C&R Property Development Limited v Mr Civil Limited
[2020] NZHC 1470
•26 June 2020
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2020-404-000025
[2020] NZHC 1470
UNDER section 290 of the Companies Act 1993 IN THE MATTER
an application to set aside a statutory demand
BETWEEN
C&R PROPERTY DEVELOPMENT LIMITED
Applicant
AND
MR CIVIL LIMITED
Respondent
Hearing: [On the Papers] Counsel:
D M Hughes and E Cowle for the Applicant
L L Fraser and S R Holden for the Respondent
Judgment:
26 June 2020
JUDGMENT OF EDWARDS J
This judgment was delivered by me on 26 June 2020 at 4.00 pm pursuant to r 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Solicitors: Anthony Harper, Auckland
Chapman Tripp, Auckland
C&R PROPERTY DEVELOPMENT LTD v MR CIVIL LTD [2020] NZHC 1470 [26 June 2020]
[1] The applicant, C&R Property Development Ltd (C&R) applies to set aside a statutory demand served by MR Civil Ltd (MR Civil).
[2] The statutory demand is for the sum of $1,015,753.36. It arises out of an adjudication determination dated 18 December 2019 under the Construction Contracts Act 2002 (CCA) (Determination).
[3] Whether the statutory demand should be set aside turns on the following key questions:
(a)Is there a high likelihood that MR Civil will not be able to repay the debt if this Court subsequently rules in C&R’s favour?
(b)Does C&R have a good arguable case?
(c)Is the issue of the statutory demand an abuse of process?
[4]By consent, the application is determined on the papers.
Background
[5] C&R is a development company. It owns a site in Huapai, Auckland that it is developing as a residential subdivision. In December 2017 C&R contracted MR Civil to undertake civil works and earthworks on that site.
[6] Issues between the parties arose early in the project and continued throughout. The departure of MR Civil’s appointed representative appears to have brought the dispute to a head. On 11 April 2019, MR Civil issued Payment Schedule 16. C&R refused to pay and instead transferred the certified sum to its solicitor’s trust account.
[7] C&R terminated the contract on 24 May 2019 relying on an alleged lack of performance by MR Civil. It claimed damages and reimbursement of costs amounting to approximately $1.9 million from MR Civil.
[8] MR Civil disputed the validity of C&R’s termination and denied any liability for the claim. It subsequently terminated the contract on 28 August 2019, and claimed a total sum amounting to just under $1.6 million from C&R.
[9]In his Determination, the Adjudicator:
(a)Concluded that MR Civil’s termination of the contract was effective and C&R’s earlier termination was not.
(b)Ruled that C&R was to pay MR Civil the sum of $1,015,753.36 within two working days of receipt of the Determination. That sum comprised:
(i)$294,666.45 (plus GST), being the amount calculated as owing under Payment Schedule 16; plus
(ii)$25,587.40, being the interest calculated as owing on Payment Schedule 16; plus
(iii)$105,907.61 (plus GST), being the amount calculated as retentions for Payment Schedule 16; plus
(iv)$163,071.17 (plus GST), being the amount calculated as the cost of work between March and May 2019 that had not been certified; plus
(v)$369,368.65, being the amount calculated as MR Civil’s lost profit; minus
(vi)$72,000, being liquidated damages for delay. This payment was due to C&R and was therefore calculated as a set off to MR Civil’s claim.
(The total value of GST on the above sums is $129,152.09).
(c)Approved the lodging of charging orders over the construction site;
(d)Ruled that each party had to meet their own costs and expenses of the adjudication, but that his costs were to be shared equally between them.
[10]Since the Determination was issued:
(a)C&R has paid the sum of the Determination into the trust account of its solicitors to be held pending resolution of the dispute between the parties.
(b)MR Civil has entered the Determination as a final judgment in the District Court.
(c)MR Civil has obtained final charging orders over the site, and C&R has applied for relief from those charging orders.
(d)C&R has commenced breach of contract and negligence proceedings in this Court. MR Civil has applied for a defendant’s summary judgment in those proceedings, alleging that they were brought out of time.
(e)C&R has filed a judicial review proceeding in addition to its High Court claim.
(f)C&R has sent a “notice to arbitrate” to MR Civil.
Legal framework
[11] A failure to comply with a statutory demand is one of the mechanisms under Part 16 of the Companies Act 1993 by which insolvency can be established. A creditor may serve a statutory demand in respect of any debt owed, so long as it is not less than the prescribed amount.1
[12] Under s 290(4) of the Companies Act, a court may set aside a statutory demand if satisfied that:
(a)There is a substantial dispute as to whether or not the debt is owing or due;
1 Companies Act 1993, s 289.
(b)The company appears to have a counterclaim, set-off, or cross-demand and the amount specified in the demand is less than the amount of that counterclaim, set-off or cross-demand;
(c)The demand ought to be set aside on other grounds.
[13] The debt in this case arises out of an adjudication under the CCA. One of the purposes of that Act is to provide a speedy mechanism for the resolution of disputes arising from construction contracts by ensuring the flow of funds before the final resolution of issues.2 This has been characterised as the “pay now, argue later” principle underpinning the CCA.3
[14] Adjudication of disputes is provided for in Part 3 of the CCA. An adjudicator’s jurisdiction is provided for in s 38. It extends to any of the matters referred to in ss 48, 49(1)(c) and 50(1)(c).4 It also includes any other matters that are of a consequential or ancillary nature necessary to exercise or complete the exercise of the jurisdiction referred to in those sections.5 By written agreement, the parties can extend the adjudicator’s jurisdiction to determine any other matters.6
[15] The substance of an adjudicator’s determination is set out in s 48 of the CCA. Relevant provisions provide:
48 Adjudicator's determination: substance
(1)If an amount of money under the relevant construction contract is claimed in an adjudication, the adjudicator must determine—
(a)whether or not any of the parties to the adjudication are liable, or will be liable if certain conditions are met, to make a payment under that contract; and
(b)any questions in dispute about the rights and obligations of the parties under that contract.
(2)If no amount of money under the relevant construction contract is claimed in an adjudication, the adjudicator must
2 Section 3(b).
3 Laywood v Holmes Construction Wellington Ltd [2009] NZCA 35, [2009] 2 NZLR 243, at [52].
4 Section 38(1)(a).
5 Section 38 (1)(b).
6 Section 38(2).
determine any questions in dispute about the rights and obligations of the parties under that contract.
[16] An adjudicator’s determination under s 48(1)(a) is enforceable under s 59.7 Section 59 provides that the determination may be enforced as a debt due,8 or by entering it as a judgment in the District Court.9 MR Civil has taken both options in this case. An adjudicator’s determination under s 48(1)(b) may be enforced under s 59A of the CCA.10 That section provides for a determination to be enforced by entry as a judgment.
[17] The same dispute can be the subject of both an adjudication and another dispute resolution process, including court proceedings.11 If subsequent court proceedings are commenced, then the adjudication nevertheless remains binding on the parties and is of full force and effect.12
[18] In any proceedings for the recovery of a debt (including under s 59), the court is prohibited from giving effect to a counterclaim, set-off or cross-demand other than a set-off of a liquidated amount where judgment has been entered for that amount, and there is no dispute between the parties in relation to it.13 This provision has been held to override the more general provisions of s 290(4) of the Companies Act.14
[19] In Gill Construction Co Ltd v Butler, Mallon J summarised the relevant provisions of the regime as follows:15
A determination under the CCA therefore 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 payee as a result of the CCA process. For this reason the CCA has been described as a “pay now, argue later” regime
7 Section 58(1).
8 Section 59(2)(a).
9 Section 59(2)(c).
10 Section 58(2).
11 Section 26(1).
12 Section 60.
13 Section 79.
14 Volcanic Investments Ltd v Dempsey &Wood Civil Contractors Ltd (2005) 18 PRNZ 97 at [30] and Laywood v Holmes Construction Wellington Ltd, [2009] NZCA 35 [2009] 2 NZLR 243 at [61].
15 Gill Construction Company Ltd v Butler [2010] 2 NZLR 229 (HC), (2009) 20 PRNZ 274.
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.
(citations omitted)
[20] In Kariiti Ltd v Donovan Drainage & Earthmoving Ltd, Bell AJ referred to a line of cases where the issue was whether there should be a departure from the “pay now, argue later” policy on the grounds that any payment made would not be recoverable later.16 The Judge said that in order for a payer to be relieved from enforcement of its obligations under the CCA, because of the risk that the payee will not repay, it needs to establish:17
(a)There is a high degree of likelihood that the payee will not be able to repay a determination after a dispute resolution procedure under s 26(1) goes in the payer’s favour; and
(b)That it has a good arguable case that it will succeed under the dispute resolution procedure under s 26(1).
[21]Both these factors are considered below.
Is there a high likelihood of the risk of non-payment?
[22] C&R says that there is a high likelihood of the risk of non-payment in this case. It says that MR Civil’s solvency rests on a loan from QNZ Ltd, the sole shareholder in MR Civil, for $1,864,924. That loan was provided for working capital purposes. C&R says that if demand for that loan is made, then MR Civil would be balance sheet insolvent.
[23] Mr Qui is the Chief Executive Officer of MR Civil, and of QNZ. Jie Gao, Mr Qui’s wife, is a director of MR Civil and the sole shareholder and director of QNZ. Both Mr Qui and Ms Gao have provided affirmations in opposition to the application to set aside the statutory demand.
[24] Ms Gao has indicated that QNZ will not demand repayment and will continue to support MR Civil as required and may in fact forgive the debt completely. C&R
16 Kariiti Ltd v Donovan Drainage & Earthmoving Ltd HC Whangarei CIV-2010-488-613, 19 November 2010.
17 At [17].
derives little comfort from that affirmation and relies on Mainzeal Property and Construction Limited (in liq) v Yan to say that such statements are not sufficient to prop up a company.18
[25] Mr Qui disputes that MR Civil will not be in a position to pay back the debt if a court later finds in C&R’s favour. He has produced a summary of MR Civil’s financial position as at 31 December 2019 prepared by MR Civil’s accountants. That summary shows that MR Civil has net assets of $1,332,129. That figure takes into account the $1,864,924 shareholder loan, which is classified as a non-current liability. In other words, even if demand for this loan was to be made, MR Civil would still have net assets of $1,332.129.
[26] This evidence is sufficient to rebut C&R’s suggestion that MR Civil will be balance sheet insolvent if demand for the QNZ loan is made. Ms Gao’s reassurances regarding demand for the loan strengthens MR Civil’s position. It cannot be said that QNZ is propping up MR Civil and even if Mainzeal stands for the broad proposition put forward by C&R (a matter disputed by MR Civil), I do not consider it to have any application in this case.
[27] On the basis of the affirmation evidence, I am satisfied that C&R cannot establish a “high likelihood” that MR Civil will be unable to repay the debt.
Does C&R have a good arguable case?
[28] C&R says that it has a good arguable case against MR Civil for liquidated damages, defective works and remediation costs. It also says it has a good arguable case for judicial review.
[29] The difficulty with the first of these claims is that the Adjudicator has already considered C&R’s case for liquidated damages, defective works and remediation costs. The claim for liquidated damages was partially allowed, but the remaining claims were rejected for want of proof. C&R says that the failure for want of proof was because the adjudication did not provide either the time or opportunity to properly
18 Mainzeal Property and Construction Ltd (in liq) v Yan [2019] NZHC 255.
hear the claims and test the evidence. But C&R has not produced any additional evidence to substantiate that submission. There is no evidential foundation to give weight to C&R’s claims that the Adjudicator’s conclusions regarding want of proof were wrong. Consequentially, there is nothing to suggest that C&R has a good arguable case on this aspect of its claim.
[30] Entertaining C&R’s claims would also be contrary to s 79 of the CCA, which prohibits the court from giving effect to any counterclaim, set-off, or cross-demand in any proceedings for the recovery of a debt under ss 23, 24 or 59 of the CCA. The issue of a statutory demand is a proceeding for the recovery of a debt.19 C&R’s claims are put forward as counterclaims, set-off or cross-demands to the recovery of the adjudicated amount as a due debt. Those counterclaims are not the subject of a liquidated amount for which judgment has been entered, and they remain the subject of a dispute between the parties. This Court is precluded by s 79 from entertaining C&R’s claims.
[31] C&R also faces some hurdles in establishing a good arguable case for judicial review. The relationship between judicial review proceedings and an adjudication under the CCA was considered by the Court of Appeal in Rees v Firth.20 The Court reviewed the relevant provisions of the CCA and concluded:
[27] 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 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).
19 Volcanic Investment Ltd v Dempsey & Ward Civil Contractors Limited, above n 14, at [20].
20 Rees v Firth [2011] NZCA 668, [2012] 1 NZLR 408.
[32] Accordingly, C&R’s judicial review claim must be considered against the backdrop of the difficulty of judicially reviewing the decision of an adjudicator.
[33] A key plank of C&R’s judicial review is that the Adjudicator exceeded his jurisdiction. The claim rests on a distinction between s 48(1)(a) and s 48(1)(b) of the CCA. Those sections are set out at [15] above.
[34] C&R accepts that the Adjudicator had jurisdiction to determine whether it was required to pay the sum of Payment Schedule 16, plus interest, as that is a payment falling within s 48(1)(a). However, it says that the Adjudicator exceeded his jurisdiction by purporting to issue determinations for retentions, uncertified work, lost profit and liquidated damages for delay under s 48(1)(a) of the CCA, when they could only fall within s 48(1)(b). Further, C&R says that findings that the claim failed for “want of proof” do not fall within s 48(1)(a) either.
[35] The significance of the distinction C&R draws between the jurisdiction in subs (1)(a) and (1)(b) is not entirely clear from C&R’s written submissions. The Adjudicator specified that his determination that C&R was liable to pay MR Civil was made under s 48(1)(a). However, the Adjudicator’s nomination of either s 48(1)(a) or (1)(b) as the appropriate source of jurisdiction is not determinative. If the Adjudicator erroneously categorised the source of jurisdiction as (1)(a) rather than (1)(b), it does not mean he was acting without jurisdiction.
[36] C&R refers to the different enforcement routes for determinations made under each limb. Determinations under s 48(1)(a) are enforceable pursuant to s 59. Determinations under s 48(1)(b) are enforceable under s 59A of the CCA which provides for the party in whose favour the determination was made to apply for it to be enforced by entry as a judgment. Although determinations pursuant to s 48(1)(a) may be enforced by additional means, an adjudicator is nevertheless acting within his jurisdiction if the determination falls within either subs (1)(a) or (1)(b).
[37] Although not expressed in these terms, it is possible that C&R draws a distinction between the different enforcement routes to argue that MR Civil cannot
enforce the Determination pursuant to s 59 if parts of it should have been made pursuant to subs (1)(b), and not subs (1)(a).21
[38] A similar argument was raised in Clark v Central Lakes Homes Limited.22 The issue in that case was whether an adjudicator’s finding as to damages, costs, expenses or loss of profits fell within s 48(1)(a) of the Act and was therefore capable of enforcement under s 59. Mander J held that the terms of the contract gave rise to an obligation on the plaintiff to make payments, including damages, costs, expenses, or loss of profit. After referring to commentary on the distinction between damages “under a contract”, and damages “for a contract”,23 the Judge concluded:
[33] The construction contract entered into between Mr Clark and CLH expressly provided that where the owner did not vacate the building site within two days, CLH would be entitled to terminate the contract and the owner required to pay CLH compensation. The liability of the owner for the specified items of restitution or indemnification, whether described as payments owing, damages, or expenses, arise under the contract and is an entitlement provided for by the contract itself. While analogous to damages at common law for breach of contract, the liability for payment is not dependent on proof of breach but the establishment of the stipulated conditions precedent. As such, they fall under s 48(1)(a) of the Act and their payment able to be enforced pursuant to s 59.
[39] Those findings are relevant to this case. The Adjudicator determined that MR Civil validly terminated the contract in reliance on cl 14.3. Clause 14.3.4 of the contract provides that in the event of a termination, the Principal (namely, C&R):
… shall be under the same obligations to the Contractor in regard to payment as apply under 14.1.2 where the Contract has been frustrated and shall be liable to pay such other compensation, if any, by way of damages as the Contractor may be entitled at law to recover.
[40] Clause 14.1.2 of the Contract, referred to in the above clause, lists seven categories of costs that the Principal must pay the Contractor, including “the value of the work carried out at the date of termination less the amounts previously paid”. MR Civil says that the retentions, uncertified work, lost profit and liquidated damages claims are all payments falling within clauses 14.1.2, and 14.3.4, and are therefore
21 I note, however, that MR Civil has entered the Determination as a judgment in the District Court, so it is not clear how far this argument could take C&R in any event.
22 Clark v Central Lakes Homes Ltd [2016] NZHC 1694.
23 At [30]–[32].
payments arising “under the contract”. Accordingly, MR Civil submits that the Determination falls within s 48(1)(a) and is enforceable under s 59.
[41] The fact that the payments are provided for under the contract distinguishes this case from the decision of Christiansen AJ in Van der Wal Builders v Walker, relied on by C&R.24 In Van der Wal Builders, Christiansen AJ observed that a liability to pay damages for breach of contract was not a liability to make a payment “under that contract” and did not fall within s 48(1)(a). But in that case, there was an arguable case that no construction contract had been concluded. Thus, it could not be said that the liability to pay damages for breach of contract arose “under the contract” and cd only arise at common law.
[42] Applying the above principles to this case, I consider MR Civil’s submission that the Adjudicator’s determinations concern payments arising under the contract are meritorious. That means they are determinations falling within s 48(1)(a) and not subs (1)(b). Consequentially, C&R’s claim for judicial review at least at this stage, appears quite weak.
[43] Finally, C&R submits that the Determination went beyond the “pay now, argue later” principle by determining claims following the termination of the contract. The argument was summarised in counsel’s written submissions as follows:
(c) the “pay now, argue later” principle of the CCA does not apply, as adjudication was not the correct forum for dealing with claims arising from termination of a contract. The Adjudicator was being asked to determine the “argue later” aspect of this principle which is not the purpose of adjudication. Put simply, there was no point in having an adjudication creating a temporal debt when the relationship between the parties was at an end. This has resulted in the Adjudicator considering issues that exceeded his jurisdiction under section 38 of the CCA, making the Adjudication Determination invalid.
[44] This submission lacks force. As set out above, the Adjudicator’s jurisdiction is set out in ss 38 and 48 of the CCA. On their face, those provisions are wide enough to encompass claims arising out of termination and C&R does not point to any particular provision that would limit such claims. Indeed, C&R’s claim submitted to
24 M van der Wal Builders & Contractors Ltd v Walker HC Auckland CIV-2011-004-83, 26 August 2011.
the Adjudicator sought damages for breach of contract following termination. Furthermore, the Determination remains an interim decision. C&R is free to commence other proceedings in respect of the termination issues – as it has done. There is nothing in the scope of the Adjudication that changes that fundamental principle.
[45] To conclude, my preliminary and high-level observation is that the judicial review proceeding does not look strong enough to warrant departure from the pay now, argue later principle underpinning the CCA.
Is the issue of the statutory demand an abuse of process?
[46] C&R says that MR Civil is using the statutory demand procedure improperly as it already has security for its claim as a result of the charging orders, and the funds paid into the trust account of C&R’s solicitor’s. This was not fleshed out in any detail in the written submissions, and can be addressed relatively briefly.
[47] Whether the charging orders and the funds in the trust account constitute security for the debt is debateable. The charging orders operate as “stop orders” preventing the disposition of the property until MR Civil can recover its debt through a sale process. They are not security for the judgment debt and they do not put the judgment creditor in the position of mortgagee.25 The sum held in the solicitor’s trust account appears to be held pending resolution of the underlying dispute, rather than as security for the debt. In any event, this is not the type of security falling within s 289(d) of the Companies Act, as it is not offered “to the reasonable satisfaction of the creditor”.
[48] It cannot be an abuse of process to seek to enforce the Determination by issuing a statutory demand in those circumstances. There is no suggestion that the demand is being used for an ulterior purpose. Indeed, the CCA specifically provides for the Determination to be enforced as a debt due. It follows that the abuse of process ground for setting aside the statutory demand must fail.
25 DW McMordland and others Hinde, McMorland & Sim Land Law in New Zealand (online ed, LexisNexis) at [15.173].
Result
[49] There is no basis to set aside the statutory demand. C&R’s application is dismissed.
[50] MR Civil is entitled to costs. The parties are strongly encouraged to agree on quantum. If quantum cannot be agreed, then MR Civil may submit a memorandum in support of costs 15 working days after receipt of this judgment. C&R may file a reply 10 working days thereafter. Memoranda should be no longer than five pages in length. Costs will be determined on the papers unless ordered otherwise.
Edwards J
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