Hurunui Hotel (2004) Limited v Strong

[2013] NZHC 883

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV-2012-409-002817 [2013] NZHC 883

IN THE MATTER OF     section 289 of the Companies Act 1993

BETWEEN  HURUNUI HOTEL (2004) LIMITED Applicant

AND  ROGER EDMUND STRONG, NOLA

ANN STRONG AND AMELIA LYNETTE SPENCE SIMPSON

Respondents

Hearing:         24 April 2013

Appearances: K W Clay for Applicant

A N Riches for Respondents

Judgment:      24 April 2013

ORALJUDGMENT OF ASSOCIATE JUDGE OSBORNE [as to setting aside of statutory demand]

Introduction

[1]      A lessee has fallen out with its landlord.   It has not been paying rates and insurance premiums (“the outgoings”) which the lease requires it to pay.  It says that it should not have to while it has an unresolved claim at arbitration for damages arising from what it says are the landlord’s breaches of lease.

[2]      The applicant (the lessee) seeks an order under s 290(4) Companies Act 1993 setting aside a statutory demand issued by the respondents (the landlord) for the outgoings up to November 2012.  It is common ground that the lessee has continued

not to pay the outgoings.

HURUNUI HOTEL (2004) LIMITED V R E STRONG, N A STRONG AND A L S SIMPSON HC CHCH CIV-

2012-409-002817 [24 April 2013]

[3]      The applicant says its claim on the arbitration – which it asserts amounts to a cross-demand under s 290(4) of the Act – is for at least $100,000.

[4]      For the reasons which follow the lessee has not satisfied me that it appears to have a cross-demand equivalent to the landlord’s demand of $12,448.23.

[5]      For the lessee Mr Clay also invoked the residual discretion under s 290(4)(c), which arises where the demand ought to be set aside on other grounds.  I am also not satisfied that such grounds exist.

The jurisdiction to set aside a statutory demand – the principles

[6]      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.

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

As to s 290(4)(a) –

Theapplicant must show that there is arguably a genuine and substantial dispute as to the existence of the debt.

Themere 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.

As to s 290(4)(b) –

Anapplicant must establish that any counterclaim, cross-demand or set-off is reasonably arguable in all the circumstances.

As to both s 290(4)(a) and (b) –

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

For  this  formulation  of  the  applicable  principles,  I  acknowledge  the  editors  of

Brookers Company and Securities Law, ch 290.02(1).

[8]      The residual discretion under s 290(4)(c) whereby the Court finds that the demand ought to be set aside on other grounds entitles the Court to do so to meet the justice of the case.   As Tipping J indicated in Commissioner of Inland Revenue v Chester Trustee Services Ltd,[1] the exercise of the discretion comes down to a Court’s judgment  as  to  whether  the  creditor’s  prima  facie  entitlement  to  liquidate  the company is outweighed by some factor making it plainly unjust for liquidation to

ensue.

The nature of the lessee’s cross-demand

[1] Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395.

[9]      The lease was entered into in 2002.

[10]     Travis Cooper, the sole director of the lessee, has given the evidence in support of this application.  The lease is of premises on which the lessee runs a hotel business.  The lessee’s main grievance is that the landlord has been running a nearby

business in direct competition with the lessee’s business since the lease was entered

into.  The lessee asserts that there has been a derogation of the grant under the lease and numerous other wrongs.

[11]     The lease required disputes to be referred to arbitration.  The parties from late

2012 have had an arbitrator in place.   A hearing is scheduled, although it appears uncertain whether that will proceed as planned.   The lessee’s claim for damages through that arbitration remains unquantified.  Mr Cooper records that the lessee has been pursuing further financial information from the landlord to assist with calculation of the lessee’s claim.  No orders as to discovery have been obtained as yet.

[12]     For this proceeding Mr Cooper has sworn an affidavit in December 2012 in which he refers to the lessee’s claim for damages for loss of profits as being “well in excess of the sum of $12,448.23 sought in the Statutory Demand”.  He says that this evidence will be presented at the arbitration.

[13]   He exhibited an affidavit he had filed in a previous proceeding (since abandoned) under the Property Law Act 2007.   In that affidavit of August 2012

Mr Cooper deposed that:

The [lessee] considers that it has lost turnover of at least $100,000 per

annum excluding GST as a consequence of the landlords’ activity.

[14]     Mr Cooper’s narrative evidence contains a number of statements indicating that the landlord’s activities have caused substantial impacts on the lessee’s profitability.

The quality of evidence as to a cross-demand

[15]     I am prepared to accept for the purposes of this application that the lessee may have in the form of the claims it is pursuing at arbitration at least the appearance of a cross-demand, as required by the first aspect of s 290(4)(b).

[16]     Where the lessee’s application fails is through Mr Clay’s inability to point to any satisfactory evidence indicating that the cross-demand is equivalent to the statutory demand.   Mr Cooper’s evidence that the cross-demand will be at least

$100,000  per  annum  is  not  a  satisfactory quantification.    Quantification  in  this context requires something more than a deponent’s ball park estimate.   I refer to cases such as Florian Leathergoods Ltd v Furjan.[2]

[2] Florian Leathergoods Ltd v Furjan HC Christchurch M283/99 30 July 1999 per Master Venning at [28].

[17]     Mr  Clay  endeavoured  to  justify  the  absence  of  quantification  by  the unresolved discovery situation in the arbitration.  He further submitted that even if that unresolved situation did not elevate the cross-demand to one sufficiently quantified in terms of s 290(4)(b), the Court could properly in the exercise of the residual discretion under s 290(4)(c) set aside the landlord’s demand as a matter of justice.

[18]     I  find  that,  not  only  is  there  no  sufficient  quantification,  there  is  no demonstrated  justification  of  the  failure  of  quantification.    Mr  Cooper’s  own evidence puts the damages claim in terms of the impact on the lessee’s profitability. There is no suggestion that the lessee has historically failed to keep its financial statements up to date or that it is currently failing to do so.  Quantifying the alleged damages, even in some approximate way, should have been possible on the lessee’s own financial records.   That is because by their nature recoverable damages will reflect the impact on the lessee’s profit or loss.   The lessee’s desire to obtain the landlord’s financial information for the purposes of the arbitration must logically relate to the lessee’s alternative cause of action which is for loss of profits.

[19]     For these reasons all the evidence of Mr Cooper touching on the quantum of damage is to be viewed as mere assertion in terms of the  principles  as  I have enunciated them.  The lessee has failed to provide material short of proof.

Landlord’s alternative grounds of opposition

[20]     For the landlord, Mr Riches submitted that the application should also be dismissed for other reasons namely:

1.    The lease properly construed imposes, in relation to the outgoings (as

well as rent), a “pay now argue later” regime.

2.    The underlying basis of the lessee’s cross-demand – the proposition that the nearby competing business amounts to a derogation of grant – is untenable.

[21]     By reason of my conclusion that the application must be dismissed for other reasons  it  is  unnecessary that  I reach  any  conclusion  on  these  two  grounds  of opposition.  I deliberately refrain from doing so in relation to the second alternative given  that  that  issue  may  fall  for  determination  in  the  arbitration.    The  first alternative (“pay now argue later”) is one which I recognise as having force.  Given, however, that the relationship between relevant clauses of the lease is not straight- forward, I also refrain from expressing a concluded view as to the correct construction.

Outcome

[22]     The application falls to be dismissed.   Counsel accepted that costs would follow the event on a 2B basis, which I view as appropriate.  There will be the usual direction extending time for payment of the demand.

Order

[23]     I order:

1.    The application is dismissed.

2.    The applicant is to pay the respondent’s costs on a 2B basis together with disbursements to be fixed by the Registrar.

3.    The time for the applicant to make payment upon the statutory demand is extended to Friday, 10 May 2013, and failing payment by that date the respondents  will  be  entitled  to  file  an  application  for  an  order  of

liquidation.

Associate Judge Osborne

Solicitors:

MDS Law (M S Tutty), PO Box 185, Christchurch. Email: [email protected]
Counsel – K W Clay. Email: [email protected]

Saunders & Co, Christchurch. Email: [email protected]