Jellicoe North Limited v Smith & Davies Limited
[2018] NZHC 1215
•28 May 2018
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2018-404-336
[2018] NZHC 1215
BETWEEN JELLICOE NORTH LIMITED
Applicant
AND
SMITH & DAVIES LIMITED
Respondent
Hearing: 28 May 2018 Appearances:
K F Gould for the Applicant
C A Murphy for the Respondent
Judgment:
28 May 2018
ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL
Solicitors:
DMG Solicitors (D Graham), Newmarket, Auckland, for the Applicant Gregory Simon, Auckland, for the Respondent
Copy for:
Kevin F Gould, Newmarket, Auckland, for the Applicant Cathy A Murphy, Auckland, for the Respondent
JELLICOE NORTH LIMITED v SMITH & DAVIES LIMITED [2018] NZHC 1215 [28 May 2018]
[1] Smith & Davies Ltd says that Jellicoe North Ltd received $218,266.78 which really belong to it. To recover these funds, it has served a statutory demand under s 289 of the Companies Act 1993. The demand requires Jellicoe North Ltd to pay it:
the sum of $218,266.78 being the amount owned by Jellicoe North Ltd to Smith & Davies Ltd in connection with certain Smith & Davies Ltd creditor payments being diverted from Smith & Davies Ltd to the bank account of Jellicoe North Ltd.
There is a misstatement in that demand. “Creditor payments” is better understood as referring to debtor payments, but that misstatement has not prejudiced Jellicoe North Ltd.1 The statutory demand gives no other details as to the diversion of the funds. There is, for example, no schedule of payments with dates. I was also advised that Smith & Davies Ltd did not send any letter of demand by its lawyers before serving the statutory demand. Ms Murphy, however, explained that there is a background to the matter which is well-known to the directors of Jellicoe North Ltd and they would not be taken by surprise.
[2] Jellicoe North Ltd has applied under s 290 to set aside the statutory demand. It relies on the ground in s 290(4)(a) that:
there is a substantial dispute whether or not the debt is owing or is due.
The principles are well established:
(a)The onus is on the applicant to show that there is arguably a genuine and substantial dispute as to the existence of the debt;
(b)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;
(c)The mere assertion that a debt exists is not sufficient – material, short of proof, is required to support a claim that the debt is disputed.
1 Companies Act 1993, s 290(5).
(d)If such material is available, the dispute should normally be resolved other than by proceedings in a companies court.
(e)It is not usually possible to resolve disputes on questions of fact on affidavit evidence alone, particularly when issues of credibility arise.
Cases where those principles have been applied include United Homes 1988 Ltd v Workman and North Harbour Equine Hospital Ltd v Little.2
[3]It is also helpful to bear in mind the guidance of the Court of Appeal given in
Industrial Group Ltd v Bakker:3
…the statutory scheme… for applications to set aside statutory demands [is] a summary proceeding. … The section calls for a prompt judgment as to whether there is a genuine and substantial dispute. The test may be compared with the principles developed in cognate fields such as applications to remove caveats [and] leave to appeal an arbitrator’s award… The tight time constraints distinguish the s 290 discretion from that to be exercised on say, a summary judgment application, where the presence of complex legal issues is not necessarily a bar to a remedy. As with leave to appeal an arbitrator’s award, the hearing should, in the normal course, be short and to the point, and the judgment likewise.
[4] The Court of Appeal reaffirmed that in AAI Ltd v 92 Lichfield Street.4 The Court added:
It is important to keep in mind the words of the statute. 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 shown must be a real and not a fanciful or insubstantial dispute ... [however] 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.
(citations omitted)
[5] Jellicoe North Ltd has also said that it is solvent but it has not provided any significant evidence as to the state of its finances. In AMC Construction Ltd v Frews Contracting Ltd,5 the Court of Appeal made it clear that assertions of solvency are not
2 United Homes (1988) Ltd v Workman [2001] 3 NZLR 447 (CA); North Harbour Equine Hospital Ltd v Little HC Auckland CIV-2006-404-7585, 19 February 2007 per Associate Judge Abbott.
3 Industrial Group Ltd v Bakker [2011] NZCA 142 at [24]–[25].
4 AAI Ltd v 92 Lichfield Street (in rec and liq) [2015] NZCA 559 at [22].
5 AMC Construction Ltd v Frews Contracting Ltd [2008] NZCA 389, (2008) 19 PRNZ 13.
usually sufficient stand-alone grounds to warrant setting aside a statutory demand. In this case I regard it as little more than an assertion to bolster the allegation of a substantial dispute. I do not intend to dwell at length on the assertions of solvency. They are, if anything, only a makeweight.
[6] The purpose of a statutory demand is to create a presumption of insolvency if there is no compliance with the demand. When a company applies under s 290, it is asking the court to set aside the statutory demand because the demand should not be used to test its solvency. Allegations of substantial dispute are a ground to set aside a statutory demand because the company says it has good reason for not paying: it legitimately contests its liability for the demand. The fact that it contests liability is ground for the demand not being used to test its solvency.
[7] This is an unusual case for a statutory demand. In saying that, I am not to be taken as saying that it is not possible to issue a statutory demand based on misappropriation of funds.
[8] Smith & Davies Ltd is a trucking company. The old Smith & Davies Ltd has been in the haulage industry for many years, but this company was established only in 2011. Mr Graeme MacKinnon and a Mr Robert Grove were directors in the old Smith & Davies business. In 2011, it became part of the Kiwi Forestry International group of companies, which, as its name suggests, carried on a forestry business. Other subsidiaries include Smith & Davies New Zealand Ltd and Harvest Pro New Zealand Ltd.
[9] In 2015, the directors of Smith & Davies Ltd were Mr MacKinnon, Mr Grove, Mr Andrew Chalmers and Mr Zane Cleaver. The Kiwi Forestry International group as a whole was experiencing cash flow difficulties, including Smith & Davies Ltd. Those cash-flow difficulties were shown in Mercedes-Benz Finance Ltd and GE Capital Ltd re-possessing capital plant of Smith & Davies NZ Ltd and Harvest Pro NZ Ltd in March 2015.
[10] Mr MacKinnon and Mr Grove are directors of Jellicoe North Ltd. They were interested in buying the business of Smith & Davies Ltd. That led to Jellicoe North
Ltd and Kiwi Forestry International Ltd entering into a conditional agreement for the sale and purchase of the shares in Smith & Davies Ltd. If the conditions were not satisfied by 13 February 2015, either party was given the right to terminate. The agreement did not settle. Mr Chalmers and Mr MacKinnon disagree why the agreement did not go ahead. Mr MacKinnon’s position is that the purchaser exercised its right under cl 3.3 to terminate the agreement because the conditions had not been satisfied. Mr Chalmers asserts that the agreement was unconditional. While the agreement did not go ahead, Messrs MacKinnon and Grove were still interested in purchasing the business of Smith & Davies Ltd. Mr MacKinnon says that there was a second agreement proposed by Jellicoe North Ltd, but it was never signed by Kiwi Forestry International Ltd. Apparently Mr Chalmers was unwilling to sign the agreement.
[11] What happened after the first agreement fell over led to the events on which the statutory demand is based. Mr Grove and Mr MacKinnon resigned as directors of Smith & Davies Ltd on 13 March 2015. Very shortly afterwards, Mr Chalmers arranged for their authority to operate the accounts of Smith & Davies Ltd with the Bank of New Zealand to be revoked. Mr MacKinnon and Mr Grove knew that their authority to operate the accounts was revoked. The agreement for sale and purchase certainly did not give Messrs MacKinnon and Grove and Jellicoe North Ltd any authority to operate the business of Smith & Davies Ltd before any sale of shares had been completed. In short, Smith & Davies Ltd makes the point that after Mr MacKinnon and Mr Grove resigned as directors, they had no authority to operate the business of Smith & Davies Ltd.
[12] But that is what Mr MacKinnon and Mr Grove did. They say that after Mercedes Benz Finance Ltd and GE Capital Ltd repossessed the capital plant of Smith & Davies NZ Ltd, and Harvest Pro NZ Ltd, credit dried up. That made it difficult for Smith & Davies Ltd to operate. Because they still wanted to take over Smith & Davies Ltd, they say that they kept the company operating. To do that, they arranged for payments that would otherwise go to Smith & Davies Ltd to be paid into the bank account of Jellicoe North Ltd. Invoices issued by Smith & Davies Ltd showed bank account details so that debtors could make payments directly into the company’s bank account. Examples of the invoices have been put in evidence. Invoices made out to
customers were changed. Bank account details were altered to show the bank account of Jellicoe North Ltd instead of the bank account of Smith & Davies Ltd. Debtors of Smith & Davies Ltd made payments into the bank account of Jellicoe North Ltd.
[13] There is a disagreement as to the amounts of the payments made. Smith & Davies Ltd says that the payments came to $218,266,78. Mr MacKinnon has given a schedule showing the payments that he acknowledges. On his schedule, the total is
$187,950.00. The difference seems to turn on a payment of $37,660.33 said to have been made by CMP Construction Ltd. Mr Chalmers has suggested that that payment went to Jellicoe North Ltd. Mr MacKinnon says that he has checked the bank statements and that no such payment was received by Jellicoe North Ltd. For that payment, Jellicoe North Ltd has established an arguable defence that it did not receive that payment.
[14] Mr MacKinnon’s schedule shows not only the receipts of payments by customers of Smith & Davies Ltd, but also how those funds have been applied. There is a column showing payments and a further column showing contra payments. Contra payments are meant to represent payments that Jellicoe North Ltd made for the expenses and liabilities of Smith & Davies Ltd. Most of the payments appear to be for fuel. Those contras are said to come to $69,626.21.
[15] As for the column of payments, some have been allocated against contras paid by Jellicoe North Ltd; two of them are said to be payments directly to Smith & Davies Ltd; three are said to comprise wages; and one is said to be a payment of lease costs. The payments come to $162,771.20. When the contra payments are taken into account, the total payments by Jellicoe North Ltd come to $232,397.41. Jellicoe North Ltd says that its payments exceed the $187,950 that it received, so it is down by
$44,447.41. It has not pursued Smith & Davies Ltd. It understands that it is unlikely to be paid.
[16] Smith & Davies Ltd accepts that Jellicoe North Ltd received payments of at least $187,950, and says further that Jellicoe North Ltd had no business receiving those funds and cannot claim any credits for the way it has spent those funds. It says that these are an unauthorised misappropriation of company funds to which Jellicoe North
Ltd, Mr MacKinnon and Mr Grove have no entitlement. Mr MacKinnon asserts that Mr Chalmers was aware that Smith & Davies Ltd was still operating. According to Ms Murphy’s submission, Mr Chalmers was unaware of the fact, but it is hard to find a firm foundation for that in Mr Chalmers’ affidavit.
[17] Part of the business of Smith & Davies Ltd was a refuse haulage contract for the Auckland Council. On 4 May 2015, Mr MacKinnon gave notice to the Auckland Council that Smith & Davies Ltd would not be continuing with that contract. Ms Murphy makes the point that Mr MacKinnon was not a director of the company and had no right to give any such notice. There are differences in the evidence as to how important the haulage contract was. As a result of the haulage contract coming to an end GE Capital Ltd and Mercedes Benz Finance Ltd repossessed the capital plant of Smith & Davies Ltd. That appears to have brought the business of Smith & Davies Ltd to an end.
[18] In July 2015, Mr Chalmers promoted a compromise between Smith & Davies Ltd and its creditors under Part 14 of the Companies Act 1993. A copy of the notice and an outline of the proposal has been put in evidence, including a list of secured creditors and unsecured, non-preferential creditors to whom notice was given. The proposal was that each unsecured creditor would be paid 20 cents in the dollar and, if that were accepted, those creditors would be barred from taking any recovery action against the company. Jellicoe North Ltd is not shown as one of the creditors notified. The meeting of creditors took place on 13 July 2015. The resolution was adopted by a majority in number and more than 75 per cent in value of the unsecured creditors who voted. Apparently votes were accepted by post, including email and fax.
[19] Smith & Davies Ltd points out that from the payments by Jellicoe North Ltd shown in Mr MacKinnon’s schedule, some were made after 13 July 2015 when the proposal was adopted. They include a payment to a creditor for lease costs,
$32,901.33, and a payment of wages, $71,972.37. Earlier payments of wages are shown in the schedule. Mr MacKinnon maintains that those were for the wages of staff. He accepts that the payment of $71,972.37 made on 18 July 2015 was salaries and holiday pay for himself and Mr Grove. He maintains that those were preferential payments under the Seventh Schedule of the Companies Act 1993. He wanted to
ensure that the payment would not be set aside as a voidable transaction if Smith & Davies Ltd went into liquidation. I have to say that that assertion may not wash completely, given that the priority in the Seventh Schedule is usually only about
$22,000 per employee.
[20] Now for whether there is a substantial dispute as to liability. Jellicoe North Ltd is prima facie liable for having received payments to which it was not entitled. Next is whether there is an affirmative defence. Most statutory demands are for debts payable under statute (such as taxes and body corporate levies) or for debts payable under a contract. But statutory demands are not confined to those cases. The Court of Appeal has recognised that statutory demands may be used also for debts payable in restitution, that is, for money had and received. In OPC Managed Rehab Ltd v Accident Compensation Corporation it said:6
[54] In the result, we conclude that, if a payment is received in circumstances where the recipient is obliged to repay it, whether because of a contractual or statutory provision to that effect or because the circumstances give rise to an obligation to repay on the basis of money had and received, the amount can be treated as a “debt due” for the purposes of s 289(2)(a). If the defence provided for in s 94B7 or the equitable defence of change of position may be available to the recipient, that may mean that there is a substantial dispute which would justify the setting aside of the statutory demand, but it would not disentitle the payer from using the statutory demand procedure on the basis that the recipient’s obligation to repay is a “debt due”.
[55] The complexities which may be inherent in an action for money had and received in many circumstances may mean that recourse to the statutory demand procedure will not be appropriate. But that is no different to the situation where the circumstance allegedly giving rise to a debt in contract are complex. In principle, where a payer has a clear entitlement to reimbursement of an amount overpaid to a recipient in an action for money had and received, it may have recourse to the statutory demand process if it is otherwise appropriate to do so.
The Court of Appeal referred to defences under what used to be s 94B of the Judicature Act 1908, and the defence of change of position. There are, of course, other available defences to claims for money had and received.
6 OPC Managed Rehab Ltd v Accident Compensation Corporation [2006] 1 NZLR 778 (CA) at [54]–[55].
7 Judicature Act 1908, s 94B. See now Property Law Act 2007, s 74B.
[21] In this case, Jellicoe North Ltd says that it used the funds for the benefit of Smith & Davies Ltd. It paid some of the funds into the account of Smith & Davies Ltd, although the amounts concerned are relatively small, only in the order of $9,000. There were larger payments to clear debts. The debts included wages. It kept the company going by paying for fuel and related expenses. On this aspect Smith & Davies Ltd criticised Mr MacKinnon’s evidence as sparse. I bear in mind, however, the guidance of the Court of Appeal in Industrial Group Ltd v Bakker that, given the tight time constraints, an applicant under s 290 cannot be expected to muster all the evidence that would be required for, say, a summary judgment application. 8 Some account must be taken of the need to get the application under way within 10 working days of service of the statutory demand.
[22] In my judgment, Mr MacKinnon has raised enough matters in his schedule to suggest that Jellicoe North Ltd can contest its liability to repay the funds that it paid into its bank account by showing that it applied those funds for the benefit of Smith & Davies Ltd. Those matters should be properly the subject of a defended hearing. I cannot at present conclude absolutely against Jellicoe North Ltd that the way it has used the funds paid into its account cannot be taken into consideration in a claim for money had and received.
[23] In short, the statutory demand cannot stand. I make an order setting aside the statutory demand of 20 February 2018.
[24] Jellicoe North Ltd is entitled to costs on the application. Mr Gould says that it will seek indemnity costs. Therefore, there ought to be full submissions. Jellicoe North Ltd is to file its submissions within 10 working days (i.e. by 12 June 2018). Smith & Davies Ltd is to file its submissions within a further 10 working days (by 26 June 2018). If Jellicoe North Ltd is to seek indemnity costs, it ought to address its GST status.
……………………………….
Associate Judge R M Bell
8 Industrial Group Ltd v Bakker [2011] NZCA 142.
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