WEALAND INTERNATIONAL (NZ) LIMITED V SAFE KIDS IN DAILY SUPERVISION LIMITED HC AK CIV-2008-404-004658

WEALAND INTERNATIONAL (NZ) LIMITED V SAFE KIDS IN DAILY SUPERVISION LIMITED HC AK CIV-2008-404-004658 3 December 2008IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV-2008-404-004658UNDER the Companies Act 1993 IN THE MATTER OF an application to set aside a statutory demand under Section 290 of the Companies Act 1993 BETWEEN WEALAND INTERNATIONAL (NZ) LIMITED Applicant AND SAFE KIDS IN DAILY SUPERVISION LIMITED Respondent Hearing: 25 November 2008 Appearances: RB Hucker and L Yaqub for Applicant L Gerrard for Respondent Judgment: 3 December 2008 at 4:45 pmJUDGMENT OF ASHER JThis judgment was delivered by me on 3 December 008 at 4:45 pm pursuant to Rule 540(4) of the High Court Rules .. Registrar/Deputy Registrar .. DateSolicitors: Hucker & Associates, PO Box 3843, Shortland Street, Auckland Holmes Dangen & Associates, PO Box 3600, Auckland Copy: L Gerrard, Haydens Law Ltd, PO Box 108170, Symonds Street, AucklandIntroduction[1] Wealand International (NZ) Limited ("Wealand") applies by way of originating application for an order setting aside a statutory demand issued under the Companies Act 1993 by the respondent, Safe Kids In Daily Supervision Limited ("Safe Kids"). [2] The background can be shortly stated. Wealand's business is placing international graduates with New Zealand employers. At some date not identified with precision by the parties but between 10 and 18 March 2008, Wealand and Safe Kids signed a document headed "International Student Training Grant Acceptance Form". Despite its heading, it is common ground between the parties that the document was a contract between Wealand and Safe Kids ("the agreement"). It provided for Wealand to pay $15,000 ("the grant") to Safe Kids in relation to the employment of a graduate, Mr Kai Zhang. Payment would be in two amounts: $2,000 on acceptance of an employment agreement with Mr Zhang, and $13,000 payable after 30 days subject to satisfaction of terms and conditions. [3] Mr Zhang was duly employed by Safe Kids and remains so. Wealand paid Safe Kids the initial $2,000 at the outset but refused to pay the further $13,000. Safe Kids issued a statutory demand for the $13,000 under s 289 of the Companies Act on 9 July 2008. [4] Wealand asserts that it is not obliged to pay the $13,000 because there is no satisfactory evidence that the funds have been spent or will be spent training Mr Zhang for his new position as required by the agreement. Wealand also contends that to advance the $13,000 when it would not be used for training purposes would be contrary to s 12A of the Wages Protection Act 1983 and consequently illegal.Approach to an application to set aside a statutory demand[5] Section 290 of the Companies Act 1993 sets out the circumstances in which the Court may set aside a statutory demand. It provides as follows:290 Court may set aside statutory demand (2) The application must be— (a) Made within 10 working days of the date of service of the demand; and (b) Served on the creditor within 10 working days of the date of service of the 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 (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.[6] While the Court has a discretion (indicated by the word "may") whether or not to set aside the statutory order, as the Court of Appeal has observed in Alfex Doors and Windows Ltd v Alutech Windows and Doors Ltd (2001) 16 PRNZ 963 at [14]: where grounds for setting aside under s 290(4) are clearly made out, it will be a rare case in which, in exercise of the residual discretion, the application is refused. The circumstances of each case will call for consideration.[7] Wealand relies on the ground set out in s 290(4)(a), namely that "there is a substantial dispute whether or not the debt is owing or due". Ms Gerrard for Safe Kids submits that Wealand has no seriously arguable defence to Safe Kids' claim so there cannot be a "substantial dispute" over the debt. [8] Section 290(4)(a) aims to avoid litigation proceedings founded on the service of a statutory demand for a debt over which there is a substantial dispute. In this regard it has often been observed that the purpose of statutory demands is to enable the courts to deal with companies which are insolvent, not to resolve commercialdisputes: Environmental Solutions Ltd v Jesco Dosiertechnik GMBH & Co KG(1999) 8 NZCLC 261,854 at 251,862. [9] Nevertheless, authorities interpreting s 290(4)(a) have insisted that the words "substantial dispute" be given their proper emphasis. Not every dispute will be sufficient to satisfy a court; the dispute must be "substantial". What constitutes a "substantial" dispute is ultimately a question of fact to be decided after taking into account all the relevant circumstances: Re Lympne Investments Ltd [1972] 2 All ER 385; Lockwood Buildings Ltd v Hunter Douglas Coilcoaters Ltd (1988) 4 NZCLC 64,295. [10] Further, the applicant must show a fairly arguable basis for a claim that it is not liable for the amount claimed. The mere assertion that a genuine substantial dispute exists is not sufficient: Forge Holdings Limited v Kearney Finance (NZ) Limited HC CHCH 20 June 1995 M149/95 Tipping J at p 2; Queen City Residential Limited v Patterson Co–Partners Architects Limited (No. 2) (1995) 7 NZCLC 260,936. The requirement to furnish a fairly arguable basis for the claim is similar to that which applies when a party opposes an application for summary judgment. It was stated in United Homes (1998) Limited v Workman [2001] 3 NZLR 447 (CA) at [34]:The Court is not required in cases of this character meekly to accept without question whatever unvarnished statements may happen to be made on affidavit. The Court is entitled to act in a more robust and commonsense manner. The principles developed in cognate fields such as applications to remove caveats, and opposition to summary judgment (eg Eng Mee-Yong v Letchumanan s/o Velayutham [1980] AC 331; Bilbie Dymock Corporation Ltd v Patel (1987) 1 PRNZ 84) apply by analogy.It is to be noted that in Re Welsh Brick Industries Ltd [1946] 2 All ER 197 it was held that something more than an arguable defence needs to be made out to set aside a statutory demand, but such a distinction from the summary judgment test has not been adopted in the New Zealand Courts. [11] Wealand has set out two bases for its assertion that there is a substantial dispute over whether the debt is owing. The first is its claim that the bulk of the $13,000 grant still to be made was not or would not be spent on training courses. Thesecond is its claim that any payment would be a payment of a premium in breach of s 12A of the Wages Protection Act 1983 ("the Act").Grant to be spent on training expensesThe agreement[12] Wealand submits that the agreement imposed a contractual condition requiring Safe Kids to spend all of the $15,000 grant on training courses. It submits that Safe Kids has not shown that the first $2,000 paid to Safe Kids was spent on training Mr Zhang. Wealand submits therefore that Safe Kids has not complied with the conditions in the agreement necessary to trigger Wealand's obligation to pay the further $13,000. [13] The agreement is a short one-page document. It states that the International Student Employment Service (effectively Wealand) would through its "benefactors" make $15,000 funding available to eligible employers to support the hiring of international graduates within New Zealand organisations. It states:The intent of this program is to support employers with training expensesassociated [sic] during first 90 days of employment and furthermore encourage the employers' cooperation to support the graduate to have the required skills to perform the duties required. [emphasis added][14] A little later the agreement states that Wealand agrees to pay $15,000 to Safe Kids, being "$2,000 on acceptance of the employment agreement and the balance of $13,000 payable after 30 days subject to the terms and conditions below". [15] The "conditions" of the grant then set out are:• The Employer offers full time permanent employment paying a minimum $15.00 per hour with a NZ employment agreement signed by both parties.• The employee must still be employed by the employer after 90 days from the starting day.• The employer will arrange the training required for the position.• If the employee terminates the employment, the employer is able to keep any grant monies paid till that time.• If the employer terminates the employment within 90 days of the starting day the employer will repay ISES any grant monies paid.• The grant must be spent on training costs associated with the graduate.• This grant will be paid in accordance with New Zealand employment laws. [emphasis added][16] There is no doubt that Safe Kids offered full-time employment to Mr Zhang. Mr Zhang has filed an affidavit which confirms that this was so. The parties agreed that Mr Zhang was receiving over $15 an hour and that he was still employed after 90 days. [17] There can be no doubt that it was a term of the agreement that the whole of the grant be spent on training costs associated with Mr Zhang. Although the term relating to "training costs" is set out in the section stating the "conditions of the grant", the conditions set out cannot be pre-conditions to payment. For instance, another condition is that if the employer terminates the employment, the employer is able to keep any grant monies paid up to that time. Moreover, the $13,000 is to be paid after 30 days, and the obligation to train is over a period of 90 days. Clearly the word "conditions" is used to mean "terms" of the contract, and not pre-conditions to payment.Was there a breach?[18] The question is then whether there is evidence of a breach of the term of the agreement that the grant must be spent on training Mr Zhang. The defences put forward by Wealand in its notice of opposition and pleadings do not articulate the consequences of the alleged breach. However, a breach could entitle the party affected by the breach to cancel the agreement. It might also give that party a set- off. [19] If there is evidence of a breach of the agreement by a failure to spend the grant on training costs, then there may be a "substantial dispute" in terms of s 290.[20] Wealand has not been able to provide any direct evidence of a failure by Safe Kids to spend the grant it has received so far on training expenses. It relies rather on an assertion of such a failure and more importantly on Safe Kids' failure to provide satisfactory information showing that the part of the grant it has received so far has been spent on training costs. [21] In response to Wealand's assertion that the payment of $2,000 was not spent on training Safe Kids filed an affidavit of Dawn Engelbrecht, a director of Safe Kids, in which she gave evidence that Mr Zhang had been trained in the role of an accountant/office manager. She asserted that:[Safe Kids] has provided the following training for Mr Zhang, inter alia, MYOB courses, web development courses, personalised one-on-one training with Red Office, intensive training in office management procedures including SmartFile utilisation, Debt collection and personalised, one-on-one training in basic and intermediate level accounting.She accepted that not all the courses involved a payment to a third party, but said that there were costs involved in sending Mr Zhang to courses, including transport and other incidental costs. She said that she had personally spent many hours working with Mr Zhang to facilitate his knowledge of accounting. [22] However, surprisingly, given the direct challenge to whether training costs had been incurred, Ms Engelbrecht did not provide in her affidavit any invoices, breakdown of hours spent in training, details of the in-house training, or any corroborative evidence from any third party save Mr Zhang. Mr Zhang in his affidavit stated that he had completed a lot of training with Safe Kids, including two MYOB courses and web design seminars and many hours being trained. However, again, there was a singular lack of detail in his account of what occurred. I note also that a letter of 10 July 2008 from Wealand's lawyers to Safe Kids' lawyers asserted that copies of invoices had been requested but not received. [23] Of course, not every uncorroborated allegation places on a respondent an obligation to provide details in response. However, this application squarely raised the issue of whether money has been spent on training costs. It would not have beena great burden on Safe Kids to have provided details and invoices of the training expenses, including hours spent. [24] Safe Kids' failure to do so raises the real possibility that there was a failure to spend the part of the grant received on training expenses. Given the real possibility of a defence based on a failure to spend the $2,000 on training Mr Zhang, the commensurate question that must arise is whether the further payment of $13,000 would be spent on training costs. The failure to show that the expenses have been spent so far on training Mr Zhang in respect of the $2,000, raises the possibility of further breaches of the agreement in respect of the $13,000.The argument as to third party expenses only[25] Mr Hucker for Wealand submitted that Safe Kids had to spend the grant on payments to third parties for the training of Mr Zhang and not on in-house costs. Ms Gerrard for Safe Kids on the other hand submitted that Safe Kids was perfectly entitled to spend the grant on expenses incurred training Mr Zhang in-house. [26] It seems likely given Ms Engelbrecht's statements in her affidavit and the submissions that I have received that Safe Kids has approached and will approach any obligation to spend the money on the basis that the grant can be spent at least in part by reimbursing Safe Kids for in-house training expenses. Ms Engelbrecht refers to the hours she has spent training Mr Zhang, and presumably places a monetary value on those hours. [27] It is not possible to discern from the words of the agreement a requirement that the training costs need be third party training costs. However, the use of the phrase "training expenses" in the first paragraph gives some indication that expenses must be spent on third parties, as the word "expenses" in context may well connote "disbursements". Equally, however, the word "costs" in the agreement might be seen as indicating that any incurring of financial cost is sufficient. The agreement is unclear on the point.[28] The issue of interpretation being difficult, it will be necessary for the purposes of interpretation to turn to the background circumstances as an aid to interpretation. Another condition in the agreement states that the grant will be paid in accordance with New Zealand employment laws. Mr Hucker submits that in terms of s 12(A) of the Wages Protection Act it would be unlawful in New Zealand to spend the grant other than on third party expenses. How this Act featured in the parties' thinking lead-up to the agreement is not known. Indeed, there is very little reference in the affidavits to the commercial background to the agreement. [29] It is not appropriate to venture a determinative interpretation of the agreement without full evidence as to its commercial background. I do, however, consider that it is arguable that the agreement could be interpreted so that the grant must be spent on third party costs only, and that it would be a breach to spend the money on in-house costs. Given the fact that Safe Kids has spent and clearly intends to spend some of the $13,000 on in-house costs, that would be not only a breach, but also an anticipatory breach. That means that there is also a substantial dispute on this second basis.The late affidavit[30] I should record that at the start of the hearing Ms Gerrard sought to file an affidavit from a solicitor in her office annexing an email from Ms Engelbrecht and associated attachments. The email stated that Ms Engelbrecht was unable to drive but was back at work and attached invoices from two businesses which she asserted in the email "had been working alongside [Mr Zhang] to train him". The invoices themselves make no reference to Mr Zhang and appear to relate to training expenses in only a limited way. They also appear to relate to services other than training, such as "customisation of invoice template" or "MYOB data file set up". [31] The email produced by the solicitor is a "hearsay statement" in terms of s 4 of the Evidence Act 2006 and is prima facie not admissible in terms of s 17. Nevertheless, s 18 confers on the Court a discretion to admit a hearsay statement in evidence if the factors listed in that section are made out.[32] I am not satisfied that Ms Engelbrecht was unavailable to be a witness. She was in Auckland and back at work and able to send emails. Nor am I satisfied that undue expense or delay would be caused if she had been required to swear a further affidavit. I therefore decline to admit this document under s 18. [33] I also accept Mr Hucker's submission that it would have been unfair to have admitted the affidavit in the Court's discretion. Mr Hucker only received it some minutes before the hearing began, and is entitled to expect service in a timeframe that would at least give his client the opportunity of examining the affidavit and if necessary of responding to it. [34] I must, however, observe in relation to the affidavit that on balance I would have construed it as favouring Wealand's position rather than that of Safe Kids. None of the invoices refers to Mr Zhang in any specific way. Moreover, many of the entries in the invoices do not appear to be for training at all. [35] I rule that the affidavit is inadmissible.Conclusion[36] I have found that it is seriously arguable that there was a breach of the term of the agreement requiring Safe Kids to spend the grant on training expenses. The $2,000 may not have all been spent on these. It is also seriously arguable that the funds could only be spent on the payments to third parties involved in training Mr Zhang, and costs incidental to such third party training. If that is so there can be no doubt that Safe Kids has breached the term and intends to breach it further. [37] This possible breach and the possible anticipatory breach mean that Safe Kids may well have a set-off against any claim by Wealand in respect of the $2,000. It may be that it has the right to cancel the agreement because of the serious past breach and anticipatory breach amounting to repudiation. While it has not cancelled yet, the possible availability of that remedy is a further indication of a seriously arguable defence if the dispute proceeds to Court.Section 12A of the Wages Protection Act[38] Wealand also submits that it cannot have an obligation to pay the further $13,000 to Safe Kids as to do so would be contrary to s 12A of the Wages Protection Act 1983. Section 12A prohibits the payment of premiums for the employment of any person. Mr Hucker submits that to pay the grant would be a premium as the money has not been and will not be spent on third parties to pay training expenses. Ms Gerrard argues that a payment to cover in-house expenses is not a premium. [39] It is not necessary to determine whether there is a substantial dispute in relation to this issue given my earlier conclusions. It involves a question of some importance as to the meaning of s 12A. The issue is best left for any trial that may occur.Conclusion[40] I conclude that there is a substantial dispute between the parties because: a) In breach of a term of the agreement the $2,000 may not all have been spent on training expenses for Mr Zhang, and the balance of $13,000 may not be so spent if it is paid; and b) If the agreement against its commercial background is interpreted as requiring the $15,000 to be spent on third party disbursements incurred in training Mr Zhang, there has been and will continue to be a breach of the agreement as clearly the money has not been and will not be so spent.Result[41] The respondent's statutory demand to the applicant dated 9 July 2008 is set aside under s 290(4)(a) of the Companies Act 1993.[42] The parties have expressly asked me to reserve the question of costs. The applicant is to file a memorandum within seven days of the date of this judgment, and the respondent is to file a memorandum within a further seven days.. Asher J