DWA Limited v Gillam

[2012] NZHC 1875

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV-2012-409-000440 [2012] NZHC 1875

BETWEEN  DWA LIMITED Plaintiff

ANDMARK ANTHONY ANDREW GILLAM First Defendant

ANDKAREN GAYLE GILLAM Second Defendant

ANDNEW ZEALAND TRUSTEE SERVICES LIMITED

Third Defendant

Hearing:         2 July 2012

Appearances: G D Jones for Plaintiff

H A Evans for First Defendant
B R D Burke for Second Defendant
K T Dalziel for Third Defendant

Judgment:      27 July 2012

RESERVED JUDGMENT OF ASSOCIATE JUDGE MATTHEWS

[1]      In April 2011 the plaintiff (DWA) sold its business to the first defendant or his nominee for approximately $3,300,000 (subject to stock valuation).  At that time DWA was called Enersave Products Limited.  On 20 May 2011 an agreement was executed  by  Enersave  Products  Limited,  Riccarton  Lighting  &  Design  (2004) Limited as the nominated purchaser, and each of the three defendants.   This agreement varied the terms of the sale and purchase contract by providing for DWA to advance $400,000 to Riccarton Lighting & Design (2004) Limited as part of the

purchase price and for this advance to be guaranteed by all of the defendants.

DWA LIMITED V MARK ANTHONY ANDREW GILLAM HC CHCH CIV-2012-409-000440 [27 July 2012]

[2]     In this proceeding DWA seeks summary judgment against each of the defendants, as Riccarton Lighting & Design (2004) Limited has defaulted in repayment of the advance of $400,000.

[3]      The guarantee is in the following terms:

3.9     Guarantee

(i)      In consideration of the Vendor entering into and acting in accordance with  this  Agreement,  the  Guarantor  (as  principal  obligor  and  not merely as a surety) unconditionally and irrevocably guarantees as a continuing obligation payment of the Vendor Loan by the Purchaser and shall pay to the Vendor on demand any sum of money that the Purchaser shall at any time become liable to pay to the Vendor in respect of the Vendor Loan and which has not been paid at the time demand is made.

(ii)    The obligations of the Guarantor pursuant to this clause shall be continuing  obligations  and  shall  not  be  satisfied,  discharged  or impaired by any act or omission or any other events or circumstances whatsoever (whether or not known to the Vendor, the Purchaser or the Guarantor) which would or might (but for this clause) operate to satisfy, impair or discharge any of the Guarantor’s liability hereunder including, but without limitation:

(b)     any release of or granting of time (or any other indulgence) to, the Purchaser or any other person; or

(c)     the existence, validity, taking or renewal of any other security, right or remedy taken by the Vendor in relation to this Agreement or any enforcement of, neglect to perfect, failure to enforce or release or waiver of any such security, right or remedy; or

(d)     any  amendment  to  or  variation  of  this  Agreement  or  any security relating thereto or any assignment of this guarantee or any such security; or

(e)     any legal limitation, disability, incapacity or other circumstance relating to the Vendor,  the  Purchaser, the Guarantor  or any other person; or

(f)     any change in the name or constitution of the Purchaser (or its successors  or assigns)  or its absorption  by or amalgamation with any other undertaking; or

(g)     any irregularity, unenforceability or invalidity of any obligation of the Vendor, the Purchaser or any other person under or pursuant to this Agreement so that the obligations of the Guarantor hereunder will remain in full force and effect and this guarantee will be construed accordingly as if there were no such irregularity, unenforceability or invalidity.

(iii)    This guarantee is a continuing guarantee and will remain in full force and effect until the obligations and liabilities of the Purchaser under or

arising out of (or in connection with) the Vendor Loan have been fully performed or discharged.

(iv)    Any  release,  compromise  or  discharge  of  the  obligations  of  the Guarantor shall be deemed to be made subject to the condition that it will be void if any payment or security which may be or has been received by the Vendor is set aside or proves invalid for whatever reason.

(v)    As a separate, continuing and primary obligation, the Guarantor undertakes to indemnify the Vendor on demand against all losses, claims or costs suffered or incurred by the Vendor while acting in good faith should any amounts which would otherwise be due under the Vendor Loan not be recoverable for any reason whatsoever including (but not limited to) the Vendor Loan being or becoming void, voidable or unenforceable.

[4]      In addition the agreement provided:

7       Limitation of Liability of Independent Trustee

New   Zealand   Trustee   Services   Limited   has   entered   into   this Agreement as an independent trustee of the Mark and Karen Gillam Business Trust and accordingly the liability of New Zealand Trustee Services Limited shall be limited to the assets under the control of New Zealand Trustee Services Limited in respect of either Trust.

[5]      No explanation was given for the presence of the word “either” in this clause and argument proceeded as though it were not there, and the final phrase of this paragraph read “in respect of the Trust”.

[6]      The principles applying to entry of summary judgment are well-established, and not in issue.  Judgment may be given for a plaintiff if the plaintiff satisfies the Court that the defendant does not have a defence to the claim.  Although the onus of establishing this position is placed on the plaintiff, where a specific defence is raised it is for the defendant to lay an evidentiary foundation for that defence.   The defendants must demonstrate a tenable defence.  However, the onus remains on the

plaintiff to satisfy the Court that there is no defence to the claim.1   Where evidence

by affidavit conflicts the Court will not normally attempt to resolve the conflict, though the Court is not bound to accept, uncritically, as raising a dispute of fact

every statement of fact, however equivocal, lacking in precision, inconsistent with

1      Auckett v Falvey HC Wellington CP296/86, 20 August 1986 Eichelbaum J.

undisputed contemporary documents or other statements by the same deponent or inherently improbable in itself it may be.2

[7]      Rule 12.2 provides that the Court “may” enter judgment if satisfied that a defendant does not have a defence to the claim.   This leaves the Court with a discretion, though it is accepted that it is a discretion of very limited scope: Berg v Anglo Pacific International (1988) Ltd.3

[8]      At the beginning of the hearing application was made for leave for the first defendant to file a supplementary affidavit.  Counsel informed me that although at the outset all defendants were represented together, as preparation for the case had proceeded, counsel had recognised that there were potential conflicts of interest between the three defendants and each would need separate representation.  This had resulted  in  his  reviewing the evidence initially filed for the first  defendant  and forming the view that it was not sufficiently comprehensive.

[9]      Leave was opposed by the plaintiff.   I proceeded with the hearing after reserving  my decision.    No  party  sought  to  adjourn,  though  Mr  Jones  initially indicated that would be his preference and only elected to proceed when faced with the prospect that a further fixture could not be allocated for perhaps three to four months.  I reserved my decision at that point and having reflected on the matter, now consider it to be in the interests of justice that the affidavit is admitted.

[10]     There is a dispute between DWA, as the vendor, and the purchaser of the business as a result of which the purchaser maintains that it has a claim against DWA in relation to the value of stock purchased as part of the business.   When DWA issued a demand for repayment of the advance of $400,000, the purchaser, which by then had changed its name to Enersave Products Limited (Enersave) to take advantage of the goodwill purchased with the business, applied to set aside the demand.  The Court rejected the application as the applicant had not shown that the

quantum of its alleged cross claim exceeded the amount claimed.

2      Attorney-General v Rakiura Holdings Ltd (1986) 1 PRNZ 12 at 14.

3      Berg v Anglo Pacific International (1988) Ltd (1989) 1 PRNZ 713.

[11]     Neither the vendor nor the purchaser has issued proceedings against the other to establish the extent of liability between them.  The notice under s 289 Companies Act 1993 expired with the result that the purchasing company is presumed to be unable to pay its debts, pursuant to s 287.   DWA has issued proceedings for appointment of a liquidator of Enersave.  Enersave is defending the application.  It has filed a statement of defence and a fixture for argument is pending.

[12]     DWA’s  position  is  straightforward.    It  claims  the  unpaid  portion  of  the purchase price pursuant to the guarantees.  It specifically relies on the wording of the guarantee which provides that each guarantor is a “principal obligor and not merely as a surety” and the terms of cl 3.9(ii) as set out above.   In relation to the third defendant it acknowledges the limitation on its liability set out in cl 7 but maintains it is entitled to enter summary judgment for the full amount of the unpaid advance, with the limitation on liability to the assets of the trust being relevant only to the extent to which judgment can be satisfied.

[13]     All the defendants maintain that as guarantors they are not liable to pay any sum greater than the principal debtor is obliged to pay, and that there is a substantial dispute between DWA and Enersave over the liability of Enersave to pay the debt, giving rise to a right of set-off to the purchaser under the principles in Grant v New Zealand Motor Corporation Ltd.4     The dispute is pleaded by DWA, and is the subject of evidence, in the liquidation proceeding.

[14]     The second defendant, Karen Gillam, maintains that she has a further defence on the basis that her guarantee was procured by the undue influence of Mark Gillam, of which DWA had notice.  At that time Mark Gillam was Karen Gillam’s husband.

[15]    Additionally, Karen Gillam maintains she has a defence as it would be unconscionable for DWA to enforce its guarantee against her.

[16]     The third defendant additionally submitted that even if liability is established, cl 7 prevents entry of judgment on quantum.

4      Grant v New Zealand Motor Corporation Ltd [1989] 1 NZLR 8.

Is the set-off claimed by Enersave a defence to claims under this guarantee?

[17]     Mr Jones submitted that it is necessary to ascertain the intent of the parties from the terms of the contract, the context and the surrounding circumstances.  He submitted that the intention of cl 3.9 is to protect DWA in the event that Enersave does not or cannot repay the advance when due by giving DWA recourse against the defendants.    To  give better effect  to  this  the  defendants  all  assume liability as principal debtors and not merely as sureties and by cl 3.9(ii) waived any matters that might otherwise discharge their liability.

[18]     Mr Jones submitted that the Court has already determined that Enersave must repay the entire loan to DWA.  Mr Jones also submitted that even if Enersave does have a cross claim or set-off against DWA, that does not give rise to a defence to the defendants as they cannot assert the set-off in their own right.  He drew attention to specific terms of the guarantee and also submitted that an equitable set-off available to a principal debtor does not give rise to a defence to a guarantor who is not a party to the contract under which the cross claim is said to arise.  Counsel relied on ASB

Bank Ltd v Hall,5 and Indrisie v General Credits Ltd.6

[19]     Mr Evans, who presented the principal arguments for all defendants on this issue, submitted that in Indrisie the guarantee was of a much more general nature than the guarantee in question in this case.  He submitted that ASB Bank Ltd v Hall is distinguishable on the basis of specific findings of fact in the judgment.  Mr Evans then noted that in Cellulose Products Pty Ltd v Truda,7 one of the cases upon which the decision in Indrisie was based, the Judge held that the only procedure open to a guarantor in a situation akin to that of the guarantors in this case would be to sue the debtor by joining it as a third party, and claim an indemnity.   The debtor in turn

would then have a right to join the plaintiff as a fourth party claiming damages for breach of warranty with all the claims then being heard and determined together. Mr Evans submitted that if this is taken to be the correct procedure to be followed,

this procedure is clearly not susceptible to an application for summary judgment.

5      ASB Bank Ltd v Hall HC Auckland CIV-2010-404-6381, 8 April 2011.

6      Indrisie v General Credits Ltd [1985] VR 251.

7      Cellulose Products Pty Ltd v Truda (1970) 92 WN (NSW) 561.

[20]     Mr Evans submitted that in Doherty v Murphy,8  the Court of Appeal of the Supreme Court of Victoria permitted a guarantor to rely on an equitable set-off as a defence to a creditor’s summary judgment application.

[21]     Mr Evans drew my attention to paragraph 11.59 in The Modern Contract of

Guarantee:9

The determination of the precise ambit of equitable set-off awaits judicial resolution but, in the writer’s view, the guarantor should be permitted to plead, not only an abatement, but also an equitable set-off possessed by the debtor  as  against  the  creditor.    The  very  definition  of  equitable  set-off means, even in its widest formulation, that it must be “closely connected” with the principal debt which is guaranteed.   A creditor can have no reasonable objection to the guarantor relying on a set-off when this connection subsists, since it relates directly to the guaranteed debt and not to other debts owed by the debtor to that creditor.  This is especially so since equitable set-off is now established as a true defence.  Although the principal debt is not directly reduced, in equity, even prior to judgment, the existence of an equitable set-off means that the creditor cannot treat the debtor as being indebted to him to the extent of the set-off.

[22]     The learned author noted divergent views on this point.  Cellulose Products v Truder has been approved in National Westminster Bank plc v Skelton,10 but in BOC Group  Ltd  v  Centeon,11   Rix  J,  in  the  context  of  an  application  for  summary judgment, and without reference to National Westminster Bank plc v Skelton, said that if a principal has an arguable set-off then:

... it seems to me that the guarantor is entitled to rely on the alleged set-off as well.

[23]     The learned author of the text indicated a preference for the view of Rix J and noted the decision in Doherty v Murphy, above.

[24]     Discussion of this point must start with the wording of the guarantee in this case.  The guarantors guarantee:

... as a continuing obligation payment of the Vendor Loan by the Purchaser and shall pay to the Vendor on demand any sum of money that the Purchaser

8      Doherty v Murphy [1996] 2 VR 535.

9      J O’Donovan and J Phillips, The Modern Contract of Guarantee

(2nd ed, Thomason Reuters, London, 2010).

10     National Westminster Bank plc v Skelton [1993] 1 All ER 242.

11     BOC Group Ltd v Centeon [1999] 1 All ER (Comm) 53.

shall at any time become liable to pay to the Vendor in respect of the Vendor

Loan and which has not been paid at the time demand is made.

[25]     This obligation is undertaken as a principal obligor and not merely as a surety but whether seen as an obligation as a surety, or as a principal obligation, the sum which the guarantors are required to pay is the crucial factor.  It is the sum of money that the purchaser shall at any time become liable to pay to the vendor.   If the purchaser has not become liable to pay that sum to the vendor, neither obligation of the guarantors – that is, as sureties or as principal obligors – has yet arisen.

[26]     Thus, if it can be shown that Enersave has an arguable defence to the claim by DWA, and a right to a set-off under the principles in Grant v New Zealand Motor Corporation Ltd resulting in Enersave not, at this point, being liable to repay the loan to DWA, no obligation on any guarantee has yet arisen and this claim must fail. I return to the facts relating to the alleged set-off below.

[27]     I do not accept Mr Jones’ submission that the Court has already adjudged that Enersave must repay the entire loan to the plaintiff.   Mr Jones, in making that submission, was referring to the judgment of this Court on the application by Enersave to set aside the statutory demand issued by DWA.  The Court decided that Enersave had not established that it had a cross claim equal to or exceeding the sum claimed in the statutory demand and therefore declined to set the statutory demand aside.  That is far from making the determination described by Mr Jones.  The effect of not setting aside the statutory demand under s 290 of the Companies Act 1993 was to trigger the presumption set out in s 287 that Enersave is unable to pay its debts, this being a ground for the Court to appoint a liquidator under s 241(4).  The judgment of the Court went no further than I have stated.

[28]     None of the provisions of cl 3.9(ii) assist the plaintiff as they are directed at satisfaction, discharge or impairment of the liability of the guarantors,  and that liability is prescribed in cl 3.9(i).  As a matter of interpretation, if (as I find) it does not arise until the liability of Enersave is established, none of these provisions has any effect.

[29]     Nor,  in  my opinion,  does  cl  3.9(v)  assist  the plaintiff.    It  has  not  been established that any part of the vendor loan is not recoverable, so it is premature to consider applying this sub-clause.

[30]     Secondly, in my view the correct principle to be applied is that preferred by the learned authors of The Modern Contract of Guarantee,12 Rix J in BOC Group Ltd v Centeon, and Doherty v Murphy.  I note support for this view, also, in Rowlatt on Principal and Surety:13

Where  the  principal  is  entitled  to  a  set-off  against  a  creditor’s  demand arising  out  of  the  same  transaction  as  the  debt  guaranteed,  and  in  fact reducing that debt, the surety is entitled to plead it in an action by the creditor against the surety alone.

[31]     I therefore find that if Enersave has an arguable cross claim against DWA the first, second and third defendants are entitled to the benefit of that arguable cross claim as a defence to this application for summary judgment.

[32]     In my view, it is necessary to determine whether it is appropriate to consider, on this application, whether that cross claim is arguable.  The approach DWA has taken to recovering its vendor loan from Enersave is to utilise the insolvency-related provisions of the Companies Act as a means of endeavouring to force payment by Enersave, and to utilise summary judgment procedures under the High Court Rules to endeavour to force payment by the guarantors.   The Court will not liquidate a company where it is shown that the company has an arguable defence or cross claim in respect of the sum claimed, nor will the Court enter summary judgment where there is an arguable defence to the claim.  On a defended application to liquidate a company,  the  existence  of  the  arguable  defence  must  be  established  by  the defendant, but the defence itself need not be established.   On an application for summary judgment it is for the plaintiff to show that the defendant does not have an arguable defence.  Whilst it is for the defendants to demonstrate a sound basis for a defence upon which they seek to rely, the onus at all times remains with the plaintiff

to establish that the defence cannot succeed, and judgment should be entered on a

12     At n 9.

13     D Marks and G Moss, Rowlatt on Principal and Surety (6th ed, Sweet and Maxwell, London, 2011).

summary basis.   The difficulty which has been caused by the plaintiff electing to utilise these procedures instead of issuing civil proceedings against Enersave and the guarantors to determine liability by trial, is that it now has two proceedings before the Court on which the Court is required to assess the same factual matrix to determine the outcome.  Despite the resources applied by DWA to proceeding in this manner, if Enersave establishes even an arguable defence, both proceedings will have been to no avail.

[33]     This  is  not  to  criticise  DWA  for  proceeding  in  the  way  it  has,  though numerous cases strongly caution creditors against using Companies Act insolvency procedures as a means to recover debts when they are on notice of a defence or cross claim which is arguable.  Fortified, perhaps, by the decision of the Court not to set aside the statutory demand, though possibly misinterpreting that decision as I have discussed ([27]), DWA has elected to press on with an application to liquidate Enersave in the face of the evidence already led, on the application to set aside the statutory demand.  The time to assess that course is when the application to liquidate Enersave, and Enersave’s defence to that application, have been fully argued and are under consideration.

[34]     Any decision on whether on the facts before me, now, Enersave has  an arguable defence or cross claim in relation to the vendor advance, of which the present defendants can take advantage on this summary judgment for the reasons I have given, will necessarily pre-empt to a degree Enersave’s own right to argue the defence which is within its own domain.  I am not prepared to take that course.

[35]     If the summary judgment application against these defendants is declined, now, but the Court finds in due course that Enersave does not have an arguable defence to DWA’s claim, DWA would have been deprived of its right to seek summary judgment against the present defendants.  If, on the other hand, Enersave establishes that it has an arguable defence on the liquidation proceeding, for the reasons I have given, that arguable defence is also available to the present defendants and the application for summary judgment against them must be dismissed.  There is no alternative to adjourning this application for summary judgment, to await the outcome of the liquidation proceeding.

[36]     As noted earlier [14], [15] and [16], the second and third defendants maintain they have other defences to this application for summary judgment.  In my opinion it is preferable that any determination on whether the plaintiff has satisfied the Court that these additional defences are not available to the second and third defendants should await further consideration of this case in due course.

Outcome

[37]     I adjourn the application for summary judgment against the first, second and third defendants for further consideration after release of the judgment of the Court on proceeding CIV-2012-409-1190, the application by DWA for appointment of a Liquidator to Enersave.

[38]     Costs are reserved.

J G Matthews

Associate Judge

Solicitors:

Lane Neave – Email: [email protected]

Young Hunter – Email: [email protected] Harmans – Email: [email protected] Taylor Shaw – Email: [email protected]