Fatweb Limited v Manaia One Limited
[2016] NZHC 1016
•18 May 2016
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV-2016-409-000243 [2016] NZHC 1016
IN THE MATTER of the Companies Act 1993 BETWEEN
FATWEB LIMITED Plaintiff
AND
MANAIA ONE LIMITED Defendant
Hearing: 16 May 2016 Appearances:
J W A Johnson for Plaintiff
D J Ballantyne for DefendantJudgment:
18 May 2016
JUDGMENT OF ASSOCIATE JUDGE MATTHEWS
[1] On 19 February 2014 the defendant, Manaia One Limited (Manaia) sold to the plaintiff, Fatweb Limited (Fatweb) certain assets of its website development and design and web hosting business then trading as Treacy Advertising. The agreement provided for part of the overall purchase price to be paid on settlement of the sale, and then for two further sums to be paid at the expiration of 12 and 24 months from the settlement date respectively. Any further sum payable was to be based on the average number of “content managed 2000 websites” sold during each 12 month period.
[2] Manaia and Fatweb were unable to reach agreement on what sum, if any, was payable in respect of the first payment period of 12 months, and referred their dispute to the arbitration of Mr S R Maling, barrister and arbitrator. The outcome of the arbitration generally favoured the position taken by Fatweb. For present purposes it is sufficient to record that Manaia was required to pay $2,248.25 to Fatweb in relation to web-hosting fees wrongly retained by Manaia, and $40,000 by
way of costs, by an award dated 26 November 2015. This award has since been
FATWEB LIMITED v MANAIA ONE LIMITED [2016] NZHC 1016 [18 May 2016]
submitted to this Court under Article 35 of Chapter 8 of the Arbitration Act 1996, and judgment has been entered accordingly.
[3] On 15 February 2016 Fatweb issued a statutory demand under s 289 of the Companies Act 1993 to Manaia claiming payment of $42,586.81. It required payment or other satisfaction of the demand within 15 working days, but Manaia did not take any step pursuant to the notice. As a result Fatweb instituted this proceeding seeking the appointment of liquidators to Manaia. Manaia now applies for orders restraining the publication of an advertisement of this application under r 31.11 of the High Court Rules, and staying the liquidation application. Manaia also seeks an extension of time within which to bring this application as it was filed and served one day outside the time limit set out in r 31.11 (five working days).
[4] Fatweb opposes the application.
[5] Rule 31.11 provides:
31.11 Power to stay liquidation proceedings
(1) If an application for putting a company into liquidation is made under rule 31.3, the defendant company, or, with the leave of the court, any creditor or shareholder of that company or the Registrar of Companies, may, within 5 working days after the date of the service of the statement of claim on the defendant company, apply to the court –
(a) for an order restraining publication of an advertisement required by rule 31.9 or any other information relating to that statement of claim; and
(b) for an order staying any further proceedings in relation to the liquidation.
(2) The court must treat an application under subclause (1) as if it were an application for an interim injunction and, if it makes the order sought, it may do so on whatever terms the court thinks just.
(3) The inherent jurisdiction of the court is not limited by this rule.
[6] The issues to be decided are:
(a) Should time be extended for the filing and service of this application? (b) Should an order be made restraining advertising of Fatweb’s
application for appointment of liquidators to Manaia and staying any further step in this proceeding?
First issue: Should time be extended for the filing and service of this application?
[7] This application was filed one day outside the prescribed period of five working days after service of the statement of claim on Manaia.1 Counsel for Manaia accepts that this occurred because of an error on his part in making a diary entry of the deadline. He accepts Mr Johnson’s submission that the five day deadline is important as it relates to the five day period after service during which publication of an advertisement cannot take place, in r 31.10. He says, however, that advertising
did not in fact take place on the sixth day, and he says that there is no prejudice to
Fatweb.
[8] Mr Johnson says r 31.11 provides a strict time limit which must be complied with, that a sufficient explanation or justification has not been given, and the effect on any other creditors is not known as advertising has not yet taken place.
[9] I accept that the time limit is strict, and the interrelationship between rr 31.10 and 31.11 is self-evident. However, in my opinion the delay is explained on a satisfactory basis. Whilst errors of this kind should not occur, from time to time they do and they should not be a bar to a party seeking to have a substantive issue put before the Court when no prejudice to the other party is shown.
[10] I extend time for the filing and service of this application accordingly.
Second issue: Should an order be made restraining advertising of Fatweb’s application for appointment of liquidators to Manaia and staying any further step in this proceeding?
[11] Because r 31.11(2) requires the Court to treat this application as though it were an application for an interim injunction, I consider first whether Manaia has
established that there is a serious question to be tried.
1 Rule 31.11(1).
[12] The principles on which the Court must proceed on an application of this nature were drawn together by Wallace J in Nemisis Holdings Ltd v North Harbour Industrial Holdings Ltd. The principles are these:2
1. The Court has an inherent jurisdiction to stay winding-up proceedings where the debt upon which such proceedings are founded is the subject of genuine dispute. In those circumstances the plaintiff cannot show it has the status of a creditor or that there has been neglect by the company to pay.
2. The jurisdiction is an inherent one to prevent abuse of process. There is no inflexible rule.
3. The governing consideration is whether the proceedings suggest unfairness or undue pressure.
4. It is a serious matter to stay winding-up proceedings, so the decision to do so is never made lightly. The onus is on the applicant and it is normally necessary to demonstrate “something more” than the balance of convenience considerations which are usually considered on an application for interim injunction. If the defendant company has had an opportunity to file appropriate affidavits, it is required to establish a strong prima facie case of the existence of a genuine dispute on substantial grounds, or show that there are clear and persuasive grounds for a stay.
[13] Mr Ballantyne acknowledges that when Fatweb served its statutory demand on 15 February 2016 Manaia was a creditor in the sums claimed. He says, however, that on 27 February 2016 the second period of 12 months expired and Manaia has a counterclaim against Fatweb for purchase monies owing in respect of that period. The director of Manaia, Ms Treacy, produces a schedule of websites which Fatweb
sold in that period. In relation to it, she says:
2 Nemisis Holdings Ltd v North Harbour Industrial Holdings Ltd (1989) 1 PRNZ 379 (HC) at
385.
To provide context to the Court, I have annexed hereto and marked “D” a schedule that was provided to Manaia by Fatweb which sets out a list of websites sold by Fatweb during the six month period between 4 March 2015 and 4 September 2015. For this six months alone, there are (at least) 148 websites that have been sold by Fatweb. This amounts to a counterclaim of
$61,665.68 arising from six of the twelve months that Fatweb is required to account to Manaia.
[14] In his affidavit in opposition Mr Collins, director of Fatweb, notes that the agreement requires payment to be made by Fatweb in respect of websites which Fatweb sold during the relevant period which used the CMS 2000 platform which Manaia had sold to Fatweb under the agreement for sale and purchase. In her affidavit in reply Ms Treacy refers to this evidence, notes that the agreement sets out what Fatweb is required to account for during the second payment period, and then says “It is not limited to websites using the CMS 2000 platform sold to Fatweb. It was for all website [sic] sold by Fatweb having acquired the Treacy business from Manaia”.
[15] There are two significant difficulties with this assertion. The first is that on a plain reading of clause 2.1(c) of the agreement for sale and purchase, any additional purchase price payable is derived from “the average number of content managed
2000 websites sold during the period…”. It does not relate to websites other than
those thus described.
[16] Mr Ballantyne says there is an issue between the parties in relation to this, but this is answered by the second point. At paragraphs 83 and 84 of the first arbitral award of Mr Maling he says:
83. And I so 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 whether or not any further payment is due in respect of 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.
[17] Although this arbitration was initiated to determine whether any sum was payable in respect of the first period, this is a finding in relation to the interpretation of the agreement, and is binding on the parties to the arbitration.
[18] It follows that the schedule produced by Ms Treacy is not compelling evidence of a claim for additional purchase monies as it does not indicate which, if any, of the listed websites are content managed 2000 websites. Thus quantum of any claim that Manaia may have against Fatweb is, at this point, a matter of conjecture. Mr Ballantyne lays responsibility for this at the feet of Fatweb, contesting that Fatweb is obliged under the contract to give an account to Manaia at the end of the second 12 month period of all qualifying sales which it secured during that period. Mr Ballantyne says that Fatweb has refused to provide this information, that it has made conflicting statements about it, and that Manaia is entitled to know how many complying websites were sold during the 12 month period in order to assess its entitlement under the contract.
[19] Mr Ballantyne is, in my view, correct in this last assertion but it does not answer the issue presently before the Court. 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.
[20] As well, there is a principle of law standing in Manaia’s way. In Anglian Sales Limited v South Pacific Manufacturing Limited, the Court of Appeal discussed the approach the Court is to take when no dispute is raised over the debt on which a notice under s 289 is issued, but where it is alleged that there is a counterclaim available to the debtor.3
[21] After considering two approaches in prior cases, the Court said: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.
[22] After referring to Bryanston Finance Ltd v de Vries (No 2), the Court continued:5
It follows that where the existence of the debt on which the petition is founded is unchallenged it cannot be said with the same confidence that the proceedings amount to an abuse of process merely by reason of an alleged counterclaim. Where therefore the debtor, while admitting the debt, advances a counterclaim in attempted answer to a petition, the latter should normally proceed to determination, with the Court retaining a discretion as to whether it ultimately makes a winding up order or not.
3 Anglian Sales Limited v South Pacific Manufacturing Limited [1984] 2 NZLR 249 (CA).
4 At 251-252.
5 At 252, citing Bryanston Finance Ltd v de Vries (No 2) [1976] Ch 63 (EWCA).
[23] Applying this principle, Fatweb’s application to place Manaia into liquidation
should not be stayed.
[24] 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 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,7 the Court dismissed the liquidation application. In Covington the Court of Appeal said:8
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.
[25] Both Covington and Heron’s Flight Limited were decisions made in relation to the final disposition of the application to liquidate a debtor company. Neither was
an application for a stay of the liquidation proceeding and in accordance with the
6 Heron’s Flight Limited v NZ Properties International Limited [2012] 1 NZLR 424 (HC).
7 Covington Railways Ltd v Uni-Accommodation Ltd [2001] 1 NZLR 272 (CA).
8 At [11].
principle in Anglian Sales the appropriate time for consideration of issues such as those now raised by Manaia is on the final determination of the application for liquidation.
[26] I do not find that the decision in Heron’s Flight Limited assists with the position advanced by Mr Ballantyne. To paraphrase the wording of the Court of Appeal in Anglian Sales, the existence of the debt on which this liquidation application is founded is unchallenged and on that basis the application should proceed to determination. When the Court comes to decide the liquidation application itself, it will consider the discretion given by s 241 of the Companies Act
1993 not to place Manaia into liquidation, but there appear to be real difficulties facing Manaia on the basis of the facts which I have discussed in this judgment.
[27] Manaia has not established that it has a serious prospect of having the liquidation application dismissed.
Outcome
[28] The interim stay is discharged.
[29] The application for a permanent stay is dismissed.
[30] Manaia will pay Fatweb costs on a 2B basis plus disbursements fixed by the
Registrar.
[31] To allow time for advertising the application for liquidation of Manaia is adjourned to the List at Christchurch at 10.00 am on 2 June 2016.
J G Matthews
Associate Judge
Solicitors:
Wynn Williams, Christchurch. Canterbury Legal, Christchurch.
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