Ipsofactoj.com: International Cases [2001] Part 6 Case 14 [NZCA]


COURT OF APPEAL, NEW ZEALAND

Coram

Clarence Holdings Ltd

- vs -

Hall

RICHARDSON P

THOMAS J

McGRATH J

14 MAY 2001


Judgment

McGrath J

(delivered the judgment of the Court)

INTRODUCTION

  1. This appeal concerns the consequences of the formation of a new company, with the same shareholding, to acquire the small business undertaking and assets of an existing company. This is a reasonably common practice in New Zealand after a business has been acquired by acquisition of the shares of a company whose history is not well known to the new owners.

  2. Amongst the assets transferred was a lease of business premises. Unfortunately the lessor was not informed of the arrangements and for some time remained unaware a new company was occupying its premises. During this period the directors of the new company entered into a fresh lease agreement with the lessor, using the name of the original company rather than that of the new one. By this time the original company had been dissolved. These basic practical errors gave rise to a legal dispute when the directors of the new company decided it should vacate the premises.

  3. Ultimately the dispute over liability for alleged breach of the terms of the agreement is to be resolved by application of statutory provisions enacted for the first time in the Companies Act 1993 and the Companies Amendment Act 1993. These provide for personal liability when a company’s name is misstated in the documents by which it incurs obligations. But there are circumstances in which personal liability may be excused, by order of the Court.

    BACKGROUND FACTS

  4. On 20 September 1989, Mt Albert TV Services Ltd ("the old company") commenced its occupancy of retail premises at Barry’s Point Road, Takapuna, having taken an assignment of an existing lease granted to the assignor by Clarence Holdings Ltd (the appellant). The lease was renewed on 31 October 1991 for a further term of four years. During 1992 the first respondent (Mr. Hall) together with the third respondent (Mr. Bagnall) acquired the shares in the old company and took over operation of its business. On 25 September, Mr. Hall and Mr. Bagnall sought formal consent from the appellant to their acquisition of shares as was required by terms of the lease. Such consent was never formally given, although the Judge found Mr. Malley of the appellant did check on the credit-worthiness of the new shareholders. The response apparently satisfied the appellant because it sent the old company a draft deed in relation to a proposed new lease of different premises on the site following an intended redevelopment of the property. The draft deed provided for Mr. Hall and Mr. Bagnall personally to guarantee the obligations of the old company as lessee.

  5. On 7 December 1992 a deed concerning the new arrangements, described as a Deed of Lease, was entered into between the appellant and the old company. Although they had been sought no personal guarantees of the old company’s obligations were given. The lease was for a term of three years with two rights of renewal each for three years. The deed also included both a demolition clause entitling the appellant to give the old company a month’s notice terminating the existing lease and requiring it to vacate the premises and provisions for the old company to lease new premises following the redevelopment.

  6. The deed provided that the ‘Form of Lease’ was to be ‘The Second Edition of the Auckland District Law Society form of lease and that there would be ‘Additional Terms’:

    The Lease shall contain such other usual terms as are normally incorporated in commercial leases prepared by Auckland solicitors. Any dispute as to what are usual terms shall be referred to arbitration.

  7. On 23 February 1993, Mt Albert TV 1993 Ltd (the new company") was incorporated. Mr. Hall and Mr. Bagnall were the shareholders and directors of the new company as they were of the old company. On 1 March 1993 the new company acquired the old company’s assets and business undertaking. The old company then ceased to trade and the new company immediately commenced business operations on the premises leased from the appellant. Eventually, on 28 May 1994, the old company was removed from the register of companies.

  8. No notice of these events was given to the appellant at the time. However the Judge found that the respondents did nothing to hide the fact that they had incorporated a new company to acquire and run the business. Indeed a fresh authority in the name of the new company for direct payment of rent was provided to the new company’s bank with the result that the new company’s name appeared on the appellant’s bank statements. Cheques sent by the new company from time to time to the appellant were also in the new company’s name. As well the name of the new company was used by its solicitor, in correspondence with the appellant’s solicitor, from November 1994. The Judge said:

    The defendants should have formally notified the plaintiff of the change and the plaintiff probably should have noticed that there had been a change. The fact is, however, that rightly or wrongly neither party realised the significance of the change. The plaintiff had its tenant and the new company had its tenancy.

  9. On 9 May 1994 the appellant gave three months notice addressed to the old company, to vacate the original premises pursuant to the demolition clause to enable the demolition and redevelopment to begin. The notice included provision for acknowledgement and acceptance of its contents in the following form:

    Acknowledged and agreed

    Mt ALBERT TV SERVICES LIMITED

    by its director:…………………………………………..

    The directors, Mr. Hall and Mr. Bagnall, signed this acknowledgement accepting its terms, on the face of it, on behalf of the old company.

  10. The redevelopment followed. Shortly before the new premises were ready for occupation, and following discussions between the parties, on 20 September 1994 the appellant’s solicitors wrote setting out certain proposed amendments to the arrangements recorded in the deed of 7 December 1992. The letter was addressed to the directors of the old company and sought its confirmation of the terms set out by signature on and return of the letter. The letter outlined terms for the fitout of the new premises, the base rental for those premises and a rental surcharge for a period of five years to reimburse the appellant for the fit-out costs. The letter also recorded arrangements for vacating the original premises. In relation to the term of the lease the letter provided:

    In addition we understand that you have agreed that the lease will change from a three year lease with two further rights of renewal of three years each to a lease of a straight term of 10 years with one right of renewal for a further period of 10 years. Rent in respect of each period to be reviewed every two years.

    (emphasis included)

  11. The identity of a signature at the foot of the letter of 20 September 1994, confirming the agreement of "Mt Albert TV Services Limited" to its terms, was disputed at the trial. Mr. Hall denied that the signature was his. However Laurenson J found Mr. Hall had signed the document. On 5 October 1994 the new company took up occupancy of the new premises. It was able to move from the old to the new premises without interruption.

  12. On 25 October 1994, the solicitor for the appellant sent to the solicitor for the new company a draft lease of the new premises. The draft incorporated the third edition (1993) of the Auckland District Law Society form rather than the second edition but it was not suggested that anything turns on that in relation to the arguments presented in this Court. The letter of 20 September 1994 anticipated that a new form of lease would be prepared. The draft named the old company as lessee. The accompanying letter said the draft was sent subject to approval of its terms by the appellant.

  13. An exchange of correspondence followed between the solicitors. On 21 November 1994 the new company’s solicitor, referring to his client by its correct name, said that he was taking instructions on the draft. The appellant’s solicitor wrote back on 24 November seeking execution and return of the draft. In the meantime the new company had taken possession on 5 October 1994 and was paying the rent on the basis set out in the letter of 20 September 1994. Later there was a further exchange of letters when the appellant’s solicitor wrote on 10 July 1995 concerning payment of the legal costs of preparation of the lease. He referred to the new company by its correct name as both solicitors did in correspondence thereafter. The new company’s solicitor replied on 12 July 1995 asserting that there was a dispute relating to the lease and that, as his client had not signed the draft, as yet it had no liability for the lease preparation fees. There matters stood until 28 November 1996 when the appellant’s solicitor wrote asserting that although the draft lease had not been signed by the new company it was bound by the deed of 7 December 1992, the letter of 9 May 1994 and the letter of 20 September 1994 to occupy the premises for the agreed ten year term. The letter threatened legal proceedings. After receiving a follow up letter the new company’s solicitor wrote back on 4 December 1996 saying:

    The lease previously submitted to me was between Clarence Holdings Limited and Mt Albert TV Services Ltd. That Company was removed from the Register of Companies on 28 May 1994.

    The current arrangements amount to a month by month tenancy. Please treat this letter as one month’s formal notice of the termination of such tenancy with effect as at 20 January 1997.

    The Judge found that on receiving this letter the appellant became aware that the new company was in occupation of the premises not the old company.

  14. In response the appellant’s solicitor replied on 23 December 1996 in terms that were strongly critical. He threatened litigation against both the new company and its directors. For the purposes of this appeal it is sufficient to set out from this letter the following key passages:

    In our opinion the Court will not be impressed with a tenant who does not tell its landlord for some two years that it has altered its corporate structure yet remained in possession had the new company pay rent as provided in the agreement and allowed the landlord to carry out a tenants fitout on the basis of the agreement to lease.

    At the very least a Court will clearly hold that the agreement to lease was effectively assigned to the new company and that it adopted the agreement by performance of its terms, including a period of occupation and payment of rent.

    ....

    Your client’s act of repudiation will not be accepted as a surrender of the lease and your client’s liability will remain in force in full for the balance of the term or until such time as our client elects to except your repudiation as a surrender. Such acceptance of repudiation will be only effective as from the date our client advises you that it accepts that the lease is at an end.

  15. Nevertheless the new company vacated the premises on 20 January 1997 and ceased to pay rent. This proceeding was commenced on 27 January 1997 against Mr. Hall as first defendant, the new company as second defendant and Mr. Bagnall as third defendant.

  16. Prior to trial, the new company was wound up. The plaintiff had been given leave by the Court to continue the proceedings against the new company in liquidation. Shortly before trial Mr. Bagnall settled with the appellant. He was then joined by the second respondent as a third party and was represented by counsel at the trial. He was not represented and did not appear at the argument of the appeal in this Court.

    HIGH COURT JUDGMENT

  17. Laurenson J held that the new company was bound by the arrangements made with the appellant in the name of the old company. These were the arrangements set out in the deed of 7 December 1992, the letter of 9 May 1994 and the letter of 20 September 1994, read together. The Judge rejected the contention that the later two documents were no more than an unenforceable agreement to enter into a contract. He concluded that, together, the deed and the two letters fully covered the terms of occupation of the premises. The Judge held the new company was bound because, after it had become assignee of the old company’s rights under the 1992 deed, the subsequent arrangements with the appellant recorded in the 1994 letters were put into effect and observed by the new company for over two years. In Laurenson J’s view the new company was estopped from contending it was not bound by them. When the appellant ultimately ratified the assignment of the lease, as it did in its solicitor’s letter of 23 December 1996, there was a binding contract between the appellant and the new company covering the entire arrangement. The draft lease tendered on 25 October 1994 had no contractual status but by then the new company was bound to the lease for a 10 year term. In vacating the premises early in 1997 the new company had acted in breach of contract and was liable for damages. Accordingly Laurenson J entered judgment against the new company (in liquidation) as first defendant awarding the appellant damages of $66,849.95 together with costs.

  18. Laurenson J next considered the claim for personal liability against Mr. Hall. He concluded there was no basis in the law of agency for a finding of personal liability once the appellant ratified the assignment in its solicitor’s letter of 23 December 1996. As the Court’s judgment confirmed the appellant had secured a binding contract to lease with the new company. Laurenson J then considered s 116(2) of the Companies Act 1955, (a provision expressed in identical terms to s 25(2) of the Companies Act 1993. This imposes personal liability on persons who misdescribe the name of a company in a document which they issue or sign on behalf of the company evidencing or creating obligations.

  19. The Judge held the letter of 20 September 1994 created legal obligations of the new company. The name of the new company had been incorrectly stated by Mr. Hall in the letter which he had signed on behalf of the new company. Unless excused under the statutory provision Mr. Hall was liable to the same extent as the new company for the discharge of the obligation. At the relevant time the appellant was not aware that the obligations were being assumed by the new company rather than the old company. On that basis personal liability under s 116(2) could only be excused if it would not be just or equitable to hold Mr. Hall liable as the person who signed the letter mis-stating the new company’s name.

  20. In Laurenson J’s view the purpose of s 116(2) was to protect a party contracting with a company the name of which had been incorrectly described. The agent responsible for mis-statement of the company’s name was to be liable if, on account of that mis-description, the company was not. Here, however, the new company had been held liable despite the misdescription. Furthermore, given that the assignment had been ratified by the letter of 23 December 1996, binding the new company to the lease it would not be just or equitable to hold Mr. Hall liable. The claim against him under s 116(2) accordingly failed. The Judge also rejected separate allegations against Mr. Hall of fraud, deceit, and misleading or deceptive conduct under the Fair Trading Act. He held that Mr. Hall’s misdescription of the new company was without knowledge of its falsity. Furthermore the misdescription had not caused the loss. As Mr. Hall was not liable his third party claim against Mr. Bagnall for contribution did not require determination.

    SUBMISSIONS ON APPEAL

  21. In this Court counsel for the appellant, Mr. O’Callahan first submitted that Mr. Hall became personally liable for the lessee’s obligations under the law of agency because he had entered into a contract as agent for a company that was no longer in existence. That, he said, was the legal effect of Mr. Hall signing the letter of 24 September 1994. He submitted the Judge had wrongly held that personal liability to be discharged by the letter sent by the appellant’s solicitor on 23 December 1996 which ratified the new company’s participation in the contract. On Mr. O’Callahan’s argument the letter of 23 December 1996 was no more than an indication that all involved in the entry into and repudiation of the deed of lease would be sued.

  22. The alternative submission for the appellant was that Mr. Hall was liable under s 116(2) of the Companies Act 1955 (as amended). Here Mr. O’Callahan’s argument was that the Judge had wrongly held personal liability did not apply under s 116(2) because the new company’s liability had been established. Mr. O’Callahan contended personal liability under s 116 for misdescription of a company’s name was as a surety who was liable unless the company actually discharged the obligation who was liable.

  23. For the respondent Mr. Kohler argued in his written submissions that the Judge’s finding that the appellant had accepted the new company as its lessee was supported by more than the letter sent by the appellant’s solicitors on 23 December 1996. In its pleadings throughout the litigation the appellant had alleged the new company was liable under the lease contract because of its adoption of its terms, acceptance of an assignment, or simply its performance of the lessee’s obligations during the period of its occupancy. There was no basis in the law of agency or contract for this Court to find Mr. Hall was personally liable.

  24. Concerning statutory liability of Mr. Hall under s 116 Mr. Kohler pointed out that it could only arise if the Court found the relevant documents had been signed on behalf of the new company. He argued that if that was so the Judge’s finding that Mr. Hall should be excused liability should be upheld, as it was not "just and equitable" that he be personally liable in terms of s 116(2)(d) of the 1955 Act. The appellant had always appreciated it was at all times dealing only with a company, having been unable earlier to secure personal guarantees from Mr. Hall or Mr. Bagnall. It had obtained the liability of the new company as its lessee, it being a company as solvent as the old company. In his oral argument he added that the failure of the new company to continue paying rent after January 1997 was unrelated to the misdescription of the company. He further argued there was a sound basis advanced for excusing Mr. Hall from liability on the basis that it would not be just and equitable to hold him liable. As well he contended Mr. Hall was liable for breach of warranty as to his authority.

    PERSONAL LIABILITY IN CONTRACT

  25. In our view, in agreement with Laurenson J, when Mr. Hall and Mr. Bagnall signed the crucial letter of 20 September 1994 in the name of the old company, they did so acting as agents for the new company although they mis-stated its name. Earlier they had failed to inform the appellant and seek its consent to the transfer of the lessee’s interest from the old company. Nevertheless, there is no sound basis for treating the two directors as acting for the old company when they signed the letter. Not only had the old company by then been dissolved but it had previously transferred its relevant business undertaking, including its leasehold interest, to the new company. In those circumstances the only logical inference is that Mr. Hall and Mr. Bagnall were acting in September 1994 as agents for the company which at the time was in existence and occupying the premises and that was the new company.

  26. Mr. O’Callahan argued that, by reference to Kelner v Baxter (1866) LR2CP 174, there was a presumption that Mr. Hall had contracted personally. The analogy he drew with that case, however, depends on the conclusion that Mr. Hall was purporting to act as agent for the old company, a view we have rejected on the facts. Kelner v Baxter is a case where an agent contracted in circumstances where he had no principal, as the company concerned had yet to be incorporated. It is accordingly to be distinguished from the present case, where we have found that the company in existence was in fact Mr. Hall’s principal.

  27. 27. We acknowledge, as Mr. O’Callahan also submitted, that in principle an agent may be personally liable for breach of an implied warranty of authority when the designated company, unknown to the negotiating parties, has been dissolved (1(2) Halsbury’s Laws of England para 172; Collen v Wright (1857) 8 E&B 647). But no authority has been cited to us indicating the principle applies where the agent had authority from his principal, but had misdescribed its name. The argument that Mr. Hall was in breach of a warranty of authority on common law principles accordingly also fails.

    LIABILITY OF THE NEW COMPANY

  28. We agree with Laurenson J that the new company became assignee of the old company’s interest as lessee under the deed of lease of 7 December 1992. It did so when it acquired the assets of the old company on 1 March 1993. While the assignment was in breach of a covenant first to obtain the consent of the lessor that did not make the assignment void. Indeed it was effective to vest forthwith the term of the lease in the new company as assignee, subject to the appellant’s rights as lessor to forfeit the lease on becoming aware of the breach (Old Grovebury Manor Farm Ltd v W Seymour Plant Sales & Hire No 2 Ltd [1979] 1 WLR 1397. CA). That consent must be unqualified to be effective.

  29. The burden of the lessee’s covenants touching and concerning the land was accordingly immediately assumed by the new company on 1 March 1993. From that date the appellant could sue the new company on those covenants which included the covenant to pay rent during the ten year term of the lease. Once Mr. Hall contracted on its behalf on 20 September 1994, the new company became further bound to the terms of the new agreement to lease.

  30. The appellant only became aware what had happened when the new company’s solicitor wrote to the appellant’s solicitor on 4 December 1996 maintaining, erroneously, that the new company was not bound by the lease but was only a monthly tenant. At that point the appellant could have sought to forfeit the lease, for breach of the covenant to obtain prior consent to an assignment, and re-enter, subject to rights of relief against forfeiture under ss 117 and 119 Property Law Act 1952. Of course, that option would not have been attractive to the appellant as it did not wish the new company’s occupation of its premises to end. Against that background its solicitor’s letter of 23 December 1996 is probably to be seen as an act of affirmation and acceptance of the new company as its lessee. What is more important, however, is that as at 23 December 1996 the new company was already bound in law to perform the lessee’s covenants under the agreement to lease but Mr. Hall was not, other than to the extent of any statutory liability for mis-statement of his company’s name. Mr. Hall’s position at common law was not affected by the letter of 23 December 1996.

    THE 1993 LEGISLATION

  31. Prior to 1 July 1994 s 116(5) of the Companies Act 1955 provided that offences, punishable by a fine not exceeding $100, were committed by officers of a company or persons acting on its behalf where the company’s name was misstated in certain situations. The penal provisions applied to certain uses, including the company’s seal, and the issue of business letters, notices or other official publications. Where the misstatement involved the signing or authorisation of the signing on behalf of the company of a bill of exchange, promissory note or cheque or order for money or goods, s 116(5)(c) further provided for personal liability of the issuer to the holder of the bill of exchange, promissory note, cheque or order for money or goods unless it was duly paid by the company.

  32. On 1 July 1994 the Companies Act 1993 came into force. The 1993 Act repealed the 1955 Act but also provided that there should be a transitional period of three years during which the provisions of the 1955 Act would continue to apply to existing companies which had not re-registered under the 1955 Act. The 1993 Act included in s 25 a new provision dealing with the consequences of incorrectly stating a company’s name. In order to apply its terms to all existing companies from 1 July 1994 s 116 of the 1955 Act was repealed and substituted by a new provision identical to s 25 of the 1993 Act. This was done by s 28 of the Companies Amendment Act 1993.

  33. In this case the significant incorrect statement of company name occurred in September 1994 during the transitional period in which the 1955 Act applied to the new company. Accordingly it is s 116 as amended in 1993 which applies in this case albeit that its terms are identical to those of s 25 of the 1993 Act.

  34. In so far as it is relevant s 116 (as amended) of the 1955 Act provides:

    116.

    Use of company name

    (1)

    A company must ensure that its name is clearly stated in—

    (a)  

    Every written communication sent by, or on behalf of, the company; and

    (b)

    Every document issued or signed by, or on behalf of, the company that evidences or creates a legal obligation of the company.

    (2)

    Where—

    (a)

    A document that evidences or creates a legal obligation of a company is issued or signed by or on behalf of the company; and

    (b)

    The name of the company is incorrectly stated in the document—

    every person who issued or signed the document is liable to the same extent as the company if the company fails to discharge the obligation unless-

    (c)

    The person who issued or signed the document proves that the person in whose favour the obligation was incurred was aware at the time the document was issued or signed that the obligation was incurred by the company; or

    (d)

    The Court is satisfied that it would not be just and equitable for the person who issue or signed the document to be so liable.

    (3)

    For the purposes of subsections (1) and (2) of this section and of section 42 of this Act (which relates to the manner in which a company may enter into contracts and other obligations), a company may use a generally recognised abbreviation of a word or words in its name if it is not misleading to do so.

  35. Section 116(1) imposes a duty on a company to ensure its name is clearly stated in the company’s written communications and in documents creating or evidencing its legal obligations. No provision is made for a breach of the duty to have penal consequences. Civil liability will attach, however, where a document creating or evidencing legal obligations incorrectly states the company’s name. Section 116(2) makes every person who issued or signed such a document personally liable, to the same extent as the company, where the company fails to discharge any such obligation. Such a person will however be excused from liability, first, under s 116(2)(c), on proof that the person to whom the obligation is owed was aware that it was incurred by the company when the document containing the mis-statement of its name was signed. Secondly, a person otherwise liable will be excused under s 116(2)(d) where the Court is satisfied personal liability would not be just and equitable. Unless so excused under either para (c) or (d), persons caught by s 116(2) of the 1955 Act, and the identical s 25(2) of the 1993 Act, are personally liable "to the same extent" as the misdescribed company incurring the obligation.

  36. The purpose of these new provisions is clarified by consideration of the effects previous law. The implications of s 116(5)(c) of the 1955 Act for personal liability for misdescription were largely overlooked in New Zealand until it was considered by the High Court in Hutt Valley Energy Board v Hayman (1988) 4 NZCLC 64,244. In that case Ellis J applied the section to a civil claim for personal liability arising from an order for supply of gas to a service station business owned by a company. The order was signed by the defendant. It made no reference to his company, although it did refer to the trading name used by the business. Accounts for gas were at times sent to the company. Ellis J held the defendant to be personally liable under s 116(5). By reference to English and Scottish cases he identified the purpose of the provision, and its antecedents, as being to ensure strict accuracy in the use of the registered name in transactions entered into on behalf of companies. A particular policy concern was that even slight variations in expression of a company name could give the impression a party was dealing with a totally different kind of company. The policy justified the statutory provision even though, in individual cases, it could be rigid and even severely penal in its effects. Because of that policy personal liability would attach even if a claimant had not been misled by the misdescription. Atkins & Co v Wardle (1889) 58 LH(QB) 337, 380-381; Scottish & Newcastle Breweries Ltd v Blair and others (1967) SLT 72, 74).

  37. Ellis J did accept that estoppel was available as a defence to a claim under s 116(5) provided there were facts sufficient to found it. This required that, having regard to the dealings between the parties, it would be unjust for a claimant to enforce its legal rights. In the Hutt Valley Energy Board case, however, the mere acknowledgement by the supplier, in the course of dealing, that gas was being supplied to the company was not enough, as the plaintiff’s expression of attitude in its dealings had not led the defendant to alter its position. In those circumstances estoppel did not arise. There was accordingly no defence and the defendant was held personally liable for supplies of gas that had not been paid for by the insolvent company.

  38. Unsurprisingly once the High Court had clarified the scope of s 116(5) it was relied on and applied in a large number of subsequent cases involving signed orders for goods supplied to a company which later became insolvent, where the company’s name was incorrectly stated in the order. It is sufficient of those cited by counsel to refer to Carpet Mill Products (Wellington) Ltd v Williams (1989) 4 NZCLC 65, 330; Jones O’Dell Motorbodies Ltd v Logan (CD1625/89, Auckland, 5 October 1989); National Bank of NZ Ltd v Coltart (1992) 6 NZCLC 68114. It was against this background that the Companies Act 1993 enacted ss 25 to recast the basis of liability for misdescription of a company’s name. As already noted s 116 is an identical provision applicable during the period of transition to the full application of the 1993 Act.

  39. The general policy of s 25 of the 1993 Act (and s 116(2) of the 1955 Act as amended) is first, every company should state its name clearly and accurately in its written communications and in all documents which evidence or create legal obligations for the company. Imposition by statute of civil liability on those persons who issue or sign documents of obligation on behalf of the company which incorrectly state its name is the principal means of giving effect to the policy. Where the company fails to discharge such an obligation those who issued or signed the document are made personally liable, subject to the section, to the same extent as the company, if the company fails to discharge the obligation. They are made sureties of the company by the Act in relation to its failure to discharge the obligations concerned.

  40. In one respect the scope of civil liability is broader than that under the terms of the 1955 Act as they were prior to 1 July 1994. Section 116 applies to any document creating or evidencing obligations. In other respects however the potential for harshness in the application of the previous provisions is lessened. The Act provides that persons liable for misdescription under s 116(2) will be excused from personal liability in two situations. The first is where the person in whose favour the obligation was incurred was aware, at the time of the mis-statement, that the obligation had been incurred by the company whose name was incorrectly stated. Liability will secondly be excused where the Court is satisfied it would not be just and equitable for the person issuing or signing the document to be personally liable.

  41. These two provisions alter the previous law as outlined and applied in the Hutt Valley Energy Board case. A person liable is now excused on proof that the person to whom the obligation is owed was aware, when the document was signed, that the obligation was that of the company; although as the High Court’s decision in this case indicates, the subjective mental element may often be difficult to establish. If at the time the document recording the obligation was signed the person claiming understood dealings were with the company whose name was incorrectly stated personal liability will also be excused. And under s 116(2)(d), persons otherwise liable will be excused if the Court is satisfied that would not be just and equitable. This broad provision confers the flexibility of a judicial discretion which the former rigid provisions, requiring proof of the elements of estoppel, did not allow. The discretion must of course be exercised consistently with the purposes of the statute.

    PERSONAL LIABILITY UNDER COMPANIES LEGISLATION

  42. We next consider whether Mr. Hall is personally liable under s 116(2). The document of 20 September 1994 created legal obligations of the new company and was signed by Mr. Hall on its behalf with the new company’s name incorrectly stated in the document. It follows that under the section Mr. Hall is personally liable to the same extent as the new company if it has failed to discharge the obligation which is the case. The issue therefore is whether liability is excluded by either para (c) or (d) of s 116(2).

  43. Laurenson J held that the appellant did not actually become aware that the new company was occupying the premises until receipt of the solicitor’s letter of 4 December 1996. While he also expressed the view that the appellant probably should have noticed at an earlier date there had been a change, it is plain that when the letter of 20 September 1994 was signed by Mr. Hall and Mr. Bagnall the appellant was unaware it was the new company which was assuming the obligations which on the face of the document were being incurred in the name of the old company. As a result of that lack of awareness Mr. Hall is unable to avail himself of the exemption from statutory liability under s 116(2)(c).

  44. The case accordingly turns on whether Mr. Hall should be excused by the Court because under s 116(2)(d) "it would not be just and equitable to hold him liable".

  45. When the letter of 20 September 1994 was countersigned by Mr. Hall and Mr. Bagnall the appellant understood it had completed a binding contract to lease with a company. It believed the contracting party to be the old company. The effect of this judgment is that the contracting party was the new company, the name of which had incorrectly been stated as that of the old. The new company was already bound to perform the lessee’s covenants under the earlier lease and was bound to the agreement reflected in the September 1994 letter from the moment it was signed.

  46. In this context there are two important points to make in relation to the limited impact on the appellant of the error of Mr. Hall and his co-director. First, the contracting party was a company which Laurenson J found was in no better or worse financial condition than the old company at the time it took over the old company’s assets and liabilities in March 1993. It had the same shareholders as the old company. The appellant had of course earlier satisfied himself of the suitability of the two directors as shareholders in a company which was its lessee. In other words from the appellant’s perspective the covenant of the new company as lessee was in all respects as good as that of the old company at the time it incurred the obligation to lease the new premises.

  47. The second point concerns the failure of the new company early in 1999. That event certainly caused the appellant loss in that the judgment it has eventually obtained against the new company for breach of contract is worthless. We are satisfied, however, the same loss would have occurred to the appellant even if the old company had at all times remained its lessee. We agree accordingly with Laurenson J that the advent of the new company was not a contributing factor to the events that caused the plaintiff’s loss.

  48. The combined effect of these circumstances indicates that no disadvantage was caused to the appellant as the result of its lack of awareness, at the time the agreement of September 1994 was signed, that it was the new company which was incurring the obligations of lessee. This, in our view, is at the heart of the issue of whether it is just and equitable that Mr. Hall should be excused liability under s 116(2)(c).

  49. Mr. Kohler also put considerable emphasis on the absence of any concealment of the existence of the new company by Mr. Hall and we accept this was so. However the genuineness of persons in Mr. Hall’s position cannot of itself carry great weight given the statutory policy of protection of those who are unaware that an obligation has been incurred by a particular company because of an incorrect statement of its name. For the same reason it is not relevant to liability for the mis-statement in 1994 that when the old company entered into a lease agreement with the appellant in 1992 Mr. Hall refused to personally guarantee the lessee’s obligations.

  50. Mr. O’Callahan reminded us that the new company, no doubt at the instance of Mr. Hall, had repudiated its contract in December 1996 and vacated its leasehold premises, ceasing thereafter to pay the rent. The new company did so after taking legal advice which was no doubt genuine but on our findings it was wrong. Nevertheless we have concluded that this conduct, and the fact that this dispute was ultimately resolved in favour of the appellant, is not a factor which can carry significant weight in considering the justice and equity of Mr. Hall’s situation. It was the subsequent insolvency of the new company, an unconnected event, rather than its repudiation of the leasehold contract, which caused the loss. It is the policy of the section to make a person signing a document misdescribing the name of the company personally liable concurrently with the company. But in this case the position of the appellant would have been no different had the obligations as lessee at all times been those of the old company only. In these circumstances we have decided the subsequent insolvency was too remote an event to carry weight in the overall justice and equity of Mr. Hall’s situation.

  51. For these reasons we are satisfied that it is just and equitable that Mr. Hall be excused from the liability he would otherwise face under s 116(2) of the Companies Amendment Act 1955.

    RESULT

  52. The appeal is accordingly dismissed. The respondent is entitled to costs in this Court in the sum of $5000 plus reasonable disbursements including travel and accommodation costs of counsel, to be fixed by the Registrar in the event of disagreement.


Cases

Kelner v Baxter (1866) LR2CP 174; Collen v Wright (1857) 8 E&B 647; Old Grovebury Manor Farm Ltd v W Seymour Plant Sales & Hire No 2 Ltd [1979] 1 WLR 1397; Hutt Valley Energy Board v Hayman (1988) 4 NZCLC 64; Atkins & Co v Wardle (1889) 58 LH(QB) 337; Scottish & Newcastle Breweries Ltd v Blair (1967) SLT 72; Carpet Mill Products (Wellington) Ltd v Williams (1989) 4 NZCLC 65; Jones O’Dell Motorbodies Ltd v Logan (CD1625/89, Auckland, 5 October 1989)

National Bank of NZ Ltd v Coltart (1992) 6 NZCLC 68114

Legislations

Companies Act 1955, s.116(2)

Companies Act 1993, s.25(2)

Authors and other references

Halsbury’s Laws of England, vol 1(2)

Representations

B O’Callahan for the Appellant (instructed by Carter & Partners, Auckland)
G J Kohler for the First Respondent (instructed by Friedlander & Co, Auckland)


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