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PNG Balsa Company Ltd v New Britain Balsa Company Ltd [2004] PGNC 247; N2520 (12 March 2004)

N2520

PAPUA NEW GUINEA

[IN THE NATIONAL COURT OF JUSTICE]

OS. NOS: 38 OF 2004

BETWEEN:

THE PNG BALSA COMPANY LTD
- Plaintiff Applicant/

AND:

NEW BRITAIN BALSA COMPANY LTD
- Defendant/Respondent

KOKOPO: Lenalia, J.
2004: 20 February 12 March

COMPANY LAW – Winding up – The process of – Creditor served notice under s. 336 of the Companies Act – Disputed debt – Creditor’s statutory demand s. 337 of same prospective liabilities – There ought to be prima facie evidence and proof of itemised debts – Existence of substantial dispute.

COMPANY LAW – Creditor’s statutory demand – Where there is no evidence to support the process of winding up a company – Demonstration of an arguably genuine substantial dispute – Mere assertions – Insufficient – Materials short of proof – Applicant to establish, the dispute is genuine – Application granted.

Due to the unavailability of local authorities in this jurisdiction on the issue of statutory demand pursuant to s. 337 of the Companies Act 1997, the following overseas authorities are cited.

CASES CITED:
The following cases are cited on judgment.
Taxi Trucks Limited -v- Nicholson [1989] 2 NLLR. 297
Queen City Residential Limited -v- Patterson Co – Partners Architects (No.2) [1995] 3 NZLR 307.
Far East Auto Imports -v- Niki International Corp. 11 PR NZ 602.

Held: (1) The test which should apply on an application to set aside a statutory demand is set out in s. 338 Subsection (4)(a) of the Company Act 1997 where a statutory demand has been issued against an applicant is that, the applicant has to show a fairly arguable basis on which it is not liable for the amount claimed in the statutory demand.

(2) Mere assertions that there exists a dispute is not sufficient. Where there exist material evidence demonstrating "a substantial dispute" the dispute should normally be resolved other than by means of issuing a statutory demand.

(3) The application to set aside the statutory demand is granted.

Counsel:
D. Lidgett, for the Applicant
Mr. D. Micha, in person for the Respondent

12 March, 2004

LENALIA, J.: The applicant company applied to set aside a statutory demand issued against it by the respondent counter-part company also dealing with the sale of balsa wood on this Province. The statutory demand requires payment of K387,792.41 against the plaintiff as a debtor company. I heard arguments from Mr. Lidgett of counsel for the Plaintiff Company and Mr. David Micha who appeared by leave of the Court for the Respondent/Defendant on 20th of February 2004, I ruled in favour of the Applicant and set aside the statutory demand and I said I would establish my reasons later. I now do so.

The Papua New Guinea Balsa Company Limited instituted proceedings by way of an Originating Summons against the Respondent being the New Britain Balsa Company Limited. In their Notice of Motion filed on 30th of January 2004, the Plaintiff sought the following orders:

1. That the Respondent/Defendant Creditor’s Statutory Demand for payment of debt dated 5th of January 2004 demanding payment of K387,792.41 against the Applicant debtor company be set aside.
   
2. Costs.
   
3. Such other orders the Court deems appropriate.
   

Before I go further, this is a proceeding pursuant ss. 337 and 338 of the Companies Act. I shall refer to certain sections of the Companies Act when I discuss the law involved in proceedings pursuant to the two sections mentioned above. The evidence in support of this application came mainly from Mr. Howard Guy Cameron. The same is one of the directors and a shareholder of both the Applicant and Respondent companies. Under s. 335 of the Companies Act, where a company is unable to pay it’s debts, a statutory demand is issued and where evidence is adduced to the satisfaction of the Court that the debtor company is not able to pay it’s debts as they become due in the ordinary course of business, an application can be made to the Court for the debtor company to be liquidated, see s. 336 (5) of the Companies Act.

Mr. Cameron’s evidence goes on to say that it seems that the claim is only based on the contract agreement dated 25th of April 1997 whereby the parties contracted to do certain things which do not appear clear from Mr. Cameron’s evidence nor from that of Mr. David Micha but which agreement was to remain in force only for 2 years until 20th May 1999 after which a further contract was to be offered to the Respondent. According to Mr. Cameron, this was also the requirement of clause 10 of the "Contract Agreement". That under that contract certain variations in relation to prizing of products sold were to be reviewed whenever there was some short-falls. This is the subject of clause 13 of their Contract.

The Plaintiff applicant through Mr. Cameron disputes the Statutory Demand Notice as to nowhere does such notice or any other statement attempts to properly qualify and itemise the sum claimed in the statutory demand. To support this argument, Mr. Cameron said in evidence that, the letter of demand dated 13th of November 2003 addressed to the same by the Respondent’s lawyers who are JEREWAI Lawyers saying that the Plaintiff was to pay K4,000.00 per week from 20th May 1997 together with 17 percent interest is flawed. In any event, Mr. Cameron says the claim by the Respondent is now Statute bar and against s. 16 of the Frauds and Limitation Act and as such any further contract beyond 20th of May 1999 up until the time the statutory demand was calculated must be supported by evidence.

Mr. Cameron further alleges that, the Respondent’s statutory demand describes the debt as a debt owing by the applicant company for services rendered under their agreement as alluded to dating back to 20th May in 1997, but nowhere in the letter of demand qualifies such claims. There is further allegation that, the Respondent company has not been trading and that it has been dormant for a number of years and it’s statutory mortgages were financed from outside sources. There is no principal place of business as well and it does not conduct it’s business nor does it employs employees and it has no accounts.

Mr. David Micha who appeared for and on behalf of the Respondent company did not cross-examined Mr. Cameron nor did he wanted to give any evidence and said, he relied on his affidavit filed by their lawyers (JEREWAI Lawyers) on 17th of February 2004. Mr. Micha said in his affidavit that he himself and Mr. Alois Nozu are directors and shareholders of the New Britain Balsa Company Limited and the executives of that company are Merss Alois Nozu, Guy Cameron and he himself (D. Micha).

The deponent says that after they purchased the "Self Company" in 1997, they re-named it as New Britain Balsa Company Limited. They then obtain a loan from the Rural Development Bank to finance its operations. It was a loan of K69,780.00. This loan was repaid in the month of March 2000. According to David, he says, for some four years now, the company only owns equipment and he and his colleague Alois have not been paid any directors fees nor even any benefits.

There is further allegation by the deponent that, Mr. Cameron deliberately used him and Alois for his own benefit as a director of the Respondent company and as such has breached his duties as a director by not acting in good faith and that Mr. Cameron should be punished. Despite the above allegations, Mr. Micha admits in paragraph 18 of his affidavit that, there may be a substantial dispute touching the amounts owing and he even agrees that the Creditor’s Statutory Demand ought to be set aside.

The law on whether a Statutory Demand should be or should not be set aside pursuant to ss. 337, 338 and 339 of the Companies Act is not clear in this jurisdiction as no local authorities were cited to me and even trying to do some research has not been successful due to limited sources we have in our libraries. In order for this Court to grant this application, the Court has a discretion under s.338 (4) of the above Act and Subsection (4) says that "The Court may grant an application to set aside". This is where this Court derives its discretion from. The Definition of the "Court" means the National Court under s.2 of the Act. I set out s. 338 Subsection (1) to (5) of the Companies Act in the following terms:

(1) The Court may, on the application of the company, set aside a statutory demand.

(2) The application shall be made, and served on the creditor, within one month of the date of service of the demand.

(3) No extension of time may be given for making or serving an application to have a statutory demand set aside, but, at the hearing of the application, the Court may extend the time for compliance with the statutory demand.

(4) The Court may grant an application to set aside a statutory demand where it is satisfied that—

(a) there is a substantial dispute whether or not the debt is owing or is due; or

(b) the company appears to have a counterclaim, set-off, or cross-demand and the amount specified in the demand less the amount of the counterclaim, set-off, or cross-demand is less than the prescribed amount; or

(c) the demand ought to be set aside on other grounds.

(5) A demand shall not be set aside by reason only of a defect or irregularity unless the Court considers that substantial injustice would be caused if it were not set aside.

I am thankful to Mr. Lidgette’s well argued submissions which I think correctly represents what the law should be in relation to the issue of whether or not the Court should grant an application for setting aside a statutory demand issued by a creditor company against it’s debtor counterpart whilst it is a going concern. Mr. Lidgett has also cited a number of overseas cases mostly from New Zealand which in my view reflect what is and what is not "a substantial dispute" under s. 338 (4)(a) of the Act.

The general principles which should be applicable in a case where a company has been issued with a letter of demand or to be more specific in terms of the Companies Act "Statutory Demand" issue pursuant to s. 337, the onus is on the applicant to show a fairly arguable basis upon which it is not liable for the amount or amounts set out in the Statutory demand. Counsel further submitted that, all the allegations made by Mr. Micha are not true and are mere assertions without proof and which should be supported by evidence.

By my reading of the three New Zealand authorities that of BB Shipping (NZ) Limited CIV – 2003 – 404 – 2626, Fletcher Homes Limited -v- Be Ellis and S.Baldick M 471 im99, judgments of MASTER Lang and Master Fair of the High Court of New Zealand and Taxi Trucks Ltd -v- Nicholson [1989] 2 NZLR 297, the principles set out in the above cases say that first, to set aside a statutory demand, an application must demonstrate that "there is arguably a genuine" and substantial dispute. This simply means that there must be some evidence to show that the debtor company owes debts and such debts ought to be adequately itemised. Secondly, where there is mere assertions that there exist a debt or debts is not sufficient. Materials short of proof is required to support the claim that the debt is disputed. Thirdly, where proof has been given that there exist a substantial dispute, the matter should be resolved in other means. See the case of Queen City Residential Limited -v- Patterson Co-Partners Architects (No.2) [1995] 3 N2LR. 307.

I am prepared to accept and adopt the principles stated in the above New Zealand case although those decisions may only be persuasive and not binding in this jurisdiction by virtue of Section Sch. 2.2. of the PNG Constitution. On the same token, this Court has a duty to perform to develop an underlying law for Papua New Guinea as required of this Court by Sch. 2.3 (1)(d) of the Constitution in the following terms:

"to the legislation of, and to relevant decisions of the Courts of, any country that in the opinion of Court has a legal system similar to that of Papua New Guinea; and"

In the absence of case law authority on the issue of whether or not, the Court should set aside a statutory, demand I adopt and apply the principles stated in the above cases.

The grounds advanced in this application to set aside the statutory demand assert that the applicant is not indebted to the respondent and that there is a substantial dispute regarding the sum for which the respondent issued the statutory demand. Reading Clause 10 of the "Contract Agreement" entered into between the applicant and respondent, the agreement was to be effective from 20th May 1997 and to have remand in force until 20th May 1999 at which time a further two years contract were to be offered to the respondent. No evidence was called by the respondent company to support any further contract if, such contract was reviewed. Apart from this, no invoices were quoted with any specific items.

For the reasons set out above, I reached a clear conclusion at the end of hearing this application that there is a genuine and substantial dispute in relation to the amount claimed in the statutory demand. I granted the application with the cost to be born by the Respondent’s company.
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Lawyer for the Applicant : WARNER SHAND Lawyers