DNS Forest Products 2009 Limited v Logic Forest Solutions Limited [2018] NZHC 1214 (28 May 2018)

Last Updated: 1 June 2018

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-Ā-TARA ROHE

CIV-2018-485-135 [2018] NZHC 1214

UNDER	the Companies Act 1993
IN THE MATTER	of an application to set aside a statutory demand
BETWEEN	DNS FOREST PRODUCTS 2009 LIMITED Applicant
AND	LOGIC FOREST SOLUTIONS LIMITED Respondent

Hearing:	16 May 2018
Appearances:	R J B Fowler QC for Applicant D T Broadmore for Respondent
Judgment:	28 May 2018

JUDGMENT OF ASSOCIATE JUDGE JOHNSTON

Issue for determination

[1] Logic Forest Solutions Ltd served a statutory demand dated 1 February 2018 on DNS Forest Products 2009 Ltd on 5 February, demanding that it pay three invoices totalling $287,701.79 or face the prospect of being wound up. By originating application dated 20 February DNS applies to set the demand aside. It says that it has a claim against Logic for more than the amount of those invoices.

[2] The issue is whether DNS’ claim is strong enough to justify setting aside Logic’s statutory demand.

DNS FOREST PRODUCTS 2009 LIMITED v LOGIC FOREST SOLUTIONS LIMITED [2018] NZHC 1214 [28 May 2018]

Some essential background

[3] DNS manages forests. In some of the contractual documentation before the Court, it is described as the owner of the Makiri Forest near Gisborne. It is not. It manages that forest for the owner or owners.

[4] On 31 January 2017 Logic and DNS entered into a Harvest Management and Graded Sale Timber Agreement. Under this DNS engaged Logic to carry out some of its responsibilities associated with managing the forest. So for example, although DNS had already engaged the company which was to do the logging, A & R Logging Ltd, Logic was to be responsible for supervising aspects of A & R’s work.

[5] The underlying commercial purpose of the Harvest Management Agreement was to enable DNS to discharge its responsibilities connected with the supply of logs to a Chinese customer. It turns out that DNS does not have a direct contractual arrangement with the customer. It was to supply logs to a related company, DNS Forest Products Ltd, which had contracted to sell logs to the customer.

[6] In early December 2017, it became clear to DNS that it was not going to get sufficient logs — or sufficient logs of the right sort — from the Makiri Forest to enable DNS Forest Products to discharge its obligations to the Chinese customer.

[7] DNS asked Logic if it could help. On 12 December 2017 the parties entered into a second contract. This was recorded in an exchange of emails. DNS engaged Logic to supply, from sources other than the Makiri Forest, “... up to 2,500 JAS prior to Friday 22 [December 2017]”. During the course of the hearing I learned that “JAS” is a measurement of quantity. The precise quantity of logs to be supplied to DNS by Logic under the 12 December 2017 Agreement is not important. But my understanding is that 2,500 JAS is quite a lot of timber. As to quality, this was to be governed by the same quality requirements as A & R were working to in the Makiri Forest. I will need to return to this.

[8] Pursuant to the 12 December 2017 Agreement Logic supplied DNS with logs. Whether it supplied 2,500 JAS or not is not clear. But nothing turns on this.
[9] Logic rendered three invoices for the supply of these logs, all dated 31 December 2017. As already said, these totalled $287,701.79. Logic says that these fell due for payment on 20 January 2018. DNS did not pay them. Surprisingly, the evidence contains no correspondence between the parties prior to Logic serving its statutory demand. Perhaps less surprisingly, nor does it contain any such correspondence after that.

[10] Through its director, Mr Danning Sun, in his first affidavit in support of DNS’ originating application, DNS says, seemingly for the first time, that it has claims against Logic for breaches of both the Harvest Management Agreement and the 12 December 2017 Agreement.

[11] With respect to the former, there is a general assertion that Logic breached both the Harvest Management Agreement and the 12 December 2017 Agreement, and Mr Sun says that DNS’ losses were “... in excess of $1,000,000”.

[12] On that basis DNS says that Logic’s claim against it reflected in the statutory demand is entirely subsumed by its claim against Logic, and the Court should set aside Logic’s demand.

The legal framework

[13] Under pt 16 of the Companies Act 1993 the Court may make an order winding up a company where it is satisfied that the company is insolvent, or unable to meet its financial obligations as they fall due.

[14] One of the mechanisms by which insolvency is established is by service of a statutory demand. Section 287(a) provides that if someone claiming to be owed
$1,000¹ or more by a company serves a demand in the form provided for,² and the
company does not pay the amount involved, the company will be deemed to be insolvent. Once the company is deemed to be insolvent the creditor may ask the Court to make an order appointing a liquidator (or liquidators) to wind it up.³

¹ Companies Act 1993 Liquidation Regulations 1994, Reg 5.

² Companies Act 1993, s 284.

³ Section 241.

[15] The scope for that process to operate oppressively on the company and those associated with it is obvious. So, s 290(4) provides that the company may apply to set a statutory demand aside and that:

The court may grant an application to set aside and the Court may grant that application 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 [$1,000]; or

(c) the demand ought to be set aside on other grounds.

[16] In this case, (a) and (c) fade into the background, and the issue resolves itself into whether DNS has a “... counterclaim, set-off, or cross-demand...” against Logic which would justify the Court in setting aside Logic’s demand.

[17] There is a bewildering number of cases which provide guidance as to the proper interpretation of s 290(4)(b), some of which were referred to in argument. One of the problems is that courts have attempted to describe just how strong a case an applicant must have in order to justify the setting aside of a demand by using general descriptive terms such as “an arguable case” and the like. I do not propose to contribute to this. Having reviewed the cases to which Mr Fowler and Mr Broadmore referred me, and others, I am satisfied that the position is correctly summarised by the authors of Brookers’ Insolvency Law and Practice in the following terms: ⁴

An applicant must establish that any counterclaim or cross demand is reasonably arguable in all the circumstances. The obligation is not to prove the actual claim. Such an obligation would amount to the dispute itself being tried on the application.

[18] So, I must focus on whether DNS has, on the affidavit evidence before me, a reasonably arguable claim for more than Logic is claiming against it, such that Logic’s demand should be set aside and the contest between the parties should be dealt with in conventional litigation.

4. Stephen Revill (ed) and Robyn Merrett (ed) Brookers’ Insolvency Law and Practice (loose-leaf ed, Brookers) at [CA 290.02(1)].

The affidavit evidence

[19] DNS’s originating application dated 20 February 2018 was filed with an affidavit sworn by a Mr Jordan Todd who is apparently a law clerk employed by DNS’ solicitors. Mr Todd deposed that for various reasons DNS’ shareholder and director, Mr Sun, could not swear an affidavit which had been prepared by or for him in time to be filed and served with the application. Mr Todd exhibited to his affidavit a copy of Mr Sun’s draft affidavit. I need say nothing more about Mr Todd’s evidence.

[20] Mr Sun swore his first affidavit on 21 February 2018 and it was filed and served shortly thereafter. I have already referred to this evidence. Mr Sun’s affidavit is brief. It is only one page long. Mr Sun confirms that he is the director of DNS. He confirms receipt of Logic’s statutory demand. He refers first to the Harvest Management Agreement. He says that Logic “... has not carried out its obligations under the Agreement. As a result, [DNS] has suffered substantial losses”. He then refers to the 12 December 2017 Agreement. He says that the logs supplied to DNS by Logic under that agreement were “... not up to the quality represented by [Logic]. [DNS] has suffered losses as a result”. Then he asserts that there is “... a substantial dispute as to whether or not the debt specified in the Demand is owing or due”. He adds that DNS had suffered loss “... in excess of $1m.” He concludes by saying that DNS “... has a set off claim and the amount specified in the Demand less the amount of the set off claim is less than the prescribed amount”.

[21] If matters had rested there, this would not be a difficult application with which to deal.

[22] However, in its notice of opposition dated 2 March 2018, Logic engages with DNS’ assertion that it has a claim or claims against it, and, in his first affidavit sworn in support, one of Logic’s directors, a Mr Richard Smith, goes into some detail in denying the legitimacy of the claim asserted by DNS.

[23] This paved the way for Mr Sun to swear a second affidavit dated 11 May 2018. In it, for the first time, the basis for aspects of DNS’ claim is articulated.
[24] I need to record that, on behalf of Logic, Mr Broadmore submitted that Mr Sun’s second affidavit should not be read. As he said, DNS filed and served this affidavit late, and should have sought leave to do so. He also said that it went beyond a response to new matters raised in Mr Smith’s affidavit. Mr Fowler for DNS accepted those criticisms, but submitted that, if Logic was prejudiced, then that was not a reason for preventing DNS from having the opportunity fully to put its case to the Court, but rather a basis for an adjournment of the hearing of the application so as to enable Logic to respond. He also made the point said that Mr Smith had filed a second affidavit in response so that there was no prejudice. I agree.

[25] I allowed Mr Sun’s second affidavit to be read.

[26] As already said, the dipositive issue is whether DNS can establish a reasonably arguable claim.

[27] Earlier, I referred to DNS’ claim as being principally under the 12 December 2017 contract. And so it is.

[28] In his second affidavit Mr Sun says that the logs supplied to DNS by Logic under the 12 December 2017 Agreement “... did not meet the specifications required under the Agreement ... governing the sale of the respondent’s logs to the applicant”.

[29] He describes DNS’ alleged losses in these terms:

(8) As a result of the failure by the Respondent to meet its obligations and duties under the Log Sale Agreement ... the applicant has suffered losses, namely RMB $1,550,000 (NZD$347,000) for claims by the Buyer that the Respondent’s Logs and logs harvested from the Makiri Forest did not comply with the required specifications. A letter the Applicant received from DNS Forest Products Limited (“DNSFP”) outlining these claims annexed and marked “B”.

(9) The Applicant has also suffered reputational damage to its business. The Buyer has always accepted deliveries derived from the Applicant, and the parties have until now had a good commercial relationship, under which there have been a number of consignments. This is acknowledged by the Buyer in its letter of complaint to DNSFP annexed and marked “B2”.
[30] As to the claim under the Harvest Management Agreement, Mr Sun’s evidence is that:

1. Prices were increased and various targets were set with the recommendation of the Respondent. However, the Respondent did not manage A & R to achieve those targets; and

2. Two crews were promised by A & R to carry out the harvesting and at the Respondent’s suggestion. It has transpired that most of the crew were working on neighbouring contract (“the Neighbouring Job”), which the Respondent knew. The Respondent took no steps to rectify this: and

100. The Applicant relied on the budget of $1.17M provided by the Respondent for the 12 kilometres of new roading. A & R has charged

$0.6M for approximately 2.5km at a grossly over-inflated rate. The Respondent did not take any steps to manage or control this; and

4. The Applicant has discovered that A & R charged for the same worker operating 2 different machines at the same time. A & R also charged for working 18 hours per day during the winter months, which was impossible. Proper supervision and management by the Respondent would have prevented this; and

5. A & R ordered gravel for roading when there were already piles of excess gravel on site. Proper supervision and management by the Respondent would have prevented this; and

6. New equipment was being used by A & R on the Neighbouring Job while it was supposed to be used on the harvesting in the Makiri Forest. Proper supervision and management by the Respondent would have enabled the availability of that new equipment for work in the Makiri Forest; and

7. The applicant paid for the transportation costs of another swing yarder (heavy duty forestry equipment) (“The Swing Yarder”) to the Makiri Forest so that it could be put to use earlier to speed up production. The Swing Yarder was only used by A & R for a few days and then shifted to the Neighbouring Job; and

8. The roading work ceased as the crews were working on the Neighbouring Job. Again, the Respondent could have prevented that from occurring; and

1. The Respondent was aware that A & R was pulling its crew out of the Makiri Forest, yet the Respondent did not notify the Applicant of this until a few days before a ship was due to arrive to load the logs; and

10. The Respondent did not manage and supervise the grading and specifications of the logs, resulting in a higher value grade being put into lower grades and causing the Applicant a lower than maximum return on the logs; and
11. The Respondent failed to properly co-ordinate with the cartage contactor for the transportation of the logs; and

50. The Respondent assured the Applicant that A & R would tidy up and ensure that all felled logs would be removed and that the Makiri Forest would not be left in a mess. However, many logs have been felled and left lying around by A & R. It has since been discovered that rotten logs sitting in the Makiri Forest must have been logged some weeks prior to the Swing Yarder being moved for use on the Neighbouring Job for them to be rotting at this rate.

[31] Mr Sun says that DNS has suffered the following losses:

1. $93,543.46, comprising the incorrect grade sorting loss of $13,051.72 and an out of spec penalty of $80,491.74; and

2. $271,136.65 for the loss of logs that were felled but not recovered by A & R; and

100. $391,043.65 representing the costs of salvaging 7.6ha of felled trees on the ground not harvested and processed by A & R; and

4. $2,384,359.29 as at the end of March 2018, for A & R’s failure to harvest an average of 300 tons per working day; and

5. $6,305.00 for increased trucking costs, caused by the Respondent’s failure to diligently carry out its obligations to ensure log production was consistent and efficiently coordinate the cartage of the logs; and

6. $74,833.26 for the failure to reach the minimum required harvest in accordance with Schedule 1A of the Harvest Agreement between the Applicant and A & R. A copy of the Harvest Agreement is annexed and marked “C”; and

7. $1,673,481.56 in loss caused by the failure to complete the contract; and

8. $327,153.15 for A & R’s failure to perform the Roading Agreement, which the Respondent should have properly managed and supervised; and

1. $80,000.00 for the cost the applicant had to bear in re-establishing earthworks machines, one hauler crew and one swing yarder crew in the Makiri Forest.

[32] There are some features of Mr Sun’s evidence which provide a convenient starting point for considering whether or not DNS has a reasonably arguable claim — or reasonably arguable claims.

[33] First, inferentially, DNS is inviting the Court to ignore the structure of the transactions involved in the sale of these logs to the Chinese customer. As already
noted, DNS does not have any contractual arrangement with the buyer. DNS obviously has an arrangement to supply DNS Forest Products, and it is DNS Forest Products which has contracted to supply the buyer. There is no evidence from DNS Forest Products. Nor is there any evidence of the nature of the arrangements between DNS and DNS Forest Products. Those arrangements may for example include an exclusion of liability which might preclude DNS Forest Products from recovering losses against DNS so that DNS has suffered no loss which it can claim against Logic.

[34] Second, there is no evidence of DNS (or DNS Forest Services) having raised any objection as to the quality of the logs supplied under either agreement until after Logic served its statutory demand. In relation to this Logic emphasises that, prior to the logs leaving the country for China, DNS had various opportunities to inspect them, and question whether reconciliations which asserted the logs supplied were in accordance with the contractual requirements. In his submissions for Logic, Mr Broadmore contended that DNS’ failure to raise any issue at any of these points was capable of creating an estoppel precluding it from asserting now that the logs were sub-standard. I do not accept that argument. However unwise it may be, a purchaser is entitled to forgo an opportunity to inspect goods supplied to it. In the absence of an express contractual provision to this effect, such a decision on the buyer’s part is not a waiver and does not absolve the seller from complying with its obligations. Nevertheless, the point remains that DNS only raised its allegations in response to Logic’s statutory demand.

[35] Third, the only evidence suggesting that the logs supplied to DNS under either agreement were not compliant with the relevant quality requirements is hearsay. Before the Court is an undated document in a Chinese dialect, apparently interpreted by an unknown interpreter, said to be a complaint made by the Chinese buyer to DNS Forest Products, which is not a party to this proceeding. DNS Forest Products has passed this complaint on to DNS and DNS now says to the Court, through Mr Sun, that it has some liability which it is entitled to pass on to Logic.

[36] Against that background, the evidence supporting the allegation of a breach by Logic of its obligations to DNS under the 12 December 2017 Agreement is, at very least, weak.
[37] The two assertions made by DNS are that logs supplied to it by Logic were short and of poor quality.

[38] In support of the allegations Mr Sun attaches to his second affidavit what he says are photographs of some of the logs, apparently on the wharf or elsewhere in China, which are intended to illustrate that at least one log measures 3.8m as against a specification of 3.9m and that some logs had what look, from the photographs, like fairly gnarly knotted areas in them.

[39] In his second affidavit Mr Smith points out that the specifications in fact provide for two lengths, a cut length of 3.9m and a finished length of 3.8m. Self evidently, by the time logs found their way to China, they would have been finished, so that the requirement was not that they be 3.9m but that they be 3.8m in length.

[40] Mr Smith also points out that in one of these photographs it is possible to identify the number allocated to one log. He has arranged for that number to be traced and is able to say that the log in question did not come from any of the forests from which Logic sourced the logs for the 12 December 2017 Agreement. For DNS, Mr Fowler was unfazed by this evidence that the only identifiable log was not one supplied to DNS by Logic under the 12 December 2017 Agreement. His submission was that if that is correct then it simply means that instead of that log being the subject of a claim by DNS under the 12 December 2017 Agreement, it would fall within DNS’ claim under the Harvest Management Agreement because it would mean that Logic had not discharged its supervisory responsibility to ensure that A & R supplied logs which met the quality requirement.

[41] Nevertheless, those points further undermine the veracity of DNS’ evidence to the point where I find myself unable to place any serious reliance on it as a basis for the alleged breach of the 12 December 2017 Agreement.

[42] That leads neatly into Mr Sun’s allegations of breach of the Harvest Management Agreement recorded above. These are, so far as I can see, completely unsupported by any contemporaneous documentary material, such as correspondence between the parties, or any other corroborative evidence. It is inconceivable that if
DNS was experiencing the myriad of difficulties it says it was experiencing with Logic’s performance of its responsibilities under the Harvest Management Agreement, that there would be no correspondence between the parties concerning them.

[43] The view I take of Mr Sun’s allegations in relation to breaches of the Harvest Management Agreement is that they are mere assertions which fall well short of establishing a reasonably arguable case.

[44] In short on the evidence before the Court I am unpersuaded that DNS has a reasonably arguable claim against Logic on any basis.

DNS’ financial position

[45] Even if I were to conclude that DNS had a reasonably arguable claim against Logic on one or more of the two bases described above, I would still be left with a further issue in relation to DNS’ solvency.

[46] In his first affidavit, Mr Smith exhibited an affidavit sworn by Mr Sun in earlier proceedings bought by A & R against DNS in which Mr Sun said, in response to an assertion by A & R that DNS had an interest in the Makiri Forest:

11. At paragraph 51 of Arana [check] Kuru’s affidavit, he says “interest” in the forest is the first respondents only asset. This is not correct. The first respondent has no interest in the forest, nor is it its asset. The first respondent has no other assets apart from a bank account, which contents vary between $10,000 and $40,000.

[47] If indeed DNS’ total assets (excluding the claims it asserts in support of this application) are limited to cash of between $10,000 and $40,000, and given that Logic’s invoices total over a quarter of a million dollars, then, on any view, DNS is insolvent.

[48] Although I do not need to address this point in any detail, that appears to me to be an additional ground for refusing to set aside Logic’s demand.

Conclusion

[49] For those reasons, I dismiss DNS’ application to set aside Logic’s demand.

Costs

[50] My preliminary view is that Logic is entitled to costs on a 2B basis in relation to this application, but that conclusion is reached without the benefit of hearing from the parties. If counsel are unable to agree on how costs should be dealt with — as I would expect them to do — then they may file memoranda and I will deal with costs on the papers.



Associate Judge Johnston

Solicitors:

Paul Cheng & Co, Wellington for applicant Buddle Findlay, Auckland for respondent