Settlers Honey Ltd v First Honey NZ Ltd

[2021] NZHC 1576

IN THE HIGH COURT OF NEW ZEALAND MASTERTON REGISTRY

I TE KŌTI MATUA O AOTEAROA WHAKAORIORI ROHE

CIV-2021-435-007

[2021] NZHC 1576

BETWEEN

SETTLERS HONEY LTD

Applicant

AND

FIRST HONEY NZ LTD

Respondent

Hearing:	21 May 2021
Counsel:	NJ Jessen for the Applicant S J Iorns for the Respondent
Judgment:	29 June 2021

REASONS JUDGMENT OF CULL J

[On discharge of freezing orders]

[1]                 First Honey NZ Ltd (the respondent) applied to discharge freezing and ancillary orders made by Campbell J on 14 May 2021 over the respondent’s two trading bank accounts and disclosure of information in respect of those bank accounts. The freezing order was limited to 21 May 2021 and under High Court Rule (HCR) 32.7, the applicant, Settlers Honey Ltd (Settlers Honey) had the onus of satisfying the Court that the freezing order should be continued or renewed and the respondent had an opportunity to be heard by the Court.

[2]                 Although the orders were made on 14 May, the respondent was not served until 18 May, by which time the respondent’s trading bank accounts had been frozen and the respondent had limited time to make any application to discharge a freezing order prior to 21 May.

SETTLERS HONEY LTD v FIRST HONEY NZ LTD [2021] NZHC 1576 [29 June 2021]

[3]                 The matter came before me as Duty Judge on 21 May, by which time the respondent had applied to discharge the orders. After hearing from Counsel for both parties, I was not satisfied that the freezing order should be continued or renewed. I stayed the ancillary orders for disclosure of the respondent’s bank accounts and sought further submissions from Counsel as to whether they can be discharged independent of the freezing order. I have received no further submissions from Counsel and I now deliver my reasons for the lapse of the freezing order and the discharge of the ancillary order.

Background

[4]                 Settlers Honey has brought proceedings against the respondent over a large transaction of medical grade manuka honey, valued at $648.254. It claims that this transaction was between Settlers Honey and the respondent’s sister company in the United States (First Honey US), and the respondent was merely an agent to this transaction. However, First Honey US made payment to the respondent, not Settlers Honey. The respondent has not made any payment to Settlers Honey for the product sold. Settlers Honey seeks a summary judgment in respect of money owed to it, on the basis that it has two claims in equity against the respondent: first, that the respondent is holding the sale price on constructive trust for Settlers Honey; and second, that they have a claim for money had and received.

[5]                 Campbell J considered that Settlers Honey had a good arguable case for both causes of action and that there was a real risk that the respondent would dissipate their assets. On this basis, the freezing and ancillary orders were granted, freezing two of the respondent’s bank accounts and requiring disclosure of the respondent’s bank statements and all bank accounts under the respondent’s name.1

The submissions of the respondent

[6]                 The respondent argues the Court should exercise its discretion to discharge the freezing order and related ancillary order. This is supported by the affidavits of

1      Settlers Honey Ltd v First Honey NZ Ltd [2021] NZHC 1086 at [20]–[30].

Mr Watson (sole director and shareholder of the respondent) and Mr Scarlet (director of First Honey US).

[7]                 It is submitted that the respondent has no good arguable case. First, it is said that Settlers Honey completely fabricated the nature of the transaction which took place and the role of the respondent within it. The product sold was meant to consist of equal amounts of the respondent and the respondent’s product that was to be blended at a Settler Honey facility with oversight from the respondent. The respondent product to be used was that which was being stored at Settler Honey’s facility. Accordingly, a portion of the $648,254 relates in part to their own product.

[8]                 Related to this, the respondent was never intended to be an agent or broker in the transaction. Mr Scarlet, in his affidavit, states firmly that First Honey US is perfectly capable of purchasing honey directly from other companies if the need arises, but the preference is to purchase honey directly from its sister company, the respondent. Both Mr Watson and Mr Scarlet are firm in their view that the arrangement was always that the respondent would be paid by First Honey US and the respondent would then account to Settlers Honey for its product used in filling the order.

[9]                 The respondent asserts that there is no real risk of dissipation of the assets subject to the freezing order. Settler Honey’s claim is a claim for money and is compensatable in damages. There is no specific asset or real property at risk of dissipation or of defeating the Court’s processes. Furthermore, the respondent is balance sheet solvent and able to meet its debts as they fall due.

[10]              It is these two elements that directly impact the test which must be satisfied for a freezing order to be made.2 However, the respondent makes some further points which are relevant to the exercise of the Court’s discretion.

[11]              First, Settlers Honey does not come to its alleged equitable claims with clean hands. In applying for a freezing order without notice, it is submitted that Settlers Honey did not provide the Court with full and frank disclosure of all relevant material

2      Shaw v Narain [1992] 2 NZLR 544 (CA) at 548.

facts as required under the High Court Rules.3 In particular, Settlers Honey failed to disclose the wider and ongoing commercial dispute between parties. For example, the respondent alleges that Settlers Honey on sold over 12,000 kg of the respondent’s honey that was stored at its facility without consent, and at a price that was not agreed or discussed with the respondent and that significantly undervalued its product. Following discovery of this fact, the respondent uplifted its remaining inventory held at Settlers Honey facilities. Further, it is contended that the sole director of Settlers Honey, the deponent Mr Matthews, owes a significant amount of money to the respondent (approximately $800,000) as he is the sole director of another company owing this debt. This was being paid off by the director weekly, although the respondent had not agreed to this arrangement.

[12]              The freezing order was not served on the respondent until four days after it had been awarded. This meant the respondent was unable to seek discharge of the freezing order at an earlier date.

[13]              Finally, the respondent is suffering significant damage, namely interference with its ordinary course of trade and reputational damage, as a result of the freezing order. Despite the order allowing the respondent to make payments in the ordinary course of business, the banks responsible for the frozen accounts are not prepared to determine what is and what is not in the ordinary course of business.4 ASB has already declined to make funds available for a lease payment and at the time of the hearing, the respondent had been notified that its payroll payments would not be met unless the applicant agreed. The respondent also submits that the reputational damage it has suffered (and is still suffering) will be difficult to quantify and claim back.

Settlers Honey submissions

[14]              Settlers Honey claims that the evidence the respondent has provided to refute Settlers Honey’s claim is based on the bare assertion of Mr Watson and Mr Scarlet in their affidavits. It submits this evidence is without foundation and is false; the

3      High Court Rules 2016, r 32.2.

4      This is contrary to HCR 32.6(3)(c) which states that a freezing order must not prohibit payments in the ordinary course of the respondent’s business, including business expenses incurred in good faith.

transaction and subsequent shipment consisted only of Settlers Honey product. A further affidavit was filed by Mr Matthews in support of this position.

[15]              Settlers Honey submits the respondent was an agent or broker in the transaction, which is evinced by the commission Settlers Honey agreed to pay to the respondent for its role in bringing the deal to them. It is further argued that the fact the respondent had no role in the production and supply of the order to First Honey US speaks to its role as an intermediary.

[16]In terms of the wider commercial dispute, Settlers Honey says:

(a)It settled its account with the respondent in full in early January, after the respondent indicated it no longer wanted the debt to be paid in instalments. No dispute was raised at the time about the value of the invoicing until the current dispute arose.

(b)The defence of legitimate set-off is not available to the respondent because Settlers Honey’s claim is based on agency. An agent is estopped from denying the principal’s title to funds that the agent has received on behalf of the principal. Accordingly, the ability to set-off Settlers Honey’s claims does not apply.

[17]              As for the risk of dissipation, Settlers Honey submits that its claim relates to particular monies obtained in breach of the agent’s duties and is thus a proprietary money claim. The money to which it alleges is held by the respondent on its behalf is therefore not fungible. It submits that it is already evident the respondent has tried to dissipate funds from the respondent accounts to another entity of which Mr Watson is also the sole director and shareholder. Further, the total cash and bank assets of the respondent, as recorded in Mr Watson’s affidavit, is less than the sum over which Settlers Honey claims a proprietary interest, indicating the money has already been dissipated.

Discussion on Freezing Order

[18]              A freezing order must only be granted (or sustained) if an applicant has a good arguable case on the substantive claim; assets to which the order can apply; and a real risk the respondent will dissipate or dispose of those assets. The Court must also consider the overall justice of the case, balancing the protection of an applicant’s ability to recover from the respondent (if the Court finds it is necessary) against any prejudice or hardship to the respondent or a third party.5

History of freezing orders

[19]              Freezing orders were initially developed by the English Court of Appeal in order to bring justice to urgent cases where the court process would be defeated if a freezing order was not made. The central aim to such orders is to ensure an applicant who obtains judgment will not be denied recovery.6 The same considerations that are required of Counsel in seeking interim injunctions apply also to freezing orders. On  a without notice application, Counsel must fully disclose the likely defences and make all material facts clear to the Court.7

Analysis

[19]      I am satisfied that there is no basis for the freezing order to continue and I summarise my reasons as follows.

[20]      In order for the Court to be satisfied the applicant for a freezing order has a “good arguable case”, the Court must have “real confidence” that a claim will succeed.8 This means that, in this case, Settlers Honey’s claim must be capable of tenable argument and supported by sufficient evidence, while taking into account the early stage in which an application is brought.9 The Court does not need to be satisfied there is no arguable defence to Settlers Honey’s claim.10

5      Shaw v Narain, above n 2, at 548.

6      See Oaks Hotels & Resorts NZ Ltd v Body Corporate 358851 [2013] NZHC 2695 at [18].

7      High Court Rules 2016, r 32.2(3).

8      National Mutual Life Nominees Ltd v Dallan Enterprises Number Five Ltd (1993) 7 PRNZ 273 (HC) at 275–276, as cited by Matthew Casey and others Sim’s Court Practice (online ed, LexisNexis) at [HCR 32.5.4].

9      Hannay v Mount [2011] NZCA 530 at [22].

10 National Mutual Life Nominees Ltd v Dallan Enterprises Number Five Ltd, above n 8, at 276.

[21]      However, Settlers Honey seeks a summary judgment in respect of the moneys owed to it and that jurisdiction is available only when there is no arguable defence.11 This immediately brings into conflict the two differing requirements of each procedure that is manifested in the memorandum by Counsel for Settlers Honey, when he says:

The plaintiff does not consider that the defendant has any genuine and/or arguable defences in relation to the claim. Nor has the defendant clearly articulated any possible defences.

[22]      This was an application on a without notice basis, following recent communication over monies owed by Settlers Honey to the respondent. The defences “inferred from correspondence and which may be argued” list two only; that the respondent was the proper recipient of the money, or that the respondent legitimately holds funds pending the resolution of its grievances. In my view, and in light of the obligations imposed by the High Court Rules,12 the obvious requirement on the applicant solicitor was to advise the Court that the respondent would likely be claiming set-off for past debts owed from commercial disputes, which are still alive.

[23]      This is plainly a commercial dispute over debts owing between the applicant and the respondent. The background to the commercial operation of the two parties would indicate that the respondent and First Honey US are companies having ongoing commercial dealings with the applicant. Settlers Honey had commercial arrangements for the storage and use of the respondent’s honey until December 2020. I am not satisfied that there is no arguable defence to Settlers Honey’s claim, which asserts a proprietary right on the basis of the respondent’s agency. I note the Judge also recognised that the applicant’s causes of action are not without some challenges and I concur.13 Settlers Honey may have a tenable argument but it requires a hearing.

[24]      On the second matter, I consider Settlers Honey has not demonstrated there is a real risk of dissipation of the respondent’s assets to warrant the continuation of the freezing order. As McGechan on Procedure opines, it is an abuse of the court’s process to seek a freezing order where there is no real risk.14 Even if a respondent is going to

11     High Court Rules 2016, r 12.2.

12     Rule 32.2(3).

13     Settlers Honey Ltd v First Honey NZ Ltd, above n 1, at [22].

14     Robert Osborne and others McGechan on Procedure (online ed, Thomson Reuters) at [HCR 32.2.03(3)(a)]; and Tranquil Holdings Ltd v Hudson (1987) 2 PRNZ 551 (HC) at 552.

dispose of assets, this does not invoke the freezing order jurisdiction, unless there is a real risk that a judgment in favour of the applicant will be partly or wholly unsatisfied if the freezing order is not made.15 The most that the applicant could provide to the Court about the risk of dissipation is Mr Matthews’ “anxiety and concerns” about the respondent’s financial position. He then says that he understood the respondent was facing foreclosure by the bank. He points to some text exchanges where a third-party criticised Mr Matthews for not “being generous enough to [the respondent] during his difficult times”. Mr Matthews then says he is now worried that the respondent is under:

extreme financial pressure from his bankers and possibly other sources that I am not aware of and that this pressure will lead him to use the money to meet other demands.

[25]      Concerns about a respondent’s solvency is not the basis for a freezing order, as this Court has previously held. “Payment by a respondent of its validly owed debts does not constitute dissipation for the purposes of an application for a freezing order.”16 This in my view, mitigates against any continuation of the freezing order. There is no evidence that the respondent cannot meet its debts. Even if the evidence was available, it would not justify a freezing order, as it would serve to give preference to the applicant creditor. This is not the purpose of the freezing order jurisdiction.

[26]      The third matter, which mitigates against the continuation of the freezing order is the requirement of the Court to balance the needs of the applicant against any prejudice or hardship that may be faced by the respondent.17 The freezing order was made in respect of the two trading accounts of the respondent. It was made without notice and the applicant took no steps to advise the respondent until four days after obtaining the orders and only when the respondent’s solicitor sent an email to the applicant’s solicitors. The results of the freezing order meant that the respondent could not meet a rental payment required over a lease for its related company, Kohiti Ltd.18 Nor could it meet its next obligation to its employees for wages, because the respondent’s bank refused to allow any payments without the consent of the applicant.

15     High Court Rules 2016, r 32.5(4); Oaks Hotels and Resorts NZ Ltd v Body Corporate 358851, above n 6, at [18], [19] and [22].

16     Palmer v Lees Power Sed Ltd (1995) 8 PRNZ 694 (HC) at 696.

17     Bank of New Zealand v Hawkins (1989) 1 PRNZ 451 (HC) at 452.

18     Mr Watson is the sole director of both the respondent and Kohiti Ltd.

The applicant did not signal to the Court the potential prejudice or hardship which could follow, as a result of the freezing order being placed over the respondent’s only operative trading bank accounts. The parties had been in communication in March 2021 and these proceedings were filed on 11 May 2021. In my view, given the recent communication and the likely detrimental effects on the respondent’s company, the applicant should have applied on notice. It highlights why courts and applicants must be cautious before freezing orders are placed over trading companies’ operative bank accounts.

[27]      The applicant is entitled to seek a remedy for outstanding payment and is seeking such by filing a summary judgment application. That should proceed forthwith. The respondents provided an undertaking at the hearing, that it and the related company Kohiti Ltd, would meet any remedy afforded to Settlers Honey by the Court, if its claim was successful. If preservation of a money sum was the aim of Settlers Honey, on notice proceedings, even on a Pickwick basis, could have achieved the same result.

Ancillary Orders

[28]      I turn to the ancillary order for disclosure of the respondent’s bank accounts. Settlers Honey submits that the ancillary order should remain in place. It argues that first, there are no express provisions or procedures relating to the length, discharge or discontinuance of ancillary orders in the High Court Rules, as there are for freezing orders. It claims ancillary orders are simply intended to be complied with, and no further recourse is afforded to the respondent.

[29]      Second, it submits the wording of HCR 32.3 makes plain that ancillary orders do not require a freezing order to be made. As stated by the Court of Appeal, all that is required is a prospective freezing order; that is, the prospect a freezing order will be made.19 The ancillary order in this case is still required for prospective freezing orders that may become necessary, if the information disclosed under such orders indicate the funds to which Settlers Honey claims it has a right to have been moved or dispersed.

19     Dotcom v Twentieth Century Fox Film Corporation [2014] NZCA 509 at [15].

[30]      Finally, Settlers Honey notes that the respondent has not disclosed the information that it was ordered to by the Court. This has inhibited Settlers Honey from assessing whether further freezing orders or other interim relief must be sought to protect its interests.

Analysis

[31]      In two recent cases, ancillary orders have been discharged alongside freezing orders.20 These cases were both before the Employment Court, however the applications were made and ancillary and freezing orders discharged pursuant to the High Court Rules.

[32]      I consider the below factors are relevant to an assessment that the ancillary order must be discontinued as the freezing order is:

(a)The ancillary order rules are found in Part 32 of the High Court Rules, entitled “Freezing orders”.

(b)The reasons for which ancillary orders can be made are very much tied to the creation and maintenance of freezing orders. HCR 32.3 specifies that ancillary orders can be made for the purpose of eliciting relevant information regarding the assets subject to (or that may potentially be subject to) a freezing order, determining whether the freezing order should be made, and appointing a receiver of the assets that are the subject of the freezing order.21 Of these purposes, Sim’s Court Practice provides the following commentary:22

It is clear from these purposes that an ancillary order may precede the making of a freezing order. It may be necessary to obtain disclosure of assets to ensure that the terms of the freezing orders are appropriately focused. The ancillary order is a prerequisite to the proper and effective operation of the freezing order jurisdiction.

20 Labour Inspector of the Ministry of Business, Innovation and Employment v Sumra Holdings Ltd [2020] NZEmpC 233; and Kang v Lee [2020] NZEmpC 50 (discharge of freezing order and ancillary order by consent).

21    Dotcom v Twentieth Century Fox Film Corporation, above n 19; and High Court Rules 2016,    r 32.3(2).

22 Matthew Casey and others, above n 8, at [HCR 3.23] (emphasis added).

Accordingly, as an ancillary order is intimately linked to the creation of a freezing order, it is unnecessary for an ancillary order to continue after a freezing order lapses.

(c)The plain meaning of ancillary is “subordinate” or “subservient”.23

(d)The wording of HCR 32.3 is clear: that the court may make an order

ancillary to a freezing or prospective freezing order.

(e)Although the High Court Rules specify an ancillary order can be made prior to a freezing order being granted, the Rules make no such similar specification as to whether ancillary orders may continue when a freezing order lapses. Viewing this in light of the meaning of “ancillary”, it would appear that specification is required where the rules applying to ancillary orders differ from those which relate to freezing orders.

[33]      The ancillary order in this proceeding was made at the same time as the freezing order. As I have decided that the freezing order should no longer continue, I consider that the ancillary order also should be discharged. This proceeding should be dealt with either as a summary judgment proceeding or as a civil proceeding. I do not believe there is a foundation for the ancillary order to remain.

23     Tony Deverson and Graeme Kennedy (eds) The New Zealand Oxford Dictionary (Oxford University Press, Melbourne, 2005) at 36.

Result

[34]      The without notice freezing order made on 14 May 2021 shall lapse. The ancillary order for disclosure is discharged.

[35]      Costs are awarded to the respondent. In the absence of agreement between the parties, memoranda from the respondent should be filed within five working days of this decision. The applicant is to file a response within three working days of the receipt of the respondent’s memorandum. Memoranda are not to exceed 10 pages.

Cull J

Solicitors:

Cooper Rapley Lawyers, Palmerston North for the Applicant Upper Hutt Law Ltd, Upper Hutt for the Respondent