Grosvenor Financial Services Group Limited v Giovanni Limited
[2012] NZHC 3370
•13 December 2012
IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY
CIV-2012-470-554 [2012] NZHC 3370
BETWEEN GROSVENOR FINANCIAL SERVICES GROUP LIMITED
Plaintiff
ANDGIOVANNI LIMITED First Defendant
ANDROBERT GRORGE TAPP Second Defendant
Hearing: 4 December 2012
Appearances: Mr O Meech for Plaintiff
Ms J Stephenson for Second Defendant
Judgment: 13 December 2012
JUDGMENT OF ASSOCIATE JUDGE DOOGUE
This judgment was delivered by me on
13.12.12 at 2 p.m, pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
Counsel:
MinterEllisonRuddWatts, P O Box 3798, Auckland – [email protected]
Ms J Stephenson, Kaimai Law Bethlemhem, Tauranga - [email protected]
GROSVENOR FINANCIAL SERVICES GROUP LIMITED V GIOVANNI LIMITED & ANOR HC TAU CIV-
2012-470-554 [13 December 2012]
[1] These proceedings arise out of the purchase by Mr Tapp of an accountancy and taxation business.
[2] The plaintiff advanced finance for the sale price for the business by way of a vendor loan agreement. The second defendant guaranteed the advance. He accepted liability as a principal debtor.
[3] Mr Tapp failed to pay an instalment of the purchase price, an amount of
$38,059.10 which fell due 1 August 2011. The notice of demand was then served by
Grosvenor on the second defendant and other parties requiring payment of
$1,564,590.39 which comprised the indebtedness then owing under the vendor loan agreement. The plaintiff now sues him for the shortfall.
[4] In the meantime on 18 June 2012, pursuant to securities which were provided when the transaction was entered into, the business was sold for $800,000 part of which price was to be satisfied by a non-refundable deposit of $300,000 and the balance of $500,000 is to be paid 12 months thereafter. This agreement was entered into by receivers for the plaintiff who had been appointed.
[5] The specific grounds of opposition which are particularised in the notice of opposition are :
a) Deductions for:
(1) the balance of the purchase price; (2) unbilled work in progress (WIP); (3) debtors ; and
b)An alleged sale of the business at undervalue (although this is not advanced by way of an arguable defence).
[6] So far as the last point is concerned, the alleged sale at undervalue, the point here is that while the issue was raised in the affidavit which the second defendant filed, it was not stated as a ground of opposition in the notice of opposition.
[7] The defendant contends that while he is liable there are disputed matters which need to go to trial at which contentions that he makes would be considered. Those contentions are, broadly,
a) That the transaction was structured in such a way that $500,000 of the purchase price on the original transaction did not become due until July of 2013. His overall liability, the defendant contends, cannot be established until the time arrives for that amount to be paid because it is possible that Mr Tapp or one of the other covenanting parties may be good for the balance of the purchase price;
b)The plaintiff has already taken steps to realise securities which has had the effect of producing the overall shortfall in the unpaid purchase price. However, it is alleged that the plaintiff has breached duties that it owes to the second defendant in his capacity of guarantor/principal debtor, amongst other people. The plaintiff has allegedly done this by failing to sell some assets over which it has security and, by not obtaining the full value for other assets that were sold.
Summary judgment principles
[8] The parties agreed upon the principles that were to be applied in dealing with summary judgment applications. In particular, Ms Stephenson agreed with Mr Meech that the well-known authority of Krukziener v Hanover Finance Limited[1] ought to be followed. She also agreed with the submission for the plaintiff that the authorities are clear that:
[1] Krukziener v Hanover Finance Limited (2008) 19 PRNZ 162.
a) Once the plaintiff has put forward a verified prima facie case, it is for the defendant to point to a proper evidential foundation for an
arguable defence. See, for example, Tilialo v Contractors Bonding
Limited CA.[2]
[2] Tilialo v Contractors Bonding Limited CA 50/93 17 March 1994 at p 5 and p 6.
b)It is not sufficient for defendants to assert without more that there is an arguable defence. That must be demonstrated on the pleadings and evidence before the Court. See, for example, Middleditch v New Zealand Hotel Investments Limited.[3]
[3] Middleditch v New Zealand Hotel Investments Limited (1992) 5 PRNZ 392.
c) The courts must be alert to the possibility of injustice in cases where some material facts to establish a defence are not capable of proof without interlocutory procedures such as discovery and interrogatories. That does not mean that defendants are to be allowed to speculate on possible defences which might emerge but for which no realistic evidential basis is put forward (Middleditch).
The failure to include the sale at undervalue in the notice of opposition
[9] In the course of the hearing it became apparent that the second defendant intended to assert that there had been a sale at undervalue. This raised questions of whether the plaintiffs had breached their obligations under s 19 of the RA.
[10] Even though this issue had not been raised in the notice of opposition which the second defendant filed, the plaintiff had responded to it by way of affidavit evidence. Mr Meech was able to make submissions on the point and for that reason I will consider this ground of opposition in the judgment.
The ground of opposition that the plaintiff should not be permitted to enter judgment until securities exhausted
[11] The point made for the second defendant arose out of the fact that the purchaser of the business assets which were secured to the plaintiff has yet to pay the full purchase price. The second instalment of the purchase price does not become payable until June 2013. The second defendant estimates that the plaintiff may be
required to pay up to $0.5 million additionally to what it has paid so far. The second
defendant’s contention was that given that the plaintiff has a contractual entitlement to a further $500,000 approximately on the sale of the business, it would be wrong, unjust and unfair for the Court to enter summary judgment at this point.
[12] Dealing first of all with the question of the legal rights of the plaintiff, Mr Meech referred me to the fact that the security documents impose no requirement on the plaintiff that it should exhaust its securities before proceeding against the second defendant. He referred the first to clause 4.3 of the guarantee which provides that it is at the discretion of the plaintiff at any time to enforce the terms of the guarantee “without first taking steps or proceedings against the Debtor or any other person”. Further, clause 4.4 exempts the plaintiff from enforcing any security or right before enforcing the guarantee.
[13] I agree with the submissions for the plaintiff. The second defendant’s position is regulated by the terms of the contract that he entered into. The Court does not have any dispensing power which enables it to ignore those terms of the contracts on the basis that it would result in hardship to the second defendant.
[14] Mr Meech submitted to me that if in due course it turns out to be the case that the plaintiff is left with a surplus after it completes recoveries under the contract for sale of the business then the contractual arrangements between the parties require the plaintiff to refund the excess to the second defendant. The submission was based upon clause 10.2.(e) of the Specific Security Deed. That particular provision makes provision for the order of application of the amounts received or recovered by the secured party. So far as relevant, it provides for distribution:
(e) fifthly, of any surplus to the Debtor …
[15] Ms Stephenson submitted to me that this would not help the second defendant because by the time that point was reached, it would be likely that he would be bankrupt.
[16] I take the view that the considerations raised by Ms Stephenson should not stand in the plaintiff’s way. If the point is ever reached at which Mr Tapp is facing
bankruptcy proceedings in circumstances where there is a realistic prospect that the plaintiffs will have made surplus recoveries, then that is no doubt a matter that can be considered as part of the discretion a Judge has when determining whether or not to make an order adjudicating a debtor bankrupt.
The allegation that the receivers did not obtain the best price for the business
[17] Mr Meech, while accepting for the plaintiff that the obligation of the receivers in this case was to obtain the best price reasonably obtainable as at the time of sale,[4] also pointed out that in terms of s 6 of the Receiverships Act 1993 the receiver appointed under a deed or agreement is the agent of the debtor company unless the deed or agreement or the instrument of appointment provides otherwise. I accept that the receivers in this case are the agents of the company and not the plaintiff.
[4] Section 19 Receiverships Act 1993.
[18] The position of the receivers is further clarified by the terms of clause 11.4 of the General Security Deed.[5] That provision makes it clear that the secured party:
... is not responsible for a Receiver’s action, including the misconduct,
negligence or default of the Receiver.
[5] Bundle of documents at page 203.
[19] Even had there had been a breach of obligation by the receiver to obtain the best price reasonably obtainable at the time, liability would be that of the receivers only and not of the plaintiff which appointed the receivers under the debenture.
[20] Further, even if the foregoing was incorrect, and the plaintiff had a viable claim against the receivers, that could not be raised by way of set off because of the provisions of clause 7.3(j) of the Specific Security Deed executed by the parties.
[21] In any case, I do not accept that the defendants have established that there is an arguable defence that the receivers breached their obligations under s 19 of the Act. It is necessary to say something about the evidence on that point.
[22] Mr Tapp has given it as his opinion that medium sized businesses like the one that he operated are sold for a good will figure of between 70 – 75 percent of the average turnover in the last three financial years of trading. On the basis of such a formula a price in excess of $900,000 ought to have been realized, he deposes. He also says that having regard to the typical way in which future maintainable earnings are capitalized (at a rate of between 30 and 33 percent) a market value of between approximately $900,000 and $1,000,000 was indicated. This he compares with the figure of approximately $800,000 which is expected to be recovered under the agreement for sale and purchase which the debtor company sold through the instrumentality of the receivers. What figure finally proves to be recoverable under that agreement is subject to possible price reductions that the purchaser may be able to obtain depending upon its trading performance in the first year following acquisition.
[23] Mr Tapp has not attempted to qualify himself as an expert to give opinion evidence of the kind he does. That evidence is not admissible.
[24] In the second place, as a matter of fact, the defendants have explained in some detail the process by which they went about marketing the business and the considerations that they took into account in negotiating the sale of the business. As Mr Meech pointed out, the receivers (and the debenture holder) had an interest in maximizing the amount recovered under the agreement for sale and purchase. Further, Ms Brownrigg, who has qualified herself as an expert and who was a consultant on the sale of the business, has deposed that the sale price obtained was satisfactory and has given evidence which satisfies me that the second defendant does not have an arguable defence that in selling the business at the price that they did that the receivers breached s 19 of the Act. That conclusion is reinforced by the fact that when the receivers discussed the possible re-financing of the debt, Mr Tapp himself valued the business at $850,000 but subject to a number of conditions which the plaintiff’s counsel described as “fishhooks” which made the transaction less attractive than the agreement actually entered into.
[25] All of this leads to the view that in the end, the figure obtained for the business reflects the best price that the receivers were able to obtain following a
reasonable marketing programme. It is idle for the second defendant to give evidence that in his opinion the business was worth more. The same may be said of his criticisms of individual aspects of the agreement for sale of the business including the value attached to work in progress
[26] Ms Stephenson also drew attention to an aspect of the timeline which she considered raised question marks about the propriety of the conduct of the debenture holders and the receivers in regard to the sale of the business. She noted that her client through her solicitor sent a “refinancing” offer to the plaintiff on 16 May 2012 and that that offer was rejected on 15 June 2012. On 16 June 2012 Mrs Hart and Tubs of BDO Chartered Accountants were appointed as receivers and managers and on the same day the receivers concluded a sale of the business. However this timeline overlooks the fact that as long ago as 25 November Mr Tapp’s solicitor had advised that his client would not be able refinance the loan and in December 2011
Mr Tapp agreed to assist in selling the business. Ms Brownrigg was brought into assist with the sale of the business in January 2012 and by June 2012 a buyer had been located and due diligence undertaken. It is also significant that since at least the end of 2011 the firm of BDO (the firm from which the receivers were appointed) had been involved in advising about the sale of the business. Indeed Mr Tapp attended a meeting that representives of BDO were present at towards the end of
2011. Midway through the following year it must have been clear that progress was required to complete a sale and no doubt there were advantages in having receivers appointed for that purpose. The receivers appointed were from BDO. It would therefore be wrong to characterise the receivers as having only a very brief exposure to the background of the debt default and the sale process before they entered into the agreement. There is nothing of substance in this point.
[27] Mr Tapp says that the agreement for sale and purchase of the business is deficient in that no provision was included in the agreement for the purpose to pay interest on the unpaid instalment which will not be payable until June 2013. However there is no evidence to establish that the receivers could have obtained interest in addition to the price they negotiated for the agreement. There is no evidence that the receivers failed to obtain additional consideration for the sale in the
form of interest and that by failing to obtain interest, therefore, they breached the obligation to obtain the best price reasonably obtainable.
[28] The defendant also raised issues about the value of the debtors which were part of the assets of the company. Debtors were not in fact included in the sale of the business. A Mr Gary Scott, the plaintiff’s Chief Financial Officer, has deposed that the:
“... receivers recent advice to Grosvenor is that they have collected $125,000 of debtors to date and they have formed a view that there is at least $100,000 of doubtful debts.
[29] I read the deposition of Mr Scott as being that action is continuing to be taken to recover the bad debts. The second defendant deposed that under his management of the company he had taken steps to get the debtors into a good state. This evidence was directed to an attempt to establish that the receivers should have done better in recoveries from the debtors of the business. Even if the evidence of the second defendant concerning the state of the debtors of the company is correct, the commercial reality is that the receivers would be expected to take steps to maximise the amount that could be obtained from enforcement of the unpaid debts. There is no reason why they would not apart from commercial practicability. In the end, though, what Mr Tapp seems to be suggesting is that it is not so much that he is complaining about the progress made with collecting the debts to date as that significant sums should still come to hand by way of collected debts which will reduce the amount that he owes to the receivers. That is to say, he is reiterating the point that he considers it unfair that he should have to meet his obligations until the receivers and the debenture holder have recovered everything by way of realisations that they practically can.
[30] As I have pointed out earlier in this judgment, the plaintiff is not required to wait until that point before taking enforcement action against Mr Tapp. Even if his expectations concerning the debts were not over-sanguine, in the final analysis they are irrelevant to the question of whether the second defendant has an arguable defence.
[31] So far as the work in progress is concerned, Mr Tapp similarly has an expectation that some $250,000 ought to be recoverable under this head. However, that point is not sustainable because, as, unlike the debts, work in progress was sold to the new owners as part of the agreement for sale and purchase and there will be no additional realisations representing work in progress. The only possible complaint that might be open to the second defendant concerning work in progress is that the receivers obtained too low a price for the business overall, having regard to the value of the work in progress. I am however satisfied that it is not reasonably arguable that the receivers did not obtain the best price available for the business, for the reasons already given.
[32] For all of these reasons I conclude that the defendant does not have an arguable defence as to quantum.
Orders
[33] The plaintiffs have submitted a memorandum which sets out the calculations
of Mr Tapp’s indebtedness under the guarantee. The underlying debt figure is
$1,617,363.74. I am satisfied that that is the correct amount of judgment and judgment will be entered for that sum.
[34] The plaintiff also seeks interest totalling $64,437.90 calculated at the contractual interest rate of 17.5 percent per annum accruing daily and compounding monthly. I agree that the amounts of interest claimed are correct and there will be judgment for the additional sum in regard to interest that I have just mentioned.
[35] The next issue concerns costs. Mr Tapp is legally aided. Notwithstanding the provisions of s 45 of the Legal Services Act 2011 the plaintiff seeks an award of costs. The plaintiff accepts that it must establish that exceptional circumstances exist which justify an award of costs.[6] The plaintiff sets out three matters:
[6] Section 45 (2).
a) The fact that liability was not contested and yet a hearing was necessary on quantum;
b)That because of the contractual arrangements between the parties the matters raised by way of contest as to quantum are spurious;
c) The second defendant failed to comply with the Rules by not filing his notice of opposition on time and necessitating appearances at two mentions hearings.
[36] I granted leave to Ms Stephenson to file submissions if necessary concerning this aspect of the matter at the hearing on 4 December 2012. However on further reflection I consider that I am able to deal with the application for costs without hearing from her.
[37] I decline to make an order as to costs. I do not consider that exceptional circumstances exist.
[38] I do not accept what is implicit in the plaintiff’s submission that contesting quantum but not liability is somehow irregular or improper. If anything, the fact that Mr Tapp did not persist with a defence in regard to liability will have reduced the costs of the proceeding and not exacerbated them.
[39] The defences on quantum have not succeeded but they cannot reasonably be characterised as “spurious”. There were matters capable of argument and enquiry into the issues was justified. Finally the non-compliance with the failure to file the notice of opposition and supporting affidavit in time while regrettable are understandable. They may well have been contributed to by the fact that Mr Tapp is in receipt of legal aid.
[40] The overall intention of s 45 is to recognise that persons who are legally aided should not, because of their reduced financial circumstances, be burdened with costs orders. However there is a recognition that even persons of limited financial circumstances may by their conduct provide cause for making costs orders. Where a legally aided person behaves in an irresponsible fashion and abuses the processes of the Courts to the extent that the circumstances may be described as “exceptional”, then notwithstanding the policy of the Act to relieve legally aided persons of the
burden of costs orders, costs orders must nonetheless be made. I do not consider that all the circumstances of this case constitutes sufficient justification for an amount departing from the starting point that a legally aided person such as Mr Tapp should lose the protection of s 45 of the Act. His conduct has not been irresponsible or reprehensible to the point where he has forfeited his entitlement to the protection of s 45. I decline to make an order for costs against him. I therefore enter judgment
against Mr Tapp in the sum of $1,681,801.60.
J.P. Doogue
Associate Judge
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