Nga Rau Tatangi Limited v Liberty Homes Limited

[2016] NZHC 1177

IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY

CIV-2016-419-54 [2016] NZHC 1177

IN THE MATTER OF	Section 289 of the Companies Act 1993
BETWEEN	NGA RAU TATANGI LIMITED Applicant
AND	LIBERTY HOMES LIMITED Respondent

Hearing:	1 June 2016
Appearances:	Mr P J Jefferies for Applicant Mr M T Milroy for Respondent
Judgment:	3 June 2016

JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE

This judgment was delivered by me on

03.06.16 at 4 pm, pursuant to

Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date……………

NGA RAU TATANGI LIMITED v LIBERTY HOMES LIMITED [2016] NZHC 1177 [3 June 2016]

[1]      The applicant contracted with the respondent for the latter to build for it residential houses in Hamilton which were part of a social housing project.   The respondent  invoiced  the  sum  of  $24,261.31  to  the  applicant  on  or  about  30

November 2015, with this amount representing a progress payment in the construction project.

[2]      The applicant refused to pay, citing breaches of contract on the part of the respondent and overpayments which it said it had made to the respondent as the reason justifying it taking the position that it did not owe anything to the respondent. The respondent issued a statutory demand which was served on 15 February 2016. The applicant then filed an originating application to set aside the statutory demand pursuant to s 290 of the Companies Act 1993.

[3]      The grounds upon which the application was based were stated as follows:

1. There is a substantial dispute as to whether or not the debts specified in the demand is owing of not;

2. The applicant has a set off and the amount specified in the demand is less than the amount of the set off; and

3.  The demand ought to be set aside on other grounds.

[4]      In advance of the fixture, I arranged a telephone conference with counsel to discuss certain aspects of the case.  Specifically, the issue that I wished counsel to consider was whether the provisions of the Construction Contracts Act 2002 applied and whether the invoice had been submitted as a payment claim under s 24 of that Act and whether, if so, any payment schedule had been provided responding to the payment claim.

[5]      Subsequent to the conference the parties sensibly reached agreement in an attempt to limit the issues at large in the proceeding.  Specifically, the respondent agreed that a valid payment schedule had been issued but had not been responded to and that accordingly the sum of $10,987.60 (a lesser sum than set out in the statutory demand) was owing.

[6]      Prior to agreement being reached in this last matter, the applicant placed in its solicitors trust account the sum of $24,261.32.   This payment was to be held on terms that it was to be made available to meet any liability that the applicant might be established to be under and to demonstrate that the applicant was not insolvent.

[7]      The  position  after  these  various  steps  were  taken  is  that,  subject  to  the arguments that will be discussed in this judgement, there is $10,987.60 owing to the respondent.  However the applicant still wished to proceed with the application to set aside the statutory demand.

[8]      Section 290 of the Act Reads as follows:

290     Court may set aside statutory demand

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.

[9]      The stance which the applicant took was that while the grounds in ss 4(a) were not available to the applicant (there being no substantial dispute available to it as to whether or not the debt owing is due) other grounds were available to it under s 29 (4)(b) and (c).

Principles

[10]     In determining whether there is a substantial dispute, the following principles are applicable (see Heath and Whale on Insolvency at 20.7):

a)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 (Queen City Residential Ltd v Patterson Co-Partners Architects (No

2) (1995) 7 NZCLC 260,396).

b)The mere assertion of a dispute is not sufficient, some material short of proof is required.

c)It is not usually appropriate to resolve disputed issues of fact on affidavit evidence alone, particularly when issues of credibility arise.

d)The jurisdiction is a summary one and calls for a prompt judgment as to whether there is a genuine and substantial dispute. It is not the task of the Court to resolve the dispute (see Industrial Group v Bakker [2011] NZCA 142 at [24]-[25]).

The claimed set off

[11]     The applicant asserts that it is owed money by the respondent which off-sets in its entirety the amount of the debt owed.  These claims are based upon a review which the applicant said has been carried out of all of the invoices submitted in the course of the building contract.  That review was carried out by Ms Sharon Lambert who is the general manager of the applicant.

[12]     One of the conclusions that Ms Lambert came to was that the applicant had been required to pay a penalty charge of $17,680.00 for alleged downtime which the respondent charged to the applicant.    The contention of the applicant is that there was no contractual justification for that charge.

[13]     There is a further claim that labour costs of $14,449.80 which were paid have not been demonstrated to be a proper charge which the respondent was entitled to make pursuant to the construction contract between the two parties.

[14]     The claim which the applicant makes however must confront the provisions of s 79 of the Construction Contracts Act 1994 (“CCA”) which provides as follows:

79Proceedings for recovery of debt not affected by counterclaim, set- off, or cross-demand

In any proceedings for the recovery of a debt under section 23 or section 24 or section 59, the court must not give effect to any counterclaim, set-off, or cross-demand raised by any party to those proceedings other than a set-off of a liquidated amount if—

(a)        judgment has been entered for that amount; or

(b)      there is not in fact any dispute between the parties in relation to the claim for that amount.

[15]     There is no doubt in this case that the debt upon which the respondent based its statutory demand lies within the scope of s 24 CCA.  That section sets out the consequences of not paying a scheduled amount in a manner indicated by the payment schedule.  Plainly, what the applicant asserts is that it has a right to recover the letters two sums that I have mentioned as money had and received.  It is asserting therefore that it has a set-off or cross-demand and such claims cannot be offset other than in the limited circumstances which are described in s 79 and which do not apply in the context of this case.

[16]     It has been determined by Court of Appeal authority that the prohibition in s 79 extends to statutory demands:  Laywood v Holmes Construction Wellington Ltd

where the Court of Appeal noted as follows:1

1    Laywood v Holmes Construction Wellington Ltd [2009] 2 NZLR 243.

[61]      We emphasise at this point the distinction between an application to set aside a bankruptcy notice or a statutory demand on the one hand and an adjudication of bankruptcy or order to wind up a company on the other. The question we are asked to resolve concerns the former. In that context, we prefer the view expressed by Randerson J in Volcanic Investments. We find some assistance in the exceptions provided for in s 79. Under that section, a set-off may be taken into account in debt recovery proceedings (including the s 73 process) if it relates to a liquidated amount and either judgment has been entered for that amount or there is no dispute between the parties in relation to the claim for that amount. Absent that, a determination can be entered  as  a  judgment  under  s  73  and  enforcement  proceedings  taken through the District Court, and any counterclaim, set-off or cross-claim must be pursued through separate proceedings.

[62]     If  that  is  the  position  in  relation  to  the  enforcement  processes available through the District Court, or where there is a charging order under the CCA, there seems in principle to be no reason why it should not apply in respect of a bankruptcy notice under s 19(1)(d) of the Insolvency Act or a statutory demand under the Companies Act. It is true that such processes have an additional dimension to them, in the sense that ultimately they lead to a process which focuses on liquidity and asset worth. It is also true, as Associate Judge Doogue said, that bankruptcy and liquidation proceedings have a broader objective than simply ensuring that a particular creditor is paid. Despite that, bankruptcy notices and statutory demands are, in a practical sense, important enforcement mechanisms, as Randerson J recognised. And in the present case, the debt which Holmes Construction seeks to recover has the force of a court judgment behind it. This is not a case  where  a  creditor  has  sought  to  use  bankruptcy  or  liquidation proceedings to recover a small amount from a person or company which can plainly afford to pay it.

[63]     If the contrary view were to be adopted, the efficacy of the s 73 process would, in our view, be undermined. Parties to construction contracts could refuse to pay an amount ordered by an adjudicator, and resist bankruptcy notices or statutory demands in relation to the debt, on the basis that they had a counterclaim, set-off or cross-demand. The effect of this would simply be to recreate similar problems to those which led to the enactment of the CCA, albeit in a different context.

[64]      We acknowledge that this approach may produce hardship. A party may have a meritorious counterclaim, set-off or cross-demand and may not raise it in the context of the CCA or by means of separate proceedings. Yet that party may be precluded from raising it in an application to set aside a bankruptcy  notice  or  a  statutory  demand  that  follows  an  unsatisfied judgment issued under s 74. This seems hard. But while the adoption of the alternative view would alleviate this hardship, it would, as we have said, create another hardship - it would keep the party in whose favour the adjudicator had ruled from its entitlement under the CCA, and thereby frustrate its purpose.

[17]     The conclusion therefore is that the possibility that the applicant could bring a claim against the respondent to recover money which the respondent received, but was not entitled to, cannot affect the entitlement of the respondent to serve the

statutory demand and to rely on that statutory demand as giving rise to a presumption of insolvency in any liquidation proceedings that it may commence against the applicant.

Other grounds

[18]     A further discrete ground that the applicant relies on is that contained in s 290(4)(c), which is the basis for the applicant contending that the demand ought to be set aside on “other grounds”.

[19]     The  grounds  that  are  put  forward  concern  the  relationship  between  the applicant and Mr Meroiti and Mr Hattingh.  Mr Meroiti was the quantity surveyor whom the applicant retained to advise it both before the contract was let and afterwards to manage and administer the carrying out of the building contract.  He was also the engineer under the building contract. As part of his responsibilities, Mr Meroiti was required to scrutinise invoices which the respondent rendered to the applicant.   I will accept for the purposes of argument in this case that that is an adequate summary of the part of the functions which Mr Meroiti was required to discharge.

[20]     For the applicant, it is asserted that Mr Meroiti did not properly discharge his obligations to the applicant in the former role.   It is said that  he approved for payment two claims which the applicant asserts were not payable.  Mr Meroiti has also given an affidavit on the part of the respondent opposing the application to set aside the statutory demand.  It is the applicant’s contention that Mr Meroiti ought not to have done so.   These factors in combination, the applicant submits, amount to grounds  upon  which  the  Court  would  be justified in  setting  aside  the statutory demand.

[21]     I do not agree with the foregoing contentions.   Issues about Mr Meroiti’s competence in passing the invoices for payment would not seem to involve any responsibility or culpability on the part of the respondent.   After all, it was the applicant who engaged Mr Meroiti.  After Mr Meroiti had been introduced into the contractual structure of arrangements the respondent was of course required to deal with him in the course of construction.   It was not however the concern of the

respondent to attend to the interests of the applicant by ensuring the accuracy of the work that Mr Meroiti carried out, during the currency of the construction contract.

[22]     I do  not  consider,  either, that  the actions  of Mr Meroiti  in  swearing  an affidavit in support of the respondent have any bearing on the question of whether the statutory demand ought to be set aside.  It should not be overlooked that HCR

9.75 empowers the Court to make an order requiring persons, to attend the Court to give evidence in any event.  Consistent with the apparent policy that underlies that rule, it would not be correct for the Court to take the view that by giving an affidavit in a proceeding, which affidavit must be taken as being presumptively honestly given, Mr Meroiti has done something worthy of the Court’s disapprobation.  Nor would it be correct to conclude that by adducing evidence from Mr Meroiti, which itself cannot be criticised, the respondent has provided grounds upon which it ought reasonably to be deprived of the entitlement to rely on the statutory demand.

Insolvency

[23]     The final point which the applicant put forward was that the company is not insolvent and that that fact is demonstrated by its ability to pay into its solicitors trust account the sum of $24,261.31.

[24]     In my view, the question of the insolvency of the company or otherwise is not a matter that is in issue at the stage where the Court is considering an application pursuant to s 290:  AMC Construction Ltd v Frews Contracting Ltd.2   Because it is not possible for the debt in this case to be denied by the applicant as a result of the operation of s 24 of the Act, it is not in issue in this case whether or not the company is so indebted.    In AMC Construction Ltd the court stated:

[5]      The first question is whether the solvency of a company can of itself constitute a ground why the demand ought to be set aside under s

290(4)(c). The solvency of a company will very often be relevant to a consideration of the grounds in subs (4)(a) and (b). The Court must

evaluate whether there is substantial dispute or a cross-claim. The

Court must make an assessment whether the case is one where, as frequently occurs, the account is disputed as a means of buying time

2       AMC Construction Ltd v Frews Contracting Ltd CA 145/2008, 25 September 2008 at [6]  and following.

to  pay,  or  whether  the  grounds  for  the  dispute  are  genuine. An examination of the company's solvency will often be a useful aid in determining whether the refusal to pay is the result of a bona fide dispute as to liability or whether it reflects an inability to pay.

[6]       In cases such as that solvency is relevant not as a separate ground under subs (4)(c), but as a relevant consideration under subs (4)(a) and (b). In this case, the appellant, in addition to relying on paras (a) and (b), seeks to elevate the question of the company's solvency to an independent ground of which the notice ought to be set aside, under para (c). In Medisys, Master Kennedy-Grant accepted a submission (which was not challenged) that the solvency of an applicant company under s 290 can constitute a ground for setting aside a statutory demand against it. He further held that it is well established that the standard of proof of the existence of a dispute as to the debt, or of a counterclaim, set off, or cross demand, is the establishment of an arguable case and that there is no reason in principle why the same standard of proof should not apply in respect of the grounds under s 290(4)(c).

[7]       We would not wish to rule out the possibility that the solvency of the company might constitute a stand alone ground for setting aside a notice under para (c). However, we consider that such cases are likely to be extremely rare. If there is no dispute as to the company's liability, so that para (a) or (b) cannot be invoked, it is difficult to imagine  circumstances  in  which  the  company  should  be  able  to avoid paying a debt, merely by proving that it is able to pay that debt. If the debt is indisputably owing, then it should be paid. If the company simply refuses to pay, without good reason, it should not be able to avoid the statutory demand process by proving, at the statutory demand stage, that it is solvent. The demand should be allowed to proceed. If it is not met, and an application for liquidation is filed, in reliance on the presumption in s 287(a) that the company is unable to pay its debts, then the company will have an opportunity on the liquidation application to rebut the statutory presumption, which applies "unless the contrary is proved". There might be circumstances in which it is appropriate to advance the inquiry as to solvency to the s 290 stage, but that would require some particular circumstance not present in this case.

[25]     Given  that  in  this  case  the  indebtedness  to  the  respondent  cannot  be contested, this is not one of the “rare” cases in which the solvency of the company is relevant at this stage where an application is before the court to set aside a statutory demand pursuant to s 290.

[26]     The  evidence  of  the  payment  into  the  solicitor’s  trust  account  does  not therefore assist the applicant in persuading the Court that the statutory demand ought to be set aside.  Of course, if this matter proceeds to the point where the respondent initiates  liquidation  proceedings  and  it  becomes  necessary  for  the  applicant  to

establish its solvency, it is entitled to put before the Court any evidence that is available to it and such evidence will no doubt be taken into account by the Court which would in such circumstances be required to judge whether that additional evidence off-set the presumption of insolvency that arises from the non satisfaction of a statutory demand.

Conclusion and costs

[27]     For the foregoing reasons I conclude that the application for an order setting aside the statutory demand should be dismissed and there will be an order accordingly.  The parties through their counsel at the hearing before me agreed that costs should follow the event and should be on a 2B basis.  There will therefore be an order that the applicant is to pay to the respondent the costs on a 2B basis together

with disbursements as fixed by the Registrar.

J.P. Doogue

Associate Judge