JP Excavators Limited (in liquidation) v HSW Holdings Limited
[2018] NZHC 2993
•19 November 2018
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV 2018-404-001682
[2018] NZHC 2993
BETWEEN JP EXCAVATORS LIMITED (IN LIQUIDATION)
Plaintiff
AND
HSW HOLDINGS LIMITED
Defendant
Hearing: 8 November 2018 Appearances:
S Chambers & A S Botterill for the Plaintiff RO Parmenter for the Defendant
Judgment:
19 November 2018
JUDGMENT OF ASSOCIATE JUDGE P J ANDREW
This judgment was delivered by me on
19.11.18 at 3:30pm, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Solicitors:
Winston Wang & Associates, Auckland Waterstone, Auckland
Counsel: R O Parmenter, Auckland
JP EXCAVATORS LIMITED (IN LIQUIDATION) v HSW HOLDINGS LIMITED [2018] NZHC 2993 [19
November 2018]
Introduction
[1] The plaintiff, JP Excavators Ltd (JPEL) carried out business in earthworks and excavating and was contracted by the defendant, HSW Holdings Ltd (HSW), to work on its property development at Don Buck Road, Massey, Auckland. JPEL is now in liquidation.
[2] JPEL seeks an order placing HSW in liquidation following a failure by HSW to pay a statutory demand for $47,594.41, a certified payment due and owing under the Construction Contracts Act 2002 (CCA).
[3] HSW resists liquidation on the basis that it has a set-off or counterclaim against JPEL that substantially exceeds the sum of $47,594.41, that it is not insolvent, and in the circumstances where it has no prospect of ever recovering any monies from its set- off (because the plaintiff is in liquidation), the residual discretion should be exercised in its favour as the “just and equitable” result. HSW says that it is in a position to meet payment of the outstanding sum (it has paid this money into the plaintiff’s solicitors trust account) but in the circumstances is unwilling to do so.
[4] HSW initially applied to set aside JPEL’s statutory demand on the basis of its claimed set-off. But it withdrew that application in recognition of the decision in Volcanic Investments Ltd v Dempsey & Wood Civil Contractors Ltd, in which the Cout of Appeal held that the words “proceedings for the recovery of a debt” in s 79 of the CCA include the issue of a statutory demand.1 As a result the section prohibits the court from giving effect to any counterclaim, set-off or cross demand in proceedings to set aside a statutory demand in the CCA context, except in very limited circumstances.
[5] While HSW acknowledges it cannot apply to set aside a statutory demand on the basis of the claimed set-off, the proceeding has now advanced to the point of liquidation. HSW contends that the Court can take into account the set-off or counter- claim at this point. I consider this issue later but I do not consider that point is
1 HSW Holdings Ltd v JP Excavators Ltd High Court Auckland CIV 2018-404-375; Volcanic Investments Ltd v Dempsey & Wood Civil Contractors Ltd [2005] 18 PRNZ 97 (HC).
determinative of JPEL’s application. The issues I must determine are whether there are clear and persuasive grounds for the set-off, whether HSW is insolvent and how I should exercise my discretion.
Relevant legal principles
[6] In a creditor’s application for liquidation relying on inability to pay debts, there are three main questions:2
(a)Is the plaintiff a creditor?
(b)Is the defendant insolvent?
(c)How should the Court’s residual discretion be exercised?
[7] Pursuant to s 287 of the Companies Act 1993 a company is presumed to be unable to pay its debts if the company has failed to comply with a statutory demand.
[8] In South Waikato Precision Engineering Ltd v Ahu Developments Ltd Associate Judge Faire held that a winding up order would not be made where there is a genuine and substantial dispute as to the existence of a debt such that it would be an abuse of the process of the Court to order a winding up.3 His Honour further held:4
(a)In such circumstances, the dispute, if genuine and substantially disputed, should be resolved through action commenced in the ordinary way and not in the Companies Court; and
(b)The assessment of whether there is a genuine and substantial dispute is made on the material before the Court at the time and not on the hypothesis that some other material, which has not been produced, might nonetheless be available.
2 Cableprice (NZ) Ltd v Taimona Haulage Ltd [2016] NZHC 828.
3 South Waikato Precision Engineering Ltd v Ahu Developments Ltd, HC Auckland CIV-2008-404- 970, 10 December 2008.
4 At [22].
[9] Where the plaintiff proceeds on the presumption of insolvency because of a failure to set aside a statutory demand, the onus falls upon the debtor to establish that there is a genuine and substantial dispute as to its liability to pay. In Covington Railways Ltd v Uni-Accommodation Ltd, the Court of Appeal held:5
[11] Where a company which is the subject of a liquidation application is indisputably in debt to the applicant creditor, it may nonetheless be able to show that it has a claim against the applicant which reduces the net balance owing to the creditor or even off-sets it altogether. Where there are liquidated sums due each way, that is simply an arithmetical exercise. It is more difficult if, on the applicant’s side, there is an indisputable liquidation sum, but the other party’s claim is for an unliquidated sum with liability and/or quantum in dispute. Then, in order to impeach the statutory demand and overcome the presumption in s287(a) that the company is unable to pay its debts when it has failed to comply with the demand, it must be able to do more than merely assert that there is an available set-off. It must be able to point to evidence before the Court showing that it has a real basis for the claimed set-off and that accordingly the applicant’s claim to be a creditor is, to the extent of the set- off, seriously in doubt. In the words of Buckley LJ in Bryanston Finance Ltd v De Vries (No.2) [1976] Ch 63, 78, it must show that there are “clear and persuasive grounds” for the set-off claim. Where this can be done, the party who has issued the statutory demand against the company will be shown to be using the statutory demand and liquidation procedures improperly because there is a “genuine and substantial dispute” about the net amount of the company’s indebtedness (Taxi Trucks Ltd v Nicholson [1989] 2 NZLR 297, 299). The dispute should then be resolved in the ordinary way – except as to any undisputed balance – rather than upon the hearing of a liquidation application.
Background facts
[10] In July 2016 the parties entered into a contract for civil subdivision works at Don Buck Road with a contract price of $2,715,245.36.
[11] In December 2017 the parties appear to have had discussions about terminating the contract between them though no formal agreement was drafted until 10 January 2018. JPEL says the delay was due to the holiday period. Nonetheless, JPEL issued a final involve payment claim under s 20 of the CCA for $488,479.89 on 21 December 2017. The same day a walkover survey of the site was undertaken by JPEL and a representative of the Terra Group, the engineers for HSW.
[12]JPEL removed all of its equipment from the site on 22 December 2017.
5 Covington Railways Ltd v Uni-Accommodation Ltd [2001] NZLR 272 (CA) (emphasis added).
[13] On 10 January 2018 HSW issued to JPEL a notice to contractor (NTP 27),, which recorded:–
[…] the civil construction contract #23826 between J P Excavators (Contractor) and HSW Holdings Ltd Principal) is agreed to be terminated by both contract parties and to be at an end as at 5:00pm 22 December 2017. Both parties agree that the terms of terminating the contract are listed in entirety below and are bound by the conditions.
[14] The conditions then listed include the “current set of progress claims nos. 14 and 15 and an agreement by the principle” to pay 75 percent of certified retention monies by 12 January 2018 and the remaining 25 percent within six months thereafter.
[15] In response to the final payment claim, on 11 January 2018 Terra Consultants on behalf of HSW issued a payment schedule under s 21 of the CCA, numbered no 15, for $47,594.41 (the final payment schedule). HSW signed the agreement and the final payment scheduled was deemed to be a certified payment due and owing under the CCA.
[16] On 17 January 2018 HSW issued another notice to contractor (NTC 28), which records: “JP Excavators have not provided confirmation of acceptance of the agreement and has removed all machinery from site as of 22 December 2017.”
[17] On 31 January 2018 Ms Natalie Tabb, on behalf of JPEL, wrote to HSW demanding payment of the final payment claim of $488,479.89.
[18] On 1 February 2018, HWC (again through Terra Consultants) issued another notice to contractor (NTC 29) which records:
Further to NTC 27 dated 10 January 2018 JP Excavators have not provided evidence of their acceptance or otherwise to the contract termination agreement as provided in NTC 27 and are considered to have abandoned the work site.
Further to NTC 26 JP Excavators have not provided an updated construction program or detailed adequate resource to complete outstanding works to the engineer.
This notice serves as a notice of default of the contract in the civil works contract for 44 Burtons Drive is now terminated.
[19]On 27 February 2018 JPEL served a statutory demand on HSW for the sum of
$47,594.41. HSW initially applied to set aside the statutory demand but on 28 May 2018 withdrew its application. On 8 June 2018 Associate Judge Bell upheld the statutory demand and ordered HSW to pay the amount of the statutory demand of
$47,594.41 by 22 June 2018.
[20] In the meantime, on 16 April 2018 JPEL was placed into liquidation by special resolution of its shareholder.
[21] HSW failed to make payment of the statutory demand and on 2 August 2018 JPEL filed its statement of claim to put HSW into liquidation.
[22] On 31 August 2018 I made an order restraining the publication of any advertisement as required by r 31.9 pending further order of the Court. The order was conditional on HSW paying the sum of $47,594.41 to JPEL to be held on trust pending further orders of the Court.
[23] JPEL currently holds the sum of $47,594.41 on trust, following payment by HSW.
Analysis and decision
Issue 1 – is JPEL a creditor?
[24] Mr Parmenter on behalf of HSW contended that JPEL is not a creditor of HSW, and HSW can overcome the presumption of insolvency because it has a set-off or counterclaim for at least $679,000 arising from JPEL’s abandonment of the 2016 contract.
[25] The critical issue I must determine is whether HSW has demonstrated that there are clear and persuasive grounds for the set-off claim. This requires the defendant to adduce sufficient evidence of a real basis for the claimed set-off and accordingly to cast serious doubt on JPEL’s claim to be a creditor to the extent of the set-off.
i) Is a set-off available as a matter of law?
[26] Before I address the critical issue, there is a logical prior question as to whether, in the context of s 79 of the CCA, a set-off or counterclaim is, as a matter of law, available to HSW. I will deal only briefly with this matter.
[27]Section 27 of the CCA provides:
79Proceedings for recovery of debt not affected by counterclaim, set- off, or cross-demand
In any proceedings for the recovery of a debt under section 23 or section 24 or section 59, the court must not give effect to any counterclaim, set-off, or cross-demand raised by any party to those proceedings other than a set-off of a liquidated amount if—
(a)judgment has been entered for that amount; or
(b)there is not in fact any dispute between the parties in relation to the claim for that amount.
[28] While it is clear that a statutory demand “is a proceeding for the recovery of a debt” thus precluding the defendant from raising a set-off or counterclaim as a defence to that demand, the courts have not yet determined whether s 79 of the CCA applies to an application to put a company into liquidation. The Court of Appeal in Laywood v Holmes Construction Wellington Ltd observed that different considerations may apply at the later, liquidation stage, but expressed no firm view on the issue.6 In a minute issued in these proceedings Associate Judge Bell indicated that a set-off or counterclaim may be available in this case because of the operation of s 310 of the Companies Act 1993.7 His Honour observed that s 310 is a substantive insolvency set- off provision which prevails over procedural provisions such as s 79 of the CCA.
[29] JPEL did not vigorously pursue the submission that a set-off is not available here as a matter of law; Ms Chambers responsibly acknowledged, without conceding the point, that there are some obiter comments that tend to favour HSW’s position.8
6 Laywood v Holmes Construction Wellington Ltd [2009] NZCA 35.
7 Minute of AJ Bell dated 8 June 2018.
8 Capital Construction Ltd v Prime Commercial Ltd at [21]-[22]; Haley Construction Ltd v Evolving Projects Ltd [2015] NZHC 2490 at [32]-[33].
The main focus of the JPEL submissions was that on the facts here, there is no real basis for the claimed set-off.
[30] I intend to proceed on the basis that a set-off is available to HSW, as a matter of law, and that a liquidation proceeding is not “a proceeding for the recovery of a debt” within s 79 of the CCA. The amount in dispute is not great and the circumstances call for a pragmatic and robust approach. I find that in substance this case turns on the factual question of whether, as indicated above, HSW has met the Covington threshold of showing clear and persuasive grounds there is a legitimate set-off.
ii) Has HSW demonstrated there is a legitimate set-off?
[31] In the circumstances, the evidence overall tends to suggest that the real dispute between the parties is not whether the original contract had been terminated by mutual agreement, but rather whether HSW is liable to pay, as part of the terms agreed, the balance between the final invoice of $488,479.89 and the payment claim certified of
$47,594.41.
[32] HSW has not filed a proof of debt in the liquidation of JPEL despite having had many months to do so. That in itself is not a decisive factor, but it is one of the factors to which I have regard.
[33] The issue of the set-off and damages arising from a claim of abandonment seems to have been raised as a response to the statutory demand and liquidation proceeding, rather than as a genuine claim in its own right. Nor has it been made at the appropriate time, namely when the claim of abandonment was first made in February 2018.
[34] The evidence points strongly to a mutual intention to terminate the original contract rather than to abandonment. It is clear from the evidence that the parties reached agreement in 2017 that the original contract would be terminated. Significant steps were then taken to give effect to that common intention, including the walkover survey at the site on 21 December 2017 and the removal the next day, by JPEL, of all its equipment. A final payment claim was also issued by JPEL and a final payment schedule signed by Terra Consultants on behalf of HSW. The notice to contractor
dated 10 January 2018 (NTW 27) appears to contain all the relevant terms of the agreement to terminate. This reflected those terms discussed in the exchange of email correspondence on 11 and 12 December 2017.
[35] Furthermore, as Ms Chambers submitted, there is no evidence detailing any history of poor workmanship by JPEL, no direct evidence of poor workmanship nor any invoices for remedial work undertaken. I acknowledge that in the affidavits of Mr Truchsess on behalf of HSW there is reference to poor workmanship. But Mr Truchsess is also the author of NTC 27, which sets out clearly the terms of the agreement to terminate. If there were any issues of poor workmanship then the clear intention of NTC 27 seems to be that all outstanding issues of that nature were to be included in the commitment to a “full and final” resolution with the relevant payments being made and the parties then walking away with no further obligations to each other.
[36] It is also clear that much of the outstanding work under the original contract needs or needed to be carried out in any event, and could not legitimately be claimed as part of any set-off.
iii)Estoppel by convention
[37] There is no clear and unequivocal written evidence of JPEL agreeing to particular terms of the agreement to terminate. However, even if there is no legally binding agreement to terminate and the contract was abandoned as HSW claims, (because the terms were not agreed) I find that JPEL has, as contended, a sound basis for the claim of estoppel by convention.
[38] Estoppel by convention is a common law doctrine which operates to prevent a party from resiling from an agreed set of assumptions underlying a particular transaction. It is one aspect of a single overarching document of estoppel based on the prevention of unconscionable conduct.9
9 Andrew S Butler and others Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington, 2009) at [19.4.1].
[39] Tipping J in National Westminster Finance NZ Ltd v National Bank of NZ Ltd held that there are five key elements or prerequisites to the existence of estoppel based on a conventional understanding between the parties:10
(a)The parties have proceeded on the basis of an underlying assumption of fact, law, or both, of sufficient certainty to be enforceable (the assumption).
(b)Each party has, to the knowledge of the other, expressly or by implication accepted the assumption as being true for the purposes of the transaction.
(c)Such acceptance was intended to affect their legal relations in the sense that it was intended to govern the legal position between them.
(d)The proponent was entitled to act and has, as the other party knew or intended, acted in reliance upon the assumption of being true and binding.
(e)The proponent would suffer detriment if the other party were allowed to resile or depart from the assumption.
(f)In all the circumstances it would be unconscionable to allow the other party to resile or depart from the assumption.
[40] In my view the evidence here points very clearly in the direction of the parties proceeding on the basis of an underlying assumption of sufficient certainty to be enforceable, namely that there was an agreement to terminate the original contract. The evidence also clearly suggests that the other elements of the doctrine of estoppel based on convention would be made out. There are very significant hurdles for HSW to overcome in advancing any set-off or counterclaim.
[41] In all of the circumstances, I conclude that HSW has not established that there are clear and persuasive grounds for the set-off claimed. The evidence falls short of establishing that there is a real basis for the claim of set-off such that JPL’s claim to be a creditor is in serious doubt.
[42] I therefore find, in relation to this first issue, that JPEL is a creditor of HSW. In doing so, I express no view on whether HSW remains liable for the balance of the final invoice of $488,479.89. That is a separate issue, although obviously not
10 National Westminster Finance NZ Ltd v National Bank of NZ Ltd [1996] 1 NZLR 548 (CA) at 550.
unrelated. As I have noted above, on the evidence adduced, that does seem to be the matter genuinely in dispute.
Issue 2 – Is HSW insolvent?
[43] It is common ground that the test for insolvency is whether a company is able to meet its current financial demands arising from assets currently realisable. Section 4(1) of the Companies Act 1993 states:
For the purposes of this Act, a company satisfies the solvency test if—
(a)the company is able to pay its debts as they become due in the normal course of business; and
(b)the value of the company's assets is greater than the value of its liabilities, including contingent liabilities.
[44] Under s 4(2)(a), for the purposes of determining whether the balance sheet test is met, directors must have regard to:
(i)the most recent financial statements of the company that are prepared under the Act or any other enactment (if any); and
(ia) the accounting records of the company; and
(ii)all other circumstances that the directors know or ought to know affect, or may affect, the value of the company’s assets and the value of the company’s liabilities, including its contingent liabilities.
[45] In order to establish that HSW is solvent and to rebut the presumption of insolvency that arises here, HSW must satisfy both limbs of s 4(1). It must show that it is able to meet its debts as they become due, and that the value of its assets exceeds the value of its liabilities.
[46] I agree with Ms Chambers’ submission that HSW has failed to provide sufficient evidence to overcome the presumption of insolvency by establishing its ability to meet current demands and to realise assets to clear debts. This is because:
(a)HSW has not provided any accounting records or documentation that would verify the 2018 financial statements. There are real questions as to whether the company is cashflow solvent.11
(b)On the face of the documents provided by HSW, the true liabilities of the company have been understated.
(c)There is no real evidence that the allegedly substantial assets can be converted into cash in a timely manner.
(d)The liabilities that Mr Shao has deposed to do not appear to be shown in the statements company’s financial position.
(e)Even if on a balance sheet test the company is solvent, it has not, in my view, satisfied the cashflow test.
[47] I acknowledge that HSW has paid the disputed sum of $47,594.41 into the plaintiff’s solicitors trust account. However, the need to establish solvency cannot be discharged by showing that the defendant company can pay one of its creditors; solvency can only be demonstrated if it is shown that the company can pay its debts generally.12
[48] In any event, as Ms Chambers submitted, a Court is not precluded from finding that a company is unable to pay its debts when insolvency is not also proven. In Forward Plastics Ltd v NZ Distilled Water Ltd, Associate Judge Bell held:13
Insolvency may be one cause of an inability to pay debts but it need not be the only cause. If a company is unable to pay its debts for reasons other than insolvency, it may still be appropriate to appoint a liquidator in the interests of creditors. A company’s inability to pay its debts may arise from the actions and policies of those with control and management of the company. If those with effective control and management of the company use their power to ensure that the company does not pay debts that are lawfully due, then the company will not have the ability to pay its debts. A company whose
11 Ms Chambers submitted that the work in progress is listed under current assets. This is usually listed as non-current assets. It appears that the liabilities exceed the assets if the work in progress is excluded. However, there was no evidence before the Court on this issue and I make no finding on it. The point may well have merit but that is a matter for expert evidence.
12 Commissioner of Inland Revenue v F B Duvall Ltd (2009) 24 NZTC 23,135 (HC) at [10].
13 Forward Plastics Ltd v NZ Distilled Water Ltd [2012] NZHC 1383.
management decides that debts should not be paid is just as much unable to pay its debts as a company without sufficient liquidity. Both cases provide grounds for an application to be made for liquidation so that the court can consider whether the company should be put into liquidation.
[49] Here HSW’s position is very clear: it will not pay the sum of $47,594.41 to the plaintiff. I find that in the circumstances here, HSW is unable to pay its debts.
[50] I now turn to address the third and final issue, namely the exercise of my discretion.
Issue 3 – is it just and equitable that HSW be put into liquidation?
[51] The amount at issue, namely $47,594.41, is relatively modest and HSW has certified the payment as due and owing. It has of course paid the amount into the plaintiff’s solicitors’ trust account.
[52] The sensible approach in the circumstances is to allow HSW time to agree to the funds being paid to the plaintiff unconditionally, and failing that, to allow for the liquidation proceedings to be advertised. Once that has occurred, an order for liquidation would be made. Absent unconditional payment by HSW to the plaintiff, I can see no “just and equitable” basis for exercising my discretion not to order liquidation. I acknowledge that the claimed set-off will likely never be tested (because the plaintiff is in liquidation) but, as I have concluded above, there is no clear and persuasive basis for concluding that it has some merit. Furthermore, I accept the submission of JPEL that, as a matter of discretion, to permit in the circumstances here an unproven set-off to be raised as a means of avoiding the payment of an established debt would be inconsistent with the purpose and intentions of the CCA.
Result
[53] I find that the JPEL has established that HSW is a creditor, that it is insolvent and that there is no reason in terms of my discretion not to make an order for liquidation.
[54] I adjourn the proceedings until 14 December 2018 at 10:45am in order to allow for the mandatory advertising to take place and to determine the final nature of any order.14
[55] In the event that HSW confirms to JPEL that the sum of $47,594.41, currently held on trust, is to be paid to the plaintiff unconditionally, then the parties are agreed, subject to the question of costs, that the proceedings will be at an end.
[56] I direct that there is to be no advertising until after 26 November 2018 at 5:00pm, to allow for HSW to confirm, if it chooses, to make the unconditional payment.
[57] On the question of costs, I am inclined to the view that the defendant should pay costs on a 2B basis.
[58] If payment is made unconditionally to the plaintiff, and if the question of costs is agreed, the obvious course is for the plaintiff to file a notice of discontinuance. If costs cannot be agreed, then memoranda should be filed within 14 days.
Associate Judge P J Andrew
14 Commissioner of Inland Revenue v The Fishing Company Ltd [2012] NZCCLR 5 (HC) at [55].
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