Brickworks Buildings Products (NZ) Pty Limited v Commercial Factors Limited
[2012] NZHC 35
•2 February 2012
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2011-404-2249 [2012] NZHC 35
UNDER the Companies Act 1993
BETWEEN BRICKWORKS BUILDING PRODUCTS (NZ) PTY LIMITED
Applicant
ANDCOMMERCIAL FACTORS LIMITED Respondent
Hearing: 11 August 2011
Counsel: A J Lloyd and D A J Tong for Applicant
V E Fletcher for Respondent
Judgment: 2 February 2012 at 12:30 AM
JUDGMENT OF ASSOCIATE JUDGE ABBOTT
In accordance with r 11.5 High Court Rules
I direct the Registrar to endorse this judgment
with a delivery time of 12.30pm, on 2 February 2012.
Solicitors:
MinterEllisonRuddWatts (A J Lloyd/D Tong) P O Box 3798 Auckland, for Applicant
Ellis Law (B Ellis), P O Box 4516 Auckland 1140, for Respondent
Counsel:
Vibeke Fletcher, P O Box 130 Auckland 1140
BRICKWORKS BUILDING PRODUCTS (NZ) PTY LIMITED V COMMERCIAL FACTORS LIMITED HC AK CIV-2011-404-2249 2 February 2012
[1] This case concerns a dispute over liability for factored invoices. It comes before the Court on an application by Brickworks Building Products (NZ) Pty Ltd (Brickworks) to set aside a demand for payment of the invoiced amounts made by the respondent, Commercial Factors Limited (CFL).
[2] The invoices were rendered to Brickworks by Brendan Taylor Transport Ltd (BTT) for work allegedly undertaken for Brickworks. CFL and BTT have had a debt factoring arrangement for some time. CFL says that the debts represented by these invoices were assigned to it under that arrangement.
[3] CFL says that it issued the demand after it heard that disputes had arisen between Brickworks and BTT, and after enquiries made about Brickworks’ financial position caused CFL to doubt Brickworks’ solvency.
[4] Brickworks contends that the demand should not have been made as CFL
knew that:
(a) there was an issue concerning the validity of the assignment of the invoices;
(b)Brickworks was disputing the validity of approximately half of the invoiced charges; and
(c) Brickworks had various claims against BTT that were available as a set-off.
Amendment of name
[5] Brickworks issued this proceeding inadvertently naming the respondent as Commercial Factors and Finance Limited. It is common ground that the respondent is named Commercial Factors Limited. I make an order amending the respondent’s name accordingly.
Background
[6] Brickworks is a registered overseas company that trades in New Zealand under the name Austral Bricks. It is part of a group of Australian companies known as the Brickworks Group. It has used BTT to distribute its goods since BTT was incorporated in April 2008. In December 2010 BTT entered into a written contract with Brickworks (signed on 16 December 2010, to commence on 1 January 2011) to provide various yard services in addition to the delivery work.
[7] BTT is a New Zealand registered company, owned and operated by Mr Brendan Taylor and his wife. Prior to its incorporation, Mr Taylor traded as Brendan Taylor Transport. Mr Taylor entered into a debt factoring agreement with CFL in that capacity in about 2001. CFL says that that agreement provided for the assignment to CFL of invoices rendered by Brendan Taylor Transport to its customers (the evidence does not disclose whether that agreement was in writing).
[8] In February 2009, BTT started sending CFL invoices that it had rendered to Austral Bricks, in keeping with the factoring arrangement previously reached between Mr Taylor and CFL. Although the invoices were addressed to Austral Bricks Ltd, there is no such company and it is common ground that the invoices were for work undertaken for Brickworks trading as Austral Bricks. The initial invoice dated 28 February 2009 was in the standard form required by CFL under its debt factoring agreements in that it contained the following printed statement:
PLEASE MAKE CHEQUES PAYABLE TO:
This invoice has been assigned to Commercial Factors Ltd and payment must be made to P O Box 62530, Central Park, Auckland.
In addition, the invoices carried a separate stamp reading:
PLEASE READ CAREFULLY because these invoices have been factored and are now the legal property of Commercial Factors Ltd. No rights of set- off or contra are available at all whilst the factoring agreement exists. Payment is valid only if paid to:
COMMERCIAL FACTORS LTD
P O BOX 62-530, CENTRAL PARK, AUCKLAND
[9] At about the same time, both BTT and CFL wrote to Brickworks (as Austral Bricks Ltd) to advise it of the factoring arrangement and that payment was to be made to CFL. Both letters were dated 2 March 2009.
[10] BTT’s letter contained the following paragraph:
All invoices, both present and future, are or will be the legal property of Commercial Factors Ltd. Consequently, no rights of set-off, counter claim or contra are available for any goods or services we purchase from you. If you consider that you or your company have a valid claim to set-off any amount due to us you must contact Commercial Factors Ltd. And notify them immediately. [sic] Otherwise payment for these purchases should they arise will be made direct by us in the normal course of business.
[11] CFL’s letter was in a standard form that it sent to customers of its factoring
clients. The material parts of that letter read:
Notification of Factoring and the Assignment of the Book Debts of Brendan Taylor Transport
We would like to take the opportunity to inform you that Commercial Factors Limited provide Brendan Taylor Transport with a comprehensive debtor’s ledger management, administrative and factoring service.
This means that we purchase invoices from Brendan Taylor Transport and
provide a management service for their debtor’s ledger.
The purpose of this letter is to inform you of the assignment of all invoices of Brendan Taylor Transport to us.
In practical terms this simply means:
1) All invoices and statements are issued by our office.
2)All payments, once due, against Brendan Taylor Transport’s invoices are to be sent to our office for processing. Please note our banking details are, ANZ Penrose, [details omitted]. Please include the reference 238/43 if paying by direct credit.
3) All present and future invoices are the legal property of
Commercial Factors Ltd.
Please note that all payments are to be made direct to Commercial Factors Ltd, thus fulfilling the Debt Factoring Agreement between Brendan Taylor Transport and Commercial Factors Ltd.
We do ask that if you consider you have a valid claim for any set-off or contra deal relating to invoices prior to the date of this letter, or any queries relating to the monthly statement or individual invoices, that you please contact us immediately. Otherwise we ask that you ensure payment for invoices is made without our client’s payment terms with you.
[12] CFL confirmed these payment arrangements in a further letter to Brickworks dated 30 March 2009.
[13] From that time onwards, BTT issued invoices to Brickworks, each of which carried the statements shown on the first invoice of 28 February 2009, and Brickworks paid the invoiced sums direct to CFL.
[14] In early 2010 BTT and CFL reviewed the factoring arrangement. On 19
February 2010 they signed a debt factoring facility agreement (the factoring agreement). Under clause 2.1 of the factoring agreement BTT assigned to CFL all existing and future debts, with ownership of future debts to vest in CFL immediately upon that debt coming into existence:
The Vendor hereby assigns absolutely to the Purchaser (and accordingly a Security Interest in favour of the Purchaser is created in) all Debts incurred or to be incurred by any Customer which shall be in existence as at the date of this agreement or which shall come into existence at any subsequent time before termination of this agreement. The ownership of every such Debt in existence as at the date of this agreement shall vest in the Purchaser as at the date of this agreement. The ownership of every such Debt coming into existence at any time after the date of this agreement shall vest in the Purchaser immediately upon such Debt coming into existence.
[15] CFL contends that it would have sent notice of this agreement to Brickworks at that time in accordance with its standard practice but that it does not have any documentary record of having done so.
[16] Up until the end of 2010 Brickworks had an arrangement with another transport company for the storage of Brickworks’ products pending distribution to its customers. Brickworks says that BTT approached it with a proposal to take over that storage arrangement. Initially it was intended that BTT would find an alternative yard. BTT was unable to secure an appropriate yard, but Brickworks found one and it was agreed that BTT would lease it from Brickworks and conduct the yard operation from there.
[17] On 16 December 2010 Brickworks and BTT entered into a written agreement encompassing the services that BTT was to provide for Brickworks, including storage of Brickworks’ products and the operation of the yard (the yard agreement). The yard agreement set out rates of charge for the various aspects of the services
(deliveries, storage and handling), as well as the costs payable by BTT for its lease of the yard.
[18] The yard agreement was drafted on the assumption that the other transport company would transfer Brickworks’ products from its yard. It appears that there was an issue over this, and BTT and Brickworks agreed orally that BTT would undertake that work at a fixed rate.
[19] The yard agreement was for a period of two years commencing on 1 January
2011. It provided for BTT to submit invoices monthly, with Brickworks to pay the invoiced amounts by the 20th of the following month. The rates payable for the various services were set out in schedules to the agreement. The parties agreed that those rates would be reviewed after one year. The yard agreement provided for immediate termination by either party for a substantial breach of any terms which were either incapable of remedy or were not remedied within 10 days of notice being given to the party in breach. Two further terms are of particular significance for the present application:
(a) Clause 21 of the agreement provided:
No party will assign any of its rights under this agreement without the prior written consent of the other party.
(b) Clause 25 provided that it was an entire agreement:
This agreement constitutes the entire agreement between the parties with respect to the subject matter of this agreement and supersedes all prior agreements, understandings and communications, whether oral or written between the parties....
[20] BTT issued invoices to Brickworks under this new arrangement in January, February and March 2011. Brickworks paid some of those invoices (the payments being made to CFL) but disputed other invoices directly with BTT.
[21] CFL heard of the disputes, reviewed the invoices, and in doing so learned that the entity to which the invoices had been rendered (Austral Bricks Ltd) was not a registered company but that Brickworks’ traded in New Zealand under the name Austral Bricks. From that time BTT rendered its invoices to Brickworks.
[22] On 4 March 2011 CFL sent Brickworks its standard letter giving notice of the factoring arrangement and assignment. The notice was in identical terms to that sent on 2 March 2009 except that it was sent to Brickworks (rather than Austral Bricks Ltd), the name of its customer was changed from Brendan Taylor Transport to Brendan Taylor Transport Limited, and a different payment reference was given.
[23] On the same day that CFL sent this letter to Brickworks, BTT met with Brickworks to discuss the disputed invoices. Brickworks says that some aspects of the dispute were resolved, but that it made clear that it would not pay for some charges which were not contemplated by the yard agreement. A few days later, on
10 March 2011, BTT ceased work under the agreement and left the yard, without notifying Brickworks. The following day it issued two further invoices, both of which Brickworks disputes.
[24] On 24 March 2011 Brickworks cancelled the yard agreement and requested
BTT to engage in mediation pursuant to a dispute resolution clause.
[25] CFL issued its statutory demand on 6 April 2011, notwithstanding this advice.
Principles for setting aside statutory demands
[26] The statutory demand was issued under s 289 of the Companies Act 1993 (the Act). The purpose of the demand is to test the solvency of the company ahead of the commencement of a liquidation proceeding. It has frequently been said that a demand is not to be used merely as a debt collection device nor to embarrass the
company where there is a dispute as to liability for the debt.[1]
[1] See Gateway Cargo Systems v Airborne Freight Ltd HC Auckland CIV-2003-404-7207, 16
March 2004 at [7].
[27] Section 290 of the Act gives the Court a discretion to set aside the statutory demand. It may do so if it is satisfied that there is a substantial dispute whether or not the debt is owing or is due, or the company appears to have a counterclaim, set- off or cross demand which exceeds the sum demanded, or there are other grounds on
which the demand ought to be set aside.[2]
[2] Companies Act 1993, s 290(4).
[28] The general principles that the Court applies in exercising its discretion are well established. They have been summarised as follows:[3]
[3] Bell Gully Brookers Company and Securities Law (online looseleaf ed, Brookers) at
[CA290.02(1)].
(a) The applicant must show that there is arguably a genuine and substantial dispute as to the existence of the debt. The task for the Court is not to resolve the dispute but to determine whether there is a substantial dispute that the debt is due. The mere assertion that there is a genuine substantial dispute is not sufficient: Queen City Residential Ltd v Patterson Co-Partners Architects Ltd (No 2) (1995) 7 NZCLC 260,936 (HC).
(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 other than by means of proceedings in the Companies Court.
(d) An applicant must establish that any counterclaim or cross demand is reasonably arguable in all the circumstances. The obligation is not to prove the actual claim. Such an obligation would amount to the dispute itself being tried on the application.
(e) It is not usually possible to resolve disputed questions of fact on affidavit evidence alone, particularly when issues of credibility arise.
Grounds for application and issues arising
[29] Brickworks says that CFL is not entitled to issue the statutory demand because BTT assigned the invoices without Brickworks' consent (contrary to clause
21 of the yard agreement). However, if the Court finds that the invoices were validly assigned, Brickworks says that:
(a) there is a genuine and substantial dispute as to approximately half of the debt; and
(b)it is able to set-off against any amounts not in dispute both a debt due to it in respect of rent and outgoings, and a claim for damages for
BTT's repudiation of the yard agreement.
[30] Brickworks also says that if the Court is not persuaded that there is a substantial dispute and set-offs which together exceed the debt, it is nevertheless just and equitable that the demand be set aside given:
(a) BTT's conduct (assigning the invoices without obtaining Brickworks’
consent and then repudiating the yard agreement);
(b)that Brickworks has attempted to resolve the disputes (this was known to CFL before it issued its statutory demand); and
(c) the security available to CFL under its factoring agreement (which includes the right to require BTT to repurchase the debt).
[31] As a further factor supporting its case that it is just and equitable to set the demand aside, and as a stand alone factor, Brickworks says that it is clearly solvent.
[32] Lastly, Brickworks seeks increased or indemnity costs on the grounds that CFL knew that the debts were disputed and was given the opportunity to withdraw the demand before this application was filed.
[33] CFL says that Brickworks has not established any of these grounds:
(a) CFL says that there can be no question that it is a creditor of Brickworks as the debts were assigned before the restriction on assignment under the yard agreement.
(b)CFL also contends that Brickworks’ disputes with BTT over the assigned debts are irrelevant as they did not exist at the time that the debt was assigned, and cannot give rise to a right of set-off after notice of assignment was given (both in the correspondence in March
2009 and again in February 2010).
(c) Further, CFL argues that even if Brickworks' claim arising out of BTT's alleged repudiation could be said to arise out of the same agreement as the debt (for the purpose of an equitable set-off), the
claim is for future losses and the law does not recognise an equitable set-off in respect of future losses.
(d)As to Brickworks' contention that it would otherwise be just and equitable to set aside the demand, CFL says that:
(i)the debts became its property as soon as they came into existence and there is no obligation on CFL to look to BTT before taking steps to recover from Brickworks as the underlying debtor;
(ii)BTT's failure to pursue matters under the dispute resolution clause in the yard agreement does not affect its rights; and
(iii)CFL was justified in issuing the statutory demand given that it had no more than unsubstantiated advice of a claim to set-off and the financial information available to it at the time showed that Brickworks had a negative net asset position and a substantial loss in the most recent financial period.
[34] Lastly, CFL contends that there is no reason to treat this matter any differently from a standard case when assessing costs.
[35] The issues arising out of the opposing contentions are:
(a) Were the debts assigned before the yard agreement?
(b) Is there a substantial dispute which must be taken into account?
(c) Is Brickworks entitled to claim set-offs in respect of rent and outgoings, and the damages claims?
(d) Is it just and equitable to set aside the demand? (e) What costs should be payable?
Was there a valid assignment?
[36] Counsel for CFL accepted, appropriately, that if the debts were not assigned before the yard agreement, BTT could not assign them without Brickworks' consent.[4]
Whether CFL is a creditor depends, therefore, on whether the debts were assigned either under the factoring agreement or earlier under the arrangements made in about February 2009.
[4] Linden Gardens Trust Ltd v Lenesra Sludge Disposals Ltd [1994] 1 AC 85 (HL); New Zealand
Payroll Software Systems Ltd v Advanced Management Systems Ltd [2003] 3 NZLR 1 (CA) at [26].
[37] Although it can be inferred from the available evidence that there was an agreement of some nature between BTT and CFL in February 2009, there is no direct evidence of the terms, and hence nature, of that agreement. That agreement was overtaken by the factoring agreement, clause 2.1 of which shows that it intended to assign debts as they came into existence and without further formalities (known as a whole turnover agreement) rather than being an agreement under which each debt is brought under the agreement only as accepted by the factor (known as a facilitative
agreement).[5] It is also clear from the wording of clause 2.1 that BTT intended to
transfer its rights in the debts to CFL “absolutely”.[6] As such the agreement comes within the statutory provision for assignment of a legal chose in action (such as a debtor) in s 50 of the Property Law Act 2007, provided written notice of the assignment was given by BTT to Brickworks.
[5] See categorisation in Freddy R Salinger, Factoring Law and Practice (2nd ed, Sweet & Maxwell, London, 1995) at [8-06], accepted in New Zealand Factors Ltd v The Farmers Trading Co Ltd HC
Auckland M1696/91, 7 May 1992 at 17 and Commercial Factors Ltd v Maxwell Printing Ltd HC
Auckland [1994] 1 NZLR 724 at 727.
[6] This is the view taken of a similar clause in Tony Tay & Associates Ltd v Commercial Factors Ltd
HC Auckland M951-IMO1, 19 October 2001 at [18].
[38] It is not clear, however, whether Brickworks was given notice of the factoring agreement. CFL’s general manager, Mr Haydon, gave evidence of the two letters outlined at paragraph [9] above and further stated that the factoring agreement was an “updated agreement” to record the customer as Brendan Taylor Transport Limited. He said that it was standard practice of CFL upon review of any factoring arrangement to send confirmation of assignment immediately and automatically to all of the client’s customers. He said that a letter was sent to Austral Bricks Limited
on or about 19 February 2010 in accordance with that practice. He said further that
CFL does not retain a hard copy on its files but that the letter was in virtually identical terms to that sent by CFL on 2 March 2009.
[39] It is surprising that CFL does not retain copies of such significant documents (particularly in light of CFL’s ability to produce the 2 March 2009 letters). I note the evidence of Brickworks’ office manager, Ms Smith, that she had no knowledge of any letter and, if one had been sent, she would expect to have seen it. Although I am unable to resolve this difference on this application, I do not see any need to do so. There is no suggestion that any notice that CFL sent was signed by BTT and there is no evidence from BTT that it gave Brickworks notice of the factoring agreement. For that reason I am not satisfied on the evidence before the court that there was a valid statutory assignment of the disputed invoices before the yard agreement, clause
21 of which prevents assignment without prior written consent.
[40] This leaves open whether CFL can claim an entitlement under an equitable assignment. For such a claim to be successful, Brickworks would need to have had clear notice of the terms of the assignment. Brickworks was never given a copy of the factoring agreement and did not know its terms. It was notified by the wording on each notice that the invoice had been assigned, but not of any matter that could preclude BTT from entering into the yard agreement with its stipulation in clause 21 that BTT could not assign any invoices arising under that agreement without Brickworks’ written consent. To the extent that BTT breached the factoring agreement by doing so, that is a matter between BTT and CFL, and CFL has rights under that agreement to protect itself from such breach.
[41] Counsel for CFL submitted that the court should take into account that all parties performed their obligations, in keeping with an assignment, from the date of the 2 November 2009 letters until 9 March 2011 (when Brickworks made its last payment to CFL in respect of invoices rendered by BTT). The only way in which the fact of payment could bear on the disputed invoices is if that could be taken to be a waiver of Brickworks’ rights under clause 21. This submission is met by clause 23 of the yard agreement which provides that any variation of the agreement had to be in writing. Moreover, Brickworks’ evidence is that Brickworks continued to pay
invoices to CFL after the commencement of the yard agreement as a result of oversight.
[42] The effect of this finding is that there is a genuine dispute as to whether there is a valid debt for CFL to demand. However, as counsel also addressed me on the other points, and in case I am wrong on the validity of the assignment, I will turn now to address briefly the other points.
A substantial dispute
[43] Ms Smith has given evidence for Brickworks that it disputes the sum of
$20,014.60 (inclusive of GST) of the $40,234.66 claimed by CFL. CFL does not challenge the fact that the disputes have been raised. It relies instead on its argument that the debts were assigned by the factoring agreement. I have already ruled against that but, even if the assignment was valid, there remains an issue over the debts now claimed. The factoring agreement specifically provides warranties by BTT (inter alia) that every debt assigned is bona fide and that there is no dispute in respect of them. I am satisfied that these are genuine disputes over Brickworks’ liability for the disputed invoices (whether BTT was entitled to charge and, in some cases, whether it undertook the work charged). CFL has recourse against BTT for such debts.
[44] I take the view, for the purpose of the breach application, that these disputes warrant the demand being set aside at least to the extent of the disputed amounts. This brings me to the issue of set-offs.
Is Brickworks entitled to claim set-offs?
[45] Brickworks contends that it has the following two claims which it is entitled to set-off against CFL’s claim:
(a) damages of at least $80,000 incurred as a result of BTT’s repudiation
of the yard agreement; and
(b) $8,077.93 for rent and operating costs invoiced under the yard
agreement, issued prior to BTT’s repudiation.
[46] It is not in dispute that a debtor has an equitable right of set-off against an assignee of the debt where the right either pre-dates the assignment or arises out of the same contract as the assigned debt:[7]
The result of the relevant authorities is that a debt which accrues due before notice of an assignment is received, whether or not it is payable before that date, or a debt which arises out of the same contract as that which gives rise to the assigned debt, or is closely connected with that contract, may be set off against the assignee....
[7] Business Computers Ltd v Anglo-African Leasing Ltd [1977] 1 WLR 578 at 585.
[47] This equitable rule is restated in s 50(3)(b) of the Property Law Act 2007, which provides that the assignee takes subject to equities arising before the debtor has actual notice of the assignment.
[48] In the statutory demand context, the set-off puts in doubt the assignee’s claim
to be a creditor[8] or eliminates the very debt on which the creditor relies.[9]
[8] Covington Railways Ltd v Uni-Accomodation Ltd {2001] 1 NZLR 272 at [11].
[9] Bean Supreme Ltd v ASDA Wholesale Ltd (1989) 4 NZCLC 65,134.
[49] Even assuming that there was a valid assignment under the factoring agreement, Brickworks claims an entitlement to set-off as both the debts and the claims raised by way of set-off arise out of the yard agreement or are closely associated with it.
[50] Counsel for CFL argued that the set-off claims were discrete and should be considered separately to the debts. She referred to the general authority of Grant v NZMC Limited[10]where the Court of Appeal said that an equitable set-off was available where a cross-claim so affects the plaintiff’s claim that it would be unjust to allow the plaintiff to have judgment without taking the cross-claim into account. The link between the set-off and cross-claim must be such that the two claims are interdependent, and the defendant’s claim calls into question or impeaches the plaintiff’s demand. Counsel also submitted that the fact that both claims arose out of
a single trading relationship was not necessarily determinative, and argued that the cross-claim had to be in existence at the same time, with any future claim to be
argued separately.[11] She argued that Brickworks’ major claim to set-off was for
separate losses arising out of repudiation of the yard agreement. As to the other aspect of set-off, she argued that the claim for rent and outgoings, although also arising out of the yard agreement, was not so connected to the invoice charges as to make them interdependent. She submitted that it was implicit in the passage cited at paragraph [46] above from Business Computers Ltd v Anglo-African Leasing Ltd that, even where a claim and counterclaim arose out of the same contract, the entitlement to set-off only arose where the counterclaim was in existence before notice of assignment was received.
[10] Grant v NZMC Ltd [1989] 1 NZLR 8 at 12-13 (CA).
[11] Relying on Esso Petroleum Co Ltd v Milton [1997] 1 WLR 938 (CA) at 951, followed in Van Melle Far East Ltd v GSL New Zealand Ltd HC Auckland CP 546/97, 27 April 1998 at [4] – [5] and Cozzolino v Santa Barbara Homes Ltd HC Auckland AP 15/SW01, 5 April 2011 at [37].
[51] The debts that CFL is claiming, and the claims for rent and for losses suffered as a result of BTT’s repudiation, all clearly arise out of the yard agreement. There is no question in my mind that they are interlinked. I do not accept the submission of counsel for CFL that it is implicit from the passage from Business Computers that the counterclaims had to have been in existence at the time of assignment (assuming for this argument that there was a valid assignment at the time of the factoring agreement). The three scenarios referred to in Business Computers are disjunctive. It is unrealistic to separate charges for carrying goods to and from the yard or handling them within the yard from charges for the use of the yard, or losses suffered as a result in BTT’s abandonment of the yard and repudiation of the yard agreement.
[52] The position with respect to the claim for damages for repudiation is not quite as clear and I accept the general principle that claims for future losses cannot be off- set. However, that is not to say that Brickworks did not suffer some loss immediately upon repudiation, which would be available by way of set-off.
[53] My view on the application of the passage from Business Computers is reinforced by the provisions of s 11 of the Contractual Remedies Act 1979, which I take as permitting a claim to set-off by a debtor against an assignee albeit limited to
the value of the benefit received by the assignee (in this case the amount of the debt).
Is it just and equitable to set aside the demand?
[54] In the context of an application to set aside a statutory demand, the court has a wide general discretion where there are factors (other than a genuine dispute or available set-off) which warrant the setting aside. Brickworks advances four factors in support of its claim that the demand should be set aside:
(a) CFL’s true dispute is with BTT. In this respect it relies upon the warranties in the factoring agreement (that every assigned debt is bona fide owing, there is no right of set-off or counterclaim available, there is no issue over BTT’s performance of its obligations, and BTT has no reason to believe that Brickworks is not and was not willing and able to pay). Notwithstanding these provisions BTT entered into the yard agreement with Brickworks knowing that that agreement required it to obtain written consent before assigning any debts. In those circumstances, Brickworks argued that the appropriate cause was for CFL to exercise its rights under the factoring agreement to require BTT to repurchase any debts that were disputed or subject to a set-off.
(b)Brickworks had sought unsuccessfully to resolve the underlying dispute with BTT (and advised CFL of that). BTT had initially agreed in principle to attend mediation but had not taken that any further.
(c) Brickworks had informed CFL of the alleged disputes, cancellation of the yard agreement and the assertion of rights of set-off, but CFL had proceeded in any event.
(d)Brickworks had produced accounts showing a clear ability to pay and given evidence that all its liabilities were guaranteed by its parent company and the wider group, which adds substantial assets and net profits.
[55] Although counsel for CFL challenged each of these points (primarily on the basis that there was no obligation on CFL to look to BTT before taking steps to
recover from Brickworks as the debtor) I take the view that this is not a suitable case for seeking payment of debt by way of a statutory demand.
Costs
[56] In the event that Brickworks was successful with its application, its counsel sought an order for increased or indemnity costs. He argued that Commercial Factors had issued the demand for the purposes of debt collection, knowing full well that the debt was disputed, and at the time of doing so it had full knowledge of the matters that Brickworks has put to the court in argument on the application (and which have proved to be successful). Counsel argued that this was an abuse of the statutory demand procedure, thus justifying an order for indemnity or increased costs. He relied on r 14.6(4)(a) of the High Court Rules which provides that indemnity costs may be awarded where a party has acted “vexatiously, frivolously, improperly, or unnecessarily in commencing, continuing, or defending a proceeding or a step in the proceeding”. Alternatively, he seeks increased costs under r
14.6(3)(b)(ii) on the basis that CFL unnecessarily prolonged the proceedings by pursuing arguments without merit.
[57] The general rule is that the successful party in an application to set aside a statutory demand is entitled to costs.[12]
[12] International Airline Training (NZ) Ltd v Rohlig New Zealand Ltd HC Auckland CIV-2003-404-
3464, 23 February 2004.
[58] Although CFL has been unsuccessful in this application, I am not persuaded that the position was so clear cut at the time of issue of the statutory demand, that it should not have issued the demand. I am not persuaded however, that it should have persisted with its application once Brickworks’ case was fully put before it in Brickworks’ notice of opposition and supporting affidavit. It seems to me that CFL persisted with the application from that point because it viewed it as a more effective debt collecting process, rather than because of a genuine belief as to a lack of arguable grounds and likely insolvency. In those circumstances, I consider that Brickworks should be entitled to increased costs for preparation for the hearing and
conduct of the hearing.
Decision
[59] I am satisfied that there are genuine disputes over the debts demanded by CFL and that Brickworks has arguable claims for set-off, which together make it appropriate to set the statutory demand aside.
[60] I make an order setting aside the statutory demand.
[61] CFL is to pay Brickworks its costs of and incidental to this application on a scale 2B basis, with the costs for preparation and appearance at the hearing to be
increased by 50%.
Associate Judge Abbott
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