A Automotive Limited v Motohaus AG 2008 Limited
[2018] NZHC 1064
•16 May 2018
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2017-404-2836 [2018] NZHC 1064
BETWEEN A AUTOMOTIVE LIMITED
Plaintiff
AND
MOTOHAUS AG 2008 LIMITED
Defendant
Hearing: 4 May 2018 Appearances:
A J Steel for the Plaintiff
C F L Godinet for the Defendant
Judgment:
16 May 2018
RESERVED JUDGMENT OF ASSOCIATE JUDGE SMITH
[1] On 30 November 2017, the plaintiff applied for an order putting the defendant into liquidation. The claim was based on the defendant’s alleged failure to comply with a statutory demand issued under s 289 of the Companies Act 1993 (the Act), demanding payment of the sum of $23,609.94 said to be owing for rent on a property at Newton Road, Grey Lynn (the premises).
[2] The defendant has filed a statement of defence to the liquidation claim, and it has also filed an interlocutory application seeking a permanent stay of the liquidation proceeding. The application for a stay was filed three working days after the time allowed by r 31.11 of the High Court Rules for filing such applications, so the defendant included in an amended stay application an application for an order extending the time to file the stay application. The time extension application was not opposed for the plaintiff, and I made an order at the hearing extending the time for filing the stay application to the date of actual filing of the amended application.
A AUTOMOTIVE LIMITED v MOTOHAUS AG 2008 LIMITED [2018] NZHC 1064 [16 May 2018]
[3] The liquidation claim has been advertised, but the defendant has nevertheless elected to pursue its application for a permanent stay, rather than defend the liquidation claim on the basis of the statement of defence filed.
[4]I now give judgment on the defendant’s stay application.
Background
[5] The defendant operates a motorcycle repair business, and acts as a distributer of motorcycle accessories and tyres. Its sole director is Mr Adrian Jordan.
[6] In the latter part of 2017, the defendant operated its business from premises in College Hill Road, Auckland. Mr Jordan wanted more space, and began looking for alternative premises. He found the premises, and he inspected the premises twice in July 2017.
[7] The premises are owned by a company called TWM Properties Ltd (TWM). The plaintiff held a lease from TWM, and it was using the premises as an auto transmission workshop, with four vehicle hoists fixed to the floor of the workshop area.
[8] The real estate agent dealing with the matter on behalf of plaintiff was Mr Anthony. Mr Jordan concluded that the premises would meet his requirements, and he told Mr Anthony that he wanted to move in by 1 August 2017. At the time, the 1 August date was thought to be achievable, and there were discussions about the plaintiff leaving some chattels, including the rear vehicle hoist, retail counter, a lathe and some air lines.
The first Agreement
[9] Mr Anthony drew up a formal agreement to lease between the plaintiff and the defendant, and the agreement to lease (the first Agreement) was completed on 12 July 2017.
[10] The first Agreement provided for a commencement date of 1 August 2017. The defendant paid the first instalment of rent ($5,416.66 plus GST) on 12 July. The second instalment, of the same amount, was due on 1 September 2017.
[11] The lease was to be in the Auckland District Law Society’s form of Deed of Lease, amended in accordance with the first Agreement. The parties were to be bound by the terms, covenants, and conditions in that form of Deed of Lease notwithstanding that they might not have executed any Deed of Lease.
[12] The defendant’s use of the premises was to be for “Motorcycle Mechanical and Retail”. Certain chattels were to remain in the premises, including a hydraulic hoist, a lathe, and air lines from compressor to outlets. These were to remain the property of the plaintiff.
[13] The defendant went ahead and made arrangements for the installation of a telephone system, internet, computer, and alarm system for the premises.
[14] Mr Jordan said that on 1 August 2017 the plaintiff had not removed all the equipment, gear, parts and machinery that it was supposed to remove from the premises. Nor had it cleared the cars from the workshop. Vehicle hoists remained in place, and electrical wiring from the oil tanks was dangling from the ceiling to the workshop with a sign saying “Danger – live wire”. According to Mr Jordan, Mr Anthony told him that Mr Browne of the plaintiff would attend to this, as it was a safety hazard.
[15] Property of the plaintiff that should have been removed remained in the premises as late as 10 August 2017, when Mr Jordan met Mr Browne. Mr Jordan said that Mr Browne appeared to be in no hurry, despite Mr Jordan urging that it was past the commencement date under the first Agreement and that the delay was costing him money.
The second Agreement
[16] Mr Jordan and Mr Browne then agreed to cancel the first Agreement and enter into a new one. Further time would be allowed for the plaintiff to move out
completely. Mr Jordan contends that it was essential that he have a firm date to enter the premises to commence business, and his evidence was that he made that clear to Mr Browne.
[17] Mr Anthony prepared a further form of agreement to lease, and it was signed on or about 14 August 2017. The new agreement to lease (the second Agreement) used the same standard form.1 It provided for a term of 30 months, and a commencement date of 1 September 2017, and the permitted business use of the premises remained “Motorcycle Mechanical Retail”. The deposit payable under the first Agreement was credited to the rent payable under the second Agreement, and the second rent instalment was payable on 1 October 2017. None of the chattels agreed to be left in the premises under the first Agreement were included in the second Agreement, and the following new provision appeared in the second Agreement:
13.0 CHATTELS WITHIN THE BUILDING
The sub-landlord [the plaintiff] agrees that if any chattels that are remaining within [the premises] upon inspection for handover on the 31st August 2017 shall transfer into the hand of the Head Landlord [ie TWM].
The pre-commencement inspection
[18] Mr Jordan arranged to inspect the premises on 31 August 2017. He met there with Mr Stacy McGovern, the director of TWM. Mr Anthony was also present.
[19] Mr Jordan said that they were unable to get into the premises. He described a chaotic situation, with people trying to remove items, equipment, and parts. He said these people left the premises in a mess – there were still live wires that had not been secured or made safe, and the “danger” sign attached to the wiring was still there.
[20] Mr Jordan said that the office area had been destroyed. The counter had been removed, and all the hardwiring of the telephone system and cables had been ripped out. Electrical wiring was left exposed on the floor. The communications systems, computer and internet, and alarm monitoring system that the defendant had installed
1 The Auckland District Law Society Form of Agreement to Lease, Fifth edition 2012(3).
under the first Agreement had been ripped out completely, and were strewn on the floor.
[21] Mr Jordan said that he called Mr Browne immediately, and Mr Browne commented only: “The builder did it.”
[22] Mr Jordan said that he and Mr McGovern went upstairs to inspect the first level at the premises. The bare flooring was soaked in oil, and the walls were smeared with oil. He said the oil was tracked throughout the entire floor, including the stairs and carpet to the exit.
The defendant cancels the second Agreement
[23] On the morning of 1 September 2017 Mr Jordan called Mr Anthony’s number and left a message. Mr Jordan’s evidence was that, when Mr Anthony returned the call, he told him that he was cancelling the second Agreement because the premises were not vacant for him to enter and they were not tenantable.
[24] According to Mr Jordan’s account, Mr Anthony phoned him back about an hour later and told him that the defendant had no right to cancel the second Agreement.
[25] The defendant’s case is that it was entitled to cancel the second Agreement, and that no rent is owing to the plaintiff. It contends that it was an essential term of the second Agreement that the defendant would be able to move in and take possession of the premises on 1 September 2017, and that the plaintiff breached that essential term. Alternatively, it says that the premises were unsafe, or otherwise in such a poor condition that the defendant was entitled to cancel.
Evidence of solvency
[26] An affidavit in support of the application for a stay order was provided by the defendant’s chartered accountant, Mr Johnston. Mr Johnston had collated financial information for the defendant as at 30 November 2013, and he produced a management report as to the defendant’s financial performance.
[27] Mr Johnston produced a copy of a statement of financial performance and a statement of financial position for the defendant. The statement of financial performance, for the eight months to 30 November 2017, showed an operating profit of $71,920. The corresponding figure for the 12 month period ended 31 March 2017 was a net loss of $457. The statement of financial position as at 30 November 2017 showed net assets of $36,170, including stock-on-hand at $198,561 and intangibles of
$50,000. Property, plant and equipment were included at $37,787. The statement of financial position as at 31 March 2017 showed a negative equity of $35,750.
Affidavits for the plaintiff
[28] A number of affidavits were filed by the plaintiff in opposition to the stay application.
[29] In his affidavit, Mr Browne said that in the first part of 2017 he decided to close down the workshop at the premises, and transfer the plaintiff’s clients to its workshop in Glenfield. He was happy with the terms of the first Agreement, and shortly after signing the first Agreement he began moving stock and equipment out of the premises.
[30] Mr Browne said that in late July 2017 he spoke to Mr Jordan and told him that there was possibly going to be a slight delay in removing the hoists from the premises. He said that Mr Jordan told him that he was relaxed about that, and it would not be an issue if the plaintiff did not have the hoists and transmission parts (which were stored upstairs) fully moved out by 1 August 2017, as long as the defendant was able to move some motorbikes into the premises by then.
[31] Mr Browne said that he had a call from Mr Jordan on the morning of 1 August 2017, in which Mr Jordan complained that two vehicles had been left in the premises, and some transmission parts had been left upstairs. Mr Browne removed one of the vehicles, and made arrangements for the hoists and the gear to be removed within the following week. Mr Browne said that on 7 August 2017 he told Mr Jordan (via Mr Anthony) that the hoist removal had been organised, and that Mr Jordan should feel free to move the second of the two vehicles out onto the street. Mr Browne said that he did not understand those to be major issues.
[32] A meeting with Mr Jordan was scheduled for 9 August 2017 to discuss progress, but it had to be cancelled at the last minute.
[33] Mr Browne said that the defendant was offered a credit of two weeks’ rent for any inconvenience resulting from the hoists not having been removed. There was no agreement on that, but eventually agreement was reached for the commencement date of the lease to be deferred to 1 September 2017. Mr Jordan did not want any of the items the plaintiff had previously agreed to leave in the building as landlord’s fixtures.
[34] Mr Browne said that after he signed the second Agreement he telephoned Mr Jordan and told him that the premises would be empty by 31 August 2017. In the meantime, the defendant was left with the keys to the premises, and it moved more than 30 motorbikes into the workshop at the premises (contrary to a request that the defendant not move any more items into the premises before 1 September, so that the removal of the hoists would not be obstructed).
[35] Mr Browne said that on several occasions after 11 August 2017 Mr Jordan contacted him complaining about “faulty wiring”, and that several lightbulbs he had installed were not working. Mr Browne said that it turned out that Mr Jordan had installed the wrong bulbs.
[36] Mr Browne arranged for the reception desk (which the defendant did not want) to be removed by a contractor, and for the contractor to make some minor repairs to the premises. Unfortunately, during the removal of the reception desk, the contractor removed some wires from a telephone connection point on the wall. That damaged the defendant’s telephone installation.
[37] Mr Browne confirmed that Mr Jordan telephoned him when Mr Jordan was at the premises on 31 August 2017, and told him that the wiring for his telephone and internet connections had been damaged in the course of the removal of the reception desk. Mr Browne said that this was the first time he had been aware of problems with the telephone system caused by the builder. He immediately agreed that the telephone connection needed to be fixed, and that the plaintiff would meet the cost of the repairs. He said that Mr Jordan shouted at him on the telephone, but eventually calmed down
and agreed that the problem could be repaired the following day. Mr Browne said that Mr Jordan and he agreed to speak the next day, and that Mr Jordan agreed that he was happy for an electrician Mr Browne had arranged to have access to repair the light switch and the extension cord.
[38] Mr Browne said that he went to the premises on 1 September 2017 after he had heard from Mr Anthony that Mr Jordan had purported to cancel the second Agreement. He inspected the telephone connection. In his view, the damage appeared to be minor and repairable. He and Mr Anthony then went to the defendant’s College Hill premises to discuss the situation, but Mr Jordan was not there. Mr Browne said there was no sign of any preparations having been made to move stock or equipment from the defendant’s College Hill site.
[39] Mr Browne sent Mr Jordan a text message at midday on 1 September 2017, confirming that the electrician would replace the light switch and a plug at the premises at 3.30 pm that day. He asked Mr Jordan for the contact details of his telecommunications people, so that the telephone line could be repaired. Mr Browne said that he received no response to the message.
[40] Thereafter, attempts were made by Mr Browne and Mr Anthony to discuss the situation with Mr Jordan and his solicitor, but no progress appears to have been made. On 7 September 2017, Mr Browne sent an email to Mr Jordan about getting access to the premises to have the telephone line repaired. The email noted that the plaintiff had had no response to Mr Browne’s earlier text message, and asked for “some feedback to enable us to rectify please”.
[41] On 8 September 2017, the plaintiff’s solicitors wrote to the defendant’s solicitor making demand for payment of the rent and other amounts said to be owing. The letter threatened enforcement steps if the outstanding lease amounts were not paid by 11 September 2017.
[42] The plaintiff received no reply to that letter, and a further letter was sent on 18 September 2017. Again, there was no reply to the correspondence.
[43] Mr Browne said that he made later attempts to contact Mr Jordan about the lease issues, sending him some text messages about arranging access for smoke alarm testing, and asking him to pay the rent and outgoings up to date. He never received a response to these messages.
[44] The plaintiff served the statutory demand on the defendant on 1 November 2017. Mr Browne accepted that the correct lease terms were those recorded in the second Agreement, but because he did not have a copy of the second Agreement when the statutory demand was issued his calculation of the rent and outgoings was made looking at the first Agreement. As a result, the statutory demand overstated the amount due in the following respects:
(a)no rent was payable for the month of September as this was paid from the deposit paid on 12 July 2017;
(b)the second instalment of the deposit (being the second instalment of rent) was not payable until 1 October 2017;
(c)no outgoings were payable for the month of August 2017; and
(d)the interest calculation set out in the statutory demand was mis-stated as a result of the above issues.
[45] Mr Browne said that, while the statutory demand contained those errors, the defendant was nevertheless then indebted to the plaintiff for $16,031.16.
[46] Further affidavits were provided in opposition to the stay application by Mr Anthony, Mr McGovern, and Mr Garske, a former employee of the plaintiff.
[47] In his affidavit, Mr Anthony gave evidence of a meeting he had with Mr Jordan and Mr McGovern on 24 July 2017. The purpose of the meeting was for Mr McGovern to get to know Mr Jordan. The result was that Mr McGovern was happy to have the defendant as a sub-lessee.
[48] Mr Anthony referred to a visit he made to the premises on 31 July 2017. He found Mr Browne moving things out of the premises. Mr Jordan was also present, and Mr Anthony arranged to meet with him at 8 o’clock the following morning for the handover of the premises. Mr Anthony confirmed that when he met with Mr Jordan at the premises at 8.00 am on 1 August 2017, two vehicles were still in the premises and the vehicle hoists had not been removed. He said that Mr Jordan was unhappy that there were still vehicles in the workshop, but was nevertheless able to begin moving motorbikes into the premises.
[49] Mr Anthony said that he met with Mr Jordan again at the premises on 9 August 2017. Mr Jordan was unhappy that the hoists had still not been removed, and that an Audi and some transmission parts were still on the premises.
[50] Mr Anthony said that when he met Mr Jordan on the premises on 31 August 2017 the premises were both vacant and accessible. All of the vehicle hoists and all of the plaintiff’s transmission parts and benches had been removed, and both the ground floor workshop and the upstairs area had been cleared of tools and parts. He said that in the course of the inspection everyone, including Mr Jordan, acknowledged that the workshop was tidy, and that all of the items that Mr Jordan had complained about had been removed.
[51] As for Mr Jordan’s complaints about the upstairs area being saturated with oil and transmission fluid, Mr Anthony said that he did not see any spilt fluids in any area of the premises. The premises could have benefitted from a thorough cleaning, including the carpets and wooden floors (which were stained with oil), but in Mr Anthony’s opinion they were no dirtier than might have been expected for premises used in connection with a vehicle workshop. He said that Mr Jordan did not raise the cleanliness of the premises as an issue during his inspection, although Mr Jordan was unhappy with the untidiness of the reception area and the damaged telephone wiring that had been caused during the removal of the reception desk.
[52] Mr Anthony denied that the office area had been “destroyed” (Mr Jordan’s description in his first affidavit), but he acknowledged that this part of the premises did need to be tidied up.
[53] Mr Anthony said that he was present when Mr Jordan called Mr Browne about the damage to the telephone wiring. Mr Jordan relayed to him their conversation, including Mr Browne’s agreement to get the telephone connection fixed the following day. The alarm system was still then working.
[54] Mr Anthony said that he and Mr Jordan left the inspection on 31 August 2017 on the basis that the premises were ready to be moved into the following day. They were entirely vacant, other than the motorbikes, a computer and some workbenches that Mr Jordan had already moved in.
[55] Mr Anthony said that he was extremely surprised when he received Mr Jordan’s call on 1 September 2017 cancelling the second Agreement. He said that Mr Jordan told him that he wanted to cancel the second Agreement because the “phone lines were a mess,” or words to that effect. He denied that Mr Jordan told him that he was cancelling the second Agreement because the premises were not vacant, or because they were not tenantable.
[56] Mr Anthony confirmed that he met with Mr Brown at the premises at 10.30 am on 1 September 2017. They put a telephone call through to Mr Jordan, and Mr Anthony spoke to Mr Jordan. He emphasised to Mr Jordan that the second Agreement was legal and binding. Mr Jordan was very unhappy and said he would call his lawyer.
[57] Mr Anthony said that he then went to the defendant’s College Hill premises to see if he could talk personally to Mr Jordan. Mr Jordan was not there. Mr Anthony then went to the premises, where he found Mr Jordan moving motorbikes out of the workshop area. He said that he asked Mr Jordan to reply to Mr Browne about getting the telephone connection fixed, but he was ignored – Mr Jordan continued removing the motorbikes.
[58] A subsequent email from Mr Anthony to Mr Jordan, contending that the telephone connection issues did not justify cancellation and that the second Agreement was binding, was met with the response that all communications should be forwarded to the defendant’s lawyer.
[59] In his affidavit, Mr McGovern described the pre-commencement inspection at the premises on 31 August 2017. The plaintiff’s employees were still then in the process of moving some items out, but in Mr McGovern’s view the premises were ready for the defendant to move in. All of the vehicle hoists had been removed, and there were no major chattels or other items left behind.
[60] Mr McGovern acknowledged that the premises did look as if they needed some commercial cleaning, but nothing beyond what could be expected of premises that had been used as a vehicle workshop for 20 years.
[61] Mr McGovern went upstairs to look at the area Mr Jordan says was saturated with transmission fluids and oil. In Mr McGovern’s view, the condition of the upstairs area did not prevent the defendant moving in and using the premises as a workshop. He did not consider any of the marks or the oil had been freshly spilt.
[62] With reference to the “live wiring” referred to by Mr Jordan, Mr McGovern understood that to be a reference to a cable hanging from the roof. It needed to have a three-pin plug attached so that it could be used. He said that he had previously spoken to Mr Browne about this, and Mr Browne had told him that the power to the cable had been disconnected in the main switchboard to make it safe.
[63] Mr McGovern confirmed that Mr Jordan was unhappy that his telephone connection had been damaged when the downstairs reception desk was removed. He said that he told Mr Jordan that he should contact Mr Browne to have it repaired. Mr Jordan then telephoned Mr Browne in Mr McGovern’s premises, and Mr McGovern’s understanding is that it was agreed between them that the repairs to the telephone line could be carried out the next day, and that a plug would be installed on the cable.
[64] Mr McGovern said that, at the end of the meeting, Mr Jordan told him that he was going to give it his “best shot” at operating out of the premises.
[65] The last affidavit in opposition was that of Mr Garske, an employee of the plaintiff. Mr Garske said that, throughout July 2017, he helped Mr Browne clear equipment, stock and tools out of the premises. He said that Mr Jordan was in the
premises on several occasions during this period, and that there were a number of discussions with him. His evidence was that Mr Jordan said that he was happy for the plaintiff to leave some transmission parts upstairs until it could get them removed. He said that Mr Jordan was not concerned about this, as it would not stop him from moving in.
[66] Mr Garske confirmed that the defendant began moving motorbikes into the premises, and at that stage he did not seem concerned about the hoists or the two vehicles that the plaintiff had left temporarily in the premises.
[67] Mr Garske said that he was present at the premises on the afternoon of 31 August 2017 when Mr Jordan and Mr Anthony made their pre-commencement inspection. By that stage, the defendant had already moved a large number of motorbikes into the workshop, as well as three bike hoists.
[68] Mr Garske confirmed the evidence of other witnesses that Mr Jordan was unhappy that some telephone wires had been pulled out from a jack point on the wall in the reception area when the reception desk was removed. Mr Garske did not see this as a major issue, however, as he understood from Mr Jordan that Mr Browne had agreed to have the problem fixed the following day.
[69] Mr Garske said that when he left the premises that afternoon all of the plaintiff’s equipment and the hoists had been removed, and the premises were clear and ready for the defendant to complete moving in. The only chattels then left in the premises were items that had been moved in by the defendant.
[70] Mr Garske acknowledged that there was some exposed wiring on the end of an extension cord in the premises. He said this was the result of a three-pin plug falling off the cord. The power to the cord had been turned off at the fusebox and the wire was not live or unsafe. On the question of the upstairs area being saturated with transmission oil and fluids, he acknowledged that there were some old oil marks on the walls and the wooden floor, but he denied that these areas were “saturated” with oil.
Mr Jordan’s reply affidavit
[71] Mr Jordan filed an affidavit in reply, to which he attached photographs of the reception/office area taken on 31 August 2017. He said that the telephone connections and power outlets (that he had installed) had been ripped out by the plaintiff’s contractor. The live power boxes “removed” from the reception counter/desk were left in the centre of the room, with the PABX removed and left on the floor also. He asserted that this constituted a safety hazard.
[72] Mr Jordan also produced photographs of an air conditioning unit and a hot water cylinder, which were said to show substandard installation and hazardous wiring. He asserted that it was not safe to move into the premises. He produced photographs showing live wire hanging from the roof of the workshop on 3 August 2017. He said that the live wire, which had a notice attached with the warning “Look Warning Live Wire”, remained hanging in that position at 1 September 2017. Mr Jordan said that he telephoned Health and Safety New Zealand on 1 September 2017 and advised them of the alleged dangers and hazards. He was told to contact WorkSafe New Zealand, and he produced a copy of an email from WorkSafe New Zealand dated 4 September 2017 confirming that he had had a conversation with an officer at WorkSafe. The email sought further information about the complaint.
[73] Mr Jordan denied that he ever agreed that the transmission parts or cars could be left at the premises. He said that he understood the plaintiff’s reason for the delay in moving the hoists, but the removal of the two vehicles and the parts was another matter altogether, as access to the workshop to conduct business was not possible because these items were in the way. He denied ever indicating that he was happy with the cars remaining, saying that it was impossible for him to start his business while they were there.
[74] Mr Jordan said that it was he who proposed that the plaintiff have the rest of August 2017 to move out of the premises. He said that he demanded that everything be removed, so as to remove any grey areas as to what chattels, fixtures et cetera were to remain.
[75] Mr Jordan said that Mr Browne rang him on 29 August 2017 to say that the plaintiff would be moving out two days early, but by 4.00 pm on 31 August 2017 Mr Anthony, Mr McGovern and he were still unable to get into the premises.
[76] Mr Jordan denied that the hazardous wiring had anything to do with faulty light bulbs, as suggested by Mr Browne. He asserted that the plaintiff’s contractor had destroyed the phone system, and not merely removed it. The contractor had pulled out the two telephones/alarm monitoring data connections, and thrown them in the rubbish with the modem and the telephones the defendant had installed. Mr Jordan said that it had taken him seven days to arrange, install, and get the telephone and alarm system up and running.
[77] In response to Mr McGovern’s evidence that the premises did look like they required commercial cleaning, but nothing beyond what might be expected of spaces that had been used as part of a vehicle workshop for 20 years, Mr Jordan acknowledged that the premises were in need of commercial cleaning. However, he went on to confirm his description of the walls and floors as being “saturated in transmission fluids”. He contended that the rooms upstairs, which were not in a category of a workshop, were not usable. Longstanding and fresh spillage of transmission fluids did not render the rooms more usable.
[78] Mr Jordan also contended that Mr McGovern was wrong in his understanding of the seriousness of the cable hanging from the roof (earlier described by Mr Jordan as “live wiring”). According to Mr Jordan, it required more than a three-pin plug to be attached. Otherwise there would have been no need for the “live wire” warning. Live wires were exposed. Nor did Mr Browne say that the repairs would be done the next day.
[79] In response to Mr Anthony’s affidavit, Mr Jordan repeated his assertions that the premises were not vacant and accessible or safe. The motorbikes that were present on 31 August 2017 were there from a previous attempt by the defendant to move in, under the first Agreement.
[80] In response to Mr Garske’s evidence, Mr Jordan said that Mr Garske had attempted to trivialise the “live wiring”, and “destruction of the phone system”, issues. He denied ever telling Mr Garske that he was “happy” about leaving the transmission parts upstairs.
The Auckland District Law Society form of Deed of Lease
[81] Mr Steel produced a copy of this form at the hearing, without objection from Mr Godinet.
[82]The following clauses appear to be potentially relevant:
Landlord’s Maintenance
11.1The Landlord shall keep and maintain the building, all building services and the car parks in good order and repair and weatherproof but the Landlord shall not be liable for any:
…
(c)Repair or maintenance which is not reasonably necessary for the Tenant’s use and enjoyment of the premises and the car parks.
(d)Loss suffered by the Tenant arising from any want of repair or defect unless the Landlord shall have received notice in writing of that from the Tenant and has not within a reasonable time after that taken appropriate steps to remedy the same.
…
Notification of Defects
12.1 The Tenant shall give to the Landlord prompt written notice of any accident to or defect in the premises of which the Tenant may be aware and in particular in relation to any pipes or fittings used in connection with the water electrical gas or drainage services.
…
Access for Works
15.1The Tenant shall permit the Landlord and the Landlord’s employees and contractors at all reasonable times and on reasonable written notice (except in the case of emergencies) to enter the premises for a reasonable period to inspect and carry out works to the premises or adjacent premises and to install inspect repair renew or replace any services where they are not the responsibility of the Tenant or are required to comply with the requirements of any statutes, regulations,
by-law or requirement of any competent authority. All repairs inspections and works shall be carried out with the least possible inconvenience to the Tenant subject to subclauses 15.3 and 15.4.
15.2If the Tenant’s business use of the premises is materially disrupted because of the Landlord’s works provided for in subclause 15.1, then during the period the works are being carried out a fair proportion of the rent and outgoings shall cease to be payable but without prejudice to the Tenant’s rights if the disruption is due to a breach by the Landlord of the Landlord’s obligation, under subclause 15.1, to cause the least possible inconvenience to the Tenant.
…
DAMAGE TO OR DESTRUCTION OF PREMISES
Total Destruction
26.1If the premises or any portion of the building of which the premises may form part shall be destroyed or so damaged:
(a)as to render the premises untenantable then the term shall at once terminate from the date of destruction or damage; or
(b)in the reasonable opinion of the Landlord as to require demolition or reconstruction, then the Landlord may within 3 months of the date of damage give the Tenant 20 working days notice to terminate and a fair proportion of the rent and outgoings shall cease to be payable as from the date of damage.
Any termination pursuant to this subclause shall be without prejudice to the rights of either party against the other.
Partial Destruction
27.1If the premises or any portion of the building of which the premises may form part shall be damaged but not so as to render the premises untenantable and:
(a)the Landlord’s policy or policies of insurance shall not have been invalidated or payment of the policy monies refused in consequence of some act or default of the Tenant; and
(b)all the necessary permits and consents are obtainable,
the landlord shall with all reasonable speed expend all the insurance moneys received by the Landlord in respect of such damage towards repairing such damage or reinstating the premises or the building but the Landlord shall not be liable to expend any sum of money greater than the amount of the insurance money received.
27.2Any repair or reinstatement may be carried out by the Landlord using such materials and form of construction and according to such plan as the Landlord thinks fit and shall be sufficient so long as it is
reasonably adequate for the Tenant’s occupation and use of the premises.
27.3Until the completion of the repairs or reinstatement a fair proportion of the rent and outgoings shall cease to be payable as from the date of damage.
27.4If any necessary permit or consent shall not be obtainable or the insurance moneys received by the Landlord shall be inadequate for the repair or reinstatement then the term shall at once terminate but without prejudice to the rights of either party against the other.
…
Suitability
38.1 No warranty or representation expressed or implied has been or is made by the Landlord that the premises are now suitable or will remain suitable or adequate for use by the Tenant or that any use of the premises by the Tenant will comply with the by-laws or ordinances or other requirements of any authority having jurisdiction.
…
No Implied Terms
44.1 The covenants, conditions and powers implied in leases pursuant to the Property Law Act 2007 and sections 224 and 266(1)(b) of that Act shall not apply to and are excluded from this lease where allowed.
The defendant’s statement of defence
[83] In its statement of defence, the defendant contended that it is able to pay its debts as they fall due. It referred to the plaintiff’s alleged breach of the first Agreement in failing to provide vacant possession on 1 August 2017, and pleaded that the first Agreement was cancelled, and the second Agreement entered into, on or about 10 August 2017.
[84] The defendant then pleaded that it was an essential term of the second Agreement that the plaintiff would provide vacant possession of the premises to the defendant on the 1 September 2017 commencement date. The second Agreement was also said to be conditional upon and subject to TWM giving approval to the sub-lease contemplated by the second Agreement.
[85] The defendant then pleaded that the plaintiff breached the terms of the second Agreement in the following respects:
(a)it failed to provide vacant possession for the defendant to enter the premises on the commencement date of 1 September 2017, time being of the essence;
(b)it damaged the office area of the premises upon removal of the retail counter, and left live electrical wiring exposed on the floor;
(c)it damaged and rendered useless the telephone system, internet and alarm monitoring installed by the defendant;
(d)it failed to make safe the exposed electrical wiring on the premises;
(e)it spilled transmission oil and fluids throughout the premises rendering the rooms on the first floor unusable;
[86] The defendant then pleaded that the plaintiff had failed to obtain TWM’s approval of the sub-lease.
[87] The defendant went on to plead that Mr Jordan gave oral notice of cancellation of the second Agreement on 1 September 2017, and that the defendant has incurred loss and damages arising from the breaches of the second Agreement (those losses to be quantified at trial).
The plaintiff’s opposition to the stay application
[88] The plaintiff says that no genuine dispute has been raised by the defendant, and that, as at 22 January 2018, the defendant was indebted to the plaintiff in the sum of at least $31,467.79. It says that the defendant was not entitled to cancel the second Agreement on the grounds alleged, and that in so doing it repudiated the second Agreement. However, the plaintiff has not accepted that repudiation, and the second Agreement remains on foot.
[89] The plaintiff also says that the defendant has insufficient cashflow and current assets from which to pay its debts as they fall due.
Applications to stay liquidation claims – legal principles
[90]Rule 31.11 of the High Court Rules provides:
31.11 Power to stay liquidation proceedings
(1)If an application for putting a company into liquidation is made under rule 31.3, the defendant company, or, with the leave of the court, any creditor or shareholder of that company or the Registrar of Companies, may, within 5 working days after the date of the service of the statement of claim on the defendant company, apply to the court—
(a) for an order restraining publication of an advertisement required by rule 31.9 or any other information relating to that statement of claim; and
(b) for an order staying any further proceedings in relation to the liquidation.
(2)The court must treat an application under subclause (1) as if it were an application for an interim injunction and, if it makes the order sought, it may do so on whatever terms the court thinks just.
(3)The inherent jurisdiction of the court is not limited by this rule.
[91] There was no significant dispute between counsel over the approach the Court should take to the application of r 31.11. The authorities show that the defendant carries a “heavy”2 onus, of establishing that there is a strong prima facie case of the existence of a genuine dispute, on substantial grounds.3 The defendant must show “something more” than that the balance of convenience favours the stay. A “genuine” dispute is one that is “real and not fanciful or insubstantial”.4 The grounds of the dispute must be “clear and persuasive”.5
[92] The Courts have been prepared to entertain an application for a stay, even though a subsisting statutory demand has not been challenged. However, good reasons must be advanced to justify a challenge to the debt under r 31.11 when no application was made under s 290 of the Act to set aside the statutory demand. While each case
2 Signs Advertising Limited v CPC New Zealand Limited [2017] NZHC 461 (HC) at [24].
3 Nemesis Holdings Limited v North Harbour Industrial Holdings Limited (1989) 1 PRNZ 379 at 385.
4 Signs Advertising Limited v CPC New Zealand Limited, above n 2, at [17]; AAI Ltd v 92 Lichfield Street Ltd (In Rec & Liq) [2015] NZCA 559, confirming Industrial Group Ltd v Bakker [2011] NZCA 142, 20 PRNZ 413 at [24]-[25].
5 Nemesis Holdings Limited v North Harbour Industrial Holdings Limited, above n 3, at 385.
is to be considered on its particular facts, a defendant who failed to apply to set aside a statutory demand on the ground that the debt is disputed needs to show some exceptional factor to justify its failure to make a setting aside application (that being a factor likely to reflect the existence of a genuine dispute).6
[93] A dispute as to only part of a debt does not prevent a plaintiff from proceeding with a liquidation claim, and is not sufficient to justify a stay.7
The defendant’s case for a stay
[94] Mr Godinet advanced two principal grounds. First, the plaintiff is not a creditor of the defendant. Secondly, the defendant is solvent. I did not understand him to rely on the alleged failure of the plaintiff to obtain TWM’s consent to the sublease contemplated by the second Agreement, and it is in any event clear on the evidence that TWM consented to the sublease and that the defendant was prepared to proceed with the second Agreement on the basis of Mr McGovern’s oral approval of the defendant as sublessee.
[95] Mr Godinet submitted that the plaintiff is relying on its own inability to provide vacant possession and attend to other matters concerning electrical safety, as a basis to establish a debt that would not otherwise exist. He submitted that the defendant has shown that there is a genuine and substantial dispute on the issue of whether the defendant validly cancelled the second Agreement. In support, he referred to the background of delay, including the agreed cancellation of the first Agreement, submitting that it was an implied term of the second Agreement that time would be of the essence for the plaintiff to provide vacant possession on the first day of the term under the second Agreement.
[96] On the question of the defendant’s solvency, Mr Godinet relied on Mr Johnston’s affidavit, submitting that that evidence shows that the defendant is solvent whether one applies a balance sheet test or a liquidity test.
6 Aditude Advertising Ltd (in liq) v Techday Ltd [2012] NZHC 1884 at [11].
7 Nemesis Holdings Ltd v North Harbour Holdings Ltd, above n 5, at 385, and Maru Industries Ltd v Dan Forbes Construction Ltd (1989) 2 PRNZ 176.
[97] Generally, Mr Godinet submitted that the institution and continuation of the liquidation proceeding, notwithstanding the defendant’s solvency and the existence of a genuine dispute, constitutes an attempt to exert undue pressure on the defendant, and savours of unfairness. He submitted that the liquidation claim should be permanently stayed, and the plaintiff left to pursue any remedies it considers it has in an appropriate separate proceeding.
Discussion and conclusions
[98]Section 37 of the Contract and Commercial Law Act 2017 materially provides:
37Party may cancel contract if induced to enter into it by misrepresentation or if term is or will be breached
(1)A party to a contract may cancel it if—
…
(b)a term in the contract is breached by another party to the contract; or
(c)it is clear that a term in the contract will be breached by another party to the contract.
(2)If subsection (1)(a), (b), or (c) applies, a party may exercise the right to cancel the contract if, and only if,—
(a)the parties have expressly or impliedly agreed that the … performance of the term is essential to the cancelling party; or
(b)the effect of the … breach of the contract is, or, in the case of an anticipated breach, will be,—
(i)substantially to reduce the benefit of the contract to the cancelling party; or
(ii)substantially to increase the burden of the cancelling party under the contract; or
(iii)in relation to the cancelling party, to make the benefit or burden of the contract substantially different from that represented or contracted for.
…
[99] In this case, the issues are whether the defendant has shown that there is a genuine and substantial dispute that the plaintiff has breached a term of the second
Agreement (or at the time of the purported cancellation it was clear that the plaintiff would breach a term of the second Agreement), and whether subparagraph (a) of s 37(2) applies. (Mr Godinet did not place any significant reliance on s 37(2)(b), which is concerned with the effect of any proved breach on the cancelling party, and there was in any event insufficient evidence produced by the defendant to establish a genuine and substantial case of entitlement to cancel on any of the s 37(2)(b) grounds).
[100] I accept that the reality is that the defendant needed to show a genuine and substantial case not only on breach of the second Agreement, but also on breach sufficient to justify cancellation. A breach entitling the defendant to damages would not suffice, as the defendant’s obligation under the Deed of Lease was to pay the rent “without any deductions or set off …”8
[101] On s 37(2)(a), Mr Godinet submitted that the parties had impliedly agreed that the performance of the terms allegedly breached by the plaintiff was essential to the defendant.
[102] The first factual issue is whether the plaintiff breached the second Agreement by failing to provide vacant possession to the defendant on 1 September 2017. Mr Steel referred to Cumberland Consolidated Holdings Ltd v Ireland, a decision of the United Kingdom Court of Appeal on the interpretation of the phrase “vacant possession” in the context of an agreement for sale and purchase of land.9 The case related to the sale of a warehouse, and during the negotiations for the sale and purchase of the warehouse the appellant had undertaken to remove certain rubbish from the warehouse. A small part was in fact removed, but the greater part, which was sufficient to preclude the respondents from using the property in the way and for the purpose they intended, was left behind. The issue was over the respondent’s entitlement to recover the costs of removing the rubbish at their own expense.
[103] In delivering the judgment of the Court, the Master of the Rolls, Lord Greene, noted that the right to actual unimpeded physical enjoyment is comprised in the right to vacant possession. The existence of a physical impediment to such enjoyment, to
8 Form of Deed of Lease, cl 1.1.
9 Cumberland Consolidated Holdings Ltd v Ireland [1946] 1 All ER 284 (CA) at 287.
which the purchaser did not expressly or impliedly consent, should stand in no different position to an impediment caused by the presence of a trespasser. “Physical impediment” to the purchaser’s ability to exercise the right to vacant possession did not mean that any physical impediment would do: it had to be an impediment which substantially prevented or interfered with the enjoyment of the right of possession of a substantial part of the property. The Court noted that such cases would be rare, and would be likely to arise only in exceptional circumstances.10
[104] Mr Steel also referred to a decision of Needham J in the Supreme Court of New South Wales, in Point Glebe Pty Ltd v Lidofind Pty Ltd.11 Again, the case was one involving rubbish left on certain properties which were the subject of an agreement for sale and purchase. A director of the purchaser inspected the properties on settlement date, and claimed to have found a large quantity of rubbish and a number of items of furniture on the property, and that there was evidence of an occupant still in possession. The vendor then purported to terminate the contract.
[105] Needham J referred to the principle applied by the Court of Appeal in Cumberland Consolidated Holdings, but on the facts did not consider that the rubbish left on the properties constituted a substantial impediment to the undisturbed enjoyment of the properties, noting the observation of Lord Greene in Cumberland Consolidated Holdings that “such cases will be rare”.12
[106] In this case, there are difficulties with the defendant’s submission that the parties expressly or impliedly agreed that time would be of the essence for the provision of vacant possession on 1 September 2018. First, there does not appear to be any such express provision in the second Agreement or in the ADLS form of Deed of Lease. Secondly, the new cl 13 that was added in the second Agreement appears to have expressly contemplated that chattels might be left on the premises, at least at the time of the pre-commencement inspection on 31 August 2017. If there were chattels left there, TWM was apparently to be responsible for them. If time for vacant possession on 1 September 2017 was to be of the essence, it seems unlikely that the
10 At 287.
11 Point Glebe Pty Ltd v Lidofind Pty Ltd (1988) 5 BPR 97,366.
12 Cumberland Consolidated Holdings Ltd v Ireland, above n 9, at 287.
plaintiff would have left itself open to the possibility that the defendant might cancel because TWM did not take the chattels that were left on the premises on 31 August 2017. It seems more likely that the intention was that if any chattels were left at the premises on 31 August 2017, then, at least as between the plaintiff and the defendant, that was not to be the plaintiff’s problem.
[107] There are also difficulties with the defendant’s submission that it has raised a genuine and substantial argument that vacant possession was not in fact available to it on 1 September 2017.
[108] The Court of Appeal decision in Cumberland Consolidated Holdings shows that the test will be a difficult one to meet where the issue is rubbish left at the premises, and in this case the defendant has not explained how, and the extent to which, any material left at the premises by the plaintiff prevented it from using the premises for the permitted use. The defendant already had approximately 30 motorcycles and three workbenches on the premises, and subject only to the issue of getting the electrical connections working safely it is not clear how the defendant would have been unable to carry out at least mechanical repair work in the premises immediately on 1 September 2017.
[109] On the evidence available to me on the stay application, I am not satisfied that the defendant has put forward a strong prima facie case on the “failure to provide vacant possession” issue, or that there is any evidence that the plaintiff has been guilty of abusing the process of the Court in commencing and pursuing the liquidation claim. I also take into account on the abuse of process issue that the defendant had ample opportunity to put its arguments to the plaintiff, but it appears to have chosen to remain silent. It ignored communications from the plaintiff in the early stages after the purported cancellation, and it made no application to set aside the statutory demand (notwithstanding that its failure to do so clearly called for some explanation13). While those choices do not preclude the defendant from contending at the hearing of the substantive liquidation claim (or indeed in support of the stay application) that there is a genuine and substantial defence on the merits, I think they can properly be taken
13 Aditude Advertising Ltd (in liq) v Techday Ltd, above n 6, at [11].
into account on the issue of whether the plaintiff has been applying improper pressure, or otherwise abusing the process of the Court, in commencing and prosecuting the liquidation claim.
[110] Nor am I satisfied on the evidence so far produced that the defendant has shown a strong prima facie case of substantial and genuine dispute on the “untenantable” part of its case for a stay.
[111] If vacant possession was available to the defendant on 1 September 2017, it appears on the evidence produced that there were provisions in the Deed of Lease that the defendant could have invoked to address the claimed defects (including the alleged safety defects associated with the electrical wiring). First, cl 12.1 of the Deed of Lease required the defendant to give the plaintiff prompt written notice of any relevant defects with the premises of which the defendant was aware, in particular “in relation to any … electrical … services.” There is no evidence of the defendant having given any such written notice before the defendant purported to cancel the lease on 1 September 2017. And under the Deed of Lease the landlord was not in any event to be liable for any losses suffered by the tenant as a result of any want of repair or defect (for which the landlord was responsible), unless the landlord had received written notice from the tenant of the defect or want of repair, and had not within a reasonable time after that taken appropriate steps to remedy the defect or want of repair.14
[112] In this case, the evidence is that the plaintiff (notwithstanding the absence of written notice) arranged for an electrician to attend at the premises at 3.30 pm on 1 September 2017 to replace the light switch and a plug, and that it was also agreed (between Mr Browne and Mr Jordan) in the course of the pre-commencement inspection that arrangements would be made to have the defendant’s telephone system repaired on 1 September 2017.15
14 Deed of Lease, cl 11.1(d).
15 Mr Browne’s evidence was that he and Mr Jordan agreed on the telephone on 31 August 2017 that the problem with the telephone connection would be repaired the following day. Mr Jordan did not appear to challenge that evidence in his reply affidavit, and nor did he challenge Mr McGovern’s evidence that it was agreed on 31 August 2017 that the repairs to the telephone line could be carried out the next day, or Mr Anthony’s evidence to the same effect. Mr Anthony noted that the alarm system was still working on 31 August 2017.
[113] On the issue of the electrical wiring, Mr Browne’s evidence was that Mr Jordan had agreed in the course of their telephone conversation on 31 August 2017 that he was happy for the electrician Mr Browne had arranged to have access to repair the light switch and extension cord. In his reply affidavit Mr Jordan did not expressly deny that he had made an agreement in those terms with Mr Browne – he simply accused Mr Browne of trying to minimise the issue, saying that a qualified electrician would be needed to make safe the live wires lying on the reception floor area. He denied that Mr Browne told him that the repairs would actually be carried out the next day (as Mr McGovern understood to be the case).
[114] The defendant provided no evidence of the extent of any electrical work that might have been required to render any live wires in the reception area safe, and I am unable in those circumstances to conclude that the issue was as serious as the defendant now contends. And it seems improbable that the electrician Mr Browne later arranged to call at the premises on 1 September 2017 to replace the light switch and plug would have left any dangerous live wires if Mr Jordan had drawn them to his attention.
[115] Notwithstanding the telephone discussion between Mr Browne and Mr Jordan on 31 August 2017, the defendant purported to cancel the second Agreement on the morning of 1 September 2017 without any further communication between the parties, and it declined to facilitate access to the premises to allow the repairs to be carried out.
[116] I do not consider this to be even arguably close to a “total destruction” situation as described as cl 26.1 of the Deed of Lease, where the premises could be considered to have been “untenantable”. There was no warranty that the premises would be suitable for the permitted uses,16 and the defendant has failed to provide sufficient evidence of the respect or respects in which it says it would have been unable to commence business operations in the premises from 1 September 2017 if it had chosen to do so.
[117] Nor am I persuaded that the evidence relating to the alleged oil saturation on the upstairs level of the premises reaches the threshold that would justify an order
16 Deed of Lease, cl 38.1.
staying the proceeding. Mr Jordan had made a number of inspections of the premises, and he must have known the condition of the upstairs level before 31 August 2017. It is not at all clear from his evidence that the condition of the premises worsened between the time the second Agreement was signed and the time the defendant purported to cancel the second Agreement. And if the plaintiff was under any obligation in this respect, the oil staining or “saturation” would have been a “defect” that the plaintiff should have been given the opportunity to remedy. (I do not consider it reasonably arguable that any lack of cleanliness of the premises went to the issue of whether vacant possession was available on 1 September 2017).
[118] I do not consider that the errors in the statutory demand affect the position on the stay application. I accept the plaintiff’s submission, based on the Nemesis Holdings Ltd and Maru Industries Ltd cases, that a dispute as to only part of a debt does not prevent a plaintiff from proceeding with a liquidation claim, and is not sufficient to justify a stay.
[119] Mr Johnston’s evidence does not in my view assist the defendant. The question of a defendant’s solvency in a liquidation proceeding is primarily concerned with its ability to pay its debts as they fall due for payment, and I do not think Mr Johnston’s evidence of apparent balance sheet solvency as at 30 November 2017 addresses that issue. Even the issue of balance sheet solvency may be questionable where the assets are said to include $50,000 for “intangibles” (presumably a figure for goodwill, which might or might not have value, and might well not have value, if it turned out that the defendant had a liability to the plaintiff that it could not meet). I note too that there was apparently a negative equity position as at 31 March 2017.
[120] While an operating profit of approximately $72,000 is reported for the eight months to 30 November 2017, the trading result for the year to 31 March 2017 appears to have been no better than break-even, and I do not think I can take much from Mr Johnston’s evidence on the important question of the defendant’s liquidity, and in particular its ability to pay the plaintiff if it were liable to the plaintiff for any significant sum.
[121] In summary, I am not persuaded that Mr Johnston’s evidence on the solvency issue, considered with the other apparent difficulties in the defendant’s case, take the case to the level where I would be justified in staying the liquidation claim.
Result
[122] The defendant’s application to stay the proceeding is dismissed. Costs are awarded to the plaintiff on a 2B basis, with disbursements to be fixed by the Registrar.
[123] The case is to be included in the next convenient liquidation list after 25 May 2018, for the purpose of allocating a fixture for the hearing of the liquidation claim on a defended basis, and giving directions for the filing of any further affidavits and written submissions.
[124] I record that my decision to refuse the defendant’s stay application has been made on the evidence available on the stay application, and my view that the defendant has failed on that evidence to discharge the heavy onus on it to justify the making of a stay order. The defendant is not precluded by this judgment from producing further evidence or submissions in its defence of the liquidation claim (including on the question of whether a genuine and substantial defence to the plaintiff’s claim exists), at the substantive hearing.
Associate Judge Smith
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