Soroka v Stephen Elliott Investments Limited

[2020] NZHC 2244

IN THE HIGH COURT OF NEW ZEALAND NELSON REGISTRY

I TE KŌTI MATUA O AOTEAROA WHAKATŪ ROHE

CIV-2020-442-12

[2020] NZHC 2244

UNDER

s 124 of the District Courts Act 2016

IN THE MATTER

of an appeal against a decision of the District Court at Nelson

BETWEEN

DARREN JOHN SOROKA

Appellant

AND

STEPHEN ELLIOTT INVESTMENTS LIMITED

Respondent

Hearing:	30 July 2020 (AVL)
Counsel:	Y E Clarisse for Appellant S Galbreath for Respondent
Judgment:	31 August 2020

JUDGMENT OF SIMON FRANCE J

[1]    Mr Soroka appeals a decision of the District Court granting a summary judgment application by Stephen Elliott Investments Ltd (SEIL).1 The company was a guarantor of a borrowing by another company, Sportsmall. Mr Soroka was also a guarantor. SEIL paid off the debt and sought contribution from Mr Soroka. The District Court awarded SEIL summary judgment on Mr Soroka’s liability to contribute. It declined to give judgment on the quantum but sent that issue to trial. SEIL cross appeals the decision on quantum.

1      Stephen Elliott Investments Ltd v Soroka [2020] NZDC 2198. The appeal is brought under the District Court Act 2016, ss 124 and 127.

SOROKA v STEPHEN ELLIOTT INVESTMENTS LTD [2020] NZHC 2244 [31 August 2020]

Facts

[2]    Mr Soroka and Mr Elliott were equal shareholders in, and directors of, Sportsmall. In 2010 Sportsmall sought a loan of $100,000 from a bank. It was approved on the basis that Mr Soroka, Mr Elliott and a company of Mr Elliott, SEIL, all guaranteed the loan on a joint and several basis. Further, SEIL provided a property it owned as security.

[3]    SEIL is owned 49 per cent each by Mr Elliott and his wife. The remaining two per cent is held in their son’s name. Mr and Mrs Elliott are the directors. In 2014 SEIL decided to sell the property that was the security for the loan. Mr Soroka was not aware of this. SEIL obviously needed a discharge of the mortgage that was securing Sportsmall’s loan. SEIL paid the bank $94,775.86 on 31 October 2014 to secure a discharge of the mortgage.

[4]    Mr Elliott and Mr Soroka agreed that Sportsmall would repay SEIL over time. The agreement was reflected in Sportsmall’s records by Mr Elliott’s personal shareholder account being credited with the repayment amount. That was the only step taken at the time, although subsequently there were obviously movements in the status of Mr Elliott’s shareholder account.

[5]    Two and a half years later, in May 2017, Sportsmall ceased trading and on  Mr Elliott’s application, liquidators were appointed on 26 July 2018. There were insufficient funds to pay unsecured creditors, meaning Mr Elliott received no payment in relation to his shareholder account.

[6]    SEIL issued proceedings claiming an equitable contribution from Mr Soroka as co-guarantor of the payment it made in 2014.

Decision under appeal

[7]    The Judge first noted the summary judgment principles governing the application.2 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

2      At [7], citing Gidden v IAG New Zealand Ltd [2016] NZHC 948 at [61].

uncertainty on the matter. The Court can determine questions of law where appropriate but will not attempt to resolve genuine conflicts of evidence or its credibility.

[8]    There were two issues before the District Court.3 First, whether Mr Soroka had an arguable defence that he was not liable to make a contribution to SEIL. The case for liability was presented and defended on the basis that equity will assist a co- guarantor who pays off the whole of a debt.4 However, it will not do so where the payment is voluntary, which is what the defendant contended it was. The second issue was whether Mr Soroka had an arguable defence as to the correctness of the amount of the claim. Mr Soroka contested what percentage of contribution he should be required to make, if any.

[9]    On the first issue, the District Court assessed SEIL as having made the payment voluntarily because it had a choice.5 The bank was not going to call up the loan. SEIL voluntarily triggered a situation whereby the bank would call up the loan but that cannot be seen as paying under demand.

[10]   The District Court focused on the fact that the loan agreement made the guarantors principal debtors, and was payable on demand. This meant Mr Soroka could have been called on by the bank as principal debtor, at any point, to pay the loan. It was his loan as much as Sportsmall’s, and therefore the fact that SEIL paid it voluntarily did not affect his liability to contribute. As a principal debtor he was liable. The District Court therefore applied the equitable contribution principle, even though the payment was voluntary and therefore would not be protected if they were only co- guarantors.6

[11]   The Court itself then floated another potential obstacle, namely the possibility of a new agreement governing the situation.7 This was a reference to the arrangements

3 At [6].

4      Trotter v Franklin [1991] 2 NZLR 92 (HC).

5      SEIL v Soroka, above n 1, [41].

6      At [38] and [42].

7      At [43]-[47].

made in 2014 at the time Mr Elliott’s shareholder account was credited with the equivalent of the money paid by SEIL. The Court, however, decided:

[47]  … the clear equitable right of contribution … cannot be derailed by   the conduct of SEIL in 2014… [There had not been] an intentional waiver of clear existing rights to claim contribution against Mr Soroka, if Sportsmall did not pay. Those rights must survive the fresh arrangements and Sportsmall’s failure to honour them.

[12]   The Court went on to make a finding that SEIL was entitled to summary judgment on liability,8 but not quantum.9 This was because Mr Soroka argued that Sportsmall had in fact paid some of the debt off, and the evidence was not sufficiently clear to resolve it.

Decision

[13]   For three reasons I consider the appeal should be allowed and the matter should go to trial.

[14]   First, I do not agree with the analysis that emphasises Mr Soroka was a principal debtor. There is no doubt this was so as regards him and the bank with the loan agreement expressly saying that was the relationship between bank and guarantor. This does not necessarily apply, however, as between the guarantors. If, as SEIL suggested, all persons who stood as principal debtors as regards the bank were thereby liable to contribute equally as between each other, then in theory Sportsmall having paid the loan could seek reimbursement from its three guarantors. I do not consider the parties ever agreed to that. No authority was cited to me that supports the proposition that the voluntariness qualification to the co-guarantors’ contribution rule is waived if the guarantor is principal debtor.

[15]   SEIL sought summary judgment on the basis that the equitable principle applying to co-guarantors applied. The District Court formed the view the principle as normally understood did not apply because the payment made by SEIL was voluntary, or, at least on the facts as they appeared, it was arguably so. That should

8 At [48].

9 At [55].

have ended the summary judgment application with the matter going to trial. There is certainly a tenable argument the payment was voluntary.

[16]   Second, I consider the District Court was correct to focus on the events of 2014 in relation to the shareholder account, and consider them to be a matter that would benefit from greater clarity around the facts. What were the terms of the agreement in 2014 that saw one shareholder’s current account credited for a sum of money paid by a related but different party?

[17]   The third point is more general. This is a small case concerning a claim for less than $50,000. The basis for liability is an equitable doctrine which the other party accepted existed, but said was not available on the facts. It also disputed quantum on two bases – one, that payments had been made and, two, that there were other events to which equity should have regard. There was also the possibility of a fresh agreement having been entered into in 2014.

[18]   These factors made it not a suitable case for a summary judgment application. A short trial was the more sensible course, especially given the risk the application would not succeed and the money involved. I will be awarding costs on the appeal, with the costs in the District Court to be reserved for assessment following the trial. I make these observations, however, to make plain my view that it was a misguided application, with this being relevant to the costs determination when it is made.

Conclusion

[19]   The appeal is allowed and the order for summary judgment on liability is quashed. It is not necessary to deal with the cross-appeal.

[20]   The appellant is entitled to standard costs on the appeal. Costs in the District Court are reserved for determination as part of costs on the trial.

Simon France J

Solicitors:

Pitt & Moore, Nelson for Appellant Duncan Cotterill, Nelson for Respondent