Official Assignee v 22 O'Shannessey Limited
[2023] NZHC 3766
•20 December 2023
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2022-404-829
[2023] NZHC 3766
UNDER Part 18 of the High Court Rules 2016 IN THE MATTER
of the bankruptcy of ANDREW MICHAEL FONAGY
BETWEEN
THE OFFICIAL ASSIGNEE IN THE BANKRUPTCY OF THE PROPERTY OF ANDREW MICHAEL FONAGY
Plaintiff
AND
22 O’SHANNESSEY LIMITED
First Defendant
WHARERIMU TRUSTEE LIMITED
Second DefendantMARAM PROPERTY TRADING LIMITED
Third Defendant
Hearing: 7 August 2023 Appearances:
P Murray for the Official Assignee
R Hucker and M Swan for the First and Second Defendants
Judgment:
20 December 2023
JUDGMENT OF ASSOCIATE JUDGE SUSSOCK
This judgment was delivered by me on 20 December 2023 at 4 pm pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
OFFICIAL ASSIGNEE v 22 O’SHANNESSEY LTD [2023] NZHC [3766] [20 December 2023]
Introduction
[1] This is an application for summary judgment by the first and second defendants.
[2] The Official Assignee has filed proceedings pursuing three causes of action against the defendants.1 All three relate to a transaction in which Andrew Michael Fonagy assigned his rights, under a loan to 22 O’Shannessey Ltd (O’Shannessey) and pursuant to a deed of acknowledgement of debt, to the then trustee of the Wharerimu Trust on 21 December 2016 (Transaction).
[3]Mr Fonagy was adjudicated bankrupt on 17 September 2020.
[4] The Transaction occurred more than two years, but less than five years prior to Mr Fonagy's adjudication in bankruptcy.
[5] The first two causes of action by the Official Assignee are brought against the first and second defendants pursuant to ss 205 and 206 of the Insolvency Act 2006.
[6] Section 205 of the Insolvency Act 2006 provides that a gift made during this time period may be set aside if the bankrupt was unable to pay their debts immediately after the making of the gift or at any time after that up to their adjudication, without the aid of the property that the gift is comprised of.
[7] Section 206 of the Insolvency Act further provides for the cancelling of an insolvent gift,2 or a disposition of property to which sub-pt 6 of pt 6 of the Property Law Act 2007 (PLA) applies.3 Section 346 of the PLA provides that subpart 6 relevantly applies to dispositions of property made by a debtor who:
(a)was either insolvent at the time or became insolvent as a result of making the disposition; or
1 The first and second causes of action are against both the first and second defendants while the third cause of action is against the third defendant.
2 Insolvency Act 2006, s 206(1)(c).
3 Section 206(1)(d).
(b)was engaged or was about to engage in a business or transaction for which the remaining assets of the debtor were, given the nature of the business or transaction, unreasonably small.
[8] The defendants say that whilst they have other defences, they have brought this summary judgment application because it is unarguable that Mr Fonagy was able to pay his debts at the time of the Transaction. Therefore, the causes of action must fail.
[9] The Official Assignee’s third cause of action is against the third defendant, Maram Property Trading Limited (Maram) which is not involved in this application. This cause of action relies on the reversal or cancellation of the Transaction. The first and second defendants say that if they establish that the first two causes of action cannot succeed then the third cause of action cannot succeed either and the whole of the proceeding would be at an end. As the third defendant is not involved, throughout the remainder of this judgment I refer to the first and second defendants as “the defendants” for convenience.
[10] Importantly, s 205(2) of the Insolvency Act provides a presumption that the bankrupt is unable to pay his debts for the purposes of that section unless the party claiming under the gift proves otherwise. The onus is therefore on the defendants to prove that Mr Fonagy was able to pay his debts at the time of the Transaction on 21 December 2016 (or at any time prior to his adjudication).
[11] The defendants say that this requires an assessment of the solvency of the bankrupt, both on the basis of an inability to pay debts within a reasonable time and an assessment of the extent to which the bankrupt’s assets exceeded liabilities. The defendants submit that the starting point for assessing the ability to pay debts is to identify which creditors proved in Mr Fonagy’s bankruptcy and then to assess what debt, if any, was owed to creditors by Mr Fonagy as at the date of the impugned transaction. Underlying this submission is a submission that where a debt arising at the time of the Transaction has been repaid prior to adjudication, it is unable to be taken into account in the assessment of solvency at the time of the impugned transaction.
[12] The defendants refer to the fact that the Official Assignee has already obtained a Statement of Affairs and had access to all records of Mr Fonagy which the Official Assignee is entitled to under the Insolvency Act since Mr Fonagy’s bankruptcy in September 2020. On this basis they submit that no further discovery or other interlocutory processes will result in any further evidence becoming available.
[13] It is not disputed that prior to the Transaction Mr Fonagy had guaranteed the obligations of Colombo Projects Ltd (Colombo), which was completing a property development on Colombo Street, Christchurch. Counsel for the defendants submits however that the value of the collateral securities held by Colombo needs to be taken into account when assessing the value to be ascribed to the guarantee for the solvency calculation. The defendants submit that to the extent that the value of the property that is the subject of the collateral securities exceeds the amount due under the loan agreement, there is no contingent obligation to be taken into account.
[14] The defendants say that when this is done, the limit of the guarantee was covered by the value of the collateral securities and so no amount needs to be included in respect of the guarantee when assessing Mr Fonagy’s solvency at the time of the Transaction.
[15] The Official Assignee, by contrast, submits that only the monies due under the loan are taken into account in assessing the value of the guarantee without regard to the value of the collateral securities underpinning the loan.
[16]The two issues for determination are:
(a)How is the value of the contingent obligation under the guarantee assessed for the purposes of assessing Mr Fonagy’s solvency?
(b)To what extent are the assets identified by Mr Fonagy able to be taken into account in assessing his ability to pay his debts?
[17] I begin by setting out the principles applying to summary judgment by defendants before recording the factual background and considering the issues.
[18] Finally I note in the introduction that issues were raised in relation to the admissibility of some of the affidavit evidence filed including whether expert evidence was sufficiently expert or independent. These issues do not to be determined because of the view I have come to on the legal issues and because I rely on evidence that is not in dispute between the parties.
Summary judgment by defendants
[19] Rule 12.2(2) of the High Court Rules 2016 provides that the Court may give judgment against a plaintiff if the defendant satisfies the Court that none of the causes of action in the statement of claim can succeed. This is in contrast to an application for summary judgment by a plaintiff where the Court may grant summary judgment in respect of a single cause of action in the plaintiff’s statement of claim (or even part of a cause of action).4
[20] In Stephens v Barron the Court of Appeal summarised the longstanding authority on defendant summary judgment, Westpac Banking Corp v M M Kembla New Zealand Ltd,5 and confirmed that a defendant seeking summary judgment has a considerable burden to discharge:6
(a)The defendant has the onus of proving on the balance of probabilities that the plaintiff cannot succeed. Usually this will arise where the defendant can offer evidence which is a complete defence to the plaintiff’s claim.
(b)An application for summary judgment will be inappropriate where there are disputed issues of material fact or where material facts need to be ascertained by the Court and cannot confidently be concluded from affidavits. It may also be inappropriate where ultimate determination turns on a judgment able to be properly arrived at only after a full hearing of the evidence.
(c)The Court must be satisfied that none of the claims can succeed. It is not enough that they are shown to have weaknesses. The assessment is not to be arrived at on a fine balance of the available evidence as would be appropriate at a trial.
(d)The residual discretion of the Court to refuse summary judgment would be properly invoked to avoid the oppression which would otherwise result if an application by a defendant for summary
4 High Court Rules 2016, r 12.2(1).
5 Westpac Banking Corp v M Kembla New Zealand Ltd [2001] 2 NZLR 298 (CA).
6 Stephens v Barron [2014] NZCA 82 at [9] (footnotes omitted).
judgment would pre-empt a plaintiff exercising the right to amend the pleadings.
(e)Summary judgment should not be applied for unless the substantive merits of the case are clear and capable of summary disposal.
Factual background
Parties
[21] Mr Fonagy established the Wharerimu Trust in December 2014. The second defendant, Wharerimu Trustee Ltd (WTL), is the current trustee of the trust. Errol Bailey is the director of WTL. Mr Bailey is Mr Fonagy’s accountant. Mr Fonagy holds the power of appointment for the Trust.
[22] The first defendant, O’Shannessy, was incorporated in August 2016. Mr Fonagy was the sole director until 14 September 2020 when Melissa Turkington, Mr Fonagy’s wife, was appointed director. Mr Fonagy resigned as a director on the day of his bankruptcy, 17 September 2020.
[23] The third defendant, Maram, was incorporated in September 2012. Mr Bailey was a director from 2014 to 2020. Maram’s current sole director is Russell Craigie. Maram’s shares are owned by Blanch Trustee Services Ltd, of which Mr Bailey is the sole director and shareholder. Maram’s registered office during the relevant periods was c/- Taurus Group Ltd, of which Mr Bailey is a director and shareholder.
Loans and guarantees
[24] On 21 December 2015, Primary Services New Zealand Ltd (Primary Services) entered into a loan agreement with Colombo and Mr Fonagy. Under the loan agreement, Primary Services agreed to lend Colombo $850,000 in return for Colombo granting a mortgage to Primary Services over a property at 818 Colombo Street, Christchurch (Colombo Property). Mr Fonagy personally guaranteed the obligations of Colombo to Primary Services.
[25]Colombo paid interest on the loan until 26 May 2016.
[26] On 27 May 2016, Colombo and Mr Fonagy entered into a term loan agreement with Waitangi Investments Ltd (Waitangi) and the Jocelyn Grattan Charitable Trust (Jocelyn Grattan Trust). Waitangi and the Jocelyn Grattan Trust advanced a further
$1.6m to Colombo and Mr Fonagy covenanted to pay any amount outstanding.
[27] Mr Short, a director of Primary Services, has provided evidence in support of the Official Assignee’s opposition. Mr Short’s evidence in summary is that:
(a)From 26 May 2016, Colombo and Mr Fonagy defaulted on their payment obligations to Primary Services.
(b)Interest remained outstanding from 26 May 2016 in default of the loan facility agreement.
(c)Contrary to Mr Fonagy's assertions, there was never any agreement to capitalise interest owing under the loan facility agreement.
(d)The entire purpose of the further funding from Waitangi and the Jocelyn Grattan Trust was because Mr Fonagy had made it clear that neither he nor Colombo could repay money owed to Primary Services, and Colombo was in default under its prior first mortgage to MJ & SJ Howard Ltd. Mr Fonagy explained to Mr Short that he urgently needed finance to prevent a mortgagee sale.
(e)Primary Services did not seek to enforce its rights against Mr Fonagy at this time only because it was clear neither Colombo nor Mr Fonagy could pay.
[28] Mr Fonagy's evidence is that there was an agreement to capitalise interest and the purpose of the further funding from Waitangi and the Jocelyn Grattan Trust is not as set out by Mr Short.
[29] The Official Assignee disputes this and submits that Mr Short's position is supported by the findings in Primary Services New Zealand Ltd v Colombo Projects
Ltd and the sealed judgment in that proceeding recording unpaid interest under the loan facility agreement from 26 May 2016.7
Background to impugned transaction
[30] On or about 18 August 2016, O'Shannessey purchased a property at 22 O'Shannessey Street, Papakura, Auckland (Papakura Property).
[31] The purchase was partly funded by a loan of $350,876.05 from Mr Fonagy to O'Shannessey. O'Shannessey executed a deed of acknowledgement of debt, acknowledging that the debt was repayable to Mr Fonagy on demand (Deed of Acknowledgment of Debt).
[32] On or about 21 December 2016, Mr Fonagy assigned his rights under the loan and Deed of Acknowledgment of Debt to the Wharerimu Trust by way of an express gift. This was recorded in a resolution of the Wharerimu Trust executed by Mr Fonagy on the same date. This is the Transaction challenged by the Assignee.
Enforcement by Primary Services in 2018
[33] In 2018, Primary Services exercised its power of sale and sold the Colombo Property for $1,350,000. Waitangi and the Jocelyn Grattan Trust's loss on sale was
$678,792.15. Following the mortgagee sale there were no funds available to repay Primary Services the amount of the deficiency.
[34] Primary Services pursued recovery of the amounts owing. This included seeking summary judgment in July 2019 against Colombo and Mr Fonagy for repayment of the principal sum of $850,000 plus interest and costs.8
[35] Mr Fonagy opposed summary judgment on the basis of alleged misrepresentations by Mr Short.
7 Primary Services New Zealand Ltd v Colombo Projects Ltd [2020] NZHC 549 at [85(b)].
8 This led to the judgment Primary Services New Zealand Ltd v Colombo Projects Ltd [2020] NZHC 549 on 18 March 2020.
[36] On 18 March 2020, summary judgment was granted in favour of Primary Services against Mr Fonagy in the sum of $1,402,790.68 (including interest from 26 May 2016 and costs).9 Amongst other things, the Court found that the representations alleged by Mr Fonagy were not made.10
[37] On 2 August 2019, Primary Services obtained freezing orders against Mr Fonagy,11 and on 7 February 2020, it obtained freezing orders against Ora Trustees Ltd (the former trustee of the Wharerimu Trust).12
[38] Mr Fonagy was adjudicated bankrupt on his own application on 17 September 2020.
Transfer of Papakura Property
[39] In July 2020, a few months before Mr Fonagy's bankruptcy, O'Shannessey transferred the Papakura Property to Maram, ostensibly for a sale price of $580,000. At the time of this sale, Mr Fonagy was still the director of O'Shannessey. The mortgage was discharged and then re-registered over the title to the Papakura Property. A mortgage to O'Shannessey was also registered on the title.
[40] The Auckland Council valuation for the Papakura Property as at the date of sale was $1,080,000. A valuation report commissioned by Primary Services from Darroch Property Services records the Papakura Property as having a registered valuation of $900,000.
[41] On 4 May 2022, the Papakura Property was transferred from Maram to the United Church of Tonga in New Zealand Trust Board, with the mortgage to O'Shannessey being discharged. The Official Assignee records in submissions that the sale price was $1.4 million.
9 Primary Services New Zealand Ltd v Colombo Projects Ltd, above n 7.
10 At [54] and [63].
11 Primary Services New Zealand Ltd v Fonagy [2019] NZHC 1869.
12 Primary Services New Zealand Ltd v Colombo Projects Ltd [2020] NZHC 101.
Official Assignee’s notice and application for freezing order
[42] On 25 May 2022, the Assignee issued a notice under s 206 of the Insolvency Act to O'Shannessey and the Wharerimu Trust. The notice stated that the Assignee wished to cancel two transactions, namely:
(a)the gift, transfer and/or assignment of Mr Fonagy's right, title and interest under the Loan of $350,876.05 to the Wharerimu Trust on or about 21 December 2016; and
(b)the gift, transfer and/or assignment of Mr Fonagy's right, title and interest (including in relation to the agreement to mortgage) under the Deed of Acknowledgement of Debt to the Wharerimu Trust on or about 21 December 2016.
[43] On 3 June 2022, Toogood J granted a without notice application for freezing orders sought by the Official Assignee in respect of property held by the three defendants, including the net proceeds of the sale of the Papakura Property.13 The reasons for the decision were issued on 13 June 2022.14 His Honour also made ancillary orders requiring the defendants to provide limited discovery.
[44] Toogood J accepted that the Assignee had a good arguable case that the transfer and/or assignment of Mr Fonagy's rights, title and interest under the Loan and Deed of Acknowledgment of Debt was a gift that would be cancelled.
[45] On 5 July 2022, O'Shannessey and the Wharerimu Trust issued a Notice of Objection to the Notice to Cancel Irregular Transaction under the Insolvency Act.
[46] Maram subsequently applied to rescind the freezing order granted by Toogood J. That application was dismissed except in relation to the required disclosure of bank account numbers which the Court held was not necessary to give effect to the orders.15
13 Official Assignee v 22 O’Shannessey Ltd HC Auckland CIV-2022-404-829, 3 June 2022.
14 Official Assignee v 22 O’Shannessey Ltd HC Auckland CIV-2022-404-829, 13 June 2022 (Reasons Minute of Toogood J).
15 Official Assignee v 22 O'Shannessey Ltd [2022] NZHC 2930 at [91].
Causes of action pleaded
[47] The Official Assignee pleads two causes of action against the defendants. In both causes of action, the Official Assignee seeks orders cancelling the gift of the Loan and the rights under the Deed of Acknowledgement of Debt and orders under s 207 of the Insolvency Act that Mr Fonagy's rights in the Loan be retransferred to the Official Assignee or for payment of compensation.
First cause of action: insolvent gift
[48] The first cause of action is pursuant to s 205 of the Insolvency Act, which provides:
205 Insolvent gift within 2 to 5 years may be cancelled if bankrupt unable to pay debts
(1)A gift by a bankrupt to another person may be cancelled on the Assignee’s initiative if—
(a)the bankrupt made the gift within the period beginning 2 years immediately before adjudication and ending 5 years immediately before adjudication; and
(b)the bankrupt was unable to pay his or her debts.
(2)A bankrupt is presumed to have been unable to pay his or her debts for the purpose of subsection (1)(b) unless the party claiming under the gift proves that the bankrupt was immediately after the making of the gift, or at any time after that up to his or her adjudication, able to pay his or her debts without the aid of the property that the gift is composed of.
[49] As referred to above, under the presumption in s 205(2), the legal burden of proving Mr Fonagy's ability to pay all his debts is placed on the party claiming under the gift, in this case O'Shannessey and the Wharerimu Trust.16
[50] The assessment of a donor's ability to pay their debts is based on whether debts are “provable debts” in the bankruptcy.17 The test is therefore whether debts are provable, not whether debts have been proved.
16 Cook v Official Assignee (2008) 2 NZTR 18-020 (HC) at [12].
17 At [14].
[51] Section 205 of the Insolvency Act was amended in 2009 by replacing the phrase “due debts” with “debts”. The effect is that when proving solvency, account can be taken of all debts that have not yet fallen due, such as contingent liabilities.18
Second cause of action: irregular transaction to which PLA applies
[52] The second cause of action is brought pursuant to s 206(1)(d) of the Insolvency Act. This subsection incorporates claims for dispositions of property to which sub-pt 6 of pt 6 of the PLA applies.
[53] The Official Assignee claims that the gift of the Loan was a disposition of property by Mr Fonagy to the Wharerimu Trust that prejudiced the Official Assignee and creditors.
[54]Section 346 of the PLA provides as follows:
346 Dispositions to which this subpart applies
(1)This subpart applies only to dispositions of property made after 31 December 2007—
(a)by a debtor to whom subsection (2) applies; and
(b)with intent to prejudice a creditor, or by way of gift, or without receiving reasonably equivalent value in exchange.
(2)This subsection applies only to a debtor who—
(a)was insolvent at the time, or became insolvent as a result, of making the disposition; or
(b)was engaged, or was about to engage, in a business or transaction for which the remaining assets of the debtor were, given the nature of the business or transaction, unreasonably small; or
(c)intended to incur, or believed, or reasonably should have believed, that the debtor would incur, debts beyond the debtor’s ability to pay.
(3)However, this subpart does not apply to dispositions to which the limit in section 142(3) of the Infrastructure Funding and Financing Act 2020 applies under a levy order made under that Act.
18 Judd v Hodgkinson [2018] NZHC 491 at [49].
[55] The Official Assignee submits that s 346(1)(b) is satisfied and that Mr Fonagy is a debtor to whom subsection (2) of s 346 applies as he was either:
(a)insolvent at the time of making the disposition or became insolvent as a result of the disposition; or
(b)was engaged, or was about to engage, in a business or a transaction for which his remaining assets were, given the nature of the business or transaction, unreasonably small.
[56] The defendants say that Mr Fonagy was not insolvent, nor did he become insolvent as a result of the disposition, and nor was he engaged in a business or transaction for which his remaining assets were unreasonably small.
Was Mr Fonagy solvent at the time of the Transaction (or at any time thereafter)?
[57] Because of the presumption in s 205 of the Insolvency Act for the purposes of the first cause of action, it is for the defendants to prove that Mr Fonagy was solvent on both a cash flow and balance sheet basis at the time of the Transaction (or at any time thereafter). This presumption does not apply in respect of the second cause of action but the have to succeed on all causes of action to succeed in summary judgment as defendants. If they cannot rebut the s 205 presumption then the summary judgment application must be declined.
[58] Mr Short gives evidence for the Official Assignee that on 26 November 2016, the debt owed by Colombo, including interest, was $912,319.69. Mr Clothier, a senior investigating accountant at the Ministry of Business, Innovation and Employment, has provided expert evidence for the Official Assignee. Mr Clothier has calculated in his affidavit that adding further interest owed between 26 November 2016 and the date of the Transaction, 21 December 2016, the debt would have increased to $920,477.90.
[59] The Official Assignee submits that the full amount of this debt is to be included as the value assigned to the guarantee when assessing Mr Fonagy’s solvency.
[60] Mr Clothier has included an estimate of Mr Fonagy’s financial position before and after the Transaction on 21 December 2016 using Mr Fonagy’s best case based on the assets Mr Fonagy has given evidence of owning at the time. This schedule of assets is consistent with the schedule prepared by Mr Keaton Pronk, a licensed insolvency practitioner, who has given expert evidence for the defendants.
[61] The estimate of Mr Fonagy’s financial position shows that if the guarantee to Primary Services is treated as a liability, Mr Fonagy’s net position before the Transaction on 21 December 2016 was -$292,007.30 and his best position immediately after was -$642,883.35. Even if only the principal sum of the loan from Primary Services of $850,000 is taken into account without interest and any liability to Inland Revenue is ignored, Mr Fonagy’s net position on a best case scenario in terms of his assets before the Transaction would still be -$188,311.71 and after the Transaction -$539,187.76. Any disputes about interest or amounts owed to Inland Revenue do not therefore affect whether he was insolvent at the time of the Transaction on the basis of the assets claimed by him.
[62] The defendants, by contrast, submit that the value assigned to the guarantee must be assessed having regard to the value of the collateral securities provided in respect of the guaranteed obligation.
[63] The defendants start by recording that the amounts due under the loan agreement as at 21 December 2016 were $850,000 to Primary Services plus $1.6 million to Waitangi and the Jocelyn Grattan Trust. The total amount outstanding was therefore $2.45 million. The defendants’ position is that the interest payments did not fall due until 1 January 2017 in respect of the Primary Services Loan, with $39,666.60 due at that time. The interest on the Waitangi and the Jocelyn Grattan Trust loan had been prepaid for the first six months and the monthly instalment of $13,333.33 was not due until 27 December 2016. If these two interest payments are included in the outstanding loan balance the total principal and interest outstanding was
$2,502,999.93.
[64] Mr Short calculates for the Official Assignee that a further $100,000 was owed in interest. The defendants say that this additional figure is not supported by the
contemporaneous documentation of Mr Short at the time but is immaterial in any event in assessing the ability of Mr Fonagy to pay his debts. This is because, in the defendants’ submission, on any analysis the value of the collateral securities based on the contemporaneous valuations of Ford Baker exceeded the amounts advanced.
[65] The Ford Baker valuations valued the development that is the subject of the collateral securities on three bases:
(a)with the resource consent and lease in place, $3,047,500;
(b)with only the resource consent, $2,679,500; and
(c)on a bare land valuation basis, $2,328,750.
[66] The valuation report had an effective date of 5 May 2016 but Mr Newberry from Fordbaker gives evidence for the defendants that the value of the property would not have altered materially by December 2016. The defendants emphasise that the Ford Baker valuations are the valuations on which Mr Short relied to make the two advances.
[67] As set out above, there is no dispute that Mr Fonagy provided a guarantee of the obligations of Colombo and that this was a contingent obligation that could constitute a debt provable in his bankruptcy for the purposes of s 232 of the Insolvency Act.
[68] If the guarantee is included without taking into account the value of any collateral security of Colombo, such as the Colombo Property, then even on the defendant’s evidence, Mr Fonagy would have been insolvent. The critical issue is therefore whether the collateral security is taken into account.
Is the collateral security to be taken into account?
Defendants’ submissions
[69] The defendants say that to the extent that the value of the Colombo Property that is the subject of the collateral securities exceeds the amounts due under the loan
agreement, there is no contingent obligation to be taken into account in assessing the ability of Mr Fonagy to make payment of the debt.
[70] The defendants submit this reflects the principle articulated by Lord Selborne LC in Re Ridler,19 as in that case the Court held the approach required was to treat the guarantee as if the guarantee had been called upon as at the date of the assessment. The defendants say that the position of the guarantor should be no different than if the guarantor were the principal debtor under the loan agreement and the owner of the collateral the subject of the securities.
[71] The defendants submit that the same position is reached if an approach is adopted of valuing the right to subrogation and the ability to exercise the securities on the payment of the amounts due under the loan agreement. The defendants say that in treating the contingent obligation under the contract of guarantee, the assessment must involve both the contingent liabilities and assets that would arise under the instrument in the event of default.
[72] The defendants say this approach is consistent with the framework imposed under the Insolvency Act to determine the quantum of the debt for which a creditor is entitled to prove in a bankrupt’s estate and that this is grounded in the following:
(a)Relying on Re Moeller, ex parte Joseph, it has been recognised that a guarantor may prove in the estate of a bankrupt after deducting the value of the securities received by the guarantor from the principal debtor.20
(b)Section 246(1) of the Insolvency Act also reflects that a secured creditor who realises a charge can only prove for any balance after deducting the net amount realised. There is also the ability to value the charge under s 247 of the Insolvency Act.
19 Re Ridler (1882) 22 ChD 74 (CA) at [80].
20 Re Moeller, ex parte Joseph (1884) NZLR 3 164 (SC).
(c)There is a self-executing bankruptcy set-off provision under s 254 of the Insolvency Act which requires an account of any credits, debts or dealings between a creditor and debtor (the set-off under the guarantee includes the ability to have recourse to the value of the collateral security at the relevant point in time) noting that unliquidated monetary claims are able to be set off.
[73] The defendants further submit that in the two cases relied on by the Official Assignee, Regal Castings Ltd v Lightbody21 and JEC No 2 Ltd v The Official Assignee at Hamilton,22 there was not a live issue as to how to value the collateral securities because there were either no such securities or, to the extent there were (the Tairua property in the JEC decision), the ability of the insolvent to pay any debt was not in issue because the transactions had occurred within two years of adjudication so being subject to automatic setting aside under s 204 of the Insolvency Act.
[74] Furthermore, the defendants say that in none of the cases relied upon by the Official Assignee was the Court embarking on an exercise of assessing the ability to pay debts. Rather, the Courts were assessing the extent to which there may have been an intention to defeat the interests of creditors and the extent to which such an intention could be inferred. In the context of s 205, the defendants say the assessment necessarily is as to the ability to pay debts.
[75] The defendants submit that a guarantor, on payment of the debt, has the ability to be subrogated to the securities that the creditor holds and can exercise those securities to obtain value from the assets of the principal debtor without any voluntary act on the part of the principal debtor. Counsel for the defendant notes the Court has long recognised the proprietary nature of this ability and the value in such rights, where secured against assets of some value. The defendants say it is understandable where there may be competing priorities over the estate of the principal debtor generally to suggest that in the absence of any right of priority in respect of specific assets, that such a claim to indebtedness is not certain enough to be taken into account in assessing assets and liabilities. However, the defendants say it is not simply a matter of
21 Regal Castings Ltd v Lightbody [2008] NZSC 87, [2009] 2 NZLR 433.
22 JEC No 2 Ltd v The Official Assignee at Hamilton [2013] NZHC 1352.
determining the amount outstanding under the loan agreement and imputing the debt then owing as a debt of the insolvent under the guarantee without assessing the connected contingent asset derived through the availability of the collateral securities.
Official Assignee’s submissions
[76] Counsel for the Official Assignee responds that it is not correct that the collateral securities must be taken into account in assessing solvency. The Official Assignee submits that the law in this respect has been settled since the 19th century, also citing Re Ridler where the Court held that a contract of guarantee created a debt that is to be treated as due and owing.23 The Official Assignee again relies on the decision of the Supreme Court in Regal Castings Ltd v Lightbody.
Discussion
[77] I discuss Regal Castings and Re Ridler in more detail below as they assist in answering the question of whether collateral securities ought to be taken into account.
[78] In Regal Castings, Tipping J referred to the following passage from Lord Selborne’s judgment in Re Ridler with approval:24
[116] The arguments on behalf of the Respondents turned much on the proposition that when a person is liable on a guarantee he is not to be regarded for the present purpose as owing a debt of that amount, without taking into account the assets of the principal debtor as well as his own. There is a fallacy in this. To hold that a guarantor can make a voluntary settlement of the whole of his property and support it by showing that when he made it the person guaranteed had assets enough to pay the amount guaranteed, would go far to defeat the contract of suretyship. We must look at the matter as if the event had already happened the possibility of which the parties must have had in contemplation when the guarantee was given of the debtor being unable to pay. I do not think that any close inquiry as to the supposed capacity of the person guaranteed to pay the debt ought to be entered into. I do not say that there might not be a state of things in which the liability of the guarantor might be so remote that it need not be regarded; but if he conveys away all his property by a voluntary settlement I think it doubtful whether the settlement could in any case be supported in the event of his ultimately being called on under his guarantee.
23 Re Ridler, above n 19, at 80.
24 At 80 cited by Regal Castings Ltd v Lightbody, above n 21, at [116]. See also Elias J at [8], and Blanchard and Wilson JJ at [59] in Regal Castings Ltd v Lightbody.
[79]Justice Tipping continued in Regal Castings:
[117] The Lord Chancellor went on to indicate that it was not appropriate to speculate about the ability of the principal debtor to satisfy the indebtedness; the Court should consider only the state of the guarantor’s assets. His Lordship concluded his judgment with these words:
The father [who was the guarantor] when he made the settlement must have known that if the son could not pay the balance to the Bank he himself, if the settlement was sustained, would have substantially nothing available to meet the liability under the guarantee but such dividend as he could get from the son’s estate. I am of opinion that a settlement made under such circumstances cannot be supported against the creditors.
[80] After setting out these passages, Tipping J held that the effect of the decision in Re Ridler is that a guarantor must be treated as if the guaranteed debt was due and owing.25
[81] Justice Tipping then goes on to say this view is supported by the discussion in Kerr on Fraud and Mistake where it cites the statement of Turner LJ in Goodricke v Taylor:26
[E]very surety must be taken to contemplate that he may be called upon to pay the debts for which he is surety, and he can no more be justified in placing the whole of his property out of the reach of his liability to pay them than if he was principal debtor.
[82]After considering the facts in Regal, Tipping J held:
[121] It is also clear that it is not appropriate to enter into any detailed inquiry as to how readily, if at all, Capro could have discharged its indebtedness to Regal.
[83] Justice Tipping noted that in that case, Capro (which is in the same position as Colombo here) had no ready ability to discharge its indebtedness. Importantly, Tipping J comments that the fact that Capro had money owing to it and may have had an ability to liquidate stock in trade, was of no significance for the purpose of assessing Mr Lightbody’s solvency. His Honour goes on to say that in any event, Mr Lightbody had certainly not established to his Honour’s satisfaction that Capro was able to pay its debts at the time he entered into the transaction in question and that in a case where
25 Regal Castings Ltd v Lightbody, above n 21, at [118].
26 At [119] citing Goodricke v Taylor (1864) 2 DE GJ & Sm 135 at 141.
the guarantor is insolvent, the onus must be on him to show that the principal debtor was so clearly able to pay its debts at the relevant time that it would be inappropriate to apply the rule in Freeman v Pope27 against the guarantor.
[84] Earlier in his judgment, Tipping J refers to the origin of the Freeman v Pope rule.28 It is useful to refer back to this because counsel for the defendants says it is necessary to go back to first principles.
[85] Tipping J discusses the origin of the rule in Freeman v Pope when discussing s 60 of the Property Law Act 1952 which provided that every alienation of property with intent to defraud creditors was voidable at the instance of the person thereby prejudiced.
[86]Tipping J explained:29
[87] Section 60 was the then current equivalent in New Zealand of a statute passed in the 13th year of the reign of Queen Elizabeth the First. The Statute of Elizabeth, as I will call it, provided that all conveyances and dispositions of property made with the intention of delaying, hindering or defrauding creditors should be null and void as against them. The statute contained a proviso in the same terms as those found in s 60(3). An early and instructive application of the statute can be found in Twyne’s Case. Kerr, in his work on The Law of Fraud and Mistake, citing Story’s Equity Jurisprudence, observes that it gradually grew into a practice when applying the statute:
to regard certain acts or circumstances as indicative of a so-called fraudulent intention, in the construction of the statute, although, perhaps, there was in fact, no actual fraud or moral turpitude. It is difficult, in many cases of this sort, to separate the ingredients which belong to positive and intentional fraud from those of a mere constructive nature, which the law thus pronounces fraudulent upon principles of public policy.
[88] Kerr then observes that drawing a line for present purposes between actual fraud and constructive fraud would be next to impossible and could rarely serve any useful purpose. Significantly Kerr adds that there were certain circumstances which came to be taken as conclusive evidence of fraud, and as invariably avoiding the conveyance. One of those circumstances was a voluntary conveyance by a person substantially indebted at the time. This circumstance came to be known as the rule in Freeman v Pope to which the first ground of appeal is directed. A voluntary conveyance means a transfer of property without valuable consideration. Questions of insufficient consideration do not require attention in this case. It will, however, be
27 Freeman v Pope (1870) LR 5 Ch App 538 (CA).
28 Regal Castings Ltd v Lightbody, above n 21, at [88].
29 At [87] and [88].
necessary to address whether the transaction in issue was voluntary in the relevant sense. The concept of substantial indebtedness developed over time into the concept of insolvency, as adopted and defined in Freeman v Pope.
(Footnotes omitted)
[87]In Freeman v Pope, Lord Hatherley LC started his judgment by saying:30
The principle on which the statute of 13 Eliz. c. 5 proceeds is this, that persons must be just before they are generous, and that debts must be paid before gifts can be made.
[88]Justice Tipping then refers to a later passage where Lord Hatherley added:31
But it is established by the authorities that in the absence of any such direct proof of intention, if a person owing debts makes a settlement which subtracts from the property which is the proper fund for the payment of those debts, an amount without which the debts cannot be paid, then, since it is the necessary consequence of the settlement (supposing it effectual) that some creditors must remain unpaid, it would be the duty of the Judge to direct the jury that they must infer the intent of the settlor to have been to defeat or delay his creditors, and that the case is within the statute.
[89] In Cook v Official Assignee, which involved an appeal against the decision of the Official Assignee under s 54 of the Insolvency Act 1967 (the predecessor to s 205 of the Act), Asher J held:32
[15] …It is clear, therefore, that with the possible exception of the patently obvious solvency of the primary debtor, a debt of guarantee is to be taken into account for the purposes of s 54(2).
[16] In Re Crawford (a bankrupt) HC WAN CIV-2005-483-235 5 May 2006, MacKenzie J applied the principle in Re Ridler in the context of s 54(2). I propose doing so in this appeal. This means that the guarantee of the company debt to Rexel is a debt for the purposes of s 54(2).
[90] Associate Judge Faire applied the same principles in JEC No 2 Ltd v The Official Assignee at Hamilton, where he accepted that a contract of guarantee creates a debt that is to be treated as due and owing.33 Consistent with the authorities, his Honour did not enquire into the primary debtor’s ability to discharge the indebtedness.
30 Freeman v Pope, above n 27, at 540.
31 At 541 as cited by Regal Castings Ltd v Lightbody, above n 21, at [90].
32 Cook v Official Assignee, above n 16.
33 JEC No 2 Ltd v The Official Assignee at Hamilton, above n 22, at [49] following the analysis of Tipping J in Regal Castings Ltd v Lightbody, above n 21.
[91] Although Mr Hucker submits that the ability of the insolvent to pay any debt was not in issue in JEC No 2 Ltd because the transactions had occurred within two years of adjudication and so were subject to the automatic setting aside under s 204, the Official Assignee’s application in that case was pursuant to ss 206 and 207 of the Insolvency Act, as the second cause of action is here. Associate Judge Faire was therefore deciding whether the bankrupt in that case, Mr Fawcett, was insolvent for the purposes of s 346 of the PLA.
[92] I accept that in Regal Castings the Supreme Court commented that Capro was not able to pay its debts but the discussion by Tipping J, and particularly the excerpts from Re Ridler, make it clear that there is no need to enquire into the collateral securities, and in fact, it would be inconsistent with the contract of suretyship to do so. The judgment of Lord Selborne in the passage referred to above at [79] discussed exactly what Mr Hucker submits ought to be done and discounts it when his Lordship said:34
To hold that a guarantor can make a voluntary settlement of the whole of his property and support it by shewing that when he made it the person guaranteed had assets enough to pay the amount guaranteed, would go far to defeat the contract of suretyship.
[93] If a guarantor could transfer property away without valuable consideration and those transactions were not able to be set aside through the relevant sections in the Insolvency Act and the PLA without first considering the value of any collateral security held at the time of the voluntary conveyance by the principal debtor, it would defeat the value of any guarantee.
[94] In this case, in the defendants’ submission, the value of the Colombo Property at the time of the Transaction was significantly in excess of the guarantee and covenant provided by Mr Fonagy. However, when the Colombo Property was sold by way of mortgagee sale in July 2018, approximately 18 months after the Transaction, it only sold for $1,350,000 leaving significant shortfalls owing to Primary Services and Waitangi and the Jocelyn Grattan Trust.
34 Re Ridler, above n 19, at 80.
[95] I accept that Lord Selborne and Tipping J both have indicated that there may be a case where for some reason the full amount of the guarantee does not need to be taken into account, but they refer to cases where it is so patently obvious that the rule in Freeman v Pope ought not to apply. I do not consider that this case is such a case.
[96] Even if only the guarantee in favour of Primary Services is taken into account in respect of the principal sum and not the interest owing, so reducing the debt to
$850,000, Mr Fonagy’s liabilities still exceed his assets even on a best case scenario in terms of value of those assets, both before and after the Transaction.
[97] I therefore do not accept that the defendants have established that Mr Fonagy was unarguably solvent at the time of the Transaction. The first and second defendants cannot therefore succeed in summary judgment of their defence.
[98] Finally I record that if I had not reached this view on the legal position in terms of the value to be attributed to a guarantee when assessing solvency, I still would not have entered summary judgment for the defendants. In those circumstances the onus would still have been on the defendants to establish that Mr Fonagy was solvent at the relevant times. There are too many facts in dispute between the parties and gaps in the evidence for summary judgment to be granted to the defendants. The assessment made by the Court is not one to be arrived at on a fine balance of the available evidence such as would be required here if I were to attempt to assess the value of both the assets that Mr Fonagy claims to have held, and the value of any liabilities taking into account collateral securities.
Result
[99]The defendants’ application for summary judgment is dismissed.
Costs
[100] I did not hear from the parties on costs. I ask the parties to confer and, only if agreement cannot be reached, to file memoranda on behalf of the Official Assignee within 30 working days and the defendants a further 10 working days.
[101] I note that the length of the affidavits filed was unusual in an application for summary judgment by a defendant. My preliminary view therefore is that an increase on the usual award of 2B costs may be appropriate perhaps allowing Band C for some steps.
Associate Judge Sussock
Solicitors:
Molloy Hucker, Lawyers & Advisers, Auckland
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