Director's bankruptcy does not invalidate company actions and failure to disclose does not preclude enforcement

The High Court has decided that the bankruptcy of a director does not invalidate actions taken on behalf of the company and that failure by a lender to disclose under the Credit Contracts Act does not necessarily preclude enforcement.

In this case 1, a company (the lender) lent $100,000 to another company (the borrower) so that its director could set up a carpet retail business. In November 1999, the borrower granted a mortgage in favour of the lender. There was no separate loan agreement, just the mortgage in the name of the borrower, which contained a deed of covenant in the director's name. The mortgage was not registered, but a caveat was lodged.

In March 2000, the director was adjudicated bankrupt, and in May 2000 he resigned as a director of the borrower.

In February 2001, an amended loan agreement was signed by the director. The loan agreement capitalised the interest due, increasing the loan to $112,000. In addition, the term of the loan was extended to May 2001. However, no interest was paid and the principal sum was not repaid on its due date.

Various steps were taken by the lender to recover the loan.

In the High Court, the lender claimed $112,000 plus interest from the borrower on the basis of a loan agreement and mortgage. It also claimed that the director had guaranteed the loan. Both the borrower and the director denied that they owed any money to the lender and raised a number of defences.

The judge pointed out that the issues in this case were based on contract, not enforcement steps taken under a mortgage. There was no doubt that the agreement to lend money between the lender and the borrower was a credit contract. The issues were:

• whether an enforceable contract was created and who it was between;
  
  
• whether the director was liable as a guarantor;
  
  
• the effect of the variation to the contract;
  
  
• whether there had been a failure to disclose under the Credit Contracts Act 1981; and
  
  
• whether, if there was a valid contract and there had been failure to disclose, the court should grant relief.

Justice Asher decided that:

• The loan contract was enforceable.
  
  
• The borrower was liable contractually under the amended loan agreement, pursuant to which it borrowed $112,000 for 16 months at an interest rate of 16% per annum.
  
  
• Although the amended loan agreement was signed by the director and a witness, it reads as if his signature was on behalf of the borrower and himself because the agreement referred to both the borrower as mortgagor and the director as covenantor.

"The task of interpretation of the ambit of an attestation is no different from the interpretation of any other part of a contract. It is necessary to consider all the provisions in the document and the signature in its context to ascertain as a matter of interpretation, the capacity in which it has been signed."

• The fact that a director has become bankrupt does not invalidate actions taken by that person on behalf of the company - section 18(1)(c) of the Companies Act 1993 must apply.
  
  
• There is no doubt that the director's bankruptcy discharged him from any obligations as covenantor under the first loan agreement. The guarantee was a debt provable in his bankruptcy under section 114 of the Insolvency Act 1967. However, he was liable as guarantor under the amended loan agreement.
  
  
• The lender had failed to disclose under the Credit Contracts Act 1981. However, the judge decided that the creditor should not be prevented from enforcing the contract because it was not a financier, the failure to disclose was inadvertent, the essential terms of the agreement were made known and the director was not prejudiced by the failure to disclose.

The judge determined that a fair penalty was the deduction of one year's interest ($17,920) from $112,000.

 

1 Mardon & Stephens Group Ltd v Zenn Holdings Ltd, 1 August 2006 - High Court, Auckland CIV-2006-404-707

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