Skylight Investments Limited v Kynoch Construction Limited
[2019] NZHC 2931
•8 November 2019
IN THE HIGH COURT OF NEW ZEALAND PALMERSTON NORTH REGISTRY
I TE KŌTI MATUA O AOTEAROA TE PAPAIOEA ROHE
CIV-2019-454-000076
[2019] NZHC 2931
UNDER Section 290 of the Companies Act 1993 IN THE MATTER OF
an application to have a Statutory Demand set aside
BETWEEN
SKYLIGHT INVESTMENTS LIMITED
Applicant
AND
KYNOCH CONSTRUCTION LIMITED
Respondent
Hearing: 8 November 2019 Counsel:
J L Bates for the Applicant G Mason for the Respondent
Judgment:
8 November 2019
JUDGMENT OF DOOGUE J
Introduction
[1] The substantive proceeding to which this interlocutory application relates is Skylight Investment Limited’s (Skylight) application to set aside a statutory demand1 issued by Kynoch Construction Limited (Kynoch). The demand was for $494,389.64 and related to four payment claims in respect of construction work done by Kynoch on four relocatable dwellings at Skylight’s land at 1347 Omahu Road, Hastings. The demand was served on 10 October 2019.
1 The statutory demand is at p 80 of the Bundle, annexed to Peter Kynoch’s affidavit, dated 30 October 2019.
SKYLIGHT INVESTMENTS LIMITED v KYNOCH CONSTRUCTION LIMITED [2019] NZHC 2931
[8 November 2019]
[2] The without notice application seeks freezing orders in respect of the following property belonging to Skylight:
(a)the land and all buildings situated at 1349-1351 Omahu Road, Hastings, more particularly described as Lot 1 Deposited Plan 425145 and Identifier 499261; and
(b)the land and all buildings situated at 1347A Omahu Road, Hastings, Deposited Plan 425145 and Identifier 887202.
[3] The application is made in reliance on rr 32.2 and 7.23 of the High Court Rules 2016, which provide:
32.2 Freezing order
(1)The court may make an order (a freezing order), on or without notice to a respondent in accordance with this Part.
(2)A freezing order may restrain a respondent from removing any assets located in or outside New Zealand or from disposing of, dealing with, or diminishing the value of, those assets.
(3)An applicant for a freezing order without notice to a respondent must fully and frankly disclose to the court all material facts, including—
(a)any possible defences known to the applicant; and
(b)information casting doubt on the applicant’s ability to discharge the obligation created by the undertaking as to damages.
(4)An application for a freezing order must be made by interlocutory application under Part 7 or originating application under Part 19, which Parts apply subject to this Part.
(5)An applicant for a freezing order must file a signed undertaking that the applicant will comply with any order for the payment of damages to compensate the respondent for any damage sustained in consequence of the freezing order.
…
7.23 Application without notice
(1)A person who wants to make an application to the court and have the application determined without any other party having been served (in these rules referred to as an application without notice) must use form G 32.
(2)An application without notice may be made only—
(a)on 1 or more of the following grounds:
(i)that requiring the applicant to proceed on notice would cause undue delay or prejudice to the applicant:
(ii)that the application affects only the applicant:
(iii)that the application relates to a routine matter:
(iv)that an enactment expressly permits the application to be made without serving notice of the application:
(v)that the interests of justice require the application to be determined without serving notice of the application; and
(b)if the applicant has made all reasonable inquiries and taken all reasonable steps to ensure that the application and supporting documents contain all material that is relevant to the application, including any defence that might be relied on by any other party and any facts that would support the position of any other party.
(3)An applicant who makes an application without notice must, if the application is of a kind that is likely to be contested if it were made on notice, file a memorandum with the application that sets out—
(a)the background to the proceeding (including the material facts that relate to the proceeding); and
(b)the grounds on which each order is sought; and
(c)an explanation of the grounds on which each order is sought without notice; and
(d)all information known to the applicant that is relevant to the application, including any known grounds of opposition or defence that any other party might rely on, or any facts that would support opposition to the application or defence of the proceeding by any other party.
(4)Failure to disclose all relevant matters to the court or to comply with subclause (3) may result in the court—
(a)dismissing the application; or
(b)if 1 or more orders have been made by the court in reliance on the application, rescinding those orders.
(5)This rule does not apply to an application for a grant of administration without notice (see rule 27.4).
[4] The matter came to me on 6 November 2019 and I directed that the proceedings be served on Skylight as I was not satisfied Kynoch could establish a real risk that Skylight would dissipate or dispose of assets imminently.
[5] This hearing was brought on at short notice and was conducted on the basis of pleadings, affidavits and submissions only.
Background
[6] The parties entered into an agreement in September 2018 whereby Kynoch was to build four accommodation blocks at 1347 Omahu Road, Hastings at a price of
$2,760,610.48 (inclusive of GST). The completion date referred to in the construction contract was “end January 2019”. The purpose of the development was to provide seasonal labour accommodation for the horticultural industry and emergency housing with a government agency.
[7] The substantive cause of action in this matter relates to the statutory demand issued 3 October 2019. The statutory demand was for the sum of $494,389.64.
[8]No payment schedules were issued by Skylight.
[9]Skylight have since applied to have the statutory demand set aside.
[10] Skylight has also transferred the property listed at [2(a)] to an associated company called DMT HB Limited. The three directors of Skylight are also directors of DMT HB limited.
[11] Kynoch asserted that by applying to set aside Kynoch’s demand, Skylight was abusing process and deliberately delaying matters to “strip the company of assets”.2
[12] Kynoch now seeks an order to freeze the remaining asset of Skylight at the project address of 1347 Omahu Road, Hastings.
The law
[13] The relevant rule is r 32.5 of the High Court Rules 2016, which for present purposes requires the applicant:
(a)to establish it has a “good arguable case” on a prospective cause of action; and
2 At [18] of Peter Kynoch’s affidavit, dated 1 November 2019.
(b)to satisfy the court, having regard to all the circumstances, that there is a danger a prospective judgment will be wholly or partly unsatisfied because the assets of the prospective judgment debtor might be removed from New Zealand, or disposed of or diminished in value.
[14] A good arguable case requires the applicant to establish the allegations are tenable and are supported by evidence, having regard to the stage of the proceedings.3 In Wing Hung Printing Co Ltd v Saito Offshore Pty Ltd, the Court of Appeal observed:4
It is clear, however, that the good arguable case test does not require the plaintiff to establish a prima facie case. This recognises that disputed questions of fact cannot be readily resolved on affidavit evidence. On the other hand, there must be a sufficiently plausible foundation established that the claim falls within one or more of the headings in r 6.27(2).
[15] The second stage requires the Court to be satisfied there is a danger the judgment will not be satisfied because assets may be removed or dealt with in a way that frustrates the judgment. In Raukura Moana Fisheries Ltd v The Ship “Irina Zharkikh”, the test was put this way:5
It is perfectly clear that a Judge must not infer a risk of dissipation merely because a foreign defendant has assets within the jurisdiction of the Court. Nor is a risk of dissipation to be inferred merely because the defendant plays its financial cards close to its chest as in The Niedersachsen. On the other hand, the test which the plaintiff must satisfy is not unduly exacting. The plaintiff must point to circumstances from which a ‘prudent, sensible commercial man, can properly infer a danger of default’. This phraseology comes from the judgment of Lawton LJ in Third Chandris Shipping Corporation v Unimarine SA [1979] QB 645 at p 671.
[16] If these two qualifying matters are established, a court will finally need to consider where the balance of convenience lies.
3 Wing Hung Printing Co Ltd v Saito Offshore Pty Ltd [2010] NZCA 502, [2011] 1 NZLR 754 at [37]-[41]; and Dotcom v Twentieth Century Fox Film Corp [2014] NZCA 509, (2014) 22 PRNZ 479 at [18].
4 Wing Hung, above n 3, at [41] (footnotes omitted).
5 Raukura Moana Fisheries Ltd v The Ship “Irina Zharkikh” [2001] 2 NZLR 801 (HC).
Good arguable case
[17] The substantive cause of action in this matter relates to a statutory demand issued 3 October 2019 and served on 10 October 2019.6 The statutory demand was for the sum of $494,389.64. This related to the following invoices, all of which were payment claims pursuant to the Construction Contracts Act 2002 (CCA):7
(a)Tax invoice dated 31 July 2019, number 1020-1118 (transportable D) for $434,902.47;
(b)Tax invoice dated 31 July 2019, number 1017-1116 (transportable A) for $13,783.21;
(c)Tax invoice dated 31 July 2019, number 1018-1092; and
(d)Tax invoice dated 31 July 2019, number 1019-1117.
[18] If Skylight had genuine reasons for disputing Kynoch’s payment claims, it could have issued payment schedules as it is required to in such circumstances by the CCA.
[19] Michael Weston, a company director and 33.4% shareholder in Skylight, asserts in his affidavit of 7 November 2019 that a series of email exchanges together with associated discussions constitute payment schedules. The payment claims were made on 6 August 2019.8 There is no period for responding to payment claims prescribed by the contract so the default period of 20 working days after service applies.9
[20] The only document from Skylight to Kynoch within the date range 6 August 2019 to 3 September 2019 in the pages identified by Mr Weston in his affidavit is the email from Mr Weston at p 16 of the bundle attached to his affidavit, sent 27 August 2019. Mr Weston’s email of 27 August 2019 is worth quoting in full:
6 Affidavit of Kayla Maria Carlson, at [2].
7 Affidavit of Peter Kynoch, above n 1, at [26].
8 At [26].
9 Construction Contracts Act 2002, s 22.
Peter
It is a shame your extent of care does not carry through to your customers. If you were as concerned for the completion of our project as you now are for your suppliers then you would not be in this situation.
I have verbally told you and also confirmed via email that your final invoice would be dependent [sic] of the code of compliance. You obviously accepted this as you continued to work with that understanding.
You can rest assured that all your suppliers will be paid in full. Once the full CCC is received.
We understand this may be as soon as next week. Regards
Michael Weston
…
[21] The Code of Compliance Certificate (CCC) came through on 1 October 2019.10 Since then, no payment has been made.
[22]By s 21(2) and (3) of the CCA:
(2)A payment schedule must –
(a)be in writing;
(b)identify the payment claim to which it relates; and
(c)state a scheduled amount.
(3)If the schedule amount is less than the claimed amount, the payment schedule must indicate:
(a)the manner in which the payer calculated the scheduled amount; and
(b)the payer’s reason or reasons for the difference between the scheduled amount and the claimed amount; and
(c)in a case where the difference is because the payer is withholding payment on any basis, the payer’s reason or reasons for withholding payment.
[23]In SOL Trustees Limited v Giles Civil Ltd, the Court of Appeal held:11
[39] We agree that technical quibbles should not be allowed to vitiate either a payment claim or a payment schedule that otherwise substantially complies with the requirements of the Act. The issue in this case is whether the
10 Affidavit of Peter Kynoch, above n 1, at [25].
11 SOL Trustees Limited v Giles Civil Ltd [2014] NZCA 539.
documents SOL relies on can be said to have substantially complied with the requirements of the Act.
[40] It is clearly insufficient to simply assert the amount claimed is disputed, which is as far as SOL's email responses to payment claims 13 and 14 went.
[41] SOL's attempt to incorporate the earlier spreadsheet as part of its payment schedule does not assist it. The spreadsheet cannot, either on its own or taken with the other emails referred to, satisfy the requirements of a payment schedule. At best it is SOL's calculation of a potential counterclaim or set-off for delay.
[24] The Court then goes on to reaffirm that s 79 of the CCA prevents such a set- off or counterclaim being raised in response to debt recovery proceedings.12
[25] The Court of Appeal in SOL Trustees Ltd did refer to two cases where substantial compliance was found. In one,13 a letter of 12 November 2010 together with an earlier payment schedule and a comprehensive letter of 1 November 2010 satisfied the requirements. The letter of 12 November referred to the property which was the subject of the contract, and under the heading “Payment Schedule”, set out plumbing and drainage works and schedule earthworks charged. It approved eight of the claimed variations and then itemised the payments said to have been made directly or indirectly. It asserted that there was an overpayment to the applicant of $26,950.99.
[26] In the other decision,14 a director of the principal sent a letter on 22 September in response to payment claims made on 12 and 19 September. The letter identified the payment claims by invoice number and quantum. It went in detail over two and a half pages and sixteen paragraphs to respond to the claim although it did not identify a scheduled amount. It could be read as providing for a nil payment. It identified doubts over the accuracy of time sheets and the resulting charges. It identified materials charged for which had been returned and instances of faulty workmanship. It sought further information. In the circumstances, Rodney Hansen J regarded the letter as conveying the essence of the reasons for withholding payment.
12 At [42].
13 NCB 2000 Ltd v Hurlstone Earth Moving Ltd HC Auckland CIV-2010-404-8096, 23 June 2011.
14 Westnorth Labour Hire Ltd v S B Properties Ltd HC Auckland CIV-2006-404-1858, 19 December 2006.
[27] The contrast between those cases and the email quoted above at [20] is stark. The email fails to satisfy any of the requirements of a payment schedule apart from being in writing. It does not identify the payment claim, state a scheduled amount and so does not trouble itself with any of the matters required where the scheduled amount is different than the claimed amount.
[28] Rather than having a scheduled amount, Mr Weston’s email is, if anything, an indication of payment once CCC was through. It shows some awareness on the writer’s part that the contract does not require Kynoch to obtain CCC as it says that he had advised Mr Kynoch that Kynoch’s final invoice would be dependent on CCC which he “obviously” accepted as he continued to do work.
[29] I do not consider the exhibits nor evidence of the discussions amount to payment schedules. It is apparent therefore that Skylight may have considerable difficulty in succeeding on their application to set aside the statutory demand. Hence Kynoch has a good arguable case in my view.
Skylight’s claims of loss
[30] Skylight makes various claims of loss. These are disputed. For the purposes of the application to set aside the statutory demand, they are immaterial. Section 79 of the CCA provides:
79Proceedings for recovery of debt not affected by counterclaim, set- off, or cross-demand
In any proceedings for the recovery of a debt under section 23 or section 24 or section 59, the court must not give effect to any counterclaim, set-off, or cross-demand raised by any party to those proceedings other than a set-off of a liquidated amount if—
(a)judgment has been entered for that amount; or
(b)there is not in fact any dispute between the parties in relation to the claim for that amount.
[31] In Laywood v Holmes Construction Wellington Ltd, the Court of Appeal confirmed that the s 79 prohibition on raising set-offs or counterclaims applied in the context of applications to set aside statutory demands.15 This has been reaffirmed in
15 Laywood v Holmes Construction Wellington Ltd [2009] 2 NZLR 243 (CA) at [61]-[64].
SOL Trustees Ltd. The CCA was intended to secure cashflow in the construction industry. Rather than being an abuse of process, the statutory demand in this case appears to be an entirely appropriate use of that process.
[32] For those reasons, I find that there is a good arguable case to suggest that Kynoch’s statutory demand is valid and should not be set aside notwithstanding the issues Skylight has with Kynoch’s performance.
Is there a real risk of dissipation of the assets?
[33] The 3,484 square metre property in Identifier 49261, of which Skylight was the registered proprietor until yesterday (7 November 2019), has been transferred to an associated company called DMT HB Limited. The three directors of this company are Mr Weston and Mr Pearce, the two deponents on behalf of Skylight in this matter, along with Ian Duncan Chrisp, who is a director of Skylight.16 Skylight asserts that the transaction was in the ordinary course of business at the time of a refinancing last month. No explanation is given as to why this transaction is in the ordinary course of business. Mr Bates offered to file supplementary affidavits to explain the legitimacy of the transaction and may of course continue to do so. The fact of the matter is that having been given the opportunity to do so, the directors, for whatever reason, have chosen not to do so up to this point.
[34] Mr Weston gives no reassurance that the land now in Identifier 887202 will not be transferred either. He says that if Skylight is prevented from leasing or selling, it will not be able to repay bank debt and a mortgagee sale would follow.17 A freezing order does not stop Skylight leasing the land or buildings thereon, so it may be inferred that what Mr Weston might be referring to is a potential sale of the property.
[35] The concern here is that Mr Weston has acknowledged that Skylight cannot pay debt owed to Kynoch notwithstanding its recent refinancing. Second, he is saying that as Skylight is a property developer it can sell or transfer land with impunity under r 32.6(3)(c) of the High Court Rules 2016.
16 Affidavit of Trevor Pearce, dated 7 November 2019 at [14].
17 At [17].
[36] In his 27 August 2019 email quoted at [19] above, Mr Weston says that Kynoch have obviously accepted that there is no payment until after the CCC is obtained. When CCC came through on 1 October 2019, no payment followed although there were negotiations. An agreement to pay $420,000 was reached and recorded in the email of Trevor Pearce, dated 8 October 2019.18 Then on 16 October 2019, Mr Pearce wrote and said that the agreement was no longer valid as Skylight had not performed and it was unsigned. This adds to my concern about Skylight’s intentions.
[37] The second issue is whether r 32.5(3)(c) protects a sale of the land this application concerns. That rule requires a freezing order not prohibit disposing of assets or making payments in the ordinary course of business, including business expenses incurred in good faith.
[38] Skylight’s deponents do not point to other assets held by Skylight which might satisfy the judgment and by suggesting that there may be a mortgagee sale they strongly imply that there are none of substance.
[39] The distinction between trading in the ordinary course of business and major transactions is well recognised in the law. While the transfer of land in Identifier 499261 may not have been a major transaction for the purposes of s 129 of the Companies Act 1993, it was a significant one for Skylight.
[40] The purpose of r 32.6(3)(c) is to allow companies to trade in a way which does not defeat the protective intent of the freezing order. It is not intended to prevent a freezing order being made. The sale or transfer of one of two major assets held by a company will likely never be in the ordinary course of business for the purposes of r 32.6(3)(c) as to interpret it in that fashion would give the companies immunity against this important protection.
18 See annexure “D” to Peter Kynoch’s affidavit of 1 November 2019.
Balance of convenience
[41] The transfer of the land in Identifier 499261 to an associated company mandates a degree of caution about allowing Skylight unfettered freedom to sell or dispose of the remaining asset under r 32.6.3(c).
[42] If a sale is to be made with a freezing order in place, Skylight can make an application for a variation of the order. If the Court is satisfied that it is appropriate in the ordinary course of business, it can be approved. An example of freezing orders being varied is provided by Mr Dotcom in his litigation with Twentieth Century Fox and others.19 This would meet the concern about a good faith sale being permitted.
[43] There is reference to the damage that a freezing order would do to the reputation of Skylight with the bank in the affidavits of Mr Pearce and Mr Weston. Mr Weston describes this as his greatest concern.20 The financing with the Bank of New Zealand is recent. Presumably the bank knew the financial position of Skylight when it refinanced. The bank after all charged $40,000 for the refinancing.21 Surely the position of Kynoch as a substantial creditor was something that the bank considered.
[44] I am satisfied on the balance of convenience that a freezing order should issue in respect of the one remaining significant asset owned by Skylight.
Orders
[45] Pending resolution of the proceedings in this Court, an order shall issue freezing the following assets of the applicant:
(a)The land and all buildings situated at 1347 Omahu Road, Hastings, more particularly described as being more or less 1.2933 hectares, Lot 2, Deposited Plan 535791 Lot 3, Deposited Plan 425145 and Identifier 887202 (Hawke’s Bay Land Registration District).
19 Twentieth Century Fox Film Corporation and others v Kim Dotcom [2016] NZHC 1948.
20 At [21] of Mr Weston’s affidavit.
21 See p 21 of the Bundle attached to Mr Weston’s affidavit.
[46] Notice of the order will be served on the mortgagors and any others with an interest in the property.
[47] I reserve leave to the applicant to apply to the Court on five working days’ notice to the respondent for discharge or variation of the freezing order.
[48]Costs will issue in favour of the respondent on category 2B scale.
Doogue J
Solicitors:
Brown & Bates Limited, Napier
Alison Green Lawyer, Palmerston North
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