NYLEX (NEW ZEALAND) LIMITED (IN RECEIVERSHIP & IN LIQUIDATION) V INDEPENDENT TIMBER MERCHANTS CO-OPERATIVE LIMITED HC AK CIV-2010-404-002207

NYLEX (NEW ZEALAND) LIMITED (IN RECEIVERSHIP & IN LIQUIDATION) V INDEPENDENT TIMBER MERCHANTS CO-OPERATIVE LIMITED HC AK CIV-2010-404-002207 15 October 2010IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV-2010-404-002207BETWEEN NYLEX (NEW ZEALAND) LIMITED (IN RECEIVERSHIP & IN LIQUIDATION) Plaintiff AND INDEPENDENT TIMBER MERCHANTS CO-OPERATIVE LIMITED Defendant Hearing: 9 September 2010 Appearances: M J Tingey and N F D Moffatt for the Plaintiff P R Cogswell for the Defendant Judgment: 15 October 2010JUDGMENT OF HEATH JThis judgment was delivered by me on 15 October 2010 at 3.30pm pursuant to Rule 11.5 of the High Court Rules Registrar/Deputy RegistrarSolicitors: Bell Gully P O Box 4199, Auckland 1140 Cogswell + Jaduram P O Box 6343 Wellesley Street Auckland 1141Introduction[1] Nylex (New Zealand) Limited (In Receivership & In Liquidation) (Nylex) seeks summary judgment against Independent Timber Merchants Co-operative Limited (ITM). Nylex contends that the sum of $181,672.09 is owing, based on a running account between the two companies. ITM maintains that the debt has been extinguished through its exercise of a right of set-off. [2] Two issues arise. The first is one of contractual interpretation. Is the amount that ITM seeks to set-off one available to it under the relevant contract? The second concerns the circumstances in which set-off can be effected, once one of the parties has entered a formal collective insolvency regime. If any right of set-off were equitable in nature, does that right survive Nylex's liquidation?Summary judgment principles[3] The application for summary judgment is brought under r 12.2 of the High Court Rules:12.2 Judgment when there is no defence or when no cause of action can succeed(1) The court may give judgment against a defendant if the plaintiff satisfies the court that the defendant has no defence to a cause of action in the statement of claim or to a particular part of any such cause of action. (2) The court may give judgment against a plaintiff if the defendant satisfies the court that none of the causes of action in the plaintiff's statement of claim can succeed.[4] The onus of establishing that a defendant "has no defence" to a plaintiff's claim rests on the plaintiff. Other than the need to raise an evidential foundation for a defence in respect of matters within the exclusive knowledge of the defendant, 1 the Court must be satisfied that the plaintiff has established that there is no fairly arguable defence available.21 Bailey v Finch (1871) LR 7 QB 34; Newell v National Provincial Bank of England (1876) 1 CPD 496; Parsons v Sovereign Bank of Canada [1913] AC 160, PC.2 Pemberton v Chappell [1987] 1 NZLR 1 (CA) at 3-4 (Somers J) and 8 (Hillyer J).[5] In cases involving the interpretation of contractual provisions, the Court must be mindful of extrinsic evidence that might be admissible to establish the meaning of relevant provisions.3 Where the summary judgment application turns on legal questions (including one of contractual interpretation), the Court is entitled to determine the point on a summary judgment application, even if the questions are difficult.4The contract[6] ITM is a co-operative company. Its role is to provide benefits to its shareholders, through bulk purchasing and distribution of hardware and other building products. The shareholders are owner-operators of various ITM stores, throughout New Zealand. They are known as "transacting shareholders". [7] On 9 March 2008, Nylex and ITM entered into a Supplier Agreement (the Agreement) by which Nylex agreed to supply its products on terms set out in the Agreement. The terms of the Agreement supplant Nylex's ordinary conditions of supply. [8] The way in which the Agreement was implemented is described in an affidavit from Mr Ryan-Kidd, the General Manager, Finance and Technology, of ITM. In summary: a) The individual transacting shareholders placed orders with Nylex, for particular products. Nylex then arranged for the physical delivery of those goods to the premises of the particular transacting shareholder. b) Nylex raised an invoice in favour of the transacting shareholder. Although that invoice was sent to the transacting shareholder (but not to ITM), the transacting shareholder was not expected to pay on that3 Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] 2 NZLR 444 (SC) at paras [4], [13] and [14] (Blanchard J), [19]-[31] (Tipping J), [62]-[67] and [70]-[78] (McGrath J) [119]-[130] (Wilson J) and [151] (Gault J).4 International Ore & Fertilizer Corporation v East Coast Fertiliser Co Ltd [1987] 1 NZLR 9 (CA) at 13, per Cooke P, for the Court. See also Pemberton v Chappell [1987] 1 NZLR 1 (CA) at 3 (Somers J) and 8 (Hillyer J).invoice. Rather, the invoice operated as a record of Nylex's dealings with the transacting shareholder, during the relevant month. c) At the end of each month, Nylex would collate all invoices and send those to ITM for payment. ITM acted as a central purchasing agency, on behalf of each of the transacting shareholders. d) On receipt of the collated invoices, ITM would raise its own invoices in favour of each transacting shareholder for purchases made by that particular entity during the month. The transacting shareholder's obligation was to pay ITM, on those invoices. e) ITM paid Nylex directly for the total amount of the collated invoices, less accrued rebates. In short, Nylex was the creditor and ITM the debtor in respect of all goods supplied by Nylex to individual transacting shareholders during the relevant month. ITM was the creditor and each transacting shareholder the debtor, in relation to obligations owed by the transacting shareholders to ITM. [9] The Agreement envisaged two types of rebates. One was based on turnover for the month and was referable to particular percentages for administration, indemnity and marketing support costs. The second related to "Platinum Supplier Events", "Gold Sponsorship", the "Member Marketing Fund", and the "Member Loyalty Programme". [10] The interpretation question concerns the "Member Loyalty Programme". Was this a benefit that accrued to ITM (as opposed to individual transacting shareholders), which provided ITM with a right to set-off the value of those benefits against moneys it owed to Nylex, for the purchase of product? [11] In the Agreement: a) ITM was described as "ITM Support Office"b) Transacting shareholders were described as "ITM Transacting Shareholders". c) When used collectively, "ITM Support Office" and "ITM transacting shareholders" were described as the "ITM Group". [12] The trading terms and conditions were set out in cl 5 of the Agreement. Modifying its terms to reflect the entities to which descriptors were assigned, cl 5 provided:5. TRADING TERMS AND CONDITIONS:ITM GROUP PURCHASE TRANSACTIONS; a) This Agreement covers all purchases made by [ITM and the transacting shareholders] from [Nylex]. b) For this Agreement [Nylex] will charge all accounts by Central Billing, i.e. invoicing all transactions direct to [ITM]. c) All invoices must clearly show the [transacting shareholder] to which the invoice relates. d) [ITM and the transacting shareholders] expect [Nylex], to deliver every order in full and on time. e) [Nylex] guarantees the goods supplied meet specification, all relevant standards and legislation required for sale in New Zealand and are of acceptable quality, fit for their intended purpose. f) [Nylex] agrees to meet all valid claims against [ITM and the transacting shareholders] where product failure occurs. This also covers claims on [ITM and transacting shareholders] under the current agreements and Acts including, but not limited to, the Fair Trading Act, the Consumer Guarantees Act, Sales of Goods Act, durability and failure under the Building Act. g) Product recalls shall be at [Nylex's] expense. h) All cost prices are free into store based on an agreed minimum order value as recorded in [Nylex's] Information Sheet. i) All invoices are required to be received at [ITM] no later than midday on the third (3rd) working day of the month following the month of the transaction. j) Suppliers, or their reps, who call on [ITM and the transacting shareholders] must resolve request for credits (RFC) within 7 days of receiving the claim. ....[13] Clause 1 of the Agreement contained part of the agreed rebate structure. Those amounts are calculated as a percentage of specified turnover; the applicable percentage increases as the volume of product supplied grows.[14] Clause 2 of the Agreement referred to "other rebates", specifically stated to be in addition to those in cl 1. They were "Platinum Supplier Events", "Conference Sponsorship", "Member Marketing Fund" and "Member Loyalty Programme". [15] ITM's case is based on the notion that the Member Loyalty Programme rebate could be calculated at 2.75% of total sales. Mr Ryan-Kidd deposes that "the rebates are fully paid to [transacting shareholders]" but "still accrued to [ITM]" rather than the individual transacting shareholders". His view was that the distribution of rebates was a matter between ITM and its transacting shareholders. [16] The critical question is whether benefits accruing under the "Member Loyalty Programme" can be used by ITM to off-set the amount claimed from it by Nylex. If, as a matter of law, that is not permissible, there is no defence to Nylex's claim. [17] Mr Ryan-Kidd referred to marketing material from Nylex, in which the loyalty scheme was explained. By way of background, it was said that the "Loyalty Points Scheme is mutually beneficial" to both Nylex and ITM. It added that:For Nylex it means that ITM stores have an added incentive to purchase [as] many products as they can from [Nylex]. For ITM stores it means they can accumulate points based on their spending which they can then redeem for a selection of vouchers and even travel. (my emphasis)[18] The notion that the loyalty scheme was referable to transacting shareholders rather than ITM itself is confirmed by the nature of the scheme. It referred specifically to an "ITM store". It said:HOW DOES IT WORK?For every $1,000 spent with Nylex on any of our products 1 point is awarded. When 10 points are achieved the ITM store can redeem them for $100 worth of Farmers, Progressive Enterprises (grocery) or Liquorland vouchers. For every $100,000 spent (100 points) on Nylex products an Air New Zealand Mystery Weekend for Two will be awarded. (approx value $1,200)When an ITM store's purchases reach $1,000,000 (1,000 points) they will be awarded a Holiday for Two to Hawaii. (approx value $8,000)[19] While the loyal points programme is not described specifically in the Agreement, it is clear that ITM itself placed reliance on it. In those circumstances, I consider that the document may be used for interpretation purposes. 5[20] The position disclosed in the promotional information is consistent with the terms of the Agreement. The calculation of 2.75% does not, in my view, relate to the Member Loyalty Programme, as that is not something that was capable of being calculated by reference to overall turnover. In my view, the Agreement envisages that the 2.75% discount is the lowest of those which might be negotiated with a local area manager and is independent of the Member Loyalty Programme. [21] As a matter of interpretation, I agree with Mr Tingey, for Nylex, that the rebates in issue are for the benefit of an individual transacting shareholder and fall outside the scope of the monthly accounting which otherwise took place between Nylex and the transacting shareholder (in relation to the original invoice) and Nylex and ITM (in relation to monthly payments). 6[22] My reasons for preferring Mr Tingey's submission on this issue are: a) First, the nature of the loyalty benefits are such that they could not be readily quantified by reference to a percentage. They consisted of things such as "a mystery weekend" and "a trip to Hawaii". The nature of the benefit is more aptly described as one earned by individual transacting shareholders acquiring points through the purchase of product for their own stores. That approach is consistent with the promotional material to which Mr Ryan-Kidd refers in his evidence. Further, cl 3 of the Agreement is not expressed in language that sits easily with the idea that loyalty benefit rebates fall within its purview.5 Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] 2 NZLR 444 (SC) at paras [4], [13] and [14] (Blanchard J), [19]-[31] (Tipping J), [62]-[67] and [70]-[78] (McGrath J) [119]-[130] (Wilson J) and [151] (Gault J).6 See para [12](b)-(e) above.b) Second, there is nothing in Mr Ryan-Kidd's evidence to demonstrate that ITM has historically accounted for loyalty benefits on the basis for which it now contends. c) Third, an interpretation requiring the loyalty benefits to be regarded as attributable to transacting shareholders more easily fits with the obligations assumed by both parties under cl 5 of the Agreement. For example, while individual transacting shareholders ordered goods from Nylex,7 Nylex's contractual obligation was to invoice ITM, showing the particular transacting shareholder to whom the invoice related. 8d) Fourth, the benefits that the transacting shareholder gained from the Agreement are the type of benefits to which the Contracts (Privity) Act 1982 9 applies. It may be possible for a transacting shareholder to claim in the liquidation on the basis of a just estimate of the benefit lost when Nylex failed. 10[23] I hold that ITM was not contractually entitled to off-set the value of the Member Loyalty rebates against the debt it owed to Nylex.Non-contractual set-off[24] In some circumstances a party to a contract will be entitled to off-set moneys owing by the other contracting party to an associated entity. However, that principle has two important restrictions. The first is that there must be a considerable degree of interdependence between the two arrangements. The second is that this type of set-off is not available when one of the parties to the contract is subject to a formal collective insolvency regime.7 See para [12](a) above.8 Clause 5(b) and (c) of the Agreement, set out at para [12] above.9 Contracts (Privity) Act 1982, s 4.10 See Companies Act 1993, ss 306 and 307.[25] The issue of "interdependence" was considered by the Court of Appeal inGrant v NZMC Ltd.11 Delivering the judgment of the Court, Somers J said that a "defendant may set-off a cross-claim which so affects the plaintiff's claim that it would be unjust to allow the plaintiff to have judgment without bringing the cross- claim to account". His Honour added that the "link must be such that the two are in effect interdependent", in the sense that the defendant's claim calls into question or impeaches the plaintiff's demand. 12[26] Grant v NZMC Ltd is one of the few cases in which the arguability of this type of set-off has been acknowledged; even then it was solely for the purpose of defeating a summary judgment application. Mr and Mrs Grant's obligation was to pay rent on leased premises "free and clear of exchange or any deduction whatsoever" but they claimed they had been induced to enter into the lease by promises made by NZMC of referrals of panel-beating work for an associated company. They alleged those promises were not kept. [27] In this case, the nature of the member loyalty benefits and the inability to quantify them readily when Nylex and ITM reconciled their accounts each month militates against allowing an equitable set-off of the type to which Grant v NZMC Ltd refers. Historically, they have never been taken into account when reconciliations of amounts owing by ITM to Nylex were prepared. [28] More importantly, the principle that equitable set-off does not survive insolvency means that the set-off alleged by ITM cannot be sustained. [29] Nylex was placed into both voluntary administration and receivership on 11 February 2009. When a "watershed" meeting failed to approve a compromise with creditors, Nylex was placed in liquidation, on 7 August 2009. 13 Under both the voluntary administration and liquidation regimes, statutory rules for set-off supersede those based on legal or equitable set-off. 14 The critical element is11 Grant v NZMC Ltd [1989] 1 NZLR 8 (CA).12 Ibid, at 12-13.13 Companies Act 1993, ss 239ABA and 239ABU.14 Ibid, ss 239AEG (voluntary administration) and 310 (liquidation).mutuality. It is well settled that the set-off provisions of the Companies Act are mandatory and cannot be "bargained away". 15[30] Sections 239AEG (voluntary administration) and 310(1) (liquidation) of the Companies Act 1993 provide:239AEG Mutual credit and set-offWhere there have been mutual credits, mutual debts, or other mutual dealings between a company and a person who seeks or, but for the operation of this section, would seek to have a claim admitted under a deed of company arrangement,— (a) an account must be taken of what is due from the one party to the other in respect of those credits, debts, or dealings; and (b) an amount due from one party must be set off against an amount due from the other party; and (c) only the balance of the account may be admitted under the deed of company arrangement, or is payable to the company, as the case may be. ...310 Mutual credit and set-off(1) Where there have been mutual credits, mutual debts, or other mutual dealings between a company and a person who seeks or, but for the operation of this section, would seek to have a claim admitted in the liquidation of the company,— (a) An account must be taken of what is due from the one party to the other in respect of those credits, debts, or dealings; and (b) An amount due from one party must be set off against an amount due from the other party; and (c) Only the balance of the account may be claimed in the liquidation, or is payable to the company, as the case may be. .... (my emphasis)[31] The reason why mutuality is so important on liquidation is because, when insolvency intervenes, a party who has the benefit of the self-executing remedy of set-off necessarily obtains a preference in respect of moneys owed to it over other creditors of the same priority. This point was made eloquently by Lord Hoffmann in15 For example, see Rendell v Doors and Doors Ltd (in liq) [1975] 2 NZLR 191 (SC) at 199, in theStein v Blake.16 In contrasting rights of legal set-off with those arising on insolvency, His Lordship (with whom the remaining Law Lords agreed) said: 17Legal set-off does not affect the substantive rights of the parties against each other, at any rate until both causes of action have been merged in a judgment of the court. It addresses questions of procedure and cash flow . . . [and] enables a defendant to require his cross-claim . . . to be tried together with the plaintiff's claim . . . ... Bankruptcy set-off, on the other hand, affects the substantive rights of the parties by enabling the bankrupt's creditor to use his indebtedness to the bankrupt as a form of security. Instead of having to prove with other creditors for the whole of his debt in the bankruptcy, he can set off pound for pound what he owes the bankrupt and prove for or pay only the balance . . . Legal set-off is confined to debts which at the time when the defence of set- off is filed were due and payable and either liquidated or in sums capable of ascertainment without valuation or estimation. Bankruptcy set-off has a much wider scope. It applies to any claim arising out of mutual credits or other mutual dealings before the bankruptcy for which a creditor would be entitled to prove as a "bankruptcy debt".[32] Although Stein v Blake was a case involving legal set-off, the same conclusion was reached by the English Court of Appeal, in Bank of Credit and Commerce International SA (in liq) v Al-Saud,18 in the context of a claim based on equitable set-off. In doing so, Neill LJ (with whom Simon Brown and Waite LJJ agreed) held that a claim for equitable set-off was unavailable because the requirement for mutuality in the insolvency set-off provisions meant that a claim based on equitable set-off could not survive insolvency. 19[33] In this case, ITM contracted to pay Nylex. ITM owes the debt claimed, subject to any right of set-off. Because the member loyalty benefits were directed at transacting shareholders there is no mutuality, for the purposes of either s 239AEG or s 310. Nylex is entitled to recover the debt ITM owes to it. Each transacting shareholder could claim in respect of the estimated lost value of the loyalty benefits that have accrued in its favour. For those reasons, ITM's claims of set-off must be rejected. In my view, Nylex has established that ITM has no defence to its claim.context of the comparable s 93 of the Insolvency Act 1967.16 Stein v Blake [1996] AC 243 (HL).17 Ibid, at 251.18 Bank of Credit and Commerce International SA (in liq) v Al-Saud [1997] 1 BCLC 457 (CA).Result[34] Judgment is entered in favour of Nylex in the sum of $181,672.09. Because Nylex's ordinary terms of trade were superseded by the Agreement, interest is awarded from the date on which the proceeding was issued, at the relevant rates applicable under s 87 of the Judicature Act 1908. [35] Nylex is entitled to costs on a 2B basis, together with reasonable disbursements, both to be fixed by the Registrar. I do not certify for second counsel. _____________________ P R Heath J Delivered at 3.30pm on 15 October 201019 Ibid at 465-466.