Merchant Finance Limited v Xu
[2021] NZHC 3589
•21 December 2021
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2019-404-1860
[2021] NZHC 3589
BETWEEN MERCHANT FINANCE LIMITED
Plaintiff
AND
RU XU and KARL EDWARD LITT
Defendants
AND
GDL MORTGAGES LIMITED
First third party
AND
WEIPING GE
Second Third Party
Hearing: 14-17 June 2021, 5 July 2021 and 22 July 2021 Appearances:
DK Wilson for the Plaintiff
CR Goode and D Oh for the Defendants MJW Lenihan for the Third Parties
Judgment:
21 December 2021
JUDGMENT OF FITZGERALD J
This judgment was delivered by me on 21 December 2021 at 3.00pm, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors:Davenports City Law (G Whiteford), Auckland Loo & Koo (B Lee), Auckland
To:D Wilson, Auckland C Goode, Auckland M Lenihan, Auckland A Kashyap, Auckland
MERCHANT FINANCE LTD v XU [2021] NZHC 3589 [21 December 2021]
Introduction.............................................................................................................. [1]
The pleadings......................................................................................................... [13]
Merchant Finance’s statement of claim............................................................... [13]
The defendants’ statement of defence and counterclaim...................................... [16]
The defendants’ third party claim against Mr Ge................................................ [24]
Mr Ge’s statement of defence to the affirmative defences and counterclaim [34]
Key issues arising................................................................................................ [39]
Factual background............................................................................................... [40]
Introduction and assessment of the evidence....................................................... [40]
Events prior to 30 November 2017...................................................................... [51]
Events in the lead up to the Loan Agreement – 30 November to 7 December 2017
............................................................................................................................. [64]
Events after the Loan Agreement was signed..................................................... [119]
Events after the Loan Agreement expired.......................................................... [139]
The expert evidence............................................................................................. [153]
Ms Harris’ evidence........................................................................................... [153]
Mr Alcock’s evidence......................................................................................... [169]
Did Merchant Finance breach any of its disclosure obligations under the CCCFA? [187]
The contents of the Loan Agreement.................................................................. [187]
A preliminary point - the correct principal sum and interest [208]
Disclosure breaches........................................................................................... [215]
Continuing disclosure........................................................................................ [219]
The application fee............................................................................................ [225]
The broker fee.................................................................................................... [228]
What are the consequences of the disclosure and other CCCFA breaches?.. [229]
Was Mr Ge acting as Merchant Finance’s agent?............................................ [253] Should the Loan Agreement be reopened for oppression?.................................................. [266]
Is the claim that the Loan Agreement be reopened time barred? [266]
Reopening a consumer credit contract – legal principles [270]
Should the Loan Agreement be reopened – discussion...................................... [276]
Did Merchant Finance breach the FTA?.......................................................... [292]
The claims against Mr Ge................................................................................... [296]
Did Mr Ge breach the CCCFA?........................................................................ [296]
Did Mr Ge breach his duty pursuant to ss 33 of the Act? [298]
Did Mr Ge breach the FTA/s 34 of the FAA?....................................................................... [324]
Result and next steps........................................................................................... [341]
Introduction
[1] In December 2017, the defendants, Ms Xu and Mr Litt (who are husband and wife) took out a loan of $1.898 million from the plaintiff, Merchant Finance. The loan was secured by a mortgage over the defendants’ property on Remuera Road in Auckland (the Property).1
[2] Merchant Finance is a second-tier lender. The second third party, Mr Ge, and his company GDL Mortgages Ltd (GDL) (the first third party), is a registered financial adviser (RFA)/mortgage broker and arranged the loan for the borrowers.2 The loan was used to repay an earlier second-tier loan (from Southern Cross Finance Ltd (Southern Cross)), secured by a mortgage over the Property. The Merchant Finance loan was for one year and was to expire on 7 December 2018. Interest (at a rate of
10.95 percent) was capitalised and thus formed part of the $1.898 million principal amount.
[3] The defendants had hoped to re-finance the Southern Cross loan with a mainstream bank. Mr Ge told them, however, that it was not possible to do so at that time, but in light of financial information provided by the defendants about their restaurant business (which was being run from the Property), was positive about the prospect of refinancing with a mainstream bank upon the expiry of the Merchant Finance loan. Absent refinancing the Southern Cross loan with a second-tier lender, the only other alternative in December 2017 would have been to sell the Property.
[4] In the event, the defendants were not in a position to refinance with a mainstream bank in December 2018, and could not reach agreement with Merchant Finance to extend the loan. After the defendants took steps in early 2019 to sell the Property, Merchant Finance sold the Property at a mortgagee sale in June 2019 for
$1.790 million.
[5] It will be apparent that the June 2019 sale price represented a shortfall on the Merchant Finance loan. After taking into account default interest, fees and costs
1 A registered valuation valued the Property at $2.6 million as of July 2017.
2 For ease of reference, I will refer to GDL and Mr Ge collectively as “Mr Ge”.
associated with the sale, Merchant Finance sues the defendants for a shortfall of
$548,009.22, plus continuing (default) interest and costs.
[6] In response, the defendants advance two affirmative defences and/or counterclaims. They say that:
(a)Merchant Finance breached a number of provisions of the Credit Contracts and Consumer Finance Act 2003 (the CCCFA), including its disclosure obligations.
(b)The Merchant Finance loan was, given the disclosure defects and all of the surrounding circumstances, oppressive, and the defendants seek orders under the CCCFA reopening the loan and granting the defendants relief.
(c)That Merchant Finance, including through Mr Ge (who is alleged to have been Merchant Finance’s agent) engaged in misleading and deceptive conduct in breach of s 9 of the Fair Trading Act 1986 (the FTA).
[7] The defendants seek various forms of relief, though none of the claims for damages were particularised or quantified prior to trial (and I declined to grant leave to amend the pleadings after the trial had commenced to include such particulars).
[8] In addition to their affirmative defences and/or counterclaims, the defendants also commenced a third party claim against Mr Ge, advancing three causes of action:
(a)The first essentially mirrors the claim against Merchant Finance and referred to at [6(b)] above, namely seeking relief against Mr Ge under the CCCFA.
(b)The second cause of action largely mirrors the FTA claim against Merchant Finance, and alleges that Mr Ge made a number of misleading statements in the context of arranging the Merchant Finance loan.
(c)The third alleges that Mr Ge breached his duties pursuant to ss 33 and 34 of the (now repealed) Financial Advisers Act 2008 (the FAA). Section 33 requires a financial adviser to “exercise the care, diligence, and skill that a reasonable financial adviser would exercise in the same circumstances”, and s 34 prohibits a financial adviser from engaging in misleading and deceptive conduct.
[9] The defendants’ pleaded claims are discursive and at times unclear. Aspects of the evidence led by the defendants, and sought to be elicited on cross-examination, also extended at times beyond the pleaded case. The defendants’ closing submissions were also lengthy and discursive, also extending at times beyond the pleaded case.
[10] I mention these matters as the Court of Appeal in Yan v Mainzeal Property and Construction Ltd (in liq) (Mainzeal) re-emphasised the importance of pleadings, and that claims are to be assessed against the pleaded case.3 It is accordingly important that the competing claims in this case are assessed against the pleadings.
[11]The balance of this judgment is structured as follows:
(a)First, I summarise the pleadings and the key issues arising from them for determination.
(b)I then set out the factual background which, given the range of allegations made against Merchant Finance and Mr Ge, is addressed in some detail.
(c)Third, I summarise expert evidence given by financial advisers called by the defendants and Mr Ge.
(d)I then set out my discussion of and conclusions on each of the issues arising for determination.
3 Yan v Mainzeal Property and Construction Ltd (in liq) [2021] NZCA 99 at [493]-[494].
[12] Finally by way of introduction, since Merchant Finance commenced its claim, Mr Litt has been declared bankrupt. As such, pursuant to s 76(1) of the Insolvency Act 2006, Merchant Finance’s proceedings against him were halted. I am not aware of any application by Merchant Finance for permission for the proceedings against Mr Litt to continue. Accordingly, while I refer to “the defendants” throughout this judgment, Merchant Finance’s claims strictly continue against Ms Xu only.4
The pleadings
Merchant Finance’s statement of claim
[13] Merchant Finance’s pleading is relatively straightforward. It sets out the terms of the loan agreement between it and the defendants (the Loan Agreement), recites the essential factual background and that the defendants failed to repay “the principal sum of $1,898,000” on the expiry of the loan on 6 December 2018. The claim then addresses two notices issued by Merchant Finance in January and March 2019 respectively pursuant to s 119 of the Property Law Act 2007 (each a PLA Notice, and collectively, the PLA Notices), and the later sale of the Property by mortgagee sale in June 2019.
[14] In terms of the shortfall amount claimed of $548,009.22, this is recorded as being calculated by reference to:
(a)the principal sum of $1,898,000;
(b)interest for the term of the loan of $207,831;
(c)repayments made by the defendants on 24 December 2018 and 21 January 2019 (totalling $45,000);
(d)default interest at a rate of 30.95 percent per annum, from 6 December 2018 to 29 August 2019 of $417,949.84; and
4 Ms Xu confirmed in her evidence that all steps taken to secure a refinancing of the Southern Cross loan, and to put in place the Merchant Finance loan, were taken by her, and not Mr Litt, in any event.
(e)agent’s commission on the sale of the Property ($41,170), plus Merchant Finance’s legal fees to the point of claim (being $25,889.38).
[15]Merchant Finance accordingly claims judgment against the defendants for:
(a) $548,009.22;
(b)interest accruing on that amount from 29 August 2019 to the date of payment at 30.95 percent per annum; and
(c)costs on a solicitor/client basis (pursuant to cl 13 of the Loan Agreement).
The defendants’ statement of defence and counterclaim
[16] Before summarising the statement of defence and counterclaim, I record that by memorandum filed on the morning of the second day of the hearing, Ms Goode, counsel for the defendants, applied to amend the defendants’ pleading. After hearing from counsel, I granted leave to make the amendments as proposed, other than amendments which effectively sought to introduce a further cause of action by way of counterclaim (calling into question the mortgagee sale and the price achieved), and seeking damages for what was said to be losses suffered on the sale. I also declined to grant leave to amend the pleadings to seek the same amount by way of damages pursuant to s 43 of the FTA. I provided my reasons for declining leave in a Reasons for Ruling No. 1 issued on 24 June 2021.5 In short, this was because of the lateness of the proposed amendments, and the reality that granting leave would have required the trial to be vacated. This was against the backdrop that on 24 September 2020, and thus some eight months prior to trial, Associate Judge Bell had raised with the defendants the fact that the counterclaim damages were unparticularised/unquantified, and cautioned that “the defendants will be required to quantify the damages they seek before the close of pleading date.”
5 Merchant Finance Ltd v Xu, CIV-2019-404-1860, minute of Fitzgerald J dated 24 June 2021.
[17] Turning to the defence and counterclaim, the essential terms of the Loan Agreement and the key factual matters pleaded in the statement of claim are broadly accepted (though there is a dispute as to the default interest rate under the Loan Agreement). The essence of the statement of defence is that the defendants were induced to enter into the Loan Agreement by misrepresentations made by Mr Ge, who is alleged to be Merchant Finance’s agent, “and/or unfair trading by [Merchant Finance], including conduct that was oppressive and in breach of reasonable standards of commercial practice”.
[18]The circumstances said to give rise to oppression are pleaded as follows:
(a)the defendants did not own the Property at the time Merchant Finance was first approached in relation to the loan (it being in Ms Xu’s mother’s name, Mrs Wang);
(b)the intended sale and purchase of the Property from Mrs Wang to the defendants was between family members at the full registered valuation amount of $2.6 million;
(c)the registered valuation was more than three months old, and was made out to Mrs Wang, not the defendants or Merchant Finance;
(d)Merchant Finance and Mr Ge (acting as Merchant Finance’s agent) required the Property to be transferred by Mrs Wang to the defendants, and had Prendos, the valuer, readdress the valuation to Merchant Finance;
(e)the maximum gross earnings the defendants disclosed (via Mr Ge) could not service the loan;
(f)Merchant Finance had never met the defendants;
(g)Merchant Finance provided misleading and incomplete disclosure about the loan;
(h)the defendants had little or no disclosure about the loan left with them to enable them to review and understand it before entering into the Loan Agreement;
(i)the loan as entered into was $250,000 more than the defendants had originally sought;
(j)the loan was to capitalise and charge interest up front;
(k)the loan amount was incorrectly calculated with all errors favouring Merchant Finance;
(l)the Loan Agreement contained an unreasonable application fee;
(m)the 30.95 percent default interest rate was added to the loan with no initial disclosure;
(n)the defendants had three young children;
(o)the defendants had never before had a home loan; and
(p)the defendants did not have enough initial disclosure or time to seek independent legal advice.
[19]The defendants further allege that:
(a)Mr Ge, acting as Merchant Finance’s agent, induced the defendants to enter into the Loan Agreement by making a number of false statements, namely that Merchant Finance was “reputable”, the loan was “low risk”, the loan was on “general terms”, the loan was at “market rates”, that “not to worry”, Merchant Finance would agree to an extension before the loan term expired, and if the defendants took up the loan “they could get refinanced to a main bank”.
(b)The security for the loan was “manipulated” in advance by Merchant Finance and Mr Ge.6
(c)Other aspects of the Loan Agreement, or the circumstances in which it came to be entered into, were oppressive, namely:
(i)Merchant Finance and Mr Ge had induced the defendants to take up a loan they could not afford;
(ii)the defendants were pressured to take up the loan as soon as possible;
(iii)Merchant Finance was to charge a holding fee, to be deducted from the principal, if the full loan amount was not drawn down by the draw down date;
(iv)Merchant Finance did not provide contact details, other than through its solicitors; and
(v)no statements of account were provided during the loan term.
[20] Against this backdrop, the defendants then plead two “affirmative defences and/or counterclaims and/or set offs”. The first is oppressive conduct in breach of the CCCFA. The defendants allege that the Loan Agreement was a consumer credit contract (which Merchant Finance does not dispute). They say that taking the CCCFA s 124 factors into account, the Loan Agreement was oppressive, and seek orders reopening the Loan Agreement and granting relief (including cancelling or varying the Loan Agreement, ordering Merchant Finance to pay the defendants compensation and/or ordering the transfer of the Property to the defendants).
6 Precisely what is meant by the allegation of “manipulation” is not clear. I proceed on the basis that it encapsulates an allegation that Mr Ge suggested that the Property be transferred from Mrs Wang to the defendants, and the Prendos valuation was re-addressed to Merchant Finance shortly before the Loan Agreement was entered into.
[21] The defendants’ second affirmative defence and/or counterclaim and/or set off is breach of the FTA. The defendants plead that the “representations, acts and conduct” by Merchant Finance, and Mr Ge as its agent, were misleading and deceptive. The representations, acts and conduct referred to are not particularised, other than by way of a general reference to the earlier paragraphs of the statement of defence and counterclaim.
[22] The defendants say they have suffered loss and damage as a result of Merchant Finances misleading conduct, including:
(a)the forced sale of their home, loss of equity in the home, losses to their business, and in payments made to the (presumably real estate) agent and Merchant Finance; and
(b)stress and harm to their family.
[23] The defendants seek “relief pursuant to s 43 of the FTA”, together with “damages, for any amount payable or loss suffered by the defendants as a result of the conduct by the plaintiff or its agent, and the plaintiff’s claim”, together with interests and costs.
The defendants’ third party claim against Mr Ge
[24] There being no opposition by Mr Ge, the defendants filed and served an amended third party statement of claim against Mr Ge on the Thursday prior to the commencement of the trial.
[25] The first cause of action against Mr Ge seeks relief pursuant to s 120 of the CCCFA. While the pleading is again somewhat discursive, it effectively makes the same allegations that are pleaded in relation to the alleged misrepresentations and inducement in the defendants’ counterclaim against Merchant Finance. The claim of oppressive conduct is advanced against Mr Ge on the basis that “acting as the mortgage broker and the agent in respect of a consumer credit loan”, Mr Ge was
required to comply with the CCCFA and follow the lender responsibility principles.7 This aspect of the pleading also repeats the allegations made in relation to Merchant Finance, in terms of the alleged deficient disclosure and unreasonable fees.
[26] Again, the defendants request that the Court exercise its jurisdiction pursuant to s 120 of the CCCFA to reopen the Loan Agreement, and grant the same relief referred to at [20] above in the counterclaim against Merchant Finance.
[27] The second cause of action against Mr Ge is for breach of the FTA. While the pleading overlaps to a significant extent with the claims against Merchant Finance, I apprehend the elements of the alleged misleading conduct by Mr Ge to be that he:
(a)advised the defendants that he could obtain a “main bank mortgage” and to transfer the family home as security for the loan to themselves (it then being owned by Ms Xu’s mother Mrs Wang);
(b)said the defendants just had “bad timing” to get a bank loan before Christmas;
(c)made those alleged misrepresentations referred to at [19(a)] above;
(d)stated that the defendants needed to “act quickly”;
(e)stated that if the defendants took up Merchant Finance’s one year loan first they “could get refinanced to a main bank” (after they had a year’s profit and loss statement, when a main bank would have required at least two years’ evidence of operating a successful business);
(f)proffered that a mortgage could be obtained for the defendants in their own names when they did not own the Property;
7 Found in s 9C of the CCCFA.
(g)advised the defendants that a main bank mortgage could be obtained in their names by transferring the Property from Mrs Wang’s ownership into their names because they were “younger”;
(h)advised the defendants to backdate a sale and purchase agreement transferring the Property from Mrs Wang’s name into their names to 30 November 2017, the same day as meeting them;
(i)advised the defendants to put the value of the transfer of ownership at
$2.6 million when the CV was $1.95 million;
(j)advised the settlement date for the sale and purchase agreement transferring the Property from Mrs Wang’s ownership into their names to be 6 December 2017, which was the same date the loan was to be drawn down on;
(k)represented that inquiries for a main bank mortgage would be made in 2018, as Mr Ge had connections and/or a good reputation with a main bank, when no inquiries were made;
(l)represented that he had tried other banks and lenders when he had not;
(m)represented that signing the GDL mortgage application form and mandate was urgent, in order to apply to Merchant Finance and get an offer, when Mr Ge knew that Merchant Finance had already agreed to provide a loan and had signed a document on 1 December 2017 to that effect;
(n)attended the defendants’ restaurant when both of the defendants were busy working, being insistent the matter was urgent and the documents were signed, so there was no time to take independent advice, nor to read and review the documents, and not leaving copies of the documents with them;
(o)represented he was professional and expert and had the defendants’ interests at heart;
(p)advised the defendants, when they complained that did not have time to read all the pages, “don’t worry, sign here and I will fill that in for you so it looks good for the lender”;
(q)changed the loan advance amount noted in the mortgage application form from $1.65 million, which the defendants had requested, to $1.89 million; and
(r)instructed, drafted and/or amended the misleading loan documents.
[28] On this cause of action, the defendants seek relief pursuant to s 43 of the FTA, and “damages, for any amounts payable or loss suffered by the defendant as a result of the conduct by the plaintiff or its agent, and the plaintiff’s claim”, together with interest and costs.
[29] As noted, the third cause of action against Mr Ge is breach of ss 33 and/or 34 of the FAA. On this cause of action, the defendants plead that the duties under ss 33 of the FAA included a requirement that Mr Ge:
(a)identify the needs of, and act in the best interests of, the defendants;
(b)act as a fiduciary, and not take advantage of vulnerabilities of the defendants;
(c)identify and respect a conflict of interest and not to act, or continue to act, unless he had obtained the fully informed and written consent from both parties to the conflict;
(d)follow a “six step advice process”; and
(e)be able to identify what a consumer CCCFA loan is, and to act in accordance with the requirements of such a loan, including lender obligations under the CCCFA and Responsible Lending Code.8
[30]The defendants allege that in breach of the pleaded duties, Mr Ge:
(a)did not identify their needs, or act in their best interests;
(b)took advantage of the defendants’ vulnerabilities;
(c)could not identify and respect a conflict of interest (presumably between him acting for the defendants and, as alleged by the defendants, as Merchant Finance’s agent), and that Mr Ge acted and continued to act without the fully informed and written consent from both parties to the conflict, including:
(i)he did not source any loans the defendants had asked him to source;
(ii)he did not disclose an alleged relationship with Merchant Finance, which shared the same lawyer as Mr Ge;
(iii)did not disclose he was writing the loan documents for Merchant Finance;
(iv)did not disclose all commissions or inducements from Merchant Finance or its law firm;
(v)did not disclose to the defendants that he instructed Merchant Finance’s lawyer;
8 The Code being promulgated pursuant to s 9G of the CCCFA. The Code is not binding, though compliance with the Code is evidence of compliance with the CCCFA lender responsibility principles.
(vi)did not disclose to the defendants that he altered terms of the loan, including the default interest rate in the Loan Agreement;
(vii)did not disclose that he instructed/sent the PLA Notices;
(d)would not assist the defendants when he owed them professional duties to do so;
(e)did not act with the diligence care and skill required of a registered financial advisor; and/or
(f)could not or did not identify the loan was a consumer credit contract under the CCCFA or act in accordance with the CCCFA, FAA and his professional duties.
[31]On this cause of action, the defendants seek the following relief:
(a)reopening of the Loan Agreement and the avoidance of it ab initio;
(b)restitutionary damages to restore the defendants back to the position they were in before Mr Ge’s negligence or “to the position they could have been in without the conduct of [Mr Ge]”;
(c)a “full indemnity” from Mr Ge as against any losses incurred by the defendants in relation to Merchant Finance;
(d)relief pursuant to s 43 of the FTA;
(e)damages for breaches of duty; and
(f)interest and costs.
[32] None of the defendants’ damages claims against Mr Ge were particularised/quantified. Somewhat curiously, the proposed particulars and quantification of loss were sought to be incorporated into the defendants’ reply to
Mr Ge’s statement of defence to the amended third party claim (the defendants’ reply filed and served on the Friday prior to the trial commencing). The suggested losses comprised loss of the family home and the equity and potential in it (quantified at
$410,000); loss of the defendants’ three restaurant businesses (quantified at $340,000); and general damages for damage to health and wellbeing (quantified at $60,000 or “such an amount the Court is minded to award”); plus “applicable penalties of breaches of statutes with payment to the plaintiffs”.
[33] I again heard argument on whether the proposed amendments to the claim against Mr Ge should be permitted. In the event, I declined to grant leave to the defendants to make those amendments relating to the losses quantified at $410,000 and $340,000 as referred to above. My reasoning was again set out in Reasons for Ruling No. 1 issued on 24 June 2021.9 Like the reason for declining the application to amend certain aspects of the defendants’ counterclaim against Merchant Finance, I was concerned at the very late stage at which the particulars were sought to be introduced, and the inevitable adjournment of the trial fixture as a result. This again took into account that the defendants had been on notice since 24 September 2020 that their damages claims needed to be particularised and quantified.
Mr Ge’s statement of defence to the affirmative defences and counterclaim
[34] Mr Ge admits he is an RFA and was subject to the relevant duties and obligations under the FAA, including those contained in ss 33 and 34.
[35] Mr Ge denies that he was acting as agent for Merchant Finance at any time. Accordingly, Mr Ge denies that any of his conduct could be in breach of the relevant provisions of the CCCFA, including the lender responsibility principles. Mr Ge broadly denies the specific allegations of wrongdoing by him, and says, amongst other matters:
(a)that at all times, he was acting in accordance with the usual and reasonable practice of mortgage brokers;
9 Above n 5.
(b)no representations were made or could have been made to the defendants that he would be able to secure a mortgage from a first tier lender, as the defendants were unable to produce up-to-date financial statements which were key requirements for first tier lenders;
(c)that any preconditions of the loan were decided by Merchant Finance, and that the defendants were asked to review and assess the loan offer before making a decision to enter into it;
(d)the defendants received independent legal advice on the Merchant Finance loan offer and formal Loan Agreement;
(e)at all times, he was trying to help the defendants out of a difficult financial situation;
(f)the defendants desperately required finance as they wanted to renovate and/or start operating their new restaurants; and
(g)the defendants were at all material times aware that Merchant Finance would be lending at a higher rate than first tier mortgagees.
[36] I also note that Mr Ge denies that ss 33 include the duties pleaded by the defendants and referred to at [29(c), (d) and (e)] above.
[37] Mr Ge further says that if there was any breach by him of any duty under the FAA, that breach did not cause the defendants any loss because:
(a)he was not responsible for drafting the Loan Agreement;
(b)the defendants received independent legal advice before entering into the Loan Agreement; and
(c)the defendants chose to sign the documentation after having received that advice.
[38] Mr Ge also says that irrespective of any breach, the defendants would have taken out the loan from Merchant Finance on the terms offered regardless, and in any event, even if there is a breach of duty, the defendants have suffered no damage as a result of his actions. This is said to be because Merchant Finance has confirmed that it will reduce its claim against the defendants by the amounts that the defendants allege the interest and fees for the initial one year term were overcharged.
Key issues arising
[39] The above (lengthy) summary of the pleadings can be distilled into the following key issues for determination:
(a)Did Merchant Finance breach any of its disclosure obligations under the CCCFA?
(b)If the answer to (a) above is “yes”, what are the consequences of any such breaches?
(c)Did Merchant Finance charge any unreasonable fees for the purposes of the CCCFA?
(d)If the answer to (c) above is “yes”, what are the consequences of doing so?
(e)Was Mr Ge acting as Merchant Finance’s agent in securing the Merchant Finance loan for the defendants?
(f)Should the Court exercise its power to reopen the Loan Agreement pursuant to s 120 of the CCCFA, and if so, what relief ought to be granted?
(g)Did Merchant Finance breach the FTA, including on the basis of any representations made by Mr Ge as its agent?
(h)Is relief pursuant to s 120 of the CCCFA available as against Mr Ge?
(i)Did Mr Ge breach any of his duties pursuant to ss 33 and 34 of the FAA?
(j)Did Mr Ge engage in misleading and deceptive conduct in breach of the FTA?
Factual background
Introduction and assessment of the evidence
[40] I make some brief initial observations on the witnesses and my assessments of credibility and/or reliability.
[41] The main evidential contest was between Ms Xu and Mr Ge. As will be evident from the discussion of the factual background below, there are aspects of both Ms Xu and Mr Ge’s evidence that I have not accepted. I formed the view that at times, each somewhat overstated or understated matters, as the case may be, reflected in aspects of their evidence-in-chief shifting under cross-examination, or not reflecting the position demonstrated by the contemporaneous documents.
[42] I should emphasise, however, that I am not suggesting that either Ms Xu or Mr Ge deliberately lied in their evidence. Rather, many of the differences between them stems from their different interpretations of what should be drawn from the underlying facts. The differences are also likely a result of recounting detailed events which took place a number of years ago, through a lens of hindsight. Ms Xu’s evidence in particular also contained many inadmissible statements of opinion, belief and/or speculation, and posed many rhetorical questions.
[43] Given the conflict in evidence between Ms Xu and Mr Ge, I have placed particular reliance on the underlying contemporaneous documents, of which there are fortunately many. The contemporaneous documentation in this case, like in many cases, provides a reliable, and sometimes the most reliable, record of the events in question.
[44] Mr Weng, a director of Merchant Finance, also gave evidence. Nothing, however, material turns on his evidence (it not being in dispute that no-one from Merchant Finance met the defendants before the loan expired, and most of the allegations against Merchant Finance being capable of being determined “off the papers” (in particular, the disclosure allegations), or on the basis of Mr Ge’s evidence (given the allegation that he was Merchant Finance’s agent). Mr Han, Merchant Finance’s other director, was not originally called by Merchant Finance to give evidence, though he was called to give evidence on a narrow topic which arose from additional documents disclosed to the defendants during the course of the trial. While Mr Han was clearly not pleased to be giving evidence, I found his evidence on that particular topic (being what was said in WeChat messages between himself and Mr Ge, and related to the suggested urgency of the loan transaction) to be broadly credible.
[45] Ms Xu’s mother, Mrs Wang, was not called by the defendants. Nor, unfortunately, was Mr Park, the solicitor who acted for the defendants on the transaction. I say “unfortunately”, as I expect his evidence would have been helpful in addressing matters such as the suggested urgency of the transaction, and the advice given to the defendants prior to entering into the Loan Agreement.
[46] The defendants and Mr Ge also each called expert financial adviser evidence; Ms Harris on behalf of the defendants, and Mr Alcock on behalf of Mr Ge.
[47] As will be evident from the summary of the expert evidence later in this section of the judgment, while Ms Harris and Mr Alcock differed on their view of whether Mr Ge met the expected standard of care for a financial adviser, they nevertheless agreed on many matters.
[48] Where the experts disagreed however, I generally prefer Mr Alcock’s evidence. This is not intended to be a criticism of Ms Harris, as I accept her expertise and reiterate that there were significant areas of agreement between her and Mr Alcock. Nevertheless, from reading Ms Harris’ brief of evidence and listening carefully to her oral evidence in court, it appeared that she had been somewhat captured by the “morals” of the dispute between the defendants and Merchant Finance/Mr Ge, stemming in part, in my view, from her quite strong – but valid –
concerns about Merchant Finance’s compliance with various disclosure obligations under the CCCFA. In the event, I found Mr Alcock’s evidence more balanced and objective, and thus helpful.
[49] Ms Harris had also proceeded on the basis that the factual position (presumably conveyed to her by the defendants in the context of the preparation of her evidence) was correct, and did not appear to have been aware that that evidence was, in many respects, in dispute. As will be evident from the factual background section below, there are aspects of the defendants’ evidence which I have not accepted. Ms Harris also proceeded on the basis that Mr Ge was Merchant Finance’s agent and thus subject to the lender obligations under the CCCFA, which I have found not to be the case.
[50]I turn now to the factual background.
Events prior to 30 November 2017
[51] The Property is a largely residential property in Remuera, which prior to 6 December 2017, was owned by Wenfeng Wang, Ms Xu’s mother. When she was in New Zealand, Mrs Wang lived at the Property, as did the defendants and their three children. Other rooms were rented out (giving rise to rental income of around $1000 per week).
[52] The Property had originally been purchased with a residential loan taken out by Mrs Wang with ASB. Ms Xu explained that when her mother bought the Property, it was fairly run down.
[53] Ms Xu said that in 2015, she had assisted her mother in seeking “top-up finance” from ASB,10 but difficulties arose when ASB took the position that the original loan to Mrs Wang ought to have been a commercial loan, rather than residential. Ms Xu said that ASB said that it would take steps to “cancel the mortgage” as a result. Given ASB would not advance any “top up” funds, Ms Xu explained how a second mortgage was then taken out with Core Finance, a second-tier lender, for
$200,000, evidently used to upgrade aspects of the Property and obtain resource
10 Her mother not speaking English, and Ms Xu holding a power of attorney on her mother’s behalf.
consent to enable a commercial operation from the front of the premises (that is, the defendants’ business).
[54] Pursuant to a lease dated 11 August 2016, the defendants’ business, “Monday Sunday Limited”, leased part of the Property from Mrs Wang. The business was originally a convenience store, but at some point changed to operate as a Thai restaurant in the evenings. The defendants’ company paid Mrs Wang rent of around
$1,500 per week.
[55] Ms Xu explained that when the Core Finance loan (of one year) was due to expire, she and her mother asked ASB if that could be consolidated into the main ASB mortgage, which ASB did not agree to do. Accordingly, in June 2017, Ms Xu again assisted her mother to secure a new loan from Southern Cross, the loan offer for which was produced in evidence. The Southern Cross loan was for $1,469,900 (with total credit available of $1,552,388.86),11 for a term of six months. The loan offer, dated 22 June 2017, recorded the purpose of the loan as being to:
Refinance ASB and Core debt and additional $50,000 to tidy up the security property for sale – PLA issued.
(emphasis added)
[56] One of the conditions of the loan was that a listing agreement was provided prior to the loan drawdown.
[57] I mention these matters (which were not addressed by Ms Xu in her evidence in chief) as the position in relation to the Property already seemed to be somewhat perilous, with a PLA notice having been issued (it not being clear if this was by ASB or Core Finance), and the expectation being that the Property would be “tidied up” and sold prior to the expiry of the Southern Cross loan.12
[58] Relevant to matters discussed later in this judgment, interest on the Southern Cross loan was capitalised, as well as legal costs and fees.
11 Being the original principal amount plus capitalised interest.
12 I note that in mid-2018, Ms Xu again sought additional finance, of $60,000, also to “tidy” the Property up for sale; see [124] below.
[59] A Prendos valuation of the Property was also produced in evidence. The valuation was dated 3 July 2017, addressed to Mrs Wang and recorded a market value for the Property of $2.6 million. The valuation stated:
The property comprises an original 1930s villa that has been extended over the years offering spacious residential accommodation. In addition there is a more recent extension to the front and this has been converted for use as a café. We understand this is owner/occupied and no formal lease details have been provided.
Note: the dwelling requires total renovation and this has been taken into consideration.
[60] I interpolate to note that loans like that offered by Southern Cross Finance were referred to by Ms Harris and Mr Alcock as “asset loans”, being second-tier lending secured against real property. They are intended for short periods of time only (six to 12 months), given the much higher interest rates and fees than those charged in connection with mainstream bank loans. The loan amounts are also generally capped at what the lender sees as the maximum acceptable “loan to value” ratio (LVR). Ms Harris and Mr Alcock agreed that an LVR of around 70 percent would generally be considered the maximum LVR for asset loans. On the basis of the Prendos valuation of $2.6 million, the Southern Cross loan reflected an LVR of 59.70 percent.
[61] Ms Harris explained that an “exit strategy” is required from a second tier loan, so that the lender can be confident the loan will be able to be repaid at the conclusion of the loan’s term. She said that exit strategies for such loans are usually:
(a)the sale of the secured property, with the loan being repaid from the proceeds of sale; or
(b)the borrower’s self-employed business income being verified to such an amount that the borrower could then qualify to refinance the loan to a main bank.
[62] On the face of the Southern Cross loan offer, the intended “exit strategy” was the sale of the Property.
[63] It was common ground that Mrs Wang’s loan with Southern Cross was due to expire on 22 January 2018. The Property was not, however, sold during term of the Southern Cross loan. Nor was there any evidence that any particular steps had been taken by either Mrs Wang or the defendants to sell the Property prior to the loan expiring, nor, until November 2017, to refinance the loan.
Events in the lead up to the Loan Agreement – 30 November to 7 December 2017
[64] I infer from the fact the Property was not sold during the course of the Southern Cross loan, and that Ms Xu took steps in late 2017 to seek to refinance the loan, that Mrs Wang’s and/or the defendants’ preference was not to sell the Property at that time. In the event, Ms Xu confirmed in cross-examination that in December 2017, she would not have wanted to sell the Property unless she absolutely had to. I further infer that this was because the defendants’ restaurant business was doing very well.
[65] Ms Xu said she had approached ANZ about a potential refinance, but the bank had said that it was not a straight-out residential property and suggested she work with a mortgage broker. Ms Xu explained that she saw an advertisement by Mr Ge (including that he specialised in bank finance loans), and contacted him to assist with the refinancing. Mr Ge had worked with the Bank of New Zealand (BNZ) for four or five years, and had set up his own financial advisory business in 2002.
[66] Mr Ge’s diary entry was produced in evidence, which recorded a meeting with Ms Xu scheduled for 2.30pm on 30 November 2017, noted as “talk to Cheryl Ru Xu on finance $1.65 million …”.
[67] I again interpolate to note that it was suggested a number of times during the evidence given on behalf of the defendants that the amount of the loan taken out with Merchant Finance was considerably more than the defendants requested (the pleading itself alleging that it was $250,000 more than the amount sought), and that the “end number” of $1.898 million had simply been proposed by Merchant Finance.
[68] I do not accept that the loan was significantly more than requested by the defendants. Mr Ge’s evidence was that Ms Xu requested an amount of $1.650 million, being what was needed to repay Southern Cross, plus $100,000 for business purposes.
Ms Xu, on the other hand, said she wanted enough to repay Southern Cross Finance, plus additional funds to set aside to pay the interest on the new loan. On balance, I prefer Mr Ge’s explanation of the reason for the additional $100,000, for the following reasons:
(a)First, it is clear that the loan amount requested was $1.650 million, as reflected in Mr Ge’s diary note.
(b)Second, an amount of $100,000 would have fallen short, by some margin, of being sufficient to meet interest payments on a $1.550 million loan (assuming an interest rate of 10.95 percent, as per the Southern Cross loan). Ms Xu did not suggest that she expected to secure a much lower interest rate than the Southern Cross loan.
(c)Third, Ms Xu confirmed that the defendants started a second restaurant business (in St Heliers) in December 2017 or January 2018, and thus almost immediately after taking out the Merchant Finance loan. Thus the request for some additional finance for business purposes has a degree of logic about it, given the timing the defendants started their second business (and there being no evidence of other sources of funds to put towards that business).13
[69] Proceeding, therefore, on the basis that the original principal amount requested was $1.650 million, the “end number” of $1.898 million broadly reflects the principal amount plus capitalised interest (at a rate of 10.95 percent per annum) and fees.14 Ms Xu said in evidence that she understood that interest and fees were to be capitalised, having agreed to Mr Ge’s suggestion in this regard.
[70] Mr Ge and Ms Xu met at around 2.30pm on 30 November 2017, at the Property. Mr Ge said that Ms Xu showed him through the Property, which included
13 The proposed amendments to the defendants’ third party claim against Mr Ge stated that start up costs for the defendants’ two new restaurant businesses, commenced during the term of the Merchant Finance loan, were “at or more than $100,000 each”.
14 See the breakdown of the $1.898 million amount set out in the loan instruction form, at [100] below.
the restaurant and a five bedroom house (behind the restaurant), and told him that her mother was receiving about $1,000 per week in rental/boarding income from the house. He said that Ms Xu said that she and her husband wanted a loan so they could continue the restaurant business from the Property, which was going very well. I note that this is consistent with Ms Xu’s evidence in her primary brief where she stated:
By late 2017 we had an evening restaurant and a plan to have a full on café at the same location to increase the scope of the business. We had turnover of around $500,000 per annum and we were both very busy.
[71] Mr Ge said that on this basis, it seemed to him that the proposed loan would be a commercial loan, as the business was being run from the Property.
[72] The process from Mr Ge’s first meeting with Ms Xu on 30 November 2017 to execution of the Loan Agreement took only one week. Each of Ms Harris, Mr Alcock and Mr Ge said that that was fast. Mr Ge said that Mr Xu told him at the 30 November meeting that arranging a new loan was urgent, as the Southern Cross loan was expiring, they required a new loan to avoid going into default, and that Ms Xu was worried that time was running out before the end of the year. Ms Xu, on the other hand, said that she did not say that the matter was urgent, and that it was Mr Ge who suggested that it needed to be progressed urgently.
[73] There are no contemporaneous documents which clearly confirm the position either way. However, on balance, I conclude that the suggestion that the matter was urgent was more likely to have come from Ms Xu than Mr Ge. I say this because:
(a)First, there was no particular reason why Mr Ge or Merchant Finance would have suggested there was any great urgency, other than of course the impending expiry of the Southern Cross loan on 22 January 2018.
(b)Second, I infer that Ms Xu was quite anxious about securing a replacement loan, rather than implementing the original “exit strategy” under the Southern Cross loan of selling Property (evidenced by her approach to ANZ, and then seeking out a broker to assist refinancing).
(c)Third, and perhaps most importantly, the contemporaneous documents that are available on this topic suggest the need for urgency may have come from the defendants rather than Mr Ge or Merchant Finance:
(i)In an email sent from Mr Ge to Mr Weng on Monday 4 December 2017, Mr Ge said:
The clients lawyer prefers to have this settle on Wednesday as he will away. Can you please ask Bibiana [Merchant Finance’s lawyer] works urgently on this loan documents.
(ii)Similarly, in a translation of a series of WeChat messages produced by the defendants as an exhibit during the trial, Mr Ge said in a voice message to Mr Weng on 5 December 2017 (discussing whether the loan would be drawn down on the 6th or 7th of December) that “… Has always said … because his/her lawyer stops working on Thursdays, that’s why the rush.
(iii)In an email from Park Legal to Loo & Koo on 7 December 2017, having returned the signed Loan Agreement and other documents, Mr Park stated “Please advise me when it is likely that the drawdown completed. We need this to be done before 3.00pm today”.
(d)Fourth, documents produced in evidence by the defendants and which they suggested confirmed that the urgency came about at the request of Merchant Finance did not, in my view, support that proposition. On the face of the documents, it is tolerably clear that the discussion of urgency related to the settlement of a separate and unrelated property transaction that Mr Han was then attending to (in which he was the purchaser and which was to settle on 12 December 2017), and which Mr Ge was working with him on (to obtain mortgage finance from Westpac). Mr Han and Mr Ge both gave evidence consistent with this. The linkage between this transaction and entry into the Loan Agreement suggested by Ms Goode was not in my view made out. Ms Goode submitted that entry into the Loan Agreement would have produced
income to Merchant Finance of $245,791 (by way of capitalised interest and fees), and that “the urgency was likely related to provide the total cash deposit to bank (sic) in sufficient time for the bank loan documents to be issued for a 12th December settlement date”. Not only is this submission speculative, in that there is no evidence to support it, it fails to take into account that no cash would pass from the defendants to Merchant Finance on execution of the Loan Agreement as a result of interest and fees being charged in advance and capitalised; rather these were simply “added” up front to the loan balance, and were to be paid on expiry of the loan in a year’s time.
(e)Finally, there is no suggestion in any of the contemporaneous documents that Ms Xu raised her concern that events were moving too fast for her liking.
[74] In the event, and despite a significant amount of time and energy at the hearing being devoted to who suggested the transaction was urgent, I do not consider the issue materially relevant to the matters I must determine in any event. The suggested urgency of the transaction was linked to the submission that the Loan Agreement was oppressive, in that the defendants were unduly rushed into entering into it and did not have time to seek independent advice. While as noted, all of Ms Harris, Mr Alcock and Mr Ge agreed that the timeframe was reasonably fast, as I discuss later in this judgment, I am equally satisfied that the defendants had sufficient time to consider the loan proposal and to seek independent advice on it.
[75] Returning to the narrative, Mr Ge said that at his meeting with Ms Xu on 30 November 2017, she showed him receipts and associated documents from the restaurant business that were stored in a “rolled up” form. He said that each roll related to one week and disclosed a net turnover of around $10,000. He said that Ms Xu told him that the restaurant’s net profit was about $4,000 per week and that she could obtain financial reports within about six months confirming that the business was returning a net profit of around $200,000 per annum.
[76] There was no particular dispute by Ms Xu of these aspects of Mr Ge’s evidence. Further, and despite the pleading that Mr Ge has said that he could obtain mainstream bank finance, the evidence at trial, including that of Ms Xu herself, was that with the appropriate financial information in hand, Mr Ge was confident of the prospects of obtaining mainstream bank finance in about a year’s time. I accordingly proceed on the basis that it was clear to Ms Xu from the outset that it was not possible to get a mainstream bank loan in December 2017, and that further second tier finance would be required. There was no suggestion by Mr Ge that he discussed with Ms Xu the prospect of not refinancing the Southern Cross loan, and instead immediately selling the Property.
[77] Ms Xu said that Mr Ge had suggested that interest be capitalised on the new loan, so the defendants did not run the risk of defaulting on an interest payment over the new loan’s term, which would not assist in any later application for main bank finance. Ms Xu also said that Mr Ge had suggested that the Property be transferred from Mrs Wang to the defendants, which again would assist with applying for mainstream bank lending, including because the defendants were “younger”. Mr Ge, on the other hand, said that these matters had been suggested by Ms Xu from the outset.
[78] I accept Ms Xu’s evidence on the question of capitalised interest. The suggestion that interest be capitalised to ensure no default and to improve later prospects of obtaining mainstream bank finance again has a degree of logic to it. And how interest was structured on a second tier loan would also be something more likely to be suggested by a mortgage broker rather than a lay borrower.
[79] In relation to the transfer of the Property, I conclude that the true position was somewhat of a mix between Ms Xu and Mr Ge’s evidence. Ms Xu said in her brief of evidence that “we may have suggested that once our financial reporting was completed, we could add our names to the title of the property”. The defendants’ closing submissions stated that:
In November 2017 Ms Xu and Mr Litt offered to help Mrs Wang to apply for refinancing with a main bank using their income and having their names on the title. Mrs Wang agreed to this.
(emphasis added)
[80] I conclude that such a suggestion was made by Ms Xu to Mr Ge at their meeting in November 2017, and he essentially “ran with it”, and suggested it be taken a step further to include the transfer, again to improve prospects of securing main bank lending on the expiry of the new loan.
[81] In making these factual findings, I do not imply that there was anything necessarily wrong or “sinister” in Mr Ge’s suggestions. Mr Alcock confirmed that capitalising interest (and fees) is not uncommon in second-tier asset lending.15 And Mrs Wang would have obviously have had to agree to the transfer of the Property into her daughter and son-in-law’s names, and there was no evidence to suggest that she was anything other than willing to do so.16 Further, there was no suggestion that Ms Xu or Mr Litt were somehow “unwilling” participants as borrowers under the Merchant Finance loan.
[82] Capitalising interest (and fees) on the replacement loan meant, however, that this would highly likely rule out another round of second-tier asset lending on the Property. This is because capitalising interest and fees on a loan of $1.650 million, with the Property valued at $2.6 million, resulted in an LVR of 73 percent, and thus just over the level the experts considered the maximum level second tier lenders would lend at.
[83] Mr Ge said that he told Ms Xu that a second-tier loan to refinance the Southern Cross loan would need to be for a short term of 6 to 12 months, and would need to be repaid in full at the end of the term. He said that he advised that the interest rate would be higher than for a mainstream bank loan. There was no particular challenge to these aspects of Mr Ge’s evidence.
15 The Southern Cross loan had, as noted, also involved capitalised interest and fees.
16 As noted, Mrs Wang was not called to give evidence, and she later entered into the relevant sale and purchase agreement. I accordingly proceed on the basis that she did so willingly.
[84]As to the proposed exit strategy, Mr Ge said the following:
I told Ms Xu that they would need to organise their financials so that they had financial statements that a bank would accept. In view of the income that Ms Xu told me that she and her husband were getting from the business, the turnover of the business and the rental income from the property, I thought that the defendants would be able to refinance a loan in 2018. I said that their other option would be to sell the property before the new loan term expired. She said that they would look to make an application to a bank refinance in 2018. She asked me to find offers for second tier finance as soon as possible in the meantime.
[85] Again, there was no real challenge to Mr Ge’s evidence in this regard, and the two proposed exit strategies are consistent with Ms Harris’ evidence on the available strategies, discussed earlier in this judgment.17
[86] Ms Xu sent Mr Ge the Prendos valuation shortly after their 30 November 2017 meeting. Mr Ge said that he immediately started making inquiries over the phone with second tier lenders. Mr Ge was unable, however, to provide any details around who he spoke to when he was cross-examined about this. Nevertheless, while I was somewhat sceptical about how many other lenders Mr Ge spoke with that afternoon/evening, as addressed later in this judgment, I am satisfied that (putting aside disclosure issues under the CCCFA, and aspects of the fees charged), there was nothing particularly onerous or unusual about the terms of the Merchant Finance loan. In other words, I do not consider a materially different (and better) loan would have been secured, even if Mr Ge has spoken at that time to many other second tier lenders.
[87] Mr Ge said that later on 30 November 2017, he ended up speaking with a Mr Han, as noted, a director of Merchant Finance. Mr Ge said that he thought he might have done one or two loan transactions with Merchant Finance prior to the defendants’ loan. Mr Han was evidently interested in lending to the defendants. Mr Ge rang Ms Xu after speaking with Mr Han to let her know of the progress made.
[88] Merchant Finance’s business was conducted from Mr Han’s personal residence.18 It is (or at least was in 2017 and 2019) operated solely by Mr Han and
17 At [61] above.
18 Presumably giving rise to Mr Han’s reluctance for his address and contact details being disclosed to the defendants, as discussed later in this judgment.
Mr Wang and did not have any other employees. It also seems that most administration and documentary work was handled by its solicitors, Loo & Koo.
[89] Mr Ge said that he organised to meet Mr Han at his home at noon the following day, Friday 1 December 2017. He said that he had also arranged for Mr Han to view the Property (from the outside) at 12.30pm, and that he discussed the transaction with Mr Han on their way to the Property.
[90] Mr Weng (as noted, the other director of Merchant Finance) said that on the morning of 1 December 2017, he undertook inquiries as to whether there would be appropriate security for the proposed loan, comprising some internet searches, including of the Property’s capital valuation. Mr Ge also sent Merchant Finance a copy of the Prendos valuation.
[91] Mr Ge visited Ms Xu and Mr Litt again at the Property at around 3.15pm that afternoon. In advance of the meeting, Mr Ge emailed Ms Xu a GDL mortgage application form, stating “Please fill in this application form, both of you sign it. I will be at your place in one hour to collect this form and talk about this loan processing in more details”.
[92] Mr Ge brought with him to the meeting, or forwarded to Ms Xu while he was there for printing, the following additional documents:
(a)a Merchant Finance mortgage application form;
(b)a document headed “Loan instruction”, setting out the core terms of the proposed loan and signed by Mr Han stating “I agree”; and
(c)a copy of Mr Ge’s mandate.
[93] Turning to each document, the GDL mortgage application was largely completed by Ms Xu. Relevant details included:
(a)that each of Ms Xu and Mr Litt had worked for six months at Monday Sunday Limited;
(b)the couple had three children (11 years and younger);
(c)their assets were declared as the Property, with a market value of $2.6 million, two cars and their business (said to be valued at $300,000);
(d)that they received rental income of $1,000 per week;
(e)disclosure of the loan from Southern Cross (in an amount of
$1,550,000); and
(f)salary/drawings for each of Ms Xu and Mr Litt of $50,000.
[94] Ms Xu accepted that all of this information was completed by her. She said that Mr Ge had told her to “round up” or “round down” some figures, but I proceed on the basis that Ms Xu accepted that this information was broadly correct.
[95] In a box in the GLD mortgage application form headed “borrowing requirements”, the figure of $1,898,000 was included as the “loan required”. There was some controversy as to whether Ms Xu had filled this out or Mr Ge had (which I discuss later in this judgment), though I am satisfied that the amount was not something Ms Xu proposed. Rather, and as noted earlier, I am satisfied that this broadly represented the $1.65 million proposed by Ms Xu as the loan amount, together with capitalised interest and fees.
[96] The GDL mortgage application form expressly recorded that “the broker is not an employee, agent, partner, nor joint venture partner of, nor does the broker act on behalf of, the lender”.
[97] Mr Ge’s mandate provided for a non-refundable $2,000 “application front fee”, together with a “success fee” of 1 percent of the loan amount, payable “immediately upon the lender’s offer being accepted and signed” by the defendants. The mandate also had a box ticked acknowledging that the defendants “have been offered the broker’s personal disclosure statement” and that they “understand that [they] could obtain a hard copy at [their] discretion”. It is not in dispute that Mr Ge did not provide the defendants with a copy of his disclosure statement.
[98] The Merchant Finance mortgage application form recorded Jay Park, from Park Legal, as the defendants’ solicitor. Other than Ms Xu and Mr Litt’s personal details, no other aspects of the form were completed (I infer this was because details of assets, liabilities and income had already been included in the GDL mortgage application form).
[99] One other point about the Merchant Finance mortgage application form which received some attention at the hearing was that under the section headed “terms and conditions of application”, it referred some 24 times to “QK Finance Investment Limited” (that is, rather than to Merchant Finance). This was an error and there was no evidence that Merchant Finance is related to QK Finance.19 I proceed on the basis that the reference to QK Finance was a “cut and paste” error, and I mention this as it appears to have been a problem with other Merchant Finance documents (such as the later PLA Notices, which also contained details wrongly “cut and paste” from earlier, but unrelated, PLA notices).
[100] Turning to the loan instruction form, is helpful for the discussion of matters in dispute later in this judgment (such as whether there was adequate disclosure under the CCCFA) to set out its terms in full. It recorded as follows:
Date:
1st December 2017
Lender:
Merchant Finance Ltd
Borrower:
Ms Ru Xu & Mr Karl Edward Litt Address: 631 Remuera Road, Remuera
Borrower’s Solicitor:
???
Loan Amount:
$1,898,000
Term:
12 months. Commerce
from 30t h March 2017 till 29t hMarch 2018
19 Mr Ge said that QK Finance is another second tier lender that he has done some work with, based on the Northshore. He said that they also used Loo & Koo as their solicitors.
Interest Rate:
10.95%
Penalty Interest:
+10%
Securities (1st registered mortgage over):
1.631 Remuera Rd, Remuera Area:
413m 21540m2
Security Value: $2,600.000
Loan Details (capitalized interest & fees): Loan Amount: $1,898,000 Less 12 months interest (10.95%): $207,831.00 Less Application Fee (2%): $37,960 Less Brokerage Fee (1%): $18,980 Less Legal Cost: $1500 Advanced amount: $1,650,709
[101] Given this document had already been signed by Mr Han for Merchant Finance, it is clear that it had been completed and signed by him prior to Mr Ge’s meeting with Ms Xu on the afternoon of 1 December 2017. Mr Ge said that he typed up the loan instruction form earlier that day, but that Mr Han had given him the “inputs” to it. Given Ms Xu’s concern, expressed in her evidence, that Merchant Finance appeared to have already agreed to the loan before Mr Ge’s meeting with her, I note that no party suggested that the loan instruction form amounted to a binding agreement, and indeed the later Merchant Finance letter of offer expressly stated that that offer was subject to a formal loan agreement being entered into.
[102] Mr Ge’s mandate, the two application forms and the loan instruction form were signed by Ms Xu and Mr Litt at the meeting on 1 December 2017.
[103] Mr Ge did not leave Ms Xu with copies of any of the documents signed on 1 December, nor did he later send her copies. Mr Alcock said that it would not be unusual not to leave copies of mortgage application forms with the proposed borrower, but that he would always have sent, in advance, a copy of his disclosure statement.
[104] On Sunday 3 December 2017, Mr Ge emailed Ms Xu, noting that “the only document we are waiting for is the S&P agreement”. This was a reference to the proposed sale and purchase agreement transferring ownership of the Property from Mrs Wang to the defendants. This is consistent with the sale and purchase agreement
produced in evidence, dated 30 November 2017, having been prepared at a later date and then backdated. If it had already been executed on 30 November 2017, there is no reason why Ms Xu would not have already provided it to Mr Ge, like the Prendos valuation.
[105] In the early hours of the morning on 3 December 2017, Mr Ge sent a range of documents to Mr Weng at Merchant Finance and Ms Bibiana Lee at Loo & Koo. Mr Ge noted in his email that the defendants had already paid an initial $2,000 deposit into his account, and “that money will be as part of the clients’ legal cost”. Mr Ge also said:
Should you have any query, please feel free to contact me. Otherwise I am expect to receive the draft loan documents early next week before it release to the clients solicitor.
[106] On Monday afternoon, 4 December 2017, Ms Lee forwarded to Mr Park at Park Legal, and copied to Mr Ge and Merchant Finance, a formal letter of offer in relation to the loan (Letter of Offer). Mr Ge in turn forwarded it onto Ms Xu, stating:
Please refer the lawyers formal offer letter. Read through. If any query, please call me. To keep, this ball rolling, please sign this offer and return it back to me asap.
[107] I again interpolate to note that Mr Alcock said that there was nothing unusual about Mr Ge receiving a copy of the Letter of Offer, and indeed it was the broker’s role to receive this and pass it on to the borrower.
[108] Also on 4 December 2017, there was an exchange of text messages between Ms Xu and Mr Ge. Mr Ge had text Ms Xu that evening to check she had received the Letter of Offer. At 7.05pm that evening, Ms Xu replied stating “Hi Bernie, got your email. I will let lawyer have a look, get back to you tomorrow, thanks” (emphasis added).
[109]The Loo & Koo Letter of Offer recorded the following:
(a)Amount of loan: $1,898,000, including application fees, broker fees, legal costs and interest for the term of the loan.
(b)The loan term was 12 months.
(c)The interest rate was stated as fixed, at 10.95%.
(d)The penalty interest rate was stated to be 20%.
(e)The drawdown date was said to be “on or before 7 December 2017”.
(f)Payment of interest was said to be “interest for the entire term of loan in advance”.
(g)It recorded that the defendants were to pay the costs of preparation of the formal loan agreement, and that “the legal documentation shall prevail over this letter of offer in the event of any inconsistency”.
(h)The Letter of Offer also noted that the borrowers agreed to pay all of the charges and fees incidental to the loan agreement, and stated “for your information, we estimate our costs on this matter to be $3,500 plus GST plus disbursement”.
[110] The letter included a space for Ms Xu and Mr Litt to accept the facility offered, on the terms contained in the letter.
[111] There was no evidence that Ms Xu or Mr Litt discussed the Letter of Offer with Mr Park. As noted, Mr Park was not called to give evidence. Ms Xu returned the signed Letter of Offer back to Mr Ge the following day (5 December 2017), shortly after noon. Mr Ge in turn forwarded it to Ms Lee at Loo & Koo, stating “Enclosed is the client signed offer letter. Please go ahead with the loan documentation towards tomorrow’s settlement”. Mr Weng at Merchant Finance was again copied into this email. Ms Lee responded shortly thereafter, stating “Thank you Bernie. We will forward the loan documents to the borrowers’ solicitors this afternoon”. Mr Ge replied to Ms Lee stating “Can you please cc me a copy as well. Thanks”.
[112]The following text exchange then took place between Ms Xu and Mr Ge:
Bernie: For the insurance, you need to make a new policy under you and your husband name as you guys will be the new owner. The interested party will be Merchant Finance Limited. Thanks.
Ms Xu:Thanks Bernie for your advice! Yes, Carlos is working on that, received the doc yet?
Mr Ge: Yes, received. And already forwarded to that lawyer. Ms Xu: Perfect! Thanks.
Mr Ge: The loan doc should be at your lawyer’s office this afternoon.
[113]Later that afternoon, Mr Ge text Ms Xu stating:
The loan documents should be emailed to your lawyer about 30 minutes ago. I received a cover letter to summary what are those documents. So, please contact your lawyer to get details and arrange signature if everything is okay.
[114] Early on the evening of 5 December 2017, Mr Ge forwarded to Ms Lee at Loo & Koo an invoice for his commission. This was in an amount of $18,980, being 1 percent of the total loan amount.
[115] Ms Xu, Mr Litt and, it seems, Mrs Wang, visited Park Legal’s offices at around 11.00am on 6 December 2017 to sign the Loan Agreement. In her brief of evidence, Ms Xu said that “[m]y mother’s lawyer Park Legal discussed matters with her just outside of the room before we signed”.
[116] Given the defendants were named as the borrowers in the Loan Agreement, and given Mr Park’s solicitor’s certificate recorded the defendants (and not Mrs Wang) as the borrowers, I consider it improbable that Mr Park only discussed matters with Mrs Wang (and “just outside of the room”). I am certainly hesitant about accepting this aspect of Ms Xu’s evidence without Mr Park being called to give evidence and the suggestion being put to him. Further, in cross-examination, and while maintaining her position that Mr Park did not explain the documents in any detail to her, Ms Xu’s evidence did shift a little, in terms of her and Mr Litt’s engagement with Mr Park. For example, the following exchanges took place with Mr Wilson, counsel for Merchant Finance:
Q. And you can see it’s [Mr Park’s solicitor’s certificate] signed by a Jay Park from Park legal on 6 December’17?
A. Yes.
Q. Do you understand this to be a certificate given by Jay Park?
A. Yes.
Q. In this document right in the middle of the page you see the heading “Documents Explained”. Do you see that paragraph?
A. Yes.
Q. In there he is certifying that the nature, effect and implications of the securities, deeds and agreements have been explained to each party and they appear to have understood the explanation.
A. Yes I saw that.
Q. Do you agree that he is saying there that he had explained the documents he’s referring to, he had explained those to you and your husband?
A.I’m not sure what he need to explain to us exactly. What we know is we went there, he received the loan document and we go there, so we told him about the loan with Merchant Finance and then – yeah we understand we’re borrowing money from Merchant Finance, then we signed the loan agreement.
Q. Well in short do you agree that Jay Park did on 6 December explain these documents to you and your husband?
A. Explain —
Q. Explain the meaning of them.
A. — to which level. We both understand that’s a loan document. Was really, really brief, that’s the loan document, I understand this from Merchant Finance to borrow the money to use the house as security. Yeah that’s what we’d been discussed.
Q. Well, you can see that his statement is that he’s explained the nature, effect and implications of the provisions of these documents to you.
A.It’s possible you can explain. For example, if you’re going to, if you are Jay Park what you, will be explained to me then I will be able to confirm, because I don’t know what you mean by explained the nature of the borrowing — the nature of the contract is we’re borrowing money from Merchant Finance and to use the property as security.
Q. Well, do you know if, can you recall whether he explained to you how much money you were borrowing?
A. Yes.
Q. Did he explain —
A. Well —
Q. — to you that the ordinary interest rate stated in the agreement was —
A. I, sorry, I don’t think he going down by list explain everything. I know the loan amount. I know the interest rate. It wasn’t explained by him. Indeed they got really short time. I look at the email was provided by Bernie. The email sent to Jay Park was on first afterhours, so that mean they received the email on 6 December in the morning, and our appointment with Jay Park was at around 11. So I don’t know if they had time to looking into anything.
…
Q. That is his certificate, that he says he explained the meaning of all documents to you.
A. Mmm.
Q.I that a true statement he is making in his certificate, or are you saying it is false?
A.I’m not saying it’s false. I can’t be confirming — like you say, he said he explained to me but I need to know what he explained to me so I can answer he said that or not. Yes.
[117] As would be expected, Mr Park’s solicitor’s certificate confirms, amongst other matters, that “the nature, effect and implications of the provisions of the securities, deeds and agreements have been explained to each party and they appeared to have understood the explanation”. Given Mr Park was not called to give evidence, I am not prepared to conclude that Mr Park’s certificate was false in this respect. Further, and as discussed later in this judgment, there is nothing in the evidence to have put Merchant Finance or Mr Ge on notice that the defendants did not or could not have received independent legal advice on the loan transaction.
[118] At 12.43pm on 7 December 2017, having returned the signed Loan Agreement and other documents to Ms Lee at Loo & Koo, Mr Park emailed Ms Lee stating “Please advise me when it is likely that the drawdown completed. We need this to be done before 3.00pm today”.
Events after the Loan Agreement was signed
[119] In December 2017 or January 2018, the defendants opened a second restaurant in St Heliers.
[120] In March 2018, Mr Ge had further discussions with Ms Xu who had asked him to inquire with a major trading bank as to whether a refinance was possible at that time. Consistent with this, there are contemporaneous emails between Mr Ge and a contact at BNZ on 13 March 2018 about a possible refinancing.
[121] Mr Ge’s contact at BNZ (a Mr Draper) replied to Mr Ge’s email stating “Looks good but we would need a new velocity instructed bank panel valuation that breaks down the portion of commercial and the portion of residential just like this one [the Prendos valuation] does”. Mr Draper also noted that if the valuation came in at a similar level to the valuation provided, the bank could look at lending the whole $1.8 million “if they made $250,000 net profit”. Mr Draper also sought various financial information about the defendants’ businesses, including 2019 forecasts for both businesses and year to date profit and losses.
[122] Mr Ge says that he spoke with Ms Xu about BNZ’s requirements and she expressed concern about them, though he reiterated that she needed to organise various financial statements in line with BNZ’s request if they were to return to any of the mainstream banks to seek to refinance Merchant Finance’s loan. Mr Ge says that Ms Xu did not subsequently provide him with any documents to support the application to BNZ, and therefore he could not advance the matter any further at that time.
[123] In her evidence in response, Ms Xu did not dispute the discussion with Mr Ge, though queried him discussing matters with BNZ without a mandate, and offered the (inadmissible opinion) evidence that “Mr Ge should have known that a first tier lender required two years of a business ownership and operating as well as the financials. He misled us on what the requirements would be to get a main bank loan”.
[291]The application to reopen the Loan Agreement is accordingly declined.
Did Merchant Finance breach the FTA?
[292] This aspect of the defendants’ claims may be addressed briefly. As will be evident from the summary of the pleadings set out earlier in this judgment, there is little specific detail in relation to the FTA claim against Merchant Finance, and it appears largely, if not wholly, to proceed on the basis of Mr Ge’s alleged representations being made as Merchant Finance’s agent. I have found that Mr Ge was not Merchant Finance’s agent.
[293] In the absence of particularised representations made on behalf Merchant Finance itself, it is difficult to address this claim any further. There is a suggestion in
50 CCCFA, ss 124(1)(b) and 9C(3)(f)(i).
the pleading that the security for the loan was “manipulated” in advance by Merchant Finance (and Mr Ge). It is not clear if this is suggesting a misrepresentation, though I am satisfied that there was no such “manipulation”. There is no evidence that Merchant Finance had anything to do with the transfer of the Property from Mrs Wang’s ownership to that of the defendants, and there is nothing sinister or wrong in requesting that the Prendos valuation be readdressed to the lender.
[294] Nor is there any detailed pleading or suggestion as to how Merchant Finance is said to have “aided, abetted, counselled or procured” breaches of the FTA by Mr Ge, or “induced by threats, promises or otherwise” a contravention of provision of the FTA.
[295]I accordingly dismiss the claim against Merchant Finance under the FTA.
The claims against Mr Ge
Did Mr Ge breach the CCCFA?
[296] Given Mr Ge was not Merchant Finance’s agent, the defendants’ cause of action against him under the CCCFA (for example, seeking relief against him by way reopening the Loan Agreement) must fail.
[297] In any event, the “heavy lifting” of the defendants’ case against Mr Ge was carried by the defendants’ claim that he breached his statutory duty pursuant to s 33 of the FAA, analogous to a claim in negligence. I accordingly turn now to that cause of action.
Did Mr Ge breach his duty pursuant to ss 33 of the Act?
[298] As a preliminary point, no freestanding cause of action in negligence, at common law, was advanced. I make this observation as there is no such cause of action as “negligent breach of statutory duty”.51 Nevertheless, all parties approached the claim for breach by Mr Ge of s 33 of the FAA as encapsulating the common law duty of care (namely to exercise the skill and care of a reasonable financial adviser).
51 Attorney-General v Carter [2003] 2 NZLR 160 (CA) at [41] – [43].
[299] The fact the claim was brought for breach of statutory duty and not in negligence might have been relevant, however, to the question of any relief (had I found the breach made out). There is nothing in the FAA to suggest that borrowers can sue a financial adviser under that statute for breach of s 33 and recover damages at law. Rather, the statutory consequence of a financial adviser’s breach of a “conduct obligation” (which includes s 33) is that, pursuant to s 49 of the FAA, the FMA may give the financial adviser “a direction in writing”.52
[300] The direction in writing can direct the financial adviser to comply with the conduct or disclosure obligation, stipulate any steps that the financial adviser must take in order to comply with the obligation, and require the financial adviser to report to the FMA within 28 days stating how and when the FMA’s direction will be implemented.53 A financial adviser who fails to comply with a direction issued by the FMA commits an offence,54 liable on conviction to a fine not exceeding $5,000.55 Complaints can also be made about financial advisers, and the FMA can initiate a complaint itself, and the FAA contains detailed provisions around the determination of such complaints by a disciplinary committee.56
[301] I mention these matters because in the case of a breach of statutory duty, it will then be a separate question as to whether that breach gives rise to civil remedies. As the Court of Appeal noted in Thompson v Turner Hopkins, a court considering this question will need to examine whether such legislative intent can be discerned from the construction of the relevant section in its statutory context.57 The Court further observed that:58
A court will not lightly assume a legislative intention to create a right to sue for damages for a breach of the statute in the absence of words that are clearly of that effect. It is, after all, very easy for the legislature to spell out the consequences of breach ...
52 FAA, s 49(3).
53 FAA, s 49(5).
54 FAA, ss 49(5) and 135.
55 FAA, s 135.
56 FAA, Part 4, Sub-Part 2.
57 Thompson v Turner Hopkins [2018] NZCA 197, [2018] 3 NZLR 299 at [14].
58 At [16].
[302] Given the detailed framework of the FAA, I doubt the FAA is properly interpreted to give rise to a right to sue for civil remedies for a breach of s 33.
[303] Nevertheless, no opposition was taken by Mr Ge to the Court determining the alleged breach of s 33 of the FAA, and as noted, the parties approached it on the basis of it being akin to a claim in negligence. I have accordingly approached the claim on that basis.59
[304] Mr Lenihan accepted that a duty of care is owed. In terms of breach, and while I accept that aspects of Mr Ge’s practice could have been improved (for example, he does not appear to have kept any written diary records of his interactions with or advice given to his clients, and it seems tolerably clear that he did not provide the defendants with a copy of his disclosure statement),60 in all of the circumstances, I have concluded that Mr Ge did not breach his duty under s 33 of the FAA. I say this for the following reasons.
[305] First, while the Loan Agreement itself was headed “Consumer Credit Contract”, and accordingly Merchant Finance has accepted in these proceedings that the agreement was a consumer credit contract, as discussed earlier in this judgment, that is a different proposition to whether it was unreasonable for Mr Ge to have formed the view that the transaction was not a consumer transaction.
[306] Mr Ge was firm in his evidence that while he could not say he had “never” transacted a consumer credit contract, he generally did not advise on them and would not have dealt with this transaction had he considered it to be a consumer credit contract. Mr Ge was accordingly firm in his view that the Loan Agreement was not a consumer credit contract. While I do not have to make any determinative finding in that respect, given Merchant Finance’s acceptance that it was a consumer transaction, I do not consider it unreasonable for Mr Ge to have formed the view he did. Plainly, the Property was not a standard residential property, and the Prendos valuation provided to Mr Ge referred to the Property as comprising residential accommodation
59 I address the suggested breach of s 34 of the FAA in the subsequent section of this judgment, when dealing with the FTA claim (given both statutes prohibit misleading or deceptive conduct).
60 Which gives rise to a breach of s 22 of the FAA.
and “a boarding house”, plus the clearly commercial aspect of the Property from which the defendants ran their business. Ms Xu’s evidence was that ASB’s position had been that its original lending to Mrs Wang ought to have been a commercial, not residential, loan. ANZ evidently also did not consider the Property to be straight out residential property. As noted earlier, I have also accepted Mr Ge’s evidence that the additional funds requested were communicated to him to be for the purposes of the defendants’ existing (and prospective) businesses. Finally, Mr Alcock’s evidence (which as noted, I generally accept) was that, having reviewed the relevant materials, he would have concluded that this was not a consumer credit contract.
[307] Accordingly, Mr Ge’s approach must be viewed through the lens that it was not unreasonable or negligent for him to have proceeded on the basis this was not a consumer credit contract.
[308] Second, the evidence demonstrates that Mr Ge made it clear from the outset that the defendants would not be able to obtain a mainstream bank loan in December 2017.
[309] Third, I do not consider that it was unreasonable or negligent of Mr Ge to have formed the view in late November/early December 2017 that there were good prospects of refinancing the Merchant Finance loan with a mainstream bank in late 2018 (even if it later became clear that that would not be possible). It is clear that Ms Xu was very aware of the need to produce financial statements and reports for the defendants’ businesses in order to progress a mainstream bank loan application. Mr Ge was advised of weekly turnover and net profit per week (and he viewed underlying materials in that context), and was told that financial reports could be secured in due course. Mr Ge said he also took into account the (undisputed) rental income being received from the Property (approximately $52,000 per year).
[310] Ms Harris said that in her view, the defendants’ businesses would have needed to have demonstrated a net profit of approximately $280,000 per annum in order to secure a main bank loan at the end of the Merchant Finance term. There was, however, no evidence or breakdown as to how or why she arrived at this figure.61 Nor was a
61 I note BNZ’s email to Mr Ge in March 2018 suggested around $250,000 per annum.
representative of a mainstream bank called to give evidence to confirm what would have been required to secure tier one lending.
[311] It is unclear to me why the defendants were unable to produce any financial or accounting reports prior to the expiry of the Merchant Finance loan. Their failure to do so cannot be laid at Mr Ge’s feet. Ms Xu accepted that she told Mr Ge that the business had commenced in 2016, so it would appear that there was at least two and a half years’ of business operations for which reports could have been prepared. Ms Harris also confirmed that banks would accept provisional financial statements to date. It seems that Ms Xu had taken some steps to brief an accountant in 2018, but the reports were never produced.62 Mr Litt suggested that the accountant would not release the reports because of the non-payment of her fees. However, I note that this was not suggested by Ms Xu.
[312] Ultimately, therefore, and in light of the (positive) financial information communicated and shown to Mr Ge in late 2017, I am not satisfied the defendants have discharged the burden of establishing that Mr Ge’s view of the likelihood of obtaining main bank finance at the expiry of the Merchant Finance loan was negligent. The alternative exit strategy was to sell the Property prior to the loan’s expiry. Mr Ge had received a copy of the Prendos valuation, and Mr Alcock confirmed Prendos are an established registered valuation firm and that most lenders would be happy to accept their valuations. The valuation was dated July 2017, but that was only a matter of months before Mr Ge met with the defendants. On the basis of the Prendos valuation, and if the sale exit strategy had had to be deployed, it was reasonable for Mr Ge to have concluded that the Property’s sale price would comfortably exceed the amounts due to Merchant Finance.
[313] Fourth, I accept that there is no real evidence of Mr Ge considering or discussing with the defendants whether the best option was not to take out a further loan, and simply “bite the bullet” and take steps to work with Southern Cross to sell the Property in late 2017 (through what Ms Harris referred to as a “managed sale”,
62 Ms Xu also said that “we finally had dealings with [Merchant Finance’s] accountant in March 2019 through [Merchant Finance’s] introduction.”
rather than a mortgagee sale). In the notes of Ms Harris and Mr Alcock’s meeting, Ms Harris stated that:
There was another alternative, and that was for Mr Ge to do nothing, and to advise the clients to liaise with Southern Cross to sell the house. SCFL would have worked with the clients to obtain a sale, if contacted at that time. This may have been the preferable option, rather than incurring further cost and increasing the loan amount to such a high level.
(emphasis in original)
[314] While that may have been an option, it was not the defendants’ preferred option. Moreover, given my finding that it was not negligent for Mr Ge to consider in late 2017 that there were good prospects of obtaining main bank finance in late 2018, it is consequently not negligent not to have pressed the “do nothing” option with the defendants. Further, even if he had, I am doubtful that the position would have altered in any event, given the defendants’ decision not to sell the Property when that had been the whole premise of the Southern Cross loan. Ms Harris accepted that the desire to preserve a business (run from the Property) which Ms Xu valued at around $300,000 was a good reason for taking out the Merchant Finance loan. There is also no evidence of what Southern Cross’s approach would have been in a “do nothing” scenario.
[315] Accordingly, while in hindsight, some consideration of the “do nothing” option would have been preferable, I am unable to conclude that Mr Ge was negligent for not doing so.
[316] Fifth, I am satisfied that Mr Ge discussed with Ms Xu the “package” offered by Merchant Finance when he met with her on 1 December 2017, and that as a result, she understood the components of the loan offer being made. Further, there was very little, if any, difference between the substantive content of the loan instruction form and the subsequent Letter of Offer sent by Loo & Koo on 4 December 2017. As noted, Ms Xu acknowledged in cross-examination that she understood what she was signing when executing the Letter of Offer. Moreover, while Ms Harris’ evidence was to the effect that the Letter of Offer ought not to have proceeded without Ms Xu and Mr Litt first having sought and received legal advice on it, the Letter of Offer was sent directly to the defendants’ solicitor, and Ms Xu told Mr Ge on the evening of 4 December 2017 that she would “let the lawyer have a look”. Accordingly, at least as far as Mr Ge was
concerned, Mr Park was to review the Letter of Offer prior to the defendants signing it.
[317] Sixth, and as noted earlier (and putting aside the establishment fee), the key terms of the Merchant Finance loan were standard for second tier asset lending. In other words, there was nothing in the terms of the mortgage instruction form or Letter of Offer themselves which ought to have rung alarm bells for Mr Ge.
[318] Seventh, I am also satisfied that it was not unreasonable or negligent for Mr Ge not to have picked up on the relatively minor error in the calculation of interest (of
$2,000). Mr Alcock said that he did not think he would have picked up the error either.
[319] Eighth, I do not consider it was incumbent upon Mr Ge to have met with Mrs Wang, as Ms Harris suggested. It was not, after all, Mrs Wang who had approached Mr Ge to arrange new mortgage finance. It seems clear that from the outset, it was understood between Mr Ge and the defendants that the defendants would be the borrowers under the proposed new loan. I therefore disagree with Ms Harris’ suggestion that in order to fulfil his duty to the defendants, Mr Ge ought to have met with Mrs Wang and established that she was not being “coerced” into transferring the Property to her daughter and son-in-law. Mrs Wang was not Mr Ge’s client.
[320] Ninth, Mr Alcock had no difficulty or concern with the type of documents that Mr Ge provided to the defendants for signing on 1 December 2017, and confirmed that it would not be unusual not to leave copies of the signed mortgage application forms with them. I accept that it would have been preferable for a copy of the loan instruction form to have been left with Ms Xu that day. But I do not consider it was negligent or in breach of a statutory duty for Mr Ge not to do so, particularly when the defendants and their solicitor received a copy of the Letter of Offer the following working day.63
[321] Tenth, I do not consider it was incumbent on Mr Ge to have picked up on or advised the defendants in relation to the (purported) change to the default interest rate
63 For completeness, I note that Mr Ge’s evidence was that Ms Xu took photographs of the documents that were signed on 1 December 2017. This suggestion was not, however, put to Ms Xu in cross- examination.
between the Letter of Offer and the Loan Agreement. As both Ms Harris and Mr Alcock agreed, it is not standard practice for a broker to be involved in the preparation or advising on the formal loan documentation. I do not consider this is altered simply because Mr Ge was copied into Loo & Koo’s email correspondence to Park Legal attaching copies of the loan documentation. Ultimately, it was Mr Park’s role to advise the defendants on the Loan Agreement (and Mr Park had already received the Letter of Offer).
[322] Finally, and in relation to a number of residual matters raised in the third party statement of claim:
(a)The defendants allege that Mr Ge did not “source any loans that the defendants asked them to.” To the extent this suggests that the defendants requested Mr Ge to seek a main bank loan rather than second tier lending, then the evidence does not bear this out. For the reasons discussed earlier, it was clear to Ms Xu from the outset that it was not possible to obtain a main bank loan in December 2017.64
(b)There are various allegations that Mr Ge breached his statutory duty because of a conflict of interest with Merchant Finance, or for not disclosing his relationship with Merchant Finance which shared the same lawyer as him. As discussed in the factual background section of this judgment, there is no evidence to suggest Mr Ge had an interest in Merchant Finance. Nor is there any evidence to suggest that Loo & Koo were Mr Ge’s solicitors, rather than Merchant Finance’s.
(c)The defendants also allege that Mr Ge did not disclose that he was “writing” the documents for the offer and Loan Agreement. Mr Ge physically typed the loan instruction form, but that the substantive inputs to that document were communicated to him by Mr Han. Loo & Koo prepared and drafted the Letter of Offer and Loan Agreement. This
64 In this context, I note that in her “background statement” filed earlier in the proceedings, Ms Xu said that on 30 November 2017, Mr Ge “have advised that it is difficult to refinance with the mainstream banks but he suggested to refinance the mortgage with non-bank lending”.
also answers a suggestion in the pleadings that Mr Ge did not disclose that he “altered” terms in those documents, including the default interest clause.
(d)It is also alleged that Mr Ge did not disclose that he instructed/sent the Property Law Act Notices. There is no evidence to support this allegation. Rather, the evidence suggests that the first Mr Ge knew of the PLA Notices was when Ms Xu told him in her telephone discussion with him on 13 December 2018 that one had been served.
(e)Finally, there is a (somewhat nebulous) pleading that Mr Ge “did not assist the [defendants] when he owed them professional duties to do so.”. To the extent this relates to events that occurred after the Loan Agreement had been entered into, Mr Ge took a number of steps in 2018 to try to secure additional finance for the defendants (from BNZ, the further $60,000 sought by Ms Xu in or around August 2018 to tidy the Property up for sale, and refinancing the Merchant Finance loan). Mr Alcock did not consider it was improper for Mr Ge to have sought a further mandate for work to be conducted by him which fell outside his earlier mandate. I accept that evidence. I have also already commented on Mr Alcock’s evidence that there was nothing inappropriate in Mr Ge attending the McDonald’s meeting on 15 December 2018.
[323]The defendants’ claim pursuant to s 33 of the FAA is accordingly dismissed.
Did Mr Ge breach the FTA/s 34 of the FAA?
[324] The particular misrepresentations alleged against Mr Ge are set out at [27] above in the summary of the pleaded cases.
[325] The first alleged misrepresentation is that Mr Ge advised the defendants that he could obtain a main bank mortgage for them. For the reasons given earlier, this alleged misrepresentation is not made out on the evidence.
[326] This also largely deals with the second alleged misrepresentation, namely that the defendants just had “bad timing” to get a main bank loan before Christmas. I am satisfied that no such representation was made by Mr Ge. The evidence confirms that the problem in getting main bank finance in December 2017 was the lack of formal financial reports and information in relation to the defendants’ business.
[327] The next alleged misrepresentation is that Mr Ge made a number of false statements, namely that Merchant Finance was “reputable”, the loan was “low risk”, the loan was on “general terms”, the loan was at “market rates” and that “not to worry”, Merchant Finance would agree to an extension before the loan expired.
[328] Again, these allegations are not made out on the evidence. There was no real focus on the suggestion that Mr Ge said that Merchant Finance was reputable, and it is unclear to me how, even if false, this would have been causative of any loss to the defendants in any event, given the Merchant Finance loan terms were industry standard, and there was no evidence that a more advantageous loan could have been secured at that time. Any suggestion by Mr Ge that the loan terms were at “market rates” would not have been misleading. I do not accept that Mr Ge said that Merchant Finance would agree to an extension before the loan term expired. I consider it inherently improbable for Mr Ge to have said this in late November/early December 2017, and before the loan had even been entered into. I have already addressed above my view that the suggestion that Mr Ge said in or around October or November 2018 that Merchant Finance would extend the loan is also incorrect.
[329] The next alleged misrepresentation is that the defendants needed to “act quickly”. To the extent this is tied to the suggested urgency, I have already discussed this earlier and concluded that the defendants have not made out that the urgency stemmed from either Merchant Finance or Mr Ge. To the extent that there was a statement by Mr Ge that the defendants needed to act quickly, this would not have been misleading, in light of the impending Christmas and holiday period and the expiry of the Southern Cross loan. It was certainly not a situation in which a leisurely approach to refinancing could have been taken.
[330] The next alleged misrepresentation is that Mr Ge proffered that “a mortgage could be obtained to the defendants in their own names, when they did not own the property.” Again, there was no real focus on this in the evidence, though I am not satisfied any statement to this effect would have been a misrepresentation in any event. Given the agreed evidence as to the nature of asset lending, it would not have made a difference to a lender such as Merchant Finance if the secured property was in the borrower’s name or a third party’s name. Rather, the concern would be that the Property was available as security and was of sufficient value to enable repayment of the loan (including all interest and fees).
[331] The defendants next allege that Mr Ge misrepresented that a main bank mortgage could be obtained in their names by transferring the Property from Mrs Wang’s ownership into their names because they were “younger”. I have already addressed above that Mr Ge did not say in late December 2017 that the defendants “would” be able to get a main bank loan. Further, even if Mr Ge had said that the prospects of the defendants obtaining a main bank loan would be enhanced by ownership of a substantial property in Remuera, and that they were younger than Mrs Wang, there is no expert evidence to suggest that any such statement would have been misleading. Indeed, from a common-sense perspective, it has a degree of logic to it.
[332] The next alleged misrepresentation concerns the suggested advice to enter into and then back date the sale and purchase agreement transferring the Property into the defendants’ names. It is not clear how any such advice would give rise to a misrepresentation for the purposes of the FTA. It is also difficult to discern what loss, if any, would have been occasioned to the defendants from any such advice.
[333] The next alleged misrepresentation is that Mr Ge advised the defendants to put the value of the Property in the sale and purchase agreement at $2.6 million, when the CV was $1.95 million. Again there is nothing in this point. It would not amount to a misrepresentation, other than perhaps implying a representation that the Property was worth in the vicinity of $2.6 million. It is difficult to conclude that this would be a misrepresentation in light of the Prendos registered valuation. There is also nothing in the alleged misrepresentation of advising that the settlement date for the sale and
purchase agreement be 6 December 2017. Not only does it not amount to a misrepresentation, again it is difficult to discern was loss, if any, would have flowed from such a statement in any event.
[334] The next alleged misrepresentation is that Mr Ge stated that he would make inquiries for a main bank mortgage in 2018, as he had connections with or a good reputation with a main bank, when no inquiries were made. Again, I do not consider this to be made out. Mr Ge did make inquiries of BNZ, as discussed at [120] to [121] above. The evidence suggests that Mr Ge had connections with the BNZ (having worked there for four to five years), hence his communications with Mr Draper, and Mr Draper’s apparent willingness to engage with Mr Ge.
[335] A further alleged misrepresentation is that Mr Ge said that he had tried other banks and lenders when he had not. Again, this is not supported by the evidence, namely that Mr Ge communicated with a number of other potential lenders in mid and late 2018, but with no success.
[336] The next “suite” of allegations all revolve around the suggested urgency in completing the transaction. None of these pleadings suggest any particular representations made by Mr Ge, other than an implicit allegation that he represented the matter was urgent for reasons emanating from either himself or Merchant Finance. As noted, I have concluded that this was not the case.
[337] The next allegation is that Mr Ge represented he was professional, expert and had the defendants’ interests at heart. There was no suggestion that Mr Ge actually said words to this effect to the defendants, but I accept it could be implied from his advertising, and effectively holding himself out as an experienced mortgage adviser. I do not consider this claim to be made out. While there are some aspects of Mr Ge’s conduct which could improve, such as the keeping of diary notes and the failure to give the defendants a copy of his disclosure statement, the evidence overall suggests that Mr Ge is an experienced financial adviser, and has a range of contacts into second tier lenders and at least at the BNZ. Further, Mr Ge was plainly seeking to advance the defendants’ interests in securing a refinancing of the Southern Cross loan, and
attempting to secure additional lending throughout 2018, including an extension to the Merchant Finance loan.
[338] The defendants further allege that Mr Ge advised them, when they complained that they did not have time to read all the pages of the documents signed on 1 December 2017, “don’t worry, sign here and I will fill that in for you so it looks good for the lender”. This again does not suggest a representation on Mr Ge’s part. Nevertheless and in any event, Ms Xu confirmed that she had in fact completed all of the information in the GDL mortgage application form, as well as those aspects of the Merchant Finance mortgage application form which had been filled out (save for the controversy as to whether she filled in the $1.898 million “loan amount requested” box). I am unpersuaded that Mr Ge changed the loan amount requested box in the GDL mortgage application form from $1.65 million to $1.898 million. He may well have told Ms Xu to have written in that figure. It was, after all, the figure already recorded in the loan instruction form as representing the $1.650 million plus capitalised interest and fees. My review of the GDL mortgage application form, including the colour printed copy produced as an exhibit during the trial, is that the handwriting appears to be the same as the remainder of the handwriting in the document (namely Ms Xu’s), and has not been “overwritten” as suggested. But in order to reach concluded view on the defendants’ allegation, expert handwriting evidence would have had to have been called. It was not.
[339] Finally, the defendants say that Mr Ge “instructed, drafted and/or amended the misleading documents”, presumably referring to the loan instruction form, the Letter of Offer and the Loan Agreement. As noted, Mr Ge confirmed that he typed the loan instruction form though the inputs came from Mr Han, Loo & Koo prepared the Letter of Offer and the Loan Agreement, not Mr Ge.
[340] The claim against Mr Ge under the FTA (and by analogy, s 34 of the FAA) accordingly fails.
Result and next steps
[341]I have found the following:
(a)Merchant Finance breached s 17 (initial disclosure), s 18 (continuing disclosure), s 38 (charging interest in advance) and s 41 (charging an unreasonable establishment fee) of the CCCFA.
(b)As a consequence, the establishment fee is to be reduced to zero. Further, Merchant Finance has agreed to accept Ms Harris’ calculation of interest over the term loan. I have also determined the claims on the basis that Merchant Finance does not pursue a default interest rate of
30.95 percent, and instead adopts a default interest rate of 20 percent.
(c)These matters are, however, eclipsed by the implications of s 99(1A) of the CCCFA. Given Merchant Finance’s failure to provide initial disclosure, and that at no time did it provide correct initial disclosure, the defendants are not liable to pay interest, default interest or fees during the period of breach. This excludes Mr Ge’s broker fee, and Loo & Koo’s fees (to the extent they are payable by the defendants under the Loan Agreement and do not exceed the amount Merchant Finance has paid to Loo & Koo).
(d)The effect of this on the quantum of Merchant Finance’s claim is to be the subject of further submissions by the defendants and Merchant Finance. An initial view is that, given the Property’s sale price exceeded the principal amount owed by the defendants to Merchant Finance (excluding interest and fees), Merchant Finance may well be required to refund monies to the defendants. The defendants’ submissions on the resulting quantum are to be filed and served on or before 11 February 2022. Merchant Finance’s submissions are to be filed and served on or before 25 February 2022. The defendants may file brief submissions strictly in reply on or before 4 March 2022. No submission is to be longer than seven pages in length. I would of course
encourage the parties to seek to agree the resulting quantum, as the calculations ought to be relatively straightforward.
(e)The defendants’ claims are otherwise dismissed.
(f)I will call for submissions on costs (including by Mr Ge) once the effect of s 99(1A) on the quantum of Merchant Finance’s claim has been agreed or determined.
Fitzgerald J
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