Dye and ASB Bank Limited HC Auckland CIV-2011-404-003255

[2011] NZHC 1283

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2011-404-003255

IN THE MATTER OF     the Insolvency Act 2006

AND IN THE MATTER OF the bankruptcy of RUSSELL DESMOND DYE

BETWEEN  ASB BANK LIMITED Judgment Creditor

Hearing:         17 October 2011

Appearances: N Chamberlain for Judgment Creditor

P F Chambers for Judgment Debtor

Judgment:      18 October 2011 at 4:00 PM

JUDGMENT OF VENNING J

ON APPLICATION TO SET ASIDE BANKRUPTCY NOTICE

This judgment was delivered by me on 18 October 2011 at 4.00 pm, pursuant to Rule 11.5 of the High

Court Rules.

Registrar/Deputy Registrar

Date……………

Solicitors:           Mark Harrison & Associates, Waimauku

Minter Ellison Rudd Watts, Auckland

Copy to:            Paul F Chambers, Auckland

N Chamberlain, Auckland

DYE and ASB BANK LIMITED HC AK CIV-2011-404-003255 18 October 2011

Introduction

[1]      Russell Desmond Dye seeks to set aside a bankruptcy notice issued by ASB Bank Limited (ASB) against him.   The bankruptcy notice is based on a summary judgment ASB obtained against Mr Dye for $1,698,222.96 (including interest and costs).

[2]      The judgment was based on a guarantee Mr Dye had given ASB to support its lending to Frontier Properties Limited (Frontier) and Gavin Ray Stevens.

[3]      The judgment represents the shortfall  owing to ASB following sale of  a property at Stanmore Bay taken as mortgage security.

[4]      The application is made on the basis that Mr Dye has a cross-claim against ASB.   The cross-claim is based in part on the defences raised by Mr Stevens to ASB’s claim against him.  Mr Dye also seeks leave to file a counterclaim in either this proceeding or in the substantive proceedings in which the summary judgment was entered.

[5]      Alternatively Mr Dye seeks an adjournment of this application until after the hearing  of  Mr  Stevens’ opposition  to ASB’s  application  for  summary  judgment against him which is scheduled for hearing later this year.

Background to the borrowing and the judgment

[6]      In August 2008 ASB, Frontier and Mr Stevens, together with Mr Dye as guarantor, entered a facility agreement.  ASB agreed to make two facilities, a revolving credit facility and term loan, available to Frontier and Mr Stevens.  The lending was secured by an all obligations mortgage over a property at 156 Brightside Road,  Stanmore  Bay  and  an  unlimited  guarantee  completed  by Mr  Dye  on  18

September 2008. The Stanmore Bay property was in two lots.

[7]      The term loan expired on 1 March 2009.  On 17 November 2009 ASB made demand  on  Frontier  and  Mr  Stevens  for  repayment  of  the  debt  then  due  of

$3,101,915.00.

[8]      Then, on 30 November 2009, ASB served Property Law Act notices on the borrowers and on 3 May 2010 served Property Law Act notices on Mr Dye.  The Property Law Act notices expired unremedied.

[9]      ASB obtained valuations for the Stanmore Bay property and marketed it for sale  by  mortgagee  tender.     The  property  was  sold  by  mortgagee  tender  for

$2,607,000.00.

[10]     On 23 August 2010 ASB made demand on Mr Stevens and Mr Dye for the shortfall of $1,416,785.00 outstanding and still owing to the bank.  When the debt remained unpaid, the bank commenced proceedings and sought summary judgment against them on 22 March 2011.

[11]     Mr Dye took advice and appeared at the summary judgment hearing but did not oppose the orders sought by ASB.  ASB obtained summary judgment against Mr Dye in the amount of $1,698,222.00 on 10 May 2011.

[12]     Some  five  weeks  later,  on  17  June  2011,  Mr  Stevens  filed  a  notice  of opposition and affidavit in opposition to the summary judgment application against him.   As noted that opposed application is for hearing later this year.   There is, however, no reason to adjourn this application until that application can be heard. For the reasons that follow, Mr Dye is in a different position to Mr Stevens, particularly given that judgment has been entered against him.

The applicable test

[13]     Mr Dye’s application is made in reliance on a cross claim against ASB.  As relevant s 17 of the Insolvency Act 2009 reads:

17       Failure to comply with bankruptcy notice

(1)      A debtor commits an act of bankruptcy if—

(a)       a creditor has obtained a final judgment or a final order against the debtor for any amount; and

(b)       execution of the judgment or order has not been halted by a court; and

(c)      the debtor has been served with a bankruptcy notice; and

(d)       the  debtor  has  not,  within  the  time  limit  specified  in subsection (4),—

(i)       complied with the requirements of the notice; or

(ii)      satisfied the Court that he or she has a cross claim against the creditor.

...

(7)      In subsection (1)(d)(ii), cross claim means a counterclaim, set-off, or cross demand that—

(a)       is equal to, or greater than, the judgment debt or the amount that the debtor has been ordered to pay; and

(b)      the debtor could not use as a defence in the action or proceedings in which the judgment or the order, as the case may be, was obtained.

[14]     The onus is on the applicant, Mr Dye, to satisfy the Court:

(a)      that he has a cross claim against ASB.  The cross claim must be of true  substance  and  one  which  the  debtor  genuinely  proposes  to pursue:  Sharma v ANZ Banking Group(NZ) Ltd;[1]   and

[1] Sharma v ANZ Banking Group(NZ) Ltd (1992) 6 PRNZ 386.

(b)that the cross claim (which means a counterclaim set-off or cross demand) is equal to or greater than the judgment debt;  and

(c)      that he could not use the cross claim as a defence in the action or proceedings in which the judgment was obtained.  If the debtor relies on factual inability to set up the cross claim he must establish cogent circumstances because the primary emphasis is on the nature of the

impediment:  Hardie v Booth.[2]

Can Mr Dye demonstrate he has a cross claim of true substance?

[2] Hardie v Booth [1992] 1 NZLR 356, 362.

[15]     Mr Dye has filed an affidavit in support of his application.  He has annexed a proposed draft statement of defence and counterclaim against ASB.   In that draft claim Mr Dye pleads that, in return for guaranteeing Mr Stevens borrowing, he was to receive a 50 per cent stake in the development of the property at Stanmore Bay either by way of his shareholding in Frontier, personally or both.  Mr Dye pleads that in breach of its obligations to the principal debtor, ASB sold the Stanmore Bay property for $2,607,000.00 when it had previously been valued at $4,150,000.00 and, if further developments were carried out, would have had a value of $5,400,000.

[16]     Mr Dye pleads that ASB has either deliberately or negligently caused him economic harm or loss to the value of 50 per cent of the difference between the sale price achieved by ASB and the market value of the property fully developed.  He calculates his loss at $1,396,500.00 as follows:

Valuation of the property “as is”  $4,150,000

Total development value of the property                   $5,400,000

Less sale price achieved by ASB  $2,607,000

A difference of:  $2,793,000

Mr Dye’s 50 per cent interest  $1,396,500.

[17]    In addition to the above cross claim, during submissions Mr Chambers suggested that Mr Dye also wished to rely on claims that Mr Stevens had raised against ASB arising from its breach of collateral contracts Mr Stevens had described in his proposed statement of defence to the summary judgment application.   Mr Chambers identified those proposed claims by Mr Stevens as:

a)  breach of a collateral contract that, in return for Mr Stevens making specific payments to the loan and overdraft facility, the ASB would in

return use moneys to reduce the loan facility and would extend the term of the loan;  and

b) breach  of  a  second  collateral  agreement  that  Mr  Stevens  would attempt to obtain $800,000 alternative funding from Westpac which would be used to reduce the term loan owing by Mr Stevens to ASB and the term loan facility would be extended accordingly.

[18]     The short answer to the proposed defences of Mr Stevens may well lie in the general terms of agreement completed by the borrowers:

17.1     Set-off:You  irrevocably  authorise  us  to  apply  (without  prior notice or demand) any credit balance (whether or not due and payable) to which you are entitled on any account (in any currency) and at any of our offices, in or towards satisfaction of any indebtedness then due and payable by you to us but unpaid.

And:

23.4     Amendments:      Except  as  otherwise  agreed  in  these  General Terms, no amendment to any Document will be effective unless it is in writing signed by all the parties to that Document.

[19]     Mr Chambers was not able to point to any written agreement to support Mr

Stevens alleged variation of the terms of the loan documents.

[20]     However, in any event Mr Chambers was not able to identify how, even if there were such agreements between Mr Stevens and ASB, (and they were breached) that could lead to any cross claim by Mr Dye against ASB.  Further, given that the guarantee completed by Mr Dye records that he is a principal debtor and not a surety:

3.NATURE   OF   GUARANTEE   AND   INDEMNITY OBLIGATIONS

3.1      Liability as Sole Principal Debtor:  As between you and us (but without affecting the obligations of the Customer) you are liable under this Deed as a sole and principal debtor and not as a surety.

there is no basis upon which, even if Mr Stevens had such defences, that those defences would be available to Mr Dye.   Mr Dye does not suggest that he was a party to any such agreements.

[21]     From Mr Dye’s point of view, the high point of any cross claim he may have against ASB is that it sold the mortgage security at an under value.

[22]     There are significant difficulties for Mr Dye with that proposed claim.  First, Mr Dye’s claim is based on the difference between the valuation of the property as developed  and  the sale  price  achieved  by the ASB.    But  the property was  not developed at the time.  There is no obligation upon a bank to increase the value of a security by carrying out any development of the property or to improve it:  Public Trust v Ottow & Anor[3] and Silven Properties v Royal Bank of Scotland.[4]

[3] Public Trust v Ottow & Anor HC Auckland, CIV-2009-404-3825 4 November 2009 at [17].

[4] Silven Properties v Royal Bank of Scotland [2004] 1 WLR 997 at [16]..

[23]     Mr  Chambers  submitted  that  ASB  should  have  done  more  in  this  case because it marketed the property as having development potential.   The property may well have had development potential. ASB was entitled to refer to that.  Indeed it may have been  criticised if  it  had  not  done  so.    But  it  did  not  assume  any obligation to carry out the improvements or development.

[24]   Next, prior to proceeding to mortgagee sale the bank obtained updated valuations for the Stanmore Bay property in March 2010 and April 2010.  The March

2010 valuation from Lyons & Co valued the property at $2,100,000 with a forced sale price of between $1.6 and $1.7 million.   Sheldons valued the property on 30

April 2010 at $3,550,000. The sale price achieved was between the two valuations.

[25]     There  is  evidence  that  the  bank  undertook  extensive  marketing  of  the property before accepting the highest tender offer of $2,607,000.  It is also notable that about the same time, in June 2010, Mr Stevens had presented two conditional sale and purchase agreements for the Stanmore Bay property totalling $2,950,000. But both were conditional upon a proposed subdivision.  The tender accepted by the

bank was not conditional upon any such subdivision.

[26]     In the circumstances Mr Dye is not able to satisfy the Court that he has a genuine and triable cross claim.

Does the proposed cross claim exceed the value of the judgment?

[27]     However, even if I am wrong in taking that view of the merits of Mr Dye’s cross claim, the short answer to this application is that in any event that the proposed cross claim does not satisfy the requirement that it must equal or be greater than the judgment debt.  The amount of the judgment debt, including interest to the date of judgment (10 May 2011) but excluding costs, is $1,663,945.

[28]     Even  taking  Mr  Dye’s  cross  claim  at  the  face  value  he  places  on  it  of

$1,396,500 and applying interest at the judicature rate of 8.4 per cent to that sum from the date the tender was accepted, namely 15 June 2010, to the date of judgment

10 May 2011, Mr Dye’s cross claim against the bank is at most $1,502,236.00.  The shortfall is in excess of $161,000.00.

[29]     The reality is that the difference will be considerably more because Mr Dye’s claim is based on the assessed development value of the section without taking any account of the costs or expenditure that would be incurred in achieving that development value.   Mr Dye cannot satisfy the requirement of s 17(7)(a) that his cross claim is equal to or greater than the judgment debt.  The application must fail on that basis alone.

Could Mr Dye have used the claim as a defence in the proceedings in which the judgment was obtained?

[30]     Although it is strictly unnecessary to consider the remaining issue I do so briefly.  Mr Chambers submitted that, for the reasons set out in Mr Dye’s affidavit he could not have raised his cross claim because he wanted to rely on Mr Stevens’ defences and Mr Stevens did not file his defences until after judgment had been entered against Mr Dye.  Mr Dye deposes as follows:

Hewas initially unaware whether Mr Stevens was defending the proceedings or whether Mr Stevens had any defences.

If Mr Stevens had no defences he believed he had no basis to defend the

proceedings.

Shortly after 5 May 2011 he managed to contact Mr Stevens who discussed

with Mr Dye at some length his intention to file defences once served.

Mr Dye then instructed his solicitors to write to ASB advising that he would rely  on  the  same  defences  and  that  ASB  should  not  pursue  summary judgment against him in the circumstances.  The solicitors wrote on Mr Dye’s advice stating inter alia:

Mr Stevens will be defending the proceedings on the basis of an agreement that he had with ASB to refinance the borrowings (as I indicated in my earlier correspondence, my client was not a party to these negotiations and therefore is not in a position to raise the details of what may amount to a sound defence).

Your client should not without having served proceedings on Mr Stevens and in the knowledge that they will be defended by him be proceeding with the summary judgment application against my client alone.  ASB has a duty to be fair to my client in these circumstances.

Please confirm that your client will not take any further action against my client pending the outcome of any defence raised by Mr Stevens. ...

[31]     ASB’s solicitors responded:

We refer to your email. ...

We have been instructed to seek summary judgment against your client tomorrow.

We note that your client has contracted out of the right to claim set-off.  We refer you to clause 8.1 of the Guarantee.

Summary judgment was then entered against Mr Dye on 10 May 2011.

[32]     Where, as here, the debtor relies upon factual inability to set up the cross claim, cogent circumstances are required to confirm the factual inability.  In Clark v UDC Finance Ltd: Casey J said:[5]

... the primary emphasis on the legal nature of the impediment suggests that such other reasons must be carefully scrutinised, and certainly simple neglect to take even the elementary step of seeking further information or advice cannot avail the debtor. ... When UDC moved in to sell the property he did nothing to query its actions or to seek particulars of the sales and the application of the money. His only response to its reports and demands was to  explain  the  group's  insolvency  and  to  emphasise  his  own  perilous financial position and inability to pay. In these circumstances his belated discovery of a possible cause of action - well beyond the eleventh hour after such lengthy inactivity - is not enough to persuade me that the conditions to set aside the notice have been satisfied. The only reason he could not have set up these claims at the proper time was his failure to take advantage of the opportunity which was fully open to him.

[5] Clark v UDC Finance Ltd [1985] 2 NZLR 636 at 639.

[33]     In Hardie v Booth Tipping J approved the above comments and added:[6]

The inability of which r 41(3) speaks is primarily a legal inability. Factual inability is also available but that requires some cogent circumstance. To take a looser view would be to frustrate the purpose of the rule which is obviously designed to ensure that all issues between the parties both ways be tried at once and that a bankruptcy notice only be set aside if the debtor has a cross-claim which either legally or factually could not be set up in the same proceedings. ... any factual grounds for the suggestion that the cross-claim could not be set must be carefully scrutinised.

[6] Hardie v Booth at 362.

[34]     In Re Fattah, ex parte Maurice, Cotton & Walker,[7] in a similar situation to the present, the judgment debtor sought to set aside the bankruptcy notice on the basis he wished to rely on a defence the principal debtor had raised.   The Judge held the defendant could have been set up by the judgment debtor in the proceedings. The application was dismissed.  Similar reasoning applies.

[7] in Re Fattah, ex parte Maurice, Cotton & Walker HC Auckland B 315im, 20 June 2001, 02 at [21]-[22].

[35]     Further, in the present case Mr Dye’s cross claim is not really based on Mr Stevens’ defences at all.  It is based on the alleged failure to sell at a proper price. However, as Ms Chamberlain pointed out, the basic information supporting that claim is the difference between the development value of the property and the sale

price of the property.  Mr Dye was well aware or should have been well aware of the

development value of the property because Ms Eccleshall’s affidavit filed in support of the application for summary judgment attached a March 2009 valuation which recorded the improved value of the land was $4.15 million and the developed value was $5,400,000. Those are exactly the same figures as the valuation from September

2009 relied on by Mr Dye to support his claim.  Further, Mr Dye was advised of the valuations and the steps taken by the bank in relation to marketing of the property.

[36]     The information  Mr Dye  needed  to  raise  the suggested  cross  claim  was before him before summary judgment was entered against him.  From a factual point of view there was no impediment to Mr Dye raising the cross claim he now wishes to pursue before the summary judgment hearing.

[37]     There is a further issue on this aspect which Mr Chambers did not address in his initial submissions.  It arises out of the no set-off clause in the guarantee.  The

documents completed by Mr Dye contain a clause excluding set-off:

8.	PAYMENTS AND SET-OFF
8.1	Payments to be free and clear:	Each payment by you to us is to

be  unconditional  and  is  to  be  in  full,  without  any  deduction  or

withholding whatsoever (whether in respect of set-off, counterclaim, charges or otherwise) unless such deduction or withholding is required by law.  ...

[38]     An issue could arise whether, in light of Mr Dye’s inability to set-off any cross claim he may have against the bank it could be said that he could not use the cross claim in the proceedings in which the judgment was obtained.

[39]     A similar, although not identical, argument was considered and rejected by the Court of Appeal in the case of Sharma v ANZ Banking Group.[8]   In that case the applicant claimed a counterclaim against ANZ.  The Judge in the High Court took the view that the counterclaim could not as a matter of law, be set up in a summary judgment proceeding.  However, on appeal the Court of Appeal took a different view.

Cooke P expressed the reasoning of the Court as follows:[9]

An application for a summary judgment is in terms of Rule 138 an interlocutory application which may be made in proceedings within the purview of Rules 135 to 144. It is not in itself a separate substantive proceeding. In the proceeding in which summary judgment is sought it is competent for the defendant to file a counterclaim pursuant to Rule 145, and that is one step that could be taken as part of the process of attempting to satisfy the Court under Rule 142(2) that the defendant has a counterclaim that ought to be tried. An affidavit in support of the counterclaim would be necessary as well. But the more usual practice is probably to endeavour to satisfy the Court to that effect by affidavit evidence and a draft counterclaim. It seems reasonably clear, however, that in one way or another the counterclaim may certainly be set up. It may or may not persuade the Court to refrain from entering summary judgment. The same applies whether the claim of the defendant is accurately to be described as a counterclaim, set- off, or cross demand, the precise connotations 'of which terms do not require discussion now.

[8] Sharma v ANZ Banking Group.

[9] At 6.

[40]     Even though it is unnecessary to determine the issue in this case, given that the cross claim does not equal or exceed the judgment, similar reasoning would seem to apply to the cross demand that Mr Dye seeks to raise.  Even though Mr Dye is unable to raise the cross demand as a defence to the application for summary judgment against him he could still use it in the proceeding in which that judgment was obtained.   Prior to and in advance of the hearing of the summary judgment application Mr Dye could have filed a statement of defence and counterclaim raising the cross claim in whatever form he wished, thus engaging r 12.12(2) of the High Court Rules:

12.12   Disposal of application

...

(2)       If it appears to the court on an application for judgment under rule

12.2 or 12.3 that the defendant has a counterclaim that ought to be tried, the court—

(a)      may give judgment for the amount that appears just on any terms it thinks just; or

(b)      may  dismiss  the  application  and  give  directions  under subclause (1).

[41]     To that extent the cross claim could have been used in the proceeding in which judgment was obtained.

[42]     It  follows  that  Mr Dye  fails  to  satisfy the requirements  to  set  aside  the bankruptcy notice on a number of grounds.   There is no basis upon which the bankruptcy notice should be set aside.

[43]     While the Court retains an inherent jurisdiction to control abuse of its process in bankruptcy proceedings:   Re Wise, ex parte Benecke[10]  this is not a case which engages the inherent jurisdiction of the Court.  The inherent jurisdiction is usually

[10] Re Wise, ex parte Benecke HC Auckland B227-228/95, 21 June 1995.

only exercised where:

there is a procedural defect in the judgment that has been obtained;

there is an arguable ground of defence in existence to the claim;

there are other circumstances in the case which lead the Court to the view it is necessary to intervene to prevent injustice.

[44]     There are no such factors in this case.  Mr Dye guaranteed borrowing by Mr Stevens and Frontier from ASB.   He did so as a principal debtor.   The principal security has been sold following a proper marketing and sale process.  Mr Dye was aware of the relevant valuations of the property and the sale process before judgment was entered against him.  He was also in receipt of legal advice before judgment was entered.

Result

[45]     The application to set aside the bankruptcy notice is dismissed.

Costs

[46]     Costs to ASB on a 2B basis.

[47]     Mr Dye retains the right to pursue any cross claim he wishes to pursue against ASB  Bank,  but  he  must  do  so  by the  issue  of  fresh  proceedings.    Mr Chambers abandoned the suggestion Mr Dye could file a counterclaim in these insolvency proceedings.  Given that judgment had been entered against Mr Dye in the related civil proceedings there is no basis to file a counterclaim on behalf of Mr

Dye in those proceedings.[11]   Mr Dye will have to issue fresh proceedings.  It may be

[11] See McGechan on Procedure r 5.53.04 Plaintiff ’s proceeding must be extant

that ultimately if Mr Dye does issue those proceedings and Mr Stevens is successful in his opposition to ASB’s application for summary judgment then the two sets of proceedings could be consolidated for a substantive hearing but such issues must be

for another day.

Venning J

The rule envisages the existence of a  proceeding by the  plaintiff against the defendant in existence at the time the counterclaim was filed. It appears from CSI International v Archway Personnel [1980] 3 All ER 215 (CA) that under the English rules a proceeding remains extant until judgment has been given and satisfied. It is doubtful whether rr 5.53-5.60 High Court Rules

2008 generally envisage such an extended period. Rule 5.58 High Court Rules 2008 requires commencement of the counterclaim within the time stated in the notice of proceeding for filing a

statement of defence. Although that period (usually 25 working days) might be enlarged by the Court under r 1.19 High Court Rules 2008, r 5.58 certainly envisages the counterclaim being filed and served by the trial date.