Valasay Holdings Limited v Lyttelton Supermarket Limited HC Christchurch Civ-2011-409-001441
[2011] NZHC 1670
•10 November 2011
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV-2011-409-001441
UNDER the Companies Act 1993
IN THE MATTER OF an application to set aside a statutory demand
BETWEEN VALASAY HOLDINGS LIMITED Applicant
ANDLYTTELTON SUPERMARKET LIMITED Respondent
Hearing: 26 October 2011
Counsel: K T Dalziel for Applicant
D M Lester for Respondent
Judgment: 10 November 2011
JUDGMENT OF ASSOCIATE JUDGE MATTHEWS
[1] This is an application to set aside a statutory demand served by the respondent on the applicant on 12 July 2011. The demand seeks payment of the sum of $100,000. The claim is based on clause 4.1 of the further terms of sale in an agreement for sale and purchase between the respondent as vendor and the applicant as purchaser of the assets comprising the Lyttelton Supermarket.
[2] Clause 4.1 of the agreement provided that the sum of $50,000, being part of the purchase price for the assets, would be paid three months after the possession date. This was later varied by agreement so the sum of $50,000 was payable on
14 March 2011 and $50,000 was payable on 13 June 2011.
VALASAY HOLDINGS LIMITED V LYTTELTON SUPERMARKET LIMITED HC CHCH CIV-2011-409-
001441 10 November 2011
[3] It is common ground that neither sum has been paid.
[4] The applicant, relying on s 290 of the Companies Act 1993, alleges it has a claim in damages against the respondent for misrepresentation, and a claim for breach of certain warranties contained in the agreement for sale and purchase, which should be set off against the debt owing under the contract. The applicant‟s case is that its claim is for $90,345; it submits that it would also be awarded costs which would result in a sum to be set off against the claim, which exceeds the amount claimed.
[5] The elements of the applicant‟s claim fall broadly into five parts. First, it claims that lighting was included within the valuation at a sum of $15,500, and it has since transpired that the lighting thus valued was owned by the landlord of the premises not the respondent. The respondent accepts that; accordingly accepts that the sum for which its notice should have been issued is $84,500.
[6] Secondly, seven refrigeration units included within the valuation are said to have been in average, poor or fair condition, when they were represented to have been in good condition.
[7] Thirdly, it is alleged that in relation to the seven refrigeration units, and a stereo system, there was a breach of a warranty within the contract relating to the condition of assets used in the business.
[8] Fourthly, it is alleged that the IT system for the supermarket is obsolete and is of little or no value, for which a $25,000 claim is made.
[9] Fifthly, there is a general group of claims in respect of an LPG reticulation system which is said to be missing, three phase power and electrical equipment said to be missing, repairs required to one refrigeration unit, valuation costs and electrical repairs.
Legal principles
[10] In Focus International Export Ltd v Honeywell Ltd,[1] the Court summarised the principles to be applied on an application to set aside a statutory demand:
[1] Focus International Export Ltd v Honeywell Ltd HC Auckland, M134-IM99, 28 May 1999, Master Faire
The Court‟s task is not to resolve the dispute but simply to determine whether there is either, in terms of s290(4)(a)(i) of the Companies Act 1993 a substantial dispute whether or not the debt is owing or due or in terms of s290(4)(b) that the applicant appears to have a counterclaim, set-off or cross- demand and the amount specified in the demand less the amount of counterclaim, set-off or cross-demand is less than the prescribed amount.
The applicant must show a fairly arguable basis on which it is not liable for the amount claimed. Forge Holdings Ltd v Kearney Finance (NZ) Ltd (HC Christchurch, M 149/95, Tipping J, 20 June 1995) at p2 and Queen City Residential Ltd v Patterson Co-Partners Architects (No. 2) (1995) 7 NZCLC
260, 936. Whilst mere assertion will not be enough some sort of material short of proof which backs up the claim that the amount in dispute is
required. ...
[11] I accept that these are the principles to be applied in this case.
Evidence on the alleged representation, and the terms of the warranty relating to condition
[12] Evidence for the applicant was given by its director Mr AHP MacDonald. Mr MacDonald said:
4. After the agreement was signed, Cherine and I arranged for Basil Roberts of Jones Lang Lasalle to act as valuer of the tangible assets on our behalf.
5. Basil and I met with the director of Lyttelton Supermarket Limited, Harpreet Rattan, on site, for the valuation. Mr Rattan showed us the assets for the valuation and reassured us throughout that the assets were in good operational order.
6. I recall asking him specifically about the fridges and Mr Rattan said they were working well and had been serviced.
7. Attached and marked “C” is an email from our valuer Basil Roberts confirming that Mr Rattan made those assurances and the notes he made.
8. I believed Mr Rattan when he said this and relied upon this in making my decision as to the value of the assets.
[13] The email referred to by Mr MacDonald in paragraph 7 of his affidavit was
sent to the applicant‟s solicitor on 31 May 2011 and is in the following terms:
Hi Kathryn
Details of site notes included within the spread sheet as requested.
Just to confirm the owner of the supermarket assured me that all refrigeration and been checked and maintained and in working order.
Regards
Basil.
31 May 2011
I presume that the word “and” should read “had”.
[14] The document referred to by Mr Roberts as “site notes included within the spreadsheet” appears to be a reprint at 30 May 2011 of the valuations carried on 29
November 2010, but containing in a column headed “Site Inspection Notes” a number of comments of direct relevance to the present case. These are, by reference to the item concerned:
Asset and Description Market Value In Situ Site Inspection Notes
3x VPOS computerised POS 28,000 Good condition computers with touch screen
and connections
Open front vertical refrigerated 20,000 Advised all in good vegetable display working order by
market owner
MAFIROL two section chilled 9,000 Advised all in good meat display cabinet working order by
market owner
MAFIROL three section chilled 13,500 Advised all in good vertical deli display working order
By market owner
MAFIROL four section wine/beer 18,000 2005 Good order chilled vertical high back display
cabinet
CARAVELL sliding top chest 1,710 Good order freezer
KOXKA open top chest freezer 2,140 Good order
DERBY lift top ice cream chest 1,500 Good order freezer
Stereo system 1,070 2005
LPG reticulation 500 2009
Electrical reticulation, single 4,800 2009 and three phase outlets,
fittings and connections
Apart from annexing these documents, the applicant did not produce evidence from Mr Roberts. He referred to representations in relation to three only of the items and refrigeration equipment.
[15] In his affidavit Mr H S Rattan, a director of the respondent, recalled a meeting with Mr MacDonald at which he advised him “that the assets the applicant ultimately purchased were in good working condition”. In relation to Mr Roberts, Mr Rattan noted that he came with Mr MacDonald to inspect and value the assets, and then said at paragraph 27.5:
I recall that pretty clearly. I remember pointing out the assets to them. I did not talk about the assets in any detail with them. I do remember they came on a business day. The supermarket was open and all of the assets were in use. They were all working. Refrigeration units, for example, were plugged in and operating.
The age and condition of all the assets would have been obvious to Jones and Mr MacDonald and I left it to them to determine their value.
[16] Mr Roberts‟ report dated 10 November 2010 contained the following:
Information sources and documentation utilised within our determination of value include, but are not limited to:
after which there followed a brief list, none of the items in which refer to information provided by the vendor.
At the time of the inspection by Mr Roberts and Mr MacDonald, the upstairs cool room was switched off. Mr Rattan said it had been switched off that day but was in working order, according to Mr MacDonald.
[17] Clause 6.3 of the contract is a warranty that the assets will be, at the giving and taking of possession, “in good operational order and condition taking account of their order and condition as at the date of the agreement”.
[18] This is not a warranty about the condition of the assets as at the date of the contract. It is a warranty that the assets are in good operational order and condition, at the date of possession, and in making an assessment of that, account must be taken of their order and condition at the date of the agreement.
The valuation of the assets
[19] The total valuation ascribed to the assets by Mr Roberts was $233,000 plus
GST. The respondent‟s valuer, Mr Williams, assessed their value to be $258,000.
[20] The parties conducted further negotiations about the contract after this valuation and the vendor‟s valuation were received. This resulted in the increase in the vendor finance which I have noted, and an agreed value for the tangible assets of
$200,000. The assets in the list were not separately marked down to achieve this figure so it is not possible to ascribe any finally agreed value for any of the items I have listed above.
Evidence on the condition of the assets
[21] Mr MacDonald said in evidence that when the contract became unconditional, staff from the supermarket asked whether the fridges “and the electrics” were going to be fixed, as there were problems of which they and Mr Rattan, the director of the respondent, were aware. Some time after that the deli fridge “nearly caught fire and eventually failed”, requiring repairs and expenditure of
$3500 to put all the fridges on their own circuit. No invoice was produced.
[22] As a consequence the applicant engaged Cowley Aqua Heat Services to review the condition of the refrigeration equipment. It also engaged Asset Valuations Limited to conduct a further valuation of the assets it had bought. For reasons which will become clear it is not necessary to review all the material in these reports. Cowley Aqua Heat Services described one unit (the vegetable cabinet) as
being in poor condition, the remaining being ascribed such adjectives as average, reasonable and normal, with references to the advancing ages of some of the units. Asset Valuations Limited described the units as poor or average, with one described as fair, and one described as recent. It summarised its view of the plant and equipment in the following paragraph:
The plant and equipment has obviously been „cobbled together‟ from second-hand cast-offs and obsolete equipment. In particular the refrigerated merchandising cabinets are either old or close to the end of their useful lives and in some cases, past their useful life. The refrigerated cabinet, displaying vegetables, is at least 30 years old and is in extremely poor condition. We believe that this unit is a liability rather than an asset.
[23] These two firms both valued the equipment, generally, at figures below those which had been assessed for the purposes of the contract.
[24] Four points, however, must be noted. The first is that in relation to the MAFAROL meat chiller, reference was made by Cowley Aqua Heat Services to the six five-watt fan motors being replaced “with correct 10 watt motors” and to the unit having had “three fan blades replaced as old blades did not have required pitch”.
[25] Secondly, the vegetable chiller described as being in poor condition by
Cowley Aqua Heat Services was valued at $2000 by that firm.
[26] Thirdly, the Asset Valuations Limited report said the “electronic POS systems are old, obsolete and are not compatible with either Progressive Enterprises Limited or Foodstuffs NZ Limited IT systems” and valued these at $3000, having noted that they are “not in service” and “obsolete”. The list of items reviewed included two check-out POS systems which were leased, and were new. From this I infer that the systems taken over with the contract have since been taken out of service and replaced with new leased equipment; there was no evidence that the supermarket is aligned to either of the grocery supply organisations referred to by Asset Valuations Limited.
[27] Fourthly, this firm listed a three-phase electrical reticulation under the heading of “Building Improvements”, but described this as “not installed” and ascribed it a nil value.
[28] The independent evidence before the Court on the value and condition of the assets in question at the date of the contract (as distinct from two months later) is confined to the evidence given about them in the two valuations carried out at that time – by Mr Roberts of Jones Lang Lasalle on behalf of the applicant, and by a valuation firm Williams Valuations Limited on behalf of the respondent. Their inspection dates were, respectively, 17 November and 15 November 2010. These valuations were approximately two weeks after the written contract was initially entered, and just before the contract was varied to provide an agreed asset purchase price (26 November 2011). The Williams‟ valuation does not describe the condition of any of the assets. The comments made in the Roberts‟ valuation are set out in the table above.
[29] There was no evidence that at possession the condition of the items in question differed in any way from the condition these assets were in at the time agreement was reached. Further, with one exception, all the units were working both when inspected and when possession was taken. The exception is the upstairs walk- in refrigerated chiller to which a market value of $1,950 was ascribed by Roberts. A value of $9400 was ascribed by Williams.
Discussion and decision
[30] I turn now to the five bases upon which the applicant maintains it has a claim against the respondent which should be offset against the sum claimed by the respondent under the notice. I have dealt in [5] with the first category, and turn to the second.
[31] The next claim relates to seven refrigeration units, and alleged representations concerning their condition. All the items were inspected both by Mr MacDonald of the applicant firm and by its valuer, in order to arrive at an agreed price. Criticism of the units on the basis that they are old is not relevant. The applicant bought what it saw and inspected, and paid its own expert‟s assessed market value less a negotiated reduction to a global figure lower than the sum of the parts of the valuation. Rather, the issue is whether they comply with the defendant‟s representations. Of the seven items of refrigeration equipment, four were assessed
by the applicant‟s own valuer as being in good order. The respondent is said to have advised Mr Roberts that the other three were in good working order. Mr MacDonald and Mr Rattan agree that the latter made statements about all the refrigeration items, Mr MacDonald saying Mr Rattan described them as working well, and Mr Rattan accepting that he said they were in good working condition. For present purposes, these descriptions come to the same. With the exception of the upstairs chiller room, the assets were all working.
[32] The MAFAROL meat chiller required six replacement fan motors and three replacement fan blades, but the evidence does not demonstrate that, arguably, this unit was not working well, or in good working order. The evidence does demonstrate that it was fitted with incorrect parts, but this does not mean that it did not conform to the representation made by Mr Rattan. Cowley Aqua Heat Services describe it as being in reasonable condition. The deli cabinet is described by Cowley as being in good overall condition. It is not arguable that these items or, apart from two, that the other refrigeration units, were misrepresented.
[33] The upstairs chiller room was not working and I am satisfied there is an arguable case that this item was not in good working or operational order.
[34] The vegetable cabinet was assessed as being in poor condition by Cowley. It is arguable that the representation to Mr Roberts was wrong, and that given the disparity in values, he relied on this statement.
[35] The third area of claim relates to the same units, and a stereo system, all of which are said to have been sold in breach of the warranty in paragraph 6.3.
[36] So far as the walk-in chiller is concerned, again I am satisfied that this item was sold in breach of the warranty. It was not working at the date of sale or at the date of possession, so in my opinion it cannot be described as being in good operational order. The same applies to the vegetable cabinet.
[37] In relation to the balance of the refrigeration items, I am satisfied that they were in good operational order at the date of possession. I reiterate that the items
were fully inspected and were, at the time of the contract, known to be far from new. The applicant‟s valuer described them all as being in good order or condition, and Cowley Aqua Heat Services described them as being average, reasonable or normal, respectively. Asset Valuations Limited described them as being poor or average or fair. Its general highly critical paragraph quoted above is of little assistance. The items were known to be old, but they were still working. There can be no doubt that, had the items been newer and in better overall condition, the applicant would have paid more for them. In short, it paid an objectively assessed value for items which it inspected and which were (with one exception as noted) operating at the date of sale.
[38] The fact that one item, the deli display fridge, required repairs as it nearly caught fire some time after the contract was settled does not point directly to the item not being in working order at the time of sale. I note that Cowley Aqua Heat Services valued it at $10,500, the respondent‟s valuer, Williams Valuations Limited, valued it at $10,700, and the applicant‟s valuer, Roberts, valued it at $13,500. Asset Valuations Limited valued it at $5000, but that seems to be out of line with the other three independent assessments. The evidence does not satisfy me that the applicant has an arguable case for breach of warranty in relation to this item.
[39] The final item in this category is a sound system, valued by Roberts at $1070, but by Asset Valuations Limited at, so far as I can ascertain from the valuation, $130. It is described by the latter as being in fair condition; the former did not comment. There was no evidence that this unit was not in good operational condition at the date of the contract or the date of possession. The applicant does not have an arguable case for breach of warranty in relation to this item.
[40] The fourth element of the applicant‟s alleged claim relates to the IT system for the supermarket, which it maintains is obsolete and of little or no value. This was described by Mr Roberts in his valuation as being in good condition. I have referred to the Asset Valuations Limited report in [26] above. As noted in that paragraph, there was no evidence that the supermarket is aligned to either of the grocery supply organisations referred to by Asset Valuations Limited, so incompatibility with their systems is irrelevant. I find that the applicant does not have an arguable case for
breach of the warrant in relation to this item, and no other basis for a claim in relation to this item was put forward.
[41] The final category is described in [9]. Counsel for the respondent accepted that issues relating to the LPG reticulation system cannot be resolved, so to that extent the applicant has an arguable case. This item was valued by Roberts at $500.
[42] Mr MacDonald said that after settlement the applicant found that the three- phase outlets and fittings, and connections, for which they paid $4800, had not been supplied. Mr Rattan did not respond to this evidence. Accordingly I find that the applicant has an arguable case for damages against the respondent in relation to this item, on the basis that it purchased it and did not receive it.
[43] Finally, the applicant maintains it has a claim in relation to repairs to one refrigeration unit, which I have referred to earlier. The claim is $3500. No invoice was produced. Although there is evidence that some motors and fan blades on this unit were incorrect and were replaced with correct parts, there is insufficient detail on how the unit functioned for me to be satisfied that the applicant has an arguable claim in relation to this item. The costs of valuations and electrical repairs, also claimed under this general heading, are insufficiently substantiated. The valuation costs may relate in part to the limited areas in which the applicant has shown an arguable case, but I do not have any evidence before me upon which I can apportion this item. I do not accept that the applicant has an arguable case on valuation costs. So far as electrical repairs are concerned, there is no evidence beyond that to which I have referred to show that the electrical repairs can form the basis of a claim.
Outcome
[44] The applicant has succeeded in demonstrating that it has an arguable claim against the defendant in relation to the following items:
(i) lighting ($15,500)
(ii) refrigeration items ($19,950) (iii) LPG reticulation system ($500)
(iv) three-phase outlets, fittings and connectors ($4800)
[45] The figures given are those in the Roberts valuation. I accept that the agreed figure for plant was $200,000 for all items. The applicant may face a difficulty in establishing quantum; for the purposes of this application the figures given are the closest estimates of loss available on the evidence and there is an arguable case for losses up to that level.
[46] The figures total $40,750. However, the amount specified in the demand is
$100,000. The difference of $59,250 exceeds the prescribed amount, so the statutory basis for setting aside the notice is not met. The application is therefore declined. However, as there is an arguable claim by the respondent in relation to $40,750, compliance with the notice will be achieved by payment of the sum of $59,250 plus the costs of the notice. The time for compliance is set at 20 working days from the date of this judgment.
[47] Each party has succeeded in part. Costs are reserved. If not agreed, memoranda may be filed within 10 working days for reference to me.
Solicitors:
Taylor Shaw, Christchurch MDS Law, Christchurch (Counsel: D M Lester)
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