Redeal Limited v Aden Trustee Limited HC Auckland CIV 2009-404-8148

[2010] NZHC 859

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2009-404-008148

UNDER  Part XVI of the Companies Act 1993

IN THE MATTER OF     a proceeding to put ADEN TRUSTEE LIMITED into liquidation

BETWEEN  REDEAL LIMITED Plaintiff

ANDADEN TRUSTEE LIMITED Defendant

Hearing:         25 May 2010

Appearances: Mr Upton and Ms Montgomery for plaintiff

Mr G A Keene for defendant

Judgment:      2 June 2010 at 4 p.m.

JUDGMENT OF ASSOCIATE JUDGE DOOGUE

This judgment was delivered by me on

02.06.10 at 4 pm, pursuant to

Rule 11.5  of the High Court Rules.

Registrar/Deputy Registrar

Date……………

Counsel:

Simpson Grierson, Private Bag 92518, Wellesley Street, Auckland – [email protected]

G A Keene, Barrister, 45B Epsom Avenue, Auckland - gr[email protected]

REDEAL LIMITED V ADEN TRUSTEE LIMITED HC AK CIV-2009-404-008148  2 June 2010

Background

[1]      The plaintiff is a supplier of electrical fittings and products.   One of the companies to which it made sales was Aden Electrical Ltd (“Aden”).  In May 2009 the defendant provided a guarantee for Aden’s debts to the extent that they exceeded

$1,600,000.

[2]      Aden has ceased trading and has been placed in liquidation.  Aden owes the plaintiff $2,123,859.35.  On 9 November 2009, the plaintiff served a statutory demand on the defendant which has not been complied with.

Does the defendant owe a debt to the plaintiff?

[3]      The defendant does not deny that it gave a guarantee over the indebtedness of Aden.  It notes however, that the obligation to guarantee only applied to debts which Aden owed to the plaintiff which were in excess of $1,600,000.  The defendant says that the debts do not reach that level after legitimate deductions have been made. The principal of the defendant, Mr Froude, says that there were numerous debts which were the subject of dispute and which total $257,018.39 by value.  I shall deal with the issue of the disputed invoices first.

[4]      I do not intend to analyse the evidence about the disputed amounts in any detail.  The important point is that there is evidence which suggests that Aden bona fide disputed some of the debts.  Mr Froude has annexed to his affidavit a table titled “Invoices on hold”.  This appears to have been a record which Aden kept of invoices that were in dispute and which was amended from time to time.  There is evidence that the table produced in evidence was updated either in November or December

2009.  That shows the total invoices in dispute amounted to $257,018.39.  On the face of it, some of the items claimed are genuine disputes.  Some of them are less easy to understand.  Often the source of the query is that no “PO” (Project order) has been provided by the plaintiff back to Aden’s accounting staff to check the proprietary of the invoice.  On some occasions these are noted as having been sorted, but yet to be approved by Mr Froude.  In my view, the overall effect of the table of disputed  invoices  is  that  it  discloses  a  substantial  dispute  about  the  level  of

indebtedness which the defendant owed to the plaintiff.   I accept that value of the disputed invoices is $257,018.39.

[5]      The second reason why the defendant says that the total debts of Aden fell below $1,600,000 is because Aden has a counter-claim available to it against the plaintiff, which must be taken into account when calculating the net indebtedness of Aden to the plaintiff.  I will deal with that claim in the next part of this judgment.

Basis of counter-claim

Background to counter-claim

[6]      The background to the counter-claim claim is as follows.   The defendant claims that the principal debtor, Aden, was entitled to continue making purchases from the plaintiff on  credit so long as it adhered to the arrangements  with the plaintiff,  including  complying  with  credit  limits.    The  defendant  says  that  the plaintiff broke this agreement on numerous occasions and this caused considerable inconvenience and interruption to Aden’s work.   In an affidavit which Mr Froude swore on 21 January 2010, he said that the fact that the plaintiff had from time to time stopped credit to Aden had a “reasonably major impact on Aden’s business”. He said that while the stopping of credit from time to time was not the sole cause of Aden’s failure, it was definitely a major factor.     In evidence given in earlier proceedings he thought that Aden could have a claim for damages of $300,000 to

$400,000.  Mr Froude offered this estimate of the damages claim in an affidavit that he swore 2 March 2010.  But a fortnight later when he swore a further affidavit, that figure had gone up to $1,000,000.    Mr Froude said that the justification for this increase was that the former accountant for Aden “has indicated to me that in his opinion the claim for damages should be for an amount of approximately $1 million (plus GST)”.

[7]      The  plaintiff says that Aden did not adhere to the arrangements as to credit and it, the plaintiff, was accordingly entitled to discontinue supply.

Evaluation of counter-claim

[8]      I intend to be guided by the authority of Covington Railways Ltd v Uni- Accommodation  Ltd  [2001] 1 NZLR 272 which, although dealing with an application to set aside statutory demand, provides valuable guidance in the present case (at 274–275):

Where there are liquidated sums due each way, that is simply an arithmetical exercise.  It  is  more  difficult  if,  on  the  applicant’s  side,  there  is  an indisputable liquidated sum, but the other party's claim is for an unliquidated sum with liability and/or quantum in dispute. Then, in order to impeach the statutory  demand  and  overcome  the  presumption  in  s  287(a)  that  the company is unable to pay its debts when it has failed to comply with the demand, it must be able to do more than merely assert that there is an available  set-off.  It  must  be  able to  point  to  evidence  before  the  Court showing that it has a real basis for the claimed set-off and that accordingly the applicant’s claim to be a creditor is, to the extent of the set-off, seriously in doubt. In the words of Buckley LJ in Bryanston Finance Ltd v de Vries (No  2)  [1976] Ch 63 at p 78, it must show that there are “clear and persuasive grounds” for the set-off claim. Where this can be done, the party who has issued the statutory demand against the company will be shown to be using the statutory demand and liquidation procedures improperly because there is a “genuine and substantial dispute” about the net amount of the company’s indebtedness (Taxi Trucks Ltd v Nicholson [1989] 2 NZLR

297 at p 299).  The dispute should then be resolved in the ordinary way – except as to any undisputed balance – rather than upon the hearing of a liquidation application.

[9]     The alleged counter-claim which the defendant relies on entirely lacks particulars, both as to its basis and as to the quantum.  In his submissions Mr Keene for the defendant stated that Aden could not buy the goods it needed elsewhere and that if the plaintiff would not provide them, it could not get the necessary products at all.  Even assuming that that is so, and that Aden looked to the plaintiff as the sole source of supply, on its own it does not explain in what way an interruption to supplies of products on credit caused loss of the order that Aden claims.

[10]     I am driven to infer that the claim in essence is that the failure to supply goods caused work interruptions and delays which eventually translated into loss. Whether the losses came about because  Aden  was prevented from  carrying out projects from which it might have made profits is one possibility. Another possible theoretical basis for the claim would be if Aden had incurred liquidated damages

claims  for  delay  in  completing  projects.    The  foreseeability on  the  part  of  the plaintiff of the occurrence of such losses might well be a live issue.

[11]     Further doubt attaches to the quantum of the counter-claim which was first estimated  as  being in  the  region  of  $300-400,000,  but  is currently estimated  at

$1,000,000 – again without any particulars being offered.

[12]     Aden and the defendant have had many months to formulate such a claim. But not only was the claim not formulated to a level of clarity where the Court could at least carry out a preliminary assessment of whether it raised serious issues, no evidential basis – even in outline form – was provided.

[13]     While that is sufficient to dispose of the asserted defence, there are other reasons why this defence cannot succeed and I will go on to consider them now. There are provisions in the contract between Aden and the plaintiff which prevent a damages claim being advanced as an equitable set-off against the debt owed.  Clause

7 of the agreement is such a provision and states:

(g)       The  buyer  will  make  all  payments  due  to  the  company  in  full without deduction or set-off and will pay Goods and Services Tax and any other Government duties, levies or taxes in respect of the Goods and Services.

[14]     Then with respect to the issue of whether there has been any breach  of contract, clause 7(j) of the agreement is relevant:

(j)        The  company  may  at  any  time  or  from  time  to  time  without assigning   any reason, refuse to extend any further credit or provide further guarantees.

[15]     This provision would seem to provide an answer to any claim that a failure to provide further credit caused loss. Even if the plaintiff and Aden had come to an agreement   modifying   the   available   credit   and   the   payment   period,      such arrangements do not necessarily trump clause 7 (j).

[16]     There are still further provisions that provide an answer to the claim which the defendant seeks to put forward.  For instance, clause 12(d) excludes any liability on the part of the plaintiff for damages “howsoever arising”, such as loss of income,

profit, opportunity, utility and other matters.  Further, clause 12(f) provides that any claim for damages shall not exceed the price received by the company for supply of the goods or services.

[17]     I conclude that the alleged cross-claim is not seriously arguable.

Did Aden in fact comply with credit arrangements?

[18]     A number of submissions were addressed to me concerning what Aden’s credit limit was and what the terms of trade were.  One such issue was whether Aden had 60 or 90 days to pay outstanding accounts.

[19]     In the end I do not consider that the terms of credit are a central issue in this case.  Such relevance as they have is that they are an indirect factor that would need to be taken into account in assessing whether the plaintiff breached its contract with Aden by putting a stop on credit sales, which it admittedly did from time to time. The plaintiff says that when it put a stop on credit sales it did so because Aden was non-compliant with the agreed terms of credit.  It says that that factor justified it in declining further credit.  But because the defendant has not demonstrated that the damages claim is a bona fide one (because of its vagueness and uncertainty) no genuine and substantial dispute has been raised about Aden’s debt being set-off by a cross-claim for damages.  That being so, there is no need to enquire into the issue of the credit limit and related matters.

Did breach of contract by the plaintiff discharge the guarantee?

[20]     Mr Keene argued that the defendant was discharged from its obligation to meet the terms of the guarantee because of breaches of contract on the part of the plaintiff through its interrupting supply of materials on credit sale.  He referred me to the authority of the High Court of Australia in Ankar Pty Ltd & Arnick Holdings Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549, where it was said that in the ordinary case where a surety agrees to be liable for the default of another upon the terms of the contract of suretyship, a significant departure by the creditor from the terms of that contract will, in the absence of agreement to the contrary, operate to preclude the existence or continued existence of the

circumstances in which the surety has agreed to be bound and the surety will be discharged: per Deane J at 570.

[21]     I am not satisfied that the defendant has demonstrated the existence of a genuine and substantial defence arising out of this issue.  In the first place, there is an absence of any analysis of what events, during the trading history of the parties, amounted to breach of contract on the part of the plaintiff.  In the second place, this argument faces the same problems that the damages claim faces which arise out of the inclusion in the head contract at clause 7(j) of an entitlement on the part of the plaintiff at any time without giving reason to refuse to extend any further credit.  The defendant has not explained how the plaintiff could be in breach of its contract for doing exactly that.

[22]     The third difficulty in the defendant’s argument arises out of the “no set-off” clauses contained in the deed of guarantee.  A similar condition was to be found in the head contract between the plaintiff and the defendant.   The presence of such clauses as a matter of construction gives rise to an inference that the plaintiff and therefore the guarantor, the defendant, were not discharged from their obligations to pay the price without deduction in the first instance, notwithstanding that there might have been breaches of contract by the plaintiff.

[23]     For the foregoing reasons, I do not consider that the principles stated in

Ankar assist the defendant.

Conclusion

[24]     Apart from the argument that breach of contract had discharged the defendant and that the indebtedness of Aden was subject to a set-off for damages for breach of contract, there is no dispute that Aden is indebted to the plaintiff in the sum of approximately $2,100,000.  There is therefore a margin of approximately $500,000 between the limit at which the guarantee takes effect ($1,600,000) and the total indebtedness ($2,100,000).  The defendant has argued that by reason of two matters, there  is  a  dispute  of  substance  as  to  whether  Aden’s  indebtedness  exceeded

$1,600,000 at which the guarantee came into effect.  The first part of the argument

concerns unresolved disputes as to whether particular invoices were properly debited to Aden.  These total approximately $257,000.  Therefore deduction of the value of those  invoices,  as  I am  prepared  to  allow  for,  does  not  reduce  the  debt  below

$1,600,000.  If the damages claim is excluded, there is no argument that there is a debt remaining which is above the $1,600,000 level and which is sufficiently large for the plaintiff to bring liquidation proceedings.

[25]     Because the defendant has not responded to a statutory demand, it is deemed, in the absence of evidence to the contrary, to be insolvent.  I declined to allow the defendant to file additional affidavits as to solvency at the hearing before me on 25

May 2010.  The presumption of insolvency has been reinforced by the fact that in this case the defendant has failed, without any reasonable ground for doing so, to pay the amount which it owes to the plaintiff under the guarantee.  I conclude that the defendant is unable to pay its debts.

[26]     My  conclusion  is  that  the  plaintiff  is  entitled  to  an  order  appointing liquidators.  I therefore order that the proceeding is to be included in my liquidation list to be heard on the 9 July 2010 at 10:45 a.m. for formal orders to be made.

[27]     I shall deal with the matter of costs on the resumed hearing date.

J.P. Doogue

Associate Judge