LINDALE KIDS LIMITED V LINDALE INVESTMENTS LIMITED HC WN CIV-2010-485-899

LINDALE KIDS LIMITED V LINDALE INVESTMENTS LIMITED HC WN CIV-2010-485-899 6 August 2010IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY CIV-2010-485-899UNDER The Companies Act 1993 IN THE MATTER OF An application to set aside a statutory demand BETWEEN LINDALE KIDS LIMITED Applicant AND LINDALE INVESTMENTS LIMITED RespondentCIV-2010-485-900AND UNDER The Companies Act 1993 IN THE MATTER OF An application to set aside a statutory demand BETWEEN PIACERE CAFE LIMITED Applicant AND LINDALE INVESTMENTS LIMITED Respondent Hearing: 4 August 2010 Counsel: P A McBride and G G Ballara for Applicants E J Horner for Respondent Judgment: 6 August 2010 at 4.45pm I direct the Registrar to endorse this judgment with a delivery time of 4.45pm on the 6th day of August 2010.RESERVED JUDGMENT OF MACKENZIE J[1] These are applications under s 290 of the Companies Act 1993 to set aside statutory demands issued by the respondent against each of the applicants. The cases are closely related and were argued together. It is convenient to deliver a single judgment. [2] The applicant companies are associated in that they have common directors and shareholders. Mr and Mrs Murdoch are directors of both companies. Both companies operated businesses at the Lindale complex on State Highway 1 north of Paraparaumu. The premises in the Lindale complex were leased from the respondent, of which Mr Rudings is a director. On 5 May 2010 the respondent issued a statutory demand pursuant to s 289 against each company, claiming arrears of rent of some $30,000 for Lindale Kids Limited and some $9,000 for Piacere Café Limited. [3] In each case, the grounds of the application to set aside is that: (a) There is a substantial dispute whether or not the debt is owing or is due; (b) The applicant has a counterclaim exceeding the amount of the debt claimed. [4] There are affidavits from both Mr and Mrs Murdoch, and Mr Rudings, filed in support and in opposition to the applications. Before dealing specifically with the particular matters raised on these issues, a more general description of the background as it emerges from the affidavits is desirable. Mr and Mrs Murdoch became involved in the Lindale complex in December 2008. They purchased the shares in Piacere Café Limited, which operated a café in the complex, from Mr Rudings and others. They also formed Lindale Kids Limited, to operate some other businesses in the complex, and entered into three leases with Lindale Investments Limited. Mrs Murdoch, in her affidavit in support of each application, says that both before and after they took the leases, Mr Rudings repeatedly told themthat he or his company would be spending considerable amounts improving and marketing the complex as a whole. She says that before they took possession, Mr Rudings encouraged them to spend considerable sums of money upgrading the premises for the benefit of the whole complex. Mr Rudings, in his affidavits, denies those claims. [5] It seems that Mr and Mrs Murdoch became concerned about the management of the complex quite soon after their involvement. The essence of their concerns is set out in a letter from their solicitors to Mr Rudings dated 28 September 2009. That letter complained of issues with the lack of proper administration of the complex, of other shops in the complex closing and of concern as to the viability of the companies' businesses as a consequence. There has been ongoing correspondence between the parties over a range of issues. [6] In the course of negotiations, an agreement was reached that rent for both companies would be reduced to 65 per cent of the amount payable under the lease, for a period. The exact terms of that arrangement are in dispute, as I later describe. There were further ongoing discussions and negotiations. Both companies ceased trading in April 2010, and vacated the premises, prior to the expiry of the leases, in May 2010, leaving substantial amounts of rent unpaid. The respondent as landlord subsequently re-entered the premises. [7] I have described that general background, not for the purposes of making factual findings on it, but as necessary for a consideration of whether there are grounds to set aside the notices. I make no factual findings, and express no view, on concerns expressed by the applicant companies, or on the responses to these concerns which have been made by the respondent. [8] The test to be applied on an application under s 290 is well established. The principles are conveniently summarised in Brookers Companies and Securities Law in these terms: 1(a) The applicant must show that there is arguably a genuine and substantial dispute as to the existence of the debt. The task for the1 Brookers Companies and Securities Law at CA290.02.Court is not to resolve the dispute but to determine whether there is a substantial dispute that the debt is due. The mere assertion that there is a genuine substantial dispute is not sufficient: Queen City Residential Ltd v Patterson Co-Partners Architects Ltd (No 2)(1995) 7 NZCLC 260,936 (HC). (b) The mere assertion that a dispute exists is not sufficient. Material, short of proof, is required to support the claim that the debt is disputed. (c) If such material is available, the dispute should normally be resolved other than by means of proceedings in the Companies Court. (d) An applicant must establish that any counterclaim or cross demand is reasonably arguable in all the circumstances. The obligation is not to prove the actual claim. Such an obligation would amount to the dispute itself being tried on the application. (e) It is not usually possible to resolve disputed questions of fact on affidavit evidence alone, particularly when issues of credibility arise.[9] Applying these principles, I turn to consider the grounds set out in the application. [10] In each case, the essence of the applicants' contention that there is a substantial dispute as to the amount owing relates to the rent reductions which were agreed and put in place. The evidence clearly establishes that there was agreement upon a reduction in rent from that specified in the leases. Mr Rudings' evidence is that the respondent had agreed to accept 65 per cent of the rent due for the months of December 2009 and January and February 2010. His evidence is that the amount demanded has been calculated giving effect to the deduction. Mr Murdoch deposes that following the respondent's initial agreement to reduce rents to 65 per cent levels, he met with Mr Rudings on a number of occasions to discuss what would happen next and that those discussions "reached the point that I reasonably believed that we had agreed the rent would be further reduced on a permanent basis from the previously agreed 65 per cent level, using a percentage of rental turnover of our businesses." Mrs Murdoch asserts, in addition, that the agreed period of the rent reduction commenced in November, not December as Mr Rudings asserts. [11] I do not consider it appropriate to attempt to resolve, on the affidavits, either of these disputed aspects. The task is to determine whether there is a substantial dispute that the debt is due. I do not regard Mr Murdoch's evidence as sufficient, onits face, raise a genuine and substantial argument that there has been agreement to reduce rent after February 2010. As to the start point of the reduction, the contention is that the reduction should have begun in November and December. The quantum of such a reduction would not, in my view, be sufficient to justify the setting aside of the demand as that would still leave a substantial sum owing. I consider that there is not a sufficiently arguable case as to the existence of the debt to satisfy the onus on the applicants under s 290(4)(a), if that ground stood alone. [12] That ground however does not stand alone. The applicant companies also assert that they have counterclaims against the respondent which justify the setting aside of the demand under s 290(4)(b). [13] The alleged counter claims relate to several matters: (a) Alleged representations by Mr Rudings on behalf of the respondent as to the nature of the complex, its operation and imminent developments, said to be actionable at common law, under the Contractual Remedies Act 1979 and the Fair Trading Act 1986. (b) Breaches of representations and of the provisions of the lease by the respondent in a number of respects including: failure to properly account for and use sums paid by the applicants in respect of marketing and promotion of the Lindale complex; failing to meet a number of costs which were the responsibility of the respondent but met by the applicants; expenditure to mitigate losses; losses due to railway works; operating losses and capital expenditure losses. [14] As I have indicated, the task of the Court is not to resolve whether those items or any of them may ultimately be established. The question is whether the applicant companies have established that any of these counterclaims are reasonably arguable in all the circumstances. [15] Counsel for the respondent submits that the issues raised in support of the purported dispute and the (as yet unfiled) counterclaim do not provide a sufficiently robust basis for finding that a substantial dispute or counterclaim exists. She submitsthat at no time until the application to set aside the demand was filed was any quantum articulated with respect to the counterclaim and that in previous correspondence there has been an indication of an inability to pay rent due to a lack of funds. [16] The Court must always be alert to the possibility that an alleged counterclaim is being raised as a means of avoiding payment. As the Court of Appeal said inAMC Construction Limited v Frews Contracting Limited,2 the Court must make an assessment whether the case is one where the account is disputed as a means of buying time to pay, or whether the grounds for the dispute are genuine. In this case, I consider that, although the alleged counterclaim has not been quantified, the sequence of correspondence, beginning with the letter of 28 September 2009 to which I have referred, clearly raised the extent of the applicant companies' concerns, and indicated that financial recompense for those was sought. I have earlier referred to Mr Murdoch's evidence about ongoing discussions about the level of rental. I have held that the evidence on those discussions does not go so far as to raise the significant possibility that a reduction of rental had been agreed, so as to constitute the basis for a substantial dispute as to the amount of rent owing. However, those discussions clearly demonstrate an intention by the applicant companies to seek financial redress for their concerns. Accordingly, I consider that the evidence does establish the existence of claims which had been advanced long before the statutory demand. I consider that those matters are, on the evidence available, reasonably arguable. [17] As to the reference in the correspondence to inability to pay rent to which Ms Horner referred, the passage relied on reads:At present we do not have the funds to pay you the agreed 65% rent from either the café or the Lindale Kids accounts. Once wages were paid this week, there are too few funds available for the rent. This is a direct result of the continued decreasing trade.[18] That comment is in effect an assertion that the companies' difficulties have been caused by the actions or inactions of the respondent of which the applicants2 AMC Construction Limited v Frews Contracting Limited CA145/08 [2008] NZCA 389, 28 September 2008.complain. I do not regard that comment as indicating that the applicants' complaints have been raised because of an inability to pay. [19] I also do not attach significant weight to the fact that no counterclaim has been filed. The first shot fired in this battle was the service of the statutory demand. There are no proceedings in which a counterclaim could have been raised. For these reasons I consider that each of the applicants have established that there is a counterclaim, or cross demand, which is reasonably arguable. [20] Counsel for the respondent also submits however that the parties have contracted on terms which now prohibit the applicants from seeking relief under s 290 of the Act. Each of the leases is subject to a provision that the tenant shall pay the rental "without right of offset" (in the case of Lindale Kids Limited) or "without deduction or setoff (whether legal equitable statutory or any other form)" in the case of Piacere Café Limited. Counsel submits that the purpose of s 290 of the Act is to allow debtors to avoid the consequences of a statutory demand where they have an arguable reason to do so, that the section is clearly for the benefit of the debtor, and there is no reason why public policy would prohibit a debtor from contracting out of this provision. Counsel points out that leases generally contain a similar provision and it would be an anathema to the principle of freedom of contract if the lessor could not rely on these provisions when trying to enforce payment of rentals. [21] I do not consider that these provisions in the lease are a bar to the setting aside of the statutory demand in these two cases. First, the prohibition on reduction is limited to offset, or setoff. A setoff is legally different from a counterclaim, although there is room for overlap between equitable setoff and counterclaim. The clauses in the lease do not refer to counterclaim. Section 290(4)(b) permits the setting aside of a demand on the basis of a counterclaim. I do not consider that the clauses could, on their wording, be intended to contract out of the ability to rely on a counterclaim as a ground for setting aside a demand. [22] Further, I do not think that the inclusion of these clauses in the leases is to be construed as contracting out of s 290(4)(b), even if the claims of the applicant companies were properly to be classified as an equitable setoff. In Grant v NZMCLtd, the Court of Appeal held that the right of equitable setoff may be excluded expressly or by clear implication.3 That has been done here. But I do not consider that the clauses are to be construed as contracting out of the ability to rely upon a claim which might otherwise be enforced as an equitable setoff as a ground for setting aside a statutory demand. Section 290 is not a provision solely designed for the protection of a debtor company. It also reflects public policy considerations as to the orderly and proper operation of the statutory processes for winding you. The statutes specifically allow a setoff or counterclaim to be taken into account in determining whether a demand should be set aside. The provision may be invoked even when the debt itself is indisputable. That is clear from Covington Railways Ltd v Uni-Accommodation Ltd. 4 A provision in a lease that rent is to be paid without deduction by way of setoff clearly makes the debt indisputably payable, despite the setoff. But it does not extinguish the ability of the tenant to enforce the rights by other means. If a demand under s 290 were not set aside in such circumstances, the ability of the tenant to enforce those rights could be severely compromised. [23] For these reasons, I am satisfied that each of the applicants has established a reasonably arguable counterclaim or cross demand which ought not to be resolved on the application, so that the statutory basis for setting aside the demands is made out. This is not a case in which the residual discretion to decline to set aside the demands should be invoked. In both cases, the demands are set aside. [24] Costs are reserved. My preliminary view is that costs should follow the event, on a 2B basis. If the parties are unable to agree in the light of this indication, they may submit memoranda."A D MacKenzie J"Solicitors: McBride Davenport James, Wellington for Applicants Morrison Kent, Wellington, for Respondent3 Grant v NZMC Ltd [1989] 1 NZLR 8.4 Covington Railways Ltd v Uni-Accommodation Ltd [2001] 1 NZLR 272.