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.
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Importance of updating company address details on the Companies Register
It is important to keep the company’s address details on the Companies Register updated at all times. Yet, we often come across situations where this does not happen, and what seems like a small omission may lead to serious consequences. For example, important legal documents can be missed, and consequently, judgment can be entered into against the company without the company’s knowledge. Further, there can be personal consequences for company directors under the Companies Act 1993 (“the Act”) if the registered address is unmanaged.
Requirement under the Act
A company must always have:
A physical registered office in New Zealand. This is the address where the company’s records (described under s 189 of the Act) are stored.
A physical address for service in New Zealand, which can be the same as the registered office or another place. This is the address where legal documents are served.
The registered office and address for service of a company at any particular time are the places that are described as those on the Companies Register at that time. This information is publicly available on the Companies Register website.
Subject to the company’s constitution, the Board of the Company can change the registered office or addresses for service at any time. If the registered office or address for service change, then notice of that change (in the prescribed form) must be given to the Registrar of Companies. Otherwise, the registered office or address for service will remain in the previous place specified on the Companies Register.
Also, s 188 of the Act allows the Registrar of Companies to require a company to change its registered office by notice in writing. In such a case, a company will have two options: change its registered office by the date stated in the notice; or appeal to the Court. Failure to comply with s 188 is an offense and renders every director of the company liable on conviction to a fine not exceeding $5,000.
If the company’s records are moved to a location other than the registered office, a notice of this must be given to the Registrar of Companies within 10 working days. If the company fails to comply with this requirement, the company and every director personally commit an offense and are liable on conviction to a penalty not exceeding $10,000.
Risks of not updating address details
Section 387 of the Act prescribes how documents in legal proceedings are to be served on New Zealand registered companies. There are several options to serve, however, service by leaving the documents at the company’s registered office or address for service are the most commonly used options. If the office is closed, the documents in question can simply be affixed to the front door.
As a result, if the company’s office or address for service is not updated, the company may risk missing essential legal documents, notices, and deadlines and be subjected to a judgment entered against them or, worse, liquidation proceedings. In our experience, unfortunately, this is common. While in certain circumstances it could be possible to reverse judgment or order that was entered into without the company knowing it, this process is expensive and procedurally complicated as an application to Court would be required.
If any of the addresses are in a building with other businesses, it is equally important to provide full details of the address, such as the level of the building, office number, and/or name. If no details are provided, the service of documents could be conducted anywhere in the building. This could again result in the essential documents being unnoticed by the company.
If the company suffers a detriment as a result of the addresses not being properly maintained on the Companies Register, the director could be personally liable for breach of his director duties.
It is also important to ensure that the address that is stated as the company’s office or the address for service is checked regularly. Some documents, such as statutory demands, when served, have a very strict and short timeframe for compliance, or making an application to set it aside. If that time lapses, the consequences could be serious as there is a risk that the company will be liquidated. If the address is not checked regularly (for example, staff usually work offsite), it is recommended that the registered office and/or address for service are at another location, such as the accountant’s or solicitor’s office.
Our expert receivership lawyers assist clients to navigate this process throughout New Zealand. There are many pitfalls if implemented incorrectly.
Please refer to our People for more information on who we are, our experience, and how we can help you.
Unsurprisingly, the Supreme Court (by majority of 3 to 2) has upheld the Court of Appeal and High Court decisions to set aside the creditor compromise put forward by Trends Publishing International Limited (“Trends”).
Part 14 of the Companies Act 1993 (“the Act”) provides a process by which compromises between a company (usually insolvent or near-insolvent) and its creditors can be implemented even though not all of those affected agree. An approved compromise is binding on the company and all creditors to whom the notice of the proposal was given.
The underlying principle is that creditors representing a majority in number and 75% in value of the debts (a qualified majority) can commit all creditors to a compromise. As well, the legislative scheme incorporates, but does not define, a concept of classes of creditors. Where there is more than one class of creditors, a qualified majority of creditors within each class must vote in favour of the compromise.
Under s 232 of the Act, a creditor may apply to the court for a declaration that the compromise does not apply to a particular creditor or class of creditors or a similar relief. The grounds for such an order include material irregularities in the obtaining of approval and unfair prejudice to a creditor, or to the class of creditors to which that creditor belonged, who voted against the compromise.
The issue in this case was that entities associated with Trends controlled more than 75% of the creditors’ vote by value (“the Related Creditors”).
A number of arm’s-length creditors challenged the validity of the compromise (“the Challenging Creditors”).
The Courts have agreed that the Related Creditors ought not to have been put in the same class as the arm’s length creditors for the purposes of voting under Part 14 of the Act.
Background
Trends provides printing, publishing, marketing and advertising services. In May 2015, its directors proposed a compromise to all of the unsecured creditors which:
provided no direct return for the Related Creditors;
favoured smaller over larger creditors; and
placed all of the creditors within one class for voting purposes.
The proposal was considered at a meeting of creditors held on 22 May 2015. 62 creditors were involved, and the debts totaled approximately $4.27 million. The Related Creditors were owed $3.23 million. The Related Creditors had agreed not to receive any payments under the compromise but were allowed to vote. Consequently, the compromise was approved by a qualified majority.
At the High Court, Heath J concluded that the Related Creditors should have been placed in a different class from the arm’s-length creditors due to their disparate interests. Heath J saw the grouping of the Related Creditors with the arm’s length creditors was designed to ensure that the proposal would be approved and amounted to manipulation. Such manipulation constituted unfair prejudice for the purposes of s 232 of the Act. Heath J therefore set the compromise aside.
The Court of Appeal upheld the judgment of Heath J, however, on slightly different grounds. The Court was of the view that:
the Related Creditors and the arm’s-length creditors ought not to have been classed together;
Callaghan Innovation (“Callaghan”), one of the Challenging Creditors, should have been placed in a separate class or alternatively (and more realistically) should have been excluded from the compromise;
the information which had been supplied in support of the proposal was inadequate and this was a material irregularity under s 232(3)(b) of the Act; and
setting aside the compromise was appropriate.
The Supreme Court decision
The Supreme Court held that the purpose of Part 14 of the Act is to give effect to compromises which reflect a fair business assessment by creditors. An assessment should reflect the common interest of all those bound by the compromise. Creditors should be placed into voting classes based on their shared rights and interests in relation to the debtor company.
The Related Creditors had very different interests in Trends than the arm’s-length creditors. The arm’s-length creditors’ purpose in entering into the compromise was to receive some payment for their debts. While the Related Creditors’ purpose was to ensure some minimal payment to the arm’s length creditors so they were bound by the compromise and Trends could continue to trade.
Further, creditors with the same rights and interests before the compromise were treated differently by it. The compromise preferred smaller creditors. It was to pay all creditors in full for the first $1,000 owing. This also created a separate class of creditors.
Ultimately, the Supreme Court held that there was a material irregularity in the process of entering into the compromise, and unfair prejudice to the arm’s length creditors. The Supreme Court set the compromise aside as it was fundamentally misconceived.
Of interest is that the two dissenting judges (Elias CJ and Ellen France J) held they would have ruled that only the Challenging Creditors were not bound by the compromise but would have upheld the compromise in other respects.
Key Take Outs
Following the correct process when proposed a compromise is important.
This case demonstrates the need to consider wider commercial classes of creditors under Part 14 compromises that are not limited to the traditional simplistic classes of ‘unsecured’, ‘secured’, or ‘preferential’ creditors. The commercial interests and legal interests need to be considered as well.
Proper consideration of these factors should be done prior to presenting the proposed compromise to creditors.
This case demonstrates that the Court will not allow related party creditors to influence the voting of the compromise as against the arm’s length creditors.
