Bailey v Earth Crest Limited [2013] NZHC 1265 (31 May 2013)

Last Updated: 25 July 2013

IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY

CIV-2012-470-1033 [2013] NZHC 1265

BETWEEN SAMUEL L BAILEY Plaintiff

AND EARTH CREST LIMITED Defendant

Hearing: 21 MAY 2013

Appearances: Mr Bailey in person

Mr N Elsmore for defendant

Judgment: 31 May 2013

_{JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE}

This judgment was delivered by me on

31.05.13 at 5 pm, pursuant to

Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

_{Date...............}

BAILEY v EARTH CREST LIMITED [2013] NZHC 1265 [31 May 2013]

Background

[1] The plaintiff filed a statement of claim on 11 December 2012 in which he sought an order placing the defendant into liquidation. The grounds were that the company was insolvent and also it was just and equitable that the company should be wound up. The plaintiff alleged in the statement of claim that in July 2012 the debtor “agreed to hire the creditor as business manager for Earth Crest Limited”. Further that he was to be paid $25/hour, travel costs, provided on-site accommodation, moving expenses and other reimbursements.

[2] It was further alleged that invoices which the creditor had rendered for the period 13 to19 August 2012, 27 August to 2 September 2012 and 10 September to

16 September 2012 were unpaid. It is also pleaded in the statement of claim that the plaintiff expended $221.31 of his own money on behalf of the defendant which the defendant has not reimbursed.

[3] The statement of claim alleges that on Monday 17 September 2012 the debtor terminated the contract without “the proper procedure”. It is further alleged that a statutory demand was served on the defendant 5 October 2012 demanding payment of $8,873.37. However the amount in the statement of claim is actually $15,615.41. It is not apparent why the amount in the statement of claim should be more than the invoices in the statutory demand. However, I accept that the evidence of the plaintiff is that six invoices spanning the period 6 August 2012 to 17 September 2012 were rendered to the defendant. I shall make further comment on the format of the invoices at the appropriate point further on in this judgment.

[4] The statement of defence says that it is unclear that the plaintiff or the plaintiff’s company Civil or Criminal Limited is the correct party to the proceedings. It says the amount claimed is unclear. It further says it has never received an invoice for the cement purchased on its behalf. It admits that “the plaintiff’s arrangements ended on 17 September 2012” and says that such a termination was justified for failure on the part of the plaintiff persistently to follow instructions and because of breaches of confidence. It makes reference to the fact that the parties attended a Disputes Tribunal Hearing on 23 January 2013 in Whangarei where the Tribunal

struck out the plaintiff’s claim saying that the dispute was appropriately to be dealt with in the Employment Tribunal because the question involved was whether the plaintiff was employed as a contractor or employee. Because of the decision that I have come to in this proceeding, it is not necessary for this Court to consider the issue of the jurisdiction of the Employment Tribunal.

[5] The defendant admits that the statutory demand was served but that the admitted failure to comply with the statutory demand cannot be relied upon because the presumption arising under the statutory demand is not available. This is because the liquidation proceedings were not commenced within time.

[6] The defendant asserts that it was not just and equitable that the defendant be placed into liquidation. The defendant made reference to the practical difficulties that would follow on the making of a liquidation order in the case of a facility housing wild animals, including lions.

[7] It has long been held that proceedings by way of winding up orders are not a suitable vehicle for the resolution of genuine factual disputes. The approach that a Court hearing a defended liquidation proceeding is required to take is summarised in the judgment in South Waikato Precision Engineering Ltd v Ahu Development Ltd:[1]

(a) A winding up order will not be made where there is a genuine and substantial dispute as to the existence of a debt such that it would be an abuse of the process of the Court to order a winding up;

(b) In such circumstances, the dispute, if genuine and substantially disputed, should be resolved through action commenced in the ordinary way and not in the Companies Court

(c) The assessment of whether there is a genuine and substantial dispute is made on the material before the Court at the time and not on the hypothesis that some other material, which has not been produced might, nonetheless be available;

(d) The governing consideration is whether proceeding with an application savours of unfairness or undue pressure.

Evidence

[8] The evidence that was filed for the plaintiff was principally that of Mr Bailey. However, there were annexed to his affidavit of 17 May 2013 considerable amounts of evidence purporting to be in the form of another affidavit sworn by Mr Stevenson. Evidence in that form is not admissible pursuant to s 83 of the Evidence Act 2006. It contains statements that are not those of the maker of the affidavit or “deponent”, who is Mr Bailey. While there was no objection to the evidence in that form, I consider that the Court, as a matter of regulating its own processes, ought not to receive that type of evidence. Quite apart from anything else, it is not just a matter of technical non-compliance with the Rules. There is the additional element that the sanctions usually available against giving dishonest evidence in s 108 of the Crimes Act 1961 may well not apply to a statement of evidence of the kind under discussion here, whether or not that additional statement of evidence which is appended to an affidavit in the proceedings was itself sworn. I make that comment because s 108 applies to an assertion etc made “in a judicial proceeding as part of his evidence on

oath”.[2]

[9] As well, the annexure to the affidavit of Mr Bailey of statements by Mr Stevenson contravenes r 9.76 High Court Rules in that it includes statements that would not be admissible if given in evidence at trial by the deponent, Mr Bailey. For those reasons I decline to read the annexures to Mr Bailey’s affidavit which purport to be affidavits by Mr Stevenson.

A substantial defence?

[10] Several issues were raised by the defendant concerning the plaintiff’s proceeding. I intend to deal with the principal submission for the defendants which was that the proceeding was not suitable for disposal in this Court because it involved substantially disputed matters concerning the debt which the plaintiff puts forward as the bases for the liquidation proceeding.

The correct plaintiff

[11] The defendant has raised disputes about the correct plaintiff in the proceeding. These arise from its contention that there is uncertainty whether the plaintiff or a company associated with him, Civil or Criminal Limited, is the correct party that ought to be identified as the creditor in respect of the debt allegedly arising out of Mr Bailey’s employment at Earth Crest Limited “containments facility” for zoo animals at Whangarei.

[12] In the first place the invoices which were rendered to the defendant were in each case stated to originate from “Sam Bailey” (address details provided) “trading as Civil or Criminal Limited”. That there is such a company is not in dispute as Mr Bailey confirms that is his company and he is a director of it. Further, what appears to be a copy of a bank statement showing the state of the account of Earth Crest Limited in August 2012 contains the entry:

21 August 2012 315 Civil n Criminal

Civil n Crim 280 gst incl debit cheque $1,075

[13] Further, the invoices which Mr Bailey rendered include GST. Wages do not include GST. The invoices are therefore inconsistent with the plaintiff asserting that the debt in this case arose from a contract of service or employment and at the same time adding GST to the amount charged. As well, Mr Bailey makes the point that the GST was charged by an oversight. He says if there was an error the defendant did not bring it to his attention and “no evidence of a substantive dispute has been presented by the defendant”.

[14] There is thus uncertainty concerning whether the plaintiff rather than the company is the creditor of the defendant.

[15] That being the case, the Court cannot be satisfied that Mr Bailey was a creditor who has standing to bring the application for appointment of liquidators.[3]

Other defences

[16] In case I am incorrect in the conclusions stated in the preceding section of the judgment, I will consider a further aspect of the defences which the defendant raised.

Presumption of insolvency

[17] The case for the defendant was that the plaintiff had not proved the necessary factual preconditions in order to give rise to the presumption of insolvency contained in s 288 of the Companies Act 1993.

[18] The plaintiff served a statutory demand at the registered office of the company on 5 October 2012. Service was affected at the address in Tauranga which was noted in the company’s records. The point was taken for the defendant that the company changed its address for service to Whangarei by filing a change of address on 29 September 2012. However, I accept the submission of Mr Bailey that the change of address did not take effect until late October 2012 and that accordingly the plaintiff served the statutory demand at the correct address as at 5 October 2012. More explicitly, service took place in accordance with s 387 of the Companies Act when the document was served at the Tauranga address.

[19] It is agreed that the filing of the statement of claim took place on 10

December 2012. If that is so, the proceeding was filed within 30 working days after the last date for compliance with the statutory demand with the consequence that the admitted failure on the part of the defendant to comply with a statutory demand has given rise to the presumption of insolvency arising under s 287 Companies Act.

Counterclaim

[20] The next issue concerns the fact there is a substantial underlying dispute between Mr Bailey and the company arising out of actions which the defendant says were in breach of the contract pursuant to which he worked at the Lion-Park. In particular the defendant says that without authority, Mr Bailey dismantled an animal cage valued at some $10,000. Mr Bailey says that that item of property did not in fact belong to the defendant but belonged to an entity associated with Mr Stevenson,

a chartered accountant at Tauranga and the person who provided sworn statements which I have earlier referred to and ruled inadmissible.

[21] The approach to counterclaims in the setting of defended liquidations has been described in the following terms:[4]

[39] There must be some assessment of the strength of The Fishing Company Limited's claim for a GST input credit. On the one hand, if the claim for the GST input credit is quite flimsy, the Court would have little difficulty in disregarding it. On the other hand, if the entitlement to a refund is obvious, the Court will have little difficulty in finding that a mutual set-off under s 310 will apply on liquidation.

[40] In Covington Railways Ltd v Uni-Accommodation Ltd [2001] 1

NZLR 272, the Court of Appeal held that in applications to set aside a statutory demand on the basis of a set-off, counterclaim or cross demand under s 290(4)(b) there is a “clear and persuasive” standard. At 274 it said:

“Where a company which is the subject of a liquidation application is indisputably in debt to the applicant creditor, it may nonetheless be able to show that it has a claim against the applicant which reduces the net balance owing to the creditor or even off-sets it altogether. Where there are liquidated sums due each way, that is simply an arithmetical exercise. It is more difficult if, on the applicant's side, there is an indisputable liquidated sum, but the other party's claim is for an unliquidated sum with liability and/or quantum in dispute. Then in order to impeach the statutory demand and overcome the presumption of s 287(a) that the company is unable to pay its debts when it has failed to comply with that demand, it must be able to do more than merely assert that there is an available set-off. It must be able to point to evidence before the Court showing that it has a real basis for the claimed set-off and that accordingly, the applicant's claim to be a creditor is, to the extent of the set-off, seriously in doubt. In the words of Buckley LJ in Brian Stone Finance Ltd v De Vries (No. 2) [1976] Ch 63, 78, it must show that there are ‘clear and persuasive grounds’ for the set-off claim. Where this can be done, the party who has issued the statutory demand against the company will be shown to be using the statutory demand in liquidation procedures improperly because there is a

‘genuine and substantial dispute’ about the net amount of the

company's indebtedness (Taxi Trucks Ltd v Nicholson [1989] 2

NZLR 297, 299). The dispute should then be resolved in the ordinary way — except as to any undisputed balance, rather than upon the hearing of a liquidation application. ”

[41] That was an application under s 290(4)(b) of the Companies Act to set aside a statutory demand on the basis of a counterclaim, set-off or cross-demand. But I see no reason why the same test of “clear and persuasive grounds” should not be applied on the hearing of the liquidation application.

[22] The defendant says that it intends to file a claim of $10,000 in regard to damaged caused to the enclosure. It acknowledges that that enclosure:

Is currently owned by ZWKL but due to an existing contract Mr Stevenson is aware that Earth Crest Limited will be the owner in due course.

[23] The plaintiff acknowledges that he removed the Serval enclosure. It is said to have been done without the authority of the defendant. Mr Bailey essentially defends the position by saying that the enclosure belonged to a third party. That will not necessarily be an answer to a breach of contract claim brought against him by his employer which asserts that he carried out the actions he did with regard to the Serval enclosure without authority.

[24] A party in the position of the defendant in this case cannot rely upon a counterclaim unless it is demonstrated that there are clear and persuasive grounds for believing that the defendant does in fact have a counterclaim available to it. I do not consider that the defendant’s alleged counterclaim can be so described. It has not been particularised in any respect. As well, there must be doubt about how the defendant could bring a claim for $10,000 when it does not presently own the enclosure.

[25] For those reasons I do not accept that the defendant has an arguable counterclaim which would amount to a defence.

Conclusion

[26] The evidence in this case leaves the Court with a doubt as to whether the plaintiff is a creditor of the defendant company. It is necessary for the plaintiff to establish that fact on the balance of probabilities but it has not done so. For those reasons, the application for an order under s 241 of the Companies Act is declined.

[27] The parties should file memoranda not exceeding three pages on each side on

_{the issue of costs within 15 working days of the date of this judgment.}

J.P. Doogue

Associate Judge

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[1] South Waikato Precision Engineering Ltd v Ahu Development Ltd HC Auckland CIV-2008-404-970,

10 December 2008.

[2] Crimes Act 1961, s 108(1).

[3] Companies Act 1993, s 241(2)(c)(iv).

[4] Commissioner of Inland Revenue v The Fishing Company [2010] NZHC 2244; (2011) 25 NZTC 20-016 (HC); also see Forward Plastics Ltd v NZ Distilled Water Ltd (2012) 11 NZCLC 98-009 (HC); Simply Logistics v Real Foods Ltd HC Auckland CIV-2011-404-3497, 14 September 2011; Provida Foods Ltd v Foodfirst Ltd [2012] NZCA 326.