York Trustees Limited v South Canterbury Finance Limited [2012] NZHC 342 (9 March 2012)

Last Updated: 19 March 2012

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2011-404-003662 [2012] NZHC 342

BETWEEN YORK TRUSTEES LIMITED Applicant

AND SOUTH CANTERBURY FINANCE LIMITED

Respondent

Hearing: 21 February 2012

Counsel: M J Matthew for applicant

T J P Bowler for respondent

Judgment: 9 March 2012

_{JUDGMENT OF ASSOCIATE JUDGE ABBOTT}

In accordance with r 11.5 High Court Rules

I direct the Registrar to endorse this judgment

with a delivery time of 4pm on 9 March 2012.

Solicitors:

M J Matthew, Rennie Cox, P O Box 6647, Wellesley Street, Auckland 1141, solicitors for applicant

T J P Bowler, Grove Darlow & Partners, PO Box 2882, Auckland 1140, solicitors for respondent

YORK TRUSTEES LIMITED V SOUTH CANTERBURY FINANCE LIMITED HC AK CIV 2011-404-003662 [9 March 2012]

[1] This application to set aside a statutory demand has its genesis in an advance made by the respondent, South Canterbury Finance Limited (SCF) (now in receivership), to the applicant, York Trustees Limited (York), in late 2008 to refinance an earlier loan.

[2] SCF served a statutory demand on York for $155,358.42, comprising the amount it had advanced for the refinancing together with interest and other charges claimed in terms of a loan agreement dated 8 December 2008 (the same date as the advance).

[3] York contends that SCF cannot claim under that agreement as it was altered in material respects without York’s consent. On that basis, York says that there is an arguable dispute over the claim for interest and other charges. Additionally, it says that it has arguable set-offs for the value of two Porsche cars given as security, and for payments made by York to SCF pursuant to an unenforceable guarantee of a similarly altered loan agreement with a related company.

[4] Lastly, York claims that the demand should be set aside on the grounds of an estoppel arising out of a representation by SCF that it would not pursue York under the loan agreement in exchange for York putting the Porsche cars up for sale and not pursuing proceedings to declare the loan agreements void.

Background

[5] There have been financial arrangements between SCF and companies associated with York’s director and shareholder, Mr Trent Cary, for some years. Initially these were with Waikato Finance Limited (Waikato Finance), a member of the South Canterbury Group. These arrangements included a loan made by Waikato Finance to York under an agreement dated 27 April 2006 (the 2006 loan). This agreement was due for repayment in October 2008. Under that agreement, York agreed to provide security for the loan in the form of a Porsche Cayenne car and a mortgage over a property at 30 York Street, Parnell, with the agreement to mortgage protected by a caveat.

[6] A separate loan, made in March 2006 to Queensland Investments (NZ) Limited (QINZ), of which Mr Cary was director and shareholder, was similarly due for repayment in or about October 2008 (QINZ 2006 loan). The QINZ 2006 loan provided for security to be given over two vehicles: a Range Rover and a Porsche Carrera.

[7] In October 2008, SCF (which by that time had taken over the affairs of Waikato Finance) made an offer to York to refinance the 2006 loan. A similar offer was made to refinance the QINZ 2006 loan. Mr Cary signed a loan agreement dated

20 October 2008 both on behalf of York and as guarantor. Although the agreement states that it was executed on the type-written date of 20 October 2008 there is no evidence as to the actual date of signature or when the signed agreement was given to SCF. This agreement expressly stated that the loan was “to restructure contract –

70222999” (that is, the 2006 loan). The loan was to be for a term of eight months, with the first payment due one calendar month from the date of the agreement (20

November 2008) and the final payment due on 20 June 2009. Although this agreement was signed, the loan was not advanced on 20 October 2008; no reason has been put forward for the delay in the draw-down.

[8] The same circumstances applied to the refinancing of the QINZ 2006 loan. York has produced an agreement bearing the type-written date of 20 October 2008 for a loan “to restructure contract – 70222765” (that is, the QINZ 2006 loan) signed by Mr Cary on behalf of QINZ and as guarantor (the agreement states that both Mr Cary and York are guarantors).

[9] Curiously, both of the 20 October 2008 agreements show the security as the inverse of the position under the 2006 agreements. In other words, York’s agreed to provide security over the Range Rover and Porsche Carrera, and QINZ agreed to provide security over the Porsche Cayenne and the York Street property.

[10] The advance and refinancing eventually took place on 8 December 2008. SCF says that on that date York and SCF entered into a further loan agreement on identical terms as the document bearing the date 20 October 2008, save for handwritten amendments to the date, the amount of the loan (which was increased by

the interest that had become due between 20 October 2008 and 8 December 2008), and the due dates for the first and last payments (to reflect the later draw-down). In addition, the page setting out the security details was changed to provide for security over the Porsche Cayenne and the York Street property as had been the case under the agreement for the 2006 loan. This new page was identical to the security page previously inserted into the agreement between QINZ and SCF of 20 October 2008.

[11] This document appears otherwise to be identical to the 20 October 2008 agreement, even to the point of Mr Cary’s initials and signatures. This suggests that the 20 October 2008 document was amended by handwritten changes (detailed above) and that the third page was simply a substitution of the security page from the (signed) QINZ agreement of 20 October 2008.

[12] The above view of the differences between the documents of 20 October

2008 and 8 December 2008 is reinforced by a comparison of the two QINZ documents of October and December 2008. The QINZ documents show the same changes, including the reverse substitution of the page stating the securities.

[13] The refinancing was effected “internally” by crediting the new advance to the

debt due to Waikato Finance. At that point the 2006 loan was repaid.

[14] York failed to make the payments stipulated under the 8 December 2008 document (although it did make payments on 19 March 2009 and 3 July 2009, totalling $11,697.41). When York did not repay the loan on the due date, SCF took steps against the securities. On 23 December 2009, after obtaining from SCF copies of the 8 December 2008 documents, York’s solicitors wrote to SCF’s (then) solicitors, referring to the alterations in the 8 December 2008 agreements and contending that they were made without York’s or Mr Cary’s authority. York took the position that the changes were either a counter-offer which had not been accepted or an unauthorised alteration. They contended that the result was that the repossession notices issued by SCF could not be valid as they were not based on a completed agreement.

[15] SCF’s solicitors responded that the arrangement was to refinance the 2006 loan and referred to a delay in acceptance of the original offer to refinance, made in October 2008. SCF took the position that if the amendments were to be considered a counter-offer, then York had accepted that offer and hence SCF’s repossession notices were valid.

[16] This exchange of correspondence appears to have precipitated a meeting in March 2010, in which the alterations to the documents were discussed. There is a dispute as to whether any agreement was reached at that meeting, but one of the outcomes was that Mr Cary put the three vehicles, over which security had been given, on the market for sale. One of the vehicles, the Range Rover, was sold and the sale proceeds were paid in reduction of the loan to QINZ (which was the owner of that vehicle).

[17] In April 2011, SCF made a formal demand for repayment of the loan and all interest and charges incurred under it. It took the same step in relation to the loan to QINZ. SCF also initiated formal steps to take possession of the two Porsche cars, both of which had been in a car dealer’s yard for some months. These steps provoked strong responses from Mr Cary on behalf of both York and QINZ: he again raised the issue of the validity of the 8 December 2008 documents and contended that SCF was estopped from exercising rights against the cars by the arrangements made in March 2010.

[18] SCF did not accept the position taken by either York or QINZ. It served the statutory demand that is the subject of this application on York on 3 June 2011, claiming $155,358.42 (being the sum of the original advance of $122,066.99 together with fees of $2,003 payable at the time of the advance and interest and other charges claimed under the 8 December 2008 document). A separate demand was served on QINZ, but that is not in issue in this application (that demand has not been pursued as QINZ has been struck off the register of companies).

Legal principles on statutory demands

[19] A statutory demand is a demand made on a company, by a creditor for payment of a debt then owing. Failure to meet the terms of the demand gives rise to a presumption that the debtor company is unable to pay its debts,1 which is a ground for bringing an application for liquidation of the company

[20] The Court has the power to set aside a statutory demand, where one or more of the following applies:2

(a) There is a substantial dispute as to whether or not the debt is owing;

or

(b) The company appears to have a counterclaim, set-off, or cross- demand which when set against the sum so demanded results in a net sum due which is less than the prescribed amount; or

(c) The demand ought to be set aside on other grounds.

[21] To succeed under the first ground, the debtor must show a fairly arguable basis on which it is not liable for the amount claimed.3 The Court of Appeal identified what is needed under the second ground in Covington Railways Limited v Uni Accommodation Ltd:4

Then, in order to impeach the statutory demand and overcome the presumption in s 287(a) that the company is unable to pay its debts when it has failed to comply with the demand, it must be able to do more than merely assert that there is an available set-off. It must be able to point to evidence before the Court showing that it has a real basis for the claimed set- off and that accordingly the applicant’s claim to be a creditor is, to the extent of the set-off, seriously in doubt.

[22] In assessing the third ground, the Court must assess whether the creditor’s

_{prima facie entitlement to liquidate the company is outweighed by some factor that}

1 _{See Companies Act 1993, ss 289(a).}

2 _{Companies Act 1993, s 290(4).}

3 Forge Holdings Ltd v Kearney Finance (NZ) Ltd HC Christchurch, M149/95, 20 June 1995 per

_{Tipping J at 2.}

4 [2001] 1 NZLR 272 at [11].

makes it plainly unjust for liquidation to eventuate.5 This discretion is to be exercised on a principled basis in conformity with the purposes for which it was introduced, and not “some ad hoc perception of what individual justice might require.”6

_{Accordingly, is exercised with caution}7 _{There is a higher threshold to achieve under s}

290(4)(c) than under either (a) or (b) to have the demand set aside.8 This is evident in need to have clear reasons to depart from the general policy of the Act that insolvent companies should be put into liquidation. In CIR v Chester Trustee Services Ltd,9

Baragwanath J noted that circumstances where the Court’s discretion could be exercised include:

(a) Where the majority of a company’s creditors oppose a liquidation

order on good grounds.10

(b) Where there is a substantial defect or irregularity in the statutory demand itself, or with the process by which it was served, which would create a substantial injustice if the demand were not set aside.11

(c) Where the statutory demand is being used to facilitate an abuse of process.12

Is there an enforceable agreement?

[23] It is long-established law that if a contractual instrument is altered unilaterally after its execution without the authorisation of a party it becomes void and unenforceable against that party: Pigot’s Case.13 Although Pigot’s Case was

dealing with an alteration to a deed, since the decision in Master v Miller14 the

_{principle has been regarded as applicable to all instruments.}15

5 _{CIR v Chester Trustee Services Limited [2003] 1 NZLR 395 (CA) at [3].}

6 _{Ibid, at [46].}

7 _{Ibid, at [48].}

8 _{John Farrar (ed) Company and Securities Law in New Zealand (Brookers, Wellington, 2008) at 821.}

9 _{CIR v Chester Trustee Services Limited [2003] 1 NZLR 395 (CA).}

10 _{Ibid, at [59]}

11 _{Ibid, at [57].}

12 _{Ibid, at [60].}

13 _{Pigot’s Case [1572] EngR 180; (1614) 11 Co Rep 26b; 77 ER 1177.}

14 _{Master v Miller (1791) 4 TR 320 (KB).}

15 Chilcott v Goss (1995) 1 NZLR 263 (CA) at 269.

[24] Accordingly, a material alteration deliberately made by the promisee, without the consent of the promisor, discharges the contract except against the party making or assenting to the alteration.16 An alteration is “material” if it alters the legal effect of the instrument. This will be the case where an alteration imposes a greater liability on the promisor.17

[25] Thus, to come within the rule in Pigot’s Case, the party who did not make the modifications must:18

(a) not have consented to the alterations, either impliedly or by subsequent approval; and

(b) be able to show that the alteration was material.

[26] There is a dispute in this case as to whether York knew of the alterations. Mr Cary says that he did not have knowledge of the alterations until mid 2009. SCF’s solicitor contends that the 20 October 2008 agreement did not proceed and was replaced by the 8 December 2008 document. However, he does not give any evidence as to communications between the parties ahead of the alterations (and it is accepted that the alterations were made by SCF). The Court cannot determine, in this application, what Mr Cary and York knew at the time of the alterations.

[27] It is clear, however, that the parties intended that SCF would advance sufficient funds to repay the 2006 loan, and that the increased sum and the change to the payment dates reflected the delay in draw-down (which appears to be a consequence of delay on York’s part in returning the 20 October 2008 offer). Further, the change in security appears to have occurred in recognition of an error in the 20 October 2008 agreements. The security pages of the agreements with York and QINZ had been switched between the 2006 agreements and the 20 October 2008 agreements. This seems to have been picked up after York returned the signed 20

_{October 2008 document and the relevant pages were switched back.}

16 _{Justice Glazebrook (ed) Commercial Law in New Zealand (looseleaf edition, LexisNexis) at [8.3.2].}

17 _Ibid.

18 Hall v Wilson CA 164/98, 18 December 1998.

[28] Viewed in this context, the alterations can be seen to have been made so that the loan agreement accurately stated the parties’ intentions, namely for SCF to advance a sufficient amount to repay the 2006 loan. York must have known that interest would continue to accrue on the 2006 loan up until the point of repayment, and that the signed document returned by York needed to be altered in order to correctly set out the intended arrangement – a loan for an eight-month term from the date of the advance.

[29] This has to be contrasted with York’s position. Mr Cary states that he was not informed of the alterations and hence could not have consented to them. He says that the changes were material because the 8 December 2008 document required York to pay a further $4,000.

[30] There is no suggestion in the evidence, nor did I understand counsel for York to contend, that York was seeking to borrow a set amount only as distinct from the amount required to repay the 2006 loan. For example, there is no evidence to the effect that York would contribute from other sources any sum required to top up a fixed sum so as to meet the amount due for repayment. In those circumstances,

comments of the Court of Appeal in Hall v Wilson19 are apposite:

Once it is accepted that the altered document correctly records what the parties wanted it to record, it is unreal to suggest the alteration was not consented to, either impliedly or by subsequent approval. It is not open to the Halls or Parnell Developments now to claim otherwise.

[31] That case is also authority for the proposition that an alteration cannot be material where the alteration is made to a flawed text in order to give accurate effect to the undisputed understanding of the parties. I find that this proposition, which is found in the following passage, applies to the changes SCF made to the principal amount and the payment dates:20

The materiality reason for rejecting Mr Miles’ submission would be based on the same facts. The argument would be that it cannot be a material alteration of a flawed text to alter it to give accurate effect to the undisputed understanding of the parties about what they had agreed to. That, the argument would continue, is precisely what happened here. The closely

19 _{Ibid at 6-7.}

20 Ibid at 7.

related nature of this reason to the first on the facts is matched by the interrelation of the two reasons as a matter of law. A line of Australian authority, notably the judgment of Bray CJ in Armor Coatings (Marketing) Pty Ltd v General Credits (Finance) Pty Ltd (1978) 17 SASR 259, has established that where the parties have reached agreement and then executed a formal contract the Courts will be willing to find an implied authority to supplement the formal document, among other things by altering it, to make it conform to the common contractual intention of the parties where by mistake it does not do so.

[32] If this were the full extent of the possible evidence to be given at trial, I would have no doubt that this is the proper conclusion to reach. However, this is an application to set aside a statutory demand. I have to be satisfied that the applicant does not have an arguable case. Mr Cary’s evidence is that he knew nothing of the alterations until late 2009. Although that evidence must be doubtful with respect to the additional interest and the payment dates, I cannot completely discount it with regard to the changes made to the security.

[33] Although it seems likely (in part; having regard to ownership of the securities) that the securities set out in the two 20 October 2008 agreements were switched in error, no evidence has been given by SCF to the effect that there was no intention to change the security from that provided under the 2006 loan. Nor is there mention of any communication between the parties on this point prior to 8 December

2008. Whilst I accept that there is also no evidence from Mr Cary (on York’s behalf) to say that he intended to change the security from the 2006 loan, that inference can be drawn from the fact that he accepted both 20 October 2008 loan offers with the security details reversed. This change in the December 2008 agreements may be a material one. Further evidence is needed before it is possible to say what the parties’ intention were on this point.

[34] By the slenderest of margins, I have come to the view on the evidence before the Court that the 8 December 2008 “agreement” contains material alterations to which York had not agreed. The consequence is that I find that the sum demanded by SCF is the subject of an arguable dispute in relation to interest and fees and other charges claimed under the agreement. I do not accept the alternative submission on behalf of York that it was entitled to fall back on the 2006 agreement for its

entitlement to payment of interest and later charges. That agreement was discharged

(apart from security, to which I will refer later) by the new advance.

[35] Counsel for York accepted that the alterations did not preclude a demand being made for payment of the principal amount of the advance ($122,066.99). This leads me to the next ground for the application, namely that York has arguable set- offs which (largely) extinguish the demand in respect of the principal sum.

Are there arguable set offs?

[36] York claims a right to set-off two alleged counter-claims. The first concerns the two Porsche cars that SCF sold, allegedly in exercise of its rights of security. The second is in respect of money allegedly paid by York under its guarantee of the QINZ loan.

[37] As to the first of these, counsel for York submitted that if the 8 December

2008 agreements are voided by the alterations, SCF’s right to security under those agreements falls away. In that event, SCF was not entitled to sell the vehicles (in exercise of security rights), and is liable for a failure to realise true market value (counsel referred to evidence from Mr Cary that the cars were worth significantly more than SCF sold them for).

[38] In respect of the second aspect of counter-claim, counsel for York argued that if the 8 December 2008 agreement with QINZ was unenforceable, York’s guarantee of obligations under that agreement falls away also. In that event, counsel submitted that York is entitled to recover payments made pursuant to the guarantee, which arguably included the proceeds of sale of the Carrera (on the basis that York contends that the Carrera belonged to it).

[39] I do not accept that York has an arguable counter-claim, and hence potential set-off for the first aspect, but cannot discount the possibility in relation to the second. I will deal with each in turn.

[40] I accept that it is arguable that if the agreements are void because of material alterations, the owner of the cars might have a claim if they were sold at undervalue. I did not accept, however, that York has made out a claim for sale at undervalue. The cars had been on the market for over a year at the values that York contends they should have been sold. SCF has given evidence that they were overvalued. The fact that they did not sell supports this. More significantly, the cars were sold at auction. Given the amount of time they had been on the market beforehand without selling, I regard York’s evidence of potential value as wishful thinking, and the auction price as fair market value. SCF has given credit to York for the net proceeds of sale of the Porsche Cayenne. Any set-off in respect of that car is therefore limited to the costs of sale. There is no evidence of those costs, but there is evidence that the sale costs for the Carrera were $2,741. Allowing for the fact that the Cayenne sold for slightly more, I accept that there could be an arguable dispute over costs of sale up to the sum of, say, $3,500 (and I have erred in favour of York in giving that figure).

[41] This takes me to the second aspect of the claim to set-off, namely, whether York should be credited with the proceeds of sale of the Carrera. SCF has applied those proceeds in reduction of the loan to QINZ.

[42] SCF sought to resist this on three grounds:

(a) The proceeds should go to the QINZ loan as the car belonged to

QINZ.

(b) It was for QINZ, and not York, to advance the argument of unenforceability.

(c) SCF had a continuing security over the Carrera, granted at the time of the 2006 agreement with QINZ. This argument had also been advanced in relation to the Cayenne, and has been found to be at least arguable in a caveat proceeding over the agreement to mortgage given

_{as further security for York’s 2006 loan.}21

21 South Canterbury Finance Ltd (in rec) v York Trustees Ltd HC Auckland, CIV-2011-404-3433, 7

October 2011.

[43] As to the first ground, the evidence about ownership is confused. Initially, York accepted that the Carrera was owned by QINZ. Subsequently, however, Mr Cary altered his evidence and produced documents supporting a claim that at material times it belonged to York. I am unable to resolve the issue on this application.

[44] I cannot accept the point being made in the second ground. A guarantor must have the right to raise an argument over the enforceability of the guarantee.

[45] As to the third ground, counsel for York raised an issue as to whether there was in fact continuing security. As that would be a matter of record, I allowed SCF the opportunity to produce further evidence. SCF has produced extracts from the Register of Securities under the Personal Properties Security Act 1999, but they appear to indicate that the current registration is from 8 December 2008, suggesting it is based on the 8 December 2008 agreement. I accept, therefore, that there is an argument available to York that that security is unenforceable.

Has York an argument based on estoppel?

[46] York’s last ground for setting aside is that it reached a compromise with SCF in March 2010, that SCF would not pursue its debt if Mr Cary allowed SCF to take possession of the cars and refrained from taking legal action to have the agreements declared void. York contends that it would be unconscionable for SCF to resile from this arrangement.

[47] The elements to establishing estoppel by representation are widely accepted:

(a) A belief or expectation created through some representation by the party against whom it is alleged;

(b) The belief is reasonably relied upon by the party alleging the estoppels;

(c) Detriment will be suffered by the party alleging the estoppel if the belief or expectation is departed from; and

(d) It is unconscionable for the other party to depart from that belief or expectation.

[48] I am not persuaded that any arrangement reached in March 2010 was other than allowing York time to try to realise the securities himself. The meeting at which the arrangement was reached (whatever the arrangement was) was held on a without prejudice basis. There is no contemporaneous record of any agreement, and the actions that followed (Mr Cary arranging to put the cars on a car yard, and not commencing any Court proceedings) are equivocal: they are equally consistent with SCF giving York time to realise the best value from the securities, and with Mr Cary and York appreciating that there was little to be gained from commencing Court proceedings given that York would, in any event, still be liable for the principal amount advanced. Against that background, it cannot be unconscionable for SCF to take steps to recover its advance.

[49] I am not persuaded that York has established a credible basis for a representation, let-alone an agreement, in March 2010 as a basis for an estoppel. The evidence suggests no more than SCF allowing Mr Cary time to try realise the securities himself. The meeting at which the arrangement was reached (whatever the arrangement was) was held on a without prejudice basis. There is no contemporaneous record of any representation on agreement, and the actions that followed (Mr Cary arranging to put the cars on a car yard, and not commencing any Court proceedings) are equivocal: they are equally consistent with SCF giving York time to realise the best value from the securities, and with Mr Cary and York appreciating that there was little to be gained from commencing Court proceedings given that York would, in any event, still be liable for the principal amount advanced. Against that background, York has failed to establish the first element of estoppel, namely, that there was an expectation created that SCF would not pursue its debt if Mr Cary allowed SCF to take possession of the cars and refrained from taking legal action to have the agreements declared void. Without being able to establish such a representation, issues of reliance, detriment and unconscionability fall away.

Decision

[50] I have accepted, albeit by the slimmest of margins, that York has an arguable case that the loan agreement is unenforceable, and that interest and costs claimed under that agreement may not be recoverable. I have also accepted that there is uncertainty over the ownership of the Carrera car, and whether SCF has a continuing security over it in respect of the QINZ loan, and hence a possible claim and set-off in respect of the proceeds of sale credited to QINZ.

[51] On the other side of the ledger, I find that SCF has an undisputable claim to the sum of $122,066.99 advanced to York on 8 December 2008.

_{[52] For the purposes of the present application the net position is:}

SCF is entitled to repayment of its advance

$122,066.99

less

_{payments made by York 11,697.41}

credit for the proceeds of sale of the

_{Cayenne car}

32,380.87

the disputed entitlement to the proceeds of sale of the Carrera car

31,877.39

_{the disputed entitlement to recover}

_3,500.00

_{the costs of sale of the Cayenne car}

_79,455.67

_{Undisputed amount due 42,611.32}

[53] The disputes over the interest and charges of $33,291.43 (being the amount demanded of $155,358.42 less the principal advanced of $122,069.99) and the disputes over the entitlement to the proceeds of sale of the Carrera (and costs of its scale) will need to be determined in the District Court.

[54] The application to set aside the statutory demand is set aside in respect of the sum that cannot be disputed, namely $42,611.32. York is to comply with the demand in that amount, within 14 days from delivery of this judgment. If York does not comply, SCF may apply in the usual way for York’s liquidation based on the demand.

[55] Although York has succeeded in some of its arguments, it has not been successful in having the demand set aside as a whole. On balance, and taking into account that York’s disputes and claims to set-off are only just arguable, I consider that SCF should be entitled to costs as the successful party. York is to pay SCF’s

_{costs on a scale 2B basis, together with disbursements as fixed by the Registrar.}

Associate Judge Abbott