LINK ELECTROSYSTEMS LTD V GPC ELECTRONICS (NZ) LTD CA CA267/06

LINK ELECTROSYSTEMS LTD V GPC ELECTRONICS (NZ) LTD CA CA267/06 14 November 2007IN THE COURT OF APPEAL OF NEW ZEALAND CA267/06 [2007] NZCA 501BETWEEN LINK ELECTROSYSTEMS LIMITED Appellant AND GPC ELECTRONICS (NEW ZEALAND) LIMITED Respondent Hearing: 1 November 2007 Court: William Young P, Hammond and Ronald Young JJ Counsel: I W Thorpe for Appellant G M Brodie and R G Smedley for Respondent Judgment: 14 November 2007 at 2.15 pmJUDGMENT OF THE COURT A The appeal is dismissed. B In this Court, the respondent will have costs of $4,000 together with usual disbursements. REASONS OF THE COURT(Given by Hammond J)Introduction[1] On 24 November 2006 Associate Judge Christiansen declined to set aside a statutory demand made by GPC Electronic (New Zealand) Limited (GPC) on LinkElectrosystems Limited (Link), under s 290 of the Companies Act 1993 (the Act) (HC CHCH CIV 2006-409-001960). [2] Link now appeals against that decision.Background[3] Link is a small company with about five employees. It designs, manufactures, and distributes electronic engine management systems for motor vehicles. [4] GPC is a supplier of electronic items which are manufactured to order. [5] Link was a customer of GPC. That relationship came to an end. GPC alleged that Link was contractually obliged to pay not only for goods manufactured for Link, but also for stock ordered by GPC on account of Link's orders, and which was left over after the orders were either completed or cancelled. [6] Link was asked to pay a sum of $77,646.92 on that account. In an exchange of correspondence, Link maintained that the sums claimed were not within its contract with GPC. [7] GPC thereafter issued a statutory demand to Link under s 290 of the Act for $82,577.75 (including interest). The statutory demand was dated 11 August 2006. Link applied promptly to have it set aside. It had previously said, in correspondence, that if any such application was made it would take that course. [8] GPC then filed a Notice of Opposition, affidavits were produced, and the cause went to a fully argued hearing before the Associate Judge. [9] In the result, the Associate Judge dismissed the application but extended the time specified in the statutory demand for Link to comply to 15 December 2006. Subsequently, the parties have obtained orders extending the time for Link to comply until this appeal has been determined.[10] We were told from the bar that Link has also provided security to GPC, apparently in the form of a bank bond, for the amount of its claim in these proceedings.The law[11] It may be useful to set out briefly the principles which obtain in this area of the law. [12] Section 289 of the Act provides that a creditor may serve a statutory demand "in respect of a debt owing by a company". That statutory demand must be in respect of a debt that is "due". It must be in writing, and it must be served on the company, requiring the company to pay, compromise, or secure the debt to the reasonable satisfaction of the creditor within 15 days of the date of service or such extended period as a court may order. [13] If such a statutory demand is made, the court (which means the High Court of New Zealand) may, under s 290(4) of the Act, set the statutory demand aside if:(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.[14] If, on the hearing of an application under s 290, the High Court is satisfied that there is a debt due by the company to the creditor that is not the subject of a substantial dispute, or is not subject to a counterclaim, set-off, or cross demand, then the High Court may, under s 291(1):• order the company to pay the debt within a specified period with a provision that in default of payment, the creditor may make an application to put the company into liquidation; or• dismiss the application and forthwith make an order under s 241(4) of the Act putting the company into liquidation, on the ground that the company is unable to pay its debts. [15] Section 290(5) and (6) provide:(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. (Emphasis added.) (6) In subsection (5), defect includes a material misstatement of the amount due to the creditor and a material misdescription of the debt referred to in the demand.[16] The statutory scheme can be highly coercive, and something of a sword of Damocles hanging over the very existence of a company. For that reason courts have insisted that the provision is not to be used oppressively as a debt collection device. The legislation is not to be utilised more widely than its clear purpose, which is to require the payment of a sum certain – or largely certain – in a context where there is no substantial dispute. [17] What the alleged debtor is required to show has long since been established:• that there is arguably a genuine and substantial dispute as to the existence of a debt;• the mere assertion of a dispute is not sufficient, some material – short of proof – is required to support the claim that the debt is in dispute;• if such material is available, the dispute should normally be resolved other than by means of proceeding by way of statutory demand;• it is routinely difficult to resolve disputed questions of fact on affidavit evidence alone – more obviously so where issues of credibility arise; and• it needs to be kept in mind throughout, that the task for the judge is not to resolve the actual dispute, but to determine whether there is a substantial dispute whether or not the debt is due.[18] This was an unusual claim for unused manufacturing components; there was a dispute as to the terms of the contract and as will become apparent later in this judgment, a dispute as to quantum. This proceeding was not therefore an obvious candidate for the issuance of a s 289 notice, and for disposal by the procedure associated with such a notice. Such a course was problematic here, and the fact that we do not propose, for the particular reasons we give, to set the notice aside in this instance should not be taken as an indication that difficult disputes as to the merits can be resolved under this process.Liability[19] Mr Thorpe complained that, in the absence of a regular proceeding with a statement of claim, Link was effectively required to "guess at" the basis of the supposed contract and that in any event there was not here a contract in the sense contended for by GPC. [20] It is necessary to introduce some further factual material at this point. [21] Link started using GPC (or its predecessor) as a contract manufacturer of electronic goods in 1992. [22] GPC claims that, when planning to fulfil Link's orders, it was commercially necessary to order more components than could reasonably be used just to fill Link's orders, and that accordingly it introduced terms into its contracts with Link to make Link liable to pay for this excess stock. [23] Undoubtedly there were contractual terms between the parties governed by GPC's standard terms and conditions. [24] We set out hereafter clause 1 of the contract:1. Terms of Contract 1.1 GPC will act as contract manufacturer of electronic equipment for the Customer on the terms contained in this Agreement, subject toany changes which may be agreed in writing between GPC and the Customer. 1.2 It is contemplated that GPC and the Customer will, in respect of each individual manufacturing assignment to be undertaken by GPC for the Customer pursuant to this Agreement, separately agree special and specific terms governing that particular assignment ("Individual Contracts"). If there is any inconsistency between this Agreement and the terms of any Individual Contract, the latter will prevail. 1.3 In this Agreement, "Work" means the contract manufacturing services to be performed by GPC under any Individual Contract, "Products" means the Products produced by GPC (including any components thereof which may have been purchased by GPC for the Customer for the Work), "Orders" means a written order and/or a forecast of anticipated orders for the work to be performed by GPC. 1.4 This Agreement will prevail over and exclude all Acts or legal obligations to the extent permitted by law. 1.5 GPC may by written agreement with the Customer change any of the terms of this Agreement.And clause 10 of the contract provided:10. Cancellation 10.1 The Customer may cancel any order or part of it provided GPC gives its written consent and as a condition of giving such consent GPC may require that: (a) it be reimbursed for the cost of reallocating labour and materials and for other direct or indirect costs incurred by GPC as a result of cancellation; and (b) the Customer purchase components and materials which GPC has ordered or purchased in reliance on the Customer's order and the Customer agrees if required by GPC to take over any purchase orders in respect of materials ordered by GPC in response to the Customer's order. 10.2 In the event that: (a) The Customer fails to pay any amount for the Work on the due date; or (b) The Customer becomes insolvent; or (c) GPC or the Customer is refused any required licences or permits in respect of the Work or the Products, then without limiting any other legal rights GPC may cancel any outstanding Work and any orders or deliveries of orders, and resellthe Products in question, or forfeit any deposit as liquidated damages, or sue the Customer for the price for the Work and any losses, costs and expenses incurred by GPC as a result of the Customer's default.[25] In mid December 2004 Link advised GPC that it was not continuing with some forecast production of its G3 products. GPC accepted that cancellation. [26] On 11 January 2005 Link advised GPC that it was cancelling an order for its 4 Link product. GPC accepted that cancellation. [27] On 13 May 2006 Mr Royds of Link and Mr Owen and Mr Paterson from GPC met to discuss GPC's claim for excess stock (at that time said to total a sum of $99,982.42) which had been made by GPC in an invoice dated 11 May 2006. It seems to be common ground that this invoice was not in front of the parties at the meeting. Mr Royds had not seen it. Nevertheless, GPC claimed Mr Royds admitted its claim for excess stock at that meeting, and agreed to a payment schedule commencing with a payment of $45,000 by 20 May. [28] Link denies it accepted responsibility to pay an invoice that it had not seen, or that it agreed to make payment for any excess stock. Indeed Mr Royds' evidence was that he paid the $45,000 on account of the remaining orders for manufacture of the G3 product. Certainly Link paid $45,000 to GPC on 17 May 2006. [29] There is a dispute as to what happened thereafter. Mr Royds claimed to have followed this meeting up when speaking to Mr Owen of GPC, to make sure that the $45,000 paid on 17 May was actually credited to the G3 product and not to excess stock. Mr Owen says it was a variation to the agreed payment schedule. [30] We will have to return to the quantum issues later in this judgment. But it is necessary first to deal with the argument that there was no liability at all on Link for the sums claimed. [31] Clearly, for reasons of business efficacy in the particular context, "orders" had to be given an extended meaning. The simple reason is that in the electronic componentry industry, one routinely cannot buy one small item. The item may beworth as little as a few cents, and minimum order quantities may therefore be required. The extended meaning of "orders" in clause 1 of the contract clearly envisaged just that sort of possibility. Just as obviously, a particular product line might be cancelled. There would then be sometimes hundreds of these items left over. GPC did not want to be left with these items. Clearly, it would be entirely unfair if GPC could (unknown to Link) unilaterally order in a great deal of stock, in effect in anticipation of Link's work. For that reason, clause 10 of the agreement clearly contemplated that there had to be a relationship between what GPC ordered in and held. That link was to be found in clause 10 of the agreement – what was got in had to be "in reliance on the Customer's order". [32] The Associate Judge rightly noted that clause 1.3 does not specify by whom the forecast document had to be prepared. But he was able to come to the clear view on the basis of evidence which he detailed in [38] of his judgment, that Link had in fact participated in the forecasting process. He found (at [39]) that "[Link] was aware of forecasts having been made and the reasons such were referred to them for input [were not just] a matter of courtesy". That was a significant finding in terms of this dispute and there was evidence on which the Associate Judge could fairly reach that view. It would have been quite wrong to hold Link liable for something it had not known about, or participated in, but the Associate Judge was alive to that danger. In this Court, Mr Thorpe did not seek to challenge this finding. In effect, he abandoned the primary argument which had been advanced on behalf of Link in the High Court. [33] Given the Associate Judge's finding, before us Mr Thorpe ran a purely legal argument as to the construction of the relevant contract(s). He contended that there were two layers of "contract". There was the umbrella contract (GPC's express terms and conditions). But, he said, there could be no liability for excess stock unless and until there was an express order, so that in effect there were then a series of individuated contracts. He said that, "In effect, GPC's standard terms and conditions of contract seek to put the cart before the horse. They attempt to create binding contractual obligations before any contract has been formed. It is submitted this is a logical impossibility."[34] Mr Brodie replied that, "There is no reason in principle at all why parties cannot contract on the basis that stock required to be ordered in anticipation of future business will have to be paid for in the event that the business does not unfold as forecast. There is no reason why such a contract cannot and should not be given effect to." Mr Brodie suggested that it was at least implicit, if indeed it was not explicit, that an overarching agreement to pay for components purchased but not then required was created by clause 10.1. [35] The argument contended for by the respondent – and which appears to have been accepted by the Associate Judge – is that clause 1.3 of the GPC terms and conditions of sale does create the overarching obligation for which Mr Brodie contended. This is because "orders" has an extended meaning. The parties were free to agree (and did so) that a forecast of an anticipated order would give rise to a contractual obligation to reimburse where the manufacturer would otherwise be left saddled with unwanted and unusable stock. This was a perfectly orthodox contractual function: that of the allocation of risk between the parties in a particular transactional setting, on the happening of certain events. We think the Associate Judge was right on this point.Quantum[36] The quantum claim is on the surface somewhat messy, but on closer examination things are clear enough. [37] As a general proposition, the alleged indebtedness arose in respect of GPC's excess stock of components remaining in store after Link's orders for products to GPC were either completed or cancelled. [38] The indebtedness was conveniently broken into three parts, as per GPC's solicitor's letter to Link, dated 29 June 2006:2 We have been instructed to demand that Link Electrosystems Limited ("LEL") pay GPC sums, totalling as at 31 May 2006, $77.646.92 ("the Debt") made up as follows:(a) $14,133.84 ("Sum (A)") in respect of material purchased by GPC to fulfil orders made by LEL for 4 Link products; (b) $42,332.99 ("Sum (B)") in respect of material purchased by GPC (as authorised by LEL) to fulfil forecasted orders made by LEL for G3 products; and (c) $21,180.09 ("Sum (C)") in respect of residual material relating to other product lines. All amounts include 7.5% mark up + GST.[39] Mr Thorpe complained that:• the figures claimed in the solicitor's letter were priced to include 7.5 percent mark up and GST;• the total sum demanded in the solicitor's letter of $77,646.92 does not directly correspond to the sum in the statutory demand (being in total $82,577.75 made up of $70,137.43 of unpaid invoices and $12,440.32 of interest); and• the claims are made in respect of alleged unpaid invoices and interest, and not on any other basis. [40] The interest sum is contractual interest, and it was not suggested that it was not correctly calculated in terms of clause 5.3 of the agreement. [41] The solicitor's letter did include a 7.5 percent mark up, and GST. Mr Brodie said he abandoned that head of claim, in this Court. [42] The relevant invoices for the sums in [38] above, and the explanations as to how they were accounted for were before the Associate Judge. The only item which appears to be now in dispute, and which is the subject of the eighth ground of appeal, relates to item (c) ($21,180.09 less the 7.5 percent mark up pre GST). [43] The Associate Judge did not deal with this expressly, no doubt because counsel for Link in the High Court (not present counsel) did not raise any argument about this item.[44] The Associate Judge rejected Mr Royd's claim that he paid $45,000 on account of G3 products specifically ordered by Link. Indeed, he took the view that Link "admitted its debt, acknowledged responsibility to address the issue, and made a significant payment towards it" (at [46]). [45] In this Court, Mr Thorpe's argument really harked back to the argument that he was making on contractual liability: that had the claim been pleaded in full it would have been necessary to particularise (and later to prove) the contractual obligations on Link to pay for each item of obsolete stock that GPC claims is for Link's account. In short, the argument on quantum here really turns on the contractual argument – the need for a specific order – which we have already rejected. [46] A point of more difficulty is that clause 10.1 (above at [24]) only applies to cancellation of orders. It does not apply directly to surplus stock acquired by GPC for the purpose of fulfilling orders which were later satisfied. GPC did produce some order forms which make it clear that Link was liable in relation to surplus stock but it seems reasonably clear that not all the surplus stock covered in item (c) was subject to the express contractual provisions. This is not to say that GPC is not entitled to payment in full, but it does leave room for argument as to the mark up claim and at least some parts of item (c). [47] In view of s 290(5) and (6), the absence of argument in the High Court addressed to the mark up and claim (c) issues, and the considerations referred to under the heading "Insolvency", the fact that some of the money claimed might be in dispute does not here warrant the setting aside of the s 289 notice. [48] It would, of course, be open to Link to pay what is not in dispute. If GPC sought to proceed with liquidation after payment of undisputed items (being (a), (b), such parts of (c) as are covered by express written contractual provision and interest on those sums) it would then be an abuse of process. [49] It is hard to see why, given the views we have expressed, the parties would not be able to resolve this matter which hardly merits further litigation costs.Insolvency[50] A critical feature of the statutory demand process is that it involves a creditor making a demand for a sum certain which can lead to liquidation if the debtor fails to meet the demand. [51] The alleged debtor can of course come into court and say that it is in good shape financially, or certainly such as could meet the debt (which it disputes), even if it is found liable to pay. What is remarkable about this case is that no assertion of solvency by Link was raised in the affidavits. Instead it simply sought to contest the debt. [52] Mr Thorpe said:107. My instructions are that Link was not insolvent, and in any case, is not insolvent now. 108. In my submission, a statutory demand issued over one year ago cannot amount to good evidence of Link's current state of solvency. Also, because GPC's claim has now been secured by Link so that GPC's claim together with interest will be paid in full in the event that Link's appeal does not succeed, the issue of Link's solvency is now irrelevant to GPC's claim. In my submission it would be unjust if Link were now to be found to be insolvent at the same time that GPC's claim was paid in full. In my submission this is a further factor weighing in favour of GPC's statutory demand being set aside.[53] There might conceivably be circumstances in which an updating affidavit as to insolvency would be required on an appeal – although we expressly do not decide that point – but generally speaking an appeal to this Court is by way of rehearing on the material as it stood at the hearing in the High Court. So the lapse of time to the hearing of the appeal is not here relevant. But in any event, the securing of a debt to an independent third party is not logically proof of solvency; such a step merely proves (and we note in passing that we have no evidence on this point) that it will in fact be met, in the particular circumstances. [54] What is significant, for present purposes, is that there was no evidence in court at the relevant time that Link was solvent. Indeed, such evidence as there waspointed to some difficulties on Link's part; the evidence from GPC was that Link was having difficulty meeting its accounts.Conclusion[55] In the result, it has not been shown that the Associate Judge was wrong. The appeal is accordingly dismissed. [56] There was no appeal against the costs awarded in the High Court. [57] In this Court, the respondent will have costs of $4,000 together with usual disbursements. We do not certify for second counsel.Solicitors: Wynn Williams & Co, Christchurch for Appellant Anthony Harper Lawyers, Christchurch for Respondent