DTB Operations Limited v Divine Inspirations Limited
[2020] NZHC 2626
•6 October 2020
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2020-404-1071
[2020] NZHC 2626
UNDER the Companies Act 1993 Section 290(4) BETWEEN
DTB OPERATIONS LIMITED
Applicant
AND
DIVINE INSPIRATIONS LIMITED
Respondent
Hearing: 6 October 2020 Appearances:
Cathy Murphy for the Applicant Andrew Gilchrist for the Respondent
Judgment:
6 October 2020
ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL
Solicitors:
Gregory Simon Law, Auckland, for the Applicant
Vlatkovich & McGown Limited (Tony Vlatkovich), Auckland, for the Respondent
Copy for:
Cathy Murphy, High Street Chambers, Auckland, for the ApplicantAndrew Gilchrist, Southern Cross Chambers, Auckland, for the Respondent
DTB OPERATIONS LIMITED v DIVINE INSPIRATIONS LIMITED [2020] NZHC 2626 [6 October 2020]
[1] DTB Operations Limited applies under s 290 of the Companies Act 1993 to set aside a statutory demand by Divine Inspirations Limited dated 19 June 2020. The demand is for $50,203.99:
… in respect of work conducted on your behalf on the John Deere Silverdale Project, full particulars of which have already been provided to you.
[2] In support of its application, DTB Operations Limited says there is a substantial dispute whether the debt is due and owing. It also believes that it has a counterclaim, set-off or cross-demand and the amount in the demand less the amount of its cross-claim is likely to be less than $1,000. It also says that it would be unjust for the demand to be upheld while the parties’ rights and obligations are still to be heard and determined.
[3] DTB Operations Limited is a construction contractor and builds commercial buildings. Mr Douglas Taylor is one of its directors. Divine Inspirations Limited is an electrical contractor which supplied electrical services under sub-contract to DTB Operations Limited on its construction jobs. The directors of Divine Inspirations Limited are Mr Wiebe Boxem and Ms Karmon Duncan.
Principles on applications to set aside statutory demands under s 290
[4] The purpose of a demand under s 289 of the Companies Act 1993 is to create a presumption of insolvency. If the company served with the demand does not comply within 15 working days of service, that presumption arises under s 287(a) of the Companies Act 1993 and can be rebutted. There are, however, cases where it would be unjust to allow the presumption of insolvency to arise on non-compliance with the demand. So s 290 allows statutory demands to be set aside, when it would be unjust to allow the presumption of insolvency to arise. The section sets out one general and two particular grounds where it would be unjust. Section 290(4) gives the court a discretion. But that discretion is limited to the question whether the statutory demand ought to stand so that non-compliance with it will give rise to the insolvency presumption. On a liquidation application the court has a wider discretion. At that
stage the court may have to take into account competing considerations: not only the interests of the creditors seeking the liquidation but also the interests of other stakeholders, including shareholders, and other creditors who see benefits in the company not going into liquidation. I have set that out here to make it clear that I am only concerned to exercise the discretion under s 290(4) of the Companies Act 1993. I am not required to decide how a liquidation application might be decided.
[5] On an application under s 290(4)(a), the onus is on the applicant to show a substantial dispute. Mere assertion of a dispute is not enough. The applicant has to show a fairly arguable basis for the dispute. The court does not resolve disputed questions of fact in affidavits, and it does not decide the substantive merits of the dispute. If there is a genuine dispute, it should more properly be decided in other proceedings.
[6] Under s 290(4)(b) a demand may be set aside if the company has a counterclaim, set-off or cross-demand and the amount in the demand less the amount of the cross-claim is less than $1,000. The power to set aside on the cross-demand claim under s 290(4)(b) is discretionary, not mandatory. To show a claim within the subsection, the company must show a real basis for it with evidence. It cannot rely on the assertion alone but must show clear and persuasive grounds.1
Some preliminary matters
[7] In this case there are no objections to the form of the statutory demand. The application to set aside the statutory demand was filed and served within time. There were, however, objections to evidence. I shall deal with those later in this decision.
[8] When I read the file, it occurred to me that there were certain factual matters which had not been addressed in evidence and which I thought might be important. Ms Murphy helpfully filed a memorandum addressing those matters. While Mr Gilchrist did not accept all the matters, he did not object to my receiving that information.
1 Covington Railways Ltd v Uni-Accommodation Ltd [2001] 1 NZLR 272 (CA) at [11].
[9] This case involves claims for payment by a subcontractor against a head contractor for construction. Divine Inspirations Limited does not say that it made any payment claims under the Construction Contracts Act 2002. That act does not apply here.
Facts
[10] Since about 2013, DTB Operations Limited has used Divine Inspirations Limited as its electrical subcontractor on its commercial construction projects. It lists some 24 jobs where Divine Inspirations Limited did work as an electrical subcontractor or supplied materials. Mr Boxem says that some of these jobs were relatively minor and in some cases his company did not go on site (for example, jobs in Niue).
[11] DTB Operations Limited has provided a copy of its supplier ledger for Divine Inspirations Limited from 1 April 2014 to 5 July 2020. Over that period, Divine Inspirations Limited charged $1,006,074.55 and DTB Operations Limited paid Divine Inspirations Limited $908,652.90. The difference between invoices rendered and payments made is $97,421.45.
[12] The last two jobs where Divine Inspirations Limited worked as electrical subcontractor for DTB Operations were for Flight Interiors at Ardmore, South Auckland, and for John Deere, at Silverdale on the northern outskirts of Auckland. Divine Inspiration’s first invoice for the Flight Interiors job was on 31 March 2019. Its first invoice for the John Deere job was 19 July 2019. The last invoices for both jobs were sent on 30 March 2020. On 20 May 2020, Divine Inspirations issued a credit note for $4,173.87 for 55 lights.
[13] Divine Inspirations Limited has also given its ledger for its dealings with DTB Operations Limited. That ledger report was only for the period, 1 April 2019 to 31 March 2020. It shows a closing balance of $104,441.11. For this decision, I assume in favour of DTB Operations that its ledger is arguably correct. The parties did not attempt a reconciliation of the two ledger reports. Mr Taylor says that Divine Inspirations Limited’s charges for the Flight Interiors job came to $252,789.71
(including GST) and its charges for the John Deere job came to $70,763.46 (including GST).
[14]The last debit items on the DTB Operations Limited’s ledger are:
1 February 2020 Invoice 7026 Flight Interiors $39,494.25 1 February 2020
Invoice 7036
John Deere
$2,875.00
26 February 2020
Invoice 7043
John Deere
$9,056.25
26 February 2020
Invoice 7042
John Deere
$31,360.95
29 February 2020
Invoice 7046
Flight Interiors
$6,612.50
29 February 2020
Invoice 7047
Flight Interiors
$2,656.69
13 March 2020
Invoice 7053
John Deere
$6,911.79
30 March 2020
Invoice 7054
Flight Interiors
$5,128.58
TOTAL:
$104,096.11
[15] The John Deere invoices total $50,203.99, the amount in the statutory demand. The ledger also shows payments during that period but those payments have been applied to reducing earlier indebtedness. Divine Inspirations Limited’s statutory demand is for the four John Deere invoices. Its demand is not for any of the Flight Interiors invoices.
[16] Mr Taylor’s primary affidavit gives background to the parties first entering into business. He says that DTB Operations Limited’s engagement of Divine Inspirations Limited was on an ad hoc basis. There was never any formalised contract between them. Until recently Divine Inspirations had never produced a set of terms and conditions. He trusted Divine Inspirations Limited to do a good job and charge a fair price. He says that in discussions with Mr Boxem at the outset it was agreed that the prices charged by Divine Inspirations Limited would need to be on a fair costs plus basis. In terms of the industry standard, this meant a fair cost plus a margin of 25 to 40 per cent. In addition, any billing needed to reflect the size of the building project and if it was placed in a competitive tender environment.
[17] Mr Taylor says that he trusted Mr Boxem to charge fairly and understood that he had been charged according to industry standards for electrical services. He was not aware of Mr Boxem’s specific billing practices because the invoices were not detailed. He says, however, that he became concerned at overcharging by Divine Inspirations Limited during the Flight Interiors job. That was in part triggered by objections from his client, Flight Interiors. That caused him to be suspicious of how Divine Inspirations Limited had been charging for their work generally. He cites, as an example of overcharging by Divine Inspirations Limited, a credit note that was issued (which I have referred to above) as an example of Divine Inspirations Limited’s belated recognition that it had been overcharging. He also received complaints from the client about slow performance. He was concerned about delays in billing by Divine Inspirations Limited. He says these difficulties resulted in a straight-out refusal by Flight Interiors to pay for sums invoiced by Divine Inspirations Limited. He asked Divine Inspirations Limited to justify its charges and complains that they never provided adequate justification. He began investigating the charges and the work done by Divine Inspirations because he now had genuine concerns about the validity of the invoices.
[18] He arranged for a “peer review” of the charges by Divine Inspirations Limited. He arranged for a Hawkes Bay electrical contractor, Best Forsyth Electrical Limited to check the invoices and prices. He produced an excel sheet which is meant to show that on the Flight Interiors job DTB Operations Limited had been overcharged by some
$33,000. Given that, he considered that if DTB Operations Limited had been overcharged on the Flight Interiors job, it had been overcharged on other jobs as well. He made attempts to set up a meeting to discuss these matters but nothing came of it. He regards his position as vindicated by the credit note for the 55 light fittings.
[19] His position now is that he is suspicious that he has been consistently overcharged by Divine Inspirations Limited right from the beginning and he wants to undertake a thoroughgoing investigation to establish whether his company has been overcharged. He claims that on the John Deere job he was overcharged by $6,409.70. He believes that if earlier jobs are investigated the overcharging could range between
$45,000 and $95,000. He accordingly says that his company was justified in not paying the John Deere invoices because of his concerns at overcharging.
[20] In its evidence, Divine Inspirations Limited says that it did have written terms and conditions of trade. It has produced a written form with a set of written terms and conditions of trade which include this under no.4 ‘Price’:
Where no price is stated in writing or agreed to orally, goods and services shall be deemed to be sold at the current amount as such goods and services were sold by Divine at the time of the contract.
[21] Divine Inspirations Limited has provided evidence showing that it did attach the terms and conditions of the contract to the invoices and that these were sent to DTB Operations Limited. That is supported in particular by an affidavit of Ms O’Callaghan, a former employee of Divine Inspirations Limited.
[22] Divine Inspirations Limited does not want to tangle with DTB Operations Limited for its claim for payment of the Flight Interiors job. It does not accept DTB Operations Limited’s criticism of its work on that job and its charges, but it has not relied on the Flight Interiors invoices for its statutory demand. The evidence shows differences that might be considered typical in construction disputes. DTB Operations Limited complains of overcharging by Divine Inspirations, slowness in performance and slowness in invoicing. In response, Divine Inspirations Limited says that there were variations with the client ordering extra work to be done and there was no fixed price. Mr Bloxem maintains that the client was happy with the work that had been carried out. If there were delays, it was because they had to wait for other trades to complete their work before he could move in. Nevertheless, it does not press for payment of the Flight Interiors invoices, recognising that there are arguable disputes. Its claim is only for money outstanding for the John Deere job.
[23] Mr Bloxem says that there were no complaints about that job. Work was completed in March 2020. In June he went back on site and spoke to the John Deere people to make sure that they were satisfied with the electoral work. He alleges that they were satisfied and allowed him to take photographs so that he could use it for advertising on his website. He was not aware of any dispute relating to that job.
[24] The reply evidence from DTB Operations Limited is an affidavit by Mr Taylor and an affidavit by Mr Forsyth of Best Forsyth Electrical Services. Mr Taylor says that he called in an electrical inspector to check the work done by Divine Inspirations
Limited. He then called in another electrical contractor to carry out further work and to complete work that should have been completed by Divine Inspirations Ltd. Mr Forsyth is a director of Best Forsythe Electrical Ltd. He is the source of the information for the peer review on which Mr Taylor relied in his first affidavit. Mr Forsyth is based in Hastings. According to the evidence, he has a much more substantial business than Divine Inspirations Limited. Mr Forsyth gives comments on the charges by Divine Inspirations Limited.
[25] I cannot, however, accept Mr Forsyth’s evidence. He has given opinion evidence. Opinion evidence can be given only by an expert, and for an expert to give evidence he is required to meet the requirements of r 9.43 of the High Court Rules 2016 and to undertake to comply with the code of conduct for expert witnesses under cl 3 of Schedule 4 of the High Court Rules 2016. He has not done that. The court has a discretion to accept expert evidence notwithstanding non-compliance. But I am wary of doing that in this case. It is not clear that Mr Forsyth was informed of the requirements of the code, and that he applied his mind to them before making his affidavit. It would be speculative to suggest that if he had committed to comply with the code his affidavit would nevertheless be the same. Accordingly, I rule that his alleged expert evidence is inadmissible.
Discussion
[26] For DTB Operations Limited to succeed, it needs to make out at least one of three alternative propositions:
(a)In the claims for the John Deere work there is a substantial dispute as to liability;
(b)The Flight Interiors claims are subject to a substantial dispute and the amounts in dispute are larger than the outstanding $47,217.462, so that any amount in dispute over that amount would reduce the liability for the John Deere invoices; or
2 This amount is the difference between the unpaid balance in DTB’s ledger and the $50,203.99 for the John Deere invoices.
(c)It has been overcharged for work before the John Deere/Flight Interiors jobs and the amounts of the excess are more than the unpaid John Deere invoices.
I will deal with them in a different order.
The historical overcharging claim
[27] DTB Operations Limited alleges that there has been overcharging in the past. It is suspicious only because of what happened on the Flight Interiors job. It considers that in the light of information it has received, if it has been overcharged for the Flight Interiors job, it is arguable it that it was also overcharged for jobs in the past, even though it has paid for that work.
[28] It says that the reasonableness of Divine Inspirations Limited’s charges can be measured against industry standards, being the standards referred to by Mr Taylor in his first affidavit. It complains that Divine Inspirations Limited has not been forthcoming with information that would allow it to establish whether there has been overcharging for past jobs. It contends that if given full disclosure of Divine Inspirations Limited’s costings, it will be able to show that Divine Inspirations Limited claimed unreasonable mark-ups on material supplied. While Ms Murphy suggested that labour rates would also be in contention, that aspect seems to be a less important aspect.
[29] This claim of historical overcharging needs to be put into context. DTB Operations Limited has been presented with a statutory demand for work carried out on the John Deere job. John Deere has already paid DTB under its contract. A company presented with a statutory demand wishing to avoid the pressure that comes with demand may search around for matters to counter the demand. There is a tendency and a temptation to present exaggerated claims on flimsy evidence.
[30] On the whole, DTB Operations Limited has been paid by its clients for electrical work for which Divine Inspirations Limited charged it. Mr Taylor does say that there were three jobs where they were short-paid on account of electrical work,
but he provides no explanatory detail to support that assertion. There has been a consistent course of dealings between the parties, where Divine Inspirations Limited’s charges have been accepted and passed on to the client with some mark-up, although the amount of the mark-up is not known. There is no concrete evidence to suggest that before the Flight Interior project there has been any actual overcharging on past jobs.
[31] In summary, the claim is speculative, the proof is uncertain, the subject matter is historical, and there has been a course of dealing between the parties where invoices have been paid without any question. In these circumstances I do not regard this claim of historical overcharging as amounting to a substantial dispute under s 290(4).
The John Deere charges
[32] There are two aspects to the John Deere charges. The first is an overcharging complaint. While Mr Taylor alleges that he was overcharged by some $6,000, there is no admissible evidence to suggest that the charges were excessive. The matter is really a matter of assertion and speculation on the part of Mr Taylor.
[33] John Deere has paid DTB Operations Limited for all its work done on the job. There is no money outstanding. That means that DTB Operations Limited has been paid for the electrical work carried out by Divine Inspirations Limited. In claiming payment from its employer DTB Operations Limited applied a mark-up to what it had been charged by Divine Inspirations Limited. This was, after all, not a fixed price job. If DTB Operations Limited were correct in its assumption that there was overcharging on the John Deere job, the amount of the mark-up charged to its client would also be reduced. It has not suffered any loss of profit as a result of any charges by Divine Inspirations Limited for the John Deere job. Accordingly, I reject any allegation of overcharging for the John Deere job.
[34] The second aspect came up only in Mr Taylor’s reply evidence. I excuse this being raised late. Mr Taylor could not have given evidence about this aspect earlier. The evidence came into existence during August 2020 whereas the application was made during July. These are the charges for the electrical inspector and the electrical
contractor. Divine Inspirations Limited has not been given any opportunity to reply to that aspect. At my request, copies of the invoices were provided. Mr Gilchrist noted that so far as the electrical contractors’ charges were concerned, while some matters may be remedial work, most of it seemed to be the new work. All the same, I regard it as arguable for DTB Operations Limited that the entire charges may be applied to reduce its liability for the John Deere work. That is an abatement of the price under the rule in Mondel v Steel.3 While a later hearing may show that the amounts are less, at this stage the amounts of the invoices are arguable and deductible. The inspector’s invoice and the electrical contractor’s invoices total $8,860.54.
The Flight Interiors work
[35] Any claim that Divine Inspirations Limited overcharged for the Flight Interiors work must be for more than $47,217.46. The peer review that Mr Taylor relies on shows overcharging of $33,000 which is less than the unpaid balance of the Flight Interiors invoices. That is not enough to reduce the amount payable for the John Deere invoices.
Outcome
[36] The upshot is that from the $50,203 in the statutory demand, I deduct the amounts of the invoices for the inspector and electrical contractor. That leaves a balance of $41,343.45. Accordingly, I uphold the statutory demand for that amount,
$41,343.45.
[37] I make an order under s 291 of the Companies Act 1993 that DTB Operations Limited is to pay that sum by 20 October 2020. If it does not pay that sum by that date Divine Inspirations Limited may begin a liquidation application.
[38] Divine Inspirations Limited is entitled to costs on the application. If counsel cannot agree costs, memoranda may be filed.
………………………………
Associate Judge R M Bell
3 Mondel v Steel (1841) 8 M & W 858; 151 ER 1288 (Ex).
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