IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV [2014] NZHC BECKETT BOOKS LIMITED Applicant

Transcription

1 IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV [2014] NZHC 1181 BETWEEN AND BECKETT BOOKS LIMITED Applicant MOVING OUT 2012 LIMITED Respondent Hearing: 20 May 2014 Appearances: Mr R D Butler for the Applicant Mr G Bogiatto for the Respondent Judgment: 30 May 2014 JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE This judgment was delivered by me on at 10 am, pursuant to Rule 11.5 of the High Court Rules. Registrar/Deputy Registrar Date BECKETT BOOKS LIMITED v MOVING OUT 2012 LIMITED [2014] NZHC 1180 [30 May 2014]

2 [1] The respondent company, Moving Out 2012 Limited, issued a statutory demand, dated 3 December 2013, in the amount of $102,699. The Applicant, Beckett Books Limited, has applied to set aside the statutory demand. [2] The summary of the background which follows is taken from the submissions filed on behalf of the applicant by Mr Butler. The background is substantially agreed between the parties. [3] The parties entered into a sale and purchase agreement, dated 29 June 2012, for the sale of a business that imports and distributes books and educational products ( the Agreement ). The applicant was the purchaser and the respondent was the vendor to the Agreement. The statutory demand relates to an amount said to be owing following an expert s valuation of the business stock. [4] The business was sold for a total of $3,310,000. Of that total, the stock in trade was estimated at $700,000. The vendor warranted that the business had a turnover of $5,635,722 in the preceding financial year. [5] The Agreement settled on 31 August 2012 and on that date the purchaser paid $700,000 for the estimated stock in trade. [6] Shortly after settlement, the purchaser paid a further $70,000 which reflected the maximum percentage stock value adjustment for stock under the Agreement. [7] Clauses of the Agreement relevantly provide: 5.1 Where in this agreement the purchase price is stated as including a sum for stock in trade, that sum is the vendor s estimate of the instore stock in trade on the date the vendor executed this agreement and is referred to in this agreement as the estimated stock value 5.2 The actual value of the stock in trade as at the giving and taking of possession shall be determined by joint stock-take by the vendor and the purchaser or their appointees or, if required by either party, by an independent valuer if one can be agreed upon. Due allowance shall be made for obsolete or damaged stock in trade. If the parties cannot agree on an independent valuer, or in the event of any dispute concerning a joint stock-take, either party may serve on the other party notice in writing requiring that the question be determined by

3 an independent valuer to be appointed by the President for the time being of the New Zealand Law Society and the party serving the notice may at any time thereafter refer the dispute for determination. An independent valuer acting under this clause shall act as an expert in determining any question concerning the stock in trade or the value of the stock in trade. The cost of such valuation shall be borne equally by the parties. 5.3 If it is determined that the actual value of the stock in trade exceeds its estimated value by more than the maximum percentage stock value adjustment stated on the front page of this agreement ( the maximum percentage ) then the purchaser: (1) shall elect whether or not to accept all or any part of such access, and (2) may choose which items of stock in trade the vendor shall retain in order to reduce the actual value to the estimated value increased by the relevant maximum percentage. Unless the purchaser notifies the vendor of the purchaser s choice of the excess stock in trade to be retained by the vendor within five (5) working days of the determination of the actual stock value the purchaser shall be deemed to have elected to accept all the stock in trade. [8] The parties initially attempted to submit their dispute as to the actual value of the stock in trade to an expert to be appointed by the President of the New Zealand Law Society. However, the parties then appointed KPMG as valuers. The position is accurately stated in the applicant s submissions where it is said that KPMG: a. submitted a draft report to the parties for comment on 9 August It would appear that this initial draft valued the stock at $890,202; and b. submitted a further report which valued the stock on hand at $872,699. [9] It is this last figure, minus the $770,000 already paid for stock, which is used as the basis for the statutory demand ($872,699 - $770,000 = $102,699). The applicant s position [10] The applicant disputes the KPMG valuation in material respects and had already paid $770,000 for stock under the Agreement. The applicant s position is that: a. the expert failed to take obsolescent stock into account;

4 b. the expert wrongly assumed that the opening stock quantities were agreed upon by the parties; and c. the parties had agreed that the applicant would not pay more than $770,000 for stock and could return stock over and above that value. [11] Reference will be made to the arguments put forward by Mr Bogiatto on behalf of the respondent further on in this judgment. Principles for setting aside a statutory demand [12] The application to set aside a statutory demand is brought under s 290 of the Companies Act The relevant parts of that section for the present application are: 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) (c) There is a substantial dispute whether or not the debt is owing or is due; or The company appears to have a counterclaim, setoff, 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 The demand ought to be set aside on other grounds. (5) A demand must not be set aside by reason only of a defect or irregularity unless the Court considers that substantial injustice would be caused if it were not set aside. [13] I agree with the statement in the following passage from the judgment of Associate Judge Abbott in North Harbour Equine Hospital Ltd v DK Little Corporate Trustee Ltd where the Court was required to consider the principles upon which the jurisdiction conferred by s 290 was to be exercised: 1 [17] The general principles which the Court applies in approaching its discretion in this matter are conveniently set out in Brookers Company and Securities Law at CA (1): (1) General principles 1 North Harbour Equine Hospital Ltd v DK Little Corporate Trustee Ltd HC Auckland CIV , 19 February 2007 at [17].

5 These principles are as follows: a) The applicant must show that there is arguably a genuine and substantial dispute as to the existence of the debt. b) The mere assertion that a dispute exists is not sufficient. Material, short of proof, is required to support the claim that the debt is disputed. c) If such material is available, the dispute should normally be resolved other than by means of proceedings in the Companies Court. d) An applicant must establish that any counterclaim or cross demand is reasonably arguable in all the circumstances. e) It is not usually possible to resolve disputed questions of fact on affidavit evidence alone, particularly when issues of credibility arise. Discussion [14] Two matters must next be discussed which directly bear upon the question of whether the Court ought to set aside the statutory demand. First, the Court has to direct itself on the correct interpretation of clause 5.2 of the Agreement. Thereafter, the Court has to consider the evidence put forward on both sides so that an assessment can be made as to whether there is a substantial dispute regarding whether a binding valuation is contemplated by clause 5.2. It is only if the last question can be answered affirmatively that the Court can confidently conclude that there is no substantial dispute as to whether or not the applicant owes the respondent the amount set out in the statutory demand. [15] The issue of the validity of valuations pursuant to clauses such as 5.2 was considered in a decision which Venning J gave in Rivette v Atrax Group New Zealand Ltd to which Mr Butler referred me. In that judgment the Court concluded: 2 [T]he distinction [as to when review is appropriate] is between failure to follow the terms of the agreed valuation instruction in accordance with the contract and a failure to apply valuation principles correctly in exercising an evaluative judgment. The former is reviewable. The latter is not. The justification for the difference lies in the parties bargain. If the expert valuer goes outside the terms of the parties bargain, or contract, then the resulting 2 Rivette v Atrax Group New Zealand Ltd (2011) 11 NZCPR 723 (HC) at [22] per Venning J.

6 valuation or part of it, may be subject to review, but if he operates within the terms of it, then the parties will be fixed with even a gross under or over valuation. [16] Mr Bogiatto did not dispute that the Rivette decision was correctly decided. I agree that I should be guided by that judgment for the purposes of my decision. [17] The validity or otherwise of the valuation lies at the heart of the present dispute. If it appears that there are substantial grounds for concluding that the valuation can be impeached on the grounds discussed by Venning J in his judgment, then the applicant will have succeeded in establishing what it needs to in order to obtain an order to set aside the statutory demand. [18] Whether the KPMG valuation conforms with the requirements of the parties Agreement, requires first, consideration of the effect of clause 5.2 of the Agreement. Interpretation of clause 5.2 [19] The key to the interpretation of clause 5.2 is to be found in the words requiring due allowance to be made for obsolete or damaged stock. [20] It is clearly the case that while the valuer was not a party to the Agreement, any instruction to the valuer providing him or her with authority to carry out a valuation necessarily had to require that a valuation be carried out which conformed to the requirements of clause 5.2. [21] In the context of the functions which the valuer was required to perform, clause 5.2 required the valuer to make allowance for obsolescence so far as necessary when valuing the stock. If there was obsolete stock and the valuer declined to write down the valuation to reflect the diminished value of those items, then he or she would not be in compliance with the mandate given to the valuer by clause 5.2. Conversely, if there were no obsolete stock, then the valuer was not obliged to discount the valuation on that account.

7 [22] The valuer in this case did not make any allowance for obsolete stock. The parties both agree that that is so. The question for the Court is whether the valuer thereby failed to make due allowance for obsolete or damaged stock in trade. [23] Only if the Court can conclude that there is a substantial reason for considering that the valuer did not make due allowance for obsolescence could it be concluded that the valuation was not one that the Agreement contemplated and therefore did not bind the parties including the applicant. Whether that is the case or not depends upon questions of evidence. It is that issue I shall consider next. Evidence on the obsolescence point [24] What the valuer actually said about obsolescence was the following: We do not consider any of the characteristics of obsolescence to be directly attributable to the stock in this case and therefore we do not consider a specific stock valuation adjustment for obsolescence to be appropriate in these circumstances. While obsolescence factors e.g. undamaged books looking old or going out of favour may influence the value of individual stock items on a net realisable basis over time, the nature of Beckett Books stock is that it is relatively long-lasting and durable product. The technology of books does not change and their physical characteristics do not wear out, at least not in the time frames relevant here. Nor would we expect customer tastes in books and educational materials to change over relatively short time frames. We consider the ageing of the stock in further detail in this report. We have been advised that any stock which is damaged in transit is generally not paid for. We have specifically adjusted for any damaged items brought to our attention in our determination below. [25] The passage quoted establishes that KPMG adverted to the question of obsolescence but decided that it was not relevant. [26] In effect, the applicant has to show that there are fairly arguable grounds for concluding that KPMG was wrong in coming to this conclusion. The applicant does not have to affirmatively prove error but must demonstrate a dispute of substance concerning that point. [27] The evidence that Mr Butler pointed me to in support of the applicant s case was, first, an extract from an which the respondent s accountant sent to KPMG

8 in the course of engaging that firm to act as valuers. In his dated 12 March 2013, Mr Macdonald wrote: Further, an issue of stock obsolescence was raised. As the stock is in excess of the contract, Mr Simmons, is able to pick what stock to keep and what to return to my clients. One would expect that if there is any stock obsolescence, then those titles would be returned to my clients. But again, that is something to be determined. [28] Mr Butler emphasised the last sentence in that excerpt. It was his contention that this amounted to an acknowledgement by the respondent s accountant that there was obsolete stock. [29] I consider that while the statement that Mr Macdonald, the accountant, made is of some relevance, the following factors need to be kept in mind in assessing its cogency for the purposes of the dispute between the parties. First of all, Mr Macdonald is not himself an expert in questions of obsolescence of retail books. He is a chartered accountant. Secondly he leaves open the question of whether the obsolescence has any relevance when he makes the reference to the question if there is any stock obsolescence. The reason why Mr Macdonald even mentioned the issue appears to be because Mr Simmons, the director of the applicant, had told him some months before that he considered that there was obsolete stock. Mr Macdonald stated in his first affidavit: In the second meeting [on 15 November 2012] Mr Simmons stated to me that he believed the obsolescence to be at least 25%. I communicated this to my client and 25% (or more) was an outrageous number. There was clearly a stock dispute that needed to be resolved by an expert. [30] Summarising the evidence to this point, it amounts to an assertion without supporting material put forward by Mr Simmons that a substantial part of the stock was obsolete and a statement by Mr Macdonald which in effect says little more than that the applicant was claiming that the stock included obsolescent items. [31] Counsel for the applicant in his submissions made reference to a passage from the affidavit of Mr Beckett, the director of the respondent. [32] Mr Beckett deposed, at paragraph 25 of his affidavit, that:

9 In any event the stock which the applicant is seeking to return is now some 18 months old. The stock is likely to be obsolete and at best of minimal value. [33] However, as Mr Bogiatto pointed out, the passage in question reflected Mr Beckett s understanding at the date when he gave his affidavit, 31 January 2014 and not at the relevant date which was the date of possession under the Agreement, 31 August Whether stock had become obsolete in the period following the date for possession is irrelevant to the matters in dispute on this application. Therefore, in my view the applicant is not assisted by this passage from Mr Beckett s affidavit. [34] Reduced to essentials, the case for the applicant rests upon an unsworn assertion which Mr Simmons made in an exchange to the effect that at least 25 per cent of the stock was obsolete. It is stating the obvious to note that the expression of opinion can hardly be regarded as objective evidence which could safely be relied upon. Mr Simmons statement was put forward to justify a position which was in the interests of the applicant to take. The proposition that the stock was obsolete, if accepted, would lead to the applicant having to pay considerably less under the sale and purchase agreement. To that extent it is self-serving. The statement is not particularised in anyway. It is not a claim that is supported by any detailed reasoning or documentation. [35] Once the proceedings had commenced, the applicant could, of course, have gone on oath to put forward reasons why it contended that the stock was obsolete but it did not take advantage of that opportunity. [36] Mr Bogiatto in his submissions contrasted the statement which Mr Simmons had made with his response when he received the draft valuation report from KPMG. That report contained the statement already referred to that the valuation was not affected by considerations of obsolescence of stock. Given that the draft valuation had expressly commented on this element, if Mr Simmons position was one that he genuinely held, he might have been expected to draw attention to, what from his point of view, was an error.

10 [37] However, the which Mr Simmons sent to KPMG on 22 August 2013 made no mention of the valuation being wrong because it failed to take account of obsolete stock. That was a lengthy one and notwithstanding the point that Mr Butler made that Mr Simmons was under time pressure to respond, one would have expected that an obvious error concerning obsolescence would have been noted. [38] Another point that should be raised is the effect of clause 5.3. This clause provides that if the actual value of the stock in trade is in excess of the maximum percentage stock value, as it was in this case, then the purchaser could elect whether or not to accept all or any part of the excess. The purchaser must notify the vendor of the purchaser s choice of the excess stock that it wishes to retain within five working days of the actual stock value being determined. Failure to notify the vendor means the purchaser is deemed to accept all of the stock in trade. [39] In this case, the applicant had an opportunity to notify the respondent that it wished to return excess stock if it did not want to pay in excess of $770,000. There is no evidence that the applicant took advantage of this clause within five working days of the final KPMG report. Conclusion [40] Considered overall, the position that the evidence discloses is first of all, that there is no evidence which establishes a significant dispute about whether obsolescence of stock was a matter that the valuer ought to have factored into the valuation. Essentially there is really only Mr Simmons unsworn assertion that obsolescence was relevant. That being so, there is therefore no dispute of substance that the valuer failed to make due allowance. Due allowance is allowance that ought properly to have been made. Without evidence that obsolescence was a factor, the topic of obsolescence was not one that the valuer ought, arguably, to have considered. One of the categories of cases where a valuation can be set aside is if the valuer failed to take into account matters which he or she ought to have taken into account. 3 It cannot be said that the valuation in this case is vitiated because the 3 Brown v Rod Cook Sportswear Ltd CA260/91, 7 July 1992.

11 valuer failed to act in accordance with clause 5.2. Therefore, there being no substantial dispute that the valuer was in error, there is no substantial possibility that the valuation could be set aside in proceedings brought for that purpose. [41] For these reasons I conclude that the applicant has failed to show that there is a substantial dispute that the amount stated in the statutory demand is arguably not owing to the respondent. Therefore the application to set aside the statutory demand is dismissed. [42] Counsel are to confer on the matter of costs and if they are unable to agree, they are to file memoranda which are not to exceed five pages within 10 working days of the date of this judgment. J.P. Doogue Associate Judge