THE SALES FACTORY LTD V TODD & ANOR HC HAM CIV 2006-419-465

THE SALES FACTORY LTD V TODD & ANOR HC HAM CIV 2006-419-465 7 August 2006IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY CIV 2006-419-465BETWEEN THE SALES FACTORY LIMITED Plaintiff AND MARK JAMES TODD AND CAROLYN FAYE TODD Defendants Hearing: 2 August 2006 Counsel: B Henry for plaintiff C Gudsell for defendants Judgment: 7 August 2006 at 14:30JUDGMENT OF ASSOCIATE JUDGE FAIRE [on application for orders to set aside statutory demand]Solicitors: Pipers Central, PO Box 26 344, Epsom for plaintiff Lewis', PO Box 529, Cambridge for defendants[1] The applicant, by an amended application, applies for orders: a) That the statutory demand issued by the defendants on 3 April 2006 and served on the plaintiff on 5 April 2006 be set aside; b) That the second statutory demand issued by the defendants on 13 April 2006 and served on the plaintiff on 14 April 2006 (demanding the same debt as in paragraph 1 herein) be set aside; c) Alternatively, that the time for complying with the said demand be extended to three weeks from the date of hearing this matter; and d) That the costs of and incidental to this application be paid by the defendants. [2] The amended application became necessary because after filing the application on 10 April 2006 the defendants served a second statutory demand, which is dated 13 April 2006, and which was apparently served on 14 April 2006. [3] The second statutory demand was served so that a mistake in the first statutory demand could be corrected. Although it will be necessary to deal with each of the specific orders sought, the merits of the matter require a consideration only of the statutory demand dated 13 April 2006 and served on 14 April 2006. [4] The statutory demand dated 13 April 2006 required the plaintiff to pay to Mark James Todd and Carolyn Faye Todd:The sum of $25,245 (including GST) due and owing for royalties for the twelve-month period, year ended 31 March 2005 as disclosed by you.[5] The statutory demand dated 13 April 2006 does not provide particulars as to the legal basis on which it is made other than to say that the sum claimed is that which is due and owing for royalties and for a twelve-month period ending 31 March 2005. This problem did concern me. I am satisfied that the plaintiff has had ampleopportunity however to advance further evidence if in fact there was any misunderstanding about the basis for the claim for the amount which is demanded. I will explain that position more fully later in this judgment. [6] The grounds set out in the application are as follows: a) Two statutory demands the first dated 3 April 2006 and the second dated 13 April issued pursuant to section 289 of the Companies Act 1993 demanding the same debt were served on the plaintiff by the defendant on 5 April 2006 and 14 April respectively; b) There is a substantial dispute as to whether the alleged debt stated on the demand is owing or is due, including the taking of a secret commission; c) It is in the interests of justice that the demand be set aside; d) Appearing by the affidavit of Robyn Gail Kay, company director, filed and sworn herein; e) Appearing in the affidavit of Dr Grahame Craig, company director and business consultant, filed and sworn herein. [7] The principal grounds relied upon in support of the application are those set out in s290(4)(a) of the Companies Act 1993. That provides:(4) The Court may grant an application to set aside a statutory demand if it is satisfied that— (a) There is a substantial dispute whether or not the debt is owing or is due; or[8] The approach that the Court adopts to an application which relies on s 290(4)(a) of the Companies Act 1993 can be shortly stated. The Court is required to determine whether there is a substantial dispute whether or not the debt is owing or is due. The applicant must show a fairly arguable basis upon which it is not liable for the amount claimed. Forge Holdings Ltd v Kearney Finance (NZ) LimitedHC CHCH M 149/95 20 June 1995 at 2 and Queen City Residential Limited v Patterson Co-Partners Architects (No 2) [1995] 3 NZLR 307 (7 NZCLC) 260,936. That formulation was approved by the Court of Appeal in United Homes (1988) Ltd v Workman [2001] 3 NZLR 447 at 451-2. Once that position is reached the statutory demand should be set aside and the dispute is then disposed of, if necessary, by other proceedings in the ordinary way. [9] Out of an abundance of caution, I refer to s 290(4)(c) of the Companies Act 1993. That provides that the Court may grant an application to set aside a statutory demand if it is satisfied that the demand ought to be set aside on other grounds. [10] With respect to the Court's power to set aside a statutory demand under s 290(4)(c) the Court of Appeal examined this question in Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395. At 397 Tipping J 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.[11] The plaintiff company was incorporated on 13 October 1987. Two name changes have been effected to it. The current name was registered on 20 January 1997. For the purposes of this case, its director is Robyn Gail Kay of Cambridge. The company entered into a heads of agreement with the defendants on 26 September 2002. Under that document it was given exclusive rights to market all products, both existing and future, which carried the Mark Todd brand and, specifically, the Mark Todd Collection brand. These products included a range of riding clothes, horse ware and saddlery products. At that time the business of the plaintiff company was newly established. It had no customer database. It had no distribution network and limited operating stock. It had no previous marketing plans or systems in place. It obtained contact information enabling it to approach its current manufacturers and suppliers from the first-named defendant, Mark Todd. [12] Under the agreement, it was required to pay royalties on 50% of the net profit being sales revenues from the business less all product operating and marketingcosts. Robyn Kay has deposed that, in the financial years ended March 2003, March 2004 and March 2005 there were no profits. [13] Robyn Kay says that she was called to a meeting at the home of Mark Todd on 24 December 2004. At that meeting was Mark Todd, a friend of Mark Todd, Robyn Kay's business consultant, Dr Grahame Craig, and Robyn Kay. Robyn Kay claims that at that meeting her business consultant tabled a financial report which disclosed the trading results. Following that meeting and at the apparent instance of Mark Todd a new heads of agreement was prepared. It bears the heading Licensing Agreement and is dated 11 February 2005. The parties are recorded as the defendants and the plaintiff company. It expressly supersedes prior agreements. It records in its recital the desire that the plaintiff obtain the exclusive rights to market the Mark Todd product range in specific countries, which are then defined. [14] It then contained the following specific clauses:3. In consideration of the grant of this license, MT shall allow TSF to use the term "The Mark Todd™ Collection" and the intellectual property in schedule 1 in all Product labeling, advertising and promotions, in connections with Products. TSF shall bear the cost and financial risk associated with marketing the Products and will pay MT a royalty on the gross sales revenue (excluding GST) of sale of the Products at the rate of 6% (six percent), until 31 March 2006 and thereafter until the renewal date at 8%. This royalty shall be paid subject to the terms set out in clause 4 below. 4. The royalty payments are to be paid to MT by TSF 6 monthly, at the close of each selling season, being March 31 st (summer) and September 30th (winter). Each royalty payment is to be made on the 20th of the month following the season end. Royalty payments for the year ended 31/3/2005 may be deferred to the following year, if TSF has cash flow issues. If the payment is deferred then the royalty rate increases to 8%. 27. This agreement constitutes the entire terms between the parties relating to the Mark Todd brand and supersedes any other prior arrangements, both written and oral. This agreement may only be varied by the written agreement of the parties.[15] In addition, it contains provisions requiring the parties to mediate any dispute and, in the event that mediation does not resolve the dispute, empowering either party to institute an arbitration proceeding.[16] Robyn Kay, in her affidavit, under the heading Dispute claims that in early 2003 she learned that Mark Todd was receiving a 6% secret commission from the approved manufacturer, a Hong Kong factory, which was supplying goods to the plaintiff company. There is a dispute between the parties as to what was said about the 6% payment. [17] Robyn Kay then says she disputes that $25,245 was due to the defendants pursuant to the licensing agreement. She complained that no calculations have been provided by Mark Todd to evidence the amount due. She further complained that the royalty term under the licensing agreement of 11 February 2005 was only for a few weeks and could certainly not have justified a claim of $25,245. [18] Mark Todd deals, in five paragraphs of his affidavit, with what he claims was the basis for the claim for royalties and how it was calculated in the statutory demand. He said:4. In late 2005 a meeting was arranged to discuss royalties and other matters. We met at our house in Cambridge on the 7 th of December 2005 at 4pm. Present at the meeting were Carolyn, our lawyer Matt Hanna, Robyn Kay, Grahame Craig, Rebecca Szabo and myself. We were concerned that we had received no payment for royalties. 5. Minutes of the agreements reached at that meeting were written up and read at the meeting at its closure by our lawyer. All present agreed with the contents. Annexed hereto and marked with the letter "A" is a copy of an email dated the 9 th of December 2005 recording the minutes. No objection has been taken to this record. The minute records: (a) the date the royalty arrangement commenced – 1 April 2004. (b) The turnover for the year ended 31 st March 2005 – calculated by Grahame Craig at $374K. (c) That the royalties are due. (d) That the manufacturers' arrangement was to remain in place. 6. The calculation of royalties is based on figures provided by Dr Grahame Craig, based on the annual accounts provided by him. I refer to Exhibit TSFL-4 of Robyn Kay's Affidavit – being copy of The Sales Factory Limited ("TSFL") accounts for the year ended 31 March 2005. TSFL has never paid any royalties of any kind in spite of promising to do so.7. In our view that the Statutory Demand properly records the debt due in respect of royalties. There is no genuine dispute at all. 8. I now address some specific paragraphs in Robyn Kay's Affidavit: (a) Paragraph 17. TSFL has always been aware of this payment and it is correct that the payments are not related to TSFL. They are not kickbacks. Annexed hereto and marked with the letters "B1" and "B2" are emails evidencing TSFL's knowledge. (b) Paragraph 18. The document referred to in Exhibit TSFL- 10 is a commission statement. We did not agree to discontinue these payments. (c) Paragraph 19. We do not accept the statement contained in Exhibit TSFL-8 is correct. The calculation is completely incorrect. We did not accept these figures and we made it clear that we did not accept them. 9. Exhibit TSFL-8 was in response to our solicitor's letter, Exhibit TSFL-9, being the letter dated the 4 th of October 2005 to Robbie Kay asking her to inform us when she would start paying royalties. I refer also to an annexure marked "C" being the email letter dated the 21st of November 2005 from our lawyer to Grahame Craig asking for financial information to enable calculations of the royalties. TSFL had not supplied this information previously. This was received and the royalty issue addressed in paragraph 5 resolved this issue. The agreement between the parties is covered in annexure "A".[19] The allegation of a further agreement made on 7 December 2005 caused me concern. It is the reason for the comment I made in [5] of this judgment. It is abundantly clear that the defendants' demand is based on an agreement allegedly made at a meeting on 7 December 2005. The plaintiff was given an opportunity to file and serve reply affidavits when the application was called before me on 1 May 2006. The plaintiff did not avail itself of that opportunity. I raised the matter, in the course of the hearing. An opportunity was given for Mr Henry to take instructions. A telephone conference was called at 9am on 3 August 2006, directly following the hearing. Mr Henry advised me that his clients did not wish to respond by affidavit to paragraphs 4 to 9 of Mr Todd's affidavit. I was advised that I should simply proceed on the matters placed before me and having regard to counsel's submissions advanced to me the day before, 2 August 2006.[20] Accordingly, the defendants' evidence that there was a new agreement made on 7 December 2005 is unchallenged. That is significant because the statutory demand is based on that new agreement. [21] One aspect of the defendants' case can be disposed of shortly. That relates to quantum of the sum demanded. The defendants' case is that the amount contained in the statutory demand has been arrived at by ascertaining the turnover of the plaintiff for the year ended 31 March 2005. That figure has been obtained from the plaintiff company's business consultant, Dr Craig. Accordingly, it was submitted correctly by Mr Gudsell that the unchallenged evidence from the defendants is that the plaintiff had a turnover of $374,000 for the year ended 31 March 2005. Six percent of that figure is $22,440. When GST is added, the figure becomes $25,245 which is the amount which is demanded in the statutory demand. In short, therefore, the defendants say that the claim is calculated from evidence provided to them, as to turnover, from the plaintiffs' business adviser. [22] Counsel were required to exchange synopsie in advance of the hearing. The plaintiff's written synopsis identified the dispute as:The plaintiff discovered the defendants were receiving a secret commission being paid to them by manufacturers in Asia. The defendants were never entitled, under the agreement, to receive the further 6%. The agreement was renegotiated on 11 February 2005 and it was agreed that the 6% commission being paid by the manufacturers to the defendants was to cease. The calculation of royalties and money due between the parties is fully disputed. This is set out in the affidavit of Dr Craig filed in support.[23] The immediate problem with counsel's submission is that when the two agreements that are referred to by the plaintiff, and in particular its director, Robyn Kay, are analysed there is no prohibition forbidding any sums being paid by the manufacturer of the product to the defendants. Nor is there anything in the agreement that requires a disclosure of such payments or, for that matter, a duty to account to the plaintiff for any such payments. [24] In view of Robyn Kay's assertion that she first learned of the 6% commissions being paid to Mark Todd in 2003, it is difficult to see how that issue can have any bearing on the agreement which is relied upon by the defendants forthe issue of the statutory demand and which was said to have been made on 7 December 2005. That is particularly so when one considers paragraph 19 of Robyn Kay's affidavit. In the first paragraph numbered 19 she discusses facsimile correspondence between Mark Todd's lawyer and herself concerning the payment of royalties by the manufacturers of the product. In the second numbered paragraph 19 she says:I raised this at the last meeting with Mark Todd (held in December 2005). He told me it was none of my business and had nothing to do with me. As far as I was concerned this was a breach of our agreement as he was continuing to obtain double royalties.[25] I have already commented that the two prior agreements of February 2005 and September 2002 make no reference at all to a prohibition from obtaining royalty payments from manufacturers. That subject matter is simply not addressed at all in either of the agreements. Further, it is not mentioned in the agreement which Mr Todd says was made on 7 December 2005. If, in fact, the plaintiff knew about the royalty payments in early 2003, as she says in her affidavit, and was told at the time that the December 2005 agreement was entered into that it was none of her business, there can be no basis for alleging either breach of an agreement or that some representation was made by the Todds which induced the plaintiff to enter into the 7 December 2005 agreement. In short, there is no basis for the application of the Contractual Remedies Act 1979. [26] A concern that I raised with both counsel concerning the 7 December 2005 agreement arises from the fact that the 11 February 2005 contained a stipulation in paragraph 27 that it:May only be varied by the written agreement of the parties.My concern is how that agreement came to be discharged or varied or replaced by the 7 December 2005 agreement. Neither counsel were prepared to address on this particular point. In fairness to Mr Gudsell, I record that there was no submission advanced by Mr Henry to the effect that clause 27 barred the making of an agreement that Mr Todd says was made on 7 December 2005. However, as Mr Gusdell submitted, the plaintiff does not challenge, in any way, Mr Todd's evidence as to the existence of that agreement of 7 December 2005. Having regardto the evidence put before me, I conclude that the written contract of 11 February 2005 was rescinded by the parol contract which was made by the parties on 7 December 2005. Lord Atkinson in British & Beningtons Ltd v NW Cachar Tea Co[1923] AC 48 at 62 said:A written contract may be rescinded by parol either expressly or by the parties entering into a parol contract entirely inconsistent with the written one, or, if not entirely inconsistent with it, inconsistent with it to an extent that goes to the very root of it.[27] Mr Henry sought to raise a further basis that would justify the setting aside of the statutory demand. He submitted that the payment by a manufacturer of a commission to Mr Todd raises the possibility of a cause of action in favour of the plaintiff based the tort of deceit. This is the so-called secret commission. He did not specifically analyse the basis for it. It is difficult to see how any such cause of action could arise having regard to the fact that the plaintiff's director knew about the commissions paid as early as 2003 and, more particularly, acknowledges that Robyn Kay raised the matter at the very meeting which Mr Todd says the agreement on which the statutory demand is based was made. It will be recalled from my reference to paragraph 19 of Robyn Kay's affidavit, that she said she raised the issue of the payment of a commission to Mr Todd by the manufacturer's and at that meeting was told that it was simply none of her business and nothing to do with her. If that was the statement that was made, it is difficult to see how there could be any reliance on a statement, presumably, to effect that no such commission had been paid. I conclude that there is simply no foundation for the submission that Mr Henry made. [28] A further matter must be the subject of comment as far as any cause of action based on deceit is concerned. Even assuming that there was such a cause of action it could only arise by way of a counterclaim as it is a separate and distinct cause of action from the contract which is the subject of the statutory demand. No attempt was made to justify the setting aside of this statutory demand based on s 290(4)(b) of the Companies Act 1993. That provision is not referred to in the amended application and, in particular, there is no reference in the grounds to that application to grounds which would justify invoking s 290(4)(b).[29] The conclusion that I am driven to is that the amount set out in the statutory demand is based upon an oral contract the terms of which were contained in a minute which was then circulated to the parties and about which no comment or criticism is made by the plaintiff. Mr Todd's evidence as to the agreement has not been challenged. Quantification of the amount contained in the statutory demand is achieved in reliance on the plaintiff's own figures as communicated by the plaintiff's business adviser and in the presence of the plaintiff's director. These matters lead to one conclusion, namely that the plaintiff has not made out a case which would justify the Court's reliance on s 290(4)(a) of the Companies Act 1993. In short, I am not satisfied that the plaintiff has discharged the onus of showing there is a substantial dispute that the sum demanded is due and owing. [30] I mentioned the possibility of the matter being dealt with under s 290(4)(c). The analyse that I have carried out, however, discloses no circumstances which would justify the Court applying that provision in this case. I can find no specific factors making it plainly unjust for a potential liquidation to follow if this demand is not met. Accordingly, s 290(4)(c) provides no basis for setting aside the statutory demand. [31] A finding by the Court that the debt demanded is not the subject of a substantial dispute permits the Court to make one of the alternative orders provided for in s 291(1). The plaintiff, in its application, has sought three weeks from the date of hearing of the matter to satisfy the demand in the event that the Court finds there is no substantial dispute. Neither counsel specifically addressed me on the matter. I consider, however, that the application itself gave sufficient notice of what the plaintiff sought in this regard and that, in those circumstances, it is appropriate that I apply s 291(1)(a). The order that I make in this judgment reflects that position.Orders[32] I order: a) The statutory demand issued by the defendants on 3 April 2006 and served on the plaintiff on 5 April 2006 is set aside;b) The second statutory demand issued by the defendants on 13 April 2006 and served on the plaintiff on 14 April 2006 is not set aside; c) The defendants may make application to put the plaintiff into liquidation if the sum of $25,245 is not paid to the defendants within three calendar weeks of the issue of this judgment.Costs[33] This is a Category 2 case. Band B appears appropriate for each step that was taken. Some allowance, however, must be made for the fact that an amended statutory demand was issued which caused the preparation of an amended notice of application. To some extent the plaintiff has been successful because the first statutory demand has been set aside. That situation requires the application of r 48D(f). The position can best be accommodated by declining an allowance based on Item 2 of the Third Schedule to the defendants. Accordingly, I order that the plaintiff pay the defendants' costs based on Category 2 Band B for each step save for the step provided for in Item 2 of the Third Schedule 3 to the High Court Rules. The plaintiff shall also pay disbursements as fixed by the Registrar. _____________________ JA Faire Associate Judge