Buying the family farm can seem a rite of passage. However, given the value of most farms inter-generational assistance can be required so that this can happen. Commonly, this assistance can take the form of an on-demand loan. While not stated, the practical reality is that if the children stay in Mum and Dad’s favour, no demand will be made, and it might be expected that the loan will be forgiven in Mum or Dad’s will.
Sometimes loan arrangements are unrecorded, which makes subsequent reconstruction difficult. However, even when the terms are recorded, over time memories and interpretation can fade or change.
What happens when Dad calls up the loan?
In the case of Totaranui Trustee Limited (In Liquidation) v Gunn where the farm was owned by a trustee company, the children (husband and wife) removed the trustee company and appointed themselves as trustees, thus neatly quarantining the debt. Or so they thought. Perhaps unsurprisingly the next step was the trustee company’s liquidation. And equally unsurprisingly the liquidator then called upon the children who now owned the farm to indemnify the retired trustee for its loss.
It then transpired that despite the clear terms of the deed of acknowledgment of debt that the clear terms had faded with time. Or more simply, the children didn’t want to pay. Summary judgment proceedings were initiated by the trustee company’s liquidator.
There were two grounds of defence: set off and the defence that the debt had not been proved. Neither grounds were successful. The argument that the debt had not been formally proven was dismissed, the Court noting that:
 Mr Tobin’s focus on the process of proving a debt misses the point. So, too, does Mr Tobin’s focus on the earlier statutory demand. The liquidator, in pursuing Totaranui’s indisputable right to indemnity for any debt incurred as trustee, claims upon the $502,150 debt which Totaranui incurred in purchasing the farm block. In his oral submissions, Mr Tobin noted that there had not only been no proof of debt from George Gunn but equally no steps taken by him to sue Totaranui for the debt. But that additional feature of George’s failure to sue on the debt takes the defendant’s case no further. The debt exists regardless of what procedures have or have not been taken in relation to it.
The ground of set-off also failed. It was argued by the children defendants that the requirements of an equitable set-off in terms of the classic formulation of Somers J in Grant v NZMC Ltd were made out. However, the court did not agree. The figure claimed by way of set-off related to the benefits received by George Gunn, the farm’s vendor, who remained on the farm “rent-free” after the sale for $529,150 less $27,000, which was gifted, the balance remaining a debt owing by the trustee company.
The facts got in the way some-what of the set-off claim. The parties having earlier agreed that Mr Gunn would live on the property rent-free in lieu of interest was recorded in correspondence after a demand for repayment was made by Mr Gunn in 2010 (the children had denied that an earlier demand for payment had been made).
The claim of set-off required the Court to find that the parties had agreed upon a term (“the loan will be forgiven progressively or at death”), which is contrary to the term of the deed that provides that “the loan is repayable upon demand”. By the second recital to the Deed of Sale, the parties agreed that the sale and purchase was taking place “upon the terms and conditions hereinafter appearing”. The recital has a similar effect to an “entire contract” clause as often found in the operative provisions of contracts and deeds.
The Court then referred to the well-established principle that the statement of the parties to a deed that appears in the recital to a deed may give rise to an estoppel by deed.
Accordingly, the parties were estopped from denying what is stated in the recital.
The result, was an order that the children indemnify the trustee company for the full amount owing.
Also see Van Delden and Or v MNS Trustees Limited (an application for a declaration that the company has a right of indemnity) where a trustee company’s liquidators seek costs of $130,355.29 (incurred transferring the ownership of trust properties following a trustee company’s liquidation) from the trust’s assets pursuant to the right of indemnity recorded in the deed of trust.
- Totaranui Trustee Limited (In Liquidation) v Gunn  NZHC 3136
- Grant v NZMC Ltd  1 NZLR 8 at 12 – 13
- Scales v Scales (2009) 10 NZCPR 479 (HC) at 
- Taylor v Knapman (1884) 2 NZLR SC 265 at 271
- Van Delden and Or v MNS Trustees Limited  NZHC 4 (orders directing service)