Frimley Estate Limited v Stonewall Homes Limited HC Napier CIV-2009-441-237

[2010] NZHC 2391

IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY

CIV-2009-441-237

BETWEEN  FRIMLEY ESTATE LIMITED Plaintiff

ANDSTONEWALL HOMES LIMITED First Defendant

ANDMICHAEL JON REDSHAW Second Defendant

Hearing:         19 March 2010 and 23 September 2010

Memoranda of Submissions Filed:    a)    Counsel for plaintiff – 15 October 2010

b)    Counsel for defendants – 28 October 2010 c)       Counsel for plaintiff – 22 November 2010

Appearances: T.M. Petherick - Counsel for Plaintiff

J.G. Krebs - Counsel for Defendant

Judgment:      15 December 2010 at 3.30 pm

JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALL

This judgment was delivered by Associate Judge Gendall on 15 December 2010 at

3.30 pm under r 11.5 of the High Court Rules.

Solicitors:           Gresson, Grayson, Solicitors, PO Box 1045, Hastings

Langley Twigg, Solicitors, PO Box 446, Napier

FRIMLEY ESTATE LIMITED V STONEWALL HOMES LIMITED AND ANOR HC NAP CIV-2009-441-237

15 December 2010

Introduction

[1]      This judgment deals with quantum following an earlier summary judgment I gave in this proceeding over one year ago as to liability.  I need to say at the outset that this whole matter has a reasonably long and tortuous history.  I apologise to the parties  for  the  length  of  time  it  has  taken  to  get  to  this  point,  but  it  will  be appreciated  from  the  matters  I  outline  at  [2]  and  [3]  following,  that  the  final (delayed) submission from counsel for the plaintiff was not received by this Court until 22 November 2010.  It was only then that all material was before the Court for proper consideration prior to formulating this decision.

[2]      On 28 September 2009, this Court entered judgment as to liability against the first defendant, Stonewall Homes Limited (“SHL”), for breach of an Agreement for Sale and Purchase (“the Agreement”) entered into with the plaintiff, Frimley Estate Limited (“FEL”), on 31 August 2007.  Summary judgment sought by FEL against the second defendant Michael John Redshaw (“Mr Redshaw”) as “Guarantor” under the Agreement was refused. The Agreement concerned the sale and purchase of 21 lots in a subdivision at Hastings owned by FEL for a price of $3,307,000.00. In breach of the Agreement, SHL as purchaser failed to complete the purchase of some of  these  lots.  When  it  did  not  comply with  the  vendor  FEL’s  notice  requiring settlement by 16 January 2009, FEL cancelled the Agreement in respect of 13 of the lots, which it then on-sold at a claimed loss of $521,226.00.

[3]      Because the Agreement limited SHL’s liability to the value of the assets of the Stonewall Properties Trust (“the Trust”), of which SHL was the sole trustee, summary judgment on quantum was reserved to allow the limitation matter to be fully argued. The hearing as to quantum took place on 19 March 2010 but was adjourned then part-heard to 7 May 2010. Due to unavailability of counsel for SHL on that date, the hearing was again adjourned.   It was finally completed on 23

September 2010. At these hearings, I heard evidence from the second defendant, Michael John Redshaw the director of SHL, Cedric Wesley Knowles (“Mr Knowles”),  an  accountant  called  by FEL;  and  Graham  Cameron  Edwards  (“Mr Edwards”) who is also an accountant and gave evidence for SHL.

[4]      Following the resumed hearing on 23 September 2010 because of an absence of time to hear full submissions, directions were made for the filing of further submissions.  Counsel for FEL filed submissions on 15 October 2010, and counsel for SHL filed its submissions in reply on 28 October 2010. A further extension of time was then granted to allow counsel for FEL to file its submissions in reply, which finally occurred on 22 November 2010.

The Issues

[5]      In  addressing the  question  of  quantum  in  this  case,  essentially the issue requiring determination is the effect of cl 14.1(2) of the Agreement, which limits SHL’s liability under the Agreement to an amount equivalent to the value of the assets of the Trust. Clause 14, set out in full, states as follows:

14.1 If any person enters into this agreement as trustee of a trust, then: (1)  The person warrants that:

(a)  that person has power to enter into this agreement under the terms of the trust;

(b)  that person has properly signed this agreement in accordance with the terms of the trust;

(c)  that person has the right to be indemnified from the assets of the trust and that right has not been lost or impaired by any action of that person including entry into this agreement;

(d)  all  of  the  persons who  are  trustees of  the  trust  have  approved entry into  this

agreement.

(2)  If that person has no right to or interest in any of the assets of the trust except in that person’s capacity as trustee of the trust, that person’s liability under this agreement shall not be personal and unlimited but shall be limited to an amount equal to the value of the assets of the trust that are available to meet that person’s liability unless the right of that person to be indemnified from the assets of the trust has been lost and, as a result, the other party to this agreement is unable to recover from that person that amount.

[6]      Hence, in order to determine the extent of SHL’s liability here in its capacity as trustee of the Trust, it is necessary to ascertain the “value of the assets of the Trust”. An issue that has arisen in this respect is the date of assessment or valuation of those assets: Is SHL’s liability limited to an amount equal to the value of the Trust’s assets as at the date of entering into an unconditional Agreement (31 August

2007), or as at the date of breach of the Agreement (16 January 2009), or as at the date of judgment in this proceeding on liability (28 September 2009)? This issue has assumed particular significance because it seems the Trust, over the course of about

one year, has disposed of all its assets and it is suggested now that it has been insolvent for some time.  FEL contends that the appropriate date for assessment is the date of the Agreement becoming unconditional, or alternatively the date of the breach.   SHL argues that the appropriate date is the date of the liability judgment, 28

September 2009, or at the very earliest, the date of breach being 16 January 2009.

[7]      Another issue that has been raised by FEL is whether the limitation in cl

14.1(2) is applicable at all, on the basis that SHL must have been under a contractual obligation here to refrain from transferring or distributing the Trust’s assets for the primary purpose of avoiding liability under the Agreement and it has not done so. This issue was raised for the first time at the hearing before me on 19 March 2010. FEL does not argue, however, that SHL has lost its right of indemnity, which would bring into play the corresponding proviso in the latter part of cl 14.1(2).

Date of Valuation

[8]      As I have noted, FEL submits that the appropriate date for assessment is the date the Agreement became unconditional, 31 August 2007, or alternatively the date of the breach, 16 January 2009. If the former date is applicable, then FEL is entitled to  full  recovery  against  SHL,  as  it  is  accepted  that  the  Trust  would  have  had sufficient assets to meet FEL’s claim at that time. If the latter date is applicable, it would be necessary to determine whether there were distributions made from the Trust prior to 16 January 2009, or whether the distributions in fact occurred at the end of the financial year, as contended by FEL. SHL, on the other hand, submits that the relevant date is the date of judgment, or alternatively at the earliest, the date of breach. There is no dispute that the Trust did not purport to hold any assets as at the date of judgment.

[9]      FEL submits that cl 14 must be construed in accordance with the contra proferentem rule and that the onus is on SHL, as the person seeking to rely on the limitation clause, to show that the clause is in fact applicable. FEL argues further that limiting liability to the value of the assets as at the date the Agreement became unconditional is also in accordance with the plain and ordinary meaning of cl 14. This is because the clause provides that liability is limited “to an amount equal to the

value of the assets of the trust that are available to meet that person’s liability”, and liability under the Agreement arose as soon as it became unconditional on 31 August

2007. It contends that other interpretations would require additional words to be read into the clause.

[10]     In response, SHL suggests that FEL’s interpretation is flawed, contending that, had it been the parties’ intention to limit liability to the value of the trust assets on the date of the Agreement or when it became unconditional the clause would have simply said so.  It argues that it is significant that the clause specifies that liability “shall” be limited, which implies a date in the future, and submits that this interpretation accords with an expectation that changes in the value of the assets after the date of the Agreement should be reflected in the extent of the trustee’s liability.

[11]     On  this,  SHL  also  refers  to  Foundation  Custodians  Ltd  v  Thornton  HC Auckland  CIV-2009-404-3112,  2  November  2009,  where  White  J  found,  in declining an application for summary judgment, that liability of the professional trustees for a loan debt was limited to the value of the assets of the trust at the time of the enforcement by the plaintiff of its mortgage security over the property. The clause in that case read:

... we agree that the liability of the limited liability trustee under this contract and under any Security or under any Guarantee is not personal and unlimited but will be limited to an amount (the “limited amount”) equal to the value of the assets of the trust under which the limited liability trustee has entered into this Agreement.

[12]     White J referred to the following “well-established principles” relating to the personal liability of trustees:

[24] The well-established principles are:

a)A trustee is personally liable for all debts incurred in the conduct of a trust, and the personal assets of the trustee are available to meet the liabilities of the trust.

b)   A trustee will normally have indemnity in the first instance from the assets of the trust in respect of liability in a trust transaction: Trustee Act 1956, s 38.

c)Trustees may avoid personal liability for the  debts of the trust under a contract with a third party if their liability is expressly limited to the assets of the trust and their personal liability is expressly excluded by the terms of the contract. The need for an express provision in the contract arises because

there is a presumption in favour of personal liability: NZHB Holdings Ltd v

Bartells at [41] per Baragwanath J.

d)   Whether the personal liability of a trustee has been excluded will depend on the language of the particular contract. In NZHB Holdings the following language, quoted at [10] and [42], was sufficient to exclude liability for an independent trustee but not for anyone else:

Persons, except independent trustees,  who  sign  this  document shall at all times remain personally liable for all obligations of the persons on whose behalf they have signed. An independent trustee is a person who is not a settler of the trust or has no rights to an interest in or assets of the trust except as a trustee of the trust.

As Baragwanath J also pointed out in NZHB Holdings at [43]:

It is common for contractual language, like that of a statute, to offer more than one possible literal meaning. In that event a major consideration is what construction best conforms with settled legal principle and settled commercial practice and thus suggests the meaning most reasonably to be ascribed to contracting parties.

e)A trustee’s right to be indemnified from the assets of the trust may be lost if the trustee breaches duties owed to the trust: Butler (ed) Equity and Trusts in New  Zealand  (2  ed,  2009) at  449–451; Laws  NZ,  Trusts  Reissue 1,  at paras 439, 455 and 459.

[25] The wording of contractual provisions designed to limit the personal liability of a trustee will vary considerably from contract to contract. Mr K R Ayers in an article “Limiting Trustees’ Liability to Lenders” (1996) NZLJ 181 at 183 identified three fundamentally different types of trustee limitation clauses:

(a) The personal liability of the trustees shall be restricted to a fixed sum eg “Despite any other provision of this document the amount of liability of the mortgagor under this document shall be limited to

$100,000”. This type of clause is normally only found in guarantees.

(b) The  secured creditor shall  look  only to  the  charged property for payment. This type of clause is quite straightforward in  both its drafting and effect. By way of example refer New Zealand Forms and Precedents form 32.21 (although note the difficulty there involved in the concept of liability being “limited to the land mortgaged” rather than to its value or the net proceeds of its sale). See also form 32.23. In practice, however, such clauses are unlikely to be attractive to lenders who will normally expect all the assets of the trust to be available to meet any liability arising in relation to a loan made to, or at the request of, the trustees.

(c) The secured creditor shall only have access to the assets of the trust to meet the trustees’ liability.

This last type of clause is the one most likely to be acceptable to secured lenders dealing with trustees.

[13]   Two questions were raised before White J, namely whether the clause reintroduced a level of personal liability in the event that the assets of the trust were insufficient to meet the debt, and whether the level of liability was to be fixed at the time of the execution of the contract or at a later time.   Regarding this second

question, White J again referred to Mr Ayers’ article “Limiting Trustee’s Liability to

Lenders” at 183-184:

In some limitation clauses reference is made to the trustees’ liability being in relation to the assets of the trust “from time to time” which expression is normally taken to mean at the time payment under the relevant document is required of the trust.

From the lender’s viewpoint often the only time it will be practicable for the lender to ascertain the extent to which the trust assets could meet liability under the relevant document will be at the time it is executed. On the other hand the trustee will not want, in effect, to guarantee the minimum value of the trust assets in the future and down to the date of actual repayment of the liability from trust assets. Most lenders seem to  implicitly take  the  view that  because they do  not  normally insist on a borrower keeping assets of a certain value (outside the specialised area of commercial securities) they should not impose a more stringent requirement on a trustee. If a date other than that of inception of a loan is to be chosen as the date on which the extent of the liability of the trustee is to be fixed by identifying the assets of the trust at that time then the other options are to either use the date on which some form of notice is given by the lender to the trustee   (which could be constituted by service of proceedings claiming repayment of the amount borrowed from the lender) or the date on which judgment is obtained against the trustee in relation to the debt. It is therefore highly desirable to be totally specific as to which of these dates are to be used as the date on which the assets of the trust are to be ascertained.

[14]     White J considered that the material words were “liability ... will be limited”, as it would normally be expected that changes in the value of the assets after the date of the agreement should be reflected in the amount of the trustee’s limited liability. He noted Mr Ayer’s comment that a trustee would not want to guarantee the minimum value of the trust assets as at the date of execution of the document, and considered that the lender would also wish to ensure that any increase in the value of the trust assets over time was available to meet any liability under the loan contract. On that basis, White J concluded that liability of the trustees was limited to the value of the assets of the trust at the time of the enforcement by the lender of its mortgage security. SHL submits that, just as the word “will” in Foundation Custodians Ltd v Thornton, the word “shall” in cl 14 must mean that the relevant date for valuation of the assets can be no earlier than the date on which FEL looked to enforce its rights, being 16 January 2009.

[15]     It may be considered somewhat surprising that before me SHL did not place any reliance on what seems to me to be the determinative conclusion reached by White J in his judgment, which was that the purpose of the limitation clause was to exclude any element of personal liability for the trustees, with the effect that the trustees were not expected to have recourse to their “personal” assets to meet the liabilities of the trust. White J accordingly held that the clause did not “reintroduce”

personal liability equivalent to the value of the assets of the trust in the event that the assets of the trust were insufficient to meet the debt under the contract. Instead, he found it provided that the creditor would have access only to the assets of the trust to meet  the trustee’s  liability.  Ultimately,  the  result  of  this  approach  was  that  the trustee’s “potential liability” under the clause was limited to the value of the assets of the trust at the time of enforcement of the mortgage security, but that this potential liability was extinguished once the lender received the proceeds of the mortgagee sale because any additional right of recovery would have imposed personal liability on the trustee.

[16]     As an aside, I need to note at this point that, with respect, the reasoning of White J here might be seen as internally inconsistent, given that the question of timing should not even arise if there is no element of “personal liability” (that is, recourse is only available to the assets of the trust, by way of the trustee’s right of indemnity).  But, in any event, as I see it, this aspect is probably immaterial to the present issues before me.

[17]     The  clause  in  Foundation  Custodians  Ltd  v  Thornton  which  White  J considered precluded any liability that could not be satisfied out of the assets of the trust, was in similar terms to cl 14.1(2) (“... we agree that the liability ... is not personal and unlimited but will be limited to an amount ... equal to the value of the assets of the trust...” in the Foundation Custodians case as opposed to:  “... liability

... shall not be personal and unlimited but shall be limited to an amount equal to the value of the assets of the trust...”) in the present case. In his judgment (at [31]), White J relied on the following reasons which he thought pointed to a complete exclusion of “personal liability”:

(a)  The purpose of clause 10.11 was clearly to remove any element of personal liability otherwise imposed on a  limited liability trustee by clause 10.10. By definition a limited liability trustee will be a professional trustee and would not be expected to have recourse to its assets, if any, to meet the liabilities of the trust. Imposing personal liability on  a  limited  liability trustee  such  as  ITL,  which  had  no  assets,  would therefore normally be pointless.

(b)  The purpose of clause 10.11 emerges clearly from the express exclusion of “personal and unlimited liability”. Having expressly excluded personal liability, it would be strange to reintroduce it at all, especially in an uncertain manner and to an uncertain extent.

(c)  The second sentence of clause 10.11 reinforces the view that the intention was to exclude all personal liability by limiting the limited liability trustee’s liability to the assets of the trust because it states:

However, if the right of the limited liability trustee to be indemnified from the assets of the trust has been lost …

This suggests that the qualification to the exclusion of unlimited personal liability was intended to extend only to the right to be indemnified from the assets of the trust in accordance with established legal principles.

(d)  The second sentence imposes personal liability on the limited liability trustee when the limited liability trustee is personally in breach of its trust obligations and that breach causes loss under the contract. In that situation personal liability would be appropriate.

(e)  In  the  context of  clause 10.11 it  therefore does not  make sense  to  interpret the reference to “an amount … equal to the value of the assets of the trust” as suggesting that the limited liability trustee is liable for anything beyond the assets of the trust from which, in accordance with well established principles (and the Mabago Family Trust deed), it would be entitled to indemnity. The reference to “an amount … equal to the value” was not intended to reintroduce an element of personal liability.

[18]     Despite the substantial similarities in the wording of the two clauses, I have formed the view that the parties here could not be considered to have intended to exclude any kind of “personal liability”, or that they sought to limit the trustee’s liability  to  its  right  of  indemnity  against  available  trust  assets.  One  point  of distinction between the two cases is that SHL is not a professional trustee, and that imposition of personal liability thus would not normally be “pointless”. In addition, I respectfully disagree with the approach being taken by White J in the Foundation Custodians case in interpreting aspects of the limitation clause.  I consider that the words “liability shall be limited to an amount equal to the value of the assets of the trust” (emphasis added) are important here.   As I see it, they are indicative of the parties’ intention that the trustee’s liability is to be defined by an amount  and this amount is to be calculated on the value of the assets of the trust at a certain point in time.  That point in time on the plain and ordinary ready of the words in the clause in my judgment should be the date the Agreement became unconditional when SHL clearly became liable under the contract.  It is upon that date that SHL has “a liability under the Agreement” to be met.   And, in my view, liability is to be potentially enforceable against the trustee personally for the amount equal to the specific dollar value  of  the  assets  of  the  trust  at  unconditional  date  if,  in  the  end,  there  are insufficient trust assets to meet the claim. I also take the view that the parties here did intend that SHL would in effect “guarantee” the availability of a minimum

amount of assets to satisfy its liability under the Agreement, and that it would be contrary to that intention to interpret cl 14.1 as a complete exclusion of personal liability rather than a mere limitation provision. SHL was in control of the assets, and it would be a big step, in my view, to attribute to the parties an intention that SHL’s liability should not exceed its right of indemnity. In these circumstances, it may well be that SHL’s failure to fully argue this point before me was simply based on an acknowledgment that White J’s interpretation did not accord with the parties’ intention in this instance.

[19]     Some further discussion of this question of the relevant date for assessment of the trust’s assets is useful here. Again in my judgment the present case is not directly comparable to Foundation Custodians Ltd v Thornton, which involved liability under a loan agreement and mortgage security rather than as here a property sale agreement. The approach taken in that case was that the parties would have intended the relevant date to be the date of enforcement of the security. It may be that if this was the approach to be taken, in the present case, a corresponding date would be the date of the breach, 16 January 2009. By then, SHL would have been aware of FEL’s claim and could have been expected to take steps to ensure that assets would be retained to meet the claim if necessary.

[20] However, as I have noted, the present case involves a contract for the sale and purchase of a significant number of sections, and it is not unreasonable to think that the parties would have contemplated an earlier date to be applicable, specifically either the date of the Agreement or more likely the date it became unconditional. The parties were well aware at that time of SHL’s obligation to perform the Agreement and complete the purchase. As noted by Mr Ayers in his article referred to at [13] above:

Often the only time it will be practicable for the lender to ascertain the extent to which the trust assets could meet liability under the relevant document will be at the time it is executed”.

A similar consideration might also apply in the context of a vendor-purchaser relationship such as the one which occurs here.

[21]     Of course, Mr Ayers  goes on to note that a trustee would not want “to guarantee the minimum value of the trust assets in the future and down to the date of actual repayment of the liability from trust assets”. I consider that, if a trustee wishes his/her liability to be defined at a future point in time, rather than the date when liability under the Agreement is assumed, the clause should make specific reference to this. Accordingly, it seems to me that the fact that the clause refers to the future by using the term “shall” should not be overemphasised in this context.  Rather than as a reference to “future liability”, as submitted by SHL, the wording could simply be understood as referring to the future imposition or enforcement of the liability.

[22]     In my view there is also some force in FEL’s argument that, if there is any ambiguity in relation to the applicable date, this should be resolved against SHL, given that there is a presumption in favour of personal liability of trustees; particularly, it seems, where the trustee is not an independent professional trustee: see NZHB Holdings. FEL’s position therefore is that the date of the Agreement or the date it became unconditional is the relevant date. This argument would only make sense, however, if it was accepted that liability generally and overall would not be limited to the “limited amount” at the relevant time if trust assets increased over time. This is because, if liability is fixed either way at a particular time, both parties are exposed to the potential risk of fluctuations in the trust’s assets. White J seemed to think that liability would remain fixed, regardless of a later increase in trust assets (“... it would normally be expected that changes in the value of the assets, either way, after the date of the Agreement should be reflected in the amount of the trustee’s limited liability” (at [39]), emphasis added). Mr Ayers appeared to hold a similar view.   With respect, in my view, this interpretation is wrong. The purpose of the clause is to “limit” the trustee’s personal liability, and an increase in trust assets over time simply means that a trustee’s “personal” liability remains unaffected by the increase due to its right of indemnity.

[23]     If the relevant date to be determined here is the date of breach and not the date the Agreement became unconditional, it would become necessary to determine the value of the assets of the Trust as at 16 January 2009.   Here, FEL claims

$521,226.00 together with interest. However, it also contends that from the information provided, at the date of the breach, SHL had net assets of $499,050.21.

So if that was the relevant date for assessment of liability, FEL could not recover the full amount claimed.

[24]     The Trust was operated as a trading trust for SHL at the time SHL entered into the Agreement with FEL. The financial records of SHL and the Trust provided to the Court disclose that, since then, all of the Trust’s assets have been either sold or distributed over the course of about one year. Assets were sold to Stonewall Constructions Limited (“SCL”), a company that was incorporated on 30 January

2009, which also seems to have taken over SHL’s trading activities. Significantly, this was only two weeks after the date of breach by SHL under the Agreement. More importantly for present purposes, a distribution (or distributions) of about

$550,000.00 was made to the Thomaskatlin Trust (“TKT”), a beneficiary under the Trust in order to build on a lake-house property in Kinloch, Taupo. This distribution occurred in the financial year ending 31 March 2009. FEL submits that the distribution did not take place until at least 31 March 2009 and that, on that basis, SHL  had  a  positive  asset  position  of  $499,050.21  as  at  16  January  2009.    In response, SHL argues that the Trust no longer had any assets on that date, because the distributions were made throughout the 31 March 2009 financial year.

[25]     The  evidence  of  Mr  Knowles,  FEL’s  accountant  is  that,  in  the  years preceding the year ending 31 March 2009, the Trust’s cash payments, drawings and other beneficiary transactions were recorded in the trust’s “current account” during the financial year, and subsequently treated as distributions in one big “wash up” at the end of the year. The effect of this was that funds paid out of the trust were advanced on loan to beneficiaries on the basis that a distribution would be made to them at the end of the year. Drawings during the year, therefore, were not distributions, but advances that were later authorised as distributions by way of resolution. However, for the first time, this methodology was not adopted in the financial statements for the year ending 31 March 2009, which suggests that there were no drawings or advances from the current account during the year, but that each individual transaction amounted to a distribution. Before me, Mr Edwards, the accountant for SHL in his evidence confirmed that the accounting treatment in terms of beneficiary advances had changed for the 2009 year. He said that the change was made without specific instructions, but was based on his professional judgment.

[26]     FEL submits, therefore, that any change in accounting methodology had not been approved by SHL’s director, Mr Redshaw, and was inconsistent with how SHL believed  the  Trust  was  operating.  Reference  is  made here to  statements  by Mr Redshaw that the Kinloch build was treated in exactly the same way as previous distributions; that he had never drafted any resolutions; that he thought that his accountant had drafted the relevant resolutions at the end of the financial year; and that a “washup” or capital distribution was required at the end of the year because he did not know how much the build would cost. Based on this evidence, FEL submits here that the only reasonable conclusion to reach is that Mr Edwards “retrospectively changed the accounting methodology” in an attempt to assist the Trust to avoid liability, that the Trust had always operated current accounts for advances to beneficiaries throughout the 2009 financial year, and that the advances prior to 16

January 2009 were in fact advances on current account, or loans, and thus formed part of the Trust’s assets at the time.

[27]     SHL in its response argues that the distributions to TKT were entirely within the terms of the Trust’s deed, and that the payments were always intended to be advance distributions rather than simple advances from the current account. It maintains that there is no evidence to suggest that TKT ever intended to borrow money from the Trust or to assume any obligation to repay, and that FEL’s submission to that effect centres on form as opposed to substance. SHL submits that Mr  Redshaw’s  evidence  cannot  be  interpreted  as  an  acknowledgment  that  the Kinloch project was to be run on the basis of loan advances, as this would attribute “far too sophisticated an understanding of the workings of the Trust and its accounting  processes  to  Mr  Redshaw”.       SHL’s  position  is  that  a  proper interpretation of his evidence must be that it was always intended that the Kinloch project be funded as a distribution, or a series of distributions, from the Trust to TKT, and that the end of year resolution was simply a “tidying up action”.

[28]     Before I go on to consider the evidence in a little more detail, it might be helpful to refer here to the decision of Wild J in Fraser v Buxton HC Wellington CIV-2008-485-1101, 3 December 2008, where the Court held that transfers totalling

$103,578 in assets from the trustees of a trust to the defendant beneficiary were to be legally characterised as “advances” or “loans”, and not as distributions as submitted

by the plaintiff. Wild J considered that, because assets were distributed before the distribution date stipulated in the trust deed, any transfers could only be advances. The date of distribution had not yet arrived. He noted that it was clear that there was no expectation that the advances would ever have to be repaid, but concluded that this could not change their character.  It was immaterial, therefore, that relevant financial statements referred to “capital distributed to beneficiaries”, and that the shares were transferred directly to another trust. In addition, there was a deed of indemnity  signed  by  the  defendant,  which  provided  that,  until  the  date  of distribution, “all distributions to Beneficiaries made by the Trustees shall constitute advances repayable to the Trustees upon demand in writing, unless otherwise determined by the Trustees from time to time”.

[29]     Leave  to  appeal  against  Wild  J’s  decision  was  refused  by  the  Court  of Appeal, where it was argued that it was not open to the court to “go behind” and “recharacterise” the transactions. The Court of Appeal concluded that it was not minded to interfere with Wild J’s factual finding that, despite some of the documentation indicating that there may have been an actual distribution, this was not the intention of the trustees or the actual substance of the transaction. I do not seek here to draw any factual parallels with Fraser v Buxton.   However, Wild J’s approach is instructive, insofar as it focused on the intention of the trustees, and the substance of the transaction, rather than accounting processes.

[30]     In my view, the starting point for determining whether the transactions in question are to be characterised as advances or distributions is to consider the trustee’s powers to make such distributions. These are contained in cl 3 and cl 5 of the Trust’s trust deed, which seem to afford SHL with a wide discretion. The deed does not specifically refer to an obligation by the trustee to pass resolutions for the purposes  of  making  distributions.    This  is  implied  however  in  cl  25.3,  which provides that a resolution in writing signed by the trustee will be as valid and effectual as if it had been passed at a meeting of trustees.  I take the view therefore that here, trustee’s decisions would ordinarily be formally recorded in resolutions. That  said,  however,  there  are  no  minutes  or  resolutions  for  the  Trust  for  the purported distributions throughout the 2009 year. The only resolutions that were

referred to in evidence were resolutions passed later approving the annual accounts of the Trust, which, for the 2009 year, included the “distributions” to TKT.

[31]     In his evidence, Mr Redshaw said that the 2009 transactions were treated in the same way as in previous years, which meant that there would be a “wash up” or a “tidy up” at the end of the year, and that this would “come up in the accounts as distribution”. He said that resolutions were drafted at the end of the financial year because it did not make sense to record a minute for each transaction during the year, and that the funds that were used to build the Kinloch lake house were essentially drawings. However, Mr Redshaw also said that the distributions throughout the year were intended to be distributions, and not loans. Clearly, Mr Redshaw was confused about the real distinction between “advances” and “distributions”, and admitted as much in his evidence.

[32]     Standing back and looking at Mr Redshaw’s evidence as a whole, I got the clear impression that Mr Redshaw had always intended to operate the 2009 transactions in the same way as in previous years.  In those previous years, he had approved distributions by signing these off later on the annual accounts, as opposed to making “individual” distributions throughout the year. In the end, of course, the effect  of  the  transactions  would  remain  the  same  because  the  earlier  advances through the year were never intended to be called up. However, I do not consider that the simple fact that the advances were not expected to be repaid is sufficient to change the character of these transactions. A similar argument was rejected by Wild J in Fraser v Buxton. This might also be the source of Mr Redshaw’s confusion and may explain why he thought that there was no real difference between paying out “distributions” as opposed to “advances” or “loans”. Overall, therefore, it seems to me that nothing had changed with respect to the 2009 transactions, although they were no longer recorded as advances from the current account.

[33]     Mr Edwards’ evidence might also be of some relevance in this respect. He confirmed that it was his decision to change away from the current account to making direct distributions during the year. Of course, the decision to make distributions rests with the trustee, and not his accountant. Interestingly, Mr Edwards also stated that he did not think that there was a difference in the substance of the

transactions. When asked whether the drawings were advances or distributions, he said

I think that the principle behind [the transactions] is that Mr Redshaw was acting as the trustee. He made a decision as to whether or not the costs [or payments] were made or incurred in the first place. He did so under the authority of his role as a trustee. They were recorded against the beneficiary and they were recorded in the end of year financial statements as distributions, so I’d call them distributions on that basis.

[34]     Given Mr Redshaw’s apparent perception that there was a need to approve distributions by way of signing off on financial statements at the end of the year, I think that the transactions throughout the year could not be regarded as distributions in their own right, but were meant and intended to be advances to be offset by a subsequent credit in the form of an end of year distribution. Accordingly, I have come to the conclusion that, in substance, the transactions in question were intended to be advances as opposed to distributions. It is not realistic to suggest that SHL departed from the pattern that it had adopted in previous years, simply on the basis of a  change  in  accounting  policy  affected  by  Mr  Edwards.    It  is  Mr  Redshaw’s intention, as director of SHL, that is of relevance here.

[35]     I conclude therefore that for the reasons outlined above and noted particularly at [17], FEL’s liability under the Agreement is to be assessed at 31 August 2007, the date the Agreement became unconditional at which time the parties accepted before me that SHL had sufficient assets to meet FEL’s full claim.  But, even if I may be wrong on this aspect and the date for determination of FEL’s liability is to be the date it breached the Agreement being 16 January 2009, at that point I find the Trust still had substantial though perhaps lesser assets albeit mainly in the form of loan advances, because the claimed distributions from the Trust did not occur until the end of that financial year.  And, on this it is instructive to note that Mr Edwards, in his evidence for FEL, acknowledges that at the beginning of the 2008/9 financial year, the Trust had a net equity of $694,000.00 and there was only a small loss for that year.

Attempt to Avoid Liability? Implied Term and Obligation of Good Faith

[36]     In light of my conclusion that FEL’s liability is to be assessed by reference to the date the Agreement became unconditional, it is unnecessary to consider the remaining arguments  raised by FEL based on  an implied term or breach of  an obligation of good faith. For the sake of completeness, however, I will do so briefly. It may still be of some benefit to set out in truncated form the parties’ arguments and my views with respect to this issue.

[37]     FEL’s overall submission in this area is that SHL has knowingly stripped assets from the Trust to attempt to avoid liability and defeat all its creditors, and that it is not entitled to do so. In his affidavit, Mr Knowles for FEL has expressed the view that the Trust appears to have set in place a process of transferring, selling or distributing its business operations and assets to other related entities in early 2009 and  continuing  until  January 2010;  that  these  transactions  did  not  occur  in  the ordinary course of business, but were intended to “shelter” assets from and to deliberately defeat the claims by creditors; that removal of cash and assets was classed as beneficiary distributions, although SHL would have been aware that obligations to FEL could not be met; that the transfer of assets to SCL may not have been at arm’s length; and that SCL has the appearance of a phoenix company.

[38]   FEL advances two submissions in respect of this allegation that SHL intentionally sought to evade liability under the Agreement.  The first is that there is an implied term that SHL agreed not to transfer or distribute its assets (either in anticipation of breaching the Agreement or soon thereafter) for the primary purpose of avoiding liability, and the second is that SHL is in breach of its obligation of good faith. Consequently, FEL contends assessment of SHL’s liability should be on the basis of the asset position that the Trust would have been in if SHL had not breached the implied term or if it had acted in good faith.  To hold otherwise would make the obligations of SHL under the Agreement worthless, and that cannot have been the intention of the parties.

[39]     In response, SHL disputes that it intentionally sought to evade liability or that its actions were in any way related to FEL’s inability to recover. It submits that there

is no evidence to support allegations of this nature, and it also disputes that any properties of the Trust were sold at undervalue. SHL further argues that, even if assets were sold at undervalue, this would not be material in the present context. It says that it decided to set up SCL for sound commercial reasons when it started experiencing pressure from its financiers, and says that it had already committed to the Kinloch lake house project prior to difficulties arising with its finance lending margins. In cross-examination, Mr Redshaw said that it would have been irresponsible to continue the Kinloch project with SHL, which was insolvent. He also noted that SHL’s insolvency meant that it could not obtain a Masters Builders guarantee. SHL maintains that, in these circumstances, it cannot be criticised for selling the Trust’s properties to SCL.

[40]     FEL questions here why there was any commercial need to set up a new company and suggests that it is no coincidence that the decision to restructure was taken in January 2009 at exactly the same time as SHL’s default under the Agreement.  It suggests that the records of SHL finally made available to FEL and the Court disclose that a concerted effort was made to dispose of all of the Trust’s assets in the 2008/9 year and that SCL was set up purely as a phoenix company. And, on this it submits that SHL was clearly aware of the impending litigation at the time,  referring  to  discussions  at  a  meeting  on  8  December  2008  between  Mr Redshaw and his accountant that the matter “was proceeding to Court and that that was going to have a significant impact on the financial performance and future of Stonewall’s Property Trust”. According to Mr Edwards, the outcome of that meeting was that little could be done to save the Trust due to its liability under the Agreement with FEL.

[41]     In relation to the implied term argument, FEL refers to the five-point test laid down by the Privy Council in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 16 ALR 363 and its discussion by the Court of Appeal in McNeill v Gould (2002) 4 NZ ConvC 193,557 where the Court said that:

[A] Court will be prepared to imply a term if there arises from the language of the contract itself, and the circumstances under which it is entered into, an inference that the parties must have intended the stipulation in question. An implication of this nature may be made in two situations: first, where it is necessary to give business efficacy to the contract, and secondly, where the term  implied  represents  the  obvious,  but  unexpressed,  intention  of  the

parties. These two criteria often overlap and, in many cases, have been applied cumulatively, although it is submitted that they are, in fact, alternative grounds. Both, however, depend on the presumed intention of the parties.

[42]     By reference to these cases, FEL submits that the alleged implied term is reasonable and equitable, as the obligations of SHL under what was going to be a reasonably long term arrangement under the Agreement would otherwise be “worthless”; that it is required to give the Agreement business efficacy, because without it the Agreement would become “nothing more than an option at the purchaser’s discretion”; that it is so obvious that “it goes without saying”, as the parties’ intention was to avoid personal liability of SHL, but only insofar as liability might exceed the value of the trust; and that the implied term is capable of clear expression and does not contradict any expressed term of the Agreement.

[43]     FEL further acknowledges that there is some debate whether a contractual obligation of good faith and fair dealing forms part of the New Zealand law.   It submits nevertheless that this question is essentially one of construction and that the terms of the Agreement here clearly show that an obligation of “good faith” was intended, given an “intrinsic failure of expression” setting out any obligations on the part of SHL with respect to asset distribution, asset maintenance and dealing with assets. FEL submits that an obligation of  good  faith would require SHL to act honestly in maintaining the assets of the Trust in accordance with “the intention of the parties to merely avoid personal liability”. It refers to a number of decisions in this context, including Pratt Contractors Limited v Transit New Zealand [2005] 2

NZLR 433, where the Court imposed an obligation of “good faith” as part of a tender contract.

[44]     FEL’s reliance on an implied term however was not foreshadowed in its statement  of  claim.  SHL  now  suggests  that  FEL  cannot  rely  on  this  argument because it ought to have been pleaded. FEL, however, points out that, on the first day of the hearing, it brought an oral application to amend the statement of claim to allow for the two implied terms to be pleaded, and that my decision on this application was reserved.  Given that I do not intend to come to a definitive view on this part of FEL’s argument, there is no need here to formally address this pleading

issue in any more detail.   Nevertheless, for convenience I do proceed now on the basis that such leave would be granted and FEL’s pleading amended accordingly.

[45]     SHL further submits that FEL’s argument of an implied term is untenable, on the basis that it does not satisfy the criteria for implied terms, and that it is inconsistent both with the trustee’s duty to act in terms of the trust deed and for the benefit of the beneficiaries, and with cl 14.1, which SHL submits sets out very clearly the circumstances in which a trustee loses the benefit of the limitation of its liability. SHL contends that its right to deal with SPT’s assets could not be fettered in the way suggested by FEL without formal agreement. In addition, SHL submits that   it   could   not   be   said   to   have   transferred   or   distributed   the   assets “for the attempted purpose of avoiding liability under the Sale and Purchase Agreement”.

[46]     I  consider  that  there  is  merit  in  FEL’s  submissions  here,  particularly regarding its implied term argument. Essentially, I take the view that the parties would not have intended the trustee’s liability to be limited in the way described in cl

14 if the trustee intentionally dissipated assets to place them out of the plaintiff’s reach.  It would be astonishing as I see the position, if, when asked at the time of contracting, it had  not  been the parties’ intention to circumscribe the limitation clause in this way – particularly given SHL’s status as a non-professional trustee. And dealing with FEL’s second submission here, the good faith argument, it seems to me that in any event in all the circumstances here, this would add little to the first implied term argument.

[47]     The only possible difficulty with FEL’s argument in this area, in my view, would have been to show that SHL intentionally “dissipated” or sheltered the Trust’s assets in order to evade liability. There was no clear evidence before me to suggest that the sales of assets to SCL occurred at under-value. The transaction of major concern however, was the substantial distribution to TKT, at a time when SHL was clearly aware of its liabilities to FEL.  My initial view on matters before the Court is that there may have been sufficient evidence to make out FEL’s argument here. On the one hand, it is clear that SHL knew quite early on that the Trust would cease to be viable because of its obligations under the Agreement with FEL, but it still chose

to make the “advances” it did, with the intention of endeavouring to turn these into distributions later and thus to effectively strip all assets from the Trust.  On the other, although it may be that the Kinloch project had been planned for some time, my understanding is that it was a lake holiday home for Mr Redshaw and his family and outside the trading operations.

Conclusion

[48]     For  all  the  reasons  outlined  above,  I  conclude  that  the  correct  date  for assessing FEL’s liability under the Agreement is the date it became unconditional being 31 August 2007 and the parties accept that on that date the Trust and SHL had sufficient assets to meet FEL’s claim.  I find therefore that cl 14 of the Agreement effectively does not operate to achieve any limitation of the final liability of SHL here.

[49]     Turning to the question of quantum, in its statement of claim and summary judgment application, FEL seeks judgment for its loss of $521,226.00 together with interest, from the respective dates of settlement of each section sale until the date of judgment, and again from the date of judgment. The statement of claim includes a schedule setting out the interest claim in more detail. It seems to include interest rates of 6.1 per cent for certain periods and penalty interest at 14 per cent for other periods. No argument or submissions were made to me by counsel on this question of interest, nor had FEL provided to the Court any updated schedule of interest claims beyond that in its 24 April 2009 statement of claim.

[50]   FEL’s summary judgment quantum claim against SHL here has largely succeeded.   Under these circumstances, and given that the application before me remains one for summary judgment upon which I need to be satisfied that SHL as defendant  has  no  arguable  defence  to  the  claims  made  against  it,  I  propose  to proceed as follows:

(a)As SHL effectively advances no dispute to the figures for loss on resale, interest, and finance costs amounting to $521,226.00 claimed at paras [19] and [20] of FEL’s statement of claim, (and as set out at

[7] of my earlier 28 September 2008 judgment in this proceeding)

summary judgment is to be granted to FEL against SHL for this sum.

(b)As to FEL’s further claim for interest beyond the amounts outlined in para [20] of its statement of claim, directions are to be made as follows:

(i)FEL  is  to  have  15  working  days  from  the  date  of  this judgment to file and serve its memorandum addressing this question of further interest for which summary judgment is claimed against FEL;

(ii)SHL is then to have a further 15 working days from that date to file and serve its memorandum in response and directed to this further interest claim question;

(iii)FEL is then to have a further 10 working days to file and serve any further memorandum it may wish, strictly in response.

(iv)Those memoranda are then to be referred to me and, in the absence of either party indicating they wish to be heard on the issue, I will decide the further interest question based upon those memoranda and the other material before the Court.

Orders

[51]     Orders are now made on FEL’s application before the Court as follows:

(a)      Summary judgment is now granted to the plaintiff FEL on its claim in this proceeding against the first defendant SHL personally in the sum of $521,226.00.

(b)On the plaintiff FEL’s claim for further interest, directions are now made in the terms set out at para [50](b) above;

(c)       As  the  plaintiff  FEL’s  summary judgment  application  against  the second  defendant,  Mr  Redshaw,  was  dismissed  earlier  in  my  28

September 2009 judgment, that substantive matter is to be the subject

of a call in the list at 10.00 am on 17 February 2011.

Costs

[52]     As to costs on both my earlier 28 September 2009 summary judgment as to liability (reserved at [46] of that judgment on the basis they were to be the subject of further consideration at this quantum hearing) and on the present quantum hearing itself, neither counsel for the plaintiff FEL or counsel for the defendants, SHL and Mr Redshaw addressed this issue before me.     At the outset in this judgment I recorded that, although the steps in this proceeding to date have largely been taken to address a summary judgment application only, the whole process has been lengthy and rather tortuous.

[53]     Under these circumstances, if costs are in issue here and cannot be resolved between counsel, an opportunity needs to be provided for submissions to be made, so the issue can be properly considered by the Court before any final order is made.

[54]     A further direction is now made that if counsel for the parties are unable to agree the question of costs between them, then they may file memoranda on the issue sequentially and, in the absence of either party indicating they wish to be heard on the matter, I will decide the costs question on the basis of the memoranda filed and the other material before the Court.

‘Associate Judge D.I. Gendall’