VNL HOLDINGS LIMITED V YARROWS FINE FOODS (AUSTRALIA) PTY LIMITED HC NWP CIV 2012-443-000162

VNL HOLDINGS LIMITED V YARROWS FINE FOODS (AUSTRALIA) PTY LIMITED HC NWP CIV 2012- 443-000162 [10 September 2012]IN THE HIGH COURT OF NEW ZEALANDNEW PLYMOUTH REGISTRYCIV 2012-443-000162[2012] NZHC 2325UNDER Section 290 of the Companies Act 1993IN THE MATTER OF an application to set aside statutory demandBETWEEN VNL HOLDINGS LIMITEDApplicantAND YARROWS FINE FOODS (AUSTRALIA)PTY LIMITEDRespondentHearing: 5 September 2012Appearances: D J King and Ms McGowan for the ApplicantS Gollin for the RespondentJudgment: 10 September 2012JUDGMENT OFASSOCIATE JUDGE CHRISTIANSENThis judgment was delivered by me on10.09.12 at 4:30pm, pursuant toRule 11.5 of the High Court Rules.Registrar/Deputy RegistrarDateSolicitors:D J King, David King Law, New Plymouth – david@davidkinglaw.comI Rosic/S Gollin, Minter Ellison, Auckland – sean.gollin@minterellison.co.nzBackground[1] The applicant (VNL) applies to set aside a statutory demand served by the respondent (YFFA). YFFA claims the sum of $1.35M (the Debt) which it says is owing pursuant to a Share Sale Agreement entered into on 3 July 2009 between it as vendor and VNL as purchaser of shares in Volumex Nominees Limited (Volumex). YFFA is a company from within the Yarrow Group of companies.[2] Volumex carried on the business of commercial property investment. It owned a commercial building in New Plymouth which had a book value of approximately $8.2M. A registered valuation of that building estimated its value at$8,394,568. At the time of the sale Volumex's financial statements recorded net assets of $9,746,554. Due to pressure placed on the Yarrow Group by its bankWestpac, it was agreed to sell YFFA's asserts to VNL a company within theownership of Mr Paul Yarrow and his own interests.[3] Of the purchase price the sum of $6,950,000 was payable on settlement on 3 July 2009. A further $1.35M was to be satisfied by VNL entering into a term loan agreement with YFFA. Accordingly and on 30 June 2009 YFFA and VNL entered into a term loan agreement whereby YFFA advanced $1.35M to VNL. The express terms of the loan agreement provided that the loan would be repayable in one sum together with interest and all other monies outstanding on 3 July 2011.[4] As earlier noted the sell down of VFFA's assets occurred because of pressurebrought upon the Yarrow Group by Westpac. Westpac held various securities overVolumex's assets and the Volumex shares. Those were to be released as part of the arrangement for a reduction of Westpac's indebtedness, and also in consideration ofundertakings given by both YFFA and VNL that the Westpac loan would be repaid.Westpac also required that YFFA take a security interest over all of Volumex's sharesand provide a security interest to Westpac over its security over the Volumex shares.[5] Accordingly on or about 3 July 2009 YFFA (as security holder) and VNL (as debtor) entered into a Deed Granting Security Interest in Shares (Security Deed) bywhich VNL agreed to grant to YFFA a security interest in the Volumex shares as security for the payment of the loan and for the performance and observance by VNL of its obligations under the Security Deed and the Loan Agreement. The Security Deed also specifically provided that VNL would repay the loan:(a) In clear and available funds and free and clear of any restriction or condition and (except to the extent required by law) without deduction or withholding on account of any tax; and(b) Without deduction or withholding on account of any other amount whether by set off, counterclaim or otherwise.[6] Also and at that time YFFA entered into a General Security Agreement with Westpac whereby YFFA granted to Westpac a Security Interest in all of its personal property and charged to Westpac all of its non-personal property. The SecurityInterest granted to Westpac extended to YFFA's interests under the Loan Agreement and Security Deed.[7] To record the undertakings that Westpac required, on 3 July 2009, YFFA, VNL, Volumex and the trustees of the P S Yarrow Trust No.4 (P S Yarrow Trust), the owner of the shares of VNL, executed a Deed of Undertaking in favour of Westpac (Deed of Undertaking). By that, YFFA undertook to Westpac that it would procure the repayment of the loan on 3 July 2011 and immediately pay any principal repayments received from VNL to Westpac. VNL undertook to Westpac that it would advise Westpac prior to any payment being made by VNL to YFFA under the Loan Agreement and that, until the loan has been paid in full and on-paid to Westpac, VNL would not make any payments to its shareholders in any form withoutWestpac's prior written consent.[8] YFFA says VNL failed to repay the loan by 3 July 2011.[9] A statutory demand was served on 29 March 2012 in respect of the amount then claimed to be due. Earlier on 27 January 2012 receivers were appointed by Westpac over some of the assets of YFFA including its interests under the loanagreement and the security deed entered into in connection with the loan agreement.In March 2012 receivers were appointed over all of YFFA's assets.[10] In response to service of the statutory demand VNL has filed this application to set aside the statutory demand. VNL claims:1. There is a substantial dispute as to whether or not the debt is owing or due.2. VNL appears to have a counterclaim, set off, or cross demandwhich exceeds the amount of YFFA's statutory demand.3. VNL is solvent.Claim that the debt was repaid[11] VNL claims that the Debt alleged is not due and owing and that it has already been paid. It says the payment was made by journal entries. It relies upon the affidavit of Mr Paul Yarrow dated 29 March 2012 in that respect. According to Mr Yarrow:1. VNL paid the debt to YFFA;2. YFFA advanced the debt amount to The Original Croissant Gourmet Pty Limited (TOCG);3. TOCG paid the debt amount to Yarrows (The Bakers) Limited (YTB);4. YTB paid the debt amount to Volumex in reduction of the debt owed by YTB to Volumex;5. Volumex advanced the debt amount to VNL.[12] In essence VNL says it paid $1.35M to YFFA who advanced that sum to TOCG who paid that amount to YTB who paid that amount to Volumex who paid that sum to VNL.[13] As evidence of this VNL states that Duncan Dovico (NZ) Limited (DDNZ) completed financial statements for the year ended 30 June 2010 on behalf of VNL as its former accountants which incorporated the above described transactions into those. VNL says those financial statements were not marked as "draft" and when VNL's solicitors, Dennis King Law Limited queried DDNZ as to the absence of thedebt from VNL's financial statements for the year ended 30 June 2010 they wereinformed that the debt had been repaid.[14] It is VNL's position that the payment has been achieved by journal entries and as such is legitimate because the parties have agreed to payment in that form. Further, that from the evidence available there was no attempt by YFFA to remove those journal entry payments from the accounts until about February 2012 and because there was no prior attempt to challenge those payments it is submitted that both parties agreed to those transactions by which it is claimed those payments were made.[15] In support of the proposition that VNL's debt has been paid, in the mannerdescribed, and by agreement, the Court is referred to the decisions of the Court ofAppeal in Ararimu Holdings Limited v Equiticorp Finance Services Limited 1 andEquiticorp Industries Group Limited v R2. In those cases it was held that payment byjournal entries is in legitimate form provided the parties agreed to payment in thatform.[16] As to claims by YFFA's Mr Pettigrew that he did not approve thetransactions, VNL discounts those claims as having not been made prior to February 2012.1 1991 CA 37/91, 10 July 1991.2 [1998] 2 NZLR 481 at pp 743 to 745.[17] VNL's position is that the journal entries having been posted to the ledger,they were no longer draft entries and this would mean that in order for those entries to be reversed the agreement of both VNL and YFFA would be required. Mr Yarrow for VNL has already stated that he would not agree to any reverse entries. Further, it is submitted that YFFA cannot unilaterally reverse the journal entries because they formed part of an interconnected chain as indeed the journal entries describe.[18] Ms McGowan for VNL submits both parties seemingly agreed to these entries and no attempts were made to amend that situation until many months later, during which time, [VNL] had relied on the assumption that the journal entries were payment of the debt. This reliance was shown by [VNL's] lack of attempt to repaythe debt following confirmation from DDNZ that payment had been made.[19] Further, for VNL it is asserted that YFFA acknowledged, by the affidavit of its Mr Ashley that information was sent to YFFA's former accountants DuncanDovico in Australia with details of the relevant journal entries; that although Mr Pettigrew said YFFA did not approve of those transactions no action was taken in respect of same until February 2012.[20] Regarding YFFA's claim that the Deed of Undertaking precluded VNL's debtfrom being repaid by journal entries Mr King submits:At the time of the execution of the Share Sale Agreement VNL was under the mistaken belief that the Yarrow Group was solvent and on that basis it assumed that journal entries or the equivalent would be possible because theDeed of Undertaking "would have been irrelevant and unnecessary because the Yarrow Group's finances would have been in a much better position andthere would have been no concerns for Westpac.The Deed of Undertaking was to Westpac and therefore it is for Westpac to enforce if it so chooses, but it has not chosen to do so at this time and therefore considerations of the Deed of Undertaking are irrelevant.[21] It is VNL's position that there is a dispute as to whether or not the journal entries were approved or not. Ms McGowan submits that clearly the journal entries for repayment of the debt were drafted and continued to be in existence until at least February 2012. Whether or not approval of those was given, is unclear. VNLapproved them as Mr Yarrow's affidavit confirms. As to whether or not YFFA didlikewise is a matter of dispute upon which the Court should not, at this time, exercise any judgment.[22] Therefore, Mr King submits that the statutory demand should be set aside in order for the parties to resolve the matter outside of the statutory demand process.Alternative defence[23] In the alternative Mr King submits that VNL has a counterclaim, set off or cross demand of sufficient amount. That position relies upon the affidavits of Mr Yarrow dated 29 March 2012, 29 May 2012, and 6 July 2012.[24] Mr Yarrow deposes that at the time of the negotiations for the Share Sale Agreement VNL was not aware that the Yarrow Group, (of which YFFA was a part) was insolvent because if it had known of this VNL would not have entered into the Share sale Agreement at all; that if the Yarrow Group's insolvency had been knownMr Yarrow would not have allowed his family trusts to mortgage its properties by way of the provision of security for funding obtained to assist VNL's purchase of theshares.[25] Accordingly it is claimed that section 6(1)(a)(i) of the Contractual Mistakes Act 1997 (CMA) provides appropriate relief; that because of a mistake influencing the actions of both parties involved, it allows one of them to resile from the terms of their contract, because it resulted in a substantially disproportionate exchange of values.[26] Mr Yarrow deposes that at the relevant time it was known the Yarrow Group was in financial difficulty and that it was intended that Volumex be sold in order to free funds to repay some of the Westpac loans. Mr Yarrow says the negotiations of the share agreement were based upon a mistaken belief by VNL and Mr Yarrow that although there were difficulties they were temporary and that the Yarrow Group would trade out of those. Mr Yarrow says what was not known was that the Yarrow Group was in fact insolvent at the time of the negotiations; that had it been knownthe Yarrow Group was insolvent VNL would not have agreed to sell as it did; that other arrangements could have been made to clear the debt.[27] VNL's case is that evidence available from its accountant Mr Sole discloses that the "wider Yarrow Group was insolvent as at 3 July 2009 and indeed earlier in 2008". It is claimed that the insolvency was not immediately obvious because thevarious Yarrow Group companies' financial statements had not been "fully and properly consolidated until the year ended 30 June 2009". For that reason the nettangible assets and after tax surplus for the Yarrow Group looked much better than was actually the case. Therefore the financial statements failed to give a true and fair view of the financial position of the overall group.[28] It is Mr King's submission that the financial accounts of the Yarrow Group did not demonstrate the underlying position of overall insolvency until the financial accounts of the group had been consolidated which consolidation did not occur until the preparation of accounts for the year ended 30 June 2009, which would have occurred after the transaction for the sale and purchase of the Volumex shares. Until then the general position is that the Yarrow Group owed between $3.8M and $5.3Mwhereas VNL's debt was only $1.35M (as per the Share Sale Agreement).[29] Mr Yarrow says that because of an assumption of solvency, reinforced by the nature in which financial accounts were presented, before those of the Group were consolidated, it would have been reasonable to expect that in due course the debts ofthe Yarrow Group and Mr Yarrow's interests would have been resolved in due courseby an exchange of cheques or by journal entries having been done.[30] At the core of an argument for a Contractual Mistakes Act defence is the belief of Mr Yarrow that VNL would not have agreed to pay the debt of $1.35M had he been better aware of the true financial position of the Group company situation. Mr Yarrow thinks the VNL debt should be cancelled but supports the matter being referred to arbitration for a resolution of those issues which he says influencedVNL's purchase of the Volumex assets.[31] Although Mr Yarrow has only been director of VNL since June 2011, his personal interests have had ownership control of VNL throughout. Also Mr Yarrow was a director of Volumex at all relevant times and was a trustee of the Paul Yarrow Trust No.4 which owned VNL shares.[32] Mr Yarrow believes that Westpac would have agreed to an exchange of cheques in due course to repay the loan although at the time financial circumstances were difficult, because of an expectation that conditions would get better.[33] Mr King submits that all of those security arrangements which were entered into in or about July 2009 in connection with the Volumex sale proceeded upon the mistaken basis that the Yarrow Group was solvent and that it follows from this that notwithstanding the Deed of Undertaking requiring repayment of $1.35M two years later, there would have been no need for that payment because Westpac would have been happy with the trading position of the Yarrow Group and would not have prevented repayment being achieved by that same process which it is said did occur by the various journal entries concerned.Legal Principles[34] Section 29(4) of the Companies Act 1993 enables the Court to set aside astatutory demand if there is a substantial debt about whether or not the debt is owing,or when a company appears to have a counterclaim, set off or cross demand of atleast equal amount.[35] Upon any application it is for the applicant to show there is arguably a genuine and substantial dispute about the existence of the debt. More than mere assertion is required and when there is a conflict in material respects the matter is best left for resolution elsewhere than in the Companies Court.Considerations[36] In this case it is argued for VNL that it has paid the debt; but if it has not then it should not have to because the parties would not have contracted for sale uponterms which were undermined by a lack of knowledge about the true financial position of the Yarrow Group of companies; that had the Group's trading positionbeen, as VNL and YFFA both expected the debt would have been repaid by a process other than provided for by their agreement.[37] In support of the first defence of having paid the debt VNL says it has been achieved by journal entries and that although YFFA was not consulted about that process of payment nothing was done by it when later it learned of the payment claim – that is until much later, by which time it was too late to object at all.[38] Whilst case authority recognises payment by the process VNL describes, it is clear that the consent of both parties to the process is required. In this case it is argued for VNL that although YFFA may not have been aware of the payment at the time, it is at least arguable that their agreement may be inferred from the lack of action subsequently to protest the process.[39] As to the CMA claim VNL (indeed it seems Mr Yarrow) claims a mistakenbelief about the Yarrow Group's solvency which, had that insolvency been known about, then it is claimed the Share Sale Agreement would have been negotiated on a different basis or not at all.Is the debt still due[40] Quite clearly it is still due. The Loan Agreement anticipated a payment beingmade against the background of Westpac's requirements in terms of which it wouldrelease its security over the asset to be transferred (Volumex's building) and inconsideration of which all affected parties would enter into a Deed of Undertaking. Those documents made it clear that the loan was to be repaid in cash. To vary that arrangement to enable payment to be made by journal entry would have required the agreement of VNL and YFFA. There is no evidence of an agreement. Mr Pettigrew of YFFA denies it. Mr Finnigan, a director of VNL at the time when DDNZ forwarded details of its transactions to it says he knew nothing of such an arrangement and says he had not authorised it.[41] Rather the position is, as Mr Gollin, counsel for YFFA submits, that at best we have the respective accountants of the parties proposing draft entries being posted to draft accounts – a situation far short of one from which the Court can reliably draw an inference of an agreement regarding method of payment.[42] It is not possible in the circumstances of this case to infer acceptance by YFFA to the method of payment, from it silence alone. Also is the fact that Mr Pettigrew, having been posted a copy of the relevant draft accounts (wherein the payment was identified) he then instructed that those be changed because the method of payment was not agreed. The fact is, as Mr Pettigrew deposes, that the draft accounts for YFFA for the year ending 30 June 2010, which contained the draft journal entries were never presented to the directors of YFFA for approval.[43] As Mr Gollin submits the Deed of Undertaking was critically important to the whole transaction because it is a document to which both sides were parties – it is evidence of their commitment in the outcome. Therefore, it is implausible to suggest that the parties involved would later agree to resolve their obligations otherwise. There is no evidence of an agreement varying the original commitment, nor would it have been logical to do so in terms of the Deed of Undertaking.[44] A letter dated 1 July 2009 from Westpac to VNL confirms the bank'sagreement to release its security on the condition of payment of $6.95M immediately. The requirement preventing VNL to make payments to shareholders or beneficiaries or advances in any form at all is quite inconsistent with the undertakings required of VNL to Westpac. The letter in question was countersigned by all affected parties including Mr Yarrow, and his solicitor Mr King.[45] Likewise with the Deed of Undertaking, there is no evidence of an agreement for repayment by journal entry. Indeed as clause 2.2.2 of that Deed reinforces, Westpac is to be advised prior to any payment being made by VNL to [YFFA] under the vendor loan agreement. There is no suggestion in this case of such advice havingbeen given prior to VNL's attempt to effect payment by journal entry in the manner described. It appears clear that the method of journal entry payment would amountto a breach of VNL's undertakings to Westpac.[46] The Court does not accept there has been repayment by VNL of its debt to YFFA.Is there a case for a counterclaim, set off or cross demand reasonably arguable?[47] Again it is clear that there is no reasonably arguable basis for VNL to resist its liability for payment of the debt.[48] There is no dispute about the fact that the purchase price represented the value of the assets being acquired. Included in the purchase price was the sum of about $8.3M reflecting the value of the principal asset – the building, the value ofwhich was supported by an independent registered valuer's valuation.[49] VNL's assertion of a counterclaim relies upon there being relief available under the CMA. The availability of such relief is discretionary but for the CMA to be available VNL would, as Mr Gollin submits, be required to establish the following elements:(a) That VNL was influenced by a mistake which was material to it.(b) That the existence of the mistake was known to YFFA, or that YFFA itself was influenced by the same mistake, or that the parties were each influenced by a different mistake about the same matter of fact or of law.(c) That the mistake resulted at the time of the contract and that there was a substantially unequal exchange of values or of a benefit or obligation which was substantially disproportionate to the consideration therefore.[50] In this case it is Mr Yarrow who provides evidence about the alleged mistaken belief of solvency of the Yarrow Group at the relevant time. Because Mr Yarrow was not a director of VNL until June 2011 his ability to provide evidence of belief about reasons held two years earlier for the purchase of Volumex shares, must be subject to qualification, even though his own interests owned the shares in thatcompany. But, his case is not assisted much by the evidence of Mr Sole, VNL'saccountant who stated that he made no assertion as to the solvency of the companies involved at the relevant time.[51] However even accepting the Yarrow Group was insolvent and if VNL had a mistaken belief as to the solvency of the group at the time there is still no reasonably arguable basis for a counterclaim or set off.[52] For a CMA argument to have traction there must be evidence of a mistaken belief as to solvency known to YFFA (as well as to VNL), or that YFFA was also influenced by the same mistake in its decision to enter into the Share Sale Agreement; or that VNL and YFFA were each influenced by their respective decisions to enter into the Share Sale Agreement by a different mistake about the same matter of fact or of law. But, there is no evidence supporting claims of mistake or knowledge of same by YFFA.[53] Also there can be no mistake unless it was material to VNL and influencedVNL's decision to enter into the Share Sale Agreement and the associateddocumentation.[54] The clear evidence is that VNL was influenced by the fact that at the time Volumex was a profitable company and its shares were valuable. Volumex owned a valuable commercial building. Valuations proved this. Volumex received a rental income of over $645,000 per annum in the two years preceding sale.[55] In the circumstances the Court does not accept it was relevant to VNL'sdecision to purchase the shares in Volumex that the Yarrow Group was insolvent –indeed if that was the case.[56] Finally for there to have been a CMA mistake it must be shown that there was a substantially unequal exchange of values or that there was a conferment of a benefit or the imposition of an obligation which was substantially disproportions are to the consideration given.[57] For reasons already provided it is clear there was no disproportionate exchange of values. VNL got good value for what it paid for. What it agreed to pay for is that actual value of what was being purchased.[58] In the circumstances the Court would not accept there is a basis for foregoing any part of the debt of $1.35M for such would be to completely disregard the obligations of the parties to Westpac and would have been detrimental to Westpac in circumstances where it had a legitimate expectation.Other considerations[59] For VNL it has been proposed the matter be referred to arbitration for determination. The Court disagrees. It is not appropriate where, as in this case, any element of dispute has been resolved by reference to available principles of law. Arbitration is not going to be helpful in circumstances with the matter in dispute is presently subject of consideration.Solvency[60] The evidence provided on behalf of VNL as to its solvency is of littleassistance to the Court. VNL's current financial accounts omit any reference to the debt of $1.35M.[61] Key matters for consideration of the Court concern a company's ability to pay its debts as they fall due. There is no present evidence available to show that VNL can pay its debt of $1.35M.Conclusion[62] The debt has not been paid nor can VNL, on the evidence available to the Court, show that it has a present ability to pay that debt.[63] There should be orders accordingly providing VNL with a further but sufficiently short period of time to comply with the statutory demand served upon it.[64] The time for compliance by VNL with the statutory demand served upon it byYFFA, shall be extended to 4:00pm 24 September 2012.[65] The applicant shall pay the respondent's costs calculated on a category 2Bbasis, together with disbursements approved by the Registrar.Associate Judge Christiansen