IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE	
CIV-2018-404-2368
[2019] NZHC 1271	

BETWEEN	SPOFFORTH PTY LIMITED
Plaintiff	
AND	FOUNDRY INNOVATIONS LIMITED
First Defendant

CHRISTINA FLORENCE DOMECQ
Second Defendant	

Hearing:	4 June 2019	
Appearances:	Alice C Eager for the Plaintiff
No appearances for the Defendants	
Judgment:	4 June 2019	

ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL

Solicitors:
Hesketh Henry (A C Eager/S Cartwright), Auckland, for the Plaintiff

SPOFFORTH PTY LIMITED v FOUNDRY INNOVATIONS LIMITED [2019] NZHC 1271 [4 June 2019]

[1]	Under a put option agreement made on 28 May 2018, Spofforth Pty Ltd, an Australian corporation, paid Foundry Innovations Ltd approximately AUD$100,000 for 317 shares in Fulcrum Group (Australia) Pty Ltd, an Australian corporation. The agreement gave Spofforth Pty Ltd the option of giving notice to Foundry Innovations Ltd to re-purchase the shares for $130,013.43 after six months. The option could be exercised earlier in the event of default by Foundry Innovations Ltd. Christina Domecq, the second defendant, a director of Foundry, guaranteed its performance. On 2 August 2018, Foundry went into receivership. That was a default event. Spofforth gave notice of the exercise of the option and made demand on Ms Domecq under the guarantee. Foundry and Ms Domecq did not pay. Spofforth began this proceeding in October 2018 to enforce payment under the put option agreement. It has applied for summary judgment.

[2]	Foundry, in receivership, took no formal steps in the proceeding. Ms Domecq filed a notice of opposition and statement of defence. Later in the proceeding she withdrew her instructions to her lawyers and was going to defend the case in person. Last week, she advised the court that she would not appear and that she was going to apply to the Insolvency Service to have herself made bankrupt. As at the start of this hearing, I have not received any advice that she has yet to become a bankrupt. If she had been made bankrupt before the hearing, the proceeding would be stayed under    s 76 of the Insolvency Act 2006. In the meantime, the plaintiff is entitled to enforce its rights against Ms Domecq under the put option agreement, and that includes continuing with its application for summary judgment.

[3]	This morning I have heard another summary judgment application against  Ms Domecq.1 That application was brought by JCCL Global Pty Ltd, which lent funds to Foundry in May 2018. That loan was also guaranteed by Ms Domecq. There are some areas of overlap between JCCL Global Pty Ltd and Spofforth Pty Ltd, but the proceedings are distinct. While there is a common background, the transactions are distinct. JCCL Global Pty Ltd is not connected with the plaintiff in this case. The plaintiffs have had separate representation and have brought separate proceedings.

1	JCCL Global Pty Ltd v Foundry Innovations Ltd [2019] NZHC 1270.

I am therefore giving separate decisions on them. At the same time, in giving this decision, I have borrowed somewhat from my consideration of matters in the claim by JCCL Global Pty Ltd.

[4]	Ms Domecq is the director of Foundry and its shareholder. She says that it was a technology investment company, which had investments in six businesses across New Zealand and Australia.  It had been operating for three years.  Foundry had a  70 per cent shareholding in another investment vehicle, Fulcrum Group Australia Pty Ltd. Plans were afoot for an initial public offering (IPO) for Fulcrum. Fulcrum needed funds to meet its liabilities. Ms Domecq was keen to avoid the loan appearing on Fulcrum’s books because that would be adverse to the pre-IPO funding strategy. It was decided that Foundry, as the largest shareholder, would assume liability for outside loans, and would in turn on-lend funds to Fulcrum.

[5]	Ms Domecq says that in February 2018, Foundry engaged a financial advisor, Mr Robert Crossman of Corpac Partners Pty Ltd to arrange to sell some of Foundry’s shares in Fulcrum, and to raise further funds which could be advanced to Fulcrum. Corpac Partners was also acting as the financial advisor to Fulcrum in relation to the IPO and pre-IPO funding strategy.

[6]	Mr Crossman approached Spofforth. That is an investment vehicle through which a Ms Tatiana Bokareva of Sydney invests in company shares. Funds invested by Spofforth came from her personal savings. Spofforth does not have any employees. Ms Bokareva says that Spofforth had made only a small number of investments in the past. When deciding on share investments, she evaluates the longevity of the company, its liabilities, current revenue and future growth. She has a background in data technology,  and  that  appears  to  have  been  the  reason  for  Mr Crossman approaching her. He provided her with publicity materials about Fulcrum and its proposals, and she was initially impressed. She says that the product seemed good and had been picked up by real and significant clients such as the Westpac Bank in both New Zealand and Australia, as well as other well-known finance companies and insurers. There were indications that other banks and retailers were in the pipeline as prospective clients. She says that during the negotiations, Mr Crossman provided her with a document called “How will Fulcrum increase its revenue from

$4.8 million for the year ending 2018 to $12.6 million in the year ending 2019?”.   Of interest, the document contained a profile for Ms Domecq:

Christina is an entrepreneur with over 15 years’ experience in starting growing and selling companies. She has been responsible for business transformation in leading companies of up to 3,000 employees. A seasoned board member and investor, she is the founding partner of Foundry Innovations and has sat on the board of major New Zealand companies, including Tourism Holdings and Harmoney.

The reference to Harmoney is of some significance, because that company is involved in financial transactions - advancing funds by way of loan.

[7]	Ms Bokareva says that initially Mr Crossman proposed a loan agreement, but she was not interested. She was more interested in investing in Fulcrum. That was because if the IPO was successful, she stood to gain on the shares that she would take under the put option agreement. So the put option was negotiated instead of a loan. She says that she was only prepared to commit $100,000 and this was to be guaranteed by Ms Domecq. She understood that the IPO would be floated on the Australian stock exchange within six months, and the put option gave Spofforth the choice of retaining the shares following the IPO or, if the IPO did not take place, then she could exercise the put option. She appreciated that the IPO may not occur, and she considered that a 30 per cent return over the six month period as appropriate.

[8]	These negotiations led to the put option agreement. She says that the negotiations took place over several weeks in May 2018. The final agreement was structured  so  that  Spofforth  would  acquire  317  ordinary  shares  in  Fulcrum  for
$100,010.33. She thought that it was potentially a good investment for Spofforth, a good product with a good company.   She says that she negotiated the deal with      Mr Crossman. She would either meet him personally or they would talk on the telephone. She never met or spoke directly with Ms Domecq. She understood that Ms Domecq was actively involved in the negotiations because when she proposed changes to the agreement, Mr Crossman had to seek instructions from Ms Domecq. She was given the impression that Ms Domecq was very confident in the success of the IPO but said that Foundry needed short-term funding and Ms Domecq was actively seeking  to  sell  her  shares  in  Fulcrum.   She  says  that  the  personal  guarantee by

Ms Domecq was fundamental to her decision to enter into the agreement, and she understood that Ms Domecq was an experienced businesswoman.

[9]	The put option  agreement  has  three  parties  –  Spofforth,  Foundry  and  Ms Domecq. It provides for the sale to Spofforth of 317 ordinary shares in Fulcrum at a price of A$315.49 per share, giving a total purchase price of $100,010.33. The purchase price was to be paid within seven days of the agreement, and Foundry would in turn deliver signed share transfers and certificates. The put option date was six months following the date of the agreement. The put option price was $130,013.43. The put option was to be exercised by Spofforth giving written notice to the vendor at any time before the put option date. If Spofforth exercised the put option:

…the Vendor must pay to the Purchaser the Put Option Price in full on the Put Option Date. Interest shall be payable on unpaid amounts at the rate of 60% per annum, calculated on daily rests.

Ms Domecq gave a guarantee. The agreement provides for default events, which are defined to include an insolvency agreement which was in turn defined to include the company going into receivership. On a default event occurring, Spofforth may, by written notice, declare that the put option price is due and payable and on receiving such a notice Foundry is required to pay the put option price plus any accrued interest. The currency of the agreement is Australian dollars and the agreement is governed by the laws of New South Wales. The courts of New South Wales have non-exclusive jurisdiction to hear claims under the agreement.

[10]	On 2 August 2018, Foundry went into receivership, much to the surprise of Ms Bokareva. On 17 August 2018 lawyers acting for Spofforth gave notice accelerating the agreement because of the insolvency event and making demand on Ms Domecq.

[11]	In her notice of opposition, Ms Domecq has set out these defences:

(a)	the put option agreement is unenforceable under the Australian Securities and Investments Commission Act 2001. She relies on the provisions in subdivision BA of that Act under which unfair terms are not enforceable;

(b)	Spofforth engaged in unconscionable conduct under subdivision C of that Act. I understand her also to say that the agreement was not enforceable at equity for being unconscionable; and

(c)	the interest rate of 60 per cent per annum is an unenforceable penalty.

[12]	In Krukziener v Hanover Finance, the Court of Appeal re-stated the principles on which courts decide plaintiff’s applications for summary judgment:2

[26]	The principles are well settled. The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried. … The Court must be left without any real doubt or uncertainty. The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated. … The Court will not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not accept uncritically evidence that is inherently lacking in credibility, as for example where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponent, or is inherently improbable: … In the end the Court’s assessment of the evidence is a matter of judgment. The Court may take a robust and realistic approach where the facts warrant it. …

[27]	Under r 141A, the defendant need not file a statement of defence. The onus remains on the plaintiff, and summary judgment will be denied if on the hearing of the application it appears that there is an issue worthy of trial.

(Citations omitted)

[13]	The contract is governed by the law of New South Wales. Foreign law is a factual matter. The foreign law needs to be proved. Section 144 of the Evidence Act 2006 relaxes the requirements for foreign law, usually a matter of expert knowledge, to be proved by appropriate experts. The court can, for example, receive copies of foreign legislation and copies of court reports of the foreign jurisdiction. In this case, the plaintiff has helpfully provided an affidavit by a Sydney solicitor who has qualified himself to give evidence as to Australian law as it relates to penalties in financing contracts. Ms Eager has also helpfully provided extracts from the Australian Securities and Investments Commission Act 2001.

2	Krukziener v Hanover Finance Ltd [2008] NZCA 198 at [26]-[27].

[14]	I deal first with the defence that the interest provisions are an unenforceable penalty. The solicitor has provided in his affidavit a review of Australian case law. He has referred to three decisions of the High Court of Australia: Ringrow Pty Ltd v BP Australia Pty Ltd; Andrews v Australia and New Zealand Banking Group Ltd and Paciocco v Australia and New Zealand Banking Group Ltd.3 He regards Paciocco as the leading Australian case on penalties. He summarises the key principles:

(a)	In determining whether a clause is a penalty, the question to ask is whether it is intended only to punish the defaulting party or whether it is a genuine covenanted pre-estimate of damage. The former is deemed a penalty, the latter is not.

(b)	Whether an interest rate is a penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each contract, judged at the time of the making of the contract, not at the time of the breach.

(c)	A sum that is merely disproportionate to the loss suffered does not qualify as a penalty. To be a penalty, the sum stipulated must be “extravagant, exorbitant or unconscionable” and “out of all proportions” to the interests of the party who seeks the protection of the clause.

[15]	He has referred to these cases: Yarra Capital Group Pty Ltd v Sklash, Bay Bon Investments Ltd v Selvarajah, Titles Strata Management Ltd v Nirta, Quantum Asset Management Ltd v Love Properties (WA) Pty Ltd and the New Zealand Court of Appeal’s decision in Wilaci Pty Ltd v Torchlight Fund No.1 LP (In Receivership).4 The New Zealand decision is relevant because the Court of Appeal was required to apply New South Wales law.

3	Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71, (2005) 222 ALR 306; Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30, (2012) 290 ALR 595; Paciocco v Australia and New Zealand Banking Group Ltd [2016] HCA 28, (2016) 333 ALR 569.
4	Yarra Capital Group Ltd v Sklash [2006] VSCA 109; Bay Bon Investments Ltd v Selvarajah [2008] 1251; Titles Strata Management Ltd v Nirta [2015] VSC 187; Quantum Asset Management Pty Ltd v Love Properties (WA) Pty Ltd [2007] WASC 167; Wilaci Pty Ltd v Torchlight Fund No.1 LP (in rec)[2017] NZCA 152, [2017] 3 NZLR 392 at [37].

[16]	The solicitor has considered whether the interest rate in this case would be an unenforceable penalty. While it is the province of an expert to describe for the court the relevant principles of foreign law, the application of those principles to the case in hand is for the court, not for the witness. I have not followed or applied his evidence insofar as he purports to give an opinion on the ultimate issue.

[17]	There is an arguable penalty element in the put option agreement. The question of penalty arises when a party in default under an agreement has additional burdens placed on them as a consequence of their having breached the agreement. It then becomes a question of judgment in each case whether it is a penalty in the sense that it is to be imposed purely for the purpose of punishment and is extravagant, exorbitant, unconscionable or out of proportion.

[18]	The put option can be considered as a financing arrangement. Spofforth bought the shares for AUD$100,000 and could require their re-purchase for the put option price of AUD$130,000. That was repayable after six months and gave Spofforth a return of 30 per cent over six months or 60 per cent per annum. If there was acceleration – as there was in this case after only three months – the interest rate was increased, because the interest was payable on the amount of the put option price. The interest rate on the put option price is 60 per cent per annum. I understand that interest rate to equate to about 90 per cent per annum of the initial purchase price paid to Foundry. The solicitor cited cases where rates of up to 200 per cent per annum had been upheld by some courts in Australia. But in those cases the courts considered the circumstances in full, not on a summary judgment basis.

[19]	In my view, there is  a  question  of  arguable  unenforceability  insofar  as  Ms Domecq is required to pay interest on the AUD$130,000 at 60 per cent per annum, so that the interest rate on default would be about 90 per cent per annum on the original purchase price. There would be no element of penalty if the interest rate of 60 per cent per annum were fixed in relation to the initial purchase price of AUD$100,010.33. Ms Domecq had agreed to guarantee payment at an interest rate of 60 per cent per annum on the initial price, so she cannot complain if, on default, she is held to that interest rate for non-payment. There is then no element of penalty in adding to the burden that she assumed at the outset. In my view, on a summary judgment basis,

I uphold the agreement to the extent of allowing interest at 60 per cent on the initial purchase price. There is an arguable defence for the interest rate of 60 per cent on the put option price.

[20]	Once that adjustment is made to the plaintiff’s claim, the other defences fall away, but I deal with them briefly just to cover the point.

[21]	Subdivision BA of the Australian Securities and Investments Commission Act 2001 deals with unfair contract terms. Not all contracts are eligible for relief – only consumer contracts and small business contracts. Ms Eager accepted that the contract in this case qualifies, as it is a “small business” contract. She noted, for example, that Spofforth Pty Ltd employs fewer than 20 persons, and the upfront price was less than AUD$300,000.5
12BF	Unfair terms of consumer contracts and small business contracts

(1)	A term … is void if:

(a)	the term is unfair; and

(b)	the contract is a standard form contract; and

(c)	the contract is:

(i)	a financial product; or

(ii)	a contract for the supply, or possibly supply, of services that are financial services.

[22]	The third requirement is satisfied. I am not, however, satisfied that once the penalty element in the interest rate is taken out the term is unfair – and I am not satisfied that this is a standard form contract. As to the contents of standard form contracts, I refer to s 12BK. In this case, the contract was negotiated over time between Mr Crossman, acting for Ms Domecq, and Ms Bokareva. Mr Crossman drew up the contract. Ms Bokoreva’s evidence refers to negotiations with changes to the proposal. It is certainly clear that Ms Domecq and her company were given a real opportunity for negotiation. The circumstances suggest something quite different from a “take it or leave it” position which s 12BK seems to be directed at.

5	Australian Securities and Investments Commission Act 2001 (Cth), s 12BF(4).

[23]	Nor was the contract, as modified, unfair. To be unfair, a contract must meet three requirements:6

(a)	it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and

(b)	it is not reasonably necessary, in order to protect the legitimate interests of the party who would be disadvantaged by the term; and

(c)	it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

[24]	In this case, Ms Domecq agreed to the interest rate of 60 per cent. That involved repayment of an additional $30,000 above the amount of the initial purchase price which would be repayable after six months. The evidence shows that Spofforth was a last resort lender. It is interesting that Ms Domecq is a New Zealander but did not turn to New Zealand sources of finance. The fact that she borrowed in Australia is itself an indication that she was a credit risk. The transaction was high risk. It turned on the success of the IPO. Indeed, the matter was worse than Ms Bokareva appreciated at the outset, given that Foundry went into receivership within three months of the agreement. Significantly, there was no security, other than the personal covenant given by Ms Domecq under her guarantee. It was appropriate to allow a commensurate interest rate to reflect the risk. The interest rate was appropriate to protect Spofforth’s interests. I am therefore satisfied that the requirements for an “unfair” term are not made out in this case. Spofforth has satisfied me to the contrary.

[25]	The next matter is unconscionable conduct. Section 12CA of subdivision C of the Australian Securities and Investments Commission Act says:

(1) A person must not, in trade or commerce, engage in conduct in relation to financial services if the conduct is unconscionable within the meaning of the unwritten law, from time to time, of the States and Territories.

6	Section 12BG(1).

There is nothing in this case that suggests that Spofforth engaged in unconscionable conduct. Foundry was a New Zealand company, with a director who had had many years of experience. Spofforth was approached for financial assistance. The negotiations were conducted at arm’s length with the assistance of an agent in Sydney. There was no disability on the part of Ms Domecq which would make her vulnerable to pressure. There was nothing in the circumstances of the case which suggests that Spofforth brought undue pressure to bear on Foundry or Ms Domecq. The fact of the matter was that Foundry did not have other sources of finance and it was prepared to enter into an agreement with a heavy interest rate because it could not obtain finance from any other source. That does not make Spofforth’s conduct unconscionable, and I see no basis for that defence.

Result

[26]	In summary, Spofforth Pty Ltd is entitled to judgment for the put option price of AUD$130,013.43 and interest on the amount of the purchase price of AUD$100,010.33 at the rate of 60 per cent per annum. The interest will run from the acceleration date, 17 August 2018. The amounts of judgment for the principal sum and interest will be in Australian currency.

[27]	Ms Eager has provided a calculation of costs under the High Court Rules. The 2B basis is appropriate. She has claimed NZ$13,826.00. That should be amended. She has allowed only .5 of a day for the time for hearing, whereas she attended for three-quarters of a day. She is entitled to claim for costs of sealing judgment and for disbursements on sealing judgment. She should provide a judgment for sealing, which should show a calculation of interest on the basis which I have outlined.

[28]	Spofforth has not obtained judgment for all the amounts it has sought. It has not obtained judgment for interest at 60 per cent per annum on the put option price. It remains to be seen whether Ms Domecq goes bankrupt. I note that that part has not been resolved by this judgment and Spofforth’s claim in that respect may require determination later.

……………………………….
Associate Judge R M Bell