Westpac New Zealand Limited v Colley
[2012] NZHC 1854
•30 July 2012
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2011-404-998 [2012] NZHC 1854
IN THE MATTER OF an application for summary judgment
BETWEEN WESTPAC NEW ZEALAND LIMITED Plaintiff
ANDKEVIN STEPHEN COLLEY First Defendant
ANDCAROLYN CYNTHIA COLLEY Second Defendant
Hearing: 2 July 2012
Appearances: Ms E Gellert for Plaintiff
Mr M Colthart for Defendants
Judgment: 30 July 2012
JUDGMENT OF ASSOCIATE JUDGE DOOGUE
This judgment was delivered by me on
30.07.12 at 4.30 pm, pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors:
Simpson Grierson, Private Bag 92518, Wellesley Street, Auckland - [email protected]
Mr Mark Colthart, Barrister, Auckland - [email protected]
WESTPAC NEW ZEALAND LIMITED V COLLEY & ANOR HC AK CIV-2011-404-998 [30 July 2012]
Background
[1] The plaintiff, Westpac New Zealand Limited (Westpac), seeks summary judgment against the first defendant (Mr Colley) and second defendant (Mrs Colley) (together, the Colleys) as guarantors of, among others, Next Electronic Servicing Limited (the Company) and the trustees of the Temple Trust (the Trust) (together, the Group), under an interlocking deed of guarantee, dated 31 January 2007 the Guarantee).
[2] The Company owes money to Westpac under a wholesale term loan, dated 18
July 2007 (the wholesale term loan), and an overdraft, dated on or about 26 January
2007 (the overdraft). The Trust owes money to Westpac under a Choices Home Loan Agreement, dated 31 January 2007 (the home loan agreement). Westpac has appointed receivers over the assets of the Company, and the Trust has sold the secured property at 163 St Andrews Road, Epsom, Auckland. However, a shortfall remains outstanding from the sale of the security.
[3] While initially, the defendants advanced a number of grounds of opposition to the application for summary judgment (including undue influence so far as Mrs Colley was concerned), only two were advanced when the application hearing proceeded. The first ground was that the Court should reopen any or all of the wholesale term loan, overdraft and home loan agreement (together the Facility Agreements) under s 120 of the Credit Contracts and Consumer Finance Act 2003 (the CCCFA) because Westpac exercised its rights or powers conferred under the Facility Agreements in an oppressive manner. As to this ground of opposition, the plaintiff says that Westpac did not exercise its powers oppressively. Westpac appointed receivers to the Company after persistent and on-going breaches of covenants, including breaches of payment obligations.
[4] The other ground of opposition was that the defendants wished to issue third- party notices against Buddle Findlay, and against an accounting firm, McGrath Nicol.
[5] Mr Colley was the CEO of the Company. From 23 October 1997 and 23
December 2004 Mrs Colley was a director of the Company. She was also a director of Salamis Holdings Limited (the sole shareholder of the Company) from 29 August
1997 until 23 December 2004.
[6] Mrs Colley is also a full-time accountant employed at BDO New Zealand. She was described in the evidence as a senior manager at that firm. However, Mr Colthart, for the defendants, explained to me that she was not a qualified accountant and that her position was essentially that of a bookkeeper. He was not contradicted by Ms Gellert, who appeared for the plaintiff, in that regard.
[7] The Colleys approached Westpac in early December 2006 seeking to refinance existing facilities for the Group (which were held then with BNZ), and to borrow further funds for the purchase of Mobilefone Repair Limited.
[8] On 31 January 2007 Facility Agreements and a Guarantee were executed.
[9] It appears that, from an early stage, there were difficulties in the bank- customer relationship.
[10] The Company breached financial covenants with Westpac in the quarters to
30 June 2007 and 30 September 2007. The Company was regularly in excess of its facilities. On or around 1 December 2007 and 16 April 2008, Westpac sent notices of breach of covenants to the Company.
[11] The Company appears to have been continually afflicted by problems with paying its bills. For example on 4 February 2010, Mrs Colley notified Mr Colley and Mr Hunter (the Company’s financial officer) by email that BDO was seeking payment of BDO’s invoices. She stated that she had explained the “Samsung situation” with the BDO credit controller and asked that “as soon as we get money in from Samsung can you please make BDO a priority to pay as has been agreed in the past”.
[12] At the Company’s request, Westpac granted the Company temporary facility increases on 12 March 2010.
[13] On 14 July 2010, the Company appointed BDO to conduct an investigation of the Company’s affairs and to provide a report. This report was provided by BDO on 6 September 2010 and showed, among other things, that:
a) The Company was under significant cashflow pressure and was struggling. It was highly geared and the pressures were only increasing.
b)The long expected Samsung contract had still not reached the point where an agreement had been formalised and there was continued uncertainty around this. Finalisation of this contract was essential if the Company was to have any chance of continuing to trade.
c) It was likely that finalisation of the Samsung contract was going to be further delayed. The status of this deal needed close monitoring because of the repeated breaking of promises, plans and expectations.
d)There was uncertainty around the amounts and dates of payment from the Company’s largest customer, Samsung, which posed serious cashflow and business continuity issues. Despite this, the Company reported to Westpac amounts not even invoiced to Samsung as accounts receivable.
e) The Company had $213,000 of arrears owing to the IRD. f) Much of the Company’s stock was obsolete.
g) The reported value of the Company’s stock was hard to ascertain. A stocktake and valuation of parts was impractical. Accordingly, the reported value of the Company’s stock was a figure produced by the Company’s management.
h)The Company capitalised internal labour and parts to fixed assets where new assets were developed or older ones significantly enhanced, rather than expensing them. This absorbed the cashflow from the Company’s operations.
i)It was likely that cash requirements for September 2010 would exceed the Company’s facility limits
[14] On or about 8 September 2010, following receipt and review of the BDO Report, Westpac transferred the Group’s file to its Credit Restructuring Group department (the CRG).
[15] On 28 October 2010, Mr Hunter contacted Westpac seeking confirmation that the bank would cover a list of payments that the Company was required to make. An internal Westpac email chain shows that a temporary excess was granted to allow time for the Samsung contract to be finalised and, in a worst case scenario, to preserve the value of the Company as a going concern.
[16] On 12 November 2010, Westpac representatives met with Mr Colley, Mr Hunter and Mr James McQueen of BDO at the Company’s Head Office. At that stage the Samsung contract had not been finalised. Cashflow forecasts provided by the Company’s management showed an immediate need for more funds. Westpac approved debits were falling due that week, as were owed to preferential creditors. A Westpac senior manager in the CRG, Mr Hale, noted that a cashflow forecast that had been provided showed that the company needed around $1.5 million in overdraft facilities compared with the original agreed limit of $800,000. The same note indicated that there were also significant budget variations, including a very serious variation in the Group’s income due to the state of the economy. The budget shortfall was put down to further delays in finalising the Samsung contract and also a dispute with Vodafone over a debt the Company claimed to be owed. In his file note, Mr Hale says he suggested selling the defendants’ house (which was secured to the bank) as a possibility. There was also reference to the need for a new investigative accountant’s report to be done as part of any further funding request.
[17] On 16 November 2010, Westpac required the Company to appoint another accountancy firm, McGrath Nicol, to conduct an independent investigation of the Company’s affairs and provide a report. In the meantime, Westpac carried out an internal review of the Company’s position. A report dated 2 December 2010 concluded that the Company was in breach of all of its covenants and had failed to meet them all for some time; that there were loan arrears; and that there were undefined excesses and frequent dishonours. It also stated that Westpac’s security position was weak.
[18] On or about 3 December 2010, Westpac sent a further notice of breach of covenants to the Company. Mr Hale deposed that the Company was in breach of the following indicators:
a) The Company’s covenanted minimum equity ratio was 40 per cent, while it had an actual ratio of 35.7 per cent;
b)The covenanted interest cover (measuring the Company’s ability to cover interest payments from income) was 0.99 whereas it should have been 2.75 or greater;
c) The Company’s leverage cover ratio, which should not have exceeded
2.5, was actually 6.96; and
d) The Company’s working capital ratio (a measure of its asset position
versus its indebtness) should have been at least 1.75. Instead, it was
1.6.
[19] That evidence has not been contradicted.
[20] On 3 December 2010, the bank sent notice to the Company that it was in breach of its covenants with the bank.
[21] The McGrath Nicol report, in draft form, was supplied to the bank on or around 14 December 2010. The following is a significant passage from that report.
Profit and loss
+ A summary of Next Group’s actual and budget results for the six months ended
30 September 2010 and actual results for FY09 and FY10 are as follows:
Next Group – Consolidated Profit and Loss
Actual Budget Actual vs Actual Actual FY10 vs
($ 000) 30-Sep-10 30-Sep-10 Budget FY10 FY09 FY09
Total sales 5,007 6,900 (1,894) 13,267 18,264 (4,997) Gross Profit 1,651 3,008 (1,356) 6,481 7,746 (1,265)
Gross profit
%
32.98% 43.59% 71.64% 48.85% 42.41% 6.44%
EBITDA (379) 950 (1,329) 1,362 1,756 (394)
Net Profit after tax
(846) 473 (1,319) 297 536 (239)
Source: unaudited management accounts
+The Group’s cash flow has been significantly impacted by the decline in profitability. As a result, creditors have been significantly deferred in order to fund short term working capital.
+ As at 24 November 2010, there was $514,000 of creditors three months or over in arrears.
While payment plans have been negotiated with the IRD and some landlords, the Group has failed to make payments due under the arrangements.
+ Numerous creditors have placed the Company on stop credit or issued formal or informal
payment demands.
+In order to be viable in the short and medium term, the Group needs to identify additional sources of revenue and where possible implement further cost savings.
[22] From the Westpac’s point of view, the McGrath Nicol report must have made for disturbing reading. It came at a time when Westpac had been asked, and had agreed, to provide a further extension of overdraft accommodation. It is not clear what the Company’s extended overdraft limit was at that point, but either $1.25 million or $1.5 million seems to have been the likely range. The report also confirmed that the budgeted after-tax profit figure was under-shot by a significant margin of $1.319 million. While this figure appeared in what was said to be a draft
report,1 the defendants do not dispute that figure in their evidence. Nor do they take
issue with the other pejorative information reported in the extract from the draft report above.
[23] To put it bluntly, the Company was insolvent at least by the date of the McGrath Nicol report. Even with the full deployment of the credit lines that it had from Westpac, the Company could not to pay its debts as they fell due. The report also considered the available client base from which the Company might derive
future earnings, and noted the increasing dependency upon the Samsung group and
1 No final copy of the report ever appears to have been issued
the vulnerability of the Companyin the event of the Samsung work being reduced or terminated.
[24] The straw that appears to have broken the camel’s back occurred on 14
Janaury 2011, when Mr Hunter advised Westpac that further payments processed on that day would lead the Company to exceed the extended overdraft facility provided for its principal account.
[25] On 18 January 2011, Westpac cancelled the Company’s overdraft facility and made demand on the Company for $1,549,038.52.
Oppressive conduct under CCCFA
Introduction
[26] I accept the submission of Mr Colthart that the Court has power to re-open a credit contract under s 120 of the CCCFA if:
(a) the contract is oppressive (s 120(a));
(b) a party has exercised or intends to exercise its rights or powers under the contract in an oppressive manner (s 120(b));
(c) a party has induced the other party to enter into the contract by oppressive means (s 120(c)).
[27] I interpolate that the submissions for the defendants were that s 120(b) is the one that is engaged in the circumstances of this case.
[28] Mr Colthart referred to s 124 of the CCCFA, which sets out certain “guidelines” for the re-opening of credit contracts that the Court must have regard to. They are extremely wide, and include:
(a) All of the circumstances relating to the making of the contract, or the exercise of any right or power conferred by the contract (s 124(a));
(b) Any payment required by the contract (s 124(b)(i)); and
(c) Any other matters that the Court thinks fit (s 124(c)).
[29] The powers of the Court on reopening an oppressive contract are set out in s 127, and include the general power to make “any orders” that the Court considers “are necessary to remedy the matters that caused the Court to reopen the contract”.
[30] Section 118 of the CCCFA states that oppressive means “oppressive, harsh, unjustly burdensome, unconscionable, or in breach of reasonable standards of commercial practice”.
[31] Ms Gellert submitted that Vautier J’s discussion of the meaning of “oppressive” in Italia Holdings (Properties) Ltd v Lonsdale Holdings (Auckland) Ltd is relevant,2 and makes it clear that the terms are disjunctive in nature:3
In each case… something more than an inquiry into whether a particular contract is advantageous or disadvantageous from the point of view of the party applying must clearly be intended. The word "oppressive" clearly connotes that some real detriment or hardship is involved. The word "harsh" indicates of something of the same nature. The phrase "unjustly burdensome" clearly shows, for example, that the fact that the performance of the contract is difficult for the party applying is insufficient. An injustice must be shown to exist as well… There are numerous decisions showing [unconscionable] was interpreted as requiring more than an inquiry in to whether a contract was fair or unfair to one party or the other. The final phrase, 'in contravention of reasonable standards of commercial practice' is admittedly a wide concept and embraces something that was included in the previous legislation. It surely in my view, however, requires something more than a simply uninformed conclusion as to what is fair or unfair from the standpoint of commercial dealings.
[32] Accordingly, something more than unfairness must be present for a right or power conferred in a contract to be considered to have been exercised in an oppressive manner.
[33] The onus of establishing oppression is on the party asserting it. The onus on a party to sufficiently particularise and substantiate allegations of oppression is highlighted in the decision of Cambridge Clothing Ltd v Simpson.4 In that case, Smellie J considered the last limb, “contravention of reasonable standards of
commercial practice”, and held that:5
2 Italia Holdings (Properties) Limited v Lonsdale Holdings (Auckland) Ltd [1984] 2 NZLR 1 (HC).
3 Ibid, at 15–16.
4 Cambridge Clothing Co Ltd v Simpson [1998] 2 NZLR 340 (HC).5 Ibid, at 348.
Except in the plainest of cases I would consider that some evidence as to what the standards of commercial practice are relative to the particular type of contract under consideration would be necessary before the Court could conclude that those standards were contravened in a particular case.
[34] Something more than unfairness is required,6 though unfairness may become so pronounced as to become oppressive.7
[35] The Court of Appeal has stated that the concept of “contravention of reasonable standards of commercial practice” is the “underlying idea” behind the definition, and thus has primacy.8
[36] Before concluding this section of my judgment, I note that no evidence was called as to what the reasonable standards of commercial practice were that Westpac ought to have observed in this case. There was therefore no scope to identify departures from such reasonable standards that might serve as a basis to support a conclusion that there had been oppressive conduct. Mr Colthart said that there had been no opportunity to do so. He made that submission on the basis that Mr Hale had raised matters in his affidavit in reply that brought the question of oppression into focus. However, Mr Colthart said, because it occurred in the context of an affidavit in reply, there was no opportunity available to the defendants to put forward evidence on the issue of oppression.
[37] I reject that submission. As will become apparent, the complaints fall into the following broad categories. The defendants submit that there was oppression in Westpac’s behaviour in:
a) Failing to disclose to the Company/Mr Colley the reservations that the Westpac management had about the company from the beginning of the banking relationship;
b) Requiring the Company to produce a financial report from BDO
when, for various reasons, BDO was not going to be acceptable to
6 Italia Holdings (Properties) Ltd v Lonsdale Holdings (Auckland) Ltd, above n 12; Taylor v Westpac
Banking Corp (1996) 5 NZBLC 104,104 (CA).
7 Didsbury v Zion Farms Ltd (1989) 1 NZ ConvC 190,229 (HC) at 109,238.
8 Greenbank New Zealand Ltd v Haas [2000] 3 NZLR 341 (CA) at [24].
Westpac, since its role as the habitual accountant as Mrs Colley’s
employer might make it seeming lacking in independence;
c) Transferring the Company’s affairs from the business banking team to the CRG. Various complaints were made about this transfer. The substance of this development was to move control of the file from the Company’s bank manager, to the Westpac’s credit enforcement department;
d) Failure to give the Company notice of the appointment of receivers;
and
e) Failing to keep Mrs Colley up-to-date on developments leading to changes in the banking accommodation given to the Company, and consequently triggering her guarantee.
[38] The defendants put forward the breach of the CCCFA as a ground of opposition in the notice of opposition dated 20 April 2012, in which they specifically alleged that Westpac’s conduct was arguably oppressive within the meaning of s 118. Mr Colley filed a substantial affidavit setting out the dealings with the bank. I accept that not all of the internal memoranda within the bank would have been made available to him before he gave this affidavit. But they were provided in the affidavit in reply, and Mr Colley filed a further affidavit after that affidavit in reply (which I permitted to be put in evidence, given that Westpac did not oppose it). From a procedural perspective, I do not accept that the defendants have been in any way disadvantaged when it came to obtaining evidence for the purposes of their defence.
[39] Before I go on to consider the various heads under which the defendants claim oppressive exercise of powers under the contract, I note the submission for Westpac that the claim of the oppressiveness in this case essentially boils down to the fact that the bank did not continue to agree to provide funding for the Company. With the exception of Mrs Colley’s case, I agree that is the real dispute in this case.
There are subsidiary considerations and arguments that may bear upon that issue, but in the end that is the nub of the defence.
[40] I consider first the various grounds of oppression relating to the Company, and then those which apply to Mrs Colley alone.
Failure to disclose
[41] The first heading under which oppressiveness is advanced concerns failure to disclose to the Company and Mr Colley the bank management’s reservations about the Company from the beginning of the banking relationship.
[42] I am unable to agree, in the absence of any authority to the contrary, that internal discussions between bank employees assessing the risk aspects of a customer must be disclosed to the customer during the term of the business relationship. While I am not asked to do so in the context of this case, I would regard it as being most unlikely that the Court would imply such a term in the contract. It may be the case that the way in which Westpac organised the flow of information between its various managers, and the methodology they used to assess issues such as the risk that a customer posed, can be linked to an assertion that the bank has exercised its powers in an oppressive manner. Yet for this to be so, the defendant would have to be able to demonstrate that it was at least arguable that conduct of this kind came within the definition of oppressiveness in s 118. I consider that the issue of whether or not the bank exercised its powers oppressively can only be considered in the light of the overall trading relationship between the parties.
[43] In its dealings with this customer, Westpac was not required to depart from prudent practices and procedures. Assessing risk and adequacy of security is very much at the heart of a bank’s business. Westpac employees have a primary obligation to safeguard the Westpac’s interests.
[44] At the same time, it would be unrealistic not to recognise that during times of financial stress, a company such as the Group here is particularly vulnerable to an abrupt termination of funding. Ms Gellert’s submission was that the defendants’ real
complaint is that the bank did not advance more money. I would observe that it is arguable that a bank may be under an obligation to take care to consider the proper interests of the customer in a situation where termination of funding is likely to lead to the closing of the customer’s business. I consider that in such circumstances, it could be argued Westpac must provide a reasonable opportunity in the circumstances to the customer to ensure that the bank is properly appraised of any aspect of the customer’s situation that might weigh against the decision to end the provision of funding. That is because termination of funding can, self-evidently, lead to the destruction of the customer’s wealth, commercial harm to the customer’s trading partners, the loss of jobs and other radical consequences including the loss of the proprietor’s home in cases where they have personally guaranteed the business’ indebtedness.
[45] There may, in particular situations, be one or more factors present showing that the bank has not met the required standard, and that its conduct is therefore oppressive. If, for example, the bank were to precipitately end funding in circumstances where a customer had no inkling that the funding was in jeopardy, and where, perhaps, a decision had been made that the particular class of lending was no longer desirable from the bank’s point of view because of declining profit margins, then a Court might be persuaded that there had been oppression. Such a conclusion would be assisted by material showing that the decision was taken at a time when the company was particularly vulnerable as a result of sudden liquidity pressures.
[46] This case is not in such a category. It is correct that the Company was vulnerable, but then it had been right from the commencement of the trading relationship between the parties. The Company had first been in breach of its covenants in 2007, which was the year when the trading relationship commenced. Over the period, during which Westpac was the Company’s bank its overdraft facilities had steadily increased from $0.5 million to a figure of $1.549 million (the amount owing at January 2011), two reports had been obtained from Chartered Accountants about the state of the Company’s finances in September 2010 and December of the same year. The figures included in the report from McGrath Nicol showed that the Company had missed its profit budget for year ended 2010 by a very large margin — approximately $1.3 million. Given the access provided to the
Company’s records, these figures must have come from the Company itself. They appear to be consistent with information that the bank had, at least by 12 November
2010. Those in charge of the Company knew that cheques were being dishonoured, and that an arrangement with the IRD (a preferred creditor) had been breached. The report from McGrath Nicol spelling out that the Company was unable to pay its debts was no more than an explicit statement of what all concerned must have already known.
[47] In all these circumstances, it is idle to submit (as the defendants do) that the way in which Westpac exercised its powers was oppressive. The decision to call in the overdraft was virtually inevitable given the circumstances known to the bank at the time. There is no room for the defendants to contend that Westpac had behaved harshly, oppressively, unjustly or in a way that was burdensome in failing to tell Mr Colley that it thought the Company was in serious trouble. The bank did not act oppressively in assembling information about the Company, and drawing conclusions from that information. Of course, there may have been some inaccuracies in that information. But Westpac’s overall judgment that this company, which had been sailing close to the wind for a long time, had now reached the point where it constituted a risk of substantial loss to the bank cannot seriously be disputed. In those circumstances, complaints about the bank’s processes in deciding to discontinue funding are of only peripheral concern, and any failures arising out of such do not seriously raise concerns about oppressive behaviour on the part of the bank.
[48] Exactly the same comment can be made about the complaint that the bank ought not to have directed the Company to obtain a report from BDO, and thereafter conclude that a further report from another accountancy practice (which in the circumstances could be viewed as more independent) ought to be obtained.
Transferring oversight of the Company to the CRG
[49] One of the other complaints arises out of Westpac transferring the management of the Company’s accounts from the business manager to the CRG. The CRG was more concerned with oversight of security available to the bank, and
other related matters. I do not know whether the Company is raising a prior issue, to the effect that the bank ought not to have transferred responsibility to the CRG at all. If that is what the defendants contend, I would reject it. A large organisation such as a bank inevitably organises itself into sections that have specialist responsibility for different aspects of the bank’s operations. I understand that the CRG became involved because of the level of risk that the Company represented. The fact that the Company was going through a deepening crisis at the end of 2010 would seem sufficient justification for the bank to change the emphasis in its dealings with the Company, from one focused on customer service, to one that was more focused on limiting damage to the bank in case the Company failed.
[50] The circumstances surrounding the transfer of the bank's account to the control of the CRG have been placed in issue. Mr Colley says that on 13 September
2010, he received a letter advising that the Company’s accounts were to be managed from that point forward by the CRG. He said he met Mr Adams, the business relationship manager for the Company at the time, at a cafe that same day. Mr Colley said in his affidavit that at that meeting:
[Mr Adams] reassured me that Westpac did not intend to appoint a receiver and that their motive was to provide [the Company] with the best advice available to help it to recover. The credit restructuring team had a higher level of expertise and they would be able to better understand the problems we were experiencing and help us.
[51] After the account was transferred to the CRG, Mr Colley says that he had trouble in communicating with the responsible managers. At that point, the Company was seeking further funding. On 25 October 2010, Mr Colley says that he sent an e-mail to Mr Swann (the person in the CRG with whom he was to deal), in which he pointed out that Westpac had three options:
...do nothing; this will result in the rapid erosion of value due to our inability to pay creditors and to recover from the current adverse trading conditions without adequate funding. Decline our request for funding; this will allow us to take the advice and/or pursue other options. The risk to the bank is that we are unable to secure alternative or supplementary funding and the bank's investment will have to be written off; the company's assets would not realise property value in a fire sale…. Support our application; this will allow the company to meet its obligations, plan for the future, and allow management to focus on the issues at hand and achieve a successful recovery, which is in all shareholders’ interests...
[52] On 28 October 2010, the bank granted a temporary excess on the Company’s facilities to allow time for the Samsung contract to be finalised and to preserve the value of the Company as a going concern. These at least were the objectives as Mr Hale from the bank viewed them. As I have previously noted, on 12 November
2010, following a meeting between Mr Colley and Mr Hale, Westpac approved an increase in the overdraft to $1.5 million.
[53] I consider that the following inferences can be drawn from the evidence so far as the complaints about the circumstances of the transfer to the CRG are concerned.
[54] First, Mr Colley was not misled by the reassurance that Mr Swann gave at the meeting at the cafe in September. Even just from his e-mail of 25 October 2010, it is plain that Mr Colley knew that the options open to the bank included declining to provide extended funding, in which case the Company would have to take advice and explore other options. The same e-mail shows that he understood that the situation could develop in such a way as to lead to the Company being closed down. Secondly, the fact that following the referral to the CRG, Westpac agreed to an excess on the overdraft limit was agreed to by the bank on the 28 October 2010 (with an extension to 14 January 2011 approved on 20 December 2010), means that there is no basis for Mr Colley’s apparent complaint that he was misled by Mr Swann into believing that it would be a matter of business as usual, and that the Company was not in any danger of having its facilities withdrawn. There is no doubt that a firmer approach — one more oriented towards the interests of the bank — was signalled from the point where the account was transferred to the CRG and that Mr Swann may have had difficulty confronting the truth of the situation when dealing with Mr Colley personally. Yet this falls a long way short of amounting to oppressive dealing on the part of the bank.
[55] The defendants further claim that Westpac failed to respond to requests for further funding and declined to meet with Mr Colley after the account was transferred to the CRG. The brief chronology that I have just set out shows that this is not the case. Westpac had set overdraft limits, which the Company from time to time had asked it to extend. The bank had made it clear on 20 December 2010 that
the overdraft would be set at $1.486 million until 14 January 2011. The Company must have known, though, that the extensions of the overdraft in terms of the amount and period were for finite terms, and that just as Westpac could agree to extensions, it could also decline such extensions. If those responsible for the Company assumed that the bank was obliged to keep meeting with them so that the Company could keep obtaining further extensions of the overdraft, then that assumption would be incorrect. Not only was there no entitlement to such an outcome, indeed given the parlous state of the Company’s affairs at the end of 2010, it must have been obvious to Mr Colley that the bank in its discretion was unlikely to take on more exposure to the Company. I therefore agree with Ms Gellert’s submission that the real complaint the Company and the defendants make is that the bank did not keep extending the overdraft. Even if it had agreed to further meetings (if and when these meetings were requested is not obvious from the evidence) common sense suggests that they would not have ended in further funding being made available. The complaint against Westpac is that it declined to further extend the overdraft, and that is the real basis of any suggestion of oppressive conduct. I do not agree that there is any basis for an arguable case in this instance either.
Obtaining the second report
[56] It was suggested for the defendants that the fact that they were required to obtain and pay for an accountant’s report on the financial state of their company amounted to oppressive conduct. The defendants say that Westpac generally used its powers in an oppressive way by demanding that the defendants commission such reports. It is a further element of the claim that after obtaining the report from BDO, Westpac came to the view that BDO were insufficiently independent and required a second report to be obtained.
[57] While there has been incomplete argument on the issue, there seems to me to be some considerations that are clear. First, it was understandable that the bank would in the first instance seek a report from the accountants who were the normal accountants for the Company, rather than commissioning a report from an unrelated firm. It could be expected that the latter course would involve greater expense
arising from the need for the second firm to familiarise itself with the affairs of the
Company starting from a point where it knew nothing about that matter.
[58] Secondly, without the assistance of any evidence on the subject, I would have thought that whether or not the established accountants for the firm were capable of producing a sufficient report very much depended upon what information was being sought. If it was, for example, a matter of updating the financial statements of the company, then it could be assumed that the accountants would observe the required accounting standards, and there would be no difficulty about BDO providing accurate information. If the terms on which the report was sought is unclear, it would call for BDO to exercise judgement about matters such as whether the company had a long term future, or whether its financial burdens were too great, and its sources of income too few, to mean that it was likely to survive. It might be questionable whether a report commissioned by the Company itself was going to be candid and balanced. To a large extent, that question lay in the hands of the directors. After all, it was the Company that was required to instruct the accountants to produce the report.
[59] In overview, I consider it was not unforseeable that the report might not be sufficiently informative and open to meet Westpac’s purposes, and that the bank should have understood that at the time when it called for the report. However, there are other gaps in the information that the Court has about this matter. These include whether the obtaining of the second report from McGrath Nicol was due to the inadequacy of the first report, or whether it was because they wanted a second opinion before providing additional security or making a decision about the direction that the bank’s relationship with the company should take.
[60] Essentially, the Company is saying that Westpac did not think matters through carefully when it sought a report from BDO, and that its want of care amounted to oppressive conduct. I agree that it is a possibility that the position was not properly thought through, but it is no more than that. In any case, the plaintiff has undertaken to accept a condition being attached to the judgment to the effect that the amount of the fee charged by BDO should be deducted from the amount for
which it obtains judgement. I do not consider that an arguable defence is made out under this head.
[61] The next particular of oppressive conduct in relation to the second report was that the report fromMcGrath Nicol contained errors. That report was obtained by the Company at the instigation of the bank. The Company was required to pay for it. I agree with Ms Gellert that there is no basis upon which the bank can be said to be responsible for raising and requiring correction of matters stated in the report which Mr Colley says were factually wrong.
[62] There is also an assertion of oppressive conduct because the bank did not provide a final copy of the McGrath Nicol report to the Company. I do not consider that the evidence establishes that it is even arguable that anything other than the draft report was ever issued. This ground for arguing oppressiveness cannot succeed either.
Non-notification of the appointment of recievers
[63] Finally, the Company says that Westpac behaved oppressively by not giving notice of its decision to appoint receivers. In his oral submissions to me, Mr Colthart told me that the real complaint was that there was no discussion between Westpac and the Company between the issuing of the draft McGrath Nicol report on 14
December 2010, and the date when Westpac made demand on the Company under the overdraft facility on 18 January 2011. Mr Colthart suggested that even at this stage the situation was still promising, and Mr Colley was confident that the Company could trade through its difficulties. Both of those assertions seem to me to be unrealistic. More to the point, the question is whether Westpac did anything that could be characterised as oppressive by calling in the overdraft which inevitably lead to the appointment of the receivers on 18 January 2011.
[64] Westpac had made it clear that any extension of overdraft was to be until
14 January 2011. Mr Colley had no basis for believing that, while the bank supported this interim option, it was actually committing itself to some other different arrangement. As I have already outlined, while Mr Colley did not
recognise the possibility in those terms, a possible receivership was plainly one of the matters Mr Colley had in mind when he sent his e-mail to the bank on 25
October 2010. As such, he could not have been surprised, in the sense that he never envisaged in any circumstances, that the receivership would occur. Furthermore, given that nearly three months elapsed between the date of his e-mail in October
2010 and the appointment of the receivers, it is difficult to draw the conclusion that Westpac behaved in an unjustifiably precipitate way by appointing a receiver when it did.
[65] Westpac was not required to give notice ahead of appointing the receiver because of the contractual term to that effect in the facilities agreements. Nor had the bank encouraged any expectation on the Company’s part that it would be specifically forewarned. Finally, there was no prejudice occasioned to the Company by the fact that it was not forewarned. There is no arguable claim of oppression to be found in these circumstances either.
Conclusion — oppressiveness in respect of the Company
[66] There is no basis for the allegation that Westpac exercised the powers it obtained in respect of the Company in an oppressive way.
Oppressiveness in respect of Mrs Colley
[67] Mrs Colley alleges that there was oppressiveness on the part of Westpac when it dealt with her in her capacity as guarantor of the Company’s obligations. It is claimed that the bank failed to keep her appraised of any developments or changes in the banking facility provided by the plaintiff to the Company. In support of his submissions, Mr Colthart referred me to the judgment in Westpac Banking
Corporation v Kalbfleisch.9
[68] In that case, Mrs Kalbfleisch and her sister Mrs Pullin each borrowed the sum of $5,000 from the bank in September 1986, intending to use the funds to establish a store. They commenced business, but after a year the partnership was dissolved. In
the terms of the agreement dissolving the partnership, Mrs Kalbfleisch accepted
9 Westpac Banking Corporation v Kalbfleisch HC Whangarei CP13/93, 23 December 1993.
responsibility for all debts. Both sisters gave evidence that the bank was aware of the dissolution in March 1987. Mrs Kalbfleisch gave a mortgage to the bank over her house securing her obligation to meet the debts of the dissolved partnership. But she also went and borrowed other funds from the bank secured over the house. The bank took the view that Mrs Pullin had guaranteed these as well. Mrs Pullin did not know about the further advances and there was no attempt made to advise her. Eventually, the bank made demand on her for $82,213.26, including interest. Mrs Pullin, by way of defence to proceedings brought by the bank, sought a re-opening of the transaction on the grounds of oppressiveness pursuant to the Credit Contracts Act 1981 (the predecessor of the CCCFA). Counsel for Mrs Pullin pointed out the bank had not let her know that there had been a ten-fold increase in her liability.
Master Gambrill said:10
Whilst I can accept that it is commercially acceptable for Mrs Kalbfleisch to increase her liability at least ten, and probably twenty times the original borrowing, I cannot accept that the guarantors’ liability in the particular and known circumstances of the original borrowing should be so increased without their knowledge.
[69] The Master also considered that it was relevant that the bank had been told about the termination of the partnership, which was the original reason for the lending and the guarantee in support of it.
[70] Mr Colthart also referred me to the authority of Didsbury v Zion Farms Ltd.11
In that case, Wallace J commented that simple unfairness on its own may not be sufficient to establish that a credit contract is oppressive.12 The Judge also accepted that in many circumstances, the question whether a term of a contract was oppressive may turn on such matters as inequality of bargaining power and the extent of disclosure. I interpolate that in this case, oppressive terms of the contract are not relied upon. Wallace J also said that where an allegation is raised that a power on a contract is being exercised in an oppressive manner:13
... a great deal must also turn on all the circumstances ... . Moreover, the degree or extent of the unfairness is relevant. Plainly, for example, unfairness in the exercise of a power readily shades into harshness.
10 Ibid, at 42.
11 Didsbury v Zion Farms Limited , above n 7, at 109,251.
12 Ibid, at 109, 238.13 Ibid.
[71] Further on he said:14
In essence in this case the exercise of the power to claim penalty interest produces a result so unfair (and also so out of proportion to the default by the Plaintiff) that it can be contended that the power has been exercised in an oppressive manner.
[72] Ms Gellert, for the plaintiff, drew my attention to the provisions of the guarantee document. This was a “plain language” document, which clearly provided in cl 11 that the parties did not have to get the consent of the guarantor to new arrangements including, presumably, the increase in the maximum liability to which the guarantor was to be exposed. Included in cl 11 was the following:
This document applies to any new and replacement arrangements and to any arrangements as changed. It does not matter that the GUARANTEED MONEY may increase because of the new and replacement arrangements, or changes.
[73] Clause 12 of the guarantee provided that certain documents had to be given to the guarantor. These included, inter alia:
When the Customer and the Secured Parties enter into a new consumer credit contract to which this document applies;
[74] The document then continued:
Apart from the above, the Secured Parties do not have to do anything in relation to you, or tell you anything concerning the Customer’s affairs; finances; or transactions with the secured parties. It is your responsibility to find these things out from the Customer.
[75] It was Ms Gellert’s submission that while the bank may not have given notice to Mrs Colley of the increase in the size of the amount secured by the guarantee, it was not required to do so. Therefore, its conduct in permitting the increases in the overdraft facility from $800,000 to a little over $1.5 million was not something that needed to be disclosed to Mrs Colley; its subsequent exercise of the guarantee could not be considered oppressive.
[76] Ms Gellert also referred to the judgment of Stevens J in Krtolica v Westpac
Banking Corporation.15 The Judge in that case was dealing with a guaranteee made
14 Ibid, at 109,238–109,239.
under the same standard contract as Westpac used in this instance. Stevens J referred to the same clauses of the guarantee as I have just mentioned, namely cls 11 and 12. The situation that he was considering in that case was very similar to this one. In that case there was a submission made that there was an obligation to give continuing disclosure where there had been increases in the amounts secured. The
Judge said:16
However, in the present case the possibility of alterations to the wholesale term loan facility was contemplated by the parties. This was expressly provided for in clause 11 of the guarantee...
[77] The Judge went on to consider an argument that the bank in that case had behaved in an oppressive and unconscionable manner. The particulars of the case were somewhat different, given the allegation of the bank actually perpetuating the ongoing insolvency. His Honour referred to the case of Didsbury, which he summarises in the following terms:
[146] Whether a credit contract is oppressive depends on several matters, as noted in Didsbury v Zion Farms Ltd (1989) 1 NZ ConvC 190,229 at 190,237 (HC):
- The relative status of the parties
- The nature and extent of the definition
- The way in which the default arose
- The implications for the borrower
- The attitude of the lender
- The existence of a collateral purpose
- The general appearance of the contract throughout.
[78] The Judges conclusion was as follows: 17
In the light of the above factors, I conclude that there was nothing inherently harsh or oppressive about Westpac’s conduct. This was a standard bank guarantee in understandable and clear terms. With regard to the terms and conditions themselves, there was nothing inherently harsh or oppressive about them. Finally, I find that there was nothing regarding Westpac’s management of Seamart’s account (as the customer) which was in any way
15 Krtolica v Westpac Banking Corporation [2008] NZCCLR 24 (HC).
16 Ibid, at [141].
17 Ibid, at [150].
in contravention of the test of reasonable standards of commercial practice referred to by Tipping J in Greenbank New Zealand Ltd.
[79] In her affidavit, Mrs Colley says:
7.2I was shocked to find that the overdraft facility established with the new loan in 2009 had increased to over $1,500,000 I was not aware of this until recently. I have now questioned [Mr Colley] about this and established that new facilities were arranged during 2010. At no time was I informed by Westpac of these changes.
7.3What is even more concerning is that when [Mr Hale] notified [Mr Hunter] that Westpac was withdrawing its funding again I was never notified or contacted to let me know what they had done.
7.4In fact, at no stage has Westpac ever informed me of any changes to the facilities. I feel I was kept in the dark regarding any matters relating to lending by Westpac right throughout.
[80] The question is whether it is arguable on these grounds that Westpac is proposing to exercise powers that are contained in its guarantee documents in an oppressive way.
[81] As the authorities make it clear the question of whether there is oppressiveness depends on the circumstances. The attitude that the Court might take to someone like the guarantor in Kalbfleisch may depend on the circumstances of the case and they were different from the present ones. The customers of the bank, and the guarantors in that case were persons of very modest financial circumstance, and their account of matters was suggestive of naiveté in commercial matters.
[82] On the other hand, Mrs Colley is not without business acumen. She has been a shareholder in the Company’s businesses. She communicated with Westpac on a number of occasions about the state of the Company’s account. She is described as a senior manager employed by BDO. Mr Colthart, with some diffidence, described her as a “bookkeeper”. She is not a qualified accountant. On the other hand, she earns a salary of over $150,000 per annum, which would indicate that she occupies a position of responsibility and is skilled in her area of work. The accounts that she agreed to guarantee were those of a family business. She does not comment on her state of knowledge of the business in 2010 leading up to the receivership. Common sense would suggest that she would have known in broad outlines that the
Company’s financial position had deteriorated. She does not say whether she read
the report BDO had prepared in relation to the Company’s financial position.
[83] My assessment can be stated briefly. Mrs Colley had been a director of the Company but was no longer a director when the sequence of increasing overdraft levels began in July 2010. She has not signed any documentation related to the increased overdraft level. There is no evidence that she was copied into emails which circulated between Mr Colley as director of the Company and Westpac. Such involvement might have shown that she understood that the overdraft was increasing. On the other hand she was married to the director of the Company, and it would be surprising if Mr Colley did not tell her about the overall deterioration of the Company’s finances. Had she been told about that, with her accounting background, it could not have escaped her understanding that increasing debt had to be financed from somewhere and that was likely to be from the bank. As well, as I have noted, she remained a senior employee at the accountancy firm responsible for providing financial advice to and financial statements for the Company.
[84] Ms Gellert invited me in general, when dealing with the bank’s application, to adopt a “robust” approach. Such an approach is certainly mandated by the authorities.18 On the other hand, adopting a “robust” approach cannot be taken to the point where the Court is not conforming to the rules and the principles that govern the entry of summary judgment. The question to be determined in this part of the judgment is whether it is arguable that the bank has behaved oppressively to
Mrs Colley as guarantor of the Company’s liability, having regard to the overall circumstances of the case. In assessing that issue, it cannot be overlooked that the increased amount Mrs Colley was required to guarantee was almost double to what it was when she signed the guarantee. Also, the overall increase in the quantum under guarantee (approximately $700,000) is a relevant factor.
[85] While the evidence leaves me with a level of scepticism about Mrs Colley’s
claim that she was shocked to find what level the overdraft had ultimately reached, I
cannot say on the evidence that this statement is wrong. Of course, if the bank had
18 Krukziener v Hanover Finance Ltd [2010] NZCA 307; (2008) 19 PRNZ 162 at [26]–[27].
been able to establish that Mrs Colley had been kept informed of the incremental increases to the overdraft during the period July 2010 to January 2011, and had not communicated with the bank she would have a much diminished case for claiming the existence of oppression. No doubt another issue that will need to be considered if the oppression argument ever goes to a defended hearing, is just what would have happened if she had attempted to limit her liability under the guarantee at, for example, the point where it had reached $1 million. Had Mrs Colley made such an overture, would that have brought forward the crisis that lead to the bank appointing receivers? However, those questions are for another day. I decline to enter summary judgment against Mrs Colley.
Issue of third party notices
[86] There is one remaining issue that needs to be considered in regard to Mr Colley. He and his wife have sought to bring third party proceedings against Buddle Findlay, a firm of solicitors, and against the accountancy firm BDO as I have earlier indicated. Westpac, while not opposing the issue of such third party notices, vigorously opposes any suggestion that entry of summary judgment ought to be deferred until questions of liability for the debt owed to Westpac have been resolved between the Colleys and the two third parties.
[87] Counsel for the plaintiff contended that the possible existence of rights to join a third party is not a defence to a summary judgment application. I would agree with that submission. But Mr Colthart submitted that the Court in appropriate cases may defer the entry of judgment to permit third party claims to take their course by declining to enter summary judgment. 19
[88] But for the argument concerning the third parties, the way is clear for the plaintiff to obtain judgment for the debt which Mr Colley owes it. The reasons why he says that the debt he owes ought not to be paid is because he wants to pass on liability to the solicitors, who initially advised him and his wife about giving the
securities that the bank required; and to his accountants, presumably because they
19 Sudfeldt v UDC Finance (1987) 1 PRNZ 205 (CA) at 209.
gave them wrong advice. Westpac did not bring about or contribute to the circumstances which are said to give rise to liability on the part of the third parties.
[89] This is a feature commonly present when a summary judgment is sought, and where the courts have often declined to withhold judgment so that third party procedures can be undertaken. I am unable to see any reason why in the circumstances of this case the Court should exercise the discretion to decline summary judgment.
[90] Mr Colthart also applied to have any judgment against the defendants stayed. I understand that the circumstances relied upon are the same as those which Mr Colthart invoked as part of the application to have the Court exercise its discretion against the entry of summary judgment. In other words, a stay is sought while the defendant brings his third party application. I am unable to agree that there are any grounds for granting a stay. There are no considerations of fairness that would justify the Court to delay the plaintiff from obtaining the fruits of its judgment while Mr Colley seeks to pursue matters against the third parties. The application for a stay is dismissed.
Result
[91] I therefore enter judgment against Mr Colley in the sums of $4,588,142.64 and $57,438.07, being the amounts which he owed to the bank as at 4 July 2012.
[92] I will however grant the unopposed application the defendants filed to join the third parties mentioned above.
Costs
[93] The plaintiff seeks costs on a 2B basis and disbursements. The parties should confer on this matter and if they are unable to agree at file memoranda not exceeding five pages on each side within 14 days of the date of this judgment.
Directions
[94] So far as the claim against Mrs Colley is concerned, I give the following timetable directions:
a) Statement of defence to be filed and served within 28 days of the date of this judgment; and
b)Parties to confer on the question of the form of discovery that is to be provided (whether tailored or standard) within 14 days after the date in (a).
[95] The registrar is to allocate a standard case management conference before me at the first available date in September. The agenda for that conference will include:
a) making a discovery order;
b) timetabling interlocutories;
c) discussion of mode of evidence at trial (including exploration of whether the affidavits filed in the summary judgment proceeding should be the base evidence subject to supplementation by any additional affidavit material);
d)pre-trial program generally including, assuming that affidavit evidence is to be used, time limits for requiring deponents to be available for cross-examination;
e) assessment of trial duration; and
f) allocation of trial date.
J.P. Doogue
Associate Judge
4