Percy v Tonga Expeditions Limited [2013] TOSC 47; CV 20 of 2012 (18 October 2013)

IN THE SUPREME COURT OF TONGA
CIVIL JURISDICTION
NUKU'ALOFA REGISTRY

CV 20 of 2012

BETWEEN:

1. SCOTT PERCY
2. LOLESIO LUI
Plaintiffs

AND

1. TONGA EXPEDITIONS LIMITED
2. ALISTAIR COLDRICK
3. DOLPHIN PACIFIC DIVING LIMITED
Defendants

'O. Pouono for the Plaintiffs
L.M. Niu S.C. for the Defendants

JUDGMENT

[1] The Plaintiffs were the two directors and sole shareholders of the First Defendant (TE) which was incorporated in December 2009. Apart from goodwill, it appears that TE's sole asset was M.V. "Hakuna Matata" which was used for whale watching.

[2] On 1 April 2010 the ANZ Bank agreed to advance $150,000 to TE for the purchase of a second vessel, the M.V. "Expeditions". Among securities taken by the bank were:

(i) A first registered mortgage debenture over TE;

(ii) A first registered mortgage debenture over Vava'u Pharmacy and Health Centre Limited; and

(iii) Unlimited guarantees by the two directors "in favour of" TE.

[3] On 29 April 2010 the Plaintiffs signed the guarantee, a copy of which was produced as Exhibit D-7. Paragraph 1.01 of the guarantee commits the guarantors to pay on demand by the bank any sums of money then owing by TE.

[4] It seems that TE did not flourish in the way hoped for and in due course the Plaintiffs decided not to continue in the whale watching business. TE was not the only operation of its kind on Vava'u; the Second Defendant was the proprietor of the Third Defendant (Dolphin) which was operating successfully. Discussion took place between the First Plaintiff and the Second Defendant and eventually an agreement was reached.

[5] Unfortunately, the full terms of the agreement were not written down however, with one crucial exception, its outlines are sufficiently disclosed by several documents including the following:

(i) D20: a share transfer form dated 9 June 2011 recording the transfer of 150 shares by the Second Plaintiff to Dolphin.

(ii) D21: a share transfer form dated 9 June 2011 recording the transfer of 150 shares by the First Plaintiff to Dolphin;

(iii) D53: a document confirming that the Second Defendant became the sole director of TE on 20 June 2011;

(iv) An extract from the Companies Register dated 5 July 2011 confirming that TE was wholly owned by Dolphin.

[6] On 4 November 2011 the Second Defendant sent an email to the Tonga Visitors Bureau Vava'u explaining what had taken place. The relevant parts of the email read as follows:

"Scott and Lolesio decided that the one boat that was in the Company "Hakuna Matata" wasn't enough and decided to take out a loan to finance a second boat "Expeditions".

Unfortunately, with Scott running the pharmacy Lolesio wasn't able to generate the income to sort out loan repayments or generate a customer base for future years. In fact the boat Hakuna Matata was neglected and required a substantial amount of money to put it right. At the time of writing this email Hakuna Matata is still unusable.

With the bank drawing down on them to recover payments from the loans they decided it was no longer viable for them to operate. Scott Percy withdrew assets from the company to cover his personal investments and Lolesio was given the option to either the company and service the outstanding loans himself or resign his shares and therefore free himself from any financial liability.

On 9 June 2011 both Scott and Lolesio signed their shares in the company to me.

Dolphin Pacific Diving Ltd had agreed with both Scott and Lolesio and also the ANZ Bank that in order for the company to survive Dolphin Pacific would take over the remaining assets and take on the outstanding debt of $115,000".

[7] It is not known when exactly the Hakuna Matata was transferred to the Second Defendant but his evidence was that after running only six whale watching trips it broke down on about 7 or 8 August 2011. On 11 August 2011 it was inspected by a diesel mechanic (Document D-24) and was found to have damaged fuel injectors in cylinders 4 and 5. According to the Second Defendant, the boat was not operable with only one functioning engine and it was therefore tied up. In about January 2012, before the engine had been repaired, the Hakuna Matata was severely damaged during a cyclone. In June 2012 it was seized by the Bank at a cost to TE of $4765.00 and then sold for $2500.00 which sum was credited to TE.

[8] It is not in dispute that following the acquisition of TE by Dolphin no repayments of the loan were made. The Second Defendant's explanation was that since the Hakuna Matata was TE's only asset and this asset was inoperable, TE had no source of income and could therefore not repay its debt. When TE failed to make the required repayments, the bank, on 12 March 2012 demanded payment of the amount due from the Plaintiffs as directors of Vava'u Pharmacy and Health Centre Ltd and in addition from the First Plaintiff qua guarantor of the loan.

[9] The Plaintiffs' case is that the intention of the parties, when the agreement was reached that Dolphin would acquire TE, was that Dolphin not only acquired TE's debt (the loan to the Bank) and the obligation to service it, but also undertook to indemnify the Plaintiffs against any demand by the bank under the guarantees.

[10] The First Plaintiff suggested that without this undertaking there was in fact no consideration for the agreement reached. Prior to its acquisition by Dolphin the Hakuna Matata had been valued at $153,138 (Document P-15) while the amount owed to the bank was $146,978. If TE simply refused to repay the bank then the bank would be free to look to the guarantors with the result that TE would be relieved of its debt to the bank while retaining the vessel.

[11] The hearing took place on 2 and 3 October 2013. The First Plaintiff gave evidence as did the Second Defendant. The only other witness was a bank officer who produced an interim statement of account showing that on 30 June 2013 TE owed the bank $159,648.60.

[12] Following the hearing, both counsel filed careful and comprehensive written submissions for which I am grateful. Mr Pouono's submission was that there could be no doubt that the intention of the parties was that the Plaintiffs were to be relieved of all liabilities resulting from TE's loan. Mr Pouono also submitted that the breakdown of the MV Hakuna Matata had no bearing on the parties' intentions. Mr Niu, on the other hand, submitted that the Plaintiffs had failed to prove any agreement by the Second or Third Defendants that the securities listed in paragraph six of the loan agreement would be replaced by themselves and in any event that such in agreement could not be performed without the bank's prior agreement which in fact had not been forthcoming. Secondly, it was suggested that the breakdown of the Hakuna Matata had frustrated the agreement reached. Mr Niu also suggested that the agreement reached was in any event invalid by virtue of the English Statute of Frauds 1677.

[13] The fact that the parties did not record their agreement in writing has already been referred to. It is also unfortunate that apart from the production of Exhibit D54 no evidence by the bank, in particular relating to any conversations between the parties and the bank at Vava'u, was led. Despite these shortcomings however, I am satisfied, on the balance of probabilities, that the purpose of the agreement reached was, in the words of the Defendant himself in his email of 4 November 2011 (already referred to in paragraph 6 above) for Dolphin "take over [TE's] remaining assets and take on the outstanding debt of $115,000 and for the Plaintiffs "to resign [their] shares and therefore to free [themselves] of any financial liability." It need hardly be pointed out that for the Plaintiffs still to be burdened with the guarantees would in no way free them from their financial liabilities. The "outstanding debt" would not have been "taken on".

[14] I do not accept the Second Defendant's evidence that the guarantees were never discussed. In his own evidence he agreed that he had discussed the transfer of TE's shares to Dolphin with the bank and I find it inconceivable that the question of the banks' securities did not arise during those conversations which took place shortly before the Second Defendant, in an email of 19 May 2011 to the Plaintiff wrote: "Hey mate .... all went well with the bank. Will bring up survey details for the boat". Furthermore, the email of 10 June 2011, copied to
Dolphin, specifically mentions guarantees yet evoked no contrary response. Having heard and seen both First Plaintiff and the Second Defendant I have no hesitation in accepting the evidence of the former and, where in conflict, rejecting the evidence of the latter.

[15] In my opinion, while, as stated by the bank on 12 December 2011 "the transfer of any security is solely in the Bank's discretion" the refusal by the bank to release the Plaintiff's from their guarantee does not offer any form of defence to the Second Defendant. I agree with Mr Pouono that the agreement reached between the parties was for the Second Defendant to ensure that the TE loan was serviced until repaid and, in the event of unforeseen failure to comply with that undertaking, to keep the Plaintiff indemnified against any claims against them by the bank. The agreement did not, in my opinion, require the consent of the bank to ensure its validity.

[16] In my view, any requirement in English law that a contract of guarantee comply with Section 4 of the Statute of Frauds is not a requirement of the law of Tonga, regrettable though that may be. Following amendment to the Civil Law Act (Cap 25) in 2003, statutes, such as the Statute of Frauds, no longer apply in Tonga. Such statutes are not part of the common law.

[17] The alternative suggestion that the binding agreement between the parties was frustrated by reason of the breakdown of the MV Hakuna Matata is in my view unsustainable. The unchallenged evidence of the First Plaintiff was that the vessel was in good condition when it was transferred to the Second Defendant who considered that he knew the boat well and had often driven it. He told the Court that he accepted the First Plaintiffs assurance that it was in good condition when he took it over "I had no reason to doubt his word". He did not have the engines of the Hakuna Matata surveyed before he acquired it. There is no evidence at all to support the suggestion that there was an implied term that the boat would, as pleaded in the Defence, continue to be in good condition. In view in the fact that the First Plaintiff was handing over total control of the vessel to the Second Defendant such a term would have been wholly unrealistic. In the absence of an implied term of that kind or the occurrence of an event which could not reasonably have been contemplated by the parties, frustration will not occur. It was indeed very bad luck for the Second Defendant that he invested in the Hukuna Matata but the fact that it would broke down so soon after he took it over does not, in my opinion, afford him any defence to the Plaintiffs claim.

[18] As I find it proved, the Second Defendant agreed to indemnify the Plaintiffs against any claims arising against them from the breach of the loan agreement. I find that this promise was broken with the result that the Plaintiffs now find themselves liable to the bank. The extent of the liability has now grown to $159,648.60 with interest accruing. I give judgment for the Plaintiffs against the Second and Third Defendants in that sum with interest at the rate of 13.65% from 30 January 2013 to date of judgment and thereafter at the rate of 10% until satisfaction of the judgment debt.

CHIEF JUSTICE

Dated: 18 October, 2013.