ASB Bank Limited v Commercial Factors Limited [2012] NZHC 520 (26 March 2012)

Last Updated: 29 March 2012

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2011-404-4551 [2012] NZHC 520

UNDER Section 72 of the District Courts Act 1947

BETWEEN ASB BANK LIMITED Appellant

AND COMMERCIAL FACTORS LIMITED Respondent

Hearing: 2 February 2012

Counsel: M D Arthur and J A McMillan for Appellant

P J Dale for Respondent

Judgment: 26 March 2012

_{JUDGMENT OF POTTER J}

In accordance with r 11.5 High Court Rules

I direct the Registrar to endorse this judgment with a delivery time of 11 a.m. on 26 March 2012.

Solicitors: Chapman Tripp, Auckland – [e-mail]

Ellis Law, Auckland – [e-mail]

_{Copy to: P J Dale, Auckland – [e-mail]}

ASB BANK LIMITED V COMMERCIAL FACTORS LIMITED HC AK CIV-2011-404-4551 [26 March 2012]

Introduction

[1] ASB Bank Limited (ASB) appeals against the judgment of Judge Harvey in the District Court at Auckland (the judgment)1 which entered judgment for

$160,868.02 against ASB in favour of the respondent Commercial Factors Limited

(CFL) and awarded costs to CFL.

[2] In December 2008 CFL agreed to provide funding to Tawil Holdings Limited (Tawil) to acquire the shares in Faulkner Collins Ltd (Faulkner) a member of the Epic group of companies. Faulkner owed about $2.8m to ASB. Initially it was proposed that CFL should purchase the debt but ultimately it was agreed that ASB should sell the debt and its securities to Tawil for $2.3m, ASB accepting a loss of some $500,000. CFL was to provide $1.8m of this sum to Tawil and would take over Faulkner’s debtors’ ledger to effectively become a substitute creditor. To this end, on

17 December 2008 CFL entered into a debt factoring facility agreement with

Faulkner (the debt factoring agreement).

[3] Between 17 December 2008 and the date the transaction between Tawil and ASB was finally settled, 24 December 2008, Faulkner’s debtors paid $160,860.02 into its account with the ASB.

[4] CFL claims it is entitled to this sum in reliance on cl 9.1 in the deed of transfer of debt and securities dated 23 December 2008, between ASB and Tawil (the deed). CFL contends that this clause entitles it to money paid by creditors into Faulkner’s ASB account in respect of debts that had been factored by CFL under the debt factoring agreement.

[5] ASB maintains that under cl 9.1 ASB retained priority under its securities until the settlement date and that until that date it was entitled to any funds paid by

_{Faulkner debtors and to apply them in reduction of Faulkner’s indebtedness.}

1 Commercial Factors Ltd v ASB Bank Ltd DC Auckland CIV-2010-004-1699, 1 July 2011.

[6] This appeal turns on the correct interpretation of cl 9.1 in the deed.

Factual background

[7] The facts are generally not in dispute.

[8] On 7 March 2007 Faulkner granted a general security interest to ASB. This was supported by cross-guarantees and indemnities from companies in the Epic Group including Epic Holdings Limited (Epic), Faulkner’s parent company. ASB registered a financing statement under the Personal Property Securities Act 1999 against Faulkner on 21 March 2007.

[9] Liquidators were appointed to Epic on 31 October 2008.

[10] On 17 November 2008 CFL registered a financing statement under the

Personal Property Securities Act against Faulkner.

[11] Faulkner operated a current account with ASB. As at 21 November 2008

ASB was owed approximately $2.8m by Faulkner, though the total amount fluctuated on a daily basis. CFL offered to purchase ASB’s securities for $2.3m. CFL advised ASB in a letter of that date they had been asked to provide funding to facilitate two subsidiaries of Epic, Faulkner and Eagle Wire Products Limited “... to continue business without any interruption to their normal activities”.

[12] On 27 November 2008 ASB accepted CFL’s proposal subject to three conditions. CFL confirmed that ASB’s terms were acceptable on 3 December 2008. Between 3 and 18 December 2008 lawyers for ASB, CFL and Tawil prepared a draft transfer deed.

[13] On 10 December 2008 Epic’s lawyers advised ASB’s lawyers that CFL would provide $1.8m by factoring the debts of Eagle and Faulkner and Tawil would provide $500,000 towards the agreed sum to be paid ASB of $2.3m. In exchange, ASB would, assign its three securities to CFL.

[14] On 17 December 2008 CFL and Faulkner entered into the debt factoring agreement. ASB had no knowledge of this agreement.

[15] On the following day, 18 December 2008, CFL proposed that the transaction be simplified so that Tawil, rather than CFL, was the purchaser of ASB’s securities though CFL would continue to finance part of the purchase price payable to ASB. ASB agreed to proceed with the simplified transaction.

[16] On 19 December 2008 CFL submitted the deed with suggested changes marked up. The parties to the deed were now ASB and Tawil (not CFL as in a previous draft). The draft included, for the first time, cl 9.1 without any explanation as to the reasons for its inclusion (the reasons for other changes were noted on the draft submitted to ASB’s lawyers). The deed provided for ASB to sell its position to Tawil for $2.3m together with costs. Settlement date was stated as 23 December

2008.

[17] Clause 9.1 provided:

9.1 Waiver for benefit of Commercial Factors Limited

Each of the Transferor and the Transferee agrees for the benefit of CFL that, as from the Settlement Date, it absolutely releases any CFL Factored debts, and CFL Proceeds and any CFL Credit Balance (whether then existing or arising [in the] future) from any Encumbrance (whether then existing or arising [in the] future) in its favour. This clause is intended to be enforceable by CFL for the purposes of the Contracts (Privity) Act 1982.

[18] A definition of CFL “factored debts” was inserted in the interpretation clause

1.1 as follows:

CFL Factored Debts means any book debts or other receivables of any

Debtor which have been factored o[r] otherwise financed by CFL.

[19] On Saturday 20 December 2008 pursuant to the debt factoring agreement, CFL factored certain of the debts and made funds available to Faulkner for use by Tawil in acquiring ASB’s securities. ASB was not aware of these transactions.

[20] On 22 December 2008 Faulkner’s ASB account received deposits totalling

$160,860.51 from Faulkner’s debtors and was subject to withdrawals of $62,309.79.

On the following day, 23 December 2008, Faulkner’s account received deposits from debtors of $21,867.38 and was subject to withdrawals of $95,748.51.

[21] On 23 December 2008 the deed was executed. Tawil’s lawyers noted in sending the executed deed to ASB’s lawyers for execution by ASB, that the delay was occasioned by Tawil wanting to see the KPMG valuation before returning the document.

[22] Settlement took place on 24 December 2008 with Tawil paying

$2,395,099.54 to ASB. ASB released its securities.

[23] Pending settlement ASB had permitted Faulkner to operate its bank account as normal. Faulkner was able to access its overdraft facility, deposits were received and withdrawals made.

[24] In March 2009 CFL discovered that $160,846.02 of the factored debts it expected to receive under the debt factoring agreement (the disputed payments), had been paid into Faulkner’s ASB account on 22 and 23 December 2008, prior to settlement. It demanded payment of this sum from ASB, which was declined. In August 2010 CFL issued proceedings against ASB for recovery of the total sum of

$160,846.02.

The judgment appealed

[25] The Judge referred to the following principles of contractual interpretation:2

a. The standard principles of contractual interpretation apply to deeds.3

2. A deed is to be given the meaning a reasonable person would conclude its words to mean, having the background information that

_{was reasonably available to the parties at the time of entering the}

2 _{At [59]-[61] of the judgment.}

3 Buckley & Young Ltd v Commission of Inland Revenue [1978] 2 NZLR 485 at 490.

agreement.4 The ultimate objective is to establish the meaning the parties intended their words to bear.5

c. There does not need to be any ambiguity in the wording of a contract before the Court can resort to pre-contractual materials, including prior negotiations, as an aid to interpreting the objective meaning.6

d. Intrinsic evidence cannot be relied upon to create an ambiguity, but context is a necessary ingredient in ascertaining meaning.7

e. The deed must be considered as a whole and its words should be given their natural and ordinary meaning. There must be a strong case to persuade the Court that the parties made a linguistic mistake that requires the Court to go against this meaning.8

f. If it is possible to conclude from the background that something must have gone wrong with the language, judges do not need to attribute to the parties an intention which they plainly could not have had.9

[26] The Judge noted the following contextual elements which he considered helpful in ascertaining the purpose of cl 9.1:10

a. Clause 9.1 was specifically inserted at CFL’s behest.

b. CFL was factoring the debts of some of the Epic companies as a means of securing repayment for its advance. It was not seeking a general security for advances over all the assets of the company.11

c. Both parties recognised that the debt level was dynamic.12

_{From CFL’s point of view, it was necessary to crystallise the}

4 _{Boat Park Ltd v Hutchinson [1999] 2 NZLR 74 at 82.}

5 _{Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5; [2010] 2 NZLR 444.}

6 _Ibid.

7 _Ibid.

8 Boat Park Ltd v Hutchinson at 82, Chartbrook v Persimmon Homes [2009] UKHL 38 at [15],

_{Vector Gas Ltd v Bay of Plenty Energy Ltd at [66].}

9 _{Vector Gas Ltd v Bay of Plenty Energy Ltd.}

10 _{At [62]-[64].}

11. The debt factoring agreement did in fact, call for a general security agreement from Faulkner and cross-guarantees and indemnities from associated entities.

12 As reflected in clauses 5.2 and 5.3 of the deed.

debt and it transferred the ledgers on 20 December to that end. It also assumed crystallisation as at 20 December 2008 on the basis that payments thereafter would be on account of its factored debts.

[27] The Judge gave significant weight to the definition of “CFL factored debts”, in particular, the fact that they are defined in the past tense. Given the definition in the deed and the process of factoring, he considered that a retrospective interpretation was the only one logically available:13

[68] If I were to accept the Bank’s interpretation of the deed it would mean that CFL factored debts had to crystallise at the date of settlement and be fixed as at the date of settlement. But the language that is employed does not say that. It makes it clear that the factoring has already taken place.

[28] The Judge considered that CFL’s interpretation of the clause precisely reflected the protection it was seeking within the context of the factoring agreement and the dynamic debt, as it mitigated the potential risk that payments received prior to settlement would go to ASB.14 He concluded as follows:

[70] A careful reading of the contract arrives at this result. An understanding of the context informs that outcome. Mr Shirkey [of ASB] was certainly aware of the context and background factual matrix. He also had the opportunity to carefully consider the effect of Clause 9.1 before recommending to the Bank’s attorney that the agreement be signed. As I have already stated this was not a “boiler plate” term. It was inserted specifically for the benefit of Commercial Factors Limited who are not a party to the agreement.

Appellant’s submissions

[29] ASB submits that the Judge interpreted clause 9.1 incorrectly and that he gave no reasons for departing from the plain meaning of the clause.

[30] It submits that the disputed payments to Faulkner’s bank account were not “CFL Factored Debts”, that this accords with the structure of the deed, and that in any event, clause 9.1 did not retrospectively rearrange the existing priorities by which ASB had priority in respect of the debts until settlement. In particular ASB

_submits:

13 _{At especially [66]-[68] of the judgment.}

14 At [69] of the judgment.

a. The Judge focussed solely on the words “which have been factored [or] otherwise financed by CFL” in clause 1.1, while overlooking the fact that the disputed payments were not of or on account of “CFL Factored Debts” at the settlement date; they were no longer debts at settlement date. The date of the debt factoring agreement is not determinative; rather, the relevant question is whether, as at the settlement date, the payments that had previously been made into the overdrawn bank account of Faulkner were “book debts or other receivables” of Faulkner as at the settlement date. The past tense utilised in clause 1.1 was not intended to retrospectively define “factored debts”; rather, it was inserted to avoid any doubt and regulate the scope of ASB’s security interest.

b. This interpretation is supported by the language and structure of the deed. Clause 9.1 is structured as a legal consequence of settlement and contains no procedural mechanisms such as those in cl 2.1(b)), which details what the ASB must do in consideration of payment of the Transfer Price by Tawil. Further, the effect of CFL argument is that ASB is obliged to unwind the effect of receipts prior to settlement, which is not the usual meaning of “releases”, particularly when coupled with the words “from the settlement date”.

c. In the absence of a specific agreement to retrospectively rearrange priorities, ASB held the first-ranking security interest prior to settlement. Counsel states that “[i]t would be highly unusual for a financier offering a refinancing facility ... to expect to rely on security over assets that had been realised by the retiring financier prior to settlement.” Due to its unusual nature, such a rearrangement requires clear contractual wording.

[31] ASB submits that the Judge also erred in his assessment of the parties’ commercial expectations. While ASB knew that the financier, CFL, was in the business of factoring, it did not know that CFL had factored debts prior to the settlement date. As the Judge correctly found, ASB had no knowledge of the debt

facility agreement entered into by CFL on 17 December 2008 or details of the debts factored pursuant to that agreement. As the deed was still being negotiated immediately prior to settlement, ASB’s reasonable expectation was that factoring would commence upon settlement.

[32] ASB further submits that clauses 13.2(e) and (h) of the cross-guarantees and indemnities dated 7 March 2007 in favour of ASB, specifically prohibit Faulkner and the other Epic group companies from creating any security interest or disposing of their assets without the prior written consent of ASB, which clearly was not given in this case.

Respondent’s submissions

[33] CFL submits that clause 9.1 has no utility if it is not given the interpretation accepted by Judge Harvey, and that it was specifically included to meet this situation.

[34] It contends that the Judge did not interpret clause 9.1 as having retrospective effect. The purpose of the clause was to ensure that the proceeds of the debts factored to CFL belonged to CFL. ASB was to retain its security until it received payment from Tawil, but once it had been paid, the factored debts belonged to CFL. Thus, these debts were able to be defined as “factored debts” simply because they had been factored.

[35] CFL submits that it was sufficient that ASB was aware that all of the available debts were being factored and that those funds were being used to provide the purchase price. Though ASB would not have known the details of the factoring arrangements between Faulkner and CFL, it must have reasonably assumed that CFL had factored all of the debts, and the only uncertainty was as to which debtors would pay prior to settlement. There is no foundation for ASB’s submission that it expected the factoring to commence on settlement, as the opposite was the case.

[36] Mr Dale also submitted that the agreement between the parties as recorded in the deed was in fact concluded on 19 December 2008. He submitted that this gave

meaning to the phrase “debts which have been factored” in the definition of “CFL factored debts” in cl 1.1 - in light, presumably, of the execution two days previously of the debt factoring agreement between Faulkner and CFL. On that date CFL’s lawyers resubmitted the amended deed to ASB’s lawyers. The amendments included cl 9.1.

[37] I do not accept that submission. The parties proceeded from the outset on the basis that there would be a written document executed by the parties which recorded their agreement. Several significant amendments were made to the initial draft submitted by ASB’s lawyers. The deed was not executed until 23 December. When Faulkner’s solicitors sent it on that day to ASB’s solicitors, they explained that the reason for the delay was that Faulkner wanted to check a valuation from KPMG before execution. It seems clear that, notwithstanding Faulkner’s desire for an urgent settlement, it was not prepared to finally commit to the contract by executing the deed until it had confirmed the valuation. Prior to execution of the deed there was not a concluded contract between Tawil and ASB.

Analysis

Plain wording of cl 9.1

[38] Clause 9.1 states that CFL factored debts, whether existing at settlement date or arising in the future, are released by ASB. Likewise any proceeds of factored debts and any credit balance that represents those proceeds. The release is “as from Settlement Date”. No retrospective meaning or intent can be read into the clause. As it stands, its meaning is perfectly clear.

[39] The phrases “for the benefit of CFL” and “enforceable by CFL for the purposes of the Contracts (Privity) Act 1982” provide context (a point to which I shall return), but they do not impact upon the plain meaning of the clause, that it is to have effect from settlement date.

[40] The only part of clause 9.1 that has a meaning that is not immediately self- evident is the definition of “CFL Factored Debts”. Thus, the existence of any

retrospective intention will turn on the interpretation of clause 1.1 and its relationship with clause 9.1.

Definition of “CFL factored debts”

[41] CFL factored debts, in terms of the definition in cl 1.1, are book debts or other receivables which have been factored or otherwise financed by CFL. ASB contends that the disputed payments represent debts which were repaid to ASB prior to settlement date and were therefore unavailable for factoring at the settlement date. ASB further submits, in support of this contention, that because Faulkner and the other members of the Epic group who were parties to the cross-guarantees and indemnities were unable, because of their undertakings to ASB, to create any security interest over the debts, they were unavailable for factoring prior to settlement. This interpretation places primacy on the phrases “as from the Settlement Date” and “whether then existing or arising in the future” in cl 9.1.

[42] CFL argues that a CFL factored debt is one that has been factored or financed by CFL, regardless of the stage at which it was done. It argues that this interpretation does not rely on clause 9.1 being read as reversing the existing priorities; rather, clause 9.1 allowed ASB to retain its security priority to protect it in the event that settlement did not occur, but it had to release all the debts factored to CFL, including the disputed payments, post-settlement. This interpretation relies on the past tense used in cl 1.1 “have been factored o[r] otherwise financed”.

[43] The different approaches to interpretation of cl 9.1 require consideration as to whether cl 9.1 reversed the existing priorities in relation to any debts factored by Faulkner prior to settlement, or whether cl 9.1 requires ASB to hold all the factored debts and any proceeds from them on trust for CFL. This enquiry may be aided by evidence of the knowledge of the parties at the relevant time.

Commercial purpose

[44] Looked at in the light of commercial purpose I find the interpretation of cl 9.1 advanced by CFL and accepted by the Judge to be untenable. It makes no sense to

simultaneously contend that ASB retained its first-ranking priority while at the same time maintaining that it was obliged to hold funds to which it was entitled, pursuant to this priority, for the benefit of CFL.

[45] In my view it would have taken clear words to achieve this outcome, it being an unusual commercial arrangement or purpose to change existing priorities between lenders. Rather, Faulkner had an overdraft facility with ASB, referred to in schedule

2 to the deed, pursuant to which credits were received and payments were made. Had it been the intended purpose and effect of cl 9.1 that certain payments were not to be available to ASB (thereby increasing the overdraft), clear mechanisms would have been required to enable such receipts to be identified and set aside. It could be expected, that had such an arrangement been intended, ASB would have placed some corresponding constraints on use by Faulkner of the overdraft facility during the relevant period. In fact between 18 December and 23 December deposits approximately equated withdrawals (overdraft $1,036,712.26 as at 18 December

2008; overdraft $1,103,700.73 as at 23 December 2008). In essence, Faulkner had use of the funds representing the disputed payments. The suggestion by CFL that by retention of the disputed payments, ASB has received double payment (from Faulkner and through the purchase price, financed by CFL) is fortuitous.

[46] Further, CFL’s interpretation of “CFL Factored Debts” necessarily constitutes a reversal of the priorities between lenders. While it submits that ASB maintained priority over the debts until the date of settlement, because on CFL’s interpretation the disputed payments had to be held by ASB for the benefit of CFL, it could not apply them towards satisfaction of its own indebtedness. At the very least this involves a substantial modification of the existing priorities. As I have said, this would have required clear words to achieve.

Intention and knowledge of the parties

[47] The above interpretation is in my view supported by the intention and knowledge of the parties. ASB knew that CFL would provide finance based on factoring arrangements. Just how and when and in what respects those factoring arrangements would be implemented between CFL and Faulkner and other

companies in the Epic group was not a matter within the knowledge, or indeed concern, of ASB. ASB was unaware of the debt factoring agreement entered into on

17 December 2008 or of the “stock take” conducted by CFL on 20 December 2008.

[48] The Judge said that it had not been suggested by any witness that Mr Shirkey (of ASB) was aware of the precise debts that had been factored by CFL. He continued that the Bank was well aware of the involvement of CFL and that a debt factoring agreement was part of the arrangement. He said “It seems unlikely that Mr Shirkey could have been unaware of the implications for [CFL] if the quantum of the debts that it was factoring should be readjusted as a result of any priority of the Bank”.15 The inference the Judge appears to draw imputes knowledge to Mr Shirkey he did not have. Without knowledge of the 17 December 2008 debt factoring agreement or the arrangements entered into by CFL based on the Faulkner debtors’ ledger as at 20 December 2008, Mr Shirkey could not have been aware of any “readjustment” that might have affected CFL.

[49] In the absence of such knowledge, and the absence of any mechanism in the deed identifying debts which were to be unavailable to ASB under its existing securities, but instead isolated and held for the benefit of CFL, this cannot be said to be the objective intention and purpose of the parties.

[50] When CFL entered into the debt factoring agreement prior to settlement and chose to base its calculations on pre-settlement ledgers without ASB’s knowledge or specific arrangements to protect its position, it ran the risk that what in fact occurred in respect of approximately $160,000 of payments, would occur.

Utility of cl 9.1

[51] CFL submits that cl 9.1 has no utility if the interpretation adopted above is correct. I agree with ASB’s submission that cl 9.1, inserted at the behest of CFL, was to avoid any doubt and regulate the scope of ASB’s security interest by releasing absolutely the specified collateral security. Further, given that CFL is not a party to

_{the deed (although in the initial draft it was), it is unsurprising that it sought to have}

15 At [44] of the judgment.

inserted a provision that the release by ASB of the specified collateral was for its benefit. It is also unsurprising that ASB raised no objection to the insertion of the clause when the draft was resubmitted.

Conclusion

[52] In summary, the meaning of cl 9.1 on its own, is clear. It applies “as from the Settlement Date” to release, for the benefit of CFL, the CFL Factored Debts and CFL Proceeds and any CFL Credit Balance, whether existing or future, from ASB’s securities. CFL Factored Debts under cl 1.1 are “book debts or other receivables that have been factored or financed by CFL”. In the context of cl 9.1, that must mean book debts or other receivables that have been factored or financed by CFL as at the settlement date or in future. The disputed payments are not debts that have been factored as at Settlement Date. They were paid prior to Settlement Date.

[53] For these reasons I conclude that the Judge erred in his interpretation of cl 9.1 of the deed. It does not have the effect of releasing from ASB’s security prior to settlement date the disputed payments totalling $160,846.02.

Result

[54] The appeal is allowed. The judgment for $160,846.02 in favour of CFL is set aside.

[55] The appellant is entitled to costs on a 2B basis on the appeal. The appellant is also entitled to scale costs in respect of the District Court proceedings.