PIONEER INSURANCE COMPANY LTD V WHITE HERON MOTOR LODGE LTD CA CA294/2008

PIONEER INSURANCE COMPANY LTD V WHITE HERON MOTOR LODGE LTD CA CA294/2008 30 October 2008IN THE COURT OF APPEAL OF NEW ZEALAND CA294/2008 [2008] NZCA 450BETWEEN PIONEER INSURANCE COMPANY LTD Appellant AND WHITE HERON MOTOR LODGE LTD Respondent Hearing: 20 October 2008 Court: Robertson, Randerson and Heath JJ Counsel: D F Dugdale for Appellant M A Gilbert SC for Respondent Judgment: 30 October 2008 at 3 pmJUDGMENT OF THE COURT A The appeal is allowed. B The statutory demand is set aside. C No order as to costs in this Court. D The order for costs made in the High Court stands.____________________________________________________________________REASONS OF THE COURT(Given by Heath J)Introduction[1] On 21 December 2007, White Heron Motor Lodge Ltd (White Heron) served a statutory demand on Pioneer Insurance Company Ltd (Pioneer), under s 289 of the Companies Act 1993 (the Act). White Heron sought payment of $1,000,000 plus interest. The demand asserted that Pioneer's liability arose out of a "Guarantee dated 10 November 2006 guaranteeing the obligations of Policy Factoring Ltd (in receivership)". [2] Pioneer applied to the High Court to set aside the statutory demand. The application was heard by Associate Judge Gendall in the High Court at Napier. It was dismissed in a judgment given by the Associate Judge on 21 April 2008. The Judge rejected all grounds advanced in support of the application. [3] Pioneer appeals against dismissal of its application. Pioneer's counsel, Mr Dugdale (who did not appear in the High Court), disavowed the grounds on which the application was argued before Judge Gendall. Instead, he took a new point. He submitted that, properly construed, the contractual documents limited Pioneer's guarantee to 75 per cent of the amount owing by Policy Factoring to White Heron. This argument was overlooked by all involved in the High Court. [4] Because there is no challenge to any of the Associate Judge's reasons, it is unnecessary for us to discuss the terms of his judgment. [5] Mr Gilbert SC, for White Heron, accepted that there was no material evidence that could be adduced to meet Mr Dugdale's argument. On that basis, White Heron did not oppose this Court hearing the new point. However, Mr Gilbert did resist the appeal substantively, on two grounds. First, it had become moot as a result of developments since the High Court hearing. Secondly, the contractual documents ought not to be interpreted in the manner suggested by Mr Dugdale.Developments subsequent to High Court judgment[6] After Judge Gendall dismissed the application to set aside the statutory demand, Pioneer paid the sum of $1,119,178.08 to the solicitors for White Heron. The funds were released to White Heron on the basis of an undertaking executed by its director and shareholder, Mr Anderson:I, Allan Dennis Anderson, Director and shareholder of White Heron Motor Lodge Limited ("White Heron") undertake to retain the sum of $1,119,178.08 received from Pioneer Insurance Company Limited ("Pioneer"), being payment under a judgment delivered by Associate Judge Gendall in the Napier High Court on 21 April 2008, and to invest the retained sum on interest bearing deposit for 30 or 90 day terms at Westpac Bank pending the earlier of settlement of the dispute between White Heron and Pioneer, disposal of Pioneer's intended appeal to the Court of Appeal (which it will prosecute without delay), or 31 December 2008. Dated 30.04.08 [Signed] A D Anderson For and on behalf of White Heron Motor Lodge Limited[7] Mr Gilbert resisted the proposition that the money paid into White Heron's Westpac account was held as a stakeholder. He accepted, however, that the parties' intention was that the money remain invested pending the earlier of one of three events identified in the undertaking: namely, settlement of the dispute, disposal of Pioneer's appeal to this Court or 31 December 2008. [8] Mr Gilbert pointed out that, because of the penalty interest running on the debt demanded, it was in the interests of both Pioneer and White Heron for the moneys to be paid across on those terms. Mr Dugdale did not demur. [9] Although Mr Gilbert argued that the appeal has become moot, he accepted candidly that, if we were to reach the opposite conclusion, it was sensible for us to determine the issue of construction on the argument we have heard.Background[10] Pioneer ran an insurance business. One of its directors and shareholders was Mr Anderson. Mr Anderson was also a director and shareholder of both Policy Factoring Ltd and White Heron. [11] Pioneer's directors were concerned about the potential for liquidity problems, arising from the need to provide for future claims. To solve the problem, Policy Factoring agreed to acquire rights to monthly premiums payable to Pioneer. Policy Factoring agreed to pay $1,000,000 to Pioneer to obtain an assignment of those rights. [12] White Heron agreed to lend the $1,000,000 purchase price to Policy Factoring. On 10 November 2006, a number of contractual documents were executed to facilitate drawdown of that sum. There were two substantive contractual documents signed. The first was called a Term Loan Agreement, the second a Guarantee and Indemnity. [13] The Term Loan Agreement had three sections to it. White Heron was the lender and Policy Factoring the borrower. Pioneer and named individuals, both in their capacities as trustees of particular family trusts and as individuals, also executed the document. The final page of the Term Loan Agreement describes those parties as "guarantors". Despite that description, the issue is whether those people did, in fact, assume obligations as principal debtors under the Term Loan Agreement. [14] The Guarantee and Indemnity was executed as a deed and signed by Pioneer and the individuals to whom we have referred. All signed as guarantors. [15] We discuss the contractual documents in detail at [29]-[42].The relevant legislation[16] Section 289 of the Act defines what is meant by the term "statutory demand" and explains what must be included in it. For present purposes, s 289(2)(a) is relevant: the demand must be "in respect of a debt that is due and is not less than the prescribed amount". The "prescribed amount" is currently $1,000: reg 5 of the Companies Act 1993 Liquidation Regulations 1994. [17] The grounds on which the Court may set aside a statutory demand are set out in s 290 of the Act. Section 290(4), (5) and (6) are relevant for present purposes:290 Court may set aside statutory demand (4) The Court may grant an application to set aside a statutory demand if it is satisfied that— (a) There is a substantial dispute whether or not the debt is owing or is due; or (b) The company appears to have a counterclaim, set-off, or cross- demand and the amount specified in the demand less the amount of the counterclaim, set-off, or cross-demand is less than the prescribed amount; or (c) The demand ought to be set aside on other grounds. (5) A demand must not be set aside by reason only of a defect or irregularity unless the Court considers that substantial injustice would be caused if it were not set aside. (6) In subsection (5) of this section, "defect" includes a material misstatement of the amount due to the creditor and a material misdescription of the debt referred to in the demand. .[18] Section 290(4)(a) allows the High Court to set aside a statutory demand if satisfied there was a "substantial dispute whether or not the debt is owing or is due". That provision reflects a Court's inability to resolve substantive disputes about the existence of a debt or its quantum in a summary proceeding. Section 290(4)(b) enables the Court to act if it appears that one of the various forms of cross-claim is available to reduce the claim to less than the prescribed amount.[19] The threshold to be applied in determining whether a "substantial dispute" exists was discussed in United Homes (1988) Ltd v Workman [2001] 3 NZLR 447 (CA) at [34]:[34] The Court is not required in cases of this character meekly to accept without question whatever unvarnished statements may happen to be made on affidavit. The Court is entitled to act in a more robust and commonsense manner. The principles developed in cognate fields such as applications to remove caveats, and opposition to summary judgment (eg Eng Mee-Yong v Letchumanan s/o Velayutham [1980] AC 331; Bilbie Dymock Corporation Ltd v Patel (1987) 1 PRNZ 84) apply by analogy.[20] By s 290(4)(c) of the Act, the High Court may set aside a statutory demand "on other grounds". While expressed in very general terms, the jurisdiction must, nevertheless, be determined by reference to the purpose of the statutory demand procedure and the scheme of s 290. [21] In Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395 (CA), this Court confirmed that the s 290(4)(c) discretion could be exercised if the Court were satisfied that a "substantial injustice" had arisen (s 290(5)) from a material mis-statement of the amount due to the creditor (s 290(6)) in the demand: at [48] and [57] per Baragwanath J, with whom Tipping and Hammond JJ agreed on this point.Analysis(a) Is the appeal moot?[22] Mr Gilbert submitted that the appeal had been rendered moot. His submission was based on the proposition that Pioneer, because it has paid the amount demanded to White Heron, is no longer vulnerable to a liquidation proceeding based on the statutory demand. [23] Mr Dugdale's rejoinder was that the parties contemplated that the appeal would proceed when the money was paid over: see the terms of the undertaking set out at [6] above. He submitted that Pioneer was subject to a judgment of the HighCourt confirming that a statutory demand had been correctly issued for a sum in excess of $1,000,000 and that it ought to be given the opportunity to correct the record. [24] A statutory demand is issued to obtain payment for a debt. If payment is not made, the demand fulfils a secondary purpose, namely to provide a basis on which the debtor's inability to pay its debts as they fall due may be proved, if liquidation proceedings were brought: see s 287(a) which creates a presumption that the debtor company is "unable to pay its debts" for, among other things, the purpose of bringing a proceeding to put the company into liquidation. Proof of insolvency is a pre-requisite to the making of a liquidation order: see s 241(4)(a) of the Act. [25] From the debtor's perspective, an application to set aside a statutory demand is usually made to demonstrate that there is no undisputed debt on which a creditor may properly rely to commence a publicly advertised liquidation proceeding. [26] When served with the statutory demand, it is clear that Pioneer sought to challenge the whole of the debt claimed by White Heron and to prevent the possibility of liquidation proceedings being issued against it. However, circumstances have changed, not only because the argument advanced by Mr Dugdale is different from that put in the High Court but also the money demanded has been paid to White Heron on agreed terms while the appeal is pursued. [27] In reality, Pioneer's present interest is in demonstrating that it has limited liability in respect of the claimed debt. A ruling to that effect is required for Pioneer to recover that part of its payment to White Heron for which it contends it is not liable. Those moneys were paid to avoid the commencement of liquidation proceedings after the Associate Judge found that the whole debt could not be disputed. We accept Mr Dugdale's argument that payment to White Heron was not made unconditionally but on terms that it would be held, albeit in White Heron's own bank account, pending the outcome of this appeal.[28] The appeal is not moot. If the point raised by Mr Dugdale were to succeed, a significant portion of the money paid to White Heron would be repaid to Pioneer. Whether relief should be granted is a separate question, to which we now turn.(b) Should the demand be set aside? (i) Submissions[29] Mr Dugdale argues that the contractual documentation makes it clear that the guarantee is limited to 75 per cent of the moneys owing by Policy Factoring to White Heron. Alternatively, he submits that there is, at least, a "substantial dispute" for the purposes of s 290(4)(a). On either view, he contends, the demand should be set aside. [30] The effect of Mr Gilbert's submission is that Pioneer, despite being described as a guarantor, is a principal debtor under the Term Loan Agreement and is liable to pay the debt in full. Mr Gilbert's position is that the Guarantee and Indemnity does not affect Pioneer's liability as a principal debtor under the Term Loan Agreement.(ii) The contractual documents[31] The Term Loan Agreement described White Heron as the "lender" and Policy Factoring Ltd as the "borrower". However, to accommodate a plain drafting technique, White Heron was also described as "(We/us)" and Policy Factoring Ltd as "(You)". [32] The alternative descriptions are found in boxes on the front page of the Term Loan Agreement, where the names of lender and borrower have been inserted. There was another box into which the name of any guarantors or covenantors could be entered. All that was written in that box was "See Attached". [33] The front page of the Term Loan Agreement stated that the "meaning of certain key words is explained in the "meaning of words" clause in the Loan Conditions".[34] The primary contractual obligations were described in the first two pages of the Term Loan Agreement. The borrower and the lender signed at the foot of the second page. That part of the documentation was also executed by Pioneer and other persons who assert they accepted obligations solely as guarantors of the principal debt. [35] The relevant terms contained in that part of the Term Loan Agreement are:Agreement to repayYou agree that: (a) you will repay all amounts that you borrow from us together with interest charges, fees, other charges and any default interest at the times and in the manner set out in the Annexure Schedule; and (b) the terms and conditions contained in the Loan Conditions apply to all loans that we make to you under this agreement. Conditions precedent to advanceBefore we can make the first advance to you under this contract: (a) you must have signed this agreement together with all of the securities; (b) the conditions set out in the Annexure Schedule (if any) and any other pre-settlement requirements that we ask you to complete must have been completed to our satisfaction; and (c) if any person is named in this agreement as a guarantor, the guarantor must have signed a deed of guarantee and indemnity in the form required by us and the conditions precedent to the acceptance of that guarantee (if any) must have been completed to our satisfaction.Using the definitions set out on the front page of the Term Loan Agreement, "you" means Policy Factoring and "we/us" mean White Heron. [36] The next part of the Term Loan Agreement was called the "Annexure Schedule" (Part 1 of the Term Loan Agreement). Table C of that part described securities (a General Security Agreement to be granted by the borrower) and a"Guarantee and Indemnity by the Guarantors". The provision relating to the Guarantee stated:Limited to 75% of moneys owing by Borrower to the Lender.[37] The final part of the Term Loan Agreement was described as "Loan Conditions" (Part 2 of the Term Loan Agreement). Mr Gilbert placed reliance on cl 2(b)(ii) of those conditions to support a submission that the word "you", when used to identify the primary contractual obligations (see [35] above]), included all persons who executed the contract. [38] Clause 2(b)(ii) provides:Construction of terms: In this contract, unless inconsistent with the context: (ii) the word "you" includes all persons executing this contract regardless of how they may be described in this contract and the covenants contained and implied in this contract will bind each of you jointly and severally as the principal party in this contract;. [our emphasis][39] A separate document, headed "Guarantee and Indemnity", was also executed. Pioneer was one of the parties that signed that document as "guarantor". [40] While executed contemporaneously with other contractual documents, the "Guarantee and Indemnity" agreement has a wider ambit than the $1,000,000 transaction in issue. [41] Clauses 1 and 2 of Part 1 of the Guarantee and Indemnity provide:ExecutionBy executing this Guarantee and Indemnity the Guarantor agrees and declares as follows:1. GuaranteeThe Guarantor unconditionally and irrevocably guarantees to the lender payment of the Guaranteed Monies and the due and punctualobservance or performance of all the Borrower's obligations contained in any Financing Document.2. Limited AmountSubject to any other limitation contained herein the Guarantors liability to the lender under this Guarantee and Indemnity shall be limited to 75% of the Guaranteed Monies. (our emphasis)[42] The term "Guaranteed Monies" is defined extensively in cl 1.11 of Part 6 of the Guarantee and Indemnity. Without going into specific examples of what is included in its scope, it states:1.11. "Guaranteed Monies" means: (i) all monies advanced, credited or lent and all other banking accommodation provided by the Lender directly or indirectly to the Borrower or to any other person on behalf of or at the request or direction of the Borrower in any way before, upon or after the execution of this Deed; (ii) all monies and liabilities (whether certain or contingent) due, owing or incurred by the Borrower to the Lender; and (iii) all interest fees and expenses payable to the lender in respect of the foregoing; .(iii) Analysis[43] The construction issue must be resolved in favour of Pioneer. Despite Mr Gilbert's valiant attempts, we are satisfied that the parties intended that the guarantee given by Pioneer was limited to 75 per cent of the moneys payable by Policy Factoring to White Heron. Our reasons for reaching that view follow. [44] The definition of "you" in cl 2(b)(ii) of the Loan Conditions contains the standard qualification: "unless inconsistent with the context". The agreement to pay the debt as a principal (see [35] above) on the second page of the Term Loan Agreement, is contained in that part of the contract that defines the term "you" specifically as Policy Factoring Ltd, the borrower: see [31] above. The context requires the obligation as a principal to be limited to the borrower in those circumstances. Clause 2(b)(ii) of the Loan Conditions does not apply to make Pioneer a principal debtor.[45] We do not regard the three conditions precedent set out at [35] above as affecting the position. Mr Gilbert accepted that Pioneer and others were named in their capacities as guarantors, so no issue of construction arises out of condition precedent (c). Indeed, that condition supports the view we have formed. [46] During the course of argument, Mr Gilbert accepted that obligations undertaken by Pioneer under the Term Loan Agreement were as guarantors, as opposed to covenantors. That being the case, it is unnecessary for us to consider whether it might have been open for White Heron to argue that Pioneer was a principal debtor on that basis. [47] We add that the interpretation of the contractual documents for which Mr Gilbert contended would have the odd result that Pioneer and the other guarantors could be liable for 100 per cent of the debt under the Term Loan Agreement but only 75 per cent under the separate Guarantee and Indemnity. Mr Gilbert accepted that would be the result if his submission were correct. We find it difficult to accept that the parties could have intended such a result. All parties potentially liable as guarantors were parties to both the Term Loan Agreement and the Guarantee and Indemnity. There would have been no need for the latter if, as Mr Gilbert contended, the same parties were all liable for the full amount of the debt as guarantors under the Term Loan Agreement. These considerations support our conclusion that, by entering into the suite of documents that included the separate Guarantee and Indemnity, the parties must have intended to limit the liability of the guarantors to 75 per cent of the debt owing by Policy Factoring. [48] Once it is accepted that the obligation under the Term Loan Agreement was as guarantor, Table C of the Annexure Schedule operates to limit liability of each guarantee to 75 per cent of the moneys owing by borrower to lender: see [36] above. Importantly, the Guarantee and Indemnity reinforces that view by limiting, in cl 2 of Part 1 of the document, the guarantors' liability to 75 per cent of the Guaranteed Monies as defined: see [41] and [42] above. [49] We are not persuaded that the Guarantee and Indemnity should be viewed independently from the Term Loan Agreement, even though its scope is wider. It isplain that the Guarantee and Indemnity was entered into contemporaneously with the Term Loan Agreement, execution of which was a condition precedent to the money being advanced (see [35] above). While its ambit goes beyond the Term Loan Agreement, there is no doubt that the Term Loan Agreement is encompassed within it. [50] It is significant also that White Heron demanded payment from Pioneer, pursuant to its obligations as a "guarantor". On any view, the obligation on a guarantor is limited to 75 per cent of the moneys payable. We find that Pioneer is liable only for 75 per cent of the moneys demanded in the statutory demand. [51] The amount paid to White Heron was $1,119,178.08; 75 per cent of that sum is $839,383.56. The difference is $279,794.52. [52] In this case, Pioneer is liable to pay 75 per cent of the debt claimed in the demand. Difficult questions of degree are involved in determining whether the difference between the debt claimed and the debt owed falls within the "substantial dispute" ground to which s 290(4)(a) refers. For example, should "substantial dispute" be assessed by reference to a dollar amount or a percentage of the debt claimed? We heard no argument on this issue and prefer to leave that question open. [53] Section 290(5) of the Act enjoins the Court not to set aside a statutory demand by reason only of a defect (defined in s 290(6) as including a material mis- statement of the amount due to the creditor). There is jurisdiction to set aside if the Court were satisfied a "substantial injustice" would be caused were no order made. [54] We are satisfied that the 25 per cent differential is such as to warrant us setting aside the statutory demand on the basis that there has been such a material mis-statement of the amount due, that a "substantial injustice" would be caused if Pioneer could not recover the lower sum. We have jurisdiction to set aside the demand under s 290(4)(c); see Chester at [57].[55] Counsel told us that, if we were to find that the guarantee was limited, they would be able to resolve entitlements to the fund held by White Heron to give effect to this Court's judgment. We leave them to do so.Costs[56] Mr Dugdale sought indemnity costs, in the event that the appeal was successful. He submitted that, while his new point had escaped attention in the High Court proceeding, the demand should never have been issued for the whole of the debt claimed. Mr Gilbert opposed, on the basis that if Pioneer succeeded it was on a point not argued in the High Court and White Heron ought not to be penalised for the way in which Pioneer had run its case. [57] We agree with Mr Gilbert. Pioneer has been granted an indulgence to raise the new point. Properly, White Heron responded to the specific points raised by Pioneer in the High Court. Because of that, White Heron ought not to pay costs in this Court. There will be no order as to costs in this Court. [58] So far as costs in the High Court are concerned, we leave those undisturbed. White Heron succeeded on the arguments put to the Associate Judge and there is no reason to reverse that part of the Associate Judge's decision.Result[59] For the reasons given: (a) The appeal is allowed. (b) The statutory demand is set aside. (c) No order as to costs in this Court. (d) The order for costs made in the High Court stands.Solicitors: Stace Hammond, Hamilton, for Appellant Gilbert Walker, Auckland, for Respondent