Bussell Construction Limited v Manchester Industrial Holdings Limited
[2015] NZHC 858
•29 April 2015
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2014-485-11442 [2015] NZHC 858
UNDER The Companies Act 1993 BETWEEN
BUSSELL CONSTRUCTION LIMITED Plaintiff
AND
MANCHESTER INDUSTRIAL HOLDINGS LIMITED Defendant
Hearing: 26 February 2015 and 20 April 2015 Counsel:
F B Collins and S U Gunawardana for Plaintiff
J Grace for DefendantJudgment:
29 April 2015
JUDGMENT OF ASSOCIATE JUDGE SMITH
[1] The defendant applies for an order under r 31.11 of the High Court Rules for orders restraining publication of the plaintiff’s liquidation proceeding and for an order staying the proceeding.
[2] In its liquidation claim, the plaintiff contends that the sum of $47,295.37 is owing to it for work carried out on a property owned by the defendant at Eva Street, Wellington (the property). The plaintiff was engaged to undertake building renovations at the property, on level one and on the penthouse.
[3] The defendant denies liability. It says that the work was carried out poorly,
and that the plaintiff’s labour and materials charges were excessive.
The background to the dispute
[4] The plaintiff ’s first five progress payment claims for the renovation work, totalling $103,960.05, were paid in full.
BUSSELL CONSTRUCTION LIMITED v MANCHESTER INDUSTRIAL HOLDINGS LIMITED [2015] NZHC 858 [29 April 2015]
[5] The dispute emerged when the plaintiff issued its payment claim number six on 1 April 2013. The defendant contended that the payment claim did not appear to correlate with the work actually performed, and it put certain questions to the plaintiff. When the plaintiff did not respond to the defendant’s questions, the defendant terminated the contract, and engaged another comapny to complete the building work.
[6] The defendant says that approximately 80 per cent of the plaintiff’s work on the penthouse needed to be demolished and rebuilt. It also alleges that the plaintiff used unqualified workers who did not follow proper methodology. Defects in the work are said to include:
(1)Walls, beams, windows, flashings and other work were built in the wrong places.
(2) Consequently, the rooms and walls did not align.
(3)One of the structural beams had been built at the wrong height and was not connected properly.
(4)The floorplates were not properly attached, and consequently walls were not locked down and were loose.
(5) Walls were not plumb.
(6)Timber framing for external walls had bowed because it had been erected and then left exposed to the elements without being locked into place or covered.
(7) The bowed frames caused the lining and cladding to be defective.
[7] The plaintiff issued another payment claim, for $16,942.64, on 13 April 2013. On 17 April 2013, the defendant sent an email to the plaintiff disputing this claim and asking for particulars. It asked for copies of all materials invoices, detailing the areas of work they related to, so that it could prepare a payment schedule for any
outstanding amounts as required by the Construction Contracts Act 2002 (the CCA). The defendant noted that, at that stage, the payments schedule would show that nothing was payable.
[8] The plaintiff did not respond for over a year. On 31 July 2014, it eventually issued a payment claim for $40,648.15 plus GST, covering work allegedly carried out at the property between 26 November 2012 and 5 April 2013. This was the first communication the defendant received from the plaintiff since the defendant sent its
17 April 2013 email.
[9] The defendant replied to the July 2014 payment claim on 1 August 2014. It
noted that “as previously discussed” the account was disputed. It added:
The matters raised in our correspondence last year have not been addressed. The claim under the [CCA] is not accepted. The payment schedule is zero.
[10] The plaintiff then served a statutory demand on the defendant under s 289 of the Companies Act 1993 (the Act). The defendant did file an application to set aside the statutory demand, but the application was not properly served and it was subsequently withdrawn. In the meantime, the defendant had not complied with the demand.
[11] On 30 October 2014, the plaintiff served on the defendant a notice of adjudication of claim under the CCA. In its notice of adjudication, the plaintiff referred to the payment claim it had served on 31 July 2014, and asserted that the defendant had neither paid the amount claimed nor issued a payment schedule under s 21 of the CCA (which, if it had been sent, would have set out any reasons the defendant had for withholding payment).
[12] On 6 November 2014 the defendant served a response to the plaintiff’s notice of adjudication. The defendant contended that the plaintiff ’s payment claim was invalid, because it failed to adequately identify the work for which the claims were made.
[13] On 12 November 2014 the plaintiff commenced the present liquidation proceeding. At that stage, the plaintiff’s adjudication application under the CCA was still pending.
[14] The defendant filed and served its application to stay the liquidation proceeding on 8 December 2014. On 15 December 2014, it filed and served a statement of defence to the liquidation proceeding.
[15] The adjudicator issued his determination under the CCA on
19 December 2014. He upheld the plaintiff ’s arguments, finding that $46,745.37 plus costs were payable to the plaintiff. There was no determination on the merits of the defendant’s allegations that the plaintiff had overcharged and carried out defective building work: the decision was made on the basis of the adjudicator’s findings that the plaintiff had served a valid payment claim under s 20 of the CCA, and that the defendant had not served a valid payment schedule in response. The finding that the defendant had failed to serve a valid payment schedule in accordance with s 21 of the CCA meant that the amount claimed by the plaintiff became a debt due to the plaintiff under ss 22 and 23 of the CCA.
[16] The defendant contends that the adjudicator erred in finding:
(1) That the plaintiff’s payment claim was a valid payment claim under
s 20 of the CCA; and
(2)That the defendant’s payment schedule was not a valid payment schedule under s 21 of the CCA.
[17] The defendant submits that the “pay now argue later” principle underpinning the CCA is not engaged in the circumstances of this case,1 because of those alleged errors by the adjudicator. It proposes to file an application for judicial review of the adjudicator’s decision, citing the alleged errors of law referred to in para [16] above
and seeking an order setting aside the adjudicator’s determination.
1 As to which, see paragraphs [26] to [28] of this judgment.
The defendant’s stay application
[18] In support of its application to stay the liquidation proceeding, the defendant says that the debt on which the liquidation claim is based is genuinely disputed, and that the plaintiff’s financial position is such that the plaintiff would be unable to refund the $46,745.37 (plus adjudicator’s costs) if the defendant were successful in its proposed application for judicial review, or if it ultimately succeeded on the merits of its allegations of overcharging and defective building work. The defendant says that that result would not be just.
[19] The defendant has deposited the sum of $46,745.37 in an independent solicitors’ trust account, to secure the plaintiff ’s position pending the determination of the proposed judicial review proceeding and any substantive determination on the merits of the parties’ respective claims.
[20] In a supplementary memorandum filed by counsel shortly before the resumed hearing on 20 April 2015, the defendant indicated that if the plaintiff ’s director Mr Bussell was willing to personally guarantee repayment in the event that either the defendant’s judicial review proceeding was successful or the defendant was awarded damages for the defective work, it would be prepared to pay a limited amount (for example, $10,000) to the plaintiff while the judicial review is pending, with the balance of the claimed money remaining in the solicitors’ trust account pending further order of the Court. That proposal was not taken up by the plaintiff.
Additional evidence of the plaintiff ’s financial position
[21] When the defendant’s stay application was called on 26 February 2015, an issue arose over certain evidence produced by the defendant in a reply affidavit which was directed to the issue of the plaintiff ’s solvency, and its ability to repay the defendant if the defendant paid the amount claimed and later turned out to have no liability. I advised counsel that I would receive this evidence, subject to the plaintiff being given an opportunity to file a further affidavit dealing with the solvency issue. The matter was adjourned to 20 April 2015 on the basis that any affidavit the plaintiff might wish to file in answer to the defendant’s insolvency allegations was to be filed and served by 5 March 2015.
[22] A further affidavit by Mr Bussell was filed on 6 March 2015. No issue was taken over the late filing of this affidavit, and I have taken it into account in this judgment.
Principles applicable to stay applications under rule 31.11
[23] Rule 31.11 provies:
31.11 Power to stay liquidation proceedings
(1) If an application for putting a company into liquidation is made under rule 31.3, the defendant company…may, within 5 working days after the date of the service of the statement of claim on the defendant company, apply to the court—
(a) for an order restraining publication of an advertisement required by rule 31.9 or any other information relating to that statement of claim; and
(b) for an order staying any further proceedings in relation to the liquidation.
(2) The court must treat an application under subclause (1) as if it were an application for an interim injunction and, if it makes the order sought, it may do so on whatever terms the court thinks just.
(3) The inherent jurisdiction of the court is not limited by this rule.
[24] There was no dispute between counsel over the principles applicable under r 31.11. They were helpfully summarised by Associate Judge Faire (as he then was) in Canam Construction Ltd v Ormiston Hospital Investment as follows:2
The general principles applicable in respect of an application for an order restraining advertising and staying a winding up application were referred to in Taxi Trucks Ltd v Nicholson. That decision referred to the earlier decision in Exchange Finance Co Ltd v Lemmington Holdings Ltd and to the decisions in Bateman Television Limited (in liq) & Anor v Coleridge Finance Company Ltd. The principles were confirmed also in Edge Computers Ltd v Colonial Enterprises Ltd.
From those authorities I extract the following specific principles:
(a) A winding up order will not be made where there is a genuine and substantial dispute as to the existence of a debt such that it would be an abuse of the process of the court to order a winding up;
2 Canam Construction Ltd v Ormiston Hospital Investment HC Auckland CIV-2010-404-291, 10
August 2010 at [6]-[7]. Citations omitted.
(b) In such circumstances, the dispute, if genuine and substantially disputed, should be resolved through action commenced in the ordinary way and not in the companies court;
(c) The assessment of whether there is a genuine and substantial dispute is made on the material before the court at the time and not on the hypothesis that some other material, which has not been produced might, nonetheless be available;
(d) The governing consideration is whether proceeding with an application savours of unfairness or undue pressure;
(e) The rule directs the court to deal with the application as if it were an application for an interim injunction;
(f) Rule 31.11 enables the court to impose terms on any order it makes; and
(g) Such applications are interlocutory in nature and accordingly it would be wrong to express a concluded view of the merits of the dispute.
Relevant provisions of the CCA
[25] The following provisions of the CCA are relevant:
3 Purpose
The purpose of this Act is to reform the law relating to construction contracts and, in particular,—
(a) to facilitate regular and timely payments between the parties to a construction contract; and
(b) to provide for the speedy resolution of disputes arising under a construction contract; and
(c) to provide remedies for the recovery of payments under a construction contract.
20 Payment claims
(1) A payee may serve a payment claim on the payer for each progress payment,—
…
(2) A payment claim must—
(a) be in writing; and
(b) contain sufficient details to identify the construction contract to which the progress payment relates; and
(c) identify the construction work and the relevant period to which the progress payment relates; and
(d) indicate a claimed amount and the due date for payment; and
(e) indicate the manner in which the payee calculated the claimed amount; and
(f) state that it is made under this Act.
…
21 Payment schedules
(1) A payer may respond to a payment claim by providing a payment schedule to the payee.
(2) A payment schedule must—
(a) be in writing; and
(b) identify the payment claim to which it relates; and
(c) indicate a scheduled amount.
(3) If the scheduled amount is less than the claimed amount, the payment schedule must indicate—
(a) the manner in which the payer calculated the scheduled amount; and
(b) the payer's reason or reasons for the difference between the scheduled amount and the claimed amount; and
(c) in a case where the difference is because the payer is withholding payment on any basis, the payer's reason or reasons for withholding payment.
22 Liability for paying claimed amount
A payer becomes liable to pay the claimed amount on the due date for the progress payment to which the payment claim relates if—
(a) a payee serves a payment claim on a payer; and
(b) the payer does not provide a payment schedule to the payee
…
23 Consequences of not paying claimed amount where no payment schedule provided
(1) The consequences specified in subsection (2) apply if the payer—
(a) becomes liable to pay the claimed amount to the payee under section 22 as a consequence of failing to provide a payment
schedule to the payee within the time allowed by section
22(b);
…
(2) The consequences are that the payee—
(a) may recover from the payer, as a debt due to the payee, in any court,—
(i) the unpaid portion of the claimed amount; and
(ii) the actual and reasonable costs of recovery awarded against the payer by that court;
…
(4) In any proceedings for the recovery of a debt under this section, the court must not enter judgment in favour of the payee unless it is satisfied that the circumstances referred to in subsection (1) exist.
26 Relationship between Part and other dispute resolution procedures
(1) To avoid doubt, nothing in this Part prevents the parties to a construction contract from submitting a dispute to another dispute resolution procedure (for example, to a court or tribunal, or to mediation), whether or not the proceedings for the other dispute resolution procedure take place concurrently with an adjudication.
(2) If a party to a construction contract submits a dispute to another dispute resolution procedure while the dispute is the subject of an adjudication, the submission to that other dispute resolution procedure does not—
(a) bring to an end the adjudication proceedings; or
(b) otherwise affect the adjudication.
(3) However, an adjudicator must terminate the adjudication proceedings on a dispute if, before the adjudicator determines the dispute, that dispute is determined under another dispute resolution procedure.
(4) Nothing in any other enactment or rule of law or any contract affects the application of this Part.
59 Consequences of not complying with adjudicator's determination under section 48(1)(a)
(1) The consequences specified in subsection (2) apply if a party to the adjudication fails, before the close of the relevant date, to pay the whole or part of the amount determined by an adjudicator.
(2) The consequences are that the party who is owed the amount (party
A) may do all or any of the following:
(a) recover from the party who is liable to make the payment
(party B), as a debt due to party A, in any court,—
(i) the unpaid portion of the amount; and
(ii) the actual and reasonable costs of recovery awarded against party B by that court:
…
(c) apply for the adjudicator's determination to be enforced by entry as a judgment in accordance with subpart 2 of Part 4.
…
(4) In any proceedings for the recovery of a debt under this section, the court must not enter judgment in favour of a party unless it is satisfied that the circumstances referred to in subsection (1) exist.
(5) In this section, relevant date means—
(a) the date that occurs 2 working days after the date on which a copy of the relevant determination is given to the parties to the adjudication under section 46(3); or
(b) if the adjudicator determines a later date under section
48(3)(a)(ii), that later date.
60 Effect of review or other proceeding on adjudicator's determination under section 48(1)(a)
An adjudicator's determination under section 48(1)(a) is binding on the parties to the adjudication and continues to be of full effect even though—
(a) a party has applied for judicial review of the determination;
or
(b) any other proceeding relating to the dispute between the parties has been commenced.
The Court’s general approach to the enforcement of CCA claims
[26] In delivering the judgment of the Court of Appeal in Salem Ltd v Top End
Homes Ltd, Panckhurst J stated: 3
What is plain is that ss 22 to 23 of the [CCA] are designed to facilitate regular and timely payments between the parties to a construction contract. If a property owner does not respond to a payment claim by serving a payment schedule, then the contractor is entitled to recover the amount of this claim as a debt due. Put colloquially, the payer is under an obligation to
3 Salem Ltd v Top End Homes Ltd CA169/05, 12 December 2005 at [22], referred to in Watts & Hughes Construction Ltd v Complete Siteworks Company Ltd [2014] NZCA 564 at [33].
pay first and argue later. This, we are satisfied, is the intention of the legislation. No doubt it reflects the philosophy referred to earlier that cashflow is the very life blood of the building industry. Contractors (and their sub-contractors in turn) are entitled to be promptly paid where they have invoked the payment regime under the [CCA] and the payer has not responded as the Act requires.
[27] And in Marsden Villas v Wooding Construction Ltd, Asher J stated:4
The non-provision of the payment schedule is one of the crucial hinges of [the CCA]. The structure appears to be that there will be absolute and irreversible consequences resulting from the non-provision of such a payment schedule. This appears to be consistent with the purpose of [the CCA] to facilitate regular and timely payments, and the approach of the Court of Appeal in Canam. In Canam the focus was on the provision of the appropriate payment claim, rather than the provision of payment schedules. However, it appears to have been the assumption that the severe consequences of the non-provision of a payment schedule in time were absolute.
[28] A determination under the CCA provides a mechanism by which payment of disputed amounts can be promptly required and enforced, even though the payer is able to separately contest that the payment was owing under the contract between the payer and the payee. If the payer’s position is upheld in separate proceedings then the payee will be required to pay back the money that he or she received from the payer as a result of the CCA process. For this reason the CCA has been described as a “pay now, argue later” regime and as giving rise to a “temporary debt”. Nevertheless, because it is a debt that may be enforced, it has been held that a
statutory demand can be issued in respect of it.5
[29] In Kariiti v Donovan Drainage & Earth Moving,6 Associate Judge Bell noted that payers have sometimes asserted that if they pay under ss 23, 24 or 59, the payee is unlikely to pay them back, even though they have good arguments to show that the payee will have been overpaid. His Honour referred to a number of High Court
decisions where payers have sought interim relief in such cases,7 citing the following
4 Marsden Villas v Wooding Construction Ltd [2007] 1 NZLR 807 (HC) at [111], referred to by the Court of Appeal in Watts & Hughes Construction Ltd v Complete Siteworks Company Ltd at [34].
5 Gill Construction Company Ltd v Butler [2010] 2 NZLR 229 at [9] citing the decision of the Court of Appeal in Laywood v Holmes Construction [2009] 2 NZLR 243 at [52] and Volcanic Investments Ltd v Dempsey & Wood Civil Contractors Ltd (2005) 18 PRNZ 97 (HC).
6 Kariiti v Donovan Drainage & Earth Moving HC Whangarei CIV-2010-488-613, 19 November
2010.
7 The cases cited included Concrete Structures NZ Ltd v Palmer [2006] NZAR 513, Gill
justification for the granting of relief in such cases which was accepted by
Courteney J in Concrete Structures NZ Ltd v Palmer:8
It cannot have escaped Parliament’s notice that one party’s position might be irretrievably prejudiced by the time a judicial review application has been determined. It is unlikely that it intended to preclude interim relief where one party faced this danger. In the balancing act between the rights of the party with a favourable adjudication to be paid immediately, and the rights of the party claiming a breach of natural justice, the significant factor must surely be the impact if the strict rights under the CCA prevailed. If the effect would be to permanently prejudice the other party so as to render its application for judicial review worthless, regardless of the outcome, then I cannot think that it was the intention. I do not consider that, as a matter of statutory interpretation, the CCA has the effect of ousting [section 8 of the Judicature Amendment Act 1977, which provides for the granting of interim relief in applications for judicial review].
[30] Associate Judge Bell noted in Kariiti that the issue in these cases is whether there should be departure from the policy of pay now, argue later, because any payment made now would not be recoverable later, that is, whether an interim payment will in fact become a final payment.9
[31] After considering the various considerations, Associate Judge Bell held that, for the payer to persuade the Court that it ought to be relieved from the enforcement of its obligations under ss 23, 24 and 59 of the CCA because of the risk that the payee will not repay, it needs to establish:
(1)That there is a high degree of likelihood that the payee will not be able to repay if a determination after a dispute resolution procedure under s 26(1) goes in the payer’s favour; and
(2)That it has a good arguable case that it will succeed under the dispute resolution procedure under s 26(1).
[32] The Associate Judge considered that the Court must be shown that the claim
(by the payer) is strong enough to warrant a departure from the ordinary “pay now,
Construction Company Ltd, above n 5, Yun Corporation Ltd v YOT HC Auckland CIV-2009-
404-7656, 26 February 2010, and Canam Construction Ltd v Ormiston Hospital Investment,
above n 2.
8 Above n 7 at [17].
9 Above n 6 at [8].
argue later” approach. He considered that an appropriate standard is that the payer must show a good arguable case.10 However, the Associate Judge noted that there will be some cases where either the payee’s insolvency is beyond argument, or the strength of the payer’s claim on the merits is beyond argument. In such cases, the Court may accept a lesser standard of proof on the limb of the test which does require proof than it would otherwise require. The Court might, for example, accept that a showing that there is a serious question to be tried on that issue is sufficient.11
[33] On the question of when it may be possible to say that a payer’s case on the merits is “blindingly obvious”, the Associate Judge sounded a word of caution: construction contracts are typically not suitable for summary decision.12
Discussion and conclusions
The defendant’s proposed application for judicial review
[34] I do not believe that the defendant’s contention that the plaintiff failed to submit a valid payment claim is beyond reasonable argument. The plaintiff’s payment claim was required to contain sufficient details to identify both the relevant construction contract to which the claim related, and the relevant construction work.13 I do not understand there to be any serious argument that the relevant construction contract (renovation work at the property) was sufficiently identified for the purposes of s 20(2)(b) of the CCA, but it is not so clear that the July 2014 payment claim sufficiently identified the relevant “construction work” to which the
claim related.
[35] The payment claim set out the amount claimed together with copies of the seven invoices on which it was based. There was also a summary showing the amount paid on each invoice, and the balance remaining unpaid. Each invoice identified particular materials purchased for the renovation work, with the prices paid for each item and the plaintiff’s margin. But none of the invoices contained a
description of the relevant work carried out: each invoice simply listed the names of
10 At [16].
11 At [19].
12 At [20].
13 Construction Contracts Act 2002, s 2(b) and (c).
particular workmen with their hourly charge-out rates, and the number of hours said to have been worked by each of them on particular dates. The defendant’s argument is that that was insufficient to “identify the construction work” carried out on the relevant dates.
[36] The adjudicator considered that the relevant work was sufficiently identified to meet the requirements of s 20(2)(c) of the CCA. He noted that this was the only job that the plaintiff was undertaking at the property, and he considered that the construction work had been clearly identified by reference to the covering letter and supporting information filed with the payment claim. The defendant could clearly identify from the payment claim what it was being charged for.
[37] The adjudicator considered that the defendant could easily have produced a payment schedule declining payment for Mr Bussell’s hours, on the basis that he was not present on the stated days. It elected not to do so. The adjudicator reasoned that, had the plaintiff inserted “activities” next to each of the hours worked, that in itself may have presented no additional assistance to the defendant if the descriptions were
incorrect.14
[38] The defendant’s argument is that, for a payment claim to be valid under the CCA, the payee must do more than simply identify the construction contract under which the claim is made. The s 20(2)(c) requirement that the payee identify particular “construction work” must require some description of the work for which the payment claim is made; otherwise the requirement would add nothing to what is already required by s 20(2)(b).
[39] It is not for me to determine on this application whether the July 2014 payment claim submitted by the plaintiff did or did not comply with s 20(2)(c) of the CCA. But I think that it must be at least arguable for the defendant: (i) that any ability the defendant might have had to produce a payment schedule detailing the work carried out by the plaintiff (and the extent to which the defendant did or did not accept that payment should be made for that work) could not have relieved the plaintiff, as the claimant, from complying with the obligation to “identify the
construction work” for which each of the progress claims was made; and (ii) that the mere identification of individual workmen, hourly rates, and hours worked did not identify any particular construction work.
[40] It is not necessary for the purposes of this decision to consider the
defendant’s alternative challenge to the adjudicator’s determination, namely that its
1 August 2014 email was a valid payment schedule with the meaning of s 21 of the CCA. If the payment claim was not valid under s 20, the defendant could not have had any obligation to submit a payment schedule in response.
[41] I accept that the scope for judicial review of the decisions of adjudicators under the CCA is limited. In Rees v Firth the Court of Appeal said: 15
The courts must be vigilant to ensure that judicial review of adjudicators’ determinations does not cut across the scheme of the CCA and undermine its objectives. But this does not mean that judicial review should be limited to instances of jurisdictional error. In principle, any ground of judicial review may be raised, but an applicant must demonstrate that the court should intervene in the particular circumstances, and that will not be easy given the purpose and scheme of the CCA. Indeed we consider that it will be very difficult to satisfy a court that intervention is necessary. As an example, given that an all important purpose of the CCA is to provide a mechanism to enable money flows to be maintained on the basis of preliminary and non- binding assessments of the merits, it is unlikely that errors of fact by adjudicators will give rise to successful applications for judicial review. In the great majority of cases where an adjudicator’s determination is to be challenged, the appropriate course will be for the parties to submit the merits of the dispute to binding resolution through arbitration or litigation (or, of course, to go to mediation).
[42] The proposed review in this case is not based on any challenge to a finding of fact by the adjudicator: the issue is alleged error of law in the interpretation of ss 20(2)(c) and s 21 of the CCA.
[43] The importance of the proposed review application is clear enough: if there was no valid payment claim, the defendant could have had no obligation to provide a payment schedule, and the adjudicator’s determination (based as it was on the defendant’s failure to provide such a schedule) could not stand. In that event, the “pay now, argue later” principle under the CCA could not apply, and the Court would
not be constrained in its approach to the broad discretion under r 31.11 by the test proposed by Associate Judge Bell in Kariiti.16 (In that case the claimant had obtained an adjudicator’s determination in its favour which had been entered as a judgment in the District Court without opposition from the defendant. There was no question in Kariiti of the plaintiff not being entitled to invoke the “pay now, argue later” principle of the CCA.)
[44] I do not think that the proposed review application is so clearly hopeless that I can put it on one side and deal with the stay application as if there were no challenge to the adjudicator’s determination. In my view, the existence of the proposed challenge, and my assessment that it is not beyond reasonable argument, are factors which I can properly take into consideration on the ultimate question on the stay application, namely whether the continued prosecution of the liquidation claim savours of unfairness, or of undue pressure being placed on the defendant.
The position if the Kariiti tests are applicable: Is there a high degree of likelihood that the payee will not be able to repay if a determination after a dispute resolution procedure under s 26(1) goes in the payer’s favour? And does the payer have a good arguable case that it will succeed under the dispute resolution procedure under s
26(1)?
[45] Neither counsel challenged Associate Judge Bell’s approach in Kariiti, and I accept that these questions provide useful guidance on how the Court should approach a payer’s application to be relieved from the enforcement of its obligations under ss 23, 24, and 59 of the CCA, in circumstances where there is a risk that the payee will not be able to repay if the payer is successful at a subsequent hearing on the merits of the construction dispute.
[46] On the first issue – whether there is a “high degree of likelihood” that the plaintiff will not be able to repay – Mr Manchester asserted in his reply affidavit that the plaintiff is simply a vehicle for the activities of its director, Mr Bussell, and is only a shell. He stated that Mr Bussell had acknowledged as much in conversations he had had with him. The plaintiff’s registered office and place of business is Mr Bussell’s own residential address, and that residence is not owned by the plaintiff. Mr Manchester alleged that the plaintiff was operating on a temporary basis only,
and had no long-term employees – none of those who worked on the property now work for the plaintiff.
[47] In addition, Mr Manchester’s evidence was that the plaintiff has little capital. He deposed that the plaintiff needed to purchase tools which a builder would normally already have, and it invoiced those purchases to the defendant. He also alleged that the plaintiff has not been paying its own debts. He produced a copy of an invoice dated 31 March 2013 from Placemakers addressed to the plaintiff, containing a handwritten claim for $150, being one month’s penalty interest on an amount of $10,000 which was said to be outstanding. Mr Manchester’s evidence was that the penalty interest related to accounts that the defendant had paid the plaintiff for, but for which the plaintiff had not paid Placemakers.
[48] In his affidavit in response sworn on 6 March 2015, Mr Bussell rejected the claim that the plaintiff is insolvent. He stated that the plaintiff was still trading, its primary business being the construction of high-end residential housing and shop fit- outs. The plaintiff presently has one full-time employee, a qualified builder who has been with the plaintiff for six years. It engages labour-only contractors and subcontractors as required. Mr Bussell rejected the contention that he had asked the defendant to pay for tools which builders would ordinarily provide themselves.
[49] In respect of the alleged late payment to Placemakers, Mr Bussell produced a letter from Placemakers confirming that the plaintiff has operated a trade account with them since June 2006, and that it has never been on “stop credit”. There are no outstanding accounts owing by the plaintiff in respect of work done by it on the property.
[50] Mr Bussell provided details of upcoming work the plaintiff has on its books, referring to four particular contracts for work to be carried out over the next two to four months. The value of these contracts ranged between $7,000 and $80,000. Mr Bussell did not say how much profit the plaintiff expected to make on the contracts.
[51] Mr Bussell said that the plaintiff’s cashflow was affected by the non-payment of the $47,295.37 by the defendant. The non-payment of that sum put “some strain” on the plaintiff’s trading performance for the financial year ended 31 March 2014. However the plaintiff was back on track to make a profit in the financial year ended
31 March 2015.
[52] Financial statements for the plaintiff for the year ended 31 March 2015 were not available at the time Mr Bussell swore his affidavit, but he produced statements of financial position for the plaintiff as at 31 March 2013 and 31 March 2014. He did not provide the statements of financial performance for those years.
[53] The plaintiff’s financial statements as at 31 March 2013 showed a net equity of $32,998, comprising total assets of $31,996 and current liabilities of ($1,002). The one substantial asset as at 31 March 2013 was a debt of $34,159 owed by Mr Bussell to the company.
[54] The statement of financial position for the year ended 31 March 2014 showed total assets of $133,785 including a loan to Mr Bussell of $79,388 and “accounts receivable” $45,000. It is not clear whether the “accounts receivable” figure represents the claim against the defendant which was the subject of the December
2014 adjudicator’s determination and on which the liquidation claim is based.
[55] Taking into account the plaintiff’s liabilities, the statement of financial position as at 31 March 2014 showed net assets of $28,731.
[56] Mr Bussell did not state whether the debt of $79,388 which he owed to the plaintiff on 3 March 2014 has been increased or reduced since that date, if it is still owing at all. Nor did he provide evidence that he would be good for the loan if it is still owing.
[57] While financial statements were not available for the year ended March 2015, Mr Bussell did say that the plaintiff’s financial position has not substantially changed since the plaintiff was first contracted to do the work on the property in late 2012,
except for the fact that the plaintiff has not been paid what it says is due to it by the defendant.
[58] Mr Bussell asserted that the plaintiff would be able to repay the amount awarded by the adjudicator in the event that the Court finds that the adjudicator’s determination was wrong in any respect and/or should there be a final judgment or award requiring the plaintiff to refund any part of the amount currently payable. He stated that there were no outstanding judgments or any other contingent liabilities of which he was aware that would prevent the plaintiff from being in a position where it could refund any amounts to the defendant. The plaintiff had not received any statutory demands under the Act, and was not the subject of any liquidation proceeding or other form of debt recovery action.
[59] On the face of it, if the plaintiff were ordered to refund a sum of approximately $49,000 to the defendant it would be unable to do so. If (as seems likely) the $45,000 recorded as an “account receivable” in the statement of financial position as at 31 March 2014 is the same money as that which is now claimed from the defendant, an ultimate finding that the defendant is not liable would have eliminated the plaintiff’s net assets as at 31 March 2014 and left a negative figure for shareholders’ funds. And the plaintiff’s ability to repay anything would have been largely dependent on Mr Bussell’s ability to pay the $79,388 owing on his shareholder’s loan.
[60] I appreciate that those figures are now a year out of date, but Mr Bussell says
that nothing has substantially changed in the plaintiff’s financial position since late
2012.
[61] Mr Bussell says that the plaintiff would be able to refund any amount which may eventually have to be refunded to the defendant, but the plaintiff’s financial statements do not appear to bear that contention out, and Mr Bussell has elected not to put before the Court any evidence of funding lines available to the plaintiff, or other means by which it could satisfy a debt of approximately $49,000, in addition to its other liabilities. Mr Bussell has also elected not to provide evidence of his ability to pay any amount which may now be owing on his shareholder’s loan account with
the plaintiff, or of his ability to advance such money to the plaintiff as might be required to enable to the plaintiff to make a repayment of approximately $49,000 to the defendant (if that should become necessary).
[62] On the evidence produced, I find that it is unlikely that the plaintiff would be able to refund the figure of approximately $49,000 owing under the adjudicator’s determination if it had to do so.
[63] The second question on the Kariiti approach is whether the defendant has shown that it has a good arguable case that it will succeed under the dispute resolution procedure which will be used to ultimately determine the merits of the construction dispute. I have concluded that the defendant has a reasonable argument on the question of whether a valid payment claim was submitted by the plaintiff, and therefore has a reasonable argument that the “pay now, argue later” principle of the CCA is not engaged in this case. More fundamentally, I consider that there is ample evidence that there were defects in the work performed by the plaintiff at the property. I refer specifically to the allegations made by the defendant through Mr Manchester’s first affidavit, including the allegation that approximately 80 per cent of the plaintiff’s work on the penthouse needed to be demolished. Mr Manchester said in his witness statement for the adjudication proceeding that the defendant incurred expenses remedying the plaintiff’s work, including architect’s fees, builder’s fees, costs of cladding materials and scaffolding costs ($9,553.05), together with extra time required to repair the plaintiffs work which cost the defendant $35,721.43 in lost rental. There is also the substantial dispute over whether the plaintiff ’s workmen actually worked the hours claimed for them as set out in the plaintiff’s invoices. In addition, statements provided in the adjudication proceeding by Mr Murdoch, the architect engaged by the defendant, and Mr Jamie Smith, the builder who completed the renovation work, appear to provide some support for Mr Manchester’s allegations of defective work and overcharging.
[64] I accept Mr Grace’s submission that none of the defendant’s claims relating to hours worked and deficiencies in the building work were challenged by the plaintiff. The plaintiff was able to obtain the adjudication determination without any consideration of the merits of its construction work at all, purely on the basis of the
adjudicator’s finding that the defendant had failed to submit a valid payment schedule.
[65] On the very limited evidence which is available to me, I conclude that the defendant does have a good arguable case that it will have at least a substantial measure of success when the merits of the construction dispute come to be finally determined.
Decision on defendant’s stay application
[66] I am satisfied that the defendant should be granted a stay of the liquidation proceeding, and an order restraining publication of any advertisement of the proceeding, pending further order of the Court. That stay and restraint is granted,
conditional upon:
(1) The defendant providing the plaintiff, within seven days of the date of
this judgment, with evidence that Duncan Cotterill is holding in its
trust account the total sum of $49,085.62, being the full amount of the
adjudicator’s determination including costs. The $49,085.62 is to
remain in the solicitors’ trust account on interest-bearing deposit as
security for the plaintiff’s claim in the liquidation proceeding, pending
further order of the Court. (2)
The defendant commencing any judicial review proceeding it may
wish to commence within 30 working days of the date of this
judgment, and thereafter prosecuting that proceeding diligently to a
hearing. [67]
The
plaintiff ’s liquidation claim will be adjourned to the list on
11 August 2015, at 10am. Leave is reserved to the plaintiff to apply by memorandum to have the liquidation claim listed for an earlier hearing if the defendant fails to comply with either of the conditions of the stay set out at paragraph [64] above.
[68] I am satisfied in balancing the various considerations that those orders are appropriate in the circumstances of this case, where the plaintiff’s claims appear to be genuinely disputed and the defendant is able to deposit the amount of the plaintiff’s claim in an independent trust account pending resolution. I bear in mind in particular that the adjudicator’s determination on which the plaintiff relies was an adjudication made without consideration of the merits of the building dispute, and is subject to what I regard as a reasonably arguable challenge by the defendant. In my view, it would place undue pressure on the defendant in those circumstances to allow the plaintiff to continue with its liquidation claim in circumstances where the amount of that claim is adequately secured. I also take into account Mr Manchester’s evidence of the defendant’s solvency.
[69] I do not see this as a case where the granting of a stay required me to find a “high likelihood” that the plaintiff would be unable to repay if the full $49,085.62 were paid to it now and it were later found that the plaintiff was not entitled to the money (i.e. the first test proposed in Kariiti). The Kariiti tests are applicable in cases where it is clear that the “pay now, argue later” principle of the CCA applies, but that is not necessarily the position in this case. If the defendant succeeds with its application for judicial review it may be found that there is no deemed debt due to the plaintiff, and no room for the application of the “pay now, argue later” approach.
[70] In those circumstances I do not think the bar to a stay application succeeding needs to be set as high as the “high likelihood of inability to repay” standard adopted by the Associate Judge Bell in Kariiti.
[71] While I have made the stay conditional on the defendant commencing and diligently prosecuting its judicial review application, the likelihood is that if the defendant has complied with the conditions of the stay, the liquidation proceeding will be dismissed when it is called on 11 August 2015 (subject to suitable arrangements being made for the amount of the adjudicator’s determination to remain on interest bearing deposit pending the outcome of appropriate litigation or arbitral proceedings to determine the substantive merits of the dispute). In those circumstances, I invite the parties to consider whether their resources might not be better spent on an appropriate proceeding designed to resolve all aspects of the
dispute on the merits. I note in that regard that the substantive disputes appear to be well-suited to arbitration, and that with sensible cooperation between the parties it ought to be possible to have an arbitrator appointed and all disputes resolved within a few months. The total amount involved is not large, and the parties may consider it sensible to adopt that approach rather than commit funds to a judicial review proceeding which, whether or not the plaintiff succeeds, will not resolve the substantive dispute.
[72] The costs of the stay application are reserved.
Associate Judge Smith
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