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When a solicitor receives loan funds from a bank, is it as an agent of the bank or of the borrower? And if the solicitor then uses the funds for their own purpose rather than the borrower’s, did the borrower ever “draw down” the funds from the bank at all and is the borrower still liable to repay?
The Court of Appeal in Westpac New Zealand v New Dawn Holdings held that a solicitor for a borrower received the loan funds as agent for the borrower, even though he had also been acting on a limited retainer with the bank to organise the documents to execute the transaction.
Accordingly, when the bank (Westpac) transferred the funds to the solicitor, the borrower had drawn down the funds and both the borrower and the guarantor’s obligation to repay had arisen. That obligation was not affected by the fact that the solicitor had then failed to settle the property purchase and had instead misused the funds for his own purposes.
The decision, as with other recent judgments from the world of banking and finance,1 highlights the importance that the Courts place on the words of the contract between lender and borrower to determine the nature of their rights and obligations, and the extent of any agency relationship. An argument here that drawdown by the borrower had not yet occurred could not be reconciled with the way that term was used in the contract.
The facts
In early 2020, Westpac made a loan for the purchase of a residential property to New Dawn Holdings Limited as borrower, and New Dawn’s sole shareholder and director Colin Chu as guarantor.
Westpac instructed New Dawn’s solicitor, Jesse Nguy, to act for it on a limited retainer to complete and arrange execution of the relevant documents and to register the mortgage on settlement of the purchase. At the time, it was not disclosed to Westpac that Mr Nguy was also a 75% beneficial owner of New Dawn, and the property was to be purchased as a joint venture between Mr Chu and Mr Nguy.
Once Mr Nguy had provided the requisite paperwork, Westpac transferred the full loan amount of $1.3m to Mr Nguy’s firm trust account. But rather than settling the purchase, Mr Nugy used the money over the following several months for personal and firm expenses, including settling the purchase of a Melbourne apartment on behalf of another client, and renovation work to a Devonport property.
Westpac was not aware of this, and interest payments under the loan agreement were made to Westpac for more than a year. During this time, Mr Nguy also acted – or purported to act – for Mr Chu and New Dawn in High Court proceedings regarding their failure to settle the property purchase until finally the vendor cancelled the transaction and sold to a third party.
It appears that Mr Chu was unaware of Mr Nguy’s misuse of the funds and of his failure to settle the purchase, and towards the end of 2020 he made a complaint to the Law Society against Mr Nguy, which resulted in Mr Nguy’s suspension from practice.2
On 14 April 2021, Westpac made demand on New Dawn and Mr Chu for repayment of the full loan amount outstanding.
The High Court decision
New Dawn and Mr Chu resisted liability on the basis that the loan monies were never in New Dawn’s power or control, and thus were never drawn down, meaning their repayment obligations had never arisen. They argued that the funds were instead held by Mr Nguy in trust for Westpac pending settlement, in terms of the limited retainer. Effectively, this was an argument that Mr Nguy held the funds as agent for Westpac, and not as agent for the borrowers, until they were applied to settlement of the property purchase.
On an application by Westpac for summary judgment against each of New Dawn, Mr Chu and Mr Nguy, the High Court made an award of summary judgment against Mr Nguy but declined to do so in respect of Mr Chu and New Dawn.
The Court held that it was reasonably arguable that Mr Nguy’s obligations to Westpac under the limited retainer did not end when he sent the executed loan document and his solicitor’s certificate to Westpac, but that he continued to owe duties to Westpac in relation to the loan monies while they were held in his firm’s trust account.
Westpac appealed.
The Court of Appeal decision
The Court of Appeal entered summary judgment against Mr Chu and New Dawn, holding that the core issue was “whether the loan monies were advanced by Westpac to New Dawn”. On close review of the loan documentation, drawdown by New Dawn had occurred, and accordingly New Dawn and Mr Chu’s repayment obligations had been triggered. In particular
- The decision as to drawdown rested solely with New Dawn – so long as it had met the documentation requirements, New Dawn could choose when to draw down the loan and whether to do so in a lump sum or in instalments.
- It was up to New Dawn to specify the account into which the monies were to be deposited.
- Mr Nguy had undoubtedly been instructed to act for Mr Chu and New Dawn in respect of the loan and purchase of the property, and his direction to Westpac to pay the funds into his firm’s trust account was plainly given on behalf of his clients with their actual or apparent authority.
- Mr Nguy was not at liberty to deal with the funds without New Dawn’s instructions.
- Reviewing the definitions relevant to “drawdown” in the documentation and the wording of contemporaneous records, drawdown was complete when the funds were transferred into the trust account.
In reaching this conclusion, the Court dismissed two factors that had assumed significance in the High Court decision as showing it was reasonably arguable that Westpac retained control of the funds.
First: in Westpac’s instructions for the limited retainer with Mr Nguy, there was an obligation on Mr Nguy to advise Westpac and seek further instructions if he became aware of anything that could affect the validity or enforceability of the bank’s security prior to disbursing the loan monies.
The Court of Appeal held that this obligation was part of Mr Nguy’s limited retainer that included registering Westpac’s mortgage. But the retainer did not give him any right to return the money to Westpac without New Dawn’s agreement.
Second: in correspondence headed “Loan Advance Advice”, sent to Mr Nguy on the day that Westpac transferred the loan monies into the trust account, Westpac requested that “in the event that settlement does not proceed” Mr Nguy should contact Westpac to “arrange repayment of the settlement funds to Westpac”.
The Court of Appeal noted that this post-dated, and therefore did not form part of, the limited retainer; and in any event was entirely consistent with the funds having been advanced to New Dawn and held on trust by Mr Nguy for its benefit and solely for the purpose of the property purchase.
Accordingly, neither factor supported an argument that Mr Nguy held the funds on trust for Westpac or that Westpac otherwise retained control of them. Mr Chu and New Dawn were, therefore, unable to escape liability to the bank.
1. For example, the UK Supreme Court decision re liability for scams in Philipp v Barclays Bank UK PLC [2023] UKSC 25; and Westpac New Zealand Ltd v MAP and Associates Ltd [2011] NZSC 89, [2011] 3 NZLR 751.
2. Auckland Standards Committee 2 v Jesse Seang Ty Nguy [2021] NZLCDT 4.
