Beckett Books Ltd v Moving Out 2012 Ltd

[2015] NZHC 669

IN THE HIGH COURTOF NEW ZEALAND AUCKLAND REGISTRY

CIV-2014-404-001493 [2015] NZHC 669

BETWEEN

BECKETT BOOKS LIMITED

Plaintiff

AND

MOVING OUT 2012 LIMITED Defendant

Hearing:	10 September 2014
Appearances:	D Grindle for the Applicant G Bogiatto for the Respondent
Judgment:	8 April 2015

JUDGMENT OF ASSOCIATE JUDGE SARGISSON

This judgment was delivered by me on 8 April 2015 at 10.30 a.m. pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date.......................................

Solicitors:

WRMK Lawyers, Whangarei

Auckland City Lawyers, Auckland

BECKETT BOOKS LIMITED v MOVING OUT 2012 LIMITED [2015] NZHC 669 [8 April 2015]

[1]      Beckett Books Limited applies to have a statutory demand for the sum of

$102,699 set aside on the basis that there is an arguable counterclaim against the party making the demand, Moving Out Limited, under s 290(4)(b) of the Companies Act 1993. That section provides:

290 Court may set aside statutory demand

[…]

(4) The court may grant an application to set aside a statutory demand if it is satisfied that—

[…]

(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.

[2]      Beckett Books Ltd already applied unsuccessfully to have an identical, older demand  set  aside  on  limited  grounds.1   The  demand  became  stale  under  s  288

Companies Act, and a new, identical demand was issued, dated 9 June 2014.

[3]      The  demand  arises  from  the  sale  and  purchase  of  a  business  known  as “Beckett Books” that imports and distributes books and educational products.2   The amount said to be owing is the unpaid balance of the value of the business’s stock as assessed  by a  jointly appointed  expert. The  applicant  says  there  is  an  arguable counterclaim against Moving Out for breach of warranty and misrepresentation as to the turnover of the business.

[4]      The basis for these claims is different to the basis on which the older demand was challenged.   In that case, the challenge was to the adequacy of the experts’ valuation of the trading stock.

[5]      Moving Out says there is no real basis for these new claims, and the mere assertion that a counterclaim exists is not sufficient to set aside a statutory demand; nor does the fact that there may be a counterclaim automatically entitle the applicant

to set aside the notice of statutory demand. It says that the contract does not allow a

1      Beckett Books Limited v Moving Out 2012 Limited [2014] NZHC 1130 (30 May 2014).

2      Beckett Books Ltd is the purchase pursuant a nomination under the agreement for sale and purchase. The nominor was Paul Simmons.

claim for set-off in any case; and in the alternative, the evidence on which the applicant relies is insufficient to show any real basis for a counterclaim.

Background

[6]      The claimed set-off or counterclaim is said to arise under three heads from the respondent’s conduct (as vendor) during the sale of the business.  These were not raised in the first application.

[7]      The first head relates to the way the supply of books by Beckett Books to the three stores owned by its directors at the time was treated within the company. The applicant alleges that Beckett Books, while controlled by the vendor, incorrectly accounted for the supply of these books in its account, and the turnover generated by the stores was misrepresented to the applicant. The sales to these three entities was said to be $550,000 and the applicant was assured that sales would continue. The actual amount of yearly sales between 1 April 2013 - 31 March 2014 was $94,500. In some cases these invoices were paid; in others, they were transferred to an inter- entity loan account.

[8]      The second head relates to the way the vendor allegedly inflated the sales figures and misrepresented the turnover.  This essentially involved Beckett Books, while controlled by the vendor, selling stock to the shops its directors owned in an artificial way, so as to inflate the apparent turnover of the business.

[9]      The third head relates to the way the vendor allegedly misrepresented the volume of Beckett Books’ sales to Paper Plus: despite knowing that Paper Plus Group accounted for 40% of sales, and a large proportion of that was through the Paper Plus Head Office promotions, the vendors failed to pass on knowledge they had obtained from Paper Plus management staff that this system of selling product was to end.

[10]     The applicant does not know how much it is counter-claiming for. It intends to get an expert report to determine that. In the meantime, it adduces various emails

and other documentary evidence which it says show the prima facie ability of a counter-claim.

[11]     The respondent says the contract prohibits set-off, so the counterclaim cannot have the effect of reducing the debt owed, and in any case, the counterclaim is unquantified and contingent and s 294 requires claims to be quantified.

Availability of a counter-claim

Is the claim excluded for being unquantified and contingent?

[12]     The respondent claims that an unquantified claim will not provide grounds for the court to set aside a statutory demand. That is not correct. In Covington Railways Limited, the Court of Appeal made it clear that an unquantified claim could justify the setting aside of a demand, so long as there was a real basis for the claimed set-off meaning that the applicant’s claim to be a creditor was, to the extent of the set-off, seriously in doubt. The key is the existence of a real dispute as to the

company’s indebtedness, which must then be resolved “in the ordinary way”.3

[13]     The question of a contingent claim may be more serious, but again, the central question appears to be whether the claim has a substantial enough basis to place  the  debt  in  doubt.  In  Datasouth  Holdings,  Master  Venning  found  that contingent and unquantified counter-claims or set-offs could not assist an applicant to set aside a statutory demand in this situation, because the counterclaim or set-off must be quantified so that the Court could determine whether the amount specified in the  demand  less  the  amount  of  the  counterclaim  or  set-off  was  less  than  the prescribed amount. But in that case, it was unclear whether the applicant would actually be able to identify any quantifiable sum at all, because no claim could exist unless and until its customers decided to make claims. The applicant was not in charge of that process. So the existence of the counter claim, not just the value of it,

was in issue. It was not clear that the counter claim was worth anything at all.4

3      Covington Railways Limited v Uni-Accommodation Limited [2001] 1 NZLR 272 (CA), at [11].

4      Datasouth Holdings Ltd v Melco Sales (NZ) Ltd High Court Christchurch M41/96, 17 May

1996, at 6, 7.

[14]     Likewise, in Alfex Doors and Windows it was unclear whether the counter claim was worth anything at all, because there was insufficient evidence to show that it had any merit, let alone whether it was worth enough to place the debt in doubt. It was the contingent nature of the claim, not the fact that it was unquantified, that was decisive. It was contingent in that it was dependent on the outcome of litigation

between the applicant and a third party. The relevant passages are as follows:5

However, we think that was a reasonable approach. At this stage, now nearly two  years  after  delivery  of  the  last  of  the  goods  concerned,  with  no quantified claim made upon Alutech, and with no clear basis for retention having been shown, it was realistic to regard the retained moneys as due and unpaid but held subject to a contingent claim.

...

Employing   the   generally   accepted   threshold   of   a “fairly   arguable basis”: United Homes (1998) Ltd v Workman 25/5/01, CA68,69 70/01, we are not satisfied that Alfex presently has any counterclaim set-off or cross- demand within the statute. The unquantified claim of “liquidated damages” plainly is contingent on the outcome of the unresolved dispute between Alfex and Ebert. Mr Michalik accepted that it is not possible to set-off or claim in respect of contingent indebtedness, as recognised in Body Corp s66289  v  Rua  Developments  Ltd 29/4/98,  Master  Faire,  HC  Hamilton M328/96, to which we were referred.

There is before the Court no sufficient basis for Alfex to continue to retain part of the purchase price against unquantified contingent claims of the kind in  question. We are  not  therefore  satisfied that there  has  been  shown  a substantial dispute whether or not that part of the debt is due.

[15]     Relevantly, the Court also stated:6

It is sufficient to say that, where grounds for setting aside under s 290(4) are clearly made out, it will be a rare case in which, in exercise of the residual discretion, the application is refused. The circumstances of each case will call for consideration. We content ourselves in this case with the brief note that Mr Michalik did not persuade us that any of the four matters taken into account by the Master were irrelevant or improper considerations.

[16]      In Pacific Forum Line v New Bay Holdings Ltd, Master Gambrill granted an application  even  though  the  amount  owing  had  not  been  quantified.  The  key

consideration was that the amount was obviously substantial:7

5      Alfex Doors and Windows Ltd v Alutech Windows and Doors Ltd CA38/01, 30 May 2001, at

[11], [15]-[16].

6 At [14].

7      Pacific Forum Line v New Bay Holdings Ltd HC Auckland M141/96, 4 April 1996, at 7.

Clearly these are evidential matters that should be addressed within the terms of an arbitration and clearly the landlord is aware that the tenant is entitled to certain compensation for events that have occurred during the alteration of the building and whilst the figure offered has not been accepted, it is the substantial part of moneys outstanding and claimed on the statutory demand.

[17]     The claim in the present case is unquantified, but it is not contingent in the sense contemplated by the above cases. Those cases are contingent in the sense that the very existence of a counterclaim or debt to set off against the statutory demand depends on the outcome of an external event over which the applicant party has no control. In this case, the existence of a counterclaim is not dependent on such an external event. It is indeed unquantified, but it is capable of quantification and, as pleaded by the applicant, appears to be of a substantial size. So long as there is some evidential foundation  establishing that there is  a real possibility of a successful counter-claim, and the counterclaim is not excluded by the contract, Beckett Books will have established what it needs to establish in order for s 290(4) to apply.

If  the counterclaim is  not  excluded for  being  unquantified  and  contingent,  is  it precluded by the anti set-off clause in the contract?

[18]     The sale and purchase agreement is in the standard form prescribed by the Real Estate Institute of New Zealand and the Auckland District Law Society. The clause cited by the respondent as precluding set-off, cl 3.3(1), does nothing of the sort. All it says is that, on the settlement date, the purchaser must pay the balance of the purchase price.

[19]     Grant v New Zealand Motor Corporation established that equitable set-off could be excluded expressly or by clear implication. The wording in the lease in that case was that payment of rent was to be “free and clear of exchange or any deduction whatsoever”. That wording embraced matters like moneys outlaid on repairs that should have been done by the landlord. It did not in its natural sense embrace a set-off, and therefore did not exclude set-off.8   As the wording in this case is even

less clear than in Grant,  I do not think it can support that interpretation. Similarly in

8      Grant v New Zealand Motor Corporation [1989] 1 NZLR 8 (CA) at 13.

Pacific Forum Line the wording “without any deduction” did not preclude a counter- claim.9

[20]     Browns Real Estate, which the respondent cites in support of the proposition that the contract excludes set-off, applies where a commercial party has “expressly agreed” that a set-off cannot be raised.10 It does not contradict the above cases. The contract does not appear to me to contain any express agreement that set-off cannot be raised. And even if there were a no set-off provision, according to Bountiful Holdings:11

The Court of Appeal [in the Brown’s Real Estate case] did not lay down a black letter rule, but simply indicated that the court had discretion and said how that discretion should be exercised in the general run of cases. When there is a no set-off provision, the party applying to set aside the demand has the  onus of persuading the  court that it should depart from the  general approach set out by the Court of Appeal.

[21]     In any case, I think the facts as alleged by the applicant would establish a counterclaim for misrepresentation rather than just a set-off. Grant describes the differences between those two things as follows:12

The effect of the distinction between set-off and counterclaim is well understood. A counterclaim is a cross-action which may have no connection at all with the subject matter of the claim, see e.g. Stumore v Campbell & Co. [1892] 1 QB 314, and is not confined to money claims. It is not of itself a defence to the claim although under RR 534 and 535, where claim and counterclaim arise out of the same matter (McPhee v Wright Stephenson & Co. (1901) 19 NZLR 321), one judgment only is given in favour of the party who on a balance is entitled to recover. Set-off affords a defence to an action wholly or in part depending upon the amount and is by its very nature limited to money claims. When a set-off is established by judgment it will pro tanto extinguish the plaintiff's claim: Briscoe v Hill (1842) 10 M. & W.

735, 738; In re Hiram Lamp Co. [1903] 1 Ch 70, 74.

While the difference between the effect of set-off and counterclaim is clear enough it is suggested that the test for deciding whether a cross-claim is one or the other is uncertain.

9      Pacific Forum Line, above n 5, at 7-9.

10     Browns Real Estate, at [16]-[17].

11     Bountiful Holdings Ltd v University of Auckland [2012] NZHC 1076, at [17].

12     Grant, above n 6, at 11.

[22]     The counterclaim is therefore available in law. The only remaining question is  whether,  on  the facts, there is  something to  suggest  that  the  counterclaim  is genuinely arguable.

Whether claim arguable on the facts

[23]     Without wanting to reach any conclusions as to the truth of the allegations made by Becketts, I consider that the evidence discloses allegations which merit further investigation.   I note by way of example the allegations in the affidavit of Paul Simmons, in support of the applicant by way of reply, that are indicative of the dispute:

38.   In paragraph 12 of her affidavit, Jill Beckett [in support of the respondent] doesn’t explain exhibit F at all.   Both Jill and the accountant were aware that they had told me on 17 July 2012 that the turnover of the business was $350,000 up until that point of the month.  Company records show that in fact the turnover was $200,000 at that time. The email indicates that both Jill Beckett and the accountant were obviously well aware of this discrepancy and had given me incorrect information during the due diligence period.

39.  I agree with paragraph 13 of Jill Beckett’s affidavit that in relation to the Clearance Shed, the stock is on consignment and only charged when it is sold.  She does not explain why her husband would say to his staff, “Can you put more stock into the Clearance Shed and charge the stock they have so it goes into sales”.

[24]     Those allegations went  unchallenged  at the hearing. That in itself is not surprisingly, given they were made in reply, but they are significant and illustrate the fact that there are unanswered questions that cannot be dealt summarily.  They are matters for trial.

Result

[25]     Counsel for the applicant submits that, if the Court does not feel able to set aside  the  statutory demand,  it  might  instead  set  aside  the  demand  subject  to  a condition under s 290(7) of the Companies Act. That condition could be akin to an order that the demand be stayed for a period of three months and if, after that time, the  applicant  has  not  filed  the  contemplated  claim  against  the  respondent,  the demand would be reinstated and the application to have it set aside declined.

[26]     Though the applicant has a responsibility to file a claim without delay, as the applicant has demonstrated it has a reasonably arguable basis for a counterclaim, it has reached the threshold in s 290(4).

[27]     I see no reason not to set aside the statutory demand.   I make an order accordingly.

Associate Judge Sargisson