Carolan v New Zealand Real Estate Credit Limited
[2016] NZHC 1757
•29 July 2016
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2015-404-483 [2016] NZHC 1757
BETWEEN MICHAEL JOSEPH CHRISTIAN
CAROLAN Plaintiff
AND
NEW ZEALAND REAL ESTATE CREDIT LIMITED
First Defendant
GEORGE KERR Second Defendant
…………………continued over/
Hearing: 27, 28, 29, 30 June and 1, 4, 5 July 2016 Appearances:
D Salmon, D Nilsson and L Clews for Plaintiffs
J K Goodall, KFT Stolberger and C Hanafin for DefendantsJudgment:
29 July 2016
JUDGMENT OF FOGARTY J
This judgment was delivered by Justice Fogarty on
29 July 2016 at 3.30 p.m., pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Date:
Solicitors:
Lee Salmon Long, Auckland
Lowndes Jordon, Auckland
Copy to:J K Goodall, Auckland
CAROLAN v NEW ZEALAND REAL ESTATE CREDIT LIMITED [2016] NZHC 1757 [29 July 2016]
EQUITY PARTNERS CAPITAL MARKETS LIMITED
Third Defendant
EQUITY PARTNERS LIMITED Fourth Defendant
EQUITY PARTNERS ASSET MANAGEMENT LIMITED
Fifth Defendant
CLAYMORE FINANCIAL SERVICES LIMITED
Sixth Defendant
Introduction
[1] For nearly seven years, Mr Carolan and Mr Kerr were close business associates. Mr Kerr was in the dominant position, substantively being the employer of Mr Carolan. They held each other in high mutual respect and for good reason. Mr Carolan resigned from Macquarie Bank (Macquarie) in June 2007 to work for Mr Kerr in the Equity Partner (EP) group of companies starting with employment with Equity Partners Capital Markets Ltd (EPCM). This was a transition from Macquarie, a very prominent merchant bank, to join EP in a start up. It took place in a buoyant economy, prior to the Global Financial Crisis (GFC). Both Mr Carolan and Mr Kerr thought reasonably that they could make a lot of money. Mr Carolan expected to at least match and likely outstrip his earnings at Macquarie. And, critically, on terms by which EP would assist him to purchase a very expensive house for his new wife.
[2] All financial transactions were via corporate entities. Nothing turns on this. The contest is whether or not, and to what extent the financial assistance was a loan which can now be enforced with interest.
[3] Mr Carolan left Macquarie after his first marriage had broken up, with the inevitable diminution of assets following the split. Mr Carolan remarried. He wanted to buy a good quality house in Auckland which was going to cost $5 million. He did not have that sum. He thought that upon exiting Macquarie on good terms he could assemble about a million dollars, maybe more.
[4] He was intending to take out a large mortgage and in the negotiations of transition to the EP group asked Mr Kerr for financial assistance to acquire the property, before he settled up with Macquarie. At this stage both men underestimated the amount of assistance that Mr Carolan would require. The initial request resulted in an advance provided by one of Mr Kerr’s companies of $480,000 to pay the deposit. There were then two unanticipated further advances. The second was a month later of $520,000. The third was another seven months later of
$165,000. At that point the total amount advanced was $1,650,000.
[5] The first loan advanced was made on 30 July 2007 from Equity Partners Ltd (EPL). It was common ground between counsel that nothing turns on which EP or Kerr entity made payments. There is also a distinction between Kerr Entities, and EP entities, but nothing turns on this distinction. The second advance was on 31
August 2007.
[6] Three days after the second advance Mr Carolan became the registered proprietor of this expensive home, which was subject to a first mortgage to the Bank of New Zealand (BNZ), who had advanced $4 million. Later that month, on 18
September, EPCM, registered a mortgage executed, of course, by Mr Carolan. This mortgage was transferred in 2014 to the first defendant/first counterclaim plaintiff, New Zealand Real Estate Credit Ltd (NZREC). The mortgage in favour of EPCM was executed by Mr Carolan as mortgagor on 30 August. The terms providing “Priority amount $860,000.
[7] In the operative clause the consideration for the mortgage was expressed as being:
In consideration of the mortgagee providing or agreeing to provide financial services to and for the accommodation of the mortgagor.
[8] The common intention of the two men was that Mr Carolan at EPCM would raise capital. The first goal was to raise capital for a media fund acquisition. This failed. No other projects in the “pipeline” materialised and only seven months later, on 16 June, Mr Carolan had tendered his resignation from EPCM and began working on contracts for the EP group via a company he had incorporated, Princeps Capital Ltd (Princeps). Then, about four months later he became an employee again, this time for another EP company, called Equity Partners Asset Management (EPAM). Later that year he became the managing director of that company. From the time Mr Carolan became managing director of the EPAM he had much greater success and was a valued associate of Mr Kerr. In August 2009 EPAM was sold to Pyne Gould Corporation (PGC). Mr Carolan became a director of Equity Partners Infrastructure Company (EPIC), another EP company, and a director of PGC.
[9] As a director of EPIC Mr Carolan effectively blocked the appointment of a Mr Boon to be a director of that company, being an appointment favoured by Mr Kerr. The two men fell out at that point. Mr Carolan resigned from PGC on
7 July 2014 and about a month later Mr Kerr requested Mr Carolan to arrange to repay the debt plus interest. The letter read:
Mick
Can you contact Michael re your mortgage please. (Michael Tinkler, Mr Kerr’s lawyer.)
Given our historical relationship we will treat respectfully – but there has to be repayment arrangements made.
The balance is in excess of $2m – and it is unfair to say the least to expect us to continue to fund.
Please see Michael and come to an arrangement to repay. George
[10] On 5 February 2015 NZREC served on Mr Carolan a notice under s 119 of the Property Law Act 2007.
[11] That led to these proceedings being commenced by Mr Carolan as plaintiff seeking orders to restrain NZREC from proceeding with the sale of a property, contending he was not indebted to that company and then contending more generally that the moneys advanced were either “written off” or were otherwise “non- recourse”.
[12] The relevant pleadings are contained in paragraph 11 of the second amended statement of claim which reads:
11. After negotiations Kerr, on behalf of EPCM, and other entities controlled by Kerr, including the Kerr Entities agreed to retain Carolan (Agreement). The terms on which Carolan was retained included:
(a) Carolan would be employed principally by EPCM, which would pay him a base salary.
(b) That base salary would be supplemented by other benefits (including bonuses and the advance which is the subject of this proceeding) so that his overall level remuneration would exceed the level of overall remuneration he was then
receiving from Macquarie Bank (that level being known to
Kerr).
(c) The Kerr Entities would facilitate Carolan purchasing a family home he desired in Remuera (Property) by advancing $1,165,000 to assist in the purchase (those funds being the alleged loan which is the subject of this proceeding) (Advance).
(d) The Advance was effectively an advance against future earnings and/or was contingent on Carolan receiving his full entitlements and/or was not repayable unless Carolan received his full entitlements under the agreement.
(e) No interest was payable on the Advance.
[13] By contrast the terms of the advances pleaded by the Kerr entities were those recorded in the draft, but not executed, written loan agreement dated 2007, and in particular, that:
(a) The advances would be repaid within three years of 1 August 2007;
(b)Interest would be payable on the advances at the rate of eight per cent per annum, compounding;
(c) The advances could be secured by registered mortgage.
[14] In closing it was submitted by Mr Goodall, for Mr Kerr, and his companies, that the deal agreed with Mr Carolan was that:
(a) He would be paid a base salary of $300,000, which was slightly higher than his salary at Macquarie.
(b) He would be paid bonuses equal to 50 per cent of EPCM’s net profit
(to be shared with his team).
(c) Mr Kerr would provide assistance to enable Mr Carolan to purchase a house.
[15] The assistance contemplated initially was a mortgage subsidy.
[16] The relief sought by Mr Kerr and his companies EPCM and NZREC is: (a) Judgment in the sum of $1,165,000;
(b) Interest at:
(i) Eight per cent per annum compounding; or
(ii) Two per cent above the counterclaim plaintiff’s borrowing rate
as at 30 August 2007; or
(iii) The rate proscribed under the Judicature Act 1908. [17] In addition, the counterclaim sought either:
(a) A declaration that the debt is secured by the second registered mortgage over the property; or alternatively
(b)An order for specific performance of the obligation of the loan agreement dated 2007 to register a mortgage security for the debt.
[18] Then it also sought:
Declarations that the notices served on Carolan on 5 February 2015 under s 119 of the Property Law Act 2007 are valid and the counterclaim plaintiffs are entitled to exercise a power of sale on the second registered mortgage.
[19] For his part, by his counterclaim, Mr Carolan seeks the following relief:
(a) A permanent injunction restraining any or all of the Kerr Entities from selling or entering into an agreement to sell the property whether by way of auction, tender, or otherwise purporting to exercise rights under s 119 of the Property Law Act.
(b)A declaration that the Kerr Entities are not entitled to exercise a power of sale in relation to the property and that Carolan has no indebtedness to the Kerr Entities.
(c) An inquiry into damages and an award of damages pursuant to s 94 of the Credit Contracts and Consumer Finance Act 2003 (the CCCFA).
(d) Interest.
[20] Both parties seek costs.
The trial issues
[21] There is no issue of fact as to the total amount of money that was advanced by the Kerr Entities for the purchase of the house in Auckland. It was $1,501,000. It is agreed that that sum was reduced by $336,000, reflecting bonuses to Mr Carolan so that the balance of the debt, ignoring interest, is $1,165,000.
[22] The substantial issue goes to the terms of the advance. In his pleadings, Mr Carolan pleaded that in an oral agreement in May 2007 between him and Mr Kerr it was agreed that the advance(s) would be part of a package of benefits that Mr Carolan would receive so that his level of remuneration would match the level he was foregoing by leaving Macquarie Bank, and that it was not a loan “that was repayable in the normal course”. For Mr Kerr, it was that the advances were loans, on agreed terms. Each side bears the onus of proof on the probabilities as to their pleadings.
[23] The terms of Mr Carolan’s package with the Kerr Entities required the retention of bonuses by participation in the Kerr Entities’ funds which were intended to be floated to the market in the long run when the cash benefits would arise to investors in the fund one of whom being Mr Carolan. Mr Carolan in various emails recognised that the advances were in the category of a loan, but essentially argued either that it was a non recourse loan or that the benefits promised by the Kerr Entities would enable the loan to be discharged from the gains obtained by working for the businesses. In that sense it was contended to be a no recourse loan meaning
there was no absolute obligation on Mr Carolan to repay the advances independently of whether he obtained the expected benefits from working for the Kerr Entities or not.
[24] The second principal issue is whether or not the loans were interest bearing. The Kerr Entities argued that they were, centering upon a 2007 draft loan agreement never signed which put a rate at eight per cent, being the official cash rate at the time. Failing that argument, there then remained the issue of whether, if a loan had to be repaid, did it bear interest and did the interest compound?
Issue 1: the terms of the advances
[25] It was accepted by both sides in the evidence that at the time both Mr Kerr and Mr Carolan thought that Mr Carolan would at least match, if not do better, working for the Kerr Entities than working for Macquarie Bank. The issue is whether Mr Kerr promised or guaranteed remuneration at least matching, if not outstripping, the benefits that Mr Carolan had been obtaining from Macquarie.
[26] The understanding between the two men was oral. It was never reduced to writing. In that sense the trial had a “he says” versus “he says” character. The agreement, such as it was, was struck between good friends. The deal was developed in discussions and, Mr Carolan said, was sealed with a handshake.
[27] Before me both counsel tried to prove different agreements. This appeared to flow from a common assumption that before a debt can arise there has to be an agreement and that a debt is a kind of contract. Well, of course, usually it is. But does not have to be.1 Proof of a debt is sufficient for a cause of action on the debt.
[28] Here it is beyond dispute that if any agreement was reached, it was reached at the time of the decision of Mr Carolan to leave Macquarie and before the first advance, which was used to pay the deposit. It is common ground that at that time
neither man expected the Kerr Entities to end up advancing $1.501 million towards
1 See, Garratt v Ikeda [2002] 1 NZLR 577 (CA) at [17] discussing the decision of Wylie J in
Prendergrast v Chapman [1988] 2 NZLR 177 (HC).
the acquisition of a house and payment of interest on the bank loan to avoid foreclosure.
[29] Putting aside the dispute as to whether there were agreed terms, and just focussing on the advances creating the debt, what happened was that both men were very enthusiastic about Mr Carolan joining the Kerr Entities Group as a capital funds raiser. Both were so optimistic they were confident that Mr Carolan’s contributions or success in raising money would reward them both handsomely such that by one means or other the loan would not only be serviced, but repaid. The history of dealings is that as Mr Carolan needed funds in addition to the funds initially agreed of $480,000, he asked for them and Mr Kerr arranged an entity to supply them.
[30] It would be unreal to try to construct a single agreement from the handshake commitment and the subsequent series of unanticipated advances. Rather, this was an entirely informal understanding and commitment between two close friends such that the words “terms of advance” has no true application to what happened. These were not two men who embarked upon “terms”. The only terms they agreed were the splitting of benefits brought to the Kerr Entities by the capital fundraising by Mr Carolan.
[31] The common element between Mr Carolan and Mr Kerr was that they both believed at the time of Mr Carolan’s transition from Macquarie to the Kerr Entities that there was every reason to expect Mr Carolan would be rewarded handsomely.
[32] During the negotiations Mr Carolan asked Mr Kerr to consider some kind incentive structure around base fees:
For example media fund is formative and differentiating between $150 million (say 1 per cent) and $250 million (additional 1 per cent on add
$100m of equity) goes a long way in focusing hearts and minds on optimal
outcomes. Suggests it is only on deal by deal basis.
These are big sums. One percent on $150 million is $1.5 million.
[33] Counsel for Mr Kerr analysed the above exchange in this way:
Mr Kerr responded with information that the deal pipeline for 2007 could result in a capital raising of $500 to $600 million. That would have resulted in a profit to EPCM that year of around $6 million, which would have been shared between EPCM and Mr Carolan i.e. $3 million each.
[34] Mr Kerr also said to the Bank of New Zealand at this time in his email of 10
August 2007:
We would expect him (Carolan) to earn an additional $1 million a year in capital raising fees without trouble. The reason we are happy paying the interest is that we want him to build up equity in the various funds he raises capital for.
[35] Earlier, on 6 June 2007, Mr Carolan asked Mr Kerr for further “colour on prospective deal pipeline which would assist me monetising revenue potential of EPCM”. And Mr Kerr replied “one per cent is guide idea on typical deal – happy added super performance kickers will think through”. He then went on to define the deal pipeline for 2007 as follows:
1. EP news and media $250 million to EPIC CUBS 100 to 200.
2. EPIC subs … 100 to 200.
3. EP Ian fund $130 million.
4. Possible round 2 for news and media.
[36] Mr Kerr then found that he had a harder job persuading his associate, Mr Merhtens, who was in favour of employing Mr Carolan under a written contract containing a three month notice clause “so that keeps elegant tension to handsomely reward”.
[37] So these two businessmen, Mr Kerr and Mr Carolan, were thinking earnings in millions of dollars, and pragmatically addressing the immediate task of funding the deposit on the new home for Mr Carolan, before he received his accrued bonuses and expectations from Macquarie Bank. Put against their expectations at the time of future revenue, the GFC not having occurred, the substantial advances made by the Kerr Entities to the acquisition of the Carolan house were relatively small.
[38] The conclusion I reach is that there was no agreement on the terms of the advance. The agreement was a personal commitment by Mr Kerr to Mr Carolan to
get him financed into the new home and that Mr Carolan would share the expected revenues handsomely. The two gentlemen did not need to take it past a handshake. I saw nothing in the case which suggested that Mr Kerr was going to defer to his junior associates who wanted to lock down the relationship into a more standard and written contract of employment, and a loan agreement.
[39] Because of the mutual trust character of the relationship, Mr Carolan’s pleaded case that there was a binding agreement that his overall remuneration would exceed his level of remuneration at Macquarie cannot be proved on the balance of probabilities. What has been proved is that both men were supremely confident that Mr Carolan would be better off with the Kerr Entities than with what he was achieving at Macquarie. And that is confirmed by the fact that Mr Carolan left Macquarie Bank. There is no suggestion in the evidence that he had to leave. He left for a better opportunity.
[40] I am satisfied that Mr Kerr’s position is corroborated by his advice to the bank that the money being advanced by him using a BNZ facility to Mr Carolan was a loan.
[41] In the end there was no real dispute that all the advances were loans. The real dispute was, as pleaded, whether the advances were on a no recourse basis.
[42] I find that Mr Kerr has proven that all the advances were a loan. The next issue is whether they were on a no recourse basis.
No recourse?
[43] Mr Carolan has not proved that the advances to the BNZ on his behalf were non recourse loans. Mr Carolan sought to make out that case, but without any documentary support and contrary to some telling evidence. That included an email on 10 August 2007 from Mr Kerr to the private banker at the Bank of New Zealand committing Mr Kerr’s entity Kerr Entities to be responsible for the interest payments for a three year period, set out in part above at [35] but, I repeat the critical explanation of why Kerr Entities would pay the interest:
The reason we are happy paying the interest we want him to build up equity in the various funds he raises capital for. At a point in time in the future these are likely to be exchanged for EPL stock at IPO and in respect of the guarantee to BNZ by EPCM Mr Carolan entered into a deed with EPCM and Equity Partners Asset Management Holdings Ltd EPAMH.
[44] The second sentence needs a little more explanation. Mr Kerr liked to have senior businessmen like Mr Carolan tied to employment by a common interest in making money by staying with the Kerr Group. It was never intended that the super benefits to be earned by Mr Carolan would be paid out in cash on a per annum basis. Rather, he would get opportunities later to cash out or take other securities.
[45] By the deed referred to in the email, Mr Carolan agreed that EPCM could register a second mortgage against the property he was buying, ranking only behind the BNZ. By the deed he acknowledged that if he ceased to be employed by EPCM or sold the property the guarantee given to the BNZ by EPCM, the guarantee would be immediately determinable by EPCM and that EPCM could do this any time after three years. The effect of this deed was to put a limit on the EPCM’s commitment to the BNZ in respect of the advances. The commitment was capped at $860,000.
[46] This deed was executed on 30 August and at the same time that Mr Carolan executed the mortgage on his new home in favour of the Bank of New Zealand. What is in Mr Carolan’s favour is that there is no execution at this time (or subsequently) of any agreement settling out the memorandum of terms of loan, let alone providing any liability for him to pay interest on the two EPCM advances, or to any other EP company for the advances being made on his behalf by that company.
[47] A year later, on 12 February, Mr Carolan with the collapse of his job, was seeking further interest payment on his behalf from Mr Kerr. He sent Mr Kerr an email saying this:
George,
Caught out with Jason who told me I will cease to be an EPAM employee this month.
Given this change probably time to assess where you and I are at financially and where to from here.
Interest costs on the house direct to bank approximately $360K a year (excluding interest costs on initial 1M deposit provided by you). This is a loan to me which will be repaid.
I would like to replace my salary at EPAM via an additional loan of $300K.
This will cover all Princeps’ business costs in year one.
We review every six months being February and August as bank interest falls due.
Mick
[48] Princeps was his company, as noted above, which he operated in the gap between losing his position as capital fundraiser and taking up the new position as executive director of EPAM. He took up this position on 1 March with a much lower base salary of $80,000 and in the same context on 3 March Mr Kerr arranged a further advance of $165,000 to the Bank of New Zealand bank account to pay his interest. He did this following an email from Mr Carolan on 29 February saying interest payment of $185,000 had fallen due and he only had $27,500 in the bank (Princeps).
[49] So, we see Mr Kerr continuing to support Mr Carolan, essentially maintaining his ownership of this expensive house.
[50] Matters considerably improved for Mr Carolan in 2009. On 1 June 2009 he became managing director for EPAM. His base salary was $250,000 per annum, with a guaranteed bonus of $390,000 per year and in his favour at that time, and indeed at no time prior to this, did Mr Kerr seek to recoup any of the advances that had been made to the Bank of New Zealand supporting the borrowings on the Carolan home.
[51] However, at no time in this narrative or later is there any written assurance or promise by Mr Kerr to Mr Carolan that the advances made by the Kerr Entities to the BNZ amounting to a loan to Mr Carolan would not have to be repaid.
[52] As noted earlier, in the end the loans amounted to $1,501,000. But it was agreed that $336,000 of the entitlements of Mr Carolan post-2009 would be off set against the loan debt, hence the sum being claimed as principal remains at $1.165 million. This treatment, again, reinforces that the Kerr Entities were always of the
view that the advances they had made to the BNZ on Mr Carolan’s behalf were loans. They were advances. Because they were, the evidential onus of proof shifted to Mr Carolan to prove they were no recourse. He has not proved so.
Interest
[53] It follows that the substantial issue in the trial comes down to whether or not the advances as loans accrued interest or, failing that, whether or not the Court has a power (and should) impose interest on the advances.
[54] The submission made by counsel for Mr Kerr’s companies was that interest was payable. There is no doubt that Mr Kerr’s solicitor, Mr Tinkler, drew up a loan agreement (never signed) and in the course of drawing up that agreement made a file note recording a telephone discussion he made with someone addressing interest on the loan. The file note is obviously examining the house purchase and the interest rate due to the BNZ. The file note was assessing Mr Carolan’s exposure on the loan arrangement and the level of earnings required to make repayment. In evidence Mr Carolan accepted that it “was certainly possible” that this record of Mr Tinkler discussing interest was a conversation with him.
[55] Counsel for Mr Kerr’s companies argued that Mr Tinkler’s file note was sufficient proof that it was accepted by Mr Carolan that interest was payable on these advances. I do not agree. It is not sufficient that he, Mr Carolan, was possibly the other person in the discussion. That is not a probability that the parties agreed that he would pay interest. Rather, I find it more material that Mr Tinkler drew up a loan agreement which would provide for interest at eight per cent that was not signed. I accept someone has clearly been instructing Buddle Findlay to record or obtain an interest component. But that did not happen.
[56] In all the financial accounts thereafter the loan is booked at cost and does not record interest accruing. The argument before the Court was this was because the loan was clearly impaired from March 2008 and it would be wrong to book interest as due when there is no ability of Mr Carolan to pay it. But again there was no proof on the balance of probabilities that there was an impairment analysis. I accept the expert evidence of Mr Hussey that it is possible in internal accounts to do a “short
cut” by simply not recording interest owing rather than first recording interest owing and then noting impairment and deleting the interest balance.
[57] I think the telling fact is that although Mr Tinkler was obviously charged with obtaining an interest agreement, it was never pursued.
[58] This does not surprise the Court when it is considered against the background context. The Tinkler file note is undated but appears to have been made in February
2008, at a time when Mr Carolan simply did not have the ability to pay. So it was to a degree somewhat academic to get him to sign a loan agreement. This was also at a time when it was still in the interests of the Kerr Entities to keep Mr Carolan in employment and incentivised. His promised income had dropped to $80,000 a year, which was a disincentive. He was committed to paying $360,000 a year in interest to the BNZ independently of the additional advances by the Kerr Group. It would have been academic to invoice Mr Carolan for the interest. Mr Kerr’s evidence was “I’m confident we made an active decision to keep it at cost”.
[59] It was also submitted for the Kerr companies that it was a term that the interest would be capitalised. Again, the only evidence in support of that is the unsigned loan agreement. No one suggested, and it cannot possibly be proved, that the unsigned loan agreement had the same effect as a signed loan agreement.
[60] I conclude that there was never any interest agreed to be paid by Mr Carolan on the advances made on his behalf to the BNZ.
[61] Equally, against Mr Carolan there is no evidence that the loan advances were ever written off or forgiven. They have been consistently retained as an asset in the financial accounts of Kerr Entities EPL, EPAM and EPAMH. The Kerr company holding the security, EPCM, was struck off and had to be reinstated to enable the enforcement of the mortgage, this was because the mortgage charge was, as we have seen, between Mr Carolan and that company.
[62] Mr Carolan’s counsel argued that the fact that the company had been struck
off was indicative of an internal decision never to recover the advances. The counter
evidence was more prosaic that the company simply got struck off because it had not been paying the registration fees. The evidence is equivocal. It has not been proved by Mr Carolan on the probabilities that the loan was ever written off or the intention never to enforce the loan was a decision ever made by any of the Kerr Entities or by Mr Kerr.
[63] In fact the likelihood is the other way. As already noted, Mr Kerr in his evidence was candid that he preferred to have senior staff beholden to him as an added incentive to perform well. It was contrary to Mr Kerr’s interests to release the mortgage one of his companies had over Mr Carolan’s property and he never has.
[64] I conclude that there has been no agreement enforceable as a contract on Mr Carolan to pay interest on the advances by any of the EP companies to the Bank of New Zealand to contribute to the purchase price and thereafter meet outstanding interest payments.
[65] The next question is, however, whether the Court can impose interest to run on the debt.
Interest under the Judicature Act 1908
[66] Section 87(2) of the Judicature Act 1908 provides:
(2) In any proceedings in the High Court, the Court of Appeal, or the Supreme Court for the recovery of any debt upon which interest is payable as of right, and in respect of which the rate of interest is not agreed upon, prescribed, or ascertained under any agreement, enactment, or rule of law or otherwise, there shall be included in the sum for which judgment is given interest at such rate, not exceeding the prescribed rate, as the Court thinks fit for the period between the date as from which the interest became payable and the date of the judgment.
[67] Counsel were not able to find any cases where s 87(2) has been applied. There is no equivalent statutory provision in the United Kingdom or Australia.
[68] The critical opening lines of the subsection require the Court to have made a finding that the interest is payable “as of right”. There are cases where the Court has found that the parties have agreed that interest would be payable but have not agreed
the rate.2 In Waikato Dairy Traders v Porteous the claim was unsuccessful on the facts but the Judge observed that, had the plaintiffs been successful, interest would have been payable even without evidence of an agreed interest rate.
[69] I have no doubt that if the Court could make a finding that interest was agreed to be payable. In such circumstances, the Court would have the ability to infer an objectively reasonable rate. But I am quite satisfied that, given the findings of fact thus already made, s 87(2) simply does not apply because there is no agreement between the parties which makes interest payable as of right.
[70] In the event that s 87(2) is not applicable then EPCM seeks interest at the prescribed rate under s 87(1) which provides:
87 Power of Courts to award interest on debts and damages
(1) In any proceedings in the High Court, the Court of Appeal, or the Supreme Court for the recovery of any debt or damages, the Court may, if it thinks fit, order that there shall be included in the sum for which judgment is given interest at such rate, not exceeding the prescribed rate, as it thinks fit on the whole or any part of the debt or damages for the whole or any part of the period between the date when the cause of action arose and the date of the judgment:
Provided that nothing in this subsection shall—
(a) Authorise the giving of interest upon interest; or
(b) Apply in relation to any debt upon which interest is payable as of right, whether by virtue of any agreement, enactment, or rule of law, or otherwise; or
(c) Affect the damages recoverable for the dishonour of a bill of exchange.
[71] Putting aside the question of whether the CCCFA applies, there is no doubt that s 87(1) can apply and interest can be imposed on the debt of $1.165 million up to the prescribed rate of 7.5 per cent, being from the date that the debt is called up (for the date the debt was called up is the date when the cause of action arose). This is because there was no term imposed on the debt. When the debt was called up by
Mr Kerr’s email on 26 September 2014, it then became payable. Not by reason of an
2 Beck v Erickson (1908) 28 NZLR 43 (SC) and Waikato Dairy Traders Ltd v Porteous HC Hamilton CP185/89, 14 June 1990.
agreed term in a contract, but because it was a debt repayable upon a reasonable demand.
[72] I have considered postponing that date on the basis that the date on which the debt was called up should be a reasonable period after Mr Kerr advised that he wanted to be repaid, allowing time for the debtor to refinance and/or sell the house. Promissory estoppel was not pleaded in this case. I raised the matter in argument with counsel. Upon receipt of the email on 26 September, I think at the very least it would take any reasonable creditor at least a month to arrange refinance because
effectively there had been acquiescence.3
[73] So the order is that interest becomes payable from 26 October 2014, that being the date I find when this cause of action arose. There is no authority to give interest on interest. So compound interest as claimed by the Kerr companies is not available. The maximum statutory prescribed rate of 7.5 per cent is reasonable in the circumstances of the debt being outstanding.
[74] I have considered a lower rate of five per cent per annum: this being the sum suggested by Kerr Entities’ submissions, as from 1 July 2011. But as from 26
September 2014, there was ability to refinance at market rates and pay out the Kerr Entities. The failure to do that faced with a call up of the loan justifies the full prescribed rate of 7.5 per cent as it reflects the fact that it was not by agreement that Mr Carolan retained the advances post 26 September 2014. Accordingly, interest at the prescribed rate applies from 26 October 2014.
Does the Credit Contracts and Consumer Finance Act 2003 apply?
[75] Mr Carolan’s case is that if the advances are a loan and any interest thereon is not enforceable because the loan contract, was a consumer credit contract and therefore disclosure was required of the interest rate and interest charges under ss 37 and 18 of the CCCFA. He seeks relief under s 94 of the Act for losses claimed to
have arisen from non-disclosure.
3 Central London Property Trust v High Trees [1947] KB 130.
[76] The first issue is whether or not this CCCFA applies. Section 3 provides:
3 Purposes
(1) The primary purpose of this Act is to protect the interests of consumers in connection with credit contracts, consumer leases, and buy-back transactions of land.
(2) It is also the purpose of this Act—
(a) to promote the confident and informed participation in markets for credit by consumers; and
(b) to promote and facilitate fair, efficient, and transparent markets for credit; and
(c) to protect the interests of consumers under credit contracts, consumer leases, and buy-back transactions of land, both when those agreements are entered into and for their duration; and
(d) to provide remedies for debtors, lessees, and occupiers (including consumers) in relation to—
(i) oppressive credit contracts, consumer leases, and buy-back transactions of land; and
(ii) oppressive conduct by creditors under credit contracts, lessors under consumer leases, and transferees under buy-back transactions of land.
(3) To achieve the purposes referred to in subsections (1) and
(2), this Act—
(a) requires creditors under consumer credit contracts and transferees under buy-back transactions of land to be responsible lenders, both when they provide credit or finance and for the duration of those agreements; and
(b) provides for the disclosure of adequate information to consumers under consumer credit contracts and consumer leases (both before entry into, and before variation of, such agreements)—
(i) to enable consumers to distinguish between competing credit or lease arrangements; and
(ii) to enable consumers to be informed of the terms of consumer credit contracts or consumer leases before they become irrevocably committed to them; and
(iii) to enable consumers to monitor the performance of consumer credit contracts; and
(iv) in the case of consumer leases, to make clear to consumers that consumer leases are not consumer credit contracts; and
(c) provides rules about interest charges, credit fees, default fees, and payments in relation to consumer credit contracts; and
(d) enables consumers to seek reasonable changes to consumer credit contracts on the grounds of unforeseen hardship; and
(e) provides for the disclosure of adequate information to consumers under buy-back transactions of land and for independent legal advice to those consumers—
(i) to inform consumers of the terms, the effects, and the implications of those transactions before they become irrevocably committed to them; and
(ii) to enable consumers to monitor the performance of those transactions; and
(f) provides rules about fees in relation to buy-back transactions of land; and
(g) provides, in relation to credit contracts that include or involve a security interest,—
(i) rules that apply in relation to the creditor's rights to repossess consumer goods; and
(ii) corresponding rights for consumers and third parties that are affected by the exercise of the creditor's rights; and
(h) applies, as appropriate, the requirements, disclosure obligations, rules, and remedies specified in paragraphs (a) to (g) in relation to guarantors.
[77] “Consumer” is not defined. All statutory provisions have to be interpreted in the light of the purpose of the Act.4 “Consumer credit contract” is defined in s 11 which provides:
11 Meaning of consumer credit contract
4 Interpretation Act 1999, s 5.
(1) A credit contract is a consumer credit contract if—
(a) the debtor is a natural person; and
(b) the credit is to be used, or is intended to be used, wholly or predominantly for personal, domestic, or household purposes; and
(c) 1 or more of the following applies:
(i) interest charges are or may be payable under the contract:
(ii) credit fees are or may be payable under the contract:
(iii) a security interest is or may be taken under the contract; and
(d) when the contract is entered into, 1 or more of the following applies:
(i) the creditor, or one of the creditors, carries on a business of providing credit (whether or not the business is the creditor's only business or the creditor's principal business):
(ii) the creditor, or one of the creditors, makes a practice of providing credit in the course of a business carried on by the creditor:
(iii) the creditor, or one of the creditors, makes a practice of entering into credit contracts in the creditor's own name as creditor on behalf of, or as trustee or nominee for, any other person:
(iv) the contract results from an introduction of one party to another party by a paid adviser or broker.
(1A) For the purposes of subsection (1)(b), the predominant purpose for which the credit is to be used is—
(a) the purpose for which more than 50% of the credit is intended to be used; or
(b) if the credit is intended to be used to obtain goods or services for use for different purposes, the purpose for which the goods or services are intended to be most used.]
(1B) The reference to intention in subsections (1)(b) and (1A) is a reference to the debtor's intention.
(2) This section is subject to sections 14 and 15.
[78] The argument for Mr Carolan to be a “consumer” is that sub-paragraphs (a), (b), (c)(i), (iii), (d)(i) of s 11(1) apply.
[79] On the black letter reading of this section, they do apply. By black letter I mean reading the provisions without regard to the purpose of the statute. Not by any measure is this case examining a market transaction for credit by consumer who is at arms length of the supplier of the finance. Rather, the setting is of two experienced bankers forming a business relationship and one banker providing the other with finance via corporate entity he controls.
[80] Counsel before the Court argued respectively that the CCCFA would be turned on its head if either it was not applied or if it was applied.
[81] I favour the latter proposition. Mr Carolan simply does not fall within the range of consumers whose interests are protected by this Act.
[82] Further, for Mr Carolan to argue that the CCCFA applies flies in the face of his evidence which lies on the strong relationship of mutual confidence between the two men, the handshake character of the deal, and details such that Mr Kerr had been the best man at Mr Carolan’s wedding, and was the godfather or one of his children.
[83] I do not think it is necessary to rely upon an argument advanced for Mr Kerr’s entities to the effect that s 11(1)(c)(i) does not apply unless the Court were to find that there was an agreement between the parties to charge interest at eight per cent. This argument is based on the premise that if interest is payable under the Judicature Act, or is not payable at all, then there is no interest charge and therefore no consumer contract. Interest charge is defined under s 5 as:
Interest charge – means a charge that accrues over time and is determined by applying a rate to an amount owing under a credit contract and includes a default interest charge.
[84] This, I agree, is another, though less fundamental, reason why the CCCFA
does not apply.
Other arguments: Promissory estoppel and/or collateral contract – preventing recovery of the advances
[85] The alternative argument is that Mr Kerr verbally promised that Mr Carolan would be in a position from the outset of his employment to have acquired the $5 million property, would be able to service the cost of that from the earnings he would receive and that any financial assistance provided by Mr Kerr to that end would not be repayable until Mr Carolan had obtained sufficient benefits from the Kerr Group by reason of his work to enable him to service the costs of keeping the property.
[86] Alternatively, the argument is that if this was not a contract, these were representations, giving rise to an equitable estoppel because Mr Carolan was encouraged by these assurances to leave Macquarie.
[87] I accept that Mr Carolan left Macquarie relying upon the assurance of Mr Kerr that he would enable Mr Carolan to acquire the $5 million property. The evidence shows that he, Mr Kerr, did this against the attempted opposition by some of his business associates, such as Mr Merhtens. Furthermore, the evidence shows that Mr Kerr did this in spite of the anticipated costs arising and that he, Mr Kerr, continued to provide financial assistance as needed until the resignation of Mr Carolan. Mr Kerr has only sought to enforce the debt after Mr Carolan left his employment. There is nothing in the context, let alone in the evidence, of what was said to make any finding that Mr Kerr had obligations to Mr Carolan beyond Mr Carolan’s resignation and departure from the Group. It is not necessary to find formally that there was such a collateral contract or an estoppel because, either way, there has been no breach of it.
[88] A slightly different argument was that Mr Carolan was assured that his earnings from the Kerr Group would be sufficient to acquire and service the $5 million home and be whole in terms of the income. This was an argument that he did not earn enough and that somehow the scale of his earnings was a guarantee made by Mr Kerr.
[89] My understanding of the evidence is different. I find that there is a clear distinction between Mr Kerr committing to get Mr Carolan into the $5 million
property, one the bank and on the other being prepared to pay unexpected amounts and ongoing interest charges to keep him there. But that is different from a contractual responsibility that he would always earn as much as he had been earning at Macquarie. The two propositions are related, but they are distinct. There was certainly, as I have found, a mutual expectation between the two men that the capital fund raising of the Kerr Group would provide rewards matching, if not being better, than those that had been enjoyed by Mr Carolan when working for Macquarie Bank. But there is no evidence that the handshake deal promised this to occur as a matter of fact over the years.
[90] Mr Kerr kept his assurances to secure and maintain the $5 million property for Mr Carolan until Mr Carolan resigned, as he had to in fact having blocked the appointment of a director promoted by his patron. Therefore, there is no breach of any collateral contract or of any promissory estoppel.
Result
[91] I make the following orders:
(a) The defendants/counterclaim plaintiffs are entitled to judgment in the sum of $1,165,000.00. [See above [16](a).]
(b)The defendants/counterclaim plaintiffs are entitled to interest on the judgment sum at the prescribed rate of 7.5 per cent per annum from
26 October 2014. [See above [16](b)(ii).]
[92] There was never any dispute as to the scope of the second registered mortgage, enabling it to be used to enforce the debt. The dispute was confined to the existence of a debt. With the findings of the debt, and its enforceability, it follows that Mr Kerr and his relevant companies are entitled to the following declarations:
(a) The debt is secured by the second registered mortgage over the property at 11 Eastbourne Road, Remuera, Auckland. [See above [17](a).]
(b)The notices served on Mr Carolan on 5 February 2015 under s 119 of the Property Law Act 2007 are valid and the defendants/counterclaim plaintiffs are entitled to exercise the power of sale in relation to the second registered mortgage. [See above [18].]
[93] The other remedies sought are dismissed. [See [16](b), as to (i) and (ii), [17](b), [19](a), (b), (c) and (d).]
Costs
[94] Had the counterclaim plaintiffs succeeded in obtaining compound interest throughout the life of the loan, the judgment sum would have been financially significantly higher. I have not calculated this sum. I am inclined to think that the outcome of this judgment is such that costs should perhaps lie where they fall. Costs are reserved. If either party pursues costs, I require the submissions of each party to be no more than five pages, excluding the schedule, exchanged in advance.
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