Volcanic Investments Limited v Dempsey & Wood Civil Contractors Limited HC Auckland CIV-2005-404-1320

[2005] NZHC 1255

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2005-404-1320

BETWEEN  VOLCANIC INVESTMENTS LIMITED

Applicant

ANDDEMPSEY & WOOD CIVIL CONTRACTORS LIMITED

Respondent

Appearances: M G Locke for Applicant

E St John for Respondent Judgment:    24 May 2005

RESERVED JUDGMENT OF RANDERSON J

This judgment was delivered by me on 24 May 2005 at 10 am, pursuant to r 540(4) of the High Court Rules

Registrar/Deputy Registrar

Solicitors:           Lovegroves, PO Box 25 066, Auckland

Alan Jones Law Partnership, PO Box 32 249, Auckland Counsel:           M G Locke, PO Box 90915, Auckland

E St John, PO Box 105 270, Auckland

VOLCANIC INVESTMENTS LIMITED V DEMPSEY & WOOD CIVIL CONTRACTORS LIMITED HC AK CIV-2005-404-1320 [24 May 2005]

Introduction

[1]    This case raises a narrow but important issue about the relationship between the winding up provisions of the Companies Act 1993 and s 79 of the Construction Contracts Act 2002. In short, the applicant (Volcanic) seeks an order staying a statutory demand issued against it by the respondent (Dempsey & Wood). The demand seeks recovery of a sum of money found to be owing to Dempsey & Wood in an adjudication under the Construction Contracts Act. Volcanic wishes to raise a set-off but Dempsey & Wood submits that s 79 of the Construction Contracts Act means the Court cannot give effect to the set-off.

The Adjudication under the Construction Contracts Act

[2]    In 2004, Dempsey & Wood carried out foundation and slab construction work for Volcanic on a property at 2 Brighton Road, Parnell. When Volcanic failed to pay for the work, Dempsey & Wood referred the dispute to adjudication under Part 3 of the Construction Contracts Act. After hearing the parties, the adjudicator made his determination on 17 February 2005. He determined that Volcanic was liable to pay Dempsey & Wood the total sum of $62,017.69 including the amount of the claim, interest, GST and costs. The adjudicator determined that the date for payment for the purposes of s 48(3)(a)(ii) was to be 24 February 2005.

[3]    Dealing with a submission by Volcanic that Dempsey & Wood had unreasonably delayed completion of the work, the adjudicator found it had not been demonstrated on the balance of probabilities that there was unreasonable delay by Dempsey & Wood. He found that the initial stages of the programme had been disrupted by Volcanic. Reference was made to a slip having occurred; to variation orders for extra work; and to delay caused by the need for piling in consequence of the discovery of unexpected fill on the site. Those delays brought the foundation works into the winter season.

[4]    The adjudicator found that it had not been demonstrated on the balance of probabilities that Volcanic had suffered any direct costs or losses as a consequence

of any delay. He also found that although there may have been some legal liability owed by Volcanic to the owner of the property (Roseneath Properties Limited), any such claim was “too loose and too late and too ill-prepared to be determined in this adjudication, even if there were delays for which [Dempsey & Wood] was legally responsible which has not been proven. ”

The Statutory Demand and the Application to Set it Aside

[5]    Having obtained a determination in its favour, Dempsey & Wood issued a statutory demand to Volcanic under s 289 of the Companies Act 1993 for the amount found to be due by the adjudicator. Volcanic now applies for an order under s 290 of the Companies Act setting aside the demand.

[6]Section 290(4) provides:

(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.

[7]    Volcanic relies on the following grounds to support its application under s 290:

a)Volcanic is solvent and able to pay its debts;

b)There is a substantial dispute as to whether the amount specified in  the demand is due;

c)Volcanic has a set-off and/or cross demand against Dempsey & Wood which exceeds the amounts specified in the demand;

d)The demand is an abuse of process;

e)Other grounds set out in a supporting affidavit.

[8]    As the case was advanced by Volcanic, the principal ground was the claimed existence of a set-off for losses said to have been incurred as a consequence of delay by Dempsey & Wood in carrying out the work. In that respect, Volcanic has issued proceedings in the District Court against Dempsey & Wood claiming the alleged losses.

[9]    Dempsey & Wood opposed the application to set aside the demand relying principally upon s 79 of the Construction Contracts Act which provides:

79     Proceedings 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.

[10]The issues to be determined are:

a)Whether by virtue of s 79 of the Construction Contracts Act, this Court must not give effect to the claimed set-off when considering the application for a stay under s 290(4) of the Companies Act;

b)Whether there are any other grounds upon which the statutory demand should be set aside.

The Statutory Scheme under the Construction Contracts Act

[11]   It is necessary to consider the provisions of the Construction Contracts Act so far as they are relevant to the determination of Volcanic’s application. The purpose of the Act is described in s 3:

3     Purpose

The purpose of this Act is to reform the law relating to construction contracts and, in particular,—

(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.

[12]   There are three ways under the Act in which a party to a construction contract may become entitled to recover money from another party as a “debt due”. Two of these are under Part 2 of the Act which provides for the recovery of payments under a construction contract. There is an evident statutory intention to ensure that payments due under such contracts are promptly made. Sections 19 to 22 set out a procedure for making and responding to payment claims. In brief, a “payee” seeking payment issues a payment claim, the response to which by the “payer” is the provision of a payment schedule. Failure to provide a payment schedule may result  in liability to pay under s 23, the consequences of which are that the payee “may recover from the payer, as a debt due to the payee in any court, … the unpaid portion of the claimed amount; …” (s 23(2)(a)(i)).

[13]   Similarly, where a payer fails to pay an amount identified in a payment schedule as the amount the payer proposes to pay, the payer may become liable to pay that amount under s 24 of the Act. Again, the consequence is that the amount may be recovered in any court “as a debt due to the payee” (s 24(2)(a)(i)).

[14]   The third way in which liability to recover a sum of money as a debt due may arise under the Act is as a result of an adjudication of a dispute under Part 3. Here, it is common ground that the adjudicator has determined for the purposes of s 48(1)(a) of the Act that an amount of money is payable by Volcanic to Dempsey & Wood under the construction contract between them.

[15]   By virtue of s 58, an adjudicator’s determination under s 48(1)(a) is enforceable in accordance with s 59 which relevantly provides:

59 Consequences of not complying with adjudicator’s determination under section 48(1)(a)

(1)       The consequences specified in subsection (2) apply if a party to the adjudication fails, before the close of the relevant date, to pay the whole or part of the amount determined by an adjudicator.

(2)     The consequences are that the party who is owed the amount (party A) may do all or any of the following:

(a)     recover from the party who is liable to make the payment (party B), as a debt due to party A, in any court,—

(i)the unpaid portion of the amount; and

(ii)the actual and reasonable costs of recovery awarded against party B by that court:

…

(4)       In any proceedings for the recovery of a debt under this section, the court must not enter judgment in favour of a party unless it is satisfied that the circumstances referred to in subsection (1) exist.

(5)In this section, relevant date means—

(a)      the date that occurs 2 working days after the date on which a copy of the relevant determination is given to the parties to the adjudication under section 46(3); or

(b)     if the adjudicator determines a later date under section 48(3)(a)(ii), that later date.

[16]   It is common ground that Volcanic has not paid the amount found to be due  to Dempsey & Wood by the adjudicator by the date specified by the adjudicator. It follows that Dempsey & Wood is entitled to recover from Volcanic the amount determined to be due plus the actual and reasonable costs of recovery as a “debt due”.

[17]   Dempsey & Wood may recover the amount “in any court”. The expression “court” is defined by s 5 as meaning the High Court or a District Court (in any proceeding in which the amount claimed does not exceed the amount to which the jurisdiction of the District Court is limited in civil cases). As I will shortly describe, the Act provides for the entry of judgment in the District Court for the amount of any debt due under the Act but there is nothing in the Act which would preclude other modes of recovery by lawful process.

[18]   There is a clear statutory intention to limit the scope for challenging an adjudicator’s determination under the Act. First, there is no provision for appeals. Secondly, s 60 provides that a determination under s 48(1)(a) is binding on the parties and continues to be in full effect even though a party has applied for judicial review of the determination and notwithstanding the commencement of any other proceedings relating to the dispute between the parties. Thirdly, where application is made to a District Court under s 73 of the Act for an adjudicator’s determination to be enforced by entry as a judgment, the grounds upon which entry as a judgment may be opposed are strictly limited by s 74(2). Those grounds are that the amount

has been paid; that the contract is not a construction contract to which the Act applies; or that a condition imposed by the adjudicator has not been met.

The meaning of s 79 Construction Contracts Act

[19]   Section 79 itself clearly contemplates that proceedings may be issued for the recovery of a debt due under ss 23, 24 or 59. There is no definition of the expression “proceedings” in the Act but there is nothing to suggest that there is any limitation in the types of proceedings for a recovery of a debt which might be relied upon. These could include an application under s 73 for entry of judgment or the issue of civil proceedings for recovery of the debt by way of summary judgment or otherwise.

[20]   Where the debtor is a company, there is nothing in the Act to  suggest the issue of a statutory demand under the Companies Act is not a proceeding contemplated by s 79 for recovery of a debt. It is an integral step in the winding up process and is the usual preliminary to a winding-up application under Part 9A of the High Court Rules. An application to set aside a statutory demand is a “proceeding” under  the  High  Court  Rules.   It  is  brought  as  an  originating  application  under r 458D(1)(a)(vi) and falls within the definition of a proceeding under r 3. An application to wind up a company is also a proceeding under the High Court Rules (rr 700A and 700C). I conclude that recovery of a debt by the lawful process of the issue of a statutory demand and the bringing of winding up proceedings against a debtor company are “proceedings” contemplated by s 79. Indeed, it was not submitted otherwise.

[21]   In my view the meaning of s 79 is plain. In any proceedings for the recovery of a debt under the identified sections, the Court is forbidden from giving effect to any counterclaim, set-off or cross demand raised by a party to the proceedings except a set-off of a liquidated amount and then, only if judgment has been entered for that amount or there is no dispute in fact between the parties in relation to the claim for that amount.

[22]   In summary, Volcanic’s claim to a set-off against the amount of the statutory demand cannot have any effect unless:

a)The amount of the set-off is a liquidated amount and;

b)Judgment has been entered for that amount or there is not in fact any dispute in relation to the claim for that amount.

[23]   For Volcanic, Mr Locke sought to persuade me that the amount claimed by way of set-off was a liquidated amount. The amounts claimed relate to mortgage renewal fees ($55,000) and interest incurred on funding of two alternative amounts -

$67,200 or $37,800 depending on the period over which interest is calculated.

[24]   It is unnecessary for me to determine whether these claims could amount to a liquidated amount under s 79 because, even if they were, it is common ground that a judgment has not been entered for that amount and that there is a dispute between the parties in respect of that amount. In the latter respect, Dempsey & Wood deny that any delay was due to their conduct and also dispute the amount claimed including  the period over which the interest is calculated.

[25]   It must follow that this Court is forbidden from giving effect to the set-off by virtue of s 79 unless s 290(4) overrides it. I now turn to that question.

Does s 290(4) Companies Act Override s 79 Construction Contracts Act?

[26]   Where there is an apparent inconsistency between provisions of two different statutes, it is a matter of construction as to which is intended to prevail. As the learned author of Burrows Statute Law in New Zealand (3^rd ed, 2003) put it at 317:

In cases such as this the ultimate question is which of the two statutory provisions Parliament intended to govern. That can involve trying to discern the respective policies and purposes underlying the provisions, and may involve resort to intrinsic evidence. In other words, the matter  comes down to one of construction.

[27]   When approaching the issue of construction, where a special provision in a statute is enacted after a more general provision in another statute, the special provision will normally prevail. In effect, the later special provision creates an exception to the general one: Burrows at 317 and cases cited.

[28]   In the present case, there is an apparent inconsistency between s 79 Construction Contracts Act and s 290(4) Companies Act. That is because,  in terms of s 290(4)(b) Companies Act, the court may set aside a statutory demand if satisfied that the company appears to have a set-off which, when deducted from the amount of the demand, would result in a figure below the “prescribed amount” (currently

$1000).

[29]   In the present case, the amount of the set-off would exceed the amount of the statutory demand so the court would have a discretion under s 290(4)(b) to set aside the demand. In contrast, s 79 Construction Contracts Act would preclude the court giving effect to the set-off.

[30]   I have no doubt that Parliament intended s 79 Construction Contracts Act to prevail and to preclude a court giving effect to any set-off in proceedings to recover  a debt established under ss 23, 24 or 59 Construction Contracts Act. I reach that conclusion for these reasons.

[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 or which become payable under ss 23 and 24 of the Act, should be promptly recoverable with very limited opportunity for further dispute: see the discussion at [12] to [15] and paragraph [18] above.

[33]   Those intentions are stated expressly in s 3 of the Act and are evident from the other provisions already identified. Reference may also be made to the decision of the Court of Appeal in George Developments Limited v Canam Construction

Limited CA244/04 12 April 2005 at [3] and [41] and to the helpful discussion in Smellie Progress Payments and Adjudication at [18], [19], [62] and [63]. To permit an unproven set-off to be raised as a means of avoiding payment of an established debt would be inconsistent with the purpose and intentions of the Construction Contracts Act.

[34]   Thirdly, Volcanic 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  & Wood. Effectively, that debt is to be paid with the set-off pursued separately in the District Court.

[35]   I conclude that Volcanic may not, in the circumstances of this case, rely on a set-off as a ground for setting aside the statutory demand under s 290 Companies Act.

Are there any other grounds upon which the statutory demand should be set aside?

[36]   Section  79  only  affects  the  operation  of  s  290(4)(b).  It  does  not  affect s 290(4)(c) in terms of which a statutory demand may be set aside “on other grounds”. However, Mr Locke did not advance in argument any other grounds other than submitting that Volcanic was solvent. In that respect, an affidavit was filed by the Managing Director of Volcanic in which it was stated that the company had an equity of just over $900,000 and that the company was solvent. It was said that the only reason for non-payment of the amount was the claimed set-off.

[37]   I am not satisfied on the evidence presented that it has been established that the company is solvent in terms of the solvency test under s 4 Companies Act. By virtue of s 287, unless the contrary is proved, a company is presumed to be unable to pay its debts if it fails to comply with the statutory demand. That presumption has  not been overcome on the basis of the evidence presented. Specifically, there is no evidence that Volcanic is able to pay its debts as they fall due.

[38]   I conclude there are no grounds established to set aside the statutory demand and, the application is dismissed accordingly. In terms of s 291 Companies Act I order that the applicant company pay the amount of the statutory demand within 14 days of the date of this judgment and that, in default of payment, the respondent may apply to put the company into liquidation.

[39]The respondent is entitled to costs against the applicant on a 2B basis.

A P Randerson, J Chief High Court Judge