Ballantyne Trustees Limited v Papprill Hadfield & Aldous Solicitors Nominee Company Limited
[2015] NZHC 2294
•22 September 2015
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV-2014-409-000178 [2015] NZHC 2294
UNDER the Companies Act 1993 IN THE MATTER OF
GOOSE BAY RANCH HOLDINGS LIMITED (IN LIQUIDATION)
BETWEEN
BALLANTYNE TRUSTEES LIMITED AND AVERILL NOELINE HEAD AND BRUCE RAYMOND HEAD AND CALMWATER ENTERPRISES PTY LIMITED AND SENG BOU KEUNG AS TRUSTEE OF THE GBR TRUST Applicants
AND
PAPPRILL HADFIELD & ALDOUS SOLICITORS NOMINEE COMPANY LIMITED
First Respondent
AND
DAVID D CRICHTON AND KEIRAN A HORNE
Second Respondents
Hearing: 8 September 2015 Appearances:
M J Wallace for Applicants
A B Darroch for First Respondent
M E Parker for Second RespondentsJudgment:
22 September 2015
JUDGMENT OF ASSOCIATE JUDGE OSBORNE
as to application under ss 165 and 284 Companies Act 1993
Introduction
[1] Goose Bay Ranch Holdings Ltd (GBRH) is in liquidation. It was put into liquidation by this Court on 27 November 2009. Keiran Horne and David Crichton
BALLANTYNE TRUSTEES LIMITED v PAPPRILL HADFIELD & ALDOUS SOLICITORS NOMINEE COMPANY LIMITED [2015] NZHC 2294 [22 September 2015]
were appointed as liquidators, having been appointed interim liquidators in March
2009.
[2] GBRH owned a 314 hectare rural property at Goose Bay. The property was mortgaged to Papprill Hadfield & Aldous Solicitors Nominee Company Ltd (the Nominee Company), the first defendant in this proceeding. The mortgage secured a loan of $1,450,000 which had been obtained on the basis of a registered valuation of
$4,450,000. In 2009, following the appointment of interim liquidators, GBRH did not meet its interest payments to the Nominee Company or repay the principal. GBRH in October 2009 failed to comply with a notice under the property issued by the Nominee Company under the Property Law Act 2007.
[3] The Nominee Company conducted a mortgagee sale, by a deadline sale process. The Nominee Company sold the property in February 2010 for $1,130,000. GBRH owes the Nominee Company a residual debt of some $420,000.
The applications
[4] The applicants are four sets from the total of five shareholders of GBRH.
[5] Initially, on 1 April 2014, the applicants filed a statement of claim by which they sought two orders:
(a) an order pursuant to s 165 Companies Act 1993 (the Act) granting leave to the applicants as shareholders of GBRH to bring proceedings in the name of and on behalf of GBRH against the Nominee Company; or (in the alternative)
(b)an order pursuant to s 284 of the Act giving directions to the liquidators to bring proceedings in the name of and on behalf of GBRH against the Nominee Company.
[6] The form of proceeding was subsequently regularised when the applicants filed a notice of application for the stipulated orders.
The s 165 application
The application for leave
[7] The applicants wish to pursue a derivative action. They therefore seek leave as shareholders of GBRH to sue the Nominee Company.
[8] Section 165 of the Act provides:
165 Derivative actions
(1) Subject to subsection (3), the court may, on the application of a shareholder or director of a company, grant leave to that shareholder or director to—
(a) bring proceedings in the name and on behalf of the company or any related company; or
(b) intervene in proceedings to which the company or any related company is a party for the purpose of continuing, defending, or discontinuing the proceedings on behalf of the company or related company, as the case may be.
(2) Without limiting subsection (1), in determining whether to grant leave under that subsection, the court shall have regard to—
(a) the likelihood of the proceedings succeeding:
(b) the costs of the proceedings in relation to the relief likely to be obtained:
(c) any action already taken by the company or related company to obtain relief:
(d) the interests of the company or related company in the proceedings being commenced, continued, defended, or discontinued, as the case may be.
(3) Leave to bring proceedings or intervene in proceedings may be granted under subsection (1), only if the court is satisfied that either—
(a) the company or related company does not intend to bring, diligently continue or defend, or discontinue the proceedings, as the case may be; or
(b) it is in the interests of the company or related company that the conduct of the proceedings should not be left to the directors or to the determination of the shareholders as a whole.
(4) Notice of the application must be served on the company or related company.
(5) The company or related company—
(a) may appear and be heard; and
(b) must inform the court, whether or not it intends to bring, continue, defend, or discontinue the proceedings, as the case may be.
(6) Except as provided in this section, a shareholder is not entitled to bring or intervene in any proceedings in the name of, or on behalf of, a company or a related company.
[9] The application and evidence indicates that the applicants’ claim would have the following ingredients:
(a) As a mortgagee exercising its power of sale, the Nominee Company had a duty to obtain the best price reasonably obtainable as at the time of sale.1
(b)On 18 February 2010, the Nominee Company sold the property pursuant to its power of sale for $1,130,000 (excluding GST).
(c) The Nominee Company breached its duty in relation to the sale by: (i) failing to adequately market the property;
(ii) failing to engage a suitable real estate agent;
(iii)promoting photographs which, while purporting to be of the property, were of a neighbouring property;
(iv)failing to furnish to prospective purchasers information as to the farming operations on the land, development potential, actual development, subdivision and investment details, and
Department of Conservation bush reserves.
1 Property Law Act 2007, s 176.
(d)The Nominee Company’s breach of duty caused GBRH loss exceeding $3,000,000. (By implication representing the difference between the figure obtained: $1,130,000 and that which would have been obtained through a sale effected in compliance with s 176
Property Law Act).
The jurisdictional issue
[10] By its notice of opposition, the Nominee Company (supported by the liquidators) first raises a jurisdictional issue. They submit that the Court does not have power under s 165 of the Act to grant the applicants leave to bring a derivative action. They say that such leave cannot be granted in relation to a company which is in liquidation.
[11] Mr Darroch submits that the leading authority on the jurisdictional point is Hedley v Albany Power Centre Ltd (in liq).2 The liquidators of Albany challenged the Court’s jurisdiction to grant leave to bring a derivative action. Wild J recognised a lack of New Zealand authority on the point and sought guidance available from comparable overseas jurisdictions. His Honour reached the view that “… once a company is placed in liquidation, the Court no longer has – or at least ought not to exercise – its s 165 jurisdiction”.3
[12] For the Nominee Company, Mr Darroch recognised that Hedley is not an authority definitively against the existence of the jurisdiction in relation to companies in liquidation. Hedley has subsequently been applied in Buxton v Mainline Contracting Ltd (in liq) – Woodhouse J found that there was no jurisdiction to grant leave to a director to bring a derivative action on behalf of a company in liquidation.4 In Zhu v Chen, Hugh Williams J reserved leave for further argument on the jurisdictional point if it transpired that any of the companies involved had in fact
been placed into liquidation.5
2 Hedley v Albany Power Centre Ltd (in liq) [2005] 2 NZLR 196 (HC).
3 At [55].
4 Buxton v Mainline Contracting Ltd (in liq) HC Auckland CIV-2010-404-1224, 22 October 2010 at [4]–[5].
5 Zhu v Chen HC Auckland CIV-2009-404-3620, 14 August 2009 at [47](d) and [64].
[13] On the other hand, Mr Darroch recognised that in Needham v EBT Worldwide Ltd, Venning J appeared to consider, without reference to the reference of Wild J in Hedley, that it was appropriate in the case before him to allow a derivative action to proceed in circumstances where there was the potential for liquidation of EBT and a practical likelihood that the liquidator would not pursue the proceedings proposed by
the applicant.6
[14] Mr Wallace, for the applicants, emphasises the degree to which the New Zealand authorities have included tentative observations. He refers to commentaries which suggest that the preferable view is against any absolute exclusion of jurisdiction and in favour of recognising various factors as counting against (rather than precluding) the grant of leave.7 I have recorded briefly the competing submissions in recognition of the fact the jurisdictional issue was properly addressed by counsel. But in relation to an area of law which must be regarded as unsettled, I refrain from determining the s 165 application by reference to the jurisdictional
issue. For the reasons which follow, I have concluded that the s 165 application must fail even if the liquidated status of GBRH does not constitute a jurisdictional bar to granting s 165 leave.
Mandatory considerations
[15] Through the provisions of s 165(2), I am required in relation to a s 165 application to have regard to:
(a) the likelihood of the proceedings succeeding:
(b) the costs of the proceedings in relation to the relief likely to be obtained:
(c) any action already taken by the company or related company to obtain relief:
(d) the interests of the company or related company in the proceedings being commenced, continued, defended, or discontinued, as the case may be.
6 Needham v EBT Worldwide Ltd HC Auckland (2006) 3 NZCCLR 57 (HC).
7 Peter Watts, Neil Campbell and Christopher Hare (ed) Company Law in New Zealand (LexisNexis, Wellington, 2011) at [20.4.3]; John Farrar and Susan Watson (ed) Company and Securities Law in New Zealand (2nd ed, Thomson Reuters, Wellington, 2013) at [22.7].
The threshold requirement
[16] By the provisions of s 165(3), I may not grant leave at all unless I am satisfied that either:
(a) the company or related company does not intend to bring, diligently continue or defend, or discontinue the proceedings, as the case may be; or
(b) it is in the interests of the company or related company that the conduct of the proceedings should not be left to the directors or to the determination of the shareholders as a whole.
[17] As GBRH is in liquidation, and the liquidators’ expressed position is that they do not intend to bring the proceedings proposed by the applicants, the threshold requirement of s 165(3)(a) is established. I therefore move to have regard to the considerations set out in s 165(2) in the consideration of the discretion which exists
under s 165(1). The Court of Appeal has recently, both in He v Chen8 and Nobilo v
Nobilo9 confirmed the standard which this Court should adopt in assessing the mandatory considerations under s 165(2) as formulated by Fisher J in Vrij v Boyle, which is that “which would be exercised by a prudent business person in the conduct of his or her own affairs in deciding to bring a claim”.10
The mortgagee sale process
[18] Many details of the Nominee Company’s mortgagee sale process are clear. By reason of its expired Property Law Act notice, the Nominee Company was entitled to proceed with a mortgagee sale from late October 2009. The property was essentially a large recreation and hunting block with no farming operation or income as such. Its potential, at least before the impact of the Global Financial Crisis (the GFC), had been seen by the applicants as for subdivision into rural/residential allotments. GBRH had been in interim liquidation since March 2009. In early November 2009, the Nominee Company retained Matson & Allan Real Estate Ltd
(Matson & Allan) to advise on a mortgagee sale process. The process was briefly
8 He v Chen [2014] NZCA 153, [2015] NZAR 437 at [30].
9 Nobilo v Nobilo [2015] NZCA 54.
10 Vrij v Boyle [1995] 3 NZLR 763 (HC) at 765, cited with approval in He v Chen [2014] NZCA
153, [2015] NZAR 437 at [30] and Nobilo v Nobilo [2015] NZCA 54 [2015] 30 FRNZ 147 at
[8].
interrupted (for November) while Mr Keung and his interests pursued the possibility of a voluntary administration and unsuccessfully opposed the full liquidation of GBRH. After a hearing in mid-November, the High Court appointed the second respondents as liquidators on 27 November 2009.
[19] Alexander (Sandy) Millyard, a former partner in the law firm associated with the Nominee Company, gave the Nominee Company’s evidence in opposition to the present applications. He was involved in meetings with Chris Flanagan of Matson & Allan from late October 2009. That firm was approached by the Nominee Company as a respected Christchurch real estate agency with experience in selling rural property of the nature of GBRH’s property. Matson & Allan suggested a marketing plan and timetable. The Nominee Company forebore from taking steps towards advertising the sale through November 2009. During that November period, Mr Millyard advised Mr Keung’s solicitors that the Nominee Company would be carrying out an advertising campaign before Christmas 2009 and again from mid- January 2010 with a view to a sale by deadline private treaty in mid- or late-February
2010. It was likely that the sale would be marketed as a mortgagee sale.
[20] In relation to the value of the property, the Nominee Company had received in a three-year period from 2006 (that is, beginning at the time of the initial loan) three registered valuations. The valuations were:
(a) Alan Stewart – 9 December 2006 – $4,450,000 (b) Telfer Young – 28 April 2008 – $4,500,000
(c) Simes – 11 June 2009 – $4,750,000.
[21] Following the High Court’s liquidation order in late November 2009, Mr
Millyard received from the liquidators a copy of a valuation of the property dated 5
August 2009 by Maxwell Valuation. It had been obtained by the solicitors for the plaintiff in the liquidation proceeding (that plaintiff being a minority shareholder in GBRH). Mr Maxwell records that he had inspected the property on 3 August 2009. He provided two valuation figures:
(a) Current market value – $1,150,000 (b) Forced sale value – $920,000.
[22] Mr Maxwell had access to the preliminary planning information from the
2006–2008 period which pertained to the potential subdivision. Mr Maxwell noted a significant degree of uncertainty surrounding the viability of such a development for a number of reasons, including the significant restriction of finance for such development projects in the preceding 12 to 18 months. Mr Maxwell concluded that his primary consideration of the property was as a large rural/recreation holding with coastal influence. He concluded that the market would not pay a premium for subdivision potential at that time.
[23] Mr Maxwell included the following observations in his report:
… the rural property market has experienced a significant decline in sales activity during the past 12 months … We are mindful however that there were a significant number of properties marketed during the Spring of 2008 with only very limited sales occurring since this time. Local real estate agents report that buyers have become increasingly hesitant with uncertainty surrounding the potential flow on effects from the global recession.
[24] On 1 December 2009, the Nominee Company received from Matson & Allan a proposed marketing schedule (providing for six advertisements in the Christchurch Press, three advertisements in Straight Furrow and two each in the Sunday Star Times and the Rural Trader). Together with the cost of brochures, the Nominee Company approved a spend of $11,382.88. At the same time, Matson & Allan and the Nominee Company signed an agency contract in relation to a deadline sale, covering the marketing fees and commission. (The latter involved a basic fee of
$500, a fee of 4 per cent on the first $500,000 sale price and a fee of 2.5 per cent on the balance of sale price, plus GST.) On the sale price subsequently achieved Matson & Allan’s commission entitlement was $36,250. Given the likelihood of a shortfall in recovery for the Nominee Company the total Matson & Allan costs (of approximately $47,000), were costs which the Nominee Company would be bearing. There was no offer from those associated with GBRH to fund the commission or any additional costs of marketing and sales.
[25] The advertising involved four advertisements in December, seven in January, and a final in early February. Mr Flanagan sent approximately 50 information packs to people who enquired. Mr Millyard was in regular discussion with Mr Flanagan as to progress.
[26] During the marketing, Mr Keung expressed to Mr Millyard his dissatisfaction about a number of matters including the Nominee Company’s choice of agent, the fact the property was marketed just prior to Christmas, the degree and quality of information and photographs used in the advertising of the property and an apparent lack of interest generated in the property.
[27] In late January 2010, Mr Millyard contacted Simes with a view to obtaining an updated valuation (Simes having provided a valuation of $4,750,000 as at 11 June
2009).11 It transpired that Simes was unwilling to provide an updated valuation.
Mr Millyard then contacted Telfer Young which had earlier provided a $4,500,000 valuation as at 28 April 2008.12
[28] At that point an issue arose over access to the property. For a week in early February 2010, Mr Millyard sought to obtain the keys for the padlocks securing the entrance to the property. His contact was with Mr Keung and Mr Keung’s solicitor over the period 2-8 February 2010.
[29] In the course of that contact, Mr Keung sent a number of emails criticising the sale process and suggesting a delay to the sale process with a new marketing plan. Mr Millyard chose to write in reply to Mr Keung’s solicitors, rejecting (with explanation) the various criticisms and the request for a delay in the sale.
[30] Mr Keung’s correspondence culminated in an email on 8 February 2010 in
which he stated that his solicitors were now seeking an injunction. There is no evidence that Mr Keung issued any proceeding for injunctive relief.
11 Above at [19].
12 Above at [19].
[31] At this point Mr Millyard received from Telfer Young an updated value estimate of the property. As Telfer Young had been unable to inspect the property, rather than a valuation report it provided two sets of figures:
(a) Market value estimate – in the range $1,800,000 to $2,000,000. (b) Force sale value estimate - $1,100,000.
[32] Telfer Young reported that discretionary spending on coastal property in the Kaikoura area had stalled with very few potential purchasers. It noted that a sale period for a property of this nature might be expected normally to take 12 months to
18 months. It estimated that a forced sale process would have an effect of between
50 and 60 per cent on market value.
[33] Shortly afterwards, with access gained to the property, Telfer Young was able to inspect the property on 19 February 2010. Telfer Young then provided a valuation report. It, once again, provided two figures (this time valuation figures) being:
(a) Current market value $1,900,000. (b) Forced sale value $1,050,000.
The valuation took into account the market, observing:
In providing the forced sale estimate we have had regard to market sales evidence throughout the Kaikoura area. The market has been particularly quiet during the past 18 months. Lifestyle block sales and also sales within proposed farm park developments have stalled.
[34] In the meantime, upon the closing of the marketing period on 17 February
2010, the Nominee Company received two offers for sale. One was what Mr
Millyard says was at a “very low level”. The other was for $1,130,000.
[35] At that point the Telfer Young inspection of the property was imminent but yet to occur. Mr Millyard discussed the earlier Telfer Young Advisory Report with Telfer Young. The Nominee Company decided to proceed to accept the $1,130,000
offer for the property, and did so on 17 February 2010. The sale was settled on 31
March 2010.
[36] The Nominee Company was left with a loss of some $420,000. In other words, the sale of the property would have had to achieve at least $1,550,000 to have seen any proceeds returned to GBRH (in liquidation). While Mr Keung was a personal covenantor in relation to the debt, he was subsequently adjudicated bankrupt on 20 September 2010. The Nominee Company has been unable to effect any further recovery.
The likelihood of the proceedings succeeding (s 165(2)(a))
Duty to obtain the best price reasonably obtainable at the time of sale
[37] The applicants’ central allegation against the Nominee Company, as reflected in their notice of application, is that the Nominee Company failed to fulfil its duty to obtain the best price reasonably obtainable for the property at the time of sale.
Evidence as to the likelihood of success
[38] The matters which the applicants say constituted breaches of the Nominee Company’s duty would inevitably at trial give rise to expert evidence relating to valuation and marketing.
[39] A remarkable feature of this application is that the applicants have adduced no expert evidence at all. Their four deponents are all witnesses of fact. Yvonne Ballantyne, a spokesperson for the first-named applicant, provided a reply affidavit dealing with factual matters in some detail. She also deposed as to her real estate qualifications and experience. But responsibly (I infer on the advice of counsel) she did not qualify herself as an expert and did not refer to the requirements of r 9.43
High Court Rules. Mr Wallace did not seek leave to have Ms Ballantyne’s evidence
admitted as expert evidence.13 Accordingly the Court is left with no expert evidence from the applicants.
13 As provided for in High Court Rules, r 9.43(3).
[40] For the first defendant, Mr Darroch identified the potential questions of valuation involved in this case as the pivotal point of the proceeding. This is demonstrated by the formulation of the applicants’ proposed claim (summarised above at [9]), being a claim for “in excess of $3,000,000”. The claim impliedly represents the difference between the figure obtained ($1,130,000) and that which would have been obtained had the Nominee Company achieved the best price reasonably obtainable at the time of sale.
[41] Mr Darroch submitted that the absence of expert evidence on the part of the applicants was striking. He identifies the Vrij v Boyle “prudent business person” standard.14 Mr Darroch submits that against the factual background on which the applicants rely, a prudent business person would not, in the conduct of his or her own affairs, commence a High Court claim without expert opinion or evidence. Such evidence is needed to support the proposition that aspects of the marketing of the
property fell below an acceptable standard and that a forced sale value of at least
$1,550,000 was reasonably achievable through the sale.15
[42] I accept Mr Darroch’s submission. It would be irresponsible for a business person in the conduct of his or her own affairs to bring a claim without supporting expert opinion or evidence. In terms of Vrij v Boyle, that finding is sufficient to dispose of the application under s 165 of the Act. I will nevertheless, below, return briefly to the applicants’ particulars of alleged breach. I will identify some further difficulties which arise in relation to those particulars.
[43] Mr Darroch made a second, overarching submission relating to the proposed claim against the Nominee Company. The submission relates to the matters likely to establish that reasonable efforts have been taken to obtain the best reasonably obtainable price. In that regard, I adopt the observations of Asher J in Public Trust v
Ottow.16 In a passage dealing with the particular steps taken by the mortgagee in that
14 Vrij v Boyle, above n 10, at [17].
15 Representing the total of the sale price achieved ($1,130,000) and the residual loss incurred by the Nominee Company ($420,000).
16 Public Trust v Ottow (2010) 10 NZCPR 879.
case, but equally informative as to the mortgagee sale process generally, his Honour observed:17
The following steps indicate that a mortgagee has made reasonable efforts to obtain the best reasonably obtainable price:
a)The appointment of a reputable real estate agent to market the property.
b)Obtaining a valuation report from an experienced valuer as a guide to what could reasonably be expected for the property.
c) Marketing over a reasonably long period of time.
d) An extensive advertising and promotional campaign. e) A properly conducted auction.
f) A sale price that, given all the circumstances, can be reconciled with expert opinion as to value.
[44] In Public Trust v Ottow, Asher J found that the mortgagee had taken all those steps.18
[45] Beyond the above observations, his Honour’s judgment is also instructive in identifying nine points of guidance in relation to the duties of mortgagees when exercising the power of sale. His Honour identified these legal principles:19
a)A mortgagee has no duty at any time to exercise the powers of sale or possession. In default of any provision to the contrary in the mortgage, the power of sale is for the benefit of the mortgagee, who can sell at any time in accordance with the mortgagee’s convenience: Raja (Administratrix of the Estate of Raja (Dcd)) v Austin Gray (A Firm).20
b)The mortgagee’s duty of care is to take reasonable care to obtain the best price reasonably obtainable at the time of sale: Agio Trustees Co. Ltd v Harts Contributory Mortgages Nominee Co. Ltd.21
c)It does not matter that the time may be unpropitious and that by waiting a higher price could be obtained: Tse Kwong Lam v Wong Chit Sen; Silven Properties v Royal Bank of Scotland.22
17 At [31].
18 At [32].
19 At [17].
20 Raja (Administratrix of the Estate of Raja (Dcd)) v Austin Gray (A Firm) [2002] EWCA Civ
1965 at [55], per Peter Gibson LJ; Silven Properties v Royal Bank of Scotland [2004] 1 WLR
997 at [14].
21 Agio Trustees Co. Ltd v Harts Contributory Mortgages Nominee Co. Ltd (2001) 4 NZ ConvC
193,480 (HC).
d)A mortgagee is under no obligation to improve the property or increase its value: Silven Properties v Royal Bank of Scotland.23
e)A mortgagee sale for a price less than the current market value assessed by valuers does not, of itself, establish a breach of duty, although a large discrepancy may indicate a failure to take reasonable care: Moritzson Properties Ltd v McLachlan.24
f) A mortgagee does not have any general duty to maintain properties prior to sale: Silven Properties v Royal Bank of Scotland.25
g) Following the service of a Property Law Act Notice there is no duty on a mortgagee to keep a guarantor informed of sales activities: G Merel & Co. Ltd v Barclays Bank.26
h)The mortgagee is not entitled to sell in a hasty way at a knock-down price sufficient to pay the debt, which because of the speed of sale leads to a lower price than could otherwise be obtained: see Palk v Mortgage Services Funding Plc.27
i) Proper care must be taken to expose the property to the market and to obtain the best price reasonably obtainable: Harts Contributory Mortgages Nominee Co Ltd v Bryers.28
[46] Relevant to prior perceptions of the value of a particular property, Asher J
observed:
[33] A failure to achieve an assessed valuation price at a mortgagee sale is not in itself any indication of a breach of the mortgagee’s duty of care to obtain the best price reasonably obtainable: Moritzson Properties Ltd v McLachlan at [61]. A failure to achieve a price that a mortgagor believes the property should achieve, does not give rise to an inference that a mortgagee has breached its duty to take reasonable care: Wallace v Bank of New Zealand.29 Of course, a sale at a price which is much less than the assessed value, when there is no explanation for the discrepancy, can indicate a failure to take reasonable care.
[47] I will return shortly to the applicants’ particulars of alleged breach but first deal with Mr Darroch’s second, overarching submission. There is evidence to indicate that the Nominee Company engaged and took advice from a reputable real
estate agent with experience of rural properties, for the purpose of marketing the
22 Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349 at 1355B; Silven Properties v Royal Bank of Scotland, above n 20, at [14].
23 At [16].
24 Moritzson Properties Ltd v McLachlan (2001) 9 NZCLC 262,448 at [61].
25 Silven Properties v Royal Bank of Scotland, above n 20, at [16].
26 G Merel & Co. Ltd v Barclays Bank (1963) 1 SJ 542.
27 Palk v Mortgage Services Funding Plc [1993] 1 Ch 330 at 337-8.
28 Harts Contributory Mortgages Nominee Co Ltd v Bryers HC Auckland CP403-IM00, 19
December 2001 at [43](d) and (f).
29 Wallace v Bank of New Zealand HC Auckland CIV-2009-404-3534, 1 July 2009 at [54].
property. It took advice with regard to the forced sale control from registered valuers. To the extent that the Nominee Company took such advice and acted in reliance upon it, it has a compelling defence to any claim which may be brought against it in relation to the mortgagee sale process. There is no evidence or basis of inference to suggest that those (non-valuers) involved in making decisions of the Nominee Company should have had reason to doubt the reliability of what was stated by Maxwell Valuation and Telfer Young. That is a further, very significant factor which a prudent business person would take into account in deciding whether to pursue such a claim.
[48] Mr Darroch made a third, overarching submission arising from the failure of the applicants to adduce any expert evidence as to marketing or valuation issues. He noted that this proceeding was initially commenced by the applicants through the (incorrect) procedure of filing a statement of claim by which leave was sought. The claim was filed on 1 April 2014. The procedural difficulties were soon noted and directions made with a view to regularising proceedings, with steps timetabled. In the substantial period that has since passed, the plaintiffs have had ample time to obtain such expert evidence as may support their complaints. I have already recorded my conclusion that the absence of such evidence is of itself determinative of the application for leave under s 165 of the Act, upon the basis that a prudent business person would not proceed with such a claim in the absence of such evidence.
[49] Mr Darroch’s third submission suggests that there is a further consequence of the absence of expert evidence. Mr Darroch notes the time which has passed since the applicants commenced this proceeding in April 2014. Mr Darroch submits that the most reasonable inference is that the applicants are unable to obtain expert evidence to support their complaints. I accept that, while that is not the only inference which may be drawn, it is a reasonable inference. It reinforces the conclusion I have reached. To the extent that another inference might be drawn, the most likely would be that the applicants have not had the resources to pay for expert advice. If one considers that alternative inference, it is another matter which would impact on the decision of the reasonable business person as to whether or not to pursue this claim. Such a person would take into account the likelihood that their
available resources would be insufficient to successfully mount complex civil litigation and take it through to a successful outcome. That business person would take into account the fact that both defendants are represented by firms and counsel who regularly appear for insured professionals and that the evidence and legal work which will be brought together in the defence of such claims will be informed, vigorous and comprehensive. These matters are not overwhelmingly against a decision to proceed but are further factors militating against the wisdom of a claim.
[50] I therefore conclude that the s 165 application should be declined. I will nonetheless deal briefly with the particulars identified by the applicants.
Failing to adequately market the land
[51] As noted, the failure of the applicants to provide any expert evidence as to a different marketing campaign is one of the striking features of this application.
[52] The Nominee Company, by way of defence, will be able to point to its retention of a well-established real estate agency with experience of rural sales. In poor market conditions, the principal of the loan had not been repaid and interest was in arrears for a lengthy period, with losses therefore accruing to the mortgagee. Sustainable criticism of a short sale process appears unlikely. Mr Wallace pointed to observations in the Telfer Young report in February 2010 indicating that a truncated or shortened marketing period would have a major effect (on realisation). His implicit suggestion was that the comparatively short period involved for marketing was irresponsible or negligent. But the Telfer Young report clearly indicates that the comparison being drawn was with a much longer marketing period of 12 to 18 months which an owner would have required in order to effect what Telfer Young described as a “full realisation”. In a sense, the Telfer Young view as to an optimum marketing period of up to 18 months serves to reinforce just how difficult the market was.
[53] Without expert evidence as to the qualities of one real estate agent against another, the applicants suggest that the mortgagee should have retained the agent preferred by Mr Keung, namely Bayleys. No proper evidential foundation has been
laid for the implicit suggestion that Matson & Allan as agent selected by the
Nominee Company had inferior marketing ability or techniques.
[54] The applicants’ evidence contains suggestions as to further marketing that might have occurred, such as exposure to international markets. Mr Keung suggests that his preferred agent would have pursued such exposure. There is no expert evidence as to what another agent would have done with a budget of the size made available by the Nominee Company (effectively out of its own money). The applicants (as shareholders in GBRH) apparently did not offer their own money to boost the marketing campaign.
[55] Finally, in relation to the marketing programme period, Mr Wallace sought to draw support for the application from my judgment in McArthur Ridge Investments Ltd v Schulz.30 That case involved the summary judgment application of a lender for its shortfall of recovery following a mortgagee sale. I dismissed the summary judgment application having regard to a number of matters concerning the quantum of the plaintiff’s claim, the pleading of the claim and the evidence of the mortgagee
sale process. Although expert evidence as to marketing matters was not called in McArthur Ridge, the significant feature of the filed evidence was that marketing had been conducted over a period of a few weeks at most, interrupted by the Christmas vacation. The tender period closed on 16 January. I found that it was reasonably arguable (even in the absence of expert evidence) that the plaintiff had not conducted the mortgagee sale over a period of reasonable length.
[56] I do not consider that the decision in McArthur Ridge assists in this case. It was a decision in relation to what was arguable in a summary judgment context. It was not a proceeding which was to be determined upon the basis of the standard set out in s 165 Companies Act. Furthermore, the facts in McArthur Ridge were materially different to the present case. In McArthur Ridge the marketing (including advertising) had very closely coincided with the core Christmas vacation period of
2008/2009. In the present case, the marketing campaign (including advertising) was deliberately structured to occur in the pre-Christmas period, to be effectively
suspended over the core Christmas/New Year period, and to recommence after New
Year for approximately four weeks.
“Failing to engage a suitable real estate agent”
[57] I have discussed the engagement of Matson & Allan under the previous heading.31
Promoting photographs which, while purporting to be of the property, were of a neighbouring property
[58] Mr Keung deposed that two photographs used by Matson & Allan in the advertisements such as those appearing in the Christchurch Press were of a neighbouring property. Mr Keung referred to that other property as a “high rocky back country property”. He described the photographs as “grossly misleading” in that they showed entire shots of neighbouring blocks next to the GBRH property. Later in his evidence, he identified that the photographs included in part the GBRH property. (The photographs had apparently been taken from a helicopter flying over the area.)
[59] Mr Keung exhibited a number of colour photographs of the property which had been taken previously for promotion purposes. By way of contrast with these, he described the photographs used by Matson & Allan as not being “high gloss marketing material”.
[60] Again, the marked feature of the applicants’ evidence is an absence of expert evidence as to the impact of photographs in this situation. The narrative of the advertisements drew attention to key features of the property including features which Mr Keung noted were not highlighted in the photographs, such as the recreation lodge and good farm tracks throughout the property. The narrative of the advertisement began with the description “Coastal property with excellent tourism and hunting potential” – it is reasonably to be inferred that Matson & Allan chose the two photographs in question because they pointed to those qualities.
Failure to furnish adequate information to prospective purchasers
[61] The final particular of an alleged failure of duty is that the Nominee Company failed to furnish to prospective purchasers (through Matson & Allan) information as to the farming operations on the land, development potential, actual development, subdivision and investment details, and Department of Conservation bush reserves.
[62] Yet again, the criticism in this regard is weak given the absence of expert evidence as to what the applicants assert should have been stated.
[63] Even without expert evidence, there is an obvious danger for any mortgagee in including in marketing information the sort of material which Mr Keung would have wanted to be included. The Nominee Company was conducting a mortgagee sale. While the mortgagee could safely provide incontrovertible details such as in relation to the titles and the subdivision potential under the Kaikoura District Plan (as was done), the mortgagee could not be required to include material which was opinion-based or debatable. The concerns of Mr Keung which appear to have the most significant financial consequences are those relating to the development potential of the block. A criticism by Mr Keung is expressed in these words:
The “king” financial feature of the … farm was clearly the established
ability to subdivide it, potentially up to 140 five acre lots …
[64] There is room for a strong argument on the part of the Nominee Company that, rather than the Nominee Company taking on a responsibility for describing the potential of the property, the mortgagee sale process reasonably required the mortgagee to seek to draw the attention of potential purchasers to the property and to leave the due diligence obligation upon the potential purchasers.
[65] In the absence of expert evidence as to the appropriateness of material to be included in any advertising, I conclude that a prudent business person, in deciding whether to pursue a claim against the mortgagee, would not attach significant weight to Mr Keung’s concerns as to the content of the advertising.
Potential damages
[66] The applicants have not particularised the method by which they calculate their potential claim as “in excess of $3,000,000”. As noted above, the implication of that figure is that it was arrived at by deducting the recovery of $1,130,000 from a figure in excess of $4,000,000.32
[67] It is clear from the main evidence called for the applicants, that of Mr Keung, that the applicants primarily assess the “true value” of the property at the time of sale by reference to the earlier registered valuations obtained. For instance, Mr Keung deposes:
Telfer Young subsequently offered a new valuation of $1,100,000 which
Papprills supplied to us justifying the fact that they sold the property for
$1,130,000 to Mr Ablett. The previous valuation from Telfer Young was
$4,500,000.
[68] Later in his evidence, Mr Keung refers to a proposal he put to the Nominee Company when the mortgagee sale process began. He refers to an agreement for sale and purchase dated 25 March 2009 in which a company of Mr Keung’s contracted to purchase the property from GBRH for $4,500,000. Mr Keung indicates that he effectively “refreshed” that offer but his proposal was refused. The refusal is entirely understandable because the March 2009 agreement assumed that the mortgagee would agree to the transfer of the title and the extension of the Nominee Company loan. The significance Mr Keung attaches to the March 2009 agreement as to a $4,500,000 sale price appears to be two-fold. One implication is that the property had a $4,500,000 value and the second is that the Nominee Company was negligent in refusing the “refreshing” offer. The second implication is clearly untenable given the mortgagee sale situation. Any implication that the (uncompleted) contract between related parties in March 2009 somehow evidences the realisable value of the property, at mortgagee sale, in February 2010, is equally untenable.
[69] Equally, the applicants’ attachment of weight to valuations of April 2008 and
June 2009 is not something on which a prudent business person would base a
32 At [9](d).
decision to commence litigation. In terms of the Court file, the best evidence as to value lies in the Maxwell Valuation of August 2009.
The costs of the proceedings in relation to the relief likely to be obtained
[70] The Court has a difficulty in considering the costs of the proposed proceedings in relation to the relief likely to be obtained. It lies in the failure of the applicants to adduce expert evidence as to value. The assumption implicit in the applicants’ proposed claim of a sum exceeding $3,000,000 is that it is based on an historical valuation which bears no relationship to the changed economic conditions at the point of mortgagee sale and to the forced sale nature of the process.
[71] On any view, the applicants’ proposed claims would be expensive to pursue. The process of briefing expert evidence is apparently yet to occur. A trial involving two independent sets of defendants, each fully funded to defend the proceedings, is unlikely to take less than one week. Realistically, costs may exceed $100,000 for each set of parties.
[72] The Court is then left, on the present evidence, to speculate as to the extent to which (if any) the applicants’ expert evidence will establish a forced sale value over
$1,550,000.33 All that can be said is that there is a distinct prospect that even were
evidence to establish that the Nominee Company was in breach of its duty in effecting a sale at $1,130,000, there is a modest possibility (but one not demonstrated by admissible evidence) that a sale at $1,550,000 would have involved a breach of duty.
[73] I accordingly conclude that the assessment of cost in relation to likely relief weighs against any decision to grant leave to a derivative action.
Action already taken by GBRH to obtain relief
[74] It is common ground that GBRH (in liquidation) has not taken steps against the Nominee Company to obtain relief. Ms Horne deposes that GBRH (in
33 See [3] above – the sum of the sale price ($1,130,000) and the residual debt owing to the
Nominee Company ($420,000).
liquidation) does not have the means to pursue any proceeding against the Nominee Company. (Additionally, Ms Horne records her view that the sale and process adopted by the Nominee Company was reasonable and bona fide.)
The interests of GBRH in the proceedings being commenced
[75] In considering the interests of GBRH, the Court is entitled to have regard to the assessment and conclusion reached by the liquidators, both of whom are experienced in liquidation work. The liquidators must regularly assess the worth of potential claims and of recovery action.
[76] Independently of my own assessment, I place weight on the view reached by the liquidators.
[77] As it happens, and by reason of the foregoing discussion, I am not satisfied that the interests of GBRH will be served by commencing the proposed proceeding. In fact, unless the applicants were to obtain expert evidence which dramatically alters the overall picture, the proposed litigation is fraught with risk of failure. Upon failure GBRH would be left with significant additional debt, unless the shareholders establish such a substantial security fund as will definitely cover all costs outcomes.
[78] The applicants’ proposed claim is fraught with difficulty. Its likelihood of success at this point appears extremely limited. On the evidence a significant likelihood of success has not been demonstrated.
Conclusion – s 165 application
[79] I have had regard to the considerations listed in s 165(2) of the Act. The evidence adduced does not satisfy me that a prudent business person in the conduct of his or her own affairs would commence the claim proposed by the applicants. The application for leave under s 165 of the Act must be dismissed.
The s 284 application
The application for directions
[80] In the alternative to their (failed) s 165 application, the applicants seek an order pursuant to s 284 of the Act giving directions to the liquidators to bring proceedings in the name of and on behalf of GBRH against the Nominee Company.
[81] The liquidators do not challenge the jurisdiction of the Court to make such an order. The relief sought by the applicants falls within the provisions of s 284(1) in that it would constitute “directions in relation to any matter arising in connection with the liquidation”.
Leave to make an application
[82] Under s 284(1) of the Act, the liquidator and a liquidation committee may as of right make an application for directions. But the applicants, as shareholders in GBRH, are required to obtain leave to seek directions.
[83] The applicants did not by their formal application seek leave. Instead, by their application for orders under ss 165 and 284 of the Act, they proceeded on the basis they were entitled as of right to make such applications. The absence of leave was not a point taken in the notice of opposition filed by the second defendants. It was however raised by Mr Parker in his submissions filed a week before the hearing. Mr Parker identified the applicants’ failure to apply for leave and submitted that in the circumstances that failure was enough to be fatal to the application.
[84] Mr Parker correctly identified the importance which the legislature and the Courts attach to the need for persons other than the liquidator and the liquidation committee to establish a prima facie case for leave before the costs of a full application are incurred. There is an intended deterrence element in relation to s 284
applications with little or no prospect of success.34
34 Brookers Company and Securities Law (looseleaf ed, Thomson Reuters) at [CA 284.02]; CCH Commentary: NZ Company Law and Practice Commentary (online looseleaf ed, CCH Intelliconnect) at [66-215]; Andrew Beck and Others Morrison’s Company and Securities Law (online looseleaf ed, LexisNexis) at [54.1].
[85] Mr Wallace, at the hearing, made an oral application for leave. He explained the absence of a leave application substantially by reference to the procedural mix-up which had occurred in this case, with the proceeding initially commenced (incorrectly) by a statement of claim and only subsequently replaced by an application.
[86] It was common ground between Mr Wallace and Mr Parker that the test applicable on an application for leave under s 284 of the Act was identified by Associate Judge Lang in Trinity Foundation (Services) No 1 Ltd v Downey, requiring the applicant for leave to establish that:35
(a) the applicant’s case has a credible factual basis; and
(b)there is a reasonable likelihood that, if the applicant’s case is established, the Court will disturb the act or decision of the liquidators in question.
[87] In essence, the applicants’ case here is that the liquidators have wrongly decided not to sue the Nominee Company.
[88] In the circumstances, I reserved my decision on the leave application. In relation to the s 165 application, I would in any event be considering the quality of the applicants’ case. An informed decision could consequently be made by hearing full submissions on both the leave application and (assuming leave were granted) the s 284 application.
[89] A prudent business person would assess any claim against the Nominee Company as having problems relating to valuation evidence at two fundamental levels, namely:
(a) the difficulty of establishing the sale price achieved ($1,130,000) was not a realistic forced sale value; and
35 Trinity Foundation (Services) No 1 Ltd v Downey (2005) 9 NZCLC 263,917 (appeal dismissed by the Court of Appeal – Trinity Foundation (Services) No 1 Ltd v Downey (2006) 3 NZCCLR
401, adopting the Associate Judge’s approach at [31]).
(b)the absence of any admissible and/or reliable evidence to support a higher value than that identified by Maxwell Valuation (in August
2009) and Telfer Young (in February 2010).
The quality of the applicants’ case
[90] The liquidators’ notice of opposition by the s 284 application asserted very simply that:
There is no merit in the proposed claim against the [Nominee Company].
[91] I treat for present purposes, Mr Parker’s use of the concept of “merit” as
equivalent to the Trinity Foundation test of “credible factual basis”.
[92] I have already concluded in relation to the s 165 application that the applicants have failed to demonstrate the existence of a viable claim for damages of
$3,000,000 or more. Having regard to the lack of valuation evidence, I have also concluded that the applicants have not provided an evidential basis upon which it might be found that a mortgagee sale conducted prudently would have achieved a sale at $1,550,000 or more.
[93] On the basis of his own evidence, Mr Keung is not slow to point out to others the ways in which he considers others have acted incorrectly. He deposes that he and his solicitor put the liquidators on notice (of claims against them) on several occasions. He says that the liquidators failed or refused to pursue a proceeding against the Nominee Company despite the valuation evidence and the other matters which he has set out in his affidavit.
[94] Virtually all the material evidence in this case is of an historical nature, relating to the period from 2006 to 2010. The recurring feature of this proceeding is that the applicants have not obtained fresh evidence whether from valuers or otherwise. The documentary material I have had to consider in this proceeding is essentially the same as that which was available to the liquidators. While I have had the benefit of narrative affidavit evidence, the essential complaints made by Mr
Keung and his co-applicants are matters which Mr Keung repeatedly put to the
Nominee Company and the liquidators at the time of the sale process.
[95] I have concluded that a prudent business person would not on the material in evidence commence a proceeding against the Nominee Company. I could equally put that finding upon the basis that the applicants’ proposed claim, on the material it has provided, is unmeritorious.
[96] In Trinity Foundation, Associate Judge Lang said in relation to his Honour’s
two-step requirements for leave, that:36
If this standard is applied, the object of legislation will be met, because truly meritorious claims will be granted leave.
[97] Applying that approach, I am unable to place the applicants’ case as involving a “truly meritorious claim”. It therefore does not deserve leave.
[98] If I were to then move to a substantive assessment under s 284 of the Act, I would approach the matter according to that set out in Penlington J’s judgment in Murray v Official Assignee (as applied to s 284 applications in Commissioner of Inland Revenue v Hulst)37 where his Honour stated:38
The question for the Court’s decision is not whether the Assignee was right or wrong in reaching his decision on the material available to him. Rather the Court's function is to consider what in its view is the correct order to make on the material before the Court as measured by the standard of reasonableness. The Court must reach its conclusion on the basis of the relevant facts as given in evidence at the hearing or otherwise properly before the Court. The Court in proceeding de novo must however always pay due regard to the decision of the Assignee given that he is charged by statute with the administration of the bankrupt’s estate in terms of the Insolvency Act and given that he has the task of ensuring that the policy of that Act is given effect.
[99] When the applicants’ proposed case is analysed (as I have done in relation to the s 165 application), the decision of the liquidators not to have GBRH pursue a claim against the Nominee Company is manifestly reasonable. I have reached that
conclusion on the evidence placed before the Court. The fact that experienced
36 At [22].
37 Commissioner of Inland Revenue v Hulst (2008) 19 NZTC 15,693 at [26] per Morris J.
38 Murray v Official Assignee HC Hamilton B318/92, 9 September 1992 at 18.
liquidators reached the same view is a matter to which I have regard but ultimately, having come to the matter fresh, I find nothing in the liquidators’ decision which calls for or justifies directions under s 284.
Section 284 application – appropriate outcome
[100] The appropriate outcome is that leave not be granted to the shareholders to apply for s 284 directions.
Costs
[101] Counsel asked me to reserve costs as there have been matters exchanged between counsel which may affect the appropriate award.
[102] I tentatively indicate to the parties, as it may be of assistance, that this is an appropriate case for costs to follow the event. It is also my tentative view (having regard to the assessment of merits which I have conducted) that the application of r 14.6(3)(b)(ii) High Court Rules may justify an award of increased costs.
[103] In the event that agreement cannot be reached between the parties on costs, counsel are to comply with the directions which follow.
Orders
[104] I order:
(a) The plaintiffs’ application dated 1 May 2015 is dismissed.
(b)To the extent that the statement of claim dated 1 April 2014 remains live, it is struck out.
(c) Costs are reserved, with memoranda (limited to four pages) to be filed respectively by the applicants for costs and thereafter (within three working days) the respondent to the costs application, the judgment as
to costs being dealt with on the papers.
Associate Judge Osborne
Solicitors:
Malcolm Wallace, Christchurch Darroch Forrest, Wellington Parker Cowan, Queenstown
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