Dalton (British Pub Supplies Limited (in liquidation)) [2018] NZHC 1197 (25 May 2018)

Last Updated: 18 June 2018

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2017-404-2383 [2018] NZHC 1197

UNDER THE	Companies Act 1993
IN THE MATTER	of an application for Orders under Section 284 of the Companies Act 1993
BETWEEN	SIMON DALTON AND MATTHEW PETER KEMP as liquidators of British Pub Supplies Limited (In Liquidation) First Applicant
AND	SIMON DALTON and MATTHEW PETER KEMP as liquidators of The English Corner Shop Limited (In Liquidation) Second Applicant

Hearing:	11 April 2018
Appearances:	B R Saldanha and M Sussman for the Applicants P J Dale for the Secured Creditors of The English Corner Shop Limited, Commercial Factors Limited and Commercial Finance and Securities Limited
Judgment:	25 May 2018

JUDGMENT OF ASSOCIATE JUDGE SMITH

[1] The applicants, Mr Dalton and Mr Kemp (the liquidators), were appointed liquidators of two related companies, The English Corner Shop Limited (English Corner) and British Pub Supplies Limited (British Pub), on 1 May 2017.

[2] The shares in English Corner are owned by Mr Graham-Campbell Lane and his wife Rachel. The shares in British Pub are all owned by English Corner.

British Pub Supplies Limited (In Liquidation) v The English Corner Shop Limited (In Liquidation) [2018] NZHC 1197 [25 May 2018]

[3] The liquidators are unsure whether the assets to which I refer below are assets in the liquidation of British Pub, or whether they are assets of English Corner, subject to a charge in favour of Commercial Factors Limited and Commercial Finance and Securities Limited (collectively, “CFL”), as holders of a General Security Agreement over English Corner (the GSA). The liquidators now apply for directions under s 284 of the Companies Act 1993 (the Act) as to the entitlement to the assets in question. They also seek a direction that they are entitled to be remunerated for their reasonable fees and expenses.

[4] The application for directions has been served on the secured and preferential creditors of both English Corner and British Pub. The only creditor to file a notice of opposition was CFL.

Background

[5] Before their liquidations, English Corner and British Pub both operated retail establishments in Auckland. English Corner imported, distributed, and sold British products. It had a retail shop in Onehunga, and later in Great South Road, Penrose. British Pub owned and operated the Spitting Feathers Bar (the Bar), at Level 1, 16 Wyndham Street, Auckland (the premises). It was an English-style bar, selling beers and crisps sourced from the United Kingdom.

[6] The premises are owned by a company called 777 Investments Ltd (the landlord). British Pub did not have any formal lease or sublease of the premises – the lessee of the premises was English Corner, under a deed of lease entered into between it and the landlord on 31 May 2011. There was no written sublease, or licence, between English Corner and British Pub. Such arrangements as existed between the two companies appear to have been informal, although Mr Lane said in his evidence that the landlord knew that British Pub owned and ran the Bar on the premises. British Pub paid the rent and operating expenses directly to the landlord.

[7] Mr Lane operated the two businesses separately, and each had different business arrangements and creditors. English Corner sold through its retail store, or on-supplied imported goods to wholesale customers. To help it with cashflow, it entered into debt factoring finance arrangements with CFL. The GSA was executed
on 20 June 2012, to secure the financial accommodation made available by CFL to English Corner. British Pub operated essentially on a cash basis, and did not have any debt factoring arrangement.

[8] English Corner supplied British Pub with some of its imported products, including UK-branded crisps and UK beer. At the date of the companies’ liquidations, British Pub owed English Corner approximately $4,200 for these supplies.

[9] By June 2015 English Corner was beginning to struggle in its business. It became necessary for British Pub to start supporting English Corner, as both CFL and another major creditor of English Corner, S D Ramsden & Co Ltd (Ramsden) were demanding payment. The problems worsened when British Pub also began to struggle.

[10] In December 2015 English Corner and British Pub entered into a Deed of Acknowledgement of Debt and Assignment (the Ramsden Deed), under which it was agreed that the proceeds of a sale of the Bar would be applied to the debt owed by English Corner to Ramsden. The amount to be repaid from the proceeds of sale (the “Lump Sum Repayment”) would be GBP200,000 if the sale price was NZD650,000 or more; if the sale price was less than that sum, the Lump Sum Repayment would be reduced proportionately. British Pub covenanted that it would ensure that the proceeds of the sale would be applied in accordance with the Ramsden Deed.

[11] The Ramsden Deed contained provisions that purported to fix the proceeds of the anticipated sale of the Bar with a trust in favour of Ramsden, and that Ramsden would have a proprietary interest in the proceeds of the sale.

[12] By the end of 2016, the situation for English Corner and British Pub was described by Mr Lane as dire. He had been unable to find an outside purchaser for the Bar, as the business was struggling and staff were going unpaid.

The first sale agreement

[13] Near the end of 2016 Mr Lane and the bar manager at the Bar, Mr Christopher Green, entered into a sale and purchase agreement relating to the Bar business. I will
refer to this agreement as “the first sale agreement”. The vendors named in the first sale agreement were British Pub and Mr Lane, and the named purchaser was Mr Green. The total purchase price was $200,000, comprising tangible assets $190,000, stock in trade $9,999, and goodwill $1. The agreement recorded that a deposit of
$32,000 had been paid by the purchaser.

[14] The balance of the purchase price ($168,000) was to be funded by vendor finance (on terms to be agreed) as to the sum of $120,000, and the first sale agreement was conditional on the purchaser’s ability to obtain the necessary finance to complete the agreement within five working days of the date of the first agreement. There was also a provision making the first sale agreement conditional on the purchaser being satisfied that the business was a suitable investment at the price of $200,000. The conditions were stated to be for the sole benefit of the purchaser.

[15] The vendor would be responsible under the first sale agreement for satisfying all rent, services, and other costs due to the date of settlement, and ensuring that all staff and contractors were paid monies due to them to the date of settlement, together with all holiday pay.

[16] A list of the tangible assets was to be provided within five working days.

[17] The first sale agreement was also conditional on the landlord consenting to an assignment of the lease of the premises to Mr Green within 15 working days of the first sale agreement becoming unconditional.

[18] The first sale agreement was in the form approved by the Real Estate Institute of New Zealand Inc. and Auckland District Law Society Inc. (Fourth edition, 2008). It contained a (standard) provision that if a condition was not fulfilled by the stipulated date for fulfilment, either party could (before the condition was waived or satisfied) avoid the first sale agreement by giving notice to the other.

[19] It appears that the parties to the first sale agreement ran into difficulties immediately. There were problems arranging the finance, and the landlord’s consent to an assignment of the lease was not forthcoming. Mr Lane said the landlord was not
easy to deal with, but he persevered, as a sale to Mr Green was really his only option. Neither party gave notice avoiding the first sale agreement.

The lease-to-own agreement

[20] British Pub could not pay the rent for the premises that was due in January and February 2017. At the end of February, rent arrears stood at $22,757.72. Mr Lane became concerned that the landlord might cancel the lease.

[21] Mr Lane and Mr Green came up with a solution, under which Mr Green’s company Bar Red Limited (Bar Red) would take over the running of the Spitting Feathers Bar as its own operation. Bar Red would be entitled to retain the profits of the business, in consideration for payments of $1,300 per week and Bar Red assuming certain liabilities of the business previously met by British Pub. The arrangement was incorporated in a one-page agreement dated 28 February 2017. I will call it “the lease- to-own agreement”.

[22] The lease-to-own agreement was in the following terms:

Contract between British Pub Supplies and Bar Red Limited For the Lease of Spitting Feathers Bar.

Lease Price is $200,000 Less Deposit of $32,000

Total to be Repaid $168,000

This is a Lease to Own Contract and any monies repaid gets taken off the total sale price of $200,000 when the Landlord approves the takeover of the lease at 16 Wyndham Street, Auckland CBD.

In lieu of stock, Red Bar will take on the liability of any outstanding Holiday Pay owing to staff.

Red Bar will take over lease payments, Indeserve Contract, Smart Pay Cadmus (Eftpos Machines) and Telecom Rental Contract (for Security System).

Repayment of the $168,000 is to be made in weekly payments of a minimum of $1300 per week (or greater) to be paid directly to CFF, until advised of any change.

The Alcohol Licence belonging to British Pub Supplies will cease and Red Bar will obtain their own Licence.

Red Bar will continue to use The English Corner Shop Limited for the provision of English Beers and Crisps and in return The English Corner Shop will assist with Accounts and staffing issues.

Bar Red will obtain and maintain Insurance to cover any damages and replacement costs to the Building and Assets of Spitting Feathers Limited. Bar Red will list The English Corner Shop as an interested party.

Any maintenance required on either the furnishings, equipment or building will be the responsibility of Bar Red Limited in accordance with the existing lease. Bar Red will also be responsible for any additional Opex charges during their lease.

On behalf of

The English Corner Shop Limited Bar Red Limited

Graham Lane Chris Green

Date: 28/2/17 Date: 28 02 17

[23] It appears that the parties did not obtain legal advice on the form of the lease- to-own agreement (although Mr Lane did obtain some legal advice on his situation in early 2017 from a family member who is a qualified lawyer), and parts of it are not well drafted. However, Mr Lane described the broad intention as follows. Mr Green would take over the staff, stock, fitout, chattels, lease, and the “Spitting Feathers” name. As with the first sale agreement, the actual amount to be paid would be
$168,000, with a $32,000 loan Mr Green had earlier made to help keep the business afloat being treated as a deposit.

[24] The weekly payments of $1,300 payable by Bar Red under the lease-to-own agreement were to be paid to CFL (referred to as “CFF” in the lease-to-own agreement). Mr Lane explained that CFL had been demanding the proceeds from the sale of the Bar business, and it had convinced him that it was entitled to the proceeds.

[25] Mr Green provided an affidavit generally confirming Mr Lane’s account of the events leading up to the liquidations of English Corner and British Pub. He said that, in anticipation of completing the sale, he established Bar Red in November 2016 to own and operate the Bar. He referred to the difficulties obtaining an assignment of the landlord’s consent to the assignment of the English Corner lease, and the
understanding that all aspects of the Bar business were to be transferred to Bar Red. He described the lease-to-own agreement as like a hire purchase-type agreement, which would “fill the gap” until he and Mr Lane could complete the first sale agreement.

[26] While CFL was not a party to the lease-to-own agreement, it is clear that it did have some influence in the drafting of the document. There were emails from Mr Lane to Mr Haydon of CFL on 12, 22 and 26 January, and on 8 February 2017, in which Mr Lane explained the difficulties he had encountered implementing the first sale agreement, and there was a substantive response from Mr Haydon on 8 February 2017. With his response, Mr Haydon attached a “work paper” setting out his thoughts on how the difficulties might be addressed.

[27] In his email of 12 January 2017 Mr Lane stated that he had been “stuck helping [Mr Green] fill in paperwork for the bar sale”, and it was apparent that they were “a little way” from getting the landlord’s consent to the assignment of the lease of the premises.

[28] In his email of 22 January 2017, he told Mr Haydon that he and Mrs Lane needed to sell the Bar to Mr Green, having agreed a price and signed the first sale agreement. This email shows that Mr Lane was concerned about the effect of the Ramsden Deed if the first sale agreement proceeded according to its terms, and that was no doubt also a concern of Mr Haydon: if the first sale agreement was implemented there would be an immediate issue as to whether the proceeds would go to Ramsden under the Ramsden deed, or whether part or all of the proceeds would go to CFL under the GSA, or under a GSA over British Pub (the British Pub GSA) that CFL had obtained in December 2016.¹

1. The British Pub GSA was purportedly given to secure past lending by CFL to English Corner, and it was later challenged by the liquidators under the Companies Act 1993 as a charge given by British Pub within the “specified period” before the liquidation of British Pub, at a time when British Pub was insolvent. In the end, CFL elected not to defend the liquidators’ challenge, and it was common ground at the hearing that CFL holds no security over any assets of British Pub.

[29] Mr Lane proposed in his email of 22 January 2017 that (if Mr Green was unable to sort out the finance) English Corner would “end up [sub leasing] to him (which we are doing anyway for the next three years) and then he is working to something.”

[30] In his email of 26 January 2017 Mr Lane told Mr Haydon that the legal advice he had received from the family member included contacting Ramsden, to see what they would do if the Bar didn't sell.

[31] Mr Lane’s email of 8 February 2017 made it clear that he was unable to afford the cost of legal advice, and would proceed without it. Mr Green was said to be having trouble securing a bank overdraft. Mr Lane said:

... What are we going to do is [Mr Green] is simply going to take over all the accounts we have and transfer them to [our company] and we’ll work on the landlord and the lease at a later date when [Mr Green] has a little more money behind him.

He will start making payment as a “management fee” to me but into your bank account. This will then come off the sale price whenever that goes through.

...

The change over for the bar is at the end of this month then payments should start and as I have said before I want to put in money from this side as well. It’s the simplest way of [Mr Green] taking over and not running to the hills. Getting money back to you, keeping the landlord happy and keeping Ramsden’s off our back.

[32] Mr Lane said that he had emailed his contact at Ramsden to tell his bosses what was happening, but had not yet had a reply.

[33] Mr Haydon replied to Mr Lane’s 8 February 2017 email the same day. He said that what Mr Lane had proposed was along the lines of what he and Mr Lane had been discussing. He noted that Mr Lane was still waiting to hear back from Ramsden on the situation.

[34] In his “work paper”, Mr Haydon commented that sale of the Bar might not be the most sensible option. There would not be any significant payment made by Mr Green/Bar Red that could be used to alleviate the financial difficulties, and “it could be argued that any sale proceeds available to creditors (CFL and Ramsdens) will only lead to further expense and complication due to any tussle for priority.” The work
paper made it plain that Mr Haydon’s concerns were to see CFL repaid, and to remove any legal obligation to repay Ramsden. To those ends, the Bar should not be sold, and the landlord would have the status quo. Mr Green would “slowly prove his worth to the landlord and be ready to take the reins in due course”. A management contract would be put in place, thus allowing Bar Red to be compensated for its increased involvement and rewarded for any increased profitability.

[35] It appears from Mr Haydon’s work paper that CFL was not then holding the British Pub GSA that had been executed in early December 2016 – Mr Haydon said that delivery of this document to CFL was “a must”.

[36] Mr Haydon’s thinking as set out in his work paper was that Mr and Mrs Lane would continue to guarantee the Bar’s performance. For that, Mr Haydon considered that they should be entitled to some compensation. He considered that a weekly fee for guaranteeing the Bar’s performance would be reasonable, and that (given the GSA) a weekly fee for the use of the secured assets would also be reasonable. Mr Haydon considered that $1,000 per week would be appropriate for the guarantee fee and $500 per week for the secured asset usage charge, with both to be paid to CFL. These payments could be considered in the overall purchase price of the Bar, thus reducing the sale proceeds. Mr Green and British Pub would enter into a three year management contract giving Mr Green the option to buy at a prescribed price.

Bar Red takes over the Bar

[37] Bar Red began running the business from 1 March 2017, and began making the weekly payments to CFL. It appears that Bar Red also began paying the rent to the landlord: while at the date of the liquidation English Corner owed the landlord approximately $22,700 for outstanding rent and operating expenses, none of that amount related to payments falling due in March or April of 2017.

[38] The arrangement did not provide any lasting financial solution for Mr Lane. He no longer had income coming in from the Bar, and he soon realised that English Corner could not survive much longer. On 1 May 2017 he signed shareholders’ resolutions placing English Corner and British Pub in liquidation.

The liquidators’ investigations

[39] Following his appointment as liquidator, Mr Dalton became aware of the first sale agreement and the lease-to-own agreement. He learned that Mr Green had been unable to obtain finance to complete under the first sale agreement, and that the parties had not been able to arrange for the lease of the premises to be assigned within the expected timeframes.

[40] Mr Dalton said that his investigations confirmed that the business and assets comprising the Bar were assets of British Pub, which owned and ran the Bar business. He originally understood that the lease of the premises was held by British Pub, but he later obtained a copy of the deed of lease and found that the lessee was English Corner.

[41] Mr Dalton was concerned to find that two agreements existed between different parties, both purporting to deal with the lease and sale of the Bar. He said that he was more troubled by the lease-to-own agreement, in which English Corner was purporting to lease and transfer the Bar which (apart from the premises lease) it did not own. As liquidator of British Pub, Mr Dalton was concerned that this would be a disposition of essentially all of British Pub’s assets, and that British Pub’s creditors would be deprived of assets that should have been available to them. There would be a corresponding windfall to English Corner’s creditors.

[42] Mr Dalton considered that the attempts to document the sale had been unsatisfactory, and posed a risk to both British Pub and English Corner. Not only were there “multiple vendors with different interests attempting to sell or lease [the Bar] to different purchasers and with differing descriptions or uncertainty as to what constituted the assets to be transferred”, there was also no security for payment of the purchase price, although possession had passed. Registered security interests over British Pub’s assets had not been discharged.

[43] Mr Dalton said that he considered disclaiming the lease of the premises, on the basis that leases often present a liability rather than an asset for an insolvent company. However, disclaimer was not appropriate where there was an opportunity to assign the
lease as a necessary incident to completing the sale of the company’s business, and he thought the liquidators could achieve that in this case.

[44] Mr Dalton said that he came to the view that the best option would be to properly document a sale of the Bar, to provide more certainty. And an assignment of the lease would benefit the creditors of English Corner to the extent that it would reduce the size and pool of English Corner’s creditors. Bar Red would be responsible for meeting the ongoing rent obligations until the expiry of the lease in 2019.

[45] Mr Dalton presented the landlord with what he saw as his options, which included disclaimer. The landlord agreed to consent to an assignment of the lease.

The second sale agreement

[46] On 29 May 2017, a variation agreement, which I will call “the second sale agreement”, was signed. The parties to the second sale agreement were British Pub, Mr Lane, English Corner, Mr Green, and Bar Red.

[47] The second sale agreement provided:

(a) British Pub was the vendor, selling the Bar.

(b) The parties acknowledged that Mr Lane had been erroneously included as vendor in the first sale agreement. He was removed as vendor.

(c) Mr Green was the purchaser. He nominated Bar Red Limited to complete the purchase.

(d) English Corner and Bar Red agreed to terminate the lease-to-own agreement.

(e) The possession date was 1 March 2017.

[48] British Pub, Bar Red and Mr Green entered into a contemporaneous term loan agreement and general security agreement for the unpaid balance of the purchase price,
which was to be paid by continuation of the weekly instalments of $1,300 plus interest to British Pub (although now the payments were to be made into the trust account of the liquidators’ solicitors – not to CFL). Also contemporaneously, English Corner and Bar Red entered into an assignment of the premises lease, and the landlord consented to the assignment.

[49] Bar Red has continued to pay the $1,300 into the liquidators’ solicitor’s trust account for British Pub, and the funds are being held there pending performance and completion of all the obligations under the second sale agreement, including the discharge and release of certain securities registered over the assets of the Bar.

The dispute – CFL says that the money paid by Red Bar was payable to English Corner for the lease, and that it holds a charge over that money under the GSA

[50] At the date of the liquidation CFL was owed $118,661.59 under its factoring arrangements with English Corner. It has taken the view that that sum was secured under the GSA, over the weekly sums payable by Bar Red under the lease-to-own agreement, which were payable to English Corner. It contends that the liquidators, who have not challenged the validity of the GSA, have wrongfully purported to interfere with its security by entering into the second sale agreement and diverting Bar Red’s weekly payments of $1,300 to British Pub.

[51] Under the GSA, English Corner granted to CFL a charge in and over “the Secured Property” of English Corner.²

[52] “Secured Property” was defined to mean:

(a) all of [English Corner’s] present and future assets (including any personal property in respect of which [English Corner] has an interest as a buyer or lessee, or which [English Corner] receives as a commercial consignment; and

(b) all of [English Corner’s] present and future rights and interest in any asset,

and includes any part of it ...

² Clause 3.1(a) of the GSA.

[53] The expression “asset” was in turn defined to include any present or future, real or personal, tangible or intangible asset, benefit, interest, property, revenue, right or undertaking ...

[54] CFL says that, for the purposes of the liquidators’ duty to distribute English Corner’s assets on a liquidation, CFL was a “secured creditor” as defined by s 2 of the Act (CFL being a “person entitled to a charge on or over property owned by the company”, and “charge” being defined as a “right or interest in relation to property owned by the company”).

[55] CFL argues that the scheme of Part 16 of the Act is to exclude from the ambit of liquidation property which is subject to a charge. The Act contemplates that secured creditors will operate independently of the liquidation, unless they decide to surrender their security in terms of s 301(5)(c) of the Act. Section 248(2) of the Act makes it clear that the liquidation does not limit the secured creditor’s rights of enforcement, and s 253 provides that the liquidator’s principal duty is to take possession of the assets and distribute them or their proceeds to “creditors” (which, for this purpose, excludes secured creditors). Similarly, ss 312 and 313, which provide for the payment of creditors by the liquidator, exclude from their ambit secured creditors.³

[56] In this case CFL says that the first sale agreement lapsed when Mr Green could not secure finance to complete the purchase, and that the relevant and binding agreement between English Corner and Bar Red is the lease-to-own agreement. The liquidators had no right to purport to cancel the lease-to-own agreement (as they did in the second sale agreement), and CFL was entitled under the GSA to the $1,300 per week payable by Bar Red under the lease-to-own agreement. The action by the liquidators in disposing of property subject to CFL’s charge involved the liquidators acting as the agents of CFL as the holder of the charge. Alternatively, the liquidators’ actions amounted to conversion of CFL’s interest, including the payments of $1,300 per week.⁴

3. P Heath and M Whale (eds) Heath and Whale on Insolvency (2nd ed, looseleaf ed, LexisNexis) at [16.35], referring to Dunphy v Sleepyhead Manufacturing Co Ltd [2007] NZCA 241, [2007] 3 NZLR 602 at [43].

⁴ Referring to Dunphy v Sleepyhead Manufacturing Co Limited, above n 2, at [47] – [48].

[57] The liquidators have taken a different approach. They say that the assets comprising the Bar business were entirely (or almost entirely) owned by British Pub, and that the understanding was always that Bar Red was paying the $200,000 purchase price to acquire assets owned by British Pub. The parties had put a zero value on the premises lease in the first sale agreement, and English Corner’s only possible interest was its interest as the holder of that lease.

[58] Mr Dalton acknowledges that British Pub did not own the leasehold interest in the premises, but he considered that the premises lease had no value (or if it did, its value was likely to be no more than the costs of dealing with an assignment of it). Those costs comprised both the liquidators’ ongoing costs, and legal costs of effecting the assignment. The landlord was challenging to deal with, and that increased the time and costs. He estimated the total costs of effecting the lease assignment at approximately $10,000.

[59] Mr Dalton supported his view that the premises lease had no value by reference to a number of arguments. First, he noted that the premises are located in a side street off Queen Street, with no noticeable signage or presence which might have justified applying a premium to the location. Further, the theme of the Bar was providing English-sourced beers and crisps: that was the Bar’s point of difference. It was the Bar itself, not the location, that was the “destination”.

[60] If the Bar business including the lease had been sold together as a going concern, Mr Dalton said that he would normally have allocated up to 25 per cent of the total price as the price of the lease. But that would only be if the business was solvent and trading successfully as a going concern. That was not the position here, where British Pub was insolvent.

[61] Allowing for the deduction of the $32,000 earlier advanced by Mr Green to assist with the business, the agreed price was in reality $168,000. If 25 per cent of that figure had been allocated as the consideration for the lease, a price of $42,000 to
$50,000 might have been put on the lease. But that percentage would not be anywhere near as high as 25 per cent in a distressed sale situation. In that situation a more
realistic figure, if the lease had any value at all, was the figure representing the cost of dealing with the lease (the $10,000 referred to above).

[62] Generally, Mr Dalton considered that a sale of the Bar business for $200,000 represented good value in the circumstances (distressed sale to an employee, following previous unsuccessful attempts to find other buyers).

[63] In view of the uncertainty as to the outcome of the claim by CFL to the proceeds of sale under the second sale agreement, Mr Dalton said that the liquidators have so far been unable to charge any costs in the liquidation. They have simply been recording their costs, pending resolution of the dispute.

The liquidators’ originating application and CFL’s notice of opposition

[64] The liquidators seek the following directions:

(a) as to the entitlement to all or part of the proceeds from the sale and disposition of the Bar;

(b) as to whether the GSA would include and extend to an unregistered leasehold interest in the premises occupied by the Bar and/or all or part of any proceeds that may have derived from the transfer of the leasehold interest;

(c) that the liquidators are entitled to be remunerated for their reasonable fees and expenses arising from the sale and disposition of the Bar and dealing with CFL.

[65] The application is made in reliance on s 284 of the Act. That section provides:

284 Court supervision of liquidation

(1) On the application of the liquidator, a liquidation committee, or, with the leave of the court, a creditor, shareholder, other entitled person, or director of a company in liquidation, the court may –

(a) give directions in relation to any matter arising in connection with the liquidation:
(b) confirm, reverse, or modify an act or decision of the liquidator:

...

(2) The powers given by subsection (1) are in addition to any other powers a court may exercise in its jurisdiction relating to liquidators under this Part, and may be exercised in relation to a matter occurring either before or after the commencement of the liquidation ...

(3) Subject to subsection (4), a liquidator who has –

(a) obtained a direction of a court with respect to a matter connected with the exercise of the powers or functions of liquidator; and

(b) acted in accordance with the direction –

is entitled to rely on having so acted as a defence to a claim in relation to anything done or not done in accordance with the direction.

(4) A court may, on the application of any person, order that, by reason of the circumstances in which a direction was obtained under subsection (1), the liquidator does not have the protection given by subsection (3).

[66] In its notice of opposition, CFL pleads the GSA, and contends that its security extended to English Corner’s leasehold interest in the premises and its entitlement to the money paid pursuant to the lease-to-own agreement. CFL also contends that the proceeds from the lease-to-own agreement are not available to meet the liquidators’ costs, or to make payment to unsecured creditors. It says that the liquidators had no power to deal with its interest in the lease to its detriment, and that in entering into the second sale agreement the liquidators wrongfully purported to assign the leasehold interest to Bar Red notwithstanding CFL’s secured interest. It contends that, as a consequence, the lease-to-own agreement remains in full force and effect, subject only to CFL’s security interest. It says that the second sale agreement is of no lawful effect, and that any payments made by Bar Red should be paid to it.

[67] In the alternative, CFL says that the liquidators have interfered with its contractual rights, and it has suffered loss as a result of the sum of $144,279.36. CFL says it is entitled to costs on an indemnity basis.

The issues

[68] The following issues fall to be decided:

(1) The interpretation of the lease-to-own agreement – were the weekly payments made by Bar Red under the lease-to-own agreement payable to English Corner or to British Pub, or to both parties?

(2) If they were payable to both English Corner and British Pub, in what proportions were English Corner and British Pub entitled to receive those payments?

(3) Did the GSA extend to and include the $1,300 paid or payable by Bar Red under the lease-to-own agreement and/or the second sale agreement?

(4) If the answer to issue 3 is “yes”, does CFL’s charge created by the GSA entitle it to a direction that the weekly payments paid or to be paid to the liquidators by Bar Red under the lease-to-own agreement, and/or under the second sale agreement, should be paid to CFL? If not, what directions or orders are appropriate in respect of the money held by the liquidators in their solicitors’ trust account, and in respect of the balance of the monies payable by Bar Red under the lease-to-own agreement and/or under the second sale agreement?

(5) If CFL is entitled to the funds held by the liquidators in their solicitors’ trust account, are the liquidators entitled to deduct their reasonable fees and expenses before remitting the funds to CFL?

[69] I will address each of those issues in turn.

Issue 1 – The interpretation of the lease-to-own agreement – were the weekly payments made by Bar Red under the lease-to-own agreement payable to English Corner or to British Pub, or to both parties?

(i) Contract interpretation principles

[70] The lease-to-own agreement is to be construed in accordance with the contract interpretation principles discussed by the Supreme Court in Firm PI 1 v Zurich Australian Insurance Limited.⁵ Arnold J, writing for the majority, said that the proper approach is an objective one, the aim being to ascertain “the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of contract. This objective meaning is taken to be that which the parties intended.

[71] While there is no conceptual limit on what can be regarded as background, it has to be background that a reasonable person would regard as relevant. Accordingly, the context provided by the contract as a whole and any relevant background informs meaning.”⁶

[72] A purposive or contextual interpretation is not dependent on there being an ambiguity in the contractual language.⁷

[73] While the starting point in the interpretation exercise will be the natural and ordinary meaning of the words used by the parties, in some cases relevant background may force the Court to the conclusion that something has gone wrong with the contractual language. In such circumstances, the Court is not required to attribute to the parties an intention which they plainly could not have had. If a particular interpretation produces a commercially absurd result, that may be a reason to read the contract in a different way than the language might suggest.⁸

⁵ Firm PI 1 v Zurich Australian Insurance Limited [2014] NZSC 147; [2015] 1 NZLR 432.

⁶ At [60].

⁷ At [61].

⁸ At [89].

[74] That said, the majority in the Supreme Court indicated that it will require “a strong case” to persuade a Court that something must have gone wrong with the language.⁹

(ii) The application of the interpretation principles in this case

[75] I accept Mrs Saldanha’s submission that the first sale agreement had not been cancelled by the parties (British Pub, Mr Lane and Mr Green) by the time the lease- to-own agreement was signed. No notice avoiding the first sale agreement had been sent, and the parties appear to have remained hopeful that finance could be arranged and that matters could be worked out with the landlord. It was against that background that they entered into what I consider was intended to be an interim agreement that would permit Mr Green’s company to take over the operation of the Bar, effectively as sub-lessee in lieu of British Pub, until things could be worked out on a permanent basis.

[76] Viewed objectively, and starting with the document’s words read in their natural meaning, I think the broad intention of the lease-to-own agreement was to confirm the parties’ intention to contract on the terms of the first sale agreement, subject to the specific variations set out in the lease-to-own agreement. I think that broad intention is confirmed by the fact that the first five lines of the lease-to-own agreement (down to “Total to be Repaid $168,000”) reflect the main financial terms of the first sale agreement (including the fact that British Pub was a contracting party in the first sale agreement).

[77] Mr Dale submits that the price of $200,000 was clearly intended to be the price payable for the lease of the premises. He relies on the words (in the third line of the lease-to-own agreement) “Lease Price is $200,000.” But in the context of the surrounding language of the lease-to-own agreement, I do not think that can be correct. The words “Lease Price is $200,000” come immediately below an express reference to the first sale agreement (line 1) and a reference to the relevant “lease” as the lease of the Bar. In my view the “Price” of $200,000 was intended to be a reference to the price payable under the first sale agreement for all of the assets that were to be

⁹ At [88].

transferred under the first sale agreement. That included the lease of the premises (owned by English Corner) and the Bar assets (owned by British Pub).

[78] Consistent with that view, the payments of $1,300 per week to be made under the lease-to-own agreement would be taken off the balance of the purchase price of
$168,000. Under the first sale agreement that balance was almost entirely payable for the Bar assets owned by British Pub.

[79] I can see no commercial sense in Bar Red making a substantially worse deal under the lease-to-own agreement than it had already negotiated in the first sale agreement. In the first sale agreement Mr Green had negotiated the acquisition of the Bar’s tangible assets, and an assignment of the premises lease, for a total price of
$200,000. Why would he have agreed (in the lease-to-own agreement) that none of the $200,000 would be paid for the Bar assets, and all of it would be attributed to the acquisition of the premises lease?

[80] One other critical financial aspect of the arrangement would remain substantially the same as under the first sale agreement: Bar Red would take over English Corner’s obligations under the premises lease, in addition to making the payments of $1,300 per week (at English Corner’s direction) to CFL. (In the ninth line of the lease-to-own agreement Bar Red agreed to take over “lease payments”, and in the last paragraph it agreed to carry out maintenance “in accordance with the existing lease”, and to be responsible for any additional Opex charges during their lease).

[81] Again, all of that made commercial sense. Under the first sale agreement, Mr Lane had a conditional deal which would see English Corner relieved of the primary responsibility for rent for the balance of the term of the premises lease (although he and Mrs Lane would probably remain liable on their personal guarantees of the premises lease), and British Pub would eventually get $200,000 for the Bar’s tangible assets. It is possible to envisage that Mr Lane might have been prepared to “trade away” British Pub’s entitlement to payment for the Bar assets in order to fix English Corner’s financial problems with CFL, but it is virtually impossible to see why anyone in Mr Green’s position would have agreed to pay the same amount as that provided in
the first sale agreement, but with none of it allocated for the acquisition of the Bar’s tangible assets. I think the better reading is that the $168,000 payable under the lease- to-own agreement was precisely the same amount as the $168,000 balance payable under the first sale agreement, for the same assets, and at the same allocated values (subject to the provision in the lease-to-own agreement amending the allocation of
$9,999 for the payment of stock). $158,000 of the balance of the purchase price would be paid for the Bar’s tangible assets, and $1 for goodwill.

[82] The provision in the lease-to-own agreement relating to Bar Red’s takeover of the stock meant that no stock-take was required (as would have been the case under the first sale agreement). Bar Red would take over British Pub’s responsibility to pay holiday pay to British Pub’s staff (whatever that liability might be), and the discharge of that responsibility would be treated by British Pub as sufficient consideration for the acquisition by Bar Red of the stock on hand at the 1 March 2017 takeover date.

[83] It is true that the lease-to-own agreement provided that the payments of $1,300 per week were to be made directly to CFL, but that was only until Bar Red was advised of any change. In circumstances where the payments were in fact being made for assets of British Pub that were not owned by English Corner, these payments might have been justified on the basis of the British Pub GSA given in favour of CFL in December 2016, but in circumstances where CFL later withdrew its claim to any security based on the British Pub GSA I think it must have been open to the liquidators to advise Bar Red under the lease-to-own agreement (assuming it was still in force) that payments should be made to them pending resolution of the question of entitlement as between English Corner/CFL and British Pub.

[84] Implicit in all of this is that the lease-to-own agreement was intended to bind not only English Corner and Bar Red, but also British Pub. British Pub assumed particular obligations under the lease-to-own agreement, and the document was signed for British Pub’s shareholder, English Corner, by its director Mr Lane. In executing the document Mr Lane (and/or English Corner) could only have been acting (to the extent he or it purported to bind British Pub) as agent for British Pub, and that must have been how Bar Red and Mr Green understood the matter. Mr Lane clearly had both actual and apparent authority to bind British Pub, and the lease-to-own agreement
did just that. It appears that the lease-to-own agreement was then part-performed by all parties, including British Pub.¹⁰ In those circumstances I find that British Pub was also a party to, and bound by, the lease-to-own agreement.

[85] I have not overlooked the correspondence between Mr Lane and Mr Haydon in January and February 2017, and the discussion and proposals in that correspondence that the weekly payments by Bar Red would be treated as a management fee payable by Bar Red to English Corner or Mr Lane, or as a fee payable to Mr and Mrs Lane for their ongoing guarantee of the premises lease, or as a fee for the use of the secured assets.

[86] There are a number of reasons why that correspondence cannot affect the interpretation of the lease-to-own agreement. First, there is no mention of a management fee in the lease-to-own agreement, nor of any payment by Bar Red to Mr and Mrs Lane for the ongoing provision of their personal guarantees. There is reference in the lease-to-own agreement to the payment of money for the use of the Bar assets, but the owner of the Bar assets was British Pub, and CFL now accepts that it has no security over British Pub’s assets. Bar Red agreed to pay $158,000 for the Bar’s tangible assets, and the only effect of the lease-to-own agreement on that was that the payments thenceforth would be made (unconditionally) at the rate of $1,300 per week, and that unless and until otherwise “advised” by English Corner (including by any liquidator of English Corner), the weekly payments would be made to CFL and not to British Pub.

[87] Another reason why the January/February 2017 correspondence between Mr Lane and Mr Haydon cannot affect the interpretation of the lease-to-own agreement is that neither Mr Green nor Bar Red was a party to the correspondence, and the extent to which they were aware of its contents is not clear. To be admissible in aid of the

¹⁰ The terminology used by the parties does not determine whether a relationship is one of agency – it is the true nature of the arrangement or circumstances that is important, and that will depend on the facts of the particular case. Earlier words and conduct may afford evidence of a course of dealing in existence at the time, and may be taken into account more generally as historical background (see Dowsing v State Insurance Ltd [1996] 3 NZLR 662, at 626). In this case the first sale agreement was “earlier conduct” which, coupled with the wording of the lease-to-own agreement, made it clear that English Corner and/or Mr Lane entered into the lease-to-own agreement on behalf of British Pub.

interpretation of a written contract background material (including any negotiations) must have been known to all of the contracting parties, and it has not been established in this case that it was.

[88] I conclude on Issue (1) that the weekly payments payable by Bar Red under the lease-to-own agreement were payable (in full) for the tangible Bar assets owned by British Pub. In accordance with English Corner’s direction given in the lease-to- own agreement they were payable to CFL until the date of the liquidation. Thereafter they were payable to the liquidators in their capacities as liquidators of British Pub.

Issue (2) – If they were payable to both English Corner and British Pub, in what proportions were English Corner and British Pub entitled to receive those payments?

[89] The answer to this issue flows from my conclusion on Issue (1). Subject to any challenge that might be made to the direction given by English Corner in the lease- to-own agreement that the weekly payments of $1,300 were to be made to CFL, the payments were payable to CFL up to the date of the liquidation, and thereafter to the liquidators in their capacities as liquidators of British Pub.

Issue (3) – Did the GSA extend to and include the $1,300 paid or payable by Bar Red under the lease-to-own agreement and/or the second sale agreement?

[90] The answer is “no”. The GSA did not extend to or cover the weekly payments of $1,300 paid or payable by Bar Red. The payments were made to acquire assets owned by British Pub, and the GSA did not apply to those assets. Any claim to security over British Pub’s assets under the British Pub GSA has been withdrawn.

Issue (4) – If the answer to issue 3 is “yes”, does CFL’s charge created by the GSA entitle it to a direction that the weekly payments paid or to be paid to the liquidators by Bar Red under the lease-to-own agreement, and/or under the second sale agreement, should be paid to CFL? If not, what directions or orders are appropriate in respect of the money held by the liquidators in their solicitors’ trust account, and in respect of the balance of the monies payable by Bar Red under the lease-to-own agreement and/or under the second sale agreement?

[91] In view of my answers on Issues (1) and (3), there is no need to answer this Issue.

Issue (5) – If CFL is entitled to the funds held by the liquidators in their solicitors’ trust account, are the liquidators entitled to deduct their reasonable fees and expenses before remitting the funds to CFL?

[92] As Ms Saldanha noted, my answers on Issues (1) and (3) mean that the Issue of the liquidators’ remuneration falls away and does not require an answer. They are holding the payments made by Bar Red in their capacity as liquidators of British Pub, and CFL has no interest in either the payments made by Bar Red that are presently held by the liquidators or in the payments to be made in the future by Bar Red under the second sale agreement or under the lease-to-own agreement.

Result

[93] I make directions under s 284(1)(a) of the Act as follows:

(a) The liquidators, in their capacity as liquidators of British Pub, are entitled to retain the weekly payments of $1,300 paid to them by Bar Red under the lease-to-own agreement and/or which have been paid or are payable by Bar Red under the second sale agreement which are now held in the trust account of the solicitors acting for the liquidators, or which may in future be received by them.

(b) The liquidators are entitled to deduct their reasonable fees or expenses from the funds so held (and from the funds to be paid in future by Bar Red under the lease-to-own agreement and/or the second sale agreement).

(c) Leave is reserved to the parties to apply for any further directions that might be necessary.

[94] The liquidators are entitled to their costs on the application for directions. If counsel are unable to agree on costs, memoranda may be submitted. Any memorandum for the liquidators is to be filed and served within 15 working days of
the delivery of this judgment. Any memorandum in response from CFL is to be filed and served within 10 working days of the receipt of the liquidators’ memorandum.




Associate Judge Smith

Solicitors:

Jackson Russell, Auckland for the Applicants