Body Corporate 172108 v Cummins
[2022] NZHC 211
•25 February 2021
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE
CIV-2021-485-458
[2022] NZHC 211
UNDER the Insolvency Act 2006 IN THE MATTER
of the bankruptcy of Robert James Cummins
BETWEEN
BODY CORPORATE 172108
Judgment Creditor
AND
ROBERT JAMES CUMMINS
Judgment Debtor
Hearing: 10 December 2021 Appearances:
J B Orpin-Dowell for judgment creditor K Sullivan for judgment debtor
Judgment:
25 February 2021
JUDGMENT OF ASSOCIATE JUDGE JOHNSTON
[1] This is another chapter in the long running dispute between Body Corporate 172108, which is the body corporate for a block of apartments in Hobson Street in Auckland, and Mr Robert Cummins and various entities associated with him which, in one configuration or another, have owned the top floor apartment in the complex, Unit 12A, throughout. The background to the dispute has been described in innumerable judgments of this Court and the Court of Appeal.1 It would be wearisome
1 See (non-exhaustive): Cummins v Body Corporate 172108 [2021] NZCA 145; Manchester Securities LTD v Body Corporate 172108 [2019] NZCA 408; Manchester Securities Ltd v Body Corporate 172108 [2018] NZCA 190, [2018] 3 NZLR 455; Manchester Securities Ltd v Body Corporate 172108 [2017] NZCA 527, (2017) 19 NZCPR 65; Manchester Securities Ltd v Body Corporate 172108 [2015] NZCA 29; Body Corporate 172108 v Manchester Securities (in liq) [2021] NZHC 2580.
BODY CORPORATE 172108 v CUMMINS [2022] NZHC 211 [25 February 2021]
to offer yet another description. I rely on the outline of the facts set out in my judgment of 19 February 2020, reissued on 28 February 2020:2
[2] Litigation between the parties has now been ongoing for more than 10 years. The factual background is complex and has already been recorded in detail in a series of judgments in this Court and the Court of Appeal. A relatively brief summary will suffice here:
(a)BC 172108 is the Body Corporate for Hobson Apartments, a 12-storey apartment block in Hobson Street in Auckland;
(b)The ownership arrangements for levels 1–11 inclusive are orthodox with BC 172108 owning common areas including the external walls and the unit title holders owning their apartments;
(c)Level 12 is different. As I understand the position, other than such things as stairwells and lift shafts, Manchester owns everything above level 11. This reflects the fact that level 12 was constructed separately, after the rest of the building;
(d)By late 2009 it had become apparent that the building was not weathertight and that extensive remedial work was necessary to all levels;
(e)BC 172108 proposed a scheme for the building’s remediation pursuant to s 48 of the Unit Titles Act 1972 (repealed);
(f)Given the unusual ownership arrangements, a key issue was the contribution if any to be made by Manchester to the cost of remedial work to the common areas on levels 1–11. BC 172108 contended that Manchester should contribute
11.88 per cent of this cost, that being the percentage of the total building area reflected by level 12. Manchester contended that as it would have to shoulder full responsibility for remedial work on level 12 it should not be expected to contribute to the cost of such work on common areas below that;
(g)The parties were unable to resolve this issue, and BC 172108 commenced proceedings in this Court;
(h)There followed a series of defended hearings and Heath J issued several judgments, the last in August 2010.1 His Honour ultimately approved a scheme that required Manchester to carry the cost of remedial work to level 12 and contribute to the cost of remedial work on the common areas of levels 1–11. The latter obligation was capped at 11.88 per cent of the total costs of remedial work to the building;
(i)Inevitably, there were delays and substantial cost escalations;
2 Body Corporate 172108 v Manchester Securities Ltd [2020] NZHC 198.
(j)In March 2013 BC 172108 applied for an order varying the scheme;
(k)In March 2017 Fogarty J issued a judgment granting BC 172108’s application, effectively removing the cap on Manchester’s obligations to contribute to the repairs on levels 1–11;
(l)Fogarty J concluded that as at the date of his judgment Manchester was liable to pay a minimum of $321,264.79 plus GST, and ordered Manchester to pay that amount as an interim payment;
(m)Manchester appealed Fogarty J’s judgment. In November 2017 the Court of Appeal dismissed this appeal;
(n)Manchester applied for leave to appeal to the Supreme Court. In March 2018 the Supreme Court dismissed this application;
(o)BC 172108 then served statutory demands on Manchester pursuant to s 290(1) of the Companies Act. Whilst I am given to understand that a number of such demands were served, only two have featured in this litigation. In the first BC 172108 demanded payment of the judgment debt of
$321,264.79 and body corporate levies then said to be payable. In the second the company demanded payment of further body corporate levies that had become payable after the date of the first demand;
(p)Manchester applied to set aside the first statutory demand. In February 2018 its application was dismissed by this Court;
(q)Manchester appealed from that decision. In June 2018 the Court of Appeal dismissed this appeal;
(r)In the meantime, Manchester had initiated an arbitration directed at quantifying claims it says it has that should be netted off against any indebtedness it has to BC 172108;
(s)Manchester then applied for a stay of BC 172108’s winding up proceeding pursuant to art 8(1) of sch 1 to the Arbitration Act 1996 on the basis that the issues in the winding up proceeding were the subject of arbitral proceedings;
(t)In December 2018 this Court dismissed that application;
(u)Manchester appealed from that judgment. In September 2019 the Court of Appeal dismissed this appeal;
(v)I heard BC 172108’s application to wind up Manchester on 10 December 2019.
[Footnotes omitted.]
[2] In that judgment an order was made winding Manchester Securities Ltd up. An appeal was dismissed by the Court of Appeal.
[3] Subsequently, the Body Corporate sought costs. On 29 July 2020 I made a costs order against Manchester Securities and Mr Cummins jointly as the two parties who opposed the Body Corporate’s winding proceedings.3 The award was for a total of $33,818.54 inclusive of costs and disbursements.
[4] The Body Corporate served a bankruptcy notice on Mr Cummins in respect of that judgment debt on 13 September 2021, and Mr Cummins now applies to set the notice aside.
[5] In my 19 February 2020 judgment, I deferred the coming into force of the winding up order for a period in order to give Mr Cummins, who at all times had effective control of Manchester Securities, an opportunity to make arrangements to pay the debt and avoid a liquidation.
[6] He did not avail himself of that opportunity. Instead, Mr Cummins put in place a series of steps which were directed at avoiding the consequences of the winding up order.
[7] At the time that the order was made Manchester Securities was the sole trustee of the Manchester Securities Trust and in that capacity the registered owner of Unit 12A. Mr Cummins arranged for himself to be appointed as an additional trustee of the trust. Then he arranged for Manchester Securities to retire as a trustee. Finally — and seemingly unnecessarily — he exercised his entitlement as settlor and appointor to remove Manchester Securities as a trustee. The upshot was to leave Mr Cummins as the sole trustee. One step that Mr Cummins did not take was to arrange for the transfer of the title to Unit 12A into his own name. It remained, and remains, registered in the name of Manchester Securities. Plainly, this was to avoid any potential liability arising from legal ownership of the property.
3 Body Corporate 172108 v Manchester Securities Limited (in liq) (costs) [2021] NZHC 1852.
[8] I turn now to the basis upon which Mr Cummins contends in this proceeding that the Court should set aside the Body Corporate’s bankruptcy notice. The argument is advanced on his behalf by Mr Sullivan on two broad bases:
(a)First, that the Body Corporate’s proceeding constitutes an abuse of process; and
(b)Second, that Mr Cummins has a cross-claim against the Body Corporate for an amount in excess of the judgment debt.
Abuse of process
[9] It is common ground that the Court has jurisdiction (inherent or under pt 15 of the High Court Rules 2016) to set aside a bankruptcy notice if to allow the judgment creditor to proceed on the basis of the same would be an abuse of process.
[10] The Court will exercise this discretion when it is necessary to do so in the interests of justice.
[11] The argument advanced on Mr Cummins’ behalf relating to abuse of process was not especially easy to follow.
[12]It certainly involved the following three propositions:
(a)Section 14 of the Insolvency Act 2006 prohibits the Court from making an order of adjudication on the application of a secured creditor unless the creditor has established that the amount of the debt exceeds the value of the security by at least $1,000;
(b)BC 172108 is a secured creditor of Mr Cummins in respect of the judgment debt on which its bankruptcy notice is founded;
(c)Thus, BC 172108 will not be able to succeed at the hearing, and, in such circumstances, it would be an abuse of process to allow the proceeding
to continue, so that the Court should exercise its discretion and set BC 172108’s bankruptcy notice aside.
[13] Thus, at the heart of the argument is the proposition that BC 172108 is a secured creditor in respect of the judgment debt.
[14] And, it is in relation to this contention that Mr Cummins’ argument is at its most obscure.
[15] One thing is very clear. The argument is predicated on the proposition that, at law, or rather equity, Mr Cummins is the beneficial owner of Unit 12A.
[16]Here is how Mr Sullivan developed the argument:
25.The Body Corporate’s attempt to uphold the bankruptcy notice, whilst it has an equitable charge over the Property, is an abuse of the process of the Court because:
(i)the Body Corporate is subrogated to the trustee indemnity and corresponding equitable charge over the Property that otherwise vests in the liquidators of MSL.
(ii)the equitable charge is a “charge” as defined in s3 of the Act; it allows the Body Corporate recourse to the Property in order to recover any indebtedness.
(iii)the Property is “property” as defined in the Act (which is broadly defined to include rights, interests, and claims of every kind in relation to property however they arise) and must therefore include the equitable proprietary interest of a trustee.
(iv)Mr Cummins is the equitable owner of the Property in his capacity as trustee of the Trust; MSL (the joint debtor) is the legal owner of the Property which it holds under a bare trust for Mr Cummins.
(v)in terms of securing any liability to the Body Corporate, there is no distinction between “trust property” owned by Mr Cummins and his “personal property”. It is trite that a trust is an equitable obligation to deal with property for the benefit of beneficiaries, not an entity. This was explained by Heath J in Ikuia as follows:
The term “trust” is descriptive in nature and is intended to capture any situation in which an individual or a company holds property for the benefit of third parties. In Hardoon v Belilios [1901] AC 118 (PC) at [123], it was said that
the relation of trustee and beneficiary was “to prove that the legal title was in [the trustee] and the equitable title in [the beneficiary]”.
and
An individual trustee (in contrast to a corporate trustee) is, in legal terms, indivisible: one cannot separate personal liability as an individual from liability as a trustee. A creditor of the individual is left to sue the human being who acts as a trustee, irrespective of the capacity in which the debt was incurred.
(vi)the counter-balance is that Mr Cummins has an indemnity out of the property he holds on trust, and a corresponding equitable charge over the trust assets, including the Property, which he can apply in discharge of such liability. That indemnity is subject to the prior right of the retired trustee (MSL) now subrogated to the Body Corporate.
(vii)in this case, the Body Corporate has refused to enforce the equitable charge over the Property, whilst maintaining a caveat to protect the charge for no apparent reason other than to prevent Mr Cummins from refinancing against the Property, including to meet any liability he may have to the Body Corporate.
(viii)notwithstanding the registered (to Sage) and unregistered (to FBFL) mortgages over the Property, and the debt secured thereby, the Body Corporate is in practice a fully secured creditor by virtue of the combination of its equitable charge together with the operation of s147(4) of the Unit Titles Act 2010. S147(4) allows the Body Corporate to withhold its pre-settlement certificate from the unit owner, thereby precluding any transfer of the Property, until it is assured of payment of any debt due to it by the owner.
(ix)it is recognised that section 147(4) does not itself create a charge, however the practical priority on any sale of the unit by another was recognised in Gilbert.
(x)similarly, the effect of s147(4) was considered by Gwyn J in the caveat proceeding. Her Honour accepted the Body Corporate’s submission that there was no current prospect of a sale of the Property and therefore no improvement to its security position from the operation of the section. However, the Body Corporate did not disclose to the Court that it had no intention of exercising its rights under the charge so as to force a sale of the Property; it could not improve its position by maintaining the caveat in any event.
(xi)the result is that the Body Corporate is:
a)maintaining a caveat to protect an equitable charge it has no intention of enforcing, whilst
b)its position is fully protected on any sale of the Property by the operation of s147(4), whilst
c)the caveat precludes Mr Cummins from refinancing against the Property, whilst
d)the Body Corporate is seeking to bankrupt Mr Cummins, whilst
e)there is a clear and persuasive/genuine dispute over whether Mr Cummins, qua trustee, is a net debtor of the Body Corporate or vice versa.
[Footnotes omitted and emphasis added.]
[17] As already recorded, although the rearrangements Mr Cummins made following my judgment of 19 February 2020 involved Manchester Securities being replaced by Mr Cummins as the trustee of the Manchester Trading Trust, the company remained the registered owner of Unit 12A.
[18] Mr Sullivan submits that, upon those arrangements being implemented, Mr Cummins became the beneficial owner of Unit 12A:
Mr Cummins is the sole trustee of the Trust and therefore he is the equitable owner of the property of the Trust, including the property at 12A/196 Hobson Street … .
[19]That proposition is plainly wrong.
[20] At all times, Manchester Securities, as the registered proprietor of the property, was the legal owner. The Land Transfer Act 2017 says so. Mr Sullivan’s contention that Manchester Securities is a bare legal owner of the property and holds the legal title in trust for Mr Cummins is no doubt correct. Certainly equity would not permit the company to claim a beneficial interest. However, what the argument ignores is that Manchester Securities holds Unit 12A on trust for Mr Cummins in his capacity as the trustee of the Manchester Trading Trust. Any interest that Mr Cummins has is in that capacity. And, in that capacity, he holds any such interest on trust for the beneficiaries (whosoever they may be). Thus, throughout, beneficial ownership has been with the beneficiaries. That is quintessentially a lawyer’s description of the position. Let me put it plainly. Despite Mr Cummins machinations in the hiatus period between this Court’s order winding up Manchester Securities and that order coming
into effect, the real owners of the assets of the trust have throughout been the beneficiaries of that trust.
[21] I reject the contention that Mr Cummins in his capacity as the trustee of the Manchester Securities Trading Trust has any beneficial rights in relation to Unit 12A.
[22] On that basis, the contention that BC 172108 is a secured creditor for the judgment debt cannot succeed.
[23] As Mr Orpin-Dowell submitted on behalf of BC 172108, there are other difficulties with the argument advanced on Mr Cummins’ behalf.
[24] First, even if BC 172108 did have some sort of equitable security, that would not extend to Mr Cummins personal assets. This is because the right of subrogation to a trustee’s right of indemnity can confer rights no greater than those enjoyed by the trustee. It follows that any equitable security would not extend to Mr Cummins’ own assets.
[25] Second, even if that were not the case, bankruptcy proceedings would not constitute an abuse of process because the possible availability of a right of subrogation is not a defence to a claim against a trustee. At least historically, bankruptcy proceedings against a trustee had to be pursued to a conclusion before a creditor could exercise a right to subrogation. As the Court explained in Levin v Ikiua,4 the trust creditor’s primary recourse is to sue the trustee personally. As a result, the creditor could be subrogated to the trustee’s right of indemnity, but first the creditor had to exhaust the available remedies against the trustee. It was only if the trustee’s assets were insufficient that recourse to the trust fund was available.
[26] For those reasons, I reject the contention advanced on Mr Cummins’ behalf that to allow these proceedings to continue would be an abuse of process.
4 Levin v Ikiua [2010] 1 NZLR 400 (HC) at [121].
Mr Cummins’ alleged cross-claim
[27] Section 17(1)(d)(ii) of the Insolvency Act 2006 provides that a bankruptcy notice may be set aside if the judgment debtor satisfies the Court that they have a triable cross-claim against the creditor exceeding the amount of the judgment debt by at least $1,000.
[28] The second basis upon which Mr Cummins contends that the bankruptcy notice should be set aside is that he has:
… a subsequently acquired cross-claim against the Body Corporate arising in equity from the combination of the subrogation, on the one hand, to Mr Cummins of the liquidators’ priority claim and, on the other hand to the Body Corporate of the trustee indemnity and equity charge that formerly vested in the liquidators.
[29] Apparently, in mid 2021 the Manchester Securities liquidation had ground to a halt because a dispute had arisen between the Body Corporate and the original liquidators appointed by the Court as to fees and expenses. Mr Cummins stepped into this dispute and took it upon himself to pay the liquidators’ costs of approximately
$57,000, which enabled him to appoint a liquidator of his own choice.
[30] It is now asserted on Mr Cummins’ behalf that he has a cross-claim against the Body Corporate in respect of this $57,000.
[31] Here is how Mr Sullivan developed the argument for what he described as “a cross-claim by way of equitable set-off by subrogation to the (equitable) rights of the liquidators of MSL”:
(i)the Body Corporate is subrogated to the trustee indemnity and corresponding equitable charge over the Property that otherwise vests in the liquidators of MSL and so can be in no better position than MSL
(ii)Mr Cummins has subrogated to the liquidators’ priority claim under clause 4 of the 7th schedule to the Companies Act 1993; the Court of Appeal has confirmed in Reynolds that that provision entitles the payer of an amount for which schedule 7 recognises a preference to be subrogated for the entity whose obligation the payment was meeting or reducing.
(iii)it is clear (following Reynolds) that Mr Cummins would be entitled to pursue the liquidators’ claim directly against MSL; that is the first leg of the double.
(iv)the issue raised here is whether the Body Corporate is liable in equity to meet MSL’s obligation to the liquidators – an obligation which is now owed to Mr Cummins.
(v)the Body Corporate is subrogated to the trustee indemnity of MSL. It is common ground that the trustee’s right of indemnity takes priority over the beneficiaries’ interest in the trust property. The rationale is that it is inequitable for a beneficiary to benefit from the property without also bearing the burden associated with that property.
(vi)a trustee has a beneficial proprietary interest in the trust property to the extent of the indemnity.
(vii)The Body Corporate is subrogated to that trustee indemnity. That is the foundation of its caveat. It now enjoys MSL’s equitable rights over the Property.
(viii)Applying a fundamental principle of equity, the Body Corporate cannot take the benefits of subrogation to MSL’s proprietary rights without also assuming the burdens associated with those rights.
(ix)One of those burdens is MSL’s liability to pay the liquidators’ fees and expenses; that liability now rests with the Body Corporate
(x) there is mutuality – the obligations arise out of the liquidation of MSL. [Footnotes omitted.]
[32] As I understand the argument, essentially, it is that, by paying the liquidators’ costs Mr Cummins became subrogated to their preferential claim under cl 4 of the 7th schedule to the Companies Act 1993, and that, as BC 172108 asserts a right to be subrogated to Manchester Securities’ rights as a former trustee to be indemnified from the trust assets, it follows that BC 172108 has an equitable obligation to pay the liquidators’ costs (to Mr Cummins) on the grounds that the law will not permit it — BC 172108 — to take the benefit of subrogation to the company’s rights without also assuming the obligations that go with those rights. On that basis, it is contended, that Mr Cummins has a right to set-off the debt owed to him against the judgment debt.
[33] As Mr Orpin-Dowell submits, the difficulty with this argument is that the proposition that because BC 172108 may have rights of subrogation to Manchester Security’s rights of indemnity, BC 172108 has an obligation to pay Mr Cummins the amount he paid to defray the liquidators’ costs is a non sequitur.
Even the most elementary application of sch 7 which deals with priorities in a liquidation indicates that the party to which Mr Cummins must look to recover his outlay is Manchester Securities, or rather the liquidator.
[34] In short, I am unpersuaded that the circumstances as described by Mr Sullivan gave rise to any obligation on the part of BC 172108 to pay Mr Cummins the amount he paid to the former liquidators in respect of their fees and expenses. Accordingly, I do not accept that Mr Cummins has a triable cross claim in the sense explained in Sharma v ANZ Banking Group.5
Conclusion
[35] For those reasons, Mr Cummins’ application for an order setting the bankruptcy notice aside is dismissed.
[36] My preliminary view is that the judgment creditor is entitled to its costs on a 2B basis. No doubt counsel will be able to resolve these. If, however, that process is impossible, they may file memoranda in the usual way, and I will deal with costs on the papers.
Associate Judge Johnston
Solicitors:
Grove Darlow & Partners, Auckland for judgment creditor Core Legal Ltd, Masterton for judgment debtor
5 Sharma v ANZ Banking Group (1992) 6 PRNZ 386.
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