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High Court of New Zealand Decisions |
Last Updated: 10 November 2016
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2016-404-1077 [2016] NZHC 2642
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BETWEEN
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T.K (HONG KONG) LIMITED
Applicant
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AND
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DIAMOND MILK FORMULAS LIMITED
Respondent
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Hearing:
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17 October 2016
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Appearances:
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Ms S Wroe for Plaintiff/Respondent
Mr R Hucker and Ms R Selby for Defendant/Applicant
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Judgment:
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4 November 2016
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JUDGMENT OF ASSOCIATE JUDGE J P
DOOGUE
This judgment was delivered by me on
04.11.16 at 3.30 pm, pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date...............
T.K (HONG KONG) LIMITED v DIAMOND MILK FORMULAS LIMITED [2016] NZHC 2642 [4 November
2016]
Introduction
[1] This proceeding is in the form of an interlocutory application for leave
to file a statement of defence to a claim seeking liquidation
orders out of
time.
[2] The grounds upon which the defendant seeks the order granting leave are
as follows:
(a) The plaintiff is not a creditor of the defendant;
(b) There is a bona fide defence to the claim brought by the
plaintiff;
(c) To the extent the plaintiff relies on clause 10 of the Licence Agreement
referred to in the affidavit of James Neil Black as
annexure “D”,
such a clause is a penalty clause and is unenforceable;
(d) In the alternative as a result of the change in the regulatory position
in the Peoples Republic of China as to the requirements
for the importation of
milk powder products an event which resulted in the agreement either being
frustrated and/or the defendant
being exempted from performance of its
obligation under the agreement as a result of clause 24 of the Licencing
Agreement arose;
(e) The plaintiff has not supplied any milk formula or product
and/or provided any consideration for the amounts claimed
in the invoice on
which this proceeding is founded and there is therefore a total failure of
consideration;
(f) The defendant is solvent and able to pay its debts as they fall due in
any event;
(g) The reason for the defendant not taking steps at an earlier [date] in
filing a statement of defence has been adequately explained
by and on behalf of
the defendant;
(h) There is no prejudice to the plaintiff should leave be
granted[.]
[3] In response, the plaintiff has filed a notice of opposition setting out
the following grounds:
3.1 [The defendant] has no defence to [the plaintiff]’s claim:
(a) [The plaintiff] is a creditor of [the defendant] pursuant to the terms of a licence agreement between the parties dated 14
November 2014 (Agreement);
(b) Clause 10 of the Agreement is not a penalty clause. It
provides for liquidated damages in an amount which is
a genuine pre-estimate of
[the plaintiff]’s loss in the event of [the defendant]’s
breach;
(c) There was no force majeure. The Chinese regulatory
changes alleged to be the force majeure event came into effect
on 1 May 2014,
months before the Agreement was signed. The parties entered into the Agreement
as a direct result of these changes;
(d) [The plaintiff]’s consideration is clearly stated in the
Agreement;
3.2 [The defendant] has the onus of establishing its solvency and has
failed to do so, It is presumed to be insolvent pursuant
to s 287 of the
Companies Act, and is in fact insolvent by its own admission;
3.3 [The defendant] has not provided an acceptable explanation for its
failure to file a statement of defence. Its account
is implausible;
3.4 [The plaintiff] will suffer prejudice if the application is granted;
and
3.5 Upon the grounds appearing in the affirmation of Kevin Bruce
Ramsey dated 12 August 2016.
[4] The background to the application is as follows. The plaintiff,
which was associated with Mr Ramsey, is apparently a successful
exporter of
products such as infant formula into countries that include the People’s
Republic of China (“PROC”).
[5] The defendant, whose director is Mr Black, wished to become involved in supplying the Chinese market with infant formula. I understand that the market is a competitive one. It appears that the market has become progressively more regulated, arising out of concern with ensuring that only products of a proper quality and purity should be recognised as suitable for importation into PROC. One feature of the regulation has been that the PROC wishes to reduce the number of persons involved in the exporting of infant formula products and to establish a robust system of certification of reliable manufacturers and processors in whose brand the importing country can have confidence. It further appears that the PROC wishes to streamline the industry by ensuring that only one entity is involved in the manufacture and packaging of product that is to be sent to China. It will be obvious that the attraction of such a reform would be that it would reduce the number of entities involved in the exporting process. That in turn would have the advantages of strengthening accountability and that there would be fewer parties, who could be
better controlled through licensing and audit surveillance. It would also
mean that the party that was permitted to manufacture would
be responsible for
all phases of the manufacturing process rather than being able to delegate parts
to other entities or individuals
who were outside the scope of the licensing
arrangements.
[6] While the court has only a necessarily superficial
understanding of the mechanics of the infant formula market,
it seems likely
that considerations such as the above lay behind the announcement in or about
February 2014 that the PROC was intending
to reform the exporting process along
the lines indicated above. In New Zealand, the responsible government
department, the Ministry
of Primary Industries conducted a briefing of those
involved in the industry to alert them to the impending changes. Mr Ramsay was
one of those who attended the briefing. Mr Black did not. His position is that
he was unaware of the exact nature of changes that
were pending. As it turned
out, the briefing was unable to offer definitive guidance on exactly what the
consequences would be
for the New Zealand market but made it clear that some
changes of the kind set out above were in the offing.
[7] In 2014, consistent with its objective of participating in the
export business, the defendant entered into an agreement
to acquire shares in a
company called Doxcon Pharmaceuticals Limited (“Doxcon”) which
operated a canning plant which
was able to pack products intended for the
Chinese market. It appears that it also had the potential to blend milk powder
formula
for that market although I understand that it had not been engaged in
that activity. No doubt the defendant’s objective was
to get into a
position where it could through its control of Doxcon have the assurance that it
had a reliable contact which would
be called upon to package and perhaps blend
formula.
[8] The plaintiff had an established connection with a company called Unitech which was the source of blended infant formula which it exported into China. Mr Black has deposed that he had tried to establish a connection with Unitech but that Mr Ramsay had taken steps to prevent this occurring. The exact truth of the position cannot be established in the context of a case of this kind but one could understand why in such a competitive environment the plaintiff/Mr Ramsay would
want to maintain exclusivity of connection with Unitech because of the value
of having an established blender as a commercial connection.
[9] In November 2014 the plaintiff and the defendant entered into an
agreement which was described as conferring on the defendant
by way of licence
the use of various trademarks and other property which the plaintiff used in
connection with its exports of products
including formula to countries including
PROC.
[10] The principal elements of this agreement were as
follows.
[11] The recitals to the agreement included the following:
[Defendant] is a New Zealand-based company in the process of selling and
distributing milk formulas in China, Asia and the Middle
East...[The defendant]
has entered into an unconditional agreement to take control of the milk formula
manufacturer [Doxcon] ...[Doxcon’s]
operations include blending, canning
and packaging for compliant export of milk formulas and associated
products...
[12] The term of the agreement was for 10 years and during the
term all intellectual property rights including copyright
trademarks and
formulations were licensed to the defendant by the plaintiff although
the plaintiff would retain ownership
of them. The trademarks included that
for the Taimana brand under which the plaintiff manufactured and exported
relevant products.
[13] Clause 6 of the agreement provided as follows:
The Taimana products for China will be blended by [Unitech] on receipt of a
written in order to [the plaintiff] by [the defendant]
and payment by [the
defendant] to the plaintiff of a 70% deposit upfront in each case. Production
run cost and delivery will
be as quoted at the time of order with
[the plaintiff] adding a 25% margin to the [Unitech] gross production cost... In
addition, [the defendant] will be responsible for arranging and paying for
canning, packaging and other requirements ready
for market by [the
plaintiff].
[14] I interpolate that the provision would seem to mean that the blending would be carried out by Unitech while the plaintiff would at the cost of the defendant attend to canning, packaging and other requirements.
[15] By cl 8 it was provided that the defendant would ensure that the
Taimana product was canned and packaged by the plaintiff
in accordance with best
practice including in accordance with all laws and regulations.
[16] Clause 9 provided:
If for any reason [Unitech] is unable or unwilling to continue blending any
product (e.g. failure to become a registered manufacturer
for infant formula by
China...) The formulation will be transferred to [the defendant] who will both
blend and can the product.
In this case [the plaintiff] will be paid
commission on the gross production cost to [the defendant] excluding the
competitive cost
of canning...
[17] A key part of the contract for the purposes of the present dispute
was cl 10 which provided as follows:
Despite any event or circumstance, [the defendant] guarantees to [the plaintiff] that a minimum of 200,000 800g equivalent cans of Taimana product for China will be ordered in the first 15 months of the Term. Should orders for China exceed 400,000 cans in the first 15 months or in any subsequent year then [the plaintiff’s] 25% commission will reduce to 10% commission but only on those cans ordered in excess of 400,000. In the event [the defendant] fails to order and pay for the minimum cans in the first
15 months or in any subsequent year [the defendant] will pay a top up fee at the period end to [the plaintiff] equivalent to the commission plus GST of
any (sic) not received by [the plaintiff] for that period
ended....
[18] A further important provision of the contract was cl 24:
24. Force majeure applies. Neither party will be liable for any
failure to perform or any delay in performing any of its obligations
under this
agreement where such failure or delay is caused by an unforeseen calamity;
hostilities; government or regulatory involvement
or interference; or any other
event all-cause reasonably beyond the control of the other party.
[19] To resume the chronology, in April 2015 the PROC announced changes that were to take effect to the regulatory regime with effect from 31 August 2015. These changes required, amongst other things, that a single entity should carry out both the formulation or manufacturing and packaging of the products destined for China. I understand that the party carrying out these functions was to be identified as the manufacturer. Manufacturers needed to have permits in order for their products to be imported into China. Further, each manufacturer was entitled to only produce products under three brands.
[20] On 1 February 2016 the plaintiff rendered an invoice to the
defendant in the sum of $402,960. This invoice was based upon
cl 10 of the
agreement, although the invoice did not make specific reference to it. That was
a claim arising out of the fact that
during the relevant period leading up to 1
February 2016 the defendant had not ordered any products from the plaintiff
and therefore
the top up provision was invoked by the plaintiff.
[21] On 4 April 2016 the plaintiff served a statutory demand to enforce
the above liability. The defendant did not respond
to the notice and
time expired for compliance on 26 April 2016. On 18 May 2016 the plaintiff
issued proceedings seeking
orders for liquidation of the defendant pursuant to s
241 of the Companies Act 1993 (the Act) alleging that the defendant was unable
to pay its debts and was presumed unable to pay its debts in accordance with s
287(a) of the Act.
[22] The defendant was required to file and serve a statement of defence
by 7 June
2016 but did not do so. The application was listed for call on 8 July 2016.
On the day before, 7 July 2016, the defendant filed
the present application
seeking an extension of time to file a statement of defence.
[23] Further reference will be made to aspects of the facts subsequently in
this judgment.
Principles
[24] The parties agreed that when determining an application of this kind
the courts are to be guided by the principles outlined
in the cases of Fresh
Cut Flower Wholesalers Ltd v Living and Giving Gift Co Ltd,1
Sayer v Capital Aviation Ltd2 and other authorities
which establish that the following matters are relevant when an application for
leave is being considered:
[25] An application for special leave must
demonstrate:
1 Fresh Cut Flower Wholesalers Ltd v Living and Giving Gift Co Ltd (2001) 16 PRNZ 173 (HC).
2 Sayer v Capital Aviation Ltd (1993) 6 PRNZ 401 (HC).
b) Whether the company has an arguable defence;
[26] In addition, the court is to be guided by the principle that winding up proceedings are not to be protracted for procedural reasons.3
Solvency of the company
[27] The solvency of the company has particular relevance. In Fresh
Cut Flower
Wholesalers Ltd Paterson J said that:4
[In] my view, even if there is an arguable defence, leave should not be
granted if the applicant is insolvent.
[28] The reason for such an approach was not analysed in any detail in that judgment. It seems likely that the reasoning which Paterson J based his conclusion on was that it is unlikely to be in the public interest to countenance the filing of a statement of defence where a company is apparently insolvent because to do so will simply delay the intervention of a liquidator through appointment by the court in the affairs of the company. The courts have frequently recognised the principle that liquidation proceedings are not to be protracted by unmeritorious defences and that it is generally desirable that they should be concluded as soon as reasonably
practicable.5 Therefore even if the defendant is able to show
good reason why it
was unable to comply with the time limits, there will not be any point in giving leave to defend in a case where there are good grounds for concluding that the company is insolvent for then, at least in a case where the ground is s 241(1)(a), the court will not wish to make an order that delays the point at which the company is brought
under the control of a liquidator.
3 Re Property Growth Securities Limited (1991) 4 ASCR 783 (VSC) at 791.
4 Fresh Cut Flower Wholesalers Ltd, above n 1, at [9].
5 Williams and Kettle Ltd v Rangiputa Stock Company Ltd HC Rotorua, CIV-2004-463-15, 14
June 2004 at [11].
[29] The judgment of Faire AJ in Maximum Internet Ltd v Net Stream Internet Ltd casts further light upon why leave may not be granted to an insolvent company even where there is an arguable defence because the court will be concerned that an insolvent company should not waste funds on the defence of the case which might, more properly, be handled by a proof of debt before the company’s liquidator.6
Faire AJ did however also say that where the grounds for appointment of a
liquidator
are the inability to pay debts, there is no absolute bar to the grant of
leave where the court is concerned as to the insolvency of
the
defendant.
[30] Assuming that the defendant is able to establish that it has an arguable defence such as that the plaintiff does not have the required status of creditor to bring the proceeding and is able to provide evidence that shows that it is fairly arguable that the company is not insolvent, it still needs to deal with the requirement to show why it did not file a statement of defence within the time limit specified by the High Court Rules 2016 (“Rules”). The defendant needs to point to considerations which
lead to the conclusion that the “overall justice of the
case”7 requires that leave is
granted. It may be that the defendant is able to put forward a reasonable
explanation as to why it did not comply with the Rules
such as mistake or
misunderstanding about exactly what had to be done or a breakdown of
communication within an organisation so that
the appropriate steps were not
taken. These last, I should add, are examples only.
[31] As well, the authorities have identified the question of prejudice resulting to the plaintiff as a result of the delay from granting an extension of time under rule r
31.17 as being relevant to the court’s consideration of whether leave
ought to be
granted.8
Is the debt disputed?
[32] One of the grounds upon which the defendant sought leave to defend
was that it has a substantial defence.
6 Maximum Internet Ltd v Net Stream Internet Ltd HC Hamilton CIV-2004-419-694, 13 August
2004 at [8].
7 The term is used by Faire AJ in Maximum Internet Ltd v Net Stream Internet Ltd, above n 6, at
[23].
8 Sayer v Capital Avidation Ltd, above n 2, at 402.
[33] The defendant asserted that there was no debt owing on the ground
that first, the entitlement to compensation which the plaintiff
relies upon
which is contained in cl 10 of the agreement, is a penalty clause and is
therefore unenforceable. Secondly, it is stated
that the change in the
regulatory requirements of the People’s Republic of China as to the import
of infant milk formula products
resulted in the contract being frustrated or the
defendant being exempted from performance of its obligation under the agreement
as result of cl 24. Thirdly, it is said that the plaintiff has not supplied any
infant formula or other product or provided any
consideration at all for the
amounts claimed in the invoice upon which the proceeding is based.
The penalty clause argument
Background
[34] The effect of the contractual arrangements was that the
defendant was required to purchase a minimum number of
cans.9 The
obligation was not defined by the value of the product but the volume. A
further effect of the contractual arrangements was
that even if the
defendant purchased less than 200,000 cans, “commission” at 25%
would be charged as though
it had in fact made such a purchase. The
defendant says this provision is a penalty clause which the law regards as
unenforceable.
Principles relating to penalty provisions in contracts
[35] Ms Wroe her submissions made reference to the principles that are
applicable when the court is attempting to determine whether
or not a
contractual provision imposes a penalty which is not enforceable as a matter of
public policy. In her submissions she
said:
The courts have long drawn a distinction between penalties and liquidated
damages:10
The distinction between penalties and liquidated damages depends on the
intention of the parties to be gathered from the whole of
the contract. If the
intention is to secure performance of the contract by the imposition of a fine
or penalty, then the sum specified
is a penalty, but if, on the other hand,
the
9 Clause10.
10 I interpolate that the authority Ms Wroe cited for this proposition is Law v Redditch Local Board [1892]
intention is to assess the damages for breach of the contract, it is
liquidated damages.
The learned authors of The Law of Contract in New Zealand comment as
follows:11
On the one hand, a clause fixing the damages may be a genuine pre-estimate of
the loss that will be caused to one party if the contract
is broken by the
other. In this case it is called liquidated damages and it constitutes
the amount, no more and no less,
that the plaintiff is entitled to recover in
the event of breach without being required to prove actual damage.
Secondly, it may be in the nature of a threat held over the other party in
terrorem — a security to the promisee that the contract
will be performed.
A sum of this nature is called a penalty, and it has long been
subject to equitable jurisdiction.
Courts of equity have taken the view that
the promisee is sufficiently compensated by being indemnified for his or her
actual loss,
and that the promisee acts unconscionably if he or she demands a
sum which, although certainly fixed by agreement, may well be disproportionate
to the injury. In such a case the penalty is unenforceable, although the
plaintiff still can prove the amount of his or her
loss in the ordinary way.
Indeed, where the agreed sum, although a penalty, is in fact less than the
damage actually suffered, it
appears that the plaintiff can recover his or her
actual loss.
[citations omitted]
[36] Mr Hucker in his submission described the operative principles as
follows:
Where a provision of a contract is penal rather than compensatory in nature,
in the event of breach, the Courts have long maintained
that such a clause is
unenforceable.12
[37] In his submissions Mr Hucker commented in a footnote:
The High Court of Australia have held that it is not only situations of
breach of contract that engage the penalty doctrine [see Andrews v Australia
and New Zealand Banking Group Limited [2012] HCA 30, (2012) 247 CLR 205 at
[46] concerning various bank fees charged to customers].
[38] By way of preliminary comment it is necessary to consider the statement of law contained in the High Court of Australia decision in Andrews to which
Mr Hucker has made reference. That statement of law was disapproved by
the
11 Burrows, Finn and Todd Law of Contract in New Zealand (5th ed, LexisNexis, Wellington,
2016) at 21.2.6.
12 See AMEV-UDC Finance Limited v Austin [1986] HCA 63; (1986) 162 CLR 170 at 193, approved by Privy
Council in Phillips Hong Kong Limited v Attorney-General of Hong Kong [1993] UKPC 3; (1993) 61 BLR 41 at
57 and cited and approved in Amaltal Corporation Limited v Maruha (NZ) Corporation Limited
[2004] NZCA 17; [2004] 2 NZLR 614 (CA) at [57].
United Kingdom Supreme Court in Cavendish Square Holding BV v El Makdessi;
ParkingEye Ltd v Beavis where the following statements concerning it were
made amongst others:13
Thirdly, the High Court's redefinition of a penalty is, with respect,
difficult to apply to the case to which it is supposedly directed,
namely where
there is no breach of contract. It treats as a potential penalty any clause
which is 'in the nature of a security for
and in terrorem of the satisfaction of
the primary stipulation'. By a 'security' it means a provision to secure
'compensation ...
for the prejudice suffered by the failure of the primary
stipulation'. This analysis assumes that the 'primary stipulation' is some
kind
of promise, in which case its failure is necessarily a breach of that promise.
If, for example, there is no duty not to draw
cheques against insufficient
funds, it is difficult to see where compensation comes into it, or how bank
charges for bouncing a cheque
or allowing the customer to overdraw can be
regarded as securing a right of compensation.
[39] The discussion in Cavendish Square in my respectful view
represents what has always been regarded as the orthodox position. Therefore my
conclusion is that before there
can be any question of the disallowance of
penalties, it must involve the contract imposing a penalty in circumstances
where it provides
for a sanction to be paid by a party breaking the contract
which exceeds the likely loss that will flow from the breach.
Was there a breach of contract?
[40] In this case, the contract makes it clear that the defendant was
required to purchase a minimum of 200,000 800 g tins of
the formula product in
the first 15 months. If the defendant did not purchase that amount, it would
nonetheless pay commission
as though it had. The payment is however described
as a “top up” payment. If for example, the defendant actually
purchased
100,000 cans it would be required to pay the 25% commission on those
products which is a contractual debt. There could be no complaint
that that part
of the commission was not recoverable. It would also be required to pay 25% on
the un-ordered 100,000 cans.
[41] Circumstances might come about where it did not, for the time being, suit the defendant to make any purchases because of, for example, temporary difficulties in
selling the product in China. The defendant might suspend buying for
the time being
with every intention that later it
would resume doing so. At the point where the 15 months period expired but when
a liability had
not yet arisen for the defendant to make payment under cl
10,14 could it be suggested that the plaintiff would have the right
to cancel on the grounds of breach? Of course, if the plaintiff made
a claim
under cl 10 and the defendant did not pay, then that might amount to a breach of
contract. The considerations just discussed,
in my view suggest, that by not
taking stock at all, or taking stock less than 200,000 units over the 15 month
period, no breach
occurred.
Were the contractual provisions in the nature of a
penalty?
[42] The next issue concerns whether the provision in fact had the effect
of a penalty.
[43] In my view, as I now explain, the plaintiff in this case is
attempting to recover the price that it was entitled to for
providing the
benefits that it did under the contract which included a licensing arrangement
and, possibly, providing access to Unitech’s
production facilities. The
agreement sets out a formula which fixes that price. It fixes that price in
relation to the amount
of products that Unitech might supply to the defendant.
The demand for a product would be an outcome of, amongst other things,
the
marketing advantages that the defendant incurred under the licensing agreement
which would in turn impact upon demand for imports
into China. The effect of
the mechanism was that the more successful the defendant was in its operations
in that market under the
Taimana brand and presenting its products with the
assistance of the defendant, the more it would pay for those advantages. That
would seem to be payment for the access to those advantages was linked to the
amount of products that were produced for the defendant
by Unitech.
[44] The agreement implicitly acknowledged the possibility that the defendant might not have much success with its operations in the Chinese market. It would seem that the plaintiff was concerned to obtain a position under the contract where it would not be exposed to, or would have a limited exposure to, that risk. By that I
mean that if the defendant was unsuccessful it would not mean that the
plaintiff
14 Because, for example, no invoice had been rendered.
would receive nothing for the valuable advantages that the plaintiff
conferred and the defendant acquired under the contract.
The risk more
or less rested with the defendant who would have to pay even if it was not
successful in exploiting the intellectual
property of the plaintiff. Whether
that was a good bargain or not from the point of view of the defendant is
irrelevant. The fact
that the price was struck by reference to hoped-for levels
of sales which may or may not ultimately be achieved is neither here nor
there.
Presumably the defendant was confident that it would achieve sales of at least
200,000 units per 15 monthly period, otherwise
it would not have entered into
the contract.
[45] The contract does no more than state that this is what the defendant
will have to pay. It does that in cl 10 which is therefore
not aptly described
as containing a penalty provision.
[46] The process of reasoning by which a given situation is tested for
the presence of an undue penalty is to compare the damages
that the claimant
might recover at law in case of a breach against what the contract provides is
to be paid to the plaintiff in the
case of a breach. But behind that question
is the anterior question of what benefits the claimant was to receive
under the
contract. Embarking upon that enquiry in this case reveals that
the very provisions of the contract which the defendant says
constituted an
unenforceable penalty are not that at all but are more properly viewed as the
provisions that prescribed the benefits
which the claimant is to receive, or, it
could be said the price which is payable under the contract.
[47] A particular provision will only be held to be a penalty when it cannot be regarded as a genuine estimate of damages that might be recoverable by litigation.15
In that context the law regards a contractual provision as being a penalty
where the stipulated sum is:16
... extravagant and unconscionable in amount in comparison with the
greatest loss that could conceivably be proved to have
followed from the
breach.
15 Pacioco v Australia and New Zealand Banking Group Ltd [2016] HCA 28, 333 ALR 569.
[48] The damages to which the plaintiff would be entitled for breach of the minimum take provision in cl 10 would be such as to place the plaintiff in the same position as if the contract had been performed. If the failure to take the minimum amount is regarded as the breach of contract, then compliance with the contractual obligation would have required the defendant to compensate the plaintiff for what it lost through the defendant not performing its contractual obligation. If the contractual obligation required the defendant to purchase not less than 200,000 units then the commission that the plaintiff would have earned would have been the 25%
of whatever “production run cost” quoted by Unitech was at the
time of the order.17
The plaintiff would therefore need to establish on the balance of
probabilities what the likely production run cost that Unitech would
have
charged on 200,000 units would have been. The sum arrived at would then be
compared with the amount that cl 10 would entitle
the plaintiff to receive where
there were no orders, or fewer, than specified in the contract.
[49] So far as I’m aware there is no direct evidence of what the
cost might have been. It appears from the invoice which
the plaintiff rendered
that a figure of $8.76 per kilogram exclusive of GST was adopted as the rate at
which Unitech would have charged.
The invoice states that it is:
Based on Unitech’s reduced price in June 2015, approved by [the defendant]
and utilising the lowest cost per KG product-adult formula[.]
[50] Again there does not appear to be any evidence asserting that the
basis upon which the charge was imposed was wrongly calculated
and there is no
comment on the claim implicit in the invoice that the defendant had
approved the rates in question.
[51] My conclusion is that as a matter of contractual interpretation the argument which the defendant puts forward that the provision was a penalty cannot be sustained. Mr Hucker was not able to suggest any evidence or other matters in addition to what was before the court which might support a contrary interpretation being adopted. I therefore conclude that the defendant does not have an arguable
defence that any liability is invalidated by the doctrine concerning
penalties.
17 Clause 6.
[52] It further follows that if the debt cannot be disputed on the
penalties ground, the plaintiff is able to justifiably assert
that it is a
creditor of the defendant and therefore is entitled to bring a claim for the
liquidation of the company pursuant to
s 241 of the Act.
Force majeure
[53] An alternative basis upon which the defendant argues that it is not
liable under the contract is that the contract was frustrated
because of changes
that the PROC made to regulations governing the importation and sale of formula
products for sale to infants.
This caused a problem for the plaintiff because
it did not have access to a manufacturer which could both blend the formula
products
and can them. While the manufacturer that it retained to blend the
formula could carry out that function, it did not have the ability
to can the
product.
[54] The evidence that has been provided by the plaintiff is to the
effect that the possibility of regulatory change was one of
the reasons why the
plaintiff entered into the contract with the defendant and why the defendant was
required to provide a contractual
warranty that it had, in effect, the ability
to acquire a company which owned canning facilities.
[55] The evidence in this area is not clear. On the one hand, the
defendant says that the change in regulations which took effect
from 31 August
2015 prohibited imports of formula into China unless they were exported from New
Zealand by the same entity who manufactured
the product and canned it. I am not
aware that the plaintiff substantially disagrees with this statement of the
position.
[56] It appears that there was a risk that the arrangement which the plaintiff relied upon of having Unitech blend the product and having the canning done elsewhere would not satisfy the requirements of the Chinese government. Mr Ramsay said that that was the reason why the acquisition of the Doxcon company was so important. That company had the ability to both blend and can the formula. The plaintiff asserts that had the defendant complied with its obligations under the contract and given a true warranty that it had the power to acquire Doxcon that would have solved
the problem but the acquisition of Doxcon was unsuccessful. That company
went into liquidation.
[57] Had the parties been able to utilise the capabilities of Doxcon,
that would have overcome any difficulty arising from the
fact that the
manufacture of the formula was carried out by one company, Unitech, and the
canning by another.
[58] Further questions arise. One of them is whether the defendant
defaulted under the agreement to acquire Doxcon because of
lack of financial
resources (which is what the plaintiff alleges) or whether the sale of Doxcon
failed because that company went
into liquidation. The further issue that I
refer to is the question of whether, had the defendant had sufficient financial
resources
to complete the purchase, the Doxcon company would have remained
solvent so that the acquisition of the company could have proceeded.
It
may be that the position is, as the defendant alleges, that the
liquidation of Doxcon was an unexpected event which
was outside the terms of the
warranty that the defendant had given about its intention to acquire majority
ownership of that company.
That is to say, the warranty only contemplated
acquisition of Doxcon so long as it was a viable company and not in
liquidation.
[59] That leads to the next point which is whether the plaintiff
is correct in submitting that the force majeure clause
did not have any
application in this case because the very difficulty that arose was one that was
foreseeable at the time when the
parties entered into the contract.
[60] The evidence which the plaintiff gives is that the PROC announced that it would actually be proceeding with changes to the regulatory regime in April 2015. However, the parties had entered into the contract some five months before on 15
November 2014. While the court would be sceptical about any claim on the part of the defendant that it did not know about the heralded changes if it had entered into the agreement after their announcement in April 2015, the date sequence which I have outlined above means that it is possible that the account which the defendant gives about this matter is correct.
[61] The plaintiff says that the fact that the parties were aware of
these problems is reflected in the fact that the contract
itself contained an
arrangement to try and overcome them.
[62] Mr Black accepts that exporting arrangements to PROC were in fact in
a state of flux at the time when the agreement
was entered into.
However, it is his contention that the first indication about pending changes
in the Chinese market which
was contained in the briefing notes of the MPI did
not reflect a possible problem arising from arrangements where there was a
bifurcation
between the blending of the product by one company and the canning
and export by another. The exact problem which Mr Ramsay has
therefore
identified as being the reason why it became desirable to have a unitary blender
and canner, was not a problem that was
apparent at the time when the parties
entered into the licensing agreement. Therefore it could not be reasonably said
that problems
arising from the duality of the lender and canner was in the
reasonable contemplation of the parties and therefore outside the scope
of the
force majeure agreement which was directed to unexpected future occurrences. I
note that Mr Black does not clearly describe
what the motivation for having the
Doxcon arrangement in place was, if it was not for the purposes that Mr Ramsay
has indicated.
However, I would accept that Mr Black has given sufficient
evidence to indicate that there may be a triable issue in the proceedings
in
relation to the force majeure clause.
[63] The court cannot safely draw an inference that the parties in
entering into this arrangement both impliedly acknowledged
their awareness that
the looming regulatory problem was located in the area of separate
canning/blending entities being involved
in the supply operation. I acknowledge
that Mr Ramsay appears to be clear in his mind that that was the case but it
cannot be said
that an understanding of the common intention of the parties to
the contract objectively determined can be based just upon the knowledge
of one
party.
[64] For those reasons I am unable to agree with the plaintiff that the defendant does not have an arguable defence that the force majeure clause ought to be given effect to.
Argument that no consideration for agreement
[65] The defendant puts forward the contention that it has a good
defence that the agreement is not binding because no consideration
was provided.
The evidential foundation for the argument is in effect that no formula product
for export to China was ever actually
provided under the contract.
[66] For the plaintiff, Ms Wroe submitted that the proposition that Mr
Hucker had put forward was misconceived. She submitted
that the contract was a
licensing agreement pursuant to which the defendant had access to the Taimana
brand which was a brand that
had standing in the Chinese market. It also had
the right to use trademarks and product get up which was the property of the
plaintiff.
[67] I accept the position as it is described by the plaintiff. The
contract is not entirely clear but it seems that the chain
of transactions that
it envisaged so far as supply of the blended product was as follows. The
product would be manufactured by Unitech.
Unitech would make the product
available for the nominated canning enterprise to package the formula. The
licence fee which was
payable to the plaintiff was to be calculated as a
percentage of the value of the product which Unitech so provided. As I have
already
noted, if the defendant did not in fact order any formula product from
Unitech there was a default arrangement requiring the defendant
to pay the
plaintiff as though there had been a supply of not less than 200,000 cans in a
15 month period. That does not however
mean that the contract was one for the
supply by the plaintiff of formula product which was not in fact
supplied and
which therefore could have given rise to a legitimate argument
that the plaintiff had done nothing under the contract to entitle
it to
payment.
[68] The defendant does not have an arguable defence that no debt arose
on the ground as described in this part of the judgment.
Is defendant arguably insolvent?
[69] In this case the defendant has failed to comply with a statutory demand which was served on it and therefore the presumption of insolvency that arises under s 287(a) comes into effect.
[70] As well as the presumption that arises under s 287, a further
difficulty that lies in the way of the defendant in attempting
to demonstrate
that it is in fact arguably solvent is that the company has itself now been put
into receivership.
[71] The evidence that has been put forward by the defendant is that in
July 2016, the company was involved in the raising of
loans and/or capital that
would enable any claim by the plaintiff to be secured. Further, it was said
that indicative indications
from the Bank of New Zealand and the Bank of China
were that they are prepared to provide ongoing funding necessary for the
defendant.
Mr Black said that he would file an updated affidavit in this
proceeding detailing those efforts. He said that “I expect
a formal loan
to be in place within a two to three week period”.
[72] As counsel for the plaintiff/respondent has pointed out in his
submissions, no further affidavit was filed and no evidence
has been put before
the court that either of the banking groups in question have agreed to make
funds available to the defendant.
Further, the fact that the defendant has had
resort to banks to raise further capital indicates that its existing resources
are
insufficient to meet its operational requirements which include payment of
debts. While it is acceptable for a defendant to have
to rely on external
funding in order to meet its debts without being condemned as insolvent, it is a
different story when the defendant
acknowledges the need for outside funding but
then implicitly accepts that that funding has not come to hand.
[73] Based upon the present evidence it is not arguable on the
part of the defendant that it is solvent. It could
not have conscientiously
pleaded that it was and if it went to a hearing in all probability the court
would determine that it was
insolvent.
Explanation for failure to file statement of claim within required time
limits
[74] For the defendant, Mr Hucker accepted that there was an obligation for his client to adequately explain the reasons for the delay in filing the statement of defence. Mr Hucker submitted:
50. The reasons for failing to file/serve a defence in time are set out
in the Affidavit of James Neil Black dated 7 July 2016.
The Defendant failed to
file a defence in time because:
(a) James Neil Black (Mr Black), a director of the Defendant company,
has been overseas for a significant period of time and
returns to New Zealand
only periodically. Accordingly, Mr Black became aware of the proceedings very
late in the piece.
(b) Mr Black had several discussions with the director of the Plaintiff company in the past few weeks and had understood that the Plaintiff was prepared to compromise the debt and deal with matters on a commercial basis. In particular, the parties had been discussing settlement options as late as 29
June 2016.
(c) When Mr Black was unable to settle with the Plaintiff he requested
an adjournment of the proceedings so that further discussions
could take place.
That request was not rejected until late afternoon on the 7 July 2016, at which
time the Defendant instructed
solicitors.
(d) The Defendant’s co-director, Brian Robert Ellis (a qualified
barrister and solicitor), believed that Mr Black had
been taking care of the
steps necessary to defend the proceedings.
[75] The plaintiff submitted that there was no acceptable explanation for
failure to file a statement of defence within the time
limits established by the
High Court Rules. Ms Wroe made the following submission:
35. TKL has given no acceptable explanation for its failure to file its
statement of defence in time.
36. Mr Black says at [22] of his affidavit that he has been overseas for a significant period of time and returns to New Zealand only periodically. He says he became aware of these proceedings “late in the piece”. However, Mr Black has been in the country continuously since late April. Mr Ramsey met with him at a café in Chancery on
10 May 2016 and discussed payment of the statutory demand. The fact of the meeting was confirmed by Mr Ramsey in writing later
that same day.
37. At [23] of his affidavit, Mr Black appears to suggest that there was a misunderstanding between himself and his co-director, Mr Ellis, as to who was taking care of the proceedings. It is difficult to see how this misunderstanding could have when Mr Black works out of Mr Ellis’ offices while Mr Black is in New Zealand. Mr Black’s statement also demonstrates that TKL was aware of the proceedings, and that they needed to be “taken care of”. The failure of Mr Black and Mr Ellis to communicate properly with each other is implausible.
[76] The evidence which Mr Black has given about his absence
overseas accounting for the failure to file a statement
of defence in time is
not satisfactory. To say as he does that he was departing from and returning to
New Zealand periodically may
have something to do with the question, but on the
other hand it may not. What Mr Black ought to have done if he were to be
believed
on this point was to provide exact details of where he was at the time
when the proceedings were served on the company and if he
was overseas to depose
when he returned. The fact that he has not done so is likely to be because he
cannot give evidence which
is helpful to the defendant.
[77] I also accept that the other explanations given are not
satisfactory. The fact that he had hopes that the company would
be able to come
to a compromise with the plaintiff is not a matter which justified a breach of
the time limits. Nor is the fact
that the plaintiff was asked to agree to an
adjournment to give time for the defendant to enter into further discussions
with the
plaintiff acceptable as a reason why the defendant stayed its hand in
filing a statement of defence.
[78] The final explanation which is put forward is that the co-director
of the company, Mr Brian Ellis who is a qualified solicitor,
believed that Mr
Black had been taking care of the steps necessary to defend the proceedings
adequately. There is no evidence
from Mr Ellis. The reasonableness or
otherwise of his alleged assumption that Mr Black was taking care of matters
is not
therefore able to be scrutinised critically. It could be that there was
no proper basis whatsoever for Mr Ellis to take the steps
that he did (assuming
that Mr Black’s affidavit is correct as to what he says about the part
that Mr Ellis played in the matter,
on which we do not have the benefit of the
latter’s evidence).
Prejudice to plaintiff if application granted
[79] One of the problems that this application has given rise to is the fact that because of the complexity of some of the issues the matter could not be dealt with in the list court. As a result there has been considerable delay in scheduling the matter as a defended hearing. The delays due to the court process are unfortunate but unavoidable.
[80] The defendant made it clear through counsel at an early stage that it intended to defend the liquidation proceedings. The High Court rules require that the statement of defence be filed 10 working days after the date on which the statement of claim is served.18 The statement of claim was served on the company on 26 May
2016. The date by which a statement of defence ought to have been filed was therefore 7 June 2016. The first call of the proceeding was 8 July 2016. I am satisfied that were it not for the fact that it was by then too late under the Rules to file a statement of defence, the defendant would have filed a statement of defence on
7 July 2016. It was on this last date that the defendant, presumably having
been informed by the plaintiff that it would not consent
to an extension of
time, filed an application for leave, that is the application which is presently
under consideration. The result
is that approximately one month was lost as a
result of the failure of the defendant to comply with the Rules.
[81] Thereafter the parties have been waiting for an available court
date. That part of the delay became inevitable when the
plaintiff, as it was
entitled to do, declined to consent to an extension of time. As a result
several months have gone by as a direct
consequence of the failure of the
defendant to observe the time limits in r 31.17.
[82] The actual prejudice that has been caused has been to delay a
hearing into the substantive merits of the liquidation application.
Given that
the company is now in receivership, there is some assurance that the company
will not be continuing to trade while insolvent.
On the other hand, had a
liquidation been commenced promptly, it is arguable that the cost of
receivership would not have been
incurred.
[83] My conclusion is that allowing the application will cause prejudice
to the plaintiff. That prejudice has taken the
form of delay and
possibly other diminishment in the financial resources of the company which
will be available for distribution
amongst the creditors.
Conclusions and summary
[84] The conclusions which have been reached in this judgment may now be
summarised.
18 High Court Rules 2016, r 31.17.
[85] I have concluded that the agreement in this case was essentially a licensing agreement with the fee payable for taking up the advantages under that licence being calculated on volumes of product actually ordered by the defendant. That charging basis though was subject to a further proviso that a minimum charge would be payable irrespective of what volumes of formula the defendant actually took. The minimum was the equivalent to the commission that would have been charged on
200,000 cans of formula being ordered in 15 months.
[86] I have further concluded that the entitlement to charge a default
commission as described in the previous paragraph
does not constitute
the imposition of a penalty. Rather it is the provision setting the price
for what the defendant was
to receive under the contract.
[87] I also determine that the imposition of a penalty can only be
considered in circumstances where there has been a breach of
contract. That is
not the case here. This is not therefore a case concerned with the contractual
provision penalising the defendant
in the case of breach of contract on
its part and the law relating to penalties has no application.
[88] The force majeure defence which the defendant puts forward is to the
effect that it is excused from any failure to perform
any of its
obligations under the agreement. It is arguable that the change in the
importing regime in PROC resulted in an inability
on the part of the defendant
to acquire products whose provenance would qualify them for importation into
China. The doubt arises
from the requirement that the same manufacturer should
blend and can the product to be exported. It is arguable that the
plaintiff’s
product would not qualify for importation into China using
products that had been manufactured by Unitech. It is also arguable that
the
exact nature of the problem, that is the duality of the canner /blender, had not
at the point when the contract was signed been
clearly identified as the risk
which the co-venturers faced. Therefore, it cannot be conclusively reasoned
that the force majeure
clause did not apply to this event.
[89] I have also concluded that the argument that there was no consideration to support the contract is not a viable one. The contract was a licensing arrangement
and at least in part the payments which the defendant was obliged to make to
the plaintiff were made in consideration for the right
to use the
plaintiff’s trademarks and other property.
[90] The further conclusion of this judgment is that the defendant is
insolvent and that in those circumstances the court ought
not to exercise its
discretion to grant leave to the company to contest the liquidation proceedings
which the plaintiff has brought.
[91] As well, I have come to the conclusion that the court in its
discretion ought to decline to grant leave because the defendant
has not put
forward a satisfactory explanation for the failure to file a statement of
defence in time. The evidence which the defendant
puts forward is vague and
unsatisfactory. Uncertainties about the evidence include exactly when Mr Black
was overseas and how it
came about that the directors of the company fell into a
misunderstanding to the effect that each thought the other was going to
attend
to filing the statement of defence. Where there is no bona fide explanation for
delay the court cannot ignore the alternative
explanation that it has in fact
come about because of the applicant’s objective of impeding or delaying
liquidation proceedings.
[92] Finally I have concluded that it can be inferred that there is some
prejudice to the plaintiff resulting from the deferral
of of its claim to put
the defendant into liquidation in circumstances where the defendant is plainly
insolvent.
[93] From all of those reasons I conclude that this is not a proper case
in which to grant leave to the defendant to file a statement
of defence out of
time.
Orders
[94] There will be an order that the application for leave to file
statement of defence out of time dated 7 July 2016 is dismissed.
[95] The parties should confer on the question of costs and if they are
unable to agree are to file brief memoranda (not exceeding
five pages on each
side) within 10 working days of the date of this judgment.
J.P. Doogue
Associate Judge
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