Smart Slabs Limited v Accent on Construction Limited
[2018] NZHC 455
•19 March 2018
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2018-404-96
[2018] NZHC 455
UNDER the Companies Act 1993 BETWEEN
SMART SLABS LIMITED
Plaintiff
AND
ACCENT ON CONSTRUCTION LIMITED
Defendant
Hearing: 1 March 2018 Appearances:
M Colthart for the Plaintiff D Grove for the Defendant
Judgment:
19 March 2018
JUDGMENT OF GORDON J
This judgment was delivered by me
on 19 March 2018 at 3.30 pm, pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar Date:
Solicitors: Heimsath Alexander, Auckland
Foy & Halse, Auckland
Counsel:M Colthart, Auckland D Grove, Auckland
SMART SLABS LTD v ACCENT ON CONSTRUCTION LTD [2018] NZHC 455 [19 March 2018]
Introduction
[1] This is an application by the defendant, Accent on Construction Limited (Accent), under r 31.11 of the High Court Rules, for an order restraining publication of any advertisement of the application by the plaintiff, Smart Slabs Limited (Smart Slabs), to put Accent into liquidation. Accent says that it has a counterclaim or set-off exceeding the amount in the statutory demand. It also says that the statutory demand was not properly served and that it is solvent.
[2]Smart Slabs opposes the application.
Factual background
[3] Accent undertakes residential subdivision throughout Auckland. It has operated since 2009. Since that time, it has undertaken approximately 60 projects and has constructed approximately 193 houses or individual projects. One of its clients is Housing New Zealand Limited. The company employs 40 employees and also regularly uses subcontractors.
[4] The issues between the parties arose out of a development located at 1-7 Tuata Street, One Tree Hill, Auckland. Accent has a contract with Housing New Zealand to construct 17 units on that site.
[5] Accent subcontracted Smart Slabs to undertake certain foundation and retaining wall works on the site. In an affidavit sworn in support of the application, Ian Fistonich, the Chief Executive Officer of Accent, deposes that in approximately November 2017 there were delays in payments by Accent for invoices that had been issued by Smart Slabs.
[6] On 6 December 2017, Smart Slabs served a statutory demand pursuant to s 289(1) of the Companies Act 1993 (the Act) requiring Accent to pay the sum of
$137,544.38. The statutory demand was sent to a generic email address for Accent. Mr Fistonich did not see the statutory demand at that time.
[7] On 8 December 2017, Accent made a payment to Smart Slabs of $30,000 on account of the amount due as at 6 December 2017, thus reducing the amount owing to
$107,544.38. No further payments were made.
[8] On 20 December 2017, a further sum of $86,923.45 became due and owing by Accent for further construction work carried out and materials supplied by Smart Slabs to Accent.
[9] Accent’s position is that a payment was scheduled to be made to Smart Slabs before Christmas, that is, until Smart Slabs attended the site on 22 December 2017 and “destroyed construction work”.
[10] On 9 January 2018, Tim Farman of Smart Slabs sent an email to Mr Fistonich stating that the statutory demand had expired on 5 January 2018 and that unless payment was made in full by 15 January 2018, an application would be filed in the High Court to put Accent into liquidation.
[11] Mr Fistonich responded by email to Mr Farman the next day, saying that the office had a skeleton staff that week, that it was closed until the following week and that Mr Fistonich had come in to the office to respond to Mr Farman’s email. In his email, Mr Fistonich records Accent’s position as set out in [9] above.
[12] Mr Fistonich says 10 January 2018 was the first time he had seen the statutory demand. It had not been sent to the registered office nor to Mr Fistonich’s email address but, as noted above, to a generic email address for the company.
[13] Mr Fistonich says the service of the statutory demand had not been raised by Mr Farman prior to 9 January 2018.
[14] On 16 January 2018, a group manager at Accent responsible for Housing New Zealand projects sent an email to Mr Farman noting that Mr Farman had previously been advised of quality issues in relation to the slab and retaining walls, and confirming the issues. Photographs were attached to the email. The email concluded:
Would you be open to a meeting next week at our offices to discuss and cover off these issues and discuss options to close off all outstanding matters, so we can move forward together?
[15] Mr Farman responded to Mr Fistonich’s 10 January 2018 email on 23 January 2018 by email. He rejected the allegations that Smart Slabs had “destroyed construction work” and the allegations of defective workmanship. The email concluded:
We have therefore instructed our lawyer to issue liquidation proceedings against your company. Those proceedings were filed last week, and we understand that they will be served on the registered office of your company shortly.
If you have a firm proposal for payment of the total amount outstanding we would be pleased to receive it. In the absence of such a proposal we will be continuing with the liquidation.
[16] The statement of claim issued by Smart Slabs is dated 19 January 2018 and seeks Accent’s liquidation. The amount owing is claimed to be $197,803.23.
[17] Mr Fistonich deposes that he had not expected the liquidation proceedings to be issued given the issues that Accent had raised with Smart Slabs regarding its alleged defective work and destruction of construction work.
Principles
[18]Rule 31.11 of the High Court Rules materially provides:
31.11 Power to stay liquidation proceedings
(1)If an application for putting a company into liquidation is made under rule 31.3, the defendant company, or, with the leave of the court, any creditor or shareholder of that company or the Registrar of Companies, may, within 5 working days after the date of the service of the statement of claim on the defendant company, apply to the court—
(a)for an order restraining publication of an advertisement required by rule 31.9 or any other information relating to that statement of claim; and
(b)for an order staying any further proceedings in relation to the liquidation.
(2)The court must treat an application under subclause (1) as if it were an application for an interim injunction and, if it makes the order sought, it may do so on whatever terms the court thinks just.
(3)The inherent jurisdiction of the court is not limited by this rule.
[19] Accent filed its application for an order restraining advertising on 2 February 2018. There is no evidence as to the date of service of the statement of claim. However, it is apparent from Mr Farman’s email of 23 January 2018 that the statement of claim had not been served as at the time of that email. I, therefore, proceed on the basis that the application was filed within five working days after the date of service of the statement of claim as is required by r 31.11(1).
[20] The general principles were summarised in Commissioner of Inland Revenue v Ron West Motors (Otahuhu) Ltd1 and Commissioner of Inland Revenue v K J Cummings Ltd.2 These cases involved applications to both restrain advertising of liquidation proceedings and to stay the proceedings. The application was under the previous rule, r 700K of the High Court Rules, which was almost identical3 to r 31.11.
Those principles as stated are:4
(a)A winding up order will not be made where there is a genuine and substantial dispute as to the existence of a debt such that it would be an abuse of the process of the Court to order a winding up;
(b)In such circumstances, the dispute, if genuine and substantially disputed, should be resolved through action commenced in the ordinary way and not in the Companies Court;
(c)The assessment of whether there is a genuine and substantial dispute is made on the material before the Court at the time and not on the hypothesis that some other material, which has not been produced might, nonetheless be available;
(d)The governing consideration is whether proceeding with an application savours of unfairness or undue pressure;
(e)The Rule directs the Court to deal with the application as if it were an application for an interim injunction;
(f)Rule 700K enables the Court to impose terms on any order it makes;
1 Commissioner of Inland Revenue v Ron West Motors (Otahuhu) Ltd (2003) 21 NZTC 18,281 (HC).
2 Commissioner of Inland Revenue v K J Cummings Ltd (2003) 21 NZTC 18,277 (HC).
3 The only difference is that r 700K provided for seven days to apply for an order (rather than five days).
4 Commissioner of Inland Revenue v Ron West Motors (Otahuhu) Ltd, above n 1, at [15];
Commissioner of Inland Revenue v K J Cummings Ltd, above n 2, at [15].
(g)Such applications are interlocutory in nature and accordingly it would be wrong to express a concluded view of the merits of the dispute. A refusal of a stay does not bar the defendant from adducing a defence based upon the stay grounds when the application to appoint a liquidator is heard.
[21]The principles have also been stated in the following way:
(a)Where a company which is the subject of a liquidation application is indisputably in debt to the applicant creditor, it may nonetheless be able to show that it has a claim against the applicant which reduces the net balance owing to the creditor or even off-sets it all together. In order to impeach the statutory demand and overcome the presumption in s 287(a) of the Act 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 was an available set-off. It must show on evidence before the Court that it has a real basis for the claimed set- off.5
(b)The onus is on the applicant for the restraining order to establish that the debt is genuinely disputed and that the plaintiff is acting unfairly in seeking to bring undue pressure.6
(c)There is no rule of practice that requires an applicant for an order under this rule to establish solvency.7
Counterclaim/set-off
[22]Accent must prove that there is a ‘real basis’ for its claimed set-off.
[23] Smart Slabs has filed an affidavit of its director, Stavros Evangelidakis, in response to the affidavits on behalf of Accent deposing as to defects in Smart Slabs’ work. Mr Evangelidakis deposes that the alleged defects, even if they do exist, are relatively minor and can be easily rectified. He says the first alleged defect relating to
5 Covington Railways Ltd v Uni-Accommodation Ltd [2001] 1 NZLR 272 (CA) at [11].
6 Pink Pages Publications Ltd v Team Communications Ltd [1986] 2 NZLR 704 (HC) at 706.
7 Maru Industries Ltd v Don Forbes Construction Ltd (1989) 2 PRNZ 176 (HC) at 184.
the height of a retaining wall would simply involve replacing some of the fill behind the retaining wall with polystyrene blocks to ease the load on the wall. He also says the wall was constructed in accordance with the plans supplied by Accent and the cost of the work to raise the height of the wall would be borne by Accent.
[24] He says the alleged defect regarding the garage floor slab for lot 11 is said to be that it “appears to be 30 – 40 mm out of square”. He says that would be simple to fix. There is also said to be a 15-mm gap between the garage slab and masonry wall. However, he says the slab was constructed exactly in accordance with the plans. There was also an allegation that the damp proof course is not continuous between the slab and the foundation to the subfloor walls. Again, he says that was constructed in accordance with the plans. As to the absence of a “bullnose” detail to a garage door, he says there was no bullnose detail for the garage door rebate on the plans.
[25] The third defect relates to the finish of the floor slab for lot 7. He says that was poured on an “all care and no responsibility” basis. The fourth alleged defect relates to the finish of the floor slab to lot 6. He says if it needs rectification, it is a relatively simple matter of grinding the floor slab.
[26] He says there is no basis for the contention that floor slabs for lots 7 and 11 need to be demolished and reconstructed.
[27] On the other hand, Accent has filed an affidavit of a Garry Peters, an independent engineer and director of Peters Holdings Limited. Mr Peters has the following qualifications: CPEng, MIPENZ, BE, NZCE, FESA (Forensic Engineering Society of Australia). Mr Peters says he was appointed by Accent to provide a review of slab and retaining wall works at issue. He provided a full report which was annexed to his affidavit setting out the defects in the work. It is those alleged defects to which Mr Evangelidakis was responding. Mr Peters has also sworn an affidavit in reply to the affidavit of Mr Evangelidakis.
[28] In relation to the retaining wall, Mr Peters says it appears to be some 400 mm too low and two additional courses of blocks will be required to build up the wall to the required height. He says the issue that has caused this wall to be built too low is
that the level of the bottom of the footing was constructed too low by approximately 400 mm. He says this is a setting problem. If the footing is too low and if the wall is constructed as per the engineer’s design, then the top wall will be too low as well. That is why it is a defect and needs to be rectified.
[29] In response to Mr Evangelidakis’ simple solution for the garage floor slab for lot 11, Mr Peters says that cutting the corner of the slab will result in the cover of the reinforcing steel at the end of the slab being reduced. The cover is approximately 50 mm and cutting 30-40 mm off the end and the corners of the slab will reduce the cover significantly. He says cutting the slab is not recommended for this reason.
[30] In relation to the 15-mm gap between the garage slab and masonry walls which Mr Evangelidakis asserts was constructed in accordance with the plans, Mr Peters says the drawings show the garage slab to be positioned hard up to the block wall with no gap shown. Accordingly, this is a defect.
[31] In response to the Smart Slabs solution for the third alleged defect, Mr Peters says grinding will be required and this will reduce the cover to the top steel brackets (mesh) in the slab. For this reason, some remediation to seal the ground areas will be required. The same applies to the fourth alleged defect.
[32] In his reply affidavit, Mr Peters says he stands by his initial report. He says there are defects that will require rectification. The works undertaken by Smart Slabs are defective and are significantly defective. He says once the work has commenced, and assuming there are no weather difficulties, he expects the rectification to take approximately eight weeks, including engineering rework, demolition of defective works, reinspection by Council and consultants, and remediation.
[33] Accent has also filed an affidavit of Artem Tspako, a quantity surveyor manager employed by Accent. Mr Tspako has a Bachelor in Construction (QS). He deposes he has reviewed Mr Peters’ report in which the defects were identified and particularised. On the basis of that report, he prepared a schedule particularising costs that will be incurred to complete the works. The total cost estimated by Mr Tspako, including GST, is $238,453.48.
[34] There is, however, one issue in relation to Mr Tspako’s costings. One category of work is headed “Issue #7 – Time delay due to the issues caused by Smartslabs”. Under that heading, Mr Tspako sets out amounts of what he describes as “liquidated damages”. The total of the said “liquidated damages” is $140,439.55.
[35] Mr Colthart, appearing for Smart Slabs, submits that the only way Accent has attempted to justify a counterclaim exceeding Smart Slabs’ claim is by including the claim of $140,439.55 as “liquidated damages”. Mr Colthart submits there is no basis for such a claim. There is no liquidated damages provision in any agreement between Smart Slabs and Accent.
[36] Mr Grove, appearing for Accent, submits that the term “liquidated damages” was simply the terminology used by the quantity surveyor. He says those damages are able to be claimed for breach of warranty.
[37]Accent’s terms and conditions contain the following:
10. Indemnity
The Supplier hereby indemnifies and will keep Accent On Construction indemnified against all costs, damages (whether direct or indirect), proceedings, loses (sic), liabilities or other expenses (including reasonable legal fees) incurred by Accent On Construction resulting from any failure of the goods and/or services supplied, including, but not limited to, any failure to comply with the warranties specified in clause 2 above.
[38]Clause 2, the warranties clause, contains the following:
In addition to all warranties, terms or conditions expresses or implied by law or otherwise, the Supplier warrants:
…
(f)That the goods and/or services will be supplied within any time period agreed by the parties, time being of the essence;
[39] There is a document signed by Mr Farman dated 19 September 2017 acknowledging that all purchase of goods or services from the suppliers are made in accordance with the terms of trade published on Accent’s website.
[40] There is, therefore, an argument available to Accent that it does have a counterclaim in the sum of $238,453.48 based on the contractual term for a breach of warranty. The defects have caused delays and a combination of cls 10 and 2(f) provide the basis for that part of the quantum of Accent’s claim.
[41] In this interlocutory application, it is not for the Court to resolve the differences regarding defects between the evidence of Mr Peters and Mr Evangelidakis.
[42] I find that the evidence of Mr Peters, together with the evidence of Mr Tspako, shows that Accent has a real basis for its claimed set-off.
Was the statutory demand correctly served?
[43]Mr Grove also submits that the statutory demand was not correctly served.
[44] As noted above, the statutory demand was served on 6 December 2017. It was not served at Accent’s registered address, nor in any of the other ways provided for in s 387(1) of the Act (which provides for service of documents in legal proceedings). The statutory demand was sent by email addressed to [email protected]. That is an email address in the Companies Office records under the heading “additional company information”. That email address is also shown on Accent’s website.
[45] Mr Colthart submits that s 388 of the Act governs the service of documents other than documents in legal proceedings on companies. Section 388(1)(d) provides for service by “emailing [the document] to the company at an email address that is used by the company”. Relying on Arzan Investments Ltd v Beresford Apartments Ltd,8 Mr Colthart submits that a statutory demand is not a document in legal proceedings and may therefore be served in accordance with s 388.
[46] However, there are decisions to the contrary. In Delta Installations Ltd v Hamilton Joinery Ltd,9 it was held that the purpose of a statutory demand is to provide
8 Arzan Investments Ltd v Beresford Apartments Ltd (2003) 16 PRNZ 825 (HC) at [21].
9 Delta Installations Ltd v Hamilton Joinery Ltd (2003) 16 PRNZ 814 (HC) at [21]. Harrison J upheld the decision on review in Delta Installations Ltd v Hamilton Joinery Ltd (2003) 16 PRNZ 820 (HC).
proof of a company’s inabilities to pay its debts. That is central to an application for the appointment of a liquidator. The demand is a document intended for use in legal proceedings and it must be served in accordance with s 387. Service by fax was not permissible.
[47] Applying Delta Installations, the statutory demand in this case would not be validly served.
[48] In this interlocutory hearing, I do not reach a decision as to which of the two earlier decisions is to be preferred.
[49] But the fact that there is High Court authority supporting Accent’s position on this issue provides a supporting reason for the order sought.
[50] In any event, I consider there has been a degree of unfairness on the part of Smart Slabs. It has sought to place undue pressure on Accent. In an email of 21 December 2017, Mr Fistonich emailed Mr Farman stating that he was chasing some other funds now and “will confirm a payment to you tomorrow”. This is consistent with what Mr Fistonich said in his email of 10 January 2018 to Mr Farman:
A payment was scheduled to be made before Xmas, until Smart Slabs attended on site on 22 December and destroyed construction works. These actions have caused us significant loss for which we are currently quantifying, in order to provide a counter-claim. In addition to this I have been advised that you are aware of the defective works in dispute.
[51] Despite this knowledge, Smart Slabs nevertheless pressed ahead and filed its statement of claim on 19 January 2018.
Solvency
[52] Smart Slabs submits that Accent has not provided any reliable independent evidence to support the allegation that it is solvent. It also refers to the email from Mr Fistonich of 21 December 2017, part of which I have referred to above. The full email says:
We were expecting and had cashflowed for a settlement of a property in a large development we did. Please see attached [not attached in the evidence]. As
you will note they have failed to settle and we now won’t get the settlement until mid-January and this has left a significant hole in our cashflow.
Apologies but I only found out this morning and had it confirmed this afternoon.
Rest assured I am chasing some other funds now and will confirm a payment to you tomorrow.
[53] In his affidavit, Mr Fistonich deposes that Accent is not insolvent. It is a successful developer and has a number of projects underway. Mr Fistonich also states that Accent’s internal accountant has produced financial records for the company.
[54] Mr Grove submits that the reason that those accounts have not been produced in evidence is because they contain information that is commercially highly sensitive. It is a main contractor with Housing New Zealand and needs to ensure that details of its pricing mechanisms are not published.
[55] In my view, the evidence adduced by Accent, effectively coming down to a bare assertion by Mr Fistonich, is not sufficient to satisfy the Court as to the company’s solvency. However, as noted above,10 there is no rule of practice that requires an applicant for an order under r 31.11 to establish insolvency.
Result
[56] Accent has established it has a basis for a counterclaim/set-off exceeding the amount claimed by Smart Slabs in its statement of claim and there has been a degree of unfairness on the part of Smart Slabs. There is also High Court authority to support Accent’s position that the statutory demand was not properly served.
Order
[57] I make an order restraining the publication of any advertisement required by r 31.9 of the High Court Rules or any other information relating to the statement of claim dated 19 January 2018 filed by Smart Slabs in this proceeding.
10 Maru Industries Ltd v Don Forbes Construction Ltd, above n 7.
Costs
[58] Costs are reserved. My preliminary view is that costs on a 2B basis would be appropriate. I encourage the parties to agree costs and file a joint memorandum.
[59] If agreement cannot be reached, Accent is to file and serve a memorandum by 6 April 2018. Smart Slabs is to respond by 16 April 2018. Memoranda should not exceed five pages.
Gordon J
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