UDC Finance Ltd v Down

[2009] NZCA 192

IN THE COURT OF APPEAL OF NEW ZEALAND

CA587/2008
[2009] NZCA 192

BETWEENUDC FINANCE LTD

Appellant

ANDCAROL MARGARET DOWN

Respondent

Hearing:19 May 2009

Court:Baragwanath, Hugh Williams and Winkelmann JJ

Counsel:L C Gellert for Appellant

No appearance for Respondent

Judgment:19 May 2009 

Reasons:7 July 2009

JUDGMENT OF THE COURT

A        THE APPEAL IS ALLOWED.

BJudgment is entered for the appellant:

-on the first cause of action for $45,877.35;

-on the second cause of action for $67,903.67;

-on the third cause of action for $243.056.66;

-on the fourth cause of action for $157,073.26;

-on the fifth cause of action for $509,602.73.

CThe respondent is ordered to pay the appellant’s costs in the High Court on a 2B basis plus usual disbursements and in this Court on a band A basis for a standard appeal plus usual disbursements.

DIn respect of each cause of action interest from the date of today’s judgment to the date of payment is to accrue at the contractual rate set out in the relevant security document relating to that cause of action.

____________________________________________________________________

REASONS OF THE COURT

(Given by Winkelmann J)

[1]       UDC Finance appealed against Associate Judge Hole’s refusal of its application for summary judgment against the respondent, Ms Down, for sums for which UDC claimed Ms Down was liable under various guarantees she had entered into in respect of the indebtedness of 123 Metals Ltd (In Liquidation) (123 Metals).  There was no appearance for the respondent at the hearing of the appeal.  The Court had received indication prior to hearing that Ms Down would not be represented.  After hearing argument from counsel for the appellant, the appeal was allowed and judgment entered for UDC.  We now give our reasons.

[2]       Ms Down was a director and the sole shareholder of 123 Metals.  She successfully resisted UDC’s application for summary judgment for an amount of approximately $1 million on the grounds that when she gave the guarantees she was unduly influenced by her husband, Mr William Conway, and Mr Raymond Moorhead, 123 Metals’ accountant and chief executive.

[3]       UDC appealed that decision on the grounds that the Judge was wrong to conclude that Ms Down had satisfied the evidential onus upon her to establish an arguable defence that she was in fact unduly influenced in the manner she claimed.  UDC argued that she offered no evidence she was unduly influenced, or that UDC had knowledge or notice of any undue influence. 

Factual background

[4]       UDC agreed to lend to 123 Metals a total principal sum of $1,165,467, in five loans made between the dates July 2005 and October 2007, for the purpose of purchasing particular assets.  Ms Down signed the loan documentation on behalf of 123 Metals, in her capacity as director of that company.  All loans were secured by a security agreement granted by 123 Metals in favour of UDC, and by further security obtained over the particular assets purchased with the advances.  Ms Down signed each of these agreements in her capacity as director of 123 Metals.  She also guaranteed each of the loans by deeds of guarantee and indemnity dated 28 July 2005, 22 November 2005, 19 July 2007, 13 August 2007, and 11 October 2007.

[5]       Ultimately 123 Metals defaulted in its obligations to UDC Finance.  UDC Finance made demand on it and Ms Down for all amounts due and owing under the various agreements and guarantees.  Neither 123 Metals nor Ms Down made payment in response to those demands.

[6]       Proceedings were commenced and an application for summary judgment filed.  The affidavit in support of the application was that of Mr Sunderland, a manager from UDC Finance.  He attached all relevant loan, security and guarantee documents, and a copy of a Companies Office search for 123 Metals recording that Ms Down was one of two directors and was the sole shareholder of that company.  We note for clarity that at the time the loans were advanced, Ms Down was sole director.

[7]       In Ms Down’s affidavit in opposition to the application for summary judgment, she said she allowed herself to be named as the director and shareholder of 123 Metals at the request of her husband, Mr Conway, who was not a director of the company.  Ms Down said it was necessary that she act in that capacity in order to secure the necessary borrowings.  She acted solely on the instructions of her husband and, at times, on the directions of Mr Raymond Moorhead, an in-house accountant with the company and eventually its chief executive. Mr Moorhead and her husband made all the decisions relating to the day to day running of the company and were involved in all dealings with lending institutions, suppliers, creditors and the like.  Her involvement with the company was so limited that she continued in her employment as a retail assistant in a shoe store for most of the time she was named as director of the company. 

[8]       As to the particular transactions, Ms Down claimed that Mr Moorhead arranged the loans with UDC Finance and that on each occasion he would call her in the morning and tell her to come to the office to sign the documents.  Normally when she went to the offices, she would be met by Mr Moorhead and a person from UDC Finance.  She would then be ushered into a side office to sign the documents.  The documents were only briefly explained to her and she was not advised to get or given the opportunity to seek legal advice.  At the meetings she attempted to get more information as to the nature of the documents which she was signing but did not get answers she understood.  As to how she came to sign the guarantees, she said:

I felt compelled to sign the loan documents and that I just had to trust both Raymond Moorhead and UDC.

[9]       Finally, Ms Down said that the machinery and items for which the loans were granted were never actually purchased; the vendors from whom they were to be purchased were fictitious companies.  She concluded:

I have subsequently learned that the advances were made to a bank account in Ponsonby.  I have no knowledge of who operated and controlled that account.  If UDC had actually contacted the companies to which the advances were supposed to have been advanced they would have discovered that the loans were fraudulent.

[10]     UDC Finance filed a reply affidavit from its Commercial Manager, Mr Proffit.  Mr Proffit’s affidavit evidence was based on the material on UDC Finance’s file and from his own discussions with Ms Down.

[11]     Mr Proffit recorded that, in addition to her shareholding and directorship of 123 Metals, Ms Down was the director of six other companies.  Based on his dealing with the file and discussions with Ms Down, he understood the position relating to 123 Metals was that Mr Moorhead was a chartered accountant employed by Ms Down or her company to undertake the day to day running of the company and deal with its accounts.  The company was a large business, with sites in several locations around the North Island.  Mr Moorhead was UDC Finance’s regular contact in respect of financing arrangements and invoicing details.  But UDC Finance dealt with Ms Down directly as director for the company when the loan agreements were signed, and separately guaranteed by her.  UDC Finance did not have any dealings with Mr Conway and did not even understand Ms Down to have a husband at the time the loan agreements were entered into.

[12]     Mr Proffit described aspects of the meeting in 2007 at which Ms Down signed the last of the guarantees she gave.  He said it took approximately half an hour.  During the meeting he followed his usual practice of explaining details of interest rates, cost of finance, terms of the loan and assets secured.  Amongst other things, he pointed out to Ms Down that she was signing the documents separately as a guarantor.  She did not ask for further time to seek independent advice. 

[13]     Following her signature on each guarantee and indemnity there was the express acknowledgement by her as guarantor that:

… the guarantor has either had independent legal advice prior to executing these terms or, if that has not occurred, that is solely the guarantor’s own choice freely made, and as a result the guarantor irrevocably waives any rights which the lack of that independent advice might otherwise have given the guarantor.

[14]     Mr Proffit also attached a director’s certificate signed by Ms Down in which she confirmed she was the sole director, and, that acting as the Board of the company, she had approved and authorised the execution of the loan and security documents by the company. 

[15]     Ms Down filed an affidavit in reply in which she referred to the discussions which Mr Proffit described.  In that affidavit she claimed that she had only a limited knowledge of 123 Metals’ assets and understood that Mr Proffit was going to talk to Mr Moorhead about the details of the company’s trading activities, its assets and the purpose of the loan.  She did not really get into any detail with Mr Proffit as to the purpose of the loan.  She trusted both him and Mr Moorhead that everything was in order.  She said the loan was not used for the benefit of 123 Metals or her gain.  Again, addressing the use to which the loans were put, she concluded:

It is my understanding that the loans themselves were obtained as a result of fraud. I had placed all my trust in Mr Moorhead, my husband Bill Conway and in fact in UDC Finance Limited.  Mr Moorhead especially knew of my reliance on him and took advantage of the position of trust that I held with him.

Decision of the High Court

[16]     The appellant accepts that the Judge correctly directed himself as to the relevant law in relation to the defence of undue influence.  He cited the following passage from Contractors Bonding Ltd v Snee [1992] 2 NZLR 157 at 165 (CA):

The basic principles are well settled. As expressed in 18 Halsbury's Laws of England (4th ed) at para 332, undue influence consists in the gaining of an unfair advantage by an unconscientious use of power by a stronger party against a weaker in the form of some unfair and improper conduct, some coercion from outside, some overreaching, some form of cheating, and generally, though not always, some personal advantage obtained by the stronger party. It is directed at conduct within a relationship which justifies the conclusion that the disposition or agreement was not the result of a free exercise of the disponer's will. The doctrine is founded on the principle that equity will protect the party who is subject to the influence of another from victimisation.

There are two categories of undue influence. One is where actual undue influence is proved. The other is where the relationship is such that undue influence is presumed, eg solicitor and client. In such a case the onus is on the other party, there the solicitor, to rebut the presumption. There is no such presumption of imposition in the relationship where, as here, a mother benefits a son.

Whether the relationship between the parties is one from which undue influence is to be presumed or whether there is evidence of actual influence, it has to be shown that the transaction constituted a manifest disadvantage to the party seeking to avoid it, explicable only on the basis that undue influence has been used to procure it (Coldunell Ltd v Gallon [1986] 1 All ER 429, 435). It follows that where, as here, the plea is of actual undue influence, the person complaining must show that:

(a)the other party to the transaction (or someone who induced the transaction for his or her own benefit) had the capacity to influence the complainant;

(b)       the influence was exercised;

(c)       its exercise was undue;

(d)       its exercise brought about the transaction;

(e)the transaction was to the manifest disadvantage of the complainant (Bank of Credit and Commerce International SA v Aboody [1990] 1 QB 923, 967).

[17]     The Judge referred to what he characterised as the leading House of Lords judgment in Barclays Bank v O’Brien [1994] 1 AC 180, noting that it had been cited with approval by this Court in Wilkinson v ASB Bank Ltd [1998] 1 NZLR 674 (CA).

[18]     The Judge said that as a matter of law certain relationships raise the presumption that undue influence has been exercised, but no such automatic presumption exists where the relationship is that of husband and wife: Wilkinson v ASB Bank Ltd at 691. He accepted that there is also no presumption between a director and/or shareholder of a company, or its chief executive officer and any other employee. In the absence of such a presumption, the onus of proving undue influence was then on the person seeking to impugn the contract, (citing Contractors Bonding Ltd at 166).

[19]     The Judge also observed that there are two occasions on which a transaction that has been procured by undue influence may be set aside against a creditor.  The first is where the wrong-doing party is acting as the agent of the creditor in obtaining the surety.  The other is where the creditor has actual or constructive notice of undue influence.

[20]      The Judge found that UDC Finance had establish a prima facie case, thereby passing the burden to Ms Down to establish an arguable defence.  To successfully resist the application for summary judgment Ms Down had to provide an evidential basis for an arguable defence that there was actual undue influence and that UDC Finance had actual or constructive notice of that undue influence at the time that it obtained each of the five guarantees.  In this regard, the Judge directed himself as to the need for Ms Down’s affidavit to pass a “threshold of credibility” test, citing a number of cases, and in particular Reeves v OneWorld Challenge LLC [2006] 2 NZLR 184 (CA). In particular, he set out the following passage from the majority judgment in Reeves [75]:

In Pemberton both Somers J and Casey J saw the provision of independent support for the defendant’s affidavit evidence as a weighty consideration. Somers J at 4 said that the provision of independent support for the defendant’s evidence lent “a sufficient degree of credence” to the claim. 

[21]     He described Ms Down’s evidence as lacking in detail but strong on bold assertions.  He directed himself that this was not a situation where UDC Finance was presumed to have knowledge that Ms Down was the victim of undue influence from either her husband or Mr Moorhead, accepting UDC Finance’s evidence that it was unaware of the existence of the husband.  Nevertheless the Judge said:

The impression one gains from the defendant is that this could be one of those exceptional cases where the plaintiff may have had actual knowledge of facts which might render the presence of undue influence existing.

[22]     He referred to independent evidence which he said tended to indicate that UDC Finance might have been aware of Mr Moorhead’s dominance as against Ms Down. The independent evidence he referred to is set out at [26] of the judgment, as follows:

(a)The defendant’s lack of knowledge concerning the assets of the company is, to some degree, confirmed by Exhibit B to Mr Proffit’s affidavit.  He needed clarification from Mr Moorhead.  There is a factual dispute here. (The defendant’s involvement with other companies in itself does not mean that she was not naïve in respect of their operations or these advances.)

(b)That the plaintiff must have paid the amount of each advance into a Ponsonby bank account (which the defendant insinuates was not a company account) raises its own question as to the plaintiff’s knowledge.

(c)The defendant’s assertion in paragraph 6 of her first affidavit, that she only received very brief explanations as to what was happening and did ask for further information, is not refuted by the plaintiff. 

[23]     He said that UDC Finance had failed to adequately counter this evidence.  Ms Down had provided evidence that Mr Moorhead had the capacity to influence her and suggests that he did so in order to commit a fraud.  The Judge found that although prima facie the transactions did not disadvantage Ms Down or the company, the effect of the transactions enabled the alleged fraud to be perpetrated to the detriment of both the company and Ms Down.  He declined the application for summary judgment.

UDC Finance’s submissions

[24]     UDC Finance argues in support of its appeal:

(a)That the Judge was wrong to conclude that Ms Down’s evidence had satisfied her evidential onus to establish an arguable defence, particularly when she had not filed any independent evidence to corroborate her account of events;

(b)The Judge placed insufficient weight on the duties imposed on Ms Down by the Companies Act 1993 as a director of 123 Metals, including the requirement that she guide and monitor the management of the company.  Had he properly considered the extent of those duties, he would have concluded that UDC Finance was entitled to assume that Ms Down was acting in accordance with her statutory duties;

(c)The Judge incorrectly applied the principles of the defence of actual undue influence.

[25]     UDC Finance submits that if the Judge’s approach were correct, a lender would be required to make inquiries to satisfy itself that actual undue influence has not been exercised over a director of a company when a company employee deals with company accounts and the director does not have specific knowledge regarding the assets.  That approach is inconsistent with well established principles concerning undue influence (including that unrealistic standards should not be placed on lenders) and at odds with the duties assumed by company directors.

Decision

[26]     We apply the principles in relation to summary judgment set out in the Associate Judge’s decision.  As the Judge directed himself, the onus was on UDC Finance to prove that Ms Down had no arguable defence to the plaintiff’s claim.  The Judge accepted that UDC Finance had established a prima facie case against Ms Down that she had no defence to its claim and that an evidential onus had therefore passed to her. 

[27]     As the Judge directed himself to successfully resist UDC’s application Ms Down had to provide some evidential basis for the defence of undue influence by providing some support for her contention (1) that there had been undue influence, and (2) that UDC Finance was on inquiry as to the risk of undue influence.  The affidavits that she filed in opposition did not meet that threshold in respect of either of the elements of the defence.

[28]     The defence of undue influence is directed toward conduct that equity treats as in some way vitiating the person’s consent to a transaction.  In Royal Bank of Scotland v Etridge (No 2) [2002] 2 AC 773 (HL) Lord Nicholls described the rationale for the defence in this way:

6. … The objective is to ensure that the influence of one person over another is not abused.  In everyday life people constantly seek to influence the decisions others.  They seek to persuade those with whom they are dealing to enter into transactions, whether great or small.  The law has set limits to the means properly employable for this purpose.  To this end the common law developed a principle of duress.  Originally this was narrow in its scope, restricted to the more blatant forms of physical coercion, such as personal violence.

7.  Here, as elsewhere in the law, equity supplemented the common law.  Equity extended the reach of the law to other unacceptable forms of persuasion.  The law will investigate the manner in which the intention to enter into the transaction was secured: “how the intention was produced”, in the oft repeated words of Lord Eldon LC, from as long ago as 1807 (Huguenin v Baseley 14 Ves 273, 300). If the intention was produced by an unacceptable means, the law will not permit the transaction to stand. The means used is regarded as an exercise of improper or “undue” influence, and hence unacceptable, whenever the consent thus procured ought not fairly to be treated as the expression of a person’s free will. It is impossible to be more precise or definitive. The circumstances in which one person acquires influence over another, and the manner in which influence may be exercised, vary too widely to permit of any more specific criterion.

[29]     In relation to the first element, the existence of undue influence, a guarantor must establish either by presumption or by evidence that she gave the guarantee as a result of undue influence.  In order to give rise to a presumption of undue influence, Ms Down would have to show that she placed trust and confidence in either her husband or Mr Moorhead with respect to her financial affairs.  As the Judge observed neither the relationship between Ms Down and her husband, nor between Ms Down and Mr Moorhead is one of those defined relationships where trust and confidence with respect to financial affairs is presumed as a matter of law.  Ms Down would instead have to show as a matter of fact that she reposed trust and confidence.

[30]     Even if a guarantor is able to show, either as a matter of law or as a matter of fact that he or she placed trust and confidence in the other party in relation to the management of the guarantor’s financial affairs, he or she must also show that the transaction is of a nature that calls for explanation.  As Lord Nicholls said in Etridge at [14]:

On proof of these two matters the stage is set for the Court to infer that, in the absence of a satisfactory explanation, the transaction can only have been produced by undue influence.

[31]     Ms Down asserts that she placed trust and confidence in her husband and Mr Moorhouse in connection with the financial affairs of 123 Metals.  But there is nothing in the nature of the transaction that calls for an explanation.  As the sole shareholder and director of the company, Ms Down has obvious motivation to provide a guarantee to enable a loan to be made to the company. 

[32]     Since no presumption of undue influence arose, Ms Down had to provide some evidence of actual undue influence (Etridge at [17]).

[33]     Ms Down said that Mr Moorhouse organised the loans and that she felt compelled to sign the documents.  But she did not detail the source of that compulsion.  The only influence Mr Moorhouse had over Ms Down on her account arose from her trust in him as an employee and from his knowledge of the affairs of the company.  That evidence does not suggest that he was the stronger party, she the weaker.  A trusted employee’s recommendation cannot, without more, constitute undue influence.  Even were it assumed that Mr Moorhouse had some influence over Ms Down, she offered no evidence of any over-reaching or unconscientious use of that influence by him in connection with the giving of the guarantees, beyond the mere assertion that he took advantage of her trust in him.

[34]     Likewise Ms Down offers no evidence to suggest that her husband pressured her to sign the documents. 

[35]     We have reached essentially the same conclusion in respect of the second element of the defence; whether UDC was on inquiry as to the existence of undue influence.  But before we consider this element it is necessary to say something about the relevant principles. 

[36]     Although the appellant accepted that the Judge had correctly directed himself as to the defence of undue influence, we note that the Judge omitted reference to the House of Lords’ judgment in Etridge and to the judgment of this Court in Hogan v Commercial Factors Ltd [2006] 3 NZLR 618. In Hogan this Court observed the divergence of approach in Barclays Bank and Etridge as to when a creditor will be on inquiry, and said that it is highly likely that the Etridge approach will be applied in this Court, at least in banking cases (at [42]).  The most significant change to the pre-existing law introduced by Etridge was the Court’s statement that from that point on banks and other lenders should regulate their affairs on the basis that unless they take steps to bring home to the individual guarantor the risks that he or she is running by standing as surety, they will be deemed to have notice that the transaction was the product of undue influence or misrepresentation (at [44]-[49]). This rule was described as applying wherever the relationship between the surety and the debtor is non-commercial: Etridge at [87]; Hogan at [43].

[37]     This rule has no application in this case as Ms Down had a commercial relationship with the debtor.  In Etridge examples of commercial relationships given were where a guarantor receives a fee for providing the guarantee, or where one company guarantees the debts of another in a group (at [88]). We consider another example to be where a sole director and shareholder of a company guarantees advances to the company. As the Lord Nicholls said in Etridge, those engaged in business can be regarded as capable of looking after themselves and understanding the risks involved in the giving of guarantees (at [88]).

[38]     Ms Down provided no evidence from which it could otherwise be inferred that UDC Finance was on inquiry as to the existence of undue influence.  To UDC Finance’s knowledge Ms Down was the sole director and shareholder of the company.  It was not aware of her husband’s existence, let alone his interest in the company.  This case does not then, fall into that category where to the knowledge of a lender, a wife provides a guarantee for advances made to her husband, or to a company whose shares are held by her and her husband (Etridge at [49]). As to Mr Moorhead, UDC Finance knew Mr Moorhead only as an employee of the company that Ms Down controlled through her shareholding and directorship.

[39]     The matters identified by the Judge as being adequate to fix UDC Finance with knowledge or notice of Mr Moorhead’s dominance over Ms Down, whether taken individually or together, do not meet the evidential threshold.  The Judge referred to Ms Down’s evidence that she had only limited knowledge of the assets of the company and that she understood UDC Finance was going to speak to Mr Moorhead about the details of the company’s trading, its assets and the purpose of the loan.  But there would be nothing unusual in a director of a trading company deferring to an executive in respect of matters of detail, and we see nothing in this point. 

[40]     The Judge also referred to the fact that UDC Finance had paid the amount of each advance into a Ponsonby bank account.  That arrangement would be most unlikely to put any lender on notice.  If the advances were paid into a non-company bank account, that was consistent with the intended use of the money advanced as UDC Finance understood it.  Since the loans were to purchase particular assets it could be expected that the advances would be paid direct to the vendor of the equipment. 

[41]     Finally, there is Ms Down’s assertion that she received only cursory explanations as to what was happening and did ask for further explanations.  Ms Down’s evidence was that she got answers to her inquiries from UDC Finance but they were not answers she understood. Ms Down did not detail what she asked the UDC Finance representatives to explain.  If Ms Down received only brief explanations from UDC Finance as to the nature of the documents, that tends to corroborate UDC Finance’s account that it proceeded on the basis that Ms Down was familiar with the affairs of the company and with these particular transactions.  She therefore did not need lengthy explanations.  In any case Ms Down signed an acknowledgment that she had either had independent legal advice prior to executing the documents or that if she had not, that was her own choice freely made. 

[42]     The Judge observed that Ms Down’s affidavits were strong on assertion, short on detail, an observation we agree with.  We consider that her affidavits can fairly be characterised as wholly unconvincing.  There is nothing in the material put forward by her to suggest that UDC Finance had knowledge or was put on inquiry that she was other than a willing signatory to the guarantee documents.  Even Ms Down’s claim to have been the victim of fraud is short on detail.  In particular there is no detail as to which of Mr Moorhouse or her husband perpetrated the fraud and there is no confirmation that a complaint has been made to the police. 

[43]     If Ms Down is a victim of fraud then it is apparent from her affidavits that she allowed that situation to develop through dereliction of her duties as a director.  She claims she agreed to be director only to secure the necessary borrowings for the company.  We infer that lenders would not have lent if her husband, who she says ran the company, was named as shareholder and director.  It is clear that information about the role of her husband was kept from UDC Finance.  As director she had the means and duty to take care to ensure that the funds were used for the purposes for which they were borrowed, but failed to do so.  Her evidence is that she let others run the company.  In these circumstances, the equity of the situation strongly favours UDC Finance. 

[44]     We agree with UDC Finance that the evidential threshold was set too low by the Judge in this case.  For these reasons we determined that the appeal should be allowed. 

[45]     When at the end of the hearing we indicated that we would allow the appeal, counsel for UDC Finance filed a memorandum as to indebtedness of the respondent.  In accordance with the terms of that memorandum we entered judgment as follows:

A        -     on the first cause of action for $45,877.35;

-     on the second cause of action for $67,903.67;

-     on the third cause of action for $243.056.66;

-     on the fourth cause of action for $157,073.26;

-     on the fifth cause of action for $509,602.73.

BThe respondent is ordered to pay the appellant’s costs in the High Court on a 2B basis plus usual disbursements and in this Court on a band A basis for a standard appeal plus usual disbursements.

CIn respect of each cause of action interest from the date of today’s judgment to the date of payment is to accrue at the contractual rate set out in the relevant security document relating to that cause of action.

Solicitors:
Simpson Grierson, Auckland for Appellant