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High Court of New Zealand Decisions |
Last Updated: 21 December 2018
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IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE
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CIV-2018-485-225
[2018] NZHC 3307 |
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UNDER
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the Companies Act 1993
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BETWEEN
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BODY CORPORATE 172108
Plaintiff
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AND
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MANCHESTER SECURITIES LTD
Defendant
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Hearing:
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4 December 2018
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Appearances:
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J Orpin-Dowell and T Allan for plaintiff/respondent M Harris for
defendant/applicant
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Judgment:
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14 December 2018
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JUDGMENT OF ASSOCIATE JUDGE JOHNSTON
[1] The plaintiff, Body Corporate 172108, an entity with responsibility for a multi- unit property in Hobson Street in Auckland City, seeks an order winding up the defendant, Manchester Securities Ltd, one of the unit title holders. Before the Court is an interlocutory application by Manchester seeking an order staying the proceeding. Very broadly speaking, this application is based on two claims that Manchester says it has, each of which is said to exceed the amount of the claim against it. The application for a stay is made pursuant to art 8(1) of sch 1 to the Arbitration Act 1996 in relation to the first of these claims, which is the subject of arbitral proceedings between the parties, and r 31.11 of the High Court Rules 2016 in relation to both. That description of the matter, whilst accurate insofar as it goes, is an oversimplification, as will become clear.
BODY CORPORATE 172108 v MANCHESTER SECURITIES LTD [2018] NZHC 3307 [14 December 2018]
[2] The scheme of both the Unit Titles Act 1972 (under which the Body Corporate originally operated) and its replacement, the Unit Titles Act 2010, is such that levies chargeable by the Body Corporate to owners are imposed on what is colloquially referred to as a “pay now, argue later” basis. In other words, in the same way that most commercial leases entitle the landlord to demand the payment of rent irrespective of any claims that the tenant may have, the Body Corporate is entitled to require that unit title holders pay properly imposed levies without deduction on account of any claims that they may have.
[3] The factual background against which the full extent of this pay now, argue later obligation must be tested is not straightforward. The parties have already been involved in extensive litigation, including two proceedings, both of which have been played out in this Court and the Court of Appeal, and, as already mentioned, an arbitration. The most recent court proceedings involved an unsuccessful application for an order setting aside the Body Corporate’s statutory demand for overdue levies dated 1 June 2017 and an unsuccessful appeal to the Court of Appeal. To save reinventing the wheel, I replicate here the Court of Appeal’s description of the background:
Background
[2] It is necessary for us to trace briefly the history of this matter leading to a decision of Fogarty J in the High Court1 and the appeal from his decision to this Court,2 as those decisions are the basis of the major amount claimed in the statutory demand.
[3] The respondent, Body Corporate 172108, represents the owners of Hobson Apartments, a 12-storey unit title development in central Auckland. The building contains the usual common areas that are owned by the Body Corporate, including most of the exterior of the building. Unusually, that is not the position in relation to level 12. The level 12 exterior is owned by the appellant, Manchester Securities Ltd (Manchester). The Body Corporate’s ownership of the exterior stops short of that level. This feature is explained by level 12 being aesthetically and physically different from the rest of the building, and being constructed separately after the rest of the building had been completed.
[4] The only common property on level 12 comprises the lift and stairwell shafts, ducts and a small recessed area at the rear of the eastern side. Unit 12A occupies all the top level, and is the largest and most valuable unit in the
1 Body Corporate 172108 v Manchester Securities Ltd [2017] NZHC 329 [Fogarty J decision].
complex. The ownership interest or unit entitlement of unit 12A is fixed at
11.88 per cent.3
[5] Severe water ingress into the building was apparent by October 2009. The Body Corporate applied under s 48 of the Unit Titles Act 1972 for a remediation scheme empowering it to carry out repairs under a single building contract to the whole of the complex, including the units and the common property. Under s 48, when any building or improvement is damaged or destroyed, the court may settle a scheme for the reinstatement of the building. The court may make orders for the application of insurance money, for payment of money by or to the body corporate, and impose such terms and conditions as it thinks fit.4 Schemes under s 48 are often used to arrange reinstatement of unit title developments suffering from weathertightness defects.5 The Body Corporate wanted Manchester to meet its percentage of the costs of all the repairs to common property like any other unit owner, by contributing 11.88 per cent to the cost as per its ownership interest.
[6] This was opposed by Manchester. It wished to repair all of level 12 itself, and not to contribute to the cost of any other work. At the time it was thought that the leaks were principally emanating from the failure of the cladding at the levels below level 12. Manchester was prepared to manage its own repairs, and asked to be excluded from any repair solution involving a single contract to the whole building. Manchester and the Body Corporate could not agree therefore on the terms of the scheme. There was an impasse on the terms of the scheme and proceedings were filed in the High Court.
[7] The scheme was subject to multiple contested hearings, and four judgments were issued by Heath J between 3 March 2010 and 10 February 2011.6 The outcome of these judgments was that a scheme was approved involving a single contract for the repair of the building as a whole. Manchester would be able to appoint a joint project manager for the level 12 work. As regards the cost allocation, Heath J noted the unusual ownership structure and considered a fair solution would be to require Manchester to contribute to the repairs of the common property on levels 1–11 as well as paying for all of the level 12 work, but on the basis that its liability would be capped at 11.88 per cent of the total cost of repairs to the whole building. We will refer to some of the provisions of the scheme later in this judgment.
[8] In 2010 and 2011 before Heath J, the indicative figure for the repairs was a total estimated cost of approximately $6.25 million, being $5.75 million for the repairs to levels 1–11 and $500,000 for the repairs to level 12. Unfortunately after the terms of the scheme were decided there were lengthy delays, escalations and disputes between the parties. The repairs to levels 1–11 were completed on 12 December 2013 at a total cost of $8,131,002, a 41 per cent increase on the original estimate. The remediation costs of level 12 also proved to be far more expensive than expected. Indeed they are still not completed. As at 2016 the likely cost to repair level 12 was estimated at $2.6
4 Unit Titles Act 1972, s 48(5).
5 The corresponding provision of the Unit Titles Act 2010 is s 74.
million, a 430 per cent increase from the original estimate of $500,000. On that basis the final cost of repairs to the whole building was likely to approach something close to $10.7 million as compared with the original estimate of
$6.25 million. Because the work to level 12 is still not completed, it is impossible to know with any degree of certainty what the final total cost of repairs to the whole building will be.
[9] On 18 March 2013, when it had become clear the costs were far greater than anticipated when the scheme was approved, the Body Corporate applied for an order varying the scheme approved by Heath J, so as to avoid what it claimed would be an unjust outcome. Whatever the final figure, it was clear by that stage that the repairs to level 12 would exceed 11.88 per cent of the total cost of repairing the building. Because of the 11.88 per cent cap on Manchester’s liability, Manchester did not have to contribute anything to the repairs to common property on levels 1–11, and was also entitled to a payment from the Body Corporate for the repairs to level 12. Therefore, the owners other than Manchester were contributing far more than expected to the common property on levels 1–11, but would also be required to make a payment to Manchester in respect of the repair to the common property on level 12, which was also much greater than expected.
[10] After a defended hearing over five days, Fogarty J issued a decision granting the Body Corporate’s application to vary the scheme.7 Fogarty J agreed with the Body Corporate that the costs blow out had rendered the logic of the scheme unjust. It could not be right that Manchester should avoid making any contribution to the cost of remediating the common property other than level 12.8 He reinstated the unit titles statutory scheme and removed the cap of 11.88 per cent enjoyed by Manchester.9 That meant that Manchester was liable to contribute $513,247.60 plus GST to the repair of the common property on levels 1–11 and no less than $25,882.39 plus GST to the uncompleted repairs to the common property on level 12. The cost of the latter was estimated at $217,865.20.
[11] He allowed a credit of $191,982.81 for the costs Manchester would pay in the first instance for the repair to the common property on level 12 in addition to its own 11.88 per cent contribution ($217,865.20 less $25,882.39 is $191,982.81). This meant its net liability figure in respect of the common property at all levels was $321,264.79 ($513,247.60 less $191,982.81 is
$321,264.79). In the nature of things, the repairs to level 12 were unlikely to be lower than the estimate and accordingly $321,264.79 plus GST was the minimum cost.10
[12] Fogarty J determined that Manchester should make an interim payment of that sum immediately.11 The Judge therefore formally ordered Manchester to pay to the Body Corporate $321,264.79 plus GST as a provisional sum. That sum was to be adjusted upon completion of remediation of the common property on level 12 to the extent that the estimate of
$217,865.20 varied.12
7 Fogarty J decision, above n 1.
8 At [67].
9 At [156]–[157].
10 At [153].
11 At [155].
12 At [157].
[13] Manchester appealed Fogarty J’s decision to this Court. It raised a number of grounds of appeal, including a submission that an order for a cash payment had never been sought by the Body Corporate in the High Court. In a decision issued on 17 November 2017, the appeal was dismissed and the result and reasoning of Fogarty J were upheld.13 This Court, like Fogarty J took a negative view of Manchester’s actions, finding its conduct to be dilatory and prevaricating.14
[14] The Body Corporate served two statutory demands on Manchester. This appeal only concerns the first of those statutory demands, served on 1 June 2017. That demand claimed two amounts. First it claimed $226,679 for ordinary Body Corporate levies as at 31 May 2017 together with interest accruing at 10 per cent. The levies ran from 1 April 2012 to 31 March 2017. The second amount was in respect of the judgment of Fogarty J, a copy of the sealed judgment being attached to the statutory demand. The amount claimed was $369,454.51, being the amount of $321,264.79 plus GST. The demand also claimed interest on that sum of $4,301.87 as at 31 May 2017. From those sums it was stated that $50,208.40 was to be deducted as already paid on account by Manchester towards the cost of repairs to common property on 21 March 2013. Thus the total claimed was $550,226.98.
[15] Manchester applied to set aside the statutory demand. That application was heard by Associate Judge Doogue, together with an application to set aside the second statutory demand, which concerned Fogarty J’s costs order in the variation proceedings.15 Manchester argued that it is owed significant sums by the Body Corporate in respect of costs incurred in the repair of level 12 for the benefit of all unit owners, and that these sums should be set off against the amounts claimed in the first statutory demand. Under the scheme settled by Heath J, the dispute as to these sums must be referred to arbitration, and the Body Corporate’s use of the statutory demand process was therefore inappropriate.
[16] The application to set aside the first statutory demand was declined, and that is the decision that is the subject of this appeal.16 The Associate Judge upheld the application in respect of the second statutory demand and that decision has not been challenged before us.
[4] The Court of Appeal’s judgment was issued in June 2018. The Body Corporate’s statutory demand continued to go unanswered. The Body Corporate then commenced this winding up proceeding.
[5] Around the same time Manchester initiated an arbitration directed at quantifying the first of the claims it says should be netted off against any levies payable by it. The evidence is that the arbitrator, Mr Brian Keene QC, has already heard a preliminary jurisdictional argument. His award is available on payment by the parties
13 Court of Appeal decision, above n 2, at [70]–[71].
14 At [44].
15 Body Corporate 172108 v Manchester Securities Ltd [2017] NZHC 1252.
16 Manchester Securities Ltd v Body Corporate 172108 [2018] NZHC 169 [Decision under appeal].
of his fees. Manchester has paid its half share of these, but the Body Corporate has not. So the outcome of the jurisdictional dispute is unknown.
[6] One of the arguments advanced on Manchester’s behalf by Mr Harris is that, as the first of Manchester’s claims is currently the subject of arbitration, the Court should stay this proceeding pursuant to art 8(1) of sch 1 to the Arbitration Act 1996. In relation to this, Mr Harris referred me to the English Court of Appeal’s judgment in Salford Estates (No 2) Ltd v Altomart Ltd, where that Court observed that, whilst the Arbitration Act 1996 (UK) has no application to winding up proceedings, one of its purposes being to encourage the use of arbitration, the Court’s general jurisdiction to stay proceedings ought to be exercised so as to discourage attempts to circumvent submissions to arbitration by winding up proceedings.17
[7] Mr Harris suggested that similar considerations apply in New Zealand. Broadly, I agree. But there are difficulties with this submission in the present context.
[8] First, the levies rendered by the Body Corporate are payable by Manchester on a pay now, argue later basis. Accordingly, the Body Corporate is entitled to proceed against Manchester by way of winding up proceedings. Second, this application is made against the background of the earlier litigation in which both this Court and the Court of Appeal have ordered Manchester to pay the levies. Third, in any event, the submission to arbitration pursuant to which Manchester has initiated arbitral proceedings expressly provides that levies rendered are payable notwithstanding the reference of any dispute to arbitration. For those reasons, my view is that the broad principles that were the focus of the English Court of Appeal’s judgment in Salford do not have any obvious application to this case.
[9] The more general argument advanced by Mr Harris, based on r 31.11 of the High Court Rules, which applies to both of Manchester’s claims, is that, notwithstanding the refusal of both the High Court and the Court of Appeal to set aside the Body Corporate’s statutory demand in view of the pay now, argue later character of the debt on which it is based, this Court should now stay the Body Corporate’s winding up proceeding.
17 Salford Estates (No 2) Ltd v Altomart Ltd [2014] EWCA Civ 1575.
[10] Essentially, the argument is that the making of a winding up order would be futile because, under s 310 of the Companies Act 1993, once a winding up order is made, and a liquidator appointed, one of the tasks of the liquidator will be to ascertain the net position as between the Body Corporate and Manchester. In other words, the liquidator will not be interested in considering the Body Corporate’s claim in isolation. He or she will only be interested in ascertaining that claim having regard to Manchester’s claim against the Body Corporate.
[11] This is a bold application. Both the High Court and the Court of Appeal, first in the original proceeding, and then in refusing to set aside the Body Corporate’s statutory demand in the second proceeding, signalled that, whilst Manchester’s claims may be matters that can and should be brought to account at the appropriate stage, Manchester was required to make payment immediately, leaving those issues to be addressed later. The Court of Appeal also made clear that it was entirely appropriate for the Body Corporate to use the statutory demand procedure (which can culminate in an application for a winding up order) to enforce those payments by Manchester.
[12] Mr Harris is correct that the existence of the set-offs claimed by Manchester would be considered at the substantive hearing of the Body Corporate’s application for a winding up order (along with other matters such as the company’s financial position at the time, for example). The existence of those claims is, however, a matter for consideration at that substantive hearing, rather than at this preliminary stage.
[13] Despite the indications from the Court of Appeal, Manchester makes this interlocutory application for a stay, which effectively challenges the legitimacy of the Body Corporate utilising the statutory demand procedure, and, in doing so, develops essentially the same argument as it did in the earlier litigation.
[14] It is not difficult to see why Manchester does not wish to leave testing this argument until the substantive hearing of the Body Corporate’s application for a winding up order. By that stage, it would be playing for very high stakes indeed. If it were not to prevail, then, subject to appeal, Manchester would be wound up. Nevertheless, it seems to me that the issues argued twice in this Court and the Court of Appeal already are essentially the same as those developed before me in support of
Manchester’s application for a stay, which is why I have characterised the application as bold.
[15] Conscious of the care with which Mr Harris developed the argument on behalf of Manchester, I have considered whether it might be said that different considerations apply to this application for a stay than applied to the company’s application to set aside the Body Corporate’s statutory demand.
[16] I can of course see the argument that if the Body Corporate’s application cannot succeed then the proceeding should be stayed so that Manchester does not have to face the risk of being wound up. But the difficulty with that argument is that it is not the role of the Court to relieve Manchester of that risk. As Mr Chisholm put it for the Body Corporate, Manchester either can pay the debt and is simply refusing to do so, in which case it cannot be heard to complain about legitimate debt collection procedures being brought against it, or it cannot pay, in which case the Body Corporate is prima facie entitled to a winding up order.
[17] The law is clear that the considerations on an application for a stay of winding up proceedings are different from those on the hearing of the application itself. The Court will only issue a stay where the continuation of a winding up proceeding can be demonstrated to be an abuse of process.18 The existence of an arguable set-off where the debt that is the subject of the statutory demand is indisputably owing has generally not been regarded as sufficient for that purpose.19 A fortiori, I would add, where the proceeding is founded on a statutory demand itself based on an unchallenged debt of a pay now, argue later nature. This is consistent with Court of Appeal authorities that have emphasised the practical nature of the statutory demand process as a method of enforcing debts that are owed on a pay now, argue later basis.20 I see no reason to distinguish between the principles applicable to setting aside a statutory demand and those applicable to staying an application for a winding up order.
18 Nemesis Holdings Ltd v North Harbour Industrial Holdings Ltd (1989) 1 PRNZ 379 (HC) at 385.
19 Anglican Sales Ltd v South Pacific Manufacturing Co Ltd [1984] 2 NZLR 249 (CA) at 251–252.
20 Laywood v Holmes Construction Wellington Ltd [2009] NZCA 35, [2009] 2 NZLR 243 at [61]– [64]; and Browns Real Estate Ltd v Grand Lakes Properties Ltd [2010] NZCA 425, (2010) 20 PRNZ 141 at [16].
[18] I am far from persuaded that in that sense there is anything abusive about the Body Corporate’s winding up proceeding. The Body Corporate was entitled to charge levies. Those levies were calculated on a basis sanctioned by the Court. There is no dispute about the arithmetic involved. The pay now, argue later basis for the debt is statue-based. Its purpose is clear. A body corporate needs to have a mechanism for ensuring that individual unit title owners pay levies on time so that it can perform its functions for the benefit of all unit title holders. The High Court and the Court of Appeal have told Manchester that it must pay the levies. Twice. In each case, Manchester has contended that it is entitled to complete the works it is carrying out and then advance its claims with a view to establishing a net position. It has done so unsuccessfully in four separate hearings. Without intending to be overly critical, if there is an abuse of process in this case it does not appear to me to be one that is attributable to the plaintiff.
[19] In my judgement, this application cannot succeed and it is dismissed.
[20] I did not hear counsel in relation to costs. I reserve them. This is not a case in which I have any preliminary view in relation to costs. If counsel are unable to agree then they may file memoranda in due course and I will deal with costs on the papers.
Associate Judge Johnston
Solicitors:
Gilbert Walker, Auckland for the defendant/applicant
Grove Darlow & Partners, Auckland for the plaintiff/respondent
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