Greymouth Holdings Limited v Jet Trustee Limited [2014] NZHC 1418 (26 June 2014)

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BETWEEN	GREYMOUTH HOLDINGS LIMITED First Plaintiff R M P DUNPHY Second Plaintiff P H AND J A MASFEN Third Plaintiffs
AND	JET TRUSTEES LIMITED First Defendant J G STURGESS Second Defendant _cont

Hearing:	On the papers.
Appearances:	J A Farmer QC and M D O'Brien for Greymouth Petroleum Holdings Limited P G Skelton QC and M Tushingham for John Sturgess & Associates Limited
_Judgment:	_{26 June 2014}

This judgment is delivered by me on 26 June 2014 at 3pm pursuant to r 11.5 of the High Court Rules.

..................................................... Registrar / Deputy Registrar

GREYMOUTH HOLDINGS LTD & ORS v JET TRUSTEES LTD & ORS [2014] NZHC 1418 [26 June 2014]

[1] John Sturgess & Associates Limited (JSAL) obtained judgment in the 5442 proceeding against Greymouth Petroleum Holdings Limited (GPHL) for unpaid management fees of $939,242. In the same judgment, GPHL obtained judgment against JSAL in the 5309 proceeding for damages for negligent performance by JSAL of the management services agreement pursuant to which the fees were owed. However, these damages have not yet been quantified.

[2] After the judgment was sealed, JSAL obtained an interim charging order over GPHL’s assets. Following service of the interim charging order, GPHL paid into court, pursuant to r 17.57 of the High Court Rules, the sum of $1,035,946, being the amount of the judgment plus accrued interest and costs. GPHL stipulated that the money was to be held in court pending the outcome of the hearing to be held in September 2014 to determine the quantum of the damages to which it is entitled under the judgment, or order of the Court. JSAL now applies for an order directing that the money held in court be paid to it.

[3] GPHL opposes the money being paid to JSAL until the damages to which it is entitled against JSAL are quantified, particularly when it expects that these damages will equal or exceed the amount for which JSAL has obtained judgment. GPHL submits that it has an equitable right to set off its judgment against JSAL’s judgment because JSAL’s claim for management fees is impeached by GPHL’s cross-claim for damages for negligent performance of the services for which those fees were payable.

(a) Does the Court have a discretion whether or not to pay the money held in court to JSAL?

Does the Court have a discretion whether or not to pay the money held in court to JSAL?

(1) A person served with an interim charging order may pay the money affected by the order into court.

(2) The money paid into court must be paid out in accordance with the result of the proceeding or an order of the court.

[6] JSAL initially took the view that the words “must be paid out” mean that it has an absolute entitlement to the money and that the Court has no discretion to order otherwise. JSAL contended that “the result of the proceeding” must mean the result of the 5442 proceeding because that is the proceeding in which it obtained judgment and the interim charging order.

[7] However, JSAL now accepts that in a case such as the present, where a judgment creditor is seeking to enforce a judgment, any money paid into court following service of an interim charging order is to be dealt with in accordance with the Court’s order under r 17.59. This rule provides:

(1) The entitled party may apply to the court to have an interim charging order made final at any time after judgment is sealed.

(2) The court may make orders and give directions for the disposal of money paid into court under rule 17.57 or 17.58.

[8] JSAL’s recent concession that the Court retains a discretion in respect of the money held in court is appropriate having regard to the history of the rules and the enforcement regime of which they form part. An interim charging order can be obtained before or after judgment. After a judgment is sealed, a charging order may be issued as of right. A charging order has the effect of charging the estate, right, title or interest of the liable party in the property described in the charging order. It does not give possession to the entitled party or enable it to recover the fruits of its judgment immediately. It merely prevents any person served with the order from

dealing with the property described in the order, except in accordance with the High

[9] A person served with an interim charging order, including a third party, may pay the stipulated amount into court. However, the money does not then become immediately due and payable to the party who obtained the interim charging order; rather, it is held by the Court pending the outcome of the proceeding or further order of the Court.

[10] If, contrary to this analysis, r 17.57 was interpreted as a mandatory obligation requiring the Court to pay any money held in court to the party who obtained the interim charging order as soon as that party obtains judgment, there would be no need to make the interim charging order final and there would be no room for the Court to exercise its discretion under r 17.59. That is plainly not what was intended.

[11] This interpretation is consistent with the enforcement scheme provided under the previous rules. Rule 17.57 is the current equivalent of r 583 in the previous rules:

Any person served with a charging order nisi may pay into Court any money affected by the order, to abide the result of the proceeding or the order of the Court.

(1) At any time after he has sealed judgment in the proceeding, the judgment creditor may apply to the Court to have a charging order nisi made absolute.

(2) On an application under subclause (1), the Court may make such orders and give such directions for the disposal of the money paid into the Court pursuant to r583 or 584 as may be just.

[13] Money paid into court pursuant to r 583 was held to abide the result of the proceeding or the order of the Court. The Court was empowered to make

appropriate orders for the disposal of the money paid into court pursuant to r 585(2)

[14] Charging orders nisi and absolute have been replaced in the new rules with interim and final charging orders. The words “to abide the result of the proceeding” have been replaced with the words “must be paid out in accordance with the result of the proceeding”. Although a literal reading of the new rule might suggest a change in meaning, there is nothing to indicate that any substantive change was intended. The change in wording was merely to modernise the language but the overall scheme of the rules remains unchanged. The use of the word “must” in r 17.57 reflects that the money must eventually be paid out. When it should be paid and to whom it should be paid is within the discretion of the Court.

[15] Rules 17.57 and 17.59 are linked; money paid into court pursuant to r 17.57 following service of an interim charging order, which may be obtained before or after judgment, is to be held pending the outcome of the proceeding or order of the court. In a case such as the present, where judgment has been obtained and the judgment creditor is seeking to enforce the judgment, the mechanism for payment is contained in r 17.59(2) and is exercised when the interim charging order is made final.

[16] Although JSAL’s application was made pursuant to r 17.57, GPHL sensibly confirms that JSAL’s memorandum dated 19 June 2014 should be treated as an application under r 17.59. I proceed on this basis.

[17] The normal rule is that a judgment creditor is entitled to the fruits of its judgment. The main exception is where a stay of execution is ordered pending an appeal so that an appeal right is not rendered nugatory. Although both sides appealed against various aspects of the judgment, there was no challenge to the judgment in favour of JSAL for unpaid management fees.

[18] The Court also has a discretion under r 17.29 to stay execution of a judgment, even if there has been no appeal from it, in circumstances where a stay is necessary to avoid a substantial miscarriage of justice. An example is where the judgment

debtor has been made bankrupt or placed in liquidation and a stay is required to ensure that the judgment creditor does not obtain a priority to which it is not entitled as against other creditors in the same class. The Court has a similar discretion when considering what order should be made under r 17.59(2) in relation to payment of money paid into court following service of an interim charging order.

[19] GPHL’s principal contention is that it would be unjust for JSAL to receive payment of its judgment for unpaid management fees when GPHL has obtained judgment against JSAL for negligent performance of the management obligations in respect of which those fees were payable. GPHL claims that it has an equitable set-off for the unquantified damages to which it is entitled under the judgment.

[20] An equitable set-off arises where a plaintiff ’s claim is impeached by a defendant’s cross-claim. Equitable set-off may be raised as a defence and operates to reduce or extinguish a plaintiff’s claim to the extent of the proven cross-claim. Had GPHL defended JSAL’s claim for management fees by pleading equitable set-off as a defence, there is no doubt that it would have succeeded. JSAL’s claim for management fees is plainly impeached by GPHL’s cross-claim for negligent performance of the management duties for which those management fees were payable. The parties did not contract out of their rights of set-off in the management services agreement. Had equitable set-off been pleaded as a defence, no judgment would have been entered on JSAL’s claim until the quantum of damages payable to GPHL was determined. Any judgment in favour of JSAL would be restricted to the amount, if any, by which the management fees exceeded the damages.

[21] However, GPHL did not defend JSAL’s claim on the basis of equitable set-off and JSAL now has judgment on its claim. Nevertheless, GPHL submits that while JSAL’s underlying cause of action has merged in the judgment, GPHL’s right of set-off was not lost and subsists in its cross-judgment.

[22] The distinction between a cross-claim giving rise to an equitable set-off which may be raised as a defence to a claim and the Court’s jurisdiction to stay execution of a judgment where there is such a cross-claim is discussed in Derham on

²Derham on the Law of Set-Off (4^thed, Oxford University Press, 2010), at 2.103.

... it is also difficult to accept that a set-off of judgments and orders in contexts other than costs against costs is an equitable set-off. In the first place, equitable set-off is a defence to an action to enforce payment of the debt or other monetary obligation, the defence operating in equity as a complete or partial defeasance of the plaintiff’s claim. A set-off of judgments and orders, on the other hand, is not a defence in that sense. Essentially, it is a procedural device which determines the amount for which execution may issue, and which may provide a ground for a stay of enforcement. Secondly, the practice of setting off judgments and orders was developed in the common law courts (as opposed to courts of equity) long before the Judicature Acts. It is true that the availability of the set-off has been described as an ‘equitable’ jurisdiction. However, that expression was used in the sense of justice and fairness, as opposed to the jurisdiction of the Court of Chancery.

The true basis of the set-off is the court’s inherent jurisdiction. Its purpose is to prevent absurdity or injustice, and to do that which is fair. It has long been accepted that the inherent jurisdiction is not confined to judgments in the same action, or the same court, without it being suggested that the claims nevertheless must be closely connected as for an equitable set-off.

[23] In Grant v NZMC Ltd, the leading authority in New Zealand on equitable set-off, Somers J confirmed that the Court may stay execution of a judgment where it would be inequitable to allow the judgment creditor to proceed and execute the judgment without bringing a cross-claim into account, including an unliquidated claim for damages:³

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. That equitable right was not limited to liquidated cross-claims but extended to unliquidated claims for damages.

[24] Whether it is correct to characterise GPHL’s judgment for unquantified damages as giving rise to a true equitable set-off as GPHL contends, the fact that the underlying claims are interdependent, each calling into question and impeaching the other, is relevant to the exercise of the Court’s discretion under r 17.59.

[25] Schofield v Church Army provides an illustration of this.⁴In that case, the Court had to consider how to exercise its discretion under Ord. 30, r 6 of the County Court Rules 1981, which is broadly equivalent to r 17.59. Mr Schofield, a former

dismissal. He obtained a garnishee order nisi over the Church Army’s bank account. The Church Army’s bank paid the money into court and Mr Schofield applied for the money to be paid out to him. The Church Army resisted the application on the basis that it was pursuing a claim against Mr Schofield for damages for theft while he was in its employ.

the court may ... after hearing the judgment creditor and the judgment debtor if they appear, order the payment out of the money to the judgment creditor or make such other order in the proceedings as may be just.

[27] The Court concluded that the scope of its discretion under this rule was the same as its discretion to make a garnishee order absolute or to stay execution of a judgment, and that the discretion should only be exercised where “there are special circumstances which render it inexpedient to enforce the judgment”.⁵

[28] The Court directed that the money be retained in court pending adjudication of the Church Army’s claims. In reaching this conclusion, the Court took into account that the Tribunal that determined Mr Schofield’s employment claim had no jurisdiction to entertain the Church Army’s cross-claim for theft. The Court was also concerned that if the money was paid to Mr Schofield and the Church Army subsequently succeeded in its claim against him, there was a risk that it would not be able to recover the money.

[29] Similar considerations apply in this case. The underlying claims gave rise to rights of equitable set-off which the parties did not contract out of. There is a real risk that JSAL will not be able to satisfy the judgment obtained by GPHL if the money held in court is paid to JSAL now. JSAL was formed for the purpose of providing management services to GPHL. It has not received management fees since the purported suspension of that contract in February 2011. There is no evidence to suggest that it has any substantial assets. It appears that JSAL’s solicitors will receive the benefit of any payment made to JSAL at this stage. GPHL is justifiably concerned that JSAL will not be able to pay the amount owing under its

_{judgment, when it is quantified. That would leave GPHL exposed to the
risk of}

paying JSAL’s management fees in full but not receiving the benefit promised by

[30] There can be no suggestion that GPHL has been dilatory in pursuing its claim. It obtained judgment on its claim at the same time as JSAL. The fact that GPHL’s judgment has not yet been quantified is only because the Court did not have sufficient information at the time judgment was given to determine the relevant losses based on the particular findings of negligence. It does not seem appropriate that JSAL should secure a significant advantage as a result of the fact that the damages have not yet been quantified through no fault on GPHL’s part.

[31] Notwithstanding these factors, JSAL submits that the money held in court should be paid to it now because, even if GPHL’s damages were already quantified in the judgment, this would be a cross-judgment that cannot be set off against JSAL’s judgment. JSAL’s solicitors claim to have a particular lien over JSAL’s judgment and assert that their unpaid costs in relation to the 5442 proceeding exceed the amount of JSAL’s judgment. JSAL notes that although the proceedings were heard together, they were not consolidated.

[32] JSAL relies on r 11.25 which enables cross-judgments to be set off against each other with leave of the Court but not if this would prejudice a solicitor’s lien for costs. Rule 11.25 provides:

(1) Cross judgments may be set off against each other by leave of the court if they are between the same parties and for any 1 or more of the following:

(2) Leave must not be granted under subclause (1) if the set-off would prejudice any solicitor’s lien for costs in the particular proceeding against which the set-off is sought.

[33] GPHL contends that JSAL’s solicitor’s lien is subject to any prior equity and that its right of equitable set-off arose when JSAL’s negligence caused loss. This was prior to the commencement of the proceeding and therefore before any solicitor’s lien could arise.

[34] I do not consider that r 11.25 assists JSAL. First, the rule applies only to money judgments. Until GPHL’s judgment is quantified, the rule has no application. Second, a solicitor’s lien is subject to any prior equity because, as with an assignment, the client is unable to confer greater rights on its solicitors than it possesses. It follows that the solicitor’s lien is not prejudiced by the set-off because it was always subject to it. Third, although the proceedings were not formally consolidated for technical reasons, they were heard together and the issues in both proceedings were inextricably linked. It would be artificial to suggest that “the particular proceeding” in which the costs were incurred was the 5442 proceeding.

[35] In Eclipse Dairy Co Ltd v Thompson, Smith J concluded that r 302 of the Code of Civil Procedure, which was in materially the same terms as r 11.25, applies to counterclaims that are in the nature of independent actions, but not to c o u n t e r c l a i m s a r i s i n g o u t o f t h e s a m e s u b j e c t m a t t e r a s t h e c l a i m : ⁶

I am of opinion that Rule 302 applies to judgments in independent actions, and that claim and counterclaim not arising out of the same subject-matter are to be regarded as independent actions. The words ‘in the particular action in which the set-off is sought’ clearly contemplate some other action

... the better opinion is that this rule applies only where the counterclaim is a

counterclaim which does not arise out of the same subject-matter as the claim is to be regarded really as a cross-action, although it is not so technically, as it is not commenced by a writ of summons. ... the cross- judgments referred to in Rule 302 ought then to be construed as comprising both cross-judgments in independent actions and separate judgments on claim and counterclaim when they do not arise out of the same subject- matter.

[36] Although, technically, the 5442 proceeding was an independent action, for the purposes of r 11.25, the claims in the 5442 proceeding should be regarded as counterclaims to the claims pursued in the 5309 proceeding. These counterclaims arose out of the same subject-matter, they were inextricably linked with the claims and were dealt with together. In these circumstances, r 11.25(2) does not apply.

judgment before GPHL’s cross-judgment is quantified, this could result in a serious injustice. The interests of justice require that the money held in court be retained for

a limited period to enable the damages for which GPHL has obtained judgment to be quantified.

[38] JSAL’s application for a final charging order is declined at this stage, as is its application for immediate payment of the money held in court. These applications can be reconsidered when the damages for which GPHL has obtained judgment are quantified. Execution of JSAL’s judgment is stayed until then.

High Court of New Zealand Decisions

Greymouth Holdings Limited v Jet Trustee Limited [2014] NZHC 1418 (26 June 2014)