B J Gibson and M P Stiassny v Stockco Ltd v Nugen Farms Ltd v A J Crafar v R S Crafar v G W Crafar

• Jurisdiction: New Zealand
• Judge: WHITE J
• Judgment Date: 17 December 2010
• Neutral Citation: [2010] NZHC 2398
• Docket Number: CIV-2009-404-7120
• Court: High Court
• Date: 17 December 2010

Under Section 34 of the Receiverships Act 1993

In the Matter of Plateau Farms Ltd, Ferry View Farms Ltd, Hillside Ltd and Taharua Ltd (all in Receivership)

Between

B J GIBSON and M P STIASSNY

Applicants

and

Stockco Limited

First Respondent

Nugen Farms Limited

Second Respondent

A J Crafar

Third Respondent

R S Crafar

Fourth Respondent

G W Crafar

Fifth Respondent

[2010] NZHC 2398

CIV-2009-404-7120

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

Application for directions by receivers of four companies in the collapsed Crafar farms group in respect of heifers sold by one of the group prior to receivership — whether sale of the heifers within the ordinary course of the company's business and thus ending lenders' security interest in the proceeds was under s53 Personal Property Securities Act 1999 (“PPSA”) (buyer or lessee of goods disposed of in ordinary course of business takes title free of certain security interests) — whether sale authorised by banks as holder of securities — whether heifer purchaser's interests subordinated to further advances made by lenders under security and consideration of the scope and definition of bad faith under s25 PPSA (rights or duties under security agreements or the Act to be exercised in good faith and within reasonable commercial practice).

Counsel:

R B Stewart QC, SCD A Gollin and A Simkiss for Applicants

F M R Cooke QC, B D Gustafson and M H L Morrison for the First Respondent

W G Manning for the Second Respondent (granted leave to withdraw) No appearance by or on behalf of the Third, Fourth and Fifth Respondents

R B Stewart QC, PO Box 2302, Auckland 1140

F M R Cooke QC, PO Box 1530, Wellington 6140

W G Manning, PO Box 5844, Wellesley Street, Auckland 1141

This judgment was delivered by me on 17 December 2010 at 2.30 pm pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

JUDGMENT OF WHITE J

Table of Contents

	Para No.
Introduction	[1]
The parties	[5]
Factual background	[15]
The interim injunction	[118]
The application for directions	[124]
StockCo's claims	[127]
The Receivers' responses	[129]
The issues	[130]
Ordinary course of seller's business	[132]
Authorisation	[158]
Subordination	[175]
Identification	[208]
Result	[265]

Introduction

1 This case involves disputes about personal property interests in various categories of livestock on dairy farms owned by the Crafar Group, now in receivership. The disputes are between the Receivers of four companies in the Crafar Group and StockCo Limited (StockCo), and arise out of sales of livestock by one of the companies in the Crafar Group, Plateau Farms Limited (Plateau), to StockCo and the lease of livestock by a company called Nugen Farms Limited (Nugen) from StockCo.

2 The Receivers have been appointed by Westpac New Zealand Limited, Rabobank Ltd, PGG Wrightson Limited and PGG Wrightson Finance Limited (the Banks) which had provided finance facilities to the four companies in the Crafar Group (the Charging Group). The Charging Group had granted various security interests in its assets, including its livestock, to the Banks.

3 The first category of livestock involved 4,000 heifers sold by Plateau to StockCo on 1 August 2008 for $3.2 million plus GST and then leased by StockCo to Nugen. The Receivers seek directions under s 34 of the Receiverships Act 1993 that, notwithstanding the sale, this livestock remained subject to the security interest granted by the Charging Group to the Banks which ranked in priority to any claim by StockCo or Nugen, and that StockCo's interest in the livestock was subordinated to further advances made to the Charging Group by the Banks. These directions, opposed by StockCo, require determination of issues under provisions of the Personal Property Securities Act 1999 (the PPSA), including:

• a) whether the sale was outside the ordinary course of the Charging Group's business (s 53);

• b) whether the sale was expressly or impliedly authorised by the Banks (s 45); and

• c) whether StockCo's interest was subordinated to further advances made by the Banks (s 88), including whether the Banks acted in good faith (s 25).

4 The other categories of livestock involve livestock purchased by StockCo from Nugen or third parties and leased by StockCo to Nugen under the terms of lease agreements in 2008 and 2009. As StockCo claims that their livestock, including the 4,000 heifers, were on farms owned by the Charging Group when the Receivers were appointed, the Receivers seek directions that the livestock, including 545 of the 4,000 heifers, are not able to be identified and that StockCo therefore has no priority claims to them. These directions, opposed by StockCo, require determination of issues under s 18 of the Sale of Goods Act 1908 relating to the ascertainment of one category of these livestock, the application of ss 36 and 40 of the PPSA relating to the enforceability of StockCo's leases against the Banks, and, if the livestock are able to be identified, the appropriateness of a pro rata calculation of the numbers of livestock now involved.

The parties

5 The four Crafar companies in the Charging Group which are in receivership are Plateau, Hillside Limited, Taharua Limited and Ferry View Farms Limited. At all material times the directors of these companies were Allan Crafar, his wife, Elizabeth Crafar, and his brother, Frank Crafar. They were also the shareholders of the companies in their capacities as trustees of their respective family trusts. From modest beginnings in the 1980s as sharemilkers and dairy farmers, the Crafar family built up a substantial dairy farming business which, when the Receivers were appointed on 5 October 2009, comprised one of the largest rural portfolios in New Zealand with approximately 20,000 cows on 21 farms owned or leased, primarily in the South Waikato, Taupo/Bay of Plenty, South Taranaki and Bulls. Currently the Receivers are operating the business from 16 farms: 13 dairy farms and three drystock grazing, ranging in size from 128 hectares to 1,750 hectares and totalling nearly 8,000 hectares. The properties are milking some 16,000 cows and supplying some 4,870,000 kilograms of milk solids per annum to Fonterra.

6 The unaudited statements of financial performance of the four companies in the Charging Group, prepared by the Groups' accountants, Stretton & Ltd of Taupo, showed for the year ended 31 May 2008:

	Milksolids Production	Net Operating Surplus
Plateau	$ 12,565,372	$ 6,560,958
Hillside	8,425,252	6,962,830
Taharua	9,964,341	4,115,145
Ferry View	96,233	(180,679)
	$31,051,198	$17,458,254

7 The same statements of financial position recorded that the total liabilities, including the liabilities to the Banks, for each company were:

At the time of the appointment of the Receivers, the Charging Group was indebted to the Banks in the sum of approximately $194 million.

Plateau	$ 113,871,841
Hillside	52,326,807
Taharua	29,439,094
Ferry View	26,174,189
	$221,811,931

8 Nugen, now also in receivership, is a company owned by family trusts associated with Robert Crafar, Allan Crafar's son. Robert Crafar was the sole director of Nugen, which was not a part of the Charging Group. Mr Manning, counsel for Nugen, appeared at the outset of the hearing and subsequently on a watching brief, but otherwise played no active part and was granted leave to withdraw.

9 There were several other companies owned and operated by members of the Crafar family which, like Nugen, were not part of the Charging Group, but which, like the four companies in the Charging Group and Nugen, were run as an overall enterprise by, or at the direction of, Allan Crafar. There was little doubt that Allan Crafar was in charge and that he treated the 30 properties owned and operated by the family as 30 paddocks in the one enterprise. While Nugen may have been Robert Crafar's company, all significant decisions about the acquisition and disposition of its assets, including its farms and livestock, were made by his father.

10 The Crafar family had a number of professional advisers, including their lawyer, Ian Blackman of Blackman Spargo Rural Law Limited, Rotorua, their accountant, Steven Bignell of Stretton & Co, Taupo, their livestock agent, John Dickson, and David Wiltshire, Finance and Administration Manager for the Crafar farm companies for three years. Together with Allan and Robert Crafar, all of these advisers provided affidavits and were cross-examined on their evidence. All of them confirmed that the Crafar enterprise was under the direction and control of Allan Crafar who made all major decisions and gave all the important instructions to the advisers.

11 For Ian Blackman, the Crafars were his largest group of clients. He was a trustee of their family trusts and closely involved in the transactions the subject of this proceeding.

12 The four Crafar companies in the Charging Group were financed by the three Banks: Westpac, Rabobank and PGG Wrightson. The Charging Group granted various securities to Westpac as agent for the Banks, in respect of their finance facilities, including:

The relevant provisions of these agreements are set out later in this judgment. Financing statements were registered on the Personal Property Securities Register (PPSR) perfecting the GSA and the GSD in relation to each of the companies in the Charging Group.

• a) A composite General Security Agreement (GSA) dated 16 May 2005 (granted by Plateau, Hillside and Taharua);

• b) A Security Sharing Deed (SSD) dated 9 June 2006 (granted by Plateau, Hillside and Taharua); and

• c) A further composite General Security Deed (GSD) dated 24 July 2008 (granted by the four companies).

13 As already mentioned, StockCo is a livestock finance company. It is registered in Hastings and carries on the business of owning and leasing livestock...