Body Corporate 49407 v Donovan
[2024] NZHC 233
•16 December 2024
IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY
I TE KŌTI MATUA O AOTEAROA TAURANGA MOANA ROHE
CIV-2023-470-000011
[2024] NZHC 233
UNDER Declaratory Judgments Act 1908, s 3, Insolvency Act 2006, s 119 and Land Transfer Act 2017, s 105 IN THE MATTER OF
Unit F, 30 Willow Street, Tauranga
BETWEEN
BODY CORPORATE 49407
Plaintiff / Counterclaim Defendant
AND
MICHAEL PHILIP DONOVAN
First Defendant / Counterclaim Plaintiff
JOHN GRAHAM KENNETH BOLTON
Second Defendant
Hearing: 21 – 22 November 2024 Appearances:
G R Grant for Plaintiff / Counterclaim Defendant
D G Hayes for First Defendant / Counterclaim Plaintiff No appearance for Second Defendant
Judgment:
16 December 2024
JUDGMENT OF ANDREW J
This judgment was delivered by Justice Andrew on 16 December 2024 at 2.00 pm
pursuant to r 11.5 of the High Court Rules 2016 Registrar / Deputy Registrar
Date ………………………….
BODY CORPORATE 49407 v DONOVAN [2024] NZHC 233 [16 December 2024]
Introduction
[1] This proceeding concerns a property (Unit F) within a unit title complex in Willow Street, Tauranga, and known as Strata Views. The plaintiff is the Body Corporate for Strata Views.
[2] Unit F was previously owned by the first defendant, Mr Michael Donovan. Since his bankruptcy in 2009 he has remained living in Unit F but has paid no levies or rates.
[3] In 2011, the Official Assignee disclaimed all rights and interests in Unit F as “onerous property”. The effect of that disclaimer was to bring to an end all rights and liabilities in Unit F for both the Official Assignee and Mr Donovan. From the date of that disclaimer, now 13 years ago, Unit F has been, in effect, ownerless property and administered by the Crown.1
[4] The Body Corporate says that the effect of the disclaimer has been that for the last 13 years there has been no “owner” from whom it can collect levies. During that time, substantial weathertight remediation works have been undertaken at Strata Views.
[5]The Body Corporate seeks:
(a)a declaration that two mortgages registered against Unit F are time- barred and unenforceable (there are in fact three mortgages);
(b)an order vesting Unit F in the Body Corporate under s 119 of the Insolvency Act 2006; and
(c)an order that the two mortgages registered against Unit F are discharged under s 105 of the Land Transfer Act 2017 because they are time-barred and unenforceable.
1 Ownerless Land vests in the Crown, described as being bona vacantia or through escheat. Treasury administers ownerless property by default.
[6] If successful, the Body Corporate will become the registered proprietor of Unit F. It then intends to clean up the premises, sell it, and arrange repayment of the levies advanced by its other owners and repayment of outstanding rates to the Tauranga City Council.
[7] Mr Donovan has brought a counterclaim, contending that Unit F should be vested in him under s 119 of the Insolvency Act. He consents to the discharge of the two mortgages. He also says that a third mortgage (described by the parties as the second mortgage, where the Body Corporate is the mortgagee) should also be discharged.2
[8] The central issue is the determination of the competing vesting applications. That turns on my assessment of the criterion of fairness under s 119 of the Insolvency Act.
Background facts
[9] Strata Views is a predominantly commercial building located in central Tauranga. Unit F is one of seven principal units in Strata Views. It is the only unit that is being operated as residential: all the other units are operating as business premises with underground parking.
[10] Mr Donovan is still recorded as the registered proprietor of Unit F on the Certificate of Title. However, there is no dispute that Unit F is bona vacantia.
[11] The second defendant is Mr Bolton, the registered mortgagee of the first and third mortgages. Mr Bolton was served with the proceedings but has taken no steps. The claim against him therefore proceeds by way of formal proof.
[12]The Certificate of Title records Mr Bolton as the mortgagee in respect of:
(a)a first-ranked mortgage, number 5760267.3, registered on 10 October 2003 and subsequently varied on 27 August 2006; and
2 The position of the Body Corporate is that it will consent to the discharge of that second mortgage provided the Court discharges all three mortgages.
(b)a third-ranked mortgage, number 8240076.1, registered on 30 July 2009.
(together referred to as the Bolton mortgages)
[13] The third-ranked mortgage, dated 10 January 2009, was entered into very shortly before Mr Donovan was adjudicated bankrupt (i.e. on 28 January 2009). The mortgage was not registered until 30 July 2009, six months after Mr Donovan’s bankruptcy began.
[14]Mr Donovan was discharged from bankruptcy on 31 December 2013.
[15] On 26 June 2017, the Body Corporate obtained judgment by default against Mr Donovan in the sum of $322,200, together with interest of $58,084.95. That was for an alleged mortgage debt under the second mortgage. The Body Corporate also obtained an order granting it vacant possession of Unit F. By that time the Body Corporate had become a second mortgagee, having purchased a mortgage from Belgrave Finance Ltd (in receivership and in liquidation) in 2016 (i.e. the second mortgage).3
[16] Strata Views underwent an extensive weathertightness remediation project during 2018 and 2019 at significant cost to the owners of the Body Corporate. The total costs of remediation works were over $1.5 million. The share for Unit F was
$242,199.67. The other owners of Strata Views have had to cover Unit F’s share of the remedial costs pending a recovery.
[17] No levies have been paid in respect of Unit F for more than 15 years. This includes all of Unit F’s share of the remedial work. Even prior to his bankruptcy, Mr Donovan had unpaid levies arrears.
[18]The total levies arrears owing for Unit F as at 18 November 2024, are
$338,994.89 plus interest owing of $207,997.14.
3 The second mortgage is recorded on the Certificate of Title identifier SA45C/859 as 7175412.3 mortgage to (now) Body Corporate 49407 – 21 December 2016 at 9.00 am.
[19] There are significant rates arrears owing to the Tauranga City Council in respect of Unit F. As at 18 November 2024 the total owing for rates and penalties was
$67,075.68, excluding interest and legal costs.
[20] The Tauranga City Council’s attempts to date to exercise its rating sale powers have been thwarted by the first-ranked mortgagee, Mr Bolton, refusing to agree a reserve price.
[21] By judgment dated 14 February 2018,4 this Court set aside the judgment that had earlier been obtained by the Body Corporate against Mr Donovan. The Court held that any liability of Mr Donovan was provable in his bankruptcy. Accordingly, he no longer had any mortgage debt and judgment could therefore not have been entered against him. The debt was no longer his. The Court further held that, as a result, the order for possession had to be rescinded.
[22] Both the Crown (the Treasury) and the Tauranga City Council have been served with the proceedings. The Tauranga City Council supports the application by the plaintiff Body Corporate for an order vesting the property in its name. The Treasury advises that its position is as follows:
(a)It is satisfied that the Official Assignee has disclaimed Mr Donovan’s ownership interest in Unit F;
(b)Following the Official Assignee’s disclaimer, ownership of Unit F likely passed to the Crown;
(c)The Crown has no interest in claiming or exercising any ownership interest in the property;
(d)The Crown does not object to the Court making an order that Unit F be vested in the Body Corporate plaintiff;
4 Body Corporate v Donovan [2018] NZHC 145.
(e)The Crown does not wish to be served or otherwise involved in any application for a vesting order and will abide by the decision of the Court.
The legal framework
[23] Section 119 of the Insolvency Act allows any person disadvantaged by a disclaimer of property to seek a vesting order from the Court:
Position of person who suffers loss as result of disclaimer
(1) A person suffering loss or damage as a result of disclaimer by the Assignee may—
(a)claim as a creditor in the bankruptcy for the amount of the loss or damage, taking account of the effect of an order made by the court under paragraph (b):
(b)apply to the court for an order that the disclaimed property be delivered to, or vested in, that person.
(2) The bankrupt may also apply for an order that the disclaimed property be delivered to, or vested in, the bankrupt.
(3) The court may make an order under subsection (1)(b) or (2) if it is satisfied that it is fair that the property should be delivered to, or vested in, the applicant.
[24]Section 105 of the Land Transfer Act reads:
Court may order mortgage to be discharged if mortgagee’s remedies barred by Limitation Act 2010
(1) The court may, on application by the registered owner of an estate or interest in land that is subject to a registered mortgage, order that the mortgage is discharged if the court is satisfied that—
(a)a proceeding by the mortgagee for payment of money secured by the mortgage is barred by the Limitation Act 2010 or any other enactment; and
(b)except for an application under subpart 1 of Part 4, any other proceeding by the mortgagee for a remedy in respect of the mortgaged land would also be barred by the Limitation Act 2010 or any other enactment.
(2) The Registrar must register the order discharging the mortgage on lodgement of a sealed copy of the order.
(3)The mortgage is discharged on registration of the order.
(4)The court may direct that—
(a)public notice of an application be given under this section:
(b)notice of the application be served on any person the court specifies.
Analysis and decision
[25]There are three issues I need to determine:
(a)Are the two Bolton mortgages time-barred and unenforceable?
(b)Should a vesting order be made in favour of the Body Corporate or, alternatively, Mr Donovan?
(c)Should the mortgages be discharged under s 105 of the Land Transfer Act?
Issue (a) – Enforceability of the mortgages
[26] The Body Corporate claims, in relation to the two Bolton mortgages, proceed by way of formal proof. Mr Bolton is the second defendant but has taken no steps at all in the proceeding.
[27] The Body Corporate says that the declarations it seeks are intended to give it certainty about the status of the mortgages prior to proceeding with the vesting order part of its claim. The Body Corporate says it is being cautious as it wishes to mitigate against the risk of it obtaining a vesting order and becoming the legal owner of Unit F, but then for some reason not succeeding in having the Bolton mortgages discharged. That would potentially expose its members to a liability under the mortgages.
[28] The Body Corporate further says that it cannot seek to discharge the Bolton mortgages before obtaining a vesting order under s 105 of the Land Transfer Act. That is because under s 105, the Body Corporate must be the registered owner of the property. This means that the vesting order claim needs to be determined after the declaratory judgment relief sought but before any orders for discharge are made.
[29] I find that Mr Bolton’s first and third ranked mortgages are time-barred and unenforceable given the provisions of the Limitation Act 1950 and/or Limitation Act 2010.
[30] In relation to the first-ranked mortgage, my reasons for that conclusion are as follows:
(a)The due date for repayment of the principal sum under that first mortgage (as varied) was 7 July 2008;5
(b)The first mortgage remained unpaid as at 7 July 2008 and was therefore in default. That is the relevant date of default giving rise to:
(i)the cause of action by the mortgagee to recover the funds secured by the mortgage; and/or
(ii)an action to recover the land (e.g. by entering into possession);
(c)The relevant limitation period applicable to a claim for payment of funds secured by the mortgage and/or an action to recover the land is 12 years, commencing on the date of the default.6 Any such action must therefore have been brought no later than 7 July 2020;
(d)Therefore, any claim that Mr Bolton might bring against the mortgagor, or in respect of the land, is now time-barred. Mr Donovan would have an absolute defence to any such claim;
(e)The debt underlying the mortgage was extinguished in any event by Mr Donovan’s bankruptcy.
[31] I further find that any acknowledgment or part-payment which may have triggered an extension of the relevant limitation period, could only have been made by
5 The principal sum was $212,000, the interest was 7 per cent, repayments were monthly and in August 2006, the term was extended to 7 July 2008 (it was originally 7 July 2005).
6 See Limitation Act 1950, ss 20(1) and 7(2).
Mr Donovan, as mortgagor, prior to his bankruptcy.7 That means that at best this might have extended the expiry of the relevant limitation period to 28 January 2021. However, the undisputed evidence of Mr Donovan is that no acknowledgment ever occurred. He had no dealings with Mr Bolton after the mortgages were granted, which was 2009 at the latest.
[32] My reasons for also finding that the third-ranked mortgage is time-barred and unenforceable are as follows:
(a)The due date for repayment of the third ranking mortgage appears to have been 10 February 2009, meaning that it was already in default before it was even registered in July 2009;8
(b)At the time the third-ranked mortgage was registered in his name in July 2009, Mr Donovan was an undischarged bankrupt. He had no right to deal with Unit F without the knowledge or consent of the Official Assignee. Such consent was not obtained;
(c)No advance of loan funds by Mr Bolton to Mr Donovan was ever disclosed to the Official Assignee during the bankruptcy;
(d)If no loans were advanced to Mr Donovan, the third-ranked mortgage is no security at all. There is therefore nothing to be discharged;
(e)The same 12-year limitation period under s 20(1) of the Limitation Act 1950 applies to this third-ranked mortgage. That means Mr Bolton needed to bring an action by February 2021, being 12 years from February 2009.
7 See also Cox v Duncan [1888] 6 NZLR 562 (SC).
8 The third ranked mortgage involves a cash payment of $200,000 by Mr Bolton to Mr Donovan. It appears that it was not disclosed to the Official Assignee and nor was the Official Assignee’s consent sought to register the mortgage.
[33] I further find that no acknowledgment could have been made by Mr Donovan that is or was capable of reviving any debt secured by the Bolton mortgages so as to bring any remedy under those mortgages within time. That is because:
(a)from the date that Mr Donovan was adjudicated bankrupt in 2009 (now more than 12 years ago) he lost any ability to deal with any of his property without the consent of the Official Assignee;
(b)there is no legal way that Mr Donovan could have dealt with Unit F at all after the date of the disclaimer in 2011. From then on, he no longer had any title or interest in it and therefore had no authority to deal with it.
[34] I accept that under s 47 of the Limitation Act 2010, a written acknowledgment of a debt can trigger a fresh cause of action. Consequently, if the acknowledgment was in 2011 or after that date, the 1950 Limitation Act would no longer apply and the Limitation Act 2010 would apply instead.
[35] Even if the requirements of the Limitation Act 2010 were satisfied, i.e. an acknowledgment triggered a fresh cause of action, such acknowledgment would only have given Mr Donovan six years in which to bring an action to recover the debt. That is because the Limitation Act 2010 includes claims for money secured by a mortgage within the definition of a money claim and is therefore subject to a six-year limitation period.
[36] In any event, there is no evidence of any acknowledgment of debt. The evidence of Mr Donovan denying any such acknowledgment is unchallenged.
[37] I accordingly conclude that the declaration sought with respect to the first and third ranked mortgages should be granted. Both are time-barred and unenforceable.
Issue (b) – Vesting order
[38] As noted, there are competing applications for a vesting order under s 119 of the Insolvency Act.
[39] Before turning to address the merits of the applications, there is a preliminary standing issue I need to address.
[40] Mr Hayes, on behalf of Mr Donovan, contends that the Body Corporate has no standing to bring an application under s 119 of the Insolvency Act. He submits that a body corporate has no right to own a unit in this complex or, if it does have such a right, it is only for the purposes of exercising a power or duty. He says that there is no relevant power or duty here which could justify ownership by the Body Corporate. Mr Hayes relies upon ss 77 (core things body corporates may do), 78 and 84 of the Unit Titles Act 2010. In particular, he focuses on s 78, which provides that a body corporate may do an act under s 77 “only for the purpose of performing its duties or exercising its powers”.
[41] I reject Mr Hayes’ submissions on the standing issue. Like a natural person, a body corporate may own land (s 77(2)) and in this case is seeking to have Unit F vested in it for the purposes of exercising its duties and powers. As s 84 of the Unit Titles Act expressly recognises, the Body Corporate has the power to impose levies on owners of principal units and determine the amount of the levy (s 121(1)). Under s 124(1), the amount of any unpaid levy is recoverable as a debt due to the Body Corporate and from the person who was the unit owner at the time the levy became payable or the unit owner at the time the proceedings are instituted. Under s 138 of the Unit Titles Act, the Body Corporate has a duty to repair and maintain any building elements and infrastructure that relate to and serve more than one unit. In seeking a vesting order here, the Body Corporate seeks to recover debts due to it, which have arisen from its duties under s 138 of repair and maintenance. The right of a body corporate to seek a vesting order in the circumstances here is entirely consistent with that broad legislative scheme and policy. In my view, it clearly does have standing to bring the present application.
[42] I also reject Mr Hayes’ submission that the underlying premise of a voting democracy in a Body Corporate would be undermined if the Body Corporate itself could/did own a unit. The Body Corporate is a representative body acting on behalf of all of its owners.
[43] I further note that there was no standing impediment to this Court granting vesting orders to the body corporates in both Re Body Corporate 2010369 and Body Corporate 203344 v Flores.10 I accept that the standing issue was not expressly argued in those cases, but there is no legitimate basis to conclude that they are wrong and should not be followed. I now turn to address the merits of the two applications.
[44] In relation to the Body Corporate’s application, there are two jurisdictional requirements:
(a)Has there been a disclaimer of the property by the Official Assignee?
(b)Has the applicant suffered loss or damage as a result of the disclaimer?
[45] Once those elements have been established, the Court has an overall discretion to apply, namely whether it is fair to vest the property in the applicant (s 119(3) of the Insolvency Act).
[46] There is no dispute here that the property has been disclaimed by the Official Assignee. Equally, in my view, it is clear that the Body Corporate has suffered loss or damage as a result of the disclaimer. As Thomas J held in Re Body Corporate 201036,11 a body corporate which had no person to levy for the cost of repairs to the unit has suffered a financial loss. That case is very similar to the present one and involved the Body Corporate’s obligations under s 138 of the Unit Titles Act to repair and maintain common property and any building elements and infrastructure which related to or served more than one unit.
[47] A similar conclusion was reached by Campbell J in Body Corporate 203344 v Flores.12 In that case his Honour held that the disclaimer had left the applicant Body Corporate with no person on whom it could call to meet its levy.13 He accordingly found that the Body Corporate was a person who, in terms of s 119 of the Insolvency Act, had suffered loss or damage as a result of a disclaimer.
9 Re Body Corporate 201036 [2016] NZHC 2035, [2016] 17 NZCPR 659 at [28]–[31].
10 Body Corporate 203344 v Flores [2022] NZHC 3410, [2022] 23 NZCPR 689.
11 Re Body Corporate 201036, above n 9, at [28]–[31].
12 Body Corporate 203344 v Flores, above n 10.
13 Body Corporate 203344 v Flores, above n 10, at [13].
[48] I reject Mr Hayes’ submission that any loss or damage under s 119(1) of the Insolvency Act must have occurred prior to bankruptcy. That is contrary to the express words of the subsection; a disclaimer occurs of course subsequent to the adjudication of bankruptcy. There is no legitimate basis for reading the statute down in the manner for which Mr Hayes contends. A person suffering loss or damage as a result of disclaimer may either claim as a creditor in the bankruptcy or apply to the Court for a vesting order in respect of the disclaimed property.
[49] In relation to Mr Donovan’s application, there is no dispute that he has standing to apply under s 119(2) of the Insolvency Act.
[50] I now address the critical issue of fairness; namely, is it fair that the property be vested in the Body Corporate or does fairness favour Mr Donovan?
[51] I find that there are numerous reasons why it would be fair to vest the property in the Body Corporate. By contrast, the competing claim for vesting by Mr Donovan lacks merit. I accept that Unit F has been his home for a lengthy period, but he has no right at all to the property, no right to occupy it or to be there, and has essentially been squatting at the expense of the Body Corporate for a very long time. I acknowledge that he remains on the title as the registered owner, but since the property was disclaimed by the Official Assignee in 2011, Mr Donovan has had no rights or liabilities in relation to it. The property is bona vacantia. Mr Donovan has no lease, no licence to occupy, or any other legal basis allowing him to live in the unit. He has made no contribution to the rates or levies, or to water and insurance expenses. By contrast, the inability to raise funds from Unit F has meant that the members of the Body Corporate have had to raise further funds amongst themselves in order for the Body Corporate to discharge its obligations under s 138 of the Unit Titles Act.
[52] The following additional factors support my finding that it would be fair to vest the unit in the Body Corporate:
(a)such order will provide the Body Corporate with a way of selling the unit to relieve it of the ongoing burdening of shouldering the obligations with respect to the unit, particularly the substantial remedial
costs of $242,000, and which remain unpaid. It will also provide assurance and certainty for an ongoing levy liability;
(b)because the Body Corporate had an obligation to remedy the water ingress problems in the building, it is only fair that it should be able to recoup some of the expenses from a unit that has benefitted from those repairs but which has made no contribution to them;
(c)the Treasury has been consulted and does not object;
(d)the Tauranga City Council also supports the vesting of Unit F in the Body Corporate. The Council has no other or better option to secure payment of the rates arrears, interest and costs owing to it (it did try but failed to sell Unit F);
(e)it will avoid the Body Corporate incurring yet more costs and being embroiled in litigation and disputes with Mr Donovan;
(f)there is simply no other viable option. I reject Mr Donovan’s evidence that he has any realistic ability to pay the necessary levies to live in Unit F. He has a poor track record and there is no reliable or probative evidence that his financial position will substantially change. His evidence on this issue was far from persuasive. I agree that the Body Corporate ought not to be expected to bear the risk associated with Mr Donovan’s precarious financial position.
[53] Mr Donovan is concerned that if the unit is vested in the Body Corporate, that the Body Corporate might somehow seek to recover outstanding levies from him because he remains as the registered proprietor on the title. However, given the Official Assignee’s disclaiming of the property, and the legal consequences that flow from that (s 118(a) of the Insolvency Act), it is difficult to see how he might have any liability. He has no rights or liabilities in respect of the unit and has no right to occupy it. In any event, his obvious precarious financial position would likely mean that there would be little utility in the Body Corporate pursuing him. On a practical level, the
outstanding levies will likely be recouped as part of the sales process. It also seems unlikely, based on the evidence of Mr Laing, who is both the chairman of the Body Corporate and a registered valuer, that the Body Corporate will make any profit on the proposed sale. None of these factors suggest it would be fair to vest the property in Mr Donovan.
[54] In conclusion, I find that it is fair to make an order vesting Unit F in the Body Corporate. I dismiss the competing application by Mr Donovan.
Issue (c) – Discharge of the mortgages
[55] I am satisfied that the grounds for orders discharging all three mortgages, under s 105 of the Land Transfer Act, are made out.
[56] I record the parties’ consent to the discharge of all three mortgages. The Body Corporate’s position is that it will consent to the discharge of its own mortgage, the second mortgage, provided I grant all of the orders it seeks in the proceedings. I intend to do exactly that, so the Body Corporate’s condition has been met.
[57] The discharge of all three mortgages is of course the sensible outcome. The only realistic way for the unit to be sold by the Body Corporate (having assumed ownership) will be to ensure that upon settlement it is free of all existing encumbrances, namely the outstanding liabilities for levies and rates and any ongoing mortgages.
[58] The terms of my orders discharging the three mortgages are set out below. They address the timing issue that the Body Corporate has raised.
Result
[59] I grant the applicant Body Corporate’s three applications (i.e. all of the orders it seeks) as recorded below.
[60] I make the following declarations pursuant to s 3 of the Declaratory Judgments Act 1908:
(a)The two Bolton mortgages registered against Unit F (Record of Title SA45C/859) are time-barred and unforceable;
(i)Mortgage 5760267.3 to John Graham Kenneth Bolton, registered on 10 October 2003, and subsequently varied on 27 August 2006; and
(ii)mortgage 8240076.1 to John Graham Kenneth Bolton, registered on 30 July 2009.
[61] I make an order under s 119 of the Insolvency Act that the land known as Unit F, 30 Willow Street, Tauranga, described in Record of Title SA45C/859 South Auckland District, being a stratum estate in freehold with the legal description Unit F Deposited Plan South Auckland 49047, is vested in Body Corporate 49407. I direct the District Land Registrar (DLR) to remove the current registered proprietor, Mr Michael Philip Donovan, and to enter the Body Corporate 49407 as the registered proprietor.
[62] I order that following the Body Corporate being registered by the District Land Registrar as the owner on the Record of Title SA45C/859, all the three mortgages registered against Unit F are discharged under s 105 of the Land Transfer Act. My orders discharging all three mortgages will not take legal effect (and no steps are to be taken by the DLR) until registration of the vesting order by the DLR and a memorandum has been filed and served by counsel for the plaintiff in this proceeding confirming the registration of that vesting order.14
[63] As to costs, my preliminary views are that having succeeded (and on the counterclaim as well) the plaintiff is entitled to costs on a 2B basis plus disbursements. If the parties cannot agree on costs, then memoranda are to be filed and served in accordance with the following timetable:
14 Counsel for the plaintiff should send a copy of her memorandum to the District Land Registrar who will then be able to take the necessary steps to discharge the mortgages.
(a)Memoranda from the plaintiff is to be filed and served by 30 January 2025;
(b)Any memorandum in response by the first defendant is to be filed and served by 13 February 2025;
(c)The Court will then determine the issue of costs on the papers.
Andrew J
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