Silver Fern Farms Limited v Southern Deer Corporation Limited HC Dunedin Civ-2009-412-000319

[2011] NZHC 1592

IN THE HIGH COURT OF NEW ZEALAND DUNEDIN REGISTRY

CIV-2009-412-000319

BETWEEN  SILVER FERN FARMS LIMITED Plaintiff/Applicant

ANDSOUTHERN DEER CORPORATION LIMITED

Defendant/Respondent

Hearing:         26 January 2011

(Heard at Christchurch)

Appearances: D M Lester for Plaintiff/Applicant

G P Curry and T E Futter for Defendant/Respondent

Judgment:      5 August 2011

JUDGMENT OF ASSOCIATE JUDGE OSBORNE

as to plaintiff ’s summary judgment application

Introduction

[1]      As a result of a long, close commercial relationship Silver Fern Farms Ltd trusted  Keith  Neylon.    When  Silver  Fern  in  1997  wanted  to  acquire  on  an anonymous basis a shareholding in a new company, NZ Deer Farms Ltd, Mr Neylon agreed that if Silver Fern put him in funds he would purchase the shareholding in his name.  The shares were then purchased by agreement between Silver Fern and Mr Neylon in the name of Mr Neylon‟s company Southern Deer Corporation Ltd, rather than by him personally.   Mr Neylon had also undertaken to hold the shares so acquired for and on behalf of Silver Fern and to follow the direction of Silver Fern with regard to those shares.

[2]      This  case turns  on  whether the law permits  or at  least  arguably permits

Southern Deer (or Mr Neylon) to disregard the directions of Silver Fern in relation to the shares.

SILVER FERN FARMS LIMITED V SOUTHERN DEER CORPORATION LIMITED HC DUN CIV-2009-

412-000319 5 August 2011

[3]      Silver Fern seeks summary judgment in relation to the proceeds of the NZ Deer Farms shares which Southern Deer has retained.

The Heads of Agreement

[4]      In 1997 Silver Fern was known as Primary Producers Co-operative Society

Ltd (commonly referred to as PPCS).

[5]      Mr Neylon and PPCS (as Silver Fern then was) entered into a heads of agreement dated 11 April 1997.  A heads of agreement will be upheld if the parties intended it to bind them from its execution and there is certainty in its essential terms

– Fletcher Challenge Energy Ltd v Electricity Corporation of New Zealand Ltd

[2002] 2 NZLR 433 at 444, Thomas J dissenting.

[6]      It  was  not  suggested  by  Mr  Curry  for  the  defendant  that  the  Heads  of

Agreement was not contractual – it clearly was.

[7]      I now set out clauses 1, 2, part of 6 and 7 of the Heads of Agreement.  The remaining  clauses  of  the  agreement  involve  matters  of  further  detail.    Neither counsel made submissions in relation to those other clauses.  The provisions of the Heads of Agreement relevant to this proceeding are (“DF” is NZ Deer Farms):

1.Keith shall at all times act as trustee and agent for PPCS in making an application for shares in DF.   The initial application for shares shall be for 1,250,000 shares in DF at an issue price of eighty cents (80c) for each (the “Shares”) and PPCS accepts that the Shares are required to be paid for on or before the 27th  day of March 1997. PPCS will place Keith in funds for the purpose of acquiring the Shares as trustee for PPCS.

2.

2.1      Keith will enter into a Trust Deed under which he undertakes:-

(a)       To hold any shares so acquired on behalf of PPCS in DF for an on behalf of PPCS and to follow all directions of PPCS with regard to those shares.

(b)       That all dividends, bonus issues and other entitlements in respect of such shares will be held for and on behalf of PPCS  and  Keith  shall  account  to  PPCS  for  any  such payments or further shares issued in respect of the shares so held.

(c)      To  advise  PPCS  of  all  notices  or  other  communications which he may receive in respect of the said Shares in DF.

2.2The parties will enter into an appropriate Deed of Trust in respect of the said shares setting out the foregoing provisions and such other provisions as may be appropriate.

...

6.Keith will use his best endeavours to obtain agreement of DF and its principal shareholders to the conditions set out in clause 3 above and if such conditions cannot be agreed then Keith will not agree to purchase or subscribe to any Shares on behalf of PPCS until he has consulted with PPCS and arranged conditions that are acceptable to PPCS.  PPCS shall not be bound to pay Keith any moneys unless the Shares are purchased or otherwise subscribed for on terms and conditions agreed to by PPCS.

7.The parties hereto agree to keep the existence of this Agreement and all matters contains within this Agreement confidential and will not release that information to any person or other party.

The agreed history

[8]      I turn to matters of the history of the transaction which are not the subject of dispute.  I will then turn to areas of dispute.

[9]      The undisputed history (using „Silver Fern‟ in relation to those times when it

was PPCS) is:

a.        Mr Neylon has always been the majority shareholder of Southern

Deer.

b.After the Heads of Agreement was signed, Silver Fern and Mr Neylon agreed that Southern Deer would be the vehicle through which the share purchase and holding of shares would occur.

c.        The  Silver  Fern  beneficial  interest  in  the  shares  was  to  remain confidential to Silver Fern and Mr Neylon and his company.

d.        Silver Fern put Southern Deer in funds to buy the shares of NZ Deer

Farms.

e.        Southern Deer‟s  purchase of NZ Deer Farms shares for Silver Fern was made.   Southern Deer and Mr Neylon have subsequently acknowledged  in  writing  that  they  were  in  a  position  of  trust  in relation to the shares.

f.        Mr Neylon and Southern Deer have acknowledged in writing that all payments made prior to 2008 on account of the shareholding in NZ Deer Farms had been paid by Southern Deer to Silver Fern.

g.        On 7 July 2008, NZ Deer Farms was placed into liquidation in a

solvent winding up of the company‟s affairs.

h.In 2008, the liquidators of NZ Deer Farms paid to Southern Deer on account of the shareholding payments a (net) total of $1,449,038.89 (“the share proceeds”) comprising:

$799,111.07     – paid 30 July 2008

$627,872.81    – paid 26 September 2008

$31,393.65     – paid 10 December 2008

Less $9,338.64 (being a repayment for a tax related transaction).

(The net total above is slightly lower than that set out in the statement of claim as the claim appears to contain a minor mathematical error).

i.         Silver Fern has repeatedly called upon Southern Deer to pay to Silver

Fern the share proceeds.

j.No  payment  has  been  made  by  Southern  Deer  to  Silver  Fern  in relation to the share proceeds.

The liquidation of NZ Deer Farms Limited

[10]     As the summarised history immediately above indicates, NZ Deer Farms was the subject of a solvent winding up in July 2008.  The net payment by the liquidators to Southern Deer on account of the Silver Fern shareholding was $1,449,038.89.

[11]     At that point, Mr Neylon began a correspondence linking the on-payment of the NZ Deer Farm payments to Silver Fern to the other commercial arrangements between the parties or their related entities.

[12]     Thus, on 25 February 2009, Mr Neylon wrote to Keith Cooper, the chief executive of Silver Fern, attaching a relatively formal memorandum.   In the memorandum, Mr Neylon sought to place the NZ Deer Farms share arrangement in the context of the broader commercial relationship between the parties.   Having referred to the potential to pool deer stock owned by Silver Fern and Southern Deer, Mr Neylon stated –

It was agreed between the parties that Southern Deer Corp Ltd would be the vehicle used to invest in NZ Deer Farms to achieve the various outcomes sort (sic).  It was also agreed between the parties that this arrangement be kept confidential for obvious reasons.

And, after referring to subsequent progress, Mr Neylon added –

It is also acknowledged by Keith Neylon and Southern Deer Corporation

Ltd, that this was a position of trust.

And,  after  setting  out  the  payments  received  on  account  of  the  shares,  and confirming that all payments (from the shares) prior to 2008 had been paid to Silver Fern, Mr Neylon went on –

Due to the current Global Credit Crunch, our Current Banker with whom we have had a long standing relationship has reneged on our June 2008 agreed arrangements with regard to our current development programme.  This has placed our company in embarrassing situation of tight interim cashflow.  We regret that we will not be in a position to write a cheque for the outstanding amount,  especially  when  we  have  a  deficit  in  the  Neylon  Livestock Accounts.

And Mr Neylon in a summary added –

As stated... we acknowledge that this was a position of trust and that all

money‟s (sic) belong to Silver Fern Farms ...

Neylon Livestock Limited and Southern Deer Farms Limited v Silver Fern Farms

Limited CIV 2009-412-845

[13]     Mr Neylon refers in his evidence to this other proceeding in the Dunedin High Court as “the reconciliation proceeding”, which is a convenient description for present purposes.

[14]     Mr Neylon explains that over a period of some 20 years he had a very close business  relationship  with  Silver  Fern.    As  he  described  it,  the  dealings  were primarily between Neylon Livestock and Silver Fern, although Southern Deer was often directly involved.

[15]     Mr Neylon gives detailed evidence as to the involvement of himself and his companies in procurement of stock for Silver Fern.   He explains that there were different pricing arrangements needed in different contexts (a weekly agreed price; an actual purchase price; and a scheduled price).  He said that there was a need in the way matters developed between the parties for not only reconciliation of accounts and  payments  but  also  for  “wash-up”  meetings  at  times  during  the  year  and, certainly, at the end of each season.  Mr Neylon refers to assumptions that had to be made as to the honesty of the other party in relation to figures being used.  He refers to his never having asked for interest on outstanding sums as there was a trust that payments would be settled up fairly regularly or, at worst, at the end of each season. Mr Neylon refers to Silver Fern and himself as being in “a form of partnership” in which he trusted that the amount agreed upon would be fair.

[16]     By 2009, Neylon Livestock and Southern Deer were claiming from Silver

Fern an alleged shortfall of payments going back to 2004.

[17]     The   shortfall   claim   subsequently   became   the   subject   matter   of   the reconciliation proceeding (issued in October 2009).  Mr Neylon has presented in his evidence in this proceeding copies of spreadsheets which had been prepared for the

seasons involved in his companies‟ claims.  Neylon Livestock and Southern Deer sue as co-plaintiffs for $1,482,121.51 (plus interest) being the alleged shortfall for the seasons 2004/2005 to 2007/2008.

Silver Fern’s application for summary judgment

The claim

[18]     Silver Ferns seeks judgment in the sum of $1,449,038.89.   It applies for summary judgment.

Southern Deer’s notice of opposition – grounds advanced

[19]     Southern Deer‟s notice of opposition contained this:

The grounds on which the Defendant opposes the application are as follows:

a.        The Defendant has a defence to the Plaintiff‟s claim;

b.The grounds are set out in the affidavits of Keith James Neylon, Lyell Douglas Williams, and Justin Lindsey Geddes filed herewith, and

c.        Such grounds as set out in further affidavits to be filed.

[20]     The notice of opposition stated that Southern Deer relies upon r 12.9 of the High Court Rules, Pemberton v Chappell [1987] 1 NZLR 1 and Grant v NZMC Ltd [1989] 1 NZLR 8 (CA).

[21]     I  had  not  had  an  opportunity  to  consider  the  quality  of  the  notice  of opposition until the hearing date itself.

[22]     When I observed to Mr Curry at the hearing that I regarded the notice of opposition as defective, Mr Curry suggested it followed normal requirements and was not defective.  I disagree.

[23]     The content of a notice of opposition is prescribed by both r 7.24 of the High

Court Rules and by Schedule 1 Form G33.

[24]     A notice of opposition which refers the reader to grounds set out in the affidavit is not sufficient.  I adopt the commentary of the editors of McGechan on Procedure (online version) at HR 12.9.01 where they state:

The notice of opposition must comply with r 7.24 and set out the grounds of opposition with sufficient particularity to enable the applicant to know the grounds on which the application for summary judgment is being opposed. Mere reference to the supporting affidavit is insufficient as the Court will not trawl  through  the  respondent‟s  documents  in  order  to  try  and  discern precisely on what basis the respondent opposes the application for summary judgment: Wall v Reinagel 31/7/89, HC Napier CP63/88, 31 July 1989.

[25]     The  present  case  was  not  one  in  which  Southern  Deer  elected  to  file  a statement of defence pursuant to the permissive provision of r 12.10.   There was therefore no formal and particularised pleading of defence through that means.  This was a case where Southern Deer apparently expected the Court and the plaintiff to

„trawl through‟ affidavits, to use the expression in McGechan.

Southern Deer’s submissions – grounds of opposition advanced

[26]     Through the process of the filing of submissions by counsel for Southern Deer (on 25 January 2011, the day before the hearing) and oral submissions at the hearing, I identify the following as the three grounds of opposition:

a.        Southern Deer claims a right of equitable set-off in respect of the account it says it and Neylon Livestock are owed in the reconciliation proceeding (above [13]).

b.Should equitable set-off not be available, Southern Deer seeks an order restraining the proceeding or staying execution by reference to relief available in equity as identified in Grant v NZLC at p 11.

c.        Finally, Mr Curry developed the proposition that Southern Deer did not hold the shares in NZ Deer Farms simply as trustee but also as the agent of Silver Fern.  This was suggested to allow Southern Deer to assert against Silver Fern claims which it might not have asserted were Southern Deer purely a trustee.

[27]     The above are the three grounds which emerged from the submissions of Mr Curry for Southern Deer.  The first two emerged from the written submissions filed the day before the hearing; the third in the course of oral submissions.

[28]     In the event, Silver Fern in this case elected through counsel to proceed with the hearing without taking objection to the notice of opposition, except in one regard. I proceeded to hear Southern Deer‟s  grounds of opposition as developed by Mr Curry through submissions on that basis.  That was an indulgence to Southern Deer. If there is a practice developed or developing whereby a notice of opposition follows the form adopted in this case, as Mr Curry‟s  response to me appeared to indicate, then such a practice needs to come to an end immediately:   it does not meet the requirements of the Rules; of fairness to the other party; or co-operation with the Court.

[29]     The specific  ground  of  opposition  to  which  Mr  Lester  objected  was  the second ground (above [26.b]), namely that the action should be restrained or execution stayed.  Mr Lester observed correctly that no formal application for a stay was made.  The Notice of Opposition did not identify such a ground. What Mr Curry offered in his submissions was a 9 paragraph submission in favour of a stay of proceeding or a stay of execution as an alternative to set-off.

Principles of summary judgment

[30]     The starting point for a plaintiff‟s summary judgment application is r 12.2 of the High Court Rules, which requires that the plaintiff satisfy the Court that the defendant has no defence to any cause of action in the statement of claim or to a particular cause of action.

[31]     Before turning to the particular issues which arise in this case in more detail, I summarise the general principles which I adopt in relation to any application for summary judgment:

a.        Commonsense, flexibility and a sense of justice are required (Haines v Carter [2001] 2 NZLR 167 at 187).

b.The onus is on the plaintiff seeking summary judgment to show that there is no arguable defence.  The Court must be left without any real doubt or uncertainty on the matter.

c.        The  Court  will  not  hesitate  to  decide  questions  of  law  where appropriate.

d.The Court will not attempt to resolve genuine conflicts of evidence or to assess the credibility of statements and affidavits.

e.        In determining whether there is a genuine and relevant conflict of facts, the Court is entitled to examine and reject spurious defences or plainly contrived factual conflicts.   It is not required to accept uncritically every statement put before it, however, equivocal, imprecise, inconsistent with undisputed contemporary documents or other statements, or inherently improbable.

f.        In assessing a defence, the Court will look for appropriate particulars and a reasonable level of detailed substantiation.

g.        In weighing matters, the Court will take a robust approach and enter judgment  even  where there may be differences  on  certain  factual matters if the lack of a tenable defence is plain on the material before the Court.

h.Where a last-minute, unsubstantiated defence is raised and an adjournment would otherwise be required, a robust approach may be required for the protection of the integrity of the summary judgment process.

i.Once the Court is satisfied that there is no defence, the Court retains a discretion to refuse summary judgment but does so in the context of the general purpose of the High Court Rules which provide for the just, speedy and inexpensive determination of proceedings.

[32]     I will now address each of Southern Deer‟s  three grounds of opposition in

more detail.  For convenience, I will first deal with Southern Deer‟s role as trustee.

The legal responsibility of Southern Deer in relation to the share proceeds

[33]     The logical starting point for the examination of the grounds of defence advanced by Southern Deer lies in an understanding and definition of the duties Southern Deer took upon itself in relation to the NZ Deer Farms Limited shares.

[34]     Southern Deer (and Mr Neylon) have acknowledged in writing that the shares were held in trust.

[35]     In New Zealand, the general duties of trustees are frequently gathered in such a way as to commence with a first duty of acquaintance with the terms of the trust and a second duty of adherence to the terms of the trust.

[36]     In this case the terms of the trust are clear.  Southern Deer became a trustee upon the express terms of trust which had already been settled between Silver Fern and Keith Neylon.

[37]     The second duty of trustees requires them to adhere rigidly to the terms of the trust: see the law as summarised in J Garrow et al, Law of Trusts and Trustees (6th ed, LexisNexis, 2005) at para 20.3 and A Butler (ed), Equity and Trusts in New Zealand, (2nd  ed, Thomson Reuters, 2009) at para 5.3.1(2).  The authors of Garrow usefully refer to a text commentary to this effect:

The ... duty of a trustee is to adhere to the terms of his Trust in all things, grave and small, important and seemingly unimportant.   This is his very plainest duty; no trustee would ever deny it or pretend to be ignorant of it, yet it is his hardest, unless from the very beginning he makes up his mind to it, and then it is as easy as eating bread and butter.

[38]     There are various descriptions applied to the classification of trusts according to the nature of the duties imposed on the trustee.  The distinction often observed is between simple or special trusts, as summarised in Garrow at 2.1.8 –

A simple trust is one in which the trustee has no active duties to perform apart from the transfer of the property to the beneficiaries when required to do so.   In that case, the trustee is called a passive

trustee or bare trustee.

A special trust is where the trustee has duties prescribed by the settlor in connection with the trust property.  The settlor has to do something more in connection with the trust – not just transfer the trust property

to the beneficiaries. The trustee is called an active trustee.

[39]     In this judgment I will use, for convenience, the expression “bare trustee”. That concept was dealt with by the Vice Chancellor, Sir Charles Hall, in Christie v Ovington (1875) LR 1 Ch D 279 at 281. His Lordship referred to a text by Dart and Barber on Vendors and Purchasers in which the authors had offered a definition of “bare trustee”. The definition was –

A  trustee  to  whose  office  no  duties  were  originally  attached  or,  who, although such duties were originally attached to his office, would, on the requisition of his cestuis que trust, be compellable in equity to convey the estate to them, or by their direction, and has been requested by them so to convey it.

[40]     His  Lordship  considered  the  last  requirement  as  to  a  request  by  the beneficiary to not be a necessary ingredient but otherwise approved the definition.

[41]     In  Herdegen  v  Federal  Commissioner  of  Taxation  (1988) 84 ALR 271, Gummow J had to consider the meaning of “bare trust” as used in Commonwealth legislation. His Honour observed at 281:

Today, the usually accepted meaning of “bare” trust is a trust under which the trustee or trustees hold property without any interest therein, other than that existing by reason of the office and the legal title as trustee, and without any duty or further duty to perform, except to convey it upon demand to the beneficiary or beneficiaries or as directed by them.

[42]     Halsbury’s Laws of England (4th ed, reissue, 2000) vol 48 Trusts at [650] (in a passage materially reproduced in Laws of New Zealand, Trusts (online version) at para 120) has this:

120   Meaning of “bare trustee”

A bare trustee is a person who holds property in trust for the absolute benefit and at the absolute disposal of other persons who are of full age and sui juris in respect of it, and who has himself no present beneficial interest in it and no duties to perform in respect of it except to convey or transfer it to the persons entitled to hold it, and he or she is bound to convey or transfer the property accordingly when required to do so.

[43]     Both the Halsbury’s and Herdegen approaches have been adopted in New

Zealand; see Burns v Steel [2006] 1 NZLR 559 at 567-568.

[44]     These authorities establish that a bare trust may arise when active duties which a trustee originally had in respect of property have come to an end (as when shares have been realised).

[45]     It may be in a case such as the present where the trustee was required “to follow all directions of [Silver Fern] with regard to those shares” that the trustee‟s role was one of bare trusteeship at the outset.  That point is unnecessary to determine in this case as the realisation of the shares clearly resulted in the trustee simply being a fund-holder.

[46]     Similarly, on the facts of this case it matters not whether the law requires the making of an express direction for payment by the beneficiary, as in some commentaries, or the beneficiary can proceed without first having made a request for transfer of payment, as on the view of the Vice-Chancellor in Christie v Ovington. In this case, a clear direction to transfer the funds was given.

[47]     The application of this duty should not usually cause difficulty.  By way of example, in Williams v Hill Ltd HC Auckland CIV-2010-404-505, 4 August 2010, Associate Judge Bell having referred to the judgment of Randerson J in Burns v Steel as giving helpful guidance on the passive role of a bare trustee in holding property for the benefit and disposal of beneficiaries who are of full age and capacity, without any beneficial interest him or herself. His Honour added at [30]:

The trustee has no duties to perform other than to convey or to transfer when required to do so.   Here the only power given to Mr Williams under each deed of trust was to transfer, deal with or dispose of shares as directed ...

[48]     The terms of the trust in this case were addressed specifically to the purchase and holding of the NZ Deer Farms‟ shares.   Regardless of any other commercial dealings between the parties, past, present or future, the agreement in relation to this trust and the duties in relation to the trust were focussed solely on upon the NZ Deer Farm shares.   There is nothing which, by implication, allows the trustee to have regard to any other aspects of the relationship between the parties or their related entities.  To the contrary, the express provisions of the trust arrangement reinforce

what the law of trust generally imposes in relation to bare trusts –

The trustee is to hold any shares so acquired ... for and on behalf of

Silver Fern

The trustee is to follow all directions of Silver Fern with regard to

those shares

All ... entitlements in respect of such shares will be held for and on

behalf of Silver Fern

[The trustee] shall account to Silver Fern for any such payments ...

[49]     Nothing turns on the fact that a formal trust deed in these terms was never entered into by Mr Neylon – equity considers that done which ought to have been done.

[50]     It is against this background – unpromising for Southern Deer – that the

Court must turn to consider Southern Deer‟s grounds of opposition.

First ground of opposition: equitable set-off

Southern Deer’s case on equitable set-off

[51]     Southern Deer‟s case on equitable set-off requires some further discussion of the commercial relationship that existed between Silver Fern and Mr Neylon.  In a

summary judgment context, I treat the following matters advanced by Mr Curry

upon the basis of the evidence filed as being at least arguable –

A commercial relationship had existed between Silver Fern and Mr

Neylon for approximately 20 years

Their  relationship  frequently  involved  corporate  entities,  such  as Southern Deer and Neylon Livestock limited which Mr Neylon controlled, but the actual deals were primarily between Silver Fern

and Mr Neylon.

There  was  frequently  a  co-mingling  of  the  financial  affairs  and

business obligations of the parties.

There was a good deal of trust between the parties in the way that they

conducted their relationship.

The  parties  conducted  “wash-up  meetings”  for  the  purposes  of

ensuring that each received its/his appropriate entitlement

Mr  Neylon  intended  Southern  Deer‟s   acknowledgement  of  the

payment obligation in relation to the shares to be of assistance in the reconciliation of issues between the parties.

[52]     From these (arguable) background circumstances, Mr Curry submitted that the relationship which had evolved between Silver Fern and Southern Deer was fiduciary in nature, having emerged from the customary dealings of more than 20 years.   That is a more difficult proposition for Southern Deer to pursue given the extent to which the dealings between the parties still involved each pursuing its own commercial interests.  In the event, for the reasons I will come to, it is unnecessary that  I determine whether the existence of the allegedly fiduciary relationship is arguable.

Principles of equitable set-off

[53]     The traditional starting point for consideration of a claim of equitable set-off in New Zealand (as relied on by Mr Curry) has been the judgment of the Court of Appeal in Grant v NZMC Ltd [1989] 1 NZLR 8 per Somers J, for the Court, at 12-

13:

The principle is, we think, clear. The defendant may set off a cross-claim which so affects the plaintiff's claim that it would be unjust to allow the plaintiff to have judgment without bringing the cross-claim to account. The link must be such that the two are in effect interdependent: judgment on one cannot fairly be given without regard to the other; the defendant's claim calls into question or impeaches the plaintiff's demand. It is neither necessary, nor decisive, that claim and cross-claim arise out of the same contract.

[54]     Significantly, in the present context, Grant v NZMC Ltd is also authority for the proposition that the right of equitable set-off may be contractually excluded expressly or by clear implication: per Somers J at 13, citing the judgment of Lord Salmon in Modern Engineering (Bristol) v Gilbert-Ash (Northern Ltd) [1974] AC

689 at 723.

[55]     The classic statement of the principle by Somers J in Grant v NZMC Ltd was re-iterated by the Court of Appeal in Hamilton Ice Arena Ltd v Perry Developments Ltd [2002] 1 NZLR 309 at 312 per Tipping J. Before citing Grant v NZMC, his Honour examined the extinguishment rationale of equitable set-off in this way, at page 311 –

Equitable set-off – general principles

[3] Before examining the facts of the present case, we will identify the general principles which apply to equitable set-off. A set-off is a right vested in a defendant facing a money claim by a plaintiff to use its own money claim against the plaintiff to absolve itself wholly or partially from its obligation to the plaintiff. A set-off is different from a counterclaim which, if established, gives the defendant a right to an independent judgment against the  plaintiff,  but  no  ability  to  reduce  or  extinguish  the  plaintiff's  claim against the defendant. Common law set-off originated in statutes passed early in the eighteenth century. Essentially the common law right was to set off mutual liquidated debts. Equity intervened to allow set-off on a wider basis  than  that  available  at  law.  Cross-claims  were  allowed  by  way  of defence, and the Courts of equity would also restrain a plaintiff from proceeding at law if the defendant could show a cross-claim which had the effect of impeaching the plaintiff's title to make the claim at law. It is helpful

to remember this historical origin when examining claims of equitable set- off today.

[4] Equity would intervene only if the defendant in the suit at law could show some cross-claim for a sum of money which, in the eyes of equity, undermined the right of the plaintiff in the suit at law to enforce his legal claim either at all, or to the extent of the cross-claim. Equity always acknowledged the defendant's right to counterclaim but took the view that in some circumstances such right was not sufficient to do justice. The Courts of equity would not readily interfere with the proceedings at law and confined themselves to cases where the claim at law and the defendant's cross-claim were so closely interrelated that it would be unconscionable for the plaintiff to seek judgment at law without bringing the defendant's cross-claim to account.

[5] The need for such close interrelationship was and still is underscored by the fact that an equitable set-off extinguishes the plaintiff's right to judgment, either entirely or pro tanto, according to the amount which the defendant is entitled to set off. There is a detailed discussion of the principles pertaining to equitable set-off in the judgment of this Court delivered by Somers J in Grant v NZMC Ltd [1989] 1 NZLR 8 ...

[56]     His Honour at page 312 concluded the discussion of general principle by reference to the formulation of Forbes J in British Anzani (Felixstowe) Ltd v International Marine Management (UK) Ltd [1980] QB 137 at 145, where it was said –

The equity claimed must go to the very root of the plaintiff‟s claim.

[57]     Under a heading “Identity of Parties”, Tipping J dealt with the facts of the case before the Court, ultimately concluding that there was a lack of identity of parties which was fatal to Hamilton Ice‟s claim.  His Honour noted the commentary in Halsbury’s Laws of England (4th  ed, 1983) vol 42 Set-off and Counter-claim at [435], where the authors said that, subject to stated exceptions:

A set-off may only be maintained where the claims to be set-off against each other exist between the same parties and in the same right.

His Honour added –

The need for identity of parties is also consistent with the proposition that the cross-claim is regarded in equity as fully or pro tanto extinguishing the plaintiff‟s right to judgment on the claim.  The concept of extinguishment is difficult if the cross-claim is made by a different party.

[58]     I   would   add   this   to   the   discussion   of   principle.      The   concept   of interdependence,  identified  in  Grant  v  NZMC,  is  critical  in  equitable  set-off. Denying equitable set-off does not deny the cross-claimant its right to pursue other relief whether available at common law or by statute (such as counter-claim or pre- judgment charging order).    The mere fact that a defendant or its related party has filed or has in the wings a monetary claim against the plaintiff falls short of the equity addressed by equitable set-off.

Mr Curry’s submissions as to the effect of corporate veil lifting on equitable set-off

[59]     The commercial relationship between Silver Fern and Mr Neylon has existed for around 20 years.  It was founded on the supply of stock to the plaintiff by Mr Neylon‟s companies – both Southern Deer and Neylon Livestock.  For the most part, the relationship appears to have proceeded without incident.  Indeed, it developed to the point where the parties agreed that Mr Neylon would purchase the shares in NZ Deer Farms on the plaintiff‟s behalf.

[60]     Unfortunately, the relationship soured, and in October 2009, the defendant and  Neylon  Livestock  issued  the  reconciliation  proceeding  (above  [13]–[17]) alleging they had not been fully paid for stock supplied to the plaintiff since 2004/05. The outstanding sum was said to be $1,482,121.51.  That claim is defended by Silver Fern.

[61]     Southern Deer claims the right of equitable set-off in respect of the sum claimed by it and Neylon Livestock in the reconciliation proceeding.   Put another way, Mr Neylon argues that the proceeds due to Silver Fern following the liquidation of NZ Deer Farms should be set-off against the sum Mr Neylon says is owed to his two companies by Silver Fern for stock supplied since 2004/05.

[62]     Mr Curry recognised that the claimants in the reconciliation proceeding were both Southern Deer and Neylon Livestock, whereas Neylon Livestock has no involvement in this application for summary judgment.   However, Mr Curry emphasised the history of commercial relationships which I have found arguable (above [51]).   Mr Curry submitted that while Mr Neylon may have structured his

operations through companies with separate corporate personalities, the true position was in fact a „single longstanding relationship‟ between Silver Fern and Mr Keith Neylon.   In other words, the particular relationship which existed between these parties justified lifting the corporate veil with respect to Mr Neylon‟s companies. Once this occurred, the parties to the different proceedings were identical.  Equitable set-off was then an available option on a standard application of the principles in Grant v NZMC, and summary judgment was not appropriate.

[63]     Mr Curry quoted from the second half of para 9 of the judgment in Hamilton

Ice Arena.  I consider it appropriate to set out the full paragraph discussion -

[9]  The Speirs brothers are of course different parties in law from their company Hamilton Ice. At one point Mr Wilson suggested that the case might be one for lifting the corporate veil and treating Hamilton Ice and the Speirs brothers as one and the same legal entity. That argument was not, however, pressed or supported by authority. That is understandable. The different transactions into which the parties entered were carefully structured with legal advice on both sides. The case falls a long way short of raising circumstances in which it would be appropriate to lift the corporate veil of Hamilton Ice and treat it and the Speirs brothers as being the same person in law. While we would not wish to rule out the possibility that in some unusual circumstance it might be appropriate to allow equitable set-off where there is no identity of parties, any such circumstance (other than one justifying the lifting of the corporate veil) would have to be consistent with the extinguishment rationale. In this case, there being no basis for lifting the corporate veil and equating the Speirs brothers with Hamilton Ice, we are of the view that the lack of identity of parties is in the circumstances fatal to Hamilton Ice's claim to set-off the money owing by Perry to the Speirs brothers against the money which it owed Perry for rent.

[64]     Understandably, Mr Curry emphasised the words in parenthesis –

“other than one justifying the lifting of the corporate veil.”

[65]     Mr Curry, in relation to the lifting of the corporate veil, referred to Savill v

Chase Holdings (Wellington) Ltd [1989] 1 NZLR 257, in which Tipping J said at

278-279 that the corporate veil may be lifted where either –

Special circumstances exist indicating that the veil is a mere facade concealing the true facts; or

Retaining  the  veil  would  lead  to  a  result  so  unsatisfactory  as  to warrant some departure from the normal rule.

(The High Court judgment was upheld on appeal: see the same Report).

[66]     Mr Curry referred to Savill’s case as being one in which the Courts have observed  that  the  “general  presumption”  whereby  a  company  is  regarded  as  a separate legal entity from its directors or shareholders is a doctrine to be “watched very carefully” (per Tipping J at 278, citing the judgment of Lord Denning MR in Littlewoods Mail Order Stores Ltd v McGregor [1969] 3 All ER 855 at 860).

[67]     It  was  Mr  Curry‟s  submission  that  both  the  circumstances  identified  in

Savill’s case exist in the present case so that –

“the  corporate  veil  between  Southern  Deer,  Neylon  Livestock,  and  Mr

Neylon should be lifted.”

[68]     Mr Curry observed that he was not aware of any case in equity where a Court has  stated  that  the  corporate  veil  can  be  lifted  only for  a  plaintiff.    Mr  Curry submitted that it would be inequitable not to take into account the circumstances which he submits point towards veil lifting.

[69]     In terms of the authorities Mr Curry had referred to, he emphasised the second limb in Savill v Chase Holdings, suggesting that the degree of “unsatisfactoriness” which might lead to lifting the veil can only properly be determined at a hearing.

[70]     Mr  Curry  submitted  that,  having  regard  to  Mr  Neylon‟s  evidence,  the corollary of Southern Deer‟s position that the corporate veil should be lifted must be that Mr Neylon is accepting personal responsibility for the debt.  He emphasised that his instructions were for Southern Deer and not for Mr Neylon personally.   Any conclusion drawn by the Court as a matter of law was a matter for the Court.

[71]     Lastly, Mr Curry said that this Court had recognised that cross-claims could be founded on customary dealings and might preclude summary judgment (John

McJorrow Ltd v ID Loader Ltd HC Wanganui CP 23/91 27 February 1992 at pp 20-

22).

Mr Lester’s submissions

[72]     Mr Lester submitted that equitable set-off was not an arguable defence to Silver Fern‟s claim.   Put simply, there was an absence of mutuality such that this application and the reconciliation claim were not interdependent in terms of the requirements for equitable set-off detailed in Grant v NZMC. Mr Lester also referred me to Tipping J‟s comments at para [8] of Hamilton Ice Arena in which his Honour quoted from Halsbury’s  Laws of England  (4th  ed, 1983) at vol 42 [435] in the following terms:

A set-off may only be maintained where the claims to be set-off against each other exist between the same parties and in the same right.

[73]     In this case, submitted Mr Lester, the requirement for „the same parties‟ was not met as Neylon Livestock was not a party to this proceeding.  Any argument that the underlying relationship between the parties allowed the corporate veil to be lifted was flawed.   The matter was contrary to the principle of separate corporate personality,  did  not  fall  within  the  exceptions  cited  by Mr  Curry,  and  was  not supported by Tipping J‟s comments in Hamilton Ice Arena.  The two claims were also not in „the same right‟. The plaintiff ‟s claim was in respect of money owed to it as a beneficiary by the defendant as a trustee.  In the reconciliation proceeding, the defendant and Neylon Livestock were seeking damages against the plaintiff for an alleged breach of contract.  Put another way, the two claims were of a completely different character.

[74]     Mr  Lester  submitted  that  the  lack  of  interdependence  of  claims  was reinforced when one considered that the trust obligation was assumed in 1997 while the trading claims in the reconciliation proceeding all arose after 2003.  They relate to different periods and different dealings.

[75]     Mr Lester also questioned the defendant‟s motive in arguing equitable set-off as a defence to this application for summary judgment.   In the letter to the Chief

Executive of Silver Fern dated 25 February 2009 (quoted above at [12]) Mr Neylon discussed  the  on-payment  to  Silver  Fern  of  money  received  from  the  2008 liquidation of NZ Deer Farms.   Mr Neylon referred to the effect of the “Global Credit Crunch” and of bankers‟ reneging on agreed arrangements as having:

...placed our company in an embarrassing situation of tight interim cash flows.  We regret that we will not be in a position to write a cheque for the outstanding amount...

[76]     The reconciliation proceeding was subsequently issued in October 2009.  In other words, Southern Deer did not raise its claims which are the subject of the reconciliation  proceeding  until  after  it  had  received  the  payments  from  the liquidation of NZ Deer Farms.   In the light of Mr Neylon‟s comments in the 25

February letter, the implication is that the defendant has now sought to link the two claims via equitable set-off because it is no financial position to make good its obligations as trustee.

[77]     Mr Lester noted that Mr Curry‟s reliance upon corporate veil lifting did not extend to the citation of any authority applying that concept.  The Court of Appeal in Hamilton Ice Arena found the circumstances of that case to be “a long way short” of establishing a case for corporate veil lifting.

[78]     Mr Lester submitted that while Mr Curry had spoken of lifting the corporate veil between Southern Deer, Neylon Livestock and Mr Neylon, the essence of what Southern Deer was seeking was to have the veil of both Southern Deer and Neylon Livestock removed so as to leave Mr Neylon as the effective party.  Put another way, Southern Deer was inviting the Court to effectively vest in Mr Neylon liability for this claim and the benefit of the claims raised in the reconciliation proceeding.

[79]     Mr Lester submitted that it was illogical for Mr Neylon to maintain that the reconciliation proceeding is, in effect, brought by the wrong parties (Neylon Livestock and Southern Deer) when, as a person in control of those companies, he chose those companies to bring the proceeding.  He chose not to add himself as a plaintiff in the reconciliation proceeding or to appear as an interested party in this proceeding.

[80]     Mr Lester noted that this is not a case in which any party to the proceeding can say or has said that there has been a misuse of a corporate entity.   Mr Lester noted  particularly  the  evidence  of  Ms  Diack,  in  which  she  deposed  that  those involved tried to keep the companies separate as best they could.  I took Mr Lester to be referring to the corporate veil lifting cases where the conduct of an individual is found to have been such as to constitute him or her the alterego of a company or, in the more poetic terms of Denning LJ in Wallensteiner v Moir (No 1) [1974] 3 All ER

217 at 238, the company was just a “puppet” of a person who was pulling its strings.

[81]     Mr Lester further submitted that the position now adopted by Southern Deer was inconsistent with that advanced by Mr Neylon in the email exchanges of 2009 when Silver Fern was demanding payment of the share proceeds.  Reference may be made to an email exchange between Craig Billows of Silver Fern and Mr Neylon on

9 and 10 June 2009 when the parties were negotiating a time payment plan.   Mr Billows recorded in an email to Mr Neylon on 9 June 2009 what he understood had been agreed at a meeting that morning, including that –

[T]here  is  no  dispute  regarding  the  monies  owed  by  Southern  Deer

Corporation ... [and]

You agree to enter into a payment plan for payment of the $1.449m owed by

Southern Deer Corp ...

[82]     To which Mr Neylon responded –

Craig,

After you left I further discussed the first payment with Ian.  He was a little uncomfortable with the first payment of $200k beginning August as our

cashflows do not kick in until September/October.  We will endeavour to get

that payment away on time subject to Bank approval.  Failing that we will get it away late September/Early October. Other than that, all is correct.

[83]     Mr Lester noted the significance of Mr Neylon‟s acknowledgement that it was Southern Deer who owed the (NZ Deer Farms share proceeds) monies to Silver Fern.   It was Southern  Deer, (not Mr Neylon  personally), that  entered into the arrangements for repayment.

[84]     Referring to Morrison on Company Law, para 3.5, Mr Lester submitted that there is no principle which permits the corporate veil to be lifted on grounds of “unfairness”. Nor should the Court lift the veil to assist the commercial objectives of a director of the company involved.  Nor should the veil be lifted in a contractual setting where specific obligations have been freely negotiated.  It was Mr Neylon‟s own record of the relationship in his memorandum of 25 February 2009 (above [12]) that recorded –

It was agreed between the parties that Southern Deer Corp Ltd would be the vehicle used to invest in NZ Deer Farms to achieve the various outcomes sort...

[85]     Mr Lester submitted that, against this background, it was not for Mr Neylon to elect to insert himself into either the trading relationship in the reconciliation proceeding or the trust relationship in this proceeding.  He submitted that lifting the veil is not an option available to a defendant, instead being an option available to a plaintiff who can show some form of misuse of the corporate entity.

[86]     Mr Lester further noted that Mr Neylon had not undertaken unequivocally to accept full personal liability for the amount claimed in this proceeding as part of the argument advanced by counsel for Southern Deer.

[87]     Finally, Mr Lester submitted that the false assumption in the submissions for Southern Deer is that by lifting the corporate veil the Court extinguishes the liability of a defendant company.  Where liability is imposed on a director because the veil has been lifted, the legal liability of the defendant company remains.  Lifting the veil extends the class of those who are responsible; it does not limit those who are responsible.  Accordingly, Mr Lester submitted that Mr Neylon cannot dictate to the plaintiff against whom it recovers.  That is the plaintiff‟s election.  Come what may, the defendant was trustee and remains responsible as such.

[88]     A final element of Silver Fern‟s case flowed from the fact that Southern Deer was only one of the parties to the reconciliation proceeding.  If successful, equitable set-off can only extinguish Silver Fern‟s claim against Southern Deer for as much as Southern  Deer  is  owed  by  Silver  Fern.    Under  the  reconciliation  claim,  both Southern Deer and Neylon Livestock seek to recover damages from Silver Fern, but

the amount owed to Southern Deer alone is not detailed.  In other words, the amount by which the Silver Fern‟s claim against Southern Deer can be extinguished is not known.  This is a necessary element of the defence, without which equitable set-off is not possible.

Equitable set-off (including corporate veil lifting) - discussion

[89]     I did  not,  in  this  case,  receive  developed  submissions  on  several  of  the aspects of the veil lifting argument which were touched on in submissions.  Had the correct answer to the veil lifting submission not appeared so clearly, it is likely that I would have called for further submissions on at least some aspects of the veil lifting issues.  In the event, that is unnecessary because the answer is clear.

[90]     On Mr Curry‟s approach, an appropriate starting point for the consideration of his veil lifting submissions lies in the judgments delivered in Savill v Chase Holdings.  The High Court trial was heard and determined by Tipping J.  An appeal to the Court of Appeal was dismissed.   Leave to appeal to the Privy Council was refused, the Privy Council observing that no error had been found in the judgments of the Court of Appeal.

[91]     The Judges in the High Court and the Court of Appeal uniformly recognised as a guiding principle the formulation of Lord Keith in  Woolfson v Strathclyde Regional Council 1978 SC (HL) 90 (a decision of the House of Lords in a Scottish case), where his Lordship observed at page 96 that it was appropriate to pierce the corporate veil  -

only where special circumstances exist indicating that [it] is a mere facade concealing the true facts.

(per Tipping J at 279; McMullin J at 306; Casey J at 312; and Bisson J at 316).

[92]     There is no merit in the proposition that in this case the veil or corporate entity of Southern Deer was a mere facade concealing the true facts.  Significantly, Mr Curry did not develop any detailed submission exploring or explaining how Southern Deer was a facade concealing true facts.   Rather, the implication of his submissions was that because Mr Neylon had interests in a number of companies,

and because he and those companies could be said to have had a mix of dealings with Silver Fern, that it was appropriate to regard Mr Neylon as the true party to any particular transaction regardless of how the parties themselves dealt with their accounting.  A second level to this argument might have been (although Mr Curry did not develop this) that the original trusteeship commitments for the NZ Deer Farm shares were entered into by Mr Neylon personally.

[93]     Nothing in those circumstances justifies an argument that Southern Deer was a mere facade.  The evidence establishes a deliberate choice of Southern Deer to be trustee.   Rather than continuing with the initial agreement that Mr Neylon would become trustee, agreement was reached between Silver Fern and Southern Deer that Southern Deer would become trustee.   In its  dealings thereafter, Southern Deer carried out its functions by acquiring the shares and by accounting to Silver Fern for all income derived from the shares until Southern Deer decided not to do so any longer.  The trust arrangements worked exactly as they were intended to.  Even when Southern Deer refused to pay over the share proceeds, Southern Deer, through its director, Mr Neylon, acknowledge that Southern Deer had the trust obligation.

[94]     Southern Deer, on the evidence, cannot arguably point to its having been a mere facade concealing the true facts.

[95]     Mr Curry‟s second limb for veil lifting (above [65]) is where –

Retaining the veil would lead to a result so unsatisfactory as to warrant some departure from the normal rule.

[96]     In putting the matter in this way, Mr Curry was referring to the High Court judgment of Tipping J in Savill v Chase Holdings where his Honour, having explored the concept of facade or sham said this at 279 –

The essence of the matter in my view is that the Court should not lift the corporate veil unless the refusal to do so would, in the words of Richmond P [in Re Securitibank Ltd (No. 2) [1978] 2 NZLR 136] lead to a result so unsatisfactory as to warrant some departure from the normal rule.

[97]     His Honour added that  it would be undesirable to categorise the sort  of circumstances which might be involved but added –

In a contractual context when it is sought to lift the corporate veil against a party I would  have thought that  the  qualifying circumstances should  be confined to situations where there is some element of fraud or sharp practice in that party‟s conduct or where it would otherwise be unconscionable if the strict adherence to the principle of the separate corporate entity were maintained.

[98]     In the Court of Appeal, both McMullin and Casey JJ, at the passages I have referred to (above [91]) identified the principle in terms of the “mere facade” formulation enunciated by Lord Keith in Woolfson v Strathclyde Regional Council. They did not test the issue by reference to the more general “unsatisfactoriness” test.

[99]   I do not read the judgment of Tipping J in Savill as suggesting that “unsatisfactoriness” is a stand-alone test.   It appears clear from his Honour‟s observations in Bentley Poultry (below [101]) that the sort of unsatisfactoriness of which   he   spoke   is   one   which   arises   through   fraud,   sharp   practice   or unconscionability.  In that sense, there is a very close relationship with the “facade” test which is the common feature of the judgments in the High Court and the Court of Appeal.

[100]   In this case, Silver Fern wants honoured the arrangements which it agreed to initially with Mr Neylon and then with Southern Deer.  Equally, there is no evidential basis to sustain an allegation of unconscionability.   Silver Fern wants simply that which Southern Deer as trustee agreed to. A beneficiary does not act unconscionably by calling for that which has vested in the beneficiary.

[101]   I am reinforced in this conclusion by reference to the judgment of Tipping J in Bentley Poultry Farm Ltd v Canterbury Poultry Farmer’s Co-operative Ltd HC Christchurch, CP 273-87, 27 October 1988.   His Honour expanded upon his discussion in Savill v Chase Holdings of the circumstances in which the corporate veil might be lifted.  His Honour said in relation to that case, at page 28 –

I was in no way suggesting by my use of the word “unconscionable” some general  test  whereby  the  corporate  veil  could  be  lifted  if  the  Court considered that it was inequitable or unfair to allow the veil to remain.  To suggest that the corporate veil  can be lifted simply if the Court feels that its presence leads to some unfairness or inequity would be quite unsatisfactory and would lead to enormous commercial uncertainty.   There can well be occasions when the fact of incorporation can, in the broad sense, be seen as

leading to some injustice, particularly with regard to creditors but in no way do I think that the Court could lend itself to such a broad test.

By using the word unconscionable I had in mind the concepts of equitable fraud and the like such as were discussed by the Privy Council in O’Connor v Hart [1985] 1 NZLR 159 – see per Lord Brightman at page 174. The difference between the word unconscionable and the word inequitable is, at least, for the present purposes, more than semantic.

[102]   At its highest, the complaint of Mr Neylon and of Southern Deer on the evidence in this case is that there would arguably be something unfair or inequitable in Silver Fern‟s receiving the share proceeds from Southern Deer when Silver Fern may still owe entities related to Mr Neylon monies on account of their trading relationships.  Having regard to the express trust relationships established, I would struggle to find such a proposition even arguable.  As it is, it would amount to an argument as to no more than unfairness.  On the authorities referred to that is not a sufficient basis to justify veil lifting.

[103]   That is sufficient to dispose of the two-limbed basis upon which Mr Curry urged the Court to find that there exists an arguable case for veil lifting.

[104]   Southern Deer‟s admitted trusteeship of the funds it holds for Silver Fern is the overarching feature of this case.   With the cashing up of the NZ Deer Farms‟ shares,  Southern  Deer  became,  if  it  was  not  already,  a  bare  trustee.    Its  sole remaining duty was to act in accordance with the directions of Silver Fern and to transfer the funds upon request.

[105]   The shares in question were bought for Silver Fern with Silver Fern‟s money. The sole reason for a trusteeship was the desire or need to maintain Silver Fern‟s anonymity as the shareholder.  The contractual terms of the trusteeship – including the requirement for the trustee to follow all directions of Silver Fern with regard to those shares – indicates the clear intention of the parties that Silver Fern was to have unfettered control and access to its shares or their proceeds.   The contractual agreement to follow all directions must mean precisely that, namely all directions including directions as to payment.

[106]   The contract does not expressly refer to the concept of set-off.   However, having regard to the provisions as to following of directions which are express, and having regard to the circumstances behind and reasons for the trustee shareholder, I find this to be a case where equitable set-off has been excluded by clear implication: see Grant v NZMC and Modern Engineering (above [53] – [54]).

[107]   Nothing in the 20 years of dealings between these and related parties and the spirit of trust and loyalty which existed between them cuts across the implication that set-off was excluded.   It was precisely that background of trust and loyalty which would have led Silver Fern to trust and depend upon Mr Neylon to carry out Silver Fern‟s wishes to the letter and to respect entirely Silver Fern‟s beneficial ownership of the shares.   Nothing in the contractual documentation by which the trust was established points to this trust being an available pool of funds for other dealings between the parties whether for the purposes of “wash-up” or otherwise.  There is nothing in the terms of the trust agreement to preserve access to the trust funds for the purposes of such “wash-up” or set-off.   The words which the parties must be taken to have carefully chosen, and the circumstances in which the assets were bought and the trusts created, point clearly the opposite way.

[108]   I therefore find that equitable set-off is not available to Southern Deer in relation to the funds for which Silver Fern sues in this proceeding.

[109]   Having reached these conclusions, it becomes unnecessary for me to consider further the alternative submissions advanced by Mr Lester against corporate veil lifting  and  equitable  set-off.    I  am  not  inclined  to  the  view  that  any  of  those alternative arguments constituted the same complete answer to the defendant‟s grounds of opposition as those already dealt with.  Given my conclusion, however, and  the  relative  paucity  of  submissions  on  those  alternatives,  I  refrain  from expressing a concluded view.

[110]   Given  the  conclusions  I  have  reached,  it  is  strictly  unnecessary  that  I determine whether (but for the parties‟ exclusion of set-off) the claims asserted by Southern Deer could have properly constituted an equitable set-off having regard to other applicable principles.

[111]   If necessary, I would have found for three additional reasons that the claims asserted by Southern Deer do not constitute valid grounds of equitable set-off.

[112]   First, Southern Deer‟s claims do not have the interdependence with the Silver Fern claim that is required under Grant v NZMC and subsequent authorities.  As the subsequent authorities, including the decision of the Court of Appeal in Hamilton Ice Arena indicate, a very useful way of testing interdependence is to determine whether the claims exist between the same parties and in the same right.

[113]   The importance of the same right is significant in this case.  Southern Deer accepted responsibilities as a trustee.  I have found it to be a bare trustee.  Silver Fern enforces through this proceeding its rights as beneficiary of the trust.  There is no dispute that in terms of the trust it is entitled as beneficiary to payment.

[114]   What Southern Deer (and another) assert against Silver Fern are rights in contract as between companies with contractual dealings in the market place.

[115]   The claims are not between parties in the same right.

[116]   Secondly, the claims are not entirely claims between the same parties.   Mr Neylon,  in  his  affidavit,  acknowledged  that  the  dealings  between  the  “Neylon” parties  and  Silver  Fern  were  “at  a  superficial  level”  primarily between  Neylon Livestock and Silver Fern.   By “superficial level”, Mr Neylon appears to mean in strict terms of the entities named and used, because in the next clause he goes on to say that “Southern Deer was often indirectly involved”.

[117]   Keith Neylon refers to his selection of Neylon Livestock as the company in whose name he would purchase stock for Silver Fern.  While he indicates that, at the outset, he could have chosen either company as the trading entity, he recognises that when Neylon Livestock was chosen, it was chosen “for accounting purposes”.

[118]   Mr Neylon says that the way in which the various companies interacted would be set out also in the affidavit of Ngaire Diack.

[119]   Ms Diack, for her part, deposed that she had been Keith Neylon‟s personal assistant from 1990 until 2004.  She refers to the dealings of Southern Deer often being mixed up with those of Neylon Livestock.  She gives, as an example of that, Neylon  Livestock  putting stock  on  a Southern  Deer  farm  for  grazing  and  later transporting that stock from the Southern Deer farm to the plant.  She says that in that case Southern Deer would charge Neylon livestock grazing fees.   On other occasions,  Southern  Deer  might  sell  stock  directly to  Silver  Fern  but  the  bank deposit might be into Neylon Livestock‟s  account, requiring a later reconciliation. Ms Diack deposed that –

The companies were entwined at times, although we tried to keep them separate as best we could.

[120]   While it was the case that Neylon Livestock was entirely owned by Keith Neylon, he had only a majority shareholding in Southern Deer.  One would expect that those responsible for the governance and running of the companies therefore had a responsibility, as Ms Diack deposed –

to keep them separate as best we could.

[121]   In short, Southern Deer‟s own evidence indicates a recognition that while Southern Deer‟s and Neylon Livestock‟s dealings at times flowed into one another, they were not treated as some form of joint enterprise in which the separate contractual rights of each were not to be respected and implemented.

[122]   Against this background , one cannot talk of mutuality in relation to any debt claimed by Neylon Livestock as owing to it.  Neylon Livestock formed no part of the trust arrangements.   Its relationship with Silver Fern was that of procurement and related services.

[123]   Thirdly, there is the issue of unconscionability.  It is of the nature of equitable set-off that the Court will find an equitable set-off only where to treat the other claim as independent would be unconscionable or inequitable (see the discussion in Grant v NZMC (above [53]–[58])). The “link” required may be established through the two claims being interdependent in the sense that they are between the same parties in the same right. As was observed by Tipping J in Hamilton Ice Arena (at [8]) –

The concept of extinguishment is difficult if the cross-claim is made by a different party.

[124]   I recognise that a requirement of strict mutuality is not universally accepted through the Commonwealth.   In his text, Derham on The Law of Set-off, (Oxford University Press, 2010), Rory Derham recognises that the weight of authority in the United Kingdom is in favour of a strict requirement of mutuality.  But he refers to other jurisdictions, including Australia and Canada, where the Courts have emphasised that mutuality is not an indispensible requirement of equitable set-off (see paras 4.67 – 4.69).   His conclusion (at 4.70) is that mutuality has not been regarded as a strict requirement of equitable set-off.  He nonetheless observes that –

Ordinarily, the justice of the case would require mutuality.

[125]   There is nothing in the facts of this case which should lead the Court to depart from a requirement of mutuality.   Mr Neylon,  precisely because he was trusted by Silver Fern, took upon himself (and subsequently his related company) obligations of trusteeship in order to permit Silver Fern to buy and hold shares.  The justice of the case requires mutuality.   Put another way, equity requires mutuality. Mr Neylon, having placed Southern Deer in the status of trustee should not be permitted to set up debts which are said to be owing to Southern Deer (and Neylon Livestock) in other capacities.

[126]   It is entirely conscionable for Silver Fern to demand that the monies held in trust for Silver Fern be paid to Silver Fern.

Equitable set-off -“customary dealings”?

Mr Curry’s submissions as to customary dealings

[127]   Mr Curry submitted that in considering the relationship between Silver Fern and  Southern  Deer  it  was  appropriate  that  the  Court  consider  the  “customary dealings of more than 20 years duration”.   In their statement of claim in the reconciliation proceeding, Southern Deer and Neylon Livestock also refer to this “customary course of dealings in relation to payment for any discrepancies” and say that there was a “custom” or an “implied term” that a reconciliation would occur at

the end of each season and that the amounts owing would be determined at that time. This custom was pleaded to have arisen as a matter of business necessity.

[128]   Although this submission was advanced by Mr Curry as part and parcel of his equitable  set-off  submission,  it  is  convenient  to  discuss  it  under  this  separate heading.

[129]   Given a degree of confusion which may be said to arise in the pleading in the reconciliation proceeding – between terms implied for reasons of efficacy and terms implied because of trade custom – I record that Mr Curry did not advance the case for an implied term for reasons of efficacy in his submissions before me.  Rather, he put the matter simply upon the basis of “the customary course of dealings”.

[130]   The  single  paragraph  in  his  written  submissions  which  identified  this argument reads –

This court has recognised that cross-claims may be founded on obligations arising from customary dealings, and that where arguable such claims will preclude summary judgment being entered: John McJorrow Ltd v ID Loader Ltd (HC Wanganui CP 23-91, Master Williams QC, 27/2/92) at pp 20-22.

[131]   Mr  Curry,  in  his  oral  submissions,  did  not  develop  upon  that  written submission.

Discussion

[132]   McJorrow’s case involved a very different situation to that involved in this case.  In that case, there was no question as to who the parties to the contract (or the responsible parties in tort) were.  Loader had rented from McJorrow a truck on wet- hireage  (that  is  with  the  driver  included).    An  accident  occurred  when  one  of Loader‟s staff took and drove the truck.  McJorrow sued for summary judgment for its damages.  Mr Curry‟s reason for referring to this case was the pleading by Loader that the practice in the contracting industry entitled Loader to use its own driver on the truck.  Master Williams QC (at 17-21) examined the law on the implication of usage into contracts before concluding (at 21-22) that the defendant had an arguable defence in a summary judgment context.

[133]   The basis of the decision in McJorrow’s case has no application to this case. Mr  Curry‟s  invocation  of  concepts  of  customary  dealings,  by  reference  to McJorrow’s case, confuses the custom and usage which is examined in such cases. That custom or usage is that which is generally followed by people in a particular business or in a particular locality.   In the Laws of New Zealand, „Contract‟, the discussion as to “Terms implied by custom” begins with this summary at [110] –

It is well established that terms may be implied by the custom of a locality or by the usage of a particular trade.

[134]   There  are then set  out  a number  of principles  which  are  required  to  be observed before a custom or usage will be imported into a contract (such as notoriety and certainty).

[135]   Finally, the Laws of New Zealand discussion at [110] concludes –

... the custom or usage can only be implied in the absence of a contrary intention.

[136]   The authors of Burrows & Others Law of Contract in New Zealand, (3rd ed, LexisNexis, 2007) at 6.3.1 say similarly –

Custom must not contradict the express terms of the contract.  In a ... case, Lord Jenkins put this in both a negative and a positive way:

[A]n alleged custom can be incorporated into a contract only if there is nothing in the express or necessarily implied terms of the contract to prevent such inclusion and, further, that a custom will only be imported into a contract where it can be so imported consistently with the tenor of the document as a whole.

[137]   The reference is to London Export Corporation Ltd v Jubilee Coffee Roasting Co [1958] 2 All ER 411 at 420. New Zealand authority to similar effect may be found in Fairbanks, Lavender, & Son v Low Bros (1893) 12 NZLR 302. In this case, Southern Deer asserts no trade-wide or locality-wide practice. Rather, it alleges a practice unique to these particular parties. It then says that the “customary” practice should be held to bind these parties or colour their rights in relation to the trust established to deal with the NZ Deer Company shares. This is no “custom” or “usage” in the sense described in Laws of New Zealand or Burrows & Others.  What there is, at most, is a history of dealings between these particular parties (or their

related entities) which is said on principles of contractual interpretation or equitable doctrine to shape a contract or to affect its incidents.

[138]   In this case, it is the trust agreement in the form of the heads of agreement signed  by Mr  Neylon  and  Silver  Fern  which  establishes  the  parties  to  and  the fundamental duties of the trust relationship.  For the reasons already explained, I am satisfied that the prior history of dealings between the parties and related entities does not affect the contractual or beneficial rights which were established.   The custom or usage which Mr Curry sought to develop by reference to McJorrow’s case cannot be implied or imported into the contractual arrangements between Southern Deer and Silver Fern because the agreed terms of trust clearly convey a contrary intention and the custom or usage suggested would be inconsistent with the heads of agreement as a whole.

Second ground of opposition: action should be restrained or execution stayed

Southern Deer’s case for an order restraining action or staying execution

[139]   In his written submissions filed in response to  Mr Lester‟s  synopsis, Mr Curry raised the possibility of a restraint on proceeding or a stay of execution in this way.  He submitted –

19.      As Grant pronounced: (11 line 37 emphasis added)

Equity would restrain an action  or execution of judgment at law   or  allow  a  set-off  where  it  would  be  inequitable  or unconscionable to allow the plaintiff to proceed without bringing to account some claim by the defendant which was sufficiently linked to that made by the plaintiff.

20.In this way Grant recognises three remedies as arising in equity: (1) Restraint of an action (2) Stay of execution and (3) Set-off.

21.All of the points considered in Silver Fern‟s submissions are directed only to this third remedy.

22.However, even if the veil is not lifted, it would still be “inequitable or unconscionable to allow the plaintiff to proceed without bringing into account some claim by the defendant”.  The other two remedies pronounced in Grant are accordingly available to Southern Deer.

23.For stay of an action or of execution rather than set-off, Grant does not  require  that  a  defendant‟s  claim  be  liquidated;  indeed,  it expressly states that this is not required:

“That equitable right was not limited to cross-claims but extended to unliquidated claims for damages” (at 11, line 41).

24.Moreover, it is clear that any other requirements addressed in Grant beyond the “inequitable or unconscionable” criterion relate only to the remedy of set-off; the Court having stated that “[the] present case is concerned with what is still called the equitable right to set-off” after having set out the three available remedies and then proceeded to address that remedy alone (at 11, line 44).

25.Accordingly, even should Your Honour hold that identity of parties was required (despite the dicta in Hamilton Ice Arena Ltd), and also hold that it is not appropriate to lift the corporate veil, applying Grant a stay of proceedings or a stay of execution would be appropriate.

26.Either of these remedies may be granted solely on the basis that: (i)  The Defendant has “some claim” against the plaintiff; and

(ii) That claim is sufficiently linked.   The claim made by the plaintiff that it would be inequitable or unconscionable to allow the plaintiff to proceed.

27.As an alternative to the claim that equitable set-off arises, Southern Deer is entitled to a stay of this proceeding or a stay of execution of this proceeding, even if the veil is not lifted.

[140]   Mr Curry did not expand upon this line of reasoning in his oral submissions.

Submissions for Silver Fern

[141]   Mr  Lester‟s  primary  submission  was  that,  in  the  absence  of  a  formal application for stay (which Southern Deer had not made), there was no basis for the Court to consider issues of stay or restraint.

[142]   Mr  Lester  went  on  to  address  the  alternative  position  should  the  Court consider issues of restraint or stay.  He submitted that the particular passage in Grant as to a restraint  identified by Mr Curry (above [139]) was in the nature of an historical discussion, the modern position being that the Court in equity finds either that the defendant has an (in this context arguable) set-off or not.  With reference to discussions  in  the  highest  Courts,  which  I  have  already  reviewed,  Mr  Lester

emphasised that there is no lower tier threshold such as “general fairness”.   He submitted that Hamilton Ice Arena is a case which well illustrates the proposition that a defendant either gets its cross-claim to the point of set-off, or its defence fails.

[143]   Mr Lester submitted that Mr Curry‟s selection of the “some claim” wording in Grant (at page 6) is apt to mislead. Equitable set-off extends to unliquidated as well as liquidated claims, but even assuming Southern Deer‟s cross-claim against Silver Fern to be at its highest at $130,000.00, then “some claim” of that size could not on any principle of equity lead a Court to denying a plaintiff judgment for an indisputable balance.

Discussion

[144]   I accept as valid Mr Lester‟s primary objection to Southern Deer‟s ground of opposition in relation to a “restraint”.  While Southern Deer‟s notice of opposition was grossly deficient, it was understandable that Mr Lester was prepared to meet the case in relation to the written submissions developed by Mr Curry in relation to set- off because set-off had been signalled in Mr Neylon‟s position and in the evidence filed for Southern Deer.  A stand-alone request to the Court for an order in equity in the nature of a restraining order was not signalled.

[145]   On this basis alone, I would disallow the defendant‟s arguments as to the

restraining of Silver Fern.

[146]   In case that position, in the event of an appeal, is found to be too harsh or otherwise inappropriate, I turn to consider the substance of Mr Curry‟s submissions. I do not find them to have merit.

[147]   Apart from his reliance on the single sentence from Grant in which the two disjunctives (“or”) are used, Mr Curry did not refer the Court to any authority which suggests that in relation to cross-claim “defences” there exists, today, in addition to the doctrine of set-off, some residual equitable remedy to cater with cross-claims which  do  not  quite  qualify  as  set-offs.    Mr  Curry‟s  submissions  contain  the suggestion that situations such as unliquidated claims for damages might fall more

appropriately into the “restraint of action or stay of execution” category rather than

set-off, but Grant is not authority for that proposition at all.

[148]   Grant was a classic equitable set-off case.  The single defence raised was by way of set-off.   The passage relied upon  by Mr Curry is not  authority for the proposition that equity would intervene in the various ways (restraint of a proceeding or stay of execution or allowance of a defence by way of set-off) according to different principles.  The requirements to justify particular outcomes are no different. It is the cross-claim amounting to a set-off which justifies equity intervening with one or other of the remedies referred to in Grant.

[149]   Accordingly, even had I found that the defendant (in the absence of formal notice) was entitled to pursue some form of restraining or staying order, I would have found that such an order was no more justified on the facts of this case than would have been a defence by way of set-off.

Third ground of opposition: Southern Deer as agent as well as trustee

Submissions for Southern Deer

[150]   Mr Curry, in his oral submissions, spoke briefly to the reference to “agency”

in the heads of agreement.

[151]   In particular, he referred to recitals and terms in the heads of agreement which recognised that Mr Neylon would be taking up shares on behalf of Silver Fern and would be holding any shares so acquired and any dividends and other entitlements on behalf of Silver Fern.  Secondly, he referred to cl 1 of the heads of agreement –

Keith shall at all times act as trustee and agent for [Silver Fern] in making an application for shares in [NZ Deer Farms] (emphasis added).

[152]   Mr Curry submitted that by virtue of this wording (and the background facts) the arrangement between Southern Deer and Silver Fern in relation to the NZ Deer Farms shares was “not simply a trust”, because Mr Neylon was appointed as agent.

As well as the express reference to “agent” in clause 1, Mr Curry noted that the words “on behalf of” are usually associated with agency.

[153]   Mr  Curry  said  therefore  that  there  was  a  need  for  all  the  words  to  be considered in their entire context as the parties understood it at the time.

Discussion

[154]   Mr Curry did not, in his submissions, specifically suggest what different responsibilities or rights would have vested in Southern Deer in its agency role as against its trustee role.   It may have been intended that the identification of the agency role should be considered in two contexts.  First, as a stand-alone matter of defence because the agent might have more discretion than a bare trustee.  Secondly, because the concept of agency standing alongside trusteeship (and against the background of the prior and continuing dealings between the parties and their associated entities) suggested either (or both) that the NZ Deer Farms‟ shares were to become part of the “wash-up” process or that rights of equitable set-off in relation to the shares were not being excluded.

[155]   I have considered whether the terminology used in the heads of agreement might assist Southern Deer in relation to either proposition.   I am satisfied that neither proposition is arguable.

[156]   There  is  nothing  at  all  in  the  heads  of  agreement  to  suggest  that  the introduction of the concept of agency into the heads of agreement was intended to dilute the trust obligations being established.   The intended trust obligations are clear, both by the express constitution of (at that time) Mr Neylon as trustee and by his commitment to enter into what is referred to both as a Trust Deed and a Deed of Trust.   Other requirements such as that under cl 2.1(a) to follow all directions of Silver Fern with regard to the shares exclude any suggestion of residual autonomy.

[157]   On the other hand, the use of the concept of agency for the purpose  of purchasing the shares and then holding them and their proceeds was entirely understandable.  Silver Fern needed someone it could trust to purchase the shares on

its behalf.  To describe the trustee as doing that “on behalf of” Silver Fern was apt. To describe the trustee also as “agent” may be arguably surplusage or even inapt, but the document read as a whole gives no suggestion that the “agency” terminology was intended to give to the trustee any discretion which he/it did not have qua trustee.

[158]   Accordingly, the agency argument takes Southern Deer no further.

Conclusion

[159]   The plaintiff is entitled to summary judgment.

Orders

[160]   I order –

There is judgment for the plaintiff in the sum of $1,449,038.89;

There  is  judgment  for  the  plaintiff  for  interest  on  each  of  the instalments from the following dates for the following sums at the Judicature Act rate applying from time to time –

1.        $789,772.43 from 30 July 2008

2.        $627,872.81 from 26 September 2008

3.        $31,393.65 from 10 December 2008

Costs

[161]   The plaintiff, by its statement of claim, sought costs on an indemnity basis. [162]   Costs must clearly follow the event and, having regard to the breach of trust

duties involved in this case, there may well be an arguable case for at least increased costs.  I leave that matter to counsel to discuss and to seek to reach agreement in the first place.  In the event that agreement is not possible, counsel for the plaintiff is to

first  file  and  serve  submissions  in  relation  to  costs  to  be  followed  within  five working days by submissions for the defendant.  It is my intention to deal with the

costs issues on the papers unless counsel suggest otherwise.

Associate Judge Osborne

Solicitors/Representatives:

Billows Law Limited, PO Box 5339, Dunedin 9058
Mr D Lester, PO Box 825, Christchurch
G Bogiatto, PO Box 106-120, Auckland 1143
Mr G P Curry, PO Box 106-586, Auckland 1143