Harcourts Group Limited v Grewal
[2018] NZHC 2983
•19 November 2018
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2018-404-1234
[2018] NZHC 2983
BETWEEN HARCOURTS GROUP LIMITED
Plaintiff
AND
GURPREET GREWAL
First Defendant
RAMANJIT GREWAL
Second Defendant
Hearing: 29 October 2018 Appearances:
T Cooley for the Plaintiff
G Round for the Defendants
Judgment:
19 November 2018
JUDGMENT OF ASSOCIATE JUDGE R M BELL
This judgment was delivered by me on 19 November 2018 at 10:30am
pursuant to Rule 11.5 of the High Court Rules.
…………………………………
Deputy Registrar
Solicitors:
Brookfields Lawyers (T Cooley), Auckland, for the PlaintiffLaw & Associates (D Law/G Round), Manukau, for the Defendants
HARCOURTS GROUP LIMITED v GURPREET GREWAL [2018] NZHC 2983 [19 November 2018]
Table of Contents
The franchise agreements
Paragraph No.
[5]
The loans
[11]
Administration and liquidation
The claims for franchise fees
[16]
Mr Grewal [22] The claims under the loan agreements
[27]
Mr Grewal’s defences [28]
The other defences
Non-disclosure [80]
Equiable set-off [81]
Outcome [83]
[1] Harcourts Group Ltd, the plaintiff, is the New Zealand franchisor for the Harcourts real estate business. Preet & Co Real Estate Ltd and Preet & Co Rentals Ltd had Harcourts franchises in South Auckland territories. Preet & Co Real Estate Ltd dealt with residential and rural real estate, and Preet & Co Rentals Ltd with letting and property management. Those companies have failed. After being put into administration, they have gone into liquidation. Gurpreet Grewal, the first defendant, is the director of both companies. His wife, Ramanjit Grewal, is the second defendant. Harcourts Group Ltd sues Mr and Mrs Grewal as guarantors:
(a)Mr Grewal for $758,824.51 plus interest under a loan to Preet & Co Real Estate Ltd in October 2017;
(b)Mr Grewal for $197,000.00 plus interest under a loan to Preet & Co Rentals Ltd in October 2017;
(c)Mr Grewal for $241,135.41 for franchise fees payable by Preet & Co Real Estate Ltd;
(d)Mr Grewal for $18,601.22 for franchise fees payable by Preet & Co Rentals Ltd;
(e)Mrs Grewal for $69,532.78 for franchise fees payable by Preet & Co Real Estate Ltd.
Harcourts Group Ltd applies for summary judgment.
[2] The defendants admit giving the guarantees. They dispute liability for the franchise fees. They admit the loans. They say that summary judgment should not be entered because they have defences which should be determined in a full hearing on the merits. Their defences are:
(a)non-disclosure of circumstances relating to the loan and franchise fees, especially the part Harcourts Group Ltd played in the failure of the business of Preet & Co Real Estate Ltd and Preet & Co Rentals Ltd;
(b)misleading and deceptive conduct under the Fair Trading Act 1986 to induce Mr Grewal to give guarantees in October 2017 by making him believe that Harcourts Group Ltd would support him and the companies, when that support was withdrawn after the guarantees were signed; and
(c)failing to disclose an accrued rebate of franchise fees of $146,043 owing to Preet & Co Real Estate Ltd.
[3]They also allege set-offs:
(a)A set-off for the $146,043.00;
(b)Equitable set-off arising out of Harcourts Group Ltd breaching its obligations under the franchise agreements by:
(i)unlawfully acquiring and misusing confidential information belonging to Preet & Co Real Estate Ltd and Preet & Co Rentals Ltd;
(ii)undermining the value of Preet & Co Real Estate Ltd by:
1. by using information to which it was not entitled;
2. giving a reduced valuation of Preet & Co Real Estate Ltd;
3. threatening Mr Grewal that he must restructure and sell half his shares in Preet & Co Real Estate Ltd; and when Mr Grewal refused to restructure advising the BNZ that Harcourts Group Ltd no longer supported the Preet
companies, leading the company’s banker to call for repayment of loans advanced;
(iii)actions undermining the value of Preet & Co Rentals Ltd by:
1. refusing to agree to the sale of that company to a third party for an amount that would satisfy the plaintiff’s claim and Mr Grewal’s liability to the company’s banker;
2. offering to acquire Preet & Co Rentals Ltd for $3.2 million and in doing so to compete with its franchisee; and
3. interfering with contractual relations to undermine the value of the property management businesses when they were subject to an agreement for sale and purchase, conditional on due diligence.
[4] In response, Harcourts Group Ltd denies the defences and refers to contractual no set-off provisions as barring the Grewals from running these defences to the loans.
The franchise agreements
[5] Preet & Co Real Estate Ltd had real estate franchises for Howick, Ellerslie, Botany, Manurewa, Otahuhu, Pakuranga, Manukau and Papatoetoe. Preet & Co Rentals Ltd had letting and property management franchises for Ellerslie, Howick, Manurewa, Pakuranga and Papatoetoe. For this case, the franchise agreements are in substantially the same terms. Harcourts Group Ltd gave the franchisee the right to operate the business under the Harcourts name within each territory for a term of five years, renewable for a further five-year term. The franchisee was required to pay a franchise fee of 8 per cent of gross income received by the franchise business and to pay for any goods and services supplied.
[6]The terms included these:
8.3 The Franchisee shall promptly pay to third parties all amounts owed to them as and when such amounts are due. In the event that Harcourts determines that any failure by the Franchisee to pay the amount due to any third party may detrimentally affect Harcourts’ goodwill, Harcourts may give written notice to the Franchisee requiring payment to be made. If payment is not so made before the expiry of 24 hours from receipt of such notice by the Franchisee, Harcourts may pay the amount in question to the third party and the Franchisee shall reimburse Harcourts forthwith upon demand. Harcourts may exercise the options under this clause in addition to or in place of its rights under clause 22 (as to termination).
…
10.3 The Franchisee shall conduct the Franchised Business efficiently and in a businesslike manner and so as to promote the mutual business interests of Harcourts and the Franchisee. …
…
12.1 The Franchisee shall keep and maintain proper accurate and up-to- date books of account and records which will fully and fairly record the financial performance of the Franchised Business.
…
12.3 The Franchisee shall deliver to Harcourts a copy of each Profit and Loss Statement and Balance Sheet prepared by it or for it immediately upon such Profit and Loss Statement and Balance Sheet being available to the Franchisee.
…
12.5 The Franchisee shall upon the request of Harcourts during the period of this Franchise Agreement and so far as reasonable thereafter, permit Harcourts to inspect and take extracts or copies from the records of the Franchised Business including the books of account referred to in clause 12.1 hereof. The Franchisee shall also explain any entry when reasonably required by Harcourts to do so.
12.6 Harcourts shall respect the confidential nature of the information provided to them pursuant to this clause, and shall not divulge it to any third party other than in the legitimate advancement of Harcourts’ business.
[7] Clause 19 of the franchise agreement deals with assignment of the business by the franchisee. If the franchisee intends to assign, transfer or part with possession of the business, Harcourts has a right of first refusal. The franchisee is to give Harcourts notice in writing of the proposed terms of sale. Harcourts has four working days in which to tell the franchisee whether it accepts the offer in the notice. If Harcourts does not accept, the franchisee will have three months in which to sell the business on those same terms without having to first offer the business to Harcourts. Nonetheless, the
franchisee may not transfer the business without the written consent of Harcourts. Harcourts is not to unreasonably withhold its consent provided certain conditions are met, one of them being that the proposed assignee meet Harcourts’ reasonable standards with respect to character, qualifications, experience, requisite licences, financial resources and abilities.
[8] Under cl 21, the franchisee is liable to Harcourts for all costs and expenses incurred in enforcing the agreement including solicitor and client costs.
[9] Clause 31 requires the franchisee to pay money received in the course of business on behalf of a client into a designated trust bank account with a registered bank and to deal with the money and manage the account in accordance with its trust status. There are audit and similar obligations.
[10] The franchise agreement contains a guarantee, cl 27. The primary obligation goes:
The guarantor hereby unconditionally and irrevocably guarantees the due and proper observance and performance by the franchisee of the obligations, provisions, terms and conditions contained and applied in this franchise agreement.
There are additional terms that the guarantor is a principal obligor and that defences that might otherwise be available to a guarantor are negated. The guarantee does not have a “no set-off” provision. Mr Grewal signed all the franchise agreements as guarantor. Mrs Grewal signed only the franchise agreements for Howick and Pakuranga for Preet & Co Real Estate Ltd as guarantor.
The loans
[11] Real estate agents and letting agents receive funds which they must hold for their principals and as such are trustees of those funds. Real estate agents must comply with the requirements of the Real Estate Agents Act 2008, including:
(a)s 122, which includes duties to pay money to those who are lawfully entitled and pending payment to hold the funds in a general or separate
trust account, which may not be drawn upon except to pay the person entitled;
(b)s 123, which requires funds to be held for 10 days after receipt;
(c)s 124, which requires the agent to furnish an account to the principal(s); and
(d)s 125, which requires trust accounts to be audited.
These are reinforced by offence provisions.1
[12] In August 2017, it came to light that funds were missing from the trust account of Preet & Co Real Estate Ltd. The evidence is silent as to how the funds went missing. There is nothing to suggest Mr and Mrs Grewal took the funds. It later turned out that there were also funds missing from the trust account of Preet & Co Rentals Ltd. Again, there is no explanation how those funds went missing, and there is no suggestion Mr and Mrs Grewal took the money for themselves. The Preet companies did not hold funds in hand to make good the shortfalls in the trust accounts. Their banker, the Bank of New Zealand, declined to extend an overdraft to meet the shortfalls. Mr Grewal approached another bank to see if it would provide finance but nothing came of that. Auditors, the Real Estate Agents Authority2 and Harcourts were all notified.
[13] In October Harcourts lent the companies the funds to meet the shortfalls in the trust accounts. These agreements were signed:
(a)An all-obligations guarantee dated 6 October 2017 by Mr Grewal for the indebtedness of Preet & Co Real Estate Ltd, Preet & Co Commercial Ltd and Preet & Co Rentals Ltd to Harcourts;
1 Section 149, an offence not to pay funds to a person lawfully entitled to receive them under s 122. Section 150, an offence to fail to hold money as required under s 123.
2 See Real Estate Agents Act 2008, Part 2, as to the functions of the Real Estate Agents Authority, especially s 12 which includes setting professional standards for agents, investigating and initiating proceedings in relation to offences under the Act and investigating on its own motion any act or omission allegation of practice or any other matter which indicates or appears to indicate unsatisfactory conduct or misconduct on the part of the licensee.
(b)General security agreements by Preet & Co Commercial Ltd, Preet & Co Real Estate Ltd and Preet & Co Rentals Ltd (the general security agreements have not been put in evidence);
(c)A deed of priority (not in evidence);
(d)A loan agreement dated 16 October 2017 between Harcourts as lender, Preet & Co Real Estate Ltd as borrower and Mr Grewal as guarantor for $758,824.51;
(e)A loan agreement dated 16 October 2017 between Harcourts as lender, Preet & Co Rental Ltd as borrower and Mr Grewal as guarantor for
$197,000;
(f)A deed of guarantee dated 16 October 2017 between Harcourts Group Ltd as lender, Preet & Co Real Estate Ltd, Preet & Co Commercial Ltd, Preet & Co Rentals Ltd, Dashmesh Homes Trust Ltd and Mr Grewal as borrowers, and Preet & Co Real Estate Ltd, Preet & Co Commercial Ltd, Preet & Co Rentals Ltd, Dashmesh Homes Trust Ltd and Mr Grewal as guarantors.
[14] Clause 1.2 of the loan agreement to Preet & Co Real Estate Ltd describes a retrospective drawdown. It details 19 payments made to lawyers’ trust accounts between 2 October 2017 and 10 October 2017. These were payments of the balances of deposits to vendors on real estate sales (after commission had been deducted). All the payments were made before the agreement was signed. Similarly, for the drawdown of the loan to Preet & Co Rentals Ltd, the drawdowns were retrospective,
$186,000 on 3 October 2017 and $11,000 on 3 October 2017. Under the loan agreements, the interest rate is 10 per cent per annum with a default interest rate of an additional 10 per cent per annum. The loan is repayable upon demand and on default. The agreements specify events of default, including non-payment, going into liquidation, insolvency and ceasing business. Payments due under the agreement must
be made without set-off, counterclaim or deduction (other than as the agreement may provide).3 The borrower is liable for all costs of enforcement.4
[15] The deed of guarantee of 6 October 2017 differs slightly from that of 16 October 2017: they have different parties, and a financial controller witnessed the 6 October deed while the guarantors’ and borrowers’ lawyer witnessed the deed of 16 October 2017. But the deeds have common terms. They are all-obligations guarantees. The guarantee undertaking is:
The guarantor hereby unconditionally and irrevocably guarantees to the lender the due and punctual payment by the borrower of all the monies hereby secured and the due performance and observance by the borrower of all of the borrower’s obligations and liabilities pursuant to or in connection with any agreements, undertakings and obligations entered into by the guarantor relating to the monies hereby secured including without limitation all obligations of the borrower to the lender pursuant to or in connection with the loan agreement.5
The definition of “monies hereby secured” includes:
All monies of whatever nature that the borrower may from time to time owe to a lender including without limitation …
The guarantee is enforceable by written demand at any time.6 Any amounts owing under the deed by the guarantor must be paid:7
… without set-off, counterclaim and free and clear of any restriction, condition or qualification.
The guarantor is liable for all reasonable costs of enforcement.8
Administration and liquidation
[16] On 22 November 2017, the Bank of New Zealand as secured creditor appointed administrators of Preet & Co Real Estate Ltd and Preet & Co Rentals Ltd.9 The
3 Clause 11.1.
4 Clause 13.1.
5 Clause 2.1.
6 Clause 2.2.
7 Clause 5.1(a).
8 Clause 5.3.
9 Under s 239K, Part 15A of the Companies Act 1993.
administrators obtained orders deferring the time for calling a first creditors’ meeting, giving notice to the Registrar of Companies and advertising the administration. That was to give time for assets to be realised to repay the companies’ debts. At the start of the administration, the companies’ liabilities together came to some $14,500,000, including $10,179,000 to the Bank of New Zealand, $1.2 million to Harcourts,
$2.2 million to the Inland Revenue, $850,000 to trade creditors of Preet & Co Real Estate Ltd and $20,000 to trade creditors of Preet & Co Rentals Ltd.10 The Commissioner of Inland Revenue was owed a core debt of $1.46 million, being $1.33 million for PAYE, and $128,000 for GST. The rest was unpaid penalties, interest and income taxes.
[17]The discrepancies in the trust accounts became public during December 2017.
[18] The administrators realised assets of approximately $2.59 million (not taking costs into account). They sold franchises for Howick, Pakuranga and Botany, and a property in South Auckland. The administrators did not recommend a deed of company arrangement. In their report to creditors they said that the majority of assets of value had been sold and any remaining assets were likely to have little or no value. There was no benefit for creditors in continuing with the administration. They recommended that the companies be put into liquidation.
[19] Both companies were clearly insolvent. They were put into liquidation on 6 April 2018 by a creditors’ resolution at a watershed meeting under s 241(2)(d) of the Companies Act. The administrators are the liquidators of the companies.
[20] Harcourts has taken the liquidation of both companies as events of default under the loan agreement. On 8 May 2018, it made written demand on Mr Grewal under the guarantee of the loan agreements:
Preet & Co Real Estate Ltd $803,514.74 Preet & Co Rentals Ltd $208,785.31 Total: $1,012,300.05
10 Report of administrators for watershed meeting, paragraph 7.2. See ss 239AE and 239AU (3) of the Companies Act.
The borrowers and the guarantors have not made any payments to reduce the amounts owing under the loans.
[21] Harcourts sues Mr Grewal under the deed of guarantee of 16 October 2017, not the guarantee of 6 October. It proved the earlier guarantee in its evidence in reply. That guarantee is relevant in assessing Mr Grewal’s defence under the Fair Trading Act.
The claims for franchise fees
Mr Grewal
[22] Harcourts soon made demand for additional payments under the franchise agreements as well. Two days later, on 10 May 2018, Harcourts’ lawyers made written demand on Mr Grewal as guarantor for payments alleged to be owing under those agreements:
Preet & Co Real Estate Ltd $241,135.49 Preet & Co Rentals Ltd $18,601.22
Harcourts has given little in the way of evidence to prove these alleged debts. Attached to a letter of demand from Harcourts’ lawyers are copies of spreadsheets showing various charges on the companies’ accounts with Harcourts. Preet & Co Real Estate Ltd’s franchise fees, payable in October 2017, were paid late and there was an ongoing interest charge. Franchise fees for November have not been paid. For Preet & Co Rentals Ltd, franchise fees payable in October 2017 were paid late, and there was an ongoing interest charge. Franchise fees payable in November and December 2017 were not paid. There is no other evidence to prove the debts.
[23] That evidence is not sufficient to establish the companies’ indebtedness for unpaid franchise fees and Mr Grewal’s indebtedness as guarantor. Evidence is required as to the companies’ earnings during the relevant periods so that it can be established that the franchise fees have been correctly calculated. That has not been done. Presumably Harcourts assessed the fees on returns made by the franchisees but there is no evidence of returns or anything else to show the franchisees’ earnings. I cannot decide this matter on assumptions. There is nothing to assure me that the
franchise fees have been correctly charged. In the absence of adequate proof by Harcourts, it has not discharged the onus for summary judgment.
[24] In opposition, Mr Grewal contended that rebates amounting to $146,043.00 were to be paid to Preet & Co Real Estate Ltd in October 2017, but have not been brought into account. In response, Harcourts says there was a rebate of $160,946.00 including GST which was credited against fees of $130,940.41 payable in September 2017, with the balance credited against other outstanding current account invoices. That again was only an assertion, unsupported by evidence. If Harcourts wishes to say it has brought the rebate into account, it should put accounting records in evidence to show that it has done so.
[25] Harcourts’ application for summary judgment against Mr Grewal as guarantor for the franchise fees fails, whichever guarantee Harcourts relies on — those under the franchise agreements or those signed in October 2017.
Mrs Grewal
[26] The evidence for Harcourts’ claim against Mrs Grewal for franchise fees is similarly inadequate. A letter of demand by Harcourts’ lawyers dated 10 May 2018 attaches a schedule of amounts said to be owing for the Howick and Pakuranga franchises of Preet & Co Real Estate Ltd but there is no evidence to support those claims. Harcourts has not proved the income of those two franchises for which it has claimed fees under the franchise agreements. Because of the inadequate proof of the debt claimed, the application for summary judgment against Mrs Grewal is dismissed.
The claims under the loan agreements
[27] Harcourts has proved the loan agreements, the guarantee of 16 October 2017, defaults under the loan agreements, demand on Mr Grewal as guarantor and the amounts owing under the loan agreements. Mr Grewal does not contest that part of the case. He has not adduced any evidence to counter it. Harcourts have proved its claims under Mr Grewal’s guarantees of the loan agreements. That is of course subject to Mr Grewal’s affirmative defences.
Mr Grewal’s defences
[28]Mr Grewal’s evidence puts a different context for these events.
[29] In December 2016, a Ms Claire Wright began working for Preet & Co Real Estate Ltd as its general manager. She had earlier been Harcourts’ Northern Regional Manager. She is the daughter of Paul Wright, a 50 per cent owner and chairman of the Harcourts Group. Mr Grewal says that from about April or May 2017 she had pressed for a 50 per cent shareholding in Preet & Co Real Estate Ltd and Preet & Co Rentals Ltd. She threatened to leave if she did not become a shareholder.
[30] In July 2017, Mr Grewal introduced approximately $1.7 million into the business accounts to reduce bank debt. If he had known of the shortfalls in the trust accounts, he says he would have transferred those personal funds to meet the trust accounts, rather than reducing the real estate companies’ debt to the Bank of New Zealand.
[31] Mr Grewal was advised of the trust account shortfall for Preet & Co Real Estate Ltd early in August 2017. He directed an internal investigation and a re-audit of accounts, obtained legal advice, told Harcourts and contacted the Bank of New Zealand.
[32] When he asked the Bank of New Zealand for an increase in the overdraft to meet the shortfall in the trust account it asked for a full statement of financial position and accounts. Mr Grewal provided the information required, but the bank did not immediately respond. On further enquiries, Mr Grewal was told it would require further time and information. Mr Grewal went to the United States on holiday on 13 September 2017. While he was away he was advised that the Bank of New Zealand declined the overdraft.
[33] On 26 September, Ms Wright contacted him to say that Mr Grewal should contact Harcourts to transfer funds to top up the trust account shortfall and that Preet & Co Real Estate Ltd could repay once the new loans had been sorted. He returned to New Zealand on 27 September 2017. On the same day, Ms Clifford, Harcourts’ chief
operating officer, advised him Harcourts would transfer funds to meet the shortfall in the trust account. Mr Grewal was very appreciative. The Bank of New Zealand contacted him asking for an explanation of what happened to the trust account. The next day he learned that the Real Estate Agents Authority had been advised of the funds missing from the trust account. He met with representatives of the Authority on 28 September 2017 and assured them funds would be put into the trust account that day. The same morning, Harcourts and BNZ representatives arrived. Ms Clifford asked for a meeting with the representatives of the Real Estate Agents Authority. The outcome was that Preet & Co Real Estate Ltd’s trust account was to be frozen but held under Harcourts’ supervision.
[34] There were discussions as to how sales consultants would be paid their commissions. Harcourts’ representatives advised Mr Grewal that Harcourts would pay all the sales consultants and the balances payable to vendors. Some of those discussions took place on 2 October 2017. On 4 October 2017 Mr Grewal learned that Harcourts had decided not to pay the commissions.
[35] On 5 October 2017, Mr Grewal met with Ms Clifford and Mr Kennedy of Harcourts, who told him Harcourts wanted to bring in another shareholder. They discussed the value of the business, which he says Ms Clifford wrote down. Mr Kennedy had a blue folder which contained sensitive information belonging to the Preet companies. Mr Grewal said he had not authorised that information to be given to Harcourts. In response, Mr Kennedy explained that they had asked Ms Wright to give them that information. The Harcourts representatives told Mr Grewal they valued Preet & Co Real Estate Ltd at $1.85 million, and they had someone in mind who could pay $900,000 for a half share. Mr Grewal disagreed with this.
[36] Preet & Co Rentals Ltd was also discussed. The Harcourts representatives told him Harcourts had plans to expand into the property management business, was willing to offer $3.2 million and was able to settle immediately. Mr Grewal did not accept that. He says that the Rentals company had 900 properties under management with a market value of $4.5 million. Ms Clifford suggested that Mr Grewal obtain independent advice. She gave him a reference to Mr Meltzer of Meltzer & Mason, a recognised insolvency practitioner.
[37] Harcourts advised the Bank of New Zealand that Preet & Co Real Estate Ltd was worth only $1.85 million. The bank’s loan had been $2.7 million. The bank advised Mr Grewal that it considered that Preet & Co Real Estate Ltd was insolvent.
[38] He later engaged Mr Meltzer. He found out that Mr Meltzer had been provided with information by Harcourts.
[39] Mr Grewal’s evidence deals with signing the loan documents in October 2017. Although he does not include it in his evidence, a letter from Harcourts’ lawyers dated 9 October 2017 to Mr Grewal and his lawyer referred to the investigation by the Real Estate Agents Authority. It recorded concerns that trust monies belonging to third parties had been unlawfully removed in breach of s 122 of the Real Estate Agents Act, PAYE, GST and income tax was outstanding, sales people were not properly supervised and managed, and the companies were trading while insolvent.
[40] The letter stated that it seemed clear that there had been breaches of the franchise agreements by the franchisees, for example, the failures to account for PAYE and the breaches of s 122 of the Real Estate Agents Act. The breaches prejudiced Harcourts’ goodwill and in turn breached the franchise agreements. While Harcourts was entitled to give written notice to terminate the franchise agreements, it reserved its rights and remedies pending further investigation but noted it expected full co- operation from Mr Grewal and the franchisees. It recorded that Harcourts had made payments to third parties which the franchisees were required to pay but were unable to do so. The letter stated that these payments had been made to clients of the franchisees, at the franchisees’ request and with their knowledge and the approval of Mr Grewal. Harcourts had made these payments to protect its goodwill. These payments were made under cl 8.3 of the franchise agreements. To formalise the payments and any further payments to be made to third parties, Harcourts required loan agreements to be signed by the franchisees:
As you will appreciate, HGL’s continued support is likely to be contingent on these documents being executed on behalf of the franchisees’ promptly and continued co-operation of the franchisees and Mr Grewal with HGL.
[41] In their email to Mr Grewal’s lawyer of 11 October 2017, which included the loan agreement, Harcourts’ lawyers said:
Please note that a further loan agreement may be required if further lending is required.
Mr Grewal complains that further lending was required but was not forthcoming.
[42] On 13 October 2017, Harcourts’ lawyers sent general security agreements, guarantee and mortgage documents to Mr Grewal’s lawyer for signing. He says that he signed all these documents for the funds already advanced because he was now heavily reliant on Harcourts’ continued support of his business. He says Harcourts had made it clear in their letter that he would not have its continued support unless he signed the documents. He contends that was a ruse to make him give a personal guarantee.
[43] Mr Grewal decided to sell Preet & Co Rentals Ltd to repay the Bank of New Zealand in full. He refers to an agreement for sale and purchase for the Rentals business (except for the Papatoetoe territory). The purchasers are Simvanjit Sidhu and Jagjindeva Grewal. The agreement is dated 14 November 2017 with settlement on 2 April 2018. There is a five-working day due diligence clause. The purchase price is $115,529.61 plus intangibles. The intangible asset value is the annual fees multiplied by 2.5, to be calculated on the third working day before the settlement date from a list of all properties managed by the vendor to be transferred to the purchasers. Mr Grewal presented that offer to Harcourts but, as franchisor, Harcourts declined to approve it, saying that he had to sell to an existing Harcourts franchisee. Mr Grewal complains about this stance of Harcourts, and alleges bad faith on Harcourts’ part.
[44] A letter dated 7 November 2017 from Harcourts to the Bank of New Zealand (and copied to Mr Grewal) includes the following:
As you will be aware, HGL has provided funds to enable the sales and rental trust accounts to be reimbursed on account of shortfalls which have been discovered. HGL does not intend to provide any further financial support unless there is an immediate and pressing case in the event that further trust account irregularities are uncovered. Any further advances to address trust account irregularities will be subject to the Board’s approval. …
At this stage, HGL have formally notified the franchisees and Mr Grewal through their lawyers that HGL considers there have been serious breaches of the franchise agreements that entitle HGL to terminate those franchise agreements immediately. HGL has reserved all its rights in this regard but it has not yet terminated the franchise agreements. While preserving its rights
under the franchise agreements, HGL is prepared to continue to consider any proposals which Mr Grewal together with the BNZ wish to put forward with a view to an orderly resolution of the current situation, in the best interests of all stakeholders and creditors. …
In short, HGL will not be providing any further financial support to the franchisees, except in respect to any further trust account shortfalls on the basis set out above. HGL is prepared to assist the franchisees, Mr Grewal and the BNZ through a restructuring or orderly sell-down basis, provided there is agreement with all parties concerned as to that process including a strict timeframe for completion.
[45] An email from the Bank of New Zealand to the Preet companies’ lawyer asked to be advised of a proposal to be considered by the bank and Harcourts. The Preet companies’ lawyer replied on 14 November 2017, setting out Mr Grewal’s proposals to achieve an orderly resolution. Mr Grewal would sell down his property portfolio (except one commercial property and his family home) and would sell the Rentals business. Mr Grewal anticipated that he would have contracts on the property portfolio by the end of the week and the sales of those properties would release sufficient funds to clear all Bank of New Zealand debt. That would leave the Harcourts debt which he would pay down in the interim and which would be secured by the remaining properties and by the general security agreement over the real estate business.
[46] On 15 November 2017, Harcourts’ lawyers wrote to Mr Grewal’s lawyer stating that the proposed agreement to sell the Rentals business was not acceptable, because of the late settlement date and because of non-compliance with the procedures in cl 19 of the franchise agreement. Under that clause Harcourts had a right of first refusal and Harcourts’ consent for the sale of the business was required. It asked for details how the debt to Harcourts was to be repaid.
[47] On 17 November 2017 a Bank of New Zealand email asked Mr Grewal and his lawyer to set out further information on Mr Grewal’s proposal. On 20 November 2017 Mr Grewal’s lawyer replied, listing properties for sale and enclosing copies of agreements for sale and purchase for some properties.
[48] An email by Ms Clifford to Mr Grewal’s lawyer dated 21 November 2017 recorded Harcourts’ unwillingness to consent to a rent-roll sale outside the Harcourts
group. In a letter of 12 December 2017, Ms Clifford stated that as a second secured creditor Harcourts expected to be paid in full over the next few days as soon as the BNZ had been paid off. Harcourts would not consider a payment plan for the moneys owed.
[49] Mr Grewal says that after the companies were put into voluntary administration on 22 November 2017, he worked hard to sell personal and company assets. He was successful in obtaining another buyer for the property management business in early 2018 — JK Realty, Harcourts’ franchise owners for Mt Albert and St Heliers. The administrators made the agreement on behalf of Preet & Co Rentals Ltd. He says the agreement was subject to due diligence. He was present at a meeting when Harcourts’ regional manager and the purchaser carried out due diligence. He contends that the regional manager encouraged the purchaser to reduce the purchase price. He says that during the due diligence period, JK Realty tried to change the terms of the agreement and made a ridiculously low offer as Harcourts had encouraged it to do. The administrators did not accept the offer and the agreement came to an end.
[50] Harcourts’ evidence in reply includes an affidavit by a former operations manager of property manager. She confirms that JK Realty entered into a conditional contract to buy the rent roll for three franchises – Pakuranga, Howick and Botany. She attended to assist in assessing income, expenses and contracts associated with the rent- roll. On arriving at the Preet offices, the information was not made available. She denies making the statements alleged by Mr Grewal.
[51] Ms Clifford has attached to her affidavit in reply a copy of the agreement for sale and purchase between the administrators and JK Realty Group. In their report to creditors, the administrators say that an offer was received for a large portion of the property management business at two and a half times the annual fee outcome. Following due diligence the offer was reduced to 50 per cent of the price and the purchaser was ultimately unable to raise funding. Offers (some unconditional) were made for properties but purchasers failed to complete. Insufficient property managers were retained to sustain the business. The business had to be sold quickly at a fire sale price because of the high risk that landlord/clients would depart. The property management portfolios for Pakuranga and Howick were sold. There was a contract
on foot for the Botany/Manurewa portfolios. It was unclear whether these would settle.
[52] Mr Grewal’s defences to the claims under his guarantee of the loans to Preet & Co Real Estate Ltd and Preet & Co Rentals Ltd in October 2017 come under two general heads:
(a)He was tricked into signing the guarantee on 16 October 2017, because Harcourts represented that unless he did so, it would no longer continue its support for his companies, but it failed to provide that support. He alleges misleading and deceptive conduct under s 9 of the Fair Trading Act 1986 and seeks an order under s 43(3)(a) declaring the guarantees and loan agreements to be void; and
(b)There are set-offs which can be pleaded against the claims under the loan and guarantees. The set-offs he describes are equitable set-offs for unliquidated claims which are said to impeach Harcourt’s claims under the loan agreement. The set-offs are primarily matters that Preet & Co Real Estate Ltd and Preet & Co Rentals Ltd might raise, but a guarantor is entitled to raise in defence of a claim by a creditor any defence (including set-off) that the debtor could raise against the creditor’s claim.11
[53]For set-offs Mr Grewal says that he can raise these matters:
(a)Harcourts obtained confidential information about Preet & Co Real Estate Ltd and Preet & Co Rentals Ltd to which it was not entitled, and misused that confidential information.
(b)Harcourts undermined the value of Preet & Co Real Estate Ltd by giving the Bank of New Zealand a below than market valuation of its business, by threatening Mr Grewal that he had to restructure and sell
11 A leading case is Bechervaise v Lewis (1872) LR 7 CP 372. See generally Rory Derham Derham on The Law of Set-Off (4th ed, Oxford University Press, Oxford, 2010) at ch 8.
half his shares in the company, and precipitating the actions of the Bank of New Zealand in appointing administrators leading to the sale of the business at an under value.
(c)Harcourts undermined the value of Preet & Co Rentals Ltd by refusing to agree to the sale of the business to a third party for $4.7m, offering to buy the business for $3.2m and competing against its franchisee and interfering with contractual relations when a purchaser was undertaking due diligence
The effect of the no set-off clauses
[54] Harcourts says that it has a clear answer to the defences under both heads: the “no set-off” provisions in the loan agreements and the guarantees.
[55] It is well established that in equity an unliquidated cross claim may be run as a defence. In Grant v NZMC Ltd the Court of Appeal said:12
The principle is, we think, clear. The defendant may set-off a cross-claim which so affects the plaintiff’s claim that it would be unjust to allow the plaintiff to have judgment without bringing the cross-claim to account. The link must be such that the two are in effect interdependent: judgment on one cannot fairly be given without regard to the other; the defendant’s claim calls into question or impeaches the plaintiff’s demand. It is neither necessary, nor decisive that claim and cross-claim arise out of the same contract.
The Court recognised that equitable set-off can be excluded by agreement.13
[56] Harcourts Group Ltd says that the no set-off clauses in the loan agreements and the guarantee bar Mr Grewal from running all his defences to its claims against him as guarantor of the loans. For Mr Grewal, Mr Round submitted that that could not be right for Mr Grewal’s claim for relief under the Fair Trading Act, because Mr Grewal was contending that his liability under the guarantee should be avoided under s 43(3)(a) by the court declaring the loan agreements and the guarantee to be void.
12 Grant v NZMC Ltd [1989] 1 NZLR 8 (CA) at 12–13.
13 Grant v NZMC Ltd [1989] 1 NZLR 8 (CA) at 13. See also Continental Illinois National Bank & Trustco of Chicago v Papanicolaou (The “Fedora” “Tatiana” and “Eretrea II”) [1986] 2 Lloyd’s Rep 441 (EWCA), and Bromley Industries Ltd v Martin and Judith Fitzsimons Ltd [2009] NZCA 382, (2009) 19 PRNZ 850 at [47] and [52].
[57] Harcourts cited cases to support its position. In Deutsche Bank (Suisse) SA v Khan and Deutsche Bank AG v Unitech Global Ltd, the Queen’s Bench addressed whether a conventional no set-off clause was effective when a defendant alleged fraud by the plaintiff and the alleged fraud was said to give the defendant a claim against the plaintiff.14 These decisions followed Mance J’s decision in Skipskreditt v Emperor Navigation.15 In Deutsche Bank AG v Unitech Global Ltd, the defendants had submitted that there was a distinction between applying a no set-off clause where the agreement had been induced by fraud, and a counterclaim that alleged or related to fraud. Teare J held that the reasoning of Mance J applied in both cases.16 In Peak Hotels and Resorts Ltd v Tarek Investments Ltd on the other hand, Barling J declined to follow Deutsche Bank AG v Unit Tech Global Ltd in cases where a contract was rescinded.17
[58] In Strategic Finance Ltd (in rec & in liq) v Moss a guarantor alleged misleading and deceptive conduct under s 9 of the Fair Trading Act in a claim by a lender. The defendant said that the agreement should be set aside as void ab initio under s 43(3). The deed of guarantee had a no set-off provision. Associate Judge Gendall said:18
Putting aside the requirement to show that Mr Moss has suffered loss or damage here, the Court could only declare the contract void ab initio if a claim under s 9 is successfully made out. That would require pursuing a set off or counterclaim, which clause 13.1 of the Deed of Guarantee essentially bars. Before even deciding on the appropriate remedy under s 43, the Court would need to determine whether a claim for relief is even available, and due to the terms of the guarantee in my view it is not. Therefore the prospect of the agreement being declared void ab initio does not avail Mr Moss of the contractual bar to this cause of action.
[59] In response, Mr Round referred to Madagascar (No.3) 2013 Ltd v Paulsen.19 The plaintiff sold its business and left in part of the purchase price by way of loan, repayable after a year. The defendants guaranteed the loan. The guarantees had a no set-off clause. The defendants alleged contractual misrepresentation and misleading and deceptive conduct under the Fair Trading Act. Amongst other things, they said
14 Deutsche Bank (Suisse) SA v Khan [2013] EWHC 402 (Comm); Deutsche Bank AG v Unitech Global Ltd [2013] EWHC 2793 (Comm).
15 Skipskreditt v Emperor Navigation [1998] 1 Lloyds Rep 66 at76-77.
16 Deutsche Bank AG v Unitech Global Ltd [2013] EWHC 2793 (Comn) at [78].
17 Peak Hotels and Resorts Ltd v Tarek Investments Ltd [2015] EWHC 1997 (Ch) at 146-148.
18 Strategic Finance Ltd (In Rec and In Liq) v Moss [2012] NZHC 3032 at [36].
19 Madagascar (No.3) (2013) Ltd v Paulsen [2016] NZHC 553.
that they were entitled to an order under the Fair Trading Act declaring the loan and guarantee void. Associate Judge Matthews held that the no set-off clause did not prevent the defendants from arguing that the guarantees could be avoided. He referred to a New South Wales decision, St George Bank Ltd v Field, where McDougall J drew this distinction:20
[18] There is an important distinction to be drawn between a defence that impeaches the guarantee itself, and a defence that impeaches the exercise of rights under the guarantee. Clauses of the kind to which I have referred may not prevent a defence being raised to liability under a guarantee where it is said (for example) that the taking of the guarantee was itself affected by some vitiating circumstance.
Other Australian cases on point are Bank of Western Australia Ltd v O’Brien, Capital Finance Australia Ltd v Davis, Daewoo Australia Pty Ltd v Porter Crane Import Ltd, Capital Finance Australia Ltd v Air Star Aviation Pty Ltd and Westpac Banking Corporation v Helicopters Brisbane Pty Ltd.21 In Madagascar, Associate Judge Matthews declined to follow Strategic Finance Ltd v Moss.22
[60] I assume for the present discussion that the no set-off clauses are valid and enforceable according to their terms. They would not be held unenforceable under s 5C of the Fair Trading Act which makes contracting-out provisions unenforceable. They would instead be upheld as coming within the exception under s 5D which allows contracting out for parties in trade.23 The contracting-out goes only to limiting the exercise of remedies as opposed to denying a party the right to allege contraventions of ss 9, 12A, 13 or 14 of the Fair Trading Act.24
[61] In my judgment, the better view is that the no set-off clause does not prevent Mr Grewal saying in defence that he is not bound by the guarantee at all because it should be set aside under s 43 of the Fair Trading Act. A contractual no set-off clause is procedural. It suspends a party’s right to raise a matter of opposition to a claim, as
20 St George Bank Ltd v Field [2007] NSWSC 902.
21 Bank of Western Australia Ltd v O’Brien [2013] NSWCA 71; GE Capital Australia v Davis [2002] NSWSC 1146, (2002) 180 FLR 250; Daewoo Australia Pty Ltd v Porter Crane Import Ltd [2000] QSC 950; Capital Finance Australia Ltd v Air Star Aviation Pty Ltd [2003] QSC 151, [2004] Qd R 122; and Westpac Banking Corp v Helicopters Brisbane Pty Ltd [2012] QSC 263.
22 Madagascar (No.3) (2013) v Paulsen [2016] NZHC 553 at [56].
23 This is only an assumption. The parties did not argue the point.
24 See Fair Trading Act s 5D(1).
opposed to extinguishing those rights.25 A defendant barred from raising a cross-claim because of a no set-off clause may run its claim later, as it is only barred from raising the matter in reduction of its liability to the plaintiff. Set-off is used to reduce a liability which is otherwise binding. Set-off does not, however, invalidate the original obligation on which the defendant is sued. When a defendant denies any liability at all to the plaintiff — as when the defendant alleges the obligation never arose or that, if it arose, it should be set aside — the defendant is not raising a set-off. Instead, the defendant is asserting a defence which goes to the foundation of the plaintiff’s claim, not just to reduction of an established liability.
[62] Misleading or deceptive conduct under the Fair Trading Act does not automatically avoid the contract induced by that misleading conduct. The contract is avoided only if the court makes an order declaring the contract to be void, in whole or in part, under s 43(3)(a). A party sued under an agreement, wishing to have the agreement avoided under s 43(3)(a), will need to claim that relief expressly. Mr Grewal has done so in his counterclaim. That should not obscure the point that in seeking an order avoiding the guarantee, he is not pleading a set-off within the no set- off clauses but is instead is attacking the very guarantee on which he is sued.
[63] Applying the no set-off clause to bar Mr Grewal from obtaining an order avoiding the guarantee in this proceeding would not just suspend his right to obtain that relief. It would take it away altogether, because once judgment is given against him, he would lose the right to say he is not bound by the guarantee. He could not have the judgment re-opened. That would go beyond the suspensory effect of the no set-off clauses. “Pay now, argue later” would become “pay now” without the opportunity to challenge liability later.
Does Mr Grewal have an arguable case for an order avoiding the guarantee and loan agreements?
[64] Mr Grewal seeks only an order under s 43(3)(a) of the Fair Trading Act declaring that the guarantees and the loan agreements are void, not any other relief under that act. The question is whether it is reasonably arguable that he could obtain
25 Insolvency set-off, as under s 310 of the Companies Act 1993, is substantive and operates differently.
such a declaration. In a summary judgment application, the onus is on the plaintiff to negate that possible defence.
[65]There is a causation requirement for any relief under s 43:
(1) This section applies if …on the application of any person, a court … finds that a person (person A) has suffered, or is likely to suffer, loss or damage by conduct of another person (person B) that does or may constitute
…
(a)a contravention of a provision of Parts 1 to 4A…
Relief is discretionary. Section 43(2) says:
The court …may make 1 or more of the orders described in subsection (3)…
Orders to declare a contract void under s 43(3)(a) are typically made when the court is satisfied that the misleading or deceptive conduct by one has induced another to enter into the contract and that it would be unjust to hold the other to the contract.26
[66] Mr Grewal’s statement of defence says that on about 26 or 27 September, Ms Wright approached him offering Preet & Co Real Estate Ltd a loan to cover the losses from the trust account until such time as the loans from third party lenders could be obtained. The loans were made between 2 and 10 October 2017. Knowing that Mr Grewal was now reliant upon the plaintiff’s continued support of his companies, Harcourts represented that loan agreements and deeds of guarantee needed to be entered into to maintain Harcourts’ support for the companies. Following the execution of the loan agreements and guarantees, Harcourts advised the Bank of New Zealand that it no longer supported Preet & Co Real Estate Ltd and Preet & Co Rentals Ltd. That led to the Bank of New Zealand requiring repayment of the funds it had advanced to the companies. The pleading says that Ms Wright was a Harcourts employee, but that cannot be correct because Mr Grewal’s own evidence is that in October 2017 she worked for the Preet companies.
26 Dungey v ANZ Banking Group (NZ) Ltd [1997] NZFLR 404 (HC); Quick Snax Ltd v Uncle’s Group (NZ) Ltd HC Auckland CP1137/92,19 June 1998; Smith v Tuskers (Yaldhurst Road) Ltd [2002] 10 TCLR 417 (HC).
[67] The focus of the misleading conduct allegation is the letter of Harcourts’ lawyers dated 9 October 2017. The central allegation is that Mr Grewal was misled into signing the loan agreements and the guarantee, because he believed he would have ongoing support from Harcourts. In the event that was not forthcoming. The letter asked the Preet companies and Mr Grewal to sign loan agreements and a guarantee with the intimation that Harcourts’ continued support was likely to be contingent on the documents being signed on behalf of the franchisees promptly and the continued co-operation of the franchisees and Mr Grewal with Harcourts.
[68] “Continued support” is vague. Harcourts has not expressly committed itself to any course of action. The letter explains that Harcourts considers that the franchisees have committed serious breaches of the franchise agreements and that there are grounds for Harcourts to terminate the franchises. The letter outlines the background, identifies the franchise agreements, Mr Grewal’s guarantee of the franchisees’ performance, investigations by the Real Estate Agents Authority, apparent breaches of the franchise agreements by the franchisees and Harcourts’ own investigations. The letter expressly reserves Harcourts’ rights and remedies. In context, “continued support” is likely to mean that Harcourts would not terminate the franchise agreements, if the loan agreements and guarantee were signed. It is a stretch to say that any actions of Harcourts which Mr Grewal might disagree with count as lack of continued support.
[69] Regardless, for its conduct to be misleading or deceptive, Harcourts must have intended on 9 October 2017 not to support the Preet companies and Mr Grewal, even if the documents were signed. That involves dishonesty, but there is nothing in Mr Grewal’s case to suggest that Harcourts dishonestly intended to trick Mr Grewal into signing the document by falsely holding out that it would continue to support him.
[70] Mr Grewal had legal assistance. His lawyer received Harcourts’ letter of 9 October 2017, just as he did. She witnessed his signing the loan agreement and guarantee. She was able to advise him of the effects and implications of the letter and the agreements. That reduced the risk of his being misled.
[71] The misleading conduct allegations are accordingly weak, but I cannot say at this stage that they are bound to fail. There are however other matters that count against his obtaining a declaration avoiding the loan agreements and guarantee: Mr Grewal would have given a guarantee for the money his companies borrowed regardless of any assurances by Harcourts, he was already personally liable to Harcourts for his companies’ indebtedness to it and it would be unjust to order a restoration to the position before the loan agreements and guarantee were signed.
[72] The Preet companies were insolvent. Their insolvency showed up in a very serious way — funds had gone missing from the trust accounts and the companies did not have access to funds to make good the deficiencies.27 If that news became public, it would be extremely damaging to the business of both companies. The public would be reluctant to deal with the franchisees if they could not be confident that their money would be safe in the trust accounts. The insolvency also showed up in the large tax arrears, especially PAYE and GST. The Preet companies’ bank was not willing to extend overdrafts or provide other accommodation. Funds would have to come from somewhere else.
[73] The companies could not continue in business unless the shortfalls in the trust accounts were made good. Mr Grewal clearly wanted to keep the business going. After all he says that he looked to Harcourts for “continued support”. Termination of the franchise agreements would have been the end of the business.
[74] Any commercial lender providing funds to the Preet companies to fix the shortfalls in the trust accounts in these circumstances would undoubtedly require the director to guarantee repayment. As a matter of commercial practice, directors’ guarantees are required for loans to small closely-held companies. Most lenders would be reluctant to make loans to an insolvent real estate business in serious breach of its trust account obligations. Harcourts may have felt compelled as it wanted to protect its brand, but it could still require the same safeguards as any other lender. In these circumstances, a claim that Mr Grewal agreed to give the guarantee because of
27 For personal insolvency, a debtor commits an act of bankruptcy if a judgment for non-payment of money to be kept in a trust account is not satisfied within five working days of judgment under s 28 of the Insolvency Act 2006.
assurances of continued support rings hollow. He would have given the guarantee anyway.
[75] If Mr Grewal had refused to sign the loan agreements and guarantee, he could not have counted on Harcourts’ continued support in any form. Harcourts had reserved its rights for the breaches of the franchise agreements. There were real risks for his business if he did not co-operate.
[76] Mr Grewal was already personally liable to Harcourts to repay the funds it had advanced to clear the trust account shortfalls. Under cl 8.3 of the franchise agreements, Harcourts could require the franchisee to reimburse it for any payments it had made to unpaid third parties. Mr Grewal had guaranteed the performance of each franchisee under each franchise agreement. He does not suggest that he was induced by misleading conduct to sign the franchise agreements.
[77] In any event, Mr Grewal signed the all-obligations guarantee on 6 October 2017. That was before Harcourts’ lawyers’ letter of 9 October 2017. There is no suggestion of misleading or deceptive conduct by Harcourts to induce Mr Grewal to sign the guarantee of 6 October 2017. That guarantee covered the companies’ liabilities to Harcourts to repay the funds advanced to clear the trust account shortfalls.
[78] An order under s 43(3)(a) of the Fair Trading Act declaring a contract void is a form of statutory rescission. When rescission is ordered in equity, the parties are to be restored to the positions they were in at the outset. The remedy may be refused if that cannot be done. Mr Grewal seeks a declaration that the loan agreements and guarantee are void ab initio, but does not seek any directions for the parties to be put back into their original positions. The court could of course direct this, but it would not have any practical effect. Harcourts advanced the funds to the Preet companies but there is no hope of repayment now that they are in liquidation. The loans cannot be undone. The impossibility of restoring the status quo counts against relief being ordered under s 43(3)(a) as it would cause a greater injustice than the one it is meant to cure.
[79] It is implausible that a court would make a declaration avoiding the loan agreements and the guarantees on the ground that Harcourts had hoodwinked Mr Grewal into giving the guarantee by holding out a false hope of continued support. He would have signed the guarantee anyway. The guarantee of 16 October 2017 recognised his existing liabilities. He was no worse off for having signed the documents. Avoiding the guarantee and the loan agreements would be unjust. A claim for a declaration under s 43(3)(a) would undoubtedly fail. While the no set-off provisions in the loan agreement and guarantee do not prevent Mr Grewal from making a claim that the court should make orders avoiding the contracts under s 43(3) of the Fair Trading Act, Harcourts has shown he does not have an arguable case for that relief.
The other defences
Non-disclosure
[80] Mr Grewal has pleaded that Harcourts failed to disclose fully the circumstances relating to the loan and the part that it played in the failure of his businesses. He has not however given any evidence on this alleged non-disclosure and Mr Round did not refer to this defence in his submissions. As a general rule, a creditor is not under a duty to disclose to a guarantor information it holds about a debtor.28 The courts have recognised an exception where there are unusual features, but that is assessed against the knowledge that the creditor is not prepared to rely on the creditworthiness of the debtor alone. The creditor is not required to disclose information already known to the surety. Here Mr Grewal knew all about his companies’ affairs and the circumstances against which Harcourts made its loans to them. This defence is not reasonably arguable.
Equitable set-off
[81] Mr Grewal’s claims of equitable set-off for his other defences – misuse of confidential information, alleged undermining of the value of Preet & Co Real Estate Ltd, undermining the value of Preet & Co Rentals Ltd and inducing a breach of
28 Shivas v Bank of New Zealand [1990] 2 NZLR 327 (HC) at 363.
contract for the sale of the property management business - cannot be raised in this proceeding because of the no set-off clauses. They cannot prevent Harcourts getting judgment under the guarantee. The no set-off clauses in the loan agreements mean that the borrowers, the Preet companies, cannot assert set-offs to reduce their liabilities under the loans. Mr Grewal can likewise not rely on defences that the companies cannot raise. The no set-off clause in the deed of guarantee bars Mr Grewal from raising as an equitable set-off any matter which he could plead against Harcourts in his own right.
[82] I note, however, that there are weaknesses to these claims, even if they are not conclusive reasons for rejecting them:
(a)It is hard to see how he can have a claim for misuse of confidential information when Harcourts was entitled to inspect and take copies of the franchisees’ records under cl 12.5 of the franchise agreements.
(b)Grewal’s complaint that Harcourts undervalued Preet & Co Real Estate Ltd does not seem to recognise that the company was insolvent and that the trust account shortfalls must have detrimentally affected the value of the business. It would not be possible to sell the business without a diligent purchaser finding out about the funds missing from the trust account. That would in turn affect the willingness of any financier to provide funds for the business. Harcourts may have done no more than disclose what Mr Grewal should have realised.
(c)Mr Grewal’s complaints about undermining the value of Preet & Co Rentals Ltd faces similar problems. His suggestion that Harcourts’ undervalued the business so that it could obtain it for itself is belied by the business having been put on the market for sale to other Harcourts’ franchisees. Harcourts’ unwillingness to approve a sale to a non- franchisee may be explained on reasonable business grounds.
Outcome
[83] The Harcourts Group Ltd has shown to the summary judgment standard that Mr Grewal does not have any defence to the claim under his guarantee of the loans to Preet & Co Real Estate Ltd and Preet & Co Rentals Ltd in October 2017. The total amounts advanced were $1,012,300.05. Harcourts Group Ltd is entitled to judgment against Mr Grewal for that sum plus contractual interest, including default interest, as claimed. It has also claimed costs on a solicitor-client basis as allowed under cl 5.3 of the deed of guarantee. It has not, however, proved those costs yet.
[84] Harcourts Group Ltd has not succeeded on its summary judgment application for franchise fees against Mr Grewal or his wife. Those parts of the summary judgment application are dismissed.
[85]I make these orders:
(a)Harcourts Group Ltd recovers judgment against Mr Grewal for
$1,012,300.05 plus contractual interest from 4 May 2018 until the date of judgment, as claimed.
(b)The applications for summary judgment against Mr Grewal and against Mrs Grewal for franchise fees are dismissed.
(c)Harcourts Group Ltd is to file and serve evidence and a memorandum for its claim for solicitor-client costs. It should address whether it is entitled to GST on those costs. Mr Grewal will have five working days to respond.
(d)The Registrar is to direct a first case management conference for directions on those parts of the case on which judgment has not been given in this decision.
(e)Leave is reserved to apply for further orders.
……………………………….
Associate Judge R M Bell
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