FALLS ROAD PROPERTIES LTD V FLETCHER HC WHA CIV-2010-488-000604

FALLS ROAD PROPERTIES LTD V FLETCHER HC WHA CIV-2010-488-000604 30 September 2011IN THE HIGH COURT OF NEW ZEALANDWHANGAREI REGISTRYCIV-2010-488-000604BETWEEN FALLS ROAD PROPERTIES LIMITEDPlaintiffAND PAUL LESLEY FLETCHER ANDMAUREEN ELIZABETH FLETCHERDefendantHearing: 28 September 2011Appearances: G P Curry and D J G Cox for PlaintiffP Magee for DefendantsJudgment: 30 September 2011 at 4:30 PMJUDGMENT OF VENNING JThis judgment was delivered by me on 30 September 2011 at 4.30 pm, pursuant to Rule 11.5 of the High Court Rules.Registrar/Deputy RegistrarDateSolicitors: Rennie Cox, AucklandThomson Wilson, WhangareiCopy to: G P Curry, AucklandIntroduction[1] The plaintiff (Falls Road) seeks to recover $625,000 (together with financing costs) from the defendants. Falls Road is a private company controlled by Mr and Mrs Hull. The defendants, Mr and Mrs Fletcher, are trustees of the P L & M E Fletcher Family Trust (Fletcher Trust).[2] Fletcher Trust agreed to sell a property at Waipu to Mr and Mrs Hull for $5 million plus GST.[3] In anticipation that it would be confirmed as nominee to settle the purchase, Falls Road obtained the GST input from the Inland Revenue Department in advance of the settlement date and paid it to Fletcher Trust.[4] However, ultimately the Hull interests were unable to settle the property and Fletcher Trust cancelled the agreement for sale and purchase.[5] Falls Road seeks to recover the $650,000 paid by it to Fletcher Trust. Fletcher Trust wishes to retain that money and to set it off against the losses it is claiming against the Hulls in the separate proceeding CIV-2009-488-762.Issues[6] The issues arising on this application are:(a) Does Falls Road have a valid claim against Fletcher Trust for the $650,000 and associated losses?(b) If so, is there any arguable defence or set-off available to Fletcher Trust?Background[7] On 23 March 2007 the Hulls agreed to buy the land at Massey Road, Waipu, from Fletcher Trust. The agreement described the purchasers as Peter Abe Hull and Beverly Anne Hull or nominee. The purchase price was $5 million plus GST. A deposit of $500,000 was payable. The settlement date was 31 August 2007. The agreement was unconditional.[8] The Hulls paid the deposit in three tranches. The final tranche was paid by 26 April 2007.[9] The Hulls initially intended that they would nominate Falls Road as the purchaser under the agreement. Subsequently they decided to incorporate another entity, Bream Bay Highlands Ltd, and nominate it as purchaser, but nothing turns on that.[10] Fletcher Trust took advice on the agreement, but only after it was executed. The Trust was advised it would have to pay GST to the Inland Revenue Department before settlement date. The Fletchers discussed the matter with the Hulls. It wasagreed that Fletcher Trust would issue a tax invoice for the purchase price and GSTso that the purchaser could claim an input tax credit for the GST from InlandRevenue Department and then pay that amount to Fletcher Trust in advance of thesettlement date. In that way Fletcher Trust would not be out of pocket in relation tothe GST it had to pay in advance of settlement and the $625,000 would ultimately becredited against the purchase price.[11] As the Hulls intended to nominate Falls Road as the purchaser they asked Fletcher Trust to make out the tax invoice to Falls Road.[12] Fletcher Trust paid the GST on the transaction to the Inland Revenue Department on about 7 May 2007. The sum paid was just under $625,000.[13] At about the same time Falls Road received the tax invoice from Fletcher Trust and sought and, (after a GST audit), obtained payment of the GST input creditfrom Inland Revenue Department of $625,000. Falls Road paid this sum of $625,000 to Fletcher Trust on 5 June 2007.[14] As a consequence of these transactions Fletcher Trust as vendor had paid the GST on the transaction to the Inland Revenue Department, the Inland Revenue Department had provided Falls Road with its GST input credit on the transaction and Falls Road had paid the $625,000 received by it to Fletcher Trust on account of the purchase price. Falls Road (and for that matter the Hulls) were under no legal obligation to pay the $625,000 to Fletcher Trust at that time.[15] Unfortunately the Hulls were unable to settle the agreement for sale and purchase.[16] Fletcher Trust took advice and issued a settlement notice to Mr and Mrs Hull as the purchasers under the agreement. No doubt it did so because the Hulls were the contracting party. Mr and Mrs Hull had never formally confirmed in writing the nomination of Falls Road as the nominated purchaser. When the settlement notice expired unremedied Fletcher Trust cancelled the agreement and forfeited the deposit of $500,000 paid by the Hulls.[17] As a consequence of the cancellation of the agreement, Fletcher Trust became entitled to a credit for $625,000 from the Inland Revenue Department for the GST it had paid on the cancelled transaction. By contrast, as Falls Road had received a GST input payment from Inland Revenue Department, it became liable to repay the $625,000 to the Inland Revenue Department. Falls Road sought and obtained a credit note from Fletcher Trust to the effect that:This credit note reverses the tax invoice dated 30 March 2007. No supply has occurred due to the undisputed cancellation of the property sale and purchase agreement by the vendor.Falls Road accounted for the GST to the Inland Revenue Department in its November 2007 return.[18] As a result, Falls Road was obliged to repay the Inland Revenue Department $625,000 by 15 January 2008. Falls Road suggested to Fletcher Trust that they liaisewith the Inland Revenue Department and that there be a crediting or set-off between the payment the Inland Revenue Department was obliged to refund to Fletcher Trust and the repayment Falls Road was required to make to the Revenue. Fletcher Trust would not agree.[19] Ultimately the Inland Revenue Department refunded the GST of $625,0001 to Fletcher Trust on 14 February 2008. Falls Road was required to refund the full amount of $625,000 to the Inland Revenue Department. Falls Road had to borrow the funds to do so. It borrowed $300,000 directly from NZ Guardian Trust and Mr Hull was obliged to borrow $325,000 from the National Bank with Falls Road assuming responsibility for the cost of that borrowing.[20] As a consequence of the refund and repayment of GST, both parties'obligations in relation to the Inland Revenue Department and the Inland RevenueDepartment's obligations to both parties were satisfied. The practical position that remained, however, was that Falls Road had paid $625,000 to Fletcher Trust in anticipation of being nominated as purchaser of the Waipu property under the agreement for sale and purchase which had subsequently been cancelled.[21] Falls Road demanded Fletcher Trust repay the $625,000 together with the cost of the borrowing it had incurred in order to repay its obligation to the Inland Revenue Department.[22] Fletcher Trust has refused to repay the $625,000 or to meet the cost of borrowing. It justifies its refusal to do so by reference to the separate proceedings it has issued against the Hulls for breach of contract. Fletcher Trust takes the position that it is entitled to retain the $625,000 as a set-off against the potential damages that Fletcher Trust has incurred as a consequence of breach of the agreement for sale and purchase.[23] Initially Fletcher Trust included a claim against Falls Road as second defendant in the separate proceedings. Falls Road sought summary judgment as a1 Approximately, in fact $633,854 was refunded after taking account of payment dates and use ofmoney interest.defendant in those proceedings on the basis Fletcher Trust had no claim against Falls Road as it had never formally been confirmed in writing to Fletcher Trust as nominee. Fletcher Trust discontinued its claim against Falls Road before the application for summary judgment was heard.[24] Notwithstanding that it discontinued its claim against Falls Road in the separate proceedings Fletcher Trust still maintains it is not liable to repay the $625,000 to Falls Road in these proceedings. It says it will account for the $625,000 in the separate proceedings in any judgment it obtains against the Hulls.Decision[25] The principles to apply to this application for summary judgment are well settled. The onus is on the plaintiff, Falls Road, to satisfy the Court that Fletcher Trust has no arguable defence or set-off to its claim for summary judgment.[26] A number of preliminary issues were raised on behalf of Fletcher Trust which are no longer pursued. First, the issue of nomination. It is accepted that although the Hulls completed a nomination in favour of Falls Road as purchaser, there was no formal written advice by the Hulls to Fletcher Trust that Falls Road had been nominated as purchaser. In the absence of such written advice, Fletcher Trust has no right to claim damages from Falls Road qua purchaser under the agreement. No doubt it was for that reason that Fletcher Trust discontinued its proceedings against Falls Road in the separate proceedings.[27] In his written submissions Mr Magee had also referred to s 9 Contractual Remedies Act 1979, and s 25 of the Goods and Services Tax Act 1985. He addressed submissions as to the effect of those provisions.[28] However, in the course of his oral submissions, Mr Magee confirmed that he accepted the only issue was whether Fletcher Trust could set-off its unliquidated claim for damages arising from breach of the contract by the Hulls against the $625,000 that was otherwise due by Fletcher Trust to Falls Road. Mr Magee recognised that the claim was an equitable claim for set-off and stood or fell onapplication of the principles in Grant v NZMC Ltd2 and Hamilton Ice Arena Ltd v Perry Developments Ltd.3[29] Mr Magee was correct to make that concession. Prima facie Falls Road is entitled to the $625,000 it has paid to Fletcher Trust. As noted, there are no issues involving GST or the Inland Revenue Department. It is acknowledged that there is no contractual relationship between Falls Road and Fletcher Trust. Prima facie Falls Road is entitled to judgment on the basis that it paid $625,000 to and for the benefit of Fletcher Trust and has received no benefit for that payment. The money was paid in anticipation of Falls Road being confirmed as nominee of the agreement for sale and purchase which did not occur. The agreement has been cancelled. There hasbeen, from Falls Road's position, no consideration for the payment. Fletcher Trust has prima facie been enriched by the payment of $625,000 by Falls Road. The enrichment has been at the expense of Falls Road. Unless Fletcher Trust has an arguable case of set-off against the $625,000 it would be unjust for Fletcher Trust to retain the benefit where there was no enforceable contractual relationship between Fletcher Trust and Falls Road nor any other basis upon which Fletcher Trust can retain the $625,000 paid to it by Falls Road.[30] That leads to the second issue, whether there is any arguable defence or set- off available to Fletcher Trust. In Grant, delivering the decision of the Court, Somers J reviewed the position of set-off in equity and summarised the position as follows:4The principle is, we think, clear. The defendant may set-off a cross-claim which so affects the plaintiff's claim that it would be unjust to allow the plaintiff to have judgment without bringing the cross-claim to account. The link must be such that the two are in effect interdependent: judgment on one cannot fairly be given without regard to the other; the defendant's claim calls into question or impeaches the plaintiff's demand. It is neither necessary, nor decisive, that claim and cross-claim arise out of the same contract.[31] Mr and Mrs Grant had agreed to take the lease from NZMC in consideration of NZMC providing work to their company. In breach of that collateral contract between NZMC and the Grants, NZMC had ceased providing the Grant's company2 Grant v NZMC Ltd [1989] 1 NZLR 8.3 Hamilton Ice Arena Ltd v Perry Developments Ltd [2002] 1 NZLR 309.4 At 12-13.with the work. NZMC nevertheless endeavoured to enforce the promise the Grantshad given it under the lease to pay rent while in breach of its own undertaking to theGrants, which had given rise to the lease on which it relied. The Court of Appealheld the claims were sufficiently interdependent to support the Grant's claim to setoff. Importantly, in that case, the parties to both the lease, and the collateralagreement, were the same, NZMC and the Grants.[32] The other leading authority on the point is Hamilton Ice Arena Ltd v Perry Developments Ltd. Perry Developments and Hamilton Ice had made an agreement for the sale of Hamilton Ice's premises to Perry with a lease back to Hamilton Ice and a loan of $80,000 from Perry to Hamilton Ice. In a separate contract the Speirs, the shareholders of Hamilton Ice, agreed to refurbish other premises for Perry. Perry agreed to pay Speirs for that work. Hamilton Ice went into arrears in its rent. Perry re-entered the premises and forfeited the lease. Hamilton Ice sought relief against forfeiture on the basis it had an equitable set-off for payments that Perry owed to the Speirs under the separate contract. The Court of Appeal reaffirmed the principlesestablished by Somers J in Grant v NZMC and concluded that there could be no set-off because there was no identity of parties between the parties to the lease and theparties to Speirs' separate contract with Perry. The Speirs' claim did not have suchinterdependence that it impeached the Perry's claim for rent or justified treating thetwo separate contracts as one contract.[33] In the course of delivering the decision of the Court of Appeal Tipping J said:5[8] Neither party referred to the title Set-off and Counterclaim in 42Halsbury's Laws of England 4th ed, 1983. There at para 435 the authors say that, subject to stated exceptions, none of which apply in the present case:"a set-off may only be maintained where the claims to be set off against each otherexist between the same parties and in the same right."What Halsbury says was certainly the position at common law under the statutes of set-off as noted in footnote 2 to para 435. The cases there cited also support the view that the position is the same with equitable set-off. The need for identity of parties is also consistent with the proposition that the cross-claim is regarded in equity has fully or pro tanto extinguishing the plaintiff's right to judgment on the claim. The concept of extinguishment is difficult if the cross-claim is made by a different party.5 Hamilton Ice Arena Ltd v Perry Developments Ltd above n 2, at [8]-[9].[9] The Speirs brothers are of course different parties in law from their company Hamilton Ice. At one point Mr Wilson suggested that the case might be one for lifting the corporate veil and treating Hamilton Ice and the Speirs brothers as one and the same legal entity. That argument was not, however, pressed or supported by authority. That is understandable. The different transactions into which the parties entered were carefully structured with legal advice on both sides. The case falls a long way short of raising circumstances in which it would be appropriate to lift the corporate veil of Hamilton Ice and treat it and the Speirs brothers as being the same person in law. While we would not wish to rule out the possibility that in some unusual circumstance it might be appropriate to allow equitable set-off where there is no identity of parties, any such circumstance (other than one justifying the lifting of the corporate veil) would have to be consistent with the extinguishment rationale.[34] There is no identity of parties or legal entities in the present case. Falls Road is a separate identity to the Hulls albeit that Mr Hull is a director and shareholder of Falls Road. By discontinuing its claim against Falls Road in the separate proceedings Fletcher Trust has acknowledged that it has no contractual (or other basis) to claim against Falls Road.[35] The only basis upon which Fletcher Trust could seek to establish a set-off then is if it were possible to lift the corporate veil and treat Falls Road and the Hulls as one and the same legal entity.[36] The principles as to when the corporate veil will be lifted are well settled. New Zealand Courts have consistently stated that exceptional circumstances will be required before the status of a company as a separate legal entity will be disregarded and the persons actually controlling the company will be taken into consideration:Re Securitibank Ltd (No 2);6 and Savill v Chase Holdings (Wellington) Ltd.7 Inreferring to unusual circumstances in the Hamilton Ice case I do not considerTipping J meant to suggest a lesser test was appropriate. Cases where the Court hasbeen prepared to lift the corporate veil generally involve situations where the peoplecontrolling a company have acted fraudulently or where the company can truly beregarded as a sham: Savill v Chase Holdings (Wellington) Ltd supra; BentleyPoultry Farm Ltd v Canterbury Poultry Farmers Co-operative Ltd (No. 2).86 Re Securitibank Ltd (No 2) [1978] 2 NZLR 136 (CA).7 Savill v Chase Holdings (Wellington) Ltd [1989] 1 NZLR 257 (CA).8 Bentley Poultry Farm Ltd v Canterbury Poultry Farmers Co-operative Ltd (No. 2) (1988) 4NZCLC 64,780.[37] As the Court noted in Attorney-General v Equiticorp Industries Group Ltd:9The phrase "to lift the corporate veil" is a description of the process by which in certain situations the Courts can look behind the corporate facade and identify the real nature of a transaction and the reality of the relationship created. It is not a principle. It describes the process, but provides no guidance as to when it can be used. If the apparent transactions are a sham, the Court must look behind them to ascertain the true position.[38] In the present case it cannot be said that the involvement of Falls Road in the transaction was in any way a sham. At the time Falls Road became involved the evidence is that the Hulls intended to use it as the vehicle to purchase the property. In fact a written nomination was completed by the Hulls in favour of Falls Road but it was left on the solicitor's file and was never confirmed in writing to Fletcher Trust.[39] The contract in the present case between the Hulls as purchasers and Fletcher Trust was a genuine contract. The Hulls' intention to nominate Falls Road as purchaser was genuine and unexceptional. Falls Road existed as a separate entity. It operated its own bank account. Ultimately Falls Road was never formally confirmed in writing to Fletcher Trust as nominee (in fact the Hulls decided to use anotherentity) but that is explained by Mr Hull's evidence.[40] The fact that there may even be a general unfairness or an inequity suffered by a third party will not itself be sufficient to warrant the Court ignoring the separate personality of a company. Such unfairness or inequity will not support lifting the corporate veil: Woolfson v Strathclyde Regional Council;10 Tunstall v Steigmann.11[41] There is nothing on the facts of the present case to support the lifting of the corporate veil. Falls Road was a bona fide separate commercial entity. The agreement for sale and purchase was genuine. The Hulls intended to nominate Falls Road as purchaser. None of the transactions were a sham. The transactions with the Inland Revenue Department were made in the genuine expectation the agreement would settle. The payment to Fletcher Trust by Falls Road was made on the same basis. There was no benefit to the Hulls or to Falls Road in the dealings with the9 Attorney-General v Equiticorp Industries Group Ltd [1996] 1 NZLR 528 at 541.10 Woolfson v Strathclyde Regional Council [1978] SC (HL) 90.11 Tunstall v Steigmann [1962] 2 QB 593 (CA).Inland Revenue Department. In fact, for the reasons given above, Falls Road is out of pocket at present.[42] Any claim that Fletcher Trust has arising from breach of the agreement for sale and purchase must be directed at its contracting party, the Hulls.Conclusion[43] For the above reasons I conclude that Falls Road is entitled to the summary judgment it seeks. Fletcher Trust has no equitable set-off it can raise against FallsRoad's claim. Falls Road is entitled to summary judgment for the $625,000 which it paid to Fletcher Trust. It is also entitled to the costs it incurred in raising the money which it had to repay to the Inland Revenue Department. Before making such payment it put Fletcher Trust on notice of its need to arrange funding to repay the GST and that it would be looking to recover all costs associated with the funding.Result[44] Falls Road is to have judgment against the defendants as trustees of Fletcher Trust in the sum of $625,000 together with judgment for additional losses of $160,894.76 and ongoing interest in respect of the additional losses from 1 September 2010 as calculated in accordance with para 15 of the statement of claim.Costs[45] The plaintiff is to have costs on a 2B basis together with disbursements as fixed by the Registrar.Stay[46] The parties in the separate proceedings are to go to a settlement conference on 23 November 2011. In a minute issued on 12 August 2011 Heath J indicated a stay of any judgment on this application for summary judgment would be appropriate until that day. Mr Curry confirmed that Falls Road consented to a stay ofexecution of the judgment on that basis. I order that there be a stay of execution of the judgment until 23 November 2011 or further order of this Court. To avoid doubt, however, I confirm the stay does not apply to perfecting the judgment. The plaintiff may seal judgment in the meantime.__________________________ Venning J