L G Home Trading Limited v Bridgeman Concrete Limited
[2024] NZHC 1418
•31 May 2024
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2023-404-2743
[2024] NZHC 1418
UNDER the Companies Act 1993 section 290 IN THE MATTER OF
an application to set aside a statutory demand
BETWEEN
L G HOME TRADING LIMITED
Applicant
AND
BRIDGEMAN CONCRETE LIMITED
Respondent
Hearing: 24 April 2024 Appearances:
H Huang for the Applicant
G Holm-Hansen and A Hunt for the Respondent
Judgment:
31 May 2024
JUDGMENT OF ASSOCIATE JUDGE C B TAYLOR
[application to set aside a statutory demand]
This judgment was delivered by me on 31 May 2024 at 4 pm pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors:
Great Wall Lawyers, Auckland, for the Applicant Hesketh Henry, Auckland, for the Respondent
L G HOME TRADING LTD v BRIDGEMAN CONCRETE LTD [2024] NZHC 1418 [31 May 2024]
Introduction
[1] LG Home Trading Limited (LG Home) applies to set aside a statutory demand made on it by Bridgeman Concrete Limited (Bridgeman Concrete) for payment of the purported balance of unpaid invoices for goods supplied by Bridgeman Concrete. The balance demanded is $1,113,861.32.
Background
[2] LG Home began trading as “Ocean Concrete” in 2018 selling and delivering ready-mix concrete. Bridgeman Concrete is the sole wholesale concrete producer. LG Home sourced concrete from Bridgeman Concrete to fulfil its customers’ orders.
[3] Between May to August 2018, Mr Kang Liu, the sole director of LG Home, met with both Mr Tim Walters (Mr Walters) and Mr Patrick Bridgeman (Mr Bridgeman). Mr Walters is the General Manager of Bridgeman Concrete and Mr Bridgeman is a director and sole shareholder of Bridgeman Concrete. Mr Walters and Mr Bridgeman agreed to an arrangement with LG Home whereby LG Home would purchase concrete on a credit account from Bridgeman Concrete for LG Home’s business.
[4] It is a disputed fact whether Mr Liu (on behalf of LG Home and in his personal capacity) signed a credit account application incorporating Bridgeman Concrete’s terms and conditions of trade. LG Home received credit statements from Bridgeman Concrete that categorised the credit sums as “current”, “one month”, “two months” and “three months+”. Mr Liu’s purported understanding of the credit payment terms were that LG Home needed to ensure that all the “three months+” sums in a monthly statement were paid by the end of that month. Mr Walters’ understanding of the credit payment terms is that LG Home was to pay in full no later than the 20th day of the month following delivery. Any amount that was not “current” was overdue.
[5] Between 2018 and 2023, LG Home purchased in excess of $33 million in goods from Bridgeman Concrete on the agreed terms.
[6] On 1 September 2023, Bridgeman Concrete ceased supplying goods to LG Home due to lack of payment. On 25 September 2023, Bridgeman Concrete served a statutory demand for the sum of $1,803,568.78 (the first statutory demand). This was withdrawn on 2 October 2023 and Bridgeman Concrete resumed supply to LG Home on a limited basis. On 2 November 2023, Bridgeman Concrete served another statutory demand on LG home for the sum of $1,113,861.32 (statutory demand), and it is this statutory demand that is the subject of these proceedings.
LG Home’s application to set aside statutory demand
[7] LG Home seeks an order that the statutory demand by Bridgeman Concrete be set aside.1 The grounds on which the orders are sought are based on the counterclaims by LG Home against Bridgeman Concrete:2
Set-Offs
(a)LG Home has the following set offs totalling $301,605.37 against Bridgeman Concrete:
(i)a security bond of $200,000.00 paid by LG Home to Bridgeman Concrete on 13 August 2018;
(ii)unpaid invoices totalling $60,205.37 for services rendered by LG Home to Bridgeman Concrete; and
(iii)unpaid invoices for items purchased from LG Home by Bridgeman Concrete totalling $41,400.00.
Supply Cut Off
(b)On 11 May 2018 the parties entered into a Plant Share Agreement (Agreement) which provided, inter alia:
1 Amended notice of originating application for order setting aside statutory demand dated 11 March 2024 at [1].
2 At [2].
(i)Bridgeman Concrete would supply and LG Home would purchase concrete goods from Bridgeman Concrete’s plants.
(ii)LG Home agreed to commit to purchasing 10,000 m3 of concrete every 12 months.
(iii)Bridgeman Concrete undertook to make available as much capacity as possible.
(iv)If either party wishes to terminate the Agreement then they must give the other party at least 6 months’ notice in writing.
(c)It was implicit in the Agreement that Bridgeman Concrete would be LG Home’s sole supplier and would continue to supply goods to LG Home on credit. This is provided that LG Home did not breach the Agreement, the credit terms, or unless Bridgeman Concrete provided reasonable notice to LG Home that it would cease supply on credit.
(d)On 1 September 2023 Bridgeman Concrete breached the Agreement by ceasing the supply of goods to LG Home, despite LG Home not being in breach of the credit terms and/or without reasonable notice to LG Home.
(e)Due to the cessation of supply, LG Home:
(i)was not able to operate its business in the month of September 2023;
(ii)was unable to fulfil customer orders themselves in the month of September 2023 damaging LG Home’s reputation with its customers; and
(iii)has significantly decreased business in the month of October 2023 despite supply resuming.
(f)As a consequence of Bridgeman Concrete’ breach of the Agreement, it has suffered estimated losses of $413,290.77 being:
(i)loss of margin from actual sales of $233,750.71;
(ii)loss of estimated gross profit of $170,815.77;
(iii)additional payroll costs of $8,724.49.
Price Increase
(g)Clause 8 of the Agreement provides that Bridgeman Concrete was required to give 3 months’ notice of any change in price of concrete goods backed up by evidence of supplier increases and undertook that it was being supplied at a competitive price and that no other alternative suppliers can provide a comparable product.
(h)Bridgeman Concrete has cumulatively increased prices as follows:
(i)$9.00 plus GST per cubic metre (which is approximately an increase of 5.8%) from 1 June 2019.
(ii)$3.00 plus GST per cubic metre (which is approximately an increase of 1.8%) from 1 March 2021.
(iii)4.5% from 1 December 2021.
(iv)9% from 1 August 2022.
(v)5% from 1 March 2023.
(i)In breach of the Agreement Bridgeman Concrete did not provide three months’ notice of price increases nor were price increases backed by evidence of supplier price increases.
(j)Prices charged by Stevenson Concrete Limited, a competitor of Bridgeman Concrete, as at February 2024 are comparable to the prices charged by Bridgeman Concrete as at 1 August 2022.
(k)As a consequence of the unlawful price increases, Bridgeman Concrete has overcharged LG Home and the debt now claimed by Bridgeman Concrete for unpaid goods supplied on credit is inflated.
(l)LG Home is entitled to set-offs and/or counterclaim against Bridgeman Concrete equal to the increase in the cost of the concrete goods supplied by Bridgeman Concrete to LG Home from 1 June 2019. This is quantified by LG Home at
$3,454,628.77.
Loss of Truck Parking
(m)Clause 17 of the Agreement provides that LG Home’s trucks may be parked at Bridgeman Concrete’s sites overnight.
(n)In breach of the Agreement, Bridgeman Concrete required LG Home to park its trucks elsewhere from 5 May 2023, and as a consequence, LG Home has incurred parking costs until the trucks were moved to another supplier’s site to park overnight. LG Home is entitled to a set-off or counterclaim against Bridgeman Concrete equal to the parking costs of $18,080.90.
Bridgeman Concrete’s notice of opposition
[8] Bridgeman Concrete opposes the application on the following grounds which in summary are:3
(a)There is no genuine dispute, substantial or otherwise, in respect of the debt specified in the statutory demand. The statutory demand seeks payment of $1,113,861.32 for invoices rendered
3 Notice of opposition to application to set aside statutory demand dated 29 November 2023 at [3].
by Bridgeman Concrete to LG Home that were overdue as at the date of the statutory demand (a further $127,919.81 is now overdue and enforceable).
(b)There is no set-off in excess of the statutory demand.
(c)The alleged counterclaims are speculative and/or illusory and do not go beyond mere assertion (either as to liability or quantum):
(i)Bridgeman Concrete was contractually entitled to:
(1)withhold deliveries at any time until payment had been made for deliveries or Bridgeman Concrete considered LG Home’s creditworthiness to be satisfactory; and
(2)terminate the credit facility by giving three working days’ notice in writing.
(ii)Even if liability could be established, there is no loss or no quantifiable proven loss as:
(1)the asserted counterclaim is unliquidated;
(2)there is no evidence that any loss has been suffered by LG Home (let alone in excess of the statutory demand), and no factual foundation for any loss to be quantified has been provided;
(3)any loss must necessarily be limited to the three days for which the parties agreed notice could be provided for termination; and
(4)there is no real basis to suggest that any asserted counterclaim exceeds the amount claimed in the statutory demand.
(d)Irrespective of the above, given the circumstances of the case, including LG Home’s conduct, promises to make payment, and
quantum of the debt, this is an appropriate case for the Court to exercise its discretion not to set aside the statutory demand.
Legal principles
Section 290 of the Companies Act 1993 provides, relevantly:
290 Court may set aside a 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.
[10]The Court has set out the principles relevant to the application of s 290(4):4
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. The Court must bear in mind that it is operating in the summary jurisdiction, with the accompanying disadvantages that brings for any applicant. 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.
[11] As to s 290(4)(a), the Court is to look at whether a genuine substantial dispute exists.5 Mere assertion of a dispute does not suffice, and the applicant must show a fairly arguable basis for it.6 In practice, it is required that there be some material short of proof that backs up the claim that the amount is in dispute.7
4 AAI Ltd v 92 Lichfield Street Ltd (in rec and in liq) [2015] NZCA 559, [2016] NZAR 1338 at [22] (footnotes omitted).
5 Taxi Trucks Ltd v Nicholson [1989] 2 NZLR 297 (CA) at 301.
6 N F Global Ltd v Sky Capital Management Ltd [2020] NZHC 2196 at [39]. See also United Homes (1998) Ltd v Workman [2001] 3 NZLR 447 (CA) at [27].
7 Arzan Investments Ltd v Beresford Apartments Ltd (2003) 16 PRNZ 825 (HC) at [17].
[12] Where a counterclaim, set-off, or cross-demand is sought to be raised, the Court has a discretionary power to set aside the statutory demand. However, the company must show a real basis, on clear and persuasive grounds, for doing so. Furthermore,“pay now, argue later” considerations have sometimes been allowed to prevail over the effect of liquidation.8
Analysis
[13] The issue to be determined in this judgment is whether there is a reasonably arguable basis for LG Home’s counterclaim relating to price increases for the concrete alleged to be in breach of the Agreement as set out at [8](g)–(l). This is the only counterclaim which exceeds the amount of the statutory demand. Consequently, I deal only with this counterclaim in this judgment.
Price increase counterclaim
[14] Mr Huang, for LG Home, contends that LG Home has an arguable counterclaim against Bridgeman Concrete due to the price increases by Bridgeman Concrete being in breach of the Agreement. He refers to cl 8 of the Agreement, and given its importance, I set it out in full:
[Bridgeman Concrete] must give [LG Home] three months’ notice of a proposed change in the price of concrete to be supplied, backed by evidence of supplier increases. When this occurs [Bridgeman Concrete] undertake to ensure that they are being supplied at a competitive price and that there are no alternative suppliers that can provide a comparable product.
[15] Mr Huang submits that cl 8 can be interpreted as Bridgeman Concrete having an obligation not to increase its prices unless it was due to Bridgeman Concrete’s supplier increasing prices, and only if Bridgeman Concrete could not obtain the same products elsewhere at a more competitive price. Mr Huang submits that Bridgeman Concrete never provided evidence of its own supplier increases despite Mr Liu enquiring with Mr Walters following each price increase. Mr Huang submits Bridgeman Concrete did not provide three months’ notice of price increases for three
8 N F Global Ltd v Sky Capital Management Ltd, above n 6, at [40], citing Volcanic Investments Ltd v Dempsey & Wood Civil Contractors Ltd (2005) 18 PRNZ 97 (HC); Browns Real Estate Ltd v Grand Lakes Ltd [2010] NZCA 425, (2010) 13 NZCPR 349; Covington Railways Ltd v Uni- Accommodation Ltd [2001] 1 NZLR 272 (CA) at 274–275.
price increases notified in writing, and it is uncertain how much notice was given for the two remaining price increases, as the notices were communicated verbally.
[16] Mr Huang submits that due to the price increases, it is estimated that LG Home paid around $3.4 million more than the prices which would have pertained had the increases not occurred. He submits the consequences of Bridgeman Concrete’s price increases were that LG Home was no longer competitive with pricing to its customers. Consequently, LG Home was forced to focus on better customer services than its competitors, which came at a cost of increasing its payroll substantially.
[17] Mr Huang submits that the notice of opposition by Bridgeman Concrete sets out the two grounds on which Bridgeman Concrete denies liability:
(a)the provisions in cl 4 of Bridgeman Concrete’s terms and conditions (T&Cs), which relate to prices; and
(b)LG Home has represented to Bridgeman Concrete that it has accepted the price increases, is estopped from bringing a claim and has waived its rights to bringing a claim.
[18] In relation to Bridgeman Concrete’s ability to increase prices under cl 4 of the T&Cs, Mr Huang disputes the application of these terms and conditions on the following grounds:
(a)It is Bridgeman Concrete’s evidence that it was constantly chasing for payments from LG Home since February 2019, but continued to supply LG Home on credit until 2023. This implies that for at least four years neither party was following or purported to enforce the payment, credit, interest or default provisions of the T&Cs.
(b)Prior to 1 September 2023, on the other occasions supply was stopped by Bridgeman Concrete. The only reason provided by Bridgeman Concrete was that the credit account had exceeded the $2 million limit, instead of alleged violations of the T&Cs by LG Home.
(c)The $2 million credit limit provided by Bridgeman Concrete was also inconsistent with the payment terms in the T&Cs, which required payment by the 20th of the month following. Mr Huang submits it was impossible for LG Home to load $2 million worth of concrete within such a period.
(d)If the T&Cs are applicable, Mr Huang submits it is unclear which of the terms and conditions apply. He submits the version found on Bridgeman Concrete’s website appears to have been created after the Agreement was signed. There are also differences between the versions of the terms and conditions produced by Mr Walters.
[19] Mr Huang submits that even if the T&Cs apply, cl 4 of the T&Cs is inconsistent with cl 8 of the Agreement. He refers to the English Court of Appeal case of Septo Trading Inc v Tintrade Ltd9 as authority for the proposition that where general terms and conditions are in conflict with what is expressly agreed, the latter will prevail. He notes that the Court found it was not reasonable to conclude that the parties’ intention was to use standard terms to deprive what had been expressly agreed of all practical effect10. He submits in the present case if cl 4 of the T&Cs were to prevail, then cl 8 of the Agreement would have no practical effect.
[20] In response to Bridgeman Concrete’s second ground of opposition that LG Home had accepted the price increase and is estopped from bringing a claim, Mr Huang refers to Mr Liu’s evidence that he enquired from Mr Walters following each price increase. However, the only response received from Mr Walters was that the cost of everything was increasing. Mr Huang further notes that the notices for the three price increases stated the price increases were due to its suppliers increasing prices. Mr Huang submits that LG Home did not waive its rights under cl 8 of the Agreement but was induced to accept the price increases due to the representations by Bridgeman Concrete that the price increases were the result of its supplier increases.
9 Septo Trading Inc v Tintrade Ltd [2021] EWCA Civ.718.
10 At [41]–[49].
[21] Mr Huang submits LG Home has adduced evidence that prices being charged by another supplier, Stevensons Concrete, in 2024 were comparable to prices being charged by Bridgeman Concrete to LG Home in 2022. In my view, Mr Huang is asking the Court to draw an inference that Bridgeman Concrete had not complied with cl 8 of the Agreement as it was not sourcing its supplies from the most competitive supplier. He notes that Bridgeman Concrete has not responded with any evidence that its five price increases were genuinely based on its own supplier increases. He submits that it is reasonably arguable that the price increases were unlawful due to Bridgeman Concrete’s price increases not being genuinely based on its own supplier increases, or alternatively, that Bridgeman Concrete breached its undertaking to ensure it was being supplied at competitive prices.
[22] Mr Holm-Hansen, for Bridgeman Concrete outlines the background to the issue of the statutory demand as follows:
(a)Bridgeman Concrete had tried to manage LG Home’s arrears (including up to $2 million) over an extended period, receiving limited periodic payments and imposing caps on credit to elicit payment.
(b)The first statutory demand was issued, but withdrawn upon receipt of a payment and a commitment to reduce the debt.
(c)Despite repeated promises of payment to induce further supply of concrete, the debt continued to increase rather than decrease.
(d)Bridgeman Concrete warned LG Home that it would stop supplying concrete on credit if arrears were not addressed.
[23]Mr Holm-Hansen notes it is instructive that:
(a)None of the arguments now being raised by LG Home have previously been raised with Bridgeman Concrete as a reason for delaying or refusing to make payment (or in support of a counterclaim). If LG Home genuinely believed it had a counterclaim for over $3.4 million
that would have resisted price increases before now and would have advanced that claim earlier.
(b)At the same time, LG Home has sought to further reduce the debt by
$100,000 (despite the proceedings being on foot and with knowledge of its current counterclaims) for which there is no rational explanation if LG Home genuinely believed it is the party owed money;
(c)LG Home fails the solvency test and has been insolvent for some time.
[24] Mr Holm-Hansen notes that LG Home has now filed two applications (advancing inconsistent interpretations of the contractual framework) neither of which are reasonably arguable. He further states that LG Home’s conduct represents an attempt by an insolvent company using its creditors as a form of finance.
[25] In relation to the issue of whether Bridgeman Concrete’s T&Cs applied, Mr Holm-Hansen submits that Mr Liu’s evidence in his four affidavits lacks credibility for the following reasons:
(a)LG Home suggest that the T&Cs do not apply because they were not always strictly enforced. The fact that Bridgeman Concrete sought to maintain an ongoing commercial relationship and manage LG Home’s default with various approaches to minimise its risk, does not undermine the enforceability of the T&Cs.
(b)LG Home questions the iteration of the T&Cs that was in force at a particular time. While the T&Cs were updated from time to time (in accordance with cl 15) acceptance of delivery amounted to acceptance of the T & Cs (cl 2) and there were no material amendments to the provisions relevant to the application.
(c)Mr Liu’s evidence in his four affidavits lacks credibility. The statement that Mr Liu “signed without properly reading” the credit account, did not read, access or understand the contents of the T & Cs when signing
the Agreement or take any legal (or any) advice prior to signing those documents is an admission of negligence on LG Home’s part. He submits Bridgeman Concrete was under no obligation to bring the particular clauses to LG Home’s attention and it is not a basis to avoid the applicability of the T&Cs.
[26] In relation to the price increase counterclaim generally, Mr Holm-Hansen submits that it has been raised at the eleventh hour, in circumstances where there was no credible basis for it not having been raised earlier. He submits that LG Home’s price increase counterclaim is not reasonably arguable because:
(a)Written notice of price increases given to LG Home either in advance or at the time of delivery. LG Home had ample opportunity to raise questions about the price increases, place orders elsewhere, or refuse delivery if it was dissatisfied with Bridgeman Concrete’s responses. Instead, LG Home accepted deliveries with full knowledge of the price increases (and was able to set its own prices accordingly) and continued to make late payment in satisfaction of deliveries. This is a clear case where the doctrine of waiver and estoppel applies as held in Wilson Parking New Zealand Limited v Fanshawe 136 Limited.11
(b)There is no basis to the complaint that the price increases caused LG Home to become uncompetitive. Bridgeman Concrete was under no obligation to provide most favoured nation pricing as the Agreement only required Bridgeman Concrete to obtain its supplies at “competitive pricing”.
(c)The terms of the Agreement also assumed LG Home was not in breach of the T&Cs, particularly as they relate to credit but LG Home, being persistently in breach, lost any entitlement to discounts or concessionary rates in the T&Cs (cl 4). Notwithstanding the continued breach by LG Home, Bridgeman Concrete applied the concessionary rates anyway.
11 Wilson Parking New Zealand Limited v Fanshawe 136 Limited [2014] 3 NZCA407 at [44].
(d)The allegation that price increases contributed to LG Home’s financial difficulties cannot be reconciled with the fact that LG Home’s gross profit margin during the relevant period rose from 22 per cent to 28.91 per cent.
[27] In response to Mr Holm-Hansen’s submission that Bridgeman Concrete’s price increase counterclaim was not raised in an earlier application by LG Home to set aside the statutory demand, Mr Huang submits that Mr Liu only discovered his copy of the Agreement in February 2024, and also only received the Stevenson Concrete pricing in February 2024. He submits both of these alerted him to the fact that there had been unlawful price increases by Bridgeman Concrete under cl 8 of the Agreement, and hence the price increase counterclaim was included in this application.
[28] In relation to the allegation that LG Home’s profit margin had increased over the relevant period from 22 per cent to 28.91 per cent, Mr Huang submits in answer to this point that it was only the gross profit and did not take account of substantial increases in costs which occurred over the same period.
Conclusion in respect of price increase counterclaim
[29] In my view, by the slimmest of margins, LG Home have established that the price increase counterclaim is reasonably arguable. My reasons for this view are:
(a)There is dispute as to whether cl 8 of the Agreement overrode cl 4 of the T&Cs as contended by LG Home. While Mr Liu’s evidence in his four affidavits is somewhat inconsistent as to what he signed and when, and what he recalls, there is an arguable point based on the Septo Trading decision12 that cl 8 of the Agreement overrode cl 4 of the T&Cs, even if the T&Cs did apply. Also, in my view there is an argument, albeit not a particularly strong one, that the course of dealing between Bridgeman Concrete and LG Home over the 2018 to 2023 period involved waiver of the T&Cs to the extent that those were inconsistent with the parties’ course of dealing over that period.
12 Septo Trading Inc v Tintrade Ltd , above n 9.
(b)There is a reasonable argument that because of the ongoing relationship between Bridgeman Concrete and LG Home, and the significance of LG Home as Bridgeman Concrete’s biggest customer, there were elements of trust and goodwill in the relationship. It is reasonably arguable that, as submitted by Mr Huang, LG Home did not question the price increases in detail because of an element of trust placed in Bridgeman Concrete.
(c)There was a reasonable explanation put forward by Mr Huang as to why the increased prices counterclaim was not made in the earlier application. The explanation being that Mr Liu only located his copy of the Agreement in February 2024 and only obtained the Stevenson Concrete pricing in February 2024. This needs to be tested by cross- examination at trial.
(d)As submitted by Mr Huang, the calculation of loss by LG Home which it claims to have suffered because of the price increases is less than
$3.4 million. Even if the claim is established at trial, it will still be a substantial amount, and will likely exceed the amount claimed under the statutory demand. While the quantification of this loss clearly needs to be tested at trial, there is a reasonable possibility given the current estimate is approximately three times the statutory demand. Therefore, if the claim is made out, the loss when quantified, will exceed under the statutory demand.
Insolvency
[30] Mr Holm-Hansen submits that LG Home is insolvent under the test in s 4 of the Companies Act 1993 because:
(a)it cannot pay its debts as they fall due (liquidity test); and
(b)its liabilities exceed its assets (balance sheet test).
[31] In relation to the liquidity test, Mr Holm-Hansen submits that the financial information of LG Home discloses that:
(a)it has not generated a net profit in 2022 or 2023;
(b)it had negative liquidity at each of 31 March 2022 and 31 March 2023 and its current liabilities exceed its current assets, such that it would have been unable to pay its debts as they fell due.
[32] Mr Holm-Hansen submits that LG Home have failed to address the liquidity aspect of the solvency test and LG Home’s synopsis of argument concedes this point.
[33] In relation to the balance sheet test, Mr Holm-Hansen submits that as at 31 March 2022 and 31 March 2023, LG Home’s total liabilities exceeded its total assets. He challenges the information contained in LG Home’s financial statements that it is solvent due to reliance on shareholder support, on the basis that:
(a)LG Home has provided no evidence of any shareholder support; and
(b)the financial statements establish that rather than any support being provided by shareholders, the shareholders have instead withdrawn funds of $664,000 in the financial year to 31 March 2023.
[34] In response to the allegation that LG Home is insolvent, Mr Huang refers to Mr Cammish’s evidence. In Mr Cammish’s opinion, LG Home is insolvent due to LG Home’s financial statements for the financial year ending 31 March 2023 showing that LG Home had not generated any net profit, has negative assets (total liabilities exceeding its total assets) and has negative liquidity (current liabilities exceed current assets). Mr Huang submits in response to these as follows:
(a)From accounting and tax perspective, LG Home did make a net loss in 2023 because of a scheduled depreciation expense of $605,476 on LG Home’s large fleet of trucks. If the net profit was adjusted to remove the depreciation expenses (and recoveries) LG Home made a net profit of $439,404 in the 2023 financial year.
(b)From an accounting perspective, the company has negative assets if one only looks at the book value of the LG Home’s fleet of trucks. However, evidence adduced by LG Home in the form of market valuations of the chassis of the trucks alone are significantly higher than the book value. This results in LG Home having positive assets if the truck fleet is valued at market value rather than book value.
(c)Regarding negative liquidity, it is acknowledged that the cash flow is an issue for LG Home, but this could be addressed by downsizing its fleet.
Conclusion in respect of insolvency
[35] There is clearly conflicting evidence in respect of the solvency of LG Home between Mr Cammish’s opinion that LG Home is insolvent, and the explanations provided by LG Home explaining why LG Home shows a negative liquidity position and a negative assets position. These accounting aspects of the financial information of LG Home need to be tested at trial with further expert evidence and cross- examination if required. In addition, as was pointed out by Mr Holm-Hansen, there is no detail as to shareholder support that may be available to LG Home. However, I note the fact that shareholders may have taken money out of the company during the 2023 year does not mean that they were not in a position to inject money back into LG Home if it was necessary.
[36] Accordingly, I am of the view that it is reasonably arguable that LG Home is not insolvent, and the potential insolvency is not a reason for the Court to exercise its discretion not to set aside the statutory demand. As referred to by Mr Huang in submissions, the Court of Appeal noted in Manchester Securities Ltd v Body Corporate 172108,13 that the discretion has only been considered in a limited number of cases and that it will only be a rare case where discretion will be exercised where the applicant has raised a clear and persuasive grounds for a set-off or counterclaim.14
13 Manchester Securities Ltd v Body Corporate 172108 [2018] NZCA 190 at [45].
14 Septo Trading Inc v Tintrade Ltd, above n 9 at [49].
Result
[37] As a result of the conclusions I have reached at [29] and [36], I am of the view that a statutory demand should be set aside pursuant to s 290 of the Companies Act 1994.
Orders
[38] I order that, pursuant to s 290 of the Companies Act 1993, the statutory demand served on LG Home by Bridgeman Concrete is set aside.
[39] As LG Home is the successful party, costs should follow the event. Counsel are directed to endeavour to agree costs and failing agreement being reached within a period of 20 working days from the date of this judgment, counsel for LG Home will file a memorandum as to costs (not to exceed five pages) within 5 days after the expiry of the 20 working day period, and counsel for Bridgeman Concrete will file a memorandum (not to exceed five pages) in response within 5 working days of receipt of counsel for LG Home’s memorandum. A decision as to costs will then be made on the papers.
Associate Judge Taylor
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