JACK GARY JOSEPH NEWSOME AND LITTLE RIDGE FARM TRUSTEE LIMITED V ANZ NATIONAL BANK LIMITED HC WN CIV-2011-485-281

JACK GARY JOSEPH NEWSOME AND LITTLE RIDGE FARM TRUSTEE LIMITED V ANZ NATIONAL BANK LIMITED HC WN CIV-2011-485-281 28 February 2011IN THE HIGH COURT OF NEW ZEALANDWELLINGTON REGISTRYCIV-2011-485-281BETWEEN JACK GARY JOSEPH NEWSOME ANDLITTLE RIDGE FARM TRUSTEELIMITEDPlaintiffsAND ANZ NATIONAL BANK LIMITEDRespondentHearing: 22 February 2011(Heard at Wellington)Counsel: M D Branch and V A Whitfield for plaintiffsO J Meech for respondentJudgment: 28 February 2011JUDGMENT OF JOSEPH WILLIAMS JIn accordance with r 11.5, I direct the Registrar to endorse this judgment with the delivery time of 4.45pm on the 28th February 2011.Solicitors: Harkness Henry, Private Bag 3077, Hamilton Minter Ellison Rudd Watts, PO Box 2793, Wellington[1] This matter came before me on Tuesday, 22 February, but because of a heavy fixtures schedule last week I indicated to counsel that I would not be in a position to issue a decision until today.[2] Jack Newsome is a trustee of the Little Ridge Farm Trust (the Trust) and the sole director and shareholder of Little Ridge Farm 2008 Limited (the Company). The company owns Kingston Farm at 123 Mangaotea Road, Tariki, on which it operates a dairy farm. ANZ National Bank (the Bank) banked the purchase of this farm in December 2007.[3] Mr Newsome through the Trust already owned the adjoining farm at 112 Mangaotea Road and it was felt that purchasing Kingston Farm and combining the two operations would produce a larger and more profitable entity.[4] On 17 February 2011, the Bank issued notices to Mr Newsome, the Trust, andthe company demanding payment of the farm's overdraft of $689,106.28 by the next day. If repayment was not made as demanded, the Bank advised that it intended to commence enforcement action.[5] The Bank has made no secret of the fact that it wants to appoint a receiver to protect its security.[6] The plaintiffs now seek an interim injunction to prevent any action by the Bank pending the resolution of substantive proceedings yet to be filed.[7] There is not time to traverse the detailed factual background to this dispute. It is sufficient to record that the plaintiffs allege as follows:(a) they were induced to purchase Kingston Farm by encouragements, representations and/or promises made by a Bank employee who was a Rural Manager (Rural Banking) at the New Plymouth branch of the Bank;(b) although the plaintiffs (and their advisors) felt that purchasing Kingston Farm would lead to their assets being over-leveraged, theywere encouraged to proceed with tendering for the farm by a promise from a Bank employee made in December 2007 and at various times thereafter until May 2008 that the Bank would contribute $1.4 million to the venture as an equity partner pursuant to the policies of a fund operated by the Bank known as the Rural Growth Fund (RGF);(c) with a joint venture equity partner, the problem of over-leveraging disappeared making a tender commercially viable for the plaintiffs.[8] When the farm purchase was due to settle in June 2008, the Bank advised Mr Newsome that bridging finance would be required as no RGF monies were available at that time. There was no indication of the trouble to come however. In fact by letter of 1 July 2008, the Bank confirmed that RGF approval had been given and indicated that an approval fee of $40,000 was payable and would be debited from the Kingston Farm account. The plaintiffs say, notwithstanding the promises made and recorded, the Bank reneged and refused to provide the $1.4 million in September 2008.[9] Mr Newsome admits he used remaining equity in Kingston Farm to borrow more to purchase a herd and a tractor – the herd funded by the Bank and the tractor through UDC, a related company of the Bank. The Bank argued that this was in breach of an RGF condition that no further borrowing against the farm occurs within two years of purchase. For his part Mr Newsome says that was not the understanding of the parties. Rather, the prohibition was against purchasing further land not stock and operating equipment. Mr Newsome says the budgets circulated prior to purchase all showed clearly to a Bank employee that a herd and tractor would need to be purchased in order to operate the farm and would need to be debt- funded. All parties, he said, proceeded knowing this.[10] In any event, the parties met during September and October 2008 to work out a way forward and it seems that Mr Newsome gave up on trying to get the Bank to change its stance on the RGF. By letter of Wednesday, 15 October 2008, the Bankadvised terms upon which it would accept "withdrawal" of the RGF application andrequested that this letter be countersigned to signify Mr Newsome's acceptance of its terms. Mr Newsome duly countersigned.[11] The shortfall of $1.4 million, which at that stage was covered by bridging finance, was then converted into standard secured debt finance. The cost of borrowing was set at a premium however in order to reflect the high debt level on the property as a result of this shift.[12] Mr Newsome says that from the date of purchase all interest payments to the Bank have been met despite the failure of the Bank to provide the promised $1.4 million equity. He says there is no basis for the Bank to take the action it has.[13] The application is made ex parte. Short term interim orders were made at 2.15 pm on 18 February without argument, because there was not sufficient time. The Judge who dealt with the matter directed that it proceed on notice thereafter and a notice of opposition was duly filed by the Bank.[14] The Bank says it has serious concerns about the financial position of the farm. The Bank says the company is currently trading at losses of $20,000 per month on average and the overdraft facility that was increased to $600,000 on 14 December 2010 is now at $689,106.28 and projected to be $735,000 by 19 March 2011. It was argued that the farm is unable to pay its creditors and may therefore be trading while insolvent.[15] In order to satisfy the requirements for an interim injunction Mr Newsome must establish that there is a serious question to be tried on the pleadings and that the balance of convenience lies with him rather than the Bank.[16] Mr Newsome argues that Kingston Farm's debt and cash-flow predicament is attributable to the Bank breaking its promise to invest in the farm. He says if theBank had contributed $1.4 million in equity funding, Kingston Farm's debt levelswould have been far lower and more manageable. Mr Newsome says the Bank cannot take advantage of the remedies available to it. He says he has causes ofaction in negligent misstatement, breach of the Fair Trading Act, breach of contract, estoppel and oppression under the Credit Contracts and Consumer Finance Act.[17] The Bank makes two arguments against these propositions.[18] First, it says the overdraft is an on-demand facility and Mr Newsome accepts that its terms have been breached. There is therefore a present right in the Bank to take the action it proposes to take under the loan covenants. There is no argument, the Bank says, that it has acted in bad faith or improperly in moving to protect its security.[19] Second, the Bank says the issue of RGF funding is entirely separate from theBank's right to exercise its rights under the loan agreement. If Mr Newsome had a claim against the Bank for breach of promise to invest in Kingston Farm then, the Bank says, he is able to proceed with that unhindered by the appointment of receivers.[20] There is not time here to assess each of the possible heads of claim but, if the facts, as alleged by Mr Newsome, are proved, it seems to me that he will have at least a serious question to be tried. I refer for example to the broad definition of"oppressive" in s 118 of the Credit Contracts and Consumer Finance Act. By the terms of s 120, the court may reopen the credit contract upon which the Bank now acts. And in determining whether to reopen the contract the court is required by the terms of s 124 to have regard to "all of the circumstances relating to the making of the credit contract", including any "inducement" to enter into the contract.[21] That provision must be read as entitling a court to consider whether Mr Newsome was forced into accepting a loan from the Bank having previously committed to the purchase but the Bank having refused to honour its promise to invest its own cash in the farm venture. Whether this is what is the cause ofKingston Farm's current financial stress remains to be seen, but that is the allegation.[22] Thus, there is at least on that ground, a serious question to be tried.[23] Where the balance of convenience lies is somewhat more difficult. The Bank is concerned that each month of delay represents a significant deterioration in the quality of its security. The Bank, as I have said, expects the farm overdraft to balloon out to $735,000 by 19 March. Mr Newsome does not deny this. His answer is that the equity in the farm is of the order of $2-3 million and so the farm can sustain a lengthy period of increasing debt before the Bank's security is affected.[24] The Bank also points to Mr Newsome's delay in taking any action to challenge the Bank's refusal to give RGF funding. The refusal was given in themiddle of 2008 and, the Bank says, it is now the end of February 2011. Mr Newsome's response is that, when faced with the Bank's fait accompli, it was decided that the only practical approach was to make the best of a bad situation.[25] The Bank also says that there is nothing in the action it proposes to take under the lending agreement that will stop Mr Newsome from bringing proceedings against the Bank under the earlier alleged RGF agreement.[26] Mr Newsome says that this is his farm and if the Bank is allowed to take the steps that it threatens, it will be lost; while on the other hand from the Bank's pointof view only money is at stake. Mr Newsome says he can maintain interest payments for at least the next three months but frankly admits that he can make no guarantee after that.[27] Although I accept that there is a serious (if novel) question to be tried here, Ido not think that the threat to Mr Newsome's property is so great in the steps theBank proposes to take as to warrant the further and ongoing threat to its security that would be represented by an interim injunction. At least not at this stage. On the contrary, a receiver could well benefit Mr Newsome by reducing the farm's debt.[28] As I understood the Bank's case, there is no present intention to issueProperty Law Act notices and commence a sale procedure. It is intended to appoint receivers presumably to take control of the cash situation. If that is correct, there isno present threat to Mr Newsome's ownership of the farm. Rather, the threat is to his access to farm revenue. While that remains the position, I do not consider thatthe balance of convenience is with Mr Newsome. That may change if the Bank takes any steps to commence sale.[29] I do not propose to make any order. Rather, I propose to adjourn the application sine die with leave to the plaintiff to bring it on within 48 hours should the Bank take any steps to sell the farm.[30] Costs are reserved.___________________________Joseph Williams J