Johnstone v The Affinity

IN THE HIGH COURT OF NEW ZEALAND
TIMARU REGISTRY
No AD 11/00
ADMIRALTY ACTION in rem

BETWEEN
P H B JOHNSTONE AND ANOTHER
Plaintiffs

AND
THE AFFINITY
Defendant

Date of Hearing: 18 August 2000

Counsel: N J Scott for the Plaintiffs
D J Clark for the Defendant

ORAL JUDGMENT OF YOUNG J

[1] This is a sequel to a judgment which I delivered last week on an interim basis adjourning an application seeking possession of a ship, the "Affinity". This judgment will, no doubt, be read in conjunction with the earlier judgment and, in those circumstances, I do not propose to rehearse the facts again. I note that the amount claimed by Mr and Mrs Johnstone has now been paid into court and that the Applebys have sought an injunction restraining the exercise by the Johnstones of their security rights under the mortgage over the "Affinity".

[2] I have timing difficulties this morning. This means that the judgment I am now going to deliver will be more succinct than might otherwise have been appropriate. I do, however, have a clear view as to the appropriate outcome and I think it desirable in light of that, and the underlying background to the litigation, to deliver a judgment now.

[3] This is a strange case, indeed, in my experience, unique in the annals of debtor and creditor law. The Johnstones have acquired by assignment a debt. They deny that the Applebys are liable as sureties for that debt whereas the Applebys are anxious to be held by this court to be sureties. Further, the Johnstones as creditors do not appear to wish to receive the money which they are owed. Rather, and for reasons which are undoubtedly collateral to the debt which is in issue in these proceedings, they wish to see the "Affinity" sold.

[4] It is perhaps not surprising, therefore, that there is no authority specifically on point in relation to the issues raised by this case - at least that counsel have been able to refer to me. 

[5] The case must, therefore, be resolved by reference to general principles to which I will now refer.

[6] First, it is clear to me that the Johnstones, upon payment to the bank of the money owed to the bank, stepped into the shoes of the bank vis-à-vis Affinity Charters Ltd.

1. To put that in more technical terms, I note that para 228, Halsbury, 4th Edn, Vol 20, Title Guarantee and Indemnity reads:-

As soon as the guarantor has paid to the creditor what is due to the creditor under the guarantee, he is entitled, unless he has waived them, to be subrogated to all the rights possessed by the creditor in respect of the debt, default or miscarriages to which the guarantee relates.

2. Section 84, Judicature Act provides:-

Every person who, being surety for the debt or duty of another, or being liable with another for any debt or duty, pays or satisfies such debt or performs such duty shall be entitled to have assigned to him, or a trustee for him, every judgment, specialty, or other security held by the creditor in respect of such debt or duty, whether such judgment, specialty, or other security is or is not deemed at law to be satisfied by the payment of the debt or performance of the duty.

I note in passing that this section is, in effect, a re-enactment of s 5, Mercantile Law Amendment Act 1856 of the United Kingdom.

3. The bank has assigned to the Johnstones the debt and the mortgage and, to that extent, it is perfectly clear that the Johnstones stand contractually vis-à-vis Affinity Charters Ltd exactly as the bank did prior to the assignment.

4. Section 42, Credit Contracts Act provides that:-

an assignee of a credit contract from a creditor shall take the contract subject to all equities, and to all rights and remedies under this Act that the debtor has or would have against the original creditor or any subsequent creditor.

[7] Secondly, as between the Johnstones and the Applebys, I am of the view that it is at least well arguable that the Applebys are sureties. As to this:-

1. Paragraph 255 of Halsbury notes:-

A guarantor who has paid more than his share of the common liability is entitled to compel contribution from the co-guarantors, whether they are bound jointly and severally or severally, and by the same or different instruments, and whether the guarantor claiming contribution did or did not know, when he became bound as such, that he was co-guarantor with others.

2. Amongst the notes to that passage is the following:-

The overpaying guarantee may claim contribution from the underpaying guarantor to equalise the burden upon them in two ways: (1) directly, under the legal and equitable jurisdiction in such cases, or (2) by taking over the creditor's rights by subrogation under the Mercantile Law Amendment Act 1856 s 5.

It will be recalled that the section referred to corresponds to s 84 of our Judicature Act.

3. In the present case, the assignment does not explicitly deal with the guarantees by the Applebys. So it might be said that, although entitled to call for assignment of those guarantees, the Johnstones have yet to do so with the result that the Applebys' status as sureties is yet to be established. This argument may, conceivably, be able to be sustained on full analysis. For the moment, however, I think that an entitlement under s 84 to call for an assignment of a security, along with the rights of subrogation which the Johnstones acquired by reason of the payment, suffice to create a relationship of creditor and surety between the Johnstones and the Applebys or, at least, this is arguably so. In other words, following the comment made in the notes to paragraph 255 in Halsbury, the Johnstones' rights vis-à-vis the Applebys, are not confined to an equitable right of contribution arising out of their shared status as co-sureties.

[8] Thirdly, although Mr Scott suggested that the way the law works is simply that creditors in this situation have a right to go to the surety if they choose, I am, myself, of the opinion, as presently advised, that a surety is entitled to pay off the debt of the debtor and take the assignment of the underlying securities. Mr Clark referred me to the following remarks of Lord Templeman in China South Sea Bank Ltd v Tan [1990] 1 AC 536 at 545:-

The surety contracts to pay if a debtor does not pay and the surety is bound by his contract. If the surety, ... is worried that the mortgaged securities may decline in value then the surety may request the creditor to sell and if the creditor remains idle then the surety may bustle about, pay off the debt, take over the benefit of the securities and sell them.

[9] Fourthly, it must at least be arguable that a secured creditor who declines payment in full of the underlying debt and instead, for collateral purposes, seeks to sell the underlying security is acting oppressively within the meaning of the Credit Contracts Act. Mr Scott suggested that the relationship between the Johnstones and Affinity Charters Ltd was no longer one of contract but, for reasons already given, I am of the view that it is not a sustainable contention. Affinity Charters Ltd has not, itself, sought relief but the Applebys, for reasons already indicated, are, in my view, at least arguably, indeed very arguably, sureties. As well, they have, along with the Johnstones, a second mortgage over the vessel. In a context where there is a deadlock amongst the directors and shareholders of Affinity Charters Ltd, I would not withhold an injunction merely because the company, itself, was not a party to the proceedings. 

[10] In short, I am well satisfied that it is well arguable that the proposed taking of possession of the "Affinity" and its sale lie outside what is permitted by the mortgage given the refusal by the mortgagees to accept payment and, as well, would be oppressive within the meaning of the Credit Contracts Act. 

[11] I therefore propose to, and do, grant an interim injunction restraining the Johnstones from taking steps under the mortgage in terms of seizing possession of the Affinity or selling it. This injunction is to apply pending further order of the court. I have adopted the course of granting an interim injunction because this, from the point of view of the Johnstones, will invoke the undertaking as to damages which the Applebys have given.

[12] Other than that, I adjourn all other applications sine die.

[13] I am well satisfied, as well, that these proceedings should be linked with the Companies Act litigation in Blenheim. Accordingly, I direct that the proceedings be transferred to the Blenheim registry of this court.

[14] I reserve all costs.

[15] I further record that this interim injunction is subject to an undertaking from the Applebys on reasonable notice to vacate the Affinity for a period of up to twelve hours to permit a valuer nominated by the Johnstones to assess the vessel.

Solicitors
Gresson Dorman & Scott, Timaru for Plaintiffs
Wisheart Macnab & Partners, Blenheim for Defendants