Federal Capital Limited v Simunovich
[2022] NZHC 2985
•15 November 2022
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2020-404-1317
[2022] NZHC 2985
BETWEEN FEDERAL CAPITAL LIMITED
Plaintiff
AND
PETER JOHN SIMUNOVICH
Defendant
Hearing: 8 June 2022 Appearances:
R Latton for the Plaintiff
M Tingey for the Defendant
Judgment:
15 November 2022
JUDGMENT OF ASSOCIATE JUDGE SUSSOCK
This judgment was delivered by me on 15 November 2022 at 4pm pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors/Counsel: Pidgeon Judd, Auckland
Fee Langstone, Auckland
R Latton, Barrister, Auckland M Tingey, Barrister, Auckland
FEDERAL CAPITAL LTD v SIMUNOVICH [2022] NZHC 2985 [15 November 2022]
Introduction
[1] The defendant has applied for strike out of the plaintiff’s claim or summary judgment of his defence.
[2] These proceedings concern two loans that the plaintiff, Federal Capital Limited, made to Seafish Tasmania Pty Ltd. The first loan of $200,000 was made in May 2019 and the second loan of $250,000 was made in June 2019.
[3] Both loans are in default. The plaintiff says that Mr Simunovich, the defendant, personally guaranteed Seafish’s obligations in respect of both loans. Federal seeks by this proceeding to recover the sums owed under both loans from Mr Simunovich.
[4] Mr Simunovich submits that the claim ought to be struck out or summary judgment awarded of his defence because Mr Simunovich did not provide a written guarantee in respect of either of the two loans as required by s 27(2) of the Property Law Act 2007 (PLA). There is therefore no basis for the plaintiff to recover from the defendant personally.
[5] Even if there were a guarantee by Mr Simunovich, the defendant further submits that the plaintiff does not have a right to enforce the guarantee without the consent of a third party which the plaintiff does not have.
[6] If the application to strike out or for summary judgment is not successful, the defendant applies for security for costs and submits that the proceedings ought to be stayed until the plaintiff has provided security.
[7] The security orders are sought on the basis that the plaintiff failed to pay a costs award for five weeks following demand, together with the fact that the plaintiff is a trustee in respect of the loan and has not provided sufficient evidence of the plaintiff’s assets.
[8] The defendant says the plaintiff’s claim lacks merit, is inconsistent with the sworn evidence previously provided and has little or no prospect of succeeding and so a security award is appropriate.
[9] Finally, as foreshadowed above, wasted costs are sought in respect of the plaintiff’s amendments to its pleadings.
Issues
[10]The issues are:
(a)Is it reasonably arguable that there is a written guarantee by the defendant in favour of the plaintiff in respect of the two loans as required by s 27(2) of the PLA?
(b)If so, is it reasonably arguable that the plaintiff can enforce the guarantee?
(c)If the proceedings are not struck out or summary judgment awarded to the defendant, should a security for costs award be made (and what is the appropriate quantum and timing)?
(d)Should wasted costs be awarded in respect of the plaintiff’s amendments to the statement of claim?
Legal principles relevant to the first two issues
[11] Before setting out the factual background, I set out below the legal principles relevant to strike out and summary judgment. There is no dispute between the parties as to the relevant principles.
Strike out principles
[12] Rule 15.1 of the High Court Rules 2016 provides that the Court may strike all or part of a pleading if it:
(a)discloses no reasonably arguable cause of action, defence or case appropriate to the nature of the pleading; or
(b)is likely to cause prejudice or delay; or
(c)is frivolous or vexatious; or
(d)is otherwise an abuse of the process of the court.
[13] The strike out principles are well settled. The Supreme Court in Couch v Attorney-General1 endorsed the following summary by the Court of Appeal in Attorney-General v Prince & Gardner:2
(a)a striking-out application proceeds on the assumption that the facts pleaded in the statement of claim are true;
(b)the causes of action must be so clearly untenable that they cannot possibly succeed;
(c)the jurisdiction is one to be exercised sparingly, and only in a clear case where the Court is satisfied it has the requisite material; and
(d)the fact that the application to strike out raises difficult questions of law and requires extensive argument does not exclude jurisdiction.
Summary judgment principles
[14] Whereas strike out is determined on the pleadings alone, determination of an application for summary judgment includes consideration of the affidavit evidence.
[15] Summary judgment in favour of a defendant is provided for in r 12.2(2) of the High Court Rules:
The court may give judgment against the plaintiff if the defendant satisfies the court that none of the causes of action in the plaintiff’s statement of claim can succeed.
1 Couch v Attorney-General [2008] NZSC 45, [2008] 3 NZLR 725 at [33] per Elias CJ and Anderson J.
2 Attorney-General v Prince & Gardner [1998] 1 NZLR 262 (CA) at 267.
[16] In Stephens v Barron3 the Court of Appeal summarised the longstanding Court of Appeal authority on defendant summary judgment, Westpac Banking Corp v M M Kembla New Zealand Ltd:4
(a)The defendant has the onus of proving on the balance of probabilities that the plaintiff cannot succeed. Usually this will arise where the defendant can offer evidence which is a complete defence to the plaintiff’s claim.
(b)An application for summary judgment will be inappropriate where there are disputed issues of material fact or where material facts need to be ascertained by the Court and cannot confidently be concluded from affidavits. It may also be inappropriate where ultimate determination turns on a judgment able to be properly arrived at only after a full hearing of the evidence.
(c)The Court must be satisfied that none of the claims can succeed. It is not enough that they are shown to have weaknesses. The assessment is not to be arrived at on a fine balance of the available evidence as would be appropriate at a trial.
(d)The residual discretion of the Court to refuse summary judgment would be properly invoked to avoid the oppression which would otherwise result if an application by a defendant for summary judgment would pre-empt a plaintiff exercising the right to amend the pleadings.
(e)Summary judgment should not be applied for unless the substantive merits of the case are clear and capable of summary disposal.
(footnotes omitted)
[17] Where a clear-cut issue of law is raised in a summary judgment application and the point can be decided as well on the application as at trial, there is no reason why the Court should not deal with the whole matter on the application for summary judgment.5
[18] The Court need not accept uncritically evidence that is inherently lacking in credibility, for example, where evidence is inconsistent with undisputed contemporary documents or is inherently improbable.6
3 Stephens v Barron [2014] NZCA 82 at [9].
4 Westpac Banking Corp v M M Kembla New Zealand Ltd [2001] 2 NZLR 298 (CA).
5 Verrall v Great Yarmouth Borough Council [1981] QB 202 at 215 and 218; and Pemberton v Chappell [1987] 1 NZLR 1 (CA) at 4.
6 Krukzeiner v Hanover Finance Ltd [2008] NZCA 187, [2010] NZAR 307 at [26]; citing Eng Mee Yong v Letchumanan [1980] AC 331 (PC) at 341.
Factual Background
[19] The proceeding relates to two loan agreements between the plaintiff, Federal Capital Limited (FCL), and Seafish Tasmania Pty Ltd (Seafish), dated 24 May 2019 and 12 June 2019. Both loans are in default and are accruing daily interest.
[20]Mr Stewart is the sole director and shareholder of FCL, a finance company.
[21] Mr Simunovich, the defendant, was at all relevant times one of three directors of Seafish with a 37.75 per cent shareholding. The plaintiff’s position is that Mr Simunovich guaranteed Seafish’s liability in respect of the FCL loans, and so FCL seeks to recover the sum owed from him personally. Mr Simunovich submits there is no written contract of guarantee as required by s 27(2) of the PLA and therefore there is no basis for the plaintiff to recover from him personally.
[22] The background to the FCL loans includes loans entered into between FE Investments Limited (FEI) and Seafish. Mr Stewart was a director of FEI at the relevant times. FEI is now in liquidation and receivership.
[23] Mr Stewart’s evidence is that Seafish and its associated entities and Mr Simunovich personally had borrowed over $5 million from FEI. These loans were secured including over Seafish’s fishing quota and by Mr Simunovich’s personal guarantee. Mr Simunovich does not dispute this in his reply evidence (although he includes the usual statement that just because he does not comment on a matter does not mean that it is accepted).
[24] Mr Simunovich’s guarantee of the FEI loans was contained in a Deed of Guarantee and Indemnity dated 25 March 2019 and was entered into by FEI as the lender, Seafish as the debtor and Mr Simunovich as guarantor (FEI Guarantee).
[25] Mr Stewart deposes that he ceased having any active involvement in FEI in about February 2019 (although his resignation as a director was not recorded on the Companies Register until mid-April 2019).
[26] In April 2019, Mr Stewart and Mr Simunovich discussed Mr Stewart arranging further loans for Seafish for up to $500,000 from four individual investors.
[27] Mr Stewart says that this was to remedy default on FEI’s loans in respect of which FEI was threatening enforcement action.
[28] On Tuesday, 9 April 2019, Mr Stewart emailed Mr Simunovich with the proposed arrangement, stating:
Peter
Please find proposed loan agreement for $500,000
What I propose to do is have you sign the agreement and return to me so that I can have each investor sign as the money is paid – so we will end up with 4 loan agreements for the individual amounts invested
We will then put the securities in place in due course Mel
[29] The proposed loan agreement was attached to the email with a blank space next to “lender”, Seafish recorded as the borrower and Mr Simunovich as the guarantor.
[30] Mr Simunovich executed a copy of the proposed loan agreement, signing with Mark Taplin as directors of Seafish and as a guarantor in his personal capacity. His evidence is that this was on the basis that Mr Stewart would arrange four separate loan agreements with four individual investors as outlined in the 9 April email.
Individual investor loans.
[31] In the event, Mr Stewart arranged two separate loans totalling $300,000 from individual investors ($100,000 from a Ms Hemus and $200,000 from the Roy and Fiona Champtaloup Trust) (Individual Investor Loans). Neither loan is at issue in these proceedings. The Individual Investor Loans included an indemnity clause, clause 15, by which Seafish as the borrower and Mr Simunovich as the guarantor, agreed to indemnify each lender. 7 This term was not included in the terms of the loans in issue.
7 See Champtaloup Family Trust v Simunovich [2021] NZDC 9886 regarding Mr Champtaloup’s loan.
The FCL Loans
[32] FCL was incorporated on 7 May 2019 with Mr Stewart as the sole director and shareholder.
[33] Following incorporation, two loans were made from FCL as lender to Seafish as borrower:
(a)for $200,000 dated 24 May 2019 (the First Loan Agreement); and
(b) for $250,000 dated 12 June 2019 (the Second Loan Agreement). (together the FCL Loans)
[34] The First and Second Loan Agreements are essentially identical in terms, with the exception of the loan amount.
[35] Mr Stewart deposes that by May 2019 he had located other investors to loan the remaining $200,000 of the $500,000 originally agreed on 9 April 2019 and that “he is sure that he discussed with Mr Simunovich that the loan would be from FCL acting as trustee for various investors”.
[36] Mr Stewart further deposes that also in May 2019, he was approached by another investor who wanted to invest an additional $250,000 for FCL to loan to Seafish. Mr Stewart says that Mr Simunovich confirmed that Seafish could use those funds as he was concerned that the $500,000 might not be sufficient to deal with the FEI arrears. Mr Stewart says that he advised Mr Simunovich that the additional
$250,000 would not be available until sometime in June 2019.
[37] Mr Stewart further deposes that he discussed with Mr Simunovich that the security arrangements needed to be changed slightly from the Individual Investor Loans because he was concerned that the security over the fishing quota would not be adequate for the sums to be loaned by FCL. This was because FEI’s loans were already secured over the quota and would rank ahead of any loans FCL made to Seafish. Mr Stewart was concerned that if Seafish defaulted on FEI’s loans, FEI might sell the quota and leave FCL with no recovery from that security. As a result, Mr Stewart says
he entered into discussions with FEI and Mr Simunovich. Mr Stewart’s evidence is that FEI and Mr Simunovich were keen to reach an arrangement because some of the funds being advanced by FCL were to be used to bring Seafish out of default on its loans from FEI.
[38] Mr Stewart’s evidence is that it was therefore agreed with both FEI and Mr Simunovich that FEI would share its existing securities for its Seafish loans with FCL. Mr Stewart deposes that “FEI was to hold its security on trust for FCL” and that the parties further agreed to regulate how the proceeds of the securities were to be split between FEI and FCL. Mr Stewart deposes the parties therefore agreed to enter into the Security Sharing Agreement (SSA). Mr Stewart’s evidence is that the securities that were agreed to be shared were:
(a)a general security agreement over all of Seafish’s present and after acquired property;
(b)a specific security over Seafish’s fishing quota; and
(c)a personal guarantee from Mr Simunovich.
[39] Mr Stewart confirms that, contrary to Mr Simunovich’s statement in his 12 April 2022 affidavit that he has not provided any guarantee to FCL, he in fact had discussions with Mr Simunovich specifying that Mr Simunovich would be providing a personal guarantee for the loans from FCL. Mr Stewart deposes that his recollection is that Mr Simunovich expected to be providing a personal guarantee and that the SSA was the vehicle by which that would occur.
[40] In his affidavit in response, Mr Simunovich says that he does not accept that he had the discussions as described by Mr Stewart above. Mr Simunovich maintains that he did not sign any guarantee or indemnity, or enter into any agreement in writing to guarantee any of Seafish’s debts to FCL. Mr Simunovich goes on to say “if this is what was intended and/or agreed as stated by Mr Stewart, then it would have been reflected in the documents signed (which it is not)”.
[41]Mr Simunovich continues in relation to the Security Sharing Agreement:
… I maintain that I never agreed that the guarantee that I had provided to FEI would apply to any advances that the plaintiff had made or might make in future to Seafish. At paragraph 37 in Mr Stewart’s affidavit he refers to me having signed the SSA in my capacity as personal guarantor. However, there is nothing in the SSA which extended that personal guarantee to Seafish’s debts (or future debts) to the plaintiff.
[42] The SSA was entered into on 31 May 2019. I discuss the SSA in further detail below.
[43] On 24 May 2019, whilst the SSA was still being negotiated, FCL entered into a loan agreement with Seafish for $200,000 which Mr Simunovich signed as director of Seafish and guarantor (First Loan Agreement).
[44] No advance appears to have been made under the First Loan Agreement until 31 May 2019. Mr Stewart says that this payment was made immediately following execution of the SSA, with the funds being advanced through the bank account of FE Securities Limited, a related company to FEI, as FCL did not yet have its own bank accounts.
[45] On the same day as the SSA was entered into, 31 May 2019, a Deed of Variation was also entered into relating to FEI’s loans to Seafish. Mr Simunovich says that he signed this document as guarantor (although the copy in evidence is not executed). Mr Simunovich deposes:
The purpose of the Deed of Variation was to enable the security sharing arrangement with the plaintiff and FEI, and to effect the necessary amendments to the loan agreements with FEI. Nothing in the Deed of Variation amended the terms or scope of my guarantor obligations. Clause C of the Deed of Variation states “… the guarantor also wishes to confirm that his obligations under the guarantee continue notwithstanding this Deed”.
This only refers to a continuing obligation, but does not amount to new or varied obligations being affected pursuant to the guarantee, which was only in favour of FEI. I was never requested to vary that guarantee to be in favour of the plaintiff.
[46] On or about 12 June 2019, FCL and Seafish entered into a second loan agreement for $250,000 (Second Loan Agreement).
[47] On 13 June 2019, the plaintiff advanced the second loan, again through FE Securities Limited. Mr Stewart says the advance could be made straight away because the SSA had already been executed by the time this loan was entered into.
[48] Mr Simunovich says that on or about 28 February 2020 SPH Quota Limited (SPH), a company related to Mr Simunovich, entered into an agreement to acquire FEI’s loans and securities (SPH Agreement). Mr Simunovich deposes in his affidavit dated 12 November 2020 that SPH paid approximately $4,400,000 to acquire the securities from FEI and he “was relying on the information from FEI, that by acquiring the securities, that [he] would be satisfying all obligations owing by Seafish”. Mr Simunovich says it was his honest belief that by making the payment, Seafish’s obligations to the creditors, including FCL, would be extinguished.
[49] Mr Stewart deposes that he and FCL were totally unaware that SPH and FEI had entered into the SPH Agreement until well after it had been executed. Mr Stewart says he has made direct enquiries of both the receivers of FEI and Mr Simunovich on behalf of SPH who have made it clear that neither FEI nor SPH will take any action to recover the funds advanced under the First Loan or Second Loan from Mr Simunovich.
[50] Mr Simunovich’s affidavit dated 12 April 2022 records that SPH, at the time of swearing, holds FEI loans for the principal sum of $1.52 million (which remains outstanding) plus interest as well as the FEI Guarantee. He further confirms that SPH has not consented to FCL pursuing Mr Simunovich in these proceedings.
Is it reasonably arguable that there is a written contract of guarantee by Mr Simunovich in favour of FCL in respect of the FCL Loans?
Written Contract of Guarantee Required
[51] Section 27(2) of the Property Law Act 2007 (PLA) requires that a contract of guarantee must be in writing and signed by the guarantor. In Brougham v Regan the Supreme Court considered a situation that counsel for Mr Simunovich submits is similar to here.8 In that case, Mr Brougham had signed the loan agreement as
8 Brougham v Regan [2020] NZSC 118, [2020] 1 NZLR 315.
guarantor but there were no operative clauses within the document imposing any obligation on him as guarantor. The Supreme Court held that the plain wording of s 27(2) required that “a contract of guarantee” must be signed by the guarantor, a more exacting requirement than s 2(2) of the 1956 Act. Section 27(4) defines a “contract of guarantee” as “a contract under which a person agrees to answer to another person for the debt, default, or liability of a third person.”
[52] The Supreme Court held that if the document signed by the person said to be a guarantor does not include an agreement to answer for the debt, default or liability of a third person, it is not a contract of guarantee and s 27(2) will not have been complied with. Counsel for Mr Simunovich relies on the following passage:9
In the present case, the Loan Agreement does not include any provision under which Mr Brougham agrees to answer to the Trustees for the debt, default or liability of the company. On the contrary, the Loan Agreement makes it clear that a separate document to that effect is required as a condition precedent to the making of the advance. In the absence of that further document, no guarantee liability arises. The decision of the Court of Appeal in this case was predicated on the finding that “[t]he Agreement (and thus the obligations being guaranteed) is in writing”. With respect to the Court of Appeal, we do not consider that means the loan agreement meets the requirements of s 27(2) in the absence of any provision in the Loan Agreement under which Mr Brougham agrees to guarantee the company’s obligations.
[53]The Supreme Court concluded this point by saying:10
… the consumer protection purpose of s 27(2) would not be met if a person who signs the document merely describing the signatory as a guarantor but otherwise containing no provisions of the purported guarantee was found liable as a guarantor. This is especially so where, as here, the document that was signed represents, first, that there would be two guarantors, but on the trustees’ case there was only one guarantor under the contract comprised in the loan agreement and, second, that the execution of a separate document was a condition precedent for the loan being made.
(footnote omitted)
[54]No guarantee liability was therefore found to have arisen.11
9 At [36].
10 At [38].
11 At [38].
Did Mr Simunovich sign a “contract of guarantee”?
[55] Counsel for Mr Simunovich submits that in this case, like in Brougham v Regan, there is no contract of guarantee. Counsel submits that the First and Second Loan Agreements do not include any clause or provision in which Mr Simunovich, agrees to answer for the debts of Seafish to FCL, Mr Simunovich only being named as guarantor. Counsel therefore submits that on the plain interpretation of s 27(2), and in accordance with the Supreme Court’s decision in Brougham, no contract of guarantee arises in respect of the FCL loans from merely being named as a guarantor.
[56] Furthermore, counsel submits that it is relevant that the First and Second Loan Agreements both contemplated that a guarantee specifically in favour of FCL would be executed as a condition of each loan but that no such document was ever executed.
[57] Mr Simunovich accepts that he provided a valid written guarantee and indemnity in favour of FEI in respect of the FEI loans, but submits that FCL is not able to rely on the FEI Guarantee in respect of the FCL Loans.
[58] In response, FCL says that the SSA can be relied on as the contract of guarantee as it records that FEI and Mr Simunovich agreed to share the FEI Guarantee with FCL.
[59] Mr Simunovich says this argument is untenable for a number of reasons including that there is no clause or provision in any of the relevant signed documents, including the SSA, which amended or varied the FEI Guarantee, such that it could be said to apply to the FCL loans. Mr Simunovich submits the SSA was an agreement to share any proceeds recovered through enforcement, but it did not give a right to FCL to enforce the FEI loans or securities, including the FEI Guarantee.
FCL Loan Agreements
[60] Beginning with the FCL Loan Agreements, although Mr Simunovich is named as guarantor, it is accepted that neither loan agreement contains any express guarantee or indemnity provisions. Notably, cl 14 of the FCL Loan agreements (in contrast with clause 15 of the Individual Investor Loans) reads:
14INDEMNITIES
14.1General
The Borrower agrees to indemnify and hold the Lender and any agent, and all persons employed or engaged by them, harmless against all costs …
[61] The FCL Loan Agreements record at clause 3.1 that it is a condition precedent that Seafish provide to FCL duly executed copies of the “Transaction Documents” which are defined at clause 1.1 to include the “Security Documents”. The “Security Documents” are listed in the First Schedule and include a “Deed of Guarantee and Indemnity from Peter John Simunovich in favour of the Lender guaranteeing the indebtedness of Seafish Tasmania Pty Limited.”
[62] Mr Simunovich says that both the First and Second Loan Agreements contemplated that the above security document would be executed as a condition of each loan. A General Security Agreement and a Specific Security Agreement were entered into but he says no guarantee or indemnity in favour of FCL was ever obtained. Although this was a condition precedent under the agreements, Mr Simunovich submits that this condition must have been waived. The plaintiff disagrees with this proposition and says the SSA was arranged instead.
[63]The FCL Loan Agreements in fact both record at clause 17.7:
17.7 Satisfaction of Conditions Precedent
The Lender may, in its absolute discretion, make an Advance to the Borrower notwithstanding that not all of the conditions precedent to that Advance have been satisfied. In any such event, no such conditions precedent shall be considered to have been waived except as expressly waived in writing by the Lender, and unless expressly so waived, performance of any such condition shall remain a condition subsequent to the Lender’s making of that Advance.
[64] There is no evidence of waiver of the condition precedent in writing and so it appears the obligation to enter into a guarantee may have remained following the advances made by FCL. This continuing obligation may provide a basis for seeking specific performance of Mr Simunovich’s obligation to sign a Deed of Guarantee and
Indemnity in respect of the FCL loans if the SSA does not provide appropriate security.12
[65] However, none of the clauses themselves amount to an agreement by Mr Simunovich to answer to the debts of Seafish. FCL submits that the SSA contains such an agreement and so I now consider its terms to see whether that is reasonably arguable.
The Security Sharing Agreement
[66] The SSA was entered into on 31 May 2019, between the execution of the two FCL Loans, with FEI as the Trustee, FCL and FEI as the Lenders, Seafish as the Borrower, and Mr Simunovich as the guarantor (SSA). The SSA is clearly in writing and has been signed by Mr Simunovich as guarantor. The sole issue is therefore whether it is reasonably arguable that under the SSA Mr Simunovich agrees to be liable for Seafish’s debts to FCL.
[67]The Introduction to the SSA reads:
A.The Borrower has existing loan facilities with FEI. Currently the Borrower is indebted to FEI for a total sum of $1,514,498.39 (plus interest and fees) as at 31 May 2019. Security for the loan facilities are:
a. First-ranking General Security Agreement (Australian PPSR FS No. 201710170116592 registered on 17 October 2017) over all the Borrower’s present and future acquired property; and
b. First-ranking Specific Security Agreement (Australian PPSR FS No. 201710170116603 registered on 17 October 2017) over Statutory Fishing Rights granted by the Australian Fisheries Management Authority and as set out in Certificate of Quota Statutory Fishing Rights Certificate No. 2979459.
B.Federal intends to make advances to the Borrower, of which $200,000 is to rank jointly and pari passu with FEI’s lending and the balance is to rank behind FEI’[s] lending.
C.FEI has agreed to share its existing securities with Federal.
DThe Lenders wish to enter into this agreement to regulate their security ranking.
E.The Trustee has agreed to act as trustee of the Lenders for the purposes of holding the securities.
12 See discussion in Brougham v Regan, above n 8, at [64] to [67], noting that entry into a guarantee appears to have been a simple condition precedent in that case.
[68] Mr Simunovich submits that the “Introduction” is simply background and not an agreement. This appears to be the case as it is only following the Introduction that the SSA records “It is agreed.”
[69]Clause 2.1 of the operative part of the SSA reads however:
2.1 Authority of Trustee
(a)Each Lender irrevocably appoints and authorises the Trustee to act as its administrative agent and security representative (and to enter into and hold the Security Documents as trustee for their benefit) under the Transaction Documents with such powers as are expressly delegated to the Trustee by the Transaction Documents together with those other powers as are reasonably incidental to those powers.
(b)Without limiting the generality of clause 2.1(a) and subject to the provisions of the Transaction Documents, the Trustee will act as agent for the Lenders in:
(i)receiving payments from the Obligors except as expressly provided in this Deed;
(ii)making demand or claim for amounts payable under the Transaction Documents;
(iii)enforcing or attempting to enforce, and exercising the rights of the Lenders against the Obligors under, the Transaction Documents; and
(iv)issuing and receiving notices under the Transaction Documents on behalf of the Lenders.
(c)The Trustee shall have no duties or responsibilities except those expressly set forth in the Transaction Documents and this Agreement.
[70] “Security Documents” are defined in clause 1.1 of the SSA to include the FEI Guarantee given by Mr Simunovich, and “Transaction Documents” as “this Agreement, the Loan Agreement for each of the Lenders, the Security Documents and each other agreement, present or future, required or contemplated by or relating to any of them”.
[71] As set out above, the defendant’s position is that there is no clause or provision in the SSA which provides that Mr Simunovich agrees to guarantee Seafish’s debts to FCL and nor did the SSA amend the terms of the existing FEI Guarantee.
[72] However, clause 2.1 says that the Trustee (FEI) will both “enter into” and “hold” the Security Documents for the Lenders’ (being FEI and FCL) benefit. The Security Documents listed in the Schedule to the SSA include the FEI Guarantee.
[73] In my view this could be interpreted as meaning that the FEI Guarantee was to be shared. The timing of the advances made under the First and Second Loan Agreements supports this interpretation, with neither advance made until after the SSA was executed, despite the First Loan Agreement having been entered into five days prior to the execution of the SSA. Mr Simunovich does not dispute that the advance was made after the SSA was executed in his reply affidavit, and nor does he refer to chasing up the advance prior to execution of the SSA.
[74] Furthermore, other clauses in the SSA support the interpretation above. For example, clause 2.2 includes:
…
(c)The Lenders agree that while any of FEI’s Total Commitment Security is outstanding, only FEI has the ability to instruct the Trustee to make demand or take any action to enforce against an Obligor any of the powers, rights or remedies exercisable under the Security Documents. After FEI’s Total Commitment Security is repaid, only Federal has the ability to instruct the Trustee to make demand or take any action to enforce against an Obligor any of the powers, rights or remedies exercisable under the Security Documents.
[75]“Total Commitment Security” is defined as meaning:
… in relation to each Lender, the aggregate principal amount of the Relevant Lender’s loan to the Borrower and which amount is secured under this Deed.
[76] “Obligor” is defined in clause 1.1 to include “the Borrower and the Guarantors” with Mr Simunovich defined as the Guarantor.
[77] With these definitions, clause 2.2 appears to proceed on the basis that FCL will be able to enforce against Mr Simunovich after FEI’s Total Commitment Security is repaid. If it was not intended for the FEI Guarantee to be shared, then this clause would not have referred to “Security Documents”, as these are only the documents listed in Schedule 1 of the SSA and do not include any separate Deed of Guarantee and Indemnity entered into by Mr Simunovich in respect of the FCL Loans. The wording of the definition of “Total Commitment Security” and its reference to “which amount is secured by this Deed” allows for an argument that the correct interpretation of clause 2.1 is that the FEI Guarantee is to be shared with FCL.
[78] Clause 5, highlighted by counsel for Mr Simunovich as the key operative provision, provides for the order of priority for the sharing of proceeds of the securities. Counsel for Mr Simunovich submits that the reference in Recital C of the SSA to FEI agreeing to share its existing securities is a reference to clause 5 and the sharing of proceeds. However, Recital C does not refer to clause 5 and there is no apparent reason to confine its meaning in this way.
[79] Furthermore, clause 5.2 provides that the order of priority will first be for payment of the Trustee’s costs and then:
…
(b)second, in respect of any Proceeds or Security Proceeds received pursuant to any Security Document entered into by the Borrower in relation to its indebtedness under each relevant Loan Agreement:
(i)first, in or towards payment to each Lender (pro rata to its Pari Passu Commitment Security) of the Interest Indebtedness and Fees due to it until its Interest Indebtedness and all such Fees are paid;
(ii)second, in or towards payment to each Lender (pro rata to its Pari Passu Commitment Security) of its Principal Indebtedness until its Principal Indebtedness is paid;
[80]“Pari Passu Commitment Security” is defined in clause 1.1 as meaning:
… in relation to FEI, the aggregate principal amount of the FEI’s loan to the Borrower and in relation to Federal the sum of $200,000 and which amount is secured under this Deed;
[81] Again, the reference in the definition of Pari Passu Commitment Security to “and which amount is secured under this Deed” in respect of an amount owed to FCL supports an interpretation that the FEI Guarantee is being shared under the SSA.
[82] The interpretation of the SSA is by no means straight forward. But as this is an application for strike out or summary judgment, the question is whether it is reasonably arguable that Mr Simunovich signed a contract of guarantee. The key point in my view is that the landscape of agreements and the SSA itself are significantly more complex than in Brougham and it appears to be reasonably arguable that there is
a written contract of guarantee. As Katz J observed in Ferrer-Aza v Nzone Race Management Ltd:13
… it is well established that factual matrix evidence is relevant (indeed sometimes critically so) to the contractual interpretation exercise. As a result, questions of contractual interpretation may not be able to be adequately addressed in a summary judgment context, particularly where there is either insufficient contextual evidence before the Court, or it is necessary to resolve disputes regarding the matrix of fact.
[83] Counsel for Mr Simunovich referred to the Supreme Court’s decision in Bathurst Resources Ltd v L&M Coal Holdings Ltd, relying in particular on the statement that “New Zealand courts have continued to exclude evidence of uncommunicated subjective intent as irrelevant to the objective approach to contractual interpretation”.14 Counsel for Mr Simunovich submits that much of Mr Stewart’s evidence for FCL is exactly that, evidence of uncommunicated subjective intent, and so ought not to be considered in interpreting the contract.
[84] I accept that evidence of uncommunicated subjective intent is irrelevant but consider that the words of the SSA itself and the evidence of timing of the advance of the first loan support a finding that it is reasonably arguable that there is a contract of guarantee.
[85] Counsel for Mr Simunovich further submits that the contracts just need to be read on their terms and that evidence of oral agreements cannot be relevant because that would undermine s 27(2) of the PLA. I agree and note that counsel for FCL emphasised that FCL was not seeking to rely on any oral agreement. The interpretation of the contract however needs to take place in its context and that context may include extrinsic evidence. As the Supreme Court held in Bathurst:15
[55]The approach to be taken to contractual interpretation is governed by the law of contract, but it is the law of evidence that ensures the trial court’s inquiry focusses only on evidence that will materially assist in applying that test. The rules of evidence do not, therefore, operate independently of the law of contractual interpretation. Rather, the law of evidence serves the law of contract. As we discuss more fully below, it is the law governing the interpretation of contracts which fundamentally shapes what is relevant, and what is therefore admissible, extrinsic evidence.
13 Ferrer-Aza v Nzone Race Management Ltd [2016] NZHC 885 at [44].
14 Bathurst Resources Ltd v L&M Coal Holdings Ltd [2021] NZSC 85, [2021] 1 NZLR 696 at [48].
15 Per Winkelmann CJ and Ellen France J, confirmed by the majority at [232(a)].
[56]The statement that the issue of admissibility is determined by the law of evidence is not without controversy. It has sometimes been suggested that the parol evidence rule governs the admissibility of extrinsic evidence. The parol evidence rule provides that when parties have reduced a contract to writing, extrinsic evidence is inadmissible to add to, vary or contradict the writing. The issue of whether the rule is properly one of evidence or of substantive law has been hotly debated. But it is well settled that the parol evidence rule does not govern the admissibility of extrinsic material in relation to contractual interpretation, as the interpretation of a contract does not involve any change to or overruling of the written terms.
(footnotes omitted)
[86] The above dicta confirms that it is not appropriate in the circumstances of this case where the interpretation of the contractual terms is in issue, to grant the application for strike out or summary judgment prior to discovery and proper consideration of the evidence. Mr Simunovich’s application for strike out or summary judgment cannot therefore succeed on this first basis that it is not reasonably arguable that Mr Simunovich signed a contract of guarantee.
Is it reasonably arguable that FCL can enforce the guarantee?
[87] In any event, Mr Simunovich submits that FCL’s claim cannot succeed because FCL cannot enforce the FEI Guarantee without SPH’s consent and SPH has not consented.
[88] Mr Simunovich’s argument is that FCL is only entitled to take action under clause 4.2 of the SSA if FEI, as the Trustee, having received instructions from all lenders (being FCL and FEI), fails to do so within a reasonable time. Mr Simunovich submits there is no evidence that FEI has received instructions from all lenders under the SSA. Rather, Mr Simunovich says, FCL’s own evidence is that FEI will not take recovery action against Mr Simunovich. In any event, Mr Simunovich submits that, as a result of the SPH assignment (which in effect has deemed SPH a Lender under the SSA pursuant to that assignment), FCL cannot seek to enforce its rights under the SSA (including any rights under the FEI Guarantee) without SPH also having given instructions to the Trustee to do so.
[89] In response, FCL says FCL is permitted to take action itself under the Security Documents, including the FEI Guarantee, pursuant to clause 4.2 of the SSA which allows FCL to enforce itself if the Trustee fails to do so within a reasonable time of being requested.
[90]Clause 4 reads:
4.Trustee for Lenders and exercise of the Security Rights
4.1Trustee to exercise Security Rights
Each Lender authorises the Trustee to exercise the Security Rights on its behalf. Each Lender agrees that the Trustee is, subject to clause 5, solely empowered to exercise the Security Rights.
4.2Enforcement by Lenders
Nothing in clause 5 prevents a Lender from taking actions which may be open to it under the Security Documents (which it has the benefit of) if the Trustee, having received instructions from all the Lenders, fails to do so within a reasonable time.
[91] FCL submits that the reliance on the SPH assignment is misplaced as FEI was obliged to provide a Notice of Assignment and complete a Deed of Accession satisfactory to the Trustee (now the receiver of FEI). There is no evidence that this has been done. Nor is there any evidence of the Trustee accepting such a transfer. That means on the evidence before the Court, the Trustee is still able to treat FEI as the Lender under the SSA. It is therefore FEI not SPH that needs to instruct the Trustee.
[92] In any event, FCL submits that even if the assignment of the loans has been validly completed that would not assist Mr Simunovich as SPH is a related party to Mr Simunovich. If the SSA has been validly assigned to SPH, conferring the contractual discretion in clause 4.2 on SPH, FCL submits that it is established law in New Zealand that:16
… absolute discretions in a contract must be exercised in a way that is not capricious, arbitrary or unreasonable, and that an apparently unfettered discretion may be subject to an implied term of reasonableness and the need to give business efficacy to the contract.
16 C & S Kelly Properties Limited v The Earthquake Commission [2015] NZHC 1690 at [68], and see discussion at [66]–[74].
[93] FCL submits that it is at least arguable that SPH (or more particularly Mr Simunovich as its guiding mind) has exercised its contractual discretion capriciously. SPH has no reason to refuse to instruct the Trustee to pursue the guarantee, except to ensure that Mr Simunovich is not held liable under it. FCL submits that is the very definition of capriciousness.
[94] The principles relating to the exercise of contractual discretions have recently been considered in Woolley v Fonterra17 and Canaan Farming Dairy Ltd v Westland Dairy Company Ltd.18 For the purposes of this strike out and summary judgment application, I adopt Doogue J’s summary of the position from Canaan:19
(a)absolute contractual discretions may not be exercised in a way that is arbitrary, capricious, or unreasonable, having regard to the provisions of the contract;
(b)the meaning of good faith in this context is the parties to the contract must be true to the ideal that lies behind the contract or, in other words, “the reasonable expectations of honest men must be protected”; and
(c)an approach focussed on the contract itself, a broad view of the purpose of the venture, and the uncertainty the contractual discretion was designed to manage ensures the Court is focused on giving effect to the bargain the parties made.
[95] As is clear from the above, whether the exercise of the contractual discretion can be challenged will need to be considered after a full hearing, after discovery has taken place, including to establish whether the assignment to SPH was valid. At this stage it is at least arguable that FCL may be able to enforce the FEI Guarantee. The defendant’s application for strike out or summary judgment cannot therefore succeed on this basis either.
[96] Counsel for Mr Simunovich further submitted at the hearing that FCL is unable to enforce the guarantee in any event until FEI had been paid in full pursuant to clause 2.2(c) of the SSA. Clause 2.2(c) records FEI and FCL’s agreement that while FEI’s Total Commitment Security is outstanding, only FEI has the ability to instruct the Trustee to make demand or take any action to enforce against an Obligor.
17 Woolley v Fonterra [2021] NZHC 2690 at [411]–[461].
18 Canaan Farming Dairy Ltd v Westland Dairy Company Ltd [2022] NZHC 2524 at [115]–[122].
19 At [122].
[97] This clause appears only to prevent FCL instructing the Trustee to enforce, as opposed to FCL directly enforcing itself, which appears to be provided for in clause
4.2 as discussed above. In any event, there is insufficient evidence on whether the Total Commitment Security has been repaid. The status of SPH and whether the assignment is valid will also be relevant to this question. Again, I do not consider this is a valid basis for strike out or summary judgment.
Should security for costs be ordered?
[98] If the proceedings are not struck out or summary judgment awarded to the defendant, Mr Simunovich seeks an order for security for costs.
[99] Mr Simunovich relies on the fact that on 8 November 2021 a costs order was made by Venning J in favour of Mr Simunovich.20 FCL was required to pay $9,352 for all steps relating to its withdrawn application for summary judgment. Demand was made by Mr Simunovich’s solicitor for those costs to be paid on 11 November 2021. FCL’s solicitors requested Mr Simunovich’s solicitors’ trust account deposit slip to allow that to be paid but, despite being provided, FCL did not pay the costs awarded or give any explanation for non-payment. Counsel for Mr Simunovich says that a security for costs application was therefore filed by Mr Simunovich on 13 December 2021. The costs awarded were paid by FCL on 17 December 2021 after the plaintiff had been served with the application.
[100] Mr Stewart, FCL’s director, says in his affidavit that he did not realise that the costs award had to be paid immediately but that when he was informed of the need to do so, FCL paid promptly.
[101] Counsel for Mr Simunovich says FCL’s belated suggestion that late payment was due to a misunderstanding is disingenuous, lacks credibility and there is no objective evidence verifying it. Similarly, Mr Simunovich says the unsubstantiated assertions that FCL is a stable company and able to pay any future costs award in this proceeding lacks credibility. There is no objective evidence of the financial position
20 Federal Capital Limited v Simunovich HC Auckland CIV-2020-404-1317, 8 November 2021 (Minute of Venning J).
of FCL which it is submitted could easily be obtained, such as a reference to realisable funds held in bank accounts or similar liquid assets.
Security for costs principles
[102]Rule 5.45 of the High Court Rules provides:
5.45 Order for security of costs
(1)Subclause (2) applies if a Judge is satisfied, on the application of a defendant,—
…
(b)that there is reason to believe that a plaintiff will be unable to pay the costs of the defendant if the plaintiff is unsuccessful in the plaintiff’s proceeding.
(2)A Judge may, if the Judge thinks it is just in all the circumstances, order the giving of security for costs.
(3)An order under subclause (2)—
(a)requires the plaintiff or plaintiffs against whom the order is made to give security for costs as directed for a sum that the Judge considers sufficient—
(i)by paying that sum into court; or
(ii)by giving, to the satisfaction of the Judge or the Registrar, security for that sum; and
(b)may stay the proceeding until the sum is paid or the security given.
[103] An application under r 5.45 involves the Court addressing the following questions (per Busch v Zion Wildlife Gardens (in rec and in liq)):21
(i)Has the applicant satisfied the court of the threshold under r 5.45(1)?
(ii)How should the court exercise its discretion under r 5.45(2)?
(iii)What amount should security for costs be fixed at?
(iv)Should a stay be ordered?
21 Busch v Zion Wildlife Gardens (in rec and in liq) [2012] NZHC 17 at [2].
[104] The Court of Appeal in McLachlan Ltd v MEL Network Ltd cautioned with respect to the discretion under r 5.45:22
… Whether or not to order security and, if so, the quantum are discretionary. They are matters for the Judge if he or she thinks fit in all the circumstances. The discretion is not to be fettered by constructing “principles” from the facts of previous cases.
[105] In relation to the threshold test, that there is reason to believe the plaintiff will be unable to pay costs, the threshold will be met where there is credible evidence of surrounding circumstances from which it may be reasonably inferred that the party will be unable to pay the costs.23 There is no particular standard of proof, but the court must reach a decision on the evidence before it. This can include reasonable inferences drawn from surrounding circumstances,24 but an ability to pay must be distinguished from a willingness to pay.25
[106] Having considered the file, it appears that following demand for payment by Mr Simunovich’s counsel on 11 November 2021, a case management conference by telephone was held on 9 December 2021 where Associate Judge Taylor required the costs to be paid by 19 December 2021 or the proceeding would be stayed. This had in fact been proposed by counsel for Mr Simunovich in a draft unsigned consent memorandum filed on behalf of the defendant on the day of the conference.
[107] Associate Judge Taylor’s minute records that Mr Simunovich had expressed concern that the plaintiff would not be able to meet the costs award and had requested that FCL make a proposal to pay security for costs. FCL declined to make a proposal and so Associate Judge Taylor recorded that Mr Simunovich would need to make an application for security for costs if he wished to pursue the application.
[108] An application for security for costs was then filed on 13 December 2021, prior to the date by which Associate Judge Taylor directed the costs award be paid. As referred to above, the costs award was then paid on or about 17 December 2021.
22 McLachlan Ltd v MEL Network Ltd (2002) 16 PRNZ 747 (CA) at [13].
23 Concorde Enterprises Limited v Anthony Motors (Hutt) Ltd (No 2) [1977] 1 NZLR 516 (SC) at 519.
24 Totara Investments v Abooth Ltd HC Auckland CIV-2007-404-990, 4 March 2009 at [28].
25 See the Court of Appeal’s comments in Murray v Wishart [2014] NZCA 461 at [163].
[109] In the circumstances, I do not consider that the slight delay in paying the costs award is sufficient to satisfy the threshold of impecuniosity. A lack of promptness in payment does not necessarily evidence an inability to pay without other supporting circumstances. None are in evidence here. Moreover, the fact that the costs award was paid (even if slightly late) in fact supports the point that the plaintiff has sufficient funds.
[110] Counsel for Mr Simunovich emphasises that FCL is acting as a trustee in respect of the FCL loans. But there is no evidence that this is always the way in which FCL operates. Mr Stewart’s undisputed evidence is that the company is financially stable and is able to pay any future costs award made in this proceeding. Mr Stewart deposes that these are the only delinquent loans on FCL’s books and that they do not materially affect its financial position, even if recovery is unsuccessful.
[111] No evidence bringing this financial ability into question has been filed. In the circumstances, I am not satisfied that there is reason to believe that FCL will be unable to pay the defendant’s costs if FCL is unsuccessful.
[112] As the threshold in r 5.45(1) has not been met, Mr Simunovich’s application for security for costs cannot proceed further and so is declined.
Application for wasted costs
[113] Mr Simunovich applies for wasted costs pursuant to r 7.77(8) of the High Court Rules following the filing of the second amended statement of claim on 8 December 2021.
[114] Rule 7.77(8) provides that when an amended pleading has been filed, the party filing the amended pleading “must bear all the costs of and occasioned by the original pleading … unless the court otherwise orders”.
[115] The wasted costs sought amount to $2,868 in total, being 50 per cent of 2B scale costs sought for the commencement of the defence ($1,195), and costs on a 2B basis for the filing of a memorandum ($956) and appearance at a case management conference ($717) on 9 December 2021.
[116] FCL accepts that there has been significant change to the pleadings, with Mr Stewart explaining in his affidavit dated 12 May 2022 that his personal emails had been caught up in the receivership and liquidation of FEI and the liquidation of FE Securities Limited.
[117] In the circumstances, I consider it is appropriate for a wasted costs order to be made. The case management conference however related to the payment of the previous costs award and the defendant’s intended application for security for costs as well as the amended pleading. Furthermore, the issues arising in relation to the amended pleading related to particulars rather than “costs ... occasioned by the original pleading” as r 77.7(8) provides for. I therefore reduce the amount claimed for these two steps by 50 per cent to reflect that.
[118]A wasted costs order is therefore made for $2,031.50 (comprising $1,195 plus
$478 ($956 x 0.5) plus $358.50 ($717 x 0.5)).
Result
[119]I order:
(a)The defendant’s application for strike out and/or summary judgment is declined.
(b)The defendant’s application for security for costs is declined.
(c)The defendant’s application for wasted costs pursuant to r 7.77(8) is granted in the amount of $2,031.50.
Costs
[120] The plaintiff has succeeded except in respect of the application for wasted costs. My preliminary view is that FCL is entitled to costs on a 2B basis. I ask the parties to confer and attempt to agree costs. If that is not possible, memoranda not exceeding five pages (excluding schedules) may be filed by the plaintiff within 20 working days of this judgment and the defendant within 30 working days. Given the
timing of these dates and the Christmas break, memoranda may be filed seeking an extension, particularly if progress is being made on reaching agreement.
Associate Judge Sussock
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