Westpac New Zealand Limited v Yarrow

[2017] NZHC 2261

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2015-404-1537 [2017] NZHC 2261

BETWEEN

WESTPAC NEW ZEALAND LIMITED

Substituted Creditor

AND

PAUL STEVEN YARROW Judgment Debtor

Hearing:	15 -16 June 2017
Appearances:	Mr R B Stewart QC and Ms E C Gellert for Substituted Creditor Mr D G Collecutt for Judgment Debtor
Judgment:	19 September 2017

JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE

This judgment was delivered by me on

19.09.17 at 11.00 am, pursuant to

Rule 11.5  of the High Court Rules.

Registrar/Deputy Registrar

Date……………

WESTPAC NEW ZEALAND LIMITED v YARROW [2017] NZHC 2261 [19 September 2017]

Introduction

[1]      The creditor in this case, Westpac New Zealand Limited (“the creditor” or “Westpac”), seeks an order adjudicating the debtor, Mr Paul Yarrow (“the debtor” or “Mr Yarrow”), bankrupt.

The background circumstances

[2]      The substantial background to this case is stated in the submissions filed on behalf of the creditor as follows. Mr Yarrow is a director of Yarrows (the Bakers) Limited (“YTBL”).  YTBL was part of an Australasian group of companies which manufactured and distributed frozen dough and baked goods, known as the Yarrow Group.   The creditor provided funding to the Yarrow Group.   The total facilities provided were in excess of $50,000,000.  The most significant facility was the Multi- Option Credit Facility (“MOCF”), which comprised drawings of NZD$29,000,000 and AUD8,000,000.

[3]      The  MOCF  was  amended  and  re-stated  on  28 March  2008.    Mr Yarrow executed the MOCF (with others) on behalf of YTBL, Southern Cross Investments Limited, Connett Properties Limited, Volumex Properties Limited, Dee Jay Distributions Limited, and the PS Yarrow Family Trust No 2.  The Yarrow Group had legal advice; Dennis King Law acted for the Yarrow Group, including in relation to the MOCF, and Buddle Findlay acted on other matters.

[4]      The Yarrow Group was facing increasing financial stress in 2008.  Prior to December 2008, YTBL instructed Deloitte to carry out an investigation into the Yarrow Group's  financial affairs.   Subsequently,  the  Yarrow Group was moved within  Westpac  to  be  managed  by  its  Credit  Restructuring  Group  (“CRG”)  on

31 December 2008.1

[5]      On 28 January 2009, Mr Yarrow provided a guarantee to Westpac of the obligations of YTBL, limited to $5,000,000 plus an amount equal to 12 months'

1      CRG is responsible for managing Westpac's stressed assets, assessing the appropriate recovery process, and working with its customers to rehabilitate their financial circumstances where possible.

interest, together with accrued  interest and  costs as set out  in the terms of the guarantee.  The guarantee included the following provisions:

Limitation:

There is a limit on the amount to be paid to the Secured Parties under this document.  It is $5,000,000.00 for the Secured Parties together (or any other amount agreed in writing) plus the amounts referred to in clause 8.

3   Payment

[Mr Yarrow] must pay the Guaranteed Money whenever the Secured Parties make  a  written  demand  on  [him].   The  Secured  Parties  may  make  any number of demands, each of which may be for payment of all or part of the Guaranteed Money at the time the demand is made.

4   Costs and expenses

[Mr Yarrow] must pay to the Secured Parties all costs and liabilities which

the Secured Parties incur in relation to [enforcement and other matters] …

5   Interest

[Mr Yarrow] must pay to the Secured Parties interest on all amounts which the  Secured  Parties  demand  that  [he]  must  pay  under  [the  guarantee] including interest.  [Mr Yarrow] must pay that interest after as well as before any judgment of a court.

8   Is there a limit on liability

Although this document relates to all of the Guaranteed Money, if page one of [the guarantee] sets out a limit, you will not have to pay more in respect of the Guaranteed Money than the amount of that limit plus an amount equal to

12 months' interest on that amount.

However, in addition to that amount, the Secured Parties may require [Mr

Yarrow] to pay:

·interest under clause 5 on any amount [he owes] the Secured Parties under this document [he does not] pay on demand; and

·expenses, fees and any government duties, taxes and charges and other amounts under clauses 4 and 6.

If there is no limit mentioned on page one of [the guarantee], there is no limit on the amount the Secured Parties can recover from [Mr Yarrow] [in terms of the guarantee].

[6]      On 26 May 2011, the Chairman of YTBL advised Westpac that the company was  unlikely  to  be  able  to  repay  or  refinance  banking  facilities  with  Westpac

expiring on 31 May 2011, and that it was unable to meet statutory demands issued on the company under s 289 of the Companies Act 1993.  In those circumstances, the directors requested that Westpac appoint receivers.

[7]      On  27 May  2011,  Westpac  made  demand  on  YTBL  for  the  sums  of NZ$38,846,602.01 and AUD8,135,399.44, being amounts outstanding under the MOCF, YTBL's overdraft, and a wholesale term loan.  On 30 May 2011, Westpac appointed Brian Mayo-Smith and Andrew Bethell as receivers to YTBL, Yarrows Traditional Foods 1923 Limited (in receivership) and Southern Cross Investments Limited (in receivership).

[8]      Between the date of appointment and 27 January 2017, the receivers have returned funds to Westpac as the first ranking secured creditor.  However, in excess of $15,000,000 remains outstanding.

[9]      On 18 August 2016, Westpac again made demand on Mr Yarrow pursuant to his obligations arising under the guarantee.   That demand was for the amount of

$5,000,000, together with interest accrued on that sum since the initial demand on

18 May 2011, calculated as follows:

Sum demanded 18 May 2011

$5,000,000.00

Interest  on  $5,000,000  at 20.95%  p.a.  from 25  May

2011 to 18 August 2016 (compounding monthly)

$9,850,285.71

Total

$14,850,285.71

[10]     Mr Yarrow accepts that he has not paid that demand in full or part.

[11]     Bankruptcy proceedings were subsequently issued against Mr Yarrow.   On

25 August 2016, an order was made substituting Westpac as creditor in the bankruptcy proceedings.   The judgment creditor claims that the judgment debtor, Mr Yarrow, is indebted to it in the sum of $14,850,285.71.

[12]     Section 36 of the Insolvency Act 2006 (“the Act”) allows the court, at its discretion, to adjudicate a debtor bankrupt if the creditor has satisfied the requirements set out in s 13 of the Act.

[13]     In  this  case,  there  was  no  dispute  that  the  creditor  had  the  right  as  a substituted judgment creditor to rely upon any act of bankruptcy that the original applicant judgment creditor had available to it.  In its application for an adjudication order, the creditor expressly relied upon the failure of the debtor to comply with a bankruptcy notice that had been served on him by the Bank of New Zealand.  It was not denied that there had been such non-compliance.

The nature of the dispute

[14]     It has been difficult in the context of this case to isolate the matters which have been raised as defences by the debtor.   No acceptable notice of intention to oppose, containing a comprehensive statement of the defences which is compliant with the High Court Rules, has actually been filed.   It is likely that this problem ultimately resulted from resource constraints under which counsel for the defendant was operating.  The position is, however, unsatisfactory.

[15]     What follows in this judgment is a discussion of the points of difference between the parties gathered from the evidence and the submissions which have been filed.

[16]     Essentially though, the debtor does not deny liability under the guarantee but he claims to be able to set-off various claims which he has against the creditor.

[17]     The dispute is thus about:

a)       Whether the debtor is able to put forward an equitable set-off defence, namely that the creditor owed YTBL and the debtor fiduciary obligations and whether it breached such obligations.  The objective is to demonstrate that it can be argued that, after taking account of the claims and setting them off against the creditor’s claim, there are grounds to argue that there is no debt owed in the first place.  Westpac will therefore not be a creditor; and

b)        The discretion as to whether a bankruptcy order should be made.

[18]      If an equitable defence of set-off can be established, there will be no need for the court to consider the discretion under s 36 of the Act to make a bankruptcy order.

[19]     Before considering these two aspects, it is necessary to firstly set out some additional background.

Circumstances in which indebtedness arose

[20]     The basis upon which the judgment creditor says that the judgment debtor became indebted to it was as follows.   The creditor had been the banker to the Yarrow Group and the individual corporate components of that group, including YTBL, for some 25 years when the key events which give rise to the present claim occurred in 2011.   By that stage, the Yarrow Group had commenced business operations in Australia.   They had also accumulated very substantial debt – some

$50,000,000 in extent.   The creditor obviously had concerns because the Yarrow Group’s debt had been managed by the creditors’ “restructuring group” for a period of two and a half years at that point.

[21]      The debtor was a director of YTBL.  The shares in YTBL were held by a trust that was settled by the debtor.   His trust had the power to appoint all of the other directors.   The judgment creditor has described him as an experienced businessman and his counsel did not submit otherwise.

[22]     The creditor requested the debtor to provide a guarantee of the indebtedness of YTBL and he did so on 28 January 2009.  It is undisputed that the debtor gave such a guarantee of the obligations of YTBL.  I am satisfied that he did provide such a guarantee and that he had independent legal advice before executing it.  Ms Sarah Roberts, who is an Auckland barrister, gave evidence that she had witnessed the signature of the debtor to the guarantee and that she had, as she certified on the execution copies, explained the general nature and effect of the guarantee and obtained a statement from him that he understood the general nature and effect of the guarantee and the risks and obligations involved.   The debtor has not put forward any evidence contradicting that aspect of the creditor’s case.

[23]     YTBL is now in receivership and liquidation.  Receivers were appointed on

30 May 2011.   It is the debtor’s indebtedness arising under the guarantee which

gives rise to the application for an order adjudicating him bankrupt.

The meeting on 29 April 2011

[24]      By 2011, the directors were continuing to progress a potential purchase of the Australian portion of the business by Sumitomo, a Japanese company.  This has been termed ‘the Sumitomo transaction’, as it was an offer to acquire 50 per cent of the Australian portion of the business for $22,000,000.   A meeting was held on

29 April 2011 regarding the Sumitomo offer.  The attendees were (as described by

Mr Yarrow):

Mr Brian Mayo-Smith (BDO Spicers); Mr Nick Hale (Westpac);

Mr Colin Pettigrew (CEO of YTBL and investor in Minto property landlord); Mr Warren  Duncan  (Director  –  Chairman Yarrows Australia  (YTBA and TOCG) and investor in Minto property landlord);

Mr Michael Finnigan (Trustee for Noel and Melva Yarrow Charitable Trust "NMYCT", Director Yarrow the Bakers (Aust) Pty Limited (YTBA) and the Original Croissant Gourmet Pty Limited (TOCG), Yarrows, investor in Minto property landlord and personal financial advisor to Mr Yarrow);

Mr Trevor Perry (Director Yarrows and investor in Minto property landlord); Mr Kevin  Gillespie  (Chairman  Yarrows  and  investor  in  Minto  property landlord); and

Mr Laurie Mayne (Mr Yarrow's lawyer).

[25]     The debtor took part in some of that meeting but then left it partway through. Even  though  he  took  no  further  part  in  the  meeting,  he  did  not  terminate  his telephone connection and he listened to the remainder of the discussions that took place.  He also arranged for an audio recording to be made of the deliberations of the other parties who remained in the meeting.   These of course included the other directors, Mr Mayo-Smith from BDO Spicers and Mr Hale from the creditor company.

[26]     The evidence of Mr Hale is that he attended the meeting on behalf of the creditor because Westpac, he said in evidence, had several key issues to consider:

a)        Westpac was  reluctant  to  appoint  receivers to  the  Yarrow Group, because it was concerned that any potential sale of the business would

be "tainted" (i.e. would be for a reduced price because the sale was by receivers), and so Westpac needed clarity as to whether the directors intended to progress the Sumitomo offer; and

b)If  so, the directors' proposed solution  in  relation  to  shortfall  debt which            would   remain    outstanding    to   Westpac    (approximately

$15,000,000) in  circumstances  where there were significant  issues with the New Zealand business assets, which would have remained secured  to  Westpac.     The  directors  anticipated  Westpac  would continue to lend, but Westpac was not certain whether it was prepared to do so.  Westpac was awaiting further information from the Yarrow Group's Restructuring Committee, which had been put in place to address  operational  under-performing,  structural  issues,  and inadequate financial reporting practices.

[27]   Importantly, therefore, the Sumitomo sale would not entirely clear the indebtedness of the Yarrow Group to the creditor.

[28]     However, there were other issues discussed at the board meeting.

[29]      Some of those present had concerns about the debtor, as a director of YTBL, carrying out his previously announced intention to undertake his own review of the finances of the group.  BDO Spicers had been appointed to review the finances of YTBL.   Mr Mayo-Smith, a partner or director of BDO Spicers who was at the meeting, was of the view that by doing so the debtor would cause upset to BDO Spicers’ staff and the accounting staff of YTBL.  Whether something could be done about that was a matter discussed at the meeting.

[30]     Some of those at the meeting were also concerned that if the debtor interfered in the sale process, he could prevent the Sumitomo transaction from occurring.

[31]     Although the transcript of the meeting taken from the recording is difficult to follow, it appears that at least one or more of the directors raised the possibility that

all of these problems could be circumvented by the creditor appointing receivers to

YTBL.

[32]     Mr Hale said that Westpac did not wish to become involved in a dispute between the directors.  Its only interest was in protecting its position in light of the advances that it had made to the Yarrow Group.  However, it would appear that he did at least go so far as to say that if it was the intention to request the appointment of receivers, then the board had better get on with it.

[33]    It is clear from the evidence that the creditor was in a bind about the appointment of receivers.   On the one hand, it did not want the appointment of receivers to be made at a time when it would be disadvantageous for such a step to be taken, namely while the Sumitomo transaction was still in train.   It is understandable that the creditor had concerns that Sumitomo might adopt a different approach to the transaction if it knew that the vendors were financially distressed. On the other hand, it appeared that the directors did not have any real idea of how the loss-making situation could be turned around and the debt be paid off.  Further, such proposals as there were before the meeting presupposed that the creditor would continue to offer financial support to the company.  Mr Hale said that the creditor was not necessarily prepared to go along with that supposition.

[34]     While receivers were not appointed following the meeting that occurred on

29 April, the directors by 26 May 2011 plainly considered that they had reached the end of the road.  It was at that date that they requested Westpac to appoint receivers. The short time that elapsed between the date of the board meeting and that request shows that the company was in extreme circumstances at the former date.

[35]     Further reference to the significance of the directors’ meeting of 29 April

2011 will be made elsewhere in this judgment.

The issues

[36]     In his submissions, counsel for the debtor said that the guarantee was entered into  “on  the  basis:  (a)  of  the  fiduciary  relationship  between  Westpac  and  the judgment debtor and Yarrow’s”.

[37]     The gist of the defence here is that the creditor owed (and breached) fiduciary obligations  to  YTBL  and  the  debtor,  with  the  result  that  breaches  of  those obligations gave rise to a duty on the part of the creditor to pay compensation or damages to YTBL.  As such, any liability owed to the creditor is cancelled out and YTBL is not a debtor anymore.   The debtor cannot therefore be called upon to honour the guarantee as there is no debt.

[38]     While it was not explicitly stated in these terms, the proposed defence would also seemingly involve the contention that the creditor breached its fiduciary obligations to the debtor by obtaining from him a personal guarantee.  The approach that I will adopt in this judgment is to enquire into the question of whether the creditor owed fiduciary obligations of the kind asserted to YTBL or to the debtor.  It will also be necessary to consider whether it is open to the guarantor in the present case to avail itself of any right of claim which the principal debtor would have had against the creditor.  Other questions will include whether there was any breach of fiduciary obligations which gives rise to an equitable set-off.   Issues of causation will also be briefly mentioned.  The significance of these topics is that if there is an equitable set-off available to the debtor, that may have the effect of negating the debt that is owed to the creditor under the guarantee.   Were that to occur, the creditor would not have the necessary status as a creditor to bring a bankruptcy proceeding against the debtor.

Relevance of cross-claims in bankruptcy proceedings

[39]     It is not enough for a debtor to argue that there is a theoretical defence available to him.  Where the court has before it an application for adjudication and it is contended that there are pending claims which should cause the court not to proceed to an adjudication on bankruptcy, the court will expect the debtor to put

before it solid evidence in support of the allegations.2

2      Sharma v ANZ Banking Group (New Zealand) Ltd (1992) 6 PRNZ 386 (CA) at 391.   While that was a case involving a statutory demand, there would seem to be no reason in principle why a similar approach should not be taken where the debtor calls into question the existence of the debt in substantive bankruptcy proceedings.

[40]     I accept that the principle stated in the Sharma v ANZ Banking Group (New Zealand)  Ltd  case  to  which  I  have  just  made  reference  is  applicable  to  the proceedings now before the court.

[41]     An issue which arises in this case concerns not just whether the debtor is able to point to some type of cross-claim which he can potentially set-off against the claim which the creditor makes against him.  The case for the debtor appears to be that, as the guarantor of the obligations of YTBL, he is entitled to avail himself of any defence that YTBL might have.   This would include any claim for breach of duty that the creditor owed to YTBL.   Part of this judgment is concerned with whether the court is able to conclude on the basis of the evidence that the debtor would have any substantial basis for contending that there were breaches of such obligations.   A complicating additional feature of the case, though, is that it is unlikely that YTBL would have any intention of availing itself of a cross-claim which the debtor asserts is available to him.  It has shown no intention of wishing to bring such a claim and there must be question marks about whether any claim is now time-barred in any event.  These issues will be dealt with briefly at the appropriate point in the judgment.  At that point, the focus will be on the question of what will happen if the conclusion of the court is that any set-off which the debtor seeks to rely upon has not been asserted to this point and is likely to ever see the light of day.  In such a case, must the creditor be indefinitely prevented from seeking the remedies that a creditor has, including that of seeking a bankruptcy adjudication?

Equitable set-off based on breach of fiduciary obligation

[42]     The Court of Appeal has generally accepted that:3

The defendant may set-off a cross-claim which so affects the plaintiff's claim that  it  would  be  unjust  to  allow  the  plaintiff  to  have  judgment  without bringing the cross-claim to account. The link must be such that the two are in effect interdependent: judgment on one cannot fairly be given without regard to the other; the defendant's claim calls into question or impeaches the plaintiff's demand. It is neither necessary, nor decisive, that claim and cross- claim arise out of the same contract.

[43]     The authorities are reviewed in The Modern Contract of Guarantee where this exact situation has been commented upon:4

3      Grant v New Zealand Motor Corp Ltd [1989] 1 NZLR 8 (CA) at 12.

The determination of the precise ambit of equitable set-off awaits judicial resolution but, in the writers’ view, the guarantor should be permitted to plead, not only an abatement, but also an equitable set-off possessed by the debtor as against the creditor. The very definition of equitable set-off means, even in its widest formulation, that it must be “closely connected” with the principal  debt  which  is  guaranteed.  A creditor  can  have  no  reasonable objection to the guarantor relying on a set-off when this connection subsists, since it relates directly to the guaranteed debt and not to other debts owed by the debtor to that creditor. This is especially so since equitable set-off is now established as a true defence. Although the principal debt is not directly reduced, in equity, even prior to judgment, the existence of an equitable set- off means that the creditor cannot treat the debtor as being indebted to it to the extent of the set-off.

[44]     The first step, therefore, is to examine whether a fiduciary obligation was owed by the creditor before establishing whether there was a breach.

Fiduciary obligations - the bank/customer and bank/guarantor contexts?

[45]     Before a debtor is able to invoke a fiduciary obligation, he is required to demonstrate why in terms of principle the court should recognise the existence of such an obligation.  Consideration of these topics has not been assisted in this case because there has been an absence of careful description of just what fiduciary obligations are relied upon by the debtor.

Who was allegedly owed fiduciary obligations?

[46]     The bulk of the case which the debtor puts forward apparently relies upon fiduciary obligations being owed by the creditor to its customer, YTBL.  The case for the debtor, then, is that it is open to him to show that the creditor breached its fiduciary obligations to YTBL.  If he succeeds in showing that is the case, and if the creditor is unable to demonstrate the existence of a primary indebtedness owed by YTBL  to  the  creditor,  then  the  ancillary  indebtedness  owed  by  the  debtor  as guarantor will also be in doubt.

[47]     However, at times in the course of the presentation of the debtor’s case, it became apparent that he was also contending that he was personally owed fiduciary obligations by the creditor, presumably to advise him that it was undesirable for him

to give a guarantee of the indebtedness of YTBL.

4      W Courtney and JC Phillips The Modern Contract of Guarantee (3rd ed, Thomson Reuters, London, 2016) at [11-059]. Citations omitted.

[48]     Because of this lack of precision, it is therefore necessary to consider both aspects of the perpetrated fiduciary obligations.  That said, the fiduciary obligations allegedly owed directly to the debtor can be dealt with relatively summarily.

General approach in principle to fiduciary obligations

[49]     The Supreme Court in Chirnside v Fay has stated that there are two situations in which the court will find that a relationship gives rise to fiduciary obligations.5   It reiterated that there is firstly an established or settled category of presumptive fiduciaries.  The other circumstances are where a fiduciary obligation specific to the factual context of the parties arises.  A fiduciary duty in the latter situation does not depend upon a party asserting that he or she is able to claim that the very nature of the relationship between the parties is one that the law has traditionally recognised as giving  rise  to  a  presumptive  fiduciary  obligation.    In  the  second  class,  when

examining the possible existence of a fiduciary obligation, I understand that the court is required to consider closely the actual circumstances that the parties found themselves in and then to conclude whether, consistent with principle, the court should recognise the existence of a fiduciary obligation.

Bank/customer

[50]     Mr  Stewart  QC,  counsel  for  the  creditor,  submitted  that  the  relationship between a bank and a customer is contractual in nature.  It was further submitted that the case law is clear that a bank and a customer relationship is not one where any presumption of a fiduciary relationship arises.

[51]     I agree.  The relationship between a bank and a customer is not one which is regarded as being an established category of fiduciary relationship.6

[52]     As the authors of Equity and Trusts in New Zealand note:7

The relationship between a bank and a customer is not per se fiduciary. After all, banks “are not charitable institutions” and rarely act in the interests of anyone other than themselves.

5      Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433 at [73].

6      Taylor v Bank of New Zealand [2011] 2 NZLR 628 (CA) at [127].

7      Andrew Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington,

2009) at [4.1].

[53]     The above is an orthodox statement of the law which is reflective of current authorities.  The contention which the debtor in this case puts forward, namely that the bank owed him and YTBL fiduciary duties, therefore, starts from an unpromising position.

[54]     But, in Chirnside and  as explained above, the court also highlighted the existence of a residual or ad hoc category, where whether the relationship will be classed as fiduciary “depends not on the inherent nature of the relationship but upon an examination of whether its particular aspects justify it being so classified.”8   It is therefore possible that a fiduciary obligation can, however, arise on the specific facts of a case.

[55]     It may be that in a particular long term banking relationship, such as that which  existed  in  this  case,  some  elements  of  a  fiduciary  obligation  may  have attached to the creditor.   There is authority that, in certain circumstances, the relationship  between  a  bank  and  a  customer  will  be  viewed  as  a  fiduciary relationship for particular purposes.9   The starting point is that banks ordinarily act in their own interests in order to safeguard their position as lenders.   Unless there is some special feature present in the relationship, the relationship does not give rise to a fiduciary relationship.10   The Court of Appeal gave an example of such a feature:11

[127]    … In essence, a fiduciary relationship may exist where bank officers proffer investment advice as to the wisdom of a business proposal, such that the customer may legitimately place reliance on that advice.

[56]     It  does  not,  however,  follow  that  every  dealing  thereafter  is  subject  to fiduciary requirements on the part of the creditor.   Equally, the fact that the bank/customer relationship does not give rise to a presumptive fiduciary obligation does not mean that it cannot give rise to an actual fiduciary obligation where the

appropriate particular facts justify such an outcome.

8      Chirnside v Fay, above n 5, at [75].

9      Taylor v Bank of New Zealand, above n 6, at [127].

10     Taylor v Bank of New Zealand, above n 6, at [127].

11     Taylor v Bank of New Zealand, above n 6.

[57]      I respectfully agree with the following statement made in Equity and Trusts in New Zealand:12

Similarly, and looking at the matter from another perspective, even if a relationship   is   of   a   generally   non-fiduciary   kind   (eg   a   commercial relationship governed by contract under which each party is generally free to pursue its own interests) there may be aspects of it which engage fiduciary obligations.

[58]     As well, I consider that the dicta in McLachlan v Mercury Geotherm Ltd (in rec) - a case involving a non-presumptive relationship - is applicable, namely that it is not enough to say that parties are in a relationship which gives rise to fiduciary obligations; it is necessary to identify those obligations.13

[59]     Although this residual or ad hoc category is never closed, the Court stated there is no universal agreement or conclusive test to determine whether someone is in a fiduciary relationship outside the established category.14

[60]     Ultimately, the circumstances just “must be such that one party is entitled to repose and does repose trust and confidence in the other”.15

[61]     Further, as Tipping J explained, a fiduciary obligation is not founded on agreement:

[82]     …. The simple answer to this submission is that equity imposes an obligation to eschew self-interest when the circumstances require. The obligation does not arise only when expressly undertaken. To hold otherwise would be to confine the powers of equity to situations akin to express trusteeship and would emasculate the breadth of equity's traditional reach by its use of concepts such as constructive trusteeship and its imposition of fiduciary  obligations.  Indeed,  it  will  be  recalled  that  in   Kuys  Lord Wilberforce spoke of cases of trust "express or implied". He thereby recognised that fiduciary duties need not be expressly undertaken.

[62]     Mr Stewart submitted:

34.       The existence of any fiduciary relationship will always be a question of fact.

The scope of any such duty will be informed by the contractual and factual context  in  which  the  fiduciary  relationship  is  claimed  to  have  existed.

12     Butler (ed), above n 7, at [17.2.3]. See also NZ Netherlands Soc “Oranje” Inc v Kuys [1973]

2 NZLR 163 (PC) at 166.

13     McLachlan v Mercury Geotherm Ltd (in rec) [2006] UKPC 27 at [25]-[26].

14     Chirnside v Fay, above n 5, at [75].

15     Chirnside v Fay, above n 5, at [85].

Relevant factors include whether the customer was commercially sophisticated, and whether the customer received independent professional advice.      A bank and customer may expressly exclude a fiduciary relationship by agreement.

[63]     Whether or not there is a fiduciary obligation depends on the circumstances. If, to give what might be an extreme example, the bank went out of its way to give advice concerning the suitability of a banking “product” in circumstances where the customer might reasonably conclude that the advice was given on the basis that the bank was exclusively taking account of the interests of the customer, then a fiduciary obligation may arise at that point.  But the matter is to be determined objectively. The subjective understanding of one party or the other is not what decides the question.

Bank/guarantor

[64]     Just as it is not controversial that banks do not generally incur fiduciary obligations to their customers, the same is applicable with regard to guarantors.  The bank may be found liable in situations where it omitted to inform the guarantor of anything which has taken place between the bank and the customer which affects the

latter’s liability and which would not normally be expected.16

[65]     When  the  specific  circumstances  of  the  granting  of  the  guarantee  are considered, it will be seen that there is no assertion by Mr Yarrow that Westpac gave him any advice about the nature of the guarantee or that it omitted to inform him of anything which is taken place between the bank and the customer which affects the latter’s liability and which would not normally be expected.17

Grounds for asserting fiduciary duty

[66]     Attention is next turned to the issue of the facts or circumstances which the debtor relies upon as establishing that fiduciary obligations arose.

[67]     The debtor is advancing grounds for the existence of a fiduciary duty that comprise of four elements.

16     Shivas v Bank of New Zealand [1990] 2 NZLR 327 (HC) at 364.

17     Shivas v Bank of New Zealand, above n 16, at 363-364.

[68]     First, the grounds are linked to the status of Westpac as the banker for the Yarrow  Group.   Secondly,  the fact  that  Westpac had  allegedly given  advice to YBTL/Mr Yarrow from time to time is relied upon.  Thirdly, the conduct of Westpac in allegedly advising the judgment debtor to desist from carrying out his own parallel assessment of the financial situation of the Yarrow Group is also relied upon.  The fourth element is the apparent knowledge of the Westpac organisation about the circumstances of the “Minto” transaction (which I will explain in due course).

[69]     If I find that a fiduciary relationship came into existence, the debtor submits that there were a number of occasions on which such a relationship was breached. First, there is an allegation surrounding Mr Mayo-Smith’s involvement in YTBL. Secondly, there is a complaint about the creditor’s conduct in attempting to remove the debtor from management.   Third, the creditor is alleged to have breached a fiduciary obligation to YTBL/the debtor by failing to advise that directors of YTBL were, to the knowledge of the creditor, in breach of their obligations by entering into a transaction with YTBL which was disadvantageous to it.   This is the Minto transaction which will be explained subsequently.   Lastly, the debtor alleges the creditor breached its obligations by taking the first steps to place YTBL into receivership.

[70]     I shall deal with each of these core contentions in order.

History of Dealings between the Parties as a Source of Duties

[71]     It is alleged that a fiduciary obligation owed by the creditor to YTBL arose out of the dealings between the debtor and the creditor.

[72]     Before I consider the detailed circumstances in regard to which the creditor is said to have breached its fiduciary obligations, some brief comments about fiduciary duties and banks will be apposite.  In this case, the debtor stressed the fact that there had been a long banking association between the Yarrow family and its businesses, on the one hand, and the creditor on the other.   But, as the relationship between banks and customers in general does not provide any support for the view that Westpac  owed  Mr  Yarrow  a  fiduciary  obligation,  it  needs  to  be  found  in  the evidence of the actual dealings between the parties.  That conclusion is not affected

by the fact that the relationship might have been a long-term one of some 25 years. Passage of time on its own cannot convert a relationship that is not fiduciary in nature into one that is.

[73]     Another point that needs to be noted is that the case for the debtor fails to reflect the individual legal personality of the debtor, in contrast with that of the companies which formed the components of the Yarrow Group.   Some additional comment concerning this aspect of the matter will be put forward next.

[74]     The approach of the debtor has been to blur the distinction between the companies, which were actually the customers of the creditor involved in the lending transactions, and the debtor in his role as guarantor of the companies’ obligations.  It is apparently assumed that a type of blanket fiduciary obligation is owed indiscriminately to both.   Analysis of the proposed defence to the debt, which the creditor claims pursuant to the guarantee, requires consideration of this point.

Fiduciary obligation owed to the debtor as guarantor

[75]     I infer that the basis upon which the debtor claims that fiduciary obligations were owed to him personally are the same matters, broadly speaking, that give rise to the claimed fiduciary obligation owed to YTBL.   Essentially, the long history of dealing  between  the  parties  would  appear  to  be  the  grounds  upon  which  the arguments for the debtor rest.  Therefore, the evaluation of those grounds which is put  forward  in  this  judgment  is  applicable  to  the  asserted  fiduciary  obligations relating  to  either  the  companies  or  the  debtor.    What  I  say  in  those  passages concerned with assessment of the former are applicable to the latter.

[76]     In the case of the debtor, it is necessary to consider the narrative from his point of view and, in particular, circumstances which were unique to him and were not applicable to YTBL.   These are the circumstances which occurred at the time when he executed the guarantee and focus upon the matter of separate legal representation.

[77]     Earlier in this judgment at paragraph [22], I referred to the brief evidence that the creditor put forward relating to the circumstances in which the debtor signed the

guarantee.  This is, of course, of critical importance when it comes to assessing the possible existence of a fiduciary obligation being owed by the creditor to the debtor.

[78]     It is necessary for the debtor to demonstrate that an arguable case can be made out that, in all the circumstances, such a fiduciary obligation came into existence.  Fiduciary obligations are sometimes explained as arising from inequality of the parties’ positions, vulnerability and other concepts.  In circumstances where a party takes independent legal advice prior to entering into a transaction such as a guarantee, that fact must be seen as going a long way towards negativing reliance on the counterparty to protect their position.

[79]     Nor does the evidence disclose that there was something unusual about the guarantee or the circumstances in which it was entered which contain any unusual elements that would call for explanation by the creditor.

[80]     In any case, the generalised evidence of 25 years of dealings and the giving of advice to the Yarrow Group by the creditor which the debtor has put forward are, in my assessment, too vague a basis upon which to construct a fiduciary obligation.

[81]     The conclusion must be that there has not been established an arguable case that the creditor owed fiduciary obligations to the debtor, either at the time that he signed the guarantee, or during the period when the subsequent events leading up to YTBL being placed into receivership and demand being made on the guarantee occurred.

The alleged advice not to pursue a separate enquiry into the state of YTBL’s finances

[82]     The basis of the proposed defence next examined concerns the fact that the debtor  claims  that  the  creditor  breached  its  obligations  to  him  or  YTBL  by dissuading or forbidding (which is not clear) him from carrying out an independent enquiry of his own into the state of the finances of YTBL.

[83]    As outlined earlier, there is authority that, in certain circumstances, the relationship  between  a  bank  and  a  customer  will  be  viewed  as  a  fiduciary

relationship for particular purposes.18    It is alleged here that a fiduciary obligation arose out of the dealings between the debtor and the creditor bank.

[84]     The correct approach to take is to examine the circumstances of the particular case and determine whether the debtor is able to show that there is a reasonably arguable case that the bank, instead of fulfilling the usual role of a bank in the bank- customer relationship, crossed the line and assumed the role, and with it the responsibility, of an adviser on financial and business matters to the debtor or YTBL.

[85]     In the course of their relationship, the debtor claimed that the creditor had provided  advice  from  time  to  time.    He  said  that  Westpac  had  a  long  term relationship with the Yarrow group “and advised Yarrows and me how to restructure and run our financial affairs”.

[86]     It is no doubt commonplace for banks to give advice of a financial nature to their customers.  But that advice can potentially be of many different kinds.  It may be that because of the expertise of banks concerning what financial instruments are available, they will give advice to their clients as to why they consider a particular type of finance structure suitable for the particular circumstances of the client’s business.   Such advice may take into account the bank’s appreciation of future interest rate trends, what type of product is most cost-effective for the client and other matters.

[87]     The key is whether the circumstances were “such that one party is entitled to repose and does repose trust and confidence in the other”.19    Even allowing for the fact that the debtor does not need to establish anything more than a reasonably arguable  case,  the  evidence  which  is  put  forward  as  the  basis  for  the  asserted fiduciary obligation is insufficient.

[88]     The fact that Westpac gave advice does not on its own cross the line from being a self-interested bank to being a fiduciary accepting responsibilities to its

customer.  It may be, for example, that even if the bank did give advice of the kind to

18     Taylor v Bank of New Zealand, above n 6, at [127].

19     Chirnside v Fay, above n 5, at [85].

the customer, it did so on the basis that it would suit the interests of both parties to structure matters the way that the bank advised.  In such a case, it may have been obvious that the bank was not in any way assuming an obligation to be solicitous to the interests of the customer to the extent where it neglected its own self-interest.  It is easy to imagine a situation where both parties agreed that it would be in their interests for lending to occur and for security to be taken, and for the bank to have been the dominant party taking the lead in designing the form that the lending would take and in which securities would be provided.   In doing so, it would be understandable if the bank, to the extent that it could, structured matters as advantageously as is possible for the customer.  It is impossible to say what matters might have been taken into account.   Based on its expertise with regard to such matters, the bank might have been able to advise on adopting structures which were beneficial from a taxation point of view for the customer.   The bank may have pointed out alternatives to the way the finance was structured which required the customer to decide where the balance lay between the convenience of having certain facilities in place and what the cost of them would be.

[89]     Some of the foregoing discussion may border upon speculation in the absence of evidence.   It is not suggested that the examples given represent what actually happened in this case.  But the examples demonstrate how equivocal the evidence of the debtor is.  To simply say that the bank gave advice begs the question of whether the quality of the advice and the context in which it was provided made it clear that the  bank  was  arranging  matters  for  the  advantage  of  the  customer  and  to  the exclusion of its own self-interest.

[90]     Regardless,  I  will  consider  the  other  aspects  in  relation  to  the  various particulars which the debtor puts forward instancing individual breaches of the asserted fiduciary duty.

Fiduciary duty arising out of advice to debtor not to pursue review of YTBL’s

finances

[91]     The debtor alleges that, in or about February or March 2011, an employee of the creditor, Mr Chapman, advised the debtor not to continue with his review of the

finances of YTBL/the Yarrow Group.   In the submissions which counsel for the debtor filed, the point is made in these terms:

51.In  or about February/March 2011 Westpac advised the judgment debtor to cease a review of the financial affairs of the Yarrow Group, and as he had done in the past Mr Yarrow followed that advice.

[92]     The plaintiff claims that as a result:

52.If  that  review  had  continued  and  Westpac  had  divulged  the information it held in relation to the Minto lease there is an inference that Mr Yarrow would have discovered that the directors of the Yarrows Group were mismanaging the financial affairs of, and not acting in the best interests of, the Yarrows group.

[93]     In 2010, the debtor claims that Westpac recommended that BDO Spicers be retained to assist and they were in fact retained by the Yarrow Group to produce an independent set of accounts for the Yarrow Group to help facilitate a potential partial sale of it.  There does not seem to be any dispute that the creditor encouraged the appointment of BDO Spicers.

[94]     The debtor says that, around about this time, he decided he would carry out his own review of the financial affairs of the Yarrow Group. He says he advised the directors and key accounting staff of his decision to do so.  The key allegations that he made were that:

15.8In or about February/March 2011 John Chapman head of risk management for Westpac, called me and advised me to cease that action as it was upsetting BDL Spicers and Yarrow’s accounting staff;

15.9     Due  to  the  longterm  relationship  with  Westpac  I  followed  John

Chapman’s advice and ceased that action.

15.10. I believe that if I continued with my review of the financial affairs of Yarrow’s and the Yarrow’s group I would have realised that the directors of the  Yarrow’s group  were  mismanaging  the financial affairs of, and not acting in the best interests of the group.

[95]     There is no record of the discussion which allegedly occurred between the debtor  and  Mr Chapman.    Mr Chapman says  he has  no  recollection  of such a discussion.  He says that, in general terms, he would not have told a director of a company that he was not to involve himself in the affairs of the company.

[96]     In my view, the question of whether  or not the conversation took place cannot be resolved in the context of a defended bankruptcy application.   Neither Mr Chapman nor the debtor gave oral evidence on this question.   They were not cross-examined concerning this disagreement.

[97]     While the case for the debtor is not clear, it would seem to amount to an assertion that the following occurred:

a)       some of the directors of YTBL had acted in contravention of their obligations with respect to the Minto property in Sydney;

b)        the creditor knew or ought to have known of that fact;

c)       by  dissuading  the  debtor  from  pursuing  his  enquiries  into  the company’s affairs, the creditor deflected the debtor from discovering the truth about the Minto arrangements; and

d)because   the   Minto   arrangements   reduced   the   profitability   and therefore the value of the Australian operations, Westpac caused loss to YTBL for which it is liable to YTBL.

[98]     The issues that arise are whether Mr Chapman actually made the comments that  he  did  and,  if  he  did  dissuade  Mr  Yarrow  from  carrying  out  his  own investigation, did he breach a duty which the creditor, by which he was employed, owed to Mr Yarrow.

[99]     Because this is a hearing under Part 24 of the High Court Rules, no discovery has taken place and therefore caution has to be exercised in deciding disputed factual matters.   I do not consider that it would be satisfactory to attempt to resolve the question of whether Mr Chapman advised or directed the debtor to not carry out the enquiry into the finances of YTBL.  Given that outcome, I will therefore consider what  the position  would  be if  the debtor  ultimately were  able to  establish  that Mr Chapman did dissuade him from carrying out his own full review of YTBL’s finances.

[100]   Little was provided by way of analysis of the content of the alleged fiduciary obligation relating to the independent enquiry into the finances of YTBL.   Brief consideration  needs  to  be  given  to  the  question  of  how  such  a  duty  could  be expressed as an incidental feature of the relationship between the creditor and the debtor.

[101]   It must be the case for the debtor that the creditor owed a fiduciary obligation not to bring about a state of affairs in which it advised or directed a company and/or its directors not to make enquiries into financial matters on which it was concerned.

[102]   In my assessment, no proper foundation has been laid to suggest that it is arguable that such a duty was owed in the circumstances of this case.

[103]   Whether or not the creditor was correct in acting, as the debtor alleges, to discourage the debtor’s investigation and whether that decision by the creditor was in the interests of the bank20  are not questions that are in issue when considering whether there was a fiduciary obligation.

Is there any substantial possibility of such a claim being pursued?

[104]   The question of whether there is any substantial possibility of a cross-claim being actually pursued is of direct relevance when considering if the debtor has an effective defence to the application for an order for adjudication.  That issue will be considered at paragraphs [202] and following.

Causation

[105]   The factual background is that the creditor had advanced substantial amounts of money to YTBL.  As I have found, it is not reasonably arguable to contend that the creditor was not entitled to protect its own position.

[106]   The question remains at the end of all the evidence, how did the creditor cause loss by discouraging the debtor from carrying out his proposed independent

enquiry?   There is no evidence that had the debtor carried out his independent

20     Indirectly in the sense that what would be conducive to the company's survival was also in the interests of the creditor.

enquiry, the financial status of YTBL would have been found to have been much more favourable than BDO Spicers concluded it was.  In order to succeed with any claim for loss, the debtor would have to show that BDO Spicers had somehow come to a mistaken view when it concluded that YTBL could not continue in business.  He would have to show that, to the contrary, it was reasonable to come to an alternative view of the financial status of YTBL.  It would be part of the claim that, as a result of all of this, the creditor could have been persuaded to continue financing YTBL which would have survived a period of insolvency and then resumed profitable trading.  There is no arguable basis for any of these contentions.

[107] At the point when the debtor was saying he intended to carry out an independent review of YTBL’s affairs, matters were at a delicate stage.   The Sumitomo offer had come in.  It would have been desirable for the company to be allowed to continue trading at least until the Sumitomo transaction had settled.  The company was being assisted by BDO Spicers.   The advice of that firm was not restricted to high level structural advice.   BDO Spicers had reported in December

2010 that the complicated group structure and reporting systems made it difficult for anyone to understand the true financial position of the company.  It was clear that Mr Mayo-Smith from BDO Spicers did not only consider that it would be unhelpful for the debtor to carry out his own enquiry, but that such an enquiry could negatively impact the work that his staff and accounting staff at YTBL were carrying on.  That would be an unpalatable outcome given the perilous position that the company was in.

[108]   Against that, it is difficult to understand what advantages would have accrued from permitting the debtor to carry out his enquiry.

[109]   The  debtor  was  only  one  of  the  directors  of  YTBL.    It  has  not  been established that there was anything in the company’s constitution which required the directors to let him have his way if he wanted to carry out an independent enquiry. The majority of the directors obviously did not want the debtor to carry out his enquiry.  The minutes of the 29 April 2011 directors meeting make that clear.  Even if the bank had not discouraged the debtor, it does not mean that he would have been free to carry out his enquiry.

[110]   Further,  even  if  the debtor  had  been  free to  carry out  his  own personal enquiry, all the indications are only evidence that it would have made no difference. Mr Stewart for the creditor made a fair point which is also decisive in my view. That was that between the date of the meeting on 29 April 2011 and the date when receivers were appointed, 30 May 2011, it would have been impossible for the debtor, by carrying out his proposed financial review, to reverse the situation that caused the appointment of receivers.  There was, therefore, no loss caused as a result of the breach of the alleged fiduciary obligations.

[111]    For it to have made any difference, the following logical steps would have had to be satisfied:

a)       the  debtor  would  have  been  able  to  carry  out  and  complete  his financial enquiry;

b)the results of his enquiry would have persuaded the directors and the creditor, as the company financier, that there had been material irregularities in regard to the Minto transaction;

c)       the  position  in  regard  to  the  Minto  transaction  would  have  been corrected, i.e., the rental arrangements would have been unwound and the lessor would have agreed to accept lower rentals which would have meant that the Australian business would have lower expenses and therefore a higher value;

d)       Sumitomo would have paid more for the business; and

e)       the  price  difference  would  have  meant  that  YTBL  would  have survived.

[112]   One has only to state the very long-range hypothetical nature of the supposed harm caused through prevention of the independent financial review to realise that the case for the debtor is not reasonably arguable.  YTBL was in parlous straits.  The creditor  was  facing  the  possibility  that  the  already  very  large  losses  would  be

augmented by further trading losses.  The directors no doubt were concerned about the company continuing trading while it was insolvent.  It was inevitable that there would be early and decisive action to bring this unfavourable situation to a halt.

[113]   It is to be accepted that the issue of causation requires special treatment in the case of breach of fiduciary obligations.  The subject was considered in the Supreme Court decision of Stevens v Premium Real Estate Ltd, in which the Court made comments about the current approach to causation.21

[85]  It was once the strict rule that when a fiduciary committed a breach of duty by non-disclosure of material facts which the party to whom the duty was owed was entitled to know in connection with the transaction, the fiduciary could not be heard to maintain that the disclosure would not have altered the decision to proceed with the transaction; once the court had determined that the undisclosed facts were material, speculation as to what course the beneficiary, on disclosure, would have taken was wnot regarded as relevant.  The strict rule could sometimes lead to unfair results and has been modified in this country by an approach which affords the fiduciary a limited opportunity of showing that all  or some of the loss would have occurred even if disclosure had been made …

[114]   The Court also stated in Maruha Corp v Amaltal Corp Ltd:22

[30]      …

“[O]nce the plaintiff has shown a loss arising out of the transaction to which the breach was material, the plaintiff is entitled to recover unless the defendant fiduciary, upon whom is the onus, shows that the loss or damage would have occurred in any event, that is without any breach on the fiduciary’s part… Policy dictates that fiduciaries be allowed only a narrow escape route from liability based on proof that the loss or damage would have occurred even if there had been no breach.”

[115]   Even though the escape route is a narrow one, it must be recognised as being a practical reality in appropriate cases.  Even if there had been some material breach of a fiduciary obligation on the part of the creditor, the loss would have been caused anyway.   The debtor has not established a basis for showing that it is reasonably

arguable to take the contrary view.

21     Stevens v Premium Real Estate Ltd [2009] NZSC 15, [2009] 2 NZLR 384. Citations omitted.

22     Maruha Corp v Amatal Corp Ltd [2007] NZSC 40, [2007] 3 NZLR 192; citing Bank of New

Zealand v New Zealand Guardian Trust Co Ltd [1999] 1 NZLR 664 (CA) at 687.

[116]   The breach of fiduciary obligation under this heading does not provide a defence to the claim under the guarantee.   It is not reasonably arguable that the creditor breached fiduciary obligations to YTBL and caused the loss which is necessary to set-off against the amount of the principal debt that was owed.  Nor is it arguable that the creditor breached a fiduciary obligation which it owed personally to Mr Yarrow.  There is also no solid foundation for an argument that any breaches of fiduciary obligation caused loss for which the fiduciary is liable to compensate the other party.

Fiduciary duty relating to the Minto transaction

[117]  The allegation of the debtor is that the creditor ought to have told the debtor/YTBL about aspects of a leasing arrangement entered into in Sydney, Australia,  which  involved  the  directors  of  an  associated  Yarrow  company  in Australia entering into a business arrangement which resulted in them obtaining undisclosed and/or excessive gains from the leasing arrangement.  The debtor alleges that because Westpac happened to be the financier for the purchase of the Minto property by a company which included some of the directors of the Yarrow Group, Westpac would have known what the details of the leasing transaction were and would thereby have understood that the lessor was proposing to charge rents to the Yarrow Group which were above market levels.

[118]   The debtor says that the creditor breached a fiduciary obligation owed to him by not telling him about this arrangement of which it was aware.

[119]   Although the details of the claim by the debtor were not spelt out, it would seem to amount to a claim that the creditor dishonestly assisted the directors of YTBL to cover up the Minto transaction details, with the result that loss was caused to YTBL.  In fact, it led to YTBL being placed in receivership.

[120]   The debtor claims that the creditor knew about the unacceptable aspects of the  Minto  transaction  because  it  had  financed  the  purchase  of  the  property  in Sydney.

[121]   Before I examine these contentions, it is important to recall the analysis that was carried out earlier in this judgment as to whether or not the creditor indeed was subject to fiduciary obligations in regard to the complaint that the debtor was prevented from carrying out an independent review of the finances of YTBL.  The remarks made in that part of the judgment have their counterparts with regard to the claim about the Minto transaction.   Nowhere in the argument which the debtor presented to the court is there an acceptable analysis of how a fiduciary obligation came into existence and what its content was.  It is impossible in my view to accept that the creditor, in the position that it found itself in, can be seen as having agreed to act in some protective or representative capacity in regard to YTBL concerning the Minto transaction.  The Minto transaction was entered into by a related company of YTBL.  It was under the control of its own directors.  The creditor then advanced money to that related company, Yarrows (The Bakers) Aust. Party Ltd (“YTBA”), for the provision of plant and equipment.   That and that alone is the indirect connection that exists between the creditor and the debtor in regard to the Minto premises.

[122]   The most fundamental issue that needs to be noted in this regard is that the creditor was not involved in the Minto transaction.  It is correct that the creditor did advance some funding which was to be used as part of the operations to be carried on at the Minto property.  But the $8,000,000 which it advanced to YTBL was for the acquisition of plant and equipment.   The creditor was not involved with the funding of the acquisition of the property itself.   A separate company, Westpac Banking Corporation (“WBC”), was involved in providing that funding.

[123]   The response of the creditor was to the effect that any lending in regard to the Minto transaction emanated from WBC, which is a separate company from the creditor.

[124]   The response of the debtor was to refer to what was described as marketing materials  which  were  produced  by  the  creditor  that  made  reference  to  the relationship that the creditor had with the Australian organisation.   It stated in its submissions:

2.        In the indicative terms dated 27 September 2007 (“the indicative terms”) for facilities totalling $NZ41.665M and $AUD8M Westpac New Zealand   emphasised  its  relationship   with  Westpac  Australia,   and   its expertise and service quality.  It stated that:

As a full service bank, Westpac New Zealand Limited (“Westpac NZ”) has the products, expertise, technology and commitment to offer you a first- class long term banking structure.

Westpac NZ is recognised as the market leader in providing wholesale and transactional solutions tailored to meet customer needs.  This is supported by Westpac NZ and Westpac Banking Corporation (collectively “Westpac”) being the bankers and or wholesale financiers to some of the top companies in  New  Zealand  in  addition  to  bankers  to  the  highest  transactional generators in new Zealand, namely the New Zealand Government.   These corporate’s require a high degree of service quality and competitiveness that Westpac consistently delivers.

Westpac profile

·    The Bank began trading in 1817 as the Bank of New South Wales.

·The financial strength of Westpac is evidenced by Standard & Poors short and long term ratings of A+ and AA- respectively and Moody’s Investor Services Inc of Aa3.

·Westpac  has  a  strong Australasian  focus,  whereby  its  balance sheet and resources are committed almost solely to the New Zealand and Australian markets.

·Westpac is one of New Zealand’s largest banks, with some NZ$29.8 billion of assets, 1.3 million customers and a market share of close to 22% in core deposits and loans.   The merger of two banks (Westpac & TrustBank in NZ) occurred in mid 1996 and is now complete.   Westpac remains committed to maintaining close links with business, retail and local community.   Approximately one in three New Zealanders have a banking relationship with Westpac.

[125]   In my view, there is no doubt that the New Zealand bank officers were not involved in the lending to the entity owned by the directors in Australia, which enabled them to purchase the Minto property and lease it to an Australian company for use by the Yarrow Group.  The fact that the marketing materials demonstrate that the two banks might cooperate in investment activities does not result in the knowledge of one automatically being imputed to the other.  It would appear that the division of responsibilities between the Australian and New Zealand Westpac organisations has resulted in the former taking responsibility for the sale of any derivative-type financial instruments in New Zealand.  Subject to that exception, all other banking type transactions of the kind which were entered into in this case are

the responsibility of the New Zealand entity, the creditor.  The types of transactions entered into in this case involved straightforward lending transactions and not currency swaps or other derivative arrangements.

[126]   While there is therefore a degree of coordination between the Australian and New  Zealand  banks,  there  is  insufficient  evidence  to  give  rise  to  a  reasonably arguable assertion that “Westpac” was a monolithic trading organisation operating in New Zealand and Australia.   There is similarly no proper foundation for the contention that, under such an analysis, the New Zealand corporate “arm” had full information about the lending activities carried out in Australia by the Australian bank.  Statements to the effect that it did appear in fact to be wrong.

[127]   Therefore, there is no support for the contention that the New Zealand bank, the creditor, is a unitary and monolithic banking organisation comprising the Australian and New Zealand arms.  They are two separate companies.  The fact that there seem to be a level of cooperation between the two banks cannot be viewed as giving rise to an obligation on the part of the creditor to investigate the Minto transaction and provide information to the debtor about aspects of that transaction, which might be inimical with the interests of YTBL.

[128]   In any case, even had there been a closer connection, the problem which the debtor has is establishing that it is reasonably arguable that the bank was required to be vigilant to the interests of the New Zealand company in relation to a transaction in Australia that  it  was  not  directly involved  in.    In  my assessment,  there are no arguable grounds for contending that the creditor was subject to a fiduciary obligation.

[129]   Mr Collecutt for the debtor stressed that discovery had not at this point been obtained.  That, in my view, does not save the weakness of the case which the debtor has put forward.  The case which the debtor has put forward has no probative basis. It is speculative.   There is no principled basis upon which the court could defer dealing with the application for a bankruptcy adjudication on the basis that the debtor may, through discovery, improve the case from one of speculation to one that rests on an evidential basis.

[130]   I do not consider that there is any basis for supposing that if the Minto claim was put forward in general proceedings, there would in fact be any discovery forthcoming which would assist the debtor.   The assumption that the debtor puts forward, which is that the two banks operate in a closely concerted way and are therefore familiar with details of each other’s trading activities, does not appear to me to be borne out by the facts of this case.  It is not an assumption that is likely to be improved by provision of discovery.

[131]   It also appears that the debtor’s claim that the creditor dishonestly assisted the directors of YTBL to breach their obligations is not one that has a serious basis. There is no foundation for any suggestion that employees of the creditor had actual knowledge of the negative aspects of the Minto transaction and that they sought to assist the directors to conceal them.  To say that such information might turn up on discovery does not advance matters.   It is possible that it would but there are no grounds for supposing that discovery is likely to lead to the disclosure of such information that would assist the debtor to put forward his case.

[132]   The net result of these considerations is that it cannot be reasonably argued that the creditor knew that the directors of an Australian affiliate of YTBL were in breach of their obligations to that company.   The factual basis upon which the arguable defence is said to rest is therefore non-existent.

[133]   There are other difficulties with the Minto transaction which shall be briefly mentioned.  First, there was no admissible evidence that the rent being charged by the lessor for the Minto property exceeded market rentals.  That conclusion follows from the ruling that I made excluding certain hearsay evidence which the debtor attempted to put before the court in an attempt to prove the excess of market rental.

[134]   The second point is that the postulated course of enquiries, which would have led to this unacceptable transaction being exposed, flounders on a factual rock.  It is that the company which was the lessee was wholly owned by a trust of which the debtor was the settlor.   The Minto lease commenced on 1 August 2007.   That is some four years before the asserted breach of fiduciary obligation by the creditor and covering up the details of the rent.  But, even in those four years, the debtor had not

put forward a case that the Minto transaction was irregular.   This was even, as mentioned, in circumstances where his own trust was involved in the transaction.  It would seem to have been unlikely, therefore, that he would have uncovered the transaction had he not been deflected from carrying out his investigation in the handful of months in 2011 which were available to him before YTBL was placed in receivership on 30 May 2011.

[135]   As well, there is no evidence before the court to show that it was in the interests of YTBL for one of the individual directors to undertake a review of the very matters  that  the  company  was  already having  investigated  by independent accountants, no doubt at substantial cost.   The company’s circumstances were pressing.  There must have been real doubt whether the creditor, as YTBL’s bankers, would continue to support the company.   YTBL was losing money.   If it had not already defaulted, it was in jeopardy of doing so in the near future.

[136]   It all depends upon the circumstances, but it could be that the relationship between the bank and the customer was one where the parties communicated in a frank and candid way.  There would be no reason why a bank in the circumstances would not state its preference in the matter.  It would not do anything wrong in such a circumstance in stating its views.

[137]   A further problem with the position which the debtor takes is that it appears to  be  affected  by  confusion  concerning  to  whom  the  creditor  would  owe  any fiduciary obligation.  It is apparently alleged that a fiduciary obligation arose out of the  customer-client  relationship.    There  is  no  room  in  such  an  analysis  for  a complaint that the bank was to consider the personal interests of the debtor.  It may be that the creditor was also the banker to the debtor and that it owed separate obligations, including fiduciary obligations, to him personally.  But on the material before the court, there is no justification for concluding that there was a fiduciary obligation owed to the debtor which constrained the creditor as to how it dealt with YTBL.

[138]   Therefore, the basis for any complaint of breach of duty must rest upon a fiduciary duty which the creditor owed to YTBL.  In that regard, there is no evidence

to support the contention that the company (through its collective directing mind, the directors) had any interest in the debtor undertaking a review of the kind that he wanted to.   Indeed, it is difficult to understand why his proposed review was preferable to the review that had been authorised by the other directors to be carried out by BDO Spicers.

[139]   The predicament that the Yarrow Group in New Zealand found itself in had come about in circumstances where the debtor was not only a director but also had the right to appoint the directors to YTBL.  The usual inference that would be drawn from such a situation was that he himself was responsible for the threatened collapse of the New Zealand operations.  It might not have been solely his actions, omissions and judgments which lead to this dire position, it is true.  There were other directors who had responsibilities to the company.  But it seems unlikely that a person who played a central role in the company during the time when its business was failing would be the correct person to turn to to carry out enquiries as to what needed to be done to salvage the position.

[140] The debtor would prefer to see himself as having being unjustifiably marginalised.  He would ascribe sinister motives to those who wanted him to stand aside and not carry out enquiries into the state of YTBL’s affairs.

[141]   The problem is that the directors of YTBL had the right to decide how the financial predicament of the company and the corrective action that was required were to be progressed.  They apparently did not view the proposed review that the debtor wanted to carry out as being potentially helpful to the company.  They were entitled to come to that opinion.  If they were acting from some malicious motive, they may have been in breach of their obligations that were owed to the company. However, the creditor would not be tainted by those breaches of duty unless it knew of them and assisted them to occur.   There is no evidence which supports that. Furthermore, the inherent circumstances point away from that being the stance that the creditor took.  The creditor wanted to obtain information about how the position of the company could be improved and that is why it supported the appointment of BDO Spicers.

[142]   Even if the creditor did try and persuade the debtor from refraining from his enquiry, there were good reasons to support that action.  There was the potential for the debtor to hinder rather than help the process.

[143]   In  the  end,  the  creditor  was  contemplating  a  large  loss  on  the  Yarrow account.  It does not seem to be consistent with reason that, in such circumstances, it would have knowingly obstructed actions on the part of the debtor that could have rescued the situation.

[144]   There is no explicit evidence that that is what the creditor did and all the inferences that arise from the known facts point away from such a conclusion.  There is no solid basis for this defence, in my view.  The conclusion must be that there was not in fact any fiduciary duty which the creditor owed to YTBL to not obstruct the debtor’s review.

[145]   But, in any event, I do not consider there to be a breach.

Loss caused by breach of fiduciary obligation in regard to the Minto transaction

[146]   It is alleged that because of the over-charging, the value of the Australian operation was of diminished value and that effected the guarantee which the debtor gave to the creditor in New Zealand.  How this translates into loss that was caused to the  Yarrow  Group  is  not  spelt  out  in  any detail.    Mr  Collecutt  for  the  debtor submitted that if the rent on the Minto property had not been as high as it was, then the earnings of the Australian operation would have been higher.   From that he argued that if the earnings were higher, then by application of a multiple to the net earnings, the price for the business would have been higher.

[147]   It must be the position of the debtor that if he had known about the excessive rental being charged for the Minto premises, he could have intervened and had the rental modified, which would have resulted in Sumitomo paying a higher price for the business in Australia.

[148]   Even if, contrary to the conclusions I have set out above, the creditor had an obligation to disclose the allegedly irregular aspects of the Minto transaction, proof

that it did not do so is not the end of the matter.  The debtor must also establish that there is an arguable case that loss resulted.

[149]   There is, I accept, force in the submissions that were made on behalf of the creditor that it is very likely that the debtor had independent knowledge about the details of the Minto transaction.   That is because the entity which was the lessee under the arrangement, YTBA, was owned by a trustee company.   That company held the property on trust for the P Yarrow Bakers Trust, which was a discretionary trust that the debtor had settled for the benefit of his family.  Therefore, it is apparent that  the  trust  which  the  debtor  had  settled  owned  all  the  shares  in  the  lessee company.  From this fact arises an inference, in the absence of any explanation to the contrary, that it is very likely that the debtor would have known what rent was being charged to the lessee.  He was therefore in possession of the very information that he now complains the creditor failed to provide him with.   I should  add that this circumstance was not disclosed in the evidence which the debtor produced to the court.

[150]   I agree that these facts do not actually prove that the debtor knew about the Minto rent.   Considerations of common sense, however, suggest that a strong inference arises that that was the case.   Such an inference is an added significant difficulty for the debtor in establishing that the failure of the creditor to expressly draw the objectionable features of the Minto transaction to the attention of the debtor actually caused loss to him or YTBL.

[151]   It is also necessary to keep in context the alleged significance of all of this information.  If the creditor had disclosed the information about the excessive rent allegedly charged to YTBA in Australia, the position apparently could have been corrected (meaning I understand that a lower rent would have been bargained for successfully), and Sumitomo would have offered to pay more for the Australian business - the price offered reflecting the greater profitability that the business would have generated.  This, in turn, would have affected the fortunes of YTBL.  YTBL would have benefited from the higher Sumitomo price.  That would have resulted in a reduction of debt owed by YTBL to its New Zealand banker, the creditor.  How all this would have come about is not even explained in outline.  Neither is it explained

what the outcome would have been for YTBL had the higher price been obtained from Sumitomo.  It is possibly implicit in the argument that there never would have been a receivership, but, given the deficiency that has remained,23  that can only be described as a very speculative outcome.

[152]   Any claim that YTBL was entitled to compensation because of the results of the breach of duty by the creditor is tenuous, to put it mildly.

Did Mr Mayo-Smith’s involvement in YTBL breach a fiduciary duty?

[153]   There had been a previous review of the financial position of the Yarrow Group carried out by the accountants, Deloitte.    Subsequently, on the recommendation of Westpac, BDO Spicers were appointed to carry out a further financial review of the group on 19 October 2010.   Mr Mayo-Smith from BDO Spicers was the particular individual who was leading this review.

[154]   In his submissions, the debtor submits in relation to Mr Mayo-Smith that:

There is clear evidence that BDO's representative acted against Mr Yarrow's and the group's best interests and took the highly unusual step of recommending that the bank make a demand on the company he was acting for with the objective of removing Mr Yarrow's involvement with the company.

[155]   The assertion is that this recommendation was made at the directors’ meeting on 29 April 2011.

[156]   It is thus the contention of the creditor that Mr Mayo-Smith’s involvement

caused harm to YTBL.

[157]   The claim for the creditor is that BDO Spicers and Mr Mayo-Smith were appointed by YTBL.  The relationship that Mr Mayo-Smith and his practice had with YTBL was that of agent of the company.  This would seem to be a correct analysis.

Counsel for Mr Yarrow did not contest its correctness.

23     There is still a deficiency of $15,000,000 owing by YTBL to the creditor after the receivers

sold YTBL’s assets.

[158]   It was not explained how the creditor could be responsible for his actions if it was the company that had appointed Mr Mayo-Smith

[159]   The contentions put forward for the creditor were that it is not unusual, when a company is placed under the surveillance of its Credit Restructuring Group, that a recommendation or requirement is imposed to carry out a review of the customer’s operations.  It is said that that is what happened in this case.

[199]   Mr Hale’s limited response provided some encouragement to the directors to proceed in the way indicated.  Nothing that Mr Hale said indicated that the creditor understood that there were alternative possibilities under consideration (that either the Sumitomo deal would proceed or the receivership) and nor did he express any view that would indicate he adopted an approach which viewed the two outcomes as being mutually exclusive.  Mr Hale has stated in his evidence that a concern was that if a receivership commenced, then that could prejudice the sale of the Australian operation because the appointment of receivers could taint the business.  By that, I understand him to mean that a buyer might take the view that because the purchaser was a distressed company, pressure could be brought to bear concerning the price at which the assets might be acquired.  It is true therefore that there was some potential tension arising from a possible appointment of receivers.  But that is a different thing from the creditor explicitly agreeing that it would eschew the receivership option in order to allow the Sumitomo transaction to proceed.

[200]   It has to be said that such concern as Mr Hale had about the tension between the two objectives is wholly understandable.  So not only is there explicit evidence from Mr Hale on the point but what he says accords with business reality.  Further, the court has the advantage of a transcript of the April 2011 directors’ meeting which sets out in its entirety what was actually discussed.

[201]   For the debtor in the circumstances to make an unsupported assertion that there was an implied term which is quite inconsistent with the evidence and business realities of the situation is in my view futile.

Restrictions on the right to put forward an equitable set-off defence

[202]   To this point, I have been considering whether there is a solid basis for an argument that the creditor owed fiduciary obligations (leaving aside the detail of to whom those obligations were owed), whether the obligations were breached and whether loss resulted.

[203]   Even if it is assumed that all of these elements were established, the question is where this leaves the debtor?

[204]   YTBL was the customer of the creditor.  The starting position would be that any fiduciary obligations are owed to YTBL and not to persons connected with that company  such  as  the  shareholders  and  directors.    It  has  not  been  adequately explained why, if there were fiduciary obligations owing not to harm YTBL, such obligations were not owed directly to the company or, if they were, were they supplemented by other obligations owed to parties with an indirect interest in what happened to the company.  This is relevant because, to date, the company has not shown  any intention  of  bringing  proceedings  against  the  creditor  for  breach  of fiduciary obligations owed to it.

[205]   Although YTBL has been in receivership, it seems likely that the directors retain residual authority enabling them to make a decision to pursue the creditor for breach of fiduciary obligations even if it must be recognised that it is unlikely that any resources will be available to the company to enable that course to be taken.25

[206]   Nor  was  it  explained  how  YTBL  might  be  compelled  by  means  of  a derivative action to take steps against the creditor in relation to the alleged breaches of fiduciary obligation, in the event that the directors did not agree that such a course is a sensible one to take.  A legitimate question arises, though, whether this is of any significance to the parties now before the court.

[207]   In my assessment, even  if it were arguable that there was a cross-claim available to YTBL against the creditor, there is no real or substantial ground for supposing that the company would wish to enforce the cross-claim.   In those circumstances, it is difficult to accept that equity would take the view that any rights of enforcement which the creditor might have available to it and which constitute an equitable set-off ought to be postponed.  That is because any restriction on YTBL bringing bankruptcy proceedings would, effectively, be of indefinite duration.  An order to that effect would have the substantive result that the creditor would lose its right to seek an adjudication of the debtor.  The debtor would for an indefinite period

into the future be able to argue that he had available to him an equitable set-off which he may or may not be able to exercise.

[208]   The intervention of equity by means of recognition of an equitable set-off is not intended to provide a final adjudication on the mutual legal rights that the parties have.  It would seem to be that the purpose of the recognition of an equitable set-off is a precondition to equity recognising that the opposing party ought not to be able to deploy legal enforcement remedies by way of court proceedings in the absence of the court hearing the counterparty’s set-off.   If there is no reason to suppose that the counterparty will ever be in a position to litigate its claim of set-off, no relevant purpose would be achieved by the court recognising it.

[209]   There is only one authority that I am aware of which expressly dealt with the issue of whether a claimant asserting an equitable set-off may not be able to assert the claim if it has done nothing to bring it, notwithstanding that it had an opportunity to do so.  In the Australian case APM Wood Products Pty Ltd v Kimberley Homes Pty Ltd,26 Cole J had before him a case where a plaintiff sought summary judgment on a contract for the supply of building components.  The plaintiff had not been paid. The  defendant  claimed  that  the  plaintiff  had  breached  the  requirements  of  the building contract and further claimed that, as a result, it had an equitable set-off arising  therefrom.    It  said  that  certain  building  trusses  which  the  plaintiff  was

required to supply by the contract were of defective quality.  The plaintiff brought a claim against the defendant in 1983.  No steps were taken to quantify the cross-claim right up until 1988.  An application was made for summary judgment by the plaintiff and it is that matter that Cole J dealt with in 1989.  In the course of his judgment, Cole J referred to Australian authority to the effect that when assessing the question of the existence of an equitable counterclaim, matters such as the conduct of the parties were relevant, that having always been the case where an application for equitable relief was sought.  The Judge said

In the present instance, in my opinion, the conduct of the Cross-Claimant, or rather the lack of it, since October 1983 in relation to the subject matter of the cross-claim is such as to disentitle it in equity to set-up the cross-claim by way of set-off. I have no doubt that had Smart. J not made the orders he

26     APM Wood Products Pty Ltd v Kimberley Homes Pty Ltd NSWSC 11361/1984, 17 February

1989.

did the Cross-Claimant would have been content, as it had been for the previous four years, to allow the action to remain as an unquantified, uninvestigated   and   unpressed   cross-claim   having   the   advantage   of preventing the Plaintiff from obtaining judgment.

[210]   That decision is included in the commentary contained in Equity and Trusts in New Zealand where the learned author commented:27

A claim of equitable set-off will be subject to the usual rules relating to the granting of equitable relief. Therefore, the defendant might be denied an equitable set-off where the defendant has failed to investigate, quantify, or press its cross-claim as a defence. In addition, it has been suggested that an assignee of a debt takes subject to equities, including relevant rights of equitable set-off. While there is no reason why that principle should not apply in general, it is important to recall that the “taking subject to equities” principle  ought  not  have  application  where  the  assignee  of  a  debt  is permitted to sue in his or her own name in respect of the legal title that he or she holds apart from that of the assignor.

This highlights the nature of equitable set-off as an equitable defence. That the defendant has a claim against the plaintiff will not be enough. There must be an equity justifying the claim as a defence.

[211]    The present case, however, has a feature which was not an aspect of the APM decision.  In that case, the party which was the potential cross-claim claimant was seeking relief based upon a cross-claim which it had not pursued.  In this case, the guarantor, namely the debtor, is seeking to invoke rights of set-off which go back many years.  It is true that the decision of whether proceedings ought to be brought to prosecute such a claim for set-off lay with YTBL and not with the debtor.  At first sight that would suggest that it would be unfair to saddle the debtor with the consequences of delay on the part of YTBL in bringing a cross-claim.  On the other hand, the realities of the case suggest that the majority of the directors of YTBL were unlikely to wish to have a case brought by the company against themselves personally.   In such circumstances, the debtor would have had to obtain leave to bring a derivative action.  He has not done so.  What, however, is not clear is when the debtor claims that he first became aware of the Minto “irregularity”.  It would seem to have been for some years, though.  The fact that I have already referred to the fact that one of the debtor’s family trusts owned the lessee company gives rise to an inference that the debtor must have been aware of the essential characteristics of the Minto lease right from the outset.

[212]   I do not accept that the overall equities of the situation in this case justified the court recognising an equitable set-off which would have the effect of halting the application for a bankruptcy order because of the failure of the debtor to honour the guarantee which he gave to the creditor.   In this case, it is not just a matter of whether the debtor is genuinely willing to bring such a cross-claim but there is the additional unlikelihood that he would ever be able to negotiate the various hurdles necessary to place himself in a position where he would be able to bring such a claim.

[213]   For those reasons, I do not consider that the claimed equitable set-off can be invoked by the debtor in order to justify the court dismissing the application for a bankruptcy order.

[214]   However, even if an equitable set-off was available, no attention has been given to describing the practical consequences flowing from it.   What, in other words, would be the effect of assuming that YTBL has an equitable set-off against the creditor?   While recognising the provisional nature of the evidence which is

available in bankruptcy proceedings of this kind,28  some attempt to state how the

damages or compensation claimable by YTBL ought to have been attempted.

[215]   The fact that YTBL might have a cross-claim against the creditor which it is able to set-off does not mean that all liability owed by the company will be extinguished.  So long as the potential for a residual debt after set-off has occurred remains, the creditor will still have a liability and the debtor, as guarantor, will also have such a liability.  To say that the debtor has the right to take advantage of any equitable set-off available to YTBL is not conclusive in its effect, in other words. Yet that is, essentially, what the argument of the debtor in this case amounts to.

[216]   The difficulty that the debtor has in this case is that he must establish that there are substantial grounds upon which the court can conclude that:

a)        YTBL has an equitable set-off which it is able to establish against the creditor; and

b)the equitable set-off would reduce the amount claimed by the creditor to $1,000 or less.

[217]   The net indebtedness owing by YTBL following the sale of the companies’ property by the liquidators is $15,000,000.  There is simply no basis upon which the court could conclude that there is a realistic chance that the various cross claims which the debtor puts forward would equal or exceed that sum.   Even though the debtor may be entitled to avail itself of any cross-claim that might be available to YTBL,  the evidence is  such that  the court  cannot  conclude other than  that  the existence of an equitable set-off does not give rise to any realistic expectation that the debt owed under the guarantee would be extinguished.

The no set-off clauses

[218]   The  guarantee  which  the  debtor  provided  to  the  creditor  contained  the following provision:

9.Can you make any deduction from money you may pay under this document?

You promise not to make any payment subject to any condition, restriction or claim you may have against the Secured Parties.

For example, if a Secured Party owes you money or you think you have a

claim against a Secured Party you promise not to deduct that amount from money you pay under this document.

You may only make a withholding or deduction from money you pay to a Secured Party under this document if that withholding or deduction is required by law.

If the law does require you to make a withholding or deduction from money you pay to a Secured Party then the following rules apply:

·You must increase the amount you pay to that Secured Party so that the Secured Party receives the amount it would have received had

there been no withholding or deduction.

[219]    The MOCF between Westpac and YTBL contains the following clause:

12.1     Set Off

If the Borrower has any money in any account with Westpac NZ, then Westpac NZ can use it to pay amounts the Borrower owes under this Agreement but need not do so. If the Borrower is in default, Westpac NZ can use money which has not yet matured due and convert money in the account of the Borrower in foreign currencies. To the maximum extent allowed by law, the Borrower gives up any

right  to  set  off  any  amounts  Westpac  NZ  owes  it  against  the

Outstanding Moneys.

[220]   The Court of Appeal has accepted that the right of equitable set-off may be contractually excluded expressly or by clear implication.29      The authors  of  The Modern Contract of Guarantee have  also  commented  on  this  in  relation  to  a guarantee contract:30

Furthermore, the terms of the guarantee itself may preclude the guarantor from pleading cross-claims and defences available to the principal debtor. Clear and unequivocal words (or an obvious implication) are required to achieve this effect …

[221]   The effect of these two “no set-off” clauses would seem to prevent the debtor from invoking in any capacity rights of set-off that might have been available to him personally or which might have been available to YTBL.

[222]   In his submissions for the debtor, Mr Collecutt dealt with this matter in the following way:

49.Whilst the fine print of the original loan document and guarantee attempted to include an exclusion clause, there is no evidence that the clause was drawn to Mr Yarrow’s attention.

50.It is open to the court to weigh the inclusion of the exclusion clause in the agreement against the fact that the advice was actually given and relied upon (e.g. s4 Contractual Remedies Act 1979, s5C Fair Trading Act 1986).

[223]   There is little substance to the first of these submissions.  Whether the debtor had the provisions of the no set-off clause drawn to his attention is irrelevant.   In signing the contract, the parties adopted the words of the contract as expressing their contractual intention.31     Another matter that Mr Collecutt raised in his oral submissions was that in Grant v New Zealand Motor Corp Ltd the court did not allow the lessor to avail itself of the no set-off clause because it did not consider that

its meaning and effect was wide enough to displace the potential right of set-off that

was contended for in that case.32

29     Grant v New Zealand Motor Corp Ltd, above n 3.

30     W Courtney and JC Phillips, above n 4, at [11-080].

31     L'Estrange v F Graucob Ltd [1934] 2 KB 394 (CA) at 403.

32     Grant v New Zealand Motor Corp Ltd, above n 3.

[224]   This reflects the idea that the courts ordinarily construe exclusion clauses strictly.33   Although the general approach to the interpretation of exclusion clauses is the same as that applying to the interpretation of contracts,34  ambiguous or unclear exclusion clauses are generally interpreted contra proferentem.

[225]   Overall,  it  is  a  matter  of  interpreting  the  language  of  the  parties  in  the contract actually before the court.  Clause 9 of the guarantee in this case expressly forbids  the  debtor/guarantor  from  treating  his  obligations  of  payment  as  being subject to any “restriction or claim that you may have against the secured parties”. Furthermore, clause 12.1 of the MOCF is unambiguous.   It explicitly states that YTBL gives up any right of set-off to the maximum extent allowed by law.

[226]   It would therefore be unlikely, in my view, that a court would adopt a view of these clauses that was sufficiently benevolent to the guarantor to shield him from the claims under the guarantee by raising a set-off against the creditor.

[227]   I do not accept that the references to the Contractual Remedies Act 1979 or the Fair Trading Act 1986 have any relevance.

[228]   The former has the effect of preserving to the court a power to consider whether a “no representation” clause ought to be given effect to.  The court can take account of matters such as the respective bargaining strengths of the parties.  Clauses of that kind are concerned with representations which have been made inducing the contract.  They do not apply to provisions of the contract which exclude liability.

Overall conclusion on defences which debtor puts forward

[229]    My conclusion is that the creditor did not owe the debtor, YTBL, or the

Yarrow Group any obligations of the kind which the debtor puts forward.

[230]   The creditor did not owe any contractual obligation which prevented it from proceeding with a receivership.  It had contractual power to take the steps that it did.

33     Dorchester  Finance  Ltd  v  Deloitte  [2012]  NZCA  226  at  [33];  McKenzie  v  Protective

Canopies Ltd [2017] NZHC 1623 at [14].

34     i-Health Ltd v iSoft NZ Ltd [2011] NZCA 575, [2012] 1 NZLR 379 at [43].

[231]   Similarly, the guarantee is an enforceable contract.  There was nothing about the circumstances in which it was entered which renders that contractual obligation unenforceable.  The debtor has not established that there is a fairly arguable defence that he was owed a fiduciary obligation to provide him with advice on entering into the  guarantee  or  which  would  arise  from  the  general  circumstances  of  his relationship with the creditor, which would prevent it from exercising its contractual rights.

[232]   There  are  no  arguable  bases  upon  which  YTBL  could  be  entitled  to  an equitable set-off which, in turn, would be available to the debtor as guarantor of the obligations of the company.  That is because the creditor did not owe any fiduciary obligations to the debtor which would govern the circumstances in which it, the creditor, could appoint receivers to YTBL.

[233]   The creditor was not in breach of any obligation in regard to the Minto transaction and nor did it breach any obligation owed to YTBL or to the debtor by appointing receivers. The creditor had bona fide reasons for appointing receivers given  the  financial  position  of  YTBL  and  that  the  directors  were  powerless  to retrieve the position.

[234]   Even had there been any breach of duty, it is clear that no loss would have resulted to YTBL, which in any event was insolvent and in a financial crisis at the point where receivers were appointed.

[235]   YTBL was bound by the no set-off provision in any case.   There was no overriding fiduciary obligation which the creditor breached.

What the court must be satisfied of before it makes a bankruptcy order?

[236]   Even though the court does not accept Mr Yarrow’s claims that he was not indebted to the creditor, that is not the end of matters.  It is necessary to consider, additionally,  whether  the  court  ought  to  exercise  the  discretion  that  it  has  to adjudicate Mr Yarrow bankrupt.

[237]   As outlined earlier, s 36 of the Act allows the court, at its discretion, to adjudicate a debtor bankrupt if the creditor has established the requirements set out in s 13.

[238]   Section 13 reads as follows:

A creditor may apply for a debtor to be adjudicated bankrupt if–

(a)       the debtor owes the creditor $1,000 or more or, if 2 or more creditors join in the application, the debtor owes a total of $1,000 or more to those creditors between them; and

(b)       the debtor has committed an act of bankruptcy within the period of 3 months before the filing of the application; and

(c)       the debt is a certain amount; and

(d)       the debt is payable either immediately or at a date in the future that is certain.

[239]   While it was initially disputed by the debtor, it was eventually conceded that it was open to the creditor to rely upon the act of bankruptcy committed in relation to the judgment creditor who brought the bankruptcy proceedings in the first place, being the proceedings into which the creditor was substituted by order of the court.

[240]   The court’s discretion as to whether to adjudicate the debtor bankrupt is defined in s 37 of the Act, which provides:

The court may, at its discretion, refuse to adjudicate the debtor bankrupt if–

(a)       the applicant creditor has not established the requirements set out in section

13; or

(b)       the debtor is able to pay his or her debts; or

(c)       it is just and equitable that the court does not make an order of adjudication;

or

(d)       for any other reason an order of adjudication should not be made.

[241]   The factors which the court is required to take into account when deciding whether to exercise its discretion will now be considered.

[242]   In  Eide  v  Colonial  Mutual  Life  Assurance  Society  Ltd,  Master  Faire summarised the main principles applicable to the exercise of the jurisdiction to bankrupt:35

I consider briefly the general principles involved in the exercise of discretion under  s  26  of  the  Insolvency Act  1967.  The  important  matters  can  be summarised as follows:

1.“A creditor who establishes the jurisdictional facts set out in s 23 is not automatically entitled to an order. On the other hand, it is for an opposing  debtor  to  show  why  an  order  should  not  be  made.” McHardy v Wilkins & Davies Marinas Ltd (CA 54/93, p 3, 7 April

1993, Hardie Boys J)

2.“In the exercise of the discretion under s 26 it is proper for the Court to consider not only the interests of those directly concerned - the petitioner, other creditors, the debtor  - but also the wider public interest.'' McHardy v Wilkins & Davies Marinas Ltd & Ors (supra) p

3

3.In determining whether an order should be made, the wider public interest   must   be   taken   into   account   to   determine   whether adjudication is “conducive or detrimental to commercial morality and the interests of the general public'' Re Nisbett, ex parte Vala (1934) GLR 553, 556

4.“On  a  bankruptcy  petition  the  court  must  have  regard  to  public interest in a way which transcends the interest of the immediate parties to the proceeding. The public interest in exposing and controlling an insolvent debtor is one which exists quite independently of the separate question of debt-collection by his immediate creditors'' Re Fidow [1989] 2 NZLR 431 at 444

5.        Absence of assets is a factor but

“even the undoubted absence of assets will not necessarily preclude an order, for the circumstances may be such that the debtor ought in the public interest to be visited with the disqualification’s that go with bankruptcy'' McHardy v Wilkins & Davies Marinas Ltd & Ors (supra), p 3

6.        Another matter

“is the potential for further investigation. A bankruptcy makes available to creditors an array of procedures for investigating the financial circumstances of the debtor. Those procedures are likely to prove  more  effective  than  an  investigation  conducted  by  other means'' Re Fidow (supra) p 444.

7.        There is a need

“for the Court to balance the various considerations relevant to the case, and to determine whether in the end the debtor has succeeded in showing that an order ought not to be made'' McHardy v Wilkins

& Davies Marinas Ltd & Ors (supra) page 4.

[243]   Eide was decided under the predecessor legislation, the Insolvency Act 1967, but there is no doubt that the decision retains its authority.

[244]   There are other matters which are relevant to the discretion whether or not to make an adjudication order.  While there is little authority on the point, I consider that considerations of accountability and deterrence are also relevant to the exercise of the discretion.  The purpose of bankruptcy is not just to bring about the orderly distribution of the bankrupt’s remaining assets amongst his or her creditors.  Other purposes are served, as the extracts from the leading authorities discussed earlier make clear.   These include the protection of the public, which is achieved by imposing disqualifications on the specific debtor who is before the court.  However, the courts have also referred to the need to reinforce commercial morality.   That would indicate that the purposes of making a bankruptcy order extends beyond the immediate concerns relating to the debtor actually before the court.   Commercial morality would be reinforced also by the effect that the making of adjudication orders  has  of  stigmatising  unacceptable  commercial  behaviour.     Commercial morality would be similarly reinforced by a wider appreciation in the community that a failure to pay one’s debts has consequences.

[245]  Having considered the various matters that are relevant, including those discussed above, the court is required to:36

“… balance the various considerations relevant to the case, and to determine whether in the end the debtor has succeeded in showing that an order ought not to be made”.

[246]   The propositions relevant to the exercise of the court’s discretion referred to above will now be considered in light of the specific matters advanced by the debtor in opposition to the making of an order of adjudication:

a)       the conduct of the creditor bears upon the court’s discretion to decline to make a bankruptcy order, with the result that the court ought not to make such an order in the circumstances of this case; and

b)the purposes for making a bankruptcy order in this case do not include recovery of the debt.  No recognised policy justifying the making of bankruptcy orders would be served by making an order in the circumstances  of  this  case  because  the  debtor  does  not  have  any assets.

[247] Another matter that I consider relevant is whether the debtor acted conscientiously in incurring liability under the guarantee.

Conduct of the creditor

[248]   The  debtor  raises  a  number  of  aspects  of  the  creditor’s  conduct  which

allegedly point in favour of refusing to make a bankruptcy order.

[249]   Dealing first with the delay point, it is now approximately six years since the

Yarrow companies were placed into receivership.

[250]   It was not suggested that the debt, which is the basis of the creditor’s claim, was time-barred.37   I understand that the contention which the debtor puts forward is that it was somehow unfair for the creditor, which has allowed the claim to lie dormant for many years, to now take steps to enforce its rights against the debtor.

[251]   The impression that I have is that the Yarrow enterprises were organised in a complicated structure which involved many different entities, including trusts. Untangling the relationships between the various entities and resolving the extent to which the final deficiency found to be owing could be recovered under the guarantee will all have taken time.  While I am not entirely clear as to the reasons for the delay, it would seem to be likely that that factor would have contributed at least to some of

the passage of time that has intervened since the events of 2011.

37     On  this issue see Polperro Corp Ltd v International Marine Services Ltd HC Auckland CIV-

2006-404-2390, 16 July 2007.

[252]   On the other hand, the debtor is unlikely to have overlooked the fact that he was  under  a  potential  liability to  the  creditor  as  a  result  of  having  signed  the guarantee.   He was never, in other words, taken by surprise by the allegedly late bringing of the claim under the  guarantee.   He does not  provide any basis for suggesting that he was prejudiced by the delay.  He does not say that he understood subjectively that,  after  a  certain  lapse  of  time,  the  creditor  had  abandoned  any intention of proceeding against him in bankruptcy.

[253]   In the circumstances, I do not consider that this is a case where the lapse of time is associated with any other factor which supports the view that the creditor’s delay was oppressive or evidences an improper use of the bankruptcy procedure against the debtor.

Assertion that no purpose would be served by making bankruptcy orders

[254]   Another matter which the debtor relies upon as weighing against the exercise of the discretion to bankrupt him is that no practical advantage will accrue to the creditor from an adjudication.  However, because of the complexity of the structures which the Yarrow Group and the individuals concerned adopted when developing their businesses, I do not find this a convincing argument.  It is not a factor which should be viewed in isolation.  It needs to be considered along with the fact that the debtor had a substantial interest in what was a multi-million dollar business.

[255]   It is to be inferred that the business created wealth for those who owned the shares in it.   No doubt it was assumed that the debtor was a person of substance when the securities for the various lending advanced by the creditor were prepared. Those securities, as I have already noted, included a personal guarantee securing a sum of up to $5,000,000.  The debtor says that he has no personal assets to back the guarantee.   He does not make clear whether that was the case from the outset or whether his asset position has changed subsequently.   If the debtor’s assets have materially diminished since the time when the guarantee was signed, the reasons for that occurrence could well be of interest to the creditor and any other persons to whom the debtor owes money.   The material put in evidence before the court established that the debtor was not a stranger to the use of family trusts as financial planning vehicles.  Whether assets which he owned found their way into those trusts,

or whether his impecuniosity is simply due to losses having been suffered, is something which could usefully be enquired into by the Official Assignee.

[256]   Establishing what, if any, rights creditors of the debtor may have in regard to transfers of wealth to family trusts is not a straightforward matter.  The general claim by the debtor that he does not have any assets could well be seen as the starting point of an enquiry, not the end.  The reason why he has no assets and what has become of such property as he did own are matters of legitimate interest to the creditors of the debtor.  The creditor’s evidence that there are no assets is not, given the complex and sophisticated business structures which seem to have been adopted in this case, of much assistance at all in resolving the question of whether a bankruptcy order is likely to serve any useful purpose.

[257]   The creditor in this case has suffered losses of tens of millions of dollars.  It lent money to the Yarrow Group in reliance on, amongst other things, the personal guarantee of the debtor.  The debtor gave a personal guarantee for an amount up to

$5,000,000 which the creditor could legitimately expect to reduce at least in part to its overall loss.  It now proves not to be able to do so.  These factors, in my view, point strongly in favour of the need for an adjudication.

Accountability

[258]   Quite   apart   from   the   need   to   allow   a   proper   investigation   of   the circumstances of the debtor’s finances, adjudication would also assist in promoting the understanding that  business  people will  be accountable where their conduct causes  harm  to  others  in  the  business  community.     The  maintenance  and enhancement of commercial morality has long been recognised as one of the objectives of bankruptcy.  The concept of accountability is linked to that objective.

Conclusion

[259]   For  all  of  these  reasons,  balancing  the  factors  that  I  have  mentioned,  I

consider that an adjudication order is the appropriate outcome in this case.

[260]   The order is to take effect at the date and time when this judgment is issued by the registrar.

[261]   The parties are to address the question of costs in memoranda not exceeding

six pages on each side within the next 15 working days.

J.P. Doogue

Associate Judge