DESIGN ELECTRONICS LIMITED v LOOKMAN [2020] NZHC 3036

DESIGN ELECTRONICS LIMITED v LOOKMAN [2020] NZHC 3036 [17 November 2020]IN THE HIGH COURT OF NEW ZEALANDNELSON REGISTRYI TE KŌTI MATUA O AOTEAROAWHAKATŪ ROHECIV-2020-442-32[2020] NZHC 3036UNDER section 290 of the Companies Act 1993IN THE MATTER OF an application to set aside a statutorydemandBETWEEN DESIGN ELECTRONICS LIMITEDApplicantAND MICHAEL ANDREW LOOKMAN and187 BRIDGE TRUSTEES 53 LIMITED astrustees of the Lookman Family TrustRespondentsHearing: 9 November 2020Appearances: S Jamieson for applicantG Downing for respondentsJudgment: 17 November 2020JUDGMENT OF ASSOCIATE JUDGE JOHNSTON[1] The issue raised by this application pursuant to s 290 of the Companies Act1993 for an order setting aside a statutory demand is whether, in the context of a loanfor a fixed term, where the agreement does not provide for early termination, or forthe consequences of early cancellation by the lender for cause, such a cancellationgives rise to a debt entitling the lender to immediate repayment of the outstandingdebt.[2] The background is largely uncontroversial. On 14 December 2016 the trusteesof the Lookman Family Trust and Design Electronics Ltd (DEL) – a start-uptechnology company - entered into an agreement that they called an "Investment andShareholding Agreement". The parties did not have the benefit of legal advice in thepreparation of the agreement. They prepared the agreement themselves. Pursuant tothis agreement the trustees agreed to lend and DEL agreed to borrow up to $2.1 millionfor a term of five years ending in December 2021. In the result, a total of $1.820million was advanced by the trustees to DEL pursuant to the agreement.[3] Clause 3 of the agreement provided as follows:Investing and Shareholding Agreement (Agreement) commences on thecommencement date will continue for a period of 5 years unless terminatedearlier in accordance with its conditions.[4] Almost from the outset the parties' arrangements have been fraught.[5] In March 2018, the trustees applied for an order appointing an interimliquidator to DEL. This application was predicated on the legitimacy of the trustees'demand for repayment of the monies advanced to DEL, and their contention that theoutstanding balance of the loan was repayable on demand.[6] Associate Judge Matthews dealt with the trustees' application in a judgmentdated 2 May 2018.1 His Honour refused to make the order sought. The Judgeconcluded that DEL had an arguable case that the debt was not repayable on demand.Having reviewed the leading authorities as to when debts are repayable on demand,and analysed the provisions of this agreement in the light of those principles, the Judgeconcluded that:[25] Arguably the advances were for a period of five years, being theexpress term of the agreement, subject to their being converted to share capitalat the option of the trustees. The description of the advances being made on areimbursement model is obscure and may support or detract from the prospectthat the loan was for five years. Evidence at a trial on whether the advancesare now due would deal with each of the above questions on interpretationwhich emerge from the wording of the document, leaving the Court toestablish its true meaning.[26] It follows that Design Electronics has established an arguable case thatthe advances made by the Lookman Trustees are not repayable on demand.1 Lookman v Design Electronics Ltd [2018] NZHC 904.[7] The trustees later commenced proceedings and sought summary judgment fororders for specific performance requiring DEL to provide the information it wasobliged to provide on a monthly basis in a timely way.[8] In a judgment dated 18 December 2018 Associate Judge Matthews granted thetrustees' application for summary judgment.2[9] The Trustees having secured an order for specific performance, when, in theirassessment, DEL did not comply with its contractual obligations in relation to theprovision of information, they asserted that DEL had repudiated the contract,purported to cancel the same and served a statutory demand for the outstandingbalance. DEL applied for an order setting aside the statutory demand.[10] In a judgment dated 23 September 2019, Associate Judge Lester concluded –as Associate Judge Matthews had done in the earlier proceeding – that the trustees'statutory demand should be set aside because DEL had an arguable defence to theclaim on which the statutory demand was based.3 His Honour's reasoning is capturedin paragraphs [17]–[23] of the judgment as follows:[17] The effect of cancellation is set out in s 42 of the Contract andCommercial Law Act 2017 ("the Act") which provides:(1) When a contract is cancelled, the following provisions apply:(a) to the extent that the contract remains unperformed atthe time of the cancellation, no party is obliged orentitled to perform it further:(b) to the extent that the contract has been performed atthe time of the cancellation, no party is, by reasononly of the cancellation, divested of any propertytransferred or money paid under the contract.[18] LFT does not rely on a term of the Agreement to maintain the validityof its demand with Mr Downing's submissions, stating: "we are not relying onthe terms of the contract now". LFT says its right to recover under s 42(3) ors 43(3)(a) of the Act is so clear cut as to be a fait accompli so much so that Ican treat the amount claimed as being a debt due. Mr Downing emphasisesthat the amount claimed is not unliquidated – the amount being fixed by thesum advanced.2 Lookman v Design Electronics Limited [2018] NZHC 3396.3 Design Electronics Ltd v Lookman [2019] NZHC 2400.[19] I cannot accept Mr Downing's argument. DEL is not under anobligation to repay the debt – that is to perform the contact further by virtueof s 42(1). At that point, unless and until DEL has been ordered to pay eitherdamages or a payment under s 43(3) no debt is owed by DEL to LFT.[20] A debt which has fallen due for payment before cancellation but hasnot been paid at cancellation remains payable following cancellation. Thatrule is not applicable in the present case because of the finding by AssociateJudge Matthews that it is arguable that the advance was intended to be for afive year term.[21] LFT did not have an "unconditionally accrued right" to be repaid atthe time of cancellation. Cancellation of itself did not create such a right forLFT where one did not previously exist. The Agreement between the partiesdoes not have a provision making the advance repayable on cancellation. Inthe absence of such provision, cancellation of itself did not make the loanwhich was arguably for a five year term immediately due and payable. Inother words, cancellation did not without more improve LFT's position byconverting what was arguably an advance for a five year term to an advancerepayable upon demand.[22] LFT, as a result of the application of s 42 of the Act, was obliged toseek relief under s 43 or seek damages. Section 43 confers a wide power onthe Court to grant relief following cancellation. That LFT has the ability toseek relief under s 43 of the Act or damages does not mean that there is apresently due and payable debt that it can demand by way of a statutorydemand. That position does not change because LDT believes its right torelief is clear cut.[23] Accordingly, it follows that the application by DEL to set aside thestatutory demand must be granted.[11] The trustees then issued proceedings for an order setting aside the orders forspecific performance in their favour and for an order cancelling the contract.[12] That application was dealt with by Associate Judge Lester in a judgment dated21 May 2020.4 His Honour made the orders sought setting aside the orders for specificperformance. However, the Judge refused to make an order cancelling the contract,as his Honour did not consider DEL's non-provision of information without moreentitled the trustees to cancel.[13] Seemingly in response to Associate Judge Lester's observations in thatjudgment, the trustees have now taken the following steps:4 Lookman v Design Electronics Limited [2020] NZHC 1066(a) On 29 June 2020 they gave notice purporting to make time of theessence in terms of the provision of the information to be provided byDEL;(b) When, in their assessment, DEL did not provide the information which– it is common ground – was due on 9 June 2020, the trustees throughtheir solicitors gave notice cancelling the contract;(c) Then, on 28 July 2020, the trustees served their statutory demand.[14] On 10 August 2020 DEL commenced this proceeding.[15] For present purposes, DEL accepts that the trustees legitimately cancelled thecontract.[16] It is against that background that the issue identified at [1] arises. The issue issimply whether, upon cancellation, the debt that the trustees are owed by DEL becamepayable.[17] As counsel submitted, surprisingly, there is no authority that addresses thispoint authoritatively.[18] However, it appears to me that the position is straightforward. The cancellationof a contract for breach does not result in the contract being treated as void ab initio.Cancellation applies only to the future rights and obligations of the parties, that is tosay their rights and obligations following cancellation.[19] So, s 42(1)(a) provides that to the extent that the parties' contractualobligations are unperformed as at the date of cancellation they are relieved of thoseobligations. And, s 42(1)(b) provides that to the extent that those obligations areperformed cancellation does not necessitate their being unwound. The idea then isthat cancellation freezes the position.[20] Obviously, there are any number of circumstances in which that might operateunfairly to one or either or both parties. That is where ss 42(2), 42(3) and 43 becomerelevant. Section 42(2) provides that ss 42(1)(a) and (b) are subject to what follows.Section 42(3) provides that nothing in s 42 is to operate so as to disentitle a party torecover damages for misrepresentation, or repudiation or breach of the contract, ands 43 confers on the Court a range of powers to grant relief following cancellationwhich are considerably wider than the formerly available common law remedies.[21] The conclusion reached by Associate Judge Lester in his September 2019decision was that it was at least arguable that the cancellation of the contract did notgive rise to an automatic right – as it may well have done at common law – on the partof the trustees to treat the loan monies outstanding as repayable immediately; rather,that the trustees would have to seek and obtain an order under s 43 entitling them torecover those monies prior to the expiry of the term of the contract.[22] For DEL, Ms Jamieson contended that the position was entirely clear froms 42(1)(b) and in particular the final part of the sentence in that clause which says that,to the extent that a contract has been performed as at the date of cancellation " noparty is, by reason only of the cancellation, divested of any property transferred ormoney paid under the contract". Thus, the argument goes, the monies lent by thetrustees to DEL constituted property transferred or money paid under the contract andthat merely by reason of cancellation DEL could not be divested of the same, but ratherthat the trustees would have to obtain a Court order to that effect.[23] It appears to me that there may be alternative contentions. For example if thefocus is on s 42(1)(a) (as opposed to s 42(1)(b)) the obligation on the part of thetrustees to lend the money they have lent until December 2021 might be regarded asan ongoing obligation which was unperformed as at the date of cancellation and itmight be said that the trustees are by reason of the cancellation no longer obliged toperform it further and DEL is no longer entitled to expect it to be performed.[24] However, in the end, like Associate Judge Lester, I take the view that it is atleast arguable that cancellation in itself does not have the effect of turning a debtrepayable at a future date into a debt payable immediately (unless of course thecontract so provides, which this contract does not).[25] In short I am satisfied that DEL has an arguable defence to the claim namelythat the debt which is the subject matter of the trustees' statutory demand was not andhas never been a current debt, and will not be unless and until the trustees do whatAssociate Judge Lester indicated they needed to do and obtain an order to that effect.[26] For those reasons, I make the order sought by DEL setting aside the trustees'statutory demand.[27] As to costs, DEL seeks an uplift of 50% on 2B scale costs in accordance withr 14.6 of the High Court Rules 2016. Its grounds for doing so are:(a) Two Judges have already ruled that the amount demanded is notrepayable on demand, and the trustees need to seek either relief unders 43 or damages; and(b) It wrote to counsel for the trustees inviting them to withdraw thestatutory demand to no avail.[28] Taking or pursuing an unnecessary step or an argument that lacks merit is aground for increased costs.5 Ms Jamieson referred me to two cases where an uplift of50% on scale costs was ordered in circumstances where one party had issued astatutory demand despite correspondence asserting on credible grounds that there wasa dispute or counterclaim.6[29] I agree that this issue had in many ways already been resolved. It was clear –especially from Associate Judge Lester's September 2019 judgment – that unless DELhas been ordered to pay either damages or a payment under s 43, there was no debtowed to the trustees. The fact DEL wrote to MMP lawyers on 31 July 2020 invitingthem to withdraw the statutory demand in light of Associate Judge Lester's decisionconfirms that the trustee's solicitors were on notice – albeit from the opposing side –that their argument lacked merit or that the statutory demand was inappropriate.5 High Court Rules, r 14.6(3)(b)(ii).6 Four Avenues Property Group Limited v Higgs Construction Limited [2016] NZHC 1202 andSummer Construction Limited v Bakker HC WN CIV-2006-485-1499, 10 November 2006.[30] In these circumstances I consider an increased costs award to be appropriate.The applicant will have its costs on a 2B basis with an uplift of 50 per cent, togetherwith such disbursements as may be allowed by the Registrar.Associate Judge JohnstonSolicitors:Tavendale and Partners, Christchurch for applicantMcFadden McMeeken Phillips, Nelson for respondents