ASB Bank Ltd v Lin

[2014] NZHC 106

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2012-404-4486 [2014] NZHC 106

BETWEEN  ASB BANK LIMITED Plaintiff

ANDRUI YU LIN First Defendant

QIAN GUAN CHEN Second Defendant

Hearing:                   5 February 2014

Appearances:           N Moffat for Plaintiff

A Kashyap for Defendant

Judgment:                5 February 2014

ORAL JUDGMENT OF ASSOCIATE JUDGE BELL

Solicitors:

Bell Gully, Auckland, for Plaintiff

Aaron Kashyap, Epsom, Auckland, for Defendants

ASB BANK LIMITED v LIN and CHEN [2014] NZHC 106 [5 February 2014]

[1]      The defendants have applied for a stay of enforcement pending their appeal to the Court of Appeal.  On 26 September 2013 Peters J gave judgment against the defendants  to  the  plaintiff  for  $134,350.68  plus  interest  and  costs,  a  total  of

$160,683.28.  In October 2013 the defendants filed an appeal against this judgment and in November they applied for a stay of execution pending the appeal.

[2]      The bank advises that it issued bankruptcy notices following the judgment, but those bankruptcy notices have not been served yet.  Mr Moffatt says that in his view the notices are now likely to be stale and it will be necessary to issue fresh bankruptcy notices. The bank has held its hand on enforcement to await the outcome of this application.

Background

[3]      The defendants are wife and husband.  They, and two companies with which they are associated, borrowed from ASB Bank Ltd.  The companies are Qian Kun International Ltd and Jack’s Ventures Ltd.   The defendants cross-guaranteed each other’s borrowings from the bank and they each gave written guarantees for the borrowings by Qian Kun International Ltd and Jack’s Ventures Ltd.  While the bank had security by way of guarantees for borrowings by Jack’s Ventures Ltd, and those guarantees were secured by mortgages over properties owned by the defendants, Jack’s Ventures Ltd did not give any security over any land it owned or over its other assets, for example, by way of a general security agreement.

[4]      The defendants defaulted in meeting their obligations to the bank under their personal borrowings from July 2011 onwards.  Jack’s Ventures Ltd defaulted from about September 2011 onwards.   The bank made demands in October 2011, and followed up with notices under ss 119 and 122 of the Property Law Act 2007.  When the defaults were not remedied, the bank had properties owned by the defendants, subject to mortgages, sold up.  The bank’s case was that after it had sold up these properties there was a shortfall.  The bank applied the proceeds of the sales towards the  debt  owed  to  it  by  Jack’s  Ventures  Ltd  ahead  of  the  defendants’ personal

indebtedness.   The result was that Mr Chen, the second defendant, owed some

$71,745.62 and his wife owed $63,605.06.  That left a residual debt owed by them both of $135,350.68.   Those sums can be combined because they had guaranteed each other’s indebtedness to the bank.  The bank’s case relied on standard bank term loan documents and standard bank guarantees which are drawn to protect the bank’s position in a wide variety of circumstances.

[5]      The judgment of Peters J dealt with two broad questions:

(a)      whether the bank came under any duty to the defendants by reason of the way it made advances to Jack’s Ventures Ltd without taking security; and

(b)      whether the bank breached the duty owed to the defendants under s

176 of the Property Law Act 2007.

On both questions she found for the bank.  On the face of it, the case seems to be a typical example of a bank pursuing mortgagors and guarantors after it had suffered a shortfall following mortgagees’ sales.

Grounds of appeal

[6]      The defendants personally drew up their notice of appeal.  At the hearing I explored with their counsel what matters can sensibly be argued in their favour on appeal.  It has been necessary to refine those matters to see what can seriously be contended on their behalf.  That is because it is necessary to take into account the limits on their ability to contest their indebtedness to the bank by virtue of the terms and conditions in the bank’s documents.

[7]      The defendants do not intend to challenge the findings of Peters J as to the allegations of breach of s 176 of the Property Law Act 2007.   The matter that concerns the defendants in particular is their guarantee of the indebtedness of Jack’s Ventures Ltd.  The background to this is that the director of the company, a Mr Jack Zhou, has apparently left the country and has left the defendants having to account to

the bank for the advances made to the company.  The defendants wish to claim that the bank ought to have, in effect, provided them with more protection when they gave their guarantee.  The arguments advanced by Mr Kashyap were along the lines that the relationship between the bank and the defendants went beyond an ordinary bank and customer relationship and approximated one in which there were elements of trust and confidence reposed by the defendants in the bank. There was a degree of reliance to the extent that the defendants could look to the bank to ensure that it did not take advantage of them unduly.  Mr Kashyap intends on appeal to run arguments that would require the court to take into account the fact that the defendants are Chinese,  that  the  bank  officer  they  dealt  with  was  herself  Chinese,  that  the documents  were  in  English,  and  that  the  defendants  were  at  a  disadvantage  in dealing with the bank.

[8]      The best hope that I can see for the defendants is that they might persuade the Court of Appeal that the guarantee they gave the bank as to the indebtedness of Jack’s Ventures Ltd could in some way be set aside retrospectively, so that they are not bound by it.  If they succeed on that, they may be able to persuade the Court of Appeal that the bank should not have applied any of the proceeds of sale of their properties towards the indebtedness of Jack’s Ventures Ltd.   While other matters have been raised, it seems to me that that line of argument probably offers them the best hope.

Principles for granting a stay pending appeal

[9]      For appeals from this court to the Court of Appeal, r 12 of the Court of Appeal (Civil) Rules 2005 governs stay of enforcement.  Under r 12(1) the filing of an appeal does not by itself stay the enforcement of any judgment. An application is required for an order under r 12(3) either by this court or the Court of Appeal.  The court has a discretionary power whether to order a stay of execution pending the appeal.

[10]     In  Minnesota  Mining  and  Manufacturing  Co  v  Johnson  and  Johnson,1

Buckley LJ said:

The object, where it can be fairly achieved, must surely be so to arrange matters that, when the appeal comes to be heard, the appellate court may be able to do justice between the parties, whatever the outcome of the appeal may be.

That approach has been followed many times.  On applications to stay enforcement pending appeal, it is standard to refer to a number of the factors which the court may take into account:

1    Whether the appeal may be rendered nugatory by the lack of a stay;

2    The bona fides of the applicant as to the prosecution of the appeal;

3    Whether the successful party will be injuriously affected by the stay;

4    The effect on third parties;

5    The novelty and importance of questions involved;

6    The public interest in the proceeding;

7    The overall balance of convenience;  and

8    The apparent strength of the appeal.

[11]     Not all these factors apply in every case.   In this case, the defendants are seeking stay of enforcement of a money judgment pending appeal.   There is old authority as to the approach which the court takes on such an application.  It goes back to a judgment of Williams J in McLeod v The New Zealand Pine Company Ltd:2

The right of plaintiff in the present case is an absolute right to have his money at once.  The right of defendants is the right of appeal, and the right in some way or other to have it made certain by this Court that that appeal shall not be fruitless.  The duty of this Court is, I think, to reconcile as far as possible the conflicting rights of the plaintiff and the defendants. The way to do that is to follow the English cases, and to say that an order staying proceedings shall be made on payment by the defendants to the plaintiff of the money in question, the plaintiff giving security for the repayment.

[12]     It is necessary also to record the caution of Woodhouse J in Skids Program

Management Ltd v McNeill: 3

I hesitate to differ from an observation of that eminent Judge [Williams J], but in my opinion it is unwise to introduce what appear to be absolutes when considering the exercise of the discretion that is involved.  This includes the Judge’s suggestion that the applicant’s ability to recover payments must be “made certain”. Removing material risks for the party required to make the payment is obviously an important consideration.  But it is not an absolute. This is perhaps implicit in the sentence in which the Judge refers to seeking to reconcile the conflicting interests “as far as possible”.   The absence of absolutes was addressed in a slightly different way by the Court of Appeal in Keung.  The Court said that the fact that an appeal will be rendered nugatory if there is no stay is not determinative.4

[13]     While Woodhouse J was concerned lest an “absolutist” approach be applied, it is apparent that there are certain recurring features which allow these particular applications to be resolved in a consistent manner.  Moreover, such cases often do not have the complicating features that make other cases more difficult to resolve.

[14]     In the case of a money judgment, the standard approach is this: if the party who has been successful at first instance gives appropriate security or assurance as to repayment if the appeal is allowed, there is usually little difficulty in principle in allowing them to have the fruits of their judgment.  Even if the unsuccessful party is required to pay the judgment sum pending appeal, they still retain the right of appeal and, if successful, are assured of repayment.

[15]     That is different from cases where interim relief is required to prevent the appeal becoming fruitless. This may arise, for example, where the relief sought in an appeal is an order sustaining a caveat or where injunctive relief has been refused or a liquidation order has been made.  In these cases it becomes all the more important to consider the overall balance of convenience.

[16]     A matter that is often raised by judgment debtors - and these defendants have raised it here – is that if a money judgment is enforced against them, they may no

longer be able to prosecute their appeal.   That complaint goes to their financial

3      Skids Program Management Ltd v McNeill HC Auckland CIV-2010-404-1696, 20 December

2011 at [11].

4      Keung v GBR Investment Ltd [2010] NZCA 396 at [21] following Cousins v Heslop [2007] NZCA 377.

ability to prosecute the appeal, not to whether the right of appeal will be rendered nugatory.   For the defendants in this case Mr Kashyap submitted that they lacked funds and would not be able to meet the judgment in any event.

[17]     I come back to the approach outlined by Williams J in McLeod v The New Zealand Pine Company Ltd.5    So long as there is an appropriate assurance of repayment if the appeal is successful, then there should be nothing to prevent the party who was successful at first instance from enjoying the fruits of judgment.  The unsuccessful party may have to run with their appeal, notwithstanding the fact that enforcement steps can be taken against them in the meantime.

Assessment

[18]     Mr Kashyap submitted that the defendants would face bankruptcy if there were no stay of execution.  The decision whether to stay enforcement pending appeal is different from the question whether the debtors should be adjudicated bankrupt. One of the consequences of bankruptcy is that any right of appeal passes to the Official Assignee on adjudication.  Subject to the Official Assignee obtaining leave

of the court,6  the Official Assignee can continue the appeal.  In practice, often the

Official Assignee reviews the case and considers whether there is a good basis for continuing the  appeal.   That  can  have  advantages  at  times,  as  it  allows  for an objective assessment of the merits of the appeal.   There is also a countervailing consideration.  Judgment debtors often have a real sense of disempowerment if they are prevented from running an appeal themselves.   But those considerations are matters that arise if there is an application for adjudication in bankruptcy.  There is no such application before the court at the moment.

[19]     Mr Moffatt makes the point that it may be some time before a bankruptcy application could be heard on its merits.  Bankruptcy notices would have to be issued and served afresh.   If an act of bankruptcy occurs, applications for adjudication

would be filed, and served.   If the applications are opposed, directions would be

5      McLeod v The New Zealand Pine Company Ltd, above n 2.

6      Insolvency Act 2006, s 217(2) and Schedule 1 clause b.

given for a defended hearing.   It would be surprising if all of that could be accomplished within the next three months.

[20]     The defendants could press ahead and get their appeal heard in the Court of Appeal.   In particular they may use the fast-track procedures available there.  The way is open to the defendants to run their appeal without facing the imminent threat of bankruptcy.  The question of bankruptcy is not likely to arise unless they do not exercise their appeal rights promptly.  If a bankruptcy application comes before the court, I am confident that any judge sitting in the bankruptcy jurisdiction would look carefully at the question that the debt on which the bankruptcy application is founded is the subject of an appeal to be heard shortly in the Court of Appeal.  A common outcome is for the bankruptcy court to await the determination of the Court of Appeal.   In saying that, I do not mean to bind any judge in the bankruptcy jurisdiction.    Putting  matters  that  way,  the  overall  balance  of  convenience  is consistent with the court following the approach in McLeod v The New Zealand Pine Company Ltd.

[21]     I refer to some other matters.  I do not need to consider the effect on third parties.  Mr Kashyap submitted that because this case involves people from outside the Anglo-Saxon culture, there may be an interest in how the court should apply the common law in the case of new migrants to New Zealand.  I do not regard this as a case involving wide public interest.  Obviously the case is important to the parties. There are no matters of novelty or of wider general importance which are to be determined on the appeal.

[22]     As to the merits, I have taken into account Mr Moffatt’s submission that the bank documents contain no set-off or deduction provisions which would stand in the way of the defendants raising any counterclaim for damages against the bank by way of a defence to the bank’s summary judgment application.  Even when those matters are taken into account there is still a possible line of argument available to the defendants by attacking the validity of the guarantee of the indebtedness of Jack’s Ventures Ltd.  But I have to say that the defendants do face what is very much an uphill task with their appeal.

[23]     On the question of bona fides of the defendants in running the appeal, it has to be accepted of course that they have a right of appeal and they have exercised that right within time.  But they do need to take into account the need to prosecute the appeal diligently.   In Schmidt v Ebada Property Investments Ltd,7  an application under r 43 of the Court of Appeal (Civil) Rules, the court made the point that r 43:

implements the philosophy that once a matter has been the subject of a determination in the High Court any party wishing to challenge that determination by an appeal to the Court must do so expeditiously or forfeit the right to pursue the appeal.

[24]     The context for that was that the time for applying for a hearing date had been shortened from six months to three months.  For the bank, Mr Moffatt made the point that the three-month time limit is approaching, the defendants have still not paid their security for costs and have not applied to set the appeal down for hearing. I make the point that they may well forfeit their right of appeal altogether if they do not meet those time limits.  With my refusing a stay of execution they will have the encouragement of a possible bankruptcy application against them if they do not get their appeals on promptly.  I comment that this matter ought to be suitable for the fast-track treatment in the Court of Appeal.  The hearing should require no more than two hours and could be heard by a Divisional Court in less than half a day.

[25]     After weighing all matters up, I follow the approach which I have outlined as appropriate for money judgments.  It is quite apparent that there would be no reason to doubt the bank’s ability to repay if the appeal should go against it.  It is after all one of the four leading trading banks in New Zealand.

[26]     I direct that if the bank provides an appropriate assurance as to repayment, the bank will be entitled to enforce the judgment.  The appropriate assurance I would accept is a written undertaking signed by a duly authorised bank officer, that if the appeal goes against the bank, the bank will forthwith refund to the defendants any proceeds of the judgment which the bank has received pending hearing of the appeal. I am sure that the bank will appreciate the consequences, not only in legal terms but

also in commercial terms, should it fail to honour that undertaking.

7      Schmidt v Ebada Property Investments Ltd [2012] NZCA 452 at [6], quoting Airwork (NZ) Ltd v

Vertical Flight Management Ltd [1999] 1 NZLR 29 (CA).

[27]     The defendants are entitled to be protected from enforcement of the judgment without that undertaking. Accordingly I order a stay of enforcement of the judgment of Peters J until the bank does give that undertaking.

[28]     The bank seeks costs on the application.  I award costs to the bank on a 2B

basis.

...........................................

Associate Judge R M Bell