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Yarrow v Westpac New Zealand Limited [2019] NZCA 610 (3 December 2019)

Last Updated: 11 December 2019

IN THE COURT OF APPEAL OF NEW ZEALAND

I TE KŌTI PĪRA O AOTEAROA
CA594/2017
[2019] NZCA 610



BETWEEN

PAUL STEVEN YARROW
Appellant


AND

WESTPAC NEW ZEALAND LIMITED
Respondent

Hearing:

17 September 2019

Court:

Brown, Clifford and Collins JJ

Counsel:

M A Corlett QC and D G Collecutt for Appellant
R B Stewart QC and S L Hawksworth for Respondent

Judgment:

3 December 2019 at 3.00 pm


JUDGMENT OF THE COURT

  1. The appellant’s application to adduce further evidence is declined.
  2. The appeal is dismissed.
  1. The respondent is entitled to costs for a standard appeal on a band A basis with usual disbursements. We certify for two counsel.

____________________________________________________________________

REASONS OF THE COURT

(Given by Collins J)

Introduction

[1] In a judgment delivered on 19 September 2017, Associate Judge Doogue granted an application by Westpac New Zealand Ltd (Westpac NZ) to adjudge Mr Yarrow bankrupt.[1] He appeals that decision.

Summary of grounds of appeal

[2] The gravamen of Mr Yarrow’s appeal is that he should not have been adjudged bankrupt because he has a clear and persuasive set-off against Westpac NZ that renders it unjust for him to be adjudged bankrupt without affording him the opportunity to have his set-off fully considered.
[3] Initially, Mr Yarrow’s appeal concerned two interconnected elements to his set‑off claims:
[4] In the hearing before us, Mr Corlett explained that the focus of the appeal was that Westpac NZ owed Mr Yarrow a fiduciary duty to disclose to him the details of the Minto lease. Mr Corlett did not pursue in the oral hearing the set-off arguments we have summarised at [3(b)].

Application to adduce further evidence

[5] On 7 May 2018, Mr Yarrow filed an application for leave to adduce further evidence, namely four deeds executed on 13 March 2011, which he contends undermines a critical part of Westpac NZ’s claim against him and supports his argument that Westpac NZ owed him the fiduciary duty we have summarised at [3(a)]. We explain at [28] to [32] that Mr Yarrow has misunderstood the four deeds he now wishes to adduce.
[6] It is convenient at this juncture to provide an overview of the basis upon which Mr Yarrow was adjudged bankrupt and then explain the basis upon which he challenges the High Court judgment.

The basis upon which Mr Yarrow was adjudged bankrupt

[7] At all relevant times, Mr Yarrow was a director of Yarrows Bakers, which was part of an Australasian group of companies that manufactured and distributed food products. The group is referred to as the “Yarrow Group”. Approximately 90 per cent of the shares in Yarrows Bakers can be linked to Mr Yarrow via a family trust he settled.
[8] In his first affidavit in opposition to the application to have him adjudicated bankrupt, Mr Yarrow explained that the Yarrow Group “were a reasonably complex group of companies operating in the baking industry in Australia and New Zealand”. The business had started in Taranaki in 1923. Mr Yarrow is a member of the third generation of the Yarrow family to be involved in the Yarrow food products business. Mr Yarrow was described as being “an experienced businessman” in the High Court judgment.[2] He does not challenge that description.
[9] On 25 September 2003, Westpac NZ provided financial facilities to Yarrows Bakers. Those facilities included a multi option credit facility (credit facility) The credit facility was extended to other entities in the Yarrow Group. The total sum lent by Westpac NZ to the Yarrow Group ultimately exceeded NZD 50 million.
[10] The credit facility was amended on 28 March 2008, at which time Mr Yarrow signed the credit facility on behalf of Yarrows Bakers and four other companies in the Yarrow Group, as well as one of his family trusts.
[11] During the course of 2008 the Yarrow Group experienced difficulties in managing its finances. This led to Deloitte being instructed to evaluate the financial position of the Yarrow Group. This in turn led to the Yarrow Group being placed under the management of Westpac NZ’s credit restructuring group with effect from 31 December 2008.
[12] On 28 January 2009, Mr Yarrow provided a guarantee to Westpac NZ in relation to the financial obligations of Yarrows Bakers. The guarantee was limited to $5 million plus interest and costs.
[13] On 26 May 2011, Yarrows Bakers advised Westpac NZ that it was unlikely to be able to meet its obligations under the credit facility and invited Westpac NZ to appoint receivers. The following day Westpac NZ issued demands for Yarrows Bakers to repay NZD 38,846,602.01 and AUD 8,135,399.44 owing under the credit facility. At about this time Westpac NZ also made demand of Mr Yarrow to pay it $5 million pursuant to the guarantee. When Yarrows Bakers defaulted, Westpac NZ appointed receivers of Yarrows Bakers and two other companies in the Yarrow Group.
[14] The receivers sold a number of assets of the companies in receivership and returned funds to Westpac NZ. There nevertheless remained a shortfall in excess of $15 million that was owed to Westpac NZ under the credit facility.
[15] On 18 August 2016, Westpac NZ made a further demand on Mr Yarrow under the guarantee. The amount claimed from Mr Yarrow was $14,850,285.71 comprising the guarantee sum of $5 million plus $9,850,285.71 in interest and costs. Mr Yarrow did not pay any of the sum demanded by Westpac NZ.
[16] Judgment was obtained against Mr Yarrow by the Bank of New Zealand, one of his creditors. A bankruptcy notice was issued against Mr Yarrow by the Bank of New Zealand, after which his debt to that bank was settled. Westpac NZ then became the substituted creditor in the bankruptcy proceedings on 25 August 2016.
[17] Mr Yarrow defended the application. He initially claimed that the guarantee was a forgery. That suggestion was refuted by Ms Roberts, a lawyer, who swore an affidavit saying she had witnessed Mr Yarrow’s signature on the guarantee. Mr Yarrow then said the Yarrow Group had paid the sum covered by the guarantee. Mr Hale, a senior employee of Westpac NZ, was able to refute this assertion by Mr Yarrow. When Mr Yarrow’s first lines of defence became untenable, he alleged set-offs based upon Westpac NZ owing him fiduciary duties. The Associate Judge observed that it was difficult to isolate with precision the matters that Mr Yarrow raised as defences in the High Court.[3] Conscious of this criticism, Mr Corlett, who was not counsel in the High Court, focused on the ground of appeal that we have summarised at [3(a)].
[18] The Associate Judge concluded that Westpac NZ had established the requirements set out in s 13 of the Insolvency Act 2006 to adjudge Mr Yarrow bankrupt. The Associate Judge also concluded that the set-off arguments advanced by Mr Yarrow were devoid of merit and that there was no basis for refusing adjudication.[4] The High Court accordingly decided to exercise its discretion under s 36 of the Insolvency Act to grant Westpac NZ’s application to adjudge Mr Yarrow bankrupt.

Mr Yarrow’s set-off contentions

The Minto leases

[19] On 7 August 2007, a company called Yarrows (The Bakers) Holdings Pty Ltd (Yarrows Bakers Holdings) purchased through an investment trust called the Minto Investment Trust (Minto Trust), a property in Minto, New South Wales (the Minto property). The Minto property was leased to another company called Yarrows The Bakers Aust Pty Ltd (Yarrows Bakers Australia).
[20] Yarrows Bakers Australia was part of the Yarrow Group. All of the shares in that company were held by another company called P Yarrow Holdings Pty Ltd as trustee of the P Yarrow Bakers Trust, a discretionary trust set up for Mr Yarrow and his family. Neither Yarrows Bakers Holdings nor the Minto Trust formed part of the entities over which Westpac NZ held security.
[21] Mr Yarrow argues that there were a number of unusual features to the Minto lease. Mr Corlett distilled the matters relied upon by his client to the following concerns:
[22] The Minto lease was replaced with a second lease on 30 June 2009. The rent was retrospectively increased to $3.5 million and then increased from 1 August 2009 to $4 million. Provision was made in the second Minto lease for a security deposit of $4.5 million. Mr Corlett submitted that this arrangement compounded the difficulties of the first Minto lease by generating a yield for the landlord of 18 per cent per annum. He contended that by any analysis this was a very generous return for the lessor, particularly as the lessor had the ability to terminate the lease on six months’ notice.
[23] Mr Corlett’s oral submissions focused on the first Minto lease. It was submitted on behalf of Mr Yarrow that it can be inferred Westpac NZ would have been fully aware of the unusual features of the first Minto lease and that if it was aware of these matters then Westpac NZ had a fiduciary duty to warn Mr Yarrow of those matters before he signed the guarantee.
[24] In its evidence in the High Court, Westpac NZ firmly rejected Mr Yarrow’s argument that Westpac NZ was aware of the Minto lease at the time Mr Yarrow signed the guarantee. The evidence set out in the affidavits of Mr Hale and Mr Chapman, another senior officer of Westpac NZ, can be summarised in the following way:
[25] Mr Stewart QC, senior counsel for Westpac NZ, submitted that as it was a company associated with Mr Yarrow’s family trust that signed the Minto leases, it was highly likely that he had knowledge of the matters, which he now complains Westpac NZ ought to have disclosed to him. In any event, he had every means to find out about those matters because of his close association with Yarrows Bakers Australia.
[26] Mr Stewart submitted it is significant that Mr Yarrow’s guarantee did not relate to the obligations of Yarrows Bakers Australia under the Minto leases. Nor did it relate to the Minto Trust’s obligation under the mortgage to Westpac Banking Corporation.
[27] Mr Stewart noted that the guarantee was signed before the second Minto lease was agreed to and that the second Minto lease could therefore have had no influence over Mr Yarrow’s decision to sign the guarantee.

Application to adduce further evidence

[28] On 7 May 2018, Mr Yarrow applied for leave to adduce the four deeds we have briefly referred to at [5]. Those deeds varied charges held by Westpac Banking Corporation in Australia in respect of securities originally granted in 2000 and 2008. Mr Yarrow has seized upon the fact Mr Chapman signed the variations to the security charges as Attorney for the Westpac Banking Corporation and Mr Hale witnessed Mr Chapman’s signature. Mr Yarrow says the roles of Mr Chapman and Mr Hale in relation to signing and witnessing the variations of deed underscores his claim that Westpac NZ would have been aware of the Minto lease at the time it was agreed to, and therefore at the time he signed the guarantee.
[29] Mr Chapman has addressed in an affidavit what happened when the four deeds of variation of security were executed on 13 March 2011. He explains that Westpac Banking Corporation in Australia was holding security over Yarrows Bakers Australia’s assets in Australia on trust and for the benefit of Westpac NZ pursuant to s 10 of the Westpac New Zealand Act 2006.
[30] The four deeds were filed with the Australia Securities and Investments Commission (ASIC) on 18 March 2011 and have been available to the public since that date. It was only in 2018 that Mr Yarrow searched the ASIC register and located the deeds he now says undermines the High Court’s judgment and support his set-off claim.
[31] There has undoubtedly been a degree of co-operation between Westpac Banking Corporation in Australia and Westpac NZ. Mr Chapman and Mr Hale’s roles in signing and witnessing the variations of deed on 13 March 2011 did not, however, have any impact on the evidence presented by Westpac NZ in the High Court which was accepted by the Associate Judge. In particular, the four variations of deed do not call into question the findings of the High Court that Westpac NZ was unaware of the terms of the first Minto lease at the time Mr Yarrow signed the guarantee. The four variations of deed provide no basis for Mr Yarrow’s claim that Westpac NZ was likely to have been aware of what he alleges were unusual features of the Minto leases.
[32] The application to adduce further evidence is declined because the evidence in question could easily have been obtained before the High Court hearing. More significantly, the four variations of deed do not undermine the High Court’s factual findings and provide no cogent basis for disturbing the decision to adjudge Mr Yarrow bankrupt.

Did Westpac NZ owe Mr Yarrow the fiduciary duties he alleges?

[33] Before analysing the factual basis of the claims that Westpac NZ owed Mr Yarrow the fiduciary duties he alleges, it is helpful to first examine the legal basis of his claims.

Do banks owe fiduciary duties to guarantors?

[34] The starting point is that where parties negotiate standard commercial transactions their legal relationship will usually be governed by the law of contract. Absent the special circumstances that we will briefly explain, “there is no justification for fiduciary law to intervene”, where the parties have agreed to the terms of a commercial contract.[5]
[35] In Chirnside v Fay, the Supreme Court confirmed two general circumstances in which the Courts may find that a relationship gives rise to fiduciary obligations:[6]
[36] Banks will ordinarily act in their own interest in order to protect their position as a lender.[7] As a consequence, the relationship between a bank and a customer or guarantor does not give rise to presumptive fiduciary obligations on the part of the bank.
[37] In rare circumstances a bank may be treated as having fiduciary obligations to a prospective guarantor where:[8]
[38] A fiduciary duty will usually only be recognised when the terms of the contract, whether express or implied do not address the matters in dispute and where the information is so material that it would be unconscionable for the bank not to have disclosed it to the prospective guarantor.
[39] This Court has previously accepted that:[9]

[A] 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.

[40] We note, however, there is an issue as to whether an equitable set-off is still available in bankruptcy proceedings in New Zealand.[10] This point was not raised in the High Court or before us. We simply record that there may be an issue about whether Mr Yarrow can pursue an equitable set-off, but deal with his appeal by addressing the substantive issues he has raised.
[41] An assessment as to whether or not equity requires a bank to have disclosed material information to a prospective guarantor requires an appraisal of the intended guarantor’s ability to make his or her own inquiries:[11]

... the bank’s duty of disclosure must be assessed against what the bank might reasonably have expected the intending guarantors to know already or to be able to ascertain without difficulty should they have been minded to do so.

The terms of the guarantee

[42] In assessing the merits of Mr Yarrow’s set-off claims it is important to consider the terms of the guarantee in the context of the very limited scope for a claim which alleges that a bank owes fiduciary duties to a guarantor.
[43] The guarantee is written in very clear English. It was signed by Mr Yarrow after he received legal advice and against the background of him being an experienced businessman, who was familiar with the affairs of the Yarrow Group.

Clause 7

[44] Clause 7 of the guarantee sets out in clear and unequivocal terms Mr Yarrow’s principal obligations under the guarantee. The relevant paragraphs provide:

This document imposes upon you a principal obligation. In addition to your guarantee obligations you agree to perform the obligations of the Customer as if you were the Customer. This means that the Secured Parties can require you to pay the Guaranteed Money whether or not they have made demand on the Customer.

Your liability under this document is independent and unconditional. It does not depend on any other right or obligation and is not subject to any condition. Your liability is not affected by anything which might otherwise release you from all or part of your obligations or limit them (if this clause was not in this document).

...

Clause 9

[45] Clause 9 of the guarantee makes it clear that, unless the law otherwise requires, Mr Yarrow could not make any deduction from moneys he was required to pay under the guarantee. The first paragraph of cl 9 provides:

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

[46] This Court held in Grant v NZMC Ltd, that parties may agree to exclude what might otherwise be a right of equitable set-off in an agreement. Clause 9 of the guarantee entitles Westpac NZ to payment from Mr Yarrow without him attempting to reduce his liability by way of set-off.[12]

Clause 12

[47] Clause 12 of the guarantee signed by Mr Yarrow sets out what information Westpac NZ was required to provide to Mr Yarrow. The clause states:

The Secured Parties must provide you with a copy of this document and all of the information, statements, and other matters disclosed to the Customer under the Credit Contracts and Consumer Finance Act 2003.

...

Apart from the above, the Secured Parties do not have to do anything in relation to, or tell you anything concerning the Customer’s:

It is your responsibility to find these things out from the Customer.

The above applies both before and after you sign this document.

[48] The terms of cl 12 of the guarantee are very clear. The effect is:
[49] In summary, these terms of the guarantee make clear that Mr Yarrow’s liability would not be affected by any condition or obligation, nor would Westpac NZ have to supply any information beyond what was required by the relevant legislation.

The evidence

[50] Notwithstanding the clear effect of cls 7, 9 and 12 of the guarantee, we will now deal with each of the factual arguments raised on behalf of Mr Yarrow, which he says supports his set-off claims.
[51] When analysing the factual basis of Mr Yarrow’s set-off claims we bear in mind that once Westpac NZ satisfied the Associate Judge that it had established the requirements set out in s 13 of the Insolvency Act, it was then necessary for Mr Yarrow to persuade the High Court to refuse to adjudge him bankrupt. This could have been done by him showing that he was able to pay his debts, or by demonstrating that it was neither just or equitable to make an order adjudicating him bankrupt or by persuading the Court for any other reason that an order for adjudication should not be made.[13]
[52] In advancing his defence in the bankruptcy proceedings, Mr Yarrow needed to show that there were clear and persuasive grounds for his set-off claims.[14]
[53] Mr Corlett submitted that there were similarities between Mr Yarrow’s case and Westpac Banking Corp v M M Kembla New Zealand Ltd.[15] In that case, this Court explained that summary judgment would be inappropriate where there are material facts that need to be ascertained and where ultimate determination of the litigation turns upon a judgement that can only properly be made after a full hearing of the evidence.[16]
[54] The circumstances of the Kembla case were vastly different from the facts before us. In Kembla, one of the company’s former employees had misused the company’s online banking system to misappropriate substantial sums of money. The company claimed that various banks had knowingly received the misappropriated money or knowingly assisted in its misappropriation. Mr Corlett suggested that some of the directors of the Yarrow Group had unlawfully ensured that significant payments of rent and other moneys were paid to Yarrow Bakers Holdings from the way in which the Minto property arrangements were structured. Even if there were merit to this aspect of Mr Yarrow’s argument, it is very difficult to see how any alleged irregularities in the Minto property arrangements can be foisted upon Westpac NZ.

Yarrows Bakers Holdings

[55] It was submitted on behalf of Mr Yarrow that the owner of the Minto property had a name that suggested it was part of the Yarrow Group. In his second affidavit in the High Court, Mr Yarrow said he “believed the Yarrows group was purchasing the Minto property”. It was suggested that Mr Yarrow thought Yarrows Bakers Holdings would have been subject to the security held by Westpac NZ. We note, however, that when he was cross-examined in the High Court Mr Yarrow said that he probably became aware in late 2007 that the Minto property had not been purchased by a New Zealand entity.
[56] An outside observer may have had reason to think that Yarrows Bakers Holdings was part of the Yarrow Group. Mr Yarrow, however, was not an outside observer. His family trust owned Yarrows Bakers Australia, the company that leased the Minto property and he was very familiar with the business affairs of the Yarrow Group. We do not accept there is any basis upon which Mr Yarrow could have believed that somehow Yarrows Bakers Holdings was part of the Yarrow Group and that Westpac NZ had security over that company. Mr Yarrow’s acknowledgement in cross‑examination that he was likely aware by late 2007 that the Minto property had not been purchased by a New Zealand entity substantially undermines his assertion that he was not aware of the ownership arrangements relating to the Minto property at the time he signed the guarantee.

Diversion of profits

[57] It was submitted there was a risk that profits from the Yarrow Group could be directed to Yarrows Bakers Holdings by the Minto property assets. This submission was developed through the contention that the rent charged under the first Minto lease was unusually high and that this concern was underscored by the even higher rent that was to be paid under the second Minto lease.
[58] If there were any merit to this submission we would have expected evidence as to what market rents were payable for comparable properties at the relevant time. As we have noted, Mr Yarrow’s family trust owned the company that leased the Minto property. It is very difficult to understand why he now contends that Yarrows Bakers Australia paid excessive rent for the Minto property without providing any independent evidence to support his complaint.

Capital expenditure for the Minto property

[59] It was claimed that Yarrows Bakers Holdings would have obtained a substantial benefit from the AUD 8 million capital expenditure advanced for plant and equipment for Yarrows Bakers Australia to use in relation to the Minto property. It was also argued that this concern was compounded by the terms of the lease that gave the lessor the ability to terminate the lease on six months’ notice.
[60] There is, however, a fundamental flaw with this argument. The terms of the Minto leases enabled Yarrows Bakers Australia to remove its plant and equipment from the Minto property in the event of the lease being terminated.
[61] Thus, there is no basis to the argument that Yarrows Bakers Holdings would unreasonably obtain a substantial benefit from any expenditure on plant and equipment in the Minto property by Yarrows Bakers Australia.

Security deposit for the second Minto lease

[62] It was argued that the security deposit set out in the second Minto lease was unusual. Westpac NZ has explained however, that this appears to have been a contractual right afforded to the Minto Trust to set-off any securities owed by Yarrows Bakers Australia against amounts that the Minto Trust may have owed to another company in the Yarrow Group. Absent any evidence from Mr Yarrow explaining these wider commercial relationships we are unable to see any grounds for concern about the security deposit in the second Minto lease.
[63] In summary, we see no merit in the factual arguments relied upon in support of the contention that Westpac NZ owed Mr Yarrow a fiduciary duty to disclose to Mr Yarrow details of the first Minto lease.
[64] The deficiencies in the factual arguments advanced by Mr Yarrow are compounded when regard is had to the following reasons why we are satisfied that Westpac NZ plainly did not owe a fiduciary duty to disclose to Mr Yarrow details of the first Minto lease at the time he signed the guarantee:

Conclusions

[65] There is no tenable basis upon which it can be said Westpac NZ owed Mr Yarrow a fiduciary duty at the time he signed his guarantee. In particular:
[66] The Associate Judge carefully analysed all of the evidence and applied the correct legal principles when concluding that Westpac NZ owed no fiduciary duty to Mr Yarrow.

Result

[67] The appellant’s application to adduce further evidence is declined.
[68] The appeal is dismissed.
[69] The respondent is entitled to costs for a standard appeal on a band A basis with usual disbursements. We certify for two counsel.


Solicitors:
Simpson Dowsett Meggitt, Auckland for Appellant
Simpson Grierson, Auckland for Respondent

[1] Westpac New Zealand Ltd v Yarrow [2017] NZHC 2261.

[2] At [21].

[3] At [14].

[4] Insolvency Act 2006, s 37.

[5] G E Dal Pont Equity and Trusts in Australia (6th ed, Thomson Reuters, Pyrmont, 2015) at [4.265].

[6] Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433 at [73]–[75].

[7] Taylor v Bank of New Zealand [2010] NZHC 2256; [2011] 2 NZLR 628 (HC) at [127]; and Commonwealth Bank of Australia v Smith [1991] FCA 375; (1991) 42 FCR 390 (FCAFC) at 391.

[8] Taylor v Bank of New Zealand, above n 7, at [138]; Andrew Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington, 2009) at [17.4.1].

[9] Grant v NZMC Ltd [1988] NZCA 135; [1989] 1 NZLR 8 (CA) at 12–13.

[10] Paul Heath and Mike Whale Heath and Whale: Insolvency Law in New Zealand (3rd ed, LexisNexis, Wellington, 2018) at [7.27].

[11] Shivas v Bank of New Zealand [1989] NZHC 862; [1990] 2 NZLR 327 (HC) at 364.

[12] Grant v NZMC Ltd, above n 9, at 13.

[13] Insolvency Act, s 37.

[14] Sharma v ANZ Banking Group (New Zealand) Ltd (1992) 6 PRNZ 386 (CA); and Robertson v ASB Bank Ltd [2014] NZCA 597 at [27].

[15] Westpac Banking Corp v M M Kembla New Zealand Ltd [2000] NZCA 319; [2001] 2 NZLR 298 (CA).

[16] At [62].

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