3i Innovation Limited v Black Magic Design Studio Limited
[2020] NZHC 1173
•29 May 2020
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2020-404-458
[2020] NZHC 1173
BETWEEN 3I INNOVATION LIMITED
Plaintiff
AND
BLACK MAGIC DESIGN STUDIO LIMITED
Defendant
Hearing: 25 May 2020 Appearances:
M J Fisher and J Yoon for the Plaintiff E J Grove for the Defendant
Judgment:
29 May 2020
JUDGMENT OF MUIR J
This judgment was delivered by me on Friday 29 May 2020 at ……..
pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar Date:…………………………
Counsel:
M J Fisher, Barrister, Auckland J Yoon, Barrister, Auckland
E J Grove, Barrister, Auckland
Solicitors:
J D Ryan, Claymore Partners Limited, Auckland S A Rohde, Lateral Lawyers Ltd, Auckland
3I INNOVATION LIMITED v BLACK MAGIC DESIGN STUDIO LIMITED [2020] NZHC 1173 [29 May
2020]
Introduction
[1] The applicant 3I Innovation Limited (3I) seeks to set aside a statutory demand dated 28 February 2020, initially issued in the name of Black Magic Design Limited, but progressed in the name of Black Magic Design Studio Limited (BMDSL). BMDSL is a company registered in the United Kingdom.
[2] The statutory demand is in the amount of GBP 15,810.00, reflected in the following invoices. All relate to the provision of industrial design services.
Date Invoice Number Amount (a) 3 April 2019 079 £ 2,115.00 (b) 20 May 2019 080 £ 2,070.00 (c) 6 June 2019 081 £ 1,110.00 (d) 4 July 2019 082 £10,395.00 (e) 12 July 2019 083 £ 30.00 (f) 15 July 2019 084 £ 60.00 (g) 15 July 2019 085 £ 30.00
[3]3I says:
(a)At no stage was it in a contractual relationship with BMDSL.
(b)Invoice 082 relates to a bonus which was never payable because it was conditional on an event which never occurred.
(c)Invoices 079, 080 and 081 include attendances which were “off piste” or “off-leash” in the sense that they related to design work which was not specifically authorised and/or that they related to emails, phone calls and discussion documents when 3I’s only obligation was to pay for design work. It says that the only sum properly payable in respect of the three invoices (assuming BMDSL is the party entitled to recovery) is £825.00.
(d)It has a counterclaim for NZD 14,959.34 as a result of BMDSL’s wrongful retention of intellectual property in certain drawings which it was required to recreate in New Zealand.
The Law
[4] There are three grounds on which an application to set aside a statutory demand can be satisfied. Section 290 of the Companies Act 1993 (the Act) states:
290 Court may set aside 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; or
(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] In this case the application is made under s 290(4)(a), but 3I also alleges a set- off, albeit of itself insufficient to extinguish all of the alleged debt.
[6] The following principles applicable to s 290(4)(a) were affirmed by the Court of Appeal in AAI Ltd v 92 Lichfield Street Ltd (in rec and in liq):1
(a)The applicant must show that there is arguably a genuine and substantial dispute as to the existence of the debt.
(b)The mere assertion that the dispute exists is not sufficient. Material short of proof is required to support the claim that the debt is disputed.
1 AAI Ltd v 92 Lichfield Street Ltd (in rec and in liq) [2015] NZCA 559, [2016] NZAR 1338 at [19].
(c)If such material is available, the dispute should normally be resolved other than by means of proceedings in the Court's Companies Act jurisdiction.
[7] In making an application under s 290(4)(a) the applicant need only demonstrate a “fairly arguable”2 basis to the alleged dispute. If it can do so then no statutory presumption of insolvency arises from non-payment of the amount specified in the demand. The onus of establishing the dispute is on the applicant.3 In AAI Ltd v 92 Lichfield Street Ltd (in rec and in liq) the Court of Appeal summarised the applicant’s task:4
What the applicant must show is that the dispute it raises has substance; the applicant must explain to the court what the dispute is; and the dispute so shown must be a real and not a fanciful or insubstantial dispute.
[8] The Court is not required to accept without question a bare assertion of facts, or “whatever unvarnished statements may happen to be made on affidavit”,5 and the debtor company must point to evidence, short of proof, of its claim.
[9] If a substantial dispute is found to exist, it is not the Court’s task to resolve it, as an application to set aside a demand is a summary hearing which “should not be converted into a full-blown trial”.6
[10] A demand will not be set aside by reason only of some defect or irregularity, unless the Court considers that substantial injustice would be caused if the demand were not set aside.7 A “defect” is considered to be a material misstatement of the amount due to the creditor, or a material misstatement of the debt referred to in the demand.8 Additionally, statutory demands have been allowed to stand in lesser
2 Forge Holdings Ltd v Kearney Finance (NZ) Ltd HC Christchurch M149/95, 20 June 1995; United Homes (1998) Ltd v Workman [2001] 3 NZLR 447 at [32].
3 JP & BM Holdings Ltd v Commissioner of Inland Revenue HC Auckland CIV-2010-404-5208, 26 November 2010, at [7].
4 AAI Ltd v 92 Lichfield Street Ltd (in rec and in liq) [2015] NZCA 559, [2016] NZAR 1338 at [22], referring to Re A Company [1991] BCLC 737 at 740.
5 United Homes (1988) Ltd v Workman [2001] 3 NZLR 447 (CA) at [34].
6 AAI Ltd v 92 Lichfield Street Ltd (in rec and in liq) [2015] NZCA 559, [2016] NZAR 1338 at [22].
7 Companies Act 1993, s 290(5).
8 Companies Act 1993, s 290(6).
amounts to reflect items that are not subject to dispute.9 This allows for situations where only part of the demand is disputed.
Is there a fairly arguable case that 3I was not in contractual relationship with BMDSL?
[11] As indicated, the statutory demand initially issued in error in the name of Black Magic Design Limited. This error was identified when the matter came before Lang J on 8 May 2020. Although the Court’s minute of the same date acknowledged BMDSL as the respondent, the matter was not otherwise addressed.
[12] I do not consider it appropriate to set aside the statutory demand on this basis alone. Section 290(5) of the Act confirms that only in the case of substantial injustice is it appropriate to set aside demands by reason of defect or irregularity. The case is one of “misnomer” in respect of which this Court said in Registered Securities Ltd (in liq) that the key issue will be whether the mistake has caused confusion or prejudice.10 A relevant factor will often be whether the demand was issued in the name of an existing entity or person because that may reflect a conscious decision which will not be the case if the named party does not exist. That occurred in Registered Securities. As the Court observed:11
Here there were two distinct entities. The case may therefore be contrasted with those of error in name where only one entity was in existence and can have been intended.
[13] No company by the name of Black Magic Design Limited was registered in the United Kingdom at the time a statutory demand was issued. BMDSL’s managing director, Mr Sterling, had previously been involved with a New Zealand company of that name, but it was deregistered in 2012 when Mr Sterling moved his business interests offshore. The only company registered in the United Kingdom with the words “Black Magic” and “Design” and which had any recorded association on the Register with Mr Sterling was BMDSL.
9 United Homes (1988) Ltd v Workman [2001] 3 NZLR 447 (CA) at [46].
10 Registered Securities Ltd (in liq) v Jensen Davies & Co Ltd (1998) 12 PRNZ 109 at 111.
11 At 113.
[14] I am satisfied therefore that the incorrect identification of Black Magic Design Limited in the statutory demand does not of itself create a sufficiently substantial injustice for the demand to be set aside. Mr Fisher does not in fact argue to the contrary.
[15] That, however, is not an end of the matter because 3I says that at no stage did it have a contractual relationship with BMDSL.
[16] There is no formal written contract in respect of the design services for which the relevant invoices were raised. 3I and its managing director, Mr Maud, have clearly had a long association with various businesses operated in New Zealand, the United Kingdom and Spain by Mr Sterling. From time to time the relationship between Mr Maud and Mr Sterling appears to have had its difficulties, only for it to be subsequently rehabilitated.
[17] The extensive materials exhibited to the respective affidavits evidence at least three occasions when the parties have done business over the last eight years. On 31 May 2012 there are email exchanges between Mr Maud and Mr Sterling relating to a project ostensibly involving pool lighting. Mr Maud’s email set out “terms and conditions” which he described as those on which 3I engaged “all consults”. These included terms that “All time spent on each and every project task is agreed in advance and that any intellectual property created as part of the contract including “drawings, specifications and prototypes” would be owned by 3I. Mr Sterling responded to the proposal by stating “I agree with these conditions for this phase of the consultancy”. The email was signed Richard Sterling and included a Black Magic Design logo. There was no reference to any corporate entity.
[18] Three years later, in March 2015, Mr Maud again sought to engage Mr Sterling’s services. He prepared a nondisclosure agreement which was signed by Mr Sterling on 30 March, with the identifier “CEO Black Magic Design Studio”. Again, no corporate entity was named and subsequent correspondence between the parties, including exchanges in respect of a fees dispute, is consistent with the provision of services by Mr Sterling in a personal capacity.
[19] In February 2016 Mr Sterling incorporated BMDSL in the United Kingdom. It remained registered until July 2018 when it was struck off. It has since, however, been restored.
[20] The subject contract was entered into in May 2018. As on previous occasions, Mr Maud first sought certain protections for 3I. His letter of 14 May said that 3I had been approached by a “LARGE innovative business – as big as you get”, asked whether Mr Sterling was “interested” and attached a confidentiality and noncompete agreement and a nondisclosure agreement. The first identified the “recipient” as Black Magic Design Studio and Richard Sterling”. It had provision for signature “for and on behalf of the Recipient”. The mutual nondisclosure agreement identified Black Magic Design Studio and Richard Sterling” as respectively “Company” and “Person”. The execution provisions were in the name of “Black Magic Design Studio/Richard Sterling”.
[21] Both documents were signed by Mr Sterling on 15 May 2018. Under his signature on the mutual disclosure agreement are the typed words:
Name: Richard Sterling Title/Function: Director Date: 15/05/18
The evidence does not establish who inserted these details into the document.
[22] On 25 May 2018 Mr Maud forwarded to Mr Sterling, what he described as “the Brief”. His email started by confirming arrangements for remuneration in the following terms:
We agreed £60 per hour Plus an additional £60 per hour if SWL [Sidewalk Labs] orders at (sic) demo system (the extra payment to match SWL payment).
[23] The target date was specified as 28 May (Spanish time) “or well before”. Two options were laid out.
[24] Before me, both parties proceed on the basis that these contractual arrangements provided the template for further design work beyond the SWL project
and including the “Street Walk”, “Stripe Lighting” and “Scooter” projects, referred in invoices 079, 080 and 081.
[25] None of the invoices for which recovery is sought are issued in the name of BMDSL. All bear the Black Magic Design logo and a footer stating “Black Magic Design – London – Gibraltar”. Some of the design/project materials delivered to 3I in respect of the relevant projects are marked as copyrighted to “Black Magic Design Studio – London” but there are also technical drawings which bear the name Black Magic Design Limited.
[26] It is common ground that it was not until 11 July 2019 that BMDSL provided 3I with terms and conditions identifying BMDSL as the contracting party. These were never agreed to. By that time the parties were in dispute.
[27] Mr Fisher also submits as highly relevant the fact that for the period 24 July 2018 to 18 December 2019 (between which dates the work identified in all the “non- bonus” invoices was performed) BMDSL was struck off the Register. He acknowledges that under s 1028(1) of the Companies Act 2006 (UK) the effect of the restoration was “as if it had not been dissolved …” but submits that the restoration occurred on the basis that the company “had never traded”.
[28] That submission relies on the fact that, as part of the restoration process,12 Mr Sterling filed “dormant company accounts” on Companies Office form AAOZ which in its terms provides that:
The attached template for dormant company accounts is only suitable for these companies limited by shares which have never traded and where the only transaction entered into the accounting records of the company is the issue of subscriber shares.
(Emphasis added)
[29] Based on this document it is far from “fanciful” to suggest that, although in the words of s 1025(2) of the UK statute, the company was “in operation at the time it was
12 Section 1025(5) of Companies Act 2006 (UK) provides, as a condition of administrative restoration, that the applicant deliver to the registrar “such documents as are necessary to bring up to date the records kept by the registrar”.
struck off”,13 it was not “carrying on business” and therefore appropriately considered a party to any contract.
[30] Based on this and the other evidence I have identified, I conclude that there is a sufficiently substantial dispute about whether 3I ever contracted with BMDSL that the company is unable to sustain its statutory demand. Indeed, the totality of the evidence appears to favour the conclusion that the counterparties to the contract were 3I and Mr Sterling personally, the latter trading as Black Magic Design Studio. It is not necessary, however, that I resolve this issue finally. It will be a matter for another court and another day.
[31] This conclusion is sufficient to dispose of the application before me. However, in the event I am wrong I go on to make brief observations in respect of the other matters raised by 3I.
The invoice for the bonus payment (Number 082)
[32] As indicated, the agreement between the parties (confirmed by the email of 25 May 2018) provided for paying an additional £60 per hour “if SWL orders at (sic) demo system (the extra payment to match SWL payment)”. The invoice for the bonus payment was raised on 4 July 2019. By that date differences had emerged in respect of the previous three invoices totalling £5,295.
[33] In respect of whether the precondition for payment of the bonus was satisfied, Mr Maud deposes:
The incentive offered was a bonus which would become payable if Sidewalklabs (sic) were to agree to undertake a pilot project, provided that 3I received payment from Sidewalklabs (sic) for the project. As events have transpired Sidewalklabs (sic) has not done a pilot project. It follows that the pre-conditions to the payment of the bonus have not occurred and Mr Sterling has no entitlement to receive a bonus payment. I interpolate that 3I did not actually use Mr Sterlings design for the Sidewalklabs (sic) project as the design was unworkable.
13 Section 1025(2) of the Companies Act 2006 (UK) provides as a “first condition” of administrative restoration that “the company was carrying on business or in operation at the time of its striking off” (emphasis added).
[34] In addition, Mr Maud exhibits an email from Mr Andrew Miller of Sidewalk Labs dated 12 May 2020 in which he advises:
As you may have heard Sidewalk Labs has withdrawn from the Keyside project in Toronto. There has been lots of media coverage of this but you can read the official statement from us via our CEO here if you are so inclined.
As a consequence we no longer will pursue a Green Way system for the neighbourhood. I am sorry that your efforts to help shape up a proposal were wasted…
[35] There is no evidence before the Court which contradicts Mr Maud’s position that the “demo system” (referred to him as a “pilot project”) was never undertaken or “ordered” by SWL.
[36] BMDSL relies on an email exchange between Mr Maud and Mr Sterling immediately after the invoice was raised which Mr Grove says reflects adversely on the credibility of what Mr Maud is now saying. He notes that Mr Maud’s immediate response was to question the existence of any bonus agreement, not whether the pre- condition had been satisfied.
Sorry, I have no understanding or records of your so called bonus payment. On that basis your invoice is incorrect and disputed.
[37] Mr Sterling responded, threatening legal action and setting out the relevant provisions in the 25 May 2018 email, to which Mr Maud responded:
I have no record of that email.
Therefore again I assume you are making up things up (sic).
[38] Mr Maud’s response may ultimately assist in efforts to undermine his credibility but he has chosen formally to go on oath, with all the associated implications, and to deny that any demo system or pilot project was ever commissioned. Although this Court is not under any obligation to accept whatever unvarnished statements may happen to be made in an affidavit, there is some support (although not decisive) in the recent email correspondence from Sidewalk Labs. In the absence of evidence to the contrary, the threshold of a real and not fanciful or insubstantial dispute is again satisfied.
The other accounts
[39] 3I claims that the balance of the accounts, except to the extent of £825.00, relate to services which are “outside the scope of works” and “were not authorised”.
[40] The genesis of this dispute can be seen in an exchange of correspondence immediately after receipt of Mr Sterling’s invoice of 4 March 2019 (for services rendered in February). The invoice was for £4,005.00. It was paid and does not feature in the debts allegedly owing. However, the day after it was submitted Mr Maud wrote to Mr Sterling recording his concerns:
I saw your last invoice.
I cannot fund you off leash. I would like to but I can’t. We need to pre-agree work in advance and cap costs.
I will go broke otherwise. Sorry.
[41]Mr Sterling responded on 6 March 2019 saying:
Okay, no problem.
At the moment we have 3.25 hours for the month…
[42] The issue resurfaced on 21 May 2019 when Mr Maud wrote to Mr Sterling saying:
Hi Richard
Just talked to Thomas.
The NZ design team discussed the aspects of the new product 2-3 weeks ago. We decided on a few changes to complete and highlighted these changes.
Your reply is off piste.
You have completed redesigned components and made design arguments well beyond our suggested changes.
WE need to look at the economics of this work.
From here on – stop work – until further notice/instructions. New instructions will be clear and concise (hopefully).
We then agree the scope of work and agree associated time allocated. Then complete as agreed.
This process is important to capture any work under the Grant. Kind regards,
Charles Maud
[43] Later, on 2 July 2019, Mr Maud took a somewhat different point, observing in respect of invoices 079, 080 and 081:
We reviewed your invoices.
We note that you have included items that we did not agree to pay and is at odds with our arrangement. In particular you have included administration costs, emails, phones and discussion documents. These items are your cost. The work for which we pay is limited to design.
We have calculated the overcharging in the amount of £4,470.00. We believe that the amount due by us is £825.00.
Please just give an adjusted invoice and we will settle that account by the end of the week in full and final settlement.
We need all the files as requested. This is normal practice and is the only way it works for us.
[44] Ostensibly therefore the deductions which he considered appropriately made from the accounts related to attendances which were not “off piste” or “off leash” in the sense of relating to work outside scope, but were for attendances Mr Maud considered he had no payment obligation, because they were incidental to design work.
[45] It is unclear on the documents before me precisely what attendances could appropriately be charged for. There is certainly evidence that in respect of a proposed transaction in 2011, identified as “the Japan concept”, Mr Maud stated to Mr Sterling “I do not commission work on an hourly basis” but as the email of 25 May 2018 confirms, that is precisely the basis on which the contractual arrangements relevant to BMDSL’s current claims proceeded. In the context of 2015 arrangements Mr Maud is also on record as telling Mr Sterling14 that “As you appreciate (sic) cannot control
14 Email of 11 March 2015.
your time and my arrangement was output based”. But it would in my view be unsafe to conclude that this was necessarily a term of the 2018 arrangements particularly because, as Mr Grove points out, previous invoices, as for example the one raised on 10 November 2018, included components of the type now disputed and these were paid.15
[46] 3I does not establish to my satisfaction that it had no obligation to pay for Mr Sterling’s “administration costs, emails, phone calls and discussion documents” but neither is it at this stage required to. It can however point to some evidence in support of its position. Had it been decisive in terms of outcome it would have been a marginal call. It is not however.
The counterclaim/set off
[47] Documents and correspondence associated with 3I’s prior (2012 and 2015) engagement of Mr Sterling strongly support its retention of intellectual property in all drawings, plans and models commissioned by it.
[48] I have already referred to the formal terms of contract submitted by 3I in the context of the 2012 engagement which were accepted by Mr Sterling. Likewise in the context of the parties’ dealings in 2015 Mr Maud advised that:
I am sorry but for 3I you having any IP is a NO GO.
[49] In my view there is a real, and not fanciful or insubstantial basis for suggesting that, by course of conduct, such a term came to be included in the parties’ 2018 arrangements.
[50] At the point differences emerged in respect of the quantum of accounts 079, 080 and 081 (for respectively attendances in March, April and May 2019), there were also tensions about delivering up relevant IP. On 26 June Mr Maud stated:
A part of the delivery of work, is the proper handover of the files – so on that basis alone the work is not complete as you suggest and therefore remains outstanding.
15 For example attendances identified as “Review email and reply 1.5 hours”, “Skype Charles [Maud] 0.5 hours”.
[51] In his affidavit in opposition Mr Sterling acknowledged that design files which “include updates comprising the work that 3i has not paid for have not yet been sent to 3i. That is our (my and BMDS’s) practice. We don’t deliver final/electronic designs until payment is made”.
[52] There is in my view a genuine and substantial dispute as to whether, in asserting such right of retention, Mr Sterling and/or BMDSL were in breach of contract and therefore liable for any resultant loss.
[53] Mr Maud deposes that in consequence of the retention, 3I was required to redraft relevant technical drawings engaging both an external designer and employing an additional staff member to do so. The following table is then set out.
People engaged in redrafting of the technical drawings
Hours worked
Rate (per hour)
Cost (to date)
Charles Maud 5 $72.00 $360.00 Thomas Moulder 15 $61.64 $924.60 Taimoor Khan 538.8 $25.38 $13,674.74 Total 558.8 n/a $14,959.34
[54] I infer in this respect that Mr Moulder was the external contractor engaged by 3I and Mr Khan the “additional staff member”.
[55] There is no documentary support for the counterclaim at this stage but I am conscious of the fact that applications to set aside should not be converted into full blown trials and that some balance is necessary in terms of the Court’s requirements for proof to civil standards on an application to set aside. It may ultimately be that Mr Maud’s time and attendance is not recoverable on the basis that his salary is a fixed and not variable cost. Further investigation may result in challenges to the time attributed to Messrs Khan and Moulder. But again those are arguments for another day.
[56] I conclude that 3I meets the threshold of establishing a sufficiently genuine and arguable cross-claim to answer approximately half of the sum claimed against it by BMDSL. Ultimately, however, such finding is not decisive having regard to my earlier conclusions.
Result
[57] I set aside the demands under s 289 of the Companies Act 1993, served on the applicant by the respondent on 2 March 2020.
[58] In making that order I note Mr Fisher’s undertaking on behalf of 3I that it will co-operate in prompt adjudication of BMDSL/Mr Sterling’s claims by the Disputes Tribunal (including a waiver as to jurisdiction) should BMDSL/Mr Sterling choose to advance their claim in that forum. Given the small sums involved, Mr Sterling’s overseas residence and current restrictions on travel, I impose under s 290(7) of the Act a condition on the order setting aside statutory demand that such co-operation extend to facilitating Mr Sterling’s attendance at any hearing by way of AVL link (if available).
Costs
[59] Mr Grove asks that these be reserved pending discussion between counsel. In the absence of agreement memoranda (maximum three pages) may be filed on the following timetable:
(a)Memorandum of applicant to be filed and served by 18 June 2020.
(b)Memorandum of respondent to be filed and served by 25 June 2020.
[60]Provisionally I regard a 2A allowance as appropriate.
Muir J
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