South Waikato Processing Facility Limited v Hunter

[2014] NZHC 222

IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY

CIV-2013-419-868 [2014] NZHC 222

UNDER  THE COMPANIES ACT 1993

BETWEEN  SOUTH WAIKATO PROCESSING FACILITY LIMITED

Applicant

ANDGEORGE M.G. HUNTER Respondent

Hearing:                   13 February 2014

Appearances            Mr Meier for Applicant

Mr Foley for Respondent

Judgment:                20 February 2014

JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE

This judgment was delivered by me on

20.02.14 at 10 a.m., pursuant to

Rule 11.5  of the High Court Rules.

Registrar/Deputy Registrar

Date……………

SOUTH WAIKATO PROCESSING FACILITY LIMITED v HUNTER [2014] NZHC 222 [20 February 2014]

Background

[1]      The  applicant  company  entered  into  an  agreement  to  acquire  land  near Arapuni in the Waikato region with the intention of constructing on that property a milk processing plant.   The applicant had expected that it would be joined in the venture by a European company.   However the European company elected not to proceed with the enterprise around the time when the applicant was required to purchase a key piece of land on which the plant was to be built.   These events occurred in September/October 2010.

[2]      The applicant urgently required some $870,000 to complete the transaction or risk the entire project from falling over and so enquiries were made to try and find an alternative source for the money.   It was in this way that the applicant came into contact with the respondent, Mr Hunter.  Mr Hunter was minded to assist and he had two associates with him who were agreeable to providing at total of $1,500,000 in funding with an immediate payment of an instalment of $870,000 which would enable the applicant to proceed with the Arapuni purchase.

[3]      Mr Hunter advanced approximately $139,000 in cash.   Both parties are in agreement that the intention was for Mr Hunter and the other two investors to take an equity stake in either the applicant company or an associated company, Arapuni Milk Ltd. However no agreement was concluded about the matter of equity and it would appear that there was no explicit agreement about what, if any arrangements were to be made for the repayment of the $139,000 cash that Mr Hunter provided.

[4]      It does not appear from the evidence given by either party that a repayment agreement  was  reached  although  the  parties  allege  different  features  of  the discussions that actually took place.

[5]      Mr Courtney, who gave an affidavit in support of the application, said that he could not recall the specific discussions both he and Mr Stapel, another director of the applicant, had with Mr Hunter. However, Mr Courtney is certain that they made

it clear that the applicant would not agree to any arrangement that would see any funds advanced repayable on demand.

[6]      The main dispute between the parties is whether a binding contract was entered into which converted Mr Hunter’s equity stake into a loan.   Mr Courtney testified that it was in July 2012 when Mr Hunter advised that he was no longer interested in an equity stake.  Mr Hunter takes the view that it was only a few days after the cash advance was made that it was agreed between the parties that the advance would be a loan.  But there was never any discussion that the loan would be for a fixed term.  Nor, would it appear, that further certainty about terms of any loan agreement were ever progressed thereafter.

[7]      Around  mid-2012,  a  series  of  email  exchanges  between  Mr  Hunter  and Mr Stapel discussed terms of the loan repayment.   Mr Stapel says that despite the parties seeing eye to eye on some of the potential terms of a loan agreement (for example that 8% interest per annum would apply) there was never a point where all the parties agreed to all the terms.  Therefore, while there were negotiations around the terms of repayment, a binding loan contract was never agreed to.  Reference was made to the existence of that draft agreement but because it was never executed it never took legal effect.  The existence of that draft may however throw light on the state of the arrangements between the parties and reference will be made to it later in this judgment.

[8]      No agreement had been reached in 2013 and solicitors acting for Mr Hunter sent a letter of demand to the applicant.  The letter claimed that:

Our client has lent South Waikato Processing Facility Limited $139,381.25. The  amount  owing  our  client,  including  an  accrued  interest,  is  now

$177,000.00.

[9]      While details of how interest was calculated and what authority there was for claiming interest are not provided in that letter.   The letter drew a response from solicitors acting for the applicant who replied 9 September 2013 by letter including the following terms:

2.        The funds were initially advanced with the intention of being equity funding.   However, when this did not eventuate it was agreed that the funds were to be debt funding.

3.In July 2012 our client outlined the terms of the debt funding to your client.  8% per annum interest was to be charged and the interest and principal were to be repaid on the earlier of five years or project commencement.  Although an overt acceptance of these terms was not forthcoming our client was led to believe that the terms were acceptable.   For over a year our client has placed reliance on the terms as a result of your client’s conduct.  Accordingly we consider that  your  clients  conduct  is  such  that  it  is  estopped  from  now recalling the loan as if it is pre-payable on demand.

[10]     Mr Hunter’s comment  on the substance of the passage of the letter just

quoted are set out in his affidavit where he says:

It  is  not  correct  that  Mr  Courtney  and  Mr  Stapels  made  clear  that  the applicant could not agree to an arrangement that would see any amounts advanced converted to a debt repayable on demand.  The applicant was in no position to dictate terms on the dates that the advances were made because it needed funds urgently both to settle the purchase of the land at Arapuni and to pay various creditors.

[11]     On 23 September 2013 the respondent Mr Hunter issued a statutory demand in the sum of $177,000.   The response of the applicant was to file an originating application for an order setting aside the statutory demand.

Applications to Set Aside Statutory Demands

[12]     The application to set aside the statutory demand is brought pursuant to s 290 of the Companies Act 1993 which provides as follows:

290      Court may set aside statutory demand

(4)      The Court may grant an application to set aside a statutory demand if it is satisfied that-

There is a substantial dispute whether or not the debt is

owing or is due; …

[13]     I accept that the way in which the section is to be applied was correctly stated in  Fletcher  Homes  Ltd  v Ellis,1  Master Faire  confirmed that  an  applicant  must demonstrate there is a substantial dispute as to whether or not the debt claimed in the statutory demand is due or owing.   In that case, the principles applicable to the applications of the present kind are stated as follows:

(a)       The onus is on the applicant to establish a fairly arguable case for its claim that it is not liable for the amount claimed;

(b)       A mere assertion that a dispute exists is insufficient.  The applicant must put forward material which, although short of actual proof, nevertheless supports the claim that the amount is in dispute; and

(c)       If such material is available, the dispute should be tried elsewhere and not on application to set aside the statutory demand.

[14]     In order to succeed, the applicant must demonstrate that the dispute which it raises is genuine.  See Taxi Trucks Ltd v Nicholson where the Court stated:2

The  applicant  must  show  a  genuine  and  substantial  dispute  as  to  the existence of the debt, and that it would be unfair- as it usually would be- to allow that dispute to be resolved by the Companies Court rather than by action commenced in the usual way.”

Issues

[15]     The statutory demand which was served in this case sought the return of monies which the respondent paid to the company in the latter half of 2010.  There is no disagreement that the sum of $139,000 was so paid.  There is a dispute about the basis upon which the money was paid.  A further issue arises concerning a claim that Mr  Hunter  may  now  be  estopped  from  claiming  that  his  loan  is  repayable  on demand.

[16]     The notice of originating application for order setting aside the statutory demand asserts that there is a genuine and substantial dispute as to whether or not the debt demanded is due and owing by the applicant and then goes on to say:

iThe respondent provided funding to the applicant in the sum of approximately $139,000 (“Investment Sum”) as part of a group of three investors.   The investors, including the Respondent, were to

1 Fletcher Homes Ltd v Ellis HC Auckland M471im99, 23 July 1999.

2 Taxi Trucks Ltd v Nicholson [1989] 2 NZLR 297 (CA) at 299 per Hardie Boys J.

take  an  equity  stake  in  either  the  Applicant,  or  an  associated company;

ii         The Investment Sum was not a debt  payable on demand but an equity investment;

iii        In  July  2012,  the  Respondent  advised  that  he  was  no  longer interested in pursuing an equity stake, and wanted to be repaid his investment;

iv        The Applicant provided the Respondent the opportunity to convert the Investment Sum to a debt payable on the earlier of either five years or when the construction on the dairy processing plant in Arapuni commenced;

v        The respondent did not respond and more than a year elapsed;

vi        The five-year period is still three years and nine months from expiry and the construction on the dairy processing centre at Arapuni has not commenced;

[17]     The notice of opposition, states that:

b)The Advance was initially to be an equity contribution, however, very shortly after the Advance was made it was agreed by the parties that it was a loan (Loan);

c)The Loan is for an undefined term and is, therefore, repayable upon demand.

d)In July 2012, the parties had discussions about converting the Loan to an equity stake in the Applicant but nothing came of this.

e)In March 2013, the parties had further discussions about converting the Loan to an equity stake in the Applicant but nothing came of this.

f)         By a document dated 25th of July 2013 prepared and signed by Don Taylor, who was at that date a director of the Applicant, and signed by the Respondent the terms of the loan were detailed and recorded that the amount of the loan was $139,381.25 and the interest rate was 8% and did not record any fixed term for the Loan.

g)        By letter dated 29th  of August 2013 the Respondent by its solicitor made written demand of the Applicant for repayment of the Loan plus accrued interest totalling $177,000 (Debt).

h)By letter dated 11 September 2013 the Applicant’s solicitor replied to the Respondent’s solicitor and, amongst other things, acknowledged that the Advance was debt not equity.

The Equity Arrangement

[18]     It would appear that the situation in which the funds were paid over by the respondent in 2010 was one of urgency from the point of view of the applicant.  The applicant was in danger of defaulting on the purchase of the land that it needed for the construction of the processing plant unless it obtained an urgent injection of funds.  That probably explains why there is a lack of precision in the evidence as to what the parties agreed to and also why there are no significant documents which would throw light upon the legal arrangements that the parties entered into.

[19]     For example Mr Stapel said in his affidavit:

12.When Mr Hunter made his investment it was agreed that Mr Hunter would  receive  an  equity stake  in  either  SWPF,  or  an  associated company called Arapuni Milk Ltd.

[20]      Mr Foley for the respondent made the point that there was no certainty about what  the  contractual  arrangements  were.     They  were  unenforceable,  in  his submission.  This submission was:

1.Any agreement which is to have contractual force must be in terms which define with some degree of certainty the obligations of the parties.3

2.Apparent lack of certainty will be cured if some means or standard can be found whereby that which has been left uncertain can be rendered certain.4

[21]     Mr Meier on the other hand submitted that:

The law in the area of certainty was examined and discussed by the Court of Appeal in Fletcher Challenge Energy Ltd v Electricity Corporation of New Zealand Ltd:5

But even where the parties are ad idem concerning all terms essential to the formation of a contract – the basic structure of a contract of the type under negotiation is found to have been present in terms which  have  been  agreed  –  they  still  may  not  have  achieved formation of a contract if there are other unagreed matters which the parties themselves regard as a prerequisite to any agreement and in

3 HG Beale (ed) Chitty on Contracts (31st ed, Sweet & Maxwell, London, 2012) at [2-141] – [2-149].

4 At [2-141] – [2-149].

5  Fletcher Challenge Energy Ltd v Electricity Corporation of New Zealand Ltd [2002] 2 NZLR 433 (CA) at 444.

respect of which they have reserved to themselves alone the power of agreement.   In such cases, what is missing at the end of the negotiation  is  the  intention  to  contract,  not  a  legally  essential element of a bargain

…

The prerequisites to formation of a contract are therefore:

(a)       An intention to be immediately bound (at the point when bargain is said to have been agreed); and

(b)       An  agreement  ,  express  or  found  by  implication,  or  the means of achieving an agreement (eg an arbitration clause), on  every term which:

(i)       was  legally  essential  to  the  formation  of  such  a bargain; or

(ii)      was regarded by the parties themselves as essential to their particular bargain.

Is there a substantial dispute whether or not the debt is owing?

[22]     It  is  Mr Hunter’s evidence that  at  the point  where the Danish  company withdrew he had discussions with Mr Stapels and Mr Courtney in the course of which it was agreed that the advances would be a loan.

[23]     Mr Stapels’ evidence about what happened thereafter was this:

15.It was only when Mr Hunter was no longer interested in formalising his equity stake that SWPF looked at alternatives for Mr Hunter.

16.      One of the alternatives the parties were considering was changing

Mr Hunter’s equity investment into a loan.

17.Despite the parties seeing eye to eye on some of the potential terms of  the  loan  agreement  (for  example  that  8%  per  annum  would apply), there was never a point where all the parties agreed to all of the terms.

[24]     The position which the applicant takes is that at some point the arrangement was reached whereby the company would pay interest on the loan and that the principal amount would be repayable after five years.  I interpolate that following the developments that occurred after the withdrawal of the Danish company, all of the shares in the applicant were subscribed to.   The applicant was apparently not intending to hold Mr Hunter to his initial indication of intention that he would

acquire shares in one or other of the companies that were then envisaged.   If, as seems more than likely, the situation was one where the parties had never reached an agreement then there would be no doubt that Mr Hunter would have had a restitutionary claim for the return of his money.

[25]     However, in my view it is beyond argument that at some point the parties turned their back on the equity arrangement and it was accepted that the funds that Mr Hunter had contributed to the company were now to be regarded as an unsecured debt. This is exactly what it happened to one of the other contributors of the capital contribution in 2010, Mr Lunn.

[26]     The  third  of  the  contributors,  Mr  Taylor,  had  agreed  to  convert  his contribution into equity.  Thereafter he became a director of the company.

[27]     It  was  impliedly  recognised  that  the  equity  deal  was  not  going  to  be proceeding when Mr Stapels emailed Mr Hunter 21st of March 2013 stating, amongst other things:

To confirm our discussion, we are able to offer you a swap from your unsecured debt to equity in SWPF and value of loan +8% interest PA to today’s date.

We… would also confirm that any sale of shares or assets of the company would provide you with either the share value as described above, or the cash equivalent at that time.

[28]     It is inconceivable that the company would have sent such an email unless it accepted that by this time that Mr Hunter was an unsecured creditor of the company.

[29]     On 12 July 2012 the CEO of the company, Mr Stapels sent an email to

Mr Hunter which stated:

In consideration of the last few meetings and emails, we believe that it is fair and reasonable to offer you similar terms that we provided to Allan Lunn. This implies that SWPF would pay 8% interest, payable on the earlier of five years, or at project start (earth moving).   SWPF nor its directors or shareholders are in a position to add a guarantee at this stage.

[30]     It would appear that the focus of the company’s efforts is to try reach an agreed position that the debt owed to Mr Hunter would not be repayable on demand but would be more of a term liability.   Attempts were made to settle a written agreement with Mr Hunter about this issue.  In the meantime, Mr Don Taylor was requested by the other directors to attempt to arrange such an outcome.  On 25 July

2013 Mr Hunter and Mr Taylor signed a memorandum which recorded, in substance, that the amount owing to Mr Hunter was the original $139,381.25 advanced in September 2010 together with monthly compounding bank rate of interest of 8% which, to quote what is apparently a comment by Mr Hunter in the body of the document – “this brings the amount it has cost to me of over $176,500.”

[31]     It is not necessary to further analyse the effect of the memorandum.  But a week or two afterwards on 8 August 2013, Mr Stapel communicated with Mr Taylor in the following terms:

Can you please get George to rewrite the letter of debt without the interest…

I will then get a loan agreement drawn up, so it is very clear that we will be paying (and expensing) interest at the correct rate. 8%.

[32]     It would appear that no further documentation concerning the liability to Mr Hunter was ever actually entered into.  What is apparent is that the company had noted the loan from Mr Hunter as a non-current liability in its financial statements ended 31 March 2013.   My conclusion is that both sides accepted that at least by

2013 and probably earlier that the respondent was to be regarded as a creditor in relation to the $139,000 that he had paid to the company.

Discussion

[33]     In my view the position which the respondent takes is to be preferred.  No doubt because of the exigencies of the situation which the applicant found itself in at August or September 2010 the predominant objective was to get an urgent infusion of money into the company, leaving the issue of how the money contributed was to be classified, as something that could be dealt with at a later point.   The parties therefore did not go beyond agreeing that the funds which the three investors were to contribute would be in some way converted into equity and the applicant.   Even concerning      that      topic      there      was      some      uncertainty      with      Mr

Stapels asserting that the funds would be regarded as an investment in either the applicant or another company to be formed.

[34]     It is also my view that  the proposal that  the involvement of the Danish company which  had  agreed  to  contribute  $1  million  was  a key element  of the structure of any proposed investment and that it is not realistic to suppose that the terms of any agreement  that the parties might  have come to would  require the respondent and the two other local investors to proceed with the investment even after the Danish company had withdrawn.

[35]     Indeed, the latter course of dealings between the parties can only be viewed as  an  acknowledgement  by the  applicant  that  the proposed  acquisition  of share capital was a dead letter.

[36]     There is no doubt that the applicant is under an obligation to ultimately repay to the respondent the $139,000.   There is however a lack of precision in the allegations which the respondent makes concerning just what was agreed to about the repayment of the funds.  There is no contemporaneous document or other basis upon which the Court before which the matter comes in the form of an application to set aside a statutory demand can come to a clear determination of what if any agreement was reached.

[37]     The position which the respondent takes is that the law treats a loan for an undefined term as repayable upon demand.6   I accept that that is a correct statement of the law.

[38]     However, it is my opinion that the applicant cannot establish a substantial dispute that the parties entered into a binding contract in terms of which the funds introduced were regarded as an advance payment for shares in a company which would later be issued to those advancing the funds.  Quite apart from anything else, there  is  no  indication  that  the  parties  discussed,  let  alone  agreed  upon,  what

proportion of the equity the contributors would acquire with the money they put in.

6  Morris v Hetaraka HC Hamilton CIV-2008-419-1607, 27 February 2009 at [36]; HG Beale (ed)

Chitty on Contracts (31st ed, Sweet & Maxwell, London, 2012) at [38-262].

That was a crucial issue because it influenced the key question of who was to have control of the company.  This is not a case, either, where the parties agreed that the finalisation of the detail of their agreement in principle could be dealt with by way of a mutually agreed mechanism at some later time.

Estoppel

[39]     Mr Meier also submitted to me that a further reason why the Court could conclude that the funds contributed were not now able to be recovered was that Mr Hunter was estopped from bringing such a claim.  The basis for making such a claim was set out in the letter which solicitors acting for the company sent to those acting for Mr Hunter 9 September 2013 which is set out above in the background facts.

[40]     There is no doubt that the directors of the company appreciated that because of their poor capitalisation position repayment to Mr Hunter would be very difficult. They expressed the view that it would be necessary to delay repayment.  But there was no acceptance of this suggestion that I can see in the evidence on the part of Mr Hunter which would have constituted a representation which the directors were entitled to reasonably view as being an assent on Mr Hunter’s part.

[41]     Mr Foley submitted that:

The test for estoppel is stated in Gold Star Insurance Co Ltd v Gaunt:7

[B]efore judgment can be given against a defendant on the grounds of estoppel, some action, or representation, or omission to act, must have been carried out by or on behalf of, the defendant causing the plaintiff to have acted in a manner causing loss.” [underline added]

[42]     A  more contemporary description of how the doctrine operates is to be found in Laws of New Zealand and is to the following effect:8

7 Gold Star Insurance Co Ltd v Gaunt [1998] 3 NZLR 80 at 86.

8 Laws of New Zealand Estoppel (online ed) at [68].

68. Promissory estoppel.

When one party has made a clear and unequivocal promise or assurance by words or by conduct to another party which was intended to affect the legal relations between the parties and to be acted on accordingly, then once the promisee has taken the promisor at his or her word and acted on the promise, the promisor is bound by it.1   This is so unless and until the promisee has been given a reasonable opportunity of resuming his or her position.

[43]     I consider that description of the elements of promissory estoppel is accurate. The claim that the applicant makes that Mr Hunter gave the necessary promise or assurance is simply not supported by the evidence.

[44]     More significantly, the issue of estoppel is not raised at all in the originating notice of application and there is no particularisation of when and by what means Mr Hunter is supposed to have made the representation that he accepted he would not get his money back for five years or until construction started.

[45]     A subsidiary issue, which is not critical to my conclusions but nonetheless raises a serious and separate doubt about the estoppel argument.  It must have been implicit   in   any   estoppel   argument   that   Mr   Hunter   would   have   made   his representation on the basis that in the meantime he would be paid interest on the funds in the meantime.  Any representation to the company that it would be able to retain the funds in the meantime would have been predicated upon the fact that Mr Hunter would be paid interest.  As I understand it, he has not been paid interest and in those circumstances the company could hardly complain that it was unconscionable for Mr Hunter to resile from the alleged representation he had made.

[46]     By  way  of  completing  the  discussion  about  estoppel  I  observe  that  the applicant considers that it is relevant to this issue that an agreement that SWPFL entered into with one of the other proposed investors, Mr Lunn, contained provisions for deferred repayment.   In my assessment, the fact that Mr Lunn may have been prepared to contract on those terms with the directors of the applicant does not add anything to the assertion of estoppel.  Mr Hunter was not a party to that agreement.

[47]     Further, the applicant attaches weight to the fact that the directors of the applicant made offers to Mr Hunter for the repayment of the money on a deferred

basis.  As I understand it, it is argued that therefore knowledge on Mr Hunter’s part of  what  the  directors  wished  can  be  seen  as  influential  in  deciding  whether Mr Hunter led the applicant to believe that he was agreeable to deferred-repayment. I am unable to agree.   The fact that Mr Hunter declined to sign an agreement on those terms had, if anything, the opposite effect.

Conclusion

[48]     Whatever  analysis  is  adopted,  the  conclusion  must  be  that  there  is  no substantial dispute that the money which Mr Hunter paid to the company is now required to be repaid.

[49]     That is because the company has been unable to demonstrate that there is a substantial  dispute  whether  or  not  the  debt  is  owing.    There  is  no  satisfactory evidence to prove that a binding contract setting out the equity arrangement was entered into.   While there was no express agreement recognising the loan and the terms of repayment, the history of correspondence suggests that the applicant treated Mr Hunter as  a creditor.   The estoppel  argument  also  fails.  Mr Hunter did  not represent, after the equity proposal did not proceed, that, nonetheless, the company could retain his funding for five years.

[50]     For those  reasons  the  originating  application  for orders setting  aside  the statutory demand dated 23 September 2013 is dismissed.  I grant the second part of the application which is to extend time for compliance with the statutory demand until 15 working days after the date of this judgment.

[51]     The parties should confer on the issue of costs and, if they are unable to agree,  are to  file memoranda not  exceeding five pages  on  each  side  within  10 working days of the date of this judgment.

J.P. Doogue

Associate Judge