority to require the business to be run in any way they saw fit.

[59]   In any event, Mr Tse’s evidence did not support Ms Ling’s claims. His evidence was to the effect that some things about the business were not exactly what he had expected, but that those things could be changed quite easily provided funding was available. By way of example, he fixed the problem with the lighting used to check proofs by spending $900.00 to purchase a new light fitting. Similarly,

once funds were available Mr Tse proposed to buy a vacuum air compressor to solve the problem with cleaning photographic negatives.

[60]   Having considered Mr Tse’s evidence on this point I am satisfied that no arguable cross-claim has been shown to exist. To be fair to Mr Ussher, he did not advance this particular cross-claim with any vigour during his closing submissions.

(e)Failure by Mr Puxty to hand over computer and financial records

[61]   This particular claim was not supported in any way by the evidence of Mr Tse. His evidence was to the effect that Mr Puxty co-operated fully in the provision of documents and the company computer. Mr Ussher effectively abandoned this particular claim in his closing submissions.

(f)Failure by Mr Puxty to follow Mr Tse’s directions

[62]   Similarly, Mr Tse did not provide any evidential basis to support this claim. His evidence was to the effect that he spent very little time actually working in the business, but that when he was there everyone in the business was trying  very hard to service existing customers and to bring in new customers. There is no arguable basis for a cross-claim under this head either.

Result

[63]   For the reasons set out above I am satisfied that none of the cross-claims advanced by Ms Ling are arguable on the evidence presently before the Court. It would therefore not be unjust to enter judgment against Ms Ling without taking the cross-claims into account.

Order

[64]   There will be summary judgment in favour of the plaintiffs against Ms Ling in the sum of $237,411.79 together with interest at the rate of $10.25 per cent per annum simple from 30 January 2004 to the date of judgment.

Costs

[65]   The plaintiffs are entitled to costs on a category 2B basis together with disbursements as fixed by the Registrar.

G L Lang Associate Judge

Solicitors:

Mr D J Jenkin, P O Box 4338, Auckland – facsimile 377 6956 Mr I Williams, P O Box 4338, Auckland – facsimile 377 6956

Peter Albertus Theodorus Maria Kemps, P O Box 62566, Auckland – facsimile 525 2811 Mr J Ussher, P O Box 44 325, Auckland – facsimile 815 1953

Frank Sing, P O Box 5730, Auckland – facsimile 366 0805