Herbert v Usar Napier Ltd

• Jurisdiction: New Zealand
• Judge: Associate Judge Johnston
• Judgment Date: 22 July 2022
• Neutral Citation: [2022] NZHC 1783
• Docket Number: CIV-2021-441-91
• Court: High Court

Between

Malcolm Andrew Herbert

Applicant/Judgment Debtor

and

Usar Napier Limited

Respondent/Judgment Creditor

Between

Usar Napier Limited

Judgment Creditor

and

Stephen Peter Lunn

Judgment Debtor

[2022] NZHC 1783

Associate Judge Johnston

CIV-2021-441-91

CIV-2021-441-90

IN THE HIGH COURT OF NEW ZEALAND

NAPIER REGISTRY

I TE KŌTI MATUA O AOTEAROA

AHURIRI ROHE

Bankruptcy and Insolvency — applications to set aside bankruptcy notices — personal liability of trustees — cross-claim — Insolvency Act 2006

Appearances:

D J O'Connor for Judgment Debtor in CIV-2021-441-90

J K Mahuta-Coyle for Judgment Debtor in CIV-2021-441-91

S Lowery for Judgment Creditor in both proceedings

The applications in both cases are dismissed.

JUDGMENT OF Associate Judge Johnston

1 These are applications to set side bankruptcy notices served by the judgment creditor, USAR Napier Ltd, on the judgment debtors, Stephen Peter Lunn in the 90 proceeding and Malcolm Andrew Herbert in the 91 proceeding.

2 The judgment debts were incurred in litigation between USAR and a number of defendant parties. These included Mr Lunn and Mr Herbert in their capacities as trustees of certain trading trusts. Those trusts were involved in a major development project in Napier. In judgments dated 5 October 2021 and 4 February 2022, Associate Judge Lester entered judgment in USAR's favour against, inter alia, Mr Lunn and Mr Herbert. 1

3 There is no doubt that these judgments were entered against them in their personal capacities. USAR subsequently served the bankruptcy notices dated 16 November 2021 on Mr Lunn and Mr Herbert. Mr Lunn and Mr Herbert commenced these proceedings on 7 December 2021 applying to set aside the bankruptcy notices.

4 Those applications were set down to be heard on 13 May 2022. In the meantime, the defendant parties in the original litigation had appealed against Associate Judge Lester's judgments and the appeal had been set down to be heard on 8 June 2022.

5 In the days leading up to the 13 May 2022 fixture, counsel for Mr Lunn and Mr Herbert applied to vacate the fixture. Their contention was that as the appeal had been set down to be heard in the Court of Appeal, and, so it was contended, there was a reasonable prospect of this Court's judgments being overturned, it would be wasteful of resources for these applications for orders setting aside the bankruptcy notices to be heard until the Court of Appeal's judgment was available.

6 In a minute dated 11 May 2022 I declined to vacate the fixture. I took the view that as the fixture had been in place for some time, all parties were prepared and ready to argue the matter and an adjournment was resisted by USAR, the most pragmatic course was to hear the matter as scheduled. At the conclusion of the hearing I indicated that I was reserving my judgment and that it might well be that the Court of Appeal's judgment would be available before I issued mine. So it has transpired. The Court of Appeal's judgment dismissing the appeal was delivered on 4 July 2022. 2 It is therefore necessary to deal with these applications.

CIV-2021-441-90: Lunn

7 Mr O'Connor opened his submissions by saying that Mr Lunn's application was “simple”. He contends that Mr Lunn was never personally liable because of the terms upon which he executed the settlement agreement.

8 Mr O'Connor relied on the seminal English case of Muir v City of Glasgow Bank. 3

9 In his speech Lord Cairns said: 4

… whether, in any particular case, the contract of a … trustee is one which binds him personally, or is to be satisfied only out of the estate of which he is the representative, is … a question of construction, to be decided with reference to all the circumstances of the case; the nature of the contract; the subject-matter on which it is to operate, and the capacity and duty of the parties to make the contract in the one form or the other. I know of no reason why [such a person] … entering into a contract for payment of money with a person who is free to make the contract in any form it pleases, should not stipulate by apt words that he will make the payment, not personally, but out of the assets of the [trust property].

10 Lord Penzance's speech in the same judgment included this passage: 5

To exonerate [a trustee from personal liability] it would be necessary to [show] that upon a proper interpretation of any contract he had made, viewed as a whole.the intention of the parties to that contract was apparent that his personal liability should be excluded; and that although he was a contracting party to the obligation the creditors should look to the trust estate alone.

11 Mr O'Connor then referred to this Court's judgment in NZHB Holdings Ltd v Bartells in which Baragwanath J described the law in similar language, confirming that whether a trustee was personally liable turned on the reasonable construction of the contract in question. 6

12 He also placed some reliance on Law Commission report concerning the law of trusts published in 2011. 7 The relevant sections of the Commission's report set out the elementary principles that: 8

(a) because a trust is not an entity but a relationship, the trustee or trustees are prima facie personally liable for all liabilities incurred by them in acting in that capacity;

(b) it is possible for them to limit or exclude personal liability; and

(c) in order to do so clear language is required.

13 Importantly, the report distinguishes between clauses in trust deeds limiting a trustee's personal liability, and provisions in contracts between trustees and third parties doing the same. 9 The former operates as between trustees and beneficiaries (although it may have consequences for third parties in relation to rights of subrogation). The latter operates as between trustees and third parties. This case is firmly within the latter category of case.

14 What then is the aspect or aspects of the settlement agreement here upon which reliance is placed for the contention that the parties contracted on the basis that Mr Lunn was not personally liable?

15 As recorded in the judgments of both Associate Judge Lester and the Court of Appeal, the settlement agreement was negotiated and executed immediately prior to the commencement of a trial in which USAR was claiming damages from the defendants for alleged breach of contract, recorded in a handwritten document entitled “Heads of Agreement”. The document makes no reference to the capacity in which it

was signed by any of the parties. However, after Mr Lunn had signed it, it was sent by his solicitors to the solicitors acting for USAR under cover of an email which said:

I have attached the agreement signed by Steve Lunn. He has signed as a professional trustee on the basis that his personal liability is limited to the assets of the trust.

16 On the strength of...