Habib Bank Ltd v The Charcoal Chicken Ltd [2004] FJHC 276; HBC0175.2001 (30 January 2004)

IN THE HIGH COURT OF FIJI
AT SUVA
CIVIL JURISDICTION

CIVIL ACTIONS NO.: HBC0175 OF 2001
AND 0535 OF 2000 (Consolidated)

BETWEEN:

HABIB BANK LIMITED
PLAINTIFF

AND:

THE CHARCOAL CHICKEN LIMITED
1ST DEFENDANT
MARY MARAIA PETERSON HEWITT
JOHN THOMAS LOW
2ND DEFENDANT

Ms B. Narayan - For the Plaintiff
Mr. S. Valenitabua - For the first named 2nd Defendant

AND BETWEEN:

MARY MARAIA PETERSON HEWITT
ARTHUR LORD
PLAINTIFFS

AND:

HABIB BANK LIMITED
JOHN LOW
DEFENDANTS

Mr. S. Valenitabua - For Plaintiffs
Ms B. Narayan - For 1st Defendant

JUDGMENT

The above two actions were consolidated and heard together. It was agreed by counsels on the day of hearing that Ms Hewitt who is the plaintiff in Civil Action 535 of 2000 would present her case first. Certain documents by both parties were put in by consent.

At the outset I must say I fail to understand why Arthur Lord was joined as a plaintiff in Civil Action 535 of 2000. His involvement in the case is only as a donee of power of attorney from Ms Hewitt the first named plaintiff but has no beneficial interest in the reliefs sought.

FACTS:

Ms Hewitt is one of the directors of Charcoal Chicken Limited. John Low was the other director. In 1992 she appointed John Low as her agent under a power of attorney. She lived in Papua New Guinea.

In 1996 they started a business of Charcoal Chicken in partnership. The partnership business operated till 1998 when it was incorporated into a limited liability company. The Memorandum and Articles of Association were signed by John Low on his own behalf and on behalf of Ms. Hewitt.

John Low managed the business of Charcoal Chicken in Suva.

On 26th April 1998 John Low applied for a loan on behalf of the partnership called Charcoal Chicken. On 13th May 1998 a loan of $130,000.00 was approved. The securities for this loan were liens over two term deposits in the name of Ms Hewitt. The two term deposits were for $60,000.00 and $46,000.00 a total of $106,000.00. The other security was a third party mortgage over Certificate of Title 14498 in the name of Ms Hewitt.

On 21st September 1998 John Low applied for further advances and the facility was increased to $150,000.00. The securities remained unaltered.

On 28th July 1999 John Low applied for further advances and on 2nd August 1999 the Bank agreed to give a total of $250,000.00 to Charcoal Chicken Limited which had by now been incorporated. The securities were liens over the two term deposits, third party mortgage and bill of sale over three motor vehicles and bill of sale over equipment belonging to Island Grill.

By August 1999 Ms Hewitt had returned to Fiji from Papua New Guinea. On 17th August 1999 Ms Hewitt and John Low signed a debenture over the assets of Charcoal Chicken Limited and bill of sale over motor vehicles. Ms Hewitt also signed a mortgage over her land comprised in Certificate of Title 14498 and gave a personal guarantee.

There were defaults in payment to the Bank. The Bank took steps to enforce the securities and on 27th November 2000 issued demand notice to Ms Hewitt under the mortgage and the guarantee. Ms Hewitt in response filed civil action 535 of 2000 wherein I note the court has ordered that legal and equitable effects of security documents have been suspended till the finalisation of the action. The Bank in turn filed Civil Action 175 of 2001 claiming moneys owing under the documents from the two directors. It could easily have counterclaimed in the other action.

I have perused the minutes of pre-trial conference and noted the issues in dispute which can really be reduced to three, that is:

(1) whether Ms Hewitt at the time of execution of security knew they were security documents that is the nature of documents or did she think they were business documents.

(2) did she have independent legal advice?

(3) Was the Bank negligent and in breach of its fiduciary duty.

PW1 MARY HEWITT is one of the parties in these actions, that is, plaintiff in Civil Action 535 of 2000 and second defendant in Civil Action 175 of 2001. She told the court that she had two term deposits in her name in the Bank. The first one is for $46,000.00 dated 26th April 1998 and the second is for $60,000.00 dated 30th April 1998. She said she purchased a property in 1987 and gave John Low, who was a close family friend, power of attorney to manage the property. That power of attorney is contained in the bundle of documents. She had business of Charcoal Chicken with John Low. She signed the business registration form. John Low operated the business and she had nothing to do with operations of the business.

She told the court that she was not aware of various loan applications made to the Bank nor aware of approval of those loans. They were all done by John Low. She did not sign the Memorandum or Articles of Association when Charcoal Chicken Limited was incorporated.

She recalled going to the offices of Khan & Company solicitors. She was taken there by John Low who asked her to sign certain papers. She did not know what those documents were nor did anyone explain their effect to her.

She admitted that the signature on the guarantee dated 17th August 1998 is hers but she did not know that she was signing a guarantee. She admitted signing the debenture and bill of Sale on the same date but again said no one explained her the contents. She further admitted executing particulars of charges but no one told her what they were. She said she had no independent legal advice.

In cross-examination she said she was a housewife and educated to Form 4. She trusted John Low. She did not know why she signed the Business Registration form. All she knew it was for business and to enable her to come back into something on her return to Fiji. She sent money to John Low for operations of business. She did not know what he did with the money. She allowed John Low to run the business on her behalf.

She admitted signing the power of attorney and reading and understanding it.

At Khan & Co. she was asked to execute some documents. She said she did not know what a mortgage was. She signed because John Low asked her to sign. She does not understand what is a guarantee.

PW2 ARTHUR LORD is the brother of Ms Hewitt. He assisted his sister in carrying out investigation about the business. He went to Bank asking for information. The Bank still did not give him information. His sister did not know that her house had been mortgaged.

DW1 ZAHIRU DIN is employed by the Bank and is in charge of credit department. He gave history of transactions between Charcoal Chicken and the defendant’s Bank. He said the Bank had sighted the power of attorney. He said Ms Hewitt had given liens to the Bank over her term deposit. The liens were signed by John Low. The mortgage had been prepared by the Bank’s solicitors. In the application for loans John Low had signed on his own behalf and as power of attorney holder.

The final increase was given in August 1999 to the company. John Low had made the application. The security documents were prepared by Bank’s solicitors Messrs Khan & Co. The security documents were tendered as exhibits.

Under normal circumstances the Bank sends monthly statement of accounts to the customer at the end of each month unless the statement gets full earlier. Charcoal Chicken fell behind in payments and the Bank wrote to it about the arrears. The arrears were not paid.

Accordingly the term deposits were appropriated on 29th September 2000 to reduce liability on the overdraft account. The appropriated amount also includes interest due on term deposits. The appropriation did not clear the debt so a writ was issued.

The Bank had sent demand notices to John Low, Charcoal Chicken and Ms Hewitt.

Ms Hewitt had visited the Bank after the appropriation of the term deposits. She was informed that the Bank had the right to encash the term deposits.

He said Ms Hewitt had arranged insurance on her property and Bank’s name is shown on the policy.

In cross-examination he said he came to Fiji from Pakistan on 24th September 2001. His testimony is based on the records. He could not say who processed the loan or circumstances leading to the loans.

He has not seen any deed of partnership regarding Charcoal Chicken on the Bank’s file but it has registration certificate. He could not say when the Bank obtained the registration certificate.

The Bank had no signature of Ms Hewitt as signatory to the account but only of John Low as Power of Attorney holder. The Bank did not have Ms Hewitt’s signature itself. He had no knowledge if Ms Hewitt was contacted before approval of loan.

He could not find any record of assets and liabilities of Charcoal Chicken Ltd in the Bank’s file.

There is a Westpac Bank cheque for $30,000.00 payable to Merchant Bank which has been deposited into the overdraft account. It is dated 28th September 1999.

Ms Hewitt was recalled by consent of parties. She said she bought the house in 1987. She bought it cash and had not insured the house till today. She made no application to insure the house or the vehicles.

In cross-examination she said her husband bought the house for her. The commencement date shown an insurance policy as 5th August 1999 and she was in Fiji then. Vehicle DO 402 is with her. Her husband had given $30,000.00 to John Low for the vehicle. The cheque was made to Merchant Bank.

NON EST FACTUM:

I shall deal with the issue of non est factum first. Non est factum is commonly pleaded in situations where it is sought to invoke the equitable jurisdiction to set aside a transaction on grounds that it was an unconscionable bargain. However non est factum is a common law rule and generally applies to –

“comparatively rare class in which a man’s faculties whether from age or natural infirmity or drink or any other cause, are so defective that he really does not know what he is doing – that his mind does not go with the deed. In such a case his instrument is void even at law – non est factum”. Blomley v. Ryan [1956] HCA 81; (1954) 99 CLR 362 at p. 401 Fullager J.

Because non est factum renders a contract void, third parties cannot derive any rights under it. Ms Hewitt alleges that she was acting on advice of John Low who told her that she had to sign certain business documents and that the solicitors told her nothing and she was not explained the contents of the documents. In short she did not know what the documents were.

On 17th August 1999 she signed not only one document but a series of documents with initials too. These were a debenture with an accompanying charge certificate, two bills of sale with accompanying charge certificates; a personal guarantee, a mortgage and a resolution of Board of Directors to obtain loan and to give securities.

When Ms Hewitt commenced her examination in chief, it was a plea in ignorance not knowing how many accounts she had at the Bank; how much money she had or who deposited the money in her name. However, she produced two term deposit slips. She tried to distance herself from the business of Charcoal Chicken saying she had nothing to do with the operations of the business.

In cross-examination it transpired though with great deal of reluctance on her part that she was aware of the partnership business and it was set up for her to return to something financially viable after her husband and she returned to Fiji from Papua New Guinea. It was a platform for future financial security. She was sending money from Papua New Guinea for the operations of the business to ensure that she had something tangible to come back to. John Low was the person in charge. He may have had the technical know how. Partners very often complement each other – one a financial source and the other the brain. Sleeping partners are not an unusual phenomenon.

She trusted John Low. She let John Low run the show. She must have considered that what John Low did was for their mutual benefit. She after all had half interest in both the partnership and the company.

I do not believe that Ms Hewitt was totally ignorant of the nature of documents she was signing. She had signed a power of attorney in Papua New Guinea which she said she read herself and understood. She was shown the guarantee during cross-examination and she conceded that the lawyer might have explained but she did not understand. She admits therefore that the solicitor witnessing the documents was present; the plaintiff may be a puppet on a string of John Low but there is no suggestion that the solicitor too was being dictated to by John Low. I find that the documents were signed by Ms Hewitt after they were explained to her and she knew they related to the business of Charcoal Chicken Limited in which she had a vested interest. This is not a case of non est factum.

PARTNERSHIP:

The plaintiff submits that in law there was no partnership between Ms Hewitt and John Low as the latter was solely running the business and he made all the decisions. I am of the view that a partnership business existed between Ms Hewitt and John Low.

First, there is the documentary evidence under the Registration of Business Names Act (document 22) in defendant’s bundle of documents. Ms Hewitt has signed on the form as an incoming partner. She herself testified that she sent money to finance the business. She could not have done this if she had no interest in the business. She also wanted a business to return to once she returned from Fiji.

As John Low was a partner, his acts done in the ordinary course of business of the partnership would bind the firm and Ms Hewitt – Section 6 of the Partnership Act. The common law also takes the same view. Alliance Bank v. Kearsley [1871] UKLawRpCP 31; 1871 LR 6 CP 433 states the position as follows:

“The partner has authority to do what is usual in the ordinary course of business. It is established that in trade partnerships one partner may borrow money for the partnership and will bind his co-partner by so doing.. That is held to be within an implied authority of a partner ...”

The sums borrowed were for the purposes of Charcoal Chicken the partnership. Mr. Valenitabua submits that Section 6 and 7 of the Partnership require express authority before an act binds other partners. This interpretation is impossible to sustain. Section 6 says the firm is liable unless it can show that a partner had no authority to act and the person who is dealing with him knows he has no authority to act. There is no evidence that the Bank knew John Low had no authority to act on behalf of Charcoal Chicken to obtain advances. Ms Hewitt’s pleadings do not suggest that either. The onus is on Ms Hewitt to show on balance of probability that John Low had no authority to act for her. Ms Hewitt cannot now undo decisions already reached or contracts already entered into by John Low on behalf of the partnership.

The account at the Bank was in the name of Charcoal Chicken. The offer for advances was made to Charcoal Chicken. Ms Hewitt has not discharged that onus of proof cast on her.

POWER OF ATTORNEY:

Powers of attorney vary infinitely. There is no standard form. Powers of attorney are construed strictly – Bryant, Powis and Bryant Ltd. v. La Banque du Peuple [1893] UKLawRpAC 5; [1893] AC 170. The authority conferred by the power of attorney must be strictly followed. If the donee of power acts beyond the scope of his powers, the third party will not be able to make the donor of power liable.

Ms Hewitt asserts that she had given power of attorney to John Low for the purpose of collecting rent and looking after the residential property. The power of attorney does not say that. There is no mention of 12 Woodward Place in the deed. It is a general power of attorney with a clause saying that the “foregoing powers are to be construed not strictly but in their widest sense”. The power of attorney contradicts her assertions.

A power of attorney is given to the donee so he can act on behalf of the donor. It is not what the donor intended but what is expressed in the deed that is material. It is on the strength of the power of attorney that third parties transact business with the donee. The Bank was quite entitled to act on the basis of the power of attorney and recognize John Low as such. This power of attorney gave John Low powers to “manage carry on and superintend any business in undertaking which I may carry ...” [Clause 10].

The Bank acted on the basis of the power of attorney and advanced moneys to the partnership. John Low had express authority to act on her behalf to borrow money. The Bank would be prejudiced if Ms Hewitt were able to circumvent the financial obligations created by John Low. It would be absurd to allow the plaintiff to renege from her obligations simply because the person she trusted to act in her interests let her down.

FIDUCIARY DUTY/INDEPENDENT LEGAL ADVICE:

Mr. Valenitabua submitted that the Bank breached its fiduciary duty to Ms Hewitt because the term deposits were in her personal name, the mortgaged property was hers and the debt was somebody else’s. He submits that she had not signed the Memorandum or Articles of Association or the Application for advances. The debt was increasing. He says the Bank ought to have been put on enquiry and sought clarifications from Ms Hewitt.

Ms Narayan submitted that the Bank acted bona fides and without negligence. The Bank knew that Ms Hewitt was a partner in the business and loans were to the business. John Low she said had clear authority under the power of attorney and the Bank need to go no further. There was no evidence to suggest that John Low was misappropriating the funds for his own use.

There is no general rule on a banker to disclose everything within a bank’s knowledge which is material to the formation of a judgment as to whether it is prudent to enter into a guarantee. Lord Campbell in Hamilton v. Watson [1845] EngR 568; 8 ER 1339 at 1343, said:

“if there were such a rule, it would be indispensably necessary for the bankers to whom the security is to be given, to state how the account is being kept, whether the debtor was in the habit of overdrawing; whether he was punctual in his dealings; whether he performed his promises in an honourable manner; for all these things are extremely material for the surety to know. But unless questions be particularly put by the surety to gain this information, I hold that it is quite unnecessary for the creditor to whom the suretyship is to be given to make any such disclosure.”

A contract of guarantee is not a contract of utmost good faith like insurance and therefore the creditor would be under no general duty to disclose material facts which would influence the mind of a prospective surety or guarantee in deciding whether to undertake the liability – Behan v. Obelon Pty Ltd. 1984 NSWLR 637 at 639.

In the present case Ms Hewitt had more than a nominal interest in the borrower Charcoal Chicken Ltd. and the Bank could safely presume that she would have received benefit from the advances made by the Bank. The transactions therefore on their face appear to be of some financial advantage to Ms Hewitt. It is not a transaction from which she derived no financial advantage. She was a shareholder in the company. It was money which was advanced for Ms Hewitt’s and John Low’s joint purposes and enterprise and not to him alone. It is not the usual case of a guarantor receiving no financial benefit.

Further the Bank could also consider the nature of the relationship between John Low and Ms Hewitt. It was a commercial relationship and the Bank could fairly conclude that the surety was capable of looking after herself and capable of understanding the extent of risks involved in giving the guarantee and the mortgage. If the relationship between debtor and surety was non commercial like husband and wife then the Bank would be put on enquiry as to undue influence and need for independent legal advice imperative. The circumstances in the present case do not require the Bank to advise Ms Hewitt of the need for independent legal advice.

I conclude therefore that Ms Hewitt had financial stake in the business of Charcoal Chicken. As such she could be expected by the Bank to derive benefits from the loans it was making to the entity. The Bank was not duty bound to investigate how John Low applied the funds. Ms Hewitt cannot now extricate herself from the arrangements and contracts put in place by her holder of Power of Attorney from her and who was also her partner.

Accordingly, I dismiss her claim in civil action 535 of 2000 against the Bank.

The civil action 175 of 2001 is a claim by the Bank against the Charcoal Chicken Limited and Ms Hewitt for $215,238.02 being amount due as at 18th April 2001 and interest at $82.56 per day from 18th April 2001.

Ms Hewitt’s claim having effectively been disposed off, she is left with no defence in this action. The Bank statements have been filed in this action. No issue is taken as to the accuracy of accounts. There is already a default judgment entered against John Low.

I find that Ms Hewitt and Charcoal Chicken Limited do owe the Bank the sum of $215,238.02 and interest as prayed.

Accordingly I enter judgment for the sum of $215,238.02. There shall be interest allowed on the said sum at the rate of $82.56 from 8th April 2001 to the date of judgment after which the interest shall be at the rate of four percent per annum.

The final orders therefore are:

(1) that plaintiff’s claim against the Bank in civil action 535 of 2000 is dismissed with costs to be taxed if not agreed.

(2) that the order made by Justice Byrne on 2nd July 2001 that the legal and equitable effects of all security documents signed by Ms Hewitt be suspended is now vacated.

(3) that there shall be a judgment for the Bank in Civil Action 175 of 2001 against Ms Hewitt and Charcoal Chicken Limited jointly and severally in the sum of $215,238.02 together with interest at the rate of $82.56 per day as from 8th April 2001 to date of judgment.

(4) further interest shall accrue at the rate of four percent per annum on the judgment sum.

(5) That Ms Hewitt and Charcoal Chicken Limited shall pay costs of civil action 175 of 2001 to be taxed if not agreed.

[ Jiten Singh ]
JUDGE

At Suva
30th January 2004