Handy Manners Limited v Project Seven Limited

[2022] NZHC 842

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2022-404-334

[2022] NZHC 842

UNDER

the Companies Act 1993, section 290.

IN THE MATTER OF

an application to set aside a statutory demand

BETWEEN

HANDY MANNERS LIMITED

Applicant

AND

PROJECT SEVEN LIMITED

First Respondent

LAW DEBT COLLECTION LIMITED

Second Respondent

Hearing:	12 April 2022
Appearances:	Lucy Harrison for the Applicant Merran A Keil for the Respondents
Judgment:	28 April 2022

COSTS JUDGMENT OF ASSOCIATE JUDGE C B TAYLOR

This judgment was delivered by me on 28 April 2022 at 3:00pm

pursuant to Rule 11.5 of the High Court Rules

………………………….

Registrar/Deputy Registrar

Solicitors:

Simpson Grierson (Ben Upton/Lucy Harrison), Auckland, for the Plaintiff Keil &Associates (Christina J Keil), Auckland, for the Respondents

Copy for:

Merran A Keil, Regent Chambers, Auckland, for the Respondents

HANDY MANNERS LIMITED v PROJECT SEVEN LIMITED [2022] NZHC 842 [28 April 2022]

[1]This matter came before the Court at 10:45am on 12 April 2022.

[2]                 Counsel for the applicant, Handy Manners Ltd (HML), has filed a memorandum dated 30 March 2022, seeking leave to withdraw an application to set aside a statutory demand under s 290 of the Companies Act 1993 (the Application) and seeking increased costs against the first respondent, Project Seven Limited (P7) and the second respondent, Law Debt Collection Limited (LDC).

[3]                 Counsel for the first and second respondents has filed a memorandum dated  4 April 2022 seeking leave to formally withdraw the statutory demand and opposing the awarding of increased costs against the first and second respondents as sought by the applicant.

Background

[4]                 On 1 March 2022, P7 issued a statutory demand to HML via its agent, LDC, (the Statutory Demand). The amount claimed was $7,042.50 (being $6,500 of P7 invoices plus $541.50 of unspecified costs).

[5]                 On 15 March 2022 HML filed the Application to set aside the Statutory Demand on the grounds that:

(a)HML has a genuine dispute as to whether the debt described in the statutory demand is due and owing; and

(b)HML has a counterclaim against P7 which exceeds the debt claimed in the Statutory Demand.

[6] Immediately after being served with the Application on 15 March 2022 P7, via LDC, withdrew the Statutory Demand.

[7]                 HML now seeks leave of the Court to withdraw the Application and seeks increased costs against the first and second respondents.

Applicant’s submissions

[8]                 Ms Harrison submits that from October 2021 to December 2021, HML engaged P7 to provide administration services, including managing HML’s Zero and trade accounts, invoicing and facilitating payroll. HML’s evidence filed in support of the Application records issues HML had with the quality of work completed by P7. HML also says that it has incurred significant additional costs in engaging other contractors to review and remedy the issues caused by P7.

[9]                 The director of HML, Mr Leonard Bloksberg, has provided an affidavit in support of the Application, confirming that he advised P7 by phone on occasions throughout January and February 2022 that he had serious complaints about the quality of the work provided by P7, that he was disputing P7’s invoices, and that HML intended to bring a Disputes Tribunal claim against P7.

[10]              Ms Harrison submits that P7 was therefore aware that HML was disputing the debt owed and that HML intended to bring a claim in the Disputes Tribunal against P7. In those circumstances, she submits the Statutory Demand should not have been issued.

[11]              In February 2022, P7 engaged LDC to recover the debt P7 considered was owed by HML. On 1 March 2022, LDC issued the Statutory Demand on behalf of P7. Subsequent to the Statutory Demand being issued, on 11 March 2022 counsel for HML wrote to P7 and LDC advising there was a genuine dispute as to whether the debt was owing and that HML considered it had a counterclaim against P7. Counsel for HML invited P7 to withdraw its Statutory Demand so that the dispute could be resolved in a more appropriate forum. No response was received to this letter from P7 or LDC.

[12]              On 14 March 2022, counsel for HML sent a follow-up email to LDC and P7, again requesting withdrawal of the Statutory Demand and advising that, if it was not withdrawn, HML would file an application to set aside the Statutory Demand the following day.

[13]              On 15 March 2022 at 9:44am a response was received by counsel for HML from LDC advising that “a substantive response would be sent through shortly”. No further response from either LDC or P7 was received, and at approximately 3:15pm on 15 March 2022 HML filed the Application.

[14]              Ms Harrison also submits that the costs should be awarded against the second respondent LDC on the basis that LDC is a third party who is “controlling and profiting from the proceeding”. Ms Harrison in support of this contention submits:

(a)all communication in relation to the Statutory Demand came from LDC including the immediate withdrawal of the Statutory Demand upon the filing of the Application, indicating LDC was controlling the proceeding as there was insufficient time to obtain instructions from P7;

(b)LDC’s website advertises that it operates on a “No Collection – No Commission” basis, and it appears to have added its debt collection costs to the amount demanded;

(c)LDC and its director, Mr Campbell, have previously been involved in a number of similar proceedings where statutory demands have been set aside or withdrawn, often with commentary from the Court that it was clear the debt was disputed.

Respondent’s submissions

[15]              The respondents oppose the  applicant’s  application  for  increased  costs.  Ms Keil, counsel for the respondents, submits that the chronology of facts attached to her memorandum shows that the respondents’ numerous requests for payment or explanation of any dispute remained unanswered until 11 March 2022, seven working days following the service of the Statutory Demand. Counsel for the respondents submits that once an explanation was provided, the applicant expected, in counsel’s submission unreasonably, that the first respondent would withdraw the Statutory Demand within two working days of the explanation, namely by Tuesday 15 March

2022. Counsel submits that the final day for filing the application was not until the following day, 16 March 2022, if it was to comply with the 10 working day time- frame.

[16]              The respondents oppose the making of the costs order sought by the applicant, for the primary reason that the applicant ignored or failed to substantiate the dispute by not responding to P7 after receiving numerous demands for payment, and was the sole cause for the need to incur legal costs in this proceeding. Ms Keil submits the first respondent acted reasonably in serving the Statutory Demand and without any reasons from the applicant as to why the debt remained unpaid, it was entitled to test whether the delay in payment of the debt was due to the applicant’s insolvency.

[17]Ms Keil for the respondents submits the Statutory Demand claimed costs of

$541.50 which were incurred by the first respondent in having the Statutory Demand served. She submits these costs are in line with the 2B costs for the issue of a Statutory Demand (Step 48, Schedule 3 of the Rules) plus service and agent’s fees. Ms Keil submits the costs claimed do not relate in any manner to the commission payment that the first respondent will pay to the second respondent if the debt is collected.

[18]              Ms Keil also submits that the applicant has erroneously included the second respondent as a party in the Application on the basis that it is “a third party controlling and profiting from the proceedings”. Ms Keil submits this assumes that the second respondent was not the agent for the first respondent and acted on its own accord outside its authority. She submits this is incorrect, and there is no evidence the second respondent acted outside of the collection authority provided to it by the first respondent.

[19]              For the respondents, Ms Keil also submits that the applicant has alleged concerns about the solvency of the first respondent to pay the costs. She submits there is no evidence that the first respondent is insolvent.

Legal principles

[20]              It is well established law that costs follow the event. In relation to statutory demands, the position is that:

(a)if the statutory demand is set aside following an application under s 290 the applicant will be entitled to costs for having succeeded, even if the creditor acted properly;

(b)the same applies to a withdrawal of the demand ahead of a hearing, if the outcome is consistent with the company’s success.

[21]              Accordingly, it is clear that HML is entitled to costs in respect of the Application to set aside the Statutory Demand.

[22]              The issues to be decided are whether increased costs should be awarded against the first respondent, pursuant to r 14.6 of the High Court Rules 2016, and whether costs should be awarded against the second respondent.

Analysis

[23]              There is dispute in the evidence as to whether the Statutory Demand was served on 1 March 2022 or 2 March 2022, and consequently whether the 10-day time period during which the applicant must file the Application expired on 15 March 2022 or 16 March 2022. I do not think this is material. The applicant’s actions in filing the Application on 15 March 2022 were reasonable as it was sufficiently proximate to the expiry of the 10-day period even if that period expired on 16 March 2022.

[24]              There is dispute in the evidence between the affidavits of Mr Bloksberg and Mrs Lechtchinskaia on behalf of P7 as to the details of conversations which took place in December 2021 and January and February 2022 relating to complaints that HML had about the services performed by P7. It is clear that HML had communicated its dissatisfaction with P7’s work and that there was some dispute regarding the unpaid invoices during this period. However, it does not appear that a full basis for the dispute was provided until the letter from HML’s counsel to P7/LDC of 11 March 2022.

[25]              It is reasonable that if a debt is disputed, the party claiming the debt needs sufficient information about the basis of the dispute to know whether the dispute is a bona fide dispute or not. Arguably, the information was not supplied by HML until 11 March 2022.

[26]              For the purposes of this costs determination, it is not necessary for me to resolve the disputed evidence as to the degree to which the basis of HML’s dispute of the unpaid invoices was communicated to P7 prior to 11 March 2022. This is because in my view it is clear that on 11 March 2022, P7/LDC knew that the debts were disputed and that there was a bona fide basis for the dispute. Ms Keil claims that there was insufficient time between 11 March 2022 and 14 March 2022 to review the information relating to the dispute and the counterclaim raised by HML and hence withdraw the Statutory Demand before the Application was filed. I do not accept this point. It is clear that there was a genuine dispute and the Statutory Demand should have been withdrawn. This view is supported by the immediate withdrawal of the Statutory Demand following the filing of the Application by the applicant.

[27]              As to the increase in costs over the scale costs, in my view HML should be entitled to increased costs as the Statutory Demand should have been withdrawn once there was a clear bona fide dispute relating to the unpaid invoices which occurred on 11 March 2022 at the latest. Arguably, HML contributed to some degree to the proceedings being issued, by failing to provide the substantive basis for the dispute of the unpaid invoices earlier and not responding to requests for payment by P7 and eventually by LDC. Consequently, I consider that an uplift of 30 per cent on schedule 2B costs is appropriate, not the 50 per cent uplift sought by the applicant.

[28]              As to an award of costs against LDC, while counsel for the applicant has pointed to a number of occasions where the Court has criticised LDC’s conduct in the issue of statutory demands. I decline to order costs against LDC for the following reasons:

(a)the applicant has not adduced sufficient evidence that LDC was a “party controlling and profiting from the proceeding”;

(b)there is no evidence before the Court of the insolvency of P7 or its inability to meet the costs award and therefore there is no requirement to award costs against LDC as a remedial action in favour of the applicant which might be appropriate if there was doubt P7 could not meet the costs award.1

[29]              To the extent that LDC’s conduct should be criticised, there are other avenues of complaint which the applicant can pursue.

Leave to submit new evidence

[30]              Counsel for the respondents sought to file new evidence by memorandum dated 19 April 2022. The new evidence relates to whether the first respondent had reasonable grounds to test the applicant’s solvency by issuing the Statutory Demand.

[31]              I decline to grant leave to the first respondent to submit the new evidence. As the new evidence was not known to the first respondent at the material times, being when the Statutory Demand was issued, when the Application was filed, and when the Statutory Demand was withdrawn, it is not relevant to this costs determination and will not be considered by the Court.

Costs of the applicant’s memorandum seeking costs

[32]              As noted by Ms Keil in her submissions, normally the costs incurred by the applicant in preparing the memorandum seeking costs would not be recoverable being costs on costs.2 However, in this case the costs issue has been the subject of detailed memoranda on behalf of the applicant and the respondents and the subject of a hearing held on 12 April 2022. In the circumstances, in my view the normal presumption is displaced, and it is appropriate that costs be awarded for the preparation of the applicant’s memorandum seeking costs.

1      Associate Judge Johnston in Capital Produce Ltd v Brooklyn Bar and Bistro Ltd [2018] NZHC 2917 at [4].

2      Bartletts Creek Vineyard Ltd Partnership v Maginness ]2021] NZHC 3078 at [17].

Result

[33]I make the following orders:

(a)As determined at the hearing, the first respondent is granted leave to formally withdraw the Statutory Demand.

(b)Costs are awarded to the applicant as against the first respondent in relation to the Application being scale costs on a 2B basis, increased by 30 per cent.

(c)Within five working days of the date of this judgment, counsel for the applicant is to provide to the first respondent an updated schedule of costs and disbursements taking into account:

(i)there is no record on the Court file of a memorandum filed by the applicant in relation to the first call which is currently claimed in the schedule of costs;

(ii)the uplift of 30 per cent of 2B scale costs in respect of the Application;

(iii)time cost for preparation of the applicant’s memorandum seeking costs is recoverable on a 2B basis;

(iv)GST should be excluded from disbursements claimed.

……………………………..

Associate Judge Taylor