Dromgool v Domo Luxury Furniture Concepts Limited

[2020] NZHC 1259

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2020-404-392

[2020] NZHC 1259

IN THE MATTER OF

an application to place a company into

liquidation pursuant to s 241(2)(c) of the Companies Act 1993

BETWEEN

TIM and JENNY DROMGOOL

Plaintiffs

AND

DOMO LUXURY FURNITURE CONCEPTS LIMITED

Defendant

Hearing:	28 May 2020
Appearances:	SL Cogan for the Plaintiffs JW Little for the Defendant
Judgment:	8 June 2020

JUDGMENT OF ASSOCIATE JUDGE SMITH

This judgment was delivered by me on 8 June 2020 at 3.30pm pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Solicitors:

Jeff Morrison & Associates Ltd, Auckland MB\C Law Ltd, Auckland

Dromgool v Domo Luxury furniture concepts Ltd [2020] NZHC 1259 [8 June 2020]

[1]    This is a company liquidation claim, where the defendant (Domo) did not apply to set aside a statutory demand served on it by the plaintiffs (the Dromgools). A failure to apply under s 290 of the Companies Act 1993 (the Act) to set aside a statutory demand normally creates a presumption that the defendant cannot pay its debts, and the Dromgools rely on that presumption in their liquidation claim.1

[2]    The amount claimed in the statutory demand, and in the Dromgools’ subsequent liquidation claim, is $18,921.60.

[3]    The Dromgools’ liquidation claim was served on Domo on 3 March 2020. Under r 31.17 of the High Court Rules 2016 Domo had 10 working days to file any statement of defence to the liquidation claim. Domo did not file its statement of defence until 20 April 2020, but Mr Cogan has sensibly not taken any point about the late filing.

The Dromgools’ liquidation claim and Domo’s statement of defence

[4]    The Dromgools say in their liquidation claim that in April 2018 they entered into a partly written and partly oral agreement to purchase 18 “Windsor” chairs from Domo. They say that the purchase price was $19,710 (including GST), and that Domo was to supply the chairs within approximately 16 weeks (or in any event, within a reasonable timeframe).

[5]    The Dromgools say that when Domo had not delivered the chairs by 30 July 2019, the parties entered into an agreement under which the purchase price was reduced from $19,710 to $18,921.60 (including GST). They say that they paid that purchase price in two instalments, the first of $11,826 (60 per cent of the original purchase price) and the second of $7,095.60 (the balance of 40 per cent of the original purchase price, less the discount agreed in the variation agreement made on 30 July 2019).

1      Under s 287(a) of the Act, a company is presumed to be unable to pay its debts if “(a) The company has failed to comply with a statutory demand …”

[6]    Domo still did not deliver the chairs, and on 29 November 2019 the Dromgools made time of the essence under the agreement. They say that Domo’s continuing failure to supply the chairs after that date amounted to a repudiation of the purchase agreement. On 19 December 2019, they cancelled the agreement.

[7]    In its statement of defence, Domo denies that it ever entered into any relevant contract with the Dromgools. It says that on or about 10 April 2018 the Dromgools agreed to purchase the 18 “Windsor” chairs from a company called Lusty’s Lloyd Loom Furniture Group Limited (Lusty) trading as “DOMO Luxury furniture concepts”. Domo says that the tax invoice for the chairs, which it sent to the Dromgools’ design agents on or about 10 April 2018, named the vendor of the chairs as Lusty.

[8]    As a further and alternative defence, Domo pleaded that, if the Court should find that Domo did agree to sell the Windsor chairs to the Dromgools, the Dromgools’ remedy would have been to make an ordinary civil claim for unliquidated damages, not to issue a statutory demand on the basis that there was a debt due and owing to the Dromgools.

The evidence

The Dromgools

[9]    Mr Dromgool provided two affidavits for the Dromgools. The Dromgools also relied on an affidavit from a Mr Stewart Garmey.

[10]   Mr Dromgool explained that he and his wife first saw the Windsor chairs at the premises of their interior designers, Design on James. They liked the look of the Windsor chair, and they researched its dimensions online at Based on the specific dimensions of the Windsor chairs, Mr Dromgool says that he and his wife ordered a custom dining table to be made by a third party. They paid for the table and had it delivered, but the Windsor chairs were never delivered.

[12]   Mr Dromgool said that Domo eventually lent some “Sika” chairs to the Dromgools for their use pending delivery of the Windsor chairs they had ordered and paid for, but the dimensions of the Sika chairs were completely different, and it was not possible for the Dromgools to seat around the table the number of people they intended to accommodate. And those who could fit around the table were seated awkwardly, well below table level. The Dromgools have used the Sika chairs, but Mr Dromgool said they never accepted them in lieu of the Windsor chairs they had ordered.

[13]   Mr Dromgool produced a bundle of correspondence, including email correspondence sent on the Dromgools’ behalf by Design on James and correspondence sent on their behalf by their solicitor Mr Jeffrey Morrison. Mr Droomgool said that throughout that correspondence Ms Karen Robertson (a director of Domo) and Mr Nigel Robertson, who were both involved in the arrangements made for the supply of the Windsor chairs, used “@domo.co.nz” email addresses. At no time did either of them suggest that Domo was not the contracting party.

[14]   Mr Dromgool acknowledged that Lusty’s name was printed on the 10 April 2018 invoice the Dromgools received immediately after the purchase. However, by the time the Dromgools received the invoice they had already ordered the Windsor chairs based on their due diligence on the Domo website.

[15]   In response to a statement from Ms Robertson that the bank account details shown on the 10 April 2018 invoice were those of Lusty, Mr Dromgool said that he did not know which entity’s bank account number was on the invoice. He understood it be Domo’s.

[16]   Mr Dromgool maintained his assertion that, at all times the party with whom the Dromgools contracted was Domo. He denied that they ever dealt with Lusty.

[17]   Mr Droomgool confirmed that the variation agreement made on or around 30 July 2019 was agreed when Ms Robertson offered a 10 per cent discount on the remaining 40 per cent of the original purchase price.

[18]   When Ms Robertson made the offer in July 2019 to discount the purchase price, she attached a copy of the original invoice. The invoice was still prominently headed “DOMO Luxury furniture concepts”, but there was no mention of Lusty on the foot of the invoice, as there had been on 10 April 2018 – Lusty’s name had been removed, and replaced with “DOMO” (followed by a Mt Roskill post office box number which was the same as that which had appeared on the 10 April 2018 invoice).

[19]    Mr Dromgool said that there was no suggestion by either Ms Robertson or Mr Robertson that Domo was not the contracting party.

[20]   Mr Garmey had filed a notice of appearance in the liquidation proceeding as a creditor in support, but he has since withdrawn that notice. He said in his affidavit that he received a call from Ms Robertson after he had filed his notice supporting the Dromgools’ liquidation claim. Ms Robertson tried to explain the situation with the Dromgools, and asked him to withdraw his notice of appearance. His evidence was that she told him that “if you proceed and [Domo] is forced into liquidation, you will get nothing. If [Domo] wins, you will get paid eventually”.

[21]   Mr Garmey said that he pressed Ms Robertson on this statement, asking how she expected to pay him either way, but she would not answer. Nor would she tell him whether Domo was solvent.

Domo

[22]   There were three affidavits filed for Domo in opposition. The principal affidavit was that of Ms Robertson.

[23]   Ms Robertson said that until about 1995 she had been working as a bank manager in Auckland. In or about 1995, she began importing furniture in the Lusty Lloyd Loom furniture range. From 2000 until the end of 2019 she was a director and shareholder of Lusty. She said that Lusty had traded under the name “DOMO Luxury furniture concepts” for many years, until it was put into liquidation on 26 November 2019.

[24]   Ms Robertson said that Lusty was put into liquidation in November 2019, primarily because of issues it was having with the quality of furniture imported by it. There were a number of warranty issues that could not be resolved, and there were difficulties with the manufacturer failing or refusing to refund the costs of goods purchased, or to replace failed products. There were also problems with some of the systems used by Lusty to control stock.

[25]   Ms Robertson confirmed that Lusty received the order from the plaintiffs in April 2018 for the supply of the Windsor chairs. On 10 April 2018 a tax invoice was sent, correctly recording the name of Lusty as the issuer. The bank account number appearing on the invoice was that of Lusty’s account. The terms and conditions referred to on the invoice were also those of Lusty.

[26]   Ms Robertson said that Domo began trading after it entered into a lease of premises in February 2019. She opened a bank account for Domo immediately after that.

[27]   The two payments made by the Dromgools for the Windsor chairs were both paid into Lusty’s bank account, and Ms Robertson maintained the position that Domo never entered into any agreement with the Dromgools, nor undertook any liability to them.

[28]   Ms Robertson expressed the belief that Domo is a solvent company. She provided financial information for Domo to Mr John Rowe, chartered accountant, for him to provide an affidavit confirming that view, and Mr Rowe has signed an affidavit to that effect. Ms Robertson said that Domo’s assets exceed its liabilities, and that it can meet its payments as they fall due.

[29]   In response to Mr Garmey’s affidavit, Ms Robertson noted that Mr Garmey’s notice of appearance in support was issued by Mr Garmey in conjunction with an Australian company Tradelanes Global Solutions Pty Limited (Tradelanes). She said that Domo has never bought any product from, nor entered into any trade arrangements with Tradelanes, and Domo does not owe Tradelanes any money.

[30]   The next affidavit in opposition was that of Mr Bruce Simpson. Mr Simpson said that he had been the accountant for both Domo and Lusty. In that capacity, he confirmed that Domo was not to his knowledge trading during 2018. He provided with his affidavit bank statements for Lusty’s bank account, which he had obtained from the liquidator of Lusty. The bank statements show that both payments made by the Dromgools for the Windsor chairs were paid into the Lusty bank account.

[31]   The last affidavit provided in opposition was that of Mr John Rowe. Mr Rowe gave evidence of his qualifications as a chartered accountant, and said that he had been asked to review various financial records and other information for Domo that had been provided to him by Ms Robertson. He was asked to express a view on whether Domo passed the solvency test contained in s 4 of the Act.

[32]   Mr Rowe said that he reviewed the information, and requested additional supporting records where he considered that was necessary. He also had various discussions with Ms Robertson. Based on the information provided to him by Ms Robertson, Mr Rowe expressed the opinion that Domo would, as at 19 May 2019, comfortably satisfy the solvency test as outlined in the Act.

Liquidation claims – relevant legal principles

[33]   The Dromgools’ liquidation claim is made pursuant to s 241(4)(a) of the Act. A liquidation order may be made under that section if the Court is satisfied that the defendant company is unable to pay its debts. Pursuant to s 287 of the Act, a company will be presumed to be unable to pay its debts if “the company has failed to comply with a statutory demand”, unless the contrary is proved.

[34]   If (as in this case) the company does not comply with a statutory demand served on it, and does not apply to set aside the statutory demand under s 290 of the Act, the onus falls on the company to establish that there is a genuine and substantial dispute as to liability to pay. “Cogent evidence, short of actual proof that the debt is not payable, is required”.2

2      Duffill Watts Ltd v Mogans Homes Ltd [2010] NZCCLR 1 (HC) at [28].

[35]   The fact that the debtor may not have applied to set aside the creditor's statutory demand is not determinative. In Yan v Mainzeal Property and Construction Ltd (in receivership and in liquidation) the Court of Appeal said:3

… a company is not prevented from showing that indebtedness is disputed, even if it has failed to apply to set aside a statutory demand under s 290. In such a case, the failure of the debtor to apply to set aside a statutory demand means that the creditor is entitled to rely on the presumption of insolvency under s 287(a) of the Act and the onus falls upon the debtor to establish that there is a genuine and substantial dispute as to its liability to pay … Cogent evidence, short of actual proof that the debt is not payable, is required.

…

… It must also be kept firmly in mind that the Court will not generally make a liquidation order if the debts relied upon are found to be in substantial dispute and not suitable for resolution in the liquidation list. That is so whether or not the disputed debts are the subject of the statutory demand.

(footnotes omitted)

Counsel’s arguments

[36]   Mr Little raised two preliminary arguments which he submitted were sufficient to have the liquidation claim determined in Domo’s favour. First, he submitted that the Dromgools are reliant for proof of Domo’s inability to pay its debts on its failure to comply with the statutory demand. However, a statutory demand can only be issued in respect of a debt which is due to the creditor, and in this case the statutory demand was not issued to recover a debt. It was in fact a claim in damages for breach of contract.

[37]   Secondly, Mr Little submitted that the claim for damages makes the Dromgools prospective creditors. As such, they were required to seek leave of the Court to file the liquidation claim under s 288(5) of the Act, but no leave application has been filed.4

3      Yan v Mainzeal Property and Construction Ltd (In Receivership and In Liquidation) [2014] NZCA 190 at [63] and [74].

4     In Precinct Properties Holdings Ltd v Golden Tower NZ Ltd [2019] NZHC 3225 at [5], Associate

Judge Bell held that a prospective or contingent creditor cannot issue a statutory demand in its own right. The Associate Judge said: “That is because a statutory demand can only be issued for a debt that is owing by the company at the time of the demand. Non-compliance with a statutory demand issued by a prospective contingent creditor cannot give rise to a presumption of insolvency. In short, a prospective or contingent creditor needs independent evidence of insolvency”.

[38]   Mr Cogan rejected Mr Little’s submission that there was no “debt” which could be the subject of a statutory demand. He referred in support to the decision of the Court of Appeal in OPC Managed Rehab Limited v Accident Compensation Corporation, where the Court said:5

[54] In the result, we conclude that, if a payment is received in  circumstances where the recipient is obliged to repay it, whether because of a contractual or statutory provision to that effect or because the circumstances give rise to an obligation to repay on the basis of money had and received, the amount can be treated as a “debt due” for the purposes of s 289(2)(a). If the defence provided for in [s 94B of Judicature Act 1908] or the equitable defence of change of position may be available to the recipient, that may mean that there is a substantial dispute which would justify the setting aside of the statutory demand, but it would not disentitle the payer from using the statutory demand procedure on the basis that the recipient’s obligation to repay is a “debt due”.

[39]   If Domo’s liability qualified as a “debt” on that basis, there was no need for the Dromgools to seek leave under s 288(5).

[40]   On the substantive part of the dispute, Mr Cogan submitted that Domo had failed to raise any genuine and substantial dispute as to its liability to pay the debt. He referred to the consistent use of the word “Domo” throughout the correspondence, and to correspondence from Ms Robertson in the course of 2019 (including at the time of the 30 July 2019 variation agreement) which Ms Robertson sent over Domo’s company name.

[41]   Mr Cogan submitted that the Dromgools are entitled to rely on the presumption of insolvency created by Domo’s failure to comply with the statutory demand. That presumption is supported by Mr Garmey’s evidence, and it has not been rebutted by the evidence of Ms Robertson and Mr Rowe. Neither Ms Robertson nor Mr Rowe provided copies of Domo’s financial statements, and Mr Rowe provided no foundation of fact for the opinion which he expressed. Without supporting evidence, Ms Robertson’s claim that Domo is solvent is insufficient.

5      OPC Managed Rehab Limited v Accident Compensation Corporation [2006] 1 NZLR 778 at [54].

[42]   Mr Little submitted that there was no adequate independent proof of insolvency in this case, and therefore no foundation for the liquidation claim. On the contrary, the evidence of Ms Robertson and Mr Rowe is sufficient to rebutt any presumption of insolvency, even if the Dromgools did have the benefit of the statutory presumption created by s 287 of the Act.

[43]   Finally, Mr Little submitted that there is a genuine and substantial dispute over whether any debt is owing to the Dromgools by Domo. There is substantial evidence that the Dromgools are creditors of Lusty, being the party with whom they contracted and the party to whom they paid the purchase price for the Windsor chairs.

Discussion and conclusions

[44]   I do not need to address Mr Little’s preliminary arguments: I am satisfied that Domo has sufficiently shown that there is a genuine and substantial dispute on the issue of whether it was the party with whom the Dromgools contracted.

[45]   First, there is no evidence that when the Dromgools agreed to purchase the Windsor chairs in April 2018 they were even aware of Domo as a corporate entity. There was no evidence that Domo’s full name appeared on the website which the Dromgools visited before they entered into the contract, and I note that a number of the pages from the website that Mr Dromgool produced contain copyright claims by Lusty. Furthermore, it appears that the contract was entered into by the Dromgools’ design agents, Design on James Limited, and that the Dromgools were not personally involved in negotiating the purchase contract.

[46]    In April 2018 Ms Robertson was prominently using the trading name “DOMO Luxury furniture concepts” and on the evidence the likelihood is that Design on James Limited agreed to contract with whatever entity happened to be using that trading name (whether it was Ms Robertson personally, a partnership of which she might be a member, or a limited liability company). Design on James presumably entered into the contract with Ms Robertson personally, or as agent for an undisclosed principal. In

that circumstance, the Dromgools would be entitled to sue the principal when identified, or elect to sue the agent.6

[47]   Ms Robertson says that the party who was trading as “DOMO Luxury furniture concepts” in April 2018 was Lusty, not Domo. It was Lusty who received the Dromgools’ order in April 2018; Domo was not even trading at that time.

[48]   That evidence is consistent with the 10 April 2018 invoice, which showed Lusty as the legal entity then using the “DOMO Luxury furniture concepts” trading name. Also consistent with Lusty being the principal, is the fact that the 60 per cent payment made by the Dromgools (on 11 April 2018) was paid into Lusty’s bank account.

[49]   I take into account also the evidence of Mr Simpson, the accountant for both Domo and Lusty, who confirmed that, to his knowledge, Domo was not trading during 2018. As a professional accountant, Mr Simpson could be expected to have some knowledge of the activities (if any) of Domo and Lusty in the 2019 financial year, and his evidence tends to corroborate Ms Robertson’s evidence on this point.

[50]   The Dromgools relied in part on a six-monthly report by Lusty’s liquidator dated 2 December 2019, in which the Dromgools were not included in an appended list of Lusty’s creditors. However the report stated that the list was compiled from records provided to the liquidator by “external parties and known creditors and the list may not be accurate”. Given that qualification, I do not think I can place much weight on the omission of the Dromgools’ names from the list.

[51]   For all of those reasons, I am satisfied that Domo has raised a genuine and substantial dispute on the issue of the identity of the party who contracted with the Dromgools in April 2018.

6      Sin Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199 (PC) at 207, per Lord Lloyd of Berwick. Both an undisclosed principal and the principal’s agent may sue and be sued on a relevant contract.

[52]   I do not see the evidence of subsequent events as providing any basis for changing that view. The fact that Ms Robertson and Mr Robertson may have corresponded with Mr Dromgool and his solicitor using “domo” email addresses is neither here nor there, as it is clear that Lusty was also using a “Domo” trading name. The liquidator of Lusty did note in his first six-monthly report that Lusty had not operated its retail division for more than 12 months, but I do not think that says anything about how the Robertsons may have been dealing with Lusty’s undischarged obligations incurred before that 12 month period.

[53]   The closing of Lusty’s retail division probably explains the use by Ms Robertson of Domo’s name in certain emails sent by her to Mr Dromgool or his solicitor in the course of 2019: Lusty was by then no longer operating an active retail business, but (by then) Domo was. In those circumstances it is not surprising that Ms Robertson would have used the Domo name, although the business in question went back to an earlier time, when Lusty was running the retail operation.

[54]   It is true that when Ms Robertson sent a revised form of invoice to Mr Dromgool on 30 July 2019, the invoice did not mention Lusty’s name. But nor did it mention Domo’s name. The invoice was headed with the same trading name “DOMO Luxury furniture concepts”, and simply had the expression “Domo” at the foot of the invoice. In those circumstances I do not think that the July 2019 transaction can be regarded as clear evidence of an agreement by Domo to assume liability for the April 2018 transaction.

[55]   Finally on this point I note that, at least as at 24 June 2019, the Dromgools’ solicitor himself appears to have been under the impression that the Dromgools’ contract was with Lusty. On that date, he sent a letter addressed to Ms Robertson and Mr Robertson with a copy to Mr Dromgool headed:

To

[Lusty]

Trading as DOMO Luxury furniture concepts

[56]   It is true that a later email sent by the Dromgools’ solicitor to Ms Robertson on 29 November 2019 was addressed to both Lusty and Domo, but I think that only serves to underline the apparent uncertainty in the minds of the Dromgools as to the identity of the party with whom they contracted.

[57]   Domo had no obligation to provide actual proof that the debt is not payable; its obligation was simply to provide cogent evidence showing that there exists a genuine and substantial dispute over its liability to pay. I think it has done that. In such cases liability should be determined in an ordinary civil proceeding, not in a liquidation claim.

[58]   Once the defendant in a liquidation claim has shown that there is a genuine and substantial dispute over the plaintiff’s standing as a creditor, the Court need not be concerned with the issue of whether or not the defendant is solvent.

[59]For the reasons set out above, the liquidation claim will be dismissed.

[60]   Mr Little asked for increased costs, contending that the Dromgools were well aware of Domo’s arguments before they commenced the liquidation claim, and the claim should never have been filed. Domo’s solicitor raised the issue of the identity of the contracting party in a letter dated 10 January 2020 to the Dromgools’ solicitor, and in a follow-up email on 17 March 2020 Domo’s solicitor contended that “there is NO evidence that Domo owes this debt but clear evidence [Lusty] was the contracting party”. Mr Little acknowledged that Domo’s arguments had not been put to the Dromgools before they issued the statutory demand.

[61]   Mr Morrison sent an email on behalf of the Dromgools on 18 March 2020, in which he referred to a number of points (primarily Ms Robertson’s use in the correspondence of the expression “Domo”, and the fact that the first report of Lusty’s liquidator did not include the Dromgools in the list of Lusty’s creditors). Mr Morrison also referred to the fact that Domo had failed to take steps to set aside the statutory demand.

[62]   In his submissions, Mr Cogan submitted that the Dromgools were also entitled to rely on Domo’s lateness in filing a statement of defence once the proceeding had been commenced.

[63]   I do not think the Dromgools can be criticised for issuing the statutory demand, particularly as they were not at that stage on notice of any contention that the contracting party was Lusty.

[64]   Although its liquidation claim has failed, I do not consider that the claim should have been seen by the Dromgools before it was commenced as lacking merit to the point where filing would be an abuse of process. There were arguments to be made for the Dromgools, including the argument about the omission of their names from the liquidator’s first list of creditors, and Ms Robertson’s use of Domo’s name in some of the 2019 correspondence between the parties. I think those arguments were properly raised by Mr Cogan, and I do not see any basis for an award of indemnity or increased costs.

[65]   The amount at issue is small, and I think Domo must accept some responsibility for the matter going as far as it did. Ms Robertson could have made it clearer in the 2019 correspondence that she was writing in her capacity as a director of Lusty, and of course the arguments could have been dealt with on an application to set aside the statutory demand. The result is that the Dromgools incurred additional costs, including the costs of advertising the liquidation claim, that they might not otherwise have incurred.

[66]   Taking those considerations into account, I think the justice of the case will be sufficiently met if I award costs to Domo on a 1B basis, plus disbursements as fixed by the Registrar.

Result

[67]I make the following orders:

(1)The liquidation claim is dismissed.

[68]   Costs are awarded to Domo on a 1B basis, plus disbursements as fixed by the Registrar.

Associate Judge Smith