Concrete Structures (NZ) Ltd v NMHB Ltd
[2019] NZHC 268
•26 February 2019
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2018-404-2074
[2019] NZHC 268
IN THE MATTER OF the Companies Act 1993 BETWEEN
CONCRETE STRUCTURES (NZ) LIMITED
Plaintiff
AND
NMHB LIMITED
Defendant
Hearing: 26 February 2019 Appearances:
P F Dalkie and S Bhanabhai for NMHB Limited
K A Badcock for Concrete Structures (NZ) Limited
Judgment:
26 February 2019
ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL
Solicitors:
Dyer Whitechurch (S Bhanabhai), Auckland, for NMHB Ltd
Kevin A Badcock Limited, Rotorua, for Concrete Structures (NZ) Ltd
Copy for:
Paul F Dalkie, Auckland, for the Plaintiff
CONCRETE STRUCTURES (NZ) LIMITED v NMHB LIMITED [2019] NZHC 268 [26 February 2019]
[1] Concrete Structures (NZ) Ltd has applied for NMHB Ltd to be put into liquidation. It says that it is a creditor for $206,391.94. In September 2018, Associate Judge Sargisson dismissed an application by NMHB Ltd under s 290 of the Companies Act 1993 to set aside a statutory demand by Concrete Structures (NZ) Ltd for payment of $206,391.94.1 Under s 291(1)(a) of the Companies Act, she ordered NMHB Ltd to pay the amount of the statutory demand within five working days. NMHB Ltd did not comply with the order. Concrete Structures relies on the non-compliance with that order as giving rise to a presumption of insolvency under s 291(2) of the Companies Act 1993. While the statement of claim does not say so expressly, Concrete Structures is relying on the ground under s 241(4)(a) of the Companies Act that NMHB Ltd is unable to pay its debts.
[2] NMHB Ltd has applied for a stay of the proceeding. It has appealed against Associate Judge Sargisson’s decision of 18 September 2018 dismissing the application to set aside the statutory demand. It says that this proceeding should be put on hold until the Court of Appeal has given its decision on its appeal. It filed the appeal in October 2018. The Court of Appeal is to hear the appeal in Auckland on 21 May 2019.
Background
[3] NMHB Ltd is a building contractor. It had a contract to erect a building in Rabone Street, Henderson, Auckland, for Rabone Estates Ltd. Mr Sam Tolich is the manager of NMHB Ltd. Concrete Structures (NZ) Ltd is a Rotorua company and, as its name suggests, manufactures concrete products to be used in construction. It had a contract with NMHB Ltd to manufacture and supply concrete panels for the Rabone Street job. That was construction work as defined by the Construction Contracts Act 2002, s 6(1)(f)(iv):
(1) In this Act unless the context otherwise requires, construction work
means any of the following work-
(f) any operation that forms an integral part of, or is preparatory to or is for rendering complete, work of the kind referred to in paragraphs (a) to (d); including:
1 NMHB Ltd v Concrete Structures (NZ) Ltd [2018] NZHC 2436.
…
(iv) prefabricating customised components of any building or structure, whether carried out on the construction site or elsewhere.
[4]Concrete Structures (NZ) Ltd served a statutory demand on NMHB Ltd for
$206,391.94 for two payment claims under the Construction Contracts Act 2002. The payment claims were dated 25 September 2017 and 15 December 2017. The first was for $150,698.88 and the second for $75,349.44. The total contract price to supply 65 panels was $262,095.00.
[5] It is accepted that the work by Concrete Structures (NZ) Ltd in manufacturing and supplying the panels was construction work under the Construction Contracts Act, and that Concrete Structures (NZ) Ltd was entitled to issue payment claims, subject to the specific matters that NMHB Ltd raises as to the payment claims in this case. NMHB Ltd did not send any payment schedules in response to the payment claims. Concrete Structures (NZ) Ltd served the statutory demand relying on the absence of any payment schedules to say that obligations to pay under the two payment claims have arisen under ss 22 and 23 of the Construction Contracts Act. That is a standard and straightforward position for an unpaid contractor under the Construction Contracts Act.
[6] NMHB Ltd says that it has claims against Concrete Structures (NZ) Ltd. It says that the panels delivered were defective and there were delays in delivery. It also contests the payment claims. It says – and this argument was presented to Associate Judge Sargisson – that when the first payment claim was sent to it, no work had been done under the contract. That fact is not disputed. The parties’ contract was that NMHB Ltd was to pay half of the contract price at the outset, and the balance on completion. NMHB Ltd argued before Associate Judge Sargisson that a payment claim can be made only for work that has been carried out and there cannot be a payment claim for future work to be performed. In other words, payment claims are not available to enforce pre-payment obligations. I record the argument but express no views on it. Mr Dalkie submits that that is a new argument and it has not been heard before the courts before. I accept his submission that it raises a pure point of law which will not turn on disputed questions of fact. It is an appealable point.
[7] The purpose in arguing that the first payment claim could not be made under the Construction Contracts Act was to allow NMHB Ltd to raise in opposition to the statutory demand counterclaims against Concrete Structures (NZ) Ltd. That was to get around the effect of s 79 of the Construction Contracts Act:
79Proceedings for recovery of debt not affected by counterclaim, set- off, or cross-demand
In any proceedings for the recovery of a debt under section 23 or section 24 or section 59, the court must not give effect to any counterclaim, set-off, or cross-demand raised by any party to those proceedings other than a set-off of a liquidated amount if-
(a)judgment has been entered for that amount; or
(b)there is not in fact any dispute between the parties in relation to the claim for that amount.
[8] A statutory demand can constitute a proceeding for recovery of debt under s 23 of the Act. Randerson J recognised that in Volcanic Investments Ltd v Dempsey & Wood Civil Contractors Ltd decision.2 NMHB Ltd argued that when no work had been carried out, the requirement to pay 50 per cent of the contract price was no more than a security arrangement, not a payment for prospective construction work. As the claim for payment lay outside the Construction Contracts Act, set-offs and counterclaims could be raised to defeat the statutory demand under s 290(4)(b) of the Companies Act 1993.
[9] Associate Judge Sargisson did not deal at length with the claim under payment claim 2. In the hearing today Mr Dalkie developed an argument that payment claim 2 could be attacked. Payment claim 2 sought payment of $75,349.44 so as to require total payments for 75 per cent of the work that had been carried out. Mr Dalkie submitted that that was not allowed under the contract. The agreement was 50 per cent at the outset and the final 50 per cent once all work had been completed. It was therefore not open to Concrete Structures (NZ) Ltd to send a payment claim for 75 per cent of the work before all the work had been completed.
[10] Unlike the first point, I am not impressed with that argument. It has not been included in the notice of appeal, although Mr Dalkie signalled that he would amend
2 Volcanic Investments Ltd v Dempsey & Wood Civil Contractors Ltd (2005) 18 PRNZ 97.
his notice of appeal. That kind of argument has been invariably unsuccessful when payment claims are contested by employers who have failed to deliver payment schedules. The short answer is that the Construction Contracts Act provides its own remedy for erroneous payment claims. So long as the claims are in the form required by s 20, any mistakes in it as to the merits of the claim, be it incorrect quantities of materials or labour supplied and claimed for, or incorrect amounts claimed, or that payment has been sought prematurely, may all be appropriately addressed by a payment schedule. It would lead to a stilted approach to the Construction Contracts Act if payment claims could be defeated on grounds that go to the substance of the claim rather than whether payment claims meet the requirements of s 20 of the Construction Contracts Act. The point here is that NMHB Ltd failed to deliver a payment schedule in time, and it is caught with the consequences of non-compliance. Those consequences are the well-established “pay now/argue later” policy of the Construction Contracts Act. While I accept that the appeal in respect of the first payment claim deals with matters requiring the serious attention of the Court of Appeal, I do not consider that there is any merit in the attack on payment claim 2.
The stay application
[11] The stay application relies on alternate rules. The application refers to rr 17.29 and 20.10 of the High Court Rules and r 12 of the Court of Appeal (Civil) Rules. The first two rules do not apply. Rule 17.29 allows the court to stay the enforcement of any judgment. That refers to enforcement under Part 17 of the High Court Rules, which applies to enforcement such as attachment orders, charging orders, sales orders, possession orders and arrest orders. None of those matters arise here. All that Concrete Structures (NZ) Ltd is trying to do is to enforce its rights under Associate Judge Sargisson’s decision upholding the statutory demand.
[12] Rule 20.10 deals with stays pending appeal for appeals to this court from other courts or tribunals. The rule does not apply to appeals from this court to the Court of Appeal.
[13] The appropriate rule is r 12 of the Court of Appeal (Civil) Rules. That allows for interim relief pending an appeal from this court to the Court of Appeal. Rule 12(3) says:
12 Stay of proceedings and execution
…
(3) Pending the determination of an application for leave to appeal or an appeal, the court appealed from or the Court may, on an interlocutory application,—
(a)order a stay of the proceeding in which the decision was given or a stay of the execution of the decision; or
(b)grant any interim relief.
[14] In this case there is no question of a stay of execution because there is no judgment to execute. It is instead a question of granting interim relief under r 12(3)(b). The application before Associate Judge Sargisson having been finally determined, there is no proceeding to be stayed, and there is no enforcement mechanism to be stayed. What NMHB Ltd is seeking by way of interim relief is that the subsequent liquidation proceeding be put on hold until the Court of Appeal has decided its appeal.
[15] As an aside, while NMHB Ltd has not referred to it, the court also has power to stay liquidation proceedings under r 31.11 of the High Court Rules. That provision is normally used when the company alleges that a proceeding is an abuse of process – as, for example, where the debt alleged by the creditor is said to be subject to a genuine dispute or the liquidation proceeding is being used for an improper purpose. I see little reason why r 31.11 could not be invoked when the judgment which the creditors rely on is subject to appeal. Here I draw an analogy with bankruptcy proceedings. Under s 42 of the Insolvency Act 2006, the court has the power to halt a bankruptcy application when the creditor’s judgment is under appeal. The cases under s 42 have applied principles similar to those applied in applications for under r 12.(3) of the Court of Appeal (Civil) Rules. I see little reason why the same approach cannot be applied under r 31.11.
[16] The Court of Appeal has given guidance for deciding whether to grant interim relief under r 12(3) of the Court of Appeal (Civil) Rules. The court is required to
balance the competing rights of the party who has obtained the judgment or order appealed against, against the need to preserve an appellant’s position against the event of the appeal succeeding. A number of factors are typically taken into account:
(a)Whether the appeal may be rendered nugatory by the lack of a stay;
(b)the bona fides of the applicant as to the prosecution of the appeal;
(c)whether the successful party will be injuriously affected by the stay;
(d)the effect on third parties;
(e)the novelty or importance of the question;
(f)the public interest in the proceeding; and
(g)the overall balance of convenience.
Insolvency set-off
[17] For this case, the important factor is the “pay now/argue later” policy of the Construction Contracts Act and how that relates to liquidation proceedings. The case law is clear that at the statutory demand stage the pay now/argue later policy prevails. That was first established in Randerson J’s decision in Volcanic Investments Ltd v Dempsey and Wood Civil Contractors Ltd3 and was upheld in Laywood v Holmes Construction Wellington Ltd.4
[18] Randerson J suggested obiter in Volcanic Investments Ltd that the pay now/argue later philosophy would also apply in any subsequent liquidation proceeding. The Court of Appeal, however, noted that that was not necessarily the case. It reserved the point for consideration later:
[61] We emphasise at this point the distinction between an application to set aside a bankruptcy notice or a statutory demand on the one hand, and an
3 Volcanic Investments Ltd v Dempsey & Wood Civil Contractors Ltd (2005) 18 PRNZ 97.
4 Laywood v Holmes Construction Wellington Ltd [2009] NZCA 35, [2009] 2 NZLR 243.
adjudication of bankruptcy or order to wind up a company on the other. The question we were asked to resolve concerns the former.
…
[65] We emphasise again that we are asked to consider only the first of the two stages referred to at [61] above. It may be that different considerations arise at the point that the court must determine whether it will exercise its discretion to adjudicate a judgment debtor bankrupt or order the liquidation of a company. … But that is a point on which we express no opinion.
[19] While the Court of Appeal expressed no opinion on the point, I give mine now. In the context of a liquidation proceeding where a company is asserting claims against the creditor in response to a claim by a creditor against the company, it is important to recognise the effect of insolvency set-off under s 310 of the Companies Act 1993. Insolvency set-off operates substantively, is mandatory and self-executing. On a company going into liquidation order, the claim of the creditor is applied against the claim of the company against the creditor so as to produce one single net obligation. The earlier separate causes of action are extinguished and replaced by one single obligation between the company and the creditor.
[20] The pay now/argue later policy of the Construction Contracts Act is purely procedural. Section 79 does not bar a claim by the payer against a payee. It simply defers it. The policy of the Act is to require the contractor to be paid and for any counterclaims to be dealt with in some later proceeding. Those procedural arrangements are trumped by the substantive effect of s 310 of the Companies Act. If set-off operates automatically on liquidation, it becomes a matter for consideration at the hearing of a liquidation application. An authority illustrating that is the decision of the English Court of Appeal in Re Bayoil SA.5 In that case, the creditor had obtained an arbitration award where the company was not entitled to raise a set-off to defeat the creditor’s claim. The creditor began a liquidation application in the English courts. It was held that the company could raise its counterclaim - which it was barred from raising in the arbitration because of no set-off rules - as a defence in the liquidation proceeding. That decision has been recently followed in Re Victory House General Partner Ltd.6 See also Commissioner of Inland Revenue v Fishing Company Ltd7
5 Re Bayoil SA [1999] 1 WLR 147 (CA).
6 Re Victory House General Partner Ltd [2018] EWHC 1143, [2019] Ch 1.
7 Commissioner of Inland Revenue v Fishing Company Ltd (2010) 25 NZTC 25,125.
where the “pay now/argue” later provisions of the High Court Rules (r 5.61) for payment of taxes to the Crown were held not to apply in the hearing of a liquidation application.
[21] To a certain extent the set-off rule makes good sense. If there were no automatic set-off under s 310 of the Companies Act, a liquidator of the company in liquidation would be able to make a claim against the creditor and the creditor would not be able to resist the claim on the ground of its own countervailing claim.8 The creditor could be required to pay to the extent of any liability established against it, and the proceeds of any judgment would be applied in the administration of the liquidation. The creditor might be paid in due course but would share pari passu with other unsecured creditors. A contractor entitled to be paid under s 23 of the Construction Contracts Act would have his claim severely reduced for having to pay any claim to the employer first. Once contractors understand that, they will see the purpose of insolvency set-off.
[22] Accordingly, it remains open to NMHB Ltd to defend the liquidation proceeding on the basis that it has counterclaims against Concrete Structures (NZ) Ltd. Even though it could not run them in opposition to the statutory demand, it may be able to be raise them at the hearing of the liquidation application. After all, if it can show that it is not a net debtor of Concrete Structures (NZ) Ltd, there may be no purpose in ordering it into liquidation.
[23] NMHB Ltd alleges these claims against Concrete Structures (NZ) Ltd. It claims $70,000 to repair defective panels, another $80,000 for late delivery of the panels, and some $290,000 for payments it should have received from its employer, the developer. It alleges that Concrete Structures (NZ) Ltd has to carry some responsibility for that because it alleges that a director of Concrete Structures (NZ) Ltd made inappropriate contact with the director of Rabone Estates Ltd. At this stage the evidence is little more than assertion. If NMHB Ltd is to develop this side of its case seriously, it will need to put forward far more persuasive evidence than the assertions in Mr Tolich’s affidavit.
8 Any proceeding by the creditor would be stayed under s 248(1)(c) of the Companies Act.
Is a stay required?
[24] Given those wider matters at play, I now consider the question of stay. While Associate Judge Sargisson did not allow the asserted counterclaims to be raised to extinguish the statutory demand, that will fall by the wayside at the hearing of the liquidation application – so long, of course, as NMHB Ltd files a proper statement of defence setting out full details of its counterclaims and provides evidence to establish them. The appeal then is something of a side-show.
[25] I discount any appeal in respect of payment claim 2, for the reasons already given. I consider the matter according to the success or failure of the appeal against payment claim 1. If NMHB Ltd succeeds on its appeal, the amount of that payment claim will be deducted from the amount of the statutory demand but the statutory demand will still be upheld to the extent of payment claim 2. It seems that NMHB Ltd is insolvent in any event. Mr Tolich’s recent affidavit has confirmed that the company is in financial difficulties and that if a stay is refused the company will put itself into liquidation.
[26] If NMHB Ltd fails on the appeal, the statutory demand will be upheld in its entirety. Even if that were to happen, NMHB Ltd will remain entitled to defend the liquidation proceeding on the basis of the counterclaims asserted by Mr Tolich. Accordingly, the success or failure of the appeal may be of academic interest only. Because I see the appeal as something of a sideshow, I see little purpose in staying this proceeding to await the finding of the Court of Appeal. Instead, it is more practical to give directions for this proceeding to continue and to give NMHB Ltd the opportunity to put forward its defence based on the counterclaims asserted by Mr Tolich in his affidavits. Accordingly, I dismiss the application.
[27]I give these case management directions:
(a)The plaintiff may advertise the proceeding in the normal way.
(b)Because of Mr Dalkie’s other commitments, the defendant will have until 18 April 2019 in which to file and serve a statement of defence
setting-out full particulars of any counterclaim, and all evidence in support of that counterclaim.
(c)The plaintiff will have until 2 May 2019 in which to file and serve any reply to the statement of defence and any opposition to the statement of defence.
(d)As the defendant is asserting an affirmative defence and the plaintiff’s entitlement is not in issue, the defendant will go first. The defendant is to file and serve a casebook and synopsis of submissions by 9 May 2019.
(e)The plaintiff is to file a synopsis of submissions by 16 May 2019.
(f)The Registrar is to allocate a hearing for no more than one day, the fixture to be no earlier than 24 May 2019.
(g)Leave is reserved to apply for further directions.
[28] Costs are reserved. Costs will be decided on the final outcome of the proceeding.
……………………………….
Associate Judge R M Bell
6
2
0