The Fishbowl Trustee Limited v Downtown House (no.2) Limited

[2018] NZHC 2892

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2018-404-001989

[2018] NZHC 2892

BETWEEN

THE FISHBOWL TRUSTEE LIMITED as

trustee of THE FISHBOWL TRUST Plaintiff

AND

DOWNTOWN HOUSE (No 2) LIMITED

Defendant

CIV-2018-404-002319

BETWEEN

DOWNTOWN HOUSE (No 2) LIMITED
Applicant

AND

THE FISHBOWL TRUSTEE LIMITED as

trustee of THE FISHBOWL TRUST Respondent

Hearing:	5 November 2018
Counsel:	AS Ross QC and PC Murray for Plaintiff/Respondent M Kersey and WM Irving for Defendant/Applicant
Judgment:	9 November 2018

JUDGMENT OF DOWNS J

This judgment was delivered by me on Friday, 9 November 2018 at 3 pm pursuant to r 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Solicitors/Counsel: Atmore & Co, Auckland.

Russell McVeagh, Auckland. AS Ross QC, Auckland.

PC Murray, Auckland.

THE FISHBOWL TRUSTEE LTD as trustee of THE FISHBOWL TRUST v DOWNTOWN HOUSE (No 2) LTD [2018] NZHC 2892 [9 November 2018]

Should a caveat remain?

[1]                  Fishbowl Trustee Ltd1 seeks an order removing a caveat from two of its properties.2 Downtown House (No 2) Ltd3 applies to maintain the caveat. The parties agree a guarantee from Fishbowl to Downtown is decisive: the caveat is either supported by the guarantee—or not at all. The parties also agree Fishbowl has paid Downtown $500,000, Fishbowl’s maximum liability under the guarantee.

Background

[2]                  Three other actors require introduction: the Fishbowl Trust;4 Pomegranate Recording Ltd;5 and Mr Mark Ensom. Mr Ensom is a builder. Mr Ensom is also the director and shareholder of Fishbowl, and the director and shareholder of Pomegranate. Fishbowl is the trustee of the Trust. The Trust invests in property, and is an “investment vehicle” for Mr Ensom and his family.6

[3]                  On 13 January 2017, Pomegranate borrowed $3.3 million from Downtown. The money enabled Pomegranate to buy a property in Grey Lynn, and develop it. Downtown’s loan was protected by a general security agreement, and a personal guarantee from Mr Ensom.

[4]                  Pomegranate needed another $500,000 for the project. On 27 March 2017, Downtown advanced Pomegranate this sum. The advance was protected by a guarantee from Fishbowl. Pomegranate later sold the Grey Lynn property—for a loss.

[5]                  The guarantee required Fishbowl to agree to mortgage its properties to Downtown, and provides for a corresponding caveat. On 22 August 2018, Downtown registered a caveat against four Fishbowl properties.

1      Fishbowl.

2      Held in three titles.

3      Downtown.

4      The Trust.

5      Pomegranate.

6      Notes of evidence, p 6.

[6]                  On 17 September 2018, Fishbowl offered to pay Downtown $500,000. Fishbowl sought confirmation the caveat would be withdrawn. Downtown said it would not. It is unnecessary to record all subsequent events. Or, related acrimony.

[7]                  On 4 October 2018, Fishbowl paid Downtown $500,000. Downtown withdrew the caveat over one of Fishbowl’s properties to allow it to be sold. By then,

Fishbowl had applied for an injunction seeking the caveat’s removal.7

[8]                  On 17 October 2018, Downtown withdrew the caveat in relation to a second Fishbowl property after Mr Ensom paid Downtown $250,000.

[9]                  Consequently, Downtown has been repaid $3.45 million: $2.7 million from Pomegranate from the sale of the Grey Lynn property; $250,000 from Mr Ensom under his personal guarantee; and $500,000 from Fishbowl under the guarantee. But, a little over $2.1 million remains outstanding, largely because of the default interest rate of 20 per cent.8

The guarantee

[10]              Because the terms of the guarantee are central, it is important to capture them. The relevant ones follow:

“Guaranteed Money” means all amounts which the Guarantor is, or may at any time become, liable to pay the Beneficiary under this deed, and a reference to Guaranteed Money includes any part of it.

“Principal Debt” means all amounts of any nature which the Principal Debtor (whether alone, or jointly, or jointly and severally with any other person) is, or may at any time become, liable (whether actually or contingently) to pay or deliver to the Beneficiary (whether alone, or jointly or jointly and severally with any other person), and a reference to Principal Debt includes any part of it.

“Principal Debtor” means Pomegranate Recording Limited (company number 1773935).

7      The case was ultimately argued under ss 143 and 144 of the Land Transfer Act 1952, which provide for removal and retention of caveats.

8      Interest was otherwise 10 per cent. Fishbowl accepted at the hearing its cause of action alleging oppression under the Credit Contracts and Consumer Finance Act 2003 added nothing.

2.1Guarantee: The Guarantor guarantees to the Beneficiary:

(a)   the due payment by the Principal Debtor of the Principal Debt; and

(b)   the performance and observance by the Principal Debtor of its obligations to the Beneficiary at any time.

2.2Continuing guarantee: The guarantee in this deed is a continuing guarantee and shall operate irrespective of any intervening payment, settlement of account or other matter or thing whatever, until a release has been signed by the Beneficiary and delivered to the Guarantor under clause 16.

2.3Indemnity: The Guarantor indemnifies the Beneficiary against:

(a)   all claims, liabilities, damages, losses and payments; and

(b)   all costs, charges and expenses (including legal expenses on a full indemnity basis and goods and services and similar taxes thereon).

Suffered, incurred or sustained by the Beneficiary at any time as a direct or indirect consequence of:

(c)   any Principal Debt not being recoverable from the Guarantor under the guarantee given in clause 2.1 including as a result of the obligation to pay the Principal Debt being or becoming void, voidable or unenforceable; or

(d)   any monetary or other obligation of the Principal Debtor to the Beneficiary not being duly satisfied or performed by the principal Debtor.

2.4Limited recourse: Notwithstanding that the guarantee and indemnities contained in this deed apply in respect of the whole of the Guaranteed Money, the Guarantor’s liability to the Beneficiary under this deed is limited up to a maximum amount of $500,000.

3.4No competition: The Guarantor shall not, unless requested to do so by the Beneficiary:

(a)   take, accept or continue to hold any security from the Principal Debtor or any other person who has given any security to the Beneficiary for any Principal Debt;

(b)   exercise any right or take the benefit of subrogation or contribution, or require marshalling, or claim the benefit of any security now or in the future held by the Beneficiary for the payment of any Principal Debt;

(c)   take steps to:

(i)recover (whether direct or by set-off, counterclaim or otherwise); or

(ii)accept, money or other property, or exercise, enforce or receive the benefit of any rights (including by way of set-off) in respect of,

any indebtedness of any nature owed to it by the Principal Debtor or any other person who has given any security to the Beneficiary for any Principal Debt; or

(d)   claim or prove in the dissolution of the Principal Debtor or any other person in competition with the Beneficiary.

3.5Guarantor to account: If, notwithstanding clause 3.4, the Guarantor:

(a)   takes, accepts or continues to hold any such security, money or other property or receives the benefit of a set-off; or

(b)   proves in the Guarantor’s own name in the dissolution of the Principal Debtor, or of any other person who has given any security to the Beneficiary for any Principal Debt (whether or not the Beneficiary has required the Guarantor to do so, or has consented to the Guarantor doing so), for all or any part of any material due (whether actually or contingently) from the Principal Debtor or such other person to the Guarantor,

the Guarantor shall immediately pay or transfer to the Beneficiary all such security, money, other property or the benefit of set-off, or all amounts received by the Guarantor in relation to any such proof, and all interest accruing thereon, until the Principal Debt is discharged in full and, until that payment or transfer is made, shall hold such security, money or other property, or the benefit of that proof or set-off, and all interest thereon, on trust for the Beneficiary in an amount not exceeding the Principal Debt then outstanding.

10.1General Undertakings: The Guarantor undertakes that, for so long as there is money outstanding or any commitment is in force under the Loan Agreement it will:

(a)   Negative pledge: not create or permit to subsist any security over the Land (as defined in clause 17), except the BNZ Mortgages existing as at the date of this deed;

(b)   Variation to BNZ Mortgages: not, without the prior written consent of the Beneficiary, agree to vary the priority amount recorded in the BNZ Mortgages registered against the Land; and

(c)   Financial indebtedness: not increase the principal amount of indebtedness owed by the Guarantor to Bank of New Zealand as at the date of this deed.

15.1Costs: The Guarantor shall pay to the Beneficiary upon demand all of the Beneficiary’s costs, losses and liabilities on a full indemnity basis (including legal expenses on a full indemnity basis and goods and services and similar taxes thereon) incurred or sustained by the Beneficiary in connection with:

(a)   the negotiation, preparation, signing, administration and release of this deed;

(b)   the exercise, enforcement or preservation, or attempted exercise, enforcement or preservation, of any right under this deed, or in suing for or recovering any Guaranteed Money; and

(c)   the granting of any waiver or consent under, or the giving of any variation or release of, this deed.

16.1Release: The Beneficiary shall not be obliged to sign or deliver a release of this deed unless the Beneficiary is satisfied that:

(a)   the Beneficiary has received all the Guaranteed Money; and

(b)   no payment received, or to be received, by the Beneficiary may be avoided, or required to be repaid by the Beneficiary, whether under any law relating to insolvency or otherwise.

17.1Security for obligations: As security for:

(a)   the payment or delivery of the Guaranteed Money; and

(b)   the performance and observance by the Guarantor of its obligations under this deed,

the Guarantor agrees to mortgage all of its present and future interests in the Land to the Beneficiary.

17.3 Caveat: The Guarantor authorises the Beneficiary to lodge and maintain a caveat against the title to the Land for the protection of this deed.

The parties’ cases in brief

[11]              Fishbowl submits the guarantee does not allow Downtown to maintain the caveat over Fishbowl’s properties. The guarantee draws a distinction between the principal debt and guaranteed money, and Fishbowl has paid the entirety of the latter. Clause 2.4 is decisive, for, it limits Fishbowl’s liability to $500,000; again, the sum paid by Fishbowl. Clause 16.1 identifies the circumstance in which Downtown must release Fishbowl from the deed. That circumstance has been met.

[12]              Fishbowl submits its interpretation of the guarantee is consistent with Equity’s protection of the right of redemption.

[13]              Downtown contends the guarantee anticipates maintenance of a caveat even though Fishbowl has paid it “the maximum amount of $500,000”.9 Fishbowl’s obligations endure until Pomegranate (or someone else) has repaid the principal debt, and Fishbowl performed its “non-monetary obligations”. Clauses 3.4 and 3.5 provide examples. Both ensure Fishbowl does not compete with Downtown for security, money, or the recovery of money. These obligations have “particular importance” because Mr Ensom controls Pomegranate, Fishbowl and the Trust, and might otherwise avoid his or their obligations.

[14]              On Downtown’s analysis, Fishbowl’s limited liability clause, cl 2.4, “does not transform the guarantee of the entire principal debt … into something less”. Principal debt and guaranteed money are synonymous even though different terms are used. Clause 17.1 thus provides for security—and maintenance of a caveat—until payment of the principal debt and Fishbowl’s performance of other obligations.

[15]              The release clause, cl 16.1, invests Downtown with a discretion to release Fishbowl from the guarantee, which arises only when the principal debt has been repaid. Other clauses support this position. For example, cl 10.1 recognises Fishbowl’s non-monetary obligations continue “for so long as there is money outstanding under the Loan Agreement”.

Analysis

[16]Three interrelated features of the guarantee stand out.

[17]              First, the guarantee creates a distinction between principal debt and guaranteed money:

“Guaranteed Money” means all amounts which the Guarantor is, or may at any time become, liable to pay the Beneficiary under this deed, and a reference to Guaranteed Money includes any part of it.

“Principal Debt” means all amounts of any nature which the Principal Debtor (whether alone, or jointly, or jointly and severally with any other person) is, or may at any time become, liable (whether actually or contingently) to pay or

9      Clause 2.4.

deliver to the Beneficiary (whether alone, or jointly or jointly and severally with any other person), and a reference to Principal Debt includes any part of it.

“Principal Debtor” means Pomegranate Recording Limited (company number 1773935).

[18]              Principal debt refers to the money owed by Pomegranate to Downtown. Guaranteed money refers to the money for which Fishbowl is liable to Downtown under the guarantee. Use of italics highlights the linkage between the definition of guaranteed money above, and the limited liability provision (cl 2.4). To explain, the latter reads:

Limited recourse: Notwithstanding that the guarantee and indemnities contained in this deed apply in respect of the whole of the Guaranteed Money, the Guarantor’s liability to the Beneficiary under this deed is limited up to a maximum amount of $500,000.

Guaranteed money is confined to the sum Fishbowl is or may become “liable to pay [Downtown] under this deed”. Clause 2.4 expressly limits Fishbowl’s “liability” to Downtown “to a maximum amount of $500,000”. So, read together, guaranteed money cannot exceed the sum of $500,000.

[19]              Downtown resists this construction on the basis cl 2.4’s opening phrase, “Notwithstanding that the guarantee and indemnities …” becomes redundant, and the definition of guaranteed money somewhat circular. I acknowledge these points. However, both may equally be explained by an intention to confirm Fishbowl’s liability is capped. And, even if I am wrong about this, guaranteed money cannot be read as principal debt.

[20]              This conclusion is supported by the factual matrix. $500,000 was the amount advanced by Downtown to Pomegranate in return for Fishbowl’s guarantee.

[21] Second, cl 2.4’s effect could not be clearer; see [18]. It limits Fishbowl’s liability to $500,000 notwithstanding “the guarantee and indemnities … in this deed”. Consequently, whatever happens that sounds in money cannot give rise to liability of more than $500,000 on Fishbowl’s part.

[22]              Third, cl 16.1 anticipates Fishbowl’s release from the guarantee when Downtown has received all guaranteed money:

Release: The Beneficiary shall not be obliged to sign or deliver a release of this deed unless the Beneficiary is satisfied that:

(a)   the Beneficiary has received all the Guaranteed Money; and

(b)   no payment received, or to be received, by the Beneficiary may be avoided, or required to be repaid by the Beneficiary, whether under any law relating to insolvency or otherwise.

[23]              Downtown has received all guaranteed money. For reasons explained above, this phrase anticipates the maximum sum of $500,000—the same sum advanced by Downtown to Pomegranate on 27 March 2017 and paid by Fishbowl to Downtown on 4 October 2018.

[24]              Contrary to Mr Kersey’s submission on behalf of Downtown, cl 16.1 does not confer Downtown a discretion. I accept Mr Ross QC’s submission such discretion would be inconsistent with Equity’s rejection of clogs on redemption, and Parliament’s related statutory concern as re-expressed in s 97 of the Property Law Act 2007. Expressed positively, cl 16.1 requires Downtown to release Fishbowl from the deed when Downtown is satisfied it has received all guaranteed money.

[25]Clause 17.1 does not affect these conclusions. Again, it provides:

Security for obligations: As security for:

(a)   the payment or delivery of the Guaranteed Money; and

(b)   the performance and observance by the Guarantor of its obligations under this deed …

[26]              True, cls 17.1 and 16.1 exhibit tension. The latter requires Fishbowl’s release from the deed on payment of guaranteed money; the former envisages maintenance of security beyond this. However, it would be odd if cl 16.1 did not prevail because it outlines the circumstance in which Fishbowl must be released from the deed—and that circumstance is met.10

10     This reasoning also addresses Downtown’s argument in relation to cl 10.1.

[27]              In any event, Fishbowl has complied with cl 17.1(a), and there is no evidence to suggest non-compliance or likely non-compliance with cl 17.1(b). To elaborate, the obligations likely contemplated by cl 17.1(b) are those addressed by cls 3.4 and 3.5, namely Fishbowl must not compete with Downtown, and must account to Downtown if it does. Downtown cross-examined Mr Ensom. It did not put to him Fishbowl had competed or may do so. Nor was either proposition implicit to its cross-examination.11

[28]              Finally, none of the cases cited by Downtown supports the proposition the guarantee permits caveat-retention despite Fishbowl’s payment of all it must pay. Ellis v Emmanuel,12 Barclays Bank Ltd v TOSG Trust Fund Ltd,13 and Minumbra Pty Ltd v AM Lancewood Investment Nominees Ltd14 recognise, in an insolvency context, the distinction between a part-guarantee and a limited-recovery guarantee. However, these cases do not hold the beneficiary of a guarantee may maintain security over property of the guarantor when the guarantor has paid all he, she or it is liable to pay under a limited-recovery guarantee, the type of guarantee here.

[29]              Jackson Mews Management Ltd v Menere was not about a guarantee.15 Rather, owners of units in a retirement village rebelled because of an encumbrance. They argued an encumbrance was akin to a mortgage, and were therefore entitled to discharge of the encumbrance upon payment of the associated fee. The High Court agreed. The Court of Appeal reversed. In doing so, Hammond and Chambers JJ observed certain obligations of a mortgagor might survive repayment of the mortgage, hence Downtown’s reliance on Jackson Mews.16

[30]              However, as discussed earlier, the guarantee requires Downtown to release Fishbowl from the deed when Fishbowl has paid it $500,000, the sum advanced by Downtown to Pomegranate. So, while Jackson Mews appears to contemplate the survival of post-redemption non-monetary obligations, that case does not inform the

11  Evidence Act 2006, s 92.  In its written and oral submissions, Downtown stressed Mr Ensom’s   and Pomegranate’s breaches of their obligations. Clause 17.1 is concerned with those of Fishbowl. And, through counsel, Fishbowl accepted at the hearing it may not compete with Downtown in insolvency.

12     Ellis v Emmanuel (1876) 1 Ex D 157 (CA).

13     Barclays Bank Ltd v TOSG Trust Fund Ltd [1984] 1 All ER 628 (CA).

14     Minumbra Pty Ltd v AM Lancewood Investment Nominees Ltd [2015] NSWSC 302.

15     Jackson Mews Management Ltd v Menere [2010] 2 NZLR 347.

16     See, for example, [43] of that judgment. The Supreme Court declined leave for an appeal.

construction of this guarantee, and more particularly, whether its obligations fall into the category contemplated by Hammond and Chambers JJ.

[31]              In conclusion, although the guarantee’s terms exhibit some circularity and tension, this case is ultimately straight-forward. The guarantee unarguably limits Fishbowl’s liability to Downtown to $500,000, and requires Fishbowl’s release when it pays this sum to Downtown. Fishbowl has done so. It follows Downtown must release Fishbowl from the guarantee, and may not maintain a caveat over its properties.

Orders

[32]              The caveat over Fishbowl’s properties is to be promptly removed under s 143 of the Land Transfer Act 1952.17

Costs

[33]              I can think of no reason why Fishbowl should not have scale costs. Fishbowl’s submissions refer to the prospect of indemnity costs. If this application is pursued, memoranda of not more than five pages may be filed by 23 November 2018 (Fishbowl), and 30 November 2018 (Downtown).

[34]Agreement is encouraged.

……………………………..

Downs J

17     Fishbowl’s application for an injunction is dismissed as superfluous.