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Court of Appeal of New Zealand |
Last Updated: 11 August 2016
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IN THE COURT OF APPEAL OF NEW ZEALAND
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BETWEEN
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First Appellant |
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Second Appellants |
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First Respondents |
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Second Respondents |
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Third Respondents |
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Fourth Respondents |
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Hearing: |
14 and 17 June 2016 |
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Court: |
Harrison, Mallon and Toogood JJ |
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Counsel: |
G M Illingworth QC for Appellant
K J Patterson for Respondents |
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Judgment: |
JUDGMENT OF THE COURT
____________________________________________________________________
REASONS OF THE COURT
(Given by Harrison J)
Introduction
[1] Paul Yarrow appeals against a summary judgment entered against him on liability in the High Court in favour of the respondents (collectively “the trustees”).[1] The amount of damages remains to be determined.[2]
[2] Mr Yarrow originally represented himself in this Court. His synopsis of submissions raised numerous grounds of appeal which it is unnecessary for us to address. He also applied for leave to adduce new evidence.
[3] At the last moment Mr Yarrow instructed Mr Illingworth QC to represent him before us. Mr Illingworth developed a ground of appeal which did not feature prominently in Mr Yarrow’s notice of opposition to the trustees’ application for summary judgment or in his own synopsis of submissions. In the result we are satisfied that this ground provides an arguable defence to the trustees’ claim. The appeal must be allowed accordingly.
[4] It is thus unnecessary for us to determine Mr Yarrow’s application for leave to adduce further evidence and it is accordingly declined.
Background
[5] The background is briefly as follows. Gilles Bakery Ltd (GBL) was a commercial baker operating in Rotorua. Initially the trustees held all the company’s shares. In 2001 they sold 75 per cent to Yarrows (the Bakers) Ltd (Yarrows), a Taranaki company. Paul Yarrow, a son of the company’s founder, and his brother, John, were directors.
[6] Yarrows later sought full ownership of GBL. On 30 June 2006 the trustees agreed to sell their remaining 25 per cent shareholding to Yarrows. The agreed purchase price of $2.25 million was to be satisfied by GBL buying its own 25 per cent shareholding. In order to finance the transaction GBL was to issue 2.25 million redeemable preference shares to the trustees, credited as fully paid and redeemable at the trustees’ option on one month’s notice to GBL after 1 July 2012. Yarrows and its principal shareholders agreed to guarantee GBL’s obligations.[3]
[7] On 25 August 2006 Paul Yarrow and others entered into a deed of guarantee of payment of GBL’s indebtedness to the trustees for any amount when validly due on redemption of the redeemable preference shares, described as by GBL to the trustees “in or about August 2006”.[4] The deed was signed for Mr Yarrow by his family trustee, Michael Finnigan, acting under a power of attorney. The terms of the guarantee were unconditional and irrevocable.
[8] In August 2012 the trustees gave GBL notice to redeem the balance of their redeemable preference shares at a value of 1.162 cents per share.[5] However, GBL defaulted. In July 2014 the trustees made demand on Paul Yarrow and his coguarantors to pay the sums due. Again that demand was not met.
[9] The terms and validity of the guarantee were not in dispute in the High Court. Instead, Mr Yarrow ran a number of defences based on collateral grounds which Peters J dismissed as unarguable. She entered judgment for liability only given that the amount owing under the guarantee was still to be settled.[6]
Deed of Settlement
[10] Mr Illingworth’s argument focused on the effect of an instrument to which we have not referred. It is an unusual document dated 10 April 2007 and described as “Deed of Settlement of Claims for Relief under the Contractual Mistakes Act 1997 and Section 56 of the Companies Act 1993” (the 2007 deed). The 2007 deed was again signed by Mr Finnigan for Paul Yarrow. Mr Yarrow says its existence only came to light when he read an earlier judgment of this court in related litigation.[7] The document is plainly relevant to liability. The trustees breached their strict obligations in failing to disclose it when one of them swore his affidavit in support of the application for summary judgment.
[11] Peters J referred to the 2007 deed briefly, noting that:
[17] The effect of the deed was first to “unwind” the Plaintiffs’ sale of their shares to GBL; secondly to substitute a sale to YTB for $2,250,000 with GBL making an advance of that amount to YTB; and thirdly for the Plaintiffs to apply the $2,250,000 to acquire the RPS.
[18] The parties to the deed also “ratified and confirmed and validated” the issue and paying up of the RPS; the terms of issue; and the redemption of 670,000 of the RPS which had already taken place. The parties also “ratified and confirmed and validated ... and expressly affirmed” the guarantee.
(Footnotes omitted.)
[12] However, Peters J was not satisfied that the 2007 deed was relevant to the issue of whether the sum due on the original redeemable preference share issue was the sum due under the guarantee; and, if so, whether his liability under the guarantee remained.
[13] The 2007 deed was entered into about eight months after Paul Yarrow executed the guarantee. Its terms are prolix, repetitive and in material respects contradictory. It is comprised principally of recitals purporting to rationalise its existence. Its apparent purpose was to cancel and then reconstitute the 30 June 2006 share sale agreement on similar terms. The deed described the 30 June 2006 agreement and the 2.25 million redeemable preference shares issued by GBL as “a purported set of arrangements” and further recited that:
- (1) The parties had received professional advice that the $2.25 million “purportedly paid” for the shares in June 2006 “exceed[ed] the available subscribed capital on those shares generating a potential tax liability of approximately $600,000 for the Minority Shareholders”.
- (2) GBL had paid $2.25 million for the remaining 25 per cent of the ordinary shares previously owned by the trustees under a mistake of fact as to tax liabilities; the purported sale of these shares was void; and GBL was entitled to recover its payment of $2.25 million.
- (3) There were contrary arguments about whether GBL’s directors could have given a solvency certificate and asserted that “it is no answer to say that the $2,250,000 was immediately used to pay up the 2,250,000 RPS because the issue of such RPS is void on the grounds of mistake”.
[14] The 2007 deed included an agreement to amend the terms of the redeemable preference share issue to read:
Such RPS have been issued credited as fully paid pursuant to an exchange of value whereby the holders of the RPS sold their respective ordinary shares in the company to [Yarrows] and used the sale proceeds of $2,250,000 to pay up the RPS in full and with the company immediately advancing such $2,250,000 to [Yarrows] thereby completing the exchange of value.
[15] The deed then recorded an agreement that “[t]he issue and paying up of the RPS and their terms of issue and the subsequent redemption of 670,000 of them are all hereby ratified and confirmed and validated”.
[16] The deed also recited that the redeemable preference share transaction among other transactions is “hereby ratified confirmed and validated ... except to the extent they are herein expressly acknowledged to be void and of no effect”; and recorded the guarantors’ confirmation that the deed of guarantee “is hereby expressly confirmed”.
Decision
[17] The trustees’ claim for summary judgment was based squarely upon the guarantee. Mr Yarrow promised repayment “in respect of any amount then validly due for the redemption of any of the 2,250,000 RPS issued by [GBL]”. The 2007 deed expressly acknowledged that the underlying agreement pursuant to which the redeemable preference shares were issued was void. The 2006 agreement and the redeemable preference shares were cancelled. The trustees repaid the $2.25 million purchase price to GBL.
[18] On the 2007 deed’s face it must be arguable that because the parties agreed to cancel the original redeemable preference share issue any liability on them was discharged; and that the provision purporting to affirm the guarantee is invalid. On one available construction the 2007 deed redeemed all the 2006 redeemable preference shares: it acknowledged expressly that the shares had been paid “in full”. Arguably those provisions operated to discharge Mr Yarrow’s liability under the guarantee. A new transaction was entered into whereby $2.25 million was advanced to Yarrows. The separate provisions within the deed purporting to ratify, confirm and validate the redeemable preference share issue are arguably ineffective as against Mr Yarrow as guarantor.
[19] It is also relevant to Mr Yarrow’s liability under the guarantee that, contrary to Peters J’s finding, the 2007 deed substituted Yarrows for GBL as the primary debtor liable on the redeemable preference shares.
[20] It is unnecessary for us to express a final view on this point. What is plain is that the trustees’ counsel should have disclosed the 2007 deed when applying for summary judgment and, when he learned of its existence, Mr Yarrow’s counsel should have developed an argument based upon it. The deed’s terms are such as to allow Mr Yarrow an arguable defence that his liability under the guarantee has been discharged.
Result
[21] The appeal is allowed. The summary judgment entered in favour of the trustees in the High Court is set aside.
[22] In the normal course costs would follow the event. However, Mr Yarrow raised a number of grounds of appeal which were unarguable and the trustees were put to unnecessary expense as a result. Also, his application to adduce further evidence was declined. In these circumstances costs should lie where they fall. There will be no order as to costs.
Solicitors:
Welsh McCarthy, Hawera for Appellant
[1] Jacquet v Yarrow [2015] NZHC 2873.
[2] The trustees abandoned their application for summary judgment against the nominated second appellants.
[3] Jacquet v Yarrow, above n 1, at [14]–[15].
[4] At [21].
[5] At [19].
[6] At [44]–[45].
[7] Gilles Bakery Ltd v Gillespie [2015] NZCA 93, [2015] NZCCLR 9 at [9].
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URL: http://www.nzlii.org/nz/cases/NZCA/2016/345.html