100 Investments Ltd v IAG New Zealand Ltd

[2018] NZHC 3244

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE

CIV-2016-409-888

[2018] NZHC 3244

BETWEEN

100 INVESTMENTS LIMITED for itself and in the name of LICHFIELD VENTURES LIMITED

Plaintiff

AND

IAG NEW ZEALAND LIMITED

Defendant

Hearing:	5 November 2018
Counsel:	P W Michalik and H M Weston for Plaintiff N A Till QC and K Welsford for Defendant
Judgment:	11 December 2018

JUDGMENT OF THOMAS J

[1]                  100 Investments Ltd has been engaged in a protracted battle with the Insurer, IAG New Zealand Ltd (IAG), in respect of an insurance claim relating to a property damaged by the 2010/2011 Canterbury earthquakes. They have now reached a settlement as to the sum payable under the insurance policy. This judgment relates to the outstanding issue between the parties and that is the entitlement of 100 Investments to receive the insurance proceeds. IAG does not oppose 100 Investments’ claim in this regard.

[2]This decision follows what was effectively a formal proof hearing.

100 INVESTMENTS LIMITED v IAG NEW ZEALAND LIMITED [2018] NZHC 3244 [11 December 2018]

Background

[3]                  At the time of the Canterbury  earthquake  sequence  of  2010  and  2011,  110 Lichfield Street, Christchurch (the Property) was owned by Lichfield Ventures Ltd. On the Property was a two-storey brick commercial building.

[4]                  The Property was insured with NZI, a division of IAG, under a material damage policy. The sum insured was $2,715,920 excluding GST and the insurance was provided on the basis that replacement value conditions applied. Mortgagees of the Property were named on the policy as Interested Parties, including Propertyfinance Funding Nominees Ltd as first mortgagee. The material damage section of the insurance policies contained a clause specifically stating that cover was extended to any person or entity having an insurable interest in the Property.

[5]                  Lichfield Ventures was in receivership during the earthquake period and placed into liquidation on 16 December 2010.   The insurance was renewed for the period   1 June 2011 to 1 June 2012. Hanover Capital Ltd was noted as an Interested Party.

[6]                  The  Property  was  damaged  in  the  earthquakes  of  4  September  2010,  26 December 2010 and 22 February 2011. The estimated cumulative cost of repair was considerable. On 15 February 2012, the Chief Executive of the Canterbury Earthquake Recovery Authority issued a notice under s 38(4) of the Canterbury Earthquake Recovery Act 2012 requiring demolition of the building on the Property. In March 2012, the Canterbury Earthquake Recovery Authority, through its demolition contractors, carried out the demolition of the building on the Property.

[7]Lichfield Ventures made claims under the insurance policies.

[8]                  In October 2014, Property Finance Securities Ltd (PFSL) acquired by assignment the first registered mortgage over the Property.

[9]                  In early December 2015, NZI paid $789,929.92 including GST to the receivers appointed by PFSL. This indemnity payment was neither paid nor received in full and final settlement of the insurance claims.

[10]              In October 2018, NZI accepted 100 Investments was entitled to receive a further payment in respect of the indemnity value of the unrepaired earthquake damage, plus interest. By the settlement agreement with 100 Investments, it has also accepted 100 Investments’ entitlement to a further sum to settle all claims under the insurance policies, subject to this decision.

100 Investments

[11]              In March 2005, Lichfield Ventures as debtor entered into a General Security Agreement with PFSL as the secured party (the GSA). The GSA is the first registered security agreement under the Personal Property Securities Register in respect of Lichfield Ventures’ personal property.

[12]              As noted above, Lichfield Ventures was placed into liquidation in December 2010. By September 2015, Lichfield Ventures owed PFSL at least $3.5 million.

[13]              On 4 September 2015, PFSL entered into an agreement to assign debt and security with Lichfield Securities Ltd (or nominee) (the Agreement to Assign). Lichfield Securities is a company in common ownership with 100 Investments. Pursuant to the Agreement to Assign, PFSL agreed to assign to Lichfield Securities:

(a)its rights in the debt Lichfield Ventures owed it;

(b)all loan documents between PFSL and Lichfield Ventures; and

(c)all securities given by Lichfield Ventures in favour of PFSL, including all guarantees, mortgages of land and security interests.

[14]              The consideration for the Agreement was $1.997 million. The assignment date was to be 25 September 2015, on which date Lichfield Securities was to pay the balance of the consideration and PFSL was to provide an executed deed of assignment of debt and security in an agreed form.

[15]              Lichfield Securities nominated 100 Investments to take the benefit of the Agreement to Assign. As subsequent events disclose, there was also some variation to the Agreement to Assign.

[16]              The parties to the Agreement to Assign clearly revised their approach to the assignment of debt and securities so far as the Property was concerned. Rather than the mortgage to PFSL being assigned to 100 Investments, the mortgagee sale route was followed. On 17 December 2015, PFSL, as first mortgagee of the Property, entered into an agreement to sell the Property to 100 Investments for the purchase price of $1,320,500 (the Sale and Purchase Agreement). The Sale and Purchase Agreement included the following clauses:

18.      Vendor selling as mortgagee

18.1The Vendor is selling as first mortgagee and in exercise of the power of sale vested in it as mortgagee under Mortgage number 7114247.15. The Purchaser shall assume without evidence that the events have happened and the required period has elapsed entitling the Vendor to exercise its power of sale.

…

28. Assignment of any residual Insurance Claim in relation to the Property

28.1 The Vendor will assign the benefit of any residual insurance claim in relation to material damage relating to the Christchurch earthquakes in respect of the Property to the Purchaser on settlement.

[17]              Between the date of the Agreement to Assign and the Sale and Purchase Agreement, NZI had made the December 2015 payment in respect of the insurance claim to PFSL. In light of the Agreement to Assign, PFSL gave 100 Investments credit for that indemnity payment and reduced the price in the Sale and Purchase Agreement for the Property by the amount of that indemnity payment.

[18]              Settlement of the sale and purchase of the Property took place on 23 December 2015.

[19]              100 Investments is now registered as proprietor of the Property pursuant to the exercise of PFSL’s power of sale as mortgagee. The subsequent mortgages are

extinguished by virtue of the power of sale having been exercised and are so recorded on the Land Transfer Act Register.

[20]              On 27 January 2016, PFSL executed a deed to assign debt and security (the Deed) in favour of 100 Investments. Although the Deed was dated 27 January 2016, it recorded the assignment date as 23 December 2015. Given the sale and purchase of the Property had settled, the assignment consideration was recorded as $660.01, reflecting the final balance required to settle the Agreement to Assign. Relevantly, and in contrast to the Agreement to Assign, the Deed did not include mortgages of land under the definition of Security (the Property having been sold to 100 Investments by PFSL as mortgagee).

[21]              Because NZI challenged 100 Investments’ right to the insurance proceeds, on 1 September 2016 100 Investments exercised its right under the GSA to enter into possession of Lichfield Ventures’ charged personal property pursuant to s 156 of the Property Law Act 2007.

[22]              100 Investments relies primarily on its right as assignee from PFSL of the insurance claim proceeds pursuant to its acquisition of the Property from PFSL, selling as mortgagee. In the alternative, 100 Investments relies on its rights under the GSA and/or its rights as mortgagee in possession, having given notice under the Property Law Act.

Intervention of Lichfield Ventures’ liquidator

[23]              Following the formal proof hearing, counsel for the liquidator of Lichfield Ventures filed a memorandum with the Court. The liquidator claimed an interest in the proceedings for two reasons. First, because 100 Investments was purporting to sue in the name of Lichfield Ventures but had neither sought the liquidator’s consent to do so, nor had a Court order been made permitting this.1 Secondly, the liquidator, on behalf of Lichfield Ventures’ creditors, claimed an interest in potential recoveries under Lichfield Ventures’ insurance policies.

1      Companies Act 1993, s 248.

[24]              The liquidator sought the opportunity to provide brief submissions to the Court as to 100 Investments’ entitlement to the insurance proceeds.

[25]              Predictably, 100 Investments objected to this course, noting that the liquidator had known about the proceedings since at least September 2018, had been provided with copies of the pleadings and advised that the case would be heard commencing  5 November 2018. Mr Michalik, for 100 Investments, pointed out that it was notable the liquidator had not applied to be joined as a party, nor sought any other formal involvement in the proceedings. Furthermore, if the liquidator had a claim, then it was for the liquidator to take appropriate proceedings in due course.

Is 100 Investments entitled to the insurance proceeds?

Effect of the liquidation

[26]              While the liquidator claimed he may but was not obliged to exercise powers in relation to charged property,2 a liquidator’s powers do not affect a secured creditor’s rights over secured property. Section 248 of the Companies Act provides:

248     Effect of commencement of liquidation

(1)With effect from the commencement of the liquidation of a company,—

(a)the liquidator has custody and control of the company’s assets:

(b)the directors remain in office but cease to have powers, functions, or duties other than those required or permitted to be exercised by this Part:

(c)unless the liquidator agrees or the court orders otherwise, a person must not—

(i)commence or continue legal proceedings against the company or in relation to its property; or

(ii)exercise or enforce, or continue to exercise or enforce, a right or remedy over or against property of the company:

(d)unless the court orders otherwise, a share in the company must not be transferred:

2      Companies Act 1993, s 254(a).

(e)an alteration must not be made to the rights or liabilities of a shareholder of the company:

(f)a shareholder must not exercise a power under the constitution of the company or this Act except for the purposes of this Part:

(g)the constitution of the company must not be altered.

(2)Subsection (1) does not affect the right of a secured creditor, subject to section 305, to take possession of, and realise or otherwise deal with, property of the company over which that creditor has a charge.

[27]              Section 305 then sets out the rights and duties of secured creditors which, as relevant to this case, provides:

305     Rights and duties of secured creditors

(1)A secured creditor may—

(a)realise property subject to a charge, if entitled to do so; or

(b)value the property subject to the charge and claim in the liquidation as an unsecured creditor for the balance due, if any; or

(c)surrender the charge to the liquidator for the general benefit of creditors and claim in the liquidation as an unsecured creditor for the whole debt.

(2)A secured creditor may exercise the power referred to in paragraph (a) of subsection (1) whether or not the secured creditor has exercised the power referred to in paragraph (b) of that subsection.

(3)A secured creditor who realises property subject to a charge—

(a)may, unless the liquidator has accepted a valuation and claim by the secured creditor under subsection (6), claim as an unsecured creditor for any balance due after deducting the net amount realised:

(b)must account to the liquidator for any surplus remaining from the net amount realised after satisfaction of the debt, including interest payable in respect of that debt up to the time of its satisfaction, and after making any proper payments to the holder of any other charge over the property subject to the charge.

…

The mortgage to PFSL

[28]              Lichfield Ventures’ indebtedness to PFSL was secured by various means, including a first mortgage over the Property. The mortgage over the Property was in the Auckland District Law Society standard form which provides that, where the mortgage is over land, then:

… the party granting the security mortgages to the security holder all of its right title and interest (present, future, legal and equitable) in the land and assigns to the security holder absolutely all of its right title and interest (present, future, legal and equitable) in land proceeds.

[29]The definition of “land proceeds” includes any proceeds of any insurance.

[30]              The proceeds of a claim under a material damage insurance policy are an accrued contractual right in existence as from the time of the damage to the insured property.3 At the date PFSL sold the Property to 100 Investments, it had an accrued present right to the outstanding insurance proceeds which are specifically included as land proceeds under the  mortgage.  PFSL  validly  assigned  that  entitlement  to  100 Investments when it sold the Property to 100 Investments in the exercise of its power of sale as first mortgagee.

[31]              Lichfield Ventures’ indebtedness to PFSL as at the date of the mortgagee sale exceeded $4.5 million. PFSL’s priority sum under the mortgage of the Property was

$3.330 million. As mortgagee exercising its power of sale, PFSL was under statutory obligations to obtain the best price reasonably obtainable and to apply the proceeds of sale to that secured by the mortgage, with any balance to those holding a subsequent mortgage or security interest.4

[32]              The effect of the mortgagee sale was to discharge the first and all subsequent mortgages over the Property, as the Land Transfer Act Register of the Property confirms.

3      Ridgecrest NZ Ltd v IAG New Zealand Ltd [2014] NZSC 129, [2015] 1 NZLR 40 at [50(d)].

4      Property Law Act 2007, ss 176 and 185.

Issues raised by the liquidator

[33]              In his memorandum to the Court dated 20 November 2018, counsel for the liquidator addressed two issues. First, he raised an issue as to the extent of 100 Investments’  rights  as  an  assignee  of  PFSL,   Lichfield   Ventures’  mortgagee. Mr Francis noted authority to the effect that an assignment of a reinstatement insurance claim is prevented.5 In this case, however, although 100 Investments’ claim included reference to the cost of reinstatement, the total amount of the insurance payout pursuant to the settlement is less than either party’s estimate of full reinstatement value and, as such, any issues concerning assignability of a reinstatement claim pursuant to those authorities do not arise. Furthermore, the cases on which Mr Francis relies concern property sold in circumstances where the vendor’s reinstatement insurance was contingent on rebuilding, a contingency which was not completed before sale. Neither was a mortgagee sale. Again, these are distinguishing factors. Not only was the sale in the present case a mortgagee sale but rights pursuant to the insurance policy had accrued; they were not contingent.

[34]              Mr Francis then submitted that, if a mortgagee obtains a surplus, whether from a mortgagee sale or insurance claims, this needs to be accounted for to other parties, either secured creditors or the mortgagor. He observed that, if the mortgagee’s rights are so qualified, then the rights of its assignee must also be so qualified. Mr Francis referred to the fact that the insurance policy noted the interest of the second mortgagee of the Property, originally Hanover Finance, and its mortgage contained a covenant to keep the Property insured. He then submitted that PFSL was unable to assign the insurance claim to 100 Investments free of the second mortgagee’s equitable interests. He relied on the authorities summarised in Insurance Claims in New Zealand:6

In some cases where there are multiple insured interests, only parts of an insured’s rights may be assigned. In Colonial Mutual General Insurance Co Ltd v ANZ Banking Group (NZ) Ltd,⁷ the owners of a property held two mortgages. The second mortgage, with ANZ, contained a covenant to insure. The insurance was effected in the names of the insured, with the second mortgagee, ANZ, noted as an interested party. The covenant to insure was

5      Bryant v Primary Industries Insurance Co Ltd [1990] 2 NZLR 142 (CA) affirmed in Xu v IAG

[2018] NZCA 149 at [25] (leave granted to appeal: Xu v IAG New Zealand Ltd [2018] NZSC 68).

6      Paul Michalik and Christopher Boys Insurance Claims in New Zealand (LexisNexis, Wellington, 2015) at [11.2.10].

7      Colonial Mutual General Insurance Co Ltd v ANZ Banking Group  (New Zealand) Ltd  [1995] 3 NZLR 1 (PC).

seen as an assignment of the insured’s rights to ANZ. [The property was destroyed by fire and Colonial Mutual paid the mortgagor rather than ANZ]

… ANZ argued that payment to the owners did not satisfy Colonial Mutual’s obligations to it as assignee. The Privy Council agreed, finding that a covenant to insure can only have effect if it assigns the mortgagee an interest in the proceeds of the relevant policy.

[35]              The obligation on a mortgagor to insure property is, as one would expect, a standard obligation in a mortgage of land. This case is no different. Clause 8 of the ADLS standard form of mortgage, which was the form used for Lichfield Ventures’ mortgage to PFSL, includes an obligation on the mortgagor to insure the property. As referred to above, the ADLS standard form also provides that the mortgagor assigns to the security-holder absolutely its rights in proceeds of insurance. The principle behind these provisions is obvious. A mortgagee advances money to a mortgagor. Repayment of that money is secured by an interest in the mortgaged property. A mortgagee needs to be satisfied that the value of the mortgaged property is (and will continue to be) sufficient to protect its position as lender so that, if the mortgagor defaults on its loan obligations, the mortgagee can realise the property and recoup its losses. A mortgagee is therefore undeniably interested (in all senses of the word) in insurance.

[36]              A subsequent mortgagee is obviously interested in insurance in the same way. Its interest is, however, subject to the rights of those with priority.

[37]              A mortgage over property grants mortgagees security for their loans in respect of the value of that property. Insurance is part and parcel of that. Effectively, it is a property interest. Once a bona fide purchaser for value becomes the registered proprietor following a mortgagee sale, the mortgages, and therefore the interests of the mortgagees in respect of the property, are extinguished.

[38]              The liquidator’s second issue concerned the right of 100 Investments to retain the settlement proceeds. The argument focused on the priority sum under the mortgage, the liquidator’s contention being that, if the settlement sum exceeded PFSL’s priority sum under the mortgage, then subsequent mortgagees would have a claim in respect of that excess. Again, however, this is premised on a misunderstanding of mortgages.

[39]              As discussed above, when insured property is damaged, the contractual right to the insurance proceeds accrues. In this case, as the Property was damaged before the mortgagee sale, the contractual right to the proceeds of the insurance claim had also accrued. PFSL’s mortgagee sale sold the Property and the rights to the insurance proceeds. As discussed, PFSL was obliged to obtain the best price reasonably attainable. Subsequent mortgagees were entitled to bid for the Property. It is unknown whether they did but, in any event, consistent with PFSL’s statutory obligation, the offer from 100 Investments must have been the best. The agreed sale price was, on that basis, the best price reasonably obtainable for the Property (including the right to the insurance claim proceeds).

[40]              Even if there is an argument to the effect that subsequent mortgagees had some sort of claim to the insurance proceeds, almost three years after date of settlement of the sale of the Property, that is a matter for them to pursue against PFSL.

[41]              Mr Francis submitted that it would be illogical if 100 Investments had greater rights to retain insurance proceeds than PFSL would have had, had the assignment of rights never taken place. This submission conflates the position of 100 Investments with that of PFSL.

[42]              The priority sum is relevant as between mortgagees.8 The priority sum does not operate as a limit on a first mortgagee’s entitlement to the insurance proceeds  per se. A mortgagee’s entitlement is to the proceeds of sale sufficient to recover the debt it is owed. There are two different concepts at play.

[43]                   Had PFSL received more than the lesser of what it was owed or $3.33 million when it sold the Property (including the insurance proceeds) to 100 Investments, it would have been obliged to account for any surplus to the subsequent mortgagees. PFSL did not receive from the mortgagee sale more than the lesser of those two sums. The mortgagee sale recovery did not fully repay the debt owed to PFSL and did not exceed PFSL’s priority sum. There was therefore no further balance to pay to any subsequent mortgagees.

8      Property Law Act 1952, s 80A. This provision applies as the mortgage came into operation prior to 1 January 2008: Property Law Act 2007, s 94.

[44]              As already discussed, on a mortgagee sale, the mortgages are extinguished. That means that the purchaser, in this case 100 Investments, takes the property, including land proceeds, free of any secured interest.

[45]              Questions as to s 185 of the Property Law Act and priority sums are issues relevant so far as the mortgagee sale is concerned. They do not affect what happens after the sale or impose future obligations on the purchaser.

Conclusion

[46]              It is therefore clear that 100 Investments has the right to the outstanding insurance proceeds in respect of the Property and the ability to settle any insurance claims under the policies with NZI/IAG. There is no need to have recourse to the GSA or the rights of 100 Investments as mortgagee in possession of Lichfield Ventures’ personal property. The fact 100 Investments purported to bring proceedings in the name of Lichfield Ventures without the consent of the liquidator was an unnecessary complication but, in the circumstances, irrelevant.

Result

[47]              For the reasons given, I am satisfied 100 Investments is the party entitled to the proceeds of the insurance claims under Lichfield Ventures’ insurance policies with NZI in respect of the Property. 100 Investments has the right to enter into an agreement to settle and discharge the insurance claims.

[48]              I record there is no issue between 100 Investments and IAG as to costs in the proceedings.

[49]              100 Investments wishes to be heard in respect of costs it has incurred as a result of action taken by the liquidator. Any such memorandum is to be filed and served by 31 January 2019, with any response three working days thereafter.

Thomas J

Solicitors:

Canterbury Legal, Christchurch for Plaintiff Young Hunter, Christchurch for Defendant