AXA New Zealand Nominees Limited v 10 Gilmer Limited (in rec) HC Wellington CIV 2011-485-1572

[2011] NZHC 1955

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

CIV 2011-485-1572

BETWEEN  AXA NEW ZEALAND NOMINEES LIMITED

Plaintiff

AND10 GILMER LIMITED (IN RECEIVERSHIP)

First Defendant

ANDGILMER SERVICES APARTMENTS LIMITED (FORMERLY CALLED QUEST G10 LIMITED) (IN RECEIVERSHIP)

Second Defendant

AND154 LIMITED Third Defendant

ANDHAYIM NACHUM Fourth Defendant

AND10 GILMER SERVICES APARTMENTS LIMITED

Fifth Defendant

ANDMEDHI ZERHOUNI Sixth Defendant

Hearing:         20 October 2011

Counsel:         K McDonald QC and S Barker for the plaintiff

L McKeown and P Barrett for the defendants

Judgment:      6 December 2011

JUDGMENT OF MALLON J

AXA NEW ZEALAND NOMINEES LIMITED V 10 GILMER LIMITED (IN RECEIVERSHIP) HC WN CIV

2011-485-1572 6 December 2011

Introduction

[1]      The plaintiff (“AXA”) applies for summary judgment against the first to fifth defendants.    Summary  judgment  is  sought  in  respect  of  a  debt  under  a  loan agreement of $5,882,658.79 plus interest.   An order for vacant possession of the property at 10 Gilmer Terrace (“the property”) is also sought.  Summary judgment is opposed on the ground that AXA has exercised its rights and powers under the loan agreement in an oppressive manner, in breach of the Credit Contracts and Consumer Finance Act 2003 (“the CCCFA”), and justifying a reopening of the loan agreement.

The facts

[2]      AXA entered into a loan agreement with the first defendant (“Gilmer”) for the sum of $5.811 million on 27 April 2007 (“the Loan Agreement”).  The loan was guaranteed by the second to fourth defendants and secured by mortgages over the property and a general security agreement.   The second defendant (“Gilmer Apartments”) operated a short term accommodation and apartment rental business from the property.

[3]      It was a condition of the Loan Agreement that Gilmer was not permitted to exceed a Loan to Value ratio (“LVR”) of 60 per cent.  A valuation obtained by AXA on 9 December 2010 showed that this limit had been exceeded because the LVR was

67.42 per cent.  As a result, on 22 February 2011 AXA made demand on Gilmer requiring  it  to  reduce  the  principal  sum  owing  under  the  Loan  Agreement  by

$636,000.   This reduction was required by no later than 25 March 2011.   Gilmer replied on 3 March 2011 querying the valuation and advising that it was currently in the process of marketing the building on a unit by unit basis.  It seems that AXA did not reply to Gilmer at this time.

[4]      Gilmer did not repay the $636,000 by 25 March 2011. A few days earlier, on

21 March 2011, and unbeknown to AXA, Gilmer entered into an agreement with the fifth defendant (“10 GSAL”), a company incorporated on 18 March 2011.   Under this agreement Gilmer purported to sell the accommodation business for $100 to 10

GSAL.  Gilmer says that this occurred because the business was failing and it needed

to bring in a manager with a proven track record.  Settlement of this agreement took place on 1 April 2011.  Following settlement, in early to mid 2011, Gilmer and 10

GSAL entered into thirteen agreements for sale and purchase of some of the units on the property.

[5]      On  19 April  2011  Gilmer  again  said  that  it  did  not  agree  with AXA’s valuation and that it was marketing the units.  Gilmer proposed to settle net proceeds as it sold off units floor by floor.  It sought a meeting.  AXA responded on 21 April

2011 advising that it was relying on the 9 December 2010 valuation and that it would not consent to a progressive sell down of the security.   It further said that it understood efforts to refinance were underway but “satisfactory progress of such is yet to be evidenced”.  On 29 April 2011 Gilmer obtained its own valuation to seek to persuade AXA that it was not in breach of the LVR.

[6]      On 2 June 2011 AXA reiterated that it did not consent to a partial sell down of unit titles and that any such disposal was prohibited under the Loan Agreement and the GSA without AXA’s consent.   It said that it required either an immediate principal reduction of $636,000, or that the whole property be marketed for sale or sufficient sales be arranged  to  clear the debt in full, or that Gilmer commence monthly principal repayments of $25,000 until loan maturity in May 2012.

[7]      On 23 June 2011 AXA served on Gilmer and the second to fourth defendants notices under s 119 and s 122 of the Property Law Act 2007.  These notices required the payment of $636,000 plus costs and disbursements of $1250 by 29 July 2011. The notices further advised that if these sums were not paid by this time all amounts secured by the mortgage would become payable and the mortgagee’s power to enter into possession and to sell the property would become exercisable.

[8]      In the meantime there was correspondence between AXA and Gilmer about refinancing.  It appears that Gilmer made a proposal of some kind because, on 24

June 2011, AXA advised that it “will agree in principle to the proposal from the Borrower” but that there were some issues.   Information was sought about timing and details as to the lender and AXA said that “[t]he proposed repayment of $4.34 m is the minimum we will require”.  On 12 July 2011 AXA sought a copy of the offer

to refinance the ground and second floors for an amount of not less than $3.14 million, copies of agreements for the purchase of the first floor units for not less than

$1.2 million and set out other conditions relating to payment of interest, legal and valuation fees, and as to a current valuation for level three.

[9]      On 12 July 2011 Gilmer received an offer from Cressida Capital One Limited (“Cressida”) for a loan of $2,645,000 which was subject to various conditions and which was open to acceptance until 14 July 2011.  The offer document, which was unsigned, was not forwarded to AXA until 15 July 2011.   In forwarding this offer document, Gilmer said that it had achieved sales of 10 level one units and three level two units with net sale proceeds of $1,776,000.  Gilmer said that, in terms of AXA’s email requiring $4,340,000 of proceeds from sales and refinance “we are there, just with a slightly different mix of sales and loan proceeds”.  Gilmer said that it would provide copies of the sale and purchase agreements by 18 July 2011.  Gilmer said that it was unable to pay the interest, legal and valuation fees but would pay these on settlement of the refinancing transaction.   It said that it would be obtaining an updated valuation and that it was targeting settlement of the transaction on 29 July

2011.  It seems that AXA did not respond to this proposal despite Gilmer following up a response on 20 July 2011.

[10]     Gilmer  had  also  received  an  indicative  offer  for  a  loan  from  Spinnaker Capital Limited (“Spinnaker”) for a loan of $4,550,000 subject to various conditions on 12 July 2011.  Gilmer did not provide details of this to AXA.  On 25 July 2011

Gilmer received and agreed to a revised offer from Spinnaker of $4,735,000.   It forwarded the offer to AXA that day.   By this time AXA had already appointed receivers of Gilmer and Gilmer Apartments pursuant to the notices which AXA had signed on 21 July 2011.1

[11]     On 25 July 2011 the receivers attended the property.   The receivers were advised that 10 GSAL was now the lessee of the property and that some of the

apartments had been sold and were “unconditional”.   They were also advised that

1      AXA says it appointed receivers on 25 July 2011. The defendants say that the notice was signed on 21 July 2011, and that it was not advertised nor forwarded to the Companies Office until 27

July 2011. The Companies Office records confirm that the notice was registered on 27 July 2011 but record the appointment date as 25 July 2011.

AXA had informed Gilmer that it was willing to consent to a partial sell down of the property.  AXA responded through its solicitors by letter dated 25 July 2011.  In that letter it was said that AXA had not consented to the partial sell down of the property nor to the refinancing proposal.  It said that AXA required Gilmer to cooperate with the receivership process, and that it was reserving its rights in respect of the sale of the business to 10 GSAL which it had not consented to.

[12]     Communications took place between AXA and Gilmer’s solicitors over the next few days.  In the course of this, on 27 July 2011, AXA received for the first time a copy of the agreement entered into between Gilmer and 10 GSAL.   AXA was concerned that the agreement sought to remove control of the property from its reach: 10 GSAL was now said to be in possession of the property and was receiving the rental generated from it.  By letter dated 28 July 2011 AXA requested that rental payments be paid into AXA’s solicitors’ trust account on a without prejudice basis. This did not occur.

[13]     The Property Law Act notices were not complied with by 29 July 2011. Gilmer says that upon the appointment of the receivers, Spinnaker lost interest in a deal and was not prepared to increase its offer to cover the receiver’s costs, legal fees and penalty interest which had been added to the amount owing to AXA.  It also says that Cressida withdrew its earlier offer

[14]     On 12 August 2011 AXA commenced these proceedings.   Urgent interim orders were sought.  Counsel for the defendants was served with the application on a “pickwick  basis.”    On  17 August  2011,  following  a  telephone  conference  with counsel, holding orders were put in place.  These orders were that:

(a)       The receivers of the first and second defendants may, on three (3)

hours notice to the defendants, attend and enter the subject property at

10 Gilmer Terrace, Wellington (“the Property”), to inspect same, and are entitled to photograph or otherwise record its current state and condition (and that of various chattels secured to the plaintiff and located within  the Property).   This  order  is  on  condition  that  the

receivers  do  not  interfere  with  the  hotel  operation  (or  its  guests)

currently run from the Property.

(b)Any and all rental payable by the fifth defendant to the first and/or second defendants must instead be paid into the plaintiff’s solicitor’s trust account.   This rental is to be held separately and undisbursed, pending further order of the Court.  It is recorded that this payment of rental is on a “without prejudice” basis, and with all parties otherwise reserving their rights in respect of same.

[15]     The application for interim orders was scheduled to be heard on 31 August

2011.  In the meantime, on 16 August 2011 Gilmer wrote to AXA setting out details of a new proposal from Cressida under which AXA would be repaid $6,111,750 by

19 August 2011.  By consent, on 30 August 2011 counsel sought an adjournment of the hearing of the interim orders application to allow the defendants the opportunity to try and repay AXA in full by 5 September 2011.  Repayment did not occur by that date.   Gilmer says that this was because no other financiers  were interested in providing financing due to the receivership.

[16]     AXA  decided  to  proceed  with  its  application  for  interim  orders  on  6

September 2011. In between the holding orders and this date the rental referred to in the order at [14](b) above had not been paid into the trust account. The defendants advised that this was because the agreement entered into between Gilmer and 10

GSAL provided that 10 GSAL would have a rent holiday for the month of April

2011; and would have a right to set-off and deduct from the rents due, all sums received  by 10  GSAL for units  booked  for accommodation  after 1 April  2011. According to the defendants this meant that no rent was presently payable by 10

GSAL.

[17]     The  hearing  of  the  AXA’s  application  for  interim  orders  proceeded  on

6 September   2011.      The   defendants   opposed   the   application   claiming   that refinancing was imminent.  Having heard from counsel I made the following orders:

(a)      Granting an interim injunction against the first defendant, the second defendant and the fifth defendant restraining them, whether acting by themselves, through their directors or employees, or in any other way whatsoever, from assigning or purporting to assign the existing leases or creating additional sublease arrangements as between them for the apartments within the property at 10 Gilmer Terrace, Wellington (as comprised and more fully described in certificates of title WN9C/86 and WN46C/783 (both Wellington Land Registration District)) (“the Property”) without first having obtained the prior written consent of AXA as mortgagee;

(b)Granting an interim injunction against the fifth defendant restraining it, whether acting by itself, through its directors or employees, or in any other way whatsoever, from asserting and/or retaining possession of the Property to the exclusion of AXA as mortgagee until further order of the Court.

[18]     On 8 September 2011 the receivers received rent of $22,000.  AXA considers that the amount of rental by this date which should have been paid, but for the deductions that had been made (refer [16] above), was $43,000.  Gilmer continued to seek refinancing from Cressida.  Cressida sought details about the trading position of the hotel.  According to a memorandum of counsel signed after the hearing of the summary judgment application, the receivers agreed to release the trading records subject to Cressida signing a non-disclosure agreement.  The memorandum advises that Cressida considered the agreement to be too onerous.  As a result, the trading records were not supplied.   AXA’s understanding is that the refinancing proposal from Cressida has since been withdrawn.

The defendants’ position

[19]     The third and fourth defendants oppose the summary judgment application. Counsel for 10 GSAL advises that 10 GSAL did not file a notice of opposition because the only order sought against it is an order for vacant possession.  Counsel says that 10 GSAL is not now in possession “its lease having been terminated by the

interim injunction granted...on 6 September 2011...”.2    Counsel acknowledges that the  first  and  second  defendants  are  unable  to  formally  oppose  the  application because those companies are in receivership but she notes that the sole director of those companies (the fourth defendant) does oppose it.

[20]     The third and fourth defendants no longer pursue an argument that the LVR under the Loan Agreement was not breached.  They oppose summary judgment on the basis that AXA has exercised, and continues to exercise, its rights and powers in an  oppressive  manner  contending  that AXA has  acted  in  breach  of  reasonable standards of commercial practice. They say that this was through:

(a)      Agreeing in principle to a refinancing proposal which involved the partial sell down of units, but then reneging on that proposal, issuing notices under the Property Law Act and appointing receivers; and/or

(b)      Prematurely  appointing  receivers,  even  before  the  expiry  of  the

Property Law Act notices.

[21]     They seek orders setting aside AXA’s actions to date, with interest reverting

to ordinary interest and vacant possession being refused.

Is it reasonably arguable that there has been oppressive conduct?

[22]     Section 120 of the CCCFA provides that a court may reopen a credit contract if the Court considers that “a party has exercised, or intends to exercise, a right or power conferred by the contract...in an oppressive manner”.   Section 118 defines “oppressive” as meaning “oppressive, harsh, unjustly burdensome, unconscionable, or in breach of reasonable standards of commercial practice.”   Section 127(1) provides that if the Court reopens a credit contract, “it may make any orders that it thinks necessary to remedy the matters that caused the Court to reopen the contract”. Section 127(2)(g) provides that the Court may “direct any party to do or refrain from

doing any act or thing in relation to any other party”.

2      That is, however, not what the terms of the order provide. Moreover, the order was an interim one.

[23]     In GE Custodians v Bartle3  the Supreme Court endorsed Court of Appeal authority that the various words which together form the definition of “oppressive” contain different shades of meaning, but “all contain the underlying idea that the transaction or some term of it is in contravention of reasonable standards of commercial practice” and that this is an objective standard.  The Court of Appeal has also said that it is generally important for the Court to be properly informed as to how the contract or term measures up against reasonable standards of commercial

practice.4

[24]     In Taylor v Westpac Banking Corporation5 the Court of Appeal considered a claim that the exercise of a power of sale under a mortgage was oppressive under the Credit Contracts Act 1981.6  The Court of Appeal said this:7

A right or power conferred by a contract...is not exercised in an oppressive manner simply because it is thought, even by the Court, that it is unfair....Unfairness itself is not sufficient.   Many mortgagors would assert that the manner in which a mortgagee is exercising a power of sale is unfair, particularly the timing of the sale....

[I]t must at all times be borne in mind that the mortgagee is exercising...a

contractual right.  Its exercise will almost inevitably cause consequences which may appear harsh to the mortgagor....[S]omething more than the consequences which are

generally associated with or to be expected in relation to the exercise of a power of

sale are required before it can be said that the manner in which the mortgagee is

exercising that power is oppressive.”

[25]     In rejecting the claim of oppression in that case, the Court of Appeal said it was not oppressive to exercise the power of sale even though the security was adequate and noted that a power of sale is “frequently exercised by mortgagees whose security is more than adequate”.8    It considered that even if the Bank could choose to delay the proposed sale, its decision to proceed with a sale did not make its conduct oppressive.9  The Court also considered that the Bank’s forbearance once the

loan in that case fell due for repayment was telling against the claim of oppression.

3      GE Custodians Ltd v Bartle [2010] NZSC 146, [2011] 2 NZLR 31 at [46].

4      Greenbank New Zealand Lt v Haas [2000] 3 NZLR 341 (CA); cited in Bartle v GE Custodians

Ltd [2010] NZCA 174, [2010] 3 NZLR 601 per Arnold J at [174].

5      Taylor v Westpac Banking Corporation (1996) 5 NZBLC 104,104 (CA).

6      The Credit Contracts Act 1981 was the predecessor of the CCCFA. It contained the same

definition of “oppressive” as that in the CCCFA.

7      At 104,109 – 104,110.

8      At 104,107 and 104,109.

9      At 104,109.

[26]     The defendants refer to the facts set out above and say that:

(a)      AXA’s actions in triggering the loan default by obtaining and relying on the valuation were motivated by its desire to have its loan repaid because the AXA fund had closed and was being repaid to investors;

(b)The “one-line” basis for the valuation gave rise to a technical breach but was unreasonable and contrary to normal commercial practice (the defendants have submitted letters from two brokers to support this);

(c)      There was adequate security for the loan of $5,781,000 which was not due for repayment until April 2012;

(d)Selling  individual  units  was  reasonable  and  prudent  in  light  of valuation advice and advice from an appraiser that the value of the building would be less if the building was sold as a single property;

(e)      The defendants had a reasonable expectation that they would be able to pursue their refinancing proposal, but instead of allowing a reasonable time for this, AXA did not respond to the proposal put forward on 15 July 2011 nor wait for the Property Law Act notices to expire when it proceeded to appoint receivers;

(f)      The appointment of receivers considerably reduced the likelihood of arranging financing while also increasing the amount required to settle AXA’s claim (through legal and receivership costs);10

(g)Other  matters  raised  by AXA (non-payment  of  rates,  absence  of insurance, the transaction with 10 GSAL, and an application by NZ Fire Service Commission to liquidate Gilmer) were minor matters or were in the process of being resolved or (regarding the transaction with 10 GSAL) were actions to try and preserve/maximise the value

of the security.

10     As at 19 August 2011 receivers’ fees were approximately $40,000 and legal fees were

approximately $65,000.

[27]     AXA says that there was nothing oppressive in the way it went about dealing with this issue.  It points out that the “one-line” methodology for the valuation was provided for in the letter of offer and had been used in the previous two valuations undertaken of the property.  It says that it has been entirely open with the defendants about its concerns and has given them adequate time to remedy the default and to put together a viable refinancing offer.  It says that there has been a clear breach of the LVR by the debtor and reasonable commercial conduct by AXA in response to that breach in seeking to enforce its contractual and statutory rights.

[28]     I consider that no reasonably arguable case of oppression under the CCCFA has been raised.   The agreement entered into by Gilmer and guaranteed by the second, third and fourth defendants, set out the LVR and provided for a valuation, to enable compliance with the LVR to be ascertained, three years from the draw down date.   The agreement also provided that it was a default if this provision was not complied with. The valuation was obtained pursuant to this contractual provision. The valuation showed that there was a breach of the LVR.  Even if it suited AXA to exercise its rights pursuant to that default (because it had closed its fund and was repaying investors), that does not make its actions unfair, let alone oppressive. AXA set out what was required to remedy the default and the time within which this was to be done.

[29]     AXA did not have to agree to a partial sell-down of units, whether that would maximise the value of the property or not.  AXA provided the defendants with an opportunity to refinance the property but no proposal acceptable to AXA had been received by 21 July 2011.  While it was undoubtedly frustrating for the defendants that AXA did not reply to the Cressida proposal before appointing receivers, AXA was not required to reply.  Under the GSA, AXA was entitled to appoint receivers regardless of the date of expiry under the Property Law Act notices.

[30]     When the receivers attended the property they learned of the transaction between Gilmer and 10 GSAL and, not surprisingly, given its timing and that it had been entered into without AXA’s knowledge or consent (contrary to the mortgage and GSAs), took the view that this was intended to prevent the exercise of AXA’s contractual rights.  Even then, AXA was willing to allow the defendants further time

to obtain refinancing as is shown by its agreement to adjourn the hearing on 31

August 2011.   That time was allowed even though AXA became concerned about other matters, including the rates and insurance position.

[31]     The evidence that the receivership affected the prospects of refinancing is inadequate.    The  evidence  from  Mr Nuchum  to  this  effect  is  not  supported  by anything from Cressida or Spinnaker to confirm this.   To the contrary, after the receivership  Cressida  made  offers  of  finance  on  8 August  2011  and  again  on

2 September 2011.  In an email dated 23 September 2011 Cressida advised Gilmer about conditions for settlement and, in respect of the receivership, said only that it would  “certainly be  preferable  to  retain  control  of  the  operation”.    Nor  is  any particular reason advanced as to why the receivership would affect the prospects of refinancing  other than  through  adding to  the  costs  of settling  with AXA.   The receivers have been continuing to operate the business and it is not suggested that, through their operation, the value of the property has diminished in some way. There is no adequate evidence that the legal costs and the receivership costs have caused any refinancing proposal to be withdrawn.

[32]     None of the matters relied on by the defendants give rise to “the something more” referred to in Taylor so as to show that AXA’s conduct was contrary to reasonable standards of conduct.  The defendants may view AXA’s conduct as harsh but objectively it was not so, when AXA did no more than rely on contractual terms which the defendants had agreed to.

Quantum

[33]     A memorandum has been filed on behalf of AXA setting out that judgment is sought against the first to fourth defendants in the sum of $5,882,658.79 (the sum set out in the statement of claim) and interest on $5,781,000 from 30 July 2011 up to the date of judgment at the agreed default rate of 13% per annum.  An order against the first and second defendants is sought that they are liable to pay interest on   the outstanding principal balance of the Loan, at the agreed default rate of 13%, from the date of judgment up until the date of repayment in full.

[34]     Nothing  has  been  received  from  the  defendants  contesting  the  quantum sought, the rate of interest claimed or the period over which it is claimed.  I therefore proceed on the basis that there is no issue about these matters.

Vacant possession

[35]     The only matter advanced against the order for vacant possession is that this is a self-help remedy that does not require court intervention.  However s 137(1) of the Property Law Act 2007 provides that “[i]f a mortgagee becomes entitled under a mortgage...to exercise a power to enter into possession of mortgaged land or goods, the mortgagee may exercise that power by-...applying to a court for an order for possession of the land or goods”.  This answers the point raised by the defendants.

No other issue being raised by the defendants, AXA is entitled to the order it seeks.11

Result

[36]     The application for summary judgment is granted in the sum and with the interest and against the defendants set out in [33] above.   In addition an order is made that the first to fifth defendants must provide vacant possession of the property upon service of the Court’s order for vacant possession.  For the avoidance of doubt, AXA is no longer restrained from exercising its power of sale of the assets that are the subject of AXA’s securities.

[37]     AXA is entitled to costs.   However, should any issue arise as to this, the parties have leave to file brief memoranda on the points of difference within 7 days.

Addendum

[38]     I refer to the memorandum of counsel for AXA dated 29 November 2011. The trust account printout appears to show that the rent was paid on 13 July 2011.

The  payment  therefore  pre-dated  the  order  made  on  17 August  2011.    In  these

11     For completeness, it is noted that the agreement entered into by Gilmer and 10 GSAL was not binding on AXA. Refer s 119 of the Land Transfer Act 1952 and Capital & Merchant Investments Ltd (in rec) v Russell Management Ltd (2009) 10 NZCPR 199 (HC).

circumstances I do not understand the basis on which AXA seeks the order set out in the memorandum.  The issue may now be overtaken by this judgment and the ability of AXA to enforce it.

Mallon J