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Supreme Court of Tonga |
IN THE SUPREME COURT OF TONGA
CIVIL JURISDICTION
NUKU’ALOFA REGISTRY
CV 38 of 2017
IN THE MATTER OF: LUNA’EVA ENTERPRISES LIMITED
AND
IN THE MATTER OF THE COMPANIES ACT 1995
BETWEEN: LUNA’EVA ENTERPRISES LIMITED
- Plaintiff
AND: RAMPRA INVESTMENT LIMITED
- Defendant
BEFORE THE LORD CHIEF JUSTICE PAULSEN
Counsel: Mr. L Niu SC for the plaintiff
Mr. W Edwards for the defendant
Hearing: 8 November 2017
Date of Ruling: 21 November 2017
RULING
The issue
[1] On 16 August 2017 Rampra Investment Limited (‘Rampra’) served upon Luna’eva Enterprises Limited (‘Luna’eva’) a statutory demand in respect of an amount of $2,005,676 that it claims is owing to it for goods supplied to Luna’eva. Luna’eva applies to set aside the statutory demand on the ground that there is a substantial dispute as to whether there is a debt due and owing by it to Rampra.
The facts
[2] A more complete statement of the facts can be found in my ruling in Prasad anor v Luna’eva Enterprises Limited anor (Unreported, Supreme Court, 10 August 2017, CV 42 of 2015, Paulsen LCJ). For present purposes it will suffice if I summarise the facts as follows.
[3] Rampra is a company incorporated in Fiji and Pratita Prasad is a major shareholder. Pratita Prasad is married to Rudra Prasad. In 2002 the Prasads incorporated a company in Tonga called Moapa Enterprises Limited (Moapa). Moapa was under the control of Mr. Prasad until April 2015 and became one of the major importers and merchants of grocery goods in Tonga.
[4] Moapa became involved in Court proceedings and was found to be operating in breach of the Foreign Investment Act 2002 (Rudra Prasad and Moapa Enterprises Limited v Derek Leonard; Pacific Forum Line (NZ) Ltd and Eckington Limited [2015] Tonga LR 27 (SC); [2015] Tonga LR 31 (CA)). This was because the significant majority (76%) of the shares in Moapa were controlled by the Prasads who were not Tongan subjects. As a result Moapa’s business license was cancelled leaving it with assets, stock and, it is alleged, a large debt owing to Rampra for the supply of goods. To retrieve the situation Mr. Prasad arranged for the sale by Moapa of its business and assets to Luna’eva with Luna’eva assuming the indebtedness of Moapa to Rampra. To give effect to these arrangements two agreements were entered into contemporaneously which I shall refer to as the sale agreement and the management agreement.
[5] The sale agreement is between Moapa and Luna’eva. It states also that the Prasads joined in the agreement. The recitals record that Moapa was selling to Luna’eva the stock, fixtures, fittings, motor vehicles and goodwill of its business and that Luna’eva had assumed debt owed by Moapa to Rampra. The relevant provisions were:
[5.1] By clause 1 Moapa sold and transferred to Luna’eva its assets and purported to transfer the debt.
[5.2] Clause 2 stated that Luna’eva did not assume any obligation or liability of Moapa except for the assumed/transferred debt.
[5.3] By clause 3 the purchase price of the business was $750,000. The amount of $100,000 was credited as paid and the balance of $650,000 was payable by four installments of $162,500 on the 15th day of the months of May, June, July and August 2015.
[5.4] Schedule 1 lists the assets being purchased. The purchase price of $750,000 was the sum of the value of all the assets and consumption tax amounting to $4,103,050 less the amount of the debt said to be owing to Rampra of $3,353,050.
[6] The parties to the management agreement were Luna’eva and its director ‘Etiluna Mafi of the one part and Rampra and the Prasads’ son, Rulesh Prasad, of the other. The recitals record that Luna’eva had purchased the ‘Business’ of Moapa and acquired the debt owed by Moapa to Rampra amounting to $3,500,000 (a different figure than in the sale agreement). Importantly, it records also that Rampra only agreed that the debt was transferred to Luna’eva on condition that Rulesh Prasad or his nominees would have management control of the business. The other relevant provisions for present purposes are the following:
[6.1] By clause 1 the term of the management agreement was five years or until the debt was paid in full.
[6.2] By clause 2 the purposes of the management agreement were to ensure payment of the debt, to train Mr. Mafi in the management of the business and to maintain Rampra as a supplier to the business.
[6.3] Clause 3 set out certain rights and responsibilities which included that Mr. Mafi was not to be involved in the day to day operations of the business and Rulesh Prasad, either personally or by his nominee, was to be responsible for the smooth and profitable operation of the business. Restrictions were placed upon Luna’eva in respect to the payment of dividends and upon Mr. Mafi not to encumber assets of the business until payment of the debt was made.
[6.4] Clause 4 provided for payment of a management fee to Rulesh Prasad or his nominee of a minimum of 3.5% of the gross sales, which was payable monthly.
[6.5] Clause 5 provided that all expenses of the business were to be paid when due.
[7] Following execution of the sale agreement and management agreement Rampra appointed Sanjeet Nand and Justin Prasad to manage the business. No payments were made by Luna’eva to Rampra. That is not to say that Luna’eva paid nothing for the business. It has paid $355,000 to or for the credit of Moapa under the sale agreement.
[8] From around 10 June 2015 Luna’eva made it clear that it would not perform the management agreement. Mr. Mafi wrote to the Ministry of Foreign Affairs stating that it did not have work contracts in place with Sanjeet Nand and Justin Prasad. In addition, Luna’eva’s lawyer wrote letters to Sanjeet Nand forbidding him to enter Luna’eva’s premises and to Mr. Prasad advising him that he could not visit or attend Luna’eva’s premises except if he was visiting as landlord.
[9] Luna’eva says it took this action for a number of reasons. First, because Mr. Prasad was managing the business contrary to undertakings given to Government at the time Luna’eva applied for its business license. Secondly, that the management agreement was an illegal contract and thirdly, that demand had been made upon Luna’eva to pay a substantial tax debt owed by Moapa.
[10] On 27 August 2015 Mr. Mafi emailed Mr. Prasad in an effort to resolve the dispute that had arisen between Rampra and Luna’eva. He wrote:
As you have noted and agreed on the meeting of the 18th August, 2015, the Management Agreement with Mr. Rulesh Prasad is invalid and void. So any Payables or Accounts under Luna’eva undertaken by that Management is invalid.....
I am proposing the following:
Pay for the Rampra debt and duly identified and discounted to a more reasonable value...
[11] Mr. Mafi’s proposals were not acceptable to Mr. Prasad or Rampra.
[12] On 6 November 2015 Mr. Edwards (acting for Rampra and the Prasads) wrote to Mr. Niu (acting for Luna’eva) referring to stocktakes that were undertaken in April 2015 and September 2015. Relevantly for present purposes Mr. Edwards wrote:
The total value of stock provided by Rampra, according to the stock take figures enclosed, which stock was received by Luna’eva Enterprises Limited on the transfer date is T$1,807,431.00. The total stock value sold but remains unpaid by Luna’eva Enterprises Limited is T$1,317,123.00. Notwithstanding that amount the further stock supplied was T$198,245.00. Therefore the total amount due and owing from Luna’eva Enterprises Limited for the stock alone is T$2,005,676.00.
[13] The Prasad’s brought proceedings under CV 42 of 2015 against Luna’eva seeking, inter alia, specific performance of the sale agreement requiring Luna’eva to pay $2,005,676 for the goods. In a ruling of 10 August 2017 I held that Moapa’s obligation to pay any debt owed to Rampra had been discharged. In its place Luna’eva had accepted the obligation to pay such debt to Rampra under the management agreement. As the Prasads were not parties to the management agreement they had no right to sue under it and I dismissed their claim. No appeal was filed from that decision.
[14] Rampra relies upon the ruling as justification for the issue of the statutory demand. The statutory demand reads:
The Creditor hereby demands and requires payment of the sum of T$2,005,676.00....being sums due and owing to the Creditor for stock and goods supplied to the Debtor’s business ....which Debt is properly incurred and has not been paid for as set out in the judgment of Lord Chief Justice Paulsen in the matter of Prasad and Prasad v Luna’eva Enterprises Limited and Moapa Enterprises Limited (In Liquidation) CV 42 of 2015, where His Honour notes in the Judgment the following:-
The statute and principles
[15] The relevant statutory provisions for present purposes are ss. 296, 298 and 299 of the Companies Act 1995 which are materially the same as sections 287, 289 and 290 of the Companies Act 1993 (NZ). They read as follows:
296 Meaning of “inability to pay debts”
Unless the contrary is proved, and subject to section 297, a company is presumed to be unable to pay its debts if — (a) the company has failed to comply with a statutory demand; ...
298 Statutory demand
(1) A statutory demand is a demand by a creditor in respect of a debt owing by a company made in accordance with this section.
(2) A statutory demand shall —
(a) be in respect of a debt that is due and is not less than the prescribed amount;
(b) be in writing;
(c) be served on the company; and
(d) require the company to pay the debt or enter into a compromise under Part XIV or otherwise compound with the creditor or give a charge over its property to secure payment of the debt, to the reasonable satisfaction of the creditor, within 15 working days of the date of service or such longer period as the Court may order
299 Court may set aside statutory demand
(1) The Court may, on the application of the company, set aside a statutory demand...
...........
(4) The Court may grant an application to set aside a statutory demand if it is satisfied that —
(a) there is a substantial dispute whether or not the debt is owing or is due;
(b) the company appears to have a counterclaim, set-off or cross-demand and the amount specified in the demand less the amount of the counterclaim, set-off or cross-demand is less than the prescribed amount; or
(c) the demand ought to be set aside on other grounds.
(5) A demand shall not be set aside by reason only of a defect or irregularity unless the Court considers that substantial injustice would be caused if it were not set aside.
(6) In subsection (5), “defect” includes a material misstatement of the amount due to the creditor and a material misdescription of the debt referred to in the demand.
(7) An order under this section may be made subject to conditions.
[16] Luna’eva relies upon s.299(4)(a) (that there is a substantial dispute whether or not a debt is owing or is due). I will now refer to the following principles relevant to the application of that section for which I must acknowledge the leading text Companies and Securities Law in New Zealand 2nd Ed particularly at 31.2 and the ruling of Associate Judge Osborne in Joint Action Funding Ltd v Eichelbaum [2016] NZHC 2929. The principles are:
(a) A debt arises where there is money owing from one person to another and there is an existing obligation to pay that money.
(b) Consequently an unliquidated claim, such as a claim for damages, does not constitute a debt.
(c) A due debt is one that is due and payable by the company to the creditor serving the demand at the date of service of the demand.
(d) Consequently a debt is due only if the creditor is entitled to immediate payment from the company.
(e) Contingent and prospective debts, not being due debts, cannot be the subject of a statutory demand.
(f) It is up to the plaintiff seeking to set aside a statutory demand to show that there is an arguable and genuine and substantial dispute as to the existence of the debt. Put another way, the dispute cannot be fanciful or insubstantial.
(g) The mere assertion that a dispute exists is not sufficient. Material short of proof is required to support the claim that the debt is disputed.
(h) If such material is available the dispute should normally be resolved other than by means of proceedings in the Court’s Companies Act jurisdiction.
(i) It is not usually possible to resolve disputed questions of fact on affidavit evidence alone, particularly when issues of credibility arise
Discussion
[17] Rampra’s statutory demand will be set aside. I am going to explain my reasons relatively briefly because I do not expect that this decision will be the last time that these parties are before the Court in relation to the same matters and I do not to wish to be seen to be deciding finally arguments that may yet arise in those other proceedings.
The previous ruling
[18] The first issue relates to the ruling in CV42 of 2015. The statutory demand asserts in relation to the ruling that ‘His Honour notes’ that the goods provided by Rampra were valued at $2,005,676 and that Luna’eva was liable to pay the debt owed to Rampra. The first proposition is correct but, for reasons I shall come to, the value of the goods is not what is in issue. The second proposition is incorrect. The Court did not determine the amount of the debt nor did the Court consider any defences that Luna’eva would have available to it in an action brought against it directly by Rampra.
Is there a debt?
[19] The statutory demand is founded on a false premise. Rampra’s claim against Luna’eva is not for the supply of goods. It is primarily in respect of a debt that it alleges was assumed by Luna’eva under the management agreement. That debt is stated in the management agreement to be $3,500,000 but the statutory demand requires payment of the lesser sum of $2,005,676 (without explanation). This sum is made up almost entirely of the value of goods initially supplied by Rampra to Moapa but then sold by Moapa to Luna’eva under the sale agreement.
[20] Rampra’s approach incorrectly conflates the value of the goods and the existence (and amount) of a debt. It also assumes that Moapa had not made any payment to Rampra for the goods. This may not be the case and one would expect, given the credit terms said to have existed between Rampra and Moapa, that payments would have been made.
[21] Despite there having been a previous Court action concerning the same matters and the parties having filed affidavits Mr. Niu is still able to make the strong point that no document has ever been produced by Rampra to show that in the books of Rampra a debt was owed by Moapa (let alone a debt in respect of the supply of the goods). There is also no evidence of a demand having been made for payment of such a debt.
[22] On the state of the evidence I am satisfied that there is a substantial dispute as to the existence of the debt that is the subject of the statutory demand.
If there is a debt is it due for payment?
[23] The management agreement did not require Luna’eva to pay the debt immediately or on any particular date. The debt was to be paid within a period of five years and from the operation of Luna’eva’s business. The management agreement was stated to be irrevocable for the first five years or until the debt was paid in full (whichever came first). Luna’eva renounced the management agreement after only a few months and before any payment was made to Rampra.
[24] Faced with the obstacle that it is difficult to see how it can be argued that any debt owed by Luna’eva to Moapa is immediately payable Mr. Edwards submitted that Luna’eva was obliged to pay for the goods immediately (and not within five years) because the goods had been supplied by Rampra to Moapa on credit terms requiring payment in 30 days. I do not accept this argument. The terms of supply vis a vis Rampra and Moapa have no bearing on the obligations of Luna’eva under the management agreement.
[25] Mr. Edwards also referred me to clause 5 of the management agreement which provides that Luna’eva was to pay all expenses of the business on due date. He argued that this required Luna’eva to pay for the goods immediately. I do not accept this submission either as clause 5 clearly does not apply to the debt. Such an interpretation is not only inconsistent with the terms of the management agreement, such as clause 2a which says ‘the debt owed to Rampra is paid in full...within five years’, but it would render the management agreement largely redundant.
[26] There is clearly a substantial dispute that any debt owed by Luna’eva to Rampra is due.
The status of the management agreement
[27] Mr. Edwards’ argued that Luna’eva had terminated the management agreement but that presupposes that Luna’eva was entitled to do so, which is not in fact Rampra’s position. As I understand it, Rampra considers that Luna’eva acted unlawfully when it renounced the management agreement. I have noted above that the management agreement itself provided that it was irrevocable for five years or until the debt was paid.
[28] From Rampra’s perspective (which assumes Luna’eva had no right to renounce the management agreement) there can be only one of two circumstances prevailing. First, Rampra has not accepted Luna’eva’s renunciation and the management agreement remains binding on both parties. Secondly, Rampra has accepted Luna’eva’s renunciation as a recission of the management agreement and terminated it. If the management agreement remains on foot there is a substantial dispute both as to whether there is a debt owed and if it is due (for reasons set out in this ruling). If the management agreement has been terminated by Rampra then it is at an end and Rampra has a claim in damages not in debt (Johnstone v Milling (1886) 16. Q.B.D. 460). In either case the statutory demand cannot be sustained.
Was the debt acknowledged?
[29] Mr. Edwards’ next submission is that in his email of 27 August 2015 Mr. Mafi acknowledged the Rampra debt. I do not agree. In that email Mr. Mafi makes a clear statement that the management agreement was null and void before proposing terms of settlement. This is consistent with the argument that Luna’eva now advances that the management agreement was an illegal contract and unenforceable.
Was the management agreement illegal?
[30] This takes me to the question whether the management agreement was an illegal contract. Luna’eva argues that the management agreement is illegal in breach of the Foreign Investment Act and therefore unenforceable against it on well-established principles (Chitty on Contracts Vol 1, 204 at 16-007 and Holman v Johnson [1775] EngR 58; (1775) 1 Cowp 341).
[31] In Prasad anor v Leonard anors [2015] Tonga LR 31 the Court of Appeal said of the Foreign Investment Act at [21]:
Its scheme and purpose is plainly to reserve certain business activities exclusively for Tongan investors.
[32] Under s.3 of the Foreign Investment Act a foreign investment business is not entitled to carry on any business in the Kingdom which is a reserved or prohibited activity. The retailing activity of distributing grocery products for final consumption is a reserved activity under regulations made under the Act.
[33] Under s.5 a foreign investment business is required to hold a valid foreign investment registration certificate and unless it holds such a certificate it cannot obtain a business license. It is an offence to carry on business without a valid business license.
[34] The term ‘foreign investment business’ is defined as ‘a foreign investor carrying on any activity for the purpose of generating revenue in trade, commerce or industry and includes any trade, profession or calling’.
[35] ‘Foreign investor’ is defined as including a company incorporated outside Tonga and undoubtedly includes Rampra.
[36] Under s.15 any person who contravenes the Act commits an offence that is punishable by a fine of $10,000 and in default of payment to imprisonment for a period not exceeding 18 months.
[37] Mr. Niu argues that the management agreement was unlawful. It was, he says, an agreement under which in breach of the Foreign Investment Act Rampra (a foreign company) carried on the reserved activity of distribution at retail of grocery products for final consumption. He submitted that Rampra carried on the same business that Moapa had previously carried on and for which Moapa’s business license had been cancelled. He also notes that Rampra did not have a foreign investment registration certificate.
[38] Mr. Edwards argues that it was Luna’eva (a Tongan company) and not Rampra that was carrying on the business. He submits Rampra did not intend to breach the Foreign Investment Act and all that Rampra did was to protect its debt whilst at the same time continuing supply to Luna’eva. The supply of goods by a foreign company is not, he argues, a breach of the Act.
[39] I am satisfied that there is a substantial dispute as to whether the management agreement was illegal both in its formation and performance because of the following matters. Luna’eva acquired Moapa’s business. The business it acquired was an activity reserved for Tongan investors. Rampra is not a Tongan investor nor did it hold a foreign investment registration certificate. It was not lawful for Rampra to carry on the business. It is clearly arguable that it was Rampra and not Luna’eva that carried on the business in fact. Through Rulesh Prasad, who was appointed by the Prasads for the benefit of Rampra to manage the business, and the restrictions imposed on Luna’eva the management agreement conferred upon Rampra control over the business and operations of Luna’eva and its revenue. This was the intention of the management agreement as the recital reads ‘Rampra has agreed that the said debt to be transferred to the “Business”, on condition that Rulesh or his nominees will have management control of “The Business”’.
[40] Consistent with all of this, the primary purposes of the management agreement were to generate revenue for the payment of the debt said to be owed to Rampra and to maintain Rampra’s access to the Tongan market for its goods and was to subsist for at least five years or until the Rampra debt was paid in full.
[41] Mr. Edwards argues that if the Court finds that the management agreement contravenes the Foreign Investment Act that does not preclude Rampra from obtaining a remedy. He submits that Rampra is able to formulate a claim that does not require it to plead or rely on the alleged illegality but upon Rampra’s proprietary interest in the goods.
[42] Having carefully considered the arguments advanced by Mr. Edwards I have doubts about whether he is correct but if he is Rampra’s remedy will be in damages not the payment of a debt. Fundamentally, I am not presently concerned with whether Rampra may ultimately prevail and obtain a remedy against Luna’eva but whether there is a substantial dispute as to the existence of a debt that is both due and owing. I am satisfied that a substantial dispute exists.
The goods supplied after Luna’eva took over the business
[43] I have considered whether Rampra might have an undisputed demand for the value of goods supplied to Luna’eva by it after Luna’eva acquired Moapa’s business. Those goods were valued at $198,245. It appears to me that it must be arguable that this sum is irrecoverable also as tainted by the management agreement under which the goods were supplied.
Result
[44] Luna’eva’s application is granted and the statutory demand is set aside.
[45] Likewise the application that Rampra has filed to liquidate Luna’eva is dismissed.
[46] Luna’eva is entitled to its costs which are to be fixed by the Registrar if not agreed.
O.G. Paulsen
NUKU’ALOFA: 21 November 2017 LORD CHIEF JUSTICE
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