DELTA ROOFING & MANUFACTURING LTD V KIWI STEEL NEW ZEALAND LTD HC HAM CIV-2009-419-000619 [2009] NZHC 1118 (25 August 2009)

IN THE HIGH COURT OF NEW ZEALAND
HAMILTON REGISTRY
                                                             CIV-2009-419-000619

              UNDER                     Section 290 of the Companies Act 1993

              IN THE MATTER OF          an application
to set aside statutory demand

              BETWEEN                   DELTA ROOFING &
                                        MANUFACTURING
LTD
                                        Applicant

              AND                       KIWI STEEL NEW ZEALAND LTD
      
                                 Respondent


Hearing:      20 August 2009

Counsel:      MD Talbot for Applicant
              ZG
Kennedy and NA Chamberlain for Respondent

Judgment:     25 August 2009 at 11:30am


                JUDGMENT OF ASSOCIATE JUDGE
FAIRE
                [on application to set aside a statutory demand]




Solicitors:   McCaw Lewis Chapman, PO Box 9348, Hamilton
for applicant
              Minter Ellison Rudd Watts, PO Box 3798, Auckland for respondent

DELTA ROOFING & MANUFACTURING LTD V
KIWI STEEL NEW ZEALAND LTD HC HAM CIV-
2009-419-000619 25 August 2009

[1]      The applicant applies to set aside a statutory demand.
The statutory demand
seeks:

         Payment of the sum of $135,288.37 being the amount owing by you for steel
         supplied
to you by Kiwi Steel New Zealand Limited at your request between
         November 2008 and January 2009.

[2]      The application
is made in reliance on s 290(4) of the Companies Act 1993.


[3]      No issue is taken with the timeliness of the application.


[4]      The application as filed relied on subs 4(a)(b) and (c) of s 290. In the course
of the hearing, Mr Talbot sought and was
granted leave to abandon reliance on
s 290(4)(b). In short, the applicant company no longer sought to place reliance for
the purposes
of this application on the existence of a counterclaim, set-off or cross-
demand in terms of s 290(4)(b).


[5]      I record that
such step was taken so that the Court was not required to rule on
the existence of a counterclaim, set-off or cross-demand on this
application. In short,
this judgment does not provide a basis for an issue estoppel submission or a
submission that the principle
in Henderson v Henderson [1843] EngR 917;  (1843) 3 Hare 100 at 115,
applies in respect of any subsequent claim which the applicant may wish to pursue
arising out of the contract which is the
basis for this statutory demand.


[6]      Mr Talbot did not advance the application in reliance on s 290(4)(c). Indeed,
no evidential
foundation appears in the papers which would justify its application.
For that reason I do not consider this aspect further.


[7]
     Section 290(4)(a) of the Companies Act 1993 provides:

         (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; ...

[8]    The approach that the Court adopts to an application which relies on
s 290(4)(a) of the Companies
Act 1993 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) Ltd HC
CHCH M149/95 20 June 1995 at 2 and Queen City Residential Ltd v Patterson Co-
Partners Architects
(No 2)  [1995] 3 NZLR 307  (7 NZCLC) 260,936.                   That
formulation was approved by the Court of Appeal in United Homes (1988) Ltd v
Workman  [2001] 3 NZLR 447 at 451-2. 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.


[9]    The respondent opposes the application.        Its position is that there is no
substantial dispute as to whether the debt is owing or is due.


[10]   It is acknowledged that the steel was supplied. It is not
disputed that invoices
for the steel supplied during the months of November 2008, December 2008 and
January 2009, totalling $135,288.88
were in fact issued. The nature of the dispute
was identified in February 2009 or possibly late January 2009. The respondent's
position
is that it verbally advised the applicant that the applicant was in breach of
contract. The respondent said it notified the applicant
that the applicant had not paid
for products supplied in October 2008. The respondent said that that was due for
payment on 20 January
2009.


[11]   The applicant's position as to when payment for products supplied was due
was explained by its managing director and
50% shareholder, Mr Barrett, in the
following way. He claimed that he had reached an oral agreement with Mr Dave
Burger representing
the respondent in October 2008.              That signalled a new
development. From that time on the respondent was to supply the
applicant's
requirements for long-run roofing iron, thought to be in the vicinity of $50,000-
$60,000 in product value per month.
Prior to that time, the applicant's orders had
related to other products and were in the order of $5000 per month. It was common
ground in the papers before me that that signalled a significant change in the trading
positions of the parties. Under that verbal
agreement, payment, Mr Barrett said, was

not due until three months after the date when payment was due on what was
commonly understood
as the current date for payment.              In short, he said his
understanding was that an account was current if it was due for
payment on the 20th
of the month following supply and was paid on or before that date. If three months
terms were to be granted then
a further three months to pay beyond the date when
payment on a current basis was required was what was understood. He said that
was
the understanding he had reached with Mr Burger.


[12]    Mr Burger did not file an affidavit. That is one of the unsatisfactory
aspects
of this case.


[13]    An affidavit was filed by the respondent's credit controller, Ms Burns. Her
involvement in the October
meeting with Mr Burger was simply to respond to a
request that Mr Burger had made to her concerning the terms of payment. She sent
an e-mail to Mr Barrett on 28 October 2008, in the following terms:

        David Burger has requested I fire through confirmation
of your payment
        terms with us.; Delta Roofing has a three month term account. If you
        require anything further please
do not hesitate to let me know.

[14]    Mr Barrett did not specifically respond to that e-mail. In his affidavit he
refers to it
and says:

        A current term account is 20th of the month following the month of invoice.
        A three month term account
is three months on that.

[15]    Mr Barrett says that when the dispute as to the timing of payment was
identified, he sought a meeting
with the respondent's personnel. That was held on 9
February 2009.      He said that the main topic of conversation was the different
interpretation of the payment terms. He said that the parties agreed to differ. He
claimed that the respondent accepted that the
historic payment pattern was consistent
with what he claimed the obligations were.


[16]    As a result of the disagreement, however,
the parties entered into a
compromise. Under the compromise, Mr Barrett said the parties agreed to reduce the
terms to 60 days by
taking the November purchases of $67,000 and spreading the
payment for them over three months, that is on 20 March, 20 April and
20 May. The

result was that product invoiced in December would get paid on 20 March, plus a
$20,000 payment off the November supply. Product invoiced in January
2009, plus
a $20,000 payment off the November 2008 invoice would be paid on 20 April 2009.
Product invoiced in February 2009, plus
a $20,000 payment off the November 2008
invoice would be paid on the 20 May. It was recognised with respect to this part of
the agreement
that it was not then known what the size of the February invoices
would be. The document recording this part of the agreement simply
records that the
amount of the payment as TBC. A similar position was agreed to in respect of
product which was invoiced for in March
2009. That was to be paid on 20 June
2009, plus $3315.89. Again, that had the notation "TBC" after it because, of course,
it was
not known at the time of the discussion what the size of the March invoices
would be.


[17]   The above agreement, however, discloses
that what the parties agreed to in
February 2009 was a 60 day extension to the normal date when payments on a
current basis were
due.


[18]   Unfortunately the February meeting did not address another problem. The
respondent insured its exposure to trade debtors.
Until February 2009, it was insured
by Atradius. That company had agreed to insure the respondent's customer credit
limits which
were less than $100,000. It provided special approval in respect of the
applicant, enabling the respondent to provide an increased
credit limit of $150,000.


[19]   In mid-February 2009, the respondent changed its insurer to QBE. QBE
expressed some concern about
the applicant's increased credit limit. The respondent
notified the applicant that it would need to apply to its insurer for an increased
limit
to cover the credit risk because by late February 2009, the amount outstanding was
in excess of $170,000.


[20]   On 10 March
2009, QBE notified the respondent that it would not insure any
credit provided to the applicant.


[21]   Mr Barrett said that he
had been told on 4 March 2009 that the respondent
had forwarded to its insurer an application for a $200,000 credit limit which would

take a couple of days to process. Apart from that he heard nothing further from the
respondent. However, on 12 March 2009, he said
it became apparent that the
respondent was not providing product which the applicant had ordered. He said he
phoned the respondent
company and was told that supply had been halted as at 5
March. He said he was given no reason for this. He said that he pointed
out that the
cessation of supply without notice could have a drastic effect on his business,
including the applicant's ability to
meet its obligations to the respondent.


[22]   The applicant's managing director, Mr Barrett, understandably feels
aggrieved by
the turn of events which occurred in March 2009. The correspondence
produced to the Court gives notice of the applicant's opposition
to any statutory
demand that would be issued. It also claims that a counterclaim for substantial
damages would issue. In relation
to that last matter, however, the information which
was placed believe the Court for the purposes of allegedly showing a counterclaim
or
set-off defence based on breach of contract simply did not provide a recognisable
foundation for such a claim. Mr Talbot, in the
course of submissions, recognised the
problem. That led to the position which I have outlined in paragraph [4] of this
judgment.


[23]   A further complicating background factor to this case is the fact that the
parties had been in a contractual relationship
since 2003. That, however, did not
relate to the supply of long-run roofing iron. That new supply occurred as a result of
the oral
agreement which Mr Barrett says he made with Mr Burger in October 2008.
The significance of the earlier supply of materials is that
it was accompanied by an
application for credit at the time signed by Mr Barrett's co-director. The application
for credit contained
a provision whereby the applicant for the credit ­ in this case the
applicant ­ agreed to abide the general conditions of sale forming part of the
application.
  One of the conditions of sale excluded claims for set-off.           The
respondent's position is that the general conditions of
sale apply to the new
arrangement which was entered into in October 2008. Mr Barrett's position claims,
first, that in terms of the
credit application signed in 2003, no general conditions of
sale were signed by any officer of the applicant company at the time.
Second, that
from his part, until Ms Burns' affidavit was filed in this proceeding, he had never
had his attention drawn to the general
conditions of sale.

[24]   The October arrangements were clearly principally oral in nature. Only one
of the parties directly involved
in those discussions has given an affidavit, namely
Mr Barrett. There would seem to be some misunderstanding as to what was agreed.
Resolution of that is plainly unsuitable in an application of this kind.


[25]   The fact that there is no clear answer on this
application to the precise
contractual obligations in terms of payment, however, does not answer the issue
raised by this application
to set aside the statutory demand. The applicant has not
cancelled the contract. The obligations of the parties therefore remain.
That is the
effect of s 7 of the Contractual Remedies Act 1979. That provision provides that the
Act has effect in place of the rules
of common law relating to the discharge of a
contract for breach. Whatever conclusion is reached as to the time for payment, be it
the time specified by the applicant or for that matter the respondent, what is clear is
that the time for payment has well and truly
passed. There has been no payment.
The result is that save for one aspect which I will short consider, there is now no
dispute as
to whether the payment is due.


[26]   The one area that needs further consideration relates to a possible 10%
discount. The respondent
offered a special 10% rebate for any monthly sales over
$50,000. The rebate is subject to a number of conditions. The one critical
condition
that has not been met in this case is that payment is received on the due date.
Payment for the months concerned, however,
has not been made at all. On that
basis, entitlement to the rebate does not arise. That leads me to the conclusion that
there is
now no proper basis for a dispute that $135,288.87 is due in respect of the
supply made for November 2008, December 2008 and January
2009. That being the
case, the application to set aside the statutory demand based on s 290(4)(a) fails.


[27]   The applicant's
position in this case has arisen by virtue of the fact that its
grievance primarily was not able to be put before the Court on grounds
that might
have succeeded, namely pursuant to s 290(4)(b). The applicant did face a problem if
it had relied on that ground in that
the general conditions to which I have made
reference does not allow for a deduction from any payment due under the contract
based
on a counterclaim or set-off. That would be a problem if the Court was able to
find that the general conditions apply to the contract
that was made in October 2008.

I have already expressed my view that that issue is unsuitable for determination in
this application.
That type of dispute must be resolved at trial.


[28]   It is necessary that I make these comments because, although I make a
specific
order pursuant to s 291 of the Companies Act 1993, it might not necessarily
follow that the Court would order the appointment of
a liquidator if an application is
made pursuant to s 241 of the Companies Act 1993. That is because the Court has a
discretion as
to whether to appoint a liquidator pursuant to s 241. The distinction
between the two stages that arise in insolvency cases, be they
bankruptcy notices and
statutory demands, on the one hand, and the ultimate determination of status, be it
adjudication in bankruptcy
or the appointment of a liquidator, on the other, was the
subject of comment by the Court of Appeal in Laywood & Rees v Holmes
Construction Wellington Ltd 
(2009) NZCA 35 at 65 of that judgment. A factor that
may well influence the Court in the overall exercise of the jurisdiction under s 241
ultimately
is whether payment is able to be made or secured in some way and
whether a properly framed counterclaim or set-off is before a Court
of competent
jurisdiction awaiting determination.


[29]   In making these comments I do not wish it to be understood that I am pre-
determining what might happen if an application to appoint a liquidator is made in
this case. I am simply suggesting to the parties,
in particular the respondent, that
care be given to its position before such decisions are launched. On the other hand,
the applicant
must realise that it is exposed to the possibility of the Court appointing
a liquidator if it is takes no step following the issue
of this judgment in terms of
payment or securing payment while some other proceeding is explored.


Orders


[30]   The application
to set aside the statutory demand is dismissed.             The
respondent may make an application to the High Court to place the
applicant into
liquidation if the sum of $135,288.88 is not paid within 15 working days of the date
of this judgment. This aspect
of the order is made in reliance on s 291(1)(a) and (2)
of the Companies Act 1993.

Costs


[31]    At counsel's request I reserve
costs in relation to this application. If counsel
are unable to agree on costs, memoranda in support, opposition and reply shall
be
filed and served at seven day intervals.




_________________________
JA Faire
Associate Judge