Colebrook v Okarahia Downs Ltd

• Jurisdiction: New Zealand
• Judge: Lester
• Judgment Date: 22 February 2019
• Neutral Citation: [2019] NZHC 241
• Court: High Court
• Docket Number: CIV-2018-409-759
• Date: 22 February 2019

Under The Companies Act 1993 and Part 31 of the High Court Rules 2016

In The Matter of An application to place Okarahia Downs Limited into liquidation

Between

Stuart James Colebrook as Trustee for the Brookfield Trust

Plaintiff

and

Okarahia Downs Limited as Partner of the Kowhai Banks Partnership

Defendant

[2019] NZHC 241

CIV-2018-409-759

IN THE HIGH COURT OF NEW ZEALAND

CHRISTCHURCH REGISTRY

I TE KŌTI MATUA O AOTEAROA

ŌTAUTAHI ROHE

Insolvency — liquidation application — sharemilking dispute — agreement required disputes to be submitted to arbitration — set-off — effect of s310 Companies Act 1993 (“CA”) (mutual credit and set-off)

Appearances:

R A Hearn for Plaintiff

S T Cottrell for Defendant

JUDGMENT OF ASSOCIATE JUDGE Lester

1 This is an opposed liquidation application.

2 The plaintiff seeks the liquidation of the defendant following the plaintiff issuing a statutory demand dated 27 August 2018 which claimed from the defendant $56,359.51, being Milk Payments owing to the plaintiff under a Sharemilking Agreement together with interest. That amount is made up as follows:

• (a) payment of $12,333.33 due 20 April 2018;

• (b) payment of $31,420.00 due 20 May 2018; and

• (c) interest of $12,606.18 on the above sums calculated at the contractual rate.

3 The defendant did not apply to set aside the statutory demand and a statement of claim seeking the liquidation of the defendant was filed on 30 October 2018. A statement of defence was filed on 20 November 2018.

4 The relationship between the parties is governed by a Federated Farmers of New Zealand agreement called the New Zealand Herd Owning Sharemilking Agreement (the Agreement), which is dated 1 June 2016 and expressed to apply for two milking seasons. It expired 31 May 2018.

5 The statement of defence asserts that in fact it is the plaintiff that is indebted to the defendant, with the amounts referred to below being available as a set-off against any amount owed by the defendant to the plaintiff for the plaintiff's share of the Milk Payment. On this basis, the defendant says the plaintiff is not a creditor.

6 The statement of defence also asserts the statutory demand and the winding up proceedings are an abuse of process because the Agreement contains a compulsory dispute resolution process which, if an agreement is not reached, requires the parties to go to arbitration. A stay is sought on that basis.

Governing principles

7 There was no dispute between the parties in relation to the governing principles.

8 In the plaintiff's application for liquidation relying on an unability to pay debts it must be shown that:

• (a) the plaintiff is a creditor;

• (b) the defendant is insolvent; and

• (c) the Court should not exercise its residual discretion against liquidation.

9 The principles summarised by then Associate Judge Faire in South Waikato Precision Engineering Ltd & Ors v Ahu Developments Ltd are as follows: 1

• a) A winding up order will not be made where there is a genuine and substantial dispute as to the existence of a debt such that it would be an abuse of the process of the Court to order a winding up;

• b) In such circumstances, the dispute, if genuine and substantially disputed, should be resolved through action commenced in the ordinary way and not in the Companies Court;

• c) The assessment of whether there is a genuine and substantial dispute is made on the material before the Court at the time and not on the hypothesis that some other material, which has not been produced might, nonetheless be available;

• d) The governing consideration is whether proceeding with an application savours of unfairness or undue pressure.

10 The defendant asserts that the plaintiff is not a creditor and also claims the proceeding is an abuse of process because of the presence of an arbitration clause.

The no set-off clause

11 The plaintiff claims that there are other amounts owed to it by the defendant than those set out in the statutory demand. However, recognising that those amounts are subject to dispute, they were not relied on in the statutory demand or for the purpose of the liquidation proceedings other than to say they must be considered when considering the overall position between the parties.

12 The plaintiff relies on the following provisions in the Agreement under the heading “No Withholding of Payments or Set Off”:

17.29 The Owner will pay the Sharemilker its Agreed Percentage of all Milk Payments in full, without deducting or withholding any amount. The Owner has no right of set off in relation to the Sharemilker's Agreed Percentage of Milk Payments under this Agreement.

17.30 It will be a material breach of this Agreement if the Owner breaches clause 17.29 and withholds money from the Sharemilker.

17.31 If the Owner withholds money from the Sharemilker in breach of clause 17.29, the Sharemilker will be entitled to the immediate payment of the amount withheld plus penalty interest in accordance with clause 17.33, without prejudice to any other rights or remedies available to the Sharemilker under this Agreement.

13 In support of its interest claim, the plaintiff relies on cl 17.33 of the Agreement which provides:

17.33 In the event of any money (including payment of the Sharemilker's portion of the Milk Payment) being due to the Sharemilker by the Owner under this Agreement and that are not subject to any dispute, the Sharemilker will present an itemised and costed account to the Owner. The Owner must pay this account within one calendar month of receipt. If the Owner fails to pay this account within one calendar month of receipt, the Owner will be liable for penalty interest of 8% per month (with interest to be compounded monthly) on the unpaid amount owing to the Sharemilker until such time as payment is made.

14 Also relevant to the argument developed by the plaintiff are cls 17.35 and 17.36 of the Agreement which provide:

Time Limits on Claims

17.35 Subject to clauses 17.3 and 17.36, no claim will be recognised or made by either party in respect of any breach of this Agreement unless the claiming party gives the other party a Notice of Dispute in accordance with clause 17.4 within 28 days of becoming aware of the alleged breach but, in any event, no later than 28 days from the last day of the Season in which the alleged breach arose.

17.36 The time limits on claims set out in clause 17.35 will not prevent either party from making a claim against the other in respect of any sums due and owing to that party, or by way of indemnity arising from or through actions by third parties.

15 The defendant points to a detailed dispute resolution section in the Agreement under cl 17 headed “Dispute Resolution”. Clause 17.1 of the Agreement provides:

17.1 The parties must use the procedures set out below to resolve any dispute concerning this Agreement, its subject matter and the rights or liabilities of the parties under this Agreement, unless clause 17.3 applies.

16 Clause 17.3 of the Agreement is not relevant for present purposes, providing that if the matter is within the jurisdiction of the Disputes Tribunal then the matter may be taken directly to that Tribunal.

17 Clause 17.4 under the heading “Initiating Dispute Resolution” provides:

17.4 If a dispute of the type referred to in clause 17.1 arises, either party may at any time within the time limits set out in clause 17.35 give written notice to the other party specifying the nature of the dispute (Notice of Dispute). The party receiving the Notice of Dispute must within 14 days give notice to the other party outlining its position in respect of the dispute ( Notice of Reply).

18 There is then an obligation to negotiate in good faith. Clause 17.5 of the Agreement provides:

Negotiation in Good Faith

17.5 The parties must meet, within 21 days of the Notice of Dispute being given to the other party and, in good faith and acting reasonably, do their best to resolve the dispute quickly through negotiation.

19 If resolution is not reached there are detailed provisions in relation to conciliation and in the event that conciliation fails, cl 17.7 of the Agreement applies, which provides:

17.7 The conciliation must be conducted by a conciliator agreed by the parties, or if the parties are unable to agree on a conciliator within 7 days of proceeding to conciliation under clause 17.6, the conciliator will be selected by the Chairperson of the National Panel of Conciliators, which can be contacted by phoning 0800 426 469.

20 It is not in dispute that the defendant directed Fonterra to direct the plaintiff's share of the monthly Milk Payment to the defendant. The amounts that would otherwise have been paid to the plaintiff by Fonterra and which are the subject of the statutory demand but which were received by the defendant are not in dispute.

21 Accordingly, it is not in dispute that the plaintiff was, but for the matters the defendant now relies on, entitled to receive its share of Milk Payments. Clause 8.2 of the Agreement requires:

Payment from Dairy Company to Sharemilker

8.2 In respect of any payments in this clause 8, the Owner [defendant] will:

8.2.1 Instruct the Dairy Company to pay the Sharemilker's percentage of the Milk Payment direct to the Sharemilker at the same time payment is made to the Owner unless otherwise agreed in writing.

Plaintiff's submissions

22 The plaintiff's submissions boil down to the proposition that the no set-off clause in the Agreement applies. The plaintiff says the defendant committed to pay the Milk Payment to the plaintiff in full without deducting or withholding any amount and that it expressly agreed not to claim a right of set-off.

23 The plaintiff says that against cls 17.29 — 17.31 of the Agreement, it is not open to the defendant to assert that it is not indebted to the plaintiff on the basis that it has a set-off or counterclaim.

Defendant's...