Newstoon NZ Limited v Horton Media Limited
[2015] NZHC 2925
•23 November 2015
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2015-404-2119 [2015] NZHC 2925
IN THE MATTER of Section 290 of the Companies Act 1993 BETWEEN
NEWSTOON NZ LIMITED Applicant
AND
HORTON MEDIA LIMITED Respondent
Hearing: 17 November 2015 Appearances:
Mr G J Thwaite and Ms W Wong for the Applicants
Ms M Brugeyroux for the RespondentJudgment:
23 November 2015
JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE
This judgment was delivered by me on
23.11.15 at 4 pm, pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
NEWSTOON NZ LIMITED v HORTON MEDIA LIMITED [2015] NZHC 2925 [23 November 2015]
Introduction
[1] This application relates to a Statutory Demand issued by the respondent, Horton Media Limited (“Horton”), to the applicant, Newstoon NZ Limited (“Newstoon”). The Statutory Demand was served on Newstoon as its registered office on 27 August 2015.
[2] The amount claimed in the Statutory Demand is the amount owing to Horton by Newstoon in relation to two unpaid invoices (invoices 31225 and 31393), together with interest owing on those outstanding invoices. The amount claimed as owing on the two unpaid invoices is also the current balance of Newstoon’s running account with Horton.
[3] The outstanding invoices relate to the cost of printing 2 runs of “Weekly
Korea”, which were published on 25 May 2015 and 26 June 2015.
[4] Newstoon has applied to set the Statutory Demand aside on the basis that all of the invoices issued to it have been paid and that, as a matter of fact, it has overpaid Horton. Newstoon’s position is inconsistent with Horton’s accounting records, which shows a balance owing by Newstoon.
[5] Section 290(4) of the Companies Act 1993 sets out the grounds on which the Court may grant an application to set aside a Statutory Demand. Therefore, the issues this Court must determine are:
(a) Is there a substantial dispute as to whether or not the debt is owing or due;
(b)Does Newstoon have a counterclaim, set-off or cross-demand that brings the net amount owing to Horton under the prescribed amount ($1,000.00);
(c) Should Horton’s demand be set aside on other grounds.
Legal principles
[1] The Court’s power to set aside a statutory demand comes from s 290 of the
Companies Act 2003 which so far as relevant provides:
290 Court may set aside statutory demand
(1) The Court may, on the application of the company, set aside a 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.
[2] I respectfully agree with the following statement of principle which is taken from the judgment of Associate Judge Faire in Italia Motorsport Ltd v European Motors Ltd:1
The approach, which the Court takes to applications on each ground, can be shortly summarised. When considering an application
1 Italia Motorsport Ltd v European Motors Ltd HC Hamilton CIV-2004-419-950,
18 October 2004.
pursuant to s 290(4)(a) of the Companies Act 1993 the Court is required to determine if the applicant can show a fairly arguable basis upon which it is not liable for the amount claimed. Forge Holdings Limited v Kearney Finance (NZ) Limited (High Court, Christchurch, M 149/95, Tipping J, 20 June 1995) at page 2 and Queen City Residential Limited v Patterson Co-Partners Architects (No 2) (1995) 7 NZCLC 260,936. That formulation was approved by the Court of Appeal in United Homes (1988) Ltd v Workman [2001]
3 NZLR 447, 451 - 2.
Background
[6] The applicant publishes a publication as “Weekly Korea”. It has dealt with the respondent since 2005, its director says. However the relationship has now come to an end. The respondent claimed that the applicant owed to it the sum of $4,121.54 comprising $4,017.62 for printing services and $103.92 for interest. The applicant applied by originating application dated 9 September 2015 for an order setting aside the statutory demand. The grounds given were these:
(a) There is a substantial dispute whether or not the debt is owing or due.
(b) One or more other grounds exist to set aside Demand, namely: (i) The frivolousness of the claim;
(ii) The failure of the Respondent to engage to reasonable negotiations; and/or
(iii) The motive of the Respondent to the extent that it arises from the Applicant’s termination of the supply arrangement with Respondent.
[7] As it happens, I will not be required to rule on whether some of the grounds set out in sub-paragraph “(b)(ii) and (iii)”. I will confine intention to ground “(a)” which is expressly recognised in s 290(4)(a) upon which ground the present application can be resolved.
[8] Both before and after the service of the statutory demand there was a lengthy exchange of correspondence between the parties about the alleged debt. Quite a number of matters which are irrelevant to the present dispute were raised. The
central and critical question for this Court is whether there is a substantial dispute that the amount claimed in the statutory demand was in fact owing.
[9] The respondent took the ground that the statements that it had received from the respondent showed that in 2015 it had paid more than it owed to the respondent and that if anything the respondent ought to provide it with a refund.
[10] The respondent sent a number of emails and accompanying accounting records which it claimed established that the position was to the contrary.
[11] The respondent’s view was that the amounts owing were supported by invoices which it set out in the following statement that accompanies the statutory
demand.
Invoice
Date of
Invoice
Due Date
Amount of
Invoice
Interest
Rate
Days
Overdue
*Interest
Payable
Total
31225
22/05/2015
29/05/2015
$2,023.49
13.00%
90
$ 64.86
$2,088.35
31393
26/06/2015
3/07/2015
$1,994.13
13.00%
55
$ 39.06
$2,033.19
$4,017.62 $103.92 $4,121.54
* Days overdue to 27/08/2015
[12] Of course, if the contention of the applicant was correct, that the running account if properly taken would show that at least for the period of 2015 credits exceeded debits, then it was not to the point for the applicant to refer to individual invoices which it claimed were unpaid.
[13] The employees of the respondent made what I accept were genuine attempts to explain the position of the applicant’s account. At one point they provided a statement to the applicant which covered the period from 5 December 2014 down to
6 July 2015. The printed statement2 indeed showed that credits of $111,295.48 had
2 BOD page 29.
been made and debits of $110,698.42 had been incurred. However, there is noted in handwriting on the statement under the figure for credits:
- 4614.68
106,680.80.
[14] It was explained to me that the significance of this entry was to show that the total credits had been only $106,680.80 (rather than the figure which the accounting system showed of $111,295.48). If this was correct, there would still be a net deficiency owed to the respondent.
[15] Mr Sanjit Dutta an account manager at the respondent gave an affidavit. He outlined attempts that had been made to resolve the issue and to explain to the applicant what the liability was comprised of. He deposed that he had asked another employee, Ms Dudding to send to the applicant a print-out of the applicants customer activity summary from 9 May 2014 to 17 July 2015. The second customer activity summary beginning on 13 March 2008 showed that a running balance as at 3
June 2014 had the account of the applicant in deficit by the sum of $4,614.68 confusingly, though, in her email Ms Dudding said that as at 3 June 2014 “the account was all clear at that date”. She went on to say:
By taking the two payments prior to 3 June 2014 (total $4,614.68) from the credit total on page 2 – leaves a balance of credits of $106,680.80 the balance of debits is $110,698.42 – the difference being $4,017.62 which is the balance outstanding.
[16] What was not explained though is why the two payments prior to 3 June 2014 ought to have been taken off.
[17] Mr Dutta, in an email of 20 July 2015 made reference to these “adjustments”.
He said:
There has been two payments in the beginning as marked that got adjusted against earlier invoices not shown here. These total $4,614.68 as handwritten.
Take invoices and payments/credits for this period, take off the earlier payments above, you arrive at a balance due of $4,017.62. This reconciles
with the two invoices of 22/05 and 22/6/15 that are unallocated and *
marked in the statement.
It’s difficult and confusing to reconcile this way I suppose.
[18] Mr Dutta showed commendable candour in making the last comment that he did.
[19] The original account activity statement which the respondent had provided and which the applicant relied on covering the year 2015 showed that from the 9
May 2014 the account was in balance. However, the above endorsements that were made to it were made on the basis that two credits, for $2,307.34 each ought to be excluded from the list of credits for the period covered by the customer activity summary. If that was done, then the figure of $4,614.68 which an unknown person had endorsed in handwriting as I previously described would in fact be correct.
[20] Ms Boyko who is the Chief Financial Officer for the respondent also gave an affidavit. So far as the point concerning the balance of payments for 2015 is concerned she said that she accepted that the applicant’s payments exceeded the invoices rendered to it in 2015 but said “this argument ignores the applicant’s running account balance”.
[21] After the timetable sequence of affidavits had been completed in this case, the parties filed a series of affidavits seeking to introduce more evidence. I declined at the hearing of this matter to allow the introduction of this material and in particular the affidavit of Ms Boyko sworn third of November 2015. That affidavit, which the respondent wished to rely upon, set out for the first time what was alleged to have been a complete reconstruction of the entirety of the trading position between the two parties.
Discussion
[22] It is not the function of the Court when hearing an application to set aside a statutory demand to resolve disputed factual matters. In this case, the applicant is able to point to apparent inconsistencies in the material that has been provided to it by the respondent which purports to show the state of the applicants account. There
are inconsistencies in that material. There may well be a good explanation as to how the apparent inconsistencies can be reconciled.
[23] However, on the face of it the records which the respondent relied upon when it issued the statutory demand in the first place and which it put before the court in its first affidavits disclosed that what the respondent had done was to provide accounting records covering a part only of the trading history between the parties. However, the data so disclosed was equivocal as to whether or not the applicant was in fact indebted to the respondent. The data was taken from the beginning of 2015 and was accompanied by an unexplained adjustment which had been carried out in handwriting to the accounts.
[24] The essential explanation that was provided concerning this was that an adjustment was being made to take into account unpaid liabilities from an earlier trading period. The position, summarised, was that the basis for the adjustment was not part of the accounts produced by the respondent’s accounting system. The respondent was in effect saying that its own accounting system did not comprise a complete statement of all of the transactions between the two parties.
[25] It became obvious to the respondent that there was a contest about this matter following the filing of the application in the affidavit in support.
[26] Only after the shortcomings of the information actually provided became apparent, did the respondent take steps to put before the Court a full reconciliation of the running account which did not start at some arbitrarily selected point. In the course of hearing from the parties about whether the respondent ought to be permitted to file further affidavit material in this area, it was explained that some of the material had to be recovered from the company’s archives. I understand that and also appreciate that such an undertaking may require some effort and time to be expended as well as the incurring of expense to recover such material. But if the respondent does not, as happened here, provide an adequate evidentiary basis to establish from the outset that its claim to be a creditor of the applicant is soundly based, that may risk not being permitted subsequently, when holes appear in its
evidence, to search for and then put before the Court, additional accounting material which it seeks to introduce by late filing of affidavits.
[27] The respondent having filed its affidavit in opposition had no right to file a further affidavit although leave could have been granted if there was some reason why justice required such an outcome. Rule 7.26 which contemplates the filing of affidavits in reply makes it clear that such affidavits are restricted to dealing with new matters that are raised in the notice of opposition or an affidavit filed by the respondent.
[28] The circumstances in which the respondent will be entitled to file a further affidavit are be restricted to those where it could not have been anticipated that the applicant would raise the matter that it did in its affidavit in reply and where justice requires the party applying to do so because it has not previously had an opportunity to comment on the matters raised. In this case, the dominating and clear dispute between the parties has been about establishing the balance remaining in their running account. Plainly, the respondent ought to have brought all of its evidence forward at the time it filed its affidavits in response. What has happened in the circumstances of this case, though, is that the respondent has sought to expand the scope of its evidence asserting that it has the right to do so because the applicant commented on the first round of evidence when it filed its affidavit/s in reply. If the affidavit in reply has gone beyond the limits that are established by r 7.26, then the appropriate approach to take is to seek a direction from the Court that to the extent that the affidavit falls outside the limits contemplated in that rule, it ought not to be read. If an applicant files an affidavit in reply which breaches that rule, the answer is not to file still further affidavits or, still worse, to file affidavits that re-open the whole factual controversy under the guise of responding to an affidavit in opposition. This is what the respondent was attempting to do in this case and I accordingly ruled at the hearing that the further affidavit by Ms Boyko ought not to be admitted for the reasons that I have now set out.
[29] It is my view that a party in the position of the applicant in this case is entitled to point to the existence of a dispute arising from shortcomings in or inconsistencies in the evidence that the respondent has put forward.
[30] As Mr Thwaite pointed out, the respondent was effectively saying that the implicit statement in the accounts was incorrect in that at the beginning of the trading period it showed a zero balance when, according to Ms Brugeyroux, counsel for the respondent, there was to be deducted from the zero running balance unpaid items from an earlier revenue period. Ms Brugeyroux attempted to explain how this came about by referring to the aged debtors schedule relating to the applicant. While it is obvious that counsel had mastered the intricacies of the figures, my conclusion is that it would not be safe for the Court to accept that the explanation that she provided took matters far enough. In my assessment, some independent verification of the position that the respondent put forward from, say, evidence from a chartered accountant, would have been necessary before I would be prepared to say that the position was clear enough to rule out the existence of a substantial dispute. The position that counsel for the respondent outlined was not so plainly correct that I could have accepted it as stating the true position of the applicant’s account with the respondent.
[31] For those reasons, I would not be prepared to accept that the reasons explaining the inconsistency of the hand written addendum with the Customer Activity Summary could safely be accepted.
[32] It is beyond the limits of an enquiry under an application pursuant to s 290 for the Court to attempt to resolve apparent conflicts in the position of the applicant’s account with the respondent. It is enough to say that there are substantial matters which are not agreed and therefore that there is a substantial dispute between the parties which satisfies the requirements of s 290(4) about whether the debt is owing or is due. Failure to pay a debt about which there is no dispute and which is subject to a statutory demand gives rise to a presumption of insolvency. Where however there is real doubt about whether the debt is due and owing, the failure to pay cannot be viewed as presumptive evidence of insolvency. That is the position in this case. I grant the application.
[33] There is no reason why the costs of the proceeding should not be paid by the party which has failed in regard to the proceeding as HCR 14.2 provides.
[34] Mr Thwaite submitted that there should be an uplift of costs. He was critical of various aspects of the conduct of the respondent including what he characterised as an unwillingness to properly negotiate with the applicant. The most obvious reason there would be for making such an order would be that the respondent had taken or pursued an unnecessary step for an argument that lacked merit. I do not however accept that such occurred in this case and therefore that ground for making an increased order under HCR 14.6 (3)(b) does not apply. It might be that the position which the respondent takes is ultimately found to have merit. That is to say it may be that in appropriate proceedings, a court might come to the conclusion that the applicant actually does owe the money which the respondent claims. The decision that I have made is essentially based upon the fact that the evidence which the respondent put forward to support the submission that there was no substantial dispute, was inadequate to the task.
[35] The respondent is to pay costs on a 2B basis together with disbursements fixed by the Registrar.
J.P. Doogue
Associate Judge
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