High Court conflict of authorities — Construction Contracts Act 2002 and statutory demands


It had been clear law following the decision of Volcanic Investments Ltd v Dempsey & Wood Civil Contractors Ltd that a set-off or counterclaim could not be used as a mode of setting aside a statutory demand made upon a company where the statutory demand was based on an unresponded to payment claim.


Law uncertain

The recent decision of Silverpoint International Ltd & Others v Wedding Earthmovers Ltd now makes the law uncertain.


The facts of the recent case were as follows. Three statutory demands were served by Wedding Earthmovers Ltd (WEL) on MPL, and one statutory demand was served upon FDL, PBL and SPL. The total amount sought was approximately $1 million.


MPL applied to set aside its statutory demand on the basis that the amount claimed in it was subject to a genuine dispute. It said a substantial reduction needed to be made to reflect credits. It also said that, as regards invoices due and owing, it was entitled to apply these against debts owed to it by WEL, and debts owed by WEL to Favona.


PBL applied to set aside the statutory demand on the basis that WEL owed money to it, and that the invoice on which the statutory demand was based was mistakenly addressed to it rather than the correct recipient MPL.


SPL applied to set aside the statutory demand on the basis that WEL was obliged to wait for payment until the outcome of the proposed tender became known and, in the alternative, that SPL was a type of joint venture to which a number of entities made contributions either by supplying money or services for which they were not to be paid.


The court first of all considered the statutory demand served upon FDL. This sought the sum of $102.399.65. It represented two payment claims that had been rendered for civil works carried out by WEL.


The court concluded that one of the invoices was enforceable because it amounted to a payment claim under the Construction Contracts Act 2002, and had not been responded to by way of a payment schedule.


It was claimed by FDL that the cost of remedying the defective drainage work was $450,000, and this counterclaim neutralises any liability it had to WEL. The issue for the court to decide was whether WEL could invoke the provisions of s79 of the CCA to bar FDL from raising any counter-claim in response to the statutory demand.


FDL argued that the decision of Volcanic Investments Ltd had been wrongly decided and that s79 could not be used to defeat an application to set aside a statutory demand on the basis of a genuine counterclaim/set-off.


The court concluded that the statutory demand process pursuant to the Companies Act 1993 was not a proceeding for the recovery of a debt for the purposes of s79 of the CCA.


The court held that it is a preliminary step that frequently accompanies a winding up proceeding — which itself may be intended to recover a debt.


However, the court went on to hold that liquidation proceedings are only the beginning of a process that may lead to part or entire satisfaction of a debt. They are not proceedings for the recovery of a debt for the purposes of s79 of the CCA.


Conflicting High Court authority

The effect of this finding is to provide a conflicting High Court authority to the Volcanic Investments decision. It leaves the law uncertain and now means that where the recipient of a statutory demand raises a valid counterclaim or set-off in response to a statutory demand, then this may be sufficient to defeat the statutory demand. Only the Court of Appeal and/or Supreme Court can resolve this conflict of authorities.


In conclusion, the court ruled that the application to set aside the statutory demands of FDL, PBL and SIL was successful.


However, it ruled that the application of MPL was unsuccessful in that no reasonably arguable defence was available to it as regards the statutory demands.


In summary, parties owed money under construction contracts should now be very weary of issuing statutory demands against companies that have at all times in response to payment claims, argued that a set-off/counterclaim exists.


That is especially so where a documentary basis for a set-off/counterclaim has been produced.

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