QDC Developments Limited v The Trustees of the Boss Properties Trust HC Wellington Civ-2010-485-1761

[2010] NZHC 2368

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

CIV-2010-485-1761

BETWEEN  QDC DEVELOPMENTS LIMITED Applicant

ANDTHE TRUSTEES OF THE BOSS PROPERTIES TRUST Respondents

Hearing:         26 November 2010

Appearances: Mr. J.A. Tannahill - Counsel for Applicant

Mr F. Collins and Ms K. Mortimer - Counsel for Respondents

Judgment:      1 December 2010 at 3.00 pm

JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALL

This judgment was delivered by Associate Judge Gendall on 1 December 2010 at

3.00 pm under r 11.5 of the High Court Rules.

Solicitors:           Lower Hutt Law Centre, PO Box 30619, Lower Hutt

Gibson Sheat, Lawyers, Private Bag 31905, Lower Hutt

QDC DEVELOPMENTS LIMITED V THE TRUSTEES OF THE BOSS PROPERTIES TRUST HC WN CIV-

2010-485-1761  1 December 2010

[1]      The applicant, QDC Developments Ltd, applies for an order setting aside a statutory demand issued by the respondents, the trustees of the Boss Properties Trust for $62,085.61 said to be for rent arrears owing under a lease. The application is brought on the stated ground that there is a substantial dispute whether the debt claimed is owing or is due.

[2]      The respondents oppose the application.

Background

[3]      As I have noted, the alleged debt relates to rental claimed to be payable under a Deed of Lease dated 27 November 2009 for commercial premises in Lower Hutt. The applicant is a tenant of these premises, and the respondent trustees are the current owners of the property and landlords. The premises were sold by the applicant, the previous owner to the respondents on 10 February 2010, prior to the commencement date of the lease.

[4]      It appears this lease arrangement came about because the respondents as prospective purchasers were unable to obtain finance to purchase the premises while they were untenanted. To achieve the sale, the applicant as vendor agreed to sign a lease whereby it would make rental payments until a new tenant could be found. The applicant says that it did not actually have any use for the premises. The lease dated 27 November 2009 was expressed to commence on 22 April 2010 and be for a term of 3 years (with 2 rights of renewal) at an initial annual rental of $126,000.00 plus 58.83% of outgoings on the property.

[5]      On 27 August 2010, the respondents issued the statutory demand in question claiming that the applicant owed $62,085.61 in rent and outgoings arrears under the lease. The respondents have since provided an updated schedule of outstanding lease obligations as at 26 November 2010.

[6]      The applicant brings this application pursuant to s 290 Companies Act 1993, which sets out the basis on which a statutory demand may be set aside:

290 Court may set aside statutory demand

(1)  The Court may, on the application of the company, set aside a statutory demand.

…

(4)  The Court may grant an application to set aside a statutory demand if it is satisfied that—

(a)  There is a substantial dispute whether or not the debt is owing or is due; or

(b)  The company appears to have a counterclaim, set-off, or cross- demand and the amount specified in the demand less the amount of the counterclaim, set-off, or cross-demand is less than the prescribed amount; or

(c)  The demand ought to be set aside on other grounds.

[7]      Section 290(4)(a) requires an applicant to show a fairly arguable basis upon which it is not liable for the amount claimed in the statutory demand: Queen City Residential Limited v Patterson Co Partners Architects (No 2) [1995] 3 NZLR 307, United Homes (1988) Limited v Workman [2001] 3 NZLR 447 at 451-2. It must show that there is a genuine and substantial dispute as to the existence of the debt: Taxi Trucks Limited v Nicholson [1989] 2 NZLR 297. Whether there is a “substantial dispute” is a question of fact to be determined in light of all the relevant circumstances: Lockwood Buildings Ltd v Hunter Douglas Coilcoaters Ltd (1988) 4

NZCLC 64,295.

[8]      Here,  the  applicant’s  essential  claim  is  that,  on  25  November  2009,  in discussions over the forthcoming lease, the parties reached a supplementary agreement (“the Supplementary Agreement”) whereby the applicant and one of the trustees on behalf of the respondent trust, a Mr Malcolm Little (“Mr Little”), agreed that each of the named parties would do their best to arrange for new tenants or subtenants for the premises. The purported Supplementary Agreement did also provide that, in the event that the parties concerned were unable to arrange for a new tenant, then each party would contribute equally to the rent payable by the applicant

under the lease.    (Although the significance of this was not argued before me by counsel for either party, it is interesting to note that the purported Supplementary Agreement was signed by Mr Little “For Boss Transport Repairs Limited” and not the respondent trust.    It appeared to be accepted by the respondent that, notwithstanding this, if the Supplementary Agreement was valid (which was disputed)  it  would  result in  only one-half  of  the  rent  being requested  from  the applicant.)

[9]      The applicant contends, therefore, that as no arrangement for a new tenant or subtenant has been achieved, the applicant is only liable for a 50 per cent share of rental payments under the lease.   In addition, the applicant says that the same approach should be applied with respect to outgoings under the lease, even though they are not specifically referred to in the Supplementary Agreement.  Further, at the hearing of this matter before me on 26 November 2010, Mr Tannahill counsel for the applicant advised that a payment of $18,000.00 had been made to the respondents earlier that week, and that it was the applicant’s position that there were now no further outstanding obligations between the parties.

[10]     In reply, the respondents deny that this Supplementary Agreement ever came into being. They dispute the authenticity of the alleged agreement (only a photocopy of which is before the Court), claiming that it was never signed for or on behalf of the respondents or their interests by Mr Little.  Mr Little has denied the signature on the Supplementary Agreement is his.   In addition, the respondents seek to rely on expert evidence provided by a Ms Linda Morrell, a forensic scientist who has provided an affidavit dated 23 November 2010.  Ms Morrell in her affidavit deposes that, in her opinion, the signature of Mr Little on the Lease Agreement was “manipulated” to produce the signature on the Supplementary Agreement. She says that the two signatures were identical, which would be the result of “cut and paste” manipulation.    Significantly,  it  is  noted  that  the  applicant  has  not  produced  an original copy of the Supplementary Agreement.

[11]     Accordingly, the respondents maintain that the applicant’s reliance on the

Supplementary Agreement does not amount to more than a “mere assertion that a

dispute  exists”,  referring  to  Travel  Shop  Limited  v  Greenwoods  Corner  Travel

(1987) Limited HC Auckland CIV-2010-404-2930, 27 August 2010 at [6].

[12]     The applicant, however, submits that there is a genuine dispute here as to whether the Supplementary Agreement is valid/authentic, and that the statutory demand should be set aside on that basis. It contends first, that the dispute cannot be resolved on the basis of the available affidavit evidence, secondly, that Ms Morrell’s affidavit was provided late, and thirdly, that it should be given the opportunity to adduce its own expert evidence on whether Mr Little’s signature on the Supplementary Agreement is authentic or not.

[13]     The applicant relies on affidavit evidence by a Mr Strawbridge, who is a shareholder and the company secretary of the applicant company, to the effect that Mr Little personally signed one original copy of the Supplementary Agreement in his presence. There is also affidavit evidence by a Mr Gray, a shareholder and director of the applicant, regarding negotiations for the alleged Supplementary Agreement. Mr Gray says that, once he had signed the Supplementary Agreement, Mr  Strawbridge  took  the  document  to  be  signed  by  Mr  Little,  and  that  Mr Strawbridge then advised him that Mr Little had signed it. He says that the applicant would not have been prepared to enter into the lease if Mr Little on behalf of the respondents had not signed the Supplementary Agreement.

[14]     I  accept  the  applicant’s  submission  that  the  authenticity  of  Mr  Little’s signature on the Supplementary Agreement and the issue of whether the parties ever entered into that agreement, cannot be definitively resolved in the context of the present  proceeding.  While  the  respondents’  evidence  at  this  point  would  seem strong, the applicant must be given a proper opportunity to challenge the evidence of Ms Morrell (which it says it intends to do), and the affidavits of Mr Strawbridge and Mr Gray here are clearly sufficient to amount to more than a mere assertion that Mr Little agreed to the terms of the Supplementary Agreement. In these circumstances, I consider that there is a fairly arguable basis upon which the applicant is not liable for half of the rent and outgoings claimed.

[15]     However, the respondents also submit that the applicant has failed to raise a real dispute regarding its liability for the remaining half of the rent and outgoings. According to a schedule provided by the respondents, which sets out the applicant’s lease  obligations  as  at  26  November  2010,  the  applicant  now  owes  at  least

$43,386.43 (being 50% of outstanding rental and interest and all the 58.83% outgoings payable by the applicant) or a lesser figure of at least $34,989.96 (if only one half of the 58.83% outgoings are payable by the applicant), assuming the Supplementary Agreement to be valid. This schedule also seems to take into account payment of the sum of $18,000.00 that the applicant apparently contends has been paid in full satisfaction of its obligations.   And significantly, before me, no real objection was taken to this schedule or its calculations by the applicant.

[16]     Instead, as I have already noted, according to Mr Tannahill, the applicant contended simply without further verification that all outstanding rent obligations had now been paid.   In addition, the applicant has endeavoured to provide some evidence to raise some dispute as to its liability to pay the original claimed amount. On this, Mr Strawbridge, in his first affidavit, states as follows:

9. On the basis of the agreement, the liability of the Applicant Company, should be limited to one half (1/2) of the rental payments due in terms of the said Lease, and, I believe, in accordance with the tenor of the arrangement recorded by the supplementary agreement, the Applicant Company should be liable for a maximum of a one half (1/2) share of other expenses and charges payable pursuant to the lease.

10. In addition to the allowances outlined above ..., I believe that the Applicant Company is entitled to further credits in relation to other matters. These include the fact  that  the  Respondent,  or  at  least  parties  or  interests  associated  with  the Respondent, are actually occupying part of the leased premises themselves and no allowance or credit for that partial occupancy has been given.

11. In addition, from my observations, I believe that other third parties have, from time to time, occupied or remained in occupation of a portion of the relevant premises and would therefore be liable to pay rental to the Respondent trustees. Again, in such instances, no credit or allowance has been provided for in the Statutory Demand ...

...

14. I have made known to the Respondent that the Company is more than willing to pay the amount properly owing by the Company in accordance with the arrangements and the agreement reached between the parties. ...

15. As a gesture of good faith on its part, the Company has deposited the sum of

$30,000.00 in the Company’s solicitor’s trust account for the purposes of meeting its share of the obligation to date.

[17]     The respondents make several submissions with respect to these allegations. First, the respondents submit that the applicant has provided no real evidence of any kind disputing its liability to pay even one-half of the rent and all of the outgoings. Referring to Travel Shop Limited v Greenwoods Corner Travel (1987) Limited HC Auckland CIV-2010-404-2930, 27 August 2010 at [28], the respondents submit that one way of showing that there is a substantial dispute would have been to place in evidence a full and reliable reconciliation, carried out by an independent party in whom the Court has confidence, of the amount payable on a 50/50 basis.  On this, the respondents also rely on the following passage from Brookers Insolvency Law & Practice at CA290.03(4):

(5)        Obligations of the debtor company

Where there is a debt in excess of the prescribed amount, but only a proportion of the debt is in dispute, the debtor company has a duty to establish what is in dispute and advise the creditor. The debtor company also has the responsibility of immediately paying the debt which is acknowledged to be due. The creditor is therefore justified in bringing an application for the company’s liquidation: Re Hart Systems Ltd (1986) 3

NZCLC 99,504; Datasouth Holdings Ltd v Melco Sales (NZ) Ltd 17/5/96, Master

Venning, HC Christchurch M41/96.

[18]     This  statement  was  confirmed  by  Associate  Judge  Faire  in  Palladium

Properties Ltd v Commissioner of Inland Revenue HC Auckland CIV-2006-404-

6942, 20 June 2007 at [25]:

Section 290(5) provides that 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. Section 290(6) provides that a defect includes a material misstatement of the amount due to the creditor. It has not been suggested to me that there would be any substantial injustice by my not setting aside both statutory demands in respect of the undisputed portions of the claims made. When that position arises a debtor company has the responsibility for paying the debt which is found to be due. A creditor will be justified in bringing an application for the company’s liquidation if the debt remains unpaid: re Hart Systems Ltd (1986) 3 NZCLC 99,504 and Datasouth Holdings Ltd v Melco Sales (NZ) Ltd HC CHCH M41-96 17 May

1996 Master Venning.

[19]     Secondly, the respondents submit that the applicant is precluded from raising any set-off or counterclaim by cl 1.1 of the signed Deed of Lease, which provides as follows:

The Tenant shall pay the annual rent by equal monthly payments in advance (or as varied pursuant to any rent review) on the rent payment dates. The first monthly payment (together with rent calculated on a daily basis for any period from the commencement date of the term to the first rent payment date) shall be payable on the first rent payment date. All rent shall be paid without any deduction or set-off by direct payment to the Landlord or as the Landlord may direct. (emphasis added)

[20]     In Browns Real Estate Limited v Grand Lakes Properties Limited [2010] NZCA  425,  the  Court  of  Appeal  concluded  that,  by  raising  a  counterclaim  in response to a statutory demand, the applicants were in breach of a no set-off clause in their lease agreement. The clause required the applicants to pay rent “free of any deduction, withholding, set-off or reduction on any account”. The Court considered that the efficacy of a no set-off provision would be undermined if a statutory demand could be set aside on the basis of a set-off, counterclaim or cross-demand that a commercial party had by contract expressly agreed could not be raised (at [16]). Accordingly, the Court concluded as follows (at [17]):

In our view a contractual no set-off provision of the typeat issue in this case would normally result in the court’s discretion being exercised against an applicant if the sole grounds for an application to set aside a statutory demand was the existence of a set-off, counterclaim or cross-demand which a party had expressly agreed could not be raised. We consider that commercial parties should be required to honour the bargain they have made, absent other grounds that tell against the recognition of a statutory demand. (footnote omitted)

[21]     And, in any event, as to the level of evidence that the applicant would be required to provide in support of its alleged set-off or counterclaim, the Court in Travel Shop Limited v Greenwoods Corner Travel (1987) Limited stated that there is an onus on the applicant to persuade the Court that it has a specific set-off or counterclaim which would defeat the statutory demand, and that “[g]eneralised assertions that there are possible claims available to the applicant will not suffice” (at [31]).

[22]     Thirdly, the respondents submit that, contrary to s 290(4)(b), any alleged counterclaim or set-off has not been quantified here. Reference is made to Datasouth Holdings Ltd v Melco Sales (NZ) Ltd HC Christchurch, Master Venning, 17 May

1996, M41/96 at 7, where the Court held that contingent and unquantified counterclaims or set-offs cannot assist an applicant to set aside a statutory demand.

[23]     In response to a further allegation from the applicant that it was not provided with the keys to the premises until 23 September 2010, the respondents submit that this argument is “artificial”, as the applicant was the previous owner of the premises and the locks remained unchanged, and because in any event the applicant did not require possession of the premises.

[24]     Based on the material that is before me, I have come to the conclusion that the applicant has failed to show that there is a substantial and genuine dispute that it owes at least one-half of the rent and one-half of the outgoings claimed by the respondents. There is the assertion that all outstanding obligations were satisfied by the payment of $18,000.00 a few days prior to the date of the hearing, and there are Mr Strawbridge’s claims that the applicant is entitled to “further credits” as outlined in paras 10 to 11 of his affidavit. To the extent that the applicant might rely on these claims as amounting to a set-off, counterclaim or cross-demand within the terms of s

290(4)(b), I consider that the applicant would be precluded here from doing so by the no set-off clause in the Deed of Lease. In any event, none of these claims are quantified, and all that the Court is left with is the bare assertion that there are no remaining liabilities. In my view, this is insufficient.

[25] I conclude therefore that the sum of $34,989.96 noted at [15] above cannot be the subject of any real dispute here.

[26]     And finally, at the hearing of this matter before me, Mr Collins for the respondents also submitted that this proceeding is essentially about the issue of whether the applicant is able to pay its debts and that, if the Court is unsure about this issue, then any disputed amount should be paid into Court pending resolution of the parties’ dispute in further proceedings.

[27]     The Court has jurisdiction to make an order setting aside a statutory demand subject to conditions: s 290(7) Companies Act 1993. In order to encourage the parties to engage in dispute resolution and/or to take and pursue substantive claim proceedings without delay, an order can be made requiring a disputed amount, or part of that amount, to be paid into the Court, pending resolution of the dispute: see Jones Rd Vineyard Ltd v Parkers Business Solutions Ltd HC Blenheim CIV-2009-

406-219, 12 November 2009 at [11]-[12]; and Morph Enterprises Ltd v Marple

Investments Ltd HC Wellington CIV-2005-485-1574, 30 November 2005.

[28]     And, by analogy, s 291 Companies Act 1993  sets out additional powers which a Court may exercise in relation to an application to set aside a statutory demand.  One such power given by s 291(1)(a) enables a Court to order payment of an undisputed debt within a specified period, failing which a creditor can apply to put the company into liquidation.  In my view, a similar result is appropriate in this case and can be achieved by an order being made in terms of s 290(7) Companies Act 1993 subject to the conditions which are to follow.

Orders

[29]     For the reasons outlined above, orders are now made therefore as follows:

The  statutory  demand  dated  27  August  2010  is  set  aside  subject  to  the following conditions:

(i)The applicant is to pay to the respondent within fifteen working days of the date of this judgment the sum of $34,989.96.

(ii)The applicant is to pay into this Court within 15 working days of the date of this judgment the sum of $27,095.65 which is to be held upon interest-bearing deposit and retained until further order of this Court is made.

(iii)The applicant is required to take all reasonable steps forthwith to bring and prosecute a claim against the respondent seeking a declaration from the Court as to the correct amount due to the respondent by way of rent and outgoings under the lease in question here and to pursue this claim with the utmost diligence.

[30]     Leave is reserved for either party to apply for further directions arising out of this order on three days notice.  This is particularly to enable the respondent to seek

further orders if it considers that the applicant is not pursuing the claim outlined in paragraph [29](iii) above with significant diligence.

[31]     As  to  costs,  although  the  statutory  demand  has  been  set  aside,  this  has occurred on payment conditions and thus in my view the respondent has effectively succeeded here in opposing the applicant’s application and is entitled to an award of costs.

[32]     Costs are awarded on the present application to the respondent against the applicant on a 2B basis together with disbursements as fixed by the Registrar.   I certify for one counsel only however.

‘Associate Judge D.I. Gendall’