Urquhart v Spanbild Holdings Limited

[2010] NZCA 435

IN THE COURT OF APPEAL OF NEW ZEALAND

CA30/2010
[2010] NZCA 435

BETWEENCRAIG ALEXANDER URQUHART

First Appellant

ANDDAVID JOHN MILLER

Second Appellant

ANDSPANBILD HOLDINGS LIMITED

Respondent

Hearing:16 September 2010

Court:Randerson, Rodney Hansen and Allan JJ

Counsel:R B Stewart QC and M C Smith for Appellants

G T Carter for Respondent

Judgment:23 September 2010 at 9.30 a.m.

JUDGMENT OF THE COURT

AThe application by the appellants for leave to adduce fresh evidence on appeal and to amend the grounds of opposition is dismissed.

BThe appeal is dismissed.

CThe appellants must pay to the respondent costs as for a standard appeal on a band A basis together with usual disbursements.

REASONS OF THE COURT

(Given by Randerson J)

Introduction

[1]        The parties to this appeal are the shareholders in a company named FINCO Holdings Limited (Finco).  The company’s shareholding is:

Spanbild Holdings Ltd  50%

Messrs Urquhart & Miller as Trustees     45%

of the Halstaff Trust  

Mr Urquhart    5%

100%

[2]        Messrs Urquhart and Miller were directors of the company along with a Mr Matheson and a Mr Waterfield representing Spanbild.

[3]        Finco had a loan facility from the ANZ Bank supported by personal guarantees from each of the shareholders.  In mid-2008, Finco was in breach of certain of its banking covenants including a requirement for a 20 per cent effective equity ratio.  Negotiations followed which resulted in the Bank offering a new loan facility on conditions which included Finco restoring its effective equity ratio.  In the meantime, the Bank made a formal demand under the guarantees from Finco and each of the shareholders for repayment of the amount owing under the existing facility.

[4]        On 2 July 2008 Spanbild Holdings Ltd (Spanbild) provided funds of $1.218 million to Finco which were applied to meet the Bank’s requirements.  This sum was sufficient to restore Finco’s equity ratio and to satisfy the Bank’s conditions precedent to the grant of the new loan facility.    The Bank then advised the guarantors it would take no further action under the guarantees at that stage.

[5]        Spanbild later sought summary judgment against the respondents for a contribution towards its payment to the Bank on a pro rata basis according to shareholding.  Spanbild relied on clause 10.2 of a shareholders’ agreement entered into on 3 April 2006:

10.2       No guarantee: Subject to clause 10.3 below, no party shall be required to give any guarantee on behalf of the Company.  If any of the parties make payment to any creditor of the Company under any guarantee or other obligation which that party may see fit to grant or undertake to assist the Company then the other parties will reimburse  the party who has made the payment to the extent necessary to ensure that the parties’ contributions will be in the same proportions as the parties’ respective percentage Shareholding in the Company.

[6]        The appellants’ defence to the claim was the payment was not made by Spanbild under its guarantee but was a shareholder’s loan to Finco.  In a reserved decision delivered on 4 December 2009,[1] Associate Judge Abbott rejected the appellants’ argument and entered summary judgment against Messrs Urquhart and Miller in the sum of $548,100 and $60,900 against Mr Urquhart.  These sums reflected the appellants’ shareholding and amounted to 45 per cent and 5 per cent respectively of the amount paid by Spanbild.  Interest and costs were also awarded in favour of Spanbild.

[1]Spanbild Holdings Ltd v Urquhart & Anor HC Auckland CIV-2008-404-4784, 4 December 2009.

[7]        The appellants seek leave to adduce further evidence on appeal and permission to amend their grounds of opposition to the claim for summary judgment.  While the matter was not mentioned in the High Court, the appellants wish to raise an issue of rectification in relation to the shareholders’ agreement.  They say it was agreed that the contributions of Messrs Urquhart and Miller as Trustees of the Halstaff Trust were to be limited to the assets of the Trust but no such provision was included in the shareholders’ agreement.

[8]        The issues on appeal are therefore:

(a)Whether the Associate Judge correctly characterised the payment made by Spanbild as a payment under the guarantee.

(b)Whether the appellants’ application for leave to adduce further evidence and to amend the grounds of appeal should be granted.

(c)If so, whether there is an arguable defence available to the appellants.

The facts in more detail

[9]        Finco’s business was the provision of finance and marketing services.  The shareholders’ agreement was executed by Spanbild and the appellants on 3 April 2006 at the inaugural meeting of Finco’s board of directors.  The agreement records that there would be equal shareholding between Spanbild on the one hand and Mr Urquhart and the Halstaff Trust on the other.  Banking facilities were arranged with the ANZ Bank and were varied from time to time.  Mr Miller is a professional trustee but is a half-brother to Mr Urquhart.

[10]       From the beginning, there were guarantees given to the Bank from each of the shareholders, limited to $6 million plus interest and costs.  Mr Miller’s liability under the Trustees’ guarantee was limited to the assets of the Halstaff Trust but this limitation did not apply to Mr Urquhart.

[11]       In addition to clause 10.2 already cited, the shareholders’ agreement recognised in clause 10.3 that there were existing guarantees given by Mr Urquhart to other parties.  Spanbild agreed to indemnify him to the extent of 50 per cent of any liability he might incur under those guarantees.

[12]       In October 2007 the shareholders agreed not to process any new loan applications.  Agreement was reached with the Bank to provide a reduced loan facility.  By March 2008 Finco was in breach of its financial covenants under the loan facility and the Bank advised that it considered there had been a deterioration in Finco’s loan book.  The Bank made it clear that an equity injection was required and that guarantees would be retained at their current levels until all bank debt had been repaid.

[13]       On 9 May 2008 the Bank formally advised Spanbild that the failure by Finco to maintain the 20 per cent equity ratio constituted an “Event of Default” under the loan facility. In response to a letter from Finco’s directors, the Bank offered a new loan facility on 16 May 2008.  The new facility would be for an amount equal to 80 per cent of the loan book, less the non-performing assets.  A condition precedent of the loan was that the shareholders were to contribute any shortfall between the existing and new loan facilities.

[14]       The correspondence from the Bank led to a directors’ meeting on 22 May 2008 at which the directors considered a range of options.  It is evident from the minutes that the Spanbild directors preferred some accommodation to be reached with the Bank by the injection of further funds and subject to certain conditions which were evidently not acceptable to Mr Urquhart.  The board agreed that Mr Urquhart could have one week to prepare a counter proposal to the Bank.  Messrs Urquhart and Miller made it clear throughout they were not in a position to contribute further funds.  Mr Matheson said Spanbild wished to resolve the matter quickly and that “recoveries and legal remedies” would be commenced if funds were injected by Spanbild in excess of its proportional (50 per cent) share.  Mr Matheson also stated that he understood there was no limitation on the Trustees’ liability under the shareholders’ agreement.  The minutes do not record any challenge to this statement.  Mr Matheson referred specifically to recovery from Mr Urquhart and the Trustees under clause 10.2 of the shareholders’ agreement.

[15]       A meeting took place between the Finco directors and representatives of the Bank on 10 June 2008 but no agreement was reached.  By letter of 13 June, the Bank advised Finco that all facilities were to be repaid by 20 June failing which the Bank would issue formal demand on Finco and all the guarantors.

[16]       A further board meeting was held on 18 June 2008.  The minutes record that Mr Matheson once again made it clear that if Spanbild injected funds in excess of its 50 per cent share, it would seek recovery from the other shareholders under the shareholders’ agreement.  Finco’s assessment was that $1.3 million would be required from shareholders to satisfy the Bank’s requirement for further equity.  A resolution was passed on that day which:

(a)Stated that the Bank was requiring shareholders to place funds into the company either by way of equity or shareholder loans subject to a deed of postponement in favour of the Bank as a condition of continuing financial facilities to the company.

(b)A formal request was being made by the company to shareholders for additional funding of $1.3 million.

(c)Resolved that:

2.Pursuant to the shareholders’ agreement dated 3 April 2006 (the Shareholders Agreement) the shareholder loans requested should be made pro rata according to each shareholder’s respective shareholding to the intent that:

2.1Spanbild provide $650,000;

2.2Craig Urquhart provide $65,000;

2.3Messrs C A Urquhart and D J Miller as trustees of the Halstaff Trust provide up to $585,000.

(d)It was further resolved that the company would be liable to pay interest on all shareholder loan account balances at a rate that is 3.5 per cent above the 90 day reserve bank bill rate (this was consistent with a provision to that effect in the shareholders’ agreement).

[17]       It is somewhat surprising that Messrs Urquhart and Miller agreed to these resolutions given their position that they were not able to provide additional funds but we note that the resolution records only that Finco had requested the shareholders to make the loans without imposing any obligation in that respect. As matters transpired these resolutions were quickly overtaken by later events.

[18]       On 20 June 2008, Mr Urquhart wrote to Messrs Matheson and Waterfield reminding them the Bank required repayment of the Finco facility by that day.  Mr Urquhart acknowledged that action by the Bank under the guarantees was likely if this did not occur.  He proposed that the Bank be approached for confirmation that it would withdraw its demands if $1.3 million was provided by way of additional equity. 

[19]       That letter appears to have resulted in further resolutions of the Finco directors on 20 June 2008 which saw Finco offering to provide an additional $1.3 million funded solely by Spanbild.  The formal resolutions were:

1.That FINCO Holdings Limited offer to provide a sum equivalent to 20% equity estimated today at 1.3M on the basis of acceptable terms and conditions for an ongoing banking relationship.

2.That the FINCO Holdings Limited Board is prepared to accept a loan of up to 1.3M from Spanbild Holdings Limited should the bank require it and that Spanbild is prepared to contribute the full amount if required subject to the banks offer being accepted by FINCO Holdings Limited.’

[20]       The same day, Mr Matheson wrote to the Bank on behalf of Finco.  The critical part of his letter states:

We acknowledge the Bank’s concerns about delays in making progress for alternative arrangements but would like to offer the following as a means of avoiding the formal demand being placed on FINCO and all guarantors of the facilities.

FINCO Holdings Limited is prepared to inject funds by way of shareholder loans to restore the level of equity to 20% with those funds injected to be utilised for the reduction of Bank debt.

[21]       On 20 June the Bank offered a new facility to Finco with the same condition precedent as to restoration of the effective equity ratio.  The offer was expressed to be open until 5 pm on 2 July.

[22]       Up to this time it was contemplated that the cash injection would be provided by Spanbild by way of shareholder’s loan.  Payment of this sum would restore the 20 per cent equity ratio which would enable the Bank to provide the new loan facility.  This would also avoid the Bank making formal demand under the guarantees.

[23]       However, matters changed on 1 July 2008 when the Bank served formal demands on Finco and the guarantors for the amount outstanding under the existing loan facility.  This was unexpected given the Bank’s offer of the new facility on 25 June which was open for acceptance until 5 pm on 2 July.  The demand made against Finco was for a sum in excess of $6.5 million while the demands made on the guarantors were limited to the agreed maximum of $6 million together with interest and costs.

[24]       The issue of these demands led to a further directors’ meeting on 2 July.  The minutes of this meeting are not agreed.  Two versions were put before the Court in evidence.  The first was prepared without input from Mr Urquhart and the second was prepared after he had added some comments of his own.  It does not appear that a final version of the minutes was ever approved but in material respects the separate versions of the minutes do not differ.  The focus of the meeting was very much upon the demands issued by the Bank the day before.  Both versions of the minutes of the meeting note that acceptance of the Bank’s offer of a new facility would require a cash injection of $1.218 million.  It was resolved that the company would accept the offer of the new facility. 

[25]       One version of the minutes also notes that, upon acceptance of the offer, the Bank should be asked to confirm the withdrawal of the notice of demand issued against Finco and the individual shareholders.  The version of the minutes which contains this reference was prepared after Mr Urquhart’s comments  which suggests this was a matter of importance to him and no doubt also to Mr Miller who attended the directors’ meeting by telephone.

[26]       It is necessary to detail exactly how Spanbild’s payment was made.  Spanbild’s group finance manager and company secretary was a Mr Wallace who deposed he had been in discussion with a Bank representative on the morning of 2 July, prior to the board meeting which took place at 1pm that day.  It was established that the amount required from Spanbild to reduce Finco’s indebtedness and enable it to accept the new facility offer of 25 June was $1.218 million.  Mr Wallace sought instructions from the Bank as to how this was to be paid.  Shortly before 10am on 2 July, the Bank emailed Mr Wallace advising that if the Bank’s offer was accepted, the amount required to comply with the effective equity ratio could be paid into Finco’s cheque account and the Bank would arrange for that amount to be applied to reduce the amount outstanding by Finco to the Bank.  This was no doubt a convenient arrangement since both Spanbild and Finco were customers of the Bank.

[27]       Following the board meeting and the resolution to accept the new facility offered, Mr Wallace arranged payment of the agreed amount from Spanbild’s cheque account into Finco’s cheque account in accordance with the Bank’s instructions.  The payment was made on the afternoon of 2 July after the Board meeting had concluded about 2pm.  Mr Wallace’s evidence is that he simply followed the Bank’s instructions and that Spanbild would have paid the money in whatever manner was directed by the Bank.  For example, if the Bank had required that the money be paid to an ANZ clearing account, Spanbild would have done so.

[28]       There is no evidence in the minutes of the 2 July meeting or in the affidavits to suggest there was any discussion between the directors about the form in which the payment to the Bank was to be made.  Mr Matheson says there was no suggestion at the board meeting that Spanbild’s payment was to be by way of shareholders’ advance to Finco nor any discussion about the terms of any such advance.  In his reply affidavit, Mr Matheson simply states that Spanbild did not provide a loan to Finco because the Bank issued formal demand under the guarantees on 1 July 2008 for the full indebtedness due. 

[29]       For his part, Mr Urquhart states that he had made himself aware of the wording of clause 10.2 of the shareholders’ agreement, noting that recovery from other shareholders was only possible if another shareholder had made a payment to a creditor of Finco under a guarantee.  He does not state when he gained this awareness.  Nor does he say that he raised this issue with Spanbild’s directors.  He makes it clear in his affidavit that he does not suggest that the transfer of the funds should not have been made.  He accepts that the payment was clearly necessary to enable Finco to meet the terms of the Bank’s revised facility offer of 25 June.  It would also result in the withdrawal of the Bank’s demand under the guarantees which was in the interests of all the guarantors.

[30]       On the same day (2 July), Mr Matheson wrote formally to the Bank on behalf of Spanbild to the following effect:

Payment under guarantee

I refer to your letter of 1 July 2008 constituting a demand by the Bank under our all obligations guarantee dated 26 May 2006.  We understand a similar demand has also been made on the other shareholders of FINCO Holdings Limited (FINCO).

We further understand you have received or are about to receive the facility offer document dated 25 June 2008 issued by the ANZ duly executed by FINCO, Spanbild Holdings Limited, the Trustees of the Halstaff Trust and Craig Urquhart.

We have today transferred the sum of $1,218,000 into FINCO Holdings Limited cheque account to be utilised by the ANZ in reduction of the existing indebtedness of FINCO to the ANZ, and which is a payment made pursuant to our guarantee dated 26 May 2006.

This reduction in indebtedness will result in FINCO being in a position to accept the facility offer dated 25 June 2008 by providing that FINCO will be in a position to meet the financial covenants required in that facility offer.

Could you therefore please now confirm your withdrawal of the demands served on FINCO and the other guarantors dated 1 July 2008.

[31]       In response, the Bank wrote to Spanbild on 4 July 2008 stating:

Re: Removal of Bank demand

Thank you for the funds provided by Spanbild Holdings Limited as guarantor to reduce the outstanding debt of FINCO Holdings Limited (FINCO).

Following the Bank’s receipt of the signed Facility Offer to FINCO dated 25 June 2008 and FINCO’s compliance with conditions in that letter, we confirm that the Bank will not take any action under the Demand Letter dated 1 July 2008 sent to Spanbild Holdings Limited.

This letter is without prejudice to the Bank’s rights, powers and remedies under any facility or security agreement between the Bank, FINCO or any guarantor.

[32]       The Bank also informed the Trustees of the Halstaff Trust and Mr Urquhart personally by letter of 8 July 2008 that the formal demands made by the Bank in its letter of 1 July 2008 would not be acted upon.

[33]       At a later point, Mr Urquhart prepared a draft budget for Finco which purported to provide for interest on any shareholder’s loan, but this was disputed by Spanbild as inappropriate.  There is no evidence that the payment made by Spanbild was ever treated as a loan in Finco’s books of account or that interest was ever paid to Finco in respect of the payment.

[34]       On 18 July 2008 Spanbild wrote to Messrs Urquhart and Miller seeking reimbursement of their respective shares of the $1.218 million payment made on 2 July.  The letter stated explicitly that: 

You will be aware that on 2 July 2008 Spanbild transferred the sum of $1,218,000 into FINCO’s cheque account, to be utilised by ANZ in reduction of the existing indebtedness of FINCO to the ANZ.

This payment was made pursuant to Spanbild’s guarantee dated 26 May 2006 and in response to ANZ’s demand dated 1 July 2008.  The reduction in indebtedness as a result of Spanbild’s payment resulted in FINCO being in a position to accept ANZ’s facility offer dated 25 June 2008 by meeting the required financial covenants.

Pursuant to clause 10.2 of the Shareholders Agreement dated 3 April 2006, Spanbild hereby requires reimbursement in relation to the payment of $1,218,000 to the extent necessary to ensure that the parties’ contributions will be in the same proportions as the parties’ respective percentage shareholding in the company.

The required reimbursements in relation to Spanbild’s payment of $1,218,000 are as follows:

from Craig Urquhart and David Miller as trustees of the Halstaff Trust $548,100 (45%); and

from Craig Urquhart, $60,900 (5%).

I advise that in the event that such reimbursement is not made to Spanbild within 3 working days of the date of this letter, Spanbild has instructed its solicitors to issue proceedings without further notice.

[35]       There being no payment in response, Spanbild issued proceedings relying on clause 10.2 of the shareholders’ agreement.

The Judge’s decision

[36]       Associate Judge Abbott was required to deal with a dispute about the interpretation of clause 10.2 of the shareholders’ agreement.  However, Mr Stewart QC for the appellants informed us that this was no longer in issue.  The appellants accept that if Spanbild’s payment is properly characterised as a payment made under the Bank guarantee, then Spanbild is entitled to recover the contributions from the appellants under that clause (subject only to the rectification argument).

[37]       On the critical issue of the nature of Spanbild’s payment, the key findings of the Judge are:[2]

… It is not in dispute that prior to receipt of ANZ’s demand under the guarantee, Spanbild was contemplating making a payment by way of shareholder advance. It is common ground that a payment had to be made to allow FINCO to accept the revised facility offer.  It seems clear, however, that Spanbild considered that it did not have an option in the matter until ANZ made its demand.  Although FINCO’s board had resolved on 18 June 2008 that shareholders would be asked to contribute in proportion to their shareholding, the defendants had stated that they were not in a position to make their contribution.

The position changed, however, with receipt of ANZ’s demand.  Spanbild had previously made known that if it had to contribute more than a share proportionate to its shareholding it would seek reimbursement from the defendants.  Its ability to do so before formal demand was made may be arguable but its entitlement is clear once the demand was made.  The making of the demand allowed Spanbild to make its payment in response to the demand, which both satisfied the pre-condition to ANZ’s offer and gave Spanbild the ability to exercise its rights under clause 10.2. …

…

It was Spanbild’s election, made prior to ANZ’s demand, to make the advance so that FINCO could accept the revised facility.  It was not bound to take that course (it had made it clear that it would do so only if there was no other option).  It was entitled to take the option of paying under the guarantee instead, when that opportunity presented itself.

[2]      At [41], [42] and [44].

[38]       The Judge concluded:[3]

… the best, and conclusive, evidence on the matter is Spanbild’s statement as to the nature of the payment made at the time that the payment was made.

[3] At [46].

[39]       Dealing with the fact that the payment by Spanbild was not made directly to the Bank but was paid to Finco, the Judge stated:[4]

I am satisfied on the facts of the present case that Spanbild paid the money to FINCO’s cheque account in its capacity as guarantor.  FINCO was not entitled to spend the money as it willed.  It was paid specifically for the purpose of repaying its debt to ANZ.  Spanbild has given evidence that it contacted ANZ prior to making the payment and was advised to make the payment in that manner.  I find that FINCO was merely a conduit for the payment, which was essentially one by Spanbild to ANZ.  This is consistent with the contemporaneous letter written by Spanbild to ANZ confirming the payment.

[4] At [55].

[40]       The Judge also rejected a suggestion made by the appellants of possible collusion between Spanbild and the Bank in relation to the manner in which the payment was made.  This contention, properly in our view, was not pursued in this Court.

First issue – the proper characterisation of Spanbild’s payment

[41]       The essence of the argument which Mr Stewart QC skilfully advanced on behalf of the appellants is briefly summarised.  He submitted that the documentary evidence clearly establishes that it was always contemplated the payment would be made by Spanbild making a shareholder’s loan to Finco.  That was so, Mr Stewart submitted, right up to and including the Board meeting on 2 July.  There was no advance suggestion by Spanbild that it intended to make the payment under its guarantee.  The proper inference to draw was that the Spanbild directors obtained the agreement of Messrs Urquhart and Miller to execute the new loan facility on the understanding that the necessary capital injection would occur by way of shareholder’s loan as previously contemplated.  After the resolution of the directors at the Board meeting on 2 July Spanbild had, without further communication or advice to Messrs Urquhart and Miller, unilaterally changed the understanding by purporting to make the payment pursuant to its guarantee.  Mr Stewart submitted that Spanbild was not entitled to do this.

[42]       Mr Stewart accepted that Spanbild was at liberty to make the payment under its guarantee unless there was an express or implied obligation by Spanbild to the other shareholders or Finco to make the payment by way of shareholder’s loan.  He also submitted, in response to a suggestion by one of the members of the court, that Spanbild might have some responsibility under the Fair Trading Act not to act deceptively in its dealings with the other shareholders.

Discussion

[43]       We are unable to accept these submissions.  We consider the Judge’s analysis is correct.  We accept that the evidence establishes that until the demand under the guarantees was made on 1 July it was contemplated by Spanbild and the other shareholders that the necessary capital injection would be made by means of a shareholder’s loan from Spanbild to Finco. 

[44]       It is equally clear, however, that Spanbild’s agreement to this proposal was given on its understanding that it was able to recover contributions to the payment from the other shareholders under clause 10.2 of the shareholders’ agreement.  This is made abundantly clear in the minutes of the Board meeting on 22 May and again in the minutes of the meeting on 18 June.  As it turns out, this was a mistaken understanding since recovery was possible under that provision only if payment was made to meet an obligation under a guarantee provided by a shareholder in respect of a Finco liability.

[45]       We agree with the finding by the Judge that the unexpected demand made by the ANZ Bank under the personal guarantees on 1 July 2008 changed the picture considerably.  While it was always possible that the Bank might have made formal demand under its guarantees, it had not done so until that date.  The making of the formal demand plainly galvanised all the shareholders.  It became imperative that agreement was reached with the Bank which essentially contained three elements:

(a)The restoration of the effective equity ratio to 20 per cent by the introduction of $1.218 million.

(b)The Bank’s agreement to the new loan facility.

(c)The withdrawal of the demands made by the Bank under the guarantees.

[46]       There is no evidence of any express or implied agreement between the shareholders that, in the changed circumstances, the necessary cash injection was to be made by Spanbild as a shareholder’s loan to the company.  The minutes of the 2 July meeting do not record any such agreement and the resolution passed at that meeting (to accept the new loan facility) made no such stipulation.  Importantly, Mr Urquhart does not suggest in his affidavit that there was any agreement or understanding to that effect.  

[47]       Nor has it ever been pleaded or suggested that Spanbild misled Messrs Urquhart and Miller as to the manner in which they intended to proceed with the payment.  Mr Urquhart does not suggest that he signed the new loan facility on the understanding that the payment would be made as a shareholder’s loan. 

[48]       There is no evidence that Messrs Urquhart and Miller would have proceeded any differently if they had known in advance that Spanbild intended to make the payment to the Bank pursuant to its guarantee.  To the contrary, Mr Urquhart accepted that the payment had to be made.

[49]       In summary, there is no evidential basis for any argument that Spanbild was not at liberty to proceed as it saw fit in making the payment to the Bank.  It is reasonable to infer that at a late stage, probably around 1 or 2 July, Spanbild became aware of the true interpretation of clause 10.2 and that it would need to make the payment under the guarantee if it were to be entitled to recover contributions from the other shareholders under clause 10.2.  Spanbild had consistently told Messrs Urquhart and Miller that they would exercise those rights if they alone were called upon to make the payment required by the Bank.  There is no evidence that Messrs Urquhart and Miller ever disputed Spanbild’s entitlement to do so until proceedings were issued.

[50]       In these circumstances, it is immaterial that Spanbild did not assert that the payment was made under the guarantee until after the directors’ meeting on 2 July.  It was free to proceed as it saw fit. Its letter to the Bank of 2 July sent on the very afternoon that the payment was made was timely notice to the Bank stipulating that the payment was made pursuant to Spanbild’s guarantee.  The matter was put beyond doubt by the Bank’s acceptance on 4 July that the payment was indeed made on that basis.

[51]       It was also submitted on behalf of the appellants that the fact that Spanbild did not pay the Bank directly but, instead, paid it into Finco’s bank account demonstrated that the payment was not made under the guarantee.  We are unable to accept that submission.  The evidence clearly establishes that the payment was made via Finco’s bank account at the request of the Bank.  By prior arrangement with the Bank, the funds contributed were then applied by the Bank in reduction of Finco’s outstanding loan.

[52]       In the circumstances, the interposition of the company between Spanbild and the Bank was a mere matter of procedure.  We agree with the Judge that the company was no more than a convenient conduit for the payment by Spanbild to the Bank under the guarantee.  In this respect, we agree with the view expressed by Gibbs CJ in Mahoney v McManus.[5]The majority of the High Court of Australia held, in circumstances much less clear than the present case, that payments made to a company by a guarantor and used by the company to pay creditors were payments made as guarantor and not by way of shareholder loans.  The majority reached that conclusion despite the funds being treated as a loan in the company’s books and despite an agreement to pay interest thereon.  The funds were distributed to various creditors who had made demands under personal guarantees but in some cases without any precise correspondence between the amounts paid to the company by the guarantor and the amount of the debts.  When the company made the payments, there was no attempt to secure the agreement of the creditors that the payments would discharge the liability of the guarantors.

[5]      Mahoney v McManus (1981) 36 ALR 545 at 551.

[53]       Gibbs CJ (delivering the leading judgment for the majority) held that, notwithstanding the factors just elaborated, it was clear the funds were not paid to the company for general purposes.  The company’s principals knew that the sole purpose was to pay the creditors who held guarantees.  It was known that the creditors would resort to the guarantees if the company’s debts were not paid.  The interposition of the company between the appellant and the creditors was a mere matter of procedure.[6]

[6]      At 550 – 551.

[54]       Mr Stewart drew our attention to a passage of the judgment of Murphy J (one of the two dissenters) in which he said that when money is paid by a debtor to the creditor in respect of a guaranteed debt there is a presumption that it is intended as a discharge of the debt by the debtor rather than a payment on behalf of the guarantor to meet the obligations under the guarantee.[7]  If there is such a presumption it could be no more than an evidential presumption which was very plainly displaced in the present case.  Murphy J acknowledged that it was possible to use the debtor as agent or conduit for payment under the guarantee.  We are satisfied that is what happened here given the contemporaneous correspondence, the precise matching of Spanbild’s payment with the amount the Bank required and the Bank’s stipulation as to the mechanism for transfer of the funds.

Second issue – the application for leave to adduce further evidence and to amend the grounds of appeal

[7]      At 553.

[55]       The appellants seek leave to adduce further evidence on appeal in support of an argument that they have an arguable defence based on rectification.  As earlier indicated, they wish to assert that there was an agreement with Spanbild that the shareholders’ agreement would include a term limiting the liability of Messrs Urquhart and Miller as Trustees of the Halstaff Trust to the assets of the Trust.  Spanbild strongly denies there was ever any such agreement. 

[56]       Buddle Findlay were the solicitors representing Spanbild at the time the shareholders’ agreement was prepared prior to Finco’s formation.  They initially prepared a draft agreement which did not include the Trustees of the Halstaff Trust as a contracting party. 

[57]       In the course of an email sent to Spanbild raising over 40 issues with the draft document, Mr Rodney Lewis (the solicitor then representing Messrs Urquhart and Miller) noted that the Trustees needed to be included as a contracting party and that the Trustees required a clause limiting the Trustees’ liability.  This request is the only written evidence suggesting this topic was an issue.  There is no documentary evidence the issue was ever discussed.  As earlier noted, the ultimate agreement did not include any limitation of liability.

[58]       In an affidavit, Mr Urquhart asserts that it was agreed “throughout the negotiations” that the liability of the Trustees would be limited to the assets of the Trust.  He recalled in particular a meeting with one of Spanbild’s directors (Mr Waterfield) on 18 January 2006 at which the limitation of liability was discussed and agreed upon.  Mr Matheson of Spanbild also attended this meeting and took extensive notes.  None of them mentions this topic and Mr Matheson does not recall that it was discussed, let alone agreed.  Significantly, at that stage, it was not contemplated that the Halstaff Trust would take a shareholding in the new company to be established.

[59]       Mr Urquhart goes on to state in his affidavit that he met Mr Waterfield on 3 March 2006 to discuss the matters raised in his solicitor’s email of 3 March including Mr Waterfield’s agreement to the limitation of the Trustees’ liability.  Mr Urquhart says that if the limitation had not been agreed to, it would have been a “deal breaker” for both himself and Mr Miller.  The latter has filed an affirmation in which he says he would never have agreed to be a party to the agreement without the limitation clause and that he understood all the shareholders had agreed to this.  He does not assert he was present at any time when the issue was discussed with the Spanbild representatives in the period prior to the execution of the shareholders’ agreement.

[60]       To the contrary, Mr Matheson says there was no agreement at the meeting on 3 March 2006 to the limitation of liability requested.  He was present at the meeting and made a number of annotations to the email received from Mr Lewis.  Although he ticked a number of items in the email, he did not tick or make any annotation beside the request for a limitation of liability.  We accept that this is not necessarily conclusive since there were other items included in the ultimate agreement which were not ticked or annotated by Mr Matheson.

[61]       The only other evidence relied upon by the appellants is an affidavit by a Mr Taylor who was general manager of a company associated with Mr Urquhart.  He says he attended many of the meetings with Messrs Waterfield and Matheson and reviewed a number of the draft agreements circulated with respect to Finco.  He recalls concerns raised by Messrs Urquhart and Miller about a limitation of liability.  He maintains that the limitation of liability issue was raised with Mr Waterfield during the negotiations and was agreed upon.  He is unable to recall any specific discussion or meeting at which agreement was reached.  He believes it must have been at the meeting on 3 March 2006 or shortly afterwards.  He does not recall Spanbild ever raising any objection to the inclusion of the limitation clause.

[62]       It seems that Buddle Findlay dropped out of the picture at an early stage after drafting the initial agreement.  Thereafter, Mr Lewis was responsible for the drafting of the agreement as ultimately signed.  He dealt directly with Spanbild in that respect.  Despite a number of other changes made by Mr Lewis to the draft agreement after the meeting on 3 March 2006, the limitation clause was not inserted. Mr Lewis was present when the agreement was signed at the inaugural directors’ meeting of Finco on 3 April 2006.  There is no record of any comment about the form of the agreement.

Discussion

[63]       We see major difficulties in acceding to the application by the appellants for leave to adduce further evidence and to amend the grounds of opposition to summary judgment.  In particular, we do not consider Mr Urquhart’s evidence is credible on this topic.  We accept that the limitation of liability issue was raised in the email from Mr Lewis but there is no credible evidence that it was accepted. 

[64]       Mr Matheson’s evidence is that a limitation of liability on the part of the Trustees would not have been acceptable to Spanbild.  A limitation of this character would have effectively left Spanbild, as a 50 per cent shareholder, responsible for 95 per cent of the company’s guarantee liabilities.  If the issue had been seriously pursued by Messrs Miller and Urquhart, it would have been a “deal breaker” for Spanbild as well.  The fact that that did not happen suggests that the issue was simply not pursued by Messrs Urquhart and Miller.

[65]       There is no documentary evidence to support the assertion that this matter was ever discussed.  The suggestion by Mr Urquhart that agreement was reached at the meeting on 18 January 2006 is seriously undermined by the evidence that it was not even contemplated at that stage that the Trustees would be parties to the agreement.  Mr Taylor’s evidence provides only limited support for Mr Urquhart’s evidence given its generalised nature.

[66]       Finally, and importantly, it was not until February this year that the appellants raised the suggestion that a limitation clause had been agreed.  This is most surprising given that the minutes of the Finco board meeting of 22 May 2008 clearly show that Mr Matheson stated Spanbild understood there was no limitation of liability on the part of the Trustees.  This statement was made by Mr Matheson in the specific context of his advice to Messrs Urquhart and Miller that Spanbild had the right to recover a contribution from them under clause 10.2 of the shareholders’ agreement.  There was no evidence then, or at any time before February 2010, that Messrs Urquhart and Miller ever disputed this assertion.  This was so despite the service of proceedings on them claiming substantial sums.

[67]       The only explanation offered on their behalf for the extraordinary delay in raising this issue is that Mr Lewis continued to act on their behalf (including representing them in the summary judgment proceedings brought by Spanbild) and that he did not raise the issue with them.  It is said that it was not until after judgment was entered and fresh legal advice obtained that this issue came to light.  Mr Stewart also asserted on behalf of the appellants that Mr Lewis was in breach of the ethical rules in appearing for the appellants in the summary judgment proceedings on the grounds that his conduct was in issue.  Rule 13.5.3 of the Lawyers: Conduct and Client Care Rules 2008 which provides that a lawyer must not act in a proceeding if the conduct of the lawyer is in issue.

[68]       We are not persuaded that this criticism of Mr Lewis is justified.  The position may have been different if Messrs Urquhart and Miller had asserted before or during the summary judgment proceedings that a limitation of liability had been agreed upon.  But there is no evidence that any such assertion was made.  On the evidence presently before the court there is no reason why Mr Lewis should not have represented the appellants in the summary judgment proceedings.  Prima facie, if the appellants believed a limitation of liability clause had been agreed upon it was for them to raise the point with Mr Lewis.

Mr Stewart drew to our attention that Gendall J had decided in other proceedings between the same parties to this appeal in respect of another Finco guarantee that Messrs Urquhart and Miller had an arguable defence on the basis of rectification. [8]  We were advised that Gendall J had before him similar evidence to the evidence which the appellants seek leave to adduce on this appeal.  With respect to Gendall J, we have reached a contrary view.  We do not consider it is seriously arguable that Messrs Urquhart and Miller have a defence to Spanbild’s claim on the basis asserted.  The assertion that an agreement was made to that effect is wholly lacking in credibility.

[8]      2009-485-002027, 11 May 2010.

[69]       Mr Stewart submitted that Mr Miller’s position as a professional trustee may have been different from that of Mr Urquhart. The guarantee Mr Miller gave to the Bank was limited to the assets of the Trust but we do not see that as affecting his liability under the shareholders’ agreement. In the end, the rectification argument must depend on what was agreed between the parties about the terms of the shareholders’ agreement.  The lack of credible evidence in that respect affects both Mr Urquhart and Mr Miller.

[70]       An application under r 45 of the Court of Appeal (Civil) Rules 2005 to adduce further evidence requires the applicant to demonstrate that the evidence is fresh, credible and cogent.  These principles have recently been affirmed by the Supreme Court in Paper Reclaim Ltd v Aotearoa International Ltd.[9]  The evidence will not be regarded as fresh if it could, with reasonable diligence, have been produced at trial.[10]Particular weight will be accorded in summary judgment proceedings to the need for finality.  It will only be in exceptional circumstances that the court will permit further evidence to be filed on appeal.[11]

[9]      Paper Reclaim Ltd v Aotearoa International Ltd [2007] 2 NZLR 1.

[10]Rae v International Insurance Brokers (Nelson Marlborough) Ltd [1998] 3 NZLR 190 at 192 (CA).

[11]Lawrence v Bank of New Zealand (2001) 16 PRNZ 207 (CA); and Erceg v Balenia Ltd [2008] NZCA 535 at [15].

[71]       It is common ground that the evidence relied upon here is not fresh.  There is no reason why it could not have been adduced in the summary judgment proceedings in the High Court.  And, as we have found, it is neither cogent nor credible.  No exceptional circumstances have been made out which would justify the grant of leave to adduce further evidence or to amend the grounds of opposition.

Result

[72]       For the reasons given, the application to adduce further evidence and to amend the grounds of opposition is dismissed.

[73]       The substantive appeal is also dismissed since there is the arguable defence to the respondent’s claim.

[74]       The appellants must pay to the respondent costs as for a standard appeal on a band A basis together with usual disbursements.

Solicitors:

Gilbert Walker, Auckland for Appellants

Chapman Tripp, Christchurch for Respondent