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Seafront Properties Limited v 5 Points NZ Limited HC Nelson CIV-2011-442-000189 [2011] NZHC 844 (28 July 2011)

Last Updated: 11 August 2011

IN THE HIGH COURT OF NEW ZEALAND NELSON REGISTRY

_{CIV-2011-442-000189}

BETWEEN SEAFRONT PROPERTIES LIMITED Plaintiff

AND 5 POINTS NZ LIMITED First Defendant

AND IAN ARTHUR DONALD IRVING AND CHERIE GEORGINA IRVING

Second Defendants

Hearing: 27 July 2011

Counsel: J M Fitchett for Plaintiff

P A Norris (Administrator) for Defendants, with leave

Judgment: 28 July 2011

_{JUDGMENT OF ASSOCIATE JUDGE MATTHEWS}

[1] On 14 September 2010 the plaintiff leased to the first defendant an area within a building on Wakefield Quay, Nelson, for use as a restaurant. The second defendants guaranteed the obligations of the first defendant under the lease.

[2] The first defendant had the benefit of a three month rent holiday for October, November and December 2010. However, it failed to pay the rent instalment due on

15 January, or subsequent instalments. A notice pursuant to ss 244 and 245 of the Property Law Act 2007 was served on the first defendant and on the second defendants early in March. The first defendant ceased trading on Sunday, 20 March and in the week commencing 21 March vacated the premises and removed, with the plaintiff’s consent, its items of stock and plant. In May the plaintiff commenced this proceeding against the first defendant and the second defendants for unpaid rental for January, February and March, together with water and rates charges, and interest. It

_{applied for summary judgment against the first and the second defendants.}

SEAFRONT PROPERTIES LIMITED V 5 POINTS NZ LIMITED HC NEL CIV-2011-442-000189 28 July 2011

[3] The application for summary judgment against the first defendant has been withdrawn. The application for summary judgment against the second defendants is opposed.

[4] The matter was first called before me on 29 June. Mr P A Norris, who is an insolvency practitioner, sought leave to represent the second defendants. As noted in an order I made on that day I gave Mr Norris leave to do so in the circumstances of this case. That leave continued for the hearing on 27 July when argument on the application for summary judgment against the second defendants was presented.

[5] In the notice of opposition by the second defendants they allege that the plaintiff is estopped from making the claim as it has signed, and is bound by, a creditors’ compromise which the plaintiff entered with the first defendant which was binding on the plaintiff in relation to its claim against the second defendants. Although Mr Fitchett sought judgment at the first call on 29 June, I adjourned the matter for a fixture and set out in an order made on that day my reasons for doing so.

Relevant legal principles

[6] Summary judgment may only be entered for a plaintiff if the plaintiff has demonstrated to the Court that the defendant does not have an arguable defence. The onus of so doing rests on the plaintiff at all times. That said, it is incumbent upon a defendant who alleges that an arguable defence exists to make out a credible ground for that defence.

[7] The principles relating to when an equitable estoppel will arise are well- established, and recorded and applied in numerous cases. Reference need be made to only one, Orix New Zealand Ltd v Milne and Ors.[1] At paragraph [12] His Honour said:

For an estoppel to arise that would release Mr Milne from his obligations under the guarantee, he would have to show that he was led to believe by the words or conduct of Orix that it would not enforce the guarantee; that he had acted in reliance on what Orix said or did; and that it would be unconscionable for Orix to be permitted to resile from its position: Burbery

Mortgage Finance & Savings Ltd v Hindsbank Holdings Ltd [1989] 1 NZLR

356 and Gillies v Keogh [1989] 2 NZLR 327.

Have the second defendants raised an arguable defence of estoppel?

[8] By the middle of March 2011 the first and second defendants had sought advice from Mr Norris in his capacity as an insolvency practitioner. The first defendant owned only stock and plant, but the second defendants owned a residential property in Rotorua. On 19 March 2011 Mr Norris, through his company, wrote a letter to creditors advising that he had been appointed as administrator to act on behalf of the first defendant, to manage and conclude its commercial affairs with its creditors. He advised that the company had not traded successfully, and he was completing a review of the financial position of the company and investigating other alternative options for the business. He indicated a hope that he would be able to disclose the result of that review and investigation to creditors by Wednesday,

20 April 2011. He indicated, however, that from a very cursory view of the financial affairs of the company it was apparent that it would not be able to meet all debts due to creditors. He indicated that the directors/shareholders had agreed to release to him as administrator their residential property in Rotorua to be realised, with the net value after sale to be used to distribute to the creditors of the first defendant under Schedule 7 of the Companies Act 1993. He was unable at that point to assess what benefit this would ultimately be for the creditors.

[9] On 20 March Mr Norris sent to the solicitors for the plaintiff a separate letter, to which he attached the letter of 19 March. He referred to the notice to quit which had been issued by the plaintiff and summarised what he described as the current position. This gave more detail of the financial position of the first defendant. It raised various options for the plaintiff to consider, including taking over the business of the company, funding the business for a period whilst it was sold as a going concern, and the assets of the company being moved from the business and unencumbered assets sold. In this letter he said:

Your client would then pursue recovery against the directors/shareholders under the guarantee arrangements obviously in place, however as advised, given their limited financial equity, it would be questioned whether the exercise would in fact be worth the “powder and shot”.

[10] As well as attaching the letter of 19 March, Mr Norris also enclosed a document which he headed “Creditors’ Compromise: Confirmation Request”, with a further paper described as a “broad basis of compromise proposal”. In this he indicated that a financial review of the position of the company would be undertaken and depending on the results of that review, assets of the company, and personal assets surrendered by the directors/shareholders to the administrator would be distributed to preferential and secured creditors with the balance pro rata to unsecured creditors.

[11] Information about the debts of the first defendant to creditors was sought and

a creditor’s claim form was enclosed for completion.

[12] This letter arrived at the solicitors’ office at approximately 7.30 am on Monday, 21 March. That evening Mr Norris, a director of the plaintiff, the plaintiff’s solicitors and the second defendants met at the premises. Agreement was reached that the first defendant’s assets could be removed from the property and this took place over the succeeding days of that week, at the end of which the premises were cleaned and physically handed back to the landlord. During that time some creditors of the first defendant agreed to compromise their positions in the way suggested in the correspondence, namely by the second defendants making the net equity of their Rotorua property available for distribution in addition to the limited assets of the first defendant.

[13] At 12.06 pm on 28 March Mr Norris registered a caveat in favour of his company over the Rotorua property claiming an interest in that property on behalf of creditors, and on behalf of his company for professional fees. On the afternoon of that day Mr Leonard, a director of the plaintiff company, completed the compromise form with details of the amount owing, and with reference to the fact that security was held for the debt from the guarantors, and returned it to Mr Norris. It arrived on

29 March.

[14] First it is necessary to examine whether, arguably, the plaintiff, by its words or conduct, led the second defendants to believe that it would not enforce the guarantee. Mr Norris was unable to direct me to any unequivocal statement by any

representative of the plaintiff, director or solicitor, to that effect. Nor do I think that such a position can arguably be inferred from the evidence of the events of the week commencing 21 March. Although early on Monday morning the plaintiff had an indication that the defendants would be trying to put together a deal with creditors which would involve the contribution of the equity in the second defendants’ house to a fund to pay creditors, and thereafter the defendants and the plaintiff worked amicably to have the premises vacated and cleaned and in the course of that probably had a number of discussions about how financial matters might pan out, there was no evidence of anything said or done by the plaintiff from which an inference might be drawn that the plaintiff was prepared to forego its rights against the guarantors on the basis of an arrangement along the lines which had provisionally been mentioned. Merely observing the first defendant clearing out the premises, and assisting in limited ways with those tasks, falls well short of leading the second defendants to believe it would not pursue its guarantees.

[15] Further, some indication of the plaintiff’s position at the time can be gleaned from the compromise form it sent to Mr Norris on the afternoon of 28 March, giving details of the amount owing under the lease, in which it specifically referred twice to having security for its debt in the form of the guarantees. If at any point during the previous week it had agreed to forego its rights under those guarantees it would not seem that those statements would have been included in this document.

[16] Whilst it is not, of course, necessary for the defendants to establish this element of an estoppel on an application for summary judgment, I find that they have not laid a sufficient evidentiary foundation from which I can reasonably infer that the plaintiff may have led the second defendants to believe it would enforce its guarantee.

[17] For this reason, the defence must fail. However, I turn to examine the second element of a defence of estoppel, in case my conclusion on the first element should be incorrect.

[18] This element is reliance. Here, a single matter of timing is crucial. At

12.06 pm on 28 March Mr Norris registered the caveat to protect the equity in the

home in accordance with the scheme which was being promoted. Therefore, before then the second defendants must have committed to contributing their equity in the Rotorua property to creditors. The evidence from Mr Leonard, a director of the plaintiff, is that he completed the form that afternoon. As that was the first clear indication that the plaintiff would agree to accept the proposal being promoted by Mr Norris, it follows that the decision to assign the equity in the house cannot have been made in reliance on it as it must necessarily have pre-dated the registering of the caveat which itself took place before the decision was conveyed. Accordingly, the second element of the suggested defence of estoppel does not have an arguable foundation on the evidence.

[19] Finally, the guarantee contained a covenant in the following terms:

1. No release delay or other indulgence given by the landlord to the tenant or to the tenant’s successors or assigns or any other thing whereby the guarantor would have been released had the guarantor been merely a surety shall release prejudice or affect the liability of the guarantor as a guarantor or as indemnifier.

[20] Given the findings I have made on the facts of this case it is not necessary to determine whether or not this clause would, in any event, have prevented the second defendants relying on the plaintiff’s acceptance of the compromise as a defence. The plaintiff briefly argued that it would have had that effect; the second defendants did not argue the point and I refrain from further comment on it.

Outcome

[21] The second defendants have not established that they have an arguable defence to the plaintiff’s claim. Accordingly the application for summary judgment by the plaintiff is successful.

[22] In Mr Norris’s written submissions he took issue with the quantum of the claim. I have reviewed his calculation of rent and note that he has terminated the obligation to pay rent as at 21 March 2011; the claim is in fact for three months rent from 16 January 2011. Liability for rent did not cease on termination of the first defendants’ occupancy. I am satisfied that the calculation of rent, outgoings and interest contained in paragraph 12 of the statement of claim is accurate. Accordingly

there will be judgment for the plaintiff for the sum of $40,838.50, inclusive of interest to 20 April 2011, together with interest at the rate of 12 per cent per annum on unpaid rental of $36,886.53 from 20 April 2011 to the date of payment and costs on a 2B basis with disbursements as fixed by the Registrar (in the absence of

_agreement).

J G Matthews

Associate Judge

Solicitors:

Rout Milner Fitchett, PO Box 580/DX WC70014, Nelson for Plaintiff (john@rmf-law.co.nz ) P A Norris (Administrator) for Defendants

[1] Orix New Zealand Ltd v Milne and Ors CIV-2005-404-4394, 17 May 2007, Rodney Hansen J.