21ST CENTURY INVESTMENTS LTD V ANZ NATIONAL BANK LTD HC AK CIV-2010-404-007366

21ST CENTURY INVESTMENTS LTD V ANZ NATIONAL BANK LTD HC AK CIV-2010-404-007366 25 February 2011IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2010-404-007366BETWEEN 21ST CENTURY INVESTMENTS LTDApplicantAND ANZ NATIONAL BANK LTDRespondentHearing: 25 February 2011Appearances: P Moodley for ApplicantM J Tingey and NFD Moffatt for RespondentJudgment: 25 February 2011ORAL JUDGMENT OF ASSOCIATE JUDGE BELLSolicitors:Brookfields, PO Box 240, AucklandBell Gully, PO Box 4199, Auckland[1] 21st Century Investment Ltd applied on 9 November 2010 to set aside astatutory demand served on it on 28 October 2010. The demand by the ANZNational Bank is for $794,909.52, said to be made up of a loan balance of$788,493.84 and an overdrawn current account balance of $6,415.68. Theapplication is made under s 290(4)(a) of the Companies Act, that is, that there is asubstantial dispute whether or not the debt is owing.[2] On applications under s 290(4)(a), the applicant must show that there is arguably a genuine and substantial dispute as to the existence of the debt. In his written submissions, Mr Tingey suggested that the test is that the applicant must show a strong prima face case that the existence of the debt is subject to a genuine and substantial dispute. The authorities do not support the proposition that there is a burden on the applicant to a strong and prima facie standard. After discussion, Mr Tingey withdrew that aspect of his submissions.[3] The task before the Court is not to resolve the dispute but to determine whether there is a substantial dispute that the debt is due. The mere assertion that there is a dispute is insufficient. Material short of proof is required to support theclaim that the debt is disputed. If such material is available, the dispute shouldnormally be resolved other than by means of proceedings in a liquidation court. It isnot usually possible to resolve disputed questions of fact on affidavit evidence alone,particularly when issues of credibility arise. For these propositions, Mr Moodleycited the decision of Associate Judge Abbott in North Harbour Equine Hospital Ltdv Little HC Auckland CIV-2006-404-7585, 19 February 2007. That case referred towell-known authorities such as Queen City Residential Ltd v Patterson Co-PartnersArchitects Ltd (No. 2) (1995) 7 NZCLC 260,936 and United Homes (1988) Ltd vWorkman [2001] 3 NZLR 447(CA).[4] In his written submissions, Mr Moodley raised an objection that the statutorydemand referred to loan balances and took the point that there was in fact only oneterm loan agreement in issue in this case. That is an insignificant matter. Unders 290(5), a demand must not be set aside for reason only of a defect or irregularityunless the Court considers that substantial injustice would be caused if it were not setaside. Mr Moodley did not develop his submission in oral argument and he wasright not to do so. It is a mere irregularity which does not cause any substantialinjustice. The matter needs to be considered on more substantial arguments that MrMoodley developed.[5] 21st Century Investment Ltd is a property developer run by Duong Hai Ha. In November 2005, it took a term loan from the bank for the sum of $976,000. It was a term loan for 10 years with interest payable monthly in arrears. The security for the loan was a first mortgage over a property at 10 Middlemore Road, Otahuhu,and a guarantee given by Mr Ha. In March 2006, the company sold the MiddlemoreRoad property. The bank gave a discharge on the company's solicitors' undertakingthat they would not release the discharge until a replacement security had beenexecuted over a property at 1265 Alfriston Road. The solicitors concerned used thedischarge without the replacement security being put in place. I make it quite clearthat Mr Moodley and his firm were not involved in any way at all in theconveyancing. Apparently, the bank became aware of the error only in late 2008.Understandably, the lack of security has soured relations between the company andthe bank.[6] Mr Ha says that there were negotiations on a without prejudice basis in 2009 and 2010. The bank issued a liquidation application against the applicant and that application was later withdrawn. The applicant paid the bank $48,252.95 on 1 July 2010, $180,000 on 16 July 2010 and $20,000 in September 2010. The effect was to pay off certain amounts of interest and costs and also to reduce the principal owed under the term loan. The parties are agreed that the principal sum was reduced to $779,574.38 – that is aside from any interest and costs.[7] At the same time as the term loan contract, the company also had a current account with the bank. The company was expected to make payments into the current account out of which the bank could then make debits for interest which were in turn credited towards interest and other costs falling due under the term loan contract. The company could operate that account in overdraft within limits.[8] For the bank's power to make charges under the term loan contract inaddition to interest, the bank referred to clauses within paragraph 10 of the contract. They include the following:10(b) Payments under this agreement must be made on demand to the address at the Bank's branch specified above;(c) The Bank may without notice debit any amount due under this agreement at any time to any of the Customers' accounts withthe Bank;(f) The Bank may apply payments received under this agreement in whatever order it chooses.[9] More importantly, the agreement also provides an acceleration provision. The material wording for this case is in paragraph 13:DefaultThe Bank may by written notice to the Customer: (i) cancel any undrawn amount of the Loan (any amount cancelled will not be available to the Customer); and/or (ii) require immediate repayment of the Loan andpayment of all interest and other amounts owing under this agreement if:(a) default is made in the payment of any amount due under this agreementor on any of the Customer's accounts with the Bank or under any liabilitythe Customer has to the Bank;..[10] The exercise of the power of acceleration under that provision is in issue in this application.[11] I begin with the current account debt of $6,415.68 referred to in the statutorydemand. On 28 October 2010, the date of the statutory demand, the account was inoverdraft to the sum of $6,415.68. The company has put in evidence a bankstatement recording this indebtedness. The statement also shows that by 12November 2010, by which time the applicant had applied to set aside the statutorydemand, the amount had reduced to $2,631.24. Mr Tingey pointed out that thatreduction in indebtedness had arisen largely because the bank had reversed interestpayments towards the term loan because there were not enough funds in the currentaccount.[12] Apart from one matter of current account fees and interest which were the subject of a demand by the bank on 1 October 2010, the bank had not made demand calling up the overdraft under the current account until it issued the statutory demandon 28 October 2010. Mr Moodley submitted that the statutory demand could not beused to call up the amount under the current account. It appears that this currentaccount operated on the basis that there had been an overdraft limit, that thecustomer was entitled to pay moneys in and take moneys out within overdraft limits,and the bank would have the power to require repayment of overdrawn amounts.The bank's terms for operating the account were not put in evidence. Theapplication to set aside makes it clear that the applicant disputed his liability underthe overdrawn current account. It is referred to in ground (d) of the application.While the point about the need for a separate demand was not expressly pleaded,there is enough in the pleading to put the bank on notice that this would be a live issue in the hearing today. The bank says that it is taken by surprise by Mr Mr Moodley's submission that the statutory demand is ineffective to requirepayment under the overdraft. The point was taken late by Mr Moodley. It was notput in his written submissions filed before the hearing. Nevertheless, although thepoint was taken late and the bank is taken somewhat by surprise, on the pleadingsthe matter is still a live issue and I am able to consider it.[13] The authority that Mr Moodley relies on is a decision of Master Kennedy-Grant in Keene v Okere Holdings Ltd HC Hamilton M No. 209/ 95, 30 November1995. In that case, a statutory demand had been used as a notice of cancellationunder an agreement for sale and purchase of real estate. Master Kennedy-Grant heldthat a statutory demand could not also be a notice of cancellation.[14] He said at page 9:A statutory demand must, in terms of s 263(2)(a) of the Companies Act 1955 as amended:...be in respect of a debt that is due...when the notice was served. The debt in this case was not due when the notice was served because, on the facts of this case, the debt did not become due until the notice was served. A notice which creates the debt cannot be said to be given in respect of a debt that is due when the notice is given.He was there referring to the provisions of the Companies Act 1955, but to all intents and purposes the provision in the 1993 Act is comparable. S 289 of the 1993 Act says:A statutory demand is a demand by a creditor in respect of a debt owing bya company made in accordance with this section.Both provisions are entitled to the same interpretation.[15] I respectfully follow the decision of Master Kennedy-Grant. Applying theKeene decision, it is arguable that there was not an enforceable debt to the bank on the current account until the bank made demand. The bank must first make demand of the customer before there can be a debt owing for funds overdrawn. Once thatdebt is established, then the statutory demand can be issued. It is not open to thebank to use the statutory demand to create the liability. That is sufficient to showthat there is an argument whether the company is liable for the funds alleged to bedue under the current account. That may be a somewhat academic point becausecopies of bank statements for the current account handed up to me show that at1 February this year, the account was in credit.[16] I move to the term loan. The main matter in issue is the bank's accelerationof the loan. The process followed by the bank was to make demand through its solicitors on 1 October 2010. That letter required payment by Friday, 8 October2010. The company's solicitors replied on 7 October 2010. The bank's lawyerswrote again on 12 October 2010 requiring payment by 4:00 pm, 14 October 2010. On 15 October 2010 the bank itself gave a notice directly to the company and to Mr Ha accelerating and demanding payment of $797,729.88 by 22 October 2010. Thatwas then followed by a letter by the company's solicitors on 18 October 2010.[17] I turn back to paragraph 13(a) of the term loan, the acceleration provision. At least two conditions are to be satisfied by the bank before it can accelerate. First, there must be an unsatisfied liability of the customer, and second, there must be a default by the customer. The question of default needs some discussion.[18] The word "default" is capable of a wide or a narrow interpretation. The wideinterpretation is that there is a default by a customer when the customer does not pay a liability to the bank whether or not the customer knows of the liability. The narrow interpretation is a more generous one to the customer: the customer is in default only if the customer is aware of the liability and then fails to pay. I take the latter interpretation, that is, that the bank must make the customer aware of the liability before it can invoke the acceleration power. An example I used during argumentwas an undisputed item in this case, valuer's fees, which the bank said that thecompany should pay. If the bank had kept its knowledge of these valuation fees to itself, that is, regarded the company as liable to pay it but had not told the company that it was required to pay the fees, then the company could not said to be in default if it failed to pay that amount. In other words, inherent in the notion of default is the requirement that the bank must notify the customer of the liability before it can use a failure to meet the liability as a basis for acceleration.[19] The bank does not take serious issue with that position. After all, it took the course in this case of notifying the customer of the liabilities it considered were due,and required the company to meet them before it exercised its power of acceleration. It is not an interpretation that the bank should be uncomfortable with because it is,after all, used to a similar method of giving notice when it has security over land andnotice has to be given under s 119 of the Property Law Act 2007.[20] The question arises as to the amount of notification, that is the quality ofinformation, that needs to be given by the bank. Some matters are routine and do notcall for great explanation. In some cases, there may be a need for explanation. Inthis case, the demand by the bank refers to legal fees and valuer's fees. Those arematters which a customer might look at and then ask questions about. If thecustomer raises proper questions, there may be a need for the bank to give furtherclarification. Quite obviously, spurious queries can be disregarded, but the matterhas to be looked at in a commonsense way. When commonsense is applied, therequirement to give proper notice so as to clearly inform the customer of itsliabilities is not a difficult standard to comply with.[21] The bank demanded payment of the sum of $19,868.57:Debits since 1 July 20101 July 2010 interest payment $4,612.601 August 2010 interest payment $4,663.491 September 2010 interest payment $4,120.441 October 2010 interest payment $4,031.22June 2010 legal fees $4,500.00July 2010 legal fees $6,103.76Valuer's fees $4,545.00Monthly account fees and debit interest on overdrawn account balance$325.96Subtotal $32,901.57Credits since 1 July 201030 July 2010 ($4,011.00)30 August 2010 ($4,011.00)9 September 2010 ($1,000.00)30 September 2010 ($4,011.00)Total outstanding $19,868.57[22] It is necessary to consider the items in the demand to see whether thecompany has shown either that there is an arguable dispute as to its liability, or thatthere is an arguable dispute as to its default. If it can show that there is an arguablecase of no liability, or an arguable case of no default, then it can say that the exerciseof the power of acceleration is itself arguable and cannot be relied upon to support astatutory demand for repayment of principal under the term loan.[23] I begin with the valuer's fees. That is the sum of $4,545. I deal with it at theoutset because the position here is relatively clear. The company ultimately acceptedthat it was liable for that amount and in fact paid that amount. But it acknowledgedits liability for that amount only in its solicitor's letter of 18 October 2010 and madepayment on 21 October 2010. By that stage, the power of acceleration had alreadybeen exercised. The company disputed the other items.[24] The first item, $4,612.60, is for interest due on 1 July 2010. The companysays that there is a dispute as to its liability. Mr Tingey characterised the positiontaken by the company as Mr Ha simply saying what his understanding was. Thematter goes beyond Mr Ha's own perceptions. While his evidence does read assaying what his understanding was, there may still be a factual basis for disputingliability. More than simply stating his belief, the company relies on extracts fromcorrespondence said to have passed between the parties in June 2010. These arerecorded in a letter by the company's lawyers to the bank's solicitors on 18 October2010. It appears from that correspondence that the bank had made demand forpayment of sums which were said to be outstanding arrears that had accrued at 28June 2010. In a further letter of 1 July 2010, the bank is recorded as requiringpayment of the sum of $248,252.95, the sum of $48,252.95 "representing theoutstanding arrears, (principal and interest) had ANZ not accelerated payment of theloan and the costs incurred by ANZ to the date of the letter." That wording issufficient to give the company some basis for saying that the payment made on that date covered the liability of interest due on 1 July 2010.[25] It may be that bank records could be placed before the court which couldshow that that claim is not sustainable and that the payment was only for liabilitiesthat accrued before 1 July 2010. But that evidence is not before the court. Theproposition that this interest of 1 July 2010 had already been discharged by thepayment made on 1 July 2010 is at least arguable. For this case, it cannot be used toestablish an uncontestable liability allowing the bank to invoke it for the accelerationpower.[26] The next three items are for interest falling due on the first of the month forthe next three months. Those items are to be compared with the amounts of credits.These three items of interest come to a total of $12,814.15. Mr Moodley says thatthe credits come to a total of $13,033 and that whatever the rights or wrongs of theinterest payments, the liability has been discharged already. That is not quite theway that the correspondence reads.[27] The first point to be noted is that the evidence now shows adequately clearlythat these were correct charges of interest. They arise because of changes in thefloating interest rate.[28] The company's solicitor had challenged the amount of the interest charges inthe letter of 7 October 2010 but only in a general way and had not set out any casefor suggesting that there was another way of calculating interest. The bank'slawyers replied on 12 October 2010 and in that they replied generally as to thecorrectness of the charges.[29] In my judgment, the response from the bank was adequate for the challengeto interest charging at that date. It cannot be said that there has been a failure ofnotification by the bank on the question of interest charges.[30] The short point about any difficulty that the customer might have had withknowing how much to pay by way of interest is to ensure that the current accountwas sufficiently topped up that it could meet interest charges, even if interest rateswere to fluctuate over time.[31] Next are the two items of legal fees for June and July 2010. The companyhad paid something towards legal fees in its payment of $48,252.95 on 1 July 2010.The company now queries its liability for further legal fees. In particular, it raisesthe point that the company had been the subject of a liquidation application whichhad later been withdrawn. The withdrawal was on the basis that there was no orderas to costs. The company says that since the liquidation application had beenwithdrawn with no order as to costs, then the bank cannot turn around after thatwithdrawal and claim costs in respect of that liquidation application. Incorrespondence, the company's solicitors had queried the bills when they wereproduced and requested an apportionment to delete any attendances that wereattributable to that liquidation application. The bank's solicitors declined to makethat apportionment.[32] In these circumstances, I am satisfied that there is an argument as to theliability for legal fees. In particular the company could not know how much to payby way of legal fees outside of the liquidation process if there had not been anapportionment by the bank's solicitors. I simply point to that as being a matter thatis open to argument. Mr Tingey accepted that the liability for legal fees wasarguable. Accordingly, the bank cannot rely on the legal fees.[33] The final item was $325.06 for monthly account fees and debit interest on theoverdrawn current account balance. Mr Moodley tried to suggest that there is somebasis for challenging that, but I remain unconvinced by his argument. The bank hasselected some parts of the current account to include in its demand. It was entitled todo that under paragraph 13(a). It has adequately notified that to the customer. Thereis nothing more that needs to be said about it. That liability cannot be contested.There was adequate notice leading to default.[34] The result is that there was incontestable liability for interest for 1 August,September and October 2010, valuer's fees and $325 under the current accountcharges. They were not fully discharged by the credits totaling $13,033. The bankgave the company adequate notice of the liabilities. In their letter of 12 October2010 the bank's lawyers answered queries raised by the company's lawyers andmade a fresh demand for the liabilities to be discharged by 4:00 pm on 14 October2010. At 15 October 2010, there still remained a debt owing to the banknotwithstanding the items I have set aside. The time given for compliance with thefresh demand was adequate. Here, I rely on the decision of the Court of Appeal inANZ Banking Group NZ Ltd v Gibson [1986] 1 NZLR 556, as discussed byRichardson J on 565. In terms of the principles in that case there was adequate notice given for payment.[35] I use the letter of 12 October 2010 as the bank's final notice to the companybecause that letter responded to the company's queries about charges in the notice of1 October 2010. The letter of 12 October contained invoices showing fees that hadbeen incurred. The customer was given adequate time to consider that letter and toconsider whether the liability did in fact exist and then, if it had the funds on hand, topay. That satisfies the requirements for due notice. The time was adequate given therelations that existed between the parties, the correspondence querying the earlierdemand and response giving information. Longer notice was not required.[36] I accordingly find that there was default in meeting unsatisfied liabilities at15 October 2010 which entitled the bank to exercise the power of acceleration.There is no genuine substantial dispute about the exercise of the power ofacceleration.[37] At this point I need some assistance from the parties. I have found that therewas no liability under the current account and it seems on information I have beengiven to date that there is nothing due there. I have found that the term loan wasproperly accelerated. I have found that there were some accumulated liabilities therebut I have deducted from them the legal fees and the 1 July 2010 interest payment. Ineed some assistance from the parties to calculate a sum which can form the basisfor a demand under s 291(1)(a) of the Act which would be an order of the Courtrequiring the company to pay a sum. It would be useful if the parties could conferand reach agreement on what that sum would be on the basis I have set out. I alsoask the parties to confer about costs. Costs are to be to scale, but the Bank reservesthe right to claim solicitor-client costs under the term loan.[38] I also add this. One of the matters that arose between the parties is that during the month of July 2010, the bank sent a document to 21st Century Investments Ltd. That document was a variation of the loan agreement. The company took that document on its face and said that the loan agreement had been varied. The bank, on the other hand, said that this document had been sent out by mistake. The correspondence in October 2010 contains contentions by both parties as to their particular positions, that is, the company took the view that this document constituted a variation of the loan agreement and had to be applied, with the bankcontending that there had not been any variation and it was relying on the terms of the original loan agreement of 2005.[39] By the time the case was being prepared for Court, the bank changed its position and was happy to accept the loan agreement as varied by the 22 July 2010 document. For this case, that aspect is a sterile dispute because the document of22 July 2010 provided that all other terms and conditions of the original agreementare confirmed, except of course to the extent that they were expressly varied. Inparticular, this document showed that the interest rate was the floating interest ratewhich is was what would have applied in any event under the original loanagreement. For all practical purposes, there was no real difference between theterms of the original agreement as they applied up to July 2010, and this loanagreement document generated on 22 July 2010. Because there is no substantivedifferent between the two, I have simply disregarded that dispute as having norelevance to the matters I have had to determine in this judgment.[40] Following the adjournment, the parties have announced that they haveconferred and they have agreed on the amount of the demand and costs according toscale.[41] I make these orders:[a] The statutory demand is upheld to the extent of $782,513.52. It is setaside for any amount above that;[b] I order 21st Century Investments Ltd to pay the sum of $782,513.52 by 18 March 2011 and in default the ANZ National Bank Ltd may apply to the Court for an order that 21st Century Investments Ltd be put into liquidation;[c] 21st Century Investments Ltd is to pay the ANZ National Bank Ltd the sum of $7,395.90 by way of costs fixed on a 2B scale. ApplyingKeene v Okere Holdings Ltd, that sum cannot be part of the statutorydemand under s 291(1)(a), but is independently payable. The bankretains the right to seek higher costs on an indemnity basis, relying onthe terms of the loan agreement;[d] The parties have leave to apply further if there are any unresolved issues on costs.__________________________R M BellAssociate Judge