All Safe Scaffold Ltd v Coghlan

[2016] NZHC 3106

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2016-404-1685 [2016] NZHC  3106

UNDER	the Companies Act 1993 Section 290
BETWEEN	ALL SAFE SCAFFOLD LIMITED Applicant
AND	BRENDAN COGHLAN Respondent

Hearing:	12 December 2016
Appearances:	J M Skinner for Applicant Andrew Gilchrist for Respondent
Judgment:	12 December 2016

ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL

Solicitors:

Skinners Law (J M Skinner), Mairangi Bay, Auckland, for All Safe Scaffold Ltd

Anthony Thomas, Mangawhai Heads, for Brendan Coghlan

Copy for:

Andrew Gilchrist, Auckland, for Brendan Coghlan

ALL SAFE SCAFFOLD LIMITED v COGHLAN [2016] NZHC  3106 [12 December 2016]

[1]      All Safe Scaffold Ltd applies to set aside a statutory demand dated 1 July

2016 for $92,488 seeking repayment of advances made by the Mr Coghlan to the company, as recorded in the accounts of All Safe Scaffold Ltd for the year ending

31 March 2014.   I have earlier today given a decision in CIV-2016-404-1745 in which Coastal Properties Ltd applied to set aside a statutory demand by All Safe Scaffold Ltd.1    Mr Coghlan, the respondent in this case, is the director of Coastal Properties Ltd.  My earlier decision sets out some of the background – and there is further background in a decision I gave on 19 April 2016 in Coastal Scaffolding Ltd v Coghlan.2

[2]        The principles on  which courts decide applications to set aside statutory demands made under s 290(4)(a) are well established.  Associate Judge Doogue re- stated them in Risecorp Investment Trustee Ltd v Staywell Hospitality Management.3

I need not repeat them.

[3]      There was an initial technical problem with the application by All Safe Scaffold Ltd.  In its initial affidavit in support of its application it did not put the statutory demand in evidence.   The court can make an order setting aside the demand only if it is satisfied that a demand exists.  The company needs to prove that it has received the demand.  That is proved by putting the demand in evidence. In the absence of that evidence, there is nothing to set aside.  All Safe Scaffold Ltd realised the point, belatedly, and filed an affidavit late exhibiting the statutory demand.   For Mr Coghlan, Mr Gilchrist did not object (sensibly) to that late evidence going in.

[4]      Mr Coghlan bases his debt in the statutory demand on his shareholders’

current account, as shown in financial statements for the year ending 31 March

2014.  The copy of those accounts which he has put in evidence shows that they were signed off and are final.  It is common ground that those financial statements

1      Coastal Properties Ltd v All Safe Scaffold Ltd [2016] NZHC 3107.

2      Coastal Scaffolding Ltd v Coghlan [2016] NZHC 751.

3      Risecorp Investment Trustee Ltd v Staywell Hospitality Management Ltd [2015] NZHC 1277 at [11]-[13].

are not disputed.  They contain a schedule showing the current accounts of both Mr Coghlan and Mr Scheib.   The net position for the shareholders was that the company owed $92,488 but that was made up of a debt to Mr Coghlan of $95,610 and a debt of $3,122.00 owed by Mr Scheib to the company.    That means that Mr Coghlan has slightly under-stated the debt in his demand.

[5]      All Safe Scaffold Ltd and Mr Scheib accept that that was the state of accounts as at 31 March 2014.  They say that that is no longer the correct state of accounts between Mr Coghlan and the company.  The accountant who prepared the

2014 accounts was a Mr Rogers, a chartered accountant.  After 31 March 2015, he began work on preparing financial statements for All Safe Scaffold Ltd but did not complete his work.

[6]      All  Safe Scaffold  Ltd  has  now instructed another accountant,  Mr Hill. When this proceeding started, Mr Hill had not completed preparing financial statements for All Safe Scaffold Ltd.  In fact, he did not put a set of accounts in evidence until his affidavit of 7 October 2016 – that was the date on which All Safe Scaffold Ltd was due to provide its closing submissions.  Mr Hill had given an earlier affidavit in which he indicated that on the information available to him then, transactions since 31 March 2014 suggested that Mr Coghlan’s debt was over-stated in the light of subsequent transactions.   Mr Hill has attached to his affidavit  appendices  which  show  transactions  on  current  accounts  by  both Mr Scheib and Mr Coghlan.  It is not immediately clear whether these schedules are the work of Mr Rogers which Mr Hill has included in his materials, or whether Mr Hill has applied his mind to them independently of Mr Rogers.   Mr Hill acknowledges that he received information for draft accounts.  In any event, I am satisfied  that  the  appendices  to  Mr  Hill’s  evidence  do  represent  work  by accountants to record transactions on the current accounts of both Mr Scheib and Mr Coghlan with All Safe Scaffold Ltd.

[7]      One appendix shows a summary of transactions on Mr Coghlan’s account. The opening balance is $95,609.42.  That corresponds with the accounts prepared by  Mr  Rogers.    It  shows  funds  introduced  of  $137,850.00  and  drawings  of

$296,475.99.  There are also entries for adjustments for 2012, for 2013 and 2014.

There is  a closing balance shown  of $45,441.97.   There are further  entries  - charges for Mr Coghlan’s Bunning’s account for $6,400.00 and interest on related party advances of $3,058.79.   For the moment, I disregard some of those items. The matters that are most relevant to me are the opening balance figure, the sum for funds introduced, and the drawings.   I express my hesitation to recognise adjustments to earlier accounts for earlier years given the apparent finality of the accounts as at 31 March 2014.

[8]     Mr Hill’s appendices set out separately schedules showing individual transactions on the current accounts of Mr Coghlan and Mr Scheib.   Another appendix shows transactions on Mr Coghlan’s current account that I describe as “drawings”.  They begin on 30 June 2014 and end on 31 March 2015.  All up they total $296,475.99.

[9]      A further appendix has a schedule which sets out funds introduced by Mr Coghlan.   They begin on 27 June 2014 and end on 31 March 2015.   Those transactions total $137,850.00.   The items in the schedule of drawings and the schedule of funds introduced each represent transactions which one would expect an accountant to pick up when preparing a schedule of transactions to reach a net position  of  transactions  on  a  current  account.     Without  allowing  for  any adjustments to accounts in earlier years, it is apparent that on the basis of these figures Mr Coghlan’s position has changed from being a creditor as at 31 March

2014 to a debtor as at 31 March 2015.  If I take the total drawings by Mr Coghlan amounting to $296,475.99 and I deduct from that the starting balance figure of

$95,609.42 and the funds he introduced of $137,850.00,  I am left with a net indebtedness of some $63,016.57.  I am confident that when those transactions are taken into account they show that Mr Coghlan is a net debtor of the company as at March 2015.

[10]     In an application to set aside a statutory demand, the company needs to have a proper basis for showing a genuine and substantial dispute as to the debt. The fact that accountants have gone through the records of the company and analysed these transactions to show a change in Mr Coghlan’s position from one of creditor to one of debtor, suggests that there are good grounds to dispute the claim

that Mr Coghlan remains a creditor of the company for the sum set out in his statutory demand.  Clearly, there is evidence of further transactions which shows that,  according  to  the  accountants,  when  all  those  transactions  are  taken  into account he withdrew more money than his starting figure and the funds he introduced.   On that basis, All Safe Scaffold Ltd has made out its case under s 290(4).

[11]     Mr Gilchrist pointed to the fairly standard disclaimers that accountants put in  financial  statements  to  show  that  Mr  Hill  was  acting  on  instructions  from Mr Coghlan and I should therefore disregard the latest financial accounts which Mr Coghlan had no input in and he had not been given the opportunity check them. I accept those submissions as far as they go but, for the purpose of an application under s 290(4) of the Companies Act it is necessary only for the company to show that there are grounds for disputing the debt in the statutory demand.

[12]     In this case, the matters raised by All Safe Scaffold Ltd go beyond assertion because there are schedules listing particular transactions which show how the change  in  indebtedness  can  be  explained.    For  those  reasons,  I  set  aside  the statutory demand.

[13]     There is another matter which the company did not rely upon, but which Mr Coghlan ought to have addressed.   The point is this: Mr Coghlan issued his statutory demand without first requiring payment of his current account. Shareholders typically leave money in on the basis that the money will not be repayable unless demand is made.  The debt is not payable until demand is made. The debt must have fallen due before the statutory demand was made.   I refer to

the decision of Master Kennedy Grant in Keene v Okere Holdings Ltd4  and also

my own decision in Twenty-First Century Investments Ltd v ANZ National Bank Ltd.5    A statutory demand can be issued only for a debt that already exists and is payable.   Money left in a company on a current account basis is not due and

payable until a demand has actually been made.

4      Keene v Okere Holdings Ltd (1996) 7 NZCLC 261,034.

5      21ST Century Investments Ltd v ANZ National Bank Ltd HC Auckland CIV-2010-404-7366,

25 February 2011 at [13]-[15].

[14]     In my decision in Coghlan v Coastal Scaffolding Ltd,6 I took care to make a finding that the debt had been called up in that case.  Similar evidence is missing here.  I would have hesitated to have upheld the demand even if I was satisfied that the amount of the demand was correct.

[15]     Accordingly, the statutory demand is set aside.  All Safe Scaffold Ltd will have costs on the application.

[16]     As to costs, Mr Gilchrist has submitted that there should be no costs on account  of the late substantive affidavit  by Mr  Hill  and the submissions  also coming in late.   He also points to the overlap between this proceeding and the proceeding under CIV-2016-404-1745.

[17]     On his first point, the lateness is a significant issue.  It did require that the case be put back.  I propose to discount the costs to All Safe Scaffold Ltd on this application (but not 1745) on account of the delay.  I do so because the evidence of Mr Hill, in his late affidavit, was in fact decisive in this case.   Short of that evidence,  I  would  have  upheld  Mr  Coghlan’s  claim.     There  is  also  the unsatisfactory feature of the statutory demand not having been proved at the outset as well.  In the circumstances, I discount the costs payable to All Safe Scaffold Ltd on this proceeding by 20 per cent.

[18]     There  have  been  efficiencies  achieved  by  running  both  proceedings together – that is, allowing for common case management directions and for the hearings to be heard together.   That must have enabled counsel to prepare more economically as well.  Mr Skinner says that he proposes to take that into account when  he  prepares  his  calculation  of  costs.    I  encourage  him  to  confer  with Mr Gilchrist to see if they can reach agreement to avoid any double-up in costs in the two applications.  If the parties cannot agree, memoranda may be filed and I will decide costs on the papers.

………………………................

Associate Judge R M Bell

6      Above, n 2.