Camray Farm Limited (in liquidatin) v FM Custodians Limited

[2015] NZHC 2552

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

CIV-2014-485-5889 [2015] NZHC 2552

BETWEEN

CAMRAY FARM LIMITED (IN

LIQUIDATION) Applicant

AND

FM CUSTODIANS LIMITED Respondent

Hearing:	7 October 2015
Counsel:	P Murray and M Hammer for the Applicant D Fraundorfer for the Respondent
Judgment:	19 October 2015

JUDGMENT OF ASSOCIATE JUDGE SMITH

[1]      On 5 July 2013 the applicant Camray Farms Ltd (Camray) lodged a caveat on the  title  to  a  farm  property  in  the  Waikato  (the  property).    The  respondent FM Custodians Ltd (FM) holds a registered first mortgage over the property.

[2]      On 29 April 2014 FM applied to Land Information New Zealand (LINZ) to have the caveat lapse.  In response to that application, Camray filed an originating application in this Court on 14 May 2014, asking that its caveat be sustained (the sustaining application).  FM filed a notice of opposition to the sustaining application.

[3]      On 10 June 2014, an interim order was made sustaining the caveat pending further order of the Court.

[4]      Camray took the position that FM had used the wrong procedure in applying to LINZ to have the caveat lapse: it contended that the proper procedure for FM as a mortgagee wanting to have the caveat removed so that it could exercise its power of

sale was to apply to the Court itself under s 143 of the Land Transfer Act 1952 (the

CAMRAY FARM LIMITED (IN LIQUIDATION) v FM CUSTODIANS LIMITED [2015] NZHC 2552 [19

October 2015]

Act) for an order removing the caveat.   FM then filed an originating application asking for an order that the caveat be removed under s 143 (the removal application).

[5]      There followed a period in which the parties endeavoured to agree a basis on which the caveat could be removed while preserving Camray’s right to assert a claim against an appropriate part of the proceeds of sale of the property.  The two Court applications were adjourned on several occasions in 2014 to allow for FM to disclose particular documents Camray had sought, and for the parties to see if they could reach agreement.

[6]      On 6 November 2014 FM entered into an agreement to sell the property (in the exercise of its power of sale under its mortgage) to a company called Sunshine Farms Ltd (Sunshine).  At that stage negotiations were continuing for the removal of the caveat.

[7]      No  settlement   of  the  two   caveat   proceedings   had   been   reached   by

27 January 2015, and on that date FM advised Camray that if the caveat was not withdrawn it would seek security for its costs on the sustaining application.  FM’s concern was that Camray, as a company in liquidation, might be unable to pay the costs which would probably be awarded to FM if FM’s opposition to the sustaining application was successful.

[8]      The parties have been unable to reach agreement on the withdrawal of the caveat.  Amended applications and notices of opposition were filed in each of the two proceedings, and in May 2015 FM formally requested information from Camray about Camray’s ability to pay costs if it is unsuccessful in the sustaining application. Camray’s solicitors replied on 5 June 2015, generally confirming that Camray does not have resources from which it could meet any award of costs which might be made in FM’s favour.

[9]      FM now applies for security for its costs on the sustaining application.  The application is opposed by Camray.

Background

[10]     Camray was incorporated in June 2008.  Its directors and shareholders were

Mr and Mrs Hardy.

[11]     On 13 June 2008 Mr and Mrs Hardy established a trust called the Camray

Farm Trust (the trust), and Camray was appointed as trustee of the trust.

[12]     In or about June 2008, Camray acquired two rural properties which Mr and Mrs Hardy had bought (“the original properties”).  It did so in its capacity as trustee of the trust.

[13]     In May 2009 FM agreed to advance $2,135,000 to the trustees of the BL (Nature Sunshine) Trust.  Repayment of the advance was guaranteed by a number of covenantors, including Camray in its capacity as trustee of the trust.   Camray provided security for its covenant, in the form  of a mortgage over the original properties.

[14]     As additional security, the borrowers provided FM with a mortgage over a property adjacent to the original property (the neighbouring property).

[15]     Camray remained as trustee of the trust until 11 June 2012, when it retired and was replaced as trustee by a company called BL (Nature Sunshine) Trustee Ltd (BLNSTL).

[16]     On  21  August  2012,  the  trust  completed  a  subdivision  of  the  original properties.  The two titles for the original properties were cancelled, and three new titles were issued to BLNSTL.

[17]     In September 2012, the properties comprised in two of these three titles were sold to third parties.   The land in the third title is the property.   It remains in the ownership of BLNSTL in its capacity as trustee of the trust.

[18]     BLNSTL is also the registered proprietor of the neighbouring property.

[19]     FM says that when Camray retired as a trustee of the trust on 11 June 2012, it did so without FM’s knowledge.  FM also says that the subdivision of the original properties into three separate lots was done without its knowledge.

[20]     Camray ran into difficulty meeting its tax obligations, and on 27 May 2013

Henry David Levin and Vivien Judith Madsen-Ries were appointed liquidators of Camray on the application of the Commissioner of Inland Revenue.  The debt to the Commissioner was $33,823.05, and Mr Levin says in his affidavit that, of that sum,

$31,752.90 was incurred by Camray between 31 January 2010 and 31 May 2012 (i.e. in the period when Camray was the trustee of the trust).   Mr Levin’s enquiries showed that the debt owing to the Commissioner of Inland Revenue arose as a result of rental income received by Camray from Camray Stud for grazing stock on land owned by the trust.

[21]     Financial statements for Camray for the year ended 31 March 2010, which the liquidators obtained from Camray’s former chartered accountants, showed total liabilities at that time of approximately $2.5 million.  However the only creditor who has claimed in the liquidation is the Commissioner of Inland Revenue.  It is doubtful that any other creditors’ claims will be pursued.

[22]     The liquidators registered the caveat against the property on 5 July 2013. They say that as Camray incurred the relevant liabilities while acting as trustee of the trust, it is entitled to be indemnified out of the trust assets.  They further contend that Camray is entitled to be indemnified for the costs and expenses incurred by the liquidators.   The liquidators say that Camray’s right to be indemnified out of the assets of the trust give rises to an equitable lien over the trust’s assets, including the property.  They say that an equitable lien over land is a caveatable interest under the Act.

The arguments on the merits of the caveat disputes

[23]     FM accepts that trustees are generally entitled to be indemnified out of trust assets for liabilities properly incurred by them in performing their role as trustee.  It further accepts that the right to indemnity normally creates an equitable lien over the trust assets, and that where land forms part of the trust assets the equitable lien

ordinarily provides a sufficient basis for the trustee to register a caveat on the title to the land.

[24]     FM makes two arguments on the merits of the caveat disputes:

(i)       certain provisions in the guarantee and mortgage documents signed by

Camray are inconsistent with its equitable lien claim; and

(ii)even if that were not so, FM’s interest as first mortgagee is a prior registered interest, which trumps any equitable lien to which Camray might be entitled.  FM says that the effect of s 105 of the Act is that any sale of the property by FM in the exercise of the power of sale in its mortgage will have the effect of  extinguishing all unregistered interests in the property, including Camray’s claimed equitable lien.

[25]     As to the first of those arguments, Camray says that it has not been properly pleaded: it says that the notice of opposition to the sustaining application (as amended) does not sufficiently plead that Camray has no caveatable interest.   In response to the second argument, Camray submits that it is not an argument which is available to a party who is opposing an application to sustain a caveat under s 145A

– such an argument can only be made by a mortgagee on an application under s 143 of the Act to have the caveat removed.

[26]     Camray has other arguments on the merits of the dispute.   It says that it would not be equitable for FM to sell the property before it sells the neighbouring property, over which it also holds a first registered mortgage.  Selling the property first will see the entire proceeds of sale applied in reduction of FM’s mortgage debt. There would be no remaining trust assets to which Camray’s trustee’s lien could attach, as the neighbouring property is not an asset of the trust.

[27]     In reply to that argument, FM says it is entirely free to decide the order in which it realises its securities: it cannot be compelled to sell the neighbouring property before it sells the property.

[28]     There was some suggestion at the hearing that if FM does sell the property first, Camray may have the right to be subrogated to FM’s rights against the neighbouring property.  However the argument was not developed in any detail, and it is not necessary for me to resolve it in order to come to a decision on FM’s security for costs application.

Applications for security for costs – the law

[29]     Rule 5.45 of the High Court Rules relevantly provides:

5.45     Order for security of costs

(1)       Subclause (2) applies if a Judge is satisfied, on the application of a defendant,—

…

(b)       that there is reason to believe that a plaintiff will be unable to pay the costs of the defendant if the plaintiff is unsuccessful in the plaintiff's proceeding.

(2)       A Judge may, if the Judge thinks it is just in all the circumstances, order the giving of security for costs.

(3)      An order under subclause (2)—

(a)       requires the plaintiff or plaintiffs against whom the order is made to give security for costs as directed for a sum that the Judge considers sufficient—

(i)       by paying that sum into court; or

(ii)      by giving,  to the satisfaction of the Judge or the

Registrar, security for that sum; and

(b)       may stay the proceeding until the sum is paid or the security given.

…

(6)       References in this rule to a plaintiff and defendant are references to the person (however described on the record) who, because of a document filed in the proceeding (for example, a counterclaim), is in the position of plaintiff or defendant.

[30]     An applicant for security for costs must persuade the Court that there is reason to believe that the plaintiff will be unable to pay the defendant’s costs if the plaintiff is unsuccessful at trial.  Once the Court is satisfied on that threshold issue,

its discretion whether to make an order for security or not, and if an order for security is made the amount of that security, is unfettered  – there is no formal checklist of principles to be applied.1

[31]     Once the threshold test is met, the Court’s task is to balance the interests of the parties.2   That balancing exercise may include an assessment of the merits of the plaintiff’s claim, but an assessment of the merits of the dispute at an interlocutory stage will usually only give the Court an impression3  - in most cases it will not be possible to form a firm view of the merits. An order for security which may have the effect of preventing a plaintiff from pursuing its claim will normally only be made after careful consideration, and in a case in which the claim has little chance of success. Access to the Courts for a genuine plaintiff is not lightly to be denied.4

[32]   In Highgate on Broadway, Kós J observed that one of the theoretical justifications for ordering security is that there may be an injustice to a defendant if the claimant would otherwise be effectively immune from a costs order.5

[33]     Delay by the defendant in making the application is a factor which may tell against making an order.6

[34]     The overriding and most important consideration of all, however, is “how

should the respective interests of the parties best be balanced?”7

FM’s application for security in this case

[35]     FM’s request for security is modest.  It asks for an order fixing security from the date of the hearing of the sustaining application on 7 October 2015, to the completion of the hearing, on a 2B basis.   After some discussion at the hearing,

counsel advised that the figure for which security is sought is $5,575.

1      A S McLachlan Ltd v MEL Network Ltd (2002) 16 PRNZ 747 (CA) at [13] and [14].

2      At [15]-[16].

3 At [21].

4 At [15].

5      Highgate on Broadway v Devine [2012] NZHC 2288; [2013] NZAR 1017 at [20].

6      At [23(c)].

7      At [24(c)].

Discussion and conclusions

[36]     FM has met the threshold requirement in r 5.45(1)(b) that it demonstrate that Camray will be unable to pay FM’s costs if Camray is unsuccessful in the sustaining application.   The question, then, is whether the Court should exercise its broad discretion in favour of making the order for security.

[37]     I am satisfied that this is not a proper case for the making of an order for security.   First, this is not an ordinary situation where an insolvent plaintiff has chosen to sue a defendant for recovery of a sum of money or some other substantial relief: the sustaining application was only filed in response to an application by FM to LINZ to have the caveat lapse.  In other words, it is FM that is the instigator of the litigation seeking the removal of the caveat.

[38]     Secondly, Mr Fraundorfer acknowledged at the hearing that there is no issue in the sustaining application which is not also an issue in the removal application.  In those circumstances, it has been clear for some considerable time that continuation of the sustaining application  has  involved  a wasteful  duplication  of the parties’ resources.   Acknowledging that reality, Camray proposed in June 2014 that the sustaining application be effectively stayed to avoid duplication between the proceedings and to minimise costs.  That proposal was put in a letter by Camray’s solicitors dated 18 June 2014.  The solicitors stated their view that FM’s ability to seek an order for removal would not be prejudiced if the sustaining application were stayed, and that issues of costs on the sustaining application could be reserved and dealt with at the same time as the issue of costs on the removal application.

[39]     In a letter dated 19 June 2014, FM’s solicitors declined to deal with the duplication issue in that way.  They contended that Camray needed to continue with the sustaining application, while FM would also proceed with the removal application.  They contended that there would be no unnecessary duplication, as in order to oppose the removal application, Camray would need to establish grounds for its caveat in any case.

[40]     It is difficult to see how that response met Camray’s point that only one proceeding was necessary, and it should be the proceeding which raised all issues relevant to the caveat dispute. That is the removal application.

[41]     For Camray, Mr Murray referred to the decision of Master Kennedy-Grant in Kimber Timber Products (1996) Ltd (in receivership) v Kimber Timber Products, a case in which an order for security for costs was sought by the defendant in circumstances where the defendant was itself running a counterclaim, the defence of which would require the plaintiff to address substantially the same issues as were raised in the plaintiff’s claim.  The learned Master asked: “to what extent will the maintenance of the plaintiff’s proceeding involve the defendant in greater costs than it will incur in any event prosecuting its own counterclaim and meeting the defence which the plaintiff puts forward?”  His Honour was not satisfied that the prosecution of the plaintiff’s claim would result in any appreciable increase in the likely length of trial, and held that there was no justification for requiring the plaintiffs to provide security for costs in respect of their proceeding when they were entitled to raise exactly the same arguments, and claim substantially the same relief, in their defence

to the first defendant’s counterclaim.8

[42]     And  in  Oceania  Furniture  Ltd  v  Debonaire  Products  Ltd,  Clifford  J considered that where there was a substantial degree of interconnection between the subject matter of the claim and counterclaim, there was no basis to award security.9

[43]     Mr Murray submits that these cases apply by analogy – all of the issues in the sustaining application are issues which arise in the separate proceeding which FM has itself commenced (the removal application).   He submits that in those circumstances there is no justification for an award for security in the sustaining application.

[44]     I accept Mr Murray’s submissions on this point, and consider that the point is decisive against FM.   There is no need for two sets of proceedings, and the only

8      Kimber Timber Products (1996) Ltd (in rec) v Kimber Timber Products Ltd HC Rotorua, CP

25/96, 26 June 1997 at [8].

9      Oceania  Furniture  Ltd  v  Debonaire  Products  Ltd  HC  Wellington  CIV-2008-485-1701,

24 April 2009 at [25]-[26].

reason FM will incur further costs in opposing the sustaining application is that it has rejected Camray’s proposal that all matters be argued on the removal application. Mr Fraundorfer  referred  at  the  hearing  to  Raiser  Developments  Ltd  v  Trefoyl Properties Ltd & Anor, in which the Court of Appeal effectively confirmed that there is no practical difference between the s 143 procedure on the one hand and the s 145A procedure on the other, other than the identity of the party entitled to initiate the application.  Irrespective of the procedure adopted, the onus is on the caveator to justify the clog that it seeks to put on the registered proprietor’s ability to deal with

its property.10   While Mr Fraundorfer referred to the case in support of the his answer

to Mr Murray’s submission that a mortgagee must use the s 143 procedure (rather than asking LINZ to lapse the caveat, and so obliging the caveator to use the s 145A procedure), the case equally underlines the fact that the duplication of proceedings in this case has been unnecessary.

[45]     I have considered Mr Fraundorfer’s submissions in support of the application carefully, but I do not find them persuasive.   He submits that the sustaining application should be considered as an application to the Court which is funded by third parties (the firm of chartered accountants in which the liquidators are partners appears to be bearing the cost of the proceedings), and that it is appropriate in those circumstances that the well-resourced party that is funding the proceeding should be required to post security.  I have considerable doubt that the liquidators in a claim properly commenced by a company in liquidation should be regarded for security purposes as equivalent to a third party funder – for one thing, liquidators are required to take appropriate steps to get in or preserve the company’s assets, and I think that puts them in a different position from an ordinary creditor pursuing a claim.  But it is not necessary for me to decide the question because it does not address the fundamental  point  that  there  is  no  apparent  need  for  the  parties  to  be  putting resources into the sustaining application at all.   The only reason FM is expending resources   on   the   sustaining   application   appears   to   be   that   it   has   decided

(unnecessarily) that both proceedings should continue.

10     Raiser Developments Ltd v Trefoyl Properties Ltd & Anor [2008] NZCA 73; (2008) 9 NZCPR

161 at [34], referring to Sims v Lowe [1988] 1 NZLR 656 (CA) at 660, per Somers and Gallen
JJ.

[46]     Mr Fraundorfer submits that FM’s position on the merits is unassailable: even if Camray could overcome the difficulty of the clauses in the security documents which are said to prevent it from asserting its equitable lien, any caveatable interest it might have would inevitably be defeated by FM’s prior registered mortgage. Whatever might be the position on the merits, the argument again simply bypasses the point that the sustaining application is unnecessary, and FM has declined the reasonable suggestion that all issues should be addressed in the removal application.

[47]   Camray submits that FM delayed unreasonably in making the present application for security, and that the application should be refused on that account.  It is not strictly necessary for me to address that argument, but I consider that the delay in this case has not been significant.  The proceedings were effectively “put on hold” for a substantial part of 2014 while the parties endeavoured to settle the dispute, and Camray was put on notice in January 2015 that security would be sought if no resolution could be reached.

[48]     In the end, the Court’s task is to balance the competing considerations and decide whether the justice of the case requires an order for security.  It is true, as Mr Fraundorfer  submits,  that  FM  will  be  able  to  meet  Camray’s  costs  if  Camray succeeds on the hearing of the sustaining application, but the reverse will not be the case.  FM will not recover its costs if it succeeds.  But FM is not in the position of a party who is compelled to continue to participate against its will in litigation brought by an insolvent plaintiff, and all of the issues will have to be addressed in the removal application which FM has itself commenced.

[49]     The application for security is accordingly refused. There will be an order for costs to Camray on a 2B basis, together with disbursements as fixed by the registrar.

Associate Judge Smith

Solicitors:

Meredith Connell, Auckland for the applicant

Holland Beckett Lawyers, Tauranga for the respondent