Trott Dairy Limited v Misty Vale Farm Limited

[2021] NZHC 2507

IN THE HIGH COURT OF NEW ZEALAND TIMARU REGISTRY

I TE KŌTI MATUA O AOTEAROA TE TIHI-O-MARU ROHE

CIV-2021-476-000022

[2021] NZHC 2507

UNDER

the Companies Act 1993

IN THE MATTER

of the liquidation of Misty Vale Farm Limited

BETWEEN

TROTT DAIRY LIMITED

Plaintiff

AND

MISTY VALE FARM LIMITED

Defendant

Hearing:

13 September 2021

Appearances:

P W Payton for Plaintiff

H C Matthews for Defendant

Judgment:

23 September 2021

JUDGMENT OF ASSOCIATE JUDGE PAULSEN

This judgment was delivered by me on 23 September 2021 at 11.00 am pursuant to Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar Date:

TROTT DAIRY LTD v MISTY VALE FARM LTD [2021] NZHC 2507 [23 September 2021]

[1]    The defendant company, Misty Vale Farm Ltd (Misty Vale) is indebted to the plaintiff, Trott Dairy Ltd (Trott Dairy) in respect of a term loan which fell due for payment on 1 February 2021 (the loan). The loan is guaranteed by the directors of Misty Vale, Paul Crouchley and his wife, Dale Crouchley.

[2]    Trott Dairy issued a statutory demand to Misty Vale in respect of the principal sum and interest owing under the loan. When Misty Vale failed to comply with the statutory demand (or apply to set it aside), Trott Dairy commenced this proceeding to put Misty Vale into liquidation.

[3]    Misty Vale has not filed a statement of defence to the claim. Despite that, and the fact that its liability to repay the loan is not disputed, Misty Vale applies to the Court for orders:

(a)granting it leave to bring an application for a stay of the proceeding out of time; and

(b)staying the proceeding.1

[4]    Misty Vale contends this proceeding is unjust and an abuse of the Court’s process. This is because  the  director  of Trott  Dairy, Alan Trott  (Mr Trott)  and  Mr Crouchley share business interests in two companies and are in the process of untangling their affairs. Misty Vale contends this process will result in money becoming available to Mr Crouchley from which Trott Dairy may be paid. However, should Misty Vale be put into liquidation in the interim, it is said Misty Vale’s property where Mr and Mrs Crouchley reside will be sold and they will lose both their home and income.

[5]    The application for stay is opposed by Trott Dairy which asks for an immediate order for the liquidation of Misty Vale. It contends Misty Vale seeks a stay so that it can retain its assets on the basis of no more than the hope that at some future unknown date one of its directors may come into funds that may be advanced to Misty Vale to

1      High Court Rules 2016, r 31.11.

pay its undisputed debt. Trott Dairy submits that such an application is plainly without merit and should not be entertained.

The facts

[6]    Misty Vale was incorporated in 2004. Mr and Mrs Crouchley are the shareholders and directors.

[7]Mr Trott is the director of Trott Dairy.

[8]    Mr Crouchley and Mr Trott have known each other for many years and it would appear that until mid-January 2021 they were on good terms.

[9]    In February 2018, Misty Vale entered into a term loan agreement with Trott Dairy pursuant to which Trott Dairy advanced a principal sum of $105,000 to Misty Vale. Interest was payable on the loan.  The principal sum fell due for repayment on 1 February 2021. Mr and Mrs Crouchley guaranteed repayment of the loan.

[10]   Trott Dairy had been purchasing and repairing properties that had suffered earthquake damage for on-sale or rental. At around the time that Misty Vale obtained the loan, Mr Crouchley and Mr Trott discussed going into business together in a similar enterprise. As a result of those discussions, Mr Crouchley says he began working for Trott Dairy in around November 2017 on an unpaid basis.

[11]   In mid-2018, AP Investments 2018 Ltd (AP) and Overdale Investments Ltd (Overdale) were incorporated. Mr Crouchley and Mr Trott were the shareholders and directors of the companies. Both companies were involved in the business of purchasing and repairing earthquake damaged houses for profit. The first houses were purchased in August 2018.

[12]   There was an intermingling of the affairs and monies of AP and Overdale.  Mr Crouchley’s position is this was a matter of convenience but also, at times, a necessity and both he and Mr Trott share responsibility for it. Mr Trott apparently saw things very differently and he had concerns about the manner in which Mr Crouchley conducted the businesses. In January 2021, there was a falling out between

Mr Crouchley and Mr Trott. As a result, from around February 2021, a process began of reconciling the financial affairs of the companies which is ongoing.

[13]On 1 February 2021, the loan became repayable.

[14]   On 30 April 2021, a letter of demand was sent to Mr Crouchley by Mr Trott’s lawyers, Evans Henderson Woodbridge, demanding repayment of the loan and interest. This was followed, on 6 May 2021, by the issue of a statutory demand by Trott Dairy to Misty Vale.

[15]   There was then correspondence between the parties’ lawyers. Mr Crouchley’s position was that it was premature for Trott Dairy to take Court proceedings to recover the loan pending the sale of the properties of AP and Overdale and the reconciliation of their financial positions. That view was not accepted by Mr Trott who considered that the repayment of the loan was independent of the affairs of AP and Overdale. In addition, Mr Trott did not accept that there would necessarily be any funds available to the shareholders of AP and Overdale upon completion of the reconciliation process.

[16]   On 18 June 2021, Trott Dairy commenced this proceeding for the liquidation of Misty Vale. It was set down to be heard on 9 August 2021. Misty Vale was served with the proceeding on 8 July 2021. Misty Vale did not file a statement of defence, nor did it apply for a stay within the time prescribed by r 31.11 of the High Court Rules 2016.

[17]   In a letter of 29 July 2021, Mr Crouchley’s lawyers, White Fox & Jones, wrote to Mr Trott’s lawyers that the appropriate course was for the liquidation application to be adjourned to allow the parties to complete the reconciliation process in respect of the affairs of AP and Overdale. On 30 July 2021, Evans Henderson Woodbridge advised that Trott Dairy did not agree to adjourn the proceeding. This application for stay was filed on 3 August 2021.

Rule 31.11 and relevant principles

[18]Rule 31.11 of the High Court Rules provides as follows:

31.11   Power to stay liquidation proceedings

(1)If an application for putting a company into liquidation is made under rule 31.3, the defendant company, or, with the leave of the court, any creditor or shareholder of that company or the Registrar of Companies, may, within 5 working days after the date of the service of the statement of claim on the defendant company, apply to the court---

(a)for an order restraining publication of an advertisement required by rule 31.9 or any other information relating to that statement of claim; and

(b)for an order staying any further proceedings in relation to the liquidation.

(2)The court must treat an application under subclause (1) as if it were an application for an interim injunction and, if it makes the order sought, it may do so on whatever terms the court thinks just.

(3)The inherent jurisdiction of the court is not limited by this rule.

[19]   Counsel agreed that an order for stay will be made only sparingly and to succeed Misty Vale must establish clear and persuasive grounds that this proceeding savours of unfairness or undue pressure such that a stay is necessary to prevent an abuse of process of the Court.

[20]   In Nemisis Holdings Ltd v North Harbour Industrial Holdings Ltd, Wallace J set out the principles governing the exercise of the Court’s discretion to stay an application for liquidation as follows:2

… The relevant legal principles and practice concerning the Court’s  jurisdiction to stay winding-up proceedings (including advertisement) are discussed in the judgments of the Court of Appeal in Exchange Finance Co Ltd v Lemmington Holdings Ltd [1984] 2 NZLR 242, Anglian Sales Ltd v South Pacific Mfg Co Ltd [1984] 2 NZLR 249 and Fletcher Development & Construction Ltd v New Plymouth Hotels Holdings Ltd unreported, 24 July 1986 CA63/86. The Court has an inherent jurisdiction to stay winding-up proceedings where the debt upon which such proceedings are founded is the subject of genuine dispute. In those circumstances the plaintiff cannot show that it has the status of a creditor … The decisions make it clear that the jurisdiction to stay is an inherent one to prevent abuse of process and that there is no inflexible rule. The governing consideration is whether the proceedings savour of unfairness or undue pressure. It is, however, a serious matter to stay winding-up proceedings so that the decision to do so is never made lightly. The onus is on the applicant and it is normally necessary to demonstrate “something more” than the balance of convenience considerations which it is usually appropriate to consider on an application for an interim injunction.

The application of the above principles was considered in some detail by Eichelbaum J in Pink Pages Publications Ltd v Team Communications Ltd

2      Nemisis Holdings Ltd v North Harbour Industrial Holdings Ltd (1989) 1 PRNZ 379 (HC) at 385.

[1986] 2 NZLR 704 where he considered it appropriate, in a case where there had been ample time to file appropriate affidavits, for the applicant to be required to establish a strong prima facie case of the existence of a genuine dispute, on substantial grounds. Another way of expressing the requirement is that there need to be “clear and persuasive grounds”, that being the test adopted by Buckley LJ in Bryanston Finance Ltd v de Vries (No 2) (1976) Ch 63 at p 78.

Misty Vale’s submissions

[21]   Mr Matthews submits Misty Vale’s failure to file this application within five working days after the  date of service of the statement of claim, as required by        r 31.11(1), is excusable. He says the default must be viewed in the context of ongoing discussions between the parties as to how the affairs of AP and Overdale would be untangled. He argues that when it was made clear that Trott Dairy would not agree to an adjournment of the proceeding to allow that to occur the stay application was promptly filed.

[22]   While Misty Vale’s notice of application asserts that Trott Dairy’s application to liquidate Misty Vale is an abuse of process, in his oral submissions Mr Matthews appeared to resile from this position. However, he maintained the proceeding smacks of unfairness and it should therefore be stayed. He identified these factors as primarily relevant:

(a)the existence of a link between the loan and Mr Crouchley’s involvement in a joint enterprise with Mr Trott through the entities AP and Overdale;

(b)the intermingling of the financial affairs of Mr Crouchley, Mr Trott and the entities with which they are associated (including Misty Vale and Trott Dairy) which is preventing Mr Crouchley from having access to money from which the loan could be paid; and

(c)that Trott Dairy is acting for an ulterior purpose to achieve “an outcome in the AP and Overdale wind-up”.

[23]   Four additional factors are identified which Misty Vale argues demonstrate “something more” than ordinary balance of convenience considerations justifying the granting of a stay. These are that:

(a)Trott Dairy is in a strong financial position;

(b)the making of a liquidation order will affect “innocent third-parties” because Mr and Mrs Crouchley may lose their home and source of income;

(c)as a consequence of Mr Trott’s encouragement to Mr Crouchley to be involved in a joint venture, Mr Crouchley has been out of employment for several years which has prevented him from borrowing either personally or against the Misty Vale property to repay the loan; and

(d)Trott Dairy holds security for the loan in the form of Mr and Mrs Crouchley’s personal guarantees and Misty Vale is prepared to give further security which will provide Trott Dairy with certainty of payment of what is owed until the affairs of AP and Overdale are resolved.

The application for an extension of time

[24]    Misty Vale has not provided any evidence as to as why it did not file its application on time in accordance with the requirements of r 31.11(1). It needs an extension of time to bring this application.3

[25]   I do not accept the submission that Misty Vale’s default was due to ongoing discussions as to how the affairs of AP and Overdale were to be untangled. Trott Dairy’s intention to apply to liquidate Misty Vale was made clear in the demand of 30 April 2021. On 13 May 2021 (that is following service of the statutory demand but before this proceeding was commenced) Mr Crouchley’s lawyers wrote to Trott Dairy’s lawyers advising that any proceeding that sought the liquidation of Misty Vale

3      High Court Rules, r 1.19.

would be subject to an application for stay. Why Misty Vale did not make such an application when proceedings were filed against it is not clear.

[26]   While it is the case the correspondence passing between the lawyers included discussion of the ways in which the affairs of AP and Overdale could be untangled the position of Trott Dairy was very plainly that Misty Vale’s obligation to repay the loan was unrelated to the affairs of AP or Overdale. Accordingly, in a letter of 21 May 2021 Trott Dairy’s lawyers stated:

In relation to your comments about the premature nature of any Court proceedings relating to the demands made on your client and the statutory demand now served on Misty Vale Farm Limited, under the term loan agreement dated 1 February 2018, none of the matters raised in your letter are grounds for a stay of any summary judgment or liquidation proceedings. The term loan agreement was entered into prior to the incorporation of either AP or Overdale Investments Limited and the repayment of this loan by Misty Vale Farm Limited and/or the guarantors is independent of what happens with these companies.

[27]   Mr Matthews referred to an email from Annette Bone, who was engaged to work on the reconciliation of the finances of AP and Overdale, to the parties of 28 July 2021 and a letter from White Fox & Jones of 29 July 2021 to Evans Henderson Woodbridge suggesting processes for reconciliation of the financial affairs of AP and Overdale. However, by that stage Misty Vale was already out of time for filing the stay application and there is nothing to suggest Trott Dairy had changed its position, as set out above.

[28]    There is no evidence justifying Misty Vale’s failure to make this application on time and the circumstances advanced in oral argument do not establish one. As noted in McGechan on Procedure in relation to applications under r 1.19, “the importance of suitable evidence is fundamental”.4 I agree with Mr Payton’s submission on behalf of Trott Dairy that Misty Vale has failed to show a proper foundation for the exercise of discretion extending time for the filing of this

4      Andrew Beck and others (eds) McGechan on Procedure (looseleaf ed, Brookers) at [HR 1.19.04].

application. However, for the reasons that follow, the application fails on its merits in any event.

The stay application

[29]   The starting point is Misty Vale does not contend it has a defence to Trott Dairy’s claim to repayment of the loan and it is accepted that the statutory pre- requisites for the making of the liquidation order sought have been met

The allegation of a link between the loan and the joint enterprise

[30]   Misty Vale’s contention of a connection between the loan agreement and the joint enterprise is based upon two curt paragraphs in Mr Crouchley’s affidavits. In his first affidavit, he deposes Mr Trott proposed that they work together and the result would be to “knock that off [the term loan] and make a million each”. In his second affidavit, Mr Crouchley says “for myself and Misty Vale” that “[o]ur investment in the business was to create income and capital to provide the payment of the Term Loan, and to generate significant additional income”. I do not accept that this amounts to clear or persuasive evidence of a connection between the loan agreement and the joint enterprise.

[31]   Mr Crouchley provides no evidence of the date or circumstances under which Mr Trott is said to have made the statement attributed to him. He has not stated either that Mr Trott’s statement, if made, was relied upon when entering into the loan agreement. Notably, the loan agreement was entered into months prior to the incorporation of AP and Overdale and the commencement of the joint enterprise. In a document I understand was sent by Mr Crouchley to Mr Trott after this proceeding was commenced (and exhibited to his first affidavit) Mr Crouchley says the loan was made to help him out with financial issues in 2017.

[32]   The loan agreement and the joint enterprise are between different legal entities. Mr Crouchley and Mr Trott are experienced businessmen and must have understood the consequences of this. They chose to document the loan as between Trott Dairy and Misty Vale but incorporated AP and Overdale to conduct their joint enterprise.

[33]   Throughout his affidavits Mr Crouchley conflates himself and Misty Vale in a misleading fashion. As examples, at para 23 of his first affidavit he says that since starting the joint venture in mid-2018 “Misty Vale (and myself personally) have put resources and our energy on a full-time basis into the Business” but there is no evidence that Misty Vale has made any investment of resources or energy into the joint venture and as Misty Vale has its own business any investment could hardly have been on a full-time basis. Similarly, at para 28 he refers to “my/Misty Vale entitlement to funds” from a reconciliation between AP and Overdale, but Misty has no interest in either company and no entitlement to such funds.

[34]   Mr Trott denies making the comment attributed to him and there is no reference to it in any document prior to the filing of Mr Crouchley’s affidavit in this proceeding. Specifically, there is no mention of it in the early correspondence between the parties’ lawyers despite Trott Dairy’s stated position the loan agreement was independent of the joint enterprise.

[35]   If the loan was intended to be repaid from profits of the joint enterprise, I would expect that would be documented in some way. Further, the loan had a term expiry date of 1 February 2021 which is inconsistent with such an understanding.

The intermingling of the financial affairs of Mr Crouchley, Mr Trott and the entities with which they are associated

[36]   Much of Mr Crouchley’s evidence deals with the process to reconcile the financial  positions  of  AP  and  Overdale  and  delays  in  completing  it.   Both    Mr Crouchley and Mr Trott have an interest in seeing the process completed, but whether or not that is the case can have no bearing upon Trott Dairy’s entitlement to demand repayment of the loan. There is no evidence Misty Vale is owed money by AP or Overdale and it is not a shareholder of either company and will not be entitled to any funds from those companies even if such funds should eventuate.

[37]   Furthermore, there is no certainty that funds will be available to either Mr Trott or Mr Crouchley once the reconciliation process is completed. The evidence of Annette Bone, who is presently conducting the reconciliation process, is that it will

take from between four and six months to complete and there is no certainty that any funds will be available to the shareholders.

[38]   Mr Crouchley says there are sums presently held by lawyers for the companies and further significant  funds will become available.   However, it is accepted by   Mr Matthews that it is not clear where the reconciliation process will end up. Further, there is the possibility of disputes as to who is entitled to any surplus funds. It may take months, if not years, for these matters to be resolved.

Ulterior purpose

[39]   There is no evidence that the liquidation process is being used by Trott Dairy as leverage in the reconciliation process. I agree with Mr Payton that the most that can be shown is that the two processes are happening at the same time.

[40]   But even if the decision by Trott Dairy to seek recovery of the loan was in some way influenced by a desire to advance Mr Trott’s personal interests, that would not amount to an abuse of the Court’s processes. The institution of legal proceedings with an ulterior motive will only constitute an abuse of process where they are being used to achieve a collateral advantage beyond what the law offers, or the proceeding is conducted, not as to vindicate a right but to cause a defendant problems of expense, harassment, commercial prejudice or the like going beyond those ordinarily encountered on properly conducted litigation.5 Here, there is no dispute that Trott Dairy has an entitlement to repayment of the loan and that is in fact what it seeks by way of this proceeding. It is not seeking any advantage beyond that which the law allows.

The additional factors

[41]   As to the additional factors that Misty Vale contends show “something more” than mere unfairness justifying a stay of the proceeding, these can be dealt with briefly.

5      Broxton v McLelland [1995] EMLR 485 (CA) at 497-498 citing Goldsmith v Sperrings Ltd [1977] 1 WLR 478 (CA) at 503; Williams v Spautz (1992) 174 CLR 509 at 526.

[42]   First, Trott Diary’s financial position is not a relevant factor in circumstances where there is no dispute as to Misty Vale’s obligation to repay the loan.

[43]   Second, I do not accept there are any “innocent third parties” who will be affected by the making of an order liquidating Misty Vale. The parties affected are Misty Vale and Mr and Mrs Crouchley who all assumed the obligation to repay the loan.

[44]   I do not accept either that if Misty Vale is liquidated Mr and Mrs Crouchley will lose their home, being the property owned by Misty Vale where they reside. The evidence of Mr Crouchley is that there is substantial equity in the property and that Misty Vale has $300,000 worth of dairy stock. If the stock were sold, Misty Vale would have the funds to repay the loan in full.

[45]   It is then said that due to Mr Trott’s encouragement of Mr Crouchley to become involved in the joint enterprise, Mr Crouchley has forgone the ability to earn income from other employment between 2017 and March 2020 and this, in turn, has prevented him or Misty Vale from borrowing to repay the loan. This is simply a repetition of the submission of a connection between the loan and the joint enterprise I have rejected earlier.

[46]   Finally, Mr Matthews submits that Misty Vale could, as a condition of ordering a stay, provide security for the loan by way of an unregistered mortgage supported by a caveat over its property. This submission presupposes that there is a proper basis to grant a stay which, in my view, there is not. In addition, this suggestion was raised only in submissions and there is no satisfactory evidence as to Misty Vale’s financial position, that it is prepared to provide security, that such security can be provided, or as to the adequacy of the security.

[47]   There is no dispute as to Misty Vale’s liability for the loan. In my view, there has been no relevant connection established between the loan and the joint enterprise. There is no unfairness in Trott Dairy bringing this proceeding and certainly not to an

extent that it is necessary for the Court to grant a stay to prevent an abuse of its process. This application must necessarily fail.

Result

[48]   The application by Misty Vale for a stay of the proceeding is dismissed in its entirety.

[49]   Trott Dairy is awarded costs on a 2B basis plus reasonable disbursements as fixed by the Registrar.

[50]   Although Trott Dairy seeks an immediate order for liquidation of Misty Vale, I have earlier set the application down for hearing on 1 November 2021 and retain that date. This will provide Misty Vale with a further opportunity to satisfy its obligations under the loan before a liquidation order is made.

O G Paulsen Associate Judge

Solicitors:

Evans Henderson Woodbridge, Marton White Fox & Jones, Christchurch