Flow Control Ltd v IL Forno Ltd

• Jurisdiction: New Zealand
• Judge: P J Andrew,Andrew
• Judgment Date: 24 May 2021
• Neutral Citation: [2021] NZHC 1159
• Docket Number: CIV-2020-404-002409
• Court: High Court

UNDER Companies Act 1993, s 290

Between

Flow Control Limited

Applicant

and

IL Forno Limited

Respondent

UNDER Insolvency Act 2006, s 17

Between

IL Forno Limited

Judgment Creditor

and

Douglas James Kleine

Judgment Debtor

[2021] NZHC 1159

JUDGE P J Andrew

CIV-2020-404-002409

CIV-2020-404-002196

IN THE HIGH COURT OF NEW ZEALAND

AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA

TĀMAKI MAKAURAU ROHE

Civil procedure, Companies — applications by the judgment debtor to set aside a bankruptcy notice under s17 Insolvency Act 2006 and to set aside a statutory demand under the Companies Act 1993 — collateral attack — abuse of process — failure to appear

Appearances:

J Kleine, Judgment Debtor in Person

No appearance for Applicant (but J Kleine, director, in attendance)

M Lenihan for Respondent / Judgment Creditor

JUDGMENT OF ASSOCIATE JUDGE P J Andrew

This judgment was delivered by Associate Judge Andrew on 24 May 2021 at 4.00 pm

pursuant to R 11.5 of the High Court Rules

Registrar / Deputy Registrar

Date

Introduction

1 There are two applications before the Court: an application to set aside a bankruptcy notice, under s 17 of the Insolvency Act 2006 (CIV-2020-404-2196), and an application to set aside a statutory demand, under s 290 of the Companies Act 1993 (CIV-2020-404-2409).

2 The judgment debtor, Mr James Kleine (“Jim”) is the sole director and shareholder of Flow Control Ltd (“Flow Control”). Flow Control has been served with a statutory demand by Il Forno Ltd (“Il Forno”). The sole director and shareholder of Il Forno is Mr Andrew Kleine (“Andrew”). Andrew and Jim are brothers. 1

3 The statutory demand and bankruptcy notice, issued by Il Forno against Jim, are based on debts arising from two judgments of Jagose J in these proceedings: the substantive judgment following trial, 2 and the subsequent costs decision. 3

4 The result of those judgments is that Jim and Flow Control are jointly and severally liable to pay costs to Il Forno in the sum of $89,974.36.

5 The critical issue in relation to the bankruptcy notice is whether Jim has a cross claim under s 17(7) of the Insolvency Act.

6 In relation to the statutory demand proceedings, the critical issue is whether the application should be dismissed pursuant to r 10.8(a) of the High Court Rules 2016, which provides that if only the defendant, and not the plaintiff, appears at the hearing, and the claim is not admitted, the defendant is entitled to judgment dismissing the proceeding.

Background

7 The background which led to the litigation is set out by Jagose J at the beginning of his 31 July 2020 judgment: 4

[1] [Il Forno] operates a bakery and café of some repute and longevity in Auckland's Ponsonby, run respectively by [Andrew] and Helane Paula Mead.

[2] On 26 October 2006, with financial assistance from Andrew's respectively older and younger brothers … [Jim] and Barry John Kleine (“Barry”), Andrew acquired a former shareholder's half-interest in the business. Jim also provided the business with professional accounting and other services. On 11 November 2015, Andrew terminated Jim's involvement with the business, alleging Jim's professional accounting services were inadequate and negligent, such as caused Il Forno to be liable for fines for failing to file tax returns. …

8 The proceedings were complex. Some sense of their complexity can be obtained from Jagose J's summary of the claim and counterclaim as set out below: 5

[3] In this proceeding, among other relief, Il Forno seeks to recover all money paid to [Flow Control] for Jim's services and on the fines liability. They, in turn, dispute any inadequacy or negligence, and assert their financial assistance to Andrew was to acquire Andrew's half-share in Il Forno for Flow Control. Flow Control also counterclaims for payment of some additional $650,000 as compensation for the balance of Jim's services to Il Forno, and an unquantified sum as damages for Andrew's alleged breach as Il Forno's director of fiduciary duties owed to Flow Control, as holder of half its shares. Il Forno and Andrew respectively deny the foundation for any such liability. Various technical defences, including under the Limitations Acts 1950 and 2010, also are raised by both sides.

[4] To be precise, Il Forno seeks declarations Andrew is the sole and legal beneficiary of Il Forno, and Jim's or Flow Control's involvement with it has been cancelled (in terms of ss 37 and 41 of the Contract and Commercial Law Act 2017) and Il Forno has no further obligations to Jim or Flow Control; and claims compensation under the 2017 Act, or as contractual and tortious (negligence) damages, in the amount of $43,277.61 (being the GST-exclusive fees paid to Flow Control within the limitation period), plus $13,600 in fines and costs, and legal fees incurred, arising out of the Commissioner of Inland Revenue's prosecution of Il Forno.

[5] So far as the statutory and contractual money claims are concerned, Jim and Flow Control assert Il Forno failed to mitigate its losses by abandoning or discontinuing its appeal against the fines liability finding; Il Forno waived or is estopped from asserting any requirement for Flow Control's fees to be invoiced; and, if Jim is not Il Forno's half-shareholder, Flow Control has an equitable set-off for the $10,000 in financial assistance

plus quarterly compounding interest since the date of its payment. On the negligence claim, Flow Control and Jim say Il Forno's and Andrew's contributory negligence caused Il Forno's losses.

[6] Il Forno also seeks to recover the sum of the money claims as money had and received by Flow Control and/or Jim on their services' failure to provide consideration for its receipt. Flow Control and Jim again assert affirmative defences of waiver and estoppel and limitation. And Il Forno seeks to recover its electronic data in Flow Control's or Jim's possession in trespass or conversion.

[7] By its counterclaim, Flow Control seeks a declaration Andrew holds 5,000 shares in Il Forno on trust for Flow Control, and an order transferring those shares to it. It also claims $650,000 (plus GST) quantum meruit for some 25 services said to have been provided to Il Forno over the nine or so years of Flow Control's involvement through Jim with Il Forno's business. Il Forno asserts the first four years of that involvement now is time-barred. And then there is Flow Control's breach of trust claim against Andrew, as mentioned.

(citations omitted)

9 In a detailed 90-paragraph judgment, Jagose J determined that Andrew was Il Forno's sole legal and beneficial owner and made a declaration to that effect in respect of the first cause of action. Il Forno's second and third causes of action failed because the Judge was not satisfied there was an agreement for the provision of accounting services by Jim, as pleaded by Il Forno. He did, however, find that Jim failed to take reasonable care preparing and filing Il Forno's tax returns and that he failed to take reasonable care to maintain Il Forno's financial records. As a consequence, he held Jim to be negligent in the performance of that duty to Il Forno and awarded $14,185 in damages. He also directed Jim to deliver up to Il Forno its files and information held by him. He dismissed all other causes of action, both in the substantive claim and counterclaim.

10 In his costs judgment of October 2020, 6 Jagose J held that Flow Control and Jim were jointly and severally liable to pay Il Forno costs in the amount of $91,828.00 plus disbursements of $83,744, being a total of $175,572.

11 In the litigation, Flow Control was ordered to pay security for costs in the sum of $85,000. That sum was paid, together with interest of $597.64, to Il Forno's

solicitors on 22 December 2020. Accordingly, the amount of costs and disbursements now payable by Flow Control and Jim is $89,974.36

12 Neither Flow Control nor Jim has paid any of that amount.

13 Jim appealed, within time, the costs judgment of Jagose J to the Court of Appeal. He also appealed against the substantive judgment, but out of time. Accordingly, for the substantive appeal, he requires the leave of the Court of Appeal. Flow Control has appealed neither the substantive judgment nor the costs judgment.

14 In a very recent judgment of Moore J in Flow Control Ltd v Il Forno Ltd, 7 an application by Jim to represent Flow Control in these proceedings was dismissed.

15 There has been further, related litigation. As Moore J noted, 8 Jim and another brother, Mr Barry Kleine (“Barry”) provided financial assistance for Andrew to acquire a former shareholder's half interest in the Il Forno business. In Jim's case, it was a $10,000 advance which Jagose J determined was a loan. 9 In their submissions on costs, Jim and Flow Control claimed that any costs award should be reduced due to the effective success of their counterclaim in the Judge's finding relative to the $10,000 loan. Jagose J dealt with that submission in his costs judgment: 10

[7] I expressly did not find Andrew had any liability to Jim in respect of the loan. Neither is there any declaration in the defendants' favour … There is no basis for their assertion “the quantum meruit claim has essentially succeeded on issue”; to the contrary, I held the defendants had not discharged their onus of proof at all.

16 Moore J later noted:

[13] Notwithstanding [Jagose J's finding], Flow Control commenced proceedings in the Disputes Tribunal (“the Tribunal”) against Andrew and his partner, Ms Mead, to recover the $10,000 loan and interest. Through Jim, Flow Control sought payment of the $10,000 loan plus interest. …

17 At the hearing before the Disputes Tribunal, Andrew offered to pay back the $10,000 by way of a set-off against the costs award of Jagose J. The offer was declined by Jim.

18 The Tribunal determined that Flow Control's claim was barred by the application of the res judicata...