Little Republic New Zealand Ltd v Kum Fu Stainless Kitchen Equipment Ltd [2020] NZHC 3478

Little Republic New Zealand Ltd v Kum Fu Stainless Kitchen Equipment Ltd [2020] NZHC 3478 [21 December2020]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2020-404-1517[2020] NZHC 3478UNDER s 290 of the Companies Act 1993IN THE MATTER of an application to set aside a StatutoryDemandBETWEEN LITTLE REPUBLIC NEW ZEALANDLIMITEDApplicantAND KUM FU STAINLESS KITCHENEQUIPMENT LIMITEDRespondentHearing: 27 October 2020Counsel: T Herbert for the ApplicantAM Swan for the RespondentJudgment: 21 December 2020JUDGMENT OF ASSOCIATE JUDGE SUSSOCKThis judgment was delivered by me on 21 December 2020 at 4pmpursuant to r 11.5 of the High Court RulesRegistrar/Deputy RegistrarSolicitors / Counsel:Forest Harrison Lawyers, AucklandTJ Herbert, Barrister, AucklandAuckland Property Legal Service, AucklandAM Swan, Barrister, AucklandIntroduction[1] This is an application to set aside a statutory demand pursuant to s 290(4) ofthe Companies Act 1993.[2] The applicant, Little Republic New Zealand Limited (Little Republic), is thefranchisee of a restaurant brand and operates three restaurants in Auckland. LittleRepublic engaged the respondent, Kum Fu Stainless Kitchen Equipment Limited(Kum Fu), to provide and install an extraction hood and fresh air system in its newrestaurant in Rosedale, Auckland.[3] A statutory demand was issued on 26 August 2020 for $13,828.50, representingthe amount Kum Fu says was the balance to pay under the contract to provide andinstall the kitchen equipment. Little Republic has applied to set aside the demand onthe grounds that there is a substantial dispute as to whether the alleged debt is owed,and that it has counterclaims that are not yet quantified that may exceed the value ofthe debt.Factual background[4] Little Republic leases the unit for its Rosedale restaurant. The unit is part of aunit title development, with unit holders' members of Body Corporate No.365310(Body Corporate).[5] Little Republic began fitting out the restaurant in February 2020. It enteredinto a contract with Kum Fu for installation of the kitchen equipment, the terms ofwhich included terms set out in the quotation provided by Kum Fu on 3 March 2020.This quote listed the items to be supplied and then set out the following:Colorsteel flashing as per BC requirementFresh Air System 6 meters away kitchen extraction as per BC requirementSpeed control for both systemnsLabour and partsProducer statement (Exclude PS4, to be advice in CCC stage) (sic).[6] In her affidavit in support of the application to set aside, the sole director forLittle Republic, Ms Liang, said that when initially negotiating with Kum Fu, she toldMr Chen for Kum Fu that any work needed to comply with the building consent. MsLiang annexed to her affidavit a copy of the message forwarding a copy of the buildingconsent to Mr Chen via the message system WeChat. The references to "BC" in thequotation appear to be a reference to the building consent.[7] The total amount set out in the quote was $24,483.50 including GST of$3,193.50. The payment terms were recorded as:Payment Term: 50% deposit30% before deliveryFull payment on completion.[8] The quote recorded that the goods delivered remained the property of Kum Fuuntil payment in full and that "[n]o credit will be accepted for special indent items".[9] Little Republic accepted the quote on 9 March 2020. Mr Chen then confirmedthat Kum Fu would start work two weeks after Little Republic paid the 50 per centdeposit.[10] Little Republic paid $11,000 on 13 March 2020 and Kum Fu began the works.On 8 May 2020, Kum Fu sought a variation, adding $300 to the contract price, as itwas required to install additional stainless steel wall linings. Ms Liang says in heraffidavit for Little Republic that the additional stainless steel wall linings were for awall clearly marked on the building consent and so should have been taken intoaccount by Kum Fu in its original quote. At that stage, however, Little Republic wasmore concerned with the installation being completed and so it agreed to the additionalamount.[11] On 17 May 2020 Mr Chen confirmed on behalf of Kum Fu that it had finishedthe part of the works that involved the roof of the restaurant, enclosing photographs.[12] It was immediately apparent from the photographs that Kum Fu had not usedColorsteel as required by the contract. Ms Liang questioned Mr Chen about this,expressing her concern that it would affect the inspections by the Council under thebuilding consent. Mr Chen responded for Kum Fu that it would not be a problem.[13] Little Republic then discovered on 22 May 2020 that flexible boot flashing hadnot been installed as required. It raised this with Kum Fu, again expressing its concernthat the work was quite different than the consent. Kum Fu replied that if LittleRepublic insisted, they would install the flashing. Kum Fu again sent photographs toLittle Republic when Kum Fu considered the works were completed.[14] On 28 May 2020 Kum Fu asked Little Republic to pay the balance of the price.Little Republic said it would pay once the Code Compliance Certificate (CCC) wasissued by the Council. Kum Fu did not agree but Little Republic said it was verycommon to pay after the issue of the CCC in case the Council's inspection discoveredthere was something wrong, noting again that Kum Fu's work was quite different fromthe building consent.[15] The Council carried out an inspection of the restaurant on 10 June 2020. LittleRepublic says (and Kum Fu does not deny) that the Council's inspectors did notinspect the works on the roof but the works were still passed.[16] On 11 June 2020 the property manager for the Body Corporate completed aninspection. This inspection identified a number of issues with the works including thatthe galvanised steel had still not been replaced with Colorsteel. The issues were setout by the property manager in an email, a copy of which Little Republic forwardedto Kum Fu. Little Republic says Kum Fu then said it would speak directly to the BodyCorporate or the landlord. It is not clear from the evidence whether this happened.[17] On 24 June 2020 the landlord telephoned Little Republic asking when the roofwould be fixed and said he would employ someone else to complete the work andcharge Little Republic if it was not done soon. Little Republic sent a message to KumFu advising them of this call via WeChat. Kum Fu responded, saying it would onlycomplete the remedial work if Little Republic paid them a further 30 per cent of thecontract price, with the balance to be paid once the landlord confirmed he wassatisfied. Little Republic advised that it would not make any further payments untilthe remedial work was done and the landlord and Body Corporate were satisfied(although confirming that as long as the problems were fixed, it would arrangepayment).[18] Mr Chen then responded for Kum Fu saying there was to be no morecommunication and that he would let Ms Liang know when he would be coming toremove the installed equipment.[19] Ms Liang emailed to say that she was disappointed with this response and thatshe would ask her lawyer to follow up. She pointed out that the remedial work mightnow have to be completed by a contractor employed by the landlord and the costs andlegal fees would need to be deducted from the balance owing.[20] On 24 June 2020 the second director of Kum Fu, Ms Yong, sent an email toLittle Republic saying that Kum Fu would fix the defective works, but again requiringpayment of 30 per cent of the total price before doing so. In response, Little Republicadvised that it would forward Ms Yong's email to its lawyer.[21] The following day, on 25 June 2020, Kum Fu's lawyer wrote to Little Republicsaying:(a) the terms of the quotation included a 50 per cent deposit and 30per cent before delivery of the goods;(b) 80 per cent had not been paid despite the goods having beendelivered and installed;(c) "there is some remedial work for my client to complete";(d) that the remedial work would not be completed until payment of$8,862.80 was made (being the difference between what hadbeen paid ($11,000) and 80 per cent of the contract price($19,862.80)); and(e) advising a statutory demand would be issued if payment was notmade within seven days.[22] Little Republic's lawyer replied on 2 July 2020 alleging that Kum Fu's actionsin relation to the contract amounted to "a serious breach of the essential terms of thecontract" and that Little Republic had suffered damage as a result. In order "to moveforward and as a gesture of good faith", Little Republic agreed to deposit $7,448.55(30 per cent of the quoted contract price) into their lawyer's trust account to be releasedif Kum Fu agreed:(a) to complete the works within three weeks of payment;(b) to complete the works strictly in accordance with the Building Consentand quotation;(c) to pay Little Republic's legal costs;(d) to provide a 10-year guarantee in relation to the works and anydocuments required by the Council in relation to the consent; and(e) to take responsibility for and repair "any non-compliant worksdiscovered".[23] On 7 July 2020, Little Republic again wrote to Kum Fu repeating the offerabove but saying that if it was not accepted by the following day Little Republic wasprepared to go through the Disputes Tribunal process, that it would engage anothercontractor to carry out the rectification works and reserving its rights to sue for costsand damages.[24] On 17 July 2020 Ms Yong of Kum Fu emailed Ms Liang of Little Republicdirectly (although lawyers were now instructed) saying that despite no agreementbeing reached, Kum Fu intended to complete the job and replace the galvanised steelwith Colorsteel. Ms Yong said it would expect payment of the balance in full"[f]ollowing completion of the work and Council approval".[25] Little Republic reiterated the conditions in their 2 July 2020 letter in response.Kum Fu said it did not accept those conditions, reserving its rights if payment was notmade in full "upon completion".[26] On 27 July 2020 Kum Fu confirmed the remedial work was done and LittleRepublic asked for the PS3 and guarantee documents. There was some delay by KumFu, partly as a result of the lockdown. When emailing to apologise for this delay KumFu again said "please make full payment once you have received the documents".[27] The required documents were finally sent on 21 August 2020, but werestamped "copy only". Little Republic advised in response that it required, and wasexpecting, the originals.[28] Correspondence continued between the parties with Kum Fu's lawyer emailingon 24 August 2020 to advise that the balance owing was $13,828.50 and that once itwas paid, Kum Fu would release the original PS3, warranty and completion certificate.The email finished by saying if full payment was not received by 4pm the followingday his instructions were to issue a statutory demand.[29] The statutory demand was served on Little Republic on 26 August 2020requiring payment of $13,828.50. The statutory demand said that the payment was for"an overdue invoice in respect of services supplied details of which are attached". Noinvoice or details were apparently attached. Little Republic's lawyers emailed KumFu's lawyers on the same day and asked them to withdraw the demand as "it isapparent there is a substantial dispute". Kum Fu refused to withdraw the demand.[30] On 3 September 2020 Little Republic's lawyers wrote to Kum Fu's lawyersadvising that Little Republic had engaged a third party to inspect the remedial worksand that the inspection had revealed that "there were still non-compliant works notrectified by Kum Fu". Little Republic's lawyers further confirmed that Little Republichad deposited the balance allegedly owing of $13,828.50 into its trust account andagain asked Kum Fu to withdraw the demand. Kum Fu did not withdraw the demandand so Little Republic filed its application to set aside.[31] Prior to the hearing, Kum Fu had its own expert inspect the works. Kum Fu'sexpert confirmed that there were still two issues outstanding:(a) the distance between the fans did not comply with the BuildingConsent; and;(b) there were no speed controls, contrary to the quote.[32] Despite being aware of the money being held on trust and the continuingdefects, Kum Fu still refused to withdraw the demand.[33] A further updating affidavit was filed with Kum Fu's submissions on 22October 2020 advising that the distance between the fans had been remedied. Nospeed control had been installed but a credit of $300 plus GST had been offered.[34] By the time of the hearing of this application, the originals of the PS3 and thewarranty and completion certificate had still not been supplied.Relevant legal principles for setting aside[35] Section 290(4) of the Companies Act 1993 governs applications to set asidestatutory demands and relevantly provides:290 Court may set aside statutory demand(4) The court may grant an application to set aside a statutory demand ifit is satisfied that—(a) there is a substantial dispute whether or not the debt is owingor is due; or(b) the company appears to have a counterclaim, set-off, or cross-demand and the amount specified in the demand less theamount of the counterclaim, set-off, or cross-demand is lessthan the prescribed amount; or(c) the demand ought to be set aside on other grounds.[36] The Court of Appeal confirmed the principles a court should apply inexercising this discretion in Confident Trustee Limited v Garden and Trees Limited.1[16] The general principles under s 290(4) are well settled:(a) The onus is on the applicant seeking to set aside the statutorydemand to show that there is arguably a genuine andsubstantial dispute as to the existence of the debt. The Court'stask is not to resolve the dispute but to determine whetherthere is a substantial dispute that the debt is due.(b) The mere assertion that a dispute exists is not sufficient.Material short of proof is required to support the claim thatthe debt is disputed.(c) If such material is available, the dispute should normally beresolved first in ordinary civil proceedings before anystatutory demand is issued.(d) If a counterclaim, cross-demand or set-off is suggested anapplicant must establish that this is reasonably arguable in allthe circumstances.(e) It is not usually possible to resolve disputed questions of facton affidavit evidence alone, particularly when issues ofcredibility arise unless such evidence is contrary to theavailable documents or earlier statements made by the parties.(footnotes omitted)[37] In the earlier decision of AAI Ltd v 92 Lichfield Street Ltd (in rec & liq),2 theCourt of Appeal put it succinctly as follows:[22] It is important to keep in mind the words of the statute. What theapplicant must show is that the dispute it raises has substance; theapplicant must explain to the court what the dispute is; and the disputeso shown must be a real and not a fanciful or insubstantial dispute.The Court must bear in mind that it is operating in the summaryjurisdiction, with the accompanying disadvantages that brings for anyapplicant. The Court must also keep in mind the requirement thatwhat is intended to be a summary hearing should not be converted intoa full-blown trial.(footnotes omitted)[38] If an application to set aside a statutory demand is made on the basis that thedebt is disputed, proof of solvency is not determinative but will support the applicant'scase that the dispute is genuine.31 Confident Trustee Limited v Garden and Trees Limited [2017] NZCA 578 at [16].2 AAI Ltd v 92 Lichfield Street Ltd (in rec & liq) [2015] NZCA 559, [2016] NZAR 1338 at [22].3 AMC Construction Ltd v Frens Contracting Ltd [2008] NZCA 389, (2008) 19 PRNZ 13 at [7].Analysis[39] In this case, Little Republic submits both that there is a substantial dispute asto whether the debt is owing and that it has a counterclaim that is likely to exceed thesum that is the subject of the demand as a result of the alleged breaches of contract.Those alleged breaches include failing to complete the works in accordance with thebuilding consent or the quotation or in a timely manner.[40] Kum Fu submits that at the time the statutory demand was served, the partieswere not aware that there were defects still remaining and its demand was properlyserved. Even if this were the case, which Little Republic disputes, as soon as it wasdiscovered that the works did not comply with the building consent or the quotation,the statutory demand should have been withdrawn.[41] The factual chronology set out above shows, however, that there was clearly asubstantial dispute between the parties even before the statutory demand was servedand so it was not appropriate to serve the statutory demand in the first place.[42] Kum Fu further submitted that if the court was not prepared to uphold thewhole of the sum demanded, it should uphold the 30 per cent payable "before delivery"as there could be no dispute that amount was owing.[43] It is correct that courts have previously allowed statutory demands to stand inreduced figures, representing items not open to dispute.4[44] Counsel for Little Republic, however, submitted that the meaning of "beforedelivery" is not clear in this case as Kum Fu was not only providing equipment, butwas also installing it. In support of "delivery" meaning provision and installation,Little Republic says that the 30 per cent was never demanded prior to when Kum Fufirst alleged it had completed the installation. In any event, Little Republic says thatif "before delivery" only requires provision of the equipment, and not installation, then4 United Homes (1998) Ltd v Workman [2001] 3 NZLR 447 (CA) at [46], citing ArbridgeDevelopments Limited v Weatherby Developments Ltd HC Auckland M285-IMOO, 2 May 2000;Cityjet Ltd v Pratt & Whitney Canada (A'Asia) Pty Ltd (1999) 8 NZCLC 262,104; JenkoInternational Ltd v New Zealand Dairy Ingredients Ltd HC Christchurch M68/00, 22 June 2000.it must be provision of all of the equipment. All of the equipment has not beendelivered in this case as speed controls have still not been provided as expresslyrequired.[45] As well as the meaning of "before delivery" not being clear in thesecircumstances, Little Republic submits that it has a counterclaim for losses suffered asa result of alleged breaches of the contract which have not yet been quantified. Forexample, in relation to the speed controls which have not been installed as required bythe quotation. A credit of $300 plus GST has been offered to Little Republic, but thishas not been accepted. The speed controls apparently assist in controlling the noise ofthe fans, which may be important for the restaurant. Counsel for Little Republicadvised at the hearing that it was not yet known whether speed controls could beinstalled retrospectively, or what the cost of remedying their omission would be.[46] It is unclear at this stage, whether Little Republic's alleged losses will amountto more than 20 per cent of the contract price. Even if the meaning of "before delivery"was clear, Kum Fu's claim to a reduced amount representing the 30 per cent "beforedelivery", cannot, therefore, succeed.Result[47] There is no question that there is a substantial dispute as to whether a debt isowing and so the statutory demand must be set aside. There is no need to go on toconsider whether there is an arguable counterclaim, but the failure to provide speedcontrols and the number of other issues arising with the works supports a conclusionthat Little Republic has an arguable counterclaim.Costs[48] As its application has been successful, Little Republic is entitled to costs.[49] Little Republic submitted that it was an abuse of process for Kum Fu to use thestatutory demand regime in this case, and that after it had been served, the respondenthad a number of opportunities when it clearly should have been withdrawn. On thatbasis Little Republic sought indemnity costs.[50] In my view, a statutory demand should not have been issued by Kum Fu andthe dispute should, instead, have gone to the Disputes Tribunal. Furthermore, onceserved, there were many points at which it should have been withdrawn, includingfollowing the Minute issued by Associate Judge Bell on 24 September 2020, where henoted that a more efficient way of dealing with the matter may be to go to the DisputesTribunal, after the full amount of the sum demanded was paid into Little Republic'slawyer's trust account and after Kum Fu's own expert identified continuing defects.[51] At several points in the correspondence, counsel for Little Republic stated thatit would be claiming indemnity costs if the statutory demand was not withdrawn. Ihave not heard from counsel for Kum Fu, however, on its position on indemnity orincreased costs.[52] Given the size of the alleged debt, I ask the parties to confer on costs. Ifagreement cannot be reached, the applicant is to file a brief memorandum within 25working days of this judgment and the respondent 10 working days after that.Memoranda are to be no more than five pages._____________________Associate Judge Sussock