Soncam Limited (in liquidation) v Mad Butcher Holdings Limited
[2020] NZHC 1041
•20 May 2020
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2019-404-000946
[2020] NZHC 1041
UNDER Section 97 of the Property Law Act 2007 and section 177 of the Personal Property Securities Act 1999 BETWEEN
SONCAM LIMITED (IN LIQUIDATION)
Plaintiff
AND
MAD BUTCHER HOLDINGS LIMITED
Defendant
PETER REGINALD JOLLANDS and CATHERINE JANE JOLLANDS
Counterclaim Defendants
Hearing: 18 November 2019 Appearances:
R B Hucker and R Selby for the Plaintiff and Counterclaim Defendants
M Tingey and S Sussman for the Defendant
Judgment:
20 May 2020
JUDGMENT OF ASSOCIATE JUDGE SARGISSON
This judgment was delivered by me on 20 May 2020 at 11.30 a.m. pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar Date.......................................
Solicitors:
Jackson Russell Lawyers, Auckland M Tingey, Auckland
SONCAM LTD (IN LIQUIDATION) v MAD BUTCHER HOLDINGS LTD [2020] NZHC 1041 [20 May 2020]
Introduction
[1]This proceeding concerns two related summary judgment applications.
[2] First, the plaintiff, Soncam Ltd (in liq), applies for plaintiff’s summary judgment on its statement of claim against the defendant, Mad Butcher Holdings Ltd. Soncam was a franchisee of Mad Butcher. Mad Butcher has a registered security interest over all Soncam’s present and after-acquired personal property. Soncam says that it is ready, willing and able to repay its full indebtedness, which it says is
$40,021.59. However, it says, Mad Butcher has refused or otherwise failed to release and discharge its security interest over the collateral. Soncam now seeks, by way of plaintiff’s summary judgment, an order that Mad Butcher release and discharge its security interest upon Soncam’s repayment of the $40,021.59 being made to Mad Butcher’s solicitors’ trust account. Mad Butcher opposes the claim and the summary judgment application on the ground that the full indebtedness is (or is arguably) $791,021.59.
[3] Secondly, Soncam’s liquidators, Peter and Catherine Jollands, apply for defendant’s summary judgment on Mad Butcher’s counterclaim against them. Mad Butcher’s counterclaim against the liquidators arises from allegations that the liquidators sold Soncam’s assets (stock and inventory) and business without first making an offer of sale and purchase to Mad Butcher, in breach of their franchise agreement. As a result, Mad Butcher says it suffered a loss of $750,000, which together with the $40,021.59 amounts to a total indebtedness of $791,021.59. The liquidators, as the counterclaim defendants, oppose the counterclaim as being unarguable; and Mad Butcher opposes the liquidators’ application for defendant’s summary judgment.
Factual background
[4] Mad Butcher operates under a franchise model; the majority of its stores are owned and operated by Mad Butcher franchisees. Franchisees operate under a franchise agreement which grants them the right to trade as a Mad Butcher store for a
set term, subject to conditions. Mad Butcher provides substantial support to its franchisees, including advertising of weekly specials, brand promotion, marketing support, favourable pricing with Mad Butcher’s suppliers, general business support, and promotion through Mad Butcher’s website and social media. In return, the franchise agreement contains terms set out in cl 16 and 21 that are designed to protect Mad Butcher’s market share within a geographical area.
[5] Clause 16.1 deals with a franchisee’s right to sell or transfer the franchise business and/or assets. It provides that any sale of a franchise business by a franchisee is conditional on the franchisee first offering the business for sale to Mad Butcher on terms no less favourable than any offer received, or alternatively that any third-party purchaser must enter into a Mad Butcher franchise agreement.
[6] Clause 21 deals with the consequences of termination of the franchise agreement. Clause 21.1(d) is of particular significance in this case:
21.0CONSEQUENCES OF TERMINATION
21.1Effects of termination: On termination of this Agreement by the Franchisor or by mutual agreement or by expiration of the term of this Agreement all rights of the Franchisee shall cease and the following shall occur:
…
(d) The Franchisor or the Franchisor’s nominee may at the Franchisor’s sole option (to be exercised by written notice to the Franchisee at any time within twenty days from the date of termination) acquire all or any part of the Franchisee’s business or assets at the Premises including its tangible and intangible assets and interests as lessee in any lease of the Premises at a price to be mutually agreed upon. …
21.2Survival of Terms on Termination: In the event of the termination of this Agreement for any reason whatsoever … all covenants and agreements to be performed or observed by the Franchisee and the Guarantor(s) under this Agreement … shall cease except for those relating to the use of the Franchisor’s name and Proprietary Marks, confidential information obligations and restraints, restriction on competition, and grant of security interest, all of which shall remain enforceable to the fullest extent notwithstanding any rule of law to the contrary.
21.3Holding Over of Franchise Business: If following expiry or termination of this Agreement for any reason the Franchisee remains in possession of the Premises and continues operation of the Franchise
Business, the terms of this Agreement shall continue to apply as appropriate on a month to month basis provided that the Franchisor may give notice at any time to the Franchisee to cease trading and the provisions of this clause 21 shall immediately apply.
[7] Soncam was a franchisee of Mad Butcher. It was a successful franchise business run by a skilled butcher, Cameron Walker, and his wife, Sonya Walker. It operated the Albany Mad Butcher store. On 24 April 2014, after the expiry of its initial franchise term, Soncam renewed its franchise agreement with Mad Butcher (the Franchise Agreement). On 21 December 2018, Soncam’s solicitors at the time, Brett Norris Lawyers, advised Mad Butcher, by letter, that the Franchise Agreement would expire at the end of the franchise term on 31 March 2019. Mr Walker had become seriously ill and was looking to sell the Soncam business.
[8] Mad Butcher wanted to ensure that when Soncam’s franchise term ended, the business would remain a Mad Butcher store. For this reason, on 24 January 2019, Mad Butcher’s solicitors, Jackson Russell Lawyers, wrote to Soncam’s solicitors regarding sale of the business on expiry of the Franchise Agreement. The letter read:
Franchisor right to buy butcher shop assets
3.As you may be aware, there are a number of provisions that apply on the expiry of the franchise agreement. These include our client’s right to acquire all or any part of your client’s business or assets including the lease (refer clause 21). Our client is interested in purchasing your client’s shop and exercising its option to purchase the assets …
4.To maximise the value for both parties, it is important that the parties move quickly to progress a potential sale. Our client requires your client to provide information about the lease, plant, fixtures and other assets, and employees to our client as soon as possible so that our client can move to secure the lease and other assets if suitable terms can be agreed.
…
No sale of butcher shop assets without offer to Mad Butcher
6.Please ensure that your client understands that it must not sell the shop or any of the butchery assets without first complying with the franchise agreement pre-emptive rights provisions that require these assets to be offered to our client first. Failure to comply with this clause may cause our client considerable loss for which your client would be responsible under the terms of the franchise agreement.
[9] On 14 March 2019, Mad Butcher registered a general security interest (GSA) on the Personal Property Securities Register (PPSR), securing its interest over all Soncam’s present and after-acquired personal property.
[10] On 26 March 2019, Mad Butcher, by its solicitors, advised Soncam’s solicitors that it intends to exercise its right to acquire all or part of Soncam’s business or assets. The letter also advised that Mad Butcher understands that the lease of the premises had not been renewed and that Mad Butcher intended to talk to the landlord. On 28 March 2019, Michael Morton, the director and CEO of Mad Butcher, corresponded with the landlord regarding a renewal of the lease. Mad Butcher also entered discussions with Eugene Lamprecht, a director of Lieben Meats Ltd, as a potential purchaser of the Soncam business and future franchisee.
[11] Also on 28 March 2019, Mad Butcher and Soncam agreed to extend the franchise term beyond 31 March 2019, allowing Soncam to trade under the Mad Butcher name after the expiry date. This was agreed to with the intention that Mr Lamprecht wanted to enter into a franchise agreement and take over the business at some point in April. Soncam was permitted to trade under the Mad Butcher name until either Mr Lamprecht purchased the business as a franchisee or, if he decided not to proceed, Mad Butcher and Soncam came to an agreement on the price of the assets of the business and Mad Butcher took ownership of the business. The landlord of the premises also agreed to roll over the lease on a month-to-month basis.
[12] As Soncam was to remain in possession of the premises and continue operation of the franchise business beyond expiry of the Franchise Agreement, there was to be a holding over of the business under cl 21.3 of the Agreement, set out at [6] above.
[13] On 1 April 2019, Mr Lamprecht and Soncam entered into a sale and purchase agreement, exploring the possibility of becoming a franchisee with Mad Butcher as part of the acquisition. The agreement was later cancelled, and on 12 April 2019, a new agreement for sale and purchase was entered into with Lieben Meats as purchaser. A final deed of assignment of the lease and franchise agreement were circulated on 15 April 2019.
[14] On 18 April 2019, the parties agreed to postpone settlement of the sale and purchase agreement to 31 May 2019. Accordingly, Mad Butcher also purported to extend the Franchise Agreement to 31 May 2019. The postponement of settlement came as a result of Mr Lamprecht’s visit to the store on 16 April 2019. He discovered that stock levels were running low and that Mrs Walker had been struggling to maintain the business on her own. The parties decided that Mad Butcher would work alongside Mrs Walker to maintain the business’ value and postponed settlement.
[15] On 24 April 2019, however, Soncam was placed into voluntary liquidation by shareholder resolution. Peter and Catherine Jollands were appointed as liquidators. Unsurprisingly, following the liquidation, Lieben Meats cancelled the agreement for sale and purchase of the Soncam business.
[16] Also on 24 April 2019, Mad Butcher’s solicitors advised the liquidators that it had a security over all Soncam’s present and after-acquired personal property, and provided the relevant documents. The solicitors also advised that Mad Butcher intended to acquire Soncam’s assets and wished to exercise its cl 21.1(d) option:
4.As per Michael Morton’s (director of MBHL) email today, our client intends to enforce its security interest, in the first instance, against the stock and inventory it has supplied Soncam by uplifting the stock as a matter of urgency. As the stock may be perishable, please ensure that it is properly preserved …
5.Furthermore, our client has an option under clause 21(d) [sic] of the Franchise Agreement to purchase all or any part of the Franchisee’s business or assets after the expiry of the Franchise Agreement. Our client would like to exercise this option, subject to it securing a lease of the premises. …
(emphasis added)
[17] On 30 April 2019, the liquidators sold Soncam’s assets (being the fixed assets and all stock) to Wholesale Meats Ltd, a competitor of Mad Butcher. Mad Butcher was not aware of the sale at the time. It says the liquidators concealed the sale despite extensive correspondence from Mad Butcher and its solicitors. Mad Butcher says it was never given an opportunity to purchase the business.
[18] On 17 May 2019, Mad Butcher’s solicitors advised the liquidators that as at that date the total debt secured under the GSA amounted to $40,021.59. In that same
letter, the solicitors sought disclosure of the full details of the sale of assets, including what goods were sold, who the purchaser was, and the terms of the sale including the purchase price. Mad Butcher alleged that “the liquidators undertook the sale with full knowledge of [its] security interest and after [it] advised that it wished to take possession” of the secured collateral.
Summary judgment principles
[19] Soncam applies for summary judgment of its claim against Mad Butcher. For a plaintiff’s summary judgment application, the plaintiff must satisfy the Court that the defendant has no defence to a cause of action in the statement of claim or any part of any such cause of action.1 The liquidators apply for summary judgment against Mad Butcher on its counterclaim. For a defendant’s summary judgment application, the defendant must satisfy the Court that none of the causes of action in the plaintiff’s statement of claim can succeed — here, Mad Butcher being the counterclaim plaintiff and the liquidators being the counterclaim defendants.2
[20] The principles of summary judgment are well-established. They can be summarised as follows:3
(a)The question is whether there is a real question to be tried.
(b)The party seeking summary judgment bears the onus of satisfying the Court that it should be granted. In assessing the defence or claim, the Court will look for appropriate particulars and a reasonable level of detailed substantiation. A proper foundation must be laid in the affidavits filed in support of the notice of opposition. The Court must be left without any real doubt or uncertainty.
(c)The Court will not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not accept uncritically
1 High Court Rules 2016, r 12.2(1).
2 Rule 12.2(2).
3 Krukziener v Hanover Finance Ltd [2008] NZCA 187, [2010] NZAR 307 at [26]; and Gardner v Gardner [2015] NZHC 2018 at [20].
evidence that is inherently lacking in credibility, for example, where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponent, or is inherently improbable. In the end, the Court’s assessment of the evidence is a matter of judgment.
(d)The need for judicial caution in summary judgment applications must be balanced with the appropriateness of a robust and realistic judicial attitude when that is called for by the particular facts of the case.
Discussion
Soncam’s summary judgment application
[21] The central issue in relation to Soncam’s claim and application for plaintiff’s summary judgment is what the full amount of Soncam’s indebtedness to Mad Butcher is (that is, the amount secured by Mad Butcher): $40,021.59 or $791,021.59?
[22] On the one hand, Soncam says the amount secured and due is $40,021.59 as confirmed by Mad Butcher’s solicitors in a letter dated 17 May 2019. It says it is ready, willing and able to repay this amount but that Mad Butcher has refused or otherwise failed to release and discharge its security interest over the collateral.
[23]On the other hand, Mad Butcher says it is owed $791,021.59, being the
$40,021.59 outlined in its letter of 17 May 2019 plus a further $751,000 which it says it suffered as a result of the liquidators selling the business in breach of the Franchise Agreement. In particular, Mad Butcher says it suffered damage of $651,000 by not receiving the income it would have received under a new franchise agreement, and of at least $100,000 for not being able to purchase and resell Soncam’s assets at profit.
[24] In answering the question of what the full amount secured by Mad Butcher’s GSA is, the Court must consider three related sub-issues. These are whether there is a real question to be tried as to:
(a)Whether Mad Butcher had an imminent substitute franchise agreement from which it can be said the loss alleged arises;
(b)Whether Mad Butcher validly exercised its option under cl 21.1(d) of the Franchise Agreement; and
(c)Whether Mad Butcher’s procurement of a lease of the business premises was a necessary condition to purchase the business under cl 21.1(d), and whether Mad Butcher’s failure to do so was due to some fault of or interference by Soncam and/or the liquidators.
[25] First, I turn to whether a substitute franchise agreement was imminent. Lieben Meats and Soncam entered into a sale and purchase agreement on 12 April 2019, and a final deed of assignment of the lease and franchise agreement were circulated on 15 April 2019. However, the agreement for sale and purchase was cancelled on 24 April 2019, following Soncam being placed into liquidation.
[26] In his affidavit dated 1 November 2019, Mr Jollands says he had a discussion with Mr Lamprecht’s solicitors to see whether the sale and purchase agreement between Lieben Meats and Soncam could be resurrected. In an email dated 24 April 2019 to the liquidators, the solicitors of Lieben Meats stated that, “[a]s discussed [over the phone], my client [Lieben Meats] is not prepared to complete the purchase of the business in its current state. I have now confirmed with Brett Norris [Soncam’s solicitors at the time] that the agreement is at an end.”
[27] Therefore, there was no imminent franchise agreement between Mad Butcher and Lieben Meats or some other third party. It cannot be said that Mad Butcher suffered damage of $651,000 by not receiving the income it would have received under a new franchise agreement, as no such agreement was imminent or in the works.
[28] Secondly, I turn to whether Mad Butcher validly exercised its option under cl 21.1(d) of the Franchise Agreement. Mad Butcher says the liquidators’ sale of the franchise business to Wholesale Meats was in breach of cls 16.1 and 21.1(d) of the Franchise Agreement and that the sale in breach caused loss to Mad Butcher, thereby increasing Soncam’s indebtedness to Mad Butcher.
[29] I consider cl 16 first — that clause provides Mad Butcher a first right of refusal. Mad Butcher says the liquidators breached cl 16 of the Franchise Agreement in selling the franchise business to Wholesale Meats without first offering it to Mad Butcher on terms no less favourable. In reply, Soncam says cl 16 did not survive termination of the Franchise Agreement — I agree. My reasons are as follows:
(a)Under cl 21.2, the only two obligations that survive termination are the restrictions on use of the Mad Butcher name, branding and intellectual property. Whilst under cl 21.3, during the holding over period, the terms of the Franchise Agreement continued to apply “as appropriate”, they ceased to exist once the holding over period ended. The holding over period ends when the franchisee either loses possession of the premises or discontinues operation of the franchise business.
(b)Soncam was placed into liquidation on 24 April 2019, thereby discontinuing operation of the franchise business and ending the hold over period. Consequently, as of 24 April 2019, cl 16 was no longer operative and therefore the liquidators did not have to first offer to sell the franchise business to Mad Butcher on terms no less favourable than what was agreed with Wholesale Meats.
[30] Next, I turn to cl 21.1(d), which contains a post-termination option under which Mad Butcher may acquire all or any part of Soncam’s business or assets at its business premises. To exercise the option, Mad Butcher was required to give written notice to Soncam within 20 days from the date of termination.
[31] On the one hand, Mad Butcher says it exercised the option by giving written notice in the form of an email from its solicitors dated 24 April 2019. That email is set out at [16] above, the relevant part stating that:
… our client [Mad Butcher] has an option under clause 21(d) [sic] of the Franchise Agreement to purchase all or any part of the Franchisee’s business or assets after the expiry of the Franchise Agreement. Our client would like to exercise this option, subject to it securing a lease of the premises.
[32] On the other hand, Soncam denies that Mad Butcher has validly exercised the option under cl 21.1(d). It says the option was exercised out of time; the Franchise Agreement was terminated by effluxion of time on 31 March 2019 and therefore written notice to exercise the option was required no later than 21 April 2019. However, as noted above, cl 21.3 provides for holding over on a month-to-month basis where, following expiry or termination of the Agreement, the franchisee continues to operate the franchise business. In my view, it is arguable that the 20-day period does not commence until the end of the holding over period. And the holding over period ends when the franchisee either loses possession of the premises or discontinues operation of the franchise business (whether because the franchisor has given the franchisee notice to cease trading or some other reason such as the franchisee being placed into liquidation). It is therefore arguable that the option was exercised in time.
[33] Soncam’s alternative submissions is more persuasive. It says that, even if the option in cl 21.1(d) was validly exercised, it was conditional on Mad Butcher procuring a lease of the business premises, which it failed to do. That is the third issue, and it is, in my view, fatal to Mad Butcher’s case.
[34] Mr Jollands, in his affidavit, deposes that upon his appointment as liquidator, he inquired of the landlord what the landlord was intending to do with the lease. The landlord advised that he considered the lease had terminated as it had not been renewed by 1 April 2019 as required under the Deed of Variation. At the time, the lease was operating on a month-to-month basis and had not been renewed as the parties had anticipated that Lieben Meats would be entering into a new lease agreement with the landlord. On 30 April 2019, by email, the landlord formally cancelled the lease. The landlord made alternative arrangements to lease the premises to Wholesale Meats.
[35] Mad Butcher had therefore failed to procure a lease of the premises. And, as the condition on which cl 21.1(d) was to be exercised was not fulfilled, ultimately, it cannot be said that Mad Butcher exercised the option under that clause. It follows that Mad Butcher was not entitled to acquire the franchise business and/or assets. Equally, it cannot be said that it suffered losses as a result of the liquidators having sold the business and/or assets to a party other than Mad Butcher or its nominee.
[36]Accordingly, Soncam’s indebtedness to Mad Butcher under the GSA is
$40,021.59 (not $791,021.59). Mad Butcher does not have a defence to Soncam’s claim that Mad Butcher should release and discharge its security interest upon Soncam paying, in full, its indebtedness of $40,021.59.
The liquidators’ summary judgment application
[37] The liquidators oppose Mad Butcher’s counterclaim on similar grounds as discussed above, namely that Mad Butcher did not validly exercise the option under cl 21.1(d) and therefore the liquidators were not the cause its losses.
[38] As the counterclaim defendants, the liquidators must show that none of the causes of action in Mad Butcher’s statement of counterclaim can succeed. These are:
(a)That the liquidators converted Soncam’s assets, of which Mad Butcher is a secured creditor, in dealing with or disposing of the assets by selling them to Wholesale Meats without authorisation from or notice to Mad Butcher, despite knowing of Mad Butcher’s interest in the assets.
(b)That the liquidators breached s 109 the Personal Property Securities Act 1999 (PPSA), under which a secured party (here, Mad Butcher) may take possession of and sell collateral (here, Soncam’s assets). In particular, the liquidators refused to recognise Mad Butcher’s rights under s 109 by retaining the assets and selling them to Wholesale Meats. And Mad Butcher was entitled to enforce its secured rights under cls 16 and 21.1(d) of the Franchise Agreement. Accordingly, it says it is entitled to damages under s 176 for the liquidators’ breach.
(c)That it is just and equitable that the Court make orders against the liquidators pursuant to s 286 of the Companies Act 1993. It says the liquidators breached their duties under the PPSA, that Mad Butcher gave notice of the failure to comply on the liquidators and that the liquidators failed to comply with those notices and did not seek the transfer back of the assets from Wholesale Meats.
(d)That it is just and equitable that the liquidators pay to the defendants
$751,000 under s 301 of the Companies Act for having misapplied assets over which Mad Butcher had a security interest.
(e)Under causes of action (a) and (b), Mad Butcher seeks damages of
$751,000 to be awarded against the liquidators in favour of Mad Bucher, being the loss it suffered, as explained at [23] above.
[39]In my view, none of the above counterclaim causes of action can succeed:
(a)First, as I have already found in relation to Soncam’s application for summary judgment above, Mad Butcher’s alleged loss from being unable to enter a new franchise agreement was not caused by the liquidators. Mad Butcher’s exercise of cl 21.1(d) was conditional on it procuring a lease of the premises. It was therefore implicit that the liquidators were free to deal with the business and assets in the event Mad Butcher did not obtain a lease of the premises, which it did not.
(b)Secondly, Mad Butcher’s counterclaim causes of action are also based in the rights arising from its security interest (as opposed to its rights under the Franchise Agreement) — however, having found that the amount of Soncam’s indebtedness is $40,021.59, it was able, ready and willing to repay in full its indebtedness. Therefore, it cannot be said that there was a breach of the liquidators’ duties under the PPSA.
Result
[40]For the above reason, I make the following orders:
(a)I give judgment against the defendant, Mad Butcher Holdings Ltd, on the plaintiff’s application for summary judgment on the plaintiff’s statement of claim, and I make the following consequential orders:
(i)The defendant, Mad Butcher Holdings Ltd, is forthwith to comply with its obligations pursuant to s 97 of the Property Law
Act 2007, ss 177 and 181 of the Personal Property Securities Act 1999 and in equity in terms of enforcing the equity of redemption by forthwith executing the Deed Poll Release annexed as annexure S to the Affidavit of Peter Reginal Jollands sword on 20 May 2019 in this proceeding, releasing and discharging its security interest registered under financing statement FU3C4JUV694J9A85 and providing such an executed Deed to the solicitors of the plaintiff immediately upon repayment of $40,021.59 being made to Mad Butcher Holdings Ltd’s nominated account.
(ii)In the event of the defendant’s non-compliance with order (a)(i), the security interest is to be extinguished and removed from the Personal Property Securities Register under s 182 of the Personal Property Securities Act 1999.
(iii)Leave is reserved in the event that further orders are required to give proper effect to the above orders.
(b)I give judgment against the counterclaim plaintiff, Mad Butcher Holdings Ltd, in favour of Peter and Catherine Jollands, the counterclaim defendants, on their application for summary judgment on the counterclaim.
[41] As costs follow the event under the statutory costs regime, the plaintiff and the counterclaim defendants, as the successful parties, are entitled to costs and disbursements in the proceeding. If the parties cannot agree upon quantum, the successful parties are to file and serve a memorandum within 5 working days of the date of this judgment. The defendant will then have a further 5 working days to file and serve any memorandum in response.
Associate Judge Sargisson
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