OFFICIAL ASSIGNEE v 22 O’SHANNESSEY LTD [2023] NZHC [3766]

OFFICIAL ASSIGNEE v 22 O'SHANNESSEY LTD [2023] NZHC [3766] [20 December 2023]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2022-404-829[2023] NZHC 3766UNDER Part 18 of the High Court Rules 2016IN THE MATTER of the bankruptcy of ANDREW MICHAELFONAGYBETWEEN THE OFFICIAL ASSIGNEE IN THEBANKRUPTCY OF THE PROPERTY OFANDREW MICHAEL FONAGYPlaintiffAND 22 O'SHANNESSEY LIMITEDFirst DefendantWHARERIMU TRUSTEE LIMITEDSecond DefendantMARAM PROPERTY TRADINGLIMITEDThird DefendantHearing: 7 August 2023Appearances: P Murray for the Official AssigneeR Hucker and M Swan for the First and Second DefendantsJudgment: 20 December 2023JUDGMENT OF ASSOCIATE JUDGE SUSSOCKThis judgment was delivered by me on 20 December 2023 at 4 pmpursuant to r 11.5 of the High Court RulesRegistrar/Deputy RegistrarIntroduction[1] This is an application for summary judgment by the first and seconddefendants.[2] The Official Assignee has filed proceedings pursuing three causes of actionagainst the defendants.1 All three relate to a transaction in which Andrew MichaelFonagy assigned his rights, under a loan to 22 O'Shannessey Ltd (O'Shannessey) andpursuant to a deed of acknowledgement of debt, to the then trustee of the WharerimuTrust on 21 December 2016 (Transaction).[3] Mr Fonagy was adjudicated bankrupt on 17 September 2020.[4] The Transaction occurred more than two years, but less than five years prior toMr Fonagy's adjudication in bankruptcy.[5] The first two causes of action by the Official Assignee are brought against thefirst and second defendants pursuant to ss 205 and 206 of the Insolvency Act 2006.[6] Section 205 of the Insolvency Act 2006 provides that a gift made during thistime period may be set aside if the bankrupt was unable to pay their debts immediatelyafter the making of the gift or at any time after that up to their adjudication, withoutthe aid of the property that the gift is comprised of.[7] Section 206 of the Insolvency Act further provides for the cancelling of aninsolvent gift,2 or a disposition of property to which sub-pt 6 of pt 6 of theProperty Law Act 2007 (PLA) applies.3 Section 346 of the PLA provides thatsubpart 6 relevantly applies to dispositions of property made by a debtor who:(a) was either insolvent at the time or became insolvent as a result ofmaking the disposition; or1 The first and second causes of action are against both the first and second defendants while thethird cause of action is against the third defendant.2 Insolvency Act 2006, s 206(1)(c).3 Section 206(1)(d).(b) was engaged or was about to engage in a business or transaction forwhich the remaining assets of the debtor were, given the nature of thebusiness or transaction, unreasonably small.[8] The defendants say that whilst they have other defences, they have brought thissummary judgment application because it is unarguable that Mr Fonagy was able topay his debts at the time of the Transaction. Therefore, the causes of action must fail.[9] The Official Assignee's third cause of action is against the third defendant,Maram Property Trading Limited (Maram) which is not involved in this application.This cause of action relies on the reversal or cancellation of the Transaction. The firstand second defendants say that if they establish that the first two causes of actioncannot succeed then the third cause of action cannot succeed either and the whole ofthe proceeding would be at an end. As the third defendant is not involved, throughoutthe remainder of this judgment I refer to the first and second defendants as"the defendants" for convenience.[10] Importantly, s 205(2) of the Insolvency Act provides a presumption that thebankrupt is unable to pay his debts for the purposes of that section unless the partyclaiming under the gift proves otherwise. The onus is therefore on the defendants toprove that Mr Fonagy was able to pay his debts at the time of the Transaction on21 December 2016 (or at any time prior to his adjudication).[11] The defendants say that this requires an assessment of the solvency of thebankrupt, both on the basis of an inability to pay debts within a reasonable time andan assessment of the extent to which the bankrupt's assets exceeded liabilities. Thedefendants submit that the starting point for assessing the ability to pay debts is toidentify which creditors proved in Mr Fonagy's bankruptcy and then to assess whatdebt, if any, was owed to creditors by Mr Fonagy as at the date of the impugnedtransaction. Underlying this submission is a submission that where a debt arising atthe time of the Transaction has been repaid prior to adjudication, it is unable to betaken into account in the assessment of solvency at the time of the impugnedtransaction.[12] The defendants refer to the fact that the Official Assignee has already obtained aStatement of Affairs and had access to all records of Mr Fonagy which the OfficialAssignee is entitled to under the Insolvency Act since Mr Fonagy's bankruptcy inSeptember 2020. On this basis they submit that no further discovery or otherinterlocutory processes will result in any further evidence becoming available.[13] It is not disputed that prior to the Transaction Mr Fonagy had guaranteed theobligations of Colombo Projects Ltd (Colombo), which was completing a propertydevelopment on Colombo Street, Christchurch. Counsel for the defendants submitshowever that the value of the collateral securities held by Colombo needs to be takeninto account when assessing the value to be ascribed to the guarantee for the solvencycalculation. The defendants submit that to the extent that the value of the property thatis the subject of the collateral securities exceeds the amount due under the loanagreement, there is no contingent obligation to be taken into account.[14] The defendants say that when this is done, the limit of the guarantee wascovered by the value of the collateral securities and so no amount needs to be includedin respect of the guarantee when assessing Mr Fonagy's solvency at the time of theTransaction.[15] The Official Assignee, by contrast, submits that only the monies due under theloan are taken into account in assessing the value of the guarantee without regard tothe value of the collateral securities underpinning the loan.[16] The two issues for determination are:(a) How is the value of the contingent obligation under the guaranteeassessed for the purposes of assessing Mr Fonagy's solvency?(b) To what extent are the assets identified by Mr Fonagy able to be takeninto account in assessing his ability to pay his debts?[17] I begin by setting out the principles applying to summary judgment bydefendants before recording the factual background and considering the issues.[18] Finally I note in the introduction that issues were raised in relation to theadmissibility of some of the affidavit evidence filed including whether expert evidencewas sufficiently expert or independent. These issues do not to be determined becauseof the view I have come to on the legal issues and because I rely on evidence that isnot in dispute between the parties.Summary judgment by defendants[19] Rule 12.2(2) of the High Court Rules 2016 provides that the Court may givejudgment against a plaintiff if the defendant satisfies the Court that none of the causesof action in the statement of claim can succeed. This is in contrast to an applicationfor summary judgment by a plaintiff where the Court may grant summary judgmentin respect of a single cause of action in the plaintiff's statement of claim (or even partof a cause of action).4[20] In Stephens v Barron the Court of Appeal summarised the longstandingauthority on defendant summary judgment, Westpac Banking Corp v M M KemblaNew Zealand Ltd,5 and confirmed that a defendant seeking summary judgment has aconsiderable burden to discharge:6(a) The defendant has the onus of proving on the balance of probabilitiesthat the plaintiff cannot succeed. Usually this will arise where thedefendant can offer evidence which is a complete defence to theplaintiff's claim.(b) An application for summary judgment will be inappropriate wherethere are disputed issues of material fact or where material facts needto be ascertained by the Court and cannot confidently be concludedfrom affidavits. It may also be inappropriate where ultimatedetermination turns on a judgment able to be properly arrived at onlyafter a full hearing of the evidence.(c) The Court must be satisfied that none of the claims can succeed. It isnot enough that they are shown to have weaknesses. The assessmentis not to be arrived at on a fine balance of the available evidence aswould be appropriate at a trial.(d) The residual discretion of the Court to refuse summary judgmentwould be properly invoked to avoid the oppression which wouldotherwise result if an application by a defendant for summary4 High Court Rules 2016, r 12.2(1).5 Westpac Banking Corp v M Kembla New Zealand Ltd [2001] 2 NZLR 298 (CA).6 Stephens v Barron [2014] NZCA 82 at [9] (footnotes omitted).judgment would pre-empt a plaintiff exercising the right to amend thepleadings.(e) Summary judgment should not be applied for unless the substantivemerits of the case are clear and capable of summary disposal.Factual backgroundParties[21] Mr Fonagy established the Wharerimu Trust in December 2014. The seconddefendant, Wharerimu Trustee Ltd (WTL), is the current trustee of the trust. ErrolBailey is the director of WTL. Mr Bailey is Mr Fonagy's accountant. Mr Fonagyholds the power of appointment for the Trust.[22] The first defendant, O'Shannessy, was incorporated in August 2016.Mr Fonagy was the sole director until 14 September 2020 when Melissa Turkington,Mr Fonagy's wife, was appointed director. Mr Fonagy resigned as a director on theday of his bankruptcy, 17 September 2020.[23] The third defendant, Maram, was incorporated in September 2012. Mr Baileywas a director from 2014 to 2020. Maram's current sole director is Russell Craigie.Maram's shares are owned by Blanch Trustee Services Ltd, of which Mr Bailey is thesole director and shareholder. Maram's registered office during the relevant periodswas c/- Taurus Group Ltd, of which Mr Bailey is a director and shareholder.Loans and guarantees[24] On 21 December 2015, Primary Services New Zealand Ltd (PrimaryServices) entered into a loan agreement with Colombo and Mr Fonagy. Under theloan agreement, Primary Services agreed to lend Colombo $850,000 in return forColombo granting a mortgage to Primary Services over a property at 818 ColomboStreet, Christchurch (Colombo Property). Mr Fonagy personally guaranteed theobligations of Colombo to Primary Services.[25] Colombo paid interest on the loan until 26 May 2016.[26] On 27 May 2016, Colombo and Mr Fonagy entered into a term loan agreementwith Waitangi Investments Ltd (Waitangi) and the Jocelyn Grattan Charitable Trust(Jocelyn Grattan Trust). Waitangi and the Jocelyn Grattan Trust advanced a further$1.6m to Colombo and Mr Fonagy covenanted to pay any amount outstanding.[27] Mr Short, a director of Primary Services, has provided evidence in support ofthe Official Assignee's opposition. Mr Short's evidence in summary is that:(a) From 26 May 2016, Colombo and Mr Fonagy defaulted on theirpayment obligations to Primary Services.(b) Interest remained outstanding from 26 May 2016 in default of the loanfacility agreement.(c) Contrary to Mr Fonagy's assertions, there was never any agreement tocapitalise interest owing under the loan facility agreement.(d) The entire purpose of the further funding from Waitangi and the JocelynGrattan Trust was because Mr Fonagy had made it clear that neither henor Colombo could repay money owed to Primary Services, andColombo was in default under its prior first mortgage to MJ & SJHoward Ltd. Mr Fonagy explained to Mr Short that he urgently neededfinance to prevent a mortgagee sale.(e) Primary Services did not seek to enforce its rights against Mr Fonagyat this time only because it was clear neither Colombo nor Mr Fonagycould pay.[28] Mr Fonagy's evidence is that there was an agreement to capitalise interest andthe purpose of the further funding from Waitangi and the Jocelyn Grattan Trust is notas set out by Mr Short.[29] The Official Assignee disputes this and submits that Mr Short's position issupported by the findings in Primary Services New Zealand Ltd v Colombo ProjectsLtd and the sealed judgment in that proceeding recording unpaid interest under theloan facility agreement from 26 May 2016.7Background to impugned transaction[30] On or about 18 August 2016, O'Shannessey purchased a property at22 O'Shannessey Street, Papakura, Auckland (Papakura Property).[31] The purchase was partly funded by a loan of $350,876.05 from Mr Fonagy toO'Shannessey. O'Shannessey executed a deed of acknowledgement of debt,acknowledging that the debt was repayable to Mr Fonagy on demand (Deed ofAcknowledgment of Debt).[32] On or about 21 December 2016, Mr Fonagy assigned his rights under the loanand Deed of Acknowledgment of Debt to the Wharerimu Trust by way of an expressgift. This was recorded in a resolution of the Wharerimu Trust executed by Mr Fonagyon the same date. This is the Transaction challenged by the Assignee.Enforcement by Primary Services in 2018[33] In 2018, Primary Services exercised its power of sale and sold the ColomboProperty for $1,350,000. Waitangi and the Jocelyn Grattan Trust's loss on sale was$678,792.15. Following the mortgagee sale there were no funds available to repayPrimary Services the amount of the deficiency.[34] Primary Services pursued recovery of the amounts owing. This includedseeking summary judgment in July 2019 against Colombo and Mr Fonagy forrepayment of the principal sum of $850,000 plus interest and costs.8[35] Mr Fonagy opposed summary judgment on the basis of allegedmisrepresentations by Mr Short.7 Primary Services New Zealand Ltd v Colombo Projects Ltd [2020] NZHC 549 at [85(b)].8 This led to the judgment Primary Services New Zealand Ltd v Colombo Projects Ltd [2020] NZHC549 on 18 March 2020.[36] On 18 March 2020, summary judgment was granted in favour of PrimaryServices against Mr Fonagy in the sum of $1,402,790.68 (including interest from 26May 2016 and costs).9 Amongst other things, the Court found that the representationsalleged by Mr Fonagy were not made.10[37] On 2 August 2019, Primary Services obtained freezing orders againstMr Fonagy,11 and on 7 February 2020, it obtained freezing orders against Ora TrusteesLtd (the former trustee of the Wharerimu Trust).12[38] Mr Fonagy was adjudicated bankrupt on his own application on 17 September2020.Transfer of Papakura Property[39] In July 2020, a few months before Mr Fonagy's bankruptcy, O'Shannesseytransferred the Papakura Property to Maram, ostensibly for a sale price of $580,000.At the time of this sale, Mr Fonagy was still the director of O'Shannessey. Themortgage was discharged and then re-registered over the title to the Papakura Property.A mortgage to O'Shannessey was also registered on the title.[40] The Auckland Council valuation for the Papakura Property as at the date ofsale was $1,080,000. A valuation report commissioned by Primary Services fromDarroch Property Services records the Papakura Property as having a registeredvaluation of $900,000.[41] On 4 May 2022, the Papakura Property was transferred from Maram to theUnited Church of Tonga in New Zealand Trust Board, with the mortgage toO'Shannessey being discharged. The Official Assignee records in submissions that thesale price was $1.4 million.9 Primary Services New Zealand Ltd v Colombo Projects Ltd, above n 7.10 At [54] and [63].11 Primary Services New Zealand Ltd v Fonagy [2019] NZHC 1869.12 Primary Services New Zealand Ltd v Colombo Projects Ltd [2020] NZHC 101.Official Assignee's notice and application for freezing order[42] On 25 May 2022, the Assignee issued a notice under s 206 of theInsolvency Act to O'Shannessey and the Wharerimu Trust. The notice stated that theAssignee wished to cancel two transactions, namely:(a) the gift, transfer and/or assignment of Mr Fonagy's right, title andinterest under the Loan of $350,876.05 to the Wharerimu Trust on orabout 21 December 2016; and(b) the gift, transfer and/or assignment of Mr Fonagy's right, title andinterest (including in relation to the agreement to mortgage) under theDeed of Acknowledgement of Debt to the Wharerimu Trust on or about21 December 2016.[43] On 3 June 2022, Toogood J granted a without notice application for freezingorders sought by the Official Assignee in respect of property held by the threedefendants, including the net proceeds of the sale of the Papakura Property.13 Thereasons for the decision were issued on 13 June 2022.14 His Honour also madeancillary orders requiring the defendants to provide limited discovery.[44] Toogood J accepted that the Assignee had a good arguable case that the transferand/or assignment of Mr Fonagy's rights, title and interest under the Loan and Deedof Acknowledgment of Debt was a gift that would be cancelled.[45] On 5 July 2022, O'Shannessey and the Wharerimu Trust issued a Notice ofObjection to the Notice to Cancel Irregular Transaction under the Insolvency Act.[46] Maram subsequently applied to rescind the freezing order granted byToogood J. That application was dismissed except in relation to the requireddisclosure of bank account numbers which the Court held was not necessary to giveeffect to the orders.1513 Official Assignee v 22 O'Shannessey Ltd HC Auckland CIV-2022-404-829, 3 June 2022.14 Official Assignee v 22 O'Shannessey Ltd HC Auckland CIV-2022-404-829, 13 June 2022(Reasons Minute of Toogood J).15 Official Assignee v 22 O'Shannessey Ltd [2022] NZHC 2930 at [91].Causes of action pleaded[47] The Official Assignee pleads two causes of action against the defendants. Inboth causes of action, the Official Assignee seeks orders cancelling the gift of the Loanand the rights under the Deed of Acknowledgement of Debt and orders under s 207 ofthe Insolvency Act that Mr Fonagy's rights in the Loan be retransferred to the OfficialAssignee or for payment of compensation.First cause of action: insolvent gift[48] The first cause of action is pursuant to s 205 of the Insolvency Act, whichprovides:205 Insolvent gift within 2 to 5 years may be cancelled if bankruptunable to pay debts(1) A gift by a bankrupt to another person may be cancelled on theAssignee's initiative if—(a) the bankrupt made the gift within the period beginning 2 yearsimmediately before adjudication and ending 5 yearsimmediately before adjudication; and(b) the bankrupt was unable to pay his or her debts.(2) A bankrupt is presumed to have been unable to pay his or her debtsfor the purpose of subsection (1)(b) unless the party claiming underthe gift proves that the bankrupt was immediately after the making ofthe gift, or at any time after that up to his or her adjudication, able topay his or her debts without the aid of the property that the gift iscomposed of.[49] As referred to above, under the presumption in s 205(2), the legal burden ofproving Mr Fonagy's ability to pay all his debts is placed on the party claiming underthe gift, in this case O'Shannessey and the Wharerimu Trust.16[50] The assessment of a donor's ability to pay their debts is based on whether debtsare "provable debts" in the bankruptcy.17 The test is therefore whether debts areprovable, not whether debts have been proved.16 Cook v Official Assignee (2008) 2 NZTR 18-020 (HC) at [12].17 At [14].[51] Section 205 of the Insolvency Act was amended in 2009 by replacing thephrase "due debts" with "debts". The effect is that when proving solvency, accountcan be taken of all debts that have not yet fallen due, such as contingent liabilities.18Second cause of action: irregular transaction to which PLA applies[52] The second cause of action is brought pursuant to s 206(1)(d) of the InsolvencyAct. This subsection incorporates claims for dispositions of property to which sub-pt6 of pt 6 of the PLA applies.[53] The Official Assignee claims that the gift of the Loan was a disposition ofproperty by Mr Fonagy to the Wharerimu Trust that prejudiced the Official Assigneeand creditors.[54] Section 346 of the PLA provides as follows:346 Dispositions to which this subpart applies(1) This subpart applies only to dispositions of property made after 31December 2007—(a) by a debtor to whom subsection (2) applies; and(b) with intent to prejudice a creditor, or by way of gift, or withoutreceiving reasonably equivalent value in exchange.(2) This subsection applies only to a debtor who—(a) was insolvent at the time, or became insolvent as a result, ofmaking the disposition; or(b) was engaged, or was about to engage, in a business ortransaction for which the remaining assets of the debtor were,given the nature of the business or transaction, unreasonablysmall; or(c) intended to incur, or believed, or reasonably should havebelieved, that the debtor would incur, debts beyond thedebtor's ability to pay.(3) However, this subpart does not apply to dispositions to which the limitin section 142(3) of the Infrastructure Funding and Financing Act2020 applies under a levy order made under that Act.18 Judd v Hodgkinson [2018] NZHC 491 at [49].[55] The Official Assignee submits that s 346(1)(b) is satisfied and that Mr Fonagyis a debtor to whom subsection (2) of s 346 applies as he was either:(a) insolvent at the time of making the disposition or became insolvent asa result of the disposition; or(b) was engaged, or was about to engage, in a business or a transaction forwhich his remaining assets were, given the nature of the business ortransaction, unreasonably small.[56] The defendants say that Mr Fonagy was not insolvent, nor did he becomeinsolvent as a result of the disposition, and nor was he engaged in a business ortransaction for which his remaining assets were unreasonably small.Was Mr Fonagy solvent at the time of the Transaction (or at any time thereafter)?[57] Because of the presumption in s 205 of the Insolvency Act for the purposes ofthe first cause of action, it is for the defendants to prove that Mr Fonagy was solventon both a cash flow and balance sheet basis at the time of the Transaction (or at anytime thereafter). This presumption does not apply in respect of the second cause ofaction but the have to succeed on all causes of action to succeed in summary judgmentas defendants. If they cannot rebut the s 205 presumption then the summary judgmentapplication must be declined.[58] Mr Short gives evidence for the Official Assignee that on 26 November 2016,the debt owed by Colombo, including interest, was $912,319.69. Mr Clothier, a seniorinvestigating accountant at the Ministry of Business, Innovation and Employment, hasprovided expert evidence for the Official Assignee. Mr Clothier has calculated in hisaffidavit that adding further interest owed between 26 November 2016 and the date ofthe Transaction, 21 December 2016, the debt would have increased to $920,477.90.[59] The Official Assignee submits that the full amount of this debt is to be includedas the value assigned to the guarantee when assessing Mr Fonagy's solvency.[60] Mr Clothier has included an estimate of Mr Fonagy's financial position beforeand after the Transaction on 21 December 2016 using Mr Fonagy's best case based onthe assets Mr Fonagy has given evidence of owning at the time. This schedule ofassets is consistent with the schedule prepared by Mr Keaton Pronk, a licensedinsolvency practitioner, who has given expert evidence for the defendants.[61] The estimate of Mr Fonagy's financial position shows that if the guarantee toPrimary Services is treated as a liability, Mr Fonagy's net position before theTransaction on 21 December 2016 was -$292,007.30 and his best positionimmediately after was -$642,883.35. Even if only the principal sum of the loan fromPrimary Services of $850,000 is taken into account without interest and any liabilityto Inland Revenue is ignored, Mr Fonagy's net position on a best case scenario in termsof his assets before the Transaction would still be -$188,311.71 and after theTransaction -$539,187.76. Any disputes about interest or amounts owed to InlandRevenue do not therefore affect whether he was insolvent at the time of the Transactionon the basis of the assets claimed by him.[62] The defendants, by contrast, submit that the value assigned to the guaranteemust be assessed having regard to the value of the collateral securities provided inrespect of the guaranteed obligation.[63] The defendants start by recording that the amounts due under the loanagreement as at 21 December 2016 were $850,000 to Primary Services plus $1.6million to Waitangi and the Jocelyn Grattan Trust. The total amount outstanding wastherefore $2.45 million. The defendants' position is that the interest payments did notfall due until 1 January 2017 in respect of the Primary Services Loan, with $39,666.60due at that time. The interest on the Waitangi and the Jocelyn Grattan Trust loan hadbeen prepaid for the first six months and the monthly instalment of $13,333.33 wasnot due until 27 December 2016. If these two interest payments are included in theoutstanding loan balance the total principal and interest outstanding was$2,502,999.93.[64] Mr Short calculates for the Official Assignee that a further $100,000 was owedin interest. The defendants say that this additional figure is not supported by thecontemporaneous documentation of Mr Short at the time but is immaterial in any eventin assessing the ability of Mr Fonagy to pay his debts. This is because, in thedefendants' submission, on any analysis the value of the collateral securities based onthe contemporaneous valuations of Ford Baker exceeded the amounts advanced.[65] The Ford Baker valuations valued the development that is the subject of thecollateral securities on three bases:(a) with the resource consent and lease in place, $3,047,500;(b) with only the resource consent, $2,679,500; and(c) on a bare land valuation basis, $2,328,750.[66] The valuation report had an effective date of 5 May 2016 but Mr Newberryfrom Fordbaker gives evidence for the defendants that the value of the property wouldnot have altered materially by December 2016. The defendants emphasise that theFord Baker valuations are the valuations on which Mr Short relied to make the twoadvances.[67] As set out above, there is no dispute that Mr Fonagy provided a guarantee ofthe obligations of Colombo and that this was a contingent obligation that couldconstitute a debt provable in his bankruptcy for the purposes of s 232 of the InsolvencyAct.[68] If the guarantee is included without taking into account the value of anycollateral security of Colombo, such as the Colombo Property, then even on thedefendant's evidence, Mr Fonagy would have been insolvent. The critical issue istherefore whether the collateral security is taken into account.Is the collateral security to be taken into account?Defendants' submissions[69] The defendants say that to the extent that the value of the Colombo Propertythat is the subject of the collateral securities exceeds the amounts due under the loanagreement, there is no contingent obligation to be taken into account in assessing theability of Mr Fonagy to make payment of the debt.[70] The defendants submit this reflects the principle articulated by Lord SelborneLC in Re Ridler,19 as in that case the Court held the approach required was to treat theguarantee as if the guarantee had been called upon as at the date of the assessment.The defendants say that the position of the guarantor should be no different than if theguarantor were the principal debtor under the loan agreement and the owner of thecollateral the subject of the securities.[71] The defendants submit that the same position is reached if an approach isadopted of valuing the right to subrogation and the ability to exercise the securities onthe payment of the amounts due under the loan agreement. The defendants say that intreating the contingent obligation under the contract of guarantee, the assessment mustinvolve both the contingent liabilities and assets that would arise under the instrumentin the event of default.[72] The defendants say this approach is consistent with the framework imposedunder the Insolvency Act to determine the quantum of the debt for which a creditor isentitled to prove in a bankrupt's estate and that this is grounded in the following:(a) Relying on Re Moeller, ex parte Joseph, it has been recognised that aguarantor may prove in the estate of a bankrupt after deducting thevalue of the securities received by the guarantor from the principaldebtor.20(b) Section 246(1) of the Insolvency Act also reflects that a secured creditorwho realises a charge can only prove for any balance after deductingthe net amount realised. There is also the ability to value the chargeunder s 247 of the Insolvency Act.19 Re Ridler (1882) 22 ChD 74 (CA) at [80].20 Re Moeller, ex parte Joseph (1884) NZLR 3 164 (SC).(c) There is a self-executing bankruptcy set-off provision under s 254 ofthe Insolvency Act which requires an account of any credits, debts ordealings between a creditor and debtor (the set-off under the guaranteeincludes the ability to have recourse to the value of the collateralsecurity at the relevant point in time) noting that unliquidated monetaryclaims are able to be set off.[73] The defendants further submit that in the two cases relied on by the OfficialAssignee, Regal Castings Ltd v Lightbody21 and JEC No 2 Ltd v The Official Assigneeat Hamilton,22 there was not a live issue as to how to value the collateral securitiesbecause there were either no such securities or, to the extent there were (the Tairuaproperty in the JEC decision), the ability of the insolvent to pay any debt was not inissue because the transactions had occurred within two years of adjudication so beingsubject to automatic setting aside under s 204 of the Insolvency Act.[74] Furthermore, the defendants say that in none of the cases relied upon by theOfficial Assignee was the Court embarking on an exercise of assessing the ability topay debts. Rather, the Courts were assessing the extent to which there may have beenan intention to defeat the interests of creditors and the extent to which such an intentioncould be inferred. In the context of s 205, the defendants say the assessmentnecessarily is as to the ability to pay debts.[75] The defendants submit that a guarantor, on payment of the debt, has the abilityto be subrogated to the securities that the creditor holds and can exercise thosesecurities to obtain value from the assets of the principal debtor without any voluntaryact on the part of the principal debtor. Counsel for the defendant notes the Court haslong recognised the proprietary nature of this ability and the value in such rights, wheresecured against assets of some value. The defendants say it is understandable wherethere may be competing priorities over the estate of the principal debtor generally tosuggest that in the absence of any right of priority in respect of specific assets, thatsuch a claim to indebtedness is not certain enough to be taken into account in assessingassets and liabilities. However, the defendants say it is not simply a matter of21 Regal Castings Ltd v Lightbody [2008] NZSC 87, [2009] 2 NZLR 433.22 JEC No 2 Ltd v The Official Assignee at Hamilton [2013] NZHC 1352.determining the amount outstanding under the loan agreement and imputing the debtthen owing as a debt of the insolvent under the guarantee without assessing theconnected contingent asset derived through the availability of the collateral securities.Official Assignee's submissions[76] Counsel for the Official Assignee responds that it is not correct that thecollateral securities must be taken into account in assessing solvency. The OfficialAssignee submits that the law in this respect has been settled since the 19th century,also citing Re Ridler where the Court held that a contract of guarantee created a debtthat is to be treated as due and owing.23 The Official Assignee again relies on thedecision of the Supreme Court in Regal Castings Ltd v Lightbody.Discussion[77] I discuss Regal Castings and Re Ridler in more detail below as they assist inanswering the question of whether collateral securities ought to be taken into account.[78] In Regal Castings, Tipping J referred to the following passage from LordSelborne's judgment in Re Ridler with approval:24[116] The arguments on behalf of the Respondents turned much on theproposition that when a person is liable on a guarantee he is not to be regardedfor the present purpose as owing a debt of that amount, without taking intoaccount the assets of the principal debtor as well as his own. There is a fallacyin this. To hold that a guarantor can make a voluntary settlement of the wholeof his property and support it by showing that when he made it the personguaranteed had assets enough to pay the amount guaranteed, would go far todefeat the contract of suretyship. We must look at the matter as if the eventhad already happened the possibility of which the parties must have had incontemplation when the guarantee was given of the debtor being unable topay. I do not think that any close inquiry as to the supposed capacity of theperson guaranteed to pay the debt ought to be entered into. I do not say thatthere might not be a state of things in which the liability of the guarantor mightbe so remote that it need not be regarded; but if he conveys away all hisproperty by a voluntary settlement I think it doubtful whether the settlementcould in any case be supported in the event of his ultimately being called onunder his guarantee.23 Re Ridler, above n 19, at 80.24 At 80 cited by Regal Castings Ltd v Lightbody, above n 21, at [116]. See also Elias J at [8], andBlanchard and Wilson JJ at [59] in Regal Castings Ltd v Lightbody.[79] Justice Tipping continued in Regal Castings:[117] The Lord Chancellor went on to indicate that it was not appropriate tospeculate about the ability of the principal debtor to satisfy the indebtedness;the Court should consider only the state of the guarantor's assets. HisLordship concluded his judgment with these words:The father [who was the guarantor] when he made the settlement musthave known that if the son could not pay the balance to the Bank hehimself, if the settlement was sustained, would have substantiallynothing available to meet the liability under the guarantee but suchdividend as he could get from the son's estate. I am of opinion that asettlement made under such circumstances cannot be supportedagainst the creditors.[80] After setting out these passages, Tipping J held that the effect of the decisionin Re Ridler is that a guarantor must be treated as if the guaranteed debt was due andowing.25[81] Justice Tipping then goes on to say this view is supported by the discussion inKerr on Fraud and Mistake where it cites the statement of Turner LJ in Goodricke vTaylor:26[E]very surety must be taken to contemplate that he may be called upon to paythe debts for which he is surety, and he can no more be justified in placing thewhole of his property out of the reach of his liability to pay them than if hewas principal debtor.[82] After considering the facts in Regal, Tipping J held:[121] It is also clear that it is not appropriate to enter into any detailed inquiryas to how readily, if at all, Capro could have discharged its indebtedness toRegal.[83] Justice Tipping noted that in that case, Capro (which is in the same position asColombo here) had no ready ability to discharge its indebtedness. Importantly,Tipping J comments that the fact that Capro had money owing to it and may have hadan ability to liquidate stock in trade, was of no significance for the purpose of assessingMr Lightbody's solvency. His Honour goes on to say that in any event, Mr Lightbodyhad certainly not established to his Honour's satisfaction that Capro was able to payits debts at the time he entered into the transaction in question and that in a case where25 Regal Castings Ltd v Lightbody, above n 21, at [118].26 At [119] citing Goodricke v Taylor (1864) 2 DE GJ & Sm 135 at 141.the guarantor is insolvent, the onus must be on him to show that the principal debtorwas so clearly able to pay its debts at the relevant time that it would be inappropriateto apply the rule in Freeman v Pope27 against the guarantor.[84] Earlier in his judgment, Tipping J refers to the origin of the Freeman v Poperule.28 It is useful to refer back to this because counsel for the defendants says it isnecessary to go back to first principles.[85] Tipping J discusses the origin of the rule in Freeman v Pope when discussings 60 of the Property Law Act 1952 which provided that every alienation of propertywith intent to defraud creditors was voidable at the instance of the person therebyprejudiced.[86] Tipping J explained:29[87] Section 60 was the then current equivalent in New Zealand of a statutepassed in the 13th year of the reign of Queen Elizabeth the First. The Statuteof Elizabeth, as I will call it, provided that all conveyances and dispositions ofproperty made with the intention of delaying, hindering or defraudingcreditors should be null and void as against them. The statute contained aproviso in the same terms as those found in s 60(3). An early and instructiveapplication of the statute can be found in Twyne's Case. Kerr, in his work onThe Law of Fraud and Mistake, citing Story's Equity Jurisprudence, observesthat it gradually grew into a practice when applying the statute:to regard certain acts or circumstances as indicative of a so-calledfraudulent intention, in the construction of the statute, although,perhaps, there was in fact, no actual fraud or moral turpitude. It isdifficult, in many cases of this sort, to separate the ingredients whichbelong to positive and intentional fraud from those of a mereconstructive nature, which the law thus pronounces fraudulent uponprinciples of public policy.[88] Kerr then observes that drawing a line for present purposes betweenactual fraud and constructive fraud would be next to impossible and couldrarely serve any useful purpose. Significantly Kerr adds that there were certaincircumstances which came to be taken as conclusive evidence of fraud, and asinvariably avoiding the conveyance. One of those circumstances was avoluntary conveyance by a person substantially indebted at the time. Thiscircumstance came to be known as the rule in Freeman v Pope to which thefirst ground of appeal is directed. A voluntary conveyance means a transfer ofproperty without valuable consideration. Questions of insufficientconsideration do not require attention in this case. It will, however, be27 Freeman v Pope (1870) LR 5 Ch App 538 (CA).28 Regal Castings Ltd v Lightbody, above n 21, at [88].29 At [87] and [88].necessary to address whether the transaction in issue was voluntary in therelevant sense. The concept of substantial indebtedness developed over timeinto the concept of insolvency, as adopted and defined in Freeman v Pope.(Footnotes omitted)[87] In Freeman v Pope, Lord Hatherley LC started his judgment by saying:30The principle on which the statute of 13 Eliz. c. 5 proceeds is this, that personsmust be just before they are generous, and that debts must be paid before giftscan be made.[88] Justice Tipping then refers to a later passage where Lord Hatherley added:31But it is established by the authorities that in the absence of any such directproof of intention, if a person owing debts makes a settlement which subtractsfrom the property which is the proper fund for the payment of those debts, anamount without which the debts cannot be paid, then, since it is the necessaryconsequence of the settlement (supposing it effectual) that some creditorsmust remain unpaid, it would be the duty of the Judge to direct the jury thatthey must infer the intent of the settlor to have been to defeat or delay hiscreditors, and that the case is within the statute.[89] In Cook v Official Assignee, which involved an appeal against the decision ofthe Official Assignee under s 54 of the Insolvency Act 1967 (the predecessor to s 205of the Act), Asher J held:32[15] It is clear, therefore, that with the possible exception of the patentlyobvious solvency of the primary debtor, a debt of guarantee is to be taken intoaccount for the purposes of s 54(2).[16] In Re Crawford (a bankrupt) HC WAN CIV-2005-483-235 5 May 2006,MacKenzie J applied the principle in Re Ridler in the context of s 54(2). Ipropose doing so in this appeal. This means that the guarantee of the companydebt to Rexel is a debt for the purposes of s 54(2).[90] Associate Judge Faire applied the same principles in JEC No 2 Ltd v TheOfficial Assignee at Hamilton, where he accepted that a contract of guarantee createsa debt that is to be treated as due and owing.33 Consistent with the authorities, hisHonour did not enquire into the primary debtor's ability to discharge the indebtedness.30 Freeman v Pope, above n 27, at 540.31 At 541 as cited by Regal Castings Ltd v Lightbody, above n 21, at [90].32 Cook v Official Assignee, above n 16.33 JEC No 2 Ltd v The Official Assignee at Hamilton, above n 22, at [49] following the analysis ofTipping J in Regal Castings Ltd v Lightbody, above n 21.[91] Although Mr Hucker submits that the ability of the insolvent to pay any debtwas not in issue in JEC No 2 Ltd because the transactions had occurred within twoyears of adjudication and so were subject to the automatic setting aside under s 204,the Official Assignee's application in that case was pursuant to ss 206 and 207 of theInsolvency Act, as the second cause of action is here. Associate Judge Faire wastherefore deciding whether the bankrupt in that case, Mr Fawcett, was insolvent forthe purposes of s 346 of the PLA.[92] I accept that in Regal Castings the Supreme Court commented that Capro wasnot able to pay its debts but the discussion by Tipping J, and particularly the excerptsfrom Re Ridler, make it clear that there is no need to enquire into the collateralsecurities, and in fact, it would be inconsistent with the contract of suretyship to do so.The judgment of Lord Selborne in the passage referred to above at [79] discussedexactly what Mr Hucker submits ought to be done and discounts it when his Lordshipsaid:34To hold that a guarantor can make a voluntary settlement of the whole of hisproperty and support it by shewing that when he made it the person guaranteedhad assets enough to pay the amount guaranteed, would go far to defeat thecontract of suretyship.[93] If a guarantor could transfer property away without valuable consideration andthose transactions were not able to be set aside through the relevant sections in theInsolvency Act and the PLA without first considering the value of any collateralsecurity held at the time of the voluntary conveyance by the principal debtor, it woulddefeat the value of any guarantee.[94] In this case, in the defendants' submission, the value of the Colombo Propertyat the time of the Transaction was significantly in excess of the guarantee and covenantprovided by Mr Fonagy. However, when the Colombo Property was sold by way ofmortgagee sale in July 2018, approximately 18 months after the Transaction, it onlysold for $1,350,000 leaving significant shortfalls owing to Primary Services andWaitangi and the Jocelyn Grattan Trust.34 Re Ridler, above n 19, at 80.[95] I accept that Lord Selborne and Tipping J both have indicated that there maybe a case where for some reason the full amount of the guarantee does not need to betaken into account, but they refer to cases where it is so patently obvious that the rulein Freeman v Pope ought not to apply. I do not consider that this case is such a case.[96] Even if only the guarantee in favour of Primary Services is taken into accountin respect of the principal sum and not the interest owing, so reducing the debt to$850,000, Mr Fonagy's liabilities still exceed his assets even on a best case scenarioin terms of value of those assets, both before and after the Transaction.[97] I therefore do not accept that the defendants have established that Mr Fonagywas unarguably solvent at the time of the Transaction. The first and second defendantscannot therefore succeed in summary judgment of their defence.[98] Finally I record that if I had not reached this view on the legal position in termsof the value to be attributed to a guarantee when assessing solvency, I still would nothave entered summary judgment for the defendants. In those circumstances the onuswould still have been on the defendants to establish that Mr Fonagy was solvent at therelevant times. There are too many facts in dispute between the parties and gaps inthe evidence for summary judgment to be granted to the defendants. The assessmentmade by the Court is not one to be arrived at on a fine balance of the available evidencesuch as would be required here if I were to attempt to assess the value of both theassets that Mr Fonagy claims to have held, and the value of any liabilities taking intoaccount collateral securities.Result[99] The defendants' application for summary judgment is dismissed.Costs[100] I did not hear from the parties on costs. I ask the parties to confer and, only ifagreement cannot be reached, to file memoranda on behalf of the Official Assigneewithin 30 working days and the defendants a further 10 working days.[101] I note that the length of the affidavits filed was unusual in an application forsummary judgment by a defendant. My preliminary view therefore is that an increaseon the usual award of 2B costs may be appropriate perhaps allowing Band C for somesteps.______________________________Associate Judge SussockSolicitors:Molloy Hucker, Lawyers & Advisers, Auckland