IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE	
CIV-2018-404-001164
[2018] NZHC 2654	

UNDER	The Companies Act 1993	
BETWEEN	WALLACE HOMES LIMITED
Applicant	
AND	PEARLFISHER TRUSTEE LIMITED
Respondent	

Hearing:	5 October 2018	
Appearances:	O Collette-Moxon and E Boshier for the Applicant T Fitzgerald and S Cooper for the Respondent	
Judgment:	12 October 2018	

JUDGMENT OF ASSOCIATE JUDGE P J ANDREW

This judgment was delivered by me on 12 October 2018 at 3:30pm pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar Date:………………………….

Solicitors:
Duncan Cotterill, Auckland Bell Gully, Auckland
Counsel:
O Collette-Moxon, Princes Chambers, Auckland

WALLACE HOMES LIMITED v PEARLFISHER TRUSTEE LIMITED [2018] NZHC 2654 [12 October 2018]

Introduction

[1]	The applicant, Wallace Homes Ltd (Wallace Homes) is a property developer. The respondent, Pearlfisher Trustee Ltd (Pearlfisher), is a non-bank lender which specialises in property development funding.

[2]	Wallace Homes applies to set aside a statutory demand for $353,260.37 issued against it by Pearlfisher. The disputed sum includes two fees that Pearlfisher says that Wallace Homes agreed to pay as part of Pearlfisher arranging finance for Wallace Homes (the loan facility). Wallace Homes was looking to refinance existing debt for
$9.5 million. The two fees consist of an arrangement fee of $100,000 and an establishment fee of $245,000.

[3]	The loan facility did not proceed. Wallace Homes says that there was no legally binding contract requiring it to pay either fee or alternatively, if there is a binding contract, the requirement to pay the fees was not triggered.

[4]	The critical issue I must determine, pursuant to s 290(4) of the Companies Act 1993, is whether there is arguably a genuine and substantial dispute as to the existence of the debt. This turns on the question of whether the prerequisites to the formation of a contract were met.

Relevant legal principles

[5]	The Court’s jurisdiction to set aside a statutory demand is contained in s 290 Companies Act 1993. That section reads:

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.

[6]	For the purposes of this hearing, I adopt as a general approach to the exercise of this jurisdiction these principles –

(a)	The applicant must show that there is arguably a genuine and substantial dispute as to the existence of the debt. Put another way, the applicant must show that there is a real and not a fanciful or insubstantial dispute.1

(b)	The mere assertion that the dispute exists is not sufficient. Material short of proof is required to support the claim that the debt is disputed.

(c)	If such material is available the dispute should normally be resolved other than by means of proceedings in the Court’s Companies Act jurisdiction.

(d)	It is not usually possible to resolve disputed questions of fact on affidavit evidence alone, particularly when issues of credibility arise.2

[7]	The court’s discretion over whether to grant the application is wide, and the court is not required to set aside the statutory demand even if the grounds in s 290(4) are established. However, the Court of Appeal has confirmed that:3
… in general terms, the discretion not to set aside a statutory demand when the necessary jurisdiction to do so is established under s 290(4)(a)(b) will be exercised only in rare cases, when there are strong grounds for doing so.

1	Re A Company [1991] BCLC 737 (Ch) at 740 per Harman J, adopted in AAI Ltd v 92 Lichfield Street Ltd (in rec and in liq) [2015] NZCA 559 at [22].
2	For this formulation of the applicable principles, I acknowledge the editors of Company and Securities Law (looseleaf ed, Brookers) at [CA290.02(1)].
3	Primary Health Remuera Ltd v Avoca Residential Construction Ltd (2004) 9 NZCLC 263, 647 (CA) at [42]; see also Alfex Doors and Windows Ltd v Alutech Windows and Doors Ltd (2001) 16 PRNZ 963 (CA) at [14].

Background facts

[8]	Wallace Homes is currently undertaking an 18-property residential development at Mangere Bridge. By May 2018, it had incurred debt of approximately
$9.5 million to a lender named Spinnaker Securities Ltd. Wallace Homes wanted to refinance that debt and so appointed a broker, Ms Rachel Wang, to arrange a new facility. Ms Wang represented Wallace Homes throughout the negotiations.

[9]	The parties met on 3 May 2018 and later that day Pearlfisher sent Ms Wang a document entitled “Indicative Offer”.

[10]	Pearlfisher says that the indicative offer was issued according to its usual business practice, which is typical in the industry. It records the terms on which Pearlfisher expected to be able to offer a loan and which Wallace Homes expected to be willing to borrow. Its purpose was to ensure that the parties had an agreement on what terms would be commercially acceptable before Pearlfisher committed to the considerable work involved in preparing a detailed lending proposal.

[11]	Pearlfisher says that its usual practice is that if it is able to arrange the finance, it will issue a “formal offer”. This is said to be the terms on which it is prepared to lend. If the formal offer is acceptable to the borrower then it will countersign the formal offer. Pearlfisher says that the parties will then have an agreement. This will typically be followed up with more detailed documentation.

[12]	The indicative offer and the formal offer both provide for a number of fees to be paid. They include:

(a)	An up-front fee (work fee), which is payable if the indicative offer is countersigned. This is said to give Pearlfisher an assurance of the borrower’s bona fide before it commits the work necessary to prepare a formal offer;

(b)	A fee that is payable if Pearlfisher provides a formal offer of finance substantially in accordance with the indicative offer (financial arrangement fee);

(c)	A fee that is payable if the formal offer is countersigned (establishment fee). This is usually the largest of the three fees.

[13]	The first indicative offer, provided by Pearlfisher on 3 May 2018, provided for the three fees referred to above. This included a work fee of $10,000.00, a financial arrangement fee of $100,000.00 and an establishment fee of $350,000.00.

[14]	That first indicative offer also provided for five guarantors.

[15]	The first indicative offer was not accepted. Negotiations took place between the parties over the following week. Ultimately, Pearlfisher agreed:

(a)	To lower the financial arrangement to $245,000.00;

(b)	To accept personal guarantees from three rather than five guarantors; and

(c)	To increase the interest rate (to offset the reduced fee).

[16]	Pearlfisher then issued a new indicative offer on 9 May 2018 (the indicative offer).

[17]	In relation to the work fee, the indicative offer says:

A work fee of $10,000.00 (GST exempt) is payable upon acceptance of this Indicative Offer.

[18]	In relation to the financial arrangement fee the indicative offer says:

A Financial Arrangement Fee of $100,000.00 (GST exempt) will be payable to Pearlfisher upon issue of a formal letter of offer materially on the terms of this Indicative Offer. Subject to the Facility drawing down on or before the Withdrawal of Offer Date the lender agrees to allow the Financial Arrangement Fee to be deducted from the loan on the initial draw down.

[19]	In relation to the establishment fee the indicative offer says:

A non-refundable Establishment Fee of $245,000.00 (GST exempt) is payable upon acceptance of a formal letter of offer. Subject to the initial drawing under the Facility occurring on or before the Withdrawal of Offer Date, the

establishment fee shall be capitalised to the Facility on the date of the initial advance, accrue Interest at the Interest Rate and be payable on the Repayment Date.

[20]	Wallace Homes signed the indicative offer. Mr Jin, Ms Chen and Mr Li signed as guarantors.

[21]	The work fee was paid the following day.

[22]	Pearlfisher says that they made a formal offer on 21 May 2018, on materially the same terms as the indicative offer. It was signed by Wallace Homes and all guarantors on the same day. The definition of the terms “financial arrangement fee” and “establishment fee” are the same as those contained in the indicative offer. I shall refer to the document of 21 May 2018 as the second proposal. It is entitled “Funding Proposal to assist with Refinance Existing Debt and Completing the Development at 155 Wallace Road, Mangere Bridge, Auckland.”

[23]	Spinnaker Securities Ltd subsequently advised Wallace Homes of its intention to apply a “break fee” or penalty interest to the existing loan. This cost had not been factored into Wallace Homes’ loan application to Pearlfisher. Ms Wang asked Pearlfisher whether Pearlfisher would cover these costs. It would not do so.

[24]	On 23 May 2018 Pearlfisher’s solicitors sent Wallace Homes’ solicitors a comprehensive and detailed package of documents for execution. This included a Property Finance Facility Agreement.

[25]	On 23 May 2018 Wallace Homes advised Pearlfisher that Wallace Homes would not be proceeding with the loan. Pearlfisher then issued an invoice for the outstanding fees.

[26]	Pearlfisher issued a statutory demand on 5 June 2018 in the sum of
$353,260.97. This included $100,000.00 for the financial arrangement fee,
$245,000.00 for the establishment fees, and legal costs.

The competing positions of the parties

[27]	Wallace Homes contends that there was no binding legal obligation to pay either the financial arrangement fee or the establishment fee. To become entitled to the financial arrangement fee Pearlfisher needed to issue a “formal letter of offer”. That never happened because the phrase “formal letter of offer” means an offer that when accepted would be both a contract and for a loan.

[28]	The second proposal did not qualify as a “formal letter of offer”. It was simply an agreement to agree; it was not capable of being a contract because there were too many complex terms left to be settled. Critically, there was no obligation on Pearlfisher to provide the loan facility/advance the funds, and Pearlfisher could withdraw at will. Pearlfisher did not give any consideration because the second proposal was on exactly the same terms as those set out in the indicative offer.

[29]	Wallace Homes further contends that even if there was a contract, the second proposal did not qualify as a “formal letter of offer” because it was not a loan. There was no term requiring Pearlfisher to advance money. They say this is a fundamental gap which cannot be filled with an implied term. A loan agreement without an obligation to advance funds is not a loan agreement at all.

[30]	In relation to the establishment fee, Wallace Homes submits that the clause requiring payment was not triggered because Wallace Homes needed to accept a “formal letter of offer”. The second proposal was not a “formal letter of offer” again, because it was not capable of being a contract. There was no term requiring Pearlfisher to advance money.

[31]	In response Pearlfisher submits that the countersigned indicative offer and the second proposal were both contracts giving rise to binding legal obligations on Wallace Homes to pay both the financial arrangement fee and the establishment fee. The prerequisites to the formation of a contract were present, namely an intention to be immediately bound, and an agreement on every term legally essential to the formation of the contract or manifested by the parties as essential to their bargain.

[32]	Pearlfisher submits that Wallace Homes countersigned both agreements and its director, amongst others, signed as guarantor. Wallace Homes was represented by a professional broker in negotiations. The structure of the agreements is said to be industry-standard, including as to the timing of the fees.

[33]	Pearlfisher further submits that at the last minute, for its own commercial reasons, Wallace Homes decided not to draw down funds from its facility. Having made that decision, it is said that Wallace Homes is unwilling to pay the fees associated with the facility, notwithstanding that they are unambiguously payable whether or not draw down takes place.

Analysis and decision

[34]	As noted at paragraph [4] above, the critical issue is whether the second proposal was a contract giving rise to a binding legal obligation to pay both fees. They are only payable if, in the case of the financial arrangement fee, there was the issue of a formal letter of offer and, in the case of the establishment fee, there was an acceptance of a formal letter of offer.

[35]	The Court of Appeal in ECNZ Ltd v Fletcher Challenge Energy Ltd4 held that the prerequisites to the formation of a contract are:

(a)	An intention to be immediately bound (at the point when the bargain is said to have been agreed; and

(b)	An agreement, express or found by application, or the means of achieving agreement (e.g. an arbitration clause) on every term which:

(i)	was legally essential to the formation of such a bargain; or

(ii)	was regarded by the parties themselves as essential to their particular bargain.

4	Electricity Corporation of New Zealand Ltd v Fletcher Challenge Energy Ltd [2002] 2 NZLR 433 (CA) at [53]; see also Reading Entertainment Australia Pty Ltd v AMP Shopping Centres Pty Ltd [2017] NZHC 2337.

[36]	It was held that this assessment must be made objectively.5 The Court of Appeal emphasised that the Court must take an “entirely neutral” approach when determining whether the parties intended to enter into a contract. Having decided that they had that intention, however, the Court’s attitude will change. It will then “do its best to give effect to their intention and, if at all possible, to uphold the contract despite any omissions or ambiguities”.6

[37]	The Court held that even if the parties leave something essential to be agreed upon later, it should not be said that prima facie the parties do not have an agreement. It held that “the intention of the parties, as discerned by the Court, to be bound or not to be bound should be paramount. If the Court is satisfied that the parties intended to be bound, it will strive to find a means of giving effect to that intention…”.7

[38]	The Court also held that mutual post-contractual conduct is relevant to this assessment.8

[39]	I find that the second proposal was a formal letter of offer that was both issued by Pearlfisher and accepted by Wallace Homes. The parties intended that upon the issue of the document and its acceptance that Wallace Homes would be bound to pay both fees and that Pearlfisher would be bound to provide the loan facility albeit on conditions that Wallace Homes had to meet. The fundamental terms of those conditions were set out in the formal letter of offer and accepted by Wallace Homes. Once accepted, which it was, it became a conditional agreement to provide finance.

[40]	Thus, upon the acceptance by Wallace Homes, through its signing of the second proposal, the parties intended to be immediately bound to an agreement which contained all of the terms legally essential to their bargain.

5	At [54].
6	At [58].
7	At [60]. See also [66] where the Court held that “merely because an important term is deferred to be settled on a future occasion, that does not mean that there is no intention to be bound. In such circumstances, provided the Court is satisfied that the parties did intend to enter immediately into a contractual relationship, it will do its best to find a means of giving effect to that intention by determining, if possible, the outstanding matter”.
8	At [56].

[41]	Wallace Homes accepts that the indicative offer of 9 May 2018 and signed by its director, Mr Jin, was a contract. Pursuant to that contract, it paid the work fee of
$10,000.00, being the first of the three fees expressly contemplated by that contract. The acceptance of the contract and its coming into existence, took place after the parties had negotiated and agreed on a reduction in the establishment fee from
$350,000.00 to $245,000.00 (the first indicative offer was never agreed to).

[42]	The proposed three-tiered fee structure, which would have to be paid regardless of whether the loan facility was ever drawn down, was expressly contemplated at this stage (i.e. at the time of the acceptance of the indicative offer) and the key events triggering the obligation to pay both fees were clearly set out. This is an important contextual factor in determining what the parties would have understood by the second proposal and whether it was intended to be a formal letter of offer.

[43]	I accept the submissions of Pearlfisher that it is clear from the circumstances that both the indicative offer and the second proposal, once accepted, were intended to be binding contracts. The relevant factors in relation to the second proposal are as follows:

(a)	It was presented as a contractual offer capable of acceptance. This is clear from the express language used in the document itself. It is described on its face as “formal loan terms (Formal Offer)” and the final paragraph of the document reads:

If this Formal Offer is in order, can you please sign the duplicate copy indicating your acceptance and return it no later than 4:00pm Wednesday 23 May 2018.

(b)	It was signed by Wallace Homes, so it indicated acceptance of an obligation;

(c)	The signature block specifically records the acceptance of an offer. The signing and counter signing is itself evidence of an intention to be legally bound;9

(d)	The contract by its terms operated immediately and operated prior to draw down;

(e)	The guarantees indicate an intention to be contractually bound (both by their existence and their terms). It would make no sense for a guarantor to sign a document that did not create any obligations;

(f)	The structure of the document (and in particular the separately recorded conditions precedent to draw down) demonstrate an intention to contract.

[44]	Read in the context of the indicative offer, which expressly contemplated the presentation and acceptance of a formal letter of offer, and against the background of the fees being specifically negotiated, there can be no real doubt that in the minds of both parties that the signed acceptance of the second proposal would give rise to binding obligations (i.e. an intention to be bound).

[45]	I do not accept the fundamental submission of Wallace Homes that there was no binding legal obligation by Pearlfisher to provide the loan facility or that somehow there was no agreement on an essential term of the bargain. Having determined that there was intention to contract and to be bound immediately, the Court must do its best to give effect to that intention and, if possible to uphold the contract despite omissions or ambiguity. There is no difficulty in the circumstances here in giving effect to the parties’ intention. This case is quite different to the circumstances in Electricity Corporation of New Zealand Ltd v Fletcher Challenge Energy10 where, as the Court emphasised, there were a number of critical items marked “not agreed”.

9	Welsh v Gatchell [2009] 1 NZLR 241 at [51].
10	Electricity Corporation of New Zealand Ltd v Fletcher Challenge Energy Ltd, above n 4.

[46]	In my view, it is clear, from express words of the second proposal that there was a binding legal obligation on Pearlfisher, subject to satisfaction of the conditions, to provide the loan facility. This includes the specific reference to “formal loan terms” and “Formal Offer”, the loan amount of $9,850,000.00 (plus accrued interest and fees), the definition of lenders and borrowers and the detailed conditions precedent to drawdown. It is equally clear that the obligation to pay the two fees in dispute arose immediately upon the issue and acceptance of the formal offer regardless of whether the loan facility was ever drawn down or proceeded. To the extent that Wallace Homes submits to the contrary, I reject it.

[47]	This is not a case of filling a fundamental gap with an implied term. The only sensible interpretation, having regard to the text of the documents and the context, is that there was a binding obligation on Pearlfisher to provide the loan facility and advance the funds, in accordance with the conditions set out. That conclusion is reinforced by the provisions in the second proposal limiting the grounds on which Pearlfisher could withdraw. Those grounds, including materially incorrect information and a date restriction by which the loan is to be drawn down, appear under the heading “Withdrawal of Offer”.

[48]	I also reject the submission of Wallace Homes that there was no consideration for the second proposal, being of course what I have found to be a “formal offer”. It is wrong to simply characterise the second proposal as a “cut and paste” of those terms set out in the indicative offer that provide no additional benefit to Wallace Homes. As Mr Fitzgerald submitted, the indicative offer expressly contemplates that a formal offer will be made “materially” on the terms of the indicative offer. Pearlfisher has provided value and performed the work necessary to put itself in the position to actually provide the loan facility on essentially the same terms as originally proposed. The process Pearlfisher went through, described as standard structure in the industry, is set out in the uncontested evidence of Mr Jarrod Bruce on behalf of Pearlfisher. This was a benefit provided by Pearlfisher to Wallace Homes.

[49]	The contract that the parties entered into may have been on terms very favourable to the lender, Pearlfisher. However, this is not a case, contrary to the submission of Wallace Holmes, where the Court could conclude that the interpretation

contended for by Pearlfisher would lead to a commercially absurd result. The context here is of course one of second tier lending where Wallace Homes was assisted throughout by a professional agent who, as noted above, successfully negotiated a substantial reduction in the establishment fee.

[50]	In contending that the second proposal never obliged Pearlfisher to advance funds/provide a loan facility, and thus did not constitute a contract, Wallace Holmes has set out in a schedule to its submissions a comparison of what it says are “extensive differences” between the terms of the indicative offer and second proposal on the one hand, and the detailed documents prepared by Pearlfisher’s solicitors (including the Property Finance Facility Agreement) on the other. These differences are said to highlight the discretionary nature of the “proposed deal” in the second proposal which was not intended to be the actual loan facility or the obligation to provide one.11

[51]	However, I find that in substance, a true comparison indicates that the subsequent documentation, namely the more detailed documents prepared by Pearlfisher’s solicitors, represent the more detailed machinery provisions, setting out in greater detail the precise terms of the contract, the essential terms of which had already been agreed. Those essential terms included the immediate payment of both fees, regardless, as I have concluded, of whether the loan facility proceeded or not. The fact that the parties in the second proposal agreed that the outstanding matters would be boilerplate terms12 is consistent with the fact that the key negotiable terms were recorded in the countersigned second proposal.

[52]	I conclude that Wallace Holmes has not shown that there is arguably a genuine and substantial dispute as to the existence of the debt.

[53]	In accordance with the terms of the contractually binding second proposal both fees became payable. There is no basis to set aside the statutory demand.

11	A second schedule sets out terms said not to be present in the second proposal but which appear in the more detailed Property Finance Facility Agreement.
12	For example, the clause entitled “Conditions Precedent to Drawdown” which refers to “conditions precedent usual for facilities of this type”.

Solvency

[54]	Wallace Homes contends that it is not insolvent. It submits that if the recipient of a statutory demand satisfies the Court that it is solvent, the demand must be set aside. However, for the reasons advanced by Pearlfisher, I reject that submission. If the debt is disputably owing, it should be paid regardless of whether the company is solvent or not. As the Court of Appeal held in the recent case of Manchester Securities Ltd v Body Corporate 172108,13 a statutory demand can legitimately be used to recover a debt even where liquidation is not a prospect. There is nothing in the Companies Act 1993 prescribing the making of a statutory demand without an intention at the time to take the further step of applying to put the debtor company into liquidation if the demand is not complied with.

[55]	Furthermore, and in any event, perfunctory  statements  of  solvency  from Mr Jin, without detailed accounting evidence, are insufficient.14

Result

[56]	The application by Wallace Homes to set aside the statutory demand is dismissed. It is clear that Wallace Homes is contractually required to pay the statutory demand sum to Pearlfisher.

[57]	Having succeeded, and in accordance with orthodox principles, Pearlfisher would in the ordinary course be entitled to costs and on a 2B basis. If the parties cannot agree on costs then memoranda are to be filed within 14 days.

Associate Judge P J Andrew

13	Manchester Securities Ltd v Body Corporate 172108 [2018] NZCA 190 at [34].
14	Auckland Electrical Solutions Ltd v Warrington Group Ltd [2017] NZHC 366 at [15].