Mikitasova v ASB Bank Limited
[2016] NZHC 897
•9 May 2016
IN THE HIGH COURT OF NEW ZEALAND WHANGAREI REGISTRY
CIV-2015-488-000175 [2016] NZHC 897
BETWEEN VIYA MIKITASOVA
Plaintiff
AND
ASB BANK LIMITED Respondent
Hearing: 23 March 2016 Appearances:
Douglas Blaikie for the Plaintiff
Michael Robinson and Julia Learner for the RespondentJudgment:
9 May 2016
JUDGMENT OF MOORE J
This judgment was delivered by me on 9 May 2016 at 3:00 pm pursuant to Rule 11.5 of the High Court Rules.
Registrar/ Deputy Registrar
Date:
MIKITASOVA v ASB BANK LIMITED [2016] NZHC 897 [9 May 2016]
Contents
Paragraph
Number
Introduction ..............................................................................................................[1] Background
Introduction ............................................................................................................[6]
ASB borrowings ...................................................................................................[10] Events of 27 February 2012 – the evidence
(a) Ms Prosser’s evidence ...........................................................................[18] (b) Ms Mikitasova’s evidence .....................................................................[30] Default and the relationship property agreement .................................................[41] Procedural steps .....................................................................................................[47] The claim..............................................................................................................[50] Ms Mikitasova’s submissions ................................................................................[55] ASB’s submissions..................................................................................................[64] Legal principles: interim injunctions ..................................................................[70]
Is there a serious question to be tried?
General principles ................................................................................................[76] Legal principles: What amounts to undue influence? .........................................[79] How is a creditor required to act so as to insulate itself from the consequences
of undue influence? ............................................................................................[81]
Is there a serious question to be tried? .................................................................[85]
Is there a relationship between Ms Mikitasova and Mr Mikitasov one where
ASB is presumed to have notice of a risk of undue influence?..........................[87] Were the steps taken by ASB sufficient? .............................................................[94] Where does the balance of convenience lie? ......................................................[103]
Would damages be an adequate remedy for Ms Mikitasova if this application
is not allowed but if she succeeds in her claim? ..............................................[105]
Would damages be an adequate remedy for ASB in the event interim orders
are made but Ms Mikitasova is unsuccessful at trial? ...................................... [115] Conduct of Ms Mikitasova .................................................................................. [119] Overall justice.......................................................................................................[124] Result .....................................................................................................................[127] Costs ......................................................................................................................[129]
Introduction
[1] ASB Bank Limited (“ASB”) seeks to exercise its rights as mortgagee to sell a section of undeveloped land owned by the plaintiff, Ms Viya Mikitasova (“Ms Mikitasova”).
[2] Ms Mikitasova has applied to this Court seeking orders restraining ASB from exercising its rights as mortgagee.
[3] Ms Mikitasova claims she was subject to undue influence on the part of her husband when she provided the guarantee in relation to her husband’s indebtedness to ASB. She says the circumstances, which were known to ASB, give rise to a presumption of undue influence which put ASB on enquiry. Despite being put on enquiry, Ms Mikitasova claims ASB made no efforts to ensure she received independent legal advice and the bank never communicated directly with her about the transaction.
[4] She thus argues she has a strong case against ASB and there is a serious question to be tried.
[5] Furthermore, she claims the land in question holds a personal and emotional attachment for her and that the cost and further inconvenience to ASB if the injunction was granted is minimal. Ms Mikitasova thus submits the balance of convenience and overall justice favours maintaining the injunction.
Background
Introduction
[6] Ms Mikitasova is a Russian woman who arrived in New Zealand with her husband, Mr Mikitasov, and three children in 2006. She was granted residency as the spouse of Mr Mikitasov, the principal applicant.
[7] Her knowledge and understanding of the English language was then, and remains today, rudimentary. Russian was spoken in the family and most socialising was undertaken within the expatriate Russian diaspora.
[8] Between April 2009 and February 2012, Mr Mikitasov borrowed funds from ASB. These were secured over a property situated at 28 Binnie Street, Paihia. This was the family home. Mr Mikitasov was the registered proprietor.
[9] An adjacent property at 30 Binnie Street was owned by Ms Mikitasova’s
grandparents who also banked with ASB.
ASB borrowings
[10] Since the couple’s arrival in New Zealand they have held various joint accounts and accounts in their own names with ASB. By way of example, in November 2007, the couple jointly borrowed $300,000 from the bank. This was secured against the family home at 28 Binnie Street. That loan was repaid.
[11] In April 2009 Mr Mikitasov borrowed $1.25 million from ASB. This was secured over 28 Binnie Street.
[12] In 2010 the property at 28 Binnie Street was subdivided by way of a boundary adjustment. Various new titles were issued for the subdivided lots at
28 Binnie Street including 26C Binnie Street, the property at the centre of these proceedings. The title to 26C Binnie Street was transferred from Mr Mikitasov to Ms Mikitasova on 26 August 2010.
[13] The $1.25 million loan, originally intended for investment purposes, was used instead to complete and improve the family home at 28 Binnie Street and to meet the subdivision and other costs.
[14] In February 2012 the couple approached ASB to increase the loan by a further $300,000. This brought the total lending to $1,550,000. ASB records reveal the stated purpose of this additional loan was to carry out works on the grandparents’ home at 30 Binnie Street.
[15] ASB agreed to advance the additional $300,000 on the basis that:
(a) the total indebtedness of $1,550,000 be structured as a $1 million revolving credit facility and a separate $550,000 term loan facility; and
(b)Ms Mikitasova grant a guarantee to ASB and mortgage over the property at 26C Binnie Street.
[16] On 27 February 2012 the couple executed the necessary documents to give effect to the agreement reached with the bank. This took place in the office of Ms Prosser who is a principal of the Kerikeri law firm known as Law Direct.
[17] It is the circumstances which surround the signing of these documents on
27 February 2012 which lie at the centre of Ms Mikitasova’s claim she was subject to undue influence on the part of her husband. It is thus necessary to examine those circumstances and the evidence filed more closely.
Events of 27 February 2012 – the evidence
(a) Ms Prosser’s evidence
[18] Although qualified in England and Wales, Ms Prosser has been in legal practice in this country for approximately 10 years specialising in property transactions and conveyancing.
[19] Ms Prosser was Mr Mikitasov’s solicitor. Earlier in the year he contacted her, requesting that she act on his behalf in a transaction with ASB. He said he intended to borrow funds from the bank and secure those funds by way of a mortgage against the property at 28 Binnie Street. The loan was to be supported by a guarantee to be given by Ms Mikitasova secured by a mortgage against the property she owned at
26C Binnie Street.
[20] On being advised that Ms Mikitasova would be providing a guarantee for
Mr Mikitasov’s borrowings, Ms Prosser explained to Mr Mikitasov that she would
need to advise his wife of her right to obtain independent legal advice. Ms Prosser also said she explained to Mr Mikitasov that she needed to be satisfied his wife understood the obligations she was assuming.
[21] On 22 February 2012 ASB also instructed Ms Prosser to act for them in the proposed transaction. Ms Prosser said that in her experience it is not unusual for a solicitor to act for the lender, borrower and guarantor in such transactions.
[22] Enclosed with ASB’s instructions were the relevant documents including instructions that Ms Prosser should advise Ms Mikitasova to seek independent legal advice and to explain why. If Ms Mikitasova chose not to exercise her right to independent legal advice, the bank’s instructions required Ms Prosser to advise Ms Mikitasova of the full effect and implications of the guarantee and to get her to sign a waiver to that effect.
[23] Ms Prosser’s evidence is that she reviewed ASB’s documents and arranged an appointment for Mr Mikitasov and Ms Mikitasova to attend her offices to sign them. Significantly, she also drafted four additional documents which included a waiver of independent legal advice, an acknowledgement of disclosure, an indemnity from the borrower in favour of the guarantor and an agreement by the borrower to give the guarantor authority to gain information about the borrower’s financial position.
[24] These steps were undertaken independently of either ASB or Mr Mikitasov’s instructions and, according to Ms Prosser, were for the benefit of Ms Mikitasova alone. Their purpose was to ensure that Ms Mikitasova either took independent legal advice or expressly waived the right to do so. To enhance the protection of her financial position as guarantor Ms Prosser did not provide copies of these documents to ASB.
[25] While frankly acknowledging she is unable to remember all of the detail of the meeting in her offices on 27 February 2012, Ms Prosser is explicit that she and Ms Mikitasova were alone when the latter signed the guarantee. While they were alone, Ms Prosser said she explained to Ms Mikitasova that she did not have to sign the guarantee if she did not want to and that she could go to another lawyer,
independent of her husband and ASB, to obtain legal advice. Despite this, Ms Mikitasova apparently told Ms Prosser that she was prepared to sign the guarantee. She then signed the waiver which Ms Prosser had prepared.
[26] It is Ms Prosser’s evidence that before the guarantee was signed she took Ms Mikitasova through it and explained to her the effect of what was she was signing. She says she explained that by signing the guarantee ASB could issue a demand for repayment of the whole loan at any time although it would usually only do so if her husband did not repay ASB under the loan agreement. Ms Prosser said she explained to Ms Mikitasova that she would be responsible for the debt and if she could not repay it ASB would be able to sell the property. Ms Mikitasova advised Ms Prosser she was prepared to sign the guarantee and with Ms Prosser as her witness, then did so.
[27] Ms Prosser claims her impression was that Ms Mikitasova understood the explanation. She showed no signs of being under any pressure to sign. Ms Prosser said she saw nothing to suggest Ms Mikitasova was labouring under any disadvantage and certainly nothing to her cause for concern over Ms Mikitasova’s ability to understand what had just been explained.
[28] Ms Prosser said that as a matter of custom and practice she is especially cautious when it comes to dealing with guarantors because she knows that guarantees can be contentious. For this reason, she takes special care to ensure that she complies not only with her clients’ instructions but also with her legal obligations. She explained it was for this reason she drafted the separate waiver document and why, on each occasion she acts on a transaction where a guarantee is being given, she specifically turns her mind to what measures can be put in place to improve the guarantor’s position. In doing so she explains to the guarantor their obligations in simple terms using plain English.
[29] It follows she does not accept Ms Mikitasova’s allegation that the nature of
the documents was not explained to her.
(b) Ms Mikitasova’s evidence
[30] Unsurprisingly, Ms Mikitasova’s description of the meeting at Law Direct’s offices on 27 February 2014 differs from that given by Ms Prosser. She deposed that the first thing she knew about any documents requiring signing was when her husband informed her just a few hours before the meeting with Ms Prosser on
27 February 2012. She said he told her they needed to see Ms Prosser to sign some papers. She says she knew Ms Prosser was her husband’s lawyer and she may have previously met her, but she did not regard her as her own lawyer nor did she share any rapport with her.
[31] She said that when she asked her husband what the papers he wanted to sign were, he told her not to concern herself; they were just legal documents and she should just say she understood them and sign them.
[32] By way of background, Ms Mikitasova said that from the outset of their marriage in 1999 her husband was domineering and effectively in charge of all business and financial matters within the relationship. She said she came to New Zealand in 2006 with little or no facility in spoken English.
[33] Even in 2012, at the time the documents were signed, she described her English as being very basic; good enough for shopping and making withdrawals from an ATM but well short of being sufficient to understand legal matters.
[34] Furthermore, her evidence is that the concept of a mortgage in Russian society was not understood. Historically, under the Constitution of the USSR, every citizen had a right to housing. The majority of housing stock belonged to the State. As a result, mortgages were, and remain, rare. Similarly, Ms Mikitasova claims that the concept of a guarantee was foreign to her and it was not until her current solicitor explained it that she acquired any form of understanding about guarantees or mortgages and even then, she says, her knowledge remains rudimentary.
[35] She said her husband has a Master of Laws in Russia and had always told her she would not understand the complexity of legal matters and she should not concern herself with them.
[36] She said from an early stage in the marriage her husband would resort to violence if she challenged his authority on any matter and that she was absolutely dependent on him managing all of the household’s financial and legal matters.
[37] She described what happened at Law Direct’s offices. She said she was present in Ms Prosser’s office when Mr Mikitasov signed the documents. She understood very little of that process. Having signed the documents Mr Mikitasov was asked by Ms Prosser to leave the room and wait outside. Before he left Mr Mikitasov spoke to his wife in Russian. He told her she needed to say that she understood what she was signing and she should sign it.
[38] He then left her alone with Ms Prosser. Ms Mikitasova claimed Ms Prosser simply asked whether she understood what she was signing. At her husband’s direction she claims she told Ms Prosser she understood the document, indicated her willingness to sign it and signed it. She estimated the whole process occupied no more than two or three minutes.
[39] Ms Mikitasova said that if Ms Prosser had told her she should get independent legal advice and that she could be liable for all of the $1,550,000 debt she certainly did not understand that, and would not have signed if she had. She said she left Ms Prosser’s office not knowing what she had signed and when she later asked her husband about it he told her not to concern herself because she would not understand it. She said she trusted him and Ms Prosser who seemed to her to be, “a very nice lady”.
[40] Aspects of Ms Mikitasova’s evidence are supported by the evidence of friends who have met and socialised with the couple since their arrival in New Zealand. Both deponents, who are fluent in Russian, described Ms Mikitasova’s proficiency in English as basic and limited. Both deposed to the belief she would not have been able to understand legal documents relating to guarantees or mortgages. For Ms Mikitasova to have properly understood would have required a Russian translation and an explanation in Russian.
Default and the relationship property agreement
[41] In November 2014 Ms Mikitasova advised ASB she was no longer living with her husband and requested ASB to remove him as an authority on her account. The bank did so.
[42] By early 2015 Mr Mikitasov had defaulted. The loan had fallen into arrears. On 30 March 2015 ASB made demand on the couple for repayment of the sum of
$59,527.45 being the amount outstanding at that time under the loan agreement which was secured by the mortgages over 26C and 28 Binnie Street and guaranteed by Ms Mikitasova.
[43] The demands were not satisfied and so ASB instructed its solicitors to issue Property Law Act 2007 notices (“PLA notices”) to the couple in respect of the default.
[44] These notices were served on Ms Mikitasova on 20 April 2015. Mr Mikitasov could not be located.
[45] By this time the couple were separated. On the evidence, the precise date of separation is unclear. A relationship property agreement executed between Mr Mikitasov and Ms Mikitasova, dated 26 May 2015, records the parties separated in or about February 2013. Under this agreement, Mr Mikitasov would transfer all his interest in 28 Binnie Street to Ms Mikitasova, subject to an ASB mortgage. This transfer was completed on 14 August 2015.
[46] The PLA notices, however, expired unremediated. As a result, ASB marketed
26C and 28 Binnie Street for sale by mortgagee auction. The auction was scheduled to take place on 10 December 2015.
Procedural steps
[47] On 9 December 2015 Ms Mikitasova obtained a without notice interim injunction from Brewer J restraining ASB from taking steps to sell the property until
17 December 2015. The injunction did not affect ASB’s ability to market and sell
28 Binnie Street.1
[48] On 15 December 2015 Ms Mikitasova sought an order extending the injunction. The following day Muir J directed that her statement of claim, application for interim injunction, affidavit in support, undertaking as to damages and the Minute of Brewer J (recording the orders) be served on counsel for ASB.
[49] At a telephone conference on 17 December 2015 Muir J extended the injunction until further order of the Court and allocated a fixture for the hearing of this matter. He suggested to counsel for ASB that the preferable procedural course was for the bank to make an application rescinding the injunction pointing out that such an application would be regarded as a de novo hearing with the onus remaining on Ms Mikitasova to satisfy the Court that an injunction should be maintained.
The claim
[50] Ms Mikitasova claims she did not understand the documentation which was presented to her for signing. Her failure was due to a combination of lack of fluency in the English language, her lack of understanding of the commercial implications of a guarantee, her lack of understanding of the concept of a mortgage and her lack of understanding that what she was signing would make her personally liable for the credit facility of her husband. More particularly, she claims she did not understand that if there was a default on the part of her husband ASB could sell 26C Binnie Street and take the proceeds.
[51] Ms Mikitasova further claims she was under duress at the time she signed the guarantee. She says her husband had been extremely violent throughout their relationship; that he was controlling and she did not believe she had any choice but to sign the documents presented to her. She claims she simply signed what was
placed before her.
1 In the course of argument I was advised the sale of that property had very recently been completed.
[52] Ms Mikitasova also claims ASB was under a duty to either directly explain the nature of the guarantee and mortgage to her or ensure that she was independently advised as to the nature of the consequences of the guarantee and any default.
[53] The essence of Ms Mikitasova’s claim is that she was not given proper independent legal advice and insufficient steps were undertaken to ensure she had a proper and adequate understanding of the documentation.
[54] She thus seeks orders:
(a) restraining ASB from taking any steps to sell 26C Binnie Street;
(b) that the deed of guarantee and indemnity signed by her on
21 February 2012 is declared void and unenforceable; and
(c) directing that ASB discharge its mortgage over 26C Binnie Street.
Ms Mikitasova’s submissions
[55] Mr Blaikie, for Ms Mikitasova, accepts ASB advanced funds to Mr Mikitasov. He accepts she signed a guarantee of her husband’s obligations under the loan agreements. But he submits she was subject to undue influence on the part of her husband when she provided the guarantee in relation to his indebtedness in favour of ASB.
[56] Mr Blaikie submits that the circumstances of the relationship between the couple and the transaction were known by ASB and as such give rise to a presumption of undue influence. This was described by Mr Blaikie as a Class 2(B) classification in terms of Bank of Credit and Commerce International SA v Aboody.2
The Class 2(B) category arises in the following circumstances:3
“… if the complainant proves the de facto existence of a relationship under
which the complainant generally reposed trust and confidence in the wrong
2 Bank of Credit and Commerce International SA v Aboody [1990] 1 QB 923 (Approved in Barclays Bank v O’Brien [1994] 1 AC 180 (HL) per Lord Browne-Wilkinson) and in New Zealand in Wilkinson v ASB Bank Limited [1998] 1 NZLR 674 (CA) at 679.
3 Barclays Bank v O’Brien, above n 2, at 423.
doer, the existence of such relationship raises the presumption of undue influence. In a class 2(B) case therefore, in the absence of evidence disproving undue influence, the complainant will succeed in setting aside the impugned transaction merely by proof that the complainant reposed trust and confidence in the wrongdoer without having to prove that the wrongdoer exerted actual undue influence or otherwise abused such trust and confidence in relation to the particular transaction impugned.”
[57] Mr Blaikie submits ASB had knowledge or possessed information from which it ought to have known:
(a) Ms Mikitasova was of Russian nationality and her exposure to the English language was limited to her experience in New Zealand. ASB would or ought to have had knowledge of this as it had possession of a copy of Ms Mikitasova’s passport;
(b) Ms Mikitasova had only been in New Zealand since 2006;
(c) other than for simple transactions Ms Mikitasova had never attended the bank other than in her husband’s company;
(d)Ms Mikitasova had no independent source of income and depended entirely on her husband for financial support; and
(e) Ms Mikitasova was to stand surety for a loan for which she would receive no direct benefit.
[58] Mr Blaikie submits that as a result of these circumstances ASB was put on enquiry as to the possibility of undue influence but made no efforts, either by itself or through its agents, to ensure Ms Mikitasova received independent legal advice. He points out ASB never communicated directly with Ms Mikitasova over the transaction.
[59] Thus the focus of the dispute is on the circumstances surrounding the signing of the guarantee and the waiver of independent legal advice.
[60] Mr Blaikie relies on the evidence filed by Ms Mikitasova. He points to Mr Mikitasov’s controlling and violent nature. He emphasises the imbalance of power and, in particular, Mr Mikitasov’s commercial and legal background, Ms Mikitasova’s subjugation to and reliance on him in relation to such matters, her lack of understanding of mortgages and guarantees and her lack of fluency in English, particularly in relation to technical matters.
[61] Mr Blaikie submits it is against this background that the events of
27 February 2012 must be viewed. He points out that Ms Mikitasova first knew she would be required to sign legal documents just a few hours before she attended the offices of Law Direct. She had had no previous professional dealings with Ms Prosser. Immediately before signing the waiver and guarantee her husband directed her in Russian to sign the documents.
[62] He submits that on Ms Mikitasova’s evidence it would have been plainly evident to Ms Prosser that Ms Mikitasova did not understand what was being explained to her. He submits it is of significance that neither Ms Prosser nor Ms Mikitasova ever had any information regarding the financial affairs of Mr Mikitasov. Ms Prosser had not been provided with any information regarding Ms Mikitasova’s ability to meet the obligations under the guarantee and, in fact, had she known the true position, Ms Prosser would have appreciated Ms Mikitasova had no hope of servicing a potential debt of $1.55 million from her own resources and that the bargain was manifestly disadvantageous to her.
[63] He thus submits that this is one of those “exceptional cases” outlined in Royal Bank of Scotland v Etridge where undue influence was probable and ASB was obliged to ensure Ms Mikitasova obtained independent legal advice before standing
surety.4
4 Royal Bank of Scotland PLC v Etridge (No. 2) [2002] 2 AC 773 (HL).
ASB’s submissions
[64] Mr Robinson, for ASB, submits that this is not a case where the relationship between Ms Mikitasova and Mr Mikitasov was one where ASB is presumed to have notice of a risk of undue influence.
[65] However, he submits that even if it was, ASB took proper steps to ensure Ms Mikitasova understood the transaction and thus the bank insulated itself from any risk from any undue influence.
[66] Mr Robinson accepts that the relationship between the plaintiff and the ex- wife and husband was “non commercial” and involved an “emotional tie” on the part of the guarantor towards the borrower. However, he submits that the undisputed evidence is that the borrowed funds were applied towards improving the family home at 28 Binnie Street and Ms Mikitasova’s grandparents’ property at 30 Binnie Street. To that extent, he submits Ms Mikitasova stood to benefit from the transaction. He also notes she took title to the adjacent property at 28 Binnie Street under the relationship property agreement and does not dispute ASB’s right to sell it.
[67] Mr Robinson submits that ASB took sufficient steps to insulate itself from the possibility that Ms Mikitasova had signed the guarantee as a result of any undue influence on the part of her husband. He notes particularly:
(a) ASB’s loan and guarantee documents were sent to Ms Prosser in
Kerikeri along with a detailed letter of instruction dated 22 February
2012.
(b)ASB's letter of instruction to Ms Prosser required her to, amongst other things:
(i)to act for ASB to review the terms of the documents to satisfy herself that the borrower and guarantor could lawfully and validly enter into the loan and guarantee and perform their respective obligations;
(ii)attend to the preparation, execution and registration of the facility agreement, guarantee and new security;
(iii) advise the guarantor to seek independent legal advice;
(iv)in the event that the guarantor did not exercise the right to take independent legal advice, advise the guarantor of the full effect and implications of the guarantee and require the guarantor to sign an acknowledgment of the advice and a waiver of independent legal advice; and
(v) certify in a solicitor's certificate that she had followed all of
ASB's instructions;
(c) Ms Prosser provided a solicitor's certificate dated 29 February 2012, which certified she had strictly complied with ASB's instructions in relation to guarantors (and in all other relevant respects).
(d)Ms Mikitasova signed an acknowledgment which formed part of the guarantee on 27 February 2012 which stated that:
(i)she had been advised in the absence of the borrower to take independent legal advice prior to signing the guarantee; and
(ii)she understood that the guarantee made her liable for all present and future amounts owing to ASB by Mr Mikitasov;
(e) In addition, the plaintiff signed a waiver of independent legal advice which acknowledged that:
(i)she had been advised by Ms Prosser to seek independent legal advice (meaning advice from a solicitor that is not acting for the lender or borrower);
(ii)she understood that Ms Prosser was acting for both the lender and the borrower in the transaction;
(iii) she had declined to take independent legal advice; and
(iv)she understood that the guarantee made her liable for all present and future amounts owing to ASB by Mr Mikitasov.
[68] Mr Robinson submits that despite Ms Mikitasova’s claim that her language skills were such that she could not have understood the terms of the guarantee, it is plain on the evidence that Ms Prosser fully explained the transactions to her and was unable to discern from her dealings any inability on the part of Ms Mikitasova to understand the explanation.
[69] Furthermore, Mr Robinson points to evidence which indicates that Ms Mikitasova’ previous interactions with ASB do not suggest her language skills were such that she was unable to manage her banking affairs.
Legal principles: interim injunctions
[70] Both counsel accepted that the principles to be applied in considering applications for interim injunctions are those as set out by the Court of Appeal in Klissers Farmhouse Bakeries v Harvest Bakeries Ltd.5 These are:
(a) whether there is a serious question to be tried;
(b)whether the balance of convenience favours the granting of an injunction;
(c) whether the overall justice of the case favours the granting of an injunction.
[71] Thus, the Court must first consider whether there is a serious question to be tried and, if it determines there is, whether damages would provide an adequate
5 Klissers Farmhouse Bakeries v Harvest Bakeries Ltd [1985] 2 NZLR 129 (CA).
remedy and against that, where the balance of convenience properly lies. In assessing the balance of convenience, regard may be had to the adequacy of damages should relief not be granted, the relative strength of each party’s case and the impact of the decision on the rights of third parties.6
[72] Finally, the Court is required to step back and consider what overall justice requires having regard to these considerations.
[73] I note that after identifying those issues, Cooke J (as he then was) in Klissers
Farmhouse Bakeries emphasised that:7
“… an interlocutory decision of this kind is essentially discretionary and its
solution cannot be governed and is not much simplified by generality.”
[74] The Court is not concerned with attempting to resolve conflicts of evidence in respect of facts which may determine the case, nor is it concerned with deciding difficult questions of law which “call for detailed argument and mature considerations”.8
[75] Although this application is brought by ASB to rescind the interim injunction the onus of satisfying the Court the injunction should continue rests with the original applicant,9 Ms Mikitasova. The application proceeds on a de novo basis allowing all of the evidence and arguments of both parties to be considered.10
Is there a serious question to be tried?
General principles
[76] As to whether there is a serious question to be tried, it has been said this consideration should not be lightly brushed over.11
6 Wellington International Airport v Air New Zealand Ltd HC Wellington CIV-2007-485-1756,
30 July 2008 at [6] and [13].
7 Klissers Farmhouse Bakers, above n 5, at [142].
8 American Cyanamid Co v Ethicon Ltd [1975] AC 396 (HL) at 407.
9 Ron West Motors Limited v Broadcasting Corporation of New Zealand (No. 2) [1989] 3 NZLR
520 (CA).
10 Carter Holt v Fletcher Holdings [1980] 2 NZLR 80 (HC); D B Baverstock Limited v Haycock
[1986] 1 NZLR 342.
11 Ansell v New Zealand Insurance Finance Ltd HC Wellington A434/83, 3 November 1983, cited in McGechan on Procedure (online ed) at [HR7.53.05].
[77] A serious question to be tried was explained by the Court in Henry Roach (Petroleum) Pty Ltd v Credit House (Vic) Pty Ltd12 and has since been affirmed by New Zealand Courts13 where it was said:
“In order to determine whether there is a serious question to be tried, it is necessary to consider what is the applicable law and whether there are arguable differences concerning it, what the facts are said to be on the opposing sides, and where the issues lie, and whether there is a tenable combination of resolutions of the issues of law and fact on which the plaintiffs could succeed.”
[78] In Re Lord Cable (Dec’d) the Court said that it is:14
“[N]ecessary for any plaintiff who is seeking interlocutory relief to adduce sufficiently precise factual evidence to satisfy the court that he has a real prospect of succeeding in his claim for a permanent injunction at the trial.”
Legal principles: What amounts to undue influence?
[79] The question under this heading is when is a creditor put on enquiry? This issue was most recently discussed in New Zealand in Gardiner v Westpac New Zealand Limited.15 There the Court of Appeal, by reference to a number of its own decisions, 16 as well as those of the House of Lords,17 summarised the position
as it stands:18
“The current position is therefore that, as this Court recognised in Hogan, there may be a difference between the approaches taken in Wilkinson and Etridge as to when a creditor would be put on enquiry. Under Wilkinson, a financier will be put on enquiry when it has knowledge of facts leading to a presumption of undue influence. Under the approach taken in Etridge, that will occur when the relationship between the principal debtor and the guarantor is non-commercial. To the limited extent that this Court considered the issue in Hogan, it appears to have favoured the Etridge approach.”
[80] For guidance as to the application of the Wilkinson approach, it is instructive to draw on certain of the observations of Blanchard J.19 There his Honour
12 Henry Roach (Petroleum) Pty Ltd v Credit House (Vic) Pty Ltd [1976] VR 309 (VSC) at 311.
13 Eco Maintenance Ltd v Leighton Contractors Pty Ltd [2014] NZHC 2340.
14 Re Lord Cable (Dec’d) [1977] 1 WLR 7 (Ch) at 19, cited in McGechan on Procedure (online ed)
at [HR7.53.05(1)].
15 Gardiner v Westpac New Zealand Limited [2015] 3 NZLR 1 (CA) at [28].
16 Wilkinson v ASB Limited, above n 2; Hogan v Commercial Factors Limited [2006] 3 NZLR 618.
17 Barclays Bank O’Brien, above n 2.; Royal Bank of Scotland PLC v Etridge (No. 2), above n 4.
18 Gardiner, above n 15, at [34].
19 At 690.
emphasised his comments were no more than observations and should not be read as definitive statements of principle. He also noted that each case will turn on its own facts and circumstances which means that the emphasis to be placed on or the relevance of particular matters will differ with a possible consequential need to tailor any general statement. However, subject to those reservations, the following observations of the Judge appear to me to be relevant in the present case:
(a) Undue influence on a guarantor is likely to be presumed if the following features are present:
(i) limited commercial ability of the guarantor;
(ii)absence of more than minimal financial stake by the guarantor in the enterprise guaranteed; and
(iii)a relationship involving an emotional tie or dependency on the part of the guarantor towards the principal debtor.
(b)A wife is no longer automatically regarded as being under a special disability vis-à-vis her husband. She must plead that she was subjected to undue influence or misrepresentation by her husband or partner and plead and prove knowledge by the financier of features which give rise to a presumption of wrong doing.
(c) In order to allay reasonable suspicion a prudent course for the financier is to insist that the guarantor be given advice by an independent solicitor and to obtain from the solicitor a certificate that the effect and implications of the documents have been explained and that the guarantor appeared to have understood the explanation.
(d)If a guarantor declines to obtain independent legal advice (and the financier would be wise to have this recorded in writing signed by the guarantor) a prudent financier will endeavour to ensure that someone, preferably a solicitor, explains the documents and their consequences.
The financier may be able by that means to obtain reasonable satisfaction that the guarantor has understood the transaction. Unless it can be shown that an explanation is given, it may be hard to argue plausibly that the guarantor did understand. In that circumstance, without proof that the guarantor knew what he or she was doing, the financier will be unable to remove the suspicion and so overcome the presumption. The existence of an acknowledgement by the guarantor of an understanding of the transaction may not suffice when unaccompanied by evidence of an explanation from someone competent to give it.
(e) It cannot be assumed that a solicitor loses the ability to function independently in advising a guarantor where the solicitor also has some involvement with the principal debtor. Depending on the circumstances a solicitor in that position may be in a better position than a stranger to give balanced advice and to assess whether its significance has been appreciated by the guarantor.
How is a creditor required to act so as to insulate itself from the consequences of undue influence?
[81] In Etridge, Lord Nicholls held that where a bank is on enquiry that a guarantor may be unduly influenced but does not wish to advise the guarantor directly as to the effects of the guarantee, then:20
“Since the bank is looking for its protection to legal advice given to the wife by a solicitor who, in this respect, is acting solely for her, I consider the bank should take steps to check directly with the wife the name of the solicitor she wishes to act for her. To this end, in future the bank should communicate directly with the wife, informing her that for its own protection it will require written confirmation from a solicitor, acting for her, to the effect that the solicitor has fully explained to her the nature of the documents and the practical implications they will have for her. She should be told that the purpose of this requirement is that thereafter she should not be able to dispute she is legally bound by the documents once she has signed them. She should be asked to nominate a solicitor whom she is willing to instruct to advise her, separately from her husband, and act for her in giving the necessary confirmation to the bank. She should be told that, if she wishes, the solicitor may be the same solicitor as is acting for her husband in the
20 Royal Bank of Scotland v Etridge (No 2), above n 4, at [79].
transaction. If a solicitor is already acting for the husband and the wife, she should be asked whether she would prefer that a different solicitor should act for her regarding the bank's requirement for confirmation from a solicitor. The bank should not proceed with the transaction until it has received an appropriate response directly from the wife.”
[82] The procedure suggested by Lord Nicholls in Etridge has not yet been adopted in New Zealand. In Hogan the Court of Appeal expressed the view that while it was “likely” these principles would apply, a final decision should be left for a case in which the issue arises more clearly and the Court has the benefit of full information as to industry practice.21 Mr Blaikie submits the present is such a case.
[83] In Gardiner, the Court of Appeal held it was not necessary to finally determine whether the principles enunciated in Etridge should be applied in New Zealand.22
[84] Gardiner involved a couple who, with their son, had signed guarantees in respect of bank advances to a company in which they were all shareholders. The company defaulted and the bank sought to enforce the guarantees. Mr and Mrs Gardiner argued they were not liable to the bank under the guarantees because they had executed the deeds through the undue influence of their son and
that the bank was on notice as to that fact. The Court observed:23
“[45] As sometimes happens in New Zealand, Westpac did not at any stage deal with the guarantors directly. Rather, it received the loan application from a mortgage broker engaged by all four guarantors. This contained detailed commentary about the proposal and the means by which the parties proposed to fund it. Once it approved the loans, Westpac dealt solely with Tararua Law, the solicitors who acted for all parties in relation to the transaction.
[46] Westpac instructed Tararua Law to act for it in arranging execution of all documents including the loan agreements and securities. In doing so, Westpac instructed Tararua Law to explain to each guarantor the meaning and effect of all documents that they were to sign.
[47] In addition, as the Associate Judge pointed out, the opening paragraph of Westpac’s letter of instructions advised Tararua Law that the letter was to be read in conjunction with Westpac’s general instructions for solicitors acting on its behalf in such situations. These required solicitors to ensure that every guarantor had a full understanding of the obligations being
21 Hogan v Commercial Factors Limited, above n 16.
22 Gardiner v Westpac New Zealand Limited, above n 15, at [44].
23 At [45]
undertaken, and to advise guarantors to seek independent advice before signing any guarantee. In the event that a guarantor did not wish to take such advice the solicitor was to ensure that the guarantor signed a waiver to that effect.
[48] Once the guarantors had signed the documents, Tararua Law returned them to Westpac along with a solicitor’s certificate. Clause 8 of this certificate advised Westpac that all guarantees had been signed in accordance with the instructions and notes provided by Westpac in relation to the completion of the guarantees. We also consider that Westpac was entitled to rely on this certificate as providing confirmation that Tararua Law had carried out Westpac’s instructions in relation to the execution of guarantees. We therefore consider that the steps Westpac took in the present case were sufficient to ensure that it met its obligations to ensure the guarantors understood the nature and effect of their guarantees.
…
[54] There is an added dimension to the present case that we consider to be important when assessing whether Mr and Mrs Gardiner agreed to provide guarantees with full knowledge of the potential consequences of doing so. It now transpires that when they signed their guarantees each guarantor also signed a document headed, ‘Certificate and Acknowledgement and Confirmation by the Guarantor’. The document was evidently prepared by Tararua Law of its own initiative, possibly in order to rebut claims such as those now made in the present case.”
Is there a serious question to be tried?
[85] In assessing whether there is a serious question to be tried it is necessary to consider two primary questions:
(a) first, whether the relationship between Ms Mikitasova and Mr Mikitasov was one where ASB is presumed to have notice of a risk of undue influence; and
(b)secondly, if so, did ASB take proper steps to ensure Ms Mikitasova understood the transaction and thereby insulated itself from the risk of undue influence.
[86] I shall deal with each of these questions in turn.
Is there a relationship between Ms Mikitasova and Mr Mikitasov one where ASB is presumed to have notice of a risk of undue influence?
[87] I am satisfied on the material before me this is an issue which is capable of serious argument despite the fact the legal position in New Zealand may be unclear.
[88] Under Wilkinson the financier will be put on enquiry when it has knowledge of facts leading to a presumption of undue influence whereas under Etridge this will occur when the relationship between the principal debtor and the guarantor is non- commercial.
[89] In my view, under either approach, there is evidence to support
Ms Mikitasova’s claim.
[90] Adopting the Wilkinson formula there is evidence which supports the inference ASB had knowledge or had information from which it ought to have known of the risk of undue influence. In that regard the following matters which ASB either knew or ought to have known are relevant:
(a) Ms Mikitasova was a Russian national who had only been in
New Zealand since 2006. The bank had a copy of her passport.
(b)She had never attended the bank other than for simple withdrawal purposes without her husband. The bank’s notes record this.
(c) She had no other source of income and depended entirely on her husband for financial support.
(d)She was to stand surety for a loan for which she would receive little or no direct benefit.
[91] Applying Blanchard J’s formulation, Ms Mikitasova had limited commercial ability. Secondly, the relationship between Ms Mikitasova and Mr Mikitasov was non-commercial and Ms Mikitasova had little or no financial stake in the enterprise
guaranteed. And finally the relationship between Ms Mikitasova and her husband is one which can clearly be described as involving “an emotional tie or dependency”.24
[92] I come to the same conclusion if the principles in Etridge are applied, namely a financier will be put on enquiry when the relationship between the principal debtor and the guarantor is non-commercial.
[93] I thus find this element satisfied the test of a serious question to be tried.
Were the steps taken by ASB sufficient?
[94] On the evidence before me this is a more difficult proposition.
[95] On its face, and on the evidence filed by ASB, there is a forceful argument that the steps adopted by ASB were sufficient. They are listed below:
(a) ASB forwarded the loan and guarantee documents to Law Direct
(Ms Prosser) along with a detailed letter of instruction dated
22 February 2012.
(b) ASB’s letter of instruction to Ms Prosser required her to, amongst
other things:
(i)act for ASB to review the terms of the documents to satisfy herself that the borrower and guarantor could lawfully and validly enter into the loan and guarantee and perform their respective obligations;
(ii)attend to the preparation, execution and registration of the facility agreement, guarantee and new security;
(iii) advise the guarantor to seek independent legal advice;
(iv)in the event that the guarantor did not exercise the right to take independent legal advice, advise the guarantor of the full effect and implications of the guarantee and require the guarantor to sign an acknowledgement of the advice and a waiver of independent legal advice; and
(v) certify in a solicitor’s certificate that she followed all of ASB’s
instructions.
(c) Ms Prosser provided a solicitor’s certificate that she had strictly
complied with ASB’s instructions in relation to the guarantors.
(d)On 27 February 2012 Ms Mikitasova signed an acknowledgement, which formed part of the guarantee which stated:
(i)she had been advised in the absence of the borrower to take independent legal advice prior to signing the guarantee; and
(ii)she understood that the guarantee made her liable for all present and future amounts owing to ASB by Mr Mikitasov.
(e) In addition, Ms Mikitasova signed a waiver of independent legal advice which acknowledged that:
(i)she had been advised by Law Direct to seek independent legal advice;
(ii)she understood that Law Direct was acting for both the lender and the borrower in the transaction;
(iii) she had declined to take independent legal advice;
(iv)she understood that that guarantee made her liable for all present and future amounts owing to ASB by Mr Mikitasov.
[96] Additionally, Ms Prosser’s evidence is that, adopting her standard practice, she explained the transactions to Ms Mikitasova in simple terms and was satisfied, from what she saw and heard, that Ms Mikitasova had understood.
[97] But for Ms Mikitasova’s claims her English language skills were such she had no effective understanding of what Ms Prosser explained to her, I would be satisfied the bank had discharged its duties to Ms Mikitasova along the same lines as the creditor in Gardiner.
[98] The difference in the present case, and what distinguishes it from Etridge, Gardiner and the other authorities referred to, is the question of Ms Mikitasova’s understanding of the guarantee and its implications.
[99] It is neither possible nor desirable in applications of this sort to determine contested facts which go to the central issues to be determined. Nor should I be concerned with attempting to resolve conflicts of evidence or deciding difficult questions of law which call for “detailed argument and mature considerations”.25
[100] A Court, on hearing the substantive claim, may need to determine whether the Etridge principles apply in this country but, of greater significance, the Court will need to determine the central facts such as Ms Mikitasova’s grasp and understanding of English at the relevant time; the nature of her relationship with her husband as the principal borrower; her knowledge and understanding of the purpose of the borrowings; her knowledge and understanding of the consequences of default by her husband; whether Ms Prosser’s dealings with Ms Mikitasova were sufficient to discharge ASB’s on notice obligations; whether, despite the waiver, the bank should have required Ms Mikitasova to obtain independent legal advice; whether a Russian translation and/or a Russian interpreter should have been provided to assist Ms Mikitasova; whether in the circumstances the bank ought to have dealt directly with Ms Mikitasova by disclosing Mr Mikitasov’s financial position and the effect of default; and what is industry practice.
[101] Plainly the present state of the evidence is inadequate for me to make such findings, nor is it appropriate, given the nature of these proceedings for me to do so. However, for the reasons given above I am satisfied that there is a serious question to be tried.
[102] Despite this I find I must also determine where the balance of convenience lies.
Where does the balance of convenience lie?
[103] There are a number of factors which I am required to consider when weighing where the balance of convenience lies. These include consideration of the following:
(a) Would damages be an adequate remedy for Ms Mikitasova if this application is not allowed but if she succeeds in her claim?
(b)Would damages be an adequate remedy for ASB in the event interim orders are made but Ms Mikitasova is unsuccessful at trial?
(c) Conduct of the defendant. (d) Interests of third parties.
[104] I shall now consider each of these matters.
Would damages be an adequate remedy for Ms Mikitasova if this application is not allowed but if she succeeds in her claim?
[105] As Wild J observed in Wellington International Airport Limited v Air New Zealand Limited, a key consideration in the assessment of the balance of convenience is whether the party will suffer unquantifiable damage in the event they are successful at trial but not on the interim application.26
[106] It is noteworthy that Ms Mikitasova has sought only to prevent ASB from exercising its right to sell the property at 26C Binnie Street and not what was the family home at 28 Binnie Street. Ms Mikitasova accepts ASB was entitled to take this course and made no application to restrain the sale. Unlike 28 Binnie Street, the property at 26C Binnie Street is a bare subdivided section.
[107] Ms Mikitasova claimed she does not want the section sold. She said she would like to retain the section in the long term. She said it is likely that if the section is sold in the present market conditions by way of mortgagee sale it would sell at a substantial discount to its real value. She expresses the belief that in a distressed sale the property is likely to realise considerably less than what she describes as a “fair amount”. In my view this claim can only be given limited weight. Sales made under forced conditions often realise lower prices than other sales. This is an unremarkable consequence of mortgagee sales. Ms Mikitasova’s interesst are required to be taken into account by ASB which owes her a duty of
reasonable care to obtain the best price reasonably obtainable as at the time of sale.27
[108] In oral submissions before me Mr Blaikie added further grounds to support his submission that damages would not be an adequate remedy. He claimed Ms Mikitasova has a close personal and emotional attachment to the property. He said her longer term aspiration is to build a house on the site if she is able to afford it although he was bound to concede that, given his client’s present parlous financial position, such a course is likely to present a challenge.
[109] A further difficulty with that submission is that there is no evidence to support it. Indeed the very opposite seems more plausible; Ms Mikitasova has no close or emotional attachment to the property.
[110] Ms Mikitasova presently lives with her children in Melbourne. I was advised from the bar that Mr Mikitasov lives in Thailand. Mr Blaikie submitted, again in the absence of evidence, that while Ms Mikitasova’s overwhelming desire is to return to New Zealand to live she is required to live in Australia in order to continue to receive child care and maintenance payments from her husband at $3,000 a month.
This is apparently because Mr Mikitasov is unwilling to return to New Zealand but is prepared to travel to Australia to maintain his contact with the children. Mr Blaikie advised the child care and maintenance payments are made by Mr Mikitasov only on the condition that Ms Mikitasova and the children reside in Australia. Again, there is no evidence whatsoever to support this claim. But even if there was it does not answer Mr Robinson’s submission that there is no sufficient evidence that this bare section holds any special or emotional attachment to Ms Mikitasova. This is not a case where the proposed sale is of a family home. There is no question here of Ms Mikitasova or the children being forced to find alternative accommodation. Indeed, Mr Robinson submitted that if such was the case ASB would not be pursuing this remedy.
[111] Another reason why I find Mr Blaikie’s submission unattractive is that the adjacent property at 30 Binnie Street, formerly belonging to Ms Mikitasova’s grandparents, has been sold. Thus any development of this section by Ms Mikitasova would be undertaken in the knowledge that her grandparents would no longer be her neighbours.
[112] Finally, I was advised that Ms Mikitasova attempted to sell the section at
26C Binnie Street last year but was unable to obtain a price acceptable to her. Again, if that is the case, it is a strong argument contradicting any claim that the section holds a special place in Ms Mikitasova’s heart such that an award of damages would not amount to adequate compensation by way of remedy.
[113] Any damages which Ms Mikitasova might be entitled to in the event she was successful in her claim are readily quantifiable.
[114] I am thus satisfied that in the event Ms Mikitasova was unsuccessful in her present application to restrain the sale but was successful at trial, damages would be an adequate remedy.
Would damages be an adequate remedy for ASB in the event interim orders are made but Ms Mikitasova is unsuccessful at trial?
[115] Although Ms Mikitasova has given an undertaking as to damages her financial position, on any analysis, is uncertain.
[116] Mr Blaikie advises that apart from the $3,000 a month she receives in child care and maintenance payments from her husband she has no other income. However, Mr Blaikie submits that the section, at 1,588 m2 is subdivisible. He submits Ms Mikitasova has been contemplating subdividing the property and selling one half to raise the capital to fund the development of the other half. He also submits that Ms Mikitasova’s grandmother may be able to provide funds which are, at present, inaccessible for reasons which are not necessary to develop.
[117] In my view, apart from the general lack of supporting evidence, these claims are speculative and are incapable of withstanding robust scrutiny.
[118] Ms Mikitasova’s financial position is such that if she was unsuccessful at trial it is unlikely she would be unable to meet any claim in damages. This too operates against the making of orders restraining the sale.
Conduct of Ms Mikitasova
[119] Although of less weight in this consideration I am satisfied that the conduct of Ms Mikitasova is such that she should be denied interim relief.
[120] Ms Mikitasova was well aware of ASB’s intention to sell 26C Binnie Street pursuant to its rights under the guarantee and mortgage. ASB served PLA notices on her in April and July 2015. Despite this, Ms Mikitasova did not bring the application for injunctive relief until the day immediately before the proposed auction. In fact the order was not served on ASB until the morning of the auction.
[121] Also of significance is that despite her solicitor’s dealing with ASB’s solicitors in the weeks immediately preceding the obtaining of the injunction, she proceeded to apply on a without notice basis.
[122] It is also noteworthy, in the context of this discussion, that although Ms Mikitasova was highly critical of Ms Prosser’s conduct she made no attempt to contact Ms Prosser or to obtain the relevant documents from her. For example, had she taken such steps she would have obtained the waiver of independent legal advice she signed, her husband’s indemnity in her favour and his irrevocable instructions to ASB which enabled Ms Mikitasova to obtain information about his financial position.
[123] I agree with Mr Robinson that these documents are material to and
inconsistent with Ms Mikitasova’s claim she was unduly influenced.
Overall justice
[124] Finally, I must stand back and satisfy myself that the overall justice of this
case lies in the Court refusing to grant Ms Mikitasova’s injunctive relief.
[125] While I accept that Ms Mikitasova has an arguable case against ASB I am satisfied that damages would adequately compensate her in this regard. I am not satisfied the evidence supports her claim she has an emotional connection to the bare land at 26C Binnie Street. Her interest in retaining the section is driven by her commercial interests. Furthermore, given her present financial position, her stated aspiration to develop the section for her own use is unrealistic.
[126] I am satisfied that the overall justice in this case lies in allowing ASB to exercise its legal rights under the guarantee and the mortgage over that property and if Ms Mikitasova is successful in her, claim damages will be an appropriate remedy.
Result
[127] ASB’s application to rescind the interim injunction order of 9 December 2015 is granted.
[128] ASB is entitled to take steps to sell the property contained within Certificate of Title 514809, located at 26C Binnie Street, Paihia, as mortgagee.
Costs
[129] Costs are awarded in favour of ASB on a 2B basis.
Moore J
Solicitors:
Mr Blaikie, Kaikohe
Simpson Grierson, Auckland
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