IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY	
CIV 2015-404-000780
[2015] NZHC 1561	

BETWEEN	BTC GROUP LIMITED
Plaintiff	
AND	MANDEEP PALA
First Defendant	
	INDERJIT LUTHERA
Second Defendant	

Hearing:	2 July 2015	
Appearances:	S Woods for BTC
S I Perese for the Defendants	
Judgment:	7 July 2015	

JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSEN

This judgment was delivered by me on
07.07.15 at 4:30pm, pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar Date……………

BTC GROUP LIMITED v M PALA and I LUTHERA [2015] NZHC 1561 [7 July 2015]

[1]	The plaintiff BTC Group Limited (BTC) seeks summary judgment against the first and second defendants (Mr Pala and Mr Luthera) for amounts outstanding under invoices rendered for clothing products supplied to Shanton Fashions Limited (Shanton).

[2]	Mr Pala and Mr Luthera are the directors of Shanton. BTC says their liability arises under a guarantee and indemnity they provided with respect to Shanton’s obligations under a credit agreement with BTC.

[3]	By their notice of opposition the defendants assert, inter alia:

(a)	They did not provide a personal guarantee and indemnity but instead provided a “Directors guarantee”;

(b)	That by arrangement with BTC, Shanton’s administrator, (administrator) sold collateral on behalf of BTC at under value and therefore BTC is barred from seeking indemnity for any liability arising from the failure to obtain the best price reasonably obtainable at the time; and

(c)	BTC’s arrangement with the administrator breached the defendants implied rights under the credit application form, that BTC would exercise its rights under its Purchase Money Security Interest (PMSI) in good faith.

[4]	For consideration by the Court is whether the defendants’ grounds of opposition disclose an arguable defence to BTC’s claim.

Background

[5]	Before the defendants acquired their interest in Shanton in late 2012, Shanton had been in administration. The defendants contacted BTC after they acquired Shanton and on or about 12 September 2012 Shanton completed a credit application with BTC for the supply of clothing.

[6]	BTC required the defendants to sign its credit application which provided it with a PMSI. The application required the defendants to provide a personal guarantee in terms set out on the second page of the application.

[7]	The key terms of the guarantee and indemnity provided:

(a)	The defendants jointly and severally guarantee to BTC the due performance of Shanton’s obligations under the Agreement to BTC of whatsoever nature and howsoever arising.

(b)	The guarantee is an all obligation and continuous guarantee lasting until either:

(i)	BTC agrees to release the defendants from their obligations under the guarantee and indemnity; or

(ii)	the defendants give notice to BTC of their renunciation of the guarantee and indemnity. The renunciation only applies to credit and accommodations provided on or after the date of receipt of the renunciation;

(c)	The defendants indemnified BTC in respect of all and any loss caused by the failure of Shanton to fulfil its obligations to BTC.

(d)	The defendants are liable to BTC as principal debtors.

[8]	Between December 2012 and January 2015 BTC supplied Shanton with clothing in accordance with the terms of the agreement. From 16 October 2014 to 2 January 2015 BTC rendered invoices totalling US$567,526.80.

[9]	On 11 January 2015 Shanton was placed into administration under the Companies Act 1993 by resolution of the directors. Mr Williams was appointed as administrator.

[10]	At the time Shanton was placed into administration it owed US$566,904.45 to BTC.

Legal principles

[11]	BTC must satisfy the Court that the defendants have no defence to all or any part of a pleaded cause of action; that there is no bona fide defence, no reasonable grounds of defence and no fairly arguable defence.

[12]	Conflicts of evidence shall be left for trial unless that conflict can be resolved by reference to written record or reasonable probability.

[13]	This summary judgment application is really about an enquiry into the defendants’ claims of a defence. Both defendants have signed a guarantee and indemnity of their company’s debt to BTC. Regardless, the Court will not grant summary judgment if it appears there would be good reason to refer the matter for trial and in particular if the Court needed to hear oral evidence regarding matters of significant factual dispute.

Dispute overview

[14]	There is a dispute between the parties as to what occurred during the period of Mr Williams’ Administration.

[15]	The defendants say BTC took possession of unsold stock and by an arrangement with the administrator did not act in good faith as was required by the exercise of rights under the PMSI which rights they say imposed a statutory duty on BTC to obtain the best price reasonably obtainable at the time of sale of that stock. In any event it is the defendants’ case that they did not provide a personal guarantee.

[16]	BTC says:

(a)	the stock they supplied to Shanton was made specifically according to Shanton’s design and order requirements; that the clothing products were not suitable for any other retailer and therefore upon

administration BTC was content to leave the stock with Shanton to be sold in the usual course of business as this would result in a much better return than if it attempted to sell the product itself.

(b)	that during Shanton’s administration there were discussions with the administrator about how best to settle Shanton’s debt. The administrator had proposed that either:

(i)	BTC settled Shanton’s debt on a global basis; or

(ii)	BTC and Shanton agree for Shanton to continue selling BTC’s products and for BTC to receive approximately 50 per cent of the sale proceeds of its stock.

(c)	BTC says it never came to any agreement with the administrator and throughout the administration it continued to demand payment of the full proceeds of its stock as well as the remaining outstanding amounts; that ultimately it received two payments from the administrator the first being based on BTC’s price of supply (the “FOB value”) and the second was described by the administrator as a good will payment but with no explanation of how it was calculated; and that it has received nothing further.

(d)	its claim is a straightforward debt collection matter and that the evidence clearly shows a sum of US$467,699.62 is due; and it is entitled to take action against the defendants under their guarantee, which in this case is in writing and forms part of Shanton’s credit application.

[17]	This Court will review the facts and the respective parties’ accounts of those. The Court will also consider what affect if any the PPSA may have had on the respective parties in the particular circumstances of this case.

Directors guarantee

[18]	The directors’ guarantee was contained on the second page of Shanton’s credit application. In that the defendants were named as directors. Relevant provisions state:

(a)	The credit was provided to Shanton at the request of the directors.

(b)	The directors jointly and severally guarantee to BTC the due performance by Shanton to BTC.

(c)	The guarantee was a continuing guarantee for the purpose of securing the performance of the whole obligations of Shanton.

(d)	The directors’ covenant to indemnify BTC in respect of any loss caused by the failure of Shanton to comply with its obligations to BTC.

(e)	In the event of default by Shanton BTC shall be entitled to take action against any of the directors to recover the whole or any part of monies owing irrespective of the taking of any action against Shanton.

[19]	The completed credit application provided BTC with a PMSI. The PMSI was registered on 31 January 2013.

The defendants’ case

That the guarantee was not personally binding

[20]	Mr Pala confirms he signed the credit application form and in doing so “understood that I was providing a directors guarantee. I did not understand this to be a personal guarantee.  … I did not sign the ‘directors’ guarantee’ understanding that it was a personal guarantee that I would be personally liable for money owing by Shanton”.

[21]	Mr Pala deposes it was his understanding of a director’s guarantee that a company acts through its directors and that the director’s guarantee provides a promise to do everything to make the company pay the credit extended to it.

Claims that BTC and the administrator arranged for the sale of the collateral on behalf of BTC

[22]	The defendants say an analysis of relevant correspondence, emails and documents supports the view of an arrangement by which in essence the administrator acted for BTC and not Shanton when stock the subject of BTC’s PMSI was sold. Therefore any shortfall on sale and in essence any shortfall at all owing to BCT should be a matter for resolution with the administrator and not the defendants.

[23]	The Court has been referred to a number of documents and emails which the defendants say provides sufficient evidence of an arrangement to support the defendants’ claim of a defence to the summary judgment application. These include:

(a)	That pursuant to the retention of title terms contained in the credit application the company could have expected the administrator would just sell the goods the subject of security.

(b)	The administrator’s email dated 24 February to BTC’s Ms Betro which includes the following statements:

3.	BTC has allowed the inventory to be sold provided the administrator accounts to BTC from traceable proceeds…

4.	I have made it clear on quite a few occasions that for Shanton to make sales it has had to discount the product in its possession. I have also made it clear that Shanton cannot account for BTC for full book value if it is going to incur the time and cost of the sales process.

(c)	The administrator’s email to Ms Betro dated 18 March 2015 which included these statements:

PMSI product is being sold but at heavily discounted prices so that it will clear. Much of it is old stock and we are now in a season change. We have discussed on many occasions that there needs to be some equity with regard to the margin that Shanton will achieve in

marketing and selling that product. I did propose 50 per cent GP but I am not sure that is enough looking at the costs that Shanton in incurring to clear the stock.

… Simpson Grierson have rightfully expressed caution around settling with me for the PMSI stock – I am guessing that their concern is that settling with me at less than 100 cents in the dollar may provide for the argument by the gtors that their obligation goes down correspondingly.

(d)	An email dated 14 May 2015 to the administrator (post administration) Ms Betro of BTC which stated:

Mandeep [Mr Pala] called us this week and told us we should have been paid for all the sales during/under your administration, from 12 January up until 30 March (as the sales were still going to your bank account until 30/3 apparently). He sounded surprised we hadn’t been paid. He raved for awhile about the status of the PMSI and the rules of such that the funds were to be held in trust etc.

Please do ensure all your legal obligations are fulfilled. The sales report sent by Mandeep show sales [of $403,130 12 January to 30 March].

We are looking forward to receiving these amounts ASAP, less the amounts already transferred, of approximately $64K and $34K.

(e)	An email from the administrator (post administration) to Ms Betro of BTC dated 18 May 2015 which stated:

It is clear that the company is obligated to BTC for receipt of funds from proceeds of sale. My legal advice is that it is a company obligation not one of the administrator. There will be debate about that from both sides and I suspect it is likely the issue will finally be resolved in Court unless settlement is reached.

[24]	Mr Perese submits that ordinarily an administrator would just sell the stock and in due course just account to a security holder; that the credit application form made it clear that the property of any goods supplied remained vested in BTC until those goods were paid for.

[25]	Mr Perese submits the post administration correspondence strongly suggests that the substantive dealings between BTC and the administrator included consideration of settlement despite BTC’s position that no agreement had been reached.

[26]	Mr Perese submits there had been a number of dealings with the administrator through emails, meetings, telephone discussions and that during some of these interactions global settlements of BTC’s claim were discussed including that the administrator wanted 50 per cent of the sale proceeds to sell the PMSI product. Mr Perese submits the administrator made offers to settle BTC’s debt as against both the company and the directors (the defendants); that discussions included advice that BTC could settle against Shanton and seek the shortfall from directors under the guarantee.

[27]	Mr Perese submits the administrator received sale proceeds of over $485,000 for BTC PMSI stock; that the administrator has not fully accounted for these to BTC, and that BTC has accepted lesser sums and BTC does not hold the administrator responsible for the balance of the PMSI monies owing but rather holds the directors responsible.

[28]	Mr Perese submits in summary:

(a)	that therein there is a lot of knowledge which strongly suggests the existence of an arrangement which in the outcome has compromised the defendants and which has also breached obligations owed to the defendants as directors and as guarantors.

(b)	there is a concern about the comfort that the Court can have that all of the relevant documents have been adduced by way of affidavit.

(c)	the administrator exercised BTC’s PMSI rights in particular as to how the PMSI sale proceeds were to be accounted to BTC, by redefining the nature of the obligation to account for those sale proceeds.

(d)	that effectively BTC cancelled its credit agreement with Shanton and entered into a new agreement with the administrator, thereby absolving the directors from any responsibility under the PMSI security.

Implied obligation of good faith

[29]	In this the third ground the defendants’ say that BTC ‘s payment arrangement with the administrator to sell Shanton’s stock was a breach of the defendants rights under the PMSI because of a failure to obtain the best price reasonably obtainable.

Overview of defendants’ case

[30]	It is the defendants case that stock retained in Shanton’s 37 retail stores nationwide following the administrator’s appointment, was sold by the administrator on behalf of/pursuant to an arrangement between BTC and the administrator; that that stock was sold at undervalue and therefore contrary to the terms of Part 9 of the PPSA which imposes a statutory duty on BTC, owed to the defendants, to obtain the best price reasonably obtainable at the time of sale.

[31]	Although BTC denies having taken possession of the stock or of reaching any arrangement with the administrator for its sale, Mr Perese provides his analysis of reasons, by reference to the affidavit evidence about why he says there is good reason to view the evidence in a trial context and not by reference to affidavits. Mr Perese submits there is sufficient evidence to suggest BTC did take possession of the stock and that there was an arrangement with the administrator whereby he sold that stock as agent for BTC and not as agent for Shanton. If that could be so then Mr Perese submits it will be appropriate to examine, again by reference to oral evidence, claims about whether s 110 PPSA obligations (including best sale prices being obtained) have been breached.

[32]	Mr Perese submits that BTC and the administrator reached an arrangement the purpose of which was to control the sale of Shanton’s stock and the effect of which was to provide BTC with possession of that stock. The arrangement, says Mr Perese was that the administrator would sell the stock as agent for BTC.

[33]	Mr Perese submits that it is significant amount of the sale proceeds has not found its way to BTC. Therefore he says the administrator needs to account and explain why this occurred.

Considerations

Directors guarantee

[34]	Mr Pala deposes it was his understanding of a director’s guarantee that a company acts through its directors and that the director’s guarantee provides a promise to do everything to make that the company pay the credit extended to it.

[35]	It is correct that a guarantee must be recorded in writing and signed by the guarantor to be enforceable but that beyond this no particular form is required by a guarantee; there is no requirement that a guarantee be contained in a separate document. Indeed, personal guarantees are regularly included as part of a company’s loan or credit application.

[36]	Whether a document provides a guarantee is a matter for assessment by reference to what a reasonably and properly informed third party would consider the words of their contract to mean.1

[37]	The Court agrees with the submissions of Ms Woods that the use of the word guarantee is itself strongly indicative of an intention for the directors to be personally liable; that a guarantee is given when a person agrees to be answerable for another’s debt or default.

[38]	The Court agrees with Ms Woods’ submission that to interpret the guarantee in the manner suggested by the defendants would make it essentially worthless to BTC.

[39]	It is common for company directors to be required to guarantee their company’s obligations in their personal capacities. The Court agrees that there is reason to doubt whether Mr Pala genuinely understood the guarantee in the way he describes.

[40]	Ms Betro deposes that in multiple phone calls with Mr Pala since 6 November 2014 Mr Pala always assured her that, due to the PMSI and the personal guarantees, BTC’s position was safe.

1 Vector Gas v Bay of Plenty Energy [2010] NZSC 5.

[41]	In the Court’s view it is clear Mr Pala personally accepted responsibility to meet any shortfall due for payment by Shanton to BTC.

Was an arrangement reached between the administrator and BTC?

[42]	The defendants claim BTC made an arrangement with the administration by which the administrator acting as a bailee sold Shanton’s goods on behalf of BTC. Further that the stock was sold at undervalue and therefore BTC is barred from seeking any indemnity arising from the failure to obtain the best price reasonably obtainable at the time.

[43]	BTC rejects this account of things. So too does the Court. In the Court’s view from the time the administration began on 15 January 2015 the administrator sold goods subject to BTC’s PSMI as agent for Shanton; that BTC was only interested in recovering the proceeds of stock sold.

[44]	The defendants’ argument implies the plaintiff took steps to take possession of the stock. The clear evidence is that it did not. The meaning of “possession” in this context is defined in s 18(3) of the PPSA:

For the purposes of this Act, a secured creditor is not in possession of collateral that is in the actual or apparent possession or control of the debtor or the debtor’s agent.

[45]	The Court agrees that in the circumstances of this case the collateral was always in Shanton’s possession and that although the administrator threatened to stop selling the collateral and to arrange for the plaintiff to pick it up, neither of those things occurred because BTC was content for the collateral to continue to be sold by Shanton by the administrator.

[46]	Section 239 W of the Companies Act 1993 makes it clear that the administrator of a company, when performing a function or exercising a power in that capacity, is the company’s agent.

[47]	Whilst liquidators will usually sell property subject to a charge as agents for a secured creditor holding the charge the position affecting the actions of an

administrator is quite different. Liquidation involves a sell down. An administrator is more likely to continue trading because voluntary administration is “an insolvency procedure for companies having the potential to be rehabilitated”.2

[48]	The Court agrees with Ms Woods’ submission that administration is a business risk mechanism rather than a mechanism to wind up the affairs of a company. The primary role of an administrator is to attempt to make compromises with creditors which may have a rehabilitative effect. Therefore in the context of carrying on the business of the company BTC’s collateral was considered Shanton’s property even though BTC had retained title and given notice to the administrator of its rights under its PMSI. Also as is clear from ss 239 ABC and 239 ABK of the Companies Act secured creditors rights to enforce security interests (which includes to enter into possession) are suspended during administration except with the administrator’s written consent or the permission of the court.

[49]	It is the Court’s view that the correspondence between BTC and the administrator reveals BTC never indicated it was exercising its rights to possession and sale of the property under s 109 or s 111 of the PPSA. The Court agrees with Ms Woods assessment that whilst BTC demanded the proceeds of the collateral:

(a)	This only occurred after becoming aware from Shanton’s sales report that a quantity of its stock had been sold;

(b)	BTC took no steps to obtain possession and even told the administrator that it did not want to do so;

(c)	BTC did not get involved in decisions about how to sell the stock in order to attempt to influence the operational decisions of the administrator;

(d)	BTC informed the administrator that if Shanton’s staff were to stop selling their collateral the plaintiff would view this as contrary to the administrator’s duties to creditors;

2 Sections 239U and 239Z of the Companies Act 1993.

(e)	BTC did not accept the administrator’s proposal that Shanton continue selling the collateral and for BTC to receive the sale proceeds less deductions for Shanton’s expenses in selling the collateral; and

(f)	The collateral continued to be sold by the company after it came out of administration despite which the plaintiff has not been paid any further sums than those received from the administrator.

[50]	In summary the Court considers there is no reason to infer that, prima facie, an administrator who sells secured collateral is acting as the secured party’s agent.

[51]	The Court agrees with Ms Woods that in any event even if BTC was considered to have exercised its rights under its PMSI using the administrator as its agent, it is evident that the best price reasonably obtainable was indeed obtained for the collateral. There is no evidence at all supporting claims of inappropriate sales practices. The defendants offer no evidence to challenge what otherwise appears to have been the reasonable steps taken by the administrator to sell the collateral.

An implied obligation of good faith

[52]	Clearly an exercise of a power of sale under a security agreement engages an equitable obligation of good faith to obtain payment of the debt.

[53]	Ms Woods is correct when she submits the notion of good faith is not relevant in this case because the Court does not accept that BTC has exercised its power of sale. However even if it had there is no issue about the power being used for purposes other than for payment of the debt owing.

Summary

[54]	The Court does not consider the defendants have an arguable defence to BTC’s claim. The case is appropriate for the grant of summary judgment.

Judgment

[55]	Judgment is entered against the defendants jointly and severally in the sum of US$467,699.62.

[56]	Interest on the outstanding amount is ordered to be paid at the contractual rate of 2 per cent per annum from the due dates for payment under the invoices up until judgment.

[57]	Service charges on the outstanding amount of the contractual rate of 1.5 per cent per month are ordered to be paid from the due dates for payment under the invoices up until judgment.

[58]	Further interest and service charges on the outstanding amount is ordered to be paid from the date of judgment to the date of payment at the contractual rate of 2 per cent per annum and 1.5 per cent per month respectively.

[59]	Costs on a solicitor and client basis.

Associate Judge Christiansen