IN THE HIGH COURT OF NEW ZEALAND

AUCKLAND REGISTRY

CIV-2009-404-007659

BETWEEN MACENNOVY TRUST LTD

Applicant

AND SEFTON CONSTRUCTION LTD (IN LIQUIDATION)

Respondent

Hearing: 26 April 2010

Appearances: R Hucker and D Beard for Applicant

C T Patterson for Respondent

Judgment: 28 April 2010 at 5:00 pm

JUDGMENT OF ASSOCIATE JUDGE BELL

This judgment was delivered by me on 28 April 2010 at 5: 00 pm

pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date: ......................

Solicitors:

Hucker & Associates, PO Box 3843, Shortland Street, Auckland

Graeme Skeates Law, PO Box 56179l, Dominion Road, Auckland

[1] In November 2009, Sefton Construction Ltd served on Macennovy Trust Ltd a statutory demand for $132,151.68. This sum was made up of sums due under three certificates of payment for work on the construction of apartments 14 Ventnor Road, Remuera, Auckland.

[2] On 20 November 2009, Macennovy Trust Ltd filed an application under s 290 of the Companies Act seeking orders for the statutory demand to be set aside or for time for compliance with the demand to be extended. The grounds of the application were:

a) That Sefton Construction Ltd was obliged to pursue recovery of its debt by way of ordinary debt recovery proceedings rather than by statutory demand, relying on s 23 of the Construction Contracts Act;

b) Macennovy Trust Ltd had a counterclaim, set-off or cross-demand and the amount specified in the statutory demand is less than the counterclaim, set-off or cross-demand;

c) The counterclaim, set-off or cross-demand is in the sum of at least $300,000 and represents sums owing by Sefton to sub-contractors which remain unpaid and due;

d) The statutory demand is an abuse of process; and

e) It is just and equitable that the Court exercise a residual discretion to set aside the demand.

[3] Sefton Construction Ltd filed a notice of opposition and affidavit by Desmond Sharp, a director of Sefton Construction Ltd, on 22 January 2010. The application was given a first call date of 12 February 2010. Macennovy Trust Ltd filed an affidavit in support of its application on 11 February 2010.

[4] The matter was called in the miscellaneous list at 11:45 am on 12 February 2010. Earlier in the morning, two applications for orders for Sefton Construction Ltd to be put into liquidation were called. The plaintiffs in both cases were unpaid sub-contractors of Sefton Construction Ltd. I directed that the liquidation applications be stood down until Macennovy’s setting aside application had been called. For better or for worse, I took the view that Sefton’s attempts to recover payments due to it under its contract with Macennovy may have a bearing on subcontractors’ attempts to recover payment from Sefton. If the statutory demand were upheld, it might not be necessary to put Sefton Construction Ltd into liquidation. However, when the setting aside application was called, counsel appeared for Macennovy Trust Ltd but there was no appearance for Sefton Construction Ltd. In the absence of any appearance for Sefton, I made an order setting aside the statutory demand and awarded Macennovy costs. Macennovy obtained the setting aside order by default. I did not consider the merits of the application. I later made an order that Sefton Construction Ltd be put into liquidation on the application of Data Pacific Ltd (CIV-2009-404-7928).

[5] On the same day, Sefton Construction Ltd (In Liquidation) applied to recall the order setting aside Macennovy Trust Ltd’s statutory demand. The application was made under r 7.40 of the High Court Rules. An application to set aside a statutory demand is made by way of originating application under r 19.2(c) of the High Court Rules. Under r 19.10, a number of rules relating to interlocutory applications apply with all necessary modifications to proceedings commenced by originating application. This includes r 7.40 – see r 19.10(1)(k).

[6] Rule 7.40 says:

(1) If a party is neither present nor represented at the hearing of an application, the Judge may—

(a) if determine the application in the party's absence in any manner that appears just; or

(b) adjourn the application; or

(2) If an order determining an application is made in the absence of a party, a Judge may, if the Judge thinks it just to do so, recall the order at any time before a formal record of it has been drawn up and sealed.

(3) A Judge may, in any manner that the Judge thinks just, reinstate an application that has been struck out for non-appearance.

(4) A Judge may make a determination referred to in subclause (2) or (3) on the Judge's own initiative or on the application of a party.

(5) Notice of an application under subclause (4) must be filed and served,—

(a) if it is made by a party who was present or represented at the hearing, within 5 working days after the hearing:

(b) if it is made by a party who was neither present nor represented, within 5 working days after receipt by the party of notice of the decision given at the hearing.

[7] In this case, the order has not been sealed and the application has been made within time.

[8] Grant Reynolds, the liquidator of Sefton Construction Ltd, has sworn an affidavit. He says that if recall of the judgment of 12 February 2010 is not granted, he intends to issue a fresh statutory demand against Macennovy Trust Ltd for the debt. He says that it does not appear that Macennovy has any reasonable grounds to dispute the debt to Sefton.

[9] Both parties referred to the dicta of Wild CJ in Horowhenua County v Nash (No. 2) [1968] NZLR 632 at 633:

Generally speaking, a judgment once delivered must stand for better or worse subject, of course, to appeal. Were it otherwise there would be great inconvenience and uncertainty. There are, I think, three categories of cases in which a judgment not perfected may be recalled: first, where since the hearing there has been an amendment to a relevant statute or regulation or a new judicial decision of relevance in a higher authority; secondly, where counsel have failed to direct the Court’s attention to a legislative provision or authoritative decision of plain relevance; and thirdly, where for some other very special reason justice requires that the judgment be recalled.

[10] The argument focused on whether there was a very special reason under the the third category. With respect, the ruling of Wild CJ in that case needs to be read in context. He was addressing recall of a judgment when there has been a determination on the merits. That is not the kind of case before the Court. Here, the plaintiff has obtained an order setting aside a judgment in default of an appearance. A recall application under r 7.40 is applied more widely than a recall application under r 11.9. The proviso in r 7.40(2) that “if the Judge thinks it just to do so” indicates that the Court has a broad discretion, which is not tied to any rigid criteria.

In this regard, the dictum of Bowen LJ in Gardner v Jay (1895) 25 ChD 50 at 58 gives useful guidance:

When a tribunal is invested by active Parliament or by rules with a discretion, without any indication of the Act or rules of the grounds upon which the discretion is to be exercised, it is a mistake to lay down any rules with a view to indicating the particular grooves in which the discretion should be run, for if the Act or the rules did not fetter the discretion of the Judge why should the Court do so?

[11] Accordingly, the question is simply whether it is just to recall the judgment.

[12] Carter & Partners, Auckland lawyers, had been acting for Sefton before liquidation. They had issued the statutory demand. They had also filed the notice of opposition and the affidavit in opposition to the setting aside application. The lawyers now acting for Sefton asked Carter & Partners why there was no appearance on 12 February 2010. Carter & Partners have advised that they did not appear, because the creditors applying to have Sefton put into liquidation had made it clear that they were going to have Sefton put into liquidation earlier in the 10 o’clock list. Carter & Partners explained that they did not have instructions to act on behalf of the liquidators. Apparently, a lawyer from Carter & Partners was present in Court earlier in the list but was not present later in the morning when the setting aside application was called.

[13] I accept that Carter & Partners had assumed, reasonably enough, that their authority to act for Sefton Construction Ltd would cease upon an order being made for the company to be put into liquidation and that would happen during the calling of the 10 o’clock list. They were not to know that I would have the liquidation applications stood down. In hindsight, it could be said that Carter & Partners would have done better if they had stayed on to await the calling of the setting aside application, but equally, they cannot be blamed for not anticipating that I would stand the liquidation applications down until later in the morning. In the circumstances, there is an innocent explanation for Sefton Construction Ltd not being represented when I dealt with the setting aside application.

[14] I understand that, in anticipation of being appointed, the liquidator had instructed counsel to appear on the setting aside application. But the liquidator was unable to take any such steps before he had been appointed. Again, it would have been helpful if counsel had explained this to me at the time that the setting aside application was called. However, the omission is not serious as to disentitle Sefton from being able to seek a recall. The company ought not to be prejudiced because of the absence of representation on 12 February.

[15] Macennovy Trust Ltd raises these matters to oppose the recall of the judgment:

a) The liquidator ought to reissue its statutory demand and the Court ought not to allow proceedings to continue on an indeterminate basis.

b) The liquidation of Sefton Construction Ltd makes a material difference to the determination of any substantive application to set aside the statutory demand. The set-off and mutual dealing provisions of s 310 of the Companies Act 1993 trump s 79 of the Construction Contracts Act 2002. It says that the liquidation of Sefton Construction Ltd raises different contractual issues between the parties requiring additional evidence and submission. The grounds on which the statutory demand can be resisted are materially different.

c) Sefton has laid no evidential foundation to show that the applicant is insolvent.

d) Sefton has not paid the costs which I ordered on 12 February.

[16] While the liquidator has indicated that he is prepared to issue a new statutory demand, that would put all parties to more delay and expense. On receiving a new statutory demand, Macennovy Trust Ltd would file a new application to set aside the statutory demand. The parties would then be put to the delay, effort and expense of preparing for a fresh hearing on a setting aside application. As I explain further below, the substantive issues now are no different from those in the setting aside application when I made the order on 12 February 2010 setting aside the statutory demand. Macennovy Trust Ltd filed affidavit evidence in support of its application. The recall of the earlier order allows that application to be considered on its merits. The concern of Macennovy Trust Ltd that proceedings ought not to continue on an indeterminate basis can be addressed by ruling on the merits of the setting aside application now.

[17] The certificates of payment Sefton Construction Ltd relied on for its statutory demand were issued by Milne Project Management Ltd, project managers for Macennovy Trust Ltd. Each certificate carries the words “This certificate of payment valuation from Dean Murray & Partners comprises a payment schedule under the Construction Contracts Act 2002. Dean Murray & Partners, Quantity Surveyors engaged by Macennovy Trust Ltd.” Each certificate is signed by Milne Project Management Ltd. The first certificate, dated 16 June 2009, is for $75,168.23 payable on 26 June 2009. The second certificate, dated 28 July 2009, is for $21,824.91 payable on 7 August 2009. The third certificate, dated 26 September 2009, is for $31,024.87 payable on 23 October 2009.

[18] It was common ground between the parties that these certificates of payment were payment schedules under s 21 of the Construction Contracts Act 2002. It was also common ground that Macennovy Trust Ltd had not made the payments due under the certificates. Section 24 of the Construction Contracts Act 2002 provides:

24 Consequences of not paying scheduled amount in manner indicated by payment schedule

(1) The consequences specified in subsection (2) apply if—

(a) a payee serves a payment claim on a payer; and

(b) the payer provides a payment schedule to the payee within the time allowed by section 22(b); and

(d) the payer fails to pay the whole, or any part, of the scheduled amount on or before the due date for the progress payment to which the payment claim relates.

(2) The consequences are that the payee —

(a) may recover from the payer, as a debt due to the payee, in any court, —

(i) the unpaid portion of the scheduled amount; and

(ii) the actual and reasonable costs of recovery awarded against the payer by that court; and

(b) may serve notice on the payer of the payee's intention to suspend the carrying out of construction work under the construction contract.

(3) A notice referred to in subsection (2)(b) must state—

(a) the ground or grounds on which the proposed suspension is based; and

(b) that the notice is given under this Act.

(4) In any proceedings for the recovery of a debt under this section, the court must not enter judgment in favour of the payee unless it is satisfied that the circumstances referred to in subsection (1) exist.

[19] Section 79 of the Construction Contracts Act, referred to by the Macennovy Trust Ltd, says:

79 Proceedings for recovery of debt not affected by counterclaim, set-off, or cross-demand

In any proceedings for the recovery of a debt under section 23 or section 24 or section 59, the court must not give effect to any counterclaim, set-off, or cross-demand raised by any party to those proceedings other than a set-off of a liquidated amount if—

(a) judgment has been entered for that amount; or

(b) there is not in fact any dispute between the parties in relation to the claim for that amount.

[20] Before Sefton Construction Ltd was ordered to be put into liquidation, s 79 prevented Macennovy Trust Ltd raising any counterclaim, set-off or cross-demand except those specifically identified under s 79. Macennovy’s argument is that that changed once Sefton Construction Ltd was ordered to be put into liquidation, because at that point the mutual credit and set-off provisions of s 310 of the Companies Act took over and s 79 of the Construction Contracts Act no longer applied.

[21] For Sefton, Mr Patterson accepted that if Macennovy Trust Ltd were to file a proof of debt with the liquidator in respect of any damages claims it might want to raise against Sefton Construction Ltd, the liquidator would apply s 310 against the debt due to Sefton Construction Ltd under the payment schedules. Given Sefton’s acceptance of this position, I asked whether Macennovy Trust Ltd had filed a proof of debt with the liquidator. I was informed that it had not. Given Macennovy Trust Ltd’s reliance on s 310 in this argument, I found it strange that Macennovy Trust Ltd had not lodged any proof of debt in support of its alleged counterclaims and had not even written to the liquidator to tell him what its claims were and what reasons it had for resisting the statutory demand. Despite the apparent concession by Sefton Construction Ltd, the matter requires some consideration.

[22] Macennovy Trust Ltd relied on two decisions, Brodyn Pty Ltd v Dasein Constructions Pty Ltd [2004] NSWSC 1230, a decision of the New South Wales Supreme Court under the Building and Construction Industry Security of Payment Act 1999 (NSW) and Bouygues (UK) Ltd v Dahl-Jensen (UK) Ltd [2000] BLR 522, a decision of the English Court of Appeal. In the New South Wales case, the contractor had obtained an adjudicator’s award which it had registered in the New South Wales District Court. The principal issued its own proceeding against the contractor for a sum greater than the adjudicator’s award. The contractor went into voluntary administration. The principal lodged a proof of debt, again for a sum greater than the adjudicator’s award. Young CJ held that the mutual credit and setoff provision of the Commonwealth Corporations Act prevailed over s 25 of the Building and Construction Industry Security of Payment Act (NSW). Section 25 is a provision which is roughly comparable to s 79 of New Zealand’s Construction Contracts Act. The judge gave two reasons for saying that the Corporations Act prevailed. The first related to the inconsistency between Commonwealth legislation and state legislation. When s 109 of the Australian Constitution was applied, the Commonwealth legislation prevailed. That reason clearly has no relevance in New Zealand. Young CJ gave policy as the second reason at [87]:

It (the Building and Construction Industry Security of Payment Act) only intends to operate when the head contractor and the subcontractor are going concerns. Once the subcontractor ceases to be a going concern, it no longer needs cashflow and the mischief to be covered by the Act is not present in that situation No one forced the subcontractor to go into voluntary administration. It elected to do so and, in my view, the protection of the BCISP Act ceased at that point and the Commonwealth law as to adjustments of rights under administration and later under a DOCA came into play.

[23] With respect, this reason overlooks the fact that contractors may become insolvent and cease to be going concerns when their principals stop making payments they are lawfully required to make under the legislation. This policy encourages an attrition approach, under which a principal will withhold payment as long as he can in the hope of bringing the contractor to his knees and putting him into bankruptcy or liquidation, thus frustrating the policy of the legislation.

[24] In Bouygues (UK) Ltd v Dahl-Jensen (UK) Ltd an adjudication had been made under the Housing Grants Construction & Regeneration Act 1996. It is not clear that that legislation contains a provision similar to s 79 of New Zealand’s Construction Contracts Act. Summary judgment had been given on an adjudicator’s award under that Act and there was an appeal from that decision. The appeal was dismissed. But the Court granted a stay of execution on the grounds that Dahl- Jensen Ltd, the contractor, had gone into liquidation. Chadwick LJ gave the Court’s reasons for the stay. He held that upon liquidation the mutual credit and set-off provisions of the English Insolvency Rules 1986 came into play. The effect was that latent claims and cross-claims between the parties would have to be applied so that at the end there was only a single claim, represented by the balance of account between the parties. Because an adjudicator’s determination was provisional only, that did not allow for latent claims to be brought into account and adjustments made and was a ground for summary judgment not to issue.

[25] While I can see the force of the approach taken by the Court of Appeal, I do not agree that it applies under New Zealand’s Construction Contracts Act at the stage of considering an application to set aside a statutory demand, based on a claim under ss 23, 24 and 59 of the Construction Contracts Act 2002.

[26] Section 79 of the Construction Contracts Act 2002 is an important provision in carrying out the act’s purpose of facilitating regular and timely payments between the parties to a construction contract and providing remedies for the recovery of payments (s 3(a) and (c)). Once a contractor has established his right to recover under ss 23, 24 and 59, the principal must pay now and argue later. He cannot raise any set-off, counterclaim or cross demand to resist payment, except as allowed under s 79. Instead he must take other steps to recover for any claim for defects, delay and the like, which lie outside a payment claim, payment schedule or adjudicator’s determination.

[27] The mutual credit and set off provisions of insolvency legislation, the Insolvency Act s 254 and the Companies Act s 310, are inconsistent with s 79. The speech of Lord Hoffmann in Stein v Blake [1996] 1 AC 243 at 250-255 is a clear exposition of the operation of the English provisions and also applies to the New Zealand provisions:

Bankruptcy set-off ... affects the substantive rights of the parties by enabling the bankrupt’s creditor to use his indebtedness to the bankrupt as a form of security. Instead of having to prove with other creditors for the whole of his debt in the bankruptcy, he can set-off pound for pound what he owes the bankrupt and prove for only or pay only the balance.” (page 25 1)

Bankruptcy set-off has a much wider scope. It applies to any claim arising out of mutual credits or other mutual dealings before the bankruptcy for which a creditor would be entitled to prove as a bankruptcy debt.

Bankruptcy set-off therefore requires an account to be taken of liabilities which, at the time of bankruptcy, may be due but not yet payable or may be unascertained in amount or subject to contingency. Nevertheless the law says that the account shall be deemed to have been taken and the sums due from one party set off against the other as at the date of bankruptcy. This is in accordance with the general principle of bankruptcy law, which governs payment of interest, conversion of foreign currencies etc., that the debts of the bankrupt are treated as having been ascertained and his assets simultaneously distributed among his creditors on the bankruptcy date.” (page 252)

[28] Under Stein v Blake insolvency set off is self-executing. At page 255, Lord Hoffman stated:

If the set-off is mandatory and self-executing and results, as of the bankruptcy date, in only a net balance being owing, I find it impossible to understand how the cross-claims can, as choses in action, each continue to exist.

[29] At some point the indefeasibility of entitlements under s 23, 24 and 59 of the Construction Contracts Act yields to set-off under the insolvency legislation. To the question where that point is s 79 provides a procedural answer. The indefeasibility applies only “in any proceedings for the recovery of a debt under s 23 or s 24 or s 59 ...”. So when a liquidator decides whether to admit a proof of debt and for how much, there is no proceeding for recovery of a debt and s 79 does not apply.

[30] In Silverpoint International Ltd v Wedding Earthmovers Ltd HC Auckland CIV-2007-404-104, 30 May 2007, Associate Judge Doogue held that if s 79 does not apply during a liquidation, then it cannot apply at the statutory demand stage. At [86] he said:

Were Favona to be placed in liquidation, the liquidator would have the right under s 310 to bring to account its claims against WEL. I come to that conclusion because the right to set-off contained in s 310 does not qualify as a “proceeding to recover a debt” against WEL and is therefore outside the purview of s 79 of the Construction Contracts Act. Yet WEL submits that at the stage where the Court is considering Favona’s application to set aside the statutory demand, the cross-demand is to be ignored. That seems to me to be a logical inconsistency, which should be avoided. It can be avoided by determining that s 79 does not apply to liquidation proceedings. Once that step is taken, logical consistency requires that s 79 should not apply in statutory demand proceedings which are ancillary to liquidation proceedings.

[31] In Layward v Holmes Construction Wellington Ltd [2009] 2 NZLR 243, the Court of Appeal overruled Silverpoint International Ltd. It preferred another line of cases, beginning with the decision of Randerson J in Volcanic Investments Ltd v Dempsey & Wood Civil Contractors Ltd (2005) 18 PRNZ 97. Randerson J held that s 79 of the Construction Contracts Act 2002 prevailed over s 290 of the Companies Act 1993. In Layward at [61 ] the Court of Appeal said:

We emphasise at this point the distinction between an application to set aside a bankruptcy notice or a statutory demand on the one hand and an adjudication of bankruptcy or order to wind up a company on the other. The question we are asked to resolve concerns the former. In that context, we prefer the view expressed by Randerson J in Volcanic Investments.

[32] At [62] the Court said:

It is also true, as Associate Judge Doogue said, that bankruptcy and liquidation proceedings have a broader objective than simply ensuring that a particular creditor is paid. Despite that, bankruptcy notices, statutory demands are, in a practical sense, important enforcement mechanisms as Randerson J recognised.

[33] The Court added at [63]:

If the contrary view were to be adopted, the efficacy of the s 73 process would, in our view, be undermined. Parties to construction contracts could refuse an amount ordered by an adjudicator, and resist bankruptcy notices or statutory demands in relation to the debt, on the basis that they had a counterclaim, set-off or cross-demand. The effect of this would simply be to recreate similar problems to those which led to the enactment of the Construction Contracts Act, albeit in a different context.

[64] We acknowledge that this approach may produce hardship. A party may have a meritorious counterclaim, set-off or cross-demand and may not raise it in the context of the Construction Contracts Act or by means of separate proceedings. Yet that party may be precluded from raising it in an application to set aside a bankruptcy notice or a statutory demand that follows an unsatisfied judgment issued under s 74. This seems hard. But while the adoption of the alternative view would alleviate this hardship, it would, as we have said, create another hardship – it would keep the party in whose favour the adjudicator had ruled from its entitlement under the Construction Contracts Act, and thereby frustrate its purpose.

[65] We emphasise again that we were asked to consider only the first of the two stages referred to at paragraph [61] above. It may be that different considerations arise at the point that the Court must determine whether it will exercise its discretion to adjudicate the judgment debtor bankrupt or order the liquidation of a company. ... But that is a point on which we express no opinion.

[34] It is clear from the above that what is said in respect of determinations under ss 73 and 74 is equally applicable to unpaid payment schedules under s 24. There is indisputable liability. The Court of Appeal accepted that at the statutory demand stage, set-offs, counterclaims and cross-demands cannot be raised to defeat a statutory demand based on an entitlement under s 79. The Court likewise reserved the position which would arise at the stage of a hearing for a bankruptcy, adjudication or liquidation order.

[35] The fact that the person enforcing the liability under ss 23, 24 or 59 has been adjudicated bankrupt or is in liquidation or administration makes no difference under the approach taken by the Court of Appeal in Laywood. At the statutory demand stage s 79 still applies as the demand is a proceeding for the recovery of a debt under s 79. Under Volcanic Investments , upheld by the Court of Appeal, s 79 prevails over inconsistent provisions of the Companies Act 1993. This result is more consonant with the purpose of the Construction Contracts Act 2002 and prevents principals using attrition tactics to wear down unpaid contractors.

[36] Because of s 79, the mutual credit and set-off arrangements under s 310 of the Companies Act 1993 do not apply at the statutory demand stage and cannot be used as an argument to set aside a statutory demand under s 290(4)(b). If considerations under s 310 cannot arise at the statutory demand stage, then the fact that the person issuing the statutory demand is itself a company in liquidation or the assignee of a bankrupt estate cannot stand in the way of recovery of payment.

[37] In the alternative that I have erred in not applying s 310 of the Companies Act 1993 at the statutory demand stage, I address the parties’ arguments under s 290(4)(b). Macennovy Trust Ltd’s grounds for setting aside included an assertion of a set-off, counterclaim or cross-demand within s 290(4)(b) of the Companies Act 1993. Its affidavit filed on 11 February 2010 sets out its evidence in support of that ground. While that part of its application was ill-founded because of the overriding effect of s 79 of the Construction Contracts Act 2002, its evidence on the issue would be relevant if s 310 of the Companies Act 1993 applied at the

statutory demand stage.

[38] These are the matters Macennovy Trust Ltd identified as giving it a counterclaim, set-off or cross-demand:

a) There was a claim for $40,000 for defects in respect of glass, including the cost of replacement glass identified in a letter of Milne Project Management Ltd of 28 July 2009.

b) Milne Project Management Ltd claimed a sum of $19,395 for defects in a letter dated 26 September 2009.

c) Sefton was also said to owe $10,000 for defects in a development in Taurarua Terrace, Parnell.

d) Sefton had not submitted guarantees, operation and maintenance manuals and as-built drawings.

e) Because Sefton had not been paying its sub-contractors, Macennovy Trust Ltd was exposed to the risk of sub-contractors removing products and materials they had supplied which Macennovy Trust Ltd claimed it had paid for.

[39] In reply, Mr Patterson pointed out that the certificates of payment of Milne Project Ltd provided for retentions and the certified payments were the balance payable after retentions had been taken into account. Thus the $40,000 for remaining residual remedial work in Milne Project Management Ltd’s letter of 28 July 2009 had been taken into account in fixing the certified payment of that date. Similarly, in the certificate of payment of 26 September 2009, retentions of $19,395 for remaining remedial work had been taken into account in fixing the certified payment. There is therefore no need to make any further allowance for defects.

[40] The correspondence for the development in Taurarua Terrace, Parnell, showed that Sefton had apparently carried out work there and there was a retention of $10,000. However, the principal in that development was Abil Property Taurarua Ltd. There was no evidence that Macennovy Trust Ltd was the principal or engaged Sefton Construction Ltd. There was no evidence that Macennovy Trust Ltd has any claim against Sefton Construction Ltd for work carried out at Taurarua Terrace, Parnell.

[41] As for work remaining to be completed under the contract, Macennovy Trust Ltd pointed out that there was no evidence that Sefton Construction Ltd had given a notice under s 24(2)(b) of the Construction Contracts Act 2002 of its intention to suspend work. Nevertheless, the evidence on this aspect is unsatisfactory. The claim for work which is alleged not to have been completed is simply an assertion set out in correspondence. Macennovy Trust Ltd has not adduced any direct evidence of work not having been completed. There is no evidence quantifying the value of incompleted work.

[42] In Yummy Tums Ltd v Foodwise Ltd HC Auckland CIV-2009-404-876, 22 June 2009 at [20]–[24], Associate Judge Sargisson held that an applicant relying on s 290(4)(b) of the Companies Act 1993 must show a fairly arguable basis for any counterclaim to come within the statutory formula. An unquantified counterclaim did not meet the test. In the absence of any evidence outlining what further work is required and then assessing the value of that work, there is no foundation for a claim under s 290(4)(b).

[43] As for Macennovy Trust Ltd’s fears that it might suffer at the hands of unpaid sub-contractors, there is no evidence that that has in fact happened. The point raised by Macennovy Trust Ltd is simply speculative. Given that Macennovy Trust Ltd has not paid Seftons under its payment schedules, the argument is not an attractive one.

[44] There is nothing in Macennovy’s point in its notice of application that Sefton Construction Ltd is obliged to pursue recovery by way of ordinary debt recovery proceedings. The Court of Appeal put paid to that in its decision in Laywood v Holmes Construction Wellington Ltd when it held that a statutory demand is a proceeding for the recovery of debt under the Construction Contracts Act 2002.

[45] Likewise, the statutory demand is not an abuse of process. It is a step that may legitimately be taken by an unpaid contractor weho has rights of recovery under ss 23, 24 and 59 of the Construction Contracts Act 2002. In this case, I see nothing improper in Sefton Construction Ltd having issued a statutory demand when it did and I see nothing improper in the liquidator maintaining that position after the company has been ordered to be put into liquidation.

[46] Macennovy Trust Ltd invoked the Court’s residual discretion to set aside because it claimed that Sefton had breached its terms of contract by failing to pay its sub-contractors, even in situations where the applicant had paid Sefton for that purpose. It was claimed that because of Sefton’s failure to pay its sub-contractors, the sub-contractors were refusing to honour their warranties given to Macennovy Trust Ltd for certain sub-contract works and were refusing to undertake any required remedial work. It was also claimed that certain sub-contractors were threatening to remove installed product (fencing and kitchens) from apartments where these items had been installed. That is, to a certain extent, a repetition of matters raised as setoff and counterclaim material for Macennovy Trust Ltd’s argument under s 290(4)(b). The argument fails for the same reasons. Sefton acknowledged that it had not paid some sub-contractors, but noted that that was because of Macennovy Trust Ltd’s failure to pay it. There is no evidence of a term of the contract between Macennovy and Sefton that Sefton must pay its sub-contractors. There is no evidence of any threatened actions by sub-contractors as claimed by Macennovy Trust Ltd. Its argument is fanciful.

[47] Macennovy Trust Ltd put in evidence the first liquidator’s report for Sefton Construction Ltd’s liquidation. It is clear from that report that Sefton Construction Ltd has very substantial creditors. However, its poor financial position was never a reason that would move a court to say that Sefton is no longer entitled to use the statutory demand procedure to relieve its ailing position.

[48] On 24 July 2009, Carter & Partners sent a fax to Macennovy Trust Ltd.

Among other things, the letter said:

There is no dispute that at least $75,168.23 is owing, as per the payment schedule/certificate of payment dated 16 June 2007 and our client reserves its right to proceed with a statutory demand.

[49] Macennovy Trust Ltd developed an argument that because Sefton’s lawyers had said that there was no dispute about the sum of $75,168.23, that was an acknowledgement that the balance of the sums claimed in the statutory demand was disputed and if that sum was disputed, then that was a misdescription. This alleged misdescription is said to be so serious that a substantial injustice would be caused to Macennovy Trust Ltd if the statutory demand were not set aside. Macennovy Trust Ltd invoked s 290(5) of the Companies Act 1993 for that submission.

[50] On 24 July 2009, the payment schedule for $75,168.23 had issued and Sefton Construction Ltd was entitled to rely on it to say that it was entitled to payment for that amount. The later payment schedules had not issued on 24 July 2009. Sefton Construction Ltd is entitled to take the same point about the later schedules as it took in its lawyer’s letter of 24 July 2009. Carter & Partners’ letter of 24 July 2009 cannot be read as a concession that there is no claim for any sum in excess of $75,168.23. The letter simply makes the point that under the payment schedule issued before that date, Sefton was entitled to payment. The letter says nothing about future payment schedules.

[51] There is no misdescription of the debt in the statutory demand and the application of s 290(5) does not arise. However, I note that in cases where the sum claimed in a statutory demand is found to be more than the undisputed part of a debt, the normal course is to set aside the demand only to the extent of the overclaim. See, for example, United Homes (1988) Ltd v Workman [2001] 3 NZLR 447 at [47].

[52] Macennovy Trust Ltd also said that Sefton had not shown that Macennovy Trust Ltd was insolvent. This submission would be relevant only if I were to consider making an immediate order under s 291(1)(b) putting Macennovy Trust Ltd into liquidation. Sefton Construction Ltd did not submit for an immediate order.

[53] Macennovy Trust Ltd’s complaint that Sefton had not paid the order for costs made on 12 February 2010 is not a ground for refusing recall. In applying for recall, Sefton Construction Ltd is saying that the order of 12 February 2010, including the order for costs, ought to be set aside. Indeed, if it had paid costs, that might be taken as an acknowledgement of its liability under the orders and could stand in the way of a recall application.

[54] On the recall application, it is just to recall the order setting aside the statutory demand. An injustice arose because an order was made by default setting aside the statutory demand, when Sefton Construction Ltd had good grounds to resist the application. The failure of misrepresentation on 12 February 2010 was in the nature of a mishap that arose from my standing the liquidation applications down. No useful purpose would be served by refusing recall and putting the liquidator to the trouble of issuing a fresh statutory demand and Macennovy to apply again to set aside.

[55] On the merits of the setting aside application, none of the matters raised by Macennovy Trust Ltd in its setting aside application give good grounds for setting aside the statutory demand. Further, the fact that Sefton Construction Ltd is now in liquidation does not prevent Sefton Construction Ltd continuing with the statutory demand. The statutory demand is valid and no grounds have been shown for it to be set aside.

[56] I also record that I was not asked to decide how the Court should exercise its discretion on an application that Macennovy Trust Ltd be put into liquidation. As the Court of Appeal noted in Laywood v Holmes Construction Wellington Ltd , different considerations may arise.

[57] Sefton Construction Ltd has succeeded in its recall application and the order of 12 February 2010 is set aside. It has succeeded in opposing the application to set aside the statutory demand. Ordinarily, it would recover costs on a 2B basis. However, the failure of representation on 12 February 2010 did cause a significant increase in costs to Macennovy Trust Ltd arising out of the recall application. Accordingly, I award Sefton Construction Ltd (In Liquidation) costs on the setting aside application, but it is to have no costs for the preparation of the recall application or the hearing on 24 March 2010.

[58] The omission in representation on 12 February 2010 also warrants a reduction in costs under r 14.7(f). On that basis, the costs in favour of Sefton Construction Ltd is also to be discounted by 20%.

[59] I make the following orders:

a) I recall and set aside the order of 12 February 2010 setting aside the statutory demand of Sefton Construction Ltd dated 5 November 2009 and the order for costs.

b) I dismiss the application by Macennovy Trust Ltd under s 290 of the Companies Act to set aside the statutory demand.

c) Under s 291(1)(a) of the Companies Act, I order Macennovy Trust Ltd to pay Sefton Construction Ltd the sum of $132,151.68 by 15 May 2010. In default of payment, Sefton Construction Ltd (In Liquidation) may make an application for an order putting Macennovy Trust Ltd into liquidation.

d) I award Sefton Construction Ltd (In Liquidation) costs on the setting aside application on a 2B basis, discounted by 20%, plus disbursements, but Sefton Construction Ltd is to have no costs for the preparation of the recall application or the hearing on 24 March 2010 and it may not recover the filing fee on the application for recall.

R M Bell

Associate Judge