Young v KPSS New Zealand Limited HC Dunedin CIV-2011-412-000314 [2011] NZHC 1671 (10 November 2011)

Last Updated: 25 November 2011

IN THE HIGH COURT OF NEW ZEALAND DUNEDIN REGISTRY

_{CIV-2011-412-000314}

UNDER the District Courts Act 1947

IN THE MATTER OF an appeal pursuant to s 72 of the District

Courts Act 1947

BETWEEN PHILIP JOHN YOUNG Appellant

AND KPSS NEW ZEALAND LIMITED Respondent

Hearing: 30 September 2011

Appearances: L A Andersen for Appellant

B L Gray for Respondent

Judgment: 10 November 2011

_{RESERVED JUDGMENT OF HON JUSTICE FRENCH}

Introduction

[1] This appeal concerns the scope of a personal guarantee. In particular, whether the guarantor was obliged to pay solicitor/client costs incurred by the

_{creditor as a result of attempts to enforce the guarantee.}

YOUNG V KPSS NEW ZEALAND LIMITED HC DUN CIV-2011-412-000314 10 November 2011

[2] The key issues for determination are:

(i) Does a clause in the following terms:

The Purchaser [principal debtor] will pay to the Seller upon written demand all legal costs (calculated as between solicitor and own client) and other costs, fees and charges howsoever incurred by the Seller in recovering payment of any monies due.

require the principal debtor to pay costs incurred in enforcing the guarantee?

(ii) What effect, if any, does the liquidation of the principal debtor have on liability under this clause for costs incurred after the liquidation commenced and in respect of which no written demand was ever made?

Factual background

[3] KPSS New Zealand Limited is a supplier of hairdressing products and equipment.

[4] On 21 April 2005 it entered into a credit agreement with Ricochet Hair Limited. The agreement detailed the terms on which KPSS was prepared to supply goods to Ricochet.

[5] Mr Young, the appellant, was a director of Ricochet. He signed the credit agreement on behalf of the company. He also signed a personal guarantee which provided as follows:

1 In consideration of KPSS New Zealand Ltd having agreed at the Director/s (being the persons whose signatures appear below) request to supply or to continue to supply goods and/or continue to give credit to the customer, the guarantor/s unconditionally and irrevocably guarantee/s jointly and severally (if applicable) the due and punctual payment to KPSS New Zealand of all moneys now or in the future payable to KPSS New Zealand Ltd by the customer.

2 This guarantee shall be a continuing guarantee and shall not be affected by any payment of moneys or settlement of account, granting time or any other indulgence to the customer or to any other director or to any other person, any arrangement between KPSS New

Zealand Ltd and the customer or any other person, failure or neglect to recover any money, any lack of power on the director/s part to give this guarantee the release discharge or transfer of security held by KPSS New Zealand, any director not executing this guarantee or any other event, act or omission on anyone’s part whatsoever.

3 The guarantee is a principle [sic] obligation and is enforceable notwithstanding that the moneys guaranteed are irrecoverable from the customer.

[6] Mr Young resigned his directorship of Ricochet in October 2005. [7] Ricochet continued to trade until mid-2008.

[8] On 9 December 2008 Ricochet went into liquidation, at which time there was some $4436.21 owing to KPSS for goods supplied between April and July 2008.

[9] In mid 2009 KPSS made demand of Mr Young under the personal guarantee. He did not accept liability, and applied to the Disputes Tribunal for relief. The Disputes Tribunal made an order, but this was quashed on appeal to the District Court.

[10] On 25 May 2010 Mr Young paid KPSS the sum of $4436.21.

[11] By that time, however, KPSS had incurred significant legal costs. It treated the payment as a payment on account and issued proceedings in the District Court for what it claimed was the balance still outstanding of $6737.96. According to the notice of claim, this comprised administration fees of $221.81, interest of $821.21 and legal costs of $5916.75.

[12] Due to an oversight on the part of Mr Young’s solicitors, no defence was filed, and KPSS obtained judgment against Mr Young in the sum of $10,959.91 by default.

[13] Mr Young then applied for an order setting aside the default judgment on the grounds that he had a substantial ground of defence which ought to be heard.

[14] Mr Young’s application to set aside was heard by a District Court Judge.

The District Court decision

[15] In his decision, the Judge identified the arguments advanced on behalf of Mr

Young as being:

(a) Mr Young could not have any liability for costs beyond the date of liquidation by virtue of the combined effect of s 248 and s 306 of the Companies Act 1993.

(b) By virtue of the terms of the credit agreement, Mr Young was only liable for costs in respect of which written demand had been made of Ricochet.

[16] As regards the first argument regarding the Companies Act 1993, the Judge said this both mis-stated the law and proceeded on an erroneous basis as to the seeking of costs:

[11] ... First s 248 does not preclude recovery of the obligation of the principal debtor upon the liquidation of the principal debtor. If the submissions for the defendant were right, then no guarantor would have any liability for any sum incurred by way of interest or costs beyond the date of liquidation of the principal debtor.

[17] As regards the second argument about the terms of the credit agreement, the

Judge had this to say:

[12] ... That proceeds on a misunderstanding as to the nature of the costs in this case. The costs for which judgment was entered were costs incurred and recoverable by the plaintiff in the proceeding against the guarantor. They were not costs for which the principal debtor would have been liable.

[18] Having rejected both arguments, the Judge concluded that Mr Young did not have a substantial ground of defence. The Judge dismissed the application.

[19] Mr Young now appeals that decision.

Discussion

[20] What Mr Young agreed to guarantee was the “due and punctual payment to KPSS of all moneys now or in the future payable to KPSS by [Ricochet]”. Counsel agreed that meant the liability of Mr Young under the guarantee was coextensive

with the liability of Ricochet under the credit agreement. To put it another way, Mr Young could only be liable for the costs if Ricochet would also have been liable for them under the credit agreement. Mr Young’s liability under the guarantee could not be greater than that of Ricochet under the credit agreement.

[21] Accordingly, counsel for KPSS Mr Gray argued that while the outcome of the District Court decision was correct, the Judge had been wrong to hold the costs were not costs for which Ricochet would have been liable. In Mr Gray’s submission, the principal debtor, Ricochet, was liable under the credit agreement for the costs and therefore so too was the guarantor, Mr Young. The guarantee expressly extended to monies payable in the future by Ricochet.

[22] The clause in the credit agreement upon which KPSS relies as generating the liability to pay costs is cl 12.1. It reads as follows:

Recovery of Legal Fees

12.1 The Purchaser will pay to the Seller upon written demand all legal costs (calculated as between solicitor and own client) and other costs, fees and charges howsoever incurred by the Seller in recovering payment of any monies due.

[23] Mr Young’s counsel, Mr Andersen, argued that the obligation created by cl 12.1 is limited to legal costs incurred in recovering money from the purchaser and the purchaser only. In support of that interpretation, he emphasised the absence of any reference to any person other than the purchaser, and the absence of any reference to the guarantee. Mr Andersen also argued that there was no basis for including an implied term extending the purchaser’s liability for legal costs to actions taken against a guarantor.

[24] In my view however, correctly interpreted, the express wording of the clause is apt to cover costs incurred in enforcing the guarantee, without the need for any implied term. I agree that the concluding phrase of the clause “payment of any monies due” means due under the credit agreement. However, the attempts to enforce the guarantee were for the purpose of recovering the payment of monies due under the credit agreement. The clause says “costs howsoever incurred”.

[25] Where Mr Andersen would seem to be on stronger ground is a further argument that the costs in question were never owing by Ricochet because they were all incurred after the liquidation and no written demand was ever made on the liquidator, as required by cl 12.1.

[26] In response to this argument, Mr Gray referred me to the Court of Appeal decision of Quainoo v New Zealand Breweries Ltd [1991] 1 NZLR 161 and the general principle that the insolvency of the principal debtor does not release the guarantor.

[27] That must, of course, be so. As explained by the Court of Appeal, liquidation does not mean the company’s indebtedness has come to an end, and it would defeat the very purpose of having a guarantee in the first place were the guarantor’s liability to be extinguished on insolvency.

[28] Thus, the fact Ricochet went into liquidation did not prevent KPSS from suing Mr Young for the debt owing on the goods, and he was wrong to initially resist payment.

[29] However, I agree with Mr Andersen that the costs incurred in enforcing the guarantee are in a different category. Unlike the debt in Quainoo, they were not owing at the time of the liquidation. The obligation did not then exist. The costs had not been incurred, and there was therefore no existing obligation to pay them. Further, no obligation to pay them ever came into existence because written demand was never made of Ricochet, and under cl 12.1 the making of a written demand was a condition precedent to liability.

[30] It is now impossible to make written demand of Ricochet or the liquidator, because the company has since been struck off the register.

[31] Ricochet was never liable, and so Mr Young cannot be liable. To use the words of the guarantee, the money was never payable by Ricochet to KPSS.

[32] It follows that in my view the Judge was wrong in his analysis of the effect of liquidation, and wrong to hold that Mr Young did not have a defence.

Outcome

[33] Mr Andersen submitted that in the event the appeal was successful, the appropriate remedy would be for me to set the judgment aside, on the basis that KPSS cannot legally succeed in its claim against Mr Young.

[34] I agree. In terms of the principles relating to the setting aside of judgments obtained by default,[1] the delay is reasonably explained,[2] and KPSS will not suffer irreparable injury if the judgment is set aside. The judgment has given KPSS a benefit to which it was not entitled in law.

[35] The above is subject to resolution of one matter. As I have mentioned, in its notice of claim KPSS contends that there is interest of $821.21 owing. Mr Andersen had assumed that this was interest being charged on the costs. Mr Gray’s understanding, however, is that it relates to interest on the unpaid debt of $4436.21. Mr Andersen accepted that if that was indeed the case, Mr Young was obliged to pay it.

[36] In the circumstances, I consider the most just course of action is to quash the judgment that had been obtained by default, but to direct as a condition of setting aside the judgment that the Court will hold the security for costs of $940 paid by Mr Young until the interest issue is resolved. Leave is reserved to either party to come back to me should a ruling be required.

[37] As regards costs, my expectation is that counsel will be able to resolve these by agreement. If that does not prove possible then submissions are to be filed within

15 working days. I should indicate that I consider it would be appropriate to take into account the fact that Mr Young was, as I have said, wrong to resist payment in the first instance, and that KPSS has not had the benefit of Court costs as a result of

_{its successful appeal to the District Court.}

[38] Finally, for completeness, I should record Mr Gray’s concerns about the practical implications of any decision allowing the appeal. However, the difficulties are easily overcome by amending the wording of the guarantee.

Solicitors:

Alistair Dunlop Paterson, Dunedin

Counsel: L A Andersen, Dunedin

Farry & Co, Dunedin

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[1] _{Russell v Cox [1983] NZLR 654.}
[2] It was not Mr Young’s fault a defence was never filed.