MSM Enterprises (Pte) Limited v Nautilus Family Trust Limited

[2014] NZHC 319

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2013-404-004309 [2014] NZHC 319

BETWEEN  MSM ENTERPRISES (PTE) LIMITED Plaintiff

ANDNAUTILUS FAMILY TRUST LIMITED First Defendant

ANDMURALI GANESH KODOOR Second Defendant

ANDGEETA MURALI GANESH Third Defendant

CIV-2013-404-004495

BETWEEN  NAUTILUS FAMILY TRUST LIMITED Plaintiff

ANDKOHINOOR OF LONDON LIMITED First Defendant

ANDMIKE PANJWANI Second Defendant

ANDMSM ENTERPRISES (PTE) LIMITED Third Defendant

Hearing:                   11 December 2013

Counsel:                  B O'Callahan and N J Carter for the Plaintiff in

Proceeding CIV-2013-404-004309; and for the Third Defendant in Proceeding CIV-2013-404-004495

M A Karam for the Defendants in
Proceeding CIV-2013-404-004309, and for the Plaintiff in
Proceeding CIV-2013-404-004495

Judgment:                28 February 2014

JUDGMENT OF DUFFY J

MSM ENTERPRISES (PTE) LTD v NAUTILUS FAMILY TRUST LTD [2014] NZHC 319 [28 February 2014]

This judgment was delivered by Justice Duffy on 28 February 2014 at 3.30 pm, pursuant to

r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Date:

Counsel:     M A Karam, Auckland

Solicitors:    Carter Kirkland Morrison, Auckland

[1]      These two proceedings concern whether a mortgagee can proceed under a second mortgage security and the Property Law Act 2007 (the Act) to enforce its security for the unpaid mortgage debt.

[2]      The mortgagor, Nautilus Family Trust Limited (Nautilus), has commenced proceedings  in  which  it  seeks  an  interim  injunction  to  restrain  the  mortgagee, MSM Enterprises PTE Limited (MSM), from exercising its powers of sale pending the outcome of the substantive proceedings.  These proceedings also include claims against the vendor of the secured property, Kohinoor of London Limited (Kohinoor), and  Mike  Panjwani,  who  is  the  father  of  the  sole  director  and  shareholder  of Kohinoor (Yasmine Panjwani).

[3]      MSM has commenced its own proceeding against Nautilus and the directors of Nautilus  (Murali  Kodoor and  Geeta Ganesh), who personally guaranteed  the secured loan.   MSM seeks summary judgment against Nautilus for the unpaid mortgage debt and against Mr Kodoor and Ms Ganesh for recovery of that debt under the guarantee.

Background to purchase of 51F Hobson Street

[4]      The  subject  property  is  situated  at  51F  Hobson  Street,  Auckland  City

(Hobson Street).  Kohinoor sold this property to Nautilus for the sum of $2,600,000.

[5]      Discussions regarding the purchase of Hobson Street by Nautilus commenced on 25 March 2011, when Mr Kodoor met with Mr Panjwani and his wife, Denise, at the Holiday Park Motel.  It is common ground between the parties that these persons have been friends for a number of years.  For Nautilus, Mr Kodoor alleges that it was during this meeting that, in the course of pre-contractual negotiations, Mr Panjwani made misrepresentations that inflated the value of Hobson Street. They were:

(a)       That the commercial tenants at Hobson Street were very reliable and prompt payers; and

(b)      That Hobson Street had a very sound earthquake rating which was

well within the Auckland Council’s requirements.

[6]      Mr Kodoor also alleges that that at this meeting, Mr Panjwani advised that second mortgage finance for Nautilus would be arranged through funds held by him, or by Kohinoor in Singapore.

[7]      The Holiday Park Motel is owned by Mr Kodoor.   He alleges that at the meeting  on  25  March  2011,  as  well  as  himself  and  Mr  and  Mrs  Panjwani, Priya Ramachandran and her husband, Raj, were also present.   They work at the Holiday Park Motel.  Mr Kodoor alleges that he asked Mrs Ramachandran to take minutes of the meeting.  Her evidence confirms this, and the minutes are attached to her affidavit evidence.   They confirm Mr Kodoor’s accounts of what was said by Mr Panjwani.

[8]    On the other hand, Mr and Mrs Panjwani deny that the alleged misrepresentations were made and that anyone other themselves and Mr Kodoor were present at the 25 March 2011 meeting.  They allege that the minutes and the evidence  of  Mrs  Ramachandran  as  to  the  alleged  misrepresentations  are  a fabrication.

[9]      In  late March 2011,  Mr Panjwani  approached  MSM regarding a loan  to Nautilus.   MSM says that Mr Panjwani advised it that his company,  Kohinoor, wanted to sell to Nautilus, that Nautilus should be able to service the loan, and that Hobson Street should provide adequate security for the loan.  At the time, Nautilus was not aware of the approach to MSM.

[10]     By a deed dated 7 April 2011, Kohinoor, Empress Management Limited and Nautilus agreed that: (a) Nautilus would purchase 11 properties, one of which was Hobson Street; and (b) that in order to assist with funding of the purchase, Kohinoor would procure a “bridging/second mortgage” loan from a lender in Singapore for Nautilus.  Nautilus contends that this loan and the purchase of the properties were co-dependent so that one would not proceed without the other.

[11]     Later, by a deed dated 12 May 2011, the terms of the sale of the properties and their financing were varied.   The sale of Hobson Street was to proceed as a separate sale.  Nautilus was to receive finance from MSM to assist it to complete the purchase of Hobson Street.  Mr Kodoor personally signed this deed as guarantor of the loan from MSM.  Kohinoor provided temporary vendor finance to Nautilus until the loan from MSM became available.  The purchase was settled on 31 May 2011. On  21  June  2011,  the  second  mortgage  finance  loan  agreement  was  executed between MSM and Nautilus and funds were advanced.

[12]     Nautilus contends that the inference to be drawn from the events leading up to the purchase of Hobson Street and the advance from MSM is that Mr Panjwani effectively arranged the entire transactions relating to the sale of Hobson Street to Nautilus.  Here Nautilus points to:

(a)      Mr   Panjwani’s   role   in   negotiating   the   terms   of   the   sale   of Hobson Street, even though he is not a shareholder or director of Kohinoor;

(b)At the meeting on 25 March 2011, he suggested that he could arrange finance from Singapore for Nautilus; and

(c)       He approached MSM to arrange second mortgage finance and made

representations to MSM regarding Nautilus’s ability to pay the loan.

[13]     Kohinoor and Mr Panjwani deny that he acted as agent for MSM.  Further, MSM denies that either Mr Panjwani or Kohinoor acted as its agents.

[14]     Nautilus accepts that there is no evidence to show that MSM is an entity under the control or ownership of either Mr or Mrs Panjwani.   Nor does Nautilus suggest that Kohinoor has any ownership of or controlling interest in MSM.

Subsequent events

[15]     Nautilus first defaulted under the second mortgage in December 2012.  This default was remedied.  Then, on 31 March 2013, there was a second default, which

was still outstanding at the time of the hearing.  On 20 August 2013, MSM issued a notice under s 119 of the Act.  At the time, $15,428.50 was outstanding under the mortgage.    The  monthly  payments  are  $7,500,  plus  interest  at  five  per  cent per annum.

[16]     Nautilus alleges that shortly after taking over Hobson Street, it encountered difficulty  with  existing  tenants,  particularly  two  tenants  that  regularly  fell  into arrears.    One  of  those  tenants,  Megaweb  Hobson  Limited  (“Megaweb”),  has provided evidence for Nautilus to the effect that Megaweb had business difficulties from  mid  2010  and  was  regularly  behind  in  its  rent  payments  from  that  time onwards.   The delay in rent payments has been confirmed by Mrs Panjwani. Megaweb has also said that Mr Panjwani approached it in March 2011 and asked it not to tell Nautilus, which was then a prospective purchaser, of the rent difficulties. Mr Panjwani confirms that he spoke with someone from Megaweb, but he does not say what the conversation was about.

[17]     As to the proof of Mr Panjwani’s role in securing the loan from MSM, Nautilus alleges that apart from communications with MSM’s lawyers, all communications with MSM have been through Mr Panjwani.

The dispute between the parties

[18]     Nautilus  contends  that  the  alleged  misrepresentations  made  to  it  by Mr Panjwani   caused   it  to   enter  into   the  sale  and   purchase  agreement   for Hobson Street and the loan agreement with MSM.  The guarantors (Mr Kodoor and Ms Ganesh) also rely on the alleged misrepresentations as having caused them to guarantee the loan from MSM to Nautilus.

[19]     Nautilus argues that in its claim against MSM, it is entitled to remedies: (a)      As against Kohinoor under the Contractual Remedies Act 1979; (b)      As against Mr Panjwani under the Fair Trading Act 1986; and

(c)      As   against   MSM   under   the   Contractual   Remedies   Act,   the Fair Trading Act, and the Credit Contracts and the Consumer Finance Act 2003.

[20]     Nautilus contends that its claims against Kohinoor, Mr Panjwani and MSM amount to an arguable defence that permits it to claim an equitable set-off against the claims that MSM has made against Nautilus for defaulting on the loan agreement. The guarantors also claim that they have an arguable defence based on equitable set- off.  They say that but for the alleged misrepresentations of Mr Panjwani, they would not have entered into the covenants with MSM.

[21]     Nautilus has confirmed that it will pay the arrears under the loan, as well as further monthly payments into a trust account, or into this Court pending determination of the substantive issues that its claim raises.

[22]     Nautilus has failed to make its payments on time.  MSM seeks to rely on its powers under the loan agreement to call up the balance of the loan on the default of the borrower. Accordingly, MSM now seeks summary judgment against Nautilus for all monies owing to it under the loan agreement, and all costs that it is entitled to claim under that agreement.  Further MSM seeks judgment against the guarantors, Mr Kodoor and Ms Ganesh, for payment of the loan.

[23]     MSM denies that Nautilus and the guarantors have any defence to MSM’s summary judgment claim, or that Nautilus has shown that there are any serious issues to be tried on its injunction claim because:

(a)      There is no legal nexus between the purchase agreement and the loan agreement;

(b)Any representations  made by Mr Panjwani  and/or  Kohinoor  were materially correct;

(c)    Neither Nautilus nor the guarantors relied on the alleged misrepresentations;

(d)      Nautilus has suffered no loss; and

(e)      Neither Kohinoor nor Mr Panjwani acted as MSM’s agent, so none of the alleged misrepresentations can be relied on by Nautilus or the guarantors  to  affect  their  position  with  MSM  under  the  loan agreement and covenants thereon.

Legal principles

[24]     The relevant legal principles are well established.

[25]     For interim injunctions, the principles are those stated in Klissers Farmhouse Bakeries  Ltd  v  Harvest  Bakeries  Ltd  [1985] 2 NZLR 129 (HC) and recently reasserted in NZ Tax Refunds Ltd v Brooks Homes Ltd [2013] NZCA 90, at (2013) 13

TCLR 531 at [12] per Arnold J:

The approach to an application for an interim injunction is well established. The applicant must first establish that there is a serious question to be tried or, put another way, that the claim is not vexatious or frivolous. Next, the balance of convenience must be considered. This requires consideration of the impact on the parties of the granting of, and the refusal to grant, an order. Finally, an assessment of the overall justice of the position is required as a check.

[26]     When a plaintiff applies for summary judgment, the court may give judgment against a defendant if the plaintiff satisfies the court that the defendant has no defence.   The relevant principles to be applied were recently summarised in Krukziener v Hanover Finance Ltd [2008] NZCA 187, [2010] NZAR 307 at [26] per Miller J:

The principles are well settled. The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried. The Court must be left without any real doubt or uncertainty. The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the  application  is  to  be  defeated.  The  Court  will  not  normally  resolve material conflicts of evidence or assess the credibility of deponents. But it need not accept uncritically evidence that is inherently lacking in credibility, as for example where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponent, or is inherently improbable. In the end the Court’s assessment of the evidence is a

matter of judgment. The Court may take a robust and realistic approach where the facts warrant it. (citations omitted)

[27]     For a defendant to raise an equitable set-off as a defence to a claim by a plaintiff, the defendant must be able to establish an inter-dependent link between the plaintiff’s   claim   and   the   defendant’s   cross-claim;   and   that   it   would   be unconscionable for the plaintiff to seek judgment at law without bringing the defendant’s cross-claim to account: see Grant v NZMC Ltd [1989] 1 NZLR 8 (CA) at pp 12-13 per Somers J:

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.

[28]     The   approach   in   Grant   was   applied   in   Hamilton   Ice  Arena   Ltd   v Perry Developments Ltd [2002] 1 NZLR 309 (CA). This case makes it clear that a lack of identity of parties regarding the subject matter of the claim and cross-claim will be fatal to the ability to raise an equitable set-off. Equitable set-off is subject to the usual rules relating to equitable relief.

Evidential threshold

[29]     With both interim injunctions and summary judgment applications, a court cannot resolve evidential disputes, particularly those that involve determinations of credibility.  Where the outcome of a claim or a defence is reliant on a particular view of disputed facts, this will generally have to be left for a trial.  However, before that should occur, the party concerned will need to satisfy the court that there is some proper basis for the factual scenario that it asserts.  Such a party cannot avoid having a  determination  made  at  the  interlocutory  stage  simply  by  asserting  factual allegations and constructing a case that hinges on the resolution of those assertions. Consequently, a court  will look for signs of  evidence that lends support to the allegations before it decides on whether interlocutory disposition will be appropriate or not.

Approach

[30]    I propose to consider MSM’s summary judgment application first.   The defendants to this claim (Nautilus, Mr Kodoor and Ms Ganesh) do not dispute that MSM is owed unpaid instalments under the mortgage, or that the terms of the mortgage entitle Nautilus to demand payment of the entire loan on default by the borrower.  However, they rely on the alleged misrepresentations by Mr Panjwani to provide them with an arguable defence in the form of an equitable set-off.

[31]     Establishing there is an arguable defence of equitable set-off depends upon a number of factors.  First, it depends upon whether Mr Panjwani can arguably be seen to have been MSM’s agent for the purpose of procuring the loan.   Secondly, it depends upon whether the elements of an equitable set-off are arguably present.

Agency

[32]     Dollars & Sense Finance Ltd v Nathan [2008] NZSC, [2008] 2 NZLR 557 is the leading authority on agency in the mortgagor-mortgagee context. Dollars & Sense Finance Ltd (D & S) agreed to lend Rodney Nathan money provided that his parents offer their residential house as security for Mr Nathan’s liability to repay the loan. D & S’s solicitor, Mr Thomas, delivered documents to Mr Nathan for his parents to sign. Mr Nathan forged his mother’s signature and returned the documents to Mr Thomas. The signatures were not witnessed and Mr Thomas returned the documents back to Mr Nathan, who had the documents falsely witnessed. The mortgage was then registered. Mr Nathan later defaulted on payments and D & S proceeded to exercise their right of sale. Neither party disputed that there had been fraud. The key issue was whether Mr Nathan’s fraud could be attributed to D & S through an agency relationship.

[33]     Did D & S make Mr Nathan its agent to obtain his mother’s signature? Blanchard J ruled out apparent authority, which requires a holding out or representation by the principal of the agent’s authority to act on the principal’s behalf.  The third party must be aware of the holding out and reasonably relied upon it.  Therefore, as D & S did not have any dealings with Mrs Nathan, representations

could  not  have  been  made.    However,  actual  authority  was  made  out  because: (a) Mr Thomas left the task of obtaining the parents’ signatures to Mr Nathan; and (b) Mr Thomas made no attempt to communicate directly with the parents or to insist that they obtain separate legal advice.   Actual authority can be expressly given through words or writing between the principal and agent, or it can be implied from the conduct  of the parties  and  the implications drawn from  express  words.    In Dollars & Sense Finance, Mr Nathan was found to have been entrusted with the task of obtaining signatures on behalf of D & S.   Thus, Mr Nathan was the agent of D & S.

[34]     It follows that based on  Dollars  & Sense Finance, a vendor could be a mortgagee’s agent in circumstances where: (a) the mortgagee clearly entrusted the vendor to do a particular task; (b) only the vendor communicated with the third party in relation to this task; and (c) the mortgagee did not perform a supervisory role.

Analysis

[35]     Whether the alleged misrepresentations were made or not, and if they were, whether they were incorrect and induced Nautilus to buy Hobson Street or not, are contested factual issues which I do not consider it appropriate to determine in a summary judgment application.

[36]     I propose to approach the matter as if the representations have the character and effect for which Nautilus contends.   I will also approach it as if the sale of Hobson Street and the loan from MSM were co-dependent.

[37]     At the time the purchase of Hobson Street was settled, finance was advanced to Nautilus by the ANZ National Bank and Kohinoor.   Nautilus says that before settlement, Mr Panjwani had said that second mortgage finance would be arranged by him through funds held by him, or by Kohinoor in Singapore.  There was a loan from Kohinoor, which was a temporary advance that was replaced by the loan from MSM on 21 June 2011, approximately three weeks after settlement.

[38]     The factual allegations to support the equitable set-off are concisely stated in Nautilus’ first amended statement of claim in the interim injunction proceedings. These allege that at the time of entering into the loan agreement with MSM (post- settlement),  Nautilus  understood  that  MSM  was  associated  with  Kohinoor  and Mr Panjwani.  Nautilus also alleges that Kohinoor and Mr Panjwani were the agents of MSM when it came to arranging the loan agreement between MSM and Nautilus.

[39]     In the first amended statement of claim, Nautilus pleads that in arranging the loan agreement, Kohinoor and Mr Panjwani were acting within the scope of their actual or apparent authority as agents of MSM.  However, in its submissions at the hearing of the summary judgment/interim injunction applications, Nautilus confined its arguments on the question of agency to apparent authority.  Nautilus stated in its written submissions that “the question of actual authority is not relevant to the present enquiry as it is not alleged (at present) that there was any formal appointment as agent”.  Nautilus then proceeded to argue that Kohinoor and Mr Panjwani acted with the “apparent” or “ostensible authority” of MSM.

[40]     However, in relying on the alleged agents having apparent authority, Nautilus overlooks the key requirement for this form of authority.  The principal is the party who represents or holds out the agent as having his or her authority, “which is relied upon by the third party”: see Dollars & Sense Finance at [9].  The holding out or self-representations by an agent cannot give rise to apparent or ostensible authority. Here, Nautilus accepts that it had no communications with MSM directly, which precludes there having been any representation or holding out by MSM as to the alleged agents’ authority.  So there is no factual basis to support the argument based on apparent or ostensible authority.

[41]    Despite Nautilus not relying on actual authority to establish the agency argument, I have, in view of the broader scope of pleading in the first amended statement of claim, considered if the facts as presently alleged might give rise to an arguable defence that relies on actual authority, in this case implied actual authority. The alleged facts relied upon by Nautilus reveal Kohinoor promising on 7 April 2011 to arrange “bridging/second” mortgage finance for Nautilus (deed of 7 April 2011). The lender at that time was to be a financier based in Singapore.  This agreement

was later varied by the deed of 12 May 2011, which split the sale of the 11 properties into two tranches, with the sale of Hobson Street proceeding first.

[42]     The deed of 12 May 2011 records at clause 2(d) that the sale of the first tranche of properties (including Hobson Street) was to be paid in part by a loan of the  equivalent  of  NZ$450,000  in  Singapore  dollars  advanced  by  the  Singapore lender on the terms set out in paragraph 9.

[43]     Paragraph 9 expressly referred to MSM as the lender and set out the terms on which MSM would lend to Nautilus. The clause commenced:

9.        The  agreed  terms  of  the  second  mortgage  finance  procured  by

[Kohinoor] for Nautilus to purchase Hobson Street is as follows:

[44]     There then followed the terms of the loan that MSM would provide.   The

12 May 2011 deed is not executed by MSM.  The parties to this deed are Kohinoor, Empress Management Limited (the owner of other properties affected by the 7 April

2011 terms of sale), Nautilus, and Mr Kodoor as guarantor of the MSM finance.

[45]     The deeds of 7 April 2011 and 12 May 2011 show that Kohinoor, as vendor of Hobson Street, was to arrange offshore finance for Nautilus, which suggests to me that in this respect, Kohinoor was acting as the agent of Nautilus.  Nautilus entered into the unconditional purchase of Hobson Street on the basis that it authorised Kohinoor to procure finance on the terms set out in clause 9 of the deed of 12 May

2011.   Nautilus’ account of the earlier discussions with Mr Panjwani about him arranging   an   offshore   loan   from   Singapore   is   not   inconsistent   with   this understanding, as Mr Panjwani appears to have acted on behalf of Kohinoor.

[46]     Thus  the facts,  as  alleged  by Nautilus,  do  not  support  an  inference  that Kohinoor was acting under the implied authority of MSM.  Instead, Kohinoor can properly be seen  as  the  agent  of Nautilus  with  its  express  authority to  procure finance on the terms set out at clause 9.   Whichever way the agency element of Nautilus’ defence is looked at, therefore, it does not support Kohinoor being the agent of MSM.

[47]     Regarding the allegation that Mr Panjwani was an agent of MSM, there is no representation or holding out from MSM to this effect.  So there can be no question of Mr Panjwani having apparent or ostensible authority to act on behalf of MSM regarding the loan to Nautilus.   When it comes to considering if he had MSM’s actual authority to act as its agent, there is first the point that Nautilus did not rely on actual authority in its submissions.  Secondly, the facts do not support an inference of implied actual authority.  The evidence from Nautilus simply describes Mr Panjwani offering to procure finance for Nautilus from Singapore.  MSM does not feature until the deed of 12 May 2011, which makes no reference whatsoever to Mr Panjwani.  I am satisfied, therefore, that Nautilus has no basis for arguing that Mr Panjwani was MSM’s agent.

[48]     The  findings  I  have  made  on  the  agency  issue  are  enough  to  preclude Nautilus from showing that it has an arguable defence based on equitable set-off. Whatever might be the legal effect of the alleged misrepresentations, it cannot be sheeted  home  to  MSM.   This  means  that  Nautilus  and  the  guarantors  have  no arguable defence to the summary judgment application.

[49]     Nautilus and the guarantors allege that they have indemnity claims against Kohinoor and Mr Panjwani for the losses caused by the alleged misrepresentation. However, those claims have no connection with MSM, given the findings I have made on the agency issue.

[50]     Nautilus and the guarantors also allege they have a right of contribution against Mr and Mrs Panjwani as co-sureties of the loan agreement.  This issue does not affect MSM’s claims against Nautilus and the guarantors. Accordingly, I propose not to examine it further.

[51]     MSM claims that it is now owed SG$302,110 plus interest of $3,017.70 per month from 31 March 2013 to the date of judgment.

[52]     Neither Nautilus nor the guarantors challenged the sum of money that MSM

contends is now due and payable under the loan agreement and the guarantee.

[53]     It  follows  that  MSM  is  entitled  to  summary  judgment  against  Nautilus, Mr Kodoor and Ms Ganesh.

[54]     Regarding Nautilus’ application for an interim injunction to stop MSM from conducting a mortgagee sale of Hobson Street, I am satisfied, for the reasons already stated, that Nautilus has not shown that there is a serious question to be tried against MSM.  The balance of convenience would favour Nautilus, as it has offered to pay the  unpaid  instalments  under  the  mortgage,  and  MSM  can  recover  the  balance against the guarantors, who are not parties to the interim injunction application. However, given the conclusions that I have reached on the equitable set-off defence, I am satisfied that Nautilus has no arguable claim against MSM and that the overall justice of the case favours MSM.  Accordingly, the application for an interim injunction is refused.

Result

[55]     MSM’s application for summary judgment against Nautilus, Murali Kodoor and Geeta Ganesh is granted.   MSM is entitled to judgment jointly and severally against Nautilus, Mr Kodoor and Ms Ganesh in the sum of SG$302,110, plus interest of SG$3,017.70 per month from 31 March 2013 to the date of judgment.

[56]     Nautilus’ application for an interim injunction is dismissed.

Duffy J