HerdBuilder Export Services Limited v AsureQuality Limited
[2023] NZHC 851
•27 April 2023
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2022-404-1921
[2023] NZHC 851
BETWEEN HERDBULDER EXPORT SERVICES LIMITED
PlaintiffAND
ASUREQUALITY LIMITED
Defendant
Hearing: 1 March 2023 Appearances:
Zane Mora for the Plaintiff
Timothy B Fitzgerald for the Defendant
Judgment:
27 April 2023
JUDGMENT OF ASSOCIATE JUDGE C G TAYLOR
[Application to set aside a statutory demand]
This judgment was delivered by me on 27 April 2023 at 3:00pm
pursuant to Rule 11.5 of the High Court Rules
…………………………. Registrar/Deputy Registrar
Solicitors:
McCaw Lewis (D Shore/A Hong), Hamilton, for the Applicant/Plaintiff
Bell Gully (T B Fitzgerald/B J Dominikovich),Auckland, for the Defendant
Copy for:
Z T Mora
HERDBULDER EXPORT SERVICES LIMITED v ASUREQUALITY LIMITED [2023] NZHC 851 [27 April 2023]
TABLE OF CONTENTS
Paragraph
Introduction [1]
Background [2]
HerdBuilder’s application to set aside statutory demand [6]
Affidavit of David Leslie Hayman dated 6 October 2022 [8] AsureQuality’s opposition [11]
Affidavit of Kirsty Mary Gray dated 20 October 2022 [12] Reply affidavit of David Leslie Hayman dated 18 November 2022 [22] Affidavits following the hearing [27]
HerdBuilder’s submissions [32]
Substantial dispute over entity [34]
Obligation to follow dispute resolution process [36]
Conclusion and alternatives [38]
AsureQuality’s submissions [40]
No substantial dispute over entity [43]
No obligation to follow dispute resolution process [50]
Conclusion [51]
Legal principles [52]
Analysis [56]
Whether, pursuant to s 290(4)(a) of the Act, there is a substantial dispute as to whether the outstanding invoice is owed by HerdBuilder or by the
Limited Partnership? [58]
Conclusion on whether there is a substantial dispute as to by which entity the
outstanding debt is owed [73]Whether, the parties are contractually obliged to follow the dispute resolution process in the agreement and the statutory demand should be set aside
under s 290(4)(c)of the Act? [76]
Conclusion in respect of the dispute resolution process argument [80] Result [81]
Orders [83]
Introduction
[1] HerdBuilder Export Services Limited (HerdBuilder) applies to set aside a statutory demand that AsureQuality Limited (AsureQuality) has made on it.
Background
[2] HerdBuilder, formerly known as Genetic Development (NZ) Limited, provides service to support exporters of breeding livestock and genetics. The legal and health status compliance for exporting livestock is overseen by the Ministry for Primary Industries (MPI). Since 2014, HerdBuilder has contracted with AsureQuality as an MPI recognised agency to perform the relevant controls and tests necessary to export livestock.
[3] On 1 November 2019, HerdBuilder and AsureQuality entered into the Service Level Agreement (the agreement) and completed a number of export shipments pursuant to this agreement. Due to increased export demand, Genetic Development (NZ) Exports Limited Partnership (the Limited Partnership) was formed in October 2020 and became operational for shipments in November 2020.
[4] Eleven shipments were then completed until May 2022 for which AsureQuality invoiced a total of $9,363,240. One invoice remains outstanding for $350,058.85 issued on 30 May 2022 (the outstanding invoice), which is the subject of the statutory demand. There is a dispute between parties as to whether HerdBuilder or the Limited Partnership contracted with AsureQuality to carry out these shipments, and therefore, which entity is properly responsible for the outstanding invoice. HerdBuilder asserts that the Limited Partnership is the correct entity, whereas AsureQuality asserts that HerdBuilder is the correct entity, which is why they issued the statutory demand against them.
[5] Notably, on 5 September 2022 the Limited Partnership was placed into liquidation.
HerdBuilder’s application to set aside statutory demand
[6] HerdBuilder seeks orders setting aside the statutory demand by AsureQuality dated 20 September 2022 (the demand) and costs.1
[7]The grounds on which the orders are sought are:2
(c) The sum claimed in the Demand is not a due and owing debt of the applicant.
(d) The sum claimed in the Demand is owed by Genetic Development (NZ) Exports Limited Partnership (In Liquidation).
(e) The Applicant advised the Respondent of this error in the Demand by emails dated between 15 August to 29 August 2022, and through its solicitor by letter dated 3 October 2022.
(f) Despite this the Respondent has continued to demand payment from the Applicant.
(g) The Service Level Agreement, on which the Respondent relies in the Demand, contains a dispute resolution process.
Affidavit of David Leslie Hayman dated 6 October 2022
[8] Mr David Leslie Hayman, Director of HerdBuilder, has made an affidavit in support of HerdBuilder’s application to set aside the statutory demand. Mr Hayman is also the Director of Genetic Development (NZ) Management Limited which is the general partner of the Limited Partnership. In his affidavit he deposes as to the background of HerdBuilder and the Limited Partnership.
[9] He deposes that a member of the HerdBuilder/Limited Partnership accounts team emailed AsureQuality in December 2020 about establishing a new account for the Limited Partnership. Despite being provided with an application form, this process was never completed, and the lack of an application was never subsequently addressed or mentioned by any of the parties. Nevertheless, Mr Hayman deposes that the following actions demonstrate AsureQuality had accepted the Limited Partnership as their new customer:
1 Originating application to set aside statutory demand dated 6 October 2022 at [1].
2 At [1].
(a)On 30 January 2021, AsureQuality provided their first invoice addressed to the Limited Partnership and all subsequent invoices, including that from 30 May 2022, were so addressed;
(b)On or around 4 May 2021, email communications switched to using “Genetic Development (NZ) Exports Ltd”, a reference to the Limited Partnership, in the subject line;
(c)On 24 May 2022, AsureQuality senior management agreed to complete work in advance for the Limited Partnership having been emailed an additional funding agreement from the Limited Partnership’s Chinese trading partner asserting the funds for their payment were in transit;
(d)The import permits provided from China and the pro-forma zoosanitary certificate, provided to AsureQuality and completed by AsureQuality respectively, listed the Limited Partnership as the exporter (examples from February and May 2022 are annexed);
Mr Hayman accepts that due to time pressure he overlooked and signed off each shipment’s Live Animal Export Consignment Agreement and Quarantine Schedule, which were based on an AsureQuality template that still referenced Genetic Development (NZ) Limited/HerdBuilder rather than the Limited Partnership.
[10] Mr Hayman goes on to depose that in August 2022, AsureQuality’s solicitors demanded payment of the 30 May 2022 invoice from HerdBuilder. He then asserted that the Limited Partnership was the correct entity. The demand was issued to HerdBuilder on 21 September 2022. HerdBuilder sought to have the demand withdrawn as the contracting entity was the Limited Partnership, or if AsureQuality maintained the debt was owed under their agreement with HerdBuilder then to follow the dispute resolution process under cl 11 of their Service Level Agreement. AsureQuality’s solicitors confirmed they would not withdraw the demand and considered that cl 11 was inapplicable. As Mr Hayman believed the Limited Partnership was the correct entity, he deposes that he did not activate cl 11 on behalf of HerdBuilder. He believes that AsureQuality are attempting to recover over and
above what they could feasibly receive under the liquidation of the Limited Partnership.
AsureQuality’s opposition
[11]AsureQuality opposes HerdBuilder’s application on the following grounds:3
(a) The applicant is liable to the respondent for the outstanding debt and there is no fairly arguable basis to contend otherwise.
(b) The outstanding debt was incurred pursuant to a Service Level Agreement, dated 1 November 2019, and a Live Animal Export Consignment Agreement, dated 20 February 2022.
(c) Both agreements were entered into by the applicant and signed on behalf of the applicant.
(d) There has been no assignment or variation of the applicant’s and/or respondent’s rights or obligations under the Service Level Agreement and/or the Live Animal Export Consignment Agreement.
(e) The invoice issued in respect of the outstanding debt did not alter the applicant’s contractual obligation to pay the outstanding debt.
(f) The applicant does not have any counterclaims or set-offs against the respondent.
Affidavit of Kirsty Mary Gray dated 20 October 2022
[12] Ms Kirsty Mary Gray, the current Head of Finance at AsureQuality and former Finance Manager from 2006–2021, has made an affidavit in support of AsureQuality’s opposition. She deposes as to the background of HerdBuilder and AsureQuality’s initial relationship and the circumstances surrounding the Service Level Agreement, the Limited Partnership, invoice, and statutory demand.
[13] In relation to the initial establishment of HerdBuilder’s credit account with AsureQuality in March 2014, Ms Gray deposes the credit application form was submitted, a commercial credit check was run and personal guarantees from both HerdBuilder’s directors, Mr Hayman and Mr David McEwen, were obtained. She goes on to note that personal guarantees were required despite a separate company of
3 Notice of opposition to application to set aside statutory demand dated 20 October 2022 at [3].
Mr Hayman’s, Hayman GD Consulting Limited, already being a client of AsureQuality.
[14] In relation to the 2020 establishment of a new account for the Limited Partnership, she deposes that there is no way that AsureQuality would have provided services to the new entity without the necessary credit application process being followed and personal guarantees being provided, which is in line with AsureQuality’s Credit Application Policy. She deposes at no stage were AsureQuality provided with further details in relation to the Limited Partnership and no request was ever made for there to be any new contracts with the Limited Partnership, nor for existing contracts between AsureQuality and HerdBuilder to be moved over to the Limited Partnership. Further, she states additional red flags would have been raised by HerdBuilder’s account having overdue invoices and the Limited Partnership being a completely new entity with no trading history or supplier references.
[15] In relation to AsureQuality addressing invoices to the Limited Partnership, she deposes that this did not alter the contractual relationship and was purely an administrative detail included at the request of someone who was well aware that they needed to set up a credit account to contract in the name of a different entity and did not do so. Ms Gray lays out requests by HerdBuilder/Limited Partnership accounts to AsureQuality in early February 2021 that the invoice entity name be amended to the Limited Partnership. Ultimately, the January invoice was retroactively amended with the Limited Partnership as the entity name but all other aspects of the invoice, including HerdBuilder’s customer number, remained the same. This name was then used for future invoices and understood to only be for the limited purpose of amending the payer.
[16] In relation to the export agreements, Ms Gray deposes that AsureQuality continued to enter into further export agreements with HerdBuilder and never entered into any such agreements nor any contract with the Limited Partnership.
[17] In relation to the outstanding invoice, Ms Gray deposes the following related to consignment “GDNZ 2214”, in reference to HerdBuilder’s former name. In February 2022, Mr Greg Stocker, Veterinary Services Operations Manager at
AsureQuality, exchanged emails with Mr Hayman about this consignment, all of which refer to HerdBuilder and not the Limited Partnership as the customer. At the end of April 2022, AsureQuality sent Mr Hayman on behalf of HerdBuilder the consignment agreement for 2214 and he signed it and dated it 20 February 2022 and Mr Stocker countersigned the next day. Ms Gray notes the consignment agreement noted it forms part of the Service Level Agreement with HerdBuilder, related to a HerdBuilder consignment code (“GDNZ 2214”), provided that HerdBuilder would pay the fees and charges, and was signed by Mr Hayman on behalf of HerdBuilder. Ms Gray notes it never mentioned the Limited Partnership and in response to Mr Hayman’s assertion that it was a recycled template document, she asserts that it properly references HerdBuilder as that was the only entity with which AsureQuality had contracted.
[18] Ms Gray asserts that the outstanding invoice relates to services rendered to HerdBuilder under the aforementioned consignment contract. Despite utilising the Limited Partnership entity name, she asserts the invoice references the HerdBuilder consignment code, described service being for HerdBuilder testing, utilises HerdBuilder’s customer number and was sent to the email on file for HerdBuilder’s account’s team. She notes that at no point did AsureQuality correspond with, or contact, any person held out as a representative of the Limited Partnership or its general partner entity.
[19] In relation to the additional funding agreement from the Limited Partnership’s Chinese trading partner, import permits provided from China and the pro-forma zoosanitary certificate, Ms Gray deposes that these are not documents which AsureQuality created and have no relevance to their contractual relationship with HerdBuilder.
[20] In relation to AsureQuality issuing the statutory demand in an attempt to receive more than they would in liquidation from the Limited Partnership, Ms Gray deposes that this is incorrect and AsureQuality is simply pursuing HerdBuilder for services rendered to them under the Service Level Agreement and consignment agreement. Instead, she deposes that Mr Hayman has gone to considerable lengths to avoid the debt and his personal obligation to pay.
[21] Ms Gray then sets out in details the dispute from August to October 2022 that arose between HerdBuilder and AsureQuality and their lawyers as to which entity is responsible for payment of the outstanding invoice and the ultimate issuance of and discussions over the statutory demand. She ultimately maintains, as do AsureQuality’s lawyers, that HerdBuilder is responsible for the debt due to the reality of the contractual relationship which has never been altered to the Limited Partnership. In conclusion, she deposes the Limited Partnership is not and never has been a customer of AsureQuality.
Reply Affidavit of David Leslie Hayman dated 18 November 2022
[22] Mr Hayman has made an affidavit in response to Ms Gray’s. He deposes that AsureQuality is listed as having a creditor’s claim with the liquidators of the Limited Partnership. As the Director of the Limited Partnership, he is aware that the Limited Partnership only owe AsureQuality the outstanding invoice, which is subject to this statutory demand and set aside application. He asserts that this position contradicts AsureQuality’s position if they maintain that HerdBuilder is responsible for the debt and that they never had dealings with the Limited Partnership.
[23] In relation to opening a new credit account for the Limited Partnership, Mr Hayman deposes he opened the Hayman GD Consulting account in 2007 without providing a personal guarantee. As he did not recall the personal guarantee requirement, he did not turn his mind to its importance from AsureQuality’s perspective. Regardless, he suggests that if a personal guarantee was required, he believes it was AsureQuality’s responsibility to chase up the account application and follow their internal credit processes and policies. From his and HerdBuilder’s perspective, the change of name on the invoices gave HerdBuilder no reason to give the matter any further thought.
[24] In relation to the invoice name change being purely administrative, Mr Hayman deposes that the request to change the payer’s name made it clear there would be a change in the financial details behind the payer given the email noted the Limited Partnership’s company number, bank account, and IRD number, which all differed from HerdBuilder’s. He again asserts that while the application form was
never filed, it was the responsibility of AsureQuality to follow its own credit policy and ensure the application form was actually completed.
[25] In response to Mr Gray’s assertion about the consignment agreement for 2214, Mr Hayman deposes the documentation she cites were completed out of their usual order, given the significant time pressures that he and Mr Stocker were under. As a result, consignment agreements were provided in hindsight, usually weeks or months after completion. Mr Hayman deposes that for the following reasons AsureQuality would have been aware the exporter was the Limited Partnership:
(a)The import permit from China which listed the Limited Partnership as the exporting entity actually started the export process.
(b)AsureQuality staff, peer reviewed or managed by Mr Stocker, completed the pro-forma zoosanitary certificate in the name of the Limited Partnership.
(c)There was no need to change the internal consignment agreement number formats (“GDNZ XXXX”) as the important number is the unique exporter code issued by MPI and regularly referenced by AsureQuality’s certifying staff. As the Limited Partnership’s MPI code was different they expected AsureQuality would have recognised the Limited Partnership was a separate customer.
(d)If the consignment agreements had been completed simultaneously with the export permit, they would more likely have been updated to reflect the Limited Partnership. Mr Hayman accepts he should have reminded Mr Stocker of this update but deposes that Mr Stocker had the above information to notify him of the change of export entity.
(e)On 24 May 2022, an email to Ms Gray and Mr Stocker included a copy of an agreement where it was clear that the Limited Partnership was the payer of accounts and exporter of the 2214 shipment.
(f)The Limited Partnership’s name is an evolution of HerdBuilder’s former name, as indicated to AsureQuality, and all external costs were to the account of the Limited Partnership as the exporter while the Limited Partnership contracted with HerdBuilder for operations and coordination.
[26] Mr Hayman reasserts that the entity change from HerdBuilder to the Limited Partnership with AsureQuality was consistent and well known. He deposes that the recent change of HerdBuilder’s name was unrelated to the statutory demand and was instead related to Limited Partnership’s liquidation, aiming to assure customers and industry contacts that HerdBuilder was not in liquidation. He again notes the inconsistency of AsureQuality’s hedging their bets position by maintaining both a creditor’s claim in the Limited Partnership’s liquidation and pursing this statutory demand. Mr Hayman deposes that if there was any confusion as to which entity the invoices were charged to, the onus was on AsureQuality to obtain certainty at the time it provided their services. He concludes that there is a clear and genuine dispute as to which entity owes the debts contained in the statutory demand.
Affidavits following the hearing
[27] At the hearing I granted leave to AsureQuality to file an affidavit on the issue of whether it had claimed in the liquidation of the partnership and HerdBuilder was granted leave to file an affidavit strictly in reply to AsureQuality’s affidavit. AsureQuality filed an affidavit sworn by Kirsty Mary Gray dated 6 March 2023, and HerdBuilder an affidavit sworn by David Leslie Hayman in reply dated 14 March 2023.
[28] The affidavit of Ms Gray confirms that AsureQuality has not claimed as a creditor in the liquidation of the Limited Partnership. In Mr Hayman’s affidavit in reply, he deposes as to the following:
(a)setting out details as to the force majeure event which caused the Limited Partnership to go into liquidation.
(b)While AsureQuality may not have claimed as a creditor in the liquidation of the Limited Partnership they are listed as a creditor in the liquidation.
(c)Reconfirms his statement in his affidavit of 18 November 2022 that the only money owed to AsureQuality by the Limited Partnership is the outstanding invoice.
[29] Mr Hayman also attaches correspondence from the liquidators to AsureQuality wherein the liquidators have indicated an intention to set aside as voidable transactions various payments made by the Limited Partnership to AsureQuality.
[30] Mr Fitzgerald filed a memorandum dated 15 March objecting to Mr Hayman’s reply affidavit. He says that it goes beyond strictly replying to the issues raised by Ms Gray’s affidavit regarding AsureQuality claiming as a creditor in the liquidation of the Limited Partnership. Mr Mora filed a memorandum in response, dated 16 March 2023 in which he submits that Ms Gray’s affidavit in paragraph [3] went beyond just dealing with whether or not AsureQuality filed a claim in the liquidation of the Limited Partnership, and Mr Hayman’s reply affidavit is limited to the matter raised in Ms Gray’s affidavit as to what was the position of AsureQuality in the liquidation of the Limited Partnership.
[31] In my view, the reply affidavit of Mr Hayman is relevant to the issue raised, namely the position of AsureQuality as a creditor of the Limited Partnership and should be admitted to the Court file.
HerdBuilder’s submissions
[32] Mr Zane Mora, for HerdBuilder, submits that the demand should be set aside for two reasons:
(a)there is a substantial dispute as to whether the debt is owed by HerdBuilder so the demand should be set aside pursuant to s 290(4)(a) of the Companies Act 1993 (the Act); and/or
(b)the parties are contractually obligated to follow the dispute resolution process in their Service Level Agreement so the demand should be set aside pursuant to s 290(4)(c) of the Act.
[33]He addresses each argument in turn.
Substantial dispute over entity
[34] Mr Mora submits that the demand was issued against the incorrect entity for the reasons set out in Mr Hayman’s affidavits, including that:
(a)The outstanding invoice was issued to the Limited Partnership;
(b)Although there was an initial contractual relationship between AsureQuality and HerdBuilder, this ceased in December 2020 when AsureQuality was advised of the new Limited Partnership customer details. After an issue with the January 2021, invoice HerdBuilder correctly made a request to have the invoices reissued to the Limited Partnership. From January 2021 to March 2022, AsureQuality issued and was paid a total of $9,348,240.40 from 18 invoices to the Limited Partnership, not HerdBuilder, and was therefore aware of their new contractual relationship with the Limited Partnership. At the very least HerdBuilder was proceeding on this basis. Further, if there were any internal credit requirements not being met by a failure to file the credit application form, that was a matter solely for AsureQuality;
(c)The outstanding invoice, being the 19th consecutive invoice, was issued to the Limited Partnership and the debt therefore lies with the Limited Partnership;
(d)All key official documents enabling the export show that from around December 2020 the exporter was changed from HerdBuilder to the Limited Partnership. This includes the import permits and the pro- forma zoosanitary certificates signed by the AsureQuality and is despite
the backdated template consignment agreement listing the exporter incorrectly as HerdBuilder;
(e)AsureQuality’s email communications reference Limited Partnership as the debtor and contractual party;
(f)The Limited Partnership was placed into liquidation and AsureQuality is listed as a known creditor in the liquidation with the only debt owed being the outstanding invoice.
[35] Mr Mora therefore submits this direct evidence demonstrates a genuine and substantial dispute as to the correct entity subject to the debt of the outstanding invoice.
Obligation to follow dispute resolution process
[36] Mr Mora submits that HerdBuilder and AsureQuality are contractually bound by a dispute resolution process pursuant to cl 11 of their Service Level Agreement and therefore AsureQuality incorrectly issued the demand. The agreement defines dispute as “any dispute, difference or question between the parties arising out of or in connection with this Agreement.” Over the course of August and early October HerdBuilder and AsureQuality discussed the correct entity for the debt and once HerdBuilder disputed the correct entity, it is submitted the correct process would have been for AsureQuality to issue a dispute notice under cl 11.1. If the dispute was unable to be resolved within 20 business days, then mediation, or if unsuccessful arbitration, was mandatory. It is submitted that AsureQuality acted in error in issuing the demand against HerdBuilder when AsureQuality’s argument rests on the contract created by the agreement, which is subject to the dispute resolution process.
[37] Ultimately, an ordinary proceeding is required to enable cross-examination and discovery to address the factual issues and need for further documents.
Conclusion and alternatives
[38] Mr Mora submits that in the event the Court considered there was no substantial dispute as to the debt being owed by HerdBuilder and that the dispute
resolution process was inapplicable, the Court should provide HerdBuilder with a specified period in which to pay the debt. He submits that it is open to the Court to extend the time for compliance with the statutory demand at the hearing under s 290(3) and order HerdBuilder to pay the debt within a specified period if satisfied there is a due and owing debt not subject to a substantial dispute under s 291(1)(a).
[39] Mr Mora concludes that there is a genuine and substantial dispute as to whether HerdBuilder is the correct entity owing the debt and/or that AsureQuality was contractually obligated to follow the dispute resolution process under the agreement. For those reasons, he submits the demand should be set aside and costs awarded to HerdBuilder.
AsureQuality’s submissions
[40] Mr Tim Fitzgerald, for AsureQuality, submits the only question is whether the contractual relationship was somehow novated from HerdBuilder to the Limited Partnership when invoicing practices changed in 2020. AsureQuality’s position is that it was not, given the explicit communication by AsureQuality to HerdBuilder that the Limited Partnership must complete a credit application, which would have involved providing a personal guarantee, which replicated the personal guarantees provided for HerdBuilder’s account by their two Directors, including Mr Hayman. By failing to file the form, HerdBuilder elected not to do this and thereby continued its relationship with AsureQuality rather than as the Limited Partnership. AsureQuality was content to receive payments from elsewhere in the HerdBuilder group but this did not relieve HerdBuilder of its contractual responsibilities nor mean AsureQuality assumed the credit risk of the Limited Partnership.
[41] Mr Fitzgerald submits that a contract between AsureQuality and the Limited Partnership cannot have been formed involuntarily against their express objection. A reasonable person would not have concluded that its willingness to invoice the Limited Partnership reflected a change of heart, or a willingness to contract without the personal guarantee that HerdBuilder had provided. The application should be dismissed as there will be no additional information at trial relevant to that assessment.
[42] Overall, he submits there is no substantial dispute over the correct entity owing the debt as there was no novation of the contractual relationship, and the parties are not contractually obliged to follow the dispute resolution process in the agreement. He addresses each in turn.
No substantial dispute over entity
[43] Mr Fitzgerald submits that the law on substantial disputes is settled — the dispute must be real and not fanciful or insubstantial meaning it is not enough to merely assert a dispute without material supporting evidence.4 HerdBuilder bears the onus.
[44] As this dispute can only arise if the contractual relationship was novated, he submits that contractual novation, like formation, would require AsureQuality’s consent.5 This consent is assessed objectively based on material available to both parties.6 In support he cites the Court of Appeal case Fletcher (t/a Fletcher Law) v Jadie Trustee Ltd in which the creditor, Fletcher Law, entered into a legal service agreement with the respondent debtor, Jadie Trustee Limited (JTL), but JTL argued that an assetless related entity, Kaimai Trustees Limited (KTL) was responsible for the debt.7 JTL argued that there was a substantial dispute as to the debtor’s identity because Fletcher Law had not issued any invoices to JTL, KTL was the entity responsible for paying legal costs, and the development related to the legal work was undertaken by KTL.8 The Court of Appeal held there was insufficient uncertainty to justify setting aside the statutory demand as: the payment of invoices by KTL was not inconsistent with a contract with JTL given KTL was related to JTL, assetless and paid invoices to secure tax deductions; inconsistency in the name of the invoiced entity was insufficient to create doubt over the identity of the contractual debtor when “there is a clearly discernible paper trail that evidences [their identity]”; an inference could be
4 Ultra Developments Ltd v Ultra Projects Ltd [2014] NZHC 1998 at [39].
5 Savvy Vineyards 3552 Ltd v Karaka Estate Ltd [2014] NZSC 121, [2015] 1 NZLR 281 at [85].
6 Fletcher Challenge Energy Ltd v Electricity Corp of New Zealand Ltd [2002] 2 NZLR 433 (CA) at [54].
7 Fletcher (t/a Fletcher Law) v Jadie Trustee Ltd [2011] NZCA 603 at [5] and [23].
8 At [6]–[9].
drawn that Fletcher Law when it was incurring significant expense intended to contract with JTL as a solvent entity rather than the insolvent KTL.9
[45] Mr Fitzgerald submits that this accords with commercial reality in which it is not uncommon for one entity within a corporate group to make payments in respect of other entities within the same group. The fact that an accounts department agrees to re-name an invoice can hardly be understood to be an agreement by a responsible person in the corporation to novate the agreement. That is especially true when doing so would leave the creditor without assurances of payment, like personal guarantees, that it previously had.
[46] Applied to this case, Mr Fitzgerald contends that contemporaneous documents disclose that AsureQuality contracted with HerdBuilder and did not enter into a subsequent contract with the Limited Partnership:
(a)It is common ground that the only documented contractual relationship was between HerdBuilder and AsureQuality;
(b)It is common ground that all invoices were issued to HerdBuilder, including January 2021 that was reissued to the Limited Partnership and there is no doubt that it was properly issued to HerdBuilder in the first instance;
(c)AsureQuality’s agreement to re-issue and invoice the Limited Partnership from then onwards would not be understood to novate the contractual relationship where:
(i)AsureQuality had refused to novate absent the Limited Partnership submitting a credit application which would have led to a personal guarantee;
(ii)The agreement provided that HerdBuilder could not assign nor transfer its obligations without AsureQuality’s prior written
9 At [7], [23] and [24].
consent (cl 16.4) and that any variation must be in writing and signed (cl 16.8);
(iii)Even after the Limited Partnership began making payment, contractual documents continued to be issued and countersigned by HerdBuilder.
[47] Mr Fitzgerald submits AsureQuality’s position is even stronger than in Fletcher (t/a Fletcher Law) v Jadie Trustee Ltd,10 where the creditor was “hardly likely” to have provided further services without ongoing assurance of payment, and that it was not reasonably arguable (even in the statutory demand context) that issuing invoices to a third party reflected an intention to release the original contracting party. The same is true in this case, with the added comfort that AsureQuality had, in terms, refused to contract with the Limited Partnership without a credit application, and indeed that the parties continued to sign consignment agreements with HerdBuilder.
[48] In relation to AsureQuality claiming as a creditor in the Limited Partnership’s liquidation, Mr Fitzgerald submits this was only raised in the reply affidavit giving AsureQuality no chance to respond. Further he asserts that there is no evidence that AsureQuality has claimed as a creditor against the Limited Partnership with the liquidators giving no evidence as to why AsureQuality’s debt was included in the liquidator’s report. That report cannot detract from the sworn evidence of AsureQuality that HerdBuilder is the correct entity nor from what a reasonable person would have understood AsureQuality to have agreed to contract on.
[49] Overall, AsureQuality submits that HerdBuilder has failed to establish sufficient uncertainty as to liability for the debt to justify setting the statutory demand aside.
No obligation to follow dispute resolution process
[50] Mr Fitzgerald submits that the dispute resolution provisions do not affect the operation of s 290 nor the statutory demand because: neither party has served the other
10 Fletcher (t/a Fletcher Law) v Jadie Trustee Ltd, above n 7.
a dispute notice triggering those provisions; the existence of a dispute resolution process does not qualify as one of the other grounds under s 290(4)(c) under which the statutory demand may be set aside, otherwise the applicant could circumvent subs (4)(a) through (4)(c); subs (4)(a) requires a substantial dispute so subs (4)(c) ought not to be interpreted to allow an inconsistent lower dispute threshold; and following ordinary principles of statutory interpretation the general subs (4)(c) does not derogate from the specific subs (4)(a).
Conclusion
[51] AsureQuality submits that HerdBuilder remained the contracting party and the application should be dismissed.
Legal principles
Section 290 of the Companies Act 1993 provides, relevantly:
290 Court may set aside statutory demand
(1)The court may, on the application of the company, set aside a statutory demand.
…
(4)The court may grant an application to set aside a statutory demand if it is satisfied that—
(a)there is a substantial dispute whether or not the debt is owing or is due; or
(b)the company appears to have a counterclaim, set-off, or cross- demand and the amount specified in the demand less the amount of the counterclaim, set-off, or cross-demand is less than the prescribed amount; or
(c)the demand ought to be set aside on other grounds.
…
[53]The Court has set out the principles relevant to the application of s 290(4):11
What the applicant must show is that the dispute it raises has substance; the applicant must explain to the court what the dispute is; and the dispute so
11 AAI Ltd v 92 Lichfield Street Ltd (in rec and in liq) [2015] NZCA 559, [2016] NZAR 1338 at [22] (footnotes omitted).
shown must be a real and not a fanciful or insubstantial dispute. The Court must bear in mind that it is operating in the summary jurisdiction, with the accompanying disadvantages that brings for any applicant. The Court must also keep in mind the requirement that what is intended to be a summary hearing should not be converted into a full-blown trial.
[54] As to s 290(4)(a), the Court is to look at whether a genuine substantial dispute exists.12 Mere assertion of a dispute does not suffice, and the applicant has to show a fairly arguable basis for it.13 In practice, it is required that there be some material short of proof that backs up the claim that the amount is in dispute.14
[55] Where a counterclaim, set-off, or cross-demand is sought to be raised, the Court has a discretionary power to set aside the statutory demand, but the company must show a real basis, on clear and persuasive grounds, for doing so. And “pay now, argue later” considerations have sometimes been allowed to prevail over the effect of liquidation.15
Analysis
[56]The two issues to be determined by the Court in this judgment are:
(a)whether, pursuant to s 290(4)(a) of the Act, there is a substantial dispute as to whether the outstanding invoice is owed by HerdBuilder or the Limited Partnership?
(b)whether the parties are contractually obliged to follow the dispute resolution process in the agreement and the statutory demand should be set aside on that basis under s 290(4)(c) of the Act?
[57]I deal with each of these in turn.
12 Taxi Trucks Ltd v Nicholson [1989] 2 NZLR 297 (CA) at 301.
13 N F Global Ltd v Sky Capital Management Ltd [2020] NZHC 2196 at [39]. See also United Homes (1998) Ltd v Workman [2001] 3 NZLR 447 (CA) at [27].
14 Arzan Investments Ltd v Beresford Apartments Ltd (2003) 16 PRNZ 825 (HC) at [17].
15 N F Global Ltd v Sky Capital Management Ltd, above n 13, at [40], citing Volcanic Investments Ltd v Dempsey & Wood Civil Contractors Ltd (2005) 18 PRNZ 97; Browns Real Estate Ltd v Grand Lakes Ltd [2010] NZCA 425, (2010) 20 PRNZ 141; Covington Railways Ltd v Uni- Accommodation Ltd [2001] 1 NZLR 272 (CA) at 274–275.
Whether, pursuant to s 290(4)(a) of the Act, there is a substantial dispute that the outstanding invoice is owed by HerdBuilder or the Limited Partnership?
[58] Mr Mora submits that the initial contractual relationship was between HerdBuilder and AsureQuality commencing around 2014 and that consistent with this is that HerdBuilder is listed as exporter on key documents to enable the export from New Zealand of livestock and subsequent import into China, such as the import certificates.
[59] Mr Mora submits that on or around 1 December 2019, HerdBuilder and AsureQuality entered into the agreement and three export shipments were completed under the agreement in 2020. Mr Mora points out that the agreement is only signed by Mr Hayman on behalf of HerdBuilder and not by AsureQuality, and the three consignment agreements in respect of consignments carried out under this agreement dated 29 November 2019, 20 June 2020 and 1 August 2020 are only signed by Mr Hayman on behalf of HerdBuilder and not by AsureQuality. Mr Mora submits that this demonstrates a less than rigorous approach by AsureQuality completing its documentation and following its own processes.
[60] Mr Mora submits that the Limited Partnership was formed and became operational for shipments in November 2020. He submits that in December 2020 the Limited Partnership was advised to all major service and stock suppliers, including AsureQuality, and that the email of 18 December 2020 was more than just a notification of change of name as the Limited Partnership had a new Inland Revenue number, a new Companies Office number, and new bank account details.
[61] Mr Mora submits that this is the point at which the account was changed to the Limited Partnership and this is evidenced by communications from AsureQuality. On 3 February 2021, after receiving January 2021 invoices from AsureQuality that were issued to HerdBuilder, HerdBuilder made a request to have the invoices amended to refer to the Limited Partnership and be reissued. He points to an internal email of AsureQuality which refers to updating the debtor name and re-sending invoices accordingly. Mr Mora submits that from this point on all invoices were issued to the Limited Partnership and from that point onwards all the parties were aware that the contractual relationship was now between AsureQuality and the Limited Partnership.
He points out a total of 18 invoices from 31 January 2021 to 31 March 2022, totalling
$9,018,181.55, were issued to and paid by the Limited Partnership.
[62] Mr Mora submits that while AsureQuality have submitted there was no change to the contractual relationship as the credit application was not completed by the Limited Partnership and no personal guarantees were given by the principals of the Limited Partnership, the evidence demonstrates that AsureQuality had consistently not completed documents or followed their own processes. He refers to the consignment agreements which were signed by Mr Hayman on behalf of HerdBuilder. Mr Mora submits that this documentation was completed substantially after the relevant consignments and was more of a template document that was being sent out by AsureQuality well after the consignments to which they related. Other than the consignment agreement of 20 February 2022, consignment agreements were not signed by AsureQuality. Mr Mora points to Mr Hayman’s affidavit evidence that Mr Hayman did not pay any attention to the consignment agreements as they were after the events to which they related and he did not pay any attention to the fact that HerdBuilder was still shown as the relevant counterparty to the consignment agreements. As to the consignment agreement dated 21 February 2022, which is the only consignment agreement signed by AsureQuality, Mr Mora explains it was focused on because it was issued in April 2022 for consignments for which the work was completed by the Limited Partnership through February to April 2022.
[63] Mr Mora submits that while the consignment agreements, including the February 2022 consignment agreement, show HerdBuilder as the exporter, other documents issued in relation to that consignment are inconsistent with this, in particular:
(a)on 2 May 2022 the translation of the import certificate with permit number AA0022000069 dated 28 April was issued and clearly identifies the exporter as the Limited Partnership;
(b)on 25 May 2022, AsureQuality signed and stamped the New Zealand Ministry for Primary Industries zoosanitary certificate with import
number AA0022000069 which clearly identifies the exporter as the Limited Partnership.
[64] Mr Mora further submits the communications regarding the amounts owed by the Limited Partnership to AsureQuality during May and June 2021 state that AsureQuality had accepted that amounts were owed by the Limited Partnership, not HerdBuilder.
[65] In summary, Mr Mora’s overall submission is that the course of conduct by AsureQuality from December 2020 onwards raises a reasonably arguable case that AsureQuality had accepted a novation of the account from HerdBuilder to the Limited Partnership. He points to the lack of attention by AsureQuality to completing documentation, and his argument is that by not following up the credit application, AsureQuality impliedly waived the formal requirements for a credit application and personal guarantees as a condition of the account transferring to the Limited Partnership. AsureQuality then issued and accepted payment of invoices in the name of the Limited Partnership from January 2021 to March 2022. He submits that while documentation such as the consignment agreements are inconsistent with the Limited Partnership being the debtor, the documents were often completed with hindsight, and accordingly were not given attention by the parties including not being signed by AsureQuality (other than the February 2022 consignment agreement which was surrounded by unusual circumstances).
[66] Mr Fitzgerald, on the other hand, submits that HerdBuilder’s obligations under the agreement could not have been novated without AsureQuality’s consent, and whether consent has been given is to be assessed objectively by reference to the material available to both parties.
[67] Mr Fitzgerald draws an analogy with the Court of Appeal’s decision in Fletcher (t/a Fletcher Law) v Jadie Trustee Ltd.16 In that decision, the appellant creditor, Fletcher Law, had entered into a legal services agreement with the respondent debtor, Jadie Trustee Ltd, in relation to the development of a farm property. Jadie Trustee Ltd argued that a related entity, Kaimai Trustee Ltd, which had no assets, was the correct
16 Fletcher (t/a Fletcher Law) v Jadie Trustee Ltd, above n 7.
debtor and submitted there was a substantial dispute as to the identity of the debtor entity because Fletcher Law had not issued any invoices to Jadie Trustee Ltd and Kaimai Trustee was the entity responsible for payment of legal costs and the development to which the legal work related was undertaken by Kaimai Trustee.
[68] Mr Fitzgerald submits that, relevantly, the Court of Appeal held there was insufficient uncertainty regarding the debtor entity’s identity to justify setting aside the statutory demand and:
(a)the payment of invoices by Kaimai Trustee was not inconsistent with the contract with Jadie Trustee in circumstances that Kaimai Trustee was related to Jadie Trustee, had no assets and paid invoices to secure tax deductions in relation to the development;
(b)the inconsistency in the name of the entity’s invoice was insufficient to create doubt as to the entity of the contractual debtor in circumstances that “there is clearly a discernible paper trail that evidences” their identity.17
(c)The inference could be drawn that Fletcher Law intended to contract with the solvent entity, that is, Jadie Trustee, in circumstances that it was incurring significant expenses and Kaimai Trustee was insolvent.
[69] Mr Fitzgerald submits that the Court of Appeal’s conclusions in the Fletcher Law decision accords with the commercial reality as it is not uncommon for one entity within a corporate group to make payment in respect of other entities in the corporate group, and the fact that an accounts department agrees to re-name an invoice can hardly be understood to be an agreement by a responsible person in the corporation to novate a contractual agreement.
[70] Applying the principles from the Fletcher Law case to the present facts, Mr Fitzgerald submits that contemporaneous documents disclose that AsureQuality
17 Fletcher (t/a Fletcher Law) v Jadie Trustee Ltd, above n 7, at [7] and [23].
contracted with HerdBuilder and did not enter into a subsequent contract with the Limited Partnership, evidenced by the following:
(a)it is common ground that the only documented contractual relationship between HerdBuilder and AsureQuality was the agreement and the various successive consignment agreements;
(b)it is common ground that invoices were issued to HerdBuilder under those contractual arrangements, including the invoices issued in January 2021 that were subsequently reissued to the Limited Partnership;
(c)AsureQuality’s agreement to reissue invoices to the Limited Partnership, and to continue to issue invoices to the Limited Partnership from January 2021 onwards, would not be understood to be an agreement to novate the contractual relationship in circumstances where:
(i)AsureQuality had already refused to novate the contractual relationship unless the Limited Partnership submitted a credit application which would have led to a personal guarantee;
(ii)the agreement provided that HerdBuilder could not assign or transfer its obligations without AsureQuality’s prior written consent and the variation of the agreement had to be in writing and signed;
(iii)even after the Limited Partnership began making payments, the contract documents continued to be issued to, and countersigned by HerdBuilder. HerdBuilder clearly and unambiguously re-committed to being the contractual counterparty more than a year after the Limited Partnership had been paying the invoices.
[71] Mr Fitzgerald submits that as the Court of Appeal found in the Fletcher Law case, the creditor was “hardly likely” to have provided further services without ongoing assurance of payment and it was not reasonably arguable (even in the statutory demand context) that issuing invoices to a third party reflected an intention to release the original contracting party. Mr Fitzgerald submits that this is true in the present case.
[72] As to AsureQuality being listed as a creditor in the Limited Partnership’s liquidators’ first report, Mr Fitzgerald submits that AsureQuality has not claimed as a creditor in the liquidation, but it has been identified as a creditor from the records of the Limited Partnership (influenced by Mr Hayman).
Conclusion on whether there is a substantial dispute as to by which entity the outstanding invoice is owed?
[73] In my view HerdBuilder has established, by a narrow of margin, an arguable case that there is a substantial dispute as to whether the debt on which the statutory demand is based is owed by HerdBuilder or the Limited Partnership. This issue needs to be dealt with following discovery and a trial where evidence will no doubt confirm whether there had in fact been an implied novation of the contractual arrangements from HerdBuilder to the Limited Partnership by a course of conduct of AsureQuality from January 2021 to March 2022. My reasons for this view are:
(a)Mr Fitzgerald has made much of the fact that invoicing the Limited Partnership as part of the same group of companies as HerdBuilder cannot objectively be taken as evidence of any novation of the contractual arrangements. However, there are more factors which support the argument than just the issuing of invoices:
(i)HerdBuilder notified AsureQuality in December 2020 that the operation of exporting had been transferred to the Limited Partnership and details of its new Inland Revenue number, Companies Office number and bank accounts were provided to AsureQuality. While AsureQuality responded by requiring a credit application to be completed, which may have led to
personal guarantees being required, AsureQuality did not just invoice the Limited Partnership but arguably began providing the services to the Limited Partnership (for example, by processing documentation in relation to the consignments which clearly identified the Limited Partnership as the exporter);
(ii)documentation relating to consignments in the Limited Partnership’s name was accepted and in some cases signed by AsureQuality (for example, the zoosanitary certificates) over a considerable period of time without any issue being raised by AsureQuality.
(b)There is some evidence that AsureQuality, albeit accounts department personnel, accepted the transfer of the account to the Limited Partnership. Discovery should shed light on the extent to which HerdBuilder’s argument that there had effectively been a novation of the account to the Limited Partnership, and waiver by AsureQuality of non-compliance with its requirements to transfer the account by its conduct can ultimately be supported.
(c)While Mr Fitzgerald has pointed to the consignment agreements continuing to be issued to HerdBuilder with HerdBuilder’s reference number, Mr Mora has demonstrated an arguable case that the documentation was not being scrutinised particularly closely by either party and was often being issued after the consignments had already been completed some weeks or months prior. Consequently, limited weight can be placed on this documentation as evidence HerdBuilder was unambiguously continuing to confirm the ongoing contractual relationship remaining with HerdBuilder by signing these consignment agreements.
[74] Accordingly, the statutory demand should be set aside under s 290(4)(a) of the Act.
[75] While not necessary to decide this judgment, briefly I turn to consider the second argument put forward on behalf of the plaintiff that the dispute regarding the correct debtor entity should be resolved under the disputes clause in the agreement and the statutory demand should be set aside under s 290(4)(c) of the Act on that basis.
Whether the parties are contractually obliged to follow the dispute resolution process in the agreement and the statutory demand should be set aside on that basis under s 290(4)(c) of the Act?
[76] Mr Mora submits that AsureQuality was obliged to follow the dispute process contained in cl 11 of the agreement and the agreement defines a “dispute” as follows:
“Dispute” means any dispute, difference or question between the parties arising out of or in connection with this Agreement.
[77] Mr Mora submits that between 15 August 2022 and 3 October 2022 AsureQuality became fully aware of HerdBuilder’s position that the correct entity in respect of the outstanding invoice was the Limited Partnership and that, once AsureQuality disputed HerdBuilder’s position, the correct process under the agreement was for AsureQuality to issue a dispute notice pursuant to cl 11.1 of the agreement.
[78] Mr Mora submits that if the dispute was unable to be resolved within 20 business days, then pursuant to cl 11.2 of the agreement the parties were obligated to attend mediation and, in the event mediation was unsuccessful, the parties were obligated to attend arbitration. He therefore submits that AsureQuality has acted in error in issuing the statutory demand against HerdBuilder when, on AsureQuality’s own argument, the outstanding invoice was subject to the agreement and therefore the dispute resolution process in the agreement.
[79] Mr Fitzgerald, on the other hand, submits that the dispute resolution provisions in the agreement do not affect the operation of s 290(4)(a) of the Act or the statutory demand for the following reasons:
(a)Neither party has served the other with a dispute notice under the dispute resolution provisions in the agreement, and accordingly the dispute resolution process had not been engaged when the statutory
demand was served or any time since. He submits the mere existence of the dispute resolution provisions cannot be grounds to set aside the statutory demand.
(b)The mere existence of the dispute resolution provisions does not qualify as one of the other grounds upon which the statutory demand may be set aside under s 290(4)(c) of the Act as to allow HerdBuilder to rely on s 290(4)(c) of the Act in this way would circumvent the purpose of s 290(4)(a) of the Act.
(c)The test in s 290(4)(a) is whether there is a substantial dispute or whether or not a debt is owing or due. Section 290(4)(c) ought not to be interpreted as allowing a lower threshold to establish a dispute than the standard test under paragraph (a) otherwise expressly provides for.
(d)HerdBuilder’s argument as to the general terms of s 290(4)(c) are used to avoid the application of the specific threshold test imposed by s 290(4)(a) and this is contrary to the principles of statutory interpretation that general provisions do not derogate from the specific ones.
Conclusion in respect of the dispute resolution process argument
[80] In my view, Mr Fitzgerald’s arguments in respect of the application of s 290(4)(c) of the Act are correct and, for the reasons set out at [79] the existence of the dispute resolution clause is not a valid reason to set aside the statutory demand under s 290(4)(c).
Result
[81] As a consequence of the conclusions I have reached at [73] and [74] by the narrowest margin, in my view it is reasonably arguable by HerdBuilder that there exists a substantial dispute in respect of the outstanding invoices, namely, that the
correct debtor is the Limited Partnership not HerdBuilder. Accordingly, the statutory demand should be set aside.
[82] As to the argument that the dispute resolution provisions in the agreement are a ground to set aside the statutory demand under s 290(4)(c), while this is not required to decide this judgment, I have expressed my view that this argument is not correct and the existence of a dispute resolution clause, which in this instance had not been engaged, should not be a valid ground for setting aside the statutory demand under s 290(4)(c).
Orders
[83]I make the following orders:
(a)HerdBuilder’s application to set aside the statutory demand is granted.
(b)As to costs, counsel are directed to endeavour to agree costs within 20 working days of the date of this judgment, failing which counsel for HerdBuilder is to file a memorandum as to costs (not exceeding five pages) within 10 working days of expiry of the 20 working day period, and counsel for AsureQuality is to file a memorandum in reply (not exceeding five pages) within 5 working days of receipt of counsel for HerdBuilder’s memorandum.
…………………………….. Associate Judge Taylor
0
6
1