Commercial Factors Ltd v Meltzer concerned a funding agreement between Commercial Factors Ltd (CFL) and the liquidators of Blue Chip New Zealand Ltd (in liq) (Company) by which CFL agreed to lend $67,750 to allow the liquidators to obtain an opinion on the merits of claims against the Company's directors.
If proceedings were commenced, the Company was to pay 2.5% of any proceeds received to CFL. If the Company did not commence proceedings but otherwise received funds, the agreement stipulated CFL's right to repayment after any liquidator costs.
The liquidators commenced but then discontinued proceedings. Following liquidator realisations of $525,350.44, CFL sued the liquidators to recover CFL's funding. The liquidators, as defendants, applied for summary judgment and strike out against CFL.
At issue was the meaning of 'commence proceedings'. The discontinuance had exposed a loophole in the agreement. With no prospect of any proceeds from a commenced and discontinued proceeding, the liquidators argued there was no obligation to repay CFL under the agreement.
The Court interpreted 'commence proceedings' broadly to mean 'start and continue', not solely the initial filing of a statement of claim.
In addition, before the liquidators had filed proceedings the Company had received approximately $27,000 that was not earmarked for litigation. This receipt triggered the duty to pay CFL that amount less the liquidators' costs under the agreement.
Accordingly, as there was an arguable case between the parties, the Court dismissed the liquidators' summary judgment application.
See the Court's decision here.