Ensom v Morrison Kent

[2022] NZHC 3391

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2022-404-472

[2022] NZHC 3391

UNDER

the Insolvency Act 2006, section 119

IN THE MATTER

AND

of Part 18 of the High Court Rules 2016

IN THE MATTER

of an application for vesting orders

BETWEEN

MARK ROBERT ENSOM (BANKRUPT)

Applicant

AND

MORRISON KENT

Interested Party

Hearing:	8 December 2022
Appearances:	D Grove for the Applicant S Beattie for Morrison Kent
Judgment:	14 December 2022

JUDGMENT OF GORDON J

This judgment was delivered by me

on 14 December 2022 at 11 am, pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar Date:

Solicitors/Counsel:

Vodanovich Law Ltd, Auckland

D Grove, O’Connell Chambers, Auckland Wotton + Kearney, Auckland

ENSOM (BANKRUPT) v MORRISON KENT [2022] NZHC 3391 [14 December 2022]

[1]    The applicant, Mark Ensom, is a bankrupt. The Official Assignee (OA) has disclaimed their litigation rights in respect of Mr Ensom’s estate, pursuant to s 117 of the Insolvency Act 2006 (the Act).

[2]    Mr Ensom now applies to have those litigation rights vested in him1 so that he may pursue a claim in negligence against the law firm Morrison Kent. Mr Ensom says it is only fair that the property (litigation rights) be vested in him because the OA has no interest in pursuing the claim.

[3]    Morrison Kent opposes the application. It says it is not fair for Mr Ensom to be able to pursue a claim given the circumstances in which the rights became vested in the OA and the potential consequences of the vesting.

[4]    The Crown does not oppose the application and abides the decision of the Court.

Background facts

[5]    The background facts that have led to this application are somewhat convoluted. The following summary of the background is drawn from the summary provided by Ms Beattie, counsel for Morrison Kent, in an appendix to her submissions. Mr Grove, for Mr Ensom, did not take issue with the summary.

[6]    On 22 February 2016 Mr Ensom signed a sale and purchase agreement (SPA) for a property at 606–612 and 620 Great North Road, Grey Lynn, Auckland (the Property) between the trustees of the Stanley Trust as vendor and MR8 Construction Ltd and/or nominee as purchaser. The sale and purchase agreement recorded the date of settlement as 15 December 2016.

[7]    On 23 February 2016 Mr Ensom emailed the SPA to Morrison Kent, asking them to hold it on file as he was planning to on sell the Property.

1      Insolvency Act 2006, s 119(3).

[8]    Mr Ensom was then the sole director and shareholder of MR8 Construction, now in liquidation.

[9]    On 17 March 2016 Morrison Kent obtained Mr Ensom’s approval to send an email to the vendor’s solicitors, Martelli McKegg, confirming  that  it  acted  for MR8 Construction in relation to the purchase of the Property. The email indicated that the due diligence condition would be satisfied on 6 April 2016.

[10]   On 31 March 2016 Morrison Kent issued an invoice to MR8 Construction for ‘Purchase 620, 606, Gt Nrth Rd Grey Lynn’.

[11]   The SPA became unconditional on 6 April 2016, upon expiry of the 30-day period specified in the SPA for satisfaction of the due diligence condition.

[12]   MR8  Construction  did  not  pay  the  balance  of  the  purchase  price  on   15 December 2016 and the purchase did not settle. On 16 December 2016 Morrison Kent received a settlement notice addressed to MR8 Construction.

[13]   On 21 December 2016 Morrison Kent issued an invoice to MR8 Construction for ‘Purchase 606, 612 and 620 Gt Nrth Rd Grey Lynn’.

[14]   On 11 January 2017 Morrison Kent received an email from John Powell of Russell McVeagh, regarding instructions to document a loan and related documents for the purchase of the Property by Morrison Kent’s “client”. The lender was Downtown House (No 2) Ltd (Downtown House).2

[15]   Morrison Kent clarified with Mr Powell that it acted for MR8 Construction, Mr Ensom and MR8 Developments Ltd (the  intended  nominee  under  the  SPA). Mr Powell confirmed that he acted for Downtown House.

2      The directors of Downtown House include Georgia Olsen who is also a shareholder. She is married to Sam Macdonald who Mr Ensom says was his partner in the venture.

[16]   MR8 Developments Ltd was replaced as nominee by Pomegranate Recording Ltd (Pomegranate).3

[17]On 13 January 2017 Mr Ensom executed:

(a)A Waiver of Independent Legal Advice, addressed to Morrison Kent and Downtown House and signed in his personal capacity (First Waiver).4

(b)A Loan Agreement between Pomegranate (as borrower) and Downtown House (as lender), as director of Pomegranate.

(c)A General Security Deed between Pomegranate (as grantor) and Downtown House (as secured party), as director of Pomegranate.

(d)An All Obligations Guarantee and Indemnity between Mr Ensom (as guarantor) and Downtown House (as beneficiary) (Guarantee), signed in his personal capacity.

(e)A Deed of Nomination between MR8 Construction (as purchaser) and Pomegranate (as nominee) dated 13 January 2017, as director  of MR8 Construction and as director of Pomegranate respectively.

(f)A Waiver of Independent Legal Advice, addressed to Downtown House and Russell McVeagh and signed in his personal capacity (as guarantor) (Second Waiver).5

[18]On 13 January 2017 the purchase of the Property duly settled.

3      The Companies Register shows that Pomegranate Recording Ltd was incorporated on 22 February 2006. Mark Robert Ensom was the sole director. It was removed from the register on 15 July 2020.

4      The details of the First Waiver are set out in [50] below.

5      The details of the Second Waiver are set out in [51] below.

[19]   On  17  January  2017  a  partner  at  Morrison  Kent  sent  an  email   to   Sam Macdonald which states that Mr Macdonald is an “equitable owner in 40%” of Pomegranate and that Mr Ensom is the “named client”.

[20]   On 19 January 2017 Morrison Kent issued an invoice to Pomegranate for ‘Purchase 606-612 and 620 Great North Road, Grey Lynn’.

[21]   On 4 April 2019 Downtown House successfully applied for summary judgment against Mr Ensom for monies owed up to 10 May 2018 (being $1,842,651.74) under the Guarantee. This Court declined Mr Ensom’s application to stay the matter so he could join Sam Macdonald. Mr Ensom alleged Mr Macdonald was liable for 40 per cent of the debt as a joint venture partner in the purchase of the Property. This Court noted that even if Mr Ensom was successful in a third party claim, he would have a residual 60 per cent liability to Downtown House “which he cannot hope to share with Mr Macdonald”.6

[22]   On 1 October 2019 Mr Ensom unsuccessfully applied to set aside a bankruptcy notice issued by Downtown House. However, in recognition of a possible claim for a contribution against Mr Macdonald, this Court ordered a conditional and temporary stay on execution: Downtown House was not to execute judgment for more than

$1 million (being a rounded difference between the amount of the judgment debt and the amount of Mr Ensom’s potential claim against Mr Macdonald of 40 per cent) until 31 October 2019.7

[23]Mr Ensom failed to pay $1 million to Downtown House by 31 October 2019.

[24]On 27 February 2020 Mr Ensom was adjudicated bankrupt.

Legal principles

[25]   The Act provides that the OA may disclaim “onerous property”.8 The definition of onerous property includes a litigation right that, in the opinion of the OA,

6      Downtown House (No 2) Ltd v Ensom [2019] NZHC 724 (first Downtown decision) at [30].

7      Downtown House (No 2) Ltd v Ensom [2019] NZHC 2566 (second Downtown decision) at [19].

8      Insolvency Act 2006, s 117.

has no reasonable prospect of success or cannot reasonably be funded from the assets of the bankrupt’s estate.9

[26]   Once the OA has disclaimed property, the Act provides that a person who suffers loss or damage because of that disclaimer may apply to the court for that property to be vested in them.10

[27]   The Court may make such an order if it is satisfied that it is fair that the property should be vested in the applicant.11

[28]   The concept of fairness does not mean that the granting of vesting orders is an exercise of discretion but rather it is an objective assessment having regard to all relevant factors. As the Court of Appeal observed in Goldstone v Goldstone:12

[11]    We consider that the discretion under s 119(3) can only be exercised once the Court has undertaken an evaluative assessment of the case and reached the point of being satisfied that to do so would be fair. The “fairness” test constitutes a threshold to be met before the discretion could be exercised. ...

[12]     We do not accept that, in the context of the Insolvency Act, determination of what is fair could turn on the Judge’s discretion. It is unlikely that Parliament intended to allow the vesting of property to be made on a discretionary basis, particularly where there are competing claims to the property. The concept of fairness allows for objective assessment of competing interests. As in the comparable assessment of the interests of justice, the evaluation is one to be made having regard to all the relevant

facts. The particular features may differ in each case, but consideration of the relevant features will lead a Judge to the point of being satisfied, or not, that vesting is fair. Whether that evaluation is correct is capable of objective assessment by reference to the factors that are relevant in the particular context.

[13]      We consider that in determining that it was fair to vest the property ...

the [High Court] Judge was making an evaluative judgment ...

9      Section 117(4)(a)(iii).

10     Section 119(2).

11     Section 119(3).

12     Goldstone v Goldstone (as administrator of the estate of Reece Clive Goldstone) [2021] NZCA 664, [2021] NZFLR 883 (footnote omitted).

[29]   As the Court of Appeal noted, the Act gives no guidance as to factors for consideration in determining whether vesting is fair under s 119(3).13 Agreeing with the High Court Judge in that case, the Court of Appeal said:

[26] We agree that the assessment of fairness must take in all the circumstances of both the applicant(s) and the property. These are likely to vary greatly. It is only by taking a broad view of what is relevant that a proper evaluation of what is fair can be reached.

[30]   In Link Technology 2000 Ltd v Peterland Ltd this Court said that factors for consideration include:14

(a)The circumstances in which the disclaimed property became vested in the OA through bankruptcy;

(b)The rights and interests of third parties and whether they consented to the vesting;

(c)The consequences of any vesting for the applicant and other persons;

(d)The nature of the interests at stake, including those belonging to proposed defendants;

(e)The strength of the proposed claim; and

(f)The ability of the applicant to progress the proceeding and pay security for costs, if required.

Discussion

[31]   I mention two preliminary issues before undertaking the required fairness assessment: first, whether the claim is time barred under the Limitation Act 2010 and second, whether Mr Ensom has standing to bring the claim. Both issues were raised on behalf of Morrison Kent in the written submissions but both were abandoned by Ms Beattie at the hearing.

13 At [25].

14     Link Technology 2000 Ltd v Peterland Ltd [2021] NZHC 428 at [18]–[20].

Time limitation

[32]   The negligence to be alleged by Mr Ensom in the draft statement of claim is the alleged failure by Morrison Kent to provide advice to Mr Ensom so as to ensure that he had appropriate protection from his alleged business partner, Mr Macdonald, in relation to what Mr Ensom says was an agreed, but undocumented, 60/40 equity partnership for the development of the property.15

[33]Section 11(1) of the Limitation Act 2010 provides:

It is a defence to a money claim if the defendant proves that the date on which the claim is filed is at least 6 years after the date of the act or omission on which the claim is based (the claim’s primary period).

[34]   Mr Grove, for Mr Ensom, submits that where a limitation period is based on a series of acts or omissions to act, the limitation period begins to run from the last of the acts or omissions.16 Mr Grove says that the relevant omission in this case occurred on 13 January 2017, being the date on which  Mr Ensom signed the  Guarantee.     Mr Grove says that Morrison Kent should have advised Mr Ensom on this date (at the latest) regarding the risks Mr Ensom was taking in circumstances where there was no written joint venture agreement between him and Mr Macdonald.

[35]   In written submissions Ms Beattie argued that the relevant omission occurred almost one year earlier, on 23 March 2016, being the date on which the sale and purchase agreement became unconditional and Mr Ensom (as director of MR8 Construction) became liable  to  complete  settlement.  However,  at  the  hearing, Ms Beattie abandoned limitation as a basis for opposing the application. While she abandoned the argument for present purposes, she reserved the right to pursue it at a later stage in the proceeding if the Court were to grant Mr Ensom’s application.

[36]   The uncontested primary limitation date for a claim in negligence against Morrison Kent is therefore 13 January 2023.

15     Whereby Mr Ensom owned 60 per cent and Mr Macdonald owned 40 per cent.

16     Galway v Pugh [2021] NZHC 3431 at [53]–[58]; Vienna Group Ltd (in liq) v Kerry Logistics (Oceania) Ltd [2022] NZHC 1473 at [42].

Standing

[37]   In written submissions, Ms Beattie argued that Mr Ensom lacked standing to bring a claim in negligence against his former solicitors. She says that Mr Ensom engaged Morrison Kent on behalf of MR8 Construction and Pomegranate. The Property was owned by Pomegranate (as MR8 Construction’s nominee). Therefore, only Pomegranate has standing to claim damages. Pomegranate has now been removed from the Companies Register.

[38]   In discussion with the Court Ms Beattie acknowledged that this argument was misconceived. Mr Ensom wishes to pursue a claim against Morrison Kent for losses suffered personally arising out of the Guarantee, which he signed in his personal capacity.

[39]Therefore, there is no issue as to Mr Ensom’s standing to make this application.

Fairness

Loss suffered

[40]   Ms Beattie submits that Mr Ensom has not suffered any loss because of any act or omission of Morrison Kent. She sets out her reasons as follows:

(a)MR8 Construction entered into a sale and purchase agreement for the Property prior to Morrison Kent providing legal services in respect of that purchase;

(b)By the settlement date, MR8 Construction had not secured the necessary finance and settlement did not occur on the agreed date;

(c)In order to complete the purchase, MR8 Construction belatedly obtained a loan from Downtown. Mr Ensom personally guaranteed the loan and waived his right to independent legal advice;

(d)Although the sale then settled, the development did not progress and the property was resold;

(e)The sale funds did not clear the debt to Downtown. MR8 Construction was unable to pay back all of the money borrowed and Mr Ensom was also unable to honour the Guarantee;

(f)When Downtown applied for summary judgment Mr Ensom raised as a defence that Mr Macdonald should be liable for 40 per cent of the amount owing as they had been partners in other projects on this basis;17

(g)The Court acknowledged there was a possibility that 40 per cent could be recovered from Mr Macdonald, but Mr Ensom nevertheless retained a 60 per cent ($1 million) liability;18

(h)Mr Ensom was given the opportunity to pay the $1 million he indisputably owed.19 He did not make any payment. As a result, he was bankrupted and the $1 million debt has consequently been released.

[41]In his draft Statement of Claim, Mr Ensom alleges:

19.Morrison Kent breached its duties to Mr Ensom in that prior to January 2017:

a.     It did not suggest that each party obtain independent legal advice as to the nature of the joint venture.

b.     Did not provide advice to Pomegranate Recordings Limited and Mr Ensom in relation to the risks associated with the arrangements entered into with Mr Macdonald.

c.     Failed to prepare a formal Joint Venture Agreement of Partnership Agreement between Mr Ensom and Mr Macdonald.

d.     Failed to discuss and  highlight that  the  lender  was related to  Mr Macdonald and accordingly the transaction was particularly risky without appropriate indemnities being provided by Mr Macdonald and his related entities.

20.Demand has been made on Mr Macdonald to pay 40% of the outstanding liability to Downtown House.

17 First Downtown decision, above n 6, at [25].

18 At [30].

19     Second Downtown decision, above n 7, at [16] and [19].

21.As the financial relationship between Mr Ensom and Mr Macdonald was not documented, Mr Macdonald denied that there was such a relationship.

22.As a result, Mr Ensom has suffered the following losses:

a.     The amount of the judgment obtained by Downtown House together with the further costs and interest that has accrued.

b.     The costs associated with the proceedings previously issued against Mr Macdonald and in defending the claims made by Downtown House.

23.Should Mr Ensom have received proper and competent advice he would not have entered into this transaction including providing a guarantee for the borrowings from Downtown House. He therefore would have suffered no losses and would not have been bankrupted.

[42]   The focus of the alleged breaches by Morrison Kent is on the risks associated with the Guarantee in  the absence of a formal  joint  venture agreement  between  Mr Ensom and Mr Macdonald.

[43]   However, this Court previously limited Mr Ensom’s liability to 60 per cent of the loan (rounded to $1 million), in the course of the bankruptcy proceedings, having regard to Mr Ensom’s alleged 60/40 partnership with Mr Macdonald and Mr Ensom’s claim against Mr Macdonald. Associate Judge Bell also recognised that “Downtown may receive some advantage if the husband of one of its shareholders is not exposed to liability”.20 In limiting Mr Ensom’s liability, this Court essentially upheld the basis of the joint venture relationship and contained the risks presented by the familial relationship between Mr Macdonald and the shareholders of Downtown. In short, the loss Mr Ensom pleads has already been remedied by a previous judgment of this Court.

[44]   Mr Ensom was bankrupted because first, the business venture was not profitable and second, he failed to repay his undisputed 60 per cent share of the debt to the lender. Nothing in Mr Ensom’s pleadings suggests that Morrison Kent was somehow responsible for the failure of the business venture or Mr Ensom’s failure to pay his share of the debt.

20 Second Downtown decision, above n 7, at [15].

[45]   Any alleged negligence on the part of Morrison Kent (which is denied) in relation to the 60/40 share between the business partners was effectively addressed by this Court in the course of the bankruptcy proceedings. It is simply incorrect to plead that Mr Ensom was held liable for 100 per cent of the debt and was bankrupted as a consequence of his failure to pay the full amount.

Windfall gain

[46]   Ms Beattie submits that Mr Ensom is essentially seeking to benefit from bankruptcy. She says that he will obtain a windfall gain if he is successful in bringing a damages claim again Morrison Kent.

[47]   Ms Beattie submits that had Mr Ensom not been bankrupted any damages obtained from Morrison Kent would have been payable to Downtown. It is Downtown (rather than Mr Ensom) that has ultimately suffered loss through these events. Further, there is no reason why Mr Ensom could not have brought proceedings against Morrison Kent at an earlier date, prior to his bankruptcy. He had in fact brought proceedings against Mr Macdonald.

[48]   I accept that, if Mr Ensom is successful in bringing a claim against Morrison Kent, having been discharged from bankruptcy, he would have the benefit of keeping the funds. I accept Ms Beattie’s characterisation of this benefit as a windfall gain. This counts against the application being granted.

Waivers

[49]   On 13 January 2017, Mr Ensom executed two waivers of independent legal advice.

[50]The First Waiver records that:

(a)Pomegranate was the borrower in the loan transaction;

(b)Mr Ensom gave an unlimited guarantee in respect of Pomegranate’s obligations to Downtown House;

(c)Morrison Kent was instructed to act for Pomegranate in relation to the loan transaction;

(d)Morrison Kent advised Mr Ensom to obtain independent and separate legal advice before entering into the loan documents;

(e)Mr Ensom declined to obtain independent and separate legal advice.

[51]The Second Waiver records that:

(a)Morrison Kent advised Mr Ensom to obtain independent legal advice before entering into the finance documents;

(b)Mr Ensom declined to obtain independent legal advice;

(c)Prior to Mr Ensom executing the Guarantee, Morrison Kent explained to Mr Ensom the effect of the Guarantee, that Mr Ensom would be liable for all money which may at any time be owing by Pomegranate to Downtown House and that Mr Ensom understood this.

[52]   Ms Beattie submits that Mr Ensom cannot claim Morrison Kent acted negligently in relation to the Guarantee, because he was advised to take independent advice and signed two waiver documents confirming that he voluntarily declined to do so.

[53]   In response, Mr Grove submits the standard waiver of independent legal advice relates solely to the finance documentation and Guarantee provided by Mr Ensom. He says that it has no bearing upon the negligence to be asserted in the proceeding. He says that a question for the Court at trial will be whether, given the risks Mr Ensom was undertaking without a contract with Mr Macdonald, any waiver of independent advice would be sufficient to discharge liability. Mr Grove suggests this will be a matter for expert evidence at trial.

[54]   I accept that in some cases a waiver will not be sufficient to discharge liability for negligence in the context of legal advice. However, I do not consider this to be

such a case. Mr Ensom declined to take independent and separate legal advice and signed two different waivers to this effect. The Second Waiver records that Morrison Kent specifically advised Mr Ensom on the risks he was undertaking. Mr Ensom nevertheless proceeded with his decision to take on 100 per cent personal liability under the Guarantee.

[55]   But in any event, as I have already found, this Court has previously limited Mr Ensom’s liability to 60 per cent of the debt, an amount he undoubtedly owed.

Capacity to pay costs

[56]   Ms Beattie observes that Mr Ensom is currently an undischarged bankrupt. She says that, in theory, he should not have any assets once discharged. Therefore, he will be unable to pay security for costs and/or costs of the proceeding in the proposed claim against Morrison Kent. Mr Ensom has not provided any evidence of litigation funding. Morrison Kent should not be required to participate in costly litigation with no prospect of obtaining a costs award if they succeed.

[57]   Mr Grove says that Mr Ensom will be discharged from bankruptcy in early 2023. It is speculative to say that Mr Ensom will not be able to pay security for costs and/or costs of the proceeding following the event. Moreover, Mr Ensom may argue that his financial position is a result of Morrison Kent’s negligence. At the hearing, Mr Grove said that Mr Ensom will be able to borrow money once discharged, and third-party funding may also be available.

[58]   Ms Beattie says in response that it is very difficult, if not impossible, to assess whether impecuniosity has resulted from the defendant’s actions and security for costs may still be required.21

21     Foni v Foliaki [2018] NZHC 3126 at [4]–[5].

[59]   In Link Technology, Grice J assessed the applicant’s capacity to pay the costs of a future proceeding as part of the overall assessment of fairness.22 The Judge observed:

[The applicant] is a bankrupt, the proceedings have not been prosecuted in a timely way There is no evidence of funding being put in place by [the

applicant], at its highest there are assurances through counsel that that will be the case that [the applicant] has sufficient funds to do so. That is a very different thing from specific arrangements concerning funding to enable this matter to be properly progressed by counsel.

[60]   The current case presents similar difficulties. Mr Ensom is a bankrupt. The claim against Morrison Kent has not been pursued promptly. Indeed, the limitation period has almost expired. I also assign little weight to Mr Grove’s assurances in the absence of any actual evidence of available funding.

[61]   As to Mr Grove’s point that Mr Ensom’s financial position is as a result of Morrison Kent’s negligence, merely arguing that the plaintiff’s claim if successful shows the plaintiff suffered losses caused by the defendant, does not make out a case for impecuniosity caused by the defendant.23 Further, as with the merits, assessment of this factor, short of a full hearing, is regularly acknowledged as being very difficult if not impossible.24

Conclusion

[62]   For all the above reasons I am not satisfied that it is fair that the litigation rights as sought should be vested in Mr Ensom.

[63]   Mr Ensom is not a person who has suffered loss as a consequence of a disclaimer by the OA. The litigation rights have no value. Mr Ensom cannot plead that any negligence on the part of Morrison Kent (denied) has caused him loss because his liability to Downtown House has already been limited to 60 per cent in earlier proceedings in this Court. Mr Ensom was alone responsible for that amount irrespective of any arrangement he had with Mr Macdonald. His claim therefore lacks merit.

22     Link Technology, above n 14, at [72].

23     DK Kelsey Ltd v Matakana 2008 Ltd [2016] NZHC 2634 at [10].

24     Meates v Taylor (1992) 5 PRNZ 524 (CA).

Result

[64]The application for vesting the litigation rights in Mr Ensom is refused.

Costs

[65]   I did not hear submissions on costs. Morrison Kent as the successful party is prima facie entitled to costs. If the parties are able to agree costs, a joint memorandum is to be filed within 25 working days of the date of this judgment. If costs cannot be agreed, Morrison Kent is to file and serve a memorandum within five working days of the date for the joint memorandum. Mr Ensom is to file and serve a memorandum in response within five working days of the date of service of Morrison Kent’s memorandum on him.

[66]   Costs submissions are not to exceed four pages (excluding any attachments). I will determine costs on the papers.

Gordon J