VH Five SPV Limited v Kimble Contracting Limited
[2016] NZHC 236
•22 February 2016
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2015-404-1829 [2016] NZHC 236
BETWEEN VH FIVE SPV LIMITED
Plaintiff
AND
KIMBLE CONTRACTING LIMITED Defendant
Hearing: 9 February 2016 Appearances:
Mr J Wilson and Mr M Colson for Plaintiff/Applicant
Mr D Chesterman for Defendant/RespondentJudgment:
22 February 2016
JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE [on Application to Set Aside Statutory Demand]
This judgment was delivered by me on
22.02.16 at 3.30 pm, pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
VH FIVE SPV LIMITED v KIMBLE CONTRACTING LIMITED [2016] NZHC 236 [22 February 2016]
[1] On 29 July 2015 Kimble Contracting Limited (Kimble) served a statutory demand on VH Five SPV Limited (VH Five) pursuant to s 289 of the Companies Act
1993. In the statutory demand Kimble claimed the sum of $260,165.92. The claim was said to be based upon a contract which the parties entered into dated 10 March
2015.
[2] VH Five has now filed an application to set aside the statutory demand. The application is opposed by Kimble.
Background
[3] The applicant, VH Five, was a property developer who was engaged in the construction of housing properties. The properties which are involved in the present dispute were located on the North Shore in Auckland.
[4] VH Five had entered into an agreement with Valiant Homes Limited (Valiant
Homes) to carry out the construction but that company was placed in liquidation on
4 March 2015. Mr Clarke, who was the sole shareholder of Valiant Homes, was willing to undertake the continued construction of the properties which Valiant Homes had in hand before it went into liquidation. This was to be accomplished by establishing a new company, Kimble, which was incorporated on 3 March 2015. Mr Clarke was also involved in another company called Valiant Management Limited, which was described as being “responsible for the day to day running of
VH Five Limited partnership and VH Five SPV.”1
[5] VH Five was apparently agreeable to Kimble taking over the work. The parties entered into a written agreement on 10 March 2015. The agreement is not entirely satisfactory and is difficult to understand. However the main features of the agreement can be described as follows. VH Five would pay Kimble the sum of
$75,000 which Kimble would use to pay the invoices of various consultants who had been retained in the projects. VH Five was also to pay another $75,000 subject to certain conditions. An important condition was that Kimble was to provide a “full
costs schedule” by 13 March 2015 for the completion of the properties mentioned in
1 Evidence of Mr C H Weise, a director of VH Five.
paragraph (a) of the agreement. Those properties were 155 Eskdale Road, 8 Vonnel
Place and 11 Tamahere Drive (the Part A properties).
[6] Other key provisions of the agreement were the following which are set out in full:2
(iii) Progress payments will be made to KCL weekly in arrears until 30
April 2015 provided that any payment is subject to the prior submission of an appropriate GST invoice following receipt of
which payment will be made (providing that such invoice is not in
dispute) within a reasonable period of time (being no later than 3 business days).
(iv) In addition to the payment referred to in paragraph (ii) of this letter agreement, KCL will be paid on an hourly basis for services provided in accordance with this letter agreement at the rates set out in the schedule to this letter agreement.
[7] The agreement provided that Kimble would complete construction of the Part A properties for a sum not greater than $586,535 plus GST. Practical completion of the Part A properties was to be by 29 May 2015.
[8] There are other aspects of the agreement which will be referred to subsequently in the course of this judgment.
[9] Counsel for VH Five described the dispute in the following terms:
3.First, there is substantial dispute as to whether the demanded sum is due and owing:
(a) Kimble contracted with VH Five to complete building work for a fixed price by a specified date. Kimble failed to complete the works within the specified timeframe and price. The contract provided for weekly progress payments in arrears until 30 April 2015, but not afterwards. The relevant invoices (issued in June and July 2015) demanded weekly progress payments, to be paid within three business days. The contract did not provide for such payments. Rather, the default regime under the Construction Contracts Act 2002 (CCA) applied. VH Five disputed the invoices and issued a payment schedule on 14 July 2015.
(b) VH Five’s evidence establishes that it is solvent. It refuses to pay the demand sum by reason of a bona fide dispute. In those circumstances, a substantial dispute exists in terms [of]
2 KCL is the respondent, Kimble Contracting Limited.
s 290(4)(a) of the Companies Act 1993. That dispute should be resolved through proceedings or by adjudication under the CCA.
4.Second, VH Five has a bona fide, arguable counterclaim against Kimble for breach of contract. That counterclaim exceeds the demanded sum. VH Five respectfully submits that the Court should set aside the statutory demand under s 290(4)(b) of the Companies Act.
[10] Kimble’s response is set out in the submissions of counsel. Mr Chesterman
summarised the response as follows:
1.The Respondent, Kimble Contracting Ltd’s (Kimble’s) grounds in opposition to VH Five SPV Limited’s (VH Five’s) application to set aside the statutory demand, may be summarised as follows:
(a) Kimble’s invoices were issued as payment claims under the Construction Contracts Act 2002 (CCA). VH Five did [not] challenge any of the invoices by serving a payment schedule on Kimble and so cannot now seek to set aside the statutory demand on the basis of a dispute or counterclaim.
(b) VH Five’s application relies upon mere assertion. It has not provided sufficient proof that the amount is in dispute or that there is a basis for its counterclaim.
(c) There is no evidential basis to support an argument that the statutory demand was an abuse of process.
Applications to set aside statutory demands
[11] The legal position relating to setting aside a statutory demand is based upon s
290 of the Companies Act which so far as relevant provides:
290 Court may set aside statutory demand
(1) The Court may, on the application of the company, set aside a statutory demand.
……..
(4) The Court may grant an application 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. (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.
(6) In subsection (5) of this section, “defect” includes a material misstatement of the amount due to the creditor and a material misdescription of the debt referred to in the demand.
(7) An order under this section may be made subject to conditions.
[12] I respectfully agree with the following statement of principle which is taken from the judgment of Associate Judge Faire in Italia Motorsport Ltd v European Motors Ltd:3
The approach, which the Court takes to applications on each ground, can be shortly summarised. When considering an application pursuant to s
290(4)(a) of the Companies Act 1993 the Court is required to determine if the applicant can show a fairly arguable basis upon which it is not liable for
the amount claimed. Forge Holdings Limited v Kearney Finance (NZ)
Limited (High Court, Christchurch, M 149/95, Tipping J, 20 June 1995) at page 2 and Queen City Residential Limited v Patterson Co-Partners
Architects (No 2) (1995) 7 NZCLC 260,936. That formulation was approved
by the Court of Appeal in United Homes (1988) Ltd v Workman [2001] 3
NZLR 447, 451 - 2.
[13] I also respectfully agree with the following statement of the principle which is to be found in North Harbour Equine Hospital Ltd v DK Little Corporate Trustee Ltd:4
[17] The general principles which the Court applies in approaching its discretion in this matter are conveniently set out in Brookers Company and Securities Law at CA 290.02(1):
(1) General principles
…
These principles … are as follows:
3 Italia Motorsport Ltd v European Motors Ltd HC Hamilton CIV-2004-419-950, 18 October
2004 at [4].
4 North Harbour Equine Hospital Ltd v DK Little Corporate Trustee Ltd HC Auckland CIV-2006-
404-7585, 19 February 2007 at [17].
a)The applicant must show that there is arguably a genuine and substantial dispute as to the existence of the debt.
b)The mere assertion that a dispute exists is not sufficient. Material, short of proof, is required to support the claim that the debt is disputed.
c)If such material is available, the dispute should normally be resolved other than by means of proceedings in the Companies Court.
d)An applicant must establish that any counterclaim or cross demand is reasonably arguable in all the circumstances.
e)It is not usually possible to resolve disputed questions of fact on affidavit evidence alone, particularly when issues of credibility arise.
Discussion
[14] VH Five accepts that the provisions of the Construction Contracts Act 2002 (CCA) apply in the circumstances.
[15] The argument that Mr Chesterman put forward for the respondent was that payment claims had been submitted by Kimble and that VH Five had not responded to these claims in time. Mr Chesterman submitted:
10.In Laywood & Rees v Holmes Construction Wellington Ltd5 the Court of Appeal confirmed that where a party does not properly challenge a payment claim through procedures under the CCA, it cannot seek to set aside a statutory demand on the basis of set-off or counterclaim.
[16] A statutory demand, as its name suggests, is a type of claim or demand which is recognised by statute and which is invested with a particular effect defined by that statute, namely the Companies Act.
[17] The statutory prescription of the nature and effect of statutory demands links them to the process of seeking orders under the Companies Act for the liquidation of
a company. One of the grounds upon which a creditor can obtain a liquidation order
5 Laywood & Rees v Holmes Construction Wellington Ltd [2009] 2 NZLR 242 (CA) at [61] – [63].
from the court is that the company is unable to pay its debts – that is, that the company is insolvent.6 The Act provides a statutory demand process which enables a creditor to establish the debtor company’s insolvency, without actually having to bring forward evidence that the company is unable to pay its debts as they fall due. If the pre-requisite steps are followed, the court may proceed on the basis of the insolvency of a company even if, in fact, the company is not insolvent at all. That
consequence comes about because the legislature has deemed that it is necessary for the proper functioning of commerce that there should be such a procedure available to creditors. However, the courts have assumed that the process is not intended to function unfairly. That it could potentially lead to unfairness is obvious. Protection for debtors is found in the fact that the creditor’s entitlement to rely upon the statutory presumption can only be invoked if the requirements imposed by the statute have been complied with. As well, the courts will ensure that the mechanism is not used in a way that is unfair.
The grounds upon which the applicant seeks the setting aside of the statutory demand
[18] Mr Chesterman was critical of the form of payment schedule which VH Five issued. He pointed out that there was a lack of particulars, photographs etc to support the objections which VH Five made to paying the claims submitted by Kimble.
[19] I remind myself that in dealing with an application to set aside a statutory demand, the Court is concerned only to determine whether there is a genuine dispute concerning liability. The evidence presented by an applicant in the position of VH Five may well be liable to criticism in the context of a substantive hearing regarding the merits of the dispute because of its lack of specificity and on other grounds. At this point, though, the assessment regarding the weight of the evidence that is offered in support of the proposed defence should not be viewed as a particularly exacting standard. After all, the Court is essentially inquiring into the question of whether there is a genuine dispute or whether the matters which the applicant has raised are
part of a strategy to avoid paying legitimate debts.
6 Companies Act 1993, s 241(1).
[20] Mr Chesterman was also critical of the various depositions which were made by Mr Weise. However, I consider that the most relevant evidence is that of the Rawa employees. Rawa was the organisation which was retained to provide advice and assistance to VH Five to carry out its various property developments. It is correct that the Rawa personnel were not functioning as quantity surveyors but I am satisfied that for the purposes of this application it can be assumed that Mr Waters and Mr Herd have adequate qualifications and sufficient independence to justify their evidence being accorded more than negligible weight.
[21] On 10 June 2015 Mr Herd produced a series of calculations which as described in his covering email were concerned with “actual costs vs budget and forecasting the cost to complete for the current house builds.” He went on to say in his email:
You won’t be surprised to see some alarming labour bills and forecast costs.
[22] As already noted, the contract price which had been agreed to in the agreement 10 March 2015 was $586,535 plus GST. By June 2015 there were concerns that the contract was over budget. However construction was not complete. In order to analyse whether the contract was over budget, the methodology that Mr Herd apparently followed was to calculate, based upon his assessment regarding the extent of completion, how much of the budget allocated to each of the projects had already been used up by current charges. He then compared those current charges with the sum that ought to have been spent to that point and came up with what he described as the “actual over forecast”.
[23] As I understand the calculations which Mr Herd carried out, the result was as follows:7
Amount by which project
expected to be over budget
155 Eskdale Rd Lot two $80,156.86 155 Eskdale Rd Lot three $113,160.00 11 Tamahere Drive $54,910.09 Total $248,226.95
7 Mr Herd did not include a calculation of an “actual over forecast” in respect of the property at 8
Vonnel Place.
[24] Kimble has not challenged the validity of these calculations, despite the fact that the actual expenditure incurred in the subsequent stages of completion was less than Mr Herd had estimated.
[25] The significance of these considerations is as follows. The contract contemplated that the fixed price amount, $586,535 plus GST would be a maximum but not necessarily a minimum charge to which Kimble would be entitled. Subject to those observations, it seems at least arguable that the contract which the parties entered into was indeed a fixed price contract. In order to maintain its liquidity, Kimble was contractually entitled to render interim bills. The contract did not however provide guidance as to how interim charges were to be levied. There was no programme of milestone events, the achievement of each of which would qualify Kimble to apply for a fixed pre-set amount of the overall contractual remuneration that was available to it.
[26] As it turns out, the position disclosed in June 2015 by Mr Herd’s calculations may have been an understatement. There is evidence that the total cost to complete has now risen to $889,383 plus GST. That is to say, there is evidence that not only was nearly all of the agreed maximum price used up, but there was a large additional cost which would have to be incurred to complete the contract beyond the point where Kimble left it when work stopped. When the two figures are added together, the figure of $889,383 plus GST results. Comparing the net figure to the agreed maximum, $586,535 plus GST gives rise to an inference that Kimble charged substantially in excess of what it was entitled to under the contract.
Mr Herd’s approval
[27] On 7 July 2015 Mr Herd sent an email which attempted to summarise the position that the parties found themselves in. It also set out an analysis of which invoices had been “approved” and which had not. The total amount that Kimble was seeking at that point was $285,837.51. The spreadsheet attached to Mr Herd’s email indicated that of this total, the sum of $143,716.49 was approved but a further
$142,121.02 was not. Counsel for Kimble made the following submission on this aspect of the matter:
This fact combined with VH Five’s agreement in June to pay outstanding invoices, indicates that the 14 July letter8 is not valid, but is simply an attempt to avoid paying invoices for which VH Five is liable.
[28] Mr Chesterman characterised as “speculative and unreliable” attempts to explain how Mr Herd could have approved such a substantial amount of the claim when VH Five reverted to a position where it claimed to owe nothing.
[29] Mr Chesterman submitted that Mr Herd’s email discloses an inconsistency in the case which VH Five now puts forward. How could VH Five claim that the charges which are the subject of the statutory demand were unjustified because these were in excess of the maximum contract price, when the project supervisor that it retained was prepared to give approval to some of the charges making up the statutory demand amount?
[30] Unfortunately, Mr Herd did not provide an affidavit in the proceeding. There is some justification for Mr Chesterman’s submission that Mr Herd did not give an affidavit because it was understood that any deposition that he could provide would not assist VH Five.
[31] Assessing the significance of Mr Herd’s apparent concession is not straightforward. I agree that the evidence is not easy to understand, given that the overall position, as Mr Herd himself determined, was that the project was running substantially over-budget. However, it also needs to be kept in mind that Mr Herd did not occupy the position of a traditional engineer under a construction contract, whose certificate that a particular progress claim is payable gives rise to a debt payable by the employer. It is arguable that VH Five can maintain the point that it has been overcharged notwithstanding that one of its agents has apparently made a statement inconsistent with that contention. Mr Herd may simply have made an error in proceeding as he did. Even if he did not, questions may emerge about the legal effect of any purported concession by Mr Herd that part of the disputed invoices
could be approved.
8 That is the payment schedule.
[32] The significance of Mr Herd’s actions might be to impair the overall evidence which VH Five could put forward in support of its case that Kimble has grossly gone over the budget and that it is therefore not entitled under the contract to any further payment, additional to what it has already received. The actions of Mr Herd would no doubt be a matter that the Court would have to take into account in assessing whether the case for VH Five in this regard is believable. However, in my view, that is the sole significance of the evidence concerning Mr Herd. The evidence does not have the effect of entirely ruling out the existence of a substantial dispute about whether VH Five is indebted to Kimble for the amounts which were set out in the statutory demand. It is simply part of the evidence overall that will have to be assessed in the usual way if the matter goes to trial.
[33] I do not consider that Mr Herd’s approval of some of the items claimed overcome the case put by VH Five that there is a substantial dispute between the parties.
Background to the CCA point
[34] The next point to be considered is whether notwithstanding the apparent existence of a substantial dispute, the CCA prevents VH Five from asserting its existence in the present context.
[35] The parties dispute whether Kimble is able to invoke the provisions of the CCA in this case. The broad effect of those provisions would be to prevent VH Five from asserting a defence to Kimble’s claim for the amounts contained in the July
2015 invoices. If it is open to VH Five to argue that the provisions of the CCA are not conclusive, then VH Five would be able to advance the linked proposition that it has a defence to the claim; and that it ought to be able to put that defence forward in defended proceedings. The statutory demand could therefore be set aside.
[36] The contract between the parties covered a critical aspect of the payment arrangements between them. Weekly claims could be lodged by Kimble and VH Five had a period of three working days within which to pay any amounts that were agreed to be payable. That arrangement only applied until 30 April 2015. This is another unsatisfactory aspect of a contract which contemplated that practical
completion would not occur until 29 May 2015. The contract was silent as to the basis upon which payment claims could be rendered after 30 April 2015 and the time that VH Five had to make payment on such claims. That being so, the applicable position would seem to be as described in the following passage from Laws of New Zealand:9
76.Progress payments. The Act makes provision for progress payments in a construction contract. The parties to a construction contract are free to agree on a mechanism for determining the number of progress payments, the interval between them, the amount, and the due date of each payment. However, if the parties to a construction contract fail to agree on such a mechanism, then the relevant provisions of the Act apply to the extent that those provisions have not been agreed between the parties.
The payment claim issue
[37] A central issue in the dispute between the parties concerned the question of whether the payment claim which Kimble served upon VH Five had been the subject of a payment schedule complying with s 21 of the CCA. Section 21 provides as follows:
21 Payment schedules
(1) A payer may respond to a payment claim by providing a payment schedule to the payee.
(2) A payment schedule must—
(a) be in writing; and
(b) identify the payment claim to which it relates; and
(c) [state] a scheduled amount.
(3) If the scheduled amount is less than the claimed amount, the payment schedule must indicate—
(a) the manner in which the payer calculated the scheduled amount; and
(b) the payer's reason or reasons for the difference between the scheduled amount and the claimed amount; and
9 Laws of New Zealand Building and Construction (Reissue 1) at [76] (footnotes omitted).
(c) in a case where the difference is because the payer is withholding payment on any basis, the payer's reason or reasons for withholding payment.
[38] VH Five does not dispute that a document purporting to be a payment claim under s 20 of the CCA was in fact served on it. Nonetheless there are several issues that need to be resolved in order to determine whether or not the applicant is caught by s 23 of the CCA. The effect of that section is that unless a payment schedule complying with the CCA is served, the payer is in effect deemed to owe any unpaid portion of the payment claim, leaving until later proceedings any dispute that the payer would wish to raise concerning whether or not the debt is actually owed. As well, by operation of s 79 of the CCA the payer cannot set up any counter-claim, set- off or cross demand in proceedings for the recovery of the debt under ss 23 and 24.
[39] The question of whether the payer (VH Five) in this case has satisfied the requirements of s 290 of the Companies Act requires the Court to consider whether or not VH Five has raised a substantial dispute that the debt is not payable pursuant to s 23 of the CCA. VH Five is of course concerned to show that there is a substantial dispute about the debt on the grounds that it cannot have arisen in the circumstances which Kimble claims. The terms of the statutory demand which Kimble served in this case were as follows:
Kimble Contracting Limited (“Kimble”) hereby demands from you the sum of $260,165.92 outstanding as per the statement attached for work undertaken pursuant to a construction contract deed 10th of March 2015, full particulars of which have been supplied to you.
Validity of the payment claim – had payments become due?
[40] Before going on to consider some of these matters it is necessary to say something additional about the contract that the parties entered into. There are time limits which are established by the CCA and which are of critical effect, both when considering the validity of the payment claim and the merits of the payment schedule. This will be explained further below.
[41] The CCA establishes that a payment claim must relate to a recognised billing period.10 The parties are free to make their own arrangements as to the relevant period for which payment claims can be made. If they do not make such arrangements then the default arrangements set out in s 17 of the CCA will apply. The effect of those arrangements is that the first period for which a progress claim can be made is one month from the commencement of work and each month
thereafter.
[42] The parties were not able to agree in this case as to what the periods of the payment claims ought to be. I will consider that issue next.
The claim period
[43] The contract itself provided that progress claims could be submitted weekly. However progress payment claims under that arrangement were stated to be agreed “until 30th of April 2015”. No provision was made for what was to happen thereafter. Because the contract contemplated that practical completion of the Part A properties was not to occur until 29 May 2015, the weekly payment arrangements did not cover the expected entire life of the construction contract.
[44] The parties made reference to the background to the contract in aid of their interpretation of the contractual arrangements.
[45] Kimble claimed that it was only necessary to have weekly progress payments down to 30 April 2015, because it was contemplated that by that date VH Five would have put in place a $500,000 overdraft arrangement. This arrangement would provide adequate assurance of liquidity from which VH Five would be able to meet future progress payment claims. On the other hand, VH Five claimed that, because it was appreciated that Kimble was taking over the contract of a company which had gone into liquidation, it was essential that short progress payment intervals be recognised in order to ensure that Kimble had sufficient cash flow to finance
construction operations.
10 Section 20(1).
[46] The evidence on this matter is equivocal. There is no express agreement between the parties that if the alleged overdraft arrangement failed to come to fruition, the weekly payments arrangement would be automatically extended. It is doubtful that the Court would imply a term to that effect, it not being obvious that that is what the parties intended. That is particularly so in the light of the fact that the parties knew that it was unlikely that the contract would be completed by 30
April 2015.11 Faced with that obvious outcome, they nonetheless agreed to a period
for weekly payments that was shorter than the expected period of construction and must have anticipated that there would be further invoices to be rendered after 30
April. Nor would it be a term that the Court would consider implying on the basis of necessity when there was a default arrangement available to cover the situation by virtue of the payment provisions of s 17(2) of the CCA.
[47] It would seem likely that the correct position, therefore, was as described in the submissions which Mr Wilson filed for VH Five:
14.Unless the parties agree to the contrary, the relevant period for a progress payment is each month after the end of the first calendar month: s 17(2)(b) of the CCA. The relevant period for a progress payment is important because the amount of a progress payment is calculated by reference to the relevant period: s 17(1) of the CCA.
[48] I acknowledge that there is a conflict of evidence between the parties as to the reasons why weekly payments down to 30 April were agreed to in the first place. This is not a conflict which can be resolved on an affidavit evidence-based hearing.
[49] The payment claims made by Kimble were served on various dates which are assumed to have been the dates of the invoices themselves. The invoices were dated
12, 16, 19, 24, 26 and 30 June 2015; and 3, 4, 7 and 10 July 2015.
[50] It is necessary to examine the timing of those invoices in light of the conclusion I have reached that it is at least arguable that the default progress payment period established by s 17 of the CCA applied in the circumstances of this
case.
11 That is implicit in the fact that the practical completion date defined in the contract was not until
29 May 2015, nearly a month later than the date when the seven-day payment arrangements ran out.
[51] I consider that the position of VH Five is the correct one. The argument for VH Five was that where the default payment position established by s 17 applies, the payee (Kimble) is restricted to submitting claims on a monthly basis. Those claims become due and payable on the date occurring 20 working days after the last day of the payment period (that is, after the end of the month under the default arrangement). It is further correct that a party who is entitled under the Act to make payment claims on a monthly basis cannot unilaterally seek to improve its position by serving payment claims more frequently than at monthly intervals.
[52] Adopting such an approach in the circumstances of this case means that the June invoices became payable 20 working days after the end of June and those served in July, 20 working days after the end of that month. Again, on this view of matters, the service of the payment schedule on 14 July 2015, which was applicable to all of the invoices, would be well within time.
The contents of the payment schedule
[53] I have previously set out my conclusion that the payment periods specified by s 17 were applicable. That leads to the further conclusion that VH Five gave a timely payment schedule in regard to the invoices which are the subject of the statutory demand.
[54] The next issue concerns whether the payment schedule otherwise conformed to the requirements of the CCA.
[55] It is possible to imagine cases where the court is able to conclude that, because of the straightforward nature of the factual context, it can confidently rule out the possibility of a payer being able to escape liability under the CCA. For example in a case where there has been a complete failure to serve a payment schedule, and no substantial dispute that that is so, the applicant will have failed to show that the statutory demand ought to be set aside. In other cases, deciding whether there is a reasonable argument which the applicant would be able to put forward concerning the payer’s compliance with the CCA will be a more nuanced question and the court may conclude that the issue is not one which ought to be determined by the Companies Court.
[56] The issue that needs to be explored in this case concerns whether the payment schedule arguably complies with the CCA. The Court does not need to come to a final conclusion regarding compliance in order to set aside the statutory demand.
[57] Kimble took the position that the payment schedule was insufficiently detailed and supported by corroborating documentary material and the like.
[58] The schedule in this case was, relevantly, to the following effect:
3.VH Five hereby advises KCL that the invoices listed in the attachment to this letter are in dispute due to non-performance by KCL of its obligations under the Agreement. In particular, KCL’s obligations under paragraphs A2, A7 and B5 are highlighted at present, namely:
a.A2/ Cost to complete the Eskdale/Vonnel/Tamahere properties limited to an amount not greater than $586,535 plus GST;
b.A7/ Practical completion of the Eskdale/Vonnel/Tamahere properties to be achieved by 29 May 2015; and
c.B5/ The renovated unit at 69 Vandeleur to be ready for sale no later than 27 March 2015.
4.To the extent the Construction Contracts Act 2002 (Act) is deemed applicable, this letter, including the Appendix, constitute a payment schedule for the purposes of the Act. The payment claims to which it relates (to the extent such invoices constitute payment claims) are listed in the Appendix and the scheduled amount of each claim is
$0.00. For the purposes of clause 3 of the Act, this scheduled amount was calculated on the basis that BH Five is withholding payment of the entire amount of these invoices for the following reasons:
a.Insufficient work has been carried out to justify a number of the invoices;
b.Invoices have been received for work not instructed to be undertaken;
c.KCL has invoiced at least $522,423 in relation to A2 (referenced above), and the cost-to-complete estimates for A2 were $499,621 at the last budget review in early June, with little to no progress having been made since then, resulting in present expected damages for non-performance of $435,509 under paragraph A2 alone.
[59] Both counsel agreed that the judgment of Rodney Hansen J in Westnorth Labour Hire Limited v S B Properties Limited correctly summarised the law in this area.12 After considering the payment schedule in that case, his Honour made the following comment:13
Although the letter does not adopt the terminology of the Act, is not stated to be a payment schedule and does not specify that the scheduled amount is nil, the essential message is clear and unequivocal. Mr Mullane explains why he now doubts the accuracy of Westnorth timesheets and hence the sums he has been charged. He identifies a charge for materials that have been returned and instances of faulty workmanship which would entitle SB Properties to counterclaim. He says he will not pay the two invoices until Westnorth provides him with full particulars of what the contracted labour has done.
[60] The Westnorth judgment made reference to what Rodney Hansen J described as “the leading case” of Multiplex Constructions Pty Limited v Luikens where the Court said:14
Section 14(3) of the Act, in requiring a respondent to “indicate” its reasons for withholding payment, does not require that a payment schedule give full particulars of those reasons. The use of the word “indicate” rather than “state”, “specify” or “set out”, conveys an impression that some want of precision and particularity is permissible as long as the essence of “the reasons” for withholding payment is made known sufficiently to enable the claimant to make a decision whether or not to pursue the claim and to understand the nature of the case it will have to meet in an adjudication.
[61] Following as I do the observations in Westnorth, I agree with Mr Chesterman that some aspects of the payment schedule in this case do not amount to statements of which it could be said that “the essential message is clear and unequivocal.”15 For a payment schedule as here to state that “[i]nsufficient work has been carried out to justify a number of invoices”16 falls short of the statutory requirements. I do not overlook the authority to which Mr Wilson referred, NCB 2000 Limited v Hurlstone Earthmoving Limited,17 which Mr Wilson referred to in the following submission:
18.The requirements for a payment schedule are set out in s 21. It must be in writing, identify the payment claim, indicate a scheduled amount, and (if less than the claimed amount) indicate the manner in
12 Westnorth Labour Hire Ltd v S B Properties Ltd HC Auckland CIV 2006-404-1858, 21 August
2006.
13 At [28].
14 Multiplex Constructions Pty Ltd v Luikens [2003] NSWSC 1140 at [78].
15 Westnorth Labour Hire Ltd, above n [28].
16 At para 4(a) of the payment schedule.
17 NCB 2000 Ltd v Hurlstone Earth Moving Ltd HC Auckland CIV 2010-404-8096, 23 June 2011.
which it has been calculated, the reasons for the difference, and the payer’s reason for withholding payment. A schedule can be understood in a non-technical way by reference to earlier correspondence and a payer can indicate its reasons for withholding payment in relatively bald terms: see NCB 2000 Ltd v Hurlstone Earth Moving Ltd.
[62] I do not apprehend that in his judgment in NCB Wylie J was intending to dissent from the conclusions contained in Westnorth Labour Hire Limited. Indeed, Wylie J cited that case with approval.18 For a payment schedule to make the statement that payment was being declined because “[i]nsufficient work has been carried out to justify a number of the invoices” does no more than set out the conclusion of the payer and does not advance the objectives identified in the Multiplex Constructions Pty Limited case referred to above.19 Such a statement is so bland that it could not have assisted Kimble to make a decision whether or not to pursue the claim.
[63] However sub-paragraph 4(a) of the payment schedule cannot be read in isolation. Other reasons were put forward for not meeting the payment claim. They need to be considered, too. The payee in this case, Kimble, was armed with the knowledge of what the contract provided for and would have had little difficulty in understanding what VH Five was intending to convey in sub-paragraph 4(c) of the payment schedule. It was clear from para (a) of the contract that the contract sum to carry out the work to the Part A properties was not to exceed $586,535 plus GST.
[64] For the purposes of deciding whether there is a substantial dispute between the parties (with this part of the dispute concerning the question of whether VH Five is entitled to the protection of the payment schedule which it issued) and following the approach identified in NCB,20 VH Five has done enough to persuade the Court that it complied with the requirements of s 21 of the CCA.
[65] The statement in the payment schedule that Kimble had invoiced at least
$522,423 out of the total contract price of $586,535 plus GST and yet an additional
18 At [49].
19 Multiplex Constructions Pty Ltd, above n 14
20 NCB 2000 Ltd, above n 17
amount of approximately $0.5 million was still required to complete the project, in my view, speaks for itself.
[66] Even if that were not enough on its own to justify a conclusion that the payment schedule gave a sufficient indication as to why VH Five was not going to pay the additional invoices, it seems likely that there would have been discussions in the background preceding the issue of the payment claim and the payment schedule about this topic. Mr Weise states that revised budgets were eventually calculated together with Kimble’s representative on 17 June 2015. Revised budgets were required for the very reason that the project had, as Mr Herd stated, gone “horribly overbudget”. In this context, it is idle for Kimble to contend that following receipt of the payment schedule it did not have a clear understanding of what the principal ground for non-payment was.
What is the significance of a conclusion that a payment schedule was validly issued?
[67] The foregoing discussion brings matters to the point where the key issue under consideration in this case can be looked at in detail.
[68] Mr Wilson made the following submission:
19.If the payer does not provide a payment schedule, then the payer becomes liable in terms of ss 22 and 23. That can be enforced by proceedings. A statutory demand can also be issued in respect of such a liability. However, if it is fairly arguable that a payment claim was not effectively or validly submitted, then that provides a basis on which to set aside a statutory demand issued in respect of the progress claim: Luxta Ltd v Paragon Builders Ltd.21
[69] The effect of serving a valid and effective payment schedule is that the payee is not able to establish entitlement to remedies such as a liquidation in proceedings in which the payer is not permitted to raise matters of defence or set off. A payee which can bring itself within the CCA payment regime need demonstrate no more than that it has not been paid the amount sought in the payment claim. If there has been a valid payment schedule, the payee can still claim for a debt that is owed to it
but in proceedings for such a purpose, the payer is entitled to raise defences and also
21 Luxta Ltd v Paragon Builders Ltd HC Wellington CIV-2010-485-1825, 17 December 2010.
to rely on any counterclaim, set-off or cross demand that might be available to it. It needs to be understood that in order to obtain an order setting aside the statutory demand, it is not enough to show that a valid payment schedule was issued. By doing that, an applicant does no more than establish that the case is one where it might be able to raise a substantial dispute as a ground for setting the statutory demand aside. Achieving that step is not the same thing as demonstrating that it actually has a substantial dispute that it can rely on. The applicant must go further than that and demonstrate that it has in fact an arguable basis for a defence of the claim.
Effect of construction being over budget
[70] There are a number of uncertainties regarding the case that VH Five can point to. The case is essentially that even though Kimble has issued invoices up to an amount approaching the maximum contract and budget for the construction, the work is still substantially incomplete and, according to VH Five, the estimated cost of bringing the project to completion will involve spending approximately $0.5 million more than the contract provided for.
[71] Assuming that the calculated additional cost to complete the project is based on substantially similar rates for labour and materials as those which Kimble is entitled to under its contract, then a large proportion of the construction must still be uncompleted.
[72] If the staging of payments ought to march together with the degree of completion, which is at least arguable, then an inference arises that Kimble has simply not carried out the work for which it seeks to be paid.
Substantial dispute
[73] I consider that the applicant is entitled to an order setting aside the statutory demand. That is because it must be at least arguable that Kimble has no claim for further payment. That is because nearly all of the fixed price to which it is entitled for completing the “A” phase of the construction has been used up when nearly
$0.5 million worth of work remains to be completed. This has occurred at a point where construction is only partially complete.
[74] Further, I have concluded that the payment schedule effectively put these grounds for non-payment forward.
Other matters
[75] The parties referred me to other matters which might bear upon the question of whether the originating application to set aside the statutory demand ought to be granted or dismissed. These include arguments over the provision of windows to the properties which were under development. As well, VH Five initially relied upon the fact that it would have a counterclaim or cross demand arising out of the damages which it would be able to claim against Kimble for breach of contract. Those damages represent the amount that it would now cost VH Five to complete the development, to the extent that that cost exceeds the contractual sum that it would have had to pay Kimble under the contract for the same work.
Summary
[76] The conclusions of this judgment are first, that that it is arguable that after
30 April 2015 the seven-day payment periods specified in the contract no longer applied and that the periods specified by s 17 applied by default. Secondly, the payment schedule which the applicant served on 14 July 2015 was arguably in time. The third conclusion is that the payment schedule can reasonably be viewed as complying with the requirements of the CCA in that it provided notice to the payee of the essence of the basis upon which VH Five disputed the payment claims.
[77] For the foregoing reasons the provisions of the CCA do not operate to prevent VH Five from putting forward a defence to the claim. Further, VH Five is able to identify a substantial dispute as to why no further payments were due to Kimble under the contract.
Orders
[78] There will be an order setting aside the statutory demand dated 27 July 2015.
[79] The parties sensibly agreed that costs should follow the result and that they should be awarded on a 2B basis. There will therefore be an order that Kimble is to pay the costs of the application on a 2B basis together with disbursements as fixed
by the Registrar.
J.P. Doogue
Associate Judge
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