Heartland Bank Limited v Auckland Concrete Limited
[2023] NZHC 2361
•28 August 2023
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2022-404-002291
[2023] NZHC 2361
UNDER High Court Rules 2016 IN THE MATTER OF
Debt collection
BETWEEN
HEARTLAND BANK LIMITED
Plaintiff
AND
AUCKLAND CONCRETE LIMITED
First Defendant
DAVID IAN BURTON
Second DefendantJUSTIN DANIEL PAUL
Third Defendant
Hearing: 7 August 2023 Appearances:
C R Vinnell for Plaintiff
J E M Lethbridge and M G P Martin for Second Defendant
Judgment:
28 August 2023
JUDGMENT OF ANDREW J
This judgment was delivered by Justice Andrew on 28 August 2023 at 4.00 pm
pursuant to r 11.5 of the High Court Rules 2016 Registrar / Deputy Registrar
Date ……………………………..
HEARTLAND BANK LTD v AUCKLAND CONCRETE LTD [2023] NZHC 2361 [28 August 2023]
Introduction
[1] Heartland Bank Ltd1 seeks summary judgment against the second defendant, Mr David Burton, as guarantor for the debts of Auckland Concrete Ltd.2 Heartland says that Mr Burton’s guarantee and indemnity of November 2020 was an all- obligations guarantee covering the company’s overdraft debt, term loan debt and support facility debt. Judgment is sought for the principal debt of $1,269,888.86 plus interest and costs.
[2] Mr Burton admits liability for the debts, but disputes quantum. Mr Burton says that the company overdraft debt was limited to $400,000 and that he should not be liable for any excess over that limit. He says that Heartland breached its ongoing disclosure obligations to him regarding the company overdraft which was raised multiple times without his knowledge, permission or consent. He contends that Heartland was in breach of its obligations under s 9C of the Credit Contracts and Consumer Finance Act 20033 to exercise the care, diligence and skill of a responsible lender.
[3] Mr Burton was a director of ACL. There is no dispute that Heartland increased the overdraft facility limit with the agreement of ACL and Mr Burton’s co-director, Mr Paul. The critical issue I must determine is whether Heartland was under an obligation to communicate directly with Mr Burton and to obtain his consent to the raising of the limit in order to enforce the guarantee beyond the $400,000 initial limit. The issue arises in the context of a summary judgment application where it is for the plaintiff to prove that the defendant, Mr Burton, has no defence to the claim.
[4] In March 2023, Heartland obtained summary judgment against ACL (now in liquidation) and Mr Paul in the sum of $1,382,687.14.4
1 Heartland.
2 ACL.
3 CCCFA.
4 That sum consists of judgment in the sum of $1,269,888.86 together with interest and costs.
Factual background
[5] ACL carried out business in the building and house construction industry. On 28 April 2023, it went into liquidation.
[6]Mr Burton is both a director and shareholder of ACL.
[7] Mr Burton executed the business overdraft facility agreement dated 9 May 2018 in his capacity as director, together with Mr Paul. Section 2 of that facility agreement defines the facility limit as “$400,000 as amended in accordance with this document”. That section also states:
The Borrower may borrow multiple Advances so long as the total principal amount (including capitalised interest and fees) outstanding under the Facility does not, at any time, exceed the Facility Limit.
The Lender may review the Facility Limit at any time. Any decrease to the Facility Limit will be notified to the Borrower by the Lender. Any increase to the Facility Limit will be agreed between the Borrower and the Lender.
(emphasis added)
[8] On 11 May 2018, Mr Burton and Mr Paul signed the account operating form, to which is attached Heartland’s general terms. Clause 4.5 of those terms states:
We may, at our discretion, honour withdrawal requests from your Account even if you do not have sufficient funds in that Account to meet the payment (unarranged overdraft) …
[9] The company overdraft was not ACL’s main trading account nor its source of working capital. It was operated almost exclusively to pay interest due on the Heartland term loan and support facility and for the payment of wages (and for interest and fees on the overdraft debt). Those were arrangements put in place by Mr Burton, as director of ACL, which included:
(a)Mr Burton signed a Heartland direct debit authority for the payment of term loan instalments from the company overdraft account.
(b)As part of the support facility, the directors were required to set up a direct debit authority for repayments of this loan from the company overdraft. They did so.
(c)ACL met its employee remuneration and tax payments via the services of a business called Ipayroll Ltd. The contract for these services was entered into on 22 January 2015. On 26 February 2021, Heartland provided a guarantee to reimburse Ipayroll Ltd, on demand, in respect of any monies paid on behalf of ACL under the payroll arrangement. This arrangement had a maximum amount payable of $35,250 and an expiry date of 25 February 2022.
(d)The company overdraft carried interest at an initial rate of 9.75 per cent (subject to amendment) and a line fee which continued to accrue as ACL failed to introduce funds to meet them.
[10] In November 2020, the parties restructured the loan and security arrangements that had been put in place between them in 2018, as follows.
[11] Heartland granted ACL a new business support facility agreement dated 25 November 2020, under which a further $500,000 was advanced to ACL for a term of 36 months.
[12] The guarantors, Mr Burton and Mr Paul, granted new guarantees and indemnities including the guarantee of 27 November 2020. Mr Burton’s personal guarantee was limited to the maximum amount of $1,345,000.
[13]The “Maximum Amount” is referred to in cl 1.3 of that guarantee as follows:
Maximum Amount:
If a Maximum Amount is specified in the Commercial Terms in respect of a Guarantor then (without prejudice to the fact that each Guarantor guarantees to us, and indemnifies us for, all Guaranteed Debt) the maximum amount recoverable from that Guarantor under this Agreement is limited to:
(a)The Maximum Amount, plus:
(b)If that Guarantor does not pay an amount when it is due under this Agreement, interest on the amount due and unpaid while the payment default continues, plus:
(c)If that Guarantor does not pay an amount when it is due under this Agreement, any costs that we incur in connection with anything we do in enforcing our rights against that Guarantor.
[14] When Mr Burton executed the guarantee on 27 November 2020, the debt owing under the company overdraft was $748,666.68. The sum of $500,000 advanced by Heartland to ACL under the business support facility was paid into the company overdraft account, reducing the debt to approximately $250,000. However, in early December 2020, over $200,000 was transferred to ACL’s BNZ current account. At that point the company overdraft limit was at $505,000.
[15] During early 2021, Mr Burton stepped away from day-to-day management and involvement with ACL; his co-director, Mr Paul, assumed these duties.
[16] On 11 January 2021, the manager of Heartland, Mr Donnelly, contacted Mr Paul advising that the balance on the company overdraft account had to be reviewed because it was “in excess of the agreed overdraft limit of $500k”. A temporary limit of $550,000 was agreed on 27 January 2021.
[17]On 3 March 2021, Heartland (via Mr Donnelly) emailed Mr Paul and stated:
Note that an increase in the overdraft will require support from David Burton as this will impact on directors/shareholders’ obligations under guarantees.
[18] On 24 March 2021, Mr Donnelly sent Mr Paul a reminder that the facility limit was in excess and set to reduce. On 13 April 2021, Mr Donnelly sent an email to Mr Paul with an unsigned variation disclosure listing a temporary extension of
$600,000 until 31 May 2021.
[19] On 21 April 2021, Mr Donnelly sent an email to Mr Paul reminding him that the overdraft balance was at $652,000 when there was a facility limit of $600,000.
[20] On 27 April 2021, Mr Paul emailed Mr Donnelly seeking to restructure the financial arrangements.
[21] On 26 May 2021, Mr Donnelly sent an email to Mr Paul advising that the overdraft balance had gone “$225k over the base limit of $500k”.
[22] It is not disputed that there was no direct communication by Heartland to Mr Burton between December 2020 and 21 June 2021 in relation to the company overdraft account, and in particular the facility limit. All communications during that period were between Heartland and Mr Paul only. Mr Burton submits that this was “the primary period” during which the facility limits were exceeded. During that time Mr Paul was looking to obtain funding from Heartland to purchase ACL shares from Mr Burton.
[23] On 21 June 2021, Heartland wrote to Mr Burton and Mr Paul expressing concern at ACL’s borrowing. The company overdraft balance at that time was “$770,286 against the current overdraft facility limit of $500,000”.
[24] In August 2021, Mr Burton signed ACL’s financial statements. These recorded that the Heartland overdraft balance as at 31 March 2021 was $603,207 (and
$481,281.00 for the previous year).
[25] The company overdraft debt continued to increase. By March 2022, the debt was $1,536,134.22. That sum was reduced by $740,000 when Mr Burton’s family trust paid the extent of its guaranteed liability.
[26] Heartland contends that Mr Burton is now liable for the following debts of ACL:
(a) Business overdraft facility agreement dated 9 May
2018 in respect of account number
03-1903-0680179-000 (Company Overdraft) $806,604.92 (b)
Term loan facility agreement dated 9 May 2018
in respect of account number 03-1903-0680179-025 (Term Loan)
$108,331.07
(c)
Business Support Facility Agreement dated 25 November 2020 in respect of account number 03-1903-0681079-024 (Support Facility)
$354,952.87
Total:
$1,269,888.86
Relevant legal principles
[27]Rule 12.2(1) of the High Court Rules 2016 provides:
The court may give judgment against a defendant if the plaintiff satisfies the court that the defendant has no defence to a cause of action in the statement of claim or to a particular part of any such cause of action.
[28] The principles applicable on a plaintiff’s summary judgment application were summarised by the Court of Appeal in Krukziener v Hanover Finance Ltd:5
The principles are well settled. The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried: Pemberton v Chappell [1987] 1 NZLR 1 (CA) at 3. The court must be left without any real doubt or uncertainty. The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated: MacLean v Stewart (1997) 11 PRNZ 66 (CA) …
Analysis and decision
[29] In his notice of opposition Mr Burton contends that Heartland was under a continuing duty to him, as surety, to disclose changes made to the contractual arrangements between it and ACL and particularly any changes which materially affected Mr Burton’s responsibility under the guarantee. Mr Burton says that Heartland failed to do so. He claims that no notice was given to him of the change to the overdraft limit. That change is now relied upon by Heartland to support greater liability under the guarantee to more than double the original $400,000 limit.
[30] In support of his principal submission that Heartland has not established that he has no defence, Mr Burton further submits that there is confusion and uncertainty with regards to the calculation of the quantum sought and that the proceedings need to go to trial. He claims that Heartland has not disclosed critical correspondence between Mr Paul and Heartland’s Mr Donelly and that as a matter of evidence Heartland has not established the quantum of his potential liability under the guarantee.
5 Krukziener v Hanover Finance Ltd [2008] NZCA 187, (2008) 19 PRNZ 162 at [26].
Issue (a) – Continuing duty to disclose?
[31] Mr Burton contends that Heartland had an obligation under s 9C(2) of the CCCFA to exercise the care, diligence and skill of a responsible lender. He argues that s 9C is to be interpreted broadly in light of the general purposes of the legislation, as set out in s 3. That section states that one of the purposes of the Act is to promote and facilitate fair, efficient, and transparent markets for credit.6 Ms Lethbridge emphasised that s 9C(2)(a)(iii) expressly refers to subsequent dealings with a “guarantor” in relation to a guarantee.
[32] Ms Lethbridge submitted that Heartland had expressly turned its mind to the need to obtain the consent of Mr Burton for a material change in the facility limit (i.e. the email of 3 March 2021) but had failed to do so. That was a breach of s 9C or at least the broad purposes of the legislation. She submitted that Heartland had an obligation to treat Mr Burton, as the guarantor, reasonably and in an ethical manner, including when breaches of the contract to which the guarantee applies have occurred or may occur or when other problems arise (s 9C(4)(c)).
[33] I reject those submissions. The legislation does not give rise to the duty of disclosure claimed. As a matter of statutory interpretation, the contention that s 9C applies to the guarantee here is flawed. That is because the scheme of the legislation makes it abundantly clear that s 9C applies only to consumer credit contracts. The guarantee here is not in the terms of the legislative definition, which is defined in reference to a consumer credit contract. Section 9B specifically defines “lender” as “a creditor under a consumer credit contract”. The term “consumer credit contract” is defined in ss 5 and 11 of the Act. A credit contract is a consumer credit contract if the credit is to be used wholly or predominantly for personal, domestic or household purposes.7 The commercial guarantee at issue here does not fall within that definition.8
[34] I note that the same conclusion was reached by his Honour Associate Judge Bell in Black v ASB Bank Ltd.9 I accept that s 9C was enacted subsequent to that
6 CCCFA, s 3(2)(b).
7 CCCFA, s 11(1)(b).
8 In her written submissions Ms Lethbridge acknowledged that the CCCFA does not have “strict application” to this case where the lending was not consumer lending.
9 Black v ASB Bank Ltd HC Auckland CIV-2010-404-3252, 8 July 2011, at [79]–[81].
decision, but Parliament did not intend to extend the application of s 9C in the manner contended by Ms Lethbridge. An important change of that kind would have involved fundamentally different statutory language.
[35] In support of her contention for an ongoing duty of disclosure, Ms Lethbridge also relies on the English decision Lloyds TSB Bank PLC v Shorney.10 In that case, several increases in the principal obligation were made by Mr Shorney without disclosure to his co-guarantor, Mrs Shorney, who had granted a mortgage in respect of a finite debt (£150,000). While the guarantee purported to exclude Mrs Shorney’s equitable rights, the creditor bank was not entitled to put the guarantor in a position in respect of the debtor that she had not reasonably anticipated.11
[36] I agree with the submission of Mr Vinnell, for Heartland, that the Shorney decision is readily distinguishable. The guarantees given by Mrs Shorney’s co- mortgagor/husband deprived her of her subrogated rights; she was put in a position that she had not reasonably expected when the bank sought to enforce guarantee liability beyond the agreed limit of £150,000. Mrs Shorney had no involvement or knowledge about the additional debt. That is not the case here.
[37] Shorney was considered by Stevens J in Krtolica v Westpac Banking Corporation.12 That case concerned a guarantor’s liability for an overdraft which had increased over time. Non-disclosure of overdraft extensions was asserted as a defence.
[38] Westpac contended that it had no duty to disclose further principal debt advances to the guarantors. The only duty was an initial one, to disclose unusual features prior to the guarantee being entered. Westpac acknowledged that a guarantee may be discharged where the principal obligation is varied but sought to distinguish its position from Shorney because the relevant guarantee was granted in respect of a running account rather than a finite debt.13 Furthermore, it argued that the guarantee expressly anticipated that further facility advances might occur.
10 Lloyds TSB Bank plc v Shorney [2001] EWCA Civ 1161, [2002] 1 FLR 81.
11 See Krtolica v Westpac Banking Corporation [2008] NZCCLR 24, at [132].
12 Krtolica v Westpac Banking Corporation, above n 11.
13 Krtolica v Westpac Banking Corporation, above n 11, at [131]–[133].
[39] Stevens J referred to the position at common law that there is no complete duty of disclosure by a creditor to a guarantor.14 He noted that in Westpac Banking Corporation v McCreanor, Hardie Boys J had outlined that a creditor only has to make disclosure when something has occurred between the creditor and principal debtor that the guarantor could not be expected to know.15 Stevens J also noted that the various dicta, including McCreanor, emphasised that a disclosure only has to be made to an intending surety.16 The authorities appear to exclude any continuing duty of disclosure.
[40] As a result, Stevens J held in Krtolica that there was no continuing duty of disclosure. He stated:17
This is not to say that, should there be some material (uncontemplated) alteration to the principal obligation, there may not be grounds for discharge of the guarantee. However, in the present case the possibility of alterations to the wholesale term loan facility was contemplated by the parties.
[41] Stevens J further observed that prior to signing the guarantee the guarantor received legal and accounting advice.18 Given her knowledge of the business, she was also familiar with the financial information of the borrower company. She understood the commercial rationale for the expansion, which prompted the increase to the lending. His Honour held that she was in a position to make an informed decision about entering into the guarantee.
[42] In substance, this case is the same as Krtolica. There was no ongoing duty of disclosure by Heartland to communicate directly with Mr Burton and to obtain his express consent to the impugned variations to the facility limit. The contractual arrangements Mr Burton agreed to and which he personally put in place expressly contemplated changes to the facility limit.
[43] Importantly, ACL, in accordance with section 2 of the overdraft facility agreement of 2018 (specifically, under the heading “facility limit”), expressly agreed
14 Krtolica v Westpac Banking Corporation, above n 11, at [127].
15 Westpac Banking Corporation v McCreanor [1990] 1 NZLR 580 at 582.
16 Krtolica v Westpac Banking Corporation, above n 11, at [129].
17 Krtolica v Westpac Banking Corporation, above n 11, at [141].
18 Krtolica v Westpac Banking Corporation, above n 11, at [16].
to the variations. It acted through and with the express authority of Mr Burton’s co- director, Mr Paul. Heartland was entitled to rely on Mr Paul’s authority to bind ACL.
[44] Throughout the whole period Mr Burton remained a director of ACL with all of the duties that that entailed. He was legally represented, and his solicitor executed the guarantee as a trustee. As a director of ACL, he was in the best position to monitor its finances and be aware of its banking obligations and requirements. It may have been his expectation that he would be kept in the loop as far as banking financing was concerned, but it was principally his responsibility, and not Heartland’s, to ensure that ACL and/or Mr Paul took the necessary steps to meet the company’s banking obligations.
[45] The guarantee that Mr Burton signed was an all-obligations guarantee. The contractual obligations which Mr Burton guaranteed included Heartland’s entitlement to allow payments to be debited to the overdraft account that were in excess of the limit.
[46] Mr Burton was aware of difficulties with the company overdraft being exceeded during 2020 and was a party to the restructuring arrangements which saw the company overdraft brought back within its limits (as a result of the business support facility).
[47] All of the transactions that occurred during the impugned period of December 2020 to June 2021 (when there was no direct communication or consent obtained from Mr Burton) related to the payment from the company overdraft of obligations pursuant to direct debit authorities or the Ipayroll arrangements, of which Mr Burton was aware of or set up. As Mr Vinnell submitted, in essence ACL “helped itself” to credit through the company overdraft by failing to make funds available to meet these obligations.
[48] Had Heartland stopped the principal and interest instalments payable under the term loan and the support facility from the company overdraft account, then the debts under those accounts (for which Mr Burton was also liable) would simply have increased.
[49] In June 2021, Mr Burton was expressly put on notice by Heartland about the facility limit being exceeded. In August 2021, he signed ACL’s financial statements recording that the overdraft balance was in excess of the limit. However, at that time Mr Burton did nothing to address the issue. At the very least he could have withdrawn his guarantee in respect of further liability at that stage.
[50] I accept that Heartland expressly acknowledged in its email of 3 March 2021 that an increase in the overdraft would require support from Mr Burton. However, there is no basis for inferring that Heartland knew that Mr Burton had not consented, even if (at best) it was poor judgment/practice to have failed to confirm Mr Burton’s consent. I note that in his letter to Heartland of 30 June 2022, Mr Burton accepted that it was not Heartland’s responsibility “to police whether or not Justin [Mr Paul] and I are communicating.”
[51] I also accept that during the relevant period Mr Paul was looking to obtain funding from Heartland to purchase ACL shares from Mr Burton. However, there is no probative evidence to somehow make that factor relevant to the question of whether Heartland owed and breached a duty of disclosure. There is no basis for suggesting that Heartland somehow improperly and deliberately excluded Mr Burton from communications about the variations to the facility limit.
[52] I further find that there has been no breach of cl 7.2 of the guarantee dated 27 November 2020. That clause is headed “How we will communicate”. It is in essence a procedural provision setting out how Heartland is required to give “notices and other formal communications” to guarantors. It also gives Heartland the discretion to communicate indirectly. There was no breach by Heartland of that clause. It gave notice to ACL and also to Mr Paul. The clause provides no basis for the imposition of an obligation on Heartland to communicate directly and separately with Mr Burton and to obtain (in addition to the express consent of the company through Mr Paul) his consent to the impugned variations.
[53] For all these reasons I find that there is no reasonably arguable case that Heartland owed and breached a duty of disclosure, as contended for by Mr Burton.
Issue (b) – Evidence demonstrating quantum of liability
[54] I reject Mr Burton’s contention that as a matter of evidence, Heartland has not established the quantum of his liability. The position is clearly set out in Mr Vinnell’s quantum memorandum of 4 August 2023 and is clearly supported by the evidence, including bank statements contained in the common bundle. Ms Lethbridge’s submissions on this point are make-weight.
Conclusion
[55] I find that Heartland has established that Mr Burton, as the defendant, has no defence to the summary judgment application. I accordingly grant Heartland’s application.
Result
[56]I make the following orders:
(a)I grant Heartland’s application for summary judgment;
(b)I enter judgment against Mr Burton and in favour of Heartland in the sum of: $1,269,888.86
(c)I award interest as follows:
(i)Interest on the sum of $806,604.92 under the overdraft at the rate of 21.19 per cent per annum ($468.27 per day) from 2 November 2022 to 7 August 2023 (279 days) as pleaded in the statement of claim at [8.6], [8.10],
[8.13] and [29]: $ 130,647.33
(ii)Interest on the sum of $108,331.07 under the term loan at the rate of 19.95 per cent per annum ($59.21 per day) from 2 November 2022 to 7 August 2023 (279 days) as pleaded
(iii)
in the statement of claim at [10.8], [10.11] and [31]: $ 16,519.59
Interest on the sum of $354,952.87 under the support facility at the rate of 14.50 per cent per annum ($141.01 per day) from 2 November 2022 to 7 August 2023 (279 days) as pleaded
in the statement of claim at [13.10],
[13.14] and [33]:
$ 39,341.79
Total: $1,456,397.57
(iv)Interest at the relevant contractual rates on the amounts owing from the date of judgment until date of payment pursuant to s 22 of the Interest and Money Claims Act 2016.
[57] Mr Burton is to pay costs to Heartland on a solicitor/client basis in accordance with the contractual arrangements. Heartland is to file a memorandum containing the quantum sought and supporting invoices.19
Andrew J
19 See Black v ASB Bank Ltd [2012] NZCA 384. See also Edel Metals Group Ltd v Geier Ltd [2018] NZCA 494.
0
2
0