Madsen-Ries v Fonterra Brands (New Zealand) Limited [2016] NZHC 1305 (17 June 2016)

Last Updated: 23 May 2018

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2015-404-003018 [2016] NZHC 1305

BETWEEN	V J MADSEN-RIES & H D LEVIN AS LIQUIDATORS OF GENERATION FOODS LIMITED (IN LIQUIDATION) Applicants
AND	FONTERRA BRANDS (NEW ZEALAND) LIMITED Respondent

Hearing:	8 June 2016
Appearances:	N H Malarao for the Applicants M D Branch for the Respondent
Judgment:	17 June 2016

_{JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSEN}

This judgment was delivered by me on

17.06.16 at 4:30pm, pursuant to

Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

_{Date...............}

V J MADSEN-RIES & H D LEVIN AS LIQUIDATORS OF GENERATION FOODS LIMITED (IN LIQUIDATION) v FONTERRA BRANDS (NEW ZEALAND) LIMITED [2016] NZHC 1305 [17 June 2016]

Background

[1] On 20 September 2013 the applicants were appointed liquidators of Generation Foods Limited (the Company) by order of the High Court at Auckland. The appointment of the liquidators occurred when the Company was put into liquidation upon the application of the Inland Revenue Department filed on 20 May 2013.

[2] The Company purchased milk products from the respondent (Fonterra) for supply to tuck shops and traded at numerous Auckland schools. Fonterra supplied milk products to the Company from 12 March 2012 and between March and October

2012 the Company accumulated a debt to Fonterra.

[3] On 11 October 2012 the Company’s account with Fonterra was placed on stop credit at which time a balance of $30,526.78 was owed to Fonterra. Also on 11

October 2012 the Company’s account was referred to Fonterra’s debt collection agent, Debt Force.

[4] Between 11 October 2012 and 20 September 2013 the Company repaid most of the debt to Fonterra. Payments to Fonterra between 11 October 2012 and 20

September 2013 (transactions) totalled $29,650.86. The liquidators say these transactions were consistent with the repayment of a debt under a repayment arrangement.

[5] The liquidators say:

(a) At the time of the transactions the Company was unable to pay its due debts and therefore those transactions enabled Fonterra to receive more towards satisfaction of a debt than it would otherwise have received or be likely to have received in the liquidation of the Company.

(b) Claims by creditors in the liquidation of the Company total $542,486 and that assets in the liquidation of the Company have been insufficient to cover the costs of liquidation and no distribution has made to the Company’s creditors.

(c) Fonterra was not entitled to repayment of its debt in priority to other creditors and there is no evidence of any security held by Fonterra that could be realised.

[6] The transactions occurred within the two year “specified period” as defined in s 292(5)(b) of the Companies Act 1993 (the Act).

[7] On 26 March 2015 the liquidators served a notice to set aside insolvent transactions. On 22 April 2015 Fonterra delivered a notice of objection to the liquidators notice. On 10 December 2015 the liquidators filed this application to set aside those transactions they claim are insolvent transactions. By that application issued pursuant to s 292 of the Act they sought recovery from Fonterra of those payments made by the Company between 11 October 2011 and 20 September 2013 totalling $29,650.86.

[8] Section 292 provides a company’s payments are voidable if made at a time when a company is unable to pay its due debts and enables another to receive more towards satisfaction of a debt owed than would have been received in the company’s liquidation. Section 294 of the Act provides that those payments be treated as transactions and are recoverable if paid within two years of the date of the company’s liquidation.

[9] Section 292(4)(B) provides an exception if the transaction was, for commercial purposes, an integral part of a continuing business relationship e.g. a running account between a company and a creditor of the company and where during the course of that relationship the level of the company’s indebtedness is increased and reduced from time to time.

[10] By its notice of opposition Fonterra claims that when it supplied those products and when it received payments for those, a reasonable person in Fonterra’s position would not have suspected and Fonterra did not have reasonable grounds for suspecting, that the Company was or would become insolvent.

[11] Section 296(3) provides a Court must not order the recovery of payments if the person from whom recovery is sought proves that when the payments were received he acted in good faith and a reasonable person in his position would not have suspected nor have reasonable grounds for suspecting the payments came from a company that was or would become insolvent, and he must have given value for the payments received or altered his position in the belief those payments were valid and would not be set aside.

[12] What is clear in this case is that no defence is raised on the basis of there being a continuing business relationship in the course of which net indebtedness would have increased and reduced from time to time. What is apparent is that during that period from March to October 2012 when Fonterra supplied its product to the Company, no payments for that product had been made. It was only after Fonterra placed the Company’s account on stop credit on 11 October 2012 that payments were made and those continued until 20 September 2013.

Application for particular discovery

[13] What is unusual in this particular case is the liquidators’ application for particular discovery. Indeed it appears this application may be the first of its kind filed in connection with a liquidator’s application to set aside transactions.

[14] Upon this application questions arise about whether there is any proper basis for it to be considered. Setting aside applications are required to be dealt with in accordance with Part 19 of the High Court Rules as indeed are applications to set aside a statutory demand.

[15] The application for particular discovery requests Court orders directing Fonterra to file an affidavit stating whether groups of documents were generated by or came into the possession of Fonterra in the period from 10 May 2011 to 20 September

2013, including:

(a) Copies of monthly statements issued by the respondent to the Company, showing new invoices paid, invoices paid and the balance outstanding each month;

(b) Any supply contract between the Company and the respondent;

(c) Correspondence (including emails and attachments) and documents received from or sent to the Company or its shareholder owner Sharon Main (Ms Main);

(d) Correspondence (including emails and attachments) and documents received from or sent to Debt Force [an agent instructed to recover outstanding debts] relating to the Company or to Ms Main; and

(e) Internal correspondence (including file reviews, default reports, emails and file notes) regarding the Company or to Ms Main.

[16] The liquidators say the documents would show whether Fonterra had reasonable grounds for suspecting that the Company was or would become insolvent and would therefore assist the Court in determining the liquidator’s setting aside application. The liquidators say Fonterra’s knowledge of the Company’s insolvency is not adequately addressed by Fonterra in its affidavit filed in opposition to the setting aside application.

[17] The liquidators say Fonterra’s knowledge of the Company’s insolvency was put in issue by the affidavit of Mr Levin in support of the setting aside applications and has also been put in issue by the affidavit of Ms Wilson, then credit manager of Fonterra, sworn on 11 June 2015 and provided to the liquidators in response to their request for further information before the setting aside applications were filed [Ms Wilson’s first affidavit].

[18] It is clear that the onus of proof for a s 296(3) defence is on Fonterra. The liquidators say the extent of Fonterra’s knowledge is fundamental to their ability to

challenge the s 296(3) defence; and therefore discovery of the documents would or might well assist the Court in determining the proceedings.

[19] The liquidators say the order sought for tailored discovery is of a specific nature and is proportional in the context of the proceedings; that the documents are reasonably believed to exist and are or have been in Fonterra’s possession or control and that it is reasonable to expect it would have maintained accounting records for the payments and records of its trading relationship with the Company.

Fonterra’s opposition

[20] By its notice of opposition Fonterra pleads:

(a) Discovery is not available as of right in an originating application;

(b) The case is not within the narrow band of marginal cases where the Court has genuine difficulty in determining whether a party has made out its case and where there is good reason to believe that discovery might well assist in that determination;

(c) Part 19 of the High Court Rules is directed at providing a speedy and inexpensive mechanism for determination which will not be achieved if the proceeding is delayed while a discovery process is undertaken;

(d) The liquidators have not proved that discovery is necessary for them to advance their case; and

(e) The request amounts to a fishing expedition.

[21] By her affidavit in opposition Ms Peacocke, senior corporate counsel for

Fonterra, deposes she has:

(a) Undertaken a search for all internal Fonterra emails relating to the

Company;

(b) Arranged for Fonterra’s Hamilton accounts team to search their records relating to the Company;

(c) Contacted Credit Works (who purchased Debt Force); and

(d) Has spoken to Fonterra’s customer services team and asked them to search their records.

[22] Ms Peacocke deposes Fonterra’s enquiries have revealed:

(a) Fonterra does not have any further internal emails to discover relating to the Company;

(b) The Hamilton accounts team could not locate any additional documents to discover to the liquidators;

(c) Credit Works did not have any additional emails over and above that which Fonterra had already supplied; and

(d) Its customer services team did not locate any further records including any relevant emails relating to the Company.

[23] Ms Peacocke states that Fonterra did not have a contract in place with the Company for the supply of products; that the Company “just ordered products from Fonterra Brands and paid for them via our invoicing process”.

[24] By a second and updating affidavit dated 1 June 2016 (Ms Peacocke’s second affidavit) Ms Peacocke deposes she had recently been made aware of some emails that may have already been archived by the Fonterra system (either because the people involved had left Fonterra or due to the age of the emails).

[25] Ms Peacocke says the only way to retrieve these would be for Fonterra’s IT provider to conduct a retrieval of the relevant mail boxes – which would take a week or so to do. Ms Peacocke states there is a small possibility that some additional emails relating to this matter could be retrieved by this process.

The liquidators’ case

[26] By his affidavit in support of the liquidators’ further discovery application Mr Levin deposed that as part of the liquidators’ investigations they reviewed the Company’s relevant records but were unable to find any Fonterra invoices or statements; and therefore their investigation and analysis was based on payments identified by the Company’s bank statements. Those show that during the period 11

October 2012 to 20 September 2013 the Company made payments to Fonterra of

$29,650.86. He noted that those transactions payments were made with the description “DebtForce” or Debt Force” whereas payments before 11 October 2012 were made with the description “Fonterra Brands” or “Fonterra”, and were not made in respect to individual invoices.

[27] It is Mr Levin’s view that the transactions were made after the Company became insolvent and was unable to pay its debts.

[28] Having received Ms Wilson’s first affidavit the liquidators requested Fonterra to provide a transaction history showing all invoices raised by Fonterra and payments made by the Company during the specified period. Mr Levin says Fonterra’s solicitors responded stating they saw no reason to supply the information requested and declined the request; that further correspondence between the parties ensued and on 5

November 2015 the liquidator’s solicitors wrote to Fonterra’s solicitors reiterating that a full transaction history was necessary to allow the liquidators to consider whether there was a continuing business relationship in the nature of a running account. Fonterra’s solicitors responded and indicated the documents requested would not be provided because in their view Ms Wilson’s first affidavit contained sufficient information to comply with any obligations for pre commencement discovery.

[29] Mr Levin responds that Ms Wilson’s first affidavit did exhibit a number of statements of accounts but that:

(a) The copy quality makes those difficult to read;

(b) They appeared to record invoices or part-invoices outstanding after the allocation of receipts from the Company; and

(c) He cannot determine whether they are a complete list of all the invoices and receipts during the period.

[30] Mr Levin deposes that as a consequence the liquidators have been unable to use Ms Wilson’s first affidavit to undertake a running account analysis. Therefore he says no transaction history has been provided to date.

[31] Mr Levin’s affidavit provides details of the Company’s debt to Inland Revenue, which debt resulted in the Company being placed into liquidation. Mr Levin deposes that on 15 October 2013 he met with Ms Main, the Company’s principal. He said she advised him that the Company had a payment arrangement with Inland Revenue. As a result the liquidators reviewed the Company’s bank statements and found a number of payments were narrated as being to Inland Revenue for arrears and that these occurred between 29 August 2011 until 13 December 2012 (with one further payment made on 14 June 2013).

[32] Mr Levin deposes that the Company’s bank statements record that the Company was operating outside of its banking facility with dishonor fees and dishonored payments occurring from, at the latest, April 2011.

[33] Mr Levin states the Company’s financial records were reporting significant working capital and net asset deficits in the period from 31 March 2011 to 31 March

2012. As a result he says the Company was unable to pay its due debts and had greater liabilities than assets from, at the latest, 31 March 2011. Mr Levin’s assessment is that the Company was insolvent for the entire specified period.

[34] Regarding Fonterra’s claims that it had no grounds for suspicion that the Company was insolvent “at the time of the supplies or, alternatively, the time the payment was received”, Mr Levin responds that based on the documents and information provided to the liquidators, he notes:

(a) On 12 March 2012 the Company placed its first order with Fonterra;

(b) By 29 June 2012 $29,587 was overdue and another $5,269 was owed but was not due for payment. According to the ledger annexed to Ms Wilson’s first affidavit the Company had not paid any of the invoices dating back to 12 March 2012;

(c) On 29 June 2012 the Company was advised by email that payment was required or the account would be placed in stop credit;

(d) By 31 July 2012, no payments had been made by the Company and

$34,855 was overdue, with further supplies of $1,862.32 not yet due;

(e) Between 3 and 17 September 2012 a number of internal Fonterra emails expressed scepticism at Ms Main’s excuses for failing to pay despite numerous requests for payment. It appears from these emails that Fonterra viewed these excuses as a tactic by Ms Main to delay payment;

(f) By 17 September 2012 $28,944 was overdue with a further $8,644 due;

(g) On 17 September 2012 Fonterra advised Ms Main that:

(i) the Company’s accounts would be placed on stop credit on 24

September if the amount owing was not paid;

(ii) following that, if the amount owing had not been cleared in seven days, then all monies owing would be put through to a debt collection agency; and

(iii) if there was a problem with credits, $300 could be deducted from the payment.

(h) In response to Fonterra’s email Ms Main offered to pay $10,000 to avoid going to debt collection, however Ms Wilson’s reply that $27,082 was required and noted that “we are not a bank”.

[35] It is Mr Levin’s assessment for all these reasons that the Company was unable to pay its debts from at latest 31 March 2011 and from this date it was reporting significant working capital and net asset deficits and was unable to meet its obligations to Inland Revenue.

[36] Mr Levin states that based on the information provided to the liquidators including the annexure to Ms Wilson’s first affidavit, Fonterra was aware of the Company’s financial difficulties.

Counsels submissions

[37] Mr Malarao for the liquidators submits Fonterra is playing its cards close to its chest, but those cards are slowly unravelling as further discovery continues to be provided as he says Ms Peacocke’s second affidavit confirms. By Fonterra’s solicitors email dated 22 April 2015 copies of correspondence between the parties post 28

September 2012 were provided. Then by email dated 28 September 2012 Ms Main provided copies of invoices to Fonterra wherein she highlighted claims of credits due.

[38] By Ms Wilson’s first affidavit she stated that putting an account on hold as in this case, was Fonterra’s normal response to trading outside of its normal terms. Mr Malarao submits there is reference therefore to there being terms and the liquidators want to know what those are. The liquidators refer to an email dated 29 June 2012 from Fonterra to Ms Main noting that she was “trading outside our terms” then there is the email from Fonterra to Ms Main dated 31 July 2012 noting “the account will be put on stop credit and sent to the debt collection agency...

[39] An internal Fonterra email dated 17 September 2012 noted “every time I contact the smokescreen is put up she is sick or a friend died or we need credits”. An email from Fonterra to Ms Main dated 17 September 2012 noted that the monies owing on the ledger would be “put through to debt collection agency”. A further Fonterra email to Ms Wilson dated 21 September 2012 noted “if this is not paid then it will be passed to the collectors and further costs will be incurred by the customer for collection of the debt and the account will go on hold”.

[40] It is Mr Levin’s view that any arrangement by which the debt was to go to a debt collector and for which the Company would be liable for collection costs, suggests that there is more about the party’s trading arrangement than has been already disclosed.

[41] Mr Malarao submits an inference of the existence of further discoverable documents can be obtained from Fonterra’s notice of opposition to the application for particular discovery for in that document Fonterra asserts:

...

(d) The applicants have not proved that discovery is necessary for them to advance their case. The documents sought relate to Fonterra’s case pursuant to s 296(3) of the Companies Act 1993.

(e) The respondent has discovered the documents it relies on to advance its defence. If there is any doubt as to the sufficiency of the documentation then the applicants have the opportunity to challenge any alleged material non disclosure during cross-examination.

[42] While it is Fonterra’s case it has provided discovery of all of those documents it would be required to the liquidators do not accept that has occurred. Counsel refers to the initial affidavit of Ms Peacocke wherein she deposed Fonterra did not have a contract in place with the Company for the supply of products; that the Company just ordered products and paid for them via their invoicing process and that to the best of her knowledge all relevant information that Fonterra held in relation to the Company has already been provided to the liquidators or disclosed as part of Fonterra’s setting aside application.

[43] Mr Malarao submits Ms Peacocke’s evidence is not sufficient to convince the liquidators that the discovery application is unnecessary. In essence they believe other documents do exist. They say emails are exhibited which are not a full record of correspondence; that emails have been rearranged and copied and pasted so that they appear in a sequential order, and that selected emails have been provided rather than the full chain of correspondence.

[44] Regarding Fonterra’s suggestion that if there was any doubt as to the sufficiency of documentation the liquidators would have an opportunity to challenge

any alleged material and nondisclosure during cross-examination counsel does not consider this is an adequate solution given that some authors of emails in question will not be available for cross-examination on the contents of their emails.

[45] Mr Malarao rejects suggestions that the discovery application is a fishing expedition. He says as liquidators they have no special knowledge of the affairs of the Company prior to their appointment and have to rely on documents provided by the relevant parties.

[46] Regarding Ms Peacocke’s updating affidavit providing evidence of the discovery of records located since Ms Peacocke’s earlier affidavit was filed; the Court is invited to consider that previous indications of complete discovery are unreliable.

[47] In this case the liquidators also seek discovery also from Debt Force because they say Debt Force was Fonterra’s agent and its knowledge of the Company’s circumstances are properly attributable to Fonterra. Otherwise, a creditor could escape liability under the relevant statutory provisions by undertaking a practice of referring all debts to debt collection agencies at the outset. Such a practice Mr Malarao submits would defeat the purpose of the voidable transaction regime and would allow the principal to put himself in a better position than he would have otherwise been if he had personal debt with the debtor.

[48] It is the liquidators case that discovery is necessary given the fact that a referral to a debt collection agency might be construed as evidence of knowledge of insolvency and therefore that the Court is likely to find it helpful to know the circumstances surrounding the referral of a debt to a debt collection agency or of any correspondence with the debt collection agency regarding that debt.

[49] Mr Malarao submits that correspondence between Ms Main and Debt Force relating to the debt is also highly relevant. He says that despite requests no such correspondence has been provided.

[50] Mr Malarao submits the Court has jurisdiction to order discovery on an originating application. In the Grange Limited v City Sales Limited¹ the Court considered there was jurisdiction to do so in the context of an application to set aside a statutory demand. In that case the Court considered discovery of the documents sought would confirm the applicant’s case, give lie to that case, or help neither one way nor the other.

[51] Mr Malarao also refers to the High Court’s decision in Shuttle Petroleum Distribution Limited v Caltex New Zealand Limited² wherein the Court examined the general statement of principle which applies in such an application. In that case the Court held:

[13] ...[t]he applications will be confined to those relatively narrow band of marginal cases where an outlined defence including a defence of set-off or a counterclaim is made out but the Court encounters genuine difficulty in determining whether or not the defence to the claim or the counterclaim does exist. If the Court has reason to believe that discovery in the proceeding will or may assist that determination it may be appropriate to order discovery.

[52] That case was also about an application to set aside a statutory demand. In that case the Court found there was a lack of information and difficulty in determining whether the counterclaim was of substance. The Judge found the information that would provide the claim was expected to be obtained from the discovery sought.

[53] Mr Malarao refers the Court to the decision of Duffy J in Katavich³ wherein consideration was given to principles relevant to discovery in originating applications. In that case Her Honour said:

[15] ...The general expectation was that with an originating summons, the proceeding would be determined on the basis of affidavit evidence. However, it needs to be recognised that the procedure is used to bring a wide variety of claims before the Court. Hence, factors that militate against discovery in applications to set aside statutory demand may have less strength in other types of claims which use this procedure. Nonetheless, an examination of the relevant case law reveals there is a reluctance to order discovery, except in a narrow band of marginal cases where the Court has genuine difficulty in determining whether a party has made out its case, and where there is substantial reason to believe that discovery would or might well assist in that

¹ (1999) 14 PRNZ 222 at 225.

² (2002) 16 PRNZ 126.

³ Katavich v Meltzer HC Auckland CIV 2006-404-5968 29 May 2009.

determination: see Shuttle Petroleum Distribution Ltd v Caltex New Zealand

Ltd (2002) 16 PRNZ 126.

[54] Mr Malarao notes the approach in Katavich was cited with approval by Associate Judge Osborne in Walker v Gibbston Water Services Limited⁴. In her review of that decision⁵ Dunningham J confirmed the approach in Katavich and noted further:

[25] However, the decision [to grant discovery] must be guided by whether it will “achieve justice in the particular circumstances”, and relevant factors to be considered will include whether the applicant will suffer irreparable injury if leave is not granted, whether there is prejudice to the opposing party, and whether there is a reasonable explanation for the delay in seeking discovery.

[55] Mr Malarao states the High Court has recently accepted that in the context of voidable transaction cases there may be a wider need for discovery than indicated in Katavich.

[56] He refers to the decision of Associate Judge Bell in McCullagh v Robt. Jones

Holdings Ltd⁶. In that case His Honour noted:

Liquidators have no special knowledge of the affairs of a Company they are appointed to be liquidators of; must less knowledge of what suppliers to the Company suspect (or ought to suspect based upon information they have) about the (subsequently liquidated) Company’s solvency. Fairness requires a respondent seeking to keep the benefit impugned transactions to discover all documents (whether supportive or adverse) that are relevant to their s 296(3) defence.

[57] In this case Mr Malarao submits the approach of Associate Judge Bell should apply equally to liquidators who are confronted with a defence based on s 296(3).

[58] Mr Malarao submits that discovery will assist the Court in determining the proceeding and it is in the interests of justice that the application be granted; that the matter of Fonterra’s knowledge has been put in issue by Fonterra itself; and, that it is not enough for Fonterra to say “it has discovered that the documents it relies on to

_{advance its defence” or “if there is any doubt as to the sufficiency of documentation}

⁴ [2014] NZHC 330.

⁵ Walker v Gibbston Water Services Limited [2014] NZHC 484.

⁶ [2015] NZHC 1462; (2015) 22 PRNZ 615.

then the liquidators have the opportunity to challenge any alleged material non- disclosure during cross-examination”.

[59] Mr Malarao submits the onus rests on the respondent in relation to s 296(3), and basic fairness requires it to disclose all relevant documents and not just those that it relies on for its defence.

[60] Fundamental to the liquidators’ claims in this regard is their belief that on the face of the documents already provided it appears that there are more documents in existence which have not been provided.

Considerations

[61] Regarding the submission of counsel Mr Branch for Fonterra that the liquidators have approached their application for particular discovery in an incorrect way because they have treated it as an ordinary application for particular discovery without giving sufficient weight to the fact that discovery in an originating proceeding will rarely be available; and because there has never been a case where discovery has been ordered in favour of a liquidator against a creditor, Mr Malarao in response submits the judgment of Associate Judge Bell in McCullagh indicates a change of approach. That case was also about claims of insolvent transactions. In that case however the particular discovery application was brought by the creditor seeking further discovery from the liquidators having challenged the liquidators claims that sufficient discovery had been provided.

[62] Those applications failed. In McCullagh, Judge Bell stated:

[6] In originating applications, the parties seeking discovery must show that discovery is necessary. The objective of securing the just, speedy and inexpensive determination of the proceeding will guide the discretion. Not only relevance, but also proportionality will come into consideration. This approach will also come into play when further discovery orders are sought – for variations under r 8.17 and for particular discovery under r 8.19.

[7] On applications under r 8.19, the starting position is a presumption that the affidavits of documents already filed are conclusive. The parties seeking further discovery has to establish that the existing affidavit of documents is incomplete.

[63] In our present case there is no dispute that the transactions in question are insolvent transactions. Fonterra is presumed to have been aware of the Company’s insolvency and bears the responsibility of proving it was not aware or could not have been reasonably been aware of that insolvency.

[64] In our case the liquidators assert justification for further discovery claiming they only want that which they believe exists in order to understand the nature of the arrangement between the parties.

[65] While access to the discovery process is not prohibited the Court has been careful to limit its availability in an originating application. Routinely in these cases neither a liquidator nor a creditor has to give discovery. The prime purpose of the originating proceeding process is a focus upon efficiency and cost effectiveness.

[66] As the relevant insolvent transaction provisions provide, a presumption of insolvency is created if the transactions occur within a certain period prior to liquidation. Until the decision of the Supreme Court in Allied Concrete Ltd v Meltzer⁷ creditors assumed a significant responsibility to prove claims of a defence.

[67] The fact remains that insolvent transaction proceedings are not ordinary proceedings. The effective reasons for these being originating applications must continue to apply. It follows that access to orders for discovery should occur in the rarest of cases.

[68] This Court does not consider the present application fits into that category.

[69] An almost forensic approach has been adopted on behalf of the liquidators in support of arguments that there must be more even though Fonterra’s evidence is that it has discovered all it has available.

[70] The liquidators refer to an email from Fonterra to Ms Main dated 31 July 2012 stating that because of a lack of response to calls or emails “the account will be put on

⁷ [2015] NZSC 7.

stop credit and sent to the debt collection agency which you will incur the costs until all monies are paid up”.

[71] Implications of terms of trade and apparent obligations to pay collection costs and agency are, the liquidators say, to be inferred. However it was not until submissions were filed that claims of a trading arrangement beyond that indicated by the aforesaid email, have been suggested. Also, it is not clear for what purpose further discovery is required – even if the Court was to infer that there was other evidence available to assist the liquidators – which the Court does not.

[72] It is not clear for what purpose monthly statements could assist the Court. The dates of payments made have not been in doubt. Clearly what is sought by the liquidators is evidence of a trading relationship. However, matters in issue between the parties upon the setting aside applications have nothing to do with claims of a continuing trading relationship.

[73] Regardless Ms Peacocke deposed by her initial affidavit Fonterra does not have any further internal emails relating to the Company to discover; that Fonterra’s accounts team accessed an old system to check if there were any additional documents were stored but none could be located for discovery to the liquidators. She deposed that [Debt Force] also provided two confirmations of payment from Westpac but apart from which Ms Peacocke says she has not received anything else from [Debt Force] over and above that already provided.

[74] Ms Peacocke’s second affidavit referred to old records having been found but mentioned a time and cost involved in accessing those. The fact of that second affidavit having been provided belies suggestions of concealment.

[75] Of course, time and cost is a relevant element if requests for further particulars are to be considered.

[76] Some challenge was made regarding the fact that Ms Peacocke may have breached a provision of the Lawyers and Conveyancers Act Rules 2008 when she witnessed Ms Wilson’s first affidavit – because they were both Fonterra employees.

However, she is not acting as a solicitor in this proceeding. Ms Peacocke’s affidavits ought to be treated as providing an affidavit of documents. The Court considers there is no reason to go behind what is contained in those affidavits.

Summary

[77] Of course the Court retains a discretion to order discovery in appropriate cases but to grant the application for particular discovery in this case would provide a general endorsement to this practice occurring whenever a creditor, who bears the responsibility for proof, claims they have no knowledge of insolvency nor any good reason to suspect the same. The fact is it will only be in rare cases that discovery ought

to be provided.

[78] As earlier noted the purpose of the originating proceeding process is for speed and inexpensive resolution. As Mr Branch submits it has always been the case, to date, that what is put forward by the creditor in a voidable transaction case is done without the benefit of discovery; that while that gives the creditor (and indeed a liquidator) some latitude in deciding what is discovered, it is important to recognise that there are three checks which work to balance the process out and those include:

(a) Lawyers involved in voidable transaction proceedings have a duty not to mislead the Court;

(b) The liquidators have a right to cross examine any deponents;

(c) The liquidators have access to all of the documentation between the parties because they have access to a company’s documentation.

[79] In this case the Court does not accept it is being misled by those same claims provided in support of further discovery. Although not obliged to, Fonterra have provided significant discovery.

[80] To its credit Fonterra provided significant discovery before the liquidators filed their application. Cross-examination would enable the liquidators to test Fonterra’s claims that everything has been discovered.

[81] The fact remains, as Associate Judge Bell noted in McCullagh that a liquidator as the holder of a company’s records must be assumed to have any documents which pass between the parties and between the company and any other relevant party. In this case the liquidators have not in any detail explained what attempts they have made to locate the documents from the company’s records. The Court should expect the liquidators to provide a summary of their search of company records to explain that which they say does not apparently exist. Similarly the Court would have expected the liquidators to have interviewed Ms Main for one assumes she could have informed them regarding her perception of knowledge that any creditor may have had of the Company’s insolvency.

[82] A modest amount only is at stake in this case. Already the costs of this proceeding must be considerable. If discovery is ordered compliance costs will be incurred. A 2B award in the substantive proceeding would add significant expense for the party that fails when the setting aside is heard.

[83] Mr Branch submits that considerations of the liquidators’ own investigative deficiencies suggest in this case that what is sought upon their application is a fishing expedition. Yet, the liquidators continue with claims of wanting to prove a continuing business relationship existed. However as Mr Branch points out clearly the requirements of a continuing business relationship were never present. Therefore much of that which is sought by the liquidators upon its particular discovery application is likely to be of no relevance at all, including the monthly statements which the liquidators say they require to properly assess the trading relationship.

[84] Mr Branch is correct that that relationship required no further assessment; supplies were made, no payments were made, the matter was passed on for debt collection, and the payments were received.

[85] The liquidators say they want to assess documents supporting claims of the existence of a supply contract. But it seems clear there is no evidence indicating knowledge of or indeed suspicion by the liquidators that any such contract existed.

[86] The liquidators’ application also seeks documents relating to the knowledge of insolvency issue. Suggestions have been made that Ms Peacocke’s second affidavit provides evidence of the discovery of additional documents. The Court does not agree with that assessment for it is clear by Ms Peacocke’s second affidavit that she does not say she knows what is contained in those additional records discovered. She merely says that there may be something of relevance in them – and as earlier noted time and expense would be required to discover what those old system records contained.

[87] Regarding claims by the liquidators relating to knowledge of insolvency in documents exchanged between Fonterra and Debt Force, Ms Peacocke says Credit Works had supplied electronic printouts of its database which Ms Peacocke provided to the liquidators, and she says it has not provided her with any additional information over and above that which Fonterra has already provided.

[88] As Mr Branch submits there is neither allegation nor evidence that the Debt Force documents are in Fonterra’s power (as a principal) and therefore if the liquidators think Debt Force has more documents than Fonterra, then a non party discovery application will be necessary.

[89] Regarding the liquidators claims relating to internal file notes etc. made by Fonterra, Ms Peacocke responded that Fonterra’s customer services team did not locate any further records including any relevant emails relating to the Company. Ms Peacocke deposes having arranged a full search of Fonterra’s records to ascertain whether it held any other documentation relating to the Company and she says having completed her search to the best of her knowledge all documentation that Fonterra holds has been disclosed to the liquidators.

Result

[90] This is not an appropriate case for particular discovery to be directed by the

Court.

[91] The liquidators’ claims of concealed documentation are speculative. A modest amount only (about $30,000) was at stake. The costs and time involved to provide

particular discovery would be disproportionate to any outcome. This is not one of those cases which is likely to present the Court with genuine difficulty in determining whether or not a creditor could prove it did not know or have reasonable cause to know whether a company was insolvent when payments were received for products supplied.

Judgment

[92] The liquidators’ application’s for particular discovery is dismissed.

[93] The liquidators are ordered to pay Fonterra’s costs on a 2B basis together with disbursements.

Associate Judge Christiansen