Kumar Trustee company Limited v Chawdrapu
[2019] NZHC 649
•1 April 2019
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2015-404-3081
[2019] NZHC 649
BETWEEN KUMAR TRUSTEE COMPANY LIMITED
Plaintiff
AND
VENUGOPAL CHAWDRAPU
First Defendant
AND
PRASANNA GUMUDAVELLI
Second Defendant
Hearing: 26, 27, 28 March, 27 July 2018 Appearances:
P D Sills for Plaintiff
D Purusram & P S Rana for Defendants
Judgment:
1 April 2019
JUDGMENT OF PAUL DAVISON J
This judgment was delivered by me on 1 April 2019 at 3:00 pm Pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors:
Hornabrook MacDonald, Auckland Aurora Law Limited, Auckland
KUMAR TRUSTEE CO LTD v VENUGOPAL CHAWDRAPU [2019] NZHC 649 [1 April 2019]
Introduction
[1] The plaintiff, Kumar Trustee Company Limited (Kumar Trustee Ltd), the corporate trustee of the Ajay Kumar Family Trust (the Kumar Trust), sues the first and second defendants, respectively Venugopal Chawdrapu and Prasanna Gumudavelli, to recover the amount of an on-demand loan of $211,136 it made to them on 5 February 2010 (the loan). The plaintiff says that despite making demands of the defendants on 7 July 2015 and 17 September 2015 for repayment of the full amount of the loan and interest thereon, the defendants have failed to make any re-payment.
[2] The defendants (who are a married couple) deny the existence of the loan, and by way of an affirmative defence say that between December 2004 and 5 February 2010, the Kumar Trust held the residential property situated at 2/12 Arabi Street Sandringham, Auckland, on trust for the defendants as the beneficial owners of the property (Arabi Street). The defendants say that when the Arabi Street property was transferred to them by the plaintiff on 5 February 2010, the effect was simply to transfer the legal interest in the property to them. They say that notwithstanding the reference in the Agreement for Sale and Purchase of Arabi Street, to the purchase price being satisfied in part by means of a “deed of Acknowledgement”, there was in fact no acknowledgment of indebtedness and no loan was made to them by the plaintiff. The defendants say the reference to the existence of a vendor loan was merely a means to enable them to raise bank finance, and that Kumar Trustee Ltd never in fact loaned them the money it now seeks to recover.
[3]The issue I must decide is whether Kumar Trustee Ltd did advance the sum of
$211,136 to the defendants by way of vendor finance at the time it transferred Arabi Street to the defendants in February 2010, or whether the defendants were at that time the beneficial owners of the Arabi Street property, and consequently they did not become indebted to the plaintiff at all.
Background
[4] In March 1999, Mr Ajay Kumar (Mr Kumar) commenced a one person mortgage and insurance brokering business under the name, Global Financial Services
Limited (Global). That company was operated out of the garage of his family residence at 7 Goldstine Place, Epsom.
[5] By deed dated 2 May 2001 Kumar Trustee Ltd was appointed as trustee of the Kumar Trust. Kumar Trustee Ltd was incorporated on 18 May 2001. Mr Kumar and his wife Mrs Poonam Agarwal are the sole shareholders and directors of Kumar Trustee Ltd, and both signed the Kumar Trust deed on the Company’s behalf. They are also beneficiaries of the Kumar Trust, along with their children, grandchildren and remoter issue.
[6] In early 2003, Mr Chawdrapu’s brother-in-law, who was at the time engaged by Mr Kumar to undertake web development work on Global’s website, suggested to Mr Kumar that he should employ Mr Chawdrapu, who had come to New Zealand from India in 2002 and was struggling to find suitable employment.1 Mr Kumar followed up the suggestion and Mr Chawdrapu commenced working at Global in April 2003.
[7] Rather than working for Global as an employee, Mr Chawdrapu elected to be engaged as a contractor for Global via his company, CRK Financial Services Limited (CRK). Mr Chawdrapu says he intended to also undertake other work elsewhere, and he wanted to be able to claim and deduct expenses from his income, thereby reducing his income tax liability. CRK was incorporated on 14 April 2003 with both defendants as sole shareholders and directors.
[8] On 4 April 2003, Mr Chawdrapu presented an “offer letter” to Mr Kumar in which he set out the essential terms on which he proposed to provide CRK’s services to Global for an initial term of three years at a starting rate for his time of $13 per hour.2 Although the proposed arrangement was for the engagement of CRK, some of the terms proposed involved employment terminology and conditions. For example: that the “salary” in the second year be calculated at $14 per hour; and that Global would pay Mr Chawdrapu three weeks’ holiday pay and public holidays on full pay.
1 In November 2002 Mrs Gumudavelli arrived in New Zealand to join her husband.
2 Prior to that Company’s incorporation.
[9] Mr Chawdrapu was accordingly engaged by Global on the basis of the terms set out in the offer document. His position was described as “mortgage broker support”.
[10] When Mr Chawdrapu commenced working at Global, he and Mrs Gumudavelli were renting the property at Arabi Street, where they had been living since February 2003. They were paying rent of $250 per week together with power, telephone and other services, but were not paying rates, insurances or body corporate levies.
[11] On 29 October 2004, the property manager representing the owner of Arabi Street notified them by letter, that the property had been put on the market for sale. The defendants were advised that once a sale had been arranged they would be given a minimum of six weeks’ notice to vacate the premises, should the purchaser require vacant possession.
[12] Mr Chawdrapu says that after receiving the advice regarding their apartment being on the market, he advised Mr Kumar and asked him whether he would consider buying the apartment and renting it back to him and his wife. Mr Chawdrapu says that Mr Kumar responded by offering to purchase the property for him and his wife. Mr Kumar disputes this account. He says that initially Mr Chawdrapu intended to purchase the Arabi Street property himself, with financial assistance from relatives and friends in India.
[13] The arrangements made between the parties regarding the purchase and ownership of Arabi Street lie at the heart of their dispute over whether Kumar Trustee Ltd loaned any money to the defendants and whether they are liable to repay it.
The purchase of Arabi Street – November 2004
Mr Chawdrapu’s evidence regarding the purchase of Arabi Street
[14] Mr Chawdrapu says that he approached Mr Kumar in either late October or early November 2004 and told him that the Arabi Street apartment where he and his wife had been residing was on the market for sale. He says that he explained to Mr Kumar that he and his wife did not have sufficient money to pay a deposit and were
not able to purchase the apartment, and asked whether Mr Kumar would consider buying it and renting it back to them. He says that he made the suggestion because he thought that if Mr Kumar purchased the apartment, he and his wife would not have to move.
[15] Mr Chawdrapu says that to his surprise, Mr Kumar responded saying that he would buy Arabi Street for the defendants. He says that Mr Kumar explained that he wanted to help the defendants and reward Mr Chawdrapu for being a loyal employee. Mr Chawdrapu says that Mr Kumar told him he wanted to secure a long-term commitment from him to continue working for Global.
[16]Mr Chawdrapu says that in their discussion of the details, Mr Kumar said:
(a)that he would take out a bank loan for 100 per cent of the purchase price;
(b)that the defendants would make the mortgage payments, pay the Auckland Council rates and also pay the body corporate levies while the apartment was in Mr Kumar’s name;
(c)that at some future point in time he would transfer the apartment into the defendants’ names and they would take over the balance of the loan owing from that time.
[17] Mr Chawdrapu says that he and his wife agreed to Mr Kumar’s proposal. He says that Mr Kumar then asked him to obtain the landlord’s contact details and negotiate an agreement to purchase Arabi Street. He says that he then contacted the owner and negotiated to purchase the property for $185,000, which was subsequently increased to $187,500. He says that after the purchase price had been agreed between himself and the owner, he advised the vendor that Mr Kumar was to purchase the property for him. He says that an agreement for sale and purchase was then drawn up and signed by the owner as vendor and by Mr Kumar for Kumar Trustee Ltd as purchaser.
Mr Kumar’s evidence regarding the purchase of Arabi Street
[18] Mr Kumar has a different account of the purchase. He says that Mr Chawdrapu had already entered into an agreement to purchase Arabi Street before the matter was first raised with him. He says that it was after Mr Chawdrapu learned that he was unable to obtain financial assistance from his relatives in India, that he approached Mr Kumar and raised the possibility of him purchasing the property and renting it to back to the defendants. Mr Kumar says that Mr Chawdrapu was very worried about defaulting on the agreement, and that it was in those circumstances that he was approached as to whether he would be interested in purchasing the property.
[19] Mr Kumar says that he wanted to help Mr Chawdrapu and at the same time saw the opportunity to buy an investment property that would be rented to reliable tenants.
[20] Mr Kumar says it was decided that Kumar Trustee Ltd would purchase Arabi Street for the Kumar Trust.
[21] Mr Kumar says that when he became involved, the vendor already knew that there was an issue as to whether Mr Chawdrapu had sufficient finance available to complete the purchase, and the vendor proposed increasing the sale price to $190,000. Mr Kumar says that he negotiated directly with the vendor, and as a result it was agreed the purchase price would be increased, but only by $2,500, to $187,500.
The Agreement for Sale and Purchase, financing and settlement of Arabi Street.
[22] On 10 November 2004 the vendor, Ms Lily Teo who resided in England, sent an email to Mr Chawdrapu saying:
Thank you very much for your improved offer of NZ $185,000. I am very pleased to say that it is accepted.
…
I am very pleased that we have reached an agreement. I am sure you will find it a good property to own and hope that you will continue to be very happy there.
[23] On 11 November 2004, Ms Teo sent Mr Chawdrapu another email in which she provided her New Zealand solicitor’s name and details and said that she was looking forward to receiving a sale and purchase agreement. The emails sent to Mr Chawdrapu by Ms Teo make it clear that there had been previous negotiations between them and that the agreed price of $185,000 represented a higher price than had been previously offered.
[24] On 19 November 2004, a Land Information Memorandum (LIM) prepared by Auckland City was sent to Global for the attention of Mrs Agarwal.
[25] On 23 November 2004, Mr Chawdrapu signed and entered into an unconditional written Agreement for Sale and Purchase of Arabi Street, with settlement scheduled for 10 December 2004. The agreement names Ms Teo as the vendor and Mr Chawdrapu “and/or nominee” as purchaser. The purchase price of
$185,000 as originally written on the agreement is deleted and replaced with $187,500.
[26] On 30 November 2004 Davies Valuations Ltd forwarded a report to Global in which they valued the apartment at $197,500.
[27] On 1 December 2004, Kumar Trustee Ltd paid the deposit of $18,750 to the vendor’s solicitors, out of the Kumar Trust’s funds. On 2 December 2004, Global submitted an application to the National Bank on behalf of “the Kumar Trust”, naming Mr Kumar and Mrs Agarwal as applicants seeking to borrow $188,000 for a term of one year, with repayments of $700 per fortnight. The application was signed by Mr Kumar and his wife and set out details of their financial position and assets. The application offered security over both Arabi Street and also the Kumar family residence at 7 Goldstine Place Epsom, which was held by Kumar Trustee Ltd. The purpose of the loan was stated as: “To purchase Investment property”.
[28] By letter of 6 December 2004, the National Bank made an offer of a home loan to Kumar Trustee Ltd. The terms of the loan were for a principal sum of $188,000 for a term of 219 months and with a fixed interest rate period of 12 months at seven percent per annum, and fortnightly repayments of $700 to be debited from Kumar Trustee Ltd’s National Bank Account. The loan was to be secured by a first charge
registered mortgage over the Arabi Street property together with such existing securities as were held by the National Bank from Kumar Trustee Ltd. The National Bank already held security over 7 Goldstine Place, together with Mr Kumar’s personal guarantee.
[29] Settlement of the purchase took place on 21 December 2004, with $168,750 of the National Bank loan funds being used to meet the purchase price. Of the balance of the loan funds, $18,750 being the amount of the deposit previously paid by Kumar Trustee Ltd, was retained and thereby reimbursed to the plaintiff. The other $500 appears to have been paid towards transactional costs. Kumar Trustee Ltd then became the registered proprietor on the certificate of title.
[30] On the same day as settlement took place, Mr Chawdrapu entered into a written residential tenancy agreement with “the Kumar Trust” for a periodic tenancy in respect of Arabi Street, which provided for weekly rent of $250 to be paid fortnightly into the Kumar Trustee Ltd bank account with the National Bank.
[31]Although the tenancy agreement provided for fortnightly rent payments of
$500, Mr Chawdrapu agreed to pay $700 per fortnight. These payments were made by automatic payments by CRK into the Trust’s account. The National Bank automatic payment authority signed by Mr Chawdrapu described the payments as, “RENT”.
[32] Mr Kumar says that the $700 per fortnight rental payments were paid in accordance with an agreement between himself and Mr Chawdrapu that Mr Chawdrapu would pay sufficient rent to cover the mortgage payments to the National Bank. Mr Kumar says as he and his wife also provided furniture for the apartment at Mr Chawdrapu’s request, the extra $200 per fortnight was because Kumar Trustee Ltd was providing a furnished apartment.
[33] Mr Chawdrapu says that after settlement, he reimbursed Mr Kumar for Kumar Trustee Ltd’s costs incurred in respect of solicitors’ fees and disbursements, the LIM report, and valuation fees. Mr Chawdrapu says that he made the payments because Mr Kumar told him it was now the defendants’ property.
[34] Mr Kumar denies ever telling Mr Chawdrapu and his wife that the property was theirs. He says that Kumar Trustee Ltd’s purchase of the property was not without risk to the Kumar Trust as the whole of the purchase price had been borrowed by Kumar Trustee Ltd from the National Bank, and the Bank held security over the Kumar family residence at 7 Goldstine place, together with Mr Kumar’s personal guarantee.
[35] Following settlement of the purchase, Kumar Trustee Ltd treated the Arabi Street property as a trust asset in its annual financial accounts. The payments received as rent from the defendants via CRK were accounted for as income from “residential rent”, and the National Bank loan was accounted for as a “non-current liability”. Mr Chawdrapu accounted for the payments of “rent” in the CRK financial statements as business expenses.
[36] Mr Kumar says that initially Kumar Trustee Ltd paid the rates and other outgoings on the property, but as the tenant was a company he considered the arrangement to effectively be a commercial tenancy, and proposed to the defendants that they, or CRK, should also meet the rates and outgoings. He says that Mr Chawdrapu was prepared to pay the rates and other property expenses as he could treat them as expenses in the CRK accounts, and reduce the amount of income tax he was otherwise required to pay. Mr Kumar says that Mr Chawdrapu negotiated increases in his fees from time to time, to reflect any increases in the rates or the rental as determined by the mortgage payments the defendants were making.
[37] Whenever the amount payable under the mortgage was increased by the National Bank, the payments made by the defendants, via CRK, were also increased, so that the “rent” payments made by the defendants equated to the amount Kumar Trustee Ltd was required to pay the bank in mortgage payments.
[38] Following settlement of the purchase the defendants thereafter continued to make payments of “rent” to Kumar Trustee Ltd until February 2010.
VPS Financial Services Ltd
[39] On 5 June 2007, the defendants incorporated VPS Financial Service Ltd (VPS Financial) and were the directors and shareholders of the company. Thereafter, Mr
Chawdrapu provided his services to Global via VPS Financial. The original hourly rates which were established when Mr Chawdrapu first commenced working for Global in 2003 and which applied for three years, were subsequently increased. Prior to the incorporation of VPS Financial, Mr Chawdrapu’s services were charged to Global by CRK. Mr Chawdrapu generally charged Global for 40 hours per week but did not work exclusively for Global. He also worked for other clients and sought to increase CRK’s revenue. By 2010 Mr Chawdrapu’s remuneration from Global had increased to $115,000 made up of: salary of $60,000; $50,000 fees paid to VPS Financial; $5000 being the cost of air fares for the defendants’ travel to India which was paid for by Global. Mr Chawdrapu himself determined the composition of his remuneration and how it was divided between salary on which Global paid PAYE, and fees charged by VPS financial.
Lump sum payments – increased payments - and rates
[40] Mr Chawdrapu says that between 2005 and March 2008 he and his wife made several lump sum payments to reduce the amount owing under the mortgage to the National Bank. He says that the following payments were made:
(a) $12,000 on 21 December 2005.
(b) $16,000 on 18 December 2007.
(c) $15,000 on 4 March 2008.
[41] He says that in addition to making the lump sum payments, the defendants increased their regular fortnightly payments whenever he received a pay increase. He says that the initial payments were made at the rate of $700 per fortnight between 5 January and 19 December 2005. From 4 January 2006 to 20 October 2008 payments of $800 per fortnight were made, and from 3 November 2008 to 5 February 2010 payments of $1000 per fortnight were made. Payments in those amounts are confirmed by the bank statements of the defendants in which VPS refers to the payments as rent paid to the Ajay Kumar Family Trust.
[42] In addition to paying Auckland Council rates, the defendants via CRK also paid body corporate levies relating to Arabi Street.
[43] Mr Kumar denies that any lump sum payments were made by the defendants to reduce the National Bank mortgage. He says that on 21 December 2005, being the date when Mr Chawdrapu says a lump sum payment of $12,000 was made, the Arabi Street National Bank mortgage came off its fixed term interest rate. The loan account records of the Kumar Trust show that a $12,000 payment was made, but there is no banking record of the defendants to show that either they or CRK made the payment. Similarly, says Mr Kumar, there are no bank records of the defendants or CRK to show payment of the sum of $16,000 made on 18 December 2007. As regards the $15,000 sum claimed to be paid on 4 March 2008, Mr Kumar says that while there is evidence by way of an email from Mr Chawdrapu to the National Bank on that day requesting that the bank transfer that sum from his account to Kumar Trustee Ltd’s loan account, that payment is a repayment of money advanced to Mr Chawdrapu, and not a voluntary lump sum mortgage reduction. Mr Kumar says that in any event, any payment reducing the National Bank mortgage over Arabi Street was for the benefit of the Kumar Trust and not the defendants.
[44] Furthermore, says Mr Kumar, if those payments had in fact been made, then when Mr Chawdrapu subsequently prepared the agreement to purchase the Arabi Street property in February 2010, he would have taken them into account and claimed a credit.
[45] Mr Kumar says that Mr Chawdrapu was constantly borrowing money from either the assets of the Kumar Trust or from Global, and any lump sum payments were made for the purpose of repaying those borrowings. Mr Kumar says that having regard to the close nature of the relationship that had developed between the two of them, Mr Chawdrapu was able to borrow money whenever he wanted and was not charged interest on those borrowings. He says that money was often advanced to Mr Chawdrapu without any written record or acknowledgement of it, although sometimes there was a note prepared by Mr Chawdrapu recording the borrowing. Mr Kumar refers to a number of documents prepared by Mr Chawdrapu to confirm his receipt of
temporary loans. An example is Mr Chawdrapu’s letter to the Trust dated 15 February 2007 in which he wrote:
Re: $10,745.00 temporary loan from Ajay Kumar Family Trust
I hereby confirm that I have received a temporary loan of $10,754.00 (Ten Thousand Seven Hundred Forty Five Dollars only) from Ajay Kumar Family Trust.
I further confirm that I have requested you to transfer the aforesaid loan amount in the name of Michael Hong & Co Trust account [account details] maintained with ASB Bank.
The said loan will be repaid with in [sic] a period of 2 months. I hereby give my personal guarantee for the said loan.
[46] The plaintiff has produced in evidence a number of other similarly worded letters signed by Mr Chawdrapu and addressed either to the Kumar Trust or to Global. The amounts of those temporary loans are: $6000; $17,000; $89,000; and $14,000. Mr Chawdrapu refers in two of his letters to requiring the loan funds: to make a payment to Forex NZ 2000 Ltd ($89,000); and to “pay the college fee for my nephew” ($14,500).
[47] Mr Kumar says that as well as the five temporary loans just mentioned, there were a number of other temporary loans borrowed by either Mr Chawdrapu or CKL between August 2004 and October 2008 to meet expenses such as Accident Compensation Commission levies and fares for travel to India. The amounts of these temporary loans were not recorded in letters but are noted on Global or Trust cheque- book stubs as payments to Mr Chawdrapu or to CFK Financial. These amounts range between approximately $500 and $5000.
[48] There are also a number of payments made by either the defendants or VPS to Kumar Trustee Ltd which are evidenced by entries on their bank statements. These payments are for amounts of: $1,750 (7 January 2007) ; $5000 (28 December 2007);
$15,000 (3 March 2008); $5000 (18 February 2009); $18,000 (23 March 2009);
$5000(15 May 2009); $2000 (16 November 2009) and the payment of $33,863.11 (5 February 2010). Mr Kumar says that none of those payments were made to either Kumar Trustee Ltd or Global for the purpose of making lump sum reductions of the Arabi Street mortgage.
Mr Chawdrapu asks Mr Kumar to transfer Arabi Street to the defendants
[49] In late 2006 or early 2007, Mr Chawdrapu asked Mr Kumar to transfer Arabi Street into the defendants’ names. By that time, they had already been paying the mortgage and other outgoings for the property for two years. Mr Chawdrapu says that in addition to paying the mortgage the defendants had also made a lump sum payment to the National Bank to reduce the principal sum under the mortgage. Mr Chawdrapu says that Mr Kumar made an excuse and asked the defendants to continue with the existing arrangements. Around that same time Mr Chawdrapu and his wife purchased a house in Mt Roskill as an investment with a view to perhaps moving there when their infant son started school at age five.
[50] In late 2009 or early 2010, Mr Chawdrapu says he again asked Mr Kumar to transfer the Arabi Street apartment to the defendants. Mr Chawdrapu says that Mr Kumar agreed that it was time to transfer the apartment. By that time the defendants “rent” payments had reduced the National Bank mortgage from the original $188,000 to an amount just over $75,000. The defendants obtained a market valuation of Arabi Street at $320,000. Mr Chawdrapu says that Mr Kumar asked him to prepare an agreement for sale and purchase.
The “gifting” letter
[51] By letter dated 11 January 2010 and addressed “To whom it may concern”, Mr Kumar stated:
Sale of property at 2/12 Arabi Street, Sandringham, Auckland
This is to certify that I have given $245,000.00 (Two Hundred Forty Five Thousand Dollars only) as an interest free loan to Mr. Venugopal Chawdrapu & Mrs. Prasanna Gumudavelli to purchase a property at 2/12 Arabi Street, Sandringham, Auckland.
The said loan carries no interest and will be repaid by gifting to them every year as per New Zealand Law until the said amount is adjusted.
For any further information in this regard, please feel free to contact me.
[52]The letter was signed:
Mr. Ajay Kumar
Trustee
Ajay Kumar Family Trust
This was despite the fact that Kumar Trustee Ltd was the actual trustee of the Kumar Trust, of which Mr Kumar and Mrs Agarwal, are the directors.
[53] It is relevant to note that the $245,000 sum represented the whole of the value of the equity in Arabi Street, as the outstanding balance of the National Bank loan at the time was approximately $75,000 and the property had been valued at and was to be purchased for $320,000. Mr Kumar says the letter was prepared by Mr Chawdrapu and presented to him for signing. He says that Mr Chawdrapu told him that the letter was required by the defendants to enable them to borrow the money they needed for the purchase of Arabi Street. Mr Chawdrapu told him that the defendants had recently purchased an investment property in Mt Roskill with a high loan to value ratio, and little equity. Mr Kumar says that Mr Chawdrapu included the reference to gifting in the letter in order to show the bank, and to cover any shortfall in the defendants’ equity position for borrowing. Mr Kumar says that he was assured by Mr Chawdrapu that the letter would only be used in an extreme situation in which he was otherwise unable to obtain finance for the purchase from a bank. Mr Kumar says that he was further assured by Mr Chawdrapu that he would never demand any gift to be made.
[54] Mr Kumar says that when asked to sign the letter drafted by Mr Chawdrapu, he told him that he did not want the letter to make any statements that were incorrect or legally impermissible. He says that he accordingly asked Mr Chawdrapu to include the words “ …as per New Zealand Law…”, and that once that amendment was made to the letter he had signed it. Mr Kumar says that he subsequently reviewed the Kumar Family Trust Deed and decided that as the defendants were not beneficiaries of the trust, Kumar Trustee Ltd could not make gifts to them from trust property. He says he advised Mr Chawdrapu that he had reached that conclusion, and there was no further discussion regarding gifting. Thereafter he says, both men proceeded on the understanding that the sale would proceed upon the basis of “straight vendor finance”.
[55] Mr Kumar says that soon thereafter Mr Chawdrapu prepared the agreement for the sale and purchase of Arabi Street in which he made no mention of any gifting by Kumar Trustee Ltd to the purchaser. He says the agreement provided for payment of
the purchase price by a sum equal to the bank loan and the balance by way of an acknowledgement, with no mention of gifting.
The sale and transfer of Arabi Street to the defendants
[56] Mr Kumar says around that time, in 2009-2010, he and his family were under considerable stress, because both his wife and his son were unwell and both were receiving specialist medical care. Mr Kumar says he was spending most of his time with his family and very little time at work. He says that during that stressful time Mr Chawdrapu took advantage of the situation and pressed him to sell Arabi Street to him for an amount based on a registered valuer’s valuation report.
[57] The defendants set about applying to banks for finance. Their first loan application was made to Westpac and is dated 12 January 2010. The defendants applied for a loan of $250,000 and stated that they themselves would contribute the balance necessary to purchase Arabi Street for $320,000. In the application the defendants listed their assets as being their investment property at Mt Roskill, their car, their Kiwi Saver investments and their furniture. The 11 January 2010 gifting letter, signed by Mr Kumar, and referring to a gift of $245,000 appears to have been submitted with their application. The Westpac Credit assessment noting:
Deposit being gifted by Vendor. Gifting statement obtained still to be signed. Property was purchased 6 years ago by Vendor on behalf of [Mr Chawdrapu and his wife] and they have been servicing the debt since then. Now seeking to transfer the property into their own names and repay existing Mortgage. Gifting statement for $240,000 ( current value 320 less debt 75k)
[58] This explanation of the reasons for the loan application refers to information provided by the defendants to the bank in support of their application for finance and reflects both the contents of the gifting letter, and the understanding of the defendants of the basis upon which they had been meeting the mortgage payments, namely that the property had been purchased by Kumar Trustee Ltd for them, and that the proposed transfer would not require any further payment, other than repayment of the existing mortgage.
[59] However, Westpac declined their application on 21 January 2010. The Credit Manager commenting:
Current lending with [National Bank] has LVR of 94%, little else in the way of assets. Why would employer want to gift dep[osit]?....
[60] The defendants then applied to the ANZ Bank and the ASB Bank. In both these applications they sought a loan of $200,000.
[61] In their 21 January 2010 application to ASB, the defendants stated that they were seeking a loan of $200,000 to purchase the Arabi Street property and to pay family loans. They stated that they would contribute $120,000 of the purchase money themselves. In their list of assets they included their investment property at Mt Roskill, but made no reference to having any equity in the Arabi Street property. Under the list of liabilities they stated that they owed $100,000 to “friends.”
[62] Mr Chawdrapu says that he and Mr Kumar sat together when he drafted the agreement for sale and purchase. He says that Mr Kumar told him what to write in the agreement regarding purchase price being satisfied in part by a bank loan and the balance by way of a deed of acknowledgement. Mr Kumar disputes that account, and says that he did not sit together with Mr Chawdrapu while the agreement was drafted and he did not tell him what to write into the agreement. He says that the wording of the agreement is entirely Mr Chawdrapu’s, and not his.
[63] The agreement for the sale and purchase of Arabi Street is dated 15 January 2010. Pursuant to the agreement Kumar Trustee Ltd agreed to sell the property to the defendants at a price of $320,000. The price was based on a valuation prepared by Davies Batley Valuers Ltd for Mr Chawdrapu, and addressed to Westpac New Zealand Ltd. The agreement provided for a possession date of 22 January 2010; a “nil” deposit; and for the purchase price to be paid on settlement as follows:
(1)part payment equal to bank loan.
(2)balance by way of deed of Acknowledgement.
[64] The agreement was conditional upon the defendants as purchasers securing finance from “any lender”.
[65] On 25 January 2010, ASB made a loan offer to the defendants of $200,000 to assist with the purchase. The loan offer was accepted by Mr Chawdrapu the same day.
Settlement of the sale of Arabi Street to the defendants
[66] Mr Kumar and Mr Chawdrapu jointly instructed the same solicitor to act for both vendor and purchaser. They jointly instructed the solicitor to effect the settlement and to apply the cash sum of $108,863.11 received by Kumar Trustee Ltd as vendor from the defendants as purchaser, to repay the National Bank the sum of $74,166 to discharge the mortgage over Arabi Street, to pay the bank’s early repayment fee of
$250, and to pay the balance of $34,446.60 into Kumar Trustee Ltd’s bank account.
[67]The written joint instructions to the solicitor were as follows:
Vijay Naidu, Newton Law.
Re: Settlement of property at 2/12 Arabi St Sandringham, Auckland.
I agree and request you to please pay $108,863.11 to National Bank for the settlement of the above property.
The extra funds of $33,863.11 will be adjusted internally between Ajay Kumar and ourselves in Vendor Finance.
Venugopal Chawdrapu Ajay Kumar
[68] The sale and purchase agreement was settled on 5 February 2010. On settlement the defendants were required to satisfy the purchase price of $320,000 by payment of $108,863.11 in cash and the balance by way of a “deed of Acknowledgement”. Mr Kumar and Mr Chawdrapu knew the sum required to repay the National Bank mortgage was approximately $75,000, leaving a balance of
$33,863.11 from the $108,863.11 which was to be paid to Kumar Trustee Ltd. The balance of the purchase price of $320,000 was to be satisfied in the manner described in the settlement statement prepared by the solicitor as being, “BY: Acknowledgement of Debt - $211,136.89”. However, notwithstanding the terms of the settlement statement, no written acknowledgment of debt was prepared, or signed and produced on settlement.
[69] The defendants utilised $108,836.11 of the $200,000 ASB loan in settlement of the purchase of Arabi Street, and the balance of approximately $90,000 was applied towards the repayment of other personal borrowings.
[70] In the Kumar Trust’s financial accounts for the year ending 31 March 2010, Kumar Trustee Ltd accounted for the debt owing to it as a current asset described as “Vendor Finance/ Chawdrapu $245,000”. The $245,000 figure is clearly an error as it omits to account for the sum of $33,863.11 which was paid and received on settlement to be “adjusted internally …in Vendor Finance”. While the correct amount in the Kumar Trust’s financial accounts should have been $211,136.89, the balance of the sale price was thereafter consistently included in the Kumar Trust’s financial accounts for the financial years from 31 March 2010 to 31 March 2014 as a current asset.
The employment agreement and Mr Chawdrapu’s subsequent resignation
[71] In June 2011, Mr Kumar suggested to Mr Chawdrapu that all his services to Global should be provided as an employee of the company rather than as a contractor. After reading an article published in the media regarding individuals contracting their services, Mr Kumar had decided that having regard to the arrangements in place between Global and Mr Chawdrapu, that in substance his role was that of a full-time employee and an employment contract was required. While Mr Chawdrapu was initially reluctant to change the existing arrangements, he nevertheless signed a detailed employment contract with Global on 30 June 2011 in which his position was described as: “Senior Business Consultant”. The employment agreement was for a term of two years from the date it was signed and provided for an annual salary of
$70,000.
[72] The employment agreement contained provisions restricting the post- employment activities of Mr Chawdrapu including: non-competition; non- solicitation of clients; and non-solicitation of employees. The non-competition clause provides:
The Employee agrees that for a period of 2 years following the termination of their employment/resignation from employment or for whatever reason, they shall not, either personally, or as an employee, consultant or agent for any other entity or employer, carry on business in competition with the Employer.
[73] Mr Chawdrapu resigned from his position with Global on 30 August 2012. His last day as an employee was 2 November 2012. In his letter of resignation to Mr Kumar he wrote:
I appreciate the opportunities I have been given at [Global Financial Services] and your professional guidance and support for all these years.
[74] Mr Chawdrapu told Mr Kumar that he was leaving Global as he was purchasing a service station on Dominion Road, Auckland, and was borrowing funds from a relative who resides in the USA. However, on 4 February 2013, Mr Chawdrapu commenced employment at Squirrel Mortgage Brokers with responsibility for focussing on the “NZ Indian market”.
[75] On 13 February 2013, Global’s solicitors wrote to Mr Chawdrapu to advise him that Global alleged that in the course of his employment at Squirrel Mortgage Brokers he had: solicited Global’s clients and carried out work for them: misused Global’s confidential information; and caused Global loss. Global’s solicitors requested that Mr Chawdrapu provide a signed written undertaking regarding future compliance with the terms of his employment agreement with Global. Mr Chawdrapu later signed an amended version of the undertaking on 12 April 2013, that omitted the clauses included in the original draft undertaking requiring Mr Chawdrapu to comply with the provisions of the employment agreement relating to non-competition with Global personally, or as an employee of a competitor, and non-solicitation of Global’s clients.
[76] Mr Chawdrapu explains that following the correspondence from Mr Kumar’s solicitors in February 2013 and his provision of an amended undertaking in April 2013, he heard nothing more from Mr Kumar regarding the alleged debt and nothing from Global regarding his alleged breaches of the employment agreement. In September 2013 he and his wife sold Arabi Street. They had by that time transferred the title to their company, Shanu Holdings Ltd. The sale was settled on 30 September 2013 for
$416,000.
Demand for repayment of loan
[77] Mr Kumar says that at the time of Mr Chawdrapu’s departure from Global, he requested the repayment of the loan, on behalf of Kumar Trustee Ltd. Mr Kumar says that Mr Chawdrapu told him that as he was purchasing the service station he did not have any money at that time, but said that he would repay the loan when he could.
[78] Mr Chawdrapu says that the topic of a loan or repayment of a loan were never mentioned by Mr Kumar. He says that he overheard Mr Kumar telling another Global employee that if Mr Chawdrapu went into another mortgage broking business he would “destroy [him] completely”.
[79] Mr Kumar acknowledges that Kumar Trustee Ltd did not take any steps to recover the outstanding vendor finance debt until 2015. He says that the period between 2013 and 2015 was very busy for Global and he did not have the time or energy to pursue the matter. He says that in 2015 when he heard that the defendants had built a new house, he was upset that they had never approached him regarding settlement of the debt. He says that he assumed that the defendants must have sufficient funds to repay the loan together with interest, and he instructed counsel to make demand for repayment. On 7 July 2015, legal counsel for Kumar Trustee Ltd wrote to the defendants, making demand for repayment of the loan of $211,136.89 together with interest at the “High Court rate 7.5% from 6/2/2010 to 7/7/2015”, totalling $296,911.24. The defendants responded via their legal counsel denying liability and saying that the loan in respect of which repayment was demanded, “was not in fact a loan at all”.
Plaintiff’s submissions
[80] Mr Sills for the plaintiff says that when the Kumar Trust sold Arabi Street to the defendants in 2010, the sum of $211,136.89 was loaned to the defendants and documented as vendor finance. He says that the loan has not been repaid despite demands being made, and that the Kumar Trust is entitled to recover the principal sum and interest. Mr Sills says that while the defendants claim that the Arabi Street property had been purchased by the Kumar Trust for them in 2004 and that thereafter they were the beneficial owners of the property, they have failed to provide any evidence to support their claim that the vendor finance provided in 2010 was not in fact a loan.
[81] Mr Sills says that the plaintiff’s case is supported by the contemporaneous documents and the evidence is consistent with the Kumar Trust having loaned the defendants vendor finance to enable them to purchase the property in 2010.
[82] Mr Sills submits that Mr Chawdrapu’s evidence is inconsistent and lacks credibility. He notes that Mr Chawdrapu admitted in evidence that the defendants did not have any documents to support his assertions.
[83] Mr Sills says that the letter dated 11 January 2010 which was prepared by Mr Chawdrapu and refers to the sum of $245,000 being loaned to the defendants interest- free and to be repaid by means of annual gifting, was only intended to be provided to a bank so that it would treat the defendants’ application for finance more favourably and did not reflect the parties’ actual arrangement regarding vendor finance. Moreover, says Mr Sills, once Mr Kumar had checked the terms of the Kumar Trust Deed and ascertained that gifting was not possible, he told Mr Chawdrapu and thereafter he believed the letter would not be provided to the banks in support of loan applications.
[84] Mr Sills further submits that although Mr Chawdrapu himself prepared the applications made on behalf of the defendants to the banks for finance, no mention was made in any of them to the defendants’ beneficial ownership of an interest in Arabi Street. He submits that when a comparison is made between the contents of Mr Chawdrapu’s loan applications to the banks and his evidence, the inconsistencies demonstrate his lack of credibility. Mr Sills notes that if the defendants’ claim to beneficial ownership of Arabi Street was correct, and they had reduced the National Bank mortgage to $75,000 by 2010, there was no need for them to have obtained a valuation of the property to determine the sale price, as it would not have been necessary for the defendants to obtain loan finance of any more than $75,000 in order to clear the mortgage.
[85] Counsel submits that there are no contemporaneous documents which refer to the existence of a trust or to the Kumar Trust holding the property on trust for the defendants. On the other hand, says Mr Sills, all of the documents are consistent with the Kumar Trust owning the property outright and treating the property as an asset in its financial statements.
[86] Mr Sills further notes that despite the terms of the 11 January 2010 gifting letter, no gifting process was ever undertaken, and the defendants took no steps at any stage to request or require any gifting in reliance on the terms of the letter. Counsel
submits that the letter was only ever intended to be used by the defendants to assist them to obtain bank finance, and it was never intended to have any application to the terms upon which the Kumar Trust provided vendor finance to the defendants for their purchase in 2010. He submits that there being no stipulation by the Kumar Trust that the vendor finance it provided was on interest free terms, it is fair and reasonable that the defendants pay interest on the loan from the date of advance – being 5 February 2010. Alternatively, he submits that it was an implied term of the lending arrangements made between the parties that the defendants were to pay interest on the loan at a reasonable rate. Mr Sills submits that the interest rate of 7.5 percent per annum prescribed by s 87 of the Judicature Act 1908 is appropriate.
Defendants’ submissions
[87] The defendants deny that they are liable to pay anything to the plaintiff. They say that when the Kumar Trust purchased Arabi Street in 2004 it did so as trustee for them, and at all times thereafter they held the beneficial interest in the property. They say that the 2010 sale agreement was only intended to effect a transfer of the legal interest in the property from the Kumar Trust to them, and that the vendor finance loan referred to in the settlement statement was not intended to refer to an actual loan with them having any obligation to repay it. They say that as they were already the beneficial owners of the property when it was transferred into their names in 2010, the Kumar Trust was unable to provide any consideration for the so-called vendor finance, as it did not own or hold the beneficial interest in the property.
[88] Mr Purusram, for the defendants, submits that the evidence relating to the Kumar Trust’s purchase of the property in 2004 is consistent with Mr Chawdrapu’s claim that the purchase was made by the Kumar Trust upon the basis that it would hold the property on trust for the defendants. He submits that Mr Kumar’s claim to have stepped in at a late stage after Mr Chawdrapu had already entered into an agreement to purchase the property and after he realised that he would be unable to borrow the money required to complete the purchase from family and friends in India, is simply incorrect. He says that Mr Chawdrapu placed considerable reliance on Mr Kumar and trusted him to arrange the finance the defendants required. Mr Purusram says that Mr Chawdrapu had signed all the documents Mr Kumar requested and required including
the tenancy agreement, which he understood was required for the purpose of securing finance for the purchase.
[89] Mr Purusram says that Mr Chawdrapu’s reliance on and co-operation with Mr Kumar also explains his signing of the services contract instead of an employment agreement when he joined Global. He says that it was Mr Kumar who required the service contract as a means of avoiding employer responsibilities, and to secure tax advantages.
[90] Mr Purusram submits that although the payments they made were described as “rent”, they were in fact loan repayments. He says that the loan repayments were disguised as rent to ensure that the Kumar Trust could obtain loan finance for the purchase. Mr Purusram says that although the tenancy agreement provided for fortnightly rental payments of $500, the defendants commenced by making fortnightly payments of $700 being the sum required to service the plaintiff’s mortgage to the National Bank, which increased over time to $1,000 per fortnight to match the increase in mortgage payments. He submits that Mr Kumar’s explanation for the increased amount as being because the defendant had also been provided with furniture, lacks credibility and is unsupported by any documentation.
[91] Mr Purusram says that the defendants’ payment of body corporate levies and Auckland Council rates for the property is consistent with them being the beneficial owners. He submits that the evidence of the defendants should be accepted and establishes that there was an arrangement between them and the plaintiff in 2004 for the Kumar Trust to purchase and hold the property on trust for them.
[92] Mr Purusram submits that the sale and transfer of the property to the defendants in 2010 was merely giving effect to the trust and the 2004 arrangements made between the parties, and says that the defendants are not liable for any loan amount under the 2010 agreement for sale and purchase of the property. Mr Purusram says that the defendants rely on the 11 January 2010 letter as evidencing a clear arrangement for the gifting of any vendor finance sum.
[93] Mr Purusram accepts that the words, “balance by way of deed of acknowledgment” as appear in the 2010 agreement for sale and purchase would have reflected the actual intention of the parties had it referred to “acknowledgment of debt and deed of gifting”. He notes that the wording of the settlement statement was prepared by the solicitor acting for both parties, and says that there is no evidence that the settlement statement was sent to the defendants prior to settlement. Counsel notes that Mr Kumar’s wife was a member of the solicitor’s staff, and he questions the independence of the legal advice as to the nature and contents of the documents that were prepared by the solicitor.
[94] Counsel submits that Mr Kumar’s explanation of the purpose of the 11 January 2010 letter should be rejected. He says that it is relevant to note that the letter preceded the agreement for sale and purchase and yet the agreement does not have a “proper clause for vendor finance.” He says that it is also noteworthy that the plaintiff did not require the defendants to sign an acknowledgement of debt or loan document to evidence the existence of the vendor finance loan. Furthermore, when the employment agreement was later prepared it contained no mention of a loan.
[95] Mr Purusram also refers to the notes made by the ASB and Westpac banks when evaluating the defendants’ loan applications in 2010. He says that the banks had noted the reasons for the loan was that the property had been purchased by the vendor on behalf of the defendants and they had since been servicing the debt. The Westpac loan appraisal also referred to a gifting statement yet to be signed for $245,000, being the current value of the property less the $75,000 owed under the National Bank mortgage. Counsel says that this information which was given to the banks was consistent with the arrangements entered into between the parties. He says that the plaintiff has not suggested in evidence that the loan applications prepared by Mr Chawdrapu and submitted to banks via Global were made without Mr Kumar’s authority.
[96] Counsel submits that the defendants also made the lump sum payments to reduce the mortgage, and also made cash payments to the plaintiff. He notes that on 5 and 6 February 2010, in addition to the cash settlement sum of $108,863, the plaintiff also received two further payments from the defendants which were credited to its
ASB bank account. The two payments totalled $74,593.91 and together with the
$108,863 sum, covered the amount required to repay the National Bank ( $75,000) and also repay outstanding loans from the plaintiff totalling $104,000.
[97] Mr Purusram submits that it is significant that the plaintiff’s claim for repayment of the loan was not made during the years between 2010 and Mr Chawdrapu’s departure from Global in early 2013. He says that although Mr Kumar made a complaint against Mr Chawdrapu in February 2013 of non-compliance with the terms of the employment agreement, and although the relationship between the two men had broken down, no steps were taken by Mr Kumar to demand repayment of the loan money. The failure to take any action to demand payment in those circumstances is, he submits, inconsistent with there being any actual loan. Subsequently several years passed before Mr Kumar instructed his legal counsel to make demand for repayment of the loan.
[98] Mr Purusram says that having regard to all the evidence the Court should conclude that the real purpose and objective of the 2010 agreement was to transfer the property to the defendants without any consideration being required as they were the beneficial owners.
Discussion
[99] The first issue concerns the basis on which Kumar Trustee Ltd acquired the Arabi Street property in 2004. Mr Kumar says that it was purchased as an investment asset for the Kumar Trust. The defendants refute that and argue that the Kumar Trust purchased the property for them beneficially.
[100] Mr Kumar and Mr Chawdrapu have given quite different accounts of how the transaction arose, how it was that Kumar Trustee Ltd came to be involved as the purchaser, and as to whether Kumar Trustee Ltd was at all times acting as and in the position of a trustee for the defendants while the legal owner of Arabi Street. The first issue to determine is which of these two versions of the events is to be preferred.
[101] The chronological sequence of events leading to the settlement of the purchase by Kumar Trustee Ltd is consistent with Mr Kumar’s evidence that Mr Chawdrapu
and his wife had already decided to purchase and were committed to purchasing the property, before Mr Kumar and Kumar Trustee Ltd became involved. The opportunity to purchase the property arose when the property manager representing the owner of Arabi Street wrote to the defendants on 29 October 2004, advising them that the property was about to be marketed for sale. The defendants were immediately interested in buying the property, and approached the owner directly to discuss the price. The email from the owner of Arabi Street to Mr Chawdrapu on 10 November 2004 shows that she had previously been dealing with him regarding the purchase of the property and that he had made an earlier offer, which had since increased to
$185,000. The owner who resided in London advised that the $185,000 offer was accepted and the following day sent Mr Chawdrapu a further email advising the name and details of her solicitors in Auckland.
[102] The agreement for sale and purchase of the property which is on the form approved by the Real Estate Institute of New Zealand and the Auckland District Law Society, was prepared and handwritten by Mr Chawdrapu. It is dated 23 November 2004 and names Mr Chawdrapu and/or nominee as the purchaser. The agreement is not conditional on finance being obtained and the purchase price, as originally written, was the agreed amount of $185,000. The agreement produced in evidence has facsimile transmission details recording that it was faxed from Global Financial Services on 23 November 2004 and on 25 November 2004 from Pat Systems. As the email address of the London based owner of Arabi Street is [email protected] I conclude that she had been sent the agreement by Mr Chawdrapu and had signed and returned it on 25 November. At that point Mr Chawdrapu was the purchaser under an unconditional agreement, and as originally written on the agreement he was required to pay a deposit of ten per cent of the purchase price. The agreement provided for settlement to take place on 10 December 2004, “or earlier by mutual agreement”.
[103] Mr Chawdrapu says that upon receipt of the 29 October 2004 letter from the property manager advising that Arabi Street was to be marketed for sale, he took the letter to Mr Kumar and asked him whether he would consider purchasing it and renting it back to him and his wife. On Mr Chawdrapu’s account his discussion with Mr Kumar would have preceded him negotiating the price, preparing the agreement and arranging for it to be sent to the vendor for signing. Mr Kumar however, says that
when he was asked by Mr Chawdrapu whether he would be interested in purchasing the property, Mr Chawdrapu had already signed an unconditional agreement and had discovered that he was unable to borrow the money required to complete the purchase from his family and friends in India.
[104] There is no indication in any of the correspondence or documents prepared or generated in relation to Mr Chawdrapu’s purchase, of when Mr Kumar and Kumar Trustee Ltd first became involved. I note that: the Auckland City LIM report is dated as being issued on 19 November 2004 and is addressed to Global for the attention of Mrs Agarwal, a director of Kumar Trustee Ltd; a title search was obtained on 29 November 2004; the valuation report prepared by Davies Valuations Ltd and addressed to Global is dated 30 November 2004; on 1 December 2004 Kumar Trustee Ltd paid the deposit of $18,750 to the vendor’s solicitors; and a loan application in the names of Mr Kumar and Mrs Agarwal was made to the National Bank on 2 December 2004 to “purchase investment property”.
[105] The existence and dates of those documents are consistent with Mr Kumar taking steps to be substituted as purchaser, after the unconditional agreement to purchase Arabi Street had already been entered into. The payment of the deposit on 1 December 2004 provides a clear indication that the increased purchase price had recently been agreed.
[106] The National Bank made a loan offer to Kumar Trustee Ltd on 6 December 2004. The loan was approved for the amount applied for - $188,000. Security for the loan was to be taken by the National Bank relying on their existing securities which included a mortgage over the Kumar family residence at Goldstine Place, Royal Oak, and Mr Kumar’s personal guarantee, together with a first mortgage over the Arabi Street property.
[107]The settlement date was deferred from 10 December to 21 December 2004.
[108] I note that the agreement for sale and purchase was altered in two significant respects from that originally prepared by Mr Chawdrapu. The original price of
$185,000 was crossed out and a new price of $187,500.00 was written, and the deposit
clause stating, “10% on unconditional date”, was similarly crossed out and in its place, “$18,750.00 on acceptance of offer” was written.
[109] These two alterations were not initialled as is the usual practice in relation to agreements for the sale and purchase of real estate. They are however, consistent with Mr Kumar’s evidence that at the time he became involved the vendor was already aware that Mr Chawdrapu was expecting to have difficulty settling the purchase and she took advantage of the situation by seeking to increase the purchase price by $5000 from $185,000 to $190,000. Mr Kumar says that he negotiated directly with the vendor and as a result the price of $187,500 was agreed upon. This would explain the alterations made to the agreement.
[110] Given that the vendor had already agreed to a sale price of $185,000 as she had confirmed in her email to Mr Chawdrapu on 10 November 2004, the most satisfactory explanation for the subsequent increase of the price is that given by Mr Kumar.
[111] Kumar Trustee Ltd paid the deposit of $18,750 on 1 December 2004, and settlement of the purchase took place on 21 December 2004. On the same day Mr Chawdrapu signed the residential tenancy agreement with Kumar Trustee Ltd to rent Arabi Street for $500 per fortnight. While Mr Chawdrapu was the tenant pursuant to the agreement, rental payments were made by the defendants’ company CRK. However, CRK commenced making payments at a rate of $700 per fortnight. Mr Chawdrapu says that the increase from the $500 per fortnight provided for in the tenancy agreement was because of the agreement reached with Mr Kumar that the property had been purchased for them, and consequently he and his wife were responsible for meeting the fortnightly mortgage payments of $700.
[112] I note here that Mr Chawdrapu did not record the arrangements that he says were made with Mr Kumar regarding the purchase of the apartment by Mr Kumar and Kumar Trustee Ltd for the defendants, and that it was being held on trust for them. Mr Chawdrapu had previously shown that he was quite capable of recording arrangements in relation to financial matters by his preparation of the service agreement dated 4 April 2003 in which he set out the terms upon which he contracted his services to Global. However, in relation to the absence of any record of the
arrangements made regarding the beneficial ownership of the apartment and the defendants’ responsibility for meeting the mortgage and outgoings, it is relevant to note that Mr Chawdrapu had arrived fairly recently both in New Zealand and at Global, and his relationship with Mr Kumar was very much that of a junior staff member. It appears that Mr Kumar had adopted the role of a mentor with Mr Chawdrapu. Mr Kumar and Kumar Trustee Ltd had access to funding, and Mr Chawdrapu and his wife were by comparison of very limited financial means. In this context I consider it is likely that Mr Chawdrapu would simply “go along” with Mr Kumar’s suggestions and proposal regarding the purchase of the property.
[113] Mr Chawdrapu described the $700 per fortnight payments from CRK’s account as “rent” in the CRK automatic payment authority to the National Bank. In addition to the rent payments, via CRK, Mr Chawdrapu also paid body corporate levies and fees relating to Arabi Street which included property insurance, and rates levied by the Auckland Council and billed to Kumar Trustee Ltd. Mr Kumar’s claim that Kumar Trustee Ltd initially paid the rates and other outgoings on the property is confirmed by the financial records and cheque foils produced in evidence showing Kumar Trustee Ltd initially paid the Auckland Council and ARC rates in August and September 2005.
[114] Mr Kumar says that CRK’s payment of the rates was the result of him negotiating with Mr Chawdrapu for the Company to take over paying the rates, as the tenancy had effectively become commercial in nature. He says that Mr Chawdrapu and his wife were willing to pay the rates and other property expenses as they could account for and deduct them as expenses in the CRK financial accounts, and thereby reduce the amount of personal tax Mr Chawdrapu paid. It appears that expenditure on those items was accounted for by Mr Chawdrapu in the CRK financial statements, described as “home office expenses” or “repairs and maintenance”. Mr Kumar says that Mr Chawdrapu negotiated an increase in the fees he charged Global to cover any increases in the mortgage payments and Council rates when they arose.
[115] While Mr Chawdrapu and his wife were meeting Kumar Trustee Ltd’s mortgage payments, and the other outgoings relating to the property, for its part Kumar Trustee Ltd at all times treated Arabi Street as its asset. In the Trust’s financial statements commencing with the financial year ending 31 March 2005 and thereafter
until 31 March 2011, Kumar Trustee Ltd accounted for the Arabi Street property as an asset and the mortgage to the National Bank as a “non-current liability”. It also accounted for the rental payments received from the defendants initially via CRK and subsequently VPS Financial. However, Mr Chawdrapu was not privy to the plaintiff’s financial statements and had no knowledge of how it was treating the Arabi Street property in its financial accounts.
[116] Having heard and observed both Mr Kumar and Mr Chawdrapu give evidence and both be extensively cross-examined, I did not find the evidence and accounts of either of them to be entirely satisfactory and convincing. While I accept Mr Kumar’s account of Kumar Trustee Ltd’s purchase of Arabi Street being ostensibly as an investment property for the Kumar Trust, I nevertheless also accept that the arrangements entered into between Mr Kumar and Mr Chawdrapu whereby the defendants would pay a sum in excess of the market rent, equal to the mortgage payments, as well as the rates, insurances and body corporate levies was consistent with an understanding and the existence of a common intention held by Mr Kumar, as director of Kumar Trustee Ltd, and Mr Chawdrapu that the defendants would derive the benefit from the increase in the value of the property and their reduction of the loan from the National Bank.
[117] It is clear that the close working relationship that had developed between Mr Kumar and Mr Chawdrapu, and which Mr Kumar wished to see continue, coupled with Mr Kumar’s wish to help Mr Chawdrapu and his wife led to him offering to purchase their rental property through Kumar Trustee Ltd and using the Kumar Trust’s assets as security. In my view the way in which these arrangements were entered into and thereafter carried into effect was accompanied by a significant degree of ambiguity as demonstrated by their respective treatment of the transaction in their accounting and business records. As a result Mr Kumar and Kumar Trustee Ltd at least formally in terms of their financial and accounting records proceeded upon the basis that Kumar Trustee Ltd owned the property and was renting it to the defendants, while the defendants proceeded on the basis that they were the beneficial owners of the property and were accordingly responsible for servicing the mortgage and meeting all the other outgoings in a manner consistent with their understanding that they were building an equitable interest in the property.
[118] Kumar Trustee Ltd’s application to the National Bank stated that the property was being purchased as an investment property. Such an explanation was necessary to satisfy the bank that Kumar Trustee Ltd would be receiving rental income with which to service the bank loan. However, while Kumar Trustee Ltd would be liable to the bank for the loan payments, the arrangements whereby Mr Chawdrapu and his wife would meet all of the borrower’s loan obligations, including any increases due to increases of interest rates, together with all other outgoings on the property is consistent with their understanding that they were doing so because they had a beneficial interest in the property. It is inconceivable that the defendants would pay an amount to service the loan in excess of the market rent for the apartment for any other reason than they believed that by making the payments at that level and reducing the bank loan they were increasing their interest in the property.
[119] The outcome of arrangements made between Mr Chawdrapu and Mr Kumar was that Kumar Trustee Ltd became the legal owner and ostensibly rented it to the defendants. The residential tenancy agreement entered into on the date of settlement provided a means for Kumar Trustee Ltd to demonstrate to the bank that a tenancy was in place pursuant to which the defendants were to pay $500 per fortnight. However the terms of the tenancy agreement were never adhered to, and in my view they were never intended to be adhered to – by either party. From the outset the “rent” paid by the defendants was an amount over and above that specified in the residential tenancy agreement and was payable to service the National Bank loan. This is an example of how both Mr Kumar and Mr Chawdrapu were parties to documents which they required for one purpose, while in fact conducting their affairs upon a quite different basis. Another example of this approach can be seen in Mr Chawdrapu paying the “rent” through his company, CRK, and treating the rental payments as deductible expenses in the company’s accounts notwithstanding that the claimed deductions do not appear to have been necessarily incurred in relation to CRK’s commercial activities.
[120] As regards the rental paid by the defendants, I do not accept Mr Kumar’s evidence and explanation that the uplift from $500 per fortnight to $700 per fortnight was intended to cover the cost of the Trust furnishing the apartment. It is clear that Mr Kumar required the defendants to pay the $700 per fortnight sum as “rent” in order to
cover the full amount of the payments due under the National Bank mortgage. The amount of “rent” paid was increased to match any subsequent increases of the amounts payable pursuant to the mortgage.
[121] I find that both parties were respectively involved in documenting the defendants’ tenancy in a manner that best suited their financial purposes, and as a consequence the documents they created are necessarily to be treated with caution when considering whether they were in fact intended to record their genuine agreement or were simply prepared to achieve another purpose.
[122] Once matters proceeded on the basis of the defendants’ meeting the mortgage and property outgoings, the understanding that they held at the outset that the property had been purchased for them and that they were the beneficial owners was reinforced by Mr Kumar’s requirement that they also pay the rates, property insurance and body corporate levies. Over time the defendants’ original understanding and belief as to the basis of the arrangement over the property became firmly entrenched and they continued to meet the mortgage and other property outgoings upon the basis that they were the beneficial owners of Arabi Street including making several lump sum payments to reduce the mortgage principal.
The defendants’ case - discussion
[123] As the defendants’ case is founded upon the existence of a trust arrangement with the plaintiff and the related events precede the creation of the documents upon which the plaintiff’s case is based, it is appropriate that I first address this aspect of defendants’ case.
[124] Mr Purusram’s submission is that the Kumar Trust purchased Arabi Street and held it on trust for the defendants. However, a trust is not an entity. It is a particular kind of relationship, recognised in equity, between trustee and beneficiary. As a result, a trust itself, cannot buy, sell, procure or dispose of property, in any way, and cannot hold property either for itself, or for another. By suggesting that a trust is capable of purchasing property and holding it on trust for a third party, the separate legal and equitable interests held by the trustee and beneficiaries respectively are conflated.
[125] Mr Purusram’s argument is better considered as being that it was Kumar Trustee Ltd who purchased the property for the defendants. However, Kumar Trustee Ltd paid the deposit and purchased Arabi Street with borrowed funds that, while legally the property of the Company, it did not itself hold an equitable interest in. The beneficial interest was held by those persons named as beneficiaries in the Kumar Family Trust deed. Therefore, once the purchase was completed, the equitable interest of the beneficiaries in the funds used for the purchase was substituted for an equitable interest in Arabi Street. As a result, Kumar Trustee Ltd could not have conveyed the equitable title in the property to the defendants, as it was never its property to convey.
[126] Consequently, irrespective of any expressed intention by Mr Kumar to purchase Arabi Street, to be held on trust for the defendants, once the purchase transaction had proceeded using Kumar Trustee Ltd as purchaser, with funds derived from those held in trust, or borrowed by the corporate trustee against the security of trust property, any such an intention could not be implemented.
[127] Where an interest in real property, be it either legal or equitable, is to be settled on trust during the lifetime of the settlor, as is the case here, it is necessary for the requirements of s 25(2) of the Property Law Act 2007 to be complied with in order for a valid trust to be created. The requirements of s 25 (2) are that the trust must be in writing and signed by the settlor. No such written memorandum to record the trust arrangement was created here.
[128] I consequently find that Arabi Street was purchased by Kumar Trustee Ltd, using funds borrowed on behalf of the Kumar Trust, and held for the beneficiaries of the Kumar Trust. In my view it is quite clear that Arabi Street could not have been purchased by Kumar Trustee Ltd to be held on a separate trust for the defendants irrespective of any explanation given by Mr Kumar to the defendants.
[129] However, the requirements of s 25(2) do not affect the creation of a resulting, implied or constructive trust.3 Mr Purusram’s submissions contained a brief argument that a constructive trust should be found to have arisen as a result of the circumstances by which the value of Kumar Trustee Ltd’s equity in Arabi Street was increased over
3 Property Law Act 2007, s 25(4).
the five year period between acquisition in December 2004 (when it was purchased for $187,500) and sale to the defendants in January 2010 (for $320,000), as it is clear that the payments made by the defendants during that period had significantly reduced the National Bank mortgage (from $188,000 to $75,000) and had also covered all other outgoings such as rates and body corporate levies. By contrast, although Kumar Trustee Ltd had provided the security for the National Bank loan it contributed no money to meet the loan payments or to meet the other outgoings such as rates and body corporate levies.
[130] During that five year period the principal of the National Bank loan was reduced by $113,000 entirely due to the payments made by the defendants. It is also significant that the defendants’ payments of “rent” were for amounts in excess of the rent provided for in the residential tenancy agreement, and their payment of the other property expenses and outgoings maintained the property during the five years over which it increased in value by $132,500.
[131]I shall return to the issue of a constructive trust presently.
The 2010 sale and purchase of Arabi Street
[132] However I now turn to the sale and purchase agreement entered into in 2010, and to the issue of whether the defendants owe Kumar Trustee Ltd a debt in respect of the balance of the purchase price stated in that agreement. In order to determine the issue, it is necessary to consider both the letter of 11 January 2010 and the sale and purchase agreement entered into on 15 January 2010.
[133] In 2010, Mr Chawdrapu requested Mr Kumar to agree to transfer Arabi Street to him and his wife. I accept Mr Kumar’s evidence that he was at that time quite preoccupied with caring for his wife and son, both of whom were undergoing specialist medical treatment. Although the defendants say that the purpose of the 2010 agreement was simply to effect a transfer to them of the property they already held as beneficial owners, the terms of the agreement as appear on its face provides for their purchase of the property for $320,000 and satisfaction of the purchase price by payment of valuable consideration by means of cash and an acknowledgment of debt.
[134] I note here Mr Sills’ submission, that if the defendants were the beneficial owners of Arabi Street from the time of its purchase by the plaintiff in 2004, and by December 2010 they had reduced the outstanding balance of the National Bank mortgage to about $75,000, there was really no need to enter into an agreement to purchase the property for an amount determined by a registered valuation. As the beneficial owners seeking to have the property transferred into their own names they only needed to pay the sum required to repay the remaining balance of the National Bank mortgage, and any costs incidental to a transfer and they could then have become the registered owners on the title of the property.
[135] The obtaining of a current market valuation to set the sale price is more consistent with a transaction involving Kumar Trustee Ltd selling a property it owned to the defendants for its market value. The need for the defendants to raise a substantial loan to enable them to purchase the property is consistent with an arm’s length sale at market value being the basis of the transaction. Furthermore, when making their several loan applications, the defendants did not advise the banks that they already owned all the equity in Arabi Street as beneficial owners.
[136] The defendants were however not intending to actually apply all of the bank finance they sought for purchase towards paying the plaintiff. While representing to the banks that they were purchasing the property from the plaintiff for a price supported by a registered valuation, they were in fact intending to use the money to repay other debts. This is yet another example of the parties’ approach to the documenting of transactions in a manner designed to achieve their financial objectives rather than reflecting the actual basis upon which they were proceeding.
The 11 January 2010 “gifting” letter
[137] Mr Chawdrapu says that in early 2010, when he renewed his earlier requests and again asked Mr Kumar to transfer Arabi Street to himself and his wife, Mr Kumar this time agreed. Around the same time Mr Chawdrapu drafted the “To whom it may concern” letter which referred to gifting by the Kumar Trust. Mr Chawdrapu said in evidence that Mr Kumar had asked him to draft the letter. He said that Mr Kumar was with him when he prepared the letter and had dictated the letter to him.
The letter is dated 11 January 2010 and is signed by Mr Kumar, as trustee. Mr Chawdrapu says that Mr Kumar signed and provided the letter to him and his wife, as confirmation of their understanding that the balance of the purchase price shown in their purchase agreement was not in fact required to be paid and would be reduced by gifting every year until the loan was extinguished. The mechanism of using a $245,000 loan representing the equity in Arabi Street coupled with a gifting programme to forgive the loan, is consistent with defendants endeavouring to obtain and realise all the equity in the property to compensate them for their payments reducing the mortgage and the other sums they had expended in maintaining the property since it was purchased by Kumar Trustee Ltd in 2004.
[138] Mr Kumar says that Mr Chawdrapu prepared the 11 January letter in order to show it to the bank to cover any shortfall in equity and that it would only be used in an extreme situation. He says he told Mr Chawdrapu that he did not want the letter to contain any statements that were incorrect or not legally permissible. He says he understood that the purpose of the letter was to assist the defendants in obtaining a bank loan to be secured against the Arabi Street property, and it was not intended to record a commitment by Kumar Trustee Ltd to gift the sum of $245,000 to the defendants over time. He says that having signed the letter he reviewed the Kumar Trust Deed and concluded that as the defendants were not beneficiaries of the Kumar Trust it was not permissible to make any gifts to them. He says that the following day he explained this to Mr Chawdrapu and told him that he was withdrawing the letter, that Mr Chawdrapu was not to use it, and that Mr Chawdrapu had told him not to worry as he would never ask for a gift from him. Thereafter Mr Kumar says he did not expect him to use it or to hear any more of it.
[139] In my view Mr Kumar’s explanation does not satisfactorily explain the gifting letter, and its purpose. While I am unable to resolve the issue of whether Mr Kumar was involved in drafting the letter as claimed by Mr Chawdrapu, it is nonetheless clear that Mr Kumar signed it, and it was prepared by Mr Chawdrapu as a means of the defendants securing the equity in Arabi Street. Although Mr Kumar signed the letter on or around 11 January 2010, I accept his evidence that he soon after told Mr Chawdrapu that as the Kumar Trust deed did not permit such gifts to parties other than beneficiaries of the trust, the arrangement described in the letter could not proceed.
[140] In his evidence Mr Kumar sought to explain the letter as being prepared by Mr Chawdrapu solely as a means of assisting the defendants to obtain bank finance and otherwise being of no significance. Irrespective of whether or not he assisted or was involved in drafting the letter, by signing a letter stating that Kumar Trustee Ltd had made an interest free loan of $245,000 to the defendants to enable them to purchase Arabi Street, knowing that the letter could be submitted to banks to support applications for loan finance, would amount to a fraud on the banks if the contents were known to be incorrect and misleading. The serious nature of making such a misleading statement would not be diminished were the letter only to be used as a last resort in an extreme situation.
[141] I find that Mr Kumar signed the letter because by January 2010 he recognised that the defendants were entitled to the whole of the equity and beneficial interest in the property because they had paid for it and that a gifting mechanism was a suitable method for effecting a transfer of the equity to them, and a letter confirming that would assist the defendants to obtain bank finance. Subsequently Mr Kumar, having investigated the ability of the Kumar Trustee Ltd to make gifts to parties who are not beneficiaries of the Kumar Trust, told Mr Chawdrapu that a gifting programme involving the Kumar Trust would not work, and that therefore Mr Chawdrapu should not use it.
[142] It appears however that the 11 January 2010 gifting letter was provided to Westpac Bank in connection with the defendants’ loan application dated 12 January 2010, as the bank’s staff noted that the deposit for the purchase had been gifted by the vendor, and that a gifting statement for $245,000 was obtained but was yet to be signed. The application to Westpac was made the day after the date on the gifting letter, and it is likely that the gifting letter had already been submitted to Westpac before Mr Kumar told Mr Chawdrapu he had discovered that Kumar Trustee Ltd was unable to make any gifts out of trust assets.
[143] Thereafter neither party appears to have referred to or relied on the 11 January 2010 gifting letter, and the $245,000 interest-free loan and gifting plan, were not referred to or relied on in relation to the sale and purchase agreement entered into several days later on 15 January 2010.
[144] The letter itself would be unenforceable against Mr Kumar or Kumar Trustee Ltd in any event. First, the letter merely states an intention to gift the balance of the loan to Mr Chawdrapu over a number of years, starting at an unspecified point in time. As there has been no actual delivery of the gift, by way of actually reducing the quantum of the loan, merely a recorded intention to do so in the future, there has been no perfected gift. In order to effect a gift, the donor must have done everything required to transfer the gift to the donor and a gift will be incomplete where it comprises no more than a promise, or an unfulfilled intention to so gift.4 In such circumstances the Court will not compel the intending donor to perfect it.
[145] The intention to gift could have been perfected had it been in deed form, thereby giving the defendants a power to force Kumar Trustee Ltd to perform the obligation to gift the debt to them, but the letter was not executed in accordance with the requirements of s 9 of the Property Law Act 2007. Nevertheless, I consider the gifting letter to be very significant as it provides an insight into the understanding of both Mr Chawdrapu and Mr Kumar as to whether the defendants had by January 2010 acquired a beneficial interest in the property. Mr Kumar is an experienced businessman who through his mortgage broking business had a well-established relationship with several major banks. It is inconceivable that he would sign a letter containing a statement confirming that the Kumar Trust had given the sum of $245,000 (which represented the value of all of the equity in Arabi Street) as an interest-free loan to the defendants for the purpose of enabling them to purchase Arabi Street, with repayment of the loan to be forgiven by means of a gifting programme, if he did not genuinely believe that the defendants were entitled to the beneficial interest in the property. I do not accept that Mr Kumar would be prepared to risk his entire business by signing a letter containing false information that would be provided to the very banks his business relied on.
[146] Furthermore, the amount of the interest-free loan referred to in the letter ($245,000) represented the whole value of the equity in Arabi Street at that time and that fact would have been well understood and appreciated by Mr Kumar when he signed the letter on 11 January 2010.
4 Chambers v Commissioner of Stamp Duties [1943] NZLR 504 at 519 – 520.
[147] However in my view, Mr Kumar’s signing of the gifting letter clearly shows that by January 2010, he recognised and understood that the defendants were and had become the beneficial owners of Arabi Street, and by signing the letter he was facilitating a mechanism which when carried out would result in the defendants becoming the legal owners of the property without paying the plaintiff any money in consideration of a transfer of the legal title to them. More significantly however, I find that Mr Kumar’s signing of the 11 January letter acknowledges that both he and Mr Chawdrapu understood and intended that the defendants were the beneficial owners of Arabi Street, and that the loan and gifting mechanism was simply a means of effecting a transfer of the property into their names without them paying any consideration as regards the value of the equity in the property. Thus the gifting letter is evidence of the existence of a common intention held by Mr Kumar and Mr Chawdrapu that the beneficial interest in Arabi Street was held by Kumar Trust Ltd for the defendants as beneficial owners.
[148] Once Mr Kumar discovered that a gifting program involving the Kumar Trust would not work, the parties thereafter proceeded on the basis that they would need to find some alternative method of transferring the legal ownership of Arabi Street to the defendants. I shall now describe how they went about trying to achieve this objective.
The Agreement for Sale and Purchase of Arabi Street (15 January 2010)
[149] The agreement entered into between the parties to effect the sale and purchase of Arabi Street dated 15 January 2010 was prepared by Mr Chawdrapu and the specific terms are written in his handwriting. Mr Chawdrapu says that he and Mr Kumar sat together and Mr Kumar told him what to write down in the agreement, including the price of $320,000, the “nil” deposit, and how the purchase price would be paid by a part payment equal to a bank loan and the balance by way of “deed of acknowledgment”. Mr Kumar says that he did not dictate the terms of the agreement as he was not present when it was prepared. I prefer and accept Mr Chawdrapu’s evidence on this issue as Mr Kumar was the more experienced of the two and Mr Chawdrapu generally looked to him for advice.
[150] However, other than being generally relevant to their respective credibility, I do not think anything turns on the circumstances in which the agreement was prepared. There is no mention in the agreement of the balance of the purchase price being either interest-free or that it was to be the subject of a gifting program that would result in it being forgiven over time. The absence of any reference to an interest-free loan and a gifting program is consistent with Mr Kumar’s earlier discovery that the Kumar Trust was unable to proceed on that basis. With the gifting strategy ruled out and discarded, the means by which the defendants were to satisfy the payment of the balance of the purchase price provided for in the agreement was clearly another method intended to achieve the same objective as was the case with the gifting letter, namely that of achieving a transfer of the property to the defendants without them paying the plaintiff any money, as the defendants had by then become the beneficial owners of the property.
[151] The fact that the parties both instructed the same solicitor to conduct the transaction is consistent with them working collaboratively to carry out the transaction to give effect to their intention regarding the transfer of the property to the defendants. The decision not to engage separate lawyers and the way in which the transaction was documented (or not documented), is consistent with the parties proceeding upon that basis and somewhat informally.
[152] The settlement statement prepared by the parties’ mutual solicitor provided for the purchase price to be satisfied by a cash payment of $108,863.11 and the balance by an “Acknowledgment of Debt” for $211,136.89. As I have earlier noted, the
$108,863.11 was applied to repay the National Bank mortgage of approximately
$75,000, and the balance was paid into a National Bank account operated by Kumar Trustee Ltd, in accordance with the terms of the letter dated 5 February 2010 signed and endorsed “Agreed and Accepted” by both Mr Chawdrapu and Mr Kumar and which stated:
The extra funds of $33,863.11 will be adjusted internally between Ajay Kumar & ourselves in Vendor Finance
[153] While there is nothing in the settlement statement or the letter of 5 February 2010 to suggest that the sum of $211,136.89 was anything other than a genuine debt
owed to Kumar Trustee Ltd by the defendants for vendor finance, it is significant that the solicitor did not prepare, or ask to see a written acknowledgment of debt when effecting the settlement. It appears that no acknowledgment of debt has ever been prepared. The failure of the parties’ mutual solicitor to require to see such a document is surprising, as an acknowledgment of debt document was the only means by which the solicitor could be satisfied that the defendants as purchasers had satisfied their obligation of paying the balance of the purchase price. I consider that the absence of any written acknowledgement of debt, and the failure of the plaintiff’s solicitor to require it before completing settlement, is consistent with the common intention of the parties being to achieve the objective of transferring Arabi Street to the defendants without them actually paying the plaintiff, as they were already the beneficial owners of the property.
[154] At the time of this sale and transfer Mr Chawdrapu was still working at Global and he had given no indication of having any intention of leaving. During this period Mr Kumar was preoccupied with caring for his wife and son, and as time passed he once again busied himself at Global. For their part the defendants continued to reside at Arabi Street and Mr Chawdrapu continued to work closely with Mr Kumar at Global. Mr Kumar and Kumar Trustee Ltd did not take any steps to demand repayment of the vendor finance loan. The failure of Mr Kumar and the plaintiff to take any steps whatsoever regarding documenting the loan or to seek repayment of the loan is consistent with them proceeding on the basis that, despite the reference to an acknowledgement of debt at the time of settlement and transfer of the property to the defendants in 2010, there was in fact no loan and no money owed by the defendants to the plaintiff.
[155] When Mr Chawdrapu resigned from his position at Global he explained to Mr Kumar that he was leaving to purchase and operate a service station. Mr Kumar says he asked him about repayment of the loan and Mr Chawdrapu explained that as he was starting up in a new business he did not have any money with which to repay the debt. As I have earlier noted Mr Chawdrapu says the topic of a loan and repayment was never raised with him by Mr Kumar. I prefer Mr Chawdrapu’s evidence on this issue. I accept his evidence that he overheard Mr Kumar telling another Global staff member that he would “destroy” Mr Chawdrapu if he went and joined another mortgage
broking firm. I consider that Mr Kumar’s attitude to the prospect of Mr Chawdrapu working for a competitor as revealed by his comment to the staff member, informs the reasons for his subsequent conduct by which he made demand for repayment of the loan. However, the fact that Mr Kumar did not raise the topic of a loan or repayment of a loan at the time that Mr Chawdrapu departed Global is consistent with Mr Kumar proceeding upon the basis that there was in fact no real loan and there was nothing for the defendants to repay.
Did the plaintiff hold Arabi Street subject to a constructive trust?
[156] While I find that the defendants have failed to establish that the Arabi Street property was held in trust for them on the basis of an express trust, by either Mr Kumar or Kumar Trustee Ltd, because Kumar Trustee Ltd was unable to settle that property on trust for them, and because the requirements of s 25(2) of the Property Law Act 2007 have not been satisfied, I now return to consider the issue of whether a constructive trust arose from the dealings and arrangements made between the parties in relation to Arabi Street.
[157] A constructive trust will arise in connection with the acquisition by one party of a legal title to property whenever that party has so conducted themselves that it would be inequitable to allow him to deny to another party a beneficial interest in the property acquired. 5
[158] The Court of Appeal in Fortex Group Ltd (In Receivership and Liquidation) v MacIntosh explained constructive trusts as follows:6
[This appeal] concerns the law of trusts; specifically the circumstances when express trusts and institutional constructive trusts come into existence and when remedial constructive trusts may be imposed. For present purposes, these three types of trust can be described as follows. An express trust is one which is deliberately established and which the trustee deliberately accepts. An institutional constructive trust is one which arises by operation of the principles of equity and whose existence the Court simply recognises in a declaratory way. A remedial constructive trust is one which is imposed by the
5 See Elders Pastoral Ltd v BNZ [1989] 2 NZLR 180 at 185; and Beatty v Guggenheim Exploration Co, 225 NY 380(1919) at p 386 per Cardozo J: “When property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest, equity converts him into a trustee.”
6 Fortex Group Ltd (In Receivership and Liquidation) v MacIntosh [1998] 3 NZLR 171 at 172 (CA).
Court as a remedy in circumstances where, before the order of the Court, no trust of any kind existed.
The difference between the two types of constructive trust, institutional and remedial, is that an institutional constructive trust arises upon the happening of the events which bring it into being. Its existence is not dependent on any Order of the Court. Such order simply recognises that it came into being at the earlier time and provides for its implementation in whatever way is appropriate. A remedial constructive trust depends for its very existence on the Order of the Court; such order being creative rather than simply confirmatory.
[159] On the basis of my factual findings that Mr Kumar and Kumar Trustee Ltd recognised that the defendants were entitled to the beneficial ownership of Arabi Street, as clearly evidenced by the contents of the gifting letter of 11 January 2010, I am satisfied that it was the common intention of the parties that the defendants would own the beneficial interest and equity in Arabi Street.
[160] Irrespective of whether an expressed common intention existed between the parties that the beneficial ownership of the property is not to follow the legal ownership, the court may still inquire into the parties conduct to determine whether such a common intention should be inferred.7
[161] In Lankow v Rose which concerned a claim to an interest in property based on a constructive in the context of a de facto domestic relationship, Tipping J summarised what a claimant must show:8
1.Contributions, direct or indirect, to the property in question.
2.The expectation of an interest therein.
3.That such expectation is a reasonable one.
4.That the defendant should reasonably expect to yield the claimant an interest.
If the claimant can demonstrate each of these four points equity will regard as unconscionable the defendant’s denial of the claimant’s interest and will impose a constructive trust accordingly.
[162] While Lankow concerned the claim of a de facto partner to an interest in property, I consider that the principles and qualifying criteria described by the Court
7 Lloyd’s Bank PLC v Rosset [1991] 1 AC 107 at 132.
8 Lankow v Rose [1995] 1 NZLR 277 at p 294.
of Appeal also apply to the circumstances of the present case which are analogous to that of a claim by a de facto partner to an interest in property, as a consequence of making contributions.
[163] Here the defendants have made a direct contribution to the equity in the property. Over the five year period between the purchase of Arabi Street by the plaintiff and its sale to the defendants, the defendants met and paid all of the payments due under the National Bank mortgage over the property and thereby reduced the principal sum by $113,000 from $188,000 to $75,000. In addition, the defendant paid the rates, insurances and body corporate levies. The only monetary contribution made by the plaintiff was its payment of the purchase deposit of $18,500 which was reimbursed to it at or shortly after settlement of the purchase, and some initial rates instalments. By meeting the mortgage and other costs associated with the property, the defendants funded the borrowing required to purchase the property and funded virtually all of the costs and expenses involved in holding the property over the five year period before it was transferred to them in January 2010.
[164] As the House of Lords has held, a common intention that the beneficial ownership of the property should not follow the legal ownership can be inferred where there has been no express agreement between the parties. Lord Bridge of Harwich, in Lloyds Bank Plc v Rosset, observed that it was “extremely doubtful” that anything less than direct contributions to the purchase price, either initially or by way of mortgage payments, will be sufficient to ground such an inference.9
[165] I find that the defendants clearly had an expectation of a beneficial interest in the Arabi Street property, and that this was an expectation shared and acknowledged by Mr Kumar for Kumar Trustee Ltd. The existence of the defendants’ expectation is evident from their payment of amounts well in excess of the market rent so as to meet the payments of interest and principal due under the National Bank mortgage. The defendants’ actions of paying insurances, rates and body corporate levies is further evidence of them acting in a manner consistent with a belief that they were building the value of their equity in the property by meeting property expenses customarily the
9 At 132 - 133.
responsibility of the property owner. Kumar Trustee Ltd conveyed to the defendants that they were expected to make those payments towards the mortgage and to meet the outgoings on the property. While I am prepared to find that there was an express common intention between the parties, I am also satisfied that absent any express arrangement between them, that having regard to their conduct, both Kumar Trustee Ltd and the defendants proceeded from the time of the purchase of Arabi Street , on the understanding and in the belief that the property had been purchased for their benefit, and as a result, they were responsible for meeting all the associated costs. On that basis both Kumar Trustee Ltd and the defendants’ shared the expectation that the defendants were the only beneficial owners of the property.
[166] I find that the defendants’ expectation of a beneficial interest in the property was a reasonable one. Mr Chawdrapu had already entered into an agreement to purchase the property before he approached Mr Kumar to ascertain whether he would be interested in purchasing it. While the evidence does not clearly establish whether Mr Kumar expressly told the defendants that he would arrange to buy the property for them, it is nevertheless apparent that Mr Chawdrapu and his wife proceeded on the basis and in the belief that they were the beneficial owners of the property. As I have noted, by arrangement with Mr Kumar and the plaintiff, they met all the mortgage payments and other outgoings on the property. I consider that by his actions of requiring and expecting the defendants to meet all the mortgage and all other outgoings on the property, Mr Kumar had reinforced the defendants’ understanding that they were the beneficial owners of the property.
[167] Apart from some payments of rates instalments, the plaintiff made no financial or other contribution to the property other than by giving security for the National Bank loan and perhaps by way of a single lump sum mortgage payment which on the basis of the evidence I am unable to determine was being paid by the defendants. That lump sum payment of $12,000 was made on 21 December 2005. In respect of that payment Mr Chawdrapu was unable to provide any evidence to show that those funds originated from either himself, his wife, or one of their companies. I am however satisfied that lump sum payments of $16,000 on 18 December 2007, and $15,000 on 4 March 2008 were made by the defendants. As to the $16,000 payment, the evidence of Mr Kumar having transferred $16,000 into the fixed loan account for Arabi Street,
is contemporaneous with $14,000 being withdrawn from the defendant’s bank account on the same day. It is not clear on the evidence where the $2000 sum representing the difference between the two amounts originated from. With regard to the $15,000 lump sum payment, on the basis of the emails between Mr Chawdrapu and the National Bank, I am entirely satisfied that the defendants made a lumpsum payment towards the mortgage.
[168] Kumar Trustee Ltd also recovered the deposit it advanced at or around the date of settlement, and so made no direct contribution to payment of the purchase price which was entirely funded from the National Bank loan of $188,000 which the defendants thereafter serviced and reduced by principal payments totalling $113,000. On that basis their expectation of having a beneficial interest in the property and being the only beneficial owners of the property was reasonable.
[169] The terms of the sale and purchase agreement by which the defendants purchased Arabi Street from the plaintiff in January 2010 provided for the non-cash balance to be satisfied by way of a “deed of Acknowledgment”. Several days before the agreement for sale and purchase was entered into on 15 January 2010, Mr Chawdrapu prepared the gifting letter dated 11 January 2010 in which Mr Kumar certified on behalf of the Kumar Trust that he had given the defendants $245,000 as an interest free loan that was to be repaid by an annual gifting programme until fully discharged. This gifting programme devised by Mr Chawdrapu was a mechanism which in substance recognised that he and his wife should not be required to pay the plaintiff in order to obtain a transfer of the property into their names. The fact that Mr Kumar signed the letter is also consistent with him proceeding on the basis that the
$245,000 referred to in the letter was not required to be paid by the defendants. That amount represented the entire value of the equity in Arabi Street as the National Bank loan had been reduced to $75,000 and together the two amounts added together matched the purchase price for the property of $320,000. Mr Kumar’s act of signing the gifting letter is a clear indication that he did not expect or require the defendants to pay the plaintiff any money in order to obtain a transfer of the legal title to the property.
[170] Mr Kumar said in evidence that he had withdrawn the letter when he discovered that Kumar Trustee Ltd was unable to make a gift to parties such as the defendants who were not beneficiaries of the trust. He said that having explained that to Mr Chawdrapu there was no further discussion and thereafter they had proceeded on the basis that the balance of the purchase price would be satisfied by “straight vendor finance”. I consider however that Mr Kumar’s acknowledgment in the gifting letter that no money would be required to be paid is significant. When Mr Chawdrapu was told by Mr Kumar that his gifting mechanism would not work as it was inconsistent with the terms of the Kumar Trust deed, it did not mean that the defendants’ beneficial entitlement to the property simply disappeared. What it meant, was that another and new mechanism was required to effect a recognition of that beneficial entitlement, and it appears that this new mechanism was the “balance by deed of Acknowledgement” provision regarding the means of satisfying the purchase price provided for in the agreement for sale and purchase several days later dated 15 January 2010.
[171] The two methods proposed by Mr Chawdrapu as the means by which the defendants would satisfy the payment of the balance of the purchase price of $320,000 in neither case involved them in paying over any cash on settlement, other than the proceeds of their bank finance which they needed to repay the National Bank. Mr Chawdrapu’s proposed mechanisms were consistent with his belief and understanding that he and his wife would not be required to pay the plaintiff anything further in order to obtain a transfer of the property into their names. Similarly, Mr Kumar’s actions of signing the gifting letter and subsequently the agreement for sale and purchase were consistent with him also proceeding on the basis that apart from the defendants discharging the National Bank mortgage, he was not expecting or requiring any money to be paid to the plaintiff prior to the plaintiff effecting a transfer of the property to them.
[172] I am also satisfied that a reasonable person in Mr Kumar and the plaintiff’s position and circumstances would have expected to yield to the defendants’ claim to be entitled to the beneficial ownership of the value of the equity in Arabi Street. Having made only a very limited contribution in terms of money and by provision of further security, a reasonable person or party holding the legal interest in the property
could not in good conscience retain the entire beneficial interest and resist the defendants’ claim to be entitled to it.
[173] Accordingly, I find that an institutional constructive trust arose from the circumstances, and that the plaintiff held the virtually all of the beneficial interest in Arabi Street together with the legal interest and title to the property pursuant to the constructive trust for the defendants.
[174] When the defendants settled the purchase of Arabi Street from the plaintiff in February 2010 for $320,000, they paid a cash sum of $108,863.11 from which the National Bank mortgage securing $74,166 was discharged, and $34,446.60 was paid into the plaintiff’s account. The plaintiff was therefore fully reimbursed for its expenditure on rates instalments, and any lumpsum payments it might have made towards the mortgage, while also receiving a significant sum. I therefore consider that the constructive trust applied to all of the remainder of the value of the equity in Arabi Street, after Kumar Trustee Ltd had been paid the outstanding balance required to repay the bank loan and discharge the mortgage, at the time the property was transferred to the defendants on settlement of the agreement for sale and purchase on 5 February 2010.
[175] Having found that the plaintiff held the beneficial interest in the equity in Arabi Street as at January 2010 on constructive trust for the defendants, it follows that as beneficial owners of the property, the defendants were consequently not required to pay the plaintiff the balance of the purchase price of $211,136 in order to obtain a transfer of the property into their own names.
[176] Following the transfer of the property to the defendants in February 2010, Mr Kumar and the plaintiff proceeded as if there was no actual debt owed to the Kumar Trust by the defendants. Although the Kumar Trust’s financial accounts recorded “Vendor Finance/Chawdrapu $245,000” as a current asset, that accounting entry is not determinative, and in my view is another example of documentation created by the parties which was inconsistent with actual events. In this regard I note that even assuming that a vendor finance liability was created on settlement of the February
2010 sale the $245,000 figure is in error as it omits to account for the sum of
$33,863.11 which was paid and received on settlement.
[177] Mr Kumar and the plaintiff made no demand for repayment of the vendor finance loan in 2013 when he and Global took issue with Mr Chawdrapu over his alleged non-compliance with the terms of the employment agreement. While Mr Kumar says he had asked Mr Chawdrapu about repayment of the vendor finance loan around the time of his departure from Global, Mr Chawdrapu says the topic was never mentioned. He says apart from the correspondence from Global’s solicitors in February 2013 over the employment contract, he heard nothing from Mr Kumar and certainly no demand for repayment of the vendor finance loan was made until Mr Sills wrote to the defendants on 7 July 2015 alleging that a loan from the Kumar Trust and advanced pursuant to the terms of the agreement for sale and purchase settled on 5 February 2010 remained outstanding, which with interest totalled nearly $300,000.
[178] The effect and result of my finding that the entire beneficial interest in Arabi Street was held by the plaintiff on constructive trust for the defendants, is that the plaintiff was not entitled to insist on being paid anything above what it was paid in consideration for transferring Arabi Street to the defendants and furthermore that there is and never was any valid and enforceable debt due or owing by the defendants to Kumar Trustee Ltd.
Result
[179] For these reasons the plaintiff’s claim fails, and accordingly I enter judgment for the defendants.
[180] The defendants are entitled to an award of costs and reasonable disbursements. I direct the defendants to file and serve their memorandum as to costs within 10 working days of delivery of this judgment, and the plaintiff to file and serve its memorandum as to costs within a further seven working days following its receipt of the defendant’s memorandum. I shall thereafter determine the costs on the papers.
Paul Davison J
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