Xinhao Developments Limited v Local Civil Construction Limited
[2022] NZHC 1082
•17 May 2022
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2021-404-2312
[2022] NZHC 1082
UNDER the Companies Act 1993, section 290 IN THE MATTER OF
an application for an order setting aside the statutory demand
BETWEEN
XINHAO DEVELOPMENTS LIMITED
Applicant
AND
LOCAL CIVIL CONSTRUCTION LIMITED
Respondent
Hearing: 29 April 2022 Appearances:
C L Holland for the Plaintiff
J P Nolen / CJ H Fraser for the Respondent
Judgment:
17 May 2022
JUDGMENT OF ASSOCIATE JUDGE C B TAYLOR
This judgment was delivered by me on 17 May 2022 at 3:00pm
pursuant to Rule 11.5 of the High Court Rules
………………………….
Registrar/Deputy Registrar
Solicitors:
Turner Hopkins (C L Holland), Takapuna, for the Plaintiff
K3 Legal Limited (J P Nolen/C J H Fraser), Auckland, for the Defendant
XINHAO DEVELOPMENTS LIMITED v LOCAL CIVIL CONSTRUCTION LIMITED [2022] NZHC 1082 [17 May 2022]
Introduction
[1] Xinhao Developments Ltd (Xinhao) applies to set aside a statutory demand that Local Civil Construction Ltd (Local Civil) has made on it.
Background
[2] Xinhao and Local Civil entered into a contract dated 7 November 2017 (the Contract), under which Local Civil would carry out certain works at 242 Flat Bush School Road, Flat Bush, Auckland (the Flat Bush address). A third party, Candor3, was engaged on behalf of Xinhao as the engineer that would supervise works carried out under the Contract.
[3] The Contract was for a lump sum of $5,150,000 plus GST. It was divided into two separable portions,1 each scheduling various property development works. The Contract was entered into on industry standard terms and conditions, but with some agreed amendments. Relevant for present purposes is the deletion of cl 9 and its replacement with a new cl 9.1, providing there will be no variations to the Contract whatsoever, and that any unscheduled works required for practical completion would be at Local Civil’s own cost.
[4] Local Civil completed its work under Separable Portion A between late 2017 and late 2018. Over that period, it submitted payment claims to Candor3, which was responsible for reviewing and certifying the scheduled amounts. On receipt of payment certificates, Local Civil would render invoices to Xinhao for the certified scheduled amounts.
[5] In June 2018, Xinhao paid Local Civil an additional sum of $230,000. This payment was described as a “bonus” in an email from Mr Hao Li, a director of Xinhao, to Candor3 (June 2018 payment).
1 Later in this judgment, I will refer to the separable portions respectively as “Separable Portion A” and “Separable Portion B”.
[6] Local Civil and Xinhao’s arrangement continued without incident until late 2018. Then, when the works progressed from those scheduled under Separable Portion A to those scheduled under Separable Portion B, a dispute developed between Local Civil and Candor3 (on behalf of Xinhao). Local Civil took the view that it should be paid additional amounts for certain additional works. Candor3 (and Xinhao), meanwhile, considered there should be no payment for the additional work due to cl.9’s “no variations” provision.
[7] On 28 February 2019, Local Civil submitted to Candor3 its second payment claim under Separable Portion B. The claim was for the sum of $331,204.49 (including GST), which included amounts claimed as “Variations” relating to alleged additional works Xinhao requested. Candor3 issued a payment certificate for the claim on 29 March 2019, certifying $114,032.30 (including GST) for the scheduled works, but rejecting all amounts claimed for the alleged additional works. Local Civil invoiced Xinhao for the certified amount on 29 March 2019.
[8] On 1 April 2019, Local Civil submitted to Candor3 its third payment claim under Separable Portion B. This claim was for $375,362.15 (including GST). As with the second payment claim, this sum included amounts claimed for alleged additional works. On 9 April 2019, Candor3 issued a payment certificate that certified
$108,962.96 (including GST) as the scheduled amount payable under the Contract. It again rejected all amounts claimed for the alleged additional works. Local Civil invoiced Xinhao for the certified amount on 9 April 2019.
[9] Later that month, Local Civil issued to Candor3 a notice of suspension of work relating to the alleged outstanding amounts from the second and third payment claims under Separable Portion B. It followed up that notice with a letter of demand to Xinhao dated 23 April 2021. On 5 May 2021, Xinhao’s solicitors responded by letter to dispute the demand for payment, stating further that the June 2018 payment of
$230,000 was not a “bonus” but instead payment for the scheduled works.
[10] Subsequently, Local Civil served on Xinhao a statutory demand dated 18 November 2021 for the sum of $222,995.26, being the aggregate amount
outstanding under the two certified payment claims. Xinhao disputes the amount is payable.
Xinhao’s application to set aside statutory demand
[11]Xinhao seeks orders:2
a.Setting aside a Statutory Demand pursuant to Section 289 of the Companies Act 1993 dated 18 November 2021 for the sum of
$222,995.26 and served on Xinhao Developments Limited by the respondent on 19 November 2021.
b.An order that time be extended for compliance with the demand until further order of the Court.
c.That the respondent pays the applicant’s increased costs of and incidental to this proceeding.
[12]The grounds on which Xinhao seeks the orders are:3
(a)There is a genuine and substantial dispute that the claimed debt is owing because the alleged outstanding debt claimed by the applicant is not within the agreed scope of the Contract between the applicant and the respondent.
(b)The issuing of a Statutory Demand is an abuse of process.
(c)The applicant is entitled to increased costs as it has made the respondent well aware that it disputes it owes a debt to the respondent.
(d)As appears from the affidavit of Guoliang Zhang filed in support hereof.
Affidavit of Guoliang Zhang dated 23 December 2021
[13] Mr Guoliang Zhang, a director of Xinhao, has made an affidavit in support of Xinhao’s application to set aside the statutory demand. He deposes Xinhao was incorporated in 2015 and that it purchases land for development. He says, pursuant to the Contract, Xinhao engaged Local Civil to carry out works at the Flat Bush address. He says Candor3 was engaged as the engineer supervising the works carried out under the Contract.4
2 Originating application by applicant to set aside statutory demand dated 3 December 2021 at [1].
3 At [2].
4 Affidavit of Guoliang Zhang dated 23 December 2021 at [2]–[4].
[14] Mr Zhang deposes that the Contract was for a lump sum of $5,150,000 plus GST, in return for Local Civil carrying out various construction works. He says cl 9.1 of the Contract provided that there would be no variations to the Contract, and that if any additional works were required, Local Civil would perform the additional works at its own cost until such time as the Practical Completion Certificate was issued.5
[15] Mr Zhang deposes that Local Civil undertook work under Separable Portion B and rendered two invoices to Xinhao, relating to works completed in February and March 2019 respectively. He says Local Civil, on 23 April 2019, issued to Candor3 a notice of suspension of work relating to alleged outstanding amounts under the invoices. He says that the notice of suspension of work expressly identifies the outstanding amounts as being for work “outside of the contract”. It also says that Local Civil had been made aware of a dispute Xinhao had raised relating to the alleged outstanding amounts.6
[16] Next, Mr Zhang deposes that Local Civil sent to Xinhao a demand letter dated 23 April 2021. Xinhao’s solicitors responded by letter dated 5 May 2021, disputing the alleged debt. Further letters were exchanged between the parties between July and October 2021. Finally, Local Civil served on Xinhao a statutory demand dated 18 November 2021 for the sum of $222,995.26. Mr Zhang says Xinhao disputes the claimed amount, saying it is outside the agreed scope of the Contract.7
[17] Even if the alleged debt was within the agreed scope of the Contract, Mr Zhang says, Xinhao denies the debt has not been paid. He says Xinhao paid Local Civil
$230,000 in June 2018, that this unallocated amount is to be considered payment for the scheduled work under the Contract, and that it sufficed to cover the alleged debts. Mr Zhang therefore characterises the statutory demand as an abuse of process, and that this is not a case where Xinhao is unable to pay.8
5 At [5]–[6].
6 At [7]–[9].
7 At [10]–[17].
8 At [18]–[22].
Local Civil’s notice of opposition to Xinhao’s application to set aside statutory demand
[18]Local Civil opposes Xinhao’s application on the grounds:9
(a)There is no substantial dispute whether the debt the subject of the Statutory Demand issued by Local Civil dated 19 November 2021 (Debt) is less than the prescribed amount and is owing or due because:
i.The Debt relates to work performed under a construction contract dated 7 November 2017 between Local Civil and the applicant.
ii.The Debt is based on scheduled amounts certified for payment in response to payment claims issued by Local Civil under the Construction Contracts Act 2002 (CCA), which were not paid and are now due and owing pursuant to section 24 of the CCA.
iii.The “disputed works” the applicant has referred to are different to the works upon which the Debt is based.
(b)The applicant does not have a counterclaim, set-off, or cross demand that would render the Debt less than the prescribed amount because:
i.Pursuant to section 79 of the CCA, the court must not give effect to any counterclaim, set-off, or cross demand as the Debt arose under section 24(2)(a) of the CCA.
ii.The alleged set-off relates to a bonus payment approved by the applicant and certified as a scheduled amount that was paid prior to the Debt arising and was expressly approved as being “over and above” any amounts claimed under the Contract at the time.
(c)The issuing of the Statutory Demand was not an abuse of process for the reasons identified above.
(d)The further grounds set out in the affidavit of Zeshu Ren dated 17 December 2021 and any further affidavits to be filed in support of this notice of opposition.
Affidavit of (Zeshu) Grace Ren dated 17 December 2021
[19] Ms Grace Ren, administrator for Local Civil, has made an affidavit in support of Local Civil’s notice of opposition. She says Local Civil is a small company that carried out, or project manages, building and construction works across the Auckland
9 Notice of opposition to originating application to set aside statutory demand dated 17 December 2021 at [3].
region. She says her role within the company includes general administrative and accounts duties, including liaising with creditors and debtors.10
[20] Ms Ren deposes that Xinhao, pursuant to the Contract, engaged Local Civil to carry out certain construction-related works at the Flat Bush address. She says the Contract was on the New Zealand Standard Conditions of Contract for Building and Civil Engineering Construction, with some agreed amendments. She says the Contract provided for civil works to be undertaken in two separable portions, with defined scopes of work to be carried out for each portion. Candor3 was the engineer under the Contract, and Local Civil commenced work in or around November 2017.11
[21] Ms Ren says Local Civil received payment in accordance with the Contract’s terms. It would submit monthly progress payment claims to Candor3 under the Construction Contracts Act 2002. Candor3 would assess the claims and then issue payment certificates identifying the sums it certified as being payable by Xinhao. Local Civil would then invoice Xinhao and receive payments for the scheduled amounts. Local Civil received its first payment on 18 December 2017, for scheduled works under Separable Portion A of the Contract. It received its final payment on 28 February 2019, for the beginning of works under Separable Portion B of the Contract.12
[22] Ms Ren says that in June 2018, Xinhao paid a performance bonus to Local Civil of $230,000. The bonus payment, as recorded in an email from Candor3 to Mr Li, was in recognition of Local Civil’s “excellent performance in the delivery of this project”. Ms Ren says Candor3 asked Xinhao to confirm that it wanted the bonus payment to be included in Candor3’s payment certificate for May 2018, “over and above” Local Civil’s claim for that month. She says Mr Li replied by the email the same day, confirming approval of the bonus payment.13
10 First affidavit of Zeshu Ren in support of notice of opposition to originating application to set aside statutory demand dated 17 December 2021 at [5]–[8].
11 At [12]–[17].
12 At [18]–[19].
13 At [20]–[26].
[23] Ms Ren deposes that a dispute developed between Local Civil and Candor3 (on behalf of Xinhao) in late 2018. The dispute concerned certain works that Xinhao had requested Local Civil carry out, but that Local Civil considered outside the scope of the Contract. Local Civil considered it should receive additional payment for the new works, while Candor3, on Xinhao’s behalf, considered no extra payment should be made due to the “no variations” provision in cl 9.1 of the Contract. Ms Ren says Candor3 refused to certify any payments that Local Civil claimed for the additional works.14
[24] Ms Ren says that despite the dispute over the additional works, Local Civil began work in January 2019 on scheduled works under Separable Portion B of the Contract. It continued to submit payment claims to Candor3. Its second payment claim, submitted on 28 February 2019, under Separable Portion B included claims for part of the additional works, as well as claims for scheduled works under the Contract. Candor3 certified amounts claimed for work under the Contract of $114,032.30, but rejected all of the amounts claimed for the additional works.15
[25] Ms Ren deposes that on 1 April 2019, Local Civil submitted its third payment claim under Separable Portion B, which also included claims for part of the additional works. Candor3 again rejected all the amounts claimed for the additional works, but certified amounts claimed for scheduled works under the Contract of $108,962.96.16
[26] Ms Ren says Xinhao has not paid Local Civil’s second and third payment claims for scheduled works under Separable Portion B. She says the total amount outstanding for the scheduled amounts is $222,995.26 (including GST). That amount now forms the basis of Local Civil’s statutory demand on Xinhao.17
[27] Next, Ms Ren deposes that on 17 April 2019, Candor3 sent Local Civil an email stating that Xinhao refused to pay the outstanding amount because it had been “paid for already” as part of the bonus payment Mr Li approved in June 2018. Local Civil then sent Candor3 a notice of suspension of works, predicated on Xinhao’s failure to
14 At [27]–[32].
15 At [33]–[41].
16 At [42]–[46].
17 At [47]–[48].
pay. Ms Ren says subsequent attempts to resolve the dispute and resume works at the Flat Bush address have been unsuccessful.18
[28] Ms Ren says Local Civil’s solicitors sent Xinhao a letter of demand on 23 April 2021. She says the letter, while setting out the correct quantum demanded, incorrectly described the amount as based on Local Civil’s payment claims, rather than the scheduled amounts that Candor3 certified. She says Xinhao’s solicitors responded the following month with a refusal to pay the debt. The reasons for non-payment were that by virtue of the bonus payment there was no debt owing, and that the amounts allegedly owed related to works outside the Contract’s scope. Ms Ren said Xinhao failed to respond to subsequent without prejudice offers Local Civil made on 27 July and 28 October 2021.19
[29] Ms Ren deposes that Local Civil served a statutory demand on Xinhao on 19 November 2021. She says that while Local Civil believes Xinhao owes it considerably more money, the statutory demand only claims the scheduled amounts from Local Civil’s second and third payment claims under Separable Portion B — amounts Candor3 has certified as payable. She says Xinhao, on 29 November 2021, requested that the statutory demand be withdrawn. On 1 December 2021, Local Civil refused to withdraw the statutory demand and noted that the outstanding amounts could not be set off against the bonus payment due to s 76 of the Construction Contracts Act. Xinhao subsequently filed the present application.20
[30] On Ms Ren’s evidence, Local Civil does not accept Xinhao’s claim there is a genuine and substantial dispute that the outstanding amounts are owing. She says the bonus payment was never intended to be a pre-payment for future works under the Contract — it was explicitly a performance bonus for works already rendered and was to be paid “over and above” the amounts claimed in Local Civil’s regular payment claims. Further, Ms Ren says, Xinhao’s claim that the amounts are not owing as they are for works outside the Contract ignores that the statutory demand is based solely on sums Candor3 has certified as scheduled amounts under the Contract.21
18 At [49]–[52].
19 At [53]–[58].
20 At [59]–[63].
21 At [64]–[69].
Objection to affidavit evidence
[31] Counsel for the Local Civil has filed a memorandum dated 21 April 2022 objecting to filing of two affidavits by Xinhao. The affidavits in question are an affidavit of Jin (Vivian) Xu dated 8 April 2022 and a further affidavit of Jin (Vivian) Xu dated 13 April 2022 (the New Affidavits).
[32] Counsel for Local Civil objects to the filing of the New Affidavits as being in breach of r 7.20 of the High Court Rules 2016, and submits that rule requires any affidavit in support of an application to be filed at the same time as the application. He submits this rule is expressed in mandatory terms as its purpose is to ensure that the opposing side is not taken by surprise. The other grounds on which counsel for Local Civil objects to the filing of New Affidavits are set out at [7] of his memorandum.
[33] Counsel for Xinhao has filed a memorandum dated 22 April 2022 opposing counsel for Local Civil’s objection to the late filing of the New Affidavits. The grounds on which counsel for Xinhao opposes the objection to the late filing of the New Affidavits are set out at [3] to [5] of counsel’s memorandum.
[34] Having considered the submissions made by each of the counsel in their respective memoranda, I will allow the late filing of the New Affidavits. The New Affidavits contain documentary evidence only, and do not require any response by Local Civil. Given the content of the New Affidavits is straightforward, there was, in my view, sufficient time for Local Civil to take them into account in relation to its submissions at the hearing, and I do not consider that Local Civil has been materially prejudiced by the late filing of the New Affidavits.
Xinhao’s submissions
[35] Ms Cherie Holland, for Xinhao, submits that the central issue is whether Xinhao can prove on the balance of probabilities that there is a genuine and substantial dispute as to the existence of the debt. She says Local Civil has not properly accounted
for the $230,000 Xinhao paid Local Civil in June 2018, and that the claimed debt is in dispute between the parties.22
[36] Ms Holland submits the decision to make that payment was not a decision made by Xinhao, and that Local Civil are aware that one director does not act unilaterally in Xinhao’s financial decisions. As well, she submits that the notice of suspension of work states Local Civil’s belief that the most commercially sensible route to resolve the “dispute” is through arbitration. She says, given the notice postdates the payment claims, the position adopted in the notice shall prevail.23
[37] Ms Holland says further that Local Civil’s letter dated 23 April 2019 records that it is aware that the nature of the $230,000 payment is disputed, and that all parties agreed in a meeting on 6 April 2021 that the payment was to be thought of as a payment towards the Contract price, with the Contract permitting no variations. She says Xinhao’s bank was responsible for funding the development, and it is improbable that the bank would release funds for the alleged bonus payment, with such bonus payment not being included in the scope of the lending arrangements. These facts, as well as the fact the Contract makes no provision for any bonus payments, supports Xinhao’s contention that the bonus for which Local Civil contends was not agreed by Xinhao. For that reason, she says Local Civil’s issue of the statutory demand is an abuse of process.24
[38] Ms Holland says a statutory demand is not to be issued where the relevant debt is disputed. She submits the onus is on an applicant seeking to set aside a statutory demand to show there is a genuine and substantial (that is a “real and not a fanciful or insubstantial”) dispute as to the existence of the debt.25 She says it is sufficient that the applicant establish an arguable case this is so.26 Here, Ms Holland submits, Local Civil has acknowledged the existence of a dispute in the notice of suspension of work and in numerous subsequent communications between the parties in attempted
22 Synopsis of submissions for the applicant dated 14 April 2022 at [31]–[32].
23 At [34]–[35].
24 At [36]–[49].
25 At [52]–[54], citing Confident Trustee Ltd v Garden and Trees Ltd [2017] NZCA 578 at [16]; AAI Ltd v 92 Lichfield Street Ltd (in rec & liq) [2015] NZCA 559, (2015) 23 PRNZ 52; and Industrial Group Ltd v Bakker [2011] NZCA 142, 20 PRNZ 413 at [24]–[25].
26 At [57], citing Arzan Investments Ltd v Beresford Apartments Ltd (2003) 16 PRNZ 825 (HC).
resolution. In her submission, therefore, Local Civil is attempting to use the statutory demand process for an improper purpose.27
[39] Ms Holland says there is no doubt as to Xinhao’s solvency. It has paid Local Civil in relation to the undisputed amounts under Separable Portion A of the Contract. She says the purpose of issuing a statutory demand is to test the debtor’s solvency, and it is clear that Xinhao is not insolvent. Further, she submits that natural justice requires that Xinhao be allowed an opportunity to have its dispute heard. Declining to set aside the statutory demand would constitute a breach of the principle of “fair play in action”, especially given Local Civil has accepted there is a dispute.28
[40] Concluding, Ms Holland submits that Xinhao is able to show it has a genuine and substantial dispute in that the $230,000 it paid to Local Civil in June 2018 was for scheduled payments and was not a bonus. As well, the evidence is that the dispute came to Local Civil’s attention as early as 23 April 2019 and that Local Civil acknowledged the dispute. The statutory demand being an abuse of process, indemnity costs in Xinhao’s favour should follow.29
Local Civil’s submissions
[41] Mr Cameron Fraser, for Local Civil, submits that it appears Xinhao is attempting to set off the outstanding debts which are the basis of the statutory demand against the June 2018 payment of $230,000. He says s 79 of the Construction Contracts Act 2002 (CCA) prevents the Court from giving effect to a counterclaim, set-off or cross-demand in proceedings for recovery of a debt under s 24 of the CCA. He submits Local Civil does not accept Xinhao’s claimed set-off or counterclaim regarding the June 2018 payment, but that due to s 79 of the CCA the payment cannot, in any event, be used to claim there is a genuine and substantial dispute underlying the statutory demand.30
27 At [58]–[59].
28 At [63]–[64], citing Contact Energy Ltd v Moreau [2018] NZHC 2884, [2019] 2 NZLR 692 at [128]–[130].
29 At [65]–[74], citing Nags Head Horse Hotel Ltd v Epsom Woods Ltd [2020] NZHC 2973 at [36],
[37] and [53]; and Haines v Memelink [2021] NZHC 1063 at [20].
30 Synopsis of submissions for the respondent dated 22 April 2022 at [1.5]–[1.7].
[42] Counsel submit the combined effect of ss 19, 24 and 79 of the CCA is that Xinhao is obliged to pay for the scheduled amounts for Local Civil’s second and third payment claims under Separable Portion B of the Contract, and that Xinhao cannot raise any counterclaim, set-off or cross-demand against the debt in the immediate proceeding.31 They say the debt is based on scheduled amounts in two payment certificates, respectively dated 29 March and 9 April 2019. In counsel’s submission, it follows from the effect of s 24 of the CCA that Local Civil can recover the outstanding debt from Xinhao and that it was entitled to serve the notice of suspension of work.32
[43] Counsel say the June 2018 payment of $230,000 was expressly a bonus that had been authorised by Mr Li, and that it was to be paid “over and above” the payment for the scheduled works in the relevant period. It cannot be retrospectively re-cast as a pre-payment for future scheduled works. To do so would be inconsistent with the payment claim and certification process that the parties had adopted throughout the project. Further, as a director and majority shareholder of Xinhao, Mr Li had authority to approve the payment and to bind the company to it. The payment cannot be revoked, it now being many months after it was made and accepted.33
[44] In any event, counsel submit, the Court need not make findings on Xinhao’s claims regarding the June 2018 payment. Xinhao is free to bring a claim regarding the payment in a separate proceeding, but is prevented by the operation of s 79 from asserting the payment as a set-off, counterclaim or cross-demand against Local Civil’s statutory demand.34 They say there are no other grounds that would justify setting aside the statutory demand and that Xinhao’s solvency is not in itself a reason to do so.35
31 At [2.1]–[2.7], citing Volcanic Investments Ltd v Dempsey & Wood Civil Contractors Ltd (2005) 18 PRNZ 97 (HC) at [20]–[21]; and Laywood v Holmes Construction Wellington Ltd [2009] NZCA 35, [2009] 2 NZLR 243 at [61].
32 At [3.1]–[3.3].
33 At [3.4]–[3.8].
34 At [3.9]–[3.13], citing Nga Rau Tatangi Ltd v Liberty Homes Ltd [2016] NZHC 1177 at [2], [5] and [17]; and Nash Properties Ltd v Harris Holdings Construction Ltd [2010] NZCCLR 2 (HC) at [3], [17], [22] and [29].
35 At [3.14]–[3.15], citing AMC Construction Ltd v Frews Contracting Ltd [2008] NZCA 389, (2008) 19 PRNZ 13 at [7].
[45] Turning to respond to matters raised in Xinhao’s submission, counsel submit that while Local Civil has tried to resolve the entire dispute (that is, the global dispute regarding payment for the alleged additional works) through arbitration, no arbitration has occurred and nothing in the notice of suspension of works prevents it from seeking payment of the debt that is due and owing by the operation of s 24 of the CCA. As well, Xinhao’s contentions regarding its bank’s requirements are irrelevant and add nothing to the present application.36
[46] Concluding, counsel submit the application should be dismissed because the debt underlying Local Civil’s statutory demand is based upon unpaid scheduled amounts owing pursuant to s 24 of the CCA. Xinhao’s claims regarding the June 2018 payment of $230,000 are irrelevant and, due to s 79, cannot in any event be given effect as a set-off, counterclaim or cross-demand. There are no other grounds to justify setting aside the statutory demand.37
Legal principles
Setting aside statutory demand
Section 290 of the Companies Act 1993 provides, relevantly:
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.
36 At [4.1]–[4.6].
37 At [5.1]–[5.2].
…
[48]There are some principles relevant to the application of s 290(4):38
What the applicant must show is that the dispute it raises has substance; the applicant must explain to the court what the dispute is; and the dispute so shown must be a real and not a fanciful or insubstantial dispute. The Court must bear in mind that it is operating in the summary jurisdiction, with the accompanying disadvantages that brings for any applicant. The Court must also keep in mind the requirement that what is intended to be a summary hearing should not be converted into a full-blown trial.
[49] As to s 290(4)(a), the Court is to look at whether a genuine substantial dispute exists.39 Mere assertion of a dispute does not suffice, and the applicant has to show a fairly arguable basis for it.40 In practice, it is required that there be some material short of proof that backs up the claim that the amount is in dispute.41
[50] Where a counterclaim, set-off, or cross-demand is sought to be raised, the Court has a discretionary power to set aside the statutory demand, but the company must show a real basis, on clear and persuasive grounds, for doing so. And “pay now, argue later” considerations have sometimes been allowed to prevail over the effect of liquidation.42 A statutory demand for a debt under the CCA cannot be set aside on the basis of a set-off or counterclaim.43
Construction Contracts Act 2002
[51]Section 24 of the CCA provides:
24Consequences of not paying scheduled amount in manner indicated by payment schedule
The consequences specified in subsection (2) apply if—
(a)a payee serves a payment claim on a payer; and
38 AAI Ltd v 92 Lichfield Street Ltd (in rec & liq), above n 25, at [22] (footnotes omitted).
39 Taxi Trucks Ltd v Nicholson [1989] 2 NZLR 297 (CA) at 301.
40 N F Global Ltd v Sky Capital Management Ltd [2020] NZHC 2196 at [39]. See also United Homes (1998) Ltd v Workman [2001] 3 NZLR 447 (CA) at [27].
41 Arzan Investments Ltd v Beresford Apartments Ltd, above n 26, at [17].
42 At [40], citing Volcanic Investments Ltd v Dempsey & Wood Civil Contractors Ltd, above n 31; Browns Real Estate Ltd v Grand Lakes Ltd [2010] NZCA 425, (2010) 13 NZCPR 349; and Covington Railways Ltd v Uni-Accommodation Ltd [2001] 1 NZLR 272 (CA) at 274–275.
43 Laywood v Holmes Construction Wellington Ltd, above n 31, at [61]–[63].
(b)the payer provides a payment schedule to the payee within the time allowed by section 22(b); and
(c)the payment schedule indicates a scheduled amount that the payer proposes to pay to the payee; and
(d)the payer fails to pay the whole, or any part, of the scheduled amount on or before the due date for the payment to which the payment claim relates.
(2)The consequences are that the payee—
(a)may recover from the payer, as a debt due to the payee, in any court,—
(i)the unpaid portion of the scheduled amount; and
(ii)the actual and reasonable costs of recovery awarded against the payer by that court; and
(b)may serve notice on the payer of the payee’s intention to suspend the carrying out of construction work under the construction contract.
(3)A notice referred to in subsection (2)(b) must state—
(a)the ground or grounds on which the proposed suspension is based; and
(b)that the notice is given under this Act.
(4)In any proceedings for the recovery of a debt under this section, the court must not enter judgment in favour of the payee unless it is satisfied that the circumstances referred to in subsection (1) exist.
[52]Section 79 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.
Analysis
[53]The issues which fall for determination are:
(a)whether there is a substantial dispute as to whether the debt which is the subject of the statutory demand is owing or is due for the purposes of s 290(4)(a) of the Companies Act; and
(b)whether Xinhao appears to have a counterclaim, set-off or cross- demand and the amount specified in the statutory demand less the amount of the counterclaim set-off or cross-demand is less than $1,000 for the purposes of s 290(4)(b).
[54] I will deal with each of these grounds for setting aside the demand in turn, dealing first with the ground under s 290(4)(b).
Are there grounds to set aside the statutory demand pursuant to s 290(4)(b) based on a counterclaim, set-off or cross-demand by Xinhao against Local Civil?
[55] Ms Holland in her oral submissions submitted that the basis on which Xinhao was seeking to set aside the statutory demand was not a set-off under s 290(4)(b) but a genuine dispute of the debt to which the statutory demand related under s 290(4)(a). Mr Fraser, on the other hand, submitted that notwithstanding Ms Holland’s submissions, in fact Xinhao was arguing set-off under s 290(4)(b), as the argument related to whether the June 2018 payment made by Xinhao had already discharged the debt in respect of the statutory demand that was issued. He then continued to submit that if that were the case, the set-off was prohibited under s 79 of the CCA.
[56] Mr Fraser submits that the two payment claims made by Local Civil on Xinhao are scheduled amounts for the purposes of s 24(2) of the CCA, which identifies the consequences of not paying the scheduled amount created by the payment schedule. The consequences are that the payee may recover from the payer as a debt due to the payee, in any court, the unpaid portion of the scheduled amount and actual and reasonable costs of recovery awarded against the payer by the court. Mr Fraser submits that the invoices submitted to Xinhao were certified by Candor3 and accordingly were scheduled amounts for the purposes of s 24(2) of the CCA.
[57] Mr Fraser further submits that pursuant to s 79 of the CCA, the Court must not give effect to any counterclaim, set-off or cross-demand raised by the party to those
proceedings if there is not in fact any dispute between the parties in relation to the claim for that amount. He relies on Volcanic Investments Ltd v Dempsey & Wood Civil Contractors Ltd,44 in which Randerson J, dealing with the applicability of s 79 of the CCA to statutory demands, said:
… I conclude that a recovery of 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.
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 by the parties in relation to the claim for that amount.
[58]Mr Fraser further relies on Laywood v Holmes Construction Wellington Ltd.45
In that decision, the Court of Appeal endorsed Randerson J’s reasoning on this point.
[59] It is therefore clear that to the extent Xinhao’s grounds for setting aside the statutory demand in effect rely on any counterclaim, set-off or cross-demand relating to the June 2018 payment (although Ms Holland submits this is not the case), that ground cannot succeed.
Are there grounds to set aside the statutory demand pursuant to s 290(4)(a) based on genuine dispute in relation to the debt to which the statutory demand relates?
[60] Ms Holland submits that there is a genuine dispute as to the payment claims which are covered by the statutory demand. In support of her submission, she relies on the following:
(a)the notice of suspension of works issued to Candor3 on behalf of Xinhao by Local Civil on 23 April 2019. She points to the wording to the notice of suspension of work, and in particular she relies on the paragraph as follows: “We believe that the more commercially sensible route to resolve this dispute is through arbitration. We do not believe
44 Volcanic Investments Ltd v Dempsey & Wood Civil Contractors Ltd, above n 31, at [20]–[21].
45 Laywood v Holmes Construction Wellington Ltd, above n 31.
that this dispute can be resolved through mediation or through an engineer’s decision process”; and
(b)the letter dated 5 May 2021 from Xinhao’s solicitors to Local Civil’s solicitors. In particular, she relies on paragraph [6] of the letter.
[61] Ms Holland submits that Xinhao have provided sufficient evidence to demonstrate that there is a genuine and substantial dispute as to the existence of the debt recorded in the statutory demand. She submits that the dispute has been communicated clearly with Local Civil and in correspondence between the parties. Accordingly, the statutory demand is to be considered as an abuse of process.
[62] Mr Fraser submits that while there is a dispute regarding the June 2018 payment, and as to payments for variations to the Contract, there is no dispute relating to the 2018 payment claims by Local Civil to which the statutory demand relates. He submits that the references to disputes in the notice of suspension of work and the correspondence between the parties’ respective solicitors, refer to the separate disputes relating to the 2018 bonus payment and other matters in dispute under the Contract, as set out in the letter from Xinhao’s solicitors to Local Civil’s solicitors of 5 May 2021. He submits that Xinhao is free to bring a claim regarding the June 2018 payment, but such dispute is separate from the payment claims covered by the statutory demand. He submits that there is no dispute regarding these payment claims, and they were certified by Candor3 on behalf of Xinhao.
[63] I am of the view that Mr Fraser’s submissions are correct. I do not find sufficient evidence of a genuine and substantial dispute by Xinhao in relation to the two certified payment claims which are the basis for the statutory demand.
Is solvency of Xinhao a reason to set aside the statutory demand?
[64] Ms Holland submitted that there can be no dispute regarding the solvency of Xinhao. She submits that Xinhao paid Local Civil in relation to the undisputed amount under stages 1 and 2 of the development. She submits that Xinhao has sufficiently demonstrated it does not have issues with solvency as it holds two real properties without any mortgages and Local Civil has not provided any quality evidence
demonstrating any lack of solvency by Xinhao. She submits the purpose of a statutory demand is to test the solvency of the debtor when that solvency is in doubt. It is clear in this instance that Xinhao is not insolvent. She submits that the decision of AMC Construction Ltd v Frews Contracting Ltd,46 which is relied on by Local Civil as discussed below, leaves the door open for solvency of the company to be a ground for setting aside a statutory demand.
[65] Mr Fraser submits that the purported solvency of the applicant is not in itself grounds for setting aside the statutory demand. He relies on the Court of Appeal decision of AMC Construction Ltd, where the Court stated:
[17] We would not wish to rule out the possibility that the solvency of the company might constitute a stand alone ground for setting aside a notice under para (c). However, we consider that such cases are likely to be extremely rare. If there is no dispute as to the company’s liability, so that para (a) or (b) [of s 290(4)] cannot be invoked, it is difficult to imagine circumstances in which the company should be able to avoid paying a debt, merely by proving it is able to pay that debt. If the debt is indisputably owing, then it should be paid. If the company simply refuses to pay, without good reason, it should not be able to avoid the statutory demand process by proving, at the statutory demand stage, that it is solvent. The demand should be allowed to proceed.
[66] Mr Fraser submits that the facts of this case are similar to AMC Construction Ltd and there are no exceptional grounds which would justify Xinhao’s solvency as a ground to set aside the statutory demand.
[67] I respectfully follow the Court in AMC Construction Ltd and consider the solvency of Xinhao is not a ground in and of itself to set aside the statutory demand.
Result
[68] Accordingly, as there are no grounds to set aside the statutory demand under ss 290(4)(a) or (b), and the solvency of Xinhao is not in itself a sufficient ground to set aside the statutory demand, Xinhao’s application must be dismissed.
46 AMC Construction Ltd v Frews Contracting Ltd, above n 35.
Orders
[69]I make the following orders:
(a)Xinhao’s application to set aside the statutory demand is dismissed.
(b)Costs with respect to the objection to the affidavit evidence of Jin (Vivian) Xu are awarded to Xinhao on a 2B basis.
(c)Costs on the application are awarded to Local Civil on a 2B basis.
…………………………….. Associate Judge Taylor
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