ADAPTABLE SOLUTIONS LTD v TOON [2017] NZHC 753

ADAPTABLE SOLUTIONS LTD v TOON [2017] NZHC 753 [20 April 2017]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2016-404-001468[2017] NZHC 753BETWEEN ADAPTABLE SOLUTIONS LIMITEDApplicantAND VICTORIA TOON AS LIQUIDATOR OFKOORB CONSULTING (1999)LIMITEDrespondentHearing: 25 October 2016Appearances: A Holmes and A Steel for ApplicantR Hollyman for the RespondentJudgment: 20 April 2017JUDGMENT OF ASSOCIATE JUDGE SARGISSONThis judgment was delivered by me on 20 April 2017 at 10.00 a.m.pursuant to Rule 11.5 of the High Court Rules.Registrar/Deputy RegistrarDate.......................................Solicitors:Hudson Gavin Martin, AucklandStainton Chellew, AucklandR J Hollyman, AucklandA J B Holmes / A J Steel, Auckland[1] Koorb Consulting Ltd is in voluntary and solvent liquidation. AdaptableSolutions Ltd claims to be owed a substantial debt by Koorb, and seeks leave unders 284 Companies Act 1993 to apply for an order to reverse (or modify) the decision ofKoorb's liquidator partially rejecting Adaptable's proof of debt. Ms Toon, theliquidator, opposes the application.[2] The alleged debt relates to a sale and purchase transaction in 2015 betweenAdaptable and Koorb.[3] Upon learning of Koorb's liquidation, Adaptable filed a proof of debt to thetune of $183,103.94 in respect of claims arising from the sale and purchase agreement.Ms Toon has accepted part of Adaptable's claim ($9,237.73), but rejected the balance.[4] For reasons I will turn to presently, I consider that Adaptable has put forwardan arguable case that justifies the granting of leave under s 284 to permit Adaptable tocommence a proceeding against Ms Toon seeking an order reversing or modifying thedecision complained of. There is insufficient evidence before the Court, however, todecide the substance of the dispute in this present application.Background[5] Adaptable and Koorb are both software companies. Adaptable developed abusiness selling, implementing and supporting resold Axapta software, now known asMicrosoft Dynamics AX, as well as several add-on modules.[6] In early 2015, Adaptable began looking for ways to sell or restructureits business. Discussions began with Koorb in May, and after considerableback-and-forth between the companies, a sale and purchase agreement was finalisedon 26 June 2015.[7] This agreement is analysed in more detail later. But in brief, Adaptable sold toKoorb a division of Adaptable's business called the "AX Business"; and Koorb agreedto make "Earn-out payments" to Adaptable for revenue earned for a 12-month period.[8] Shortly after the agreement was signed, the parties developed an informal"work around" transitional arrangement for work that Koorb would eventually provideunder the agreement, but was not then in a position to provide. Essentially, Adaptablewould perform the work for AX customers and invoice Koorb at standard customerrates, and Koorb would then invoice the customer. Adaptable provided three invoicesto Koorb under this arrangement.[9] In late September 2015, Koorb agreed to on-sell the AX Business to a thirdparty, UXC Eclipse. As this was prior to the expiry of Koorb's 12-month obligationto make monthly Earn-out Payments, the on-sale triggered a provision to the effectthat an accelerated Earn-out payment became due immediately or on demand. Koorband Adaptable could not agree on the calculation of the Earn-out payment. Disputesarose.[10] The issues in dispute were two-fold. Essentially, they boil down to differencesin contractual interpretation over the sale and purchase agreement, and the "workaround" transitional side-agreement.[11] On the first issue, the interpretational dispute is whether is the "Earn-outPayments" provision covers revenue earned from add-on products DF and ZAP.(DF is an extension to the Microsoft AX system, and the ZAP software integrates withthe Microsoft AX system.) Adaptable considered that the provision did cover DF andZAP. From August to November 2015, Koorb initially made three Earn-out Paymentswhich included DF and ZAP revenue, along with revenue from another add-on, Atlas.However, after the disputes arose, Koorb contended that these payments had been inerror, and from then on, Koorb made deductions from itsEarn-out Payments in respect of ZAP and DF revenue.[12] On the second issue of the "work-around" side-agreement, Adaptable said thatthe Earn-out Payment should include revenue from AX customers transferred toKoorb, for which Adaptable provided services under the "work around" arrangementsand invoiced Koorb. Koorb contended that the "work around" arrangement wasseparate from the Earn-out Payments, and that Koorb had previously excluded theseamounts with no objection from Adaptable.[13] On 11 February 2016, Koorb was placed into voluntary and solvent liquidationby its shareholders. Ms Toon was appointed liquidator. On 3 May 2016, Adaptablefiled a proof of debt for $181,094.53 plus accrued interest from13 January 2016 to that date of $2,009.41.[14] After taking legal advice, Ms Toon then wrote to Adaptable on 26 May 2016advising it that she accepted part of Adaptable's claim ($9,237.73) but declined thebalance ($173,866.21). On 14 June 2016, Ms Toon tendered payment of a further$536.42 in interest which she had omitted to allow on Adaptable's claim.[15] On 20 June 2016 a director of Adaptable wrote to Ms Toon setting out hisconcerns at the process she had followed. He did not receive a response. Adaptablesubsequently applied to the Court for leave to proceed with an application unders 284(1) Companies Act, which I am now required to decide.Legal framework[16] Section 284(1) makes it clear that Adaptable must first seek the leave of theCourt before applying for orders under that section:284 Court supervision of liquidation(1) On the application of the liquidator, a liquidation committee, or, with theleave of the court, a creditor, shareholder, other entitled person, ordirector of a company in liquidation, the court may—...(b) confirm, reverse, or modify an act or decision of the liquidator:...(emphasis added)[17] Section 284(1) functions as a "filtering mechanism"1 and the court as agatekeeper before an application for orders can be made.2 The court attempts to strikea balance between protecting the rights of meritorious claimants, while also ensuring1 Trinity Foundation (Services No 1) Ltd v Downey HC Auckland CIV-2010-404-3180, 18 August2005 at [21].2 Manifest Capital Management Pty Ltd v Lawrence HC Auckland CIV 2010-404-7741, 20December 2011 at [7].that a liquidated company's assets are not "frittered away as a result of claims that areunlikely to succeed".3[18] Both parties have agreed that the correct test to be applied in determiningwhether to grant leave under s 284(1) was that set out by Lang AJ (as he then was) inTrinity Foundation (Services No 1) Ltd v Downey.4 The Judge held that a creditorseeking leave under s 284 must show it has an arguable case, and in order to grantleave, the Court must be satisfied that:(a) The applicant's claim has a credible factual basis; and(b) There is a reasonable likelihood that, if the claim is established, theCourt will disturb the act or decision in question.[19] This second step acknowledges that liquidators should remain free to undertaketheir duties in a cost effective and efficient manner, without their every decision beingchallenged. In general, the Court will be slow to interfere with a liquidator's day-to-day administration, or the bona fide exercise of its discretion.5 The Court is likely tointerfere only if the decision of a liquidator is found to be "wrong or unreasonable".6[20] It is apparent that this two-part test requires the Court to consider the "likelymerits of the application" and thus to examine the parties' respective positions to thelevel of detail appropriate in an interlocutory application.7[21] I turn now to the first limb of the test. Whether there is a credible factual basisto Adaptable's claim turns on the two contractual interpretational questions concerningKoorb's obligations under the Earn-out Payment provision, and the transitional side-agreement. These questions are addressed in the analysis that follows.3 At [22].4 At [21].5 Trinity Foundation (Services No 1) Ltd v Downey (2005) 9 NZCLC 263,917 (HC) at [17]-[20];CIR v Hulst; CIR v Oriana Finance Ltd (2000) 19 NZTC 15,693 at [25].6 Trinity Foundation (Services No 1) Ltd v Downey above n 1 at [31]. The "wrong or unreasonable"criterion was also referred to in Registrar of Companies v Body Corporate 307730 [2013] NZCA659, [2014] 2 NZLR 623 at [4].7 Official Assignee v Norris [2012] NZHC 961 at [18].The scope of the Earn-out Payment provision[22] Adaptable submits that according to the plain words of the agreement, theEarn-out Payment applies to all revenue derived from the AX Business division, whichprovided sales, consulting, support and other services to its customers.[23] Therefore, in reliance on this interpretation, Adaptable argues that Koorb hasfailed to pay to Adaptable:(a) $102,650, being margin on licence sales revenue (annualised pursuantto the formula set out in cl 3.3) from two existing customers of the AXBusiness, namely:(i) Sale of a licence to use DF to SIMX; and(ii) Sale of a licence to use ZAP software to Metro Glass.(b) $16,080.12, being margin on maintenance income (annualised pursuantto the formula set out in cl 3.3) from three AX Business Contracts,namely:(i) Maintenance of the DF extension for SIMX, provided by theAX business;(ii) Maintenance of the DF extension for Delmaine, provided by theAX business; and(iii) Maintenance of the ZAP software for Metro Glass, provided bythe AX business.Terms of the Agreement[24] The starting point in any contractual analysis is the relevant terms of theagreement itself.8 These are set out below.[25] Koorb was obligated to pay the Earn-out Payments under cl 3.1 of theagreement, which sets out the purchase price of the agreement for the AX Business asfollows:The Purchase Price for the AX Business is:(a) the net book value of the AX Equipment as at the Completion Date(as agreed by the parties by the Condition Date); plus(b) Goodwill, comprising $150,000 in cash plus the Earn-out Payment.[26] Clause 3.2 of the agreement set out how the purchase price was to be paid:The Purchase Price will be paid as follows:(a) on the Completion Date Koorb will pay to Adaptable $150,000 incleared funds,(b) (subject to clause 3.3) on the 25th of each month, starting on25th August 2015 and ending on 25th July 2016, Koorb will pay toAdaptable the instalment of the Earn-out Payment derived in theimmediately preceding calendar month;(c) when making a payment under paragraph (b) Koorb will provide toAdaptable with such information as Adaptable may reasonablyrequire to enable Adaptable to verify each instalment of the Earn-outPayment.[27] The Earn-Out Payment is defined in clause 1 of the agreement as follows:Earn-out Payment means a sum equal to the following revenue earned byKoorb from the AX Business in the 12 months from the Completion Date:9(a) 100% of the margin on licence sales to existing customers andcustomers named in the AX Prospect List originated after theCompletion Date,(b) 20% of all services revenue derived from the AX Business Contractsand customers named in the AX Prospect List, and(c) 100% of the margin on all maintenance income derived from theAX Business Contracts and customers named in the AX Prospect List8 Firm Pl 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 at [63].9 The Completion Date is defined in clause 1 of the agreement as 3 July 2015.[28] "AX Business" is defined in cl 1:AX Business means the division of Adaptable that provides sales, consulting,support and other services in relation to the Microsoft Dynamics AX Software.[29] In this case, Koorb on-sold the business before the end of the12 month period throughout which it was to pay monthly Earn-out Payments toAdaptable. It therefore triggered cl 3.3 which relevantly provides that:If Koorb resells all or part of the AX Business before payment of the lastinstalment under clause 3.2(b), Koorb will immediately, and on demand, payto Adaptable the balance of the Earn-out Payment, calculated by multiplying(1) the average of the instalments of the Earn-out Payment that have alreadybeen paid to Adaptable, by (2) the number of instalments that have not beenpaid.[30] I cannot agree with Adaptable that the proper interpretation is plain on a simplereading of the contractual terms. Though it is certainly arguable, it is not obviouswhether the wording "in relation to the Microsoft Dynamics AX Software" in thedefinition of AX Business encompasses add-ons or extensions to AX software. TheEarn-out Payment provision and the remainder of the agreement do not clarify thisambiguity.[31] In submissions, both parties relied heavily on the broader contractual contextto bolster their respective interpretations of the objective intention of the parties. Whilethis is certainly a permissible tool in contractual interpretation,10 it does indicate thatthe interpretational dispute cannot be resolved through a simple reading of the text.Broader contractual context[32] Concerning pre-contractual negotiations, Adaptable submits that whileAdaptable's early Information Memorandum set out the AX and ZAP/BI divisions asseparate, it was subsequently agreed at a meeting on 22 June 2015 that because theZAP/BI Business was so small, it was not worth separating from the AX Business.(Koorb has a different account of this meeting; it says that Koorb did not agree toincorporate ZAP income into its offer.)10 Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444 at [27].[33] On the other hand, Ms Toon submits that pre-contractual negotiations indicatethat Koorb only intended to purchase the AX Business component of the Adaptablebusiness which did not include ZAP or DF. She points to the following evidence:(a) An Information Memorandum presented by Adaptable directors toKoorb directors at a meeting on 18 May 2015. The InformationMemorandum stated that Adaptable operated as four distinct divisions:AX related software and services; SL related software and services;CRM related software and services; BI and Infrastructure relatedservices. Ms Toon says this suggests that AX and ZAP are distinct,standalone business divisions within Adaptable.(b) When Koorb sought clarification as to what was included in theAX division, Adaptable responded by sending summary spreadsheetswhich divided up the income of the four business divisions and set outwhich third party products were treated as part of the AX division. ZAPand DF were not included among those third party products.(c) Koorb made its offer to Adaptable on that basis, and the covering emailstated that "This proposal is only for the AX component of theAdaptable business and does not include BI (ZAP), DemandForecaster, Dynamics SL or CRM."[34] Adaptable also submits that its interpretation is supported by post-contractualconduct: Koorb itself accepted that it was required to pay Adaptable for revenuerelated to license sales and service/maintenance revenue relating to other "add-on"products sold by the AX Business (such as ATLAS and RF Smart). It made paymentsin relation to those add-on products. Koorb initially also included ZAP and DF in itsEarn-out calculations, before later seeking to correct what it now describes as an"error".Summary[35] It remains unclear whether the revenue from license sales and maintenanceincome in relation to ZAP and DF is covered by the Earn-out Payment provision.However, there is enough to suggest that Adaptable's reading of the text, in light ofthe extrinsic evidence and in particular Koorb's post-contract payments, is at leastarguable.The work-around arrangements[36] The "work around" arrangement appears to be a side contract entered into byAdaptable and Koorb, of which there is little documentary evidence. The parties differas to whether the work performed by Adaptable for the AX contacts and invoiced toKoorb meant that revenue was "earned by Koorb". In other words, there isdisagreement over whether this work fell within the scope of the Earn-out Paymentprovision.[37] According to Adaptable, Ms Toon and Adaptable reached an agreement in July2016 that Adaptable would continue to provide licences and maintenance services forexisting customers and AX Business Contracts for an interim period until Koorb wasable to service those customers itself.[38] Adaptable contends that the parties did not agree that revenue from thoselicence and maintenance services would be excluded from the Earn-out Payments.Although Adaptable carried out the work and invoiced Koorb, it was incorrect to saythat Koorb did not earn any revenue from that work. Koorb may not have earned anymargin or profit, but that is irrelevant to its contractual obligation to pay20 per cent of all services revenue derived from the AX Business Contracts. As forthe licence sales and maintenance income, this was work that was carried out byAdaptable on behalf of Koorb, at Koorb's request.[39] Therefore, when annualised pursuant to the formula in cl 3.3, Adaptable saysthat Koorb is required to pay $51,371.25, being margin on licence sales revenue,service revenue and maintenance service income for existing customers andAX Business Contracts.[40] Ms Toon says that under the "work around" arrangements, Adaptable invoicedKoorb (at the full client rate) and Koorb then invoiced the client, as this wasadministratively simpler for the client. However, both Koorb and Adaptable treatedthese invoices separately from the Earn-out Payments (referring in particular to theemail from Adaptable director Mr Cox). This was revenue earned by Adaptable, notKoorb, and therefore outside the definition of the Earn-out Payments.[41] I am less persuaded by the merits of Adaptable's claim regarding the "workaround" arrangement. However, I do not think that this arrangement can be treated inisolation from the first issue, and I am therefore reluctant to exclude the possibilitythat Adaptable has an arguable case.Is there a reasonable likelihood the Court will disturb the decision?[42] Relevant here is Adaptable's submission that Ms Toon's decision-makingprocess was seriously flawed. In particular, Adaptable contends that:(a) Ms Toon relied on a wrong interpretation of the agreement, one whichwas inconsistent with the plain meaning of the words in the agreementand relies entirely on pre-contractual documents selected for her byKoorb shareholder-directors. She had selective regard to and placedundue weight on pre-contractual correspondence and conduct(including the subjective views of Koorb's directors).(b) She made a peremptory decision to reject the claim without obtainingall relevant information, examining witnesses, or acting in anindependent and impartial manner.(i) She sought advice only from legal advisers previouslyappointed by Koorb's director-shareholders, and informationonly from Koorb's director-shareholders.(ii) She did not carry out any independent investigation, review anyother company documents, or request to interview anybody.(c) She did not seek documents from Adaptable and gave Adaptable noopportunity to comment on the selected non-contractual documents thatshe relied on for her interpretation of the agreement.[43] Ms Toon responds by saying that she took time to consider the relevant materialheld by the company in liquidation. She considered the claim carefully, seekingfurther information from Koorb and taking legal advice on the materials. There wasno obligation to revert to Adaptable in the circumstances.[44] Ms Toon further says that Adaptable's response to her decision has providedno new evidence or information. She met later with the directors of Adaptable on awithout prejudice basis to discuss their proof of debt. She reviewed specific materialprovided to her, but that material did not change her assessment.[45] Ms Toon says that she discharged the obligation she owed to other actual andprospective creditors and also to shareholders to realise the company's assets in areasonable, proportionate and efficient manner.[46] I am inclined to agree with Ms Toon. Based on the evidence before me, I wouldnot describe Ms Toon's decision as peremptory. Unlike Manifest Capital ManagementPty Ltd v Lawrence,11 this is not a case where the liquidator arrived at a decision in anunreasonable and peremptory fashion, and without first obtaining all the relevantinformation. That, however, is not determinative.[47] It is not necessary for Adaptable to prove that the liquidator's process wasdefective before the Court can exercise its discretion to grant leave. The overallquestion, it is worth reminding ourselves, is whether there is an arguable case thatshould be allowed to proceed.[48] I consider that there is enough in Adaptable's evidence to meet this threshold.On the material before me, it is unsafe for me to conclusively determine the twocontractual interpretation questions at issue in this case. Doing so would require an11 Manifest Capital Management Pty Ltd v Lawrence, above n 2.in-depth forensic examination that is not possible or appropriate in this interlocutoryapplication.[49] However, I am satisfied that Adaptable has at least an arguable case for itsreading of a fairly ambiguous text in light of the relevant extrinsic material. I am alsocognisant that Koorb, as a voluntarily liquidated company, may still have sufficientassets to pay Adaptable if the debts are proven. This provides a further discretionaryfactor weighing against preventing the matter from proceeding further.Conclusion and orders[50] On this basis I am satisfied that Adaptable should be granted leave to have itsclaim for orders determined by the Court. Therefore its application for leave tocommence proceedings and make the necessary application for that purpose is granted.[51] As costs follow the event under the statutory regime, Adaptable is entitled tocosts on a 2B basis plus disbursements. I order accordingly._____________________Associate Judge Sargisson