Herbert v USAR Napier Limited
[2022] NZHC 1783
•22 July 2022
IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY
I TE KŌTI MATUA O AOTEAROA AHURIRI ROHE
CIV-2021-441-91
[2022] NZHC 1783
BETWEEN MALCOLM ANDREW HERBERT
Applicant/Judgment Debtor
AND
USAR NAPIER LIMITED
Respondent/Judgment Creditor
CIV-2021-441-90 BETWEEN
USAR NAPIER LIMITED
Judgment CreditorAND
STEPHEN PETER LUNN
Judgment Debtor
Hearing: 13 May 2022 Appearances:
D J O’Connor for Judgment Debtor in CIV-2021-441-90
J K Mahuta-Coyle for Judgment Debtor in CIV-2021-441-91 S Lowery for Judgment Creditor in both proceedings
Judgment:
22 July 2022
JUDGMENT OF ASSOCIATE JUDGE JOHNSTON
[1] These are applications to set side bankruptcy notices served by the judgment creditor, USAR Napier Ltd, on the judgment debtors, Stephen Peter Lunn in the 90 proceeding and Malcolm Andrew Herbert in the 91 proceeding.
[2] The judgment debts were incurred in litigation between USAR and a number of defendant parties. These included Mr Lunn and Mr Herbert in their capacities as trustees of certain trading trusts. Those trusts were involved in a major development project in Napier. In judgments dated 5 October 2021 and 4 February 2022,
HERBERT v USAR NAPIER LIMITED [2022] NZHC 1783 [22 July 2022]
Associate Judge Lester entered judgment in USAR’s favour against, inter alia,
Mr Lunn and Mr Herbert.1
[3] There is no doubt that these judgments were entered against them in their personal capacities. USAR subsequently served the bankruptcy notices dated 16 November 2021 on Mr Lunn and Mr Herbert. Mr Lunn and Mr Herbert commenced these proceedings on 7 December 2021 applying to set aside the bankruptcy notices.
[4] Those applications were set down to be heard on 13 May 2022. In the meantime, the defendant parties in the original litigation had appealed against Associate Judge Lester’s judgments and the appeal had been set down to be heard on 8 June 2022.
[5] In the days leading up to the 13 May 2022 fixture, counsel for Mr Lunn and Mr Herbert applied to vacate the fixture. Their contention was that as the appeal had been set down to be heard in the Court of Appeal, and, so it was contended, there was a reasonable prospect of this Court’s judgments being overturned, it would be wasteful of resources for these applications for orders setting aside the bankruptcy notices to be heard until the Court of Appeal’s judgment was available.
[6] In a minute dated 11 May 2022 I declined to vacate the fixture. I took the view that as the fixture had been in place for some time, all parties were prepared and ready to argue the matter and an adjournment was resisted by USAR, the most pragmatic course was to hear the matter as scheduled. At the conclusion of the hearing I indicated that I was reserving my judgment and that it might well be that the Court of Appeal’s judgment would be available before I issued mine. So it has transpired. The Court of Appeal’s judgment dismissing the appeal was delivered on 4 July 2022.2 It is therefore necessary to deal with these applications.
1 USAR Napier Ltd v Herbert [2021] NZHC 2639; and USAR Napier Ltd v Herbert [2022] NZHC 90.
2 Herbert v USAR Napier Ltd [2022] NZCA 288.
CIV-2021-441-90: Lunn
[7] Mr O’Connor opened his submissions by saying that Mr Lunn’s application was “simple”. He contends that Mr Lunn was never personally liable because of the terms upon which he executed the settlement agreement.
[8] Mr O’Connor relied on the seminal English case of Muir v City of Glasgow Bank.3
[9]In his speech Lord Cairns said: 4
… whether, in any particular case, the contract of a … trustee is one which binds him personally, or is to be satisfied only out of the estate of which he is the representative, is … a question of construction, to be decided with reference to all the circumstances of the case; the nature of the contract; the subject-matter on which it is to operate, and the capacity and duty of the parties to make the contract in the one form or the other. I know of no reason why [such a person] … entering into a contract for payment of money with a person who is free to make the contract in any form it pleases, should not stipulate by apt words that he will make the payment, not personally, but out of the assets of the [trust property].
[10]Lord Penzance’s speech in the same judgment included this passage: 5
To exonerate [a trustee from personal liability] it would be necessary to [show] that upon a proper interpretation of any contract he had made, viewed as a whole…the intention of the parties to that contract was apparent that his personal liability should be excluded; and that although he was a contracting party to the obligation the creditors should look to the trust estate alone.
[11] Mr O’Connor then referred to this Court’s judgment in NZHB Holdings Ltd v Bartells in which Baragwanath J described the law in similar language, confirming that whether a trustee was personally liable turned on the reasonable construction of the contract in question.6
3 Muir v City of Glasgow Bank (1879) 4 App Cas 337(HL).
4 At 355.
5 At 368.
6 NZHB Holdings Ltd v Bartells HC Auckland CIV-2000-404-1385, 10 June 2004 at [33]-[35].
[12] He also placed some reliance on Law Commission report concerning the law of trusts published in 2011.7 The relevant sections of the Commission’s report set out the elementary principles that:8
(a)because a trust is not an entity but a relationship, the trustee or trustees are prima facie personally liable for all liabilities incurred by them in acting in that capacity;
(b)it is possible for them to limit or exclude personal liability; and
(c)in order to do so clear language is required.
[13] Importantly, the report distinguishes between clauses in trust deeds limiting a trustee’s personal liability, and provisions in contracts between trustees and third parties doing the same.9 The former operates as between trustees and beneficiaries (although it may have consequences for third parties in relation to rights of subrogation). The latter operates as between trustees and third parties. This case is firmly within the latter category of case.
[14] What then is the aspect or aspects of the settlement agreement here upon which reliance is placed for the contention that the parties contracted on the basis that Mr Lunn was not personally liable?
[15] As recorded in the judgments of both Associate Judge Lester and the Court of Appeal, the settlement agreement was negotiated and executed immediately prior to the commencement of a trial in which USAR was claiming damages from the defendants for alleged breach of contract, recorded in a handwritten document entitled “Heads of Agreement”. The document makes no reference to the capacity in which it
7 Law Commission Court Jurisdiction, Trading Trusts and Other Issues: Review of the Law of Trusts Fifth Issues Paper (NZLC IP28, 2011).
8 At 81; citing GE Dal Pont Equity and Trusts in Australia (Thomson Reuters, Rozelle (NSW), 2011) at [23.120]; Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 (HCA) at 367; and Muir v City of Glasgow Bank (1879) 4 App Cas 337.
9 At 81; citing Vicki Ammundsen “The trustee’s liability – limited to assets or not?” New Zealand Tax Updater (CCH, 23 April 2009) at 1; Sovereign Homes Ltd v Meurant HC Auckland CIV-2006- 404-7394, 15 May 2007.
was signed by any of the parties. However, after Mr Lunn had signed it, it was sent by his solicitors to the solicitors acting for USAR under cover of an email which said:
I have attached the agreement signed by Steve Lunn. He has signed as a professional trustee on the basis that his personal liability is limited to the assets of the trust.
[16] On the strength of that email Mr O’Connor submits that USAR is not entitled to pursue Mr Lunn personally for the amount of the judgment entered against him. Instead, it is contended USAR may look directly to the assets of the trust.
[17] Here is how Mr O’Connor put the argument in his synopsis of submissions as amended during the course of the hearing:
Judgment debtor limited his liability. He assumed liability only as a trustee to the extent of the assets of the trust and did not assume personal liability for his own personal assets.
[18] In my view, there is a difficulty with this argument. Effectively, Mr Lunn is inviting the Court to consider a defence that would have been available in the proceeding in which judgment was obtained, but apparently not argued at first instance, or in the Court of Appeal. The essential argument being advanced is that USAR’s claim against Mr Lunn was flawed in the first place and that this Court should not have entered judgment against him personally.
[19] Having regard to the terms of ss 36 and 37 of the Insolvency Act 2006, it is not out of the question on an application such as this for the judgment debtor to attack the underlying judgment. A debtor may contend that the Court should exercise its discretion to refuse to adjudicate him or her bankrupt, but it is for the debtor to show why an order should not be made.10 In doing so, a debtor may challenge the underlying judgment.11
[20] However, the cases indicate that such an argument will only be entertained where there is evidence of some underlying procedural or substantive flaw in the process which could not have been argued before the Court at first instance, and which
10 Baker v Westpac Banking Corporation CA212/92, 13 July 1993 at 4.
11 See Keung v Official Assignee [2020] NZHC 32; Re White, ex parte Silich [2020] NZHC 2107; and Ramsay Healthcare Australia Pty Ltd v Compton [2017] HCA 28.
has resulted in a material miscarriage of justice. There must be a proper basis for looking behind the underlying judgment.12 Further, whether a debtor has raised the claimed defence at the underlying judgment stage is a relevant consideration.13
[21] Even if the contention advanced by Mr O’Connor on Mr Lunn’s behalf is treated as being arguable, I cannot see that there was any flaw in the process. The argument that Mr O’Connor puts up is plainly one that might have been advanced before Associate Judge Lester but was not. Nor, as far as I can see, did it form any part of the argument in the Court of Appeal.
[22] In my view, it is not open to Mr Lunn to come back to the Court at this point and effectively contend that the judgment which has been the subject of detailed consideration in this Court and the Court of Appeal is wrong.
[23] In any event, I am not satisfied that there is any merit in the argument. Even if Mr Lunn’s solicitor’s covering email is to be treated as contractually significant, what it says is not that Mr Lunn was not accepting any personal liability but rather that he was seeking to limit the extent of his personal liability to the value of the assets of the trust, presumably on the basis that he has a right to be indemnified from those assets. Therefore, there is a sense in which the email confirmed, rather than disavowed. Mr Lunn’s acceptance of personal liability.
[24] For those reasons, I decline to set aside the bankruptcy notice dated 7 December 2021 served by USAR on Mr Lunn.
CIV-2021-441-91: Herbert
[25] The argument advanced on behalf of Mr Herbert by Mr Mahuta-Coyle was more orthodox. It was based on s 17 of the Insolvency Act and the contention that Mr Herbert had a cross claim that was advanced in the original proceeding before Associate Judge Lester. As Mr Mahuta-Coyle says in respect of that cross claim, that Associate Judge Lester dismissed it because “… the applicant and other defendants
12 Keung v Official Assignee [2020] NZHC 32 at [51].
13 See Re Wilson, ex parte Biomex Trustees Ltd [2020] NZHC 1038; and Re Ellerm, ex parte Bank of New Zealand HC Christchurch CIV-2011-409-1211, 11 October 2011.
could point to no loss as a consequence of any such misrepresentation and, therefore, any claim in that regard could not, or would not, succeed”. Mr Mahuta-Coyle’s submissions proceeded on the basis that Mr Herbert had appealed from Associate Judge Lester’s judgments and that the same argument —possibly enhanced by further evidence which Mr Herbert anticipated inviting the Court of Appeal to receive — would be advanced at the appellate level, and that if that contention was successful, the amount of the cross claim would exceed the amount of USAR’s judgment against Mr Herbert. The appeal has been dismissed. The Court of Appeal held that the new evidence sought to be adduced was not fresh, credible, or cogent.14 The substantive defence was considered not reasonably arguable.15
[26] Mr Mahuta-Coyle does not advance any other argument in favour of the order sought to set aside the judgment. In those circumstances, I have no option but to dismiss the application.
Conclusion
[27]The applications in both cases are dismissed.
[28] My preliminary view is that the judgment creditor in each case is entitled to its costs on a 2B basis, although, as the cases were argued together, there should be one set of costs for which each of the judgment debtors will be jointly and severally liable. However, as I have not heard from counsel on costs, if either of the judgment debtors, or for that matter the judgment creditor, wishes to contend for a different costs outcome they may do so. Should they wish to do so, a memorandum should be filed within 10 working days of the date of this judgment and response memoranda are to be filed within a further 10 working days. I will deal with costs on the papers.
Associate Judge Johnston
Solicitors:
Lawson Robinson, Napier for the Applicant in the 90 and 91 proceeding Anthony Harper, Christchurch for Respondent in both proceedings
14 Above n 2, at [36]-[37].
15 Above n 2, at [40]-[47].
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