Gangnam Property Investments Limited v Affin Interiors Limited (in receivership and liquidation)

[2017] NZHC 3197

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2017-404-000943 [2017] NZHC 3197

BETWEEN

GANGNAM PROPERTY

INVESTMENTS LIMITED Plaintiff

AND

AFFIN INTERIORS LIMITED (IN RECEIVERSHIP AND LIQUIDATION) First Defendant

AND

GABRIEL VASILE STELIAN NICOLAU Second Defendant

Hearing:	13 November 2017
Appearances:	J McBride for the Plaintiff No appearance for the First Defendant K Sullivan for the Second Defendant
Judgment:	18 December 2017

JUDGMENT OF ASSOCIATE JUDGE SARGISSON

This judgment was delivered by me on 18 December 2017 at 3.30 p.m. pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date.......................................

Solicitors:

Patel Nand Legal, Auckland

WCM Legal, Wellington

J McBride, Auckland

GANGNAM PROPERTY INVESTMENTS LTD v AFFIN INTERIORS LTD & Anor [2017] NZHC 3197 [15 December 2017]

K Sullivan, Wellington

Introduction

[1]      At face value this proceeding involves a straightforward summary judgment application seeking rental arrears pursuant to a deed of lease.

[2]      The lease concerns a commercial premise at 507 Rosebank Road, Avondale, Auckland.  The lessor is the plaintiff, Gangnam Property Investments Ltd. Gangnam entered into a deed of lease with the first defendant, Affin Interiors Ltd, as lessee, on

15 February 2016.

[3]     Gangnam initially brought proceedings against Affin, which is now in receivership and liquidation, but that claim has been discontinued.  Gangnam instead pursues the second defendant and Affin’s director, Mr Nicolau, who guaranteed Affin’s obligations under the lease.  Gangnam seeks to recover approximately $500,000 for outstanding rent, property management fees, and interest under the lease.

[4]      But Mr Nicolau submits he has an arguable defence.  In particular, he says he has a counterclaim against Gangnam and/or a valid claim against its director, Mr Patel, which exceeds the value of Gangnam’s claim against him.  Specifically, Mr Nicolau says that Affin is owed over a million dollars for uncompensated renovation work that Affin undertook on a property beneficially owned by Mr Patel.

[5]      I am satisfied that this provides an arguable defence to Gangnam’s claim, and that the summary judgment application should accordingly be declined.  My reasons follow.

Facts

Affin’s rapid growth

[6]      Affin began trading in 2010 and quickly became a successful shop fitting company. An opportunity arose in 2015 to significantly expand the business when the

liquidators of a competitor company offered to sell all the company’s assets to Affin for $500,00.

[7]      Affin reached out to one of its former clients, Gangnam, to help secure the deal. Mr Nicolau asked Mr Patel if Gangnam would be interested in buying shares in Affin to help fund the purchase of the assets. According to Mr Nicolau, they reached a verbal agreement that Mr Patel would purchase a 25 percent shareholding for $500,000. But then Mr Patel apparently presented Mr Nicolau with a very different written contractual arrangement, involving:

(a)      a term loan agreement to advance Affin the money at 5 percent interest (repayable in five years), a first ranking general security agreement over all of Affin’s assets and undertakings, and a 25 percent share sale to Gangnam for $1;

(b)a shareholders’ agreement stipulating that Mr Nicolau and Mr Patel were both entitled to one equal vote, and that most important business decisions required unanimous approval of the both shareholders.

[8]      Mr Nicolau signed all these documents. He acknowledges his naïveté, but explains that he felt pressured to sign because he had already committed to purchasing the assets from the liquidators.  On my reading of the evidence, there are also signs that Mr Patel’s force of personality exerted considerable influence over Mr Nicolau personally.

[9]      In early 2016 Affin moved into a substantially larger premise in Avondale. Gangnam purchased the property and leased it to Affin for 12 years.  Affin’s annual rental increased from $50,000 to approximately $60,000.   This was a significant commitment: Affin’s annual turnover was approximately $2 million at that time.

[10]     Fortunately, Affin grew quickly with its turnover peaking at around $7 million. But its costs also ballooned as Affin added new staff and contracts. Mr Nicolau admits that Affin came under increasing financial strain and was soon struggling to pay all its creditors on time.

[11]     Relevantly for this application, rent payments also began to fall in arrears.

The Kohimarama renovations

[12]     Nonetheless, Mr Nicolau maintains that Affin would have survived were it not for  renovation  work  undertaken  by Affin  on  a  multimillion  dollar  property  at

174 Kohimarama Road.  The property is registered in the name of Mr Patel’s sister, but there is no dispute that Mr Patel lives there and is the beneficial owner. Now a minority shareholder in Affin, it seems Mr Patel was able to persuade Mr Nicolau to direct a fair portion of Affin’s time and resources towards this project.

[13]     The  design  phase  began  in  2015  and  construction  sometime  in  2016. Mr Nicolau wanted a fixed price contract for this work, with a standard charging process like any other client.  Mr Patel, however, insisted on an ad hoc arrangement. He would set off charges against the rental arrears owed to Gangnam (a critical point I will return to later) or else render charges to his other companies, seemingly so he could claim back GST.  As events panned out, the scope of the work also shifted significantly: an initial estimate of about $600,000 for a full recladding developed, on Mr Patel’s direction, into a $1.7 million estimate for more large-scale renovations.

[14]     Crucially, Mr Nicolau further insists that significant sums (totalling over a million dollars) are yet unpaid.  On 13 June 2016, an invoice for $1.2 million plus GST was rendered on Mr Patel based on the accounting records maintained by Affin. Mr Patel did not pay, indeed he disputed his liability to pay. Meanwhile, he continued to demand payment of the rental arrears. Shortly before the renovation work was completed, Affin ceased further work pending payment of the invoice.

Relationship breaks down

[15]     After unsuccessful attempts at resolving the dispute, Gangnam eventually terminated the lease on 1 July 2017.  Gangnam effected re-entry of the premises on the same day, locking Affin out of the premises and taking possession of all the company assets. This meant Affin could no longer continue trading.

[16]     Relying on powers under General Security Agreement, Mr Patel appointed two receivers on 4 July 2017 who promptly sold all of Affin’s assets and stock. One of the two receivers appointed was the solicitor Gangnam had engaged to help with the recovery of the rental arrears.  Mr Nicolau complained (and still complains) that this is a conflict of interest, and that this explains why the receivers have not pursued Affin’s largest debt, the uncompensated renovation work.

[17]     Gangnam had first issued summary judgment proceedings against Affin and Mr Nicolau in May 2017, but then stayed proceedings against Affin after the company was placed into liquidation on 24 July 2017.  Summary judgment proceedings were reinvigorated when Gangnam filed an amended statement of claim against Mr Nicolau on 19 July 2017.

Law

[18]     Plaintiff summary judgment is provided for in High Court Rule 12.2(1). The legal principles are well settled.

[19]     The question in plaintiff summary judgment is whether the defendant has no defence to the claim.1   The Court must be left without any real doubt or uncertainty.2

The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the onus shifts to the defendant to demonstrate why the application should not succeed.3

[20]     The court will be reluctant to resolve material conflicts of evidence or assess the credibility of deponents.   But it will not uncritically accept evidence that is

inherently lacking in credibility.  Overall, the Court will take a robust and realistic

approach to the evidence.

1      Pemberton v Chappell [1987] 1 NZLR 1, (1986) 1 PRNZ 183 (CA) at 185.

2      Krukziener v Hanover Finance [2008] NZCA 187, (2008) 19 PRNZ 162 at [26].
3      MacLean v Stewart (1997) 11 PRNZ 66 (CA).

Analysis

Parties’ submissions

[21]     Gangnam’s   statement   of   claim   and   submissions   are   succinct   and unembellished — so much so they risk being evasive.  Counsel for Mr Patel came close to conceding as much at the hearing.

[22]     Detailing very little of the wider factual narrative canvassed above, Gangnam simply relies on the terms of the lease. Specifically, it claims that Mr Nicolau is liable, as guarantor under the lease, to pay Gangnam:

(a)      an outstanding balance of approximately $440,000 for unpaid rent and property management fees from the date Affin took possession of the premises on 1 October 2016 to the date Gangnam effected re-entry on

1 July 2017;

(b)plus interest at the default rate, totalling to $57,273.37 as at the date of the hearing.

[23]     In  reply,  Mr  Nicolau  raises  a  number  of  possible  defences.  For  present purposes, it is only necessary to consider the strongest of these: the contention that Mr Nicolau has a set-off in respect of the work done on his Kohimarama property.

Is it arguable that Mr Nicolau has an equitable set-off defence?

[24]     It is well established in summary judgment proceedings that a defendant may raise equitable set-off as a defence to the plaintiff’s claim.   Equity will allow a set-off where it would be inequitable or unconscionable to allow the plaintiff to proceed without bringing the defendant’s claim to account.  In this case, Mr Nicolau seeks to set-off against Gangnam’s claim for the rental arrears a cross-claim for the unpaid renovations work.

[25]     I find the factual basis of the set-off sufficiently credible to be arguable. Not only is Mr Nicolau’s affidavit evidence credible enough at first blush, but it is

supported by further affidavit evidence from two chartered accountants, Ms Tang and Mr Prasad. The former worked in-house at Affin from 2016 till it ceased trading, while the latter is the director of a chartered accountancy practice which provided accounting assistance to Affin.  Both depose to the significant financial strain placed on Affin by uncompensated work on the Kohimarama property, of which detailed records were kept.

[26]     Gangnam replies with what it takes to be two ‘knock-down’ arguments.  First, it contends the set-off is blocked by the operation of the no set-off clause in the deed of lease.  Second, that there is no exact equivalence of identity between the parties involved in the two claims.

The no set-off clause

[27]     Parties can contract out of an equitable right to set-off, and on its face, this is exactly the situation in this case.  The deed of lease contains the usual “no set-off” clause, which reads:

All rent shall be paid without any deductions or set-off by direct payment to the Landlord or as the Landlord may direct.

[28]     The meaning of the clause is not disputed: in the ordinary course, the tenant has no ability to raise a set-off as a basis for refusing to pay the full amount of the rent owed under the lease.

[29]     Mr Nicolau responds to this challenge in two ways.

[30]     His primary rebuttal is to rely on the court’s residual discretion to decline summary judgement under High Court Rule 12.2. This discretion is extremely limited, however, reserved solely for cases where granting summary judgment would cause an injustice.4   The authorities are clear that where the set-off is excluded by an express contractual provision in an agreement between commercial parties, barring exceptional circumstances, it cannot be said to be an injustice to give effect to the

bargain the parties have made.5     The issue is whether there is something about Mr Nicolau’s case that suggests such exceptional circumstances. I leave that question open.

[31]     For the more compelling submission, in any case, is this: Gangnam is estopped from relying on the no set-off clause by virtue of Mr Patel’s conduct in setting off charges for the renovation work against the rental arrears.   Though this second response was not clearly articulated by counsel for Mr Nicolau, he made pointers in its direction.  It is not fatal that equitable estoppel was not pleaded.  The task of this court is fundamentally to determine whether Mr Nicolau has “no defence” to Gangnam’s cause of action.6

[32]     The doctrine of equitable estoppel, at its heart, is about preventing parties from going back on their word (whether express or implied) when it would be unconscionable to do so.7    In other words, a party will not be permitted to deny an assumption, belief or expectation that it has allowed another to rely on where such a denial would be unconscionable.

[33]     In this case, I consider it reasonably arguable that the key elements of the doctrine may be made out.8  The evidence suggests that:

(a)      The conduct of requiring that the charges be set off against the rental arrears owed to Gangnam created a reasonable expectation that the no set-off clause was impliedly being waived, at least with respect to the renovation work.

(b)Affin relied on this expectation, begrudgingly allowing Mr Patel to set off the charges in this way and thereby giving up his preference for a

5      Bromley Industries v Martin & Judith Fizsimons (2009) 19 PRNZ 850 at [66]. See also Dominion

Finance Group Ltd v Kheong [2012] NZHC 1485 at [79].

6      Westpac Banking Corp v M M Kembla New Zealand Ltd CA50/00, 2 May 2000; CA51/00, 9

November 2000 at [65]-[68].

7      National Westminster Finance NZ Ltd v National Bank of NZ Ltd [1996] 1 NZLR 548 (CA) at 549 per Tipping J.

8      Gold Star Insurance Co Ltd v Gaunt [1998] 3 NZLR 80 (CA) at 86 per Holland J.

standard charging process (or indeed, for another ordinary fee paying client).

(c)     Affin, and therefore Mr Nicolau as its guarantor, would suffer considerable financial detriment if Affin was ordered to pay up the rental arrears without the opportunity to set off that debt against the uncompensated renovation work.

(d)Moreover, this outcome is clearly unconscionable, especially in light of the wider factual narrative canvassed above, involving close intermingling   of   Mr   Patel   and   Gangnam   in   Affin’s   affairs. I particularly have in mind here Mr Patel’s driving (and allegedly coercive) influence of the company’s rapid business expansion that led to the cashflow issues; and also his insistence on an unorthodox financial arrangement for his renovation work.

[34]     I do not need to be convinced that this submission would succeed. I must only be satisfied, and in the circumstances I am so satisfied, that the equitable estoppel argument is reasonably arguable and ought not be dismissed at this summary stage.

Non-equivalence of parties

[35]    But there is a further hurdle for Mr Nicolau.   This summary judgment proceeding is brought by Gangnam against Mr Nicolau; but the cross-claim pursues a debt owed to Affin by Mr Patel personally. There is therefore no exact equivalence of parties as one would expect in an equitable cross claim.

[36]     Tipping J  aptly describes the importance of an equivalence of parties in

Hamilton Ice Arena Ltd v Perry Developments Ltd:9

The need for identity of parties is also consistent with the proposition that the cross-claim is regarded in equity [as] fully or pro tanto extinguishing the plaintiff's right to judgment on the claim. The concept of extinguishment is difficult if the cross-claim is made by a different party.

[37]     Tipping J did not rule out the possibility, however, that in some “unusual circumstances” equitable set-off might yet be justified where there is no exact identity of the parties. One such circumstances recognised by the courts is where there is high level of intermingling of the affairs between the parties to a proceeding and the entities implicated in the cross-claim.10

[38]     It is reasonably arguable that this exception holds force in this case also, given the  extensive  intermingling  between  the  parties  involved  in  this  proceeding. In particular:

(a)      Mr Patel is the sole director of Gangnam, and Mr Nicolau the sole director of Affin. Their dealings with each other personally are closely bound up with their dealings as directors of their respective companies.

(b)This is especially the case because Gangnam is a minority shareholder in Affin; indeed, in many respects it enjoys equal shareholder rights over the company as does Mr Nicolau as majority shareholder.

[39]     For instance, Mr Patel’s ability to persuade Affin to undertake substantial work on his house is tightly connected with Gangnam’s position as minority shareholder. The close intermingling is further evidenced by Mr Patel setting off his personal debts to Affin against Affin’s debts to Gangnam.  It is clear that the claim and the cross- claim are interconnected: Affin’s inability to pay its rental arrears is causally related with the cashflow problems created by Mr Patel’s failure to compensate Affin for the work on the Kohimarama property.11

[40]   Stepping back to view the underlying equities in this case, it would unconscionable to prematurely kill the cross-claim, or more specifically the reliance on equitable estoppel, due to a lack of perfect equivalence between the parties. Or, to put it another way, in the circumstances of this case it would be unequitable for Gangnam to escape a potentially meritorious cross-claim because of this technical

‘defect’. After all, as the adage says, equity will look to substance over form.

10     See for example Easy Energy Ltd v Jump NZ Ltd HC Wellington CIV-2010-485-2294, 1 July 2011.

11     Grant v NZMC Ltd [1989] 1 NZLR 3 at 12-13.

Affin’s claims not Mr Nicolau’s responsibility

[41]     For completeness, I address one final issue. Gangnam contends that any claim in debt that Affin might have is now the responsibility of Affin’s liquidators and receivers. And it will be their decision whether any steps are taken on behalf of Affin against Mr Patel to recover the alleged debt.   So, Gangnam suggests, Mr Nicalau cannot rely on a debt owed to the company as a defence to his liability as guarantor.

[42]     Yet Mr Nicolau is not seeking to sue Mr Patel based on uncompensated renovation work; he is merely raising it as a possible defence.  Arguably there is no bar to Mr Nicolau doing so. It may be that he will need the liquidators’ permission to pursue the matter further at trial.  However, if the cross-claim is indeed meritorious, I consider it reasonably arguable such permission would be granted by the court if not the liquidators given the immensity of the amounts at issue in the cross-claim.

Result

[43]     Gangnam’s application for summary judgment is declined.

[44]     Costs are reserved in  accordance with the Court of Appeal’s  decision in

NZI Bank Ltd v Philpott.12

[45]     The Registrar is asked to allocate an initial case management conference.

Associate Judge Sargisson