SINCLAIR v RURAL BUILDERS LIMITED [2020] NZHC 1857

SINCLAIR v RURAL BUILDERS LIMITED [2020] NZHC 1857 [29 July 2020]IN THE HIGH COURT OF NEW ZEALANDPALMERSTON NORTH REGISTRYI TE KŌTI MATUA O AOTEAROATE PAPAIOEA ROHECIV-2020-454-13[2020] NZHC 1857UNDER the Insolvency Act 2006IN THE MATTER of an application to set aside a bankruptcynoticeBETWEEN JEREMY RALEIGH SINCLAIRApplicantAND RURAL BUILDERS LIMITEDRespondentHearing: 16 July 2020Appearances: D Sheppard for applicantA Swan for respondentJudgment: 29 July 2020JUDGMENT OF ASSOCIATE JUDGE JOHNSTON[1] This is an application pursuant to s 17(1)(d)(ii) of the Insolvency Act 2006 foran order setting aside a bankruptcy notice, and the question which the Court mustresolve is whether the applicant, Mr Jeremy Sinclair, has a triable cross claim againstthe respondent, Rural Builders Ltd, for an amount equal to or greater than the judgmentdebt on which the bankruptcy notice is based that he could not have used as a defencein the proceeding in which the judgment was obtained.[2] The dispositive issue is more refined, but that is best identified after outliningthe factual background.[3] During the second quarter of 2018 Mr Sinclair entered into contractualarrangements with a company called Lumberland 2006 Ltd which manufactures andmarkets kit-set pole sheds and RBL which is a building company. Essentially,Mr Sinclair agreed to purchase one of Lumberland's kit-set pole sheds and engagedRBL to erect it on his property outside Palmerston North.1[4] It is common ground that the building needed to meet certain specifications sothat Mr Sinclair could use it for his business that requires him to garage largemachinery, and that it needed to be designed specifically to meet those needs. In duecourse, Lumberland obtained plans and specifications for the shed from an engineeringconcern called MiTeck NZ Ltd, that Mr Sinclair says he was assured accommodatedhis requirements. These plans and specifications were identified as FB53302.[5] Lumberland submitted an application to the Manawatu District Council forconsent and in due course the Council granted consent for the erection of the kit-setpole shed in accordance with FB53302.[6] For reasons that are not explained in the evidence, after the Council had grantedconsent, Lumberland had MiTek prepare amended plans and specifications whichwere identified as FB53302(B).[7] Around mid-2018 work commenced on the erection of the kit-set pole shed.[8] Mr Sinclair says that RBL breached its obligations by failing to build the kit-setpole shed in accordance with either FB53302 or FB53302(B).[9] During the course of the hearing Mr Sheppard went to considerable lengths todemonstrate the extent of the alleged deviations from the first and second(unconsented) plans and specifications, and the other defects from which Mr Sinclairsays the as-built kit-set pole shed suffers. At a later stage Mr Sinclair obtained a reportfrom HABiT Manawatu (2017) Ltd, a surveying concern. This report itemised theextent to which the kit-set pole shed deviated from the first and second plans and1 In fact it would appear that the contractual arrangements involved Mr Sinclair and his wife.Nothing turns on this. Both parties have proceeded on the basis that Mr Sinclair should be treatedas the contracting party, and I do likewise.specifications and other defects with the construction. HABiT came close toconcluding that the only option is the demolition of the existing structure and theerection of a new one. I do not need to dwell on this evidence. Mr Swan did notchallenge the contention that the kit-set pole shed was not built in accordance witheither set of plans and specifications. In any event, on the evidence, I am satisfied thatMr Sinclair has a triable case to that effect.[10] I now turn to how the dispute between the parties has played out.[11] On 30 August 2018 RBL rendered an invoice for $12,686.07 in respect of theconcrete floor of the kit-set pole shed. The invoice was addressed not to Mr Sinclairbut to his company, New Zealand Vehicle Plant & Asset Sales Ltd (NZVPAS).[12] By this stage, Mr Sinclair had paid Lumberland $ 47,332.80 for the kit-set poleshed (the full amount of that company's quote) and RBL $20,000 in progresspayments. And more importantly, having consulted HABiT, he had reached the viewthat RBL's work was defective. He refused to pay the invoice.[13] There followed exchanges of correspondence which resolved nothing.[14] Then, on 14 November 2018, RBL commenced proceedings in the DisputesTribunal to recover the amount of its 30 August 2018 invoice.[15] At this time, the Tribunal's monetary jurisdiction was limited to $15,000 (inthe absence of any agreement between the parties extending that amount).[16] The originating documentation in RBL's claim was served on Mr Sinclairshortly after 14 November 2018.[17] Having regard to the background as I have described it thus far, Mr Sinclair'sperception at this stage was not only that RBL's claim for the amount of its invoicewas unjustified, but that he had a claim against the company for the cost ofdemolishing the kit-set pole shed and erecting a replacement which would exceed theamount of the claim against him by several factors.[18] Mr Sinclair had already spoken to the Council and obtained advice fromHABiT, and it would seem that at this point he engaged and at least took somepreliminary advice from his solicitors. In this way, he became aware that he could notpursue the full amount of the claim he perceived himself as having against RBL byway of a cross claim in the Tribunal proceedings because of the limit on the Tribunal'smonetary jurisdiction and understood that if he was to do so he would have to do soelsewhere.[19] Armed with that knowledge, but apparently still acting for himself in thematter, Mr Sinclair emailed the Tribunal on 5 December 2018. Here is what he said:On obtaining advice from the Council and also an independent builders [sic]report then also legal advice we wish to have this transfer [sic] to the DistrictCourt house due to the counterclaim we will be filing. I have hadcorrespondence with our lawyer and am awaiting a reply on how to proceed.Can you please advise if this is the correct procedure?[20] The Tribunal's records apparently indicate that by email dated 12 December2018 its case officer replied to Mr Sinclair in these terms: Proceedings would need to be filed in the jurisdiction that you wishproceedings to be heard in and a request for other proceedings to be joinedand transferred to the current proceeding. We recommend seeking legaladvice regarding this process in how to proceed.[21] Mr Sinclair says that he did not receive that email. That assertion on his partsits uneasily with an affidavit he swore in earlier, related proceedings in this Court inwhich he said that he had overlooked the Tribunal's email of 12 December 2018. Inhis affidavit in reply in this proceeding Mr Sinclair seeks to explain this apparentdiscrepancy in these terms:13. As I reiterate below, I never received any response to this query.18. I am adamant that I never received and saw the email from theTribunal's case officer of 12 December 2018. Mr Lover appears tocast doubt on that however, in that at paragraph 11.(b) of his affidavithe refers to my previous statement of my affidavit from April 2019that I "unfortunately overlooked an email response from the Tribunalwhich indicated that for a transfer to occur I need to issue my ownproceedings."19. It is important for this Court to appreciate that I made that commentin my earlier affidavit simply on the basis of the Disputes Tribunal'shearing decision that said that an email had been sent to me. It wasno concession that I had received and seen the Tribunal's email. Ireiterate that I have never seen it. The only reference that I have seenof the email to this day is the reference contained in the Tribunal'srehearing decision.20. As mentioned in my first affidavit, I doubled checked receipt of it andcould not find it. I have now checked again, for the purposes ofpreparing this affidavit, and still cannot find it.21. In all, I swear that I never received and saw the Tribunal CaseManager's advice, which was that to get the Rural Builders' DisputesTribunal claim transferred to the District Court I had to issue my ownDistrict Court proceedings and then ask for the proceedings to bejoined and transferred (if in fact that advice was given (which isunclear)).[22] This point cannot be resolved in summary proceedings on the basis of untestedaffidavit evidence, and for present purposes I accept that Mr Sinclair did not receivethe Tribunal's Case Manager's email of 12 December 2018.[23] Nevertheless, the position remains that Mr Sinclair had received notice of thehearing on 18 December 2018; was actively involved in seeking to establish hisposition; had consulted both the Council and HABiT; had engaged his solicitors andtaken some preliminary advice; was aware that he could not pursue the full cross claimthat he believed he had in the Tribunal as a result of the limit on the Tribunal'smonetary jurisdiction; and had emailed the Tribunal to the effect that he proposed topursue this cross claim and effectively sought an adjournment of the hearing so thatboth RBL's claim and his could be heard together in the appropriate forum; and, onthe assumption I make, had had no response. In those circumstances, Mr Sinclairelected not to attend the hearing.[24] The Tribunal hearing took place on 18 December 2018. RBL's claim wasundefended. Unsurprisingly, it secured judgment for the amount of its invoice.[25] When Mr Sinclair became aware of this, apparently still acting for himself, hemade an informal application for a rehearing on the ground that he had the cross claimalready described.[26] In a decision dated 18 March 2019 the Tribunal declined Mr Sinclair'sapplication for a rehearing, essentially on the basis that he had received notice of thehearing and had elected not to take part.[27] On 20 March 2019 RBL sought to enforce the Tribunal's judgment.Inexplicably, it did so by serving a statutory demand pursuant to s 289 of theCompanies Act 1993 on NZVPAS. NZVPAS applied to set that statutory demandaside. Ultimately, RBL recognised the inevitability of its statutory demand being setaside and withdrew. There was then a dispute about costs and in a judgment dated8 July 2019 I awarded NZVPAS costs on the discontinuance. When the costs awardwas not paid NZVPAS itself served a statutory demand requiring payment. In the end,the costs award was paid.[28] Then, on 2 March 2020, RBL issued this bankruptcy notice against Mr Sinclairwhich is of course what they should have done back in March 2019.[29] I pause there to mention that it was not until 12 April 2020 that Mr Sinclaircommenced proceedings in the District Court against RBL. Some criticism is levelledat him for the delay. His rejoinder is that until December 2019 he was preoccupiedfirst with seeking a rehearing before the Tribunal and then dealing with RBL's misfirewhen it served the statutory demand on his company and finally with a serious healthscare that Mrs Sinclair had had, and that it is really only in the second quarter of thisyear that he has been able to focus his attention on pursuing his claim.[30] In the end I am not persuaded that anything turns on this, and I do not proposeto spend any further time dealing with the criticisms RBL makes of Mr Sinclair'sdelay.[31] Mr Sheppard's argument is that RBL's bankruptcy notice should be set asidebecause the case falls squarely within s 17(1)(d)(ii). He says that Mr Sinclair had, andstill has, a triable cross claim against RBL for an amount substantially greater than theamount of RBL's claim, and that Mr Sinclair could not use that as a defence in theTribunal proceeding because the amount of his claim exceeds the Tribunal'sjurisdiction of $15,000.[32] In advancing that argument Mr Sheppard placed considerable reliance on thejudgment of this Court in 90 Nine Ltd v Nikitin,2 which he submitted bore an uncannyresemblance to this case. There are certainly similarities between 90 Nine Ltd v Nikitinand the present case, but the only similarity which has any potential to bear on theoutcome is that in both cases the judgment creditor's claim was commenced in theTribunal and the alleged cross claim on which the judgment debtor relied exceededthe Tribunal's monetary jurisdiction.[33] I accept Mr Sheppard's submission that there are passages in Associate JudgeBell's judgment that suggest that the judge was proceeding on the basis that thejudgment debtor could not rely on any cross claim as a defence if that cross claimexceeded the monetary limit of the Tribunal's jurisdiction.[34] This brings me to the dispositive issue, namely whether, for the purposes of anapplication to set aside a bankruptcy notice under s 17(1)(d)(ii) of the Insolvency Act,the fact that a judgment debtor's alleged cross claim exceeded the monetaryjurisdictional limit of the court or tribunal in which the judgment creditor commencedthe original claim in and of itself means that the judgment debtor was unable to relyon that cross claim as a defence.[35] In approaching this issue it appears to me to be important to keep certain thingsin mind. The Court will always be dealing with a situation in which the party who hasserved the bankruptcy notice is holding a judgment against the applicant that it is primafacie entitled to enforce. One available enforcement mechanism is bankruptcyproceedings initiated by the service of a bankruptcy notice. This is a mechanism thatexists to protect not only the judgment creditor but also the general public. It is nottherefore especially surprising that the grounds upon which the judgment debtor maymove to set aside the bankruptcy notice are limited. Under s 17 of the Insolvency Actthe judgment debtor must be able to establish a triable cross claim that he could nothave relied on as a defence in the earlier proceeding. The broad sweep of theauthorities is that the impediment must generally be a legal one, though it may2 90 Nine Ltd v Nikitin [2020] NZHC 445.sometimes be factual, but, in any event, must have made it impossible for the judgmentdebtor to rely on his claim.[36] I do not accept that Mr Sinclair was precluded from relying on his cross claimto defend RBL's claim against him. It was open to him to commence a proceeding inthe District Court for the full amount of his claim (as of course he has now done), andthen make the necessary application for joinder and removal so that both RBL's claimagainst him and his cross claim against RBL could be litigated in the same forum. TheCourt's focus in this context is on legal opportunity, not the subjective abilities,understanding or knowledge of a debtor.3[37] It appears to me that it does no violence to the language of s 17(1)(d)(ii) to saythat there was no legal impediment preventing Mr Sinclair relying on the cross claimthat he says he has "in the action or proceedings in which the judgment, or the order,as the case may be, was obtained". In other words, I do not interpret the words "in theaction or proceeding" also to mean "in the forum in which the judgement creditor hascommenced its proceeding".[38] That interpretation of s 17 appears to me to reflect a purposive approach. Letus imagine a situation in which "A" commences a claim against "B" in the DistrictCourt for unliquidated damages of less than the monetary limit of the District Court'sjurisdiction of $350,000. "B" has a triable cross claim for damages of more than$350,000. If the argument advanced on Mr Sinclair's behalf in this case were toprevail, then "B" could ignore the District Court proceeding, allow "A" to proceeddown the path of proving his case before a District Court Judge and securing judgmentby default, confident in the knowledge that if "A" were subsequently to serve abankruptcy notice, he — "B" — could have it set aside. In my judgement, Parliamentcould not have intended that.[39] If that means that I am differing from Associate Judge Bell in 90 Nine Ltd thenI respectfully do so. However, I am not sure that that is the case. Although, as alreadysaid, His Honour appears to have proceeded on the basis that the applicant there could,for the purposes of s 17(1)(d)(ii) of the Insolvency Act, potentially rely on the fact that3 See Re Williams HC Auckland B120/94, 20 June 1994 at 4.his cross claim exceeded the Tribunal's jurisdiction as a basis for contending that hecould not rely on it as a defence, the case was ultimately determined on the basis thatthe applicant could not establish that he had a triable cross claim.[40] For those reasons, whilst accepting that Mr Sinclair is able to establish a triablecross claim for an amount exceeding RBL's claim against him in respect of which itobtained judgment in the Tribunal, and on which the bankruptcy notice served on himwas based, I am not satisfied that he could not have used that cross claim as a defencein responding to RBL's claim against him.[41] Mr Sinclair's application is dismissed.[42] As to costs, my preliminary view is that RBL as the successful party is entitledto a costs award on a 2B basis together with such disbursements as may be allowed bythe Registrar. I expect counsel will be able to finalise costs. However in the unlikelyevent that they cannot do so, they may come back to the Court by memorandum and Iwill deal with costs on the papers.Associate Judge JohnstonSolicitors:Fitzherbert Rowe, Palmerston North for applicantAuckland Property Legal Service, Auckland for respondent