Sullivan v R J Magness Limited HC Auckland CIV-2010-404-007663
[2011] NZHC 491
•17 May 2011
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2010-404-007663
BETWEEN TIIMOTHY PETER SULLIVAN Appellant
ANDR J MAGNESS LIMITED Respondent
Hearing: 20 April 2011
Appearances: J R F Cochrane for Appellant
S J Plummer for Respondent
Judgment: 17 May 2011 at 4:00 PM
JUDGMENT OF COURTNEY J
This judgment was delivered by Justice Courtney on 17 May 2011 at 4:00 pm
pursuant to R 11.5 of the High Court Rules.
Registrar / Deputy Registrar
Date………………………
Solicitors: Kensington Swan, Private Bag 92101, Auckland 1142
Fax: (09) 309-4276 – R Cochrane
Counsel: S J Plummer, P O Box 3320 Shortland Street, Auckland 1140
Fax: (09) 307-6504
SULLIVAN V R J MAGNESS LTD HC AK CIV-2010-404-007663 17 May 2011
Introduction
[1] The appellant, R J Magness Limited, is a supplier of electrical appliances. The respondent, Timothy Sullivan, was, at the relevant time, the sole director of DCTS Holdings Ltd (DCTS), a property development company which has since been struck off the register. In August 2008 Magness supplied appliances worth
$12,845 to DCTS, which installed them in a house it was intending to sell. By October 2010 DCTS had not paid the balance and Magness was poised to repossess the appliances, as it was entitled to do under its terms of trade. It refrained from doing so as a result of a letter written by Mr Sullivan under the heading of DCTS which conveyed that the property would not be sold without suitable prior arrangements for payment of the debt having been made:
Further to our conversation last week. Please accept this fax as confirmation that we intend to settle your account in full. I further confirm that I will not sign any sale and purchase agreement to sell the property without suitable prior arrangements have (sic) been made with you. In any case I look forward to getting your account settled in a timely manner and continuing the relationship we have had with your company for many years.
Please ensure any communications are made with me, as contacting the real estate agent is most detrimental to all parties.
[2] Notwithstanding this assurance, the property was sold and Magness was not paid. Magness sued DCTS and Mr Sullivan in the District Court at Auckland for the balance owing, $9,845. Judge Joyce QC entered judgment against Mr Sullivan on unspecified equitable principles, notwithstanding that Magness had advanced its case on the basis of a separate contract between it and Mr Sullivan. Mr Sullivan appeals on the grounds that:
(a) The facts did not support a finding of personal liability;
(b)The Judge erred in basing his decision on equitable principles when the case had been advanced as one of breach of contract.
[3] On a general appeal such as this the appellant must persuade this Court that the decision under appeal was wrong. If it can do so, it is entitled to a fresh assessment of the case by this Court.[1]
The District Court hearing and decision
[1] Austin Nichols & Co Inc v Stichting Lodestar [2007] NZSC 103.
[4] Magness’ case was commenced by a notice of claim filed under r 2.10
District Court Rules. The relevant allegations were that:
3.On or about 21 October 2008 Timothy Peter Sullivan in consideration of the plaintiff forbearing to sue at his request agreed not to sign any sale agreement for 5 Second Avenue before suitable prior arrangements were made with the plaintiff for payment in full...
5. The defendants have failed and refused to pay the balance owing of
$9,845. The plaintiff did forbear from issuing proceedings against the defendants on or about 21 October 2008.
On or about 19 December 2008 the first defendant sold the property at 5 Second Avenue, Stanley Point for approximately $3m without making any prior arrangements with the plaintiff or paying the balance owing for the whiteware sold with the property.
[5] Of counsel who appeared on the appeal, only Ms Plummer, for Magness, had also appeared in the District Court. She gave her recollection of the way the hearing proceeded.
[6] A judicial settlement conference date had been allocated. Judge Joyce QC was to chair the settlement conference. When the parties arrived at 2:15 pm for the conference, however, the Judge expressed the view that the matter might better be dealt with as a short trial. He invited the parties and counsel to proceed immediately on that basis, which they agreed to do. In hindsight this was unwise because the parties had no time for the normal preparation that precedes a trial. In particular, counsel were unprepared in terms of submissions.
[7] Magness’ manager, Ms Harrison, gave evidence, as did Mr Sullivan. Counsel
then made brief oral submissions. The submissions made on behalf of Magness were
strongly directed towards Magness’ reliance on Mr Sullivan’s 21 October 2008 letter
and its forbearance to sue as a result of that reliance. Ms Plummer recalled her submission that the circumstances were close to a guarantee and warranted lifting the corporate veil. However, there was little in the way of legal submissions and no authorities cited. Ms Plummer accepts that the case was advanced as a breach of contract case and that there was no mention in her submissions of reliance on equitable principles.
[8] The Judge gave an oral decision the same day. His Honour rejected the proposition that Mr Sullivan had, by the fax, guaranteed or otherwise assumed direct responsibility for the debt. The Judge then turned to consider Mr Sullivan’s personal liability on a different basis:
[28] I know from my enquiry of Mr Sullivan that he was the person who signed the sale and purchase agreement and, as I have said before, he did that without making any attempt to enter upon a suitable arrangement with Magness.
[29] In my view the writing was on the wall at the time he sent that fax that unless he could in some way persuade Magness that they would be duly looked after, the men in the overalls would be on site to remove the appliances; a real problem, no doubt, for the selling of what appears to have been a rather expensive piece of real estate.
[30] He must have been all too conscious that he had to do something that
would stop any seizure occurring, and the “something” was his fax of 21
October: a fax upon which, plainly, Magness relied in that it forbore to send out the men in the overalls and recover the product that had been sold in the
August as it was entitled to do under the Romalpa provision.
[31] By not keeping his personal assurance, Mr Sullivan in my consideration plainly and personally created a situation where, in practical terms, Magness came to be bereft of any useful means of getting its items back. For it to have – when it belatedly learned of the sale – sought to pursue the new owners would have been for it to set out on a path fraught with difficulties.
[32] In short, Mr Sullivan let Magness down. In doing so, in my view, he has brought upon himself a state of affairs where he personally must be, and I will hold him, accountable to Magness for its loss.
[33] The crucial promise is unequivocally in the language he uses: “I will not sign any sale and purchase agreement.” In fact, of course, he did, and that is why we are here today. He had control of the pen and he chose to sign the agreement. He was perfectly frank about that. He had signed it for the company, and thereby going against his own word, he personally brought about a situation where Magness became the loser.
[34] Principles of equity demand that he, having taken advantage thus in order to better the interests of a company that was important to him, must be personally responsible for the consequences.
Did the facts support a finding of personal liability?
[9] The central issue in this case was whether Mr Sullivan should be personally liable for DCTS’ debt. This turned on the capacity in which Mr Sullivan was acting when he sent the fax on 21 October 2008. Given the context in which the fax was sent and the fact that it was written under the heading of DCTS, Mr Sullivan was clearly acting, at least partially, in his capacity as director. Therefore, personal liability could only result if there were circumstances that justified lifting the corporate veil or if (which was not argued) Mr Sullivan wrote the letter in a dual capacity.
[10] Lifting the corporate veil is a step taken rarely and usually in circumstances involving fraud or sharp dealing as explained by Tipping J in Bentley Poultry Farm Ltd & Ors v Canterbury Poultry Farmers Co-operative Ltd (No 2):[2]
[2] Bentley Poultry Farm Ltd & Ors v Canterbury Poultry Farmers Co-operative Ltd (No 2) (1989) NZCLC 96,269 at 64790-64791.
The essence of the approach of Richmond P in the Security Bank case[3] was that the veil of incorporation should not be lifted unless a strict application of the principle of separate corporate identity would lead to a result so unsatisfactory as to warrant some departure from the normal rule. The Court of Appeal emphasised in Security Bank and re-affirmed in Savill v Chase[4] that the fundamental starting point must be the importance of the doctrine of separate corporate over personality…
[3] [1978] 2 NZLR 136 at 158-159.
[4] Savill & Anor v Chase Holdings (Wellington) Ltd & Anor; Concept Investments Ltd v Savill & Anor (1988) 4 NZCLC 64,442 at 64,460.
As to the concept of unconscionability which I mentioned in Savill v Chase
…I was in no way suggesting by my use of the word “unconscionable” some general test whereby the corporate veil could be lifted if the Court considered that it was inequitable or unfair to allow the veil to remain. To suggest that the corporate veil can be lifted simply if the Court feels that its presence leads to some unfairness or inequity would be quite unsatisfactory and would lead to enormous commercial uncertainty. There can well be occasions when the fact of incorporation can in the broad sense be seen as leading to some injustice, particularly with regard to creditors but in no way do I think that the Court could lend itself to such a broad test.
By using the word unconscionable I had in mind concepts of equitable fraud and the like such as were discussed by the Privy Council in O’Connor v Hart
[1985] 1 NZLR 159-see per Lord Brightman at p174. The difference between the word unconscionable and the word inequitable is, at least, for present purposes, more than semantic.
[11] It is self-evident from the facts of the case that it is not one that would justify lifting the corporate veil. Undoubtedly, Mr Sullivan has acted dishonourably and his actions have resulted in unfairness to Magness. However, if he was acting solely in his capacity as a director of DCTS there could be no justification for lifting the corporate veil to hold him personally responsible for those results.
[12] The alternative route to personal liability would have been a finding that he was acting in the dual capacity of company director and on his own account. The circumstances in which a finding of dual capacity could be made were considered by the Court of Appeal in Vulectic v Contributory Mortgage Nominees Ltd:[5]
[13] No-one disputes that it is possible for a person to sign a contract once but in a dual capacity. But there is a presumption that, if the signer purports to sign on behalf of a company or another, he or she is signing only in that capacity. Such a presumption may be displaced by clear words within the contract or by extrinsic evidence from which may be inferred the signer’s intention when affixing his or her signature.
[5]Vulectic v Contributory Mortgage Nominees Ltd (2006) 7 NZCPR 552.
[13] The Judge concluded, correctly, that Mr Sullivan wrote the fax on behalf of DCTS. There is, therefore, a presumption that it was written by Mr Sullivan only in that capacity. There must be something clear either from the fax itself or from the extrinsic evidence that would displace that presumption to justify a finding that he had signed in a dual capacity. In my judgment there is nothing in the fax nor in the extrinsic evidence that would do so.
[14] Mr Sullivan had dealt with Magness on behalf of DCTS over a long period. It was plain from the documents produced by Magness (invoices, receipts and statements of account), that it knew it was dealing with a company, all such documents being directed to DCTS. All the correspondence produced in relation to this matter from DCTS were signed in the same way by “Tim Sullivan” with no reference to his status in the company. DCTS appeared not to have a proper
letterhead but was shown as the sender above the address. As a result, the fact that
Mr Sullivan did not add his status as director beneath his name is not significant in determining the capacity in which he signed the fax 21 October 2008.
[15] Whether Mr Sullivan did sign the fax in a dual capacity ultimately turns on whether one can read the third sentence “I further confirm that I will not sign any Sale Agreement and Purchase Agreement to sell the property without suitable prior arrangements have (sic) been made with you” as displacing the presumption that he was signing only on behalf of the company. Any sale and purchase agreement would probably have to be signed by Mr Sullivan anyway as the sole director. Further, he used “we” and “I” apparently indiscriminately throughout the various letters he wrote to Magness. In these circumstances, there is no justification for reading this sentence as displacing the presumption.
[16] The Judge’s conclusion that Mr Sullivan gave a “personal assurance” was inconsistent with the fact that he was not acting in his personal capacity at all. This conclusion makes it unnecessary to consider the alternative ground of appeal that the Judge had no power to grant relief on equitable grounds where the case had been advanced as one for breach of contract.
Result
[17] The appeal is allowed.
[18] The parties may address the issue of costs by way of memoranda filed on behalf of the appellant by 20 May 2011 and on behalf of the respondent by 27 May
2011. If the appellant wishes he may reply by 3 June 2011.
P Courtney J
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