Change Training Consultants Limited v Pacific Language School (2006) Limited

[2013] NZHC 2071

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV-2013-409-000540 [2013] NZHC 2071

UNDER

Part 19 of the High Court Rules

IN THE MATTER OF

Section 290 of the Companies Act 1993

BETWEEN

CHANGE TRAINING CONSULTANTS LIMITED

Applicant

AND

PACIFIC LANGUAGE SCHOOL (2006) LIMITED

Respondent

Hearing:	5 August 2013
Appearances:	P S Davidson for Applicant K T Dalziel for Respondent
Judgment:	15 August 2013

JUDGMENT OF ASSOCIATE JUDGE MATTHEWS

[1] On 25 March 2013 the respondent (Pacific) issued a demand to the applicant (CTC) under s 289 of the Companies Act 1993.  It required payment of the sum of

$226,237.62, said to be outstanding student fees owing to Pacific. CTC applies to set aside this notice on the ground that there is a substantial dispute on whether or not the alleged debt is owing or due. CTC says it has overpaid Pacific $60,993.48 for fees and is solvent.

[2] CTC is a private training establishment accredited to deliver a number of educational courses to students. CTC and Pacific are parties to a document described as a collaborative delivery agreement by which Pacific undertook to provide various services to CTC as part of the delivery of some of its courses. The services to be provided have apparently evolved since the agreement was signed in

CHANGE TRAINING CONSULTANTS LTD v PACIFIC LANGUAGE SCHOOL (2006) LTD [2013] NZHC 2071 [15 August 2013]

February 2010 so that more recently Pacific has only provided facilities and pastoral care.

[3] The agreement between CTC and Pacific sets out the basis for payments to be made for the services provided by Pacific. Calculation of fees is to follow a formula with an appearance of some complexity, involving debits and credits related to a number of further factors such as recruitment of students, provision of extracurricular activities, and others. For present purposes, I need not be more specific. Suffice it to say that Pacific maintains that it has correctly calculated a sum which it says CTC owes it, and CTC says it has not, and that its calculation that a substantial sum is owing the other way is correct.

[4]      The principles to be applied are well-established and are these:1

(a)The applicant must show that there is arguably a genuine and substantial dispute as to the existence of the debt.

(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.

(e)It is not usually possible to resolve disputed questions of fact on affidavit evidence alone, particularly when issues of credibility arise.

[5]    Although s 290(4) of the Companies Act 1993, which empowers the Court to set aside a statutory demand, is phrased in discretionary terms, the discretion thus given is to be exercised only in rare cases, when the necessary jurisdiction to do so has been established.2

[6] The Court of Appeal has emphasised that an application  to  set  aside  a statutory demand is a summary proceeding calling for a prompt judgment to be made

1       See, for example, North Harbour Equine Hospital Ltd v DK Little Corporate Trustee Ltd & Anor HC Auckland CIV-2006-404-7585, 19 February 2007, per Associate Judge Abbott; The Trinity Hills Retreat Ltd v Kroehl HC Nelson CIV-2010-442-101, 12 August 2010, per Associate Judge Osborne and, generally, Brookers Company and Securities Law (looseleaf ed, Brookers)

at [CA 290.02].

2       Primary Health Remuera Ltd v Avoca Residential Construction Ltd (2004) 9 NZCLC 263,647 at [42] (CA).

on whether there is a genuine and substantial dispute. It is not the task of the Court to resolve a dispute which has been identified.3

Relevant evidence

[7] It is accepted by Pacific and CTC  that  there  have  been  disagreements between them in relation to their mutual financial affairs since at least 2011. At that time, and from the inception of the collaborative delivery agreement early in 2010, CTC was under the direction of a Mr Hodgson. Mr P M Sun, the director and majority shareholder of Pacific, maintains that CTC was in arrears with payments it owed to Pacific from 2011 onwards. He says that he and Mr Hodgson agreed to a plan to resolve their differences in relation to CTC’s alleged indebtedness in February 2012. Mr Sun says, however, that CTC continued to be in arrears and in his affidavit sets out in some detail the steps taken by both sides to reach resolution of these issues over ensuing months.

[8] In August 2012 CTC changed ownership and Ms A Longuet became the majority shareholder and CEO. Although employed by the company prior to that she had not been part of the senior management team, and on taking office found that there were a number of issues to deal with including the obligations of Pacific under the agreement with CTC. Early in August she and another director held a meeting with Mr Sun and Mr Toonen of Pacific. At that meeting she was informed by Mr Sun and Mr Toonen of what she described as “the legacy issues left by the previous regime including amounts allegedly owing to the respondent”.

[9] After the meeting she instructed CTC’s accountant to review, investigate and audit the sums allegedly owing as she was unconvinced that the amount claimed was correct. She was aware that there had been disputes between Mr Hodgson and Pacific in relation to the sums claimed.

[10] From the evidence of Mr Sun and Ms Longuet it is clear that as at August CTC disputed the sums Pacific claimed to be owing. Had a demand under s 289 of the Companies Act been issued in respect of the amount that Pacific thought was

3       Industrial Group Ltd v Bakker [2011] NZCA 142 at [24].

owing then, there is no doubt it would have been set aside. However, the notice was not issued until six months later and it is necessary to determine whether by that time the dispute had been resolved so that an undisputed debt was properly able to be the subject of a demand.

[11] In the affidavits presented by both sides there is mention of funds paid to, held by and then received by CTC from the Public Trust. There is no outline, however, of how the Public Trust is involved. On inquiry, counsel informed me that students are required to pay their fees initially to the Public Trust. I was left completely in the dark, however, about whether the funds are held by the Public Trust for the students, for CTC, or for Pacific, when the Public Trust might be required to release the funds, and if released to CTC the basis, if any, upon which all or part of funds released to CTC might have to be paid to Pacific.

[12] In the collaborative delivery agreement there is no mention of these arrangements, except in schedule C which sets out a procedure for CTC to prepare a buyer-created invoice at the close of enrolments for a given semester setting out all payments expected from the Public Trust, and to make payment on the day following scheduled payments being received from the Public Trust by direct credit, that payment being made to a bank account nominated by Pacific. Whilst that procedure appears straightforward on its face, it required a great deal more explanation in the context of a case in which the Court is required to determine whether there is a dispute between the parties about the sum claimed by Pacific. This is because on a literal reading of this requirement it would seem that all tuition fees paid to and then held by the Public Trust are to be paid to Pacific, but other provisions of the agreement about which party is to receive tuition fees do not align with such a simple approach.

[13] After carefully considering all the evidence put before me I remain largely in the dark about how monies paid by students to the Public Trust are to figure in the calculation of the financial position between CTC and Pacific. Whilst this is crucial to determining the financial position, an exercise I am not specifically required to undertake, it is important in the context of this case for the following reasons. Mr Sun believes that CTC has been drawing down funds from the Public Trust in

relation to students introduced by Pacific or looked after at the Christchurch campus, which have not been paid to Pacific when they should have been. On the other hand, Ms Longuet says that Pacific did not have a proper process in relation to completion of Public Trust forms as required by the New Zealand Qualifications Authority rules, nor in relation to the issuing of fee receipts, which she says Pacific did but was not entitled to do. She says the lack of proper processes led to Pacific having a disorganised administrative structure, which meant that full financial information in relation to student fees was not available to CTC.

[14] From August 2012 onwards the parties worked relatively cooperatively in attempting to establish the financial position. According to Mr Sun, CTC sent spreadsheets to Pacific every fortnight, as it worked through and checked Pacific’s claims for monies said to be owed. He described these spreadsheets as a work in progress but says that over time CTC accepted Pacific’s claims for payments. He says the spreadsheets identified undisputed monies owing and payment claims that had not as yet been verified. He says the last spreadsheet was sent by CTC on 6 December 2012.

[15] According to Mr Sun, also, while this process was underway Pacific provided information in support of its claims, and there were ongoing discussions and exchanges of email correspondence. Pacific takes the spreadsheet of 6 December 2012 as expressing the final position reached as a result of the negotiations and bases its claim that there is an undisputed debt owing on this spreadsheet.

[16] Mr Sun says that prior to 6 December 2012 Pacific had prepared a spreadsheet of what it believed to be the correct current statement of monies owed and sent it to CTC’s accountant. The accountant started with that data and, according to Mr Sun, created a second page to the spreadsheet in which undisputed claims for students are shown, with an amount owing of $283,427. In addition it shows sums owing for students described as “pipeline students” with undisputed sums owing totalling $42,071. Then there is a horizontal line on the document below which there are names of students, and the monetary claims which Mr Sun says CTC was still checking, as at 6 December 2012. The sum which forms the amount claimed in the statutory demand is then shown at the bottom of the sheet.

Thus Mr Sun maintains that there can be no dispute about the amount said to be owing, because it is derived from a spreadsheet prepared by CTC.

[17] In an affidavit in reply, Ms Longuet takes issue, to an extent, with Mr Sun’s evidence. I say “to an extent”, because Pacific’s counsel was critical of the level of Ms Longuet’s engagement with the evidence of Mr Sun and, in particular, his production and analysis of the last spreadsheet. Her response is more general. She says that she instructed CTC’s accountant to stop making payments to Pacific when she discovered there were discrepancies in documentation in relation to payments made to the Public Trust. She saw these discrepancies as being caused by CTC’s inability to establish amounts that were being paid to Pacific, which was in turn the result of a lack of proper process on the part of Pacific’s administrative officer.

[18] Without being more specific, Ms Longuet says that CTC has evidence of a myriad of issues that call into question the reliability and robustness of Pacific’s processes. These are referred to in emails which she produces. As a result, she says, CTC has no confidence that it can rely on Pacific’s claims for amounts said to be owing, and CTC disputes and continues to dispute the amount claimed. She says that from the time she took office in 2012, until 6 December that year, CTC’s accountant worked on uncovering the facts in relation to student funds held at the Public Trust and as a result prepared a spreadsheet which she produced, and which shows that Pacific owes CTC $60,993.48. Ms Longuet produced in her first affidavit, without explanation, papers which are said to show the way this sum has been arrived at. Mr Sun says in his affidavit in opposition that he has never previously seen these papers; in reply Ms Longuet maintains their accuracy, but fails to engage with the evidence of Mr Sun in relation to the spreadsheet which he produced.

[19] In her first affidavit Ms Longuet also raises a  number  of  criticisms  of Pacific’s performance in other areas, which CTC maintains amount to breaches of the terms of the agreement with Pacific. CTC’s counsel says that these factors contributed to CTC forming the view that it could not rely on Pacific’s processes to any extent and, in particular, in relation to its calculation of monies said to be owing. Mr Sun takes issue with the allegations made by Ms Longuet.

Discussion

[20] As noted earlier, when Ms Longuet took over CTC in August 2012, there was certainly disagreement between the parties about whether any sums were owing and if so how much. Both parties engaged in an exercise of trying to establish the position to their mutual satisfaction over the succeeding four months. Pacific’s position was that this was achieved in the form of the spreadsheet of 6 December; on the other hand, CTC saw that as a work in progress and stopped making payments or, it seems, continuing the process of the previous four months because of its concern about monies in the Public Trust.

[21] I find the spreadsheet relied on by Pacific to be of limited value in establishing its position for three reasons. First, although I have considered Mr Sun’s explanation of the document and submissions made by counsel, I am left in difficulty following what the document is said to establish. Mr Sun says it shows that CTC accepted that it owed $402,277.12 but had paid $90,084.49, which ought to result in a deficit of $312,192.63. He says that the last column shows a deficit/shortfall of $301,616.83, but neither figure is correct. On the spreadsheet, unhelpfully produced in A4 format resulting in minute font, there is a column marked “To PLS” which has a total of $402,277.12. There is another column marked “Total Paid”, and a further column marked “Excess/Short”, each of which has a total of $90,084.49, the former showing merely the figures and the latter showing the figures preceded with a minus sign. It is unclear on the face of the document why there are two columns, but tolerably clear that the former represents a total of payments said to have been made. Completely missing, however, from the three pages of the exhibit produced to the Court, is the figure $301,616.83, nor a “Last Column” which is said by Mr Sun to show that figure.

[22] Even if I assume, which I should not have to, that there has been an error producing the exhibit and the document which should have been produced to the Court has a column showing a deficit or shortfall of that sum, that is not the end of the problem. As I have noted, there is a short arithmetical calculation on the third page of the exhibit, from which the sum demanded has been derived, which I now reproduce:

Total amount	$372,757.06
SBG paid until 6/12/12	$146,519.44
SBG owes SBNZ	$226,237.62

SBG and SBNZ are the acronyms used on this document for CTC and Pacific respectively.

[23] The difficulty is that I cannot derive from the information before me the source of the opening figure of $372,757.06. As I have said,4 the sum shown on this in the column “to PLS” on this page is $283,427. Then there is a shorter column with five student names which total $42,071. If those figures are added together a total  of  $325,498  is  reached.    If  the  total  in  the  paid  column  on  this  sheet,

$146,519.44, is deducted from that, that would leave a balance of $178,978.56. On the previous page of the exhibit there is another list of students and this time the total in the column marked “To PLS” is $402,277. This is the sum which Mr Sun says CTC accepted was owing, and it is the sum from which, in his affidavit, he has deducted $90,084.49 which, on the same page is shown as the total of a column marked “Total Paid as at 18/06/12”. The problem with deducting that figure, as Mr Sun does in his affidavit, is that the arithmetic on the second page of the exhibit shows $146,519.44 being deducted (see [19] above).   And whether one deducts

$146,519.44 or $90,084.49, the figure of $372,257.06 remains unexplained.

[24] Overall, the lack of clarity in relation to how the sum claimed in the statutory demand has been calculated is nothing short of profound.

[25] Secondly, whilst I accept that Ms Longuet did not choose to engage with the specific calculations in her affidavit in reply, nor with Mr Sun’s evidence that the balance sheet being relied on was essentially derived from calculations undertaken by CTC’s own accountant, there is no reason not to give due weight to Ms Longuet’s evidence on the reasons for her stopping further payments to Pacific in December 2012, the point at which ongoing attempts to derive an agreed position also ceased.

4 [14] above.

[26] Thirdly, the information given to the Court about funds paid to, held by or received from the Public Trust is at best hazy. Fault for this lies with both parties and I do not overlook the burden of establishing a dispute over the sum claimed, which lies on CTC. Nonetheless, it is not the function of this Court in this jurisdiction to try to create a clear picture from scant information.

[27] Overall, my conclusion is that Pacific has sought to rely on one figure in a spreadsheet, produced as a work in progress, as a final agreed position of indebtedness, when the document relied on is itself far from clear and there remain issues over monies originally paid to the Public Trust. In my view, the issuing of the statutory demand was a bold attempt to have CTC pay a sum which Pacific thought CTC accepted, on its own figures, but I am satisfied that is not the position. What is required to establish the financial position between Pacific and CTC (and I venture the view that this has been required since at least July 2012, if not earlier) is a careful independent review of the records establishing liability for payments one way or the other between the parties, the monies paid to and from the Public Trust, and the monies passing between the parties. Only by a full accounting exercise will this be established. The evidence before the Court does not show this has been completed. Although I can understand Pacific’s wish to rely on figures that it says were produced by CTC and show a debt, I am left decidedly uneasy with the proposition that CTC ever accepted that an undisputed position had been reached, that monies moving to and from the Public Trust are properly accounted for, and therefore that there is a sum owing which is not genuinely in dispute.

[28] It is unnecessary for me to canvass or consider the other issues raised by CTC about Pacific’s performance. They do not give rise to monetary consequences, on the evidence before me, which should be taken into account in assessing whether an undisputed debt is owing.

Outcome

[29] I find there is a genuine and substantial dispute as to the existence of the debt claimed by Pacific.  I set aside the demand under s 289 of the Companies Act.

[30] Both counsel said that costs should be awarded on a 2B basis; accordingly I award costs to CTC on a 2B basis, together with disbursements to be fixed if necessary by the Registrar.

J G Matthews Associate Judge

Solicitors:

David Graham Law Office, Auckland. Taylor Shaw, Christchurch.