Solicitor's undertaking

Summary

The Court of Appeal upheld the High Court decision that Mr Bhanabhai had breached the undertaking given and the amount of the compensation awarded was upheld.

Facts

The defendants were barristers and solicitors acting for two companies, Nautilus Developments Limited ("NDL") and Golden Gate Holdings Limited ("GGH"). The companies were group registered for GST purposes under Nautilus. Both companies were involved in a construction project of a block of residential apartments in Hobson Street, Auckland.

The companies accounted for GST output tax on the erroneous understanding that it was payable only when sales were settled. On 17 April 1997 the matter was finally resolved between the parties and it was agreed that GST would be payable on settlement in respect of the units with contracts entered into prior to July 1996, a concession on the part of the Commissioner. GST on agreements after July 1996 was to be accounted for on the basis of the normal time of supply rules, being the receipt of the deposit (July 1996 being the date on which the company had received a letter outlining an original proposal for agreement).

As a result of the agreement being reached a GST refund was due to NDL. However, to ensure that GST payments in respect of the pre-July 1996 contracts were actually paid on settlement an undertaking was required to be given by the defendants, and it was given, signed by Mr Bhanabhai. The undertaking given on 17 April 1997 was written in the following terms:

"We are the solicitors for Golden Gate Holdings Ltd. We have been instructed to settle the sale of the units in the development and we undertake that on settlement of units 3F, 5A, B, C, D, E, F, 6A, B, C, D, E and F, we will forthwith pay to you the GST component of the sale consideration."

The arrangements made on 17 April were supplemented by further arrangements made in a meeting on 21 April between Mr Cunningham and Mr Davison and confirmed by correspondence on the same day between Mr Cunningham and the accountant.

UDC was the principal lender to the development. On 9 June 1998 s92 Property Law Act Notices were served calling up the mortgage. On 9 June 1999 UDC had not enforced the Notices and Parkhurst Investments Limited (the defendant being a director and shareholder) took over the securities. On 10 June 1999 GGH went into liquidation, NDL already being liquidated in September 1998.

The liquidator, Mr Montgomerie, issued proceedings against the Directors of NDL seeking to recover over $2 million on behalf of the unsecured creditors, including over $1 million claimed by the Commissioner. This proceeding was later settled for $500,000. The settlement monies were sufficient only to cover the liquidator's costs and no dividends were paid to the creditors.

The undertaking of 17 April 1997 was not met and the Commissioner sought an order that the defendants pay the GST which it undertook to pay or damages for the equivalent sum.

Decision

In the High Court, Laurenson J found for the Commissioner and the amount of $300,000 was awarded. This reflected the contribution already made by Mr Bhanabhai towards the liquidator's settlement. Costs and interest were also awarded to the Commissioner.

The case was appealed by Mr Bhanabhai and the Commissioner cross-appealed on the amount of costs awarded.

The appeal raised the following issues:

1. Was the undertaking given by Mr Bhanabhai personally or on behalf of the developers?
2. If given personally, did the undertaking apply if UDC insisted on (and was entitled to) all proceeds of sale or to settlements not effected through the firm?
3. If given personally, was the undertaking overtaken by subsequent events?
4. Should the Judge in the High Court have granted relief to the Commissioner on orthodox principles associated with undertakings?
5. Is the claim by the Commissioner an abuse of process given the settlement of the proceedings brought earlier by the liquidator?

With regard to (a), the Court of Appeal was not minded to interfere with the factual findings made by Laurenson J. They read it also as an undertaking by the firm as if it was on behalf of the developers there was no reason for it to be given by the solicitors.

With regard to (b), the Court concluded that if Mr Bhanabhai was not prepared to ensure that he was in a position to give effect to the undertaking, or to accept the consequences of not being able to do so, then he should not have given the undertaking. Mr Bhanabhai was in a far better position than Mr Cunningham, both to recognise the practical contingencies which might affect his ability to give effect to the undertaking and to assess the risk that those contingencies might crystallise. Mr Bhanabhai was in a position at least to influence the timing of the settlements.

With regard to (c) the Court held that there was nothing in the latter arrangements made on 21 April which impugns the continuing effectiveness of the undertaking. The arrangements entered into on 21 April were primarily addressed to units which were not the subject of the 17 April undertaking.

With regard to (d) the Court held that the undertaking was unconditional and the firm simply failed to honour it. The undertaking was relied on by the Commissioner and should be enforced.

With regard to (e) the Court held that the claim on the undertaking was not an abuse of process for the reasons that the liquidator in the first proceedings was acting independently and settlement was not assented to by the Commissioner. The claim by the liquidator was different to that of the Commissioner conceptually. The liquidator was seeking relief based on the contention that the directors had breached their duties to the company whereas the Commissioner's claim is that Mr Bhanabhai incurred a direct responsibility to the Commissioner in respect of the undertaking.

With regard to (f) the Court saw no basis to interfere with the discretionary determination of the Judge in awarding costs on a 2B scale.