As Base Limited v IMI Developments Limited
[2017] NZHC 1017
•18 May 2017
IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY
CIV-2016-419-348 [2017] NZHC 1017
BETWEEN AS BASE LIMITED
First Plaintiff
SCOTT BASE LIMITED Second Plaintiff
AND
IMI DEVELOPMENTS LIMITED First Defendant
ROTOTUNA VENTURES LIMITED Second Defendant
GRAEME MATANGI Third Defendant
CONTINUED OVERLEAF
Hearing: 5 April 2017 Appearances:
Mr S Ma-Ching for Plaintiffs
Mr Cornege for DefendantsJudgment:
18 May 2017
JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE
This judgment was delivered by me on
18.05.17 at 11 a.m., pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
AS BASE LIMITED & Anor v IMI DEVELOPMENTS LIMITED & Anor [2017] NZHC 1017 [18 May 2017]
ANDTRIG GROUP LIMITED Fourth Defendant
TRIG HOLDINGS 2014 LIMITED Fifth Defendant
TRIG DEVELOPMENTS (2011) LIMITED Sixth Defendant
KVM DEVELOPMENTS LIMITED Seventh Defendant
3GNT LIMITED Eighth Defendant
GARY JOHN ILTON Ninth Defendant
GARY JOHN ILTON AND KAREN ILTON AS TRUSTEES OF THE ILTON BUSINESS TRUST
Tenth Defendant
GREGORY NEAL ILTON Eleventh Defendant
GREGORY NEAL ILTON AND VANESSA KAY MATANGI AS TRUSTEES OF THE G & V ILTON BUSINESS TRUST
Twelfth Defendants
GRAEME SELWYN MATANGI, MELISSA BRIDGET MATANGI AND WAIRAU TRUSTEE LIMITED AS TRUSTEES OF THE MGM TRUST
Thirteenth Defendants
[1] This is an application for summary judgment in which the plaintiffs bring claims for monies advanced to the various defendants.1 There are three causes of action. The defences which the defendants raise are discussed in the course of this judgment.
Principles
[2] Mr Cornegé for the defendant submitted that the summary judgment application ought to be determined as follows:2
2.1The Court will be familiar with the principles which apply on an application for summary judgment. They are conveniently summarised by the Court of Appeal in Krukziener v Hanover Finance Limited:
The principles are well settled. The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried: Pemberton v Chappell [1987] 1 NZLR 1 (CA) at 3. The court must be left without any real doubt or uncertainty. The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated: MacLean v Stewart (1997) 11 PRNZ 66 (CA). The court will not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not accept uncritically evidence that is inherently lacking in credibility, as, for example, where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponent, or is inherently improbable: Eng Mee Yong v Letchumanan [1980] AC 331 (PC) at
341. In the end the court’s assessment of the evidence is a matter of judgment. The court may take a robust and realistic approach where the facts warrant it: Bilbie Dymock Corporation Ltd v Patel (1987)
1 PRNZ 84 (CA).
[3] Mr Ma Ching, counsel for the plaintiffs, did not disagree with that approach and I consider it the appropriate approach for the court to take in the current application.
The alleged unjustified interest rate charged on loan AS Base to IMI
a) The basis of the dispute is set out in the affidavit of Mr Matangi.
1 High Court Rules, r 12.2(1).
2 Citations omitted.
[4] Mr Matangi asserts that, after a requirement was imposed upon them by Mr Tony Scott that they accept the unilateral increase in the interest rate charged with regard to this loan, he and the other directors felt that they had no ability to resist his requirements because they were dependent upon Mr Scott and his companies for the provision of further finance.
[5] In essence, the directors seek to explain why they apparently conceded to the demands which Mr Scott was making of them for interest over and above what the contract provided for.
Background
[6] The plaintiff companies are owned by Mr Scott and entities associated with him. The business activities of the companies involve lending money and investing in businesses, including property development ventures.
[7] The defendant companies are owned by Messrs Matangi, Ilton and Ilton, as well as by entities associated with those individuals. Mr Matangi is the third defendant in the proceedings. Messrs Gary Ilton and Gregory Ilton are the ninth and eleventh defendants respectively.
[8] In respect of one of the other defendants, KVM Developments Limited (KVM), ownership resided with both Mr Scott and the Trig Group Limited (TGL). TGL and other related entities were owned by the three individual defendants and their associated entities.
[9] AS Base Limited (“AS Base”), the first plaintiff, claims that it advanced funds to one of the defendant companies, IMI Developments Limited (“IMI”), on 14
September 2012 (“the IMI loan”). As at 1 February 2017, the amount now claimed
to be owing for principal and interest is $172,686.75.
[10] Scott Base Limited (“Scott Base”), the second plaintiff, claims that it made a loan to KVM in accordance with a loan agreement on 22 October 2013 (“the KVM loan”). It now claims to be owed $931,189.16 for principal and interest as at 1
February 2017. A distinguishing feature of this loan is that the second plaintiff
claims that it was made on the terms of the RVL loan agreement, which was an earlier transaction entered into on or about 22 October 2013. The relationship between the advance from KVM and the RVL loan agreement is explained below.
[11] Scott Base also claims that, in terms of a loan agreement dated 8 July 2015, it made advances to Mr Matangi (“the Matangi loan”). As a result, it now claims that it was owed the sum of $103,795.37 for principal and interest as at 1 February 2017.
[12] The plaintiffs’ claim interest on each of the loans since 1 February 2017 at the rate of 25 per cent and they also seek costs on a solicitor client basis.
[13] The defendants dispute that anything is owed and summarise their defence in the following terms:
1.4In respect of the KVM loan, the defendants say they have an arguable defence because:
1.4.1 The Scott entities did not lend money to KVM Developments Ltd (KVM).
The funds paid into KVM was equity funding, in exchange for which Mr
Scott took a shareholding in KVM;
1.4.2Even if funds had been lent to KVM, it has a counterclaim arising from a failure to funds it through to resource consent stage; and
1.4.3Even if there was a loan, and KVM is liable, the guarantees executed by the remaining defendants do not extend to any lending by the plaintiffs to KVM.
1.5In respect of the IMI and Matangi loans, the defendants say they have an arguable defence because:
1.5.1When funds were paid to the Scott entities on the sale of the Cambridge development by KVM to the Porter Foster JV Ltd, the defendants exercised their right of appropriation. Accordingly, the IMI and Matangi loans have been repaid in full;
1.5.2If they were not, they were repaid following the assignment of the Lone Star debt owed to 3GNT Ltd; and
1.5.3In any event, it would be inequitable for the Scott entities to recover against the Trig Group given the failure to fund KVM though to resource consent stage, and the interconnected nature of the parties.
The funding that Scott Base provided to KVM
[14] In light of the statement of the defendants’ contention set out above, it is apparent that the transaction allegedly entered into for the advance of funds from Scott Base to KVM is at the heart of the dispute between the parties. That is the transaction which I will consider first.
The defendants’ position
[15] The position that the defendants take is that there was never a loan to KVM:
3.1 The defendants’ position in respect of the alleged loan to KVM is
simple: there was no such loan..
3.2Mr Matangi’s clear evidence (which is confirmed by Greg and Gary Ilton) is that no funds were lent by the Scott entities to KVM. Instead, Mr Scott provided equity funding in exchange for a shareholding in KVM. For the purposes of a summary judgment application, this should be a complete answer.
1.4In respect of the KVM loan, the defendants say they have an arguable defence because:
1.4.1The Scott entities did not lend money to KVM Developments Ltd (KVM). The funds paid into KVM was equity funding, in exchange for which Mr Scott took a shareholding in KVM;
1.4.2Even if funds had been lent to KVM, it has a counterclaim arising from a failure to funds it through to resource consent stage; and
1.4.3Even if there was a loan, and KVM is liable, the guarantees executed by the remaining defendants do not extend to any lending by the plaintiffs to KVM.
1.5In respect of the IMI and Matangi loans, the defendants say they have an arguable defence because:
1.5.1When funds were paid to the Scott entities on the sale of the Cambridge development by KVM to the Porter Foster JV Ltd, the defendants exercised their right of appropriation. Accordingly, the IMI and Matangi loans have been repaid in full;
1.5.2If they were not, they were repaid following the assignment of the Lone Star debt owed to 3GNT Ltd; and
1.5.3In any event, it would be inequitable for the Scott entities to recover against the Trig Group given the failure to fund
KVM though to resource consent stage, and the interconnected nature of the parties.
[16] Mr Matangi (who provided the evidence for the defendants) denies that there were ever any such agreements.
The plaintiffs’ contentions
[17] The plaintiffs accept that there was never a specific loan agreement entered into between Scott Base and KVM. Mr Scott says that it is correct that he and Mr Matangi did not discuss interest rates for the KVM loan and that “[a]s far as [he] was concerned, [Mr Scott and Mr Matangi] were both operating on the basis that the lending would be on the terms as the last loan, which was to RVL”. He said that the loan was on the basis of a 25 per cent interest rate reducible to 15 per cent.
[18] The plaintiffs further deny that the arrangement between the parties was that the funds would be advanced to KVM in return for a 25 per cent interest in the development project at Cambridge. The plaintiffs say not only did they not enter into such an arrangement, a transaction of that kind would not make commercial sense.
[19] The contentions of the plaintiffs are that initially Mr Scott understood that the Cambridge development which the defendants were going to undertake would be a new development carried out by RVL. The explanation that Mr Scott gives is that, as mentioned before, there had been an earlier loan agreement entered into between his companies and RVL, which had been repaid.3 He considered that the appropriate structure for the lending would be to re-advance the loan to RVL, which could then disburse the money for the Cambridge project. As noted above, the total amount
owing under these advances is said to be $931,189.16 for principal and interest as at
1 February 2017.
[20] The first tranche of the funds was in fact paid into RVL’s bank account on 16
April 2015 in an amount of $400,000.
3 This agreement was entered into on or about 22 October 2013.
[21] In fact, the defendants established a new company, KVM, to carry out the Cambridge development. That company was not incorporated until 22 April 2015, nearly a year after the initial advance of $400,000 was made.
[22] Subsequent advances which totalled approximately $1,467,000 were paid into the bank account of KVM.
[23] The plaintiffs’ further contention is that the reason why the initial payment of
$400,000 was routed through RVL was that any advances to that company were secured. This explanation is apparently not put forward in relation to the balance of the advances. It is further argued that it is contrary to common sense that the plaintiffs would have made advances of this magnitude solely in return for a 25 per cent shareholding in KVM. Mr Scott deposes that the company was worth little, although the basis for his opinion is not set out. He says he made it clear that the payments were made to KVM on the basis that they were loans and that he or his companies would also be taking a shareholding in KVM. He says that he was in a position to extract such an agreement from Messrs Matangi, Ilton and Ilton because they were in no position to negotiate. Mr Scott says that the reason there was no
loan agreement was that, by the time the subsequent advances4 were made, he had
become familiar with Mr Matangi and now trusted him.
[24] A further factor which the second plaintiff relied upon was a grant of securities, which took the form of a guarantee entered into on 8 July 2015. The contention of the second plaintiff was that, unless it was a creditor of the defendants, there would be no need for such securities.
[25] The contention is put forward that because shares in KVM were not issued immediately, that casts doubt upon the account of the defendants that the second plaintiff was to be an equity participant in the Cambridge project by way of holding
shares in KVM.
4 That is other than the advance routed through RVL.
The defendants’ response to the plaintiffs’ contentions
[26] The defendants say that the intention had always been that the development of the Cambridge property would be carried out through the Trig Group of companies. I infer that RVL was not a member of that group.
[27] The defendants say that the potential profitability of the Cambridge project was very considerable, with profits in the region of $10,000,000 expected. They say that the original $400,000 was intended to take matters to the end of the resource consent stage, at which point, if resource consent were gained, the property would be very considerably enhanced in value. When the $400,000 did not arise in a Trig Group account, enquiries revealed, according to Mr Matangi, that the money had been paid into the RVL account in error. Mr Matangi’s position is that RVL was never intended to be a party to the Cambridge development. Therefore, the statement by Mr Scott that it was intended that the money should be the subject of a re-advance of the RVL loan which had since been repaid is incorrect.
[28] Mr Matangi says that the proposal, which he and Messrs Ilton and Ilton proposed, was that Mr Scott’s interest in the project would be recognised for the 25 per cent equity holding. They would hold the balance of the shares. Mr Scott’s interests would be acquired on the basis that his companies were providing the finance, while the defendants were going to actually carry out the subdivision.
[29] As to the money being paid into the account of RVL, Mr Matangi said that was a unilateral mistake which was made by Mr Scott.
[30] The defendants’ contention is that there is no basis for concluding that, when
Mr Scott paid the money into RVL, he did so with the sanction of the defendants.
[31] Mr Matangi accepted that, after Mr Scott had paid the deposit, he told him that he would prefer his involvement to be that of a creditor receiving interest. Mr Matangi said however that the defendants did not agree with such a proposal.
[32] Consistently with that evidence, at some time prior to 9 March 2015, the defendants’ solicitors, McCaw Lewis, wrote to Mr Thoms, the plaintiffs’ then solicitor.5
[33] The letter so far as relevant stated:6
11.There are two points here. One is an appropriate JV agreement. Our clients are amenable to this. It is however noted that the shares in KVM were offered to Tony [Scott] on the basis that he would fund the Cambridge development through to a resource consent. This is not occurred and our clients are concerned at Tony’s breach of this arrangement. Our clients are not certain that is appropriate for Tony to have the risks associated with being a director of the development company (including health and safety legislation responsibilities; and due attention to the management and solvency of the development at present. This point can however be discussed further …
12.Appropriate documentation can be put in place. As above, it is important to emphasise that the shares in KVM were offered to Tony on the basis that he would fund the Cambridge development through to resource consent. This is not occurred. Tony’s contribution is not of a similar quality to the other shareholders; it is funding. Put another way, Tony is a shareholder in KVM on the basis of funding he provides. If this is simply a loan to the company on usual commercial terms, then Tony is not contributing the inputs he was supposed to in order to become a shareholder. Our clients fear is that Tony has chosen to be an investor, not a lender. If he wishes to be a lender, he should not be a shareholder.
[34] Mr Matangi says that in the fact a draft joint venture agreement was prepared in November 2015. The draft stated that the parties were contemplating a 50-50 incorporated joint-venture (“JV”). The draft agreement contemplated that whatever vehicle Mr Scott nominated, which was to be known as the “JV partner”, would be:
... A party that has the experience, skills and resources to assist in the management and funding of the construction of the Commercial Development contemplated by this Agreement.
[35] The draft agreement further contemplated that the contribution that each side would make to the JV would be $1,300,000 to be contributed by the Trig Group
attributable to the value of the transfer of the rights under the agreement to purchase
5 The original letter from McCaw Lewis does not appear to have been exhibited but inserts from it were set out in the reply that Mr Thoms sent on 9 March 2015 as an omnibus reply to previous correspondence.
6 KVM was the company undertaking the development at Cambridge.
the land for the development, provision of designs for the development, past costs incurred and other matters.
[36] Because that agreement was never actually signed, the question of how much Mr Scott would have to finance was never apparently tied down with any more specificity than that.
[37] In regard to the point made about securities having been provided, the contentions of the defendants are as follows. The defendants point out that the guarantee which they signed did not make any reference to lending to KVM. I should interpolate that it was part of the case for the second plaintiff that the guarantees did extend to RVL. It will be recalled that part of the second plaintiff’s case was that, although the lending in this case was destined for KVM, the form in which the advances were allegedly made was by way of a “re-advance” by RVL. The contention is that, although RVL, admittedly, was not involved in the Cambridge development because there was already an existing finance agreement that the parties had entered into recording advances to RVL, that agreement presumably for considerations of convenience was adopted as the framework for the further advances to KVM.
[38] Then, in regard to the question of commercial reality, the defendants say that it did not make sense for the plaintiffs to both receive a 25 per cent interest in the profits from the subdivision, as well as being entitled to highly remunerative rates of interest under the alleged loan agreement that the second plaintiff contends for.
Burden of proof
[39] Applying that approach to the present case, the question for the court hearing an application of the present kind is not whether the defendants have been able to establish that their conduct, reasonably interpreted, shows that they did not intend to enter into a contract. That would be to overstate the obligation resting on the defendants. What the defendants must do is establish that there is an argument available to them that the conduct in question does not give rise to the inference that the plaintiffs seek to have the court draw from their conduct. The approach that the court is required to take is to consider whether the explanation that the defendants
put forward is sufficiently substantial and that it ought to be determined by the court at trial. It is on that footing that I will consider both the various aspects of the conduct of the defendants which the plaintiff relies upon and the countervailing submissions which the defendants make concerning the available inferences that can arguably be drawn from that conduct.
Discussion
[40] One possible route that the plaintiffs suggest could lead to summary judgment involves the view that the parties were parties to a loan agreement, which was based upon the argument that I have mentioned, to the effect that the parties structured the Finance by way of a loan from RVL. In other words, a loan agreement, which had previously been entered into by RVL, and which had since been repaid, would be pressed into service again. The funds would be advanced as a further loan to RVL which would then be on-lent to KVM.
[41] However, there must be an arguable defence available to the defendants concerning this approach because there is evidence that the payment to RVL of the first tranche of the finance was as a result of a mistake, which was later corrected in the accounts.
[42] That being so, it is not a straightforward matter to understand the basis upon which the RVL loan agreement could be relied upon as the vehicle for a further advance. There would be no problem with such an explanation if the RVL loan agreement contemplated not simply a single loan advance, but a loan agreement that Scott Base would advance a specific amount to RVL, coupled with an entitlement to further unascertained loans in the future. These latter loans would include advances to be made to RVL as a conduit, with the funds then being passed on to KVM. Alternatively, the parties could have agreed that they would enter into a fresh advance, which in all respects was to be in identical terms to those which formed the basis of the RVL advance. Those terms would include an implied term (there does not seem to be any suggestion of express terms covering the detail of the arrangement) that the securities which the defendants provided in support of the RVL advance would be available for the fresh advance, which was to be made in regard to the Cambridge development.
[43] The problem which stands in the path of Scott Base is that any orally agreed understanding to the effect claimed is disputed by Mr Matangi. It is correct that disbursement of the initial tranche of money was made to the account of RVL but, as earlier noted, Mr Matangi explains that this was an error.
[44] Mr Scott agrees that there was no discussion between himself and Mr Matangi about the interest rates that would be payable for the advances for the Cambridge development. As earlier noted, he said that “as far as [he] was concerned, [Mr Scott and Mr Matangi] were both operating on the basis that the lending would be on the terms as the last loan, which was to RVL”. This is not of course evidence as to what the parties agreed. It is a statement of his opinion. He does not set out the primary facts which would justify such an opinion and would justify the court in coming to the conclusion that the terms of the fresh advances to KVM would be identical to the basis upon which the advances were made to RVL. Mr Scott does say that, in a discussion which he believes took place between 16
April 2015 and 5 August 2015, Mr Matangi told him that he and his solicitors thought that the 15 per cent interest rate for the advances was “expensive”, but that “they” were prepared to pay regardless. Mr Matangi denies this conversation occurred. If it did, it would provide some evidence that supports the view of Mr Scott that there had been at least an implicit recognition that interest rates would be 25 per cent, which was a standard feature of loans that he had made, including the RVL loan. From that, it could be reasoned that the advances to KVM were loans.
[45] Mr Scott agreed that there was no discussion about the repayment dates for advances made under the KVM loan. His evidence concerning this matter is again unsatisfactory. He said that “[i]t was my understanding that KVM would be required to repay the funds on demand, though KVM would be seeking funding from traditional lenders, non-traditional lenders, equity funders and investors, etc, to fund the balance payable under the sale and purchase agreement”. There is support available for the view which Mr Scott has said he held that it was proposed that KVM would refinance advances which Scott Base was going to make to it. In particular, Mr Scott refers to an email which Mr Matangi sent to him on 5 July 2015 which, broadly described, says that a further advance which he was seeking would be repaid if mezzanine finance could be obtained.
[46] The significant point about that email is that it provides written confirmation that in July 2015, when the Cambridge project was well advanced, Mr Matangi saw Scott Base as a lender who had to be repaid, rather than an investor who would take a share of profits in the development.
[47] By the time that the parties first came to any tentative agreement about the structure for the Cambridge development, that is to say the draft JV agreement circulated in December 2015, Mr Scott had already contributed the bulk of the money which he says was a loan. $1,267,000 had by this time already been paid to KVM. The draft JV agreement was never executed by the parties.
[48] Mr Matangi says that all the parties agreed that Mr Scott was going to provide the funding. In return, he “would take an equity stake in the project in order to create a platform from which Tony [Scott] could realise his investment in the project. It was to be a company still to be incorporated for the purpose”. As I have noted, Mr Matangi says that the share which Mr Scott was to have was to be 25 per cent. That percentage figure was significantly different from the 50 per cent which was discussed in the draft JV document prepared at the end of 2015.
[49] KVM had been incorporated in April 2015, as I have already mentioned. Mr Scott did actually acquire 25 per cent of the shares in that company. I do not overlook that at one stage, in order to accommodate another potential equity investor in the Cambridge development, the defendants unilaterally removed Mr Scott as a shareholder, but his position was subsequently reinstated.
[50] The position was therefore that Mr Scott made the bulk of the advances that he did throughout 2015, on the defendants’ telling, in the expectation that he would receive a 25 per cent interest in the Cambridge development.
[51] It is correct that, on different occasions, the defendants agreed to treat the funds being advanced to the company as repayable to the second plaintiff. That would provide some inferential evidence that the parties’ conduct, viewed by the reasonable bystander, evidenced an arrangement under which the second plaintiff was to be a creditor of KVM. It does not go any further than that and does not give
rise to any further inference which would enable the court to be satisfied that the elements of an enforceable lending agreement were present. That would require some evidence that there was an agreement on interest rates, the term of the loan, the maximum amount to be lent under the facility and other usual provisions. There is no evidence concerning those matters.
[52] There is also the further possibility that, because the parties had on previous occasions entered into formal written lending agreements, an inference arose that they intended that that should be the case in regard to the advances to KVM for the Cambridge development. There is therefore some support for the view that the parties intended that legal relations would not come into effect until such an agreement had been executed.7
[53] Further, there are statements which the defendants made to the opposite effect, namely that it was not open to the second plaintiff to contend that it was both a creditor of the development company KVM and was also entitled to a 25 per cent shareholding in the company, and therefore to the profits that the project might generate.
[54] Both parties put forward arguments that the analysis of the arrangements which they were putting forward better accorded with commercial reality than that put forward by their opponent.
[55] Mr Cornegé submitted that the contention of the second plaintiff that it was going to be entitled to commercial rates of interest, plus an entitlement to participate in the profits of the development, would not be consistent with commercial reality.
[56] The case that Mr Ma Ching put forward was that the shareholding was granted in recognition of the fact that the second plaintiff was prepared to make itself available as a funder of the Cambridge project.
[57] In the first place, such an assertion would seem to be arguably too sweeping. The second plaintiff, it is true, did agree to make funding available for some of the
7 Concorde Enterprises Ltd v Anthony Motors (Hutt) Ltd [1981] 2 NZLR 385 (CA) at 388.
initial stages of the project up to the obtaining of resource consent, but even based on the second plaintiff’s evidence, there is no ground for supposing that it was going to be a funder of the project beyond that point. There were going to be other primary and mezzanine funders as well.
[58] But the real problem with accepting such a contention is that the type of interest rates that the second plaintiff had been in the practice of charging under earlier arrangements were in the region of 25 per cent. Self- evidently, the second plaintiff was receiving some remuneration for providing the funding. Whether, in light of the overall circumstances of the development being funded, this would have been viewed by the parties as ample compensation is not a straightforward question. To answer it would require consideration of evidence at trial concerning such matters as the element of risk that the development presented, the degree of pressure that KVM was under to locate a financier and whether there was any other offeror in the market who might be interested in funding that component of the finance that the second plaintiff was to provide.
[59] A further aspect of the relevant background, which might cast light upon what the parties must have intended, is that it needs to be borne in mind that it appears to have been the defendants who came up with the concept for the subdivision and they would be the ones who would carry out the work to bring the development to a conclusion. There is therefore a discernible reason why their case for participating in the profits was stronger than any case that the second plaintiff could put forward.
[60] The total amount of funds which the second plaintiff provided was in the vicinity of $1,800,000. The overall requirement of funds for the project was estimated to be in excess of $10,000,000. Early estimates of the profitability of the project appeared to have been in the vicinity of $4,000,000. Had that come to pass, the consideration which the second plaintiff would have received would have been
$1,000,000. There were of course major risks that there would be no profit at all, on the other hand.
[61] The analysis which the defendants put forward is not without weaknesses either. The argument of the defendants is that the second plaintiff entered into an arrangement whereby it would supply finance as necessary to finish the project to the resource consent point. The amount of finance was apparently to be flexible. The second plaintiff would provide what KVM required. It is correct that, at the commencement of the advances, a budget was put forward. However, in the end, the amount of finance that was actually provided had risen to an excess of $1,800,000, which was hundreds of thousands of dollars greater than the budget for projection that had been supplied. And yet on the defendants’ analysis, notwithstanding that the amount of finance might increase by large multiples over the resource consent stage of the development, the plaintiffs were to be restricted to 25 per cent of the profit. Increases in funding which the second plaintiff contributed did not reduce the profitability of the project from the defendants’ point of view. They did not have responsibility for repaying the funding which the second plaintiff put into the project. But if this was truly the explanation of the commercial arrangements that the parties entered into, the second plaintiff could end up being called upon to provide such a significant amount of finance that it got nothing back at all from the project or might even incur a loss.
[62] If this truly was the arrangement, the second plaintiff, who did not have operational control of the project and therefore would not have a close appreciation of likely costs, entirely entrusted its fortunes to the defendants who did. That is to say, the second plaintiff had to hope that the budgeted expenditure which the defendants expected to incur in the development would not exceed a point beyond which there was no profit in the project for the second plaintiff.
[63] The outcome just discussed certainly does not reflect commercial reality.
[64] A significant part of the case for the second plaintiff was that Mr Matangi had acknowledged that at some point the funds that had been advanced by the second plaintiff would need to be repaid. Evaluating this type of evidence in the summary judgment context is very difficult, if not impossible. The fact was that the parties commenced their dealings on an unsatisfactory basis and there was no clear documentation of exactly what the arrangement was going to be. The defendants
contend that the position of the second plaintiff changed as matters progressed and that, instead of being an equity participant in the project, the second plaintiff developed a preference for being treated as a creditor. The overall case of the defendants is that they were desperate for the finance that the second plaintiff could potentially provide to them. This would explain why they were prepared to be accommodating of new demands which the second plaintiff put forward.
[65] I mentioned the point about the failure to issue shares immediately in KVM/Trig. This is of no real weight in my view. It may be explained by the fact that the parties in this case, at least on this occasion, were more focused on their business than the efficient completion of paperwork clarifying the legal basis which would reflect their rights and liabilities arising out of the funding of the Cambridge development.
[66] The parties had lawyers acting on both sides, but that does not of course mean that they had come to a clear arrangement about how they were to order their business.
[67] There is therefore considerable uncertainty about what the defendants agreed to. Their own position is confusing. In a letter which the solicitors wrote in March
2016, they appear to concede that an agreement will need to be reached for repayment of the funding that the second plaintiff had contributed. However, they also made the point that the second plaintiff could not both be a creditor to the project and an equity participant in it. But even then the position is not straightforward because Mr Matangi, some four months later in a text message, told Mr Scott that “the guys have agreed to the 25% shareholding”.
[68] It is possible that the second plaintiff was keeping its options open. It is at least arguable that it may have considered that it would be rewarded more positively by taking an equity partnership in the development, rather than taking the role of a financier. However, as the project developed momentum, the initial cost budget which Mr Matangi put forward, and which was the basis for his request that the second plaintiff contribute, quickly proved to be insufficient. It may be that, because
of the mounting costs, the second plaintiff decided to revert to the role of moneylender rather than equity participant.
[69] Evaluation of all these matters is well beyond the reach of this Court in the course of considering a summary judgment application. It is therefore impossible to conclude that the second plaintiff’s analysis is more consonant with business reality than that which Mr Cornegé put forward on behalf of the defendants.
[70] The question arises as to where this leaves the second plaintiff. The second plaintiff might well be able to persuade a court at trial that it is correct in its contention that there was a loan agreement in place, either by adoption of the instrumentality of the earlier RVL loan agreement or by some implied or oral agreement between the parties. On the other hand, it could be that the court would find that the parties pushed ahead with the development and the lending from the second plaintiff, without coming to a clear legal understanding about what rights the second plaintiff was to have. It might be that no certain, and therefore legally enforceable agreement, was ever reached. While the plaintiffs would no doubt invoke their argument that the parties entered into earlier financing agreements, that in my view would not be decisive because every lending agreement would involve commitments that were entered into in a different setting so far as risk is concerned.
[71] To summarise, the overall position would seem to me to be this. The funding for the Cambridge project was the last of such proposals in a series of funding and investment arrangements that the second plaintiff had made with the defendants and through which the second plaintiff became involved in property developments. For the purposes of previous advances, written loan agreements had been entered into. On this occasion, the parties did not draw up a bespoke written loan agreement. The second plaintiff had, though, acquired a 25 per cent interest in the project. The only issue is whether that was its entire reward for entering into the arrangement or whether it was additional to commercial interest rates and other charges.
[72] If there was no certainty about the legal positions of the respective parties, then the position might be, as I remarked to counsel at the hearing, that the second plaintiff’s remedy would be to seek restitutionary relief. I accept that I was not
addressed on this possibility by either counsel but, as presently advised, I would view it as being a distinct possibility that that is how the legal arrangements between the parties might be analysed. That is to say, KVM may well have been under an obligation to repay the money, not as a result of a loan agreement, but as a result of entitlements founded on to the general law.
[73] However, there may be very good explanations for why this occurred. One may be that the defendants were more focused on carrying out the development at Cambridge. That may not be the correct explanation, but it is discussed as one possible way in which the delay might have been accounted for. The fact that there was a delay, in my view, is of slight evidential significance, at best.
[74] The point is made for the plaintiffs that, when the KVM development at Cambridge was sold, the defendants only required a partial release of a general security agreement (“GSA”), which had been granted to the plaintiffs over the property of KVM. The plaintiffs say that the fact that only a partial release of the securities was sought amounts to an implicit acceptance that the loans had not been repaid in full. As Mr Cornegé points out, this factual contention was put forward in reply by the plaintiffs. It is not clear to me that in fact the defendants accepted the position of the plaintiffs, which was apparently that there was still money owing. It may be that they sought the best outcome they could in relation to either securities at that time, so that they could be free to dispose of the property and reduce indebtedness. The underlying assumption that the defendants ought at this point to have been contending that all of the loans had been repaid was also questionable. There were other loans owing to the plaintiffs, namely the IMI and Matangi loans. They were expected to be repaid by way of an assignment of loan, the details of
which do not need to be enquired into in the current context.8 It may be that the
securities which were partially released applied also to the IMI and Matangi loans.
[75] It may have been the case that the defendants were not opposed to repaying the money that had been advanced for the Cambridge project. In their view, it was
incumbent upon the second plaintiff to make an election as to whether it would
8 This was the loan owing by the Lone Star franchise business to a company called 3GNT
which was to be transferred to interests associated with Mr Scott.
obtain repayment or whether it would continue (in the view of the defendants) to be an equity partner, but that, subject to such election, repayment could be contemplated. But the terms upon which the repayment would be made, and in particular how much was required in order to satisfy the demands of the second plaintiff, is not a matter that is clear from the contemporaneous communications between the parties and the conduct of the defendants. It is at least arguable that there is a defence available to the defendants in this area.
[76] The function of the court when dealing with a summary judgment application is to test for the existence of an arguable defence. If the matters that are put forward by way of defence cannot be relatively easily dismissed as being improbable, and quite unarguable, then it will not be appropriate to enter summary judgment.
[77] Because of those uncertainties, in my judgment, it is not possible at summary judgment stage to conclude that it was beyond argument that a reasonable observer would conclude that the parties were agreeing to the second plaintiff being both a financier and equity partner. There is, as I have already noted, the additional problem that it is difficult to spell out with required certainty what the terms of any loan agreement were intended to be.
[78] While no reference was made by counsel to the authorities that might support such a point of view, it would seem that, in general terms, a party who has received the property of another and who cannot point to some legal entitlement to retain it, will in general terms be required to return to its owner.9 Exactly what the basis for a right of restitution is does not need to be discussed further. It was not a matter that was made a subject of the submissions which counsel put forward at the hearing.
Guarantees
[79] The allegation which the plaintiffs make is that the parties entered into guarantees by way of security for all three loans.
9 Hudson v Robinson (1816) 105 ER 910 (KB).
[80] Mr Cornegé submitted that, even if there was a loan for which KVM was liable, the guarantees executed by the remaining defendants did not extend to any lending by the plaintiffs to KVM.
[81] The point that is made is confined to the lending from KVM. No similar contention is put forward with respect to the lending to IMI and Mr Matangi.
[82] Because I have concluded that summary judgment ought not to be granted to the second plaintiff with regard to the alleged KVM loan, it not being established on what, if any, basis the defendants were liable for that loan, it follows that the guarantees in respect of that loan which the other parties gave are unenforceable.
The Matangi and IMI loans
[83] The defendants under these two categories of claim do not dispute that loan agreements were entered into and that the amounts which are claimed have not been paid. They put forward the affirmative defences in regard to those loans.
Appropriation to the IMI and Matangi loans
[84] The defendants assert that proceeds of sale received from the sale of the Cambridge project and from another source were to be applied at the direction, implied or express, to pay off the IMI and Matangi loans. If that appropriation was in fact carried out, it would appear that it is at least arguable that the indebtedness under those loans would no longer be owing and therefore summary judgment would not be applicable in regard to them.
Circumstances in which party may appropriate payments
[85] The legal principle which is applicable in cases where a party claims the right to appropriate a payment to a particular debt is stated in commentary:10
307. Debtor has first right to appropriate. Where several distinct debts are owing by a debtor to a creditor, the debtor has the right, when they make a payment, to appropriate the money to any of the debts that the debtor pleases; and the creditor is bound, if the creditor takes the money, to apply it in the manner directed by the debtor. If the debtor does not make any
10 Laws of New Zealand Contract (online ed) at [307]. Citations omitted.
appropriation at the time when they make the payment, the right of appropriation devolves on the creditor.
An appropriation by the debtor need not be made in express terms, but must be communicated to the creditor or be capable of being inferred. It may be inferred where the nature of the transaction or the circumstances of the case are such as to show that there was an intention to appropriate.
[86] If the payee does not exercise the right of appropriation then:11
... the matter is one of account, and the way the creditor has actually dealt with the payment will be treated as the actual appropriation.
[87] The first aspect of the appropriation argument centres upon the assignment of a debt, which was owed by one company that the defendants owned to another. Specifically, it was alleged that a company called 3GNT Ltd advanced $300,000 to Lone Star Hamilton Ltd. There is no dispute that the debt was actually assigned to one or other of the plaintiffs. But the evidence which the defendants put forward concerning the alleged appropriation is insufficient for the purposes of the defence. Mr Matangi says:
103.The debt owed by Lone Star to 3GNT was assigned to Tony Scott. We understood that the debt so assigned was to be applied to reduce any debt of the Matangi loans and IMI loan still outstanding.
[88] It will be seen that the deponent did not set out the exact basis upon which the appropriation defence is relied upon. He deposes only to what “we” understood. Whether there was any proper basis for such a belief, or it was fanciful and wishful thinking, is not something that can be assessed having regard to the form of the deposition given. I do not accept that the evidence in the form offered is sufficient to support an assertion that there is an arguable defence based on appropriation.
The debts were repaid in any event from the KVM proceeds
[89] The second part of the argument relevant to appropriation concerns the
$1,300,000 that was received on sale of the Cambridge development. The submission of the plaintiffs in regard to this aspect of the defence was as follows:
11 Ronaldson Averill Solicitors Nominee Company Ltd v Development Finance Corp of New
Zealand [1988] 1 NZLR 495 (CA) at 10.
31.The defendants say that any amount outstanding on the Matangi and IMI Loan was fully repaid from the $1.3 million repaid on the KVM development.
32. The plaintiffs’ position is that the $1.3 million was repaid to the KVM Loan.
33. The defendants’ position is not credible:
(a) There is no evidence that this understanding or belief that the $1.3 million repaid all balances outstanding between the parties was
communicated to the plaintiffs at the time, or their solicitors.
(b) No attempt has been made to explain the differing beliefs of Mr
Matangi and Mr Gary Ilton:
(i) Mr Matangi’s explanation is that the defendants felt
obligated by the securities entered into by KVM to pay $1.3 million to the plaintiffs, and that the payment would repay
all outstanding loans, and part of Mr Scott’s alleged equity
contribution to KVM.
(ii) Mr Ilton’s explanation is that he did a “rough calculation”
and thought it would repay $140,000 owed on the IMI Loan, $160,000 owed on the Matangi Loan, and $900,000 in respect of the RVL current account;
(iii) Mr Matangi’s explanation is then that the defendants
transferred a debt owed by Lone Star to 3GNT to Mr Scott to reduce the balances of the Matangi Loan and IMI Loan
(which by Mr Ilton’s explanation, and his own, would
already have been repaid by the $1.3 million).
(c) If the defendants considered all of the loans were fully repaid, then all of the securities at the time could have been released. Instead, they sought a partial release of security for KVM only.
(d) If they considered that all of the loans were fully repaid, they would not have sold the Massey Street units and paid the sale proceeds
($172,402.85) to the plaintiffs in November 2016.
34.No attempt has been made to explain why the defendants made repayments on the loans after the date they believed them to be repaid.
35. Mr Matangi and Mr Gary Ilton’s position that the loans were fully repaid by
the $1.3 million is mere assertion and provides no arguable defence.
[90] The position of the defendants is that there was sufficient money from the sale of the Cambridge development to pay the IMI and Matangi loans.
[91] One assumption which underlies the contentions of the defendants is that KVM/Trig did not owe anything in respect of the advances which the second plaintiff made to KVM for the development. This reflects the defendants’ view that all of the advances which were made to KVM were for the purpose of buying equity in the Cambridge development. While the second plaintiff might have been entitled to any surplus left over, which was attributable to his proportion of the equity held in the project, the defendants assert that there was nothing left after the debts incurred in the development project had been paid.
[92] The evidence of Mr Scott is that approximately $1,300,000 was received into the trust account of the plaintiffs’ solicitors and “used to reduce the KVM loan balance”.
[93] The position may be summarised as follows. The defendants consensually paid the proceeds of sale of $1,300,000 to the plaintiffs. There is no evidence that they gave any notice requiring the payment to be appropriated to any particular debt. The plaintiffs have used the fund to pay debts other than the Matangi and IMI debts. That is to say, the plaintiffs have treated the funds received as paying off what they contend was the loan made to KVM.
[94] The question that arises is the following. In circumstances where the payee has appropriated funds to a debt, “Debt A”, and where but for that appropriation the payment would have extinguished a different debt, “Debt B”, what effect, if any, does an arguable defence about the enforceability of Debt A have on Debt B?
[95] It would seem that if there is doubt about whether Debt A is recoverable, then similarly there must be doubt about whether Debt B is claimable.
[96] Consistent with the conclusions that I came to when dealing with the entitlement of the plaintiffs to receive payment of the amounts that they claimed were due from KVM, the result must be that the court must similarly conclude that there is a doubt about whether the plaintiffs ought not to have credited against the IMI and Matangi loans the $1,300,000 recovered on the sale of the Cambridge development.
[97] If the $1,300,000 was not payable by KVM, there is no doubt that the defendants would have authorised payment of that amount against the loans to IMI and Mr Matangi. If the second plaintiff did not have an entitlement to the fund as creditor of KVM, then no issue of appropriation arises, in other words. There would not, in that circumstance, be two or more debts between which the second plaintiff was able to appropriate the $1,300,000.
[98] For these reasons, I do not consider that, so long as the defendants are able to contend that they have an arguable defence to the KVM claim, they should be treated as not having discharged the IMI and Matangi debts.
Other defences and equitable set-off claim
[99] Because of the conclusions that I have come to concerning the doubts about the basis upon which the second plaintiff is able to claim to recover the funds contributed to the KVM development, the summary judgment application is not able to succeed. For those reasons, it is not necessary to consider other defences, including the equitable set-off claim based upon the assertions that the plaintiffs had an obligation to provide continuing finance to KVM for the Cambridge development and the resulting claim that allegedly the plaintiffs breached this requirement and caused loss to the defendants.
Result
[100] The evidence which the parties filed in this case extended to some 1,200 pages. A day’s hearing had been allocated to hear argument. These factors suggest that the case may have lain out at the outer limits of cases suitable for summary judgment. Questions of fact were raised for determination. In Pemberton v Chapel
it was stated:12
Where the only arguable defence is a question of law which is clear-cut and does not require findings on disputed facts or the ascertainment of further facts the Court should normally decide it on the application for summary judgment , just as it will do so on an application to strike out a claim or defence before trial on the ground that it raises no cause of action or no defence: cf R Lucas & Son (Nelson Mail) Ltd v O’Brien [1978] 2 NZLR 289; and see European Asian Bank AG v Punjab and Sind Bank [1983] 2 ALL ER
508, 516. Where the defence raises questions of fact upon which the outcome of the case may turn it will not often be right to enter summary judgment. There may however be cases in which the Court can be confident
– that is to say, satisfied – that the defendant’s statements as to matters of
fact are baseless. The need to scrutinise affidavits, to see that they pass the threshold of credibility, is referred to in Eng Mee Young v Letchumanan
[1980] AC 331, 341 and in the judgment of Greig J in Attorney-General v
Rakiura Holdings Ltd (Wellington, CP 23/86, 8 April 1986).
12 Pemberton v Chapel [1987] 1 NZLR 1 at page 4.
[101] The reasoning set out in the judgments in the House of Lords case in Three Rivers13 also throws light on the limits of the summary judgment procedure in the context of other than simple cases. Lord Hope stated:
[95] The method by which issues of fact are tried in our courts is well settled. After the normal processes of discovery and interrogatories have been completed, the parties are allowed to lead their evidence so that the trial judge can determine where the truth lies in the light of that evidence. To that role there are some well-recognised exceptions. For example, it may be clear as a matter of law at the outset that even if the party were to succeed in proving all the facts that he offers to prove he will not be entitled to the remedy that he seeks. In that event a trial of the facts would be a waste of time and money, and it is proper that the action should be taken out of court as soon as possible. In other cases it may be possible to say with confidence before trial that the factual basis for the claim is fanciful because it is entirely without substance. It may be clear beyond question that the statement of facts is contradicted by all the documents or other material on which it is based. The simpler the case the easier it is likely to be to take the view and resort to what is properly called summary judgment. But more complex cases are unlikely to be capable of being resolved in that way without conducting a mini-trial on the documents without discovery and without oral evidence. As Lord Woolf MR said in Swain’s case [citation omitted] that is not the object of the rule. It is designed to deal with cases that are not fit for trial at all
[102] While that case, it is true, was concerned with a strikeout application, the remarks which Lord Hope made in his speech would seem to have also been intended by him to have application to summary judgment applications, properly so called.
[103] It is a matter of judgment where any particular case falls when it comes to suitability for summary judgment. The subject matter of this case, the scale and scope of the evidence and the extent of arguments provided mean that this is not a case that is suitable for summary judgment.
[104] The application for summary judgment with respect to each of the causes of action is dismissed.
13 Three Rivers District Council and others v Bank of England (No 3), [2001] 2 All ER 513, at
[95].
[105] The parties should confer on the question of costs and, if they are not able to agree, they are to file memoranda on each side not exceeding four pages within 10
working days of the date of this judgment.
J.P. Doogue
Associate Judge
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