Colley v Westpac New Zealand Ltd
[2013] NZCA 57
•14 March 2013 at 3:00pm
| IN THE COURT OF APPEAL OF NEW ZEALAND |
| CA531/2012 [2013] NZCA 57 |
| BETWEEN | KEVIN STEPHEN COLLEY |
| AND | WESTPAC NEW ZEALAND LIMITED |
| CA565/2012 | |
| BETWEEN | WESTPAC NEW ZEALAND LIMITED |
| AND | CAROLYN CYNTHIA COLLEY |
| Hearing: | 19 February 2013 |
Court: | O'Regan P, Randerson and Asher JJ |
Counsel: | M R T Colthart for Appellant in CA531/2012 and Respondent in CA565/2012 |
Judgment: | 14 March 2013 at 3:00pm |
Recalled and Reissued: | 17 September 2013 |
Effective date of Judgment: | 14 March 2013 |
JUDGMENT OF THE COURT
AThe appeal by Mr Colley against the entry of summary judgment is dismissed.
BThe appeal by Westpac against the refusal to enter summary judgment against Mrs Colley is allowed. Summary judgment is entered against Mrs Colley for the same sum as that entered against Mr Colley, $4,588,142.64 and $57,438.07, being the amounts owed to the bank as at 4 July 2012.
CMr and Mrs Colley must pay to Westpac contractual costs under the guarantees.
DThe amount paid by Mr Colley into this Court for security for costs on appeal shall be paid to Westpac or its solicitors.
____________________________________________________________________
REASONS OF THE COURT
(Given by Asher J)
Introduction
These are two appeals arising out of the collapse of Next Electronic Servicing Ltd. Kevin and Carolyn Colley were guarantors of that company’s indebtedness to Westpac New Zealand Ltd. In a judgment of 30 July 2012, Associate Judge Doogue gave summary judgment to Westpac against Mr Colley, but declined to give summary judgment to Westpac against Mrs Colley.[1] Mr Colley appeals against the Judge’s entry of summary judgment against him, and Westpac against the Judge’s refusal to enter summary judgment against Mrs Colley. The central issue was whether the bank’s conduct was oppressive.
[1]Westpac New Zealand Ltd v Colley [2012] NZHC 1854.
In 2007, Next Electronic Servicing Ltd (“Next”) was a nationwide company providing servicing support for major consumer electronic brands. It was a significant enterprise that had traded for many years. In the year ended 31 March 2009 its revenue was $18.3 million.
In January 2007, it changed banks and entered into arrangements with Westpac New Zealand Ltd (Westpac or the bank). The facilities, which included a $3 million wholesale term loan, a $400,000 wholesale term loan, and an $800,000 overdraft, were entered into in that same month. Total indebtedness was $5.4 million. The Colleys guaranteed the borrowing of Next and an associated trust. We will consider the terms of the guarantees in due course. Mr Colley was the Managing Director of Next. Mrs Colley did not hold office in the company but was employed fulltime by BDO accountants, who were the accountants for Next. She had previously been a director of the company from 23 October 1997 until 23 December 2004. Material on the bank file shows her frequently communicating with the bank about matters of financial detail relating to the advance and Next.
Next breached financial covenants with Westpac in the 30 June and 30 September 2007 quarters. On or about 1 December 2007 and 16 April 2008, Westpac sent notices of breach of covenant to the company.
The overdraft facility was progressively increased thereafter from $800,000 to $1.5 million. No specific notice of the increase was given to Mrs Colley as guarantor.
By 2010, Next was facing significant financial problems. It was losing corporate customers and having difficulties with its primary customer whose loyalty was central to its survival. At the company’s request, Westpac granted temporary facility increases on 12 March 2010. Because of concerns about the company’s performance, a report was obtained from its accountants. The report, which was provided on 3 September 2010, made it clear that the company was facing significant financial hurdles.
On or about 8 September 2010, management of Next’s account was transferred to Westpac’s Credit Restructuring Unit. On 28 October 2010 a further temporary advance of $115,000 was made by Westpac to Next. Westpac then required a second accountant’s report, and the accountancy firm McGrath Nicol was briefed. This report was made available in draft in early December 2010.
Westpac interpreted this report as demonstrating that the company was unable to pay its debts as they became due in the normal course of business. Next was operating outside all the various limits that had been imposed by Westpac. Its relationship with its only remaining major customer was fragile and uncertain.
On 18 January 2011, Westpac appointed receivers. At that time $4,171,604 was owed to Westpac and guaranteed by the guarantors. The receivers determined that the company could not be sold as a going concern. In due course, it was placed into liquidation by the Inland Revenue Department which was owed $509,347. The total net proceeds received by Westpac following the receivership and liquidation was $220,682.45. There was therefore a large shortfall which was the subject of a summary judgment proceeding against the Colleys as guarantors. These were defended.
Associate Judge Doogue entered judgment against Mr Colley for the sums claimed.[2] The Judge did not accept that Mr Colley was able to put forward any arguable defence. However, he found that there had been arguably oppressive behaviour in relation to Mrs Colley, declined to enter judgment against her, and made timetable directions.[3]
Mr Colley’s appeal
[2]At [91].
[3]At [94]–[95].
The arguable defence set out in the notice of opposition of Mr and Mrs Colley to the summary judgment claim was that the “conduct” of the plaintiff as provided in their affidavits was “arguably oppressive” within the meaning of that term set out in s 118 of the Credit Contracts and Consumer Finance Act 2003 (“the Act”). It was also submitted that the Colleys have arguable claims against third parties arising out of the subject matter of the proceeding.
Mr Colley sought to re-open the contracts under s 120 of the Act, which provides that the Court may re-open a credit contract in any proceedings if it considers that:
(a) the contract, lease, or transaction is oppressive; or
(b)a party has exercised, or intends to exercise, a right or power conferred by the contract, lease, or transaction in an oppressive manner; or
(c)a party has induced another party to enter into the contract, lease, or transaction by oppressive means.
There were six essential points that Mr Colthart raised on behalf of Mr Colley, which he argued fully before Associate Judge Doogue and reiterated before us, where he claimed there had been oppressive conduct. If Mr Colley’s arguments were successful, Mrs Colley would also have had an arguable defence on the same grounds.
Westpac’s alleged failure to disclose reservations about Next
This argument for the Colleys is based on material disclosed by Westpac in the course of the proceedings. That material showed that senior management at Westpac harboured concerns about Next’s business at the outset of the banking relationship, and that these concerns continued to be privately voiced within Westpac during the relationship. For instance, in a note of 27 December 2006, a bank executive noted that while there was merit in the transaction, there was low core equity, a weak fall-back position and unproven sustainable earnings. These circumstances made it a “marginal deal”.
The Associate Judge was unable to see any link between the complaint of failure to disclose and oppression.[4] Nor do we. Any bank might have had similar reservations about the Colleys. It was not a case where Westpac had any secret agenda. The advance was made in the usual way, anticipating that there would not be a default and the bank would make a profit. It is not oppressive for bank managers to not fully disclose to a customer all their opinions about its financial position. Further, we are unable to see how the alleged non-disclosures at the time the facility was created in 2008 could be seen as an operative inducement to enter into the contract in 2008 under s 120(c), or the oppressive exercise of a power under s 120(b) in 2010. The alleged non-disclosure was, in itself, not the exercise of a right or power.
[4]At [41]–[48].
This was not a case of a bank lending money to a customer who had no means to meet its commitments. The Colleys came from an experienced and successful business background and were confident of their ability to service the loans. They were confident of Next’s future and were choosing to seek the funding from Westpac.
Commissioning a report from BDO
Mr Colthart submitted that by commissioning a report in July 2010 from BDO accountants who were the accountants of Next, Westpac failed to disclose its concern at BDO’s lack of independence. This led ultimately to it seeking another report from different accountants in November 2010.
The BDO report, when it was made available, disclosed serious problems. It was expressed in words that were sympathetic to Next and the senior management. However, it showed significant cash flow pressure, difficulties in the company remaining within existing bank facilities, undue reliance on one customer, problems with that customer, the loss of other significant customers, troubles in debt recovery, IRD arrears of $213,000, and other irregularities.
It had made sense to the bank to get a report from BDO accountants as the firm which was already familiar with the dealings with Next, and we can see no basis for criticism of that decision. The only criticism that can be made of the commissioning of the BDO report by Westpac was that after the report was obtained, Westpac chose to get another report from accountants entirely independent of the Colleys. This later decision was made as a consequence of the problematic situation that the BDO report revealed and a wish, then, to get an entirely independent report. Even if using BDO accountants was unwise, the decision could not in any circumstances be described as harsh or unjustly burdensome, or in breach of reasonable standards of commercial practice and therefore oppressive.
Transferring the bank oversight to the Credit Restructuring Unit
It is argued for Mr Colley that Westpac misled him as to the reasons and circumstances surrounding the transfer of the account to the Credit Restructuring Unit. However, in a letter of 13 September 2010, Westpac stated that because of concerns about deteriorating working capital caused by the loss of key clients, as well as unresolved payment issues with the largest client and ongoing capital expenditure requirements, a transfer had been made. This statement was frank and accurate. It was up to the bank how it managed the account, and it was not unjust or in breach of reasonable standards of commercial practice if it did not disclose all its considerations to its customers.
Failure and delays on Westpac’s part in reviewing Next’s position and Mr Colley’s wishes for a meeting
Mr Colley pointed to delays in Westpac reviewing Next’s accounts and responding to requests for additional facilities in late 2010, and asserted that he had difficulty in obtaining meetings with the relevant managers.
We agree with the Associate Judge that the short answer to this is that the real complaint is that Westpac did not keep extending Next’s overdraft as Mr Colley wanted. As he observed,[5] more reviews and more meetings would not have produced more funding. Next’s financial position was parlous and it was in breach of a number of important limits. Mr Colley’s resolute optimism despite the bad news was not untypical of debtors. Westpac had no obligation to provide further funding and its refusal to do so cannot be regarded as in any way oppressive. The soundness of its concerns was demonstrated by the massive shortfall in funds following liquidation.
Obtaining the McGrath Nicol report
[5]Westpac, above n 1, at [55].
The second accountant’s report was commissioned from McGrath Nicol on 16 November 2010. It is understandable that a second report was sought given that the policy of the Credit Restructuring Unit was that reports must be prepared by accountants who do not act for the customer. The concern was that the BDO report had been signed by the partner for whom Mrs Colley worked. The report that was ultimately obtained vindicated the decision to obtain it. It disclosed a further significant decline in sales and profitability, and the net forecast for short term cash flow was entirely negative. Various recommendations were made including proposals for monitoring and cost savings, and Westpac giving consideration to providing temporary accommodation. To obtain this report was not oppressive.
Mr Colthart submitted also that the bank acted oppressively by failing to meet with Mr Colley regarding the draft version of the McGrath Nicol report, issued in December 2010. In his judgment, Associate Judge Doogue did not consider that the evidence established that anything but the draft report was ever issued.[6] It was Mr Colley’s evidence that on the day after the report was sent to him he met with McGrath Nicol to address any errors that had arisen. He expressed his views. We do not think that the bank’s actions were oppressive. Further, there is no reason to suppose that any changes to the report would have led to any different outcome, given Next’s poor financial position.
Cancelling the overdraft facility and appointing receivers
[6]At [62].
The complaints of cancelling the overdraft facility and appointing receivers must lie at the heart of Mr Colley’s complaint of oppression. Section 124 sets out the guidelines for re-opening credit contracts, and provides at s 124(b)(ii) that in deciding whether a contract should be re-opened, the Court must have regard to whether the time given to the debtor to remedy the default is oppressive, having regard to the likelihood of loss to the creditor. Mr Colthart suggested that there should have been more discussions before receivers were appointed.
However, Westpac had clearly expressed its concerns in the letter of 13 September 2010. It had advised that any extension of the overdraft was only until 14 January 2011. Mr Colley could hardly claim that he was at all surprised by the appointment of a receiver. In an email he had sent to Westpac on 25 October 2010 he had referred to Westpac having three options. He stated that one of them was:
… we will not be able to trade through the present economic downturn and … will be obliged to write off [the] investment.
Therefore, he had contemplated a collapse of the company some three months earlier. He had received notices of default, and those defaults were significant. He had been informed of the transfer of the account to the Credit Restructuring Unit. We agree with the Associate Judge that there was nothing oppressive in the conduct of Westpac in the last few months, nor in the way in which the receivers were appointed.
Other matters
Mr Colthart submitted further that the affidavit in support of the summary judgment application was defective. This was because it simply traced the history of the loan, producing the relevant documents and summarising the amount owed, with a final paragraph stating the plaintiff’s belief that the defendants had no defence to the plaintiff’s claim.
We do not accept that criticism. The bank’s affidavit produced all the documents that established the claim and the quantum. There had been no notice of any particular defence or claim of oppression at that point in time, and there was no obligation on Westpac’s part to try to anticipate and answer possible defences that were not yet notified.
Mr Colthart made a considerable number of detailed criticisms of the Judge’s findings of fact. We do not propose going through these criticisms one by one. Most of them cannot be sustained, and on the few occasions where there may be some basis for criticism, the variance between the Associate Judge’s summary and what is in the evidence was slight. We are not satisfied he made any material errors of fact in this part of the judgment.
Finally, we see no merit in the submission that the Associate Judge ought to have exercised his discretion to decline summary judgment to allow the Colleys to pursue third party claims. The fact that there may be claims available to a defendant for indemnity or contribution is not, as a general rule, a basis for declining summary judgment[7] and there are no particular circumstances that persuade us that such a course would be appropriate in this matter.
[7]Thomson v Woolford [1987] 1 NZLR 604 (HC).
The appeal against the summary judgment entered against Mr Colley must be dismissed.
Mrs Colley
Introduction
In Mrs Colley’s affidavit in opposition to the summary judgment application was a section headed “Kevin’s influence” in which she referred to her trust in his business judgment and acumen. However, undue influence was not a ground of opposition, and there was no submission of undue influence before the High Court. Her complaint is that Westpac acted oppressively.
Mrs Colley’s claim of oppression can be summarised as follows:
·She was a reluctant guarantor.
·She felt pressure at the time of signing. She recalled it being explained to her by a lawyer at Buddle Findlay that she was signing a personal guarantee, but she felt rushed.
·She thought that their home was the only asset in which she had an interest that was at risk under the personal guarantee.
·She was not aware of the fact that the overdraft facility was increased from $800,000 to over $1,500,000 and was not informed of the changes.
·Singly or in combination these factors made it oppressive for the bank to demand the full amount under the guarantee.
The Judge, in his decision on the case against Mrs Colley, stated that he could not overlook that the amount guaranteed had almost doubled by an increase of $700,000 over a four year period. In the paragraph where he summed up his views on Mrs Colley’s liability he stated:[8]
While the evidence leaves me with a level of scepticism about Mrs Colley’s claim that she was shocked to find what level the overdraft had ultimately reached, I cannot say on the evidence that this statement is wrong. Of course, if the bank had been able to establish that Mrs Colley had been kept informed of the incremental increases to the overdraft during the period July 2010 to January 2011, and had not communicated with the bank she would have a much diminished case for claiming the existence of oppression. No doubt another issue that will need to be considered if the oppression argument ever goes to a defended hearing, is just what would have happened if she had attempted to limit her liability under the guarantee at, for example, the point where it had reached $1 million. Had Mrs Colley made such an overture, would that have brought forward the crisis that lead to the bank appointing receivers? However, those questions are for another day. I decline to enter summary judgment against Mrs Colley.
Discussion
[8]Westpac, above n 1, at [85].
In her affidavit, Mrs Colley referred in detail to her state of mind at the time she signed the guarantee and how what she was told affected her. The oppression provisions of the Act are not, however, focused on personal hardship to a debtor. It is not injustice to the debtor that is the issue, but rather the conduct of the creditor. A credit contract cannot be impugned as oppressive by reference to matters that affected the debtor but which were unknown to the lender.[9]
[9]GE Custodians v Bartle [2010] NZSC 146, [2011] 2 NZLR 31 at [47].
It was not correct for the Associate Judge to concentrate on Mrs Colley’s state of mind and reaction. Oppression under s 118 does not arise just because a debtor is in a position of hardship, even if that hardship is extreme. The focus is on the acts of the creditor, either in relation to the contract or transaction itself, or the creditor’s specific acts before or after the credit contract arose. The allegedly oppressive acts must fall under one of the three matters specified in s 120.
The only oppressive conduct relied on by the Associate Judge in relation to Mrs Colley was the lack of notice to her of the increase in the overdraft facility. Mr Colthart did not seek formally to support the decision on any other ground. Nevertheless, Mr Colthart submitted that there was oppressive conduct when Mrs Colley entered into the guarantees, and also in the exercise by the bank of its rights and powers under the guarantee and loan contracts.
The execution of the guarantee
We record that no oppressive conduct on the part of the bank can be discerned from the facts disclosed concerning Mrs Colley’s signing of the guarantee. Mrs Colley was a senior manager at BDO accountants and earned a salary of approximately $150,000. She was listed as an accountant by the New Zealand Institute of Chartered Accountants. The company documents show that she was involved in the financial affairs of Next. We have been referred to a number of communications from her where she has dealt directly with Westpac in relation to the relatively complex financial affairs of the company. That correspondence shows her to have been privy to its financial affairs, and to have understood those affairs.
The bank forwarded the guarantee documents to Buddle Findlay, the solicitors for Mr and Mrs Colley. They did so in the usual way of banks in New Zealand giving the customer’s lawyer a limited retainer and instructing it to complete and arrange for the execution and registration of the loan documents on behalf of the bank. The letter asked Buddle Findlay to act for it with the consent of the parties to the transaction. It asked Buddle Findlay to familiarise itself with the terms of the documents and the solicitor’s certificate. Buddle Findlay was to satisfy itself that the customers and every guarantor could lawfully enter into the documents, and that the performance of their obligations under the documents did not conflict with any law or the company’s constitutional documents. Buddle Findlay was asked to verify and complete any guarantors’ detail. In relation to the execution of the documents the instruction was that they must, among other things, explain to the customers and the guarantors the meaning and effect of all documents.
Further, under the heading “Advising Guarantors” it was stated that it was Buddle Findlay’s responsibility to ensure there was a full understanding by every guarantor of the obligations being undertaken, and there was no undue influence being exerted on the guarantor. In particular, if Buddle Findlay was also acting on behalf of the customers, it was instructed that it should advise every guarantor that he or she should seek independent legal advice before signing the guarantee because of his or her risk of liability under the guarantee. Every guarantor was also to be advised that, if he or she did not understand the financial risks of guaranteeing the customers, then he or she should also seek independent financial advice.
Westpac also asked that if any guarantor declined to take independent legal advice, this was to be advised to Westpac. Buddle Findlay was to ensure that the “waiver of independent legal advice” form was signed by that guarantor. In such cases, Buddle Findlay would need to provide the advice to the guarantor and execute the solicitors’ certificate in the guarantee.
Buddle Findlay in due course provided the solicitor’s certificate in the guarantee and the general certificate. There was nothing to suggest that Westpac’s use of Buddle Findlay or their instructions were in breach of accepted standards of commercial practice. Westpac acted reasonably in leaving it to Buddle Findlay, who acted for the Colleys, to arrange for execution and provide advice to the Colleys.
Mrs Colley’s complaints of being pressured and rushed are therefore irrelevant to the assessment of whether the bank’s action was oppressive. The evidence of what the bank did shows it to have acted in accord with reasonable standards of commercial practice.
The increase in the loan
Mrs Colley’s central complaint was that she did not expect and was given no notice of the increase in the loan. To put it in terms of s 120, she argued that the increase in the loan without notice to her and the calling up of her guarantee in relation to that increase were oppressive acts. Her submission was presented from the perspective of her surprise and shock when she learnt about the increase.
However, the correct perspective in terms of the Act is the actions of the lender in increasing the loan, and what was known to it. In summary, the following matters are relevant:
·The guarantee stated in plain words that Mrs Colley was guaranteeing all existing “and future” indebtedness of Next.[10]
·The guarantee stated that Westpac and Next were entitled to enter into new arrangements or change existing arrangements at any time without Mrs Colley’s consent.[11]
·The guarantee provided that Westpac did not have to do anything in relation to or tell the guarantor anything concerning the customer’s affairs or finances and that it was the guarantor’s responsibility to find these matters out from the customer.[12]
·The guarantee provided that it did not matter the guaranteed money might increase because of new and replacement arrangements or changes.[13]
·In her acknowledgement of guarantee, Mrs Colley stated that she had been advised to obtain independent legal advice, and understood the terms and provisions of the documents including certain specific matters. The acknowledgement was signed in the presence of the lawyer at Buddle Findlay.
·A solicitor at Buddle Findlay signed and provided to the bank a guarantor’s solicitor’s certificate recording that the solicitor had explained to Mrs Colley the general nature and effect of the guarantee, and the guarantor had stated that she understood its general nature and effect and the obligations and risks involved.
[10]Guarantee clause 2.
[11]Clause 11.
[12]Clause 12.
[13]Clause 13.
Thus, on the basis of documents and acknowledgements signed by Mrs Colley, she was squarely informed that there could be future increases.
Mr Colthart relied on the case of Westpac Banking Corp v Kalbfleisch[14] where he submitted relief was granted on similar facts. We agree with Associate Judge Doogue’s observation that the facts of that case were different.[15] There had been a loan of $5,000 for the purposes of a partnership that was later dissolved. After the dissolution which was known to the bank, there were significant advances of $82,000 to one of the debtors only, for projects quite unconnected to the original advance. The judgment discloses no specific advice that the guarantee was of future advances. These facts can be contrasted with the Colley advances, where they were all for the benefit of the original debtor, were for the original commercial purpose, and where the guarantor acknowledged that she understood the terms, which included future indebtedness and new arrangements.
[14]Westpac Banking Corp v Kalbfleisch HC Whangarei CP13/93, 9 September 1993.
[15]At [81].
There is nothing to indicate that the increase of the overdraft was in breach of reasonable standards of commercial practice. There was nothing inherently harsh or oppressive about advances to a company that were guaranteed in the particular circumstances of this advance being increased without notification to the guarantors. Increases in an overdraft facility provided to a trading company are a common commercial circumstance, and it was plain from the documents signed by Mrs Colley that this could happen.
Most importantly, Westpac was entitled to assume that she knew this. Westpac was free to assume that Buddle Findlay would have given dispassionate and competent advice on the guarantee and Mrs Colley’s potential liability.[16] It could rely reasonably on her acknowledgement. It was at liberty to proceed on the basis that Mrs Colley had entered into the transaction on a fully informed basis and that all risks associated with the advance had been pointed out.
[16]GE Custodians, above n 9, at [48].
Because it is irrelevant to the issue of oppression that Mrs Colley was or was not shocked when she received notice of the amount of the increase, it is not necessary to consider the credibility of Mrs Colley’s evidence or Mr Robinson’s submissions pointing to her involvement in the affairs of Next and her accounting experience.
There was no basis to conclude that Westpac had acted oppressively in increasing the loan without notifying Mrs Colley, in making demand on her or in claiming from her the full amounts advanced. Westpac’s appeal against the decision to dismiss the summary judgment application against Mrs Colley must therefore succeed.
Costs
There is provision for contractual costs in favour of Westpac under the guarantees,[17] and we will make an order to that effect. If there is any dispute over those costs, that will be a matter for the High Court.
Result
[17]Provided for at cl 4 of the guarantee.
The appeal by Mr Colley against the entry of summary judgment is dismissed.
The appeal by Westpac against the refusal to enter summary judgment against Mrs Colley is allowed. Summary judgment is entered against Mrs Colley for the same sum as that entered against Mr Colley, being $4,588,142.64 and $57,438.07, being the amounts owed to the bank as at 4 July 2012.
Mr and Mrs Colley must pay to Westpac contractual costs under the guarantees.
The amount paid by Mr Colley into this Court for security for costs on appeal shall be paid to Westpac or its solicitors.
Solicitors:
Simpson Grierson, Auckland for Westpac New Zealand Ltd
5
2
0