There are a variety of barriers to settlement throughout the mediation process. These include communication barriers, unrealistic expectations, emotional barriers, cultural barriers, intraparty conflict and fear of losing face.
This article discusses caucusing as an effective way of overcoming barriers and challenges of mediation.
Mediation caucusing
Mediation caucusing is the use of separate meetings between the mediator and the parties individually during a joint mediation session. Caucuses can be conducted at various stages of a mediation and sometimes in combination with joint sessions. Mediators often use caucus sessions to discuss the conflict and advance the negotiation.
David A Hoffman noted in his book on shuttle diplomacy that caucusing is widely used because it can overcome a variety of tactical and strategic barriers that would be difficult in joint sessions such as (to name a few):
communication barriers
emotional barriers
information barriers
cultural barriers
strategic barriers
unrealistic expectations
obstacles to generating options
need for negotiation coaching
need for process management
internal conflicts
fear of losing face
Communication barriers
In mediations with particularly high-conflict behaviour, the parties may communicate aggressively and may find it difficult to remain in the joint session. A skilled mediator will reframe the statements made by each party and may decide to meet separately with the parties to manage any barriers to communication between them.
Emotional barriers
Mediations often cause intense emotions, especially when the conflict is highly personal, or one party believes that the other party is not bargaining in good faith.
Hormonal changes occur when people are under stress. Adrenaline production rises, and people experience a fight or flight reaction. Caucusing provides parties with a space to recover from any confronting behaviour. Caucuses also create a space for safe venting of intense emotion without negatively affecting the atmosphere of the joint session.
Information barriers
The mediator is sometimes given critical information unknown to the other side on a confidential basis in a caucus session.
The parties are often reluctant to share such information because if it is shared in advance of trial, the other party will have time to prepare a response to lessen the impact of the damaging evidence. However, a mediator is obliged to obtain express permission to share information imparted confidentially in a private session. A skilled mediator will understand and adhere to professional obligations and will not compromise confidentiality or impartiality.
Cultural barriers
Mediators need to identify and manage any perceived power imbalances. Racial, cultural, class, and other differences may lead some people to perceive themselves to be less powerful so they prefer private caucuses in a mediation. This is especially the case if a party’s identity is a central element in the mediation and the aggrieved party perceives (accurately or inaccurately) a lack of respect from the other party because of that identity.
For example, a group of students at Columbia University in 1996 went on a hunger strike and requested the university to create an ethnic studies department. The anger and mistrust on both sides made joint meetings problematic so caucus sessions were particularly useful.
Strategic barriers
Most parties are reluctant to share their true bottom line out of fear that this will be exploited by the opposing party. Caucus sessions may help mediators determine a zone of possible agreement.
The mediator may ask each party separately what they believe the other side might be willing to offer to settle the case. The two answers may assist the parties to come to a range within which the parties are comfortable they can settle.
The mediator may also ask a range a party might be willing to bargain in. Such “range bargaining” communicates a willingness to be flexible and begin defining the parameters of a zone of possible agreement.
Unrealistic expectations
Parties often have overly optimistic assessments of their best alternative to a negotiated agreement (BATNA). A skilled mediator can assess a party’s BATNA by exploring what will happen in Court if the dispute is not settled. Overconfidence is one of the many cognitive miscalibrations to which the human mind is prone; others include self-serving bias and status quo bias, which likewise can skew a party’s assessment of his or her BATNA.
A skilled mediator will be able to test the inferences that have led each party to their conclusions about their BATNAs. In joint sessions, parties usually exaggerate their likelihood of success and minimise the other party’s likelihood of winning.
Lawyers commonly seek mediation when they believe the other side, or even their own clients, have an overly optimistic view of the case because the mediator can persuade each side to be more realistic.
Obstacles to generating options
The parties may fear that sharing something in a joint session could reveal their openness to solutions that they wish to keep private.
Mediators may encourage brainstorming first in caucus sessions and then in joint session to gain the trust of the parties and reduce the risk that an idea advanced in the mediation could be viewed as biased.
Need for negotiation coaching
Mediators commonly engage in negotiation coaching because disparities in negotiating skill and mediation experience can create an unlevel playing field.
Negotiation coaching may encourage parties to explore each side’s interests instead of focusing solely on positions, help parties generate options, and decide offers and counteroffers.
Coaching is impossible in joint sessions because it could give the appearance of partiality, and because the parties are rarely truthful about their bargaining strategies.
Need for process management
Caucus sessions may be required if there is a party displaying disruptive behaviour. Joint sessions may be harder to manage in some circumstances.
If a party, or party’s lawyer, cannot pick up on social cues and is unable to control the impulse to talk throughout the mediation, a skilled mediator may decide to separate the parties to create some time and structure to the mediation.
Internal conflicts
Parties often need internal mediation within their own team. A party, and his or her lawyer, may have differing ideas about the best negotiation strategy. There may also be an uneasy alliance or a difference in dynamics within a group.
Parties can be transparent about internal disagreements in caucus sessions and then achieve unity in joint sessions. Separate meetings may also be needed to determine whether there is a potential conflict of interest.
Fear of losing face
In commercial disputes, some executives or employees may have similar interests with respect to outside constituencies (shareholders, suppliers, and customers) and with internal constituencies (company’s officers, employees and board of directors). They may be motivated to avoid letting them believe that they gave up or left money on the table.
An effective mediator can help maximise everyone’s interests. Often, the most successful way to assist the parties to reach a resolution and save face in a negotiation is for the final proposal to come from the mediator.
In a “mediator’s proposal” procedure, the parties are less likely to dismiss a proposal and the mediator can discuss the proposal confidentially with the parties. Even when a mediator’s proposal is not accepted by a party, these separate conversations can often lead the way to resolution.
Conclusion
Mediation caucusing adds value to mediation by overcoming various tactical and strategic barriers and impediments to settlement. Although the no-caucus model may be appropriate for certain types of mediation (and preferred by some mediators), often parties prefer the efficiency that can be achieved with caucusing. Numerous variations and hybrid mediation formats may also be useful.
How can you find out more?
At Norling Law, we are passionate about solving commercial disputes and legal issues. We offer professional, independent, and impartial mediation services to users in a dispute.
Norling Law supports mediation as an efficient way of solving legal issues. Especially if the parties to the dispute want a negotiated outcome that remains private and confidential and that puts a prompt end to the costs of having the dispute ongoing.
As mediators and representatives, we assist the users to a mediation achieve their priorities throughout the mediation process and enable them to make informed decisions regarding the resolution of the disputes they are involved in.
Our mediator, Wendy Alexander, regularly assists with the facilitation of settlements through mediation.
At Norling Law, we receive a large number of commercial disputes. Commercial disputes can be extremely stressful and can often be suitable for mediation. The parties may have been negotiating directly to reach a solution that would meet the interests of both parties. However, the parties often find it difficult to reach agreement.
Using mediation is an option that could potentially resolve commercial problems quickly and efficiently. Mediation is a low-cost option to consider before deciding on whether to litigate. Traditional mediation is usually a more expensive process as it involves the users meeting physically and there are resulting costs involved with travel and booking a neutral meeting room (or rooms). Sometimes traditional mediation might not be available at all for urgent matters.
Wendy can effectively assist users of mediation with her extensive experience as a commercial mediator. Wendy can help parties decide whether the parties’ objectives would be best served using joint sessions, caucusing, or a combination of these approaches. Wendy completed training at Program on Negotiation at Harvard Law School, USA and the Arbitrators and Mediators Institute of New Zealand (AMINZ). Wendy is also an Associate Member of AMINZ. This training complements the skills she already has in negotiation and dispute resolution.
Wendy often receives feedback from the mediation parties that they felt relaxed and in safe hands with the management of the dispute and that Wendy truly understood where they were coming from.
If Wendy’s expertise can be of assistance, the first step is to send us the details of the situation here.
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.
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.
Many mediators believe that the most serious challenge facing commercial mediation is poor public and professional awareness of the mediation process. This is a major obstacle to the potential users of mediation attempting to resolve commercial disputes using the mediation process.
Financial and time constraints are also commonly identified as other challenges in dispute resolution.
This article explores who uses mediation and the benefits of mediation.
Users of mediation
The users are the most important people in mediation, and everything revolves around them. Mediation helps the users to resolve disputes. The mediator’s aim is to empower the users and their representatives’ aim is to advocate for them.
The greatest demand for commercial mediation comes from the building/construction, insurance and property disputes, as well as contract disputes in general.
Benefits of mediation
The parties involved in commercial disputes often choose mediation because of its benefits compared to litigation, including:
low costs;
speed and efficiency;
certainty and control of outcome;
confidentiality;
flexibility;
preservation of relationships;
ability to get advice about alternatives, risks, and consequences.
Mediation is also generally much cheaper than other third-party alternatives.
The users to mediation may have different priorities depending on the specific area. At Norling Law, we can assist users achieve their priorities throughout the mediation process. We can assist users both as mediators and representatives.
Many parties are happy with using mediation as a dispute resolution process because of its benefits (outlined above). Accordingly, mediation should be included as an advised option for resolving disputes more regularly. All lawyers have a positive obligation under r 13.4 of the Conduct and Client Care Rules to keep the client advised of alternatives to litigation that are reasonably available to enable the client to make informed decisions regarding the resolution of the dispute.
How can you find out more?
At Norling Law, we are passionate about solving commercial disputes and legal issues.
Norling Law offers professional, independent, and impartial mediation services to users in a dispute. Norling Law supports mediation as an efficient way of solving legal issues. Especially if the parties to the dispute want a negotiated outcome that remains private and confidential and that puts a prompt end to the costs of having the dispute ongoing.
As mediators and representatives, we assist the users to a mediation achieve their priorities throughout the mediation process and enable them to make informed decisions regarding the resolution of the disputes they are involved in.
Our mediator, Wendy Alexander, regularly assists with the facilitation of settlements through mediation.
At Norling Law, we receive a large number of commercial disputes. Commercial disputes can be extremely stressful and can often be suitable for mediation. The parties may have been negotiating directly to reach a solution that would meet the interests of both parties. However, the parties often find it difficult to reach agreement.
Using mediation is an option that could potentially resolve commercial problems quickly and efficiently. Mediation is a low-cost option to consider before deciding on whether to litigate. Traditional mediation is usually a more expensive process as it involves the users meeting physically and there are resulting costs involved with travel and booking a neutral meeting room (or rooms). Sometimes traditional mediation might not be available at all for urgent matters.
Wendy can effectively assist users of mediation with her extensive experience as a commercial mediator. Wendy completed training at Program on Negotiation at Harvard Law School, USA and the Arbitrators and Mediators Institute of New Zealand (AMINZ). Wendy is also an Associate Member of AMINZ. This training complements the skills she already has in negotiation and dispute resolution.
If Wendy’s expertise can be of assistance, the first step is to send us the details of the situation here.
So, you or your client have been served with a statutory demand.
What does it mean? What are the consequences? What must you do and by when? These are all questions that need to be answered within a short timeframe.
Issuance of a statutory demand is the first step in the process to commence liquidation proceedings against a company. This is not the only available path to commence liquidation proceedings against a company, however, this is the most used one.
As such, if a statutory demand has been served on a company, it should not be ignored as there could be serious consequences if it is not addressed.
Usually, a statutory demand can be set aside if there is a substantial dispute as to whether the debt is owing, or there appears to be a counterclaim or a setoff. The methods of setting aside a statutory demand are discussed in our previous article.
Unlike a usual statutory demand, the Supreme Court in Laywood v Holmes Construction Wellington Ltd [2009] NZSC 44 held that in certain circumstances, a statutory demand for a debt under the Construction Contracts Act 2022 (the CCA) might not be able to be set aside even if a company has a substantial dispute, counterclaim, or setoff. This is due to the “pay now, argue later” regime under the CCA.
This has recently been affirmed by the Court of Appeal in Demasol Ltd v South Pacific Industrial Ltd [2022] NZCA 480.
Background to Demasol Ltd v South Pacific Industrial Ltd
South Pacific Industrial Ltd (SPI) was the head contractor for demolition works. Demasol Ltd (Demasol) specialised in asbestos removal and was the subcontractor to demolish a large bin tank containing asbestos.
Demasol served two payment claims which contained charges for additional works due to variations to the contract. SPI did not dispute the payment claims by issuing payment schedules as required by the CCA, nor did it pay the amounts sought in the payment claims. Consequently, Demasol served a statutory demand on SPI.
SPI applied to set aside the statutory demand. The High Court set aside the statutory demand under s 290(4)(a) of the Companies Act 1993 because it was reasonably arguable that the second payment claim was not valid due to the charged variations being disputed. Demasol appealed to the Court of Appeal.
Payment claims under the CCA
The Court of Appeal noted that the objective of the CCA is to secure timely cashflow to contractors and subcontractors in the construction industry. The CCA does not shut the payer out from disputing the amount claimed but it requires the payer to pay first and argue later.
If a payer does not respond to a payment claim by serving a payment schedule under s 21 of the CCA, then the contractor is entitled to recover the amount as a debt due under s 23.
If a payer had issued a payment schedule and the dispute has not been resolved, then there may be a substantial dispute and s 290(4)(a) of the Companies Act 1993 may be invoked to set aside a statutory demand.
Whether the statutory demand should be set aside
Demasol made its payment claims under the CCA and complied with the statutory requirements under s 20.
SPI then became liable to pay the claimed amounts under s 22 as it failed to provide a payment schedule or pay the amounts claimed within 20 working days.
All the issues SPI belatedly disputed should have been covered in a payment schedule (which SPI failed to do). As a result, Demasol became entitled to recover the debt from SPI under s 23.
The Court of Appeal held that the payment claims served by Demasol on SPI were valid payment claims under the CCA. There was no substantial dispute as to whether SPI was liable to pay the amounts claimed. Accordingly, Demasol was entitled to enforce its statutory demand.
Therefore, the Court of Appeal held that the High Court erred in setting aside the statutory demand under s 290(4)(a) of the Companies Act 1993 as doing so would be contrary to the CCA and undermine its purposes. SPI was not shut out from the CCA’s adjudication processes or other proceedings. It simply had to pay now and argue later.
Outcome
SPI’s application to set aside the statutory demand was dismissed but the time for complying with the statutory demand was extended.
Our view
This recent Court of Appeal case reinforces the “pay now, argue later” regime under the CCA. It is a good reminder to all in the construction industry to respond promptly to payment claims pursuant to the process prescribed in the CCA.
The timeframes in the CCA are strict and failing to comply has irreversible consequences and can result in the payment claim being enforced in the Courts as a debt which will likely result in increased costs for the payer. It might be too late to dispute the debt once the contractor takes enforcement steps in reliance on s 23(2)(a) of the CCA.
Conclusion
If you have been served with a payment claim under the CCA or a statutory demand, or require legal assistance, we invite you to contact our specialists for a no obligation discussion. Our lawyers at Norling Law can assist you as part of our no obligation legal consultation.
To book a free 30-minute consultation, please click the button below:
The ins and outs of creating a shareholders agreement
The start of a new business venture is an exciting opportunity. One would hope all involved parties only have the best intentions in mind. In our experience, although these relationships start on a positive note external factors and influences can create a shift in position. This can turn the business relationship sour virtually overnight. In these situations, a robust shareholders agreement will be of indisputable value.
A business is like a marriage
It is imperative to have good communication skills and the ability to resolve and manage conflicts in both business and marital relationships. Without these skills, it will be difficult for all parties to build and maintain trust and confidence in one another, especially when it comes to overcoming challenges. A successful relationship needs clearly defined boundaries, goals, and a mutual understanding of what’s working, and what isn’t, and how to better collaborate to ensure these goals are met.
People often get caught up by the excitement of a new opportunity and rush into business relationships without first setting a strong and stable foundation. Without careful thought into the business or relationship it will be more susceptible to tough periods.
Disputes are inevitable
Shareholder disputes are inevitable. In our experience shareholder disputes in declining companies are just as common as disputes in successful companies. Arguably, it is more common for successful companies to have shareholder disputes. Rapid growth and high cash flow can cause shareholders to have a shift in perspective, leading to a potential conflict of interest as to how the company should be run in this new and exciting stage.
The taste of success or the prospect of doom can affect even the humblest of business partners and cause a dispute. However, it will be how you handle said dispute that will determine the solution.
If you fail to prepare, prepare to fail.
It is better to be safe than sorry, especially in situations where money and reputation are on the line.
Our past clients will tell you that it’s easier to agree on set rules and boundaries when the relationship is good, rather than in the face of a dispute. When a business relationship turns sour trust can be fleeting resulting in more time and money spent on negotiating a mutually agreeable outcome. If there are more than two shareholders involved the situation can evolve into an exercise of whose side to pick.
A simple sit-down conversation at the beginning of a business relationship has helped our prior clients:
Learn more about the character, beliefs, and general position of their (potential) business partner(s);
Communicate with their (potential) business partner(s) what is fundamentally important to them;
Realise what needs to be documented to help safeguard the best interests of the parties and the company moving forward; and
Sometimes, decide not to be involved with the other person(s) in business.
In saying this, great care needs to be taken when it comes to creating the shareholders agreement itself. Unlike other legal documents, a standard template will not be of value. Each shareholder agreement must be the product of the circumstances and the discussions of the individual shareholders.
A good shareholders agreement is a ‘living’ document. A well drafted agreement will encompass a wide range of possible scenarios and will provide solutions/guidance on each occasion. Shareholders agreement can also be regularly updated with the consent of all participating parties. In comparison, a standardised document will not be of use when push comes to shove. The upfront cost of preparing robust documentation is easily justified if a business relationship sours and lawyers are called in to fight.
If it all goes wrong
Sometimes, even with good documentation, disputes are inevitable and Court intervention may be required.
This is where our innovative solutions for shareholder disputes provide clients with the most value.
We are specialist lawyers who resolve commercial disputes and can help you strategically navigate any commercial dispute or Court action quickly and efficiently. If you want to talk, schedule a no obligation 30-minute consultation with our experts here:https://norlinglaw.co.nz/consultation/
Overall, the key takeaways are:
Shareholder disputes are extremely costly to resolve.
They can be avoided if you have a robust, well-drafted, and well-considered shareholders agreement put in place.
Unfortunately, there is some upfront cost for this, but that is easily justified when a dispute arises, or shareholders wish to part ways.
Sometimes Court intervention is unavoidable. For the best result, you should engage transparent expert commercial lawyers who can tackle your problems strategically and efficiently.
