Engini Limited v NZNet Internet Services Limited (in liquidation)
[2016] NZHC 368
•7 March 2016
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2015-404-2562 [2016] NZHC 368
IN THE MATTER of the liquidation of NZNET Internet
Services Limied (in Liquidation)
BETWEEN
ENGINI LIMITED Appellant
AND
NZNET INTERNET SERVICES LIMITED (IN LIQUIDATION) Respondent
Hearing: 3 March 2016 Appearances:
S H Barter for Appellant
B J Norling and A Cherkashina for RespondentJudgment:
7 March 2016
JUDGMENT OF WHATA J
This judgment was delivered by Justice Whata on
7 March 2016 at 2.30 p.m., pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Date:
Solicitors:
Barter & Co., North Shore City
B J Norling, Albany, Auckland
ENGINI LIMITED v NZNET INTERNET SERVICES LIMITED (IN LIQUIDATION) [2016] NZHC 368 [7
March 2016]
[1] Engini Ltd (Engini) appeals against the decision of Judge GM Harrison, striking out Engini’s defence to NZNet Internet Services Ltd’s (NZNet) claim for rental. The Judge found that there was no evidence whatsoever for any consideration passing from Engini NZNet to off-set or otherwise nullify the rental debt owing.1
More specifically he struck out the defence based on a transfer of shares to NZNet’s
then director, Mr Andrews.
[2] Engini appeals the strike out decision on the basis, among others:
d)The learned Judge erred in that he did not take into account the creditor’s invoices arose solely to create the transaction and the Defendant would not have accepted the invoices without prior agreement that the issue of shares would satisfy them; …
[3] NZNet contends that this “additional” ground cannot be raised as it was not pleaded nor argued before the District Court and, if it was, NZNet should be given leave to adduce evidence that the additional ground is without merit. The evidence sought to be adduced includes:
(a) Minutes of the 2008 annual general meeting of Engini’s shareholders
enclosing approved accounts for the year ended 31 March 2008;
(b)Financial reports of Engini for the years ended 31 March 2009, 2010 and 2011;
(c) File note listing payables from Engini to NZNet for the year ended 31
March 2010;
(d) File note indicating that NZNet was to write off receivables from
Engini as bad debts;
(e) List of invoices issued by NZNet to the respondent for the year ended
3 March 2008;
(f) Email from Stephen Andrews to Toby Kingston dated 13 March 2013;
1 NZ Net Internet Services Ltd (in liq) v Engini Ltd [2015] NZDC 19835 at [12].
(g) Email from Gerard Mackie to Mr Kingston to Anthony Liew dated 14
September 2010;
(h) Interview transcripts from the interviews with Messrs Mackie and
Kingston.
Background
[4] The essential background to the claim is succinctly addressed by the decision of Judge Harrison. I adopt it here for ease of reference.
The claim
[1] The plaintiff (NZ Net) was placed into liquidation on 17 November
2011 by special resolution of its shareholders and this claim is now advanced by the liquidators.
[2] Egini Limited (Engini) was involved in the development of soaftware. It sublet premises from NZ Net. In 2008 and thereafter, NZ Net issued invoices to Engini for occupation of the premises and also for domain name hosting, those invoices totalling $77,568.25 for which NZ Net now seeks judgment plus interest and costs.
[3] In its statement of defence, conducted by Gerard Mackie, one of its directors, Engini claimed that the debt was forgiven by NZ Net.
[4] At the first case management conference held on 29 January 2015 the Judge conducting the conference noted that “the defendant is relying on an alleged forgiveness of the debt but no such document appears from its list of documents”. He ordered standard discovery to be completed within 20 working days. NZ Net complied with that order on 2 March 2015 but Engini failed to comply.
[5] On 31 March 2015 the second case management conference was held. Again there was no appearance on behalf of Engini. On NZ Net’s application I made an “unless order” in the following terms:
Unless the defendant files and serves an affidavit of documents within 10 working days of receipt of this direction, which discovers document(s) which support the defence of forgiveness of debt, the defence will be struck out and judgment entered for the plaintiff.
This order was served on Engini on 7 April 2015.
[6] On 16 April 2015 Engini served its affidavit of documents together with electronic discovery but this did not disclose any documentation as evidence of the alleged forgiveness.
[7] Prior to the making of this order, on 27 March 2015 NZ Net applied to strike out the statement of defence, essentially on the ground that although
forgiveness of the debt was pleaded no particulars or documentary evidence had been produced to support that.
[8] On 30 April 2015 Engini filed notice of opposition to the strike out application in which it changed it sposition by alleging that, rather than being forgiven, the debt was satisfied by the transfer of shares in Engini to Mr Stephen Andrews who was a director of NZ Net. Annexed to the notice of opposition was a calculation entitled “Engini shareholder debt/share calculations 2010/2011”. No explanation of the meaning of this document was given and I have not been able to decipher it. Suffice to say that it does not refer in any way to a transfer of shares in satisfaction of the debt owned to NZ Net.
[9] On 18 September 2015, apparently, in an effort to reconcile the conflicting defences raise, an amended statement of defence was filed. This alleged, essentially, that NZ Net had not suffered any loss as its director and shareholder, Mr Stephen Andrews, received the benefit of the Engini shares as valuable consideration for the writing-off of the debt.
[5] The Judge’s resolution of the claim is equally succinct. It states:
Was the debt forgiven?
[10] The Court of Appeal in McCathie v McCathie [1971] NZLR 58 stated (at [61]-[62]):
There is of course no question that there is an ancient rule of law now too firmly established to be displaced other than by legislation, that in order to support an assertion by a debtor that a debt was released by the creditor it is necessary that the release be enshrined in a deed unless consideration has passed between the debtor and the creditor. It is not enough that there should be clear evidence of the release contained for example in a letter which passed between the two parties.
[11] Based upon that authority, in the absence of a deed forgiving the debt, and there is no deed, the debt can only be satisfied by the passing of valuable consideration.
[12] There is no evidence whatsoever of any consideration passing from Engini to NZ Net. The fact that Mr Andrews may have received shares cannot amount to satisfaction of the debt owed to NZ Net even though Mr Andrews may have been the sole director and shareholder of NZ Net at the time of the share transfer. A director and shareholder of a company is a separate legal identity from the company itself, one from the other, and a payment to a director cannot amount to the satisfaction of a debt owing to the company of which he is a director without acquiescence by the company in that course of action, of which there is no evidence whatsoever.
[13] In these circumstances I am of the view that the defence must be struck out as disclosing no tenable defence. A-G v Prince [1998] 1 NZLR
262; Couch v A-G [2008] NZSC 45.
Argument
[6] Mr Norling, for the applicant submits that Engini always accepted the existence of the debt but maintained the debt was not due and payable. He submits in particular:
(a) Firstly, in its original statement of defence, Engini pleaded that the debt had been forgiven by NZNet;
(b)Later in its notice of opposition to strike out application, Engini changed its position by pleading that the debt had been in fact satisfied with the issue of Engini’s shares to Mr Andrews personally (the alleged satisfaction);
(c) In its amended statement of defence, Engini repeated its latter position and further specified that the alleged satisfaction occurred in 2011;
(d)The latter position was also argued by Engini during the interlocutory hearing.
[7] Mr Norling now complains that in its notice of appeal Engini pleads that there had been a prior agreement the debt would not be repaid and that Engini would not have accepted the invoices but for that prior agreement. He says that this ground was neither pleaded or submitted in the District Court proceeding. On that basis he submits that the additional ground is incapable of being raised by Engini.
[8] In terms of leave to adduce further evidence, Mr Norling accepts that an appeal proceeds on the evidence which was presented to the decision maker at the original Court and that r 20.16(3) specifies that leave may only be granted if there are “special reasons” for the evidence. “Special reasons” include evidence that had not previously been available to the appellant or evidence that was not previously
relevant to the issues raised in the original hearing.2 Mr Norling then categorises the
documents as follows:
2 Citing Complaints Committee No.1 of Auckland District Law Society v P (2007) 18 PRNZ 760.
(a) Documents that were not produced as they were irrelevant to the issues raised in the District Court;
(b)Documents that were not available to NZNet during the District Court proceedings;
(c) Documents that were not available at the District Court hearing, being interviews under oath with Messrs Mackie and Kingston after their appointment as interim liquidators of Engini.
[9] Overall, Mr Norling submits that there are special reasons within the meaning of r 20.16(3) of the High Court Rules for the hearing of the new evidence.
[10] Mr Barter, responds:
(a) This is an appeal on a question of law and there need to be very “special reasons” why any evidence would be allowed on an appeal on a question of law;
(b)The only relevant facts in the decision are that there was no deed of forgiveness nor direct consideration and the appellants accept that factual element;
(c) Engini pleaded that the director agreed to forgive the debt in consideration for the issue of shares to a third party and the only issues for appeal is whether the decision was correct in law or sufficient (in not dealing with promissory estoppel).
(d)The contentions made by Mr Norling only really raised matters of semantics, that the different phraseology is simply different ways of describing the same event, namely that the debt was forgiven.
(e) Whether the agreement was reached prior to or after the invoices is a matter for determination at trial and if the pleadings are inconsistent then they can and should be amended.
(f) NZNet’s position is circular insofar as it seeks leave to introduce evidence in the event that this Court exercises a discretion to allow the additional ground. He makes the point that if the Court accepts that the pleading could amount to a promissory estoppel, then the appeal process is over (in favour of the appellant). Whether or not there was a promissory estoppel depends on the facts as demonstrated by the evidence at trial.
Assessment
“The additional ground”
[11] As I indicated to Mr Norling, the argument that the additional ground was not pleaded is properly a matter for the appellate Judge and not for interlocutory determination. Indeed, in my view it would be a waste of judicial resource to consider the point, which naturally forms part of the appeal as a whole and is best understood within the context of the full substantive review of the pleadings that will need to be undertaken to resolve it.
[12] For present purposes I have simply satisfied myself that the ground of appeal is at least arguable. Paragraph 4 of the amended statement of defence records:
They deny paragraph 2.4 and add further that the invoices were not payable as an oral agreement for the sale and purchase of the Defendant’s shares was entered into in consideration for the invoices due and payable to the Plaintiff being written off. Verbal correspondence discussing the debt owing to the Plaintiff and the corresponding debts by other shareholders began from
2007. The Defendants IP, operations and means of income were sold in
2009 and the Defendant effectively stopped trading as an entity in 2010. The Defendant approved inter-company debt settlements which included the settlement with the Plaintiff by shareholder resolution on the 27th of June
2011. On the 17th of August 2011, Mr Stephen Andrews updated the
Companies Office register and the Defendant’s share register to reflect the
inter-company debt settlements which also included the debts owed to the
Plaintiff.
[13] Without commenting at all on the merits and without undertaking a substantive contextual review, it seems to me that there is at least an arguable case that Engini pleaded that the agreement was reached “prior to” the invoices having
been rendered, contrary to Mr Norling’s basic submission. On that basis, the
application to have this limb of the appeal struck out is dismissed.
Further evidence
[14] I also agree with Mr Barter that the application to adduce further evidence is not strong. “Special circumstances” are ordinarily required before leave is granted to adduce evidence that was not before the District Court in an appeal essentially on a point of law.3 In my view, this Court must be even more cautious in the context where the appeal is against a decision to strike out a defence. While there may be cases where new evidence might be adduced, such evidence would normally need to be of an incontrovertible kind demonstrating that the point raised on appeal has no prospect of success.4
[15] With respect to the care taken by Mr Norling to illustrate the type of evidence that he sought to adduce on the ground of appeal, it falls well short of the type of evidence of this kind. In summary, the evidence highlighted by Mr Norling for the purposes of argument simply suggests that the debt remained on the books of Engini up until the end of 2010 and then was written off. That might be then said to support the proposition that there was no agreement in advance of the invoices being rendered. But as Mr Barter commented, in order to resolve that issue with surety, and on the balance of probabilities, the defendant would inevitably have to be given the opportunity to proffer any evidence which offers a contrary perspective. That cannot sensibly be achieved on an appeal on a question of law. Moreover, and significantly in my view, the primary position of NZNet is that the additional ground was not considered at all by the District Court Judge because it had not been properly pleaded or the subject of evidence. In effect, therefore, this Court on appeal would be invited to resolve a substantive defence point based only on the evidence sought to be adduced by NZNet. But in order to achieve fairness, this Court would be compelled to afford Engini the opportunity to present its evidence on the point.
The effect of all of this is that the substantive merits would be resolved on an appeal
3 CH & DL Properties Ltd v Christchurch District Licensing Agency (2010) 20 PRNZ 680 (HC).
4 Primary Care Systems Ltd v Attorney-General (2001) 15 PRNZ 465 (CA) at [29].
against a strike out decision. That is an impermissible use of the strike out and appellate procedures.
Result
[16] Given the foregoing, I therefore reject the application to effectively strike out the proposed ground of appeal (d) and for leave to adduce further evidence.
[17] With the agreement of counsel, costs are reserved.
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