If you have received a payment claim, you must respond with a payment schedule within the prescribed timeframe or pay. If you fail to do so, s 23 of the Construction Contracts Act 2002 (the Act) states that:
the payee may recover from the payer, as a debt due, in any Court, the unpaid portion of the claimed amount, and the actual and reasonable costs of recovery awarded against the payer by Court; and
the payee may serve notice on the payer of its intention to suspend construction work.
A payment schedule must set out the undisputed amount which the payer acknowledges should be paid (if any), and also set out any disputed amount (if any) with reasons for the dispute.
A payment schedule is designed to allow a contractor to receive the funds that all parties acknowledge are due. This way, the contractor continues to receive cash flow and is notified of reasons why a certain payment is not received. This was summarised by the Court in Marsden Villas Limited v Wooding Construction Limited HC Auckland CIV-2006-404-809, 1 March 2006:
The Act therefore has a focus on a payment procedure, the results that arise from the observance or non-observance of those procedures, in quick resolutions of dispute. The processes that it sets up are designed to sidestep immediate engagement on the substantive issues such as set-off for poor workmanship which in the past were so often used as tools for unscrupulous principals and head contractors to delay payments. As far as the principle is set up, the regime is ‘sudden death’. Should the principal not follow the correct procedure, it can be obliged to pay in the interim what it was claimed, whatever the merits. In that way, if the principal does not act in accordance with the quick procedures of the Act, that principal, rather than the contractor and subcontractors, will have to bear the consequences of delay, in terms of cash flow.
Statutory requirements for a payment schedule
A payment schedule has no set form. However, s 21 of the Act states that a payment schedule must:
Be in writing;
Identify the payment claim to which it relates;
State the scheduled amount which it proposes to pay; and
If the scheduled amount is less than the claimed amount, the payment schedule must:
indicate how the scheduled amount was calculated;
explain reasons why the scheduled amount is less; and
if the difference is because the payer is withholding payment, the reasons why payment is being withheld.
A payer is allowed to dispute 100% of the claimed amount by stating that the scheduled amount is zero.
Payment schedules in the Courts
A variety of different payment schedules scenarios have been before the Courts, with varying outcomes.
In Westnorth Labour Hire Limited v SB Properties Limited HC Auckland, CIV-2006-404-1858, 19 December 2006, the payer responded to a payment claim by providing the contractor with a detailed letter on the various issues, cost overruns and a suspicion that work had been improperly charged for. The letter concluded with:
I must advise that we do not agree with your charges for the reasons noted above and until you provide the breakdown requested and until we have had suitable time to consider the information you provide, no further payments will be made …
Whilst not in any particular form, the Court held that the letter was a valid payment schedule. The Court held that the letter was in writing, it indicated that the scheduled amount was nil and provided reasons as to why the scheduled amount was less than the claimed amount.
The Court’s decision in Westnorth can be contrasted to the decision in Metalcraft Industries Limited v Christie HC Whangarei, CIV-2006-488-645, 15 February 2007. In that case, in response to the payment claim, the payer’s solicitors informed the contractor that:
In any event our client disputes liability for payment, and advises that she is unable to specify if any payment is to be made to your client, until she receives invoices for the remedial work undertaken by her replacement contractors. This, and our earlier correspondence, is to be regarded as our client’s reason for withholding payments. The cost of the remedial work is expected to exceed your client’s invoice.
Any summary judgment proceedings on the basis of your claim that the sum is a debt due, or otherwise, will be defended and costs will be sought.
The High Court held that the above statements, when read together with earlier correspondence, could not be construed to mean that the scheduled amount was nil. On the contrary, the above statements show that the payer was not in a position to specify the scheduled amount and there was no unequivocal denial of liability for all of the payment claim. Rather, the payer indicated that she would review her position at a later date.
Importantly, the Court held that:
… An assertion that remedial work is required at a cost which would exceed the payment claim could never constitute a valid reason either for the difference between the scheduled amount and the amount claimed or for withholding payment. General and unspecified allegations of defective workmanship are insufficient unless quantified within a reduction for the claimed cost of remedial work. Similarly a claim that excess materials were supplied is not enough; Ms Christie would have to identify them and their value to justify a further reduction in the scheduled amount. Delays in completing the work and consequential damage caused by leaking and water damage may give rise to a counterclaim for special damages, but even if quantified they could not be taken into account in the scheduled amount: s 79. None of the reasons given in Pegg Ayton’s correspondence justified withholding payment of any part of Metalcraft’s claim.
The Court in Metalcraft was of the view that the decision of Westnorth can be distinguished on the basis that the correspondence in Westnorth contained all the information required for the contractor to understand its position and make the appropriate decision. In particular, the Court noted that the correspondence:
…contained a number of arithmetical calculations, beginning with the amount of the invoices, their relationship to projected budgets and total previous payments and figures for materials returned – in substance a calculation indicating why no money was considered to be then payable.
In essence, a payment schedule must state a scheduled amount regardless of how detailed the complaint is. This is reinforced by the Court’s decision in Charles Beckhan v Betty DC Whangarei CIV-2007-090-2424, 21 February 2008. In that case, the Court rejected a letter from the payee’s solicitors as a payment schedule, claiming that the payee had already paid more for the value of the work and the materials, and further claimed that the invoices did not correspond with the time spent or the materials provided to site. The Court reasoned that there was no calculation at all as to how and by how much the payee claimed to have overpaid.
It is also worth noting that in Cube Buildings Solutions Ltd v King HC Christchurch CIV-2009-409-34, 17 December 2009, the High Court held that the inclusion of a deduction for amounts that had already been paid does not invalidate a payment schedule. The Court came to this conclusion because s 79 of the Act permits the Court to take account of a counterclaim, set-off or cross-demand in circumstances where there is no dispute in relation to the claimed amount.
It is less clear whether a payer is able to raise a set-off, crossclaim or counterclaim in a payment schedule in relation to items outside of the payment claim itself. For example, a contractor is contracted to construct a building. It starts this process by laying the foundations before proceeding to erect the frames. The contractor submitted monthly payment claims for the foundations and while erecting the frames, defects appear in the foundations which had already been claimed. The payer then issues a payment schedule in response to the payment claim for frames containing a deduction for remedial work to the foundations.
While there is no direct authority on point, the Court in Canam Construction Limited v George Developments Limited HC Auckland CIV-2004-404-3565 observed that s 21 “makes it clear any payment schedule is confined in scope to claims raised upon the payment claim.” If the payment schedule is restricted to the confined scope, then it could be argued that deductions for works not within the scope of the payment claim are inappropriate.
Additionally, the Court of Appeal in SOL Trustees Ltd v Giles Civil Ltd [2015] 2 NZLR 482 indicated that it would be inconsistent with s 79 of the Act if a counterclaim or set-off could be relied on as a response to an earlier payment claim. It is noted that the Court of Appeal’s statement is obiter as the issue was not fully argued before the Court.
These decisions can be contrasted to the holding in Metalcraft where the Court held that a payment schedule that “properly quantifies the amount incurred by a principal in remedying the allegedly defective workmanship by a contractor may … constitute a valid reason for withholding payment for that amount”.
Conclusion
Our view is that the holding in Metalcraft is likely to be the correct position. The High Court recently took guidance from Metalcraft in The Fletcher Construction Company Limited v Spotless Facility Services (NZ) Limited [2020] NZHC 1942 decision, where Justice van Bohemen echoed Harrison J’s words:
The specific purpose of the payment schedule is to give the contractor full and unequivocal notice of all areas of difference or dispute to enable it to properly assess its future options.
However, a payer must still be able to provide sufficient details of its counterclaim or set-off which can be difficult given that relevant information may not be available at the time.
Contact us if you have received a payment claim and need to respond with a payment schedule. Our lawyers at Norling Law can review your payment claim and discuss strategies to respond to your payment claim as part of our no obligation legal consultation. To book a free 30-minute consultation please click this link https://norlinglaw.co.nz/consultation-brent/.
A contractor is not required to complete extra work and cannot expect payment for completing extra work that has not been specified in the original contract, without either a new contract, a variation of the existing contract, or an order made under a term in the contract that permits variation of the work.
A variation is an alteration to the scope of works in a construction contract. It could be an addition, substitution, or omission from the original scope of works. A variation should always be within the scope of works originally required. It should not be of such different character or quality as to be totally different to the works originally contemplated. If that is the case, then the contractor could argue that it is not a variation, but extra work.
Almost all construction projects, whether small or large, will have variations. The three critical aspects of a variation are:
What can be varied,
The process of claiming a variation, and
Valuing the variation.
What can be varied?
The first step in identifying a variation to the scope of works is identifying the scope of works itself. The scope of works and services is defined by the contract, commonly by reference to documents such as plans and specifications or a project brief. If works or services are part of the scope of works, then they are not a variation.
A common dispute that arises in relation to variations is whether a variation is, in fact, a variation. These arguments are common where the scope of works is not clear. It is, therefore, important to define with as much precision as possible, exactly what the scope of works includes. Failing to do so could mean that work can be implied to be included within the scope of works if incidentally required.
For example, if a plan shows that the contractor is to install a door and the specifications do not specifically refer to any hinges on those doors, supplying the hinges are part of the scope of works as it is necessary for the completion of that work and likely to be the contractor’s responsibility.
The variation process
Most written construction contracts will specify a process for instructing or claiming a variation. This is because at common law, the principal does not have an automatic right to instruct variations. So, unless the contract empowers the principal to instruct variations, the contractor can refuse to perform the variation and insist on performing the original scope of works.
For example, in Ettridge v The Vermin Board of the District of Murat Bay [1928] SASR 124, a contractor was engaged by the principal to construct a fence along a railway line. During construction, the principal instructed the contractor to deviate from the original line. The contractor refused to accept the deviation and abandoned work claiming that the contract did not give the principal a power to vary the contract. The Court held that as the principal did not have the power to instruct variations, it had repudiated the contract by insisting on the deviation. Accordingly, the contractor was entitled to terminate.
Most written contracts allow the principal to instruct variations and the contractor to claim for variations. In respect of the former, the process will normally involve an instruction from the principal, which can be written or verbal, to vary the works. Depending on the construction contract, this power could be very wide and can represent a significant risk for the contractor.
For instance, the contractor could be required to undertake extra works even though it may not have the necessary resources, or the work may be uneconomic. Furthermore, instructions issued at a later stage in the project may entail extensive redesign and rework which can also force the contractor to remain on site for significantly longer than envisaged. Accordingly, contractors would be well-advised to seek advice on the extent of this power before entering the contract.
In respect of a contractor’s claim for variations, depending on the contract, it may provide specific instances when a variation is claimable. Under NZS 3910 for example, it provides that a variation is claimable where there is a significant discrepancy, late instructions, nominated subcontractor defaults, incorrect information supplied by principal, early occupancy by principal and etc.
In our experience, it is common for disputes to arise because the correct process prescribed by the contract in relation to variation is not followed. A common issue encountered by contractors is non-payment for variation works requested pursuant to verbal instructions from the principal. This issue is especially prevalent in residential building projects.
Typically, this scenario involves a verbal agreement between the principal and contractor for works to be varied. However, once the variations have been completed, the principal attempts to avoid payment by denying that it had instructed the contractor to undertake those variations. If the variation clause requires the variation to be recorded in writing, and the contractor fails to document this, the contractor takes on the risk of not getting paid for the variation as there would be no clear evidence of an agreement for the contractor to perform them.
This could lead to a costly and time-consuming dispute to establish the variation.
While it may seem unfair, the contractor is not entitled to payment if it cannot prove that the variation was instructed. This situation can be avoided by insisting that all variations, large or small, be documented before undertaking the variation in question or refusing to carry it out unless it is formally instructed in writing.
Valuing the variation
The written construction contracts will usually have clauses setting out how a variation is valued.
The variation could be valued by agreement and if so, such agreement should be documented to prevent disputes in the future.
If not done by agreement, the parties should be aware of the valuation procedure in the contract. Typically, the contract will include a schedule of rates that will apply to most variations. Contractors should therefore check how variations are valued and whether those prices are feasible before entering the contract. Failing to do so could mean that the contractor is obligated to carry out a variation at a loss.
Conclusion
In the next article, we will discuss potential avenues available to contractors outside of the contract where the variation process has not been complied with. They include quantum meruit, estoppel and the doctrine of free acceptance.
Variations are an inevitable component of many construction contracts, and to ensure a fair outcome for all parties involved, the scope of work in the contract needs to be comprehensive. Our lawyers at Norling Law can review your scope of works and variations, and can assist with dispute resolution, as part of our no obligation legal consultation. To book a free 30-minute consultation please click this link https://norlinglaw.co.nz/consultation-brent/.
Creditors’ limited ability to pursue directors for breach of duties
The facts of Banks v Farmer [2021] NZHC 1922 will sound familiar to many. A gap in the market is identified and a business is set up to fill that gap. The issue many of these start-up businesses face is trying to convince investors to support them. Upon securing an investor there is subsequent pressure placed on the directors to make good on that investment. But sometimes everything might turn sour, with investors left trying to recover the money they put into these ventures.
The background of this case centres around a company named Mako Networks Holdings Limited (Mako), the company operated within the technology security market and the development of technological solutions for this area. Adam Banks (Mr Banks) was an investor in Mako, between 2011 and 2014 he had invested over $3.2 million in unsecured loans. Unfortunately, Mako was placed into liquidation and receivership when it owed creditors $34.5 million. Mr Banks brought these proceedings against the four directors of Mako (the Directors) on the basis they did not act in accordance with their obligations as directors.
Section 301 of the Companies Act 1993
Section 301 of the Companies Act 1993 (the Act) provides the High Court with the power to require a director (amongst other persons) to repay the money or return property of the company, or to make a contribution to the assets of the company by way of compensation. Under this section, liquidators, creditors, and shareholders are given the opportunity to make an application to the Court which is only triggered when the company in question is in liquidation.
An order made under this section will qualify as a judgment debt, therefore enabling liquidators, creditors, and shareholders to hold directors personally liable, resulting in the commencement of bankruptcy proceedings, if necessary, to enforce payment.
Application in Banks v Farmer
In the High Court decision, the third cause of action against the defendants was for a breach of their directors’ duties. Specifically, their failure to act in good faith and the best interests of the company, for carrying on business in a manner that was likely to create a substantial risk of serious loss to creditors, and for letting the company incur obligations that it was not able to perform and for their failure to exercise the care, diligence, and skill that a reasonable director would exercise in those circumstances.
Mr Banks relied on s 301(1)(c) of the Act to claim relief in the sum he advanced to Mako. In the alternative, Mr Banks sought the defendants restore or contribute $29,897,000.00 to Mako. He specifically referred to s 135 (reckless trading), s 136 (improperly incurring obligations), and s 137 (failing to exercise reasonable skill and care) as the directors’ duties that were breached.
In his discussion of the case, Moore J referred to the purpose of the Act regarding directors’ duties stating “Directors’ duties are not intended to prevent the taking of legitimate business risks or constrain genuine business judgment, but rather to protect shareholders and creditors against illegitimate abuses of directors’ power.” Moore J referenced that directors’ duties under ss 135 and 136 aim to protect shareholders and creditors from the directors taking big risks. These sections are intended to discourage directors from increasing their company indebtedness. Moore J also referenced that s 135 should only penalise illegitimate risk-taking. It was decided that there was no breach of s 135 before April 2014, and therefore this section failed.
Under s 136 it has to be established that when obligations were entered into a director of a company did not believe a company would be able to perform these obligations. Or that if there was a belief, it was an unreasonable one. Moore J also decided this section would fail as the defendants subjectively believed on reasonable grounds that Mako would be able to meet its obligation to Mr Banks as those obligations were due.
Section 137 relates to a duty of care. Moore J considered that by mid-2014, the Directors of Mako should have been aware of its looming cash flow issues. He considered that without a multi-million dollar contract coming into play, the company would not be able to meet its obligations. As such “at that point, a reasonable director, exercising due care, diligence, and skill, would have caused Mako to cease trading and go into liquidation” and it was concluded that a breach of s 137 was found.
Section 301 as a remedy for creditors
As s 137 was found to have been breached by the Directors, Moore J considered whether s 301(1)(c) could be used as a remedy with Mako no longer being at liquidation at the time of the trial.
Moore J held that s 301(1)(c) was unavailable as a remedy to Mr Banks as Mako was no longer in liquidation. At the time the proceedings were initiated, Mako was in liquidation, however, before the trial had begun, Mako was removed from the register. Moore J referred to the practical issues regarding the varying lengths of trials and securing a court date after an application has been filed. However, the law is clear, and the company must be in liquidation, otherwise, there will be no directors of a company to be held liable. It was noted that Mr Banks could have made an application under s 239 of the Act to restore Mako as a company. Yet, no applications were made.
The second consideration under this section was whether creditors could be personally compensated for a breach of directors’ duties. Moore J concluded that directors’ duties are owed to the company, not to specific creditors. As such, only a company is entitled to receive a remedy for a breach of directors’ duties. Moore J reviewed two conflicting decisions of the High Court on this issue. In Mitchell v Hesketh [1998] 8 NZLC 261,559 (HC), Master Venning was of the view there is a limit on the approach for creditors to obtain personal compensation. Where the claim was for “negligence, default, or breach of duty or trust about the company, the Court may only award relief by ordering that the director pay compensation to the company under s 301(1)(b)(ii).”
In the alternative decision, in Marshall Futures Ltd (in Liq) v Marshall [1992] 1 NZLR 316 (HC), Tipping J was of the view s 301(1)(c) permits creditors to be personally compensated in limited circumstances. Tipping considered whether “moneys which are the subject of the declaration of personal responsibility are payable to the company…for the benefit of the creditors of the company as a whole or whether they are payable directly to the creditor.” His conclusion was that monies would be payable if the claim was payable to the creditor directly, without needing the liquidator to be involved. However, this authority was not helpful to Mr Banks, as the liquidator would have had to be notified of the claim, which did not occur.
Conclusion of Moore J – what it means for creditors
In the decision Moore J decided in favour of the defendants, holding that Mr Banks was unable to recover directly under s 301(1)(c). Section 301(1)(c) allows the Court to order directors to pay or transfer money or property directly to applicant creditors. However, a relief under this section can only be ordered where a director has misappropriated specific funds or property. This was not the case in this case so there could be no relief ordered to Mr Banks. In this case, the directors were found in breach of directors’ duties, but not misappropriation.
Section 301(1)(b) allows for relief where there has been a breach of director duties (as was the case here), however, this section provides for such relief to be paid to the company (as opposed to directly to the creditor) and then liquidators could make distributions to creditors. Section 301(1)(b) allows for the pool of assets in a liquidation to increase as the Court can order a person to repay or restore money or property with interest, or to contribute a sum to the assets of the company by way of compensation. However, at the time of the trial, Mako was no longer in liquidation and had been struck off the companies register. As such, Mr Banks was not able to utilise s 301 as a creditor as there was no company in existence that could receive the payment.
This decision highlights the importance of having security over your investments in a company. In this case, Mr Banks was left without any proper avenue for recourse under s 301.
It is common practice in the construction industry for clients to ask a contractor to provide a quote or estimate on a project.
What is a quote?
A quote is an offer to carry out the work for an exact price. Once a quote is accepted, the contractor is unable to charge more than the agreed price, subject to variations, cost fluctuations and provisional sums.
The benefits of a quote are that both parties are aware of the costs from the outset and can budget for the project accordingly. However, this can be a high risk path for the contractor if they fail to adequately price any element of the project as they are contractually required to bear any losses from their mispricing. The high-profile losses by Fletcher Construction on the International Convention Centre is an example of this.
What is an estimate?
Unlike a quote, an estimate is a best guess of how much a project might cost. It is a contractor’s best guess of what the labour, materials and margin is going to be from start to finish. An estimate does not carry with it a legal obligation to carry out the work at a fixed price and does not provide a cap for the total cost. While a contractor is not legally bound to its estimate, it owes a duty of care to the principal when providing the estimate.
An experienced contractor is likely to price a project on this basis if they consider the project too risky to provide a fixed price. This would be more common particularly in the current market. The uncertainties could include their ability to obtain materials, the site conditions, and the scope of works itself.
Estimates in court
A common dispute that arises is where the principal claims that it was provided a quote as opposed to an estimate.
In Jefferson v Straw Homes Limited [2017] NZHC 1766, the contractor and principal entered a residential building contract. In that case, the agreement was specified to be for “managed labour only” and the contract price was not stated. The principal had limited funds available to it which were sourced mostly from borrowings. This was made known to the contractor before work commenced and it was communicated that this was the limit.
Two written estimates were provided both containing words stating that it was a “price estimate” for $646,060.63. This was subsequently inserted into the contract as the “contract price”, at the principal’s request. As the project progressed, the principal enquired as to the cost to complete the project. The contractor informed him that there was approximately $100,000 of work still required over and above the estimate. After that, the relationship between the parties deteriorated and the principal stopped paying the contractor’s invoices.
At Court, the principal relied on the “contract price” in the agreement. However, the Court considered that the interpretation of the phrase “contract price” must be determined according to what a reasonable and properly informed third party would consider the parties intended the words of their contract to mean, and the facts and circumstances known and likely to be operating on the parties’ minds at the time.
In considering the facts of the case, the Court held that a reasonably and properly informed third party would have considered the words “contract price” in this instance to mean an estimate as per the written estimate provided at the same time, as:
The contractor indicated that it was not prepared to commit to a fixed price at the time;
The plans were still fluid when the contract was entered into;
The estimate gave imprecise figures for a number of items;
The estimate was based on plans with a smaller floor area and a large plan was being considered at the same time;
A third party would understand that the parties had agreed on a managed labour contract with the hope that the project could be completed for less with labour input from the principal;
The principal’s behaviour was consistent with there being no fixed price; and
The contractor continued to invoice the principal when the “contract price” had been exceeded, and the principal paid those invoices.
Having found that it was an estimate, the Court proceeded to consider whether the contractor owed the principal a duty of care in providing its estimate and whether that duty was breached.
On this issue, the Court held that in circumstances where the contractor was made aware of the principal’s financial situation and wished to limit the amount they wished to spend, this gave rise to a duty on the contractor, in contract and in tort, to ensure that accurate cost estimates were given before work commenced. This would have enabled the principal to make decisions to ensure that it remained within its financial limit.
In any event, the Court considered that while there was a breach, the principal did not suffer a loss. The Court held that it was wrong to consider the additional expenditure they were forced to incur as a loss when some of the additional expenditure was not caused by the contractor. Furthermore, the principal received a larger asset.
Conclusion
For contractors, the takeaways are to always be clear whether you are providing an estimate or a quote. Frequently, we encounter contractors providing estimates headed up with the word “quote” when it had no intention to provide a quote.
Additionally, contractors owe a duty of care to the principal in preparing its estimate. Practically, this means that a contractor may be required to do more than review plans and designs when preparing the estimate by visiting the site or engaging a quantity surveyor to ascertain the materials required.
Likewise, for the principal, if you are not sure whether you have received an estimate or quote, seek clarification from the contractor. Inform the principal of your financial situation and what you can afford before entering a construction contract, and regularly update the contractor on your financial situation as your project progresses.
The impacts of COVID-19 to local and global supply chains have resulted in unprecedented pressure on the construction industry as a result of price increases on some building materials. In some cases, this made projects unaffordable for principals and contractors alike, with elevated risk of budget blowouts. As such, care should be used in the current market when assessing when to issue a quote or an estimate for a particular job.
Contact us if you are considering embarking on a construction project and are weighing up proceeding with a fixed price quote or an estimate. Our lawyers at Norling Law can review your options and discuss the pros and cons as they relate to your specific situation as part of our no obligation legal consultation. To book a free 30-minute consultation please click this link https://norlinglaw.co.nz/consultation
Benjamin Franklin once said that “by failing to prepare, you are preparing to fail.”
While it is true that there is no way to guarantee success in a legal proceeding, Norling Law advocates that meticulous preparation is the only way to put forward your client’s best chance of succeeding in their case. But what happens when proceedings are brought prematurely, without adequate preparation?
A recent case that Norling Law acted in demonstrates this. In Another Orange Service Centre Limited (In Liquidation) v Vincent [2021] NZHC 2135, the liquidator of the Another Orange Service Centre Limited (In Liquidation) (the Company), Mr Noyce, brought a claim against the sole director and shareholder of the Company, Mrs Vincent. The claim was for repayment of the Company’s shareholder current account, which had allegedly been overdrawn by $914,612 at the point of liquidation. The claim was brought via summary judgment application in the High Court.
The claim
Prior to its liquidation, the Company operated a motor vehicle repair shop. Mrs Vincent withdrew sums of money from the Company’s account, in her role as a shareholder. When the Company went into liquidation, the liquidator investigated the books of the Company. When calculating the claimed amount, he added payments that had been made from the Company’s bank account to Mrs Vincent’s personal bank account, and what appeared to be payments of Mrs Vincent’s non-business-related expenses by the Company.
The liquidator claimed that he had assessed the Company’s records and could not locate any evidence that Mrs Vincent complied with the requirements of s 161 of the Companies Act 1993 when she made these payments. As such, the payments were presumed to be personal drawings, and therefore repayable on demand.
For an in-depth discussion on s 161 of the Companies Act 1993, see an earlier article that Norling Law published, here. In summary, where payments are not recorded under the requirements of s 161, the payments retain a status as advances or drawings that are repayable on demand. The director or shareholder that withdraws the sums becomes personally liable to repay those monies to the company, unless they demonstrate that the payments were fair to the company.
Summary judgment
In a summary judgment application, the applicant must prove that the respondent has no arguable defence to the claim. That is, that there is no real question to be tried. The Court must be left without any real doubt or uncertainty that the application ought to be granted. As soon as there are disputed facts and the dispute is genuine, a judge will not usually engage in granting summary judgment.
In this case, the onus was on the liquidator to prove that Mrs Vincent had withdrawn the claimed sums as personal withdrawals, and at the very least, that she did not comply with the requirements of s 161.
There is more to a dispute than what is first disclosed
Prior to the commencement of the proceedings, the liquidator wrote to Mrs Vincent on 25 March 2021, attaching his nearly 900-page analysis of the Company’s accounts. He requested that Mrs Vincent review and identify any incorrectly allocated payments to her, by 29 March 2021, just 4 days later.
Norling Law was engaged at the point Mrs Vincent received the 25 March 2021 letter. However, there was no response from the liquidator when Norling Law requested further time so that it could properly analyse the information that the liquidator had provided.
On 30 April 2021, the liquidator made a demand for full payment of $914,612 from Mrs Vincent. Shortly after this, summary judgment proceedings were commenced in the High Court. This was just over one month after the first demand to Mrs Vincent was made.
Upon filing the claim, the liquidator filed a supporting affidavit. However, he did not exhibit in this affidavit the Excel Workbooks (containing his analysis), or the source documents upon which the analysis was based. The liquidator filed draft financial accounts from the Company but provided very little detail of the methodology he adopted to distinguish personal and business expenses. He explained that providing this information would require more than 900 pages of his accounting analysis.
Further, the liquidator did not provide these source documents or analysis in his second affidavit. This is surprising as Mr Turner, an independent expert for Mrs Vincent, had challenged the validity of the liquidator’s assessment for Mrs Vincent’s liability on several bases. As noted by Associate Judge Paulsen, the liquidator’s response to Mr Turner’s evidence was ‘superficial’. Further, Associate Judge Paulsen said that in circumstances where the applicant’s claim is founded upon the liquidator’s analysis, it is to be expected that all of that would be provided.
On behalf of Mrs Vincent, Norling Law argued that the applicant failed to produce sufficient evidence to establish the claim, and consequently, that Mrs Vincent had an arguable defence to liability against the whole sum.
Associate Judge Paulsen was not satisfied that the liquidator had calculated the sum owing correctly. It was noted that a decision could not be made in the absence of evidence.
Furthermore, the liquidator was found to have not given his evidence in compliance with rule 9.43(2) High Court Rules 2016, and the code of conduct for expert witnesses. His Honour found that on the evidence provided by Mrs Vincent, Mr Turner and Mr Noyce, a large portion of the sum claimed must have been drawings, however, the exact amount could not be determined. Consequently, Associate Judge Paulsen entered judgment for the liquidator against Mrs Vincent as to liability but found that quantum could only be determined following a further hearing and there was no immediate obligation to pay any amount.
Discussion
The difficulty with this case is that there was little evidence before the court to make a judgment from. Associate Judge Paulsen had no choice but to divide the issues into liability and quantum as there was no way that quantum could be decided. It is this writer’s observation that if this matter had been pursued as a standard proceeding, both parties would have had more time to file and respond to evidence. Accordingly, the outcome could have been vastly different.
While the liquidator had the onus of submitting evidence to prove their case, Associate Judge Paulsen thought that both parties had ample time to file further evidence from the beginning of the proceedings until the time it was heard before him.
Our thoughts
In summary, Norling Law believes that this case was not suitable for summary judgment, as the evidence to succeed in the application was not put before the court. We submit that it is an inefficient use of resources to have progressed the matter through this path, without meticulous preparation having taken place. We believe that it would have been more efficient to have this case heard in full through ordinary proceedings from the beginning.
While liability has been found, quantum is yet to be decided.
With more time, and meticulous preparation, who knows, the liquidator may have walked away with more than partial success.
