PROVIDA FOODS LIMITED V FOODFIRST LIMITED HC HAM CIV 2009-419-001581

PROVIDA FOODS LIMITED V FOODFIRST LIMITED HC HAM CIV 2009-419-001581 29 June 2010IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY CIV 2009-419-001581BETWEEN PROVIDA FOODS LIMITED Applicant AND FOODFIRST LIMITED Respondent Hearing: 24 June 2010 Counsel: MD Branch and SJ Rawcliffe for applicant ML Broad and RF Leggett for respondent Judgment: 29 June 2010 at 12:00JUDGMENT OF ASSOCIATE JUDGE FAIRE [on applications to (a) set aside a statutory demand, and (b) for particular discovery]This judgment was delivered by me on 29 June 2010 at 12:00am pursuant to Rule 11.5 of the High Court Rules. Registrar/Deputy Registrar DateSolicitors: Harkness Henry, Private Bag 3077, Hamilton for applicant Kensington Swan, Private Bag 92 101, Auckland for respondentThe applications[1] There are two applications which require determination. The first is the applicant's application to set aside a statutory demand issued by the respondent and served on the applicant, which is dated 4 November 2009. The second is the applicant's application for particular discovery. [2] Both applications were called before Associate Judge Sargisson on 15 February 2010. At that time the Associate Judge: a) Made an interim order extending the time for compliance with the statutory demand pending further order; and b) Directed that both applications be adjourned for a fixture and be determined together. In addition, orders for the filing of affidavits and submissions and a casebook were made.The grounds advanced in support of the application to set aside the statutory demand[3] Mr Branch, in his submissions, clarified the grounds which are relied upon by the applicant in support of the application to set aside the statutory demand. [4] Those grounds are as follows: a) The applicant has a counterclaim in the sum of $517,313.13; b) The applicant has a set-off in the sum of $450,549, being a sum which is owed to it by the respondent under a fund which appears in therespondent's accounts as retained discount account (referred to in this judgment a RDA); c) The applicant is solvent and good reason exists for not paying the sum demanded; d) In the alternative, the application to set aside the statutory demand should be adjourned until the applicant has been given access to the documents sought in its discovery application and is then able to better, either plead or at least articulate the set-off opposition and the counterclaim; and e) In the further alternative, the application to set aside the statutory demand should be adjourned to allow the applicant to make an application to the court for orders under the Companies Act 1993, s 178. [5] Mr Branch confirmed that the amount claimed in the statutory demand is not disputed by the applicant. There is therefore no basis for the application of the Companies Act 1993, s 290(4)(a) to this application.The documents sought in the discovery application[6] I will set out later in this judgment the precise form of order sought in the application. For the purpose of the examination of the issues in this case, however, it is appropriate to record that the scope of the discovery sought covers the following areas: a) Documents which record or explain how and why the respondent has set-off from debts owed by a member to the respondent some or all of that member's RDA;b) Documents which record those members who have been unable to pay their debts to the respondent together with documents which disclose the steps taken to recover the outstanding debts; c) Documents relating to certain investments and/or loan accounts to a number of companies by the respondent; and d) Documents which disclose the sales by the respondent to each of its members in the 2008 and 2009 year and the 2009 and 2010 year period from 1 April 2009 to 31 October 2009, plus purchases made by members of the respondent for that period from a third party on which a rebate was paid to the respondent. [7] From the applicant's perspective the discovery is sought to determine: a) Whether there has been a breach of the constitution of the respondent by the respondent or its directors in relation to: i) Recovery of debts from members; and/or ii) Investment of members' funds; b) The way that the applicant is being treated in relation to set-off in respect of the RDA as compared with other shareholders in relation to the RDA entitlement; and c) The applicant's sales performance so that the percentage of profit allocated to the applicant through the RDA can be verified. [8] The documents are said by the applicant to be necessary to advance both its counterclaim and its plea of set-off.The statutory grounds[9] The application to set aside the statutory demand relies particularly on the Companies Act 1993, s 290(4)(b) and, in the alternative, (c). Subsection (4) provides:290 Court may set aside statutory demand(4) The Court may grant an application to set aside a statutory demand if it is satisfied that— (a) (b) The company appears to have a counterclaim, set-off, or cross-demand and the amount specified in the demand less the amount of the counterclaim, set-off, or cross-demand is less than the prescribed amount; or (c) The demand ought to be set aside on other grounds.[10] No issue is taken with the timeliness of the application in this case. In short, the provisions of the Companies Act 1993, s 290(2) have been complied with.The court's approach to applications to set aside a statutory demand[11] When a matter is to be determined pursuant to s 290(4)(b) of the Companies Act 1993, the court's approach is as set out in Covington Railways Ltd v Uni- Accommodation Ltd1 where the court said:Where a company which is the subject of a liquidation application is indisputably in debt to the applicant creditor, it may nonetheless be able to show that it has a claim against the applicant creditor, it may nonetheless be able to show that it has a claim against the applicant which reduces the net balance owing to the creditor or even off-sets it altogether. Where there are liquidated sums due each way, that is simply an arithmetical exercise. It is more difficult if, on the applicant's side, there is an indisputable liquidated sum, but the other party's claim is for an unliquidated sum with liability and/or quantum in dispute. Then, in order to impeach the statutory demand and overcome the presumption in s287(a) that the company is unable to pay its debts when it has failed to comply with the demand, it must be able to do more than merely assert that there is an available set-off. It must be able to point to evidence before the Court showing that it has a real basis for the claimed set-off and that accordingly, the applicant's claim to be a creditor is, to the extent of the set-off, seriously in doubt. In the words of Buckley LJ in1 Covington Railways Ltd v Uni-Accommodation Ltd [2001] 1 NZLR 272 (CA).Bryanston Finance Ltd v De Vries (No.2) [1976] Ch 63, 78, it must show that there are "clear and persuasive grounds" for the set-off claim. Where this can be done, the party who has issued the statutory demand against the company will be shown to be using the statutory demand and liquidation procedures improperly because there is a "genuine and substantial dispute" about the net amount of the company's indebtedness (Taxi Trucks Ltd v Nicholson [1989] 2 NZLR 297, 299). The dispute should then be resolved in the ordinary – way – except as to any undisputed balance – rather than upon the hearing of a liquidation application.[12] With respect to the court's power to set aside a statutory demand under s 290(4)(c) this question was examined in Commissioner of Inland Revenue v Chester Trustee Services Ltd2 where the court said:If the focus is on the justice of the particular case the discretion must always be exercised on a principled basis and not on some ad hoc perception of what individual justice might require. All cases involving s 290(4)(c) must in the end come down to a judgment by the Court as to whether the creditor's prima facie entitlement is outweighed by some factor or factors making it plainly unjust for liquidation to ensue.[13] Because the question of solvency has been raised in this case, an issue arises as to whether that, of itself, could constitute a ground why the demand ought to be set aside under the Companies Act 1993, s 290(4)(c). In AMC Construction Ltd v Frews Contracting Ltd3 it was said at [7]:We would not wish to rule out the possibility that the solvency of the company might constitute a stand alone ground for setting aside a notice under para (c). However, we consider that such cases are likely to be extremely rare. If there is no dispute as to the company's liability, so that para (a) or (b) cannot be invoked, it is difficult to imagine circumstances in which the company should be able to avoid paying a debt, merely by proving that it is able to pay that debt. If the debt is indisputably owing, then it should be paid. If the company simply refuses to pay, without good reason, it should not be able to avoid the statutory demand process by proving, at the statutory demand stage, that it is solvent. The demand should be allowed to proceed. If it is not met, and an application for liquidation is filed, in reliance on the presumption in s 287(a) that the company is unable to pay its debts, then the company will have an opportunity on the liquidation application to rebut the statutory presumption, which applies "unless the contrary is proved". There might be circumstances in which it is appropriate to advance the inquiry as to solvency to the s 290 stage, but that would require some particular circumstance not present in this case.2 Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395 (CA) at 397 per Tipping J.3 AMC Construction Ltd v Frews Contracting Ltd (2008) 19 PRNZ 13 (CA).[14] The position in relation to solvent companies and statutory demands was also considered in Apple Fields Ltd v The Trustees Executors & Agency Co of New Zealand Ltd.4 The court there recognised that the legitimate purpose of a statutory demand is to obtain payment of a debt. The fact that a solvent company refuses to make a payment does not necessarily make the issue the statutory demand an abuse of process. It will, however, be an abuse of process if it is issued for some other or ulterior purpose than that of obtaining payment of a debt. [15] Because there is a discovery application in this case, it is appropriate that I briefly confirm the approach to such applications. In Shuttle Petroleum Distribution Ltd v Caltex New Zealand Ltd5 the position was considered. Discovery in statutory demand cases will be confined to those relative narrow band of marginal cases where an outline defence, including a defence of set-off or counterclaim was made out but the court encounters genuine difficulty in determining whether or not the defence to the claim or the counterclaim does exist. If that position applies and the court has reason to believe that discovery in the proceeding will, or may, assist that determination it may be appropriate to order discovery. Neither counsel suggested the approach adopted in that case was inappropriate. [16] The Companies Act 1993, s 290(7) permits the court to make an order subject to conditions. That authorises the adjournment and, in appropriate cases, on terms. Those terms might well include, after discover and inspection has been completed, the filing and service of a draft statement of set-off and counterclaim which complies with the High Court Rules as to particulars. It might also involve the providing of security for the debt while the discovery and pleading is being undertaken. In this way the respondent's position can be safeguarded while the discovery and pleading are being undertaken. [17] I raised the above possibilities with Mr Branch in the course of the hearing. He advised his client was prepared to give security. His client's preference was that the security be given by a bank bond. He would, however, accept an order that payment be made to the Registrar on the understanding that the fund was held in an4 Apple Fields Ltd v The Trustees Executors & Agency Co New Zealand Ltd (1999) 8 NZCLC 262,008; (1999) 13 PRNZ 387.interest-bearing account pending determination of the question of entitlement to the fund by order of the court. He also accepted that the applicant should provide a pleading in the terms outlined. His position was premised on the basis that the approach that I have just outlined should only be adopted if I concluded that there was not sufficient before me to justify a setting aside of the demand at this stage.Background[18] The applicant is a food distribution company. It operates from two sites. One is in Hamilton and the other is in Mt Maunganui. It services South Auckland, Waikato, King Country, Coromandel and the Bay of Plenty. [19] The respondent is a cooperative and distribution company which is 100% New Zealand owned and operated. Members distribute high quality products and services on behalf of suppliers to various customers including supermarkets, convenience stores, hospitals, schools, restaurants and food outlets. Its distribution centres have been servicing the industry for over 20 years. The applicant has been a member for 17 years. [20] The relationship between the respondent and its shareholders (the members) is governed by the respondent's constitution. There are currently 13 members who are active shareholders of the respondent. That does not include the applicant, which gave notice of resignation from the cooperative on 5 October 2009, effective from 31 October 2009. [21] The applicant has shown significant growth over the years. It has increased its share of sales through the respondent from 8 per cent total of the respondent's sales in 1999 to an estimated 30 per cent in 2009. [22] Profits of the respondent for each financial year after tax and a small dividend on members shares are then allocated to members based on their respective proportion of the respondent's sale to members by way of an allocation to the members RDA (referred to as "RDA"). It is common ground that the applicant's5 Shuttle Petroleum Distribution Ltd v Caltex New Zealand Ltd (2002) 16 PRNZ 126.current RDA balance is $450,549.00. The respondent's position is that none of the events which would justify a payment of the applicant's RDA balance to it as set out in the constitution have occurred with the result that the balance is not due and payable. A payment of $43,566.00, being the RDA amount for the 2000 financial year is scheduled to be paid out at 31 August 2010. The respondent says that future RDA payments are contingent on there being sufficient cashflow available in the business for payments to be made. [23] There have been disagreements between the applicant and the respondent's officers as to the manner of operation of the respondent. Extensive material has been the subject of the affidavit evidence filed in relation to this. [24] As earlier recorded, the applicant acknowledges that it has a debt due to the respondent in the sum claimed in the statutory demand. Its only reason for refusing payment is the existence of the alleged counterclaim as to part and the set-off as to the other part of the amount claimed. The applicant raises a concern that if it pays, and the respondent is liquidated, its position, when compared with active members in relation to its RDA entitlement, will be significantly disadvantaged because it will not be entitled to the set-offs which apply in liquidation. That arises from clause 8.5 of the respondent's constitution. [25] The applicant has produced significant information on its own financial position which reveals that it is a solvent company. I have already referred to the possibility of the demanded debt being paid into trust with the Registrar whilst discovery is completed. The applicant's solvency has not been seriously challenged by the respondent. [26] The position adopted by the applicant has raised an unusual position so far as an application under s 290 is concerned. It has raised the issue of the solvency of the respondent who is, of course, the creditor. That arises directly from clause 8.5 of the respondent's constitution. That, as I have mentioned, deals with the RDA and provides that an immediate right to set-off any debt owed by a member to the respondent will arise if the respondent is placed into liquidation. The applicant's position, then, is this. If it pays the full amount demanded there will be nothing leftshould the respondent go into liquidation for its RDA to be set-off against. The prospect then is that it would lose the entire benefit of its RDA. By contrast, continuing active members would not because any debt that they owed to the respondent would be reduced by their respective RDA entitlement. This, of course, is a direct consequence of a decision which the applicant has taken to withdraw from the cooperative. Mr Broad submitted that is a decision which the applicant was free to take. However, as the applicant knows the rules relating to the cooperative, it cannot complain should it choose to take a particular position which, having regard to those rules, has a consequence adverse to the applicant. The applicant's position is no difficult from any other member which should choose to withdraw and who have no outstanding debt to the respondent before the liquidation of the respondent. [27] The respondent's position, however, is that it is not insolvent. I have not been provided with a complete financial analysis of the respondent's position and therefore hesitate to make any final finding on that position. Nor do I see any real point in completing an analysis of the respondent's financial position based on what has been provided. [28] What is required is an examination of the basis for the set-off and counterclaim. Mr Broad, for the respondent, certainly adopts the position that there is no such proper basis and that is why the discovery application should be dismissed. In short, he submits it would serve no useful purpose. [29] I now consider the reasons advanced for non-payment.The set-off[30] The amount of the RDA set aside for the applicant is not in issue. What is in issue is whether it is yet due and whether the applicant can set it off against its debt to the respondent. [31] The respondent's position is that none of the events in its constitution have occurred which makes the applicant's RDA account payable. Its directors' position is that they will move at the annual general meeting of the respondent that paymentof the RDA arising out of the 2000 financial year will be paid to the members, including the applicant, if, in fact, the applicant settled this debt first. That 2000 payment is planned, provisionally, for 31 August 2010. A current refusal to pay the debt, however, has put payment of the 2010 RDA in jeopardy. [32] There are two relevant constitutions with respect to the applicant's RDA entitlement. However, counsel's submissions concentrated on the current constitution. That is directly applicable to the majority of the RDA account currently held for the applicant by the respondent. [33] The starting point for this analysis is the respondent's constitution. [34] The relevant parts of the current constitution are as follows:VII PROFITS DIVIDENDS AND DISCOUNTS8 1 Each year out of the net tax paid profits of the Company and after making due provision for the running and management of the Company and such other matters as the Board deems advisable the Board shall recommend to the Annual General Meeting the making of the following provision out of the funds available as a result of the last concluded financial year ... (ii) a discount that shall be carried to the Retained Discount Account, such discount to be calculated in respect of each member who qualifies on the basis of the discount formula 8 3 The said discounts so earned to the Retained Discount Account shall henceforth each year be supported by a Voucher. The first Voucher shall show the accumulated creditors in that account as well as that year's discount and each succeeding Voucher shall show the amount of discount in that year allocated to the particular member 8 4 The amount allocated to each member in the Retained Discount Account and each Voucher shall be subject to set-off and the entitlement of each member shall be the net figure after taking into account any set-off whether the same arises out of unpaid purchase moneys for merchandise or arising howsoever ... and each member acknowledges that the net figure only is payable out of the Retained Discount Account and by virtue of any Voucher and each Voucher issued by [NZARFD] shall have endorsed thereon a provision that the discount shown on the face of the Voucher is subject to set-off and [NZARFD] shall only be liable to pay when the Voucher matures the net amount after taking into account any set-offwhenever and howsoever arising and whether or not such set-off is a true set-off at law. 8.5 Subject as aforesaid Vouchers shall be payable to each member entitled in a manner to be determined by the Board from time to time. Notwithstanding the foregoing the vouchers shall be immediately due and payable should [NZARFD] go into liquidation or be placed in receivership 8 6 The Board shall, if in doubt, consult the Auditors as to the amount to be credited to any member, the amount of any set-off, the entitlement to payment and the time of payment of any voucher and any matters arising out of or in any way pertaining to the Retained Discount Account and the Vouchers and a certificate from the Auditors on any such matters shall be final and binding and conclusive as between the company and the member and any person claiming under that member 8 7 The dividends and discounts each year shall be fixed at the Annual General Meeting but so that neither shall exceed the amount recommended by the Board.[35] Mr Broad referred me to NZ Associated Refrigerated Food Distributors Ltd v Donley.6[36] The applicant in the Donley case is the respondent in this proceeding. It has undergone a name change since that decision. [37] In the Donley case there was no argument about the quantum of the RDA. What was in issue was the time when the RDA was payable and, in particular, whether it was caught by the provisions of the Companies Act 1993, s 310 dealing with mutual credits and set-offs in a company liquidation. It is not necessary to analyse the facts in that case further. Where the decision is of assistance, however, is in Associate Judge Abbott's analysis of clause 8 of the constitution, which is the very constitution which is applicable in this case. At 7 [46] he said:A debt is "due" when it is payable: Stroud's Judicial Dictionary, 6 th ed, citing Re European Life Assurance, LR 9 Eq. 122. NZARFD's constitution prescribes when the money held in the retained discount account becomes payable: a) The constitution provides a mechanism for payment in the form of the vouchers (clause 8 3).6 NZ Associated Refrigerated Food Distributors Ltd v Donley (2010) 10 NZCLC 264,626.7 Ibidb) NZARFD's obligation to pay the allocated credit arises "when the voucher matures" (clause 8 4). c) The vouchers "shall be payable ... in a manner to be determined by the Board" (clause 8 5). d) There are two circumstances in which the vouchers are payable other than as determined by the directors. The first is when the Board obtains an auditor's report because of uncertainty on various matters including entitlement to payment and timing of payment (clause 8 6). In this circumstance the voucher will be payable as certified by the auditor (who can certify both as to entitlement and as to timing of payment of any voucher). The second is if NZARFD went into liquidation or was placed in receivership (clause 8 5). In that event all amounts are payable immediately.[38] The respondent's chairman of directors described the way in which the constitution has been applied. At [32] and following of his affidavit of 2 December 2009:32. The RDA is an entry in foodfirst's accounts that records a rebate from previous years trading that can be paid to members at a future date specified by the directors. The directors can defer payment of these rebates if they deem that to be expedient. For instance, cash- flow difficulties in any given year may see rebates deferred. 35. Provida's RDA is currently recorded as $450,549.00. Provida's next RDA payment of $43,566.00 (The RDA amount for the 2000 financial year) is scheduled to be paid out on 31 August 2010, with the balance to be paid incrementally annually thereafter. 36. All future RDA payments are contingent upon there being sufficient cash flow available in the business for payments to be made. If it is deemed that there is insufficient cash flow, or there is any other reason why the directors believe a distribution should not be made, then payment will be deferred. 37. There is no debt which has accrued to Provida, which foodfirst believes that Provida can set-off. To offset RDA payments that are scheduled to be paid on 31 August 2010 and beyond in the future, would be to provide Provida with a windfall at the expense of the other members of foodfirst and non active shareholders. 38. There is also no certainty that the amounts scheduled to be paid in the future will be paid. foodfirst will need to address the loss made for the 2009 financial year. If Provida was allowed to set-off its RDA balance this would give it a benefit ahead of other members and non active shareholders by paying off its indebtedness. The board has not yet made the decision of how this loss will be allocated. Naturally the board's decision will impact on RDA balances.[39] Based on the same constitution and similar facts as to the approach taken by the respondent's directors, given in evidence to Associate Judge Abbott, and the evidence which I have been given in this case, Associate Judge Abbott concluded that the money held in the RDA account was not payable at the time the set-off was claimed and therefore provided no defence to that portion of the summary judgment application that was before him. [40] The immediate issue, then, is whether there is any reason to reach a different conclusion on the question of the date for payment of the RDA from that reached by Associate Judge Abbott. [41] Mr Branch submitted: a) That the finding in NZ Associated Refrigerated Food Distributors Ltd v Donley8 was not binding on me; and b) That when analysis of the constitution against the factual matrix is undertaken a different conclusion as to when the RDA is due results. He drew attention to the following: i) Clause 8.4 of the constitution states in its concluding words:and the company shall only be liable to pay when the voucher matures to a net amount after taking into account any set-off whenever and howsoever arising and whether or not such set-off is a true set-off at law;It is perhaps notable that Associate Judge Abbott's judgment does not contain the concluding words of clause 8.4, namely, "and whether or not such set-off is a true set-off at law"; ii) Clause 8.4 gives an absolute right of set-off. This arises from the use of the words "shall be subject to set-off";8 NZ Associated Refrigerated Food Distributors Ltd v Donley, above n6.iii) The board's ability to decide when payment should be made pursuant to clause 8.5 is limited to paying the vouchers. By contrast there is no limitation to the right to claim a set-off in relation to the balance in the RDA; iv) Payments of the vouchers are made pursuant to clause 8.5, which is expressly made subject "as aforesaid" which by implication means subject to the set-off contained in clause 8.4; v) Properly interpreted clause 8.4 provides for an absolute right of set-off and clause 8.5 deals with the basis on which the voucher is paid. The basis on which payment is made, it was submitted is independent of and does not impact on the right of set-off allowed in clause 8.4; vi) The incentive provided to a member to refrain from exercising a right to call for the set-off is provided by the operation of clause 5.3 which permits the respondent and its directors to redeem a members shares if, in the opinion of the directors, it is in the best interests of the respondent to do so; vii) In the Donley case the respondent applied clause 8.4 following the Donley's bankruptcy without there being any specific evidence that the sum was "made due". He submitted that that indicated a different treatment of set-offs between members which, in itself, might amount to prejudicial conduct. He also referred to the way the board had dealt with another member, Service Foods (Wellington) Ltd. That company's position is referred to in an appendix to the respondent's financial statement for the year ended 31 March 2009. The entry appears to be saying that there has been an off-set against moneys owing to the respondent by Service Foods (Wellington) Ltd of $133,657 from a debt owing by thatcompany to the respondent. In the same appendix that company appears under the inactive members column. That was explained to me as being members who no longer put orders through the respondent. Mr Branch submitted that there was no apparent reason for the difference in treatment between the applicant's position and that of Service Foods (Wellington) Ltd; viii) Mr Branch referred to correspondence between the applicant and the respondent which drew attention to the constitutional change and the different position that relates in connection with payments made for RDA credits posted prior to the new constitution coming into force in 2002. The position, he said, was not set out of the benefit of the court in the Donley case; and ix) He drew attention to the fact that the applicant had sought documentary information on the treatment of set-offs pursuant to the Companies Act 1993, s 178 but that had been refused. [42] Mr Broad's response to Mr Branch's submissions which I find compelling, in summary are these: a) "Voucher" is defined in the interpretation section of the constitution of the respondent as:the document issued by the company each year to each member reflecting the amount that year accredited to that member as a discount and held in the RDAb) The amount which is subject to set-off is, by clause 8.4 of the constitution, "the amount allocated to each member in the RDA and each voucher"; c) By clause 8.3 the RDA is supported each year by the voucher. The voucher is the record of entitlement of a member;d) The amount payable to a member and therefore subject to set-off is the amount due at the relevant time. I adopt and agree with Associate Judge Abbott's analysis in NZ Associated Refrigerated Food Distributors Ltd v Donley9 where he said:A debt is "due" when it is payable: Stroud's Judicial Dictionary, 6th ed, citing Re European Life Assurance, LR 9 Eq. 122.e) The amount due is that which is determined under clauses 8.5 and 8.6. That requires a determination by the board or, if in doubt, by the board referring the matter to the auditors. That is subject to an overriding provision that if the respondent is placed into liquidation the vouchers shall be immediately due and payable. The board has made no such present determination in respect of the amount which the applicant seeks to set-off; and f) The constitution is clear. There is no ambiguity. I can find no strong case that would persuade a court if something has gone wrong with the language that might justify departing from the plain words of the constitution. For that reason, I do not see a justification in this case for widening the inquiry beyond that which is contained in the constitution itself. On that basis, which ever view one adopts as to the approach to interpretation which was recently referred to in Vector Gas Ltd v Bay of Plenty Energy Ltd10 this is not a case that requires consideration beyond the constitution itself. [43] The above analysis is sufficient to dispose of the set-off ground advanced for non-payment of the debt, subject to one reservation. That reservation stems from the very power reserved to the board itself. As Mr Broad put it in his submissions, the board's power is discretionary. The respondent is not bound to use its discretion in the same way each time. If it were, the power would not be "in a manner determined by the board from time to time". How the respondent board has used its discretion, does not impact on the nature of that discretion. The reservation I have is that the9 NZ Associated Refrigerated Food Distributors Ltd v Donley, above n6 at [46].very exercise of the discretion itself may be a justification for the application of the Companies Act 1993, s 174. Subsection 2 of that section provides relief against the company itself. There is, at least, a theoretical basis for a counterclaim in reliance on the Companies Act 1993, s 174 against the company which needs, therefore, to be considered in light of the Companies Act 1993, s 290(4)(b) in relation to the handling of the RDA and voucher entitlement. This matter, however, needs to be considered under the next section which I will analyse in this judgment.The counterclaim[44] There has not been placed before me the precise basis of a specific counterclaim. Nor has it been suggested that the counterclaim could ever be expressed in terms of an unliquidated sum. This case is therefore in the "more difficult" category referred to Covington Railways Ltd v Uni-Accommodation Ltd11so far as the applicant is concerned. The applicant indeed understands its difficulty and no doubt that is the reason why the discovery application has been made. [45] I have already referred, in the analysis of the set-off ground for setting aside the statutory demand, to the allegation of potential prejudicial treatment of the applicant by the respondent's board in relation to its RDA. There appears to be, in the accounts, at least one non-active member's RDA being used as a set-off with the approval of the board outside a setting involving the liquidation of the member. However, that is a substantially different situation from the one which would have to be essentially alleged, namely, that this applicant is, by itself, being signalled out for prejudicial treatment. All the evidence shows that there has been a consistent policy followed by the board of the respondent in dealing with the majority of its members' RDAs. There is plainly not enough before me to support a counterclaim on the ground of prejudicial treatment. [46] Mr Branch advanced the case for a counterclaim on the principal basis that there had been a breach of two provisions of the respondent's constitution, namely, clauses 3.5 and 3.7. Those closes respectively provide:10 Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5; (2010) 9 NZBLC 102,874.3.5 The Company will use its best endeavours to collect from all its members the invoiced price for all merchandise delivered to each member and protect the Company and its members overall from any defaults, inactivity or other malpractices of any individual member 3.7 The Company will as in the past work towards a cohesive and properly structured distribution of merchandise through the country and the provision of goods and services that are determined by the Board to be complementary thereto and to this end may purchase shares in companies (including member companies) which can provide such goods and services[47] Mr Branch summarised the applicant's complaints about the way in which the respondent has failed to use best endeavours as follows. It is alleged that the respondent has failed to: a) Use its best endeavours to collect from all its members the invoiced price for all merchandise delivered to each member and, nor have they protected the company and its members overall from any default, inactivity or other malpractices of any individual member; and b) Exercise the implied requirement of competence when purchasing shares in other companies. [48] The evidence from Mr Hudson, for the applicant, and Mr Pickup, for the respondent, goes into an examination of a number of matters, all of which are disputed. This jurisdiction cannot determine disputed matters of fact. In the course of the hearing, I raised with Mr Branch that the only clear way of examining this aspect of the case is to call for a detailed statement of counterclaim which complies with the High Court Rules as to particulars, which could then be considered against the evidence that has been adduced. In addition, there would need to be some evidential basis to support the quantum claimed in such counterclaim. A reference to historical performance, by itself, I would have thought, would have been clearly insufficient. [49] If I, for the sake of the analysis, allow potential prejudicial treatment of a shareholder in respect of the treatment of the RDA there are two potential heads of11 Covington Railways Ltd v Uni-Accommodation Ltd [2001] 1 NZLR 272 (CA).damages advanced on the applicant's behalf in relation to the counterclaim. They are: a) A loss of profit entitlement for three periods: the financial years ended 31 March 2008, 31 March 2009 and the period 1 April 2009 to 31 October 2009; and b) The prejudicial treatment in respect of the payment of the RDA. [50] The statutory basis for the RDA claim, based on prejudicial treatment, could conceivably be the Companies Act 1993, s 174. [51] Mr Branch submitted that the loss of profits claim could be brought by a shareholder in reliance on the Companies Act 1993, s 171. That permits a shareholder to bring an action against the company for a breach of duty owed by the company to the shareholder. He noted that the commentary to Companies and Securities Law12 provides that, in addition to any duties under the act, the company's constitution may provide for duties owed by the company to its shareholder. He submitted that breaches of clauses 3.5 and 3.7 of the constitution are matters which could justify a claim under s 171. Mr Broad submitted that s 171 was not intended to authorise a claim of the type submitted by Mr Branch. He observed that if all shareholders were entitled to sue the company and did so successfully, the ultimate result is that the company would be left with large liabilities to all shareholders that the company would not be able to pay. He submitted that that would simply lead to a position of robbing Peter to pay Paul. He further submitted that the action would, in any event be limited by the rule in Foss v Harbottle.13[52] The analysis of the position, through no fault of the respondent, is difficult. Counsel's submissions embarked on an analysis that was not unlike that which one would expect on a strike out application. The problem is that the foundation for the specific counterclaim is not fixed in the way that the court would have if it was considering a strike out application in relation to a pleading.12 Companies and Securities Law (looseleaf ed, Brookers) at [CA171.01].13 Foss v Harbottle (1843) 2 Hare 451; 67 ER 189.[53] But for two matters, I would dismiss the application because I do not consider that there is a proper foundation laid out for the existence of the counterclaim. The first matter that causes me concern, however, with this case is that there is a history of requests for information being sought by the applicant from the respondent, which has, until recently, been denied. If that is provided, the applicant may well be able to frame a proper counterclaim. Second, if the application to set aside the statutory demand is dismissed and the usual conditions which are applied by the court under the Companies Act 1993, s 291 apply, that is an application to appoint a liquidator can be made within a certain period of time after the dismissal of the application to set aside the statutory demand, the likely result is that there would be a further and more detailed examination of the respondent's status as creditor at the second proceeding stage. In particular, there would be a detailed examination as to whether there is any justiciable justification for the applicant's refusal to pay this account in proceedings to appoint a liquidator. [54] Further, there is some evidence of an interest in the company held by the applicant in the form of the RDA. The present position can be protected by: a) Requiring the amount claimed in the statutory demand to be paid to the Registrar of the court to be held in an interest bearing account pending further order of the court and directing that if it is not so paid within a period of ten days, that the respondent may present an application to the court to appoint a liquidator; b) Requiring the respondent to provide discovery of the documents sought in the application by the filing and service of an affidavit of documents in accordance with the High Court Rules; and c) Requiring the applicant to file and serve a draft statement of claim which fully particularises in accordance with the High Court Rules as if it were an independent claim, the claim which the applicants says it is entitled to make by way of counterclaim in respect of the current proceeding.[55] I envisage that shortly after completion of the above steps the position could be reviewed by the court and if further hearing time is required for this application appropriate arrangements would then be made. [56] I am satisfied that the approach that I have outlined, having regard to the authorities referred to in [9] and [17] of this judgment is justified in this case, which I would classify as unusual and demanding of special consideration. It is unusual because there is clear evidence of the solvency of the applicant company. There is correspondingly and understandably some doubt as to how much effect the payment of this may have on the solvency of the respondent. The respondent's trading position reveals that it has had to deal, unfortunately, with members who have not been able to meet their responsibility to the respondent, which is one of the reasons advanced for losses which have occurred. [57] Accordingly, for the above reasons, I order: a) The applicant shall, within 10 days of the delivery of this decision, pay to the Registrar of this court the sum of $977,852.13 to be held by the Registrar pending determination by this court of the party entitled to the fund failing which the respondent may make application to put the company into liquidation; b) The respondent shall, within 28 days of the delivery of this decision, file and serve an affidavit of documents in accordance with the High Court Rules which discloses all documents relating to: i) Instances where the respondent has set-off all or some of the RDA against debts owed by members; and ii) Members' accounts where those members have been unable to pay their debt to foodfirst on due date (including, but without limitation, information relating to Fresh & Frozen Food Distributors Ltd, Service Foods Manawatu Ltd, Service Foods Wellington Ltd, Service Foods (2003) Ltd and Pellows FrozenFoods Ltd), such information to include any steps taken to recover those arrears and documents relating to the cost of such steps; and iii) Investments and/or loan accounts relating to Vinery Projects Ltd, Service Foods Manawatu Ltd, Service Foods (Wellington) Ltd and Service Foods (2003) Ltd; and iv) Sales by foodfirst to each member of the respondent for the 2008/2009 year and the part year 2009/2010 being the period 1 April 2009 to 31 October 2009 and, for the same period, members' purchases from McCains Foods (NZ) Ltd on which a rebate was paid to the respondent; c) The respondent shall make the documents referred to in the affidavit of documents, save for those which are covered by privilege and confidentiality available for inspection as from the time of the filing and service of the affidavit of documents; d) The applicant shall file and serve within 49 days of the date of delivery of this judgment, a draft statement of counterclaim which fully particularises the applicant's claim against the respondent as if it were a stand-alone statement of claim; e) The application is adjourned for a telephone conference with counsel at 10:50am on 14 September 2010. Its purpose shall be to give directions relating to the completion of the hearing of the application to set aside the statutory demand; f) Costs are reserved. _____________________JA Faire Associate Judge