Allied Farmers Investments Limited v Elgin Investments Limited (in rec) HC Christchurch CIV 2010 409 520

[2010] NZHC 1274

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV 2010 409 520

BETWEEN  ALLIED FARMERS INVESTMENTS LIMITED

Plaintiffs

ANDELGIN INVESTMENTS LIMITED (IN RECEIVERSHIP)

First Defendant

ANDDAVID IAN HENDERSON Second Defendant

ANDRFD INVESTMENTS LIMITED Third  Defendant

CIV 2010 409 656

AND BETWEEN            RFD INVESTMENTS LIMITED Applicant

ANDALLIED FARMERS INVESTMENTS LIMITED

Respondent

Hearing:         19 July 2010

Appearances: N Gedye and J P Forsey for Plaintiff in 520 and Respondent in 656

K W Clay for Defendants in 520 and Applicant in 656

Judgment:      20 July 2010

JUDGMENT OF ASSOCIATE JUDGE OSBORNE

ALLIED FARMERS INVESTMENTS LIMITED V ELGIN INVESTMENTS LIMITED (IN RECEIVERSHIP) AND ORS HC CHCH CIV 2010 409 520  20 July 2010

Introduction

[1]      Elgin Investments Limited (now in receivership) owned a shopping centre then known as Spotlight Plaza in Sydenham, Christchurch.   It is now known as Sydenham Central.

[2]      In the happier times of 2005 Elgin wanted to refinance in order to refurbish the plaza.   In November 2005 it entered into an agreement with Hanover Finance Limited for a loan of $5,300,000.00.  To get that loan it agreed on terms which are not unusual in contracts of this nature.  In particular to get the loan Elgin agreed to a second mortgage over its Sydenham property, and its director David Henderson and a shareholder RFD  Investments Limited associated with David Henderson, each gave guarantees.

[3]      Hanover began advancing the agreed money in November 2005.  The parties then agreed to increase the loan by $300,000.00 and the balance of the loan was drawn down between November 2005 and February 2006.   Elgin in total received

$5,600,000.00 from Hanover.

[4]      The  loan  was  originally  due  for  repayment  on  4  November  2006.    By agreements in November 2006, April 2007, October 2007 and November 2007 the term was progressively extended out to 31 October 2008.   The guarantors were signatories to each extension agreement.

[5]      The  loan  was  not  fully repaid  in  2008.    Hanover  commenced  efforts  to recover payment.   It served Property Law Act notices but did not proceed to mortgagee sale.

[6]      In December 2009 Hanover assigned to Allied Farmers Investments Limited a number of loans including this loan.   Also included was a loan by a company called Five Mile Holdings Limited, now in receivership.  Five Mile Holdings is also a company associated with David Henderson.  That loan was for a sum in excess of

$40,000,000.00.   The guarantors of the Five Mile loan, as with the Elgin loan,

included David Henderson personally and RFD.  The required notices of assignment were given.

[7]      Allied, like Hanover, was unable to obtain repayment of the Elgin loan from Elgin or its guarantors.  These proceedings concern two of the steps which Allied has taken by way of recovery.

[8]      First,  there  is  a  summary  judgment  application  (the  520  proceeding)  by Allied against Elgin, David Henderson and RFD issued in March 2010.  Secondly, in March 2010 Allied issued a statutory demand under s 289 Companies Act 1993 against RFD.   RFD has (in the 656 proceeding) applied to set aside that statutory demand.

[9]      The short point of the litigation is that Elgin as the borrower and RFD and David Henderson as guarantors want to repay nothing on account of the loan which Elgin received.

Summary judgment proceeding – the application and opposition

[10]     For convenience I will focus on the summary judgment proceeding first.  Mr Clay for the defendants responsibly accepted that on the facts of this case the RFD application  for  setting  aside  the  statutory  demand  would  fail  if  the  summary judgment application of the plaintiff is successful.

[11] There is no dispute by the defendants as to the making of the loan and there has been no criticism of the plaintiff’s evidence as to the balance of the account such as to raise a serious issue as to quantum. I will return to the issue of quantum in relation to a pleadings point, (below at [35].

[12]    To justify non-payment of the debt the defendants raised three areas of argument.

[13]     First, pleadings issues; secondly, a set-off claim said to arise from the Five Mile loan; and third an argument as to oppression in terms of the Credit Contracts and Consumer Finance Act 2003.

[14]     In his written submissions and at the hearing Mr Clay did not pursue the third ground, oppression, explaining that the oppression alleged lay in Elgin’s seeking to ignore a right of set-off.  Mr Clay accepted that if the defendants’ set-off ground of opposition fails then the oppression argument could not add anything.

[15]     I will therefore turn to examine the first two grounds of opposition.

Summary judgment – the principles

[16]     Before  doing  so,  my  starting  point  in  relation  to  a  plaintiff’s  summary judgment application must lie in r 12.2 High Court Rules which requires that the plaintiff satisfy me that the defendants have no defence to any cause of action in the statement of claim or to a particular cause of action.

[17]     The general principles which I adopt in relation to an application of this nature are:

(a) The onus is on the plaintiff seeking summary judgment to show that there is no arguable defence.  The Court must be left without any real doubt or uncertainty on the matter.

(b) The  Court  will  not  hesitate  to  decide  questions  of  law  where appropriate.

(c) The  Court  will  not  attempt  to  resolve  genuine  conflicts  of evidence or to assess the credibility of statements and affidavits.

(d) In determining whether there are genuine and relevant conflicts of facts, the Court is entitled to examine and reject spurious defences or plainly contrived factual conflicts.  It is not required to accept

uncritically every statement put before it, however equivocal, imprecise, inconsistent with undisputed contemporary documents or other statements, or inherently improbable.

(e) In weighing these matters, the Court will take a robust approach and  enter  judgment  even  where  there  may  be  differences  on certain factual matters if the lack of a tenable defence is plain on the material before the Court.

(f) Once the Court is satisfied that there is no defence, the Court retains a discretion to refuse summary judgment but does so in the context of the general purpose of the High Court Rules which provide for the just, speedy and inexpensive determination of proceedings.

Summary judgment – the statement of claim – the pleadings issues as to variation

The pleadings themselves

[18]     The precise grounds of opposition in relation to the pleadings are set out in paragraph 3.5 of the notice of opposition which states:

Allied has failed to plead:

(i)The  nature  of  Henderson’s  and  RFD  obligations  under  their guarantees;

(ii)      The steps that Allied took to recover the outstanding balance under the guarantees;

(iii)     How the amount claimed has been calculated and in particular has failed to set out the dates of advances and any repayments.

[19]     I will first focus on the nature of the guarantee obligations.  I note in doing so that that ground of opposition does not affect Elgin as borrower.  The statement of claim as filed pleaded this:

On 1 November 2005 the second and third defendants each executed a deed of guarantee and indemnity in respect of the lending referred to [earlier in the statement of claim].

[20]     The  criticism  of  this  pleading  is  that  it  does  not  identify  the  terms  of guarantee and indemnity material to affect the liability of the guarantors.

[21]     Mr Clay referred to the decision of this Court in Westpac New Zealand Limited  v  Cooper  HC  Auckland  CIV  2009-409-990,  29  January  2010  and particularly that passage of   Duffy J’s judgment which appears at [30].  Her Honour said:

[30]     The  competing  arguments  raises  the  question  of  what  Westpac should have done in its application for summary judgment.  I consider that Westpac’s initial documents should have included the following:

(a)       A statement of claim which, in relation to both guaranteed debts, pleaded:

i)the  creation  of  the  debts  and  the  guarantees,  the existence and nature of Mr Cooper’s obligations under the guarantees, the defaults and arrears owing, and the steps Westpac took to recover the arrears arising after the mortgagee sales;

ii)        the steps Westpac took to recover the outstanding balance under the guarantee, including an outline of the process followed to achieve compliance with the statutory notice regime under the Property Law Act ; and

iii)       an  allegation  that  should  the  notice  process  have been defective in any way, this has not resulted in any prejudice to Mr Cooper;

(b)       Affidavit evidence which proved the allegations required to be pleaded.  Regarding proof of no prejudice, if notices were not properly given to Mr Cooper, I consider that something of the kind identified by Asher J in Public Trustee v Ottow

& Ottow HC AK CIV 2009-404-3825 4 November 2009 at

[31] may serve to show prima facie that the mortgagee sale process had not prejudiced Mr Cooper:

[31]     The  following steps indicate that  a  mortgagee has made reasonable efforts to obtain the best reasonably obtainable price:

a)         The  appointment  of  a  reputable  real estate agent to market the property.

b)       Obtaining a valuation report from an experienced valuer as a guide to what could reasonably be expected for the property.

c)        Marketing   over   a   reasonably   long period of time.

d)      An   extensive   advertising   and promotional campaign.

e)          A properly conducted auction.

f)        A   sale   price   that,   given   all   the circumstances, can  be  reconciled  with expert opinion as to value.

[22]     Mr Clay puts his criticism of the plaintiff’s pleading in the present case in this way in his written submissions:

18.The statement of claim does not plead the terms of guarantee and indemnity but simply refers to a deed of guarantee and indemnity.  It is therefore submitted that the statement of claim does not satisfy the requirements set out by Duffy J requiring the existence and nature of the defendants’ obligations under the guarantees to be pleaded.  It is not pleaded whether the action is brought against the second and third defendants as guarantors or principal debtors.  That the nature of the obligations should be set out in the statement of claim is apparent from the pleading at para 15 with its specific reference to cl 12.4 of the loan agreement providing for solicitor-client costs.

…

20.The pleadings further allege a variation to the agreement or further allege variations to the guarantees and indemnities but do not plead the nature and obligations of the guarantors when variations occur, which as a matter of law would release the guarantors from their obligations under the guarantees.

[23]     I consider that there is a measure of valid criticism of the pleading in this regard.  It is plain when one reads the evidence filed that the terms of the guarantees in this case permitted variation of the principal debt without discharging the guarantors.  To meet that criticism Mr Gedye presented a week before the hearing an amended statement of claim and made oral application for the admission of that document.  I will return to that amendment.

[24]     Mr Gedye was also entitled to suggest in relation to the original pleading that it had come very close indeed to pleading all the material details on which the

plaintiff might have succeeded against the guarantors.   At paragraph 8 of the statement of claim it is alleged:

The loan fell due on 4 November 2006 but on or about 20 November 2006, 2

April 2007, 3 October 2007 and 30 November 2007 the plaintiff and the defendants agreed successively to extend the maturity dates ultimately to

31 October 2008 when the loan finally expired and fell due.

[25]     The agreement of a guarantor to a variation overcomes the common law discharge  doctrine  in  relation  to  guarantor’s  liability.    For  an  example  of  the operation of such agreement by guarantors see Liguori v Richelieu Investments Ltd [2008]  NZCCLR  35,  a  judgment  of  Andrews  J,  especially  at  [50]  and  [54]. Therefore, the pleading as it stood in relation to the time extensions of the loan was sufficient without reference to further terms of the original contracts.   But while paragraph  8 involved a pleading by the plaintiff as to the extended period of loan such a pleading did not appear in paragraph 7 in relation to the agreed additional advance of $300,000.00.

[26]     In  my judgment  as  the  pleadings  stand  that  was  a  single  valid  point  of criticism.  The evidence which was provided to the Court by virtue of the summary judgment  nature  of  the  application  clearly  evidences  the  agreement  of  both guarantors.  That agreement could have been simply pleaded.  Nevertheless, in my judgment some amendment was correctly required.

Amendment of pleadings – the principles

[27]     The general approach to amendment of pleadings where leave is required is that the Court should allow amendment even at a late stage if the amendment is necessary for the purpose of determining the real controversy between the parties, unless such amendment is likely to result in an injustice to one or more of the defendants or is likely to cause significant delay.  This was the approach adopted by Tompkins J as trial Judge and subsequently endorsed by the Court of Appeal in Elders Pastoral Ltd v Marr (1987) 2 PRNZ 383 at 384 (per Cooke P for the Court).

[28]     The general principle applies also in summary judgment cases.  Casey J, in delivering the judgment of the Court of Appeal in Cegami Investments Ltd v AMP Financial Corporation (NZ) Ltd [1990] 2 NZLR 308, said this at 314:

There is no justification for holding the summary judgment rules suspect and needing  to  be  strictly  confined  because  they  are  thought  to  deprive defendants of the privilege of a full trial. They are aimed at cases in which the plaintiff can establish there is no genuine defence, and they should be approached and applied in a way that will most effectively enable the Court to reach a conclusion on that question. With this in mind we see no good reason why the ordinary provisions about amendment should not apply to such  proceedings  if  the  justice  of  the  case  requires  it  and  there  is  no prejudice to the defendant. It would be a matter for regret if these salutary rules became hedged with restrictive interpretations narrowing the ordinary scope of amendment, regardless of the merits of the application and the position of the parties.

[29]     His Honour observed in that case that the amendment had been prompted by Cegami’s own action in making it clear it was not going to honour the contract in question – there is no suggestion in the judgment of the Court of Appeal, however, that a change of  circumstances or events after the issue of the proceeding is a necessary ingredient.  The general principle is, as stated, broader.

[30]     The Court of Appeal also observed in Cegami Investments, at 314, that while the Master was correct to have allowed the summary judgment application to proceed on the new basis, it may have been more appropriate that the plaintiff apply formally for leave to amend.

[31]     I therefore apply these as the governing principles:

i.     the Court has a discretion; and

ii.     the discretion should not be exercised in favour of amendment if:

a.         it will significantly prejudice the defendant; or b.       it will cause significant delay; or

c.         it will cause a miscarriage of justice (or, expressed another way) it is not in the interests of justice.

Amendment of pleadings - discussion

[32]     Mr Gedye’s amendments for the plaintiff clearly spell out the terms of the contract relied on.  At paragraph 5 of the amended statement of claim this is stated:

5.On 1 November 2005 the second and third defendants each executed a deed of guarantee and indemnity in respect of the lending referred to in paragraphs 3 and 4 above, both deed providing, inter alia:

(a)       the Guarantor unconditionally and irrevocably guarantees to the lender the due payment by the Debtor of the Guaranteed Indebtedness and the due performance of and compliance by the Debtor with the Guaranteed Obligations (clause 2.1);

(b)The Guarantor undertakes that if, for any reason, the Debtor does not pay when due…any Guaranteed Indebtedness, it will pay the relevant amount immediately on demand by the Lender (clause 2.2);

(c)       The Guarantor is not to be discharged, nor are its obligations to be affected, by anything which, but for clause 3.2 would or might have discharged the Guarantor or affected its obligations,  including  the  eventualities  set  out  in  clauses

3.2.1 to 3.2.9 inclusive of the deed (clause 3.2);

(d)Each payment by the Guarantor to the Lender under this deed is made… free and clear of and (except to the extent required by law) without any deduction or withholding for or on account of tax on any other account, whether by way of set-off, counterclaim or otherwise (clause 8.12).

and the plaintiff otherwise relies on the full terms of the deeds of guarantee including the  definitions  of  capitalised  terms,  which  are  annexed  to  the affidavit of J L Fleming in support of application for summary judgment, sworn 12 March 2010 as exhibits 031 and 047.

[33]     In this case Mr Clay has properly conceded that he cannot point to any prejudice through the amendment.   Equally, he has not been able to point to any delay which would ensue.   There was no further evidence needed to be filed or submissions  prepared.    There  is  no  injustice  in  my judgment  in  permitting  the amendment sought by the plaintiff.  It is clear that the defendant guarantors knew at all times the case they had to meet.  Because this is a summary judgment case the guarantors have received copies of each contract not only at the time they entered into  those  contracts.    They  and  their  advisers  have  received  all  the  relevant documents again at the time the proceeding was commenced.   These are typical financing  arrangements   in  relation  to  substantial  sums  by  parties   who   are

experienced commercial people on all sides.  There is nothing surprising or unusual in the obligations that the guarantors took on and which the amended statement of claim now pleads.

[34]     Accordingly, there will be the orders as to amendment that I make at the end of this judgment.

Summary judgment – the statement of claim – the pleadings issues as to calculation of quantum

[35]     Mr Clay’s further criticism of the pleading was in relation to quantum.  In his written submission he stated that Allied did not plead that the full amount of the loan was advanced, nor (if it claims that that was not required) why the full sum was not advanced.  In oral argument this fell away as the Allied evidence clearly establishes the advancing of the full sum.  A statement to the contrary by David James Godden in an affidavit filed by the defendants in opposition was incorrect.  It should never have been made, as the history of the loan was readily verifiable.

[36]     A  technical  pleading  issue  remained  in  that  the  statement  of  claim  had expressly pleaded the advancing of the originally agreed $3,300,000.00 but had omitted expressly a reference to the advancing of the additional $300,000.00.  The pleading oversight was readily apparent when one reads the associated affidavits. There was no merit in the criticism in this regard but, in the event, Mr Gedye’s amended pleading addresses the oversight without causing embarrassment or difficulty to the defendants.

[37]     In the  grounds of opposition, as  I have indicated, the third particular  of pleading deficiency was alleged to be in relation to the calculation of the amount paid, and in particular the dates of advances and repayments.

[38]     The quantum in this case flows from a running account.   In the demand presented  by the  plaintiff  before  the  proceeding  commenced  no  questions  were raised.  The issue of detail of quantum was raised for the first time in the notice of opposition after the plaintiff had pleaded the balance of account.  I do not consider

the criticism of the pleading in this regard valid.  In any event, Mr Gedye attached to the  amended  statement  of  claim  a  full  statement  of  account.    Again,  Mr  Clay accepted that there was no prejudice to the defendants in the amendment in this regard.  The attachment simply identifies the mathematics leading to the balance of the amount claimed.

Summary  judgment  –  the  statement  of  claim  –  the  pleadings  issues  as  to recovery steps

[39]     The second particular of alleged pleading deficiency was that the plaintiff had not pleaded the steps which Allied took to recover the outstanding balance under the guarantees.

[40]     This was an aspect of the pleading of the plaintiff in Westpac New Zealand Limited v Cooper which was found to be deficient by Duffy J.  But there can be no criticism of the plaintiff in this case.   The recovery issue arose in Westpac New Zealand  Limited  v  Cooper  because  the  lender  qua  mortgagee  had  realised  its mortgage security.   No such recovery has occurred in this case in relation to the plaintiff’s second mortgage.  A pleading in relation to recovery was not required

The setting aside application – pleadings issues

[41]     Mr  Clay’s  submission  as  to  inadequacies  in  the  pleadings  necessarily focussed on the Allied statement of claim (in the 520 proceeding).  It is that nature of pleading to which the observations of Duffy J in Westpac New Zealand Ltd v Cooper were directed.   The pleading criticism could not attach to Allied’s response to the RFD application to set aside Allied’s statutory demand (in the 656 proceeding), as in a proceeding of that nature Allied is responding, through a notice of opposition and affidavit evidence, to another’s (RFD) application.  The documents filed in the 656 proceeding disclosed the relevant contracts being the Loan Agreement and RFD’s Deed of Guarantee.  Even were the pleadings issue to have become an impediment to Allied’s success in the summary judgment proceeding, it would have left the Allied opposition to the setting aside application to be dealt with on its merits.  No pleading amendment was required in that regard, nor did Mr Clay suggest there was.

[42]     The defendant asserts a right of equitable set-off.

[43]     Set-off  at  law  would  not  be  available  to  the  defendant  as  mutual  debts claimed to be set-off at law are confined to liquidated claims: Laws of New Zealand, Set-off and Counterclaim, at [20] - [21].

Equitable set-off – the principles

[44]     Equitable  set-off  is  available  in  relation  to  unliquidated  claims.     The principles applicable to set-off in New Zealand are those set out in Grant v New Zealand Motor Corporation Limited [1989] 1 NZLR 8 (CA). The Grants were sued for rent under their lease from NZMC. Set-off was claimed in relation to alleged provision of work to be given by NZMC to the Grants’ panel-beating company. The Court of Appeal set aside a summary judgment entered against the Grants on the basis that their cross claim qualified as a set-off which was arguable and prevented summary judgment being entered. Somers J, delivering the decision of the Court, stated the principle in this way (at 12 - 13):

The principle is, we think, clear. The defendant may set-off a cross-claim which so affects the plaintiff's claim that it would be unjust to allow the plaintiff to have judgment without bringing the cross-claim to account. The link must be such that the two are in effect interdependent: judgment on one cannot fairly be given without regard to the other; the defendant's claim calls into question or impeaches the plaintiff's demand. It is neither necessary, nor decisive, that claim and cross-claim arise out of the same contract.

[45]     The Court of Appeal, in Hamilton Ice Arena Limited v Perry Developments Limited [2002] 1 NZLR 309 applied the Grant v NZMC statement of principle.  In speaking to the principle, Tipping J (for the Court) identified several aspects associated with the equitable jurisdiction.  At 311 His Honour observed that:

The Courts of equity would not readily interfere with the proceedings at law and confined themselves to cases where the claim at law and the defendant's cross-claim were so closely interrelated that it would be unconscionable for the plaintiff to seek judgment at law without bringing the defendant's cross- claim to account. (emphasis added).

and,  at  312,  His  Honour  referred,  with  apparent  approval,  to  the  statement  of Forbes J in British Anzani (Felixstowe) Ltd v International Marine Management (UK) Ltd [1980] 1 QB 137 at 145, where his Lordship stated that:

...the equity must go to the very root of the plaintiff’s claim.

[46]     As a general rule, a set-off may only be maintained where the claims to be set-off against each other exist between the same parties and in the same right: Hamilton Ice Arena Ltd v Perry Developments Ltd at 312 (adopting 42 Halsbury’s Laws of England (4th ed.1983) Vol.42 Set-off and Counterclaim, at [435]).

[47]     The need for identity of parties is consistent the fact that the cross-claim is regarded in equity as fully or pro tanto extinguishing the plaintiff’s right to judgment on  its  claim:  Hamilton  Ice  Arena  per  Tipping  J  at  312.     The  concept  of extinguishment   is   difficult   if   a   cross-claim   is   made   by  a   different   party. Accordingly, it would be a very unusual circumstance and one which would still have to be consistent with the extinguishment rationale for equitable set-off to be available where there is no identity of parties: per Tipping J at 313.

[48]     It is recognised in New Zealand (as in England) that parties may contract out of the equitable right of set-off by clear and unequivocal words or by clear implication: Modern Engineering (Bristol) Ltd v Gilbert-Ash (Northern) Ltd [1978] AC 689, especially per Viscount Dilhorne at 712 and Lord Salmon at 723, applied in

Grant v NZMC Ltd at 13.   See also Halsbury’s Laws of England (5th  ed, 2009)

Vol.11 Civil Procedure at [664]; Laws of New Zealand, Set-off and Counterclaim at

[28].

[49]     The words “free and clear of exchange or any deduction whatsoever” (as used in the relevant contract in Grant v NZMC,  do not in their natural sense embrace a set-off: Grant v NZMC Ltd at 13.  The position is otherwise where a contractual agreement contains words such as “free and clear of any deduction or withholding for any reason whatsoever”.

[50] The law establishes the right of parties to a contract to exclude rights of set- off (above at [48]. Mr Gedye’s written submissions, filed a week before the hearing, identified exclusion provisions in the three relevant contracts as follows:

a.   Clause 5.8 of the loan contract (Hanover and Elgin, with Henderson and RFD

as guarantors):

5.8Payments to be Free and Clear: Each payment to Hanover under this Agreement or the Securities is to be made, to the maximum extent permitted by law, free of any restriction and without any deduction or withholding in respect of any taxes, duties, set-off, counterclaim or otherwise.   If any deduction or withholding is required by law, the Borrower will  pay  to  Hanover  an  additional  amount  equal  to  the amount deducted or withheld, so that the net amount actually received and retained by Hanover on the due date (free from any liability in respect of any deduction or withholding, and ignoring any amount which Hanover is deemed to have received at law) is equivalent to the amount Hanover would have received and retained had no deduction or withholding been made or required.

Clause 3 (identifying the nature of the guarantee and indemnity obligations):

3.1      Liability  as  Sole  Principal  Debtor:  As  between  the Guarantor and the Lender (but without affecting the obligations of the Debtor) the Guarantor is liable under this Deed as sole and principal debtor and not as a surety.

b. Clause 8.2 of both Deeds of Guarantee (of Henderson and of RFD as guarantors)

8.2      Payments  to  be Free  and  Clear:  Each  payment  by the

Guarantor to the Lender under this Deed is to be made:

8.2.1    free of any restriction or condition; and

8.2.2   free and clear of and (except to the extent required by law) without any deduction or withholding for or on account of tax or on any other account, whether by way of set-off, counterclaim or otherwise.

[51]     These provisions, submitted Mr Gedye, excluded set-off and counterclaims.

[52] Mr Clay’s written submissions omitted reference to these contractual provisions. Instead, at paragraph 20 Mr Clay went so far as to submit that the variations which had been made to the loan agreement “as a matter of law would release the guarantors from the obligations and the guarantees”. In oral submissions, Mr Clay did not pursue that submission given the express provisions of each Deed of Guarantee (to which I have referred above at [50]). But Mr Clay in his oral submissions went on to respond to the effect of cl 5.8 of the Loan Contract and of

8.2 of each Deed of Guarantee in this way (and I paraphrase his submissions which at this point were solely oral).

[53]     Mr Clay said that the words in cl 8.2.2 “except to the extent required by law” should be read as “except to the extent permitted by law and demanded by the guarantor”.  That would allow an equitable set-off which the guarantor would be able to assert but for contractual exclusion.

[54]     Neither the words on their own, nor in the contract as a whole, support Mr Clay’s reading down.  “Required by law” is to be given its natural reading, given that it is a careful exception to what is otherwise an all-encompassing stipulation.  The legal context of the exception supports the conclusion that “required by law” means precisely what it says - it has been recognised in the cases (see Grant v NZMC and in the  commentaries)  that  a  complete  exclusion  of  rights  of  a  set-off  may not  be possible in the case of set-off which arises from statutory provisions.

[55]     Mr Clay then said that the expression in cl 8.2.2 “on account of tax or any other account” suggests a requirement that the excluded sum claimed by way of set- off must be in the nature of a disbursement made or incurred, such as a tax payment. Mr Clay submitted that a set-off for damages is not of that nature, and it is therefore not a set-off excluded by cl 8.2.2.

[56]     In my view, nothing in cl 8.2.2 suggests that the sum withheld or deducted has to relate to a disbursement whether made or to be made.  I accept Mr Gedye’s submission that the term “on account of” should be given in these contracts an ordinary meaning of “in respect of”, so that in the phrase “on account of tax or any other account” the meaning is equivalent to “in respect of tax or any other sum”.

[57]     The Concise Oxford Dictionary gives as the meaning of “on account of” “because of”.   I find that equally illustrative of the meaning of the words used in cl 8.2.2, which would thereby be read as meaning:

“because of tax or because of any other reason”.

[58]     My view is reinforced by reading cl 8.2.2. as a whole – the intention of the parties, viewed objectively, was clearly to require payments of interest and principal which were free and clear in every sense (other than where the law required otherwise).  Hence the words used:

…on account of tax or any other account”.

…whether by way of set-off, counterclaim or otherwise.  (Emphasis added).

[59]     I  am  further  reinforced  in  my  view  by  reading  the  three  contractual documents together.  The guarantors entered into commitments as guarantors under the Deed of Guarantee.   By cl 3.1 of each deed, each accepts he or it is liable as principal debtor.   The Loan Agreement deals with this exclusion of set-off and counterclaim in cl 5.8 (set out above at [50]).   The wording of cl 5.8 is slightly different to cl 8.2 in the Deeds of Guarantee in that the later phrases of cl 8.2 are rolled together (with some different words) to preclude deduction or withholding “in respect of taxes, duties, set-off, counterclaim or otherwise”.   In my judgment, the wording of cl 5.8 is no less clear, and is to precisely the same effect as cl 8.2.  The intention objectively is to completely exclude set-offs unless that set-off is required by law.

[60]     Mr Clay’s submission that the set-off asserted by the defendants in this case is not excluded by cl 5.8 and 8.2 respectively must fail.

[61]     A further point emerges from cl. 5.8 of the Loan Agreement.  That clause, in its  second  sentence  (after  excluding  virtually  all  set-offs  and  counterclaims) provides:

If any deduction or withholding is required by law, the Borrower will pay to Hanover an additional amount equal to the amount deducted or withheld, so that the net amount actually received and retained by Hanover on the due date (free from any liability in respect of any deduction or withholding, and ignoring any amount which Hanover is deemed to have received at law) is

equivalent to the amount Hanover would have received and retained had no deduction or withholding been made or required.

[62]     As no submissions were addressed to me in relation to this provision, I do not make a finding in relation to its application to the present facts.  It does, however, appear on its face to prevent any benefit accruing to the borrowers in this case from a right of set-off or counterclaim for a second reason – that is, in addition to excluding deductions or withholding for any reason, cl 5.8 stipulates that the borrower must top-up the amount which is the net of any set-off (because set-off is required by law) to the sum which represents the gross debt (free of legal set-off).   If Mr Clay’s submission as to the meaning of “required by law” were correct, (which I have found it is not), then  cl 5.8 would appear to nullify the benefit of the set-off at law.  It is unnecessary that I finally determine its effect.

Equitable set-off – identity of parties – independence of contracts

[63]     The defendants in this case assert as a set-off a claim which is said to arise in relation to the Hanover loan made to Five Mile in December 2009 (above at [6]). The defendants relied upon the content of an affidavit sworn by David Henderson in a separate proceeding brought by Allied against Five Mile and its guarantors.  At the heart  of  the set-off  asserted  by the  Five  Mile  affidavit  was  the  suggestion  that behaviour of Hanover/Elgin (or the receivers appointed to Five Mile) had caused damage to the defendants as to not only cancel out (by way of set-off) the Allied claim on the Five Mile contract but to leave a balance to flow over to the defendants benefit on the Elgin contract.

[64]    The set-off alleged by the defendants in this case arises from a plainly independent contract whereby Hanover on 7 July 2006 agreed to lend to Five Mile money for a Five Mile project at Queenstown.   In Christchurch the year before (November 2005), Hanover had agreed to lend Elgin money for Elgin’s project at Sydenham.  The companies are independent companies.  There is no relationship in substance between the transactions.  There is no identity of parties in the sense of the party who is liable and sets up the claim of set-off or counterclaim.   There is a coincidence  of  two  guarantors,  David  Henderson  and  RFD,  who  happen  to  be

guarantors of each transaction.   But that will be the case every week and every month  in  New  Zealand  in  many  many  commercial  transactions  which  are independent of one another.   A claim by parties to the Five Mile contract has no interdependence in the sense used in the set-off cases.  The fact that Allied became by assignment the owner of both loans makes the loans no more interdependent than they were when Hanover as a financier in the market entered a loan contract with two separate companies in 2005 and 2006 and undoubted to dozens of other companies   sums of money for their separate development purposes.     The commercial reality of the two separate contracts is well illustrated by the following

table which Mr Gedye included in his written submissions:

Date of Agreement	1 November 2005	7 July 2006
Borrower	Elgin: some Henderson shareholders but many external shareholders.  Vehicle for some 20  syndicated  property investors.	FMHL:  solely  as  member  of Henderson Group
Guarantors	D Henderson RFD Investments	Property Ventures Ltd Lichfield Ventures Ltd Naval Ltd D Henderson 92 Lichfield Ltd RFD Investments Ltd
Purpose of loan	To assist in refinancing second mortgage, and to provide funds for  refurbishment of  Spotlight Plaza at 363-373 Colombo St, Christchurch	To refinance existing borrowing and to pay professional fees for property at Grant Road, Queenstown (Five Mile property).
Security	Second    mortgage   over   363 Colombo St, GSA over Elgin	Various mortgages over properties in Queenstown and Christchurch, GSA over FMHL

[65]     In my judgment, the set-off claim is in this case without any merit on its commercial facts.   It is also entirely without merit in that it lacks the equitable or

good conscience aspect of merit that equitable set-offs must have in terms of the authorities to which I have referred.  There is nothing inequitable or unconscionable in the owner of the debt owed by Elgin recovering that debt some two years after it was due for repayment.

Equitable set-off – restriction order - s 11(1) Contractual Remedies Act 1997

[66]     Mr Gedye developed a further point in a written reply (addressed as part of his submissions) which had not been elevated as such a significant point in his written submissions.  For convenience, I quote his written reply in this way:

3.The FMHL counterclaim, filed late on 16 July 2010, demonstrates the separateness of all of the FMHL matters from the Elgin loan. This document commences with a denial that Hanover owned the FMHL loan.   This distances Hanover as undisputed former Elgin lender  even  further.    Allied  emphasises  its  submission  that  it  is neither   appropriate   nor   possible   to   go   into   these   alleged counterclaims in this context.  However, it submits that nothing in the counterclaims indicates that damages of more than $43m (the amount   of   the   plaintiff’s   claims)   are   likely   to   be   awarded. Therefore, the counterclaims can be fully and effectively brought to bear in that proceeding.  It is accepted that Allied as assignee may be visited with these counterclaims in the FMHL action: s11(1) Contractual Remedies Act 1979 and s132 CCCF Act 2003.

4.S11(2)  Contractual  Remedies  Act  1979  limits  any  exposure  by Allied to the FMHL claims to the value of the performance of the assigned loan contracts.  The defendants in the FMHL action cannot succeed against Allied for more than the amount due under the relevant  FMHL  loans.    Therefore,  all  FMHL  matters  must  be resolved within that proceeding and Allied cannot have any potential additional liability to be set off in the Elgin proceeding.

[67]     I agree that Mr Gedye’s submission on s 11 Contractual Remedies Act, along with his submissions relating to the application of the more general principles of equitable set-off would also be decisive in this case.  The effect of s 11 Contractual Remedies Act is, as Mr Gedye submitted, that there cannot be an overflow claim by any of the parties in the Five Mile Holdings litigation against the plaintiff which could flow into the present litigation over the Elgin loan.  That is plainly the effect of s 11 Contractual Remedies Act.  If I had not found for the plaintiff on the general principles of set-off which I have dealt with earlier I would have found for the plaintiff on this ground alone.

[68]     The authors of the Law of Contract in New Zealand Burrows, Finn & Todd

(3rd ed, 2007) at 17.3 state this as to the relationship between s 11(1) and s 11(2):

If the assignee becomes liable for the assignor’s breach in this way then, subject to any agreement or provision in the contract to the contrary, the assignee’s  obligations  are  limited  by  subs  (2)  to  “the  value  of  the performance of the assigned contract to which he is entitled by virtue of the agreement”.  The word “is” in this context has no temporal significance.  So a purchaser of property could still claim damages from an assignee up to the value the assignee derived from the assigned contract, notwithstanding  that the purchaser had paid all money due under the contract and performance of the contract had no present value.  The assignee’s liability was limited to the amount due by the purchasers at the time the agreement was assigned to the assignee.    Probably the  “value”  of  the  contract  in this  context  is  to  be determined by the Court on an objective basis.   Any excess has to be recovered from the assignor who, as has already been seen, remains fully liable on the assigned contract.

[69]     This paragraph was cited as a helpful analysis by the Court of Appeal in S B Properties Ltd (in liquidation) v Holdgate [2009] NZCA 327.. The last sentence in the quoted passage reinforces my analysis of the effect of s 11(2) as it applies to the present case – any claims which RFD or David Henderson might have against the assignee, Allied, are limited to the value of the Five Mile loan, with the value of any claim beyond that figure claimable only from Hanover as assignor, not from Allied the assignee.

[70]     The statutory provisions under s 11 Contractual Remedies Act appear to reflect, not alter, the position at common law.   See the discussion in Corbin on Contracts, (Revised Edition, West Publishing, St. Paul, 2007) vol 9 at [51.2] where the authors refer to a decision of the Court of Appeals  First Circuit in Michelin Tires (Canada) Ltd v First National Bank of Boston (1981) 666 F.2d 673. The majority observed that the relevant provision of the Uniform Commercial Code had made no substantial change in prior law. Rather, it was observed at 678:

Common sense requires that we not twist the “precarious security” of an assignee into potential liability for his assignor’s breach.

Equitable set-off – the quality of the set-off claim and evidence generally

[71]     The fall back position of the plaintiff was that this may be one of those cases where the Court in examining the defendants’ evidence as to the set-off asserted

should take a robust approach.  That is permissible where the claim and evidence is so plainly tenuous or weak that no weight should be attached to it.  Mr Gedye went some way towards inviting the Court to examine the evidence in detail.   I refrain from doing so having regard to the grounds on which I have already found the plaintiff has succeeded.  The point is nevertheless reserved to the plaintiff.

The jurisdiction to set aside a statutory demand – the principles

[72]     It is, as I have said, common ground between the parties that there is no room on the facts of this case for a different outcome in relation to the setting aside statutory demand jurisdiction to that which will apply in the summary judgment jurisdiction.  For completeness I record that the jurisdiction I exercise in this regard is pursuant to s 290 Companies Act 1993 and I refer specifically to the basis upon which the Court may grant an application as contained in s 290(4) Companies Act which reads:

290     Court may set aside statutory demand

…

(4)      The Court may grant an application to set aside a statutory demand if 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.

[73]     For  the  purposes  of  this  hearing  I adopt  as  the  general  approach  to  the exercise of the jurisdiction the following five principles:

•The applicant must show that there is arguably a genuine and substantial dispute as to the existence of the debt.

•The mere assertion that the dispute exists is not sufficient.  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 the Court’s Companies Act jurisdiction.

•An applicant must establish that any counterclaim, cross demand or set-off is reasonably arguable in all the circumstances.

•It is not usually possible to resolve disputed questions of fact on affidavit evidence alone, particularly when issues of credibility arise.

Application of the principles to the setting aside application

[74]     For the reasons I have stated in relation to the summary judgment discussion and  particularly  having  regard  to  my  finding  that  the  claim  of  set-off  is  not reasonably arguable in the circumstances of this case, the RFD application in relation to the statutory demand served on it must fail.

Orders

[75]     Having given this judgment orally I have now heard from counsel as to the form  of  orders  that  I should  make  flowing  from  the  judgment  and  I have  had submissions as to costs.

[76]     Leave is granted to the plaintiff in relation to the filing of the amended statement of claim.

[77]     There  will  be  judgment  in  the  520  proceeding  for  the  plaintiff  in  the following sums:

a.         $4,698,661.63

b.Interest on $4,661,132.42 at 24% per annum from 13 March 2010 to the date of judgment.

[78]     There  will  be  an  order  dismissing the  applicant’s  application  in  the  656 proceeding.

Costs

[79]     The plaintiff in the 520 proceeding and as respondent in the 656 proceeding seeks costs on a 2B basis, together with disbursements.  Costs on a 2B basis plus disbursements in 520 would amount to $11,910.00.  In relation to 656 they would amount to $2,444.00.

[80]     It is Mr Forsey’s submission that costs should follow the event.  The plaintiff in relation to the 520 proceeding for which it has express contractual rights and arguably has overlapping contractual entitlements in the 656 proceeding was entitled under  its  contractual  documents  to  costs  on  a  solicitor/client  basis  but  has  not pursued those.

[81]     Against the submissions Mr Forsey has made, Mr Clay has accepted that costs  must  follow  the  event  on  a  2B  basis  on  the  520  proceeding  but  he  has submitted that costs should lie where they fall on the 656 proceeding and his reasoning is this.  Adopting the criticism of the winding up proceeding pursued by a creditor in Edge Computers Ltd v Colonial Enterprises Limited (1996) 9 PRNZ 621

Mr Clay referred me in particular to the judgment of the Court delivered by McKay J His Honour said this at p 625:

The winding-up application does not appear to have any legitimate purpose. Edge  elected  to  seek  summary  judgment,  and  only  issued  its  statutory demand when confronted with Colonial's complaint of the concealed defects in the motherboards. It then obtained an adjournment of the summary judgment application on the ground of needing time to file affidavits, which was a clear indication that it intended to proceed to have the issues resolved in those proceedings. While those proceedings were pending in the District Court, and without filing its affidavits, it then applied to the High Court for the winding-up order. We are satisfied that in the circumstances of this case, the application for winding up while the real issues between the parties are awaiting resolution in the District Court is an abuse of process. If Edge has a

valid explanation for its actions, and if there has been no fraud in regard to the motherboards, that can be determined by the District Court. It is not an appropriate question to be determined in a winding up, and the winding-up procedure should not be used as a means of preventing it from being determined.

On the evidence before the Court, we are not persuaded that Colonial is insolvent, and agree with the Master's view that this is not established.

[82]     Mr  Clay  points  to  the  decision  of  Allied  to  pursue  in  tandem  with  its summary judgment application against RFD and the others the process of statutory demand against RFD a few days later.  He points out that RFD, if it was to resist the demand, had no alternative but to bring its application within the ten working days required by the statute.  It has thereby been exposed to incurring its own additional costs and has been exposed to Allied’s costs in the 656 proceeding.  The focus of his submissions was on the additional expense as well as the distraction in relation to what might be called the primary summary judgment proceedings.

[83]     Edge Computers v Colonial Enterprises contains understandable criticism of a  creditor  who  pursues  a  winding  up  proceeding  for  an  ulterior  purpose.    The purpose in that case was that, its summary judgment proceeding having run into the impediment of a substantive response filed by the other party, the plaintiff brought the winding up proceeding with the inferential purpose of applying pressure to the alleged debtor.

[84]     I also view the Edge Computer case as a very different case in that the alleged debtor there provided evidence, accepted as arguable by the Master and endorsed by the Court of Appeal, to show that it was solvent.  Additionally, evidence of a counterclaim was provided which again by inference both Courts accepted was arguable.

[85]     This is a very different case.  RFD has presented no evidence of solvency. Indeed, the evidence suggests that it is unlikely to be solvent given that in June it passed into receivership.  Secondly, I have found that there was no arguable claim of set-off in this case and that the set-off claim was without merit.

[86]     It  is  understandable  where  a  creditor  is  pursuing  both  corporate  and individual debtors, and has to pursue summary judgment against the individuals, that the  creditor  may  for  convenience  encompass  all  debtors  within  the  summary judgment procedure.  It is not abusive on the facts of this case that Allied at the same time in relation to the company issued a statutory demand.  It is for the debtor to take its own advice and to decide whether it has grounds to resist the statutory demand.  If it chooses to accept the statutory demand and face up to its responsibilities as the Court ultimately finds them to be, then the plaintiff’s summary judgment would fall away as against that party without the need for the expense of a defended summary judgment proceeding.  There is an aspect of “what goes around comes around”.

[87]     There is no compelling reason for costs not to follow the event in each proceeding.

Costs orders

[88]     I order that the defendants jointly and severally pay the costs of the 520 proceeding, together with disbursements, in the total sum of $11,910.00.

[89]     I order that the applicant in the 656 proceeding pay the respondent’s costs in a total sum of $2,444.00.

Statutory demand consequential order

[90]     Having dismissed the application to set aside the statutory demand I now extend the time for payment by RFD to Allied to 4.30pm 29 July 2010.  If payment pursuant to the statutory demand is not made by that date Allied will be able to

present an application for the winding up of RFD.

Solicitors:

Duncan Cotterill, Christchurch

Cousins & Associates, Christchurch