Highland Springs Limited v Tyco Flow Control Pacific Pty Limited HC Dunedin CIV 2010 412 611

[2011] NZHC 39

IN THE HIGH COURT OF NEW ZEALAND DUNEDIN REGISTRY

CIV 2010 412 611

UNDER  Part 19 of the High Court Rules 19.2 and

19.7

IN THE MATTER OF     an application under s 290 Companies Act

1993 for an order that a statutory demand be set aside

BETWEEN  HIGHLAND SPRINGS LIMITED Applicant

ANDTYCO FLOW CONTROL PACIFIC PTY LIMITED

Respondent

Hearing:         7 February 2011

Counsel:         D J More for Applicant

A C Cunninghame for Respondent

Judgment:      7 February 2011

JUDGMENT OF ASSOCIATE JUDGE OSBORNE

as to an application to set aside a statutory demand

[1]      The  statutory  demand  in  this  case  was  issued  by  the  respondent  to  the applicant on 16 August 2010 for $9,191.84 and relates to an irrigation pipeline installation in 2008.

Background

[2]      Highland Springs was developing a fourteen lot subdivision on farmland at

McArthur Road, near Alexandra.  Water Dynamics, a division of Tyco Flow Control

Pacific Pty Limited (which I will refer to as Tyco). contracted with Highland Springs

HIGHLAND SPRINGS LIMITED V TYCO FLOW CONTROL PACIFIC PTY LIMITED HC DUN CIV 2010

412 611 7 February 2011

to supply and install a water reticulation system (from a spring) for the subdivision. The contract price, inclusive of GST, was $38,140.96.  Some matters such as trench formation, the water intake and the flow or quality of water from the spring, were not the responsibility of Tyco.

[3]      The contract is in writing.  The applicant believed that it was dated 30 July

2007 and produced a copy of a document bearing that date.  The respondent attaches a fully signed document dated 30 August 2007 which I am satisfied is in fact the contract as concluded.  Nothing turns on the date because the terms are identical.

[4]      The works were carried out and there is some difference between deponents as  to  the start  date  of  contract  works  and  the  dates  on  which  difficulties  were encountered. Again, nothing turns on the difference in dates.

Highland Springs’s evidence

[5]      Highland Springs gave its evidence through its director, Shaun McLellan. Tyco gave its main evidence through the site supervisor, Wayne Muir, supported in part by a sales engineer of Tyco, Tony Stiles.

[6]      The Highland Springs version of events is:

a.   Initially air release valves were not installed.

b.After the ditches for the irrigation were backfilled the supply flow diminished because the valves fitted were in fact intake valves and not release valves.  The location of the valves was dysfunctional due to pressure issues.   The system was losing pressure due to a faulty non-return valve.

c.   At a point in 2007 Highland Springs gave Tyco back fittings which were not needed for the installation.

d.In 2010 pressure problems led to an independent plumbing company finding the non-return valve had been fitted to the outlet side of the pump rather than to its inlet side.

e.   By  September  2010  a  point  had  been  reached  where  the  water company was ready to be passed over to the individual lot owners who were effectively to take over ownership of the system.

Tyco evidence as to the pipeline

[7]      The Tyco evidence was from Messrs Muir and Stiles.   They referred the Court to a plan which I am satisfied is the plan which is expressly referred to in the contract as an ―attached plan‖ but was not in fact attached to the form of contract which Mr McLellan produced.

[8]      The evidence of Tyco is that the line of pipeline shown on the plan was specifically designed to take into account the typography between the spring and the water tank.  The trench to be formed was the responsibility of Highland Springs and not of Tyco.  It is the Tyco evidence that Highland Springs departed from the route of the pipeline as shown on the contract plan.  Mr Stiles has given evidence of detailed discussions with Mr McLellan to which Mr McLellan has not filed reply evidence. Mr Stiles says that Mr McLellan’s accepted that he would take full responsibility for the route and for anything that went wrong with the pipeline (by inference as a result of the changed route).

Setting aside a statutory demand – the jurisdiction

[9]      The Court’s jurisdiction to set aside a statutory demand is contained in s 290

Companies Act, and I refer specifically to the basis upon which the Court may grant an application as contained in s 290(4) which reads:

290     Court may set aside 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.

[10]     For the purposes of this hearing I adopt as a general approach to the exercise of this jurisdiction these 5 principles –

The applicant must show that there is arguably a genuine and substantial dispute

as to the existence of the debt.

The mere assertion that the dispute exists is not sufficient.   Material short of

proof is required to support the claim that the debt is disputed.

If such material is available the dispute should normally be resolved other than

by means of proceedings in the Court’s Companies Act jurisdiction.

An applicant must establish that any counterclaim, cross demand or set-off is

reasonably arguable in all the circumstances.

It  is  not  usually  possible  to  resolve  disputed  questions  of  fact  on  affidavit

evidence alone, particularly when issues of credibility arise.

Discussion of evidence of counterclaim

[11]     I  have  summarised  about  (at  [7]  –  [8])  they Tyco  evidence  as  to  High

Springs’s change of the route of the pipeline.

[12]     Normally the failure of Mr McLellan to file any reply evidence might have led to difficulties of attaching significant weight to his assertions as to an arguable complaint giving rise to some form of counterclaim.

[13]     That is in my judgement not so in this case because of concessions that are contained in the evidence of Mr Muir for Tyco.   When the individual complaints which Mr McLellan has made in relation to the system are analysed, there are at least two that raise arguably the existence of contractual failures by Tyco which might lead to counterclaims, notwithstanding any difficulties which Highland Springs may have brought on itself by the change of pipeline.

[14]     The  first  such  complaint  is  in  relation  to  the  release  valves  which  Mr McLellan accepts were not initially installed.  Mr Muir does not comment directly on that issue, but by inference the suggestion is that there is no need to comment on those because they were subsequently installed.  There is an argument available to Highland Springs that Tyco failed in its contractual duty.

[15]     The second, perhaps more important, consideration relates to the replacement of valves. Mr McLellan gave some reasonably detailed evidence as to the problems which arose (summarised above at [6](b)).  Mr Muir responds to that evidence in his affidavit in this way:

14.I do not believe there are any issues with system (sic) but if there are these are a direct consequence of the route adopted by the applicant or more likely with the intake, which will be seen from the contract was entirely the applicant’s responsibility.    The applicant is more or less correct in relation to the valves which were replaced, but these were replaced at no additional cost to the applicant, and this is Mr McLellan’s only valid complaint. (emphasis added)

[16]     Ms Cunninghame in her submissions sought to develop initially a proposition that from the evidence filed I could be satisfied that there was no arguable counterclaim because the change of route had caused the problems.  However, the evidence of Mr Muir which I have quoted does not allow Tyco to take its case in this arguable context to that point.  Mr Muir’s evidence expressly points to the intake as the more likely problem and the line of the pipeline.  In other words, he asserts that the re-routing of the pipeline is less likely to have caused the problem.  I am satisfied that there is available to Highland Springs a basis of argument that the cause of the problem with the valves may not have been the route (which was the single factor initially pointed to by Tyco as the seat of the problem).  On the evidence before me I am also not in a position to treat issues over the intake and its level as so clearly

established as to rule that Highland Springs must accept the responsibility for problems at the intake.

[17]     For completeness, I then turn to the other two areas of concern raised by

Highland Springs.

[18]     Mr McLellan raised the issue of return of product for which he suggested his company had not receive proper credit.  Mr Muir dealt properly with this issue by referring to a credit note of $357.64 for returned product.  Mr McLellan chose not to reply to that evidence and I find no reasonable argument on the evidence that Tyco failed to give proper credit for product returned.

[19]     The fourth item related to the allegation of Mr McLellan that valves were placed on the wrong side of the pump.   This allegation was also   the subject of specific response by Mr Muir.  He deposed that the check valve can be placed on either side of the pump in a positive head situation.  Mr McLellan again chose not to reply to that evidence.  There is no suggestion that Mr McLellan has expertise in that particular area.  There is reference to his brother, a director of another company as having plumbing expertise but that is not so in relation to this Mr McLellan.  I do not find  any  reasonable  argument  established  on  the  limited  evidence  which  Mr McLellan elected to give.

The quantum of counterclaim

[20]     That  brings  me  to  what  then  became  the  focus  of  Ms  Cunninghame’s

submissions which is the quantum of the claim.  The quantum of Tyco’s demand is

$9,191.84.   Highland Springs had paid $36,000.00 of an originally quoted sum of

$38,140.46.  The fact that there is more than the balance of approximately $2,000.00 owing on the  original  contract sum relates to  extras which were the subject of invoices which had been properly put before me by Mr Muir in evidence.

[21]     There is no issue taken by Mr McLellan as to the quantum of items in those invoices or as to a credit which Tyco has given on a credit note.  I am satisfied that the balance owing on the contract, taking into account extras, was $9,191.84.

[22]     In his reply submissions Mr More sought to develop a proposition that (in terms of s 289(2) Companies Act 1993) the statutory demand in this case is not for a debt which is due.  He suggested that his client’s counterclaim cuts across the debt being due.  That is not the case as a matter of law.  The amount of $9,191.84 became due as a matter of the contract which it relates to.  Highland Springs clearly treated the contract works as having passed over to it when Highland Springs completed the transfer of ownership of the water system to the owners of the lots in the subdivision.

[23]     The real issue in this case arises under s 290 of the Act and that is the basis on which the application was in fact filed before the Court.  Highland Springs asserts a counterclaim.

[24]     I turn to the quantum of the counterclaim.  Mr More highlighted the fact that in his affidavit Mr McLellan identifies a number of activities Highland Springs had to attend to because of alleged breaches of performance by Tyco.  In particular, Mr

More referred me to:

work Mr McLellan had carried out by a specialist consultant in relation to a

leak;

Mr McLellan’s decision to hold back on billing individual lot owners for

water supplied up to September 2010 because of problems that had been encountered with the water;

to the costs of remedial work by third party plumbers and contractor and;

a reference to ―the one hundred hours or more that I spent time wise in trying

to   get   the   water   system   that   the   Respondent   was   meant   to   have

commissioned, to actually work‖.

[25]     The deficiency that evidence is that it is wholly lacking in detail.  It is for an applicant in a case such as this where it asserts a right of counterclaim to provide that measure of detail which can properly be provided at the time the matter comes to Court.  The Court can deal with further detail by leave to file further evidence by

adjournment if the justice of the case requires.  Highland Springs made application for further either leave to file further evidence or adjournment.  The counterclaim is asserted without quantification.   The nearest that Mr McLellan came to putting something before the Court was in the following paragraph of his affidavit at 10:

The costs to date to remedy the defects in the Respondent company’s water system is far greater that (sic) the amount of $9,191.84 that the Respondent has claimed by Statutory Demand.  Once the quantum is assessed we will be counter claiming and/or setting that amount off their claim…

[26]     This is not a case where a statutory demand was issued out of the blue.  Mr

Muir exhibited an email exchange which occurred between the parties between 8

March 2010 and 14 May 2010 when Tyco was chasing payment.   The email exchange, as Mr Muir indicated in his evidence, dealt with a number of the issues which had been identified between the parties but ultimately resulted in Tyco indicating that it would be pursuing the winding up of Highland Springs by the statutory demand process.  A letter was sent to that effect on 24 May 2010 and was apparently not responded to.  The statutory demand in question was issued almost 3 months later.

[27]     In these circumstances I find that in relation to quantum Highland Springs has failed to produce what is required, namely material short of proof.  Between the threat of the issue of the statutory demand and the issue of the proceeding Highland Springs had a period close to three months in which to obtain and produce material short of proof.  Following the issue of this proceeding it had had more than 3 months to produce material short of proof.  It has not done so.

[28]     In these circumstances I find that Highland Springs has not satisfied the Court as to the circumstances under s 290 in which the Court may set aside a statutory demand.

Solvency of Highland Springs

[29]     For completeness, I refer to Highland Springs’s solvency because that has been raised in the notice of application as a matter in support of the application.

[30]     By the time the matter came to hearing before me this morning in a sense the issue had fallen away because Mr More had signalled the previous week that it was likely Highland Springs would put its new solicitor in funds to cover the full amount of the demand.  I am advised from the bar that that has been done and Mr More is obtaining a written undertaking from his instructing solicitor as to the non-payment of that sum out of the trust account in the resolution of the dispute.  In the event the solvency of an applicant company cannot take an applicant’s case any further.  I refer in particular to what the Court of Appeal said in AMC Construction Ltd v Frews

Contracting Ltd[1]:

If there is no dispute as to the company’s liability, so that para (a) or (b) cannot be invoked, it is difficult to imagine circumstances in which the company should be able to avoid paying a debt, merely by proving that it is able to pay that debt. If the debt is indisputably owing, then it should be paid. If the company simply refuses to pay, without good reason, it should not be able to avoid the statutory demand process by proving, at the statutory demand stage, that it is solvent. The demand should be allowed to proceed. If it is not met, and an application for liquidation is filed, in reliance on the presumption in s 287(a) that the company is unable to pay its debts, then the company will have an opportunity on the liquidation application to rebut the statutory presumption, which applies ―unless the contrary is proved‖. There might be circumstances in which it is appropriate to advance the inquiry as to solvency to the s 290 stage, but that would require some particular circumstance not present in this case.

[1] AMC Construction Ltd v Frews Contracting Ltd CA 145/08 25.9.08.

[31]     This does not, of course, remove the right of Highland Springs to seek to prove its solvency in the event of a winding up application proceeding.

Orders

[32]     I order:

a.   That the application is dismissed

b.   The time for payment specified in the statutory demand is extended to 4pm

14 February 2011.  If payment is not made by that date the respondent will be entitled  to  present  an  application  for  the  winding  up  of  the  applicant

company.

Costs

[33]     At  the  conclusion  of  this  judgment  I  heard  briefly  from  counsel  on  the question of costs, I having indicated that costs in my view must follow the event on a

2B basis.  Mr More responsibly accepted that he could not argue to the contrary.  I

therefore order:

[34]     The  applicant  is  to  pay  the  respondent’s  costs  of  and  incidental  to  this application on a 2B basis, together with disbursements as fixed by the Registrar.

Solicitors

Scholefield Cockroft Lloyd, Alexandra
Bodkins, Alexandra