Lorraine Services Limited v K Road Holdings Limited
[2019] NZHC 435
•18 March 2019
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2018-404-2378
[2019] NZHC 435
UNDER the Companies Act 1993, section 290 IN THE MATTER OF
an application to set aside a statutory demand
BETWEEN
LORRAINE SERVICES LIMITED
First Applicant
NORRIE AND DAUGHTERS LIMITED
Second ApplicantAND
K ROAD HOLDINGS LIMITED
Respondent
Hearing: 25 February 2019 Appearances:
J Leenoh for the Applicants
C LaHatte for the Respondent
Judgment:
18 March 2019
JUDGMENT OF ASSOCIATE JUDGE R M BELL
This judgment was delivered by me on 18 March 2019 at 4:00pm
pursuant to Rule 11.5 of the High Court Rules.
…………………………………
Deputy Registrar
Solicitors:
K3 Legal Ltd, Auckland, for the Applicants
High Street Consultancy, Auckland, for the respondent
Counsel:Chris LaHatte, Auckland/Wellington
LORRAINE SERVICES LIMITED v K ROAD HOLDINGS LIMITED [2019] NZHC 435 [18 March 2019]
[1] Lorraine Services Ltd applies under s 290(4)(b) of the Companies Act 1993 to set aside a statutory demand by K Road Holdings Ltd for $23,601.75 owed to it under an agreement to lease. A schedule in evidence shows that Lorraine Services Ltd was to pay 12 months of rent at $1,809.95 a month from March 2017 to February 2018 but paid only one month – April 2017. The debt is for rent of $19,900.45 and interest at 17 per cent per annum of $3,692.30, a total of $23,601.75.
[2] Norrie and Daughters Ltd also applies to set aside a statutory demand by K Road Holdings Ltd requiring it to pay $19,699.39 under an agreement to lease dated 14 October 2015. A schedule in evidence shows that rent for the year from March 2017 to February 2018 at $2,068.44 per month was payable but Norrie and Daughters Ltd paid only $8,108.53 leaving outstanding rent of $16,712.75. Interest at 17 per cent per annum has been calculated at $2,986.64 to give a total of $19,699.39.
[3] Lorraine Services Ltd and Norrie and Daughters Ltd are related companies. In 2010 Lorraine Services Ltd occupied commercial premises in Penrose, Auckland, under an agreement to lease. In 2012 Norrie and Daughters Ltd occupied another part of the same premises under an agreement to lease. The agreements to lease expired on 31 January 2017 and from then on there were month-to-month tenancies under which the applicants could give 20 working days’ notice. Lorraine Services Ltd and Norrie and Daughters Ltd stopped occupying the premises as tenants at the end of February 2018.
[4] Lorraine Services Ltd and Norrie and Daughters Ltd say that they have set-offs or counterclaims against K Road Holdings Ltd which should be taken into account, with the result that the statutory demands should be set aside. They raise these matters as giving them grounds for set-off or counterclaim:
(a)The area occupied by Norrie and Daughters Ltd was misdescribed in the agreement to lease as 64.8 square metres, whereas in fact the correct area was 45 square metres, so that rent was overpaid.
(b)K Road Holdings Ltd misrepresented the fixtures in the premises for broadband, causing loss to both companies.
(c)K Road Holdings Ltd did not credit certain payments of rent against the applicants’ accounts.
(d)K Road Holdings Ltd changed the security locks on the premises which meant the staff could not access the premises out of normal business hours.
(e)K Road Holdings Ltd overcharged Lorraine Services Ltd for outgoings.
(f)Norrie and Daughters Ltd was overcharged for a carpark, whereas the agreement to lease allowed for the use of two carparks. It was deprived of the use of a carpark.
Procedural matters
The applicants’ lack of legal representation
[5] While the applicants have now instructed lawyers and were represented at the hearing by a lawyer, Mr Norrie, a director of both companies, prepared, filed and served the setting-aside application and affidavit in support. He only instructed lawyers after K Road Holdings Ltd filed its notice of opposition. K Road Holdings Ltd took the point that as Lorraine Services Ltd and Norrie and Daughters Ltd are companies, Mr Norrie could not begin proceedings in this court on their behalf. Instead, they could only be represented by lawyers. With that submission, K Road Holdings Ltd relied on well-established authorities that a corporation cannot not appear in person, but only through an agent, and the only people authorised to take proceedings on behalf of another in this court are qualified lawyers.1 Because a lawyer had not filed the application, it was a nullity. In Muse on Allen v Szekely Brown J
1 Re GJ Mannix Ltd [1984] 1 NZLR 309 (CA) and Commissioner of Inland Revenue v Chesterfields Preschools Ltd [2013] NZCA 53, [2013] 2 NZLR 679.
v also cited Muse on Allen Ltd v Szekely [2017] NZHC 1468 and Dreamtech Designs and Productions Pty Ltd v Clownfish Entertainment Ltd [2015] NZCA 491.
struck out a proceeding as not having been validly commenced because a non-lawyer had started a proceeding on behalf of a company.2 In Dreamtech Designs and Productions Pty Ltd v Clownfish Entertainment Ltd the Court of Appeal had dismissed an application for a company to be represented by a lawyer who did not hold a New Zealand practising certificate.3
[6] But in developing his nullity submission in the hearing Mr LaHatte, realised that the argument would present a difficulty for K Road Holdings Ltd. If the setting- aside application were a nullity, the court would not be able to make any orders under s 291 of the Companies Act (for payment or for immediate liquidation). The presumption of insolvency under s 288(1) could not be invoked, because more than 30 working days had passed since the last day for complying with the demand and there was no order under s 290(3) extending the time for complying with the statutory demand. It was therefore in the interest of K Road Holdings Ltd to treat the application as effective to avoid having to serve fresh statutory demands.
[7] In my judgment, a breach of the rule in GJ Mannix Ltd is an irregularity, which may lead to strike-out, but it does not make the proceeding a nullity from the outset. The rule is not absolute. The court has a discretion to allow a company to be represented by someone other than a lawyer, as where it would be unduly technical to insist on the rule, and where costs savings could be relevant.4 As this case demonstrates, the irregularity can be cured by a company instructing lawyers to continue the proceeding. While Mr Norrie ought not to have started the proceeding, the irregularity has been cured. I decline to strike out the proceeding for non- compliance with the GJ Mannix rule.
Late evidence
[8] In his first affidavit, Mr Norrie attached a copy of an agreement to lease between K Road Holdings Ltd and Lorraine Services Ltd dated 14 October 2010 providing for a two year lease from 1 November 2010 with two rights of renewal. He
2 Muse on Allen Ltd v Szekely [2017] NZHC 1468.
3 Dreamtech Designs and Productions Pty Ltd v Clownfish Entertainment Ltd [2015] NZCA 491.
4 Commissioner of Inland Revenue v Chesterfields Pre-Schools Ltd at [26].
also provided a copy of an unsigned proposed lease between EJV Property Investment Ltd and Norrie and Daughters Ltd for a one year term beginning 1 February 2018 with a one year renewal, but all parties agree they never entered into such an agreement.
[9] Mr Norrie’s evidence referred to the Auckland District Law Society Deed of Lease (sixth edition) 2012, but he did not provide a copy. There is no evidence of any written agreement between Norrie and Daughters Ltd and K Road Holdings Ltd, and no evidence of any agreement by Lorraine Services Ltd to lease the premises after 31 October 2014. The director of K Road Holdings Ltd did not provide copies of any agreements to lease with his evidence, but referred to the terms of agreements to lease made in October 2015, and to the Auckland District Law Society deed of lease. At the hearing however Mr LaHatte tendered, without objection from Ms Leenoh, copies of two agreements to lease: one between Lorraine Services Ltd and K Road Holdings Ltd for a one year lease from 1 February 2015 with one year renewal, and an agreement to lease between K Road Holdings Ltd and Norrie and Daughters Ltd for one year with a one year right of renewal. During the hearing I asked for a copy of the Auckland District Law Society deed of lease. That was provided after the hearing.
Interest on unpaid rent
[10] The disclosure of the agreements to lease made in October 2015 provided that the default interest rate on unpaid rent was 5 per cent per annum above the rate charged to the landlord by the landlord and his unsecured overdraft accommodation at the time the default occurs. Ms Leenoh suggested that interest should be calculated only at 5 per cent per annum. The interest rate had not been put in issue in the original application and there was nothing in the evidence to suggest that the interest rate charged at 17 per cent has been wrongly claimed. The default interest provision is enforceable. I see no reason to adjust the amounts claimed for interest.
The no set-off issue
[11] K Road Holdings Ltd says that neither Lorraine Services Ltd nor Norrie and Daughters Ltd can raise their counterclaim objections under s 290(4)(b) of the Companies Act against its claim for unpaid rent because they are both required to pay
rent without any deductions or set-off. For that, it relies on the Auckland District Law Society Deed of Lease (Sixth Edition) 2002, cl 1.1:
All rent shall be paid without any deductions or set-off by direct payment to the landlord as the landlord may direct.
It says that the parties agreed that the terms of the Auckland District Law Society lease would apply.
[12] The special conditions of the Lorraine Services Ltd agreement to lease of 14 October 2015 say:
This shall be the only agreement between the parties. If any dispute should arise then the ADLS Sixth Deed of Lease edition shall be used.
On the other hand, the special conditions of the Norrie and Daughters Ltd agreement to lease of the same date says:
Following the execution of this agreements to lease by both parties a formal deed of lease shall be prepared by the landlord’s solicitors such lease to contain the provisions of this agreement to lease and shall be in the form of the Sixth Edition 2012 Auckland District Law Society lease or the latest addition thereof (“the Lease”).
[13] Ms Leenoh accepted that for the Lorraine Services Ltd agreement, the ADLS deed of lease bound the parties on any issues which had not been expressly addressed in the agreements to lease. She submitted however that the ADLS deed of lease did not apply to the Norrie and Daughters Ltd lease. She referred to special condition (3) in both agreements to lease:
The Tenant and Landlord shall pay their own legal fees and disbursements in relation to the negotiating, drafting, execution and completion of the agreement to lease.
Referring to “negotiating”, Ms Leenoh submitted that the agreement contemplated that further negotiations would be required to establish the terms of a deed of lease and there was therefore uncertainty, as the agreements contemplated more than an agreement to agree. In those circumstances, the no set-off provision in the ADLS deed of lease did not apply contractually.
[14] I do not accept that there was anything left to negotiate. The agreements to lease deal with all the variables that might require negotiation: identification of the premises, term of the lease, rights of renewal, monthly rental, payments in advance, proportion of outgoings, default interest rate and use of the premises. There is nothing left to negotiate. The agreements to lease can be read comfortably with ADLS leases as the variables in the ADLS document had already been written and there was therefore no uncertainty under the agreement to lease.
[15] Besides, the purpose of special condition (3) is to provide for payment of legal costs on the parties making the agreement to lease. It is drafted widely to make it clear that each party pays their own costs, but the condition cannot be read out of context to suggest uncertainty when there is none.
[16] It is common ground that there was no formal deed of lease, but the parties’ agreement to enter into a formal lease in terms of the ADLS deed of lease binds them contractually. Equity regards that as done which ought to be done. Under Walsh v Lonsdale,5 the terms of the ADLS deed of lease bind the parties even though no formal lease was executed. Clause 1.1 of the ADLS lease provides for payment of rent without set-off or deduction. Parties to a contract may of course agree that payments should be made without set-off or deduction.6 The no set-off clause appears valid.
[17] In normal proceedings, a no set-off clause operates procedurally as a pay now/argue later provision. A party is required to pay, but still retains the right to bring a separate proceeding to pursue whatever claim it has against the payee. Under s 290(4)(b), a statutory demand may be set aside not only if the company has a set-off but also if it alleges a counterclaim or cross-demand. A no set-off clause may prevent a company from alleging the set-off (under the statutes of set-off or at equity), but it may not apply contractually to counterclaims or cross-demands. They are not defences to a creditor’s claim but procedurally are treated as separate claims against the payee.
5 Walsh v Lonsdale (1882) 21 Ch D 9 (CA).
6 Grant v NZMC Ltd [1989] 1 NZLR 8 (CA).
[18] The Court of Appeal has held, however, that a no set-off clause may be a ground for not allowing an application based on s 290(4)(b). In Browns Real Estate Ltd v Grand Lakes Properties Ltd, it said:7
In our view a contractual no set-off provision of the type at issue in this case would normally result in the court’s discretion being exercised against an applicant if the sole grounds for an application to set aside a statutory demand was existence of a set-off, counterclaim or cross-demand, which a party had expressly agreed could not be raised. We consider that commercial parties should be required to honour the bargain they have made, absent other grounds that tell against recognition of a statutory demand.
[19]In Bountiful Holdings Ltd v University of Auckland, I said:8
[17] It is important to note that the Court of Appeal is laying down a general approach that should be followed. The court indicated how the discretion should be exercised under s 290(4)(b), especially in the highlighted part of paragraph [17]. The Court of Appeal did not lay down a black-letter rule, but simply indicated that the court had a discretion and said how that discretion should be exercised in the general run of cases. When there is a no set-off provision, the party applying to set aside the demand has the onus of persuading the court that it should depart from the general approach set out by the Court of Appeal.
I follow that approach here.
The misdescription of the leased area
[20] Norrie and Daughters Ltd contends that it has been overcharged for the lease of its premises because the agreement to lease describes the area as 64.8 square metres whereas it is in fact much less, 44 square metres or so. Mr Norrie has attached to his affidavit a letter to K Road Holdings Ltd dated “7 October 2014 September 2014” in which he raised the issue how the areas should be measured. K Road Holdings Ltd maintains that the area of the premises was correctly measured according to the guidelines in the International Property Measurement Standards: Office Buildings. It also makes the point that the rent was not fixed on a per square meterage rate.
[21] There is an effective answer. The parties addressed the matter in the agreement to lease of 14 October 2015. The premises are described as:
7 Browns Real Estate Ltd v Grand Lakes Properties Ltd [2010] NZCA 425 at [17].
8 Bountiful Holdings Ltd v University of Auckland [2012] NZHC 1076 at [17].
64.8 square metres more or less as more particularly outlined in red on the plan attached, a share of the balcony and a share of the common area of the property hereto and being part of the part of the property at (address given) together with the use of 2 car parks at the property.
The agreement includes this special condition:
Norrie and Daughters to email a letter to K-Road Holdings Ltd confirming that there is no longer any dispute in regards to the rental leaves or the area of the unit of the Norrie and Daughters tenancy.
[22] Ms Leenoh submitted that that clause applied only prospectively to the new lease, and that the complaints as to area for the earlier occupation could still be litigated. To the contrary, in entering into the new agreement to lease, the parties obviously intended to resolve any outstanding disputes. The provision is clearly intended to bar Norrie and Daughters Ltd from raising any arguments as to area both for the current lease and for the earlier lease.
[23] Moreover, the claim of having been overcharged for an earlier tenancy might be a matter of counterclaim, but it does not give rise to an equitable set-off. It does not come within the principle for equitable set-off stated by the Court of Appeal in Grant v NZMC Ltd:9
The principle is, we think, clear. The defendant may set-off a cross-claim which so affects the plaintiff's claim that it would be unjust to allow the plaintiff to have judgment without bringing the cross-claim to account. The link must be such that the two are in effect interdependent: judgment on one cannot fairly be given without regard to the other; the defendant's claim calls into question or impeaches the plaintiff's demand. It is neither necessary, nor decisive, that claim and cross-claim arise out of the same contract.
There is not the interdependence that would make it unjust for K Road Holdings Ltd to recover rent for 2017-2018 without allowing for adjustments because of alleged overcharging under an earlier agreement. Further, under the Court of Appeal’s approach in Browns Real Estate v Grand Lakes Properties Ltd, there is no reason why Norrie and Daughters Ltd should not be held to the contractual arrangement for payment of the rent without deductions.
9 Grant v NZMC Ltd [1989] 1 NZLR 8 (CA) at 12-13.
Outgoings
[24] Lorraine Services Ltd says that it was overcharged for outgoings. The agreement for lease provides that Lorraine Services Ltd is to pay 11 per cent of total operating expenses. Mr Norrie attaches to his affidavit a budget report which shows that for repairs and maintenance-drainage, Lorraine Services Ltd was incorrectly charged 16.67 per cent of the outgoings. The result is that Lorraine Services Ltd should have been charged $61.82, instead of $92.72, an excess of $31.54. K Road Holdings Ltd concedes the point and accepts that there should be a deduction from its debt for that amount. Where a payee concedes a claim by the payer, that may be an appropriate occasion not to follow Browns Real Estate v Grand Lakes Properties Ltd.10 The demand by Lorraine Services Ltd is adjusted accordingly.
The carpark issue
[25] Norrie and Daughters Ltd says that it has overpaid for carparks. The issue is referred to in the letter of 7 October 2014 September 2014, but that letter was put in evidence for another issue, the 64.8 square metre question. Mr Norrie’s affidavit in support of the application did not state that his company was alleging a set-off for overpayments for a carpark. Unsurprisingly, K Road Holdings Ltd did not address that issue, as it could not have known that the matter was in issue. The matter was raised formally only in the submissions for Norrie and Daughters Ltd. Beyond the assertions in the letter, there is no evidence as such that Norrie and Daughters Ltd was deprived of using the carpark. I regard the fleeting reference to the issue in the letter as insufficient to raise the matter seriously. Further, the matter arose under an earlier agreement to lease. I see no reason why it should be taken into account in reducing the rent payable in the later lease. The principle in Browns Real Estate Ltd v Grand Lakes Properties Ltd applies.
10 Simply Logistics Ltd v Real Foods Ltd HC Auckland CIV-2011-404-3497, 14 September 2011 at [60]-[63].
Payments not credited
[26] Mr Norrie says that Lorraine Services Ltd paid $1,770.10 on 6 May 2016 and Norrie and Daughters Ltd paid $2,144.64 on the same date, but K Road Holdings Ltd has not given credit for those payments. If that were correct, that would be a ground for reducing the debt and arises independently of any set off, counterclaim or cross- demand.
[27] In response, Mr Fassler, director of K Road Holdings Ltd, showed that the sums had been credited against invoices and had accordingly been taken into account. The matter was not pursued at the hearing.
Lack of access to premises
[28] Mr Norrie says that on 10 January 2016 K Road Holdings Ltd without notice changed the front access door electronic lock. Because of this, staff were unable to access the premises outside normal working hours. The matter was not rectified until 29 January 2016. He says that his staff work flexible hours including on weekends, and the change of locks caused disruption.
[29] In response, Mr Fassler says that the key-pad which deactivated the magnetic lock on the front door malfunctioned and the system had to be replaced. That was done the same day. The key-pad was replaced with a swipe card, using the same cards as the underground carpark. Additional swipe cards were ordered and they arrived on 29 January. That meant staff could have access through the carpark in the basement. They already had two access cards. One of the applicant’s staff asked for five additional cards but he was unable to give her the last one. He says that the issue turns on the applicant’s having only four access cards instead of the eight they requested between 10 and 29 January 2016.
[30] The issue is minor. While a tenant is of course entitled to quiet enjoyment, which entails right of access to the premises at any time, it is difficult to see that the issue has caused any significant loss to the business of either of the applicants. Mr Norrie does not attempt to quantify the loss arising.
[31] The Court of Appeal had this kind of quibble in mind in Browns Real Estate Ltd v Grand Lakes Properties Ltd. If the applicants consider that they can run some claim against K Road Holdings Ltd for not having out-of-hours access to the premises between 10 and 29 January 2016 they should bring a separate proceeding.
Claim for internet costs
[32] The applicants say that they incurred internet costs of $30,675.00 for which they hold K Road Holdings Ltd responsible. They say that half of that sum ($15,337.50) should be deducted from the amounts in each statutory demand.
[33] In June 2014, Norrie and Daughters Ltd entered into a contract with Kordia to provide fibre optic internet and telephone services. This was a three year contract at
$840.00 per month. In addition, there was an installation fee of $435.00. The applicants say that K Road Holdings Ltd is liable for this because of misrepresentations made as to internet cabling within the premises. Mr Norrie says that in 2010 he asked a director of K Road Holdings Ltd about the internal wiring used for internet cabling. He was told that the wiring was KAT5. In 2014, he asked K Road Holdings Ltd’s director, Mr Eddy Fassler. Again, Mr Fassler assured him that the building was correctly wired with KAT5 cable, and was capable of handling fibre optic internet speeds. On the basis of Mr Fassler’s assurances, Norrie and Daughters Ltd entered into the contract with Kordia and later agreed to renew the lease.
[34] Mr Norrie says that the expected internet speeds were not achieved. On investigation, it was found that while the required internet speeds were achieved to the premises, inside the premises internet speed was slow. In 2016, there was rewiring work which resulted in improved speeds. As well as costs of the Kordia contract, Mr Norrie also asserts unliquidated losses through decreased productivity. K Road Holdings Ltd’s current director, Mr Andrae Fassler, contests the claim. He says that K Road Holdings Ltd did no more than describe the cabling installed in the walls but made no representation as to achievable internet speeds. It is not the kind of information that a landlord could or would give. That was always a matter for the tenant to check.
[35] It is not clear that the entire costs of the Kordia contract would be recoverable as damages. The applicants might have a case that this was wasted costs, but it does appear that the applicants did derive some benefit from the Kordia contract. The costs of carrying out remedial work in 2016 might be recoverable, but Mr Norrie does not say what those costs were. Showing losses from lack of productivity will always be difficult to prove. Mr Fassler also makes the point that the applicants did not suggest that they should have any deduction from their rent when the problem first arose. It has only been raised belatedly in response to the claim for rent falling due after February 2017.
[36] Again, this matter falls squarely within the principle in Browns Real Estate v Grand Lakes Properties Ltd. It does not provide grounds for the applicants to withhold payment of rent under the pay now/argue principle. They should pay the rent and pursue any claims for misrepresentation separately.
Outcome
[37] The result is that there is only one issue on which Lorraine Services Ltd has succeeded, an adjustment of $31.54 because of operating expenses. The statutory demand against it is accordingly reduced to $23,530.21. In all other respects, I am satisfied that the statutory demands are sound. While the applicants have raised various grievances, mainly relating to periods before those for which they have been charged rent after the expiry of the agreements to lease at the end of January2017, they should pay the rent that has fallen due. They may consider that they have arguable claims for earlier periods, but they cannot be used to reduce their liability under the statutory demands.
[38]Accordingly, I make these orders:
(a)The application to set aside the statutory demand against Lorraine Services Ltd is set aside to the extent of $31.54 but is otherwise upheld for the sum of $23,570.21.
(b)The application to set aside the statutory demand against Norrie and Daughters Ltd is dismissed.
(c)Under s 291(1)(a) of the Companies Act:
(i)Within 10 working days of this decision Lorraine Services Ltd is to pay K Road Holdings Ltd $23,530.21. K Road Holdings Ltd may apply for Lorraine Services Ltd to be put into liquidation if it does not comply with that order.
(ii)Within 10 working days of this decision Norrie and Daughters Ltd is to pay K Road Holdings Ltd $19,699.39. K Road Holdings Ltd may apply for Norrie and Daughters Ltd to be put into liquidation if that company does not comply with the order.
(d)Lorraine Services Ltd and Norrie and Daughters Ltd will pay K Road Holdings Ltd the costs of the setting aside application. If the parties cannot agree costs, memoranda may be filed.
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Associate Judge R M Bell
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