NUTRA FOODS 2011 LIMITED (in liq) v ATTITUDE FOODS (2018) LIMITED [2023] NZHC 2013

NUTRA FOODS 2011 LIMITED (in liq) v ATTITUDE FOODS (2018) LIMITED [2023] NZHC 2013 [31 July2023]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2023-404-0090[2023] NZHC 2013IN THE MATTER of the Companies Act 1993BETWEEN NUTRA FOODS 2011 LIMITED (in liq)PlaintiffAND ATTITUDE FOODS (2018) LIMITEDDefendantHearing: 24 July 2023Counsel: LB Harrison for the PlaintiffD Hayes for Mr Le Sueur and DefendantJudgment: 31 July 2023JUDGMENT OF ASSOCIATE JUDGE BRITTAINThis judgment was delivered by me on 31 July 2023 at 12 pm, pursuant tor 11.5 of the High Court RulesRegistrar/Deputy RegistrarDate:Solicitors/Counsel:Simpson Grierson, AucklandHunwick Law Ltd, HamiltonD Hayes, HamiltonIntroduction[1] The plaintiff, Nutra Foods 2011 Ltd (in liquidation) (Nutra Foods), was putinto liquidation by this Court on 4 February 2022. Prior to its liquidation, the directorof Nutra Foods, Terry Le Sueur, procured a sale of Nutra Foods' chattels and stock onhand to the defendant, Attitude Foods (2018) Ltd (Attitude Foods), a companyincorporated by Mr Le Sueur.[2] The transaction was executed pursuant to an agreement dated 25 August 2021and titled "Bill of Sale" (the agreement). The purchase price was $250,000 plus GST(the purchase price), due by 1 September 2022. The agreement provided for thecharging of penalty interest on any balance outstanding by that date.[3] At some point between 25 August 2021 and the liquidation of Nutra Foods on4 February 2022, Attitude Foods began to operate the business formerly operated byNutra Foods. There were further transactions between Nutra Foods andAttitude Foods prior to the liquidation of Nutra Foods, however, the liquidator ofNutra Foods maintains that the purchase price due under the agreement was never paidin full.[4] On 15 September 2022, Nutra Foods served a statutory demand onAttitude Foods under s 289 of the Companies Act 1993 (the Act), demanding paymentof the outstanding purchase price, stated to be $279,000. Attitude Foods did notcomply with the statutory demand. Nutra Foods now applies for an order puttingAttitude Foods into liquidation. The application is opposed by Attitude Foods and byMr Le Sueur in his capacity as a shareholder of Attitude Foods.Background[5] Shortly after the liquidation of Nutra Foods, the liquidator demanded paymentof the full purchase price from Attitude Foods. That led to settlement negotiationsbetween the liquidator and Mr Le Sueur.[6] After the agreement and before the liquidation of Nutra Foods, there weretransfers of funds between Nutra Foods and Attitude Foods that resulted in a net receiptof funds by Nutra Foods, agreed by the liquidator to be $59,235. The liquidatoraccepts that this amount should be set off against the purchase price.[7] At a meeting between the liquidator and Mr Le Sueur on 27 April 2022,Attitude Foods granted a security interest to Nutra Foods in all property owned byAttitude Foods, to secure the purchase price due under the agreement.[8] At the meeting, it was agreed verbally and in principle that Attitude Foodswould pay Nutra Foods $150,000 in full and final settlement of the purchase price.The liquidator says that she made it clear that the terms of settlement agreed inprinciple were subject to the parties entering into a written settlement deed.[9] On 29 April 2022, Mr Le Sueur sent an email to the liquidator's office seekingto record the terms of settlement. The written terms proposed included payment of$150,000 by: prompt payment of not less than $100,000, (subject to Condition 4) and thebalance of $50,000 paid off as soon as possible, but at any rate not later than1 September 2022.[10] Condition 4 was that a factoring company would agree to factor all unpaidinvoices that had been rendered by Attitude Foods to its customers.[11] A member of the liquidator's staff responded by email that same day. Theemail records a varied proposal and refers to an earlier telephone conversation withMr Le Sueur. The varied proposal was that Attitude Foods would pay the total amountthat the factoring company was prepared to pay immediately, with the balance of the$150,000 to be paid before 31 July 2022. The email advised that the liquidator's officewould draft a settlement deed to reflect the agreed terms.[12] It appears that there were further negotiations between the parties, and on9 May 2022, a member of the liquidator's staff sent an email to Mr Le Sueur attachinga draft settlement deed. The email stated:Your offer is acceptable to the Liquidators on the terms set out below.Please find a draft Deed attached.If the Deed is acceptable, please advise and we will issue a final version forsignatures.[13] The draft deed recorded the agreed set-off of $59,235, and that the outstandingbalance of the purchase price was $219,379.75 including GST.[14] The draft deed provided for a compromise, with Attitude Foods to pay$150,000 including GST in two instalments: $100,000 by 13 May 2022 and $50,000by 31 July 2022.[15] Clause 6.1 of the draft deed provided that if Attitude Foods defaulted in makingthe payments, then Nutra Foods and the liquidator had the right to recover theoutstanding balance of the purchase price due under the agreement.[16] Attitude Foods did not sign or return the draft deed or make the payments of$100,000 and $50,000. Instead, between 15 July 2022 and 18 August 2022,Attitude Foods made small payments to the liquidator, which totalled $8,500.[17] In addition, customers of Attitude Foods mistakenly made payments due toAttitude Foods to Nutra Foods' bank account, which totalled $4,832.29. Theliquidator and Mr Le Sueur have agreed that these payments can be applied to thepurchase price.The grounds of opposition[18] In the written submissions on behalf of Attitude Foods and Mr Le Sueur, thefollowing grounds were raised in opposition to an order placing Attitude Foods intoliquidation:(a) there is a dispute as to the quantum of the debt;(b) the security interest granted by Attitude Foods on 27 April 2022amounts to a compounding by Attitude Foods with Nutra Foods unders 289(2)(d) of the Act; and(c) if there is a balance due, the Court should exercise its discretion to allowAttitude Foods a further opportunity to pay.[19] In his oral submissions on behalf of Attitude Foods and Mr Le Sueur, Mr Hayesrefined the grounds of opposition. He submitted that the Court should exercise itsdiscretion and not liquidate Attitude Foods on the grounds that Nutra Foods hassecurity for the debt and Attitude Foods should be allowed a further opportunity to payany amount that is outstanding to Nutra Foods.Legal principles[20] The Court has a discretion to stay or dismiss a liquidation proceeding foundedon a debt that is the subject of a genuine and substantial dispute. Enforcing a genuinelydisputed debt by liquidation may constitute an abuse of process.1[21] A defendant company may raise a dispute in a liquidation proceeding eventhough the company did not apply to set aside the statutory demand on the basis thatthe debt was disputed.2[22] The failure to apply to set aside a statutory demand is a factor that may be takeninto account when the Court considers whether a dispute raised later by the defendantis genuine.3[23] Where the relevant requirements under s 241 of the Act for the appointment ofa liquidator have been met, the applicant is generally entitled to an order putting acompany into liquidation. That said, the Court retains a discretion, exercisedsparingly, not to place the company into liquidation.41 Cummins v Body Corporate 172108 [2021] NZCA 145, [2021] 3 NZLR 17 at [20] citing Re BayoilSA [1999] 1 WLR 147 (CA) at 156. See also Yan v Mainzeal Property and Construction Ltd (inrec and in liq) [2014] NZCA 190 at [61].2 Heron's Flight Ltd v NZ Properties International Ltd [2012] 1 NZLR 424 (HC) at [23], [25] and[27].3 See National Finance 2000 Ltd v All Star Cars Ltd HC Auckland M703-IM02, 10 September 2002at [37].4 See Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395 (CA) at[3] and Feltex Carpets Ltd (in rec) v N&I Investments Ltd (2006) 3 NZCCLR 714 (HC) at [38].DiscussionDoes Attitude Foods owe an undisputed debt to Nutra Foods?[24] The liquidator's position is that a binding compromise in respect of theoutstanding purchase price was not reached because the draft settlement deed was notexecuted by the parties, and in any event, Attitude Foods failed to make payment ofthe reduced price of $150,000.[25] On 31 May 2022, the liquidator sent an email to Commercial Factors Limitedseeking confirmation that it was going to factor debts owed to Attitude Foods, so thatAttitude Foods would be able to pay the reduced purchase price of $150,000. Theemail referred to the draft deed:The Liquidator has agreed to settle the Balance with [Attitude Foods] as setout belowa) $100,000 will be paid on or before 13 May 2022b) $50,000 will be paid on or before 31 July 2022Together the "Settlement Sum"The Settlement Sum is in full and final settlement of any claims that theLiquidator or Company may identify against Terry and/or [Attitude Foods] inthe liquidation.[26] It is reasonably arguable that the terms of settlement set out in the draft deedbecame binding on the parties despite the deed never being signed. The letter fromthe liquidator's office to Commercial Factors Ltd on 31 May 2022 referred to a bindingagreement, rather than an agreement in principle or an agreement that was subject tocontract.[27] If so, then Attitude Foods was due to make a payment of $100,000 by 13 May2022, and a final payment of $50,000 by 31 July 2022. Attitude Foods defaulted inrespect of both obligations.[28] Furthermore, if the draft deed was binding, the default by Attitude Foodsentitled Nutra Foods to recover the full amount of the outstanding purchase priceunder the agreement. This appears to be $206,047.46, being $219,379.75 less the partpayments totalling $8,500 and the further set-offs of $4,832.29.[29] On 3 October 2022, after the statutory demand was served, Mr Le Sueur wroteto the liquidator acknowledging that Attitude Foods was in breach of the terms in thedraft deed, advising that Attitude Foods was no longer able to pay the price of$150,000. The letter stated that "we estimate [the debt] to be around $200k — not$279k" and acknowledged that penalty interest was payable under the agreement.Mr Le Sueur stated that paying off the balance was a "very high priority" and offeredto meet to discuss a restructured payment plan.[30] Despite this admission, Mr Le Sueur's position in his notice of opposition andaffidavit was that the reduced purchase price of $150,000 remained binding and waspaid by the set-offs and part payments that are accepted by the liquidator, together withfurther payments made by Attitude Foods direct to the creditors of Nutra Foods.[31] This position is unsustainable. First, as discussed above, the liquidator wasentitled to enforce payment of the full amount due under the agreement.[32] Secondly, Attitude Foods offered insufficient evidence that it made paymentsto Nutra Food's creditors that would exceed the outstanding purchase price. Somesupporting invoices were produced by Mr Le Sueur. But as the liquidator points out,some of those invoices relate to the supply of packaging products after the sale of theNutra Foods's assets to Attitude Foods and others are made out to Attitude Foods, andone to Mr Le Sueur. Mr Le Sueur produced a handwritten ledger, but there is noadequate explanation of its relevance, or what it purports to evidence.[33] Thirdly, there is no evidence that the liquidator agreed to satisfaction of theoutstanding purchase price by means of payment to Nutra Food's creditors. The draftdeed required payment to be made to "the Company", being Nutra Foods, not itscreditors.[34] A debtor cannot discharge a debt owed to a creditor by unilaterally makingpayment to a third party, without the consent of the creditor. The liquidator says thatshe would never agree to such means of payment because it would amount to apreference of some creditors of Nutra Foods over others. Mr Le Sueur's letter of3 October 2022 did not mention any claimed right to set-off payments made byAttitude Foods to Nutra Food's creditors.[35] At the hearing, Mr Hayes responsibly conceded that any payments byAttitude Foods direct to creditors of Nutra Foods could not amount to paymentstowards the purchase price without the liquidator's consent.[36] I find that Attitude Foods is indebted to Nutra Foods for the outstandingpurchase price of $206,047.46, and there is no genuine dispute about that.The security interest[37] The security interest was granted to Nutra Foods over the assets ofAttitude Foods on 27 April 2022, before the statutory demand was served. Thesecurity interest cannot therefore amount to a compounding with Nutra Foods, or acharging of Attitude Food's property to secure payment of the debt, so as to satisfy thestatutory demand under s 289(2)(d) of the Act.Should the Court exercise its discretion not to liquidate Attitude Foods?[38] As a secured creditor, Nutra Foods has standing to apply for an order puttingAttitude Foods into liquidation under s 241(2)(c)(iv) of the Act. Nutra Foods hassatisfied the statutory requirements for obtaining an order putting Attitude Foods intoliquidation, subject to the Court's residual discretion as to whether a liquidation ordershould be made.[39] Mr Hayes submitted that the existence of the security interest was a factor infavour of the Court exercising its discretion not to put Attitude Foods into liquidation.In effect, Mr Hayes submitted that Nutra Foods should be content to exercise its rightsas a secured party, including by the appointment of a receiver if necessary.Attitude Foods has not adduced any evidence of the value of the secured assets.Nutra Foods is entitled to elect to put Attitude Foods into liquidation.[40] The liquidator of Attitude Foods will have the power to deal with the chargedproperty under s 254(a) of the Act, but subject to the charge.[41] Attitude Foods has not adduced any evidence to support its assertion that it issolvent. Furthermore, it has consistently failed to meet its obligations owed toNutra Foods as they have fallen due.[42] Attitude Foods has failed to establish any grounds to justify the Courtexercising its residual discretion to decline to put the company into liquidation.[43] Nutra Foods seeks that the liquidator of Nutra Foods, Janet Sprosen, also beappointed as one of the liquidators of Attitude Foods. Ms Sprosen is not disqualifiedfrom appointment under s 280 of the Act, and there is nothing unusual in theappointment of one liquidator to two companies that are related, or that have transactedwith one another.Result[44] The defendant company is put into liquidation.[45] Janet Sprosen and Leon Francis Bowker are appointed liquidators.[46] The rates of remuneration of the liquidators and staff working under theirsupervision and control are fixed at the rates set out in the liquidators' consent dated 4April 2023. The liquidators are to apply at the conclusion of the liquidation forapproval of their overall remuneration.[47] The plaintiff is entitled to costs against the defendant and Terry Le Sueur,jointly and severally, on a 2B basis, together with disbursements as fixed by theRegistrar._____________________Associate Judge Brittain