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High Court of New Zealand Decisions |
IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY
CIV-2009-404-3588
UNDER the Companies Act 1993 and High Court
Rules
IN THE MATTER OF a Statutory Demand dated 2 June 2009
BETWEEN
PARALLEL IMPORTED LIMITED
Applicant
AND
SHIPLEY CONSULTANTS LIMITED
Respondent
Hearing: 20 August 2009
Appearances:
Mr AC H Clemow for Applicant
Mr A M Swan for Respondent
Judgment: 7 September 2009 at 3 p.m.
JUDGMENT OF ASSOCIATE JUDGE DOOGUE
This judgment was delivered by me on
07.09.09 at 3 pm, pursuant
to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date...............
Counsel:
Gaze Burt Lawyers, P O Box 91 345, Auckland (Mr ACH Clemow)
Mr A M Swan, Barrister, P O Box 5444, Auckland
PARALLEL
IMPORTED LIMITED V SHIPLEY CONSULTANTS LIMITED HC AK CIV-2009-404-3588 7
September 2009
Introduction
[1] Parallel Imported
Limited (Parallel) is, as it name suggests, an importing
company. It has franchised its business to other parties. It engaged the
respondent
Shipley Consultants Limited (Shipley) to provide the services of a Chief Financial
Officer for its business, with the
nominated person under the contract being Mr
Michael Naylor. The contract was entered into 27 March 2006 and was to continue
until
26 September 2006 or until terminated in accordance with the contract.
[2] Mr Naylor's status was that of an independent contractor
to Parallel. The
contract could be terminated by one month's notice before the expiry of the
contractual term. Clause 12.3 provided
that the contractor's services could be
terminated in writing without notice in the event of any serious or material breach of
the
provisions of the contract. There was annexed to the contract a schedule setting
out a description of the responsibilities of Shipley/Mr
Naylor.
[3] On 19 May 2009 Mr Naylor was continuing to function as the Chief
Financial Officer. The organisation was by that
date apparently under some pressure
from its bank to produce financial accounting information and forecasts. Mr Naylor
prepared this
information and sent it to the bank with a covering email. The email
contained a number of surprising assertions by Mr Naylor, including
that after
adjustments to some of the figures `you have a loss making business'. He said that:
To arrest this [trend], we
simply need to pull some rabbits out of the bag. In
my projections I have anticipated that the shareholders take a 20% haircut
in
their wages possibly here, [one of the directors] will have to `volunteer' to
take a slightly bigger slice. Still,
you will see from the numbers that the
business simply cannot afford to have the five shareholders take well over [a
specified figure] in wages. So, this is rabbit number one.
[4] There were other unusual features to the covering email that
it is not
necessary to detail at this stage. What was surprising about the email was that it was
sent by an employee of the company
to the company's bank, and that it contained
potentially damaging assertions about the company. It was the more remarkable
because
apparently it had not been authorised by any of the directors or, nor was it
discussed with the directors before it was sent off.
[5] Unsurprisingly, the directors of the company reacted immediately and
forcefully when they found out about the existence
of the email. The immediate
result was that the company terminated the services of Shipley/Naylor. They did so
orally, when such
notice ought to have been in writing, but for the purposes of this
application nothing turns on that feature of the case.
[6] Subsequently, Shipley invoiced Parallel
for amounts it claimed to be owed
for services provided. Following non-payment, on or about 2 June 2009 Shipley
served a statutory
demand on Parallel claiming the amount of $32,456.26. Parallel in
turn filed an originating application seeking an order setting
aside the statutory
demand. Shipley has opposed the making of the order sought. The grounds on
which Parallel made its application
were the following:
a) That the debt claimed by the respondent from the applicant was
disputed on bona
fide grounds;
b) That the respondent knew the debt was disputed before it served that
statutory demand;
c) That the applicant was solvent.
[7] The respondent opposed the making of the orders sought on the grounds:
a) There is no dispute that the debt was owing and due;
b) The debt relates to services provided to the
applicant which until
termination of the contract had never been the subject of a dispute;
c) The allegations
made by the applicant about the quality of the work
done by Mr Naylor were baseless and without foundation.
The
jurisdiction to make the orders sought
[8] The present application is brought pursuant to s 290 of the Companies Act
1993, which
provides:
290 Court may set aside statutory demand
(1) The Court may, on the application of the company, set aside
a
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.
(3) No extension of time may be given for making or serving an
application to have a statutory demand set aside, but, at the hearing
of the application, the Court may extend
the time for compliance
with the statutory 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.
(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.
(6) In subsection (5) of this
section, "defect" includes a material
misstatement of the amount due to the creditor and a material
misdescription
of the debt referred to in the demand.
An order under this section may be made subject to conditions.
[9] I respectfully
adopt the following statement of principle taken from the
judgment of Associate Judge Faire in Italia Motorsport Ltd v European Motors
Ltd
(HC Hamilton CIV2004-419-950 18 October 2004):
[4] The approach, which the Court takes to applications on each ground,
can be shortly summarised. When considering an application
pursuant to s 290(4)(a) of the Companies Act 1993 the Court
is
required to determine if the applicant can show a fairly arguable
basis upon which it is not liable for the amount
claimed. Forge
Holdings Limited v Kearney Finance (NZ) Limited (High Court,
Christchurch, M 149/95, Tipping J, 20 June
1995) at page 2 and
Queen City Residential Limited v Patterson Co-Partners Architects
(No 2) (1995) 7 NZCLC 260,936. That formulation was approved by
the Court of Appeal in United Homes (1988) Ltd v Workman [2001]
3 NZLR 447, 451 - 2.
[5] I need not consider s 290(4)(b) of the Companies Act 1993 because
that was not relied upon by the applicant.
[6] With respect to the Court's power to set aside a statutory demand
under s 290(4)(c) the Court of Appeal examined this
question in
Commissioner of Inland Revenue v Chester Trustee Services Ltd
[2003] 1 NZLR 395. At 397 Tipping J said:
If the focus is on the justice of the particular case the discretion must
always be exercised
on a principled basis and not on some ad hoc
perception of what individual justice might require. All cases
involving
s 290(4)(c) must in the end come down to a judgment by
the Court as to whether the creditor's prima facie entitlement is
outweighed by some factor or factors making it plainly unjust for
liquidation to ensue.
[7] The following further observations
must be made:
a) Whilst mere assertion will not be enough some sort of
material short of proof which backs
up the claim that the
amount is in dispute is required: Paramoor Eleven Limited v
Pramb Wong Enterprises
Limited (High Court, Auckland, M
1460/94, Master Gambrill, 10 April 1995);
b) With respect to s 290(4)(c),
the Court has a discretion to set
aside a statutory demand on grounds other than those
specified in ss
(4)(a) and (b);
c) I endorse the comments of Wild J in Apple Fields Ltd v
Trustees Executors and Agency
Co of New Zealand Ltd 13
PRNZ 387, 395. He said:
The legitimate purpose of a statutory demand is to obtain
payment of a debt due.
Was
there arguable breach of contract by Shipley and does it prevent Shipley
from recovering fees owed?
[10] Parallel's primary
position was that Shipley was in breach of its contractual
obligations and that as a result was unable to claim the debt which was
the
foundation for the statutory demand.
[11] Assuming, for the purposes of argument, that Shipley was in breach of its
contract,
the first issue to consider is whether for that reason the law will not permit
it to claim the debt owed to it by Parallel. No authority
was referred to which would
support that conclusion.
[12] There is no reason why Shipley should not recover compensation
notwithstanding
that it breached the contract. Nor is it disentitled to compensation
because Parallel Imported cancelled the contract. Shipley's
entitlement is made clear
by cases such as Brown v Langwoods Photo Stores Ltd - [1991] 1 NZLR 173
[13] My view, is that even if Shipley had breached the contract - e.g. because of
incompetence, breach of confidentiality
or for some other reason - it was nonetheless
still entitled to be recognised as a creditor of Parallel for the debt owed, with Parallel
having a right to cross-claim for loss resulting from any breach.
[14] Therefore, the applicant has not satisfied me that
there is a substantial dispute
whether or not the debt is owing in terms of s 290(4) of the Companies Act 1993.
Does Parallel have
a counter-claim and does that justify its application?
[15] The next issue is whether Parallel has a counter-claim, set-off
or cross-
demand which could be raised against the debt claimed in the statutory demand. For
this to be of assistance to Parallel,
the set-off or similar would have to be large
enough to mean the amount specified in the demand, less the amount of the counter-
claim, set-off or cross-demand is less than the prescribed amount in terms of s
290(4).
[16] Mr Clemow took me through the
evidence of the poor performance on the
part of Mr Naylor. I do not need to review it in detail. Suffice to say that there is
evidence
that would justify a submission that Parallel had a fairly arguable complaint
about the quality of the work. I do not overlook the
various criticisms that Mr Swan
made of that evidence. Mr Swan said no complaint was ever made about the quality
of the work right
up until the time when Mr Derriman dismissed Mr Naylor by
giving him oral notice to that effect 19 May 2009 following an email which
Mr
Naylor sent, purportedly on behalf of Parallel, to its banker, ASB.
[17] I interpolate that while the point just referred
to is not without weight, it is
not unknown, on the other hand, for tensions to simmer away beneath the surface in
organisations
of this kind. The dissatisfaction may then come out into the open when
a series of unfortunate occurrences culminates in a final
event, which makes one or
more of the parties lose their patience.
[18] I should say something additional about that email to
the ASB that I referred
to in paragraph [3] at this point, because it is an important aspect of the evidence. It
was Mr Swan's submission
that Mr Naylor was entirely justified in sending the
email, as it was sent in the course of performing his duties as Chief Financial
Officer. I have to say that I take a contrary view. The email to the ASB which Mr
Naylor sent on 19 May 2009 arguably represented
a breach of confidentiality or a
duty of loyalty which Mr Naylor owed to his employer. A more specific
determination
of that matter will have to be deferred to another occasion. But there
is a reasonable argument available to Parallel for the purposes
of the present
application that by sending the email, Mr Naylor was in breach of contract.
[19] Mr Swan then pointed out to me
that while the documentary material showed
that there had been errors and mistakes on Mr Naylor's part, when considered over
the
period of the life of the contract, from March 2006 till May 2009, they were not
of any great significance. He pointed out that the
amounts of money involved were
not great and that the total number of mistakes that the documentary evidence raised
was some six
in number only.
[20] To my mind, Mr Naylor owed to his employer obligations to be careful and
that he warranted he had the necessary
competence to perform his tasks. It is
reasonably arguable that he breached such obligations as evidenced by the various
errors
that he made. Some of the mistakes appeared to result from the mistake of
pasting into spreadsheet calculations material from the
wrong accounting period. I
accept that mistakes do happen and that there must be some margin for error allowed
without a party being
in breach of contract. But having regard to Mr Naylor's
position of CFO, the degree of responsibility invested in him and the reasonable
expectation that his work should be of a high standard, I was left with an impression
that it was reasonably arguable that his performance did not measure up to what the
contract
required. Mr Naylor's work on occasions was slapdash.
[21] The next, and crucial, issue is what, if any, loss Parallel suffered
as a result of
Mr Naylor's breaches. As Mr Swan pointed out, the unfortunate communication
with ASB does not seem to have permanently
blighted the relationship between the
bank and Parallel because ASB is still Parallel's banker.
[22] Against that, Mr Clemow
submitted:
At paragraph 16 of Mr Derriman's affidavit (page 72), he estimates that Ross
Melville's fees to Parallel
during the term of the contract were between
$80,000 and $100,000 per year. At paragraph 32 b-c (page 74) he estimates
that the cost for checking and repairing Parallel's accounts after termination
will amount to over $30,000, and that an
audit required by the bank as a
direct result of Mr Naylor's email to it on 19 March 2009 will cost between
$20,0000
and $25,000. The plaintiff claims these are costs that would not
have been incurred but for Shipley and Mr Naylor's poor performance
and
the problems they caused.
[23] I understand that the reference to PKF Ross Melville's fees to be significant
for the
following reasons. In essence, the applicant asserts that had Mr Naylor done
his job properly, there should not have been a need
for Ross Melville to carry out as
much work as it did. All or part of the fees are, in other words, seen as damages
stemming from
Mr Naylor's breaches of contract. This is another head of dispute
between the two sides. The documents the applicant have filed include
an assertion
on oath that the applicant suffered loss under this head. As a question of fact, it is
difficult to evaluate the strength
of this claim. If it is correct in fact, there is little
doubt that it could justify the Court concluding that there was a substantial
dispute as
to whether the debt was owing because it would give the applicant grounds to plead
an equitable set-off. My assessment
is that on the basis of the evidence filed so far,
the claim is arguable but could not be described as compelling.
[24] Another
matter that the applicant referred to in its evidence is the assertion
that ASB has imposed a requirement and the applicant alleges
that this results from
Mr Naylor's unauthorised communication with it - that Parallel's accounts now be
verified by an independent
accountant. The result, Parallel says, is that it has
incurred additional cost. That is to say, in addition to carrying the costs
of its own
accounting staff doing the work internally and the further costs rendered by its
regular external accountants, the firm
must now pay for an additional independent
accounting firm to verify its day-to-day accountant. Mr Parbu of the firm of PKF
Ross
Melville, who are the usual external accountants, estimates this cost at between
$20,000-$25,000 annually. On balance, I am prepared
to assume that this extra
expenditure was partly caused by Mr Naylor sending out the email to ASB. I come
to that conclusion not
without some hesitation because it may be that the truth is that
the applicant was in fact going through difficult times and that
the bank would
inevitably have discovered the true position at some point. Had that occurred, the
bank may have called for extra
accounting surveillance anyway. That is to say, it
must be arguable that this expense would have been incurred even without
a breach
of obligation on the part of Mr Naylor.
[25] Other costs that the applicant claims will ensue from Mr Naylor's alleged
breaches of contract include the cost of rectifying his mistakes and correcting what
the applicant describes as his defective or
over-complicated systems. Mr Derriman,
a director of Parallel, has provided an estimate of additional accountancy work
required as
being in the vicinity of $30,000. Mr Derriman also complained that as a
result of Mr Naylor's lack of skill, Parallel had to pay its own accountants $80,000 -
$100,000 a year in
addition to the $144,000 a year that it had to pay Shipley. Mr
Derriman also says that because of Mr Naylor's mistakes there has
been damage to
Parallel's reputation in the eyes of its licensees. Elsewhere in his evidence, Mr
Derriman estimates that the loss
caused to Parallel from retaining Shipley has been
in the order of $1,000,000. I have to say that I regard this last assertion as
being far-
fetched and improbable. Not only is that estimate not creditable, but it does not
enhance the confidence the Court might
otherwise have had in Mr Derriman's
evidence.
[26] Mr Derriman goes on to say that it is not practicable to definitively quantify
the amount of loss because that would require retaining a specialist accountant for
the purpose. Mr Swan submitted that the losses
that I have recorded in this paragraph
were vague and uncertain.
[27] I think it is fair to conclude that Parallel has suffered
some loss. It may be
that when the matter comes to be determined by a Court the criticisms that Mr Swan
made of the applicant's evidence
will be found to be in large part justified. It is
difficult in circumstances of present application to assess how much, if any,
of the
PKF Ross Melville accounts would arguably have been incurred even if the company
had retained a competent Chief Financial
Officer.
[28] As to the cost of putting the accounts right, one would have expected that
those sums had now been incurred and
that it would have been possible for the
accountants to identify the exact cost of that type of work. However that has not
occurred.
[29] To conclude, in my judgment it is not implausible that Parallel incurred some
financial cost arising from Shipley's breach
of contract. It is difficult to reach a firm
view but the result in my view is that the Court must conclude that the applicant has
a reasonable argument that the respondent will eventually be found to owe it money.
[30] The figures in question seem to be
these:
Respondent's unpaid fees 32,456.26
Accounting fees to make good
defective work -30,000.00
Fees payable to independent accountant, say
-20,000
Amount arguably owing to applicant -17,543.74
[31] The result
is that it is reasonably arguable that the respondent is indebted to
the applicant and not the other way round. The application will
therefore be granted.
Costs
[32] The parties should confer on the matter of costs and attempt to agree them. If
they are unable
to, I shall hear counsel at 9am on a suitable date to argue the matter.
_____________
J.P. Doogue
Associate Judge
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