Daisy Limited v Wellington Distributors Limited

[2014] NZHC 497

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

CIV-2013-485-10075 [2014] NZHC 497

BETWEEN  DAISY LIMITED Applicant

ANDWELLINGTON DISTRIBUTORS LIMITED

Respondent

Hearing:                   13 March 2014

Counsel:                  J C La Hatte for applicant

N H Whalley for respondent

Judgment:                18 March 2014

RESERVED JUDGMENT OF DOBSON J

[1]      This was an application brought in reliance on s 290 of the Companies Act

1993 (the Act) to set aside a statutory demand served by the respondent (WDL) on the applicant (Daisy).

[2]      The statutory demand  was  served  on  22 November 2013  for the sum of

$134,463.68.  The demand relates to costs incurred by WDL as lessor in reinstating premises previously leased to Daisy in central Wellington, together with legal costs incurred by WDL’s solicitors in relation to the lease.

[3]      The setting aside was sought on the basis that Daisy did not owe the amount demanded to WDL, that the amount claimed was excessive and beyond any liability for reinstatement under the lease.  In addition, Daisy claimed that it had a set-off or counterclaim  in  respect  of misleading and  deceptive conduct  on WDL’s  part  in

dealings between them for a new lease on varied terms.

DAISY LTD v WELLINGTON DISTRIBUTORS LTD [2014] NZHC 497 [18 March 2014]

Adequacy of service of application

[4]      WDL took a preliminary jurisdictional point that Daisy’s application to set aside the statutory demand had not been served in accordance with the requirements under the Act, thereby rendering the proceedings a nullity.

[5]      In terms of s 290(2) and (3) of the Act, the application had to be made and served on the creditor within 10 working days of the date of service of the demand. The section specifies that no extension of time may be given for filing or serving such an application, and it is accepted that if that time limit is not complied with,

then the company loses its opportunity to set aside the statutory demand.1    In this

case,  Daisy  served  WDL  with  a  copy  of  the  application  within  the  requisite

10 working day period.   As served, the copy was incomplete in that it was  not endorsed with the “CIV number” allocated to the proceedings by the Court Registry, or the date on which the application would be called in Court.   In a separate communication the same day, those details were provided.

[6]      The challenge to adequacy of the service was argued on the basis that service of the incomplete copy did not comply, and the technical point was taken that strict compliance is required.

[7]      For WDL, Mr Whalley invited analogy with the reasoning in Hyro Australia Pty Ltd v Commissioner of Inland Revenue.2     In that case, a service copy of the application was unendorsed (apparently lacking the same details that can only be added after filing as were absent in the present case).  Advice of those details was only provided when the applicant served a further copy, duly endorsed with those details, after the 10 working day period had elapsed.

[8]      It was held in Hyro that service had not been effected in compliance with the statutory requirements.    The  delay in  provision  of  a  full  service  copy  was  not determinative on the facts in that case as there had been an acknowledgement of

service of the initial, unendorsed copy, which the Court held the applicant to have

1      See, for example, Linda Howes and Stephen Revill Companies and Securities Law (Brookers, Wellington, 2003) at [CA290.01].

2      Hyro Australia Pty Ltd v Commissioner of Inland Revenue (2011) 25 NZTC 20-102 (HC).

been entitled to rely on.   Without that, however, service as effected within time would have been inadequate.

[9]      Mr Whalley  conceded  that WDL was  on  notice  of  the  full  terms  of  the application, and the details endorsed in it on filing, before the expiry of the requisite

10 day period.  He had also to concede that WDL was not prejudiced in any respect in responding to the application to set aside the statutory demand by virtue of having received all the requisite information in two communications, rather than one, when both were received within the time limit.

[10]     These circumstances distinguish the case from the circumstances in Hyro. Recognising the adequacy of the two communications, first the unendorsed copy of the application, and second the details that were to be endorsed on it, in a timely way, meet the purpose of enforcing a strict time limit for the taking of that step.  I am accordingly satisfied that the challenge to the adequacy of service cannot be sustained.

[11]     For Daisy, Mr La Hatte raised an alternative argument that WDL should be treated as having waived its right to object to any deficiency in service by having entered a substantive opposition to it.  He submitted that if WDL wished to preserve its entitlement to challenge the adequacy of service, then the correct response was to protest the invocation of the Court’s jurisdiction.  Procedurally, that course may well have been preferable.   However, it is unnecessary to rule on the point.   As with WDL’s own challenge to the adequacy of service, the point does not have compelling merit.  Had I been persuaded in different circumstances that any deficiency in service had led to material prejudice to WDL, then the form in which WDL subsequently joined issue in opposing the statutory demand would be unlikely, on that ground alone, to preclude its pursuit of a challenge to the adequacy of service, so long as the essence of the challenge was clearly signalled in WDL’s initial response.

Is there a substantial dispute as to whether the claimed debt is owing?

[12]     Messrs Ali and Sutherland, duly authorised representatives respectively of

Daisy  and  WDL,  have  sworn  relatively  extensive  affidavits  addressing  their

competing versions of the background to WDL’s claim for the amount stipulated in

the statutory demand as reinstatement costs and legal expenses.

[13]     WDL entered into a lease for a four year term from 1 November 2008, with a predecessor  to  Daisy  as  lessee,  namely  Wellington  Nannies  College  Limited. Interests connected with Mr Ali entered into a conditional agreement to purchase that business in June 2012, and thereafter Daisy dealt with WDL as to the terms on which it might take an assignment of the existing lease.

[14]     Relatively protracted negotiations occurred as to the terms on which Daisy might enter into a new lease with WDL, instead of taking an assignment of the existing lease.  I will revert later to Daisy’s claim of misleading conduct on WDL’s part in the course of those negotiations, but the outcome was inconclusive so that the four  year lease term expired on 31 October 2012, from which point the parties agreed that Daisy would continue as a month by month lessee.  It is accepted that the terms of the original lease continued to govern Daisy’s on-going occupancy, and accordingly those lease terms are the source of rights and obligations when Daisy vacated the premises.

[15]     The parties agreed that the lease would terminate on 25 February 2013, by which time reasonably significant differences had emerged as to the scope of alterations that might be undertaken to the premises, and how the costs of such alterations would be reflected in rental under a new lease.

[16]     Solicitors  for  WDL put  solicitors  for  Daisy  on  notice  in  a  letter  dated

30 January 2013  of the  lessor’s  requirement  that  the  lessee remove all  fixtures, fittings and chattels, that any alterations or additions to the leased premises be made good, and that rental be paid up to 25 February 2013.  On 7 March 2013, solicitors for WDL wrote  again  to  solicitors  for  Daisy,  citing the provisions  in  the lease requiring the lessee’s fixtures, fittings and chattels to be removed, and the lessee’s obligation to reinstate.

[17]     Mr Sutherland deposed that he inspected the premises around the termination date  and  discovered  that  no  attempt  had  been  made  to  reinstate  residential

accommodation that had been provided for during the term of the lease (in what were otherwise only commercial premises), that unwanted furniture and fittings and rubbish had been left behind, that repairs to walls were required and that a number of blinds had been broken and others replaced with curtains.   WDL thereafter commissioned quantity surveyors and architects to assess the cost of, and design, the extent of work required to reinstate the premises.

[18]     A first statutory demand was served on Daisy in early May 2013 for the extent of unpaid rent.   That amount was eventually paid so that steps to pursue liquidation of Daisy in reliance on it did not proceed.

[19]     Subsequently, after Mr Sutherland had supervised the physical works that he considered were required to reinstate the premises, he prepared a schedule of the amounts incurred by WDL in reinstating the premises, and removing fixtures, fittings and chattels that had been left behind by Daisy.  That schedule cross-referenced to invoices for all the work.  In the majority of cases, the charge was for 66.87 per cent of the costs incurred.   That apportionment was done on the basis that the works involved affected a larger area in the premises than had been the subject of the lease, and that percentage reflected the portion of the costs incurred in respect of the area that had been the subject of the lease.

[20]     WDL did not engage with Daisy in any way in relation to this claim, once all these costs had been quantified.  The first notice Daisy received was the statutory demand, which annexed to it as a schedule the breakdown of all the costs.  The range of views on the cost of reinstatement work required prior to that time had fluctuated from a projection obtained from its builder by Daisy of $19,000, to  a quantity surveyor’s projection of some $400,000 that was obtained by WDL.   Before the work was undertaken, WDL’s solicitors had flagged the prospect of work costing approximately $75,000.

[21]     Mr Sutherland deposed in considerable detail to the steps he undertook to satisfy himself of the reasonableness of the costs incurred, and that the elements sought to be recovered from Daisy were confined to work for which Daisy was liable under the reinstatement and make good provisions in the lease.  The entitlement to

rely on the statutory demand is defended effectively on the basis that the reasonableness of Mr Sutherland’s schedule cannot be challenged by Daisy.

[22]     Quantification of lessees’ liabilities to reinstate and make good at the end of a commercial lease is notoriously difficult.  I can take judicial notice of the fact that such disputes are routinely the subject of arbitration or other forms of dispute resolution.  The terms providing for the lessees’ obligations are generally in standard form  (here  the  5th   edition,  2008,  of  the Auckland  District  Law  Society  form). However, a large range of factual circumstances, from a reconstruction of the state of the premises at the commencement of the lease to the scope of work required to effect   reinstatement   without   material   betterment,   provide   fertile   ground   for

argument.

[23]     Mr Ali’s affidavit cites 13 components of the costs claimed by WDL that he contended do not (or perhaps do not wholly) constitute reinstatement costs.

[24]     Mr Sutherland has provided a separate explanation in relation to each of the

13 items, justifying the view he had formed that they do comprise reinstatement costs. There has been no affidavit in reply from Mr Ali.

[25]     The sum for which the statutory demand issued included some $17,200 for legal costs.  Mr Ali separately questioned the recoverability of those costs under the terms of the lease.  The only narration for all the fee notes is “deed of renewal and variation of lease” in December 2012, February, April, July and August 2013.  As Mr La Hatte pointed out, there may well be an issue as to the recoverability under the terms of the lease for conveyancing work in relation to a variation of lease that eventually did not proceed.

[26]     Mr La Hatte submitted that the statutory demand procedure is not appropriate for claims in relation to unliquidated sums.  The cases do not recognise such a broad proposition.   In an application to set aside a statutory demand, the applicant must show a genuine and substantial dispute over its obligation to pay the debt claimed. The debt must be due and presently payable as at the date on which the statutory demand is served in the sense that the creditor is entitled to immediate payment of

the sum claimed.3     Statutory demands should be used to prove insolvency of a company rather than as a means to collect outstanding money.4    As Master Faire observed in Gateway Cargo Systems Ltd v Airborne Freight Ltd:5

... statutory demands should only be issued in cases which are appropriate, that is, where there is a genuine basis for establishing the evidential foundation so that an application can ultimately be made to appoint a liquidator.   It is quite improper for the procedure to be used as a debt collection device or as a device to embarrass a party in a situation where there is a contest as to liability for a given debt.

[27]     Mr Whalley’s fallback position was that if a genuine dispute was found to exist in relation to some portion of the sum cited in the statutory demand, then the statutory demand should still not be set aside where Daisy could not claim that it had no liability for any part of the sum claimed.  He cited the implicit acknowledgement on  behalf  of  Daisy  that  reinstatement  work  costing  $19,000  was  required  to discharge Daisy’s obligations, and suggested that the Court could be satisfied that there was no credible dispute in relation to a portion of the sum stipulated for, in excess of that minimum sum.

[28]     I am not satisfied that that is an appropriate basis on which to decline the relief sought by Daisy here, on the facts of this case.  The Court has the power to order payment of an undisputed portion of a claimed debt, pursuant to s 291(a) of the Companies Act 1993.6    The amount of the debt must, however, be certain.  That is not the case here.

[29]     I can sense the frustration that has apparently led WDL to resort to a statutory demand for the extent of reinstatement expenses without prior dialogue with Daisy. The exchanges about the scope of work that might be done in the premises for a new lease on varied terms reflect frustrations, and eventually a fractious  relationship between the parties.   Demand for rent outstanding at the time Daisy vacated the

premises appears only to have been taken seriously when that debt was made the

3      Re Bryant Investment Co Ltd v Advanced Windows [1974] 1 WLR 826, [1974] 2 All ER 683.

4      Pirtek Waikato Ltd v Ellison Trading Ltd HC Hamilton M107/99, 10 August 1999 at [8].

5      Gateway  Cargo  Systems  Ltd  v  Airborne  Freight  Ltd  HC  Auckland  CIV-2003-404-7207,

16 March 2004 at [7].

6      See,  for  example,  Cityjet  Ltd  v  Pratt  &  Whitney  Canada (A’Asia) Pty  Ltd  HC Auckland M1371im99, 13 October 1999 in which Master Faire ordered payment of the undisputed portion of the debt claimed.

subject of a statutory demand.   Mr Sutherland has gone to considerable lengths to

justify his claim that there can be no dispute as to WDL’s entitlement to be paid.

[30]     The difficulty with that approach is that a lessor cannot deny a lessee the opportunity to take a contrary view on amounts claimed, where numerous factual components, including the reasonableness of the steps the lessor has elected to take in effecting reinstatement, are open  to argument.    It would  be an  abuse of the statutory demand procedure to allow it to be used to pre-empt a lessee’s opportunity to test the justification for amounts claimed to be incurred in reinstating premises. That is the case, however thoroughly the lessor has persuaded itself that the lessee’s challenge would be futile.

[31]     In the same way, if I acceded to Mr Whalley’s plea on his fallback position, the difficulty would be in identifying a finite sum which the Court can be satisfied is within the part of the claim in respect of which there could be no dispute.  That, too, is beyond the scope of the statutory demand procedure.

[32]     The result is that WDL has failed to identify with sufficient certainty a sum about which there is no dispute.

Does Daisy have a counterclaim or set-off?

[33]     From about the time the parties agreed that the lease would terminate, Daisy’s solicitors  foreshadowed  a  claim  against  WDL  for  misleading  conduct.     The complaint was that WDL misrepresented the arrangements it was prepared to enter into for work on the premises and the terms of a new lease which Daisy allegedly relied on in incurring expenses to pursue such plans.

[34]     From a consideration of all the correspondence annexed to both affidavits, my preliminary view is that the prospect of such a claim was more in the nature of a pre-emptive strike to provide a bargaining tool in negotiations with WDL, rather than a tenably based claim for actionable misleading conduct.  Given the existence of a dispute on the quantum of the reinstatement claim, it is unnecessary to form a view, but had it been necessary to do so, I am doubtful that Daisy could make out a counterclaim or set-off that would justify setting aside the statutory demand.

Outcome

[35]     For the reasons set out above, I am satisfied that there is a substantial dispute as to whether the debt cited in the statutory demand is owing and the application is accordingly granted. The statutory demand is set aside.

Costs

[36]     The applicant is entitled to costs on a 2B basis, together with disbursements as approved by the Registrar.

Dobson J

Solicitors:

Queen City Law, Auckland for applicant

Buddle Findlay, Wellington for respondent