DELTA ROOFING & MANUFACTURING LTD V KIWI STEEL NEW ZEALAND LTD HC HAM CIV-2009-419-000619

DELTA ROOFING & MANUFACTURING LTD V KIWI STEEL NEW ZEALAND LTD HC HAM CIV- 2009-419-000619 25 August 2009IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY CIV-2009-419-000619UNDER Section 290 of the Companies Act 1993 IN THE MATTER OF an application to set aside statutory demand BETWEEN DELTA ROOFING & MANUFACTURING LTD Applicant AND KIWI STEEL NEW ZEALAND LTD Respondent Hearing: 20 August 2009 Counsel: MD Talbot for Applicant ZG Kennedy and NA Chamberlain for Respondent Judgment: 25 August 2009 at 11:30amJUDGMENT OF ASSOCIATE JUDGE FAIRE [on application to set aside a statutory demand]Solicitors: McCaw Lewis Chapman, PO Box 9348, Hamilton for applicant Minter Ellison Rudd Watts, PO Box 3798, Auckland for respondent[1] The applicant applies to set aside a statutory demand. The statutory demand seeks:Payment of the sum of $135,288.37 being the amount owing by you for steel supplied to you by Kiwi Steel New Zealand Limited at your request between November 2008 and January 2009.[2] The application is made in reliance on s 290(4) of the Companies Act 1993. [3] No issue is taken with the timeliness of the application. [4] The application as filed relied on subs 4(a)(b) and (c) of s 290. In the course of the hearing, Mr Talbot sought and was granted leave to abandon reliance on s 290(4)(b). In short, the applicant company no longer sought to place reliance for the purposes of this application on the existence of a counterclaim, set-off or cross- demand in terms of s 290(4)(b). [5] I record that such step was taken so that the Court was not required to rule on the existence of a counterclaim, set-off or cross-demand on this application. In short, this judgment does not provide a basis for an issue estoppel submission or a submission that the principle in Henderson v Henderson (1843) 3 Hare 100 at 115, applies in respect of any subsequent claim which the applicant may wish to pursue arising out of the contract which is the basis for this statutory demand. [6] Mr Talbot did not advance the application in reliance on s 290(4)(c). Indeed, no evidential foundation appears in the papers which would justify its application. For that reason I do not consider this aspect further. [7] Section 290(4)(a) of the Companies Act 1993 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; [8] The approach that the Court adopts to an application which relies on s 290(4)(a) of the Companies Act 1993 can be shortly stated. The Court is required to determine whether there is a substantial dispute whether or not the debt is owing or is due. The applicant must show a fairly arguable basis upon which it is not liable for the amount claimed. Forge Holdings Ltd v Kearney Finance (NZ) Ltd HC CHCH M149/95 20 June 1995 at 2 and Queen City Residential Ltd v Patterson Co- Partners Architects (No 2) [1995] 3 NZLR 307 (7 NZCLC) 260,936. That formulation was approved by the Court of Appeal in United Homes (1988) Ltd v Workman [2001] 3 NZLR 447 at 451-2. Once that position is reached the statutory demand should be set aside and the dispute is then disposed of, if necessary, by other proceedings in the ordinary way. [9] The respondent opposes the application. Its position is that there is no substantial dispute as to whether the debt is owing or is due. [10] It is acknowledged that the steel was supplied. It is not disputed that invoices for the steel supplied during the months of November 2008, December 2008 and January 2009, totalling $135,288.88 were in fact issued. The nature of the dispute was identified in February 2009 or possibly late January 2009. The respondent's position is that it verbally advised the applicant that the applicant was in breach of contract. The respondent said it notified the applicant that the applicant had not paid for products supplied in October 2008. The respondent said that that was due for payment on 20 January 2009. [11] The applicant's position as to when payment for products supplied was due was explained by its managing director and 50% shareholder, Mr Barrett, in the following way. He claimed that he had reached an oral agreement with Mr Dave Burger representing the respondent in October 2008. That signalled a new development. From that time on the respondent was to supply the applicant's requirements for long-run roofing iron, thought to be in the vicinity of $50,000- $60,000 in product value per month. Prior to that time, the applicant's orders had related to other products and were in the order of $5000 per month. It was common ground in the papers before me that that signalled a significant change in the trading positions of the parties. Under that verbal agreement, payment, Mr Barrett said, wasnot due until three months after the date when payment was due on what was commonly understood as the current date for payment. In short, he said his understanding was that an account was current if it was due for payment on the 20thof the month following supply and was paid on or before that date. If three months terms were to be granted then a further three months to pay beyond the date when payment on a current basis was required was what was understood. He said that was the understanding he had reached with Mr Burger. [12] Mr Burger did not file an affidavit. That is one of the unsatisfactory aspects of this case. [13] An affidavit was filed by the respondent's credit controller, Ms Burns. Her involvement in the October meeting with Mr Burger was simply to respond to a request that Mr Burger had made to her concerning the terms of payment. She sent an e-mail to Mr Barrett on 28 October 2008, in the following terms:David Burger has requested I fire through confirmation of your payment terms with us.; Delta Roofing has a three month term account. If you require anything further please do not hesitate to let me know.[14] Mr Barrett did not specifically respond to that e-mail. In his affidavit he refers to it and says:A current term account is 20th of the month following the month of invoice. A three month term account is three months on that.[15] Mr Barrett says that when the dispute as to the timing of payment was identified, he sought a meeting with the respondent's personnel. That was held on 9 February 2009. He said that the main topic of conversation was the different interpretation of the payment terms. He said that the parties agreed to differ. He claimed that the respondent accepted that the historic payment pattern was consistent with what he claimed the obligations were. [16] As a result of the disagreement, however, the parties entered into a compromise. Under the compromise, Mr Barrett said the parties agreed to reduce the terms to 60 days by taking the November purchases of $67,000 and spreading the payment for them over three months, that is on 20 March, 20 April and 20 May. Theresult was that product invoiced in December would get paid on 20 March, plus a $20,000 payment off the November supply. Product invoiced in January 2009, plus a $20,000 payment off the November 2008 invoice would be paid on 20 April 2009. Product invoiced in February 2009, plus a $20,000 payment off the November 2008 invoice would be paid on the 20 May. It was recognised with respect to this part of the agreement that it was not then known what the size of the February invoices would be. The document recording this part of the agreement simply records that the amount of the payment as TBC. A similar position was agreed to in respect of product which was invoiced for in March 2009. That was to be paid on 20 June 2009, plus $3315.89. Again, that had the notation "TBC" after it because, of course, it was not known at the time of the discussion what the size of the March invoices would be. [17] The above agreement, however, discloses that what the parties agreed to in February 2009 was a 60 day extension to the normal date when payments on a current basis were due. [18] Unfortunately the February meeting did not address another problem. The respondent insured its exposure to trade debtors. Until February 2009, it was insured by Atradius. That company had agreed to insure the respondent's customer credit limits which were less than $100,000. It provided special approval in respect of the applicant, enabling the respondent to provide an increased credit limit of $150,000. [19] In mid-February 2009, the respondent changed its insurer to QBE. QBE expressed some concern about the applicant's increased credit limit. The respondent notified the applicant that it would need to apply to its insurer for an increased limit to cover the credit risk because by late February 2009, the amount outstanding was in excess of $170,000. [20] On 10 March 2009, QBE notified the respondent that it would not insure any credit provided to the applicant. [21] Mr Barrett said that he had been told on 4 March 2009 that the respondent had forwarded to its insurer an application for a $200,000 credit limit which wouldtake a couple of days to process. Apart from that he heard nothing further from the respondent. However, on 12 March 2009, he said it became apparent that the respondent was not providing product which the applicant had ordered. He said he phoned the respondent company and was told that supply had been halted as at 5 March. He said he was given no reason for this. He said that he pointed out that the cessation of supply without notice could have a drastic effect on his business, including the applicant's ability to meet its obligations to the respondent. [22] The applicant's managing director, Mr Barrett, understandably feels aggrieved by the turn of events which occurred in March 2009. The correspondence produced to the Court gives notice of the applicant's opposition to any statutory demand that would be issued. It also claims that a counterclaim for substantial damages would issue. In relation to that last matter, however, the information which was placed believe the Court for the purposes of allegedly showing a counterclaim or set-off defence based on breach of contract simply did not provide a recognisable foundation for such a claim. Mr Talbot, in the course of submissions, recognised the problem. That led to the position which I have outlined in paragraph [4] of this judgment. [23] A further complicating background factor to this case is the fact that the parties had been in a contractual relationship since 2003. That, however, did not relate to the supply of long-run roofing iron. That new supply occurred as a result of the oral agreement which Mr Barrett says he made with Mr Burger in October 2008. The significance of the earlier supply of materials is that it was accompanied by an application for credit at the time signed by Mr Barrett's co-director. The application for credit contained a provision whereby the applicant for the credit – in this case the applicant – agreed to abide the general conditions of sale forming part of the application. One of the conditions of sale excluded claims for set-off. The respondent's position is that the general conditions of sale apply to the new arrangement which was entered into in October 2008. Mr Barrett's position claims, first, that in terms of the credit application signed in 2003, no general conditions of sale were signed by any officer of the applicant company at the time. Second, that from his part, until Ms Burns' affidavit was filed in this proceeding, he had never had his attention drawn to the general conditions of sale.[24] The October arrangements were clearly principally oral in nature. Only one of the parties directly involved in those discussions has given an affidavit, namely Mr Barrett. There would seem to be some misunderstanding as to what was agreed. Resolution of that is plainly unsuitable in an application of this kind. [25] The fact that there is no clear answer on this application to the precise contractual obligations in terms of payment, however, does not answer the issue raised by this application to set aside the statutory demand. The applicant has not cancelled the contract. The obligations of the parties therefore remain. That is the effect of s 7 of the Contractual Remedies Act 1979. That provision provides that the Act has effect in place of the rules of common law relating to the discharge of a contract for breach. Whatever conclusion is reached as to the time for payment, be it the time specified by the applicant or for that matter the respondent, what is clear is that the time for payment has well and truly passed. There has been no payment. The result is that save for one aspect which I will short consider, there is now no dispute as to whether the payment is due. [26] The one area that needs further consideration relates to a possible 10% discount. The respondent offered a special 10% rebate for any monthly sales over $50,000. The rebate is subject to a number of conditions. The one critical condition that has not been met in this case is that payment is received on the due date. Payment for the months concerned, however, has not been made at all. On that basis, entitlement to the rebate does not arise. That leads me to the conclusion that there is now no proper basis for a dispute that $135,288.87 is due in respect of the supply made for November 2008, December 2008 and January 2009. That being the case, the application to set aside the statutory demand based on s 290(4)(a) fails. [27] The applicant's position in this case has arisen by virtue of the fact that its grievance primarily was not able to be put before the Court on grounds that might have succeeded, namely pursuant to s 290(4)(b). The applicant did face a problem if it had relied on that ground in that the general conditions to which I have made reference does not allow for a deduction from any payment due under the contract based on a counterclaim or set-off. That would be a problem if the Court was able to find that the general conditions apply to the contract that was made in October 2008.I have already expressed my view that that issue is unsuitable for determination in this application. That type of dispute must be resolved at trial. [28] It is necessary that I make these comments because, although I make a specific order pursuant to s 291 of the Companies Act 1993, it might not necessarily follow that the Court would order the appointment of a liquidator if an application is made pursuant to s 241 of the Companies Act 1993. That is because the Court has a discretion as to whether to appoint a liquidator pursuant to s 241. The distinction between the two stages that arise in insolvency cases, be they bankruptcy notices and statutory demands, on the one hand, and the ultimate determination of status, be it adjudication in bankruptcy or the appointment of a liquidator, on the other, was the subject of comment by the Court of Appeal in Laywood & Rees v Holmes Construction Wellington Ltd (2009) NZCA 35 at 65 of that judgment. A factor that may well influence the Court in the overall exercise of the jurisdiction under s 241 ultimately is whether payment is able to be made or secured in some way and whether a properly framed counterclaim or set-off is before a Court of competent jurisdiction awaiting determination. [29] In making these comments I do not wish it to be understood that I am pre- determining what might happen if an application to appoint a liquidator is made in this case. I am simply suggesting to the parties, in particular the respondent, that care be given to its position before such decisions are launched. On the other hand, the applicant must realise that it is exposed to the possibility of the Court appointing a liquidator if it is takes no step following the issue of this judgment in terms of payment or securing payment while some other proceeding is explored.Orders[30] The application to set aside the statutory demand is dismissed. The respondent may make an application to the High Court to place the applicant into liquidation if the sum of $135,288.88 is not paid within 15 working days of the date of this judgment. This aspect of the order is made in reliance on s 291(1)(a) and (2) of the Companies Act 1993.Costs[31] At counsel's request I reserve costs in relation to this application. If counsel are unable to agree on costs, memoranda in support, opposition and reply shall be filed and served at seven day intervals. _________________________ JA Faire Associate Judge