Tellen Systems NZ (2013) Limited (in receivership and in liquidation) v Fibre Investments Limited
[2022] NZHC 19
•14 January 2022
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE
CIV-2022-409-000006
[2022] NZHC 19
BETWEEN TELLEN SYSTEMS NZ (2013) LIMITED (IN RECEIVERSHIP AND IN
LIQUIDATION)
ApplicantAND
FIBRE INVESTMENTS LIMITED
First Respondent
AND
KEVIN DAVIES
Second Respondent
Hearing: 11 January 2022
(Hearing by way of telephone)
Appearances:
T Daley for the applicant
B Gustafson for the respondents
Judgment:
14 January 2022
JUDGMENT OF DOOGUE J
This judgment was delivered by me on 14 January 2022 at 12.30 pm pursuant to Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar Date:
TELLEN SYSTEMS NZ (2013) LTD v FIBRE INVESTMENTS LTD [2022] NZHC 19 [14 January 2022]
Introduction
[1] The applicant, Tellen Systems NZ (2013) Limited (Tellen), by its liquidators Rhys Cain (Cain)and Larissa Logan (Liquidators) applies for the following orders:
(a)an interim injunction preventing the respondents, Fibre Investments Limited (FIL), and Kevin Davies of Principle Insolvency Limited (Receiver) (jointly called “the respondents”) from selling any Tellen property;
(b)that Tellen file and serve a statement of claim by no later than 28 January 2022;
(c)if Tellen does not file and serve a statement of claim on or before 28 January 2022 that the injunction lapse;
(d)any other orders the Court deems appropriate; and
(e)costs.
[2] Tellen applies for interim relief because it says there are serious questions to be tried in respect of substantive claims against the respondents for:
(a)relief against the proposed sale of collateral under s 109 of the Personal Property Securities Act 1999 (PPSA) because there is a significant conflict of evidence on the facts, in that the applicant does not accept the validity of the debt alleged to be owed by Tellen to FIL;
(b)breach of s 110 of the PPSA because neither of the respondents have taken reasonable steps to obtain the best price reasonably obtainable in respect of the proposed sale of Tellen;
(c)breach of s 114 of the PPSA because FIL has not complied with the mandatory procedure set out within the PPSA, or the Personal Property
Securities Regulations Act 2001 (PPSA Regulations), in respect of the proposed sale of Tellen; and
(d)breach of s 25 of the PPSA because the respondents have not exercised their rights, duties or obligations under any security agreement, or the PPSA, in good faith.
[3]The respondents deny Tellen’s claims and say:
(a)there are no serious questions to be tried in respect of the applicant’s alleged substantive claims against the respondents;
(b)damages are an adequate remedy for any valid claims which the applicant may have (although the first respondent denies the applicant has any valid claims);
(c)the undertaking as to damages provided by the applicant is limited to the assets of Tellen, which is of no value as those assets fall within the securities held by the first respondent. Effectively therefore no undertaking has been provided by the applicant for any resultant damages; and
(d)the process for sale of Tellen as a going concern has been robust and proper in all respects and all allegations to the contrary are vigorously denied. Further, the Liquidators have been fully informed about all aspects relating to the sale by the Receiver.
Background
[4] Tellen was incorporated on 23 July 2014 and carried on business providing telecommunications services to (primarily) the health and aged care services sectors.
[5] Tellen was placed into receivership on 4 October 2021 and then placed into liquidation on 22 October 2021.
[6] FIL was incorporated on 11 May 2011 to operate as a trustee of the Fibre Investments Trust (the Trust), settled by a deed of trust dated 10 May 2011 (Trust Deed).
[7]Pursuant to the Trust Deed:
(a)Neil Simmonds (Simmonds) was appointed sole settlor, sole named beneficiary and sole appointor of the Trust; and
(b)the Trust was to undertake commercial and business ventures and activities.
[8] By virtue of a deed of acknowledgement of debt between Simmonds (as “beneficial owner”) and FIL dated 16 January 2012, FIL acts as Simmonds’ agent and Simmonds is the sole beneficiary.
[9] On or around 3 November 2014, Tellen and FIL entered into a number of agreements, including:
(a)a security sharing deed between Malcolm Briggs (Briggs), Tellen’s sole director, and FIL and Tellen dated 3 November 2014 (SSA);
(b)a shareholders’ agreement between Briggs, FIL and Tellen dated 3 November 2014;
(c)a general security agreement (GSA) between Tellen and FIL dated 3 November 2014 (GSA). The GSA was registered on the Personal Properties Securities Register, financing statement registration number FB19PJ1U4B778247/1.
[10] In or around 2018, Tellen became involved in a dispute with Simon Williams (Williams) in respect of a failed business venture wherein Tellen purchased shares in a company, Sedco New Zealand Ltd (Sedco)from Williams. Sedco subsequently failed and was placed into liquidation in February 2018. A dispute arose between Tellen and Williams. The dispute was heard in the High Court of Auckland over eight
days before Gault J. Gault J released his decision on 27 May 2021, the result of which was that:
(a)Williams was to pay Tellen $137,094.80 (plus interest);
(b)Tellen was to pay Williams $568,429.45 (plus interest) and 67 per cent of further payments made by Williams to Sedco’s creditors.
[11] Following Gault J’s decision, Williams served a statutory demand dated 20 July 2021 and a sealed judgment dated 5 July 2021 seeking payment of the award in the High Court on Tellen. A statement of claim was filed on or around 13 August 2021.
[12] On or around 25 August 2021, FIL issued a notice of demand to Tellen (Demand), which alleged that Tellen was indebted to FIL pursuant to the SSA, SHA, and the GSA (collectively the Security Documents) as set out in [9].
[13]Inter alia, the Demand:
(a)recorded FIL had received notice of the statutory demand made against Tellen, which may lead to the liquidation of the Tellen;
(b)gave notice FIL wished to exercise its purported powers under the Security Documents by calling up the balance of any purported secured monies;
(c)asserted that the balance of the secured monies owed to FIL as at 20 August 2021 was $2,983,160.34, plus any accrued interest to be calculated at 7 per cent per annum (Secured Monies);
(d)did not provide any particulars as to how the Secured Monies had been calculated; and
(e)demanded payment of the Secured Monies within seven days or by 1 September 2021.
[14] On 30 August 2021, Briggs wrote to FIL in response to the Demand and confirmed that Tellen was unable to pay the Secured Monies within the time period stipulated within the Demand (the response letter). Briggs made no enquiries as to how the Secured Monies had been calculated.
[15] On 4 October 2021, in purported reliance on the GSA, FIL appointed the Receiver.
[16] On or about 17 October 2021, the Receiver advertised Tellen for sale as a going concern.
[17] On 22 October 2021, Tellen was placed into liquidation by order of the High Court in Auckland pursuant to s 241(2)(c) of the Companies Act 1993 and the Liquidators appointed. Williams was the applicant creditor.
[18] On 26 October 2021 at approximately 11.15 am to 11.51 am, Cain and two of his colleagues, Sue Fletcher and Michael Vear (Vear), attended a video conference with Mr Petterson (Petterson), a forensic accountant working for the Receiver.
[19]A number of items were discussed during the video conference:
(a)information memorandum: Petterson indicated that at that stage there were 12 interested parties. He noted that interested parties would be required to pay a $50,000 bond in order to allow them to undertake substantive due diligence, in order to keep ‘tyre kickers’ out;
(b)valuation: Cain asked whether the Receiver had engaged anyone to carry out a high-level valuation of Tellen. Petterson noted that he had undertaken the valuation of Tellen himself and considered Tellen to be worth approximately $350,000;
(c)liquidation process: Cain assured Petterson that the Liquidators were only interested in ensuring the sale process was conducted as a genuine arm’s length transaction and in confirming that the security was valid.
For the latter purpose they would be seeking confirmation of the secured debt and therefore required documents evidencing the debt;
(d)experience with Tellen: Cain asked Petterson whether he was familiar with Tellen. Petterson advised he was not and that he had started working on the receivership four days prior to the video conference; and
(e)consent for Receiver to act as agent for Tellen: Cain noted the Receiver would require consent from the Liquidators in order to act as agent for Tellen.
[20] Based on this conversation and on review of the information memorandum Cain was concerned about the following:
(a)that it was highly unusual for a Receiver not to obtain an independent valuation for a business they were selling, particularly given the business was the subject of highly contentious legal proceedings including the question of its financial performance; and
(b)Petterson told him he had required a non-refundable $50,000 deposit from parties wanting to undertake due diligence and Cain was immediately concerned it would likely deter a number of prospective buyers. Protecting confidential information can be achieved by simply requiring any prospective purchasers to sign a non-disclosure agreement. Therefore, in Cain’s opinion, the only possible result of requiring such a significant bond to be paid would be to reduce the number of potential purchasers.
[21] Following the video conference, Cain instructed Vear to request further information from the Receiver, including:
(a)a list of known creditors;
(b)a list of known debtors;
(c)Tellen’s IRD number;
(d)the most recent set of Tellen’s financials;
(e)access to Tellen’s accounting programme; and
(f)confirmation of the insurance validity.
[22] Petterson responded later that day and indicated he had asked for access to Tellen’s MYOB system to be arranged, which would provide most of the information sought.
[23] On 27 October 2021, Cain received a letter from the Receiver which, among other things, requested the Liquidators’ consent for the Receiver to continue acting as agent for Tellen in respect of the proposed sale.
[24] On 28 October 2021, FIL submitted a secured creditor’s valuation and claim under s 305(4) of the Companies Act 1993 for $2,105,000 (Claim). The Claim was purportedly made in reliance upon the Security Documents and a “security sharing deed” that was not provided.
[25] On 4 November 2021, Cain received a letter from Mr Bell (Bell) (acting on behalf of a Mr Lambert (Lambert)). Bell indicated that, among other things, following a recent case management conference in respect of proceedings between Tellen and Lambert, Lester AJ had issued a minute in which it was recorded that Lester AJ was of the tentative view the Liquidators’ permission was not required for the proceeding to continue. Lester AJ set down a further case management conference for the respondents’ counsel to obtain the Liquidators’ view on the issue on 10 November 2021.
[26] On 5 November 2021, Cain wrote to the High Court Registrar, confirming he was one of the liquidators for Tellen and requesting permission to attend the upcoming case management conference. In his email he also outlined that (among other things):
(a)the Liquidators were not represented by counsel;
(b)they had read Lester AJ’s minute dated 27 October 2021 and agreed with the tentative view regarding s 248 of the Companies Act 1993;
(c)the Liquidators were not currently in a position to consent to the Receiver acting as agent for Tellen as, for example, they had not yet been able to verify the validity or quantum of the secured creditor’s claim or even the validity of the Receiver’s appointment; and
(d)the Liquidators had requested and received some information from FIL as secured creditor but that further information requests were outstanding.
[27] With Lester AJ’s consent, Cain attended the further case management conference on 10 November 2021. Lester AJ’s minute records that the principal topic for discussion was whether the Liquidators would consent to the Receiver acting as agent for Tellen. At the conference Cain raised a number of concerns the Liquidators had in this respect, including that:
(a)the Liquidators had still not been provided with access to Tellen’s MYOB system, despite Petterson’s email dated 26 October 2021; and
(b)the various outstanding requests for information.
[28] Lester AJ directed that the MYOB records be provided within five working days and that a further conference be convened on 30 November 2021 to allow the Liquidators time to review the further information.
[29] Following the conference, the Liquidators emailed Petterson and noted that access to the MYOB records was required to be provided within five days. Access was arranged later that day.
[30] Cain also received a response from the respondents’ counsel on 10 November 2021 to his emails of 28 October and 3 November 2021. Among other things, counsel confirmed they were now also acting for FIL, the secured creditor.
[31] On 11 November 2021, Cain understood that Vear followed up with Franklin Law, acting for FIL, as to the status of the outstanding information request. Franklin Law responded they would follow up with their client.
[32] On 18 November 2021, Vear followed up with Franklin Law again, noting that no further information had been provided.
[33] On 18 November 2021, another member of the Liquidators’ team followed up with Franklin Law as to the outstanding information requests, and also requested confirmation as to whether there were any signed loan agreements or documentation between FIL and Tellen and, if so, for them to be provided urgently.
[34]On 19 November 2021, Franklin Law responded and provided copies of:
(a)the SSA;
(b)the demand; and
(c)the response letter.
[35] Of particular concern to the Liquidators was the fact the alleged debt had apparently changed from $2,983,160.34 plus interest as at 20 August 2021 (being the amount claimed in the original Demand) to $2,105,000 as at 28 October 2021 (being the amount claimed within the Claim), a difference of $878,160.34 or approximately 29 per cent before interest.
[36]Additionally, FIL had still not provided any particulars of the alleged debt.
[37] On 26 November 2021, Cain wrote to the Court to provide an update as to the Liquidators’ investigations in advance of the scheduled conference on 30 November 2021. In his email Cain noted the Liquidators declined to consent to agency being granted to the Receiver, primarily because the Liquidators remained unsatisfied as to the validity of the appointment of the Receiver and the alleged debt, including that:
(a)they remained concerned about the alleged advances made by the secured creditor to Tellen, as despite numerous requests for a schedule of receipts and payments from FIL particularising the alleged debt no substantive response had been received and they were therefore unable to verify the existence or quantum of the alleged advances;
(b)based on their review of the documentation provided, advances claimed by FIL to have been made to Tellen were recorded in Tellen’s financial records as deposits made from the bank account of Simmonds who, at that stage, they were only aware was an investor in Tellen (as they had not been provided with any information as to the relationship between Simmonds and FIL); and
(c)the SHA referred to an earlier advance from FIL to Tellen of $175,000, although the exact date of that advance was unknown as it predated the historical bank records of Tellen that the Liquidators had been able to access.
[38] Additionally, Cain was concerned that all advances to Tellen subsequent to the SHA appeared (based on the Liquidators’ review of Tellen’s bank accounts) to have originated from Simmonds’ bank account but were being held out as being advances from FIL. Cain was concerned the advances were being characterised in that way as it is FIL, rather than Simmonds, who has a registered security under the GSA.
[39] On 29 November 2021, Cain relayed his concerns to the Receiver and requested any documentation which they might have that could validate the alleged debt.
[40] In light of these outstanding concerns, the scheduled case management conference for 30 November 2021 was adjourned to 17 December 2021.
[41] On 30 November 2021, the Liquidators issued notice to FIL under s 261 of the Companies Act 1993 to provide all books, records or documents which evidenced the Claim including, but not limited to:
(a)a full schedule of receipts and payments relating to the claimed amount;
(b)any signed loan agreement between Tellen and FIL; and
(c)any correspondence between Tellen and FIL in respect of the claimed amount.
[42] On 8 December 2021, FIL provided a number of previously unseen documents to the Liquidators including:
(a)a letter to Tellen from FIL dated 25 August 2021;
(b)a spreadsheet which purportedly recorded the advances made by FIL to Tellen (Claim Particulars);
(c)a loan agreement between Tellen and FIL, dated 28 May 2014 (Loan Agreement);
(d)the deed of acknowledgment of debt (DOAD);
(e)a deed of trust dated 10 May 2011 (Trust Deed), in respect of the Trust;
(f)resolution of directors of Tellen dated 3 November 2014; and
(g)Tellen’s constitution.
[43]These documents showed the Liquidators:
(a)FIL was incorporated on 11 May 2011 to operate as a trustee of the Trust;
(b)Pursuant to the Trust Deed:
(i)Simmonds was appointed sole settlor, sole named beneficiary and sole appointor of the Trust; and
(ii)the Trust was established to undertake commercial and business ventures and activities; and
(c)by virtue of the DOAD, FIL acts as Simmonds’ agent and Simmonds is essentially the beneficial owner of FIL.
[44] Until then the Liquidators were not aware of any formal relationship between Simmonds and FIL.
[45] The Liquidators carried out a comparison exercise of the alleged advances against Tellen’s bank accounts and noted several concerns, as set out in Cain’s affidavit at [77] and [78].
[46] Upon inspection of these further supplied documents, the Liquidators remained concerned as to the validity of the debt, and therefore the appointment of the Receiver, and continued to decline to consent to the Receiver acting as agent of Tellen. They communicated this and their concerns to the High Court on 17 December 2021, both at the conference and again by email that same day.
[47] During that conference, Cain noted that while in principle the Liquidators considered that sale of the business would be a good idea, they had not been provided with sufficient information about the sale process that had been undertaken by the Receiver in order for them to be able to advise whether the process had been appropriately undertaken.
[48] Following the conference, counsel for the respondents forwarded Cain an email from the Receiver outlining the sale process. Petterson’s forwarded email contained information the Liquidators had not been previously made aware of, for instance that two tenders had been submitted in response to the information memorandum and that a sale and purchase agreement had been submitted to the highest tenderer.
[49] The successful offer was submitted by Simmonds on behalf of Dark Horse Technologies (DHT), or its nominee, on 29 November 2021. The proposed purchase price was $520,000. DHT was not incorporated (and still is not).
[50] However, rather than allay the Liquidators’ concerns, the further sale documentation provided further cause for concern. Based on this additional information it was apparent to the Liquidators:
(a)no independent valuation had been undertaken, rather the Receiver had done his own valuation. Noting that the Receiver was acting as an agent of FIL, there was accordingly no independence in the setting of the business value. While they still had not been provided with sufficient information in order to carry out any substantive valuation of Tellen, they noted Tellen had previously purchased a large portion of Sedco’s business for $850,000 and incorporated Sedco into its own business. While Cain appreciates that Sedco was ultimately placed into liquidation, he would have expected to see some residue of value retained by Tellen. For instance, he notes that Tellen’s balance sheet as at the date of liquidation, i.e. 22 October 2021, records assets totalling approximately $1,000,000, including an asset called “CDI Communications” (CDI) with a value of $425,000. However, DHT’s valuation (and proposed purchase price) of Tellen a little over a month later (29 November 2021) is just $520,000;
(b)given DHT is a yet-to-be-registered entity whose signatory is Simmonds (the beneficial owner of FIL), this could not be said to be an arm’s length transaction. This is particularly concerning to the Liquidators. Further, Cain had raised concerns with the Receiver about ensuring a transparent, independent process during the original discussion on 26 October 2021; and
(c)Cain relayed these concerns to both counsel for the respondents and the Court on 17 December 2021.
[51] In lieu of the Liquidators’ consent for the Receiver to act as agent of Tellen, counsel for the Receiver indicated, by way of memorandum to the Court, the Receiver would apply to the Court for consent to act. He indicated to the Court the application would be filed before Christmas 2021.
[52] Instead, FIL issued notice under s 114 of the PPSA on 23 December 2021 of their intention to dispose of collateral subject to the GSA and indicated that such sale would settle on 12 January 2022 (s 114 Notice).
[53] This was the first time that sale by the secured creditor directly (as opposed to by the Receiver) had been proposed or raised with the Liquidators.
[54] Given the short timeframe (10 days), the Liquidators engaged solicitors Anthony Harper. On 5 January 2022, the Liquidators instructed Anthony Harper to write to counsel for the Receiver requesting that, given the time of year, the parties agree to halting the sale so that a meeting could be arranged later in January 2022 to discuss the various issues which continued to concern the Liquidators. To quote from the letter:
In the meantime, we are advised that the secured creditor intends to sell the assets of the company on or about 15 January, via the ‘agent’ of the receiver to himself. Our instructions are to seek an injunction to restrain the sale of the assets on the basis that:
…
3.2No market testing has taken place because unusually, the receiver required a $50,000 non-refundable fee to allow any prospective purchaser to do due diligence;
3.3The secured creditor intends to sell the assets to himself; and
3.4Our clients are not satisfied as to the veracity of the security and the purported advances made under it (which is not surprising given the position as stated (above).
[55] The letter also said that if no agreement could be reached on halting the sale the Liquidators would have no option but to seek interim relief from the Court.
[56] On 10 January 2021, counsel for the Receiver declined to delay the proposed sale and sent further information which the Liquidators had not had time to review but
which, at face value, raised further concerns about the validity of the alleged debt. Hence the Liquidators’ decision to make the current application.
Relevant legal principles
Commencement of proceedings
[57] A proceeding is required to be commenced by the filing of a statement of claim or originating application.1
[58] The Liquidators have not filed a statement of claim or an originating application. They rely on urgency to bring a pre-commencement application for an interim injunction under r 7.53 which provides:
7.53 Application for injunction
(1)An application for an interlocutory injunction may be made by a party before or after the commencement of the hearing of a proceeding, whether or not an injunction is claimed in the party’s statement of claim, counterclaim, or third party notice.
(2)The plaintiff may not make an application for an interlocutory injunction before the commencement of the proceeding except in case of urgency, and any injunction granted before the commencement of the proceeding—
(a)must provide for the commencement of the proceeding; and
(b)may be granted on any further terms that the Judge thinks just.
[59] Rule 7.53 of the High Court Rules allows a Court to grant interim relief by way of an injunction before or after a proceeding is commenced. The power to grant relief is discretionary.
[60] Rule 7.53(2) of the High Court Rules allows a party to make an application for an interlocutory injunction before the commencement of proceedings in cases of urgency, so long as any injunction provides for the commencement of the proceeding.
[61] The Court must be satisfied in a pre-commencement application for an interim injunction under r 7.53 that the case is so urgent as to warrant interim intervention.
1 High Court Rules 2016, r 5.25.
What is meant by urgent was considered by Gendall J when considering r 236A(2) (the predecessor to rule 7.53, and very similar in its wording). He said:2
“Urgent” means needing immediate action. In one sense all applications for interlocutory injunctions could be said to be urgent, so as to seek interim relief to prevent harm or injury to legal rights pending the hearing of the substantive proceeding, but for an application under r236A(2) to be granted, it must be a special case with the urgency of a special nature so that the failure to obtain interim relief would or might lead to irreparable harm.
[62] Even where the Court determines the applicant is otherwise entitled to an interim injunction on the evidence, the applicant’s case can still fail to meet the urgency test attaching to pre-commencement proceedings.
[63] I am satisfied for three primary reasons the Liquidators have established the necessary urgency test attaching to pre-commencement proceedings:
(a)their efforts have been impeded by an apparent failure by the respondents to provide all necessary disclosure to the Liquidators;
(b)the time of year and the intervention of the Christmas and New Year holiday period has disrupted ongoing business; and
(c)due to the apparent deficiencies in the notice of sale of collateral dated 22 December 2021 pursuant to s 114 of the PPSA.
[64] An application for interim relief can be made on a without notice basis. HCR 7.46 sets out the grounds upon which a Court may decide a matter on a without notice basis.
[65] HCR 7.46(3) prescribes the circumstances in which a Court may determine an application on a without notice basis and provides:
7.46 Determination of application without notice
(3)The Judge may determine that an application can properly be dealt with without notice only if the Judge is satisfied that –
2 Tardus Mortgages Ltd v Lister HC Palmerston North CP 38-98, 27 August 1999 at 6.
(a)requiring an applicant to proceed on notice would cause undue delay or prejudice to the applicant; or
(b)the application affects only the applicant; or
(c)the application relates to a routine matter; or
(d)an enactment expressly permits the application to be made without serving notice of the application; or
(e)the interests of justice require the application to be determined without serving notice of the application.
[66] Consideration of an application for an interim injunction focuses on three matters:3
(a)whether there is a serious question to be tried;
(b)the balance of convenience between the parties; and
(c)an assessment of the overall justice of the case.
Serious question to be tried
[67] The New Zealand Courts tend to take a closer look at the claim than was advocated by Lord Diplock in American Cyanamid Co v Ethicon Ltd, in which his Lordship said that this head was only there to weed out frivolous or vexatious claims with no real prospect of success.4
[68] A process often followed in New Zealand is that set out by Lush J in the Australian case Henry Roach (Petroleum) Pty Ltd v Credit House (Vic) Pty Ltd.5 That approach is to consider the applicable law, the facts put forward by each side and where the issues lie, and to assess whether there is a tenable resolution of the issues of law and fact on which the applicant could succeed.
3 Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd [1985] 2 NZLR 129 (CA).
4 American Cyanamid Co v Ethicon Ltd [1975] AC 396, [1975] 1 All ER 504 (HL) at 408.
5 Henry Roach (Petroleum) Pty Ltd v Credit House (Vic) Pty Ltd [1976] VR 309 at 31; Development Consultants Ltd v Lion Breweries Ltd [1981] 2 NZLR 258 (HC).
Balance of convenience
[69] The balance of convenience can also be described as “the balance of the risk of doing an injustice”.6 It is the “guiding principle” in granting an interim injunction.7 This stage requires the Court to balance the injustice or harm that may be caused to the applicant if an interim injunction is not granted and the applicant ultimately succeeds in gaining a permanent injunction, against the injustice or harm that may be caused to the respondents if an interim injunction is granted and the applicant ultimately fails to gain a permanent injunction. Although this inquiry is “broad and flexible”,8 the Courts usually consider factors such as:
(a)the adequacy of damages to both parties;
(b)preservation of the status quo;
(c)the relative strength of each parties’ case;
(d)the conduct of the parties; and
(e)the effect on innocent third parties.
Adequacy of damages for both parties
[70]In relation to the adequacy of damages, the House of Lords in
American Cyanamid held:9
… the court should first consider whether, if the plaintiff were to succeed at the trial in establishing his right to a permanent injunction, he would be adequately compensated by an award of damages for the loss he would have sustained as a result of the defendant’s continuing to do what was sought to be enjoined between the time of the application and the time of the trial. If damages in the measure recoverable at common law would be adequate remedy and the defendant would be in a financial position to pay them, no interlocutory injunction should normally be granted, however strong the plaintiff’s claim appeared to be at that stage. If, on the other hand, damages would not provide an adequate remedy for the plaintiff in the event of his
6 Cayne v Global Natural Resources plc [1984] 1 All ER 225 (CA) at 237; McLaughlin v McLaughlin [2019] NZHC 2597 at [37].
7 Eng Mee Yong v Letchumanan [1980] AC 331 (PC) at 337.
8 McLaughlin v McLaughlin, above n 6, at [38].
9 American Cyanamid Co v Ethicon Ltd, above n 4, at 408.
succeeding at the trial, the court should then consider whether, on the contrary hypothesis that the defendant were to succeed at the trial in establishing his right to do that which was sought to be enjoined, he would be adequately compensated under the plaintiff’s undertaking as to damages for the loss he would have sustained by being prevented from doing so between the time of the application and the time of the trial. If damages in the measure recoverable under such an undertaking would be an adequate remedy and the plaintiff would be in a financial position to pay them, there would be no reason upon this ground to refuse an interlocutory injunction.
[71] Adequate compensation in this context is what is fair and just in the circumstances of the case, including consideration of intangible harm and the difficulty of assessing damages.10
[72] The House of Lords in American Cyanamid held that whether either party is in a position to pay damages is a factor to be considered when assessing the adequacy of damages.11 New Zealand Courts have also considered the ability of parties to pay damages. Although ultimately declining to grant an interim injunction, the Court in Anvil Jewellery Ltd v Riva Ridge Holdings Ltd considered the ability of the parties to pay damages, in assessing the adequacy of damages.12 The Court had a “reservation” as to the adequacy of damages for the applicant, due to the potential inability of the respondents to pay an award of damages, in contrast with the applicant’s ability to pay damages.13 Had there been sufficient evidence of the respondents’ financial position, the Court may have been satisfied damages were an adequate remedy.14 In Vero Insurance New Zealand Ltd v Fleet Insurance & Risk Management Ltd, in finding the balance of convenience favoured the granting of an interim injunction, the Court found it was “significant” that the applicant was in a position pay substantial damages, while there was doubt about whether the respondent would be able to do so.15
Relative strength of each party’s case
[73] In finding where the balance of convenience lies, the strength of the plaintiff’s case is one factor to be considered. Hardie Boys J in Shotover Gorge Jet Boats Ltd v
10 Gilks v Marsh (1982) 1 NZCLC 95-063 at 6.
11 American Cyanamid Co v Ethicon Ltd, above n 4, at 408.
12 Anvil Jewellery Ltd v Riva Ridge Holdings Ltd [1987] 1 NZLR 35 at 42.
13 At 42.
14 At 42.
15 Vero Insurance New Zealand Ltd v Fleet Insurance & Risk Management Ltd HC Auckland CIV-2007-404-001438, 21 May 2007 at [86].
Marine Enterprises Ltd said that where a plaintiff has established there is a serious question to be tried, “the relative merits of the parties’ cases ought not to assume prominence in a consideration of where the balance of convenience lies.”16
[74] There is an intrinsic limit to the examination of the merits of the argument based on the affidavit evidence provided and the interlocutory nature of the application. As Lord Diplock observed:17
The extent to which the disadvantages to each party would be incapable of being compensated in damages in the event of his succeeding at the trial is always a significant factor in assessing where the balance of convenience lies; and if the extent of the uncompensatable disadvantage to each party would not differ widely, it may not be improper to take into account in tipping the balance the relative strength of each party's case as revealed by the affidavit evidence adduced on the hearing of the application. This, however, should be done only where it is apparent upon the facts disclosed by evidence as to which there is no credible dispute that the strength of one party's case is disproportionate to that of the other party. The court is not justified in embarking upon anything resembling a trial of the action upon conflicting affidavits in order to evaluate the strength of either party’s case.
The conduct of the parties
[75] The applicant’s conduct can be relevant, as an injunction may be refused if the applicant does not come to the Court with clean hands, in such a way that would make the granting of an injunction unconscionable.18
[76] A respondent’s conduct can also be an important consideration when assessing the balance of convenience, notably where a respondent has acted with its “eyes wide open”; in other words, while aware of the applicant’s right.19 In finding that the balance of convenience favoured the preservation of the status quo in New Zealand Farmers’ Co-operative Association of Canterbury Ltd v Farmers Trading Co Ltd, Chilwell J held:20
A defendant cannot create his own inconvenience and then have it taken into account in balancing the scales of convenience – at least not when he embarks upon questionable conduct with his eyes open.
16 Shotover Gorge Jet Boats Ltd v Marine Enterprises Ltd [1984] 2 NZLR 154 (HC) at 157.
17 American Cyanamid Co v Ethicon Ltd, above n 4, at 409.
18 Media Works NZ Ltd v Sky Television Network Ltd (2007) 74 IPR 205 (HC) at [106].
19 New Zealand Farmers’ Co-operative Association of Canterbury Ltd v Farmers Trading Co Ltd
(1979) 1 TCLR 18 at 28.
20 At 28.
Preservation of the status quo
[77] A useful description of the approach to this consideration was provided by Lord Diplock in American Cyanamid:21
Where other factors appear to be evenly balanced it is a counsel of prudence to take such measures as are calculated to preserve the status quo. If the defendant is enjoined temporarily from doing something that he has not done before, the only effect of the interlocutory injunction in the event of his succeeding at the trial is to postpone the date at which he is able to embark upon a course of action which he has not previously found it necessary to undertake; whereas to interrupt him in the conduct of an established enterprise would cause much greater inconvenience to him since he would have to start again to establish it in the event of his succeeding at the trial.
[78] The status quo has been referred to as “the last peaceable state between the parties”.22 However, I note there is some disagreement over when the status quo is to be assessed: before the alleged wrongdoing; or immediately before the commencement of proceedings.
Overall justice
[79] This final stage requires the Court to “stand back from the case and consider where the overall justice of the case lies”.23 Although the balance of convenience will normally determine whether the Court should grant an interim injunction, a consideration of the overall justice may mean this is not so.24
Are there serious questions to be tried?
[80]The applicant claims the following serious issues to be tried:
(a)relief against the sale under s 109 of the PPSA;
(b)a failure to comply with the mandatory procedure set out in s 114 of the PPSA;
21 American Cyanamid Co v Ethicon Ltd, above n 4, at 408-409.
22 R & M Wright Ltd v Ellerslie Gateway Motels Ltd HC Wellington CP188-90, 11 July 1990 at 8.
23 Vero Insurance New Zealand Ltd v Fleet Insurance & Risk Management Ltd, above n 15, at [90].
24 McLaughlin v McLaughlin, above n 6, at [67].
(c)breaches of s 110 of the PPSA in that no independent valuation of the company was obtained and the sale process was deficient; and
(d)breach of s 25 of the PPSA.
Relief against the sale under s 109 of the PPSA
[81] Cain has sworn an affidavit where he says the Liquidators do not accept the debt alleged to be owed by Tellen to FIL exists or that, to the extent any debt is owed, it is as extensive as has been claimed because:
(a)the respondents have not been able to provide any evidence which reasonably satisfies the Liquidators as to the existence, or extent, of the alleged debt;
(b)FIL has submitted three significantly different valuations of the alleged debt with no explanation as to the discrepancy;
(c)Tellen’s own financial records do not correlate with FIL’s claims, in that a significant number of the payments claimed were not paid by FIL; and
(d)there are significant discrepancies and inconsistencies within the documentation provided by FIL evidencing its claims.
[82] Petterson, as Receiver, provided an affidavit to the Court dated 12 January 2022. Given the urgency of the matter and the timeframe within which it was filed it is undoubtedly less fulsome than it would have been had there been more time to prepare it. No other affidavits were filed on behalf of the respondents. Significantly, however Petterson still has not provided evidence to verify the validity of the alleged debt in the face of very serious questions about its validity.
[83] There is, in addition, no evidence FIL has taken possession of the collateral, as is required by s 109 of the PPSA.
[84] Tellen is currently in the control of the Receiver (as far as the applicant is aware). As such, it is unclear how FIL could have taken possession in order to be able to exercise any rights they may have under s 109.
Failure to comply with the mandatory procedure set out in s 114 of the PPSA
[85] Section 114(1) of the PPSA provides that a secured party who intends to sell collateral under s 109 must, not less than 10 working days before selling the collateral, give notice of that sale.
[86]Section 16 defines “working day” as:
… means a day of the week other than—
(a)Saturday, Sunday, Good Friday, Easter Monday, Anzac Day, the Sovereign's birthday, Labour Day, and Waitangi Day; and
…
(b)A day in the period commencing on 25 December in any year and,—
(i)Except in sections 165, [167A,] 168, and 178, ending with 2 January in the following year; …
[87] Section 114(4)(b)(i) provides that the notice given under subs (1) must be in the form prescribed by regulations made under the PPSA.
[88] Section 23 of the PPSA Regulations provides that the forms set out in Schedule 2 are the forms that must be used for the matters under the PPSA to which the forms relate.
[89] Form 1 of Schedule 2 to the PPSA Regulations prescribes the form to be used where giving notice of intention to sell collateral under s 114 of the PPSA.
[90]Counsel for the applicant submitted:
(a)the s 114 Notice does not comply with the PPSA or the PPSA Regulations;
(b)the wording of the PPSA and the PPSA Regulations is clear, in that both s 114 of the PPSA and s 23 of the PPSA Regulations use the word “must”. Therefore, the obligation to issue notice in compliance with these sections is mandatory;
(c)the timeframe stipulated within the s 114 Notice also does not comply with the timeline prescribed by the PPSA, in that the respondents appear to have calculated the “10 working days” without reference to s 16 of the PPSA. The proper calculation of the 10 working days would be 17 January 2022;
(d)proceeding with the sale absent a valid s 114 notice would be an abuse of process and should not be allowed; and
(e)critically, the s 114 Notice fails to provide details of the total amount of arrears due under the security agreement which, as noted above, is uncertain. Absent this information, the Liquidators have been unable to consider any of the remedies available to debtors upon whom notice under s 114 of the PPSA has been served.
[91] Counsel for the respondents submitted that s 114 of the PPSA has been complied with, at least insofar as the time period for notice is concerned. He submitted that the respondents relied on s 114(2), which provides that the 10 working days’ notice requirement is not applicable if the secured creditor reasonably believes that the value of the collateral will deteriorate in that period.
[92] I am satisfied that, notwithstanding that submission, there remains a serious issue to be tried as to the validity of the notice.
Breach of s 110 of the PPSA - no independent valuation of the company was obtained and the sale process was deficient
[93] Section 110 of the PPSA provides that a secured party who exercises a power of sale of collateral under s 109 owes a duty to obtain the best price reasonably obtainable as at the time of sale to, inter alia, the debtor.
[94] The principles applicable to a mortgagee’s duty when exercising a power of sale under s 176 of the Property Law Act 2007 (PLA) are relevant by analogy to the duty under s 110 of the PPSA.
[95] In Murray v UDC Finance Ltd, Davison J (dealing with s 176 of the PLA) restated the steps which would indicate that a mortgagee (or secured creditor, as the case may be) had made reasonable efforts to obtain the best reasonably obtainable price, as originally set out in Public Trust v Ottow,25 as follows:26
(a)The appointment of a reputable real estate agent to market the property.
(b)Obtaining a valuation report from an experienced valuer as a guide to what could reasonably be expected for the property.
(c)Marketing over a reasonably long period of time.
(d)An extensive advertising and promotional campaign.
(e)A properly conducted auction.
(f)A sale price that, given all the circumstances, can be reconciled with expert opinion as to value.
[96] Davison J considered there was an arguable defence to an application for summary judgment on the ground the secured creditor had failed in its duty as the secured party to take reasonable care to obtain the best price reasonably obtainable, and that this constituted a serious question to be tried (thus defeating the application for summary judgment).27
[97] The requirement that a proper valuation be obtained by a creditor prior to embarking on any sale has been described as a “matter which is of near universal importance” and that the:28
… creditor must have a proper valuation of the foods before embarking upon a sale, particularly one by private contract. Only then can it have a sense of whether its efforts are coming close to obtaining the bet price. The valuer who provides valuation must have the requisite expertise …
25 Public Trust v Ottow (2009) 10 NZCPR 879 (HC).
26 Murray v UDC Finance Ltd [2018] NZHC 3386 at [37].
27 At at [58]-[59].
28 Gault on Commercial Law (online ed, Thomson Reuters) at PS6.03(1)(d).
[98] The Liquidators do not accept that either FIL or the Receiver have proven they have taken reasonable steps to ensure they obtain the best price reasonably obtainable in selling Tellen because:
(a)no independent valuation has been obtained;
(b)there is a concern that the proposed sale price is undervalue. The proposed sale price values Tellen’s assets at $520,000, whereas Tellen’s balance sheet as at the date of liquidation (only one month earlier) valued its assets at approximately $1,000,000;
(c)a $50,000 bond was required to be paid by prospective purchasers in order to be able to conduct due diligence, which has likely restricted the number of potential purchasers;
(d)the proposed sale is to a related party (both a 40 per cent shareholder in Tellen as the beneficial owner of FIL’s shareholding and the sole beneficiary of the secured creditor). As such, the lack of independence in valuing the company is of particular concern; and
(e)FIL only gave notice of its intention to sell under s 109 of the PPSA on 23 December 2021 (with the intention to settle on 12 January 2022) and so FIL cannot possibly have conducted a reasonable sale process in that timeframe, particularly given the time of year.
[99] Petterson has confirmed that there is no requirement on a receiver to obtain a valuation of assets of a company before selling those assets, and that all s 110 of the PPSA and s 19 of the Receiverships Act 1993 require is that the selling party obtain the best price reasonably obtainable as at the date of sale.
[100] Petterson also confirmed that he advised the Liquidators about the sale process in the Zoom meeting on 26 October 2021 and supplied the following information to the Liquidators in the meeting:
(a)he placed two advertisements in the New Zealand Herald seeking expressions of interest in Tellen;
(b)prepared an information memorandum which summarised the financial position of the company in addition to information already available on the company website;
(c)answered questions put by interested parties seeking to decide whether to pursue the investment opportunity further (which was actively encouraged);
(d)formally entered into a security bond agreement, by the receipt from interested parties of $50,000 to cover any breach in confidentiality that may arise from an interested party obtaining information on the company, ensuring the parties who sought information about the business were genuine parties who would view the $50,000 bond as part of the purchase price of the business;
(e)negotiated with interested parties, which was a complicated process and resulted in a significant increase in offer price from Broadtech Ltd (the second highest offer) who moved from an initial offer of $287,000 to
$400,000. The information available to the Liquidators (which they have never requested) of this process indicates the complexity of negotiation and soundness of the approach followed by the Receiver, as it served not only to drive up the final price but also confirmed the Receiver’s view that the value of the business was in non-balance sheet assets (principally the staff);
(f)received final offers;
(g)accepted an offer of the highest price;
(h)documented that offer in a sale and purchase agreement (which has not yet been signed by the Receiver as the Receiver does not have agency enabling him to do so); and
(i)reported to FIL that the Receiver was unable to conclude a sale without agency, which led FIL to serve a notice on the Receiver, the Liquidators and Tellen that FIL, in the absence of such action being taken by the Receiver, would conclude the sale.
[101] Petterson’s evidence is that Cain has not sought any specific information from him concerning the sales process or the outcome of that process, other than what is recorded above.
[102] However, during a telephone discussion with Cain on 7 December 2021, Petterson volunteered a brief update on the sales process, noting that initially three parties were interested but that had dropped down to two parties with whom the Receiver was negotiating. Petterson says in that conversation he advised Cain that the company’s major assets were “off the book”, in that they comprised the staff, the company supply arrangements out of the United Kingdom and Australia and that, other than a small amount of stock and debtors, the company was worth nothing. Petterson also says he wanted to get the deal done before Christmas, although he foresaw some challenges in that regard in getting staff agreements and key supplier transfers in place before the end of the year.
[103]Counsel for the respondents submitted:
(a)the Liquidators were aware the Receiver was conducting the sale process over October, November and December 2021. Counsel for the applicant agreed that is correct but stated there was never a settlement date (at least as communicated to the Liquidators) until purported notice under s 114 of the PPSA was issued, and it was not until 23 December 2021 that the respondents indicated there was any urgency in respect of the sale process; and
(b)a reasonable inference to be drawn in the circumstances is that the proposed settlement date was not in contemplation until issue of the purported notice under s 114 and therefore the alleged urgency of the sale is again entirely of the Respondents own doing.
[104] Counsel for the respondents submitted that the Liquidators are being disingenuous about the true value of the company.
[105] At [94](d) of his affidavit, Cain states that Tellen’s balance sheet as at the date of liquidation showed more than $1,000,000 in assets as opposed to the highest offer received of $520,000.
[106] Petterson’s evidence is, as Cain ought to be fully aware of from both his perusal of the MYOB balance sheet and management accounting ledgers (to which he obtained access on 10 November 2021), that:
(a)the balance sheet to which he refers is a management accounting (internal) balance sheet and does not contain adjusted accounting entries for the previous year end (a fact that would be obvious to Cain when he compared the comparative balances on the balance sheet with the previous year’s financial statements that have been prepared by the external chartered accountants to Tellen);
(b)the balance sheet contains a number of balances that reflected expenditure by the company (and therefore were recorded as assets) which the Liquidators knew were of no value, including:
(i)intercompany account CDI (part of the failed Sedco purchase referred to in [17] to [25] of Cain’s affidavit) overstating asset values by $296,000;
(ii)inventory which had a book value of $389,566 was overstated due to old, obsolete and consignment stock (as reported in the
sales information memorandum), overstating values by
$249,000;
CDI investment (part of the failed Sedco purchase referred to in
[17] to [25] of Cain’s affidavit) overstated asset values by
$425,000;
(iv)trade debtors over 90 days, and therefore unlikely to be collected, totalled $19,000;
(v)plant, machinery and office equipment although showing a book value of $8,880 would be unlikely to realise much more than 20 cents on the dollar in a liquidation sale, an overvaluation of
$7,000;
(vi)the company does not own any motor vehicles as all company vehicles are leased, resulting in overstatement by $18,000;
(vii)the monetary liability of Tellen in relation to the claim by Williams in the Sedco/Tellen litigation is not recorded in the balance sheet referred to by Cain, resulting in a material understatement of Tellen’s liabilities. It was this monetary sum that formed the basis of the application to place Tellen in liquidation and resulted in Cain’s appointment as liquidator.
[107]In summary, Petterson’s evidence is that:
(a)the management accounting balance sheet that Cain refers to as showing “more than $1,000,000 in assets” actually totals $1,053,240. Deducting the above known or reasonably known overstated values (which total $1,014,000), the real asset position is more likely to be a realisable asset position of $39,240; and
(b)the liabilities of the company are under-recorded on that balance sheet by approximately $600,000, being the debt owed in the Sedco
proceedings which Cain knew but had not disclosed to the Court. The debt is referred to in [24] of his affidavit when he talks of the judgment against Tellen in the Sedco proceedings.
[108] What Petterson’s evidence does not address is that the point being made by Tellen is not that the company balance sheet as at the date of liquidation represents the true value of Tellen’s assets but rather that the contrast between that position versus the valuation put forward by the purchaser casts doubt on the true value of Tellen. In addition, several estimates have been made over a relatively short period of time, further undermining the Liquidators’ confidence in the proposed purchase price.
[109] There must be a seriously arguable case that the respondents have not taken reasonable steps to obtain the best price reasonably obtainable because:
(a)no independent valuation has been carried out, rather Petterson himself has conducted a valuation. This is notwithstanding the fact that Petterson admitted he had only started working on the receivership four days prior. As set out in Murray v UDC Finance Ltd,29 citing Public Trust v Ottow,30 obtaining a valuation report from an experienced valuer as a guide to what could reasonably be expected for the property is required in order to obtain the best price reasonably obtainable;
(b)no extensive advertising or promotional material campaign has been carried out. As noted in Cain’s affidavit, the Receiver took the unusual step to require the payment of a $50,000 bond in order to carry out due diligence. This step was purportedly taken in order to keep out ‘tyre kickers’ or otherwise protect Tellen’s confidential information. A standard non-disclosure agreement would provide adequate protection in terms of protecting confidential information. A possible effect of requiring such a bond in respect of a relatively small entity such as Tellen could be to reduce the number of potential purchasers. While it
29 Murray v UDC Finance Ltd, above n 26.
30 Public Trust v Ottow, above n 25.
may keep out some ‘tyre kickers’, it may also have the effect of diminishing the pool of potential purchasers; and
(c)there remains too much uncertainty as to the actual assets of Tellen to know what an appropriate sale price ought to be.
Breach of s 25 of the PPSA - the respondents have not exercised their rights, duties or obligations under any security agreement or the PPSA in good faith
[110] Section 25 of the PPSA provides that all rights, duties or obligations that arise under a security agreement (such as the GSA) or the PPSA must be exercised or discharged in good faith and in accordance with reasonable standards of commercial practice.
[111] The ultimate question is whether a secured party has acted primarily for the purpose of recovering its debt. The question is to be answered objectively, not by examining a secured party’s subjective motives but by examining whether its actions are taken in good faith, bearing in mind its entitlement to prefer its own interests wherever they conflict with other interested parties.31
[112]In Coltart v Lepionka & Co Investments Ltd, Harrison J stated:32
… The Lepionka mortgagee has not sought to disguise that it acquired Westpac’s mortgage with the predominant, possibly sole, intention of preserving the security and exercising its power of sale to protect related parties. While that intention does not of itself prove bad faith, we agree with the Associate Judge that the Lepionka mortgagee’s subsequent actions arguably give rise to an inference that its predominant purpose was not to sell for the best price reasonably obtainable or to protect its security. Instead, the Lepionka mortgagee’s actions invite the inference that its predominant purpose was to secure collateral advantages for the Lepionka purchasers, driven by factors extraneous to the relationship of mortgagee and mortgagor. The strict legal separation between the two Lepionka entities is not enough to shield the Lepionka mortgagee’s actions from challenge. Mr Lepionka’s overt control of and identification with each makes it difficult to maintain the appearance of independence.
31 Coltart v Lepionka & Co Investments Ltd [2016] NZCA 102, [2016] 3 NZLR 36 at [63].
32 At [66].
[113]In Fatupaito v Harris the Court of Appeal, distilling the principles set out
Lepionka, provided:33
A mortgagee therefore need not have purity of purpose. But it does act in bad faith if, judged objectively, it acts for a predominant purpose which is collateral to, or to use the language of this Court in Coltart v Lepionka and Co Investments Ltd, exogenous to, its interests as mortgagee in preserving its security and obtaining repayment of a secured debt. However a mortgagee does not act in bad faith if the effect of the exercise of its power undertaken for the predominant purpose of securing repayment is that it secures to itself some collateral advantage.
[114] In Fatupaito the Court of Appeal considered whether the appointment of a receiver had been made in bad faith. The Court concluded:34
It follows that the liquidators are entitled to a declaration that the receivers were not validly appointed under the terms of the GSD because the appointment was made in bad faith. The appointment was made in bad faith because the principal purpose of Bankhouse was collateral to its legitimate interest in preserving the security and obtaining repayment of the secured debt. Its principal purpose was to procure control for a third party, Mr Olliver, of assets that would enable him to better pursue his personal dispute with his estranged wife and in which Bankhouse had no interest.
[115] Counsel for the applicant submitted FIL’s conduct in the appointment of the Receiver and in exercising its rights, obligations and duties under the GSA and PPSA has been carried out in bad faith, in that they have been carried out for an ulterior motive.
[116] Counsel for the applicant submitted, as was the case in Lepionka, FIL’s conduct here gives rise to the inference that its predominant purpose has been to secure Tellen’s assets so that they may be transferred to the new company incorporated by Simmonds and/or to defeat Williams’ statutory demand because:35
(a)FIL’s first demand was issued shortly after, and in response to, Williams’ statement of claim;
(b)the lack of any valuation or independence in the sales process leads to the inference that the predominant purpose was to facilitate transfer of
33 Fatupaito v Harris [2018] NZC 497, [2019] NZAR 192 at [53].
34 At [65].
35 Coltart v Lepionka & Co Investments Ltd, above n 32.
the assets of Tellen to FIL rather than to promote robust free market competition;
(c)the Receiver and FIL were both aware the Liquidators were particularly interested in ensuring the sales process was conducted independently and transparently. However, it was not disclosed that the proposed purchaser was also in fact the sole beneficiary of FIL and therefore a beneficial owner of 40 per cent of Tellen’s shares until December 2021; and
(d)having failed to obtain the Liquidators’ consent to act as agent of Tellen, and therefore conduct a receivership sale, instead of applying to the Court for permission FIL instead took the step to issue notice (purportedly) under s 114 of the PPSA and apparently intends to conduct the sale in this fashion.
[117] Counsel for the respondents submitted that counsel for the applicant alleged the Receiver was involved in fraud. This is simply incorrect and unhelpful. Bad faith and fraud are not the same. The basis for the allegation is the failure to exercise the rights, duties and obligations under the GSA and PPSA.
[118] There is currently little or no evidence provided by the respondents that addresses this issue directly. I am satisfied that there is prima facie a serious question to be tried in the absence of direct evidence addressing it.
Summary
[119] I find on the evidence currently available to the Court that there are serious questions to be tried in respect of substantive claims against the Respondents for:
(a)relief against the proposed sale of collateral under s 109 of the PPSA because there is a significant conflict of evidence on the facts as to the amount of the debt alleged to be owed by Tellen to FIL;
(b)possible breach of s 110 of the PPSA because the respondents may not have taken reasonable steps to obtain the best price reasonably obtainable in respect of the proposed sale of Tellen;
(c)apparent breach of s 114 of the PPSA because FIL has not complied with the mandatory procedure set out within the PPSA or the PPSA Regulations in respect of the proposed sale of Tellen; and
(d)alleged breach of s 25 of the PPSA because the respondents have not exercised their rights, duties or obligations under any security agreement or the PPSA in good faith.
[120] Having established there are serious questions to be tried I turn now to consider the balance of convenience.
Balance of convenience
[121] The balance of convenience can also be described as “the balance of the risk of doing an injustice”.36 It is the “guiding principle” in granting an interim injunction.37 Although this inquiry is “broad and flexible”,38 the courts usually consider factors such as:
(a)the adequacy of damages to both parties;
(b)preservation of the status quo;
(c)the relative strength of each parties’ case;
(d)the conduct of the parties; and
(e)the effect on innocent third parties.
36 Cayne v Global Natural Resources plc at 237; McLaughlin v McLaughlin at [37], above n 6.
37 Eng Mee Yong v Letchumanan, above n 7 at 337.
38 McLaughlin v McLaughlin, above n 6, at [38].
Adequacy of damages for both parties
[122] In this case damages are not an adequate remedy for Tellen as any subordinate interests in the collateral or the sale proceeds would be extinguished, meaning unsecured creditors would be forced to pursue their claims via the court rather than in liquidation.
[123] The Liquidators would be unable to pursue any further investigations as to the validity of the debt, or even pursue legal proceedings as there would not be any funds remaining in Tellen to fund them.
[124] Given the significant conflict of evidence on the facts, particularly in respect of the validity and quantum of the alleged debt and the extraordinarily short timeframe between notice of sale and settlement (as well as the time of year at which it was issued), the Liquidators have not been able to adequately consider whether there are any other available avenues available to Tellen under, for instance, the PPSA. Should the sale proceed any such rights would be extinguished.
[125] Tellen’s assets would be immediately dispersed upon settlement beyond FIL. The purchaser’s signatory (who is also the beneficial owner of the alleged debt and beneficial owner of 40 per cent of Tellen’s shares via FIL) incorporated a new company called Tellen Communications Limited on 17 December 2021, of which he is sole director. The Liquidators are concerned that the assets of Tellen will be transferred to this new entity, at which point tracing of those assets would become even more difficult.
[126] Conversely, the respondents would suffer little prejudice were the sale to be delayed:
(a)the purchaser has a vested interest in purchasing Tellen (for the reasons described above). As such, it is unlikely the transaction would fall through in the face of delay;
(b)the Receiver has been running the day-to-day operations of Tellen since his appointment and could continue to do so, meaning the value of Tellen as a going concern can be preserved until a sale at a later date;
(c)the currently proposed sale process (being a sale under the PPSA) has only been proposed since 23 December 2021. In the context of such a short sales process it can hardly be said that further delay would be unreasonable;
(d)to the extent there is any inconvenience to the respondents, it is entirely of their own making. They have been aware from the outset of the Liquidators’ concerns, and more recently of the Liquidators’ intention to oppose any sale, and yet have elected to proceed regardless with their eyes wide open. They have also failed to comply with the procedure set down in the PPSA which has, in part, brought about this application;
(e)there is no evidence there will be a significant diminution of goodwill in Tellen and therefore its value. There is no element of goodwill in the purchaser’s valuation of Tellen; and
(f)in any event, the prejudice to the applicant outweighs any prejudice to the respondents.
[127]This factor weighs in favour of the injunction being granted.
Preservation of the status quo
[128]Petterson’s evidence is that if the injunction is granted it would cause:
(a)a failure to perform existing contracts in place;
(b)withdrawal from contract negotiations underway for new business;
(c)loss of security of employment and staff relationships, resulting in loss of key staff and liquidated damages claims for breach of existing
contracts in place at the date the both the Receiver and Liquidators were appointed; and
(d)loss of offshore suppliers.
[129] It is also Petterson’s evidence that due to delays in being able to confirm a sale of the business, Tellen has already lost one sale for $65,000 and is on the cusp of losing another sale for a similar amount.
[130]No evidence is offered in this regard other than Petterson’s opinion.
[131] By contrast, the proposed sale of Tellen will not preserve the status quo. Tellen will cease to exist. Its assets will be transferred to a third party entity.
[132] What is proposed by the injunction is that there be a period of less than three weeks where the Liquidators’ concerns can be addressed. The obtaining of an independent valuation of the assets of Tellen that supported the sale price under the proposed purchase would see a sale likely concluded in short order. No evidence is proffered from the secured creditor or the purchaser as to their views on a short delay in order to complete formalities to the satisfaction of the Liquidators. If the urgency of the sale existed to the extent submitted by the respondents, noting that the proposed sale was anticipated to settle on 12 January 2022, it is reasonable for them to have filed a brief affidavit as to their position. They have not done so.
[133]This factor favours the granting of the injunction.
Relative strength of each party’s case
[134] In this case, given the paucity of evidence available to me from the respondents and the time constraints everyone (including the Court) has been labouring under, it would be unfair to weigh this factor into account one way or the other.
The conduct of the parties
[135] In this case the respondents appear not to have not complied with the procedure set down in the PPSA.
[136] Any potential prejudice to the respondents has been brought about by their own doing. The respondents have embarked on this course of action with ‘their eyes open’, in that they were fully aware of the Liquidators’ concerns but proceeded with the sale regardless.
[137] Had the respondents sought the Court’s consent for the Receiver to act as agent for Tellen, as counsel for the respondents indicated would occur in his memorandum to the Court dated 17 December 2021, these matters would have been dealt with in a more orderly fashion with all parties having an opportunity to be heard.
[138] The respondents have had every opportunity to provide evidence which verifies the validity of the alleged debt and have not.
[139]This factor therefore weighs in favour of the injunction being granted.
Effect on innocent third parties
[140]There is no determinative factor here.
Undertaking as to damages
[141] The applicant has provided an undertaking as to damages in the following form:
… this undertaking as to damages is given by Tellen Systems NZ (2013) Limited (in receivership and in liquidation) (Tellen) … As such, any undertaking as to damages is limited to the assets of Tellen.
[142] Counsel for the respondents submitted the undertaking as to damages is “worthless”. He argued it is the three GSA holders that are entitled to take Tellen’s assets and to apply the proceeds to repay their debt, subject to paying preferential creditors pursuant to the seventh schedule of the Companies Act 1993. None of the three GSA holders support the Liquidators’ objection to the sale process. He submitted in those circumstances the Liquidators should give personal undertakings as to damages.
[143] There are assets in Tellen. The purchaser’s own valuation puts the value of these at $520,000. The exact value of these assets is unknown because no valuation has been carried. There are also the proceedings being pursued by the respondents against Mr Lambert, which are an asset of Tellen. Presumably the respondents see value in that proceeding as they are funding it. These assets combined would exceed the $440,000 owing to the three GSA holders. In those circumstances the undertaking is entirely orthodox.
Overall justice
[144]An assessment of the overall justice favours the applicant:
(a)as noted above, the respondents have been aware of the Liquidators’ concerns from the outset but have proceeded with the proposed sale regardless;
(b)the applicant, and the Liquidators, have acted reasonably throughout the course of the liquidation. The matters which the Liquidators have sought to investigate and gain assurance in respect of are entirely ordinary matters and the Liquidators’ expectations as to such evidence are not unusual, i.e. it should have come as no surprise to anyone that the Liquidators required reasonable evidence of the claimed debt and that the sales process was being conducted in an appropriate fashion; and
(c)conversely, from the outset the respondents have unreasonably delayed in providing basic evidence to support the alleged debt and are now seeking to proceed with a sale process that was proposed for the first time on 23 December 2021.
Orders
[145] An interim injunction shall issue to prevent the respondents, FIL and Kevin Davies, the Receiver, from selling any Tellen property pending further order of the Court.
[146] The applicant shall file and serve on the respondents a statement of claim on or before 28 January 2022.
[147] If the applicant elects not to file a statement of claim on or before 28 January 2022 the interim injunction shall lapse.
[148] On request by any party the matter shall be set down for a case management conference for further timetabling directions to be made.
[149]Costs are reserved.
Doogue J
Solicitors:
Anthony Harper, Auckland Grant & Co, Auckland CC:
B Gustafson, Auckland
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