T.K (Hong Kong) Limited v Diamond Milk Formulas Limited
[2016] NZHC 2642
•4 November 2016
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2016-404-1077 [2016] NZHC 2642
BETWEEN T.K (HONG KONG) LIMITED
Applicant
AND
DIAMOND MILK FORMULAS LIMITED
Respondent
Hearing: 17 October 2016 Appearances:
Ms S Wroe for Plaintiff/Respondent
Mr R Hucker and Ms R Selby for Defendant/ApplicantJudgment:
4 November 2016
JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE
This judgment was delivered by me on
04.11.16 at 3.30 pm, pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
T.K (HONG KONG) LIMITED v DIAMOND MILK FORMULAS LIMITED [2016] NZHC 2642 [4 November
2016]
Introduction
[1] This proceeding is in the form of an interlocutory application for leave to file a statement of defence to a claim seeking liquidation orders out of time.
[2] The grounds upon which the defendant seeks the order granting leave are as follows:
(a) The plaintiff is not a creditor of the defendant;
(b) There is a bona fide defence to the claim brought by the plaintiff;
(c) To the extent the plaintiff relies on clause 10 of the Licence Agreement referred to in the affidavit of James Neil Black as annexure “D”, such a clause is a penalty clause and is unenforceable;
(d) In the alternative as a result of the change in the regulatory position in the Peoples Republic of China as to the requirements for the importation of milk powder products an event which resulted in the agreement either being frustrated and/or the defendant being exempted from performance of its obligation under the agreement as a result of clause 24 of the Licencing Agreement arose;
(e) The plaintiff has not supplied any milk formula or product and/or provided any consideration for the amounts claimed in the invoice on which this proceeding is founded and there is therefore a total failure of consideration;
(f) The defendant is solvent and able to pay its debts as they fall due in any event;
(g) The reason for the defendant not taking steps at an earlier [date] in filing a statement of defence has been adequately explained by and on behalf of the defendant;
(h) There is no prejudice to the plaintiff should leave be granted[.]
[3] In response, the plaintiff has filed a notice of opposition setting out the following grounds:
3.1 [The defendant] has no defence to [the plaintiff]’s claim:
(a) [The plaintiff] is a creditor of [the defendant] pursuant to the terms of a licence agreement between the parties dated 14
November 2014 (Agreement);
(b) Clause 10 of the Agreement is not a penalty clause. It provides for liquidated damages in an amount which is a genuine pre-estimate of [the plaintiff]’s loss in the event of [the defendant]’s breach;
(c) There was no force majeure. The Chinese regulatory changes alleged to be the force majeure event came into effect on 1 May 2014, months before the Agreement was signed. The parties entered into the Agreement as a direct result of these changes;
(d) [The plaintiff]’s consideration is clearly stated in the
Agreement;
3.2[The defendant] has the onus of establishing its solvency and has failed to do so, It is presumed to be insolvent pursuant to s 287 of the Companies Act, and is in fact insolvent by its own admission;
3.3[The defendant] has not provided an acceptable explanation for its failure to file a statement of defence. Its account is implausible;
3.4 [The plaintiff] will suffer prejudice if the application is granted; and
3.5 Upon the grounds appearing in the affirmation of Kevin Bruce
Ramsey dated 12 August 2016.
[4] The background to the application is as follows. The plaintiff, which was associated with Mr Ramsey, is apparently a successful exporter of products such as infant formula into countries that include the People’s Republic of China (“PROC”).
[5] The defendant, whose director is Mr Black, wished to become involved in supplying the Chinese market with infant formula. I understand that the market is a competitive one. It appears that the market has become progressively more regulated, arising out of concern with ensuring that only products of a proper quality and purity should be recognised as suitable for importation into PROC. One feature of the regulation has been that the PROC wishes to reduce the number of persons involved in the exporting of infant formula products and to establish a robust system of certification of reliable manufacturers and processors in whose brand the importing country can have confidence. It further appears that the PROC wishes to streamline the industry by ensuring that only one entity is involved in the manufacture and packaging of product that is to be sent to China. It will be obvious that the attraction of such a reform would be that it would reduce the number of entities involved in the exporting process. That in turn would have the advantages of strengthening accountability and that there would be fewer parties, who could be
better controlled through licensing and audit surveillance. It would also mean that the party that was permitted to manufacture would be responsible for all phases of the manufacturing process rather than being able to delegate parts to other entities or individuals who were outside the scope of the licensing arrangements.
[6] While the court has only a necessarily superficial understanding of the mechanics of the infant formula market, it seems likely that considerations such as the above lay behind the announcement in or about February 2014 that the PROC was intending to reform the exporting process along the lines indicated above. In New Zealand, the responsible government department, the Ministry of Primary Industries conducted a briefing of those involved in the industry to alert them to the impending changes. Mr Ramsay was one of those who attended the briefing. Mr Black did not. His position is that he was unaware of the exact nature of changes that were pending. As it turned out, the briefing was unable to offer definitive guidance on exactly what the consequences would be for the New Zealand market but made it clear that some changes of the kind set out above were in the offing.
[7] In 2014, consistent with its objective of participating in the export business, the defendant entered into an agreement to acquire shares in a company called Doxcon Pharmaceuticals Limited (“Doxcon”) which operated a canning plant which was able to pack products intended for the Chinese market. It appears that it also had the potential to blend milk powder formula for that market although I understand that it had not been engaged in that activity. No doubt the defendant’s objective was to get into a position where it could through its control of Doxcon have the assurance that it had a reliable contact which would be called upon to package and perhaps blend formula.
[8] The plaintiff had an established connection with a company called Unitech which was the source of blended infant formula which it exported into China. Mr Black has deposed that he had tried to establish a connection with Unitech but that Mr Ramsay had taken steps to prevent this occurring. The exact truth of the position cannot be established in the context of a case of this kind but one could understand why in such a competitive environment the plaintiff/Mr Ramsay would
want to maintain exclusivity of connection with Unitech because of the value of having an established blender as a commercial connection.
[9] In November 2014 the plaintiff and the defendant entered into an agreement which was described as conferring on the defendant by way of licence the use of various trademarks and other property which the plaintiff used in connection with its exports of products including formula to countries including PROC.
[10] The principal elements of this agreement were as follows.
[11] The recitals to the agreement included the following:
[Defendant] is a New Zealand-based company in the process of selling and distributing milk formulas in China, Asia and the Middle East…[The defendant] has entered into an unconditional agreement to take control of the milk formula manufacturer [Doxcon] …[Doxcon’s] operations include blending, canning and packaging for compliant export of milk formulas and associated products…
[12] The term of the agreement was for 10 years and during the term all intellectual property rights including copyright trademarks and formulations were licensed to the defendant by the plaintiff although the plaintiff would retain ownership of them. The trademarks included that for the Taimana brand under which the plaintiff manufactured and exported relevant products.
[13] Clause 6 of the agreement provided as follows:
The Taimana products for China will be blended by [Unitech] on receipt of a written in order to [the plaintiff] by [the defendant] and payment by [the defendant] to the plaintiff of a 70% deposit upfront in each case. Production run cost and delivery will be as quoted at the time of order with [the plaintiff] adding a 25% margin to the [Unitech] gross production cost… In addition, [the defendant] will be responsible for arranging and paying for canning, packaging and other requirements ready for market by [the plaintiff].
[14] I interpolate that the provision would seem to mean that the blending would be carried out by Unitech while the plaintiff would at the cost of the defendant attend to canning, packaging and other requirements.
[15] By cl 8 it was provided that the defendant would ensure that the Taimana product was canned and packaged by the plaintiff in accordance with best practice including in accordance with all laws and regulations.
[16] Clause 9 provided:
If for any reason [Unitech] is unable or unwilling to continue blending any product (e.g. failure to become a registered manufacturer for infant formula by China…) The formulation will be transferred to [the defendant] who will both blend and can the product. In this case [the plaintiff] will be paid commission on the gross production cost to [the defendant] excluding the competitive cost of canning…
[17] A key part of the contract for the purposes of the present dispute was cl 10 which provided as follows:
Despite any event or circumstance, [the defendant] guarantees to [the plaintiff] that a minimum of 200,000 800g equivalent cans of Taimana product for China will be ordered in the first 15 months of the Term. Should orders for China exceed 400,000 cans in the first 15 months or in any subsequent year then [the plaintiff’s] 25% commission will reduce to 10% commission but only on those cans ordered in excess of 400,000. In the event [the defendant] fails to order and pay for the minimum cans in the first
15 months or in any subsequent year [the defendant] will pay a top up fee at the period end to [the plaintiff] equivalent to the commission plus GST of
any (sic) not received by [the plaintiff] for that period ended.…
[18] A further important provision of the contract was cl 24:
24.Force majeure applies. Neither party will be liable for any failure to perform or any delay in performing any of its obligations under this agreement where such failure or delay is caused by an unforeseen calamity; hostilities; government or regulatory involvement or interference; or any other event all-cause reasonably beyond the control of the other party.
[19] To resume the chronology, in April 2015 the PROC announced changes that were to take effect to the regulatory regime with effect from 31 August 2015. These changes required, amongst other things, that a single entity should carry out both the formulation or manufacturing and packaging of the products destined for China. I understand that the party carrying out these functions was to be identified as the manufacturer. Manufacturers needed to have permits in order for their products to be imported into China. Further, each manufacturer was entitled to only produce products under three brands.
[20] On 1 February 2016 the plaintiff rendered an invoice to the defendant in the sum of $402,960. This invoice was based upon cl 10 of the agreement, although the invoice did not make specific reference to it. That was a claim arising out of the fact that during the relevant period leading up to 1 February 2016 the defendant had not ordered any products from the plaintiff and therefore the top up provision was invoked by the plaintiff.
[21] On 4 April 2016 the plaintiff served a statutory demand to enforce the above liability. The defendant did not respond to the notice and time expired for compliance on 26 April 2016. On 18 May 2016 the plaintiff issued proceedings seeking orders for liquidation of the defendant pursuant to s 241 of the Companies Act 1993 (the Act) alleging that the defendant was unable to pay its debts and was presumed unable to pay its debts in accordance with s 287(a) of the Act.
[22] The defendant was required to file and serve a statement of defence by 7 June
2016 but did not do so. The application was listed for call on 8 July 2016. On the day before, 7 July 2016, the defendant filed the present application seeking an extension of time to file a statement of defence.
[23] Further reference will be made to aspects of the facts subsequently in this judgment.
Principles
[24] The parties agreed that when determining an application of this kind the courts are to be guided by the principles outlined in the cases of Fresh Cut Flower Wholesalers Ltd v Living and Giving Gift Co Ltd,1 Sayer v Capital Aviation Ltd2 and other authorities which establish that the following matters are relevant when an application for leave is being considered:
[25] An application for special leave must demonstrate:
1 Fresh Cut Flower Wholesalers Ltd v Living and Giving Gift Co Ltd (2001) 16 PRNZ 173 (HC).
2 Sayer v Capital Aviation Ltd (1993) 6 PRNZ 401 (HC).
a) A convincing reason for the granting of leave, a lack of prejudice and justification for the indulgence;
b) Whether the company has an arguable defence;
c) Even if it does, if the company is insolvent leave ought not to be granted.
[26] In addition, the court is to be guided by the principle that winding up proceedings are not to be protracted for procedural reasons.3
Solvency of the company
[27] The solvency of the company has particular relevance. In Fresh Cut Flower
Wholesalers Ltd Paterson J said that:4
[In] my view, even if there is an arguable defence, leave should not be granted if the applicant is insolvent.
[28] The reason for such an approach was not analysed in any detail in that judgment. It seems likely that the reasoning which Paterson J based his conclusion on was that it is unlikely to be in the public interest to countenance the filing of a statement of defence where a company is apparently insolvent because to do so will simply delay the intervention of a liquidator through appointment by the court in the affairs of the company. The courts have frequently recognised the principle that liquidation proceedings are not to be protracted by unmeritorious defences and that it is generally desirable that they should be concluded as soon as reasonably
practicable.5 Therefore even if the defendant is able to show good reason why it
was unable to comply with the time limits, there will not be any point in giving leave to defend in a case where there are good grounds for concluding that the company is insolvent for then, at least in a case where the ground is s 241(1)(a), the court will not wish to make an order that delays the point at which the company is brought
under the control of a liquidator.
3 Re Property Growth Securities Limited (1991) 4 ASCR 783 (VSC) at 791.
4 Fresh Cut Flower Wholesalers Ltd, above n 1, at [9].
5 Williams and Kettle Ltd v Rangiputa Stock Company Ltd HC Rotorua, CIV-2004-463-15, 14
June 2004 at [11].
[29] The judgment of Faire AJ in Maximum Internet Ltd v Net Stream Internet Ltd casts further light upon why leave may not be granted to an insolvent company even where there is an arguable defence because the court will be concerned that an insolvent company should not waste funds on the defence of the case which might, more properly, be handled by a proof of debt before the company’s liquidator.6
Faire AJ did however also say that where the grounds for appointment of a liquidator
are the inability to pay debts, there is no absolute bar to the grant of leave where the court is concerned as to the insolvency of the defendant.
[30] Assuming that the defendant is able to establish that it has an arguable defence such as that the plaintiff does not have the required status of creditor to bring the proceeding and is able to provide evidence that shows that it is fairly arguable that the company is not insolvent, it still needs to deal with the requirement to show why it did not file a statement of defence within the time limit specified by the High Court Rules 2016 (“Rules”). The defendant needs to point to considerations which
lead to the conclusion that the “overall justice of the case”7 requires that leave is
granted. It may be that the defendant is able to put forward a reasonable explanation as to why it did not comply with the Rules such as mistake or misunderstanding about exactly what had to be done or a breakdown of communication within an organisation so that the appropriate steps were not taken. These last, I should add, are examples only.
[31] As well, the authorities have identified the question of prejudice resulting to the plaintiff as a result of the delay from granting an extension of time under rule r
31.17 as being relevant to the court’s consideration of whether leave ought to be
granted.8
Is the debt disputed?
[32] One of the grounds upon which the defendant sought leave to defend was that it has a substantial defence.
6 Maximum Internet Ltd v Net Stream Internet Ltd HC Hamilton CIV-2004-419-694, 13 August
2004 at [8].
7 The term is used by Faire AJ in Maximum Internet Ltd v Net Stream Internet Ltd, above n 6, at
[23].
8 Sayer v Capital Avidation Ltd, above n 2, at 402.
[33] The defendant asserted that there was no debt owing on the ground that first, the entitlement to compensation which the plaintiff relies upon which is contained in cl 10 of the agreement, is a penalty clause and is therefore unenforceable. Secondly, it is stated that the change in the regulatory requirements of the People’s Republic of China as to the import of infant milk formula products resulted in the contract being frustrated or the defendant being exempted from performance of its obligation under the agreement as result of cl 24. Thirdly, it is said that the plaintiff has not supplied any infant formula or other product or provided any consideration at all for the amounts claimed in the invoice upon which the proceeding is based.
The penalty clause argument
Background
[34] The effect of the contractual arrangements was that the defendant was required to purchase a minimum number of cans.9 The obligation was not defined by the value of the product but the volume. A further effect of the contractual arrangements was that even if the defendant purchased less than 200,000 cans, “commission” at 25% would be charged as though it had in fact made such a purchase. The defendant says this provision is a penalty clause which the law regards as unenforceable.
Principles relating to penalty provisions in contracts
[35] Ms Wroe her submissions made reference to the principles that are applicable when the court is attempting to determine whether or not a contractual provision imposes a penalty which is not enforceable as a matter of public policy. In her submissions she said:
The courts have long drawn a distinction between penalties and liquidated damages:10
The distinction between penalties and liquidated damages depends on the intention of the parties to be gathered from the whole of the contract. If the intention is to secure performance of the contract by the imposition of a fine or penalty, then the sum specified is a penalty, but if, on the other hand, the
9 Clause10.
10 I interpolate that the authority Ms Wroe cited for this proposition is Law v Redditch Local Board [1892]
1 QB 127 at 132.
intention is to assess the damages for breach of the contract, it is liquidated damages.
The learned authors of The Law of Contract in New Zealand comment as follows:11
On the one hand, a clause fixing the damages may be a genuine pre-estimate of the loss that will be caused to one party if the contract is broken by the other. In this case it is called liquidated damages and it constitutes the amount, no more and no less, that the plaintiff is entitled to recover in the event of breach without being required to prove actual damage.
Secondly, it may be in the nature of a threat held over the other party in terrorem — a security to the promisee that the contract will be performed. A sum of this nature is called a penalty, and it has long been subject to equitable jurisdiction. Courts of equity have taken the view that the promisee is sufficiently compensated by being indemnified for his or her actual loss, and that the promisee acts unconscionably if he or she demands a sum which, although certainly fixed by agreement, may well be disproportionate to the injury. In such a case the penalty is unenforceable, although the plaintiff still can prove the amount of his or her loss in the ordinary way. Indeed, where the agreed sum, although a penalty, is in fact less than the damage actually suffered, it appears that the plaintiff can recover his or her actual loss.
[citations omitted]
[36] Mr Hucker in his submission described the operative principles as follows:
Where a provision of a contract is penal rather than compensatory in nature, in the event of breach, the Courts have long maintained that such a clause is unenforceable.12
[37] In his submissions Mr Hucker commented in a footnote:
The High Court of Australia have held that it is not only situations of breach of contract that engage the penalty doctrine [see Andrews v Australia and New Zealand Banking Group Limited [2012] HCA 30, (2012) 247 CLR 205 at [46] concerning various bank fees charged to customers].
[38] By way of preliminary comment it is necessary to consider the statement of law contained in the High Court of Australia decision in Andrews to which
Mr Hucker has made reference. That statement of law was disapproved by the
11 Burrows, Finn and Todd Law of Contract in New Zealand (5th ed, LexisNexis, Wellington,
2016) at 21.2.6.
12 See AMEV-UDC Finance Limited v Austin (1986) 162 CLR 170 at 193, approved by Privy
Council in Phillips Hong Kong Limited v Attorney-General of Hong Kong (1993) 61 BLR 41 at
57 and cited and approved in Amaltal Corporation Limited v Maruha (NZ) Corporation Limited
[2004] 2 NZLR 614 (CA) at [57].
United Kingdom Supreme Court in Cavendish Square Holding BV v El Makdessi; ParkingEye Ltd v Beavis where the following statements concerning it were made amongst others:13
Thirdly, the High Court's redefinition of a penalty is, with respect, difficult to apply to the case to which it is supposedly directed, namely where there is no breach of contract. It treats as a potential penalty any clause which is 'in the nature of a security for and in terrorem of the satisfaction of the primary stipulation'. By a 'security' it means a provision to secure 'compensation ... for the prejudice suffered by the failure of the primary stipulation'. This analysis assumes that the 'primary stipulation' is some kind of promise, in which case its failure is necessarily a breach of that promise. If, for example, there is no duty not to draw cheques against insufficient funds, it is difficult to see where compensation comes into it, or how bank charges for bouncing a cheque or allowing the customer to overdraw can be regarded as securing a right of compensation.
[39] The discussion in Cavendish Square in my respectful view represents what has always been regarded as the orthodox position. Therefore my conclusion is that before there can be any question of the disallowance of penalties, it must involve the contract imposing a penalty in circumstances where it provides for a sanction to be paid by a party breaking the contract which exceeds the likely loss that will flow from the breach.
Was there a breach of contract?
[40] In this case, the contract makes it clear that the defendant was required to purchase a minimum of 200,000 800 g tins of the formula product in the first 15 months. If the defendant did not purchase that amount, it would nonetheless pay commission as though it had. The payment is however described as a “top up” payment. If for example, the defendant actually purchased 100,000 cans it would be required to pay the 25% commission on those products which is a contractual debt. There could be no complaint that that part of the commission was not recoverable. It would also be required to pay 25% on the un-ordered 100,000 cans.
[41] Circumstances might come about where it did not, for the time being, suit the defendant to make any purchases because of, for example, temporary difficulties in
selling the product in China. The defendant might suspend buying for the time being
13 Cavendish Square Holding BV v El Makdessi; ParkingEye Ltd v Beavis [2015] UKSC 67; [2016] 2 All ER 519 at [42].
with every intention that later it would resume doing so. At the point where the 15 months period expired but when a liability had not yet arisen for the defendant to make payment under cl 10,14 could it be suggested that the plaintiff would have the right to cancel on the grounds of breach? Of course, if the plaintiff made a claim under cl 10 and the defendant did not pay, then that might amount to a breach of contract. The considerations just discussed, in my view suggest, that by not taking stock at all, or taking stock less than 200,000 units over the 15 month period, no breach occurred.
Were the contractual provisions in the nature of a penalty?
[42] The next issue concerns whether the provision in fact had the effect of a penalty.
[43] In my view, as I now explain, the plaintiff in this case is attempting to recover the price that it was entitled to for providing the benefits that it did under the contract which included a licensing arrangement and, possibly, providing access to Unitech’s production facilities. The agreement sets out a formula which fixes that price. It fixes that price in relation to the amount of products that Unitech might supply to the defendant. The demand for a product would be an outcome of, amongst other things, the marketing advantages that the defendant incurred under the licensing agreement which would in turn impact upon demand for imports into China. The effect of the mechanism was that the more successful the defendant was in its operations in that market under the Taimana brand and presenting its products with the assistance of the defendant, the more it would pay for those advantages. That would seem to be payment for the access to those advantages was linked to the amount of products that were produced for the defendant by Unitech.
[44] The agreement implicitly acknowledged the possibility that the defendant might not have much success with its operations in the Chinese market. It would seem that the plaintiff was concerned to obtain a position under the contract where it would not be exposed to, or would have a limited exposure to, that risk. By that I
mean that if the defendant was unsuccessful it would not mean that the plaintiff
14 Because, for example, no invoice had been rendered.
would receive nothing for the valuable advantages that the plaintiff conferred and the defendant acquired under the contract. The risk more or less rested with the defendant who would have to pay even if it was not successful in exploiting the intellectual property of the plaintiff. Whether that was a good bargain or not from the point of view of the defendant is irrelevant. The fact that the price was struck by reference to hoped-for levels of sales which may or may not ultimately be achieved is neither here nor there. Presumably the defendant was confident that it would achieve sales of at least 200,000 units per 15 monthly period, otherwise it would not have entered into the contract.
[45] The contract does no more than state that this is what the defendant will have to pay. It does that in cl 10 which is therefore not aptly described as containing a penalty provision.
[46] The process of reasoning by which a given situation is tested for the presence of an undue penalty is to compare the damages that the claimant might recover at law in case of a breach against what the contract provides is to be paid to the plaintiff in the case of a breach. But behind that question is the anterior question of what benefits the claimant was to receive under the contract. Embarking upon that enquiry in this case reveals that the very provisions of the contract which the defendant says constituted an unenforceable penalty are not that at all but are more properly viewed as the provisions that prescribed the benefits which the claimant is to receive, or, it could be said the price which is payable under the contract.
[47] A particular provision will only be held to be a penalty when it cannot be regarded as a genuine estimate of damages that might be recoverable by litigation.15
In that context the law regards a contractual provision as being a penalty where the stipulated sum is:16
… extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach.
15 Pacioco v Australia and New Zealand Banking Group Ltd [2016] HCA 28, 333 ALR 569.
16 Dunlop Pneumatic Tyre Company Limited v New Garage and Motor Co Ltd [1914] UKHL 1, [1915] AC 79 at 87 per Lord Dunedin.
[48] The damages to which the plaintiff would be entitled for breach of the minimum take provision in cl 10 would be such as to place the plaintiff in the same position as if the contract had been performed. If the failure to take the minimum amount is regarded as the breach of contract, then compliance with the contractual obligation would have required the defendant to compensate the plaintiff for what it lost through the defendant not performing its contractual obligation. If the contractual obligation required the defendant to purchase not less than 200,000 units then the commission that the plaintiff would have earned would have been the 25%
of whatever “production run cost” quoted by Unitech was at the time of the order.17
The plaintiff would therefore need to establish on the balance of probabilities what the likely production run cost that Unitech would have charged on 200,000 units would have been. The sum arrived at would then be compared with the amount that cl 10 would entitle the plaintiff to receive where there were no orders, or fewer, than specified in the contract.
[49] So far as I’m aware there is no direct evidence of what the cost might have been. It appears from the invoice which the plaintiff rendered that a figure of $8.76 per kilogram exclusive of GST was adopted as the rate at which Unitech would have charged. The invoice states that it is:
Based on Unitech’s reduced price in June 2015, approved by [the defendant]
and utilising the lowest cost per KG product-adult formula[.]
[50] Again there does not appear to be any evidence asserting that the basis upon which the charge was imposed was wrongly calculated and there is no comment on the claim implicit in the invoice that the defendant had approved the rates in question.
[51] My conclusion is that as a matter of contractual interpretation the argument which the defendant puts forward that the provision was a penalty cannot be sustained. Mr Hucker was not able to suggest any evidence or other matters in addition to what was before the court which might support a contrary interpretation being adopted. I therefore conclude that the defendant does not have an arguable
defence that any liability is invalidated by the doctrine concerning penalties.
17 Clause 6.
[52] It further follows that if the debt cannot be disputed on the penalties ground, the plaintiff is able to justifiably assert that it is a creditor of the defendant and therefore is entitled to bring a claim for the liquidation of the company pursuant to s 241 of the Act.
Force majeure
[53] An alternative basis upon which the defendant argues that it is not liable under the contract is that the contract was frustrated because of changes that the PROC made to regulations governing the importation and sale of formula products for sale to infants. This caused a problem for the plaintiff because it did not have access to a manufacturer which could both blend the formula products and can them. While the manufacturer that it retained to blend the formula could carry out that function, it did not have the ability to can the product.
[54] The evidence that has been provided by the plaintiff is to the effect that the possibility of regulatory change was one of the reasons why the plaintiff entered into the contract with the defendant and why the defendant was required to provide a contractual warranty that it had, in effect, the ability to acquire a company which owned canning facilities.
[55] The evidence in this area is not clear. On the one hand, the defendant says that the change in regulations which took effect from 31 August 2015 prohibited imports of formula into China unless they were exported from New Zealand by the same entity who manufactured the product and canned it. I am not aware that the plaintiff substantially disagrees with this statement of the position.
[56] It appears that there was a risk that the arrangement which the plaintiff relied upon of having Unitech blend the product and having the canning done elsewhere would not satisfy the requirements of the Chinese government. Mr Ramsay said that that was the reason why the acquisition of the Doxcon company was so important. That company had the ability to both blend and can the formula. The plaintiff asserts that had the defendant complied with its obligations under the contract and given a true warranty that it had the power to acquire Doxcon that would have solved
the problem but the acquisition of Doxcon was unsuccessful. That company went into liquidation.
[57] Had the parties been able to utilise the capabilities of Doxcon, that would have overcome any difficulty arising from the fact that the manufacture of the formula was carried out by one company, Unitech, and the canning by another.
[58] Further questions arise. One of them is whether the defendant defaulted under the agreement to acquire Doxcon because of lack of financial resources (which is what the plaintiff alleges) or whether the sale of Doxcon failed because that company went into liquidation. The further issue that I refer to is the question of whether, had the defendant had sufficient financial resources to complete the purchase, the Doxcon company would have remained solvent so that the acquisition of the company could have proceeded. It may be that the position is, as the defendant alleges, that the liquidation of Doxcon was an unexpected event which was outside the terms of the warranty that the defendant had given about its intention to acquire majority ownership of that company. That is to say, the warranty only contemplated acquisition of Doxcon so long as it was a viable company and not in liquidation.
[59] That leads to the next point which is whether the plaintiff is correct in submitting that the force majeure clause did not have any application in this case because the very difficulty that arose was one that was foreseeable at the time when the parties entered into the contract.
[60] The evidence which the plaintiff gives is that the PROC announced that it would actually be proceeding with changes to the regulatory regime in April 2015. However, the parties had entered into the contract some five months before on 15
November 2014. While the court would be sceptical about any claim on the part of the defendant that it did not know about the heralded changes if it had entered into the agreement after their announcement in April 2015, the date sequence which I have outlined above means that it is possible that the account which the defendant gives about this matter is correct.
[61] The plaintiff says that the fact that the parties were aware of these problems is reflected in the fact that the contract itself contained an arrangement to try and overcome them.
[62] Mr Black accepts that exporting arrangements to PROC were in fact in a state of flux at the time when the agreement was entered into. However, it is his contention that the first indication about pending changes in the Chinese market which was contained in the briefing notes of the MPI did not reflect a possible problem arising from arrangements where there was a bifurcation between the blending of the product by one company and the canning and export by another. The exact problem which Mr Ramsay has therefore identified as being the reason why it became desirable to have a unitary blender and canner, was not a problem that was apparent at the time when the parties entered into the licensing agreement. Therefore it could not be reasonably said that problems arising from the duality of the lender and canner was in the reasonable contemplation of the parties and therefore outside the scope of the force majeure agreement which was directed to unexpected future occurrences. I note that Mr Black does not clearly describe what the motivation for having the Doxcon arrangement in place was, if it was not for the purposes that Mr Ramsay has indicated. However, I would accept that Mr Black has given sufficient evidence to indicate that there may be a triable issue in the proceedings in relation to the force majeure clause.
[63] The court cannot safely draw an inference that the parties in entering into this arrangement both impliedly acknowledged their awareness that the looming regulatory problem was located in the area of separate canning/blending entities being involved in the supply operation. I acknowledge that Mr Ramsay appears to be clear in his mind that that was the case but it cannot be said that an understanding of the common intention of the parties to the contract objectively determined can be based just upon the knowledge of one party.
[64] For those reasons I am unable to agree with the plaintiff that the defendant does not have an arguable defence that the force majeure clause ought to be given effect to.
Argument that no consideration for agreement
[65] The defendant puts forward the contention that it has a good defence that the agreement is not binding because no consideration was provided. The evidential foundation for the argument is in effect that no formula product for export to China was ever actually provided under the contract.
[66] For the plaintiff, Ms Wroe submitted that the proposition that Mr Hucker had put forward was misconceived. She submitted that the contract was a licensing agreement pursuant to which the defendant had access to the Taimana brand which was a brand that had standing in the Chinese market. It also had the right to use trademarks and product get up which was the property of the plaintiff.
[67] I accept the position as it is described by the plaintiff. The contract is not entirely clear but it seems that the chain of transactions that it envisaged so far as supply of the blended product was as follows. The product would be manufactured by Unitech. Unitech would make the product available for the nominated canning enterprise to package the formula. The licence fee which was payable to the plaintiff was to be calculated as a percentage of the value of the product which Unitech so provided. As I have already noted, if the defendant did not in fact order any formula product from Unitech there was a default arrangement requiring the defendant to pay the plaintiff as though there had been a supply of not less than 200,000 cans in a 15 month period. That does not however mean that the contract was one for the supply by the plaintiff of formula product which was not in fact supplied and which therefore could have given rise to a legitimate argument that the plaintiff had done nothing under the contract to entitle it to payment.
[68] The defendant does not have an arguable defence that no debt arose on the ground as described in this part of the judgment.
Is defendant arguably insolvent?
[69] In this case the defendant has failed to comply with a statutory demand which was served on it and therefore the presumption of insolvency that arises under s 287(a) comes into effect.
[70] As well as the presumption that arises under s 287, a further difficulty that lies in the way of the defendant in attempting to demonstrate that it is in fact arguably solvent is that the company has itself now been put into receivership.
[71] The evidence that has been put forward by the defendant is that in July 2016, the company was involved in the raising of loans and/or capital that would enable any claim by the plaintiff to be secured. Further, it was said that indicative indications from the Bank of New Zealand and the Bank of China were that they are prepared to provide ongoing funding necessary for the defendant. Mr Black said that he would file an updated affidavit in this proceeding detailing those efforts. He said that “I expect a formal loan to be in place within a two to three week period”.
[72] As counsel for the plaintiff/respondent has pointed out in his submissions, no further affidavit was filed and no evidence has been put before the court that either of the banking groups in question have agreed to make funds available to the defendant. Further, the fact that the defendant has had resort to banks to raise further capital indicates that its existing resources are insufficient to meet its operational requirements which include payment of debts. While it is acceptable for a defendant to have to rely on external funding in order to meet its debts without being condemned as insolvent, it is a different story when the defendant acknowledges the need for outside funding but then implicitly accepts that that funding has not come to hand.
[73] Based upon the present evidence it is not arguable on the part of the defendant that it is solvent. It could not have conscientiously pleaded that it was and if it went to a hearing in all probability the court would determine that it was insolvent.
Explanation for failure to file statement of claim within required time limits
[74] For the defendant, Mr Hucker accepted that there was an obligation for his client to adequately explain the reasons for the delay in filing the statement of defence. Mr Hucker submitted:
50.The reasons for failing to file/serve a defence in time are set out in the Affidavit of James Neil Black dated 7 July 2016. The Defendant failed to file a defence in time because:
(a) James Neil Black (Mr Black), a director of the Defendant company, has been overseas for a significant period of time and returns to New Zealand only periodically. Accordingly, Mr Black became aware of the proceedings very late in the piece.
(b) Mr Black had several discussions with the director of the Plaintiff company in the past few weeks and had understood that the Plaintiff was prepared to compromise the debt and deal with matters on a commercial basis. In particular, the parties had been discussing settlement options as late as 29
June 2016.
(c) When Mr Black was unable to settle with the Plaintiff he requested an adjournment of the proceedings so that further discussions could take place. That request was not rejected until late afternoon on the 7 July 2016, at which time the Defendant instructed solicitors.
(d) The Defendant’s co-director, Brian Robert Ellis (a qualified barrister and solicitor), believed that Mr Black had been taking care of the steps necessary to defend the proceedings.
[75] The plaintiff submitted that there was no acceptable explanation for failure to file a statement of defence within the time limits established by the High Court Rules. Ms Wroe made the following submission:
35.TKL has given no acceptable explanation for its failure to file its statement of defence in time.
36.Mr Black says at [22] of his affidavit that he has been overseas for a significant period of time and returns to New Zealand only periodically. He says he became aware of these proceedings “late in the piece”. However, Mr Black has been in the country continuously since late April. Mr Ramsey met with him at a café in Chancery on
10 May 2016 and discussed payment of the statutory demand. The fact of the meeting was confirmed by Mr Ramsey in writing later
that same day.
37.At [23] of his affidavit, Mr Black appears to suggest that there was a misunderstanding between himself and his co-director, Mr Ellis, as to who was taking care of the proceedings. It is difficult to see how this misunderstanding could have when Mr Black works out of Mr Ellis’ offices while Mr Black is in New Zealand. Mr Black’s statement also demonstrates that TKL was aware of the proceedings, and that they needed to be “taken care of”. The failure of Mr Black and Mr Ellis to communicate properly with each other is implausible.
[76] The evidence which Mr Black has given about his absence overseas accounting for the failure to file a statement of defence in time is not satisfactory. To say as he does that he was departing from and returning to New Zealand periodically may have something to do with the question, but on the other hand it may not. What Mr Black ought to have done if he were to be believed on this point was to provide exact details of where he was at the time when the proceedings were served on the company and if he was overseas to depose when he returned. The fact that he has not done so is likely to be because he cannot give evidence which is helpful to the defendant.
[77] I also accept that the other explanations given are not satisfactory. The fact that he had hopes that the company would be able to come to a compromise with the plaintiff is not a matter which justified a breach of the time limits. Nor is the fact that the plaintiff was asked to agree to an adjournment to give time for the defendant to enter into further discussions with the plaintiff acceptable as a reason why the defendant stayed its hand in filing a statement of defence.
[78] The final explanation which is put forward is that the co-director of the company, Mr Brian Ellis who is a qualified solicitor, believed that Mr Black had been taking care of the steps necessary to defend the proceedings adequately. There is no evidence from Mr Ellis. The reasonableness or otherwise of his alleged assumption that Mr Black was taking care of matters is not therefore able to be scrutinised critically. It could be that there was no proper basis whatsoever for Mr Ellis to take the steps that he did (assuming that Mr Black’s affidavit is correct as to what he says about the part that Mr Ellis played in the matter, on which we do not have the benefit of the latter’s evidence).
Prejudice to plaintiff if application granted
[79] One of the problems that this application has given rise to is the fact that because of the complexity of some of the issues the matter could not be dealt with in the list court. As a result there has been considerable delay in scheduling the matter as a defended hearing. The delays due to the court process are unfortunate but unavoidable.
[80] The defendant made it clear through counsel at an early stage that it intended to defend the liquidation proceedings. The High Court rules require that the statement of defence be filed 10 working days after the date on which the statement of claim is served.18 The statement of claim was served on the company on 26 May
2016. The date by which a statement of defence ought to have been filed was therefore 7 June 2016. The first call of the proceeding was 8 July 2016. I am satisfied that were it not for the fact that it was by then too late under the Rules to file a statement of defence, the defendant would have filed a statement of defence on
7 July 2016. It was on this last date that the defendant, presumably having been informed by the plaintiff that it would not consent to an extension of time, filed an application for leave, that is the application which is presently under consideration. The result is that approximately one month was lost as a result of the failure of the defendant to comply with the Rules.
[81] Thereafter the parties have been waiting for an available court date. That part of the delay became inevitable when the plaintiff, as it was entitled to do, declined to consent to an extension of time. As a result several months have gone by as a direct consequence of the failure of the defendant to observe the time limits in r 31.17.
[82] The actual prejudice that has been caused has been to delay a hearing into the substantive merits of the liquidation application. Given that the company is now in receivership, there is some assurance that the company will not be continuing to trade while insolvent. On the other hand, had a liquidation been commenced promptly, it is arguable that the cost of receivership would not have been incurred.
[83] My conclusion is that allowing the application will cause prejudice to the plaintiff. That prejudice has taken the form of delay and possibly other diminishment in the financial resources of the company which will be available for distribution amongst the creditors.
Conclusions and summary
[84] The conclusions which have been reached in this judgment may now be summarised.
18 High Court Rules 2016, r 31.17.
[85] I have concluded that the agreement in this case was essentially a licensing agreement with the fee payable for taking up the advantages under that licence being calculated on volumes of product actually ordered by the defendant. That charging basis though was subject to a further proviso that a minimum charge would be payable irrespective of what volumes of formula the defendant actually took. The minimum was the equivalent to the commission that would have been charged on
200,000 cans of formula being ordered in 15 months.
[86] I have further concluded that the entitlement to charge a default commission as described in the previous paragraph does not constitute the imposition of a penalty. Rather it is the provision setting the price for what the defendant was to receive under the contract.
[87] I also determine that the imposition of a penalty can only be considered in circumstances where there has been a breach of contract. That is not the case here. This is not therefore a case concerned with the contractual provision penalising the defendant in the case of breach of contract on its part and the law relating to penalties has no application.
[88] The force majeure defence which the defendant puts forward is to the effect that it is excused from any failure to perform any of its obligations under the agreement. It is arguable that the change in the importing regime in PROC resulted in an inability on the part of the defendant to acquire products whose provenance would qualify them for importation into China. The doubt arises from the requirement that the same manufacturer should blend and can the product to be exported. It is arguable that the plaintiff’s product would not qualify for importation into China using products that had been manufactured by Unitech. It is also arguable that the exact nature of the problem, that is the duality of the canner /blender, had not at the point when the contract was signed been clearly identified as the risk which the co-venturers faced. Therefore, it cannot be conclusively reasoned that the force majeure clause did not apply to this event.
[89] I have also concluded that the argument that there was no consideration to support the contract is not a viable one. The contract was a licensing arrangement
and at least in part the payments which the defendant was obliged to make to the plaintiff were made in consideration for the right to use the plaintiff’s trademarks and other property.
[90] The further conclusion of this judgment is that the defendant is insolvent and that in those circumstances the court ought not to exercise its discretion to grant leave to the company to contest the liquidation proceedings which the plaintiff has brought.
[91] As well, I have come to the conclusion that the court in its discretion ought to decline to grant leave because the defendant has not put forward a satisfactory explanation for the failure to file a statement of defence in time. The evidence which the defendant puts forward is vague and unsatisfactory. Uncertainties about the evidence include exactly when Mr Black was overseas and how it came about that the directors of the company fell into a misunderstanding to the effect that each thought the other was going to attend to filing the statement of defence. Where there is no bona fide explanation for delay the court cannot ignore the alternative explanation that it has in fact come about because of the applicant’s objective of impeding or delaying liquidation proceedings.
[92] Finally I have concluded that it can be inferred that there is some prejudice to the plaintiff resulting from the deferral of of its claim to put the defendant into liquidation in circumstances where the defendant is plainly insolvent.
[93] From all of those reasons I conclude that this is not a proper case in which to grant leave to the defendant to file a statement of defence out of time.
Orders
[94] There will be an order that the application for leave to file statement of defence out of time dated 7 July 2016 is dismissed.
[95] The parties should confer on the question of costs and if they are unable to agree are to file brief memoranda (not exceeding five pages on each side) within 10 working days of the date of this judgment.
J.P. Doogue
Associate Judge
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