Walkers Nurseries Limited v National Bank of New Zealand HC Napier CP45/95 - [2001] NZHC 705

IN THE HIGH COURT OF NEW ZEALAND
NAPIER REGISTRY CP45/95

BETWEEN WALKERS NURSERIES LIMITED
Plaintiff

AND NATIONAL BANK OF NEW ZEALAND
Defendant

CP22/97

AND BETWEEN BRIAN WILLIAM WALKER
Plaintiff

AND NATIONAL BANK OF NEW ZEALAND
Defendant

Hearing: 2-6 July, 9-12 July and 17 July 2001

Counsel: K J Crossland for Plaintiffs
B W Gilmour with A McEwan for Defendant

Judgment: 2 August 2001

JUDGMENT OF ELLIS J.

Solicitors:
Stace Hammond, Hamilton for Plaintiffs
Bannister & von Dadelszen, Hastings for Defendant

[1] Before the Court are two consolidated claims. Both Walker Nurseries Limited (Walkers Nurseries) and Mr Walker sue the National Bank of New Zealand Limited to recover losses sustained as a result of dealings with a partnership Horticultural Contact operated by a Mr Bush and a Mr Radburnd. Walkers Nurseries was a third generation nursery business in Hawke’s Bay. Mr Walker was the sole director of Walkers Nurseries and with his daughter held all the shares. At a Nurserymen’s Conference in Taupo in Autumn 1986 Mr Walker heard a Mr Sewell address participants about banking and Mr Bush asked him many questions and then himself addressed participants about his new broking business for selling nursery stock. Mr Sewell was the manager of the National Bank at Hastings and Mr Bush and his business Horticultural Contact were the Bank’s customers. Mr Walker was attracted by the idea of selling stock through a broker and discussions took place. Mr Walker agreed to sell stock through Horticultural Contact, but was concerned that the proceeds of sale would be secure to Walkers Nurseries as they passed through Horticultural Contact’s hands and bank account. Walkers Nurseries claims that $388,611.52 was received by Horticultural Contact for its trees and paid into Horticultural Contact’s account with the Bank, but it was only paid $211,654.00 and so a shortfall of $176,957.52. Walkers Nurseries now claim this sum from the Bank and Mr Walker claims to recover damages for his own losses from the Bank also: hence the two actions arising out of the same transactions and their consequences. The claims are presented in two stages. The present hearing is to determine liability including liability if any to pay compound interest. The amount of money not accounted for is agreed as the $176,957.52 referred to already, and the quantum of other entitlements is reserved for further consideration.

The claims and the defences

[2] The claim by Walkers Nurseries is based on an allegation that the Bank held the $176,957.52 as constructive trustee for it, that the Bank has been unjustly enriched, that it knowingly received the monies belonging to Walkers Nurseries, and that it knowingly assisted Horticultural Contact to deprive Walkers Nurseries of those monies. The Bank agrees the money was paid into the Horticultural Contact account with it, but denies liability to account to Walkers Nurseries for it. It further alleges the claims are statute barred, as any cause of action arose as long ago as 1987 or 1988 and the proceedings were not commenced until 1995 and 1996. The plaintiffs accept that timing, but deny they are out of time and counter that the cause of action was not discovered until 1995 and so the claims are not barred.

[3] Mr Walker claims that the Bank owed him an equitable duty of care, and that the Bank acted in breach of that by not ensuring the $176,957.52 was paid to Walkers Nurseries and thereby caused him personal losses above those suffered by Walkers Nurseries, including the loss of real estate, and caused him distress. The Bank denies the claims on the basis that no cause of action is disclosed as well as the grounds relevant to the claim by Walkers Nurseries.

[4] The plaintiffs also seek compound interest and exemplary damages. Allegations of dishonesty are made by the plaintiffs against the officers of the Bank. On the other hand, the Bank claims the plaintiffs are seeking equitable relief and do not come to Court with clean hands.

The essential history

[5] Mr Bush had returned to New Zealand from trading overseas in the Middle East. He presented to the Bank as a man of means. He bought houses and set up a partnership known as New Zealand Fruit Tree Nursery Partnership with two other men, including Mr Radburnd. They claimed they were going to revolutionise the fruit tree nursery business with fast track techniques involving the production of rootstock by means of tissue culture. By 1985 Mr Bush had established himself with the Bank as worth some $1.6m and he raised $230,000 from Mr Sewell in November 1985 to be repaid in five to six months for the rootstock project (hereafter referred to as TC). A few days later Mr Sewell agreed to advance a further $95,000 to another Bush-Radburnd partnership for a nursery project called their Field Division. Part of the security provided was an unlimited guarantee signed by Mr Bush’s wife. The Taupo Nurserymen’s Conference then took place in March 1986. Mr Bush experienced trouble and could not repay the Bank loan which stood at some $300,000 due in July. Messrs Bush, Radburnd and another man Mr King opened the Horticultural Contact account with the Bank for the brokerage business on 17 April 1986. Documentation relating to this has either been lost or destroyed by the Bank, but the Diary Note made by a bank officer records:

“17.4.86

S.B.

Mr Bush’s secretary called in on behalf of Messrs Bush and King to open the Partnership account ‘Horticultural Contact’. The account is to be used for the brokerage of plants and has been opened with a $5,000 deposit drawn against another of Mr Bush’s accounts - ‘The Fruit Tree Nursery’. The completed Partnership forms will be dropped off later this afternoon in exchange for a new accounts kit. 60 size cheque and large deposit books have been ordered.”

[6] The reference to the brokerage of plants is significant and is confirmed by public advertisements of the business and I quote from one such in July:

“Live Plant Brokerage, a new nationwide horticultural service. Able to place and procure on your behalf - live plants! Confidentiality is assured . . .Horticultural Contact. . .”

Further, Mr Radburnd gave evidence that Mr Sewell was told that Horticultural Contact’s business was that of a broker.

[7] The TC business did not prosper, but Mr Sewell extended the loans and increased the facility by $70,000 in August 1986. Mr Sewell was told Mr Bush was not coming to grips with the TC cashflow problems. Mr Bush’s problems were compounded by his wife leaving him in August 1986. Mr Sewell realised the Bank must look to its security and got Mrs Bush to sign a mortgage. TC’s cashflow then collapsed. By the end of 1986 TC’s business has ceased, the Field Division had made a $50,000 loss and Mr Bush agreed to sell one of his properties to repay the Bank. Mr Bush then engaged a new accountant, Mr Barnes, and in February 1987 TC was granted by the Bank a facility of up to $364,000. By April 1987 TC’s cashflow had again collapsed.

[8] Against this background I return to the Taupo Nurserymen’s Conference in March 1986. Mr Walker’s evidence was that at the presentation by Mr Bush, several nurserymen told Mr Bush they did not like the idea of him holding their money for their stock and Mr Walker shared that concern. He said Mr Sewell reassured the meeting that he was used to this type of situation and funds would be safe under the arrangement he and Mr Bush would set up. Mr Walker said that he felt this was a strong reassurance on a very important aspect of Mr Bush’s proposals. He said some nurserymen told Mr Bush that they would expect payment for stock supplied by the 20th of the month. I was told that up to that time most transactions for the sale of stock was done informally by word of mouth and a handshake, and that written agreements for sale were only beginning to be introduced. Mr Cooke, another nurseryman, gave evidence that he too was at the Taupo Conference and heard Mr Bush’s and Mr Sewell’s presentations. While he did not say that Mr Sewell undertook that nurserymen’s funds would be safe, he confirmed this was said by Mr Bush, that there was a lot of discussion about it and that Mr Sewell plainly had a close relationship with Mr Bush and was on very familiar terms with him after the close of his own presentation. Mr Sewell said in evidence that he denied giving reassurances to the nurserymen after Mr Bush’s presentation. He said he would not and could not have done so. Bearing in mind all the evidence relating to Mr Sewell’s own position at the time and Mr Bush’s claims, I think it more likely than not that Mr Bush did reassure nurserymen their money would be safe and that Mr Sewell said words of comfort and reassurance.

[9] Following this introduction, Mr Walker’s next meeting with Mr Bush was when Mr Bush claimed he had contracts for the sale of Walkers Nurseries’ stock and litigation was threatened and other parties were involved. A settlement was negotiated. Mr Walker said Mr Bush presented as wealthy, but with a poorly performing nursery. He said he was hesitant to sell through Mr Bush “because Walkers Nurseries would be financially vulnerable if Horticultural Contact did not pay for the trees supplied after Horticultural Contact had onsold them to third parties”. Mr Bush responded that his own accountant could arrange a format to protect the funds, although difficulties would arise as buyers would be allocated stock from several nurseries and so monies received by Horticultural Contact would be for those nurseries too. He said they agreed that Mr Bush’s accountant Mr Barnes would discuss the matter with Walkers Nurseries’ accountant Mr Dent. Mr Walker met with Messrs Bush and Radburnd in early July 1987 to settle the terms of trade. Mr Walker said he wanted a “separate trust account” and a letter was produced dated 7 July 1987 stating that “payment is as per terms and conditions of the trust account to be adhered to strictly”. This was accepted and endorsed by Mr Bush. Attached to the letter were the agreed terms of trade on a modified standard form used by Walkers Nurseries. The requirement of a 10% deposit, and payment by the 20th of the month and penalty interest were deleted.

[10] In the meantime Mr Bush’s other businesses had not prospered and his obligations to the Bank had not been met. Mr Radburnd told Mr Sewell on 30 April 1987 that the Field Division had secured a contract that would provide funds. Mr Radburnd told Mr Sewell on 12 May 1987 that the funds from this contract would be paid into the Horticultural Contact account and then transferred into the TC account to reduce its indebtedness. This was confirmed by letters from Mr Bush and Mr Radburnd dated 27 May 1987 to Mr Sewell. This is the relevant passage in the letter:

“Coming to you today, Terry and I feel more at ease after the pressures and problems our business has endured over the past year. The information provided is a summary showing sales far in excess of those predicted in our last amended cashflow, that will lead to greater cashflow and more profitability. This however, will not be recognised for some months yet. Our creditor accounts are still around us, but reducing as accounts and deposits are received with every creditor hopefully being current by late June. These creditors were accumulated by our Tissue Culture operation and are actually being paid by Horticultural Contact, with reimbursement expected at the end of our financial year, (November). Enclosed is a list of accounts prepared by Janet regarding how our creditors were paid and where they have been paid from. This scenario has left Horticultural Contact losing its extreme cashflow and benefits at the expense of our Tissue Culture business. Disappointing to say the least, however it allows us to retrieve our overall deficit.”

[11] Mr Radburnd’s letter states that TC’s creditors had accumulated and were being paid by Horticultural Contact with reimbursement expected by November. The list of these creditors has since been lost by the Bank. The second to last sentence is hard to follow. My understanding of the evidence is that Horticultural Contact’s funds were used to pay TC’s indebtedness and TC would reimburse Horticultural Contact in November 1987.

[12] Mr Bush’s letter was optimistic and made explicit reference to Walkers Nurseries in these terms:

“Walkers Nurseries: No doubt you are aware this organisation is in the process of changing hands. Through good fortune we have been given the task to liquidate as many of the fruit trees they hold. This has been quite a blessing for us as it has enabled us to fulfill contracts we would not normally be able to furnish but more importantly we are able to accomplish our normal profit margins on the sale of trees without the initial financial commitment on our part.”

[13] This refers to the alleged sale referred to by Mr Walker, but also illustrates the technique of trade using back to back contracts with no capital required. TC’s overdraft was reduced to $137,000 by the end of May, but Mr Bush’s accounts were placed on the “Marginal List” by the Bank. While the Horticultural Contact account was to be operated in credit, occasionally it was allowed to be overdrawn by the Bank. Mr Sewell said in evidence that in August 1987 he informed Mr Radburnd that no formal overdraft would be allowed in the Horticultural Contact account and that TC would not be extended further credit. All this makes it plain that in July 1987 all the Bush accounts were struggling and the obligations to the Bank were being met by Mr Bush liquidating assets and money received into the Horticultural Contact account.

[14] I now return to Mr Walker’s position at the beginning of July 1987. He was insisting that a separate trust account be opened for funds coming into Horticultural Contact for Walkers Nurseries’ stock. Urgency was needed, as the winter selling season was well advanced. He says Mr Barnes told him a separate account was not needed, as the existing Horticultural Contact account was of a trust nature. Mr Barnes denies saying such a thing. Mr Walker says that Mr Barnes suggested he ring Mr Sewell and that was agreed. He says Mr Sewell confirmed a second account was not needed as the existing Horticultural Contact account, while not a formal trust account, had a similar status. Mr Walker says he nevertheless required a special account if at all possible. He says Mr Sewell gave him via Mr Barnes further assurances. I need not set them out. Mr Dent confirms Mr Walker’s concern at the time and says he advised him that the arrangement was very loose and depended significantly on the integrity of the partners of Horticultural Contact. He could not confirm or deny that positive assurances from Mr Sewell were relayed to Mr Walker. Mr Sewell says he never understood either the -00 or the -02 account to have been in the nature of a trust account, or the dealing as broking, and so he could not have given the assurance Mr Walker claims. He drew attention to the set-off provision in the diary note I am about to record. The Bank’s diary note for 9 July 1987 and the preceding one say:

“18.6.87

. . .These people are obviously struggling to make ends meet at present and the account should be monitored closely. Diary Note for information purposes only.”

“9.7.87

GWF FOR MANAGER

OD $4,170 LT NIL

Mr Radburnd and Mr Bush have requested that we open a 02 account on this account to handle all of the transactions from Walkers Nurseries. The account will actually be run by Peter Barnes and Bill Dent both Chartered Accountants. They have requested that we set this account off against the 00 account and

SECURITIES: Please attend to the execution of a Letter of Setoff and set off margin differential can be 2%. Mr Radburnd also advised that within the next two to three weeks the 00 will be conducted back in credit figures.”

[15] An -02 account was then opened and used only three times for small amounts of no present relevance except to observe that the signatory was Mr Radburnd and that Mr Barnes and Mr Dent had no involvement in it at all and no contact one with the other in relation to it. All monies of relevance for Walkers Nurseries’ trees went through the original -00 account. It does, however, confirm that Mr Walker was trying to ensure that monies from the sale of Walkers Nurseries’ stock was kept separate and secure to Walkers Nurseries, and the Bank was well aware of this. Mr Walker says Mr Barnes rang him and confirmed the Bank account had been set up. Be that as it may, Walkers Nurseries then allowed its stock to be sold through Horticultural Contact. By the end of the selling season in September, Horticultural Contact had not uplifted all the stock it had sold and Mr Walker became increasingly concerned, as it was becoming too late to lift dormant trees. He was told Horticultural Contact was having problems with some contracts, but on 14 September Mr Bush started uplifting stock he had ordered to plant in Horticultural Contact’s own nursery at Korokipo and within three days had planted a large part of the order. Mr Walker pressured for payment and as at 23 September he invoiced Horticultural Contact for the amount outstanding and Mr Bush said even if the contracts for sale did not work out, Walkers Nurseries would be paid from seasonal finance. Payment was not forthcoming and on 3 November Mr Walker threatened legal action as Walkers Nurseries was being pressured by its bank. Mr Walker also insisted that the proceeds of sale should be banked into the special -02 account. Payment of $83,000 was received on 16 November, reducing the amount owing to $242,867.37. No further payment was forthcoming and on 17 December 1987 the parties and their accountants met. Mr Walker repeated that stock was supplied on the understanding that it was presold by Horticultural Contact to third parties and was told the on-selling contract had fallen through and that another client of Horticultural Contact did not want the stock until 1988. Mr Walker enquired about the stock planted at Korokipo and was told that stock to a value of $190,000 was there unsold. At this time it was decided to incorporate Horticultural Contact and this was done. Mr Walker was also told of Mr Bush’s matrimonial problems and the effect of those on his assets. Mr Barnes told Mr Walker there was no money in the -02 account because the trees remained unsold. Mr Walker said in evidence he was still relying on the use of the -02 account, although neither he or Mr Dent had access to it. Unsatisfactory negotiations continued and in February 1988 Mr Walker instructed his solicitor to sue Horticultural Contact for the value of the stock, most of which Mr Walker believed was planted at Korokipo and about $49,000 worth of which was still in Walkers Nurseries’ land. All of the responses on behalf of Horticultural Contact supported Mr Walker’s belief as to the whereabouts of the stock and that it was unsold.

[16] Walkers Nurseries was in serious financial difficulties due to the failure by Horticultural Contact to pay for the stock it had ordered. Its bank was not prepared to help. With Mr Dent’s help, Mr Walker sought finance from Mr Sewell, who complained that he was being expected to lend money to Mr Bush to pay Walkers Nurseries. In March 1988 Mr Sewell offered banking accommodation to Walkers Nurseries. Documentation was put in hand. The financial arrangements involved the transfer of ownership of Walkers Nurseries’ stock to Horticultural Contact Limited and an instrument by way of security given by Horticultural Contact to Walkers Nurseries for the amount owing. It was prepared but never completed. By 26 April 1988 a further $28,054 was paid by Horticultural Contact to Walkers Nurseries. Horticultural Contact was also negotiating financial assistance from Mr Sewell on the basis that the ownership of Walkers Nurseries’ stock had passed to Horticultural Contact. Mr Radburnd wrote two letters to Mr Sewell dated 18 April 1988 saying that Horticultural Contact had renegotiated its contract with Walkers Nurseries and held stock to a value of $245,246.00. Mr Bush wrote to Mr Walker a day later confirming that stock to a value of $203,324.00 (including GST) was held at Korokipo and that Walkers Nurseries would be paid by 30 September 1988 or incur interest at 2% (per month I assume) thereafter.

[17] On 18 April 1988, however, Mr Sewell withdrew the Bank’s offer of finance to Walkers Nurseries, saying the business climate was too risky. Attempts to find further finance failed. Walkers Nurseries took action against Horticultural Contact for the value of stock sold and obtained judgment in this Court on 16 June 1988 for $205,546.52 in respect of the stock held at Korokipo and $49,362.39 in respect of stock sold but not uplifted from Walkers Nurseries: a total of $254,908.91.

[18] In the meantime Walkers Nurseries had on 13 May 1988 been put into receivership by its Bank. It is unnecessary to recount the processes or results for Walkers Nurseries or Mr Walker at this stage.

[19] The above account describes the facts as presented to and seen by Mr Walker up until the time judgment was entered against Messrs Bush and Radburnd. It is plain he thought Walkers Nurseries’ trees to a value of $205,546.52 were in the ground at Korokipo. Two further significant events are not in dispute. The first is that the landlord of the land leased to Horticultural Contact at Korokipo re-entered in September 1988 and destroyed all the stock planted therein. Mr Walker went and saw for himself that this was so and concluded that all the Walkers Nurseries’ trees there were destroyed. The second is that by virtue of persistent investigations by a Mr Burns, another nurseryman who had suffered like Mr Walker at the hands of Horticultural Contact, Mr Walker was told in July 1995 that Walkers Nurseries’ stock thought to be in the ground at Korokipo had been sold by Horticultural Contact and this could be traced from Horticultural Contact’s accounts, and its cashbooks in particular.

[20] Subsequent tracings now show that $388,611.52 worth of Walkers Nurseries’ trees planted at Korokipo had been sold by the end of April 1988. This is agreed and flows from analyses done by Mr Dent and a Mr Shaw which were produced by consent.

The transactions in Horticultural Contact’s -00 account from March 1987 to April 1988

[21] As I have recorded, Mr Sewell was told in May 1987 that Horticultural Contact was transferring its money to TC to meet its indebtedness. It is convenient to record now what actually happened in the Horticultural Contact account from March 1987 until April 1988. This was analysed by Mr Dent and Mr Shaw by reference to the bank statements and cashbooks and reduced to detailed schedules and summaries. As I have recorded, Horticultural Contact received $388,611.52 from buyers for stock obtained from Walkers Nurseries and paid Walkers Nurseries $211,654.00, leaving an unpaid balance of $176,957.52. The analyses show that over the period a total of $1,122,733.42 was paid out of the Horticultural Contact account. This was made up of:

(1) Payments to outside nurseries for sales $ 432,885.17

(2) Payments to the Fruit Tree Nursery (HB) Field Division A/C Biss and Radburnd $69,050.97

(3) Payments to the Fruit Tree Nursery (Tissue Culture) A/C Bush and Radburnd $119,028.74

(4) Payments for Fruit Tree Nursery (Tissue Culture) General expenses $129,808.59

(5) Payments to nurseries possibly on a Dr/Cr basis $106,650.65

(6) Other payments $171,140.49

(7) Bush and Radburnd personal drawings $ 94,208.81

$1,122,773.42

[22] Some of the contracts and receipts relating to Walkers Nurseries’ stock took place before the end of May 1987 when Mr Sewell was expressly told that Horticultural Contact was diverting funds to TC, but on the analyses it is fair to proceed on the basis that the unpaid $176,957.52 was in respect of stock supplied and sold after May 1987 and before the end of April 1988, and so before the arrangements involving Walkers Nurseries, the Bank and Horticultural Contact made or attempted to be made thereafter. I expressly record this to emphasise the fact that the stock was sold by Horticultural Contact before it represented to the Bank and Walkers Nurseries that it remained unsold in the ground at Korokipo.

[23] On the face of it, it seems that payments grouped under numbers (1), (2), (5) and (7) are unexceptional and to be expected as part of the arrangements understood by Walkers Nurseries and Mr Sewell. On the other hand, payment to TC or to its creditors would not be part of those arrangements and would be the type of payments referred to in Mr Radburnd’s letter to Mr Sewell of 27 May 1987. These funds should have been paid to nurserymen including Walkers Nurseries, Mr Burns and no doubt others. Categories (3) and (4) total $248,837.33, which is some $72,000 in excess of the $176,959.52 unpaid to Walkers Nurseries. On the information before me, I think it is more likely than not that the $248,837.33 paid out included the monies properly payable to Walkers Nurseries. If category (6) is added, this conclusion is reinforced. There has been no evidence to the contrary and I do not think in all the circumstances precise accounting is possible beyond the analyses I have been presented with. Mr Crossland presented a tracing exercise done on a first in first out basis, but I am prepared to base my decision on the overall picture presented by Mr Shaw.

[24] The Bush accounts were all wound up following the bankruptcy of Messrs Bush and Radburnd and I was told there was a net deficit of a little over $30,000. This represents the Bank’s net loss. If the $248,837.33 had not been diverted to TC and its creditors and paid to the nurserymen, then it seems to me TC’s indebtedness overall would have been greater by that amount and the greater part of that indebtedness would have ultimately been borne by the Bank. It is impossible to be precise on the information I have, but bearing in mind the size of TC’s debt to the Bank from time to time as illustrated by a graph produced by Mr Burns, I think the payments to TC and to TC’s creditors were to the benefit of the Bank.

Collateral evidence

[25] Mr Walker and Mr Burns (who also gave evidence before me) were highly critical of the Bank and Mr Sewell in particular. Apart from matters I do refer to, I do not consider it necessary to set out the listed complaints or resolve them.

The extent of Mr Sewell’s knowledge

[26] Both claims proceed on the basis that Horticultural Contact’s accounts with the Bank were in the nature of a trust account and that Mr Sewell and the Bank knew or should have known that and that all funds received into the -00 account in particular were the property of the nurserymen who supplied the trees, less Horticultural Contact’s proper commission. The plaintiffs say Horticultural Contact was a broker. The Bank and Mr Sewell on the other hand say all transactions were those of debtor and creditor and the nurserymen have no claim of the kind alleged. The plaintiffs called Mr Macpherson as a witness. He gave evidence as an expert banker and I accept his qualifications. He told the Court that in a situation such as the present and as indicated by the Bank’s diary notes of 17 April 1986 already set out above, and the subsequent one of 9 July 1987 in relation to the opening of the -02 account, a prudent banker should have enquired as to the exact nature and purpose of the account to avoid the bank being later accused of conducting the account improperly. He referred to a copy of the National Bank’s Manual referring to trust accounts to the same effect. He referred to the first diary note and said:

“4.8 It is apparent that the brokerage nature of the account and the implied trust therein was never recognised at the National Bank by the manager or other staff. Such ‘trust’ status was further enforced when the Bank opened the number two account for transactions relating to Walker’s Nurseries Ltd dated 9 July 1987 and when it appears inadequate inquiries were made by the National Bank. The manager was aware funds in Horticultural Contact(s) account were being transferred to The Fruit Tree Nursery Account and that Horticultural Contact(s) owed Walker’s Nurseries Ltd as well as others. In considering all the various factors involved, I am of the opinion that the National Bank have failed in their duty to ‘know their customer’, particularly when advances, both secured or supposedly secured, were permitted.

4.9 Copy of the National Bank’s procedures headed ‘Opening New Accounts’ has been made available. These procedures which are in some detail and depth and on page No. 33.00(1) paragraph seven, reads:

“Negligence is not necessarily confined to the specific collection transaction but also relates back to the circumstances surrounding the opening of the customer’s account. This is one reason why so much emphasis is placed on following correct procedures re identification and character reference in opening any new account.”

4.10 Amongst other instructions for the opening of new accounts, the following points are noted:

(a) Request to open new accounts should be dealt with only by the Manager, Accountant or by a responsible officer to whom such a role has been specifically delegated.

(b) Complete Manager’s diary note.

4.11 The procedures for opening of new accounts, as sighted, indicate the National Bank required full, careful and exact action to be taken.”

[27] I am satisfied that this correctly states the appropriate steps to be taken when such accounts are opened.

[28] In the present case I am satisfied that Mr Sewell actually knew that the -00 account was being operated by the distinct partnership entity Horticultural Contact (as opposed to other Bush or Bush Radburnd accounts) to receive funds from the sale of trees and that those proceeds were to be applied to pay the nurserymen for those trees, and that the surplus would belong to Horticultural Contact as its commission. He knew that the partnership had no capital, apart from the initial $5,000 paid in from another Bush account. He knew that the business would be conducted by back to back contracts initiated by first finding a buyer for the trees and then matching that to a seller or sellers. He must have realised that Horticultural Contact was in no position to buy and hold stock itself as he did not agree for the account to be overdrawn (with one or two minor exceptions and against his overall instructions). If he had enquired he would have been told that the nurserymen were not to know the sale price to the orchardists or the commission charged.

[29] By the time the instructions for the -02 account were received, Mr Sewell was already in serious doubt as to the soundness of the Bush enterprises, and realised that Walkers Nurseries in particular were insisting that its claim to the proceeds of sale of its stock be recognised and secure in the monies banked by Horticultural Contact. He must have realised too that because of the sale of stock from several nurserymen, the operation of the -02 account would not be practicable. It seems he did nothing to ensure that the account was run by Messrs Barnes and Dent and he must have realised the -02 account never did function as envisaged by the diary note.

Mr Macpherson’s opinions

[30] Mr Macpherson observed, I think correctly, that the Bush accounts were intrinsically interwoven and that transactions between them involved “robbing Peter to pay Paul”. Mr Macpherson emphasised the use of the phrase “brokerage of plants” in the Bank diary note when the -00 account was opened. Dictionary meanings were quoted and that from the Concise Oxford Dictionary will suffice. A broker is a “middleman in business, agent, commissioner” and examples are given of pawnbroker, stockbroker, person licensed to sell or appraise distrained goods. So “brokerage” is the broker’s fee or commission. In Strouds Judicial Dictionary 6th ed (2000) “broker” is compared with “factor”. A broker is described as one who contrives, makes, and concludes bargains and contracts between merchants and tradesmen, in matters of money and merchandise, for which they have a fee or reward, being a description approved by Best CJ in Gibbons v Rule 4 Bing. 306. And whereas a broker is not put into possession of the property to be sold, a factor is: Barrie v Corrie 2 B & Ald. 143. In the present case Horticultural Contact was put into possession of the nursery stock and it seems that the property passed to Horticultural Contact and thence to the purchaser. It can therefore be argued that Horticultural Contact was not a broker but a factor. Mr Macpherson quoted from the New Zealand Commercial Dictionary (3rd ed) p203:

“A broker is a general agent who buys and sells goods for his principal, without being entrusted either with the possession or control of the goods or of their documents of title. Often he does little more than bring the parties together and when a contact [sp] is concluded he takes his commission and drops entirely out of the transaction. A broker, unless there is some special stipulation on usage in a particular trade, cannot act in his own name, although he may act for a principal whose identity he refrains from disclosing; again he has no property in the goods he buys or sells, and therefore no lien. Apart from agreement or usage, he is not entitled to receive payment for the goods although in the case where he acts on behalf of an undisclosed principal the purchaser is protected provided he pays the broker before the true principal is disclosed.”

[31] He went on to say that in his experience “broker type” accounts were conducted by stock and station agents or a seed broking company. In the case of stock and station agents and seed brokers, the arrangements were similar to Horticultural Contact’s. He also referred to stockbrokers and insurance brokers. In those cases he considered the banker was obliged to emphasise to the customer that he was dealing with funds held in trust.

[32] As I have said, the intention was that Horticultural Contact’s only interest in the transaction was the commission it would earn and deduct from the price obtained from the purchaser as the monies passed through its bank account on their way to the nurserymen vendors. In my view, the decision as to whether or not a constructive trust has been created is not answered by whether or not Horticultural Contact was a broker or a factor. The substance of the transactions must determine that. Mr Macpherson considered that Horticultural Contact was acting as a broker. He analysed the record of the -00 and -02 accounts and the Bank diary notes on them. He concluded that the Bank and its staff did not understand or realise what a broker does or the relationship which pertains between a broker and his principals. His evidence proceeded:

“7.7 Subsequent diary notes to that dated 17 April 1986 indicate to me that the account was conducted by Mr Bush and his partners at their will and discretion without due control by the National Bank. I come to this view notwithstanding diary note dated 18 June 1987 stating the account should be monitored closely.

7.8 Diary note dated 9 July 1987 is of particular importance in this matter, in that the National Bank were specifically requested to open a number two account for Horticultural Contact(s) to handle all of the transactions from Walker’s Nurseries Ltd. This number two account was to be conducted by Mr Peter Barnes and Mr Bill Dent, Chartered Accountants. In my opinion thereafter, such request placed the National Bank on notice that certain funds being received by Horticultural Contact(s) were the property of Walker’s Nurseries Ltd. Again, it appears that the true nature of the account was not understood. Why any set-off between the accounts was agreed to is not apparent from the diary notes. In my view, it further indicates the lack of understanding of the purpose of the account(s) and a failure to make proper inquiries.

7.9 From 9 July 1987 to 4 November 1987, diary notes 31 July 1987, 21 August 1987, and 7 October 1987 indicated this account was overdrawn without many questions being asked or any control being exerted over the account. Even when Mr Radburnd telephoned Mr Sewell on 4 November 1987 to allow the account to overdraw up to $10,000 and advised that Walker’s Nurseries Ltd were owed $100,000 no specific questions appear to have been asked about this debt.

7.10 Despite all the diary notes prior to 4 November 1987, in particular diary note 18 June 1987, the heading that day indicates the account had reverted to credit $59,979 whilst the ‘02’ account was overdrawn $19. Yet the manager did not really appear to be at grips with the fact Horticultural Contact(s) had creditors far in excess of available funds and on 13 November 1987 when credit balance was $161,849 with debts to Walker’s Nurseries Ltd and presumably others, the National Bank was seeking to restrain disbursement of credit funds. By 21 December 1987 the account had again been paid overdrawn to $3,034 and the manager confirmed the indebtedness despite recording ‘they are aware the account should operate in credit’.

7.11 Diary note dated 27 January 1988 indicates that finance $75,000 was to have come from the Bank of New Zealand and had been declined. In place of that finance, new finance from Kearns Corporation, Christchurch had been arranged. No query appears to have been raised by ‘BPK’ or the manager as to the nature of this finance which is somewhat surprising in view of Mr Bush’s avowed allegiance to the National Bank. The ‘warning bells’ that finance was being raised from other sources appear to have been ignored.

7.12 The heading of page 3 of the diary note sheets was changed by the manual addition of ‘Ltd’ and subsequent typed sheets indicated Horticultural Contact(s) was a limited liability company, yet there was no recording of this significant change in status, despite the apparent frequent dealings with Mr Bush.

7.13 In diary note 18 April 1988, the manager agreed to advances against a debenture mortgage and a guarantee from Messrs Bush and Radburnd. There was some urgency to have documents completed before Mr Bush left for Bahrain.

7.14 Ten days later on 28 April 1988 ‘DPK’ noted that ‘this account is meant to be a limited company, although we do not hold any Memorandum, or Articles of Association and no Certificate of Incorporation’. ‘DPK’ had to phone solicitors to confirm this and instructed New Accounts to amend (computer) loadings and order new cheque books.

7.15 Such change of status of an account would normally, in my experience be fully recorded by diary memo and a new separate account opened for the distinct legal entity to which certain assets and liabilities of the prior business would be transferred in due course.

7.16 Even then, it would appear, the true nature of the business was not ascertained, or understood, nor was any in-depth inquiry made of the principals as to the assets and liabilities of Horticultural Contact(s) and/or Horticultural Contact Limited.

7.17 It is noted that in diary note 25 March 1993 the question whether the actual balance in the account of the partnership was transferred to the company thus ceasing the partnership and commencing the company, was raised. The writer of this diary note appeared concerned over this because of the legalities. He/she could have also been concerned that the National Bank’s procedures could have been disregarded, to their detriment.

7.18 By 26 May 1988, some 38 days after the diary note on 18 April 1988, it was evident the business was in further trouble with the additional problem that Mr Bush had matrimonial difficulties. Despite these apparent ‘warning bells’ the manager appears to have taken the position that funds would appear, as per a cash forecast and from Mr Bush’s alleged share of the matrimonial property. Whilst the manager was prepared to allow an increase in the indebtedness against an apparent unsupported guarantee from Messrs Bush and Radburnd, it appears he gave no thought to the matrimonial property position, in any depth.

7.19 The position disclosed in diary note 24 June 1988 was that Horticultural Contact Limited had $350,000 owing to creditors and Walker’s Nurseries Ltd had judgment against them. It appears this still did not give rise to any firm to strong action. The attitude conveyed in this diary note appears that the National Bank would not suffer to any extent because funds from the sale of trees and an unregistered mortgage from Mr Bush over his ‘half’ of the joint family home would cover the indebtedness. It does not appear that any position in relation to the sale of trees was in fact ascertained. In view of the position disclosed, it is considered the National Bank should have ‘stopped’ the account then, if not previously, to crystallise the debt and insisted on a number two account being conducted in credit for current transactions.

7.20 The position disclosed in diary notes dated 27 and 29 June 1988 really showed Horticultural Contact was in very serious trouble, yet the manager appears to have taken the view that because a form of security was held he had nothing to worry about. He gave no apparent consideration to either the matrimonial property position or that of the creditors.

7.21 From 1 July 1988 to 4 November 1988, diary notes indicate it was ‘business as usual’ despite the matter previously disclosed. In diary note 1 December 1988, the manager appears to have had some concerns as to whether the company was in fact solvent when it commenced trading and whether there would be any litigation or other actions arising therefrom.

7.22 Following that diary note, the recordings mainly deal with the subsequent winding up of the company, the claim by Mr Burns and the request(s) for production of documents. Even when diary note 11 November 1992 was recorded and the manager refers to the business as ‘seed brokers’ it appears that the customer’s business as a broker was not recognised or considered.

7.23 After reviewing the copies of the documents provided and considering the relevant matters, it is my opinion that had the then manager of the National Bank, Hastings:

(a) made himself fully cognisant with the nature and purpose of Horticultural Contact(s) whether as a partnership or limited liability company;

(b) made full and in-depth inquiries of the principals;

(d) exercised firmer control in the allowance of unauthorised and unsecured overdrafts;

(e) recorded all matters fully, accurately and timely;

(f) recognised that Mr Bush’s business ability was lacking;

Walkers Nurseries Ltd and others together with this Bank may not have suffered the losses which arose.

7.24 The footnote to diary note 18 August 1986 shows the manager was aware Horticultural Contact had stock from wholesalers which they sold to various horticulturalists and that the margin was thin but reasonably profitable. It appears that he did not recognise then that Horticultural Contact worked on a commission basis.”

[33] The above analysis and criticism spans a period longer than that relevant to that upon which the Court must concentrate, but it gives a complete picture which I find helpful. Mr Sewell did not accept the criticisms on the basis that he thought, and still thinks, the Horticultural Contact accounts were simple debtor and creditor accounts with no element of trust funds being involved. I have already made my findings as to what the Bank and Mr Sewell actually knew, and the form of the transactions Horticultural Contact negotiated. I also accept Mr Macpherson’s evidence of what a prudent banker should have done and found out in the circumstances of this case. I now turn to the question whether or not the Bank became a constructive trustee for the nurserymen and Walkers Nurseries in particular.

The creation of a constructive trust

[34] In my discussion of the evidence and facts I have touched on the fact that the transactions negotiated by Horticultural Contact involved the property in the stock passing to Horticultural Contact and hence to the purchaser. It seems plain from Mr Bush’s letter to Mr Sewell of 27 May 1987 (quoted in para 12 above) that Mr Bush was aware of the risks of agreeing to buy stock and that that could require “initial financial commitment”. Mr Gilmour for the Bank stressed the significance of the transaction whereby Horticultural Contact agreed to buy stock, uplifted a significant amount of it and planted it in its own land and left some with Walkers Nurseries. Further, Walkers Nurseries sued Horticultural Contact in debt for the stock on the basis that the property had passed to Horticultural Contact. Mr Crossland countered this by submitting that this was only the result of the original arrangement for back to back contracts falling through. I am satisfied that Walkers Nurseries when it agreed to sell stock to Horticultural Contact intended that the liability to pay fell on Horticultural Contact, but expected the ultimate buyer to pay Horticultural Contact and so provide the funds to pay it. As is abundantly plain, Mr Walker tried to insist on a trust account being set up and Mr Bush agreed in writing to that. Both Mr Walker and Mr Bush proceeded on the basis that the payments received by Horticultural Contact from buyers of Walkers Nurseries’ stock were “earmarked” for Walkers Nurseries and that Horticultural Contact was not free to treat the monies as its own.

[35] I now try to analyse the position from first principles. There is no doubt that whether or not there is an element of trust involved between the customer and third parties, the relationship between a bank and its customer is that of debtor and creditor. In general a banker is not entitled to refuse his customer’s demand for repayment on the grounds of mere suspicion or curiosity. Similarly, when he takes money from his customer in discharge of a debt, he is not bound to enquire into the manner in which the money was acquired by the customer. However, a banker is bound to refuse payment if he has, or a reasonable banker would have, grounds for believing that the customer is defrauding its principal or otherwise defeating his true intentions, or if he is on notice that the payment is in breach of trust. Where the customer’s title to money is defective, the banker may be exposed to a tracing claim, an action for conversion, or an action for money had and received: Halsbury’s Laws of England, 4th ed, vol 3(1) paras 155 and 160.

[36] A banker is not required to supervise accounts he knows contain trust funds or to protect those entitled to them. However, a banker can become a constructive trustee even in respect of payments made in accordance with its customer’s mandate. The following types of knowledge will suffice to impose a trust: (1) actual knowledge; (2) wilfully shutting one’s eyes to the obvious; or (3) recklessly failing to make appropriate enquiries. As far as the author of the Halsbury text in 1989 was concerned, the authorities were not clear as to whether a trust would be imposed when the relevant knowledge is merely of circumstances which would indicate the facts to an honest and reasonable person or put such a person on enquiry: Halsbury (op. cit.) para 174.

[37] In New Zealand the law was reviewed by our Court of Appeal in Westpac Banking Corporation v Savin [1985] 2NZLR 41. That was a case where two boat owners instructed a firm Aqua Marine to sell their boats, receive and bank the proceeds, deduct their commission and pay them the net proceeds. The contracts for sale were between the owners and the purchasers (as contrasted with back to back agreements for sale and purchase as here). Aqua Marine completed the sales and paid the proceeds into its trading account which was in overdraft. The proceeds reduced the overdraft, the owners were not paid, so when Aqua Marine went into liquidation the bank had the benefit of the proceeds. The surrounding facts have some resemblance to those now before the Court. Holland J. at first instance found that the bank must have been aware that the monies were being employed to meet Aqua Marine’s commitments to the bank, that when the monies were paid in, the prospects of Aqua Marine’s liquidation were significant, and that at all stages Aqua Marine was mixing the money it received on behalf of its principals with its own money to meet its commitments to the bank, that by receiving the cheques to reduce the overdraft the bank assisted the company with knowledge of a dishonest and fraudulent design on the part of the company, and the bank manager was motivated by a desire to reduce the amount owing by the company to the bank and so reduce the bank’s eventual losses. The Court of Appeal upheld these findings on the facts. In separate judgments Richardson J and Sir Clifford Richmond analysed the leading case of Thomson v Clydesdale Bank Ltd [1893] AC 282 (HC). Richardson J. observed at p 45 that it was clear that Aqua Marine was acting on behalf of the owner and not on its own account. In the present case the defendant Bank claims Horticultural Contact was acting on its own account. Richardson J. then referred to Paget’s Law of Banking (9th ed 1982 p83) and Halsbury 4th ed, vol 3, paras 40 and 60. He then said at page 52-53:

“The more difficult problem lies in deciding what yardsticks are to be applied in determining whether or not the person charged as constructive trustee had the requisite constructive knowledge. The most recent comprehensive discussion of this difficult question is in the 131-page judgment of Peter Gibson J in Baden, Delvaux and Lecuit v Societe General pour Favoriser le Developpement du Commerce et de l’Industrie en France SA [1983] BCLC 325. There are five categories or types of knowledge: (1) actual knowledge; (2) knowledge which is obtainable but for shutting one’s eyes to the obvious; (3) knowledge obtainable but for wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make; (4) knowledge of circumstances which would indicate the facts to an honest and reasonable person; and (5) knowledge obtainable from inquiries which an honest and reasonable person would feel obliged to make, being put on inquiry as a result of his or her knowledge of suspicious circumstances.

Earlier judicial debate had centred mainly on the fourth and particularly the fifth type of knowledge. Peter Gibson J concluded that there was sufficient authority to treat all five categories of knowledge as material but considered that only in exceptional circumstances should a Court impute type (5) knowledge to an agent such as a bank acting honestly on its ‘customer’s’ instructions. The Judge made it clear that he considered the five types of knowledge were the requisite knowledge for constructive trusteeship whether of the ‘knowing receipt’ category, which up to now I have been discussing, or the ‘knowing assistance’ category where the property has not necessarily passed through the hands of the defendant and, as he pointed out, the relevant knowledge must be of facts and not of mere claims or allegations (Carl Zeiss Stiftung v Herbert Smith & Co (No 2) [1969] 2 Ch 276).”

[38] He later said he favoured the view that liability could be established in any of the five ways and referred to the Halsbury text (vol 48, para 592) which corresponds with the same approach I have quoted (vol 3 (1) para 174).

[39] Richardson J. also referred with approval to a remark by Lord Cairns in Gray v Johnston (1868) 3 HL 1, 11:

“And to that I think I may safely add, that if it be shewn that any personal benefit to the bankers themselves is designed or stipulated for, that circumstance, above all others, will most readily establish the fact that the bankers are in privity with the breach of trust which is about to be committed.”

[40] It is always important to approach the imposition of a constructive trust in commercial transactions with restraint so as not to “impede the free flow of commerce”. This too was emphasised by Richardson J. at p 49 and I think it fair to observe was the basis of the approach of Sir Clifford Richmond in his analysis of the authorities.

[41] For present purposes I think the current authority binding on this Court is Royal Brunei Airlines v Tan [1995] 3AllER 97. Delivering the opinion of the Privy Council Lord Nicholls reviewed the state of New Zealand authority at page 105. He started his analysis by quoting from Lord Selbourne L.C. in Barnes v Addy (1874) LR9 Ch App 244, 251-252:

“That responsibility [of a trustee] may no doubt be extended in equity to others who are not properly trustees, if they are found . . . actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust. But . . . strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.”

[42] He then analyses the degrees of wrongdoing that would or would not result in the Courts implying a constructive trust. In the present case, there is no doubt that Horticultural Contact agreed to hold the net proceeds of the transactions on trust for the nurserymen and Walkers Nurseries in particular, and were acting fraudulently and in breach of that trust by diverting those monies to meet TC’s indebtedness and making other payments as well. Lord Nicholls said that a third party such as the Bank here, would be liable to the beneficiaries of the trust if it acted dishonestly, but not if it was merely negligent unless the beneficiary could establish some duty of care owed them directly by the third party. What was “dishonesty” for this purpose was fully described at pages 105-106:

“Dishonesty

Before considering this issue further it will be helpful to define the terms being used by looking more closely at what dishonesty means in this context. Whatever may be the position in some criminal or other contexts (see, for instance, R v Ghosh [1982] 2 All ER 689, [1982] QB 1053), in the context of the accessory liability principle acting dishonestly, or with a lack of probity, which is synonymous, means simply not acting as an honest person would in the circumstances. This is an objective standard. At first sight this may seem surprising. Honesty has a connotation of subjectivity, as distinct from the objectivity of negligence. Honesty, indeed, does have a strong subjective element in that it is a description of a type of conduct assessed in the light of what a person actually knew at the time, as distinct from what a reasonable person would have known or appreciated. Further, honesty and its counterpart dishonesty are mostly concerned with advertent conduct, not inadvertent conduct. Carelessness is not dishonesty. Thus for the most part dishonesty is to be equated with conscious impropriety.

However, these subjective characteristics of honesty do not mean that individuals are free to set their own standards of honesty in particular circumstances. The standard of what constitutes honest conduct is not subjective. Honesty is not an optional scale, with higher or lower values according to the moral standards of each individual. If a person knowingly appropriates another’s property, he will not escape a finding of dishonesty simply because he sees nothing wrong in such behaviour.

In most situations there is little difficulty in identifying how an honest person would behave. Honest people do not intentionally deceive others to their detriment. Honest people do not knowingly take others’ property. Unless there is a very good and compelling reason, an honest person does not participate in a transaction if he knows it involves a misapplication of trust assets to the detriment of the beneficiaries. Nor does an honest person in such a case deliberately close his eyes and ears, or deliberately not ask questions, lest he learn something he would rather not know, and then proceed regardless. However, in the situations now under consideration the position is not always so straightforward. This can best be illustrated by considering one particular area: the taking of risks.”

“Taking risks

. . .He is required to act honestly, but what is required of an honest person in these circumstances? An honest person knows there is doubt. What does honesty require him to do?

The only answer to these questions lies in keeping in mind that honesty is an objective standard. The individual is expected to attain the standard which would be observed by an honest person placed in those circumstances. It is impossible to be more specific. Knox J captured the flavour of this, in a case with a commercial setting, when he referred to a person who is ‘guilty of commercially unacceptable conduct in the particular context involved’: see Cowan de Groot Properties Ltd v Eagle Trust plc [1992] 4 All ER 700 at 761. Acting in reckless disregard of others’ rights or possible rights can be a telltale sign of dishonesty. An honest person would have regard to the circumstances known to him, including the nature and importance of the proposed transaction, the nature and importance of his role, the ordinary course of business, the degree of doubt, the practicability of the trustee or the third party proceeding otherwise and the seriousness of the adverse consequences to the beneficiaries. The circumstances will dictate which one or more of the possible courses should be taken by an honest person. He might, for instance, flatly decline to become involved. He might ask further questions. He might seek advice, or insist on further advice being obtained. He might advise the trustee of the risks but then proceed with his role in the transaction. He might do many things. Ultimately, in most cases, an honest person should have little difficulty in knowing whether a proposed transaction, or his participation in it, would offend the normally accepted standards of honest conduct.

Likewise, when called upon to decide whether a person was acting honestly, a court will look at all the circumstances known to the third party at the time. The court will also have regard to personal attributes of the third party such as his experience and intelligence, and the reason why he acted as he did.”

Lord Nicholls concluded with a caution about the use of the term “knowingly” assisted.

Did the Bank act “dishonestly”

[43] It is not in contest that the Bank is bound by the actions and understanding of its manager Mr Sewell and he in turn was aware of diary notes made by others. I also record that this Court is well aware of the business climate leading up to October 1987. It could be described as one of incautious optimism and infected much of the business community including banks.

[44] Mr Sewell knew that Horticultural Contact held itself out to be brokers of nursery stock and had asked the Bank to open an account for the brokerage of plants. That alone must have alerted him to a likely element of trust in Horticultural Contact’s handling of funds through its bank account. He knew the method of operation was the finding of buyers and sellers and matching them with back to back contracts for sale and purchase. He knew Horticultural Contact operated without capital (the initial $5,000 paid in is of little significance). He intended that the Horticultural Contact account would always operate in credit (the short term small overdrafts were permitted despite this intention and to meet exigencies presented by Burns or Radburnd). He knew that the funds coming into the account would be from the sale of plants and that Horticultural Contact’s interest in the funds was limited to its commission and that all the balance was to be paid to the suppliers of the stock. He knew Bush and Radburnd’s enterprise TC was in serious financial difficulties virtually from the start and was heavily indebted to the Bank. He was relying on the sale of Bush securities to meet the debt and was anxious to perfect them. As a result of what Messrs Bush and Radburnd told him in May 1987, he knew that Horticultural Contact was funding TC’s debts on the basis that Horticultural Contact would be repaid by the end of the year, and he knew that Walkers Nurseries was about to become a significant supplier of plants to Horticultural Contact.

[45] He must have realised that funds in the Horticultural Contact account that were due to be paid to nurserymen was being diverted to pay TC’s debts to the Bank. If he did not, he turned a blind eye to it.

[46] By the conclusion of 7 July 1997 or very shortly thereafter he must have known of Walkers Nurseries’ concern about the security of its funds as they passed through Horticultural Contact’s hands and its bank accounts with the Bank and that Walkers Nurseries considered the monies so received and banked by Horticultural Contact were (less commission) the property of Walkers Nurseries. In these circumstances, as a reasonable and honest banker he was bound to enquire in detail what the relationship with nurserymen and Walkers Nurseries was. He would have been told that Walkers Nurseries and Horticultural Contact had agreed that the proceeds of sale to buyers was, less commission, to be held by Horticultural Contact on trust for Walkers Nurseries. This would have reinforced what he must have already suspected, that Horticultural Contact was not free to apply funds in its bank account to fund TC either by reducing its overdraft or paying its creditors. This being so, he should have realised that he placed the Bank at risk by allowing the Horticultural Contact account to be used in this way. I therefore find that Mr Sewell, as a reasonable and honest banker, was bound to enquire and would have found that by funding TC, Horticultural Contact was defrauding Walkers Nurseries or otherwise defeating the agreement reached between Walkers Nurseries and Horticultural Contact. For these reasons I consider the plaintiffs have established that when monies were received into the Horticultural Contact account, the Bank should have taken steps to prevent the monies being diverted to the benefit of TC, and so the Bank.

[47] I think too that in this case, as in Savin’s case, the Bank through its manager Mr Sewell was motivated to advance the Bank’s interests by reducing the TC overdraft and the pressure from TC’s other creditors. Mr Crossland submitted that this had an importance because delaying the collapse of TC would protect the Bank’s securities from the operation of relation back on bankruptcy or liquidation. There is no doubt that it was to the benefit of the Bank to increase the solvency (or rather reduce the insolvency) of TC. The constructive trust so established means that the funds paid out for the benefit of TC which include the $176,957.52 that should have been paid to Walkers Nurseries, are held by the Bank for the unpaid nurserymen. The plaintiff Walkers Nurseries has accordingly proved its claim for $176,957.52.

[48] Having reached this conclusion, it is unnecessary to recast my decision in terms of unjust enrichment, knowing receipt, or knowing assistance.

Mr Walker’s personal claim

[49] Mr Crossland could find no authority to support his claim that Mr Walker as a guarantor and the landlord of Walkers Nurseries and its major shareholder and director could have a claim against the Bank independently of his company. When a trader operates through a limited liability company, he must accept that the separate legal personality created not only protects him from personal liability, but precludes him from bringing claims based on wrongs done to the company. Mr Crossland relied on Christiansen v Scott [1996] 1NZLR 273. There the Court of Appeal was considering a claim by directors and shareholders of a company against their own professional advisers and it was arguable that they were owed a duty of care. The Court of Appeal agreed that the matter should go to trial. Here the Bank and Horticultural Contact knew they were dealing with Walkers Nurseries and not Mr Walker personally. Any obligation that could arise could not on the facts related to this Court be to Mr Walker himself. I was invited to extend the law by creating a new cause of action based on an “equitable duty of care”. It is common knowledge that injury to a company adversely affects the interests of shareholders and guarantors. Further, causing a tenant company to go into liquidation often harms the landlord. However, this is not a case in which I should consider a radical departure from the settled principles. Mr Walker’s claim accordingly fails as disclosing no cause of action.

The limitation defence

[50] I say immediately that the trial of this matter has not been made easy being over 14 years after the crucial events. The Bank failed in many respects to keep documents for the period normal practice deems appropriate, and performed very badly indeed in the discovery process. However, I have felt able to reach firm conclusions on the facts after having made all proper allowances for memories to have dimmed, and bearing in mind the burden of proof on the plaintiffs.

[51] I have already recorded that it is not in contest that the breaches of trust occurred before the end of April 1988 and that both sets of proceedings were commenced more than six years after that in 1995 and 1996. Further, I find that because Mr Walker thought on reasonable grounds that the stock was not sold, but destroyed, it did not occur to him to claim that the Bank had received into Horticultural Contact’s account the proceeds of sale now claimed. He was only alerted to this by Mr Burns in 1995.

[52] In my view, the limitations position is set out in s 21 of the Limitation Act 1950:

“21. Limitation of actions in respect of trust property - (1) No period of limitation prescribed by this Act shall apply to an action by a beneficiary under a trust, being an action -

(a) In respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy; or

(b) To recover from the trustee trust property or the proceeds thereof in the possession of the trustee, or previously received by the trustee and converted to his use.

(2) Subject as aforesaid, an action by a beneficiary to recover trust property or in respect of any breach of trust, not being an action for which a period of limitation is prescribed by any other provision of this Act, shall not be brought after the expiration of 6 years from the date on which the right of action accrued:

Provided that the right of action shall not be deemed to have accrued to any beneficiary entitled to a future interest in the trust property until the interest fell into possession.

(3) No beneficiary as against whom there would be a good defence under this Act shall derive any greater or other benefit from a judgment or order obtained by any other beneficiary than he could have obtained if he had brought the action and this Act had been pleaded in defence.”

[53] This provision applies to constructive trusts: Arataki Properties Ltd v Craig [1986] 2NZLR 294 (CA) where Somers J said at p 300:

“The suggested restriction of s 21 of the Limitation Act to express trusts will not bear examination. The language of the Limitation Act is plainly to the contrary, for the words ‘trust’ and ‘trustee’ are defined in s 2(1) as having the same meanings as in the Trustee Act 1956 in which ‘trust’ extends to implied and constructive trusts and ‘trustee’ has a corresponding meaning.”

[54] In my view “fraud” and “fraudulently” are to be construed in the same way as “dishonesty” in Royal Brunei Airlines v Tan (above), and accordingly my finding is that the Bank had acted fraudulently, as I have already described. I have read the commentary on the equivalent English provision in Halsbury’s Laws of England 4th ed vol 28, paras 1037 and 1038, which relies on Armitage v Nurse [1997] 2AllER 705. This case draws a distinction between “actual fraud” and equitable or constructive fraud as applied by the Courts of Equity: see the judgment of Millett LJ (as he then was) at page 710 and the reference to Nocton v Lord Ashburton [1914] AC 932.

[55] Further, I have already held that by paying the $176,957.52 to TC or its creditors, the same was converted to the use of the Bank which has in effect retained the benefit of the payments since they were made. Accordingly, I consider s 21(l) means that there is no limitation period in this case. The limitation defence accordingly fails.

Clean hands

[56] The Bank claims that the -02 account was set up on Walkers Nurseries’ instruction and the Bank was told that the account would be run by Horticultural Contact’s and Walkers Nurseries’ accountant, that they took no steps to ensure that the proceeds went into the -02 account and so it is that failure rather than the failure to act that caused the losses. Further, Mr Walker made no enquiry of the Bank to ensure Horticultural Contact was complying with the arrangement. Accordingly the Bank says neither plaintiff did all it or he could to protect the funds. The reality is that Mr Barnes and probably Mr Sewell too told Mr Walker that the -02 account could not work because the money came in from sales of mixed stocks and that the 00 account was just as good. Whatever was said, it is plain the -02 account would not have availed the plaintiffs in the circumstances. In any event, I do not consider either plaintiff guilty of unconscionable conduct. Mr Walker thought all his stock had been ploughed under, so why should he have approached the Bank? This defence is accordingly rejected as well.

Compound interest

[57] The Bank must account to Walkers Nurseries for the $176,957.52 and the benefits it has received as a result of the payments to the creditors of TC, including the Bank. It must also make restitution to Walkers Nurseries but not so as to result in double payment. This may involve settling appropriate rates of interest and consideration of compounding it. The Court will need to know the full facts as to benefit and loss before deciding whether compounding is necessary or appropriate.

Exemplary damages

[58] The basis of liability is constructive fraud, which falls between negligence and actual dishonesty. In this case I do not consider actual dishonesty was established. The position of exemplary damages in civil cases has very recently been reviewed in Bottrill v A (C.A.75/00, unreported 13 June 2001). For the reasons there discussed, my preliminary view is that this is not an appropriate case for exemplary damages. However, I reserve this aspect of the claim so that counsel can have the opportunity to consider the Bottrill decision and make submissions based on it. I refer also to the commentary in [2001] NZLJ 233.

Damages and costs

[59] These are still at large, and it is in this context that the performance of the Bank on discovery must be addressed. The cases both stand adjourned accordingly.