Taylor v Bank of New Zealand HC Christchurch CIV-2008-409-000964 [2010] NZHC 2256; [2011] 2 NZLR 628 (14 December 2010)

AND DAVID JOHN TAYLOR, ALISON MARGARET TAYLOR AND ALAN ANTHONY PHILIP PERRY AS TRUSTEES OF THE D J TAYLOR FAMILY TRUST

	Home \| Databases \| WorldLII \| Search \| Feedback High Court of New Zealand Decisions

Introduction [1] A brief outline of the history of Cabellos [6] The causes of action [26]

Was the appointment of receivers in breach of contract? [30] The relevant legal principles [31] The events leading to the appointment of receivers [35] Grounds of challenge to the appointment [39] Did the demand for payment give rise to an available event of default? [43] Was notice, before the appointment of the receivers, required? [51] Are the plaintiffs stopped from challenging the validity of the

receivers’ appointment? [60] Could BNZ have relied upon alternative events of default? [77] Claim one: unlawful receivership [86] Claim two: breach of guarantee [93] The banking facilities [94] The rival contentions [104] Evaluation [106]

The relevant legal principles [174] The expert evidence [178] Evaluation: validity of the receivers’ appointment [182] Evaluation: steps taken to obtain the best price for the assets [185] Sale of Cabellos as a going concern [187]

The decision that Cabellos would not continue to trade [189] Action against Cameron Gladstone [192] Criticisms of the actual sale process [194]

Claim two: receivers’ failure to account for $39,471 upon termination of their appointment

[1] This case concerns a company Cabellos Holdings Limited, now in receivership. Its business was the supply of hair products to salons throughout New Zealand. The first plaintiff, Mr David Taylor, founded the company and remained a major shareholder until its receivership in August 2007.

[2] The second plaintiffs, Mr Taylor, his daughter Alison and and Mr Alan Perry are the trustees of the D J Taylor Family Trust (the Trust). In their trustee capacity they provided a guarantee of banking accommodation provided to Cabellos by the Bank of New Zealand (BNZ).

[3] The BNZ is named as the first defendant on account of its banking relationship with Cabellos and, more particularly, as a result of its appointment of the receivers in 2007. Arising from that appointment, and other acts, numerous causes of action are levelled against the Bank.

[4] The second defendants, Messrs Neville Fagerlund and Michael Keyse of the firm HFK Limited, were the receivers appointed by the BNZ. They are sued in this capacity in relation to their performance during the course of the receivership.

[5] Mr Taylor seeks to recover damages totalling $2,356,208, being advances he made to Cabellos ($2,164,208) and the alleged value of his shares in the company ($192,000). Mr Taylor sues in three capacities, namely as a shareholder, guarantor and unsecured creditor of Cabellos. The Trust seeks to recover damages in the sum of $173,923.99. This is the sum which the Trust was called upon to pay under its guarantee. The trustees sue, therefore, in their capacity as guarantors of Cabellos.

[6] Cabellos was formed by Mr Taylor in December 1999. In February 2000 the company entered into a distribution agreement with Davines S.p.A an Italian company. The agreement secured to Cabellos the exclusive right to distribute Davines hair care products in New Zealand.

2005, disclosed a loss for the year of $300,418. In the result retained losses increased to over $2.6m. Although the company’s sales had increased significantly (from $1.5m in 2004 to almost $2.5m in 2005) operating expenses increased even more to give rise to the trading loss.

[8] Cabellos needed a new financier. In late 2004 Mr Taylor, assisted by Michael Ambrose, a business advisor who then also had a small shareholding in Cabellos, prepared a business proposal for submission to BNZ. In the course of this process Mr Ambrose also advised Mr Taylor to approach Paul Hibbs as a possible equity investor in Cabellos.

[9] In May 2005 the BNZ became Cabellos’s banker. The security for banking accommodation included guarantees from Mr Taylor and the Trust.

[10] In June 2005 Mr Paul Hibbs purchased 150,000 redeemable preference shares in Cabellos for $150,000. Mr Hibbs is an investment manager. He is the director of a private investment company through which a number of wealthy investors participate in business ventures.

[11] In December 2005 Cabellos retained Mr David Crichton, a chartered accountant, to evaluate the situation of the company. This initiative was undertaken at the suggestion of BNZ. Mr Crichton concluded that Cabellos was “technically insolvent” if shareholders’ advances were treated as unsecured loans repayable on demand. The advances totalled $2.5m producing a net liability position of $2.3m. Mr Crichton recommended that the company obtain an injection of equity of at least

[12] On 9 March 2006 Mr Taylor, Mr Hibbs’ venture company (Cameron Gladstone Commercial Limited) and Cabellos entered into heads of agreement in relation to the required capital injection of $400,000. The shares in Cabellos were to be redistributed so that Mr Taylor and Cameron Glastone held equal shareholdings, future funding requirements of the company would be met by Mr Hibbs, minority

shareholders would be bought out and Mr Hibbs would become one of four directors of the company, with Mr Taylor to continue as Cabellos’s general manager.

[13] Mr Hibbs injected $450,000 into Cabellos prior to the end of March 2006, bringing the total injection made through him to $850,000 (including the preference share payment).

[14] On 31 March 2006 the BNZ offered revised banking facilities to Cabellos. A term of the new arrangement was that Cameron Gladstone provide a guarantee for the sum of $550,000. New guarantees from Mr Taylor and from the Trust were also to be provided in this sum.

[15] In the year to 31 March 2006 Cabellos achieved sales of $2.3m, but also made a net loss of $530,000.

[16] During the balance of 2006 Mr Hibbs provided further capital injections totalling $350,000. By year’s end the advances from his company totalled $1.2m.

[17] In January 2007 Mr Michael Beauchamp commenced employment with Cabellos as its general manager. His engagement required that Mr Taylor relax his control over the company. Difficulties soon emerged. Over time Mr Beauchamp became increasingly aligned with Mr Hibbs, and distanced from Mr Taylor.

[18] In the year to 31 March 2007 Cabellos incurred a loss of $594,000. Retained losses increased to $3.7m and total shareholder advances were also $3.7m.

[19] Sometime in April 2007 Mr Hibbs determined that he would facilitate no further cash advances to Cabellos. By then his company had advanced $1.44m. This decision was not communicated to Mr Taylor.

[20] On 30 April 2007 the BNZ again offered revised banking facilities. These included a $180,000 increase to the Trust’s mortgage with BNZ secured against a holiday home in the Marlborough Sounds. The greater part of this sum was needed by Mr Taylor to satisfy a judgment debt obtained against him by BNZ in an unrelated context. A term of the Bank’s offer was that the guarantees of the

Cabellos’ facilities from Mr Taylor, the Trust and Cameron Gladstone be increased to $720,000.

[21] On 1 May 2007 Mr Hibbs offered to buy out Mr Taylor’s interest in Cabellos. The price offered was $192,000 for Mr Taylor’s shares and payment of his $2.3m shareholder advance to the company over a 10 year period, with minimum annual payments of no less than $200,000.

[22] On 3 May 2007 solicitors acting for Mr Taylor and Mr Hibbs exchanged letters. Mr Taylor’s solicitor offered alternative terms for a buyout of Mr Taylor’s interest in Cabellos; while Mr Hibbs’ solicitor withdrew the offer of 1 May, demanded repayment within seven days of advances made by Cameron Gladstone to Cabellos, advised that Cameron Gladstone would make no fresh advances and suggested that Cabellos should be placed in voluntary liquidation because it was trading when insolvent.

[23] On 7 May Messrs Taylor and Hibbs and their solicitors met. Cabellos had a liquidity crisis on account of Mr Hibbs’ decision to cease providing funding through his company. The meeting was unproductive.

[24] On 21 May 2007 Mr Hibbs’ solicitor advised Mr Taylor that Cameron Gladstone would not provide a guarantee to the BNZ and made further demand for repayment by 23 May of the $1.44m of shareholder advances to Cabellos.

18 July 2007 - Mr Hibbs met with the BNZ, told the Bank that his company would not execute the guarantee, advised of his resignation as a director of Cabellos and of his intention to issue a statutory demand for repayment of the advances made to the company.

19 July 2007 - BNZ reversed an automatic periodic payment to Cabellos’s warehousing agent. The agent stored Cabellos’s stock and dispatched product to salons. The Cabellos business was dependent upon the services of its agent.

BNZ wrote to Messrs Taylor and Hibbs requiring that they “find a workable solution” to the impasse which had developed, and recommending that Mr Crichton be engaged as a facilitator.

23 July 2007 - Mr Crichton arranged to meet Messrs Taylor and Hibbs, but a joint meeting did not eventuate.

26 July 2007 - Mr Hibbs made a revised offer to purchase Mr Taylor’s shareholding in Cabellos for $400,000 payable over three years.

27 July 2007 - Mr Taylor retained Farr Financial Services Limited, a Wellington investment company, to obtain future funding for Cabellos, including an immediate advance of $100,000.

30 July 2007 - BNZ served a demand for payment on Cabellos seeking immediate payment of all banking facilities totalling $309,459.90 plus EUR148,138.

2 August 2007 - BNZ appointed Messrs Fagerlund and Keyse to be the receivers and managers of Cabellos on the grounds of non-compliance with the demand.

Beauty Limited, a company formed by Messrs Hibbs and Beauchamp for $292,803. May 2008 - Mr Taylor and the Trust filed this proceeding.

10 September 2008 - following payment of $173,923 under its guarantee, the Trust took an assignment of the BNZ general security agreement under which the receivers were appointed.

16 October 2008 - the Trust terminated the appointment of Messrs Fagerlund and Keyse as receivers, in favour of a new appointee and demanded immediate payment of any surplus funds of Cabellos held by the receivers.

[26] In substance eight causes of action remain. Six are against BNZ and two against the receivers.

(a) A breach of contract in appointing receivers contrary to the terms of the facility arrangements and when the sum demanded was not due and owing. Mr Taylor seeks damages in the sum of $2.3m.

(b) A breach of duty or of its equitable obligations in relation to the grant of revised banking facilities to Cabellos in April 2006 and May 2007, in that a guarantee from Cameron Gladstone was to be obtained, but was not. The plaintiffs seek an order setting aside Mr Taylor’s and the Trust’s guarantees, repayment of the sum of $173,923 paid by the Trust under its guarantee, or payment by Cameron Gladstone of a one-third share of that sum.

(c) A breach of fiduciary duty owed to Mr Taylor and the Trust, in that the Bank’s actions in the lead-up to the receivership were unconscionable in several respects. Mr Taylor claims damages of $2.3m and the Trust damages of $173,923.

(d) Breach of a duty of care in negligence by the Bank in relation to the same actions pleaded in relation to the previous cause of action; and therefore a similar claim for damages as in (c).

(e) Dishonest assistance by the Bank in that with knowledge that Mr Hibbs planned to take over Cabellos, the Bank intentionally or recklessly proceeded with receivership leading to the acquisition of Cabellos by Boutique. Mr Taylor and the Trust seek similar damages.

(f) That the Bank is vicariously liable for the defaults of the receivers, in that having been put on notice of such defaults it failed to intervene. Mr Taylor and the Trust claim the same amounts as damages.

(a) That they breached fiduciary duties owed to the plaintiffs in the general performance of their duties. Mr Taylor and the Trust claim damages of

(b) A breach of fiduciary duty in that the receivers retained and failed to account for $39,471.93 following the termination of their appointment. The Trust claims the retained sum.

Although these two claims are pleaded in equity Mr Whiteside in closing acceptED that the allegations could equally be assessed by reference to the duties imposed upon receivers under ss18-19 of the Receiverships Act 1993.

[29] Several of the factual aspects of the case are relevant to one or more cause of action. Indeed there is a considerable overlap between the various claims. To avoid repetition I shall consider whether the BNZ’s action in placing Cabellos in receivership was unlawful as a separate prior issue.

[30] This issue is of overarching importance. It is the subject-matter of the first cause of action, but the allegation is also relied upon in relation to various other of the claims.

[31] There was no discernible difference between counsel as to the legal principles applicable to the appointment of a receiver. A secured creditor’s power to appoint a receiver is purely contractual. Typically, the security agreement will identify events of default upon the occurrence of which a receiver may be appointed. It follows that the appointor must be able to justify its actions by reference to the terms of the security agreement.

[32] The appointment of a receiver may be invalid because an event of default did not occur, or because the appointment was not made in the manner prescribed in the security agreement. Indeed, the manner in which a receiver is to be appointed must be strictly followed.

[33] If the appointment is invalid the appointor and the receiver may be jointly and severally liable as trespassers, assuming the receiver has entered into possession of the secured property.

[34] In addition to these well-settled common law principles, s25 of the Personal Property Securities Act 1999 also applies to a receiver’s appointment. Section 25 relevantly provides:

(1) All rights, duties, or obligations that arise under a security agreement or this Act must be exercised or discharged in good faith and in accordance with reasonable standards of commercial practice.

The rights of a secured creditor to demand repayment of its debt, and to enforce its security (including by the appointment of a receiver), must be exercised in accordance with this section. It imposes a further statutory requirement over and above the common law obligations.

2007 BNZ served a demand on Cabellos for payment forthwith of all sums owed to the Bank. A statement was attached to the demand which showed the total amount sought. There were four components which made up the amount demanded. These were a current account (styled wages account) of $6,035.49, a debtor finance facility of $295,464.52 and a business visa facility of $2,579.34. These accounts, with interest, bank charges and fees added, totalled $309,459.90. In addition BNZ claimed EUR148,138 in respect of a letter of credit facility.

[36] On 1 August 2007 BNZ officers Messrs Peter Adamson and Lawson Scott went to the premises of Cabellos at Mandeville Street, Christchurch. Their purpose was to serve demands upon the guarantors of Cabellos’ indebtedness. They spoke to Mr Taylor, who indicated that through FAR Finance Limited he was endeavouring to refinance the banking facilities with another provider. In discussion, Mr Taylor voiced the concern that the payment demand, and further actions taken by the Bank, would only play into the hands of Mr Hibbs. Mr Taylor clearly considered that Mr Hibbs was intent upon acquiring the business undertaking of Cabellos.

[37] Later that evening Mr Taylor sent an email to Mr Scott in which he sought a reasonable time in which to refinance. Attached to the letter were calculations as to the trading position of Cabellos if it was allowed to meet orders which had been received, and were still to be processed. The calculation, prepared by the Company’s in house accountant, suggested that the Company was in a position to continue in business without any increase in the Bank’s exposure. The letter included this:

I respectfully suggest that continuing the supply of stock to customers and the payment of wages to staff, places the bank at least in no worse position, and certainly leaves Cabellos in a stronger position, with customers in particular largely unaffected.

[38] The next morning, 2 August, Mr Scott advised Mr Taylor by email that BNZ was unable to “provide any commitment at this time”. Later that morning Messrs Fagerlund and Keyse were appointed as receivers and managers of Cabellos. They accepted the appointment. Mid-afternoon, Mr Fagerlund went to the offices of Cabellos and served a copy of the notice of appointment on Mr Taylor. Mr Fagerlund was provided with essential information concerning the business of the Company. Arrangements were made for the locks to the premises to be changed. Mr Taylor, however, was provided with keys so that he could have access to the premises in the meantime.

[39] Mr Whiteside advanced detailed submissions by way of challenge to the validity of the appointment. In making the appointment BNZ relied upon a general security agreement dated 10 June 2005. Under the agreement Cabellos granted a security interest to BNZ in relation to all its present and after acquired property. Clause 2 of the agreement governed payment of the amounts secured under the agreement. Cabellos agreed to pay the secured amounts immediately on demand, unless there was a separate written agreement which governed repayment of a particular facility. Clause 2.2 provided that any secured amounts which were payable upon a contingency need not be paid until the happening of that contingency.

[40] Clause 14 of the general security agreement defined BNZ’s rights of enforcement. One enforcement option governed by cl 14.1.7 was the appointment of a receiver of all or any part of the secured property.

[41] Mr Whiteside made three main submissions in challenging the validity of the appointment. These were:

(a) that the amounts demanded in the letter of demand were not due and owing, and in particular BNZ did not comply with cl 2.2 of the agreement, in that secured amounts only payable upon a contingency fell due upon the happening of that contingency,

(b) that BNZ following an event of default (here, non-payment of the demand) did not give written notice to Cabellos of its intention to proceed to enforcement as required by cl 14.1 of the agreement, and

(c) that the appointment was not made in good faith and in accordance with reasonable standards of commercial practice as required by s25 of the Personal Property Securities Act.

[42] BNZ contested each of these allegations. In addition, Mr Palmer submitted that there were other events of default upon which BNZ could have relied to appoint a receiver. It is of course settled that a creditor may rely upon alternative events of default; even events of which it was unaware at the time of the appointment: see for

example Curragh Developments Ltd (In Rec) v Rodewald, ^[1]and the further cases

cited at [24] of that decision. Further, counsel argued that if the appointment of the receivers was defective for the absence of written notice before the appointment was made, subsequent events gave rise to an estoppel which precluded Cabellos (or Mr Taylor) from disputing the validity of the appointment.

[43] The arguments advanced in this context were intricate. In order to appreciate them it is necessary to refer to the bank facilities held by Cabellos in more detail.

[44] The two major figures in the notice of demand were those pertaining to the debtor finance facility, $295,464.52, and to the letter of credit facility, EUR148,138.30. The former was governed by a debtor finance facility agreement between BNZ and Cabellos also concluded in June 2005. This facility comprised a conventional factoring arrangement. Invoices raised by Cabellos in relation to products sold to hair salons were purchased by BNZ. It immediately paid 80 per cent of the value of the invoice to Cabellos. The salons paid the amounts due into a special account established by BNZ. On payment, the Bank was of course in receipt of the full value of the invoice. It was reimbursed for the 80 per cent it had earlier paid to Cabellos. After deduction of interest and any fees to which it was entitled, BNZ paid such part of the 20 per cent as remained to Cabellos. Clause 17 of the facility agreement defined events of default and provided for termination of the agreement by notice in writing to Cabellos. Mr Whiteside submitted that BNZ could not demand the full amount outstanding in the finance facility account unless and until the facility agreement was terminated pursuant to cl 17.

[45] Moreover, the argument continued, the debit in the facility account was not a present liability of Cabellos because that figure was covered by invoices already rendered, payment of which could be expected in the near future. In addition, upon their payment BNZ would receive 100 per cent of the amount due, and would incur a liability to pay 20 per cent of the invoice value to Cabellos, after deduction of interest and fees. In short, the amount demanded, $295,464.52, was in reality a snapshot of what was payable by the salons as at 30 July 2007, as opposed to being a conventional liability of Cabellos.

[46] Somewhat similar arguments were advanced in relation to the letter of credit facility. In particular, counsel stressed that the amount demanded, EUR148,138.30, was a contingent liability which in terms of the letters of credit actually issued would not fall due until 23 August 2007. Submissions were also advanced directed to whether the debit figure of $6,035.49 in the wages account, and the $2,579.34 debit in the credit card account, were properly included in the letter of demand.

[47] Mr Palmer, for BNZ, responded to all points. For reasons which will become apparent, I consider it is unnecessary to consider the raft of arguments directed to the amounts claimed in the letter of demand. Two aspects prompt that conclusion.

[48] The first is that aside from the rights and wrongs of the figures included in the letter of demand, Mr Whiteside also contended that the making of the demand and the subsequent appointment of receivers had to be “in accordance with reasonable standards of commercial practice” as required by s25 of the Personal Property Securities Act. An inquiry as to this would require me to decide whether BNZ acted in a reasonable commercial manner towards Cabellos. This would necessitate evidence as to present commercial practice in relation to events of default of this kind and concerning the appointment of receivers: Greenbank New Zealand

Ltd v Haas.^[2]There is no evidence before me concerning the reasonable standards of

commercial practice, yet I fear that the arguments advanced would ultimately lead to a s25 evaluation.

[49] The second, and a more fundamental reason, arises in relation to BNZ’s reliance upon alternative events of default. Although the Bank elected to proceed by way of a letter of demand, there were other events of default which seem to me to be of much greater consequence, in that they went to Cabellos’ viability as a trading concern. I shall turn to these shortly.

[50] But it is first necessary to confront Mr Whiteside’s argument based on cl 14.1 of the general security agreement that, after an event of default, BNZ could not exercise its right to appoint receivers without first giving written notice of its intention to do so. Even if BNZ is to rely upon alternative events of default, it still must have met its obligations under the agreement pertaining to the appointment of the receivers. A valid appointment remains a necessity, regardless what event of default is ultimately relied upon.

At any time after an Event of Default occurs you may at your option, exercisable by notice in writing to us (irrespective of any agreement in writing or course of dealing to the contrary, or any concession or delay or previous waiver by you), treat the Secured Amounts as payable immediately and may immediately or at any later time (in addition to the exercise and enforcement of all or any of your other Rights) do all or any of the following things without giving us any or further notice or demand:

[52] Mr Whiteside contended that any of the prescribed rights of enforcement were only “exercisable by notice in writing to us [Cabellos]”. It is common ground that following service of the letter of demand no further written notice was given to Cabellos. Rather, on 2 August 2007 the Bank proceeded directly to an appointment of receivers. It followed, Mr Whiteside said, that the appointment was invalid for non-compliance with an essential contractual stipulation.

[53] The contrary argument put by Mr Palmer was that cl 14.1 provided two options to the Bank after the occurrence of an event of default. Option one, only exercisable by notice in writing, was to treat the secured amounts as “payable immediately”. Option two was to exercise any of the rights of enforcement under cl 14 which could be done “without giving [Cabellos] any or further notice or demand”. These were said to be separate options; both, or one of which could be exercised. Counsel stressed that, if the Bank was required to give a notice in writing before enforcement action was taken, the word “any” in the final phrase would be rendered otiose.

[54] The interpretation of cl 14.1 is not straightforward. A focus upon the punctuation contained in the clause suggests that the exercise of the available options is always to be “by notice in writing to [Cabellos]”. The requirement is preceded by a comma and its expression, including the words in brackets, is concluded by a comma, before the options are set out. This, at least on a first reading of the clause, suggests that a written notice was required regardless of which option the Bank elected to adopt.

[55] However, this interpretation of the clause falls away once regard is had to the concluding words “without giving [Cabellos] any or further notice or demand”. The word “any” must be accorded meaning. Once it is, the obvious meaning becomes that doing “all or any of the following things” (exercising the rights of enforcement in the balance of the clause) may be done without notice or demand. This interpretation seems workable. Written notice is required if BNZ elects to treat the secured amounts as immediately payable. If, however, it elects to exercise its rights of enforcement notice to Cabellos is not required.

[56] But does this interpretation make commercial sense? Where, as in this case, BNZ relies on a letter of demand as the event of default it would seem unlikely that the Bank would then serve written notice that the secured amounts are immediately payable. But, a letter of demand is only one of the 22 events of default described in cl 13 of the agreement. Most of these events are not related to payment of the secured amount. A reading of the available events of default suggests that there will be instances where in response to the particular default the Bank may well elect to give notice requiring immediate payment of the secured amount, but not take further enforcement action. Understandably, the customer’s obligation to immediately pay the secured amounts would need to be triggered by a written notice.

[57] Does proceeding to enforcement action without prior written notice also make commercial sense? The rights of enforcement set out in cl 14.1.1 to 14.1.8 include: taking possession of the secured property, managing or using the secured property (including to carry on a business), leasing or selling the secured property, completing any sale or lease of the secured property, severing fixtures for the purpose of sale and the appointment of a receiver. As a matter of first impression one might think that the exercise of these powers would be subject to prior notice. On the other hand, the powers are intrusive in nature and the intention may be that forewarning is inappropriate, so prior notice is not required.

[58] In my view the correct interpretation is that, after an event of default, the option to treat the secured amounts as payable immediately is only exercisable by notice in writing; but there is no similar requirement in relation to the exercise of the rights of enforcement. This interpretation gives effect to the concluding phrase

(“without giving us any or further notice or demand”) which the alternative interpretation would not.

[59] Despite my conclusion that a notice in writing to Cabellos was not required before appointment of the receivers occurred, I am nonetheless satisfied of the need to consider BNZ’s estoppel argument in case I am wrong in relation to the prior point.

[60] Estoppel is pleaded as an affirmative defence by BNZ: see [14]-[19] of the amended statement of defence to the third amended statement of claim. The gist of the defence is that Cabellos through its officers acquiesced in the appointment of Messrs Fagerlund and Keyse with knowledge of the fact that no notice was given by BNZ of its intention to make the appointment. Acquiescence is said to be demonstrated by conduct which occurred immediately after the appointment and later.

[61] The leading case in relation to estoppel in the present context is Bank of Baroda v Panessar.^[3]An issue in that case was whether the appointment was invalid because the bank allowed only one hour in which to comply with a demand for payment of the secured amount. Walton J held that the appointment was valid but, had it not been, that the company was estopped from disputing the validity of the appointment. This was on account of subsequent dealings with the receiver, including the purchase of certain assets of the business from the receiver.

[62] The availability of estoppel in this context is confirmed in Receivers and Administrators^[4]and in Private Receivers of Companies in New Zealand.^[5]The discussion in each points out that in most cases the invalidity will be of a technical nature and, in consequence, readily capable of correction if promptly challenged.

Hence, where there is no challenge, but rather conduct which unequivocally evinces acceptance of the appointment, an estoppel will arise.

[63] For conduct to give rise to an estoppel presupposes that the person estopped knows of the irregularity and elects to overlook it. This requirement presents a difficulty in this instance. I have already found that following the event of default there was no need for BNZ to give notice of its intention to enforce its security by the appointment of receivers. I am only considering estoppel against the possibility that my finding is wrong. This necessitates an exercise of mental gymnastics, in which I assume notice was required, and then inquire whether Cabellos by its conduct accepted the appointment as a valid one, aware no notice had been given. In so doing, the Company is to be taken as fixed with knowledge of its right to challenge the appointment, as this is an element of its contractual rights (albeit assumed in this instance).

[64] The evidence relied upon to found an estoppel requires a focus upon events immediately after appointment of the receivers and also upon events later that year. On the afternoon of 2 August Mr Fagerlund went to the premises of Cabellos. He gave Mr Taylor a copy of the receivers’ notice of appointment. A discussion followed. Mr Fagerlund sought information and certain records. Mr Taylor gave an outline of the business operation, including details of the distribution agreement with Davines and of the working relationship with SB Global Logistics Limited (“SB Logistics”), which warehoused the hair products and arranged their distribution to the salons. Mr Fagerlund was also provided with records of the Company, including financial statements.

[65] On the morning of 3 August the receivers met with Messrs Hibbs and Beauchamp, who indicated their wish to purchase the assets of Cabellos. Negotiations began. Probably later that day, Mr Fagerlund advised Mr Taylor of the Hibbs/Beauchamp interest. Mr Taylor said he was also interested in purchasing the assets. Thereafter, the receivers took steps to stimulate an offer from Mr Taylor, or from interests with which he was associated.

[66] Messrs Hibbs and Beauchamp advanced their proposal through their company, Boutique Hair and Beauty Limited. Various draft agreements were tabled. The first dated 5 August 2007 offered a purchase price of $200,000 plus GST. The next iteration, dated 7 August 2007, increased the purchase price to $344,703, less

35 per cent of the value of any invoices raised by the receivers before settlement. The receivers were continuing to sell stock, and accordingly the price formula was designed to take account of any diminution in the stock value.

[67] On 8 August 2007, frustrated at the delay in the receivers’ acceptance of their previous offers, Messrs Hibbs and Beauchamp reduced their purchase price by

[68] On 9 August there was a further meeting at which the receivers sought changes to the deal, including an increased purchase price.

[69] Subsequent to the meeting the receivers contacted a senior Davines’ representative in Italy and discussed with him whether Davines would entertain concluding a distribution agreement with someone other than Boutique. This was promoted as a means to a better price. Messrs Hibbs and Beauchamp learnt of this initiative and responded by again reducing their offer, and insisting upon an immediate settlement.

[70] Despite Boutique’s demands, it was not until 15 August that the final iteration of the agreement was signed. It provided for a purchase price of $304,703 before application of the 35 per cent mechanism to cover stock sold by the receivers in the meantime. Messrs Hibbs and Beauchamp signed the agreement for Boutique and the receivers on behalf of Cabellos. Although dated 15 August, Mr Keyse insisted that the agreement was both signed and settled on 16 August, and his evidence continued:

That was the problem that, um, we’d agreed to complete the sale and yet Neville Fagerlund was giving Mr Taylor every possibility and it was causing a lot of dissent and that’s why Mr Beauchamp was jumping up and down because he said we had a deal and Mr Fagerlund was saying I do wish to obtain an agreement – sorry, offer from Mr Taylor. I’m trying to give him every advantage and in fact on that final day, on the 16^th, Neville went out of the room and said “I’m going to phone Mr Taylor and ascertain where he’s

at”. And I was sitting in that room with the other two saying, and they were saying, well I thought we had a deal and they were highly agitated at that stage.

[71] In the meantime, Mr Taylor had also been endeavouring to formulate an offer. He contacted a Davines’ director, a Mr Braguzzi, in Italy seeking his agreement to conclusion of a new distribution arrangement. He was also in contact with potential funders. However, these initiatives proved fruitless. On 12 August Mr Taylor sent an email to his legal advisor, Mr Kerry Ayers, which included this:

I cannot come up with an offer for lack of a funder. Gary Jackson has simply not followed through on verbal commitments yet again, so it is obviously his way of saying no.

Elsewhere the letter recorded that Cabellos continued to trade under the control of the receivers and that in Mr Taylor’s opinion Mr Hibbs, aided by Mr Beauchamp, was pursuing a strategy, begun earlier, to achieve a takeover of Cabellos. Obviously, Mr Fagerlund remained ignorant of Mr Taylor’s inability to mount an offer right up to the moment the Boutique deal was signed.

[72] A further area of interaction between Mr Taylor and the receivers was in relation to the value of stock. Soon after appointment an issue arose concerning the extent of dead (redundant) stock held by Cabellos. On the basis of one stock analysis obsolete stock was quantified in the sum of $148,460, out of a total stock figure of $474,076. Mr Taylor disputed this. He calculated a figure for obsolete stock within the range of $87,000 to $53,000, dependent upon certain contingencies. On 7 August he gave this analysis to the receivers in an endeavour to influence their views on this question.

[73] Finally, Mr Taylor’s daughter, Alison Taylor worked for the receivers in relation to the collection of Cabellos’ debtors. She had previously worked for the company in an administrative role and had held a small stake in the business. From September until Christmas 2007 she worked three to four mornings a week at the offices of HFK. Her knowledge of the Cabellos’ client base enabled her to better collect the amounts owed by individual salon holders. A high rate of recovery (over

[74] In my view the conduct of Mr Taylor, in particular, gives rise to an estoppel. Standing alone, Mr Taylor’s cooperation with the receivers on the day of their appointment would not be sufficient. But, this cooperation, coupled with his course of conduct in seeking to purchase the assets of Cabellos, and in endeavouring to persuade the receivers to re-evaluate the extent of obsolete stock, evinced an acceptance of the validity of the appointment. Mr Taylor was aware that following the event of default notice was not given to Cabellos of BNZ’s intention to appoint receivers. If (contrary to my earlier finding), there was a requirement for notice, Mr Taylor must be presumed to know of this term of the agreement. With such presumed knowledge, he nonetheless elected to deal with the receivers on the basis they were validly appointed.

[75] I am also satisfied that it would be unconscionable to now permit Mr Taylor to depart from his earlier stance. If at the time he had taken objection to the appointment, the defect was one which could have been easily remedied. As it was, the receivers were lulled into a false sense of security. To now allow Mr Taylor to challenge their appointment would be to the receivers’ detriment – and equally to the detriment of BNZ.

[76] For these reasons I find, in the alternative, that if notice of the intended appointment was required the affirmative defence of estoppel is available.

[77] Mr Palmer submitted that four alternative events of default were available to

[78] The first was a breach of cl 13.1.2 of the general security agreement. Cabellos did not provide financial statements for the year ended March 2007, or management accounts for May or June 2007; when reporting covenants under the agreement, or under the Cabellos’ facility agreements, imposed an obligation to do so. Second, was a default against cl 13.1.4 in providing financial information to the Bank which was untrue, incorrect or misleading in a material respect; in that on 24

June 2005 Mr Taylor provided a statement of position which did not disclose a significant judgment debt to which he was liable.

[79] The third and fourth events of default were based on cl 13.1.10 of the general security agreement which concerns insolvency, and cl 13.1.21, which relevantly provides that:

If any event or series of events, whether related or not, occurs, or any circumstances arise or exist, that in [the Bank’s] reasonable opinion may have a material adverse effect on [the Bank’s] interests under this agreement, in the Secured Property, [Cabellos] or [Cabellos’] ability or willingness to comply with all or any of [its] obligations under this agreement or any collateral security ...

[80] Mr Palmer submitted that as at 30 July 2007 Cabellos was: (a) insolvent as defined in s4 of the Companies Act 1993,

(b) dysfunctional on account of the management and governance deadlock between Mr Taylor and Mr Hibbs,

(d) without a source of funding following the decisions of Cameron Gladstone to make no further advances to Cabellos and instead to demand repayment of the advances, $1.4m, made to that time.

[81] In my view there is overwhelming evidence that Cabellos was insolvent, and that circumstances existed which on a reasonable assessment may have had a material adverse effect on BNZ’s interests under the general security agreement, as at the end of July 2007. The reasons for these conclusions can be explained quite briefly.

(a) The company is able to pay its debts as they become due in the normal course of business; and

(b) The value of the company’s assets is greater than the value of its liabilities, including contingent liabilities.

Hence, the test requires both an ability to pay debts and a positive balance sheet.

[83] Cabellos could meet neither limb of the test. Its trading history in the financial years to March 2005, 2006 and 2007 showed that it was trading unprofitably in each of these years, and therefore it was only increased shareholder advances in each of these years that enabled the business to pay its way: see [7], [10], [12], [15], [16] and [18]. And, as Mr Crichton pointed out when he was retained in December 2005 to evaluate the situation of Cabellos, the Company was insolvent then on account of “shareholder funds” which were properly to be viewed as unsecured loans repayable on demand: see [11]. Further injections of shareholders’ funds in 2006 and 2007 further exacerbated the negative balance sheet position. By March 2007 the liabilities of Cabellos exceeded the assets by over

$3.5m, once shareholder advances of $3.7m were properly categorised as a current liability, not shareholders’ funds.

[84] Clause 13.1.21 defines the event of default by reference to the existence of circumstances which would have enabled BNZ to form the “reasonable opinion” that such circumstances “may have a material adverse effect on [its] interests ...”. In my view the evidence of Messrs Scott and Adamson demonstrated that both officers actually turned their minds to this issue and in fact concluded that BNZ’s interests were materially affected by the circumstances which had arisen in July 2007. On 18

July Mr Hibbs visited the Bank. He told Mr Scott about the dysfunctional situation of Cabellos: see [21]-[24]. On 19 July Mr Scott wrote to the shareholders of Cabellos, recorded his concerns and his then assessment of the Company’s position. He recommended that Messrs Taylor and Hibbs urgently engage Mr Crichton in an endeavour to negotiate a resolution of the impasse which by then had developed. Objectively considered, I think he reasonably thought that the ongoing provision of facilities was risky, particularly given Cabellos’ trading history and its continuing dependence upon the involvement of Cameron Gladstone as a shareholder and funder of the Company.

[85] For these reasons I find that Cabellos’ insolvency, and the existence of circumstances which had a materially adverse effect on BNZ’s interests as the Company’s banker, gave rise to two alternative events of default as at the end of July

2007. To my mind the availability of these two events is so plain, that I think it appropriate to focus upon them in assessing the validity of the appointment.

[86] This claim is made by Mr Taylor in relation to his total advances to Cabellos,

$2.16m, plus the alleged value of his shareholding, $192,000. The total claim therefore, is $2,356,208.

[87] My findings in the previous section of this judgment are necessarily fatal to this cause of action. In short, I am satisfied that BNZ was entitled to appoint receivers in 2007 and that it did so in accordance with its contractual obligations under the general security agreement.

[88] Even if I had found that the appointment was invalid, it seems to me that Mr Taylor’s claim against BNZ still faced insuperable difficulties. Mr Palmer referred to these in opening the defence case for BNZ. Counsel raised two aspects. First, whether this cause of action (and indeed some of the others) were available to Mr Taylor, as opposed to the Company. Second, assuming the first difficulty was overcome, counsel questioned whether the damages claimed were recoverable in principle.

[89] The case of Tudor Grange Holdings Ltd & Ors v Citibank NA & Anor ^[6]was cited. A company involved in the scrap metal business was placed into receivership by Citibank. Mr Crawley, who had a substantial interest in the business, brought an action against the bank without the consent of the receivers, albeit pursuant to resolutions passed by the directors of the company in receivership. Citibank successfully applied to strike out the claim.

What is said is that the pleading as delivered discloses no cause of action so far as Mr. Crawley is concerned. I find it very obscure how it can be alleged that the banks came under a duty of care to Mr. Crawley personally as opposed to the companies in which he was involved. However, I will assume that such a case can be made out. Even so, Mr. Crawley can have no cause of action against the banks whether for breach of contractual or tortious duty of care, innocent misrepresentation, fraudulent misrepresentation or any other head, unless he can allege and prove damage suffered by him. As I have said, all the damage pleaded in the statement of claim is damage suffered by the company. Mr. Sheridan has accepted, quite correctly, that Mr. Crawley as shareholder cannot recover as damage suffered by him personally damage done to the company resulting in a reduction in the value of his shareholding.

The New Zealand cases of Amerton Corporation v NZIB Investments Ltd^[7]and Impact Collections Ltd v Bank of New Zealand^[8]are also authorities which recognise the limits upon shareholders in seeking to advance claims which naturally lie with a company, as opposed to its shareholders.

[91] With reference to damages, Mr Taylor claims both the face value of his shareholding in Cabellos, and recovery of the shareholder advances which he had made to the Company. In closing, Mr Whiteside alluded to the difficulties in relation to damages by reminding me that where there was uncertainty the Court must do its best in resolving what is essentially a question of fact. In relation to this cause of action he argued that damages as for trespass, where proof of actual damage is not required, were appropriate.

[92] These suggestions are all very well, but I struggle to understand how the amounts claimed are recoverable. Given the parlous state of Cabellos at the time of the receivership, it must be the case that Mr Taylor’s shareholding was not worth anything. And, the suggestion that an unlawful receivership occasioned the loss of his shareholder advances is equally problematic. Assuming for the moment that Mr Taylor enjoyed standing to bring the present claim and that it had succeeded, I would have thought damages based on the loss of a chance might have been a possible avenue of recovery. The chance would have been the opportunity for Cabellos to

have not only continued trading, but profitably as well, so as to enable it to repay shareholder advances. It seems to me the odds of this occurring were negligible.

[93] This cause of action is based on the circumstance that when BNZ offered revised banking facilities to Cabellos in March 2006, and again in March 2007, a term of the offer was that Cameron Gladstone would provide a guarantee in favour of the Bank. This did not occur. This failure is the basis upon which relief is claimed by the plaintiffs. Although I have already mentioned the relevant banking history of Cabellos (see [8]-[20]), it is necessary to refer to these aspects in more detail.

[94] On 23 May 2005 BNZ offered facilities to Cabellos, subject to the provision of guarantees by Mr Taylor and the D J Taylor Family Trust. The guarantees were for the sum of $700,000, being a figure which matched the Bank’s exposure under the debtor finance and letter of credit facilities. In addition, BNZ provided a house loan of $690,000 to the Trust, secured by a first mortgage over a holiday home in Queen Charlotte Sound. This advance was further secured by guarantees from Mr Taylor and Cabellos also for the sum of $690,000. The loan was required to provide operating capital for Cabellos.

[95] The guarantees of the Cabellos’ facilities were signed by Mr Taylor and by the trustees on 10 June 2005. The guarantees were in a common form. I shall refer to certain clauses of the guarantee shortly.

[96] That same month Mr Hibbs acquired 150,000 redeemable preference shares in Cabellos for $150,000. At the end of 2005 Mr Crichton assessed the situation of Cabellos, and concluded that an immediate injection of at least $400,000 was required. On 9 March 2006 Mr Taylor, Cameron Gladstone and Cabellos entered into heads of agreement (see [12]), whereby Mr Taylor and Cameron Gladstone were

to hold equal shareholdings in the Company and Mr Hibbs was to become a director and to facilitate its funding requirements.

[97] On 31 March 2006 BNZ offered revised banking facilities. The limit in relation to the letter of credit facility was to be reduced and Cameron Gladstone was to provide a guarantee in the sum of $550,000, while the guarantees for Mr Taylor and the Trust were to be reduced to a similar sum. The offer was subject to conditions precedent, namely that concerns raised in Mr Crichton’s report were to be “satisfactorily addressed”, and that:

The offer was accepted. On 24 May 2006 BNZ sent the three new guarantees to Cabellos. None of the guarantees were signed and returned to BNZ. Nor did the Bank take any decisive steps to secure execution of the guarantees.

[98] On 30 April 2007 the Bank again offered revised facilities to Cabellos. In line with the new limits contained in the offer, the Bank required three guarantees for the sum of $720,000. The letter of offer recorded with reference to the new guarantees from Mr Taylor and from the Trust, that the revised sum of $720,000 represented an “increase from existing $700,000” (a reference back to the 2005 guarantees). By contrast, the guarantee required from Cameron Gladstone for

$720,000 included no reference to an increase from an existing figure. Nor did the offer make completion of the shareholder agreement a condition precedent.

[99] A letter of the same date to the Trust offered to increase the amount secured under the Queen Charlotte Sound mortgage by $180,000. The increase was essentially required to enable Mr Taylor to meet a judgment debt obtained against him by BNZ in relation to an unrelated dispute. Security for the increase was via the first mortgage, with an increase in Mr Taylor’s personal guarantee from $690,000 to

[100] The loan offers were accepted. On 4 May 2007 Mr Taylor took the personal guarantee he was to provide in relation to the Trust’s increased borrowing of

[101] Mr Rolton then received by post on 11 May 2007 the new guarantees to be signed by Mr Taylor and the Trust. He was not provided with a guarantee for execution by Cameron Gladstone. There was a complication in relation to the trustees signing the new guarantee, because of the appointment of a new substitute trustee. Mr Rolton corresponded with Mr Scott in the first half of July concerning this problem. Later, when he still could not provide the guarantee from the trustees, Mr Rolton on 27 July 2007 wrote again to Mr Scott, but he was then told that the Bank “would not be pursuing these securities at this time”.

[102] By then Mr Hibbs had made offers to buy out Mr Taylor’s interest in Cabellos (see [21]-[22]) and, when this did not occur, Mr Hibbs resigned as a director of the Company at the end of May and, on 18 July 2007, advised the BNZ that Cameron Gladstone would not be signing the new guarantee. I infer from this that Mr Hibbs had also received the new guarantee by post in May, at much the same time as Mr Rolton received the guarantees for the other parties.

[103] In the end result the only guarantees which were signed and returned in relation to Cabellos’ indebtedness to BNZ, were those from Mr Taylor and the Trust dated 10 June 2005 for $700,000. It was pursuant to this guarantee that in September 2008 the Trust paid $173,923 to BNZ, being the amount owed by Cabellos to the Bank following the receivership.

[104] In closing submissions Mr Whiteside advanced, I think, three main points in support of the plaintiffs’ case:

(a) that BNZ acted in bad faith in that it connived with Mr Hibbs, turned a blind eye to Cameron Gladstone’s obligation to provide a guarantee and concealing this from the plaintiffs;

(b) that, in the alternative, BNZ was at least negligent in not obtaining the guarantee of Cameron Gladstone and was also thereby in breach of its own internal policies and procedures; and

(c) that the effect of the Bank’s conduct was to materially alter the terms of the guarantee without the knowledge and consent of the plaintiffs, such that they should be discharged from their obligations as guarantors.

(a) that negligence on BNZ’s part (which was denied) in failing to secure a guarantee from Cameron Gladstone, was incapable of supporting a claim to avoid the guarantee;

(b) that the available equitable principles which may enable a guarantor to avoid his obligations, did not avail the plaintiffs in the circumstances of this case (and in any event it was questionable whether such principles could be used in support of a cause of action, as opposed to as a shield in resisting a creditor’s claim under the guarantee); and

(c) that the terms of guarantee included a principal debtor clause (cl 8.4), a clause which made guarantors liable regardless that another guarantor did not sign the guarantee (cl 9.2(a)), and cl 12.2 provided that the plaintiffs’ obligations were not affected by anything that might otherwise affect those obligations under the law relating to sureties; which contractual agreements were fatal to the present claim.

[106] Both the extent of any duty owed by a creditor to guarantors, and the circumstances in which equitable relief may avail guarantors, were reviewed by the Court of Appeal in Westpac Securities v Dickie^[9]at 663-4. Hardie Boys J, in delivering the judgment, quoted from Bank of India v Trans Continental Commodity Merchants Ltd,^[10]where Robert Goff LJ firstly cited with approval from the judgment at first instance:

... But as a matter of principle I cannot accept Mr Murray’s submission that a surety is discharged if a creditor acts towards the principal debtor in a manner which is irregular and prejudicial to the interests of the surety. Leaving aside what may be the special case of fidelity guarantees, I consider the true principle to be that while a surety is discharged if the creditor acts in bad faith towards him or is guilty of concealment amounting to misrepresentation or causes or connives at the default by the principal debtor in respect of which the guarantee is given or varies the terms of the contract between him and the principal debtor in a way which could prejudice the interests of the surety, other conduct on the part of the creditor, not having these features, even if irregular, and even if prejudicial to the interests of the surety in a general sense, does not discharge the surety.

With that statement of principle I find myself in agreement, subject to the comment that I would perhaps have preferred to state it the other way round, that is to say that there is no general principle that ‘irregular’ conduct on the part of the creditor, even if prejudicial to the interests of the surety, discharges the surety, though there are particular circumstances in which the surety may be discharged, of which the instances specified by the learned Judge provide certainly the most significant, and possibly the only, examples.

[107] In Westpac Securities Hardie Boys J also referred to the decision of the Privy Council in China & South Sea Bank Ltd v Tan Soon Gin,^[11]in which the Board reaffirmed that the tort of negligence does not supplant the principles of equity by which a surety may be protected, nor may the tort contradict the contractual promises contained in a guarantee.

[108] I accept the view advanced on behalf of the plaintiffs that this case is most unusual for the fact that the Bank, on two occasions, failed to ensure that a guarantee was executed by Cameron Gladstone. At this point I am concerned to assess the failure in terms of a negligent omission, and whether this can avail the plaintiffs. I shall return to the more sinister contentions which surround the failure in a moment. In my view a negligent omission is clearly insufficient to affect the situation of guarantors. The citations from Bank of India adopted by Hardie Boys J in Westpact Securities, and equally the Judge’s reference to China & South Sea Bank, demonstrate as much.

[109] I turn to the second contention, that BNZ variously acted in bad faith towards the Cabellos’ guarantors, such as to engage the equitable principles recognised in Bank of India. In essence, the arguments advanced under this head require a finding as to the bona fides, or otherwise, of Messrs Adamson and Scott. Were they, or either one of them, in league with Mr Hibbs? Did Mr Lawson turn a blind eye to the requirement to obtain a guarantee from Cameron Gladstone? Generally, were these bank officers aligned to Mr Hibbs’ interests, and adverse to the interests of Cabellos and its guarantors?

[110] Mr Adamson and Mr Scott were cross-examined in particular detail. I had ample opportunity to assess both as witnesses. Mr Scott reported to Mr Adamson. It was Mr Scott who had a hands-on role in relation to Cabellos. Mr Adamson provided oversight, and became involved when matters of particular consequence arose.

[111] I judge Mr Scott to be a conscientious and straight-forward bank officer. He was careful in relation to note taking and the performance of his role generally. I am satisfied that his consistent approach was motivated by what he saw to be in the best interests of the Bank. When questioned concerning events which occurred in mid-

2007, shortly before the receivers were appointed, it became evident that Mr Scott viewed matters very much from the Bank’s perspective. He did not, I think, foresee the potential consequences of some of the actions which he was instrumental in taking. This was the first occasion on which he had direct involvement in a receivership. In particular, I doubt that Mr Scott anticipated that appointment of the receivers might avail Mr Hibbs in his acquiring the Cabellos business undertaking, much less that he acted with an intent to assist in the achievement of this end.

[112] In my view the role played by Mr Adamson was secondary to that of Mr Scott. His involvement was reactive. In the main relevant actions were initiated by Mr Scott although often with Mr Adamson’s approval. In terms of business acumen, I consider that Mr Adamson’s understanding was similar to that of Mr Scott. Both acted upon their view of what was in the best interests of the Bank and without, I think, particular foresight as to the downstream consequences.

[113] Turning to the failure to obtain a guarantee from Cameron Gladstone, the first point is that the failure was all-embracing. Neither Mr Taylor nor the trustees provided fresh guarantees of the Cabellos’ facilities in 2006, or in 2007. This was not a situation where BNZ pursued and obtained guarantees from some guarantors, to the exclusion of another. Rather, the Bank’s approach (failure) was even handed.

[114] The March 2006 revised facilities offered to Cabellos were subject to the condition precedent that the 9 March 2006 “shareholder agreement be completed by

31 May 2006”. Seemingly it was contemplated that about two months would be required to convert the heads of agreement into a final agreement. In fact, Messrs Taylor and Hibbs became preoccupied with the management of the business of Cabellos, as opposed to completion of the final agreement. Following acceptance of the Bank’s offer, Cabellos enjoyed the revised banking accommodation it had been offered. There was little incentive for the shareholders to progress matters.

[115] On balance I find that BNZ’s failure to chase up and obtain the guarantees in

2006 occurred on account of the non-completion of the shareholders’ agreement. No doubt there was an element of neglect on the part of the Bank personnel responsible for ensuring that the guarantees were to hand. But, BNZ was committed to ensuring that Cameron Gladstone’s integration as an equal shareholder in Cabellos occurred. This was a distraction. Also, the fact that BNZ already held guarantees from Mr Taylor and the Trust, meant that the Bank was not exposed as it would have been if no guarantees were in place.

[116] Following the further offer of revised facilities at the end of April 2007 a similar pattern unfolded. The offer was accepted, new forms of guarantee were prepared and sent out by the Bank, but nothing further transpired. Only one guarantee was executed, being Mr Taylor’s guarantee of the $180,000 top up of the Trust mortgage. No doubt, Mr Taylor attended to this aspect in haste on 4 May because he required the funds both to satisfy his $154,000 judgment debt to the Bank and to provide a $25,000 cash injection for Cabellos. Otherwise, aside from the Bank preparing and posting out the new forms of guarantee of Cabellos’ indebtedness, nothing was done. Then, on 21 May 2007 Mr Hibbs through his solicitor indicated to Mr Taylor that Cameron Gladstone would not provide a guarantee to the BNZ. Later, on 18 July 2007 Mr Hibbs told the Bank this, at the

same time as he put BNZ on notice of the by then dysfunctional relationship between himself and Mr Taylor.

[117] In these circumstances I find that there was no bad faith on the part of officers of the Bank. Nor did BNZ conceal, misrepresent or connive to create a situation where Mr Taylor and the Trust were guarantors of Cabellos, but Cameron Gladstone was relieved of that obligation. At most, the actions of the responsible officers may be criticised for the fact that they adopted a relaxed approach, perhaps in the knowledge that the 2005 guarantees remained in place. This conduct may be termed irregular, and also prejudicial to the interests of the existing guarantors, but it is not of a character to discharge the earlier guarantees on the available equitable grounds.

[118] Even if these factual conclusions can be faulted, the terms of the June 2005 guarantees require consideration. Clause 8 is the indemnity clause. The guarantors agreed to indemnify BNZ against any loss it may suffer because of an inability to recover any amounts payable to the Bank by Cabellos. And, cl 8.4 provided:

This indemnity is an additional obligation of yours which we may enforce against you as a principal debtor separately from your guarantee.

[119] Clause 9, headed “Other guarantors” provides that liability of the guarantors was joint and several (separate), so that each guarantor may be liable for the total amount owed by Cabellos. Then, cl 9.2 provided:

You are liable to us under this guarantee even if any other person named as, or intended to be, a guarantor for any amount which is payable to us by the customer:

(a) does not sign this guarantee or any other document, or does not sign this guarantee or any other document properly; ...

Finally, cl 12 provided that the liability of guarantors was continuing, and that:

12.2 Your obligations under this guarantee are not affected by anything that might otherwise affect them under the law relating to sureties, including:

(a) any change in the constitution, composition, control, legal capacity, rights or obligations of us, the customer, any other guarantor or person or you; ... (emphasis added)

[120] Generally, equitable rights which may avail a guarantor are subject to any express contractual terms contained in the guarantee itself. Where a guarantor is deemed to be a principal debtor, equitable rights otherwise available to a guarantor do not apply: Pogoni v R & W H Symington & Co (NZ) Ltd.^[12]Similarly, where multiple guarantors are contemplated, but a guarantee is not obtained from one of them, a clause excusing such failure is enforceable: Westpac Banking Corp v Meikle.^[13]

[121] The pleading of this cause of action is detailed, but also difficult to comprehend. As best I can tell the gist of the claim is that in the particular circumstances of this case BNZ so involved itself in the affairs of Cabellos as to become a business advisor to the Company. On this account the plaintiffs contend that much more than a banker and customer relationship existed, with the result that BNZ owed fiduciary obligations to Cabellos, Mr Taylor (both as a client and as an unsecured creditor and guarantor of Cabellos) and to the Trust (as a client of the Bank and guarantor of Cabellos).

[122] As I understand it the allegation that BNZ assumed fiduciary obligations is essentially founded on two aspects: that BNZ, having required the engagement of Mr Crichton to assess the viability of Cabellos in late 2005, subsequently required his appointment as a mediator to seek to resolve differences between the shareholders of Cabellos; and secondly, that in the context of the 2007 shareholder dispute BNZ learnt of Mr Hibbs’ intention to purchase the business assets of Cabellos and failed to advise Mr Taylor of Mr Hibbs’ intentions, or otherwise act so as to protect Cabellos in relation to the takeover.

[123] Against this background it is alleged that the receivership was “unlawful as it was exercised in bad faith with an intention or with the result that it would:

(b) enable [Cameron Gladstone] to benefit from the receivership at the expense of Cabellos and the [plaintiffs] ...”

[124] Mr Whiteside cited a number of authorities in support of the proposition that fiduciary obligations may arise in the context of a banker-customer relationship where the bank takes upon itself the role of a business advisor. One such New Zealand case was Pacific Industrial Corp v Bank of New Zealand,^[14]which concerned an interim injunction application to restrain the bank from exercising its mortgagee powers at the expense of a financial restructuring exercise which was in train. Thomas J accepted it was arguable that the bank was subject to fiduciary obligations, which it had breached. Since it concerned interim relief the case is of limited

[125] Counsel also relied upon Commonwealth Bank of Australia v Smith,^[15]a decision of Davies, Sheppard and Gummow JJ sitting on appeal in the Federal Court. The case centred on the actions of a local bank manager in a small country town who provided both banking accommodation and advice to the respondents. The respondents were clients of the bank who, with the bank manager’s assistance, acquired a leasehold interest in a hotel. This was a new business venture for them. The lessees of the hotel were also customers of the bank. The manager introduced the parties and subsequently advised the respondents in relation to their acquisition of the leasehold interest. At first instance findings were made that the bank manager was in a position of conflict, that he advised the respondents that the intended lease of the hotel was a good business opportunity and that in doing so he failed to keep the respondents properly informed (concerning terms of the lease and in conveying that there were other parties interested in acquiring the lease).

It remains to deal with fiduciary relationship. It is not a novel proposition that where a bank gives to a customer advice upon financial affairs, then in addition to any contractual rights the customer may have (something which does not arise on this appeal) the relationship between the parties may be such as to found either or both a common law duty of care and a fiduciary duty: see Halsbury’s Laws of England, 4^thed, 1989, vol 3(1), “Banking”, para 251.

A bank may be expected to act in its own interests in ensuring the security of its position as lender to its customer but it may have created in the customer the expectation that nevertheless it will advise in the customer’s interests as to the wisdom of a proposed investment. This may be the case where the customer may fairly take it that to a significant extent his interest is consistent with that of the bank in financing the customer for a prudent business venture. In such a way the bank may become a fiduciary and occupy the position of what Brennan J has called “an investment adviser”: Daly v Sydney Stock Exchange Ltd [1986] HCA 25; (1986) 160 CLR 371 at 384-5; 65 ALR

The judgment includes reference to other Australian and Canadian authorities decided in a similar context.

[127] I accept that bankers may assume fiduciary obligations over and above the purely contractual agreements which ordinarily govern the banker-customer relationship. In essence, a fiduciary relationship may exist where bank officers proffer investment advice as to the wisdom of a business proposal, such that the customer may legitimately place reliance on that advice. As the second quotation from Commonwealth Bank indicates, a bank ordinarily takes actions in its own interests in order to safeguard its position as a lender to the particular customer. Actions of this kind are not sufficient to give rise to a fiduciary relationship. The dividing line may be crossed, however, if the bank assumes an investment advice role, and reliance by the customer is evident. All the circumstances will be relevant; including whether the bank introduced the parties, whether it advised the customer when in a situation of conflict, whether the customer was sophisticated and whether the customer received independent professional advice.

[128] As in the case of Messrs Adamson and Scott, Mr Crichton and Mr Hibbs were each closely cross-examined over an extended period. In the result I reached firm conclusions concerning the approach adopted by the two bank officers and by Mr Crichton in relation to their respective roles concerning Cabellos. It was Mr Scott who primarily dealt with the shareholders of Cabellos. Throughout, Mr Scott was conscious of the distinction between requiring certain actions on the part of the shareholders, as opposed to advising them to take a particular business course of action. I find that neither of the BNZ officers gave advice to Mr Taylor concerning how he should conduct his business affairs.

[129] Perhaps, the closest they came to doing so was at a meeting with Mr Taylor on 27 July 2007. Eight days earlier Mr Scott had written to the shareholders pointing out matters of concern to the Bank (inadequate financial reporting, the overdraft position, non-completion of guarantees and the shareholders’ dispute), which concerns had prompted the Bank’s decision not to meet an automatic payment due to Cabellos’ warehouse agent. The letter required the shareholders to negotiate and find a workable solution to their problems within a week. Otherwise a demand for repayment of the facilities would be made.

[130] On 27 July Mr Taylor told Messrs Adamson and Scott that the shareholder dispute was unresolved. He revealed that Mr Hibbs had offered to purchase his shareholding in Cabellos for $400,000 and also spoke about whether the holiday home owned by the Trust should be sold and the surplus funds injected into the Company. The “pros and cons” of these steps were discussed, and the officers urged the need to seriously consider the $400,000 offer and also the wisdom of making further advances to Cabellos. But, in my view they did not step into an advisory role. Mr Taylor was told that the decisions lay with him and that he would be well- advised to obtain independent professional advice.

[131] In relation to Mr Crichton I am equally satisfied that he acted appropriately throughout his dealings with reference to Cabellos. In December 2005 he was appointed by Cabellos, although at the insistence of the Bank, to evaluate the

Company’s viability. He concluded that Cabellos was technically insolvent and that its viability was marginal. BNZ indicated it would continue to support Cabellos in the short term, but that structural changes were required. Mr Taylor identified Mr Hibbs and Mr Jackson, an Australian, as potential equity investors in the Company. In due course Mr Hibbs, through Cameron Gladstone, became an equity partner in the business.

[132] Mr Crichton had odd dealings in relation to Cabellos in 2006, essentially in order to monitor whether progress was being made in implementing his recommendations. From May 2007, however, his involvement was more significant. In early May Mr Hibbs made his first offer to purchase Mr Taylor’s shareholding in Cabellos: see [21]. Mr Crichton had discussions with both men concerning the offer to purchase.

[133] Then, in July Mr Crichton received a copy of the letter from BNZ to the shareholders, by which they were required to resolve their difficulties. It contained a recommendation that they engage Mr Crichton to facilitate discussions. On 23 July Mr Crichton met with Mr Hibbs who indicated that the joint shareholding arrangement in relation to Cabellos was at an end so far as he was concerned. Mr Crichton was then instrumental in drafting a further offer for Cameron Gladstone to purchase the balance of the shares in Cabellos for $400,000. Mr Crichton did not consider this figure represented a principled assessment of the value of the shares, but rather an amount which might be of interest to Mr Taylor or be at least sufficient to spark a negotiation. In Mr Crichton’s view the value of the shareholding was minimal.

[134] He met with Mr Taylor, who was accompanied by a business associate Mr Brian Heald. It became evident that Mr Taylor was still wedded to the notion that Cabellos could trade on under the existing management, provided both shareholders were willing to inject further funds into the Company. Alternatively, Mr Taylor spoke of his purchasing the Cameron Gladstone shareholding. The

Crichton secured various extensions of this while Mr Taylor considered his options.

[135] In the end Mr Crichton’s efforts proved to be in vain. Mr Taylor was of the view that Mr Hibbs’ offer was too low. On 30 July Mr Crichton received a letter from Mr Taylor, by which he declined the $400,000 offer but indicated that his shareholding could be acquired upon payment of the amount he had advanced to Cabellos, almost $2.5m. The shareholder dispute was in a state of deadlock. Over the next few days the letter of demand was served, and BNZ appointed the receivers.

[136] Even accepting for present purposes that Mr Crichton was an agent of the Bank when acting in the role of an intermediary between Mr Taylor and Mr Hibbs, I see no basis for finding that he acted in bad faith or otherwise inappropriately. After meeting with the shareholders individually, Mr Crichton concluded that the shareholder relationship was beyond repair. He was, I think, genuinely concerned as to Mr Taylor’s situation. His life’s assets were tied up in Cabellos. The Bank had imposed a deadline. Recognising Mr Taylor’s vulnerability, and that Mr Hibbs was best placed to mount a share buyout, Mr Crichton focused on this option. In the event his efforts failed. The failure reflected Mr Taylor’s intractable position, as much as anything.

[137] In the course of the process Mr Hibbs told Mr Crichton that he would endeavour to acquire the assets of Cabellos in the event of a receivership. This intention was not surprising, given that Cameron Gladstone had already invested

$1.4m in the business. Nor was it new information. On 18 July Mr Hibbs had told Mr Scott the details of the management dispute and spoke of his wish to purchase Mr Taylor’s shares and continue the business. From at least this point BNZ was on notice as to Mr Hibbs’ intentions. I shall not at this point detail my assessment of Mr Hibbs’ takeover aspirations. That is better done in the context of the claim that BNZ gave dishonest assistance in relation to a takeover plan.

[138] The findings I have already made that the BNZ officers did not assume an investment advice role, and to the extent that Mr Crichton did so, he acted in good conscience, are necessarily fatal to the present claim. However, there is another equally fundamental flaw in the plaintiffs’ case. The facts of Commonwealth Bank of Australia v Smith disclose a situation where a bank assumed fiduciary obligations to its ultimate detriment. There, not only was investment advice given, but it was

also acted upon. Acquisition of a leasehold interest in the hotel occurred and proved to be disadvantageous. The respondents recovered damages, which reflected the difference between what they paid and the true value of their acquisition.

[139] In the present case a sequence of business advice, a business transaction and resultant loss is not established. Rather, the claim purports to be based upon BNZ’s decision to appoint receivers. Such appointment is alleged to have been made in bad faith, with an intention to terminate Cabellos’ business and to enable Mr Hibbs to pick up the business assets and make a fresh start. In short, the plaintiffs’ case is not one based on the advice supposedly given by fiduciaries, but rather the decision of BNZ to enforce its security by the appointment of receivers.

[140] The obligations upon a creditor in that context are conveniently described in Downsview Nominees Ltd v First City Corp Ltd.^[16]The Privy Council expressly considered the obligations upon a receiver/manager while in possession of the debtor’s business, but the discussion is also apt to describe the obligations upon the creditor as well. Lord Templeman said this at 522:

... when a receiver and manager exercises the powers of sale and management conferred on him by the mortgage, he is dealing with the security; he is not merely selling or dealing with the interests of the mortgagor. He is exercising the power of selling and dealing with the mortgaged property for the purpose of securing repayment of the debt owing to his mortgagee and must exercise his powers in good faith and for the purpose of obtaining repayment of the debt owing to his mortgagee. The receiver and manager owes these duties to the mortgagor and to all subsequent encumbrancers in whose favour the mortgaged property has been charged. (emphasis added)

The decisions of the receiver and manager whether to continue the business or close down the business and sell assets chosen by him cannot be impeached if those decisions are taken in good faith while protecting the interests of the debenture holder in recovering the moneys due under the debenture, even though the decisions of the receiver and manager may be disadvantageous for the company.

In the discussion which immediately followed His Lordship emphasised the great difference between managing a company for the benefit of a security holder, and managing it for the benefit of its shareholders; which in turn exposed the dangers

inherent if courts became involved in imposing tortious and equitable duties over and above the requirements of honest purpose and good faith: see p 525 of Downsview.

[142] This cause of action is significantly pleaded by reference back to allegations advanced in support of the previous claim for breach of fiduciary obligation. The tortious duty said to be owed by BNZ to the plaintiffs was to put in place the Cameron Gladstone guarantee, not to reverse payments to Cabellos’ creditors without warning and not to put Cabellos into receivership in the circumstances which prevailed as at August 2007.

[143] The alleged breach of this duty is based on the same allegations as were advanced with reference to the claim of breach of fiduciary obligation. The alleged breach falls into two parts. The first is that BNZ “demanded that [Mr Taylor] sell his shareholding in Cabellos to [Cameron Gladstone].” I have already considered, and rejected, this allegation (see [129]). It is also alleged that BNZ breached its duty of care because, aware that Mr Hibbs/Cameron Gladstone would make no further advances to Cabellos, it reversed a payment to the Company’s warehouse agent, declined to allow a reasonable time for Cabellos to refinance its facilities, made the demand for their repayment and then proceeded to enforce its security by appointing receivers. I shall return to the evaluation of this allegation in a moment.

[144] The damage alleged to flow from the breach is again similar to that alleged in relation to the previous cause of action; namely that as a result of the receivership the business of Cabellos failed and Mr Hibbs/Cameron Gladstone acquired its assets and made a fresh start. Thereby, it is said, Mr Taylor lost his investment in Cabellos and the Trust lost the sum it was called upon to pay pursuant to its guarantee.

[145] Even if the relationship which existed between the plaintiffs and BNZ is susceptible to the recognition of a tortious duty of care, it is readily apparent that this claim is an endeavour to relitigate issues which I have already considered in the context of previous more specific causes of action.

[146] As to the suggested duty to obtain the Cameron Gladstone guarantee, I have already considered and rejected the proposition that the failure was unconscionable, and explained the limits in relation to the power of courts to intervene (see [105]- [106]). The reversal of a monthly payment to the warehouse agent was an incident of the process leading to receivership. So were the other alleged breaches relating to timing, the making of the demand and the appointment of receivers. In substance the central allegation is that BNZ was not entitled to make the appointment and that it was not an action taken in accordance with reasonable standards of commercial practice.

[147] And I have already considered the legality of the receivership, although by reference to alternative events of default, as opposed to the actual default relied upon by BNZ. I found that in all the circumstances there were events of default which amply justified BNZ’s decision to appoint receivers. On the basis of these findings this claim must fail.

[148] The gist of this claim is that BNZ, aware that Mr Hibbs was intent upon staging an hostile takeover of Cabellos, lent him dishonest assistance by taking the steps towards and ultimately placing the Company in receivership. Thereby, it is said that Mr Hibbs and Mr Beauchamp were placed in a position to acquire the undertaking of Cabellos, and continue the business as Boutique Hair and Beauty Limited.

[149] An equitable claim for dishonest assistance is available against a third party who has dishonestly assisted a trustee, or fiduciary, in the commission of a breach of trust or fiduciary obligation. There are three elements to such a claim:

(a) the existence of a trust or fiduciary obligation, which is breached by the trustee/fiduciary,

(b) dishonest procurement of, or assistance in, the breach by the third party, and

Here, the plaintiffs must establish the breach of a fiduciary obligation which was owed to them by Mr Hibbs and/or Cameron Gladstone, and that BNZ dishonestly procured, or assisted in, the breach with the result that the plaintiffs sustained loss.

[150] The pleading of this claim is commendably brief. Earlier paragraphs in the statement of claim which allege that BNZ’s appointment of the receivers was unlawful, its failure to obtain the Cameron Gladstone guarantee was unconscionable and mala fides, and that BNZ breached a fiduciary duty it owed to the plaintiffs and Cabellos, are adopted. However, the pleading does not identify the fiduciary obligation said to be owed to the plaintiffs by Mr Hibbs/Cameron Gladstone. Nor did the submissions of counsel extend to this issue.

[151] Cameron Gladstone was of course a shareholder in Cabellos, and Mr Hibbs a director. The essential duty of a director is to act in good faith and in what the director believes to be the best interests of the company: s131(1) of the Companies Act. Whether this duty is of a fiduciary nature is considered in Directors Powers

and Duties.^[17]The author concludes that, although a director’s duty of loyalty is

often described as a fiduciary duty, strictly speaking directors’ fiduciary obligations are separate; being a duty not to enter into transactions where personal interests

might conflict with those of the company, and a duty not to benefit in any way from their office; at least not without disclosure and approval of the director’s actions.

[152] Although not expressly pleaded, I think the plaintiffs’ case was advanced on the basis that Mr Hibbs both abused his office and pursued his personal interests at the expense of Cabellos. Such allegations, if sustained, would avail Cabellos, but it was not explained how Mr Taylor in his personal capacity, and the Trust, were owed fiduciary obligations of this nature as shareholders, creditors and guarantors of the Company.

[153] The intended role of Mr Hibbs/Cameron Gladstone in the Company was spelt out in the heads of agreement concluded on 9 March 2006 between Mr Taylor, Cameron Gladstone and Cabellos; in which “[Paul]” was substituted for Cameron Gladstone throughout the text. The background recitals to the agreement referred to the shareholding of Mr Taylor and [Paul] in Cabellos and continued:

D. David, Cabellos and [Paul] have identified Cabellos is under capitalised and [Paul] wishes to introduce additional capital into Cabellos.

E. On a preliminary basis, pending the parties entering into a detailed formal Shareholders’ Agreement, the parties wish to enter into this Heads of Agreement to record their intentions.

Clause 1.1 recorded that [Paul] would introduce additional funds of $400,000 immediately and that a share redistribution would occur so that Mr Taylor and [Paul] held equal shareholdings (cl 1.2). The next sub-clause provided:

1.3 Future funding requirements of Cabellos shall be met exclusively by [Paul] without any call on David to introduce additional capital or funding.

Clause 7 stated that following signing of the heads of agreement the parties would negotiate a formal detailed agreement, incorporating the existing terms and such additional terms as were necessary.

$700,000 to Cabellos. The additional $400,000 contemplated in cl 1.1 was duly paid. By about April 2007 the Cameron Gladstone advance was $1.44m. On 3 May

advances would not be made and suggested that Cabellos be placed in voluntary liquidation because it was trading when insolvent.

[155] I have not heard submissions directed to the status of the heads of agreement and, more particularly, whether Mr Hibbs’/Cameron Gladstone’s decision in early

2007 to make no further advances to the Company amounted to a breach of contractual obligation. By then Cameron Gladstone was already owed a substantial sum by a company which had incurred a loss of $594,000 to March 2007, and which had retained losses of $3.7m and shareholder advances totalling $3.7m. Whether, in these circumstances, cl 1.3 of the heads of agreement could still be construed as an open-ended obligation upon [Paul] I very much doubt.

[156] But, assuming the alleged breach of fiduciary duty was as I have supposed it to be in [151], the issue is whether Mr Hibbs took advantage of his position as a director of Cabellos and preferred his own interests to those of the Company by pursuing a buyout strategy and, in due course, purchasing the undertaking of the Company from the receivers. This difficult question was not broached in the course of the plaintiffs’ closing submissions. It seemed to be assumed that by the use of the phrase “hostile takeover” a breach of fiduciary obligation could be assumed. I am by no means satisfied that this is the case. A close examination of the circumstances which prevailed at the time was required. However, even assuming that a breach of fiduciary obligation occurred, it was also necessary that BNZ was complicit in the breach.

[157] The Bank’s defence was that its officers in placing Cabellos in receivership were not motivated to assist Mr Hibbs in a takeover of the Company. To the extent that the receivership in fact assisted Mr Hibbs’ takeover aspirations, this was incidental to BNZ taking action to protect its own interests.

[158] The leading case on what constitutes dishonest assistance is Royal Brunei

Airlines v Tan.^[18]Mr Tan’s company was a travel agent for the airline. It transacted

business with the airline’s customers on the basis that monies received remained the property of the airline and were to be held in a separate trust account and paid to the airline periodically, subject to the deduction of commission. Contrary to this term of the agency agreement, the company paid the monies into its current account, used them to meet operating expenses and eventually lost a significant sum. Mr Tan, as the main shareholder and managing director of the company, was sued as a party to the company’s breach of trust. In light of the difference of opinion in the courts below, the Privy Council was required to determine what constituted knowing assistance in a breach of trust.

Drawing the threads together, their Lordships’ overall conclusion is that dishonesty is a necessary ingredient of accessory liability. It is also a sufficient ingredient. A liability in equity to make good resulting loss attaches to a person who dishonestly procures or assists in a breach of trust or fiduciary obligation. It is not necessary that, in addition, the trustee or fiduciary was acting dishonestly, although this will usually be so where the third party who is assisting him is acting dishonestly.

The Privy Council found that Mr Tan as the guiding hand of the company was implicated in dishonestly assisting a breach of trust. It was “beside the point” that he hoped, or even expected, when the money was paid into the current account that there would be no shortfall. It was the breach itself, and the state of mind which existed at that point, which established whether there was dishonest assistance or not. Earlier at 389 Lord Nicholls explained that dishonesty in this context “means simply not acting as an honest person would in the circumstances”. It was, therefore, “an objective standard”, albeit the third party must act with “conscious impropriety”.

[160] Was there dishonest assistance on the part of BNZ? The first problem is that the breach of fiduciary obligation on the part of Mr Hibbs/Cameron Gladstone remains undefined. But assuming there was a breach, the plaintiffs allege that the appointment of receivers implicated BNZ in the breach such as to comprise dishonest assistance. This allegation presupposes that the receivership was an integral aspect of Mr Hibbs’ plan. I do not, however, see matters in such simple terms.

[161] Despite its poor trading history Cabellos enjoyed a margin (gross profit percentage) of over 60 per cent on the sale of its products. It had an exclusive New Zealand agency with Davines and had achieved an increase in its market share over time. Mr Hibbs explained in evidence that these features made Cabellos an attractive investment opportunity. He was also aware that Mr Taylor was in his sixties and nearing the end of his working career, which suggested that a future opportunity to acquire a controlling interest in the company would present itself.

[162] But despite the advances from Cameron Gladstone to Cabellos in 2006 (see [13]-[16]), trading did not improve. In early 2007 Mr Beauchamp was appointed general manager and additional sales staff were engaged; but within a few months Mr Hibbs became disillusioned and sought to acquire Mr Taylor’s interest in Cabellos immediately.

$192,000 for Mr Taylor’s shares, and payment of his $2.3m advance over a 10 year period, with minimum payments of no less than $200,000 per annum. Mr Taylor counter-offered on the basis that he would enter into an agreement to sell his shareholding at an agreed value payable over three years with interest, plus immediate repayment of his current account and termination of his management role. Mr Hibbs was not interested in this price, and withdrew his offer.

[164] Although the evidence is somewhat sketchy, it is apparent that Mr Hibbs communicated the terms of a further offer in the course of May 2007. Mr Crichton was instrumental in preparing a draft one page document which indicated that Cameron Gladstone would buy out all the shareholders in Cabellos for $700,000 payable by monthly payments over seven years, with 8 per cent interest. This represented $550,000 for Mr Taylor’s shareholding. Further terms included that Mr Taylor resign as a director and cease employment with the Company at the end of May. The terms of the offer were conveyed to Mr Taylor, but on 18 May Mr Heald, Mr Taylor’s friend, rang Mr Crichton and advised that the revised offer was unacceptable.

[165] The previous day Mr Taylor was involved in a desperate initiative. He signed shareholder and directors’ resolutions for the issue of 192,000 new shares in Cabellos to Cameron Gladstone, the consideration for such shares being the debt of

$1.44m owed by Cabellos to Cameron Gladstone. Mr Taylor signed the two necessary directors’ resolutions, and a shareholders’ resolution approving the share issue was signed by Mr Taylor and his daughter Alison. Mr Hibbs was not told about this.

[166] A further buyout offer to Mr Taylor was authorised by Mr Hibbs in discussion with Mr Crichton on 25 July 2007. The terms were similar to those offered earlier in the month, except that the purchase price for the shares in Cabellos not already owned by Cameron Gladstone was reduced to $400,000. This offer, and its rejection, is detailed at [131]-[133].

[167] In my view this history of offers made by Mr Hibbs/Cameron Gladstone to acquire all the shares in Cabellos is not consistent with the thesis that Mr Hibbs’ plan was to engineer a receivership and then purchase the business undertaking from the receivers. In addition, as Mr Hibbs said in cross-examination, he was conscious of the $3.7m of tax losses available to Cabellos and of the importance of the Davines’ distribution agreement. He was advised, and understood, that a receivership would put the distribution agreement at risk and preclude future access to the Company’s tax losses. All in all, I do not accept that Mr Hibbs viewed a receivership as the best means to Cameron Gladstone assuming control of Cabellos. I consider that it was only in the final days of July, after Mr Taylor declined the $400,000 buyout proposal, that Mr Hibbs saw receivership as the likely option. Until then I am satisfied that his aim and preference was to achieve a buyout, with the attendant advantages entailed in this course of action.

[168] This finding necessarily undermines the central allegation that BNZ lent assistance to Mr Hibbs by the appointment of the receivers. Moreover, I do not consider that Messrs Adamson and Scott took the decision to appoint receivers dishonestly and in order to assist Mr Hibbs to take over Cabellos. There is no adequate evidence in support of this proposition. To the contrary, I am satisfied that the Bank’s officers made the demand upon Cabellos for payment and appointed the

receivers on account of concerns as to the commercial viability of the Company. I regard Mr Scott’s letter to Mr Taylor and Mr Hibbs of 19 July 2007 as a genuine assessment of the concerns which prompted enforcement action on the Bank’s part. Accordingly, in my view there is no basis for a finding of dishonest assistance.

[170] In the statement of claim this cause of action is referred to as one for breach of fiduciary duty. The claim is framed by reference to the duty upon the receivers to act in good faith and for a proper purpose, to exercise their powers with regard to the interests of unsecured creditors and guarantors of Cabellos, and to obtain the best price reasonably attainable for the Company. In closing submissions Mr Whiteside accepted that these duties were no different from those imposed by ss 18 and 19 of the Receiverships Act 1993.

(1) A receiver must exercise his or her powers in good faith and for a proper purpose.

(2) A receiver must exercise his or her powers in a manner he or she believes on reasonable grounds to be in the best interests of the person in whose interests he or she was appointed.

(3) To the extent consistent with subsections (1) and (2) of this section, a receiver must exercise his or her powers with reasonable regard to the

(b) Persons claiming, through the grantor, interests in the property in receivership; and

A receiver who exercises a power of sale of property in receivership owes a duty to –

(b) Persons claiming, through the grantor, interests in the property in receivership; and

[173] The allegations of default advanced in the statement of claim are wide- ranging. Virtually every action of the receivers, and also certain omissions, are alleged to be in breach of their statutory obligations. I shall analyse the list of complaints under four headings. These are that the receivers:

(b) failed to take all reasonable steps to achieve a good price from the sale of the undertaking of Cabellos;

[174] The requirement upon receivers to act in good faith and for a proper purpose (s18(1)) gives statutory expression to the decision of the Privy Council in Downsview.^[19]But, I do not apprehend that the receivers’ bona fides, or genuineness of purpose, is under challenge in this case. Subsection (2) prescribes the duty owed to the appointor, here BNZ. Again, this duty is not called in question by the plaintiffs.

[175] Their focus is more upon subs (3) by which receivers must exercise their powers with reasonable regard to the interests of the company and others involved

with the company. In the text, Private Receivers of Companies in New Zealand,^[20]

The position under s 18 can perhaps be summarised by saying that the receiver has a duty to act in good faith and for the purpose for which he or she has been appointed, namely to recover as much as possible of the indebtedness owing to the secured creditor. The receiver also has a duty to take reasonable care of the interests of the secured creditor and, whilst the interests of the secured creditor must be put first, the receiver has also a subsidiary duty not to act in a way which unreasonably prejudices the interests of the company and others with claims against the company.

[176] The section assumes the overarching duty owed to the appointor, and expressly recognises a duty to obtain the best price reasonably obtainable for assets, given that the receiver is engaged in the exercise of a power of sale held by the appointor. Hence, the duty is to obtain the best price reasonably obtainable in a receivership situation.

In deciding whether a receiver or mortgagee has fallen short of the duty to take reasonable precautions in a sale, the facts must be looked at broadly and it is proper to allow some margin for business and risk assessment by the receiver or mortgagee in the realisation of the security.

Later in the same paragraph the Chief Justice adopted a statement that a receiver “will not be adjudged to be in default unless he is plainly on the wrong side of the line”. Although Moritzson was decided before enactment of the Receiverships Act and therefore with reference to the then relevant equitable principles, I am satisfied the suggested approach applies equally today.

[178] Before I refer to the expert witnesses it is convenient to mention a development which occurred during the course of the trial. Messrs Fagerlund and Keyse were jointly appointed as receivers of Cabellos. However, Mr Fagerlund assumed the lead role. Mr Keyse lent assistance, particularly with regard to the sale

of the business undertaking to Boutique, including dealings with a representative of Davines, Mr Sergio Cavazanna. Both men provided witness statements prior to trial and Mr Fagerlund sat in during the evidence of relevant prior witnesses. Before the second defendants’ case was opened, however, he fell ill and was unable to give evidence.

[179] In the result Mr Keyse gave the principal evidence on behalf of the receivers. This elicited the objection that some parts of his testimony were hearsay and should not be received on this account. Then, in relation to some issues, Mr Keyse gave evidence which was not wholly consistent with that contained in Mr Fagerlund’s witness statement. This prompted Mr Whiteside to the view that Mr Fagerlund’s witness statement should be admitted in evidence. It was, pursuant to s9(1) of the Evidence Act 2006. I shall have regard to Mr Fagerlund’s evidence, but also take into account the circumstances in which it was received.

[180] Two independent experts gave evidence concerning aspects of the receivership. Both were experienced insolvency practitioners, who had worked as both liquidators and receivers. Mr Geoffrey Maltzer, called by the plaintiffs, provided a witness statement prepared after he had seen Mr Taylor’s evidence and the pleadings. He described the general duties of receivers, and expressed various reservations concerning the performance of Messrs Fagerlund and Keyse based on the information with which he had been supplied. With regard to one aspect he withdrew criticisms originally included in the witness statement in light of further and better information which he had been provided by the time of his giving evidence. In the end result I did not find Mr Maltzer’s evidence of great assistance. Put shortly, he was hamstrung on account of the inadequate information with which he was supplied.

[181] Mr John Vague was called on behalf of the second defendants and gave evidence with a much fuller appreciation of the facts of the case. He also enjoyed the advantage that he was the last witness called, and he gave evidence after listening to Mr Keyse’s account of the receivership and his cross-examination. Mr Vague, in my view was better placed to give opinion evidence on the contentious issues in this case.

[182] The expert witnesses were in agreement that one of the first duties of a receiver, following appointment, is to verify the validity of the appointment. Mr Fagerlund’s witness statement included evidence relevant to this aspect. He said that on the date of appointment, 2 August 2007, BNZ provided the documents needed to commence the receivership. He added that this included a notice of appointment, but not the Bank’s internal records concerning the debtors’ finance, or letters of credit, facilities. He observed “We relied on the BNZ to have cancelled the facilities and appointed [the] receivers appropriately.” Nonetheless the documents were provided to the firm’s solicitors, presumably to confirm the validity of the appointment. He said that subsequently the solicitor telephoned and gave advice that “everything was in order”.

[183] This process was criticised as inadequate and as providing no comfort as to the validity of the appointment. I agree. In order for the solicitor to have given meaningful advice he would have needed the general security agreement, the notice of demand and related documentation in order to verify that an available event of default had occurred: see the discussion at [39]-[59]. On the basis of Mr Fagerlund’s evidence it is not apparent that his firm’s solicitor was even placed in a position to give advice concerning the validity of the appointment.

[184] In the event, however, any failure on this score was of no moment. I have already given my reasons for concluding that BNZ gave due notice to Cabellos before appointing the receivers (see [51]-[58]), that the plaintiffs were estopped from challenging the validity of the appointment in any event (see [60]-[75]), and that alternative events of default were available to BNZ (see [77]-[84]). Accordingly, in my view the appointment of the receivers was validly made and any failure by them to take adequate steps to confirm the validity of the appointment does not advance matters. The position would have been different of course had the appointment been shown to be invalid.

[185] The allegations under this heading concern the methodology adopted by the receivers. All aspects of their approach were challenged. Logically, the first group of allegations concern the decision to sell the business undertaking, essentially the stock, to Boutique; rather than to adopt an entirely different approach. It is said that the receivers should have sold Cabellos as a going concern or continued to conduct the business in receivership for much longer than they in fact did. A linked contention was that they failed to call upon and require Cameron Gladstone to provide further funding, in particular a sum of $100,000 which was to have been provided in April 2007, and also that they failed to require this company to provide a guarantee of the BNZ facilities.

[186] The remaining allegations concern aspects of the process followed in negotiating and effecting a sale of Cabellos’ assets to Boutique. The complaints include that the receivers failed to take steps to retain the Davines’ distribution agreement, did not manage the conflict of interest which affected Messrs Hibbs and Beauchamp throughout the sale and purchase negotiations, that prospective buyers of Cabellos were not sought through advertising and other inquiries, that to the extent there were expressions of interest these were not properly pursued, and that valuation advice was not obtained concerning the true market value of the assets.

[187] To my mind this allegation is untenable. The Davines’ distribution agreement concluded on 10 March 2006 provided that it was transferable, but only to an entity over which Mr Taylor had 51 per cent control: cl 2 of the introduction. Further, cl 10.2 provided for termination of the agreement if either party was unable to pay its debts as they became due in the ordinary course of business, or was placed, in receivership. It is common ground that the agreement was the cornerstone of Cabellos’ business. While, in the face of these terms in the agreement it may still have been open to the receivers to negotiate a way forward, this was highly unlikely for reasons to which I will refer shortly in considering the sale of assets to Boutique.

[188] In addition, the financial, and dysfunctional management, situation of Cabellos meant that the opportunity to effect a sale of the business as a going concern was in my view remote. As Mr Vague put it “there was no going concern as such to sell”.

[189] Again, in my view this allegation is untenable. Mr Fagerlund’s evidence included an assessment of the position of Cabellos as at 2 August 2007. He concluded that the Company had been trading while insolvent for several years and that continuing to do so was not an option. The accounts to 31 March 2007 showed assets of $1,286,000 and liabilities of $4,560,442. The Company had accumulated losses of $3.7m. Its net loss in the year ended March 2006 was $530,339 and in the next year $591,624.

[190] There were arrears of wages owing of $55,919; and a preferential sum owed to Inland Revenue of $130,130, mainly arrears of GST and PAYE.

[191] In these circumstances the receivers concluded that to continue to trade was not feasible. However, they determined that it was appropriate to fulfil existing orders from hair salons. Stock was available at Cabellos’ warehouse agent, SB Logistics, subject to securing its release. An arrangement to achieve this was negotiated, and over a brief trading period sales totalling $143,512 were made to satisfy orders on hand at the date of receivership. I consider that in relation to the continuation of trading the receivers could have done no more than they in fact did.

[192] This allegation I likewise regard as unsustainable. I have already expressed the view that the March 2006 heads of agreement was probably unenforceable

12 months or more later (see [154]). Moreover, the suggestion that the receivers were in a position to force the issue in the face of Mr Hibbs’/Cameron Gladstone’s statement that no further funding of Cabellos would occur, is unrealistic. Had the receivers expended time and money on this cause, I fear their conduct would have courted a complaint of wasted expenditure.

[193] Similarly, the contention that the receivers were in a position to in some way require Cameron Gladstone to provide a $720,000 guarantee in favour of BNZ as at August 2007 is unrealistic. In light of developments to that point there was no prospect that the guarantee would be signed. To pursue the matter would have been a serious error of judgment.

[194] In concluding the sale to Boutique the plaintiffs challenge the very approach which the receivers adopted following their decision that the only available course was to sell Cabellos’ remaining assets to best advantage. I have already referred to aspects of the sale process when considering whether the plaintiffs were estopped from challenging the validity of the receivers’ appointment (see [64]-[71]).

[195] The first complaint is that the receivers were tardy in making contact with Davines, with the result that Messrs Hibbs and Beauchamp were able to position themselves to become the preferred future New Zealand distributor of Davines’ products. Mr Maltzer gave evidence that the receivers should have contacted Davines on day one or two of the receivership. I accept this evidence.

[196] On the day of the receivers’ appointment Mr Beauchamp was in contact with both Davines’ Asia Pacific manager in Sydney, Mr Cavazanna and a senior manager of the Company in Italy, Mr Paolo Barguzzi. Mr Beauchamp in an email to Mr Barguzzi confirmed that Cabellos was in receivership, advised that he and Mr Hibbs were formulating a “plan of action”, said the intention was for Mr Hibbs to be the majority shareholder of a new company with Mr Beauchamp to have a minority stake and to manage the Company, and that Davines support to this new venture was sought. On Monday, 6 August, by which time the receivers had already met with Messrs Hibbs and Beauchamp, Mr Cavazanna phoned Mr Keyse and said that Davines’ commitment lay with Messrs Hibbs and Beauchamp, because Mr Taylor had proved unreliable many times in the past.

[197] On 7 August Mr Keyse emailed Mr Cavazanna to indicate that the receivers required advice from a duly authorised person in the head office in Italy confirming

Davines’ views upon a new distribution agreement. The next morning Mr Cavazanna purported to provide this advice, despite the fact he was only an area manager. Telephone contact followed, in the course of which Mr Cavazanna became agitated because his authority to speak for Davines had been doubted. He asserted that management people in Italy were on holiday and could not be reached in order to provide a direct response. Mr Keyse described this as a “lame excuse” in a communication to Mr Fagerlund.

[198] Eventually, on the afternoon of 8 August, Italian time, Mr Barguzzi sent two emails, one of which gave notice of termination of the Cabellos distribution agreement and the other stated that Davines would “only conclude a distribution agreement with Mr Paul Hibbs or with an entity to be formed and controlled by Paul Hibbs and Michael Beauchamp”.

[199] In my view this documentation demonstrates that Messrs Hibbs and Beauchamp achieved their objective of securing a commitment from Davines before the receivers had even made contact with the Italian company. But I do not accept that Messrs Fagerlund and Keyse can be criticised for this. They were simply out- manoeuvred. The intended purchasers enjoyed a distinct advantage. They had an existing relationship with the Davines’ management. The receivers did not, and they were also endeavouring to come to grips with the business of Cabellos following their appointment. In short, Messrs Fagerlund and Keyse had no reasonable opportunity to preserve the position with Davines before these intending purchasers intervened.

[200] Next, it is said that the receivers failed to recognise and manage the conflict of interest which existed throughout the negotiations with Messrs Hibbs and Beauchamp. I am not sure what exactly is meant by this. I do not accept that the receivers failed to recognise the obvious conflict of interest which afflicted Messrs Hibbs and Beauchamp as both former officers, and intending purchasers, of Cabellos. For example, the receivers’ insistence that a senior person from head office in Italy, rather than the Asia Pacific manager from Sydney, speak on behalf of Davines is an indication that the receivers were alive to the “insider” position which Messrs Hibbs and Beauchamp enjoyed. Whether they adequately managed the

conflict is ultimately to be assessed by judging whether a reasonable price was achieved for the assets.

[201] The next group of allegations concern the adequacy of the steps taken to test the market in relation to the sale of the assets of Cabellos. No advertising was undertaken. In response to this complaint a passage from Mr Keyse’s evidence encapsulates the receivers’ viewpoint:

To be clear, there was no “business” of Cabellos to sell. Due to the company’s insolvent position, there were only tangible assets to be sold and no goodwill. Furthermore, the attitude of Davines, and in particular statements that it would only do business with Mr Hibbs and/or Mr Beauchamp, restricted the position further. In my view Davines was the key to achieving the maximum sale price. Prospective purchasers would [only] have been prepared to pay more for the assets if they included a distribution contract.

13 days. At the same time the receivers took steps to enable Mr Taylor to table a purchase proposal if he was able (see [64]-[70])..

[203] The only other expression of interest was from Mr Steve Wilkins of HairFX Limited. On the afternoon of 9 August Mr Wilkins followed up an earlier telephone conversation, by registering an interest in the purchase of the assets of Cabellos. He spoke of the financial standing of HairFX, said that he had already been in discussion with Mr Cavazzana and indicated that the assets of interest to his company were the stock, warehouse fittings, key staff and the distribution agreement. The letter also contained reference to Davines having approached HairFX to take over the distribution agency some 15 months earlier.

[204] But, by the time of the HairFX letter the receivers were already in receipt of advice from Italy that Davines were committed to concluding a distribution agreement with Messrs Hibbs and Beauchamp, if possible. Mr Fagerlund promptly telephoned HairFX and advised Mr Wilkins that the distribution agreement with Cabellos had been cancelled. He was assured, however, that HairFX remained in discussions with Mr Cavazzana. The next day, 10 August, Mr Fagerlund spoke to

Mr Cavazzana in person at the Christchurch offices of HFK Limited and was told that there were no current negotiations with HairFX.

[205] On 16 August, the day after the Boutique agreement was signed, Mr Wilkins wrote to the receivers as follows:

We are surprised with your lack of response to our offer to purchase the business of Cabellos Holdings Limited (in receivership).

We are in communication with Davines International who appear comfortable in dealing with us as potential New Zealand agents. We remain concerned that you have precluded us from bidding for the business to allow the “best possible price” to be achieved through due process.

We remain ready and willing to purchase the business on terms and information requested in our earlier email communications.

Mr Keyse responded to the effect that the sale of stock had been concluded, and that he and Mr Fagerlund were “totally perplexed” as Mr Cavazzana had told them the opposite with reference to the views of Davines.

[206] Mr Wilkins was subpoenaed by the plaintiffs to give evidence. Ultimately, he did not do so. I am left, therefore, to assess matters on the basis of the receivers’ evidence and the written communications sent by HairFX. In my view the steps taken in relation to the expression of interest were reasonable in all the circumstances. HairFX’s expression of interest conveyed that it wished to acquire limited key assets together with the distribution agreement. I infer from this that HairFX, like Boutique, aspired to the Davines’ agency in New Zealand. Given what they were told by Mr Cavazzana on 10 August I think it is understandable that the receivers did not pursue the HairFX expression of interest with more vigour.

Evaluation: was the best price reasonably obtainable for the assets at the time of sale achieved?

[207] The allegations under this heading include assets which were sold at an alleged under-value, as well as assets which were allegedly not got in and sold at all. The overarching question is whether at the end of the sale process the total amount realised was the best price reasonably obtainable in the circumstances of this receivership.

[208] In seeking to answer this question I do not have the assistance of expert evidence, at least in support of the plaintiffs’ case. A valuer was not called. Mr Maltzer confined his evidence to observations concerning the desirability of advertising, that receivers should obtain a formal valuation unless there was a very compelling case to the contrary and the like. Mr Vague on the other hand did express a view concerning the adequacy of the price obtained, although from the perspective of an expert receiver rather than a valuer.

[209] The plaintiffs’ case in support of the contention that the best price reasonably obtainable was not achieved rested on evidence given by Mr Taylor. In my view this was not satisfactory. A similar situation obtained in Moritzson in which Elias CJ said this concerning evidence of value given by a witness who was the founder of the company in receivership:

[73] I have serious reservations about the reliability of Mr Tompkins’ evidence of value. He clearly feels a sense of grievance about the failure of the tannery. I found him anxious to attribute blame to others, without acknowledging any contribution of his own. He was not an independent expert witness. The plaintiff did not call any independent evidence of value. The value placed by Mr Tompkins upon the plant is not substantiated.

These concerns apply equally in this case. I think it only to be expected that Mr Taylor viewed matters through an entirely different lens to that of experienced receivers.

[210] To judge whether the receivers achieved the best price reasonably obtainable in the circumstances which confronted them, one must first establish the assets which were available for sale, assess their book value as at the date of the receivership, and then judge whether the price obtained by the receivers reflected fair market value. In this instance all three steps in the exercise are not without difficulty.

[211] Immediately following their appointment the receivers set about identifying the assets of Cabellos. Mr Fagerlund visited the business premises and met with Mr Taylor and Cabellos’ accountant, Mr Alan Perry. He was given the most recent financial statements and also an up-to-date statement of financial position which had

asset. I shall refer to its extent in a moment. Office equipment	The fixed assets were modest, being: $13,952
Fixtures and fittings	$3,781
Plant and machinery	$520
Retail stands	$27,000
Merchandising equipment	$29,735
Salon refitting costs	($5,863)
	$69,125

[212] At trial some time was spent exploring whether the receivers had got in all of the fixed assets. There was cross-examination of witnesses concerning the adequacy of steps taken to obtain back from employees items of property belonging to Cabellos. One item, for example, was a data projector said to be worth $5,000 used by an employee for sales demonstrations. Another debate concerned the market value of display stands which Cabellos had provided to its salon customers throughout New Zealand. Mr Taylor considered that these were of considerable value, whereas the receivers took limited or no steps to retrieve and realise them.

There are some things which receivers get remarkably good prices for, there are other things they get remarkably bad prices for and as a generalism things such as display stands and shelving we can never realise anything worthwhile for. Some of the time it’s not worthwhile uplifting them to sell because the cost of uplifting them would be more than the value of what we would obtain.

Mr Gallaway submitted that this evidence was of general relevance to the complaint that various items were not traced and sold in the receivership. Some items were sold at auction for a small amount, while the sale to Boutique included some fixed assets as well.

[214] With reference to the stock inventory of Cabellos as at 2 August 2007 the position was conveniently summarised in an exhibit produced by the second defendants (exhibit HFK1), to which Mr Taylor was referred in cross-examination. It showed the book value of stock and fixed assets, exclusive of GST, as follows:

[215] Exhibit HFK1 also showed the amount obtained from the sale of stock and fixed assets, being:

Total paid by Boutique for stock and assets	$260,269
Receivers’ sales during trade-on period	$143,500
	$403,769

Mr Taylor accepted the accuracy of these figures, although not the suggestion that the amount received represented a good return – a point to which I will return shortly.

[216] Mr Gallaway relied upon exhibit HFK1 as demonstrating that the receivers had achieved a price which was about equivalent to book value. In one respect, however, I consider the figures are misleading. It cannot be correct to deduct the amount of $143,500 from the book value figure because of the stock sold by the receivers in the trade-on period and, therefore, before the sale of assets to Boutique. I consider the book value of the assets was $541,304, while the amount realised was

$403,769. I note, however, that according to the receipts and payments schedule included by the receivers in their final report, there were some additional receipts, including an amount of $2,688 for the sale of fixed assets at auction.

[217] There is one complication in relation to the stock inventory. The total stock value figure in exhibit HFK1, $477,078, excludes any allowance for dead stock. In

fact the book value of stock shown in the statement of position prepared by Mr Perry, was $322,616. This figure took account of a dead stock calculation made by Ms Jo Andrews prior to the receivership. She reduced the inventory total by

$148,460 in relation to stock which she variously described as “dead”, out of date and “overstocked but sellable”. She also identified one product as unsalable for some unstated reason. Post-receivership however, Mr Taylor disputed Ms Andrews’ assessment. On 7 August he sent a copy of Ms Andrews’ stock analysis in which he revised the problem stock figure down from $148,460 to $87,443. Unfortunately, Mr Taylor’s email simply said that he had colour-coded the original stock analysis, in support of his views, but no further explanation was provided. The colour-coded version included a breakdown of the lesser figure, $87,443, which Mr Taylor posited, but no further explanation or comment.

[218] This question was the subject of cross-examination, particularly of Mr Taylor. Ms Andrews did not give evidence. Mr Taylor said that he was suspicious of her analysis because she was a relatively new employee, who commenced working for Cabellos when Mr Beauchamp became the general manager at the beginning of 2007, and that in his view she was aligned to Messrs Hibbs and Beauchamp. On the other hand, her analysis was undertaken pre-receivership and was adopted by Mr Perry in preparing a statement of position.

[219] Absent the assistance of independent valuation evidence from someone with knowledge of the hair product industry, I am unable to resolve the conflict in the evidence. It is clear that the realisable value of more than 25 per cent of the stock on hand was questionable, but I am not placed to reach a firm view as to the likely market value. That said, I do not consider the receivers could be criticised in placing reliance upon the inventory figure contained in the statement of position. This figure was used by Mr Perry on the basis of an analysis undertaken prior to the receivership.

[220] Whatever the true book value of the inventory was, Mr Taylor’s essential complaint was that the receivers were wrong to sell the stock to Boutique for

$260,269, exclusive of GST, with some allowance built in for fixed assets as well. This realisation was less than the landed cost price of the stock. Moreover,

Mr Taylor considered that there was ample opportunity to sell the stock to wholesalers or salons at a better price than was received from Boutique. He said there were at least 42 wholesalers within Australasia and many more salons which would have paid more than cost price for the products. He also said that Cabellos’ normal mark-up on cost price was 200 per cent, so that after provision for sale costs a margin of over 60 per cent was attainable.

[221] Mr Taylor criticised the receivers for having the “mindset” that the stock had to be sold to an authorised Davines’ distributor, when this was not the case. He maintained that if Davines declined to buy the stock back, the receivers had a free hand. Mr Taylor compiled calculations based on various scenarios in order to demonstrate to the receivers what could have been achieved if they had traded on for two or three months and sold the inventory on the open market. The most conservative scenario was to sell the hair products at a 50 per cent discount on list prices, which, after sales costs, would have produced an increased return of almost

$224,000 by comparison to the price achieved by Messrs Fagerlund and Keyse. If the products were sold at their normal list prices over an estimated three month period, Mr Taylor calculated an additional return of over $1.2m.

[222] In evaluating these contentions the starting-point is the Davines’ distribution agreement. Clause 11.1 provides:

(i) permit the Distributor (Cabellos) to sell its remaining inventory consistent with any inventory returned which is merchantable; or

The submissions of counsel did not dwell upon the correct interpretation of this clause. I think that Davines, despite the words “shall be entitled to”, were bound to either permit sale of the inventory, or repurchase it. Accordingly, if Davines did not elect to repurchase at the invoice price, Cabellos was entitled to sell its remaining stock provided it was merchantable.

[223] I accept it is at least arguable that the receivers could have sold the stock to others in the industry at a better price than was paid by Boutique. In saying that I do

not accept the sale scenario figures advanced by Mr Taylor. But, to reach a conclusion on the balance of probabilities that a better price could in fact have been obtained, proper evidence was required.

[224] The fact is that Cabellos failed to make a profit in each of the years prior to the receivership. Despite a 200 per cent mark-up on cost price, and a theoretical margin of 60 per cent after sales expenses were met, significant losses were made throughout the final trading years of the Company. Yet, according to Mr Taylor, the receivers should have been able to trade on for two or three months and achieve a positive return.

[225] In these circumstances the thesis that a better return was attainable than that obtained from a prompt one-off sale to Boutique, required the support of industry and/or expert evidence. There is no evidence to confirm Mr Taylor’s assertion that wholesalers and/or salons would have purchased products from the receivers, even at a marked down price. Nor do I have proper and independent evidence to show that sale costs could have been maintained at a level which would have turned a profit.

[226] For these reasons I find that it is not established that the price achieved by the receivers was less than the best price readily obtainable in the circumstances of this receivership. In reaching this conclusion I also note the observations of Mr Vague at [38] of his evidence:

Every receivership must be assessed on its own facts and in situations where a company is insolvent and no longer trading, such as this was, a timely sale of assets is often the appropriate course of action and the most effective way in which to obtain the “best price reasonably obtainable”. Such a sale reduces ongoing holding costs and also ongoing receivers’ fees.

Under questioning, he also made the observation that experience had shown that the first buyer was usually the best buyer.

[227] This was a claim for breach of a contract brought by Cabellos against Sevilles. In August 2000 a contract was signed whereby Cabellos was to exclusively supply a particular hair care product to Sevilles. However, Sevilles had a change of

heart and opted to use a different product. Mr Taylor obtained legal advice that Sevilles was in breach of contract and proceedings were issued. The claim was unresolved in 2006 when the heads of agreement with Cameron Gladstone was signed. Clause 5.1 of the agreement provided that the benefit of the claim vested in Mr Taylor and Mr Hibbs to the exclusion of Cabellos.

[228] After their appointment the receivers took advice from Mr Dale Lester, a barrister, concerning the claim. Following the discovery of documents he raised concerns as to the likely success of the claim. Eventually, Mr Whiteside on behalf of Mr Taylor wrote to Mr Fagerlund on 7 February 2008 stating that the claim was not an asset in the receivership and requesting that the litigation file be transferred to Mr Taylor. The following day Mr Lester responded by setting out terms upon which the claim would be relinquished to Mr Taylor.

[229] Apparently, there was subsequently an out of court settlement at what might be termed a cost of litigation figure.

[230] The allegation in the statement of claim is that the receivers failed to realise the true value of the claim, being $186,000. This contention is untenable. The circumstances to which I have just referred demonstrate as much.

[231] For completeness I note that another allegation of failure to realise the true value of the assets of Cabellos was that the Company had a value of $5m as a going concern at the time of Mr Hibbs’ offer on 1 May 2007, and that the receivers should have recovered approximately this sum. This allegation is similarly untenable. Following the receivership, if not before, Cabellos was not saleable as a going concern, and certainly not at a price approaching the level suggested.

Evaluation: did the receivers collect from Cabellos’ debtors the amount reasonably obtainable in receivership?

[232] As at 15 August 2007 when the sale of assets to Boutique was completed, the debtors of Cabellos were:

Current	$143,513 (26.5%)
One month	$231,551 (42.8%)
Two months	$83,528 (15.4%)

However, after an allowance for bad debts of $22,420, the end debtors’ figure was shown in the accounts of Cabellos as $518,325.

[233] The final amount collected from debtors was $506,576. In per centage terms this represented a 93 per cent recovery in respect of the total debtors’ figure (ignoring the provision made for bad debts in the accounts of Cabellos).

[234] Ms Alison Taylor was engaged by the receivers to attend to the collection of debtors. She worked part-time until January 2008, during which period almost all of the total collection was achieved.

[235] The statement of claim simply asserted that the receivers failed “to properly collect all debts of Cabellos ...” without further particulars as to what level of recovery should have been achieved, and why. Nor did I find the evidence for the plaintiffs particularly helpful to an understanding of this component of the claim. Ms Alison Taylor referred to difficulties which she encountered because the computerised customer files were not available to her when she commenced working for the receivers. She attributed the loss to Boutique having been given open access to the Company’s records. To recover amounts owed to Cabellos Ms Taylor had to recreate the customer information by the manual production of a spreadsheet.

[236] Mr Craig Melhuish, an accountant with HFK, said that the customer information was lost through the cancellation of a lease with the service provider. Subsequently, the server was re-established, but in the meantime Ms Taylor was hindered in the recovery exercise. Nonetheless, Mr Melhuish considered that the recovery achieved was reasonable in the context of the receivership.

[237] Mr Vague expressed the opinion that the receivers did very well in collecting over $518,000, which he attributed to employing Ms Taylor to undertake this task

and to pursuing the debts promptly. The major part of the recovery was made in the first two or three months of the exercise.

[238] I do not consider the receivers failed to collect the sum which was reasonably obtainable in the circumstances of the receivership. While some issues arose in relation to the collection process, I am satisfied the sum collected represented the best result reasonably obtainable at the time.

Claim two: receivers’ failure to account for $39,471.93 upon termination of their appointment

[239] To recap, on 10 September 2008 following the sale of a house property in the Marlborough Sounds the Trust paid the balance due to the BNZ, $173,923, and took an assignment of the general security agreement.

19 September seeking the sum of $39,500 from the receivers. The letter referred to a meeting which had occurred, at which it was said the receivers had agreed to remit funds to the Trust. Of relevance for present purposes, Mr McGarry responded to this letter on 10 October by pointing out that under the BNZ general security agreement the receivers were agents of Cabellos and that the Company was responsible for payment of the receivers’ remuneration. The letter continued: “Accordingly in our view these monies should be held by the receivers pending the outcome of the litigation referred to in paragraph 3(a) of your letter”. This reference was to this proceeding which had been issued in May 2008. Mr Gallaway’s firm was acting for the receivers in relation to the litigation, whereas Mr McGarry continued to advise them about receivership matters.

[241] This prompted a response on 16 October. A letter from the Trust, but only signed by Mr Taylor purported to remove Messrs Fagerlund and Keyse as receivers, and appoint Mr Hansen in their place. Demand was also made for payment out of

any surplus funds. Mr McGarry responded by seeking proof of Mr Taylor’s authority to speak on behalf of the Trust.

[242] Further correspondence followed concerning the rights and wrongs of the receivers’ stance. In a letter dated 26 November 2008 solicitors for the Trust said this:

The fact of the matter is that your clients have been dismissed as the receivers of Cabellos Holdings Limited. There are no outstanding issues involving the company which entitle your clients to retain the excess funds in Cabellos. The litigation between creditors of the company and your clients is not something for which your clients can retain the excess funds.

Although Mr McGarry had suggested an application to the Court for directions, this course was not adopted.

[243] The second plaintiff Trust contended that receivers were subject to a duty to cease to act and to account for any surplus funds, as soon as the secured creditor had been paid. Here, BNZ was paid and had assigned its rights under the general security agreement to the Trust. Hence, the argument continued, the receivers had no right to retain surplus funds as an indemnity for costs which may be incurred in the present litigation.

[244] Mr Gallaway submitted that cl 15.3 of the general security agreement deemed the receivers to be the agent of Cabellos, which was also “solely responsible for ... payment of the receivers’ remuneration”. Reliance was also placed upon evidence given by Mr Keyse concerning the validity of the appointment of a new receiver. It was not until mid-November 2008 that Mr McGarry was provided with a resolution of the trustees dated 17 November, which he subsequently described as having “the appearance of a belated affirmation of the unilateral action taken by Mr Taylor last month in dismissing ... the receivers”.

[245] In their final report the receivers treated the end date of the receivership as

16 December that they had ceased to act. As I understand it, the second defendants rely upon the legal advice they received as justification for their decision to retain the surplus funds. I assume they view 16 December 2008 as the end date of the receivership, rather than 16 October 2008 when the plaintiffs say their appointment was terminated.

[246] A number of relevant authorities are reviewed by the authors of Private Receivers of Companies in New Zealand^[22]both at [6.08] under the heading “Receivers’ Indemnity – from charged assets” and at 11.36, “Accounting for surplus monies on completion of receivership”. Since cl 15.3 of the general security agreement provided that the receivers were the agents of Cabellos and were to be paid for their services by the Company, they enjoyed a right of indemnity from the

charged assets. The right extended to fees and expenses properly incurred in the course of the receivership. The receivers were also entitled to an equitable lien over the assets in order to secure and enforce the Company’s liability to indemnify. These principles mirror those which apply in any normal principal and agent relationship.

[247] The facts of this case give rise to two issues: (a) when did the receivership end, and

(b) were the receivers entitled to retain the excess funds beyond the end of the receivership to protect against expenses likely to be incurred in relation to receivership related litigation?

Resolution of the first issue is complicated by the differences which surrounded the termination process.

[248] Although in their final December 2008 report the receivers purported to resign from their appointment, it seems to me that their removal had already been effected. The Trust paid the balance owed to BNZ, took an assignment of the

general security agreement and thereby acquired the right to “remove any receiver previously appointed”: cl 15.1 of the general security agreement. The removal of Messrs Fagerlund and Keyse was complete upon notice to them: Windsor Refrigerator Co Ltd v Branch Nominees Ltd.^[23]

[249] In this case the adequacy of the notice was contentious, to the extent that Mr Taylor acting alone purported to effect the removal and appoint Mr Hansen as the new receiver on behalf of the Trust. It may be that the removal was not validly effected until on 17 November the trustees had resolved to approve the removal and the appointment of Mr Hansen and notice of this authorising resolution was given to Mr McGarry on 19 November 2008. However, for reasons which will become apparent shortly, any doubts as to when the removal was perfected are of limited relevance.

[250] Upon termination of a receiver’s appointment the right to an indemnity from the company, and to secure that right by a lien, subsist. A period to establish the amount due to the receivers for fees and expenses is allowed, during which a lien may be maintained. But the point at stake between the parties is whether the receivers may retain surplus funds in the long term against the contingency that they may incur further fees and expenses in the defence of pending litigation.

[251] The common law position may be demonstrated by reference to authority. In Dyson v Peat,^[24]the defendant receiver operated a colliery and, following its sale, retained funds against the possibility that he may face future claims arising from his tenure of the colliery. Eve J rejected the lien asserted by the receiver, saying at 104:

It is clear that no liability has yet accrued here, and it is admitted that no cause of action on the part of any surface owner has yet arisen. There has been no payment made by the defendant on behalf of the plaintiffs, no demand has been made upon him, and so far as is known there is no liability ripening against him. In these circumstances it is impossible to suggest that he has any lien at law. Has he then any equitable lien? I am of opinion that he has not either upon principle or authority.

Hence, a mere apprehension of the possibility of litigation does not enable a receiver to withhold funds.

[252] Two more recent Australian cases illustrate the other end of the spectrum. In Expo International Pty Ltd v Chant,^[25]the right of a receiver to retain monies against the costs of proceedings was upheld where the receiver already faced claims that he had obtained an inadequate price for the assets and had disbursed monies in an unauthorised manner. Needham J, in upholding the receiver’s lien, said at 890 that “unless it could be determined that on no possible basis could the receiver be liable

for claims against the amount [held] ...” the plaintiff liquidator’s application seeking the release of the fund must be denied.

[253] In Flexible Manufacturing Systems Pty Ltd v Fernandez,^[26]however, the liquidator’s claim to an equitable lien to cover future litigation costs was denied. At the date the receivership was terminated Mr Fernandez, the receiver, was not the subject of a claim. Subsequently, he was named as a defendant in proceedings brought by the company against the secured creditor (who appointed Mr Fernandez), and others. At [28] Heerey J said:

The validity of the lien has to be assessed as at the termination of the receivership. If there was then no lien, the respondent was obliged to hand over the funds to the mortgagees or pay it at their direction to FMS [the company]. Since there was at best a contingent claim, the respondent was not entitled to retain the funds.

The Judge then noted that Mr Fernandez was protected in any event under a deed of indemnity provided by the mortgagee at the time of his appointment. This, it seems, influenced the decision.

[254] These authorities show that where litigation is actually pending against a receiver, a lien in respect of future costs is likely to be recognised. But, they must be read subject to s20 of the Receiverships Act, which provides:

Notwithstanding any enactment or rule of law or anything contained in the deed or agreement by or under which a receiver is appointed, -

(a) It is not a defence to proceedings against a receiver for a breach of the duty imposed by section 19 of this Act that the receiver was acting as the grantor’s agent or under a power of attorney from the grantor:

(b) A receiver is not entitled to compensation or indemnity from the property in receivership or the grantor in respect of any liability incurred by the receiver arising from a breach of the duty imposed by section 19 of this Act. (emphasis added)

[255] Two questions arise with regard to its application in this instance. These are whether the claim against the receivers in November 2008 was in substance one alleging a failure in terms of s19 to obtain the best price for the assets of Cabellos, and, if so, whether the claim was framed in a manner to bring s20(b) into play.

[256] The original statement of claim dated 12 May 2008 raised two claims against Messrs Fagerlund and Keyse. The first was very similar to the first cause of action in the third statement of claim: see the summary at [169] and [172]. A significant component, perhaps the main component, of the claim was the alleged failure to obtain the best price reasonably obtainable for the assets of Cabellos. But also included in this iteration of the claim were allegations that the receivers failed to satisfy themselves as to the validity of their appointment and failed to take various actions which were said to be available to them, as well as a claim that debts were not collected to best advantage. And, this cause of action was always pleaded on the basis of a breach of fiduciary duty, not by reference to the statutory duty contained in s19 of the Act.

[257] In these circumstances, does s20(b) apply? It seems to me that this question is to be answered by having regard to the situation which confronted the receivers in November 2008. Had they, or their advisors, given attention to s20 (which they may not have done), would they have considered that the section proscribed their right to an indemnity. I am of the view that to the extent the claim alleged a failure to obtain the best price obtainable for the assets, an indemnity was not available and therefore neither could a lien be asserted in relation to the surplus funds. I doubt, however, that the pleading of the claim as one for “breach of fiduciary duty” takes s20(b) out of play.

[258] But, were reasonable receivers entitled to take the view that a right of indemnity from Cabellos remained, and with it the right to a lien, because the cause

of action alleged more than a breach of s19? Paragraph 6.3 of the original statement of claim included as particulars that the receivers failed: to continue trading Cabellos, to call upon Cameron Gladstone to provide funding and to execute the guarantee to the BNZ, to properly collect all outstanding debts, to gather all assets and to protect the information of Cabellos. Most, if not all, of these allegations seem to me to allege failings which fall outside the reach of s19. Accordingly, I conclude that reasonable receivers, faced with the claim as it stood in November 2008, would have been reasonably able to conclude that an indemnity for fees and expenses remained available in relation to at least those aspects of the plaintiffs’ claim.

[259] Nor do I consider that the fund retained by the second defendants was greater than that required in light of the litigation peril which they faced. In their third receivership report the receivers showed funds on hand of $24,063 as at

15 September 2008, while the comparable figure in their final report was $18,130 as at 16 December 2008. The figure of $39,471.93 was the amount on hand as at

3 June 2008, as advised by Mr Fagerlund to the plaintiffs’ solicitors. It is not the relevant figure. The amount on hand when they were removed as liquidators was probably closer to $20,000.

Claims six and seven: BNZ’s vicarious/fiduciary responsibility for the actions of the receivers

[261] These final two causes of action against BNZ allege that it was vicariously responsible for the various alleged failings of the receivers asserted in the first claim against them; and that BNZ similarly breached a fiduciary obligation by failing to intervene when placed on notice as to the alleged neglect and mala fides of the receivers. Both claims fail given the findings made in relation to the receivers’ conduct.

[263] Costs are reserved. I note that Mr Taylor was in receipt of legal aid for this proceeding. If the defendants seek costs, memoranda may be filed, to which the

^[1] Curragh Developments Ltd (In Rec) v Rodewald (2001) 9 NZCLC 262,639 (HC).

^[2] Greenbank New Zealand Ltd v Haas [2000] NZCA 145; [2000] 3 NZLR 341 (CA) at [24]- [25].
^[3] _{Bank of
Baroda v Panessar [1987] 1 Ch 335
(Ch).}
^[4] W Kerr, M Hunter and R Walton Receivers and Administrators (18^thed, Sweet and Maxwell, London, 2005) at [20-19].
^[5] P Blanchard and M Gedye Private Receivers of Companies in New Zealand (Lexis Nexis, Wellington, 2008) at [3.10].

^[7] _{Amerton Corporation v
NZIB Investments Ltd HC Auckland CP688/93, 31 May 1995.}

^[8] Impact Collections Ltd v Bank of New Zealand (2004) 9 NZCLC 263,497.
^[9] _{Westpac
Securities v Dickie [1991] 1 NZLR 657
(CA).}
^[10] Bank of India v Trans Continental Commodity Merchants Ltd (1983) 2 Lloyds Rep 298 at 301-302 (CA).

^[11] China & South Sea Bank Ltd v Tan Soon Gin [1989] UKPC 38; [1990] 1 AC 536 (PC).
^[12] _{Pogoni v R
& W H Symington & Co (NZ) Ltd [1991] 1 NZLR 82
(CA).}
^[13] Westpac Banking Corp v Meikle HC Wellington CP98/97, 2 June 1998.
^[14] _{Pacific
Industrial Corp v Bank of New Zealand [1991] 1 NZLR
368.}
^[15] Commonwealth Bank of Australia v Smith [1991] FCA 375; (1991) 102 ALR 453 (FCA).

^[17] P Watts Directors’ Powers and Duties (LexisNexis, Wellington 2009) at [6.2]. See the heading

^[22] Blanchard and Gedye, Private Receivers of Companies in New Zealand.
^[23] _{Windsor
Refrigerator Co Ltd v Branch Nominees Ltd [1961] Ch 375,
(CA).}
^[24] Dyson v Peat (1917) 1 Ch 99 (Ch).
^[25] _{Expo International Pty Ltd v Chant (1977-1978) 3 ACLR SC (NSWSC)
888.}
^[26] Flexible Manufacturing Systems Pty Ltd v Fernandez [2003] FCA 1491; (2004) 22 ACLC 47 (FCA).

High Court of New Zealand Decisions

Taylor v Bank of New Zealand HC Christchurch CIV-2008-409-000964 [2010] NZHC 2256; [2011] 2 NZLR 628 (14 December 2010)