DENIZE FARMS LIMITED V SPOTBURN FARMS LIMITED (IN LIQUIDATION) HC AK CIV-2011-404-5374

DENIZE FARMS LIMITED V SPOTBURN FARMS LIMITED (IN LIQUIDATION) HC AK CIV-2011-404- 5374 16 December 2011IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2011-404-5374UNDER the Companies Act 1993BETWEEN DENIZE FARMS LIMITEDApplicantAND SPOTBURN FARMS LIMITED (INLIQUIDATION)RespondentHearing: 5 December 2011Appearances: Ms D Williams for ApplicantMr K Puddle for RespondentJudgment: 16 December 2011 at 12:00 PMJUDGMENT OF ASSOCIATE JUDGE DOOGUEThis judgment was delivered by me on16 December 2011 at 12 noon, pursuant toRule 11.5 of the High Court Rules.Registrar/Deputy RegistrarDateSolicitors:Ms Daisy Williams, Barrister, Shortland Chambers, Auckland – daisy@shortlandchambers.co.nzLowndes Jordan, P O Box 5966, Auckland –kdp@lojo.co.nz[1] The respondent, Spotburn Farms Ltd (in liq) ("Spotburn") served a statutory demand on the applicant, Denize Farms Ltd ("Denize Farms") on 16 August 2011.The statutory demand notified the applicant that Spotburn:HEREBY REQUIRES you to pay to it the sum of $252,562.50 in respect of monies advanced to you, being funds advanced to Spotburn Farms Limited (In Liquidation) on or about 4 July 2008 and deposited to your bank account, being the amount due by you („the debt‟).[2] The background to the service of the statutory demand is, in brief, as follows.[3] The underlying debt at issue relates to the sum of $252,562.50 advanced by StockCo Ltd ("StockCo") to Spotburn in July 2008 under the terms of a Livestock Agreement entered into between those two parties ("the Livestock Agreement").[4] Clauses 1.1 and 1.2 of the Livestock Agreement effectively provided that theadvanced funds ("the Advance") were to be applied for the purchase of specificlivestock on StockCo‟s behalf. The livestock that were to be purchased were 700deer and 1100 lambs ("the Livestock") as specified in the Schedule to the LivestockAgreement. Clauses 1.4 and 2.1 state that the Livestock would be owned outright and unencumbered by StockCo. Clauses 3 and 6 of the Schedule detail how the Livestock would then be bailed to Spotburn to be farmed through to processing in October/November 2008. The proceeds then were to be applied to repayment to StockCo of the Advance plus interest and costs (and any balance to be retained by Spotburn as profit).[5] StockCo paid the funds into a nominated bank account, the details of which were supplied to it by Mr Denize, the manager of a group of companies of which Spotburn was a member. The bank account was actually that of Denize Farms. In evidence filed for the current proceedings, Mr Denize said that the reason for this was that Spotburn did not have its own bank account. I interpolate that it is notdisputed that the money was paid into the applicant‟s bank account in circumstances where it was to be held on trust for the benefit of the respondent.[6] The respondent served a statutory demand dated 16 August 2011 on the applicant, which the applicant now seeks to set aside. The statutory demand sought payment in the amount of $252,562.50 in respect of an inter-company debt between Spotburn and Denize Farms.[7] Denize Farms in its application alleges that there is a genuine and substantial dispute as to whether there is a debt owing by Denize Farms to Spotburn. Spotburn denies this.[8] Essentially what the applicant says is that the funds that were advanced to it on trust were used for the purposes for which they were intended, namely, the purchase of the Livestock. Mr Denize has filed two affidavits on behalf of the applicant. I will examine those affidavits further on in my judgment. The respondent asserts that there are inconsistencies between the two affidavits and that the account given by Mr Denize does not pass the threshold of credibility required if a statutory demand is to be set aside. There is a more comprehensive examination of the grounds on which the respondent opposes the application later on in thisjudgment. But in overview, it is the position of the respondent that Mr Denize‟saffidavits ought not to be accepted, primarily on account of their inconsistency with each other and, in the case of the first affidavit, that it is at variance with contemporary bank statements.Issues[9] Mr Puddle set out the respondent‟s reply to the application to set aside thestatutory demand as follows:4 Spotburn‟s position is that:4.1 The Application was not properly filed in time and it is an abuse of process. On the tenth and final working day after service of the Statutory Demand the Application was filedsolely in reliance on the unsupported and inadmissible hearsay evidence of a junior barrister deposing that her client had instructed her that a substantial dispute existed as to the debt. Due to the strict statutory time frames for filing an application to set aside a statutory demand, this constituted an abuse of process.4.2 Denize Farm‟s assertion of the existence of loans and theirsubsequent assignment is inherently implausible, not supported by any contemporaneous documents and is an invention after the fact. Actual bank statements show that Denize Farms simply frittered the money away on various expenses.4.3 Even if the alleged loans and assignments did occur, then a debt nonetheless exists between Denize Farms and Spotburn due to the fact that Denize Farms knowingly paid out money in breach of their obligations as trustee.4.4 Even if there is a dispute as raised there still exists a debt of $2,562.50, which is sufficient to maintain the Statutory Demand (albeit in a lesser amount).Principles[10] I shall briefly re-state the principles which are to guide a Court dealing with an application under s 290 of the Companies Act 1993.[11] The applicant bears the onus of proof to show that there is a fairly arguable basis upon which it is not liable for the amount claimed.1 The dispute must be more than a mere assertion.[12] There must be a proper foundation for the dispute and assertions made must pass the threshold of credibility.2 Issues of credibility can be resolved on the basis contemplated in Eng Mee Yong v Letchumanan:3Although in the normal way it is not appropriate for a judge to attempt to resolve conflicts of evidence on affidavit, this does not mean that he is bound to accept uncritically, as raising a dispute of fact which calls for further investigation, every statement on an affidavit however equivocal, lacking in1 Eastgate Real Estate Ltd v Walker (2001) 15 PRNZ 308 (HC) at 315.2 Freemont Design & Construction Ltd v W Stevenson & Sons Ltd HC Auckland CIV 2005-404-4807, 20April 2006.3 Eng Mee Yong v Letchumanan [1980] AC 331 (PC) at 341.precision, inconsistent with undisputed contemporary documents or other statements by the same deponent, or inherently improbable in itself it may be. In making such order on the application as he "may think just" the judge is vested with a discretion which he must exercise judicially. It is for him to determine in the first instance whether statements contained in affidavits that are relied upon as raising a conflict of evidence upon a relevant fact have sufficient prima facie plausibility to merit further investigation as to their truth.[13] The effect of s 290 is that it requires an applicant seeking to set aside a statutory demand to place before the Court information which, while not being required to carry the Court to the point where it is able to conclude that the information is correct, at least has the appearance of sufficient reliability that it can be said that a Court dealing with the matter could accept the account given as being correct.Reliability of the Denize evidence[14] Against that background, the following matters seem to me to be relevant.[15] First, there is the inconsistency between the two affidavits. Mr Denize has sought to explain the difference between the two versions as being one of his not giving a sufficient explanation in the first because he did not think it was required. But in fact the two explanations are inconsistent.[16] In the first affidavit, Mr Denize said that the money paid into Denize Farms‟sbank account was used to pay a deposit under the Livestock Agreement. In the course of her cogent submissions, Ms Williams agreed with me that the plainmeaning of the relevant part of Mr Denize‟s first affidavit was that the applicant hadmade a payment in one transaction of $250,000 and that payment had been madedirectly to Develop Spotburn Ltd ("DSL") for the purchase of livestock. This wouldseem to be unarguable given what Mr Denize actually said in his first affidavit sworn 15 September 2011, which was:10. On or about 17 November 2008, $250,000 of the $252,562.50 advanced by StockCo was paid by Denize Farms to DSL on behalf of Spotburn as a deposit under the agreement between Spotburn and DSL.[17] That affidavit was responded to by Mr Horton, the liquidator of the respondent, in an affidavit that he swore on 20 September 2011. Mr Horton rejected the account that Mr Denize had given as being untrue. He exhibited to his affidavitrelevant pages from the applicant‟s bank statement for the period 30 June 2008 to 31July 2008. That bank statement evidenced that payment to the account of $252,562.50 on 4 July 2008. But rather than $250,000 being disbursed by way of a payment to DSL, the bank statement disclosed that the funds in the account were dispersed by a series of payments to a number of different payees and included what seemed to have been some personal payments to Denize family members.[18] Subsequent to the bank statement information being provided, Mr Denize, in his second affidavit sworn 11 October 2011, asserted that a different arrangement from that which he originally deposed was entered into.[19] In his second affidavit, Mr Denize accepted that the sum of $250,000representing a payment from StockCo had been deposited into the applicant‟s bankaccount for July 2008. He said:So that [Spotburn] could honour its agreement with StockCo, [Spotburn] entered into an agreement on 7 November 2008 to buy stock from DSL. It was agreed that [Spotburn] would pay a deposit of $250,000 to DSL. [Spotburn] agreed to assign the $250,000 of intercompany loans and shareholder advances to DSL. In consideration for this transfer DSL received a deposit of $250,000 for the stock. The balance of that purchase price was to be paid by February 2009. I attach marked "B" a copy of the agreement. It is this transaction that I was referring to when I said in my affidavit that the funds had been "applied to the purchase of stock". The application was not direct payment of the funds for stock, but rather the application of the debts created following advances by [Spotburn] to the deposit payable to DSL for the stock[20] He added:I did not intend to mislead the Court or anyone else with my comment that the funds had been "applied to the purchase of stock". The full explanation of what occurred did not seem to me to be relevant in the context of the liquidation proceeding, which was centred on [Spotburn‟s] failure to repay the loan rather than on what happened to the proceeds.[21] Mr Puddle was very critical of what he saw as being nothing less than a change of explanation. He also drew attention to the fact that none of the sequence of background transactions, being the intercompany loans which were allegedly assigned from the respondent to DSL, in consideration of part of the purchase price for the stock, were documented. He drew my attention to the sparsity of the documents which were disclosed following the liquidators serving a written notice on the companies. They do not contain documentation of the background loans or the assignment, nor do they contain any evidence that DSL assented to a variation ofthe parties‟ contract to permit the satisfaction of part of the purchase price to takeplace in this way.[22] It was also Mr Puddle‟s submission that the explanation which Mr Denizeadvanced to explain the different accounts given was wholly inadequate. He drewmy attention to the fact that Mr Denize‟s first affidavit was not filed until 15September 2011, nearly a month after the date of service of the statutory demand.[23] Mr Denize says that Denize Farms was not a debtor that had received an advance of approximately $250,000 from Spotburn. The true position, he says, was that Denize Farms had entered into a transaction for which it gave good consideration equivalent to the $250,000 which Spotburn had paid to it.[24] If, as I conclude, there is an inconsistency between the two accounts, Mr Denize has not given a proper explanation for the differences. The flavour of his second affidavit suggests that he was the human agent of the companies who actuated the dealings between the related companies. He does not say that, while he was not a party to the making of the original arrangements, he found out about them later. He does not seek to suggest that someone else was the individual responsible for the companies entering into the various arrangements now contended for. My conclusion is that Mr Denize must have had first hand knowledge of these matters and yet, when he gave an affidavit in September, it contained an incorrect explanation of the means by which the deposit was paid.[25] Had the arrangement been as he described it in the first affidavit, there could have been a bona fides and substantial basis for the applicant disputing that the company was indebted to the respondent. The account given was that the moneywas received into Denize Farm‟s account and used to pay for the Livestock.However, as I have already noted, the problem with that account was that it was atvariance with what the respondent‟s liquidator was able to establish plainly, namely that the money was not used to make a payment for livestock pursuant to an agreement between DSL and Spotburn.[26] The evidence of the state of the bank account instead suggested that Denize Farms had used the money for its own purposes and had not applied it for the purpose for which it had been entrusted by Spotburn. The second statement that Mr Denize gave addressed this by attempting to show that while payment had not been directly made for livestock, Denize Farms had paid for it on behalf of the respondent by indirect means. That is, Denize Farms had advanced the money that it held for the benefit of the respondent to other Denize companies. This had resulted in those companies owing debts to Denize Farms; that Denize Farms had then assigned the benefit of the debts to DSL in part payment of the price of stock which Spotburn was purchasing from DSL. By this means, Denize Farms had conferred on Spotburn a financial benefit equivalent to the amount of the money that Spotburn had entrusted to it. It is said by virtue of Denize Farms satisfying Spotburn‟s obligation under thestock purchase agreement, the debt that Denize Farms owed to Spotburn was extinguished.[27] The inconsistency of the two accounts that Mr Denize has given, both on oath, represents a stumbling block for the applicant satisfying the Court that there is a substantial dispute concerning the existence of the debt.[28] The Court is not helped in resolving the matter by the absence of any explanation as to why what appears to be an involved and complex arrangement was entered into when all that the Denize Farms had to do was to hold the $250,000-oddin its bank account until it was required to pay it to DSL. Secondly, there is no documentation of the arrangement whether by way of minutes or other documents.[29] Thirdly, the alleged arrangement does not seem to have been sanctioned by the party who advanced the money to Spotburn, that is StockCo.[30] Fourthly, there is no corroboration of the assertion implicit in Mr Denize‟saccount of matters that DSL was prepared to accept an assignment of the obligations of third parties in satisfaction of the debt owed to it by Spotburn or why it should have done that in preference to receiving cash. Unless DSL agreed to such an arrangement, Denize Farms would have been in no position to assign rights arising under the alleged debts to Spotburn in satisfaction of the debt that it owed to Spotburn.[31] Fifthly no information is provided as to whose liabilities Denize Farms paid off. Were any of the payments made by Denize Farms for the purpose of paying its own debts? I mention one or two examples of payments in the case which show it is difficult to see how DSL would be benefited. One is a payment of $2,000 to aperson described as "Mum D" in the bank statements. A similar uncertainty arises inthe case of payments made during July 2008 "totalling $25,000 for "Pers everyday".[32] Providing some corroboration is particularly important in this case where a second explanation about the nature of the payments made has been put forward which is substantially different from that which Mr Denize advanced in his first affidavit. In such circumstances, the Court will carefully scrutinise the apparent credibility of the second account and it behoved the applicant to provide supporting detail which would reassure the Court that the second account was one that a Court could take seriously as a foundation for a substantial dispute between the parties. Those observations are supported by the remarks of Lord Diplock in the well-known case of Eng Mee Yong v Letchumanan, which I have quoted above at [12].[33] All of the weaknesses which his Lordship described in the above-quoted passage are present in the present case.[34] Section 290(4) of the Companies Act 1993 allows the Court to grant an application to set aside a statutory demand if the Court is satisfied that there is a substantial dispute whether or not the debt is owing or due. I agree with the submission for the respondent that it is well established that the applicant bears the onus of proof to show that there is arguably a genuine and substantial dispute as to the existence of the debt.[35] Given the difficulties with the evidence that I have set out above, it is my judgment that the applicant has not demonstrated that there is a substantial dispute about whether or not the debt is owing.[36] In any case, as Mr Puddle pointed out, such payments as were made did not result in a disbursement of the entire $252,562.50 which the applicant held for the benefit of the respondent. There is a balance of $2,562.50 yet to be accounted for. I agree that a convincing case would be available to the respondent if necessary that the $2,562.50 is owing. However, on balance I think it preferable for the Court to rest its decision, if it can, on a conclusion about whether the $252,562.50 is actually owed. My conclusion in that regard is that there is no substantial dispute about whether the latter amount is owed by the applicant and therefore the application to set aside the statutory demand must fail and it is dismissed.[37] Mr Puddle submitted that I ought to make an order under s 241(4) for the immediate liquidation of the applicant. I think the preferable order is to direct the applicant to pay the sum of $252,562.50 not later than 3 February 2012 with leave being reserved to the respondent to make an application to place a company into liquidation after that date if the amount has not been paid. The proceeding is to be listed in the liquidation list on 10 February 2012.[38] On the issue of costs, Mr Puddle submitted that the way in which the applicant had gone about making its application amounted to an abuse of process. He submitted that from the circumstances in which a junior barrister gave an affidavit in support of the application which her employer was instructed to bring on behalf of the applicant which was no more than a recitation of hearsay evidence and which included conclusionary comments, that it was apparent that the filing of that affidavit was a tactic to get round the rigorous time limits provided for in s 290 of the Companies Act 1993. On that basis, he submitted that an exemplary order for costs was required and further submitted that I should make an order for costs on a solicitor–client basis against the applicant.[39] I would prefer not to comment on the propriety of the conduct of the barrister in question. I have not heard from her about the circumstances in which she came to give the affidavit. I would only comment that there are risks that by doing so, counsel could be seen to compromise her independence as a member of the bar. In the overall circumstances of the case I think the fairest order is that the applicant pay costs on a 2B basis together with disbursements fixed by the Registrar and that will be the Court order._____________J.P. DoogueAssociate Judge