IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE	
CIV-2019-404-2697
[2020] NZHC 2406	

UNDER	The Companies Act 1993, Section 290	
BETWEEN	FCL 178 LIMITED

Applicant	
AND	INGRAM ARCHITECTURE LIMITED

Respondent	

Hearing:	24 August 2020	
Counsel:	P F Dalkie for applicant
J R Duckworth for respondent	
Judgment:	16 September 2020	

JUDGMENT OF KATZ J

This judgment was delivered by me on 16 September 2020 at 4:00 pm Pursuant to Rule 11.5 High Court Rules

Registrar/Deputy Registrar

Solicitors:	Foley & Hughes, Auckland
Jennifer G Connell & Associates, Auckland

Counsel:	P F Dalkie, Barrister, Auckland
J R Duckworth, Auckland

FCL 178 LTD v INGRAM ARCHITECTURE LTD [2020] NZHC 2406 [16 September 2020]

Introduction

[1]	FCL 178 Ltd applies to set aside a statutory demand for $27,720.20 served on it by Ingram Architecture Ltd.

[2]	FCL carries on business as a property developer. Ingram was employed by FCL to provide architectural services in relation to a 12 unit project in Te Atatū, Auckland. It is common ground that FCL has not paid Ingram for various work it undertook on the project.

[3]	FCL’s application is made pursuant to s 290(4)(b) of the Companies Act 1993, which provides that a statutory demand may be set aside if the company served with the demand 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 of $1,000. FCL asserts that it has a counterclaim for at least $78,331.30, excluding GST, which would significantly exceed the quantum of Ingram’s claim. Ingram’s view is that FCL’s counterclaim is not genuine and is simply raised as a ruse by FCL to avoid payment of its debt.

Facts

[4]	The original architectural plans for the Te Atatū development were prepared by a third party and were approved by Auckland Council. The original plans, however, were incomplete. On 22 July 2019, Ingram was hired to undertake a review of the existing plans and to expand on the detailing and coordination where necessary. Ingram were to continue to perform this role over the course of the construction as new issues arose, issuing invoices monthly according to a specified hourly rate. Ingram issued invoices accordingly, but none of them were paid. Ingram’s statutory demand of    $27,720.20 represents the total of   its invoices dated 31 July 2019,     31 August 2019, and 30 September 2019, respectively.

[5]	On 18 October 2019, the directors of Ingram and Mr Cook, a representative of FCL, met at Ingram’s office to discuss the unpaid invoices. Ingram’s evidence is that FCL agreed at that meeting to pay the three invoices on 21 October 2019. Mr Cook, on the other hand, says that any agreement to pay was subject to approval by FCL’s

director and he gave no timetable for that. In any event, FCL failed to pay the outstanding invoices, and Ingram stopped work. Ingram says that no issues with its work were raised at, or prior to, the 18 October 2019 meeting. That assertion is supported by the contemporaneous documents.

[6]	On 22 November 2019, Ingram served a statutory demand on FCL for its unpaid invoices. FCL subsequently filed an originating application under s 290 of the Companies Act 1993 to set aside the statutory demand.

[7]	Meanwhile, on 31 October 2019, FCL appointed new project managers. On 20 November 2019, there was a site investigation, which, FCL alleges, revealed serious defects in the work done according to Ingram’s amended plans. In particular, FCL alleges that the planned building did not meet fire safety standards.

[8]	On 27 November 2019, engineers engaged by the new project managers inspected the site. They issued a report on 5 December 2019. That report alleges several failings on the part of Ingram. For example, it is said that Ingram’s drawings lacked a rigid air barrier board on the outer walls and fire lining on all the required walls. As a result, it is alleged, their plans were noncompliant with the relevant fire codes. FCL alleges that Ingram focused exclusively on the exterior firewalls and did not consider the internal firewalls. The costs of bringing the building up to fire code standard form the basis of FCL’s proposed counterclaim.

[9]	FCL also suggests that the acoustics of the interior units are flawed, although this alleged defect, and its significance, was not addressed in any detail at the hearing.

[10]	Ingram does not accept that its plans do not meet the relevant fire standards. It insists that they are compliant and, if there are any errors, that they are the responsibility of the previous architects. There is conflicting evidence as to the scope of Ingram’s role and the interface between Ingram’s responsibilities and those of the previous architect.

The law

[11]	Section 290(4) of the Companies Act 1993 provides that the court may set aside a statutory demand if (a) there is a substantial dispute over whether the amount is owing, (b) if there is a counterclaim subject to the provision at [3] above, or (c) if there are other grounds on which the demand should be set aside.

[12]	FCL’s written submissions were somewhat unclear and appeared to suggest that the demand ought to be set aside on the basis that there is a substantial dispute over whether the debt is owing, because there is a sufficiently large counterclaim. Counsel advised at the hearing, however, that the sole basis of FCL’s application is that it has a counterclaim that exceeds the amount of the debt owed.

[13]	In Covington Railways Ltd v Uni-Accommodation Ltd the Court of Appeal explained the approach the Court should take where a debtor alleges under s 290(4)(b) that it has a counterclaim, set-off or cross-demand that exceeds the claimed debt, as follows: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 at p 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 at p 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.

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

[14]	The power to set aside a statutory demand under s 290(4)(b) is discretionary, not mandatory. In some cases “pay now, argue later” considerations have been allowed to prevail over the effect of the section.2 While “counterclaim, set-off, or cross-demand” is given broad scope, it does not cover claims that are not actionable, such as contingent claims. To show a claim within the subsection, the company must show a real basis for the claim, supported by evidence. It cannot rely on assertion alone but must show clear and persuasive grounds.3 Further, the Court of Appeal has recently clarified that the court must be able to determine the proposed sum of the counterclaim.4

Does a counterclaim exist?

[15]	There are several contested issues. The first is whether Ingram’s revised plans are noncompliant. The second is whether this would be a breach: Ingram suggests that they stopped work legitimately three months in, and hence that any “errors” discovered months down the track would have been caught and dealt with in the fullness of time, if FCL had paid the invoices. The plans were a work in progress and were not fully developed at the time Ingram ceased work.

Were the plans noncompliant?

[16]	FCL has tendered the plans themselves, an affidavit from its director, and a report from the project manager suggesting that the plans are noncompliant. Ingram denies that the plans are noncompliant.

[17]	It is usually not possible, or appropriate, to attempt to resolve disputed questions of fact on affidavit evidence alone, particularly when issues of credibility arise, unless (for example) the evidence is contrary to the available documents or earlier statements made by the parties.5 Here, each party has put forward seemingly plausible arguments, supported by evidence. Resolving the conflict raised by the evidence will require cross-examination and, possibly, independent expert  evidence.

2	Volcanic  Investments Ltd v Dempsey & Wood  Civil Contractors Ltd  (2005) 18 PRNZ 97  (HC),
Browns Real Estate Ltd v Grand Lakes Ltd [2010] NZCA 425, (2010) 13 NZCPR 349.
3	Covington Railways Ltd v Uni-Accommodation Ltd [2001] 1 NZLR 272 (CA) at 274-275.
4	Manchester Securities Ltd v Body Corporate 172108  [2018] NZCA 190, [2018] 3 NZLR 455   at [28].
5	Confident Trustee Ltd v Garden and Trees Ltd [2017] NZCA 578 at [16].

The issue of whether the plans were compliant is not clear cut and is not amenable to being determined in the context of the summary statutory demand procedure.

Was the plans’ putative noncompliance Ingram’s fault?

[18]	Ingram suggests that their contract with FCL required them to continue making alterations and expansions to the plans as construction progressed. The errors that FCL purports to identify, Ingram says, were only discovered months after Ingram stopped work. Ingram submits that FCL cannot hope to recover damages for losses allegedly incurred as a result of working off incomplete plans, given that the reason the plans are incomplete is that FCL wrongfully failed to pay Ingram’s invoices. There is therefore no valid counterclaim.

[19]	The contract provides that Ingram will identify key areas where detailing is lacking. If other areas come up over time, Ingram is to expand on the plans as necessary. Whether Ingram ought to have identified the putatively non-compliant elements of the design and made the relevant changes prior to it ceasing work is a factual matter that cannot be determined at this preliminary stage, in the absence of cross-examination. Determination of this issue will likely depend, for example, on how obvious any errors were (assuming there were errors). Quite possibly expert evidence will be needed to explain when, in the context of an ongoing project, Ingram can reasonably have been expected to identify and address any errors in the original plans. Again, these are not issues that are suitable for determination on a summary basis, in the context of an application to set aside a statutory demand.

If a counterclaim exists, is it sufficiently large to negate the statutory demand?

[20]	FCL has tendered evidence indicating that the quantum of the counterclaim will be $78,331.30. The quantum of the counterclaim has not, at this stage, been disputed by Ingram. It is therefore clear that the counterclaim, if established at trial, will exceed Ingram’s claim by a significant margin.

Result

[21]	The statutory demand is set aside.

[22]	The parties are encouraged to resolve any issues of costs between counsel. If this is not possible, leave is reserved to file memoranda. Any memorandum on behalf of FCL is to be filed by 25 September 2020. Any memorandum in response from Ingram is to be filed by 2 October 2020.

Katz J