IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2009-404-006241

UNDER	Section 290 of the Companies Act 1993

BETWEEN	WATERFRONT CAPITAL TRUSTEE 1
LIMITED & ORS Applicants

AND	HANOVER FINANCE LIMITED Respondent

Hearing:	24 February 2010

Counsel:	D Salmon/S A Bonney for applicants
S A Barker/J M Blythe for respondent

Judgment:	11 August 2010 at 11:30am

JUDGMENT OF ASSOCIATE JUDGE ABBOTT

This judgment was delivered by me on 11 August 2010 at 11:30am, pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Solicitors:
Lee Salmon Long, PO Box 2026, Auckland 1140 for applicants
Buddle Findlay, PO Box 1433, Auckland 1140 for respondent

WATERFRONT CAPITAL TRUSTEE 1 LIMITED & ORS V  HANOVER FINANCE LIMITED HC AK CIV
2009-404-006241  11 August 2010

BETWEEN     WATERFRONT CAPITAL TRUSTEE 2 LIMITED, WATERFRONT CAPITAL TRUSTEE 3 LIMITED, WATERFRONT CAPITAL TRUSTEE 4 LIMITED, WATERFRONT CAPITAL TRUSTEE 5 LIMITED, WATERFRONT CAPITAL TRUSTEE 6 LIMITED, WATERFRONT CAPITAL TRUSTEE 7 LIMITED, WATERFRONT CAPITAL TRUSTEE 8 LIMITED, WATERFRONT CAPITAL TRUSTEE 9 LIMITED, WATERFRONT CAPITAL TRUSTEE 10 LIMITED, WATERFRONT CAPITAL TRUSTEE 11 LIMITED, WATERFRONT CAPITAL TRUSTEE 12 LIMITED, WATERFRONT CAPITAL TRUSTEE 13 LIMITED, WATERFRONT CAPITAL TRUSTEE 14 LIMITED, WATERFRONT CAPITAL TRUSTEE 15 LIMITED, WATERFRONT CAPITAL TRUSTEE 16 LIMITED, WATERFRONT CAPITAL TRUSTEE 17 LIMITED and WILLIAMS LAND LIMITED

[1]       This is a dispute over the enforceability of a loan advanced by Hanover Finance Limited (Hanover) for the purchase and development of a tourist resort in Fiji.  It is before the Court on an application to set aside statutory demands which Hanover has served on the eighteen applicant companies, requiring repayment of the loan.

[2]       The applicants say that there are genuine disputes as to whether they are liable to repay.  Hanover opposes the application.  It says that there is no substance to any of the alleged disputes.

Background

[3]  The applicant Williams Land Limited (then named Williams Capital Limited) (WLL) entered into an agreement with Hanover on 23 April 2007 for a loan to assist with the purchase of an existing resort on Vatulele and the development of that resort (the loan agreement).  It did so expressly as manager of a general partnership trading as the Waterfront Fund.

[4]       The Waterfront Fund was established by a deed dated 31 August 2006 with a view to investing in the development and sale of properties in New Zealand and Fiji. It initially comprised the applicants other than WLL (I will refer to them as “the special purpose companies”) and a limited liability partnership formed in the United Kingdom by associated interests.  WLL was appointed manager of the partnership. The partnership provided that other entities could join by means of a deed of accession. By the time of the loan agreement several other overseas partnerships had joined the partnership but the applicants remained the sole New Zealand entities in it.

[5]       The  partnership  entered  into  a  joint  venture  to  acquire  the  property  on Vatulele Island, Fiji.  A company, Vatulele Joint Venture Trustee Limited (VJVTL), was formed to hold the land as bare trustee for the joint venture.  The agreement to purchase the land was due to settle in late April 2007.   VJVTL approached ANZ Bank in Fiji for the finance needed to complete the purchase and to commence the development.

[6]       At that time (April 2007) Fiji was under military rule.  On 6 December 2006 the Reserve Bank of Fiji had announced restrictions on local borrowing by business entities controlled by non-residents.  It confirmed the continuation of restrictions on
30 March 2007.

[7]       On  or  about  20  April  2007  VJVTL obtained  a  loan  from  ANZ,  Fiji  of F$2,750,000.  It was for a period of two years, and was secured by first mortgage over the resort land.  Prior to securing this loan, as further funding was not available in Fiji, the Waterfront Fund approached Hanover for the balance of the funds required.  On 23 April 2007 WLL signed an agreement with Hanover for a loan of
$5,000,000, also for a period of two years.  The agreement provided for interest to be compounded,  and  to  be  payable  at  the  expiry  of  the  term.    WLL  signed  the agreement “as manager of the general partnership trading as the Waterfront Fund”. VJVTL signed the loan agreement as guarantor.

[8]       The first advance under the loan was made on 26 April 2007.   The loan became due for repayment at the end of April 2009.  The Waterfront Fund made a number of unsuccessful attempts to refinance the loan, before and after is due date. It remains outstanding.  Hanover has made demand on WLL and each of the special purpose companies for the amount due under the loan agreement ($11,622,812.09) as at 10 September 2009.

Overview of competing positions

The grounds for the application and opposition

[9]       WLL and the special purpose companies say that there is a substantial dispute as to whether the debt which Hanover claims is owing or due.  The special purpose companies say that they were not parties to the loan agreement.  All applicants also claim that the agreement has been frustrated, and that the demands are void because Hanover was required to obtain ANZ’s consent to any enforcement action.

[10]     Since  the  statutory  demands  were  served  and  this  application  was  filed, Hanover has agreed to transfer all its assets, including the loan agreement under

which the demands have been made, to Allied Farmers Investments Limited (Allied) as part of a financial restructuring arrangement.  As a further ground of opposition, the applicants say that the statutory demands are now of no effect (as a consequence of the restructuring) as Hanover no longer has an interest in the debt.

[11]     Hanover opposes the application.  It says that there is no basis for any of the alleged disputes.  It says that WLL entered into the loan agreement on behalf of all of the special purpose companies as partners in the Waterfront Fund, and that the agreement has not been frustrated by events in Fiji.  It says that it is not required to obtain ANZ’s consent.   Finally, and although it says that the transfer of the loan agreement as part of the restructuring arrangements has not yet taken place, out of an abundance of caution it has applied to join Allied to this proceeding to address any concern that the applicants have about a possible second demand.

[12]     It was agreed between counsel at the start of the hearing that the Court could determine the assignment issue without need for a formal amendment to the application.

Principles to be applied

[13]     The application is brought under s 290 of the Companies Act 1993 (the Act). Under that section the Court has a discretion to set aside a statutory demand where there is a substantial dispute as to whether or not the debt being demanded exists or is due, or on other grounds (which could include the applicants’ contention that Hanover is no longer a creditor for the purpose of making a statutory demand under s
289 of the Act).

[14]     The principles which the Court applies when deciding whether or not to exercise this discretion are well established.  It is sufficient for the purposes of this application to adopt the succinct summary of the Court of Appeal in Link Electrosystems Ltd v GPC Electronics (New Zealand) Ltd at paragraphs 16 and 17:

[16]      The statutory scheme can be highly coercive, and something of a sword of Damocles hanging over the very existence of a company. For that reason Courts have insisted that the provision is not to be used oppressively as a debt collection device. The legislation is not to be utilised more widely than its clear purpose, which is to require the payment of a sum certain — or largely certain — in a context where there is no substantial dispute.

[17]      What the alleged debtor is required to show has long since been established:

•           that there is arguably a genuine and substantial dispute as to the existence of a debt;

•           the  mere  assertion  of  a  dispute  is  not  sufficient,  some material — short of proof — is required to support the claim that the debt is in dispute;

•           if such material is available, the dispute should normally be resolved other than by means of proceeding by way of statutory demand;

•           it is routinely difficult to resolve disputed questions of fact on  affidavit  evidence alone  —  more  obviously so  where issues of credibility arise; and

•           it needs to be kept in mind throughout, that the task for the Judge is not to resolve the actual dispute, but to determine whether there is a substantial dispute whether or not the debt is due.

[15]     Although the Court must bear in mind the admonition in the last two points just cited, a Court is not required, even on these summary applications, to accept uncritically any or every allegation of a dispute of fact.   It can and will assess whether facts being advanced pass a threshold of credibility, often by reference to
contemporary documents or other statements of a witness.

[16]     The Court has to decide whether there is a proper legal foundation, and a sufficient factual basis, for any of the matters advanced by the applicants as constituting a substantial dispute as to whether or not the debt claimed is owing or due (s 290(4)(a)), or for any other grounds (s 290(4)(c)), to warrant setting the demands aside.

The effect of the assignment to Allied

[17]     It is not in dispute that on 17 November 2009 (after the statutory demands had been made and this application had been brought), Hanover and a related company, United Finance Limited, (United) entered into an agreement to dispose of their loan books to Allied.  Nor is it in dispute that on 18 December 2009 Hanover (and United) entered into a further agreement with Allied in relation to certain of the loans for which legal title did not pass to Allied on completion of the sale of the loan books.   The relevant parts of the latter agreement, for the purpose of the present application, read:

BACKGROUND

Hanover  ...  and [Allied], among others  are  parties to  an Agreement  for
Assignment of Finance Assets in Exchange for Debenture Obligations dated
17 November 2009 (the Sale Agreement) pursuant to which Hanover ... [has]
agreed to transfer certain loan assets being the Finance Assets described in paragraph 2 of Schedule 1 to the sale [sic] Agreement (the Loan Assets) to [Allied].  The parties wish to agree to certain arrangement to apply in respect of those Loan Assets in respect of which legal title is not passed to [Allied] on Completion under the Sale Agreement.

THE PARTIES AGREE as follows:

1          Hanover... to account for benefit
If and to the extent that a Loan Asset:

(a)        is   not   effectively   assigned   or   novated   to   [Allied]   at
Completion; or

(b)        cannot  be  effectively  assigned  or  novated  without  the consent of a third party and that consent has not been obtained,

then,  from  Completion    and  pending  the  parties  obtaining  the required third party consent and the effective assignment or novation of the Loan Asset, Hanover ... will:

(c)        hold that Loan Asset as bare trustee on trust for [Allied] .... .

[18]     When the applicants learned of these transactions their director, Mr Evan

Williams, wrote by email to Hanover’s finance manager, Mr James Fleming (on

4 February 2010):

We understand that Allied have now taken everything over and I imagine that includes the Vatulele loan.   Can you confirm?   Should we be dealing with you? ....

[19]     Mr Fleming replied the following day:

Yes Allied have taken over the Vatulele loan and I will continue to manage this. ....

[20]    The applicants contend that, as a consequence of these transactions and Hanover’s advice, Hanover has assigned the debt to Allied either absolutely or in equity, and (if it is payable) the debt is payable only to Allied pursuant to s 51(3) Property Law Act 2007.   They say that there is an issue over the nature of the assignment (absolute or equitable) which cannot be determined until the terms of the sale agreement are disclosed.  Moreover, they say that if the debt is no longer due to Hanover (because it has been assigned absolutely), or Hanover cannot sustain a demand for the debt in its own right (because the debt has been assigned in equity), Hanover no longer qualifies as a creditor for the purposes of s 289 of the Act.

[21]     Counsel for Hanover submitted that there is no tenable argument that the debt has been assigned absolutely in light of the unequivocal evidence of Mr Fleming, supported by the agreement of 18 December 2009, that the loan had not been legally assigned.  In his written argument, counsel took the position that the loan agreement had not been assigned in any manner.  However, in oral argument, he accepted that it was arguable that the loan had been assigned in equity but submitted that that did not affect Hanover’s ability to pursue the debt as it remained the legal owner.  He argued that the declaration of trust in favour of Allied did not, as a matter of company law, deprive Hanover of its status as a creditor, relying on the reasoning of the Privy Council in Parmalat Capital Finance Ltd v Food Holdings Ltd (in liquidation) &
Anor.    He submitted that Hanover had a sufficient interest to demand payment of

the debt without joining Allied (as equitable assignee), and that there was nothing in the Property Law Act 2007 to preclude it from bringing liquidation proceedings against  the  applicants  on  its  own.    However,  out  of  an  abundance  of  caution, Hanover had applied to join Allied as an applicant (with Allied’s consent) to ensure that the applicants did not face the risk of a second demand for the same debt.

[22]     If the assignment of this loan to Allied was absolute, there can be no question that Hanover could no longer be considered a creditor, or that there was still a debt due to it for the purpose of s 89 of the Act.  Section 50 of the Property Law Act 2007 expressly provides that an absolute assignment of a right to receive payment of a debt passes to the assignee (Allied) all the rights of the assignor (Hanover) in relation to the right to receive payment, as well as all of the remedies of the assignor and the power to give a good discharge of the debt.  The first question to decide in this case is whether there is a substantial dispute as to whether there has been an absolute assignment of the loan agreement and the debt.   I find there is not.   There is no reason to question the unequivocal evidence of Mr Fleming that:

... the loan that is the subject of the statutory demands at issue in the current proceeding is one of a bundle of loans that have not been legally assigned from Hanover to Allied.  Rather, Hanover holds the loan on trust for Allied. Annexed and marked “A” is an Agreement to Hold Certain Loan Assets in Trust which evidences this. I confirm that this situation pertains at present.

[23]     I do not consider it necessary to investigate the terms of the agreement for assignment of Hanover’s loan book dated 17 November 2009 in light of this unequivocal evidence, and the terms of the agreement of 18 December 2009 (set out in paragraph [17] above.  Although the email exchange between Mr Williams and Mr Fleming, read on its own, is equivocal as to the nature of the assignment, it is not inconsistent with Mr Fleming’s subsequent clear evidence that the loan has not been legally assigned.

[24]     The more significant question is the legal effect of an equitable assignment. Counsel for the applicants argued that s 51(3) of the Property Law Act 2007 applies:

51        Further consequences of assignment of thing in action

(1)        This section applies to a thing in action assigned in accordance with section 50(1) or in equity.

(2)        Payment of all or part of the debt to the assignor by a debtor who does not have actual notice of the assignment discharges the debtor to the extent of the payment.

(3)        The debt owing by a debtor who has actual notice of the assignment is payable to the assignee.

[25]     Counsel  for  Hanover  argued  that  a  statutory  demand  was  a  creature  of company law and the provisions of the Property Law Act 2007 (and particularly s 53(3)) were not intended to prevent a party who has standing (such as Hanover as the legal owner of the debt) from bringing liquidation proceedings.

[26]     I accept the distinction put forward on behalf of Hanover between a statutory demand as a precursor to and for the purposes of liquidation proceedings, and the assignment provisions of the Property Law Act.   The latter are directed towards ensuring that a debtor is not prejudiced or embarrassed by more than one claimant for the debt as a consequence of assignment.

[27]     A similar conclusion was reached by the Privy Council in Parmalat Capital Finance Ltd.   In that case the respondent liquidators had petitioned for winding up of the appellant (Parmalat).  There was a complicated background of intercompany arrangements under which the respondents issued loan notes and used the proceeds of the issue to purchase stock in another company in the group, so as to provide it with equity finance.  The stock was charged as security for noteholders.  Parmalat entered into a put agreement with the respondents to buy the stock when the loan notes fell due, to allow the respondents to pay the noteholders.  The respondents also
charged their rights under the agreements as security for repayment of the notes. The respondents brought a petition for winding up of Parmalat, founded on the sums owing under the put agreement.   Parmalat (by this time itself in administration) opposed the winding up petition on the grounds that the respondents had no locus standi  as  petitioners  because  they  had  assigned  the  entire  benefit  of  the  put agreement to a trustee for the noteholders.

[28]     There were two questions before the Privy Council.  The first was whether the respondents were creditors.   The second was whether the trustee for the noteholders (Norwest) should have joined in the proceeding.

[29]     The Privy Council found that the respondents were creditors, having retained both the legal title and an equity of redemption:

6.         There is no dispute that, at the commencement of the winding up, the money due under the put agreements had become payable and PCFL was insolvent. Section 96 of the Companies Law provides that a petition may be presented by a “creditor” and the first question is whether Food and Dairy were creditors.  The Board considers that they were.  Food and Dairy were the contracting parties to the put agreements and had the right, as against PCFL, to demand payment.  They retained both the legal title and the equity of redemption.  In the opinion of the Board, the fact that they had assigned the debts by way of security to Norwest did not deprive them of the status of creditors.

[30]     Further, the Privy Council said it was not necessary for the equitable assignee to be joined (rejecting an analogy with an action to recover a debt where an assignor seeking to recover must join the assignee):

7.         Mr Moss QC, who appeared for the appellants, submitted that even if Food and Dairy were entitled to sue, the proceedings were not properly constituted because Norwest, as equitable assignee, should have been joined in the proceedings.   He relied upon the analogy of an action to recover a debt, in which it is clear that an assignor seeking to recover an assigned debt must join the assignee:  see Walters & Sullivan Ltd v J Murphy & Sons Ltd [1955] 2 QB 584, 588.   But the analogy is false.   As P O Lawrence J explained in Re Steel Wing Company Ltd [1921] 1 Ch 349, 357:

“The main reason why an assignee of a part of a debt is required to join all parties interested in the debt in an action to recover the part assigned  to  him  is  in  my  opinion  because  the  Court  cannot adjudicate completely and finally without having such parties before it.   The absence of such parties might result in the debtor being subjected to future actions in respect of the same debt, and moreover might result in conflicting decisions being arrived at concerning such debt.   In my opinion, however, this reasoning does not apply to a winding up petition.   After a winding up order has been made the Court in all cases when it is necessary will investigate, adjudicate upon, and settle the petitioner's debt as well as the debts of the other creditors.  In the case of an assignee of part of a debt the Court in adjudicating upon his claim can and will do so in the presence of the persons entitled to the remainder of the debt, and the rights of all parties interested in the debt will be completely and finally settled once and for all.”

8.         In other words, a winding up order does not affect the legal rights of the creditors or the company.  It only puts into effect a process of collective execution against the assets of the company, for the benefit of all creditors. In the course of that process, the rights of creditors may have to be determined.  But such a determination is not necessary at the stage when the order is made.   An equitable assignor therefore has a sufficient interest without joining the assignee.

[31]     In the present case, similarly, there is no dispute that the money due under the loan agreement has become payable.   It is also a reasonable inference from the applicant’s failure to repay the debt that they are insolvent (the debt fell due in April
2009), and it is the appellants own evidence that they have been unsuccessful in raising the funds needed to repay it.   The statutory demands were made at a time when Hanover had both legal and equitable ownership of the debt, and it is clear from the evidence that Hanover has retained legal title pending compliance with undisclosed  contractual   commitments  before  an  absolute  assignment  can  be effected).  Counsel for the applicants sought to distinguish Parmalat on the basis that Privy Council’s finding was based on company law of the Cayman Islands, and that the assignment in that case had been by way of security.  It is clear from the extracts from the report cited above that the Privy Council did not see any reason to distinguish between the company law of the Cayman Islands and that of the United
Kingdom as described in Re Steel Wing Company Limited.   I consider that the same

reasoning has equal application here.  Nor do I see any reason to distinguish the case on the basis that the assignment in Parmalat was by way of security only.   The critical point, in my view, is that Hanover has retained legal title.

[32]     I also note that the concept of collective execution, underlying the reasoning of the Privy Council, has had judicial support in this country in Bank of New Zealand Ltd v Rada Corporation Ltd.

[33]     I find that Hanover remains a creditor (in terms of s 240(1) of the Act, for the purposes of s 289 of the Act, notwithstanding the assignment of the loan to Allied in equity.  I also find, on the basis of the principle in Parmalat, that it is not necessary to join Allied as the equitable assignee.  In that respect, however, I take into account that Allied consents to be joined and views its interest and Hanover’s interest in the debt as one and the same.

The parties to the agreement

[34]     The applicants contend that none of the 17 special purpose companies are a party to, and thereby liable under, the loan agreement.  They argue the WLL alone is named as borrower, and that its execution of the loan agreement as manager of the Waterfront  Fund  partnership  does  not  bind  the  special  purpose  companies  as partners.  They say that Hanover cannot rely on clause 13.3 of the general terms and conditions to the agreement (which extends the definition of the borrower to partners of a partnership) because WLL is not a partnership nor is it described in the agreement as a member of a partnership.

[35]     Hanover  contends  that  all  of  the  special  purpose  companies  are  bound, relying on s 9 of the Partnership Act 1908.  It contends that WLL had authority to enter into the loan agreement on behalf of the Waterfront Fund partnership and by signing the loan agreement as manager it showed an intent to bind the partnership (in circumstances  where  it  was  a  condition  precedent  of  the  loan  agreement  that Hanover be provided with a copy of the partnership, and that the board of Waterfront Fund partnership approve entry into the loan agreement and security documents, which steps were taken before the loan agreement was signed).

[36]     I am not persuaded that there is an arguable dispute over the liability of the special purpose companies.   I am satisfied that WLL’s execution of the loan agreement binds them as partners in the Waterfront Fund partnership.

[37]     Section 9 of the Partnership Act 1908 applies:

9          Partners bound by acts on behalf of firm

An  act  or  instrument  relating  to  the  business  of  the  firm,  and  done  or executed in the firm name, or in any other manner showing an intention to bind the firm, by any person thereto authorised, whether a partner or not, is binding on the firm and all the partners:

Provided that this section shall not affect any general rule of law relating to the execution of deeds or negotiable instruments.

[38]     WLL’s execution of the loan agreement has to be construed in the following context:

a)        The loan was sought for the purpose of completing the purchase of the land and helping to fund development of the resort for the Waterfront Fund partnership.

b)	The special purpose companies are all partners in that partnership.

c)        WLL was appointed manager of the partnership under the partnership deed dated 31 August 2006.

d)        Under clause 12.3 of the partnership deed WLL was appointed to manage the partnership business, including executing contracts or documents necessary or desirable for management of the business, and to borrow on behalf of the partnership:
12.3     Manager to manage Partnership:  Subject to the terms of this   deed,   the   Manager   will   manage   the   Partnership Business, as agent for and on behalf of the Partners, with power to do all things the Manager considers necessary or desirable for the Partnership Business as if it were the absolute owner of all assets of the Partnership.   Without limiting the generality of the foregoing, the Manager will represent the Partnership in all matter of Partnership Business, and do or cause to be done all things that it considers necessary or desirable for the efficient and proper management of the Partnership Business.  In particular, but without limiting the foregoing sentence, the Manager will have the following powers and authorities:

...

(c)       to execute on behalf of the Partnership any contracts or documentation that the Manager considers necessary or desirable in the management of the Partnership Business, and exercise (or refrain from exercising) all rights, powers and discretions conferred under any contract or documentation:

...

(h)       subject to clause 11.3(d) to borrow on behalf of the Partnership and give security over the Property (or any part thereof for that purpose.

e)        Under clause 11 of the partnership deed a board was established to supervise   the   partnership   business,   including   supervising   the manager’s performance of its obligations and approving the terms of any borrowings to be made by the partnership.  In  particular, clause
11.3(d) provided:

11.3     Responsibility   of   the   Board:      The   Board   shall   be responsible for supervising the Partnership Business, including:

...

(d)	approving the terms of any borrowings to be made by the Partnership. ....

f)	The services to be performed by the manager were set out in schedule

3 to the deed.  They included:

•	Arranging and managing bank or external finance (in accordance with the terms of this deed).

g)        The partnership deed also provided (clauses 12.4 and 12.5) that the rights, powers and discretions of the manager under the deed were to continue despite any change in the composition of the partnership, and for each of the partners to appoint the manager as its attorney.

h)        Hanover’s loan offer to WLL dated 20 April 2007 was addressed to WLL “in its capacity as manager of the general partnership trading as The Waterfront Fund”.  It required as conditions precedent to any loan that WLL was to provide it (Hanover) with a copy of the partnership deed and evidence that the board had approved entry into the loan and the security documents.  Hanover’s evidence that it was provided with a  copy  of  the  partnership  deed  before  it  entered  into  the  loan agreement has not been challenged.

i)         On or about 19 April 2007 the Board of the Waterfront Fund passed a resolution approving WLL’s entry into the loan agreement (and other documents) in its capacity as manager of the partnership after noting, for the purposes of clause 11.3(d) of the partnership deed, that the board considered it to be in the best interests of the partnership to borrow on that basis.

j)         The requirement of the loan offer that Hanover be provided with a copy of the partnership deed, and evidence of board approval of the loan, were carried forward into the special  conditions of the loan agreement, as conditions precedent.

[39]     I find, in this context, that the execution of the loan agreement by WLL “as manager of the general partnership trading as the Waterfront Fund” shows an intention by both parties to bind the Waterfront Fund, with the effect that the loan agreement is binding on the special purpose companies as partners.

[40]     Counsel  for  the  applicants  sought  to  draw  a  distinction  between  WLL’s signature “as manager” and VJVTL’s signature “in its own capacity and as bare trustee for the participants in the Vatulele joint venture”.   I see nothing in that distinction to assist the applicants, particularly in the context that I have described. He also argued that it was not necessary for WLL to sign on behalf of the applicants because the parties intended that any recourse was primarily to be to the stated securities.  There is no limitation to this effect in the loan agreement.   I am in no doubt that the proper interpretation of the loan agreement is that WLL entered into it on behalf of the partnership.

[41]     The last matter advanced on behalf of the applicants was that Hanover could not rely on clause 13.3 of the loan agreement, because that clause applied only where the borrower was, or was described as, a partner in the partnership, and WLL was a company and not one of the partnership.   Although a partner is defined in the partnership deed as any party to the deed (which would appear to include WLL), I do not have to decide that point.  I am satisfied that the parties intended that WLL was entering into the loan agreement, and that clause 13.3 does not require a different interpretation.

[42]     Counsel for the applicants took issue with evidence provided by Hanover’s manager, Mr Mark Hensley, as to its intention in respect of WLL’s execution of the loan agreement, and as to what he described as “common practice” of managing partners.  As will be apparent from the reasoning above, I have not given any weight to that evidence in coming to my decision on the interpretation of the loan agreement and the application of s 9 of the Partnership Act 1908.   I am satisfied that the Waterfront Fund partnership was borrowing through WLL as its disclosed manager.

The effect of the deeds of priority

[43]     It was a term of the loan agreement that ANZ Bank, Hanover, the vendor of the resort land (presumably because it retained some interest in the venture or the land) and VJVTL enter into intercredit deeds/deeds of priority.  Under those deeds Hanover agreed to rank behind ANZ in respect of its security.  The deeds provided in clause 10 that:

... subsequent ranking Chargees may not exercise any power, right or remedy under or in respect of their Security without the consent of [ANZ].

[44]     The applicants say that the issue of the statutory demands is an exercise by Hanover of a power under its security (being a mortgage over the resort land and a mortgage debenture over VJVTL’s undertaking), in that the loan and therefore the debt, are secured by FJFVTL’s guarantee, and thereby come within the scope of those securities.   They contend that Hanover’s argument that a demand under the loan agreement is not the exercise of a power, right or remedy under or in respect of the security, would rob the words “or in respect of” of any meaning, and would undermine the purpose of the priority deed.  They say that consent was required, and on the evidence before the Court, it was not obtained.

[45]     Hanover advances several arguments for saying this does not constitute a ground for setting aside the demands.  First, it says that clause 10 is for the benefit of ANZ, not the applicants, and that ANZ is aware of the demands and has not challenged Hanover in respect of them.  Secondly it says that clause 10 applies only where Hanover wishes to enforce its security (in other words take steps in respect of the mortgage or the debenture granted by VJVTL), and that the demands are claims on the applicants rather than VJVTL in respect of the covenant to pay under the loan agreement.

[46]     I am not persuaded that there is any merit to the arguments advanced for the applicants.  The deeds of priority govern the obligations of ANZ and Hanover, but only in respect of the common securities (the mortgage debenture over VJVTL’s assets and undertaking and the mortgage over the resort land.  There is no reasonable argument  for  extending  the  application  of  the deeds  to  constrain  Hanover  from

taking action against the Waterfront Fund partnership.   ANZ had no relationship with  WLL  or  the  partnership  generally,  and  had  taken  no  security  from  them. Hanover is exercising rights as lender under its loan agreement, and not as a secured creditor in respect of the securities governed by the deeds of priority.

[47]     Moreover, even if the demand could be construed as being “in respect of the security” the obligation under clause 13.3 is clearly for the benefit of ANZ, rather than third parties such as WLL or the special purpose companies.  At best it would be a breach of obligations to ANZ, and would not operate to make the obligations under the loan agreement void.

Is the agreement frustrated?

[48]   The development of the Vatulele resort has coincided with a period of constitutional and economic uncertainty in Fiji.  The applicants say that uncertainty created by the removal of the Government of Fiji by its military in December 2006, and the subsequent annulment of its constitution, have led to a deterioration of its economic position.  Added to that, they say that the ability of non-residents to raise money has been significantly curtailed by the introduction in the early part of 2007 of  new  policies  on  overseas  investment.    They  contend  that  these  events  have affected the financial viability of the resort, preventing an anticipated refinancing of the Hanover loan in Fiji, and making it impossible to refinance the loan offshore. They say that the extent of these political and economic changes could not have been foreseen and has radically altered the nature of the parties’ bargain.

[49]     The applicants have produced evidence from:

a)	a consultant on financial and policy matters in Fiji as to:

i)	the December 2006 coup and subsequent constitutional events;

ii)        the effect on the economy, including supervision of aid by international organisations and the international community, the lowering of Fiji’s credit rating, the tightening of exchange

control policies, a decline in Fiji’s gross domestic product and the ratio of investment to GDP, and a sharp production in tourist numbers and earnings from tourism; and

iii)	the	unexpected	extent	and	duration	of	the	economic deterioration.

b)        Mr Williams as to the political and economic conditions at the time that  the  loan  was  taken  out,  the  effect  of  decline  in  economic conditions on the resort, and the effect of that decline on the Waterfront Fund’s attempts to finance the Hanover loan (including the approaches made to prospective financiers with a view to refinancing the loan in New Zealand).

[50]     Counsel for the applicants submitted that the applicants’ affidavits disclose an arguable basis for their claim for frustration of the loan agreement.  He argued that a claim of frustration is highly fact specific, and requires a factual inquiry which is  not  possible  in  a  summary application  to  set  aside  a  statutory demand.    He submitted that the applicants had done enough to establish a substantial dispute on this issue.

[51]     The respondent contends that the matters advanced by the applicant cannot meet the test for frustration.   Counsel for the respondent submitted that cases in which loan agreements have been held to have been frustrated are extremely rare (the Court was not referred to any cases, internationally, where such a claim had succeeded).     Hanover  does  not  dispute  the  events  set  out  by  the  applicants concerning the constitutional and economic deterioration in Fiji at material times, but contends that those matters are so far short of what the applicants need to show for a successful claim of frustration that there is no call for any further inquiry.  It says:

a)        The  Reserve  Bank  of  Fiji’s  restriction  on  non-resident  entities’ borrowing in Fiji was in place before the loan agreement was signed, and its continuance was foreseeable.

b)        It  lent  the  money  in  New  Zealand,  to  New  Zealand  and  English domiciled entities (the partners of the Waterfront Fund) so as to avoid any Fiji specific risks.

c)        The  applicants’  inability  to  refinance  is  because  it  cannot  offer acceptable  security  to  a  new  lender,  and  in  that  respect  it  is  no different from any borrowers in the present economic environment: economic hardship does not frustrate a contract.

d)        It denies that there was any mutual understanding (as contended for by the applicants) that the loan would be repaid from refinancing in Fiji, noting that there is nothing to that effect in the loan agreement. Further,  even  if  there  was  an  arguable  dispute  as  to  whether refinancing in Fiji was “mutually anticipated”, it was not mentioned in the contract and therefore did not meet the test for frustration that it went to the very basis of the contract.

[52]     Counsel were agreed on the test for frustration of contract.  It is to be found in the often cited passage of the House of Lords in Davis Contractors Ltd v Fareham Urban District Council:

... frustration occurs whenever the law recognizes that without default of either  party  a  contractual  obligation  has  become  incapable  of  being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract.  Non haec in foedera veni.  It was not this that I promised to do .. .  There must be ... such a change in the significance of the obligation that the thing undertaken would, if performed, be a very different thing from that contracted for.

[53]     The Courts have adopted the following principles when applying the general test:

a)        The doctrine of frustration must not be invoked lightly.  It must arise out of some external event, which has occurred without the fault of a contracting party.

b)        There must be a failure of something that the parties intended was at the basis of the contract in the intention of both parties.

c)        Whilst foreseeability is a factor, it is not definitive (the fact that a risk is foreseen does not necessarily preclude the application of the doctrine).

A contract will not be discharged for frustration merely because it turns out to be more difficult to perform, than expected.  Inflation, variation in prices, and currency depreciation are ordinary risks of business which do not, of themselves, affect the bargain the parties have made: . 

A recurring theme in the various cases is that it is not sufficient that the contract has become more burdensome or performance more expensive.  The test is a much higher one. ....  As Viscount Simon said in British Movietonenews Ltd at p 185, the parties to a contract are often faced with a turn of event they did not anticipate, such as a wholly abnormal rise or fall in prices or a sudden depreciation of the currency, but this does not itself affect the bargain they have made.

d)        Frustration operates in an all-or-nothing fashion.  If the contract is not frustrated, it remains on foot, and both parties remain liable for its non-performance.   If it is frustrated it fails completely and neither party can continue with performance.

e)        Ultimately it is a question of the proper interpretation of the contract, having regard to the circumstances in which it was made, including any necessary implication.

[54]     I am not persuaded that the applicants have raised an arguable dispute on the basis of frustration.  Hanover accepts, at least for the purposes of this application, the evidence   put   forward   by   the   applicants   as   to   the   political   and   economic consequences of the Fijian coup, after entry into the loan agreement.   It is not

necessary,  again  for  the  purposes  of  this  application,  to  resolve  the  difference between the parties as to whether the parties could have foreseen the duration of the political uncertainty or the severity of the economic deterioration.  Foreseeability can be  a  factor,  but  it  is  not  necessarily  determinative  either  way.    Ultimately  the question  is  whether  the  duration  and  extent  of  the  political  and  economic deterioration have made such a difference to the applicants’ obligation to pay that it can be said that it was not what the parties intended in those circumstances.  This point can be decided by the terms of the agreement.

[55]     The  learned  author  of  International  Loans,  Bonds,  Guarantees,  Legal Opinions, Philip R Wood QC, has expressed the view that although loan agreements can be affected by frustration, it is likely to occur only in extremely unusual circumstances: 

Frustration of loan contracts

Loan contracts may be affected by frustration of contract as with any other contract, as where the contract becomes impossible or possible only in a radically different way from that originally contemplated.   However, frustration is extremely unusual.

It is considered that external events outside the control of the borrower, such as economic depressions, war or the like, will not excuse the borrower from its obligation to repay a loan.

....

An  obligation  to  pay  might  be  frustrated  if,  for  example,  the  credit agreement requires payment to a specific bank in a country of the currency and  it  is  completely  impossible  to  make  payment  through  the  payment system or to deliver the money in any other way.  It is considered that the test would be stringent.

[56]     I also accept the submission of counsel for Hanover that where the obligation that is said to have been frustrated is the payment of money, the method of performance  that  is  said  to  have  become  impossible  must  be  stipulated  in  the contract, and not merely contemplated by the parties.  Support for this view can be found in the view of Sir Guenter Treitel QC in Frustration and Force Majeure where he discussed circumstances affecting ability to pay, or where a contemplated

method of performance subsequently becomes impossible.      In the former circumstance, the learned author referred to the decision of the English Court of Appeal in Universal Corporation v Five Ways Properties Ltd  as support for the proposition  that  events  affecting  a  buyer’s  ability to  pay could  be  a  ground  of discharge where the contract specified a source of payment (my emphasis) and that source later failed.  In the case of impossibility of method of performance, he commented that where a contract required a specified method of payment to be adopted,  (again  my emphasis)  the  contract  could  be  discharged  if  that  method subsequently became impossible.  In each case, it was the intention of the parties as expressed in the contract that was affected by the alleged frustrating event.

[57]     In  Universal  Corporation  v  Five  Ways  Properties  Ltd,  purchasers  of  a property  intended  to  finance  the  purchase  from  monies  deposited  in  a  bank  in Nigeria.   Due to a change in exchange control regulations in force in Nigeria, the money was received some six weeks late, and after a notice to complete had expired and the vendors had rescinded the contract.  The Court rejected an argument that the delay in obtaining the funds had frustrated the contract:

The judge dealt with the topic of frustration quite shortly.  He said:

“But quite emphatically the doctrine of frustration cannot be brought into play merely because the purchaser finds, for whatever reason, he has not got the money to complete the contract”

That seems to me to be an accurate and proper statement.   Certainly the plaintiff was unable, by reason of matters beyond its control, to complete the contract when it should have done so, but this is something quite different from the contract having been incapable of performance; not in my view, can it be suggested that anything had happened to make the performance of the contact, in the circumstances existing at the date of completion, significantly different from what was contracted for.

[58]     Further support for the proposition that the means of payment needs to be specified in the contract, in order to amount to a frustrating event, can be found in the decision in International Finance Corporation v Utexafrica SPRL.   In that case counsel for the defendant argued that a loan agreement had been frustrated by outbreak of civil unrest in Zaire in 1991, which had had an impact on the ability of the defendant to earn foreign currency required to meet its obligations under the loan agreement.  The civil unrest only began to undermine the economic stability of Zaire after the loan had been advanced, and at the time that the defendant was to pay
instalments under the loan.   The Court rejected an argument of frustration, even though the contract had specifically provided for a means of payment:

33.       Mr Popplewell accepted that the impact of political or economic factors will not usually by sufficient to frustrate an agreement of this kind, but he submitted that the present case was unusual because the parties had clearly contemplated that the loan should be repaid with foreign currency derived from earnings of the factory in Kinshasa. He submitted that the parties had not allocated the risk of disruption of  the  business  to  Utexafrica,  so  that  when  performance  in  the manner   contemplated   by   the   parties   became   impossible   the agreement was discharged.

34.       Although  I  readily  accept  that  the  parties  to  the  Investment Agreement did contemplated that the instalments of the principal and the amounts due by way of interest would be paid from the proceeds of the business, I am unable to accept that under the agreement the obligation  to  make  the  semi-annual  payments  of  principal  and interest was directly linked to the financial success of the project or that the parties failed to allocate the risk of economic disruption. There  is  nothing  in  the  Investment  Agreement  which  expressly makes the obligation to make those payments conditional on the ability to raise foreign exchange from the business or links the two in any other way, nor do I think that any such condition or linkage can be implied.  The parties clearly did give some consideration to questions of this kind because Texaf’s obligations under the Article IV of the FERA to fund the retention account are expressly made subject to events of force majeure which include civil war, insurrection or armed hostilities in Zaire causing production to fall below a certain level.  No such provisions were included in either the Investment Agreement or the FERA in relation to the obligation of Utexafrica.  It is perhaps interesting to note in passing that although it seems to have been accepted that Texaf’s obligations have been discharged under these provisions, it has not previously been suggested  that  the  agreement  has  been  discharged  as  far  as Utexafrica is concerned.

35.	In  these  circumstances  I  do  not  think  that  there  is  any  realistic prospect the Utexafrica would defeat the claim on these grounds.

[59]     Even accepting that there is a possible argument that the duration and extent of the political and economic deterioration was greater than anticipated at the time of the loan agreement, I find that this does not go to the heart of the obligation to pay. It is far more significant that there is no provision in the agreement as to how the refinancing was to be effected, let alone that it was to be from a source in Fiji.  It is also relevant that the loan was advanced in New Zealand, to a predominantly New Zealand domiciled group (the applicants).   These two factors, plus the undisputed efforts of the applicants to refinance within New Zealand, indicate that it was a matter for the applicants as to how and where they refinanced the loan.   This is
consistent with the views of Sir Guenter Treitel referred to above,  when arguing

that loss of capacity to pay, of itself, was not a frustrating event.

[60]     I can accept that there could be an argument that performance became more difficult after the loan agreement, but that does not meet the test for frustration.  It is no different from any loan contract in poor economic times.

[61]     Counsel for the applicants argued that it was axiomatic that the parties would not have provided in the agreement for a source of repayment if they were of the one mind that the agreement was not to apply in these circumstances.  As I have already indicated, that argument does not fit with authorities or the context.  The agreement needs to be construed against the background of military coups, and the fact that the applicants had the opportunity to protect themselves against the possibility that the political and economic circumstances would not be resolved in time to achieve a refinancing, but did not seek to do so.  It is a reasonable inference that they did not because Hanover would not have been willing to assume such a risk.

[62]     Finally, it is significant that the applicants did not raise frustration until these proceedings  were  issued.    If  the  deterioration  was  as  marked  as,  and  had  the

contractual significance for which, they now contend, I would have expected them to have raised frustration well before they did.

Decision

[63]     The  applicants  have  not  satisfied  me  that  there  is  a  substantial  dispute whether or not the debt is owing or due, or that the statutory demand ought to be set aside on any other grounds.

[64]     Counsel for Hanover sought an order that Hanover be entitled to file an application for the liquidation of the applicants within 48 hours of any decision dismissing the application to set aside.   Given the length of time since the loan became due, it is unlikely that the applicants will be in a position to meet the demand within any further extension of the period of time for compliance.   However, I propose allowing slightly longer than Hanover sought, in case the applicants have, since the hearing of this application, been able to identify some source of finance to enable them to repay the loan.

[65]     I make an order that the applicants are to pay the debt within 5 working days and, in default of payment, Hanover may make an application to put the applicants into liquidation.

[66]     As the successful party, Hanover is entitled to costs.  I see no reason to make an order other than on a 2B basis.  If counsel are unable to agree, either party may approach  the  Registrar  and  have the  matter  listed  for  call  in  the  miscellaneous insolvency list at 11:45am on 31 August 2010.   If that mention is required, memoranda setting out the costs being sought, and the areas of dispute, are to be
filed by Hanover by 26 August 2010, and by the applicants by 27 August 2010.

Associate Judge Abbott