R & C Trading Limited v Pakuranga Plaza Limited

[2024] NZHC 3919

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2024-404-1009

[2024] NZHC 3919

IN THE MTTER

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

BETWEEN

R & C TRADING LIMITED

Applicant

AND

PAKURANGA PLAZA LIMITED

Respondent

Hearing:

16 December 2024

Appearances:

T A Hwang for applicant

T Nelson and J A Clark for Respondent

Judgment:

19 December 2024

JUDGMENT OF ASSOCIATE JUDGE LESTER

This judgment was delivered by me on 19 December 2024 at 11:30am pursuant to Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar

R & C TRADING LIMITED v PAKURANGA PLAZA LIMITED [2024] NZHC 3919 [19 December 2024]

[1]    R & C Trading Limited (RCL) is a tenant of Pakuranga Plaza Limited (PPL) pursuant  to  a Deed  of Lease dated 30 November 2020 (the Lease). RCL operates  a bakery/cafe from the leased premises which is in a shopping mall owned by PPL.

[2]    Since the commencement of the Lease, RCL has rarely not been in arrears in respect of of its rental and outgoing obligations to PPL.

[3]    On 21 March 2024, PPL served a statutory demand claiming unpaid rent and outgoings of $204,254.09 including GST, being the sum due as at 11 March 2024. Those arrears have built up since 5 August 2021, being the last time RCL’s statement showed a zero balance. In fact, other than the opening balance being zero and a brief period of three weeks in July 2021 when RCL had a small credit of just over $1,100, RCL  has  always  been  in  arrears,  albeit  at  times  for  modest  sums,  but  since   1 January 2022 the arrears have never been less than $51,000.

[4]    RCL applies to set aside the demand served on 21 March 2024. I am left in no doubt that the application should be dismissed. I now set out my reasons for that conclusion.

[5]    RCL does not dispute PPL’s calculation of the amount due or that it is obliged by the Lease to pay the non-rental items included in the demand.

The basis for the challenge to the demand

[6]    RCL’s application relies on two misrepresentations as giving it grounds to challenge the demand  — one it says was an express representation and the other,     a representation by omission.

[7]    The express misrepresentation is said to be that PPL said it intended to refurbish the Plaza to make it more appealing. RCL complains that no refurbishment work has been done. Leaving to one side the fact that a statement about future intentions is generally not regarded as a misrepresentation, I assume without deciding, that RCL has a reasonably arguable case that a misrepresentation was made.

[8]    The misrepresentation by omission is said to be that PPL was aware major roadworks to construct the eastern bus way were due to commence in 2021, which it did not disclose to RCL but this was not pursued at the hearing. RCL says PPL was aware of those roadworks which were likely to involve a significant restriction on pedestrian and car access to the Plaza and that the roadworks would continue for an extended period. RCL complains that PPL did not tell it about the plans for the eastern bus way. Ms Hwang, counsel for RCL, explained that the significance of the disruption caused by the roadworks was that it compounded the impact of the absence of refurbishment at the Plaza. Had the Plaza been refurbished, the submission goes that it would have been a greater drawcard to the public which would have gone some way to mitigate the loss of business due to the roadworks.

[9]    There is a dispute as to whether RCL raised either of the above matters prior to receiving the demand. PPL submits that RCL had not referred to either matter prior to the demand. On two occasions RCL entered repayment programmes with PPL in respect of its arrears — both of which RCL failed to honour. I would have expected the alleged misrepresentations, if they had any substance, would have been raised at the time the repayment programmes were being negotiated but such are not referred to in any contemporary correspondence. However, I need not make a determination in respect of this point.

The no set-off clause

[10]Clause 15.4 of the Lease provides:

Payments

15.4 The Lessee will pay all money to be paid to the Lessor by an appropriate order or orders on the Lessee’s bankers directing payment to the credit of the Lessor’s account at such bank and branch as is from time to time nominated by the Lessor, and otherwise as the Lessor may direct, without equitable or legal deduction, counterclaim or set-off.

No set-off clause: the authorities

[11]   The principles applying to a no set-off clause are well established. The Court of Appeal in Browns Real Estate Ltd v Grand Lakes Properties Ltd, considered

whether a contractual no set-off provision precludes a successful application to set aside a statutory demand under s 290(4)(b) of the Companies Act 1993 (the Act) where the application relies on a set-off.1 The Court said that the efficacy of a no set-off contractual provision would be undermined if statutory demands could be defeated on the basis of a set-off, counterclaim or cross demand, a commercial party had by contract expressly agreed, could not be raised. The Court said:2

In our view a contractual no set-off provision of the type at 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. Grand Lakes, rightly in our view, conceded that an application to set aside the demand can be made under s 290(4)(c). Such an application would, however, need to be on grounds other than the existence of a set-off or counterclaim.

(footnotes omitted)

[12]   RCL has agreed to pay rent without set-off or deduction. It has been settled, at least since Browns Real Estate Ltd, that a no set-off clause precludes a debtor from raising a set-off in the context of an application to set aside a statutory demand. In short, such clauses require “pay first and argue later”.

[13]   In Bountiful Holdings Ltd v University of Auckland, a decision of Associate Judge Bell, the Judge said:3

[23] In a similar way, I regard the claims here as disputes that, typically, could arise between landlords and tenant. The Browns Real Estate approach applies. The landlord is entitled to require the rent to continue to be paid to it, notwithstanding arguments as to it allegedly diverting work away from its tenant in favour of other caterers. That may be hard on a tenant who finds its cash-flow cut off as a result of the actions of its landlord but, hard as it may be, that is the effect of the contractual arrangements that the tenant has entered into.

(emphasis added)

1      Browns Real Estate Ltd v Grand Lakes Properties Ltd [2010] NZCA 425, (2010) 13 NZCPR 349.

2 At [17].

3      Bountiful Holdings Ltd v University of Auckland [2012] NZHC 1076.

[14]The Judge concluded:

[25]  I accept that in issuing the statutory demand the university was doing no more than asserting its rights under the lease to recover payment of rent. It was entitled to exercise the powers under the lease, even though it may cause hardship on Bountiful Holdings Ltd.  It is not something that gives any  cause for setting aside the statutory demand.

[15]   Ms Hwang submits that while cl 15.4 of the Lease requires RCL to pay without deduction, counterclaim, or set-off, there is a fundamental question of what exactly is payable to PPL given there was a serious misrepresentation that may give rise to a rent abatement and/or termination of the Lease.

[16]   I now deal with each of the possible remedies Ms Hwang says may be available to RCL as a result of the alleged misrepresentation.

Termination of the Lease

[17]   Mr Chiem, director of RCL, says that in about October 2022, PPL told tenants there would be no refurbishment programme. Accordingly, it seems it was no later than October 2022 that RCL learnt of the claimed misrepresentation. RCL did not cancel the Lease at that time and by staying in occupation of the premises with full knowledge of what it now says was a misrepresentation, it has affirmed the Lease.4

[18]RCL has not purported to cancel the Lease at any time.

[19]   In any event, even if RCL could now cancel for an alleged misrepresentation, it would not relieve it of its obligation to pay accrued arrears of rent:5

Rights and liabilities, or any cause of action, accrued unconditionally prior to cancellation are not discharged by cancellation.

[20]   Accordingly, the possibility of termination does not assist RCL — the arrears have accrued and PPL’s right to recover them survives cancellation.

4      Section 38 of the Contract and Commercial Law Act 2017 provides that a party is not entitled to cancel a contract if with full knowledge of the misrepresentation they have affirmed it. Affirmation is final and the affirming party cannot subsequently change their mind.

5      Stephen Todd and Matthew Barber Burrows Finn and  Todd  on  The  Laws  of  Contract  in  New Zealand (7th ed, Lexis Nexis, Wellington, 2022) at [18.4.1]. See also Brown v Langwoods Photo Stores Ltd [1991] 1 NZLR 173 CA at 176 applied in Liu v Hu [2024] NZCA 205.

Abatement

[21]   The Laws of New Zealand chapter on set-off and counterclaim at para 18 states in relation to abatement:

In answer to a claim for rent, a tenant has an ancient common law right to set up by way of defence any sum of money actually expended by him on repairs which the landlord, in breach of covenant, has failed to carry out. He may also set up any sum of money actually expended by him at the landlord’s request to fulfil the landlord’s obligations in respect of the land or to protect the tenant’s occupation. However, the common law right extends no further, and does not include cross-claims for an uncertain or unliquidated sum.

(footnotes omitted)

[22]   In Gough v Timbalok New Zealand Ltd,6Panckhurst J after referring to the distinction between set-off and counterclaim from Grant v NZMC Ltd said:7

There is also a helpful commentary in 42 Halsbury’s Laws of England (4th ed) under the heading “Set-off and Counterclaim”, paras 401-489. The commentary includes an analysis of the concept of abatement.

Abatement: Abatement at common law can arise in two situations.  A purchaser of goods or a defendant in a claim for work and labour (for example under a building contract) may defend an action for the price of such goods, or such work and labour, by showing that their worth was diminished by reason of breach of contract. In such cases the purchaser, or property owner, may have a true defence at law to the other’s claim. In form the defence will ordinarily be an unliquidated claim for damages.

Set-off at law: This is the right to set off debts arising from transactions of a different nature, where such debts can be ascertained with certainty at the time of pleading. If a plaintiff’s claim was for damages a legal set-off of a liquidated sum could not be made, and visa versa. So, a common law set-off is limited to the situation where there are mutual debts, and the plaintiff’s action to recover is met  by  a  set-off  of  the  amount  owed  to the defendant by the plaintiff. The set-off operates as a defence.

[23]   In the context of an application to set aside a statutory demand, the Court must be: “Able to determine from the material provided whether the amount of the …. counterclaim is more than the amount claimed in the statutory demand”.8 An outline

6      Gough v Timbalok New Zealand Ltd [1997] 1 NZLR 303 at 302.

7      Grant v NZMC Ltd [1989] 1 NZLR 8 (CA).

8      Manchester Securities Ltd v Body Corporate 172108 [2018] NZCA 190, [2018] 3 NZLR 455 CA at [28], approved in HWD NZ Investment Co Ltd v Body Corporate 392418 [2024] NZCA 38 at [23].

of the claim is also not enough,9 albeit a genuine reasoned estimate of loss may be sufficient given the tight timeframes that apply in an application to set aside a statutory demand.

[24]   RCL has not attempted to quantify its claim against PPL. This in itself would be fatal to the abatement claim but recourse to abatement is not an answer to cl 15.4 as it prohibits RCL from claiming “equitable or legal deduction”. The Court of Appeal in Grant v NZMC Ltd said:10

Statute apart, the recognised deductions which a tenant may make against his rent are those authorised by the lease itself and those in respect of moneys paid by the tenant which it was the landlord’s obligation to pay. The latter include moneys outlaid on repairs covenanted to be, but not in fact done by the landlord (as in Lee-Parker v Izzet [1971] 1 WLR 1688 in which the right to deduct was described as one of “ancient common law”) and moneys payable by the landlord the failure to pay which imperils the tenant’s possession (as in Sapsford v Fletcher (1792) 4 Term Rep 511 and the other cases mentioned in 27 Halsburys Laws of England (4th ed) para 232, note 7).

The covenant to pay rent without deduction may embrace such matters. It is not easy to envisage any other subject-matter to which they relate. We do not think the word  ‘deduction’ is clear enough to hold that it  was  agreed that   a set-off of the kind claimed by Mr and Mrs Grant could not be made. The word ‘deduction’ does not in its natural sense embrace a set-off.

[25]   Accordingly, reference to abatement does not assist where there is a clause barring legal deduction. The ancient common law right referred to by the Court of Appeal in Grant is the right of abatement referred to in The Laws of New Zealand passage set out above.

The application of the no set-off clause

[26]   Even if there had not been a no set-off clause here, I seriously doubt whether the unquantified claim raised by RCL would mean that it is unjust to permit PPL to recover its arrears. Grant v NZMC Ltd provides that before a defendant’s cross-claim can be an equitable set-off it must so affect the plaintiff’s claim that it would be unjust to allow the plaintiff to have judgment without bringing the cross-claim into account.

9      Jacobsen Creative Surfaces Ltd v Mapei Spa, HC Auckland M967/02, 5 February 2003 at [23]- [24].

10     Grant v NZMC Ltd, above n 7, at 13.

[27]   Here, RCL has done nothing since October 2022 in respect of the alleged refurbishment misrepresentation. Ms Hwang submitted Mr Chiem had orally raised his complaints but that is disputed. Again, there is nothing in writing where RCL raises a claim against PPL. Mr Chiem says the eastern bus way roadworks commenced in 2022. He does not say when he learnt PPL knew of the bus way from early 2020 — his hearsay evidence being:11

I have been told by sources in PPL that they had discussions with the Council about this from early 2020.

[28]   However, Mr Chiem concludes his affidavit by saying; “Accordingly, R&C stopped paying rent in October 2022”.

[29]   It was not until 4 December 2024, that is two weeks before the scheduled hearing of RCL’s application to set aside the demand, that it gave notice of its desire to arbitrate the dispute.

[30]   RCL has been in occupation of the premises throughout.   On the evidence     I have, RCL has not paid rent for over two years. It left it to the eleventh hour to commence the arbitration process. Of course, RCL’s arrears go back further than October 2022 and given the presence of the no set-off clause it was untenable for it to simply occupy the premises, not pay rent and only seek to have its claim addressed so late in the piece.

[31]   Ms Hwang’s written submissions do not address the basis upon which RCL should not be held to its contractual obligation to not raise a set-off in respect of unpaid rental. While the approach in Browns Real Estate is not absolute, as the Court retains a discretion to set aside a demand all things being equal, that discretion will not be exercised in an applicant’s favour if the sole ground to set aside the demand is the existence of a set-off. I find cl 15.4 of the Lease is a bar to RCL raising a set-off as an answer to PPL’s statutory demand.

[32]   There is no reason not to apply the no set-off clause in this case. That is all the more so when the alleged set-off is not quantified. Again, the significant delay by

11 Affidaivt of Bon Cheak Chiem dated 8 April 2024, para [14].

RCL in pursuing its claim while enjoying occupation of the premises would in any event stand against recognising an equitable set-off.

Solvency

[33]   No evidence of solvency is filed in the form of accounts. It is not enough for RCL to say that PPL has never questioned the solvency of RCL.  In any event, as  Ms Hwang correctly notes, the Court of Appeal has found that solvency itself would not be a standalone ground for setting aside a statutory demand.12 In AMC Construction Ltd v Frews Contracting Ltd, the Court referred to s 290(4)(c) of the Act which provides that the Court may set aside a statutory demand if it believes the demand ought to be set aside on grounds other than a substantial dispute in relation to the debt or that the company has a counterclaim or set-off. The Court of Appeal said:13

We would not wish to rule out the possibility that the solvency of the company might constitute a stand alone ground for setting aside a notice under para (c). However, we consider that such cases are likely to be extremely rare.

[34]   This is not such a rare case; this can be said with confidence given RCL has not led evidence of its solvency. Again, it is not for PPL to question solvency when the application to set aside the demand did not rely on solvency.

Substantial injustice

[35] The application to set aside did not expressly seek to rely on s 290(4)(c) of the Act noted at [33] above. Ms Hwang submits that when considering whether to set aside a statutory demand, the Court is obliged to examine whether the alleged creditor’s prima facie entitlement to liquidate the company is outweighed by some factor making it plainly unjust for liquidation to proceed.14

[36]   Ms Hwang submits that here, a statutory demand procedure was being used unfairly or as undue pressure. She submits the statutory demand was issued by PPL to place undue pressure on RCL and was therefore being used unfairly.

12     AMC Construction Ltd v Frews Contracting Ltd [2008] NZCA 389 at [7].

13 At [7].

14     Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395.

[37]   I cannot accept that submission given RCL, on its own admission, has not paid rent for more than two years, having been in arrears almost for the entire duration of its tenancy and failed to honour its payment obligations.

[38]   There is no abuse of process here. If anything, it is RCL that could be said to have abused its position by remaining in occupation of the premises for more than two years without paying rent, having been in arrears for an extended period, and only at the eleventh hour seeking arbitration. No doubt Ms Hwang, being new counsel instructed, recognised RCL’s  failure to pursue its claim put it in a weak position.   Ms Hwang said everything that could possibly be said in support of the application but I am satisfied that it cannot succeed.

Orders

[39]I make the following orders:

(i)dismissing RCL’s application;

(ii)requiring RCL to pay the debt claimed in the demand within 20 working days (as defined in the Act) of this judgment and directing that, in default of payment, PPL may make an application to put RCL into liquidation; and

(iii)awarding PPL costs and disbursements on the application on an indemnity basis (per its entitlement under cl 15.1(b) of the Lease). (If costs cannot be agreed, memoranda may be filed)

Associate Judge Lester

Solicitors:

Queen City Law, Auckland Graham & Co, Auckland

Copy to counsel:
R Latton, Barrister, Auckland