Jain v Kiwibank Limited [2012] NZCA 242 (12 June 2012)

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Jain v Kiwibank Limited [2012] NZCA 242 (12 June 2012)

Last Updated: 21 June 2012

IN THE COURT OF APPEAL OF NEW ZEALAND

CA27/2012 [2012] NZCA 242

BETWEEN JOTI JAIN AND RUPINDER CHAHIL Appellants

AND KIWIBANK LIMITED Respondent

Hearing: 22 May 2012

Court: O'Regan P, Wild and Miller JJ

Counsel: A H Waalkens QC for Appellants S A Barker and N H Whalley for Respondent

Judgment: 12 June 2012 at 3 pm

JUDGMENT OF THE COURT

A The appeal is dismissed.

2. The appellants must pay the respondent costs for a standard appeal on a band A basis plus usual disbursements.

____________________________________________________________________

REASONS OF THE COURT
(Given by Miller J)

Introduction

[1] Kiwibank funded a townhouse development for the appellants, Ms Jain as borrower and Mr Chahil as guarantor.[1] Advances were made from time to time under two loans and a revolving credit facility (the facility), the latter having been established to cover interest payments on the loans. Payments were made as Kiwibank’s agent, Ortus International Ltd, certified progress.
[2] Progress was slow. The facility was established in April 2009 but the development was only 75 per cent complete on 22 October 2009, when it expired and was to be repaid unless Kiwibank agreed to its extension. On 4 November Ortus certified progress payment No 9, but Kiwibank declined to meet it, citing concerns about the appellants’ financial position and a dispute between the appellants and Placemakers, their principal supplier of building materials. On 16 November 2009 Kiwibank demanded repayment of all sums payable under the facility.
[3] The appellants say that Kiwibank was obliged to advance progress payment No 9 but instead stopped the development, causing them significant loss. Kiwibank says it could call up the loan, for it had not agreed to extend the facility, and in any event the appellants had also breached the facility and security documents.
[4] Kiwibank later sold the property as mortgagee on an “as is” basis and sued the appellants for the shortfall. On 7 October 2010 it secured summary judgment for $1,396,884 with interest and costs, the appellants having done nothing to oppose.[2] They moved to set the summary judgment aside, explaining their earlier inaction to the satisfaction of Associate Judge Sargisson. The question was, and is, whether they had a substantial defence.[3] The Associate Judge held that they did not.[4] This appeal is brought from her refusal to set the summary judgment aside.

The loans

[5] We adopt the Associate Judge’s summary of the background to the loans:

[9] Ms Jain held a Business Edge Transactional Current Account with Kiwibank under the account number .... Relevantly, under the terms of operation, Kiwibank was entitled to demand repayment if the account was operating in debit.

[10] In July 2007, Kiwibank advanced a home loan of $1.4 million to Ms Jain under a term loan facility to enable Ms Jain to refinance existing borrowing secured over her property at 57 Bolton Street, Blockhouse Bay.

[11] In April 2009, Kiwibank provided Ms Jain with second term loan facility. This was for funding of up to a maximum of $1.612 million for a townhouse development at her Bolton Street property. The named developer was the Jain Group, which was essentially Mr Chahil and Ms Jain. The builder was BF Mudgway Limited.

[12] Kiwibank also provided Ms Jain with a revolving credit facility to cover advances of up to a maximum of $140,000 on 28 April 2009. The advances were to be used for the purpose of meeting capitalised interest on the term loans, thereby effectively funding the cost of the borrowings for the development pending completion and sale of the townhouses.

[13] Though cl 6.2 of the revolving credit facility expressly states that all advances under it are to be repaid by 22 October 2009, the clause allows for the possibility of extension. Materially, it states:

Final payment...

The borrower will pay to Kiwibank all amounts owing under this agreement... no later than 11 am on 22 October 2009 unless Kiwibank agrees to extend the date.

[14] The possibility of a review by Kiwibank decides whether to extend the revolving credit facility is referred in the loan summary that is set out as a preface to the facility. It states:

Loan Summary

Loan type: The loan is a revolving credit agreement.

Maximum amount: The maximum amount of the loan is $140,000.00.

Expiry: The loan expires on 22 October 2009. Prior to that expiry date, Kiwibank will review the loan and either terminate the loan or agree to extend the term of the loan from that expiry date.

Interest: The rate of interest charged on the loan is variable.

This is only a summary of the terms of the loan, which are set out in more detail below.

[Emphasis added]

The parties’ dealings in October-November 2009

[6] The appeal turns on a meeting held on 30 October 2009. The Associate Judge conveniently summarised the narrative around this meeting, as follows:

[17] By early October 2009, the townhouse development was suffering from a serious lack of progress. The head contractor was not able to uplift materials from its supplier, Placemakers. Placemakers maintained that it was owed significant overdue sums on the materials it had supplied for the development, and it advised Kiwibank accordingly. It also maintained that Mr Mudgway, director of the head contractor, had acknowledged the debt of monies owing on the Bolton Street development, and that Mr Chahil was causing problems in meeting the debt because he was using monies drawn down for his personal use. Mr Chahil disputes this.

[18] On 30 October 2009, there was an on-site meeting at Bolton Street. Kiwibank representatives, Mr Grenfell of Ortus, who was responsible for certifying monthly draw-downs to meet construction costs, Ms Jain and Mr Chahil, and Mr Mudgway attended. They discussed in particular whether any creditors of the Bolton Street development were owed money. Ms Jain and Mr Chahil said that there were not. Mr Mudgway agreed. On this basis, Ms Jain, Mr Chahil and Mr Mudgway agreed that the development could be finished by 14 December 2009. It seems that Kiwibank indicated it would release a further interim payment, although the parties dispute whether this amounts to a firm agreement.

[19] On 1 November 2009, Placemakers provided Kiwibank with a copy of a letter it had received from Ms Jain and Mr Chahil’s solicitors, Richard Allen Law. The letter dated 2 September 2009 and signed by Mr Allen, principal of Richard Allen Law, indicates a somewhat different position with respect to Bolton Street. It states:

RE JOTI JAIN & RUPINDER SINGH CHAHIL – Supplies for 57 Bolton Street, Blockhouse Bay Auckland

We act for the above clients.

Our clients acknowledge the total amount outstanding to the date is $137,771.17.

We confirm on behalf of our clients that $100,000.00 will be paid on or before 20 September 2009 and the remaining balance paid on or before 25 October 2009. We note our client’s confirmation is given on the basis that you remove any restrictions on the account and continue with the supply of goods to our client. We also note our client’s advice that the delay in supply will likely result in the delay in payment.

Please acknowledge receipt of this letter and confirm that you will continue supply of goods to our clients.

[20] On 4 November 2009, Ortus gave Kiwibank a report. The report recommended that a draw-down be issued in favour of Jain Group for $219,814.74, which included “a catch-up payment of $178,345.03 ... as discussed with the Builder and the Bank’s representative, Mr John Mowat.” The report also stressed, however, that “any payment on this project is totally at the discretion of Kiwibank...”

[21] On 6 November 2009, Placemakers issued formal notices of demand on Ms Jain and Mr Chahil for the outstanding debt on the Bolton Street development. Placemakers claimed the outstanding debt stood at $166,646.50. The notices of demand were copied to Kiwibank by Placemakers.

[22] On 9 November 2009, Kiwibank wrote to Mr Mudgway about the updated cost to complete the project. Its letter refers to their previous discussions and Mr Allen’s Bolton Street spreadsheet dated 6 November 2009 setting out the updated cost to complete as at 20 October 2009. The letter also sets out Mr Mudgway’s response to its proposal for a drawdown of $219,874.74, which included $178,345.03, as set out in the spreadsheet, for invoices yet to be paid.

[23] Materially, the letter does not give unqualified agreement to the proposed drawdown. Rather, it requires copies of council onsite inspection sheets and the applicable invoices and advises that:

Should the Bank agree to release funds to meet the abovementioned payments [its] intention would be to make these payments direct to the respective subcontractors involved.

[24] There is no evidence that the invoices were provided in a way that satisfied Kiwibank. But it seems that Mr Mudgway’s position had changed somewhat since the meeting on 30 October, given that substantial sums were now requested for invoices yet to be paid.

[25] On 17 November 2009 Mr Apperley, Kiwibank’s Business Recovery Manager, met with Ms Jain and Mr Chahil and on Kiwibanks’s behalf and served them with written demands for repayment of the overdraft on the current account.

[7] The written demands claimed $135,227, being the balance payable under the facility. On non-payment, the Bank issued the mortgage default notices pursuant to which it later sold the property.

The Associate Judge’s decision

[8] The Associate Judge considered that the question was whether Kiwibank arguably reached a binding agreement to extend the facility. She answered the question in the negative, citing the contemporaneous records which indicated that Kiwibank provisionally agreed to extend it and make a further advance, but on conditions which were not met. She added that Kiwibank had learned of breaches of the facility and mortgage which entitled it to demand repayment. She cited three breaches: Ms Jain had granted a second mortgage without Kiwibank’s consent; the appellants’ dispute with Placemakers adversely affected their ability to fund the development; and there was evidence, in the form of negotiations with Placemakers, that the appellants were unable to pay their debts as they fell due.

The issues on appeal

[9] The appellants raise a number of grounds. Only two matter. They are:

1. Whether Kiwibank was obliged to extend the facility when it expired on 22 October; alternatively
2. Whether Kiwibank agreed in fact to extend the facility.

Was Kiwibank obliged to extend the facility?

[10] For the appellants, Mr Waalkens QC argued that the expiry date of the facility was a nominal date only, and that Kiwibank was obliged to review it and either terminate or extend it. Alternatively, there should be implied a term that Kiwibank was obliged to extend the facility unless the appellants were in breach. He emphasised that the facility was an adjunct to the term loans, designed to capitalise interest on those loans until the development was complete. Absent some default, Kiwibank was obliged to extend the facility until the development was completed.
[11] We reject these submissions. The facility provided unambiguously that it expired on 22 October unless Kiwibank agreed to extend it. Expiry need not co-incide with completion of the development. Rather, the facility assigned to the appellants the risk that they would not complete on schedule. The proposed implied term would contradict the express terms of the facility.

Did Kiwibank agree to extend the facility?

[12] The central question is whether it is arguable that Kiwibank did in fact agree to extend the facility at the meeting of 30 October.
[13] The meeting was attended by two Kiwibank representatives, John Mowat and Shashi Srivastave. Also present were Mr Mudgway, Mr Chahil, and David Grenfell of Ortus. The meeting was summarised in an email of 4 November from Mr Mowat. The subject of discussion was the lack of progress. There was a dispute between Mr Mudgway and Placemakers about payments, he saying that he had paid Placemakers but they had credited the money to the wrong account, and they that Mr Chahil had diverted Kiwibank advances, using the money for other purposes. Mr Mowat asked repeatedly whether any money was outstanding to anyone on the project. He was assured that it was not. When asked, Mr Chahil expressed concern about Mr Mudgway’s ability to complete the project on time, and on budget. He sought assurances. Mr Mudgway was agreeable to such commitment but wanted a payment of $178,345 to get things going again. Mr Mowat recorded that:

At this time I agreed that subject to Ortus providing us with an updated drawdown request and that being reasonable we would prefer to see things completed to protect our position. Again it was stated that there were NO outstanding amounts owing on this project at this time. It is also worth noting that we were advised by Mudgway that almost all material were held on-site and the major issue for him was paying sub-contractors and labour.

At this time Chahil & Mudgway went away with David Grenfell to sort out the agreement as stated above.

[14] Apparently with the assistance of Mr Grenfell, Mr Chahil and Mr Mudgway swiftly negotiated an agreement under which the development would be completed for the original contract price and by 14 December. That was signed on 1 November.
[15] Ms Jain also wrote to Placemakers identifying specific payments that had been made but which Placemakers had apparently not credited to the correct account. However, on 1 November Placemakers advised Kiwibank that so far as it was concerned money was still owed on the project. The amount claimed was substantial, $166,646. We have also referred to the letter from Richard Allen Law, which evidences the appellants’ acceptance that money was due to Placemakers.
[16] It appears that Kiwibank advanced one payment direct to Placemakers, a sum of $38,657 which was drawn down to pay for the roof. That payment was made on 4 November. The Bank also paid an Ortus fee.
[17] On 4 November Ortus issued progress report No 9, recommending that Kiwibank allow a drawdown of $219,815. However, Ortus also noted the Placemakers claims, which it was investigating, and expressed the opinion that the amount needed to complete the development exceeded the amount budgeted. Ortus estimated that an additional $95,000 would be needed.
[18] On 9 November Mr Mowat wrote to Mr Mudgway:

You have requested that the Bank agree to the drawing down of a further request for drawdown of funding amounting to $219,874.78. While the Bank has now been provided with the account details of the applicable payments, a prerequisite of these funds being released is the provision of the following information:-

1. The company is to provide copies of all council onsite inspection sheets, confirming that the inspections have passed to date.

2. In regard to the updated cost to complete spreadsheet as at 20 October 2009 provided to the Bank, advising that the amount to be paid being $178,345.03, please provide copies of the applicable invoices.

Please arrange for the above information to be provided directly to David Grenfell either by Fax on 04 4728792 or scanned and by email to [e-mail].

Should the Bank agree to release funds to meet the abovementioned payments, it is the Bank’s intention to make these payments directly to the respective sub contractors involved.

[19] At about the same time, Placemakers issued demands for the outstanding amount.
[20] Kiwibank then decided not to continue funding the development. It insisted that the facility be repaid.
[21] Mr Waalkens pointed to statements in affidavits by Messrs Jain and Mudgway to the effect that at the 30 October meeting Kiwibank agreed unconditionally to extend the facility. Mr Chahil said:

My belief has always been that from the 30 October 2009 meeting on site and as a result of the affidavit of Barry Mudgway Kiwibank agreed that it had no grounds at all to halt the funding of the project and that it was bound to continue. My very firm view from the meeting was that funding would be continued.

[22] However, the Associate Judge need not accept that general assertion uncritically, however improbable or however inconsistent with contemporanous documents.[5] The meeting was held to discuss the lack of progress and Mr Mudgway’s apparent inability to complete because of his financial difficulties. Mr Mowat did indicate that the Bank preferred to see the development completed, but it was improbable that he would agree not only to extend the facility but also to its inevitable corollary, further advances, without evidence that the project could be completed on time and on budget. His email of 4 November confirms that, as does the parties’ behaviour. For example, Messrs Chahil and Mudgway went away and within a couple of days had negotiated the agreement that the Bank required. It was also unlikely that Kiwibank would commit to the additional funding without an updated drawdown request from Ortus. The email confirms that too. The letter of 9 November is to the same effect, and entirely consistent; it evidences Kiwibank’s mistrust of Mr Mudgway and its insistence upon verification of the work done to date and the amount needed to complete.
[23] Nor can there be any doubt that as events unfolded after 30 October it became apparent that the development would not be completed on budget. Ortus confirmed that in its Progress Report No 9. Whatever the rights and wrongs of the dispute with Placemakers, it had become plain that Placemakers would not co-operate and would not acknowledge that arrears had already been paid. That must have affected the timing of completion if not the ultimate cost. Kiwibank’s decision to fund a payment to Placemakers after the meeting does not demonstrate that a commitment had been made; it shows rather that Kiwibank was keeping its options open while it awaited evidence that the project could be completed on time and on budget.
[24] For these reasons the appellants have failed to point to an arguable case that Kiwibank agreed to extend the revolving credit facility, whether at the meeting of 30 October or subsequently.

Other grounds

[25] We need not deal with Mr Waalkens’s further argument that Kiwibank must honour a drawdown request made by Ortus. Such obligation would not preclude the Bank from insisting on repayment of the facility. Drawdowns were made under the term loans, not the facility. But we do observe that under the loan documents Kiwibank would make a loan only if “it has received and is satisfied with”, among other things, certification of each progress payment by Ortus.
[26] Equally, we need not deal with the question whether the appellants were in default under the mortgage documents so as to justify Kiwibank’s actions independently of the facility expiring.

Decision

[27] The appeal is dismissed.
[28] The appellants must pay the respondent costs for a standard appeal on a band A basis plus usual disbursements.

Solicitors:
Citylaw, Auckland for Appellant
Buddle Findlay, Wellington for Respondent

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[1] The appellants say that Mr Chahil was the beneficial owner and Ms Jain his employee, but nothing turns on that for purposes of this appeal.

[2] Kiwibank Ltd v Jain HC Auckland CIV-2010-404-440, 13 December 2011.

[3] High Court Rule 12.14; Russell v Cox [1983] NZLR 654 (CA); and Cheah v Equiticorp Finance Group Ltd [1989] 3 NZLR 1 (PC).

[4] Kiwibank Ltd v Jain HC Auckland CIV-2010-404-440, 13 December 2011 at [35].

[5] Eng Mee Yong v Letchumanan [1980] AC 331 (PC) at 341 per Lord Diplock.