Thomas v MacKintosh
[2021] NZCA 344
•27 July 2021 at 11.00 am
| IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA |
| CA288/2020 [2021] NZCA 344 |
| BETWEEN | PHILIP DEAN THOMAS |
| AND | JOHN BOWDEN MACKINTOSH AND MATTHEW CHADLOW HALL |
| AND | ALISON MARGARET SYME, MARK WREFORD REED, SIMON THOMAS REED AND ELEANOR MARY MARR |
| Hearing: | 25 May 2021 |
Court: | Kós P, Miller and Gilbert JJ |
Counsel: | H A Evans and D R Weatherley for Appellant |
Judgment: | 27 July 2021 at 11.00 am |
JUDGMENT OF THE COURT
AThe appeal is allowed. We make the orders stated at [67] and [68].
BThe first named second respondent must pay the appellant costs for a standard appeal on a band B basis, with provision for second counsel and disbursements as fixed by the Registrar.
____________________________________________________________________
REASONS OF THE COURT
(Given by Miller J)
During Norman Thomas’s lifetime, he and his son Philip built up a substantial farming operation in North Canterbury. His three children, and some of his grandchildren, did not agree about what ought to happen to the farms following his death in 2012. Litigation began shortly before he died and a variety of proceedings have been on foot ever since.
The parties reached agreement about the distribution of land, plant and equipment in a Heads of Agreement dated 20 September 2015. That agreement was founded on valuations which they accept. They did not agree about resulting adjustments among them. Churchman J resolved a large number of disputes in a wide‑ranging judgment delivered on an application by the first respondents, who are the executors and trustees of Norman’s estate, for directions.[1] The parties accept almost all of the Judge’s directions. This appeal concerned two of them. Shortly before the hearing the parties settled one ground of appeal, leaving only one which we must decide. At the end of this judgment we record consent orders on the first ground.[2]
[1]Mackintosh v Thomas [2020] NZHC 860 [Judgment under appeal].
[2]Consent orders were made at the hearing in a related appeal, CA280/20, disposing of an appeal and cross-appeal in that proceeding. We need not record them here.
The second ground concerns the interpretation of a provision in the Heads of Agreement dealing with refinancing of bank debt on the transfer and vesting of land. It is a dispute about accounting for bank debt which must be refinanced on dissolving the ND and PD Thomas Partnership (“the Partnership”), which the appellant, Philip Thomas, ran with his father and later with the trustees. Philip’s sisters, the second respondents Alison Syme and Eleanor Marr,[3] were not members of the Partnership, but they are the sole beneficiaries of Norman’s estate, an asset of which is his interest in the Partnership. Hence the conflict. If Philip is right the estate must pay an estimated net $227,095.50 to balance the two partners’ current accounts. If Alison is right he must pay an estimated net $1,372,904.50.[4]
[3]The other second respondents, who are Alison’s sons, ultimately took no part in the appeal before us.
[4]Since many of the parties to this appeal are family members, we refer to them by their first names for clarity.
Eleanor has abided the decision of the Court. The trustees take a neutral position in this Court.
Because the issue is a narrow one we need not survey the entire factual background, which can be found elsewhere,[5] or summarise the judgment under appeal, or review previous judgments of this Court or the High Court.[6] In particular, it is not generally necessary to examine disputes about the reasonableness and expense of the actions taken by the trustees, who were not parties to the Heads of Agreement, or the alleged failures of various family members to account for assets or pay rent for Partnership assets they use. We confine ourselves to the context necessary to the issue we must decide.
Narrative
The ND and PD Thomas Partnership
[5]Judgment under appeal, above n 1, at [7]–[38]; Thomas v Thomas HC Christchurch, CIV-2011-409-2514, 24 April 2012; Thomas v Mackintosh [2017] NZCA 610; and Mackintosh v Thomas [2018] NZHC 1372.
[6]Mackintosh v Thomas [2015] NZHC 823; Mackintosh v Thomas [2016] NZHC 2313; Mackintosh v Thomas [2016] NZHC 3141; and Thomas v Mackintosh [2017] NZCA 549.
Norman and his wife, who predeceased him (and whose name does not appear in the materials before us), had three children: Eleanor, Alison, and Philip. Norman and Philip formed the Partnership by agreement dated 21 April 1983. At that time Philip was 25. He had worked for his father since leaving school at the age of 16 in 1974.
The family came to own 11 farms, most of them purchased between 1987 and 2006. Eight of them were owned by Norman and Philip as tenants in common; they are known as Cranmore, Middlewoods, Wilsons, Steeles, McCauslands, Mays, Halkett and Cridges. They were not treated as Partnership assets; the Partnership was a farming operation. Two properties, Chesmars and Yaldhurst, were owned by Norman. The last, Nordean, was owned by a company in which Norman and the ND Thomas Family Trust each held half the shares.
Conflict within the Partnership unresolved at Norman’s death
Norman and Philip fell out, and in 2010 Norman began farming with Alison’s sons, Mark Reed and Simon Reed. Mark occupied Chesmars and Cridges, and Simon occupied Yaldhurst and Halkett. As noted above, Cridges and Halkett were jointly held by Norman and Philip.[7]
[7]We understand that Halkett was not farmed as part of the Partnership business from April 2010.
On 3 December 2010 Norman gave notice of dissolution of the Partnership. The partners could not agree on the distribution of assets. On 16 April 2012 Norman brought proceedings seeking a declaration that the Partnership be dissolved and its assets distributed. He died a month later, leaving an estate estimated at $20 million.
Norman’s will
Norman’s will was executed on 22 December 2011. The executors, who were replaced by the first respondents on 3 October 2013, were Eleanor, Alison and Simon. As noted, Eleanor and Alison are the sole beneficiaries.
The Partnership continued but changed its business
Following Norman’s death the Partnership continued. Philip farmed the remaining six properties that he occupied -— Cranmore, Middlewoods, Wilsons, Steeles, Mays and McCauslands — with the trustees for about six months following their appointment. Since 31 March 2014 he has farmed the properties on his own account. This was the preference of the trustees, who did not want to run a farming business. The Partnership became an asset-owning business which rented Partnership assets to those, including Philip, who were in possession of them. As a farming operation profits had been split 2/3 to Philip and 1/3 to Norman (or the estate) but as a property business the partners shared the profits equally.
After 31 March 2014 all family members who were in possession of Partnership assets were to execute leases and pay rent at valuation, but only Eleanor did so. The others were content, as Mr Mackintosh deposed, to retain possession of the land, plant and equipment, without paying a proper rent. In the result, the trustees were starved of funds and had to resort to the High Court, where Gendall J directed that they be funded.[8] Churchman J rightly criticised family members for ignoring those directions.[9]
The Westpac mortgage
[8]Mackintosh v Thomas, above n 5.
[9]Judgment under appeal, above n 1, at [4] and [243].
Norman and Philip took out a term loan of $3.2 million from Westpac Bank to buy McCauslands in 2006. It is secured by mortgage over that property and Wilsons. We understand that the security extends to all Partnership liabilities to the Bank, including current account overdraft indebtedness.
Treatment of the Westpac mortgage since 31 March 2014
Since 31 March 2014 Philip has met most of the payments on the Westpac mortgage, which as noted is a Partnership liability, and other outgoings on the properties he farms.
The trustees were initially unwilling to treat one half of these payments as an off-set against rent, presumably for cashflow reasons. They accepted that the payments ought to be credited to Philip’s current account.
In his affidavit evidence, however, Mr Mackintosh deposed that it was an accounting error to give Philip credit for mortgage payments. His evidence was that because the money came from the Partnership bank account the Partnership made the payments.
As a matter of commercial substance, since 31 March 2014 mortgage payments have been met from the income of Philip’s farming business, which have been paid into the Partnership bank account. There is also evidence that the trustees asked Philip to meet the mortgage payments and he agreed to do so. Philip has operated the account alone since that date, though it remains a joint account. For accounting purposes the Partnership’s accountant, Raelene Rees, has treated the Partnership bank account as closed from 31 March 2014.
The trustees maintained in the High Court that Philip acted without their consent by taking over the bank account and the accounts prepared by Ms Rees were in error. The account was in credit at 31 March 2014, and Philip is said to have improperly treated the balance as his own property from that date.
Churchman J accepted this evidence, finding that Philip had appropriated virtually all the Partnership’s liquid assets, comprising not only funds of $510,373 in the bank account, but also 2014 debtors and produce and livestock. The Judge found the total was $2,233,866, though Philip had also paid Partnership creditors of $136,680.[10]
[10]Judgment under appeal, above n 1, at [245].
The position actually is that with the acquiescence of the trustees the Partnership did cease farming from 31 March 2014 and thereafter Philip has farmed on his own account. At that date the balance in the account stood at $942,641.08. It was the product of the Partnership’s farming activities. From that account, $233,333.33, was paid to the trustees as Norman’s share of the farming operation’s assets and liabilities at that point. Philip used some $200,000 of the balance to repay a partnership debt and retained the rest.
We observe that Ms Rees deposed that she acted on the instructions of the trustees, and under their supervision, when preparing the accounts. Total distributions recorded in the accounts amounted to $764,890, of which Philip received $509,927 and the trustees $254,963.
In this Court the trustees acknowledged in their written submissions that they authorised Philip to withdraw $466,666.67 from the bank account, though they maintained they did not agree to him taking over the account. (The difference between $466,666.67 and $510,373 represents a float of $43,706.33 that they say was to be left in the account.) The trustees further agreed, again contrary to their position as recorded and accepted by the Judge, that Philip should receive credit for the amount he introduced into the Partnership bank accounts,[11] and for his contributions to mortgage payments.[12] We record that this was Eleanor’s position in the High Court.
[11]They accept the figure of $418,402.36 adopted in the Judgment under appeal, above n 1, at [250].
[12]We express ourselves in that way because he has paid some rent and has apparently not continued to meet all the mortgage payments.
A consent memorandum was filed before the hearing inviting us to allow Philip’s first ground of appeal; that is, the appropriation of cash, the finding that he did not introduce funds to meet interest payments but simply returned some of the money he had taken, and the direction that he is not entitled to credit for sums paid from the Partnership bank account in the 2014 and 2015 financial years. The parties agreed that:
(a) The trustees agreed and authorised Philip to withdraw $466,666.67;
(b)The trustees agreed to Philip purchasing the other liquid assets of the partnership, and that he did so;
(c)The trustees did not agree to Philip withdrawing the cash balance of $43,706.33, which should therefore be debited against Philip's current account with the partnership;
(d)Philip should be credited with payments he made towards the mortgage interest. This is recorded in the High Court judgment as being $418,402.36 but no actual figure is mentioned in the actual order made at para 279(a).
(Footnote omitted).
It is regrettable that these concessions by the trustees and Alison were not made before Churchman J. We appreciate that the trustees were undoubtedly motivated by serious cashflow concerns, and for that reason insistent that there be no netting off when accounting for payments. But the facts were not made clear to the Judge, and he made incorrect findings as a result. In our view the misunderstanding undoubtedly affected his approach to the second and surviving ground of appeal, which concerns refinancing of the mortgage.
Two points follow from this account of how the mortgage was treated prior to the Heads of Agreement. The first is that the Westpac loan remained a Partnership debt for which the estate was liable, as between partners, as to one half. The second is that for the purposes of winding up the Partnership, the concessions must be reflected in the partners’ current accounts; specifically, funds Philip introduced to the Partnership must be credited in his current account, as we understand Ms Rees did in the accounts she prepared. We do not understand these points to be in dispute any longer.
Current account balances
We have not been called on to quantify the partners’ current accounts and need not reconcile the figures given by Ms Rees with those proffered by the trustees in argument in the High Court. We have used her figures, as Mr Fowler QC for Alison did in argument, but they are merely part of the context for the issue we must decide. We assume that adjustments may be made when the Partnership is wound up.
It is common ground that there is a substantial imbalance in the partners’ current accounts, as reflected in Partnership accounts prepared by Ms Rees and accepted by Churchman J. As at 31 March 2015 the estate’s current account stood at $12,848,098 and Philip’s at $10,102,289. The difference was $2,745,809. To rebalance the accounts Philip would have to pay half of that sum, $1,372,904.50.
The nature of the dispute can now be seen. It is whether and how the Heads of Agreement alter what would otherwise be the orthodox accounting treatment of Philip’s refinancing. Ms Rees explained that if his refinancing is treated as the introduction of money to the Partnership to retire its debt his current account will be credited with $3.2 million. She calculated that the trustees would need to pay $454,191 to balance the current accounts in that case. (In practice it appears they would pay half of that sum and their current account would be debited by the same amount, as reflected in our sums in the introduction of this judgment.) If the refinancing is a transaction which need not be accounted for within the Partnership, the imbalance in the estate’s favour will remain and it is Philip who must pay to balance the current accounts.
The Heads of Agreement
The Heads of Agreement followed a mediation conducted by Robert Fisher QC against the backdrop of proceedings brought to dissolve the Partnership and to advance various testamentary promises claims. They signed the Heads of Agreement on 20 September 2015.
The Heads of Agreement was preceded by a trustees’ memorandum intended to guide and assist the parties in their negotiations. Under the heading “Framework” it explained how assets and liabilities of the Partnership should be dealt with:
The first relates to the allocation of the partnership assets and liabilities. In the normal course of events where one partner buys out another partner’s interest in the assets and liabilities of the partnership, transactions are recorded as a cost/credit to that partner’s current/capital account. The plant and machinery Norman took from the partnership and now used by Hannor and Hitcham would be charged to Norman’s account so that it can be dealt with in his estate. Philip in turn would be charged for and credited with those assets allocated to him and liabilities accepted by him. All transactions would be at market value. In the end there would be two balances — the amount one partner would owe the other. If most of the partnership properties are allocated to Philip at market value then clearly Philip will be indebted to his father’s estate. How the asset of Philip’s debt to the estate is treated would be a matter for the parties to decide after considering the relativity of the various claims.
The memorandum dealt with a number of issues, including the treatment of estate liabilities. The trustees understandably wanted to ensure that they and the estate were released from all liabilities. They recited that generally the liabilities were well understood and had been paid as they fell due, but noted that the burden of some might need to be borne by the properties which benefited from them. They addressed the Westpac loan specifically:
The trustees will require the Westpac Bank loan to be repaid as part of any settlement. They understand that while the bank may be prepared to provide a release from the ongoing loan, this would only apply after two years from the date of such release. That would not be acceptable. The trustees will insist upon repayment of the loan and an immediate and unqualified release from the liability.
The parties succeeded in reaching an agreement which was recorded in the Heads of Agreement. It contemplated that a further agreement would be executed and settlement, by distribution of properties and assets, would be implemented, via consent orders, on 31 March 2016:
38.While the provisions of this Agreement reflect the substantive binding intentions of the parties, the precise mechanisms in terms of how the transactions will be effected are yet to be determined.
39.The precise mechanisms, to give effect to the intentions of this Agreement, are to be subsequently agreed and recorded in a comprehensive agreement which will:
a.seek Court orders by consent; and
b.give effect to the most tax effective means by which the substantive agreements can be effected.
The comprehensive agreement envisaged has not been negotiated, but it is not in dispute that the signed Heads of Agreement binds the parties, who were the family members, including Eleanor, Alison and Philip. As noted, the trustees were not party to the agreement.
Clauses 1 to 3 recorded how properties were to be distributed:
It will be seen some properties were to be vested in Alison, Mark and Simon, who would take unencumbered title. They were Halkett, Cridges, Chesmars, and the “[p]ortion of McCauslands known as Pitts Road”.
The estate’s interests in several other properties were to be vested in Philip. The agreement did not say that the properties would vest unencumbered. Philip was also to receive the Nordean land. This seems to have been a swap with Alison for Pitts Road.
Clauses 4 to 13 dealt with the transfer of other assets, including plant and machinery (which generally went to the party holding possession). We need not quote all of them. Clauses 4 and 8 provided for Eleanor. Clause 4 stated that Yaldhurst would be sold for her benefit.
4.That the Estate will sell its interests in Yaldhurst for the benefit of Eleanor Marr on the following conditions:
a.Mark Reed will provide vacant possession of the land on 31 March 2016, unless agreed otherwise with the Trustees (but with Mark having the right to harvest crops after 31 March 2016 if required).
b.Eleanor Marr pays for the cost of sale of the property.
And Philip would purchase Eleanor’s shares in Nordean Farms Ltd, which owned the Nordean land:
8.Eleanor Marr retains her 5/12th share in Nordean which is represented by her interest in the Thomas Family Trust and the Nordean Farm Limited which interest Philip Thomas will purchase by 31 March 2016 or as otherwise agreed.
Clause 7 provided that any interest Alison has in Nordean Farms Ltd and the Thomas Family Trust will vest in Philip:
7.That any interest, including any current account, Alison Syme has in Nordean Farm Limited and the Thomas Family Trust will be vested in Phillip Thomas.
Clause 6 provided that any other beneficial interest the estate has in the Partnership will vest in Philip:
6.That any other beneficial interest the Estate has in the ND and PD Thomas Partnership will vest in Philip Thomas.
Clause 14, on which the dispute before us centres, was headed “Transfer of liabilities”. It dealt with the Westpac mortgage:
14.That the ND and PD Thomas Partnership’s mortgage liability to Westpac will be refinanced by Philip Thomas so that when Pitts Road is transferred it will be free of the mortgage.
It will be seen that this clause envisaged that when Pitts Road is transferred to Alison it will be free of the Westpac mortgage.
The Heads of Agreement went on to provide for rent, outgoings and liability for tax. It said nothing about mortgage payments that had been made by Philip since March 2014. Under the heading “Other matters” it stated that the Partnership is still in existence and will continue until the estate’s interest is dissolved on a date to be agreed:
31.That the ND and PD Thomas Partnership is currently in existence and will continue until the Estate’s interest is dissolved on a date to be determined between the Trustees of the Estate and Philip Thomas.
There was no provision for trustees’ indemnities, contrary to the trustees’ request, but the parties agreed to abandon all claims against them. Clause 36 provided that Eleanor and Philip would have an equal one-half share in any residue of the estate. And cl 37 dealt with how any shortfall would be funded:
37. If there is a shortfall in the Estate, it will be met as to:
a.$0 to $400,000 shortfall by Eleanor Marr 50% and Philip Thomas 50%.
b.shortfall in excess of $400,000 by Eleanor Marr, Alison Syme and Philip Thomas in equal one-third shares.
Events since the Heads of Agreement
Steps were taken after the Heads of Agreement to swap possession of properties which were to vest in the parties. Notably for present purposes, Alison took possession of Pitts Road, which is part of McCauslands. We are told that it is a block of 50.07 ha and the balance, which remains in Philip’s possession, comprises 160.29 ha.
However, many disputes continued. They culminated in the judgment under appeal, which as noted was delivered on the trustees’ application for directions.[13] Pending resolution of the interpretation issue the Westpac mortgage has not been refinanced, title to the properties has yet to vest or be transferred, the Partnership’s closing accounts have not been settled, and we understand the estate remains largely undistributed.
The trustees’ proposed settlement mechanism
[13]Trustee Act 1956, s 66.
The trustees proposed the following mechanism for distribution of the estate, as recorded by the Judge:
[171] The trustees wish to follow a transaction process to distribute the estate. That process is described in submissions as involving the following steps:
(a)On a given date, the property concerned is “transacted” to the appropriate beneficiary at market value.
(b)At the same time, the estate takes a mortgage security over that property for the full amount of the purchase price as a loan.
(c)Other assets and net rentals are to be handled in the same way.
(d)On a future date, those purchase price loans are repaid in full by each beneficiary and, contemporaneously, a legacy of the same amount, less any debt owed to him/her, is distributed to that beneficiary.
The Judge recorded that this mechanism was flexible and was thought to give certainty to asset values and GST.[14] The parties had some reservations about it, but he thought it necessary to give effect to the complex transactions contemplated by the Heads of Agreement.[15] It is not clear why he formed this view.
[14]Judgment under appeal, above n 1, at [172].
[15]At [179].
Of course McCauslands and Wilson were subject to the Westpac mortgage. In their submissions in the High Court, the trustees identified two options for refinancing the mortgage:
61The trustees on behalf of the partnership therefore seek the following direction in a way that binds the partners:
(a)Is the Westpac Bank mortgage to be refinanced by Philip [transacting] McCauslands and Wilsons (less Pitts Road) with the full purchase price paid by him to the purchaser in cash, the purchaser lending to Philip the purchase price less the amount to repay the mortgage, thereby leaving the purchaser to repay the mortgage: or
(b)Is Philip to pay into the partnership for the credit of his partner’s account such sum in cash as is required to enable the partnership to repay the Westpac mortgage and the partnership is to repay the Westpac mortgage from that cash.
The first of these options followed the trustees’ preferred distribution mechanism. The trustees supported it. Their counsel advised that:
57It is McCauslands and Wilsons which are subject to the Westpac mortgage. The trustees’ view is, with the exception of Pitts Road which forms part of McCauslands but is to go to Alison, what the estate owns to vest in Philip is (apart from other properties) McCauslands and Wilsons subject to the Westpac mortgage. Philip takes the property subject to the mortgage. There is currently a differential between the partners’ accounts of about $2.9m in the estate’s favour and under this scenario this differential will remain, although the net equity would be debited to Philip’s partners’ account and the property and mortgage would be removed from the partnership's balance sheet.
58The decision to transact properties does not change that position. Philip would pay the full purchase price for the property and the partnership would use part of those funds to pay off the mortgage. What would be lent back to Philip by the partnership would be the purchase price less the amount of the mortgage. He will fund the balance of the purchase price in cash from his own resources. The differential in the estate's favour would remain.
It will be seen that Philip would take the balance of McCauslands “subject to the mortgage”, with the result that the current account differential of about $2.9 million in the estate’s favour would remain. It appears the trustees had formed the view, at a late stage, that the mortgage would be transferred to Philip.
The trustees’ counsel explained that under the second option Philip would introduce funds to the Partnership to refinance the mortgage:
59There is however another approach. If Philip was to introduce a sum into the partnership to pay off the loan, his partner’s account would be credited and the funds used to repay the loan. The net effect there is the differential between the partners’ accounts, currently about $2.9m in the [estate’s] favour, would result in a differential of about $300,000 in Philip’s favour.
There was no evidence that Westpac agreed to the first of these options, under which it would lose security over Pitts Road. Philip’s counsel advised the Judge from the bar that the second option was the only one acceptable to the Bank.
The judgment below
Churchman J dealt with liability to pay mortgage interest and liability to refinance the mortgage in the same section of his judgment. As noted above, it is not now in dispute that his findings with respect to mortgage interest and rent were incorrect. We mention them only to the extent necessary.
The Judge began by accepting as entirely reasonable the trustees’ position as expressed in the memorandum preceding the mediation, which we have quoted at [29] and [30] above. He explained that:
[236] The trustees’ position as set out in that memorandum was entirely reasonable. The loan was a debt of the Partnership. The trustees stood in Norman’s shoes as a partner in the Partnership. They therefore became liable for the loan in the same way Norman had been. If, because of the agreement reached by the respondents and recorded in the [Heads of Agreement], the trustees were not able to dispose of their interest in Wilsons and McCauslands and repay the loan from the sale proceeds, they were entitled to an unqualified release from their liability. They were entitled to be put in sufficient funds by the respondents to pay the estate’s share of the mortgage interest. They were also entitled to expect that Philip as the other partner in the Partnership, would pay his share of the mortgage costs.
The Judge reviewed the evidence about who was liable to pay interest and whether there was to be a set-off against rent, then found that:
[254] Philip seems to be under the misapprehension that the estate has some obligation to pay, from its funds, half of the cost to discharge the Westpac mortgage before Wilsons and McCauslands are transacted to him. For example, in his affidavit of 1 March 2019 at [5], he says:
… the trustees have at various points tried to impose conditions on making a title available. Typically, these conditions relate to:
(a)me taking over, in my own name, the partnership liability to Westpac, prior to me receiving clear title as contemplated by the Heads of Agreement …
(b)my agreement to the transfer of Pitts Road to Alison in order for her to make her shortfall payments — again, this would require the bank’s consent …
[255] The interest that the Partnership has in Wilsons and McCauslands is the interest in properties that are subject to a $3.2 million mortgage. All that the estate has to transfer to Philip and the other respondents is the net interest in the properties in which the estate has an interest. Whoever takes these properties in terms of the [Heads of Agreement], receives them in the same state that they are now, i.e. subject to a mortgage.
[256] The trustees are correct to insist that Philip, as the person specified in the [Heads of Agreement] as receiving Wilsons and McCauslands, assumes responsibility for the mortgage. If the respondents had wanted the estate to discharge the Westpac mortgage prior to transacting Wilsons and McCauslands to Philip, they would have needed to provide cash to the trustees to do that because, as they were well aware, the trustees had no other means of achieving such an outcome.
The Judge went on to find that Philip was aware — contrary to his evidence — at the time of the mediation that the trustees insisted that the draft accounts were wrong and maintained that he had expropriated funds in the Partnership bank account. He described Philip’s claim that he was unaware of the trustees’ stance as a critical part of Philip’s case.[16] It will be apparent from what we have already said that this finding was in error, through no fault of the Judge.
[16]At [257].
The Judge noted the alternative options for refinancing the mortgage and rejected the second of them. He reasoned that:
[269] As discussed at [393] below, the Partnership will come to an end on the major distribution date. What the trustees will have to distribute to Philip on that date are the titles to Wilsons and McCauslands that are the subject of a mortgage.
[270] That mortgage is a Partnership debt. The trustees are entitled to insist that, as part of the winding up of the estate, it is discharged.
[271] Nothing in the [Heads of Agreement] imposes an obligation on the trustees to discharge the Westpac mortgage from the general funds of the estate. The respondents were very keen to divide up the estate’s assets in the [Heads of Agreement] but much less keen to accept responsibility for the estate’s liabilities, including the mortgage.
[272] In entering into the [Heads of Agreement], the respondents largely ignored the contents of the trustees’ memorandum which clearly drew to their attention the need for any settlement to address all of the estate’s liabilities including the mortgage in a way that released the trustees from all liabilities.
[273] The [Heads of Agreement] specifically said that on the transaction date, Philip has to refinance the Westpac mortgage. It does not say that Philip and the trustees have to refinance the mortgage. His need to refinance the mortgage does not arise from anything to do with the Partnership. It arises from the fact that he wanted the estate’s interest in the Wilsons and McCauslands farms to vest in him pursuant to the [Heads of Agreement].
The appeal
We have already referred to the trustees’ stance at the hearing in the High Court. As noted, they adopted a neutral stance before us, abiding the Court’s decision. The protagonists were Philip and Alison.
For Philip, Mr Evans noted that the Heads of Agreement is silent as to the refinancing mechanism. It makes no reference to the transfer of the mortgage, which would in any event require the Bank’s consent. It simply contemplates that Philip will refinance, discharging the Partnership’s obligation to the Bank. He noted that the trustees’ memorandum recorded that they “require the Westpac Bank loan to be repaid” as part of any settlement, with an “immediate and unqualified release” from their liability under the loan. He emphasised that McCauslands (less Pitts Road) was to vest in Philip and refinancing was a separate step. He characterised the trustees’ proposal for settlement as a requirement that Philip not only refinance but also purchase the estate’s share of the Partnership debt. The Judge adopted an unjustified assumption that the refinancing was for Philip’s benefit alone.
For Alison, Mr Fowler submitted that under the Heads of Agreement, Philip agreed to assume personal responsibility for the Westpac mortgage. He argued that is fair because Philip receives almost all the Partnership land. The alternative would leave the estate in financial difficulty, which the parties knew when they negotiated the Heads of Agreement. He characterised Philip’s argument as a claim that he and the trustees must refinance the mortgage together. The purpose of cl 14 was to require Philip to assume liability for the mortgage. Had the parties intended that he would receive a current account credit they would have said so. He emphasised that the Heads of Agreement provided in cl 1 that Alison would take unencumbered title to the properties, but it did not say that the properties would pass unencumbered to Philip.
Analysis
In our view the interpretation of the Heads of Agreement urged on us by Mr Fowler is incorrect. For the reasons which follow, we are satisfied that the appeal must be allowed. We need not survey the authorities on contract interpretation, about which there was no dispute before us. We adopt the orthodox approach derived from the Supreme Court decisions in Bathurst Resources Ltd v L & M Coal Holdings Ltd[17] and Firm PI 1 Ltd v Zurich Australian Insurance Ltd.[18] The only point we need emphasise is that while background material is relevant, text remains centrally important.[19] There is no dispute about the admissible background.
[17]Bathurst Resources Ltd v L & M Coal Holdings Ltd [2021] NZSC 85.
[18]Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432.
[19]Firm PI 1 Ltd v Zurich Australian Insurance Ltd, above n 18, at [63].
The analysis may begin with the trustees’ memorandum, which the parties agree forms an important part of the context. The trustees’ general approach was recorded in the passage quoted at [29] above. With respect to the Westpac loan, they were insistent that it be repaid. There was no mention of the loan being transferred or otherwise renegotiated by the Partnership. Their unmistakeable objective was that it should be repaid and thereby cease to be an obligation of the Partnership. We are unable to accept the Judge’s view that this approach somehow supports the argument that the mortgage would be transferred. They expressly stated that it must be repaid.
There is no doubt that the Partnership was not in a position, without realising land assets, to refinance the mortgage itself, but it did not need to do so. If the balance of McCauslands was to vest in Philip, it could be made a term of the agreement that he must refinance the Partnership debt, so releasing it from liability to the Bank. Contrary to the view taken by the Judge, no question arose of the Partnership refinancing the mortgage.
The Heads of Agreement accordingly provided in cl 2 that the estate’s interest in the listed properties, including the balance of McCauslands, would vest in Philip, and in cl 14 that he would refinance the Partnership’s mortgage liability to Westpac. Put another way, as between Philip and the rest of the family he would introduce the funds necessary to repay the Bank. The Agreement was silent as to how he would do that. It left the source of funding as a matter for him. There is no reference to a transfer of the mortgage or, as the trustees argued in the High Court, to Philip taking McCauslands “subject to the mortgage”. On the contrary, cl 14 envisaged that after refinancing, Pitts Road — which was part of the Bank’s security — would be free of the mortgage. It is presumably because Alison was to take Pitts Road free of any mortgage that cl 1 specified she would receive an unencumbered title. We were not referred to any evidence that there were existing mortgages on the other properties to pass to her side of the family.
The Heads of Agreement was silent as to the consequences for the partners’ current accounts. The consequence of Philip repaying the Partnership debt would ordinarily be that his current account would be credited with the funds he introduced for that purpose. The question is whether there is anything about the Heads of Agreement, or the context, to suggest that the parties intended the refinancing would be treated differently.
On the face of it, the answer to this question is “no”. The Heads of Agreement did not address the Partnership dissolution. It provided rather that the Partnership was in existence and would continue until the estate’s interest was dissolved on a date to be agreed between Philip and the trustees. It bears repetition that the trustees, as the other partner, were not party to the Heads of Agreement.
The treatment of the Westpac debt in the Partnership accounts would have implications for the estate, as we have explained above. But we do not accept Mr Fowler’s submission that the family would not have agreed to an outcome which left the estate in financial difficulty. On the contrary, there is every reason to think they were quite sanguine about that. The estate is very valuable, but the family had decided that its assets, including land held by Norman and Philip as tenants in common, would be distributed in specie. They paid little heed to the wishes of the trustees. The estate was already cash-poor but the parties were unwilling to realise assets or to fund the trustees, whose anxiety about the estate’s cashflow was made clear in their memorandum. The parties expressly contemplated the estate might be left with a shortfall when the Heads of Agreement was implemented. They provided for that possibility in cl 37, which prescribes how any shortfall is to be funded.
That leaves Mr Fowler’s argument that the outcome is unfair because Philip ends up not only with his own interest in land formerly farmed by the Partnership but also with a disproportionate share of the estate’s assets. Counsel told us that under the Heads of Agreement Philip receives estate property valued at (in round numbers) $10 million, while Alison receives estate property valued at $5 million and Eleanor receives estate property valued at $4.5 million. The balance of the estate, which as noted was worth about $20 million, goes to Mark and Simon.
There are three, collectively insuperable, difficulties with this argument. The first is that this proceeding was not brought to determine the merits of the parties’ underlying claims to estate assets. They settled those claims in the Heads of Agreement, which is the source of the imbalance to which counsel pointed.
The second is that only by reference to those underlying claims could a court decide whether an imbalance is unfair. We are entirely without the evidential foundation needed to do that. In Philip’s telling he went to work for Norman at 16 and was not paid until the Partnership was formed, he and Norman acquired most of the properties through their efforts over many years, and Norman expropriated jointly‑owned assets when they fell out in 2010. Mr Evans pointed out that Philip had brought his own claims as an aggrieved business partner, not merely as a disappointed beneficiary of his father’s will. He argued that from Philip’s perspective he is being asked to pay for property (McCauslands) that he already owns. We have little doubt that other family members would offer very different accounts. The point is that even if we were minded to do so, we are in no position to say who is right.
The third difficulty is that Mr Evans did not accept Mr Fowler’s calculations. He argued that they do not credit Philip with loss of his half interest in some properties, notably Halkett. He contended that Philip is actually to receive estate assets of $6.6 million.
Decision
The appeal is allowed. With respect to the first ground of appeal we make the following orders by consent:
(a)The appeal is allowed in respect of the first ground of appeal.
(b)The decision of Churchman J at [260] that Philip appropriated $466,666.67 cash from the Partnership’s bank account (and all other liquid assets of the Partnership) and that this was not authorised by the trustees, is quashed.
(c)The balance of $43,706.33 is to be debited against Philip’s current account.
(d)The finding at [261] that Philip did not introduce any funds to meet interest payments in 2014 and 2015 is quashed.
(e)The direction at [279(a)] that Philip is not entitled to the claimed credit for sums paid from the Partnership bank account in the 2014 and 2015 years is set aside.
With respect to the second ground of appeal, we direct that Philip is entitled to credit in his Partnership current account for the funds introduced to refinance the Westpac mortgage and discharge the Partnership’s obligations to the Bank under the mortgage. We see no need to modify the trustees’ application for directions, as Mr Evans invited us to do. We direct rather that the orders made in the Court below are varied accordingly.
Alison must pay Philip costs for a standard appeal on a band B basis, with provision for second counsel and disbursements as fixed by the Registrar. We make no order as to costs against Eleanor or the trustees.
We record that in their submissions before us the trustees advised that should Philip succeed they will likely be required to apply to the High Court for further funding, pursuant to leave reserved, to vary orders made by this Court on 19 December 2017 and 31 October 2018. That is a matter for them.
Solicitors:
Young Hunter, Christchurch for Appellant
Meares Williams, Christchurch for First Respondents
Harmans, Christchurch for First Named Second Respondent
Wynn Williams, Christchurch for Second and Third Named Second Respondents
RMF Silva Ltd, Ashburton for Fourth Named Second Respondent
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