Bank of New Zealand v Khidirbekov

[2013] NZHC 128

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

CIV-2011-485-2237 [2013] NZHC 128

BETWEEN  BANK OF NEW ZEALAND Plaintiff

ANDADYL KHIDIRBEKOV First Defendant

ANDDANIEL JOHN WILLIAM HUNT Second Defendant

Hearing:         28 January 2013 (Heard at Wellington)

Counsel:         R.J. Gordon & P Roy - Counsel for Plaintiff

E.B. Sweet - Counsel for Second Defendant

Judgment:      12 February 2013

JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALL

Under r 11.5 of the High Court Rules I direct the Registrar to deliver this judgment at 3.30 pm on 12 February 2013.

Solicitors:           Minter Ellison Rudd Watts, Solicitors, PO Box 2793, Wellington

Kirkland Morison, Lawyers, PO Box 1290, Auckland

BANK OF NEW ZEALAND V A KHIDIRBEKOV & ANOR HC WN CIV-2011-485-2237 [12 February 2013]

Introduction

[1]      Before  the  Court  is  an  application  filed  4  October  2012  by  the  second defendant Daniel John William Hunt (Mr Hunt) to set aside or vary a summary judgment entered against him on 24 January 2012 in favour of the plaintiff, the Bank of New Zealand (BNZ).

[2]      Mr Hunt and the first defendant in this proceeding (Mr Khidirbekov) on 2

October 2008 gave a guarantee for indebtedness owing to BNZ by a company, Revolution Productions Int. Limited (Revolution).  The guarantors on the front page of the guarantee document were described as Mr Khidirbekov and Mr Hunt “in their capacity as Trustee(s) of The Emerald Trust”.   Revolution defaulted, and demand made on both Mr Khidirbekov and Mr Hunt was not met.   On 24 January 2012 summary judgment was entered against them both in this Court on an unopposed basis for a total outstanding debt of $141,460.00 plus interest and costs.  Mr Hunt alone now applies to have the summary judgment against him either set aside or varied  to  exclude his  personal  liability  (thus  entering  liability against  him  as  a Trustee limited to the assets of the Emerald Trust).

Background

[3]      Revolution has a total share capital of 100 shares held as to 70 shares by Emerald Entertainment Limited and as to 30 shares by GS Productions Limited.  Mr Hunt and Mr Khidirbekov together held a 75% shareholding in Emerald Entertainment Limited.   Mr Hunt was also a 40% shareholder in GS Productions Limited.

[4]      Mr Hunt and Mr Khidirbekov are also the present trustees of the Emerald Trust,  a  trust  established  on  8  April  2003  essentially  for  the  benefit  of  Mr Khidirbekov and his family.   Mr Hunt was appointed as a trustee on 22 January

2007.

[5]      In June 2008, Revolution was seeking a loan overdraft facility from BNZ and applied for a permanent overdraft.  A director of Revolution at the time, Mr Simon Ranginui, requested that the guarantors of the BNZ loan might be the major shareholders instead of the directors.  As a result, BNZ agreed to the Emerald Trust being a guarantor and documents were prepared to reflect this.

[6]      Mr Hunt and Mr Khidirbekov thus entered into a guarantee agreement “as trustees of the Emerald Trust”.  The document on BNZ’s standard guarantee form was dated 2 October 2008.  Liability under the guarantee was specifically limited to

$120,000 plus interest and costs.  Mr Hunt executed the guarantee in the presence of a solicitor Ms. Susan Wyness (Ms Wyness) who certified to BNZ that Mr Hunt indicated he fully understood his obligations.

[7]      Revolution was struck off the Companies Register on 15 February 2011.  It was in default under the BNZ loan facility and BNZ made demand for repayment on Mr Hunt and Mr Khidirbekov on 7 July 2011. This demand was not met.

[8]      Around July 2011 it seems Mr Hunt corresponded with Mr Justin Toebes (Mr Toebes) BNZ’s lawyer whom he knew personally, generally querying his position and  his  liability to  BNZ.    Mr Toebes  responded  by  email  on  12 August  2011 indicating that, on the terms of the signed guarantee, there was no limitation of Mr Hunt’s liability to the assets of the Emerald Trust as he was now claiming, and the debt sought was due from him personally.

[9]      Summary judgment proceedings were filed  in  this Court by BNZ on  27

October 2011.  No steps were taken or opposition filed by either defendant.

[10]     On 24 January 2012, summary judgment was entered unopposed against both defendants for $141,460, plus interest at 17.80% per annum from 7 July 2011 costs and disbursements.

[11]     Since then, the parties it seems have been negotiating to arrange repayment of the debt but no agreement was reached.  Eventually, BNZ indicated they planned to commence bankruptcy proceedings against Mr Hunt.

[12]     Then, on 3 October 2012 Mr Hunt filed the present application to set aside or vary the summary judgment.

Setting aside a summary judgment

[13]     Where a party does not appear at the hearing of an application for summary judgment the Court may set aside or vary the judgment if it appears to the Court that there has been or may have been a miscarriage of justice.[1]  The generally relevant considerations in the Court's assessment of whether there may have been a miscarriage of justice are whether the defendant has a substantial ground of defence, whether the delay is reasonably explained and whether the plaintiff will not suffer irreparable injury if the judgment is set aside.[2]

Counsels’ submissions and my decision

[1] High Court Rules, r 12.14.

[2] Russell v Cox [1983] NZLR 654 (CA) at 659; affirmed in Nottingham v Registered Securities Ltd (In Liq) (1998) 12 PRNZ 625, 629.

[14]     Before me, Mr Hunt submitted there will be a miscarriage of justice in this case if the summary judgment against him is not set-aside for three reasons. I will deal with each of these in turn.

[15]     First, Mr Hunt submits he has a primary defence to the summary judgment application. This defence is that he is not personally liable for the debt, as he only entered into the guarantee in his capacity as a trustee of the Emerald Trust. He places great emphasis on the words on page 1 of the guarantee, which state that Mr Hunt entered into the guarantee in his “capacity as Trustee(s) of the Emerald Trust.” He submits if he were to be personally liable, these words would have been removed. Furthermore BNZ would have alerted him to his personal liability and insisted that he get independent legal advice from that provided to the trust.

[16]     Alternatively as a second defence, he submits that BNZ used the wrong form for the guarantee. The form should have incorporated a clause protecting Mr Hunt

from personal liability.

[17]     The  law  is  clear  that  trustees  can  incur  liability  by  contract.  A  trustee normally incurs unlimited personal liability, unless liability is expressly limited by the contract.[3] “There is a presumption in favour of personal liability...”[4]. The Law of Trusts (NZ) states:[5]

[3] Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington, 2009) at [5.3.4].

[4] NZHB Holdings Ltd v Bartells (2005) 5 NZCPR 506 at [41].

[5] Law of Trusts (online looseleaf ed, LexisNexis) at [6.3].

There is a strong presumption that trustees who enter into a contract with another party are personally liable. This presumption is not displaced because a person makes a contract or covenant “as trustee”. Those words are simply descriptive and remain as personal contracts or covenants by the trustees themselves.

It is not contrary to public policy for a trustee to limit or exclude personal liability but these exclusions can only be achieved by clear words. Earl Cairns LC stated it as: [6]

a question of construction, to be decided with reference to all the circumstances of the case; the nature of the contract; the subject matter on which it is to operate, and the capacity and duty of the parties to make the contract in the one form or in the other.

[6] Muir v City of Glasgow Bank and Liquidators (1879) 4 App Cas 337, 355; applied by Yeldham J in Helvetic Investment Corporation Pty Ltd v John Knight (1982) 7 ACLR 225 and by the New South Wales Court of Appeal at Helvetic Investment Corp Pty Ltd v Knight (1984) 9 ACLR 773.

[18]     In NZHB Holdings Ltd v Bartells the Court said:[7]

Recent experience in more than one case suggests that the concept of trust is used more often than it is understood. Unlike a company or an incorporated society a “trust” is not a legal person recognised as distinct from the humans who direct their affairs. On the contrary, trustees can contract only in their own right: either they do so and are personally liable to the extent provided by the ordinary law which the agreement may modify or there is no agreement at all. But where parties have gone to the trouble of entering into a documented transaction the courts are reluctant to reach the latter conclusion.

[7] NZHB Holdings Ltd v Bartells (2005) 5 NZCPR 506 at [34].

[19]     Similarly in AMP General Insurance v Macalister Todd Phillips [2007] 1

NZLR 485 (SC) the Supreme Court at [42] endorsed in straightforward terms the general principle that “liabilities incurred by a trustee in relation to a trust are always the personal liabilities of the trustee.”  This personal liability is, of course, counter-balanced in equity by the trustee being entitled to full indemnification out of

the trust property.

[20]     The answer in this case as I see it is a simple one – as the contract between the parties did not expressly limit liability, Mr Hunt is personally liable. There is nothing to suggest otherwise. In fact, the guarantee already included one express limitation on liability (the $120,000 cap), suggesting any further limitation would be expressly  excluded.  Mr  Hunt  was  aware  of  the  obligations  arising  from  the guarantee, as certified by Ms. Wyness. Mr Hunt does not have a substantial ground of defence.

[21]     On this aspect, Ms Wyness, who as I understand it is a barrister and solicitor of this court of over 10 years standing, witnessed Mr Hunt’s signature on the guarantee and certified specifically:

“..... that before this Guarantee and Indemnity was signed and in the absence of the customer (Revolution):-

(a)       I  fully  explained  the  effect  of  its  provisions  to  (Mr  Hunt)  and  Adyl Khidirbekov – his attorney D.J.W. Hunt and informed him/her/them of the matters referred to in the (risks in giving this Guarantee) Warning above; and

(b)       he/she/they indicated to me that he/she/they understood the Warning and the nature and extent of his/her/their obligations under this Guarantee and Indemnity and would sign it voluntarily.”

[22]     It is also telling in my view that from all the evidence before me, it would appear that at no time until very recently has Mr Hunt denied personal liability to the BNZ that he owes as trustee.   On the contrary, on repeated occasions he acknowledged the personal nature of the indebtedness that he owed (for example in a communication referred to by Mr Toebes at “GJT11” of his affidavit, Mr Hunt said “I offer a proposal to the Bank for consideration on the debt judged against myself in my personal capacity while a trustee of the Emerald Trust”) and sought time indulgences to pay the debt, indulgences which in fact were granted.  It seems that it was only once Mr Hunt had exhausted the Bank’s forbearance on payment that, suddenly an actual contest as to liability emerged.

[23]     Mr   Hunt   then   endeavoured   to   advance   his   second   alternative   and contradictory defence argument.  This was that the BNZ “appears” to have made a mistake in supplying the incorrect form of guarantee at the time.  He maintains that

the document used should have included a direct provision expressly limiting his personal liability to the available assets of the Emerald Trust.

[24]     In this regard, Mr Hunt refers to clause 28(d) of the Terms and Conditions of the guarantee itself.   When it is to apply this clause provides what is essentially an orthodox limitation of liability clause for professional trustees (commonly lawyers and accountants) and states:

If you are named in the Main Terms of this Guarantee as a trustee to whom this paragraph (d) applies you are liable only to the extent of an amount equal to the value of the assets of the trust available from time to time to meet your liability, to which shall be added the sum (if any) by which the value has been diminished by any breach of trust caused by your wilful default or dishonesty.

[25]     Mr Hunt however is not a lawyer or an accountant, nor was he named in the Main Terms of the Guarantee as a professional trustee to whom the limitation would apply.    It  was  clear from  page 1  of the  guarantee terms  that  this  clause 28(d) limitation did not apply here.  For Mr Hunt to claim now, long after the event, that he believes such a limitation should have applied to him when it did not, in my view, is simply untenable.

[26]     And, for Mr Hunt to maintain now that he entered into the guarantee under some sort of unilateral mistake ultimately does not assist him here, because in any event relief could only be granted if the existence of such a mistake was actually known to the other party – s. 6(1)(a) Contractual Mistakes Act 1977 and see Tri-Star Customs and Forwarding Ltd v Denning (1998) 8 TCLR 431 (Court of Appeal) at

436.  Here it is clear on what I see as the undisputed evidence before the Court:

(a)      That the BNZ was not operating under any mistake.   It intended to take a guarantee from the trustees of the trust, and it also intended that the professional trustee’s limitation clause at 28(d) would not apply.

(b)The BNZ had received a solicitor’s certificate from Mr Hunt’s then solicitor in respect of the guarantee as drafted (i.e. without the professional trustee’s limitation clause applying), certifying that she had fully explained the effect of its provisions to Mr Hunt – and that

he indicated he understood the nature and extent of his obligations under it.

[27]     For all these reasons I dismiss this defence argument of mistake Mr Hunt has endeavoured to advance here.

[28] As to the second consideration noted at [13] above, Mr Hunt submits that his delay here can be reasonably explained. He contends he relied at the time on the incorrect advice of BNZ’s lawyer Mr Toebes that he had no defence, causing him to take no steps to defend the proceedings. Mr Hunt says he was also overseas when the proceedings were served on him, and did not fully appreciate the consequences of not defending the action against him.

[29]     However, it is clear from his evidence as a barrister and solicitor and officer of this Court, that Mr Toebes did not advise Mr Hunt not to oppose the summary judgment application against him. Mr Toebes simply outlined the legal position as he saw it. Mr Hunt made his own decision not to take any steps in the proceeding.  In my view Mr Hunt’s delay here has not been reasonably explained.

[30]     Thirdly and finally, Mr Hunt submits that setting aside the judgment which he seeks will not cause BNZ to suffer undue prejudice, as BNZ is a trading bank. Mr Hunt however, says he will be bankrupted if the judgment is allowed to stand.

[31]     Yet there is no evidence of this. Just because BNZ is a trading bank in my view does not mean it can be assumed they will suffer no prejudice. They are still owed a debt for loans they advanced on the strength of the personal guarantee at issue here.

[32]     I  am  satisfied  there  has  been  no  miscarriage  of  justice  here,  and  the application to set aside the summary judgment must also for this reason be denied.

[33]     Finally, in his 22 November 2012 affidavit in reply, Mr Hunt now appears to shift blame to the then solicitor acting for him and the Trust, Ms. Wyness, for giving him what he says was incorrect legal advice – “at the time of execution [of the

guarantee] she advised me verbally that I was not liable personally.” – para [10]. If that truly were the case, however, it would seem logical that Mr Hunt would have adduced evidence from Ms Wyness here actually confirming this. But he has not done so. And, in any event, this still could not alter the liability that Mr Hunt owes to the Bank. Incorrect legal advice (if indeed it had occurred) might at best give Mr Hunt a cause of action against his then solicitors, but it would not mean that he could not unilaterally disregard his clear legal obligation owed to the BNZ here.

Conclusion

[34]     For  all  the  reasons  outlined  above,  the  present  application  fails  and  is dismissed.   The summary judgment granted against Mr Hunt on 24 January 2012 remains.

[35]     As to costs the BNZ has been successful in opposing the present application and I see no reason why it should not be entitled to an award of costs in the usual way.

[36]     Costs are therefore awarded on this application in favour of the BNZ against Mr  Hunt  on  a  category  2B  basis  together  with  disbursements  as  fixed  by  the Registrar.  In this regard however although two counsel appeared before me for the BNZ, I certify for one counsel only.

‘Associate Judge D.I. Gendall’