Fatweb Limited v Manaia One Limited

[2016] NZHC 2563

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV-2016-409-000243 [2016] NZHC 2563

UNDER	the Companies Act 1993
BETWEEN	FATWEB LIMITED Plaintiff
AND	MANAIA ONE LIMITED Defendant

Hearing:	25 October 2016
Appearances:	G J C Carter and D J Pine for Plaintiff Ms Treacy, Director, with leave for Manaia One Limited
Judgment:	27 October 2016

JUDGMENT OF ASSOCIATE JUDGE MATTHEWS

[1]      In this proceeding the plaintiff, Fatweb Limited (Fatweb), applies for an order placing the defendant, Manaia One Limited (Manaia) into liquidation.  Its ground is that Manaia is insolvent and unable to pay its debts, and as proof it relies on a presumption of insolvency under s 287 of the Companies Act 1993, as Manaia has failed to comply with a demand issued against it under s 289.

[2]      The demand was for the sum of $42,586.81, and relied on an arbitral award registered as a judgment of this Court.  Counsel for Fatweb says that the total now owing,  comprising  the  original  award,  a  second  award,  costs  and  interest  is

$80,057.24.   After service of the statement of claim Manaia filed a statement of defence.  The essential premise of the defence is that Fatweb is indebted to Manaia in  a sum  of not  less  than  $61,665.68,  which  exceeds  the amount  stated in  the statutory demand.  It therefore denies it is indebted to Fatweb, or that it is insolvent and unable to pay its debts, and says it is not just and equitable that the company be

placed into liquidation.

FATWEB LTD v MANAIA ONE LTD [2016] NZHC 2563 [27 October 2016]

[3]      Shortly  after  service  of  the  proceeding  Manaia  applied  for  an  order restraining publication of an advertisement of the application and an order staying any further step on this proceeding.  The principal ground for this application was that Manaia has a valid counterclaim in a sum exceeding its indebtedness to Fatweb, and was solvent.

[4]      This  application  was  argued  on  16  May  2016.     The  application  was dismissed.  Essentially, the ground put forward by Manaia to stay the application was that it had a valid counterclaim, on the same basis that it asserts now.  The point was thoroughly argued by Mr Ballantyne, then counsel on behalf of Manaia, and since the judgment was issued, Manaia has not filed any further evidence in support of its position  (despite  there being  a  timetable  in  place  allowing  it  to  do  so).1      It  is apposite, therefore, to note the following passage from the judgment dated 18 May

2016:2

[19]    … What  the  Court  is  being  asked  to  do  by  Manaia  is  defer  the enforcement proceeding of an established liability which Fatweb has elected to take under the Companies Act, while it ascertains whether or not it has a counterclaim which might, if for a sum exceeding the amount it owes to Fatweb, result in Fatweb no longer being a creditor.  As a matter of fact, there are real difficulties standing in Manaia’s way.   The first is that Ms Treacy’s assessment of the possible quantum of her counterclaim is based on an assumption that all of the websites sold during the first six months of the second 12 month period were websites within the terms of the agreement. The second is that the solicitors for Fatweb have advised the solicitors for Manaia in writing that just one platform within the terms of the agreement was sold during the period.  The third difficulty is that the evidence before the arbitrator in relation to the first period was that after a few months Fatweb decreased use of the content managed 2000 platform and developed its own Fatweb content managed platform which it used thereafter.   In an affidavit filed in opposition to this application, Mr Collins says that while a small number of websites have gone live in the second period using the Manaia platform, the contracts relating to those were signed during the first

12 month period so have been taken into account in the arbitration for that period.

[5]      Ms Treacy, the sole director of Manaia, appears for Manaia on the present application.     In  essence  she  asserted  the  same  position  as  that  asserted  by

Mr Ballantyne on behalf of Manaia on the application for a stay.  She maintains that

1      See Fatweb Ltd v Manaia One Ltd HC Christchurch CIV-2016-409-000243, 26 October 2016 (Minute) and earlier Minutes in relation to procedural issues and a ruling in relation to the admission of affidavits tendered on the day of the hearing.

2      Fatweb Ltd v Manaia One Ltd [2016] NZHC 1016.

Manaia needs to examine the records of Fatweb to determine whether Fatweb’s contention,  that  there  is  nothing owing under the contract  between  Fatweb  and Manaia,  is  correct  or  not.    The  arbitral  awards  on  which  the  demand  is  based resolved liability in respect of a certain period, but liability for payments under the agreement between Fatweb and Manaia for a subsequent period have not yet been resolved.  Payments would be due to Manaia if it could be shown that Fatweb used the platform it purchased from Manaia for the purpose of developing websites, during the subsequent period.  It maintains that it did not.  Ms Treacy, presenting her argument, adamantly contends that it did but says that she needs access to certain of Fatweb’s  records  for  inspection  by  a  suitably  qualified  assessor,  to  determine whether she is right.  She describes the information Manaia needs as the codes that drive the websites which Fatweb has produced as she contends Fatweb used codes provided by Manaia.

[6]      Although the present proceeding was filed in April 2016, and the period in respect of which Ms Treacy maintains Manaia will be owed money by Fatweb expired in February 2016, Manaia has not taken any step to bring its claim in relation to this period either to arbitration, or to a court, by instituting proceedings.  Apart from applying to stay this proceeding to enable it to do so, it has not taken any step at all towards validating its assertion.  Ms Treacy says that it has sought records from Fatweb and for present purposes I accept that.  It is substantiated to an extent by the fact  that  on  13 September  Fatweb  offered  Manaia  access,  on  certain  terms,  to specified records.  This offer was not accepted.   Ms Treacy says that this year has been a particularly difficult one for her because of personal health issues and her son’s ill-health.  She also says that she has been frustrated by the lack of information provided by Fatweb.  She gives these as her reasons for not doing anything to pursue a claim against Fatweb.

[7]      These assertions can only take Manaia so far.  The reference to dates which I have given show that it has had months to take steps to validate its position.  Had it commenced arbitration proceedings or filed proceedings in a court it could have obtained orders by way of discovery which would have required Fatweb to produce the records relevant to Manaia’s assertion that it is owed money.  It has failed to do so.  The delay can be divided into two parts, the first a period of some three months

before the Court considered the stay application in May, and rejected it, and the second a period of a further five months during which, faced with the fact that there was no stay of this proceeding in place, Manaia still failed to take any steps of the kind I have outlined.  In the meantime Fatweb has been without the proceeds of the arbitration to which it is entitled.

[8]      Whilst the Court recognises the health issues faced by Ms Treacy and her son and accepts that these will have been reasons for Ms Treacy not attending to the affairs of Manaia as efficiently as a director might have been expected to do, I am not satisfied that these amount to reasons which prevented Manaia taking steps to pursue its claim over such a long period.  I also observe that if Ms Treacy’s personal circumstances were such that she could not direct the company as she believed it should be directed, she had available to her the option of appointing another director to take over her role and institute proceedings of one kind or another in relation to the alleged debt owing by Fatweb.

[9]      In April Ms Treacy swore an affidavit and filed it in this proceeding, to which was annexed the annual accounts for Manaia as at 31 March 2015 which disclosed a net  asset  position  of $611,331.    If those  accounts  are accurate, they disclose a position which should have enabled the company to take legal advice and assert its position by a recognised means.  Ms Treacy deposed in that affidavit that she was confident that Manaia did not have any creditors other than Fatweb, and she confirmed that Manaia was solvent.  She said there had been no material variation to the company’s financial position since March 2015.

[10]     There are, however, grounds to hold concerns over Ms Treacy’s evidence about the financial position of Manaia.  It has failed to meet a judgment of this Court for an extended period, and in the course of delivering submissions for Manaia Ms Treacy said that Manaia could not pay this debt by any means at all, including borrowing.   When I indicated to her that the 2015 accounts show that she owes Manaia $484,069, she said that neither she nor any family trust or other entity with which she is involved had any prospect of paying any part of that sum to Manaia. The only other assets Manaia had at March 2015 were accounts receivable.  There is

no information before the Court on whether all or any part of these accounts have been received or, if so, how Manaia has applied those monies.

[11]     There are, therefore, sound reasons for the Court to be concerned about the solvency of Manaia, both in terms of balance sheet insolvency and its ability to pay its debts when due.

[12]     In the judgment dated 18 May I cited passages from Anglian Sales Limited v South  Pacific  Manufacturing  Limited.3      It  is  apposite  to  cite  the  first  of  these passages again:4

As already observed, the Courts have invoked an inherent jurisdiction to stay winding-up proceedings, where the debt upon which such proceedings are founded is the subject of genuine dispute.   Where then the petitioner is unable to show that he had the status to present a winding-up petition as a “creditor” under s 219(1) of the Companies Act 1955, or that there has been a “neglect” by the company to pay, the Court may intervene to prevent the serious harm which is likely to follow from the presentation and advertising of the petition.  But the right to have a winding-up petition determined, being a right conferred by statute, ought not be taken away except where the existence of that very statutory right itself is seriously challenged; that is, where the challenge can on appropriate grounds be made to the petitioning creditor’s status as such.  If a challenge were allowed in circumstances short of this, the Court would in effect be refusing to give effect to the very right which the statute has conferred upon a creditor to have the petition itself considered.   In bringing his petition the creditor is doing no more than asserting the right which the statute entitles him to do.   In our opinion a creditor’s right in this respect ought not to rest simply on the balance of convenience considerations which may be relevant to an application for an interim injunction.  Something more than that is required.

[13]     It is also apposite to cite a passage from the judgment of 18 May 2016, in which the Court cited a passage from the decision in Covington Railways Ltd v Uni- Accommodation Ltd:5

Mr Ballantyne, however, relies on Heron’s Flight Limited v NZ Properties International Limited.6 Heron’s Flight Limited had applied for an order putting NZ Properties International Limited (NZPIL) into liquidation based on an unpaid costs order of the Court of Appeal, and a notice under s 289 of the Companies Act issued in respect of it.  NZPIL had issued proceedings in the High Court against Heron’s Flight Limited claiming damages in a sum

3      Anglian Sales Limited v South Pacific Manufacturing Limited [1984] 2 NZLR 249 (CA).

4      At 251-252.

5      Fatweb Ltd v Manaia One Ltd, above n 2, at [24], citing Covington Railways Ltd v Uni- Accommodation Ltd [2001] 1 NZLR 272 (CA) at [11] (certain citations omitted).

6      Heron’s Flight Limited v NZ Properties International Limited [2012] 1 NZLR 424 (HC).

greater than the sum claimed in the notice, and defended the application for liquidation as a consequence.  The Court found that the claim by NZPIL was “based on clear and persuasive grounds”.  Applying Covington Railways Ltd v Uni-Accommodation Ltd, the Court dismissed the liquidation application. In Covington the Court of Appeal said:

Where a company which is the subject of a liquidation application is indisputably in debt to the applicant creditor, it may nonetheless be able to show that it has a claim against the applicant which reduces the net balance owing to the creditor or even off-sets it altogether.  Where there are liquidated sums, due each way, that is simply an arithmetical exercise.  It is more difficult if, on the applicant’s side, there is an indisputable liquidated sum, but the other party’s claim is  for  an  unliquidated sum  with  liability and/or  quantum in dispute.   Then in order to impeach the statutory demand and overcome the presumption of s 287(a) that the company is unable to pay its debts when it has failed to comply with that demand, it must be able to do more than merely assert that there is an available set-off.  It must be able to point to evidence before the Court showing that it has a real basis for the claimed set-off and that accordingly, the applicant’s claim to be a creditor is, to the extent of the set-off, seriously in doubt.  In the words of Buckley LJ in Bryanston Finance Ltd v de Vries (No. 2) [1976] Ch 63 at p 78, it must show that there are “clear and persuasive grounds” for the set-off claim. Where this can be done, the party who has issued the statutory demand against the company will be shown to be using the statutory demand in liquidation procedures improperly because there is a “genuine and substantial dispute” about the net amount of the company’s indebtedness (Taxi Trucks Ltd v Nicholson [1989] 2 NZLR 297 at p 299). The dispute should then be resolved in the ordinary way – except as to any undisputed balance, rather than upon the hearing of a liquidation application.

[14]     On the evidence before the Court I find that Manaia does no more than merely assert that it has an available claim against Fatweb in respect of which it is entitled to a set-off.  In fact, material before the Court casts doubt on the asserted set- off, in two ways.  First, the claim is based on Manaia being entitled to a payment in respect of all content-managed websites published by Fatweb during the second payment period, regardless of the platform used for the creation of those websites, but a binding finding of the arbitrator detracts from this proposition.   Manaia’s entitlement to payments in relation to websites created during the second period of

12 months, under the agreement, relies on a clause with identical wording to the clause on which it relies in relation to the first payment period.7

[15]     The arbitrator reached the following conclusion:

[83]  And so I conclude that it is plain as a matter of construction of the [agreement for sale and purchase] that the reference in condition 2 to “Content  Managed  2000  Websites”  refers  to  websites  developed  on  the Treacy platform (as distinct from the later in time Fatweb platform) and it is the number of sales of these websites which is relevant when calculating

7 Arbitrator’s interim award dated 26 November 2015 at [16].

whether or not any further payment is due in respect to either payment period.

[84]  Viewed objectively it seems to me to be inescapable that this is what the parties had in mind when they made their contract.

[16]     Given this binding ruling, and the all but identical terms of the provision relating  to  the  second  payment  period,  the  entitlement  of  Manaia  is  only  to  a payment in respect of websites developed on the Treacy platform.   The arbitrator went on to conclude on the evidence before him that the Fatweb platform was separate and distinct from the Treacy platform, and that there are substantial differences.

[17] These findings cast material doubt on Manaia’s asserted entitlement to payments to the extent maintained. As noted in paragraph [19] of the judgment dated 18 May, cited at [4] above, its assessment of the amount of its possible claim is based on an assumption that all of the websites sold during the first six months of the second period were websites within the terms of the agreement; these terms are the subject of the arbitrator’s ruling in relation to both periods covered by the agreement, and Manaia’s assertion is incorrect.

[18]     Secondly, the evidence of Mr Collins is that:8

… the last website sold which was developed using the Treacy CMS 2000 platform, and which therefore has to be accounted for by Fatweb, was sold on 19 November 2014.  No websites have been built using the Treacy CMS

2000 platform during the Second Payment Period.

[19]     Mr Collins went on to say:9

No websites were produced by Fatweb during the Second Payment Period using the Treacy CMS 2000 platform.   Fatweb has already accounted to Manaia One for websites built off the Treacy CMS 2000 platform in the first payment period.

[20]     As I have recorded, no evidence has been presented to the Court since this affidavit  was  filed,  on  behalf  of  Manaia.     The  evidence,  therefore,  stands

unchallenged. This casts significant doubt on Manaia’s asserted counterclaim.

8      Affidavit of Mr Collins dated 30 May 2016 at 7.

9      Affidavit of Mr Collins dated 30 May 2016 at 10.

[21]     Ms Treacy asserts that if she could get information from Fatweb into the hands of an appropriate analyst she is sure that it will show that Mr Collins’ evidence is wrong.  Whether that is so is conjecture, and Manaia has had ample opportunity to obtain the records by one form or other of interlocutory procedure on an arbitration or a civil suit.  On the principles applying to the issue before the Court, Fatweb is entitled to proceed.

[22]     I conclude that there is no proper basis upon which to exercise the Court’s discretion not to place Manaia into liquidation, based on its asserted counterclaim against Fatweb.

Outcome

[23]     I make an order placing Manaia One Limited into liquidation.  I appoint Rhys James Cain, insolvency practitioner of Christchurch, and Rees Graham Logan, chartered accountant of Auckland, as the liquidators.  I approve their remuneration in accordance with their consent signed by Mr Cain on 19 April 2016 and Mr Logan on

18 April 2016, but subject to s 248 of the Companies Act.   I direct that they may exercise their powers individually, pursuant to s 242.

[24]     The order will lie in court until Fatweb through its solicitors files in court an up-to-date certificate that the debt remains unpaid.

[25]     Fatweb sought costs on an increased basis because Manaia had not filed evidence or submissions  as  ordered  by the Court,  and  the position  it took  was untenable given the binding ruling of the arbitrator.

[26]     I do not think that grounds for an increase above scale costs have been made out.   The non-compliance with procedural orders by Manaia has led to additional attendances being required on the part of Fatweb, but it may claim costs in its assessment for the steps it has been required to take.  As well, costs were awarded against  Manaia in  respect  of  adjournment  of the fixture for  this  application  on

20 October.

[27]     Manaia will pay costs to Fatweb on a 2B basis plus disbursements fixed by

the Registrar.

J G Matthews

Associate Judge

Solicitors:

Wynn Williams, Christchurch

cc: Ms Treacy