GANGNAM PROPERTY INVESTMENTS LTD v AFFIN INTERIORS LTD & Anor [2017] NZHC 3197 _x000b_

GANGNAM PROPERTY INVESTMENTS LTD v AFFIN INTERIORS LTD & Anor [2017] NZHC 3197[15 December 2017]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2017-404-000943[2017] NZHC 3197BETWEEN GANGNAM PROPERTYINVESTMENTS LIMITEDPlaintiffAND AFFIN INTERIORS LIMITED (INRECEIVERSHIP AND LIQUIDATION)First DefendantAND GABRIEL VASILE STELIAN NICOLAUSecond DefendantHearing: 13 November 2017Appearances: J McBride for the PlaintiffNo appearance for the First DefendantK Sullivan for the Second DefendantJudgment: 18 December 2017JUDGMENT OF ASSOCIATE JUDGE SARGISSONThis judgment was delivered by me on 18 December 2017 at 3.30 p.m.pursuant to Rule 11.5 of the High Court Rules.Registrar/Deputy RegistrarDate.......................................Solicitors:Patel Nand Legal, AucklandWCM Legal, WellingtonJ McBride, AucklandK Sullivan, WellingtonIntroduction[1] At face value this proceeding involves a straightforward summary judgmentapplication seeking rental arrears pursuant to a deed of lease.[2] The lease concerns a commercial premise at 507 Rosebank Road, Avondale,Auckland. The lessor is the plaintiff, Gangnam Property Investments Ltd. Gangnamentered into a deed of lease with the first defendant, Affin Interiors Ltd, as lessee, on15 February 2016.[3] Gangnam initially brought proceedings against Affin, which is now inreceivership and liquidation, but that claim has been discontinued. Gangnam insteadpursues the second defendant and Affin's director, Mr Nicolau, who guaranteed Affin'sobligations under the lease. Gangnam seeks to recover approximately $500,000 foroutstanding rent, property management fees, and interest under the lease.[4] But Mr Nicolau submits he has an arguable defence. In particular, he says hehas a counterclaim against Gangnam and/or a valid claim against its director, Mr Patel,which exceeds the value of Gangnam's claim against him. Specifically, Mr Nicolausays that Affin is owed over a million dollars for uncompensated renovation work thatAffin undertook on a property beneficially owned by Mr Patel.[5] I am satisfied that this provides an arguable defence to Gangnam's claim, andthat the summary judgment application should accordingly be declined. My reasonsfollow.FactsAffin's rapid growth[6] Affin began trading in 2010 and quickly became a successful shop fittingcompany. An opportunity arose in 2015 to significantly expand the business when theliquidators of a competitor company offered to sell all the company's assets to Affinfor $500,00.[7] Affin reached out to one of its former clients, Gangnam, to help secure the deal.Mr Nicolau asked Mr Patel if Gangnam would be interested in buying shares in Affinto help fund the purchase of the assets. According to Mr Nicolau, they reached a verbalagreement that Mr Patel would purchase a 25 percent shareholding for $500,000. Butthen Mr Patel apparently presented Mr Nicolau with a very different writtencontractual arrangement, involving:(a) a term loan agreement to advance Affin the money at 5 percent interest(repayable in five years), a first ranking general security agreementover all of Affin's assets and undertakings, and a 25 percent share saleto Gangnam for $1;(b) a shareholders' agreement stipulating that Mr Nicolau and Mr Patelwere both entitled to one equal vote, and that most important businessdecisions required unanimous approval of the both shareholders.[8] Mr Nicolau signed all these documents. He acknowledges his naïveté, butexplains that he felt pressured to sign because he had already committed to purchasingthe assets from the liquidators. On my reading of the evidence, there are also signsthat Mr Patel's force of personality exerted considerable influence over Mr Nicolaupersonally.[9] In early 2016 Affin moved into a substantially larger premise in Avondale.Gangnam purchased the property and leased it to Affin for 12 years. Affin's annualrental increased from $50,000 to approximately $60,000. This was a significantcommitment: Affin's annual turnover was approximately $2 million at that time.[10] Fortunately, Affin grew quickly with its turnover peaking at around $7 million.But its costs also ballooned as Affin added new staff and contracts. Mr Nicolau admitsthat Affin came under increasing financial strain and was soon struggling to pay all itscreditors on time.[11] Relevantly for this application, rent payments also began to fall in arrears.The Kohimarama renovations[12] Nonetheless, Mr Nicolau maintains that Affin would have survived were it notfor renovation work undertaken by Affin on a multimillion dollar property at174 Kohimarama Road. The property is registered in the name of Mr Patel's sister,but there is no dispute that Mr Patel lives there and is the beneficial owner. Now aminority shareholder in Affin, it seems Mr Patel was able to persuade Mr Nicolau todirect a fair portion of Affin's time and resources towards this project.[13] The design phase began in 2015 and construction sometime in 2016.Mr Nicolau wanted a fixed price contract for this work, with a standard chargingprocess like any other client. Mr Patel, however, insisted on an ad hoc arrangement.He would set off charges against the rental arrears owed to Gangnam (a critical pointI will return to later) or else render charges to his other companies, seemingly so hecould claim back GST. As events panned out, the scope of the work also shiftedsignificantly: an initial estimate of about $600,000 for a full recladding developed, onMr Patel's direction, into a $1.7 million estimate for more large-scale renovations.[14] Crucially, Mr Nicolau further insists that significant sums (totalling over amillion dollars) are yet unpaid. On 13 June 2016, an invoice for $1.2 million plusGST was rendered on Mr Patel based on the accounting records maintained by Affin.Mr Patel did not pay, indeed he disputed his liability to pay. Meanwhile, he continuedto demand payment of the rental arrears. Shortly before the renovation work wascompleted, Affin ceased further work pending payment of the invoice.Relationship breaks down[15] After unsuccessful attempts at resolving the dispute, Gangnam eventuallyterminated the lease on 1 July 2017. Gangnam effected re-entry of the premises onthe same day, locking Affin out of the premises and taking possession of all thecompany assets. This meant Affin could no longer continue trading.[16] Relying on powers under General Security Agreement, Mr Patel appointed tworeceivers on 4 July 2017 who promptly sold all of Affin's assets and stock. One of thetwo receivers appointed was the solicitor Gangnam had engaged to help with therecovery of the rental arrears. Mr Nicolau complained (and still complains) that thisis a conflict of interest, and that this explains why the receivers have not pursuedAffin's largest debt, the uncompensated renovation work.[17] Gangnam had first issued summary judgment proceedings against Affin andMr Nicolau in May 2017, but then stayed proceedings against Affin after the companywas placed into liquidation on 24 July 2017. Summary judgment proceedings werereinvigorated when Gangnam filed an amended statement of claim against Mr Nicolauon 19 July 2017.Law[18] Plaintiff summary judgment is provided for in High Court Rule 12.2(1). Thelegal principles are well settled.[19] The question in plaintiff summary judgment is whether the defendant has nodefence to the claim.1 The Court must be left without any real doubt or uncertainty.2The onus is on the plaintiff, but where its evidence is sufficient to show there is nodefence, the onus shifts to the defendant to demonstrate why the application shouldnot succeed.3[20] The court will be reluctant to resolve material conflicts of evidence or assessthe credibility of deponents. But it will not uncritically accept evidence that isinherently lacking in credibility. Overall, the Court will take a robust and realisticapproach to the evidence.1 Pemberton v Chappell [1987] 1 NZLR 1, (1986) 1 PRNZ 183 (CA) at 185.2 Krukziener v Hanover Finance [2008] NZCA 187, (2008) 19 PRNZ 162 at [26].3 MacLean v Stewart (1997) 11 PRNZ 66 (CA).AnalysisParties' submissions[21] Gangnam's statement of claim and submissions are succinct andunembellished — so much so they risk being evasive. Counsel for Mr Patel cameclose to conceding as much at the hearing.[22] Detailing very little of the wider factual narrative canvassed above, Gangnamsimply relies on the terms of the lease. Specifically, it claims that Mr Nicolau is liable,as guarantor under the lease, to pay Gangnam:(a) an outstanding balance of approximately $440,000 for unpaid rent andproperty management fees from the date Affin took possession of thepremises on 1 October 2016 to the date Gangnam effected re-entry on1 July 2017;(b) plus interest at the default rate, totalling to $57,273.37 as at the date ofthe hearing.[23] In reply, Mr Nicolau raises a number of possible defences. For presentpurposes, it is only necessary to consider the strongest of these: the contention thatMr Nicolau has a set-off in respect of the work done on his Kohimarama property.Is it arguable that Mr Nicolau has an equitable set-off defence?[24] It is well established in summary judgment proceedings that a defendant mayraise equitable set-off as a defence to the plaintiff's claim. Equity will allow aset-off where it would be inequitable or unconscionable to allow the plaintiff toproceed without bringing the defendant's claim to account. In this case, Mr Nicolauseeks to set-off against Gangnam's claim for the rental arrears a cross-claim for theunpaid renovations work.[25] I find the factual basis of the set-off sufficiently credible to be arguable. Notonly is Mr Nicolau's affidavit evidence credible enough at first blush, but it issupported by further affidavit evidence from two chartered accountants, Ms Tang andMr Prasad. The former worked in-house at Affin from 2016 till it ceased trading, whilethe latter is the director of a chartered accountancy practice which provided accountingassistance to Affin. Both depose to the significant financial strain placed on Affin byuncompensated work on the Kohimarama property, of which detailed records werekept.[26] Gangnam replies with what it takes to be two 'knock-down' arguments. First,it contends the set-off is blocked by the operation of the no set-off clause in the deedof lease. Second, that there is no exact equivalence of identity between the partiesinvolved in the two claims.The no set-off clause[27] Parties can contract out of an equitable right to set-off, and on its face, this isexactly the situation in this case. The deed of lease contains the usual "no set-off"clause, which reads:All rent shall be paid without any deductions or set-off by direct payment tothe Landlord or as the Landlord may direct.[28] The meaning of the clause is not disputed: in the ordinary course, the tenanthas no ability to raise a set-off as a basis for refusing to pay the full amount of the rentowed under the lease.[29] Mr Nicolau responds to this challenge in two ways.[30] His primary rebuttal is to rely on the court's residual discretion to declinesummary judgement under High Court Rule 12.2. This discretion is extremely limited,however, reserved solely for cases where granting summary judgment would cause aninjustice.4 The authorities are clear that where the set-off is excluded by an expresscontractual provision in an agreement between commercial parties, barringexceptional circumstances, it cannot be said to be an injustice to give effect to the4 Bromley Industries v Martin & Judith Fizsimons (2009) 19 PRNZ 850 at [57]-[62].bargain the parties have made.5 The issue is whether there is something aboutMr Nicolau's case that suggests such exceptional circumstances. I leave that questionopen.[31] For the more compelling submission, in any case, is this: Gangnam is estoppedfrom relying on the no set-off clause by virtue of Mr Patel's conduct in setting offcharges for the renovation work against the rental arrears. Though this secondresponse was not clearly articulated by counsel for Mr Nicolau, he made pointers inits direction. It is not fatal that equitable estoppel was not pleaded. The task of thiscourt is fundamentally to determine whether Mr Nicolau has "no defence" toGangnam's cause of action.6[32] The doctrine of equitable estoppel, at its heart, is about preventing parties fromgoing back on their word (whether express or implied) when it would beunconscionable to do so.7 In other words, a party will not be permitted to deny anassumption, belief or expectation that it has allowed another to rely on where such adenial would be unconscionable.[33] In this case, I consider it reasonably arguable that the key elements of thedoctrine may be made out.8 The evidence suggests that:(a) The conduct of requiring that the charges be set off against the rentalarrears owed to Gangnam created a reasonable expectation that the noset-off clause was impliedly being waived, at least with respect to therenovation work.(b) Affin relied on this expectation, begrudgingly allowing Mr Patel to setoff the charges in this way and thereby giving up his preference for a5 Bromley Industries v Martin & Judith Fizsimons (2009) 19 PRNZ 850 at [66]. See also DominionFinance Group Ltd v Kheong [2012] NZHC 1485 at [79].6 Westpac Banking Corp v M M Kembla New Zealand Ltd CA50/00, 2 May 2000; CA51/00, 9November 2000 at [65]-[68].7 National Westminster Finance NZ Ltd v National Bank of NZ Ltd [1996] 1 NZLR 548 (CA) at 549per Tipping J.8 Gold Star Insurance Co Ltd v Gaunt [1998] 3 NZLR 80 (CA) at 86 per Holland J.standard charging process (or indeed, for another ordinary fee payingclient).(c) Affin, and therefore Mr Nicolau as its guarantor, would sufferconsiderable financial detriment if Affin was ordered to pay up therental arrears without the opportunity to set off that debt against theuncompensated renovation work.(d) Moreover, this outcome is clearly unconscionable, especially in light ofthe wider factual narrative canvassed above, involving closeintermingling of Mr Patel and Gangnam in Affin's affairs.I particularly have in mind here Mr Patel's driving (and allegedlycoercive) influence of the company's rapid business expansion that ledto the cashflow issues; and also his insistence on an unorthodoxfinancial arrangement for his renovation work.[34] I do not need to be convinced that this submission would succeed. I must onlybe satisfied, and in the circumstances I am so satisfied, that the equitable estoppelargument is reasonably arguable and ought not be dismissed at this summary stage.Non-equivalence of parties[35] But there is a further hurdle for Mr Nicolau. This summary judgmentproceeding is brought by Gangnam against Mr Nicolau; but the cross-claim pursues adebt owed to Affin by Mr Patel personally. There is therefore no exact equivalence ofparties as one would expect in an equitable cross claim.[36] Tipping J aptly describes the importance of an equivalence of parties inHamilton Ice Arena Ltd v Perry Developments Ltd:9The need for identity of parties is also consistent with the proposition that thecross-claim is regarded in equity [as] fully or pro tanto extinguishing theplaintiff's right to judgment on the claim. The concept of extinguishment isdifficult if the cross-claim is made by a different party.9 Hamilton Ice Arena Ltd v Perry Developments Ltd [2002] 1 NZLR 309 (CA) at [8].[37] Tipping J did not rule out the possibility, however, that in some "unusualcircumstances" equitable set-off might yet be justified where there is no exact identityof the parties. One such circumstances recognised by the courts is where there is highlevel of intermingling of the affairs between the parties to a proceeding and the entitiesimplicated in the cross-claim.10[38] It is reasonably arguable that this exception holds force in this case also, giventhe extensive intermingling between the parties involved in this proceeding.In particular:(a) Mr Patel is the sole director of Gangnam, and Mr Nicolau the soledirector of Affin. Their dealings with each other personally are closelybound up with their dealings as directors of their respective companies.(b) This is especially the case because Gangnam is a minority shareholderin Affin; indeed, in many respects it enjoys equal shareholder rightsover the company as does Mr Nicolau as majority shareholder.[39] For instance, Mr Patel's ability to persuade Affin to undertake substantial workon his house is tightly connected with Gangnam's position as minority shareholder.The close intermingling is further evidenced by Mr Patel setting off his personal debtsto Affin against Affin's debts to Gangnam. It is clear that the claim and the cross-claim are interconnected: Affin's inability to pay its rental arrears is causally relatedwith the cashflow problems created by Mr Patel's failure to compensate Affin for thework on the Kohimarama property.11[40] Stepping back to view the underlying equities in this case, it wouldunconscionable to prematurely kill the cross-claim, or more specifically the relianceon equitable estoppel, due to a lack of perfect equivalence between the parties. Or, toput it another way, in the circumstances of this case it would be unequitable forGangnam to escape a potentially meritorious cross-claim because of this technical'defect'. After all, as the adage says, equity will look to substance over form.10 See for example Easy Energy Ltd v Jump NZ Ltd HC Wellington CIV-2010-485-2294, 1 July 2011.11 Grant v NZMC Ltd [1989] 1 NZLR 3 at 12-13.Affin's claims not Mr Nicolau's responsibility[41] For completeness, I address one final issue. Gangnam contends that any claimin debt that Affin might have is now the responsibility of Affin's liquidators andreceivers. And it will be their decision whether any steps are taken on behalf of Affinagainst Mr Patel to recover the alleged debt. So, Gangnam suggests, Mr Nicalaucannot rely on a debt owed to the company as a defence to his liability as guarantor.[42] Yet Mr Nicolau is not seeking to sue Mr Patel based on uncompensatedrenovation work; he is merely raising it as a possible defence. Arguably there is nobar to Mr Nicolau doing so. It may be that he will need the liquidators' permission topursue the matter further at trial. However, if the cross-claim is indeed meritorious,I consider it reasonably arguable such permission would be granted by the court if notthe liquidators given the immensity of the amounts at issue in the cross-claim.Result[43] Gangnam's application for summary judgment is declined.[44] Costs are reserved in accordance with the Court of Appeal's decision inNZI Bank Ltd v Philpott.12[45] The Registrar is asked to allocate an initial case management conference._____________________Associate Judge Sargisson12 NZI Bank Ltd v Philpott [1990] 2 NZLR 403, (1990) 3 PRNZ 695