Tile 'N' Style Limited v Degussa Construction Chemicals New Zealand Limited HC Wellington CIV-2004-485-1950

[2005] NZHC 1285

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

CIV-2004-485-1950

BETWEEN

TILE ’N’ STYLE LIMITED

Applicant

AND

DEGUSSA CONSTRUCTION CHEMICALS NEW ZEALAND LIMITED

Respondent

Hearing:         24 February 2005

Appearances: D.G. Dewar for Applicant

J. McLennan for Respondent Judgment:  1 March 2005

JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALL

Introduction

[1]        This is an application for an order setting aside a statutory demand dated 8 September 2004 issued by the respondent against the applicant. The demand claims the sum of $40,029.87 “being the amount owing to Degussa Construction Chemicals New Zealand Limited for products supplied to you by it up to and including invoice 44801440 of 30 April 2004”.

[2]The application is opposed by the applicant.

Background facts

[3]        The respondent company presently and under its former name, Master Builders Technologies (NZ) Limited, operates/operated as a supplier of various

TILE ’N’ STYLE LIMITED V DEGUSSA CONSTRUCTION CHEMICALS NEW ZEALAND LIMITED HC WN CIV-2004-485-1950 [1 March 2005]

chemical-based  building  products.     These include waterproofing products and sealants used in a number of building applications, including for roofs and gutters.

[4]        As part of its business, the applicant operates as an applicator of these waterproofing compounds. The applicant acknowledges that it has used the respondent’s products for some years on a number of the applicant’s customer’s building sites. The applicant contends that a substantial number of leakage and other problems have arisen on sites on which the respondents’ products were used. This is disputed by the respondent.

[5]        The statutory demand claims the sum of $40,029.87 which, according to the respondent, is for unpaid product supplied and invoiced to the applicant.

[6]        The calculation of this amount is somewhat complex, but appears to be set out in a letter from the respondent to the applicant dated 27 August 2004, exhibited as Exhibit “G” to the first affidavit of a Mr Gresslehner filed in support of the application.

[7]        The respondent’s position is that this case is a simple matter involving non- payment of accounts rendered by the respondent to the applicant some time ago, about which there can be no genuine or substantial dispute.

[8]        The applicant, however, disputes this and states that this matter involves two issues:

a)First, whether the amounts claimed by the respondent in respect of the products supplied are correct or not.

b)Secondly, whether the applicant’s claims against the respondent for rectification and other costs it has incurred in respect of both defects in the products supplied and inadequacies in the installation instructions given, by the respondent, are justified.

Counsel’s Arguments and My Decision

[9]        The first stated ground in the application to set aside the statutory demand is that the demand does not comply with s290 of the Companies Act 1993, as it does not correctly name the applicant.

[10]      Although this ground was not argued before me today, for the sake of completeness I will deal with it.

[11]      The statutory demand is addressed to “Style ‘N’ Tile Limited”, a duly incorporated company having its registered office at 58 Mana Esplanade, Paremata”. It seems that the correct name of the applicant company is “Tile ‘N’ Style Limited”.. Its registered office, however, is at 58 Mana Esplanade, Paremata, Wellington.

[12]Section 290(5) Companies Act 1993 states:

(5) A demand must not be set aside by reason only of a  defect  or irregularity unless the Court considers that substantial injustice would be caused if it were not set aside.

[13]Brookers Companies and Securities Law, Volume 1 at CA290.06 states:

A defect or irregularity in a statutory demand is not by itself sufficient reason for the demand to be set aside unless substantial injustice would result. This is stated clearly in subs (5).

Because of the inclusionary nature of the definition of ‘defect’ (subs (6)), the term needs to be construed according to its ordinary meaning, that is, the lack or absence is of something necessary or essential for completion, a shortcoming or deficiency, or an imperfection. A defect according to ordinary understanding is not necessarily something of a minor nature; it can be either major or minor and it is not to be confined to a rigorous or narrow reading: Topfelt Pty Ltd v State Bank of NSW (1993) 47 FCR 226; 120 ALR 155.

…

Similarly an understatement of debt in a statutory demand has been held not to render the statutory demand invalid: Wichita Pty Ltd v Elders IXL Ltd (t/a Elders Pastoral) (1990) 8 ACLC 704; 2 ACSR 273. However, in Astor Construction Ltd v Mega Merger Interiors Exteriors Ltd 21/5/02, Master Anne Gambrill, HC Auckland M24-IM02, the Master stated that where a statutory demand does not state the company name correctly in accordance with s25(1) Companies Act 1993, the demand may be held to be a nullity.

[14]      Under the circumstances prevailing in this case, I take the view that the  defect in the statutory demand does not provide a sufficient reason here for the demand to be set aside. The applicant company was well aware when it received the statutory demand that the demand was intended for it and the debt in question related to its trading accounts claimed to be outstanding by the respondent.

[15]      The company name described in the statutory demand, although incorrect, was clearly inverted in error. The demand, in any event, bore the correct registered office address of the applicant. Notwithstanding the comments of Master Anne Gambrill in Astor Construction Limited, in terms of s290(5), I do not consider that substantial injustice would be caused here if the demand were not set aside because of the accepted defect or irregularity in it.

[16]Therefore, I reject this ground in the Notice of Opposition by the applicant.

[17]      The other broad grounds set out in the application are first, that the debt the subject of the demand is disputed, and secondly, that the applicant has a counterclaim and equitable set-off against the respondent, which exceeds the amount of the debt. In addition, the applicant contends that the respondent’s use of the statutory demand procedure here is an improper use of the process.

[18]I turn to consider these issues now.

[19]      The application is made under s290 Companies Act 1993. Under s290(4) the Court is given a discretion to set aside a statutory demand if it is satisfied that

a)There is a substantial dispute whether or not the debt is owing or is due; or

b)The company appears to have a counterclaim set off or cross demand and the amount specified in the demand less the amount of the counterclaim set off or cross demand is less than the prescribed amount; or

c)The demand ought to be set aside on other grounds.

[20]      To invoke this discretion an applicant must go further than merely assert the existence of a dispute or some counterclaim or set off. It must be shown that there is a genuine and substantial dispute as to the existence of the debt and, further, that it would be unfair to allow that dispute to be resolved through the liquidation provisions of the Companies Act 1993, rather than by actions in the usual way – see Taxi Trucks Limited v Nicholson [1989] 2 NZLR 297, 291, and Pink Pages Publications Limited v Team Communications Limited (1986) 3 NZCLC 99, 764.

[21]      As to the issue of a disputed debt, the onus rests upon the applicant to satisfy the Court that the debt is disputed – see Re Scott Plumbers Limited (1994) 2 NZCLC 99, 184.

[22]      It is important to note the words of Gault J in Alfex Doors and Windows Limited v Alutech Windows and Doors Limited (Court of Appeal, CA31/01, 30 May 2001, p6, para 17), that there is no onus on the applicant, however, to “actually prove its claim…or to a set-off or counterclaim”.

[23]      This is further confirmed in United Homes (1988) Limited v Workman [2001] 3 NZLR 447, where the Court of Appeal indicated that the provisions of s290(4)(a) and (b) do not require the applicant to establish a substantive prima facie case, but simply need the company to show a “fairly arguable basis” on which it is not liable on the demand in question. Once this occurs then, as the Court of Appeal stated in Alfex Doors and Windows Limited v Alutech Windows and Doors Limited at p6, para 14:

…It will be a rare case in which, in the exercise of the residual discretion, the application is refused.

[24]      As paragraph [19] above notes, s290(4)(b) provides that the Court may grant an application to set aside a statutory demand if it is satisfied that the debtor company appears to have a substantial counterclaim, set-off or cross demand.

[25]      For a statutory demand to be set aside on this basis, that counterclaim, set-off or cross demand must be bona fide arguable, and must have a sufficient link with the admitted debt to make it appropriate to set aside the demand – Rennie v Prospect

Resources Limited (HC Greymouth, 3 November 1995, M14/9, Tipping J). It is  clear that the link with the admitted debt does not, however, have to be immediate – Queen City Residential Limited v Paterson Co-Partners Architects Limited (No. 2) (1995) 7 NZCLC 260, 936 and Pacific Forum Line Limited v Newbay Holdings Limited (HC Auckland, 29 March 1996, M141/96, Master Anne Gambrill).

[26]      In Covington Railways Ltd v Uni-Accommodation Ltd [2001] 1 NZLR 272; (2000) 8 NZCLC 262,374 (CA), the Court of Appeal, at pp 274-275; p 262,376, gave guidance as to what an applicant seeking to set aside a statutory demand must prove in dealing with a set-off or counterclaim:

Where a company which is the subject of a liquidation application is undisputably 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 offsets it altogether. Where there  are  liquidated sums due each way, that is simply an arithmetical exercise. It is more difficult if, on the applicant’s side, there is an indisputable liquidated sum, but the other party’s claim is for an unliquidated sum with liability and/or quantum in dispute. Then, 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 set-off and that accordingly the applicant’s claim to be a creditor is, to the extent of the set-off, seriously in doubt. In the words of Buckley LJ in Bryanston Finance Ltd v de Vries (No. 2) [1976] Ch 63 at p 78, it must show that there are ‘clear and persuasive grounds’ for the set-off claim. Where this can be done, the party who has issued the statutory demand against the company will be shown to be using the statutory demand and liquidation procedures improperly because there is a ‘genuine and substantial dispute’ about the net amount of the company’s indebtedness (Taxi Trucks Ltd v Nicholson [1989] 2 NZLR 297 [(CA)] at p 299. The dispute should then be resolved in the ordinary way – except as to any undisputed balance – rather than upon the hearing of a liquidation application.

[27]      As I understand the applicant’s position, its major complaint against the respondent is twofold. First, it relates to what the applicant says is a substantial dispute as to calculation of the amounts claimed by the respondent. Secondly, the applicant contends that it has major cross-claim issues with the respondent arising from rectification work it was required to undertake as a result of either the respondent’s products being defective or failing, or alternatively arising from incorrect recommendations or negligent installation advice given by the respondent.

[28]I turn now to consider each of these areas in dispute individually.

[29]      As to the applicant’s contentions in relation to the amounts claimed for the alleged debt, it says that it disputed the amounts of the various debts claimed from the outset. It points to a letter it wrote to the respondent dated 28 April 2004, and subsequent correspondence, meetings and discussions then held with the respondent in an attempt to settle the issues.

[30]      This dispute relates to both the quantity of goods supplied and their value. It includes claims that the respondent had substantially overcharged the applicant in respect of its quoted prices, and further it had failed to provide credits for returned product.

[31]      Much material has been put before the Court on behalf of both the applicant and respondent with respect to these matters. The dispute between them here is an intensely factual one and any resolution would require a detailed consideration and testing of all the evidence.

[32]      The applicant’s arguments as to incorrect calculations of the debt due are hotly contested by the respondent.

[33]      Suffice to say at this point that it is difficult for this Court to resolve the significant factual disputes arising between the parties. Detailed testimony will be required and there is an argument that this question is best determined before a Judge who can review all the contested evidence and not by way of the statutory demand procedure employed here.

[34]      As I see it, the more telling question, however, relates to the applicant’s second argument noted at paragraph [27] of this judgment. This argument turns  upon the applicant’s allegations of product failure, or negligent advice on the part of the respondent.

[35]      As to this, the applicant states that on 29 June 2004, over two months before the statutory demand was issued, it sent to the respondent a summary of its claims

against the respondent. In this letter the applicant noted 19 separate projects on which it says it had been forced to carry out rectification work as a result of either the failure of product supplied by the respondent, or because of the respondent’s incorrect recommendations or advice as to the application of those products.

[36]      Mr Cloughley for the respondent in turn denies that the problems encountered by the applicant with these individual projects resulted from defective products or inadequate instruction from the respondent. Rather, he says they were caused by the applicant’s failure to correctly apply the products in question.

[37]      What is clear to me is that there are significant factual disputes between the parties as to the causes of the individual problems which occurred on the 19 projects in question.

[38]      Expert evidence will be required before a Court could determine whether the applicant’s position or the respondent’s position is the correct one.

[39]      These performance complaints, in my view, go to the heart of the dispute here.

[40]      Again, the evidential material put before the Court to date provides conflicting claims and views over the product performance issues.

[41]      By way of example, it is significant in my view that Mr Gresslehner, in Exhibit “A” to his second affidavit dated 3 November 2004 annexes an e-mail from Mr Steve Peterson, a technical product specialist from the respondent’s United States arm of the respondent company, sent to the applicant in response to its query, which states:

Sonoguard over HLM5000 would not be an approved application.

[42]      This information, however, appears to be quite inconsistent with the specific evidence on this product provided by Mr Cloughley on behalf of the respondent when he states at paragraph 24 of his affidavit:

24. Top coating Sonoshield HLM5000 with another coating is quite satisfactory, but HLM5000 needs to be the normal specified thickness, and the top coat may require maintenance.

[43]      As I understand the position, evidence of this sort may well become crucial to the final determination of the product performance dispute between the parties, and the applicant’s claim that it was required to expend significant sums of its own money (exceeding the amount of the claimed debt) upon rectification work.

[44]      With respect to the second ground put forward by the applicant relating to its counterclaim or set-off against the respondent, the applicant has filed District Court proceedings against the respondent relating to the present dispute. In these proceedings, under its first cause of action the applicant seeks $16,958.73 for rectification work undertaken by the applicant at a Greta Point site as a result of the respondent’s defective product supplied. And, in its second cause of action in the District Court proceedings the applicant seeks $23,894.25 for claims it says it has been required to meet for rectification work undertaken elsewhere on some 16 individual projects where it says the respondent’s defective products or advice have caused the applicant to be liable to undertake the work at its own cost.

[45]      These amounts sought in the applicant’s Statement of Claim in the District Court total $40,852.98, which is approximately $900.00 more than the amount sought in the respondent’s statutory demand here.

[46]      The claims and counterclaims between the parties here require resolution. Under the circumstances prevailing here, the statutory demand process, however, is not an appropriate place for this to occur.

[47]      Taking all these matters into account, I am of the view that the applicant has been able to establish here on a fairly arguable basis that a genuine and substantial dispute exists between the parties as to whether the applicant may be liable for the amount claimed in the statutory demand in terms of s290(4)(a) and (b) Companies Act 1993.

[48]      And finally I note that, the grounds for setting aside the statutory demand under s290(4) having been made out, it is clear to me that in the words of the Court of Appeal in Alfex Doors and Windows Ltd (at paragraph 14) this is not one of those:

… rare cases in which, in the exercise of the residual discretion, the application (to set aside) is refused.

Conclusion

[49]      It will be apparent, therefore, that the applicant’s application to set aside the statutory demand has been successful.

[50]The statutory demand dated 8 September 2004 is set aside.

[51]      As this application has been successful, costs are awarded to the applicant on a category 2B basis, together with disbursements, as fixed by the Registrar.

Associate Judge D.I. Gendall

Delivered at 4.30pm on 1 March 2005.

Solicitors:

Thomas Dewar Sziranyi Letts, Lower Hutt for Applicant Holmden Horrocks, Auckland for Respondent