Simply Logistics Limited v Real Foods Limited HC Auckland CIV-2011-404-3497

[2011] NZHC 1877

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2011-404-3497

UNDER  the Companies Act 1993

IN THE MATTER OF     an originating application to set aside a statutory demand pursuant to the High Court Rules Part 19 and section 290 of the Companies Act 1993

BETWEEN  SIMPLY LOGISTICS LIMITED Applicant

ANDREAL FOODS LIMITED Respondent

Counsel:         N W Wood for Applicant

L J Turner for Respondent

Judgment:      14 September 2011

ORAL JUDGMENT OF ASSOCIATE JUDGE BELL

Solicitors:

Rice Craig, P O Box 72-440 Papakura

Email:   [email protected]

Hudson Gavin Martin (Wayne Hudson), P O Box 105-900 Auckland 1143

Email:   [email protected]

Copy for:

Lewis J Turner, P O Box 775 Auckland 1140

Email:   [email protected]

Case Officer:     [email protected]

SIMPLY LOGISTICS LIMITED V REAL FOODS LIMITED HC AK CIV-2011-404-3497 14 September 2011

[1]      On 31 May 2011 Real Foods Limited served a statutory demand on Simply Logistics Ltd requiring payment of $150,710.70 for rent.  Simply Logistics Ltd has applied under s 290 of the Companies Act 1993 to set aside the demand.

[2]      Under the deed of sublease between Real Foods Ltd and Simply Logistics Ltd, rent is to be paid without deduction or set-off.  Simply Logistics Ltd raises a number of claims against Real Foods Ltd in defence, and also by way of set-off, counterclaim and cross-demand.  The main issue in this case is whether the Court should allow these defences, set-offs, counterclaims and cross-demands in the light of the “no set-off” provision in the sublease.

[3]      Real  Foods  Ltd  carries  on  business  at  39  Aintree  Avenue,  Mangere, Auckland.  It leases premises from Real Investments Ltd under a deed of lease dated

26 February 1996.   Real Foods Ltd imports food products and supplies them to nation-wide supermarket chains.  It has a manufacturing division.

[4]      Simply Logistics Ltd provides warehousing and logistics services.  In 2005, Simply Logistics Ltd took over the warehousing side of Real Foods Ltd’s operations. This  arrangement  was  recorded  in  two  agreements:    a  sublease  of  part  of  the premises at 39 Aintree Avenue, and a warehousing storage services agreement.  The sublease was for six years four months (less one day) from 1 April 2005 until 30 July

2011 with two rights of renewal of three years each.   The initial annual rent was

$239,000  per  annum  plus  GST.    The  sub-tenant’s  percentage  of  outgoings  was

63.96%. The sublease provided that the business use was warehousing. [5]  Clause 4.2 of the sublease said:

Annual rent is to be paid without deduction or set-off.  Payment is to be by

way of automatic banker’s authority as the sub-landlord may direct.

[6]      The directors of Simply Logistics Ltd guaranteed the sub-tenant’s obligations under the sublease.

[7]      Under the warehousing storage services agreement Simply Logistics Ltd provides  Real  Foods  Ltd  with  services  under  these  headings:    unloading  and checking of stock; storage handling; inventory control;  and audit management and delivery.  The agreement allows Simply Logistics Ltd to provide similar services to third parties, with  two  exceptions,  including any business  whose products  were incompatible with the products handled by Real Foods.  The agreement contains a schedule of charges payable by Real Foods Ltd to Simply Logistics Ltd.  There are provisions for annual adjustments.

[7]      In  the part  dealing with  the term  clause 2.4  of the warehousing storage services agreement says:

Notwithstanding the preceding provisions of this clause 2, this Agreement will automatically terminate (subject to clauses 5.2 and 5.3(h)) on the same date as the sublease terminates.

[8]      Clause 8.10 says:

All payments to be made by Real Foods to Simply Logistics under this Agreement may be set-off against any payments owing by Simple Logistics to Real Foods.

[9]       Clause 15 deals with termination.  Clauses 15.1 and 15.2 deal with events on which the agreement terminates.   Clause 15.3 deals with what is to  happen on termination or expiry:

On termination or expiry of this Agreement:

(a)       the parties will terminate the Sublease in accordance with its terms;

(b)       each party must immediately cease to use the other party’s Confidential

Information;

(c)       each party must immediately forward to the other party all copies in its possession of all material containing the other party’s Confidential Information;

(d)       Real Foods will allow Simply Logistics access to all data relating to the

Third Party Services in accordance with clause 11;

(e)       Simply Logistics will immediately transfer all data relating to the Services to Real Foods in accordance with clause 11;

(f)       Real Foods may recover from Simply Logistics all money paid for any

Services not provided under this Agreement;

(g)       Simply Logistics may recover from Real Foods all amounts payable for Services provided under this Agreement but not paid for prior to termination or expiry; and

(h)       The provisions of clauses 6.3, 10, 12, 13, 15.4 and 15.5 will remain in full force and effect.

[10]     The sublease does not have express provisions under which the sub-lessor may re-enter but under cl 12 of the sublease, provisions of the head lease apply as between the sub-lessor and the sub-lessee, except where there are inconsistent provisions in the sublease itself.   The head lease is the Auckland District  Law Society Form of Commercial Lease (3rd ed) 1993.  Under cl 29 of the head lease, the landlord has power to re-enter, amongst other things, if the rent is in arrears for

14 days after any rent payment due.

[11]     Relations between the parties have broken down.  On Saturday 2 April 2011, Real  Foods  Ltd  purported  to  re-enter  the  premises.    It  changed  the  locks  and prevented Simply Logistics Ltd from going back on the premises or using the premises (except to a limited extent, to uplift some property).   It retained pallets belonging to Simply Logistics Ltd.

[12]     On 8 April 2011, the lawyers for Simply Logistics Ltd sent a fax to Real Foods Ltd advising that Simply Logistics Ltd did not accept that the re-entry was valid because no notice under s 245 of the Property Law Act 2007 had been given. The fax advised that Simply Logistics Ltd treated the re-entry as a repudiation of the sublease and gave notice of cancellation under the Contractual Remedies Act 1979.

[13]     Each side makes claims against the other.   The claims of Real Foods Ltd against Simply Logistics Ltd are:

Rent  $150,710.70

Overcharges by Simply Logistics Ltd  $7,139.58

Outgoings  $1,002.11

Power bill  $1,338.96

Cost of reinstating premises  $93,467.58

Interest on unpaid rent  $26,773.98

Storage costs overcharged by

Simply Logistics Ltd  $94,241.58

Losses arising from incorrect stock rotation  $57,500.00

Fire alarm call account  $258.75

Stock losses  $86,435.07

Amounts previously invoiced  $13,007.45

Total:  $531,875.76

[14]     Simply Logistics recognises the rent figure and the power bill as valid, but contests the rest of the claims.  Mr Hughey of Simply Logistics Ltd gives reasons for contesting the rest of the claims.  For this hearing, Real Foods Ltd recognises that in a setting-aside application those claims could be contested under either s 290(4)(a) or s 290(4)(b).  It has issued its statutory demand only for outstanding rent, which is not disputed.

[15]     Simply Logistics Ltd makes these claims against Real Foods Ltd:

(a)      It  says  that  Real  Foods  Ltd  owes  $99,746.27,  being the value of undisputed invoices issued by Simply Logistics Limited for the period up to the date of the purported re-entry.  I note that Real Foods Ltd does not dispute its liability under those invoices.   The rest of the claims by Simply Logistics Ltd are contested.

(b)Simply Logistics Ltd has issued further invoices, mainly of a historic nature, for $11,011.14.

(c)      Simply Logistics Ltd alleges that Real Foods Ltd has breached either an informal understanding between the parties as to exclusivity or, alternatively, a term of the contract or is guilty of misrepresentation because Real Foods Ltd has used some other contractor for warehousing    services.       It    claims    that    there    is    either    a

misrepresentation or it was led to believe that it would be given exclusivity.   Alternatively, it says that there has been a breach of contract by other contractors having been used.   For that it claims losses which it calculates at $128,923.36.

(d)It claims losses following the eviction from the premises and puts those losses at $112,000.  It says that as a result of that eviction it lost the business of valuable customers.

(e)      It also says that it is either the owner or entitled to possession of pallets,  and  quantifies  its  losses  of  the  pallets  in  the  sum  of  a

$22,989.97 and $31,006.39, a total of $53,996.36.

The sums claimed by Simply Logistics Ltd are more than the amount set out in the statutory demand of Real Foods Ltd.

[16]     Real Foods Limited admits liability for $99,746.27 for the invoices up to

2 April 2011 but disputes the balance of the items.

[17]     Real Foods Limited has issued its statutory demand only for the outstanding rent,  recognising  that  the  rest  of  its  claims  are  disputable  and  unsuitable  for  a statutory demand.   It says it is entitled to maintain its demand for rent, notwithstanding the claims made by Simply Logistics Ltd.  It says that the rent figure itself is not subject to dispute.  While it does not dispute its indebtedness to Simply Logistics Ltd for the $99,746.27 for invoices rendered for the last part of the sub- lease, it says it does not have to apply those invoices against the rent.  It has, instead, applied those invoices against the claims which Simply Logistics Ltd disputes.   It says that the no set-off or deduction provision in the sublease is a pay now, argue later provision which prevents Simply Logistics raising its claims against its right to be paid rent.

[18]     Simply Logistics says that the undisputed invoices of $99,746.27 are either payment of rent or, if they are not for payment of rent, they can be set off against its

liability for rent.  It says that its other claims are arguable and far exceed the amount claimed for rent.

[19]     In decisions under s 290 of the Companies Act, it is normal to recite the general principles on which the courts apply s 290(4). These principles are:

(a)      The applicant must show there is arguably a genuine and substantial dispute as to the existence of the debt.  The task of the court is not to resolve the dispute but to determine whether there is a substantial dispute the debt is due.  The mere assertion that a dispute exists is not sufficient.

(b)Material, short of proof, is required to support the claim that the debt is disputed.  If such material is available, the dispute should normally be resolved other than by means of proceedings in the companies court.

(c)      An applicant must establish that any counterclaim or cross-demand is reasonably arguable in all the circumstances.  The obligation is not to prove the actual claim.   Such an obligation  would amount to the dispute itself being tried on the application.

(d)It is not usually possible to resolve disputed questions of fact on affidavit evidence alone, particularly when issues of credibility arise.

[20]     To those standard principles it is necessary to add two further matters.

[21]     When considering applications under s 290, the court is entitled to take into account the tight time-frames within which an applicant must file and serve the application.  In Industrial Group Ltd v Bakker,1 the Court of Appeal said:

[24]     We note that the statutory scheme is for applications to set aside statutory demands to be a summary proceeding.   The application

1      Industrial Group Ltd v Bakker [2011] NZCA 142 at [24] and [25].

must be made within 10 working days of the date of service of the demand:  s 290(2)(a).  No extension of time may be given: s 290(3). It follows that it would be unusual for the High Court to engage in detailed analysis of the merits of any counterclaim, set-off or cross- demand.   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.:

[25]      The approach required by the “appearance” test in s 290 is a review with a low threshold. 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.

[22]     There is also the decision of the Court of Appeal in Browns Real Estate Ltd v Grand Lakes Properties Ltd.2    In that case, the Court of Appeal held that the “pay now argue later” approach applies when there is a contractual provision excluding a right of set-off.  I will consider that decision later.

[23]     “Pay now,  argue  later”  has  an  accepted  place  in  substantive  law  and  in ordinary civil proceedings.  Under the pay now, argue later approach, the law gives priority to a creditor’s demand for payment and requires that right to payment to be honoured, ahead of any claim that the debtor might wish to bring against him.  The debtor must pay the creditor’s debt first, and have his own claim against the creditor heard and determined separately, usually at a later time.  It is a policy under which the courts give priority to the cash-flow requirements of the creditor.  Examples of the pay now, argue later approach are found in common law, in statute and under contract.   Examples under the common law are in claims for freight, where the shipper is not allowed to raise claims for damage to the goods shipped, short delivery or delay, and proceedings on bills of exchange and other negotiable instruments when unliquidated cross-demands cannot be used to defend claims for payment

under the negotiable instrument.

2      Brown’s Real Estate Ltd v Grand Lakes Properties Ltd [2010] NZCA 425, (2010) 20 PRNZ 141.

[24]     Statutory  examples  are  r  5.61  of  the  High  Court  Rules,  under  which  a defendant is not entitled to advance any set-off or counterclaim against proceedings by the Crown to recover of taxes; s 79 of the Construction Contracts Act 2002, which limits the kind of counterclaim, set-offs and cross-demands that can be raised in response to  claims for payment under ss  23, 24 and 59  of the Construction Contracts Act;  and s 4 of the Wages Protection Act 1983 under which an employer is restricted in making deductions from wages.

[25]     In Grant v NZMC Ltd,3  the Court of Appeal recognised the right to exclude by contract a claim for set-off.

[26]     Against the pay now, argue later approach, there is another relevant principle

- insolvency set-off.  Insolvency set-off applies under s 310 of the Companies Act

1993 and s 254 of the Insolvency Act 2006.  Section 310 of the Companies Act 1993 says:

310     Mutual credit and set-off

(1)       Where there have been mutual credits, mutual debts, or other mutual dealings between a company and a person who seeks or, but for the operation of this section, would seek to have a claim admitted in the liquidation of the company,—

(a)       An account must be taken of what is due from the one party to the other in respect of those credits, debts, or dealings; and

(b)       An amount due from one party must be set off against an amount due from the other party; and

(c)      Only the balance of the account may be claimed in the liquidation, or is payable to the company, as the case may be.

[27]     All the claims between the parties in this case are within the mutual credit and set-off provisions of s 310(1) of the Companies Act 1993. If Simply Logistics Ltd were immediately put into liquidation, those claims of Simply Logistics and Real Foods Ltd that are valid would be set-off against each other to produce a net balance.

Only the balance can be claimed in the liquidation.  The set off applies automatically,

3      Grant v NZMC Ltd [1999] 1 NZLR 8 at 13.

as explained by Lord Hoffman in Stein v Blake.4    It is self-executing and does not require action on the part of the parties.

[28]     When a company goes into liquidation there can be no room for the pay now, argue later policy.5     That is because there is a final accounting as at the date of liquidation.  The pay now, argue later approach is inconsistent with insolvency set- off and cannot survive a company going into liquidation.   Between ordinary civil proceedings and the start of liquidation, there is a border area where “pay now argue later” stops applying and insolvency set-off starts.  The question is where the line is

to be drawn.

[29]     Because insolvency set-off is one of the effects of a company going into liquidation, the way that insolvency set-off will operate is a relevant consideration when the court considers a liquidation application.  If the result of the application of insolvency set-off is that the company does not owe the creditor anything, then, all other things being equal, it would not be sensible to make an order that the company be put into liquidation for the creditor would not receive anything upon liquidation. In  other  words,  when  the  court  considers  whether  to  make  an  order  putting  a company into liquidation, insolvency set-off rather than “pay now, argue later” will apply as the relevant consideration.

[30]     This is illustrated by the decision of the English Court of Appeal in Re Bayoil S A.6     In that case, the creditor had obtained an arbitration award in a claim for freight.  In the arbitration, the shipper had not been able to set up its counterclaim for breach of the charterparty.  This was the result of the application of pay now argue later.   However, on the creditor’s petition for Bayoil SA Ltd to be wound up, the

English Court of Appeal held that the counterclaim for breach of the charterparty

4      Stein v Blake [1996] 1 AC 243 (UK HL) at 251-254.

5      Section 310 contains exceptions to the application of mutual credit and set off. The exceptions show that the statute governs the scope of insolvency set off. They do not mean that other cases of pay now, argue later can be imposed on the statutory scheme.

6      Re Bayoil SA [1999] 1 WLR 147 (CA) followed in CIR v Fishing Company Ltd HC Auckland

CIV 2010-404-4955, 14 December 2010.

should have been taken into account in the exercise of the discretion whether to make a winding-up order.

[31]     The  next  question  is  whether  the  insolvency  set-off  principle  can  be considered at a stage earlier than the hearing of the liquidation application.   The answer is found in s 290(4).  Section 290(4)(b) says that where 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, is less than the prescribed amount, then the statutory demand may be set aside.  It is necessary to consider the words: “counterclaim”, “set-off” and “cross-demand”.

Cross-demand or cross action

[32]     “Cross-demand” and “cross-action” are interchangeable.   Where a plaintiff brings a proceeding against a defendant, a cross-demand or cross-action is a separate proceeding which the defendant brings against the plaintiff.  The matters which the defendant raises in his separate proceeding against the plaintiff are not required to provide a defence to the matters in the plaintiff’s claim and can be entirely unrelated. In this situation, the plaintiff’s claim against the defendant and the defendant’s claim in the separate proceeding against the plaintiff, are, to use the weapons metaphor, swords, not shields.

Counterclaim

[33]     A counterclaim is like a cross-demand, except that it is made in the same proceeding  as  the  plaintiff’s  claim  against  the  defendant.    A counterclaim  is  a creature of statute.   It was introduced by the (English) Judicature Act 1875.   A counterclaim may be based on matters entirely unrelated to the causes of action in the plaintiff’s statement of claim.  The matters alleged in the counterclaim need not be a defence to the matters alleged in the plaintiff’s statement of claim.  Again, a counterclaim is a sword, not a shield.

Set off

[34]     On the other hand, set-offs go to defence.   They are shields, not swords. “Set-off”, as used in s 290(4)(b), refers to solvent set-off, not insolvent set-off under s 310 of the Companies Act.  That is because the company is not yet in liquidation and also because of the reference to counterclaim and cross-demand (which would be unnecessary in insolvency set off).

[35]     Strictly speaking,  the  presence  of  set-off  in  s 290(4)(b)  is  not  necessary, because a genuine set-off goes to a defence under s 290(4)(a).  But “set-off” has been included in s 290(4)(b) to make it clear that all manner of cross-claims of any nature (so long as there is mutuality of course) can be raised between the company and creditor.

[36]     The law as to set-off is summarised in the judgment of Somers J in Grant v NZMC Ltd.7    Solvent set-off may arise in statute, at common law and at equity.  It goes to diminish or extinguish a plaintiff ’s claim.  It does not, of itself, give rise to an independent right of claim, although it may coincide with a counterclaim or cross- demand.

[37]     In s 290(4)(b) “counterclaim”, “set-off” and “cross-demand” are disjunctive. A company applying under s 290(4)(b) only needs to show one of these, not all three. The combination of counterclaim or set-off or cross-demand shows that Parliament intended to cover the range of potential claims that a company might wish to raise against a creditor.  The fact that set-off, be it under statute, common law or equity, might not be available against a creditor does not prevent s 290(4)(b) applying if the company can show that  the matter  can be raised in a counterclaim or a cross- demand.  Swords, as well as shields, can be used to extinguish a debt claimed in a statutory demand.  The effect of s 290(4)(b) is that on its wording, and subject to the matter of discretion which I will discuss later, the pay now, argue later principle does not apply.   Instead, the words are consistent with an insolvency set-off approach

being applied whereby all manner of claims are taken into account to find the net

7      Grant v NZMC Ltd [1989] 1 NZLR 8 (CA) at 11.

balance between the parties.   Matters of counterclaim and cross-demand, which might otherwise be heard separately, are dealt with together.  One is set off against another on an application under s 290(4)(b).

[38]     This  effect  of  s  290(4)(b)  is  reinforced  when  the  case  law  before  the Companies Act 1993 is considered.  There was no provision equivalent to s 290 in the Companies Act 1955.  If a company wished to contest a notice under s 218 of the Companies Act 1955, the company had to apply for an injunction to restrain the issue of proceedings or to seek a stay once a proceeding had started.  Where a company admitted the debt but asserted a substantial counterclaim for more than the amount claimed in the s 218 notice, the court would not restrain the proceeding but would instead allow the petition to go to a hearing, with the court retaining a discretion whether it ultimately made a winding-up order:   see Anglian Sales Ltd v South

Pacific Manufacturing Co Ltd.8   Enacting s 290, Parliament clearly intended to alter

the earlier law by allowing issues of counterclaim to be determined at an earlier stage, before the hearing of a liquidation application.   With s 290, Parliament has given a company served with a statutory demand the opportunity to apply to the court to have the statutory demand set aside if it can show it has a cross-demand or a counterclaim, albeit not a set-off.

[39]     It  is  also  important  to  recognise  that  if  s  290(4)  did  not  allow  for counterclaims and cross-demands to be taken into account at the statutory demand stage, that would not deprive the company of the right to raise those matters in defence on the hearing of a liquidation application.  Instead, the company’s rights to raise these matters would be postponed to the hearing of the application.  It can be advantageous for both creditor and company to test the validity of an alleged counterclaim at the s 290 stage rather than to allow matters to go to a full defended hearing.

[40]     The Court of Appeal’s decision in Brown’s Real Estate Ltd v Grand Lakes

Properties Ltd needs to be considered against that background.   In that case, the

8      Anglian Sales Ltd v South Pacific Manufacturing Co Ltd [1984] 2 NZLR 249 (CA) at 252 and 255.

creditor, a landlord, had served a statutory demand on the company for money owing under a lease.  The lease contained a clause that required that the money should be paid “without demand from the lessor and free of any deduction, withholding, set-off or reduction on any account”.   The company claimed to have a counterclaim for misrepresentation made by the creditor inducing the company to take the lease. Associate Judge Osborne found the claims of misrepresentation and loss arguable, but applied the no set-off clause in the lease to dismiss the application to set aside the

statutory demand. The Court of Appeal upheld his decision.  It said:9

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.

[41]     The Court was influenced in the approach it took by the no set-off effect of s 79  of  the  Construction  Contracts  Act  2002.    Section  79  of  the  Construction Contracts   2002   is   inconsistent   with   290(4)(b)  of   the  Companies  Act.      In Volcanic Investments Ltd v Dempsey & Wood Civil Contractors Ltd,10  Randerson J held  that  s 79  of  the  Construction  Contracts  Act  prevailed  over  s  290  of  the Companies  Act.     The  Court  of  Appeal  upheld  this  in  Laywood  v.  Holmes Construction Wellington Ltd.11    In Brown’s Real Estate the Court of Appeal said:

Just as in the CCA context, the efficacy of a no set-off contractual provision would be undermined if statutory demands could be set off on the basis of a set-off, counterclaim or cross-demand a commercial party had by contract expressly agreed could not be raised.   In such a situation there seems no reason in principle why statutory demands and bankruptcy notices should not be available as debt enforcement measures which, as was conceded by Brown’s, other enforcement measures would be (including summary judgment).

[42]     It is important to recognise the basis for the Court of Appeal’s decision in

Brown’s Real Estate.  It did not have to reconcile inconsistent statutes, as it did in

9      Brown’s Real Estate Ltd v Grand Lakes Properties Ltd at [17].

10     Volcanic Investments Ltd v Dempsey & Wood Civil Contractors Ltd (2005) 18 PRNZ 97.

11     Laywood v Holmes Construction Ltd [2009] 2 NZLR 243 (CA). See also MacEnnovy Trust Ltd v

Sefton Construction Ltd (In Liq) HC Auckland CIV-2009-404-7659, 28 April 2010.

Laywood.  Nor was the Court of Appeal offering a new interpretation of s 290(4)(b). It was not excluding from the statute the words “counterclaim” or “cross demand” and confining it simply to set-off.  Nor was the Court of Appeal saying that it was possible to contract out of s 290 of the Companies Act and that the wording of the lease in that case was an effective ouster of the jurisdiction of the court.  It said:12

There is the question as to whether a contractual provision, however worded, can totally oust the jurisdiction of the courts to consider a counterclaim, set- off or cross-demand.  However this is an issue that is more theoretical than real.

[43]     Instead, the Court of Appeal held that the presence of a no set-off clause in a contract is a factor that comes into play in the Court’s exercise of the discretion under s 290(4) whether to set aside the statutory demand.   The Court’s decision means that all other things being equal, the court will exercise its discretion against an applicant if the sole ground for an application to set aside a statutory demand is the existence of a set-off, which the company had expressly agreed could not be raised.

[44]     There are potential arguments against the exercise of the discretion that will arise in the general run of cases.  I outline some.

[45]     First, the creditor who wishes to recover a debt has a range of remedies. When the debtor is a company, one of those remedies is to serve a demand under the Companies Act.  A creditor who serves a statutory demand under the Companies Act is invoking an insolvency procedure.   When using that insolvency procedure, the creditor should not be taken by surprise by the application of insolvency law to that procedure.  If the creditor does not want insolvency law to be applied, the creditor has the option of taking other steps, such as applying for summary judgment.  Pay now,  argue  later  rules  are  applied  in  summary  judgment  applications.   Alleged

counterclaims do not give grounds to oppose a summary judgment application.  That

12 At [17].

pay now, argue later may be applied in a summary judgment application does not mean that it should be applied in an insolvency procedure.

[46]      Besides, the time taken to resolve a defended summary judgment application is roughly the same amount of time as is required to resolve a defended application to set aside a statutory demand.

[47]     Second, the Court of Appeal has suggested parallels between  a statutory demand procedure and summary judgment procedure.   But it is also important to note the differences  between  them.   The summary judgment  procedure requires formal pleadings with any statement of claim to be verified by affidavit.  It gives any defendants served a minimum of at least 11 working days in which to file a notice of opposition and affidavits, with the opportunity to obtain extensions of time, which are usually granted.   The statutory demand procedure is far less formal.   Far less information needs to be offered by the creditor.  It does not have to be verified by affidavit.  The company is left with only 10 working days to respond by filing an application and serving it, and there is no option to extend time.  These differences do not suggest there is a strong case for applying a summary judgment approach in a s 290 application.

[48]     Third, mutual credit and set-off under s 310 cannot be bargained away.13   As an  insolvency  set  off  approach  is  applied  under  s  290(4)(b),  the  bar  on  not contracting out should be preserved.

[49]     Fourth, words in a contract that only exclude set-off do not, in their ordinary meaning, also exclude a counterclaim or cross-demand.   The extension of words excluding set-off to shut out counterclaims or cross-demands operates only in a s 290 context.  Ordinarily a contractual provision to exclude a right to bring a cross action has the effect of excluding a right to bring a claim. A contra proferentem approach is

applied in interpreting such a provision, not an expansive one.

13 Rendell v Doors & Doors Ltd [1975] 2 NZLR 191 (SC) at 199.

[50]     Fifth, refusing to recognise a counterclaim at the s 290 stage is simply to defer the issue to be dealt with in a defended liquidation hearing or in the conduct of a liquidation.  It can be more efficient to address the issue earlier.

[51]     Sixth, a company served with a statutory demand may find that the safest course is to make an application to set aside a statutory demand under s 290, even though there may be a contractual provision excluding rights of set-off, while reserving its right to defend the case at a final hearing as well.  That is because there

is a line of cases14  that holds that a failure to apply to set aside a statutory demand

may  preclude  the  company  from  later  raising  those  issues  at  the  hearing  of  a defended liquidation application.   While I have declined to follow those cases,15 nevertheless prudent lawyers would need to be aware that other judges do apply that test, and they cannot take it for granted that a failure to apply to set aside a statutory demand would necessarily leave them free to use arguments based on counterclaims at a final hearing of a liquidation application.   In other words, under the Court of

Appeal’s  approach,  an  argument  as  to  counterclaim  may have  to  be  run  twice, instead of once, with the attendant expense to all parties.

[52]     These  are  general  observations  which  might  count  against  the  Court  of Appeal’s approach.   But, because they are general observations that apply in the normal run of cases, the Court of Appeal obviously did not intend them to count.  If those  reasons  were  now  applied  to  the  exercise  of  a  discretion  in  favour  of  a company, that would be a challenge to the judgment of the Court of Appeal. They cannot count in the exercise of the discretion.   Instead, the enquiry that I have to make is whether there are particular circumstances in this case that require me not to exercise the discretion in the way indicated by the Court of Appeal.  That is, in this

case are all other things equal or not?

14      Foundation Securities NZ Ltd v Direct Labour Services Ltd HC Auckland CIV-2006-404-4391,

1 February 2007; and Balmoral Marketing Ltd v Karapiro Spa Ltd HC Auckland CIV-2005-404-

6396, 3 October 2006.

15     Heron’s Flight Ltd v NZ Properties International Ltd HC Auckland CIV-2010-404-5878.

[53]     Simply Logistics Ltd tried to distinguish Brown’s Real Estate Ltd by saying that the wording was different in that case.  It referred to Grant v NZMC Ltd where the Court of Appeal held that the words in the lease in that case were not effective to exclude a  right  of set-off.    It  allowed  equitable  set-off to  apply in  a  summary judgment application.   The words in Grant v NZMC Ltd were “free and clear of exchange  or  any deduction  whatsoever”.    However,  the  words  in  this  lease  do exclude the right to claim set-off.

[54]     In this case I look at what would be the situation if Real Foods Ltd were instead to apply for summary judgment against Simply Logistics Ltd claiming only the unpaid rent.

[55]     On such an application there would be an issue whether Simply Logistics Ltd has a defence for the invoices for $99,746.27.16   But it would not be able to raise any of the other matters by way of defence.  That is because the no set-off clause would stand in its way.  All the other matters that are raised could instead be raised by way of counterclaim.  The wording in the sublease is not effective to exclude the right of Simply Logistics Ltd to raise counterclaims of the sort that it has in this case.  While

the words are not effective to give a defence to a summary judgment application, the right to use the sword of a counterclaim is not lost.  In their ordinary context these words in this lease cannot be used to exclude counterclaims generally.

[56]     That result I have just described is similar to the result that would have applied in Brown’s Real Estate.  If the landlord in Brown’s Real Estate Ltd had issued summary judgment proceedings, the wording of the lease in Brown’s Real Estate Ltd would have allowed the landlord in that case to recover summary judgment and the tenant would have been restricted to suing by counterclaim.   I do not read the wording in Brown’s Real Estate Ltd as precluding the tenant from raising a counterclaim in the normal way.  That is a simple application of the pay now, argue later approach.  Because that would be the approach under Brown’s Real Estate Ltd it

is also the approach in this case.

16     Simply Logistics Ltd argues that there was a course of conduct during the sublease under which its invoices were applied against rent.

[57]     Accordingly, I should give the same effect to the words in the sublease in this case as the Court of Appeal gave to the words in Brown’s Real Estate Ltd.    What is significant is that there is exclusion of set-off, but there is not an express exclusion of counterclaim or cross-demand.   Following the Court of Appeal’s approach, even though there is not an express exclusing of counterclaim or cross-demand in the lease, it has to be treated as having that effect in the context of an application under s 290(4)(b).

[58]     Simply Logistics Ltd points to other provisions in the parties’ contractual arrangements.  Clause 8.10 of the warehousing services agreement contains a power of set-off.  That power of set-off needs to be put alongside the no set-off provision in the sublease.  Clearly, the two provisions cannot apply if cl 8.10 is considered to give Simply Logistics Ltd a power of set-off.     That would not stand up against the exclusion of set-off in the sub-lease.  The only way that cl 8.10 of the warehousing services agreement and the rent payment clause in the sublease can be reconciled is to hold that the power of set-off in cl 8.10 lies with Real Foods Ltd alone.

[59]     Clause 15.3(g) of the warehousing services agreement envisages a general taking of accounts for services provided by Simply Logistics Ltd up to termination of the lease, and payments made for services by Real Foods Ltd up to termination of the lease.  I find that cl 15.3 is a relevant factor to take into account in the exercise of the discretion.  It is a matter that falls outside the normal run of cases under Brown’s Real Estate Ltd.

[60]     I deal now with Simply Logistics’ undisputed invoices for the $99,747.27. Real Foods Ltd admits its liability to Simply Logistics Ltd for that sum.   It has refused to take that undisputed debt into account against the liability for rent.

[61]     If the position of Real Foods Ltd is that it will insist on the payment in full of the rent due to it, but will withhold payment of the invoices due to Simply Logistics Limited even though it acknowledges that the money is payable, then that is an unacceptable position.   It certainly is not within the normal run of cases under Brown’s Real Estate Ltd.  The case it was dealing with was an unliquidated disputed counterclaim for damages.

[62]     As I understand Real Foods Ltd’s position in this case, it has applied the undisputed invoices towards other claims which it acknowledges are disputed and disputable.    In  my judgment,  Real  Foods  Ltd’s  appropriation  of the  undisputed invoices to the disputable parts of its claims, while asserting its claim in full for rent, is unfair and oppressive and takes this case out of the run of the mill.

[63]     There is a history of Real Foods Ltd exercising its set-off powers under the warehouse agreement to meet rent liabilities.   Its refusal to do so now does not entitle it to ask the Court to apply the discretion under Brown’s Real Estate Ltd in its favour.   This is not a case where the Court should refuse to take the undisputed liability of $99,746.27 into account against the rent debt.   Once that deduction is made, the debt in the statutory demand is reduced to some $50,900.

[64]     Following its re-entry on 2 April 2011, Real Foods Ltd took possession of pallets owned or hired by Simply Logistics Ltd.  Simply Logistics Ltd has provided photographic evidence that Real Foods Ltd was using those pallets.   Lawyers for Simply Logistics Ltd demanded the return of the pallets in letters of 8 April 2011 and

12 April 2011. That request was ignored.

[65]     In the first affidavit in response to the application, Mr Teague of Real Foods Ltd simply regarded the issue of the pallets as irrelevant and disclaimed any liability on the issue.  The matter was then developed further in a late affidavit from Real Foods Ltd filed only shortly before the hearing and after Simply Logistics Ltd had filed its affidavit in reply.  Simply Logistics Ltd did not object to my reading that affidavit.  In that affidavit Real Foods Ltd advances a proposal that pallets could be swapped for pallets.  There is no evidence that Simply Logistics Ltd has agreed to the proposal.   There is no evidence of any customary practice to set off pallets against pallets.   As a matter of ordinary law one cannot substitute one item of property for another item of property in defence of a claim for wrongful taking of property.  Pallets are not a medium of exchange.

[66]     Real Foods Ltd has retained property of Simply Logistics Ltd.  This taking of property was in the context of the unlawful eviction of a tenant from commercial premises.  Real Foods Ltd did not purport to distrain and, in any case, the right to

distrain has now been abolished under s 265 of the Property Law Act 2007.  Given this deliberate retention of property, it seems that Real Foods Ltd is continuing to hold these pallets knowingly and without any colour of right.

[67]     There is guidance how the discretion should be exercised from the Court of Appeal’s decision in Industrial Group Ltd v Bakker.17   In that case, Industrial Group Ltd was under a liability to pay the Bakkers sums under a deed of assumption of debt.  The deed of assumption imposed an unequivocal liability on Industrial Group Ltd to pay.  Industrial Group Ltd refused to pay the debt, alleging that the Bakkers had  made  misrepresentations  inducing  the  contract.    At  first  instance18,  when applying New Zealand law, I held that there was no equitable set-off.  I applied a pay now, argue later approach, saying that Industrial Group Ltd should pay the debt under the deed of assumption and pursue its claims against the Bakkers separately. Industrial Group Ltd succeeded on its appeal.  Accepting new evidence, the Court of Appeal held that Industrial Group Ltd had claims against the Bakkers in deceit.  It held that Industrial Group Ltd’s counterclaim for deceit required the statutory demands to be set aside.  Clearly, the Court of Appeal did not consider that the pay now, argue later approach I had taken at first instance should require the discretion in Brown’s Real Estate to be applied in favour of the Bakkers.  If a claim for deceit is good  reason  not  to  apply  the  discretion  in  Brown’s  Real  Estate  Ltd,  then  the

deliberate misappropriation of property warrants the same approach.   I decline to exercise the discretion of Brown’s Real Estate Ltd in respect of the misappropriation of the pallets.

[68]     The claim for the pallets is about $54,000 and I add that to the $99,746.27 for the undisputed invoices.   Those sums, taken together, exceed the amount of the statutory demand.  I decline to exercise the discretion in Brown’s Real Estate Ltd for those two items.  That is sufficient to set aside the statutory demand.  My judgment is that those particular claims are not matters that the Court of Appeal would have

contemplated as being in the normal run of cases in Brown’s Real Estate Ltd.

17     Industrial Group Ltd v Bakker [2011] NZCA 142.

18     Industrial Group Ltd v Bakker HC Auckland CIV 2009-404- 6432, 12 April 2010 at [135]-[145].

[69]     What I have said so far is enough to dispose of the case, but I wish to add some comments about the remaining issues, having heard argument from the parties. These comments are not part of my decision.

[70]     Overall, the remaining claims are the kind the Court of Appeal would have had in mind in ruling that contractual no set-off provisions ought to apply.   Other than the question of the pallets, that applies to the re-entry.   I am going to take a charitable view of the conduct of Real Foods Ltd, in that its re-entry without giving notice under s 245 of the Property Law Act 2007 resulted from ignorance of the law and from not taking legal advice.  Re-entries are not always done smoothly.  They can be cause for dispute.  But those matters are not enough for the discretion to be exercised in this case.

[71]     Simply Logistics Ltd has shown an arguable case for wrongful re-entry by Real Foods Ltd.   If Simply Logistics Ltd has suffered losses as a result of that unlawful eviction from the premises, those rights of actions are saved by s 267 of the Property Law Act 2007.  I make no comment about the quantum of damages claimed because there is not sufficient material for me to make any informed comment about it.

[72]     As to the claim by Simply Logistics Ltd that it could hold Real Foods Ltd to its exclusivity claim, the contractual documents do not contain any term as to exclusivity of services.   Both the warehousing storage services agreement and the deed of sublease contain entire agreement clauses.   These are contracts between commercial parties.  It is a normal case for the exercise of the discretion under s 4(1) of the Contractual Remedies Act  1979 not to allow evidence of pre-contractual negotiations.  It would also be difficult to imply a term along the lines contended for by Simply Logistics Ltd, particularly in light of the approach taken to interpretation of contracts and implying terms under the decision of the Privy Council in Attorney-

General for Belize v Belize Telecoms.19

19     Attorney-General for Belize v Belize Telecoms [2009] 1 WLR 1988 (PC).

[73]     Finally, Real Foods Ltd raised as an issue that Simply Logistics Ltd had not given adequate proof of solvency.  Simply Logistics Ltd made general assertions of insolvency; the general assertion was that it has been able to carry on trading profitably apart from the first year of operations.  The Court of Appeal has made it clear  that  insolvency  is  not  normally  a  stand-alone  ground  for  setting  aside  a

statutory demand.20     I think I can take a realistic view of the situation.   There is

enough  evidence  to  indicate  that  Simply  Logistics  Ltd  has  some  cash-flow difficulties.  However, I also note that it is actively trading.  This is not enough for me to say that the company is doomed to fail and that the spectre of insolvency is hanging over it, so that I ought to be suspicious of the claims that it has made.  It has clearly got an argument with Real Foods Ltd following the falling-out between them, but that ought to be played out in the ordinary courts.   The disputes between the parties ought not to be resolved in the context of a company liquidation proceeding.

[74]     In summary, I make the following orders:

(a)       Real Foods Ltd’s statutory demand of 30 May 2011 for $150,710.70 is

set aside.

(b)Real Foods Ltd is to pay Simply Logistics Ltd costs of $5,452.00 and disbursements of $408.89.

..............................................

Associate Judge R M Bell

20     AMC Construction Ltd v Frews Contracting Ltd (1908) 19 PRNZ 13 (CA).