Soil Research Limited v Outdoors & Beyond Limited
[2017] NZHC 145
•14 February 2017
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2016-404-2481 [2017] NZHC 145
BETWEEN SOIL RESEARCH LIMITED
Applicant
AND
OUTDOORS & BEYOND LIMITED Respondent
Hearing: 8 February 2017 Appearances:
L Johnson for the Applicant
N Tabb for the RespondentJudgment:
14 February 2017
JUDGMENT OF ASSOCIATE JUDGE R M BELL
This judgment was delivered by me on 14 February 2017 at 11:00am
pursuant to Rule 11.5 of the High Court Rules
…………………………………………………….
Registrar/Deputy Registrar
Solicitors:
Rice Craig (N W Woods/L Johnson), Papakura, for the Applicant
Natalie Tabb, North Harbour, Auckland, for the Respondent
SOIL RESEARCH LIMITED v OUTDOORS & BEYOND LIMITED [2017] NZHC 145 [14 February 2017]
[1] Soil Research Ltd applies under s 290 of the Companies Act 1993 to set aside a statutory demand by Outdoors & Beyond requiring payment of $65,317.39. The debt is said to be for managerial services provided by Outdoors & Beyond Ltd between May and August 2016. Soil Research Ltd disputes its liability to pay. On the other hand, Outdoors & Beyond Ltd says that Soil Research Ltd has been cash- flow insolvent throughout, has had difficulty paying other creditors, stalled in paying Outdoors & Beyond Ltd through lack of funds, and never complained about the quality of the services provided until Outdoors & Beyond Ltd served its statutory demand in September 2016.
[2] Soil Research Ltd operates in the Auckland/Waikato/Bay of Plenty areas as a supplier of soil nutrient products. It has developed a product which may be a useful substitute for nitrogen-based fertiliser. Its director is Mr Philip Walesby. Until the start of 2016 he was based in Auckland but soon afterwards he moved to Russell and apparently spends considerable periods overseas. According to counsel, the company was in a start-up phase in 2015 with relatively modest sales. Mr Walesby was keen to spend time on product development and sourcing. He sought a manager to run the company on a day-to-day basis. That led to the contract with Outdoors & Beyond Ltd, a company under the control of Mr William Solomon, who says that he has had over 20 years in senior management positions.
[3] On 4 December 2015 Outdoors & Beyond Ltd and Soil Research Ltd signed a letter under which Outdoors & Beyond Ltd was appointed to provide managerial services to Soil Research Ltd. The letter stated that a formal agreement would be drawn up and signed before 1 January 2016. Under the agreement, Outdoors & Beyond Ltd would provide Mr Solomon’s services. He was required to give up all other positions to concentrate on his role with Soil Research Ltd. The letter recorded fees to be paid each month plus further sums to cover expenses. There was also a commission on monthly earnings before interest, tax and shareholders’ dividends.
[4] The parties followed with a contractor agreement dated 15 December 2015. The recitals provide a form of job description:
The Contractor’s role will include, but is not limited to, the following
responsibilities:
(a) Manage the business within the policies, values and governance of the board;
(b) Develop and implement the company’s expansion progamme through strategic planning, staff recruitment and training, cash-flow management, sales and marketing, supply chain management and administrative systems;
(c) Develop a culture within the business that reflects the core values of the board;
(d) Represent the company in the market in a professional and businesslike manner without bringing the reputation of the company into disrepute.
[5] Another recital recorded the company’s operations in Auckland, Waikato and the Bay of Plenty, and its wish to expand its business throughout New Zealand. The agreement provided for payment of a management fee and expenses, which follow the terms in the letter of 4 December 2015. There is an express provision that the agreement is not an employment contract. The agreement also includes these terms:
2. The company wishes to appoint the Contractor as its Chief Operating Officer to manage its growth in New Zealand. However, from time to time, the Contractor may be called upon to represent the interests of the Company in other projects.
3. The Contractor warrants to provide the services of William Owen
Solomon for the purpose of fulfilling its obligations under this agreement.
The agreement is otherwise silent as to the particular services to be provided by
Outdoors & Beyond Ltd.
[6] The contract also included these:
5. The parties may enter into a substantive Contract which shall include but not limited to the terms of this agreement.
…
10. AGREEMENT, the parties agree that the clauses contained within this agreement shall be binding.
11. NOTICE, this agreement may be terminated by either party giving six months written notice but no such notice will be given within the first
12 months of this agreement.
12. VARIATION, this agreement may be varied in writing by mutual consent and signed by both parties.
13. DISPUTE, all differences or dispute concerning any of the matters arising out of this agreement shall be referred to arbitration in accordance with the Arbitration Act 1908 or any amendments thereto.
[7] Mr Solomon says that in working as chief operating officer he:
(a) reported to Mr Walesby on at least 29 separate occasions between January and August 2016 (in addition to over 400 texts and emails giving information about the business to Mr Walesby);
(b)arranged and held 90 day sales meetings with all sales personnel, (five in all) to undertake staff training, set targets, support staff in their jobs and ensure common purposes and goals;
(c) invited Dr Jonathan Cutting as an expert to meetings to discuss his trials of the product and as a technical trainer. He invited another soil scientist to a second meeting as an expert to speak about his findings and results of his peer review;
(d) recruited new staff;
(e) arranged for an existing sales person to have an independent contract; (f) investigated the possibility of a joint venture between Soil Research
and a company associated with a Mr Berney;
(g) engaged a soil scientist to carry out a peer review of scientific results
for performance of the company’s product;
(h)attended relevant industry meetings and field days to market and promote the company and its product;
(i) built and maintained relationships with customers and suppliers; and
(j) oversaw the day to day running of the business.
[8] He says that difficulties he encountered in doing the work included: (a) Mr Walesby’s move from Auckland to Russell;
(b) his cellphone was blocked by Mr Walesby’s cellphone;
(c) Mr Walesby would not allow him access to records or information which would confirm what stock Soil Research Ltd owned and where it was held;
(d) Mr Walesby had email problems after moving to Russell; (e) Mr Walesby did not come to 90 day sales meetings.
[9] Outdoors & Beyond Ltd invoiced Soil Research Ltd for its work for the first eight months of 2016. Soil Research Ltd never paid on time. Mr Solomon always had to chase for payment, often many times. Soil Research Ltd paid for the first four months. It paid only $5,000 for May 2016. It did not pay anything for June to August 2016. Payment for September 2016 had also become due but that did not form part of the statutory demand.
[10] The total value of the unpaid invoices in the statutory demand is $64,799.89. The rest of the demand is made up of a claim for costs and disbursements.
[11] Mr Walesby criticises Mr Solomon’s performance. In his first affidavit he says that Mr Solomon withheld information from him. That included information as to a proposed joint venture, including the identity of the joint venture partners. Mr Solomon misled Soil Research Ltd as to funding required for the soil scientist’s peer review report. Mr Solomon did not report his difficulties in obtaining sales. Mr Solomon employed staff and commission sales people without his approval. Mr Solomon wrongly held himself out to be the chief executive of Soil Research Ltd. Mr Solomon did not provide the required management reports. He did not confirm orders. Mr Solomon did not implement the company’s expansion
programme. He met only one of its sales targets and did minimal strategic planning, marketing and training. Mr Solomon did not represent the company in a professional, businesslike manner. He made various untrue and defamatory remarks regarding the company.
[12] Mr Walesby also alleges breach of an unspecified oral agreement that monthly sales targets would be met and breach of a confidentiality agreement.
[13] In his reply affidavit, Mr Walesby says that Soil Research Ltd cancelled the contractor agreement on 14 October 2016 on the basis of substantial breaches. He raises, for the first time, allegations of misrepresentation by Mr Solomon as to his past experience, and maintains that there is missing stock. Those are new matters that do not belong in a reply affidavit.
[14] The general principles the courts apply in applications under s 290 are not in dispute. The purpose of a demand under s 289 of the Companies Act is to create a presumption of insolvency if the company served with the demand does not comply with it within 15 working days of service. This presumption under s 287(a) of the Companies Act can be rebutted. There are, however cases where it would be unjust to allow the presumption of insolvency to arise on non-compliance with the demand. The general purpose of s 290 is to allow statutory demands to be set aside. Section 290(4) sets out one general and two particular grounds where it would be unjust for the presumption of insolvency to arise. The discretion under s 290(4) is accordingly limited to the question whether the statutory demand ought to stand so that non-compliance with it will give rise to the insolvency presumption. That is a relatively confined discretion. On a liquidation application the court has a wide discretion. By that stage the court may have to take into account competing considerations. In this setting-aside application, I am not required to pre-determine how a liquidation application might be decided.
[15] On an application under s 290(4)(a) the onus is on the applicant to show a substantial dispute. Mere assertion of a dispute is not enough. The applicant has to show a clearly arguable basis for the dispute. The court does not resolve disputed questions of fact on affidavits and it does not decide the substantive merits of the
dispute. If there is a genuine dispute, it should more properly be decided in other proceedings.
[16] Under s 290(4)(b) a demand may be set aside if the company has a counterclaim, set-off or cross demand, and the amount in the demand is the amount of the cross claim is less than $1,000.00. To show a claim within s 290(4)(b), the company must show a real basis for it in evidence. It cannot rely on assertion alone, but must show clear and persuasive grounds.1
[17] The contractor agreement provides that any disputes must be referred to arbitration (cl 13). Article 8 of the First Schedule of the Arbitration Act 1996 provides that a court must stay a proceeding and refer the parties to arbitration if the proceedings are about a matter which is the subject of an arbitration agreement
unless the court finds amongst other things:2
… that there is not in fact any dispute between the parties with regard to the
matters agreed to be referred.
[18] In Zurich Australian Insurance Ltd v Cognition Education Ltd, the Supreme Court ruled on the application of Article 8 in the context of a summary judgment application under the High Court Rules. It said:3
If it is clear that the defendant is not acting bona fide in asserting that there is a dispute, or it is immediately demonstrable that there is nothing disputable at issue, there is not in reality any “dispute” to refer to arbitration. In these circumstances, a stay could properly be refused and summary judgment would be available. By contrast, in other situations falling within the broader test (that is, the “no arguable defence” test applied in summary judgment), there will be what can properly be described as “disputes” even though they are ultimately capable of being determined by a summary process.
[19] In the context of an application under s 290(4), relying on assertions of substantial dispute, it is appropriate to apply the narrow meaning of “dispute” set by the Supreme Court in Zurich, when there is an arbitration provision in the contract
between the parties.
1 Covington Railways Ltd v Uni Accommodation Ltd [2001] 1 NZLR 272 (CA) at 274-275.
2 Arbitration Act 1996, art 8 sch 1.
3 Zurich Australian Insurance Ltd v Cognition Education Ltd [2014] NZSC 188, [2015] 1 NZLR
383 at [36].
Section 290(4)(a)
[20] Soil Research Ltd has not satisfied me that it is bona fide in asserting a dispute. It has throughout been short of funds. In April 2016, Mr Solomon texted Mr Walesby over the difficulty in collecting bags of product stored with a logistics company in Mount Maunganui because there were outstanding accounts going back to September 2015 and the company had not received any payments since January
2016. The debt was for $5,112.76. Mr Solomon would not be able to arrange delivery to the customer until the logistics company had been paid.
[21] In an email of 19 July 2016 Mr Solomon reported an overdue account with a
South Auckland logistics company. Another text by Mr Solomon to Mr Walesby on
14 June 2016 reported that an account for $199.30 (for room hire used for meetings for the sales team) had not been paid. In other text messages, Mr Solomon recorded his concern at the company trading while insolvent. Other members of the Soil Research Ltd sales team had not been paid and were under significant financial pressures.
[22] The evidence as to Mr Solomon’s efforts to obtain payment also bears this out. Soil Research Ltd never paid on time. Mr Solomon had to chase up payment every month. This was even the case in the early months when there could be no reason for holding or delaying payment. The part-payment of $5,000 on the May invoice is consistent with the company not having further monies to pay, rather than withholding payments. There is no evidence that before the statutory demand was served Mr Walesby had any concern about Mr Solomon’s performance. Instead Mr Walesby tended to offer explanations such as difficulties with overseas banks in arranging payment.
[23] Soil Research Ltd has not given any evidence that until it was served with the statutory demand it showed any concern with Mr Solomon’s performance. In these circumstances, complaints of defective performance have a hollow ring.
[24] I find that under the contractor agreement, Outdoors & Beyond Ltd was entitled to be paid for each of its invoices, the subject of the statutory demand. Soil
Research Ltd has not queried the particular amounts claimed in the invoices. Mr Solomon was clearly providing Outdoors & Beyond Ltd’s managerial services up until the end of August 2016, if not later. Insofar as it relies on s 290(4)(a) of the Companies Act, I assume that Soil Research Ltd may have some complaints about the way that Mr Solomon did his job, but those complaints, such as they are, are not enough to give it any arguable defence to its obligation to pay the invoices in full. In particular, the debts to Outdoors & Beyond Ltd are not subject to a defence of
common law abatement under Mondel v Steel.4 That decision recognised that for
some contracts (sale of goods and building contracts are standard examples) a payer may resist a claim for payment by showing that the value of what was supplied was less than that contracted for. But that does not apply to all contracts. A claim for freight is a well-known exception, as is a claim under a bill of exchange. Another exception is a contract for the provision of professional services.5 In such cases,
there is no obligation to pay unless no benefit whatever was derived from the work.6
[25] A contract to provide managerial services is akin to a contract to provide professional services. Managing a business requires the application of skill and experience in varying and often changing circumstances. It does not allow for the measurement of performance against a contractual standard in the same way as, for example, the delivery of goods that do not comply with a contractual description or the performance of work at odds with a contractual specification. A supporting consideration is that a contract to provide managerial services is close to an employment contract. Under the Wages Protection Act 1983 employers may not
make deductions from wages due.7 The policy considerations preventing such
deductions are also applicable in the case of contracts to provide managerial services.
[26] Mondel v Steel accepted that if there had been a complete failure of performance the conditions for payment would not be satisfied. I assume also that if
4 Mondel v Steel (1841) 8 M & W 858, 151 ER 1288 (Exch).
5 In Mondel v Steel, Templer v M’lachlan (1806) 2 Bos & PNR 136 is cited as authority.
6 Modern authorities are Hutchinson v Harris (1978) 10 BLR 19 (CA) at 31-31, Multiplex
Constructions (UK) Ltd v Cleveland Bridge UK Ltd [2006] EWHC 1341 (TCC).
7 Wages Protection Act 1983, s 4.
performance had been so defective, a “congeries of defects”,8 as to amount to a total failure of performance, then there may be grounds to withhold payment. The evidence for Soil Research Ltd does not, however, suggest that it is arguable that there was a total failure of performance or that performance was so defective as to amount to non-performance. Even on the evidence for Soil Research Ltd, Outdoors
& Beyond Ltd clearly provided managerial services under the contract.
Section 290(4)(b)
[27] That deals with Soil Research Ltd’s case under s 290(4)(a). It may, however, contend that its complaints as to performance can instead be addressed by claims of equitable set-off which may be available under s 290(4)(b). That may include claims for breach of the contractor agreement and also other contracts where the test of
equitable set-off under Grant v NZMC Ltd can be satisfied.9 For that matter, under s
290(4)(b) Soil Research Ltd is not confined to showing a case for equitable set off. It may rely on any actionable claim against Outdoors and Beyond Ltd as a cross- demand or counterclaim. Any set-off, counterclaim or cross-demand under s 290(4)(b) needs to show clear and persuasive grounds for good reason – as a safeguard against the temptation for insolvent companies to allege flimsy claims against a creditor in the hope of warding off the time for payment.
[28] In submissions, Soil Research Ltd’s strongest attack on Outdoors & Beyond Ltd was for failure to obtain satisfactory sales of product. It said that there were sales targets and the failure to reach those sales targets was a breach of contract. The contractor agreement says nothing about requiring specific sales targets to be met. Instead, Soil Research Ltd alleges that there was an oral agreement that required sales targets. Apart from Mr Walesby’s assertion, there is no evidence of such an agreement. Mr Walesby does not state the time, date and circumstances in which such an agreement was made. It is implausible that the parties would make an oral agreement, when they recorded their other arrangements in writing. After all, the
contractor agreement provides that any variation of it was to be in writing and signed
8 The phrase is Lord Dunedin’s in W & S Pollock & Co v Macrae (1922) S C (HL) 192 at 200.
9 Grant v NZMC Ltd [1989] 1 NZLR 8 (CA) at 12-13.
by both parties. An agreement under which the contractor was to achieve specific sales targets is a variation of the contractor agreement.
[29] There may have been a budget with sales projections, but it was not put in evidence. Such a document by itself is not an adequate foundation for a claim that failure to reach budgeted sales is a breach of the contractor agreement. Instead the provision for commission is an incentive for the manager to achieve overall profitable performance by the company. Mr Solomon was not required to make the sales personally. He was to manage the sales team.
[30] Mr Solomon professes to be baffled as to how Mr Walesby came up with the figures for the sales targets. He notes that in a report he advised that one of the sales team was “bullish” about getting over 200 tonnes in March 2016. But the report made it clear that Mr Solomon himself did not vouch for those figures. He also makes the point that 43.7 tonnes of product were sold in the whole of 2015 whereas in the eight months to the end of August, 139.2 tonnes were sold.
[31] Soil Research Ltd submitted that a claim is available for missing stock. This allegation amounted to assertion only. There is no hard evidence to show that the company was missing any stock or that any absence of stock was attributable to any breach of contract on the part of Outdoors & Beyond Ltd.
[32] The other complaints by Soil Research Ltd are simply that – complaints – but do not by themselves show anything that could be the subject of a cross demand, counterclaim or set-off that needs to be taken seriously. Certainly Soil Research Ltd did not try to show that they caused any monetary loss. Further, while in some cases the evidence is contested, in others Mr Solomon had sound answers. Mr Solomon showed, in response to Mr Walesby’s complaints as to the joint venture, that he had advised Mr Walesby of the joint venture by giving the names of those involved, and he put in evidence responses by Mr Walesby showing that he approved. As to Mr Walesby’s complaint about needing information as to the funding required for a peer review report by the soil scientist, Mr Solomon provided a response which showed that the report came in under budget. In response, Mr Walesby attacked the quality of the report. In response to Mr Walesby’s complaint of insufficient
reporting, Mr Solomon showed that he was in frequent contact with Mr Walesby and that Mr Walesby did not take the opportunity to attend arranged meetings with the sales team. There is only assertion, but no admissible evidence, as to any statements that Mr Solomon made to third parties.
[33] Mr Walesby alleged breach of a written and signed confidentiality agreement. The alleged breach was that Mr Solomon copied to third parties a letter he had sent complaining about non-payment. Soil Research Ltd’s insolvency is not a trade secret and was not the subject of the confidentiality agreement. Overall, Soil Research Ltd has not shown clear and persuasive grounds for any set-off, counterclaim or cross demand under s 290(4)(b).
A defect in the statutory demand
[34] The unpaid amount of the invoices in the statutory demand is $64,799.89. The demand is for $65,317.39. The extra $517.50 is for costs and disbursements. That part is impermissible. A statutory demand can be issued only for a debt that is already due and owing. A statutory demand cannot create a debt. There is no provision in the contractor agreement under which Outdoors & Beyond Ltd can require payment of its debt collecting costs. If there is a liquidation application, any order for costs made may include the costs of the statutory demand, but that comes later. I have noted that debt collecting agencies frequently include claims for costs in statutory demands when there is no legal basis for doing so. That should be discouraged and will be reflected in reduced costs.
Result
[35] Overall I am satisfied that there is not a genuine dispute as to the indebtedness of Soil Research Ltd under the invoices. Soil Research Ltd’s allegations of a dispute and counterclaim do not ring true when there is clear evidence of insolvency and the company continued to use the services of Outdoors & Beyond Ltd for an extended period without making any complaints as to performance while not paying it. The belated complaints are no more than a stalling
device. Relevantly, there is no evidence that Soil Research Ltd is solvent and is in a position to pay the debt.
[36] I make these orders:
(a) I dismiss the application to set aside the statutory demand, except to the extent of $517.50.
(b)By 3 March 2017, Soil Research Ltd is to pay Outdoors & Beyond Ltd $64,799.89. If it does not, Outdoors & Beyond Ltd may apply for a liquidation order.
(c) The time for complying with the statutory demand extended by
Associate Judge Sargisson will expire on 3 March 2017.
(d)Soil Research Ltd will pay Outdoors & Beyond Ltd costs on a category 2 basis but with a deduction of $517.50. If counsel cannot agree costs, memoranda may be filed and I shall decide costs on the papers.
………………………................
Associate Judge R M Bell
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