David Reid Homes Northland Limited v Stratful [2015] NZHC 1598 (7 July 2015)

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UNDER	the Companies Act 1993 s 290
IN THE MATTER OF	an application to set aside a statutory demand
BETWEEN	DAVID REID HOMES NORTHLAND LIMITED Applicant
AND	KEVIN STRATFUL First Respondent SECLUSION CHARTERS LTD Second Respondent KRS CONSULTING LTD Third Respondents

Hearing:	7 July 2015 at 2:15pm
Appearances:	C Murray for Applicant K Young for Respondents
_Judgment:	_{7 July 2015}

1993 to set aside a statutory demand dated 22 April 2015 for the sum of $9,200 said to owe under the provisions of an agreement dated 20 August 2014 for the sale and purchase of shares. The grounds for the application are that there is a substantial dispute as to the amount claimed, and that David Reid Homes Northland Ltd has a set-off counterclaim or cross-demand which exceeds the amount of the debt. On

8 June 2015 I directed that the time for complying with the notice be extended, pending further order of the court.

[2] The person making the demand is Mr Kevin Stratful. There are three respondents. The others are Seclusion Charters Ltd and KRS Consulting Ltd. Those are companies associated with Mr Stratful. They did not make the statutory demand. In applications under s 290 of the Companies Act, it is necessary to join as a respondent only the creditor who issued the statutory demand. It was unnecessary to join Seclusion Charters Ltd and KRS Consulting Ltd. I strike them off as respondents.

[3] In an application to set aside a statutory demand, the court is essentially concerned with whether it is just that the debt stated in the demand should be used to test the solvency of a company. Non-compliance with a demand under s 289 of the Companies Act gives rise to a presumption of insolvency which may be used in an application to put the company into liquidation. There are times when a company may have good reason not to pay certain alleged debts. Section 290 allows the court to set aside demands under s 289 in certain cases. One of those cases is when the debt is subject to a substantial dispute. Another is when the company asserts a set- off, counterclaim or cross-demand for a sum that exceeds the amount of the alleged debt. For applications to set aside on the ground that the debt is subject to a dispute, it is not sufficient for the company simply to say that it disputes the debt. It must show that there is good ground for the assertion. Real evidence must be adduced.

[4] The company applying to set aside the demand must show a clearly arguable case that it is not liable for the amount claimed. Once the court is satisfied that the company has a clearly arguable case that it is not liable, a setting-aside order may be

made. The dispute will be decided by ordinary proceedings in a civil court rather than by liquidation procedures in the company’s court. As for applications under s 290(4)(b), the test applied for set-off or counterclaim is that laid down by the Court of Appeal in Covington Railways Ltd v Uni-Accommodation Ltd: ¹

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 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, 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 and 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.

[5] Under both heads, the court does not resolve disputed questions of fact and is not required to make final findings unless satisfied there is not a genuine dispute as to liability.

[6] David Reid Homes Northland Ltd is the Bay of Islands franchisee for David Reid Homes. It carries on a construction business. Until August 2014 there were two men behind the company: Shane Murray and Kevin Stratful. They were both directors. Their family trusts each owned 50 per cent of the shares in the company. Apparently as a result of growing differences between the men, Mr Stratful exited from the company under an agreement for the sale and purchase of shares of

_{20 August 2014. The parties to the agreement are: the company, the
trustees of}

¹Covington Railways Ltd v Uni-Accommodation Ltd [2000] NZCA 230; [2001] 1 NZLR 272 (CA) at [11].

Mr Stratful’s family trust, Mr Stratful, the trustees of Mr Murray’s family trust, Mr Murray and Seclusion Charters Ltd, a company associated with Mr Stratful. The agreement provided for the trustees of the Stratful trust to sell their shares in the company to Mr Murray’s family trust at a price of $1.00 per share, with settlement on 1 September 2014. There were provisions for writing off a loan amounting to

$390,103.07 owed by the company to Seclusion, and for the company to transfer ownership of a computer, used by Mr Stratful, to him. There were other provisions typically found in an agreement for sale and purchase of shares in a privately-held company.

[7] The agreement also provides for Mr Stratful to work for the company after settlement. That is set out in cl 5 of the agreement. It records that the company is negotiating construction contracts described this way:

(a) Metlifecare Pavilion (Metlifecare); (b) Metlifecare Infrastructure (Stage 4); (c) Reid; and

[8] The clause also provided for the company to pay the Stratful family trust a sum equal to 1.5 per cent of each contract sum (exclusive of GST) if binding contracts were entered into on or before 30 September 2014.

For his assistance in relation to the Metlifecare contracts Kevin will receive a calendar monthly payment of $4,000 plus GST and use of a Company vehicle and mobile cell phone. After 1 December 2014 the Company shall have no responsibility for payment of any contract relating to Kevin or Stratful’s cell phone. This payment is made and payable when the Metlifecare monthly payment is paid and or when Cash flow allows.

Kevin agrees to assist Shane to run the Company’s business for a period of no less than four calendar months commencing 1st September 2014 and in particular focus on Metlifecare and the Blunt, Subritsky, Swan & Meads sales contracts.

[11] Clause 11 is an entire agreement clause. Clause 12 required the parties to do everything reasonably required to give effect to the agreement according to its spirit and intents.

[12] It is undisputed that settlement occurred on 1 September 2014. The Murray family trustees paid the Stratful family trustees for the shares. It is apparently common ground that the conditions for cl 5 to be triggered were satisfied. Mr Stratful worked for the company up until 5 November 2014 when David Reid Homes Northland Ltd cancelled the contract. Mr Stratful’s statutory demand is for payment for two months’ work in September and October 2014, claiming $4,000 per month plus GST.

[13] Missing from the case are any invoices by Mr Stratful requiring the company to pay. Also missing is any evidence of any letter of demand by Mr Stratful before he issued the statutory demand. There is also no evidence that Mr Stratful is registered for GST.

[14] I mentioned that on applications to set aside statutory demands it is not sufficient for the company to assert that liability is disputed. It must be backed up with evidence of substance. Much of the evidence for David Reid Homes Northland Ltd is unsubstantiated allegations. There are however, some elements which do amount to substantial evidence which I take note of. I do not address other aspects of the case because I regard them as not carrying enough persuasive weight to require consideration.

[15] There is one matter that is accepted on both sides. On 10 October 2014, Mr Stratful sent an email to the project manager for Metlifecare. The subject matter of the email is “Ongoing commitment to Metlifecare”. The email is timed at

I am delighted that we have agreed a way forward on my involvement with the ongoing development of Oakridge Villas in Kerikeri. As discussed, you have my full commitment during the changeover phase from David Reid Homes to Seclusion Homes.

There will not be any issues with the trade people or local suppliers, and I would expect a seamless changeover. An immediate upside for Metlifecare is that Seclusion Homes does not have a license fee, therefore that reduction will be reflected in the pricing of stages 4A and 4B and all ongoing villa builds. Also I will be able to give my full time commitment to the project.

_{Early next week I will send you the pricing for stage 4 infrastructure
and 4A}

Once again, thank you for an excellent meeting, and look forward to meeting you again later this month to finalise details.

[16] The email contains a reference to “Seclusion Homes”. That requires some explanation. That is not the company, Seclusion Charters Ltd. Mr Stratful did have another company called Seclusion Developments Ltd. The name of that company was changed to KRS Consulting Ltd during November 2014. Mr Murray apparently found out about that email on 28 October 2014.

[17] The relevance of the email is that while he was engaged by David Reid Homes Northland Ltd to secure construction contracts with Metlifecare - not only the Pavilion but also the Infrastructure contract described as Stage 4 – Mr Stratful approached and dealt with Metlifecare with a view to obtaining that contract for himself. After Mr Murray found out about that, there was a meeting on 5 November

2014 which resulted in David Reid Homes Northland Ltd cancelling the contract under cl 5(d) of the agreement for sale and purchase of shares.

[18] Mr Stratful acknowledges that he sent the email, but tries to downplay its significance. He suggests that when he made contact with Metlifecare, David Reid Homes Northland Ltd was not in fact interested in pursuing the stage 4 contract. Instead there were negotiations for the contract for the pavilion. He contends that

Metlifecare told him that stage 4 would be put out to tender. When he told Mr Murray about this, Mr Murray did not show any interest in the matter. He also alleges that Metlifecare had concerns that Mr Murray had taken over the company without consulting them as to how the changeover would be carried out and as to how the various projects would be managed. He claims that he was the one who had managed the other contracts for Metlifecare for the last six years, and that Metlifecare had inserted a clause that he was to remain project manager for the Pavilion contract until completion. He acknowledges however that he felt that what he had done was morally wrong, and he gave away his proposal to secure the Metlifecare contract for himself. He says that he did that on 13 October 2014. He also contends that his actions did not impact on the relationship between Metlifecare and David Reid Homes Northland Ltd. David Reid Homes Northland Ltd did complete the Pavilion contract and a related company, Kerikeri Infrastructure Ltd got the contract to build the Stage 4 Infrastructure.

[19] By this downplaying evidence, Mr Stratful wants to make light of what he did and to contend that it ought not to stand in the way of his being paid his work for the company in September and October 2014. In short, he says there can be no dispute as to his entitlement to be paid.

[20] I note, first, that the fact that David Reid Homes Northland Ltd cancelled his contract on 4 November 2014 does not make any difference to his entitlement to be paid. Case law under s 8 of the Contractual Remedies Act has made it clear that obligations that have already accrued before cancellation remain enforceable after cancellation. The question is whether Mr Stratful’s actions before the cancellation deprive him of his right to claim for remuneration.

[21] Under cl 5(d), he was employed as an independent contractor. That contract required him to work in the interests of David Reid Homes Northland Ltd with a view to bringing about a contractual relationship between that company and Metlifecare. He was an agent of the company. As its agent he had a duty not to try to gain for himself benefits he was employed to obtain for the company. In this

situation, his right to remuneration is under question. The Laws of New Zealand

An agent is not entitled to remuneration where he or she has been guilty of a wilful breach or misconduct in the course of the agency, but a trifling breach of duty will not disentitle the agent to remuneration. Substantial performance by an agent may be sufficient to earn remunerationeven if he or she breaches the terms of appointment.

[22] Authorities cited are Buchanan v Neale & McLeod³and McLennan v Wolfsohn.⁴David Reid Homes Northland Ltd has an arguable case that Mr Stratful’s conduct was a wilful breach or misconduct in the course of the agency. I do not say that it is more than arguable. Mr Stratful may have an argument that it was indeed

only a trifling breach because it did not occasion any harm to the company. The matter is not clear enough for me to make any finding one way or the other on that point. At this stage, it is only Mr Stratful’s say-so that the company did not suffer any detriment. That will need to be tested at a fuller hearing. The point remains that there are respectable arguments available to David Reid Homes Northland Ltd that Mr Stratful has lost his right to remuneration. That may be an important remedy because it might otherwise weaken the fiduciary duties that an agent owes his principal.

[23] On that ground alone, I find that Mr Stratful’s right to remuneration is subject

[24] A second matter relied on by David Reid Homes Northland Ltd is an allegation that Mr Stratful under-quoted in pricing for Metlifecare contract. The under-pricing extended to $35,000 or thereabouts. It is not clear to me at this stage whether that occurred before the sale of the shares in the company and Mr Stratful’s resignation as director or afterwards. If it occurred before, there may be a reasonable argument for Mr Stratful that he ought not to be held liable for that given that the

_{agreement for sale and purchase for shares was intended to resolve the
differences}

between the parties. There is, I suspect, something of a grudge aspect in Mr Murray airing arguments as to pricing. Nevertheless, there is enough to add to the disputability of the debt.

[25] A further matter is the absence of invoices. Mr Stratful’s remuneration was to be calculated on a GST plus basis. If Mr Stratful is to be paid on a plus GST basis, he needs to produce tax invoices under the GST legislation so that he is accountable for the GST, and also to enable David Reid Homes Northland Ltd to claim an input when making its GST returns. It is remarkable that there are no tax invoices in evidence. If I had found that there was no genuine dispute as to the debt, I would not have required David Reid Homes Northland Ltd to pay the debt until Mr Stratful had provided tax invoices and he had provided evidence to show that he was registered for GST purposes.

[26] In these circumstances, I am satisfied that under s 290(4)(a) of the Companies Act there is a substantial dispute as to the debt in the statutory demand. I set aside the statutory demand of 22 April 2014. David Reid Homes Northland Ltd is not required to comply with the demand. Its liability will have to be decided in another proceeding.

[27] David Reid Homes Northland Ltd will have costs on a category 1 band B basis. David Reid Homes Northland Ltd will not be able to recover the costs for the bundle of documents. I disallow those costs because although a bundle of documents was provided, it was badly put together and it was impossible to find any documents in it. That was shown by the difficulties that Ms Murray had in trying to use it during the hearing.

High Court of New Zealand Decisions

David Reid Homes Northland Limited v Stratful [2015] NZHC 1598 (7 July 2015)

High Court of New Zealand

David Reid Homes Northland Limited v Stratful [2015] NZHC 1598 (7 July 2015)