Sinclair v Rural Builders Limited

[2020] NZHC 1857

IN THE HIGH COURT OF NEW ZEALAND PALMERSTON NORTH REGISTRY

I TE KŌTI MATUA O AOTEAROA TE PAPAIOEA ROHE

CIV-2020-454-13

[2020] NZHC 1857

UNDER

the Insolvency Act 2006

IN THE MATTER

of an application to set aside a bankruptcy notice

BETWEEN

JEREMY RALEIGH SINCLAIR

Applicant

AND

RURAL BUILDERS LIMITED

Respondent

Hearing:	16 July 2020
Appearances:	D Sheppard for applicant A Swan for respondent
Judgment:	29 July 2020

JUDGMENT OF ASSOCIATE JUDGE JOHNSTON

[1]    This is an application pursuant to s 17(1)(d)(ii) of the Insolvency Act 2006 for an order setting aside a bankruptcy notice, and the question which the Court must resolve is whether the applicant, Mr Jeremy Sinclair, has a triable cross claim against the respondent, Rural Builders Ltd, for an amount equal to or greater than the judgment debt on which the bankruptcy notice is based that he could not have used as a defence in the proceeding in which the judgment was obtained.

[2]    The dispositive issue is more refined, but that is best identified after outlining the factual background.

SINCLAIR v RURAL BUILDERS LIMITED [2020] NZHC 1857 [29 July 2020]

[3]    During the second quarter of 2018 Mr Sinclair entered into contractual arrangements with a company called Lumberland 2006 Ltd which manufactures and markets kit-set pole sheds  and  RBL  which  is  a  building  company.  Essentially, Mr Sinclair agreed to purchase one of Lumberland’s kit-set pole sheds and engaged RBL to erect it on his property outside Palmerston North.1

[4]    It is common ground that the building needed to meet certain specifications so that Mr Sinclair could use it for his business that requires him to garage large machinery, and that it needed to be designed specifically to meet those needs. In due course, Lumberland obtained plans and specifications for the shed from an engineering concern called MiTeck NZ Ltd, that Mr Sinclair says he was assured accommodated his requirements. These plans and specifications were identified as FB53302.

[5]    Lumberland submitted an application to the Manawatu District Council for consent and in due course the Council granted consent for the erection of the kit-set pole shed in accordance with FB53302.

[6]    For reasons that are not explained in the evidence, after the Council had granted consent, Lumberland had MiTek prepare amended plans and specifications which were identified as FB53302(B).

[7]Around mid-2018 work commenced on the erection of the kit-set pole shed.

[8]    Mr Sinclair says that RBL breached its obligations by failing to build the kit-set pole shed in accordance with either FB53302 or FB53302(B).

[9]    During the course of the hearing Mr Sheppard went to considerable lengths to demonstrate the extent of the alleged deviations from the first and second (unconsented) plans and specifications, and the other defects from which Mr Sinclair says the as-built kit-set pole shed suffers. At a later stage Mr Sinclair obtained a report from HABiT Manawatu (2017) Ltd, a surveying concern. This report itemised the extent to which the kit-set pole shed deviated from the first and second plans and

1      In fact it would appear that the contractual arrangements involved Mr Sinclair and his wife. Nothing turns on this. Both parties have proceeded on the basis that Mr Sinclair should be treated as the contracting party, and I do likewise.

specifications and other defects with the construction. HABiT came close to concluding that the only option is the demolition of the existing structure and the erection of a new one. I do not need to dwell on this evidence. Mr Swan did not challenge the contention that the kit-set pole shed was not built in accordance with either set of plans and specifications. In any event, on the evidence, I am satisfied that Mr Sinclair has a triable case to that effect.

[10]I now turn to how the dispute between the parties has played out.

[11]   On 30 August 2018 RBL rendered an invoice for $12,686.07 in respect of the concrete floor of the kit-set pole shed. The invoice was addressed not to Mr Sinclair but to his company, New Zealand Vehicle Plant & Asset Sales Ltd (NZVPAS).

[12]   By this stage, Mr Sinclair had paid Lumberland $ 47,332.80 for the kit-set pole shed (the full amount of that company’s quote) and RBL $20,000 in progress payments. And more importantly, having consulted HABiT, he had reached the view that RBL’s work was defective. He refused to pay the invoice.

[13]There followed exchanges of correspondence which resolved nothing.

[14]   Then, on 14 November 2018, RBL commenced proceedings in the Disputes Tribunal to recover the amount of its 30 August 2018 invoice.

[15]   At this time, the Tribunal’s monetary jurisdiction was limited to $15,000 (in the absence of any agreement between the parties extending that amount).

[16]   The originating documentation in RBL’s claim was served on Mr Sinclair shortly after 14 November 2018.

[17]   Having regard to the background as I have described it thus far, Mr Sinclair’s perception at this stage was not only that RBL’s claim for the amount of its invoice was unjustified, but that he had a claim against the company for the cost of demolishing the kit-set pole shed and erecting a replacement which would exceed the amount of the claim against him by several factors.

[18]   Mr Sinclair had already spoken to the Council and obtained advice from HABiT, and it would seem that at this point he engaged and at least took some preliminary advice from his solicitors. In this way, he became aware that he could not pursue the full amount of the claim he perceived himself as having against RBL by way of a cross claim in the Tribunal proceedings because of the limit on the Tribunal’s monetary jurisdiction and understood that if he was to do so he would have to do so elsewhere.

[19]   Armed with that knowledge, but apparently still acting for himself in the matter, Mr Sinclair emailed the Tribunal on 5 December 2018. Here is what he said:

On obtaining advice from the Council and also an independent builders [sic] report then also legal advice we wish to have this transfer [sic] to the District Court house due to the counterclaim we will be filing. I have had correspondence with our lawyer and am awaiting a reply on how to proceed. Can you please advise if this is the correct procedure?

[20]   The Tribunal’s records apparently indicate that by email dated 12 December 2018 its case officer replied to Mr Sinclair in these terms:

… Proceedings would need to be filed in the jurisdiction that you wish proceedings to be heard in and a request for other proceedings to be joined and transferred to the current proceeding. We recommend seeking legal advice regarding this process in how to proceed.

[21]   Mr Sinclair says that he did not receive that email. That assertion on his part sits uneasily with an affidavit he swore in earlier, related proceedings in this Court in which he said that he had overlooked the Tribunal’s email of 12 December 2018. In his affidavit in reply in this proceeding Mr Sinclair seeks to explain this apparent discrepancy in these terms:

13.      As I reiterate below, I never received any response to this query.

…

18.I am adamant that I never received and saw the email from the Tribunal’s case officer of 12 December 2018. Mr Lover appears to cast doubt on that however, in that at paragraph 11.(b) of his affidavit he refers to my previous statement of my affidavit from April 2019 that I “unfortunately overlooked an email response from the Tribunal which indicated that for a transfer to occur I need to issue my own proceedings.”

19.It is important for this Court to appreciate that I made that comment in my earlier affidavit simply on the basis of the Disputes Tribunal’s hearing decision that said that an email had been sent to me. It was no concession that I had received and seen the Tribunal’s email. I reiterate that I have never seen it. The only reference that I have seen of the email to this day is the reference contained in the Tribunal’s rehearing decision.

20.As mentioned in my first affidavit, I doubled checked receipt of it and could not find it. I have now checked again, for the purposes of preparing this affidavit, and still cannot find it.

21.In all, I swear that I never received and saw the Tribunal Case Manager’s advice, which was that to get the Rural Builders’ Disputes Tribunal claim transferred to the District Court I had to issue my own District Court proceedings and then ask for the proceedings to be joined and transferred (if in fact that advice was given (which is unclear)).

[22]   This point cannot be resolved in summary proceedings on the basis of untested affidavit evidence, and for present purposes I accept that Mr Sinclair did not receive the Tribunal’s Case Manager’s email of 12 December 2018.

[23]   Nevertheless, the position remains that Mr Sinclair had received notice of the hearing on 18 December 2018; was actively involved in seeking to establish his position; had consulted both the Council and HABiT; had engaged his solicitors and taken some preliminary advice; was aware that he could not pursue the full cross claim that he believed he had in the Tribunal as a result of the limit on the Tribunal’s monetary jurisdiction; and had emailed the Tribunal to the effect that he proposed to pursue this cross claim and effectively sought an adjournment of the hearing so that both RBL’s claim and his could be heard together in the appropriate forum; and, on the assumption I make, had had no response. In those circumstances, Mr Sinclair elected not to attend the hearing.

[24]   The Tribunal hearing took place on 18 December 2018. RBL’s claim was undefended. Unsurprisingly, it secured judgment for the amount of its invoice.

[25]   When Mr Sinclair became aware of this, apparently still acting for himself, he made an informal application for a rehearing on the ground that he had the cross claim already described.

[26]   In a decision dated 18 March 2019 the Tribunal declined Mr Sinclair’s application for a rehearing, essentially on the basis that he had received notice of the hearing and had elected not to take part.

[27]   On 20 March 2019 RBL sought to enforce the Tribunal’s judgment. Inexplicably, it did so by serving a statutory demand pursuant to s 289 of the Companies Act 1993 on NZVPAS. NZVPAS applied to set that statutory demand aside. Ultimately, RBL recognised the inevitability of its statutory demand being set aside and withdrew.   There was then a dispute about costs and in a judgment dated   8 July 2019 I awarded NZVPAS costs on the discontinuance. When the costs award was not paid NZVPAS itself served a statutory demand requiring payment. In the end, the costs award was paid.

[28]   Then, on 2 March 2020, RBL issued this bankruptcy notice against Mr Sinclair which is of course what they should have done back in March 2019.

[29]   I pause there to mention that it was not until 12 April 2020 that Mr Sinclair commenced proceedings in the District Court against RBL. Some criticism is levelled at him for the delay. His rejoinder is that until December 2019 he was preoccupied first with seeking a rehearing before the Tribunal and then dealing with RBL’s misfire when it served the statutory demand on his company and finally with a serious health scare that Mrs Sinclair had had, and that it is really only in the second quarter of this year that he has been able to focus his attention on pursuing his claim.

[30]   In the end I am not persuaded that anything turns on this, and I do not propose to spend any further time dealing with the criticisms RBL makes of Mr Sinclair’s delay.

[31]   Mr Sheppard’s argument is that RBL’s bankruptcy notice should be set aside because the case falls squarely within s 17(1)(d)(ii). He says that Mr Sinclair had, and still has, a triable cross claim against RBL for an amount substantially greater than the amount of RBL’s claim, and that Mr Sinclair could not use that as a defence in the Tribunal proceeding because the amount of his claim exceeds the Tribunal’s jurisdiction of $15,000.

[32]   In advancing that argument Mr Sheppard placed considerable reliance on the judgment of this Court in 90 Nine Ltd v Nikitin,2 which he submitted bore an uncanny resemblance to this case. There are certainly similarities between 90 Nine Ltd v Nikitin and the present case, but the only similarity which has any potential to bear on the outcome is that in both cases the judgment creditor’s claim was commenced in the Tribunal and the alleged cross claim on which the judgment debtor relied exceeded the Tribunal’s monetary jurisdiction.

[33]   I accept Mr Sheppard’s submission that there are passages in Associate Judge Bell’s judgment that suggest that the judge was proceeding on the basis that the judgment debtor could not rely on any cross claim as a defence if that cross claim exceeded the monetary limit of the Tribunal’s jurisdiction.

[34]   This brings me to the dispositive issue, namely whether, for the purposes of an application to set aside a bankruptcy notice under s 17(1)(d)(ii) of the Insolvency Act, the fact that a judgment debtor’s alleged cross claim exceeded the monetary jurisdictional limit of the court or tribunal in which the judgment creditor commenced the original claim in and of itself means that the judgment debtor was unable to rely on that cross claim as a defence.

[35]   In approaching this issue it appears to me to be important to keep certain things in mind. The Court will always be dealing with a situation in which the party who has served the bankruptcy notice is holding a judgment against the applicant that it is prima facie entitled to enforce. One available enforcement mechanism is bankruptcy proceedings initiated by the service of a bankruptcy notice. This is a mechanism that exists to protect not only the judgment creditor but also the general public. It is not therefore especially surprising that the grounds upon which the judgment debtor may move to set aside the bankruptcy notice are limited. Under s 17 of the Insolvency Act the judgment debtor must be able to establish a triable cross claim that he could not have relied on as a defence in the earlier proceeding. The broad sweep of the authorities is that the impediment must generally be a legal one, though it may

2      90 Nine Ltd v Nikitin [2020] NZHC 445.

sometimes be factual, but, in any event, must have made it impossible for the judgment debtor to rely on his claim.

[36]   I do not accept that Mr Sinclair was precluded from relying on his cross claim to defend RBL’s claim against him. It was open to him to commence a proceeding in the District Court for the full amount of his claim (as of course he has now done), and then make the necessary application for joinder and removal so that both RBL’s claim against him and his cross claim against RBL could be litigated in the same forum. The Court’s focus in this context is on legal opportunity, not the subjective abilities, understanding or knowledge of a debtor.3

[37]   It appears to me that it does no violence to the language of s 17(1)(d)(ii) to say that there was no legal impediment preventing Mr Sinclair relying on the cross claim that he says he has “in the action or proceedings in which the judgment, or the order, as the case may be, was obtained”. In other words, I do not interpret the words “in the action or proceeding” also to mean “in the forum in which the judgement creditor has commenced its proceeding”.

[38]   That interpretation of s 17 appears to me to reflect a purposive approach. Let us imagine a situation in which “A” commences a claim against “B” in the District Court for unliquidated damages of less than the monetary limit of the District Court’s jurisdiction of $350,000. “B” has a triable cross claim for damages of more than

$350,000. If the argument advanced on Mr Sinclair’s behalf in this case were to prevail, then “B” could ignore the District Court proceeding, allow “A” to proceed down the path of proving his case before a District Court Judge and securing judgment by default, confident in the knowledge that if “A” were subsequently to serve a bankruptcy notice, he — “B” — could have it set aside. In my judgement, Parliament could not have intended that.

[39]   If that means that I am differing from Associate Judge Bell in 90 Nine Ltd then I respectfully do so. However, I am not sure that that is the case. Although, as already said, His Honour appears to have proceeded on the basis that the applicant there could, for the purposes of s 17(1)(d)(ii) of the Insolvency Act, potentially rely on the fact that

3      See Re Williams HC Auckland B120/94, 20 June 1994 at 4.

his cross claim exceeded the Tribunal’s jurisdiction as a basis for contending that he could not rely on it as a defence, the case was ultimately determined on the basis that the applicant could not establish that he had a triable cross claim.

[40]   For those reasons, whilst accepting that Mr Sinclair is able to establish a triable cross claim for an amount exceeding RBL’s claim against him in respect of which it obtained judgment in the Tribunal, and on which the bankruptcy notice served on him was based, I am not satisfied that he could not have used that cross claim as a defence in responding to RBL’s claim against him.

[41]Mr Sinclair’s application is dismissed.

[42]   As to costs, my preliminary view is that RBL as the successful party is entitled to a costs award on a 2B basis together with such disbursements as may be allowed by the Registrar. I expect counsel will be able to finalise costs. However in the unlikely event that they cannot do so, they may come back to the Court by memorandum and I will deal with costs on the papers.

Associate Judge Johnston

Solicitors:

Fitzherbert Rowe, Palmerston North for applicant

Auckland Property Legal Service, Auckland for respondent