Kuamate Holdings Limited v Quarry Capital Limited

[2021] NZHC 148

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE

CIV-2020-409-000462

[2021] NZHC 148

UNDER

the Companies Act 1993

IN THE MATTER

of a statutory demand dated 10 September 2020

BETWEEN

KUAMATE HOLDINGS LIMITED

Applicant

AND

QUARRY CAPITAL LIMITED

Respondent

Hearing:	15 December 2020
Appearances:	J M Stringer for Applicant S D Munro for Respondent
Judgment:	12 February 2021

JUDGMENT OF ASSOCIATE JUDGE PAULSEN

This judgment was delivered by me on 12 February 2021 at 2.30 pm pursuant to Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar Date:

KUAMATE HOLDINGS LTD v QUARRY CAPITAL LTD [2021] NZHC 148 [12 February 2021]

Introduction

[1]        Kuamate Holdings Ltd (Kuamate) applies under s 290 of the Companies Act 1993 to set aside a statutory demand issued to it by Quarry Capital Ltd (Quarry).

[2]        Quarry’s statutory demand requires payment of a debt of $233,229.16, being the outstanding balance of an on demand loan between Quarry and Kuamate along with legal costs in respect of the issue of the statutory demand.

[3]        Kuamate argues the statutory demand should be set aside as there is a substantial dispute whether the debt is due and owing.1 It contends the debt is not due and owing as it was to have three years following demand to repay the loan. At the hearing, Kuamate also argued the statutory demand should be set aside on “other grounds”.2

[4]Quarry opposes the application.

The facts

[5]        Kuamate was formerly known as Taurus Group Ltd. It operated an accountancy and business advisory service.

[6]        David Kitson, Errol Bailey and Geoffrey Angus were all involved in the business of Kuamate.

[7]        Mr Kitson was a director of Kuamate and the trustees of a trust associated with him, known as the Prado Trust, owned shares in the company.

[8]        Quarry was formerly known as Taurus Management Ltd. It operates a business establishing and managing commercial property investment syndicates.

[9]Mr Kitson is the Managing Director and Chief Executive Officer of Quarry.

1      Companies Act 1993, s 290(4)(a).

2      Companies Act, s 290(4)(c).

[10]      The shares in Quarry are owned by the trustees of the Prado Trust as well as by entities associated with Mr Bailey and Mr Angus.

[11]      In 2010, Kuamate entered into term loan agreements with parties associated with it recording advances made to it by those parties. One such entity was the Prado Trust. Kuamate provided security for the advances by way of a General Security Agreement (the General Security Agreement). Pursuant to a Declaration of Trust, Taurus Trustee Services Ltd held the General Security Agreement as trustee for the lending parties.

[12]      A term loan agreement was entered into between the trustees of the Prado Trust and Kuamate dated 16 March 2010 (the 2010 agreement). It recorded the Prado Trust had made advances to Kuamate of $117,001 but contemplated the possibility of further advances. The principal sum owing was repayable upon demand but once demand was made Kuamate had three years to repay. There was provision for the payment of interest if demanded prior to 1 January in each year.

[13]      On 30 September 2018, Mr Kitson resigned as a director of Kuamate to focus on the business of Quarry. At the time, Kuamate was indebted to both Mr Kitson and the Prado Trust.

[14]      In early 2019, the debts owing by Kuamate to the Prado Trust and Mr Kitson were assigned to Quarry and terms agreed between Kuamate and Quarry for repayment of them. The terms of repayment were documented by solicitors acting for both parties, Malley & Co. Those terms are contained in a loan agreement dated 1 July 2019 (the loan agreement), which is the kernel of this proceeding, and incorporates standard terms of an ADLS Term Loan Agreement (2018) (the ADLS terms).

[15]      The loan agreement was between Quarry as lender, Kuamate as borrower, and Mr Bailey as guarantor. The recitals record Kuamate owed the trustees of the Prado Trust $264,406.52 which had been assigned to Quarry and that the parties wished to acknowledge the debt and make provision for its repayment.

[16]The repayment terms under the loan agreement were:

(a)Kuamate was to repay the debt on demand, at the rate of no less than

$3,000 per month.

(b)No interest was payable unless Quarry gave Kuamate, before the end of June in any year, a notice in writing stipulating a rate and time of payment of interest. The interest rate could not exceed 10 per cent per annum.

(c)The terms of the loan agreement prevailed over the ADLS terms to the extent there was any inconsistency.

(d)Kuamate was to arrange for Quarry to be secured for repayment of the debt under the General Security Agreement.

(e)Mr Bailey guaranteed repayment of the debt.

[17]The ADLS terms included the following:

(a)A default occurred if Kuamate:

(i)failed to pay any monies due to Quarry, or

(ii)failed to comply with any non-monetary obligation owed to Quarry and where such failure was capable of remedy and continued for a period of seven days after Quarry had served notice requiring Kuamate to remedy such failure.

(b)If a default occurred the monies owing by Kuamate became due and payable upon demand, or to the extent any notice was required by law to be given before the monies became payable, immediately on expiry of the relevant notice period, without the need for any further notice or demand.

(c)Kuamate would pay Quarry’s legal costs arising from or related to any default by it upon demand.

(d)Kuamate represented and warranted that:

(i)it was solvent according to the meaning of the term in s 4 of the Companies Act 1993; and

(ii)information provided by it in connection with the loan agreement and the ADLS terms was true and accurate; there were no facts or circumstances that had not been disclosed to Quarry which would make any information untrue, inaccurate or misleading; and the representations and warranties were “deemed to continue for as long as this contract is in effect by reference to the facts and circumstances as they exist…”.

[18]      In accordance with the loan agreement, Kuamate made payments to Quarry at the rate of $3,000 per month from July 2019 to June 2020.

[19]      On 22 June 2020, Quarry issued Kuamate with what purported to be an interest notice (the interest notice) under the loan agreement advising as follows:

(a)the balance owing under the loan agreement as at 30 June 2020 was

$228,406.52;

(b)that from 1 July 2020 interest was payable at the rate of 10 per cent per annum calculated on the amount owing at the end of each month;

(c)the loan was to be repaid over a 36 month term with equal instalments of $7,371 per month (which amount was inclusive of principal and interest); and

(d)the first instalment was due on 1 August 2020 or the next business day if it fell on a weekend (which it did) and thereafter on the first day of each month.

[20]      The interest notice also requested confirmation that Kuamate had arranged for Quarry to have security for repayment of the debt under the General Security Agreement as required by the loan agreement.

[21]      Upon receipt of the interest notice, Kuamate ceased making payments under the loan agreement.

[22]      On 2 September 2020, Quarry’s solicitors, Anderson Lloyd, issued a letter of demand to Kuamate. Quarry demanded payment of the full balance of the loan which was $233,229.16. Payment was required by 9 September 2020 failing which a statutory demand would issue.

[23]      Forming the basis of demand were allegations that Kuamate was in breach of the loan agreement in the following respects:

(a)it had failed to make monthly payments that were due under the loan agreement as required by the interest notice;

(b)it had failed to provide security for the loan under the General Security Agreement; and

(c)it had breached the continuing representations and warranties in the ADLS terms concerning Kuamate’s solvency and the nature of Kuamate’s assets and business as there had been a hive-down of the business and assets to a new company.

[24]      In respect to this last matter, Anderson Lloyd stated the new company was using Kuamate’s former name (Taurus Group Ltd), had some common directors and shareholders to Kuamate, was providing the same accountancy and financial services as Kuamate formerly provided, and was utilising the same premises and staff. As a result, it was said, Quarry had no details of the assets or solvency position of Kuamate giving rise to concern that the hive-down was an attempt to defeat Quarry’s interests as a creditor.

[25]      Having  received  no  response  to  the  letter  of  2  September  2020,  on    10 September 2020 Quarry issued the statutory demand.

[26]      On 14 September 2020, Kuamate’s solicitors, MacLean & Associates, responded to the letter of 2 September 2020 and the statutory demand. In a letter of that date, they challenged the interest notice and asserted that Quarry was demanding a sum which was not owing. They sought confirmation that the statutory demand would be withdrawn. Quarry’s demand for payment was invalid, they claimed, because:

(a)the interest notice purported to introduce a provision into the loan agreement that the debt was repayable over a 36 month term but the loan agreement permitted payments of $3,000 per month;

(b)a “reduced term” for the debt repayment could only be implemented if there was an agreement reached between the parties and Kuamate had not agreed; and

(c)there was no need to provide security under the General Security Agreement as that security was already in place.

[27]      MacLean & Associates also stated that Kuamate had made no further payments under the loan agreement as it did not believe that Quarry had the right to increase the monthly repayment sum. However, there was no mention of the hive-down of Kuamate’s business and assets.

[28]      Quarry refused to withdraw the statutory demand and this application followed.

Principles on application to set aside statutory demands

[29]Section 290(1) and (4) of the Companies Act provide:

290Court 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.

[30]Section 291(1) of the Act provides:

291Additional powers of Court on application to set aside statutory demand

(1)If, on the hearing of an application under section 290 of this Act, the Court is satisfied that there is a debt due by the company to the creditor that is not the subject of a substantial dispute, or is not subject to a counterclaim, set-off, or cross-demand, the Court may ---

(a)Order the company to pay the debt within a specified period and that, in default of payment, the creditor may make an application to put the company into liquidation; or

(b)Dismiss the application and forthwith make an order under section 241(4) of this Act putting the company into liquidation, ---

on the ground that the company is unable to pay its debts.

[31]      For the purposes of s 290(4)(a), an applicant must show there is arguably a genuine and substantial dispute as to the existence of the debt. A mere assertion that a dispute exists is not sufficient. Material short of proof is required to support a claim 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.

[32]      It is not usually possible to resolve genuinely disputed questions of fact on affidavit evidence alone, particularly when issues of credibility arise.3 Apposite in this case however, in AAI v 92 Lichfield Street Ltd, the Court of Appeal said:4

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.

[33]      In relation to s 290(4)(c), there exists a residual discretion under the “other grounds” jurisdiction which enables the court to do justice between parties. As noted by Tipping J in Commissioner of Inland Revenue v Chester Trustee Services Ltd, the exercise of the discretion comes down to the court’s judgement 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 occur.5

[34]      Finally, in this discussion of principles, as noted in FTG Securities Ltd v Bank of New Zealand, there is scope for the proven solvency of a debtor to be taken into account in the assessment of “other grounds” under s 290(4)(c) but the scope is limited.6 There, Osborne J adopted what was said by the Court of Appeal in AMC Construction Ltd v Frews Contracting Ltd as follows:7

If there is no dispute as to the company’s liability, so that para (a) or (b) of the Act 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.

Is there a substantial dispute?

[35]      The loan agreement does not contain a term or a date for repayment of the loan. This is because it created an on demand obligation. Clause 2 of the loan agreement

3      AAI v 92 Lichfield Street Ltd (in rec and in liq) [2015] NZCA 559; (2015) 23 PRNZ 52 at [19] citing AAI v 92 Lichfield Street Ltd (in rec and in liq) [2015] NZHC 1421 at [17].

4      AAI v 92 Lichfield Street Ltd (in rec and in liq), above n 3, at [22] citing Re A Company [1991] BCLC 737 (Ch) at 740 per Harman J.

5      Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395 (CA) at [3].

6      FTG Securities Ltd v Bank of New Zealand [2020] NZHC 2009.

7      At [23] citing AMC Construction Ltd v Frews Contracting Ltd [2008] NZCA 389; (2008) 19 PRNZ 13 at [7].

reads: “[Kuamate] will repay the Debt to [Quarry] on demand, at the rate of no less than $3,000 per month.”

[36]      Where a loan is expressed to be repayable on demand simpliciter the lender’s right to repayment arises immediately from the date of the advance, unless the parties have either expressly or by necessary implication demonstrated an intention that a demand is required in order to create a liability to repay.8

[37]      In this case the issue of whether the debt became repayable only following the making of a demand does not arise. Quarry made a demand for repayment of the debt by Anderson Lloyd’s letter of 2 September 2020 which both required full repayment and gave Kuamate until 9 September 2020 to do so. Quarry submits that the seven days was a reasonable period for compliance with the demand and no issue has been taken with that by Kuamate.

[38]      However, in MacLean & Associates’ letter of 14 September 2020, Kuamate’s stance was that the debt was repayable at $3,000 per month. On that basis, the debt was not repayable on demand and the interest notice was an invalid attempt by Quarry to both increase the monthly payments and reduce the term of the loan agreement. The primary argument Kuamate now pursues is somewhat different.

[39]      Kuamate now argues the debt was repayable three years following demand. This is because, Kuamate contends, the debt was repayable on the same terms as the 2010 agreement with only the additional requirement that Kuamate make monthly payments of $3,000. On this basis the statutory demand was issued in respect of a debt that was not yet due and owing.

[40]      Ms Stringer submits on this basis there is a substantial dispute as to the terms for repayment which is not suitable for summary determination in this proceeding. The issue, she says, must go to a full hearing as it requires further contractual analysis and cross-examination of witnesses to determine conclusively.  The use of the statutory

8      For discussion in relation to “on demand” obligations see DFC New Zealand Ltd v McKenzie

[1993] 2 NZLR 576 (HC) at 582.

demand process is unjustified and the demand should be set aside. I do not accept this submission.

[41]      Any evidential foundation for Kuamate’s argument is almost entirely lacking. Kuamate relies upon two affidavits of Mr Bailey. In the first affidavit, Mr Bailey refers to the 2010 agreement but he does not assert that Kuamate was to have three years to repay the debt following demand. In that affidavit his stance was Quarry had no right to impose a “term over which the Loan was to be repaid.” Similarly, MacLean & Associates made no such assertion in the letter of 14 September 2020.

[42]      The argument now relied upon was raised in Mr Bailey’s second affidavit. This was in reply to an affidavit of Mr Kitson. In that affidavit, he says the basis for repayment of the debt was not changed from the 2010 agreement apart from the requirement that payments of $3,000 per month be made and that it was “understood” that the term Kuamate would have three years before repayment was required “remained part of the Agreement.” He says he would never have accepted an arrangement that exposed Kuamate to a liability repayable on demand for the amount in question.

[43]      Mr Bailey’s evidence is implausible. There is nothing in the loan agreement reflecting what he says was understood by the parties. The loan agreement was prepared by lawyers acting for all parties and formalised legally binding arrangements for repayment of the loan. It would not be expected that they would have fundamentally failed to record the parties’ intentions. The fact that all parties signed the loan agreement, which is a very short and straightforward document, would strongly suggest they did not. The terms of the loan agreement and ADLS terms are on their face a complete record of what was agreed.

[44]      Context is, of course, also important. As the loan agreement records, following the assignment of the debt from the Prado Trust to Quarry the parties wished to agree on terms for its repayment. This came about because of Mr Kitson’s resignation from Kuamate and the assignment of the debt to Quarry. There was a material change in circumstances. The purpose of entering into the loan agreement was to record new terms of repayment reflecting changed circumstances.

[45]      There is nothing else in the evidence that supports Mr Bailey’s assertion of what the parties “understood”. He has not produced any corroborating documents or correspondence, he does not provide an explanation for the terms of the loan agreement, he does not explain why he signed the loan agreement, both on behalf of Kuamate as borrower and himself as guarantor, when it does not record the parties’ understanding and, importantly, there is no evidence from the solicitors Malley & Co.

[46]      Furthermore, Mr Bailey’s evidence that the repayment terms “were not changed” and there was an assignment of the debt “on the same terms as the existing debt”, except for the agreed monthly repayments of $3,000, is plainly wrong. The terms of the loan agreement differed substantially from the 2010 agreement in all of the following respects:

(a)the agreements are between different parties;

(b)the loan agreement makes no reference to deferred repayment following demand;

(c)the loan agreement introduced monthly repayments of $3,000;

(d)the loan agreement introduced the ADLS terms including, importantly default provisions;

(e)there were different terms in respect to the payment of interest; and

(f)Mr Bailey personally guaranteed Kuamate’s obligations under the loan agreement.

[47]      Finally, it is to be noted no submissions were presented identifying the legal mechanism by which the understanding Mr Bailey says existed between the parties could be given effect to, having regard to the fact that the parties chose to record their bargain in the loan agreement which makes no mention of it. Is it Kuamate’s case that the understanding would take effect as a term of the loan agreement and, if so, how? Is it that Kuamate would seek rectification of the loan agreement? Does it consider

Quarry is estopped from relying on its express terms? Is there some other possibility? None of this is made clear and no evidence directed to the issue.

[48]      I reject Kuamate’s contention and find that Quarry was entitled to, and did, call up the debt under the loan agreement. But in any event, had I considered there was any possible merit in Mr Bailey’s contention, Quarry argues, and I accept, that it was entitled to call up the debt immediately because of Kuamate’s defaults of both monetary and non-monetary obligations under the loan agreement.

[49]Quarry contends Kuamate committed defaults in:

(a)failing to make monthly payments;

(b)failing to provide security as required by the loan agreement; and

(c)breaching the representation and warranties in the ADLS terms when it hived-down its assets and business.

[50]      In relation to the monthly payments, I should say something more about the interest notice. As noted, Kuamate was required to make monthly payments of no less than $3,000 per month. By the interest notice, Quarry purported to increase the monthly payments to $7,371 inclusive of interest. The words “no less than $3,000 per month” in cl 2 of the loan agreement foreshadowed the possibility of larger monthly payments. There is no description of the circumstances under which that would occur, nor any mechanism for determining what the increased monthly payments might be.

[51]      Quarry has assumed it could increase the monthly payments. The loan agreement does not provide for that. It could equally be argued it was for Kuamate to determine what it would pay each month (provided it was not less than $3,000) or that monthly payments could be increased only by agreement.

[52]      Quarry also overlooked that the loan agreement requires an interest notice to be given in each year if interest is to be payable. It was not open to it to require payment of interest over 36 months.

[53]      In my view, therefore, it is certainly arguable that the interest notice was invalid in so far as it required increased monthly payments to be made and interest to be paid over 36 months.

[54]      That said, Kuamate’s obligation to make monthly payments of $3,000 remained and it failed to do so for July, August and September 2020. There is no dispute about this. Mr Bailey states in his first affidavit that he would arrange for the three payments of $3,000 due on 1 July, August and September 2020 to be made. This was, of course, well after Quarry had demanded repayment of the loan and issued the statutory demand. Whilst Mr Bailey contends that Kuamate did not make payments because it did not accept Quarry’s interest notice, that did not release it from the obligation to make the monthly payments that were not disputed.

[55]      Kuamate also committed a default under the loan agreement in failing to arrange for Quarry to be secured for repayment of the debt under the General Security Agreement. In response to Quarry’s request in the interest notice that Kuamate provide confirmation of the security, MacLean & Associates advised that the security was in place. That was correct so far as the Prado Trust was concerned, but the debt was assigned to Quarry and there has never been any evidence provided that the General Security Agreement is held by Taurus Trustee Services Ltd for Quarry.

[56]      In his second affidavit, Mr Bailey asserts that the security has now been given and annexes a General Security Agreement which records Kuamate, as the secured party, being granted security by Taurus Trustee Services Ltd and Blanch Trustee Services Ltd as trustees for an entity called the Cressbrook Trust. This is wholly irrelevant to the issue. Quarry is not a party to this General Security Agreement and derives no benefit from it.

[57]      Kuamate’s third default relied upon by Quarry is more problematic. This is not because I consider it obviously lacking in merit but because issues connected with it are not suitable for determination in a proceeding of this kind. Quarry’s argument is that in hiving-down its business and assets Kuamate is in breach of continuing representations and warranties that it is solvent and that information it provided “in connection with this contract is true and accurate”. It is not disputed that Kuamate

hived-down its assets and business to a new company but there is insufficient evidence that it is insolvent (Mr Bailey claims it is not), nor is there evidence of specifically what information was provided by Kuamate to Quarry in connection with the loan agreement and how that was not true and accurate.

[58]      I am satisfied Kuamate was in breach in two of the three respects relied upon by Quarry. Under the ADLS terms if a default occurs the full amount owing under the loan agreement becomes due and payable upon demand. Kuamate was in default when Quarry made the demand for repayment by Anderson Lloyd’s letter of 2 September 2020. Kuamate had until 5.00 pm on 9 September 2020 to pay the debt but did not do so. The debt was due and payable at that time and the statutory demand was validly issued on 10 September 2020.

Other grounds

[59]      Although not raised in the notice of application, Kuamate advances four matters in support of its application that might fall under this heading. Quarry objects to these matters being raised. I consider I can deal with them on their merits without any prejudice to Quarry.

[60]      First, Mr Bailey says that he has received advice that a company should not issue a statutory demand without an ordinary resolution of its shareholders. He does not disclose the advice and no authority has been provided to support that proposition. I do not know of any. The business and affairs of companies are managed by or under the supervision of their directors.9 Mr Kitson is the Chief Executive Officer and Managing Director of Quarry and he confirms that the statutory demand was validly issued on behalf of Quarry.

[61]      Second, it is argued that the “dispute” between the parties should be determined in accordance with a dispute resolution clause contained in a shareholders agreement of Quarry. Kuamate is not a party to the shareholders agreement and its liability to pay the debt is not a matter arising out of or relating to the shareholders agreement to which the dispute resolution clause applies.

9      Companies Act, s 128.

[62]      Third, Mr Bailey asserts that the issue of the statutory demand is so that     Mr Kitson may have leverage to acquire the 50 per cent of shares in Quarry owned by entities associated with Mr Bailey and Mr Angus.

[63]      There is no evidential basis for this allegation other than Mr Bailey’s assertion. No legal submissions were presented as to why it would be unjust for Quarry to take action against Kuamate to recover a substantial debt owed by it in the circumstances of this case. Those circumstances include the acknowledged transfer of the business and assets of Kuamate to a third party with payment for those assets being dependent upon the performance of the new company and its continuing ability to pay its liabilities.

[64]      Quarry is owed a substantial sum and, on the evidence, has good reason to be concerned that its right to recover the debt may be defeated. The steps that have been taken are to validate its legal right to payment, which is what the law allows. It is not an abuse of the statutory demand procedure. The fact that a director of Quarry may obtain some collateral advantage does not make it so.

[65]      Fourth, Mr Bailey asserts that Kuamate is solvent but there are no financial accounts before the Court. Mr Bailey attaches to his second affidavit a single page statement of assets and liabilities of Kuamate as at 30 September 2020, with no supporting documents.

[66]      Kuamate has disposed of its business and assets. It defaulted in making payments to Quarry. In so far as it has assets they consist entirely of money owing by third parties with nothing before me to confirm the third parties’ ability to pay. Kuamate has not satisfied me it is solvent.

Result

[67]The application to set aside the statutory demand is dismissed.

[68]      I make an order under s 291 of the Companies Act 1993 that Kuamate is to satisfy the statutory demand by 19 February 2021. If it does not do so by that date Quarry may make an application to put Kuamate into liquidation.

[69]      Quarry is entitled to its costs on the application on a 2B basis. If counsel cannot agree on quantum, memoranda may be filed within 14 days.

O G Paulsen Associate Judge

Solicitors:

MacLean & Associates, Christchurch Anderson Lloyd, Christchurch