Manchester Securities Ltd v Body Corporate 172108
[2018] NZCA 190
•13 June 2018 at 9.30 am
| IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA |
| CA98/2018 [2018] NZCA 190 |
| BETWEEN | MANCHESTER SECURITIES LIMITED |
| AND | BODY CORPORATE 172108 |
| Hearing: | 3 May 2018 |
Court: | Kós P, Asher and Gendall JJ |
Counsel: | M C Harris and H E McQueen for Appellant |
Judgment: | 13 June 2018 at 9.30 am |
JUDGMENT OF THE COURT
AThe appeal is dismissed.
BThe appellant must pay the respondent costs for a standard appeal on a band A basis and usual disbursements.
____________________________________________________________________
REASONS OF THE COURT
(Given by Asher J)
Table of Contents
| Para No | |
| Introduction Background The arguments Arbitration The scheme The test to be applied Are there clear and persuasive grounds showing a set-off? Should the claimed set-off have led to the granting of the application? Set-off against the judgment sum Approach to the exercise of the discretion Our decision on the exercise of the discretion The ordinary levies Conclusion Result | [1] [44] |
Introduction
This is an appeal against a refusal to set aside a statutory demand under s 290(1) of the Companies Act 1993 (the Act). It is far from the usual dispute about a debt. The parties to the appeal are both victims of catastrophic weathertightness failures of their apartment building. These failures have required them to incur very significant expenses in endeavouring to remedy the building faults. It is that gruelling process that has led the appellant, the owner of the top and largest apartment, and the respondent body corporate, representing the other 38 unit title owners, to fall out.
Background
It is necessary for us to trace briefly the history of this matter leading to a decision of Fogarty J in the High Court[1] and the appeal from his decision to this Court,[2] as those decisions are the basis of the major amount claimed in the statutory demand.
[1]Body Corporate 172108 v Manchester Securities Ltd [2017] NZHC 329 [Fogarty J decision].
[2]Manchester Securities Ltd v Body Corporate 172108 [2017] NZCA 527 [Court of Appeal decision].
The respondent, Body Corporate 172108, represents the owners of Hobson Apartments, a 12-storey unit title development in central Auckland. The building contains the usual common areas that are owned by the Body Corporate, including most of the exterior of the building. Unusually, that is not the position in relation to level 12. The level 12 exterior is owned by the appellant, Manchester Securities Ltd (Manchester). The Body Corporate’s ownership of the exterior stops short of that level. This feature is explained by level 12 being aesthetically and physically different from the rest of the building, and being constructed separately after the rest of the building had been completed.
The only common property on level 12 comprises the lift and stairwell shafts, ducts and a small recessed area at the rear of the eastern side. Unit 12A occupies all the top level, and is the largest and most valuable unit in the complex. The ownership interest or unit entitlement of unit 12A is fixed at 11.88 per cent.[3]
[3]The unit entitlement or ownership interest is the relative value of the unit in relation to the others in the development: Unit Titles Act 1972, s 6; and Unit Titles Act 2010, s 38.
Severe water ingress into the building was apparent by October 2009. The Body Corporate applied under s 48 of the Unit Titles Act 1972 for a remediation scheme empowering it to carry out repairs under a single building contract to the whole of the complex, including the units and the common property. Under s 48, when any building or improvement is damaged or destroyed, the court may settle a scheme for the reinstatement of the building. The court may make orders for the application of insurance money, for payment of money by or to the body corporate, and impose such terms and conditions as it thinks fit.[4] Schemes under s 48 are often used to arrange reinstatement of unit title developments suffering from weathertightness defects.[5] The Body Corporate wanted Manchester to meet its percentage of the costs of all the repairs to common property like any other unit owner, by contributing 11.88 per cent to the cost as per its ownership interest.
[4]Unit Titles Act 1972, s 48(5).
[5]The corresponding provision of the Unit Titles Act 2010 is s 74.
This was opposed by Manchester. It wished to repair all of level 12 itself, and not to contribute to the cost of any other work. At the time it was thought that the leaks were principally emanating from the failure of the cladding at the levels below level 12. Manchester was prepared to manage its own repairs, and asked to be excluded from any repair solution involving a single contract to the whole building. Manchester and the Body Corporate could not agree therefore on the terms of the scheme. There was an impasse on the terms of the scheme and proceedings were filed in the High Court.
The scheme was subject to multiple contested hearings, and four judgments were issued by Heath J between 3 March 2010 and 10 February 2011.[6] The outcome of these judgments was that a scheme was approved involving a single contract for the repair of the building as a whole. Manchester would be able to appoint a joint project manager for the level 12 work. As regards the cost allocation, Heath J noted the unusual ownership structure and considered a fair solution would be to require Manchester to contribute to the repairs of the common property on levels 1–11 as well as paying for all of the level 12 work, but on the basis that its liability would be capped at 11.88 per cent of the total cost of repairs to the whole building. We will refer to some of the provisions of the scheme later in this judgment.
[6]Body Corporate 172108 v Meader (2011) 12 NZCPR 101 (HC); Body Corporate 172108 v Meader HC Auckland CIV-2009-404-6868, 19 August 2010; Body Corporate 172108 v Meader (2011) 12 NZCPR 181 (HC); and Body Corporate 172108 v Meader HC Auckland CIV-2009-404-6868, 10 February 2011.
In 2010 and 2011 before Heath J, the indicative figure for the repairs was a total estimated cost of approximately $6.25 million, being $5.75 million for the repairs to levels 1–11 and $500,000 for the repairs to level 12. Unfortunately after the terms of the scheme were decided there were lengthy delays, escalations and disputes between the parties. The repairs to levels 1–11 were completed on 12 December 2013 at a total cost of $8,131,002, a 41 per cent increase on the original estimate. The remediation costs of level 12 also proved to be far more expensive than expected. Indeed they are still not completed. As at 2016 the likely cost to repair level 12 was estimated at $2.6 million, a 430 per cent increase from the original estimate of $500,000. On that basis the final cost of repairs to the whole building was likely to approach something close to $10.7 million as compared with the original estimate of $6.25 million. Because the work to level 12 is still not completed, it is impossible to know with any degree of certainty what the final total cost of repairs to the whole building will be.
On 18 March 2013, when it had become clear the costs were far greater than anticipated when the scheme was approved, the Body Corporate applied for an order varying the scheme approved by Heath J, so as to avoid what it claimed would be an unjust outcome. Whatever the final figure, it was clear by that stage that the repairs to level 12 would exceed 11.88 per cent of the total cost of repairing the building. Because of the 11.88 per cent cap on Manchester’s liability, Manchester did not have to contribute anything to the repairs to common property on levels 1–11, and was also entitled to a payment from the Body Corporate for the repairs to level 12. Therefore, the owners other than Manchester were contributing far more than expected to the common property on levels 1–11, but would also be required to make a payment to Manchester in respect of the repair to the common property on level 12, which was also much greater than expected.
After a defended hearing over five days, Fogarty J issued a decision granting the Body Corporate’s application to vary the scheme.[7] Fogarty J agreed with the Body Corporate that the costs blow out had rendered the logic of the scheme unjust. It could not be right that Manchester should avoid making any contribution to the cost of remediating the common property other than level 12.[8] He reinstated the unit titles statutory scheme and removed the cap of 11.88 per cent enjoyed by Manchester.[9] That meant that Manchester was liable to contribute $513,247.60 plus GST to the repair of the common property on levels 1–11 and no less than $25,882.39 plus GST to the uncompleted repairs to the common property on level 12. The cost of the latter was estimated at $217,865.20.
[7]Fogarty J decision, above n 1.
[8]At [67].
[9]At [156]–[157].
He allowed a credit of $191,982.81 for the costs Manchester would pay in the first instance for the repair to the common property on level 12 in addition to its own 11.88 per cent contribution ($217,865.20 less $25,882.39 is $191,982.81). This meant its net liability figure in respect of the common property at all levels was $321,264.79 ($513,247.60 less $191,982.81 is $321,264.79). In the nature of things, the repairs to level 12 were unlikely to be lower than the estimate and accordingly $321,264.79 plus GST was the minimum cost.[10]
[10]At [153].
Fogarty J determined that Manchester should make an interim payment of that sum immediately.[11] The Judge therefore formally ordered Manchester to pay to the Body Corporate $321,264.79 plus GST as a provisional sum. That sum was to be adjusted upon completion of remediation of the common property on level 12 to the extent that the estimate of $217,865.20 varied.[12]
[11]At [155].
[12]At [157].
Manchester appealed Fogarty J’s decision to this Court. It raised a number of grounds of appeal, including a submission that an order for a cash payment had never been sought by the Body Corporate in the High Court. In a decision issued on 17 November 2017, the appeal was dismissed and the result and reasoning of Fogarty J were upheld.[13] This Court, like Fogarty J, took a negative view of Manchester’s actions, finding its conduct to be dilatory and prevaricating.[14]
[13]Court of Appeal decision, above n 2, at [70]–[71].
[14]At [44].
The Body Corporate served two statutory demands on Manchester. This appeal only concerns the first of those statutory demands, served on 1 June 2017. That demand claimed two amounts. First it claimed $226,679 for ordinary Body Corporate levies as at 31 May 2017 together with interest accruing at 10 per cent. The levies ran from 1 April 2012 to 31 March 2017. The second amount was in respect of the judgment of Fogarty J, a copy of the sealed judgment being attached to the statutory demand. The amount claimed was $369,454.51, being the amount of $321,264.79 plus GST. The demand also claimed interest on that sum of $4,301.87 as at 31 May 2017. From those sums it was stated that $50,208.40 was to be deducted as already paid on account by Manchester towards the cost of repairs to common property on 21 March 2013. Thus the total claimed was $550,226.98.
Manchester applied to set aside the statutory demand. That application was heard by Associate Judge Doogue, together with an application to set aside the second statutory demand, which concerned Fogarty J’s costs order in the variation proceedings.[15] Manchester argued that it is owed significant sums by the Body Corporate in respect of costs incurred in the repair of level 12 for the benefit of all unit owners, and that these sums should be set off against the amounts claimed in the first statutory demand. Under the scheme settled by Heath J, the dispute as to these sums must be referred to arbitration, and the Body Corporate’s use of the statutory demand process was therefore inappropriate.
[15]Body Corporate 172108 v Manchester Securities Ltd [2017] NZHC 1252.
The application to set aside the first statutory demand was declined, and that is the decision that is the subject of this appeal.[16] The Associate Judge upheld the application in respect of the second statutory demand and that decision has not been challenged before us.
The arguments
[16]Manchester Securities Ltd v Body Corporate 172108 [2018] NZHC 169 [Decision under appeal].
In his written submissions, Mr Harris on behalf of Manchester submitted that the High Court made two errors:
(a)First, after setting out much of the background correctly, the Judge’s analysis overlooked that the claimed set-off is subject to compulsory arbitration. This required the Associate Judge to set aside the demand unless he was satisfied that Manchester was not acting bona fide in asserting there was a dispute, or it was immediately demonstrable there was nothing disputable at issue. Extensive submissions were directed to this point in the High Court, but the Associate Judge did not consider it: the Associate Judge said that he would return to the point “further on”, but never did.[17] This was a clear and indisputable error. Had the point been considered, it would have been apparent that the proper forum to resolve the dispute is arbitration.
(b)Second, the Associate Judge found that it was not seriously arguable that the costs claimed by Manchester in relation to level 12 conferred a benefit on the other unit owners, even though Manchester’s evidence to the contrary was uncontested. This was another clear and material error.
[17]At [34].
We reformulate those arguments given the oral submissions. Underlying Manchester’s position is its claim that under the remediation scheme the Body Corporate must pay for the costs of Manchester’s management consultants and other construction-related advisors that provide a benefit to all individual proprietors, other than Manchester, or the Body Corporate. The claim for these costs is presently $604,942. The first issue is whether, because of provisions requiring the parties to go to arbitration if there is a dispute on such costs, Associate Judge Doogue should have set aside the claim for $369,454.51 arising from the judgment of Fogarty J. The second issue is, regardless of whether the arbitration point is successful, whether the existence of a substantial claim of set-off by Manchester should lead to both claims in the statutory demand being set aside.
We proceed to deal first with the judgment sum of $369,454.51 and second with the ordinary levies, recognising that we are following a different order from that in the statutory demand.
Arbitration
The scheme
Manchester’s underlying set-off claim was that, after the approval of the remediation scheme, Manchester had incurred $604,942 in costs paid to consultants and other advisors for work that was for the benefit of the other unit owners in the Body Corporate. It submitted this was a legitimate claim against the Body Corporate, and constituted a set-off greater than the amount sought in the statutory demand. Any dispute about the existence or quantum of the benefit had to be arbitrated under the explicit terms of the scheme.
In this regard Manchester relied on art 21.2 of the scheme approved by Heath J and amended by Fogarty J, which reads, showing its amended form after the deletion of part of the first sentence by Fogarty J:
21.2
Manchester shall not be liable to pay more than 11.88% of the total Cost of the Repairs carried out pursuant to this Schemeprovided however that any Costs incurred by Manchester in respect of project management consultants or other construction-related advisors that do not provide benefit to all other individual proprietors or the body corporate shall be borne solely by Manchester. The costs in respect of project management consultants or other construction-related advisors that Manchester contends provide a benefit to all individual proprietors (other than Manchester) or the body corporate shall be made available in writing, together with supporting documentation to the secretary of the body corporate. Any dispute about whether benefit is provided to all individual proprietors (other than Manchester) or the body corporate shall be determined under the dispute resolution provisions of this Scheme.It can be seen that the costs of project management consultants and other construction-related advisors that Manchester contended provided a benefit to all individual providers, other than Manchester, could prima facie be claimed by Manchester. A dispute seems to be anticipated in the reference to Manchester “contends”. Any dispute about whether the stated work is for the benefit of all the individual proprietors, other than Manchester, or the Body Corporate, is to be determined under the dispute resolution provisions of the scheme.
The dispute resolution provisions of the scheme referred to in art 21.2 are at art 13, and involve referral to arbitration. Although only parts of this clause are relevant, we set it out in full:
13 Dispute resolution
13.1The Body Corporate’s decision shall be final in all respect all matters arising under this scheme, except where 5 or more Owners whose objection in monetary value cumulatively exceeds $30,000, or where one Unit Owner has an objection which in monetary terms exceeds $10,000. Upon receiving notice of such an objection, the Body Corporate shall refer the matter to arbitration.
13.2The objecting Owners must give notice to the Body Corporate of their objection within 15 working days of receiving an assessment as to Costs or other notice from the Body Corporate which is the subject of the objection outlining the grounds on which such objection is made. On receipt of the notice the Body Corporate will refer the matter to an arbitrator (to be appointed by the President of the Quantity Surveyors Association) and the arbitrator shall determine the issue under the provisions of the Arbitration Act 1996. The arbitrator’s decision shall be final and the costs of the arbitration shall be borne as between the objecting Owners and the other members of the Body Corporate generally as the arbitrator shall decide.
13.3No Owner shall be entitled to withhold payment of a Levy on the basis that the matter is in the process of dispute resolution.
Mr Harris argued that the figure of $604,942 was a figure contended for by Manchester under art 21.2. Any dispute about set-off for those consultants and advisors’ fees was to be determined by arbitration under art 13.2. The statutory demand process was therefore being used inappropriately. He submitted that there was a bona fide dispute which should go to arbitration. As a preliminary point he submitted that this submission was erroneously not determined in the High Court.
While the Associate Judge did set out aspects of the arbitration arguments, we agree that he does not appear to have directly addressed and resolved them.
The test to be applied
Section 290 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), 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.
In relation to set-off, s 290(4)(b) provides that the court may grant an application to set aside the statutory demand if the company “appears to have a counterclaim, set-off, or cross-demand” and the amount specified in the demand less the amount specified in the counterclaim is less than $1,000.[18] Just as any defence must be shown to be reasonably arguable, so must any set-off, counterclaim or cross‑demand. However, the obligation is not to prove the actual claim. It is not expected that the dispute itself is to be tried in the course of hearing the application. It has been said that “clear and persuasive” grounds must be shown for a set-off, rather than a mere assertion.[19] There must be a real evidential basis for the claim, and the claim must be arguable as a matter of law.[20]
[18]Companies Act 1993 Liquidation Regulations 1994, reg 5.
[19]Covington Railways Ltd v Uni-Accommodation Ltd [2001] 1 NZLR 272 (CA) at 274–275, citing Bryanston Finance Ltd v de Vries (No 2) [1976] Ch 63 (CA) at 78.
[20]Provida Foods Ltd v Foodfirst Ltd [2012] NZCA 326, (2012) 21 PRNZ 546 at [32].
In relation to contingent and unquantified counterclaims or set-offs, it has been held that the court must be able to determine from the material provided whether the amount of the set-off or counterclaim is more than the amount claimed in the statutory demand. Thus in Sunglass Hut New Zealand Ltd v Amtrust Pacific Properties Ltd, the High Court held that, while the applicant had shown an arguable counterclaim for damages or compensation, the unquantified nature of the counterclaim meant that it had not shown to the required standard that the counterclaim would have equalled or exceeded the amount claimed in the statutory demand.[21] That is not an issue here, where Manchester has given general evidence claiming a set-off of $604,942.
[21]Sunglass Hut New Zealand Ltd v Amtrust Pacific Properties Ltd HC Auckland M1710/02, 24 June 2003 at [41].
Mr Harris submitted that where the dispute in issue is subject to arbitration, a different and lower threshold applies. In such cases a narrow meaning of “dispute” is adopted. He relied on the Supreme Court decision of Zurich Australian Insurance Ltd
v Cognition Education Ltd.[22] It was stated there, in the context of a summary judgment application after an exhaustive review of authority, that the summary judgment should not be entered unless it is “clear that the [applicant] is not acting bona fide in asserting that there is a dispute, or it is immediately demonstrable that there is nothing disputable at issue”.[23]
[22]Zurich Australian Insurance Ltd v Cognition Education Ltd [2014] NZSC 188, [2015] 1 NZLR 383.
[23]At [36].
In that case the Supreme Court granted a stay, applying the lower threshold, and refused to determine a summary judgment application on the basis that the contract in question required the dispute to be referred to arbitration. Reliance was placed[24] on the statement of Lord Mustill in Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd:[25]
I believe however that care should be taken not to confuse a situation in which the defendant disputes the claim on grounds which the plaintiff is very likely indeed to overcome, with the situation in which the defendant is not really raising a dispute at all. It is unnecessary for present purposes to explore the question in depth, since in my opinion the position on the facts of the present case is quite clear, but I would endorse the powerful warnings against encroachment on the parties’ agreement to have their commercial differences decided by their chosen tribunals, and on the international policy exemplified in the English legislation that this consent should be honoured by the courts …
[24]At [22].
[25]Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd [1993] AC 334 (HL) at 356 (citations omitted).
We accept that the considerations referred to in Zurich apply in the s 290 context. However, the comments by the Supreme Court, and in Channel Tunnel Group Ltd, were in the context of an arbitration clause being invoked in relation to the debt claimed. That is not the situation in this case. There is no suggestion that the arbitration clause in the scheme relates to the claim in the statutory demand. The demand is for the judgment sum of $369,454.51 and the levies of $226,679, and it is not suggested that those figures can be arbitrated. The arbitration clause relates to the claim for consultant costs raised by Manchester that it seeks to set off against the undisputed amounts claimed in the statutory demand.
When the debt claimed in a statutory demand is not at issue, and not subject to proposed arbitration, and it is a set-off or cross-claim that is sought to be arbitrated, the need to give priority to the purpose of the Arbitration Act 1996 to encourage the use of arbitration as an agreed method of resolving commercial and other disputes[26] is less engaged. While it was said in Zurich that the Arbitration Act “recognises the importance of party autonomy and limits the scope for curial intervention in the arbitral process”,[27] this has less force where the arbitral process is not directly engaged. An arbitration requirement in relation to the debt claimed is not defeated. The arbitration requirement is a stage removed, and arises as a means of determining the set-off.
[26]Arbitration Act 1996, s 5(a).
[27]Zurich Australian Insurance Ltd v Cognition Education Ltd, above n 22, at [42].
In determining this issue we have considered the purpose behind the statutory demand process. Sections 289 and 290 fall within pt 16 of the Act, entitled “Liquidations”. They appear under the heading “Company unable to pay its debts”. Accordingly, the view has frequently been expressed that statutory demands should only be used to prove the insolvency of a company in anticipation of liquidation, rather than as a means to collect a debt.[28]
[28]See for example Environmental Solutions Ltd v Jesco Dosiertechnik GMBH & Co KG (1999) 8 NZCLC 261,854 (HC) at 261,862; Pirtek Waikato Ltd v Ellison Trading Ltd HC Hamilton M107/99, 10 August 1999 at [8(e)]; and Gateway Cargo Systems Ltd v Airborne Freight Ltd HC Auckland CIV-2003-404-7207, 16 March 2004 at [7]. See also Andrew Brown and others Company Law (online looseleaf ed, Thomson Reuters) at [CA289.07].
We consider that the purpose of statutory demands is not so limited. A statutory demand can legitimately be used to recover a debt even where liquidation is not in prospect. In Laywood v Holmes Construction Wellington Ltd this Court acknowledged that statutory demands “are, in a practical sense, important enforcement mechanisms”, notwithstanding that they may ultimately lead to a process which focuses on liquidity and asset worth rather than the payment of a particular creditor.[29] As was put by Wild J in Apple Fields Ltd v Trustees Executors & Agency Co of NZ Ltd:[30]
Unsurprisingly, there is nothing in the Act proscribing the making of a statutory demand without an intention at the time to take the further step of applying to put the debtor company into liquidation if the demand is not complied with. After all, the maker of a statutory demand will generally expect, or at least hope, that the demand will be met. … The legitimate purpose of a statutory demand is to obtain payment of a debt due.
The same view has been expressed elsewhere.[31]
[29]Laywood v Holmes Construction Wellington Ltd [2009] NZCA 35, [2009] 2 NZLR 243 at [62].
[30]Apple Fields Ltd v Trustees Executors & Agency Co of NZ Ltd (1999) 13 PRNZ 387 (HC) at 393 and 395.
[31]See for example Magsons Hardware Ltd v Concepts 124 Ltd [2011] NZCA 559 at [38]; AMC Construction Ltd v Frews Contracting Ltd [2008] NZCA 389, (2008) 19 PRNZ 13 at [7]; Browns Real Estate Ltd v Grand Lakes Properties Ltd [2010] NZCA 425, (2010) 20 PRNZ 141 at [16]; and Paul Heath and Michael Whale (eds) Heath and Whale: Insolvency Law in New Zealand (2nd ed, LexisNexis, Wellington, 2004) at 462–463.
To set aside a statutory demand applying a lower threshold to set-off subject to arbitration would, in our view, do damage to one of the purposes of the statutory demand procedure, which is to require corporate entities to promptly pay debts not subject to a substantial dispute. The dispute is about the set-off which, while it may be a defence,[32] is not the debt itself. In this case, the debt claimed in the statutory demand is undisputed and not subject to arbitration. Once it is accepted that statutory demands are a legitimate tool for the recovery of undisputed debts, the fact that there are other outstanding amounts between the parties that are subject to arbitration should not result in the application of a lower test. The arbitration does not go to the amount claimed in the statutory demand.
[32]Grant v NZMC Ltd [1989] 1 NZLR 8 (CA) at 13.
In our view, the claimed set-off in this case should be subject to the usual threshold test for statutory demands and set-off. As set out in Covington Railways Ltd v Uni‑Accommodation Ltd, the party seeking to set aside the demand:[33]
[M]ust be able to do more than merely assert that there is an available set-off. It must be able to point to evidence before the Court showing that it has a real basis for the claimed set-off and that accordingly the applicant’s claim to be a creditor is, to the extent of the set-off, seriously in doubt.
Are there clear and persuasive grounds showing a set-off?
[33]Covington Railways Ltd v Uni-Accommodation Ltd, above n 19, at [10].
The determination by Associate Judge Doogue in the High Court appeared to be that Manchester had failed to cross the threshold of a seriously arguable case. The Judge did not directly address the two different tests that we have discussed, but applied the usual test of “clear and persuasive” grounds.[34] He concluded in the relevant part of the judgment:[35]
The evidence which has been put forward on behalf of the applicant does not enable the court to come to any view as to whether any part of the funds which were outlaid by the applicant on the costs of project management consultants comes within the provisions of cl 21.2. Inferences are just not an adequate basis to assume that this factual issue has been satisfied. For all the court knows, advice may have been received from consultants about such diverse matters as the aesthetics of the level XII remediation, as well as the thermal efficiency of the roofing structure and wall claddings in regard to the level XII part of the building. The advice may have been received on the relative economies of adopting one form of construction or choice of materials over another which would only advantage the level XII owner by reducing the cost of the repair. While it would not be consistent with the principles upon which applications of this kind are decided to insist upon a rigorous analysis of the benefit to the other parts of the building, having regard to considerations such as those I have just listed, and perhaps others, at least some attempt ought to have been made to confront the point. I am not satisfied that it is seriously arguable that the costs which were expended by the applicant resulted in benefit to the other owners in the body corporate.
[34]Decision under appeal, above n 16, at [12].
[35]At [56].
Mr Harris argued that this was not a fair analysis of the evidence. He referred us to an affidavit of Mr Cummins, sole director of Manchester, that was filed in support of the application to set aside the statutory demand. That affidavit exhibited a spreadsheet setting out the various costs and what the experts did. Mr Cummins referred to the work of specific consultants and the amount charged, and he asserted a claim under art 21.2:
Manchester contends that all of the consultants’ costs set out in the spreadsheet to 31 May 2017 provide a benefit to the Body Corporate in terms of the clause. There is an obvious benefit to the Body Corporate in remediating the common property at level 12. It is also obvious that the remediation of the main roof benefits all proprietors.
There was no specific attempt by Mr Cummins to detail precisely how the work of the consultants benefitted the whole building, but he referred to evidence of a quantity surveyor who assumed that all the consultants’ costs provided a benefit for the Body Corporate as well as Manchester. Mr Cummins also disputed Body Corporate common property repair costs in respect of levels 1–11, alleging double counting of insurance recovery and betterment, and disputed relatively minor components of the amounts claimed in the statutory demand.
The affidavits filed in reply by the Body Corporate generally contest Mr Cummins’ claims, pointing out that Manchester has not completed the work on level 12 and so has no ability to properly arbitrate at the present time. The claims for deductions to the amounts in the statutory demand are strongly refuted. There is again no detailed analysis.
We have found the narrative of both sides in relation to the details of the set‑off claim to be superficial and unsatisfactory. This may be because the repair issues are technical and complex. We have to recognise the complexity of that background in assessing the strength of the set-off claim. Importantly we recognise the fact that it is likely that at least some of the consultants’ costs would have been for the benefit of the whole building, given that they were addressing the roof, cladding and structural soundness of the top level, the weathertightness of which was essential to the lower levels.
Therefore, the claim under art 21.2 is not necessarily strong, and because of the lack of detail we are not able to give it a full evaluation. However, we are of the view, contrary to that of the Associate Judge, that the threshold of a clear and persuasive ground showing a set‑off has, by a fine margin, been crossed by Manchester.
This means that, although we have not accepted Mr Harris’ argument that a lower threshold should apply, contrary to the learned Associate Judge we do accept that Manchester crosses the threshold in s 290(4)(b), of showing a sufficient set-off to enable a court to set aside the statutory demand.
Should the claimed set-off have led to the granting of the application?
Set-off against the judgment sum
Mr Powrie for the Body Corporate submitted that Manchester had to pay the judgment sum entered against it by Fogarty J as sought in the statutory demand, and could not defer it even if there was a sufficient set-off shown by Manchester. We have examined the decision of the Associate Judge, and are not clear whether he accepted this point or not. We are unable to follow aspects of the reasoning.[36] There has been no formal notice given by the Body Corporate to support the judgment on other grounds and the High Court reasoning leaves us uncertain whether this was necessary. Given that the issue of the immediate payability of the judgment sum ordered by Fogarty J of $321,264.97 plus GST was thoroughly traversed before us in argument, we consider it fair and appropriate to consider the point. Mr Harris, in addition to saying that there was an obligation to refer the issue to arbitration and set aside the statutory demand, also submitted that Manchester was able to set off the consultants’ costs against the judgment sum ordered by Fogarty J, despite Fogarty J’s reference to an immediate payment.
Approach to the exercise of the discretion
[36]In particular [51]–[55] and [65].
In approaching this we recognise that we have reached the position that an arguable set-off has been established (and a bona fide dispute for arbitration purposes has also been established). Nevertheless under s 290(4) of the Act, the court is given a discretion. The court “may” grant an application to set aside a statutory demand if it is satisfied of any of the matters specified, including the applicant appearing to have a set-off. The discretion has only been considered in a limited number of cases.
In Alfex Doors & Windows Ltd v Alutech Windows & Doors Ltd this Court recognised the existence of the discretion.[37] Nevertheless it held that where grounds for setting aside under s 290(4) are clearly made out, it will be a rare case in which, in the exercise of the residual discretion, the application is refused.[38] The circumstances of each case will call for consideration. The use of the discretion to decline an application was upheld by this Court in Browns Real Estate Ltd v Grand Lakes Properties Ltd where a lease provided for payments of rent without set-off.[39] This provision was held to be sufficient for a court to refuse to exercise its discretion to set off against a statutory demand claiming lease payments.[40]
[37]Alfex Doors & Windows Ltd v Alutech Windows & Doors Ltd (2001) 16 PRNZ 963 (CA) at [4].
[38]At [14].
[39]Browns Real Estate Ltd v Grand Lakes Properties Ltd, above n 31.
[40]At [16]–[17].
In Sunglass Hut New Zealand Ltd v Amtrust Pacific Properties Ltd Master Lang would have exercised his discretion to allow the statutory demand to stand, even if he had not taken the view that there was insufficient evidence to show that the counterclaim would have equalled or exceeded the amount of the statutory demand.[41] Master Lang had regard to the failure by the applicant to provide the respondent with any reasons for withholding the rent and outgoings, and it had never formulated any claim for compensation before it filed its affidavits in the proceeding.[42]
[41]Sunglass Hut New Zealand Ltd v Amtrust Pacific Properties Ltd, above n 21, at [43].
[42]At [44]–[45].
In Luxe One Ltd v Body Corporate 68792, a case concerning a statutory demand for body corporate levies, Associate Judge Smith, in addition to his finding that there was no genuine and substantial dispute, stated that he would have exercised his residual discretion to refuse the setting aside application.[43] He took into account evidence that the applicant had not challenged the levies which were the subject of the statutory demand until after that demand had been served. There had been a failure to challenge the amounts over a significant period.[44]
[43]Luxe One Ltd v Body Corporate 68792 [2017] NZHC 2672 at [169] and [172].
[44]At [172].
It is unnecessary to attempt to formulate any test for the exercise of the residual discretion. Clearly it will only be a rare case where the discretion is exercised against setting aside a statutory demand where a genuine and substantial dispute has been shown or the applicant has raised clear and persuasive grounds for a set-off or counterclaim. For the reasons that we are now about to detail, we consider this is one of those rare cases.
Our decision on the exercise of the discretion
The core of Fogarty J’s decision was that the scheme set by Heath J should be varied because of a change in circumstances. As this Court set out in its decision on appeal, Fogarty J found that:[45]
(a)The cost blow out had rendered the logic of the scheme unjust. It could not possibly be right that Manchester should avoid making any contribution to the cost of remediating the common property.
(b)The repair and remediation of levels 1–11 was conducted professionally. The Body Corporate could not be criticised for delaying the work until put in funds by reaching a settlement with Auckland City Council, against whom it had a claim. That was normal.
[45]Court of Appeal decision, above n 2, at [29] (footnotes omitted). See Fogarty J decision, above n 1, at [67] and [79].
He held that the scheme should be amended to reinstate the unit title statutory scheme. The cap of 11.88 per cent was removed and Manchester was ordered to pay the cost of repairs of common property to all levels calculated in accordance with the unit entitlement (now known as ownership interest) of Manchester’s unit, 12A.[46] He held that Manchester should make an interim payment of $321,264.79 immediately, to be adjusted upon completion of the remediation to level 12.[47] That sum was reached after Fogarty J gave a credit for amounts payable by the other unit title owners for repairs to the common property on level 12 under the varied scheme. That credit was given “if only to encourage immediate compliance by Manchester with this Court’s order to the benefit of all the other unit holders”.[48]
[46]Fogarty J decision, above n 1, at [156].
[47]At [155].
[48]At [154].
Even though the possibility of a later adjustment was contemplated, the Judge’s intention that payment should be immediate was clear. The Body Corporate had expended considerable sums for the benefit of all owners including Manchester; Manchester should make the payment at once. Manchester has refused to do this and maintains that refusal in this proceeding as it seeks to set aside the statutory demand. While a set-off can be raised to set aside a statutory demand based on a judgment sum, in this case we are firmly of the view that Manchester should not be allowed to refuse to pay immediately as directed by the High Court.
Fogarty J was clearly aware that there were going to be later adjustments which could be in Manchester’s favour. While he may not have been aware of the specific sums, he must be taken to have been aware of the potential claim for Manchester’s consultant costs under 21.2. This Court was also aware of potential cross‑claims by Manchester, as the evidence filed in support of that appeal made general references to amounts expended by Manchester to repair level 12 for the benefit of all unit owners.[49] In rejecting Manchester’s challenge to Fogarty J’s order for immediate payment, this Court said:
[69] We do not accept those submissions. In our view, the Judge was fully entitled to order an interim payment of his own initiative rather than wait until Manchester completed its level 12 repairs as Manchester considered should happen. There was no certainty as to that date and, as the Judge was aware, Manchester had refused to pay any building or annual operating levies. Manchester was not prejudiced. It was on notice that the Body Corporate considered its contribution to the cost of levels 1–11 common property repairs should be fixed at $322,525. The terms of Fogarty J’s order allow for subsequent adjustment. The disputed items are not significant.
[49]See Court of Appeal decision, above n 2, at [80], where Manchester’s claim and its ability to invoke the right to arbitrate are referred to.
Thus this Court has already confirmed the judgment of Fogarty J directing Manchester to pay the interim sum to the Body Corporate immediately. We consider that Manchester’s application to set aside the statutory demand for the interim payment on the basis of a set-off for repairs to level 12 is effectively an attempt to relitigate matters already decided.
Further, in a remediation scheme of this nature, where payments are made to the Body Corporate for the benefit of all unit holders, individual unit holders should not be able to defer payment of their share. If they are allowed to do so the body corporate system fails, as Fogarty J’s judgment implicitly recognised. Some unit owners would have to suffer a greater cash drain than others. While this is not a claim for ordinary levies, the refusal to pay by Manchester is unfair to other unit owners who have to carry more of the costs for levies under the remediation scheme, and this damages the cooperative principle behind the unit title system.
Under art 21.2, any dispute about the set-off for consultants’ fees is to be determined under the dispute resolution provisions of the scheme. Those provisions are at art 13, as we have set out. Article 13.3 provides that that no owners shall be entitled to withhold payment of a levy charged under the remediation scheme on the basis that the matter is in the process of dispute resolution. This is a very broad statement. It is not necessarily confined to dispute resolution by way of arbitration. It could also include court proceedings. What is clear is that the obligation to pay levies is special. They should be paid at once, whether or not there is a dispute. Pay now, argue later.
The specific arbitration provisions came before the High Court in an earlier dispute between Manchester and the Body Corporate about the payment of levies under the remediation scheme.[50] In that case it was also claimed that the levies were erroneous on their face.[51] Associate Judge Bell said in relation to art 13.3:
[39] I accept the submission as to “pay now argue later”. There is an obvious practical purpose. It enables the body corporate to fund remedial works effectively. Cash flow is assured. Dissident owners who want to contest levies are still required to pay, although they may take their complaints as to the levies to arbitration.
[50]Manchester Securities Ltd v Body Corporate 172108 [2013] NZHC 177.
[51]At [6].
We agree with that summary of the position. Ultimately if Manchester overpays the Body Corporate, it will be able to recover what it is owed at a later date if an arbitration results in an award in its favour. This indeed was the finding of Associate Judge Bell in the High Court in relation to the earlier claim for levies.[52]
[52]At [62].
We also observe that it would be premature for there to be an arbitration. It is part of the Body Corporate’s case that it is too early to have an arbitration as work still continues on level 12, and the amount of the costs is not finalised.
We are also influenced in our decision by the poor level of detail of the cross‑claim provided by Manchester, to which we have earlier referred.[53]
[53]See above at [41].
Finally, we note that both Fogarty J and this Court were critical of Manchester’s conduct, finding its behaviour to be “dilatory” and “prevaricating”.[54] This Court found that Manchester must take “the lion’s share of the blame” for the disputes.[55] Mr Cummins had accepted that Manchester’s construction process, stopping and starting and still going years later, was the “most uneconomical way to do construction”. This conduct by Manchester is another reason why we decline to exercise our discretion to set aside the statutory demand.
[54]Fogarty J decision, above n 1, at [14]; and Court of Appeal decision, above n 2, at [44].
[55]Court of Appeal decision, above n 2, at [44].
Therefore, despite an arguable set-off and the presence of the arbitration clauses and a bona fide dispute, because of Fogarty J’s order for payment immediately and the history we have outlined, we uphold the decision not to set aside the statutory demand.
The ordinary levies
A proportion of the amount claimed in the statutory demand is for ordinary levies, as we have set out. It is not clear to us exactly what view the Associate Judge took of the ordinary levy component of the statutory demand.
It is important to note that the levies are not disputed by Manchester. They have been accumulating since 2012. The dispute concerns the set-off claims which are greater than the statutory demand total.
The issue is again best dealt with under the court’s discretion under s 290(4). Manchester and the Body Corporate have been engaged in a complex and long‑running dispute about various costs expended by both parties in the course of this leaky building remediation, the cost of which has far exceeded anyone’s expectations. In these circumstances we do not consider that a possible counterclaim or set-off by Manchester, which may go to arbitration, should provide a basis for withholding payment of ordinary levies.
We also note that there are indications in the Unit Titles Act 2010 that ordinary levies are charged on a pay now, argue later basis. For example, under s 96(3), an eligible voter is disqualified from voting unless all the levies for his or her unit have been paid. This is clearly designed to encourage prompt payment of levies.[56] However, this point was not the subject of any detailed submissions before us.
Conclusion
[56]Similar points were made by Associate Judge Bell in Body Corporate 324525 v Stent [2017] NZHC 2857 at [202]–[205].
We have followed a different route from that of the High Court. However, we have reached the same conclusion. In our view the amount ordered to be paid by Fogarty J including GST plus interest, together with the amount of the unpaid levies together with interest, are due and payable. The application to set aside the statutory demand was correctly dismissed.
Result
The appeal is dismissed.
The appellant must pay the respondent costs for a standard appeal on a band A basis and usual disbursements.
Solicitors:
Gilbert Walker, Auckland for Appellant
Grove Darlow & Partners, Auckland for Respondent
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