21st Century Investments Ltd v ANZ National Bank Ltd HC Auckland CIV-2010-404-007366

[2011] NZHC 152

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2010-404-007366

BETWEEN  21ST CENTURY INVESTMENTS LTD Applicant

ANDANZ NATIONAL BANK LTD Respondent

Hearing:         25 February 2011

Appearances: P Moodley for Applicant

M J Tingey and NFD Moffatt for Respondent

Judgment:      25 February 2011

ORAL JUDGMENT OF ASSOCIATE JUDGE BELL

Solicitors:

Brookfields, PO Box 240, Auckland

Bell Gully, PO Box 4199, Auckland

21ST CENTURY INVESTMENTS LTD V ANZ NATIONAL BANK LTD HC AK CIV-2010-404-007366 25

February 2011

[1]      21st  Century Investment Ltd applied on 9 November 2010 to set aside a statutory  demand  served  on  it  on  28  October  2010.  The  demand  by  the  ANZ National  Bank  is  for  $794,909.52,  said  to  be  made  up  of  a  loan  balance  of

$788,493.84  and  an  overdrawn  current  account  balance  of  $6,415.68.     The application is made under s 290(4)(a) of the Companies Act, that is, that there is a substantial dispute whether or not the debt is owing.

[2]      On applications under s 290(4)(a), the applicant must show that there is arguably a genuine and substantial dispute as to the existence of the debt.   In his written submissions, Mr Tingey suggested that the test is that the applicant must show a strong prima face case that the existence of the debt is subject to a genuine and substantial dispute.  The authorities do not support the proposition that there is a burden on the applicant to a strong and prima facie standard.   After discussion, Mr Tingey withdrew that aspect of his submissions.

[3]      The task before the Court is not to resolve the dispute but to determine whether there is a substantial dispute that the debt is due.  The mere assertion that there is a dispute is insufficient.  Material short of proof is required to support the claim that the debt is disputed.   If such material is available, the dispute should normally be resolved other than by means of proceedings in a liquidation court.  It is not usually possible to resolve disputed questions of fact on affidavit evidence alone, particularly when issues of credibility arise.   For these propositions, Mr Moodley cited the decision of Associate Judge Abbott in North Harbour Equine Hospital Ltd v Little HC Auckland CIV-2006-404-7585, 19 February 2007.  That case referred to well-known authorities such as Queen City Residential Ltd v Patterson Co-Partners Architects Ltd (No. 2) (1995) 7 NZCLC 260,936 and United Homes (1988) Ltd v Workman [2001] 3 NZLR 447(CA).

[4]      In his written submissions, Mr Moodley raised an objection that the statutory demand referred to loan balances and took the point that there was in fact only one term loan agreement in issue in this case.   That is an insignificant matter.   Under s 290(5), a demand must not be set aside for reason only of a defect or irregularity unless the Court considers that substantial injustice would be caused if it were not set aside.   Mr Moodley did not develop his submission in oral argument and he was right not to do so.   It is a mere irregularity which does not cause any substantial injustice.  The matter needs to be considered on more substantial arguments that Mr Moodley developed.

[5]      21st  Century Investment Ltd is a property developer run by Duong Hai Ha. In November 2005, it took a term loan from the bank for the sum of $976,000.  It was a term loan for 10 years with interest payable monthly in arrears. The security for the loan was a first mortgage over a property at 10 Middlemore Road, Otahuhu, and a guarantee given by Mr Ha.  In March 2006, the company sold the Middlemore Road property.  The bank gave a discharge on the company’s solicitors’ undertaking that they would not release the discharge until a replacement security had been executed over a property at 1265 Alfriston Road.  The solicitors concerned used the discharge without the replacement security being put in place.  I make it quite clear that Mr Moodley and his firm were not involved in any way at all in the conveyancing.  Apparently, the bank became aware of the error only in late 2008. Understandably, the lack of security has soured relations between the company and the bank.

[6]      Mr Ha says that there were negotiations on a without prejudice basis in 2009 and 2010. The bank issued a liquidation application against the applicant and that application was later withdrawn.  The applicant paid the bank $48,252.95 on 1 July

2010, $180,000 on 16 July 2010  and $20,000 in September 2010.  The effect was to pay off certain amounts of interest and costs and also to reduce the principal owed under the term loan.  The parties are agreed that the principal sum was reduced to

$779,574.38 – that is aside from any interest and costs.

[7]      At the same time as the term loan contract, the company also had a current account with the bank.   The company was expected to make payments into the current account out of which the bank could then make debits for interest which were in turn credited towards interest and other costs falling due under the term loan contract.  The company could operate that account in overdraft within limits.

[8]      For  the  bank’s  power  to  make  charges  under  the  term  loan  contract  in addition to interest, the bank referred to clauses within paragraph 10 of the contract. They include the following:

10(b)Payments under this agreement must be made on demand to the address at the Bank’s branch specified above;

(c)    The Bank may without notice debit any amount due under this agreement at any time to any of the Customers’ accounts with the Bank;

…

(f)     The Bank may apply payments received under this agreement in whatever order it chooses.

[9]      More importantly, the agreement also provides an acceleration provision. The material wording for this case is in paragraph 13:

Default

The Bank may by written notice to the Customer: (i) cancel any undrawn amount of the Loan (any amount cancelled will not be available to the Customer);  and/or  (ii)    require  immediate  repayment  of  the  Loan  and payment of all interest and other amounts owing under this agreement if:

(a)  default is made in the payment of any amount due under this agreement or on any of the Customer’s accounts with the Bank or under any liability the Customer has to the Bank;..

[10]     The exercise of the power of acceleration under that provision is in issue in this application.

[11]     I begin with the current account debt of $6,415.68 referred to in the statutory demand.  On 28 October 2010, the date of the statutory demand, the account was in overdraft  to  the  sum  of  $6,415.68.    The  company  has  put  in  evidence  a  bank statement  recording  this  indebtedness.    The  statement  also  shows  that  by  12

November 2010, by which time the applicant had applied to set aside the statutory demand, the amount had reduced to $2,631.24.   Mr Tingey pointed out that that reduction in indebtedness had arisen largely because the bank had reversed interest payments towards the term loan because there were not enough funds in the current account.

[12]     Apart from one matter of current account fees and interest which were the subject of a demand by the bank on 1 October 2010, the bank had not made demand calling up the overdraft under the current account until it issued the statutory demand on 28 October 2010.  Mr Moodley submitted that the statutory demand could not be used to call up the amount under the current account.   It appears that this current account  operated  on  the  basis  that  there  had  been  an  overdraft  limit,  that  the customer was entitled to pay moneys in and take moneys out within overdraft limits, and the bank would have the power to require repayment of overdrawn amounts. The  bank’s  terms  for  operating  the  account  were  not  put  in  evidence.    The application to set aside makes it clear that the applicant disputed his liability under the overdrawn current account.   It is referred to in ground (d) of the application. While the point about the need for a  separate demand was not expressly pleaded,

there is enough in the pleading to put the bank on notice that this would be a live issue  in  the  hearing  today.    The  bank  says  that  it  is  taken  by surprise  by Mr Mr Moodley’s  submission  that  the  statutory  demand  is  ineffective  to  require payment under the overdraft.  The point was taken late by Mr Moodley.  It was not put in his written submissions filed before the hearing.  Nevertheless, although the point was taken late and the bank is taken somewhat by surprise, on the pleadings the matter is still a live issue and I am able to consider it.

[13]     The authority that Mr Moodley relies on is a decision of Master Kennedy- Grant in Keene v Okere Holdings Ltd HC Hamilton M No. 209/ 95, 30 November

1995.   In that case, a statutory demand had been used as a notice of cancellation under an agreement for sale and purchase of real estate.  Master Kennedy-Grant held that a statutory demand could not also be a notice of cancellation.

[14]     He said at page 9:

A statutory demand must, in terms of s 263(2)(a) of the Companies Act 1955 as amended:

...be in respect of a debt that is due...

when the notice was served. The debt in this case was not due when the notice was served because, on the facts of this case, the debt did not become due until the notice was served.  A notice which creates the debt cannot be said to be given in respect of a debt that is due when the notice is given.

He was there referring to the provisions of the Companies Act 1955, but to all intents and purposes the provision in the 1993 Act is comparable.  S 289 of the 1993

Act says:

A statutory demand is a demand by a creditor in respect of a debt owing by a company made in accordance with this section.

Both provisions are entitled to the same interpretation.

[15]     I respectfully follow the decision of Master Kennedy-Grant.   Applying the Keene decision, it is arguable that there was not an enforceable debt to the bank on the current account until the bank made demand.  The bank must first make demand of the customer before there can be a debt owing for funds overdrawn.  Once that

debt is established, then the statutory demand can be issued.   It is not open to the bank to use the statutory demand to create the liability.  That is sufficient to show that there is an argument whether the company is liable for the funds alleged to be due under the current account.   That may be a somewhat academic point because copies of bank statements for the current account handed up to me show that at

1 February this year, the account was in credit.

[16]     I move to the term loan.  The main matter in issue is the bank’s acceleration of the loan.   The process followed by the bank was to make demand through its solicitors on 1 October 2010.   That letter required payment by Friday, 8 October

2010.   The company’s solicitors replied on 7 October 2010.   The bank’s lawyers wrote again on 12 October 2010 requiring payment by 4:00 pm, 14 October 2010. On 15 October 2010 the bank itself gave a notice directly to the company and to Mr Ha accelerating and demanding payment of $797,729.88 by 22 October 2010.  That was then followed by a letter by the company’s solicitors on 18 October 2010.

[17]     I turn back to paragraph 13(a) of the term loan, the acceleration provision. At least two conditions are to be satisfied by the bank before it can accelerate.  First, there must be an unsatisfied liability of the customer, and second, there must be a default by the customer.  The question of default needs some discussion.

[18]     The word “default” is capable of a wide or a narrow interpretation.  The wide interpretation is that there is a default by a customer when the customer does not pay a liability to the bank whether or not the customer knows of the liability.  The narrow interpretation is a more generous one to the customer: the customer is in default only if the customer is aware of the liability and then fails to pay.   I take the latter interpretation, that is, that the bank must make the customer aware of the liability before it can invoke the acceleration power.   An example I used during argument was an undisputed item in this case, valuer’s fees, which the bank said that the company should pay.  If the bank had kept its knowledge of these valuation fees to itself, that is, regarded the company as liable to pay it but had not told the company that it was required to pay the fees, then the company could not said to be in default if it failed to pay that amount.  In other words, inherent in the notion of default is the requirement that the bank must notify the customer of the liability before it can use a failure to meet the liability as a basis for acceleration.

[19]     The bank does not take serious issue with that position.  After all, it took the course in this case of notifying the customer of the liabilities it considered were due,

and required the company to meet them before it exercised its power of acceleration. It is not an interpretation that the bank should be uncomfortable with because it is, after all, used to a similar method of giving notice when it has security over land and notice has to be given under s 119 of the Property Law Act 2007.

[20]     The question arises as to the amount of notification, that is the quality of information, that needs to be given by the bank.  Some matters are routine and do not call for great explanation.  In some cases, there may be a need for explanation.  In this case, the demand by the bank refers to legal fees and valuer’s fees.  Those are matters  which  a  customer  might  look  at  and  then  ask  questions  about.    If  the customer raises proper questions, there may be a need for the bank to give further clarification.  Quite obviously, spurious queries can be disregarded, but the matter has to be looked at in a commonsense way. When commonsense is applied, the requirement  to  give  proper  notice  so  as  to  clearly  inform  the  customer  of  its liabilities is not a difficult standard to comply with.

[21]     The bank demanded payment of the sum of $19,868.57:

Debits since 1 July 2010
1 July 2010 interest payment	$4,612.60
1 August 2010 interest payment	$4,663.49
1 September 2010 interest payment	$4,120.44
1 October 2010 interest payment	$4,031.22
June 2010 legal fees	$4,500.00
July 2010 legal fees	$6,103.76
Valuer’s fees	$4,545.00
Monthly    account    fees    and   debit    interest    on overdrawn account balance	$325.96
Subtotal	$32,901.57

Credits since 1 July 2010
30 July 2010	($4,011.00)
30 August 2010	($4,011.00)
9 September 2010	($1,000.00)
30 September 2010	($4,011.00)
Total outstanding	$19,868.57

[22]     It  is  necessary  to  consider  the  items  in  the  demand  to  see  whether  the company has shown either that there is an arguable dispute as to its liability, or that there is an arguable dispute as to its default.  If it can show that there is an arguable case of no liability, or an arguable case of no default, then it can say that the exercise of the power of acceleration is itself arguable and cannot be relied upon to support a statutory demand for repayment of principal under the term loan.

[23]     I begin with the valuer’s fees.  That is the sum of $4,545.  I deal with it at the outset because the position here is relatively clear.  The company ultimately accepted that it was liable for that amount and in fact paid that amount.  But it acknowledged its liability for that amount only in its solicitor’s letter of 18 October 2010 and made payment on 21 October 2010.  By that stage, the power of acceleration had already been exercised. The company disputed the other items.

[24]     The first item, $4,612.60, is for interest due on 1 July 2010.  The company says that there is a dispute as to its liability.  Mr Tingey characterised the position taken by the company as Mr Ha simply saying what his understanding was.   The matter goes beyond Mr Ha’s own perceptions.   While his evidence does read as saying what his understanding was, there may still be a factual basis for disputing liability.  More than simply stating his belief, the company relies on extracts from correspondence said to have passed between the parties in June 2010.   These are recorded in a letter by the company’s lawyers to the bank’s solicitors on 18 October

2010.   It appears from that correspondence that the bank had made demand for payment of sums which were said to be outstanding arrears that had accrued at 28

June 2010.   In a further letter of 1 July 2010, the bank is recorded as requiring

payment  of  the  sum  of  $248,252.95,  the  sum  of  $48,252.95  “representing  the

outstanding arrears, (principal and interest) had ANZ not accelerated payment of the loan and the costs incurred by ANZ to the date of the letter.”   That wording is sufficient to give the company some basis for saying that the payment made on that date covered the liability of interest due on 1 July 2010.

[25]     It may be that bank records could be placed before the court which could show that that claim is not sustainable and that the payment was only for liabilities that accrued before 1 July 2010.   But that evidence is not before the court. The proposition that this interest of 1 July 2010 had already been discharged by the payment made on 1 July 2010 is at least arguable.  For this case, it cannot be used to establish an uncontestable liability allowing the bank to invoke it for the acceleration power.

[26]     The next three items are for interest falling due on the first of the month for the next three months.  Those items are to be compared with the amounts of credits. These three items of interest come to a total of $12,814.15.  Mr Moodley says that the credits come to a total of $13,033 and that whatever the rights or wrongs of the interest payments, the liability has been discharged already.   That is not quite the way that the correspondence reads.

[27]     The first point to be noted is that the evidence now shows adequately clearly that these were correct charges of interest. They arise because of changes in the floating interest rate.

[28]     The company’s solicitor had challenged the amount of the interest charges in the letter of 7 October 2010 but only in a general way and had not set out any case for  suggesting  that  there  was  another  way  of  calculating  interest.    The  bank’s lawyers replied on 12 October 2010 and in that they replied generally as to the correctness of the charges.

[29]     In my judgment, the response from the bank was adequate for the challenge to interest charging at that date. It cannot be said that there has been a failure of notification by the bank on the question of interest charges.

[30]     The short point about any difficulty that the customer might have had with knowing how much to pay by way of interest is to ensure that the current account was sufficiently topped up that it could meet interest charges, even if interest rates were to fluctuate over time.

[31]     Next are the two items of legal fees for June and July 2010.  The company had paid something towards legal fees in its payment of $48,252.95 on 1 July 2010. The company now queries its liability for further legal fees.  In particular, it raises the point that the company had been the subject of a liquidation application which had later been withdrawn.  The withdrawal was on the basis that there was no order as  to  costs.   The company says  that  since the  liquidation  application had  been withdrawn with no order as to costs, then the bank cannot turn around after that withdrawal and claim costs in respect of that liquidation application.    In correspondence, the company’s solicitors had queried the bills when they were produced and requested an apportionment to delete any attendances that were attributable to that liquidation application. The bank’s solicitors declined to make that apportionment.

[32]     In these circumstances, I am satisfied that there is an argument as to the liability for legal fees.  In particular the company could not know how much to pay by way of legal fees outside of the liquidation process if there had not been an apportionment by the bank’s solicitors.  I simply point to that as being a matter that is  open  to  argument.    Mr  Tingey accepted  that  the  liability for  legal  fees  was arguable.  Accordingly, the bank cannot rely on the legal fees.

[33]     The final item was $325.06 for monthly account fees and debit interest on the overdrawn current account balance.  Mr Moodley tried to suggest that there is some basis for challenging that, but I remain unconvinced by his argument.  The bank has selected some parts of the current account to include in its demand.  It was entitled to do that under paragraph 13(a).  It has adequately notified that to the customer.  There is nothing more that needs to be said about it.  That liability cannot be contested. There was adequate notice leading to default.

[34]     The result is that there was incontestable liability for interest for 1 August, September and October 2010, valuer’s fees and $325 under the current account charges.  They were not fully discharged by the credits totaling $13,033.  The bank gave the company adequate notice of the liabilities.   In their letter of 12 October

2010 the bank’s lawyers answered queries raised by the company’s lawyers and

made a fresh demand for the liabilities to be discharged by 4:00 pm on 14 October

2010.     At 15 October 2010, there still remained a debt owing to the bank notwithstanding the items I have set aside.  The time given for compliance with the fresh demand was adequate. Here, I rely on the decision of the Court of Appeal in ANZ  Banking  Group  NZ  Ltd  v  Gibson  [1986] 1 NZLR 556, as discussed by

Richardson J on 565.   In terms of the principles in that case there was adequate notice given for payment.

[35]     I use the letter of 12 October 2010 as the bank’s final notice to the company because that letter responded to the company’s queries about charges in the notice of

1 October 2010.  The letter of 12 October contained invoices showing fees that had been incurred.  The customer was given adequate time to consider that letter and to consider whether the liability did in fact exist and then, if it had the funds on hand, to pay.  That satisfies the requirements for due notice.  The time was adequate given the relations that existed between the parties, the correspondence querying the earlier demand and response giving information.  Longer notice was not required.

[36]     I accordingly find that there was default in meeting unsatisfied liabilities at

15 October 2010 which entitled the bank to exercise the power of acceleration. There is no genuine substantial dispute about the exercise of the power of acceleration.

[37]     At this point I need some assistance from the parties.  I have found that there was no liability under the current account and it seems on information I have been given to date that there is nothing due there.  I have found that the term loan was properly accelerated.  I have found that there were some accumulated liabilities there but I have deducted from them the legal fees and the 1 July 2010 interest payment.  I need some assistance from the parties to calculate a sum which can form the basis for a demand under s 291(1)(a) of the Act which would be an order of the Court requiring the company to pay a sum.  It would be useful if the parties could confer and reach agreement on what that sum would be on the basis I have set out.  I also ask the parties to confer about costs.  Costs are to be to scale, but the Bank reserves the right to claim solicitor-client costs under the term loan.

[38]     I also add this.   One of the matters that arose between the parties is that during the month of July 2010, the bank sent a document to 21st Century Investments Ltd.  That document was a variation of the loan agreement.  The company took that document on its face and said that the loan agreement had been varied.  The bank, on the other hand, said that this document had been sent out by mistake.   The correspondence in October 2010 contains contentions by both parties as to their particular  positions,  that  is,  the  company  took  the  view  that  this  document constituted a variation of the loan agreement and had to be applied, with the bank

contending that there had not been any variation and it was relying on the terms of the original loan agreement of 2005.

[39]     By the time the case was being prepared for Court, the bank changed its position and was happy to accept the loan agreement as varied by the 22 July 2010 document.   For this case, that aspect is a sterile dispute because the document of

22 July 2010 provided that all other terms and conditions of the original agreement are confirmed, except of course to the extent that they were expressly varied. In particular, this document showed that the interest rate was the floating interest rate which  is  was  what  would  have  applied  in  any  event  under  the  original  loan agreement.   For all practical purposes, there was no real difference between the terms of the original agreement as they applied up to July 2010, and  this loan agreement document generated on 22 July 2010.   Because there is no substantive different between the two, I have simply disregarded that dispute as  having no relevance to the matters I have had to determine in this judgment.

[40]     Following  the  adjournment,  the  parties  have  announced  that  they  have conferred and they have agreed on the amount of the demand and costs according to scale.

[41]     I make these orders:

[a]      The statutory demand is upheld to the extent of $782,513.52.  It is set aside for any amount above that;

[b]      I order 21st  Century Investments Ltd to pay the sum of $782,513.52 by 18 March 2011 and in default the ANZ National Bank Ltd may apply to the Court for an order that 21st  Century Investments Ltd be put into liquidation;

[c]      21st  Century Investments Ltd is to pay the ANZ National Bank Ltd the sum of $7,395.90 by way of costs fixed on a 2B scale.  Applying Keene v Okere Holdings Ltd, that sum cannot be part of the statutory demand under s 291(1)(a), but is independently payable.   The bank retains the right to seek higher costs on an indemnity basis, relying on the terms of the loan agreement;

[d]      The parties have leave to apply further if there are any unresolved issues on costs.

R M Bell

Associate Judge