IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE	
CIV-2017-404-003072
[2019] NZHC 1849	

BETWEEN	TURNOVER LIMITED
Plaintiff/Applicant	
AND	BUY RIGHT CARS (2016) LIMITED
Defendant/Respondent

BRANDON ORLANDINI
Counterclaim Defendant	

Hearing:	2 July 2019	
Appearances:	D J MacRae for the Plaintiff/Applicant and Counterclaim Defendant
M Arthur and L Bercovitch for the Defendant/Respondent	
Judgment:	1 August 2019	

JUDGMENT OF HINTON J

This judgment was delivered by me on 1 August 2019 at 9.30 am pursuant to Rule 11.5 of the High Court Rules

…………………………………………………………………… Registrar/Deputy Registrar

Solicitors:
Morgan Coakle, Auckland Chapman Tripp, Auckland

TURNOVER LTD v BUY RIGHT CARS (2016) LTD [2019] NZHC 1849 [1 August 2019]

[1]	This is an application for ancillary orders to a prospective freezing order under part 32 of the High Court Rules 2016.

Background

[2]	In July 2016, Turners Automotive Group Ltd (Turners) bought the business of Buy Right Cars from the plaintiff for $9.18 million (cash and Turners shares), plus
$22 million for inventory.

[3]	There was also earn-out consideration to be determined by the business performance over the two years following completion – year end July 2017  (earn-out 1) and year end July 2018 (earn-out 2). The amount of profit paid to the plaintiff vendor (and retained by the defendant) for each earn-out period related to the performance to target achieved for that period. The plaintiff, led by Mr Orlandini, who had set up and run Buy Right Cars for about 18 years, was to remain in control of the business for the earn-out period.

[4]	For earn-out 1, the plaintiff received $3,415,938.

[5]	In May 2017, the parties executed a variation to the sale agreement whereby the plaintiff relinquished  day-to-day responsibility for  the  business  and  received  a $1 million non-refundable advance on account of earn-out 2. The business performance for earn-out 2 was such that the plaintiff received nothing above the
$1 million advance.

[6]	The plaintiff says that it should have received $6.4 million in total for earn-out 2, and having received only the $1 million advance, sues for $5.4 million. The claim is based inter alia on a breach of a fundamental covenant that the defendant would not take any action that would adversely affect the business during the earn-out period. The plaintiff says the defendant made wholesale detrimental changes during earn-out 2, including changing the business model from import and sale of cars ex-Japan to sale of cars ex-New Zealand. Under the sale agreement, if the defendant breaches a fundamental covenant, the full amount of the earn-out becomes payable, regardless of whether applicable performance targets have been met.

[7]	The defendant counter-claims for a total of about $500,000, saying that the first earn-out was over-paid, primarily because of alleged inadequate stock write-downs.

Ancillary orders to freezing order

[8]	The ancillary orders sought are orders for comprehensive discovery relating to the defendant’s post-August 2018 financial position (including minutes of meetings, board reports, monthly accounting and information about decisions). The plaintiff cannot obtain such discovery in the substantive proceeding because the defendant’s financial position after earn-out 2 is considered to be not relevant to that proceeding.

[9]	The plaintiff seeks these orders because it says it has real concerns regarding what is happening to the defendant’s business, has asked for information and not received satisfactory answers. It is consequently concerned any judgment might not be satisfied.

[10]	The hearing of the substantive proceeding is not until May 2020.

The legal test

[11]	Although the plaintiff argues there is a slightly different test for granting an ancillary order than for a freezing order, I do not agree. The same rule, 32.5 of the High Court Rules, applies to both.

[12]	In terms of r 32.5, the plaintiff has to relevantly show:

(a)	It has a good arguable case on an accrued cause of action.

(b)	There is a danger that a prospective judgment will be wholly or partly unsatisfied because the assets of the prospective debtor might be disposed of, dealt with, or diminished in value.

(c)	That the particular order sought is just and necessary.

[13]	The defendant argues that the plaintiff has to show a “strong” arguable case and a “real” danger of dissipation, relying in both instances on BNZ v Hawkins.1 I consider the Court should stay with the language of r 32.5, and not read extra words into it. I note that McGechan refers to case law to the effect that a freezing order requires a “real risk”.2 “Real risk” may be much the same as “a danger” but that does not elevate danger to real danger.

[14]	The plaintiff does not have to show any intent to defeat its claim as is clear from the first two criteria above.3 But the disposal of assets or making payments in the ordinary course of the respondents' business, including business expenses incurred in good faith, does not satisfy the requirement of r 32.5(4)(b)(ii), as  confirmed by     r 32.6(3)(c). Indeed, that rule provides the Court “must not” prohibit such a disposal.4

Good arguable case

[15]	I consider the plaintiff has met the threshold of a good arguable case for purposes of interim relief. On the face of it, the case has a reasonable basis.

[16]	The defendant argues that there was no breach of the fundamental covenant that it would not take any action that would adversely affect the business during the earn-out period. It says that it has not moved out of imported cars and has only grown the ex-New Zealand business to 6 per cent of turnover. I could not locate evidence of this. The defendant also points to its own pleading that the plaintiff also tried to change from Japanese importing but failed. I do not see any relevance in the second point.

[17]	There seems to be evidence to support the plaintiff’s claim and it is pleaded in detail. The breach of the fundamental covenant is also not the only pleaded breach.

[18]	The defendant particularly challenges the quantum of the claim. I agree that on the face of it the claim seems high bearing in mind that the plaintiff itself achieved

1	BNZ v Hawkins [1989] 1 PRNZ 451 (HC). It seems that there was no rule at the time and the Court was relying on the common law.
2	McGechan on Procedure (online looseleaf ed, Thomson Reuters) at HR32.2.05. This would apply equally to ancillary orders.
3	Mogilin v Jo HC Auckland CIV-2011-404-1584, 26 August 2011 at [34]; and Oaks Hotels & Resorts NZ Ltd v Body Corporate 358851 [2013] NZHC 2695 at [17].
4	IAG New Zealand Ltd v H Construction North Island [2018] NZHC 620 at [30].

an earn-out of $3.415 million in earn-out 1, but claims a lost earn-out of $6.5 million for the second year. On the other hand, I note that the maximum combined earn-out consideration to be paid to the plaintiff was capped at $27 million. I have some concern as to how “good” the arguable case is in terms of the full quantum of the claim. But again it is premature to make any further assessment of that.

[19]	Overall, I consider the plaintiff has a good arguable case for purposes of r 32.5.

Danger of disposal/diminution in value of assets

[20]	The plaintiff relies here on a number of further changes or proposed changes in the business, which it says show a danger that assets might be disposed of or diminished in value. I set these out in the order and language of the plaintiff’s submissions:

(a)	Closing one of the defendant’s car yards.

(b)	Offering another two car yards for sub-lease, including the Ryan Place site, which contains the head office and compliance workshop.

(c)	Making staff redundant, including senior managers.

(d)	Reducing the total number of stock (and accordingly total value of stock) held by the business – from around 2,100 vehicles (with a value of around $25 million) down to around 1,600 vehicles (with an anticipated value of around $18 million), or based on Mr Hunter’s evidence to around 1,700.5

(e)	Not maintaining vehicle buying levels.

(f)	Significantly reducing profits and running at a loss.

(g)	Changing its branding and/or trading under the Turners name.

5	Mr Hunter is the Turners CEO who swore an affidavit in opposition to this application dated 5 June 2019.

[21]	Mr MacRae, counsel for the plaintiff, accepts that making staff redundant, ((c) above), is not particularly significant, and I do not address it. He also agrees that
(d) and (e) can be considered together. I also group (a) and (b) together.

[22]	Beginning with (a) and (b), I am advised by Mr Arthur, for the defendant, that at the time of the business purchase, there were eight car yards. He says that under the defendant’s ownership, the number of car yards was increased to 11, although as I understand it this was in the sense that the defendant took over some of Turners’ other car yards. It is now reduced to 10 because, according to Mr Hunter, an unprofitable site that was always temporary in Manukau was closed. This may though be one of the sites that the defendant had just “inherited” from Turners. Mr Hunter acknowledges that the defendant has also had initial discussions about outsourcing the vehicle compliance operation at Ryan Place (and by inference about sub-leasing that site, which also contains the head office), but says those discussions are preliminary and no decision has been made. It has also considered, but made no decision to move from a site at Gavin Street and is committed under the lease for that site until October 2020. The defendant says it has at the same time stated its intention to expand outside of Auckland. Mr MacRae says that the two points about car yard numbers are not the most concerning of the plaintiff’s points.

[23]	I have already noted that I do not need to address the point at (c).

[24]	With regard to (d) and (e), there is no evidence from the plaintiff of the allegation that stock have been reduced. The defendant has provided evidence from Mr Hunter that while stock numbers have been reduced, the total value is not materially down, and that value is currently approximately $22 million, not
$18 million as the plaintiff alleges. The defendant says that it is trying to reduce the amount of locked-up capital and to reduce financing/use of capital costs.

[25]	I address (g) next, leaving (f) to last. It is correct that the defendant has changed its branding from Buy Right Cars to Turners. There is no factual dispute here. When Turners acquired Buy Right Cars, it announced that the brand had a better name than Turners’ name. Turners says that it subsequently carried out market research, the results of which Mr Hunter exhibits, which showed the Turner brand as more powerful

than Buy Right Cars, and as a result a decision was made to write-off the Buy Right Cars brand. Mr Arthur advises me that this led to a write-off in the defendant’s accounts to March 2019 of approximately $300,000, and a write-off in the balance of the Turner Group accounts of $4.2 million. I do not have evidence of this breakdown, but accept his advice. The plaintiff seems to have understandably thought that the branding change had or would diminish the value of the defendant itself by
$4.5 million. This was based on a statement published by Turners which said the brand rationalisation will result in a $4.5 million one-off write-off associated  with  the  Buy Right Cars brand value. It seems that most of the Buy Right Cars goodwill was reflected as an asset in the group balance sheet, not the defendant’s.

[26]	Finally, I turn to (f). The plaintiff points to the fact that in the financial year to March 2019, the defendant incurred an operating loss of $871,000, as compared to a profit of $2.446 million the year before. Its net assets reduced from $5.5 million in the 2018 year to $4,853,000 in the 2019 year. The plaintiff also points to the fact that other divisions of the Turners automotive group have increased their operating profit levels in 2019 and, on the whole, increased their net assets. This information all derives from the Turners website consolidated financial accounts, Turners being a publicly listed company. The plaintiff does not have the March 2019 financial accounts for the defendant itself. This is part of the discovery sought in the ancillary orders application.

[27]	The plaintiff expresses concern that Turners may be favouring the balance of its divisions over and above the defendant and/or winding down the Buy Right Cars business, and points to the other matters I have already addressed as consistent with a winding down of the business.

[28]	In response, Mr Arthur says that Mr Hunter’s affidavit of 5 June 2019 does not address the material change in the 2019 accounts, as it was not a point made in the plaintiff’s application. Apparently, the end-of-year financial information was published on the Turners website in May 2019, but not picked up by the plaintiff until June 2019, a point on which Mr Arthur was critical, though I am not sure of the relevance of that criticism. I would have thought the defendant, knowing of the plaintiff’s application, would have fairly anticipated that the plaintiff would realise

before this hearing that the consolidated financial information was publicly available. Also, the point about the poor 2019 results was clearly made in Mr MacRae’s written submissions dated 18 June 2019. Nonetheless, while the published consolidated financial results are annexed to an affidavit of Mr West, solicitor, dated 25 June 2019, on behalf of the defendant, I am surprised that the defendant has not taken the opportunity to file a further affidavit by Mr Hunter. (I accept that Mr Hunter’s affidavit as filed is fulsome on the other points.)

[29]	In reply to Mr MacRae’s  submissions on the downturn in the 2019  year,   Mr Arthur points to the $226 million equity of the Turner Group showing in the 2019 financial accounts. He also says that Turners intends to amalgamate the defendant with the Automotive Retail  division,  or the bulk of it, represented at  page 8 of     Mr West’s affidavit. He says this would lead to the defendant’s being part of a division which has net assets in excess of $40 million. However, no resolution has yet been made and obviously no commitment can be given until then. This means I cannot really rely on the stated intention to amalgamate, or on the greater assets of the Turner division/group, of which Mr Arthur made much. On an amalgamation, Turners Group, or the relevant division, would take responsibility for the liabilities of the defendant which would remove any issue relevant to this application,6 but until and if that happens, Turners has not accepted any responsibility for any liabilities of the defendant, (nor does it have to).

[30]	Mr Arthur advises me (but not addressed in evidence), that the loss suffered by the defendant for the 2019 year can be explained as being caused by three write-downs. First is the write-down of $300,000 for signage/brand name to which I have already referred. Second, is a write-down for the closed-down site and third is a write-down for stock. He says that absent those write-downs, the defendant would have broken even. That explains the loss, although the explanation comes from the bar. No explanation has been given for the material drop in profit.

[31]	Mr Arthur also says that immediately prior to the purchase of the business by Turners, the company had net assets showing in the end of March 2017 accounts of

6	This is the general, though not invariable, effect of amalgamations and it seems to be assumed here.

$3.7  million.	He says under Turners’ ownership, that equity increased to the
$5.5 million level as at March 2018, and it has now dropped back to $4.85 million, still in excess of the March 2017 figure.7

[32]	The value of the business is obviously not synonymous with its equity, as reflected in the sale price in 2016 in comparison to the March 2017 equity. However, both parties seem to accept, that for present purposes the equity is relevant.

[33]	The plaintiff’s claim is for $5.4 million, plus interest and costs. The equity of the defendant as at March 2019 is $4.85 million.

[34]	I can understand the plaintiff’s concerns, particularly arising out of the  March 2019 results, the disposal and write-off of the Buy Right Cars brand, and Turners’ not providing explanatory information as to the reduction in profit (which is their right but nonetheless goes to the merits of this current application). I do not consider these arise out of any intent to defeat, or deliberate action by Turners, but that is not required. I would not, however, on the evidence as it currently stands, be prepared to find that there is a danger going forward of assets being disposed of, dealt with or diminished in value leading to a danger that a prospective judgment debt may be wholly or partly unsatisfied. There is no good evidence of that. The brand write-off has occurred and, based on the market research, that should have a positive future effect on profits. Decisions about closing down a branch are in the ordinary course of business and in any event, seem to be some time off. The stock asset change is not as drastic as the plaintiff thought and again, these are ordinary course of business decisions.

[35]	As stated earlier, the Courts have made it clear that diminution in value of assets in the ordinary course of business, (although on the face of it not excluded from r 32.5) is not to be met with a freezing order.8

7	I assume from this submission and Mr MacRae’s silence on the point that Turners acquired the whole balance sheet.
8	IAG New Zealand Ltd v H Construction North Island [2018] NZHC 620 at [30].

Conclusion

[36]	The application for ancillary orders is therefore declined. If the Turners six-monthly accounts to 30 September 2019 show a further decline in the fortunes of the first defendant, and there has been no amalgamation, the plaintiff may wish to renew its application.

[37]	Costs are reserved. The defendant is to file submissions as to costs by Friday, 16 August 2019 and the plaintiff by Friday, 23 August 2019.

Hinton J

Addendum

I would add that the extent of the “ancillary orders” discovery sought by the plaintiff was unnecessary in any event, in my view. I am also aware that relations have soured between Turners and Mr Orlandini. However, in circumstances where Turners is basically writing-off the goodwill it purchased, which would naturally engender concern from the plaintiff, I would have thought it productive for the parties to find a way in which the defendant’s basic 2019 financial statements and related information could be provided to the plaintiff’s solicitor and/or independent accounting adviser on the basis of non-disclosure to Mr Orlandini. This is not a case where there is the usual concern over providing a plaintiff with details as to a defendant’s financial position. The plaintiff will have had many of those details until a year ago and is not in competition with the defendant.