Tailored Buildings Solutions Limited v Evans

[2020] NZHC 2208

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2019-404-002532

[2020] NZHC 2208

UNDER

The Insolvency Act 2006

IN THE MATTER

of the bankruptcy of O L Evans

BETWEEN

TAILORED BUILDING SOLUTIONS LIMITED

Judgment Creditor

AND

OLIVER LLEWELLYN EVANS

Judgment Debtor

CIV-2019-404-002530

BETWEEN

TAILORED BUILDING SOLUTIONS LIMITED
Judgment Creditor

AND

JADE EVANS

Judgment Debtor

Hearing:	17 August 2020
Appearances:	M R Taylor and E E Hill for the Judgment Creditor A C Eager for the Judgment Debtors
Judgment:	28 August 2020

JUDGMENT OF ASSOCIATE JUDGE GARDINER

This judgment was delivered by me on 28 August 2020 at 11.30 a.m. pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar Date.......................................

TAILORED BUILDING SOLUTIONS LTD v EVANS [2020] NZHC 2208 [28 August 2020]

Introduction

[1]                  Tailored Building Solutions Ltd (TBS) has applied for orders adjudicating Oliver Llewellyn Evans and Jade Evans bankrupt on the grounds that they have failed to pay the amount specified in a bankruptcy notice served upon them or enter into any arrangement and have therefore committed an available act of bankruptcy.

[2]                  Mr Evans opposes the making of an order of adjudication on the grounds that he is able to pay his debts and/or it is just and equitable that the Court does not make an order of adjudication. Ms Evans opposes on the basis that her husband (from whom she is now separated) is able to pay his debts, including the judgment debt. The judgment debt was incurred jointly by Mr and Mrs Evans. She can pay her own debts (apart from the judgment debt) and it is just and equitable that the Court does not make an order for adjudication.

[3]The issues are:

(a)Are Mr and Mrs Evans able to pay their debts?

(b)Is it just and equitable that the Court does not make an order of adjudication?

[4]                  In answering those questions, the Court must consider the relationship between the Construction Contracts Act 2002 (the CCA) and the Insolvency Act 2006.

Factual background

[5]                  In 2018 the judgment debtors, Mr and Mrs Evans, entered into a construction contract with TBS to complete the construction of their home at 80 Matthias Place, Whitford (the Property).

[6]                  TBS was engaged to continue and complete the building project after Mr and Mrs Evans terminated their contract with their former builder.

[7]                  Their building work continued through until 23 December 2018, when a dispute arose.

[8]                  Mr  and  Mrs  Evans  purported   to   terminate   the   contract   on   around  21 February 2019. It was TBS’s position that the purported termination was unlawful and amounted to repudiation. TBS terminated the contract on 25 February 2019.

[9]                  TBS had outstanding invoices which Mr and Mrs Evans refused to pay. They raised several issues with the invoices, which they said established a set-off of the amounts sought by TBS.

[10]              TBS referred the matter to adjudication under the CCA. The parties filed submissions and evidence in relation to the claim by TBS, and the defences and alleged set-offs raised by Mr and Mrs Evans.

[11]              On 13 September 2019, the adjudicator issued a determination in favour of TBS (the adjudicator’s determination). The determination required Mr and Mrs Evans to pay to TBS the determined sum of $314,259.03 (plus interest from 11 July 2019 and any additional amount TBS paid to uplift the determination) within two working days.

[12]              Mr and Mrs Evans did not pay the adjudication award. TBS applied to the District Court  for entry of the  determination as  a judgment  pursuant  to s 73 of   the CCA. This was not opposed by Mr or Mrs Evans. An order was made by the District Court on 8 November 2019. The judgment debt was $336,776.03 plus costs and disbursements of $1,441.50.

[13]              Following entry as a judgment, on 22 November 2019, TBS obtained and served on Mr and Mrs Evans bankruptcy notices. Mr and Mrs Evans filed an application to set aside the bankruptcy notices, but later withdrew this application as it was filed and served out of time. Mr and Mrs Evans did not comply with the bankruptcy notices served on them.

[14]              On 10 March 2020, Mr and Mrs Evans were each served with the judgment creditor’s applications for adjudication orders, summons and supporting affidavit of Paul Buddle, director of TBS.

[15]              On 3 June 2020, Mr and Mrs Evans filed notices of opposition and supporting affidavits.

[16]              In the meantime, on 31 January 2020, Mr and Mrs Evans filed proceedings in this Court (CIV-2020-404-151). They dispute the adjudicator’s determination and consider they have a counterclaim of $479,193.82 arising out of:

(a)defective works requiring rectification;

(b)overcharging for labour; and

(c)issues arising from materials purchased.

[17]              Pursuant to timetable orders, Mr and Mrs Evans were required to file supplementary  evidence  by  12  June  2020,  with  TBS’s  evidence  in  reply  by  26 June 2020. While TBS filed its reply evidence pursuant to the timetable, Mr and Mrs Evans did not file their supplementary evidence until 6 August 2020, with their submissions.

[18]              At the hearing, I heard submissions from Mr Taylor, for TBS, and Ms Eager, for the judgment debtors, on this timetable breach.  While it was unfortunate  that  Mr Evans’ supplementary affidavit was not filed and served until after TBS had filed its reply evidence, Mr Evans’ later evidence is a refinement of his earlier statement of assets and liabilities. Any prejudice to TBS is outweighed by the value of the Court having this current evidence. I therefore grant leave for the late filing of the supplementary affidavit of Mr Evans dated 6 August 2020.

Legal framework

[19]There are two relevant Acts:

(a)The Insolvency Act 2006; and

(b)The Construction Contracts Act 2002.

Insolvency Act

[20]              The criteria for when a creditor may apply for the debtors’ adjudication are set out in s 13 of the Insolvency Act:

13       When creditor may apply for debtor’s adjudication

A creditor may apply for a debtor to be adjudicated bankrupt if—

(a)the debtor owes the creditor $1,000 or more or, if 2 or more creditors join in the application, the debtor owes a total of $1,000 or more to those creditors between them; and

(b)the debtor has committed an act of bankruptcy within the period of  3 months before the filing of the application; and

(c)the debt is a certain amount; and

(d)the debt is payable either immediately or at a date in the future that is certain.

[21]              Under s 17, a debtor commits an act of bankruptcy (as required under s 13(b)) if a creditor has obtained a final judgment/order against the debtor for any amount, the execution of which has not been halted by a court, and the debtor, having been served with a bankruptcy notice, has not complied with the requirements of the notice or otherwise satisfied the Court that he or she has a cross-claim against the creditor.

[22]              Once the s 13 requirements are made out, the judgment creditor is prima facie entitled to an adjudication order.1 However, the Court may, in its discretion, refuse adjudication for the reasons set out in s 37 of the Insolvency Act. Section 37 provides:

37       Court may refuse adjudication

The court may, at its discretion, refuse to adjudicate the debtor bankrupt if—

(a)the applicant creditor has not established the requirements set out in section 13; or

(b)the debtor is able to pay his or her debts; or

(c)it is just and equitable that the court does not make an order of adjudication; or

(d)for any other reason an order of adjudication should not be made.

1      See Baker v Westpac Banking Corp CA212/92, 13 July 1993 at 5 and 8; and Re Epirosa HC Wellington B498/91, 6 March 1992 as cited in Insolvency Law & Practice (online looseleaf ed, Thomson Reuters) at [IN37.01].

[23]              The Court of Appeal has observed that s 37 confers a “wide discretion”, informed by various factors.2 In Body Corporate 68792 v Memelink, the Court of Appeal found that these factors include:

(a)Whether the debtor is able to pay his or her debts over time, bearing in mind that bringing finality within a reasonable period of time is the essence of bankruptcy proceedings;

(b)The circumstances in which the debt was incurred, and whether the creditor has acted unreasonably in petitioning bankruptcy as opposed to taking some other cause of action;

(c)Whether adjudication is conducive or detrimental to commercial morality and the interests of the general public; and

(d)Whether adjudication would be pointless in the sense that creditors are unlikely to receive payment.

[24]                In the decision under appeal in Memelink, Associate Judge Smith found that, as a matter of fact, Mr Memelink was a debtor unwilling to pay his debts rather than one who was unable to do so.3 The Court of Appeal noted that the scheme of the insolvency legislation is to provide an appropriate means of dealing with insolvency, and not debt collection.4 The Court explained that it is well-established that proof of ability to pay debts  does  not  include  proof  of  willingness  to  pay  debts,  citing Re Stirling, ex parte Webb Ross & Co where Smellie J considered the precursor to s 37 and concluded:5

The provisions of s 26(2) [the precursor to s 37] show a clear intention of the part of the legislature that bankruptcy is not to be visited on a person able to pay his debts. If the debtor chooses not to pay, the creditor can seek execution. The Insolvency Act indeed may be seen as an enactment which strengthens the dichotomy between insolvent debtors and solvent debtors — creditors of the latter have their remedies in execution, remedies which are not to be used against insolvent debtors.

2      Body Corporate 68792 v Memelink [2018] NZCA 509, [2019] NZAR 127 at [15].

3      Body Corporate 68792 v Memelink [2017] NZHC 905.

4      Body Corporate 68792 v Memelink (CA), above n 2, at [18].

5      Re Stirling, ex parte Webb Ross & Co [1990] 1 NZLR 569 (HC) at 575 as cited in Body Corporate 68792 v Memelink (CA), above n 2, at [18].

[25]              The Court of Appeal agreed with the Associate Judge’s conclusion that when the evidence was considered as a whole it revealed Mr Memelink as someone who was unwilling, rather than unable to meet his debts. This was in the context of an individual who the Associate Judge described as “a habitual debtor, who disputes numerous apparently valid claims against him and (in a number of cases) has paid at the last minute, when there was no other option open to him”.6

[26]              The Court also regarded it as significant that Mr Memelink had a legitimate and ongoing dispute as to quantum and liability.

[27]              The discussion of the s 37 discretion by Asher J in Lawson v Perkins is highly relevant:7

[18]      The wording of s 37 and the scheme of the Act confirm that its focus is on insolvent persons and not on general debt collection. The elaborate provisions in parts 3 and 4 of the Act relating to dealing with a bankrupt and a bankrupt's property can have no relevance to a solvent debtor. They are designed to facilitate a proper recovery for creditors from an insolvent estate, to ensure that the insolvent's affairs are properly wound up and future business dealings controlled, and to provide for an orderly discharge. This has nothing to do with debt collection. There are execution processes specifically designed for this purpose. Nor are the processes designed to punish debtors. Rather, the bankruptcy procedure is designed to provide for the orderly administration of the affairs of an insolvent person.

[19]      The modern approach to bankruptcy is helpfully summarised for New Zealand purposes in Heath and Whale on Insolvency (looseleaf ed) at para 2.2:

Judicial comment through the latter part of the twentieth century has made it clear that bankruptcy is not to be seen as a punitive process, but primarily to do the best for creditors that can be done out of bankrupts’ property, and otherwise to give bankrupts an opportunity, after a period of time, to continue their lives free of the debts that caused the bankruptcy. Nevertheless, the Courts have also indicated that there is an element of public interest in scrutinising the affairs of people who have incurred debts that they cannot pay in full. This judicial comment reflects the provisions in bankruptcy legislation providing for a degree of public scrutiny and scrutiny by creditors of the process of bankruptcy and of the debtor …

[20]      There is no doubt about the basic principle. Where the debtor is able to pay his or her debts and appears able to obtain payment by execution against the assets of the debtor, an order for adjudication is unlikely: Re Stirling, ex parte Webb Ross & Co [1990] 1 NZLR 569 (HC); Re Hall, ex parte City Construction Ltd [1990] 1 NZLR 577 (HC); Attorney-General v Payne HC

6      Body Corporate 68792 v Memelink [2016] NZHC 1906 at [52].

7      Lawson v Perkins [2009] NZFLR 330 (HC).

Wellington CIV-2004-485-1723, 25 May 2005 at [14]; and Re Siemer, ex parte Mentha HC Auckland CIV-2007-404-7665, 6 November 2008 at [38]–[39].

[21]      The reference in s 37 to a debtor being able to pay his or her debts is only one of four reasons for refusal set out in s 37. It therefore does not automatically follow that because a debtor is able to pay his or her debts that adjudication should be refused. Rather, the presence of the overall discretion indicates that there may be circumstances where a debtor who is able to pay his or her debts should nevertheless be adjudicated bankrupt.

[22]      In Holdgate v Blocassa Ltd [2007] NZCA 132 … [t]he Court of Appeal held at [19] that the debtor must be able to pay his or her debts if they are incurred:

… either immediately or within a reasonable time. If unable to do this, the debtor may be declared bankrupt even though he or she has more assets by value than liabilities.

[23]      Thus the ability of the debtor to pay either immediately or within a reasonable period of time was the critical factor. In that case it was held, largely because of the debtor's failure to provide adequate details as to the claimed assets, that it could not be shown that the Associate Judge was plainly wrong in ordering adjudication.

[24]      The Court will always be careful to ensure that there is sufficient supporting material to substantiate the assertions made by a debtor: Re Siemer at [38]. In this case Mr Lawson’s solvency is confirmed by the Family Court and High Court judgments, which both detail his comfortable asset position. It is confirmed by Mr Lawson’s affidavits and his payment of moneys into Court.

[25]      Against Mr Lawson’s solvency I must weigh Mr Gould’s submission that Mr Lawson “deserves” to be made bankrupt. The submission can be justified in a moral sense in that Mr Lawson has put forward no credible defence, appears to have endeavoured to avoid service, and has generally sought to defeat Ms Perkins’ legitimate claim. Ms Perkins as creditor is in a weaker financial position than he is. His refusal to pay is unjustified and totally without merit.

[26]      There may indeed be circumstances in which an order could conceivably be made against a solvent debtor. If a solvent debtor had deliberately sought to make execution impossible or extremely difficult the Court might consider exercising its discretion in favour of adjudication. If the debtor had a large number of creditors and there was a public interest in the administration of the debtor’s assets, the Court might also order adjudication. And there is the circumstance referred to in Holdgate of the debtor not establishing that that there are assets from which the debt could be paid within a reasonable time.

[27]      None of these apply here. To adjudicate Mr Lawson bankrupt simply because his refusal to pay is unmeritorious would be a misuse of the bankruptcy process. There are execution procedures available to Ms Perkins which if pursued should eventually produce the money she is owed. While execution may be less convenient and more expensive than an application for adjudication, there appears to be no reason why such remedies could not be

successfully pursued in this case. The registration of a charging order against the home that Mr Lawson jointly owns is likely to lead ultimately to a sale by the Registrar. This could take some time and Mr Lawson might raise procedural impediments, but there is nothing to indicate that execution will fail.   Charging orders might also be executed against chattels owned by    Mr Lawson and indeed against the money which he has paid into Court, although I have not yet had full submissions on this point.

[28]      In Holdgate v Blocassa Ltd, the Court of Appeal dismissed an appeal against Associate Judge Doogue’s dismissal of Mr Holdgate’s application for annulment of the order adjudicating him bankrupt.8 In that case, there was no independent evidence to support the appellant’s claim that he had assets amounting to $1.6 million. The appellant had not provided sufficient supporting information to substantiate that assertion. The only assets in respect of which there was independent verification were two properties. In considering whether those two assets provided a basis for annulment of the adjudication, the Court observed that it is not enough that the debtor has assets; they must be able to be used immediately or within a reasonable time to pay the debt.9

[29]The Court continued:

[19] Section 26 of the Insolvency Act provides that a Court may dismiss a bankruptcy petition if it is satisfied that the debtor is able to pay his or her debts. This means that the debtor must be able to pay his or her debts as they are incurred, either immediately or within a reasonable time. If unable to do this, the debtor may be declared bankrupt even though he or she has more assets by value than liabilities. Put another way, a debtor will not necessarily avoid bankruptcy by showing a positive balance sheet. It is the capacity to pay either immediately or within a reasonable time that is critical. …

[30]      In that case, the appellant needed to complete subdivisions before the two properties could be sold. It was unclear to the Court how the further work would be funded or how long it would take for the subdivisions to be completed. On that basis, the Court of Appeal held that the High Court was correct to decline Mr Holdgate’s application.

[31]In Re Hall, ex parte City Construction Ltd, Master Towle observed:10

8      Holdgate v Blocassa Ltd [2007] NZCA 132.

9 At [19].

10     Re Hall, ex parte City Construction Ltd [1990] 1 NZLR 577 (HC) at 579.

It is important to draw attention to the difference between the concepts in bankruptcy and those created by statute under the Companies Act 1955 where non-compliance with the demand made by a s 218 notice within the specified time means that the company is deemed to be insolvent and if the debt is undisputed, liable to become the subject of a winding-up order. In the case of non-compliance with a bankruptcy notice the default entitles a creditor to file his petition but the Court must consider this in the light of the debtor’s true position without any presumptions of statutory insolvency, leaving it open to the Court to exercise its discretion under s 26(2) to dismiss the petition if it is satisfied the debtor is indeed able to pay his debts. There also remains the application of the further part of the exercise of the discretion in considering whether it is just and equitable to make bankrupt a debtor who has not paid as distinct from a person who cannot pay at all.

[32]      In that case, Master Towle concluded that there was clear and undisputed evidence that the debtor was able to pay his debts, and therefore he exercised his discretion in his favour and dismissed the petition.

Construction Contracts Act 2002

[33]The purpose of the CCA is set out in s 3:

(a)to facilitate regular and timely payments between the parties to a construction contract; and

(b)to provide for the speedy resolution of disputes arising under a construction contract; and

(c)to provide remedies for the recovery of payments under a construction contract.

[34]      The CCA has been described as a “pay now, argue later” regime. As the Court in Gill Construction Co Ltd v Butler described it:11

[9] A determination under the CCA therefore provides a mechanism by which payment of disputed amounts can be promptly required and enforced, even though the payer is able to separately contest that the payment was owing under the contract between the payer and the payee. If the payer’s position is upheld in separate proceedings then the payee will be required to pay back the money that he or she received from the payee as a result of the CCA process. For this reason the CCA has been described as a “pay now, argue later” regime and as giving rise to a “temporary” debt (for example, Laywood v Holmes Construction Wellington Ltd [2009] NZCA 35, [2009] 2 NZLR 243 at [52]). Nevertheless, because it is a debt that may be enforced, it has been held that a statutory demand can be issued in respect of it: Volcanic Investments Ltd v Dempsey & Wood Civil Contractors Ltd (2005) 18 PRNZ 97 (HC).

11     Gill Construction Co Ltd v Butler [2010] 2 NZLR 229 (HC).

[35]      Section 59 of the CCA provides that if a party to an adjudication fails to pay the amount determined by the adjudicator, the party to whom the amount is payable may, inter alia, apply for the adjudicator’s determination to be enforced by entry as a judgment in accordance with pt 4, subpt 2 of the CCA. This is what TBS did.

[36]      In the spirit of “pay now, argue later”, s 79 of the CCA places restrictions on counterclaims and set-off, providing:

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.

[37]      Section 26 provides that a CCA adjudication outcome does not prevent a party from submitting their dispute to another forum for determination. Section 27 further provides that a party may file separate proceedings in court in relation to the dispute, and those proceedings are unaffected by the adjudication determination.

Does the CCA prevail over the Insolvency Act?

[38]      Mr and Mrs Evans ask the Court to exercise its discretion to not adjudicate them bankrupt and they say that their dispute and counterclaim with TBS is a relevant consideration. That raises the question: does s 79 of the CCA prevent the Court from considering that dispute and counterclaim when exercising its discretion? The relationship between s 79 of the CCA and the provisions of the Insolvency Act regarding bankruptcy adjudication has not yet been determined by the New Zealand courts.

[39]      It has been held that the Court is unable to consider counterclaims, set-offs or cross-demands in an application to set aside a statutory demand under the Companies Act 1993 or a notice of bankruptcy under the Insolvency Act based on a debt arising

from a CCA adjudication.12 In Laywood v Holmes Construction Wellington Ltd, the Court of Appeal examined whether the debtor could raise its counterclaim in order to have a bankruptcy notice set aside under s 19(1)(d) of the Insolvency Act 1967. The Court considered the decision of Randerson J in Volcanic Investments Ltd v Dempsey & Wood Civil Contractors.13 In that case, Dempsey & Wood had obtained a determination from an adjudicator under the CCA that Volcanic was liable to pay it a specified amount under a construction contract by a specified date. Volcanic did not pay the amount by the due date, and Dempsey & Wood issued a statutory demand for payment under s 289 of the Companies Act. Volcanic responded by applying for an order under s 290 of the Companies Act setting aside the demand. The principal ground was that Volcanic claimed a set-off for losses said to have resulted from delay by Dempsey & Wood in carrying out the work, losses which Volcanic was seeking to recover in District Court proceedings.

[40]      Randerson J considered the relationship between ss 73 and 79 of the CCA and the Companies Act 1993. His Honour held that the words “proceedings for the recovery of a debt” in s 79 include the issue of a statutory demand and the institution of winding-up proceedings.14 The language of s 79 was plain — a Court was prohibited from giving effect to any counterclaim, set-off or cross-demand, except on limited circumstances.15 Section 79 of the CCA prevailed over s 290(4)(b) of the Companies Act:16

[30]      I have no doubt that Parliament intended s 79 [of the] Construction Contracts Act to prevail [over the s 290 of the Companies Act 1993] …

[31]      First, s 290(4) is a provision relating to the recovery of debts generally. In contrast, the Construction Contracts Act is special legislation dealing with the recovery of specific types of debt under a specific type of contract, namely construction contracts as defined in the Act. As such, the usual rule applies and the later specific legislation should prevail over the earlier general enactment. If it were otherwise, s 79 would be of no effect in this context.

[32]      Secondly, there is a clear statutory intention that payments due under construction contracts should be paid and disputes resolved quickly. It is intended that the recovery of debts found to be due following an adjudication

12     Laywood v Holmes Construction Wellington Ltd [2009] NZCA 35, [2009] 2 NZLR 243.

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

14 At [20].

15 At [21].

16     Volcanic Investments Ltd v Dempsey & Wood Civil Contractors Ltd, above n 13.

… should be promptly recoverable with very limited opportunity for further dispute …

[33]      Thirdly, Volcanic [the debtor] is not prevented from pursuing the set- off in the District Court proceedings it has launched. Section 79 simply requires that the set-off may not be given effect in recovery proceedings for the amount due to Dempsey & Woo [the creditor]. Effectively, that debt is to be paid with the set-off pursued separately in the District Court.

[41]      That approach was adopted by this Court in several cases predating the Court of Appeal’s consideration of the issue in Laywood v Holmes. In Laywood, the debtor argued that the Volcanic decision was wrong, on the basis that the steps contemplated in the Companies Act are not “proceedings for the recovery of a debt” within the meaning of s 79. As a consequence, it was argued, s 79 of the CCA does not override s 290(4) of the Companies Act, and a company against whom a demand has been made on the basis of an unsatisfied judgment resulting from the s 73 process may have it set aside if it has satisfied the Court that it has a counterclaim, set-off or cross-demand. Associate Judge Doogue took this view in Silverpoint International Ltd v Wedding Earthmovers Ltd.17 The Associate Judge said that the statutory demand procedure was not a proceeding for the recovery of the debt.18 He further observed that the primary object of liquidation proceedings was “the collection and distribution of the assets among unsecured creditors after payment of preferential debts”.19 Accordingly, the Associate Judge concluded that:20

… while liquidation proceedings are de facto used to exert pressure on [a] company to pay their debts, the end view and the objective of, such a proceeding is not a “proceeding for the recovery of a debt”. Therefore [a] preliminary step leading up to those proceedings, the issue of a statutory demand, cannot itself be a “proceeding” within the meaning of s 79.

[42]After considering these competing cases, the Court of Appeal concluded:21

[61]      We emphasise at this point the distinction between an application to set aside a bankruptcy notice or a statutory demand on the one hand and an adjudication of bankruptcy or order to wind up a company on the other. The question we are asked to resolve concerns the former. In that context, we prefer the view expressed by Randerson J in Volcanic Investments. We find some assistance in the exceptions provided for in s 79. Under that section, a

17     Silverpoint International Ltd v Wedding  Earthmovers  Ltd  HC Auckland  CIV-2007-404-104, 30 May 2007.

18 At [77].

19 At [79].

20 At [83].

21     Laywood v Holmes Construction Wellington Ltd, above n 12.

set-off may be taken into account in debt recovery proceedings (including the s 73 process) if it relates to a liquidated amount and either judgment has been entered for that amount or there is no dispute between the parties in relation to the claim for that amount. Absent that, a determination can be entered as a judgment under s 73 and enforcement proceedings taken through the District Court, and any counterclaim, set-off or cross-claim must be pursued through separate proceedings.

[62]      If that is the position in relation to the enforcement processes available through the District Court, or where there is a charging order under the CCA, there seems in principle to be no reason why it should not apply in respect of a bankruptcy notice under s 19(1)(d) of the Insolvency Act or a statutory demand under the Companies Act. It is true that such processes have an additional dimension to them, in the sense that ultimately they lead to a process which focuses on liquidity and asset worth. It is also true, as Associate Judge Doogue said, that bankruptcy and liquidation proceedings have a broader objective than simply ensuring that a particular creditor is paid. Despite that, bankruptcy notices and statutory demands are, in a practical sense, important enforcement mechanisms, as Randerson J recognised. And in the present case, the debt which Holmes Construction seeks to recover has the force of a court judgment behind it. This is not a case where a creditor has sought to use bankruptcy or liquidation proceedings to recover a small amount from a person or company which can plainly afford to pay it.

[63]      If the contrary view were to be adopted, the efficacy of the s 73 process would, in our view, be undermined. Parties to construction contracts could refuse to pay an amount ordered by an adjudicator, and resist bankruptcy notices or statutory demands in relation to the debt, on the basis that they had a counterclaim, set-off or cross-demand. The effect of this would simply be to recreate similar problems to those which led to the enactment of the CCA, albeit in a different context.

[64]      We acknowledge that this approach may produce hardship. A party may have a meritorious counterclaim, set-off or cross-demand and may not raise it in the context of the CCA or by means of separate proceedings. Yet that party may be precluded from raising it in an application to set aside a bankruptcy notice or a statutory demand that follows an unsatisfied judgment issued under s 74. This seems hard. But while the adoption of the alternative view would alleviate this hardship, it would, as we have said, create another hardship — it would keep the party in whose favour the adjudicator had ruled from its entitlement under the CCA, and thereby frustrate its purpose.

[65] We emphasise again that we were asked to consider only the first of the two stages referred to at [61] above. It may be that different considerations arise at the point that the court must determine whether it will exercise its discretion to adjudicate a judgment debtor bankrupt or order the liquidation of a company: see AMC Construction Ltd v Frews Construction Ltd [2008] NZCA 389 at [7]. But that is a point on which we express no opinion.

[43]     The issue was considered by Associate Judge Bell in the context of an application for immediate liquidation under s 291(1)(b) of the Companies Act in  239 Queen St Developments Ltd v Watts & Hughes Construction Ltd:22

[23]      In my judgment arguments along the lines of “pay now/argue later” under the Construction Contracts Act are not appropriate to require an immediate order for liquidation. That is because the policies of “pay now/argue later” eventually run out. Once there is a bankruptcy or a liquidation, the principles of insolvency set-off take over. The relevant set-off provision is s 310 of the Companies Act 1993. It can be a relevant factor on a hearing of a liquidation application whether a claimant is a creditor after s 310 of the Companies Act has been applied. It may be necessary to see whether there is a net liability after taking into account all claims between the claimant and the company.

[24]      Accordingly, the claims of the applicant that it may have set-offs that could be raised on liquidation should be heeded and should not be brushed aside by an immediate order for liquidation. For those reasons, I do not regard this as an appropriate case to make an immediate order for liquidation, nor to adjourn the matter for further consideration.   I will make an order under      s 291(1)(a).

[44]      Associate Judge Bell returned to the question in Concrete Structures (NZ) Ltd v NMHB Ltd.23 The decision was an interim decision on the debtor’s application for  a stay of the proceeding to allow its appeal against the High Court’s dismissal of its application to set aside a statutory demand to be determined by the Court of Appeal. In that case, Associate Judge Bell noted that the law is clear that at the statutory demand stage the “pay now, argue later” policy prevails, citing Volcanic as upheld in Laywood v Holmes. He noted that while Randerson J suggested, in obiter, in Volcanic, that the “pay now, argue later” philosophy would also apply in any subsequent liquidation proceeding, the Court of Appeal noted that that was not necessarily the case, without expressing an opinion on the point. Associate Judge Bell then said:24

[19]      While the Court of Appeal expressed no opinion on the point, I give mine now. In the context of a liquidation proceeding where a company is asserting claims against the creditor in response to a claim by a creditor against the company, it is important to recognise the effect of insolvency set-off under s 310 of the Companies Act 1993. Insolvency set-off operates substantively, is mandatory and self-executing. On a company going into liquidation order, the claim of the creditor is applied against the claim of the company against the creditor so as to produce one single net obligation. The earlier separate

22     239 Queen St Developments Ltd v Watts & Hughes Construction Ltd [2012] NZHC 1791.

23     Concrete Structures (NZ) Ltd v NMHB Ltd [2019] NZHC 268.

24     Concrete Structures (NZ) Ltd v NMHB Ltd, above n 23.

causes of action are extinguished and replaced by one single obligation between the company and the creditor.

[20]      The pay now/argue later policy of the Construction Contracts Act is purely procedural. Section 79 does not bar a claim by the payer against a payee. It simply defers it. The policy of the Act is to require the contractor to be paid and for any counterclaims to be dealt with in some later proceeding. Those procedural arrangements are trumped by the substantive effect of s 310 of the Companies Act. If set-off operates automatically on liquidation, it becomes a matter for consideration at the hearing of a liquidation application.

…

[21]      To a certain extent the set-off rule makes good sense. If there were no automatic set-off under s 310 of the Companies Act, a liquidator of the company in liquidation would be able to make a claim against the creditor and the creditor would not be able to resist the claim on the ground of its own countervailing claim. The creditor could be required to pay to the extent of any liability established against it, and the proceeds of any judgment would be applied in the administration of the liquidation. The creditor might be paid in due course but would share pari passu with other unsecured creditors. A contractor entitled to be paid under s 23 of the Construction Contracts Act would have his claim severely reduced for having to pay any claim to the employer first. Once contractors understand that, they will see the purpose of insolvency set-off.

[22]      Accordingly, it remains open to NMHB Ltd to defend the liquidation proceeding on the basis that it has counterclaims against Concrete Structures (NZ) Ltd. Even though it could not run them in opposition to the statutory demand, it may be able to be raise [sic] them at the hearing of the liquidation application. After all, if it can show that it is not a net debtor of Concrete Structures (NZ) Ltd, there may be no purpose in ordering it into liquidation.

(footnotes omitted)

Discussion

Ability to pay

[45]      The onus is on Mr and Mrs Evans to provide enough evidence demonstrating their ability to pay the amount owed.25 They must demonstrate that they are able to pay immediately or within a reasonable time.26

[46]      Mr Evans maintains that he has enough equity in the Whitford property to meet the judgment debt. He relies on a forecasted valuation by Seagers, registered valuers and property advisors, dated 6 April 2018, which assesses the market value of the then

25     Insolvency  Law  &  Practice  (online  looseleaf  ed,  Thomson  Reuters) at  [IN37.04(2)].     See, generally, Re Tootell, ex parte Rabobank Australia Ltd [2013] NZHC 2975 at [6].

26     Holdgate v Blocassa above n 8, at [19].

incomplete house at $1.625 million “as is” and $2.7 million “as if complete”. That valuation relies on, amongst other things, the plans for the completed dwelling and comparable sales in the area.

[47]      Mr Evans also relies on a more current appraisal from Ray White Half Moon Bay dated 29 June 2020, which appraises the value of the home at between $4 million and $5 million. However, as Mr Taylor for TBS pointed out, this document is an appraisal rather than a formal valuation and notes only two comparable sales. The two properties in question last sold for $2.19 million and $2.9 million, giving a median/mean of $2.56 million.

[48]      It is unclear whether the Whitford property, swimming pool and landscaping is complete. Ms Eager conceded that there was no conclusive evidence of this fact before the Court.

[49]      The capital value of the property as at 1 July 2017 is $1.35 million, comprising land value of $1.275 million and improvements of $75,000. It can be assumed that the value of the improvements is much higher than that now, even if the house is incomplete.

[50]      In his affidavit dated 6 August 2020, Mr Evans said that he had a Sovereign Home Loan with a balance of $1,324,466.66. He provided print-outs from two loan accounts as at 12 June 2020. At the hearing, Ms Eager sought to introduce evidence from the bar of the balance as at 17 August 2020. Mr Taylor objected. He also submitted that the print-outs are not evidence of the collective value of the loan balance, nor is it clear whether there are additional loans or further separate loan accounts against the Property.

[51]      Mr Evans said in his 6 August affidavit that he had $448,536.98 in cash in an ASB current account. He substantiated that with a print-out of the account covering 15 July 2020 to 4 August 2020. At the hearing, Ms Eager sought to introduce into evidence an updated bank statement dated 17 August 2020. Mr Taylor submitted that this information should be treated with caution, noting that the balance as at

4 August 2020 was due to a large deposit of $450,000 made that day by his company, International Certifications Ltd. Prior to that, the bank account was in overdraft.

[52]      Mr Taylor pointed out differences between Mr Evans’ original statement of assets and liabilities in his original affidavit evidence dated 3 June and his supplementary affidavit dated 6 August 2020. Several assets were removed in the second statement, including five Ford Ranger motor vehicles, a property owned by Mr Evans’ company (International Certifications Ltd), and cash in a Bank of America account.    In addition, Mr Evans originally included his company at a valuation of

$7 million, and in his later statement reduced that to $7,000 on the basis that he was a

0.1 per cent owner rather than a 100 per cent owner.

[53]      Mr Taylor submits that these and other issues with the evidence put forward by Mr Evans raises serious issues as to the veracity of the information in his sworn affidavits, and that his evidence of ability to pay should be viewed with caution.

[54]      While I do not accept all Mr Taylor’s objections, it is true that Mr Evans’ account of his financial situation has changed materially between his first and supplementary affidavits (a period of only two months). There is a question mark about the movement of funds between his company and his own personal account. His sworn evidence as to his loan balance is over two months old. There is an absence of corroborating evidence for some of the assets listed in his most recent statement of assets. There is no current valuation of the Whitford property by a registered valuer. There is no evidence that the dwelling and surrounding features are complete.

[55]      The cumulative effect of these issues is that there is insufficient supporting information before the Court to establish conclusively that Mr Evans is able to pay his debts, including the judgment debt. I return to this point later.

[56]      As to Mrs Evans, she attests to that fact that she has no assets of significant value and $8,000 of credit card debt. She relies on Mr Evans’ ability to pay the judgment debt and their joint dispute and counterclaim as her basis for avoiding an adjudication.

Just and equitable

[57]      Mr and Mrs Evans maintain that it is just and equitable that the Court not adjudicate them bankrupt because of their dispute with the adjudicator’s determination and their counterclaim, which they are pursing in separate High Court proceedings. If they are adjudicated bankrupt, they are denied the opportunity to pursue that claim.

[58]      I share the view of Associate Judge Bell that a judgment debtor can raise alleged counterclaims and set-offs in defence to applications that they be adjudicated bankrupt/placed in liquidation.27 The mutual set-off provisions under s 310 of the Companies Act are mirrored at s 254 of the Insolvency Act. Bankruptcy or liquidation is the final step in the process. It cannot be the intent of the insolvency regime that an individual should be adjudicated bankrupt by this Court without regard to a counterclaim or set-off which they intend to pursue and which, if successful, would mean that they are not insolvent at all. Further, the “pay now argue later” approach of the CCA anticipates that the party against whom a CCA determination is made will have the opportunity to “argue later”, that is, to pursue a legitimate dispute and counterclaim. If Mr and Mrs Evans are adjudicated bankrupt, the right to pursue that action vests in the Official Assignee and they are denied that opportunity.

[59]      That does not mean that the bare assertion of a counterclaim or set-off is enough. The onus is on the judgment debtor to convince the Court to exercise its discretion not to make the adjudication order (to which the judgment creditor is prima facie entitled). In Covington Railways Ltd v Uni-Accommodation Ltd, where a company applied to set aside a statutory demand on the grounds of a counterclaim, the Court of Appeal said:28

… in order to impeach the statutory demand and overcome the presumption in s287(a) 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 is an available set-off. It must be able to point to evidence before the Court showing that it has a real basis for the claimed setoff and that accordingly the applicant’s claim to be a creditor is, to the extent of the set- off, seriously in doubt. [In other words] … it must show that there are “clear and persuasive grounds” for the set-off claim. …

27     See 239 Queen St Developments Ltd v Watts & Hughes Construction Ltd, above n 22; and Concrete Structures (NZ) Ltd v NMHB Ltd, above n 23.

28     Covington Railways Ltd v Uni-Accommodation Ltd [2011] 1 NZLR 272 (CA) at [11].

[60]      In a later Concrete Structures decision, Associate Judge Bell said that the same approach applies when a company resists a liquidation because of a set-off or counterclaim.29 I conclude that the same approach must apply when a judgment debtor resists a bankruptcy adjudication because of set-off or counterclaim. The debtor must convince the Court that it has a sound and credible counterclaim or set-off, before the Court will take it into account when exercising its discretion under s 37 of the Insolvency Act.

[61]      I turn to the Evans’ dispute and counterclaim. I have considered Mr Evans’ articulation of his claims in his affidavit dated 3 June 2020; Mr and Mrs Evans’ statement  of  claim dated 31 January 2020;  and TBS’s statement  of defence dated  6 March 2020.   I have also considered the CCA adjudication determination dated   13 September 2019.

[62]      The statement of claim and Mr Evans’ evidence repeats the claims made in the CCA adjudication: overcharging; defective work and delayed completion.

[63]      The CCA adjudicator was Mr Colthart. His determination runs for 30 pages. Mr Colthart records that both parties served comprehensive submissions, evidence and bundles of supporting documents. TBS adduced expert evidence from a quantity surveyor, a registered building surveyor and a roofing expert, in addition to factual evidence from Mr Buddle. The Evans’ case involved a valuer, a building consultant and a quantity surveyor as well as factual evidence. Both parties were legally represented.

[64]      Mr Colthart notes that the contract was a cost reimbursement (charge-up) contract whereby Mr and Mrs Evans were charged the contractor’s labour hours, plus materials and sub-contractor costs plus a margin. The adjudication relates to payment claims 11 (which incorporated unpaid balances from claims 9 and 10), 12 and 13.  Mr and Mrs Evans had paid preceding payment claims 1 to 8. As the adjudicator recorded at para 43 of the determination, TBS did not advance their claim based on default liability under ss 22 and 23 of the CCA. It sought a determination that the

29     Concrete Structures (NZ) Ltd v NHMB Ltd [2019] NZHC 1769 at [6] citing Commissioner of Inland Revenue v The Fishing Company Ltd [2012] NZCCLR 5 (HC).

Evans were liable to pay the net amount claimed in payment claims 11, 12 and 13 on the merits. Mr Colthart observed that a “determination on the merits requires me to carefully consider the evidence in support of each of the payment claims, and the substantive reasons advanced by the Evans for non-payment.”

[65]      In terms of Mr and Mrs Evans’ claim of overcharging, Mr Colthart heard legal submission on the principles applicable to cost plus percentage contracts and considered the factual and expert evidence. Relying especially on the evidence of the quantity surveying experts, Mr Colthart rejected the Evans’ overcharging claim and concluded that the amount claimed by TBS was reasonably and properly incurred, had been adequately substantiated by TBS to the Evans, and was payable in accordance with the terms of the contract.

[66]      Mr Colthart then considered the second significant challenge raised by Mr and Mrs Evans: defects in the roof installed by TBS which require a replacement roof at an estimated cost of $119,313. Mr Colthart stated that he had carefully reviewed the evidence, including that of the experts, and he was not satisfied that the appearance of the roof was due to defects in installation or that the entire roof needs to be replaced. He therefore rejected the Evans’ counterclaim for the cost of replacing the roof.

[67]      Mr Colthart reached the same conclusion about Mr and Mrs Evans’ claim to abatement of $129,160 for the cost of demolishing and replacing a retaining wall which they say was built in the wrong location. He then considered each of the other defects alleged by Mr and Mrs Evans concerning electrical work, plumbing and drainage and the membrane roof and in each case was not satisfied that Mr and Mrs Evans were entitled to the abatement claimed by them.

[68]      Finally, Mr Colthart considered Mr and Mrs Evans’ claim that they suffered loss due to the delayed completion of the work. This claim is repeated in their statement of claim in their High Court proceedings where they allege that TBS warranted that it would complete the works by November 2018. The adjudicator rejected that claim, noting that the contract does not provide for a fixed completion date. The relevant clause (cl D of the Contract Agreement) provided an anticipated date for practical completion, but that date was subject to change “once a schedule is

completed.”    The general terms of the contract provide that the works will be completed within a reasonable time.

[69]      Having considered this adjudication determination, the Evans’ statement of claim dated 31 January 2020 and Mr Evans’ explanation of his counterclaim in his affidavit dated 3 June 2020, I am not persuaded that they have a sound and credible claim. They have not put forward any new information, or argument as to why they consider the adjudication determination was wrong. I did not hear any submission from Ms Eager as to why the Evans’ consider they will achieve a different result in the High Court. Accordingly, I am not persuaded that this Court in CIV-2020-404-151 will come to a different view to Mr Colthart.

Conclusion

[70]      Mr and Mrs Evans have not persuaded me that it would be just and equitable for me not to adjudicate them bankrupt because they have a clear and persuasive counterclaim. I decline to exercise my discretion, for that reason.

[71]      Nor am I satisfied, on the evidence before the Court, of Mr Evans’ solvency. However, I am not prepared to make a final finding on that at this stage.

[72]      Mr Evans maintains that he can pay the judgment debt and remain solvent, and points to a cash balance in his bank account, considerable equity in the Property and other assets. In that case, Mr Evans should pay the judgment debt and pursue his separate High Court proceedings. He has not put forward any evidence that TBS would be unable to repay the sum if Mr and Mrs Evans are successful in those proceedings.

Result

[73]      Before I make a final determination as to the solvency of Mr Evans and the adjudication application, I give Mr Evans a final opportunity to pay the judgment debt to TBS.

[74]      This case will be called before me in the bankruptcy list on 8 October 2020 at 11:45 am. If the judgment debt is still outstanding at that stage, I will consider what final order should be made.

[75]      The parties are to update the Court, by joint memoranda if possible, filed three clear days before the call.

[76]Costs are reserved.

Associate Judge Gardiner

Solicitors:

Hesketh Henry, Auckland
Claymore Partners, Auckland

M R Taylor, Auckland E E Hill, Auckland