Gold Band Finance Limited v Stokes

[2018] NZHC 2263

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE

CIV-2018-409-000261

[2018] NZHC 2263

IN THE MATTER

of the Insolvency Act 2006

AND

IN THE MATTER

of the bankruptcy of COLIN PETER STOKES

BETWEEN

GOLD BAND FINANCE LIMITED

Judgment Creditor

AND

COLIN PETER STOKES

Judgment Debtor

Hearing:	23 July 2018
Appearances:	C P Stokes (Judgment Debtor/Applicant) in person C T Jolliffe for Judgment Creditor/Respondent
Judgment:	30 August 2018

JUDGMENT OF ASSOCIATE JUDGE OSBORNE

on application to set aside bankruptcy notice

[1]    Colin Peter Stokes, in 2002, purchased land in a subdivision at Yaldhurst Road, Christchurch, intended to be known as Noble Village. There were subsequently many difficulties with the subdivisional development which drew Mr Stokes and others into litigation to protect their interests. The subdivider’s remaining land held material significance for Mr Stokes (and other purchasers) for drainage and similar purposes, and for the future subdivision of their own land. This had led to Mr Stokes and others to caveat their interests in the remaining land (with the caveats subsequently upheld

GOLD BAND FINANCE LTD v STOKES [2018] NZHC 2263 [30 August 2018]

through litigation). However, Gold Band Finance Limited (Gold Band) held a mortgage over the remaining land. It effected a mortgagee sale in 2017.

[2]    In the meantime, Mr Stokes and another had issued ordinary proceedings against the subdivider and others associated with the subdivision. The plaintiffs had Gold Band added to that proceeding as a defendant. It identified two causes of action against Gold Band.

[3]    Gold Band successfully applied for orders either striking out the causes of action against it, or entering summary judgment for Gold Band.1 The Court struck out one cause of action (stating it would have entered summary judgment if that were the only application) and entered summary judgment for Gold Band on the second cause of action (“the strike out/summary judgment orders”).2 The Court ordered Mr Stokes to pay to Gold Band the costs and disbursements of the application which were fixed at $11,086.75.

[4]In May 2018 Gold Band had a bankruptcy notice issued against Mr Stokes for

$9,863.33 (which took into account a partial payment made by Mr Stokes).

Application to set aside bankruptcy notice

[5]Mr Stokes applies for an order setting aside the bankruptcy notice.

[6]Gold Band opposes the application.

Setting aside a bankruptcy notice – jurisdiction

[7]    Mr Stokes implicitly invokes the jurisdiction of the Court under s 17(1)(d)(ii) Insolvency Act 2006. Where a bankruptcy notice has been served, the debtor does not commit an act of bankruptcy if the debtor satisfies the Court that they have a cross claim against the creditor.

1      Smith v Noble Investments Ltd [2017] NZHC 2885 (“the strike out judgment”).

2      The strike out judgment, above n 1, at [73] – [74] and [89] – [90].

[8]    The nature of the required cross claim is identified in s 17(7) of the Act which provides:

In subsection (1)(d)(ii), cross claim means a counterclaim, set-off, or cross demand that –

(a)is equal to, or greater than, the judgment debt or the amount that the debtor has been ordered to pay; and

(b)the debtor could not use as a defence in the action or proceedings in which the judgment or the order, as the case may be, was obtained.

[9]The principles which arise from these provisions are helpfully summarised in

Brookers Insolvency Law and Practice, as requiring the debtor to:3

(i)Demonstrate that he or she has a cross claim of true substance which he or she genuinely proposes to pursue,⁴ (see further IN17.10(1)):

(ii)Establish that the cross claim is equal to or is greater than the judgment debt (see further IN17.10(8));

(iii)Establish that he or she could not, by law, use the cross claim as a defence in the action or proceeding on which the judgment or order providing the basis for the bankruptcy notice was entered,⁵ (see further IN17.10(4));

(iv)If he or she relies on factual inability to set the cross claim, he or she must establish some cogent circumstances because the primary emphasis is on the legal nature of the impediment,⁶ (see further IN17.10(4).

Grounds of application

[10]   Mr Stokes identified his grounds of application in six paragraphs. They can be grouped under three headings as follows:

(a)Refusal of redemption

(1)    From 14 December 2014 to 12 January 2015 the judgement creditor Gold Band Finance Limited (“GBF”) refused to provide the documentation required to redeem their mortgage 7915583.35 by parties with the right of redemption who had requested to do so, and refused to allow redemption;

3      S Revill and J Walsh (eds) Brookers Insolvency Law and Practice (looseleaf ed, Thomson Reuters) at [IN17.10].

4      Sharma v ANZ Banking Group (1992) 6 PRNZ 386, [1992] 3 NZBORR 183 (CA).

5      Clark v UDC Finance Ltd [1985] 2 NZLR 636, (1984) 1 BCR 644 (HC), 639.

6      Hardie v Booth [1992] 1 NZLR 356 (HC), 362.

(2)    Under the SSJV, Delta “prevented” GBF from allowing the caveators to redeem or assign GBF’s mortgage as they were entitled to do, and GBF refused the caveators’ requests when it was not legally entitled to.

(3)    GBF, the judgment creditor, failed to act in good faith when exercising powers of sale, even if it had such powers after refusing the request to redeem, toward parties with the right to redeem including the judgment debtor.

(b)Gold Band’s conduct in sharing its security

(1)    In and around December 2009 onwards, GBF as first mortgagee entered confidential Security Sharing Joint Ventures (“SSJV”) with the mortgagor Noble Investments Limited (“NIL”) and another party that was advancing interests behind the judgement debtors’ caveats, Delta Utility Services Limited (“Delta”), to use GBFs’ first mortgagee position and powers to defeat the judgement debtors’ caveats and prior known interests in favour of NIL and Deltas’ subordinate interests.

(2)    GBF the judgment creditor cheated the judgment debtor and others of their prior interests in the mortgaged land by transferring it by way of mortgagee powers to benefit Delta and NIL’s associated parties in a new joint venture including Delta as the major financial partner and as effective redeemer of GBF’s mortgage.

(c)Cross claim equal to or greater than judgment debt (which could not be relied upon)

(1)    The counterclaim, set-off, or cross-demand of costs and damages that the judgment creditor has caused the judgement debtor exceeds that of the judgment creditors’ claims, including Court proceedings, the loss of 13 fully serviced residential sections valued at approximately $300,000 each ($3,900,000), and relies on documented facts that could not be put forward in the proceeding in which the creditor judgment was obtained, that could not be put forward in previous judgements that the creditor judgment relied on, and on facts that have been discovered since.

Ground one: refusal of redemption

[11]   There is a litigation background to Mr Stokes’ complaint that Gold Band refused to allow him to redeem the mortgage.

[12]   In his ordinary proceedings, Mr Stokes had pursued two causes of action against Gold Band.

[13]   By the first cause of action (the ninth cause of action in the statement of claim) Mr Stokes asserted that, through partial assignment of its mortgage, Gold Band purported to share the mortgage with two other creditors, in breach of s 84 Property Law Act 2007. Mr Stokes sought a declaration and damages.

[14]   The Court, in striking out that claim, held that this cause of action could not succeed because:7

(a)Gold Band had not assigned the mortgage, but rather had agreed to hold part of its security on trust for the other creditors; and

(b)Gold Band had not breached the provisions of s 84 Property Law Act, there having been no part-assignment, but in any event s 50 of the Act authorised a part-assignment.

[15]   For his second cause of action against Gold Band (the tenth cause of action in the statement of claim), Mr Stokes asserted that Gold Band had refused to allow him (and others) to redeem the mortgage unless they also purchased the debt of another creditor, an alleged breach of s 102. Mr Stokes claimed a declaration and damages.

[16]   The Court entered summary judgment on this cause of action for Gold Band because Gold Band had provided Mr Stokes with a proper opportunity to redeem the mortgage. The Court found it was proper that the redemption sum took account of the other creditors’ debt.8 Mr Stokes had failed to tender what he believed to be the correct redemption sum.9

[17]   On this setting aside application, Mr Stokes first relies on the proposition that he has a cross claim against Gold Band flowing from its refusal to allow him to redeem the mortgage.

7      The strike out judgment, above n 1, at [66] – [67].

8 At [80].

9 At [89].

Evidence relating to Gold Band’s sharing of the mortgage security

[18]   The background to Mr Stokes’ unsuccessful claims against Gold Band lies in mortgage sharing arrangements entered into in 2013. Gold Band entered into an agreement in that regard with Delta Utility Services Ltd (“Delta”) and Avanti Finance Ltd (“Avanti”).

[19]   Those mortgage-sharing arrangements have been described in earlier judgments. In Gold Band Finance Ltd v Philpott, the Court explained the arrangements:10

Established or arguable facts

[42]    Gold Band had a registered security with priority over the interest caveated by Philpott. The value of the security may be sufficient to protect Gold Band’s exposure.

[43]     Delta provides utility services and did so in relation to Noble’s subdivision from, at the latest, 2009. On 20 November 2009, Delta and Noble entered into a loan contract including Noble’s agreement to grant a first mortgage security over Noble’s Lot 14. Gold Band had agreed to Delta’s mortgage having first priority capped at an amount of $5 million. Philpott was approached to withdraw the Philpott caveats or to provide consent to allow registration of the Delta mortgage as a first mortgage, but refused to do either.

[44]   Gold Band, Delta and Noble entered into a Security Sharing Deed on 14 April 2010. The parties recorded that, since Philpott had refused to withdraw the caveat to allow the registration of the Delta mortgage as a first mortgage, Gold Band had agreed to hold its mortgage over Lot 14 as trustee for Delta, Gold Band thereby subordinating its priority in favour of Delta.

[45]   Noble and Delta subsequently entered into a second loan agreement in respect of further work completed by Delta. Delta was again unable to register a mortgage having priority over the Gold Band mortgage because Philpott refused to withdraw its/their caveats so far as they affected Lots 18 and 19. Gold Band, Delta and Noble then (on 21 December 2011) entered into a second Security Sharing Deed giving Delta first priority to $8.6 million on the new mortgage and increasing its priority under the first mortgage to $5.5 million.

[46]   On 20 August 2013, Noble and Delta entered into a further (collateral) mortgage agreement over the remaining lots (other than Lots 14, 18 and 19).

[47]   On 22 August 2013, Gold Band and Delta entered into a deed of partial assignment of debt and security sharing with Avanti Finance Ltd (Avanti). By that deed, Gold Band sold 37.5 per cent of its Philpott loan to Avanti and 30 per cent to Delta. Gold Band also agreed to hold part of its mortgage security on trust for Delta and Avanti in those proportions.

10     Gold Band Finance Ltd v Philpott [2015] NZHC 2383, (2015) 16 NZCPR 749.

[48]   As a consequence of the various dealings between Gold Band, Noble, Delta and Avanti, the legal position is:

(a)  Gold Band is the first mortgagee (both legal and beneficial of Lots 11–13 and 15–17); and

(b) Gold Band holds its first mortgage in Lots 14, 18 and 19 in trust for Delta; and

(c)  Gold Band’s interests include those of Avanti.

[20]   Gold Band Finance Ltd v Philpott involved an application by Gold Band for an order that a caveat lodged by Mr Stokes and another party should lapse. It was one of Mr Stokes’ grounds of opposition that Gold Band had assisted subordinated parties to defeat his interest. Reliance was placed on Instant Funding Ltd v Greenwich Properties Holdings Ltd,11 a case in which a mortgagee sale had taken place when the lender could have been paid out in full by a prospective purchaser. The Court concluded that, arguably, the agreement between a receiver and the mortgagee had been made in order to avoid the sale to the buyer.

[21]   In Gold Band Finance Ltd, I ordered removal of Mr Stokes’ (and others’) caveats.12 In doing so, I distinguished the facts in Instant Funding:

[75] Neither the circumstances relating to Gold Band’s security sharing arrangement with Delta nor Gold Band’s present intention to enforce its security by mortgagee sale involve, even arguably, unconscionable conduct by Gold Band. Gold Band made a commercial decision to share its security with Delta. Now, in the absence of repayment by Noble, Gold Band seeks to realise that security through an ordinary sale process. The arguable inference of unconscionable motivation in the selection of one buyer and the rejection of another in Instant Funding is not available in this case.

[22]   For the hearing of the more recent strike out/summary judgment applications, Mr Stokes and Gold Band filed evidence according to a timetable in the normal way. At the hearing (on 7 – 8 November 2017) Mr Stokes sought to rely on a document which he had attached to his synopsis of submissions. It is a Memorandum dated 1 August 2016 prepared by the Board of Dunedin City Holdings Ltd (the parent company of Delta) apparently for consideration by the Dunedin City Council (the “Council memorandum”).

11     Instant Funding Ltd v Greenwich Properties Holdings Ltd HC Auckland CIV-2007-404-6806, 20 December 2007.

12     Gold Band Finance Ltd v Philpott, above n 10, at [77].

[23]   Mr Stokes has explained that he obtained the Council memorandum from a city councillor ten days before the strike out/summary judgment hearing. That is why it came to be attached to his synopsis of submissions rather than produced in evidence. In terms of the timetable for evidence, he would have been unable to exhibit the Council memorandum as he did not have it at that point.

[24]   Mr Stokes viewed the Council memorandum as important for reinforcement of his argument that other parties had colluded to defeat his right of redemption.

[25]   Gold Band had entered into its security sharing arrangements with Delta and Avanti Finance in August 2013. Gold Band’s power of sale became exercisable in July 2014. In December 2014, Mr Stokes approached Gold Band about the mortgage.

[26]The Council memorandum reports the following as “background”:

During December 2014, Gold Band Finance advised that it had been approached by one of the western neighbours and caveators, who was offering to purchase a share of the first mortgage loan. Delta received legal advice that it would be detrimental to Delta’s interest if the caveator or any other adversarial party was to obtain a share of the first mortgage. Further legal advice indicated the terms of the tri-party agreement were such that Gold Band was unable to transfer its share of the first mortgage without Delta’s prior consent, however Avanti Finance was in a position to assign its share without the consent of either Delta or Gold Band.

On 29 January 2015, the Delta Board authorised management to make a drawing of circa $2.2 million to purchase the Avanti Finance share of the first mortgage loan in order to prevent the sale of an interest in the first mortgage to the caveator or any other adversarial party. This decision was notified to DCHL immediately.

[27]   Mr Stokes has presented detailed submissions as to why the Council memorandum “sheds new light and weight on previous evidence including emails”. Central to his case is the allegation that Gold Band acted collusively with other parties and in bad faith to prevent Mr Stokes redeeming the mortgage. He submits that when the evidence is seen in that light, this case is similar to Instant Funding and his causes of action are arguable.

The rejection of the Council memorandum

[28]   At the strike out/summary judgment hearing, Mr Stokes sought to rely on the Council memorandum. Gold Band opposed its introduction in evidence.

[29]   The Court heard argument and ruled that the Council memorandum would not be admitted in evidence. The Court issued brief reasons. Mr Stokes takes issue with some of the Court’s reasoning which appeared to assume that the document had been available to Mr Stokes significantly earlier than it was. The Court also relied on other reasoning including that because the Council memorandum had been introduced as an attachment to submissions shortly before the hearing, neither Gold Band nor Delta had had the opportunity to file opposing evidence.

[30]Mr Stokes did not appeal the ruling excluding the evidence.

[31]   Nor  did  Mr  Stokes  appeal  the  strike out/summary judgment.    Mr Stokes explained his decision not to appeal in his written synopsis:

3.5.11The Applicant considers that an appeal against Associate Judge Matthews’ judgement upon which this bankruptcy notice relates, and which would include the new Respondents SSJV Document and facts within, would also require an appeal of the previous Associate Judge Osborne decision’s that Associate Judge Matthews agreed with and relied upon. And that while an out of time appeal may be possible and successful, the Applicant considers his and the Courts resources are best spent prosecuting the proceedings on foot where the new Respondents SSJV Document and facts within would then be brought before the Court in full proceedings with other related documents and cross examination, so the Court can make a fully informed decision on Delta preventing redemption of the first mortgage and Gold Band agreeing to be controlled by a subordinate JV partner with interests behind the caveats.

3.5.12Appealing Associate Judge Matthews and Associate Judge Osborne’s decisions ahead of the full proceedings is considered to be a waste of the Applicants and the Courts resources. And further, that failing to lodge these appeals out of time should not deter from the fact that the Respondent GBF and its SSJV partners actions and collusion in relation to the misuse of mortgagee powers has caused the Applicant (and others) cause for set-off or cross-demand or claims well in excess of the amounts the judgement creditor is claiming. The loss of 13 sections.

Discussion

[32]   Mr Stokes’ grounds of application (above at [10]) are set out in six paragraphs which I have summarised under the three headings (refusal of redemption, Gold Band’s conduct in sharing its security, and cross claim equal to or greater than judgment debt (which could not be relied upon). The six points all contribute to Mr Stokes’ key proposition that he had a cross claim which he was not able to rely upon in the strike out/summary judgment hearing, following which the costs award was made.

[33]   Under s 17(1)(d)(ii) Insolvency Act 2006, Mr Stokes must establish that he had a cross demand (or set-off or counterclaim) which he could not assert in the proceedings in which Gold Band obtained its costs order.

[34]   In this case, the cross demands which Mr Stokes asserts in response to the costs order are the same cross demands as he was making in the proceeding in which the costs judgment was made. The costs judgment arose precisely because the Court found that Mr Stokes’ causes of action were not arguable on either the pleadings or the evidence. In other words, the cross demands, far from unavailable to Mr Stokes in that proceeding, were the very focus of the substantive claims against Gold Band.

[35]   In his submissions, Mr Stokes suggested that his claims in the proceeding fell within the definition of s 17(7) by reason of the fact that the strike out and summary judgment were issued in 2014, before Gold Band effected the mortgagee sale in 2012. The submission does not assist Mr Stokes. First, his claim against Gold Band was and remained for damages in relation to Gold Band’s conduct in dealing with Delta and Avanti. Subsequent events might arguably have served to increase the appropriate level of damages if the substantive claims were upheld. But that does not detract from the fact that the damages claims were available to Mr Stokes from the time he first pleaded them in 2014. Secondly, the mortgagee sale had in fact taken place by the time of the strike out/summary judgment hearing in November 2017, as recorded in that judgment.13

13     Smith v Noble Investments Ltd, above n 1, at [7].

[36]   The alternative submission on which Mr Stokes most heavily focused was that he was unable at the November 2017 hearing to put forward “documented facts that have been discovered since” (above at [10]). Mr Stokes was implicitly relying upon  a line of authority concerning practical impediments to the assertion of a cross claim.

[37]   The Court of Appeal, in Clark v UDC Finance Ltd, recognised that the primary emphasis in the predecessor provision to s 17(7) was upon the legal nature of the impediment to asserting the cross claim.14 Casey J, delivering the Court’s judgment, nevertheless recognised that there may be room for some added qualification of a practical nature. His Honour referred to the observations of Lukin J in Re Stokvis where it was observed that:15

mere failure to take advantage of the opportunity can hardly be said to be an inability.

Casey J in Clark added the qualification that a “failure” may be justified if it was due, for example, to supervening circumstances which made it factually impossible for the debtor to do anything about the claim at that time.16

[38]   The Court’s restrictive approach to allegations of factual or practical inability was restated by Tipping J in Hardie v Booth:17

The inability of which r 41(3) speaks is primarily a legal inability. Factual inability is also available but that requires some cogent circumstance. To take a looser view would be to frustrate the purpose of the rule which is obviously designed to ensure that all issues between the parties both ways be tried at once and that a bankruptcy notice only be set aside if the debtor has a cross- claim which either legally or factually could not be set up in the same proceedings. As Casey J said in Clark's case the primary emphasis is on the legal nature of the impediment and therefore any factual grounds for the suggestion that the cross-claim could not be set up must be carefully scrutinised.

[39]   Re Williams is illustrative.18 Not every inability of a debtor to advance their case in the earlier proceeding will be treated by the Court as a matter which allows the cross claim to be treated as qualifying under s 17(1) of the Act. In Re Williams, the

14     Clark v UDC Finance Ltd [1985] 2 NZLR 636 at 640.

15     Re Stokvis (1934) 7 ABC 53 at 57.

16     Clark v UDC Finance Ltd, above n 14, at 640.

17     Hardie v Booth [1992] 1 NZLR 356 (HC) at 362.

18     Re Williams HC Auckland B120/94, 20 June 1994.

debtor sought to assert in the bankruptcy context a claim which he had identified as a defence before the Disputes Tribunal where the judgment debt was incurred. Notwithstanding the debtor’s allegations, the Referee had decided in favour of the creditor upon the creditor’s claim. Counsel for the debtor noted that the debtor had appeared without legal counsel in the Disputes Tribunal and could not be expected to understand the legal implications of how he had put his case. Fisher J observed:19

It seems to me, however, that when the Act refers to a situation in which the debtor “could not set up” his counter-claim, set-off or cross-demand, that is an objective test which refers to legal opportunity rather than the subjective abilities, understandings and knowledge of the individual debtor.

[40]   In this case, Mr Stokes developed very detailed submissions as to the late availability of the Council memorandum and as to why his damages claims against Gold Band are (notwithstanding the strike out and summary judgment) arguable. He invites the Court to overlook the fact that he had pleaded the same damages claims in that proceeding. Those demands in terms of s 17(7) could be used in that proceeding. Indeed, as against Gold Band, they were the very focus of Mr Stokes’ claims. When Mr Stokes’ submissions here are correctly analysed, they do not involve the proposition that his demands could not be used in that earlier proceeding. Rather, his case is that he was not permitted, by reason of the Associate Judge’s ruling excluding the Council memorandum, to support the identified demands by all the available evidence.

[41]   For Gold Band, Ms Joliffe emphasised, in line with Gold Band’s grounds of opposition, that Mr Stokes did not avail himself of his rights to appeal either the evidential ruling or the strike out/summary judgment orders (or both).

[42]   In relation to the relevance of appeal rights, I adopt the observation of Associate Judge Smith in Aluminium Plus Wellington Ltd (in liq) v Shaw, where his Honour stated:20

In the ordinary course, a judgment debtor whose defence has been rejected by the court or who has failed to raise a defence which might have been available to him or her, cannot deploy the failure of that defence as a cross claim in opposition to a bankruptcy notice later issued by the judgment creditor. The

19     Above n 18, at p 4.

20     Aluminium Plus Wellington Ltd (in liq) v Shaw [2017] NZHC 2607 at [58].

right place for the debtor to raise the defence is by way of appeal against the judgment (or possibly, depending on the circumstances, by application for a rehearing).

[43]   That this is the correct position necessarily flows from the limited extent to which a cross claim may be examined in terms of s 17 of the Act. The Court may examine the cross claim only to the extent it could not have been asserted in the proceeding in which the judgment or order was made. If the debtor did assert the demand in the earlier proceeding, then generally any challenge to that previous judgment must be through normal appeal or review processes. Mr Stokes’ case here is in essence that he has arguable grounds of appeal against the original judgment. That does not mean that his demand could not have been asserted in the earlier proceeding. It was in fact so asserted.

[44]   As a consequence of Mr Stokes’ inability in the earlier proceeding to establish that his claims against Gold Band were arguable, Mr Stokes was ordered to pay the costs and disbursements which are the subject of the present bankruptcy notice. Mr Stokes is aggrieved both by the evidential ruling which precluded his reliance upon the Council memorandum and by the strike out and summary judgment orders. At this hearing, he has articulately developed an argument as to why, if the Council memorandum had been introduced in evidence, it might have altered the outcome in the strike out/summary judgment proceeding. But the provision of s 17 of the Act is such that an application for setting aside a bankruptcy notice is not the procedure by which those previously asserted demands may be re-examined.

[45]   The application for an order setting aside the bankruptcy notice must be dismissed.

[46]Costs must follow the event.

Orders

[47]I order:

(a)The interlocutory application dated 24 May 2018 is dismissed;

(b)The judgment debtor is to pay to the judgment creditor the costs of the application on a 2B basis together with disbursements to be fixed by the Registrar.

Associate Judge Osborne

Solicitors:

Anthony Harper, Christchurch

Copy to: C P Stokes (self-represented)