Alpine Prime Properties Limited v Haskell Construction Limited

[2019] NZHC 3223

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE

CIV-2019-485-465

[2019] NZHC 3223

UNDER

section 290 of the Companies Act 1993

IN THE MATTER

of an application to set aside a statutory demand

BETWEEN

ALPINE PRIME PROPERTIES LIMITED

Applicant

AND

HASKELL CONSTRUCTION LIMITED

Respondent

Hearing:	25 October 2019
Appearances:	F B Collins for applicant M Freeman for respondent
Judgment:	9 December 2019

JUDGMENT OF ASSOCIATE JUDGE JOHNSTON

Introduction

[1]    The applicant, Alpine Prime Properties Ltd (Alpine), applies to set aside a statutory demand dated 31 July 2019 and served on it by the respondent, Haskell Construction Ltd (Haskell), on 1 August 2019. Haskell’s demand is for payment of a debt of $133,619.06 due pursuant to an adjudication determination under s 25 of the Construction Contract Act 2002 issued on 29 July 2019.

[2]Haskell opposes the application.

ALPINE PRIME PROPERTIES LIMITED v HASKELL CONSTRUCTION LIMITED [2019] NZHC 3223

[9 December 2019]

Background

[3]    Alpine is a property developer. It owns four lots in a  subdivision  in  Ruapehu Street, Paraparaumu. Haskell is  a construction company.  Its  director is  Mr Christopher Haskell. The company was incorporated three years ago and employs about 11 staff.

[4]    On 3 August 2018, Alpine and Haskell entered into a contract for the construction of a residential dwelling on one of the lots in Ruapehu Street. The contract price was about $800,000, which was to be paid in nine stages as the development progressed. Construction commenced in August 2018. By September 2018 Haskell had completed stage one (foundations and floor structure). An invoice was issued for stage one and paid by Alpine.

[5]    An issue then arose concerning the introduction of structural steel members into the building design. The consented plans upon which Haskell tendered for the contract did not include steel, but these plans were based on provisional engineering designs. The structural framing then went through several revisions, with the result that steel would be required. On 10 December 2018, Haskell received the revised design including the steel.

[6]    On 29 January 2019, Haskell sought to increase the contract price to accommodate the inclusion of the steel. Alpine did not accept the proposed variation to the contract price. Meanwhile, Haskell had continued with the construction works, largely completing stage two (wall and roof framing) except for the steel work.

[7]    On 13 February 2019, Haskell issued a payment claim for stage two, arguing it had achieved “substantial completion” within the meaning of the construction contract. A site meeting was held on 26 February 2019. A disagreement emerged.

[8] On 18 April 2019, Alpine purported to cancel the contract pursuant to ss 362N(2)(b) and 362O(a) of the Building Act 2004, alleging substantial breaches of contract by Haskell. On 24 April 2019, Haskell purported to accept Alpine’s cancellation as though it had been made under cl 15.2.2(c) of the contract, which

allows cancellation where the parties agree the contract has become impossible to perform or is otherwise frustrated.

[9]    On 10 June 2019, Haskell submitted the dispute to an adjudicator appointed under the Construction Contracts Act. The adjudicator issued his determination on 10 May 2019. The adjudicator determined that stage 2 was not substantially complete because the steel work had not been done, but he went on to determine the fair and reasonable sum owed to Haskell pursuant to cl 15.3 of the contract, which provided for such payment upon cancellation. Deducting the amount already paid by Alpine, the adjudicator set that sum at $133,619.06, which is the amount Haskell claims in its statutory demand. The adjudicator was careful to stress that he was only dealing with the outstanding amount due under the contract and had not been asked to consider whether the cancellation by Alpine was justified or amounted to a repudiation, or whether either party was entitled to damages as a result.

[10] On 11 June 2019, the same adjudicator accepted a second reference to adjudication, this time from Alpine, concerning the issue of cancelation. On 29 May 2019, the adjudicator issued his second determination in which he declared that Haskell had breached the contract, including by violating implied warranties under the Building Act, and the cancellation by Alpine was therefore justified. However, the adjudicator said that he had no evidence upon which he could change the assessment of loss made in his first determination.

[11]   Alpine is now seeking a third adjudication, before another adjudicator, to determine its claim for damages arising from Haskell’s breach of contract. Haskell denies it was in breach of contract and says the adjudicator lacked jurisdiction to issue a declaration to that effect. It is resisting Alpine’s attempt to have the issue of damages determined in a third adjudication. Haskell says the proper forum for this is arbitration.

[12]   Pending the third adjudication, Alpine has not paid the $133,619.06 it owes under the first adjudication. It is in this context that Haskell issued its statutory demand.

Legal framework

[13]   Failure to comply with a statutory demand is one of the mechanisms by which insolvency is established under pt 16 of the Companies Act 1993. A creditor may serve a statutory demand on a company in respect of any debt owed that is not less than the prescribed amount.1 A company served with a statutory demand may apply to the Court within 10 working days to have the statutory demand set aside.2 The Court may set aside a statutory demand if it is satisfied that:3

(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.

[14]   The debt in this case arises by operation of s 59 of the Construction Contracts Act:

(1)The consequences specified in subsection (2) apply if a party to the adjudication fails, before the close of the relevant date, to pay the whole or part of the amount determined by an adjudicator.

(2)The consequences are that the party who is owed the amount (party

A)  may do all or any of the following:

(a)recover from the party who is liable to make the payment (party B), as a debt due to party A, in any court,—

(i)the unpaid portion of the amount; and

(ii)the actual and reasonable costs of recovery awarded against party B by that court:

(b)if party A is a party who carries out construction work under a construction contract, serve notice on party B of party A’s intention to suspend the carrying out of construction work under the contract:

(c)apply for the adjudicator’s determination to be enforced by entry as a judgment in accordance with subpart 2 of Part 4.

…

1      Companies Act 1993, s 289.

2      Section 290.

3      Section 290(4).

[15]   Although a party owed an amount from an adjudication can seek enforcement by having the determination entered as a judgment under s 59(2)(c), it can also seek to enforce the determination directly as a debt pursuant to s 59(2)(a). Amongst other things, this allows the party to issue a statutory demand when the other party is a company. In either case, s 79 of the Construction Contracts Act provides certain restrictions on counterclaims and set-off:

79Proceedings for recovery of debt not affected by counterclaim, set-off, or cross-demand

In any proceedings for the recovery of a debt under section 23 or section 24 or section 59, the court must not give effect to any counterclaim, set-off, or cross-demand raised by any party to those proceedings other than a set-off of a liquidated amount if—

(a)judgment has been entered for that amount; or

(b)there is not in fact any dispute between the parties in relation to the claim for that amount.

[16]   Section 79 is consistent with the purpose of the Construction Contracts Act “to facilitate regular and timely payments between the parties to a construction contract” and “to provide for the speedy resolution of disputes arising under a construction contract”.4 Adjudication awards are interim in nature and s 79 ensures they are enforceable on a ‘pay now, argue later’ basis.

The applicant’s case

[17]   Alpine’s position is that it should not be required to make interim payment of the $133,619.06 it owes to Haskell because it has a counterclaim for damages resulting from breach of contract that, it says, in all likelihood will exceed the amount claimed in Haskell’s statutory demand. Alpine’s claim in the third adjudication is for

$304,789.04.

[18]   On behalf of Alpine, Mr Collins relied on Kariiti Ltd v Donovan Drainage & Earthmoving Ltd to advance the submission that an interim payment under the Construction Contracts Act need not be paid if there is a real risk the creditor will be

4      Construction Contract Act 2002, s 3.

unable to repay the amount following a final determination on the merits and the debtor has a strong case that the creditor will ultimately have to repay that amount.5

[19]   Alpine says it is “blindingly obvious” that it has a right to damages given the declaration issued in the second adjudication, although Mr Collins submitted the standard is not set so high. Alpine also says it has reason to believe Haskell might be insolvent and therefore at risk of being unable to repay the $133,619.06 following the third adjudication. In this respect, Alpine makes several accusations about the way Haskell conducted itself during the construction process and suggests its earlier behaviour is indicative of significant cashflow problems. Alpine also accuses Haskell of adopting delaying tactics, referring to its resistance to participating in the third adjudication.

[20]   Haskell strongly denies any suggestion it is insolvent and says it will demonstrate it is a solvent and profitable trading company if required to do so, although Mr Freeman submitted that Haskell should not be so required. In any event, for reasons that will become apparent, it is unnecessary to consider Haskell’s solvency in any detail.

Interaction between s 79 of the Construction Contracts Act and s 290 of the Companies Act

[21]   The simple answer to Alpine’s application is that it cannot invoke its counterclaim to avoid the ‘pay now, argue later’ regime for interim payments established by the Construction Contracts Act. Although, ordinarily, a company served with a statutory demand is entitled to have that demand set aside if it can demonstrate it has a counterclaim or set-off equal to or greater in value than the amount claimed in the statutory demand, s 79 of the Constructions Contract Act precludes that possibility.

[22]   There was historically some debate as to whether s 79 had that effect on s 290(4) of the Companies Act. In Volcanic Investments Ltd v Dempsey & Wood Civil Contractors Ltd, Randerson J held that the instigation of liquidation proceedings by

5      Kariiti Ltd v Donovan Drainage & Earthmoving Ltd [2010] NZHC 2146 at [10].

the issuing a statutory demand falls within the meaning of “any proceedings for the recovery of a debt under … section 59” in s 79 of the Construction Contracts Act.6 Several cases thereafter adopted this approach.7 In an article published in 2006, Ren argued that the courts had misconstrued s 79, which he contended was never intended to apply to statutory demands.8 Ren’s analysis found favour with Associate Judge Doogue in Silverpoint International Ltd v Wedding Earthmovers Ltd.9

[23]   This debate was put to rest by the Court of Appeal in Laywood v Holmes Construction Wellington Ltd:10

[61]      We emphasise at this point the distinction between an application to set aside a bankruptcy notice or a statutory demand on the one hand and an adjudication of bankruptcy or order to wind up a company on the other. The question we are asked to resolve concerns the former. In that context, we prefer the view expressed by Randerson J in Volcanic Investments. We find some assistance in the exceptions provided for in s 79. Under that section, a set-off may be taken into account in debt recovery proceedings (including the s 73 process) if it relates to a liquidated amount and either judgment has been entered for that amount or there is no dispute between the parties in relation to the claim for that amount. Absent that, a determination can be entered as a judgment under s 73 and enforcement proceedings taken through the District Court, and any counterclaim, set-off or cross-claim must be pursued through separate proceedings.

[62]      If that is the position in relation to the enforcement processes available through the District Court, or where there is a charging order under the CCA, there seems in principle to be no reason why it should not apply in respect of a bankruptcy notice under s 19(1)(d) of the Insolvency Act or a statutory demand under the Companies Act. It is true that such processes have an additional dimension to them, in the sense that ultimately they lead to a process which focuses on liquidity and asset worth. It is also true, as Associate Judge Doogue said, that bankruptcy and liquidation proceedings have a broader objective than simply ensuring that a particular creditor is paid. Despite that, bankruptcy notices and statutory demands are, in a practical sense, important enforcement mechanisms, as Randerson J recognised. And in the present case, the debt which Holmes Construction seeks to recover has the force of a court judgment behind it. This is not a case where a creditor has sought to use bankruptcy or liquidation proceedings to recover a small amount from a person or company which can plainly afford to pay it.

6      Volcanic Investments Ltd v Dempsey & Wood Civil Contractors Ltd (2005) 18 PRNZ 97 (HC).

7      See, for instance, Kizer Builders Ltd v OEC Construction Ltd HC Wellington CIV-2006-485-2287, 16 November 2006; Freemont Design & Construction Ltd v Natures View Joinery Ltd HC Hamilton CIV-2006-419-269, 26 July 2006; and SCI Development & Construction Ltd v NZ Built Ltd HC Auckland CIV-2005-404-3656, 23 December 2005.

8      John Ren “Enforcing Payment Obligations Under the Construction Contracts Act 2002” (2006) 12 NZBLQ 336 at 352–355.

9      Silverpoint International Ltd v Wedding Earthmovers Ltd HC Auckland CIV-2007-404-104, 30 May 2007.

10 Laywood v Holmes Construction Wellington Ltd [2009] NZCA 35, [2009] 2 NZLR 243.

[63]      If the contrary view were to be adopted, the efficacy of the s 73 process would, in our view, be undermined. Parties to construction contracts could refuse to pay an amount ordered by an adjudicator, and resist bankruptcy notices or statutory demands in relation to the debt, on the basis that they had a counterclaim, set-off or cross-demand. The effect of this would simply be to recreate similar problems to those which led to the enactment of the CCA, albeit in a different context.

[64]      We acknowledge that this approach may produce hardship. A party may have a meritorious counterclaim, set-off or cross-demand and may not raise it in the context of the CCA or by means of separate proceedings. Yet that party may be precluded from raising it in an application to set aside a bankruptcy notice or a statutory demand that follows an unsatisfied judgment issued under s 74. This seems hard. But while the adoption of the alternative view would alleviate this hardship, it would, as we have said, create another hardship – it would keep the party in whose favour the adjudicator had ruled from its entitlement under the CCA, and thereby frustrate its purpose.

[65]      We emphasise again that we were asked to consider only the first of the two stages referred to at para [61] above. It may be that different considerations arise at the point that the court must determine whether it will exercise its discretion to adjudicate a judgment debtor bankrupt or order the liquidation of a company (see AMC Construction Ltd v Frews Contracting Ltd [2008] NZCA 389 at para [7]). But that is a point on which we express no opinion.

[24]   Mr Collins submitted there is an inherent contradiction between the interim ‘pay now, argue later’ regime of the Construction Contracts Act and the finality of liquidation. He said this contradiction has not yet been resolved by the courts and was expressly left open by the Court of Appeal in Laywood v Holmes Construction Wellington Ltd. While Mr Collins is correct that the Court emphasised it was not dealing with an application to place a company into liquidation, that is of no assistance to Alpine, which, at this stage, is merely seeking to set aside a statutory demand. It may well be that Alpine could resist being placed into liquidation but that does not entitle it to have the statutory demand set aside. The Court of Appeal was clear that, at this stage of the liquidation process, s 79 of the Construction Contracts Act applies and precludes the consideration any counterclaim in the enforcement of an adjudication award. Any other interpretation would undermine the ‘pay now, argue later’ regime of the Construction Contracts Act.

[25]   Nor does the Court have any discretion in this. The wording of s 79 is clear, there can be no set-off or counterclaim unless “judgment has been entered for that amount” or “there is not in fact any dispute between the parties in relation to the claim for that amount”. In this respect, Alpine’s reliance on Kariiti Ltd v Donovan Drainage

& Earthmoving Ltd is misplaced. That decision concerned an application to stay a liquidation proceeding under r 31.11 of the High Court Rules 2016. The creditor, who had been awarded $110,664.89 by an adjudicator, entered the determination as a judgment in the District Court pursuant to s 59(2)(c) of the Construction Contracts Act. The creditor then issued a statutory demand and, when the debtor did not pay, it applied to have the debtor placed into liquidation. The debtor then commenced proceedings in the District Court seeking final determination of the correct amount payable under the construction contract. It was in this context that the debtor applied to stay the liquidation proceedings. That is quite a different situation from the present for several reasons. The debtor in Kariiti Ltd v Donovan Drainage & Earthmoving Ltd was not claiming a right of set-off. Rather, it had commenced proceedings seeking a final determination that would supersede any interim award under the Construction Contracts Act. Section 79 was, therefore, not engaged. The question before the Court was effectively one of interim relief, not set-off. In any event, the Court was dealing with an application to stay the liquidation proceedings, not an application to set aside a statutory demand. As I have said, the Court of Appeal has emphasised the potential distinction between the various stages of the liquidation process.

[26]   Where a statutory demand is served to enforce an adjudication award under the Construction Contracts Act, there is simply no scope for the Court to entertain any counterclaim or set-off (except one permitted under s 79).

Result

[27]Alpine’s application to set aside Haskell’s statutory demand is dismissed.

[28]   I reserve costs, not having heard from counsel as to these. My preliminary view is that Haskell is entitled to costs on a 2B basis. In any event, I would expect counsel to be able to resolve costs, but, if that is not possible, the parties may come back by memorandum in the usual way.

Associate Judge Johnston

Solicitors:

Gibson Sheat, Wellington for applicant

Thomas Dewar Sziranyi Letts, Lower Hutt for respondent