Mastagard Limited v Solly's Freight (1978) Limited [2012] NZHC 1050 (11 May 2012)

Last Updated: 23 June 2012

IN THE HIGH COURT OF NEW ZEALAND NELSON REGISTRY

CIV-2012-442-000106 [2012] NZHC 1050

BETWEEN MASTAGARD LIMITED Plaintiff

AND SOLLY'S FREIGHT (1978) LIMITED Defendant

Hearing: 10 May 2012

Appearances: D C Russ for Plaintiff

G M Downing for Defendant

Judgment: 11 May 2012

_{COSTS JUDGMENT OF ASSOCIATE JUDGE MATTHEWS}

[1] On 28 February 2012 the defendant issued a statutory demand to the plaintiff under s 279 of the Companies Act 1991 demanding payment of the sum of $7,031.25 stated to be an amount due and payable for freight services supplied by the defendant.

[2] On 15 March 2012 the plaintiff applied for an order setting aside the notice, under s 290 and r 19.10 of the High Court Rules. An affidavit was filed in support. This was met with a notice of opposition and an affidavit on behalf of the defendant, and the plaintiff then filed two further affidavits in reply. The application was called in a List and adjourned to a fixture on Thursday, 10 May. On Monday, 7 May the defendant advised the plaintiff it would not oppose the making of an Order. No agreement was reached in relation to costs.

[3] The plaintiff sought costs on an indemnity basis. The defendant accepted that it must pay costs but submitted that scale costs were appropriate.

MASTAGARD LIMITED V SOLLY'S FREIGHT (1978) LIMITED HC NEL CIV-2012-442-000106 [11 May

2012]

[4] In June and August 2010 the defendant transported certain goods to Christchurch and delivered them to premises occupied by NZ Plastic Recycling Limited, which is owned by the plaintiff. Several trips were involved. Instructions for this work were evidently given orally. Neither the plaintiff nor the defendant has a note of the original instruction. The cartage records prepared by the defendant state that the work was to be charged to “MastaGaurd”, and “MasterGaurd”.

[5] The defendant did not receive payment. On 9 March 2011 the defendant wrote to the plaintiff requesting payment. On 10 May 2011 Mr Stapleton, a director and the manager of the plaintiff, wrote advising the debt was owed by NZ Plastic Recycling Limited, and on the same day NZ Plastic Recycling sent out a creditor compromise proposal to its creditors, including the defendant. Although the defendant did not accept the compromise, it did receive payments pursuant to it, and retained them.

[6] On 3 February 2012 the solicitors for the defendant wrote to the plaintiff demanding payment for the invoices, referring to the letter sent by the plaintiff in May indicating that the account was a debt of NZ Plastic Recycling Limited, disagreeing with that contention, and advising that a notice under s 289 would be issued if payment was not received in cleared funds within seven days. No reply was sent and on 28 February 2012 the solicitors wrote again enclosing the statutory demand in issue in this proceeding.

[7] On 6 March Mr Stapleton, a director and general manager of the Mastagard group of companies, wrote to the defendant by email. It contained in bold the words “We formally advise that this statutory demand is in dispute”, and set out five grounds which formed the basis of the stated dispute. This was followed on 12

March by a letter from the plaintiff’s solicitors to the defendant’s solicitors confirming the existence of the dispute, the principal ground of which is that the defendant had invoiced the wrong entity for its services, and that NZ Plastic Recycling Limited was the contracting party. It asked the defendant to withdraw the demand by Tuesday 13 March, and advised that if it was not withdrawn an application would be filed to set it aside, with the letter being produced in support of

an application for full indemnity costs. No response was received to this letter and the application was therefore filed.

[8] Mr Russ for the plaintiff submitted that the statutory demand should not have been issued. The defendant was notified that the debt was owing by NZ Plastic Recycling Limited. That company had made payments on account of the debt which the defendant had accepted. The goods were not delivered to the plaintiff, the defendant had not produced and did not have any evidence that the plaintiff had ever entered a contract with it, and that given the issue about the identity of the contracting party which had been squarely raised before the notice was issued, it was for the defendant to prove that the debt was owing, which it could not do on its own documentation. Mr Russ submitted that the defendant had pressed on with the initiation of the notice as a precursor to a winding-up proceeding on full notice not only of the legitimate dispute about liability but also of its potential responsibility for a claim for indemnity costs, given the expense to which it would be put by the otherwise inevitable application to set aside the statutory demand. He pointed out that the plaintiff is a company of financial substance which could not afford to allow the demand to expire without taking action, and was therefore entirely justified in the steps it took, at considerable expense.

[9] Mr Russ submitted that the defendant had an opportunity to refrain from issuing the notice in the first place, to withdraw it when requested, to withdraw it when the application and affidavit in support were served, and to withdraw it as soon as the affidavit in reply was served. Instead, the application was withdrawn when submissions for the fixture on 10 May had been fully prepared along with a casebook for use by the Court.

[10] Mr Downing submitted that his client was entitled to treat with circumspection the statement by the plaintiff that the debt was owing by a company under its control which was in financial difficulties, and that it had rejected this explanation when it was first raised. It seemed odd to his client, he said, that the debt which was rendered against the company with the name on the cartage documents was suggested to be a debt by a company of which it was unaware and which was evidently insolvent. His client company was entitled to be suspicious and

the issuing of the notice was not vexatious. Mr Downing said his client only reached a position of knowing that it was inappropriate to proceed with the notice when the affidavits in reply were served by the plaintiff. He pointed out that the plaintiff had not called any witness to say who actually arranged the cartage.

Discussion

[11] When a notice under s 289 is issued, the recipient is required to take prompt steps to respond to it because of the tight time limits imposed, as noted in Rembrandt Custodians Ltd v Pro-drill (Auck) Ltd.[1] I noted this case in a judgment of the Court which I issued on 26 January 2012: McWilliam Consulting Group Ltd v Keith Ussher Architecture Services Ltd.[2] I reproduce paragraphs [2] – [4] inclusive of that judgment:

[2] Rule 14.6 of the High Court Rules provides that the Court may order a party to pay increased costs in certain circumstances. Paragraph 3(d) provides that increased costs may be ordered if “some other reason exists which justifies the court making an order for increased costs despite the principle that the determination of costs should be predictable and expeditious”.

[3] I refer first to Rembrandt Custodians Ltd v Pro-drill (Auck) Ltd. At paragraphs [37] and [38] Master Lang said:

[37] The issuing of a statutory demand is a very serious matter. As this Court has often pointed out, the recipient of a statutory demand must act quickly in order to avoid the statutory consequences of failing to comply with the demand: see for example Keystone Ridge Ltd v City Sales Ltd (Unreported, High Court, Auckland, M549/02, 9

July 2002, Heath J) and Isolare Investments Ltd v Fetherston (Unreported, High Court, Auckland, M1042/02, 17 October 2002, Master Lang).

[38] One of the most significant potential consequences is the establishment of jurisdiction to immediately place the company in liquidation. If a company wishes to avoid those consequences it must either persuade the issuer of the statutory demand to withdraw it or, alternatively, apply to the Court for an order setting the demand aside. The timeframe for the filing of such an application is very tight. There is no room for error, because the Court has no power to extend the time within which an application to set aside a statutory demand

may be filed. In those circumstances, it is obviously encumbent on the issuer of a statutory demand to ensure that the demand is being issued on a proper basis. In particular, it must take care to ensure that the debt which is claimed in the statutory demand is not the subject of a genuine dispute: see First Light Construction Ltd v Glenn’s Glass & Aluminium Ltd (Unreported, High Court, Rotorua, M33/02, 15 August

2002, Master Lang).

[4] In Gateway Cargo Systems Ltd v Airborne Freight Ltd, (HC Auckland CIV-

2003-404-7207, 16 March 2004) Master Faire stated, at paragraph [7]:

[7] In a judgment I delivered on 23 February 2004 International Air Training (NZ) Ltd v Rohlig New Zealand Limited (High Court, Auckland, CIV 2003-404-3464) I made the following observations in relation to statutory demands and the following originating applications:

Rule 46 provides that costs are to be in the discretion of the Court. In Mansfield Drycleaners Ltd v Quinny's Drycleaning (Dentice Drycleaning Upper Hutt) Ltd (CA 296/01, 29 September 2002) the Court of Appeal, in noting the Court's over-riding discretion pursuant to r46 said:

there is a strong implication that a Court is to apply the regime in the absence of some reason to the contrary: Body Corporate 97010 v Auckland City Counsel. We do not think that a Court should hesitate to depart from the regime where appropriate but we agree that some articulation of the reason for doing so is to be expected, however succinct. If no reason is given it will expose the award to close appellate scrutiny.

The general principles to be applied in the exercise of that discretion are those contained in r47. The first general principle there stated is that the party who fails with respect to a proceeding should pay the costs to the party who succeeds.

There is developing a trend where debt collectors use statutory demands as the first step in a process to recover a debt. The statutory demand procedure is not intended as a debt collection device. Its purpose is to provide the evidential foundation to support an application to appoint a liquidator in respect of a company. That follows from s287 of the Companies Act 1993. One of the persons authorised to apply to appoint a liquidator, by virtue of s241 of the Companies Act 1993, is a creditor of the company. A creditor, in terms of s241 of the Companies Act 1993, includes both contingent and prospective creditors. A creditor will be successful if the creditor can show that the company is unable to pay its debts. It is for that purpose that the statutory demand is used. The reason that it is used is because noncompliance, in terms of s287, presumes that the company is unable to pay its debts. Precise proof of the quantum of debt where a liquidator is appointed is a matter that will ultimately have to be determined by the liquidator of the company. The liquidator's principal duties are defined in the Companies Act 1993 starting at s253.

I emphasise these matters because there is a common misconception that the statutory demand procedure is in some way analogous to the summary judgment regime which relates to ordinary proceedings. A summary judgment application is, of course, an interlocutory application. An application made to set aside a statutory demand, as I have already said, is an originating application. In short, it is a discrete, stand-alone, application.

Because of its special nature, an order on the application concludes the specific application to the Court. Generally it will not be appropriate to reserve costs pending some other event. However, because the Court is required to exercise the discretion, each case will be determined on the facts before the Court. Nevertheless, there needs to be good reason for departing from the general principle that the party who fails should pay costs to the party who succeeds.

If the above points are observed, statutory demands should only be issued in cases which are appropriate, that is, where there is a genuine basis for establishing the evidential foundation so that an application can ultimately be made to appoint a liquidator. It is quite improper for the procedure to be used as a debt collection device or as a device to embarrass a party in a situation where there is a contest as to liability for a given debt.

[12] I am satisfied:

(a) Before the notice was issued the defendant had clear notice of the existence of a dispute by the plaintiff of any liability to pay the sum claimed, both from the plaintiff and from the plaintiff’s solicitor.

(b) The ground for disputing liability to pay the debt is substantial.

(c) The defendant did not have any record of an instruction from the plaintiff upon which to assert that a contract with the plaintiff existed, and thus to refute the ground of dispute raised by the plaintiff.

(d) By that point it had become inappropriate to issue a statutory demand under s 289. The correct course was to proceed with debt recovery proceedings, which could have been instituted at little cost through the Disputes Tribunal.

[13] On the basis of the authorities to which I have referred in this judgment, and numerous other judgments of this Court referred to in McGechan on Procedure and Company Law texts, it was inappropriate to use the insolvency provisions of the

Companies Act as a means to enforce payment of a disputed debt. The direct and inevitable consequence for the plaintiff was to incur cost in bringing this proceeding.

[14] Further, I accept Mr Russ’s submission that there were at least two further opportunities to withdraw the notice well before a point three days before the stipulated fixture date, and indeed the opportunity was a continuing one from the time the first email on the topic was received from Mr Stapleton. I am satisfied that the notice should not have been issued, and even if issued should have been withdrawn long before it was.

[15] Although reference could be made to a number of cases in an attempt to draw a comparison between costs awarded in other situations, and the facts of this case, it is preferable in my view to approach the exercise of discretion on a principled basis and by reference to the facts of this case. These reasons justify a significant increase over scale costs:

(a) The notice was improperly issued.

(b) The plaintiff was put to immediate and significant expense responding to it within a tight timeframe.

(c) At any time the notice could and should have been withdrawn and costs paid, but this did not occur.

(d) There is no justification for the defendant having acted as it did at any point since the email sent by Mr Stapleton on 6 March and the letter sent by the plaintiff’s solicitors on 12 March.

Quantum

[16] Mr Russ prepared a schedule indicating the sum which would be awarded on a scale 2B basis, amounting to $4,230. Under item 28 of the scale he assessed that

0.4 of a day should be awarded for a callover, if scale were applied. Mr Downing noted that under item 28, 0.3 of a day is allowed for an appearance at a case management conference. Plainly the reference by Mr Russ to item 28 should have been a reference to item 23 which is for an appearance at a hearing on a company

liquidation proceeding, assessed at 0.4 of a day. I therefore find that appropriate scale costs, were they to be awarded, would be $4,230.

[17] By comparison the actual costs incurred by the plaintiff are $6,288.20, and in each case disbursements of $946.86 are claimed.

[18] The sum sought by the plaintiff is less than a 50 percent uplift on scale costs and in my opinion is more than amply justified; by reference again to McWilliam Consulting Group Ltd v Keith Ussher Architecture Services Ltd, it will be noted that in not dissimilar circumstances a 100 percent increase on scale was awarded. However, it is not appropriate to award costs in a figure beyond the costs charged.

Outcome

[19] I award to the plaintiff costs in the sum of $6,288.20 together with disbursements in the sum of $946.86, a total of $7,235.06.

J G Matthews

_{Associate Judge}

Solicitors:

Fletcher Vautier Moore, PO Box 90, Nelson. Email: [e-mail]

McFadden McMeeken Phillips, PO Box 656, Nelson. Email: [e-mail]

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[1] Rembrandt Custodians Ltd v Pro-drill (Auck) Ltd HC AUCK M337-IM03, 13 June 2003, at [37] – [38].

[2] McWilliam Consulting Group Ltd v Keith Ussher Architecture Services Ltd HC CHCH CIV-2011-409-2007, 26 January 2012.