Forest Export Management Limited v DNS Forest Products 2009 Limited HC Napier Civ-2011-441-489

[2011] NZHC 1518

IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY

CIV-2011-441-489

IN THE MATTER OF     the Companies Act 1993

BETWEEN  FOREST EXPORT MANAGEMENT LIMITED

Applicant

AND  DNS FOREST PRODUCTS 2009

LIMITED Respondent

(Heard at Napier)

Counsel:         D.J. O'Connor - Counsel for Applicant

M. Taylor - Counsel for Respondent

Judgment:      3 November 2011

ORAL JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALL

Solicitors:           Lunn & Associates, Solicitors, PO Box 846, Napier

Paul Cheng & Co, Solicitors, PO Box 27088, Wellington

FOREST EXPORT MANAGEMENT LIMITED V DNS FOREST PRODUCTS 2009 LIMITED HC NAP CIV-

2011-441-489 3 November 2011

Introduction

[1]      This is an application to set-aside a statutory demand dated 21 July 2011 issued by the respondent against the applicant claiming a total sum of $148,828.22.

[2]      This amount represents a principal claim described as being for:

work completed by Frank Burgiss Contracting – repairing and upgrading the logging road, water tabling, culverts and logging drainage ... at the Waimarama 3C Trust Block.

That principal claim is made under 5 invoices totalling $143,211.40.  In addition, the demand claims a further sum of $5,616.82 representing an order for costs made in this Court on 9 December 2010 against the applicant.

[3]      The present application is brought on the essential ground that there is a substantial dispute between the parties as to whether the debt claimed is owing.

[4]      The  application  to  set-aside  the  statutory  demand  is  opposed  by  the respondent.

Background

[5]      This  matter  has  a  reasonably  long  history.    Essentially  it  involves  two contracts entered into between the parties.  The first contract, as I understand it is dated 1 March 2010, and provides for the applicant as contractor to construct roading access to the respondent’s forestry block at Waimarama 3C Trust.

[6]      The second contract, which as I understand it was entered into orally, relates to the provision by the applicant of certain log loading facilities for the respondent at the Napier Port.

[7]      Work under the forestry roading contract was commenced by the applicant some time ago and it seems certain difficulties arose.   Of the total contract price under  this  roading  contract  of  about  $50,000.00,  as  I  understand  it  some  $20-

30,000.00 was paid to the applicant.

[8]      The applicant did not complete the work under this contract.  It contends that it had no option but to do this as the contract progressed.  It says it vacated the site only after numerous warnings it had given to the respondent, because its work in carrying out the roading was being consistently frustrated and obstructed.

[9]      The respondent’s position is quite different.  It maintains that, because of the failure on the part of the applicant to carry out its contract properly, the respondent properly terminated the contract.  There does not appear to be any formal notice of termination before the Court however – I simply note this as an aside at this point.

[10]     Following  the  applicant’s  vacating  of  the  site,  the  respondent  it  seems engaged Frank Burgiss Contracting to “repair and up-grade the logging road and related facilities”.  It is the cost of this work which, according to the respondent cost it  some  $143,000.00,  it  is  now  seeking  from  the  applicant  under  the  statutory demand.

[11]     Some adjustment to this figure, however, according to Mr Taylor for the respondent is required here.

[12]   First, the $143,211.40 principal claim does not take into account the approximately  $20,000.00  unpaid  to  the  applicant  under  the  original  roading contract.  Mr Taylor acknowledges that this $20,000.00 should be deducted.

[13]     In addition, as I understand it, a very recent decision of the Disputes Tribunal (which decision by the way has been appealed by the respondent) has been given in favour of the applicant relating to its claim for unpaid work carried out under the Napier Port log loading contract.  Under this decision the Disputes Tribunal ordered a sum of approximately $11,000.00 to be paid by the respondent to the applicant.

[14]     For present purposes Mr Taylor for the respondent acknowledged that this (approx) $11,000.00 should also be deducted from the total amount claimed under the statutory demand.

[15]     With these deductions the principal claim amount which Mr Taylor says is now claimed under the statutory demand totals approximately $112,000.00.  It is this amount for which he contends the statutory demand should stand.

[16]     As I have noted above the total amount under the demand also includes

$5,616.82  representing  the  costs  award  made  in  this  Court  in  favour  of  the respondent on an earlier application in that case by the respondent to set-aside a different statutory demand (which was ultimately withdrawn by the applicant).

[17]     Notwithstanding  those  earlier  proceedings  and  what  is  a  long  history  of dispute and correspondence between the parties over both the contracts between them, the respondent in July of this year chose to issue the statutory demand which is now before the Court.

Counsels’ Arguments and My Decision

[18]     The application before me is brought pursuant to s 290(4)(a) Companies Act

1993.  This provides that the Court may grant an application to set-aside a statutory demand if it is satisfied that there is a substantial dispute whether or not the debt in question is owing or is due.

[19]     The principles relating to s 294(a) Companies Act 1993 are well settled.  The authors  of  Brookers  Insolvency  Law  & Practice  provide  the  following  succinct summary at para CA290.02:

CA290.02  Setting aside a statutory demand

(1)        General principles

The general principles applicable to  applications under s  290(4) are now well established. These principles, which can be discerned from cases such as United Homes (1988) Ltd v Workman [2001] 3 NZLR 447; (2001) 9 NZCLC 262,605 (CA); Fletcher Homes Ltd v Ellis 23/7/99, Master Faire, HC Auckland M471IM99; Forge Holdings Ltd v Kearney Finance (NZ) Ltd 20/6/95, Tipping J, HC Christchurch M149/95; Queen City Residential Ltd v Patterson Co-Partners Architects Ltd (No 2) (1995) 7 NZCLC 260,936; Rennie v Prospect Resources Ltd

3/11/95, Tipping J, HC Greymouth M14/95; Crown Transport Services Ltd v Waipa District Council 2/7/08, Associate Judge Faire, HC Hamilton CIV-2007-419-1711; and Taxi Trucks Ltd v Nicholson [1989] 2 NZLR 297; (1989) 1 PRNZ 390 (CA), are as follows:

(a)      The applicant must show that there is arguably a genuine and substantial dispute as to the existence of the debt. The task for the Court is not to resolve the dispute but to determine whether there is a substantial dispute that the debt is due. The mere assertion that there is a genuine substantial dispute is not sufficient: Queen City Residential Ltd v Patterson Co-Partners Architects Ltd (No 2) (1995) 7 NZCLC

260,936 (HC).

(b)       The mere assertion that a dispute exists is not sufficient. Material, short of proof, is required to support the claim that the debt is disputed.

(c)       If such material is available, the dispute should normally be resolved other than by means of proceedings in the Companies Court.

(d)       An applicant must establish that any counterclaim or cross demand is reasonably arguable in all the circumstances. The obligation is not to prove the actual claim. Such an obligation would amount to the dispute itself being tried on the application.

(e)       It is not usually possible to resolve disputed questions of fact on affidavit evidence alone, particularly when issues of credibility arise.

This statement of principles is set out in North Harbour Equine Hospital Limited v Little

19/2/07, Associate Judge Abbott, HC Auckland CIV-2006-404-7585 and in Carpet Plus

2003  Ltd  v  A  Team  Flooring  Specialist  Ltd  19/1/09,  Associate  Judge  Sargisson,  HC Auckland CIV-2008-404-4725. See also Trinity Hills Retreat Ltd v Kroehl HC Nelson CIV-

2010-442-101, 12 August 2010.

[20]     As I have noted above, the present application is essentially based on the contention that there is a substantial dispute whether or not the debt claimed by the respondent, even in the reduced form noted above, is owing or is due.

[21]     Turning now to consider counsel’s arguments in this matter the first question relates to the major part of the claim under the statutory demand representing the accounts for work completed by Frank Burgiss Contracting.  As I have noted, taking into  account  the  $20,000.00  unpaid  to  the  applicant  under  its  contract,  this effectively totals a net sum claimed of some $123,211.40.  At the outset I repeat the comments I have outlined above that this whole matter between the parties has a long and complex history.  The forestry roading contract dated 1 March 2010 which is before the Court provides in some detail for remedying of defects in work under the contract to be undertaken by the contractor (the applicant here) where these are “specified  by notice in  writing  given to  the contractor  by the owner” within  a reasonable period of time – para 9.  In addition, para 18.1 of this contract also deals with contract breaches by the applicant contractor and indicates that the owner (the respondent here) “may by notice in writing to the contractor determine this contract at any time” .... if there is a breach on the part of the applicant contractor in carrying out the contract, “provided that the owner shall have given to the contractor at least 7

days written notice to amend any such breach and the breach has not been amended as required in such notice within that time”.

[22]     In the present case as I understand it there is no evidence before the Court of any notice having been given by the respondent to the applicant formally notifying it of defects in the work and requiring their remedy.  Nor, as I have noted is there any evidence before the Court of any formal written notice being given by the respondent to the applicant terminating the contract.

[23]     Notwithstanding this, the respondent has appeared to proceed here on the basis that it was entitled to employ an alternative contractor (in this case Frank Burgiss Contracting) to carry out work which it maintained the applicant had failed to properly complete under its contract.

[24]     From all the material before the Court it is clear to me that these allegations of breach of contract on the part of the applicant are strongly disputed.

[25]     There are before the Court a range of emails between the parties and also what seem to me to be acknowledgements in Memoranda from respective counsel that issues surrounding this forestry roading contract (and indeed surrounding also the Napier Port log loading contract) have been the subject of substantial disputes between the parties for some time.

[26]   Indeed the solicitors to the respondent have themselves in their own correspondence (letters dated 28 October 2010 and 29 October 2010) acknowledged that disputes have existed between the parties and that these disputes have been on foot for some time.

[27]     It was the presence of these disputes which, in fact, was a critical factor (in the earlier decision in other proceedings) on the part of the applicant in this proceeding to withdraw the statutory demand it had issued earlier against the respondent.

[28]     Given all these matters, and the fact that I must be mindful here that the application  before me is  one to  set-aside  a statutory demand and  therefore any disputes between the parties properly raised are normally to be resolved by means other than proceedings such as this in the Companies Court, I am satisfied that a genuine and substantial dispute exists in this case as to the respondent’s claim in its statutory demand for the net amount due on the Frank Burgiss Contracting Invoices. Indeed, if anything the claim for this amount must be properly seen as merely a damages claim against the applicant.  It does not fall within the normal bounds of cases where statutory demands are properly issued for established debts due under clear contractual arrangements, loan arrangements, or for assessed taxation and the like.   I repeat that I am satisfied here there is a clear dispute between the parties concerning this effective damages claim by the respondent and that this claim should be dealt with elsewhere.

[29]     Also on this aspect, I note that in the forestry roading contract itself at para

28 there is an arbitration clause.   This relates to situations where there is an “irreconcilable dispute or irreconcilable difference between the parties”.  It could be that a reference to arbitration might be appropriate here.

[30]     It follows therefore that the statutory demand, in so far as it relates to these

Frank Burgiss Contracting invoices, must be set-aside.

[31]     That  leaves  for  consideration  the  remaining  $5,616.82  claimed  in  the statutory demand for costs ordered by this Court against the applicant on the earlier statutory demand matter.

[32]     On its face this amount represents an order of this Court and the amount in question should be paid.

[33]     I am mindful, however, that in recent weeks the applicant has itself been the successful recipient of an order of the Disputes Tribunal whereby approximately

$11,000.00 was ordered to be paid to it by the respondent.  As I have noted above that Disputes Tribunal decision is the subject of an appeal but, at this stage, the interests of justice in my view require that this outstanding costs order of $5,616.82

should not be the subject of a statutory demand given what is a clear right to set-off which exists for the applicant.

[34]     For these reasons also, the statutory demand in so far as it relates to the balance amount of $5,616.82 is now set-aside.

[35]     For completeness I deal with one other argument advanced before me by Mr Taylor for the respondent.   This relates to his claim that in any event there is no evidence before the Court to show that the applicant company is solvent and hence its issue of the statutory demand in question here was perfectly proper.

[36]     In my view, that matter is quickly disposed of.

[37]     In Brookers Insolvency Law & Practice at para CA290.05(3) the learned authors note:

CA290.05    Other grounds

(3)        Solvency of the applicant company

In AMC Construction Ltd v Frews Contracting Ltd 25/9/08, CA145/08, the Court of Appeal stated that it would be extremely rare that solvency of the company could constitute  a  standalone  ground  for  setting  aside  a  statutory  demand  under  s

290(4)(c). The Court held, at [7]:

“If there is no dispute as to the company’s liability, so that para (a) or (b) [of s

290(4)] cannot be invoked, it is difficult to imagine circumstances in which the company should be able to avoid paying a debt, merely by proving that it is able to pay that debt. If the debt is indisputably owing, then it should be paid. If the company simply refuses to pay, without good reason, it should not be able to avoid the statutory demand process by proving, at the statutory demand stage, that it is solvent. ....”

[38]     The  situation  before  me,  however,  is  rather  different  from  that  outlined above. As I have found earlier in this judgment, the debts claimed by the respondent here are clearly the subject of substantial and long-standing disputes.  There is no question here that this is one of those rare cases where some questions as to the solvency of the applicant company could be raised such that the statutory demand should be allowed to remain.

Conclusion

[39]     For all the reasons I have outlined above the statutory demand in question here is now set-aside.

[40]     As to costs, I am satisfied that the applicant which has been successful in bringing this present application is entitled in the usual way to an order for costs.

[41]     Although in passing I have given some consideration as to whether under the circumstances here this may be an appropriate case for an uplift of the usual category

2B costs to be ordered I take the view here but only by a fine margin that, given the long history of claim and counter-claim between these parties, this is a matter where scale costs alone with no uplift should be ordered.

[42]     An order is now made that the respondent is to pay to the applicant category

2B  costs  on  this  application  together  with  disbursements  as  approved  by  the

Registrar.

‘Associate Judge D.I. Gendall’