Brookmill Finance Limited v Dawson
[2015] NZHC 1682
•20 July 2015
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2013-404-4254 [2015] NZHC 1682
IN THE MATTER of the Companies Act 1993 BETWEEN
BROOKMILL FINANCE LIMITED Plaintiff
AND
AARON DAWSON Defendant
Hearing: 30 June 2015 Appearances:
Mr R B Hucker for plaintiff
Ms A Fuiava for the DefendantJudgment:
20 July 2015
JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE
This judgment was delivered by me on
20.07.15 at 4 p.m.., pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
BROOKMILL FINANCE LIMITED v AARON DAWSON [2015] NZHC 1682 [20 July 2015]
Introduction
[1] This decision concerns an application under s 76(2) of the Insolvency Act
2006 (the Act) for leave to continue proceedings against the defendant, Mr Aaron
Dawson, notwithstanding his bankruptcy.
[2] Prior to the defendant’s bankruptcy, the plaintiff, Brookmill Finance Limited, obtained judgment against the defendant under the first cause of action in the statement of claim. It is not disputed that the defendant is indebted to the plaintiff for that amount.
[3] The remaining cause of action (in respect of which leave is sought) deals with the security provided by the defendant. The plaintiff has sought a declaration in the following terms:
a declaration that the plaintiff has a security interest in those shares held by the First Defendant in Wairahi Estate Holdings Ltd;
Background
[4] The circumstances that bring the parties before the Court are as follows. The defendant is the principal of a company called Eastern Bays Renovations Ltd (Eastern Bays). In 2012, Eastern Bays was experiencing what was described as cash flow pressures. The defendant, who is a director of Eastern Bays, sought financing from the plaintiff, which is in the business of buying and discounting trade debtors. The plaintiff, on 12 December 2012, purported to enter into a discounting agreement with Eastern Bays. Mr Collins, who is a director of the plaintiff, signed the agreement on behalf of the plaintiff and the defendant signed on behalf of Eastern Bays.
[5] There were two documents which the parties entered into to give effect to the discounting agreement. The first document, the “Terms and conditions for purchasing accounts receivable”, was on letterhead of the plaintiff and was addressed to “Aaron Dawson, Eastern Bays Renovations Limited”. The key part of this
document was the section contained in the security agreement, which was to the following effect:
6. SECURITY AGREEMENT
To secure all your present and future payment and performance obligations to us, however arising, you hereby grant us a continuing security interest in the Collateral by way of registration of a charge over the assets of the Seller.
In the event of default by the Seller you hereby grant:
A good registrable mortgage over any land owned by the Seller subject only to such prior mortgages and encumbrances as are in effect at the time of registration of the mortgage, such mortgage to secure all monies owing from time to time by the Seller to Brookmill Finance Limited and to be in such form and to contain such convenants [sic] and conditions as may reasonably be required by Brookmill Finance Limited. The Seller hereby irrevocably appoints Brookmill Finance Limited its true and lawful attorney to sign in its name and on its behalf any mortgage, or variation thereof which we shall request you to execute pursuant to this clause but which you shall refuse or execute or be unable to execute or be unable to execute through incapacity, absence of any cause.
[6] It is clear, therefore, that the provision, read as a whole, contemplated securities being taken over both personal property and real estate. A central dispute in the case was whether the defendant owned any real estate. He did, however, own shares in a company called Wairahi Estate Holdings Ltd (WEHL), which would be included in the “assets” over which the plaintiff was entitled to as security. As I note below, WEHL owned land even if the defendant did not. There is a dispute as to whether the defendant owned those shares beneficially.
[7] The defendant also gave a guarantee of the obligations of the seller of the
invoices. The term “seller” was defined in the guarantee as follows:
D. “Seller” means the following person or entity selling accounts receivable to us in accordance with the Terms and Conditions: AARON DAWSON DIRECTOR OF EASTERN BAYS RENOVATIONS LIMITED.
[8] In the discounting agreement, “seller” was defined in similar terms, to refer
to:
The undersigned person or entity from whom we may from time to time purchase an account receivable.
[9] There is no doubt that Eastern Bays was the vendor of the accounts receivable which were sold. The debts were owed by debtors of the company, and that fact is confirmed by the former accountant who took part in the creation of the arrangements which ultimately took the form of the discounting agreement.
[10] The case for the plaintiff was that the defendant owned the shares in WEHL and, therefore, they were part of the assets available to the creditors in his bankruptcy.
[11] The position which the defendant took was that his interest in the shares was relevant to his role as a trustee. It is established that, under s 104 of the Act, assets held by a bankrupt in trust for other persons do not pass to the Official Assignee. The Official Assignee took the view that the defendant is correct in arguing that the shares in WEHL belong to the Stanley Family Trust (the SFT) and that, therefore, the shares do not fall into the estate of the defendant. The plaintiff said that view is incorrect and, accordingly, has sought a declaration consistent with its point of view (and thus contrary to the position which the Official Assignee has taken).
[12] Before I consider the central questions that arise in regard to the issue of whether the plaintiff has satisfied the requirements of s 76 of the Act, and therefore whether the plaintiff is entitled to bring the proceeding in which a declaration is sought, it is necessary to briefly consider the requirements of the section in question.
The law
[13] Both counsel referred to the decision of Saimei v McKay, where Paterson J (in an approach subsequently cited with approval by the Court of Appeal in Ma v Tay)1 held that the s 76 discretion should be exercised on the following principles:2
(a) the court has the discretion to do what is right and fair in the circumstances of any given case;
1 Ma v Tay [2014] NZCA 608 at [25].
2 Saimei v McKay HC Auckland CP543-96, 1 October 1998. This was a decision under the predecessor provision to s 78(2), s 37 of the Insolvency Act 1967, but it has been accepted in Walker v Forbes [2013] NZHC 412 at [14], that the case law under that provision continues to apply.
(b) a bankrupt person’s assets should be distributed in an orderly fashion,
avoiding prejudice to other creditors;
(c) while the court is to be satisfied that a claim is sustainable at a threshold level, it should not undertake an investigation into its merits;
(d)the claim should be of a type that is suited to being determined by an action rather than by filing a proof of debt with the Official Assignee;
(e) there should be a prospect of the applicant benefiting financially if leave were to be granted (it must be considered that the respondent is entitled to reserve certain amounts from his or her earnings); and
(f) if the applicant is successful, continuation of the proceedings should not run the risk of resulting in a legal aid claim on the taxpayer without a benefit to the applicant.
[14] I accept the above is a correct summary of the principles espoused in that decision.
[15] Both counsel also noted that Saimei has been applied in various subsequent decisions, including the case Navix Line (New Zealand) Ltd v Milo.3 In that case, Morris J noted a further factor to be considered: whether there is a public interest in having allegations of fraud resolved (in a case where the claim involves such allegations). In this case, there is no allegation of fraud.
Analysis
[16] The following points are noted by way of introduction. For the plaintiff, the point of the present application is to enable it to take proceedings which it would hope would end in the Court drawing the conclusion either that the defendant owned the beneficial interest in the shares and was free to give a charge over them, or,
alternatively, that while the shares were owned by the trust, the trustees agreed to
3 Navix Line (New Zealand) Ltd v Milo HC Auckland CP281-SD99, 5 December 2002.
give security over them in support of the guarantee that the defendant had given of the debts which Eastern Bays owed to the plaintiff. However, it appears from the way in which the action is presently pleaded, and the submissions which Mr Hucker made for the plaintiff, that the question which would be raised in the pleadings, if leave were granted, is whether the defendant was the beneficial owner of the shares.
[17] If the defendant’s only connection with the shares is that he was one of a number of trustees who held the shares for trust beneficiaries, then it is difficult to see the point of bringing proceedings against him unless the defendant was the sole trustee who held the shares (which he was not).
[18] In my assessment, the principal issues that arise are these: (a) whether the shares were the property of SFT; and
(b)whether the defendant had authority on behalf of the SFT to grant a security over the shares.
Is there a tenable argument available to the plaintiff that the security interest over the shares came into existence?
[19] The case for the defendant was that the owners of the shares are the trustees of the SFT. If the defendant were the sole owner of the shares, there can be no doubt that his agreement to grant a security over those shares would bind the trust. Whether or not he was authorised in terms of the trust deed to give such a security would not be relevant unless the plaintiff had notice of the fact that the defendant was acting in breach of the trust in entering into an agreement of the kind that he did.
[20] The express uncontradicted evidence of the defendant was that the SFT owned the shares and that the trustees of the trust are Dawstan Trustee Ltd and the defendant. Mr Hucker did not accept that position but was unable to point to any evidence which would raise a contestable issue about whether the defendant owned the shares in his own right or as a trustee for the trust. Mr Hucker referred to the fact that the defendant is shown on the companies register as being the owner of the
shares as a trustee. He submitted that it is not permissible to note equitable interests of that kind on the company records. Assuming that Mr Hucker is correct, I do not accept that it makes any difference to the outcome of the case. The object of the rule against entering equitable interests on the share register is not to defeat any equitable interests in the shares. Its object is to ensure that the register shows, on its face, who has legal ownership of the shares.
[21] If the defendant was one of a number of trustees of the SFT, each of the trustees would have needed to agree to the trust property, that is the shares, being made available as security for the debts of Eastern Bays. The requirements of independence of the trustees, and that of unanimity between the trustees, rule out any suggestion that the defendant was functioning as the agent of the other trustees when
he entered into the discounting agreement.4 It may, however, be arguable that the
defendant was a director of the trustee company, Dawstan Trustee Ltd, and that, when he signed the agreement with the applicant, he did so in multiple capacities including that of a director of the trustee company. A further potential difficulty is that a single director does not customarily have authority to bind a company.5
[22] The case for the plaintiff was that one could conclude, from the dealings between the defendant and itself, that it was the intention of the parties that the defendant (as guarantor) had the backing of the land at Whananaki and that the land at Whananaki was to be the subject of security by way of a charge over the shares in the owner, WEHL. This was said to be an understanding that was shared by all of the parties to the agreement. The agreement does not, of course, say that explicitly. In support of its position, the plaintiff referred to evidence about the discussions that the parties held at the time when the discounting agreement was entered into.
[23] Mr Hucker submitted that the evidence of what other persons, such as Mr
Collins (the principal of the plaintiff) and Mr Pascoe gave about what they thought
was the parties’ intention, is evidence of context or background that is admissible.
4 Insight Legal Trustee Co Ltd v Colebrook [2012] NZHC 1822 at [53].
5 Peter Watts “Company Contracts, and Reckless Trading: Re Global Print Strategies Ltd” (2009)
15 NZBLQ 3 at 4.
Mr Hucker submitted that such evidence could be considered on the authority of
Vector Gas Ltd v Bay of Plenty Energy Ltd.6
[24] The first problem is that the evidence which has been put forward sets out what Mr Collins and Mr Pascoe considered to be the effect of the discussions between the parties. Such evidence is not helpful and is probably not admissible. The correct position in regard to such evidence was stated in the following terms by Tipping J in Vector Gas:7
[19] The ultimate objective in a contract interpretation dispute is to establish the meaning the parties intended their words to bear. In order to be admissible, extrinsic evidence must be relevant to that question. The language used by the parties, appropriately interpreted, is the only source of their intended meaning. As a matter of policy, our law has always required interpretation issues to be addressed on an objective basis. The necessary inquiry therefore concerns what a reasonable and properly informed third party would consider the parties intended the words of their contract to mean. The court embodies that person. To be properly informed the court must be aware of the commercial or other context in which the contract was made and of all the facts and circumstances known to and likely to be operating on the parties' minds. Evidence is not relevant if it does no more than tend to prove what individual parties subjectively intended or understood their words to mean, or what their negotiating stance was at any particular time.
[20] Although subjective evidence would be relevant if a subjective approach were taken to interpretation issues, the common law has consistently eschewed that approach. The common law focuses strongly on the agreement in its final form as representing the ultimate consensus of the parties. Hence it is regarded as irrelevant how the parties reached that consensus. To inquire into that process would not be consistent with an objective inquiry into the meaning of a document which is generally designed to be the sole record of the final agreement. A party cannot be heard to say -- never mind what I signed, this is what I really meant.
[25] It is my conclusion that the evidence of Mr Pascoe and Mr Phillips about what the parties intended their agreement to achieve cannot legitimately be taken into account in deciding the effect of the discounting agreement and the associated guarantee. In any case, the argument does not deal with the requirement that all of
the trustees, as owners of the shares, needed to enter into the agreement.
6 Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] 2 NZLR 444 (SC).
7 Above n 6, (footnotes omitted).
[26] Mr Hucker submitted that, in any case, the plaintiff would be able to apply for an order rectifying the written agreement that the parties entered into. I accept that if the discussions between the parties were as Mr Pascoe deposed, then it might be possible for the court to rectify the written agreement. The question of just how the agreement would be rectified deserves brief attention. Essentially, the agreement would still be between Eastern Bays and the plaintiff, as purchaser of the invoices from Eastern Bays, as well as the defendant, as a director and shareholder of Eastern Bays. I should add that the defendant did not contest that he was the authorised agent of Eastern Bays to enter into the arrangement.
[27] However, the discounting agreement, as rectified, would have to go further than simply recording that the defendant agreed to give a security over the trust shares. On the assumption that the defendant did not own them out of right, the discounting agreement would need to be varied to the extent necessary to bind the legal owners of the shares. Therefore, it would need to be the case that the court was satisfied that the owners of the shares, represented by the defendant, agreed to provide security over the shares in support of the guarantee that he gave to the plaintiff. The problem with the requirement for unanimous and independent agreement of the trustees again confronts the plaintiff at this point.
Could the Court explore the trust structure?
[28] There are, however, further issues that need to be considered in relation to the alleged ownership of the shares by the trust. The first concerns the defendant’s assertion that the shares in WEHL were transferred to him as a trustee of the SFT.
[29] It is at least arguable that the defendant, in his discussions with the plaintiff, did in fact make reference to the land at Whananaki being available as required to satisfy his obligations under the guarantee. In fact, it may be more than merely arguable because the defendant’s accountant (who may be ultimately viewed as a disinterested witness, telling the truth in the matter) supported the account which Mr Collins gave about what the defendant said in reference to the land at Whananaki. The Court can go no further than commenting that the form in which the evidence presently takes is arguably inadmissible. That is because Mr Pascoe did
not set out what the defendant actually said. Apart from being arguably inadmissible, his evidence lacks clarity. Instead of saying what the defendant said, Mr Pascoe described his understanding of the conversation. For example, he said that “It was clear from the discussion that Aaron’s personal guarantee covered all his personal assets… Including the Whananaki property.”
[30] I think it is fair to proceed on the assumption, though, that Mr Easton may be able to attest that the defendant said something along the lines of “I will make sure the land at Whananaki is available to meet the debt if I can’t pay it”.
[31] Even if the defendant did make such a comment, there is more than one way in which it could be interpreted. It could mean that even though the land at Whananaki was owned by a company in which the shares were owned by a trust, the defendant would be able to contrive matters so that the trust (which was apparently in control of the land owning company) would make the property available for satisfaction of the defendant’s debts.
[32] In this regard, if the defendant did say what is attributed to him, it would mean that the trust was nothing more than the alter ego of himself and his wife. In such a circumstance, there is power for the court to ignore the trust structure.8
[33] It may, of course, prove to be the case that this analysis is not correct. It could, for example, be established that while the defendant did not take steps to put in place the necessary formal agreements to the land which WEHL owned to satisfy
any deficiency owed to the plaintiff, that was because the trustees of the SFT decided that it would not be an appropriate exercise of the discretion to make the property of WEHL available, as the defendant had said it would be.
Concluding remarks
[34] The issues just discussed, as well as others, could be the subject of interlocutory probing if leave is granted to the plaintiff to bring this proceeding. It is
not necessary for the plaintiff to demonstrate, at this stage, that there is a likelihood
8 Glass v Hughey [2003] NZFLR 865 (HC). See also Andrew Butler (ed) Equity and Trusts in
New Zealand (2nd ed, Thomson Reuters, Wellington, 2009) at 408.
of success in the proceeding. That is not required, in my view, in order for an applicant for leave to cross the threshold imposed by s 76.
[35] I should add that there are a number of other issues that were not touched upon in the submissions before me. One of those is the question of whether the alleged arrangement was one of guarantees in which case the requirements of s 27 of the Property Law Act 2007 would need to be considered. That, however, was not a point that was raised by the defendant and, accordingly, it would not seem to be necessary to make any comment on it in the context of this application.
[36] Ms Fuiava, for the defendant, took the position that because the shares in WEHL were held on trust, any contract to give security over them for the benefit of Eastern Bays, in the circumstances, must be invalid. I agree with Mr Hucker that it does not necessarily follow that because the shares in WEHL were held by the defendant on trust that he was not capable of charging them. Clearly, it would be open to the trustees to agree to make available the property which they owned for the purposes of the beneficiary wishing to provide security by way of a charge. The point Ms Fuiava raises is therefore not a ground for declining to grant leave under s 76 of the Act.
Results
[37] The view that I have come to is that the plaintiff is able to show that it has a case that clears the threshold under s 76 of the Act.
[38] The application is granted.
[39] The parties should, in the usual way, attempt to come to agreement on the question of costs. If they are unable to resolve that matter, they are to file memoranda not exceeding four pages on each side within 10 working days of the date of this judgment.
J.P. Doogue
Associate Judge
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