Body Corporate 68792 v Memelink
[2020] NZHC 2691
•13 October 2020
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE
CIV-2020-485-162
[2020] NZHC 2691
BETWEEN BODY CORPORATE 68792
Plaintiff
AND
HARRY MEMELINK and CISCA
JOHNETTE FORSTER as trustees of the Link Trust No. 1
Defendants
Hearing: 5 and 6 October 2020 Counsel:
A O’Connor for plaintiff
D G O Livingston and M F Moughan for defendants P R W Chisnall for Official Assignee
Judgment:
13 October 2020
RESERVED JUDGMENT OF DOBSON J
Introduction and background
[1] This judgment deals with a small part of protracted hostilities between the principal defendant, Mr Memelink, and one of the bodies corporate with which he has wide-ranging disputes.
[2] The plaintiff in this case, Body Corporate 68792 (the Body Corporate), is the body corporate for a series of units in a commercial/industrial zone on the corner of Hutt Road and Wakefield Street in Lower Hutt. The defendants, Mr Memelink and Ms Forster, are the current trustees of Link Trust No 1 (the trust) and in that capacity are the legal owners of 52 per cent of the units in the Body Corporate.
BODY CORPORATE 68792 v MEMELINK [2020] NZHC 2691 [13 October 2020]
[3] Mr Memelink has, for a number of years, challenged what he perceives to be mismanagement and wrong and discriminatory treatment in the governance of the Body Corporate. Substantially because of his challenges the Body Corporate has, since 2015, had a sequence of three administrators appointed to attempt to resolve differences between unit holders, including Mr Memelink, and those managing the Body Corporate. Mr Memelink has initially either supported, or at least acquiesced in, the appointment of each of the administrators, but has subsequently found fault with their administration in circumstances where the respective administrators have not accepted his claims and criticisms of the previous conduct of the Body Corporate.
[4] In early 2018, the accounting firm Deloitte was retained (also with Mr Memelink’s concurrence) to prepare a report intended to reconcile the character of levies that had been charged by the Body Corporate and allocation of individual unit owners’ liability for them. Mr Memelink rejects the outcome of that exercise, complaining that Deloitte did not carry out the tasks contemplated and that he was precluded by others from pressing his view of matters with the Deloitte personnel involved.
[5] For several years, the trust has refused to pay levies on the grounds that they include amounts not properly chargeable to unit owners, and that Mr Memelink has claims against the Body Corporate for amounts he has paid for liabilities of the Body Corporate or in respect of which he is entitled to refunds from the Body Corporate. Under Mr Memelink’s direction, the trust has maintained that stance, notwithstanding the legal obligation for unit holders to make timely payment of all levies charged by the Body Corporate.1
[6] Mr Memelink is an undischarged bankrupt, having been twice bankrupted by order of this Court in respect of acts of bankruptcy in different periods.2 The evidence in the present proceeding shows that Mr Memelink’s bankruptcy has not constrained his activities in directing the business of the trust in all aspects of its property management and ownership business, including initiatives to purchase further properties, negotiating sales and dealings with tenants.
1 See [22] below.
2 Adjudication on 28 August 2018 and 9 March 2020.
[7] In April 2017, Mr Memelink arranged for the incorporation of Lynx Trustees Limited, with his brother-in-law, Mr Roy Bassett-Burr, being listed as the director and shareholder. That company operated as a corporate trustee of the trust until it was placed in liquidation on 10 September 2019 on the application of the Body Corporate for unpaid body corporate levies. Since then, Ms Forster has been added as a second trustee. In the current proceeding, there is no suggestion that Ms Forster has assets sufficient to meet the Body Corporate’s demands, nor has it been suggested that she might be expected to pursue indemnification for such liability from the trust in order to satisfy the Body Corporate’s claims.
[8] The Official Assignee, who is Mr Memelink’s trustee in bankruptcy, appears to have a somewhat equivocal relationship with him. Mr Memelink claims that all the initiatives he is taking are on notice to the Official Assignee, who is supportive of his attempts to clear all his personal debts by dealings involving the trust. Mr Chisnall, who appeared for the Official Assignee but who was, for the most part, excused from sitting through the hearing, suggested the relationship has been less than a fully positive one. He was hopeful that recent dialogue will lead to a more constructive relationship. The Official Assignee has lodged caveats against all of the trust properties and by that means seeks to control dealings arranged by Mr Memelink in respect of any of them.
[9] Provisional accounts for the trust for the year ended 31 March 2020 include gross rentals received of $466,893. The real property assets listed in the financial statements are valued at $3,594,673, based on historical acquisition costs which seem highly likely to be substantially less than current market values. If that assumption is valid, then there would appear to be several million dollars in equity in the trust properties, above the extent of loans undertaken in respect of them.
[10] The draft financial statements for the trust to 31 March 2020 include a beneficiary current account as a liability in the amount of $4,064,848. In his evidence, Mr Memelink accepted that that amount is owed to him. Ms Joy Rohloff, the independent accountant who has prepared the accounts, confirmed that to be the case. It is accordingly an asset in his estate in bankruptcy which, subject to realisation, should be available to the Official Assignee to satisfy the debts that have been proven
in his bankruptcies. It appears that the majority of Mr Memelink’s debts were incurred in his capacity as trustee of the trust, so that he is in any event entitled to be indemnified for those liabilities by the trust. I understood from Mr Chisnall that the Official Assignee is pursuing that avenue to discharge the debts proven in the bankruptcies.
The current proceeding
[11] The Body Corporate has brought this proceeding because all alternative attempts to procure payment of outstanding levies have been thwarted by Mr Memelink. The Body Corporate seeks orders either that the Court appoint receivers to the trust, or alternatively that Mr Memelink be removed as a trustee and replaced with independent professional trustees who would acknowledge its liabilities to the Body Corporate and discharge them.
[12] In February 2020, the Body Corporate sought to commence this claim by way of originating application. Leave to do so was declined in a judgment of Clark J on 20 March 2020.3 The claim has subsequently been brought in conventional form with a statement of claim and defence, and with the bulk of evidence by way of affidavits. Seven affidavits sworn in support of the defence of the claims were filed and served only on the last working day before the hearing. All those deponents were required for cross-examination. The majority of deponents were cross-examined during the two-day hearing. Two of the defendants’ deponents, Ms Forster and Mr Anthony De Vries, did not appear and I have accordingly disregarded their evidence.
[13] The proceeding is brought on the basis that there are doubts about the trust’s ability to make payment of the outstanding levies and that, in any event, whilst Mr Memelink remains in control he is determined that the trust will not make such payments. The trust’s balance sheet in the draft financial statements as at 31 March 2020 record net assets of $2,780. The net assets include a loan advanced to a related company for some $1.9 million, the solvency of which is questioned by the Body Corporate, and an indemnity for repayments procured by Mr Memelink to honour a guarantee of a loan of a former lawyer for the trust totalling more than $1 million,
3 Body Corporate 68792 v Memelink [2020] NZHC 594.
where there may also be some questions over its recoverability. Ms Rohloff had not undertaken any assessment on the recoverability of these amounts listed at face value as assets.
[14] Mr Memelink sought to assure the Court that the trust does have the financial wherewithal to make the payments. However, it is not prepared to do so until full details of historical dealings on behalf of the Body Corporate have been fully disclosed to Mr Memelink, affording him the ammunition he considers will enable him to make out claims for maladministration and improper dealings by various persons involved in the Body Corporate’s management in the past. He wants to raise set-off of such liabilities allegedly owed to him by the Body Corporate.
[15] In his evidence, and in Mr Livingston’s submissions on his behalf, Mr Memelink sought to reassure me that the trust was in a position to meet outstanding levy obligations, and that he was keen to sit down with the current administrator and his advisers to resolve issues. However, neither he nor Mr Livingston in his submissions would go so far as to acknowledge that payment of all outstanding levies charged since 1 January 2018 on all the units owned by the trust would be paid within any defined period. I cannot accept his loosely worded assurances as sufficient to assuage the administrator’s concerns that it is yet another diversionary tactic to avoid a loss of control in circumstances in which the payments would be procured from the trust if others take control of it.
[16] Mr O’Connor cited from a July 2018 affidavit Mr Memelink had completed in responding to an appeal brought by the Body Corporate and another in earlier litigation against him. Mr Memelink’s approach to business was reflected in the following:4
I have always elected to carry out business in a manner that keeps the maximum amount of money in my bank as possible. To achieve this, I elect to pay my bills at the last opportunity. By keeping funds in my account, I am able to be in a position to act on opportunities in a dynamic way.
[17] Mr O’Connor submitted that the pattern of Mr Memelink’s behaviour since then demonstrates the same commitment to avoiding lawful obligations.
4 Affidavit of Harry Memelink filed in Body Corporate 68792 v Memelink [2018] NZCA 509.
[18] In related litigation, on 16 September 2020 Associate Judge Johnston heard a challenge brought by Mr Memelink to the Official Assignee’s acceptance of proofs of debt in Mr Memelink’s bankruptcies.5 Prominent among the debts were claims by the Body Corporate for the extent of unpaid levies for which Mr Memelink is liable as a trustee of the trust. At the time of the present hearing, the Associate Judge’s decision on that challenge was reserved. I took Mr Livingston to accept that the Associate Judge’s ruling on the extent of the debt owed by Mr Memelink to the Body Corporate in respect of each of the periods to which his bankruptcies related would constitute sums immediately payable to discharge the liabilities for past levies.
The Body Corporate’s predicament
[19] The history of dealings between the Body Corporate and Mr Memelink justifies Mr O’Connor’s submission that Mr Memelink will disregard all lawful directions for payment, including judgments, and particularly whilst he remains bankrupt he uses that status as a shield. At the same time, Mr Memelink is not prohibited by the Official Assignee from vigorous pursuit of disputes with the Body Corporate and others, and with individuals responsible for steps previously taken on behalf of bodies corporate in which he or trusts with which he is associated have interests. Mr Memelink has failed to procure payment of costs orders made against him (substantially or entirely in his capacity as trustee) in related litigation.
[20] The state of the available evidence precludes a definitive finding on whether the trust does have sufficient net assets to pay any substantial extent of outstanding levies, once they have been quantified. I would certainly not be prepared to rely on a finding that there are doubts about its financial capacity to meet any significant liability for existing levies as the ground for either form of relief sought by the Body Corporate. The Body Corporate can place this issue no higher than that doubts about the trust’s solvency add to other grounds it can advance for the forms of relief that are sought.
[21] The Body Corporate is in a parlous financial state, caused substantially by the trust’s default in payment of levies and the extraordinary level of administrator’s and
5 Memelink v Official Assignee HC Wellington CIV-2018-485-363.
legal fees incurred in pursuing payment from it and responding to Mr Memelink’s challenges. As owner of 52 per cent of the Body Corporate units, there is a self- destructive element in some of the initiatives Mr Memelink has pursued and the vigorous opposition he has mounted to attempts by the Body Corporate to recover lawfully payable levies.
[22] A relevant issue on which I received limited assistance from counsel was the status of a unit holder’s liability to pay a levy once it is issued by the Body Corporate. During argument, I put to counsel that the practical position was that unit holders had to “pay now, dispute later”. That was a loose reference to one of a number of judicial observations about the relationship between a body corporate and unit owners, and in particular the obligation to make timely payment of levies once demanded by the body corporate. Section 124(2) of the Unit Titles Act 2010 provides that the amount of any unpaid levy, together with any reasonable costs incurred in collecting it, is recoverable as a debt due to the body corporate by the person who was the unit owner at the time the levy became payable. In Butcher v Body Corporate 342525, the Court of Appeal rejected an argument that this did not constitute an arrangement to “pay now, argue later”.6 There are numerous other authorities that recognise the relationship between a body corporate and unit owners can only be sustained if the unit owners’ obligation under s 124(1) of the Unit Titles Act is indeed to be applied on the basis that they must pay the levies without deduction or cross-claim, and then argue about other entitlements thereafter.7
[23] There is no evidence that the Body Corporate has engaged with Mr Memelink on those terms. However, as Mr O’Connor observed, it would not have made any difference as Mr Memelink is steadfastly determined to resist all legal forms of compulsion for payment of the outstanding levies.
6 Butcher v Body Corporate 342525 [2018] NZCA 19 at [67]–[68].
7 For example Maiden v Body Corporate 46112 [2018] NZHC 1219 at [71]–[73]; Wheeldon v Body Corporate 342525 [2015] NZHC 884 at [52]; Manchester Securities Ltd v Body Corporate 172108 [2019] NZHC 253 at [10], [2017] NZCA 527 at [49]; Body Corporate 324525 v Stent [2017] NZHC 2948 at [23]–[25] and [35]. A number of these decisions confirm the appropriateness of awarding indemnity costs for bodies corporate having to pursue unit owners for unpaid levies and the exclusion of unit owners from voting if levies are not paid up to date.
The legal bases for relief
[24] The Body Corporate sought orders on two alternative bases that would enable appropriate independent persons to be authorised to take sufficient control of the assets of the trust to procure payment of outstanding levies.
Appointment of receivers
[25] The Body Corporate’s application invoked the Court’s inherent jurisdiction to appoint receivers. Mr O’Connor relied on my decision in Bank of New Zealand v Rowley and Skinner as an example of the circumstances in which the Court will appoint receivers to trust assets where the usual basis for appointment does not exist, namely where the debtor has contractually committed to accepting the appointment of a receiver over the debtor’s assets in the event of a default on a contractual obligation.8 The circumstances in Rowley and Skinner were somewhat different from the present case. There, the Bank of New Zealand (BNZ) had made advances for the purposes of Messrs Rowley and Skinner’s accounting business, in reliance on representations as to the extent of debtors comprising assets of the business. The business was operated via trusts of which they were trustees and members of their families were beneficiaries. In order to trace and recover any assets subsequent to their convictions for fraudulent transactions, imprisonment and bankruptcy, the BNZ sought the appointment of receivers over all and any assets of the trusts to facilitate recovery. The terms of borrowings arranged by Messrs Rowley and Skinner did not give the BNZ a contractual right to appoint receivers over the trust assets.
[26] In that case, I was persuaded that the appointment of receivers on certain terms was appropriate. I appointed independent insolvency practitioners as court-appointed receivers of all the assets of Messrs Rowley and Skinner’s trusts. The appointment was on terms that they were empowered to exercise the powers conferred upon liquidators pursuant to ss 261 to 267, and ss 273 and 274, of the Companies Act 1993 as if the trusts were a company in liquidation, the settlor and the trustees (both past and present) were the directors of a company and the beneficiaries of the trusts were shareholders of a company in liquidation. I also directed that the receivers would
8 Bank of New Zealand v Rowley and Skinner [2012] NZHC 3540.
require a court order prior to making any distribution to creditors out of the net realisation of trust assets and any such application had to be on notice to the Official Assignee. The fact that the receivers were appointed on the application of the BNZ was not to give the BNZ any priority over other creditors having the same ranking of claims against the trusts, except in respect of BNZ’s recovery of its costs in the proceeding.9
Removal of trustees and their replacement
[27] The alternative relief sought to achieve the same end for the Body Corporate was for orders under s 51 of the Trustee Act to remove Mr Memelink as a trustee of the trust and replace him with the insolvency practitioners proposed as receivers. There is specific power to remove a trustee who is bankrupt under s 51(2) of the Trustee Act 1956, and the power to appoint new trustees in s 51(1) is governed by expediency. The Court’s supervisory jurisdiction under the Trustee Act is always to reflect the interests of the beneficiaries of the trust. To justify orders under s 51, the Body Corporate would have to make out that Mr Memelink’s continued control of the trust was contrary to the interests of the beneficiaries of the trust, to an extent that their interests would be better served if he were replaced.10 I was told that Mr Memelink and members of his family and friends constitute the class of discretionary beneficiaries. Mr Memelink has no children and a recent attempt to add the children of his sister, Mrs Bassett-Burr, has presently been stalled by the Official Assignee.
[28] Mr O’Connor did not give any prominence to an argument that the beneficiaries’ interests would be improved by removal of Mr Memelink and replacement by the proposed receivers. It is not instinctively an attractive assignment for them, when the reality is that they are proposed for the task by the Body Corporate, and might find themselves conflicted in attempts to procure payment of outstanding levies when that course might not be justified in advancing the interests of the beneficiaries.
9 At [33].
10 See Kain v Hutton CA23/01, 25 July 2002 at [17]–[19] and Gray v Heighway [2020] NZHC 473 at [8].
Analysis
[29] Accordingly, I have focused the competing cases on whether the Body Corporate can justify some limited form of court-authorised control of trust assets, for the purpose of procuring payment of outstanding levies and regularising a basis on which future levies will be met in a timely way.
[30] Mr Livingston did not challenge the Court’s jurisdiction to appoint receivers in the present circumstances. Rather, his opposition relied essentially on two grounds. First, that the Body Corporate’s concern at the trust’s lack of financial resources to meet the outstanding levies was misplaced, and that Mr Memelink was poised to conduct constructive dialogue with the Official Assignee, whose concurrence would always be required in taking initiatives to make the payments. Accordingly, on that first ground, Mr Livingston’s submission was that appointment of receivers was unnecessary to procure payment for the Body Corporate.
[31] Secondly, Mr Livingston reflected Mr Memelink’s concerns that receivers appointed in the Body Corporate’s interests would frustrate his attempts to press the Body Corporate for disclosure of information he considers necessary to advance the claims he has long foreshadowed. Mr O’Connor’s response to this concern was that Mr Memelink had sufficient information to begin proceedings of the type he had threatened for some time, and that the Body Corporate would respond to legitimate discovery applications when they had been framed by the terms of an appropriate pleading. Until relevance was defined in that way, Mr O’Connor submitted that the Body Corporate was justified, having regard to years of experience with Mr Memelink’s “fishing expeditions”, in resisting further requests, at least until the administrator was paid a reasonable cost for the work involved in attempting to identify the old records and to have them copied for Mr Memelink.
[32] It is not possible to resolve this difference about the reasonableness of demands for information and the scope of Mr Memelink’s rights to demand it in this judgment. There may well be a measure of justification for both points of view. It cannot provide a ground for denying the Body Corporate relief of the type it seeks, on appropriate terms. Rather, Mr Memelink’s concern can be addressed by imposing conditions on
the appointment of receivers to ensure that they do not frustrate what are otherwise legitimate initiatives by Mr Memelink in this regard.
[33] In considering the justification for some limited form of independent control over trust assets, the position of the Official Assignee is critical. If the Associate Judge quantifies the liability for past levies (as accepted by the Official Assignee in proofs of debt filed for the Body Corporate) for any substantial amount, it seems likely that at least a refinancing, and possibly a sale, of one of the trust’s properties would be required to clear the debt. That can only occur with the concurrence of the Official Assignee. In addition, although the evidence before me was not clear on the point, separate insolvency practitioners who are the liquidators of the trustee company are likely to have a power of veto over transactions if they have also lodged caveats against the trust properties. There ought to be commonality of interests between the Official Assignee and those liquidators, given the substantial commonality between the identity of the creditors for whom they are concerned.
[34] It is clearly preferable for all the interests necessarily involved that consensus be achieved without the need for intervention by yet another intervener backed with court authority. If Mr Memelink is genuine in his wish to clear the extent of any debt for outstanding levies as confirmed in the judgment that is awaited from the Associate Judge, then he and his advisers ought to be afforded a short period in which to reasonably achieve an outcome by agreement. Failing that, however, I am satisfied that the unusual sequence of circumstances would justify the appointment of receivers to the trust assets, to procure, in co-operation with the Official Assignee and the liquidators of the trustee company, a mode of payment of outstanding levies and a reliable process for prompt payment of future levies that will need to be issued in accordance with the rules governing the Body Corporate.
[35] The terms for relief I propose are intended to afford Mr Memelink and his advisers the opportunity to satisfy the extent of the Body Corporate’s claim for outstanding levies, to the extent upheld by the Court and as reflected thus far in the Official Assignee’s acceptance of proofs of debt in Mr Memelink’s bankruptcy, so that these orders will apply as unless orders on the default of that outcome being achieved by consensus.
Outcome
[36] The defendants, in their capacity as trustees of the trust, will have a period of two months from the issue of the Associate Judge’s decision on the matters argued on 16 September 2020 in which to pay the amount of outstanding levies confirmed in that judgment, or to secure the payment of that amount to the satisfaction of the Body Corporate.
[37] If that outcome is not achieved, then I order that Ian Bruce Shephard and Jessica Jane Kellow be appointed as receivers of all assets of the trust on the following limited terms:
(a)they are empowered to exercise the powers conferred upon liquidators pursuant to ss 261 and 267, and ss 273 and 274, of the Companies Act 1993 as if the trust was a company in liquidation, the settlor and the trustees were the directors of a company and the beneficiaries of the trust were shareholders of a company in liquidation;
(b)those powers are subject to the requirement for these receivers to deal with trust assets in co-operation with the Official Assignee as the trustee in bankruptcy of Mr Memelink and the liquidators appointed to the former corporate trustee, Lynx Trustees Limited;
(c)the appointment of the receivers is for the limited purpose of procuring payment of outstanding levies owed to the Body Corporate, and taking all steps to facilitate a process by which future levies will be paid in a timely way;
(d)the receivers are not to obstruct initiatives by Mr Memelink or advisers on his behalf in seeking information about dealings undertaken by the Body Corporate, and such dealings are to continue as between Mr Memelink and his advisers on the one hand and the administrator and his advisers on the other, irrespective of the appointment of these receivers;
(e)the receivers’ reasonable costs in effecting these limited purposes will be recoverable from trust assets.
Costs in the proceeding
[38] There have been a number of irregularities in the conduct of this proceeding, but it is neither necessary nor appropriate to record and comment on them in this judgment.
[39] My provisional view is that the Body Corporate should be entitled to a modest contribution to its costs, but if the extent of past levies confirmed in the Associate Judge’s judgment are paid within two months of delivery of that judgment, then the relief sought will no longer be necessary. In that event, I am satisfied that each party should bear its own costs.
[40] If the orders for appointment of the receivers become operative, then the Body Corporate will be entitled to costs on a 2B basis, plus recoverable disbursements.
Dobson J
Solicitors:
Steve Gill, Lower Hutt for plaintiff
Livingston & Livingston, Wellington for defendants Anthony Harper, Christchurch for Official Assignee
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