AOTEAROA FORESTS LIMITED AND NZ FOREST WORKS LIMITED

[2024] NZHC 3076

IN THE HIGH COURT OF NEW ZEALAND MASTERTON REGISTRY

I TE KŌTI MATUA O AOTEAROA WHAKAORIORI ROHE

CIV-2024-435-18

[2024] NZHC 3076

UNDER

section 290 of the Companies Act 1990

IN THE MATTER

of an application to set aside a statutory demand

BETWEEN

AOTEAROA FORESTS LIMITED

Applicant

AND

NZ FOREST WORKS LIMITED

Respondent

Hearing:	9 October 2024
Appearances:	J Browne for Applicant D Calder for Respondent
Judgment:	22 October 2024

JUDGMENT OF ASSOCIATE JUDGE SKELTON

[1]    The applicant, Aotearoa Forests Ltd (AFL), applies to set aside a statutory demand issued by the respondent, NZ Forest Works Ltd (NZFW), in the sum of

$120,276.39 (including GST).1 The statutory demand is dated 18 July 2024 and was

served on 19 July 2024.

[2]    AFL submits the demand should be set aside on the basis there is a substantial dispute as to whether or not the debt is owing or is due; and that it appears to have a

1      This sum presently incorporates $658 in costs for the preparation of the statutory demand and costs of service. The demand less the costs would be $119,618.39 (including GST). The demand appears to be overstated by a further amount of $1,941.29 in respect of an invoice which was not due for payment until after the demand was issued. The demand less this amount would be for

$117,677.10.

AOTEAROA FORESTS LIMITED v NZ FOREST WORKS LIMITED [2024] NZHC 3076 [22 October 2024]

counterclaim, set-off, or cross-demand against the respondent which exceeds the amount specified in the demand. The counterclaim arises out of a number of alleged breaches by NZFW of its contract with the applicant.

[3]    NZFW submits that there are no genuine disputes or reasonably arguable counterclaims. Rather, it says the claims are designed to avoid payment because the contract has not been as profitable as AFL expected.

Background

[4]    The dispute between the parties relates to a logging arrangement in a pine forest in Tawa, known as Takapu Forest or “Whispering Pines”. The forest is owned by Whispering Pines Estate Limited (WPEL). A company related to AFL, Aotearoa Forest Management Ltd (AFML) acquired a stumpage block of pine trees in the forest by entering into a contract with WPEL. The contract provides for harvesting the block over the 2023 and 2024 calendar years.

[5]    NZFW harvests forests on behalf of forest owners. It ordinarily operates on a standard contract arrangement whereby it sells all the merchantable logs on behalf of the forest owner, receives all revenue, deducts agreed costs, and pays the remaining balance to the forest owner.

[6]    On 6 March 2023, AFL contracted with NZFW for the latter to undertake harvesting management services on its behalf for the stumpage block acquired by AFML (the Contract). AFL agreed to all terms and conditions, which included NZFW selling all the logs and receiving the revenue.

[7]    On 6 November 2023, the parties varied the Contract so that revenue from the sale of logs would go directly to AFL (or a related company). All contractors were employed directly by AFL (or a related company). The exception was the earthmoving/roading contractor, Fraser Hyde Contracting Limited (FHCL), which was employed by NZFW.

[8]    NZFW commenced harvest management services in December 2023. Things were going smoothly until around March 2024 when there was a sharp downturn in export prices.

Legal principles

[9]    Under s 290 of the Companies Act 1993, the Court may, on the application of a company, set aside a statutory demand. It relevantly provides:

290     Court may set aside statutory demand

…

(2)The application must be—

(a)made within 10 working days of the date of service of the demand; and

(b)served on the creditor within 10 working days of the date of service of the demand.

(3)No extension of time may be given for making or serving an application to have a statutory demand set aside, but, at the hearing of the application, the court may extend the time for compliance with the 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

…

(5)A demand must not be set aside by reason only of a defect or irregularity unless the court considers that substantial injustice would be caused if it were not set aside.

(6)In subsection (5), defect includes a material misstatement of the amount due to the creditor and a material misdescription of the debt referred to in the demand.

(7)An order under this section may be made subject to conditions.

[10]   The general principles that apply to applications to set aside statutory demands are well settled.2

(a)The onus is on the applicant seeking to set aside the statutory demand to show that there is arguably a genuine and substantial dispute as to the existence of the debt. The Court's task is not to resolve the dispute but to determine whether there is a substantial dispute that the debt is due.

(b)The mere assertion that a dispute exists is not sufficient. Material short of proof is required to support the claim that the debt is disputed.

(c)If such material is available, the dispute should normally be resolved first in ordinary civil proceedings before any statutory demand is issued.

[11]   In 144 Trustees Ltd v Mike Pero Real Estate Ltd, Osborne J set out a general approach to the exercise of the Court’s jurisdiction to set aside a statutory demand under s 290(4):3

As to s 290(4)(a):

·The applicant must show that there is arguably a genuine and substantial dispute as to the existence of the debt. Put another way, the applicant must show that there is a real and not a fanciful or insubstantial dispute.

·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.

·If such material is available the dispute should normally be resolved other than by means of proceedings in the Court’s Companies Act jurisdiction.

As to s 290(4)(b):

·An applicant must establish that it appears to have a counterclaim, cross-demand or set-off which is reasonably arguable in all the circumstances.

·The “appearance” test involves a review of low threshold.

2      See Confident Trustee Ltd v Garden and Trees Ltd [2017] NZCA 578 at [16].

3      144 Trustees Ltd v Mike Pero Real Estate Ltd [2018] NZHC 3197, (2018) NZCPR 220 at [8].

·The hearing relating to a s 290(4)(b) argument is to be short and to the point.

·It is to be distinguished from a summary judgment application where complex legal issues are not a bar to a remedy.

As to both ss 290(4)(a) and (b)

·It is not usually possible to resolve disputed questions of fact on affidavit evidence alone, particularly when issues of credibility arise.

Issues

[12]   The alleged debt relates to roading costs and management fees claimed by NZFW under the contract.

[13]   Although the actual costs invoiced by NZFW for roading works are not disputed, AFL contends that there was an agreement that payment of roading costs would be spread out over several months and therefore the roading costs were not due at the time the statutory demand was served.4 AFL also contends that NZFW has, in breach of contract, completed the harvesting directly for WPEL, and not accounted for the revenue received including whether it has been used to cover the outstanding April and May 2024 roading invoices.

[14]   Mr Browne, for AFL, was unable to confirm whether AFL disputes the management fees, other than the amount of $1,941.29 (invoiced on 30 June 2024) which seems not to have been due for payment until after the statutory demand was served. I note that the balance of the management fees which are properly part of the debt claimed in the statutory demand only total approximately $5,842.

[15]   AFL also contends it has reasonably arguable counterclaims for breach of contract by NZFW which exceed the amount of the demand. These counterclaims relate to alleged harvesting of low value logs, alleged downgrading of logs and the alleged breach arising from working directly with WPEL.

4      The debt must be due and presently payable as at the date on which the statutory demand is served in the sense that the creditor is entitled to “immediate payment” thereof: see Robyn Merrett and Stephen Revill (eds) Insolvency Law and Practice (online looseleaf ed, Thomson Reuters) at [CA289.02(1)].

[16]   I turn to consider these issues, first addressing the alleged counterclaims for harvesting low value logs and downgrading logs and then addressing the roading costs issues, including the alleged counterclaim relating to working directly with WPEL.

Harvesting low value logs and downgrading logs

[17]   These two counterclaims are based on an alleged breach by NZFW of its contractual obligation to exercise “all proper care and skill and endeavour to ensure the minimum amount of waste to marketable log and to cut the most favourable grades”.5

[18]   First, AFL contends that NZFW harvested low value logs incurring a loss for AFL in the total sum of $21,271.48 (including GST). AFL says that NZFW breached its contractual obligation by exporting low grade logs (domestic pulp) contrary to AFL’s cutting instructions. Domestic pulp attracts lower prices than bigger/longer logs. AFL contends that NZFW’s spreadsheet with estimated figures for the forest, and the photographs in evidence, indicate that low grade pulp logs have been exported as KI and KIS grade export logs;6 causing loss to AFL because at the relevant time these grades were producing a negative return. Mr Daning Sun, director of AFL, has prepared a spreadsheet showing the log volumes sold and calculating the alleged loss.

[19]   NZFW says that no domestic pulp logs were exported. All logs exported fell within the export log specifications. AFL’s cutting instructions included KI and KIS log grades as merchantable grades, and there was no instruction to limit the volume of lower value merchantable export log grades to be cut and loaded out. The forest did not contain large volumes of high-grade logs, and NZFW could only manage harvesting what was on site.

[20]   Second, AFL claims NZFW wrongfully downgraded logs causing loss to AFL of $44,777.35 (including GST). AFL says that NZFW downgraded logs to lower, less valuable, categories during export. C3 Ltd, an independent company involved in the exporting process, has produced Small End Diameter (SED) reports detailing the wood

5      As contained in cl 9 of the Contract.

6      Low grade logs.

carted to the port for export. Based on these reports, Mr Sun has calculated the loss arising from NZFW’s downgrades in a spreadsheet which details, over a seven-month period, the numbers of higher grade logs being found in lower grade categories. AFL contends that NZFW’s loose quality control, failing to maximise the return, is contrary to AFL’s cutting instructions and caused loss to AFL.

[21]   NZFW states that a SED measurement is one component of log specification and does not of itself determine the log grade. It says it is impossible for it to now provide evidence that the logs with larger SED may not have met other specifications, as they have now been exported. NZFW notes that the total gross revenue for the logs delivered to the port between December 2023 and 16 June 2024 is $1,989,670.00. Therefore, AFL’s claimed loss for the alleged downgrades equates to 2.04 per cent of the gross revenue.

[22]   The total amount of these two counterclaims is $66,048.83 (including GST). AFL invoiced NZFW for the bulk of the claimed losses on 31 May 2024 and a further invoice for $1,853.32 was issued on 30 June 2024. Mr Robert Calder,7 director of NZFW, disputed the claims on 20 June 2024. Then, on 18 July 2024, NZFW issued the statutory demand.

[23]   The outstanding invoices were followed up by AFL on 23 July 2024. In response, Robert Calder reiterated that NZFW disputed AFL’s claims and formally requested that the disputes be referred to arbitration under cl 13 of the Contract. I was advised at the hearing that the parties have not progressed the arbitration process any further and an arbitrator has not yet been appointed.

[24]   There is a significant amount of evidence and submission put forward by both parties on these claims and there is arguably a genuine and substantial dispute between the parties which has been referred to arbitration. I remind myself that I am only required to be satisfied that AFL appears to have a counterclaim which is reasonably arguable, and that the “appearance” test is a review of low threshold.

7      Mr Robert Calder is the director of NZFW, whilst Mr Dahl Calder is counsel for NZFW in these proceedings. To avoid confusion, I will refer to Robert Calder by his full name throughout the decision.

[25]   The claims were made, and disputed, some time before the statutory demand was issued, so this is not a case of counterclaims being manufactured in response to a statutory demand. Indeed, in this case, the evidence indicates that the statutory demand for outstanding roading costs and management fees may have been issued in response to AFL’s claims. There is contemporaneous documentary and photographic evidence that provide some support for the claims and the quantum is based on detailed spreadsheets prepared by Mr Sun. I am satisfied that AFL appears to have reasonably arguable counterclaims against NZFW in the sum of approximately $66,048.83 (including GST).

Roading issues

[26]In my view, there are three issues to consider here. I address each issue in turn.

Dispute as to whether roading costs were due for payment at time of statutory demand

[27]   First, as noted above, AFL contends that the parties agreed that roading costs would be spread out over time to align with revenue and therefore the roading costs claimed in the statutory demand were not due for payment when the statutory demand was served. Mr Sun says this agreement was reached during phone conversations with Robert Calder.

[28]    There is a direct conflict of evidence between Mr Sun and Robert Calder as to whether there was any agreement in this regard. Robert Calder acknowledges that he had phone discussions with Mr Sun regarding the 30 April 2024 roading invoice, but he denies that there was any agreement between the parties to spread the roading costs over several months to align with revenue. He says industry practice is that roading costs need to be paid prior to harvest revenue coming in, and the contract required payment on the 20th of the month following the invoice. He says that, after part payment of the 30 April 2024 roading invoice was made by AFL in May, he demanded AFL make full payment. But, contrary to the Contract, AFL only paid a further third of the costs in June and no more has been paid since.

[29]   There is some support for AFL’s position in the evidence. There are emails between Robert Calder and Mr Sun in August, November and December 2023 which

indicate there may have been some flexibility in payment of roading costs and that roading costs were to be approved in advance by AFL. There are also emails between Robert Calder and Mr Sun between 4 June and 6 June 2024 which suggest that, although Robert Calder was chasing Mr Sun for payment of the 30 April 2024 roading invoice, there was some arrangement for payment by instalments. The evidence is that two payments of $34,326.35 each were made by AFL in May and June in respect of the 30 April 2024 roading invoice. Robert Calder also says that at some point:

… Mr Sun was still giving NZFW verbal confirmation that NZFW would definitely get paid for the remaining 1/3 of the April roading invoice and he gave payment dates that proved to be fruitless.

[30]   Mr Calder, counsel for NZFW, submits this is not an issue where questions of credibility need to be determined by cross-examination at trial. He submits that there is no contemporaneous documentary record of any such agreement. However, as noted above, the emails between 4 and 6 June 2024 arguably provide some contemporaneous documentary support for an agreement to pay by instalments over several months.

[31]   Mr Calder also submits that the Contract is clear that NZFW invoices for roading costs were to be paid on the 20th of the month following the invoice. However, this submission begs the question of whether the parties agreed to vary or amend the payment terms.

[32]   Mr Calder refers to the ‘entire agreement’ clause in the contract requiring that no amendment will be effective unless in writing and signed by both parties. However, as submitted by Mr Browne, there is an issue as to whether the parties waived the formal requirements in the entire agreement clause. In support of this, Mr Browne highlights the earlier informal agreements between the parties by exchange of emails whereby, at AFL’s request, NZFW agreed to reduce the management fee it was otherwise entitled to under the contract.8

[33]   Mr Calder also submits that there was no consideration for any amendment to the payment terms. However, this raises issues as to whether consideration was

8      Stephen Todd and Matthew Barber (eds) Burrows, Finn and Todd on the Law of Contract  in New Zealand (7th ed, LexisNexis, Wellington, 2022) at [19.3.2].

required and, if so, whether there was consideration in the form of a benefit “in practice”.9 These are not issues that can properly be resolved in the context of an application to set aside a statutory demand.

[34]   Mr Calder submits that, even if there was some agreement with regard to spreading payment of the April 2024 roading invoice over several months, the pattern of payments by AFL suggests that AFL should have made a further payment in July, but no payment was made even in  response to  the statutory demand.   However,   Mr Browne submits that, by July, there was clearly a dispute between the parties about AFL’s claims discussed above and that is why no further payments were made by AFL.

[35]   Mr Calder submits further there were no discussions or agreements in relation to the 31 May 2024 roading invoice for $76,026.50. Mr Calder notes that Mr Sun gave an instruction by email dated 10 May 2024 for this roading work to be undertaken. I agree with Mr Calder that while there is evidence from Mr Sun of a specific oral agreement to spread the costs of the 30 April 2024 roading invoice “over several months”, Mr Sun does not refer to any specific discussions or agreement regarding spreading payments for the 31 May 2024 roading invoice.

[36]   Overall, I consider there is conflict of evidence regarding the alleged oral agreement to spread payments for the April 2024 roading invoice over several months. I consider there is arguably a genuine and substantial dispute as to whether the final instalment of the 30 April 2024 invoice was due before the statutory demand was served on 19 July 2024.10 However, I do not consider there is sufficient evidential basis before me to support an argument that there was also an agreement to spread payment of the 31 May 2024 roading invoice over several months.

Dispute as to existence of roading costs debt arising out of NZFW harvesting directly for WPEL

[37]   Second, AFL submits that the Contract is still on foot yet NZFW, in breach of the contract, has: harvested directly for the landowner WPEL; delivered logs on its

9      At [4.5.3(b)].

10     The final one third instalment payment for the 30 April 2024 roading invoice may have been due on 20 July 2024 in line with the usual monthly payment process.

own bush dockets; and received the revenue that AFL ought to have received under the contract, including the portion of revenue AFL earmarked to pay for the roading costs which are the subject of the statutory demand. AFL submits the Contract provides AFL would manage the marketing and sale of the logs; all logs would be delivered on AFL’s bush dockets; and AFL would receive all revenue and is responsible for paying all costs as agreed with NZFW.

[38]   Mr Sun has produced a spreadsheet calculating the revenue that AFL would otherwise have received which would have gone towards roading costs; this is estimated to be $108,317.92 (including GST). Mr Sun says that NZFW has received the benefit of the roading required to complete the harvest, and the revenue from completing the harvesting, but has still issued a statutory demand against AFL for outstanding roading costs.

[39]   Mr Calder submits that, although the agreement between AFL and AFML is not in evidence, “it must be right that any right AFL had to harvest the trees was dependent on the contract between WPEL and AFML”. He says there was a dispute between WPEL and AFML that resulted in AFML leaving the remaining harvest and management with WPEL. The continuing availability of trees was essential to the contract between AFL and NZFW and, as a result of the dispute between WPEL and AFML, the trees were no longer available. Therefore, Mr Calder argues the contract “became impossible to perform and was otherwise frustrated and for that reason NZFW was discharged from further performance”.

[40]   Mr Calder also submits there was no agreement that AFML could pay for the balance of the roading costs from future log sales and, in any event, the amount calculated by Mr Sun as revenue that would have gone towards roading costs is “entirely speculative” as revenue from future log sales was never guaranteed.

[41]    There is limited evidence as to the position between AFML and WPEL, and neither of these parties are before the Court. Mr Sun is also a director of AFML. He states in his evidence that WPEL trespassed AFML on 13 June 2024, but, from AFML’s perspective, the contract with WPEL is still on foot and the dispute between AFML and WPEL has been referred to mediation or arbitration.

[42]   Robert Calder states in his evidence that NZFW considers AFL has repudiated the Contract because of the dispute between AFML and WPEL. He says he was approached by WPEL to complete the harvesting around 20 June 2024 and, because he had not had a response from Mr Sun to an email sent on 18 June 2024 regarding progressing the harvest, he “accepted the job” and got on with harvesting the remaining trees for WPEL.

[43]   However, it is not clear on the evidence before me that the Contract has been cancelled by NZFW as a result of any repudiation, and it is not even clear that this is the position asserted by NZFW. As noted above, Mr Calder submits that the contract has become impossible to perform and is frustrated and this is the basis on which NZFW was discharged from further performance. Nor is there any evidence put forward as to NZFW’s arrangements with WPEL, what revenues have been received by NZFW as a result of completing the harvest for WPEL, and whether any of those revenues have been used to cover the outstanding roading costs.

[44]   I cannot properly determine in the context of an application to set aside a statutory demand whether the contract has been repudiated, or cancelled, or affirmed, or whether it is “frustrated”. Even if the contract has been properly cancelled or is frustrated, there is an issue as to when precisely the parties were discharged from their obligations and what obligations and liabilities had accrued by that date, and whether money paid before the time of discharge is recoverable, or whether money payable at the time of discharge ceased to be payable.11 Further, as the completion of the harvest has been enabled by the roading work undertaken in April and May 2024, an issue arises as to whether a portion of the revenue from completing the harvest has been, or should have been, used by NZFW to cover some or all of the outstanding roading costs, and whether AFL should be required to pay NZFW for those costs. It is difficult to see why AFL should necessarily be liable for roading costs to enable harvesting for which it has not received any revenue or benefit.12

[45]   There are a number of issues and questions on the evidence before me as to the status of the Contract and the position between the parties. I am satisfied that there is

11     Contract and Commercial Law Act 2017, ss 42 and 61.

12     Contract and Commercial Law Act 2017, ss 43 and 62.

arguably a genuine and substantial dispute between the parties with regard to these issues, and therefore as to the existence of the alleged debt for outstanding roading costs.

Counterclaim for damages arising from alleged breach of contract

[46]   Third, and related to the discussion above, AFL contends that it has a reasonably arguable counterclaim against NZFW for breach of contract on the basis that NZFW has undertaken the balance of the harvest directly for WPEL while the contract with AFL may still be on foot.

[47]   While Mr Sun has put forward a calculation of AFL’s loss arising from this alleged breach ($108,317.92), it is acknowledged by Mr Browne that this is not as precisely calculated as the losses claimed for the other counterclaims discussed above. However, I am satisfied that it is reasonably arguable that AFL has suffered some loss as a result of the alleged breach.13 For example, it is reasonably arguable that AFL has a claim for losses or liability incurred on the basis that NZFW would perform the contract by delivering logs to the exporter on AFL’s bush dockets and that AFL would receive the revenue. Alternatively, AFL may have a claim for restorative or restitutionary damages based on the benefit (revenue) gained by NZFW from the breach.14 Even if Mr Sun’s estimate referred to above is discounted by up to 50 per cent, the counterclaims would together exceed the specified amount in the statutory demand.

[48]   Again, on the basis of a review of low threshold, I am satisfied that AFL appears to have a reasonably arguable counterclaim in this regard.

Conclusion

[49]   For the reasons set out above, I consider there is arguably a genuine and substantial dispute between the parties as to whether AFL is liable for the outstanding roading costs claimed in the 30 April 2024 roading invoice and the 31 May 2024

13     See Beckett Books v Moving Out 2012 Ltd [2015] NZHC 669 at [12]; and Arrow Matting Systems Ltd v Impala Equities Ltd [2015] NZHC 1479 at [83].

14     Stephen Todd and Matthew Barber (eds) Burrows, Finn and Todd on the Law of Contract  in New Zealand (7th ed, LexisNexis, Wellington, 2022) at [21.5].

roading invoice. Further, for the reasons set out above, I consider that AFL appears to have reasonably arguably counterclaims against NZFW for breach of contract which exceed the amount claimed in the statutory demand. Therefore, I consider that the statutory demand should be set aside.

[50]   I do not consider it appropriate in the circumstances to impose any conditions on the setting aside of the demand. AFL should not be required to pay the alleged debt to the Court or into an independent trust account when there is arguably a genuine and substantial dispute as to the bulk of the amount claimed in the statutory demand. Further, I do consider that it is appropriate to impose a condition that AFL is to expedite determination of its counterclaims by way of arbitration. NZFW referred the disputes to arbitration and the process has not been progressed by either party and no arbitrator has been appointed. It may well be more cost efficient for the parties to refer the disputes between them to mediation.

Result

[51]   The statutory demand is set aside under s 290(4)(a) and/or s 290(4)(b) of the Companies Act 1993.

[52]   My preliminary view is that costs should follow the event and that AFL is entitled to 2B costs and reasonable disbursements as fixed by the Registrar. The parties should endeavour to agree costs. However, if costs cannot be agreed then memoranda may be filed (not exceeding three pages, excluding costs schedules) and costs will be determined on the papers.

Associate Judge Skelton

Solicitors:

Henderson Reeves, Whangarei for Applicant Gibson Sheat Lawyers, Wellington for Respondent