New Zealand Credit Law Bulletin - Vol 6, No 2, March 2006
A free, plain English review of recent law and items of interest for creditors, produced by Hattaway & Associates Ltd, Credit Consultants. To subscribe, visit the New Zealand bulletin index and enter your details on the right
Plain language disclaimer:
This bulletin is not legal advice. Do not make decisions on legal matters based on a brief commentary. Instead, get professional legal advice.
In this issue:
- Lender should have checked further – mortgage void for fraud
Failure to check meant lender “wilfully blind” and therefore its security was void - Guarantor claims signature not his but…
…Creditor uses police handwriting expert to prove it is - Stoush over early examination of bankrupt director
Could a bankrupt leave the country forever? Apparently so! - Mareva injunctions – a tool creditors should know about
But judges don’t grant them unless there’s a good reason
1. Lender should have checked further – mortgage void for fraud
NATHAN V DOLLARS & SENSE LIMITED HC AK CIV 2002-404-2666 25 August 2005
Mr and Mrs Nathan purchased a property in Kerikeri in 1963. In 1991, their son, Rodney, became the assistant manager of the Settlers Tavern in Whangarei.
Mr Harris, a director of Settlors Tavern, arranged for Rodney to buy 75% of the Settlers Tavern shares owned by one of the other directors for $250,000. Harris was also involved in a business called General Capital Finance Ltd. General Capital arranged a loan for Rodney from Dollars and Sense Ltd. A mortgage over Rodney’s parents’ house was to be security for this loan.
Rodney did not obtain any legal advice even though the solicitor for Dollars and Sense advised him to. Harris gave Rodney the mortgage documents to be signed by his parents. When they were returned, the signatures had not been witnessed and other necessary details were missing. The solicitor for Dollars and Sense wrote to Harris expressing his concerns. He said:
“Given that neither Rod nor his parents have sought legal advice, and given that the parents are providing security for their son, I am concerned that this is settled properly and that nobody says at a later date that the securities were completed under duress or improperly or were otherwise deficient. These documents really need to be fully and unequivocally enforceable.”
The documents were returned to Rodney who gave them back to Thomas on 8 August 1996. No-one other than Rodney spoke to his parents.
The business became unprofitable. Rodney made one repayment of $1000 before it was placed into liquidation in August 1998.
In 2000 Mrs Nathan became aware of the debt. In December 2001 a demand under the Property Law Act was served upon Mrs Nathan and Mr Nathan senior. Mrs Nathan sued. On March 2005 the matter went to a full hearing before the High Court. Mrs Nathan claimed, and the court agreed, that her signature had been forged by Rodney.
However, that in itself did not make the registered title voidable. For this to happen, it must “be brought home to the registered proprietor or to the registered proprietor’s agent.” If the lender or its agent knew enough so that they should have checked further, the lender “…is guilty of that wilful blindness or voluntary ignorance which, according to the authorities, is equivalent to actual knowledge, and therefore amounts to fraud.”
Mrs Nathan said Dollars & Sense knew or was wilfully blind to the fraud. The fraud had been “brought home” to Dollars and Sense.
The judge agreed. Dollars and Sense, through its lawyer and Harris, were aware that Nathans parents weren’t receiving legal advice. They also knew the documents weren’t properly executed at the beginning and that when they were returned the same person was shown as witnessing all signatures. The judge said that when these matters were looked at all together Dollars & Sense had been wilfully blind to the possibility of fraud connected with the obtaining of the security from Mr Nathan’s parents.
He said, “Dollars & Sense …had ample opportunity to ensure that the signatures were not fraudulently obtained. A simple phonecall by [the lawyer] to the parents would have sufficed.”
He held that the mortgage was void due to it being fraudulently obtained and ordered that it be removed from the register.
Mrs Nathan also claimed that Rodney was Dollars and Sense’s agent, and therefore what he knew, Dollars and Sense can be said to know.
Again, the judge agreed. He said that as Rodney was undertaking significant tasks for Dollars and Sense at its request, he was acting as its agent. The judge said that “Dollars & Sense cannot take the benefit deriving from Mr Nathan’s fraudulent actions (the mortgage), whilst disclaiming his actions for other purposes.” The lenders “made no effort to communicate directly with Mr Nathan’s parents. Dollars & Sense must therefore either have intended Mr Nathan to explain the nature of the transaction and to tell his parents that Dollars & Sense expected them to receive full independent legal advice, or Dollars & Sense was indifferent as to the truth of the matters recorded there.”
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2. Guarantor claims signature not his but…
COMPOSITE RETAIL SOCIETY LIMITED V PHILLIP MIDDLETON PRYDE HC AK CIV. 2004-404-7011 [10 October 2005]
Composite Retail Society is a buying group. It is an incorporated society. Its members are small retail clothing and footwear businesses which combine together in order to buy larger quantities and save money.
The arrangement the society made with wholesalers allowed members to place their orders directly with suppliers and receive the goods direct. The suppliers would then charge Composite for the deliveries and Composite pays them. Composite bills the retailers.
Composite estimated that it processed $84 million worth of transactions in a year. Mr Pryde was associated with a business called Footloose Shoes Ltd. He guaranteed Footloose’s debt to Composite. Footloose was placed in receivership in December 2003 by its banker. Composite sued Pryde under the guarantee.
Pryde raised doubt about the validity and enforceability of the guarantee and also whether the signature on the guarantee was his. Composite brought in a police examiner to prove that it was his signature.
The judge held that the guarantee was valid and enforceable and awarded judgment for $668,251.86 against Pryde.
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3. Stoush over early examination of bankrupt director
COMMERCIAL FINANCE & SECURITIES LIMITED V MCKAY HILL & COMPANY And Ors HC NAP CIV-2003-441-884 [9 December 2005]
Mr Neilson was the director of the companies in the Neiloss Group. Ms Ross was his partner. One of the companies in the Neiloss Group was Neilson Horticulture Limited. This company was wound up by petition of the Commissioner of Inland Revenue in
2001.
This led to litigation between Commercial Finance & Securities Ltd and McKay Hill & Co and 3 other defendants. Before this case was heard, Commercial Finance and Securities Ltd sought an order for examination of Neilson and Ross in the High Court. They made the application because they believed they were witnesses of material evidence and intended to leave the country before the trial. The examination was critical, according to Commercial Finance, in particular to establish Neilson’s dealings with Mr Wood, the fourth defendant, and various things that Wood was aware of. The application was opposed by Wood. The other defendants indicated that they would abide by the decision of the Court.
Commercial Finance argued that for Mr Wood it would only be of minor inconvenience for Neilson and Ross to be examined and that failure to make the orders would be of a serious inconvenience to them.
Wood argued, among other things, that as Mr Neilson was an undischarged bankrupt he would be unable to leave the country regardless. Neilson was not likely to be discharged before June 2006. When a person is declared bankrupt they have a number of restrictions placed upon them, after three years they are automatically discharged unless the Official Assignee who oversees the affairs of bankrupts, objects. However, the witnesses had apparently indicated that by the end of January 2006 they intended to leave New Zealand on a permanent basis.
The judge said that Commercial Finance’s application was successful as the “plaintiff has done enough to discharge the onus upon it” by showing that the evidence of Neilson and Ross was relevant and material, and that an injustice might occur if it was unable to be heard. He made an order for the examination of Neilson and Ross.
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4. Mareva injunctions – a tool creditors should know about
A powerful tool which judges don’t grant unless there’s a good reason
Region Air Ltd had assets in NZ to the value of US$430,000. They also had other assets some of which were leased to Kiwi International Airlines Ltd.
Kiwi had various claims against Region Air and brought an application for a Mareva injunction against it. A Mareva injunction is used to stop a debtor from taking assets out of the country and therefore out of the reach of its creditors.
There are three requirements that must be satisfied in order for the injunction to be awarded. First the plaintiff must have a good arguable case against the defendant; secondly there must be a real risk that the defendant will dispose of the assets so that a judgment in favour of the plaintiff would remain unsatisfied; and finally the overall justice of the case must warrant the granting the injunction, having regard to the competing interests of the parties, and the interests of third parties.
The plaintiffs raised four causes of action, one of which the judge believed was arguable. The crucial point, however, was that Region Air, was owed more by Kiwi than the value of the claim that Kiwi had made. Even if Kiwi won, it would still owe Region Air money. Because of this, the claim for a Mareva injunction was dismissed.
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