Mainzeal Property and Construction v Facility Finance Ltd
[2000] NZCA 187
•4 September 2000
| IN THE COURT OF APPEAL OF NEW ZEALAND | CA14/00 |
| BETWEEN | MAINZEAL PROPERTY AND CONSTRUCTION LIMITED |
| Appellant |
| AND | FACILITY FINANCE LIMITED |
| Respondent |
| Hearing: | 17 August 2000 |
| Coram: | Gault J Robertson J Salmon J |
| Appearances: | K W Berman and SMO Manalo for Appellant |
| H Janes for Respondent | |
| Judgment: | 4 September 2000 |
| JUDGMENT OF THE COURT DELIVERED BY SALMON J |
This is an appeal against a decision of Master Kennedy-Grant granting an application by the respondent, Facility Finance Limited, (“Facility”) to set aside a statutory demand by Mainzeal Property and Construction Limited (“Mainzeal”) under s.289 of the Companies Act 1993.
The statutory demand served on Facility by Mainzeal was for the sum of $867,000. The application to set aside was made on the grounds set out in subs.(4)(a) and (c) of s.290 of the Companies Act. The arguments put forward on behalf of Facility, which found favour with the Master were that Facility had an arguable defence of estoppel in relation to the claim and that it was arguable that Mainzeal had slept on its rights and thereby prejudiced Facility.
Master Kennedy-Grant summarised the circumstances leading to the dispute as follows. (We have changed “applicant” and “respondent” to “Facility” and “Mainzeal” wherever those terms are used in quotations from the Master’s judgment.)
[a]Facility and another company, Churchill Group Holdings Ltd (“CGHL”), entered into a joint venture agreement in january 1994 for the development and construction of the Pacific Plaza Shopping Centre in Whangaparaoa.
[b]In November 1994 the joint venture entered into a contract with Mainzeal for the construction of the shopping centre.
[c]In or about 1996 differences arose between Mr Noel Fava and Mr Philip Fava, the effective operators respectively of Facility and CGHL.
[d]As a result of these differences:
[i]An agreement was reached between Facility and Mainzeal in November 1996 which is recorded in a letter of 18 November 1996 from Mr DE Wackrow, Facility’s solicitor. Mr Wackrow was also, as it happens CGHL’s solicitor and the joint venture’s solicitor. Mr Wackrow’s letter was addressed to Mr P Deane, then Mainzeal’s General Manager.
[ii]A deed of termination of the joint venture was entered into between Facility and CGHL in December 1996.
[e]The effect of these agreements was that:
[i]Facility was to pay $100,000 of the amount claimed in a statutory demand which had been served on the joint venture by Mainzeal.
[ii]The balance of the amount of the statutory demand, $167,000 was to be paid out of the settlement of the sale of a half share in the shopping centre to a third party
[iii]The amount of the final certificate in favour of Mainzeal for the construction of the shopping centre was also to be paid out of that amount.
[f]The sale of the half share of the shopping centre went though in March 1998
[g]CGHL did not pay Mainzeal anything at that stage
[h]In March 1998 a further agreement was entered into, this time between CGHL and Mainzeal, the terms of which are set out in Mr deane’s letter of 18 March 1998 to Mr P Fava of CGHL. The text of that letter is as follows:
pacific plaza final account
further to our recent discussion, I set out below the position that has now been agreed in respect of the Final Account and the security position and contractual arrangements that Mainzeal would accept to accede to your request for time to pay that account.
1Final account for Pacific Plaza agreed at $12,563,000.00 (excluding GST) plus unpaid and accrued interest on certified and unpaid claims of $35,040.00 (excluding GST) up to and including 31 December 1998 which leaves an outstanding balance of $810,000.00 only which includes GST and interest.
2Payment of outstanding balance of $810,000.00 (including GST and interest) deferred until the earlier of the settlement of the sale of the Superstore property to Pacific Plaza owner or 90 days after Practical Completion of the new Superstore or 31 December 1998.
3Outstanding balance to be secured by a third mortgage over the Superstore property subject to first mortgage to ANZ of approximately $1.0 million and a second mortgage to Fava’s Sportscar World Limited for $200,000 with usual priority. Mortgage to allow for penalty interest at the rate of 18% per annum for non-payment as per item 2.
4Security to remain in force until all paid, or alternative security arrangements to the satisfaction of Mainzeal put in place.
5Churchill Group Holdings Limited to enter into a construction contract with mainzeal for the construction of the proposed Superstore adjacent to Pacific Plaza for a price of $1,959,043.00 (excluding GST). This amount is to be paid on the sale of the Superstore property to Pacific Plaza owners or 90 days after Practical Completion whichever occurs earlier.
6Any monies due and unpaid or due to be paid under the building contract to be secured on same basis as 3 above.
7Security agreement and documents are to be to Mainzeal’s complete satisfaction (eg Auckland District Law Society standard form) and are to be prepared by Mainzeal’s solicitors with their reasonable expenses to be met by Churchill Group.
The above proposals are of course subject to Mainzeal being satisfied with the title position, valuation, takeout offer and ANZ loan offer and conditions including ANZ’s required priority amount. In that regard, to facilitate matters please provide us with the relevant documents at your earliest convenience.
Please signify your agreement to the above by signing and returning the enclosed copy of this letter.
[i]In September 1998 a formal deed acknowledging debt and further obligations was entered into between CGHL andMainzeal.
[j]The deed contained the following recitals:
AMainzeal completed construction and refurbishment of the Pacific Plaza Shopping Centre at Whangaparaoa under contract to Churchill and Facility Finance Limited (“Facility”) (the “Pacific Plaza Centre”).
BMainzeal has agreed to discount its final account for payment under the Pacific Plaza Contract to $12,563,000 (excluding GST) together with accrued interest of $35,040 on certified and unpaid claims and accept the outstanding balance of $810,000.00 (the “Debt”) in full and final payment of the Pacific Plaza Contract on the terms and conditions contained in this deed.
CThe parties wish to further record the agreement and further matters as between them.
[k]The deed contained the following operative clauses among others:
2.Acknowledgment of Debt and Terms
2.1Churchill irrevocably acknowledges and agrees that the Debt is now due and owing by it to Mainzeal.
2.2Nothing in this deed shall affect any liability or obligation, owed or to be performed by Facility in favour of Mainzeal or any rights or remedies which Mainzeal may have against Facility.
2.3In consideration of Mainzeal agreeing to defer payment of the Debt on the terms and conditions set out in this deed:
(a) Churchill agrees to pay the debt upon the earlier of settlement of the sale of the Superstore Property or 90 days after Practical Completion or 31 December 1998;
(b) Churchill agrees to pay interest at the rate of 16 percent per annum (before as well as after judgment) on any amount of the Debt not paid when the Debt falls due for payment under clause 2.3(a) above.
(c) Churchill irrevocably agrees to enter into the Superstore Contract; and
(d) Churchill irrevocably agrees to grant the Mortgage in favour of Mainzeal to better secure to Mainzeal the Secured Moneys.
[l]Mainzeal kept its part of this agreement.
[m]CGHL has failed to pay Mainzeal and is not now in a position to do so.
[n]Mainzeal has therefore served a further statutory demand on Facility.
The following further facts are relevant. Facility was unaware of the agreement reached in the 18 March 1998 letter and the September 1998 deed until those documents were disclosed in the course of these proceedings. Facility made no inquiry to ascertain whether Mainzeal had been paid in accordance with the terms of Mr Wackrow’s letter of 18 November 1996. Eighty per cent of the half share in the shopping centre which was sold to the third party belonged to Facility, the other 20 per cent to Churchill. That had the effect that 80 per cent of the proceeds of that sale belonged to Facility. It was acknowledged by counsel that Facility made no attempt to ensure that the proceeds of the sale were held in a trust account, nor did it take any other steps to ensure that the terms of Mr Wackrow’s letter would be fulfilled so far as payment to Mainzeal was concerned.
After setting out the arguments advanced by Mrs Janes, for Facility, the Master rejected an accord and satisfaction argument on the basis that the deed reserved the rights of the creditor against the other co-debtor and dealt with other arguments as follows:
[10] So far as the estoppel argument, if I can so describe it, is concerned, I consider that this can be taken into account both under s 290(4)(a) of the Companies Act 1993 and under s290(4)(c). Under the former it arguably, in my view, provides a defence based on a representation that the arrangements set up by Facility for payment of Mainzeal had been carried out and that there was no continuing liability on the part of Facility to Mainzeal. Whether at trial this would be held to be the case is another matter; but I certainly consider that it is arguable.
[11] There is certainly prejudice.
[12] So far as the question of whether these matters constitute other grounds for setting aside the statutory demand under s 290(4)(c) is concerned, it is my view that it is inappropriate to permit the company jurisdiction of this Court to be invoked in circumstances where there are questions as to the appropriateness of the course of conduct adopted by the creditor. It is arguable in this case that the creditor has slept on its rights and has thereby prejudiced the debtor company and, even if estoppel cannot be established, I think that it is more appropriate for the claim to be dealt with in the ordinary jurisdiction of the Court than in its company jurisdiction.
Facility has sought leave to file out of time a notice of intention to support the judgment on grounds other than the ones upon which it was based. Mainzeal does not oppose the application, but does oppose Facility’s rights to raise the arguments on the basis that they were not raised in the High Court and are matters upon which further opposing evidence could have been advanced. In fact the only new argument is that set out in subparagraph [a] of the following paragraph.
The grounds of the cross appeal are as follows:
[a]The agreement entered into between Mainzeal and Facility on 18 November 1996 carried implied terms that when the sale proceeds from the sale of 50 per cent of Pacific Plaza to Aral Holdings Ltd became available Mainzeal:
[i]Would make demand and receive payment of its final invoice for Pacific Plaza as intended by both parties;
[ii]Would not take any action that could or would prejudice the position of Facility to make payment toMainzeal; and
[iii]Would notify or consult Facility if it intended to alter the burden of performance of the agreement, and obtain the consent of Facility to such an alteration.
[b]Mainzeal’s actions in not seeking payment under the agreement, and entering into an accord and satisfaction with Churchill Holdings Ltd constituted a serious breach of the agreement, and substantially altered the burden of the agreement and resulted in severe financial consequences for Facility. Facility is therefore entitled to consider itself discharged from its obligations, or to seek damages to off-set the losses resulting from Mainzeal’s conduct.
[c]Mainzeal’s decision to not demand performance of the agreement with Facility, but instead to enter into a Deed Acknowledging Debt and Further Obligations and a new construction contract with Churchill Holdings Ltd which took account of the Pacific Plaza debt, amounted to a waiver of its rights against Facility, so that Mainzeal is no longer entitled to pursue Facility for the Pacific Plaza debt.
The Statutory Provisions
Section 290 of the Companies Act provides:
290. COURT MAY SET ASIDE STATUTORY DEMAND -
(1) The Court may, on the application of the company, set aside a statutory demand.
(2) The application must be--
(a) Made within 10 working days of the date of service of the demand; and
(b) Served on the creditor within 10 working days of the date of service of the demand.
(3) No extension of time may be given for making or serving an application to have a statutory demand set aside, but, at the hearing of the application, the Court may extend the time for compliance with the 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.
(5) A demand must not be set aside by reason only of a defect or irregularity unless the Court considers that substantial injustice would be caused if it were not set aside.
(6) In subsection (5) of this section, "defect" includes a material misstatement of the amount due to the creditor and a material misdescription of the debt referred to in the demand.
(7) An order under this section may be made subject to conditions.
Facility’s claim that the demand should be set aside was based on paragraphs (a) and (c) of subs.(4). Paragraph (c) confers upon the Court a broad discretion. Such decisions as there are on the meaning of this provision show that the Court will set aside a statutory demand if it can be demonstrated that the use of the liquidation procedure is an abuse of the process of the Court in that the petitioning creditor is using the procedure for an ulterior purpose. If not otherwise covered by paragraph (a), paragraph (c) could be resorted to where there is a genuine defence to the claim, even if it is one which might still have the result eventually of the creditor recovering a lesser amount than that claimed. In those particular circumstances it may be appropriate to make an order in respect of a lesser sum as was done in Arbridge Developments Ltd v Weatherby Developments Ltd (CA.102/00, judgment 4 July 2000). An appropriate analogy is the principles relating to refusing entry of summary judgments.
The Estoppel Issue
As indicated above the principal ground upon which the Master set aside the notice was that there was an arguable defence based on a representation that the arrangements set up by Facility for payment of Mainzeal had been carried out and there was no continuing liability on Facility.
The factual basis relied upon for this finding was the agreement recorded in Mr Wackrow’s letter of 18 November 1996 and the actions (or lack of them) of Mainzeal subsequently.
Facility argued that Mainzeal had a responsibility to ensure that it was paid out of the settlement of the sale of the half share in the shopping centre to a third party and that rather than do that, it entered into a further agreement with Churchill which changed the requirements for payment in the context of a further contract to be entered into with Churchill. The Master accepted that it was arguable that Mainzeal had led Facility to believe that the arrangements which had been made in November 1996 and December 1996 had been carried out successfully and that Mainzeal had been paid.
Facility argued that the failure by Mainzeal to claim until July 1999 had prejudiced Facility because it deprived Facility of the opportunity to recover under the December 1996 agreement with Churchill and it had exposed Facility to increased and continuing liability for interest.
The elements necessary for the application of the doctrine of estoppel are well known. In relation to estoppel by convention they were set out by this Court in National Westminster Finance NZ Ltd v National Bank of NZ Ltd [1996] 1 NZLR 548 and in a more general context by the High Court of Australia in Waltons Stores (Inter State) Ltd v Maher (1988) 164 CLR 387. As the Court said in National Westminster Bank:
The broad rationale of estoppel, and this is not a test in itself, is to prevent a party from going back on his word (whether express or implied) when it would be unconscionable to do so. (p.549)
The Master was of the view that it was arguable that Mainzeal had represented that the arrangement set up by Facility for payment of Mainzeal had been carried out. This representation was said to have arisen as a result of Mainzeal’s silence as to the fact that it had not been paid out of the proceeds of sale and that it was a reasonable inference that Mainzeal knew that Facility would rely on the agreement set out in Mr Wackrow’s letter of November 1996 and not take any steps. We do not accept that in law the facts outlined can amount to a representation by Mainzeal. Mainzeal did not represent that it would be paid by the proceeds of sale. Rather, Facility and Churchill undertook to pay Mainzeal in that way. As indicated above 80 per cent of the proceeds of the sale of the half share in the shopping centre belonged to Facility. It was Facility which undertook to pay Mainzeal out of the proceeds of that sale. Facility’s failure to ensure that happened cannot be transmuted, as Facility would have it, into an obligation by Mainzeal to ensure that it was paid. Mainzeal’s failure to make a claim does not assist Facility. There is no obligation upon a creditor to bring a claim immediately an amount owing is due. There is nothing unconscionable in a creditor exhausting the prospects of payment from one co-debtor before pursuing the other and where, as in this case, there is no representation by the creditor to the debtor, there is nothing unconscionable in delaying the demand for payment. We can see no factual basis for the application of the doctrine of estoppel in these circumstances and conclude that the appeal must succeed in this regard.
The Defence that the Creditor had Slept on its rights
This seems to have been treated by the Master as a separate ground for setting aside the statutory demand. He said:
It is arguable in this case that the creditor has slept on his rights and has thereby prejudiced the debtor company and, even if estoppel cannot be established, I think that it is more appropriate for the claim to be dealt with in the ordinary jurisdiction of the Court than in its company jurisdiction.
In the absence of estoppel, we can see no reason why a creditor, having a claim to a debt to which there is no genuine defence, should be denied the benefit of the statutory demand procedure merely because payment was not demanded sooner. In our view the only respect in which it can be said that Facility has been prejudiced by any delay on the part of Mainzeal in bringing its claim is in relation to the question of interest. There are factual matters arising in relation to this issue which it is not possible to determine in these proceedings. This, however, would not prevent an order being made in relation to the amount owing exclusive of interest.
Implied Terms
The first of the grounds of the cross appeal is that the agreement entered into between Mainzeal and Facility on 18 November 1996 included the implied terms referred to in paragraph [8(a)] above. Mrs Janes for Facility, referred to the five point test for the implication of terms laid down by the Privy Council in BP Refinery (Western Port) Pty Ltd v Shire of Hastings [1977] 16 ALR 363 and the decision of this Court in Devonport Borough Council v Robbins [1979] 1 NZLR 1. We do not find it necessary to deal with this submission in detail. It is sufficient to say that the terms suggested are not required to give business efficacy to the contract. The agreement is plain in its terms. It placed obligations on Facility in relation to payment, not upon Mainzeal. That ground of the cross appeal must fail. It is not necessary, therefore, to address Mr Berman’s submission that this new ground should not be considered.
Accord and Satisfaction
The second of the grounds of cross appeal is that Mainzeal entered into an accord and satisfaction with Churchill Holdings, with the result that the co-debtor Facility, was discharged from its obligations.
The Master considered this argument and rejected it because the agreement with Churchill, which is said to constitute the accord and satisfaction reserves Mainzeal’s rights against Facility. He held that there was no obligation on a creditor reserving rights against other co-debtors to notify them of the fact that it is proposing to do so or has done so.
The first question is whether the deed between Churchill and Mainzeal does in fact constitute an accord and satisfaction. Accord and satisfaction has been defined in British Russian Gazette and Trade Outlook Ltd v Associated Newspapers Ltd [1933] 2 KB 616 at 643 as follows:
Accord and satisfaction is the purchase of a release from an obligation whether arising under contract or tort by means of any valuable consideration, not being the actual performance of the obligation itself. The accord is the agreement by which the obligation is discharged. The satisfaction is the consideration which makes the agreement operative.
Facility argues that the deed of September 1998 constituted an accord and satisfaction because Mainzeal agreed to discount its final account for payment under the Pacific Plaza contract and to defer payment of that account in consideration (inter alia) of Churchill entering into a new contract with Mainzeal referred to as the superstore contract. In fact the consideration is expressed as being Mainzeal’s agreement to defer payment of the debt and in terms of the deed Churchill acknowledged that the balance outstanding on the Pacific Plaza contract was now due and owing by it to Mainzeal.
We do not consider that the deed constituted a release of obligation. Rather, it clarified the extent of the obligation and deferred payment of the amount owing. The deed does not, therefore, constitute an accord and satisfaction.
But even if that were not so, the express reservation of rights against Facility means that the document would be construed as a covenant not to sue rather than an accord and satisfaction. The law has recently been reviewed by this Court in Allison v KPMG Peat Marwick [2000] 1 NZLR 560. Although that decision concerned joint tort feasors, it is clear from the cases cited therein that the same principles apply to joint debtors – see in particular the discussion in paragraphs 128 and 129.
We do not accept Mrs Janes’ argument that Mainzeal had a duty to disclose to Facility the deed it had entered into with Churchill and the reservation of Mainzeal’s rights against Facility. The inquiry is as to the effect of the deed. The co-debtor’s position is determined by the terms of the deed. Disclosure or its absence cannot affect that outcome. We are not persuaded that the duties to which she refers are in fact analogous to the present case.
Waiver of Rights
The final ground of cross appeal claims that the September 1998 deed amounted to a waiver of Mainzeal’s rights against Facility. We accept Mr Berman’s submission that this argument appears to be no more than accord and satisfaction and/or estoppel in a different form. Mrs Jane’s submissions claim that in that deed Mainzeal waived its rights against Facility. Clearly it did not do so. Rather, it expressly reserved those rights.
Conclusion
We are satisfied that the appeal must be allowed. However, for the reasons earlier addressed in this judgment we consider that the amount which Facility is required to pay should be reduced to $774,960 leaving interest to be claimed in separate proceedings if Mainzeal so desires.
As requested by Mr Berman we order, pursuant to s.291(1)(a) of the Companies Act that the sum of $774,960 be paid by 18 September 2000 failing which Mainzeal may apply for an order putting Facility into liquidation.
Mainzeal is entitled to costs in both Courts. Costs in the High Court should be fixed by that Court. In this Court costs are fixed at $3,000 together with reasonable disbursements approved, if necessary, by the Registrar.
Solicitors
Kensington Swan, Auckland, for Appellant
Jones Young, Auckland, for Respondent
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