AAI Limited v 92 Lichfield Street (in receivership and in liquidation)
[2015] NZHC 2190
•11 September 2015
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV-2015-409-000143 [2015] NZHC 2190
BETWEEN AAI LIMITED
Plaintiff
AND
92 LICHFIELD STREET (IN RECEIVERSHIP AND IN LIQUIDATION)
Defendant
CIV-2015-404-001712
BETWEEN 92 LICHFIELD STREET (IN RECEIVERSHIP AND IN LIQUIDATION)
Plaintiff
ANDAAI LIMITED Defendant
Hearing: 8 September 2015 Appearances:
C Langstone for Plaintiff
S Munro and V Heward for DefendantJudgment:
11 September 2015
JUDGMENT OF DUNNINGHAM J
Introduction
[1] On 6 March 2015, 92 Lichfield Limited (in receivership and in liquidation) (Lichfield), served AAI Limited (AAI), its insurer, with a statutory demand.1
Lichfield said that AAI had agreed to pay $6,500,000 for its property damage claim,
and it now sought payment of it.
1 For convenience I refer to the parties by name given the confusion which could arise from their varying roles as plaintiff/defendant/applicant or respondent in the two proceedings.
AAI LIMITED v 92 LICHFIELD STREET (IN RECEIVERSHIP AND IN LIQUIDATION) [2015] NZHC 2190 [11 September 2015]
[2] AAI applied to set the statutory demand aside. It said it never reached a binding agreement to pay that amount.
[3] Associate Judge Osborne disagreed. He held that the $6,500,000 was indisputably owed because AAI had agreed to pay it, and Lichfield could pursue its statutory demand for that amount. If the amount was not paid within 15 working days of the date of his judgment, Lichfield was able to apply to the Court to place AAI into liquidation.
[4] Since that judgment issued, AAI has appealed the High Court’s decision to
the Court of Appeal, and Lichfield has made an application to liquidate AAI.
[5] As a consequence of those two events, the following interlocutory applications have been made:
(a) in relation to CIV-2015-409-143 (the statutory demand proceedings), AAI applies for orders:
(i)staying enforcement of the judgment of Associate Judge Osborne dated 23 June 2015 given in the High Court at Christchurch, pending the determination of AAI’s appeal against that judgment;
(ii)restraining publication of any advertisement required by r 31.9 or any other information relating to the liquidation proceedings;
(iii)directing that the judgment sum currently held in AAI’s solicitor’s trust account be held in that trust account in the joint names of AAI and Lichfield, that AAI’s solicitors are to be constituted as stakeholders in respect of the same, and that the
funds shall not be released except by further order or by agreement in writing given by both parties.2
(b)in relation to CIV-2015-404-001712 (the liquidation proceedings), AAI applies for an order:
(i)that the liquidation proceedings be stayed pending determination of AAI’s appeal against the judgment of Associate Judge Osborne dated 23 June 2015, given in the High Court of Christchurch in proceeding CIV-2015-409-000143.
Application for stay of judgment in statutory demand proceedings
[6] AAI seeks a stay of enforcement of the judgment of Associate Judge Osborne dated 23 June 2015 on the grounds that:
(a) if the stay is not granted AAI’s appeal rights will be rendered nugatory;
(b)there is reason to believe that AAI would be unable to recover any monies paid should an appeal be successful;
(c) Lichfield will suffer little or no prejudice as the judgment sum of
$6,500,000 is currently being held in AAI’s solicitor’s trust account on interest bearing deposit, pending the determination of the appeal; and
(d)it would prejudice AAI should Lichfield apply to place AAI into liquidation and advertise that liquidation.
2 There was also a request to stay the proceedings pending determination of the appeal and restraining Lichfield from filing liquidation proceedings against AAI, but as liquidation proceedings are now on foot, they are dealt with by AAI’s application for a stay in that proceeding.
[7] The application for stay is opposed by Lichfield on numerous grounds and sub-grounds, extending over nine and a half pages. In summary, these grounds are:
(a) Lichfield is the successful party and is entitled to the fruits of its judgment;
(b)the orders sought by AAI do not strike the right balance between Lichfield’s rights to have the fruits of judgment and the need to preserve the position in case AAI’s appeal is successful;
(c) AAI’s appeal rights will not be rendered nugatory if a stay is not
granted but, even if they are, this is not determinative;
(d)the bona fides of AAI is in question as it has not prosecuted its appeal expeditiously;
(e) as the successful party Lichfield will suffer prejudice if a stay is granted;
(f) a stay will adversely affect third parties including Lichfield’s
creditors;
(g)there is no novelty or importance of the questions involved justifying the stay;
(h) the overall balance of convenience favours Lichfield; (i) AAI’s appeal is without merit;
(j) AAI should, in any event, be required to pay the costs award of
$9,314 immediately;
(k)Lichfield was entitled to make the application to liquidate AAI and it was neither unfair, nor did it savour of undue pressure, to do so; and
(l)if the Court is minded to grant a stay, the object of a stay can be fairly achieved by granting it on terms which:
(i)require the immediate payment of the sum of $4,627,000, (which Lichfield says is the minimum which AAI would be obliged to pay Lichfield in any event); and
(ii)which give security and assurance as to repayment of the balance of $1,873,000 if the appeal is allowed.
Legal principles applying
[8] The power to grant a stay of proceedings or of enforcement of a judgment, pending determination of an appeal in the Court of Appeal, is found in r 12(3) of the Court of Appeal (Civil) Rules 2005. The rule provides:
12 Stay of proceedings and execution
...
(3) Pending the determination of an application for leave to appeal or an appeal, the court appealed from or the Court may, on application,—
(a) order a stay of the proceeding in which the decision was given or a stay of the execution of the decision; or
(b) grant any interim relief.
...
[9] AAI accepts that it bears the onus of persuading the Court that if a stay was not granted, its appeal right would be rendered nugatory. However, in deciding the issue, it says regard should be had to the Court of Appeal’s decision in New Zealand Insulator’s Ltd v ABB Ltd,3 where it approved the decision of Buckley LJ in Minnesota Mining and Manufacturing Company v Johnson & Johnson, saying:4
The object, where it can be fairly achieved, must surely be so to arrange matters that, when the appeal comes to be heard, the appellate Court may be able to do justice between the parties, whatever the outcome may be ... If the
3 New Zealand Insulator’s Ltd v ABB Ltd (2006) 18 PRNZ 459 at [13].
4 Minnesota Mining and Manufacturing Company v Johnson & Johnson [1976] FSR 136; [1976] RPC 671 (CA).
defendant in good faith proposes to appeal, challenging either the trial Judge’s findings or his law, and had a genuine chance of success on his appeal, the plaintiff’s entitlement to his remedy cannot be regarded as certain until the appeal has been disposed of.
[10] The relevant factors to be taken into account in deciding whether to order a stay were identified by the Court of Appeal in Dymocks Franchise Systems (NSW) Ptd Ltd v Bilgola Enterprises Ltd.5 They are:
(a) whether the appeal may be rendered nugatory by the lack of stay; (b) the bona fides of the applicant as to the prosecution of the appeal;
(c) whether the successful party will be injuriously affected by the stay; (d) the effect on third parties;
(e) the novelty and importance of the question involved; (f) the public interest in the proceedings; and
(g) the overall balance of convenience.
[11] This list of factors does not include the appeal’s prospect of success, although, as acknowledged by the Court of Appeal in Keung v GBR Investment Ltd,6 the apparent strength of the appeal can be treated as an additional factor.
[12] In this case, the judgment is a money judgment and as Associate Judge Bell held in ASB Bank Ltd v Lin:7
In the case of a money judgment, the standard approach is this: if the party who has been successful at first instant gives appropriate security or assurance as to repayment if the appeal is allowed, there is usually little difficulty in principle in allowing them to have the fruits of their judgment. Even if the unsuccessful party is required to pay the judgment sum pending appeal, they still retain the right of appeal and, if successful, are assured of repayment.
5 Dymocks Franchise Systems (NSW) Ptd Ltd v Bilgola Enterprises Ltd [1999] 3 NZLR 239.
6 Keung v GBR Investment Ltd [2010] NZCA 396 at [21].
7 ASB Bank Ltd v Lin [2014] NZHC 106 at [14].
What bearing do the various factors have to the question of whether a stay should be granted in this case?
Will the appeal be rendered nugatory?
[13] The primary ground on which AAI seeks the stay is that Lichfield is insolvent, so if the appeal is determined in AAI’s favour, AAI will be unable to recover the judgment sum ordered. AAI explains, by reference to the receivers’ most recent six monthly report, that the respondent owes $7,296,197 to Equitable Property Holdings (Equitable) as a secured creditor, as well as further unknown amounts to the second and third mortgagees of the property. The total of Lichfield’s known liabilities in February 2015, when the report was prepared, was $9,869,743.00. Lichfield’s only real asset is the land and earthquake damaged building at
92 Lichfield Street. The insurer’s valuation indicates the market value of the land is
$923,000, being the difference between the market value of the land and improvements, and the market based indemnity value of the improvements alone. Thus, even if Lichfield received the $6,500,000, its assets would not meet its known liabilities.
[14] AAI says that the affidavit of David Ruscoe, one of the receivers of Lichfield, confirms that if the receivers are paid the judgment sum, it will be distributed to their appointer, Equitable, as first mortgagee, after costs of the receivership are paid, along with the proceeds of sale of the property. Thus AAI says, if it is successful with its appeal and is entitled to be repaid the judgment sum, it will rank as an unsecured creditor behind Equitable and the other secured creditors and it is clear there would be no prospect of it being able to recover any of the amounts paid from Lichfield.
[15] In response, Lichfield does not deny this, but says that it is not the only consideration. It says that AAI’s proposal that the whole of the judgment sum be held by a stakeholder until further order of the Court or written agreement by both parties, is more than is required to preserve AAI’s position because:
(a) AAI is obligated under the insurance policy to pay Lichfield not less than the indemnity value of its building, which Lichfield says is more than the insurer’s valuation; and
(b)AAI itself has said that if there is no binding agreement between the parties, then it would pay Lichfield the indemnity value under the policy of $4,627,000 without the consent of the three mortgagees and close the claim, (although Lichfield says if the Court holds there is no binding agreement, then it would instead enforce its policy entitlement to have AAI pay the costs of having the building repaired).
[16] As a consequence, Lichfield says that in order to do justice between the parties, whatever the outcome of the appeal, the applicant would neither need nor be entitled to recover the whole of the judgment sum paid to the respondent, only the balance of $1,873,000 in the event it is successful on appeal.
[17] AAI dismisses this suggestion, saying that the proceedings were only about its obligation to pay $6,500,000 pursuant to an alleged agreement. They did not deal with Lichfield’s entitlements under the policy. If Lichfield now wishes to assert an entitlement to be paid the indemnity value of the building, it must do so in separate proceedings.
[18] In any event, AAI claims:
(a) the figure of $4,627,000 cannot be taken as fixing the indemnity value, even as a minimum that AAI would agree to pay;
(b)under the policy wording the indemnity value is not payable immediately, as was the case in TJK (NZ) Ltd v Mitsui Sumitomo Insurance Co Ltd.8 Instead the indemnity value is only payable when
rebuilding or repair work has not been “commenced and carried out
8 TJK (NZ) Ltd v Mitsui Sumitomo Insurance Co Ltd [2013] NZHC 298.
with reasonable dispatch”, a point which had not yet been reached in
the present case; and
(c) if AAI was required to pay that sum across now, it would lose the opportunity to bargain as to what indemnity value is.
[19] I accept AAI’s position that if the full judgment sum were paid to Lichfield now, it would render its appeal nugatory, as the dispersal of funds to creditors would mean repayment would be impossible in the event its appeal succeeds.
[20] The more vexing question is whether, in the interests of doing justice to the parties, it is appropriate that payment of a sum equal to the insurer’s calculation of the indemnity value of the building, which is the insurer’s minimum obligation under the policy, should be required to be paid now.
[21] As always, the first consideration is what the policy provides. The policy was issued by AAI. In respect of material loss or damage to Lichfield’s buildings, the basis of settlement set out in the policy is that:
(a) On buildings, machinery, plant and all other property and contents (other than those specified below); the cost of reinstatement, replacement or repair in accordance with the provisions of the … Memoranda as set out herein.
[22] Reinstatement is defined in the Memoranda to allow repair or replacement to
“a condition equal to, but not better or more extensive than, its condition when new”.
[23] The provisions in the Memoranda include the following:
(i) The work of rebuilding, replacing, repairing or restoring, as the case may be … must be commenced and carried out with reasonable dispatch, failing which the insurer(s) shall not be liable to make any payment greater than the indemnity value of the damaged property at the time of the happening of the damage.
…
(iv) No payment beyond the amount which would have been payable under this Policy if this memorandum had not been incorporated herein shall be made until the sum equal to the cost of reinstatement
shall have been actually incurred; provided that where the insured reinstates or replaces lost or destroyed property at a cost which is less than the cost of reinstatement (as defined) but greater than the value of such property at the time of the happening of its loss or destruction, then the costs so incurred shall be deemed to be the cost of reinstatement.
[24] The combined effect of these provisions is that the primary entitlement is to the cost of reinstatement, to be carried out by the insured, subject of course to the terms, conditions and limits in the policy.
[25] However, there are two circumstances in which only the indemnity value of the property will be payable. The first is where the work of rebuilding or reinstating the property has not been “carried out with reasonable dispatch”, which AAI accepted was not the case here. The second is where the insured elects to simply claim the indemnity value of the damaged property.
[26] AAI says there is one further qualification to the second circumstance, and that is that AAI is only required to make payment of the indemnity value of the damaged property until the point it is determined that the insured has failed to carry out the reinstatement work with reasonable dispatch. In asserting that, AAI relies on provision (i) set out in para [23] above. It says that provision means the obligation to pay the indemnity value of the building as at the time of damage, does not arise until that determination has been made. It says this is not a case like TJK (NZ) Ltd where the insured is entitled to payment of the indemnity value immediately, but any further payment relating to reinstatement costs can be made at a later point in time.
[27] I do not accept that the policy can be read in that way. First, the effect of provision (i) in the Memoranda is to limit the insurer’s obligation to pay anything greater than indemnity value, not to determine the timing of the payment of indemnity value. It is a practical provision which closes off the insurer’s liability, with the passage of time, to pay any greater sum than the indemnity value. It does not defer payment of that amount until that stage.
[28] This view is reinforced by two other provisions in the policy. Provision (iv) says, in summary, that the insurer is only required to meet the costs of reinstatement which exceed the indemnity value of the property, when those are actually incurred.
The language of this provision is similar to that in the relevant policy in the TJK (NZ) Ltd case. In that case the relevant provision read “no payment of more than the indemnity value will be made under this extension … until the cost of reinstatement has been actually incurred”.9 Here it reads “No payment beyond the amount which would have been payable under this policy … shall be made until the cost of reinstatement is shall have been actually incurred …”. I consider there is no material
difference between the effect of these two provisions, and they both anticipate that indemnity value will be paid before the costs of reinstatement have been incurred.
[29] Second, the fact that the indemnity value is fixed “at the time of the happening of damage”, points strongly to this amount being ascertained and paid promptly. It cannot have been intended that, four and a half years after the damage, when the insurer says the point has not yet been reached where the insured has failed to carry out reinstatement works with reasonable dispatch, that payment of the indemnity sum as defined can be further delayed.
[30] Finally, the insurer’s position is contrary to its own assertions. Memoranda dated 21 June 2013 and 10 October 2013 from AAI state that Lichfield would only receive its “policy entitlement” of indemnity value (plus certain other costs) if it did not accept the offer so the insurer could close its file off. Therefore it is erroneous to suggest that payment of the indemnity value entitlement was required to be deferred under the policy. Rather, the policy did not contemplate deferral so that the file could be closed promptly.
[31] Accordingly, I am satisfied that the insurer’s minimum obligation to Lichfield is to pay indemnity value of the building, regardless as to whether AAI wins or loses on appeal, and regardless of whether, if Lichfield loses, Lichfield elects to accept indemnity value or chooses to reinstate the building.
[32] Therefore it is my view that to protect the insurer’s appeal rights, the judgment need only be stayed to the extent of the difference between the insurer’s assessment of indemnity value (that it has said it would agree to pay) and the full
extent of the judgment, being the balance plus the costs award.
9 TJK (NZ) Ltd, above n 8 at [27].
The bona fides of AAI as to the prosecution of the appeal
[33] While this was raised as a ground for opposing the stay, it was not pressed at the hearing and I am satisfied that there is no evidence to suggest that AAI is not pursuing the appeal in good faith. It has exercised its right to appeal within time. The appeal has been entered onto the fast track and it is due to be heard on
30 September 2015. While that was achieved at Lichfield’s behest, AAI did not oppose the early hearing of the appeal. Furthermore, it has provided security for Lichfield’s costs and has placed the judgment sum in an interest bearing account pending the outcome of the appeal. I am satisfied this issue does not prevent the grant of a stay.
Will Lichfield be injuriously affected by the stay?
[34] Lichfield’s receivers, through the affidavit of Mr Ruscoe, explained that the receivers will be adversely affected by the non-payment of the amount demanded (or any part of it). He says:
(a) the receivers intended to sell the property at 92 Lichfield Street once they had received the $6,500,000 from the applicant and to conclude the receivership. AAI’s failure to pay that sum means the receivers continue to be in an uncertain position until the appeal is finally determined, which could involve an appeal to the Supreme Court;
(b)if the Court finds that the agreement reached on 1 November 2013 is not binding on AAI, Lichfield is not prepared to accept the insurer’s assessment of the indemnity value of the property and it would then look to repair the building under the terms of the insurance policy. While there is this uncertainty over how AAI will settle Lichfield’s insurance claim, the receivers cannot deal with the property;
(c) this uncertainty, in turn, means that the receivers are delayed in fulfilling their duties to the secured creditors of the company;
(d)there are currently three parties interested in purchasing the site. With the delay those parties may lose interest and/or property values may drop in this time;
(e) the further delay means that administrative costs continue to be incurred, including costs of maintaining containers around the damaged building, diverting traffic away from it, and insuring the building. These costs exceed $6,000 per month.
[35] I accept that the receivers remain in a state of uncertainty, and continue to incur costs, while the appeal is on foot. However, that is a consequence of the appeal process and its inherent uncertainty rather than of any decision to grant a stay.
[36] However, I accept that in determining how to do justice between the parties’ competing interests, I should take into account the receivers’ need for income to meet the ongoing costs of holding the building while the appeal process runs its course. While I accept that to protect AAI’s interest it would be inappropriate to allow the $6,500,000 to be paid in full to Lichfield for it then to be distributed to creditors before the appeal is determined, if some funds are paid they can meet the receivers’ ongoing need for funding pending determination of the appeal.
Novelty and importance of the question involved and public interest
[37] Both parties accepted that the appeal did not involve a novel issue, and the outcome was really driven by the particular factual circumstances of this case. This factor does not materially assist either party’s position.
The effect on third parties
[38] AAI denies that any third parties will be adversely affected. All of the money will go to the first mortgagee, Equitable, and not to any other parties. The risk asserted as to the potential for the property’s value to drop during the period of delay, to the creditors’ disadvantage, is no more than an assertion. There is no evidence to support that possibility and equally, the property value could rise in that time. In any event, AAI says that the receivers could sell the building now if they chose to do so.
[39] The effect on third parties asserted by Lichfield really focused on the delay in selling the property, with the possibility that the receivers may not get as good a purchase price as they could now, and also the delay the receivers and liquidators will experience in completing their duties to creditors.
[40] However, as already noted, these delays are the consequence of the appeal process itself, and as I consider it appropriate to place some constraints on Lichfield’s ability to enforce the judgment, they are inevitable. They do not lead to adverse consequences to third parties that are sufficiently material to decline the stay outright.
Merits of the appeal
[41] Lichfield argued strongly that the appeal was “without merit” and has no prospects of success, and says this factor supported rejecting the application for a stay, or at least ordering it on terms.
[42] It is clear that Lichfield has grounds for resisting the appeal, but I could discern no basis for its assertion that the appeal “has no prospects of success”. It can neither be dismissed as a hopeless case, nor can it be said to be an abuse of process, and such arguments were not asserted in the first instance hearing. As AAI’s case was accepted as arguable in the first instance hearing, I cannot dismiss it as unarguable on appeal. However, I take the assessment of its merits no further than to say that it is not a factor which weighs either way in determining whether to grant a stay.
The overall balance of convenience
[43] In determining the overall balance of convenience, the issues come squarely back to those discussed in relation to whether the appeal would be rendered nugatory if the stay was declined. Once again, I am balancing Lichfield’s entitlement to the fruits of its judgment with AAI’s concern that its appeal would be rendered nugatory if the judgment sum was handed over to an insolvent party which intends to promptly distribute that sum to its creditors.
[44] I am satisfied that it would be unfair not to grant a stay in AAI’s favour, but in the circumstances of this case, the stay need not extend to the whole of the judgment sum. Importantly, I could identify no scenario, nor could AAI point to one, where Lichfield would not be entitled to at least indemnity value of the building. AAI has repeatedly asserted that indemnity value, based on its valuation, is
$4,627,000. Lichfield disputes that and says it is more. There is no prospect of the indemnity value changing over time to reduce, because the policy does not specify current indemnity value, but fixes the indemnity value as that which the building had at the date of damage. For the reasons discussed above, I also do not consider that Lichfield’s entitlement to indemnity value is deferred until the point is reached when the insurer considers that they have not been “carried out with reasonable dispatch”.
[45] While Mr Langstone argued that this proceeding did not involve a claim under the policy, but a claim outside the policy (so I should not link the amount to be paid to the policy provisions), I consider that to achieve justice as between the parties, it is appropriate to have regard to Lichfield’s minimum entitlement if the appeal succeeds. Accordingly, I have decided that it is appropriate to stay enforcement of the judgment to the extent of the disputed amount of $1,873,000 plus costs, but to allow the judgment to be enforced to the extent of the sum of
$4,627,000, which is the least entitlement Lichfield would have if it is unsuccessful on appeal, at which point the parties would revert to the policy entitlement.
[46] For the avoidance of doubt, this decision does not determine the quantum of the indemnity value. If AAI succeeds on its appeal, and the parties revert to assessing what Lichfield’s entitlement is under the policy, then the correct figure for the indemnity value of the building is still to be determined.
Application to stay of liquidation proceedings
[47] The decision of Associate Judge Osborne refusing to set aside the statutory demand, extended the time for compliance with the statutory demand to
14 July 2015. I accept that in those circumstances it was open to Lichfield to file an application to liquidate AAI after that date in order to preserve its position.
[48] Since filing the application, Lichfield has agreed, and the Court has so ordered, that Lichfield is to withhold any advertising of the liquidation proceeding against AAI until the application for stay is heard and determined.
[49] Given my finding that it is appropriate to stay enforcement of part of the judgment in the statutory demand proceedings, I also consider it is appropriate to extend the time for restraining Lichfield from advertising the liquidation application until the appeal is finally determined. It is clear that AAI has the funds to meet the full judgment sum, and it would be unfair, and would be to AAI’s clear detriment, if the liquidation proceedings were progressed before final resolution of the appeal.
[50] Accordingly, I order:
(a) enforcement of the judgment dated 23 June 2015 in proceeding
CIV-2015-409-143 is stayed on condition that:
(i) the applicant pay the respondent an interim payment of
$4,627,000 within five working days;
(ii) the applicant retains the balance of the judgment sum of
$1,873,000, and the costs award of $9,314, in the applicant’s solicitor’s trust account on interest bearing deposit, in the joint names of the applicant and the respondent, and the funds are not to be released except by further Court order, or by the agreement in writing of both parties;
(b)that the liquidation proceedings in CIV-2015-404-1712, and any advertising required by r 31.9 or any other information relating to the liquidation proceedings, is stayed pending determination of the defendant’s appeal against the judgment of Associate Judge Osborne dated 23 June 2015 given in the High Court of Christchurch in proceeding CIV-2015-409-143.
Costs
[51] Given that both parties have achieved a degree of success, I consider that this is a case where it is appropriate for costs to lie where they fall. However, I reserve the issue of costs in the event that position is not accepted. In those circumstances:
(a) the party (or parties) seeking costs are to file any submissions on costs by 25 September 2015;
(b) any submissions in response are to be filed by 2 October 2015; (c) submissions are not to exceed five pages.
Solicitors:
Fee Langstone, Auckland
Anderson Lloyd, Christchurch
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