Gilles Bakery Limited v Gillespie
[2015] NZCA 93
•25 March 2015 at 12 pm
| IN THE COURT OF APPEAL OF NEW ZEALAND |
| CA506/2013 [2015] NZCA 93 |
| BETWEEN | GILLES BAKERY LIMITED & ORS |
| AND | K J GILLESPIE, W A DUNCAN AND T N PERRY M C FINNIGAN AND C PETTIGREW WESTPAC NEW ZEALAND LIMITED |
| Hearing: | 7 October 2014 |
Court: | Stevens, Wild and Goddard JJ |
Counsel: | G J Judd QC and K J Patterson for Appellants |
Judgment: | 25 March 2015 at 12 pm |
JUDGMENT OF THE COURT
AThe appeal is dismissed.
BThe second respondents are entitled to their costs for a standard appeal on a band A basis and usual disbursements.
CThe appellant Gilles Bakery Ltd is to indemnify the third respondent in respect of its costs and expenses on this appeal.
____________________________________________________________________
REASONS OF THE COURT
(Given by Wild J)
Table of Contents
| Para No | |
| Introduction | [1] |
| Factual background | [5] |
| Evidence | [39] |
| First cause of action – against Messrs Finnigan and Pettigrew The pleading | [46] |
| Yarrows was a de facto or deemed director of Gilles | [47] |
| Yarrows owed statutory and fiduciary duties to Gilles and its preference shareholders | [48] |
| Yarrow breached its statutory and fiduciary duties to Gilles | [50] |
| Messrs Finnigan and Pettigrew are liable as joint tortfeasors in respect of Yarrows’ breach of its statutory duty and as accessories to Yarrows’ breach of fiduciary duty | [51] |
| Appellants’ supporting submissions | [52] |
| Our view | [59] |
| Yarrows was a de facto or deemed director of Gilles | [65] |
| Yarrows owed statutory and fiduciary duties to Gilles and its preference shareholders | [68] |
| Yarrows breached its statutory and fiduciary duties to Gilles | [70] |
| Messrs Finnigan and Pettigrew are liable as joint tortfeasors in respect of Yarrows’ breach of its statutory duty and as accessories to Yarrows’ breach of fiduciary duty | [74] |
| Second cause of action – against Westpac The pleading | [76] |
| Appellants’ supporting submissions | [81] |
| Our view | [84] |
| Result | [92] |
| Costs | [93] |
Introduction
Under appeal is a judgment delivered by Associate Judge Abbott on 28 June 2013.[1] It dealt with applications by the respondents to strike out the appellants’ claims against them, or for summary judgment against the appellants. The Associate Judge held the claims against the respondents could not succeed and, accordingly, entered judgment for the respondents against the appellants.
[1]Gilles Bakery Ltd v Gillespie [2013] NZHC 1608.
On 25 July 2013 the appellants appealed. On 28 May 2014, in support of their appeal, the appellants provided this Court with the draft of a third amended statement of claim (draft 3 ASoC) they propose filing in the High Court if this appeal succeeds. This new pleading was not before the High Court. Indeed, there is no reference in the judgment to any request by the appellants for an opportunity to amend their pleading.
Although he accepted it was inappropriate to strike out a claim if defects in it could be cured by amendment, Mr Henry for the first respondents submitted that did not apply to summary judgment. However, as this Court has acknowledged, in Westpac Banking Corporation v MM Kembla New Zealand Ltd,[2] the argument for exercise of the residual discretion to enable a plaintiff to amend its claim is stronger in the case of summary judgment than in strike out, because summary judgment results in issue estoppel. Accordingly, we deal with this appeal on the basis of the draft 3 ASoC. If that gives the appellants a tenable claim, it would be inappropriate for the summary judgment to stand.
[2][2001] 2 NZLR 298 (CA) at [66]. Similar principles were applied in Jones v Attorney-General [2004] 1 NZLR 433 (PC).
Thus, the issue for us is: can the respondents satisfy this Court that the causes of action against them in the draft 3 ASoC cannot succeed? After setting out the factual position, we will deal in turn with each fresh proposed cause of action, ruling on its tenability.
Factual background
Gilles Bakery Ltd (Gilles) was a bakery company in Rotorua. It was directed and managed by Mr Trevor Boss and Mr Jean-Philippe Jacquet and owned by their family interests. It baked bread under contract for Yarrows (The Bakers) Ltd (Yarrows). Messrs Finnigan and Pettigrew were two of Yarrows’ six directors.
In 2001 Yarrows bought 75 per cent of the shares in Gilles, paying cash. On 30 June 2006 Gilles acquired the remaining 25 per cent, the consideration being satisfied by the issue of fully paid redeemable preference shares to the vendor
parties.[3] The Agreement for Sale and Purchase of Shares entered into on 30 June 2006 provided:
(a)The redeemable preference shares carried no right to vote except on an action affecting the rights attaching to those shares under s 117 of the Companies Act (cl 3.1(d)).
(b)Messrs Boss and Jacquet remained directors of Gilles until they ceased to hold office in accordance with Gilles’ constitution or the new shareholders’ agreement (cl 10).
[3]There was a cash payment of $670,000 to Mr Jacquet and Mr Boss redeemed shares to the value of $50,000 in March 2009.
A Shareholders’ Agreement entered into on 25 August 2006 between Yarrows and the Boss and Jacquet family interests required Yarrows to appoint to the board of Gilles one director nominated by each of the Boss and Jacquet family interests, for as long as they remained redeemable preference shareholders in Gilles. Messrs Boss and Jacquet were nominated and appointed on that basis.
On 31 August 2006 Gilles adopted a new constitution which provided:
(a)The redeemable preference shares which had been issued to Messrs Boss and Jacquet and their family interests carried no voting rights (cl 3.2(d)).
(b)Clause 19:[4]
DIRECTORS MAY ACT IN INTERESTS OF HOLDING COMPANY
If at any time the Company is a subsidiary of a body corporate then, when exercising powers or performing duties as a Director, any Director may act in a manner that he or she believes is in the best interests of the Company’s holding company, even though it may not be in the best interests of the Company.
[4]Clause 1.1 of the constitution provided “director” means a person appointed as a director of the Company in accordance with this constitution”.
On 10 April 2007, the parties issued into a Deed of Settlement to address a potential tax liability resulting from the 30 June 2006 sale to Gilles of the remaining 25 per cent shareholding. The deed declared that sale void and substituted a sale to Yarrows on the same terms. Thus, Yarrows became the holder of all the ordinary shares in Gilles.
In late 2007 Yarrows approached its banker, Westpac Banking Corporation (Westpac), for increased loan finance to fund the expansion of its business in New Zealand and Australia. At that stage, Westpac held a first ranking debenture over Yarrows. The deed of debenture was dated 1 March 1996 and charged all Yarrows’ “present and future assets and undertakings”. The priority amount was $10 million. The debenture was supported by a cross-guarantee and indemnity between Westpac and Yarrows and those companies in the Yarrows group listed in schedule 1 to the guarantee dated 8 July 2005. Gilles was not one of those companies.
In a letter dated 9 November 2007 addressed to the directors of Yarrows, Westpac made a loan offer. The conditions of approval included requirements that Gilles, prior to drawdown:
(a)accede to the Guaranteeing Group by executing a Supplemental Deed attached as a schedule to the Cross Guarantee and Indemnity in favour of Westpac dated 8 July 2005 (Members of the Guaranteeing Group were then listed in the offer – they comprised the 10 companies in the Yarrow Group and three Yarrow family trusts.); and
(b)provide a first registered General Security Agreement (GSA) in favour of Westpac over all its present and after-acquired property and a first ranking security interest over any of its present and future assets and undertakings which are not personal property.
The effect of those requirements was that Gilles became a guarantor of Yarrows’ debt to Westpac and its undertaking became registered security for that debt.
This first offer was accepted on 12 November 2007 by all the offeree entities, except Gilles. All the acceptances except one were signed by Mr Finnigan as director or trustee or under power of attorney. The exception was the Yarrow Family Discretionary Trust; the offer was signed by D J King as trustee. The offer was returned to Westpac without Gilles’ acceptance.
On 19 November 2007 Mr Pettigrew, as a director of Yarrows, emailed Mr Boss:
Hi Trevor
We are varying our terms with Westpac and require redocumentation of our loan.
This requires the signature of a Gilles Director.
Can you please sign the attachment and send back to me ASAP.
Thanks
Colin
The attachment was Westpac’s offer of 9 November 2007.
Mr Boss deposes “I never signed that Westpac letter. I note that Colin Pettigrew signed it on behalf of all other parties”.[5]
[5]Mr Boss’s affidavit, sworn 18 July 2012 at [24]. In fact he is wrong, Mr Finnigan signed it for the other offeree parties.
The Yarrows board nominated Messrs Pettigrew and Finnigan to contact the directors of Gilles and request the guarantee required by Westpac. Messrs Finnigan and Pettigrew discussed Westpac’s first loan offer with Mr Boss on 22 November 2007. The following day, 23 November, Mr Boss sent Messrs (Colin) Pettigrew and (Michael) Finnigan an email in these terms:
Colin and Michael
Confirming as discussed yesterday
I am prepared to sign document subject to being offered alternate satisfactory security. With bank wanting gilles g/- and first charge/debenture our security is watered down considerably. You discussed either talking to bank again or charge over pauls properties. The latter may be easier and keep bank out of picture.
As far as [Mr Jacquet] is concerned you will have to talk to him directly. My latest info is that he would like his money out over next 12 months for various reasons
Leave it to you to come back to me
regards
trevor
Westpac’s offer required Gilles, before drawdown, to execute the documents detailed in [11] above and a Director’s Certificate. Those documents were drafted by Westpac’s solicitors, Simpson Grierson, and emailed for comment to Gilles’ solicitors, Dennis King Law (DKL) on 23 November. DKL was also acting for Yarrows. The covering email stated “We have also attached a sample director’s certificate …”.
DKL responded on 14 December with detailed comments about some of the loan documentation. In relation to the Gilles documents the letter stated:
9.GSA for Gilles Bakery Ltd
This document is in order.
10.Supplemental Deed for Gilles Bakery Ltd
This document appears to be in order.
On the sample director’s certificate the letter commented “This document is in order”.
Westpac made an amended offer in a letter dated 15 February 2008. As with the first offer, increased lending facilities were offered to Yarrows. The changes now included extending Yarrows’ Wholesale Term Loan facility to 28 February 2011 and increasing its Wholesale Advance facility to $38.5 million (including AUD8 million). There were identical conditions of approval relating to Gilles.
The second offer was accepted by all the offeree parties on 18 February and returned to Westpac. In the case of Gilles, the signatory was “M Finnigan” as director.
On 29 February Simpson Grierson forwarded to DKL execution copies of the required loan documentation, including the Supplemental Deed, GSA and director’s certificate for Gilles. The latter was pro forma.
DKL delivered the documents required to be executed by Gilles to Mr Brian Erskine-Shaw. Mr Erskine-Shaw was Gilles’ accountant, trustee of the Boss and Jacquet family trusts and a professional adviser to both the directors and the trusts.[6]
[6]Mr Finnigan’s affidavit sworn on 2 August 2012 at [15.4].
On 19 March 2008 DKL addressed to Gilles a “consent of client to acting for more than one party to transaction”. The other client was specified to be Yarrows and its associated interests. The legal work was that involved in the Westpac refinancing transaction. The consent identified a possible conflict between the interests of Gilles and those of the Yarrows interests. The consent recorded this advice:
Our advice to you is:
1.You should take independent advice from another firm of solicitors and get them to do the legal work.
2.We will make the arrangements for you to see an independent solicitor if you want.
3.In seeking independent advice, you will be liable for the costs of the independent advice unless the other parties agree otherwise.
4.Although we strongly recommend that you seek independent advice, we can continue to do the legal work for you if you insist.
5.If we do continue to do the legal work, the normal duties and loyalties of solicitors to clients will be reduced in the following ways:
(a)We will not be able to give you any advice as to the wisdom of your entering into the transaction with the other client (ie whether proceeding with any transaction is in your best interest). Our work in respect of any transaction will be limited to mechanically carrying out the transaction.
(b)We will not be able to negotiate with the other client as to the terms or any details of any transaction. You will have to discuss such matters direct with the other client or obtain the services of someone else for the purpose of negotiations.
(c)Even if we have some knowledge or information which could be important to you, we will not be able to disclose that information to you if it is confidential to the other client or if disclosure may hurt the interests of the other client.
(d)We will not be able to give you any advice which may hurt the interests of the other client.
Messrs Boss and Jacquet signed this acknowledgment for Gilles. Their acknowledgment stated:
I have read and understood all of the above.
I still want Dennis King Law to act for me in respect of the legal work and I consent to them also acting for the other client.
On 25 March 2008 Mr Boss emailed Mr King, subject ‘Yarrows/gilles documents’. He said:
Dennis
I am in receipt of the wad of paper.
I assume you are acting on our behalf on this matter and in our best interests – please confirm
I still have to track down Jean philippe which may not be until wed 26/3.
regards
Trevor Boss
Later that day Mr King replied to Mr Boss, copying his email to Messrs Erskine-Shaw, Duncan (a director of Yarrows) and Finnigan. Mr King’s email stated:
Trevor,
Please note I act for the Yarrow Group and its subsidiaries including Gilles Bakery Ltd as a company, but I do not act for the Jacquet/Boss interests because (a) they have never instructed me to act for them and (b) I would in any event be obliged to refuse instructions from the Jacquet/Boss interests as I already act for the Yarrow Group including Gilles Bakery Ltd as a company.
I regret to advise that I cannot therefore act for the Jacquet/Boss interests in this situation, and if they are in any doubt they should consult their own professional advisers (we understand they are in the habit of consulting Brian Erskine-Shaw). However, I mention the following which I understand Colin Pettigrew may have already discussed with yourself, JP and Brian Erskine-Shaw[.]
Mr King then made two bullet points. First, he listed the person (Mr Peter Yarrow) and the entities which had guaranteed redemption of the preference shares in Gilles. Secondly, he expressed the view that Gilles’ assets were likely to be included in any pooled liquidation order made under s 271 of the Companies Act in the “hopefully very unlikely” event of the Yarrows Group defaulting on its obligations to Westpac.
Mr King concluded his email:
I trust you and your advisers may find the above comments of assistance. I will take the liberty of copying this email to Brian Erskine-Shaw to keep him in the loop.
The documents, described at [16] above, were returned by DKL to Westpac, duly executed, on 31 March. Each of the Supplemental Deed and GSA was signed by Messrs Jacquet and Boss as directors of Gilles. Gilles’ director’s certificate was completed by Mr Jacquet as a director of Gilles. He certified:
(a)Gilles’ board of directors had passed resolutions approving the transaction, authorising execution of the documents by Gilles and authorising “the persons specified in paragraph 9 to give any notices and other communications and take any other action required under or in connection with the documents on behalf of [Gilles]” (cl 1.1).
(b)Resolutions were duly passed in writing signed by all the directors of Gilles (cl 1.2).
(c)In approving the Documents and the Transaction, the Board, after taking into account all relevant factors, considers that [Gilles] is receiving or will receive fair value under them (cl 2.2).
(d)In approving the Documents and the Transaction, the Board, after taking into account all relevant factors, has resolved (pursuant to an express provision in the constitution of [Gilles]) that [Gilles’] entry into and performance of the Documents and the Transaction is in the best interests of [Gilles’] holding company (cl 3).
(e)It having been determined that the Transaction is a Major Transaction for the purposes of s 129 of the Companies Act, all the shareholders of [Gilles] have by special resolution approved the documents and the transaction and the resolutions of the Board (cl 4.1).
(f)The shareholders of [Gilles] have unanimously ratified and approved the resolutions of the Board after full disclosure by the directors of [Gilles] of all relevant interests (cl 4.2).
(g)The documents have been properly executed by [Gilles] by [Mr Jacquet] a director of [Gilles] and [Mr Boss] a director of [Gilles] (cls 5.1 and 5.2).
(h)Paragraph 9, Authorised Signatures, provided:
The following are the true signatures of the persons who have been authorised to give any notices and other communications, and to take any other action required, under or in connection with the Documents on behalf of [Gilles].
The signatures which followed were:
· Mr Jacquet, Director.
· Mr Boss, Director.
· Mr Finnigan, Group Finance Director.
· Mr Pettigrew, Chief Executive Officer of Yarrows Group.
Each man signed against his name in cl 9 of the Certificate.
(i)[Gilles’] details and the description of secured property in the Security are correct. [Gilles] acknowledges Westpac NZ will be relying on this information in preparing and registering a financing statement on the Personal Property Securities Register (cl 11).
The Certificate was signed by Mr Jacquet at Rotorua and dated 28 March 2008.
The resolution of the directors of Gilles referred to in [29](a) above was passed on 28 March 2008. It is signed by Messrs Jacquet and Boss. Having noted the Company’s shareholders had previously approved the resolutions to be passed at the directors’ meeting, they resolved:
2.The Board, after taking into account all relevant factors, resolves that the company’s entry into and performance of the documents in the first schedule below and in the transactions contemplated by those documents is in the best interests of the company and of the company’s holding company.
On 31 March 2008 DKL provided to Westpac a Certificate as solicitors for the Borrowers and Guarantors. Amongst other things DKL certified the documents had been duly authorised and executed by the directors and members of Gilles. The Certificate also provided:
5.1We have advised [Gilles] as to the nature and effect of their obligations pursuant to the Facilities, their guarantee of the Facilities, and the Securities.
5.2[Gilles] have confirmed that they understand the nature of the transaction and the extent of their liability pursuant to the Facilities, the guarantee and the Securities.
5.3We have recommended to [Gilles] that they take separate advice as to their guarantee.
5.4[Gilles] have confirmed that they have chosen not to be independently advised regarding the Facilities, their guarantee and the Securities.
On 15 July 2008 the various companies in the Yarrows Group executed, in favour of DKL, a “Consent of Clients to Acting for All of Them on Transaction”. This consent was signed for Gilles by Mr Finnigan as “the finance director of its 100% ordinary Shareholder Yarrows (The Bakers) Limited, MC Finnigan”. It is not clear to us whether, in signing this consent for Gilles, Mr Finnigan was aware of the consent to act given by Messrs Boss and Jacquet for Gilles on 19 March 2008, set out in [23]–[24] above.
Yarrows then continued in business until May 2011, when it was placed into receivership by Westpac. The circumstances in which this occurred are explained by Mr Finnigan in the affidavit he swore on 2 August 2012 in support of the summary judgment/strike out application.
Mr Finnigan deposed the Yarrows Group was financially stable but needed a new capital partner. In April 2011, at the instigation of Mr Paul Yarrow, the principal shareholder, a deal was agreed in principle with the Japanese company Sumitomo, under which Sumitomo would inject capital. Westpac had approved the deal. There followed an acrimonious disagreement between Mr Paul Yarrow on the one hand, and the directors of the Yarrows Group and the trustees of Mr Paul Yarrow’s father’s charitable trust (a minority shareholder) on the other hand. It was over Mr Yarrow’s role in the new company. Following that disagreement, Mr Paul Yarrow refused to agree to the deal with Sumitomo. Mr Finnigan explained “Paul Yarrow’s last minute refusal to enter the deal (that he at all times until the last moment wanted) with Sumitomo, and his conduct towards the Yarrow’s directors and Westpac, left the Yarrow’s directors (including myself) no choice but [to] go to Westpac and request the appointment of a receiver”.[7]
[7]At [22].
On 30 May 2011 Westpac (reluctantly – according to Mr Finnigan)[8] appointed BDO Spicers as receivers. Mr Finnigan explained that “to the directors’ angst”, BDO decided to go to the market in an effort to negotiate a higher price than Sumitomo had been prepared to pay for a half share in the Yarrows Group business. Mr Finnigan deposed “[t]he result was a dismal failure by the receivers and the business was sold by them in separate parts at a price considerably lower than the amount Sumitomo was prepared to pay …”.[9]
[8]At [23].
[9]Also at [23].
Mr Finnigan also deposed that Messrs Boss and Jacquet attempted to buy Gilles’ business from the receivers but were out-bid by Mr John Yarrow, Mr Paul Yarrow’s younger brother.[10]
[10]At [24].
On 25 October 2011 Simpson Grierson, acting for Westpac, made demand on Gilles under its Cross Guarantee and Indemnity and the GSA for payment of $39.8 million and AUD8 million (we have used round figures).
In their draft 3 ASoC the appellants claim they have suffered loss:
(a)Gilles claims to have suffered loss totalling $4,147,684.65, being the sum of monies taken by Westpac either from the proceeds of the sale of Gilles’ business or from Gilles’ bank account in October and November 2011.[11]
(b)Messrs Boss and Jacquet claim they have “suffered loss of $2,428,239.92, as per the attached schedule”. No schedule is attached to the draft 3 ASoC provided to the Court.
Evidence
[11]This is detailed in paragraphs 106–109 of the draft third amended statement of claim. Paragraph 109 states that the loss claimed is “the sum of the amount specified in paragraphs 95–97 above”. We think the reference is intended to be to paragraphs 106–108.
Affidavits were sworn in support of the strike out/summary judgment application by Yarrows’ directors Messrs Trevor Perry, Warren Duncan and Kevin Gillespie. Mr Gillespie was the chairman of Yarrows. All three men then swore further affidavits responding to the first affidavit Mr Boss swore, on 18 July 2012, in opposition. These main points emerge from these six affidavits:
(a)The Yarrows board asked Messrs Finnigan and Pettigrew “to engage with the directors of [Gilles] for the purposes of obtaining the guarantee requested by Westpac”.[12]
(b)None of them ever gave the directors of Gilles any instructions or directions or exerted any control. Messrs Duncan and Gillespie said they had met one or both the Gilles directors when they attended Yarrows board meetings.[13] Mr Perry deposed he had never met or had any contact with the directors of Gilles.[14]
(c)They believed it was appropriate for Yarrows to request the guarantee from Gilles because Yarrows owned all the ordinary shares in Gilles and they were not aware of any reason why Yarrows should not make that request.
[12]Mr Perry’s affidavit sworn on 12 June 2012 at [5].
[13]Mr Duncan’s affidavit sworn on 14 June 2012, at [8]; Mr Gillespie’s affidavit sworn on 14 June 2012, at [10].
[14]Mr Perry’s affidavit, above n 12, at [7].
Mr Boss swore a first affidavit in opposition on 18 July 2012. He deposed to receiving at least one phone call from each of Messrs Finnigan and Pettigrew advising him the Westpac documents would be arriving from DKL and that they “did not so much request as demanded and insisted that we execute those documents”. He stated Yarrows “would not be [accepting] no for an answer” and claimed he and Mr Jacquet had to execute the documents for Gilles “not just because of the pressure from Yarrow’s (sic) through Finnigan and Pettigrew, but also from DKL on behalf of Yarrow’s (sic)”.[15]
[15]At [35].
Mr Boss offered, as an example of Yarrows’ directors acting on behalf of Gilles, Mr Finnigan signing for Gilles on 15 July 2008 a consent to DKL to act for all the Yarrows parties in a transaction involving an advance of $6,000,000 by Westpac to Volumex Nominees Ltd.[16] The provision for Gilles’ consent was worded “Gilles Bakery Ltd by the finance director of its 100% ordinary shareholder Yarrows (The Bakers) Ltd MC Finnigan”.
[16]At [32].
Mr Boss also claimed the Yarrows directors knew at the time executing the Westpac documents would place Gilles and its preference shareholders “in grave financial jeopardy”, “but not one word was said to alert [Mr Jacquet] and me”.[17]
[17]At [29].
Mr Finnigan then swore an affidavit, on 2 August 2012. These are the main points:
(a)The Yarrows board made a conscious decision to allow Gilles and its directors to run their own company. Yarrows never exceeded what it could properly do as shareholder.[18]
(b)He and Mr Pettigrew only met the Gilles directors at the annual shareholders meetings when they discussed Gilles’ financial statements and approved the directors’ bonus payments. As 100 per cent share holder, Yarrows’ approval of those payments was required because they represented a profit split between the two Gilles directors and Yarrows.[19]
(c)He confirms he and Mr Pettigrew were asked by the Yarrows board to discuss Westpac’s request with the Gilles directors, and that they requested Messrs Boss and Jacquet to sign the guarantee. He confirms the response was Mr Boss’s 23 November 2007 email. He rejects any suggestion of hostility or disagreement with Messrs Boss and Jacquet and deposed the Yarrows directors were open to proposals to deal with the concern Mr Boss raised, but says they never came back with a proposal.[20]
(d)He rejects Mr Boss’s assertions that Messrs Boss and Jacquet were not told the Westpac facility to Yarrows was being increased to $60,000,000 and that executing the documents placed Gilles and its preference shareholders “in grave financial jeopardy”. He points out that Westpac was prepared to extend Yarrows’ facility although it agreed Yarrows needed a new capital partner.[21]
[18]At [11].
[19]At [12].
[20]At [13]–[15].
[21]At [18]–[19].
Mr Boss swore an affidavit in reply on 7 September 2012. He added these points:
(a)Examples of the controls placed on Gilles by Yarrows were:[22]
[22]At [15].
· a capex expenditure limit of $10,000; and
· directors’ fees of not more than $6,000.
He asserted:
… They certainly gave the impression that if we did not do as we were told they would appoint new directors in their capacity representing the 100% shareholder.
(b)He points out that he ended his 23 November 2007 email to Messrs Finnigan and Pettigrew “leave it to you to come back to me” and complains they never did.[23]
(c)He says that when he and Mr Jacquet did not immediately sign the documents they had received via DKL there followed “hurry up” phone calls from Messrs Finnigan and Pettigrew “which amounted to demands and insists that we get on with it and sign them up by the end of March”.[24] He referred to the mention in his earlier affidavit to “my earlier email where I stated that Finnigan/Pettigrew were putting the pressure on”.[25]
(d)He gives these two explanations of why he and Mr Jacquet signed the Westpac documents for Gilles:
When first approach we were told what I had to do eventually we did it.[26]
…
From our point of view with the DKL letter stating there was virtually no option coupled with the previous indications from the Yarrow’s that they had the power to appoint additional directors to achieve what they wanted there was nothing we could do but sign the documents.[27]
[23]At [16].
[24]At [22].
[25]At [17]. There is, in fact, no such reference in Mr Boss’s earlier affidavit, nor does he exhibit any email mentioning pressure to sign.
[26]At [13].
[27]At [23].
There is no affidavit from Mr Jacquet.
First cause of action – against Messrs Finnigan and Pettigrew
The pleading
This cause of action is summarised in paragraphs 112–139 and then specifically pleaded in paragraphs 140–148 of the draft 3 ASoC. It has four essential elements:
Yarrows was a de facto or deemed director of Gilles
First, Yarrows was a de facto or deemed director. This was because Messrs Jacquet and Boss (being directors for the purposes of s 126(1) of the Companies Act 1993) were required to act in accordance with Yarrows’ directions or instructions or were accustomed so to act because:
(a)Yarrows’ power to appoint and remove directors from Gilles’ board gave it control of Gilles;
(b)Yarrows “cracked the whip” on any matters important to it; and
(c)Mr Finnigan acted as a director of Gilles in signing Westpac’s February 2008 letter of offer and in signing on 15 July 2008, in favour of DKL, a “Consent of Clients to Acting for All of Them on Transaction”.
Yarrows owed statutory and fiduciary duties to Gilles and its preference shareholders
Secondly, because it was a de facto director, Yarrows owed statutory and fiduciary duties to Gilles and its preferential shareholders. Section 131(1) of the Companies Act applied to Yarrows as a de facto director of Gilles, and required it to act in good faith and in what it believed to be the best interests of Gilles. Section 131(2) did not apply to Yarrows, because cl 19 of Gilles’ Constitution, permitting directors of Gilles to act in the interests of Yarrows as its holding company, applied only to Messrs Jacquet and Boss. Additionally, Yarrows owed fiduciary duties of loyalty, or alternatively a fiduciary duty separate from the duty of loyalty, to Gilles and its preference shareholders because, as a deemed director of Gilles, it came within a recognised category of “inherently fiduciary” relationships.
Yarrows owed fiduciary duties to Gilles’ preference shareholders who were entitled to place trust and confidence in Yarrows because:
under the management of Messrs Jacquet and Boss Gilles provided to Yarrows a continuing flow of substantial profits;
the preference shareholders had become preference shareholders in substitution for being 25 per cent ordinary shareholders solely in Yarrows’ interests and in so doing had lost the right to participate as shareholders. This meant they were completely reliant on Yarrows to act in their interests; and
they had an expectation that Yarrows would act in their interests.
Yarrow breached its statutory and fiduciary duties to Gilles
Thirdly, Yarrows breached its statutory (s 131(1)) duty and its fiduciary duty to Gilles and its preference shareholders by:
(a)procuring Gilles to act against its interests by executing the Westpac documents. In doing this, Yarrows preferred its own interests to those of Gilles where there was a conflict of interest between the two companies. Gilles’ interests could not be served in any way by acceding to Yarrows’ demands that Gilles become a party to the cross‑guarantee and give the GSA. By procuring Gilles to execute those documents, Yarrows caused Gilles to become exposed to all Yarrows’ debts and liabilities when Gilles itself had no net liabilities.
(b)failing to ensure Messrs Jacquet and Boss were fully informed concerning the jeopardy in which Gilles and its preference shareholders were being placed by the execution of the Westpac documents. Yarrows did not provide Messrs Jacquet and Boss with any details of the financial position of Yarrows or the Yarrows Group. Yarrows could not require Gilles to execute the Westpac documents without being absolutely satisfied Gilles was proceeding having received clearly independent advice. To Yarrows’ knowledge, DKL could not possibly give such advice, since it was acting also for Yarrows in the transaction.
Messrs Finnigan and Pettigrew are liable as joint tortfeasors in respect of Yarrows’ breach of its statutory duty and as accessories to Yarrows’ breach of fiduciary duty
Fourthly, Messrs Finnigan and Pettigrew were joint tortfeasors with Yarrows in respect of its breach of its statutory duties and accessories to Yarrows’ breaches of fiduciary duties because:
(a)Mr Finnigan was a director of Yarrows.
(b)both men, having been instructed by Yarrows to procure Gilles’ execution of the documents, carried out those instructions.
(c)Yarrows’ directors, in particular Mr Finnigan, took no steps to ensure Messrs Jacquet and Boss, as directors of Gilles and representatives of its preference shareholders, were fully informed of the circumstances leading to Westpac’s requirements that Yarrows procure Gilles to commit itself to Westpac.
(d)Messrs Finnigan and Pettigrew knew of the conflict of interest between Yarrows and Gilles. In particular they knew Gilles’ preference shareholders were in a different position, in that they were external to the Yarrows Group.
(e)Messrs Finnigan and Pettigrew took no steps to ensure Messrs Jacquet and Boss were fully informed of the circumstances leading to Westpac’s requirements that the Yarrows directors procure Gilles to commit itself to Westpac.
(f)Consequently, the actions of Messrs Finnigan and Pettigrew in procuring Gilles’ execution of the documents were not those of honest persons. Their dishonesty for the purposes of liability to Gilles was also dishonesty for the purposes of liability to the preference shareholders.
Appellants’ supporting submissions
Mr Judd explained the appellants now consider only Yarrows was a de facto or deemed director of Gilles. This is the major structural change to the pleading: earlier it was alleged Yarrows and Messrs Finnigan, Pettigrew and the other Yarrows directors were all de facto directors of Gilles.
Dealing with the statutory duty owed by Gilles’ directors under s 131(1),[28] Mr Judd submitted only Messrs Jacquet and Boss were directors within the definition in cl 1.1 of Gilles’ constitution (directors appointed in accordance with the constitution). Therefore cl 19 of the constitution only applied to them and only they were entitled to take advantage of the exemption conferred by s 131(2):
131Duty of directors to act in good faith and in best interests of company
…
(2)A director of a company that is a wholly-owned subsidiary may, when exercising powers or performing duties as a director, if expressly permitted to do so by the constitution of the company, act in a manner which he or she believes is in the best interests of that company's holding company even though it may not be in the best interests of the company.
[28]Section 131(1) provides:
Subject to this section, a director of a company, when exercising powers or performing duties, must act in good faith and in what the director believes to be the best interests of the company.
Mr Judd took issue with Associate Judge Abbott’s holding that cl 19 applied, by necessary implication, to any deemed director because such a person was subject to the same duties as an appointed director. He argued the constitution needed to be clear if it were to apply also to persons not appointed directors, but who “were intermeddling in the business and affairs of the company in a way which made them de facto directors”. While the duties of appointed directors are transparent and clearly in front of them, that is not the position for intermeddlers. Further, a properly appointed director, when considering whether to use s 131(2), must act in good faith. That is unlikely when the “acting” is by an intermeddler. Accordingly, if Yarrows wished to take advantage of cl 19 it could properly appoint directors who would then become subject to the transparent obligations imposed by s 131(1). Mr Judd emphasised s 131(2) does not impose an obligation to act in the best interests of the holding company, it just grants permission to do so. So consideration of the opposing considerations in s 131(1) and (2) is necessary.
Turning to the alleged fiduciary duty, Mr Judd submitted it arises when one party is entitled “to place trust and confidence in the other”.[29] The preference shareholders rely on this in claiming Yarrows owed them fiduciary duties “of the Coleman v Myers variety”.[30]
[29]Chirnside v Fay [2007] 1 NZLR 433 (SC) at [75] and [80] per Tipping J, delivering the judgment of Blanchard and Tipping JJ.
[30]A reference to Coleman v Myers [1977] 2 NZLR 225 (SC) and Coleman v Myers [1977] 2 NZLR 297 (CA).
Next, to prove it acted in good faith, Mr Judd contended Yarrows would at a minimum have to demonstrate it made full and complete disclosure of its circumstances to Messrs Jacquet and Boss. It would need to prove it had carefully considered whether to use cl 19. A solution for Yarrows acting as a director of Gilles in good faith may have been to tell Westpac that Gilles’ preference shareholders must take priority.
In relation to the breach of fiduciary duty accessory liability principle, Mr Judd referred to the Privy Council’s decision in Royal Brunei Airlines Sdn Bhd v Tan as the leading authority. Delivering the Council’s judgment, Lord Nicholls said:[31]
A liability in equity to make good resulting loss attaches to a person who dishonestly procures or assists in breach of trust or fiduciary obligation. It is not necessary that, in addition, the trustee or fiduciary was acting dishonestly, although this will usually be so where the third party who is assisting him is acting dishonestly.
[31]Royal Brunei Airlines Sdn Bhd v Tan [1995] AC 378 (PC).
Applying the principle here, Mr Judd submitted Messrs Finnigan and Pettigrew are liable because they assisted – carried out – the decision of Yarrows’ directors to obtain Gilles’ execution of the Westpac documents. They acted dishonestly because they were “simply not acting as an honest person would in the circumstances”.[32]
Our view
[32]At 389.
This claim cannot succeed. We concur with Mr Henry’s categorisation of the claim as a misconceived attempt to hold Messrs Finnigan and Pettigrew liable for actions which are wholly the responsibility of Messrs Boss and Jacquet.
Strikingly, the proposed claim ignores these critical documents:
(a)The email DKL sent Mr Boss on 25 March 2008 ([26]–[28] above) and the accompanying certificate dated 31 March 2008 those solicitors gave Westpac ([31] above).
(b)The resolutions signed on 28 March 2008 by Messrs Boss and Jacquet (referred to in [29](a)–(d) and [30] above).
(c)The certificate dated 28 March 2008 Messrs Boss and Jacquet gave Westpac ([29](a)–(i) above).
From those documents emerge these points:
(a)DKL made it clear to Mr Boss before he and Mr Jacquet signed anything that DKL could not act for the Jacquet/Boss interests in the transaction and advised them to consult their own professional advisers if they were in any doubt about it.
(b)DKL certified to Westpac that it had advised Gilles (the company) as to the nature and effect of the documents, had confirmed Gilles understood “the nature of the transaction and the extent of their liability pursuant to the facilities, the guarantee and the Securities”, had recommended to Gilles that it take separate advice and that Gilles had confirmed it had chosen not to be independently advised.
(c)Messrs Boss and Jacquet, as directors of Gilles, resolved “after taking into account all relevant factors” that the company’s entry into the transaction and execution of the loan documents “is in the best interests of the company and of the company’s holding company”.
(d)Mr Jacquet on behalf of the board of directors of Gilles certified to Westpac the directors had made this resolution.
These documents stand squarely in the path of the proposed claim. Yet, as we have said, there is no attempt to confront or overcome them – not even any acknowledgment of their existence.
This was a straightforward commercial lending transaction. Its main features, none of which was unusual, were:
(a)Messrs Boss and Jacquet were appointed directors of Gilles under the Shareholders Agreement of 25 August 2006 to represent the preferential shareholders.[33] Each man was appointed specifically to represent his family trusts and entities who held preferential shares.
(b)Yarrows did not exercise its power to appoint other directors to Gilles’ board.
(c)Westpac’s requirement that Gilles also give a cross-guarantee of Yarrows’ indebtedness to the bank. Westpac had a first ranking debenture over Yarrows’ assets and undertaking and held cross‑guarantees from the other Yarrows subsidiaries, but was being asked to increase its lending to Yarrows. It was therefore to be expected Westpac would seek security also over Gilles as a whollyowned subsidiary of Yarrows.
(d)Messrs Finnigan and Pettigrew conveyed Westpac’s requirement to Mr Boss in an email (dated 19 November 2007).
(e)Mr Boss’s reply email of 23 November 2007 (above at [15]) which demonstrates:
· his concern that signing the guarantee and GSA would “water down considerably” the security available to the preferential shareholders; and, consequently
· his firm grasp of the commercial implications of Gilles signing those documents.
(f)Messrs Boss and Jacquet signed the documents which were brought around to their offices by their financial adviser, Mr Brian Erskine‑Shaw.[34]
(g)The directors’ and solicitors’ certificates subsequently provided to Westpac, by Messrs Boss and Jacquet and by DKL respectively.[35]
[33]Above at [6].
[34]Above at [16] and [22] .
[35]Above at [29].
We deal now with each of the four aspects of the cause of action against Messrs Finnigan and Pettigrew.
Yarrows was a de facto or deemed director of Gilles
Associate Judge Abbott held this was a question of fact and there was insufficient evidence in respect of the Westpac refinancing transaction to support the allegation.[36] But the Associate Judge considered there was “just enough” in Mr Boss’s evidence of continuing oversight by Yarrows to suggest the appellants may be able to amend their pleading to show a reasonably arguable course of action, and was prepared to give the appellants an opportunity to amend.[37]
[36]At [57] and [63].
[37]At [63].
We consider this allegation cannot succeed. It is supported by the three particulars (a) to (c) summarised in [47] above. We consider there is no substance in particular in (a), which equates the potential or ability to control with actual control. Beyond asserting Yarrows placed “a limitation on [Messrs Boss and Jacquet] in terms of capital expenditure and directors’ fees”, particular (b) is a general assertion that Yarrows “cracked the whip”. No detail as to how and when Yarrows did this is provided. Particular (c) is accurate but is confined to the Westpac financing transaction and does not support the allegation of a course of control or oversight by Yarrows. Further, the 15 February 2008 offer accepted by Mr Finnigan for Gilles was overtaken by the series of documents subsequently executed by Messrs Boss and Jacquet. As to the 15 July 2008 consent also signed by Mr Finnigan for Gilles, we reiterate the point made in [24] – that Messrs Boss and Jacquet had already (on 19 March 2008) signed a consent for DKL to act for Gilles. In summary, the three particulars do not support the allegation.
Even if the directors of Yarrows did insist that Messrs Boss and Jacquet execute the documents (and the available documentation and evidence suggests they did not), that would not render Yarrows a de facto director of Gilles. We agree with the view expressed in Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd:[38]
[243] In my view the reason that third parties having commercial dealings with a company who are able to insist on certain terms if their support for the company is to continue, and are successful in procuring the company’s compliance with those terms over an extended period, are not thereby to be treated as shadow directors within the definition, is because to insist on such terms as a commercial dealing between a third party and the company is not ipso facto to give an instruction or express a wish as to how the directors are to exercise their powers. Unless something more intrudes, the directors are free and would be expected to exercise their own judgment as to whether it is in the interests of the company to comply with the terms upon which the third party insists, or to reject those terms. If, in the exercise of their own judgment, they habitually comply with the third party’s terms, it does not follow that the third party has given instructions or expressed a wish as to how they should exercise their functions as directors.
Yarrows owed statutory and fiduciary duties to Gilles and its preference shareholders
Nor do we consider either of Mr Judd’s two main arguments in relation to statutory and fiduciary duties can succeed. We agree with Associate Judge Abbott’s view that s 131(2) must (because cl 19 of Gilles’ constitution applies by necessary implication) cover Yarrows if it was a deemed director of Gilles.[39] Mr Judd’s contrary argument rests on an interpretation of cl 19 of Gilles’ constitution that would have the nonsensical effect that Yarrows, having been deemed to be a director of its wholly-owned subsidiary Gilles, could not then act in the best interests of Yarrows as holding company of Gilles. On the other hand, Messrs Boss and Jacquet, though appointed to represent their own family interests as preferential shareholders, could act in the interests of Yarrows as holding company. We decline to align ourselves with such an uncommercial outcome.
[39]At [75].
Second, Mr Judd argues Yarrows, as a deemed director of Gilles, owed fiduciary duties to Gilles’ preferential shareholders. This is an equally hopeless argument. As a director of Gilles, Yarrows’ fiduciary duties were to the company – that is, to all its proprietors.[40] If some distinction is to be drawn between the ordinary and the preferential shareholders, then it was Messrs Boss and Jacquet who owed fiduciary duties specifically and primarily to the preferential shareholders. As we pointed out in [7] above, they were appointed to the board of Gilles specifically to represent the preferential shareholders.
Yarrows breached its statutory and fiduciary duties to Gilles
[40]Gilles Bakery Ltd v Gillespie, above n 1, at [85].
The first alleged breach of duty by Yarrows is preferring its interests to those of Gilles. This argument falls away. Assuming Yarrows did that, it was entitled to as per s 131(2) and cl 19 of Gilles’ constitution.
Nor can the second allegation succeed. The appellants allege DKL, to Yarrows’ knowledge, could not possibly give Messrs Boss and Jacquet independent advice, since it was acting also for Yarrows.
But, in the consent they signed on 19 March 2008 to DKL acting for Gilles in the transaction, Messrs Boss and Jacquet acknowledged they understood the position but still wanted DKL to act for both Gilles and Yarrows. Further, and more specifically, in his email to Mr Boss on 25 March 2008, Mr King made it abundantly clear DKL could not act for the Boss/Jacquet interests. He urged Messrs Boss and Jacquet to consult their own professional advisers if they were in any doubt about the transaction. There was no request by Messrs Boss and Jacquet, or by their advisers, for any additional information, for example as to the financial position of the Yarrows Group.
Westpac’s second letter of offer dated 15 February 2008 set out the details of its amended offer. In particular, Condition of Approval No. 1 required amendment of the Deed of Subordination dated 13 July 2005 “so that Westpac NZ has a first priority of $60,000,000 plus interest and enforcement costs …”. Mr Boss deposes “I never received or saw any such letter”.[41] If that is correct, Mr Boss was at least aware of its existence, because the letter is the first document listed in the schedule of documents to the director’s certificate signed by Mr Jacquet on 28 March 2008 on behalf of the board of directors of Gilles. If he did not request and read Westpac’s 15 February 2008 letter, Mr Boss can hardly now complain about that. We note Mr Boss signed the 28 March 2008 certificate as a director of Gilles, as an authorised signatory for notices and communications in connection with the documents comprising the transaction. Further, the same $60,000,000 priority for Westpac appears in Westpac’s first (9 November 2007) offer, which Mr Boss certainly received, because his 23 November 2007 email responds to it. As we pointed out in [63](e) above, that email demonstrates he had a firm grasp of the commercial implications of Gilles executing the cross-guarantee and GSA. None of the alleged breaches by Yarrows is arguable. Rather, it is Messrs Boss and Jacquet who are responsible for the loss to Gilles.
Messrs Finnigan and are Pettigrew liable as joint tortfeasors in respect of Yarrows’ breach of its statutory duty and as accessories to Yarrows’ breach of fiduciary duty
[41]Mr Boss’s affidavit in reply sworn 7 September 2012 at [31].
Given our view that Yarrows was not in breach of its statutory and fiduciary duties to Gilles, and owed no duties to Gilles’ preferential shareholders, the question whether Messrs Finnigan and Pettigrew were liable as joint tortfeasors or accessories to Yarrows’ breach does not arise.
To summarise, the proposed amended claim against Messrs Finnigan and Pettigrew cannot succeed. The appeal against the summary judgment entered by Associate Judge Abbott in their favour must therefore be dismissed.
Second cause of action – against Westpac
The pleading
This cause of action is also summarised in paragraphs 112–139 and is then specifically pleaded in paragraphs 149–160 of the draft 3 ASoC.
The primary allegation is in paragraph 149:
Westpac was a joint tortfeasor in respect of [Yarrows’] breach of its statutory duties, was an accessory to [Yarrows’] breach of fiduciary duties, and was an accessory to [Yarrows’] breach of fiduciary duties owed to the preference shareholders in that it instigated, participated in and took the benefit of the transaction.
Then, under the heading “Westpac’s dishonesty”, there follows a series of allegations in paragraphs 150–158. The essence of these is:
(a)Westpac knew of the conflict of interest between Yarrows and Gilles. In particular, it knew Gilles’ preference shareholders were in a different position to Yarrows in that they were external to the Yarrows Group.
(b)Westpac conveyed its requirements for Gilles to give a cross‑guarantee and GSA to Yarrows’ directors and DKL.
(c)Westpac knew Messrs Jacquet and Boss were the de jure directors of Gilles, but it did not convey its requirements to them.
(d)Westpac did not ensure Messrs Jacquet and Boss as directors of Gilles and representatives of the preference shareholders were fully informed of the circumstances leading to Westpac’s requirements.
(e)Westpac knew DKL could not give Gilles independent legal advice and “it knew categorically that [Gilles] was not receiving independent legal advice. Yet it nevertheless proceeded without taking any steps at all to ensure … [Gilles] received clearly independent advice.”
(f)These were not the actions of an honest person.
As a consequence of Westpac being an accessory to breach of fiduciary and s 131 duties, it is alleged the guarantee and GSA “were and are invalid so that Westpac was not entitled to and must refund the monies it took from [Gilles] in reliance on the purported securities”.
The claim is for $4,147,684.65.
Appellants’ supporting submissions
Mr Judd made the general submission that Westpac is liable as an accessory because it “instigated, participated in and took the benefit of the transactions when it knew of the special harm to the preference shareholders, without taking steps to ensure the [Gilles] directors were fully informed and had given informed consent to the transaction”. The practical effect of the transaction was on the preference shareholders because, without the guarantee, Gilles’ assets would have flowed back to Yarrows as the ordinary shareholder and thence to Westpac, but the preference shareholders would have been paid out in priority. That the first letter of offer was not signed by Gilles, and the second was signed by Mr Finnigan, who Westpac knew was not a director of Gilles, was also relied on as relevant to “Westpac’s state of mind, in connection with the requirement for dishonesty”.
Mr Judd quite properly referred us to the Supreme Court’s decision in GE Custodians v Bartle.[42] The Court held a financier such as Westpac, which might otherwise suspect there is something improvident about the borrowing, is ordinarily excused from making inquiry if aware the borrower is being advised about the transaction by an independent lawyer. The lender is entitled to assume a lawyer instructed by the borrower will not have a conflict and will give dispassionate and competent advice and that the borrower has therefore chosen to enter into the transaction on a fully informed basis. Mr Judd sought to distinguish Bartle because:
(a)Gilles was not a borrower – Westpac knew Gilles was not getting anything out of the transaction, which made it highly improvident.
(b)Westpac was not aware Gilles was being advised about the transaction by an independent lawyer. On the contrary, it knew DKL was acting for both Gilles and Yarrows.
(c)Westpac could thus not be satisfied Gilles had entered into the transaction fully informed and independently advised.
[42]GE Custodians v Bartle [2010] NZSC 146; [2011] 2 NZLR 31 at [48].
Mr Judd explained the appellants’ case against Westpac in tort in the following way. First, Westpac imposed requirements on Yarrows. Secondly, Yarrows saw those requirements were carried out. Thirdly and in consequence, Westpac and Yarrows were acting in pursuance of a joint purpose initiated by Westpac, making Westpac a joint tortfeasor in relation to Yarrows’ breach of s 131(1). For authority on joint tortfeasors, Mr Judd referred us to Todd, The Law of Torts in New Zealand:[43]
A tort is committed by several persons as joint tortfeasors … where the act giving rise to the tort is one for which both or all are responsible …
Our view
[43]Stephen Todd (ed) The Law of Torts in New Zealand (5th ed, Thomson Reuters, Wellington, 2009) at 1092. The same point is made in the latest edition, Stephen Todd (ed) The Law of Torts in New Zealand (6th ed, Thomson Reuters, Wellington, 2013) at 1214.
We also consider the claim against Westpac cannot succeed.
Much of what we have said in ruling out the proposed claim against Messrs Finnigan and Pettigrew applies equally to Westpac. We make four additional points.
First, we agree with Mr Robinson’s submission that Westpac has a complete answer to the appellants’ proposed allegations against it, because it relied on the director’s certificate signed by Mr Jacquet on behalf of himself and Mr Boss and it is not alleged that certificate was invalid.[44]
[44]Gilles Bakery Ltd v Gillespie, above n 1 at [95].
Secondly, Westpac’s requirement for additional security in the form of the cross-guarantee and GSA from Gilles cannot make it an accessory to any breach of duty by Yarrows. To establish liability on Westpac’s part for dishonestly assisting Yarrows, the appellants would need to establish:
(a)Actual assistance by Westpac in a breach by Yarrows of an equitable duty: Westpac New Zealand Ltd v Map & Associates.[45]
(b)Westpac had a dishonest state of mind: Royal Brunei Airlines Sdn Bhd v Tan.[46] Dishonesty in law is an objective standard: Westpac New Zealand Ltd v Map & Associates;[47] Royal Brunei Airlines Sdn Bhd v Tan.[48]
[45]Westpac New Zealand Ltd v Map & Associates Ltd [2011] NZSC 89, [2011] 3 NZLR 751 at [10].
[46]Royal Brunei Airlines Sdn Bhd v Tan, above n 31.
[47]At [26].
[48]At 389.
Westpac’s requirement for the additional security from Gilles cannot amount to actual assistance to Yarrows. And, objectively assessed, there is no scope here for an allegation that Westpac had a dishonest state of mind.[49] Such comprises either:
(a)actual knowledge the transaction is one in which Westpac cannot honestly participate; or
(b)a sufficiently strong suspicion of breach of trust that it is dishonest not to inquire, coupled with a deliberate decision not to inquire lest the inquiry result in actual knowledge.[50]
[49]Gilles Bakery Ltd v Gillespie, above n 1, at [97].
[50]Westpac New Zealand Ltd v Map & Associates Ltd, above n 45, at [27].
Thirdly, the appellants’ allegation that Westpac had some duty of disclosure to Gilles is untenable. It is well established a lender is under no general duty of disclosure to a commercial guarantor.[51] In particular, there is no duty, unless asked, to disclose facts affecting the risk the guarantor is being asked to undertake.[52] The reasons the law treats a commercial guarantee differently were explained by Nicholls LJ in Royal Bank of Scotland plc v Etridge:
[88] Different considerations apply where the relationship between the debtor and guarantor is commercial, as where a guarantor is being paid a fee, or a company is guaranteeing the debts of another company in the same group. Those engaged in business can be regarded as capable of looking after themselves and understanding the risks involved in the giving of guarantees.
[51]Hamilton v Watson (1845) 8 ER 1339, approved in Westpac Banking Corporation v McCreanor [1990] 1 NZLR 580 (HC). See also Royal Bank of Scotland plc v Etridge (No 2) [2002] 2 AC 773 (HL) at [81]; James O’Donovan & John Phillips The Modern Contract of Guarantee (English edition, 2nd ed, Sweet & Maxwell, London, 2010) at 4-21–4-22.
[52]Shivas v Bank of New Zealand [1990] 2 NZLR 327 (HC) at 363–364; O’Donovan & Phillips at 4-21‑4-22.
Fourthly, Mr Judd is correct in submitting GE Custodians v Bartle deals with advice to the borrower, which is not the issue here. But the gravamen of Bartle is that a lender such as Westpac is entitled to assume advice being given to the counterparty is independent and accurate.[53] Here, Westpac was entitled to rely on DKL’s certificate in the terms set out in [31] above.
[53]Above n 42, at [48].
To summarise, the proposed amended claim against Westpac cannot succeed. The appeal against the summary judgment entered by Associate Judge Abbott in Westpac’s favour must therefore be dismissed.
Result
As neither of the proposed amended claims can succeed, the appeal against the summary judgment entered in the respondents’ favour by Associate Judge Abbott is dismissed.
Costs
The second respondents, Messrs Finnigan and Pettigrew, are entitled to costs for a standard appeal on a band A basis and usual disbursements.
Clause 6, Costs, of the Cross Guarantee and Indemnity dated 8 July 2005 between Westpac and Yarrows and its subsidiaries, including Gilles, entitles Westpac to an indemnity in respect of its costs and expenses incurred in enforcing the guarantee. Accordingly, we order Gilles to indemnify Westpac in respect of its costs and expenses of this appeal.
Solicitors:
McKechnie Quirke & Lewis, Rotorua for Appellants
Shanahans, Auckland for Second Respondent
Simpson Grierson, Auckland for Third Respondent
Re Hydrodam (Corby) Ltd [1994] 2 BCLC 180 (Ch) at 183. The Court of Appeal of New South Wales agreed with this passage in Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd [2011] NSWCA 109, [2011] 250 FLR 242 at 265.
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