Herring v Herring HC Christchurch CIV 2009-409-001111

[2009] NZHC 2331

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IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV 2009-409-001111

BETWEEN  RUSSELL HERRING Plaintiff

ANDRUSSELL JAMES HERRING AND BRENDA MAY HERRING (AKA BRENDA MAY TREACY) AND ANTHONY ROBERT HERRING (AS TRUSTEES OF THE R J AND B M HERRING FAMILY TRUST) Defendants

Hearing:         7 October 2009

Counsel:         S M Dwight for Plaintiff

D M Lester for B M Herring

Judgment:      15 October 2009

JUDGMENT OF FOGARTY J

Introduction

[1]      Mr Russell and Mrs Brenda Herring (now Treacy) were married in 1993.  To avoid confusion between Russell and Anthony Herring and because they are so described in the disputed assignment of debt,  I refer to the couple hereafter as Russell and Brenda.

[2]      They established businesses together divided into three corporate entities: Webpower Limited, Artworks.net Limited and Travelindex.co.nz Limited.  In 2002

they purchased a property at Mt Pleasant as their family home.

HERRING V HERRING AND ORS (AS TRUSTEES OF THE R J AND B M HERRING FAMILY TRUST) HC CHCH CIV 2009-409-001111  15 October 2009

[3]      On 18 March 2002 they executed a deed as settlors and as trustees, in the latter instance together with a third person, a solicitor, Mr Anthony Herring, who has just resigned as trustee.

[4]      The trustees acquired the Mt Pleasant property and 1800 of the 2000 shares in Webpower  Limited,  59%  of  the  shares  in  Artworks.net  Limited  and  a  similar majority shareholding in Travelindex.co.nz Limited.

[5]      Those acquisitions by the trust were funded by Russell and Brenda separately advancing sums of money to the trustees.  These advances are recorded by a number of deeds of acknowledgment of debt from the trustees as debtors to either Russell or Brenda as creditor.   These acknowledgments of debts all record that the debts are repayable upon demand.  One of the first acknowledgments of debt record that the debtors are only liable in their capacity as trustees and not personally.  But all the other acknowledgments of debt record that Mr Anthony Herring is liable in his capacity as trustee and not personally or in any other capacity.

[6]      In the years from 2002 to 2006 both Russell and Brenda executed deeds of forgiveness  of  debt.    The  result  is  that  the  balance  owing  to  each  of  them  is

$271,000.

[7]      The marriage broke down.   They separated on 10 October 2007.    Russell now lives in Melbourne.  Brenda still resides in Christchurch, and lives in the home transferred to the trustees, against the wishes of her co-trustee, Russell.

[8]      Brenda earns her living as a web designer operating via a company, Treacy Advertising Limited.   Russell says that this company has taken the assets of Artworks.net.  Brenda says that that company ceased trading in November 2008 due to  Russell  freezing  the  bank  accounts  of  that  company  and  Travelindex.co.nz Limited.

[9]      Russell’s  position  is  that  he,  having  been  deprived  of  the  benefit  of  all property assets, seeks money to support himself and to fund professional assistance to resolve the property issues.

[10]     To this end he has as creditor made a demand in writing upon the trustees as debtors for the sum of $271,000.     This has not been paid and he has brought proceedings in this Court for summary judgment.

[11]     There were originally four grounds of opposition to the entry of judgment:

1.That the debt is an item of relationship property and the Family Court has exclusive jurisdiction in respect of proceedings between spouses concerning relationship property.

2.That Brenda has a set-off which equals the amount of Russell’s claim in that Russell is a debtor of Brenda in respect of a similar set of acknowledgment of debts with the same balance of $271,000 due.

3.That Brenda has had assigned to her part of a debt which Russell owes to Webpower Limited, which Brenda can raise as an alternative set- off.

4.That these proceedings are an abuse of process being commenced with the ulterior motive of placing pressure on Brenda in respect of relationship property matters where the Family Court has exclusive jurisdiction.

[12]     At the oral hearing the first ground was abandoned.  The fourth ground was effectively not pursued, although not abandoned.

[13]     The summary judgment application will be effectively opposed if one of grounds 2, 3 or 4 are sustained.  After hearing oral argument I was satisfied the third ground had the greatest merit and I start with that.

The availability of a set-off of Russell’s indebtedness to Webpower

[14]     The accounts of Webpower record that Russell and Brenda have current accounts.  They are minor shareholders each with 1% of the company.

[15]     In the three years ended 31 March 2007, 2008 and 2009 they have each been debited broadly equal sums for drawings, terminal tax paid and interest.

[16]     In the draft accounts for the year ended 31 March 2009 the closing balance in respect  of  Russell  shows  a  liability  of  $579,015  and  in  respect  of  Brenda  of

$543,402.  By comparison as at 31 March 2007 the respective sums were $310,667 and $304,821.

[17]     These accounts are prepared by a firm of accountants, but have not been audited.  They have been adopted by Brenda, as sole director of the company.

[18]     There was an agreement entered into after the separation on 20 February

2008 whereby Brenda appointed Russell as an additional director of Webpower but neither the accounts as at 31 March 2008 or the draft accounts in 2009 record him as a director.

[19]     Russell made his notice of demand on 6 April 2009.  On 8 July Webpower and Brenda entered into a deed of assignment of debt.   This deed recorded the amount Russell owed Webpower as appearing in the accounts ended 31 March 2007 of $310,667.  It also recorded that Webpower had agreed to assign to Brenda:

… in her capacity as trustee of the R J & B M Herring Family Trust

Brenda agreed to accept the assignment, subject to the conditions set below, of

$271,000 of Russell’s overdrawn shareholder’s current account.

[20]     Then followed the operative three terms of the deed:

1.The Assignor agrees to assign, and the Assignee agrees to accept assignment of $271,000.00 of Russell’s overdrawn Shareholders Current Account in the Assignor on the following terms and conditions:-

1.1The  part  of  Russell’s  overdrawn  Current  Account  being assigned to the Assignee is $271,000.00, or such other amount agreed that may be agreed between the Assignor and the Assignee in writing (“Russell’s Overdrawn Current Account”);

1.2The assignment  is  solely for  the  purpose  of  meeting the claim against the Assignee set out in the Proceedings.   To the extent that the assignment is not necessary for that purpose, the assignment will have no effect.

2.For the avoidance of doubt, the assignment of Russell’s Overdrawn Current  Account  will  not  extinguish  the  remaining  overdrawn current account owed by Russell to the Assignor.  This amount will remain outstanding.

3.In accordance with clause 42 of the Schedule of Trustees Powers of the Trust, the liability of Brenda, in her capacity as trustee of the Trust, is limited to the assets of the Trust.

[21]     The intent by way of this deed is for Brenda to meet Russell’s payment of demand  by  offsetting  the  same  sum  from  his  overdrawn  shareholder’s  current account in Webpower.

[22]     Ms Dwight for Russell had several arguments in opposition to this set-off point:

1.The  assignment  by  Webpower  was  an  improper  use  of  Brenda’s power   as   a   director,   transferring   a   debt   to   herself,   for   no consideration, and/or there is no evidence that it was in the interests of Webpower.

2.That the assignment was so hinged with conditions that it was not effective.

3.As an equitable set-off (the parties agreed a legal set-off could not be argued) the debts are entirely independent and there is nothing unjust in allowing Russell to recover a payment due to him by the trustee debtors without regard to his indebtedness to Webpower.

4.        That it has not been proved that Russell owed a debt to Webpower.

[23]     In response Mr Lester argued that once a notice of demand had been lodged by Russell the trustees were entitled to look to the assets held by them as trustees for the means to meet the demand.  A part of the trust’s assets is the liability of Russell to Webpower.  Although there may be some doubt as to the precise indebtedness on

any view of it, it is in excess of $271,000 as it was recorded as $310,000 during the course of the marriage.   Brenda in her capacity as a trustee is entitled to be indemnified from the trust assets against claims against her as a trustee and accordingly the assignment to her in her capacity as trustee is an appropriate recognition of that entitlement.  Assignments can be conditional:  see s 50(7) of the Property Law Act 2007.  The assignment is complete.

[24]     Both counsel agreed that the leading authority on equitable set-off in New Zealand is the decision of the Court of Appeal, delivered by Somers J, in Grant v NZMC Limited [1989] 1 NZLR 8. Mr and Mrs Grant were lessees of NZMC Limited. They were behind in the rent and rates. NZMC sued to recover the sums. The Master entered judgment. Mr and Mrs Grant appealed contending they had an arguable defence to the claim by way of set-off. Their argument was that there was a contract collateral to the lease whereby NZMC promised to refer panel-beating work to them, upon which promises were not kept.

[25]     In three pages of concise reasoning the Court examined the ability to set off claims for unliquidated sums against the certain debt of rent and rates.   For the Court, Somers J, said:

… Equity would restrain an action or execution of judgment at law or allow a  set-off  where  it  would  be  inequitable  or  unconscionable  to  allow  the plaintiff to proceed without bringing to account some claim by the defendant which was sufficiently linked to that made by the plaintiff.

(at 11)

[26]     Somers J then examined a number of authorities to sustain this proposition and drew his analysis to a close with the following summation:

The principle is, we think, clear. The defendant may set-off a cross-claim which so affects the plaintiff's claim that it would be unjust to allow the plaintiff to have judgment without bringing the cross-claim to account. The link must be such that the two are in effect interdependent: judgment on one cannot fairly be given without regard to the other; the defendant's claim calls into question or impeaches the plaintiff's demand. It is neither necessary, nor decisive, that claim and cross-claim arise out of the same contract.

(at 12-13)

[27]     In argument both counsel relied on the summation paragraph.  I have set out the opening proposition because in my view it emphasises, as one would expect, that the test ultimately is whether it is unconscionable to allow the plaintiff to proceed without bringing to account a cross-claim sufficiently linked.

[28]     There is no doubt that by reason of the separate personality of Webpower the credit that Russell has with the trustees of $271,000 and the disputed liability he has for drawings as a shareholder with Webpower are independent of each other.   But, as Mr Lester put it:

Equity is not distracted by labels, it looks to substance.

In support of that he emphasised the last sentence in the summation paragraph.

[29]     Standing on its own the assignment does look odd and appears on the face of it to be without consideration.   It could, however, be associated with appropriate resolutions by Webpower and journal entries, such as declaring a dividend (the draft accounts to 31 March 2009 show a net surplus or profit of $328,338), and providing for satisfaction of the dividend by way of assignment of part of the chose in action Webpower had against Russell.

[30]     There can be no dispute that the affairs of Webpower and its owners, the trustees, are interrelated.  I do not think that too much emphasis should be placed on the selection of the word “interdependent” in the summation in Grant.  On the facts of that case, coupled with the analysis of the authorities which precede it, the word “interrelated” could have been substituted without there being any significant difference in meaning.  The Court of Appeal favoured a wider approach to equitable set-off, following Hanak v Green [1958] 2 QB 9, in particular the comments by Morris LJ at 16-24. That is the reason for the presence of the last sentence in the summation paragraph.

[31]     Ms Dwight had a number of technical criticisms as to the lack of absolute character of the assignment.   I do not think it is necessary to rule on those.   I am inclined to the view that the assignment was hastily drawn and could be improved upon, making it more certain.  But it is not necessary to decide that.

[32]     The better view of the law of equitable set-off is that it does not require the set-off to be in place and enforceable at the time the claim is made or being pursued. This is the view preferred in The Laws of New Zealand (Part 1, The Right of Set-Off and the Right to Counterclaim) at paragraph 41.

[33]     The question in the context of opposition to summary judgment is whether or not a set-off could be raised were the case to go to trial.  As the Court of Appeal in Grant poses it, the question for this Court is whether it could be inequitable or unconscionable to allow the plaintiff to proceed without bringing to account some claim by the defendant which was sufficiently linked to that made by the plaintiff.

[34]     I am satisfied that it is formalistic for Russell to call for satisfaction of the trustees’ indebtedness to him while at the same time there is a case that he has a greater indebtedness to one of the assets held by the trustees.

[35]     Accordingly, I am driven to the conclusion that the plaintiff cannot satisfy this Court that the defendant has no defence by way of equitable set-off to the cause of action in the statement of claim: see r 12.2(1).

Set-off by reliance upon Brenda’s credit of $271,000 with the trustee debtors

[36]     It is not necessary for me to adjudicate this proposition.  But, in the event the case goes any further I would intimate that I struggle to grasp how a liability of the trustees to Russell in the sum of $271,000 could be set-off by releasing him as a co- trustee from liability in respect of the trustees’ indebtedness to Brenda.  There is no necessary equivalence in such an exchange of benefits.  The proposition seems to me to be counter to the propositions of law summarised in The Laws of New Zealand (Part 1, The Right of Set-Off and the Right to Counterclaim) at paragraph 38:

If two defendants are sued for a joint debt, they cannot set off a debt due to one of them separately …

This rule is illustrated by the following two cases.

[37]     In Jones v Fleeming (1827) 7 B and C 217,   R Jones brought proceedings claiming a year’s salary of £80 against his former employers, Mr Fleeming and his brother, J Jones.  One of his former employers, Mr Fleeming, sought the right to set- off the sum of £120 which the plaintiff had drawn against his employers (exercising a power of authority) for the purpose of obtaining the release of his brother who had been arrested in Cornwall.   That bill was dishonoured.   As a result of it being dishonoured Mr Fleeming was called upon and paid under his guarantee out of his own funds.   Having discovered why he had to pay this £120 he dismissed the plaintiff.  It was held that Mr Fleeming could not set-off that sum against the claim made by R Jones against the partnership of himself and Mr J Jones.  Bayley J held:

Fleeming and J Jones have never jointly paid any money to the use of the plaintiff, and the payment by one cannot be set off in this action. …

[38]     Jones is not wholly on point on the facts.  However, it does demonstrate that where the defendants have a joint liability the presence of one of the defendants having a claim against the plaintiff is not sufficient for that claim to be raised by way of set-off.

[39]     In the case of Watts v Christie  (1849) 11 Beav. 546 at 551 two men, Thomas and William Watts carried on business as partners and had an overdraft with their bankers, Messrs Clarke and Co. of £333. But at the same time Thomas had a credit with the bankers of £478. The bankers became insolvent and later bankrupt. The assignees in bankruptcy brought an action against the partnership to recover the debt of £333 to be met with an argument that Thomas was entitled to set-off at law his credit of £478. This was rejected. The assignees argued that at law a separate debt cannot be set-off against a joint debt. Neither can it in equity or bankruptcy. The reasoning of the Court was somewhat discursive and it seems to me essentially decided on another point that Thomas was an unsecured creditor in respect of his

£478 deposit and that he would have only been able to take advantage of that deposit had he, prior to the bankruptcy, withdrawn his £478 and deposited it in the joint account eliminating the debt of £333.

[40]     All in all, I think that the common law has set its face against developing a rule allowing a debt due by several debtors to be set-off by a credit personal to one

of those debtors. This is because the presence of the joint debt raises potential injustice, if a set-off is allowed.  By contrast, equitable set-off is not rule bound, but appeals to conscience.   Equity can look at all the facts of the relationships and exercise a judgment as to whether it is just to allow a set-off.

Costs

[41]     I turn to the question of costs.  These I am going to reserve.  This dispute is but part of a much more complex dispute between the parties which will either settle or have to be continued either in this Court or in the Family Court.   I am not confident I can make a just order at this stage of the litigation.   There is leave to apply to seek resolution of costs.

Solicitors:

Cavell Leitch Pringle & Boyle, Christchurch, for R J Herring (Counsel: S M Dwight) Layburn Hodgins, Christchurch, for B M Herring (Counsel: D M Lester)