Matrix Custodian Limited v Cotton HC Auckland CIV 2009-404-1067
[2010] NZHC 289
•3 March 2010
IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY
CIV-2009-404-1067
BETWEEN MATRIX CUSTODIAN LIMITED
Plaintiff
ANDPHILIP ANTHONY COTTON First Defendant
ANDDARREN JOHN WALLBANK Second Defendant
ANDKASMAN DANIEL Third Defendant
Hearing: 16 February 2010
Appearances: Mr M Sandelin for Plaintiff
Mr B Cunningham for Third Defendant
Judgment: 3 March 2010 at 4 p.m.
JUDGMENT OF ASSOCIATE JUDGE DOOGUE
This judgment was delivered by me on
3 March 2010 at 4 p.m., pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
Counsel:
MinterEllisonRuddWatts, P O Box 3798, Auckland – by email: mihai[email protected]
Mr B Cunningham, Barrister, P O Box 3599, Auckland – by email: [email protected]
MATRIX CUSTODIAN LIMITED V COTTON AND ORS HC AK CIV-2009-404-1067 3 March 2010
Background
[1] The plaintiff, Matrix Custodian Limited (“Matrix”) has brought this proceeding against the third defendant, Mr Daniel, as guarantor of a financial facility provided by Matrix to Mangawhai Developments Limited (in receivership) (“Mangawhai Developments”). Mangawhai Developments was a company formed
to develop a subdivision consisting of 47 lots at Devich Road, Mangawhai (“Development”). Mangawhai Developments defaulted on the loan. Summary judgment has already been entered against the first and second defendants, who did not oppose Matrix’s application. The third defendant, Mr Daniel, became involved
in Mangawhai Developments through his company, Green Planet New Zealand Limited, which took shares in Mangawhai. It is against that background that he executed the guarantee of the loan from Matrix.
[2] The following chronology was provided by counsel for the plaintiff and is not disputed by Mr Daniel’s counsel.
Date Event 1. 23/02/2007 Guarantee provided by Mr Daniel to Matrix
(“Guarantee”)
2. 26/02/2007 Loan agreement entered into by Matrix and
Mangawhai Developments (“Loan”)
3. 07/05/2007 Deed of variation of Guarantee (“Variation”) 4. 20/06/2007 Default under the Loan 5. 14/12/2007 Demand made by Matrix on Mangawhai
Developments and the defendants
6. 29/01/2009 Further demand made on Mr Daniel 7. 09/02/2009 Receivers appointed to Mangawhai Developments
Summary judgment principles
[3] In his judgment in Pemberton v Chappell [1987] 1 NZLR 1 at 3, Somers J
said:
At the end of the day R 136 requires that the plaintiff "satisfies the Court that
a defendant has no defence". In this context the words "no defence" have reference to the absence of any real question to be tried. That notion has been expressed in a variety of ways, as for example, no bona fide defence, no reasonable ground of defence, no fairly arguable defence. See eg Wallingford v Mutual Society (1880) 5 App Cas 685, 693; Fancourt v Mercantile Credits Ltd (1983) 154 CLR 87, 99; Orme v De Boyette [1981] 1 NZLR 576. On this the plaintiff is to satisfy the Court; he has the persuasive burden. Satisfaction here indicates that the Court is confident, sure, convinced, is persuaded to the point of belief, is left without any real doubt or uncertainty.
[4] Summary judgment proceedings are designed for cases where there is clearly
no defence. Defendants should not be deprived of their right to trial unless the plaintiff clearly demonstrates that there is no reasonable possibility of the defence succeeding. The following passage from Tipping J in Lindale Financial Services Ltd v Colonial Mutual Life Assurance Society Ltd (1997) 12 PRNZ 320 at 322 demonstrates the balance required in assessing a summary judgment application:
Summary judgment proceedings are designed for cases where it is clear there
is no defence to the plaintiff’s claim. While it is entirely proper for the Court
to take a robust approach when ascertaining whether proffered defences have any arguable validity or are simply a smokescreen, there are limits.
Defendants should not be deprived of the opportunity of a full trial, unless
the plaintiff clearly demonstrates that there is no reasonable possibility of the defence succeeding. While summary judgment proceedings are a valuable and desirable short cut in clear cases, care must be taken not to allow excessive robustness to work an injustice to the defendant.
[5] The plaintiff must satisfy the Court that the defendant has no arguable defence to the claims brought against it.
Issues
[6] On the day prior to the fixture for this matter Mr Daniel’s solicitors filed a third amended notice of opposition and at the hearing before me on 16 February Mr Cunningham sought leave to file that document. Mr Sandelin, sensibly, did not oppose that course and I accordingly granted leave to the defendant. The third amended notice of opposition added the following defences.
(9)The plaintiff is a wholly-owned subsidiary of Matrix Funding Group Limited, which company accepted a proposal by the first and second defendants to compose the debt owed to the plaintiff, the first and second defendants being joint and several guarantors with the third defendant.
4.The third defendant relies on rule 12.9 of the High Court Rules and British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Company of London [1912] AC 673 (HL) and Harris v ANZ Banking Group (NZ) Ltd CA165/01, 10
June 2002.
5.The third defendant now relies on the principle of law that the release of one joint or joint and several debtor is a release of all: Perry Developments Ltd v Catley HC Hamilton CIV-2003-419- 001684, 28 September 2004, Priestly J; Nicholson v Revill (1836) 4 Ad & El 675; 111 ER 941; (KB); Re EWA [1901] 2 KB 642 (CA);and Deanplan Ltd v Mahmoud [1993] Ch 151.
[7] These had not previously been pleaded. Mr Cunningham told me that while
he did not have instructions to abandon formally the other points that had been of defence set out in earlier iterations of the notice of opposition, he would not be making any submissions in support of those grounds of opposition. It will be necessary, therefore, for me to say something brief about each of those grounds. I will then deal with the new grounds in more detail.
The grounds of opposition in the original Notice of Opposition
The agreement with Mangawhai that it would retire all debt prior to the defendant acquiring an interest in company
[8] Mr Daniel’s company, Green Investment Holdings Limited (“GIHL”), entered an agreement dated 8 September 2006 to take up shares in Mangawhai. The agreement included a provision that Mangawhai would pay all the indebtedness which it owed to financiers. Mangawhai was also bound in terms of the agreement, according to the notice of opposition, to obtain from the financiers an acknowledgement that neither GIHL nor the third defendant had any liability arising out of the indebtedness of Mangawhai. This, it was said, provided the defendant with a defence to the plaintiff’s claim.
[9] This point was met by the plaintiff pointing out that Matrix was not a party
to this agreement and was therefore not bound by it. I agree. The agreement was between Mangawhai and GIHL, and cannot amount to a substantial defence for Mr Daniel in the present proceedings.
Non est factum
[10] Mr Daniel said that he was not bound by the guarantee because he was able
to invoke the defence of non est factum.
[11] I accept the submission of the plaintiff that the following are the elements of the defence which a party in the position of Mr Daniels must establish:
The requirements of a plea of non est factum are stringent. In order to establish the defence of non est factum, a guarantor must prove:
(a)that he has signed the guarantee believing it to have a particular effect;
(b) that the guarantee must in reality have a radically different effect, thus creating a wholly different result from that which was understood by the guarantor;
(c)the guarantor’s mistaken belief must have resulted from an erroneous explanation of the guarantee given to him by a third party;
(d)the guarantor must be able to show that notwithstanding his error, he acted with all reasonable care in the circumstances.
Refer: Conlon v Ozolins [1984] 1 NZLR 489 (CA)
[12] Mr Daniel has not provided any evidence establishing that the defence is open to him in this case. The most he can say is that he does not recall signing the documents. He also says that he cannot understand why a solicitor who he says was acting for Mangawhai, some of the other defendants and himself “allowed me to sign it”.
[13] That being the extent of the evidence, the defendant falls a long way short of addressing the four matters set out in Conlon v Ozolins [1984] 1 NZLR 489. The defendant does not therefore have a reasonably arguable defence of non est factum.
Undue influence
[14] The specific pleading of this defence in the third amended notice of opposition was to the following effect:
(3) The third defendant alleges that his signature as guarantor of the debts owed to the plaintiff by Mangawhai Developments Limited (in rec) was obtained by undue influence on the part of the first and second defendants.
[15] As Mr Sandelin submitted, in this case the defendant could not rely upon a presumption of undue influence arising because a businessman in the position of Mr Daniel is regarded by the law as capable of looking after himself: Royal Bank of Scotland Pl v Etridge (No 2) [2002] 2 AC 773 (HL) at [88]. That being so, the plaintiff submitted that is was incumbent upon Mr Daniel to provide clear evidence
of undue influence. I agree that there is no such evidence here and further, no evidence that Matrix actually knew of any undue influence that might have been brought to bear by the other parties who were involved in Mangawhai, whether as managers, officers or investors. Nor can it be inferred that Matrix was put on enquiry as to the existence of undue influence.
[16] In any event, the defendant received independent legal advice from his solicitor, Mr Lemalu, and that circumstance is regarded by the law as being sufficient to negative the effect of undue influence. The complaint that Mr Daniel apparently has about the quality of that advice is not a matter which can be laid at the plaintiff’s feet.
[17] There is no reasonably arguable defence available to Mr Daniel based upon undue influence.
Grant of mortgage by Mangawhai was not sanctioned by the necessary shareholder resolution
[18] This point is formulated in the following way in the notice of opposition:
(4) The third defendant alleges that the granting on 12 December 2005
by Mangawhai Developments Limited (in rec) to Financial Trust No
4 of a mortgage, subsequently assigned on 14 March 2006 to Financial Trust No 4, and then on 28 February 2007 to the plaintiff, was invalid by reason of there being no shareholder’s resolution by the then sole shareholder, Green Investments Holdings Limited, approving the grant of the security interest.
[19] The defendant is precluded from raising this point, in my view, by the indoor management rule under s 18 of the Companies Act 1993.
Receivers’ breaches of duty to sell unsold lots promptly and failure otherwise to promptly exercise power of sale
[20] The fifth, sixth and seventh grounds of defence in the third amended notice of opposition can be dealt with together. I accept the submissions for the plaintiff that there is no evidential legal basis to attribute to Matrix any failure by the receivers to perform their duties. The receivers are the agents of the company in receivership and the plaintiff is not liable for their actions. Further, the contractual arrangements between the parties contained in Clause 17.2 an express exclusion of the right to claim set-off.
17.2 All amounts payable by the Borrower under the Relevant Document
[loan] shall be paid:
...
17.2.2free and clear of, and (except to the extent required by law) without any deduction or withholding on account of, any Tax or any other amount, whether by way of set-off or otherwise.
[21] Even if there was a claim available to Mr Daniel arising out of the actions of the company or the receivers in relation to the disposition of the property which was the subject of the security, it would be caught by the provision of the contract which
prohibits setting-off. Therefore, the defendant would not be entitled to claim an entitlement to plead as a defence any equitable set-off that might arise from the receivers’ conduct.
The release of the co-guarantors
[22] The one matter on which Mr Cunningham addressed me in his submissions was the defence contained in paragraphs 3(9), 4 and 5 of the third amended notice of opposition (which I have set out at paragraph [6] above).
Defendant’s submissions
[23] Mr Cunningham referred me to evidence filed on behalf of the defendant which established that on 26 June 2009, the first and second defendants, as insolvents, each lodged in the Court a proposal to creditors under subpart 2 of Part 5
of the Insolvency Act 2006. The reports of the trustee in respect of the proposals of the first and second defendants stated that the insolvents’ proposals were accepted by the required majority of creditors and a resolution accepting each of the proposals was made at the creditors meetings held on 10 July 2009. The reports of the trustee
in each case showed that the first and second defendants each owed Matrix Funding
Limited an amount of $9,800,617.00.
[24] On 31 July 2009, the first and second defendants filed notices of application
for approval of their creditors’ proposals. Under the respective proposals, the first and second defendants each stated that, if the proposals were accepted, each of them would be required to pay $500,000 over a 5-year period, of which amounts the first defendant would pay $163,129.00, and the second defendant $241,428.84, to Matrix Funding Limited.
[25] Although the proposals were in respect of the indebtedness of Mangawhai Developments to the plaintiff, the first and second defendants’ proposals were accepted by, among others, Matrix Funding Limited. The plaintiff is a wholly- owned subsidiary of Matrix Funding Limited. I interpolate at this point that Mr Sandelin did not did not raise any issue concerning the identity of the two different companies. I do not therefore need to investigate Mr Cunningham’s assertion that the acceptance of the proposals by Matrix Funding Limited does not raise any corporate veil issue in respect of the plaintiff, which company he described as “the slave of Matrix Funding, if not its alter ego”. The acceptance of the proposals by Matrix Funding Limited was, he submitted, in effect an acceptance of the proposals by the plaintiff.
[26] Paragraph 2 of the respective reports of the trustee stated that on or about 29
June 2009, notice was given to every known creditor affected by the proposals. Mr
Cunningham submitted that for the purposes of the summary judgment application, it
should be accepted that the plaintiff was therefore bound by the compromise arrangements. The result of this was that the plaintiff had released the first and second defendants from their liability under the guarantee and could not now sue the third defendant. This resulted, said Mr Cunningham, because in equity, the release of a debt owed by one or more joint and several guarantors is the release of all: Perry Developments Ltd v Catley HC Hamilton CIV-2003-419-001684, 28 September 2004, Priestley J.
Plaintiff’s submissions
[27] Mr Sandelin argued that the submission that the Proposals have released the third defendant from his liability under the Guarantee cannot succeed because, pursuant to the express terms of the Guarantee (clauses 4, 6, 12), the plaintiff has the right to pursue a remedy against the third defendant despite entering into a compromise with the first and second defendants as co-guarantors.
[28] Counsel for the plaintiff accepted that at common law, a creditor’s release of one joint and several debtor will release the other debtor(s) from the obligation to pay. Mr Sandelin accepted that that proposition could be extracted from the authority which the defendant relied upon, Deanplan Ltd v Mahmoud [1993] Ch 151.
He referred me, however, to a passage in James O’Donovan and John Phillips The Modern Contract of Guarantee (3rd ed, Ligare Pty Ltd, Riverwood, NSW, 1996) where the authors opined, at 384:
A clause authorising the creditor to “grant releases and discharges as [it] thinks fit, without prejudice to or in any way limiting or lessening the liability of the guarantor” has been held sufficient to preserve the full liability of the guarantor who agrees to this clause in circumstances where the guarantor’s liability might otherwise have been reduced to the extent that the right of contribution had been affected by the release of another guarantor. (Footnote omitted).
[29] In Perry Developments Ltd v Catley, Priestley J recognised at [27] that this exception from the common law rule applies when contractually the creditor has reserved its rights against a joint debtor.
[30] Mr Sandelin further submitted that the general principles relating to the formation of contracts apply to the formation of contracts of guarantee. It is the parties to the contract of guarantee who determine the terms on which they contract.
Discussion
[31] The relevant terms of the Guarantee in this case provide as follows:
4. Liability not to be Affected
4.1The liability of the Guarantor under this Deed shall not be discharged, abrogated, prejudiced or affected by any of the following:
4.1.1the granting of time, credit or any indulgence or other concession to the Borrower or the Guarantor or any other guarantor of the Borrower or to any other person by the Lender; or
…
4.1.5any security or law or any other dealing, matter or thing which but for this provision might operate to abrogate, prejudice or affect the guarantee (it being the intention of the parties that the guarantee and obligations of the Guarantor shall be absolute and unconditional in any and all circumstances); or
4.1.6the liability of any other guarantor of the Borrower or any other person ceasing from any cause whatsoever (including release or discharge by the Lender)…
6. Lender may elect not to enforce
6.1Without in any way discharging, abrogating, prejudicing or affecting the liability of the Guarantor under this Deed, the Lender may:
…
6.1.2from time to time make any arrangement or compromise with any other guarantor of the Borrower or any other person in relation to the whole or part of the Secured Monies and/or all or any of the Secured Obligations.
12 Principal Debtor
12.1Although as between the Borrower and the Guarantor the liability of the guarantor to the Lender may be that of surety only, nevertheless as between the Guarantor and the lender the liability of the Guarantor shall be deemed to be the
liability of a principal debtor. Accordingly, such liability shall not be affected or diminished, nor shall any security collateral to this Deed be released or discharged, by any of the preceding matters or by any other act, indulgence or omission which but for this clause would have operated to release the Guarantor wholly or partly from the Guarantor’s liabilities to the lender.
[32] I agree with counsel for the plaintiff that several of the provisions of clause 4 are of themselves a sufficient answer to the third defendant’s argument as to discharge by release of co-guarantors. As well, the Principal Debtor clause by which the third defendant is deemed a principal debtor and not a surety would cover the position. Sub-clauses 4.1.6 and 6.1.2 are also specifically applicable. In particular, I accept that even if the foregoing provisions did not preserve the plaintiff’s position, the catchall sub-clause 4.1.5 is clearly intended to exclude the operation of common law principles which “abrogate, prejudice or affect the Guarantee” of the very kind relied upon by the third defendant.
[33] At common law, a release of a contractual obligation, although granted to only one of the co-debtors, had the effect of releasing all of the debtors: Deanplan Ltd v Mahmoud at 170. Whether for these purposes a compromise under the Insolvency Act has the same effect was not discussed in the submissions that I received from Counsel. I will briefly examine that issue below. But, the general law aside, the contract of guarantee entered into here contained in the plainest words provisions providing for the position of the parties in just such a contingency. The contract provided that even if the main creditor could not sue on the debt, that would not affect the creditor’s entitlement to sue the guarantor.
[34] Next, I need to consider the submission that Mr Cunningham made which was that a creditor in the position of the plaintiff could only preserve its position vis-
à-viz the guarantor if the release or discharge instrument itself contained an express retention of rights against the guarantor. No authority was cited to support that proposition. I cannot see any difficulty in principle with the parties agreeing in advance of the occurrence of an event that such event will not, if it occurs, have the usual legal effect that the law would otherwise attribute to it. Conversely, I cannot see why in principle it should be necessary for a reservation of rights to be stated at
the time when a transaction which had the effect of releasing the debt actually occurred.
[35] My conclusion therefore is that the entry into the compromise arrangements with the first and second defendants did not release Mr Daniel from liability under
the guarantee at common law.
[36] It remains to consider the terms of the statute itself. Section 334 of the
Insolvency Act 2006 applies. It provides as follows:
334 Effect of Court approval
(1)A proposal that is approved by the Court is binding on all the creditors whose debts are provable under this subpart and are affected by the terms of the proposal.
(2) The Court's approval is conclusive as to the validity of the proposal.
[37] The relevant “proposal” in this case was concerned with the debts of the insolvents and not those of the third defendant. The debt arising under the guarantee was owed by the third defendant and not the insolvents and therefore could not have been proved in the bankruptcy of the insolvents. The plaintiff is not therefore bound
by the proposal and it is irrelevant to the question of the third defendant's liability.
[38] The third defendant does not therefore have any substantial defence based upon the release of the co-debtors.
Conclusion
[39] The plaintiff is entitled to summary judgment. I enter judgment against the defendant in the sum of $9,163,769.76. I also order that the plaintiff is entitled to interest at the default rate of 14% per annum from 28 January 2009 until that date of payment. Counsel should be able to agree on the matter of costs. If they are not I shall hear them concerning that matter at 9 a.m on a date which is convenient.
J.P. Doogue
Associate Judge
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