Little Republic New Zealand Limited v Kum Fu Stainless Kitchen Equipment Limited
[2020] NZHC 3478
•21 December 2020
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2020-404-1517
[2020] NZHC 3478
UNDER s 290 of the Companies Act 1993 IN THE MATTER
of an application to set aside a Statutory Demand
BETWEEN
LITTLE REPUBLIC NEW ZEALAND LIMITED
Applicant
AND
KUM FU STAINLESS KITCHEN EQUIPMENT LIMITED
Respondent
Hearing: 27 October 2020 Counsel:
T Herbert for the Applicant AM Swan for the Respondent
Judgment:
21 December 2020
JUDGMENT OF ASSOCIATE JUDGE SUSSOCK
This judgment was delivered by me on 21 December 2020 at 4pm pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors / Counsel:
Forest Harrison Lawyers, Auckland TJ Herbert, Barrister, Auckland
Auckland Property Legal Service, Auckland AM Swan, Barrister, Auckland
Little Republic New Zealand Ltd v Kum Fu Stainless Kitchen Equipment Ltd [2020] NZHC 3478 [21 December 2020]
Introduction
[1] This is an application to set aside a statutory demand pursuant to s 290(4) of the Companies Act 1993.
[2] The applicant, Little Republic New Zealand Limited (Little Republic), is the franchisee of a restaurant brand and operates three restaurants in Auckland. Little Republic engaged the respondent, Kum Fu Stainless Kitchen Equipment Limited (Kum Fu), to provide and install an extraction hood and fresh air system in its new restaurant in Rosedale, Auckland.
[3] A statutory demand was issued on 26 August 2020 for $13,828.50, representing the amount Kum Fu says was the balance to pay under the contract to provide and install the kitchen equipment. Little Republic has applied to set aside the demand on the grounds that there is a substantial dispute as to whether the alleged debt is owed, and that it has counterclaims that are not yet quantified that may exceed the value of the debt.
Factual background
[4] Little Republic leases the unit for its Rosedale restaurant. The unit is part of a unit title development, with unit holders’ members of Body Corporate No.365310 (Body Corporate).
[5] Little Republic began fitting out the restaurant in February 2020. It entered into a contract with Kum Fu for installation of the kitchen equipment, the terms of which included terms set out in the quotation provided by Kum Fu on 3 March 2020. This quote listed the items to be supplied and then set out the following:
Colorsteel flashing as per BC requirement
Fresh Air System 6 meters away kitchen extraction as per BC requirement Speed control for both systemns
Labour and parts
Producer statement (Exclude PS4, to be advice in CCC stage) (sic).
[6] In her affidavit in support of the application to set aside, the sole director for Little Republic, Ms Liang, said that when initially negotiating with Kum Fu, she told Mr Chen for Kum Fu that any work needed to comply with the building consent. Ms Liang annexed to her affidavit a copy of the message forwarding a copy of the building consent to Mr Chen via the message system WeChat. The references to “BC” in the quotation appear to be a reference to the building consent.
[7]The total amount set out in the quote was $24,483.50 including GST of
$3,193.50. The payment terms were recorded as:
Payment Term: 50% deposit
30% before delivery
Full payment on completion.
[8] The quote recorded that the goods delivered remained the property of Kum Fu until payment in full and that “[n]o credit will be accepted for special indent items”.
[9] Little Republic accepted the quote on 9 March 2020. Mr Chen then confirmed that Kum Fu would start work two weeks after Little Republic paid the 50 per cent deposit.
[10] Little Republic paid $11,000 on 13 March 2020 and Kum Fu began the works. On 8 May 2020, Kum Fu sought a variation, adding $300 to the contract price, as it was required to install additional stainless steel wall linings. Ms Liang says in her affidavit for Little Republic that the additional stainless steel wall linings were for a wall clearly marked on the building consent and so should have been taken into account by Kum Fu in its original quote. At that stage, however, Little Republic was more concerned with the installation being completed and so it agreed to the additional amount.
[11] On 17 May 2020 Mr Chen confirmed on behalf of Kum Fu that it had finished the part of the works that involved the roof of the restaurant, enclosing photographs.
[12] It was immediately apparent from the photographs that Kum Fu had not used Colorsteel as required by the contract. Ms Liang questioned Mr Chen about this, expressing her concern that it would affect the inspections by the Council under the building consent. Mr Chen responded for Kum Fu that it would not be a problem.
[13] Little Republic then discovered on 22 May 2020 that flexible boot flashing had not been installed as required. It raised this with Kum Fu, again expressing its concern that the work was quite different than the consent. Kum Fu replied that if Little Republic insisted, they would install the flashing. Kum Fu again sent photographs to Little Republic when Kum Fu considered the works were completed.
[14] On 28 May 2020 Kum Fu asked Little Republic to pay the balance of the price. Little Republic said it would pay once the Code Compliance Certificate (CCC) was issued by the Council. Kum Fu did not agree but Little Republic said it was very common to pay after the issue of the CCC in case the Council’s inspection discovered there was something wrong, noting again that Kum Fu’s work was quite different from the building consent.
[15] The Council carried out an inspection of the restaurant on 10 June 2020. Little Republic says (and Kum Fu does not deny) that the Council’s inspectors did not inspect the works on the roof but the works were still passed.
[16] On 11 June 2020 the property manager for the Body Corporate completed an inspection. This inspection identified a number of issues with the works including that the galvanised steel had still not been replaced with Colorsteel. The issues were set out by the property manager in an email, a copy of which Little Republic forwarded to Kum Fu. Little Republic says Kum Fu then said it would speak directly to the Body Corporate or the landlord. It is not clear from the evidence whether this happened.
[17] On 24 June 2020 the landlord telephoned Little Republic asking when the roof would be fixed and said he would employ someone else to complete the work and charge Little Republic if it was not done soon. Little Republic sent a message to Kum Fu advising them of this call via WeChat. Kum Fu responded, saying it would only complete the remedial work if Little Republic paid them a further 30 per cent of the
contract price, with the balance to be paid once the landlord confirmed he was satisfied. Little Republic advised that it would not make any further payments until the remedial work was done and the landlord and Body Corporate were satisfied (although confirming that as long as the problems were fixed, it would arrange payment).
[18] Mr Chen then responded for Kum Fu saying there was to be no more communication and that he would let Ms Liang know when he would be coming to remove the installed equipment.
[19] Ms Liang emailed to say that she was disappointed with this response and that she would ask her lawyer to follow up. She pointed out that the remedial work might now have to be completed by a contractor employed by the landlord and the costs and legal fees would need to be deducted from the balance owing.
[20] On 24 June 2020 the second director of Kum Fu, Ms Yong, sent an email to Little Republic saying that Kum Fu would fix the defective works, but again requiring payment of 30 per cent of the total price before doing so. In response, Little Republic advised that it would forward Ms Yong’s email to its lawyer.
[21] The following day, on 25 June 2020, Kum Fu’s lawyer wrote to Little Republic saying:
(a)the terms of the quotation included a 50 per cent deposit and 30 per cent before delivery of the goods;
(b)80 per cent had not been paid despite the goods having been delivered and installed;
(c)“there is some remedial work for my client to complete”;
(d)that the remedial work would not be completed until payment of
$8,862.80 was made (being the difference between what had been paid ($11,000) and 80 per cent of the contract price ($19,862.80)); and
(e)advising a statutory demand would be issued if payment was not made within seven days.
[22] Little Republic’s lawyer replied on 2 July 2020 alleging that Kum Fu’s actions in relation to the contract amounted to “a serious breach of the essential terms of the contract” and that Little Republic had suffered damage as a result. In order “to move forward and as a gesture of good faith”, Little Republic agreed to deposit $7,448.55 (30 per cent of the quoted contract price) into their lawyer’s trust account to be released if Kum Fu agreed:
(a)to complete the works within three weeks of payment;
(b)to complete the works strictly in accordance with the Building Consent and quotation;
(c)to pay Little Republic’s legal costs;
(d)to provide a 10-year guarantee in relation to the works and any documents required by the Council in relation to the consent; and
(e)to take responsibility for and repair “any non-compliant works discovered”.
[23] On 7 July 2020, Little Republic again wrote to Kum Fu repeating the offer above but saying that if it was not accepted by the following day Little Republic was prepared to go through the Disputes Tribunal process, that it would engage another contractor to carry out the rectification works and reserving its rights to sue for costs and damages.
[24] On 17 July 2020 Ms Yong of Kum Fu emailed Ms Liang of Little Republic directly (although lawyers were now instructed) saying that despite no agreement being reached, Kum Fu intended to complete the job and replace the galvanised steel with Colorsteel. Ms Yong said it would expect payment of the balance in full “[f]ollowing completion of the work and Council approval”.
[25] Little Republic reiterated the conditions in their 2 July 2020 letter in response. Kum Fu said it did not accept those conditions, reserving its rights if payment was not made in full “upon completion”.
[26] On 27 July 2020 Kum Fu confirmed the remedial work was done and Little Republic asked for the PS3 and guarantee documents. There was some delay by Kum Fu, partly as a result of the lockdown. When emailing to apologise for this delay Kum Fu again said “please make full payment once you have received the documents”.
[27] The required documents were finally sent on 21 August 2020, but were stamped “copy only”. Little Republic advised in response that it required, and was expecting, the originals.
[28] Correspondence continued between the parties with Kum Fu’s lawyer emailing on 24 August 2020 to advise that the balance owing was $13,828.50 and that once it was paid, Kum Fu would release the original PS3, warranty and completion certificate. The email finished by saying if full payment was not received by 4pm the following day his instructions were to issue a statutory demand.
[29] The statutory demand was served on Little Republic on 26 August 2020 requiring payment of $13,828.50. The statutory demand said that the payment was for “an overdue invoice in respect of services supplied details of which are attached”. No invoice or details were apparently attached. Little Republic’s lawyers emailed Kum Fu’s lawyers on the same day and asked them to withdraw the demand as “it is apparent there is a substantial dispute”. Kum Fu refused to withdraw the demand.
[30] On 3 September 2020 Little Republic’s lawyers wrote to Kum Fu’s lawyers advising that Little Republic had engaged a third party to inspect the remedial works and that the inspection had revealed that “there were still non-compliant works not rectified by Kum Fu”. Little Republic’s lawyers further confirmed that Little Republic had deposited the balance allegedly owing of $13,828.50 into its trust account and again asked Kum Fu to withdraw the demand. Kum Fu did not withdraw the demand and so Little Republic filed its application to set aside.
[31] Prior to the hearing, Kum Fu had its own expert inspect the works. Kum Fu’s expert confirmed that there were still two issues outstanding:
(a)the distance between the fans did not comply with the Building Consent; and;
(b)there were no speed controls, contrary to the quote.
[32] Despite being aware of the money being held on trust and the continuing defects, Kum Fu still refused to withdraw the demand.
[33] A further updating affidavit was filed with Kum Fu’s submissions on 22 October 2020 advising that the distance between the fans had been remedied. No speed control had been installed but a credit of $300 plus GST had been offered.
[34] By the time of the hearing of this application, the originals of the PS3 and the warranty and completion certificate had still not been supplied.
Relevant legal principles for setting aside
[35] Section 290(4) of the Companies Act 1993 governs applications to set aside statutory demands and relevantly provides:
290 Court may set aside statutory demand
…
(4)The court may grant an application to set aside a statutory demand if it is satisfied that—
(a)there is a substantial dispute whether or not the debt is owing or is due; or
(b)the company appears to have a counterclaim, set-off, or cross- demand and the amount specified in the demand less the amount of the counterclaim, set-off, or cross-demand is less than the prescribed amount; or
(c)the demand ought to be set aside on other grounds.
…
[36] The Court of Appeal confirmed the principles a court should apply in exercising this discretion in Confident Trustee Limited v Garden and Trees Limited.1
[16]The general principles under s 290(4) are well settled:
(a)The onus is on the applicant seeking to set aside the statutory demand to show that there is arguably a genuine and substantial dispute as to the existence of the debt. The Court’s task is not to resolve the dispute but to determine whether there is a substantial dispute that the debt is due.
(b)The mere assertion that a dispute exists is not sufficient. Material short of proof is required to support the claim that the debt is disputed.
(c)If such material is available, the dispute should normally be resolved first in ordinary civil proceedings before any statutory demand is issued.
(d)If a counterclaim, cross-demand or set-off is suggested an applicant must establish that this is reasonably arguable in all the circumstances.
(e)It is not usually possible to resolve disputed questions of fact on affidavit evidence alone, particularly when issues of credibility arise unless such evidence is contrary to the available documents or earlier statements made by the parties.
(footnotes omitted)
[37] In the earlier decision of AAI Ltd v 92 Lichfield Street Ltd (in rec & liq),2 the Court of Appeal put it succinctly as follows:
[22] 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. 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.
(footnotes omitted)
[38] If an application to set aside a statutory demand is made on the basis that the debt is disputed, proof of solvency is not determinative but will support the applicant’s case that the dispute is genuine.3
1 Confident Trustee Limited v Garden and Trees Limited [2017] NZCA 578 at [16].
2 AAI Ltd v 92 Lichfield Street Ltd (in rec & liq) [2015] NZCA 559, [2016] NZAR 1338 at [22].
3 AMC Construction Ltd v Frens Contracting Ltd [2008] NZCA 389, (2008) 19 PRNZ 13 at [7].
Analysis
[39] In this case, Little Republic submits both that there is a substantial dispute as to whether the debt is owing and that it has a counterclaim that is likely to exceed the sum that is the subject of the demand as a result of the alleged breaches of contract. Those alleged breaches include failing to complete the works in accordance with the building consent or the quotation or in a timely manner.
[40] Kum Fu submits that at the time the statutory demand was served, the parties were not aware that there were defects still remaining and its demand was properly served. Even if this were the case, which Little Republic disputes, as soon as it was discovered that the works did not comply with the building consent or the quotation, the statutory demand should have been withdrawn.
[41] The factual chronology set out above shows, however, that there was clearly a substantial dispute between the parties even before the statutory demand was served and so it was not appropriate to serve the statutory demand in the first place.
[42] Kum Fu further submitted that if the court was not prepared to uphold the whole of the sum demanded, it should uphold the 30 per cent payable “before delivery” as there could be no dispute that amount was owing.
[43] It is correct that courts have previously allowed statutory demands to stand in reduced figures, representing items not open to dispute.4
[44] Counsel for Little Republic, however, submitted that the meaning of “before delivery” is not clear in this case as Kum Fu was not only providing equipment, but was also installing it. In support of “delivery” meaning provision and installation, Little Republic says that the 30 per cent was never demanded prior to when Kum Fu first alleged it had completed the installation. In any event, Little Republic says that if “before delivery” only requires provision of the equipment, and not installation, then
4 United Homes (1998) Ltd v Workman [2001] 3 NZLR 447 (CA) at [46], citing Arbridge Developments Limited v Weatherby Developments Ltd HC Auckland M285-IMOO, 2 May 2000; Cityjet Ltd v Pratt & Whitney Canada (A’Asia) Pty Ltd (1999) 8 NZCLC 262,104; Jenko International Ltd v New Zealand Dairy Ingredients Ltd HC Christchurch M68/00, 22 June 2000.
it must be provision of all of the equipment. All of the equipment has not been delivered in this case as speed controls have still not been provided as expressly required.
[45] As well as the meaning of “before delivery” not being clear in these circumstances, Little Republic submits that it has a counterclaim for losses suffered as a result of alleged breaches of the contract which have not yet been quantified. For example, in relation to the speed controls which have not been installed as required by the quotation. A credit of $300 plus GST has been offered to Little Republic, but this has not been accepted. The speed controls apparently assist in controlling the noise of the fans, which may be important for the restaurant. Counsel for Little Republic advised at the hearing that it was not yet known whether speed controls could be installed retrospectively, or what the cost of remedying their omission would be.
[46] It is unclear at this stage, whether Little Republic’s alleged losses will amount to more than 20 per cent of the contract price. Even if the meaning of “before delivery” was clear, Kum Fu’s claim to a reduced amount representing the 30 per cent “before delivery”, cannot, therefore, succeed.
Result
[47] There is no question that there is a substantial dispute as to whether a debt is owing and so the statutory demand must be set aside. There is no need to go on to consider whether there is an arguable counterclaim, but the failure to provide speed controls and the number of other issues arising with the works supports a conclusion that Little Republic has an arguable counterclaim.
Costs
[48]As its application has been successful, Little Republic is entitled to costs.
[49] Little Republic submitted that it was an abuse of process for Kum Fu to use the statutory demand regime in this case, and that after it had been served, the respondent had a number of opportunities when it clearly should have been withdrawn. On that basis Little Republic sought indemnity costs.
[50] In my view, a statutory demand should not have been issued by Kum Fu and the dispute should, instead, have gone to the Disputes Tribunal. Furthermore, once served, there were many points at which it should have been withdrawn, including following the Minute issued by Associate Judge Bell on 24 September 2020, where he noted that a more efficient way of dealing with the matter may be to go to the Disputes Tribunal, after the full amount of the sum demanded was paid into Little Republic’s lawyer’s trust account and after Kum Fu’s own expert identified continuing defects.
[51] At several points in the correspondence, counsel for Little Republic stated that it would be claiming indemnity costs if the statutory demand was not withdrawn. I have not heard from counsel for Kum Fu, however, on its position on indemnity or increased costs.
[52] Given the size of the alleged debt, I ask the parties to confer on costs. If agreement cannot be reached, the applicant is to file a brief memorandum within 25 working days of this judgment and the respondent 10 working days after that. Memoranda are to be no more than five pages.
Associate Judge Sussock
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