Bushpark Property Developments Ltd (in Liq) v Yang
[2012] NZHC 973
•14 May 2012
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2011-404-001981 [2012] NZHC 973
UNDER the Companies Act 1993
IN THE MATTER OF the liquidation of BUSHPARK PROPERTY DEVELOPMENT LIMITED (IN LIQUIDATION)
BETWEEN BUSHPARK PROPERTY DEVELOPMENTS LIMITED (IN LIQUIDATION)
First Plaintiff
ANDHENRY DAVID LEVIN AND VIVIEN JUDITH MADSEN-RIES AS LIQUIDATORS OF BUSHPARK PROEPRTY DEVELOPMENT LIMITED (IN LIQUIDATION)
Second Plaintiffs
ANDPEI CHI YANG First Defendant
ANDHSIU MEI SU Second Defendant
ANDL K TRUSTEE (NO 19) LIMITED Third Defendant
Hearing: 23-24 April 2012
Counsel: N H Malarao and P C Murray for Plaintiffs
G J Kohler and J A Wickes for Defendants
Judgment: 14 May 2012
In accordance with r 11.5 I direct the Registrar to endorse this judgment with the delivery time of 4.00pm on the 14th day of May 2012.
BUSHPARK PROPERTY DEVELOPMENTS LIMITED (IN LIQUIDATION) V YANG HC AK CIV-2011-404-
001981 [14 May 2012]
RESERVED JUDGMENT OF COLLINS J
Introduction
[1] This proceeding has been initiated by the second plaintiffs who are the liquidators of the first plaintiff (Bushpark). They are seeking to recover from the defendants (vendors) one-third of the deposit which Bushpark paid the vendors in relation to the purchase of a property in Karaka (the property). That transaction occurred prior to Bushpark being placed in liquidation. At all material times the vendors were the registered owners of the property.
Facts
[2] On 11 February 2007 Bushpark entered into an agreement with the vendors for the sale and purchase of the property (the agreement).1
[3] The essential terms of the agreement were:
(1) The purchase price was $6.9 million inclusive of GST.
(2)The deposit was $1.03 million, representing 15 per cent of the purchase price.
(3) Settlement was to be on 11 February 2008.
[4] Clause 9.4 of the Agreement provides:
9.4If the purchaser does not comply with the terms of the settlement notice served by the vendor then:
(1) Without prejudice to any other rights or remedies available to the vendor at law or in equity the vendor may:
1 The agreement is a common form of agreement for the sale and purchase of real estate. It is the
7th edition of a form of agreement prepared by the Real Estate Institute of New Zealand and the
Auckland District Law Society.
(a) sue the purchaser for specific performance; or
(b) cancel this agreement by notice and pursue either or both of the following remedies namely:
(i) forfeit and retain for the vendor’s own benefit the deposit paid by the purchaser, but not exceeding in all 10% of the purchase price;
(ii) sue the purchaser for damages. [emphasis added].
[5] On 26 February 2007 Bushpark paid the deposit of $1.03 million to the vendors’ real estate agents who deducted their commission ($162,000) and paid the balance of the deposit ($873,000) to the vendors.
[6] On 29 January 2008 the vendors’ solicitors sent Bushpark a settlement statement for sale and purchase of the property.
[7] On 8 February 2008 Bushpark’s solicitors informed the vendors’ solicitors that Bushpark believed it had been induced to enter into the agreement because of misrepresentations made by the vendors or their agents about the development potential of the land.
[8] On 11 February 2008 the vendors’ solicitors wrote to Bushpark’s solicitors asking, inter alia:
So that we may take instructions, please advise:
(a) Details of the representation(s) alleged to have been made to your client.
(b) The maker of the representation(s).
(c) The place and approximate time(s) and date(s) of the alleged misrepresentation(s).
Given settlement of this matter was scheduled for 11 February 2008 we would be grateful if you could come back to us on these matters as soon as possible.
[9] On 15 February 2008 the vendors’ solicitors served a settlement notice pursuant to cl 9 of the agreement on Bushpark’s solicitors, requiring Bushpark to settle within 12 working days after service of the notice.
[10] On 21 February 2008 Bushpark’s solicitors wrote to the vendors’ solicitors
saying, inter alia:
(1) Bushpark was prepared to settle for $4.5 million.
(2)That the proposed reduction in purchase price was warranted because of misrepresentations made by the vendors’ real estate agents about the potential development value of the property.
[11] The vendors’ solicitors issued an amended settlement notice on Bushpark’s solicitors on 20 May 2008. The change between the settlement notices involved the second settlement notice specifying that the sum of $2.54 million would be paid into an agreed independent trust account pending resolution of the dispute between the parties over the true value of the property.
[12] Bushpark did not settle in response to the amended settlement notice.
[13] On 24 July 2008 the vendors commenced summary judgment proceedings against Bushpark. In that proceeding the vendors sought:
(1)an order that Bushpark specifically perform all its obligations under the agreement; or
(2)an order that Bushpark specifically perform its obligations under the agreement on an interim basis by paying the full purchase price less
$2.54 million which would be paid into an independent trust account pending final settlement of the matter; or
(3)a declaration that the vendors were “entitled to forfeit the deposit or damages in lieu of specific performance and/or forfeiture”; and
(4) interest and costs.
[14] On 10 November 2008 an application was made to the High Court to have
Bushpark placed into liquidation. The liquidators were appointed on 29 March 2009.
[15] In the meantime, on 14 November 2008 the vendors’ summary judgment proceeding was called in the Auckland High Court. There was no appearance for Bushpark. I was informed that the vendors elected to abandon their claim for specific performance and to proceed instead with their claim for a declaration that they were “entitled to forfeit the deposit or damages in lieu of specific performance and/or forfeiture”.
[16] Regrettably the Court’s records concerning the events of 14 November 2008 cannot be located. I have therefore been asked to determine what happened on
14 November 2008 by reference to two documents:
(1)The evidence which supported the submission that the vendors elected not to seek specific performance included the following acknowledgement in the vendors’ written submissions to the Court hearing the vendors’ summary judgment application:
2.2The following factors mitigate against specific performance ...
(a) The fact that the [vendors are] a vendor not purchaser.
(b) Arguably damages is an adequate remedy.
(c) It is not clear whether [Bushpark] can actually comply with an order. Generally speaking the Court will not make an order that perhaps cannot be complied with.
(2) In a letter of 20 April 2009 to the liquidators’ solicitors the vendors’
solicitors explained:
We can confirm that on Friday 14 November the application for summary judgment was called in the Auckland High Court before Associate Judge Faire. There was no appearance for the defendant. The submission re summary
judgment was filed. His Honour recorded that the plaintiffs elected to proceed on the alternative relief sought (i.e. to abandon the claim for specific performance) and enter judgment as to liability for the plaintiffs. His Honour adjourned the application for relief for a two hour fixture. In essence it is a quantum hearing. The Court has scheduled the hearing for 7 May 2009.
The vendors’ solicitors enclosed a copy of the summary judgment proceedings with
this letter.
[17] I interpret this evidence to mean:
(1) On 14 November 2008 the vendors:
(a) abandoned any claim they had to specific performance; and
(b)elected to proceed with their claim for a declaration that they were entitled to retain the entire deposit.
(2)The Court probably entered judgment in favour of the vendors on the issue of liability (i.e. ruled that the vendors were entitled to retain at least part of the deposit).
(3)The Court adjourned the proceeding until 7 May 2009 for a hearing on what portion of the deposit the vendors were entitled to retain.
(4) Bushpark does not appear to have been made aware of the events of
14 November 2008 until the vendors’ solicitors wrote to the
liquidators on 20 April 2009.
[18] On or about 30 April 2009 the liquidators made demand on the vendors to pay to the liquidators $345,000 which is the difference between the 10 per cent of the purchase price retention referred to in cl 9.4(b)(i) of the agreement and the 15 per cent deposit that was actually paid by Bushpark to the vendors on 26 February 2007.
[19] For reasons which were not explained to me the parties did not proceed with the summary judgment hearing on quantum which was scheduled for 7 May 2009.
[20] On 22 June 2010 the liquidators issued a notice to set aside a voidable transaction under s 294(1) Companies Act 1993. That notice described the $345,000 at issue as being a voidable transaction. On 27 July 2010 the vendors served a notice of objection to the liquidators. In that notice the vendors challenged the lawfulness of the voidable transaction notice.
[21] This proceeding was commenced on 30 March 2011.
[22] The evidence before me included two unchallenged affidavits from a Mr Stevenson, a registered valuer. Mr Stevenson explained in his affidavits that a 15 per cent deposit was appropriate in this case because:
(1)the land in question was vacant development land that was subject to potentially significant fluctuations in value;
(2) the agreement provided for a 12 month delay in settlement; (3) the agreement did not provide for interest; and
(4) the vendors would have to pay their land agents commission even if
Bushpark defaulted on settlement.
[23] The vendors also relied on an unchallenged affidavit from a Mr Chan, a solicitor with experience in acting for those involved in the sale and purchase of development land. He explained that long settlement dates are “not uncommon” in such transactions and that:
Long settlement dates carry greater risk than normal for vendors. Markets can rise and fall. Where markets fall the danger is that a purchaser will renege on the purchase or try to renegotiate. As a consequence it is not uncommon for deposits in such purchases to exceed 10% - often as high as
20%.
The plaintiffs’ claims
[24] The plaintiffs’ pleaded causes of action can be summarised in the following way:
(1) Breach of contract
[25] The first cause of action alleges breach of contract. The plaintiffs plead that the vendors’ failure to repay the $345,000 in question constituted a breach of cl 9.4 of the agreement.
(2) Insolvent transaction
[26] The plaintiffs’ second cause of action alleges the existence of an insolvent transaction. They plead that when the vendors elected not to pursue their claim for specific performance on 14 November 2008 they entered into a voidable transaction in relation to the $345,000 in issue.
(3) Resulting Trust
[27] The third cause of action alleges that the vendors are accountable as trustees
of a “Quistclose Trust” to the liquidators for the $345,000 in issue.
(4) Transaction intended to prejudice creditors
[28] The plaintiffs plead that the alleged transaction of 14 November 2008 constituted a disposition of property that was intended to prejudice creditors and that it should therefore be set aside under Part 6 subpart 6 Property Law Act 2007.
(5) Equitable lien
[29] The plaintiffs claim an equitable lien in relation to the $345,000 that is in issue in this proceeding. During the course of submissions however counsel for the liquidators submitted that this claim was in the nature of a claim for relief as opposed to being a specific cause of action.
Was there a breach of a contract?
Issues
[30] The vendors argue that although the agreement was cancelled it was “not cancelled by notice per cl 9.4.(1)(b) of the agreement”. From this position the vendors submit that if the agreement was not cancelled “by notice per cl 9.4(1)(b) of the agreement” then general principles relating to the forfeiture of deposits apply and the vendors are entitled to retain the entire deposit. This part of the vendors’ case was explained in the following way:
(a) At no time was there ever an obligation on them to pay anything to
Bushpark ...
(b) Conceptually, alternatively/additionally in any event they were entitled to forfeit the amount paid as a non-penal deposit.
[31] The liquidators expressed concern at the vendors’ approach. Their concern was founded upon their interpretation of the pleadings. The liquidators referred to what they submitted was a clear acknowledgement in the statement of defence that the contract was cancelled on or about 14 November 2008.
[32] Having examined the pleadings I cannot say that the liquidators’ understanding of the pleadings is as clear as they believe. In any event, the key point is whether in this case it was necessary that cancellation be achieved “by notice per cl 9.4(1)(b)” of the agreement, and if not, what consequences follow.
[33] I propose to address the issues raised by this part of the case by: (1) setting out the relevant general legal principles;
(2)addressing the issue as to how the agreement was cancelled in this case; and
(3) addressing the issue of what amount of the deposit can be forfeited.
General principles
Deposits
[34] A deposit may serve two purposes:
(1) It may form part of the payment of the purchase price;2 or
(2) It may be paid as a guarantee for the purchasers’ due performance of
the contract.3
[35] It is commonly accepted that “when it is plain from the terms of the [agreement] that the deposit was paid as an earnest or as a guarantee for the purchasers’ due performance of the contract, the deposit is absolutely forfeited to the vendor” if the purchaser fails to settle.4 However, this broad statement of the law is subject to the qualification that in some circumstances a purchaser who pays a deposit may be entitled to relief against forfeiture under section 9 of the Contractual Remedies Act 1974 or through resort to equitable principles.5
[36] Under the common law, when a contract was cancelled, rights which had accrued unconditionally under the contract up to the time of cancellation were not compromised. The common law was summarised in the following way by Dixon J in McDonald v Dennys Lascalles Ltd:6
When a party to a simple contract, upon a breach by the other contracting party of a condition of the contract, elects to treat the contract as no longer binding upon him, the contract is not rescinded as from the beginning. Both parties are discharged from the further performance of the contract, but rights are not divested or discharged which have already been unconditionally acquired.
2 Soper v Arnold (1889) 14 App Cas 429 (HL) at 435 per Lord Macnaghten; Martin v Finch
[1923] NZLR 570 (SC) and Garratt v Ikeda [2002] 1 NZLR 577 (CA).
3 Howe v Smith (1884) 27 Ch D 89; Martin v Finch [1923] NZLR 570 (SC) and Garratt v Ikeda
[2002] 1 NZLR 577 (CA).
4 Martin v Finch [1923] NZLR 570 (SC) at 571; Stockloser v Johnson [1954] 1 QB 476 and
Garratt v Ikeda [2002] 1 NZLR 577 (CA) at 588.
5 D W McMorland Sale of Land (3rd ed, 2011, Cathcart Trust) at para 7.01
6 ` McDonald v Dennys Lascalles Ltd (1933) 48 CLR 457 at 476.
[37] This explanation of the common law is reflected in s 8(3) Contractual
Remedies Act 1979. That subsection provides:
(3) Subject to this Act, when a contract is cancelled the following provisions shall apply:
(a) So far as the contract remains unperformed at the time of the cancellation, no party shall be obliged or entitled to perform it further:
(b) So far as the contract has been performed at the time of the cancellation, no party shall, by reason only of the cancellation, be divested of any property transferred or money paid pursuant to the contract.
[38] An explanation of the effect of s 8(3) Contractual Remedies Act 1979 can be found in the following extract from The Contractual Remedies Act 1981:7
Under the Act, when a contract is cancelled for breach, wrongful repudiation or misrepresentation, it is not cancelled in the sense of never having existed. Both parties are discharged from further performance of their primary obligations but rights to money and to property which have unconditionally acquired are not divested. Thus, if a purchaser fails to pay a deposit on the due date, the vendor does not lose his right to recover the deposit as a debt due by later cancelling the contract.
[39] It was noted by the Court of Appeal in Garratt v Ikeda8 that for a vendor to require payment of an unpaid deposit following a cancellation of a contract “is in substance” a requirement to perform an obligation created by the contract rather than recovery of a debt. For this reason a vendor’s claim to recover an unpaid deposit is not abrogated by s 8(3) Contractual Remedies Act 1979 simply by virtue of cancellation of the contract.
[40] As previously noted, however, although a deposit is by its nature usually subject to forfeiture to the vendor upon cancellation of the contract, the purchaser may nevertheless obtain relief under s 9 Contractual Remedies Act 1979 or through equitable principles. The law was explained in the following way by the Court of
Appeal by Garratt v Ikeda:9
7 Francis Dawson and David McLauchlan The Contractual Remedies Act 1979 (Sweet & Maxwell, Auckland, 1981) at 134.
8 At [20].
9 At [38].
The fact that the parties choose to call a payment under a contract a deposit, irrespective of the amount involved or its true nature, does not mean that the use of the word “deposit” automatically ousts the remedial provisions of s 9.
[41] The Court of Appeal cited Denning LJ in Stockloser v Johnson, where his
Lordship said:10
Again, suppose that a vendor of property, in lieu of the usual 10 per cent deposit, stipulates for an initial payment of 50 per cent of the price as a deposit and a part payment; and later, when the purchaser fails to complete, the vendor resells the property at a profit and in addition claims to forfeit the
50 per cent deposit. Surely the court will relieve against the forfeiture. The vendor cannot forestall this equity by describing an extravagant sum as a deposit, any more than he can recover a penalty by calling it liquidated damages.11
[42] Simanke v Liu12 is an example of a purchaser being relieved from the obligation to pay a full “deposit” upon cancellation of the contract. That case concerned a contract to purchase a property for $650,000. The contract contained a clause requiring payment of a so-called deposit of $300,000 within 14 days of acceptance of the contract. Following cancellation of the contract the vendor sought to recover the $300,000 “deposit” from the purchaser. Henry J held that the sum involved was not truly a deposit but part of the purchase price. He held “the vendor’s right to [the $300,000] ceased as at cancellation when the corresponding
obligation to give title also ceased”.13
Cancellation
[43] It is also commonly appreciated that when a party breaches a contract then the party not in breach may elect to cancel the contract. Once an election is made and communicated it is final and precludes the party not in breach from exercising rights they might otherwise have had under the contract. This doctrine of election is now found in s 7(5) Contractual Remedies Act 1979 which provides that:
... a party shall not be entitled to cancel the contract if, with full knowledge of the repudiation or misrepresentation or breach, he has affirmed the contract.
10 Stockloser v Johnson [1954] 1 QB 476 at 491 per Denning LJ.
11 See also Simanke v Liu (1994) 2 NZ ConvC 191,888 (HC).
12 Simanke v Liu (1994) 2 NZ ConvC 191,888 (HC).
13 At 191,895.
[44] Generally speaking cancellation of the contract does not take effect until the cancellation is communicated to the other party. This may be done by words, or by conduct evincing an intention to cancel, or both. No particular form of words is necessary. Subsections 8(1) and (2) Contractual Remedies Act 1979 provide as follows:
8 Rules applying to cancellation
(1) The cancellation of a contract by a party shall not take effect—
(a) Before the time at which the cancellation is made known to the other party; or
(b) Before the time at which the party cancelling the contract evinces, by some overt means reasonable in the circumstances, an intention to cancel the contract, if—
(i) it is not reasonably practicable for the cancelling party to communicate with the other party; or
(ii) the other party cannot reasonably expect to receive notice of the cancellation because of that party's conduct in relation to the contract.
(2) The cancellation may be made known by words, or by conduct evincing an intention to cancel, or both. It shall not be necessary to use any particular form of words, so long as the intention to cancel is made known.
[45] A number of anomalies may flow from the requirements of s 8(1) that cancellation be communicated before the cancellation takes effect.14 It is however very clear that unless s 8(1)(b) can be invoked a cancellation of a contract has no effect until the cancellation is made known to the other party.
What is required to achieve cancellation of a contract in accordance with cl 9.4(1)(b)?
[46] As noted earlier, the vendors argue that in order to be limited by the 10 per cent forfeiture provision in cl 9(4)(1)(b) of the agreement the vendors must first
cancel the agreement by notice under cl 9.4(1)(b). The vendors argue that absent
14 See DW McLauchlan “Contract and Commercial Law Reform in New Zealand” (1984) 11
NZULR 36 at 45 and Schmidt v Holland [1982] 2 NZLR 406 (HC).
such cancellation the parties cannot be bound by the 10 per cent forfeiture provision and that, in these circumstances, the vendors are entitled to forfeit the entire deposit.
[47] The vendors derive support for their position from Globe Holdings Ltd v Westham Holdings Ltd.15 In that case the parties entered into a contract for the defendants to purchase a property in Northland. The purchase price was $12.5 million plus any GST that was payable. After the purchaser failed to pay the agreed deposit, the parties negotiated a variation to the contract which involved the purchaser paying a deposit comprising three payments of $500,000 and an increase
in the settlement price to $13 million. The purchaser failed to pay any part of the
$1.5 million deposit. The vendor issued summary judgment proceedings seeking specific performance. An order for specific performance was issued. However, that order was subsequently dissolved by order of the High Court and the contract was also terminated by the same order. The issue which subsequently came before the Associate Judge was whether the total deposit of $1.5 million could be recovered without proof of actual loss where the contract had been terminated or cancelled because of the purchaser’s failure to settle. The form of agreement in that case was
identical to the agreement in the case before me. The Associate Judge concluded:16
Clause 9 deals with the position where a “settlement notice” is served. This contract was terminated or cancelled not by a specific notice issued pursuant to clause 9, but by an order of the Court. The power of forfeiture given by clause 9 would not therefore seem to apply in this case. The limitation on forfeiture of the deposit to an amount not exceeding 10% of the purchase provided by clause 9.4(1)(b)(i) would not seem to apply. The rights and obligations conferred by clause 9 require the service of a notice before clause 9 applies.
[48] The vendors are correct when they point out that cl 1.2 of the agreement specifies that all notices under the agreement must be served in writing and that there is no document called a “notice of cancellation” (or document which uses similar language) which was served by the vendors upon Bushpark.
[49] However, in my judgment, the approach which the vendors advance suffers from a number of defects. The vendors’ arguments primarily invite the Court to
prefer form over substance, which is an approach that is rarely endorsed by common
15 Globe Holdings Ltd v Westham Holdings Ltd HC Hamilton CIV-2005-419-1749, 21 June 2006.
16 At [20].
law courts. Lord Diplock made this point in the following way in The Antaios
Compania Neviera S.A. v Salen Rederierna A.B.:17
... if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.
[50] In the present case, any objective construction of cl 9.4(1)(b)(i) would lead to the conclusion that the parties intended that the vendor would need to cancel the contract before they could retain all or part of the deposit (exactly how much of the deposit is considered in [56] to [62]). Provided there was a clear and obvious cancellation then it was not necessary for there to be a cancellation “by notice per cl 9.4(1)(b) of the agreement”. Any other conclusion would flout commonsense.
[51] In my judgment, on 14 November 2008 the vendors elected to cancel the contract. My reasons for reaching this conclusion are:
(1) At the time the vendors issued their claim for summary judgment on
24 July 2008 the vendors were preserving their options under the contract. At that time the vendors had still to decide whether or not to seek specific performance or to cancel the contract and, inter alia, retain the deposit.
(2)On 14 November 2008 the vendors made an election. On that date the vendors must have told the Court that they were abandoning their claim for specific performance and that they were electing to pursue a declaration that they were entitled to retain the deposit. (It was probably not necessary for the vendors to get a declaration that they were entitled to retain the deposit but that was the procedure the vendors elected to follow).
(3)The vendors could only abandon their claim for specific performance and elect to seek to retain the deposit if they had first decided to
cancel the contract.
17 The Antaios Compania Neviera S.A. v Salen Rederierna A.B. [1985] AC 191 (HL) at 201; see also E W Thomas “The Judicial Process and How Judges Think” (2009) 1 NZ Law Rev 1 at 13.
(4)The vendors’ argument that it was the Court and not the vendors that cancelled the contract is not persuasive. Realistically, the Court could only have taken the steps it appears to have taken on 14 November
2008 after the vendors had advised the Court that they did not wish to pursue their claim for specific performance.
[52] It is also clear the vendors’ decision to cancel the contract was not communicated to Bushpark at that time. The first that Bushpark appears to have been made aware of the cancellation of the contract occurred on 20 April 2009 when the solicitors for the vendors wrote to the liquidators. In that letter the vendors’ solicitors explained the events that had occurred in Court on 14 November 2008 (see [16(2)). The vendors’ solicitors also sent the liquidators copies of the summary judgment proceedings under cover of the same letter.
[53] No explanation has been provided as to why there was close to a five month delay between the vendors’ decision to cancel the contract and the communication of that decision to Bushpark. There is therefore nothing to suggest a factual foundation that could engage s 8(1)(b) Contractual Remedies Act 1979.
[54] In my judgement the vendors communicated their cancellation of the contract to Bushpark when the vendors wrote to the liquidators on 20 April 2009. That letter satisfied the requirements of s 8(2) Contractual Remedies Act 1979. It was not necessary for the vendors to send a specific notice of cancellation “by notice per cl 9.4(1)(b) of the agreement”. On 20 April 2009 Bushpark, through its liquidators knew that the contract was cancelled and that the vendors were intending to keep the entire deposit.
[55] It will be apparent from this conclusion that I have chosen not to follow the reasoning of the Associate Judge in Globe Holdings Ltd v Westhaven.18 If it were necessary for me to distinguish Globe Holdings Ltd v Westhaven from the present case I would do so on the basis that in that case the contract was apparently cancelled by the Court. In the present case I believe the vendors elected to cancel
the contract on 14 November 2008 and communicated this decision to the Court.
18 Globe Holdings Ltd v Westhaven HC Hamilton CIV-2005-419-1749, 21 June 2006.
How much can the vendors retain?
[56] Aside from cl 9.4(1)(b), there are three other clauses in the agreement which refer to the repayment of a deposit:
(1)Under cl 4.2(1)(b) if, prior to settlement the property is destroyed or damaged, the purchaser may be entitled to the return of the deposit.
(2)Under cl 5.2(4), if the vendor is unable to remove or comply with any objection or requisition as to title then the purchaser may be entitled to cancel the contract and to receive the benefit of the return of the deposit.
(3)Under cl 9.5(ii) of the agreement, if the vendor does not comply with the terms of a settlement notice then the purchaser may cancel the agreement and require the vendor to repay the deposit and any other money paid on account of the purchase price.
It will be noted that these three scenarios relate to situations where the purchaser has had no control over the inability of the parties to achieve settlement, and in all three situations the purchaser is entitled to a complete refund of the deposit and any other moneys paid on account of the purchase price.
[57] In this case it is the purchaser that has defaulted on settlement and accordingly attention focuses upon cl 9.4(1)(b)(i).
[58] The vendors argue that because Bushpark has paid a 15 per cent deposit then the vendors are entitled to retain the entire amount paid by way of deposit. The vendors referred to the general common law principles relating to a purchaser forfeiting a deposit if the contract is cancelled by a vendor because of a purchaser’s failure to settle. In addition, the vendors also placed reliance on s 8(3)(b) Contractual Remedies Act 1979 (refer [37]).
[59] The vendors also submitted that if Bushpark genuinely believed that the full sum paid on 26 February 2007 was not entirely a deposit then the plaintiffs had the option of applying for relief under s 9 Contractual Remedies Act 1979. The vendors submitted that it was significant that the plaintiffs had not taken that step.
[60] In my judgment the approach urged upon me by the vendors fails to give proper effect to the language of cl 9.4(1)(b)(i) of the agreement. The language of that clause leaves me in no doubt that if a vendor does cancel the contract then pursuant to that clause the vendor is entitled to retain the deposit paid provided the sum retained by the vendor does not exceed 10 per cent of the purchase price. Any other interpretation would render otiose the words “but not exceeding in all 10% of the purchase price” in cl 9.4(1)(b)(i) of the agreement.
[61] While it is no consolation to the vendors, had cl 9.4(1)(b)(i) of the agreement not referred to a retention of 10 per cent then I would have concluded that it would have been reasonable in the circumstances of this case for the vendors to have retained the entire deposit which was paid. The reasons why I would have reached that conclusion are explained in the unchallenged evidence Mr Stevenson and Mr Chan set out in [22] and [23] of this judgment. They provided very compelling reasons why a 15 per cent deposit was reasonable in the circumstances of this case.
[62] Having reached the conclusion that the plaintiffs must succeed in their claim in contract I will briefly deal with the plaintiffs’ remaining three causes of action out of deference to the arguments submitted by the parties and in the event that it is thought that I have erred in my conclusion in relation to the plaintiffs’ first cause of action.
Was there an insolvent transaction?
[63] The plaintiffs’ second cause of action alleges that the vendors’ decision to cancel the agreement on 14 November 2008 constituted an insolvent transaction within the meaning of s 292 Companies Act 1993.
[64] For convenience, I set out subs 292(1), (2) and (3) Companies Act 1993:
292 Insolvent transaction voidable
(1) A transaction by a company is voidable by the liquidator if it—
(a) is an insolvent transaction; and
(b) is entered into within the specified period.
(2) An insolvent transaction is a transaction by a company that—
(a) is entered into at a time when the company is unable to pay its due debts; and
(b) enables another person to receive more towards satisfaction of a debt owed by the company than the person would receive, or would be likely to receive, in the company’s liquidation.
(3) In this section,
transaction
means any of the following steps by the company:
(a) conveying or transferring the company's property: (b) creating a charge over the company's property:
(c) incurring an obligation:
(d) undergoing an execution process:
(e) paying money (including paying money in accordance with a judgment or an order of a court):
(f) anything done or omitted to be done for the purpose of entering into the transaction or giving effect to it.
[65] The issue in relation to this second cause of action is whether the vendors’ decision to cancel the agreement and retain the entire 15 per cent deposit constituted a transaction. It was accepted by the parties that Bushpark was solvent when it paid the deposit on 26 February 2007.
[66] The liquidators submit that the vendors’ decision to cancel the agreement on
14 November 2008 was a transaction because it was:
(1) a payment of money (s 292(3)(e) Companies Act 1993); and/or
(2) an obligation (s 292(3)(c) Companies Act 1993); and/or
(3)an act done or omitted to be done for the purpose of entering into a transaction or giving effect to it (s 292(3)(f) Companies Act 1993).
[67] The liquidators submitted that:
(1)They derived support for their approach from the judgment of the Court of Appeal in Trans Otway Ltd v Shepherd.19 In that case it was held that a setoff constitutes a payment of money for the purposes of s 292(1)(e) Companies Act 1993.
(2)If Bushpark did incur an obligation to pay damages then that obligation could only have arisen at the time the vendors cancelled the contract. The liquidators submitted this was sufficient to constitute a “transaction” for the purposes of s 292(1)(c) Companies Act 1993.
(3) In effect the vendors were trying on 14 November 2008 to credit
$345,000 against any damages claimed that they may have against Bushpark. The liquidators submitted that this is a type of transaction that is covered by s 292(1)(f) of the Companies Act 1993.
[68] I have concluded that the liquidators are not correct when they submit that a
“transaction” as defined in s 292 Companies Act 1993 occurred on 14 November
2008. The transaction that occurred in this case took place on 26 February 2007 when Bushpark paid $1.03 million to the vendors (via the vendors’ agent). At that point, and subject to the terms of the contract, the vendor was entitled to retain the deposit. No transaction within the meaning of s 292 Companies Act 1993 occurred
on 14 November 2008 in relation to the deposit. On that day the vendors decided to:
19 Trans Otway Ltd v Shephard [2005] 3 NZLR 678 (CA). That judgment was appealed to the Supreme Court, Trans Otway Ltd v Shephard [2005] NZSC 76, [2006] 2 NZLR 289 but not on the point for which it has been cited in this Court: see also Shephard v Kilbirnie Plymouth Investments Ltd HC Wellington CIV-2009-485-2397, 15 February 2011.
(1) cancel the contract; and
(2) abandon their right to seek specific performance.
The vendors continued to retain the money they had obtained on 26 February 2007, subject to their entitlement to do so under the terms of the agreement.
[69] At no point did the vendors purport to treat the $345,000 as:
(1)a “setoff”. The vendors always regarded that sum as part of the deposit it had received on 26 February 2007 to which it had absolute entitlement; or as
(2) a payment in lieu of damages.
[70] In my respectful view the liquidators have endeavoured to construct responses to arguments that have not in fact been raised by the vendors in order to try and bring the events of 14 November 2008 within the definition of a “transaction”. In my assessment the liquidators’ second cause of action must fail because the relevant transactions occurred on 26 February 2007, well before Bushpark was insolvent and well before the period for voidable transactions commenced.
Resulting Trust
[71] In their third cause of action the plaintiffs plead that the vendors hold the
$345,000 as a trustee for Bushpark. The basis of this submission is that where money is paid for a specific purpose, and where that purpose fails, a resulting trust can be applied to the funds to protect the payer. Thus, in the paradigm case of Barclay’s Bank Ltd v Quistclose Investments Ltd,20 Quistclose lent £290,000 to Rolls Razor for the purposes of paying a dividend. Before the dividend could be paid Rolls Razor was placed into liquidation. The House of Lords held that the loan had
been paid for the specific performance of paying a dividend, and was therefore held
20 Barclay’s Bank Ltd v Quistclose Investments Ltd [1970] AC 507 (HL).
on an express trust for that purpose. When that purpose could not be met, a resulting trust applied to the funds for the benefit of Quistclose.
[72] The liquidators submit that only two-thirds of the deposit was liable to forfeiture in the event of Bushpark’s defaulting on settlement, and the remaining third ($345,000) was part payment of the purchase price. This submission mirrors the plaintiffs’ submissions on the correct meaning of cl 9.4(1)(b)(i) of the agreement.
[73] Having already ruled that the plaintiffs’ interpretation of cl 9.4(1)(b)(i) of the agreement is correct, it is not necessary to spend long on this aspect of the case. Suffice to say that had cl 9.4(1)(b)(i) not contained the 10 per cent of the purchase price retention provision I would have concluded that in the circumstances of this case the entire deposit could have been retained by the vendors. Those circumstances were explained in the evidence of Mr Stevenson and Mr Chan. Had it been necessary for me to reach that conclusion then I would also have had to reject the plaintiffs’ third cause of action on the basis that no resulting trust could exist if the entire deposit was subject to forfeiture to the vendors upon cancellation of the agreement by the vendors following Bushpark’s failure to settle.
Recoverable Disposition?
[74] Sections 344 to 350 Property Law Act 2007 allow the Court to restore the property of a debtor that has been disbursed in a manner that prejudices the debtor’s creditors.
[75] The relevant provisions of ss 345 and 346 Property Law Act 2007 provide:
345 Interpretation
(1) For the purposes of this subpart,—
(a) a disposition of property prejudices a creditor if it hinders, delays, or defeats the creditor in the exercise of any right of recourse of the creditor in respect of the property; and
(b) a disposition of property is not made with intent to prejudice a creditor if it is made with the intention only of preferring one creditor over another; and
(c) a disposition of property by way of gift includes a disposition made at an undervalue with the intention of making a gift of the difference between the value of the consideration for the disposition and the value of the property comprised in the disposition; and
(d) a debtor must be treated as insolvent if the debtor is unable to pay all his, her, or its debts, as they fall due, from assets other than the property disposed of.
(2) In this subpart, unless the context otherwise requires,—
disposition
means —
(a) a conveyance, transfer, assignment, settlement, delivery, payment, or other alienation of property, whether at law or in equity:
...
proceeds
(a) the proceeds of the sale or exchange of the property;
and
(b) if the property is money, other property bought with that money
property
includes the proceeds of any property.
346 Dispositions to which this subpart applies
(1) This subpart applies only to dispositions of property made after
31 December 2007—
(a) by a debtor to whom subsection (2) applies; and
(b) with intent to prejudice a creditor, or by way of gift, or without receiving reasonably equivalent value in exchange.
(2) This subsection applies only to a debtor who—
(a) was insolvent at the time, or became insolvent as a result, of making the disposition; or
(b) was engaged, or was about to engage, in a business or transaction for which the remaining assets of the debtor were, given the nature of the business or transaction, unreasonably small; or
(c) intended to incur, or believed, or reasonably should have believed, that the debtor would incur, debts beyond the debtor's ability to pay.
[76] The plaintiffs submit that the decision of the vendors to cancel the agreement on 14 November 2008 constituted a disposition of property which the plaintiffs are entitled to recover.
[77] In my assessment the disposition of property in this case took place on
26 February 2007. That was the date the payment of the $345,000 in issue occurred. In my judgement, the plaintiffs have erroneously conflated the payment of the entire deposit on 26 February 2007 with the vendors’ decision to cancel the contract and abandon their claim for specific performance on 14 November 2008. Because the provisions of Part 6 subpart 6 Property Law Act 2007 do not apply to dispositions that occurred prior to 31 December 2007 the plaintiffs’ fourth cause of action must fail.
[78] For completeness I record that s 60 Property Law Act 1952 was in force at the time the deposit was paid in this case. However, that section would not have assisted the plaintiffs either because that section required:
(1) an alienation of property; and
(2) an “intent to defraud creditors”.
There was no “intent to defraud creditors” in this case. The deposit was paid and received on 26 February 2007 honestly and in good faith. Thus, even if the plaintiff had based their fourth cause of action on s 60 Property Law Act 1952 it would have failed.
Equitable lien?
[79] The fifth cause of action alleges the existence of an equitable lien. An equitable lien may exist in relation to a deposit in the following general circumstances:
(1)A purchaser may have an equitable lien in relation to a deposit where the agreement has been cancelled by the purchasers because of the failure of a contingent condition of the contract (see [56]).
(2)Where there could be a right of relief against forfeiture of the deposit21 or of instalments of the purchase price not paid by way of a deposit.22
[80] In the present case the plaintiffs claim that the vendors are contractually obliged to repay the $345,000 in issue. The liquidators could have registered a lien to secure that sum, even after cancellation of the contract.23 In light of the way I have determined the first cause of action it is not necessary to spend further time on the plaintiffs’ arguments based upon their claim to an equitable lien.
Conclusions
[81] Judgment is entered in favour of the plaintiffs in relation to the first cause of action. The liquidators are entitled to recover from the defendants the sum of
$345,000 together with interest and costs.
[82] If the parties are unable to resolve issues relating to costs then the plaintiff must file a memorandum within 15 working days, the defendant will respond within
a further 10 working days.
Solicitors:
Meredith Connell, Auckland for Plaintiffs
Loo & Koo, Auckland for Defendants
D B Collins J
21 Simanke v Liu (1994) 2 NZ ConvC 191,888 (HC).
22 Frankcombe v Foster Investments Pty Ltd [1978] 2 NSWLR 41 (SC) at 57.
23 Francis Taradale Westend Ltd (1998) 3 NZ ConvC 192,762 (HC) at 197,666; Joy v Roskim HC Hamilton CIV-2003-419-331, 12 June 2003 at [9].
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