29 July 2016

Loan: Carolan v. NZ Real Estate Credit

After falling out with close business associate Michael Carolan, merchant banker George Kerr asked Carolan to arrange repayment of $1.16 million funding the purchase of a five million dollar Eastbourne Road home at Remuera in Auckland.  The High Court dismissed his claim that it was a non-recourse loan.
Mr Carolan left Macquarie bank in 2007 to join Mr Kerr at his Equity Partner group of companies.  Mr Kerr had been best man at Mr Carolan’s wedding and was godfather to one of his children.  Prospects at Equity Partner looked rosy.
The High Court was told Mr Carolan’s new base salary at $300,000 was slightly higher than his previous salary at Macquarie.  A $1.5 million bonus was anticipated with a proposed capital raising to create a media fund.  Recently remarried, Mr Carolan was looking to buy in Eastbourne Road as his new family home but was short of ready cash.  Mr Kerr advanced $480,000 for the deposit.  A four million dollar BNZ loan finalised the purchase.
Mr Kerr later advanced more money to clear interest due on Mr Carolan’s BNZ loan.  When a $185,000 BNZ interest payment fell due in February 2008, Mr Carolan could rustle up only $27,500 in cash.  His shift to Equity Partners just prior to the 2008 global recession coincided with lean times for merchant bankers. The expected fruitful media capital raising had not gone ahead.    
Evidence was given that Mr Kerr and Mr Carolan fell out mid-2014 when Mr Carolan blocked appointment to an Equity Partner subsidiary of a director favoured by Mr Kerr.  By this time, Mr Carolan had been the beneficiary of $1.16 million used to fund his Eastbourne Road residence.  There was no written agreement governing the money.  Everything had been settled on a handshake between business mates.
Justice Fogarty ruled there was no dispute there had been a loan of $1.16 million.  At issue was the terms of the loan.  Mr Kerr said it was repayable on demand and demand was made in late 2014.  Mr Carolan said it was a non-recourse loan.  It was not expected to be paid off, but instead worked off with credits from successful business deals.  To the extent there was no bonus income following the global economic recession, the loans were to be written off, he said.
Justice Fogarty said there was no evidence the loans were ever to be written off or forgiven.  The loan contracts could not be re-opened for a failure to make disclosures required by the Credit Contracts and Consumer Finance Act.  The Act applies to consumer credit.  Justice Fogarty said a handshake deal between two mutual friends does not amount to a consumer transaction.   He ordered repayment of $1.165 million together with interest at 7.5 per cent running from October 2014.
Carolan v. NZ Real Estate Credit – High Court (29.07.16)

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