NZ Commercial Property Maintenance Limited v Soullight Painting & Plaster Limited
[2022] NZHC 1401
•15 June 2022
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2021-404-2230
[2022] NZHC 1401
BETWEEN NZ COMMERCIAL PROPERTY MAINTENANCE LIMITED
PlaintiffAND
SOULLIGHT PAINTING & PLASTER LIMITED
Defendant
Hearing: 10 May 2022 Appearances:
Matt Taylor for the Plaintiff Julia Leenoh for the Defendant
Judgment:
15 June 2022
JUDGMENT OF ASSOCIATE JUDGE C B TAYLOR
[Application to file a statement of defence out of time]
This judgment was delivered by me on 15 June 2022 at 3:00pm
pursuant to Rule 11.5 of the High Court Rules
………………………….
Registrar/Deputy Registrar
Solicitors:
K3 Legal Limited (Julia Leenoh), Auckland, for the Plaintiff Maria Taylor Lawyer, Auckland, for the Defendant
Counsel:
Matthew Taylor, Barrister, Auckland
NZ COMMERCIAL PROPERTY MAINTENANCE LIMITED v SOULLIGHT PAINTING & PLASTER LIMITED [2022] NZHC 1401 [15 June 2022]
Introduction
[1] The defendant in this proceeding, Soullight Painting & Plaster Ltd (Soullight) applies to extend the time for it to file a statement of defence and counterclaim against the plaintiff, NZ Commercial Property Maintenance Ltd (NZ Commercial).
[2] NZ Commercial and Soullight are parties well known to each other. The two have worked together on various projects since 2015, with NZ Commercial acting as a main contractor, and Soullight as subcontractor. NZ Commercial has now sought to put Soullight into liquidation on the basis of an unpaid statutory demand.
Background
[3] In August 2020, the parties entered into a construction contract under which Soullight would conduct painting work at a property at 20–22 Lynton Road, Mt Wellington, Auckland (the HNZC Project). In December 2020, Soullight left the site. It had not completed its work under the contract. Soullight’s position is that it completed around 90 per cent of the agreed work.
[4] NZ Commercial alleges Soullight’s work was incomplete, substandard and defective. It says it incurred significant costs in bringing in an alternative subcontractor to complete and remediate the painting work. Soullight, meanwhile, says NZ Commercial brought in the alternative subcontractor to avoid its obligations to pay Soullight.
[5] On 8 April 2021, NZ Commercial’s lawyer wrote to Soullight stating that it had incurred remedial costs with an alternative contractor in the sum of $60,338.50 (excluding GST), and costs of materials in the sum of $4,985.22 (excluding GST), to complete the work. The letter noted that had Soullight finished the work, it would have been due a payment of $9,000 (excluding GST). It stated that Soullight therefore owed NZ Commercial $56,323.70 (excluding GST). Soullight did not respond to the letter.
[6] NZ Commercial proceeded to serve three statutory demands on Soullight for the sought amount. The first two statutory demands expired during periods in which New Zealand was under lockdown, due to the COVID-19 pandemic.
[7] NZ Commercial says this proceeding is founded on the third statutory demand, dated 7 October 2021 and served the following day. Soullight, meanwhile, says it is not clear the statutory demand was in fact served then. It says service is in issue on the present application.
[8] Soullight has not paid the sum NZ Commercial seeks. On 5 November 2021, NZ Commercial filed an application to put Soullight into liquidation, with notice served on Soullight on 22 November 2021.
[9] On 21 February 2022, Soullight filed the present application for an extension of time to file a statement of defence and counterclaim. It rejects the claim that it owes NZ Commercial any money and says instead that it is owed money. It intends to counterclaim for the money it says NZ Commercial owes it.
[10] Soullight also says NZ Commercial’s statutory demand is defective and does not reflect the parties’ obligations to each other. It says further the demand is based on a prospective damages claim and is accordingly not founded on an immediately payable debt. It says NZ Commercial must therefore seek the Court’s leave to make the liquidation application.
Application for extension of time to file statement of defence
[11] Soullight seeks an order for an extension in time to file a statement of defence.1 The grounds on which the order is sought are:2
(a)The defendant has an arguable defence which it intends to pursue;
(b)There is a genuine and substantial dispute against the debt;
(c)The defendant is solvent;
1 Application for extension in time to file statement of defence dated 21 February 2022 at [1].
2 At [2].
(d)There is no prejudice to the plaintiff / respondent in an extension of time given the plaintiff has not submitted sufficient material before the Court to justify the grant of a liquidation order;
(e)The overall justice of the case requires the defendant to be given the opportunity to raise its defence given the statutory demand may be defective due to material misstatements and / or material misdescription of the debt referred to in the demand.
Affidavit of Myung Jing Song
[12] Mr Myung Song, sole shareholder and director of Soullight, has made an affidavit in support of the application. He deposes that Soullight has been engaged on multiple painting projects with NZ Commercial in the last seven years. He says their contractor–subcontractor relationship was atypical because NZ Commercial would provide a quote for scope of works, which Soullight would then either accept or reject.
He says all agreements were made orally or in person.3
[13] Mr Song says the director of NZ Commercial, Mr Beomkoo Yun, approached him in August 2020 to complete work for the HNZC Project. He says Mr Yun provided a paint budget, and that the total budget for the interior and exterior work was estimated to be $120,329.93. Mr Song says he accepted this budget on behalf of Soullight and commenced work at the HNZC Project. After arriving at the site, however, Mr Yun asked Mr Song to complete paint jobs that were not part of the original scope of works. Mr Song says he asked Mr Yun for a budget for the additional work, which Mr Yun eventually provided. The further budget for the additional tasks came to $15.018.87.4
[14] Mr Song deposes that Soullight completed the enlarged scope of works and was in the process of completing the original scope of works when Mr Yun requested further paint work be completed. He says neither the original nor the enlarged scope of works provided for these variations. Mr Song deposes he again asked Mr Yun to provide a further budget for these works. He says Mr Yun confirmed he would do so,
3 Affidavit of Myung Jin Song in support of application for extension in time dated 20 February 2022 at [3]–[4].
4 At [5]–[6].
but asked that Mr Song commence work on the variations immediately. Soullight then completed the variations work, on faith of the parties’ past dealings.5
[15] Mr Song says that once the variations work had been completed, he asked Mr Yun for the budget and pricing so that Soullight could issue an invoice. He says Mr Yun assured him he would provide the budget once he returned to the office. Several weeks passed, however, with no budget being provided. Mr Song deposes he then told Mr Yun that Soullight had to be paid for the variations work before the original scope of works could be completed. He says that at this stage 90 per cent of the original scope of works had been completed, and all of the work for the enlarged scope of works and variations had been completed.6
[16] Next, Mr Song says that Mr Yun contacted him in early December 2020 to tell him that another paint company would be finishing the project and that Soullight would no longer be required. He says that this was the point at which the parties’ relationship broke down. He says NZ Commercial refused to pay Soullight for outstanding invoices due and owing to Soullight.7
[17] Mr Song says he believes Soullight has an arguable defence against NZ Commercial’s claim. He says there is a genuine and substantial dispute relating to the debt NZ Commercial claims. He deposes that Soullight completed almost all of the contracted works and no issues were ever raised about the quality of its workmanship. He says Soullight is entitled to be paid for the variations it completed at NZ Commercial’s instructions, and that NZ Commercial has also refused to pay Soullight for work it completed on another project.8
[18] Mr Song deposes that Soullight is solvent and has a constant stream of revenue. He says it has enough money to satisfy the statutory demand, accounting for the set- offs. Further, he says that at the time he received the statutory demands he did not understand the gravity of the situation. He says they were preceded by a letter that made incorrect allegations, and he accordingly did not see the statutory demands or
5 At [7].
6 At [8]–[9].
7 At [10]–[11].
8 At [12]–[16].
the court proceedings as having any standing. He says he regrets his passivity and understands he should have taken steps to refute and dispute the documents at the time
— that is why he now files for an application to extend time to file a defence.9
[19] Mr Song says he does not think the relevant statutory demand was served on him on 8 October 2021, because the most recent statutory demand he has seen is dated 13 July 2021.10
[20] Mr Song deposes he believes it would be unfair and unjust for Soullight to be liquidated. It is solvent and NZ Commercial’s claim against it is inaccurate and misleading. NZ Commercial owes Soullight money. Soullight has completed the majority of the contracted works and NZ Commercial has failed to pay. Further, because the works were 90 per cent complete, Mr Song says he does not believe the figure NZ Commercial has provided as representing completion of the balance of the works. He says NZ Commercial has not provided any supporting information justifying the amounts claimed.11
Notice of opposition to application for extension of time to file statement of defence
[21] NZ Commercial opposes the application for an order extending time for Soullight to file a statement of defence.12 The grounds of opposition are:13
a.The debt the subject of the statutory demand is due and owing to the respondent;
b.There is no genuine or substantial dispute as to the debt;
c.The respondent made written demand for payment of the debt at various times throughout 2021, without any response from the applicant;
d.The applicant has no valid counterclaim or set-off against the respondent;
9 At [17]–[19].
10 At [20].
11 At [21]–[24].
12 Notice of opposition to application for leave to file statement of defence dated 17 March 2022 at [1]–[2].
13 At [3].
e.The applicant has not provided any reasonable explanation for its failure to file and serve a statement of defence within time;
f.The applicant is insolvent;
g.It is just and equitable in the circumstances that the applicant company is put into liquidation;
h.The further grounds as set out in the affidavits of Beomkoo Yun and
Matthew Kevin Costello filed in this proceeding.
Affidavit of Beomkoo Yun
[22] Mr Yun has made an affidavit in support of the notice of opposition. He deposes the works at the HNZC Project proceeded on a charge-up basis for the first two or three months. He says the contracted work was for interior and exterior painting with a total value of $120,396 (excluding GST). Mr Yun says some additional variation work was also required throughout the course of the contract, which variations were recorded by Mr Song and paid for by NZ Commercial. He says NZ Commercial paid Soullight for the charge-up work, the contract work and the variation work.14
[23] Mr Yun says Mr Song’s reference to “additional” painting work in the hallways, lobbies and data rooms is incorrect — this work formed part of the contract work. He says additionally that Mr Song was not on site often and that Soullight was behind schedule — in turn affecting NZ Commercial’s head contract. Mr Yun alleges Soullight’s work was substandard, requiring continuous repair and causing delay. He says Soullight left the site in December 2020 and did not return.15
[24] Mr Yun says Soullight left without completing the works, and what work it had done had substantial defects requiring remediation. He says NZ Commercial asked Soullight to return to the site to remedy the defective work, but Soullight did not do so. At that point, Mr Yun says, NZ Commercial was left with little option but to engage other contractors to complete the work. He says NZ Commercial followed its contractual obligations to notify Soullight of the defects and the remedies required.16
14 Affidavit of Beomkoo Yun in support of notice of opposition to application for leave to file statement of defence dated 17 March 2022 at [3]–[7].
15 At [8]–[14].
16 At [15]–[19].
[25] Mr Yun says NZ Commercial incurred significant costs as a result of Soullight’s defective work and default in performance. NZ Commercial therefore wrote to Soullight advising it of the incurred costs and demanding payment of
$56,323.72 (excluding GST) — or $64,772.26 (including GST). Mr Yun says Soullight did not respond to this letter. Consequently, NZ Commercial served statutory demands on Soullight on 22 April, 14 July and 8 October 2021. The reason for the multiple demands, Mr Yun explains, is that the first two demands were unable to be satisfied in time due to COVID-19 lockdowns. After service of the final statutory demand, NZ Commercial issued liquidation proceedings. Mr Yun says the proceedings were served on Soullight on 22 November 2021.17
[26] Mr Yun says Soullight did not file a defence to the liquidation proceedings, and it was not until 21 February 2022 that NZ Commercial received a response — service of the application for an extension of time to file a statement of defence. He says Soullight’s alleged counterclaims are completely without merit — the claimed “additional” painting work formed part of the agreed scope of works; NZ Commercial did raise issues with Mr Song as to his workmanship; there is nothing to the allegation that NZ Commercial failed to pay Soullight for its work on another project; and NZ Commercial has paid Soullight for its contract work on the HNZC Project.18
Affidavit of Matthew Kevin Costello
[27] Mr Matthew Costello, project manager at NZ Commercial, has made an affidavit in support of the notice of opposition. He deposes that his responsibility throughout the HNZC Project was to coordinate and manage subtrades engaged by NZ Commercial, including Soullight. He says between December 2020 and February 2021, after Soullight had left the site, he provided photographs of the incomplete work and defects to Soullight and asked it to return to complete the project. He says these efforts were unsuccessful.19
17 At [20]–[27].
18 At [28]–[40].
19 Affidavit of Matthew Kevin Costello in support of notice of opposition to application for leave to file statement of defence dated 17 March 2022 at [4]–[6].
Reply affidavit of Mr Song
[28] Mr Song has made an affidavit in reply to Messrs Yun and Costello’s affidavits. He deposes that he denies Soullight entered into a written subcontract agreement with NZ Commercial for the HNZC Project, maintaining all instructions and scope of works were agreed verbally. He says the total budget for the original scope of works was $120,396.81 (excluding GST) — correcting an error in his earlier affidavit that stated the figure as $120,329.93. He says additional works were required throughout the course of the project and that these were always recorded as “extra work”, separate from the original scope of works. While these were generally small tasks that did not require a separate budget, Mr Song says there were two lots of substantial additional work that the parties agreed on, enlarging the original scope of works. He deposes these additional works were all by way of verbal instructions.20
[29] Mr Song denies that the painting work on the hallways, lobbies and data rooms formed part of the original or enlarged scope of works He says this work was explicitly additional, and Soullight completed it because of Mr Yun and NZ Commercial’s assurance that it would be paid for, and because of the parties’ previous history and business relationship. He reiterates that he specifically requested Mr Yun provide a further budget for these works, and that Mr Yun assured him multiple times that one would be provided. Mr Song says he believes Soullight is entitled to payment for the alleged additional works, as they never formed part of the original or enlarged scope of works.21
[30] Mr Song says he visited the site as required and that he was working on multiple sites at the relevant time. He says he ensured staff were on site at all times to complete the works required and the Soullight only fell behind schedule because NZ Commercial kept requesting additional works and because Soullight had to do re- painting works whenever other contractors at the site caused damage. He denies Soullight’s work was substandard, saying there were defect checks every week. Further, he disputes Mr Yun’s characterisation of Soullight leaving the site — he says
20 Reply affidavit of Myung Jin Song dated 4 April 2022 at [4]–[11].
21 At [12]–[21].
it left because it had no other choice. It had not been paid for what Mr Song says were the additional works.22
[31] Mr Song deposes it was usual for NZ Commercial and Soullight to agree verbally and work on projects together without formal documentation. He says that is how the parties did business for seven years. He says the HNZC Project was the same. As well, he disputes that the incomplete works, cleaning, substantial defects and paint stains were caused by Soullight. He attributes these to the negligence of other contractors and poor project management. While acknowledging NZ Commercial asked Soullight back to the site to complete remedial works, he reiterates that Soullight was in no position to do so for so long as NZ Commercial refused to pay for the additional works. And he says that despite NZ Commercial’s conduct, Soullight’s manager, Mr Guan Ho Kim, returned to the site on four separate occasions to clean the excess paint.23
[32] Mr Song disputes that NZ Commercial incurred costs to the extent that it claims. As well, he says he does not believe the statutory demand was correctly issued. Taking into account the figures he claims each party owes the other, Mr Song says the amount of the statutory demand can be set off and that NZ Commercial continues to owe Soullight money. In any event, he says he thought the statutory demands Soullight received were defective in that they contain material misstatements and misdescriptions of the contended debts.24
[33] Mr Song denies any issues as to workmanship were raised while Soullight was at the site. He says these issues were only raised after it left, and despite that weekly defect checks were carried out during the time it was there. He maintains there is an outstanding payment owed by NZ Commercial to Soullight in relation to a project at Hauraki Primary School. He says the balance due from NZ Commercial to Soullight is $21,000 for the additional works at the HNZC Project and $3,800 for the Hauraki Primary School.25
22 At [22]–[24].
23 At [25]–[32].
24 At [33]–[43].
25 At [48]–[53].
[34] Finally, Mr Song reiterates that Soullight is solvent and that it has enough money in its bank account to operate.26
Reply affidavit of Mr Kim
[35] Mr Kim has also made an affidavit in reply to Messrs Yun and Costello’s affidavits. He supports Mr Song’s contention that the scope of works on the HNZC Project was verbally agreed between Mr Yun and Mr Song, and that it was not unusual for Soullight to begin works before being provided with a formal budget. He says he disagrees that Soullight carried out substandard work and that NZ Commercial engaged other contractors to complete remedial works on Soullight’s works. He says from the first week of December 2020 until 11 December 2020, both Soullight and other subcontractors were working on the HNZC Project. He says some of these other subcontractors were instructed to do further paint works on items Soullight had already painted.27
[36] Mr Kim says the photographs attached to Mr Yun’s affidavit show defects that were caused in the additional works completed by the other subcontractors, not works completed by Soullight. He says he noticed a different subcontractor applying additional paint to paint work Soullight had already completed, but this additional paint was the incorrect specification in that it was the wrong brand and colour. He says he alerted the other subcontractor to his concerns because he was worried NZ Commercial would allege wrongdoing on Soullight’s part. He says his concerns were vindicated and additional painting works by the new subcontractor had to be re- done.28
[37] Mr Kim says he believes it was Mr Costello’s responsibility, as project manager, to manage the painting subcontractors and to provide the correct painting specifications. He says he believes Mr Costello’s lack of knowledge and limited attendance at the site resulted in the defects the new painting subcontractors caused.
26 At [54].
27 Reply affidavit of Guanho Kim dated 4 April 2022 at [8]–[13].
28 At [14]–[16].
Mr Kim also says he sought on multiple occasions that NZ Commercial provide a budget for the variation works, but this was never provided.29
[38] Mr Kim deposes that there were a lot of difficulties while working on the HNZC Project. He alleges Mr Costello did not properly carry out his responsibilities as project manager and that he was rarely on site. He says the poor project management made working conditions difficult for Soullight. He says no one from NZ Commercial attended the weekly progress meetings between all contractors to the HNZC Project. Due to Mr Costello’s absences from the site, Mr Kim says, he would have to communicate with him by way of instant message.30
[39] Mr Kim says Mr Costello sent him photographs of “incomplete works” and “substantial defects” but maintains Soullight did not cause the defects. He says defect checks occurred every week and were to protect subcontractors from being blamed for works not completed by other contractors. He says that while Soullight was on site, it completed any required remedial work at no further cost, irrespective of whether Soullight caused the relevant defect. He says Soullight did this in good faith and on the strength of Mr Song and Mr Yun’s previous friendly relationship.31
[40] Mr Kim says Mr Costello messaged him in January 2021 asking that Soullight remedy defects at the site. He says this was after Soullight had already left the site and other painting subcontractors had been on site for a month. He reiterates his belief that Mr Costello gave inadequate instructions to the other painting subcontractors and that this resulted in the defects. He says that he visited the site personally four times between 18 and 22 December 2020 to clean excess paint that Mr Costello had identified, and confirms that much of this excess paint was unrelated to the painting works done by Soullight.32
29 At [17]–[21].
30 At [22]–[28].
31 At [29]–[31].
32 At [32]–[35].
Supplementary affidavit of Mr Yun in reply
[41] Mr Yun has made a supplementary affidavit in reply to Mr Song and Mr Kim’s reply affidavits. He deposes to his belief that their reply affidavits are incorrect and are a retrospective attempt to overcomplicate a simple dispute. He says Mr Song’s statements as to the agreed scope of work are demonstrably wrong. He says Mr Song miscalculated the amount of paint to be applied. He says he disagrees that he ever reassured Mr Song he would send a further budget for the alleged additional works, and that he never prepared such budget because that work had already been priced into the existing budget. He says Soullight’s invoice for $21,000 (plus GST) for the alleged additional works is not credible in any way.33
[42] Mr Yun says Mr Song’s affidavits raise, for the first time, allegations that Soullight had to undertake painting works from damage caused by other contractors at the site. He says NZ Commercial has no knowledge of this alleged issue, and that it was never raised by Soullight at the time. He says that if the allegation is true, however, that it would be an issue for the head contractor. He also disputes Mr Song’s allegations that NZ Commercial mismanaged the project, saying NZ Commercial has lost money on the project because of Soullight’s defaults and the consequent costs of remediation.34
[43] Mr Yun disputes Mr Song’s claim that Soullight completed 90 per cent of the contract works and all of the variation works. He says Soullight has been paid $110,00 out of the contract price of $120,396 (excluding GST), and for additional variation works totalling $29,841.71 (excluding GST). But he says Soullight actually completed far less work than claimed. He says Soullight did not apply various topcoats and most areas required some form of remedial work.35
[44] Mr Yun also disputes Mr Song’s claim that NZ Commercial engaged other subcontractors before Soullight left the site. He says other subcontractors were engaged only when Soullight failed to perform its contractual obligations, and that
33 Supplementary affidavit of Beomkoo Yun in reply to affidavits of Guanho Kim and Myung Jin Song sworn on 4 April 2022 dated 26 April 2022 at [4]–[15].
34 At [16]–[18].
35 At [19]–[20].
NZ Commercial would not have had to engage other subcontractors and incur remedial costs but for Soullight’s default. And Mr Yun says he had no idea how Mr Song arrives at the figure of $38,060.33 that he says Soullight is owed.36
Supplementary affidavit of Mr Costello in reply
[45] Mr Costello has also made a supplementary affidavit in reply to Mr Song and Mr Kim’s reply affidavits. He deposes that he agrees with the content of Mr Yun’s supplementary affidavit as to calculation of the paint to be applied. He says Mr Song was not on site at the HNZC Project very often, so he largely dealt with Mr Kim. He says neither Mr Kim nor Mr Song told him that they had to re-do work as a result of damage by other contractors. Further, he says it was obvious from his visual inspection and from the photos he took that the work was substandard and the defects were caused by Soullight.37
[46] Mr Costello says he is unsure why Mr Song says that Soullight was not engaged to complete all paint works. He says this is incorrect, and that Soullight was in fact engaged to complete all paint works as NZ Commercial’s subcontractor. He says it was only once it became apparent in early December 2020 that Soullight was failing to perform its obligations, would not finish the project and that its work was substandard, that NZ Commercial engaged other painting subcontractors.38
[47] Mr Costello says Mr Kim’s suggestion that he ordered the wrong paint for the apartment doors is incorrect. He says NZ Commercial supplied the finishing schedule to Soullight, and Soullight ordered and applied paint in connection with those items. He says that had Mr Kim read the painting specification, he would have seen what paint was actually required. Mr Costello disagrees that he instructed Mr Kim to apply the incorrect paint, and says he never gave incorrect painting specifications to the new subcontractors. He maintains Soullight’s work had to be redone because it was defective and substandard.39
36 At [24]–[29].
37 Supplementary affidavit of Matthew Kevin Costello in reply to affidavits of Guanho Kim and Myung Jin Song sworn on 4 April 2022 dated 26 April 2022 at [4]–[5].
38 At [7].
39 At [11]–[15].
[48] As to Mr Kim’s allegations about Mr Costello’s infrequent attendance at the site, Mr Costello says he attended site meetings when required or requested. He says he did not attend every weekly meeting because NZ Commercial’s attendance was not necessary. He says he did not closely manage the painters and only gave them brief instructions because it was Soullight’s responsibility to manage its own employees and contractors, not NZ Commercial’s.40
[49] On Mr Kim’s return visits to the site to clean excess paint, Mr Costello says it was paint that Soullight had applied incorrectly. He says the fact 11 workers spent four days cleaning the paint just goes to show the extent of the issue.41
Soullight’s submissions
[50] Ms Julia Leenoh, for Soullight, submits there is a range of underlying disputes between the parties relating to the HNZC Project. First, the scope of works is in dispute. Secondly, the extent to which Soullight completed the contract works is not agreed. Thirdly, it is unclear whether, and to what extent, Soullight’s works were defective. Fourthly, the nature of Soullight’s discontinuance of work is disputed. Finally, it is disputed what amounts (if any) are due and owing to, and from, each of the parties.42
[51] Ms Leenoh says this is a case where there are significant conflicts of evidence and credibility issues, requiring a full trial. She submits further that there is a substantial dispute as to whether the debt the subject of NZ Commercial’s statutory demand is due.43
[52] Ms Leenoh submits Soullight’s delay in filing its proposed statement of defence is not significant in the circumstances, given the parties’ continued discussions relating to the debt and Soullight’s firm position it does not owe NZ Commercial any money. She says Soullight believed the matter could be resolved by discussion and did not think further steps in court would be necessary. She submits further that there
40 At [18]–[21].
41 At [22]–[23].
42 Defendant / Applicant submissions seeking an extension in time to file statement of defence dated 26 April 2022 at [18]–[19].
43 At [20]–[23].
is no material prejudice to NZ Commercial in allowing the extension, as the issues this proceeding raises need to be resolved, NZ Commercial has been on notice for some time that Soullight disputes the claimed debt, and liquidation is a drastic step for NZ Commercial to take in recovering the alleged debt.44
[53] Ms Leenoh submits the overall justice of the case requires Soullight be given the opportunity to raise its defence. She says use of the statutory demand procedure as a debt collection device is an abuse of process. It is instead intended to be used to establish insolvency — a prospective debt such as one comprising a claim for damages does not justify the issue of a statutory demand. That the alleged debt is only prospective means NZ Commercial requires the Court’s leave to apply for an order that Soullight be put into liquidation. It has neither sought nor been granted such leave.45
[54] Ms Leenoh also submits the extension of time should be granted because Soullight is demonstrably solvent and can therefore rebut the presumption that it is unable to pay its debts.46
[55] Concluding, Ms Leenoh submits that an extension of time should be granted to allow Soullight to raise its defence, as the overall interests of justice require this. She submits Soullight seeks 2B costs against NZ Commercial on the basis that it has improperly used the statutory demand process as a debt collection device in abuse of the Court’s processes.47
NZ Commercial’s submissions
[56] Mr Matt Taylor, for NZ Commercial, submits there are three main elements to consider when determining whether an application to file a defence out of time. First, the Court is to consider whether the applicant has an arguable defence that it is not
44 At [23]–[28].
45 At [29]–[35], citing International Airline Trading (NZ) Ltd v Rohlig New Zealand Ltd HC Auckland CIV-2003-404-3464, 23 February 2004 at [16]; Procorp International Ltd v Maximax Ltd HC Auckland M787-IM99, 2 September 1999; Re Prime Link Removals Ltd [1987] 1 NZLR 510 (HC) at 512; and Precinct Properties Holdings Ltd v Golden Tower NZ Ltd [2019] NZHC 3225 at [6]–[8].
46 At [36]–[38], citing AMC Construction Ltd v Frews Contracting Ltd [2008] NZCA 389, (2008) 19 PRNZ 13 at 16.
47 At [39]–[40].
liable for the whole amount demanded. Secondly, it is to consider if there is a genuine and reasonable explanation of the inability to comply with the required timeframe.
Thirdly, leave should not be granted if the applicant is insolvent.48
[57] Mr Taylor says Soullight has raised a proposed defence in only the most basic of forms, and that its proposed counterclaim, even if proven, does not exceed the demanded sum. He says Soullight’s arguments lack an evidential basis when compared with the contemporaneous documentation and Soullight’s previous statements. He submits that in this respect, Soullight’s affidavit evidence has little credibility.49
[58] Mr Taylor submits that liquidation proceedings should be acted on more promptly than ordinary proceedings; a liquidation is likely to affect not only the applicant creditor but the commercial community in general. He submits that Soullight’s explanation for the delay lacks substance. There was no genuine mistake about the time for compliance. Mr Song’s explanation that he “did not understand the gravity of the situation” because the letter made “totally incorrect allegations” is an unacceptable and inadequate excuse and does not justify the Court granting an indulgence.50
[59] Mr Taylor says Soullight is incorrect to say there would be little prejudice to NZ Commercial if the application is granted and that NZ Commercial had been put on notice of a dispute prior to the application. He says there was in fact no notice given of any dispute until the present application was filed. Given the lack of a genuine explanation for delay, he submits, the application should fail.51
[60] Mr Taylor says that even if an applicant has an arguable defence, it also has to prove solvency. He says strong evidence needs to be adduced to that effect, and that Soullight has not done so. He submits that Mr Song has only produced a screenshot
48 Submissions on behalf of respondent in opposition to defendant’s application seeking an extension of time to file a statement of defence dated 3 May 2022 at [16].
49 At [20]–[53].
50 At [54]–[58], citing Matthew Mini Coaches Ltd (in liq) v Scotch Myst Ltd [2019] NZHC 3015 at [45]–[47]; and Auckland City Council v Stonne Ltd HC Auckland CIV-2007-404-4208, 30 November 2007 at [50]–[51].
51 At [59]–[60].
of a bank account balance showing available funds of $12,164.50. Mr Taylor says this quite clearly does not meet the required threshold — no bank accounts, profit and loss statements, trading records or statements of assets and liabilities have been provided. No verifying evidence from an accountant has been adduced. He says, therefore, that Soullight has not discharged its evidential onus and that insolvency can be inferred.52
[61] Summarising, Mr Taylor says Soullight had provided no genuine reason for delay. It is presumed to be insolvent. Its proposed grounds of defence are meritless. Any question as to the exact quantum of NZ Commercial’s demand would be best addressed in a proof of debt claim with a liquidator, rather than in a defence to this proceeding. If the liquidator genuinely considers Soullight to have a counterclaim, he or she can pursue this on behalf of the company.53
Legal principles
[62] Rule 31.20 of the High Court Rules 2016 provides that a person who does not file a statement of defence or appearance within the time prescribed may not appear at the hearing without an order extending the time granted on an interlocutory application under r 31.22 or the special leave of the Court.
[63] Rule 31.17 provides that a statement of defence in liquidation proceedings must be filed within 10 working days after the date on which the statement of claim was served. Leave will not be granted to file a defence out of time unless an arguable defence can be shown on the papers.54 In principle, then, the test to be applied is the same as in an application to set aside a statutory demand.55
52 At [60]–[65], citing Fresh Cut Flower Wholesalers Ltd v Living and Giving Gift Co Ltd (2001) 16 PRNZ 173 at [9]; Matthew Mini Coaches Ltd (in liq) v Scotch Myst Ltd, above n 50, at [37]–[41]; and Auckland City Council v Stonne Ltd, above n 50, at [46].
53 At [66]–[67].
54 Fresh Cut Flower Wholesalers Ltd v Living and Giving Gift Co Ltd, above n 52, at [9].
55 Orme v Parkway Investments Ltd HC Hamilton M149/00, 7 May 2001 at [15]. Broadly stated, factors relevant to setting aside a statutory demand include whether a genuine substantial dispute exists as to the underlying debt, whether the company appears to have a counterclaim, set-off or cross-demand and whether the demand ought to be set aside on other grounds. See Companies Act 1993, s 290; Taxi Trucks Ltd v Nicholson [1989] 2 NZLR 297 (CA) at 301; and AAI Ltd v 92 Lichfield Street Ltd (in rec & liq) [2015] NZCA 559, (2015) 23 PRNZ 52 at [22].
[64] Leave should not be granted if the applicant is insolvent, and the applicant should be able to provide a reasonable explanation for its failure to file its statement of defence in time.56 In summary, as Associate Judge Doogue has said:57
Thus there are three matters to consider:
a) Is there an arguable basis that defendant is not liable?
b) Is the defendant insolvent?
c) Has the defendant advanced a reasonable explanation for its failure to file and serve its statement of defence.
[65] Grant of extension of time is an indulgence, as the Court rules are designed to ensure the speedy resolution of liquidation proceedings.58 An applicant must provide a proper factual foundation upon which the Court can exercise its discretion to grant the indulgence.59 The ultimate consideration informing the exercise of the discretion is the overall justice of the case.60
Analysis
[66]The issues which are to be determined in this proceeding are:
(a) does Soullight have an arguable basis that the debt on which the statutory demand is based is the subject of a substantial dispute?
(b) has Soullight advanced a reasonable explanation for its failure to file and serve its statement of defence within the required timeframe?
(c) is Soullight insolvent, and what is the effect of s 288(5) of the Companies Act 1993 in relation to the statutory demand?
(d) in the overall interests of justice should leave be granted to Soullight?
56 Auckland City Council v Stonne Ltd, above n 50, at [20]. See also Khurana Trustee Ltd v Castle Backpacker K Road Ltd [2021] NZHC 1315 at [19]–[25].
57 At [21].
58 Eversons International Ltd (in liq) v Bionutrient Customs Ltd [2020] NZHC 2989 at [19].
59 Body Corporate 166208 v York Trustees [2018] NZHC 593 at [30].
60 Eversons International Ltd (in liq) v Bionutrient Customs Ltd, above n 58, at [21], citing Body Corporate 62870 v Health Distributors (Holdings) Ltd [2018] NZHC 1717 at [8].
[67]I will deal with each of these issues in turn.
Does Soullight have an arguable basis that the debt on which the statutory demand is based is the subject of a substantial dispute?
[68]The disputes between the parties, to the extent they exist, relate to:
(a) the exact scope of works agreed to for the HNZC Project between the parties;
(b) what works were completed by Soullight and what works remained incomplete at the time the works stopped;
(c) whether there are any defective works, and how they are to be quantified;
(d) how the contract came to an end;
(e) based on the findings above, what amounts, if any, are due and owing to each of the parties?
Scope of works
[69] NZ Commercial submits that the scope of works relates to the interior and exterior painting of the entire HNZC Project, which is a six storey apartment complex with five units on each storey, with the exception of a small amount of additional work.
[70] Soullight submits that the scope of works relates only to interior painting of the five units on each storey, and exterior painting which included the breezeway and did not include additional painting work that was instructed.
[71] The budget document both parties refer to is uncertain. The document appears to list quantities of paintwork at an estimated rate which is handwritten. NZ Commercial says the works were budget based on 4,494 square metres, based on wall area. However, Soullight says the agreement was reached based on floor area of each unit on each storey. NZ Commercial says that an estimation of area based on floor area of the units is inherently improbable.
Works completed by Soullight
[72] NZ Commercial says that Soullight did not finish the HNZC Project, but it is unclear to what extent works were not completed. Soullight says it completed 90 per cent of the scope of works that was agreed between the parties, as well as additional work which was not paid for. NZ commercial says, with the exception of additional work which has been paid for, no further additional works were agreed nor completed.
Whether there were defective works and how they are to be quantified
[73] NZ Commercial says the works completed by Soullight were defective and that it incurred costs to complete the scope of the works. Soullight says it did not carry out defective work, and the defects referred to in NZ Commercial’s affidavit relate to works completed by other subcontractors unrelated to Soullight.
How the contract came to an end
[74] NZ Commercial says Soullight improperly walked off the site. Soullight says it had no other choice but to leave the site as it was not being paid for work that it had completed. Soullight says that additional works had been instructed and completed in full, yet payment was not forthcoming.
[75] Soullight asserts that it had a statutory right to receive progress payments for works completed under the Construction Contracts Act 2002. NZ Commercial submits that Soullight’s invoices did not comply with s 20 of the Construction Contracts Act and therefore the provisions of the Act are inapplicable.
[76] In relation to Soullight’s right to receive progress payments under the Construction Contracts Act, there have not been put before the Court invoices from Soullight that comply with s 20 of the Act, and so I do not find any basis for Ms Leenoh’s assertion that Soullight held a statutory right to the relevant payment.
What amounts, if any, are due and owing to each of the parties
[77] NZ Commercial says it is owed money from Soullight. Soullight says it is owed money from NZ Commercial. NZ Commercial has demonstrated in evidence
that an amount of $20,000 claimed related to invoice 366057 has in fact been paid and Soullight has conceded this.61 NZ Commercial has also established that an amount referred to in Mr Kim’s reply affidavit of $11,000 (excluding GST) was in fact paid to Soullight but was not related to the HNZC Project. Soullight maintains that the sum of $38,000.33 was not paid under the original scope of works,62 and that $21,000 (excluding GST) is owing by NZ Commercial for variation works.63 Soullight also maintains $3,800 is owing by NZ Commercial in relation to another project.64
[78] NZ Commercial submits that Soullight’s record-keeping was poor and Soullight does not seem to be aware of what payments were made and when. Mr Taylor submits that this goes to the credibility of Soullight and its evidence and disputes in respect of the debt.
[79] Mr Taylor submits that Soullight’s evidence is based on matters raised for the first time in the affidavit evidence and which lack an evidential basis when compared with the contemporaneous documentation and previous statements by Soullight. He submits Soullight has taken a “scattergun” approach to raising disputed issues and has raised as many issues as it could think of, and accordingly the evidence has little credibility.
[80] In relation to this issue, in conclusion, it is my view that there is evidence of material disputes between the parties relating to the debt on which the statutory demand is based.
Has Soullight advanced a reasonable explanation for its failure to file and serve its statement of defence within the required timeframe?
[81] As a preliminary matter in relation to this issue, there has been some dispute about when the statement of claim was served on Soullight. NZ Commercial filed two supplementary affidavits from Mr Simran Jeet Singh. The first affidavit, sworn on 10 March 2022, confirms service of the statutory demand upon Soullight on 8 October 2021. The second affidavit, also sworn on 10 March 2022, confirmed service of the
61 Reply affidavit of Myung Jin Song, above n 20, at [53].
62 At [37].
63 At [38].
64 At [39].
notice of proceeding, statutory demand and verifying affidavit on Soullight on 22 November 2021. These affidavits dealt with the issue of service of the proceedings, and accordingly the delay is from 22 November 2021 until February 2022, when Soullight applied for leave to file the statement of defence out of time.
[82] Ms Leenoh submits that the delay is not significant in the circumstances, given the parties’ continued discussions throughout relating to the debt. She submits that Soullight has disputed it owed any money to NZ Commercial, and the parties had discussions regarding the dispute and Soullight sought more information from the outset to explain the debt being claimed. Although this information was not forthcoming at the time, Soullight believed discussions with NZ Commercial would continue with an ultimate view to resolve matters between them, and was under the impression further steps in the Court would not be necessary.
[83] The explanation offered in Mr Song’s affidavit in support of the application is that at the time he received the statutory demand he did not understand the gravity of the situation. He says they were preceded by a letter that made incorrect allegations, and he accordingly did not see the statutory demands or the Court proceedings as having any standing.
[84] Mr Taylor submits that this explanation for the delay is inadequate and should not justify granting leave.
[85] My view in relation to the explanation for the delay is that the excuse is barely adequate. Mr Song’s expectation that, despite the court documents he was receiving, the matter would be sorted out without reference to the courts, is lent some credibility by the long course of dealings between the parties. From Ms Leenoh’s submission, these dealings were frequently face to face meetings with verbal discussions.65
65 Defendant/Applicant submissions seeking an extension of time to file a statement of defence, above n 42, at [4].
Is Soullight insolvent, and what is the effect of s 288(5) of the Companies Act in relation to the statutory demand?
[86] It is well established that the use of the statutory demand procedure as a debt collection device is an abuse of the Court’s process. As Master Faire (as he then was) observed:66
[16] … statutory demands should only be issued in cases which are appropriate, that is, where there is a genuine basis for establishing the evidential foundation so that an application can ultimately be made to appoint a liquidator. It is quite improper for the procedure to be used as a debt collection device or as a device to embarrass a party in a situation where there is a contest as to liability for a given debt.
[87] The statutory demand procedure is intended to be used to establish a presumption of insolvency and not to recover commercial debts.67 Ms Leenoh has submitted that the Court has often found that a claim for damages not converted into a judgment debt will not be considered a “debt” due that would justify the issue of a statutory demand, because it would be considered a prospective debt at best. For this proposition, she relies on Re Prime Link Removals Ltd68 and Precinct Properties Holdings Ltd v Golden Tower NZ Ltd.69
[88] Ms Leenoh submits that the sum claimed under NZ Commercial’s statutory demand is not a debt that is immediately payable but a damages claim that is considered prospective. As has been discussed above, there are disputes about the extent to which Soullight completed the works, the extent to which there are defects in the works completed by Soullight, and the extent to which it was necessary for NZ Commercial to engage other contractors to carry out remedial or completion works in respect of the painting. The amount claimed in the statutory demand is related to costs incurred by NZ Commercial in the remedial and completion work which NZ Commercial says was necessary due to defaults by Soullight.
[89]Ms Leenoh points to s 288(5) of the Companies Act, which provides that:
66 International Airline Trading (NZ) Ltd v Rohlig New Zealand Ltd, above n 45, at [16].
67 Procorp International Ltd v Maximax Ltd, above n 45.
68 Re Prime Link Removals Ltd, above n 45, at 512.
69 Precinct Properties Holdings Ltd v Golden Tower NZ Ltd, above n 45, at [6]–[8].
An application to the court for an order that a company be put into liquidation on the ground that it is unable to pay its debts may be made by a contingent or prospective creditor only with leave of the court; and the court may give such leave, with or without conditions, only if it is satisfied that a prima facie case has been made out that the company is unable to pay its debts.
Consequently, Ms Leenoh submits that because NZ Commercial’s statutory demand is based on a prospective damages claim and is not an immediately payable debt, leave of the Court was necessary to issue the statutory demand. NZ Commercial has not applied for nor obtained leave of the Court.
[90] Soullight did not apply to set aside the statutory demand under s 290 of the Companies Act. Notwithstanding the statutory demand has not been set aside, the defective basis on which it has been issued, namely being based on a claim for damages which is a prospective debt only and without leave of the Court as required under s 288(5) of the Companies Act, in my view weighs significantly in Soullight’s favour for the granting of leave in balancing of the interests of justice between the parties.
[91] As to evidence of solvency produced by Soullight, this is limited to a screenshot of a bank account of the company. Mr Taylor submits, and I think correctly, that the evidence Soullight would have been expected to produce would have been accounts, profit and loss statements, trading records or statements of assets and liabilities that show its solvency. In addition, he points out that no evidence from an accountant has been provided to verify the documentation whatsoever.
[92] Mr Taylor submits that Precinct Properties Holdings Ltd would be distinguished as a case in which, quite clearly, the sum demanded was a damages claim. The claim had not been properly quantified or made out. He submits that in the present instance, NZ Commercial is not a prospective or contingent creditor, nor is the claim a prospective damages claim. It has incurred actual costs as a result of Soullight’s breach and/or default. There is no uncertain future event upon which the liability may be founded, and upon which NZ Commercial’s loss may be further crystallised. He submits that the loss has been suffered and the damages have been quantified — NZ Commercial has incurred costs of $64,772.25 (including GST).
[93] In addition, Mr Taylor submits that r 31.20 is not an alternative means of setting aside the statutory demand. He relies on McDonald v Amba Holdings Ltd,70 where the applicant filed an out-of-time application to stay liquidation proceedings (pursuant to rr 1.19 and 31.11 of the High Court Rules) in which the underlying debt was disputed. Associate Judge Johnston considered that such an application was an abuse of process as the applicant could have applied to set aside the statutory demand at the time, and was subsequently seeking to rely on grounds under s 290 in its out of time application for a stay. In other words, he considered that it was at least arguable that r 31.11 was not to be used as an alternative route to apply to set aside a statutory demand on the basis of a disputed debt.
[94] In the present instance I do not regard the defects in the issue of the statutory demand resulting from NZ Commercial being a prospective creditor and the application of s 288(5) of the Companies Act as being an alternative means of setting aside the statutory demand. The statutory demand remains in place. The defects in the issue of the statutory demand are relevant in weighing the interests of overall justice between the parties, when the Court is considering whether to grant leave to Soullight to file its statement of defence.
In the overall interests of justice, should leave be granted to Soullight?
[95]Returning to the principles set out at [64] and [65] above, in summary:
(a)Soullight has established grounds for a dispute of the debt on which the statutory demand is based;
(b)Soullight’s explanation for the delay in filing the statement of defence is not a particularly satisfactory explanation (although, having regard to the extensive course of dealings between the parties, it does have some credibility); and
(c)the evidence of Soullight’s solvency is not extensive.
70 McDonald v Amba Holdings Ltd [2019] NZHC 3380.
[96] Having said this, in my view the overall interests of justice between the parties is in favour of granting leave to Soullight. In my view, it is unjust for Soullight to be put into liquidation without the ability to raise defences when the statutory demand upon which the liquidation application is based is in relation to a prospective debt only, and effectively invalidly issued without leave of the Court pursuant to s 288(5) of the Companies Act. To have the draconian consequences of liquidation of the company based on an unproven claim for damages is an unjust result.
Result
[97]I make the following orders:
(a)Soullight is granted leave to file a statement of defence.
(b)Soullight is awarded costs on a 2B basis.
…………………………….. Associate Judge Taylor
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