FTG Securities Limited v Crown Asset Management Limited
[2020] NZHC 2007
•10 August 2020
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE
CIV-2018-404-1710
[2020] NZHC 2007
BETWEEN FTG SECURITIES LIMITED
Plaintiff
AND
CROWN ASSET MANAGEMENT LIMITED
First Defendant
AND
BANK OF NEW ZEALAND
Second Defendant
Hearing: 8–10 June 2020 Counsel:
A J Forbes QC and H M Weston for Plaintiff R P Coltman and K Rowe for First Defendant
K M Paterson and A E Cao for Second Defendant
Judgment:
10 August 2020
Reissued:
21 August 2020
JUDGMENT OF OSBORNE J
This judgment was delivered by me on 10 August 2020 at 4.00 pm pursuant to Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar Date:
FTG SECURITIES LIMITED v CROWN ASSET MANAGEMENT LIMITED [2020] NZHC 2007 [10 August 2020]
TABLE OF CONTENTS
What this case is about[1]
The sequence of events
The securities “assigned” to FTG[10]
Tuam’s receivership and liquidation[17]
Contractual dealings between FTG and BNZ – June 2012 to November 2015[29] Contractual dealings between FTG and CAML – March 2015 to June 2015[34] FTG commences the -659 proceeding against BNZ and the receivers[46] FTG commences a new (this -1710) proceeding[59]
FTG’s pleading of its claim[65]
The context[73]
BNZ’s pleading of its defence[77]
CAML’s pleading of its defence[85]
Legal principles – interpretation of the Priority Deed[87]
The reason for non-compliance with cl 15[90]
Equitable assignment of contractual rights
The law[98]
Contractual prohibitions on assignment – impact on transfer of contractual rights [103] The available constructions of a prohibition clause[110] Contractual prohibitions on assignment – impact on transfer of equitable interests [112] The Chester Legal Aid case[134]
Discussion of the legal principles[143]
Application of the principles to the prohibition in cl 15[152]
Procedural relief sought by FTG[164]
FTG’s enforcement of rights against CAML
The declaration sought by FTG in relation to equitable assignment[169]
The declaration sought by FTG in relation to proceeds received by CAML[172]
FTG’s enforcement of rights against BNZ[183]
Interpretation of the Priority Deed[184]
The application of equitable and other defences generally[187]
The clean hands defence
Equitable principles[190]
The transaction[201]
FTG’s conduct [205] Costs
[213]
Result
[214]
What this case is about
[1] This case concerns the debts incurred and securities given by a property development company, Tuam Ventures Ltd (Tuam), now both in receivership and in liquidation.
[2] By 2007, Tuam had two secured creditors, namely Bank of New Zealand (BNZ), the second defendant in this proceeding, and Canterbury Finance Ltd (CFL). BNZ has continued to hold its interests through to today. The interests of CFL passed to the first defendant, Crown Asset Management Ltd (CAML).
[3] The plaintiff – FTG Securities Ltd (FTG) – in 2015 sought to acquire from CAML its bundle of debt and second-ranking security interests. For that purpose, FTG entered into a Deed of Transfer of Debt and Securities (the Transfer Deed) dated 15 June 2015 with CAML.
[4] As between BNZ and CAML, subordination and rights of priority were the subject of a Deed of Subordination and Priority (the Priority Deed) which Tuam, BNZ and CFL had entered into in July 2007. In general terms, BNZ had the first-ranking security of $7.5 million (together with other sums) and CAML’s second-ranking security was for $10 million (together with other sums). In 2015, there was little or no confidence that realisation out of Tuam would be sufficient to discharge the debt owed to BNZ.
[5] It transpired, as a result of funds subsequently received by Tuam, that there were more than enough funds to satisfy the debt owed to BNZ as the holder of first- ranking securities. FTG considers that BNZ has also claimed more than its entitlement under the Priority Deed.
[6] A difficulty for FTG in pursuing those arguments has arisen because, when taking an assignment of CAML’s interests, it knowingly participated in an assignment that was contrary to an express prohibition on assignment without consent (the consent requirement) in terms of the Priority Deed.1 CAML, for its part, was not prepared to
1 FTG Securities Ltd v Bank of New Zealand [2019] NZCA 16, [2019] 3 NZLR 607 at [62] [Court of Appeal judgment].
lend its name to any claim of FTG against BNZ. As a result of the breach of the consent requirement, FTG’s first attempt to enforce its asserted priority rights failed. In 2018 it was found by this Court (in what I will call “the -659 proceeding”) (and confirmed on appeal) that FTG was unable to enforce or rely on the Priority Deed as against BNZ, because the breach of the requirement for consent to any assignment had rendered it ineffective as a statutory assignment (under the Property Law Act 2007).2
[7] Costs and disbursements were awarded to BNZ by the High Court in the -659 proceeding in the sum of $43,133.3
[8] On the appeal the Court of Appeal awarded standard costs and disbursements.4 FTG has not paid either sum to BNZ.
[9] In this subsequent proceeding (the -1710 proceeding), FTG asserts that there was nevertheless an effective equitable assignment. FTG says that it is entitled to enforce a second priority either by joining CAML (as it has) as second defendant in this proceeding or by a requirement that CAML as a plaintiff commence a claim against BNZ for priority entitlement, with the fruits of that claim then flowing to FTG. FTG seeks declarations as to such entitlements.
The sequence of events
The securities “assigned” to FTG
[10] Tuam was involved in property development in Christchurch. It was the subsidiary of another company, Property Ventures Ltd (PVL). PVL was one of the principal businesses associated with a property developer, David Ian Henderson. In the course of its activities from 2005, Tuam obtained finance from CFL and BNZ.
[11] In this Court’s 2018 judgment, Gendall J set out an historical summary of security arrangements entered into by Tuam, which I adopt:5
2 FTG Securities Ltd v Bank of New Zealand [2018] NZHC 1516 [High Court judgment]; on appeal, see Court of Appeal judgment, above n 1; leave refused to appeal to the Supreme Court in FTG Securities Ltd v Bank of New Zealand [2019] NZSC 93.
3 FTG Securities Ltd v Bank of New Zealand [2018] NZHC 2108 at [11].
4 Court of Appeal judgment, above n 1, at [64].
5 High Court judgment, above n 2.
[21] BNZ advanced the sum of $7.5 million to [Tuam] in 2007 (the BNZ Facilities). BNZ’s securities for the BNZ Facilities were to include a registered mortgage over a property owned by [Tuam] at 179 Tuam Street, Christchurch (179 Tuam), the Priority Deed which provided BNZ with a priority amount of
$7.5 million plus two years’ interest and costs, a new guarantee from Mr Henderson and PVL, and a perfected security interest in all the present and after acquired property of [Tuam] (the GSA).
[22] The advance was made at that point to enable [Tuam] to complete a commercial development of 179 Tuam which was part of Mr Henderson’s SOL Square bar and hospitality precinct.
…
[24] BNZ registered a Financing Statement on the PPSR in respect of [Tuam] and a Financing Change Statement subordinating CFL’s security interests in all of [Tuam]’s present and after acquired personal property to BNZ. A further advance to [Tuam] of $1,143,330 was made by BNZ on about 9 November 2007 but this was ultimately repaid.
[12] It was when BNZ advanced to Tuam the $7.5 million in 2007 that Tuam, BNZ and CFL (on 20 July 2007) entered into a first Deed of Subordination and Priority. The Priority Deed with which this case is concerned was a replacement deed entered into on 25 February 2008 containing some variations to the priority arrangements, but being the same as the previous deed in all material terms.
[13] The Priority Deed contained a prohibition against assignment by one secured party without consent of the other secured party. In particular, cl 15 provided:
TRANSFER OR ASSIGNMENT
15. Neither Secured Party will transfer or assign any interest or right in or to that Secured Party’s Securities to any person unless that person has entered into a deed or contract in a form approved by the other Secured Party (which approval will not be arbitrarily or unreasonably withheld or delayed) by which that person agrees to be bound by the Document.
[14] While the “Secured Parties” under the Priority Deed were initially BNZ and CFL, the CFL interest subsequently passed to CAML.6
[15] Tuam defaulted on the terms of its facilities, leading the BNZ to appoint receivers in 2009 (as to which see below at [17]).
6 The CFL interest was purportedly assigned to CAML, at least arguably in breach of cl 15, with the assignment subsequently validated by agreement reached between the relevant parties in 2019.
[16] On 15 June 2015, CAML and FTG entered into the Transfer Deed. By the Transfer Deed, CAML purported to assign to FTG all its right, title and interest in the debt and securities (including the Priority Deed). By the Transfer Deed, FTG “acknowledged” that it was bound by the provisions of the Priority Deed. FTG registered a financing charge statement on 2 July 2015.
Tuam’s receivership and liquidation
[17] BNZ on 27 July 2009 (pursuant to BNZ’s GSA) appointed Stephen John Tubbs and Colin Anthony Gower as receivers and managers of Tuam, following default by Tuam. For a period, the receivers received rental income from 179 Tuam as tenants continued to trade and pay rent.
[18]Beginning in May 2010 the receivers made a series of payments to BNZ.
[19] 179 Tuam Street sustained some damage in the 4 September 2010 earthquake and major damage in the 22 February 2011 earthquake. The buildings were no longer occupied. BNZ was unable to proceed with an intended mortgagee sale of the property. The receivers lodged insurance claims with AAI in relation to property and business damage, which became the subject of protracted dispute.
[20] On 9 February 2012, this Court appointed Robert Bruce Walker as liquidator of Tuam.
[21] In October 2014, Tuam entered into a sale and purchase agreement of a modest portion of the property to the Crown as a result of which the receivers in December 2014 made payment of the proceeds of sale to BNZ.
[22] In September 2016, Tuam reached a settlement of the material damage portion of its insurance claim.
[23] In December 2016, BNZ as mortgagee of 179 Tuam Street sold the property to Waihapu Ltd.
[24] In March 2017, Tuam settled its business insurance claim, final proceeds of which were received by the receivers in February 2018.
[25] In April 2018, the receivers filed an originating application for directions under the Receiverships Act 1993 (the -229 proceeding). In that proceeding, the receivers seek orders as to the priorities for distribution of the surplus arising from the receivership of Tuam.
[26] In August 2019, Mr Walker as liquidator of Tuam filed an application for directions under the Companies Act 1993 the (-511 proceeding). The liquidator seeks direction as to whether FTG took a valid equitable assignment of CAML’s securities and whether FTG has any entitlement to surplus funds held by the receivers.
[27] In September 2018, FTG applied for an order setting aside a statutory demand issued by BNZ in relation to costs awarded in the -659 proceeding.
[28] The various proceedings – this (the -1710), the -229, the -511 and the -2013 – were consolidated to be heard at the same time as this proceeding. The receivers, through counsel, took no active part on their application, abiding the Court’s decision. The parties claiming interests in the fund were heard both in this and the other (consolidated) proceedings.
Contractual dealings between FTG and BNZ – June 2012 to November 2015
[29] FTG, desiring to purchase security interests over Tuam, ultimately entered into the Transfer Deed with CAML, which is the subject of this proceeding (above at [16]).
[30] Previously, FTG had entered into agreements with BNZ for BNZ to assign its debt and securities in Tuam to FTG.
[31] Those events were summarised in a passage in the judgment of Gendall J in finding that FTG was not entitled to enforce the Priority Deed against BNZ, which I adopt:7
7 High Court judgment, above n 2.
[33] During the course of [Tuam]’s receivership, between June 2012 and late November 2015, BNZ and FTG engaged in discussions about FTG acquiring the BNZ debt owed by [Tuam] and its first charge securities over [Tuam]. On two separate occasions FTG conditionally agreed to these interests from BNZ.
[34] On the first occasion, FTG and BNZ entered into an agreement to assign BNZ’s debts and securities in [Tuam] on 2 December 2013 (First Assignment Agreement). That agreement was conditional upon (inter alia) CAML consenting to the assignment (CAML consent condition) and confirmation of the estimated amount of the debt (which was to be the purchase price of the debts and securities).
[35] Following correspondence between BNZ and FTG, and FTG and CAML, both FTG and BNZ confirmed satisfaction of the CAML consent condition. BNZ provided FTG with documents necessary to confirm the remaining conditions. Despite a number of extensions of time being requested by FTG and granted by BNZ, FTG failed to confirm the First Assignment Agreement as unconditional. Finally, BNZ cancelled the First Assignment Agreement on 19 May 2014.
[36] Nearly a year later, a further conditional agreement to assign BNZ’s debt and securities in [Tuam] was entered into between BNZ and FTG on 2 March 2015 (Second Assignment Agreement). That Agreement was not conditional upon CAML’s consent (such consent having already been obtained).
[37] Again, FTG sought a number of extensions for confirmation of the conditions in the Second Assignment Agreement. These were granted by BNZ.
[38] Correspondence between Canterbury Legal, FTG’s solicitors, and BNZ’s solicitors about the Second Assignment Agreement continued between April 2015 and late November 2015. Finally, on 26 November 2015, the agreement still not at that point being declared unconditional, BNZ cancelled the Second Assignment Agreement.
[32] The securities to be conditionally assigned by BNZ to FTG under both the First Assignment Agreement and the Second Assignment Agreement included all priority arrangements in relation to the securities. In other words, the priority arrangements under the Priority Deed were to be assigned. In the First Assignment Agreement (2 December 2013) (ultimately not confirmed by FTG) the prohibition against assignment under cl 15 of the Priority Deed (above at [13]) was taken into account in BNZ’s drafting by making the agreement conditional upon the consent of CAML as the other secured party and a party to the Priority Deed. As recorded by Gendall J, the consent of CAML had been obtained by the time FTG and BNZ entered into the Second Assignment Agreement.
[33] Accordingly, in relation to the First Assignment Agreement and the Second Assignment Agreement, FTG and BNZ both took account of and gave effect to the cl 15 prohibition by first providing for and then obtaining the consent of CAML.
Contractual dealings between FTG and CAML – March 2015 to June 2015
[34] There was correspondence between FTG’s solicitor (Grant Smith of Canterbury Legal) and Sharon Burleigh, the General Manager of CAML, from March/April 2015. The correspondence establishes that representatives of FTG at that time were negotiating FTG’s purchasing the debts and related securities owed to CAML by Tuam (as well as Cashel Ventures Ltd and Anthem Holdings Ltd). The discussed purchase price was $100,000. These discussions took place shortly after the date (2 March 2015) on which FTG had entered into the Second Assignment Agreement with BNZ.
[35] There was then what was to become an important exchange of emails (the FTG/CAML emails).
[36] By June 2015 Mr Smith had forwarded to Ms Burleigh a draft Deed of Transfer of Debt and Securities (for $100,000). Ms Burleigh emailed back some proposed changes and drew attention to the cl 15 prohibition in the Priority Deed, stating:
The Deed of Priority does not allow assignment unless the assignee agrees to be bound by the document. I suspect we will need to get BNZ to acknowledge that the securities are being assigned and they will require FTG to confirm such.
[37]Mr Smith replied by email on 8 June 2015 stating:
Thank you for your email. It is important that this transaction be kept strictly confidential at this stage. There is no obligation to advise the BNZ prior to this transaction being completed and our client (at clause 4) has acknowledged that it agrees to be bound by the Deed of Priority.
[38] Clause 4 of the draft deed submitted by Mr Smith indeed contained such provision, stating:
4. DEED OF PRIORITY
FTG acknowledges the interests of each other secured party pursuant to the Deed of Priority, and hereby acknowledges that it is bound by the provisions of the Deed of Priority.
[39] One week later, on 15 June 2015, CAML and FTG entered into the Transfer Deed, Ms Buxton executing for FTG (witnessed by Mr Smith) and Ms Burleigh executing for CAML.
[40] The risk deliberately taken by FTG in entering into the Transfer Deed has been the subject of findings both of this Court and the Court of Appeal in the earlier proceedings. Gendall J accepted the arguments advanced on behalf of the BNZ and the liquidator as to FTG’s deliberate contravention of cl 15.8 Asher J, delivering the judgment of the Court of Appeal, recorded:9
[62] We observe that this [dismissal of the appeal] is not a harsh outcome. FTG has not failed on a technicality. FTG knowingly took a risk in participating in an assignment that was contrary to the express prohibition on assignment without the consent required by the contract, which was for the benefit of BNZ. FTG cannot now seek to rely on the same contractual arrangement against BNZ. There is no unfairness in it being prohibited from doing so.
[41] FTG’s sole director, Ms Buxton, chose to give no evidence in the earlier proceeding or this. The evidence on behalf of FTG was instead given by Mr Henderson who deposed to having direct knowledge of the matters in his affidavits. In his affidavits, Mr Henderson did not discuss the email exchanges as to the cl 15 prohibition or the discussions leading to the execution of the Transfer Deed, which he witnessed. What he did identify in his evidence was FTG’s acknowledgement of being bound by the Priority Deed in the Transfer Deed.
[42] BNZ’s evidence was provided by its Manager – Strategic Business Services, Peter Adamson. Mr Adamson referred to and produced the FTG/CAML emails which BNZ had obtained through discovery.
8 High Court judgment, above n 2, at [98]–[100].
9 Court of Appeal judgment, above n 1.
[43] FTG subsequently filed a further affidavit of Mr Henderson. Mr Henderson gave no evidence in relation to the FTG/CAML emails. He did however produce a much later (19 July 2017) letter from Canterbury Legal to BNZ’s solicitors, Buddle Findlay. In it, FTG (without any admission that such was required) formally requested that BNZ approve the form by which FTG agreed in 2015 to be bound by the Priority Deed. Buddle Findlay replied that BNZ did not approve the purported assignment or the form of the purported assignment.
[44] The documentary evidence overwhelmingly supports the findings previously made by this Court and the Court of Appeal that FTG took a risk in relation to the Transfer Deed assignment knowing that it was contrary to the cl 15 prohibition. The risk was that the assignment would prove to be ineffective. FTG elected in this proceeding to continue to rely on Mr Henderson as its single deponent with personal knowledge of the events surrounding the assignment, well after the High Court and Court of Appeal judgments had been published, containing as they did findings of FTG’s deliberate contravention. Mr Henderson has said nothing to challenge the factual basis of those findings. This supports the strong inference from the documents themselves that there was nothing FTG could say to contradict those conclusions.
[45] I reach on the evidence before me the same findings of deliberate contravention of cl 15 and risk-taking as recorded by Gendall J and the Court of Appeal (above at [40]).
FTG commences the -659 proceeding against BNZ and the receivers
[46] Upon the basis of the Transfer Deed entered into in June 2015, FTG filed its - 659 proceeding in this Court in 2016 against BNZ and the receivers. FTG sought declarations as to the interpretation of the Priority Deed and in particular:
(a)that all funds received from the receivership of Tuam should be applied in reduction of Tuam’s debt to BNZ and deducted from BNZ’s Priority Sum under the Priority Deed;
(b)that BNZ should provide an account to FTG for the aggregate sums to be taken into account under the priority provisions of the Priority Deed; and
(c)that the receivers be required to give effect to the priority provision under the Priority Deed.
[47] BNZ counterclaimed that FTG was not properly a party to the Priority Deed and was unable to enforce it against BNZ. BNZ asserted that CAML had not validly assigned its interest in the Priority Deed to FTG because BNZ’s consent to the assignment had not been sought and obtained, in breach of cl 15.
[48]The receivers abided the Court’s decision.
[49] Gendall J determined matters relating to the validity of the Transfer Deed assignment as a preliminary question – while his Honour’s judgment was identified as an “interim judgment” its function was to substantively determine the question of validity, leaving other issues for later determination.
[50]In the High Court judgment, Gendall J found:10
[107] By way of an interim judgment in this proceeding, the initial preliminary question as to whether FTG is properly a party to the Priority Deed and otherwise from a technical viewpoint it is entitled to enforce it against BNZ must be answered no. The requirements of cl 15 of the Priority Deed were not technically complied with. Given this, the starting point here is that FTG has not obtained a valid statutory assignment of the debt and securities originally held by CFL and the rights and obligations under the Priority Deed. It follows that at this point FTG is unable to enforce the Priority Deed and has no standing to seek the further declarations … which it seeks in this proceeding.
[51] The specific reasons upon which Gendall J reached these conclusions were set out in an earlier paragraph of his Honour’s judgment:
[103] Reducing this matter to its basics, I find that the technical non- compliance with the cl 15 requirements invalidates the purported assignments to CAML and FTG for the following additional specific reasons:
10 High Court judgment, above n 2, at [107].
(a)By its terms cl 15 provides for a condition precedent to the assignment of the relevant debts and securities.
(b)In endeavouring to obtain its assignment here, FTG, in particular, but also CAML, made a decision not to comply with cl 15, a provision of which they were aware.
(c)The effect of the failure by FTG and CAML (and indeed CFL and CAML earlier) to seek BNZ’s approval and consent in terms of cl 15 is that the condition precedent has not been satisfied.
(d)In the terms outlined in the Priority Deed (which under cl 10 amends all previous agreements), the debt and security interests have not been validly assigned to FTG and it does not have title to them.
(e)FTG’s contention that cl 15 was not intended to invalidate assignments and a breach was only to sound in damages, in my judgment, misunderstands cl 15. That clause could have been framed as a simple obligation on an assignor to procure the agreement of an assignee to be bound by the terms of the Priority Deed, the breach of which would be likely to sound only in damages. However, the drafters of cl 15 went further and required that:
(i)Before any assignment “will” occur, the approval of BNZ was required to the form of contract by which the assignee became bound; and
(ii)That approval or consent by BNZ could not be arbitrarily or unreasonably withheld or delayed.
(f)Insofar as that requirement for BNZ’s consent not to be arbitrarily or unreasonably withheld or delayed is concerned, if a breach of cl 15 sounded only in damages, it would serve little purpose because:
(i)The clause contemplates that BNZ’s approval requirement is a clear condition to assignment. If BNZ’s consent was not required for a valid assignment, there is no reason for its discretion to be fettered in this way; and
(ii)The requirement to obtain BNZ’s approval provides commercial certainty as to whether an effectual assignment has occurred. If approval/consent is withheld on grounds that are said to be unreasonable it is intended this be resolved before the proposed assignment rather than resulting in long term uncertainty regarding the effectiveness of the assignment.
(g)As a matter of construction, FTG’s argument is not supported by the plain language of cl 15 and, in my view, it is contrary to principle. From a technical point of view, as the assignments are ineffective, this leaves intact the legal relationship between the original parties here (CFL, BNZ and [Tuam]) unless later issues such as equitable assignment, waiver, estoppel or the like, not argued before me, become of relevance.
(h)These matters are consistent with the conclusion reached by the Court of Appeal in New Zealand Payroll Systems11 and the English Court of Appeal and House of Lords in Tolhurst v Associated Portland Cement Manufacturers.12
[52] FTG appealed. The Court of Appeal dismissed that appeal, upholding the High Court judgment but expressing a qualification as to the potential extent of the ineffectiveness of the assignment. In the Court of Appeal’s conclusion, Asher J stated:13
[60] Gendall J stated that FTG does not have title to the debt and security interests,14 and that the assignments were ineffective.15 Insofar as those statements may be read as meaning that the assignments were ineffective against all parties and in all circumstances, the Judge did not need to go that far. What is clear is that the assignments are ineffective against BNZ. We do not agree, respectfully, with any wider statements about the effect of the breach that were made by the learned Judge, in particular that the assignments were in all respects ineffective. There may still be an enforceable contract between the assignor and the assignee.
[53] In support of the final proposition in that passage, Asher J footnoted the decision of the House of Lords in Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd (Linden Gardens), which his Honour had earlier observed was the leading decision on the effect of prohibitions on assignment which the New Zealand courts have applied.16 His Honour continued:
[61] It follows that we agree with the ultimate decision reached by the High Court insofar as the preliminary question is answered by saying that FTG is not able to enforce or rely on the Deed of Priority against BNZ. We agree with the conclusion that FTG consequently has no standing to seek the declarations sought against BNZ. But we do not need to go further, and do not do so.
[54] In reaching its conclusion, the Court of Appeal rejected a number of limbs of argument advanced by FTG in support of the proposition that rights under the Priority Deed had been validly assigned to FTG notwithstanding that BNZ did not give approval under cl 15. FTG’s (ultimately rejected) arguments were that:17
11 New Zealand Payroll Software Systems Ltd v Advanced Management Systems Ltd [2003] 3 NZLR 1 (CA) [New Zealand Payroll].
12 Tolhurst v Associated Portland Cement Manufacturers (1900) Ltd [1902] 2 KB 660 (CA).
13 Court of Appeal judgment, above n 1 (some footnotes omitted).
14 High Court judgment, above n 2, at [103(d)]; as set out at [51] above.
15 At [103(g)]; as set out at [51] above.
16 Court of Appeal judgment, above n 1, at [22] citing Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85 (HL) [Linden Gardens].
17 Court of Appeal judgment, above n 1, at [19].
(a)the commercial purpose of cl 15 was to ensure that any assignment was subject to the Deed of Priority, and no more – because FTG had agreed to be bound by the Priority Deed and was so bound, the commercial purpose of cl 15 had been fulfilled;
(b)as FTG had agreed to be bound by the Priority Deed, BNZ would have had no valid basis upon which to reasonably withhold consent under cl 15; and
(c)FTG had acquired an indefeasible legal title to the mortgage in Tuam when that interest was registered against the title to 179 Tuam Street – that interest also assigned to FTG – an in personam exception cannot be asserted against FTG, which therefore has standing to bring the proceeding.
[55] The Court of Appeal examined and rejected each of those arguments in turn.18 In rejecting the invitation to adopt a restrictive interpretation of cl 15 or to ignore or water down the requirement for consent, the Court of Appeal found that “the clause means what it says”.19 That meant that FTG’s agreement to be bound by the Priority Deed was insufficient to meet the terms of cl 15. The Court of Appeal explained:
(a)as any assessment of the reasonableness of a refusal to grant consent is intended to take place only after consent has been refused, the Court will not undertake a retrospective counter-factual analysis of whether consent could reasonably have been withheld;20 and
(b)indefeasibility arguments in relation to Tuam’s mortgage are irrelevant in relation to FTG’s claim based on the Priority Deed, the mortgage interest having no effect on the personal contractual obligations,
18 At [35]–[42].
19 At [42].
20 At [46].
including cl 15, arising under the Priority Deed.21 In any event, FTG’s mortgage had been extinguished by the 2016 mortgagee sale.22
[56] The Court of Appeal, before proceeding to its “conclusion”, considered whether FTG had available any remedy directly against BNZ in relation to the priorities under the Priority Deed. In doing so, the Court of Appeal returned to discuss its earlier decision in New Zealand Payroll Software Systems Ltd v Advanced Management Systems Ltd (New Zealand Payroll).23 In New Zealand Payroll, the Court of Appeal referred to a very similar issue which had come before the House of Lords in Linden Gardens.24 The Court of Appeal agreed with the approach taken in that and some later cases.25 In short, an assignment of contractual rights in breach of a prohibition against such assignment is ineffective to vest the contractual rights in the assignee.26
[57] Accordingly, the courts will not enforce the performance of an obligation which constitutes a breach of a prior contract with a third party.
[58] In the -659 proceeding, the Court of Appeal applied Linden Gardens and New Zealand Payroll thus:27
[58] When the question was asked in New Zealand Payroll Systems whether a breach of a prohibition on assignment should be compensated in damages or whether the courts should treat the assignment as if it had never occurred, this Court held that the agreement not to assign without consent should generally be specifically enforced as between the immediate parties. Therefore, as a consequence of the failure to comply with cl 15, the First and Second Assignments are invalid as against BNZ. FTG consequently lacks standing to bring these proceedings against BNZ.
FTG commences a new (this -1710) proceeding
[59] At the conclusion of the High Court judgment, Gendall J had made directions as to the filing and service of any fresh applications (and supporting material) relating
21 At [47]–[53].
22 At [53].
23 New Zealand Payroll, above n 11.
24 At [23], citing Linden Gardens, above n 16.
25 At [26].
26 At [24].
27 Court of Appeal judgment, above n 1 (footnote omitted).
to the -659 proceeding. The directions included provision for CAML to become involved as a party to the -659 proceeding.28
[60] FTG did not proceed pursuant to the directions so issued. FTG instead commenced (in August 2018) this (-1710) proceeding in the Auckland Registry, naming CAML and FCS Loans Ltd (FCS) as defendants, but not joining BNZ as a defendant.
[61] FTG claimed against CAML and FCS declarations and orders as to FTG’s entitlements in equity.
[62] In filing its proceeding, FTG applied for summary judgment. When other parties involved in the -659 and the -229 proceeding proposed consolidation of all proceedings because of the overlap of issues, FTG opposed consolidation. The Court subsequently ordered consolidation. FTG withdrew its application for summary judgment.
[63] I make an observation here as to the decision of FTG to commence a fresh proceeding, combined with a summary judgment application, in the Auckland Registry (for a declaration as to the validity of an equitable assignment) with BNZ not named as a defendant. That was clearly a tactical decision intended to provide the opportunity for FTG to obtain a judgment in the absence of BNZ, notwithstanding demonstrably arguable issues.
[64] As it transpired, with appropriate interventions to ensure that all necessary parties were before the Court, BNZ came to be joined as a defendant in this (-1710) proceeding when the various proceedings were consolidated. FTG subsequently discontinued the claim against FCS (which was in liquidation).
FTG’s pleading of its claim
[65] FTG pleaded the provisions of the Transfer Deed (fully entitled “Deed of Transfer of Debt and Securities”) dated 15 June 2015.
28 High Court judgment, above n 2, at [112].
[66]FTG pleaded that pursuant to the Transfer Deed (inter alia):
37.1.CAML transferred to FTG all of its right, title and interest in the transferred property;
37.2.FTG acquired such right, title and interest as CAML had in the transferred property;
37.3.The CAML deed of transfer cl 4 provided that “FTG acknowledges the interests of each other Secured Party pursuant to the Deed of Priority, and hereby acknowledges that it is bound by the provisions of the Deed of Priority.”
37.4.Further material provisions of the CAML deed of transfer were:
‘Transferred Property’ was defined in the CAML deed of transfer to mean:
(iii)all the right, title and interest of CAML in the debt;
(iv)all the right, title and interest of CAML to, under and by virtue of the transaction documents;
(v)all rights of action and claims of CAML arising out of or relating to the transaction documents and the debt; and
(vi)all moneys payable to or to become payable to CAML under or by virtue of or in respect of the transaction documents or the debt.
“Borrowers” was defined to mean [Tuam], Cashel and Anthem Holdings.
“Debt” was defined to mean all indebtedness of the borrowers to CAML under the transaction documents that is owing at, or becomes due and payable after, the date of the transfer deed.
“Transaction documents” was defined to mean all loan agreements entered into by the borrowers which have been acquired by CAML as set out in Schedule 1, including:
(i)the priority deed;
(ii)a GSA given by [Tuam] dated 7 October 2005 with the security interest perfected by registration of financing statement numbered
FJ44B2FIMD390465/C0006;
(iii)an all obligations mortgage given by [Tuam] over title numbers CB423/280; CB423/279; CB44B/244 and CB490/134 (the land subject to title number CB5D/404 was acquired by the Crown and the mortgage over it was struck off);
(iv)a funding approval between CFL and [Tuam] dated 29 October 2007;
(v)a deed of guarantee and indemnity in respect of [Tuam] given by Cashel to CFL dated 1 November 2007;
(vi)a cross-guarantee deed given to SCFL by Mr Henderson; Cashel; [Tuam]; Hotel So Corporation and Hotel So Operations dated 23 December 2008;
(vii)a term loan agreement between CFL and Cashel dated 17 October 2006;
(viii)a variation to term loan agreement between CFL and Cashel dated 25 February 2008;
(ix)a deed of guarantee and indemnity in respect of Cashel given by PVL and Mr Henderson to CFL dated 17 October 2006.
“Purchase Price” was defined as $100,000.
[67]FTG further pleaded that:
(a)FTG paid to CAML the agreed ($100,000) purchase price on settlement on 26 June 2015;
(b)Tuam was notified on 1 July 2015 that CAML had transferred absolutely to FTG all of its right, title and interest in all amounts owing by Tuam to CAML and all securities given by Tuam to CAML;
(c)on 2 July 2015, FTG registered a financing change statement thereby perfecting its security interest in all of Tuam’s present and after- acquired personal property;
(d)on 2 July 2015, FTG also registered transfers of the mortgages held by CAML so that FTG held second-ranking mortgages over Tuam’s certificates of title;
(e)consequently, from 2 July 2015, FTG acquired and held second- ranking, subordinated:
(i)securities interests in all Tuam’s present and after-acquired personal property; and
(ii)mortgage interest in Tuam’s titles to 179 Tuam Street;
(f)neither CFL nor CAML, as transferors, specifically sought or obtained the approval of BNZ to the transfer of Tuam’s debt and securities in terms of cl 15, CFL and CAML having the obligation to obtain such approval if it was required;
(g)all of the rights of CAML under the CFL debt and securities have been validly assigned in equity to FTG by virtue of the Transfer Deed;
(h)as at 31 May 2019, the total amount outstanding to FTG, as assignee and owner of the CFL debts and securities (including guarantees) was as follows:
(i) Tuam: $17,097,703
(ii) Cashel Ventures Ltd: $32,409,230;
(i)the total amount outstanding to FTG ($49,506,933) is secured by FTG’s security interests over Tuam’s present and after-acquired property and the second-ranking mortgages over Tuam’s certificates of title (subject to the terms of the Priority Deed) pursuant to the guarantees acquired by FTG and listed in the Transfer Deed sch 1; and
(j)FTG’s debt continues to accrue interest under the terms and conditions specific to each Transaction Document.
[68] For a first cause of action (against CAML only), invoking a status as equitable assignee, FTG brought together its factual allegations and asserted:
63.In the premises:
63.1.FTG acquired a valid and enforceable equitable title to and interest in [Tuam’s] debt and securities originally acquired by CFL from [Tuam] and subsequently transferred by SCFL to CAML and then by CAML to FTG, including the proceeds therefrom;
63.2.FTG became the controller of [Tuam’s] debt and securities and the proceeds therefrom;
63.3.[Tuam’s] debt and securities and the proceeds therefrom are subject to an equitable charge in favour of FTG;
63.4.As assignor CAML is a constructive trustee of such debt and securities and the proceeds therefrom for the benefit of FTG as the equitable assignee;
…
63.6. Consequently, FTG has a valid and enforceable equitable title to and interest in TVL’s debt and securities and the proceeds therefrom.
[69] Pursuant to those pleadings, and because CAML had indicated it was not willing to join this proceeding as a plaintiff, FTG seeks:
(a)a declaration that FTG is the equitable assignee of Tuam’s debt and securities interest and the proceeds therefrom; and
(b)an order that FCS and CAML respectively account for and transfer to FTG, as the equitable assignee and beneficial owner, Tuam’s debt and securities interest and the proceeds therefrom.
[70] For a second cause of action (against BNZ only) FTG brought together its factual allegations and alleged, under a heading “Breach of the Priority Deed”:
66.In the premises:
66.1.FTG has standing and the right by reason of its equitable title and interest in [Tuam’s] debt and securities originally acquired by CFL from [Tuam] to enforce the provisions of the priority deed against BNZ, in particular the First Secured
Party Amount of $7,500,000 referred to in paragraph [17] above and the Priority Amounts referred to in paragraph [18/3] above;
66.2.FTG is entitled to compel CAML as the prior transferee of [Tuam’s] debt and securities originally acquired by CFL from [Tuam] to enforce the same provisions of the priority deed against BNZ. The rights of CAML against BNZ will be directly affected by any judgment obtained in this proceeding. Accordingly they are necessary parties to this proceeding who ought to be bound by any judgment obtained in it;
66.3The full amounts received by BNZ from distributions from the receivers and from the mortgagee sale referred to at paragraphs [47]–[51] above, must be applied by the BNZ, as the First Secured Party:
(a)in reduction of the First Secured Party’s Debt, as defined in cl 20 of the Appendix and as referred to in paragraph [19/20] above; and
(b)in calculating the aggregate of BNZ’s First Secured Party Amount, as defined in the priority deed and in cl. 3 of the Schedule (incorporated into the priority deed by cl. 3 of the priority deed) and, in particular:
(i)must be applied towards the First Secured Party Amount so defined; and
(ii)must be applied towards the First Secured Party’s Debt Cap, as defined in cl. 18.1 of the Appendix, incorporated into the priority deed by cl. 4 of the Appendix.
[71]Pursuant to the second cause of action (against BNZ) FTG claimed:
(a)a declaration that FTG is entitled to enforce the provisions of the Priority Deed;
(b)a declaration that FTG can compel CAML to enforce those provisions;
(c)a declaration that CAML can enforce the same provisions of the Priority Deed against BNZ;
(d)a declaration that BNZ must apply the full amounts received by it as alleged at para [66.3] of FTG’s pleading (above at [70]);
(e)judgment for all amounts received by BNZ in excess of the First Secured Party Amount and the first Secured Party’s Debt Cap, estimated at $3,389,064.35 (together with certain other sums); and
(f)compound interest on such judgment sum at FTG’s cost of funds.
[72] In this proceeding FTG asserts an equitable interest arising through the assignment of what became CAML’s rights as the “Second Secured Party” including particularly those under the Priority Deed. It is FTG’s case, as explained by Mr Forbes in submissions, that the Transfer Deed operated only to transfer the rights of the Second Secured Party to FTG and did not transfer the obligations. It is common ground between the parties that, as a matter of law, a novation was required if CAML’s obligations to BNZ under the Priority Deed were to be transferred to FTG.
The context
[73] The judgment of the Court of Appeal in relation to the -659 proceeding provides the context.29 Furthermore, on the matters material to that Court’s dismissal of FTG’s appeal, issue estoppel applies.
[74] FTG had asserted that it had obtained a valid assignment of debt and securities, including the Priority Deed. In particular, FTG sought to enforce the contractual right of CAML to have Tuam’s payments allocated in accordance with the priorities set out in the Priority Deed.
[75] Material rulings of the Court of Appeal which bind the parties and this Court in relation to this proceeding are:
(a)the Transfer Deed assignment was ineffective against BNZ;30
(b)FTG is not able to enforce or rely on the Priority Deed against BNZ;31 and
29 Court of Appeal judgment, above n 1.
30 At [60].
31 At [61].
(c)FTG had no standing to seek the declarations sought against BNZ.32
[76] Subsidiary findings of the Court of Appeal which equally bind the parties and this Court include:
(a)the parties to the Priority Deed, as commercial parties, had been entitled to prohibit assignment, and such prohibition was not to be restrictively construed;33
(b)on the plain words of cl 15, BNZ’s consent, as well as the assignee’s agreement to be bound, were essential prerequisites to valid assignment;34
(c)considerations of public policy which might militate against the validity of a prohibition on assignment – such as arise when an assignment concerns registered interest in land (such as mortgages) – do not arise in relation to the assignment of the contractual rights under the Priority Deed. Indefeasibility of title (as under Tuam’s mortgage) does not interfere with the personal obligations of the parties under the Priority Deed being the relevant contract;35
(d)FTG’s mortgage in any event became irrelevant to the current issues involving assignment when FTG’s mortgage was extinguished following the BNZ mortgagee sale in 2016;36 and
(e)it is not open to FTG to contend that BNZ should be deemed to have permitted the assignment by reference to some retrospective counter- factual analysis of whether consent could reasonably been withheld – in the absence of a request for consent prior to assignment, FTG cannot
32 At [61].
33 At [37].
34 At [41].
35 At [37] and [48]–[52].
36 At [53].
assert that request was (or would have been) unreasonably withheld.37
BNZ’s pleading of its defence
[77]I will refer only to the material aspects of BNZ’s defence.
[78]The fact and text of the Transfer Deed were not put in issue.
[79] BNZ denied that FTG had acquired and held second-ranking, subordinated securities interests in Tuam’s present and after-acquired personal property and mortgage interest in Tuam’s titles to 179 Tuam Street. BNZ additionally pleaded that:
(a)BNZ was not asked to, and therefore did not, agree to an assignment of the obligations of CAML under the Priority Deed to FTG;
(b)BNZ has not approved any form of deed or contract by which FTG agreed to be bound by the Priority Deed; and
(c)as a consequence of those two matters:
(i)there was no valid assignment of CAML’s debt and securities interest in Tuam to FTG;
(ii)there was no valid assignment of CAML’s rights and obligations in the Priority Deed to FTG; and
(iii)FTG was (and is) unable to enforce the Priority Deed against BNZ.
[80] To the extent that FTG pleaded reliance upon authorised assignments in terms of a term loan agreement, a GSA and a registered mortgage, BNZ pleaded that those documents needed to be read together with the Priority Deed, which through cl 10 varied the debt and security arrangements between CFL and Tuam.
37 At [43]–[46].
[81] In response to FTG’s pleading (para [63], above at [68]) that it had acquired a valid and enforceable equitable title in Tuam’s debt and securities, BNZ denied the allegation and said further:
(a)FTG did not give valuable consideration for the purported assignment;
(b)the assignor, CAML, did not do all it had to do to effect a valid equitable assignment in that it failed to obtain the approval of BNZ to the proposed assignment; and
(c)FTG was disentitled to equitable relief because it did not come to the Court with clean hands.
[82] BNZ provided particulars of the allegation that FTG did not have clean hands in that:
(a)FTG had two opportunities to acquire BNZ’s debt and securities interest in Tuam through the First Assignment Agreement and the Second Assignment Agreement but, in purportedly carrying out due diligence under the Second Assignment Agreement, was in fact negotiating with CAML to obtain CAML’s debt and securities interests in Tuam;
(b)following CAML’s having raised with FTG on 3 June 2015 the requirement to notify BNZ of the proposed Transfer Deed, FTG requested that the transaction be kept strictly confidential at that stage, saying that there was no obligation to advise BNZ prior to the transaction being completed; and
(c)FTG had entered into the Transfer Deed knowing that it was contrary to cl 15 of the Priority Deed.
[83] Additionally it asserted that FTG was not entitled to equitable relief by reason of the operation of the doctrine of laches, and in particular by FTG’s actions in
commencing a fresh proceeding rather than pleading its case in the existing -659 proceeding, causing a duplication of hearing time and expense.
[84] BNZ further pleaded that FTG’s claims involve consideration of issues which have already been determined or ought reasonably to have been brought to the Court for determination in the -659 proceeding, thereby constituting an abuse of process.
CAML’s pleading of its defence
[85]CAML has abided the Court’s decision on whether:
(a)FTG is the equitable owner of the debt and securities in Tuam (except to the extent set out at [86](a) below); and
(b)CAML has the direct legal right to enforce the Priority Deed against BNZ.
[86] CAML asserts that irrespective of the Court’s decisions regarding those issues, FTG cannot compel CAML to enforce the Priority Deed against BNZ because:
(a)if the Court finds that FTG is not the equitable assignee, then the claim for such an order of compulsion must also fail; and
(b)procedurally, CAML did not need to be a party to the proceeding (other than as a named co-defendant) as CAML has disavowed any interest in the debt, securities or surplus, thereby creating no risk of competing claims.
Legal principles – interpretation of the Priority Deed
[87] In its judgment, the Court of Appeal held, citing Vector Gas Ltd v Bay of Plenty Energy, that the usual rules of contractual interpretation apply to cl 15 of the Priority Deed.38
38 Court of Appeal judgment, above n 1, at [36], citing Vector Gas Ltd v Bay of Plenty Energy [2010] NZSC 5, [2010] 2 NZLR 444 at [119] and [122].
[88] Consequently, the Court ruled that cl 15 was not to be restrictively interpreted, the Court stating:
[41] … On the plain words of cl 15, consent, as well as the agreement to be bound, is an essential prerequisite to valid assignment. As has been stated, “[i]t cannot be correct to conclude that when parties incorporate a clause that expressly prohibits assignment they do not really mean that. Clearly they do.”
[42] Thus although cl 15 is, as prohibitions on assignment go, a clause of narrow ambit, we see no reason as a matter of contract to adopt a restrictive interpretation of it, or to ignore or water down the requirement for consent. The clause means what it says. Therefore, FTG’s agreement to be bound by the Deed of Priority is insufficient to meet the terms of cl 15. Clause 15 also required BNZ’s consent to the form of the assignment. Consent was neither sought nor obtained.
(footnotes omitted)
[89] Once cl 15 was so interpreted, it followed (as found by this Court and the Court of Appeal) that cl 15 had not been complied with.
The reason for non-compliance with cl 15
[90] An issue estoppel precludes FTG from asserting here that cl 15 of the Priority Deed had been complied with.
[91] Mr Forbes QC for FTG nevertheless developed the submission (in response to BNZ’s equitable defences) as to the circumstances in which CAML failed to seek BNZ’s consent in terms of cl 15.
[92] Mr Forbes first focused on the wording of FTG’s request though Mr Smith on 8 June 2015 (“It is important that this transaction be kept strictly confidential at this stage. There is no obligation to advise the BNZ prior to this transaction being completed”.) Mr Forbes submitted that, with the request relating to confidentiality “at that stage”, there was still time for CAML to seek BNZ’s approval as to the form of the assignment, with no objection being raised by CAML.
[93] Mr Forbes’ submission ignores the clear intent and full import of Mr Smith’s email. Mr Smith was clearly requesting the transaction be kept secret from BNZ prior to execution of the deed, which occurred within the week.
[94] On any view of the correspondence, FTG made itself a party to CAML’s failure to seek BNZ’s consent. Such was succinctly reflected in the Court of Appeal’s judgment, observing that: “FTG knowingly took a risk in participating in an assignment that was contrary to the express prohibition on assignment without the consent required by the contract”.39
[95] Of note is the fact that this observation of the Court of Appeal occurred in the context of the Court’s findings that there was no unfairness involved and that it was not a harsh outcome that FTG was being prohibited from relying on the contractual arrangement against BNZ. While the Court’s observations in that regard are strictly obiter they are of persuasive value in relation to the equitable issues which I must consider (especially when no additional evidence has been called in relation to matters informing fairness).
[96] Mr Forbes’ submission, nevertheless, is that FTG’s 8 June 2015 email is a “red herring”. In his words, that is because the email does not show any conduct that breached FTG’s duty to CAML in the transaction. Mr Forbes submitted that it is only the conduct of FTG in relation to its obligations to CAML under the Transfer Deed that attracts equitable considerations of clean hands. In other words, it matters not that FTG, in its conduct in entering into the Transfer Deed may be found to have procured or at least participated in CAML’s breach of the cl 15 consent requirements.
[97] I accept that, if the focus is narrowly constrained in the way Mr Forbes invites, it may be said that FTG did not breach a duty to CAML. In my consideration of “clean hands” below from [195], I return to consider whether this Court’s approach in equity is so narrowly constrained.
39 Court of Appeal judgment, above n 1, at [62].
Equitable assignment of contractual rights
The law
[98] By this proceeding, FTG seeks to establish that it has a right of priority over funds which flows from the Priority Deed. Such an intangible right or thing in action is generally capable of assignment.
[99] The Property Law Act (through sub-pt 5 of pt 2) provides a statutory mechanism for the assignment of things in action. FTG’s attempt, through the -659 proceeding, to establish that it had taken an effective assignment at law failed.
[100] In this proceeding, FTG invokes the concept of equitable assignment. It is common ground between the parties that a right, such as a prior right (through contract) to funds, is generally capable of being assigned in equity. In such event, the assignor retains the cause of action at law and the assignee has a cause of action in equity. From the time of the assignment, the assignor holds the legal title of the property right in trust for the assignee.40
[101] Section 50 Property Law Act now provides for both legal and equitable assignments. It states:
50 How thing in action assigned
(1)The absolute assignment in writing of a legal or equitable thing in action, signed by the assignor, passes to the assignee—
(a)all the rights of the assignor in relation to the thing in action; and
(b)all the remedies of the assignor in relation to the thing in action; and
(c)the power to give a good discharge to the debtor.
(2)Subsection (1) applies whether or not the assignment is given for valuable consideration.
(3)Subsection (1) applies subject to—
(a)section 51; and
40 Roger Fenton Garrow & Fenton’s Law of Personal Property in New Zealand (7th ed, LexisNexis, Wellington, 2010) Vol 1 at [9.76].
(b)any equities in relation to the thing in action that arise before the debtor has actual notice of the assignment and would, but for subsection (1), have priority over the rights of the assignee.
(4)The priority of an assignment to which subsection (1) applies and which is not given for valuable consideration is to be determined as if the assignment had been given for valuable consideration.
(5)A legal or equitable thing in action is to be treated as having been assigned in equity (whether the assignment is oral or in writing) if—
(a)the assignee has given valuable consideration for the assignment; or
(b)the assignment is complete.
(6)Subsection (5)—
(a)prevails over any rule of equity to the contrary; but
(b)applies subject to sections 24 and 25.
(7)An assignment to which subsection (5) applies is complete when the assignor has done everything that needs to be done by the assignor to transfer to the assignee (whether absolutely, conditionally, or by way of charge) the rights of the assignor in relation to the thing in action.
(8)Subsection (7) applies even though some other thing may remain to be done, without the intervention or assistance of the assignor, in order to confer title to the rights on the assignee.
[102] As I have noted, it was common ground between the parties in this case that a right such as a right to priority over funds is of a nature which is assignable but subject to some limitations.
Contractual prohibitions on assignment – impact on transfer of contractual rights
[103] As identified by the Court of Appeal in the -659 proceeding, the leading decision on the effect of prohibitions on assignment is the judgment of Lord Browne- Wilkinson in the House of Lords in Linden Gardens.41 The Court of Appeal’s analysis in its judgment in the -659 proceeding, while recognising the legality (under the Property Law Act) of the assignment of choses in action, established the primacy of the contractual prohibition under cl 15. Asher J, for the Court, concluded:
41 Court of Appeal judgment, above n 1, at [22], citing Linden Gardens, above n 16.
[56] Sections 48–53 and 84 of the Property Law Act 2007 do not assist FTG. While these sections plainly endorse the legality of the assignment of choses in action, we do not see them as having any relevance to the issue before us. The issue before us is one of contract. Clause 15 places a contractual restriction on such an assignment, which is plainly lawful and unaffected by the Property Law Act.
[104] The Court of Appeal identified particular passages in the judgment of Lord Browne-Wilkinson in Linden Gardens as of application to the purported assignment under the Transfer Deed.
[105] In Linden Gardens, A had contracted B to remove asbestos from A’s premises. A was not permitted to assign the contract without B’s consent. The prohibition was to not assign “without written consent” from B.
[106] Lord Browne-Wilkinson, with whom the other law Lords agreed, rejected the proposition that there should be a policy against alienability of rights given that the law does not favour restrictions of alienability of rights over land. His Lordship observed:42
… no such reason can apply to contractual rights: there is no public need for a market in choses in action. A party to a building contract, as I have sought to explain, can have a genuine commercial interest in seeking to ensure that he is in contractual relations only with a person whom he has selected as the other party to the contract. In the circumstances, I can see no policy reason why contractual prohibition on assignment of contractual rights should be held contrary to public policy.
[107] Lord Browne-Wilkinson recognised that the legal effect of a prohibition on assignment depends on its construction, observing:43
[A] prohibition on assignment normally only invalidates the assignment as against the other party to the contract so as to prevent a transfer of the chose in action: in the absence of the clearest words it cannot operate to invalidate the contract as between the assignor and the assignee and even then it may be ineffective on the grounds of public policy. …[t]he existing authorities establish that an attempted assignment of contractual rights in breach of a contractual prohibition is ineffective to transfer such contractual rights. …If the law were otherwise, it would defeat the legitimate commercial reason for inserting the contractual prohibition, viz., to ensure that the original parties to the contract are not brought into direct contractual relations with third parties.
42 Linden Gardens, above n 16, at 107.
43 At 108 (emphasis added, as in Court of Appeal judgment, above n 1, at [25].
[108] Lord Browne-Wilkinson went on to consider a proposed analogy with leases, where the law recognised that an assignment in breach of covenant gave rise to a forfeiture, but pending forfeiture the term was vested in the assignee. Lord Browne- Wilkinson observed that the law applicable to assignment of contractual rights differs from that applicable to the assignment of leases, observing:44
… an assignment of contractual rights in breach of a prohibition against such assignment is ineffective to vest the contractual rights in the assignee. It follows that the claim by Linden Gardens fails and the Linden Garden action must be dismissed.
[109] All these observations apply, as the Court of Appeal in the -659 proceeding has observed, to the cl 15 prohibition. For the reasons identified in the Court of Appeal judgment (at [47]–[53], summarised at [55](b) above), FTG’s argument as to the relevance of the indefeasibility of Tuam’s mortgage had no effect on the operation of cl 15. As a matter of issue estoppel, FTG cannot contend that the (erstwhile) indefeasibility of a mortgage interest affects the cl 15 prohibition.
The available constructions of a prohibition clause
[110] In Linden Gardens, Lord Browne-Wilkinson referred to an article “Inalienable rights?” by Professor R M Goode.45 In that article, Professor Goode noted that where a contract between A and B prohibits assignment of contractual rights by A, the effect of such prohibition is a question of the construction of the contract. Professor Goode identified that there are at least four possible interpretations, summarised in Linden Gardens as follows:46
… (1) that the term does not invalidate a purported assignment by A to C but gives rise only to a claim by B against A for damages for breach of the prohibition; (2) that the term precludes or invalidates any assignment by A to C (so as to entitle B to pay the debt to A) but not so as to preclude A from agreeing, as between himself and C, that he will account to C for what A receives from B: In re Turcan (1888) 40 Ch.D. 5; (3) that A is precluded not only from effectively assigning the contractual rights to C, but also from agreeing to account to C for the fruits of the contract when received by A from B; (4) that a purported assignment by A to C constitutes a repudiatory breach of condition entitling B not merely to refuse to pay C but also to refuse to pay A.
44 At 109.
45 At 104; R M Goode “Inalienable Rights?” (1979) 42 MLR 553.
46 At 104.
[111] As Lord Browne-Wilkinson observed in Linden Gardens, having set out the list of possible interpretations, the question in each case must turn on the terms of the contract in question.47
Contractual prohibitions on assignment – impact on transfer of equitable interests
[112] FTG asserts that it acquired a valid and enforceable equitable title in CAML’s bundle of interests, including CAML’s rights under the Priority Deed.
[113] BNZ’s central defence in this regard is that the assignor, CAML, did not do all it had to do to effect a valid equitable assignment in that it failed to obtain the approval of BNZ to the proposed assignment.
[114] In the initial synopsis of submissions for FTG, counsel addressed the breach of cl 15 by submitting that, in the light of the Court of Appeal judgment, FTG is required to join CAML which has the direct legal right to enforce the Priority Deed against BNZ. Mr Forbes referred to commentary in leading texts which identify the procedural routes available to the equitable assignee of a thing in action. He referred in particular to Law of Personal Property in New Zealand for the proposition: “An equitable assignment binds the property itself; and from the time of the assignment the assignor holds the legal title of the chose in trust for the assignee.”48
[115]Mr Forbes referred also to Equity and Trusts in Australia for the proposition:49
The equitable assignee of a debt may, therefore, sue to recover it even though he or she has no direct contractual relationship with the debtor, or sue for the infringement of the assignor’s rights absent a legal relationship with the infringing party.
…
…it is ordinarily appropriate to join the assignor as a party, as an equitable assignee who sues in her or his own name is denied damages or a perpetual injunction unless the assignor has been joined. This avoids the risk of duplication of claims against the debtor both from the legal owner of the chose (the assignor) and any competing assignees.
47 At 105.
48 Fenton, above at 40, at [9.52] (footnotes omitted).
49 G E Dal Pont Equity and Trusts in Australia (7th ed, Thomson Reuters, Sydney, 2019) at [3.120]– [3.125].
[116] Mr Forbes’ synopsis did not address whether the breach of the cl 15 prohibition rendered the assignment ineffective both in law and in equity.
[117] In her synopsis, Ms Paterson submitted that cl 15 operated in equity as in law to prevent the effective assignment of any interests or rights referred to in cl 15 if transacted in breach of the requirement to obtain BNZ’s consent.
[118] Ms Paterson submitted that equity’s respect of restrictions on assignment is accurately described and explained by Peter Turner in his 2008 article “Legal assignment of rights of restricted assignability”.50
[119] Having discussed the origins of equitable assignment, Mr Turner then discusses how contractual provisions relating to assignment are construed in equity. The discussion serves to emphasise the importance that equity will attach to the contractual intentions of the parties to the contract. Mr Turner writes (with detailed footnotes which I omit):51
B. Contractual construction in equity
The equitable principles concern restrictions found by construction. Modern accounts usually distinguish between cases on express contractual restrictions on assignment, and cases involving an element of personal confidence reposed by one party in the other. This is, in principle, a curious distinction. Equity does not make it. Indeed, the distinction can be shown not to matter.
When parties to a contract restrict the proprietary quality of assignability in the rights they create, they do so by expressing an appropriate intention. Equity recognizes and respects these restrictions. Where it is found, for instance, that A and B intend to restrict the assignment of rights created under a contract between them, equity will not enforce an assignment between B and C to violate those restrictions. This is the case whether the restriction is directly stated, or is gathered indirectly from other contract terms and from the character and purpose of the contract. The processes of construction are central in every case to determining both the nature of the right sought to be dealt with, and the nature of the intended dealing with that right.
Given that the assignability of contractual rights is always a matter of construction, it is not surprising that the underlying substantive principles developed in equity are the same whether the restriction on assignment is express or not. This will be clear from the discussion below. Whatever difference exists between the two groups of cases lies in the forensic exercise used to find the relevant intentions. Where an express restriction appears, the
50 P G Turner “Legal assignment of rights of restricted assignability” [2008] LMCLQ 306.
51 At 310–311 (emphasis added).
enquiry focuses primarily upon the restricting words “and secondarily upon the character of the obligation”, referring to the context if necessary. Where there is no express restriction on assignment, construction necessarily ranges more widely and looks more to the context. Historically, equitable procedure was peculiarly adapted to assist such wide-ranging tasks.
[120] Mr Turner cites for the proposition which I have emphasised the judgment of Millett LJ in R v Chester and North Wales Legal Aid Area Office (No. 12) (the Chester Legal Aid case).52
[121] In the article, Mr Turner by reference to the House of Lords’ 1729 decision in Lynch v Dalzell, identifies an early example of equity accepting a restriction on “its own liberal attitudes” where insurers had taken the course of “restraining” the policies to the contracting persons only.53 As Mr Turner notes, that was done at a time when equity was liberally enforcing assignments of legal choses in action despite a strong common law policy against assignment.
[122] Peter Turner observes that the decision in Lynch had endorsed a deliberate move to restrict the assignment of rights and fire insurance policies by means of terms in the contract, referring to observations in an 1887 text.54
[123] Ms Paterson submitted that the contractual prohibition on assignment (without consent) under the Priority Deed also brings into operation the provisions of sub-pt 5 of pt 2 Property Law Act. In particular, s 49(2) provides:
49 Application of subpart
…
(2)A thing in action that is not capable of being assigned cannot be assigned under this subpart.
52 R v Chester and North Wales Legal Aid Area Office (No. 12) [1998] 1 WLR 1496 (CA) [the
Chester Legal Aid case] at 1501.
53 Turner, above 50, at 313, citing Lynch v Dalzell (1729) 2 ER 292 (HL).
54 At 313, citing J B Porter The Laws of Insurance: Fire, Life, Accident, and Guarantee (2nd ed, London, 1887) at 299.
[124] The text books tend to give as examples of things incapable of assignment bare rights of action and contracts involving special personal qualifications.55 But such are simply examples.
[125] In their discussion of things incapable of assignment in Smith and Leslie’s The Law of Assignment, the authors identify contractual prohibitions on assignment as examples of matters rendering a thing in action incapable of assignment.56
[126] Similarly, the authors of Burrows, Finn and Todd on the Law of Contract in New Zealand explain the s 49(2) reference to rights that cannot be assigned in this way:57
Certain rights are incapable of assignment, whether under the earlier law or under the Property Law Act 2007. These include bare rights of litigation and rights under contracts that involve personal skill or confidence. In addition, the contracting parties themselves may agree that the benefit of the contract may not be assigned.
The authors of the text note that the House of Lords decision in Linden Gardens was approved and adopted by the Court of Appeal in New Zealand Payroll. They go on to explain:58
A non-assignability clause has a clear commercial purpose. The parties do not wish, without consent, to be obliged to deal with a party not of their own choosing. The identity of the other party matters to them. If the law did not enforce such an agreement, the legitimate commercial expectations of the parties would be defeated.
[127] Ms Paterson referred also to this Court’s judgment in HEB Contractors Ltd v Verrissimo (Verrissimo).59 In Verrissimo the second plaintiff had agreed to sell industrial sites to the defendant and subsequently assigned its interests in the agreements to the first plaintiff along with its legal interest in the land. The plaintiffs sought specific performance against the defendant.
55 For example, see Jody L Foster A Practitioner’s Guide to the Property Law Act 2007 (2nd ed, LexisNexis, Wellington, 2015) at [8.3.2]; Fenton, above n 40 at [9.24].
56 Marcus Smith and Nico Leslie The Law of Assignment (2nd ed, Oxford University Press, Oxford, 2013) at [25.23]–[25.24].
57 Jeremy Finn, Stephen Todd and Matthew Barber Burrows, Finn and Todd on the Law of Contract in New Zealand (6th ed, LexisNexis, Wellington, 2018) at [17.1.8].
58 At [17.1.8(c)].
59 HEB Contractors Ltd v Verrissimo [1990] 3 NZLR 754 (HC).
[128] In Verrissimo, the defendant argued that the agreements were incapable of assignment by reason of a personal element involved in the benefit to which the defendant was entitled. Williamson J, in rejecting that argument, nevertheless recognised the situations (both under the statute and in equity) in which there can be no valid assignment of contracts incapable of assignment, stating:60
Neither an absolute assignment under s 130 nor a valid equitable assignment enable the valid assignment of contracts which are not capable of assignment. Normally contracts for the sale of land are capable of assignment because personal considerations are not important.
[129] In relation to the Property Law Act, Mr Forbes noted that s 49(2) is subject to s 53, which provides:
An assignment of an amount that will or may be payable in the future under a right already possessed by the assignor (whether the right arises before, on, or after 1 January 2008) is to be treated as an assignment of a thing in action.
[130] Mr Forbes submitted that s 53 applies in this case, requiring the Court to treat the assignment of the interests under the Priority Deed as an effective assignment.
[131] Mr Forbes further submitted that this is not a case where the thing in action has a personal element which by its nature is not assignable. The Court of Appeal rejected Ms Paterson’s submission that BNZ’s entitlement under cl 15 to give (or withhold) approval as to form includes approval as to identity.61 Mr Forbes submitted that the wording of cl 15 indicates that the rights and interests under the Priority Deed are in fact assignable in nature.
[132] Mr Forbes further submitted that the “security interest” is a property right and is assignable without consent, referring to authorities which recognise the Courts having “looked askance” at any attempt to render interests inalienable.62
[133] Mr Forbes submitted that what is involved in this case is the assignment of property rights, not bare rights of action or rights under contracts that involve personal
60 At 762.
61 Court of Appeal judgment, above n 1, at [40].
62 Linden Gardens, above n 16 at [430 a-b]; New Zealand Payroll, above n 11, at [26]; Garry Denning Ltd v Vickers [1985] 1 NZLR 567 (CA) at 572.
skill or competence where the personal attributes of the contracting parties are important.
The Chester Legal Aid case
[134] The decision of the England and Wales Court of Appeal in the Chester Legal Aid case came four years after the decision of the House of Lords in Linden Gardens.63 In the (New Zealand) Court of Appeal decision in the -659 proceeding, the Court found the observations of Lord Browne-Wilkinson in Linden Gardens to be applicable to the cl 15 prohibition, at least in the context of a statutory assignment. The Court of Appeal noted that the reasoning in Linden Gardens had been adopted in England (in the Chester Legal Aid case) and in New Zealand (in New Zealand Payroll).64
[135] Notwithstanding the Court of Appeal’s reference to the Chester Legal Aid case, in the hearing before me counsel did not develop submissions on it. That the Chester Legal Aid case is relevant to the issues in this case is evident from the discussion of Smith QC and Leslie in The Law of Assignment where they include this discussion in their chapter dealing with “Prohibitions on Assignment”:65
D. The Application of Prohibitions to Legal and Equitable Assignments
[25.23] One question that was not before the court in Linden Gardens is whether a non-assignment clause will, absent express wording, cover both legal and equitable assignments equally. This important point was considered by the Court of Appeal in [the Chester Legal Aid case], a case in which the managing director of a company had tried to take an assignment of his company’s cause of action under a contract, in spite of a contractual prohibition on assignment. Dismissing the managing director’s appeal, Millett LJ held that:66
It was submitted before us that the assignment was effective in equity to transfer the beneficial interest in the company’s cause of action, so that it was effective as an equitable but not a legal assignment. I do not accept this. The subcontract expressly prohibits any assignment of the claim, nor merely any legal assignment, and in my opinion an equitable assignment is as much within the prohibition as a legal assignment ... [the company] could not have assigned the beneficial interest to Mr Flood by contracting to do so, since equity will not enforce the performance of an obligation which constitutes a breach of a prior contract with a third party.
63 The Chester Legal Aid case, above n 52.
64 Court of Appeal judgment, above n 1, at [28].
65 Smith and Leslie, above n 56.
66 The Chester Legal Aid case, above n 52, at 1501.
[25.24] As can be seen, Millett LJ reached his decision by construing the anti- assignment clause to comprehend all forms of assignment. Indeed, this would appear to be the natural construction of almost any clause prohibiting assignment, and it is submitted that unusual circumstances will be required before a court departs from this approach.
[136] In the circumstances, following the hearing before me, I invited and received from counsel supplementary written submissions in relation to the Chester Legal Aid case.
[137] For FTG, Mr Forbes observed that in the judgment of Millett LJ, his Lordship referred to the Court of Appeal’s decision in an earlier stage of the litigation, in Flood v Shand Construction Ltd.67 The Court of Appeal in that case held that the assignment in question was ineffective to transfer the company’s cause of action to Mr Flood, because of the prohibition on assignment in the company’s subcontract. In his judgment, Evans LJ explained the Court’s interpretation of the prohibition clause, including by reference to the fact that it may be important to the contractor that he should operate the contractual machinery and arbitrate or litigate only with the party with whom he had chosen to contract. Mr Forbes submitted that the Court of Appeal’s earlier finding that the subcontract was not capable of assignment flows from the fact that there was a personal element with the identity of the contracting party important. Mr Forbes submitted that the subsequent observations of Millett LJ in the Chester Legal Aid case, as to an inequitable assignment being prohibited, were made in that context.
[138] Mr Forbes noted that in the Chester Legal Aid case the assignee had sought to be substituted for the assignor as plaintiff, a course rejected by the Court of Appeal. Mr Forbes stated that at no stage had the assignee sought to bring an action by joining the assignor as defendant, which would have been the correct procedure. Mr Forbes described the Chester Legal Aid case as being authority for the proposition that the assignee (FTG in this case) cannot directly sue either at law or in equity the debtor/obligor (BNZ).
67 At 1504, citing Flood v Shand Construction Ltd (1996) 81 BLR 31 (CA).
[139] Mr Forbes submitted that the Chester Legal Aid case is not authority for the proposition that an assignee cannot bring its action if it joins the assignor (CAML in this case) as a defendant. He submitted that if the Chester Legal Aid case is interpreted in that way it is contrary to the decision in Linden Gardens.
In the absence of an effective assignment by the company to its director, it was the company which held all interest in and was able to enforce the subcontract. Hobhouse LJ continued:91
It may well be that if the company succeeds in the action, then it may hold the fruits of its success in trust. It is not necessary to express any view about that because we are not concerned with that stage in the story.
[179] Here, one of the declarations expressly sought by FTG is as to its entitlement to proceeds which CAML may receive on account of Tuam’s debt and securities. All potential claimants have been before the Court in one or more of the consolidated proceedings. We are at “that stage in the story” when it is appropriate either to make or deny the declaration sought.
[180] In these circumstances, there is no valid basis, as between CAML and FTG, to deny FTG a declaration that CAML is required to account to FTG for any proceeds CAML may receive from any realisation of Tuam’s debt and securities.
[181] Under the Transfer Deed, CAML has received and retained the consideration of $100,000 on account of the intended transfer of its title and interest. No steps have been taken by either party to the Transfer Deed to cancel the contract which the
89 The Chester Legal Aid case, above n 52.
90 At 1504.
91 At 1504–1505.
Transfer Deed evidences. Because CAML asserts no interest in Tuam’s debt and securities (or the surplus), as between CAML and FTG there is no legal basis upon which CAML could retain the $100,000 consideration without accounting to FTG for the fruits of realisation of the assets which the party had intended should be assigned to FTG.
[182]A declaration will be made.
FTG’s enforcement of rights against BNZ
[183]The enforcement declarations sought by FTG against BNZ are that:
(a)FTG is entitled to enforce the provisions of the Priority Deed; and
(b)FTG can compel CAML to enforce the same provisions.
Interpretation of the Priority Deed
[184] FTG, through its claim against BNZ in this proceeding, seeks declarations as to the interpretation and operation of the Priority Deed.
[185] In light of the findings set out above, and in particular because FTG has not taken a valid assignment of CAML’s interest in Tuam’s debt and securities (including the Priority Deed), FTG does not have standing in this proceeding to seek declarations in relation to the interpretation of the operation of the Priority Deed. It is simply not a party to the Priority Deed either originally or through assignment.
[186] As it happens, in the -229 proceeding (with which this proceeding was consolidated) the receivers of Tuam have sought directions as to the priorities for distribution of the surplus arising from the receivership of Tuam. The separate judgment issued today in the -229 proceeding, Gower v FTG Securities Ltd, contains the Court’s directions given in response to the receivers’ application.
The application of equitable and other defences generally
[187] As summarised at [81]–[83] above, BNZ pleaded (as alternative defences to FTG’s claims) equitable defences which may be summarised as “clean hands” and “laches”. BNZ also invoked abuse of process principles. These defences were raised in the alternative to BNZ’s primary submission, which I have upheld, that FTG did not take a valid equitable assignment of Tuam’s debt and securities.
[188] It is therefore strictly unnecessary that this judgment focuses on the affirmative defences. I will add nothing further in relation to the defences of laches and abuse of process, neither of which on the facts I would have upheld.
[189] I will on the other hand discuss the application of the maxim “he who comes to equity must come with clean hands” as I adjudge it to be a second and complete answer to FTG’s claim against the BNZ.
The clean hands defence
Equitable principles
[190] As accurately described in Andrew Butler’s text Equity and Trusts in New Zealand:92
The basic notion behind the maxim is that where a person seeks to invoke equitable relief in relation to a particular transaction, he or she must not have acted improperly in relation to that transaction. Hence, even if the plaintiff can show a violation of his or her equitable rights, relief to give effect to those rights may not issue if it would allow the plaintiff to derive a benefit from his or her wrong.
[191] The principles are well settled and are applied uniformly in the Commonwealth jurisdictions including New Zealand, Australia and England. The case law cited from across the Commonwealth is often old but is of continuing application.
[192] Mr Forbes referred to the Laws of New Zealand description of the maxim and its limitations, in a summary which succinctly and accurately states the law:93
92 Andrew Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington, 2009) at [38.2.1].
93 Charles Rickett Laws of New Zealand (Equity) (online ed) at [284].
284. Unclean hands as a defence.
A Court of equity will not permit a person to derive any advantage from his or her own wrong.94 This principle has limitations:
(1)the alleged wrong must be a depravity in both a legal and moral sense;95
(2)the alleged wrong of the plaintiff must be directly related to the equitable claim against the defendant;96
(3)the defence will not be available where the plaintiff merely takes advantage of a defendant’s bad business judgment or failure to take proper precautions;97 and
(4)the Court will take into account the consequences of refusing relief to a plaintiff, in the wider context of the policies of equity or of statute as these apply to the plaintiff’s claim.98
[193] As the commentary in Butler’s text (above at [190]) indicates, the Court considers a clean hands defence where a person seeks to invoke equitable relief in relation to a particular transaction. The impugned conduct must be material in the sense that it played “a material part” of or had an “immediate and necessary relation” or nexus to the equity sought.99
[194] The facts of Milloy v Dobson, in which a clean hands defence was not upheld, illustrate the requirements of materiality or nexus between the conduct complained of and the equity sought.100 The case involved a dispute about the obligations of contribution in equity between co-guarantors of a bank loan. The parties had also been involved in litigation involving a different business venture, within their broader corporate structure, which had been subject to a settlement. Subsequently allegations were made that the plaintiff had diverted the proceeds of the settled litigation. In the High Court the clean hands defence failed, the guarantee issues being found to be
94 Meyer v Casey (1913) 17 CLR 90 at 124. See also Kettles and Gas Appliances Ltd v Anthony Hordern & Sons Ltd (1934) 35 SR (NSW) 108 (NSWSC); FAI Insurances Ltd v Pioneer Concrete Services Ltd (1987) 15 NSWLR 552 at 557–561.
95 Dering v Earl of Winchelsea [1775-1802] All ER Rep 140 (Exch).
96 Dering v Earl of Winchelsea, above n 95; and Moody v Cox and Hatt [1917] 2 Ch 71 (CA) at 87– 88 per Smith LJ.
97 Unilever plc v Cussons (New Zealand) Pty Ltd [1997] 1 NZLR 433 (CA) at 442.
98 Money v Money (No 2) [1966] 1 NSWR 348 (NSWSC); Angelides v James Steadman Henderson’s Sweets Ltd (1927) 40 CLR 43 (HCA) at 67; and Dow Securities Pty Ltd v Manufacturing Investments Ltd (1981) 5 ACLR 501 (NSWSC).
99 Dering v Earl of Winchelsea, above n 95, at 142. See also other cases footnoted in Butler, above n 92, at [38.2.3(3)] and n 163.
100 Milloy v Dobson [2016] NZCA 25.
“remote” from the other litigation in the sense that they involved a “completely separate business transaction”.101 Moore J observed: “Other than the same parties being involved there is no other relationship or logical connection between the actions of Mr Dobson and the relief claimed under this cause of action.”102 On the other hand, his Honour observed that the clean hands defence should not be the subject of an overly technical or dogmatic approach to considerations of nexus, when it is resolving matters of conscience.
[195]The Court of Appeal dismissed the appeal, summarising the applicable law:103
[99] There is no dispute as to the applicable law. The equitable principle is that “He who comes into equity must come with clean hands”. The essence of clean hands is that if the petitioner is guilty of impropriety in a matter pertinent to the suit, equity may refuse the decree sought:104
[W]here a person seeks to invoke equitable relief in relation to a particular transaction, he or she must not have acted improperly in relation to that transaction. Hence, even if the plaintiff can show a violation of his or her equitable rights, relief to give effect to those rights may not issue if it would allow the plaintiff to derive a benefit from his or her wrong.
[196] In their text On Equity, Young, Croft and Smith provide a useful test for determining materiality.105 They observe:106
One way of testing for the application of the maxim is to consider whether the right the claimant seeks is one which, if protected, would allow the claimant to take advantage of their own wrong. If the claimant can establish their claim to equitable relief without needing to rely on any conduct said to give rise to “unclean hands”, then the connection is not “immediate and necessary”. It follows that where the impropriety is unrelated, or only indirectly related to the equity sued for, it is irrelevant: see Meyers v Casey;107 and Hypec Electronics Pty Ltd (in liq) v Mead.108
101 Milloy v Dobson [2014] NZHC 1631 at [97].
102 At [97].
103 Milloy v Dobson, above n 100.104 Butler, above n 92, at [38.2.1] (emphasis added). See also Angell v Morresey HC New Plymouth A33/85, 1 April 1986 where the High Court declined relief because the parties had perpetrated a fraud on the social welfare system.
105 Peter W Young, Clyde Croft and Megan Louise Smith On Equity (Thomson Reuters, Sydney, 2009).
106 At [3.330] (some footnotes omitted).
107 Meyers v Casey (1913) 17 CLR 90 (HCA).
108 Hypec Electronics Pty Ltd (in liq) v Mead (2003) 202 ALR 688 (NSWSC) (affirmed on other grounds in Hypec Electronics Pty Ltd v Mead [2004] NSWCA 221).
[197] For FTG, Mr Forbes referred to Unilever plc v Cussons (New Zealand) Pty Ltd as a case in which a clean hands defence failed.109 In the absence of any duty owed by the appellant to the respondent, it could not be said that the respondent’s conduct had amounted to some breach of duty.110 This observation in Unilever plc was made in the context of the argument in that case, where the defence was founded on an alleged breach of duty. But breach of duty is simply an example, albeit perhaps the most common example, of improper conduct which may give rise to the clean hands defence. Such is identified in the judgment of the Court delivered by Gault J when his Honour referred to the commentary in Meagher, Gummow and Lehane’s text for the proposition:111
… in most cases where a plaintiff has been declined relief on the ground of unclean hands the plaintiff’s conduct has amounted to some breach of duty which is owed to the defendant or the public generally.
[198] An example of a case where a clean hands defence was upheld is Quadrant Visual Communications Ltd v Hutchison Telephone (UK) Ltd.112 In that case the plaintiffs had entered into an agreement to sell the first plaintiff’s business to the first defendant. Part of the consideration for the sale was to be calculated by reference to the number of people who subscribed to the first plaintiff’s telephone network between the date of the agreement and the transfer date. The plaintiffs also agreed not to enter a contract of an unusual nature or outside the ordinary course of business. At the completion meeting, the plaintiffs disclosed to the first defendant that, since the date of the agreement, they had engaged a marketing company to run a campaign to increase their subscriber base. However, they failed to disclose that they had made a second and similar agreement with the marketing company. Stocker LJ, in upholding the lower Court’s finding that the plaintiffs had come to court with unclean hands, stated:113
In my view, it is sufficient that the conduct stigmatised by the judge was in connection with the contract as a whole since, had full disclosure been made, completion might never have taken place and must at least have affected the
109 Unilever plc v Cussons (New Zealand) Pty Ltd, above n 97.
110 At 442.
111 At 442, citing R P Meagher, W M C Gummow and J R F Lehane Equity: Doctrines and Remedies
(2nd ed, Butterworths, Sydney, 1984) at [324].
112 Quadrant Visual Communications Ltd v Hutchison Telephone (UK) Ltd [1993] BCLC 442 (CA).
113 At 449.
consideration paid. The equity sued upon was specific performance of a contract.
Stocker LJ found the actions of the plaintiffs in disclosing only one of the marketing agreements “amounted at the very least to trickery”.114 Accordingly he upheld the clean hands defence and refused to grant specific performance.
[199] The fact that the plaintiff has “dirty hands”, if established, is not an absolute bar. Tipping J observed in Marshall Futures Ltd v Marshall: “the whole circumstances must be taken into account before consideration is given to defeating an equitable claim on the basis that the plaintiff has unclean hands”.115
[200] As identified in Butler’s text, it is possible for a plaintiff to deflect a defence of clean hands by showing that he has “washed his hands”.116 Butler observes that such a situation arises if the particular improper conduct came to an end well before the suit began or it is shown that the impropriety was accidental and would not occur again.117
The transaction
[201] For FTG, Mr Forbes’ fundamental submission was that the Court must focus on “the transaction between CAML and FTG” and not on any dealings or otherwise that FTG had with BNZ.
[202] I do not find that it is helpful or necessary, in this context, to so narrowly view the transaction through which FTG claims its entitlement. Significantly, the tests identified in the cases and commentaries do not have a focus on characterising a particular transaction as being between particular parties.
[203] Rather, the focus is on the nexus or closeness of relationship between the alleged wrong and the equitable claim.
114 At 453.
115 Marshall Futures Ltd v Marshall (1992) 1 NZLR 316 (HC) at 331.
116 Butler, above n 92, at [38.2.9].
117 Referring to Kettles and Gas Appliances Ltd, above n 94, at 130–131.
[204] Here FTG’s equitable claim is based on the alleged validity of the assignment of CAML’s priority rights as against BNZ.
FTG’s conduct
[205] FTG had been provided with all the relevant loan and security documents, including the Priority Deed. FTG knew the contractual requirement as between CAML and BNZ whereby either party wishing to assign its interests had to obtain the approval (as to form) of the other. FTG, as I have found, made a deliberate decision to have CAML keep the proposed assignment secret from BNZ.
[206] If (contrary to my earlier finding) FTG was found to have prima facie obtained an equitable interest enforceable (directly or indirectly) against BNZ through those means, it would have achieved on Mr Forbes’ own argument the taking of all the enforceable benefits under the Priority Deed while leaving BNZ with rights of enforcement of CAML’s covenants under the Priority Deed only as against CAML.
[207] FTG’s conduct in participating in the attempted assignment in breach of the prohibition clause has a direct relationship to the equity which it seeks to enforce (directly or indirectly) against BNZ.
[208] On the authorities, it is not a requirement that FTG directly owed any duty to BNZ. Ms Paterson submitted that FTG’s conduct did amount to a breach of legal as well as moral duties. Ms Paterson invoked the tort of inducing a breach of contract, upon the basis that FTG had intentionally induced CAML to commit a breach of its obligations under the assignment provisions of the Priority Deed. While there is scope for that argument, it is sufficient on the authorities relating to the clean hands defence that FTG knowingly interfered with (and had it been successful, would have defeated) the contractual entitlements of BNZ to be involved in the assignment process.
[209] As Ms Paterson observed, FTG now seeks the Court’s intervention in equity to give FTG (equitable) standing when it has no legal standing because of its own calculated decision-making. The rights under the Priority Deed were at the core of what FTG wished to acquire from CAML. Yet FTG made a deliberate decision to have CAML breach the requirements of the Priority Deed.
[210] The consequences of leaving FTG without an enforceable (direct or indirect) remedy against BNZ arise from FTG’s own deliberate actions. It is no answer to submit, as Mr Forbes did, that under the prohibition clause it was CAML (not FTG) which had the obligation to obtain BNZ’s approval. It was FTG which procured CAML’s failure to seek such consent, taking risks as to the very consequences which have ensued.
[211] There are no circumstances which should lead the Court in its discretion to refuse to uphold the clean hands defence in this case as between BNZ and FTG. To the extent that FTG, through Mr Forbes’ submissions, invited the Court to focus on the transaction between CAML and FTG, there are in terms of the judgments delivered today remedies which remain available to FTG by reason of the subsistence of the contract as between FTG and CAML. Neither party has moved to cancel the Transfer Deed. The contractual rights as between the two parties remain for the time being. CAML has retained the $100,000 consideration it was paid for the flawed transaction.
[212] In the exercise of the Court’s equitable jurisdiction, I would have upheld BNZ’s clean hands defence and, on this ground also, refused FTG the relief it seeks in this proceeding against BNZ.
Costs
[213] Costs and disbursements must follow the event. There will be an order for costs. The issues warranted the involvement of junior counsel and I will so certify. In the event that the parties are unable to agree on the quantum of costs and disbursements, they will be determined upon memoranda filed and served, defendants to file first and the plaintiff to file second (five page limit each).
Result
[214]I order:
(a)Unless and until the Deed of Transfer of Debt and Securities dated 15 June 2015 between FTG Securities Ltd and Crown Asset Management Ltd is validly cancelled, Crown Asset Management Ltd is required to
account to FTG Securities Ltd for any proceeds Crown Asset Management Ltd may receive from any realisation of the debt and securities of Tuam Ventures Ltd (in rec and in liq) as “assigned” under the said Deed.
(b)Except to the extent of the declaration at [214(a)], the declarations sought against the first and second defendants are refused.
(c)On the second cause of action, there is judgment for the second defendant.
(d)The plaintiff is to pay to each of the defendants their costs and reasonable disbursements, with a certificate for second counsel.
Osborne J
Solicitors:
Canterbury Legal, Christchurch
A J Forbes QC and H Weston, Christchurch Duncan Cotterill, Auckland
Buddle Findlay, Christchurch
SCHEDULE 1
The terms of the Transfer Deed
[1] Under the Transfer Deed, entitled “Deed of Transfer of Debt and Securities”:
(a)CAML transferred to FTG all of its right, title and interest in the transferred property;
(b)FTG acquired such right, title and interest as CAML had in the transferred property;
(c)Clause 4 provided that “FTG acknowledges the interests of each other secured party pursuant to the Deed of Priority, and hereby acknowledges that it is bound by the provisions of the Deed of Priority”.
“Transferred Property” was defined in cl 1 to mean:
(i)all the right, title and interest of CAML in the debt;
(ii)all the right, title and interest of CAML to, under and by virtue of the transaction documents;
(iii)all the rights of action and claims of CAML arising out of or relating to the transaction documents and the debt; and
(iv)all moneys payable to or to become payable to CAML under or by virtue of or in respect of the transaction documents or the debt.
The provisions of the Priority Deed
[2] The Priority Deed, fully entitled “Deed of Subordination and Priority (PPSA and non-PPSA)”, contained terms as follows:
PARTIES
Debtor TUAM VENTURES LIMITED
First Secured Party BANK OF NEW ZEALAND
Second Secured Party CANTERBURY FINANCE LIMITED DEFINITIONS
CollateralAll present and after-acquired personal property in respect of which a security
interest is granted by the Debtor under both the First Security Agreement and the Second Security Agreement, and including and extending to proceeds. A reference to Collateral includes any part of it.
First Secured Party Amount $7,500,000.00
First Secured Party Securities
(a)The First Security Agreement; and
(b)The registered first mortgage granted by the Debtor in favour of the First Secured Party over the land comprised in Certificates of Title 423/280, 423,279, 490/134, 5D/404, 455/127 and 448/244 (all Canterbury Registry);
and
First Secured Party Security includes either of them.
First Security Agreement The security agreement signed or assented to
by the Debtor, under which a security
interest is granted over the Collateral and a charge is created over Other Property in
favour of the first Secured Party (whether or not it extends to other assets and property)
and dated 7 May 2007.
Interest Period 24 months
Other Property All of the Debtor’s assets and property, including any land, but excluding the Collateral, that is subject to any First Secured Party Security or any Second Secured Party Security, and includes any part of it.
Second Secured Party Amount $10,000,000
Second Secured Party Securities
(a)The Second Security Agreement; and
(b)The registered second mortgage granted by the Debtor in favour of the Second Secured Party over the land comprised in Certificates of Title 423/280, 423,279, 490/134, 5D/404, 455/127 and 448/244 (all Canterbury Registry);
and Second Secured Party Security includes either of them.
Second Security Agreement The security agreement signed or
assented to by the Debtor, under which a security interest is granted over the Collateral and a charge is created over Other Property in favour of the Second Secured Party (whether or not it extends to other assets and property), and dated 7 October 2005.
PROVISIONS
Subordination and priority
1. The First Secured Party and the Second Secured Party agree to subordinate and arrange priorities in respect of the First Secured Party Securities and the Second Secured Party Securities.
Debtor acknowledgment
2. The Debtor acknowledges that the First Secured Party and the Second Secured Party are entering into these subordination and priority arrangements.
Incorporation of provisions
3. The parties acknowledge and agree that the provisions in the schedule attached are incorporated into this deed. The definitions above (which encapsulate the commercial terms of the subordination and priority arrangement) are to be read and applied in terms of the Schedule.
Additional provisions
4. The parties acknowledge that the provisions in the Appendix to the Schedule are incorporated into this deed.
[3] Clause 3 (in the “Provisions” section) incorporates the provisions of a Schedule into the Priority Deed. Provisions in the Schedule included:
SUBORDINATION
1. The security interest of a Secured Party in the Collateral that for the time being does not have priority pursuant to clauses 3, 4 and 5 is, to the extent necessary to give effect to those provisions, subordinated to the security interest of the other Secured Party in the Collateral.
…
Priority amounts
3.The First Secured Party Securities and all moneys from time to time secured under them will, in respect of the Collateral and Other Property, have priority over the Second Secured Party Securities for an amount not exceeding the aggregate of:
(a)the First Secured Party Amount;
(b)interest, owing to the First Secured Party at the Enforcement Date, but limited to an amount equal to the interest which would accrue in a period of six months calculated on a daily basis at the highest rate payable by the Debtor to the First Secured Party immediately before the Enforcement Date, on the lesser from time to time of:
(i)the First Secured Party Amount; and
(ii)the balance secured by, and outstanding under, the First Secured Party Securities,
but, for the avoidance of doubt, excluding interest which has been capitalised under or paid by way of an advance under the facilities comprising the First Secured Party’s Debt as defined in clause 18.1 of the Appendix and which is therefore accommodated within the First Secured Party Amount;
(c)interest, for the Interest Period commencing on the Enforcement Date, calculated on a daily basis at the highest rate payable by the Debtor to the First Secured Party immediately before the Enforcement Date, on the lessor from time to time of:
(i)the First Secured Part Amount; and
(ii)the balance secured by, and outstanding under, the First Secured Party Securities,
(d)the amount of all fees, bank charges, taxes and reasonable expenses (including legal expenses, remuneration of a receiver, and goods and services and similar taxes on those amounts) incurred by the First Secured Party, or by any receiver appointed by the First Secured Party, in protecting, or exercising any powers or rights under the First Secured Party Securities in relation to, Collateral or Other Property;
(e)the amount of any preferential payments required by law to be paid; and
(f)interest, calculated on a daily basis at the greater of a rate equivalent to the cost of funds of the First Secured Party or the relevant receiver (as the case may be) and the highest rate payable by the Debtor to the First Secured Party immediately before the Enforcement Date on the amounts in (d) and (e) above from the date of payment of the relevant amounts until the date of reimbursement of those amounts to the First Secured Party or the relevant receiver (as the case may be)
2.Subject to clause 3, the Second Secured Party Securities and all moneys from time to time secured under them will, in respect of the Collateral and Other Property, have priority over the First Secured Party Securities for an amount not exceeding the aggregate of:
(a) the Second Secured Party Amount;
(b) interest owing to the Second Secured Party at the Enforcement Date, but limited to an amount equal to the interest which would accrue in a period of six months calculated on a daily basis at the highest rate payable by the Debtor to the Second Secured Party immediately before the Enforcement Date, on the lesser from time to time of:
(i)the Second Secured Party Amount; and
(ii)the balance secured by, and outstanding under, the Second Secured Party Securities,
but, for the avoidance of doubt, excluding interest which has been capitalised under or paid by way of an advance under the facility comprising the Second Secured Party’s Debt as defined in clause
18.1 of the Appendix and which is therefore accommodated within the Second Secured Party Amount;
(c) interest, for the Interest Period commencing on the Enforcement Date, calculated on a daily basis at the highest rate payable by the Debtor to the Second Secured Party immediately before the Enforcement Date, on the lessor from time to time of:
(i)the Second Secured Party Amount; and
(ii)the balance secured by, and outstanding under, the Second Secured Party Securities.
(d) the amount of all fees, bank charges, taxes and reasonable expenses (including legal expenses, remuneration of a receiver, and goods and services and similar taxes on those amounts) incurred by the Second Secured Party, or by any receiver appointed by the Second Secured Party, in protecting, or exercising any powers or rights under the Second Secured Party Securities in relation to, Collateral or Other Property; and
(e) the amount of any preferential payments required by law to be paid; and
(f) interest, calculated on a daily basis at the greater of a rate equivalent to the cost of funds of the Second Secured Party or the relevant receiver (as the case may be) and the highest rate payable by the Debtor to the Second Secured Party immediately before the Enforcement Date, on the amounts in (d) above from the date of payment of the relevant amounts until the date of reimbursement of those amounts to the Second Secured Party or the relevant receiver (as the case may be).
5.Subject to clause 4, the First Secured Party Securities will, in respect of the Collateral and Other Property, have priority over the Second Secured Party Securities for the balance (if any) secured by, and outstanding under, the First Secured Party Securities.
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DIRECTION TO PAY
14. Each Secured Party irrevocably and unconditionally authorises and directs a liquidator, official assignee, administrator, receiver, or similar person appointed or acting in respect of the Debtor to pay the proceeds of the realisation of Collateral or Other Property in accordance with the provisions of this Document.
TRANSFER OR ASSIGNMENT
15. Neither Secured Party will transfer or assign any interest or right in or to that Secured Party’s Securities to any person unless that person has entered into a deed or contract in a form approved by the other Secured Party (which approval will not be arbitrarily or unreasonably withheld or delayed) by which that person agrees to be bound by the Document.
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INTERPRETATION
17. In addition to the definitions set out in the document ("Document") which incorporates this schedule of terms these definitions and reference apply:
Enforcement Date The earlier of:
(a)the date on which the Secured Party enforces (including, but not limited to, appointing a receiver) that Secured Party’s rights under a Security of that Secured Party; and
(b)the expiry date of a notice issued in respect of a Secured Party’s Security under section 118 or 119 of the Property Law Act 2007, pursuant to which a Secured Party enters into possession, or exercises that Secured Party’s power of sale, of any land.
[4] Clause 4, within the “Provisions” of the Priority Deed, incorporated into the Deed the provisions of an Appendix to the Schedule. The Appendix contained terms including:
18INTERPRETATION
18.1Definitions: In clauses 18 to 28 of this deed, unless the context other requires:
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“Enforcement” means the exercise by the Securityholder of any right available to it by way of enforcement or realisation of a security interest under any one or more of its Securities (including, without limitation, the service of a notice under section 119 of the Property Law Act 2007 or the appointment of a receiver).
“First Secured Party’s Debt” means, at any date, all indebtedness owed by the Debtor to the First Secured Party and, for the avoidance of doubt but without limitation, includes indebtedness arising as a result of any bonds or bank guarantees issued by the First Secured Party in relation to the Security Property and/or the Development.
“First Secured Party’s Debt Cap” means, at any date, the amount specified in clause 3 but includes that amount as it may be increased as a result of the operation of clause 21.2.
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19.SUBORDINATION
19.1Subordination of Second Secured Party’s Debt: Notwithstanding the provisions of any agreement or other document constituting or evidencing any of the Second Secured Party’s Debt, the Debtor and the Second Secured Party hereby covenant for the benefit of the First Secured Party that the Second Secured Party’s Debt shall be subordinated in point of priority and (except as expressly provided in this deed) right of repayment or payment to the prior repayment or payment of the First Secured Party’s Debt up to the amount of the First Secured Party’s Debt Cap.
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19.4Enforcement of Second Secured Party’s Debt: The Second Secured Party covenants for the benefit of the First Secured Party that, unless:
(a)all repayments and payments have been made to the satisfaction of the First Secured Party in full and final satisfaction of all of the Debtor’s obligations in respect of the First Secured Party’s Debt up to the amount of the First Secured Party Debt Cap; or
(b)the First Secured Party has given its prior written consent to any enforcement, repayment, payment or action pursuant to (c), (d) or (e) below,
it will not, prior to the Termination Date:
(c)exercise any right of Enforcement under the Second Secured Party Securities; or
(d)take or receive payment or accept any assets in respect of, all or any of the Second Secured Party’s Debt, directly or indirectly and whether in any composition by the Debtor with
its creditors, by exercise of set-off, counterclaim, consolidation of accounts or in any other manner; or
(e)take any action whatsoever whether by way of the seeking of injunction relief or otherwise to prevent the First Secured Party exercising any of its rights including, but not by way of limitation, under this deal of the First Secured Party’s Securities.
19.5Subordinated Payments to be held on Trust: If, prior to the Termination Date, the Second Secured Party shall (except as expressly provided in this deed) take or receive any payment or accept any assets in respect of any of the Second Secured Party’s Debt, whether upon the dissolution of the Debtor or for any other reason, then the Second Secured Party shall hold each such payment and any such assets on trust as bare trustee to pay the relevant amount (plus interest (if any)) and turn over the relevant assets to the First Secured Party in or towards the discharge of the First Secured Party’s Debt. Any such amount paid or the value of any such assets held by the Second Secured Party on account of being trustee for the benefit of the First Secured Party and paid over to the First Secured Party shall be treated, for the purposes of the obligations of the Debtor in respect of the Second Secured Party’s Debt, as if it had not been paid or turned over by the Debtor. The Second Secured Party’s Debt shall accordingly be deemed not to be discharged to that extent.
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19.7Duties of Second Secured Party as Trustee: Pending the payment by the Second Secured Party to the First Secured Party of any of the Second Secured Party’s Debt so taken or received or the turning over of any assets so accepted by the Second Secured Party in the circumstances referred to in clause 19.5, the Second Secured Party shall:
(a)not co-mingle any such amount to be paid or any assets to be turned over to the First Secured Party with its other assets; and
(b)place any such amount to be paid to the First Secured Party in a separate, interest-bearing account (to be designated as a trust account) with any bank or financial institution in New Zealand.
The Second Secured Party as trustee shall account to the First Secured Party for any of the Second Secured Party’s Debt so taken or received by it or assets so accepted by it.
19.8Failure of Trust: If and to the extent that the trust constituted by clause 19.5 of this deed is for any reason not properly constituted or is otherwise not effective, the Second Secured Party agrees (on an indemnity basis) forthwith on demand to pay to the First Secured Party any of the Second Party’s Debt so taken or received or any assets so accepted by the Second Secured Party as described in clause 19.5 of this deed.
19.9Dissolution of Debtor: In the event of the dissolution of the Debtor:
(a)the First Secured Party shall be entitled to receive payment in full of the First Secured Party’s Debt but only up to the amount of the First Secured Party’s Debt Cap before the Second Secured Party receives payment of any part of the Second Secured Party’s Debt and any liquidator of the Debtor shall take this clause as authority to pay moneys in accordance with the arrangement set out in this clause; and
(b)the Second Secured Party shall upon the dissolution of the Debtor take such action as may be required by the First Secured Party in order to enable it to enforce payment of the Second Secured Party’s Debt and to collect and receive all payment and distribution in respect of the Second Party’s Debt.
20.APPLICATION OF PROCEEDS
The First Secured Party shall, as soon as practically possible following receipt, apply the proceeds of sale of any part of the Security Property in reduction of First Secured Party’s Debt and upon application of such proceeds by the First Secured Party against outstanding principal (the amount applied in reduction of principal, termed the “Reduction Amount”), the First Secured Party Amount shall, but subject to the operation of clause 21.2 automatically reduce by an amount equivalent to the Reduction Amount.
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27. DEBT ASSIGNMENT
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27.2Default under Second Secured Party’s Debt: The parties agree that in the event the Second Secured Party is in a position to exercise a right of Enforcement in relation to the Securities for the Second Secured Party’s Debt it may give notice to the First Secured Party (which notice shall be irrevocable) requiring an assignment of the First Secured Party’s Debt and all securities for the First Secured Party. If the Second Secured Party gives such notice it must pay to the First Secured Party by way of bank cheque or other cleared funds within 5 working days of the time of delivery of any such notice, an amount certified by the First Secured Party as being the amount equal to the First Secured Party’s Debt. Any certificate from the First Secured Party under this clause shall be final, binding and conclusive except in the case of fraud or manifest error. If the Second Secured Party does not complete payment within this period, the First Secured Party shall have no further obligations to the Second Secured Party under this clause 27.2.
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