Silk Water Limited (in liq) v Mama's Soup Kitchen Limited HC Invercargill CIV 2010-425-489

[2010] NZHC 1862

IN THE HIGH COURT OF NEW ZEALAND INVERCARGILL REGISTRY

CIV 2010-425-000489

BETWEEN  SILK WATER LIMITED (IN LIQUIDATION)

Plaintiff

ANDMAMA'S SOUP KITCHEN LIMITED Defendant

Hearing:         22 October 2010

(Heard at CHRISTCHURCH)

Counsel:         S M Grieve and WJ Hamilton for Plaintiff

K G Reid and B G Frowein for Defendant

Judgment:      22 October 2010

JUDGMENT OF FOGARTY J

[1]      This is an application for preservation orders under r 7.55(3) of the High Court Rules.   The plaintiff is seeking orders that the net proceeds of a sale of property owned by the defendant in Queenstown, a sale of which is due to be settled today, be paid into Court pending the determination of the plaintiff’s claim.

[2]      The property is the subject of a sale for $2.5 million.  A deposit of $250,000 has been paid.  That sum has been used, I understand, to pay other creditors of the defendant.  The net proceeds of the sale this afternoon, after allowing for payment of GST $312,500, and vendor rates of $5,424.36, and of the Kiwibank mortgage of

$2,085,016, will be the sum of $163,611.70.

[3]      The effective question for me today is whether or not that sum should be paid into Court pending consideration of the merits of the plaintiff’s substantial claim,

and if so, under what conditions.

[4]      The plaintiff was the purchaser of the same property from the vendor back in

2007.  The purchase was $8.5 million plus GST, if any.  A deposit of $1.7 million was paid and then the plaintiff, as purchaser, was unable to settle on time and then starting from the latter part of August and through to 26 March it made a number of payments on account of the purchase price to the defendant.  So from 26 March 2008 the plaintiff had paid towards the purchase of the property $6,375,025.26.     The plaintiff had in January 2008 registered a caveat on the property.

[5]      On  23  April  (Mama’s  Soup  Kitchen)  MSK’s  solicitor  confirmed  an agreement to extend the settlement date to 30 April and said:

If settlement is not completed in full on that date we are instructed to cancel the agreement.

[6]      On  22  May  the  defendant’s  solicitor  wrote  to  the  plaintiff’s  solicitor  as follows:

Further to our letter of 23 April 2008 we note that our respective clients have agreed to cancel the Agreement for Sale & Purchase dated 24 August 2007. Cancellation is effective immediately.

With regard to the funds paid by your client to date, we understand that it is agreed between our client that these funds will be repaid to your client less costs and interest incurred upon our client receiving settlement of the sale of the property to another party.

The sale that is settling today is the sale of this property to another party.

[7]      This application is made in reliance on sub-rule (3) of r 7.55 which provides:

7.55     Preservation of property

…

(3)       The Judge may order that a fund be paid into court or otherwise secured if the proceeding concerns the right of a party to the fund.

(Emphasis added)

[8]      This phrase that I have emphasised is essentially the same test that was in the rule in its former form as r 331(3) and it is common ground between counsel that the authorities construing sub-rule (3) of r 331 remain the appropriate authorities to guide the application of r 7.55 sub-rule (3).

[9]      These rules as to the preservation of property have to be understood in the context of the policy that just because a plaintiff has a claim, indeed a meritorious claim, against a defendant, there is no right under our legal system whereby an order can be sought from the Court requiring the defendant to set aside monies or other assets sufficient to meet the claim.   Rather, we do have a number of remedies of which preservation of property is but one, designed in special circumstances to secure assets pending a determination of the merit of the claim.  These other ones are pre-judgment charging orders including particularly freezing orders and mareva injunctions.

[10]     The  critical  question  in  this  case  is  whether  or  not  the  plaintiff  has  a reasonable argument that it has a right to this sum of $163,611.70 which will be in the trust account of the defendant’s solicitor this afternoon, assuming the contract settles today.   The statement of claim does not plead such a right.  The statement of claim is essentially arguing a common law cause of action based on the terms of the letter of 22 May set out above and pleads that the defendant pursuant to that agreement was required on the resale of the property to repay to the plaintiff the sum advanced less costs and interest.  That of itself does not create a right to the fund.

[11]     The question, however, is whether the second paragraph of the letter of 22

May should be interpreted as imposing an obligation on MSK to pay the funds to the plaintiff from the funds received upon settlement.   I consider that it is arguable at common law, by way of interpretation of contract, that that is implicit in that paragraph.  Ms Frowein has argued that that paragraph goes no further than setting the time for repayment and argues that if it had been intended to create a proprietary charge it would have said something more.  Against that there is the argument the solicitor in that second paragraph was reporting to the counter party solicitor an agreement that had been reached between the respective client directors and it is quite possible that client directors would not have turned their minds to the best legal expression of the deal.   I note in passing that there is another argument that the second paragraph is not confirming the terms of what had been agreed between the two parties but was rather reporting MSK’s solicitors’ understanding of what had been agreed between the two parties.

[12]     Secondly,  I  consider  that  independently  of  the  meaning  of  the  second paragraph, including implicit promises, there is another issue as to whether or not an obligation arose in equity whereby it would be unconscionable for MSK’s directors to use the proceeds of sale of the property without first using the proceeds to repay such funds as had been paid by the purchaser on account of the purchase price first as a priority out of the receipts.  I consider that is reasonably arguable in the context of a settlement.  This is so when one particularly reflects on the fact that the principal function of a deposit in a property transaction is to secure on behalf of the vendor the risk of having to resell should the purchaser not complete the sale.  But in this case, as a result of a series of extensions of settlement, the purchase paid over $6 million on account of a total purchase price of $8.5 million.

[13]     I conclude that there are two bases, one at common law and one at equity where it is arguable that the plaintiff has a right to the net proceeds of sale of this property ahead of other use of the funds.  Therefore, I find that there is jurisdiction for the making of a preservation order under r 7.55(3).

[14]     The next question is whether or not I should exercise the discretion to make such an order.  The discretion is preserved in the phrase:

The Judge may order … .

[15]     It is important in these cases, of course, for any orders to secure a just outcome of the dispute.  MSK has an argument that it has a competing counter claim at common law or equitable set-off at equity.  The gist of this argument is that the breaches  of  the  plaintiff  deprived  the  defendant  of  the  opportunity  to  sell  the property on the market and thus avoiding this loss.  That is an extremely simplified proposition and may not do justice to the argument.  I have set it out as briefly as that principally to record that there is an intent to have a counter claim or a claim for set- off and I do not consider it necessary for me to decide whether that is reasonably arguable or not and I am making no comment in that regard.

[16]     The second, and more material consideration it seems to me, is that there are signs that MSK itself has financial difficulties.  I have already alluded to the fact that the deposit has already been used to pay off other creditors.  I am left then with the

difficulty that both parties and I should add, and I have not had occasion to refer to it at this stage, that the plaintiff is itself in liquidation.   It has no assets and these proceedings are being brought with the support of the Inland Revenue Department who is a principal creditor of the plaintiff.

[17]     Ms Frowein argued that if I made a preservation order there ought to be an undertaking for damages by the Commissioner of Inland Revenue in the event that the  claim  is  unsuccessful.    At  this  stage  I  am  not  inclined  to  call  for  such undertaking, but I do not rule it out.  Rather, I am minded at this stage to impose:

1.        That the sum of $163,611.70 will be held in the trust account of

Goodman Tavendale Reid pending further orders of the Court.

2.That the parties will devise a formula for either reaching a settlement or bringing this dispute back to the High Court for adjudication which endeavours to exhaust no more in total than 20% of the fund, that is, of the $163,611.70.

[18]     I do note that the dispute itself may include the defendant’s dissipation of the

$250,000.  So the dispute itself may be over the sum of $413,611.17.    But at this stage I am calling for a plan which will potentially exhaust 20% of the fund that is actually there, that is 10% for each party.

[19]     Effectively  this  is,  to  a  degree,  either  mandating  the  parties  to  go  into alternative dispute resolution or having another short hearing in this Court.  That is also why I have said if it cannot be settled the matter should come back to the High Court, because I envisage it should come to myself.  I have now had the benefit of a half day argument which has included a good  introduction to the merits of the dispute.

[20]     I am aware that this order may prove to be impracticable and that is why I have asked the parties to see if they can come to an agreement in that regard.  If not, I will receive written submissions to be filed by 1 November after the parties have exchanged drafts as to an alternative method of resolving this dispute.

[21]     These conditions are unusual but I am determined that such little money that is left is not exhausted by litigation over it.

[22]     Costs in the meantime are reserved.

Solicitors:
Anderson Lloyd, Dunedin, for Plaintiff
Goodman Tavendale Reid, Christchurch, for Defendant