North Shore Health Sauna Limited v New Zealand Sports Complex Limited HC Auckland CIV-2010-404-7015

[2011] NZHC 181

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2010-404-7015

BETWEEN  NORTH SHORE HEALTH SAUNA LIMITED

Applicant

ANDNEW ZEALAND SPORTS COMPLEX LIMITED

Respondent

Hearing:         25 February 2011

Appearances: G Thwaite and K Oh for the Applicant

A Commons for the Respondent

Judgment:      4 March 2011

RESERVED JUDGMENT OF ELLIS J

This judgment was delivered by me on 7 March 2011 at 4 pm, pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Solicitors:           G J Thwaite, PO Box 6239, Auckland 1141

Counsel:           A H J Commons, PO Box 1804, Auckland 1140

NORTH SHORE HEALTH SAUNA LTD V NEW ZEALAND SPORTS COMPLEX LTD HC AK CIV-2010-

404-7015 4 March 2011

[1]      North Shore Health Sauna Limited (North Shore Health) apply to set aside a statutory demand issued by the respondent, New Zealand Sports Complex Limited (in Receivership) (NZ Sports).

[2]      The relevant history to the matter begins on 18 December 2008 when North Shore Health and NZ Sports entered into a Deed of Lease in relation to premises that were to be occupied by North Shore Health for business purposes.   The lease contained a standard clause stating:

All the rent shall be paid without any deductions or set-off by direct payment to the landlord, or as the landlord may direct.

[3]      On 17 December 2009 NZ Sports was put into receivership.

[4]      By 30 June 2010 North Shore Health was considerably in arrears under the lease.    Following discussions  between  North  Shore Health  and  the receivers  of NZ Sports, the parties entered into a surrender of lease (the “Deed of Surrender”) which relevantly provided as follows:

2.    Surrender of Lease

In consideration of the Landlord agreeing not to immediately sue the Tenant for non-payment of rent and outgoings under the Lease and an agreement between the Landlord and the Tenant whereby the Tenant has agreed to enter into the New Lease, the Tenant surrenders and conveys the Lease to the Landlord with effect from the Operative Date.   The Landlord accepts the surrender of the Lease so that the residue of the term of the Lease merges in the reversion and is extinguished on the Operative Date but without prejudice to either party‟s rights arising before the Operative Date and the rights and obligations of the parties in this deed.

3.    Arrears

3.1  The Tenant will remain liable for payment of rent and outgoings under the Lease up to the Operative Date.   The quantum of  the rent and outgoings arrears payable by the Tenant to the Landlord as at the Operative Date (assuming the June 2010 rent is paid) is $78,656 (Arrears).

3.2  The Tenant asserts that it has made payment of amounts payable by the Landlord under the Lease on behalf of the Landlord.  The Landlord has no evidence of such payments being made on its behalf.  The Landlord is  prepared  to  allow  the Tenant  to  establish  that  it  has  made  such payments and that they were payable by the Landlord under the Lease. The Tenant must produce clear evidence of payments made by it on

behalf of the Landlord.  For the purposes of this clause “clear evidence” means receipts issued by the provider of the relevant services and bank statements evidencing payment of the amount claimed.   The clear evidence required by this clause must be given to the Landlord within ten working days of the date of this deed.  If the Landlord accepts that payments have been made by the Tenant on behalf of the Landlord the Landlord will set off such payments against the rent and Arrears.  For the avoidance of doubt the Arrears will remain due and payable notwithstanding the surrender of the lease under this deed.

3.3  The Arrears (subject to adjustment under clause 3.2) will be paid as follows:

3.3.1    $26,219 on the Operative Date;

3.3.250% of the unpaid balance of the rent and outgoing arrears on the date one month after the Operative Date (30 July 2010); and

3.3.3The final payment of 50% of the unpaid balance of the rent and outgoings arrears on the date two months after the Operative Date (30 August 2010).

3.4  Amounts which are not paid on their due date will incur penalty interest at the rate of 14% per annum calculated from the date payment was due until the date payment is made.

[5]      As foreshadowed in clause 2, a new lease was then entered into between the parties.  That lease also contained the standard „no set-off‟ clause in relation to rental arrears.

[6]      As is evident from the terms of the Deed of Surrender, notwithstanding the

$78,656 arrears that were accepted and agreed by North Shore Health to be owing, the receivers agreed to give North Shore Health a limited right of set-off in relation to those arrears.   In accordance with the process for establishing such a set-off stipulated in clause 3.2, a quantity of documents was provided  by North Shore Health to the receivers within the time specified in that clause.  Some, but not all, of these were accepted by the receivers as proof or evidence of payments having been made by North Shore Health on behalf of NZ Sports and, as a result, the arrears agreed to be owing in the Deed of Surrender was reduced by the receivers to an amount of $42,308.53.

[7]      The  evidence  that  was  rejected  by  the  receivers  as  insufficiently  clear involved proof of payments being made by North Shore Health (in the form of bank statements  and  the like)  but  without  any corresponding proof of  receipt  by the

relevant payee.  It seems to me that the receivers‟ stance in this respect was not only

entirely reasonable but also in accordance with the express terms of clause 3.2.

[8]      Having  rejected  some  of  the  documents  provided  as  being  insufficient evidence of the relevant payments being made, the receivers nonetheless gave North Shore Health a further three working days to provide them with any further substantiating documentation in that respect.  However, no such documentation was forthcoming and nor were any payments made by North Shore Health in relation to the remainder of the arrears.  This led to the issuing by NZ Sports of the statutory demand dated 7 October 2010 for the sum of $42,308.53.

[9]      On 21 October 2010 North Shore Health applied to set aside the statutory demand.  The grounds relied upon were firstly that the company was entitled to set- off further amounts against the amount demanded and secondly that there was a substantial dispute as to whether or not the debt was owing.   North Shore Health said, inter alia, that:

According to the surrender of lease, the exact amount of arrears is to be determined after the complete adjustment of the amounts of the payments made by the applicant.

Such adjustment ... is not completed yet.

[10]     In mid-December 2010, there were negotiations between the parties in an attempt to settle the matter.   Through an exchange of emails, an agreement was reached whereby North Shore Health would continue to pay the rent owing under the new lease together with two lump sum amounts of $10,000 which would be accepted by the receivers as meeting the obligation to pay the outstanding arrears (the “settlement agreement”).   That agreement was, however, subject to the following express conditions:

If the payments identified ... are not made on the dates identified, time strictly of the essence, then the further $24,791.40 arrears, the subject of the statutory demand in CIV-2010-404-7015 become immediately payable and:

(a)     North Shore Health Sauna Limited will have no recourse to dispute

the amount payable as per the receiver‟s  position in CIV-2010-404-

7015.

(b)     The receivers will proceed with the current matter CIV 2010-404-

7015 on the court date set: 25 February 2011 (providing that if the failure to pay relates to a payment due following 25 February 2011,

the receivers will seek a relisting of this matter so that the matter can

proceed).

[11]     Those conditions imposed by NZ Sports were rather obliquely amended by

North Shore Health‟s solicitors on 21 December 2010 who advised:

Our client advised that they would accept the receivers‟ offer, subject to the

condition that:

1.In relation to the balance of $24,791.40, if the rent  and operating expenses  are  paid  in  accordance  with  current  deed  of  lease  from March 2011 until the expiry of the current lease (30 June 2015) or until the date of the receiver sells [sic] the property to the third party (whichever comes earlier), then the $24,791.40 will be waived by the receivers and will not be payable. ...

[12]     That   amendment   was   accepted   by   the   receivers   in   an   email   dated

21 December 2010 which stated:

The matter is now resolved accordingly.

[13]     It is not in dispute that North Shore Health did not honour the payment schedule specified in the December 2010 agreement.  NZ Sports received just two of the specified payments.  On 14 January 2011, $18,317.84 (being the December rent which had been due on 21 December 2010) was paid and on 14 January 2011 the first $10,000 instalment of arrears (which had been due on 31 December 2010) was paid. The receivers then took steps to bring the matter on accordingly.

[14]     Just  prior  to  the  hearing  on  25  February,  however,  North  Shore  Health obtained leave to amend their application to have the statutory demand set aside from Associate Judge Bell.   The basis for the amendment was that North Shore Health said that, in mid-December 2010, a further agreement between themselves and NZ Sports had been discovered.  The agreement was dated 23 December 2008 and written in both English and Korean, the Korean version to prevail.   The agreement purported to modify the original 18 December 2008 Deed of Lease and, in particular, to reduce the amount of rent that was payable by North Shore Health.

Discussion

[15]     It is trite that in an application to set aside a statutory demand, the onus is on the  applicant  to  show  that  there  is  a  genuine  and  substantial  dispute  as  to  the existence of the debt.1    In order to do this, the applicant must satisfy the Court that there is a fairly arguable basis upon which it is not liable.

[16]     In the present case, I accept as a matter of fact that North Shore Health disputes the amount owing and says that there are further amounts that have been paid by them which should be set off against the arrears.   The question is rather whether North Shore Health has a tenable legal position in that respect.

[17]     Mr  Thwaite  made  a  number  of  valiant  submissions  in  support  of  his contention that there was a fairly arguable basis upon which North Shore Health‟s liability could be disputed.  He said that:

(a)      Notwithstanding the limited and circumscribed ability to set-off the rental arrears contained in clause 3.2, the Deed of Surrender also contained some wider, implied, right to set-off that could be exercised by North Shore Health notwithstanding that the time limits specified in clause 3.2 had expired;

(b)The receivers‟ grant of a three day indulgence (in terms of the time allowed under the Deed of Surrender) for North Shore Health to provide documentation supporting the payments said by it to have been made on NZ Sports‟ behalf, overrode or negated the agreed process and time limits specified in clause 3.2 and put the whole issue of set-off at large again;

(c)      The statement in the December 2010 agreement that in the event of default “the further $24,791.40 arrears, the subject of the statutory demand in CIV-2010-404-7015, become immediately payable and ...

North Shore Health Sauna Limited will have no recourse to dispute

1 Section 290(4)(a) Companies Act 1993; Taxi Trucks Ltd v Nicholson [1989] 2 NZLR 297(CA).

the amount payable, as per the receiver‟s position in CIV-2010-404-

7015”, nonetheless permits the amount payable still to be disputed;

(d)The  December  2010  settlement  agreement  was  contrary  to  public policy and should not be enforced (no authority being proffered for that submission);

(e)      The newly discovered 23 December 2008 agreement gave rise to a further and separate area of genuine dispute both as to the amount of arrears owing and as to the existence of a debt at all.

[18]     Mr Commons for the receivers submitted (firstly) that the December 2010 agreement should be regarded as determinative of the matter; the terms of the agreement meant that North Shore Health was contractually bound not to contest the statutory demand in Court.   But in any event (Mr Commons said) the Deed of Surrender was clear on its face and that North Shore‟s right to set-off was limited to the very specific process set out in clause 3.2.  He also said that to the extent that the newly discovered, earlier, agreement was genuine it makes no difference to the legal position because it has necessarily been superseded by the Deed of Surrender (and the settlement agreement).

[19]     I agree with Mr Commons that in the Deed of Surrender, North Shore Health contractually agreed that a specified quantum  of rental arrears  was owed by it, subject only to an agreed and clearly circumscribed process for establishing a set-off. North Shore Health participated in that agreed and circumscribed process and as a result the amount of arrears owing was reduced by the receivers.  There is no factual basis for saying that the receivers acted other than in conformity with the agreed process and indeed, they also granted North Shore Health a further three day indulgence which North Shore Health chose not to utilise.

[20]     As  to  the  legal  position,  it  follows  that  I  do  not  accept  Mr  Thwaite‟s submissions that there existed some wider, inchoate, right to set-off.  The two lease agreements themselves contained express provisions precluding any set-off against rental  arrears.   The  Deed  of  Surrender  must  be  interpreted  in  that  context  and

clause 3.2 can accordingly only be read as an agreed, specific and limited exception to  what  would  otherwise  have  been  the  position.    Furthermore,  I consider  that clause 3.2 would, in any event, be otiose if such a wider set-off right existed. Thus at the time the statutory demand was issued there could in my view be no dispute that the amount specified in the demand was owing.

[21]     The settlement agreement (as set out on the email exchange recorded above) makes no legal difference to that position.   It is, in my view, doubtful that North Shore Health‟s promise not to dispute the statutory demand in the event of default constitutes good consideration that overcomes the rule in Foakes v Beer.2 The most that was being promised by North Shore Health in the settlement agreement was not to dispute an amount which (as I have found) it was already indisputably contracted to pay. 3   It is for that reason that I consider that it is the Deed of Surrender that must be determinative of the matter.

[22]     As  regards  the  significance  of  the  newly  discovered  (though  earlier) agreement, I agree with Mr Commons that some doubt as to its authenticity necessarily exists given the agreement has never previously been referred to by North Shore Health, either in discussions with receivers about the Deed of Surrender or in the context of these proceedings.  Strangely, the agreement was not referred to by North Shore Health  at the time of the December settlement, even  though it appears that its existence had been “discovered” by then.

[23]     Ultimately, however, and as Mr Commons also submitted, the existence of any further, earlier, agreement could make no difference to the legal position. That is because it has necessarily been superseded by the agreements contained in the Deed of Surrender and the new lease (and, arguably, the December 2010 agreement).  It was not suggested (and nor do I think it could be) that any question of contractual

mistake arises.

2 Foakes v Beer (1884) 9 App Cas 605.

3 The irrelevance of the settlement agreement is, I think, underscored by the fact that no contractual proceedings would ever conceivably be taken by the receivers to enforce that agreement. The only relevant obligation to enforce is the one that already exists under the Deed of Surrender.

[24]     For completeness I record that even though the statutory demand in question was for arrears in the sum of $42,308.53 it is accepted by the receivers, that that amount has of course been reduced by the $10,000 payment already made pursuant to the settlement agreement.  I do not consider that has any effect on the validity of the statutory demand or on the present application.   As Mr Commons submitted, s 290 of the Companies Act 1993 provides (in subsections (5) and (6)) that a demand is not to be set aside by reason only of a defect or irregularity, and “defect” is defined as a material misstatement of the amount due or of the debt referred  to in the demand.  The exception to that rule (substantial injustice being caused) plainly has no application in the circumstances of the present case.

[25]     In the end, therefore, the unfortunate reality is that notwithstanding the very reasonable and conciliatory attitude taken by the receivers, North Shore Health has breached every agreement it has entered into with NZ Sports.  While I accept that times are hard, there is simply no proper basis upon which the statutory demand can or should be set aside.  North Shore Health‟s application is dismissed accordingly. The receivers are entitled to costs on a 2B basis.

[26]     Although,  in  his  written  submissions,  Mr  Commons  indicated  that  the receivers also sought immediate liquidation of North Shore Health Limited, he indicated orally that the preferable course would be to make an order that in the event that the arrears owing were not paid within 14 days then liquidation should follow, but with the matter to be called again at the expiry of that period in case any further issues about payment arose.   Mr Thwaite sought a further 14 days in that respect and I am prepared to accede to that.

[27]     Accordingly the matter is to be placed in the Liquidation list on 1 April 2011 in the expectation that liquidation will follow in the event that  payment of the

outstanding $32,308.53 has not by then been made.

Rebecca Ellis J