Wiig v Daken

[2016] NZHC 2044

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV-2014-409-000644 [2016] NZHC 2044

BETWEEN

MURRAY EDWIN NIGEL WIIG

Plaintiff

AND

BRIAN MURRAY DAKEN First Defendant

AND

EUROPEAN WOODWORKS LIMITED Second Defendant

Hearing:	22 August 2016
Appearances:	G A Hair for Plaintiff D M Lester for Defendants
Judgment:	31 August 2016

JUDGMENT OF DUNNINGHAM J ON RESERVED ISSUE

Introduction

[1]      On 12 April 2016 I issued a judgment on the first defendant’s cross claim against the plaintiff for losses arising out of, inter alia, alleged breaches of warranties given in an agreement for purchase of the plaintiff’s shares in a manufacturing business.

[2]      In  respect of one of the allegations,  I agreed  there was a breach  of  the relevant warranty, but could not determine whether any loss flowed from it, as the parties’ evidence on loss had not anticipated the factual findings in my judgment.  I therefore reserved leave to determine what loss, if any, flowed from the breach.  The

parties have taken up that opportunity which has led to the present hearing.

WIIG v DAKEN [2016] NZHC 2044 [31 August 2016]

The relevant warranty in the October agreement

[3]      The terms on which the shares were purchased were set out in an agreement for sale and purchase of shares which was executed on 20 October 2013 (the October agreement).  It provided a number of warranties including the following:

9.1      the Vendor warrants with the Purchaser that:

…

(c)       other than normal trade credit, or as previously disclosed by the Vendor  to  the  Purchaser,  there  are  no  amounts  owing  by  the Company to any other person or Company, and in particular, there are no amounts payable to the Vendor.

(d)       the Company does not have any liabilities, actual, prospective or contingent, at the settlement date, other than as liabilities fully disclosed to the purchaser.

[4]      Clause 9.2 of the October agreement further contained an agreement by the plaintiff to indemnify the first defendant, for any breach of, or inaccuracy in, the warranties contained in the agreement.

[5]      One of the pleaded heads of claim was that there had been a breach of the warranties at cls 9.1(c) and (d) of the agreement, with the first defendant’s pleadings claiming that:

28.      Post-settlement  the  first  defendant  discovered  that  the  amounts owing and invoices payable by the company had not been disclosed to the first defendant.

29.      There were unpaid and overdue accounts of over $260,000 including

GST at settlement and no overdraft facility or income to meet these debts.

[6]      In evidence, Mr Daken claimed that, as at settlement on 23 October 2013, there was a total of $75,928 in unpaid accounts from September 2013, or earlier.  He also claimed that the company’s current account stood at $173,000 overdrawn and there was GST owing of $14,776.  However, it was unclear what amounts comprised the total of $260,000 claimed in the pleadings.

[7]      I found that a number of invoices had not been paid within the terms of normal trade credit in breach of cl 9.1(c).   In particular, I found that there was

$38,880.08 in unpaid trade accounts which should have been paid no later than

20 October 2013 and before settlement.  There was, though, a lack of clarity over what invoices were unpaid relating to the shareholder dispute and whether those were company debts.

[8]      There was also a dispute over whether invoices to an overseas supplier, Holz Schiller, were within the normal trade credit exception in cl 9.1(c).  I concluded that the Holz Schiller invoices should be excluded from the total unpaid liabilities as they were invoices from a trade creditor which were not overdue for payment at the time of settlement.

[9]      However,  despite  my  finding  the  company  had  liabilities  at  the  time  of settlement which were either:

(a)       not disclosed; or

(b)      other than normal trade credit,

it was not apparent that a recoverable loss had been incurred.   This is because I found that Mr Daken was incorrect to assert Mr Wiig was bound by a representation that the overdraft would be no more than $115,000 at the time of settlement of the share purchase.  Instead, I found that Mr Daken had advised the overdraft had been increased to $240,000 prior to settlement, and the original cap of $115,000 placed on the overdraft was removed before the October agreement was signed.  Furthermore, Mr Daken acknowledged he did not know what the overdraft stood at, at the time of settlement.   For this reason I held that a disclosed debt of the company was the overdraft of up to $240,000.

[10]     When considering whether there was a recoverable loss at the time of the settlement, I considered it likely that, had the outstanding accounts and other liabilities been paid, the company overdraft would still have been within its overdraft limit as disclosed by Mr Wiig to Mr Daken shortly before settlement.  If that was the case, there was no recoverable loss in terms of the warranty.

[11]     However,  because  neither  party  had  addressed  their  evidence  to  that possibility,  it  was  unclear  to  me  whether  my  calculation  that  the  undisclosed company liabilities,  other  than  normal  trade  credit,  would  exceed  the  disclosed overdraft limit, was correct.

[12]     In  accordance  with  the  leave  reserved,  I  held  a  further  hearing  on

22 August 2013 at which these issues were addressed.   In dealing with procedural issues prior to the hearing, I made it clear that the defendant’s claims could only relate  to  debts  which  were  in  breach  of  cl 9.1(c)  and  (d)  and  which  could  be identified from the evidence before the Court. The hearing proceeded on that basis.

Preliminary  issue  –  was  the defendant’s  document,  described  as  the “Aged

Payables” schedule, in evidence before the Court?

[13]     To support his claim that there was a total of $75,928.94 in overdue trade accounts, the first defendant relies on a schedule he prepared, which was included in the common bundle, and which was headed “Aged Payables European Woodworks Limited September 2013” (the Aged Payables schedule).  It listed accounts payable to 25 October 2013 and showed a balance of $75,928.94 as its estimate of the total unpaid invoices from trade creditors to September.

[14]     The plaintiff queried whether this evidence could be relied on because the Aged Payables schedule was not expressly referred to in Mr Daken’s brief of evidence, nor was it referred to by Mr Franks as evidence in Mr Daken’s claim under cl  9.1(c).   As  a  consequence,  Mr  Daken  was  not  cross-examined  on  the Aged Payables schedule.

[15]     However, as Mr Lester pointed out, as a consequence of incorporating this document in the common bundle, r 9.5 provides that such documents, unless the Court otherwise directs, are considered –1

(a)       to be admissible; and

(b)      to be accurately described in the common bundle index; and

1      High Court Rules, r 9.5(1).

(c)      to be what it appears to be; and

(d)      to have been signed by any apparent signatory;

(e)       to have been sent by any apparent author and to have been received by any apparent addressee; and

(f)       to have been produced by the party indicated in the common bundle index.

[16]     Rule 9.5(4) then provides that:

A document in the common bundle is automatically received into evidence (subject to the resolution of any objection to admissibility) when a witness refers to it in evidence or when counsel refers to it in submissions (made otherwise than in a closing address).

As Mr Daken confirmed in oral evidence that the Aged Payables schedule was a document that he prepared, it is a document received in evidence.

[17]     I accept that for that reason, the Aged Payables schedule can be used to support submissions to resolve the quantification of loss.  To the extent that it is a compilation of invoices which are included in the common bundle, it is also demonstrably accurate.  However, where the detail of it was not supported by other primary evidence such as copies of the relevant invoices, and was not the subject of cross-examination, the weight I give it will be reduced accordingly.

Unpaid invoices

[18]     The starting point for Mr Daken’s claim for loss arising from breach of cl 9, is the sum of $75,928.94 in overdue accounts, as set out in the Aged Payables schedule.    As  Mr  Lester  explains,  this  includes  the  invoices,  which  totalled

$38,800.08 referenced in my 12 April 2016 judgment.

[19]     It was acknowledged at the hearing that a sum of $4,472.83 is included in that total, but is not explained in evidence nor is it referenced to any invoice.  In the circumstances, there is no evidence to support it being a liability of the company

which breaches the warranty and should be excluded from the calculation of that sum.

[20]     The invoices listed in this schedule as due for payment prior to settlement, but which were not included in my total of $38,880, are as follows:

Ammon GmbH and Co	$4,414.97
Grant Thornton	$3,450.00
Antony Hamel Lawyer	$4,945.00
Business Team	$3,238.92
Kyne Management Services	$17,073.59
Malley & Co. Lawyers	$4,867.50
Total	$37,989.98

[21]     While the Ammon GmbH and Co invoices are not separately provided in the common bundle, these invoices were referred to in evidence because it was alleged by Mr Daken that Mr Wiig provided $20,000 to the company after settlement in order to pay these outstanding invoices.2    I am also satisfied that I can rely on the Aged Payables schedule listing of these.   I accept therefore that those two further unpaid invoices dated September 2015 totalling $4,414.97, should be taken into account in the calculations.

[22]     The remaining five invoices are all invoices which relate to the shareholder dispute with the former shareholders Ms Habermann and Mr Rampe.

[23]     As two of these were paid directly by Mr Wiig, being the Kyne Management Service invoice totalling $17,074 and the Malley & Co invoice totalling $4,867, that leaves  only the Antony Hamel,  Business Team  and  Grant Thornton  invoices  to

consider.  I accept they were overdue for payment at the time of settlement.

2      Although I found the $20,000 was advanced to the company by Mr Wiig, not paid to it to satisfy pre-existing debts, and was therefore repayable.

[24]     However, a question arose as to whether they were all properly treated as invoices of the company.  The first defendant says that shareholder disputes should not have been company debts, but met instead by the relevant shareholders.   The Antony Hamel invoices were addressed to “Chris and Sandra, C/- European Woodworks Limited”, while the Business Team and Grant Thornton invoices were simply addressed to European Woodworks.  All of these invoices were received and treated as obligations of the company and, of course, were paid by the company after settlement.   In the absence of evidence to displace that treatment, I consider these invoices should also be treated as debts of the company which were not disclosed and which were overdue at the time of the settlement. That takes the total of overdue invoices discernible from the evidence, including the Aged Payables schedule, to

$54,928.97.

[25]     In addition, to the invoices discussed above, Mr Daken now says he has correctly aged other unpaid accounts and considers the following should have been

paid at settlement because they were September invoices:

Envirowaste	$20.41
ICE	$431.25
Mitre 10	$187.48
New Zealand Couriers	$259.59
Ammon GMBH and Co invoice	$17,583.81
Glastrosch GMBH	$3,045.71, but net $2,077.47

[26]     In respect of these accounts, the Court does not have a copy of the actual invoice.   The only evidence available to the Court at the time of hearing was the Aged Payables schedule and, in respect of all of them, except the Glastrosch invoice, the dates entered suggest that the relevant account was not overdue at the time of settlement.

[27]     In these circumstances, I only accept the balance of the Glastrosch invoice referred to on the Aged Payables schedule, in the net amount of $2,077.47, was

overdue for payment at settlement.  However, I do not accept that the balance of the other invoices, for which there is no evidence before the Court to support counsel’s assertion that they were incorrectly dated when  entered into the Aged  Payables schedule, were overdue at settlement.

[28]     Thus I find that the total of overdue trade invoices at settlement in breach of cl 9.1(c) was $57,006.44.

GST owing

[29]     Mr Daken gave evidence that $14,776.29 was owing in GST and he was not challenged on this assertion in cross-examination.   The real issue is whether the unpaid GST was a disclosed liability.  Mr Wiig says that Mr Daken had access to all the company’s accounting systems prior to settlement, and his understanding of what Mr Daken would have known is set out at paragraph 75 of Mr Wiig’s evidence. However, in cross-examination Mr Daken says he did not have the extensive access to company information that Mr Wiig claimed, and that Mr Wiig still controlled it. He also said, and I accepted, that he did not know what the overdraft level was, or what the debtors were at the time he purchased the shares.  I am satisfied therefore that he did not know what the company owed in GST and that this amount is a liability of the company which does not fall within either of the exceptions provided at cl 9.1(c) or (d).   I am therefore satisfied that this, too, was a liability of the company and a breach of the warranties at 9.1(c) and (d).

ACC

[30]     The defendant claims that at the time of settlement of the share purchase, there  were  unpaid ACC  levies  of  $8,230.02.    There  was  no  claim  for  this  in Mr Daken’s evidence or any document which expressly showed this as a liability at settlement.    However, counsel for Mr Daken explains that there is an acknowledgment in the company’s profit and loss statement for the six months to

30 September 2013, of an ACC liability of $9,571.  Of this, only $1,431.41 had been paid, leaving ACC outstanding as at 30 September 2013 of $8,139.59.

[31]     However, in my view, the documents relied on to support these assertions do not unequivocally demonstrate this.  The company’s profit and loss statement of the six months to September 2013, does not suggest that $9,571 in ACC remains unpaid. Rather, that is the total cost of ACC to that point.  Thus, the subsequent reference to

$1,431.41 being paid for ACC cannot simply be subtracted from the first figure to give the amount owing.   Furthermore, Mr Daken has not raised a claim that there was an undisclosed liability to ACC which forms part of his 9.1(c) claim at any prior point in the proceedings, and there was no opportunity to cross-examine him on this. This aspect of the claimed loss is therefore disallowed.

Further claim

[32]     Finally,  Mr  Daken  raises  a  further  claim  in  relation  to  a  breach  of  the warranty that there were no amounts payable to the vendor.  Mr Daken asserts that the sums of $2,564.22 for the period 23 October to 30 November 2013 and wages claimed  and  paid  to  Mr Wiig on  30  October  2014  of $1,057.69  were amounts payable to the vendor in breach of warranty 9.1(c).

[33]     Again, as such a claim was never articulated in the pleadings, nor explored in evidence or cross-examination, I am not prepared to give judgment on such a claim now.

Conclusion

[34]     Accordingly, the sums I am satisfied which were unpaid, in breach of the warranties at 9.1(c) and (d) were:

(a)       the sum of $57,000.11 in overdue accounts (including a net amount of

$2,077.47 owed to Glastrosch GmbH) as set out in the Aged Payables schedule; and

(b)      with the amount of $14,776.29 owing in GST.

[35]     Had  these  items  been  paid  at  settlement  as  warranted  by  the  October agreement, then the total overdraft would have stood at $244,782.29.  That exceeds the disclosed overdraft liability of $240,000.

[36]     As a consequence, I conclude that there is a loss arising from the breach of warranty, totalling $4,782.29, and give judgment in the first defendant’s favour accordingly.

Costs

[37]     In my earlier judgment I deferred costs to be dealt with at the conclusion of the leave reserved issue.

[38]     If costs can not be agreed, costs submissions by the party or parties seeking costs can be filed within 20 working days of the date of this decision with any submissions in response by 25 working days after the date of this decision.

[39]     Costs will be determined on the papers.

Solicitors:

Malley & Co, Christchurch

Cameron & Co, Christchurchp

Dunningham J