LILY O NEW ZEALAND LTD v NANTONG MAYMARK INT'L TRADING CO. LTD [2013] NZHC 3081

LILY O NEW ZEALAND LTD v NANTONG MAYMARK INT'L TRADING CO. LTD [2013] NZHC 3081 [21 November 2013]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2013-404-3904[2013] NZHC 3081UNDER the Companies Act 1993IN THE MATTER of an application for orders setting aside astatutory demandBETWEEN LILY O NEW ZEALAND LIMITEDApplicantAND NANTONG MAYMARK INT'LTRADING CO. LIMITEDRespondentHearing: 18 November 2013Counsel: DJ Valente for applicantHM Lim for respondentJudgment: 21 November 2013JUDGMENT OF ASSOCIATE JUDGE FAIRE[on application to set aside statutory demand]This judgment was delivered by me on 21 November 2013 at 4:30pmpursuant to Rule 11.5 of the High Court Rules.Registrar/Deputy RegistrarDateSolicitors: LeeSalmonLong, AucklandForestHarrison, AucklandThe application[1] The applicant applies to set aside a statutory demand dated 6 August 2013. The statutory demand seeks payment of the sum of US$105,415.97. That is recorded in the statutory demand as:Being the amount which you are indebted to Nantong Maymark Int'l TradingCo. Ltd in respect of goods supplied to you, as per the invoices rendered toyou from Nantong Maymark Int'l Trading Co. Ltd.[2] Annexed to this judgment and marked "A" is a list of the invoices whichmake up the sum demanded.[3] The application pleads:(a) There is a genuine and substantial dispute whether or not the debt demanded is due and owing because the majority of the debts due under the invoices claimed in the statutory demand have been settled and the invoiced debts claimed are not owing or due, and there is a genuine and substantial dispute as to the balance of the debt claimed; and(b) The demand is defective, materially and intentionally misstating the amounts owing (which are in any event not due) to the extent that substantial injustice would result if the demand were not set aside.The statutory basis for the application[4] The application relies on s 290(4)(a), (5) and (6) of the Companies Act 1993. The relevant parts of s 290 provide:290 Court may set aside 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(5) A demand must not be set aside by reason only of a defect or irregularity unless the Court considers that substantial injustice would be caused if it were not set aside.(6) In subsection (5) of this section, defect includes a material misstatement of the amount due to the creditor and a material misdescription of the debt referred to in the demand.The court's approach to an application to set aside a statutory demand based on the Companies Act 1993, s 290(4)(a)[5] The approach that the court adopts to an application that relies on the Companies Act 1993, s 290(4)(a) 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) Ltd1 andQueen City Residential Ltd v Patterson Co-Partners Architects.2 That formulation was approved in United Homes (1988) Ltd v Workman.3 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.The opposition[6] The respondent opposes the application and pleads as follows:(a) There is no genuine and substantial dispute whether or not the debt demanded is due and owing;(b) The statutory demand is not defective;(c) The statutory demand is not materially and intentionally misstating the amounts owed.1 Forge Holdings Ltd v Kearney Finance (NZ) Ltd HC Christchurch M149/95, 20 June 1995 at 2.2 Queen City Residential Limited v Patterson Co-Partners Architects Ltd (1995) 7 NZCLC 260,936 (HC).3 United Homes (1988) Ltd v Workman [2001] 3 NZLR 447 (CA) at 451-452.The main issues raised in this application[7] The main issues raised in this application are:(a) Have the parties entered into a settlement agreement which settles all questions relating to the invoices that make up a substantial part of the debt which is being demanded and fixes the time for payment?(b) Is there a genuine and substantial dispute as to the balance of the debt demanded?(c) In the alternative, does the demand materially and intentionally misstate the amount that is due, to the extent that a substantial injustice would result if the demand were not set aside?Background[8] The applicant is a buying agent for Pumpkin Patch Ltd clothing. The respondent, a clothing manufacturer in China, is the major supplier of that clothing.[9] There is no written agreement between the applicant and respondent. The applicant placed orders for Pumpkin Patch clothing with the respondent. The respondent then manufactured the clothing in accordance with the orders and then arranged for the clothing to be shipped to the applicant in New Zealand.[10] The respondent's director says that she became concerned when the applicanthad not paid for invoices that were rendered in 2011. She made a special trip to New Zealand in April 2013 with the purpose of having a face-to-face discussion with theapplicant's representative about the non-payment issue.[11] The respondent's director says that on 15 May 2013 she sent the applicant'sdirector a list of invoices due and owing to the respondent. That totalled US$518,733.63. The invoices were divided into four categories. They were:(a) invoices where clothing had been shipped and where the applicant had received payment from Pumpkin Patch;(b) invoices where clothing had been shipped and where the applicant had not received payment from Pumpkin Patch;(c) invoices where clothing had yet to be shipped and where the applicant had not yet received payment from Pumpkin Patch;(d) invoices relating to testing costs and covering some over- and under- payments.[12] Annexed to this judgment and marked "B" is a list of the invoices of the amount claimed to be due at 15 May 2013.[13] There is a contest as to whether the applicant's director in fact accepted all the invoices that made up the debt. It was the respondent's director's understandingthat she had.[14] The respondent's director told the applicant's director that she could notcontinue to supply unless payments were made and security was provided for the unpaid balance. That was particularly so because of the fact that the applicant had received payment for some of the clothing from Pumpkin Patch but had not made payment in respect of those invoices to the respondent.[15] The applicant made a substantial payment US$180,155.74 on 17 May 2013. The payment was accompanied by a list of the invoices that it was made in respect of.[16] Annexed to this judgment and marked "C" is the list of invoices.[17] The result left a balance outstanding of US$338,577.89.[18] A further development occurred on 24 May 2013. The merchandising brand manager for Pumpkin Patch wrote to the respondent's director. The letter made thefollowing points:(a) The respondent would need to resolve with the applicant any outstanding payments in respect of which Pumpkin Patch has paid the applicant;(b) In respect of goods received by Pumpkin Patch but in respect of which Pumpkin Patch has not paid the applicant, Pumpkin Patch would pay these invoices directly to the respondent;(c) In respect of orders placed with the applicant and respondent, but not yet completed or handed over, the applicant will act as agent for the current orders and Pumpkin Patch will make payment direct to therespondent under Pumpkin Patch's normal terms of trade;(d) There were a number of issues with invoices and payments but Pumpkin Patch regarded those as matters between Pumpkin Patch and the applicant, although they might require some documentation from the respondent to resolve them.[19] On 29 May 2013, the respondent served its first statutory demand on the applicant seeking payment of US$161,368.95. That amount was calculated by the respondent's director on the basis that Pumpkin Patch would pay the respondentdirectly for orders which Pumpkin Patch had not paid to the applicant.[20] Annexed to this judgment and marked "D" is the list of invoices attached tothis statutory demand.[21] Of particular significance for the purposes of this case is that the sum claimed in the 29 May 2013 statutory demand excluded the amount owing in respect of invoice M13L20 for US$111,111.60.[22] On 28 June 2013, the respondent's director discovered that in respect of invoice M13L20 Pumpkin Patch would only pay US$87,413.50. The respondent'sdirector calculated the shortfall in respect of this invoice as US$23,698.01 (sic US$23,698.10).[23] Following service of the statutory demand on 29 May 2013 a series of emails and letters passed between the applicant's and respondent's solicitors. They commenced with the applicant's solicitor's email of 11 June 2013. The email records that it is a settlement proposal. It commences:Further to my recent emails and subject to the parties agreeing a form of awritten Settlement Agreement ("Agreement") reflecting the below terms ourclient would like to propose:It then sets out five specific matters upon which agreement is sought.[24] The correspondence and emails proceeded to a position where, on 26 June2013, the respondent's solicitors wrote confirming that they had received a paymentof US$80,000 and advising that they would be providing an updated statement regarding the outstanding sum due and owing and the minimum payments that had to be paid by the applicant on or before the various dates set out in the emails that had been exchanged. The email pointed out that time was of the essence. It also emphasised that the agreement between the applicant and the respondent wascontingent on Pumpkin Patch making payments to the respondent directly for the shipments involved.It then invited the applicant's solicitor to prepare a formal agreement for execution. A clarification was then sought from the applicant's solicitor which received a positive response.[25] The draft settlement deed was never signed. It has been produced. It records a payment of US$80,000 having been made on 25 June 2013. It then makes provision for a payment of a balance of US$72,477.46 in four equal instalments on 25 September 2013, 24 December 2013, 25 March 2014 and 25 June 2014.[26] The settlement deed is the first time that the balance figure of US$72,477.46 is mentioned.[27] The respondent's director has confirmed her understanding of the settlementproposal proposed as follows:(a) The Applicant is to pay the Respondent USD80,000 on 25 June 2013. The Respondent received this on 26 June 2013.(b) Provided that above (a) is paid and Pumpkin Patch pays the invoices which it has not paid to the Applicant, the remaining balance is to be paid in 4 equal instalments.(c) The Respondent is to waive the interest charges for the outstanding balance.(d) The Respondent is to cease any action to pursue the first statutory demand and any debt enforcement action.(e) The Respondent is not to interfere with the Applicant's relationshipwith Pumpkin Patch.(f) The Applicant is to contribute NZD2,000 for the Respondent's legalcosts by 11 July 2013. The Applicant has failed to pay this within due date.[28] She advises, however, that the settlement terms proposed have never been finalised due to a misrepresentation concerning the payment of the invoice M13L20.[29] The applicant's position is that the email trail in fact provided a sufficientbasis for the court to conclude that there was a concluded agreement. The effect of the concluded agreement for the purposes of this statutory demand argument is that a substantial balance of the sum claimed in the statutory demand is not due for payment and, in fact, is to be paid on a deferred basis in accordance with the settlement.Accounting between the parties[30] At this time it is possible to analyse what the position is between the parties.The respondent's statutory demand of 6 August 2013 records the balance due on all of its invoices as at that date. It includes the shortfall in respect of invoice M13L20 at US$23,698.01. It also includes invoices for testing costs, which have not been paid by the applicant, totalling US$2,029.98. In short, it has been calculated on the basis that the applicant is responsible for those testing costs.[31] The applicant disputes that it has ever been responsible for testing costs. Its position is, as outlined in a series of emails, that testing costs were not to be invoiced separately. If they were to be charged, they were to be included in the invoice for theproducts supplied. The applicant claims it has been over-charged for, and has paid, the testing costs of US$7,126.67. That figure is the total of the testing costs in thedocument annexed to this judgment and marked "E" and which are the figures with the line drawn through. This is a second version of the document annexed andmarked "B". The short point of this is that in respect of the sum demanded in the statutory demand there is a dispute concerning the liability to pay testing costs. The invoices in respect of testing costs total, both paid and unpaid, US$9,156.65.[32] A further matter needs to be brought to account, however. That is, that the applicant has arranged a telegraphic transfer to the respondent, subsequent to the filing of the reply affidavit of, US$18,000. Counsel were not able to agree on the exact figure for which credit should be given because there was a bank charge of some $25 involved. For the purposes of this judgment, however, I record that the applicant seeks a credit of US$18,000. Accordingly, the position is that the applicant acknowledges that in respect of the amount set out in the statutory demand of US$105,415.97 the amount ultimately due must be reduced by the total testing cost figure of US$9,156.65 and the subsequent payment of US$18,000, or a total of US$27,156.65. That would leave the amount owing of US$78,259.32.[33] It should be emphasised that as between the parties, apart from the deferment of payment issue, the only current dispute as to the sum owing appears to be in relation to the testing cost figure of US$9,156.65.[34] The next matter that can be recorded is that in terms of the agreement that the parties were working to, at no time does there appear to have been any agreement as to how the US$23,698.01 figure in respect of invoice M13L20 was to be treated. It is significant that it is not taken into account in the draft deed of settlement that wasforwarded by the applicant's solicitor to the respondent's solicitor. It is clear therespondent did not know that there was going to be a contest regarding this figure by Pumpkin Patch. I cannot tell on the material whether the applicant and its solicitor knew that there was a contest concerning this figure. The response to me of theapplicant's counsel was that this was a sum that was due and payable and outside the terms of the alleged settlement. If that is the case, then it would seem that the sum ofUS$23,698.01, which is included in the sum claimed in the statutory demand, is not the subject of any substantial dispute and is presently due for payment.The first issue[35] In determining whether the parties have entered into a settlement agreement, I start by asking the question whether the email and correspondence trail evidences an intention on the part of the parties to be immediately bound to an agreement on every term that the parties regarded as essential to their bargain. The scope of that inquiry, and the approach to be taken, was confirmed by the Court of Appeal inFletcher Challenge Energy Ltd v Electricity Corporation of New Zealand Ltd.4[36] The first issue that arises is whether or not there is, in this case, a concluded agreement when the correspondence indicates that the solicitors advanced the negotiations on the basis that the parties would execute a formal settlement deed. Ms Valente referred me to the judgment of Harrison J in RPNZ Ltd v The Real Estate Institute of New Zealand Inc.5 His Honour gives a helpful summary of the approach that should be followed in determining whether or not a contract exists where the parties have referred to the conclusion of their negotiations by the entry into a formal contractual document and said:6[29] In Masters v Cameron (1954) 91 CLR 353 at 360-364 the High Court of Australia, after analysing the major authorities, identified three distinct classes of cases where negotiating parties reach agreement upon terms of a contractual nature and agree that the subject matter shall be covered by a formal contract. Those classes are where the parties (1) have finally arranged all terms of their bargain and intend to be immediately bound to their performance but also propose to restate those terms in a fuller and more precise way although not to different effect; or (2) have completely agreed upon all terms of the bargain and intend no departure from or addition to them but nevertheless have made performance of one conditional upon execution of a formal document; or (3) do not intend to conclude a bargain at all unless and until they execute a formal contract. In defining the first category the Court (361) adopted this statement of principle by Lord Blackburn (Rossiter v Miller (1878) 3 App Cas 1124 at 1151):4 Fletcher Challenge Energy Ltd v Electricity Corporation of New Zealand Ltd [2002] 2 NZLR 433 (CA) at [53].5 RPNZ Ltd v The Real Estate Institute of New Zealand Inc. HC Auckland CIV-2003-404-527, 15 September 2005.6 At [29] to [33]. As soon as the fact is established of the final mutual assentof the parties so that those who draw up the formal document have not the power to vary the terms already settled, I think the contract is completed.[30] In Masters the Court observed that agreements fall into the third category, and do not have and are not intended to have any binding effect of their own, in contrast to the first two categories, where theparties have imposed a 'subject to contract' qualification becauseeither (a) they have agreed only on major issues and contemplate that others will or will not be regulated by the provisions to be introduced into a formal document, or (b) they simply wish to reserve to themselves a right to withdraw from the negotiating process at any time before the formal document is signed (361-362). Ultimately, of course, the question of intention is answered by thelanguage used by the parties. But, when the words 'subject to contract' are used, the Court adopted this statement by LordWestbury (Chinnock v Marchioness of Ely (1865) 4 De G J & S 638 at 646): If to a proposal or offer an assent be given subject to a provision as to a contract, then the stipulation as to the contract is a term of the assent, and there is no agreement independent of that stipulation.[31] The High Court concluded that where a 'subject to contract' phraseis used (363): such words prima facie create an overriding condition, so that what has been agreed upon must be regarded as the intended basis for its future contract and not as constituting a contract.The Court endorsed Sir George Jessel MR's plain words (Winn v Bull (1877) 7 Ch D 29 at 32) that:It comes, therefore, to this, that where you have a proposal or agreement made in writing expressed to be subject to a formal contract being prepared, it means what it says; it is subject to and dependent upon a formal contract being prepared [32] I note that neither counsel cited Masters in argument and nor was there any suggestion that this case fell within a fourth category described by McLelland J (Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd [1986] 40 NSWLR 622 at 628). That class exists where the parties were content to be bound immediately and exclusively by the terms upon which they had agreed while anticipating execution of a further contract in substitution of the first and containing by consent additional terms. It is not my intention to enjoin a decidedly academic argument about whether in truth this is a truly different category or merely a restatement of the first Mastersclass (see Helmos Enterprises Ltd v Jaylor Pty Ltd [2005] NSWCA 235). I need only to observe that the distinction is a fine one.[33] The leading New Zealand authority on subject to contract clauses was decided in the context of an agreement for sale and purchase ofland (Carruthers v Whittaker [1975] 2 NZLR 667 (CA)). The Court of Appeal held that in those transactions parties intend to contract in accordance with common practice by each signing both copies of the agreement. The Court has since extended this principle to conclude that a natural inference arises to the same effect in commercial transactions (Concorde Enterprises Ltd v Anthony Motors (Hutt) Ltd[1981] 2 NZLR 385(CA) at 388-389). This inference may be displaced by evidence that the purpose of a formal document was merely to record the contract in greater detail and was not a precondition of the contract (Cromwell Corporation Ltd v Sofrana Immobilier (NZ) Ltd (1992) 6 NZCLC 67,997 (CA) at 68,015), which is an example of the first Masters category of cases.[37] Two things are self-evident as I look at the correspondence. One is a recognition by both sides that some adjustment had to be made for over-charges. That, as it has been subsequently analysed, appears to be a reference to charging for testing costs which the applicant says should not have occurred. No specific amount was stated in the correspondence as to the exact adjustment. There is currently no specific agreement on that issue.[38] The second matter is that the actual total sum due for payment had not beenfinally established. The applicant's solicitors, in drafting the deed, had not taken into account the problem with invoice M13L20 and the fact the Pumpkin Patch was not going to pay US$23,698.01. The need to establish what was due and payable wasidentified by the respondent's solicitor's email as late as 26 June 2013 when she recorded:You are aware that the agreement between our client and yours is contigent [sic] on Pumpkin Patch making payments to our client directly for the shipments involved.[39] Neither counsel suggested there was any need to go outside the email trail and the information that is contained in the affidavits. In short, no further information could be provided to the court upon which it could come to a conclusion as to whether or not the negotiations had produced a final and binding agreement as at 26 June 2013. As that is the case, and as there were two significant matters still to be agreed upon, I find that there was no concluded agreement concerning the terms of payment and the sum to be paid as at 26 June 2013. That answers the first issue that I have recorded in [7]. It means that there was no agreement to defer the time for payment of specified sums.The second issue[40] The second issue concerns the question of liability for testing costs. I have already recorded that there was no formal agreement between the parties. The emails, however, that were exchanged on this issue satisfy me that there is a dispute as to who should be responsible for those testing costs. The amount in issue, as I have already recorded, is US$9,156.65. That is the sum which must be taken out of the figure contained in the demand because there is a dispute as to whether the applicant is liable for that sum. That, then, is sufficient to conclude the second issue.The third issue[41] The third issue requires a consideration of s 290(5) and (6) of the Companies Act 1993.[42] Having regard to the conclusions I have reached on the first and second issues, the current amount due for payment after allowing for the disputed testing costs of US$9,156.65 and the US$18,000 payment recently made, is US$78,259.32.[43] When I apply s 290(6) of the Companies Act 1993, the misstatement of the amount due at the time of the demand is in respect of the testing costs figure of US$9,156.65 only. In other words, the figure of US$105,415.97 is over-stated and should have been US$96,259.32. Had it done so, it would have allowed for the fact that there was a dispute over the testing costs at the time of the issue of the statutory demand, namely 6 August 2013.[44] On the question of whether this defect means the statutory demand should be set aside, Ms Valente referred to the Court of Appeal decision in Pioneer Insurance Company Ltd v White Heron Motor Lodge Ltd.7[45] The Court of Appeal, in that case, left open the question as to what extent a difference in the amount demanded and the amount that was found not to be the7 Pioneer Insurance Company Ltd v White Heron Motor Lodge Ltd [2008] NZCA 450, (2008)19 PRNZ 286.subject of a dispute could be said to create a substantial dispute for the purposes of s 290(4)(a).8[46] The Court held that a difference of 25 per cent, in that case a figure of $279,794.52, was sufficient to justify a conclusion that a substantial injustice would be caused if the demand was allowed to stand.9 The Court reached that conclusion on an application of s 290(4)(c) and (6) of the Companies Act 1993.[47] The facts of this case are quite different. The reduction is 8.6 per cent of the original sum demanded. I am satisfied that, in respect of the third issue, there is no justification for setting aside the demand.[48] Overall, the proper approach is to record the present debt, which takes account of a recent payment, and to require payment of it within 15 working days. If there is a failure to pay, then the order would permit application to be made to place the applicant company into liquidation and to appoint a liquidator. I arrive at this conclusion by applying:(a) The time for payment specified in s 289(2)(d) of the Companies Act 1993; and(b) The provisions of s 291(1)(a) of the Companies Act 1993.Orders[49] I order that the applicant pay the sum of US$78,259.32 to the respondent within 15 working days of the release of this judgment. If the applicant fails to make this payment the respondent may make application to the High Court to place the applicant company into liquidation and to appoint a liquidator.Costs[50] I did not give counsel the opportunity of addressing on costs at the conclusion of the hearing. Although the respondent has been successful, there is reduction in8 At [52].9 At [54].what could be the subject of a notice under s 289 of the Companies Act 1993. I therefore reserve costs. I indicate to counsel that in my view this is a Category 2 case. Most of the steps would appear to fit within Band B. Accordingly, I make provision for the parties to agree on the appropriate quantum of costs. If counsel cannot agree within 15 working days of this judgment, memoranda in support, opposition and reply setting out which the appropriate sum for costs should be shall be filed and served at seven-day intervals. On receipt of the reply memorandum, the file shall be referred to me to conclude the judgment for costs._____________________JA FaireAssociate Judge