Aotearoa Forest Marketing Limited v New Zealand Forest Enterprise Limited [2014] NZHC 3194 (12 December 2014)

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UNDER	the Companies Act 1993
IN THE MATTER	of the liquidation of NEW ZEALAND FOREST ENTERPRISE LIMITED
BETWEEN	AOTEAROA FOREST MARKETING LIMITED First Plaintiff LIGHT GARDEN HOLDINGS LIMITED Second Plaintiff
AND	NEW ZEALAND FOREST ENTERPRISE LIMITED Defendant

Hearing:	9 &12 December 2014
Appearances:	E Meade on agency instructions for J Golightly for Plaintiffs E J Grove for Defendant
_Judgment:	_{12 December 2014}

[1] Aotearoa Forest Marketing Limited (AFM) and Light Garden Holdings Limited (LGH) seek to liquidate New Zealand Forest Enterprise Limited (NZFE). NZFE denies that it owes money to either AFM or LGH and says, in any event, it is not insolvent.

[2] AFM supplied timber to NZFE. NZFE did not pay on three invoices issued on 11, 18 and 25 May 2014, totalling $47,248.73. AFM issued a statutory demand for that sum which expired unremedied. AFM then issued liquidation proceedings relying on the presumption in s 287 of the Companies Act 1993 that NZFE is unable to pay its debts.

[3] LGH filed an appearance in support. LGH then issued its own separate liquidation proceeding. It claims NZFE owes it $41,950.17 for the supply of timber between 13 June 2013 and 30 November 2013.

[4] LGH had served a statutory demand on NZFE on 23 June 2014 which also expired unremedied, however, LGH was out of time to rely on that statutory demand to establish NZFE’s insolvency.

(d) two of AFM’s invoices are dated September 2013 but are actually replacement invoices and claim significantly larger sums; and

[6] In relation to LGH’s claim NZFE’s position is that it does not owe any money

(a) LGH through a related company Ridge Top Logging Limited sold timber which it was logging for NZFE to third party Marusumi and has not accounted for that;

(b) LGH agreed to rent a digger for NZFE for use for the logging. It has failed to pay any rental (NZFE claims $12,530) and caused damage of

(c) LGH caused damage to a fence belonging to the owner of a forestry block who NZFE had licensing logging rights from and left the block in a damaged state, which has led the owner to put NZFE on notice of a claim for $18,000 in total; and

[7] The starting point is that NZFE owes AFM $47,248.73 for timber supplied by AFM to it. Mr Qian, director of NZFE, acknowledges that the three invoices comprising that amount have not been paid. The issue is whether NZFE has set-offs or counterclaims which reduce that balance or offset it altogether.

[11] 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 offsets 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

¹Covington Railways v Uni-Accommodation Ltd [2000] NZCA 230; [2001] 1 NZLR 272 (CA).

quantum in dispute. Then, in order to impeach the statutory demand and overcome the presumption in s 287(a) that the company is unable to pay its debts when it has failed to comply with the 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 Bryanston Finance Ltd v de Vries (No 2) [1976] Ch 63 at p 78, it must show that there are ''clear and persuasive grounds'' for the set-off claim.

[9] NZFE paid a deposit of $30,000 to AFM. NZFE claims that deposit should now be brought into account to reduce the amount claimed by AFM.

[10] Mr Watson, a director of AFM, accepts NZFE has paid a deposit of $30,000 to it. Mr Watson says payment of deposits are customary in the industry. The forest owner takes the deposit from the firm which obtains the rights to the trees. The firm gets the deposit back once the job is complete. The deposit is held to reduce the risk of non-payment for the timber harvested. The deposit is not used to pay invoices unless that is a term of the contract.

[11] Mr Watson says that AFM contracted to THR Fitzsimons for the rights to a forest block through its agent Woodmetrics Limited. AFM was required to pay a deposit of $50,830 to Woodmetrics Ltd. NZFE was to pay the deposit as the ultimate recipient of the timber. Thirty thousand dollars was payable immediately with the remaining $20,830 to be paid once deliveries of the log volume started. Although NZFE paid the initial deposit of $30,000 to AFM it has not paid the balance of

$20,830. Mr Watson says AFM will not become entitled to apply the deposit to payment until the Fitzsimons’ job is completed and Woodmetrics Ltd releases the deposit.

[12] There is apparently no written agreement between AFM and NZFE regarding the deposit. While there may be a written agreement between AFM and Woodmetrics Ltd regarding the payment of the deposit that has not been put in evidence before the Court. However, what is clear is that the relationship between AFM and NZFE has broken down entirely. It is at an end. AFM will not be harvesting any more trees or supplying any more timber for NZFE from the

Fitzsimons’ block. On that basis, at the very least on the bare information before the Court, NZFE has a claim to have the deposit of $30,000 paid by it applied against the moneys AFM says is otherwise due to it for timber supplied. Either the deposit will ultimately have to be repaid by AFM to NZFE or it will be applied against the money owing.

some product has not been in spec to for two reasons machine processing has been cutting to smaller dia no checks were undertaken by the logging crew

We have now taken steps to avoid small sed by requesting loads with undersized log to be returned to the bush

Therefor prepared to offer a couple of loads for free (k) Providing payment is made tonight

[14] Although Mr Qian said in his evidence that AFM had never supplied the free loads nor paid any other compensation for them, in his submissions Mr Grove noted that Mr Qian “now does recall [as Mr Watson asserts] that $4,025 was paid to NZFE by way of a credit given by AFM”.

[15] However NZFE nevertheless argues that it has a counterclaim against AFM in relation to the supply of logs that were not to specification. Mr Qian annexed to his affidavit email communications in Chinese from his customers. Mr Grove has translated the emails by having resort to a google translating program. I ruled that evidence and the translations as inadmissible on the grounds they were hearsay statements that were not sufficiently reliable.

[16] Mr Grove nevertheless submitted that there was evidence from Mr Qian that NZFE had provided a credit note on 12 September 2013 to a Chinese company for USD27,425.22 credited to a customer in September 2013. However, Mr Qian’s evidence about the credit note does not satisfy the test of providing clear and

persuasive grounds for a set-off. As noted, Mr Qian has changed his evidence and position on whether the agreed credit provided by NZFE of $4,025 was provided.

[17] Further, Mr Qian has produced emails regarding his complaints about the logs failing to comply with specifications between May and August 2013, yet where, as here, there was a supposedly substantial sum of in excess of USD27,000 credited to a customer in September 2013, Mr Qian said nothing at the time. There were no contemporaneous documents in which Mr Qian raises the matter, nor did Mr Qian take any issue with subsequent invoices issued on 22 February, 28 February, 4

March, 16 March, 23 March, 19 March 2014, all of which were paid without apparent demure by NZFE. I reject the claimed USD27,000 credit note as a basis for counterclaim on the evidence currently before the Court.

[18] Next, NZFE says there are errors in the invoices which had the result of inflating the amounts charged by $1,401.32. Mr Watson’s response is that the difference in the rates charged on the same invoices for the same grades of timber were the result of the different lots of timber having been logged and delivered at different times. Different rates applied at those different times. Mr Watson’s response is credible. I note that the allegation was advanced for the first time following service of the s 289 notice in an email from NZFE’s solicitor dated 11 July

2014 – at that time it was alleged the overcharging was between two and three thousand dollars. Again NZFE fails to establish any credible basis for complaint or set-off on this point.

[19] The last issue in relation to AFM’s claim is the suggestion that two of the invoices Mr Watson now relies on from September 2013 are in fact backdated replacement invoices. However neither of those invoices were relied on to support the statutory demand. It was only in responding to NZFE’s defence of these proceedings and Mr Qian’s evidence that Mr Watson has carried out a full reconciliation. That full reconciliation discloses that the amount due by NZFE to AFM is actually, on his recalculated figures, $59,183.30. However, I accept that,

just as NZFE should have raised issues earlier, if AFM intended to rely on invoices predating the three which formed the basis of the statutory demand it should have raised the matter earlier. For present purposes I put the recalculated claim to one side. That answers the issue raised by the differing amounts in the invoices which relate to that recalculated sum.

[20] The result is that, in relation to AFM’s claim against NZFE, I am satisfied

[22] Mr Silich is a director of LGH. He is also a director of Ridge Top Logging Ltd (Ridge Top). NZFE says timber from its site was sold by either Ridge Top or LGH to another entity, Marusumi. While LGH was logging timber for NZFE, Ridge Top logged timber for sale to Marusumi. Mr Silich says Ridge Top became involved because NZFE’s rows at Marsden Point became full and they did not have space to store more K grade logs:

In order to help ... out, I offered to get the logs into Marusumi for pulping, through my company Ridge Top ...

[23] This issue was raised by Mr Skeates, NZFE’s solicitor on 3 July 2013. NZFE raised an invoice for the timber. Mr Silich rather blandly says Ridge Top fully and properly accounted to NZFE for the logs sold to Marusumi (minus the amounts owed for harvesting) on 16 December 2013. No detail or documentation is, however, put before the Court to confirm the position. The Court is satisfied that there is an issue about the timber supplied to Marusumi that cannot be resolved on the evidence before it.

[24] NZFE next raises an issue concerning rental for a digger it supplied to LGH. Mr Silich’s evidence is that the dispute between the parties about the rental was also settled at the meeting on 16 December 2013. However, there is no independent contemporaneous record of that meeting or letter following it. There is a real dispute about the use of the machine. Mr Silich asserts that while the clock on the digger

may have increased from 13,522.3 hours to 13,679.5 hours – or 157.2 hours as claimed by NZFE, 67.6 hours of that time resulted from the key to the digger being left on when it was not being used and that LGH should not have to pay for that. That is obviously not a matter that can be resolved on the affidavit evidence before the Court. I accept Mr Grove’s submission that NZFE has a credible claim to the

[25] NZFE also claims for damage occasioned to the digger while LGH was using it. There is a dispute about that matter which again cannot be resolved on the current evidence.

[26] Similarly NZFE claims it has a potential liability to Mr Parker for the repair of a fence damaged during logging on his land and for site cleanup. There is a rather basic letter to that effect but, again on the basis of the evidence before the Court, there is at least a potential claim raised against NZFE.

[27] Mr Silich in his evidence and Ms Golightly in her submissions suggested that NZFE had changed its position by raising differing invoices for the various claims it made against LGH. In particular Ms Golightly criticised NZFE’s invoice for

$40,744.50 when another version of the same invoice dated 16 December 2013 claimed $19,469.50. However, as Mr Grove pointed out, the initial invoice still contained at its base the other claims which, if taken into account, totalled the

[28] Given that even Mr Silich acknowledges a dispute (which he says was resolved at this meeting on 16 December), I am satisfied that NZFE has arguable defences or counterclaims to the LGH claim which should be heard. The Court cannot reach a concluded view on the affidavit evidence as to what was or was not agreed on 16 December.

[29] NZFE is presumed to be unable to pay its debts as it has failed to pay the statutory demand issued. It is for NZFE to prove the contrary, namely that it is not insolvent or that it is able to pay its debts.

[30] Associate Judge Doogue commented in CIR v Volcanic Investments Ltd²the onus is on the defendant to provide a reasonable basis for the Court to ultimately conclude that it is solvent. Bland claims that the company is solvent will not suffice. It is advisable for a defendant to exhibit up to date or at least recent accounts substantiating the claim to solvency as well as paying the amount due to an acceptable stakeholder.³

[31] NZFE has produced through Mr Qian a bank statement dated 18 August 2014 showing a credit sum of just in excess of $100,000. That is not sufficient to prove that NZFE is not insolvent or is able to pay its debts. For example, the company may have other bank accounts that were in debit to the same or greater amount. Mr Grove sought to submit that the evidence of $100,000 taken with the volume of the trading of in excess of $1.6 million between NZFE and AFM, suggested solvency, but that trading says nothing about the current state of NZFE. It is clear that it was dealing with other parties. The one page bank statement as at 18 August and Mr Qian’s bare assertion of solvency are not sufficient in this case to overcome the presumption of insolvency.

[32] Having reached that stage, following the hearing on Tuesday, I indicated that was the Court’s general position and directed that if NZFE failed to pay the undisputed sum owing to AFM of $17,248.73 before the end of business yesterday then when the matter was called this morning at 10.00 am NZFE would be placed

²_{CIR v Volcanic Investments Ltd HC Auckland
CIV-2006-404-5253, 14 February 2007.}

³Concept Manufacturing Ltd v Concept Lighting Ltd HC Auckland M 896-IM00, 6 July 2000.

See also Gill Construction Ltd v Butler HC Wellington CIV-2009-406-203, 2 November 2009.

[33] Counsel have confirmed that the sum of $17,248.73 has been paid. In the circumstances the application to liquidate NZFE is dismissed.

[35] Counsel for AFM seeks costs on a 2B basis together with disbursements. With reference to LGH, counsel suggests that costs should lie where they fall.

[36] For NZFE Mr Grove submits that the costs awarded to AFM, if there are to be costs, should be reduced by 50 per cent to recognise that half of the work done was effectively done for LGH. However he submits that costs should really lie where they fall given the success NZFE had in opposing the application. As for LGH Mr Grove seeks costs against that company on a 2B basis, together with disbursements.

[37] I am satisfied it is appropriate that costs should follow the event in the case of AFM. It was entitled to bring the application to liquidate. NZFE failed to pay on the statutory demand. The Court rejected the suggestion that there was nothing owing or that NZFE’s suggested counterclaims exceeded the undisputed amount that NZFE owed AFM. NZFE was effectively granted an indulgence by the Court by the adjournment to enable payment of the ultimately undisputed amount owing, rather than placing it into liquidation following the hearing.

[38] In the circumstances AFM is to have costs against NZFE on a 2B basis together with disbursements. However, I acknowledge the point that Ms Golightly represented both AFM and LGH, so that the costs claimed for preparing written submissions, preparation of the bundle for the hearing, and appearance at the hearing, are to be reduced by 50 per cent in calculating those steps. There is to be however a full recovery and no deduction in relation to other costs and disbursements.

[40] In relation to LGH, while NZFE has succeeded in opposing LGH’s claim against it, on the evidence before the Court there are unpaid invoices owing by NZFE to LGH. The issue is whether the counterclaims claimed by NZFE, which the Court has found are arguable and cannot be determined on the evidence before it, ultimately will exceed those unpaid invoices or the sums claimed in those unpaid invoices.

[41] So while I accept NZFE has succeeded and is entitled to costs, I do not consider that the costs should be payable immediately.

[42] NZFE is to have costs against LGH on a 2B basis. Those costs, however, are to be payable following the outcome of any proceedings between LGH and NZFE regarding the amounts in dispute. In the event no proceedings are issued to resolve those matters I reserve leave for counsel to seek a direction from the Court as to the payment of those costs.

[43] Applying the same logic that I have applied to the reduction of costs for the preparation for the hearing and the attendance at the hearing the costs that NZFE is to have for those items are to be reduced by 50 per cent as half of the hearing

High Court of New Zealand Decisions

Aotearoa Forest Marketing Limited v New Zealand Forest Enterprise Limited [2014] NZHC 3194 (12 December 2014)