LJS Management Ltd v Amirco Ltd (in liq) HC Auckland CIV 2010-404-2931
[2010] NZHC 1808
•30 August 2010
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2010-404-002931
BETWEEN LJS MANAGEMENT LTD Appicant
ANDAMIRCO LTD (IN LIQUIDATION) Respondent
Hearing: 30 August 2010
Appearances: M Bos for Applicant
R M Dillon for Respondent
Judgment: 30 August 2010
ORAL JUDGMENT OF ASSOCIATE JUDGE BELL
Solicitors/Counsel:
Devonports Harbour Lawyers (S Goodwin), PO Box 302-558, North Shore City
Gaze Burt, PO Box 301-251, Albany, Auckland
M Bos, PO Box 1613, Shortland Street, Auckland
LJS MANAGEMENT LTD V AMIRCO LTD (IN LIQUIDATION) HC AK CIV-2010-404-002931 30 August
2010
[1] LJS Management Ltd applies under s 290(4) of the Companies Act 1993 for an order setting aside a statutory demand issued by the respondent for $41,085.
[2] Initially, there were two grounds for the application. The first ground was that there was a substantial dispute about the merits of the claim for $41,085, but that ground has now been abandoned. The second ground is that the respondent has a counterclaim, set off or cross-demand within s 290(4)(b):
(4) The Court may grant an application to set aside a statutory demand if it is satisfied that –
...
(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;
...
That ground remains alive.
[3] At the time that the statutory demand was served, the applicant had not filed a proof of debt with the respondent. It submitted a proof of debt after it had been served with the statutory demand. Complaint has been made about the liquidator’s failure to deal with the proof of debt. Mr Dillon explained that the liquidator’s stance was that the proof of debt was neither accepted nor rejected. For present purposes, I need only say that the applicant took the proper course by beginning its present application under s 290 to have the statutory demand set aside. It may have been prudent for it to have done that even if it had filed a proof of debt before it was served with the statutory demand. In a situation where a proof of debt has been filed by a creditor, there is uncertainty whether it has been accepted or not, the liquidator has still issued a statutory demand, someone in the position of the applicant would be wise to begin an application under s 290 first, whatever the fate of the acceptance of the proof of debt.
[4] The applicant is the franchisor of the LJS Fish & Chip franchises. In October
2007, it entered into a written agreement with Amirco Ltd, a company run by Amir and Hatem Shousha for the operation of an LJS cafe and takeaway business in the
Whangaparaoa shopping centre. The franchise was to run for five years. Clearly, however, the franchise was unsuccessful because the franchisee gave notice that the business would close from 23 December 2007. It gave that notice the week before.
[5] On 19 March 2008, Amirco Ltd went into liquidation.
[6] Special condition 16(d) of the Schedule, in Part E, of the franchise agreement provides:
(d) Option to Purchase after Termination by Default
In the event of early termination of this agreement for general breach of the provisions hereof or on the occurrence of any of the matters set out in Clause 42(v) and in consideration of the sum of one dollar ($1.00) (the receipt of which is hereby acknowledged) the Franchisee grants to LJS an option to purchase any or all of the Franchisee’s fixtures fittings plant chattels and/or the lease of the business if the same is held in the name of the Franchisee and has not been terminated for default or surrendered such option to be exercisable by LJS within ten (10) working days following termination of this Agreement as aforesaid at a purchase price to be determined by independent valuation with the purchase price to be paid in cash in one sum one (1) month after the determination of the purchase price PROVIDED THAT LJS shall be entitled to set off all claims costs fees damages howsoever arising hereunder in reduction of such purchase price AND PROVIDED ALSO that any matter in dispute between the parties relating to the appointment of an independent valuer or as to the valuation assessed or the quantum of set off claimed by LJS shall be referred to arbitration AND PROVIDED ALSO the Franchisee shall not therefore during the term of this agreement or during the ten (10) working days above- mentioned following termination damage incapacitate alter disconnect shift or remove any item whatsoever and by way of example but not in limitation of the foregoing any partitions or building material, plant, fitting, machine, utensil, implement, paper product, food product, cooking product, item of decoration, sign, menu, light, floor or ceiling covering without the written consent of LJS having first been sought and obtained in each and every instance.
[7] This gave LJS Management Ltd an option to purchase the franchisee’s fixtures, fittings, plant and chattels. LJS Management Ltd exercised that option on
8 January 2008. It arranged for the items to be valued by an auctioneer. His valuation was approximately $11,500. LJS Management Ltd arranged for that sum to be paid to the ASB Bank in satisfaction of the Bank’s security. Later, the liquidators contested the valuation. The dispute went to arbitration. The arbitrator,
Mr R G Hawke, found in favour of the liquidators that the plant, fittings, fixtures and chattels ought to be valued on an in-situ basis. He held that there was a further sum payable under the exercise of the option amounting to $41,085, including GST. That award was the subject of the statutory demand served on the applicant.
[8] In a later award, the arbitrator awarded the respondent costs of $17,818.25, inclusive of GST. That made the total sum payable now $58,903.25 (inclusive of GST).
[9] LJS Management Ltd applied to the High Court for leave to appeal against the arbitrator’s award under clause 5(1)(c) of the Second Schedule of the Arbitration Act 1996. In LJS Management Ltd v Amirco Ltd (In Liquidation) HC Auckland CIV-2010-404-4018, 12 August 2010, Keane J dismissed that application and awarded Amirco Ltd (In Liquidation) costs on a 2B scale, plus disbursements as fixed by the Registrar.
[10] LJS Management Ltd lodged a proof of debt with the liquidators for
$47,437.72. In the hearing, the applicant outlined a claim against the respondent amounting to $53,184.50, as follows:
Original arrears claim:
As claimed with liquidator on 31/3/08: Unpaid franchise fees and other charges to
December 07: $ 8,812.44 Valuationcost:
$ 225.00
Final Powerbills:
$ 436.75
Locksmith’s bill to effect entry and new key:
$ 652.30
Legal costs:
$ 3,273.13
Additional Claim:
LostFranchisefees: December 07: 10 days
$ 400.56
January08 toJuly08:
$ 8,528.66
August 08:
17 days
$ 681.04
Lost Marketing fees:
December 07: 10 days $ 288.50
January 08 to July 08: $ 6,116.05
August 08: 17 days $ 490.44
Other:
Franchise Agreement Liquidated Damages: $22,500.00
Trading losses from 22/12/07 to 17/8/08: $ 779.63
$53,184.50
[11] For this judgment, I divide the sums claimed up into liabilities that had accrued before termination of the franchise and liabilities that had accrued after the termination of franchise. Amounts that have fallen due before termination were:
Unpaid franchise fees and other charges
to December 2008: $8,812.44
Final power bills: $ 436.75
Total: $9,249.19
========
[12] All other matters appear to have fallen due on or after termination. That includes a locksmith’s bill for re-entry on 15 January 2008.
[13] Amongst the items falling in the period after termination is the sum of
$22,500 for liquidated damages. That arises under clause 42(vi)(h) of the franchise agreement, which says:
In the event moreover that termination of this agreement is by LJS and arises out of the default or breach or non-compliance by the franchisee, then in addition to any other rights or remedies which LJS may have at law or in equity, the franchisee shall pay to LJS liquidated damages calculated in accordance with item 12 of the Schedule.
[14] Item 12 of the Schedule says:
Liquidator damages
Twenty thousand dollars ($20,000) subject to CPI adjustment in each and every year.
[15] I make a preliminary comment about the claim as presented in the applicant’s submissions. The sum specified is for $22,500. Clearly, the applicant has added GST of $2,500 to the sum of $20,000. However, this is said to be a sum payable by a franchisee by way of damages to meet expenses and losses that the franchisor has incurred as a result of the termination by the franchisee. That being a damages liability, there would not appear to be any relevant taxable supply under the Goods & Services Tax Act 1986, and in these circumstances, no GST is payable under the liquidated damages clause. In other words, clause 26 seems to be quite correct in not referring to GST. That is in contrast to other sums payable under the franchise agreement where it has made expressly clear whether sums are inclusive or exclusive of GST. In other words, the most the applicant could recover under clause 42(vi)(h) is $20,000, rather than any extra sum for GST.
[16] The respondent protested that this payment is not in fact a genuine pre- estimate of damages but is instead a penalty. The point taken by the respondent is that clause 42(vi)(h) requires the franchisee to pay liquidated damages in addition to any other rights or remedies which the franchisor may have at law or in equity. The respondent complains that this amounts to double recovery. Its argument is that remedies available at law or in equity include damages recoverable at common law and it is improper for the franchisor to recover both damages at common law and, in addition, to have a sum for liquidated damages. It says, therefore, that the sum is a penalty, referring in particular to the test set out by Lord Dunedin in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 (HL) at 86-
88:
1. Though the parties to a contract who use the words “penalty” or “liquidated damages” may prima facie be supposed to mean what they say, yet the expression used is not conclusive. The Court must find out whether the payment stipulated is in truth a penalty or liquidated damages. This doctrine may be said to be found passim in nearly every case.
2. The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damages.
3. The question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach.
4. To assist this task of construction various tests have been suggested, which if applicable to the case under consideration may prove helpful, or even conclusive. Such are:
(a) It will be held to be penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach.
(b) It will be held to be penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid. This though one of the most ancient instances is truly a corollary to the last test. Whether it had its historical origin in the doctrine of the common law that when A. Promised to pay B. a sum of money on a certain day and did not do so, B. could only recover the sum with, in certain cases interest, but could never recover further damages for non-timeous payment, or whether it was a survival of the time when equity reformed unconscionable bargains merely because they were unconscionable.
(c) There is a presumption (but no more) that it is penalty when “a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage”.
On the other hand:
(d) It is no obstacle to the sum stipulated being a genuine pre- estimate of damage, that the consequences of the breach are such as to make precise pre-estimation almost an impossibility. On the contrary, that is just the situation when it is probable that pre- estimated damage was the true bargain between the parties. [Citations omitted.]
[17] The matter becomes a question of interpreting clause 42(vi)(h). I do not read the clause the same way as the respondent. The clause contains an express reference to recovery of liquidated damages. That is a remedy in addition to remedies at law or in equity. But when the clause expressly provides for recovery of liquidated damages, there is an exclusion of recovery of damages at common law. That, after all, is the purpose of a liquidated damages clause. If a clause expressly provides that liquidated damages are recoverable, by implication, recovery of additional damages at common law is excluded. The words “in addition to any other rights or remedies which LJS may have at law or in equity” allow only for remedies other than damages.
[18] The next matter is to see whether the sum of $20,000 is a genuine pre- estimate of the damages. In this case, there is adequate support that it is a genuine
pre-estimate. The items in the applicant’s submissions setting out losses alleged to have fallen due after termination provide the support. Those sums in the round come to approximately $20,000. That is sufficient to satisfy me that the clause is a genuine pre-estimate for this case.
[19] The applicant also said that the losses relate to matters that are not easily measured, such as loss of reputation in the brand and loss of discounting power for purchases, supplies and other matters of the like. This was said with a view to claiming both measurable expenses and losses claimed in counsel’s submissions (part of “other remedies”) and losses that are not readily measurable (to be covered by liquidated damages). The words used do not support such an interpretation, which risks giving rise to double recovery. The parties have made their bargain that upon termination for breach or default by the franchisee, the franchisor can recover
$20,000 for all losses and expenses incurred following termination. Even if it is now thought to be an inadequate estimate by the franchisor, that is the bargain that it has made and it must live with it.
[20] In outlining the test, I have considered where the burden of proof lies. In Robophone Facilities Ltd v Blank [1966] 1 WLR 1428 (CA) at 1447, Diplock LJ held that the burden of proof in challenging a liquidated damages clause lies on the party challenging the clause. I express reservation whether that is the appropriate test. Often the party who is in the position to give evidence as to the merits of the clause is the person for whose benefit the clause is inserted. In this regard, I note the dictum of Lord Mansfield in Blatch v Archer (1774) 1 Cowp 63:
It is certainly a maxim that all evidence is to be weighed according to the proof which it was in the power of one side to produce and the power of the other to have contradicted.
[21] Here, it is within the power of the franchisor to justify its pre-estimate of damages. Correspondingly, the franchisee is in a weak position to challenge such a pre-estimate. Accordingly, I have assumed that the applicant, as the franchisor for whose benefit this clause was inserted, has the burden of justifying it as a genuine pre-estimate. I find that it has discharged that burden in this case.
[22] The consequence is that, as the applicant has made out the liquidated damages clause at $20,000, the remaining parts of its claim for losses falling due after termination are not separately recoverable. They are all subsumed under the liquidated damages figure. The applicant has made out a reasonably arguable case against the respondent for the $9,249.19 for fees and royalties that fell due before termination and an additional $20,000 for damages following termination. This gives a total figure of $29,249.19, with only $9,249.19 subject to GST.
[23] The result is that even if the applicant can recover interest on that sum, the interest would not be enough to overtake the $59,000 odd payable under the award of the arbitrator. There is accordingly a shortfall so that the applicant has not made out its case under s 294(b) as to the amount of its set off or counterclaim. The application therefore cannot succeed.
[24] A further issue requires determination; whether the sum claimed by the applicant can be the subject of mutual credit and set-off under s 310 of the Companies Act. That arises because the respondent is in liquidation. Section 310 provides:
310 Mutual credit and set-off
(1) Where there have been mutual credits, mutual debts, or other mutual dealings between a company and a person who seeks or, but for the operation of this section, would seek to have a claim admitted in the liquidation of the company,—
(a)An account must be taken of what is due from the one party to the other in respect of those credits, debts, or dealings; and
(b)An amount due from one party must be set off against an amount due from the other party; and
(c)Only the balance of the account may be claimed in the liquidation, or is payable to the company, as the case may be.
(2) A person, other than a related person, is not entitled under this section to claim the benefit of a set-off arising from—
(a)A transaction made within the specified period, being a transaction by which the person gave credit to the company or the company gave credit to the person; or
(b)The assignment within the specified period to that person of a debt owed by the company to another person—
unless the person proves that, at the time of the transaction or assignment, the person did not have reason to suspect that the company was unable to pay its debts as they became due.
(3) A related person is not entitled under this section to claim the benefit of a set-off arising from—
(a)A transaction made within the restricted period, being a transaction by which the related person gave credit to the company or the company gave credit to the related person; or
(b)The assignment within the restricted period to that person of a debt owed by the company to another person—
unless the related person proves that, at the time of the transaction or assignment, the related person did not have reason to suspect that the company was unable to pay its debts as they became due.
(4) This section does not apply to an amount paid or payable by a shareholder—
(a)As the consideration, or part of the consideration, for the issue of a share; or
(b) In satisfaction of a call in respect of an outstanding liability of the shareholder made by the board of directors or by the liquidator.
(5) In this section, related person means a related company and includes a director of the company in liquidation.
(6) For the purposes of subsection (2) of this section, specified period
means—
(a)The period of 6 months before the date of commencement of the liquidation together with the period commencing on that date and ending at the time at which the liquidator is appointed; and
(b)In the case of a company that was put into liquidation by the Court, the period of 6 months before the making of the application to the Court together with the period commencing on the date of the making of that application and ending on the date on which, and at the time at which, the order of the Court was made; and
(c) If—
(i)An application was made to the Court to put a company into liquidation; and
(ii) After the making of the application to the Court a liquidator was appointed under paragraph (a) or paragraph (b) of section 241(2) –
the period of 6 months before the making of the application to the
Court together with the period commencing on the date of the
making of that application and ending on the date and at the time of the commencement of the liquidation.
(7) For the purposes of subsection (3) of this section, restricted period
means—
(a)The period of 2 years before the date of commencement of the liquidation together with the period commencing on that date and ending at the time at which the liquidator is appointed; and
(b)In the case of a company that was put into liquidation by the Court, the period of 2 years before the making of the application to the Court together with the period commencing on the date of the making of that application and ending on the date on which, and at the time at which, the order of the Court was made; and
(c) If—
(i)An application was made to the Court to put a company into liquidation; and
(ii) After the making of the application to the Court a liquidator was appointed under paragraph (a) or paragraph (b) of section 241(2),—
the period of 2 years before the making of the application to the Court together with the period commencing on the date of the making of that application and ending on the date and at the time of the commencement of the liquidation.
[25] The respondent argued against set-off arising. Its first ground was based on lack of mutuality. Its argument was to the effect that the amount payable under the option exercised in January 2008 was to be paid to a failed franchisee, whereas the other sums falling due arose before the termination of the franchise. It argued that this meant that the sums were recoverable between parties in different capacities. I do not accept that argument. I draw assistance from the decision of Allan J in McCullough v Base Control Ltd (In Liquidation) HC Auckland CIV-2008-404-3375,
24 November 2008. At paragraph [29] of his decision, Allan J recited a helpful extract from Brookers Company & Securities Law (looseleafed, Brookers), vol 1 (2003) at 310.07:
Section 310 makes it clear that insolvency set-off is allowed in a liquidation only if there has been mutual credits, mutual debts, and other mutual dealings. As Parke B stated, in Forster v Wilson (1843) 12 M & W 191; 152
ER 1165:
“the Court of King’s Bench, in construing this clause, … have held that it did not authorize a set-off, where the debt, though legally due to the debtor from the bankrupt, was really due to him as a trustee for another,
and, though recoverable in a cross action, would not have been recovered for his own benefit.”
Similarly, a debt owed to an executor (acting as such) cannot be set off against a debt due from the executor in his or her personal capacity: Bishop v Church (1748) 3 Atk 691. Equally, a claim against a bankrupt for fraudulent misrepresentation cannot be set against a claim by an assignee for rent that is accrued to since the date of a bankruptcy: Kitchen’s Trustee v Madders [1950] Ch 134; Re a Debtor [1909] 1 KB 430.
Another situation in which it is not possible to claim set-off is where a debt is owed to a partnership and a cross-claim arises out of a debt owed by one of the members of that partnership acting in his or her own personal capacity: Re Hart, ex p Caldicott (1884) 25 Ch D 716; Re Pennington and Owen Ltd [1925] Ch 825.
However, set-off in a liquidation has been allowed to enable a tax rebate due to company in liquidation to be set-off against money owed by the company to different Government departments: Re D H Curtis (Builders) Ltd [1978] 2
All ER 183. This decision was based on the theory that under the common law the Crown is one and indivisible.
[26] I find that the applicant and the respondent in their dealings with each other, both in the applicant’s claim for sums falling due and in the respondent’s claim under the award, were not in different capacities. At all times, both parties were wearing the same hats.
[27] The next part of the respondent’s argument was that this set off did not come within s 310(1) of the Companies Act because it was a transaction that fell within s 310(2). It is useful in this context to remember the purpose of subs (2). That is usefully set out in the judgment of Blanchard J giving the decision of the Supreme Court in Trans Otway Ltd v Shephard [2006] 2 NZLR 289 (SC) at [17]. There, he said:
The reason for this qualification of the general rule in s 310(1) is to prevent a creditor from taking opportunistic advantage over other creditors by engineering a situation in which it also becomes a debtor of the company at a time when it must be taken to have appreciated the company’s insolvent position. Derham comments that the qualification, which is of long standing, has the effect:
of discouraging dealings in debts owing by the bankrupt or the company as the case may be, in a way that would negate the principle of a pari passu distribution of a bankrupts or the company’s property.
[28] I also note footnote 11 to that passage of Blanchard J:
In this context, as paragraph (a) of subs (2) makes clear, the transaction is not of course the set off itself but the event giving rise to the potential to assert it.
[29] A discussion arose whether the material transaction is the franchise agreement of October 2007, under which the option was conferred, or the exercise of the option in January 2008. Both periods fall within the specified period of 6 months under s 310(6), but the difference in the timing is relevant because of the knowledge test under s 310(2). That is, under s 310(2), the set off will not be applied:
Unless a person proves that at the time of the transaction or assignment the person did not have reason to suspect that the company was unable to pay its debts as they became due.
[30] Clearly, there is a different state of knowledge on the part of the applicant in October 2007, in the franchise agreement and in January 2008, when it exercised its option to purchase. In January 2008, faced with defaults by the franchisee and the franchisee having given notice that it was going to abandon the franchise, the applicant had reason to suspect that the respondent was unable to pay its debts as they became due. Mr Bos did not suggest otherwise.
[31] The question is what is the meaning of “a transaction being a transaction by which the person gave credit to the company or the company gave credit to the person” in s 310(2). In this regard, Mr Bos referred to the decision of Finnigan v He [2010] 2 NZLR 668 (HC). In that case, a landlord had re-entered. The company in liquidation was the tenant. There was approximately $45,000 due to the landlord by way of rent. However, with the way the landlord re-entered, he incurred a damages liability in tort to the tenant for some $90,000. The question arose whether one could be set off against the other. Duffy J held that set off was applicable in that case. The liquidator’s submission that the submission of the liquidators that the set off was not available under s 310(2) was rejected. In coming to that decision, Duffy J referred to the dictum of Millett J in Re Charge Card Services Ltd [1987] Ch
150 at 190:
The object of that section [s 31 of the Bankruptcy Act], like its predecessors, is to prevent the injustice to a man who has had mutual dealings with a bankrupt from having to pay in full what he owes to the bankrupt while having to rest content with a dividend on what the bankrupt owes him. Of course, a debtor to the bankrupt must not be allowed, after the date of the
receiving order, to gain an advantage by buying up the bankrupt’s liabilities in order to obtain the benefit of a set off. But to disallow the set off of a provable debt merely because it was still contingent at the date of the receiving order, where the contingency has since occurred and the liability which has arisen is exclusively referable to and has resulted in natural course of events from a transaction between the same parties entered into before the receiving order, would in my judgment be productive of the very injustice the section and its predecessors were designed to prevent.
[32] Duffy J then went on to say at [39]:
The substance of Millett J’s dictum commenting on the object of bankruptcy set-off and the recognised unfairness of requiring someone who is both a creditor and a debtor of a bankrupt to pay his or her debt to the bankrupt in full, whilst at the same time only receiving a dividend, or nothing as payment of the debt owed by the bankrupt, has been said in many cases, including by the Supreme Court in Trans Otway at [15].
[33] Millett J was talking about a contingent liability, which later matured into an actual liability on bankruptcy or liquidation, with set off automatically taking effect under s 310.
[34] In this case, I do not accept that the potential liability of the respondent under an option to purchase which has not been exercised is a contingency within the mutual credit and set off rule. That is, the transaction which is relevant to the mutual credit and set off in this case is not the entry into the franchise agreement and the conferring of the option, but the later transaction under which the franchisor exercised the option. It is that transaction which created liabilities between the parties, and it is that transaction by which one party gave credit to the other. Under the franchise agreement, all that occurred was that an opportunity was given for an option to be exercised, but it did not give rise to any liabilities, not even prospective liabilities or contingent liabilities. Nothing of that nature arose until the option was actually exercised. It is the exercise of the option which gives rise to a transaction between the parties by which liabilities are created and credit is given. Accordingly, I find that it is the exercise of the option in this case which triggered the transaction under s 310(2)(a). Therefore set off is not available because at that time, the applicant clearly knew that the company was unable to pay its debts as they became due.
[35] In addition, Mr Dillon argued that he could rely on the applicant having “reason to suspect”, under s 310(2), because of the state of the company’s affairs at the time of the signing of the franchise agreement. I was not persuaded by that argument. At least for this proceeding, I am concerned only with whether the applicant has a reasonably arguable case. The information available to the applicant was that the people behind the company had assets in their own names when the applicant entered into an agreement under which they were to operate this franchise. There was nothing in the circumstances from which it could infer, at least on the information available to me today, that that franchise was going to fail. It is certainly not an adequate basis for me to say that the applicant could not prove that it could not honestly suspect that the company was not going to be able to pay its debts.
[36] That leads to the question of what steps are to be taken now. Here, the applicable provision is s 291 of the Companies Act:
291 Additional 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.
(2) For the purposes of the hearing of an application to put the company into liquidation pursuant to an order made under subsection (1)(a) of this section, the company is presumed to be unable to pay its debts if it failed to pay the debt within the specified period.
[37] Under that section, the Court is entitled to find the amount of the debt owing by a company. Sometimes that sum can be the same as the amount in the statutory demand. That would be the case when the Court has dismissed an application. Sometimes the amount may be less and that would happen when the company established that the part of the debt, the subject of the demand, is subject to a
substantial dispute. Likewise, I see no reason why the Court cannot also find that the amount of the debt is higher than the amount in the statutory demand. At the s 291 stage, the statutory demand is spent. In most cases, the time within which an applicant can rely on the failure to comply with the statutory demand under s 288(1) is long gone. Instead, at the s 291 stage, the Court is making its own decision as to the amount of the debt which is undisputed. Where undisputed liabilities have accrued since the service of the statutory demand, I see no reason why the Court cannot take these into account.
[38] The application to set aside the statutory demand is dismissed.
[39] I order LJS Management Ltd to pay Amirco Ltd (In Liquidation) the sum of
$58,903.25 no later than 20 September 2010. In default of payment, Amirco Ltd (In Liquidation) may make an application under the Companies Act 1993 to put LJS Management Ltd into liquidation.
[40] The liquidators sought my determination of the applicant’s claim for liquidated damages under s 307(2). My determination is that they can accept proof for $20,000 for losses and expenses incurred arising after termination of the franchise agreement, but cannot accept claims for other sums for post-termination losses or expenses.
[41] Costs are awarded to the respondent on a 2B basis in the sum of $7,144. The respondent will also have disbursements, if any, as approved by the Registrar.
R M Bell
Associate Judge
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