Herbert Construction Company Limited v Strata Group Consulting Engineers Limited
[2013] NZHC 952
•9 May 2013
IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY
CIV-2012-441-768 [2013] NZHC 952
BETWEEN HERBERT CONSTRUCTION COMPANY LIMITED
Applicant
ANDSTRATA GROUP CONSULTING ENGINEERS LIMITED Respondent
Hearing: 2 May 2013 (Heard at Napier)
Counsel: D. O'Connor - Counsel for Applicant
E.M. Bate - Counsel for Respondent
Judgment: 9 May 2013
JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALL
This judgment was delivered by me on 9 May 2013 at 3.30 pm pursuant to r 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date: ..................................
Solicitors: Lunn & Associates, Solicitors, PO Box 846, Napier
Hansen & Bate Limited, Solicitors, PO Box 235, Hastings
HERBERT CONSTRUCTION COMPANY LIMITED V STRATA GROUP CONSULTING ENGINEERS LIMITED HC NAP CIV-2012-441-768 [9 May 2013]
Introduction
[1] This is an opposed application brought by Herbert Construction Company Limited (Herbert) to set-aside a statutory demand issued against it by the respondent, Strata Group Consulting Engineers Limited (Strata). The statutory demand in question dated 9 November 2012 claims the sum of $33,935.75 which is said to be the balance due and owing on a number of outstanding accounts for engineering services carried out by Strata, only part of which accounts have been paid by Herbert.
[2] Herbert’s stated grounds in its application to set-aside the statutory demand are first, that it now disputes the outstanding accounts and secondly, that it has a counterclaim against Strata with respect to a different later contract not covered by the invoices in question, and the amount sought in this counterclaim exceeds the amount specified in the statutory demand.
[3] In bringing this application Herbert relies on ss 289 and 290 Companies Act
1993.
Background Facts
[4] Herbert is a building construction company which has been involved in a number of large commercial construction projects. On some of these, it has engaged engineering services from Strata, a professional firm of consulting engineers. As a result, work has been carried out by Strata for Herbert over some time on a range of different contracts and various tax invoices have been issued to Herbert for these services. One of those contracts was for engineering services relating to a building development at Hastings Street, Napier known as the “Paxies Development”. The basic contract price for this Paxies Development engineering work was itemised in an 8 September 2011 offer from Strata that formed the basis of the agreement between the parties and totalled $47,500.00 plus GST.
[5] In late 2011/early 2012 discussions took place between officers of Strata and officers of Herbert with respect to payment of a number of the then outstanding Strata invoices for this Paxies Development job. On or about 2 February 2012 the amount outstanding for this engineering services work totalled $38,113.50.
[6] Then, it seems on 15 February 2012, members of Herbert’s staff by email entered into a “Payment Schedule” arrangement to clear the remaining outstanding invoices. Under this arrangement, Herbert agreed to settle these invoices over a period of time on the basis of a commitment from Herbert to pay $5,000.00 per month starting around 22 February 2012. No issues of any kind were raised over the quality of the work undertaken by Strata on the Paxies Development or the amounts claimed in any of the invoices issued for this work.
[7] The Payment Schedule arrangement itself was further confirmed in email exchanges between Herbert and Strata later in February 2012. An initial $5,000.00 payment under the arrangement was made on 24 February 2012 and, on 2 April 2012 and 19 April 2012, further commitments were confirmed by Herbert to continue this
$5,000.00 monthly arrangement – see Exhibit “A” to the 4 December 2012 affidavit
of Donna Marie Julian filed in this proceeding on behalf of Strata.
[8] It was not until 22 June 2012 that Herbert in an email to Strata for the first time claimed that the invoices in question “are disputed” and that “Herbert Construction intends to issue proceedings against Strata Group”. This was quite contrary to the 19 December 2011 email from Lynn Porter of Herberts to Strata that confirmed: “No there is nothing wrong with your invoices – its our cashflow that is the problem. We will be able to pay the invoices ....”.
[9] And, that “dispute” from Herbert it seems did not in any way relate to the “Paxies Development”. Instead, it involved a counterclaim against Strata by Herbert over a separate construction contract with a third party, the fertiliser company Ravensdown. Under this contract, Herbert was to build a rock store and canopy building for Ravensdown (“the Ravensdown Contract”). Mr Russell Nettlingham (Mr Nettlingham), a director and employee of Strata, was appointed to be the
registered engineer under the Ravensdown Contract and he administered that contract throughout.
[10] Recently, Herbert has brought claims against Mr Nettlingham and Strata in the Hastings District Court in relation to Mr Nettlingham’s conduct as registered engineer under the Ravensdown Contract. The claims allege interference with contractual relations, inducing breach of contract and deceit/bad faith/collusion between employer and administrator. It is interesting to note here that Herbert’s counterclaim in the District Court was not filed however until 11 December 2012, nearly two weeks after the date Strata’s present statutory demand expired on 30
November 2012.
[11] Herbert has also brought a claim against Ravensdown. That claim I am told is in arbitration, with a 5 day arbitration hearing date scheduled to begin on 14
October 2013.
[12] Herbert’s arbitration claim is for something in excess of $740,000.00.
Ravensdown has brought a counterclaim against Herbert for around $230,000.00.
[13] It is Herbert’s contention now that its counterclaim against Strata with respect to the Ravensdown Contract exceeds the amount claimed against it under the statutory demand and the counterclaim should be addressed first before Strata is permitted to proceed with any litigation to have Herbert placed into liquidation.
Counsels’ Arguments and My Decision
[14] Herbert brings the present application pursuant to s 290(4)(a) and (b) Companies Act 1993. These provide that the Court may grant an application to set- aside a statutory demand if it is satisfied first, that there is a substantial dispute whether or not the debt in question is owing or is due or secondly, that the company appears to have a counterclaim, set-off or cross-demand that exceeds the debt. The principles relating to s 290(4) Companies Act 1993 are well settled. The authors of
Brookers Insolvency Law & Practice provide the following succinct summary at para
CA290.02:1
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.
[15] On its face and given the Payment Schedule agreement reached between
Strata and Herbert in February 2012 for the progressive payment of the outstanding invoices in question, at the outset in this case it would appear that Herbert may have
1 Insolvency Law and Practice (online looseleaf ed, Brookers) at [CA290.02]; adopted in North Harbour Equine Hospital Limited v Little HC Auckland CIV-2006-404-7585, 19 February 2007 at [17]; Carpet Plus 2003 Ltd v A Team Flooring Specialist Ltd HC Auckland CIV-2008-404-4725, 19 January 2009 at [4] and Trinity Hills Retreat Ltd v Kroehl HC Nelson CIV-2010-442-101, 12 August 2010 at [5].
some difficulty in maintaining its dispute that the monies claimed in the statutory demand are not due. As I have noted above, no issues were raised by Herbert in relation to the engineering services provided for the Paxies Development or in relation to the invoices rendered between September 2011 and March 2012. And indeed Herbert made payments against these invoices of $5,000.00 on 22 December
2011 and $5,000.00 on 27 February 2012.
[16] In Herbert’s present application however, it endeavoured to advance a number of arguments to counter this.
[17] The first of these concerned the counterclaim noted at [9] above which
Herbert says it has raised against Strata relating to the Ravensdown Contract.
[18] On this, a submission was advanced by Mr O’Connor, counsel for Herbert, that the statutory demand proceeding should at least be adjourned or stayed until the arbitration and counterclaim are determined. Herbert had apparently made this offer previously but it was refused by Strata. Notwithstanding this, as I understand the position, Herbert repeats the offer and invites the Court to stay the present statutory demand proceeding until the arbitration/counterclaim is determined as a practical and pragmatic way forward. Alternatively, Herbert contends that in any event its present application should succeed and the statutory demand be set aside.
[19] Before me, Mr O’Connor did acknowledge that the only real issue to be determined here is whether Herbert has a genuine and arguable counterclaim against Strata and if so, whether the statutory demand in question should be struck out or alternatively stayed. Notwithstanding what I have noted at para [2] above, it does seem that Herbert has abandoned one specific ground advanced in its original application, to the effect that the invoice amounts for the Paxies Development claimed by Strata are disputed.
[20] In response, Mr Bate for Strata before me contended that there can be no counterclaim or set-off defence here for two principal reasons:
(a) The first is that, in early 2012 at the latest, Herbert clearly acknowledged the outstanding debt as due and entered into the payment schedule arrangement noted above to clear this on the basis of payments of $5,000.00 per month. It is not appropriate now to endeavour to renege on this settlement arrangement.
(b)Secondly, and in any event, the contractual arrangements between Herbert and Strata as set out in the original contract between the parties for the Paxies Development provided for all payments to be made by Herbert free of any deduction, set-off or counterclaim whatever. The attempts by Herbert to refuse payment here on the basis of an alleged counterclaim are clearly in breach of this provision in the contract.
[21] At the outset and addressing the argument noted at [20](a) above, I need to say that, under all the circumstances prevailing in this case, there is substance in this estoppel – type argument advanced by Mr Bate for Strata. As I see the position, the statutory demand debt was completely unrelated to the alleged counterclaim over the Ravensdown contract and clearly a settlement arrangement for the debt was reached between the parties in February 2012. Indeed one $5,000.00 payment under this arrangement was made by Herbert. Herbert also acknowledged this agreement and arrangement on several occasions by email in February-April 2012 and in my view should have honoured this settlement, a settlement which also gave it a period of some time to clear what were undisputed debts.
[22] Notwithstanding this, and turning to deal with the second argument noted at [20](b) above, in any event I am satisfied here that Herbert agreed with Strata in its original contract for engineering services on the “Paxies Development” that all payments would be made free of deduction set-off or counterclaim. As I have noted above, at no time did Herbert in any real way suggest that the invoices in question were themselves disputed. Quite the contrary. At [8] above I recorded the uncontradicted evidence contained in the email from Lynn Porter on behalf of Herbert that “there is nothing wrong with your invoices – it is our cash flow that is the problem.” And, the simple belated claim to have these invoice amounts offset by
way of some possible future counterclaim or set-off in my judgment are prohibited under the contract here, a contract freely entered into between the parties.
[23] I reach this conclusion for the following reasons which I now set out in some detail.
[24] First, although before me Mr O’Connor for Herbert endeavoured to argue that Herbert had not agreed to the particular terms of the contract which had been submitted to it by Strata for the Paxies Development engineering work, nor had it signed the “Service and Conditions of Engagement” offer, it is clear from those particular terms that they do apply here. Indeed a paragraph specified at the conclusion of the Offer of Services as “Contract Conditions” quite clearly provides:
Contract Conditions
It is our policy to sign up a shortform agreement confirming the scope of works and design fees so all parties expectations are clearly understood. This offer is based on the standard Conditions of Engagement attached. Should this fee be acceptable we ask you to please sign The offer of service and return a copy to Strata Group. Should the offer of service not be signed and work be requested from the client we would assume the offer of service and associated terms and conditions are acceptable.
(emphasis added)
[25] No issue was taken by Herbert at any time with any of these terms and conditions. Substantial engineering work for the Paxies Development was clearly requested by Herbert and undertaken by Strata. Herbert cannot argue now that these terms and conditions did not apply to that Paxies Development engineering services contract.
[26] That said, the terms outlined in those Standard Conditions of Engagement include a no set-off clause and in my view are reasonably clear. At para [5] the following is stated:
5. All amounts payable by the Client (Herbert) shall be paid within twenty (20) working days of the relevant invoice being mailed to the Client. Late payment shall constitute a default and the Client shall pay default interest on overdue amounts from the date payment falls due to the date of payment at the rate of 2% on overdue accounts will be charged per month under clause 5 without prejudice to other rights and remedies. None shall be
withheld, reduced or deferred on account of any claim, counterclaim, set off or otherwise. (emphasis added)
[27] On this issue of a no set-off or counterclaim clause, the general position adopted by the Courts is set out in a decision (in not dissimilar circumstances to the present) of the Court of Appeal in Browns Real Estate Ltd v Grand Lakes Properties Ltd [2010] NZCA 425 (at [17]) as:
In our view a contractual no set-off provision of the type at issue in this case would normally result in the court’s discretion being exercised against an applicant if the sole grounds for an application to set aside a statutory demand was the existence of a set-off, counterclaim or cross demand which a party had expressly agreed could not be raised. We consider that commercial parties should be required to honour the bargain they have made, absent other grounds that tell against the recognition of a statutory demand.
[28] But, before me, Mr O’Connor for Herbert endeavoured to argue that, notwithstanding this Court of Appeal decision in Browns Real Estate Ltd, even if the particular condition in the present case applied to the contract between Herbert and Strata, it should not affect the ability of Herbert to advance its counterclaim argument here. In support of this contention Mr O’Connor referred me to a recent decision of His Honour Associate Judge Bell in Herbert Construction Company Limited v Carter Holt Harvey Limited HC, Napier, 16 April 2013, CIV-2012-441-
368 2013 NZHC780 which he claimed supported his argument.
[29] In that case, His Honour Associate Judge Bell did set-aside a statutory demand issued by Carter Holt Harvey Limited against Herbert (apart from a sum of
$65,600.91) and in doing so said:
How should the court exercise its discretion under s 290(4)?
[50] To sum up so far, Herbert has an arguable case for breach of the implied condition as to merchantable quality. Herbert cannot now reject the roofing materials because the time for rejection has passed. Its remedy is a claim for damages. Its right to abate the price has been effectively excluded by clause 2.3. It has not shown that there is any arguable dispute as to the other building materials supplied by Carters which it has not paid for. Its damages claim against Carters is arguably for more than $403,370.64.
[51] Herbert has not shown that there is a substantial dispute whether or not the debt is owing under s 290(4)(a), because under clause 2.3 of the terms of trade it must pay the price without deduction or set-off. On the other hand, its claim for damages is arguably a counterclaim or cross-demand under s 290(4)(b). Carters refers to the Court of Appeal’s decision in Browns Real Estate Ltd v Grand Lakes Properties Ltd2 as authority that a counterclaim or cross-demand should not be a
2 Browns Real Estate Ltd v Grand Lakes Properties Ltd [2010] NZCA 425, (2010) 20 PRNZ 141.
ground for setting aside a statutory demand when the contract between the parties contains a contractual no set-off provision. The Court said:3
In our view a contractual no set-off provision of the type at issue in this case would normally result in the court's discretion being exercised against an applicant if the sole grounds for an application to set aside a statutory demand was the existence of a set-off, counterclaim or cross-demand which a party had expressly agreed could not be raised. We consider that commercial parties should be required to honour the bargain they have made, absent other grounds that tell against the recognition of a statutory demand.
[52] The court was not laying down a black letter rule. Instead it was indicating how the court should exercise its discretion in the general run of cases, where there are contractual no set-off provisions.4 Because the matter lies within the court’s discretion, cases may arise where a counterclaim may still run, notwithstanding the no set-off provision.5 A typical case for the court not to exercise its discretion in favour of the counterclaim is where the creditor is owed an undisputed debt, but the company asserts a claim for unliquidated damages based on some matter that is not directly connected to the debt the subject of the demand.
[53] The part of Carters’ debt owed for other building supplies, $65,600.91, is such a typical case. Herbert does not dispute that debt, but is withholding payment because of an unrelated claim for unliquidated damages. There is no good reason to
exer cise t he d iscr etio n i n Her b er t’s fa vo ur o n t hat p ar t o f the statu to r y d e ma nd .
[54] The matter is different with the $338,716.73 for the supply of the roofing materials. The question here is whether Herbert’s failure to pay this sum or to secure or compound for it within fifteen working days of service should be allowed to give rise to a presumption of insolvency under s 288(1) of the Companies Act. This is what Nicholls LJ was getting at in dealing with the corresponding provision under the English Insolvency Rules in Re A Debtor, ex parte the Royal Bank of Scotland, when he said:6
... the circumstances which normally will be required before a court can be satisfied that the demand “ought” to be set aside, are circumstances which would make it unjust for the statutory demand to give rise to those consequences in the particular case. The court’s intervention is called for to prevent that injustice.
[55] In my judgment, there are factors that make it unjust for the statutory demand to give rise to the presumption of insolvency, notwithstanding the contractual no set off provision:
(a) Her b er t’s co u nter clai m i s d ir ec tl y r elate d to the same matter as the debt claimed by Carters – the supply of the roofing materials;
(b) Herbert’s liability to pay the price turns on a matter of timing – if the defects in the roofing materials had been identified within the seven days for rejection, Herbert could have required Carters to repair, replace or refund. The delay in the defects being identified may have triggered liability, but there is an element of hardship in treating that liability as grounds to create a presumption of insolvency;
(c) The defects in the roofing materials resulted in Herbert not being paid by Ravensdown, which must have caused cash flow difficulties. It is hardly fair for Carters to press for payment when its supply of the roofing materials caused those difficulties; and
(d) There is a genuine and major dispute as to the quality of the roofing materials. Such genuine disputes are going to cause the parties difficulties
3 At [17].
4 Simply Logistics Ltd v Real Foods Ltd HC Auckland CIV-2011-404-3497, 14 September 2011 at
[42]–[43]; Bountiful Holdings Ltd v University of Auckland [2012] NZHC 1076 at [17]–[19].
5 See Simply Logistics Ltd v Real Foods Ltd as an example.
6 Re A Debtor, ex parte the Royal Bank of Scotland [1989] 1 WLR 271 (CA).
at various points along the supply chain. Such difficulties should not be used by suppliers to threaten purchasers with insolvency.
[56] For these reasons I exercise the discretion in favour of Herbert on its counterclaim and set aside the statutory demand to the extent of $338,716.73.
(emphasis added)
[30] It will be quite apparent from the matters noted in the judgment of His Honour Associate Judge Bell at [29] above, and in particular those which I have highlighted, that the counterclaim in that case was entirely different from Herbert’s counterclaim in the case before me. In the decision of His Honour Associate Judge Bell, as he notes at para [55](a), Herbert’s counterclaim there was directly related to the same matter as the debt claimed by Carters being the supply of roofing materials on the contract in question. Thus he exercised his discretion in favour of Herbert on its counterclaim to set-aside the statutory demand (in part) notwithstanding the existence of the no set-off clause. But, as His Honour Associate Judge Bell set out at para [52] of his judgment, the case is different where, notwithstanding a creditor is owed an undisputed debt, the company debtor asserts a claim based on some other matter not directly connected to the debt the subject of the demand (which is precisely the case before me with Herbert’s counterclaim relating to the different Ravensdown Contract). In this situation, His Honour Associate Judge Bell said quite clearly that this is a case where the Court would not exercise its discretion in favour of the counterclaim.
[31] As I see the position, this decision of His Honour Associate Judge Bell not only does not assist Herbert, but in fact it provides additional authority to that of the Court of Appeal in Browns Real Estate Limited in support of Strata’s position here. This is to the effect that the no set-off contractual provision must result in this Court exercising its discretion against Herbert in the present case.
[32] For these reasons Herbert’s application to set-aside the statutory demand must fail. There can be no question here in terms of s 290 Companies Act 1993 that there is a substantial dispute whether the debt in question is owing or due to Strata or that Herbert may have a proper counterclaim, set-off or cross demand that exceeds that debt.
[33] Given these conclusions, I leave on one side any question as to whether there may be any validity in the counterclaim over the Ravensdown contract which Herbert says it has against Strata. That is a matter to be pursued in separate proceedings if thought appropriate. And, on this aspect, no suggestion was made here that Strata is insolvent or in any way financially vulnerable, such that if payment of the outstanding uncontested invoices is made now, Herbert may not be able later to recover any moneys paid to Strata if the counterclaim liability should be ultimately established.
[34] Also for completeness at this point, I simply note in passing that nothing has been placed before the Court by Herbert to deal with any questions as to its solvency or otherwise.
[35] Lastly, before me Mr Bate for Strata noted that clause 5 of the Conditions of Engagement between the parties provided for payment of penalty interest on overdue amounts owing to Strata. He confirmed that the statutory demand which is before me does not include a claim for interest under the contract. Notwithstanding this, Mr Bate endeavoured to argue that, pursuant to s 291 Companies Act 1993, the Court had jurisdiction to make an order now increasing the amount payable under the statutory demand to include this interest component.
[36] Under all the circumstances prevailing in this case, however, I decline to make any amendment to the statutory demand which Strata itself freely chose to issue against Herbert. Had Strata wished to claim contractual interest it could have done so in the original statutory demand. It chose, however, not to do this.
[37] The statutory demand as served is to remain unvaried. If Strata wishes to make a later claim for interest under the contract, then it is of course free to do this separately.
Conclusion
[38] For all the reasons outlined above, the application by Herbert to set-aside the statutory demand fails and it is dismissed.
[39] An order is now made extending the time for Herbert to make payment upon the statutory demand to Thursday, 16 May 2013. Failing payment by that date, Strata will be entitled to file an application for an order of liquidation.
[40] As to costs, the respondent Strata has been successful in opposing this application and I see no reason why costs should not follow the event in the usual way.
[41] Costs are therefore awarded to Strata against Herbert on this application on a category 2B basis together with disbursements as fixed by the Registrar.
‘Associate Judge D.I. Gendall’
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