Heartland Bank Limited v Ora HQ Limited
[2021] NZHC 144
•12 February 2021
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV 2020-404-95
[2021] NZHC 144
UNDER Part 18 of the High Court Rules BETWEEN
HEARTLAND BANK LIMITED
Plaintiff
AND
ORA HQ LIMITED
First Defendant
WILD LOGIC LIMITED
Second DefendantWILD LOGIC PROPERTIES LIMITED
Third Defendant
Hearing: 31 August 2020 Appearances:
I J Thain and I E Scorgie for Plaintiff T Cooley for Defendant
Judgment:
12 February 2021
JUDGMENT OF DUFFY J
This judgment is delivered by me on 12 February 2021 at 11:30am pursuant to r 11.5 of the High Court Rules.
.....................................................
Registrar / Deputy Registrar
Solicitors:
DLA Piper, Auckland
Meredith Connell, Auckland Brookfields, Auckland
HEARTLAND BANK LTD v ORA HQ LTD [2021] NZHC 144 [12 February 2021]
[1] The third defendant (Wild Logic Properties) seeks leave to file a statement of defence out of time. The plaintiff (Heartland Bank) opposes the application. The first defendant (Ora HQ) abides the decision of the Court. The second defendant (Wild Logic) does not oppose the application.
Background to the present application
[2] Heartland Bank is bringing proceedings against Ora HQ, Wild Logic and Wild Logic Properties claiming a secured interest in funds held in the bank account of Wild Logic.
[3] Ora HQ, Wild Logic and Wild Logic Properties are in liquidation and receivership. Wild Logic Properties was the last to be placed in liquidation. This occurred by a special resolution of its shareholders, on 5 July 2020. Heartland Bank only became aware of this matter on 14 July 2020. At the time there was a formal proof hearing allocated for Heartland Bank’s proceeding, which engaged r 15.9(3) of the High Court Rules 2016. This meant that the liquidators of Wild Logic Properties could not file a statement of defence without leave of the Court, hence the present application. Heartland Bank opposes the application. Ora HQ abides the decision of the Court.
Background to the substantive proceedings
[4] The proceedings concern a range of financial agreements between the three defendants and Heartland Bank. These are set out below.
[5] Ora HQ was a software-based marketing company. In 2014 Ora, HQ sought funding from Heartland Bank and, in February 2015, the parties executed a general security deed (the Ora HQ GSD). As part of this agreement, Ora HQ granted Heartland Bank a continuing security over its personal property and a fixed charge over its other property.
[6] Wild Logic was a business consultant services company. On 3 June 2016, Wild Logic executed a general security deed with Heartland Bank (the Wild Logic GSD).
Pursuant to this GSD, Wild Logic agreed to grant Heartland Bank a continuing security over its personal property (this included all the first defendant’s personal property).
[7] On 24 May 2016, Ora HQ entered into a term loan facility agreement with Heartland Bank to restructure an existing loan. On 22 December 2017, this loan was restructured a second time.
[8] On 3 June 2016, The Fulcrum Limited (Fulcrum) entered into a term loan facility agreement with Heartland Bank. Between 2015 and 2017, Fulcrum and Ora HQ were part of the Foundry Innovations Group, a group of investment companies. On 3 June 2016, Wild Logic provided a guarantee for the Fulcrum facility. Accordingly, if Fulcrum did not repay its debt, there was an undertaking by Wild Logic to fulfil that obligation.
The alleged breaches of these agreements
[9] By 7 June 2017, Ora HQ’s loan accounts were in arrears with Heartland Bank by $1,224,360.01. Notice of the arrears was sent to the director, Ms Domecq. Without the consent of Heartland Bank, Ora HQ subsequently entered into an agreement selling a portion of its business to Grow NZ. $650,000 was paid to Ora HQ on 21 July 2017, as a deposit for the sale. This money was not transferred to Heartland Bank.
$170,000 was, in fact, transferred to Wild Logic. This forms the basis of Heartland Bank’s first cause of action, being an alleged breach of the Ora HQ GSD.
[10] On 12 July 2017, Mr Jeffery, the sole director of Wild Logic Properties, paid the sum of $250,000 into the Heartland Bank account of Wild Logic. The following day, $240,000 was transferred from Wild Logic’s bank account to a solicitor’s trust account. This transfer of funds was not approved by Heartland Bank. It is common ground that this transfer was for the purchase of 84 Watkins Road (Watkins Road) by Wild Logic Properties. This transfer forms the basis of the second, third and fourth causes of action, which are as follows: (a) breach of the Wild Logic GSD; (b) a breach of constructive trust by Wild Logic in transferring the sum to the solicitor’s trust account; and (c) a claim that the solicitor’s trust account holds the $240,000 sum on constructive trust for Heartland Bank.
[11]Ora HQ and Wild Logic remain indebted to Heartland Bank for more than
$3,000,000.
Subsequent events
[12] In June 2019, Ms Domecq, the director of both Ora HQ and Wild Logic, was adjudicated bankrupt. Heartland Bank contends that the director of Wild Logic Properties, Mr Jeffery, Ms Domecq’s long-term partner, improperly placed that company into liquidation on account of Ms Domecq’s bankruptcy.
[13] The property owned by Wild Logic Properties has since been sold, pursuant to an agreement that the proceeds of the sale are to be held in the trust account of Wild Logic Properties’ solicitor, pending resolution of the proceeding. The net proceeds that are held on trust are $390,671.73. Heartland Bank and the Official Assignee for the bankruptcy of Ms Domecq subsequently agreed that the Official Assignee would receive $140,000 of this sum, to reflect the deposit Ms Domecq paid for the property. This leaves a balance of approximately $250,000. Ownership of those funds is in issue.
Relevant law
[14]Rule 15.9(3) of the High Court Rules provides:
After a proceeding is listed for a formal proof hearing, no statement of defence may be filed without the leave of a Judge granted on the ground that there will or may be a miscarriage of justice if judgment by default is entered, and on such terms as to time or otherwise as the Judge thinks just.
[15]In deciding whether to grant leave this Court is to consider:1
(a)Whether the defendant has a substantial ground of defence;
(b)Whether the delay is reasonably explained; and
(c)Whether the plaintiff will suffer irreparable injury if leave to defend is belatedly granted.
1 Neumayer v Kapiti Coast District Council [2014] NZHC 417 at [8].
[16] Whether Wild Logic Properties ought to be granted leave is a discretionary matter to be decided in relation to the three criteria set out above at [15] (a) – (c).
Whether the defendant has a substantial ground of defence
[17] Wild Logic Properties submits that if leave is not granted there will be a miscarriage of justice as it has a substantial ground of defence. The defence relied on is as follows:
(a)The $250,000 paid by Mr Jeffery into the account of Wild Logic was received by Wild Logic as an agent for Wild Logic Properties and was held by Wild Logic on trust for Wild Logic Properties;
(b)The proprietary beneficial interest of Wild Logic Properties in the sum of $250,000 had priority over any security interest of Heartland Bank; and
(c)Alternatively, if the sum of $250,000 was not held by Wild Logic on trust for Wild Logic Properties, then the payment of $240,000 from Wild Logic to Wild Logic Properties was a debtor-initiated payment within the meaning of s 95 of the Personal Property Securities Act 1999 (PPSA).
[18] Counsel for Heartland Bank disagrees. Counsel submits that Wild Logic Properties does not have a substantial ground of defence for the following reasons:
(a)The amount transferred from Wild Logic to the solicitor’s trust account was transferred from a bank account over which Heartland Bank held a perfected security interest and therefore priority.
(b)There is no documentation evidencing the alleged agency of Wild Logic to Wild Logic Properties.
(c)There is no documentation evidencing a debt due and owing from Wild Logic to Wild Logic Properties and no debtor-initiated payment as defined in s 95 of the PPSA.
(d)In any event, if Wild Logic Properties has a claim in respect of the
$240,000 sum, it would rank behind and not affect Heartland Bank’s claim to the extent of $170,000, being the sum that was transferred to Wild Logic from the sale of a portion of Ora HQ’s business.
Discussion
[19] The affidavits of Ms Domecq and Mr Jeffery state that the $250,000 paid to Wild Logic was being held on trust for Wild Logic Properties. At the time, Ms Domecq was the sole shareholder of Wild Logic Properties and had entered into an agreement with Mr Jeffery whereby he would become a 50% owner in the company upon the payment of $250,000. Mr Jeffery has provided a copy of this agreement, which was executed by Ms Domecq as a director of Wild Logic Properties but not by Mr Jeffery. A further affidavit of Paul Vlasic, one of the liquidators of Wild Logic Properties, notes that Wild Logic Properties did not have a bank account, supporting the possibility that Wild Logic was acting as its agent and holding the sum on trust.
[20] Of the $250,000 payment that Wild Logic received, $240,000 was transferred to the solicitor’s trust account for the purchase of Watkins Road. The remaining
$10,000 was loaned to Wild Logic and used to repay a number of debts. There is no documentary evidence to support the existence of this loan.
[21] Whether Wild Logic was holding the $250,000 money on trust for Wild Logic Properties hinges on whether the evidence of Mr Jeffery and Ms Domecq to that effect is believed. There is evidence consistent with their assertions: namely Mr Vlasic has confirmed that Wild Logic Properties does not have its own bank account. Generally, credibility cannot be determined by interlocutory hearing. Evidence that appears spurious or fantastical can be dismissed summarily, but otherwise evidence should be subject to scrutiny in the usual manner at trial before it is rejected.
[22] Heartland Bank appears to have a perfected security interest pursuant to s 17 of the PPSA over Wild Logic’s bank account. Section 23 of the PPSA sets out the circumstances in which the Act will not apply: a lien, charge, or other interest in personal property created by any other Act, or by operation of any rule of law.2 In Stiassny v North Shore City Council, this Court commented on the argument that “when property is held on trust for another’s benefit, it will be excluded from the trustee’s ‘property’ for the purposes of the PPSA, unless the trust in substance secures payment or performance of an obligation”.3 The argument was based on an interpretation of ss 17 and 23 of the PPSA. The Court commented that whether a trust interest is in substance a security interest, securing payment or performance of an obligation “will depend on the purpose of the transaction, the role and relationship of the parties, the practicality and commercial reality, and the parties’ intentions”.4 If no security interest exists, the PPSA will not apply. However, this Court observed that this will not be the end of the assessment; a beneficial interest in property, which is not a security interest, will not necessarily trump any perfected security interest.5 What will be required is an assessment of the substance of the transaction.6
[23] In Stiassny, the Court referred to the Canadian case, Graff v Bitz, where the principal gave an agent money to buy a motor vehicle that was subsequently registered in the agent’s name.7 The Canadian Court found the elements of a resulting trust were established. This Court regarded that circumstance as being “analogous to a finding in New Zealand of an interest created by operation of rule of law, excluding it from the ambit of the PPSA s 23(b)”.8 Similarly, an implied trust was also said to fall outside the scope of the PPSA.9 However, no such resulting or constructive trust was established in Stiassny, as the argument concerned the existence of an express trust.10
[24] In this case, if it is accepted that $250,000 was transferred to Wild Logic to be held on trust for Wild Logic Properties this money was not advanced for a specific
2 Section 23(b).
3 Stiassny v North Shore City Council [2008] 1 NZLR 825 at [51] and [52].
4 At [52].
5 At [56].
6 At [57].
7 Graff v Bitz (1991) 10 CBR (3d) 126.
8 At [54].
9 At [56].
10 At [57].
purpose or to secure an obligation relevant to Wild Logic, which means the transfer would likely fall outside the definition in s 17 of the Act. Instead, the transfer would be likely to give rise to a resulting trust or constructive trust, meaning that it could not be a “security interest” for the purposes of s 23 of the PPSA.
[25] It follows that Wild Logic Properties has a substantial ground of defence if a Court finds its evidence is credible.
Whether the delay is reasonably explained
[26] The next consideration is whether Wild Logic Properties is able to provide a reasonable explanation for the delay in filing a statement of defence.
[27] Wild Logic Properties submits that the delay in bringing this application can be reasonably explained by the fact that it previously lacked the financial resources to defend the claim. Further, the liquidators were appointed on 5 July 2020 and only became aware of the proceeding on 14 July. They then acted as soon as was reasonable in instructing counsel to file this application. In addition, the Covid-19 pandemic restrictions of March to May 2020 caused an effective stay of the original proceeding until July 2020.
[28] To the contrary, Heartland Bank submits that the delay is not justified as it was significant; the statement of defence being due on 23 March 2020. Heartland Bank also says that there is no satisfactory explanation as to why Wild Logic Properties previously lacked adequate resources to defend the hearing but is now able to do so. Heartland Bank further submits that as Mr Jeffery has been aware of the proceedings since February 2020, it is likely that the motivation behind putting Wild Logic Properties into liquidation was improper.
Discussion
[29] The action taken by the liquidators following their appointment was reasonably prompt. However, Wild Logic Properties has not fully explained how it has now found the resources to finance a defence to the claim. Wild Logic Properties has never traded, and its only business was in purchasing and selling Watkins Road. The
liquidators have provided no evidence to explain why Wild Logic Properties lacked financial resources before being placed in liquidation by Mr Jeffery but is now able to fund a defence.
[30] Mr Jeffery has explained why Wild Logic Properties was placed into liquidation. The company was incorporated for the sole purpose of operating as a joint venture company to acquire and then sell Watkins Road. Once those actions were complete there was no further purpose for the company’s existence.
[31] Wild Logic Properties has gone some way to explain the delay. However, the explanation is not as thorough as it should have been.
Whether the plaintiff will suffer irreparable injury if leave is granted
[32] The final consideration is whether Heartland Bank will suffer irreparable injury if leave is granted belatedly.
[33] Wild Logic Properties submits that the plaintiff will not suffer irreparable injury as follows: the proceeding has only been on foot since January 2020 (a short time considering the Covid-19 lockdown of March to May 2020); Heartland Bank will not be prejudiced by the filing of a statement of defence; and, unnecessary costs will be incurred by both parties if Wild Logic Properties were to apply to set aside a judgment entered by default.
[34] On the other hand, Heartland Bank says that it will suffer irreparable injury if leave is granted, as it has expended substantial sums of money on negotiating that the proceeds of the sale of Watkins Road be held on trust pending resolution of the proceeding, and obtaining consent from the liquidators of the first and second defendants to bring the proceedings. Heartland Bank submits that more will have to be spent if leave is granted. Further, Wild Logic Properties has no means of paying any costs award that may subsequently be given in Heartland Bank’s favour.
Discussion
[35] Heartland Bank has demonstrated that it has incurred costs to date. However, those particular costs would have been incurred whether the proceeding was defended or not. Whilst Heartland Bank may find it has no ability to recoup litigation costs from Wild Logic Properties, that is an inevitable consequence of proceeding against an impecunious defendant. The detriment to Heartland Bank will be simply the difference in costs between a defended proceeding and a formal proof proceeding. That does not equate to an irreparable injury.
[36] There are the wasted costs Heartland Bank has expended in preparing for the formal proof hearing. However, this injury can be remedied by an award of costs against Wild Logic Properties.
Conclusion
[37] Wild Logic Properties appears to have a substantial defence to the claim it faces. Everything here hinges on whether its evidence is credible, which is something that can only be assessed at trial. The company has offered some explanation for the delay. Heartland Bank will suffer some financial cost if leave to file a statement of defence is granted but those costs are no more than the usual run of costs that flow from a defended proceeding. In all the circumstances, I consider the interests of justice weigh in favour of granting Wild Logic Properties leave to file a statement of defence.
[38] However, Wild Logic Properties should ensure that from now on it acts expeditiously and does nothing to delay the progress of the proceeding.
[39]I make the following directions:
(a)Wild Logic Properties is granted leave to file and serve a statement of defence;
(b)It should do so within ten working days of delivery of this judgment;
(c)The proceeding is to be called for mention in the Duty Judge list no earlier than 12 working days after delivery of this judgment and within 15 working days of delivery of this judgment. This will enable the Court to ensure that adherence to the directions on which the grant of leave is conditional has been performed;
(d)Heartland Bank has leave to file a costs memorandum for recovery of wasted costs arising from the formal proof hearing not proceeding. It should do so within ten working days of delivery of this judgment. Wild Logic Properties has leave to file and serve a response within five working days of receipt of the memorandum of Heartland Bank. Heartland Bank has leave to file and serve a memorandum in reply if one is necessary.
[40] The parties have leave to file and serve memoranda on costs, within ten working days of delivery of this judgment, if they cannot agree costs. Each has leave to respond to the memorandum filed by the other. Such responses are to be filed and served within five working days of receipt of the other’s memorandum.
Duffy J