Dominion Finance Group Limited (in rec and in liq) v Le Prou HC Rotorua CIV 2011-463-000169

[2011] NZHC 1614

IN THE HIGH COURT OF NEW ZEALAND ROTORUA REGISTRY

CIV 2011-463-000169

IN THE MATTER OF     Insolvency Act 2006

AND IN THE MATTER OF the bankruptcy of Shane allen Le Prou

BETWEEN  DOMINION FINANCE GROUP LIMITED (IN RECEIVERSHIP AND IN LIQUIDATION)

Judgment Creditor

ANDSHANE ALLEN LE PROU Judgment Debtor

CIV 2011-463-000170

AND IN THE MATTER OF the bankruptcy of Shane Allen Le Prou

BETWEEN  DENISE ELLEN LE PROU Judgment Debtor

Hearing:         30 August 2011

Appearances: K J Crossland for the Judgment Creditor

In person, Judgment Debtors

Judgment:      30 August 2011

ORAL JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSEN

Solicitors/Counsel:

K Crossland, Stace Hammond, Hamilton –  [email protected]

Copy to: S A and D E Le Prou, 850 Whangamata Road, RD1, Taupo 3377

DOMINION FINANCE GROUP LIMITED (IN RECEIVERSHIP AND IN LIQUIDATION) V SHANE ALLEN LE PROU HC ROT CIV 2011-463-000169 30 August 2011

[1]      The judgment creditor (DFG) has applied for adjudication orders against the judgment  debtors  (Mr  &  Mrs  Le  Prou).    On 8  November  2010  DFG  obtained judgment against Mr & Mrs Le Prou by consent in the sum of $6,027,255.83.

[2]      Bankruptcy notices were served but were not responded to.

[3]      On 30 June 2011 Mr & Mrs Le Prou filed notices of intention to oppose the adjudication applications.   The stated ground for opposition is that the actions of DFG  invalidated  Mr  &  Mrs  Le  Prou‟s  guarantees  of  the  borrowings  of  their company, Sade Developments Ltd (Sade).

[4]      A lengthy affidavit in support has been filed by Mr Le Prou.

[5]      Mr Le Prou deposes to the guarantees being signed upon the execution of:

a)        A loan agreement between the Sade and DFG. b)        A deed of priority.

[6]      Mr Le Prou has noted by clause 7 of the deed of priority DFG was committed to Westpac the first security holder to act in good faith and in a timely manner with regards to release of securities to allow settlement of sales of subdivision lots.  He identifies the relevant clauses as:

7.[DFG to] act in good faith and cooperate with the first security holder to ensure the timely completion of the development and the settlement of the sales of the units comprised in the development and otherwise to give effect to the provisions of this deed.

7.4.2    Releases

The delivery of any release or releases of a mortgage or other securities which are required to enable a settlement of any sale whether of a unit comprised in the development or of the whole or any part of the land...

[7]      Mr Le Prou argues that those clauses were necessary to give the security documents any workable sense.  He said Sade‟s was a staged development whereby

it  was  always  the  contemplation  of  all  lenders,  including  DFG  that  as  the development progressed, lots would be sold, which would require partial discharges of their mortgages.  The proceeds of sale could then be used to reduce indebtedness, and meet any further costs associated with completing the development.

[8]      Mr Le Prou contends that it was not stated in the loan agreement that Sade and/or its guarantors could not avail themselves of any of the benefits implied or otherwise in clause 7.  Mr Le Prou refers to clause 1.2 of the deed of guarantee of indemnity which states:

In this agreement unless the context otherwise requires any reference to:

„Agreement includes  this  deed  and  any  other  instrument, contact, deed, licence or legally enforceable arrangement, undertaking or understanding (in which case whether or not in writing and whether expressed or implied).‟

[9]      Mr Le Prou says it was the guarantor‟s understanding that this definition of references made in the guarantee documents includes (amongst others) the deed of priority document.

[10]     Mr & Mrs Le Prou‟s position is that DFG caused default in clause 7 of the priority  deed   and   by   extension   has   invalidated   the   guarantor‟s   documents. Specifically he refers to the actions of the receivers of DFG in refusing, inappropriately, to release mortgage securities when requested to do so in order to facilitate  sales  of  development  lots.    One  aspect  of  this  inappropriate  refusal concerns the receiver‟s rejection of offers for the purchase of those lots, usually with claims that the offers were inadequate.

[11]     The  judgment  debtors‟ consent  to  judgment  being  entered  against  them occurred in the background of settlement negotiations between the parties.  Mr Le Prou refers to a copy of a letter from Sade‟s solicitor to Sade which advised that [in the course of settlement discussions] the receivers were abandoning their demand that Sade give up any right to raise a claim against the receivers at some later date. The solicitor noted further:

However given the clause of the guarantees which prevents you from raising any counterclaim or set off until all the monies secured by the guarantees has

been repaid, any counterclaim may well be of limited utility and practice. They could come into play if DFG tries to bankrupt you.   As [Mr Bruce Stewart QC] has explained the Court will sometimes exercise its discretion not to bankrupt someone if he or she has a good claim against the lender that might otherwise not be pursued...

[12]     Mr Le Prou acknowledged that Mr Crossland, counsel for DFG, invited the Le Prous to introduce their concerns to the Court in the summary judgment proceeding which was heard by Potter J and dealt with by a consent order on 8

November 2010.

[13]     Mr Le Prou repeats Mr Crossland‟s submission at the time:

Assuming such set offs or counter claims exist and are available to the Le Prous, now is the time for considering such matters or at the hearing of bankruptcy adjudication application if and when issued.

[14]     Mr Le Prou said on this advice it seemed little use in wasting any more Court time debating the subject.  He said consenting to summary judgment was a precursor to enabling the Le Prous to present a defence to the Court at a later date, if needed upon the bankruptcy adjudication application.

[15]     Then over the space of some 25 or so pages of his affidavit, Mr Le Prou has detailed particulars of alleged failures of DFG and its receivers to adhere to clause 7 of the deed of priority.  I do not consider it necessary to review Mr Le Prou‟s account of alleged failure, for reasons which will become apparent in my conclusions.

Considerations

[16]     The  Le  Prous‟ judgment  debt  is  based  on  their  business  guarantee  debt

stemming from a failed property development by their company, Sade.

[17]     The matters raised in Mr Le Prous‟ affidavit repeat the theoretical counter claims or set offs that belong to Sade and not to the Le Prous themselves.  Sade has been in liquidation since 7 December 2010 and its liquidators have stated in writing they are not pursuing any claims against DFG.

[18]     The Le Prous‟  challenges to bankruptcy relate  to claims of an ability to pursue those set offs and counterclaims which Sade have abandoned.  These factors apart the Le Prous have not advanced any evidence relevant to the exercise of the Court‟s discretion on whether to grant an adjudication order or not.  The Le Prous invite the Court to refuse to adjudicate pursuant to s 37 of the Insolvency Act 2006 (the Act).  The Court infers that the Le Prous contend it is just and equitable that the Court not make an order of adjudication pursuant to s 37(c) of the Act.  In short they contend they do not deserve that outcome.

[19]     It is clear that the Le Prous should demonstrate to the Court why an order for adjudication should not be made.   In the exercise of its discretion the Court will consider not only the interests of the debtors as well as the creditors, but will also have regard to the wider public interest.  The public interest includes factors beyond the  immediate  consideration  of  creditor  and  debtor;  it  includes  an  interest  in

“exposing and controlling an insolvent debtor”. [1]    Therefore there is a need for the

Court to balance the various considerations relevant to the case, and to determine whether in the end the debtor has succeeded in showing that an order ought not to be made. [2]

[1] Re: Fidow (a debtor) [1989] 2 NZLR 431 (HC) at 444.

[2] McHardy v Wilkins & Davies Mariners Limited, CA 54/93, 7 April 1993 at 4.

[20]     In this case the Le Prous have sought to relitigate issues that were closed by the consent judgment and which ought properly to have been raised from a jurisdictional basis in an application to set aside the bankruptcy notices.   The Le Prous did not do that in this case.  Regardless, I will undertake an assessment of the Le Prous‟ position.  It is based on a complaint that DFG failed to provide releases of mortgages to enable sales in Sade‟s development.  It depends also on the Le Prous somehow being subrogated to Sade‟s position.

[21]     I consider the claim fails for these reasons:

a)        Clause 7, including 7.4 of the priority deed makes no reference at all to Sade, the mortgagor.

b)There  is  no  “contractual  duty”  owed  by  DFG  to  Sade  under  the provisions of clause 7 nor is there a basis to imply such a term.  If the first mortgagee (Westpac) was concerned about DFG‟s (the second mortgagee‟s)  action  or  inaction  it  had  recourse  to  its  irrevocable power of attorney by which Westpac could effect the objective of releasing the mortgage – it follows that the receivers could not be criticised for breaching any duty to the investors and DFG whose interests they were bound to protect.

c)        The Le Prous were not parties to the priority deed.

d)       The  provisions  of  the  Le  Prous‟ guarantees  prevent  them  from

availing themselves of defences available to Sade.

[22]     The Le Prous claim a right of set off in respect of rights they say have been preserved to Sade.   But, a set off may only be maintained where the claims exist between the same parties and in the same right.   There is no set off here existing between the same parties because the complaints arise out of contracts between DFG and Sade, whilst the guarantee is a standalone security between DFG and the Le Prous.   The guarantee specifically provides that DFG is authorised to set off any amount the Le Prous have against “secured money”.  No set off is preserved to the guarantors.

[23]     This Court is familiar with the situation confronting the Le Prous in this instance where the debt upon which the adjudication order is sought stems from an unmet guarantee of a company by a director.  Here the Le Prous have been given courage by the fact that the final version of the consent judgment did not include the term DFG has asked for namely that the Le Prous confirm there was no claim against DFG or the receivers.  Since, Sade has never made any claims against DFG or the receivers and it is clear they will not do so in the future.  Only Sade had a right to consider pursuing such.

The judgment debtors’ situation

[24]     They live at a Taupo property owned by Sade which is subject to DFG‟s second mortgage and also Westpac‟s first mortgage.   DFG now owns Westpac‟s mortgage.   The Le Prous have lived there rent free since judgment was entered against them.

[25]     The debt due is very large – a fact that can be strongly persuasive in the

exercise of the Court‟s discretion.

[26]     The Le Prous owe about $1.8M through their personal guarantees in respect

of Westpac‟s mortgage, which mortgage DFG has now acquired.

[27]     The indebtedness arose out of an attempt to subdivide farmland.   Business failures of this type ordinarily result in developers being adjudicated bankrupt. Usually oversight is required in order to control those persons who may wish to incur further credit  for  future business  development  reasons.    In  this  case it  is estimated that development debt will exceed $3M if the debt security is sold.  The Court agrees with Mr Crossland‟s submission that the fact that the security remains unsold can have no practical impact on the debtors‟ insolvency – even if the Court considered it could take it into account in the exercise of its discretion.

Summary

[28]     The  Le  Prou‟s  opposition  to  bankruptcy  is  based  on  claims  that  their guarantees of Sade‟s borrowing were invalidated by contractual breaches by DFG to their company, because of alleged failures by DFG to release mortgage securities in order to facilitate sales of development lots.

[29]     No other grounds have been advanced.  The Le Prou‟s case is advanced on the basis that their position is protected by the security documents which expressly or impliedly protect their position as guarantors.   But, that is not so.   No right of subrogation is available to them.  They are not subrogated to the contract between DFG and Sade. The guarantees do not preserve rights of set off.

[30]     Any  rights  impliedly  reserved  by  the  terms  of  a  consent  judgment  are confined to Sade, and not to Mr and Mrs Le Prou.  Sade‟s liquidators are experienced professionals and have advised they do not intend to pursue any claims against DFG.

[31]     Because of the large sum due, and because even if the loan security is sold there will still remain a debt of about $3M, no purpose is served by delaying the process that must be applied.

Result

[32]   No proper basis has been established for refusing adjudication orders. Accordingly those orders are made and are timed at 3:14pm.

[33]     Costs  are  awarded  to  DFG  on  a  2B  basis  together  with  disbursements approved by the Registrar.

Associate Judge Christiansen