IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH  REGISTRY

CIV-2013-409-1216 [2013] NZHC 1892

BETWEEN	RD2 INTERNATIONAL LIMITED Applicant

AND	NDP 2010 LIMITED Respondent

Hearing:	23 July 2013

Appearances:	J Marcetic for Applicant
H C Matthews for Respondent

Judgment:	29 July 2013

JUDGMENT OF ASSOCIATE JUDGE OSBORNE
[as to application for order setting aside statutory demand]

The application

[1]       The  applicant,  RD2  International  Limited  (“RD2”)  applies  for  an  order setting aside a demand issued by the respondent, NDP 2010 Limited (“NDP”).  The demand is for $6,085.48 (“the debt”), representing costs on an earlier similar application in which NDP obtained an order setting aside a statutory demand issued
by RD2.1

The grounds of this application and counterclaim

[2]       RD2  accepts  the  debt  is  due  and  owing.    RD2’s  principal  ground  of application is there is a counter-claim in excess of $450,000.00 arising out of a guarantee given by NDP to RD2 in relation to the indebtedness of a related company
(Natural Dairy Products Limited – (“NDPL”).

1	NDP 2010 Ltd v RD2 International Ltd [2012] NZHC 959.

[3]       To succeed on the application RD2 invokes s 290(4)(b) Companies Act 1993 which provides:

...

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 is less than the prescribed amount.

[4]       As applicant, RD2 must establish that its counterclaim is reasonably arguable in all the circumstances.

[5]       The Court’s approach to an application based on a counterclaim is further informed by the observations of the Court of Appeal   in Industrial Group Ltd v Bakker2in which the Court emphasised the low level of threshold which confronts an applicant in this jurisdiction when asserting a counterclaim.   The decision also emphasises the summary nature of this jurisdiction.  I refer to the judgment of the Court given by Fogarty J:3

We note that the statutory scheme is for applications to set aside statutory demands to be a summary proceeding.  The application must be made within
10 working days of the date of service of the demand: s 290(2)(a).   No
extension of time may be given: s 290(3).  It follows that it would be unusual for the High Court to engage in detailed analysis of the merit of any counterclaim, set off or cross demand.   The section calls for a prompt judgment as to whether there is a genuine and substantial dispute.  It is not the task of the Court to resolve the dispute.  The test may be compared with the principles developed in cognate fields such as applications to remove caveats, leave to appeal an arbitrator’s award and opposition to summary judgment.

The approach required by the “appearance” test in s 290 is a review with a low threshold.   The tight time constraints distinguish the s 290 discretion from that to be exercised on say, a summary judgment application, where the presence of complex legal issues is not necessarily a bar to a remedy.  As with leave to appeal an arbitrator’s award, the hearing should, in the normal course, be short and to the point, and the judgment likewise.

2	Industrial Group Ltd v Bakker [2011] NZCA 142.
3	At [24] and [25]

The counterclaim

Mr Honiss’s evidence

[6]       RD2’s  evidence  was  provided  by  its  director,  Damian  Honiss,  whose evidence was not subject to any evidence in opposition.   RD2 is entitled in the circumstances to have Mr Honiss’s evidence on factual matters treated as reliable. That conclusion is reinforced by some of the conclusions already reached by Associate Judge Sargisson in the earlier litigation.4

[7]       Mr Honiss gives a background for what he says was the agreement which

gives rise to RD2’s counterclaim.

   There was a history of dealings between RD2 and a group of companies, the Natural Dairy Products Group, associated with Brent Thornton.  Mr Thornton  regularly  in  his  emails  described  himself  as  the  managing
director of the companies in that group.

   Goods were supplied by RD2.  Debt was incurred by NDPL.  NDPL fell behind with payments.  Mr Thornton, in late 2010, began exploring ways of recapitalising the business.  He had a number of discussions with Mr Honiss as to meeting outstanding debts, and as to his plans.  The plans came to include, in late 2010, two new companies, being a holding company, NDP 2010 Limited (which I am referring to as “NDP”), and a
trading company, NDP Trading Limited.

   Mr  Honiss  then  turns  to  discussion,  under  the  heading  “NDP  2010 guaranteed payment of NDPL’s debt”.  He says, and I summarise:  At a conference  call  on  10  February 2011,  Mr Thornton  agreed  with  two directors of RD2 including Mr Honiss that, amongst other things, NDP would guarantee payment of the debt.  Mr Honiss recorded the agreement as to that guarantee in an email dated 16 February.   On 18 February,

Mr Thornton sent an email reply by way of a marked up version of the

16 February  email.	The  full  exchange  in  relation  to  this  issue  then became:

NDP 2010 Limited will guarantee to RD2 the debt of ND.  Agree.

[8]       The last word highlighted in this judgment is marked up in red in the email. In the introduction to the email, Mr Thornton records that the mark-up indicates matters that may require changes or noting or further discussion.  He then refers to being keen to get the letter agreement drawn up.

[9]       Mr Thornton identified three issues as needing further discussion.  Mr Honiss ultimately deposes that none of those issues was controversial.

[10]     On  the  strength  of  Mr Thornton’s  promises,  RD2  started  supplying  new

goods to NDP Trading from February 2011 through to September 2011.

[11]     Mr Honiss details continuing failures in the making of repayment of the debt. The debt was, in late 2011, pursued through solicitors, with RD2 issuing its statutory demand.   In October 2011, solicitors responded on behalf of NDP 2010 to a letter demanding payment of the debt. They stated:

The alleged debt sits with NDP 2007 not NDP 2010 Limited.

[12]     NDP 2007 Limited was the previous holding company of the Natural Dairy

Products Group.

[13]     NDP’s lawyers stated that if the demand was not withdrawn an application to set aside would be made.  It was that application which was made and resulted in setting aside the judgment of Associate Judge Sargisson.5

[14]     Mr Honiss deposes that the assertion by the solicitors for NDP as to the debt being  of  NDP 2007  was  completely  contrary to  his  earlier  agreement  with  Mr Thornton.  He refers to Mr Thornton’s email confirmation.  For RD2, Mr Marcetic, in relation to the enforceability of the guarantee, accepts that a guarantee is required

to  be in  writing,  but  relies  upon  s 22  Electronic Transactions Act  2002  for the proposition  that  Mr Thornton  on  behalf  of  NDP 2010  signed  the  document  by printing his name at the foot of the email.

[15]     Mr Honiss deposes also that since 18 February 2011 the parties had been operating on the basis set out in that email.

[16]     Mr Honiss’s  confidence  as to the natural  arrangements  apparently led to RD2’s statutory demand in October 2011, only for the demand to be set aside, with the consequence of the judgment debt for costs which is now the subject of the NDP demand.

The findings in the 2012 judgment

[17]     Associate Judge Sargisson identified the issue for determination, as raised by

NDP’s application to set aside RD2’s demand as:

.. whether there is a genuine dispute about the existence of the 18 February contract ... and therefore a dispute as to the identity of the principal debtor.

[18]     NDP 2010’s submission is recorded as being that NDPL, the former trading company, solely owed the debt.

[19]     As NDP was found to have raised a genuine contention on these issues, it succeeded in having the demand set aside.  NDP was found to have a fairly arguable case that another entity was the correct debtor.

Some further developments

[20]     RD2 responded to the 2012 judgment by issuing a statutory demand on the entity (NDP 2007) identified by Mr Thornton as the correct debtor in the 2012 proceeding.    NDP 2007  issued  an  application  to  set  aside  that  demand.    In  an affidavit in support, Mr Thornton exhibited documents in the earlier 2012 proceeding and the judgment itself, observing:

I understood from the Court’s earlier judgment that there were a number of possibilities  in  relation  to  the  alleged  indebtedness,  and  it  was  not appropriate for these matters to be dealt with in an insolvency proceeding.

[21]     Mr Thornton’s affidavit glosses over the argument put on behalf of NDP 2010 in the earlier proceeding, namely that the correct entity of the debtor was another entity.

[22]     Mr  Honiss  deposes  that  on  25  March  2013,  shortly  before  NDP 2007’s application  was  due to be heard, that  company withdrew its  application.   As  a consequence, NDP 2007 was ordered to pay costs to RD2.  It did not do so.  It was three months later, on 21 May 2013, put into liquidation on RD2’s application.  NDP
2010, then some two weeks after NDP 2007 was put into liquidation, issued the statutory demand which is the subject of this proceeding.

Discussion

Findings

[23]     I find on the basis of Mr Honiss’s uncontradicted evidence that RD2 has

established a reasonably arguable case that NDP (I am referring again to NDP 2010

Ltd) entered into an enforceable guarantee of the debt.  There is evidence to support a finding that NDP guaranteed the debt of NDPL.  Mr Thornton arguably on behalf of NDP endorsed, agreement (in red) against RD2’s written requirement of such guarantee.  Although NDP points to Mr Thornton’s earlier statements in the email as qualifying the agreement, one of the three descriptions of the red annotations was that they were for “noting”.  The frequently recurring use of “Agreed” in the email suggests these may have been the matters for noting.  It is possible that a Court will find a statement as simple as “Agreed” must have been for noting, as against the other alternatives “further discussion” or “changes”.   RD2, therefore, has on the evidence a tenable argument that NDP entered into a contract of guarantee, recorded in writing.

Mr Matthews did not make any submissions reflecting the detailed criticism of the guarantee argument which Ms Frampton addressed on behalf of NDP 2010 at the
2012 hearing.  Ms Frampton’s submissions are set out by Associate Judge Sargisson in her judgment.  I have referred to those submissions as something of a checklist to consider  whether  there  is  any  other  argument  available  to  NDP  which  would

completely undermine the arguability of a written guarantee.   My conclusions are these (reference to the subparagraph numbers at [24] of Her Honour’s judgment):6

(a)       “An earlier, 1 February 2011, letter saying NDP had no intention of assuming liability” - such does not preclude NDP deciding subsequently to enter into a guarantee through the 18 February email (or otherwise).

(b)       “Some contractual terms were not agreed in the 18 February 2011 email” - Mr Honiss’s  uncontradicted  evidence is that none of the matters left to be resolved on 18 February were ultimately controversial, and that RD2 began supplying new goods to NDP trading on the strength of the guarantee and other promises.   It is arguable that RD2 thereby provided such consideration as required for the guarantee as agreed to by NDP 2010 to be effective.

(c)      “No formal written agreement was ever produced” - in the 2012 proceeding, NDP produced evidence indicating that it would have required all its directors to have approved such a guarantee.   What NDP 2010’s alleged usual practice or its actual expectation may have been can be tested at trial.  It remains arguable that Mr Thornton, as a Managing Director of the Group, entered the commitment for NDP.

(d)       “In later correspondence, in June and August 2011, RD2 does not refer to a February 2011 agreement” - this is an evidential point which may weaken, but does not destroy the argument that a commitment was actually entered into in February 2011.

(e)       “The  marked-up  red  comment  “Agree”  in  the  18  February  email indicated a matter requiring “changes”, “noting” or “further discussion”’ - I have already discussed this notation.   A trial Court
may reasonably conclude that the simple annotation “Agreed” invites

6	NDP 2010 Ltd v RD2 International Ltd, above n 1, at [24].

neither further discussion nor change, and therefore must have been for noting.

[24]     While Associate Judge Sargisson predictably on these submissions found that NDP had a reasonably arguable defence to RD2’s claim, I equally find in relation to the five identified grounds that RD2’s claim is not defeated beyond argument by any of those grounds.

The case as put by Mr Matthews

[25]     Mr Matthews submitted centrally:

The counterclaim ... that is raised is the same assertion of a guarantee of debt by NDP 2010 that was the principle [sic] subject matter of the Court’s earlier Judgment on 8 May 2012.

...

Mr Honiss accepts that “the Court considered that there was a genuine and substantial dispute about whether NDP 2010 had entered into a contracted guarantee with RD2.”

[26]     Mr Matthews invited the Court to conclude that in this proceeding RD2 is inappropriately asking the Court to reach a conclusion inconsistent with the 2012 judgment.   I agree with Mr Marcetic that there is no inconsistency between the conclusion I have reached as to the reasonable arguability of RD2’s guarantee claim and that reached by Associate Judge Sargisson that NDP’s defence to the demand was tenable.  I accept Mr Marcetic’s characterisation of the position, especially as set out in Mr Marcetic’s written submissions, which read:

14        The result in the  earlier proceeding is  not inconsistent  with this application because the relevant question for the Court is slightly different in each proceeding:

14.1     In the earlier proceeding, RD2 could succeed only if it could satisfy the Court that its guarantee claim was so strong and clear, that there was no reasonably arguable defence to its claim.   It failed to do so.  The Court held that the defence was arguable.

14.2     In this proceeding, RD2 must succeed provided it can show that there is a reasonably arguable basis for its claim.  That is, the statutory demand can stand only if NDP 2010 can reach the same threshold that would apply if, in an ordinary

proceeding,  NDP  2010  sought  defendant  summary judgment.  Put another way, RD2 asks the Court in this case to hold that the claim is arguable.

15.       Seen in that light, RD2 seeks a ruling in this case quite consistent with the earlier decision.  RD2 does not ask this Court to hold that its guaranteed claim must succeed; it says merely that it is an arguable claim.

(Mr Marcetic’s emphasis)

[27]   Mr Matthews in his oral submissions developed a further, related point concerning RD2’s assertion of a counterclaim in response to this judgment debt.  He submitted that what marks out this counterclaim is that it is based on the very argument that was found wanting in the 2012 judgment, with the consequence that RD2 was ordered by the Court to pay costs.  Mr Matthews’ submission carried with it the flavour of an abuse of process argument, suggesting that RD2 should not be entitled to raise a counterclaim based on its failed 2012 argument.

[28]     I  do  not  consider  that  under  s 290  of  the  Act,  RD2’s  assertion  of  its counterclaim in these circumstances should be unavailable.  Mr Matthews pointed to no authority in support of that proposition.  I know of none.  On first principles, the applicant is entitled under s 290 to rely on its counterclaim in relation to any debt, including a judgment debt, whether or not the debt was incurred in a Court case relating to the same or similar issues.

RD2’s solvency

[29]     RD2 advanced a secondary ground of application, namely that it is able to pay its debts as they fall due.   Mr Marcetic did not advance submissions on this ground.   It is not generally one which will justify the setting aside of a demand where there is no good reason for non-payment.  Given my finding in favour of RD2 on the primary point, it is unnecessary that I reach a decision based on this ground, and I do not do so.

Outcome

[30]     The appropriate course is to grant the application.  As the applicant has been successful, it should have costs. A 2B award is appropriate.

Orders

[31]	I order:

(a)	The statutory demand issued by NDP 2010 Limited on 30 May 2012 is set aside.

(b)	NDP 2010 Limited is to pay the costs of RD2 International Limited on a 2B basis, together with disbursements to be fixed by the Registrar.

Associate Judge Osborne

Solicitors:
Chapman Tripp, Auckland
White Fox & Jones, Christchurch