Pinnacle Steele Limited v Design engineering (Si) Limited

[2016] NZHC 388

IN THE HIGH COURT OF NEW ZEALAND

DUNEDIN REGISTRY

CIV-2015-412-000140

[2016] NZHC 388

UNDER

the Companies Act 1993

IN THE MATTER

of an application under s 290 Companies Act 1993 to set aside a statutory demand

BETWEEN

PINNACLE STEEL LIMITED

Applicant

AND

DESIGN ENGINEERING (S.I.) LIMITED

Respondent

Hearing:	3 March 2016
Appearances:	L A Andersen for Applicant C O'Connor for Respondent
Judgment:	9 March 2016

JUDGMENT OF ASSOCIATE JUDGE MATTHEWS

[1]    Pinnacle Steel Limited (Pinnacle) is a steel fabricator. Design Engineering (S.I.) Limited (Design Engineering) prepares designs and shop drawings for steel structures, and undertakes weld testing. In 2015 Pinnacle engaged Design Engineering to prepare drawings for steel structures it was to supply under a contract with Naylor Love and a separate contract with Calder Stewart. It also engaged Design Engineering to undertake weld testing in relation to the same contracts. Pinnacle says that drawings provided by Design Engineering were both late and inaccurate, resulting in Pinnacle having to remake various assemblies it was to provide to the head contractors. As a result it has not paid Design Engineering in full. On 24 November 2015, Design Engineering issued a notice to Pinnacle under s 289 of the Companies Act 1993 demanding payment of $87,145.97. Pinnacle now applies under s 290 to set

PINNACLE STEEL LTD v DESIGN ENGINEERING (S.I.) LIMITD [2016] NZHC 388 [9 March 2016]

that demand aside. It says there is a substantial dispute on whether the sum claimed is owing, and that this dispute was identified prior to the demand being issued.

[2]    Design Engineering denies that there is a dispute. It says that an earlier dispute was settled and the sum now claimed is the sum which Pinnacle agreed to pay pursuant to that settlement.

Legal principles

[3]Section 289 of the Companies Act provides:

289 Statutory demand

(1)      A statutory demand is a demand by a creditor in respect of a debt owing by a company made in accordance with this section.

(2)      A statutory demand must—

(a)be in respect of a debt that is due and is not less than the prescribed amount; and

(b)be in writing; and

(c)be served on the company; and

(d)require the company to pay the debt, or enter into a compromise under Part 14, or otherwise compound with the creditor, or give a charge over its property to secure payment of the debt, to the reasonable satisfaction of the creditor, within 15 working days of the date of service, or such longer period as the Court may order.

[4]    The statutory purpose of a demand under s 289 is to lay an evidentiary foundation for an application to the Court to appoint a liquidator under s 241. One of the grounds for an appointment is that the company in question is unable to pay its debts. Under s 287 a company is presumed to be unable to pay its debts if it fails to comply with a demand under s 289. Thus, whilst demands under s 289 are commonly issued as a means of recovering debts, their purpose is specific. In a recent case I noted:1

[6] …  I cannot stress too highly the fundamental need for parties who seek to rely on notices under s 289, and those who are placed in a position of dealing with them, to focus on the fundamental purpose of a notice under that section and long-established case law which makes it crystal clear that notices are not to be utilised unless there are sound grounds for believing, at the time of their

1      Bernard Street Properties (2007) Ltd v Rebuild and Repair Canterbury Ltd [2015] NZHC 2096.

issue, that there is no dispute of substance, and no qualifying claim or set-off available to the alleged debtor.

[5]The same principle has also been enunciated recently by the Court of Appeal:2

[22] It is important to keep in mind the words of the statute. What the applicant must show is that the dispute it raises has substance; the applicant must explain to the Court what the dispute is; and the dispute so shown must be real and not a fanciful or insubstantial dispute.³ The Court must bear in mind that it is operating in the summary jurisdiction, with the accompanying disadvantages that brings for any applicant. The Court must also keep in mind the requirement that what is intended to be a summary hearing should not be converted into a full-blown trial.

[6]    Consistent with this approach, the Court of Appeal has also laid down the way in which the Court is to approach an application under s 290:4

(1)    We note that the statutory scheme is for applications to set aside statutory demands to be a summary proceeding. ... The section 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. The test may be compared with the principles developed in cognate fields such as applications to remove caveats, leave to appeal an arbitrator’s award and opposition to summary judgment.

(2)     … The tight time constraints distinguish the s 290 discretion from that to be exercised on, say, a summary judgment application, where the presence of complex legal issues is not necessarily a bar to a remedy. As with leave to appeal an arbitrator’s award, the hearing should, in the normal course, be short and to the point, and the judgment likewise.

Facts

[7]    Because of perceived faults with the steel structures supplied to them by Pinnacle, both Naylor Love and Calder Stewart withheld monies from the invoices rendered to them by Pinnacle, as they offset what they claimed to be additional expense to which they had been put as a result. As Pinnacle had laid the blame for the problems experienced by Naylor Love and Calder Stewart on design engineering, it withheld sums from the invoices Design Engineering rendered. It is sufficient to record that there was a good deal of negotiation between Pinnacle and Design Engineering over these issues. In the course of this, the specific difficulties which had been brought to the attention of Pinnacle by Naylor Love and Calder Stewart were

2      AAI Ltd v 92 Lichfield Street Ltd (in receivership & liquidation) [2015] NZCA 559 per Winkelmann J.

3      Re A Company [1991] BCLC 737 (Ch) at 740 per Harman J.

4      Industrial Group Ltd v Bakker [2011] NZCA 142, (2011) PRNZ 413 (citations omitted).

identified to Design Engineering, and by late-October 2015 the financial consequences of these issues were settled between Pinnacle and Design Engineering. One term of the agreement which was reached was that Pinnacle would pay Design Engineering a final sum of money in settlement in relation to the Naylor Love contract. It paid the entire balance owing in relation to the Calder Stewart development, and it paid the sum that was owing to Design Engineering in respect of checking of welding, which had not been in dispute.

[8]    Before the final agreed payment was made to Design Engineering in relation to the Naylor Love development, Naylor Love withheld a further sum of $40,000 from a payment due to Pinnacle, on account of an intended deduction in relation to the cost of scaffolding for a longer period than intended, and similarly, propping of parts of the works. As I understand it, Naylor Love was to finally quantify the sum to be claimed, but the $40,000 deduction was an estimate at the time. As a result of this deduction Pinnacle did not pay the final agreed sum to Design Engineering, and this led to Design Engineering serving the notice which is at issue in this proceeding.

The arguments for the parties

[9]    For Pinnacle, Mr Andersen says that although a settlement was reached on the facts known at the time, the subsequent claim by Naylor Love was not known to Pinnacle at the time the settlement was reached, and that it amounts to a further claim for damages which, if valid, arise from the conduct of Design Engineering, and for which that company is responsible. He says that if it is liable to Naylor Love for the later claim, Pinnacle is entitled to claim that sum from Design Engineering. On this basis he says that Pinnacle has a defence to the claim now made, or that it has a counterclaim against Design Engineering arising from Naylor Love’s latest claim, and is entitled to a set-off against the sum it agreed to pay under the settlement.

[10]   For Design Engineering, Mr O’Connor says that Pinnacle is estopped from refusing to pay the sum it agreed to pay. It represented that payment would be made, and Design Engineering relied on that representation by continuing to fulfil its obligations under its contract by sending one of its staff to the Naylor Love project to check welding.

Discussion

[11]   There is no dispute that in relation to the issues raised by Calder Stewart and Naylor Love which were the subject of negotiations between Pinnacle and Design Engineering, a binding settlement agreement was reached, nor that under that settlement Pinnacle is liable to pay to Design Engineering the agreed final settlement sum. Part has in fact been paid.

[12]   On the facts presented to the Court it is arguable that the later claim by Naylor Love in respect of additional costs for scaffolding and propping was made after the settlement was reached. As these charges arise from delays in providing fabricated steel to its project, for which Pinnacle blames Design Engineering, it is arguable that Design Engineering is liable to Pinnacle in respect of this new claim. If Pinnacle was not aware of the later Naylor Love claim at the time it entered the settlement in relation to defined elements of its contract with Design Engineering, as it maintains, its claim that Design Engineering is liable to it for any liability it may have to Naylor Love under the later claim is outside the terms of the settlement. Thus, while Pinnacle may be liable to Design Engineering under the settlement contract, Design Engineering may be liable to Pinnacle under its original contract for further damages resulting from non-performance in relation to the Naylor Love contract.

[13]   In terms of s 290(4)(b) Pinnacle appears to have a counterclaim, set-off or cross-demand against Design Engineering.

[14]   It seems, however, that after allowing for the cross-demand, there may be a comparatively small sum owing under the settlement contract, as the balance of the sum owing under the statutory demand exceeds the sum of $40,000 deducted by Naylor Love from Pinnacle’s invoice.  The demand was issued for $87,145.97, and

$44,793.93 has been paid since, leaving a balance owing of $42,352.04. Thus it appears that Pinnacle owes Design Engineering $2,352.04 more than Naylor Love has now deducted from its invoice. Neither counsel turned any attention to this issue, but on the basis of the figures I have given which are drawn from the evidence and submissions, the net sum arrived at by deducting the amount of Pinnacle’s cross-

demand from the balance owing under the notice exceeds the prescribed amount of

$1,000.5

[15]   If these figures are accurate the grounds set out in s 294(b) do not apply. Nonetheless, I am satisfied that the demand ought to be set aside, under s 294(c) with a condition imposed under s 290(7), that within 10 working days Pinnacle pay to Design Engineering the difference between the balance owing pursuant to the notice under s 289, and the sum of $40,000.

[16]   Given the analysis which I have set out it is not necessary to deal in detail with Design Engineering’s assertion that Pinnacle is estopped from denying that it is liable to pay the sum owing under the settlement agreement. Pinnacle does not deny liability to pay that sum, but by invoking the procedure provided for by s 289, Pinnacle’s claim is also subject to the terms of s 290 which expressly allows the Court to recognise a cross-demand, when considering whether to set aside its statutory demand. A cross- demand is wider than a counterclaim.6 Although the cross-demand in this case is slightly less than the sum owing under the settlement, the further ground for setting aside a statutory demand under s 290(4)(c) is appropriate to cover this situation. Even if, at a trial, Design Engineering could establish an estoppel in relation to the debt owed by Pinnacle under the settlement contract, under the jurisdiction given to the Court by the Companies Act the existence of a valid, arguable cross-demand is sufficient for the Court to prevent Design Engineering proceeding under its s 289 notice.

Outcome

[17]   The statutory demand issued by Design Engineering on 24 November 2015 is set aside.

[18]   Mr Andersen seeks costs on an indemnity basis. He notes that before the notice was issued Design Engineering was aware of the fact that Pinnacle disputed liability to pay the balance of the agreed settlement sum because of the new claim made by

5      Companies Act 1955 Liquidation Regulations 1994, reg 5.

6      Teak Construction Ltd v Leaweld Ltd HC Auckland M1581-IM00, 25 January 2001 per Master Kennedy-Grant.

Naylor Love, and it is common ground that Design Engineering did not inform its solicitors of this before they issued the notice under s 289.

[19]   After considering all the facts put before the Court in this case, I am not satisfied that indemnity costs should be awarded. Although the Court has, on numerous occasions, recorded that notices under s 289 are not to be issued when the issuing party has notice of a dispute of substance, or a valid basis for a cross-demand, that does not mean that as a matter of course the Court will award costs on an indemnity basis upon finding that an arguable defence exists, or that the basis for a cross-demand has been made out. In each case the Court will assess the facts before it, and take into account the general principle that recovery of costs should normally be at a level amounting to two-thirds of actual costs, if reasonable.

[20]   In this case, I am not satisfied that Design Engineering has acted in any of the ways specified in r 14.6(4) and thus justified the Court in ordering it to pay indemnity costs. Its conduct, overall, cannot be described as vexatious, frivolous or improper. Its basis for requiring a payment from Pinnacle was a concluded settlement agreement after negotiation, not merely, for example, an overdue invoice. Its error in issuing the notice arose from a failure to recognise that in invoking s 289 of the Companies Act, it was also subject to s 290 of the Act.

[21]   I am satisfied that the justice of the case is met by Design Engineering paying costs to Pinnacle on a 2B basis together with disbursements fixed by the Registrar.

J G Matthews

Associate Judge

Solicitors:

Albert Alloo & Sons, Dunedin. Gresson Dorman & Co, Timaru.