National Finance 2000 Ltd ((in Receivership) and (in Liquidation)) v William Buck New Zealand Ltd Hc Ak

JurisdictionNew Zealand
CourtHigh Court
Judgment Date07 December 2011
Date07 December 2011
Docket NumberCIV-2010-404-7157



National Finance 2000 Limited (In Receivership and In Liquidation)
William Buck New Zealand Limited
First Defendant


O'Halloran Company Limited
Second Defendant


Vero Liability Insurance Limited and American Home Assurance Company Limited
First Third Party


Aeon New Zealand
Second Third Party


Covenant Trustee Company Limited
Third Third Party

No appearance for Plaintiff

B Morley and N Chambers-Penman for First and Second Defendants

M C Harris for Third Third Party



The third third party, Covenant Trustee Company Limited, applies to strike out the claim against it by the first and second defendants. The key question is whether a trustee for debt securities issued to the public owes reasonable diligence duties to the issuer (as opposed to investors) to find out whether breaches of the trust deed have occurred, to take steps to remedy breaches and to ascertain whether the assets of the borrowing group are sufficient to discharge the amounts of the debt securities as they fall due.


The proceeding arises out of the failure of the plaintiff, National Finance 2000 Ltd. It went into receivership in May 2006. It was put into liquidation in August 2008. National Finance provided motor vehicle finance. It raised funds by issuing debt securities to the public. The debt securities were secured under a debenture trust deed.


The first and second defendants are an accounting practice. They were National Finance's auditors. The second defendant, O'Halloran and Company, was in practice between 2004 and May 2006. The first defendant is a company which took over the practice of the partnership. I refer to both the first and second defendants as “the auditors”.


National Finance sues the auditors in contract and in tort for negligence in auditing accounts for September 2004 and March 2005. In short it says that the auditors failed to detect and report breaches of the debenture trust deed provisions as to permissible percentages of total liabilities in relation to total tangible assets and as to the permissible value of related party transactions in relation to total tangible assets. If these breaches had been detected and reported, the trustee would have become aware of the breaches and appointed receivers, would not have consented to an amendment to the trust deed in 2005 and National Finance would not have continued to make more loans to related parties. For the September 2004 audit it claims damages of $3,472,158.60 and for the March 2005 audit it claims damages of $687,935.40.


Under s 33(2)(a) of the Securities Act 1978 no debt security shall be offered to the public unless the issuer of the security has appointed a trustee for the security and both the issuer and the trustee have signed a trust deed for the security. National Finance entered into the debenture trust deed dated 14 April 2000 with Covenant Trustee Company Limited, a trustee company, as trustee for members of the public who invested in debt securities issued by National Finance.


The auditors say that Covenant was a concurrent tortfeasor and claim contribution under s 17(1)(c) of the Law Reform Act 1936. Their statement of claim against Covenant as third party alleges that Covenant owed National Finance identical duties under the Securities Act and at common law. It pleads breach of a statutory duty to take care and breach of a duty of care at common law. The duties are framed in terms of the reasonable diligence duties in clause 1 of Schedule 5 of the Securities Regulations 1983:

Duties of trustee

  • (1) The trustee shall exercise reasonable diligence to ascertain whether or not any breach of the terms of the deed or of the terms of the offer of the debt securities has occurred and, except where it is satisfied that the breach will not materially prejudice the security (if any) of the debt securities or the interests of the holders thereof, shall do all such things as it is empowered to do to cause any breach of those terms to be remedied.

  • (2) The trustee shall exercise reasonable diligence to ascertain whether or not the assets of the borrowing group that are or may be available, whether by way of security or otherwise, are sufficient or likely to be sufficient to discharge the amounts of the debt securities as they become due.


For both causes of action the alleged breaches of duty by Covenant are essentially that it was aware of the true state of related party transactions including a lack of security over the assets of one related party borrower, but failed to ascertain whether there had been a breach of the trust deed, failed to remedy any breaches of the trust deed, and erred in consenting to an amendment to the trust deed.


Covenant applies to strike out the claim against it, because it says that while it was under the reasonable diligence duties, it did not owe those duties to National Finance. It says that the auditors have not disclosed any reasonable cause of action against it and it cannot be held to be a concurrent tortfeasor.

Strike-out principles

The Court of Appeal stated the established criteria for striking-out in Attorney-General v Prince, 1 and the Supreme Court endorsed them in Couch v Attorney-General: 2

  • (a) Pleaded facts, whether or not admitted, are assumed to be true. This does not extend to pleaded allegations which are entirely speculative and without foundation;

  • (b) The cause or action or defence must be clearly untenable;

  • (c) The jurisdiction is to be exercised sparingly and only in clear cases. This reflects the court's reluctance to terminate a claim or defence short of trial;

  • (d) The jurisdiction is not excluded by the need to decide difficult questions of law, requiring extensive argument.

  • (e) The court should be particularly slow to strike out a claim in any developing area of the law, perhaps particularly where a duty of care is alleged in a new situation. There is considerable authority that developments in negligence need to be based on proved rather than hypothetical facts.


Further, it may be appropriate to give the opportunity to amend, where a claim can be saved. In Marshall Futures Ltd v Marshall, 3 Tipping J said:

It seems to me that in a case where the plaintiff can undoubtedly start again, being within time, the Court should only strike out if satisfied that on the best view of the facts from the plaintiff's point of view he cannot succeed at law, or alternatively where the pleading is so deficient as to require a de novo start rather than an amendment. As Mr Goddard aptly put it, the question will often be one of degree. The difference, using by analogy the terminology of motor vehicle insurance, is between a pleading which is a total write off and one which is deficient but is capable of effective repair.

The trust deed and statutory setting

The only evidence given in support of the application is non-contentious. Covenant's director has attached a copy of the debenture trust deed of 14 April 2000 plus copies of amendments of 12 September 2002 and 22 March 2005.


National Finance and Covenant are the parties to the trust deed. The trust deed contains a recital that Covenant has agreed to act as trustee for the benefit of the investors (called “stockholders”) on the terms and conditions and with the powers and authorities in the deed. Clause 1.1(a) says:

This Trust Deed shall be construed and take effect as a contract and declaration of trust made in New Zealand.


As a trust deed it is somewhat light on details identifying the property subject to the trust. It is left to inference that the trustee holds the charge it has taken over the assets of the company and the proceeds of the charge on trust for investors. The deed provides for the creation and issue of stock, with repayment secured by a charge taken over company assets enforceable on default. There are extensive provisions imposing obligations on National Finance and its subsidiaries including to pay, not to enter into related party transactions beyond a given limit, to give reports and information for payment by the company, and to pay the trustee's remuneration for acting as trustee. There is an express indemnity in favour of the trustee. The trustee may retire, but there is no provision for its removal from office against its will. Presumably a trustee could be removed by the court on an application under s 51 of the Trustee Act 1956.


The statutory context for the reasonable diligence duties is the Securities Act 1976 and the Securities Regulations 1983. 4 As already noted, under s 33(2) of the Act no debt security shall be offered to the public for subscription unless the issuer of the security has appointed a person as a trustee for the security and both the issuer and the trustee have signed a trust deed relating to the security, and a copy of the trust deed and any amendments has been registered under the Act.


Under s 45(1) every trust deed shall contain all information and other matters that are required to be included by regulations; and under s 45(2) it shall contain all clauses prescribed by regulations “as clauses that are deemed to be contained in a trust deed”. These provisions have effect notwithstanding anything to the contrary in any deed in which they are contained.


Through clause 24, Schedule 5 of the Securities Regulations sets out clauses deemed to be contained in trust deeds for debt securities. They are the reasonable diligence duties in [6] above and other provisions: for the trustee's power to obtain information, for the trustee or investors holding ten per cent of the securities to...

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