BANK OF NEW ZEALAND V SHUKLA HC AK CIV-2012-404-2219

BANK OF NEW ZEALAND V SHUKLA HC AK CIV-2012-404-2219 [5 October 2012]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2012-404-2219[2012] NZHC 2591BETWEEN BANK OF NEW ZEALANDPlaintiffAND NARESH KUMAR SHUKLADefendantHearing: 21 August 2012Appearances: A J Stuart for PlaintiffDefendant in personJudgment: 5 October 2012JUDGMENT OF ASSOCIATE JUDGE R M BELLThis judgment was delivered by me on 5 October 2012 at 3:00pmpursuant to Rule 11.5 of the High Court Rules....................................Registrar/Deputy RegistrarSolicitors:Buddle Findlay (Scott Barker/A J Stuart) Auckland, for PlaintiffEmail: Scott.Barker@buddlefindlay.comAlexandra.Stuart@buddlefindlay.comCopy for:Naresh Kumar Shukla, AucklandEmail: nshukla.nz@gmail.comCorban Revell (Lawrence Ponniah/Craig Orton) P O Box 21180 Henderson Auckland 0610.Email: corton@corbanrevell.co.nzCase Officer:Email: Vili.Taukolo@justice.govt.nz[1] The Bank of New Zealand sues Mr Naresh Shukla for $435,803.66 plus interest under a guarantee he gave in July 2009 for the indebtedness of his company, 230 Marua Ltd. The bank applies for summary judgment. Although Mr Shukla earlier instructed lawyers, who filed a notice of opposition and affidavit in opposition on his behalf, Mr Shukla appeared in person to oppose.[2] 230 Marua Ltd imported and sold furniture in Ellerslie, Auckland. The company had earlier been called Century Furniture Direct Ltd. It had been a customer of the Bank of New Zealand since April 2002 when it obtained an overdraft facility for $25,000 and a documentary letter of credit facility for $75,000.Mr Shukla guaranteed the company's liabilities under these arrangements. Overtime credit facilities were extended.[3] The arrangements relevant for this proceeding were made in July 2009. The company had a "multi-option" facility with the bank. This allowed the company tooperate an overdraft up to $425,000. The facility was to expire on 31 December 2009. Mr Shukla signed a written guarantee and indemnity as to the payment of thecompany's liability to the bank. The limit of his liability under the guarantee is$425,000 plus additional amounts, including: an amount equal to one year's intereston the guaranteed amounts, for which the bank makes demand; interest from the date of the demand until the date of payment; and reimbursement of any costs, expenses and liabilities payable by Mr Shukla. The guarantee incorporates a schedule of terms and conditions of the guarantee, although Mr Shukla says that he was not provided with a copy of that schedule. Although the term of the facility expired at the end of 2009, the bank allowed the company to keep using the overdraft up to the limit of $425,000.[4] Mr Shukla says that he had a good working relationship with the bank'smanagers in the early years. They did not insist on punctual provision of financial statements, even though the terms of the bank's facilities required them within 120 days of the end of the financial year. Temporary overdraft extensions were alsogiven with little difficulty. Mr Shukla says that with the bank's support, thecompany was able to trade through the 2008 downturn.[5] He says that matters changed when a new manager took over the company'saccount during 2011. He says that trading conditions were difficult because of another downturn in the economy and as a result of the Christchurch earthquake. Buying furniture is often a discretionary item and during a downturn, there is a drop in demand for furniture. But he says that the conditions in 2011 were no more difficult than in 2008.[6] The new manager took him to task for not supplying annual financial statements within 120 days of balance date. The new manager also required additional supporting information, including an up-to-date aged creditor position, up- to-date financial statements for two related companies, confirmation of all indebtedness within the group of companies, plus personal borrowings and proposals for the company to reduce the overdraft.[7] Mr Shukla says that this change of approach was a surprise because it was a departure from the way earlier managers had dealt with the account. He says that when the bank made these demands, the company was not in default of any repayment obligations and was within the credit limit of $425,000. He claims thatthe new manager's approach was high-handed and unjustified.[8] In late August 2011 the new manager required the company to reduce its overdraft by $5,000 a month with effect from the beginning of September 2011. Mr Shukla says that the bank made this demand on short notice. He says that his pleas to allow the current arrangements to stay in place fell on deaf ears. He agreed to reduce the overdraft as he considered that he had no choice.[9] In January 2012 the bank wrote, advising that the overdraft limit was $400,000, but that it had been exceeded by $19,330.82. The bank required the excess to be cleared within five days. If it was not cleared and the bank had not received an acceptable repayment proposal, the file would be referred to another division of the bank. Mr Shukla replied, asking the manager to change his stance butwithout success. He now makes the point that the bank was within the original overdraft limit of $425,000.[10] On 20 March 2012 the company owed $429,655.21. The bank asked for funds to be lodged to clear the debt or to provide a written repayment proposal by 27 March 2012. The proposal could include refinancing from a similar source or a sale of assets. The company did not comply with the demand and went into liquidation on 28 March 2012. The bank had a general security agreement. It appointed a receiver on 29 March 2012.[11] The new manager puts the bank's side of the story. Soon after taking over the company's account and having met with Mr Shukla, he wrote with a proposal that the existing overdraft facility of $425,000 be turned into a term loan to be paid back over five years, plus $25,000 to remain as an overdraft facility. This would besubject to the bank's internal credit approval process. He requested a range ofinformation so that the bank could consider this proposal. The letter noted that financial statements to 31 March 2010 were not available yet but did not make an issue of the matter. The manager says that when he followed up, Mr Shukla put himoff, saying that he would "speak with his accountant".[12] 230 Marua Ltd did not provide the bank with annual financial statements for the year ending March 2010 until March 2011. These showed a drop in gross profit from $1.448 million for the year before to $775,000 with net losses in both years. Between September 2010 and August 2011 the company exceeded the overdraft limit of $425,000 in six of the 12 months. While Mr Shukla complained that the manager was cold towards him, the manager says that his difficulty was obtaining information from Mr Shukla. He struggled to carry out a review of the banking arrangements because of delays by the company in providing information the bank required. It was against that background that the bank required the overdraft to be reduced by $5,000 per month.[13] The bank received the company's financial statements for the year ended31 March 2011 at the beginning of 2012. These showed a further drop in the gross profit of the company from $775,000 for the year before to $339,000. The companymade a trading loss of $252,000. The statement of financial position showed a working capital deficit.[14] There was a meeting in February 2012 with Mr Shukla and his accountant. The accountant provided some financial information but the manager says that it did not include much of the company's debt and showed a more positive financialposition than he knew to be the case. The manager required the company to provideaccurate information about the company's financial position together with anacceptable plan. If that were provided, the bank might consider an alternative to itscurrent plan of reducing the company's overdraft by $5,000 a month.[15] Mr Shukla did provide a repayment proposal. It involved freezing thecompany's accounts for six months and at the end the six months the company would repay the bank a lump sum of $30,000. This was not acceptable to the bank because it did not cover the interest accruing on the overdraft, let alone meet the overdraft itself. The manager was not confident that the company would be able to pay $30,000 in six month's time because the company had made losses for the lasttwo years and was continuing to trade over its overdraft limit. Mr Shukla's proposalwas also dependent on his finding a shareholder to invest $50,000 in the company. The manager considered that a slim prospect. There was no evidence of any proposed investor. The company also stopped making deposits into the overdraft account. It was against that background that the bank required full repayment of the debt.[16] Mr Shukla submits that the manager took a hard line with his company because of differences in ethnicity. However, it is clear that the bulk of the overdraft facility had become hardcore and was not likely to reduce in the short term. The financial statements presented by the company showed a marked downturn in turnover and in gross profit, while it continued to make losses. From a commercialpoint of view, the bank's actions are readily understandable as a response to the company's deteriorating financial position.[17] If Mr Shukla had not opposed, the bank's evidence is enough to give itjudgment against Mr Shukla under the guarantee. It is necessary to consider thegrounds in Mr Shukla's notice of opposition to see whether the bank has shown thathe has no defence to its cause of action under the guarantee. The notice of opposition raises these questions:1. Did the guarantee expire in December 2009?2. Is Mr Shukla discharged from the guarantee?3. Is the bank estopped from enforcing the guarantee?Did the guarantee expire in December 2009?[18] Mr Shukla's notice of opposition says that he has no liability under theguarantee because the amounts claimed were credited to 230 Marua Ltd after 31 December 2009. That was after the expiry of the term of the multi-option facility of July 2009. The argument seems to rely on the rule in Clayton's Case.1 Although the company had an overdraft at 31 December 2009, further deposits into the account after that date were applied against earlier indebtedness, which was subject to the guarantee, but fresh indebtedness which arose after 31 December 2009 was not subject to the guarantee. The argument claims that the guarantee did not apply to indebtedness arising after 31 December 2009.[19] The text of the guarantee refutes that argument. The guarantee defines"Guaranteed Amounts" as including any amounts which arepresently owing or owing on a contingency, or becoming owing in the future by the customer under any facility or instrument of any kind.(Emphasis added)These words are wide enough to cover indebtedness arising after 31 December 2009 under the multi-option facility, when the bank allowed the company to use the overdraft. The guarantee document signed by Mr Shukla contains a warning in bold. Part of that warning says:1 Devaynes v Noble (1816) 1 Mer 572, 35 ER 781.The liability of the guarantor for the Guaranteed Amounts includes all amounts owing or that become owing by the customer under any facility or instrument of any kind (whether existing now or in the future).That part also gave notice that Mr Shukla was guaranteeing all future indebtedness of the company to the bank, not just indebtedness incurred before 31 December 2009.[20] Under clause 8 of the guarantee document signed by Mr Shukla, the schedule setting out the terms and conditions of guarantee and indemnity was incorporated into the guarantee. While Mr Shukla says that he did not receive the schedule, clause 8 is effective to make the schedule part of the terms of the guarantee. Clause 11.1 of the schedule provides that the guarantee is a continuing guarantee of all of the guaranteed amounts. That also shows that the guarantee did not expire on 31 December 2009.[21] There are no terms in the guarantee signed by Mr Shukla or in the schedule to say that the guarantee expires on 31 December 2009 or on the expiry of the multi- option facility. The guarantee is clear that it continued to apply after 31 December 2009. Under the guarantee Mr Shukla is liable for fresh debt incurred after that date.Is Mr Shukla discharged from the guarantee?[22] The second ground in the notice of opposition is that Mr Shukla has been discharged by reason of two matters:(a) The bank allegedly acting in a high-handed manner and in bad faith towards Mr Shukla; and(b) The bank wrongfully relying on an event of default to justify a reduction in the facility credit limit. That action is said to have caused the company to default to the prejudice of Mr Shukla.[23] The thrust of Mr Shukla's case is that the bank ought not to have required230 Marua Ltd to reduce its overdraft by $5,000 a month beginning on 1 September 2011, and it also ought not to have demanded repayment in full on 27 March 2012.[24] Certain gross misconduct by a creditor may discharge a guarantor, but those occasions are rare. The bank referred to the judgment of Robert Goff LJ in Bank of India v Patel.2 He quoted the judge at first instance:3But as a matter of principle I cannot accept Mr Murray's submission that asurety 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 of 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.Robert Goff LJ went on to say: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 thepart of the creditor, even if prejudicial to the interest of the surety, discharges the surety, although 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. I say that simply because I do not wish to be thought to be shutting the door upon any further development of law in this field by rigidly confining the circumstances in which a surety may be discharged to the specified instances, though I freely recognise that I am unaware at present of any others. But that merely irregular conduct on the part of the creditor, even if prejudicial to the interests of the surety, does not discharge the surety, there can in my judgment be no doubt.[25] Under the discharge argument, the terms of the arrangements agreed between the bank and 230 Marua Limited are relevant. They include these parts of a letter of advice of 23 July 2009:Under clause 3 the limit is stated to be $425,000:... or an amount that we, from time to time notify you;3.1 We may from time to time at our discretion reduce your limit by a single amount or progressive amounts...2 Bank of India v Patel [1983] 2 Lloyds Rep 298 - also quoted in Westpac Securities Ltd v Dickie[1991] 1 NZLR 657 (CA) at 663-664.3 Ibid, at 301-302.Clause 11.2(f) of the terms and conditions of guarantee and indemnity provides:11.2 Your obligations under this guarantee are not affected by anything that might otherwise affect them under the law relating to sureties,including (f) a variation or extension to, or a stopping, replacement or refusal of any credit, banking facilities or other arrangement(including a granting or increasing any banking facilities) given to the customer alone or together with any other person, whether with or without your consent or knowledge(Emphasis added)[26] Under these terms the bank was entitled to require reduction of the overdraft and to demand repayment in full, without discharging Mr Shukla from his guarantee.[27] The facts leading up to the bank's actions are also relevant. The companyhad exceeded its overdraft limit in six of the 12 months before August 2011. Between 4 July 2011 and August 2011, it had exceeded the overdraft limit five times. The company had delayed in providing financial statements. Although the bank had requested them in September 2010, they were not received until March 2011. Further information was requested between March and August 2011, but it was notprovided. The bank also considered Mr Shukla's response to its requirement on23 August 2011 to reduce the overdraft, but rejected his suggestion to delay the reduction, because it had not been provided with information it had been requesting.[28] The bank can point to relevant business considerations: the debt had turned hardcore, the company had been exceeding its overdraft limit, and the company had not given it up to date information to enable it to review its arrangements. These gave it reason to exercise its power to require the overdraft to be reduced. None of these matters come anywhere near the kind of conduct described by Robert Goff LJ in Bank of India v Patel that would discharge the guarantee.[29] The fact that the steps taken by the bank were prejudicial to the interests of Mr Shukla is beside the point. The bank has shown that Mr Shukla's dischargeargument does not give an arguable defence.Is the bank estopped from enforcing the guarantee?[30] The third ground in the notice of opposition is that the bank is estopped from asserting that an event of default occurred with the failure to provide financial accounts within the alleged 120 days from the balance date, and from denying that there are any requirements to provide financial statements within a given period and to stay within overdraft limits.[31] For this judgment I will assume that at trial Mr Shukla may be able to establish that previous bank managers gave words of assurance that led him to believe that 230 Marua Ltd would not have to provide financial statements within four months of balance date, and that breaches of the overdraft limit would be acceptable to the bank. Even so, Mr Shukla does not have a defence based on promissory estoppel. There is a helpful outline of the relevant principles for promissory estoppel in Krukziener v Hanover Finance Ltd.4Promissory estoppel[37] Promissory estoppel was traditionally concerned with promises to refrain from exercising pre-existing contractual rights: Ajayi v R T Briscoe (Nigeria) Ltd [1964] 1 WLR 1326 (PC). The promise had to be clear and unequivocal: Woodhouse AC Israel Cocoa Ltd SA v Nigerian Produce Marketing Co Ltd [1972] AC 741 at 768 (HL). The legal rights were suspended, and might be resumed on giving notice, so long as the promisee could resume its former position:Motor Oil Hellas (Corinth) Refineries SA v Shipping Corporation of India [1990] 1 Lloyd's Rep 391 at 399 (HL).[38] Following the decisions of the High Court of Australia in Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 andCommonwealth of Australia v Verwayen (1990) 170 CLR 394, promissory estoppel is no longer confined to promises affecting pre- existing rights. However, the departure from a voluntary promise is not unconscionable in itself, even if detriment results. Rather, equity responds to the defendant creating or encouraging an assumption in the plaintiff, and its knowledge that the plaintiff will rely on the assumption to its detriment. The plaintiff must have been led to believe that the promise would affect or result in legal relations; thus a promise made in negotiations that are subject to contract will not lead to an estoppel: Waltons Stores at 406 and 422. Lastly, equity does not intervene to satisfy the promise, but to avoid the detriment. These requirements in the current authorities, as the High Court recognised, are seen as necessary to preserve the law of contract as the principal mechanism for the enforcement of promises.4 Krukziener v Hanover Finance Ltd (2008) 19 PRNZ 162 (CA) at [37]-[38].[32] I apply those principles here. As the Court of Appeal pointed out, the departure from a voluntary promise is not unconscionable in itself, even if detriment results. An estoppel may create a suspension of legal rights, but legal rights may be resumed on giving notice, so long as the promisee can resume its former position. Here, the bank made it clear to Mr Shukla and to 230 Marua Limited, that it did require up to date financial information so that it could review its position. Earlier, the multi-option facility had expired. Both before and after expiry, the bank could require reductions in the overdraft, in whole or in part. The bank wished to have up- to-date information so that it could review arrangements. The company was operating consistently up to the limit of the overdraft and often over it. The debt had become hardcore. 230 Marua Limited and Mr Shukla were put on notice that the bank was concerned. The bank did not have to ground its actions on alleged breaches of terms for providing financial statements within 120 days of balance date. Any past assurances as to not insisting on timely delivery of financial statements did not stand in the way of the bank exercising other rights.[33] When financial statements were provided they showed a deteriorating financial position. Given the worsening circumstances it was not unreasonable or unconscionable for the bank to act in the way it did, even if it departed from assurances earlier managers had given Mr Shukla. Mr Shukla has not shown any arguable basis that he or the company acted on those assurances to their detriment. Even if they had, they were given the opportunity to address the matter. Any suspension of rights was at an end. There is no estoppel that barred the bank from taking the steps that it did.[34] The defence as to estoppel fails.Outcome[35] The bank has shown that Mr Shukla does not have a defence to its claim against him under the guarantee. The application for summary judgment succeeds.[36] The bank provided a calculation of the amount owing under the guarantee. The bank has brought into account a payment received from the receivers of230 Marua Limited. At the date of hearing, 21 August 2012, the amount owing under the guarantee is $442,386.31. The bank is entitled to judgment against Mr Shukla as follows:1. For the sum of $442,386.31;2. Interest at $200.82 per day from 21 August 2012 until the date of judgment;3. Solicitor/client costs of $8,651.60 and disbursements of $1,189.25 under clause 5(c) of the guarantee; and4. On enforcement of the judgment, the bank is required to bring into account any payments it receives from 230 Marua Limited in reduction of its indebtedness.[37] The bank has also sought a declaration that interest runs at the contract rate after judgment. While the guarantee provides that interest runs up until the date of payment, that provision merges on judgment and there is no contractual provision to overcome the merger.5 It is not entitled to the declaration.............................................R M BellAssociate Judge5 Economic Life Assurance Society v Usborne [1902] AC 147 (HL) at 149-150.