Magsons Hardware Ltd v Concepts 124 Ltd

• Jurisdiction: New Zealand
• Judge: Andrews J
• Judgment Date: 07 November 2011
• Neutral Citation: [2011] NZCA 559
• Docket Number: CA671/2010
• Court: Court of Appeal
• Date: 07 November 2011

Between

Magsons Hardware Limited

Appellant

and

Concepts 124 Limited

Respondent

[2011] NZCA 559

Court:

Arnold, Winkelmann and Andrews JJ

CA671/2010

IN THE COURT OF APPEAL OF NEW ZEALAND

Appeal from a High Court decision dismissing the appellant's application for an order setting aside a statutory demand made by the respondent — respondent made a series of payments to appellant in exchange for withdrawal of caveats on respondent's titles to enable sale to proceed — caveats based on building materials supplied to third party — respondent owned land that houses were constructed on — no contractual relationship between parties — High Court held appellant had exerted illegitimate pressure on respondent when it had no basis on which to sustain caveats — elements of undue duress — whether pre-contractual relationship needed — use of statutory demand procedure against solvent companies.

Counsel:

L Ponniah for Appellant

G Bogiatto for Respondent

JUDGMENT OF THE COURT

• A The appeal is allowed.

• B The statutory demand served by the respondent on the appellant is set aside.

• C The respondent is to pay the appellant's costs as for a standard appeal on a band A basis plus usual disbursements.

REASONS OF THE COURT

(Given by Andrews J)

Introduction

1 This is an appeal by Magsons Hardware Ltd (Magsons) against the dismissal of its application for an order setting aside a statutory demand made by the respondent, Concepts 124 Ltd (Concepts), in the judgment of Associate Judge Bell delivered on 10 September 2010 (the judgment). 1 $20,000 is at issue. It was paid by Concepts to Magsons by way of four payments of $5,000, for the removal of each of four caveats registered by Magsons against the titles to land owned by Concepts.

Background

2 There is no dispute as to the background facts. The following summary is taken from the judgment, 2 and the judgment of Associate Judge Abbott on applications by Magsons for orders that the caveats not lapse. 3

3 Magsons operates a Mitre 10 franchise. Between May and October 2008 it supplied building materials to Flat Bush Construction Ltd (FBCL) for use in construction projects in Flat Bush, South Auckland. FBCL's director, Mr Cummins, guaranteed its indebtedness to Magsons for those supplies. Mr Cummins is also a director of Concepts, which owned land at Flat Bush, on which FBCL constructed buildings. Although Magsons had a contract with FBCL, there was no contractual relationship between Magsons and Concepts.

4 FBCL was put into liquidation on 27 November 2008. Magsons is an unsecured creditor. As at the date of liquidation, Concepts owed Magsons $404,542.96, excluding interest and recovery costs. Magsons obtained summary judgment against Mr Cummins on his guarantee on 15 October 2009, 4 for $555,376.13.

5 On 27 February 2009, Magsons registered caveats against 13 titles to land owned by Concepts at Flat Bush. It claimed that Concepts held part of its interest in the land on trust for it, because Magsons could trace building materials it supplied into buildings erected at Flat Bush.

6 Between 16 March and 15 June 2009 there were discussions, meetings, and correspondence between the parties and their solicitors (Corban Revell for Magsons and Mr Bogiatto for Concepts) concerning challenges to the validity of the caveats, the removal of caveats from individual titles, payments to be made for removal, and settlement of matters between Magsons, Concepts and Mr Cummins. On 19 March 2009, Magsons withdrew two of the caveats to allow sales to proceed. On 6 April 2009, it filed an application for the remaining caveats to be sustained (as well as further caveats registered against the titles of others of Mr Cummins' companies). Following this there were negotiations between the parties. These resulted in Magsons withdrawing four of the remaining caveats on 13 and 21 May 2009, when Concepts made payments totalling $20,000.

7 Shortly before the hearing of Magsons' application on 15 June 2009, Corban Revell advised Mr Bogiatto that the application to sustain the caveats over Concepts' titles would be withdrawn, and the caveats themselves were withdrawn.

8 By a demand pursuant to s 289 of the Companies Act 1993 dated 2 June 2010 (served on 3 June 2010) Concepts demanded that Magsons pay $20,000:

… in respect of payments made on a without prejudice basis pending an application to sustain a caveat over 46 Carlos Drive, which ultimately failed.

The demand included the usual statement that if Magsons failed to comply with the demand it would be presumed to be unable to pay its debts.

9 Magsons applied to set aside the demand by an originating application dated 17 June 2010. The stated grounds were that:

• 2.1 There is no amount outstanding by [Magsons] to [Concepts].

• 2.2 Alternatively there is a genuine dispute as to whether there is an amount outstanding by [Magsons] to [Concepts].

• 2.3 [Magsons] is solvent and able to pay its due debts.

• 2.4 Appearing in the affidavit of Sunita Patel sworn on 17 June 2010.

10 In her affidavit in support of Magsons' application to set aside the demand, Ms Patel, accountant for Magsons, referred to the correspondence between the parties concerning the caveats and the payments, and asserted that the debt referred to in the demand is not a genuine debt. She also stated that Magsons has an annual turnover in excess of $60 million, was able to pay $20,000 if it were genuinely due, and was able to pay its debts as they fell due.

11 An affidavit sworn by Mr Cummins was filed in opposition to Magsons' application. His affidavit referred to the correspondence surrounding the payments to Magsons. He said that the negotiations concerning the removal of the caveats and payments were on a without prejudice basis, as Concepts maintained throughout that lodging the caveats was improper. He said that payments to Magsons to release the caveats were made “under duress and for expediency – purely to allow settlements to proceed on unconditional sale contracts which the caveats were impeding from settling”.

12 Ms Patel swore an affidavit in reply on 21 July 2010. In essence, she denied Mr Cummins' assertions.

The judgment

13 Having set out the background facts and referred to the judgment of Associate Judge Abbott, Associate Judge Bell accepted that Magsons had an arguable case that, when it lodged the caveats, it honestly believed on reasonable grounds that it had a caveatable interest. 5 He referred to a submission made by Mr Bogiatto that only $2,290 worth of Magsons' building materials had found their way into the development at 46 Carlos Drive. However, he found that Magsons had an arguable case that there was nothing improper in their caveats against all of the titles to Concepts' land. 6

14 The Associate Judge went on to consider Concepts' submission that it made payments to Magsons under duress. In doing so, he referred to the correspondence between solicitors and the application to sustain the caveats. He recorded that Concepts had negotiated sales of units in the Carlos Drive development and had asked Magsons to release its caveats so the sales could proceed, but that Magsons had declined to do so. He further recorded that in the following negotiations, an arrangement was reached that in return for a payment of $5,000 from the proceeds of sale of a unit, Magsons would remove its caveat in respect of that unit, and that the four payments of $5,000 made pursuant to that agreement were what Concepts sought to recover. 7

15 The Associate Judge held that it was clear from the evidence that Concepts was in a position of vulnerability, being heavily indebted, with no equity in its property, and needing sales to apply to the mortgages. 8 He did not accept Magsons' submission that the negotiations could be characterised as a legitimate compromise of a dispute. 9 He concluded that Magsons had taken improper advantage of its position as caveator, having used its refusal to remove the caveats as leverage to put pressure on Concepts, and had obtained as a result payments which should have gone to the mortgagees. 10

16 The Associate Judge found that Concepts had made out the ingredients for economic duress. Magsons had applied illegitimate pressure by refusing to remove the caveats to allow sales to proceed, when they had no right to leave the caveats in place in the face of clear evidence that there was no equity in the properties. 11 Accordingly, he found that the agreements to pay $5,000 for each caveat removed were voidable for duress. 12 In the circumstances, he found that Concepts was entitled to be refunded $20,000, and that there was no substantial dispute as to Magsons' liability to refund the payments. The application to set aside the demand was dismissed. 13

Issues on appeal

17 On behalf of Magsons, Mr Ponniah set out five issues in his Summary of Issues. They may be paraphrased as follows:

• (a) whether, at the time the demand was made, Magsons owed a debt to Concepts;

• (b) whether the hearing of an application to set aside a statutory demand is an appropriate forum to properly consider a claim of economic duress, which requires a resolution of disputed questions of fact and issues as to credibility on affidavit evidence alone;

• (c) whether the Associate Judge erred in ruling that the agreement under which Concepts paid (in total) $20,000 was void for duress;

• (d) whether, in any event, it was necessary for Concepts to have taken steps (such as an application to the Court) to void the agreements; and

• (e) whether, in all the circumstances, there was a substantial dispute as to whether there was a debt owed by Magsons to Concepts at the time the statutory demand was issued, such that the demand ought to have been set aside and the dispute resolved by means other than proceedings under the Companies Act.

18 At the hearing, the issues were compressed into the...