B Property Group Limited v Ecotech Commercial (NZ) Limited

[2020] NZHC 2673

IN THE HIGH COURT OF NEW ZEALAND NELSON REGISTRY

I TE KŌTI MATUA O AOTEAROA WHAKATŪ ROHE

CIV-2020-442-013

[2020] NZHC 2673

UNDER

the Companies Act 1993

IN THE MATTER

of the liquidation of a company

BETWEEN

B PROPERTY GROUP LIMITED

Plaintiff

AND

ECOTECH COMMERCIAL (NZ) LIMITED

Defendant

Hearing:	1 October 2020
Appearances:	J Burley for plaintiff G Praat for defendant
Judgment:	12 October 2020

JUDGMENT OF ASSOCIATE JUDGE JOHNSTON

[1]                 The plaintiff has commenced winding up proceedings against the defendant pursuant to pt 16 of the Companies Act 1993. The defendant seeks an order pursuant to r 31.11 of the High Court Rules staying the proceeding and prohibiting advertising. This is opposed.

[2]                 The background to the dispute between B Property Group Ltd (BPG) and Ecotech Commercial (NZ) Ltd (Ecotech) is not without its complications, arising as it does from a failed joint enterprise. However, as the argument unfolded before me, it became increasingly obvious that the dispositive issue was a narrow one.

B PROPERTY GROUP LIMITED v ECOTECH COMMERCIAL (NZ) LIMITED [2020] NZHC 2673

[12 October 2020]

[3]                 BPG is a property developer. Ecotech was formed in order to establish a business which it was envisaged would import and market kitset homes and other buildings. By 2015 it had apparently established contractual arrangements with a foreign manufacturer of such products. It had also secured Ministry of Business, Innovation and Employment confirmation that the buildings to be imported complied with New Zealand Building Code standards for residential homes.

[4]                 In 2017 BPG and Ecotech, through their respective Managing Directors had discussions concerning BPG using Ecotech’s modular building system for a development project in Wanaka involving a multi-storey motel complex. Both parties recognised that the current MBIE approval would not extend to a structure of that description, and therefore that, before the proposed development could go ahead, Ecotech would need to secure MBIE approval for the system to be used for multi-storey buildings which would involve Ecotech committing significant time and resources to the process.

[5]                 Without the assistance of their solicitors, BPG and Ecotech (and other parties) prepared and executed a document they described as a “term sheet” plainly intended to record the arrangements they had in mind.

[6]The terms sheet concluded as follows:

The Term Sheet is a binding document. Upon signing the Term Sheet it is a confirmed commitment to proceed to the finalisation of the Agreements (most are already in Draft format) that will be required to govern the terms of this Term Sheet. Both parties agree to act in good faith to do all things necessary and appropriate to deliver in full the terms and purposes agreed in this term sheet, and within the agreed timeframes. Should a party have good reason to believe that the other party is failing to meet their good faith obligations, they are entitled to issue a formal written “Request to Remedy” notice to the other party detailing the fault, the remedial action required and the timeframe for that remedy to be put in place. On the basis that the Request to Remedy notice is itself fair and reasonable, the non-defaulting party shall be entitled to terminate the agreement if the defaulting party does not satisfactorily remediate on the identified faults with [sic] the stated time period.

[7]                 It is not easy to know exactly what the parties’ objectively assessed collective intention was from that concluding paragraph.

[8]                 Although the parties say that the term sheet is “a binding document”, it does not purport to be the final description of their arrangements, and, in the second sentence, the parties committed to finalising their agreement in a formal agreement at a later stage. The view I take is that this document is not capable of being regarded as a heads of agreement, let alone a final contractual arrangement. It is more in the nature of a joint statement as to what the parties expect to agree in due course. To apply what appears to me to be the most obvious legal tag to the document, it is an agreement to agree.

[9]                 It would seem that both BPG and Ecotech then set about attempting to finalise their contractual arrangements. However, for whatever reason, that did not occur.

[10]              In the meantime, it seems that Ecotech was facing certain financial difficulties and bearing in mind the parties’ apparent intention of working together on some aspects of their businesses, BPG agreed to make a payment to Ecotech.

[11]              The term sheet contemplated that the final arrangements between the parties would involve BPG making certain payments to Ecotech as the anticipated development progressed. Whether and if so how closely the funding arrangement to which I have just referred is linked to that is not obvious from any contemporaneous evidence.

[12]              In any event, BPG agreed to advance monies to Ecotech, presumably to assist it in pursuing the parties’ joint objectives, and the arrangement was captured in a short agreement, once again prepared by the parties without the assistance of their solicitors, but this time in rather clearer terms.

[13]              The parties to the second arrangement were Ecotech, a company which had yet to be formed but which the parties referred to as MOD Hotels Ltd, BPG and, importantly, a company by the name of Modular Build Ltd (MBL) which is referred to as the “trustee”.

[14]The recitals to this agreement were in the following terms:

2.Background

2.1The above listed parties (Excluding the Trustee) entered into a Term Sheet agreement on March 4th — marked “Annexure A”. The formal documents reflecting this term sheet are currently being prepared.

2.2As a sign of good faith, B Property Group has agreed to deposit the “Margin A Advance” listed under the term sheet (being a value of

$220,000 plus GST NZD) to the Trustees’ nominated bank account.

[15]Then, the agreement provided:

3.Agreement

3.1B Property Group agrees to advance the above listed payment to the trustee on the basis the Trustee holds the money on trust on behalf of Ecotech Commercial and does not distribute the funds to Ecotech Commercial until the formal agreements reflecting the list term sheet had been completed and executed by the parties.

3.2Should the parties not have completed the formal agreements reflecting the list term sheet within 14 days of signing this agreement then  the  Trustee  agrees  to  refund  the  above  listed  amount  to   B Property Group.

[16]              The evidence is that pursuant to that arrangement BPG paid $200,000 inclusive of GST — as opposed to $220,000 plus GST — to MBL. Almost as soon as MBL received those funds, BPG was put under pressure by Ecotech to permit MBL to release monies to Ecotech. It is common ground that BPG did authorise MBL to release the funds. The funds were released in full by MBL to Ecotech, and have since been expended by that company in the ordinary course of its business. In the meantime, the deadline for the finalisation of the contractual arrangements referred to in cl 3.2 came and went.

[17]              Some nine months later BPG requested the “return” of those funds and then on 23 January 2020 served a statutory demand on Ecotech. Ecotech appears to have treated the letter of demand with ignore, and did not comply with the statutory demand within the 15 days as required of it. BPG therefore commenced this proceeding in which Ecotech now applies for the order I have described.

[18]              As submitted on behalf of BPG by Mr Burley, against the background of a demand for the payment which was ignored and the service of a statutory demand which was also ignored, forcing BPG to commence proceedings, Ecotech starts from

a weak position in terms of this application which is founded squarely on the proposition that there is a genuine dispute as to the alleged debt, the very issue which BPG’s informal demand and more particularly its statutory demand were designed to draw out.

[19]              Furthermore, Ecotech’s explanation for why it did not comply with the statutory demand in one way or another prior to the expiry of the statutory 15-day period for doing so is not at all convincing. The statutory demand was served at Ecotech’s registered office — the office of its accountants — under cover of a letter from BPG’s solicitors. Ecotech’s Managing Director, Mr Tony Frost, says that this was only forwarded to him by email 4 days later on 27 July 2020. Mr Frost says that he did not open the attachment and therefore was unaware that it was a statutory demand. As Mr Burley submits this evidence is difficult to follow. As he also says, this nevertheless left 7 working days within which an application to set aside the statutory demand could have been made. The position appears to me to be that Ecotech did not take BPG’s informal or formal demands seriously until they were forced to do so by the commencement of this proceeding.

[20]              I accept Mr Burley’s submission that as a result BPG has the “standing” to apply to wind up the company described by the Court of Appeal in 99 Ltd v Luxury Rentals NZ Ltd1 and is entitled to a prima facie presumption of insolvency. In Waikato Motors v Westend Property Developments Ltd,2 Associate Judge Smith confirmed that an applicant for a stay in such a situation carries a heavy onus and must establish that there is a strong prima facie case of the existence of a genuine dispute on substantial grounds. In MacDonald v Amber Holdings Ltd,3 I went further and suggested that it is a form of abuse of process for a defendant to make such an application when all that he, she or it relies on are the grounds that were available on an application to set aside a statutory demand.

1      99 Ltd v Luxury Rentals NZ Ltd [2019] NZCA 424 at [16].

2      Waikato Motors v Westend Property  Developments  Ltd  [2019]  NZHC  865  at  [5]  citing  Signs Advertising Limited v CPC New Zealand Limited [2017] NZHC 461 (HC) at [24] and Nemesis Holdings Limited v North Harbour Industrial Holdings Limited (1989) 1 PRNZ 379 at 385.

3      MacDonald v Amber Holdings Ltd [2019] NZHC 3380 at [22].

[21]Despite those relatively strongly worded decisions, in insolvency proceedings

— whether bankruptcy or winding up proceedings — the court has a residual discretion at every stage, including on a final application for an order, and where an applicant can establish a strong prima facie case for the existence of a genuine dispute, the court will invariably stay the proceeding and require the case to proceed in the ordinary way.

[22]              In my judgment Ecotech is able to establish a strong case that there is a genuine dispute about the alleged debt here.

[23]              The $200,000 was paid by BPG to MBL as trustee on 26 March 2020 pursuant to an informal (but perfectly enforceable) trust instrument that required the trustee to hold those monies and only pay them out to Ecotech in the event that BPG and Ecotech executed their anticipated contractual arrangements within a certain period of time. BPG then permitted the trustee to pay those monies away meaning that there is no question of them being held on trust. That raises a serious question about the basis for those payments — was BPG assuming a degree of risk and agreeing to make absolute payments to Ecotech in the expectation that it would ultimately be deducted from any entitlement Ecotech might have had when the development was concluded? Or, in authorising the trustee to make these payments, did BPG reserve its position and secure for itself an entitlement to recover those monies not from the trustee but from Ecotech?

[24]              As to this core issue there is a dramatic conflict of evidence. BPG’s Managing Director Mr Andrew McIntosh, says that he expressly reserved the company’s position, although he is unable to put before the Court any conclusive record of this. Ecotech’s Managing Director, Mr Frost, denies this. On BPG’s behalf Mr Burley poses the rhetorical question: Why would BPG elect to simply give away $200,000 in that way? The answer may be that BPG anticipated the finalisation of the contractual arrangements, MBIE authorising Ecotech’s use of its building system for multi-storey buildings, the successful development of a motel complex and that BPG would get its investment back by deduction against any entitlements that Ecotech might have at that stage. In all the circumstances, that does not appear to me to be a fanciful assessment of the position. Furthermore, it is perhaps even easier to understand when one

appreciates that BPG’s Managing Director, Mr Andrew McIntosh, is the brother of one of Ecotech’s directors, Mr Phillip McIntosh.

[25]              Generally, there appears to be a lack of clarity in terms of the parties’ obligations, especially in regards to what is to occur in the situation they now find themselves in. As a result, I am left in real doubt as to whether BPL is entitled to recover the monies that were the subject of its statutory demand.

[26]              In the end, my judgment is that there is a genuine issue to be tried as to whether or not BPG is entitled to the recovery of this $200,000 from Ecotech, and that that can only be determined upon proper examination of the parties’ evidence and the testing of that evidence in the usual way. Certainly, it does not seem to me to be an issue which this Court sitting in its insolvency jurisdiction should determine on a summary basis.

[27]              Accordingly, I grant Ecotech’s application for a stay of these winding up proceedings and an order prohibiting their advertising.

[28]              Not having heard from counsel in relation to costs I reserve these. My preliminary view is that Ecotech is entitled to its costs on a 2B basis. With that indication I expect that counsel will be able to deal with costs without further reference to the Court. However, if that proves impossible the parties can file memoranda in the usual way.

Associate Judge Johnston

Solicitors:

McVeagh Fleming, Auckland for plaintiff Knapps Lawyers, Nelson for defendant