New Zealand Credit Law Bulletin - Vol 10, No 2, February 2010
A free, plain English review of recent law and items of interest for creditors, produced by Hattaway & Associates Ltd, Credit Consultants. To subscribe, visit the New Zealand bulletin index and enter your details on the right
Plain language disclaimer:
This bulletin is not legal advice. Do not make decisions on legal matters based on a brief commentary. Instead, get professional legal advice.
In this issue:
- Valiant efforts to stop a recidivist fraudster
OA acts to prevent significant risk of harm to the commercial community - Building co's first attempt to collect: Did the Construction Contracts Act claim ask for $23,795 or $458,858.67?
How to get this almost-foolproof claim process wrong - The second attempt: The use of assignment of debt to avoid a winding up
But the assignor owes us a lot more than we owe them, claims creditor
1. Valiant efforts to stop a recidivist fraudster
KNIGHT V OFFICIAL ASSIGNEE HC AK CIV 2000-404-000434 [2009] NZHC 215 (25 February 2009)
Michael Helsby Knight was convicted of fraudulently using a document to obtain a pecuniary (money) advantage as long ago as May 1985. He has spent a considerable amount of his time in Australia and has been bankrupted there twice. In 1990 he was convicted of managing a company when prohibited. He has been banned indefinitely in New South Wales from being involved in any business.
He was made bankrupt in New Zealand in 2001. In 2002 and 2004 Knight was sentenced for offences against the Fair Trading Act. He has made two applications to be discharged from bankruptcy, both of which were refused by the High Court. In March 2005, Knight pleaded guilty to fraud and was sentenced to 18 months imprisonment for using a forged document to obtain a pecuniary advantage.
However, in January 2008 Knight obtained the Official Assignee's approval to his employment by Wealand International NZ Limited as an assistant branch manager. Ironically, in February 2008 Knight was prosecuted by the National Enforcement Unit of the Ministry of Economic Development for previously taking part in the management of a business without the consent of the Official Assignee and within five years of a conviction of a crime involving dishonesty. According to the summary of facts, the companies Knight had worked for had a business association with an entity called Graduate House, the name under which Wealand trades (see, for example, http://www.stuff.co.nz/national/125965).
While working for the companies, it was alleged that Knight produced significant amounts of written material which were sent to potential clients under a fictitious name and that he was directly involved in the management, acting independently of a director who stood aside and took no active part in the management of a company.
That job came to an end in May/June and Knight obtained a position with another company, Kiwi Professionals Limited, as an assistant manager. The Official Assignee refused to consent to that employment, so Knight proposed returning to his previous position with Wealand. However, the Official Assignee now wouldn’t consent to this either. He based his decision on the significant potential risks Knight posed to the commercial community.
Knight applied under s 86 of the Insolvency Act 1967 (the 2006 Act didn’t apply in this case) for an order reversing or modifying the decision.
Under s 60(g) of the Act, consent was only required if the job involved participation in the management or control of a business. The judge in the High Court concluded that in this case the job description showed it did.
Knight’s lawyer said that the Official Assignee should have pointed out the problem parts of the job description so it could be modified, or imposed conditions on his consent. The judge however, said that “The position would not have ceased to be a managerial one simply by deleting some duties and modifying others.”
Knight’s lawyer said the Official Assignee had previously agreed to Mr Knight working for the same firm in the same job and there had been no material change of circumstances that would justify a change of heart.
The judge said, “In my opinion, the Official Assignee does not have to show a change of circumstances in order to justify his change of position. His overriding duty is to come to the right decision. If that requires that he review an earlier decision, he is perfectly at liberty to do so. A change of circumstances is not required. His is not a judicial proceeding; it is an administrative procedure. He is not obliged to act consistently. In all of the circumstances, the Official Assignee's decision to refuse his consent was the only one reasonably open to him.”
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2. Building co's first attempt to collect: Did the Construction Contracts Act claim ask for $23,795 or $458,858.67?
Doric Interiors Construction Ltd issued claims under s 20(2) Construction Contracts Act 2002 against two companies it claimed to have done work for, Vijay Holdings Ltd, a property developer, and Magsons Hardware Limited, a related building supply company. Mr Vinod Kumar is the controlling director of both Vijay and Magsons.
If the companies wished to dispute the claim, they had, in this case, 20 working days to do so. Vijay did not do so. Magsons did. In theory, this meant that Vijay could no longer dispute the claim.
Doric Interiors Construction Ltd then served statutory demands on Vijay and Magsons. A statutory demand is the first step for a creditor to put a debtor company into liquidation.
Doric Construction claimed that Vijay owed it $451,858.67 and Magsons owed it amounts of $379,501.60 and $386,091.52. Vijay and Magsons both applied to the High Court to set the demands aside. The matters were all heard together.
The alleged debts related to building contracts which Doric Construction claimed it had carried out on behalf of the two companies. It was accepted that Doric Construction had bought over half a million dollars of materials from Magsons’ Mitre 10 stores in relation to these contracts. Doric Construction claimed that even after setting off this amount, it was still owed the amounts it claimed.
Vijay accepted that it had entered into a contract with Doric Construction. The company was to build homes for Vijay. The contract was confirmed in a letter from Vijay signed on behalf by Mr Vinod Kumar, Vijay’s Managing Director.
The claim Doric Construction had sent to Vijay sought payment of $23,795 which is referred to as the total current payment claim. However, at the foot of the claim there was a panel marked "statement" which advised that a total amount due on contract to date is $458,858.67. There were various calculations showing how both figures was reached.
Vijay acknowledged in court that it owed $33,587.64 (slightly more than the amount shown as currently payable) which it had not paid, so it didn’t dispute the claim. However, it said that it doesn’t owe Doric Construction any more than that. Doric Construction said that the failure to dispute the “total amount due on contract to date” of $458,858.67 meant that it was liable for this too.
Associate Judge Robinson in the High Court concluded that the claim did not make it clear that it was for $458,858.67, so Vijay was only liable for $23,795 at this point. If Doric Construction wanted to, it could issue a new, clearer claim under s 20 for the larger amount.
Magsons had sent payment schedules within the appropriate time, disputing the Construction Contracts Act claims which Doric Construction had made. Magsons claimed it was not a builder but a retailer of hardware and building materials operating two "Mitre 10" megastores and one "Home and Trade" in Auckland. Magsons said it had contracts with two other developers, Stratus Development Limited and Guardian Developments Limited, to supply building materials for the properties over which Doric Construction claimed money was owed. Magsons claimed Doric Construction had contracts with those developers, not with Magsons.
The judge looked at two contract documents. One of these was for supply of building products by Magsons to one of the relevant properties. Doric Construction didn’t appear to be a party to this and its lawyers acknowledged that it had no written contract with Magsons in respect of this property.
Another contract purported to be between Magsons and Doric Construction but Magsons. It was signed by a former manager at Magsons but Magsons’ managing director, Vinod Kumar claimed to know nothing about it. He said that all emails and other files in relation to the matter had been deleted.
The judge concluded that there was a genuine and substantial dispute as to the existence of any construction contract between Magsons and Doric Construction. Doric Construction appealed on all of its claims to the Court of Appeal, however, that appeal will not be heard before mid to late 2010.
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3. The second attempt: The use of assignment of debt to avoid a winding up
Following the previous case, Doric Construction sought an order from the High Court for Vijay to be put into liquidation on the grounds that it hadn’t paid the undisputable amount - $23,975.
Shortly before the hearing, Vijay let Doric Construction know that it had been assigned $23,975 of the half million dollars owed by Doric Construction to Magsons Hardware for building supplies. This, Vijay claimed, exactly cancelled Vijay’s debt to Doric Construction. As explained in the previous case, Magsons and Vijay have the same controlling director.
Doric Construction claimed it did not owe Magsons any money at all so Magsons didn’t have any debt that it could assign to Vijay to cancel out Doric Construction debt. Rather, it said that Magsons owed Doric Construction hundreds of thousands of dollars more than Doric Construction owed Magsons. This was the subject of an appeal to the Court of Appeal.
However, Judge Lang pointed out that a letter from Doric Constructions’ accountant accepted that it did owe Magsons half a million dollars for materials purchased from Magsons’ Mitre 10 hardware stores. This showed that there was an undisputed debt which could be transferred and which could therefore be set off against the debt owed by Vijay to Doric Construction.
He said, “The position may, of course, be different in the event that the Court of Appeal rules in Doric's favour in relation to the appeals that it has lodged against the decisions of the Associate Judge.” However, in the meantime, he ordered that the liquidation proceeding against Vijay be stayed (stopped) and that Doric Construction be restrained from advertising the proceeding.
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