National Bank of New Zealand v Clements HC Rotorua CIV 2011-463-001

[2011] NZHC 476

IN THE HIGH COURT OF NEW ZEALAND ROTORUA REGISTRY

CIV 2011-463-001

BETWEEN  THE NATIONAL BANK OF NEW ZEALAND

Plaintiff

ANDLANCE FREDERICK CLEMENTS First Defendant

ANDRANDAL THOMAS CLEMENTS AND COLLEEN LORRAINE CLEMENTS Second Defendants

ANDTHOMAS LEE RODEWALD AND JENNIFER ANNE LEE

First Counterclaim Defendants

Hearing:         10 May 2011

(Heard at Auckland)

Counsel:         MP Ward-Johnson for plaintiff and counterclaim defendants

MJ  Hammond for second defendants

Judgment:      12 May 2011 at 11:00 AM

JUDGMENT OF FAIRE J

Solicitors:           Harris Tate, PO Box 1147, Tauranga 3140

Tompkins Wake, PO Box 258, Hamilton 3240

THE NATIONAL BANK OF NEW ZEALAND V CLEMENTS HC ROT CIV 2011-463-001 12 May 2011

[1]      The second defendants apply pursuant to r 7.53 for an interim injunction against the plaintiff and the counterclaim defendants, which would restrain them from auctioning properties at 2590 Broadlands Road and 190 Allen Road, Reporoa, on 5 May 2011.

The procedural position

[2]      The  proceeding  commenced  as  a  summary  judgment  application  by  the plaintiff against both defendants.  At the first call of the proceeding on 14 February

2011 summary judgment was entered against the first defendant.  The first defendant had taken no steps in the proceeding.  The proceeding was adjourned in respect of the second defendants and directions were made by consent.   Those directions provided for:

(a)      The filing and service of an application for leave to join a third party and draft statement of claim;

(b)The filing and service of affidavits in reply together with any notice of opposition to the second defendants’ application for leave to issue a third party notice; and

(c)       The filing of submissions in respect of an anticipated fixture. [3]       On 4 May 2011 the second defendants filed:

(a)       An interlocutory application without notice for an interim injunction; (b)      An undertaking as to damages;

(c)       An affidavit in support; and

(d)      A statement of counterclaim.

[4]      The statement of counterclaim and the application for an interim injunction were erroneously assigned a new court reference number, but nothing turns on this. Counsel are agreed that the documents to which I have made reference all relate to the one matter and should appear on the original court file.  I proceed on that basis.

[5]      Counsel  for  the  second  defendants,  counsel  for  the  plaintiff  and  the counterclaim defendants completed a consent memorandum, which was referred to Lang J.  The purpose of the memorandum was to provide for the urgent disposal of the application for the interim injunction on an “on notice” basis.  The parties agreed that the auction scheduled for the following day, 5 May 2011, would not take place. They requested the court to provide a hearing time urgently because the properties concerned were dairy farm properties and therefore any sale by auction had to settle on 1 June 2011.  They pointed out that if a determination of the application for an interim injunction could not be resolved by 1 June 2011 it was unlikely that any subsequent sale would settle before 1 June 2012.  Lang J ordered an urgent fixture for  10 May 2011  and  gave  directions  for  the  filing  of  additional  affidavits  and submissions.  His Honour recognised that the time was very short.  The papers that have  been  filed,  understandably,  because  of  the  brief  time  involved,  contain  a number of gaps.  I have allowed some latitude in the way material has been placed before me because of the need to resolve this matter on an urgent basis.

The court’s approach to an interim injunction

[6]      The principles to be applied in the grant of an interim injunction are well settled.  Two major subjects must be considered; namely, whether there is a serious question to be tried and the balance of convenience.  There is a need to exercise a residual discretion and to stand back after looking at the whole facts of the case to see where the overall justice lies: American Cyanamid Co v Ethicon Ltd; Consolidated Traders Ltd v Downes; and Klissers Farmhouse Bakeries Ltd v Harvest

Bakeries Ltd.[1]

[7]      The second defendants have been involved in farming throughout the whole of their married life on the principal property, the subject of this application.  It is a

533 hectare property at 2590 Broadlands Road, Reporoa.  The property was acquired by Mr Clements’ parents in 1956, when he was in high school.  The property was in scrub at the time of purchase.  When Mr Clements left school he helped his parents clear the property.  It was run, at that time, as a dry stock property.

[1] American Cyanamid Co v Ethicon Ltd [1975] AC 396 (HL); Consolidated Traders Ltd v Downes [1981] 2 NZLR 247 (CA); Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd [1985] 2 NZLR 129 (CA).

[8]      In 1965 the second defendants married and commenced living together on the farm.   In 1968 Mr Clements acquired the farm following his father’s death.   The second defendants have remained on the farm since 1965.   Their children were brought up on the farm and were involved in it.  The second defendants say that they have a strong emotional attachment to this property.

[9]     The second defendants purchased a second property, the subject of this application, in 1969.  It is a 77 hectare property at 190 Allen Road.  It was originally an old piggery.  It was developed by the second defendants, firstly as a beef farm.  It was converted to a dairy farm in 1979-1980 and at the time the second defendants’ son, Lance, left school.   Mr Clements says the conversion to a dairy farm was to ensure that his son could have a farm to work on and so that father and son could become involved in dairy farming together.  The second defendants say that because the way this property has been developed and the link with their son, they also have a strong emotional attachment to it.

[10]     Mr Clements exhibited an email sent by his daughter to an officer of the plaintiff bank.  It was sent on 7 March 2011, to seek further time to see if a solution to the financial problems which were being faced by the second defendants could be achieved.  It is instructive, however, in that it gives some indication of the actions taken by the second defendants with respect to their children which, clearly, has had a  marked  effect  on  their  current  financial  difficulties.     Under  the  heading Irresponsible lending: the debt the email provides:

It many ways it has been a complicated tale of a farming family with three sons all wishing to progress into independent farm ownership under the

historic generation farming system which New Zealand has previously allowed.   In sharing the income of 1500 acres in the two man farms over four primary farming families, it allowed for a series of losses to build up over the years.   Once the farm was converted to dairy approximately 15 years   ago,   they   entered   into   their   first   level   of   debt,   which   was approximately 3.5 million.  Whilst sheep and beef farmers they maintained a low basic overdraft but nothing more.  The 3.5 million was the cost of the dairy conversion from a sheep and beef farm which included the cost of Fonterra shares, effluent, water reticulation, 50 bale rotary cowshed, races, capital dressings of fertilizer, re-grassing, etc… etc… essentially the cost of converting 1500 acre’s to an operational dairy farm.

Eight years ago, one of the three brothers left the farm and my parents paid him out $500,000 to purchase his new independent farm, which left their debt at approximately 4 million.  They were left with three primary families on farms, one main herd, one contract milking herd and one share milking deal.  It should be noted that this was the first stage that the business started coming under pressure, with that level of debt, two share milking contracts which promoted high revenue regardless of the cost and the historical low milk payment of under $5 kg/ms, their business was setup to earn final losses every year regardless of them working 7 days a week and drawing personal salaries of only

[11]     The same email gives advice to the Bank of steps being taken by the second defendants’ daughter to raise a substantial off-shore loan which the daughter says in the email she would use, certainly as to the finance fee, to rectify the debt equity ratio problems with the family farms.   The email is also critical of various steps taken  by  the  Bank  in  its  attempts  to  recover  the  debts  owed  by  the  second defendants.

[12]     Unfortunately, there is no affidavit from Miriam Clements, who is currently overseas.   Some material has been placed before the Court  that indicates when Miriam Clements made an application for overseas finance in 2010.   The latest correspondence produced on the subject is dated 9 May 2011.   It is produced by Miriam Clements’ father, the second defendant.  It indicates that some progress has been made with the application for the overseas finance.  Counsel were agreed that the limited information as to where this finance was being sought, and any detail about it, should be kept confidential.  To that end, counsel requested that the Court make orders, on a consent basis, prohibiting anyone searching the Court file or reading the second affidavit of Mr Clements, dated 10 May 2011 which revealed the source of this finance.   There will be an order by consent to that effect at the

conclusion of this judgment, on the basis that access to that affidavit is prohibited without a further order of this Court.

The counterclaim defendants

[13]     The counterclaim defendants were appointed receivers and managers of the second defendants’ property in March 2011.  The second defendants took issue with the appointment. The counterclaim defendants were then reappointed by the plaintiff under the new partnership general security agreement.   The appointment has not been challenged and the point certainly was not pursued by Mr Hammond.

[14]     The counterclaim defendants, who have both filed affidavits, complain that the  second  defendants  have  not  fully  disclosed  facts  relating  to  their  financial position.  They say that the second defendants’ farming and financial affairs were in a state of disarray prior to their appointment.  They have carried out an estimate of the financial position of the second defendants as at 2 March 2011, as a result of which they conclude that the second defendants are insolvent.   They say that is because their liabilities exceed their assets and because they are unable to pay debts as they fall due.  They record that PGG Wrightsons have registered charging orders against all properties owned by the second defendants.  Those charging orders were registered on 2 February 2011.   They also exhibit correspondence from Westpac Bank confirming that the action taken by the Bank in respect of properties owned by the second defendants at Horsham Downs and Paparoa is unlikely to satisfy the indebtedness to the Bank.  There are also issues concerning the second defendants’ unsatisfied obligations to the Inland Revenue Department.   They exhibit the latest financial statements prepared for the second defendants, which show significant balances owed by the second defendants’ children to them.  They express the view that  that  is  one  of  the  reasons  for  the  poor  financial  position  of  the  second defendants, ie because of the advances they have made to their children.  They have carried out their own estimate of the financial position of the second defendants. The  statements  prepared  necessarily  give  estimates  of  the  likely  realisable  sale figures in respect of the properties the subject of the mortgagee sale application, the properties the subject of action by the Westpac Bank, the sale of stock and the sale of machinery.   I will not set out in full, the precise allocation of value to assets and

liabilities.   Suffice to say, on a low estimate of asset value basis, the receivers’ conclude  that  the  second  defendants’  overall  position  discloses  an  excess  of liabilities over assets of $4,652,383.   If a high  estimate of value of the assets, particularly the assets I have mentioned, is taken into account there is shown an excess of liabilities over assets of $2,227,793.

[15]     The statement of position records the overall debt due to the plaintiff Bank at

$12,135,018.   The precise make-up of that debt is not recorded in the affidavit material placed before me.  What I have is an imprecise position which is apparently made up of five separate loan accounts that the second defendants have with the Bank and which, as at the date of hearing, showed a total indebtedness to the Bank of $13,760,106.19.  Of particular importance, however, is the outstanding amount in respect of two loan transactions which are the subject of the counterclaim, which I will shortly refer to.  They have current debit balances of $1,667,916 in respect of the 2008 transaction and $1,070,000 in respect of the 2006/7 transaction.  I will refer to the significance of this later in this judgment.

The counterclaim

[16]     As  at  2006  and  2007  the  farm  at  2590  Broadlands  Road,  Reporoa  was

divided into three blocks.  The second defendants’ son, Lance, was share milking a

365 acre portion of that farm.  Another son, Gavin Clements, was share milking on another part of the farm.  Mr Clements was milking on the rest of the farm.  Each ran separate businesses.

[17]     The second defendants’ son, Lance, wished to purchase a run-off for his share milking business on the main farm. A property was located which was 14 kilometres from the main farm, at 340 Deep Creek Road, Reporoa.  There was a separate title on  which  a  house  was  constructed.    Lance  Clements  incorporated  a  company, Ormond Downs Ltd.  He sought finance from the bank to complete the purchase of the farm, which consisted of approximately 53 hectares, and the house block.  The total purchase price was $1.8 million.   The bank agreed to fund the purchase by Ormond Downs Ltd.   The funding was guaranteed by Lance and by the second defendants to a maximum of $1,000,000 plus twelve months interest.  The second

defendants obtained independent advice before executing the guarantee.   The evidence discloses that the purchase was funded entirely by the borrowing from the bank. Although it is not precisely clear from the papers, it seems that the purchase of the house property was settled in the early months of 2007 and the purchase of the run-off block itself, was settled on 1 June 2007. As part of the package the bank was to provide some additional seasonal overdraft funding to Ormond Downs Ltd.  It is common ground that the second defendants were anxious to retain Lance on the home farm and were concerned that if they did not support his acquisition of further farm land he might wish to leave and farm elsewhere.

[18]     In the following year Lance Clements discovered the possibility of acquiring further land adjoining the land he had acquired at 340 Deep Creek Road, Reporoa. The bank was approached again for funding.   The cost of this purchase was $2.5 million.   The second defendants’ involvement in this transaction was by way of a

$1.5 million loan that they undertook from the bank which was then advanced by them to Ormond Downs Ltd and Lance.

[19]     The purchases have proved unsuccessful and clearly were beyond the means of the parties to retain the properties.  A mortgagee sale of the two pieces of farm land was settled on 30 September 2010 and produced $2,450,000.  At that stage, the indebtedness of Lance and his company, Ormond Downs Ltd, to the plaintiff Bank was, prior to the application for mortgagee sale funds, $5,360,412.14. At the time of the issue of the summary judgment proceedings, and after taking into account the mortgagee  sale  proceeds,  Lance  and  his  company  owed  the  bank  in  excess  of

$2,000,000.   The precise sum proved and which was the subject of the summary judgment entered on 14 February 2011 against Lance Clements was $2,493,634.50, including all interest and costs.

[20]     The second defendants have defended the proceedings.   Their exposure in relation to the transaction with their son, Lance and Ormond Downs Ltd, for which judgment is sought against them is for the guaranteed sum of $1,000,000 plus twelve months interest and costs.  That part of the summary judgment application is still to be determined.

[21]     The basis for the application for an interim injunction restraining the sales of the  principal  farm  property  and  the  Allen  Road  property  is  that  the  second defendants’ involvement in the Bank’s lending in relation to the property acquired by their son, Lance, followed their reliance on information provided to them by the bank officer who was advising both them and their son, Lance, in respect of the two transactions.  They advanced four separate causes of action against the plaintiff Bank alleging misrepresentation, unconscionable bargain, undue influence and negligent mis-statement.   They seek declarations cancelling the contractual loan documents with  the  bank.    Though  the  precise  relief  is  not  spelled  in  the  counterclaim, Mr Hammond described the relief sought as entitling the second defendants:

To cancel the guarantee of $1,000,000 together with interest on that amount, the  borrowing  of  $1.5  million  and  the  obligation  to  pay  the  interest  of Ormond Downs  Limited’s debt if the milk pay out drops below $6 per kilogram of milk solids.

If they were to succeed, the effect of an order cancelling the loan contracts would reduce their indebtedness to the bank by approximately $2,737,916.

[22]     There may also be additional damages claimed.  What is apparent, however, is that this counterclaim in no way covers the second defendants’ indebtedness to the plaintiff Bank.  Without the additional damages that still stands at a figure in excess of $11,000,000.

[23]     What is in issue in the second defendants’ claim is a general allegation that Mr Walker on behalf of the Bank advised the second defendants that the transactions which were being undertaken for the purpose of purchasing the further land were affordable based on forecasts and budgets that the Bank had either supervised or prepared, when it is alleged that that could not possibly have been true.  In addition, the second defendants allege that the Bank, through Mr Walker, had said that it would never call on the defendants pursuant to the guarantee.

[24]     The evidential foundation for the four causes of action advanced is disputed by Mr Walker in his affidavit.  The position in relation to the claim simply cannot be resolved  on  an  interlocutory  application  and  almost  certainly  would  require extensive cross-examination of the witnesses and resort to documented records of

conversations and matters of that kind at the relevant time.  What can, however, be said  is  that  Mr Clements’  account  clearly  confused  the  timing  of  events,  thus throwing into serious question whether the causes of action that he is alleging could have any actual basis in so far as the guarantee that was entered into in relation to the

2006-7 land purchase.   The same, however, cannot be said about the second transaction.

[25]     Mr Ward-Johnson, in my view, correctly put matters into perspective.   He submitted that whilst the plaintiff Bank disputes that there is a serious issue to be tried, because the issues involved in the counterclaim cannot be resolved in this application, the matter should be examined on “balance of convenience” grounds. The second defendants are clearly insolvent.  Any delay in the sale of the securities held by the Bank could cause greater harm which, clearly, could not be recovered. Further, the second defendants’ position is such that there really is no value in the undertaking they have given as to damages in the event that an injunction were granted.

[26]     This is a case where no issue is taken with the validity of the mortgages that are the foundation for the mortgagee sale.  Nor is any issue taken with the service of notices under the Property Law Act 2007 as pre-requisites to the exercise of the power of sale.   What is apparent, on the material before me, is that the second defendants’ financial  position  is  such  that  irrespective  of  the  counterclaim  they cannot meet their commitments to the Bank, assuming that the principal claims in the counterclaim are found in their favour.  In short, there is no basis for contesting something in excess of $10,000,000 of indebtedness to the Bank.  No foundation for a case that suggests that there has been a breach by the plaintiff of the obligations imposed  on  a  mortgagee  by  s 176  of  the  Property  Law  Act  2007  or  by  the counterclaim defendants by the operation of ss 19 and 20 of the Receivership Act

1993 has been established.

[27]     Mr Hammond invited me, by way of an alternative submission, to adjourn the application for a short period of days to see if the second defendants’ daughter’s application for finance from an international source could be confirmed, together with an affidavit from the daughter confirming that she would advance sufficient

funds to her parents, the second defendants, in the event that her finance application was successful to discharge the indebtedness to the bank.  The material before me does not provide a sufficient basis for any real confidence that this finance will be available.  However, I record that if there is, in the short term, a significant change in position there might be justification for a second application in reliance on rr 7.52 and 7.53.

[28]     There is no justification for an order restraining a mortgagee sale in view of

the second defendants’ financial position.

Orders

[29]     I order:

(a)      The  application  for  an  order  restraining  the  plaintiff  and  the counterclaim  defendants  from  auctioning  the  properties  at  2590

Broadlands Road and 190 Allen Road, Reporoa is refused;

(b)By consent, the second affidavit of Randal Thomas Clements sworn on 10 May 2011 in this proceeding and the exhibits referred to shall not be disclosed to any party, entity or person except the parties to this proceeding without an order of this Court.

Costs

[30]     Counsel were in agreement that costs should follow the event and that this was  a  Category  2  Band B  application.    Accordingly,  I  order  that  the  second defendants  pay  the  plaintiff’s  costs  based  on  Category 2  Band B  together  with

disbursements, as fixed by the Registrar.

JA Faire