ISAC New Zealand Ltd v John Managh

• Jurisdiction: New Zealand
• Judge: Mallon J
• Judgment Date: 05 December 2013
• Neutral Citation: [2013] NZHC 3242
• Docket Number: CIV 2011-441-396
• Court: High Court
• Date: 05 December 2013

In The Matter Of

The Companies Act 1993

And In The Matter

The Liquidation of Gambling Helpline Limited (In Liquidation)

Between

Isac New Zealand Limited Applicant

Applicant

and

John Managh

Respondent

[2013] NZHC 3242

Court:

Mallon J

CIV 2011-441-396

IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY

Application under s284 Companies Act 1993 (“CA”) (Court supervision of liquidation) seeking an order setting aside the liquidator's decision to reject the applicant's proof of debt and a direction that the debt be paid — plaintiff sought payment of $178,000 for early termination of an IT services contract — under the contract plaintiff was required to be paid a monthly charge for the IT services provided — if the contract was terminated early in certain circumstances, a provision in the contract required the monthly charges to be paid as if the contract had not been terminated — there were two years left on the contract — whether the liquidator was required to accept the claim irrespective of the termination provisions in the contract — whether the contract was entered into by the chief executive officer of liquidated company without actual or apparent authority — whether the clause under which the payment was sought was an unenforceable penalty.

Counsel:

R Hucker for the Applicant

M MacFarlane for the Respondent

JUDGMENT OF Mallon J

Table of Contents

Introduction	[1]
The evidence	[3]
Claim for future debt	[65]
Claim under clause 11.2	[74]
Authority to contract	[83]
Lost data	[100]
Penalty	[109]
Relief	[125]

Introduction

1 ISAC 1 seeks payment of $178,802 for early termination of an IT services contract with GHL. 2 The contract came to an early end when GHL's parent company, Lifeline, 3 put GHL into voluntary liquidation without warning or notice to GHL or ISAC. Under the contract GHL was required to pay a monthly charge for the IT services provided over the term of the contract. If the contract was terminated early in certain circumstances, a provision in the contract required GHL to pay those monthly charges as if the contract had not been terminated. ISAC filed a proof of debt in the liquidation pursuant to this provision. The liquidator rejected the proof of debt.

2 ISAC's claim is brought by way of an application under s 284 of the Companies Act 1993 seeking an order setting aside the liquidator's decision to reject ISAC's proof of debt and a direction that the debt as claimed by ISAC be paid. The issues are:

• (a) whether the liquidator was required to accept ISAC's claim irrespective of the termination provisions in the contract;

• (b) if not, whether ISAC terminated the contract in circumstances which enabled it to claim the $178,802 under the contract;

• (c) if it did, whether the contract was entered into by GHL's chief executive officer (CEO) without actual or apparent authority;

• (d) whether there is any substance to a claim that ISAC breached the contract;

• (e) whether the clause under which the payment was sought was an unenforceable penalty;

• (f) whether relief under s 284 is appropriate.

The evidence

The background

3 Lifeline is a charitable trading trust. It provides free confidential helpline counselling services and face to face counselling. Its wholly owned subsidiary, GHL, provided problem gambling counselling services via telephone, text and email. GHL's main source of funding was under a contract with the Ministry of Health. Up until November 2008 the Ministry contracted directly with GHL for the provision of those services. After that, the Ministry awarded the contract to Lifeline who then subcontracted with GHL for the provision of services.

4 GHL initially managed its own IT services. In 2004 it was proposed that ISAC would provide IT services. At this time, Mr Tonkin, a director and shareholder of ISAC, was also a director of GHL. For this reason the decision whether to enter into a contract with ISAC was referred to the GHL Board. The proposal first came to the GHL Board on at its meeting on 18 February 2004. The minutes record that Mr Tonkin declared his interest, that alternative quotes were to be considered and discussed by GHL's CEO and Chairman and that a discussion paper was to be sent to the directors with a recommendation.

5 The GHL Board next considered the IT contract at its meeting on 17 March 2004. The GHL Board minutes from 17 March 2004 state the following:

COMPUTER FACILITIES MANAGEMENT

The Directors discussed the computer facilities management further with the CEO and Ms Ferguson. The following points were noted:

• •There was a termination clause included in the ISAC NZ Limited proposal with a minimum 12 month contract and a three month exit clause after the initial 12 months.

• …

• •The issue was a management decision but had been taken to the Board in view of the interests of a director. The competitive quote was considerably higher and was duly noted.

• AGREED:

• Directors agreed to accept the recommendation to enter into a computer facilities management contract with ISAC NZ Limited on the terms and conditions to be agreed between ISAC NZ Limited and [GHL].

6 Following this, the ISAC/GHL contract was entered into on 14 June 2004. Ms Ferguson, the then Business Manager of GHL, executed the contract on behalf of GHL. The contract set out the services to be provided and the charges for these services. The contract was for a minimum term of 12 months “[o]r until terminated in accordance with clause 11.” Clause 11 provided for early termination in the event of assignment, bankruptcy (or similar) or default. It also provided that, following the initial 12 month period, either party could terminate the agreement by providing one month's notice in writing. It further provided that “[u]pon termination each party shall be regarded as discharged from any further obligations under this Agreement”.

7 On 1 July 2005 a second contract, which replaced the 2004 contract, was entered into between GHL and ISAC. It was executed by Ms Ferguson who was by then GHL's CEO. The contract did not go to the Board for approval. The contract was in similar terms to the 2004 contract, except that if a party wished to terminate the contract after the initial 12 month period, three months' notice of that intention was required. After the initial 12 month term of the 2005 contract neither party gave notice. ISAC continued to supply IT services to GHL under that contract.

8 From November 2008 the Ministry of Health funding to GHL was provided under a contract between the Ministry and Lifeline. With the Ministry's approval Lifeline subcontracted with GHL. Dr Bellringer's understanding was that this change in the Ministry/Lifeline/GHL contracts had come about because of a breakdown in the relationship between GHL's then CEO and the Ministry. Dr Bellringer was appointed as GHL's CEO on 12 October 2009. She understood that her “extremely good relationship” with the Ministry was one of the reasons why the GHL Board employed her as CEO.

9 For present purposes the relevant Ministry of Health contract with Lifeline and Lifeline's subcontract with GHL commenced on 1 July 2010. Each contract was for a term of three years. For Lifeline those contracts were executed by Lifeline's CEO (Ms Denvir). For GHL the subcontract was executed by Dr Bellringer.

10 Mr Bogan, who was the chair of Lifeline's Board and the Audit and Risk Committee, was not happy that these contracts had been signed by Ms Denvir and Dr Bellringer without the authority of their respective boards. The GHL Board minutes at this time record that the contract between Lifeline and GHL should have been signed at Board level and a copy of the contract was requested so that the directors could ratify it. Ms Denvir's evidence is that Mr Bogan reprimanded her for entering into the contracts without the authority of the Lifeline Board.

11 Lifeline's Audit and Risk Committee reviewed the contract with the Ministry of Health and the GHL subcontract at its meeting on 4 October 2010 (which Dr Bellringer and Ms Denvir attended). At that meeting a lawyer attended and provided advice about the risks under these contracts. This included advice as to the relative ease with which the Ministry could terminate the contract. The minutes record they all were agreed “[t]hat the importance is the relationship with the Ministry more than the contract document and having channels open for transparent discussions around grey areas and areas of re-negotiation.”

12 For her part, Dr Bellringer considered the contract to be only one part of the equation and that the relationship between the parties was very important. Dr Bellringer knew from various discussions with the Ministry that they were “happy” with the services provided by GHL and that her relationship with the Ministry was a good one. She believed the Ministry would not terminate the contract without discussions and attempts to mediate.

13 Mr Bogan agreed with Dr Bellringer's evidence about this. He said that the advice of their lawyer was that the Ministry contract “really depended on the relationship between the parties” and that the GHL Board needed to work to maintain the relationship with the Ministry. Mr Bogan was reasonably comfortable the contract would continue because “we had a good relationship with the Ministry”. He said that the Ministry were “really happy” with the performance of the contract under Dr Bellringer's stewardship and that Dr Bellringer went “way and above the call of duty in terms of fulfilling the Ministry requirements, to provide a good and capable gambling [counselling] service”.

The ISAC 2011 contract negotiations

14 It was part of Dr Bellringer's role as CEO of GHL to review the contracts entered into by GHL and its service providers. As part of that role, in 2010 Dr Bellringer obtained a quote from another IT service provider, IT Live....