C L & J Properties Limited v Simmons HC Nelson CIV-2007-442-000186
[2007] NZHC 1776
•1 June 2007
IN THE HIGH COURT OF NEW ZEALAND NELSON REGISTRY
CIV-2007-442-000186
IN THE MATTER OF s290 of the Companies Act 1993
BETWEEN C L & J PROPERTIES LIMITED Applicant
ANDFRASER WILFORD SIMMONS RAEWYN JEAN SIMMONS DON ALAN ROBERTSON RICHARD HUGH WILLIAMS MARGARET JEAN WILLIAMS NICHOLAS PETER MOORE COLIN ALISTAIR HUNT MICHAEL JOHN GILBERT Respondents
Hearing: 18 May 2007
Appearances: S.J. Zindel for Applicant
J.O. Upton QC for Respondents
Judgment: 1 June 2007
JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALL
Introduction
[1] This is an application for an order setting aside a statutory demand served by the respondents on the applicant on 28 March 2007.
[2] The statutory demand requires payment from the applicant as borrower of the sum of $325,000, which is said to be “an amount owing pursuant to an undated loan agreement…”.
[3] The application is opposed by the respondents.
C L & J PROPERTIES LIMITED V SIMMONS AND ORS HC NEL CIV-2007-442-000186 1 June 2007
Background Facts
[4] The first-named respondents Fraser Wilford Simmons and Raewyn Jean Simmons (“The Simmons Family Trust”) owned two blocks of farmland at Rarangi. Each block was subject to three mortgages. The first mortgage on each block was to New Zealand Finance Limited. The second mortgage on one block was to the respondent Colin Alistair Hunt, and the second mortgage on the other block was to the respondents Colin Alistair Hunt, Margaret Jean Williams, Nicholas Peter Moore and Richard Hugh Williams. The third mortgage on each block was to the respondent Michael John Gilbert and to a Mr Don Alan Robertson.
[5] The Simmons Family Trust were in default under mortgages on the properties, and a mortgagee auction sale took place.
[6] The properties were passed in at this auction. Subsequently, the Simmons
Family Trust entered into a private sale of the land to the applicant as purchaser.
[7] In order that this sale could eventuate, it is apparent that two things needed to occur:
a) Substantial vendor finance had to be left in by the Simmons Family
Trust as vendors; and
b)Having regard to the vendor finance which was left in, the nett sale proceeds on settlement could only be sufficient to pay costs and to repay the first mortgagee, New Zealand Finance Limited. Accordingly a “side deal” contract was agreed to between the applicant and the second and third mortgagees which it was hoped would at least partly protect the position of those mortgagees insofar as the sum of $325,000 was concerned.
[8] That “side deal” contract which it appears was signed the day after the sale contract of the two farm blocks to the applicant was reached, provided for the following:
a) The applicant as vendor to complete a subdivision of part of the farm property to create a new 1.01 hectare lot.
b) This 1.01 hectare lot was sold to a number of the respondents for
$325,000 plus GST.
c) Settlement of this purchase was to take place five working days after the new title for the 1.01 hectare lot was issued.
d)Settlement of the purchase of this lot was to occur contemporaneously with repayment by the Simmons Family Trust of the $325,000 owed to the respondent purchasers. The applicant as vendor recorded that:
It would use the gross purchase price (excluding GST) to repay part of the debt that the vendor owes to Simmons and that it has been irrevocably authorised by Simmons to make such repayment by way of a payment to the trust account of Michael Gilbert, lawyer, for the credit of Simmons.
e) The sale agreement was subject to a condition that the subdivision be completed by February 2007.
f) Paragraph 5 of the special conditions of this sale agreement stated:
If this agreement is cancelled by the vendor under clause 1 of these further terms and conditions of sale (the subdivision within twelve months condition) then the vendor undertakes to immediately repay
$325,000 of the debt that the vendor owes to Simmons, and further records that the vendor has been irrevocably authorised by Simmons
to make such repayment by way of a payment to the trust account of
Michael Gilbert, lawyer, for the credit of Simmons.
[9] In addition to this “side deal” contract, it is accepted by the parties that the two farm sale contracts between the Simmons Family Trust as vendor and the applicant as purchaser provided for vendor finance totalling $569,500. This was to be interest free, but to have a penalty rate of 13% per annum for non-payment.
[10] It is important to set out the terms of this vendor finance specifically provided under a clause headed “Main Terms Of Vendor Finance” in the agreement between the parties. Those terms are:
Term of Loan
$325,000 shall be repaid on the earlier of:-
(a) 5 working days after the issue of a new title for a 1 ha lot in the south-eastern corner of lot 2LT360140 or
(b) 12 months from the possession date.
The balance of the loan shall be repaid on the later of:-
(a) The settlement of the re-sale of Lot 1 LT360140 by the Borrower following practical completion of the remaining work and the issuing of a code compliance certificate for that work or
(b)The settlement of the sale of the other new 1 ha lot in the south-eastern corner of Lot 2 LT360140.
The Vendor/Lender may extend the 12 month deadline for the $325,000 payment if the Vendor/Lender wishes to do so by notice in writing to the Borrower at least 1 month before the due date and may subsequently further extend the deadline one or more times if the Vendor/Lender wishes.
It is acknowledged by the Vendors that the Borrower may pay sums to them or on their behalf for various items including the payment of the work needed to obtain a code compliance certificate for the house. This includes any payments that need to be made to Ron Findlater or Abacus Engineers or Duke Cook to obtain the assistance of those firms in the obtaining of code compliance certificates, finance etc but which are amounts owed to those firms by the Vendors or one of them. All of these payments shall be credited against the principal owing.
Directed Repayment
The Vendors/Lenders hereby irrevocably instruct and authorise the Borrower that the first $325,000 of repayments (excluding incidental repayments due to payment of expenses etc) shall be paid to the Trust Account of Michael Gilbert for the credit of the Vendors/Lenders.
[11] So far as the vendor finance debt is concerned, it seems the applicant made a series of payments totalling about $339,000 within 12 months of the possession date to or for the benefit of the Simmons Family Trust. These amounts were represented by firstly a payment to the Simmons Family Trust for a GST liability it had ($87,339); secondly, payment by way of a credit for a subdivided section purchased from the applicant by the Simmons Family Trust ($226,000); and thirdly, payment of a nett amount (of about $26,000) paid by the applicant to third parties to obtain a code compliance certificate for the partly completed house on the property which the Simmons Family Trust agreed could be made.
[12] The applicant’s position, therefore, is that these payments totalling about
$339,000 made during the first twelve-month period of the vendor finance arrangement met the applicant’s liability to pay the first $325,000 of vendor finance.
[13] The respondents dispute this. They acknowledge that these monies were paid, and that the payments were made to or for the benefit of the Simmons Family Trust as vendors under the vendor finance arrangement. They contend, however, that the payments should have been made pursuant to the irrevocable authority and instruction contained in the terms of the vendor finance agreement (see paragraph [10] above) to “the trust account of Michael Gilbert for the credit of the Vendors/Lenders” which did not occur.
[14] It is on that basis that the respondents issued their statutory demand against the applicant, claiming repayment to them of the $325,000.
[15] Two other matters require mention at this point. The first relates to the fact that the original $569,500 vendor mortgage debt, of which the $325,000 formed part, was, of course, owed to the Simmons Trust as vendors of the land. In March 2007 the respondents arranged an assignment of a $325,000 part of this debt from the Simmons Family Trust as original vendors and lenders to themselves. Issues are raised by the applicant as to the status of that assignment, but for the reasons I outline below, for the purposes of the present application I do not need to traverse these at any length.
[16] The second raises questions as to the manner of service of the present application, which the respondents contend was defective. In my view, this contention is quickly disposed of. Here, the statutory demand specified the offices of the respondent, Michael Gilbert, as the place for repayment of the debt. Mr Gilbert indeed was one of the assignee creditors personally, and solicitor and attorney for a number of the other respondents. In addition, all payments of the debt were directed by the Notice of Assignment to be made to Mr Gilbert’s trust account. In the present case, any argument advanced for the respondents that, in serving Mr Gilbert alone, service of the application has not been properly effected is unmeritorious. In Astor Construction Ltd v Mega Merger Exteriors Limited (2002)
16 PRNZ 273, service on a creditor’s solicitor was deemed sufficient in not dissimilar circumstances to the present. And in my view the provisions of one or more of rr 201, 208, 209 or 210 also provide assistance to the applicant here. I reject the respondents’ opposition to this application based on non-service.
Counsel’s Arguments and My Decision
[17] The plaintiff brings this application under s290 Companies Act 1993 and in particular relies on s290(4)(a) and (c) Companies Act 1993.
[18] The relevant parts of s290(4) state:
(4)The Court may grant an application to set aside a statutory demand if it is satisfied that –
(a) There is a substantial dispute whether or not the debt is owing or is due;
or…
(c) The demand ought to be set aside on other grounds.
[19] The approach the Court is to adopt when considering applications relying on s290(4)(a) requires the plaintiff to show a fairly arguable basis upon which it is not liable for the amount claimed in the statutory demand – Forge Holdings Limited v Kierney Finance (NZ) Limited (HC Christchurch, N149/95, 20 June 1995) and Queen City Residential Limited v Patterson Co Partners Architects (No. 2) [1995] 3
NZLR 307. This formulation was approved by the Court of Appeal in United Homes
(1988) Limited v Workman [2001] 3 NZLR 447 at 451-2.
[20] In other words, it must be shown that there is a genuine and substantial dispute as to the existence of the debt, and further that it would be unfair to allow that dispute to be resolved through the liquidation provisions of the Companies Act
1993 rather than by actions in the usual way – Taxi Trucks Limited v Nicholson [1989] 2 NZLR 297 and Pink Pages Publications Limited v Team Communications Limited (1986) 3 NZCLC 99, 764.
[21] When a proceeding is to be determined pursuant to s290(4)(c) which relates to the demand being set aside “on other grounds”, helpful guidance is found in Commissioner of Inland Revenue v Chester Trustee Services Limited [2003] 1 NZLR
395 (CA) where Tipping J at 398 said:
All cases involving s294(c) must in the end come down to a judgement by the Court as to whether the creditors prima facie entitlement is outweighed by some factor or factors making it plainly unjust for liquidation to ensue. The ground advanced by the insolvent company must be sufficiently compelling to overcome the general policy of the Act with regard to insolvency companies.
[22] I turn now to consider the plaintiff’s first ground in its application, that the demand is the subject of a genuine and substantial dispute.
[23] At the outset, I need to make it clear that in my view the use by the respondents of the statutory demand procedure with respect to the $325,000 debt claimed here is not appropriate. For the reasons I will outline, I am satisfied that a substantial and bona fide dispute exists with respect to the debt claimed, and that it would be unfair here to allow the present dispute to be resolved by this liquidation procedure rather than by an action in the usual way. That said, the present application to set aside the statutory demand is to succeed, and an order to this effect is to follow. I now set out my reasons for reaching this conclusion.
[24] As I have noted above, the $325,000 claimed in the statutory demand represents the first part of the vendor finance which was in terms of the vendor finance agreement to be paid “12 months from the possession date” of the farm blocks purchased by the applicant. This date was to be in February 2007.
[25] Before me it was not questioned by any party that prior to February 2007 the applicant had repaid total sums of about $339,000 to or for the benefit of the Simmons Family Trust, and that this had been done in the manner set out in paragraph [11] of this judgment.
[26] Turning firstly to the “Directed Repayment” provision of the vendor finance terms (set out at paragraph [10] above), this states:
The Vendors/Lenders hereby irrevocably instruct and authorise the borrower that the first $325,000 of repayments (excluding incidental repayments due to payment of expenses etc) shall be paid to the trust account of Michael Gilbert for the credit of the Vendors/Lenders.
[emphasis added]
[27] Here, as I understand the position, there is a possible argument that parts of the $339,000-odd payments made by the applicant might be said to be “incidental repayments due to payment of expenses etc”. First, a payment of $87,339 was made to the Simmons Family Trust for a GST liability. Whether or not this might fall within the definition of “incidental repayments due to payment of expenses etc” is a conclusion that might well arise once further evidence and argument in this dispute is heard. In addition, however, the further nett payment (of about $26,000) paid by the applicant effectively on behalf of the Simmons Family Trust to third parties to obtain a code compliance certificate for the partly completed house as I see it may very well come within this definition of “incidental repayments due to payment of expenses etc”. Also, these payments to obtain the code compliance certificate made “on behalf of” the Simmons Family Trust to third parties were permitted specifically in paragraph 4 of the “Main Terms of Vendor Finance”.
[28] Given this, in my view the payments of $87,339 and about $26,000 made by the applicant may well fall outside the directed repayment instructions contained in the vendor finance terms noted above. Clearly in my view there is a reasonable argument that this might be the case. And certainly paragraph 4 of the “Main Terms of Vendor Finance” envisaged that on behalf payments would be made to third parties.
[29] That said, this might well provide a complete answer to the respondent’s claim that these portions of the applicant’s loan repayment (totalling $113,339 approximately) were not properly made in that they were not paid to Michael Gilbert’s trust account. If that does prove to be the case ultimately then only some
$211,661 of the initial $325,000 due would be in issue here.
[30] Further, there is another argument in this area which in my view may turn out to assist the applicant here when it is fully explored. This relates to the $87,339
payment for GST liability. As I understand it, this payment was made by the applicant at the direction of all parties to the accountants for the Simmons Family Trust, and not to the Trust itself. Given this payment was made directly to other professional advisers of the Trust, there can be little complaint on the part of the respondents that this amount was not paid to Mr Michael Gilbert.
[31] And in any event, even if it is accepted that the full $339,000 payments from the applicant were made to or for the direct benefit of the Simmons Family Trust, then there is a reasonable argument in my view that the applicant’s obligations under the vendor finance terms have been met in the sense that the payments have been made effectively “for the credit [ie, the benefit] of the Vendors/Lenders”.
[32] In my view the decision of the Court of Appeal in Cashmere Enterprises Ltd v Mathias (2002) 4 NZ ConvC 193, 570, provides some support to the applicant here. In that case a client authorised a solicitor to apply a GST refund to repay a vendor mortgage. A copy of the irrevocable authority was sent to the vendor mortgagee. The Court of Appeal held there was no liability on the part of the solicitor when repayment of the vendor mortgage was not made because he had made no independent promise to the mortgagee to make that payment.
[33] Although the vendor finance directed repayment provision noted in paragraph [10] above does provide an irrevocable “instruction and authority” to the applicant to pay monies to the trust account of Michael Gilbert, this provision clearly states that this is to be “for the credit of the Vendors/Lenders”. There is no direction that these monies are to be paid to the respondents or to any other party. The essence of the obligation throughout remained that the payments were to be made “for the credit of” (ie, the benefit of) the Simmons Family Trust.
[34] And as I see it, there is a reasonable argument that this is what occurred here. There was no promise by the applicant to pay the respondents as mortgagees.
[35] The task for a Court in considering an application to set aside a statutory demand is not to resolve a dispute but to determine whether there is a substantial dispute whether or not the debt is due – Androcles Investments Ltd v Highway
Publications Ltd HC CHCH M455/00 14 February 2001, Master Venning. In my view the applicant here has done sufficient to show a reasonable argument that there is a genuine and substantial dispute as to the existence of the $325,000 debt owing to the respondents in terms of the statutory demand.
[36] Here, in addition, I am satisfied that evidential disputes may well arise which will attract issues of credibility. It is clear that a Court cannot resolve these issues on affidavit evidence alone in a situation such as the present – Eng Mee Yong v Letchumanan s/o Velayutham [1980] AC 331.
[37] For all these reasons I am satisfied that there is a genuine and substantial dispute as to the existence of the debt, and as to whether it may in fact have already been paid by the applicant. This is sufficient to dispose of the present application before me.
[38] On this ground alone, the application must succeed. An order setting aside the statutory demand is to follow.
[39] For the sake of completeness, however, I now turn to address several arguments advanced for the respondents here. These obviously hinged around the suggestion that payment by the applicant to the Simmons Family Trust of the
$339,000 did not dispose of the applicant’s liability to the respondents. According to submissions made to me by counsel for the respondent, the fact that the applicant paid these monies, which is undisputed, is beside the point. He argues that $325,000 of this sum should have been paid to the respondent, and not the Simmons Family Trust, and if this means that the applicant is required to pay the same monies twice, then that is unfortunate, but nevertheless must be required.
[40] The respondent’s position is that the “irrevocable authority” given by the Simmons Family Trust in the vendor mortgage document to the applicant means just that. They claim that any payment made in contravention of that irrevocable authority is a breach of the agreement and the respondents, therefore, have a right to demand repayment of this sum now.
[41] Given my findings noted above, in my view these suggestions by the respondent are dubious. Notwithstanding this however, if the respondents, as lenders, do have appropriate rights to demand the $325,000 from the applicant, then this highly contested issue should be tested in a proper substantive hearing rather than under the summary procedure involved in the present application. The entire matrix of fact in this proceeding needs consideration to arrive at a proper final conclusion. And I need to say also that it is significant here that no evidence has been provided for the Court to consider at the present time from the trustees of the Simmons Family Trust. Given that they are principal players in the events in question here, this is surprising, and ultimately it may turn out to be a critical factor in unravelling this whole matter.
[42] What I see as an attempt by the respondents to craft an obligation on the part of the applicant to themselves effectively as third parties by reference to the overall matrix of fact in this matter is in my view not appropriate to justify their issuing the present statutory demand. The “side deal” contract in my view does not add significantly to the vendor finance obligations assumed by the applicant in the “Main Terms of Vendor Finance” agreement which arguably have been met.
[43] As I said at the outset, the statutory demand procedure, in my view, is not appropriate for use where the debt, as here, is disputed in a genuine and bona fide manner.
[44] Given these findings, I do not need to deal with arguments such as estoppel or set-off/counterclaim in relation to the $339,000 payments made by the applicant here.
[45] Nor do questions over the 10 February 2006 agreement between the applicant (as vendor) and the respondents (as purchaser) need to be explored. Whether this agreement may be ended or remain on foot still is a matter for later consideration. Suffice to say that for present purposes there is a reasonable argument that the first
$325,000 vendor finance repayment obligation has been satisfied by the applicant.
[46] Although, as I have noted above, in terms of s294(A) Companies Act 1993 the applicant bears the onus to satisfy this Court that the debt in the statutory demand is indeed disputed, I find here that the applicant has done sufficient to show that the amount claimed is the subject of a genuine and substantial dispute.
Conclusion
[47] The present application therefore succeeds. An order is made that the statutory demand served on the applicant on 28 March 2007 by the respondents is set aside.
[48] As to costs, the applicant has been successful in this application and I see no reason why it should not be entitled to an order for costs in the normal way. Costs are therefore awarded to the applicant against the respondents on a category 2B basis, together with disbursements as fixed by the Registrar.
‘Associate Judge D.I. Gendall’
Solicitors:
Zindels, Nelson
J O Upton QC, Wellington
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