Camray Farms Limited (in liquidation) v BL (Nature Sunshine) Trustee Limited
[2019] NZHC 2536
•7 October 2019
IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY
I TE KŌTI MATUA O AOTEAROA KIRIKIRIROA ROHE
CIV-2016-419-000063
[2019] NZHC 2536
BETWEEN CAMRAY FARMS LIMITED
(in liquidation) Plaintiff
AND
BL (NATURE SUNSHINE) TRUSTEE
LIMITED as Trustee of the CAMRAY FARM TRUST
First Defendant
COLLINGWOOD TRUSTEES LIMITED as
Trustee of the GORDON MOORE TRUST, and TONY SCHRAMM
Second DefendantsFM CUSTODIANS LIMITED
Third Defendant
Hearing: 27–30 May 2019, and
5 and 23 September 2019: further submissions received
Counsel:
P V Shackleton and L M Deane for the Plaintiff No Appearance of, or for the First Defendant W C Pyke for the Second Defendants
R A Rosser for the Third Defendant
Judgment:
7 October 2019
JUDGMENT OF EDWARDS J
This judgment was delivered by me on 7 October 2019 at 11.00 am.
Registrar/Deputy Registrar
Counsel: W C Pyke, Auckland
Solicitors: Meredith Connell (Office of the Crown Solicitor), Auckland Holland Beckett, Tauranga
CAMRAY FARMS LTD (in liquidation) v BL (NATURE SUNSHINE) TRUSTEE LTD [2019] NZHC 2536
[7 October 2019]
TABLE OF CONTENTS
A snapshot of the dispute [8]
The background in more detail [16]
The Neighbouring Property and the Nature Sunshine Trust [20]
The Original Properties, Camray, and 609 Ngahinapouri Rd [23]
FMC – Nature Sunshine Trust loan [28]
Bridgefield Trust advances [32]
Scown vendor finance and Matakauri Lodge advance [34]
The GMT - Nature Sunshine Trust loan [38]
Subdivision, the Property, and BLNSTL [44]
Liquidation [48]
Sale of the Property and Neighbouring Property [54]
The trustee’s indemnity [57]
The Law [57]
Issues in this case [74]
Did the current liabilities exist in 2009? [77]
Are the liabilities current? [83]
(a) Deferred settlement: Scown – 609 Ngahinapouri Road: $354,375 [86]
(b) Nature Sunshine Trust: $1,317,532 [91]
(c)Bridgefield Trust: $391,375 and (d) Matakauri Lodge: $432,961 [103]
Liquidators’ costs [114]
Conclusions on the trustee’s indemnity [117]
Is GMT’s mortgage valid? [119]
Was there an enforceable oral guarantee? [120]
Is the mortgage valid anyway? [127]
Other issues [150]
Result [152]
[1] The plaintiff, Camray Farms Ltd (Camray), and the second defendant, the Gordon Moore Trust (GMT), each claim priority to the proceeds of sale of properties in Ohaupo known as the Neighbouring Property and Property.
[2] Camray is a former trustee of the Camray Farm Trust and, in that capacity, a former owner of the Property. Through its liquidators (who were appointed in 2013) Camray claims priority to the proceeds of sale of the Property pursuant to a right of indemnity for liabilities incurred in Camray’s capacity as trustee. The right of indemnity gives rise to an equitable lien. That lien was protected by a caveat lodged by the liquidators over the Property.
[3] The right of indemnity is said to arise in relation to a GST liability (in respect of which there is no dispute), and other liabilities listed in Camray’s last set of financial accounts from 2009 and 2010. None of the creditors listed in those financial accounts have made claims in the liquidation. Two of them were liquidated and removed from the Companies Register. Whether these liabilities can support the exercise of the trustee’s indemnity is a live issue in this case. Camray also makes a claim in relation to its liquidators’ costs. These costs have not been finally quantified but those already incurred well exceed the total proceeds of sale.
[4] GMT claims priority to the proceeds of sale through mortgages registered against both properties. Those mortgages are said to secure a loan advanced by GMT to the trustees of the Nature Sunshine Trust. The trustees of the Nature Sunshine Trust were the owners of the Neighbouring Property before it was sold.
[5] There is no challenge to the GMT mortgage over the Neighbouring Property, but the validity of the GMT mortgage over the Property is in dispute. That GMT mortgage ranked ahead of Camray’s caveat protecting the right of indemnity and associated lien. Camray says that this mortgage is a nullity because it does not secure any obligation by Camray.
[6] In response, GMT says that its mortgage over the Property secured an enforceable oral guarantee of the GMT loan to the Nature Sunshine Trust. Alternatively, it says that the mortgage was security for that loan and a variation of that loan agreed in 2009.
[7] If Camray can establish its claim for an indemnity, and that the GMT mortgage is invalid, then both parties accept that their respective entitlements to the proceeds of sale of both the Neighbouring Property and Property, are to be determined by the doctrine of marshalling by apportionment.1 The method of apportionment, however, will depend on the quantum of Camray’s interest (if any) established pursuant to the trustee’s indemnity.
A snapshot of the dispute
[8] To put the dispute in context, it is necessary to understand the security interests and their order of priority in both the Neighbouring Property and the Property immediately prior to sale. That is depicted in the following diagram:
NEIGHBOURING PROPERTY
Address: 497 Ngahinapouri Road CT: SA55A/567, Lot 2–3 DP 68692
Previous owner: trustees of Nature Sunshine Trust
Owner at time of sale: BLTNSTL as trustee of Nature Sunshine Trust
PROPERTY
Address: 316 Forkert Road CT: 571681, Lot 1 DP 450118
Previous owner: Camray as trustees of Camray Farm Trust
Owner at time of sale: BLTNSTL as trustee of Camray Farm Trust
FMC’s first registered mortgage FMC’s first registered mortgage GMT’s second registered mortgage GMT’s disputed mortgage Caveat by Damian Botherway (non-party) Camray’s caveat
1 The parties’ respective marshalling claims for the entire proceeds and Camray’s alternative claims for subrogation were abandoned accordingly.
[9] The Property was previously owned by Camray in its capacity as trustee of the Camray Farm Trust. It was transferred into the ownership of the first defendant, BL (Nature Sunshine) Trustee Ltd (BLNSTL), when BLNSTL replaced Camray as trustee in 2012. BLNSTL remains the current owner of the Property in its capacity as trustee of the Camray Farm Trust.
[10] The Neighbouring Property is also owned by BLNSTL but in its capacity as trustee of another trust, the Nature Sunshine Trust. BLNSTL participated in this proceeding until shortly before trial when its counsel was granted leave to withdraw. It was not represented and did not appear at trial.
[11] Prior to sale, both properties were subject to a first ranking mortgage in favour of the third defendant, FM Custodians Ltd (FMC). Those mortgages secured a loan advanced by FMC to the trustees of the Nature Sunshine Trust, and a guarantee of that loan given by Camray. FMC was represented at trial but did not take an active part in it.
[12] GMT had a second ranking mortgage over both the Property and Neighbouring Property. As mentioned in the introductory remarks, GMT’s mortgage over the Neighbouring Property secures a loan advance made by GMT to the trustees of the Nature Sunshine Trust in 2007. There is no dispute that this mortgage is valid.
[13] However, there is a dispute about the validity of GMT’s mortgage over the Property (as shown by the broken line in the above diagram). Camray alleges that the mortgage is invalid as it does not secure anything. GMT claims that it secures the monies payable under the GMT-Nature Sunshine Trust loan either through a guarantee of that loan given by Camray, or directly.
[14] As part of a settlement agreement reached by the parties to this proceeding, both the Neighbouring Property and the Property were sold and the debts to FMC were discharged. The balance, of $500,000, is held in trust pending resolution of Camray’s claim.
[15] If Camray can establish its claim to the Property, and prove that GMT’s mortgage is invalid, it will rank behind FMC in relation to that Property. GMT will have the second ranking mortgage on the Neighbouring Property. Both Camray and GMT will be equally affected if FMC’s debt is treated as being discharged solely from one property or the other. In that event, both Camray and GMT accept that their respective entitlements to the proceeds of sale are to be determined by the doctrine of marshalling by apportionment.
The background in more detail
[16] The background to this proceeding concerns property and financing transactions involving entities connected in one way or the other with Mr Murray Hardy and Mrs Margaret Hardy.
[17] Mr and Mrs Hardy were involved in a number of business ventures, but are perhaps best known for their Hardy’s Healthy Living franchise. Mr and Mrs Hardy were both declared bankrupt on 18 February 2013 but were subsequently discharged from bankruptcy on 12 March 2016.
[18] Other key individuals include Mr Tony Schramm and Mr Damian Botherway. Mr Schramm is a former lawyer who practised with the firm Schramm Law. Mr Schramm was both an adviser to Mr and Mrs Hardy and a trustee or director of the various entities involved in this dispute. Mr Schramm was also a director of Collingwood Trustees Ltd, who was the trustee of GMT from its formation on 23 July 2004 and at the time of the relevant transactions. He became a trustee of GMT himself on 21 November 2012 when Collingwood Trustees Ltd resigned.
[19] Mr Botherway is also a solicitor and was formerly employed with Schramm Law. He subsequently acquired that business and now practices from a firm known as Botherway Legal Ltd. Mr Botherway represented BLTNSL in this proceeding until shortly before trial when he was granted leave to withdraw as counsel.
The Neighbouring Property and the Nature Sunshine Trust
[20] The property at 497 Ngahinapouri Road is known as the Neighbouring Property in this proceeding. It was a lifestyle block which appears to have been the Hardys’ family home and was also used to house a number of thoroughbred horses.
[21] The Neighbouring Property was sold in 2012. It was owned by the trustees of the Nature Sunshine Trust at the time of the transactions at issue in this proceeding. The trustees of the Nature Sunshine Trust were originally Mr and Mrs Hardy. Mr Schramm was also a trustee at the time of the financing and property transactions at issue in this proceeding, but resigned in 2012.
[22] BLNSTL was incorporated in June 2012 and replaced the Hardys as the sole trustee of the Nature Sunshine Trust at that time. Mr Botherway and Mr Hardy were previous directors and shareholders of BLNSTL. Mr and Mrs Hardy’s son is currently the sole director of BLNSTL and another family member is the sole shareholder.
The Original Properties, Camray, and 609 Ngahinapouri Rd
[23] It appears that the Hardys had a plan to purchase the farm properties adjacent to their own so that they could extend their horse breeding stud operations, and to subdivide and then sell the new properties. Steps were taken in 2008 and 2009 to bring that plan to fruition.
[24] On 5 May 2008, the Hardys entered into sale and purchase agreements for two properties adjoining their own: 545 Ngahinapouri Road property and 316 Forkert Road property (Original Properties). The vendors under both agreements were Mr and Mrs Scown.
[25] Camray was subsequently incorporated on 13 June 2008 and the Camray Farm Trust was settled by the Hardys. Camray was the appointed trustee for the Camray Farm Trust. Mr and Mrs Hardy were the directors and shareholders of Camray. They, along with other family members, were also the beneficiaries of the Camray Farm Trust. Camray, in its capacity as trustee for the Camray Farm Trust, was nominated as the purchaser under the sale and purchase agreements for the Original Properties.
[26] In April 2009, the Hardys and the Scowns entered into another sale and purchase agreement for a third property at 609 Ngahinapouri Road, Ohaupo. Camray became the nominated purchaser at the same time. This property purchase did not go ahead and Camray’s liability to settle this agreement is one of the liabilities relied on to support the exercise of the trustee’s right of indemnity.
[27] Settlement for the purchase of the Original Properties took place on 5 May 2009 (although title was not transferred into Camray’s name until 6 May 2009). The funding of the purchase price for these properties was by way of advances from the Nature Sunshine Trust, Bridgefield Trust, and a vendor loan from the Scowns.
FMC – Nature Sunshine Trust loan
[28] On 1 May 2009, the Nature Sunshine Trust entered into a loan agreement with FMC for $2,135,000. The trustees of the Nature Sunshine Trust at this time were Mr and Mrs Hardy and Mr Schramm. Mr and Mrs Hardy, Camray (as trustee for the Camray Farm Trust), and Hardy’s Ltd as trustee of Hardy’s Healthy Living Franchise Trust guaranteed the loan.
[29] The loan was drawn down on 5 May 2009. The net sum advanced (after deductions were made for legal and processing fees) by FMC to the Nature Sunshine Trust was approximately $2.088m. On the same day, 5 May 2009, Nature Sunshine Trust advanced that same sum to Camray.
[30] From those funds the sum of approximately $787,000 was paid to the Bank of New Zealand on behalf of Nature Sunshine Trust. That discharged the first ranking mortgage held by that bank over the Neighbouring Property. The net sum Camray received from Nature Sunshine Trust, therefore, was approximately $1.3m. This formed the bulk of the funds used to purchase the Original Properties. The debt owed by Camray to the Nature Sunshine Trust is one of the liabilities said to give rise to the trustee’s right of indemnity.
[31] The FMC-Nature Sunshine Trust loan and the guarantees were secured by first ranking mortgages over the Original Properties and Neighbouring Property. Those mortgages were registered on 6 May 2009.
Bridgefield Trust advances
[32] Around the same time, on 5 May 2009, the Bridgefield Trust made two advances to Camray. The first was for the sum of $350,000, and the second was for
$28,000, making a total of $378,000. These advances also appear to have been applied to the purchase price of the Original Properties. Camray’s indemnity claim relates to this liability also.
[33] The Bridgefield Trust appears to be another Hardy entity. Bridgefield Ltd was a former trustee of the Bridgefield Trust. It was a company controlled by the Hardys. Bridgefield Trust was put into liquidation on 7 June 2011, and was subsequently removed from the Companies Register.
Scown vendor finance and Matakauri Lodge advance
[34] Mr and Mrs Scown were the vendors of the Original Properties. Correspondence between the solicitors acting for the vendors and purchasers of the Original Properties record the purchase price for the Original Properties being partially funded by vendor finance for approximately $388,000. That vendor loan was secured by a mortgage over the Original Properties and the Neighbouring Property.
[35] On 10 August 2009, Camray was advanced the sum of $17,112 by the Matakauri Lodge Trust. Three days later, on 13 August 2009, a further advance of approximately $396,392 was made by Matakauri Lodge Trust to Camray. Debts recorded as being owed by Camray to the Matakauri Lodge Trust are also relied on in support of the indemnity claim.
[36] The Matakauri Lodge Trust is also a Hardy entity. Mountain Trustee Ltd was a former trustee of this trust. This company was also controlled by the Hardys. Like Bridgefield Ltd, it was placed into liquidation by the Court on 7 June 2011, and subsequently removed from the Companies Office Register.
[37] It appears that the advances received from the Matakauri Lodge Trust were used by Camray to discharge the Scowns’ vendor loan on 13 August 2009.
The GMT - Nature Sunshine Trust loan
[38] The GMT trust was settled on 23 July 2004. The beneficiaries of this trust are the children (and their spouses) and grandchildren of Mr Gordon Moore. Mr Schramm explained in evidence that Mr Gordon Moore was an elderly client of his firm who had entrusted him with all his affairs.
[39] The original trustee of the GMT trust was Collingwood Trustees Ltd. The directors of Collingwood Trustees included Mr Schramm, and Mr Botherway, and the sole shareholder of the company was Botherway Legal Ltd. Mr Schramm replaced Collingwood Trustees Ltd as the trustee in 2012.
[40] On 8 August 2007, GMT (as lender) entered into a loan agreement with Nature Sunshine Trust (as borrower) for the sum of $500,000 (the GMT-Nature Sunshine Trust loan). The term of this loan was 18 months from draw-down. The draw down date was 10 August 2007 and so the loan fell due for repayment on 10 February 2009.2 Interest was payable by way of deduction from the principal sum with the total sum (including interest, fees, and costs) due for repayment at the end of the term.
[41] The GMT-Nature Sunshine Trust loan was secured by unlimited guarantees by Mr and Mrs Hardy, Matakauri Lodge Trust, Matakauri Trust, Hardy’s Health Living Franchise Trust, and Hardy’s Health Living Company Limited. It was also secured by an agreement to mortgage over the Neighbouring Property, and an agreement to mortgage over Matakauri Trust Property in Queenstown. The agreement to mortgage the Neighbouring Property was not registered in 2007.
[42] It is common ground that there were no payments made in reduction of this loan. In around April or May 2009, GMT says that the term of the loan was extended to allow the Nature Sunshine Trust to refinance its existing lending and secure the funds necessary to enable the purchase of the Original Properties (via Camray). GMT
2 The liquidators originally contested whether this advance had actually been made, but that was not pursued at trial
says that it agreed to this extension on condition that it was provided with additional security. The additional security was a mortgage provided by Camray over the Original Properties. The validity of this mortgage is in dispute.
[43] GMT’s mortgages over the Neighbouring Property and the Property were registered on 9 June 2009.
Subdivision, the Property, and BLNSTL
[44] By 2012, the Hardy entities were running into financial difficulty and in August of that year, FMC issued default notices in relation to the mortgages over the Property and the Neighbouring Property.
[45] On 21 August 2012, Camray subdivided the Original Properties into three new properties with the following title identifiers: CT 571681 (the Property), CT 571682, and CT 571683. All three subdivided properties remained subject to the FMC and GMT mortgages registered over the Original Properties.
[46] The newly subdivided properties, and the Neighbouring Property, were transferred into BLNSTL’s name on 21 August 2012 in its capacity as trustee of the Camray Farm Trust, and Nature Sunshine Trust, respectively.
[47] Two of the newly created titles (CT 571682 and CT 571683) were subsequently sold to third parties for $390,000 and $420,000 respectively.
Liquidation
[48] The Hardys were both adjudged bankrupt on 18 February 2013. Camray was subsequently placed into liquidation on 27 May 2013 and Mr Levin and Ms Madsen- Ries were appointed liquidators.
[49] At the time of liquidation, Camray’s only assets comprised of $2,000 cash at the bank, $6,000 related party loans, and the claimed right to a trustee’s indemnity. A caveat protecting the equitable lien in respect of this indemnity was lodged over the Property on 5 July 2013.
[50] The Inland Revenue Department is the only party to make a claim in the liquidation. That claim, for $37,472.27, was admitted by the liquidators in December 2013. There is no longer any dispute that this debt is related to the Camray Farm Trust activities.3
[51] Camray relies on the liabilities to the Scowns, trustees of Nature Sunshine Trust, Bridgefield Trust and Matakauri Trust as giving rise to a right of indemnity. Those liabilities total approximately $2.5m.
[52] The liquidators sent requests to these creditors asking whether they intended to make a claim in the liquidation. There was no response. Mr and Mrs Hardy declined to participate in an interview with the liquidators, and requests for further information from them, Mr Schramm, and Mr Botherway, were not fruitful. Mr Schramm was the only witness directly involved in the events of 2009 to give evidence in this proceeding. He did so on behalf of GMT.
[53] Camray also claims a lien over the proceeds of sale of the Property in respect of its liquidators’ costs and disbursements. The quantum of those costs have not been finalised as yet, but those already incurred, exceed, by a significant margin, the proceeds of sale the subject of this dispute. Mr Levin confirmed in his evidence that any assets recovered in this proceeding will be applied to the liquidators’ disbursements (i.e. legal fees) in the first instance. Application of the proceeds of sale to those costs will mean that there will be nothing left for creditors.
Sale of the Property and Neighbouring Property
[54] In March 2016, Mr and Mrs Hardy were discharged from bankruptcy. Six months later, on 21 September 2016, FMC settled the sale of the Neighbouring Property to Mr and Mrs Hardy for the sum of $950,000 (inclusive of GST if any). The Property was sold by FMC by way of mortgagee sale to third parties for the sum of
$1,370,000 plus GST. The total proceeds of sale for both properties (less direct costs of sale) were approximately $2.206m.
3 This debt appears to relate to unpaid GST on rental income/grazing fees received by Camray from the Camray Stud. GMT originally challenged this debt on the grounds that it did not relate to Camray’s trustee duties, but that challenge was not pursued at trial.
[55]The parties to this proceeding agreed to FMC paying itself approximately
$1.7m from these proceeds of sale with the remaining $500,000 held on trust pending determination of this proceeding. FMC does not make any claim to the remaining funds.
[56] Against that background, I turn to consider Camray’s claim to the trustee’s right of indemnity.
The trustee’s indemnity
The Law
[57] A trustee has a right of indemnity against the trust assets for liabilities incurred in the performance of the trustee’s duties. The right of indemnity may be expressly provided for in the trust deed, or implied at equity.4 There is also a statutory right of indemnity provided for in s 38(2) of the Trustee Act 1956. That section provides:
(2) A trustee may reimburse himself or pay or discharge out of the trust property all expenses reasonably incurred in or about the execution of the trusts or powers; but, except as provided in this Act or any other Act or as agreed by the persons beneficially interested under the trust, no trustee shall be allowed the costs of any professional services performed by him in the execution of the trusts or powers unless the contrary is expressly declared by the instrument creating the trust: provided that the court may on the application of the trustee allow such costs as in the circumstances seem just.
[58] This section includes limitations on the claim for the costs of professional services unless the contrary is expressly declared in the trust instrument. In this case, the Trust Deed contains a right of indemnity that extends to those costs. The relevant clause in the Trust Deed provides:
4.1The payments out of Trusts
The Trustees may as they think fit pay out of the income or the capital of the Trust Fund any of the following:
(a)The expenses of administering the Trust Fund including payment for professional services to any Trustee being a solicitor, accountant or other person engaged in any profession or business, and, if one of the Trustees is a professional trustee or a company, then all usual charges for acts done by the Trustee or any employee or partner of the
4 Worrall v Harford (1802) 32 ER 250 at [7].
Trustee in connection with the trust, including acts which a Trustee not being any professional business could have done personally.
(b)The costs of acquiring further assets of the Trust Fund.
(c)Any debts or liabilities of the Trust Fund.
…
[59] The right of indemnity against trust assets exists where a trustee has paid trust expenses from their personal funds and they seek recoupment of those funds (the right of recoupment). It also exists where liabilities have been incurred, but have not yet been paid. In that case, the trustee seeks to pay the liabilities out of trust assets, that is, it seeks to be exonerated for those liabilities (the right of exoneration).5 It is the right of exoneration that is in issue in this case.
[60] The trustee’s right of indemnity takes priority over the beneficiaries’ interest in the trust property.6 The rationale is that it is inequitable for a beneficiary to benefit from the property without also bearing the burden associated with that property.7 However, a trustee can only call on the indemnity if a liability has been properly incurred. If a trustee is in breach of the trust, then the right of indemnity might be lost.8
[61] Similarly, the trustee retains the right of indemnity, and its equitable lien, even after it has resigned as trustee or been replaced. The new trustee takes the trust property subject to the former trustee’s equitable proprietary interest arising out of the right of indemnity.9 That means in this case that Camray’s rights to the trust property are superior to those of BLNSTL as the new trustee of the Camray Farm Trust.
[62] Protection and enforcement of the trustee’s right of indemnity is by way of an equitable lien over the assets of the trust. There is no dispute that this creates a
5 Andrew Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington, 2009) at [16.6.1 (2)].
6 Lynton Tucher, Nicholas Le Podevin and James Brightwell Lewin on Trusts (19th ed, Sweet & Maxwell, London, 2015) at [22.037]; and Ford and Lee Principles of the Law of Trusts (looseleaf ed, Thomson Reuters, 2018) at [14.250].
7 Hardoon v Belilios [1901] AC 118 at 123.
8 Levin v Ikiua [2010] 1 NZLR 400 (HC) at [126].
9 Ford and Lee Principles of the Law of Trusts (looseleaf ed, Thomson Reuters, 2018) at [14.250] and [14.370].
proprietary interest in the trust property in favour of the trustee where the right is one of recoupment.10 There has, however, been debate about whether the right of exoneration creates a proprietary interest in the trust property. The current position in New Zealand appears to be that it does.11 The parties proceeded on this basis – as do
I. The equitable lien therefore supports the registration of a caveat, and may be enforced just like any other charge over land, that is, by order of sale or court order.
[63] The lien comes into existence when the right of indemnity arises, that is at the time the liability was incurred.12 It is not always necessary for the amount of the liability to be determined in order for the trustee’s charge or lien to arise. For example, a future contingent liability to pay capital gains tax and unquantified court costs may still support a lien.13
[64] Trust creditors may claim against trust property by way of subrogation to the trustee’s right of indemnity in cases where judgment against the trustee would be fruitless.14 The justification for such a right is to avoid the injustice of a beneficiary getting the benefit of assets earned as the result of credit given to the trustee by the creditor.15
10 Re Suco Gold (1983) 7 ACLR 873, cited with approval in Official Assignee v Menzies HC Auckland CIV 2010-404-5457, 14 February 2011.
11 LSF Trustee Ltd v Footsteps Trustee Co Ltd (in liq) [2017] NZHC 2619 at [19]; see also Official Assignee v Menzies, HC Auckland CIV 2010-404-5457 14 February 2011 at [28]. Whether a right of indemnity by way of exoneration from the trust assets gives rise to a caveatable interest has been questioned by some commentators: see HAJ Ford, Trading Trusts and Creditors Rights (1981) MULR 1; Bill Patterson “Trustees Indemnities, equitable liens, subrogation and caveats: has the law taken a wrong turn?” (paper presented to New Zealand Law Society Trusts Conference, June 2011); Andrew Steele “Trustees Indemnities, Equitable liens, Subrogation and Caveats” (2013) 15 BCB 155.
12 Ford and Lee (eds) Principles of the Law of Trusts (looseleaf ed, Thomson Reuters, 2018) at [14.250] and the cases cited at footnote 6: Chief Commissioner of Stamp Duties (NSW) v ISPT Pty Ltd (1998) 45 NSWLR 639 at 653; Custom Credit Corp Ltd v Ravi Nominees Pty Ltd (1992) 8 WAR 42 at 52-53; Scaffidi v Scaffidi Holdings Pty Ltd [2010] WASC 29.
13 Ford and Lee (eds) Principles of the Law of Trusts (looseleaf ed, Thomson Reuters, 2018) at [14.330]; Agusta Pty Ltd v Official Trustee in Bankruptcy (2009) NSWCA 129.
14 Lynton Tucher, Nicholas Le Podevin and James Brightwell Lewin on Trusts (19th ed, Sweet & Maxwell, London, 2015) at 858.
15 Re Johnson (1880) 15 CH D 548 at 552.
[65] The trustee’s right of indemnity and equitable lien passes to a liquidator upon liquidation.16 This raises an issue about whether the assets recovered are generally divisible among creditors. That issue was considered in Re Suco Gold Pty Ltd.17 The Full Court of the Supreme Court of Australia drew a distinction between the trustee’s rights of recoupment and rights of exoneration. The Court held that proceeds may be divisible amongst the general pool of creditors where the trustee in liquidation has discharged the liability and is seeking to recoup that sum out of the trust property. However, where the trustee is exercising rights of exoneration (as in this case), then indemnity only exists for the purpose of discharging the trustee’s liabilities incurred in the performance of the trust; it does not exist to recover assets for more general distribution to creditors.18
[66] The Court in that case also confirmed that a liquidator is entitled to have recourse to trust property for the purposes of meeting the costs and expenses of a liquidation in so far as they relate to the trust. If there are non-trust liabilities, then the liquidators’ expenses must be apportioned between recovery of the trust and non-trust liabilities.19 In this case, all of Camray’s liabilities were incurred in its capacity as trustee and so the question of apportionment does not arise.
[67] The position taken in Re Suco Gold Pty Ltd is consistent with the approach taken in New Zealand cases. In Levin v Ikiua, Heath J drew a distinction between the bankruptcy of an individual trustee and the liquidation of a corporate trustee.20 In the latter case, his Honour held that the assets of the company do not vest in a liquidator. Therefore, any property held in trust will be excluded from property available for distribution to company creditors.21
[68] The decision in Re Suco Gold Pty Ltd has also been followed in New Zealand insofar as it relates to the liquidator’s right to be indemnified out of trust assets. In
16 Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360; In Re Suco Gold (1983) 7 ACLR 873 at 877–878; Ahmed Terzic Subrogation to the Trustee’s personal right of indemnity (2017) 91 Aust LJ 736.
17 Re Suco Gold (1983) 7 ACLR 873.
18 At 881.
19 At 883.
20 At [116].
21 Levin v Ikiua [2010] 1 NZLR 400 (HC).
Re Secureland Investments Ltd, Holland J concluded that a provisional liquidator was entitled to retain trust assets until the trustee’s expenses and remuneration were paid.22 Those costs and expenses included those relating to the administration of the trusts “in the light of the trustee companies having been ordered to be wound up”.23 The Judge noted in that case that care had to be taken to ensure that the remuneration was “qua trustee and not remuneration qua Provisional Liquidator in respect of which his rights must be restricted”.24
[69] That decision was followed in Re Francis James Nominees Ltd (in liq). After reviewing relevant authorities, Doogue J concluded that in one way or another a liquidator was entitled to some remuneration for bringing in the trust assets.25
[70] In Australia, the liquidators’ right to remuneration has been most recently confirmed in Neeeat Holdings (In liquidation).26 In that case, the Court said that the premise underpinning recovery of liquidators’ costs relating to the trust assets is that the trustee’s obligation to pay trust debts can be performed only through the liquidator. The liquidators’ right to remuneration is accordingly regarded as a debt incurred in performing the duties of the trustee.27
[71] The consequence of this is that the recovery of liquidators’ costs and fees is not pursuant to the order of priorities stipulated in the Companies Act 1993, but according to the rules of equity that apply when a trust is wound up. The distinction may be immaterial in practice, however, as priority is often accorded to the costs associated with recovering the assets in cases of trust administration.
[72] Another consequence of recovery being “qua trustee” is that a liquidator will only be indemnified out of trust assets for costs and expenses if those costs and expenses are reasonably incurred.28 That is consistent with the limitations that exist generally on the trustee’s right of indemnity. Although the source of that obligation is
22 Re Secureland Mortgage Investments Ltd (No 2) (1988) 4 NZCLC 64,266 (HC).
23 At 9.
24 At 11.
25 Re Francis James Nominees Ltd (in liq) (1988) 4 NZCLC 64,279 (HC).
26 Neeeat Holdings (in liq) [2013] FCA 61.
27 At [25].
28 In Re Berkeley Applegate (Investment Consultants) Ltd (No 1) [1989] 1 Ch 32 at [34]–[35] cited with approval in Neeeat Holdings (in liq) [2013] FCA 61 at [24].
in equity, it is, in any respect, consistent with the recovery of liquidators’ costs pursuant to statute.29
[73]I now turn to consider the application of these principles to Camray’s claim.
Issues in this case
[74]Camray’s claim to the right of indemnity is based on:
(a)the IRD debt;
(b)liabilities recorded as “current liabilities” in Camray’s last set of financial accounts; and
(c)its liquidators’ costs.
[75]There is no longer any dispute between the parties regarding the IRD debt in
(a) above. Camray’s GST liability totals $21,400.23. Interest and penalties of
$10,352.67 have accrued on this sum. There is also a preferential claim of court costs. Camray’s right of indemnity in relation to this liability is established.
[76] The contentious issues concern the liabilities in (b) and (c). There are two questions concerning the claim in respect of Camray’s “current liabilities” in (b). First, whether there is sufficient evidence that they existed, and second, whether they remain current. Both these issues are considered next. The claim in relation to liquidators’ costs is considered subsequently.
Did the current liabilities exist in 2009?
[77] The liabilities relied on by Camray are recorded in the last set of financial accounts prepared by Camray’s accountants. The set of financial accounts for the year ended 31 October 2009 record them as follows:
29 Companies Act 1993, s 276.
Current Liabilities Oct 2009 Mar 2009 $ $ ANZ Bank 25 Accounts Payable 3,098 1,640 Deferred Settlement Scown – 316 Forkert Rd 1,613,474 Deferred Settlement Scown – 545 Ngahinapouri Rd 418,732 Deferred Settlement Scown – 609 Ngahinapouri Road 354,375 Camray Trust 29,267 74,562 Nature Sunshine Trust 1,317,532 Advance: Bridgefield Trust 391,375 Advance Matakauri Lodge 432,961 2,528,633
2,108,408
[78] As can be seen below, there are some differences recorded in the financial accounts prepared for the financial year ended 31 March 2010, but the current liabilities relied on by the liquidators remain the same:
$ ANZ Bank 24 Accounts Payable 864 Deferred Settlement Scown – 316 Forkert Rd Deferred Settlement Scown – 545 Ngahinapouri Rd Deferred Settlement Scown – 609 Ngahinapouri Road 354,375 Camray Trust 29,267 Nature Sunshine Trust 1,317,532 Advance: Bridgefield Trust 391,375 Advance Matakauri Lodge 432,961 2,526,398
[79] Mr Pyke submits that these accounts are neither accurate nor sufficiently certain to prove that the liabilities existed at these dates. He stresses that neither set of accounts was signed and there is no documentation (for example, a trustee’s resolution) indicating that the accounts were adopted by Camray.
[80] That submission has merit – at least in relation to the 2010 accounts. It seems likely that they were in draft form. That was the opinion of Mr Mason, an independent expert accountant called on behalf of Camray. He also said that the 2010 accounts were unlikely to be accurate as there were few, if any, transactions recorded after 31 October 2009.
[81] However, the draft form of these accounts does not mean that there is no evidence to establish that these liabilities existed at the time. Other documentary evidence produced at trial corroborates the existence of those liabilities, as summarised below:
(a)Deferred settlement: Scown – 609 Ngahinapouri Road: $354,375: This liability is supported by copies of the sale and purchase agreement showing the purchase price; the tax invoice naming Camray as the purchaser; the entries in Camray’s general ledger; a letter from the Scowns’ solicitor confirming the failure to settle; and a title search of the property.
(b)Nature Sunshine Trust: $1,317,532: It is clear that this sum is the net proceeds from the FMC-Nature Sunshine Trust loan once the BNZ mortgage had been discharged. There is no dispute that such sums were advanced. The advance is recorded in Camray’s general ledger, and in the accounting records obtained from Camray’s accountants. Camray applied this advance towards the purchase price for the Original Properties.
(c)Advance: Bridgefield Trust: $391,375: This entry is supported by corresponding entries in Camray’s general ledger. The total advance is made up of three separate advances of $39,375, $350,000, and $28,000. Those records show that the first of those sums, $39,375, was the deposit payable for the purchase of 609 Ngahinapouri Rd. A letter from Schramm Law (on behalf of Camray) to the solicitors for the vendors records this as having been paid on the same day the advance was made. The other two sums, of $350,000 and $28,000, are recorded as advances
from Bridgefield Trust for the purchase of the Original Properties. There is no dispute that the purchase of these properties went ahead. That rebuts any suggestion that these were merely journal entries, rather than actual cash advances.
(d)Advance: Matakauri Lodge: $432,961: Camray’s general ledgers provide support for this liability also. Advances totalling $432,960.58 are recorded in Camray’s general ledger. The ledger statement for Camray records that at least two of those advances ($396,392.93 and
$17,111.83 respectively) were applied on 13 August 2009 to repay the Scowns’ vendor loan for the purchase of the Original Properties. Those sums are further substantiated by correspondence between the lawyers acting for the Scowns and Camray as to the balance of the vendor loan, and its subsequent repayment on 13 August 2009. The Scowns’ mortgages secured over the Original Properties and Neighbouring Property were discharged on 13 August 2009.30
[82] On the basis of Mr Mason’s expert opinion, and my own review of the documentary evidence, I am satisfied that there is sufficient evidence to establish the existence of the liabilities listed in the October 2009 accounts.
Are the liabilities current?
[83] The real contest relating to the trustee’s right of indemnity concerns the currency of these liabilities. This issue has a number of facets to it. There is an issue about whether the liabilities have been discharged or waived since they arose in 2009. Even if that hurdle can be overcome, then there remains an issue about whether enforcement of the liabilities is too remote to support the exercise of the lien. By that I mean whether the indemnity and lien can be triggered in circumstances where the trust creditor has not taken any steps to enforce its debt and is unlikely to ever do so.
30 The discharge of the mortgages are recorded on the certificates of title for Neighbouring Property and Original Property. The document trail suggests that the date of the advances recorded in the general ledger (CBD 5/3881) were in error.
[84] Evidence concerning the liabilities after 2009 is, unsurprisingly, sparse. Camray relies on a letter dated 29 September 2011 from a solicitor at Botherway Legal on behalf of the Nature Sunshine Trust and the Camray Farm Trust, to the Gordon Moore Trust. Various documents, including Camray’s 31 October 2009 accounts, are enclosed with that letter, and reference is made to potential claimants as referred to in the financial reports.
[85] Little can be taken from that letter in my view. Read in context, the solicitor is simply confirming that she is not aware of any other potential claimant in respect of Nature Sunshine Trust or Camray Farm Trust other than those listed in her letter. That does not provide good evidence that the liabilities remain current. In any respect, the currency of each of the liabilities requires closer analysis of the nature of the liability and the evidence specifically relating to it. That follows next.
(a)Deferred settlement: Scown – 609 Ngahinapouri Road: $354,375
[86] This liability relates to the deferred settlement on 609 Ngahinapouri Rd. The sum stated in the 2009 and 2010 statements is the purchase price for the property ($393,750) minus the deposit ($39,375) paid on 5 May 2009. In other words, it is the sum required to settle the purchase of the property at 609 Ngahinapouri Rd.
[87] Settlement was due on 31 July 2009 but did not proceed on that date. A letter from the Scowns’ solicitor, dated 10 February 2010, suggests that the parties were still hoping to settle at a future date and had made arrangements for the payment of penalty interest at a reduced rate on that basis. The liability recorded in the accounts was premised on the basis that settlement, although late, would nevertheless still proceed.
[88] Camray’s purchase of the property did not, however, proceed. There is no evidence to suggest that the Scowns sought specific performance of the sale and purchase agreement or took other steps to compel Camray to settle. In other words, there is no evidence that the Scowns sought to enforce this liability either at the time, or subsequently. In fact, as the certificate of title for the property records, the Property was sold to third parties in 2013. If there was a prospect of the Scowns seeking to enforce their agreement and require payment of the settlement sum, then that prospect was dispelled by the sale of the property to third parties.
[89] The sale to third parties also changed the nature of Camray’s potential liability. From at least that date (if not earlier), Camray was exposed to a damages claim by the Scowns for breach of the sale and purchase agreement. A potential claim in damages is different in kind to the sum required to complete a sale and purchase agreement as recorded in the draft accounts. There was no evidence directed towards the quantification of a potential damages claim. And there was simply no evidence that the Scowns intended to enforce such a claim. The prospect of them doing so now, or in the future, is so remote as to be virtually non-existent.
[90] The upshot of all this evidence is that I am not satisfied that the liability for the deferred settlement on 609 Ngahinapouri Rd recorded in the financial accounts remains a current liability supporting the exercise of the equitable lien.
(b)Nature Sunshine Trust: $1,317,532
[91] The issue in respect of the Nature Sunshine Trust debt is whether it has been repaid as a result of the sale of the three subdivided properties (including the Property).
[92] Mr Schramm took the view that the sale of these properties, and the discharge of the FMC-Nature Sunshine Trust loan, resulted in the automatic discharge of Camray’s liability to Nature Sunshine Trust. He said that this had occurred as a matter of accounting practice.31 BLNSTL also pleaded that the alleged current liabilities had been discharged by the sale of the subdivided properties,32 although no evidence was produced to support that contention.
[93] I do not agree with Mr Schramm that the discharge of the FMC-Nature Sunshine Trust debt resulted in an automatic discharge of the Nature Sunshine Trust- Camray debt. The proceeds of the sale of the property were applied to discharge Nature Sunshine Trust’s liability to FMC. That discharged both Camray’s obligation as guarantor of the FMC-Nature Sunshine Trust loan and the mortgage securing those obligations. But the Nature Sunshine Trust advance to Camray was a separate advance. It does not follow, therefore, that the discharge of the liability under the
31 NOE p130, line 13 – p131, line 12.
32 Amended Statement of Defence dated 12 April 2019, para [25(c)].
FMC-Nature Sunshine Trust loan automatically discharged the liability arising under the Nature Sunshine Trust-Camray loan.
[94] Whether that analysis is correct, is, however, ultimately immaterial. That is because I have reached the same conclusion via a different route, namely inferences drawn from the evidence adduced at trial. That evidence suggests that the liability has been discharged, waived, or at the very least, is so unlikely to be enforced that it cannot support the exercise of the lien in this case. The evidence relied on to reach that conclusion is as follows.
[95] First, there is no dispute that the FMC funds advanced to the Nature Sunshine Trust were then on-advanced to Camray for the purpose of purchasing the Original Properties. It is reasonable to infer from that flow of funds that the parties intended any funds arising out of the sale of those properties to flow back the same way. That is, repayment of the funds to discharge Nature Sunshine Trust’s liability to FMC would simultaneously discharge Camray’s liability to the Nature Sunshine Trust.
[96] Second, Mr Schramm’s evidence adds support to that inference. I accept that Mr Schramm was not giving evidence on behalf of BLNSTL or the former trustees of the Nature Sunshine Trust. Nor was he a trustee of the Nature Sunshine Trust at the time of the sale of the properties. Nevertheless, he was a trustee of the Nature Sunshine Trust at the time the original advance was made. His belief that the Nature Sunshine Trust liability was automatically discharged when the properties were sold lends support to the conclusion that the parties intended the liability to be discharged in this way.
[97] Third, BLNSTL, in its capacity as the trustee of the Nature Sunshine Trust has not taken any steps to recover this advance in the ten years since it was made. Notably, it has not made a claim in the liquidation or otherwise sought to enforce its rights. Mr Shackleton submits that there may be tactical reasons why BLNSTL has not filed a claim in the liquidation. That may be so, but that does not suggest an intention to pursue the debt. In fact the opposite is the case. The failure to make a claim is consistent with the liability having been discharged or waived. At the very least, it is consistent with an intention not to take steps to enforce that liability in the future.
[98] Fourth, and finally, this is not a case where inferences may be drawn from BLNSTL’s failure to adduce evidence or respond to letters sent by the liquidators’ lawyers. Such an inference may only arise where: (a) the party could be expected to call the evidence; (b) the evidence of that witness would explain or elucidate a particular matter; and (c) the absence of that evidence is unexplained.33
[99] The first of these two conditions are met in this case. But the third is not – or at least not entirely. Shortly before trial, BLNSTL’s counsel sought leave to withdraw on the grounds that he did not have instructions and had no funds to continue. A corporate entity can only appear at trial through counsel. The absence of legal representation, and the lack of available funds, provide some explanation for why BLNSTL did not appear or call evidence at trial.
[100] Even if all three conditions were met, the inferences to be drawn could only add to the weight of the evidence suggesting that the liability remained current. But, for the reasons outlined above, I consider the weight of that evidence points in the opposite direction. That is, it suggests that the liability has been discharged, waived, or is highly unlikely to be enforced. Any adverse inference to be drawn from the absence of evidence would not be sufficient to shift the weight of that evidence towards a finding that the liability remained current.
[101] To conclude, I consider the cumulative effect of the inferences to be drawn is that Camray cannot show, on the balance of probabilities, that the liability remains current. In all probability, I consider it has been discharged or waived. But even if I am wrong about that, it nevertheless shows that Nature Sunshine Trust is highly unlikely to ever enforce its debt. For reasons that I expand on further below, I do not consider equity would afford the protection of the equitable lien to Camray in those circumstances.
[102] I find that Camray is unable to exercise its right of indemnity in relation to this liability also.
33 Perry Corporation v Ithaca (Custodians) Ltd [2004] 1 NZLR 731 (CA) at [153].
(c)Bridgefield Trust: $391,375 and (d) Matakauri Lodge: $432,961
[103] The advances made by Bridgefield Trust and Matakauri Lodge are dealt with together as they raise the same or similar issues.
[104] The sale of the subdivided properties and the repayment of the FMC-Nature Sunshine Trust loan does not have any impact on the repayment of the Bridgefield and Matakauri advances. These were separate advances from the FMC loan and were from entities otherwise unconnected to that loan.
[105] The evidence relating to these advances and the possible discharge of liabilities is even thinner than that related to the Nature Sunshine Trust loan. The corporate trustees for both trusts were placed into liquidation on 7 June 2011 with their liquidations completed in December 2013. They were both subsequently removed from the Companies Office Register.
[106] Claims received in the liquidation of Bridgefield exceeded $10.5m; the claims in the Mountain Trustees exceed half a million. Despite that, the liquidators for both entities did not make a claim in Camray’s liquidation in relation to the noted advances. I accept Mr Shackleton’s submission that the only plausible explanation for the liquidators not making a claim in Camray’s liquidation is that they did not know about the debts Camray owed. Overall, I am not persuaded that the liabilities owed to trustees of the Matakauri Trust and Bridgefield Trust have been discharged.
[107] But that is not determinative. The issue in relation to these two liabilities is whether they are too remote to support the exercise of the trustee’s indemnity. That is, whether Camray can exercise its proprietary right over the Camray Farm Trust property to exonerate itself from future liabilities when it is highly unlikely that it will ever be asked to meet those liabilities.
[108] Mr Shackleton submits that these creditors are still entitled to submit a claim in the liquidation at any time as time stopped running upon liquidation. He also points to Mr Levin’s evidence to show that if material funds became available for distribution, Camray’s liquidators could apply to restore the companies to the Register so that they could receive a distribution.
[109] That may be correct in theory, but the reality is that there is little to no prospect of material funds becoming available for distribution to creditors. Camray has no other assets other than the equitable lien that is the subject of this proceeding. Mr Levin confirmed in evidence that the sums recovered as a result of this proceeding would be used to discharge the liquidators’ costs. There will be nothing left to pay creditors even if claims were subsequently received in the liquidation, or if companies were restored to the Register for that purpose.
[110] The issue is whether equity will enforce a lien to support the trustee’s indemnity in these circumstances. I think not. The exercise of the right cannot exist in a vacuum. There must be a sense of reality which informs it. In other words, there must be a realistic prospect of the liability being enforced to warrant the protection afforded by the equitable lien.
[111] The prospect in this case of either creditor ever seeking to enforce its liability is so low as to be non-existent. There have been no steps taken in the last 10 years to recover these liabilities and there is no reason to suggest that the creditors will do so in the future. The trustees of both entities have been liquidated and removed from the Companies Office Register. There is accordingly no “creditor” to enforce the debt. There is also no reason for the liquidators of the companies (or Camray’s liquidators) to restore either company to the Register in order to make a claim in circumstances where the only assets available to Camray will be applied to meet the liquidators’ costs.
[112] Recovery in relation to these liabilities is also at odds with the equitable underpinnings of the doctrine. With the exception of the IRD debt, the attempted recovery of the trust assets is not being driven by Camray’s creditors seeking to enforce their liabilities. Nor is this a case of the creditors looking to subrogate to the trustee’s right of indemnity to enforce their liability against the trust property. Rather, it is being driven by the liquidators’ desire to recover assets to meet their own costs and expenses. The liabilities are simply the springboard by which they seek to do that. In that respect, it is a case of the tail wagging the dog.
[113] In sum, I do not consider the exercise of the trustee’s indemnity in relation to liabilities that are unlikely to ever be enforced is consistent with the equitable
underpinnings of the doctrine. The trustee’s indemnity cannot be established in relation to the Bridgefield and Matakauri liabilities either.
Liquidators’ costs
[114] The liquidators also claim an equitable lien in relation to their costs and expenses. As the review of the authorities set out above confirms, such a claim has been allowed on the basis that the trustee’s obligation to pay trust debts can only be met through the liquidator acting in the shoes of the trustee.
[115] But for the IRD liability, I would have hesitated before allowing the right of indemnity to be exercised to recover the liquidators’ costs. The recovery of the liquidators’ costs is an incident of the recovery of trust assets in order to discharge trust liabilities. If there are no trust liabilities justifying the exercise of the right to indemnity it is difficult to see how recovery of the liquidation costs may be justified as an act of the trustee. Enforcement of the lien in those circumstances would relegate the right of indemnity to another asset gathering tool in the liquidator’s armoury. That is not consistent with either the purpose or the equitable foundations of the trustee’s indemnity.
[116] Nevertheless, the claim by the IRD in the liquidation triggered the exercise of the trustee’s indemnity. The asset to meet that debt could only be recovered by the liquidator acting as trustee. The costs relating to recovery of that debt are accordingly recoverable. Just how much more is recoverable is difficult to say. An examination of the liquidators’ costs to understand whether they were all incurred “qua trustee” and not “qua liquidator” will be necessary. Further, the reasonableness of the costs incurred will also need to be assessed. Until that determination is made it is not possible to quantify the extent of the trustee’s lien over the trust property in relation to the liquidators’ costs.
Conclusions on the trustee’s indemnity
[117]To conclude, the right of indemnity is:
(a)allowed insofar as it relates to the IRD debt.
(b)allowed in relation to the liquidators’ costs but subject to a determination that they were incurred as “trustee” and were reasonably incurred.
(c)not allowed in relation to the current liabilities, as I am not persuaded that the liabilities are either current, or support the exercise of the trustee’s indemnity in this case.
[118] Those findings do not determine Camray’s claim. To succeed, Camray must also show that GMT’s prior ranking mortgage over the Property is invalid, so that its equitable lien takes priority. That issue is considered next.
Is GMT’s mortgage valid?
[119] Camray says that the GMT mortgage is invalid because it does not secure any obligation on the part of Camray. GMT defends this claim on the basis that the mortgage secures a guarantee of the GMT loan to Nature Sunshine Trust when the term of that loan was extended in April 2009. There is no written copy of this guarantee, so the first factual issue to be determined is whether there was an enforceable oral guarantee as alleged.
Was there an enforceable oral guarantee?
[120] The only party to give oral evidence about the alleged oral guarantee was Mr Schramm. Mr Schramm explained that around April or May 2009, Mr and Mrs Hardy approached him seeking to refinance their lending so as to enable them to purchase the adjoining properties. Mr Schramm said that at the time he considered the extension of the GMT loan was in the interest of GMT, but only if it had security over the existing property (the Neighbouring Property) and the new properties to be purchased (the Original Properties). The reason for that, Mr Schramm said, was because the new financier (FMC) would take a first registered mortgage over both properties and so if GMT wanted to maintain its security position, it needed to get security over the new properties to be purchased also.
[121] That evidence falls well short of what is required to establish the existence of an oral agreement to guarantee. Significantly, Mr Schramm was unable to recall the particulars of any agreement reached. He was unable to say whether the guarantee was on demand and whether it was limited to a particular sum. Although he said that it formed part of the general discussions about the Nature Sunshine- FMC refinancing, he was unable to identify when the agreement to guarantee was struck.
[122] He was also uncertain about those who had agreed to this alleged oral guarantee. Mr Schramm’s only recollection was that there were “constant discussions” between himself, Mr Hardy and a solicitor from Botherway Legal, and that it was likely only those three people were present when the agreement was reached. Mrs Hardy was a trustee of the Nature Sunshine Trust and the Camray Trust at that time and yet does not appear to have been present in any of the meetings when the alleged guarantee was agreed.
[123] Furthermore, there is no documentary evidence corroborating Mr Schramm’s account. There were no file notes produced. There were no trustee resolutions either signed or in draft on behalf of any of the three trusts involved in the transaction. The Authority and Instruction form (A&I form) for the mortgage (discussed further below) simply refers to a “loan agreement and variation” and makes no reference to the mortgage securing a guarantee of that loan.
[124] There was also no evidence given by any other party present during these discussions to corroborate Mr Schramm’s account. Mr Schramm relied on a Deed of Understanding dated 22 May 2015, signed by BLNSTL (in its capacity as trustee of the Nature Sunshine Trust and as trustee for Camray Farms Trust), Tony Schramm (as trustee of GMT) and Mr and Mrs Hardy.
[125]I do not consider that Deed advances GMT’s case for the following reasons:
(a)The Deed itself is inadmissible hearsay evidence. There has been no reason proffered as to why Mr and Mrs Hardy, as the former trustees of the Nature Sunshine Trust, were unavailable to give evidence at trial.
(b)Even if admissible, the Deed has little probative value. It was executed in 2015, some six years after the alleged discussions, and two years after the liquidators’ investigations had commenced.
(c)Further, there are no details or particulars of the alleged guarantee outlined in this Deed, and so no further reassurance as to the certainty of any terms said to be agreed between the parties.
[126] At best, this evidence confirms that there was discussion about GMT taking a second ranked mortgage over the Original Properties in consideration for extending the term of the GMT-Nature Sunshine Trust. The ex-post facto legal justification for that mortgage put forward by GMT is a guarantee by Camray of that loan. But that is not the same as evidence of an oral guarantee given at the time. Considered in its totality, I am not satisfied that there is enough evidence to prove the existence of an oral guarantee.
Is the mortgage valid anyway?
[127] Mr Pyke submits that even if an oral guarantee is not found to exist, the mortgage is nevertheless valid. That is because, in his submission, it was registered with consent of the mortgagor (Camray) and registration conferred an indefeasible title on the mortgagee (GMT). Following trial, I sought further submissions on this alternative argument.
[128] Mr Shackleton, for the liquidators, submits that the alternative argument as developed in GMT’s supplementary submissions goes well beyond what was pleaded and advanced in its closing submissions. He says that the arguments now put forward by GMT were not put to Mr Levin, and nor were they explored in the questioning of Mr Schramm.
[129] It is true that the particulars of GMT’s defence to Camray’s claim of invalidity focused on the alleged guarantee and the Deed of Understanding. Nevertheless, the broader defence put forward by GMT denied Camray’s claim that the mortgage did not secure anything The particulars of the arrangement GMT relied on to defend that claim were also pleaded in the statement of defence, and were canvassed in the
questioning of Mr Schramm. In any respect, the claim of invalidity is put forward by Camray and it is for it to prove, on the balance of probabilities, that the mortgage is invalid because it does not secure anything.
[130] Even if an amendment to the pleadings was required, then I would have granted leave to file such an amendment. Camray is not materially prejudiced by consideration of the alternative argument. Whether the mortgage secures the GMT-Nature Sunshine Trust loan (as varied) is to be answered by considering the construction of the relevant mortgage documents. And, as explained further below, I am satisfied that there is sufficient evidence from which the necessary determinations of fact may be made. I proceed to consider the alternative argument accordingly.
[131] The indefeasibility point is addressed first. In Westpac New Zealand Ltd v Clark, the Supreme Court considered the effect of the indefeasibility provisions under the Land Transfer Act 1952 where the underlying mortgage documentation was forged.34
[132] The Court drew a distinction between a fixed sum mortgage and an all obligations mortgage. In the former case, registration of the forged mortgage would have given the mortgagee in that case (Westpac) security for that fixed sum. But where the mortgage was, on its face, an all obligations mortgage, and reference was made to an unregistered document incorporated by reference (the loan agreement), it still had to be determined whether a particular unregistered document was in fact the one to which the registered documents were making reference.35 That was to be determined by construing the relevant documents. The Court said that the object of the interpretation exercise is to ascertain the mortgagor’s contractual liability and whether it extended to liability under a document which was not the document of the mortgagor.36
[133] The mortgage in this case was registered electronically. Its essential terms were recorded in an A&I form addressed to Schramm Law from Camray Farm Ltd as
34 Westpac New Zealand Ltd v Clark [2009] NZSC 73, [2010] 1 NZLR 82.
35 At [43].
36 At [48].
trustee of Camray Farm Trust. That form is dated 1 May 2009 and is signed by Mr and Mrs Hardy on behalf of the Camray Farm Trust. Key entries on that form include the following:
(a)The transaction details for the mortgage refer to the Original Properties.
(b)The words “loan agreement and variation” have been written in the space marked for the date and nature of the base document.
(c)The mortgagee is recorded as Collingwood Trustees Ltd (i.e. GMT)
(d)The priority sum is $500,000 plus two years interest and costs.
(e)Reference is made to the memorandum of mortgage terms number 2007/4240.
[134] Memorandum of mortgage 2007/4240 refers to an Auckland District Law Society standard form memorandum registered pursuant to s 155A of the Land Transfer Act 1952. By virtue of s 155A(7), the terms of that memorandum are incorporated into the terms of the mortgage.
[135] The front page of that memorandum records that it is intended for inclusion in an all obligations memorandum of mortgage (ADLS form 6305 or 6306). Included in the bundle of documents produced at trial is a memorandum of mortgage in ADLS form 6306 (and expressed to be an all obligations mortgage). Attached to this mortgage is a deed of priority.
[136] The parties to that deed of priority are recorded as the three trustees of the Nature Sunshine Trust, and Camray Farm Ltd as trustees of the Camray Farm Trust. Both are recorded as mortgagors. FMC is recorded as the first mortgagee, and the second mortgagee is recorded as Collingwood Trustees Ltd (that is, GMT). The execution clause of the memorandum of mortgage has not been completed but the execution clause of the Deed has been signed by the trustees of the Nature Sunshine Trust, and the directors of Camray at the time (Mr and Mrs Hardy). It has also been
signed and witnessed by Mr Schramm on behalf of GMT. The pages of the Deed and the memorandum of mortgage have all been initialled by those parties.
[137] On the basis of this evidence, I am satisfied that the mortgage is an all obligations, as opposed to a fixed sum, mortgage. Accordingly, whether it secured the GMT-Nature Sunshine Trust loan depends on the interpretation of the terms in the memorandum of mortgage 2007/4240.
[138] Clause 2 of the 2007/4240 mortgage defines “the secured moneys” and relevantly includes:
2. “THE SECURED MONEYS” DEFINED
(a)In this instrument, “the secured moneys” means:
(i)all moneys which are now or at any time in the future owing by a party granting the security or an accommodated person to the security holder;
…
(iii)each and every payment or performance of an obligation:
(A)by a party granting the security or, if there is more than one, any one or more of them; or
(B)by any accommodated person, in respect of any secured agreement,
and without limiting the generality of the foregoing, includes all moneys in respect of:
(iv)loans, credits, advances or other financial services or facilities made or provided to the party granting the security or to any one or more of them or to any other person for the accommodation of the party granting the security.
…
[139] As Camray does not owe any monies or obligations to GMT directly, the application of this clause will depend on whether Nature Sunshine Trust is an “accommodated person to the security holder” within the meaning of cl 2 (a)(i) and/or “an accommodated person in respect of any secured agreement” in cl 2 (iii)(B) or whether the loans were advanced “for the accommodation of the party granting the security” in cl 2(iv).
[140]An “accommodated person” is defined in cl 1 (d) of 2007/4240 as follows:
“accommodated person” means any person:
(i)with whom the security holder contracts or makes any arrangement; or
(ii)to whom the security holder provides any financial services or facility
for the accommodation of the party granting the security.
[141] Nature Sunshine Trust falls within subclause (i) and (ii) of the definition of “accommodated person” as it has a contract with the security holder (GMT) and GMT has provided it with a facility. The question is whether this arrangement can be said to be “for the accommodation of the party granting the security”. That phrase is defined to mean:
“for the accommodation of the party granting the security” means for the accommodation of, at the request of, at the direction of or on account of the party granting the security or, if there are more than any one of them, any one or more of them
[142] This phrase has been considered in two High Court cases.37 Both cases involved different factual scenarios to this case, although some parallels may be drawn with the circumstances in Finance & Leasing. Mr Shackleton submits that both cases stand for the proposition that to fall within the definition of “for the accommodation of the party granting the security” the accommodation must be at the request or direction of the person granting the security.
[143] To the extent that the cases stand for this proposition, then I respectfully disagree. The definition is not limited to accommodations made at the request or direction of the secured party. Those are but two limbs included in the definition. The other limbs are “accommodation” per se, and “on account of the party giving this mortgage”. The fact that these are separate stand-alone limbs to the definition is confirmed by the commas separating each of them and the absence of any conjunctive word making a “request” or “direction” a qualifying requirement. The clause itself is
37 Finance and Leasing Ltd (in receivership v Ashgrove holdings Christchurch Ltd ]2013] NZHC 297; Galuvao v Bridgecorp Ltd HC Auckland CIV-2008-404-827.
drawn in wide terms and there is no reason to read the plain meaning of the words any more restrictively.
[144] There can be no argument that the GMT-Nature Sunshine Trust loan itself was for the accommodation of Camray. That loan was entered into well before Camray was incorporated and before the arrangements for the purchase of the Properties were contemplated. The issue, therefore, is whether the variation to the term of that loan, was for the accommodation of Camray.
[145] Mr Schramm explained in his evidence that he was approached by the Hardys who explained that they wanted to refinance the Bank of New Zealand mortgage and finance the purchase of the Original Properties. They could not repay the loan to GMT (which had by then fallen due) and meet the anticipated commitments to FMC. Accordingly, to put the plan into action, they needed GMT’s consent to extend the term of the GMT-Nature Sunshine Trust loan. Mr Schramm described this scenario several times in his evidence, but the following passage captures the essence of what he says happened:38
Three parties come to me, Hardy’s, Nature Sunshine Trust and Camray Trust and they say, “We’ve got this project in mind, we want to get rid of the Bank of New Zealand, we want to get money from FNT [sic] and we want to buy this farm, will you go along with it?” Gordon Moore Trust says, “Okay, how much is FNT [sic] going to lend?” “Yes, it will have security for that.” “How much priority does it require?” “Mmm, okay, we’ll take second mortgage over both properties and you can do it.” That’s how it happened.
[146] Mr Shackleton says that this is insufficient evidence to show that the extension of the loan was intended to accommodate Camray. Rather, he says the extension was for the accommodation of Nature Sunshine Trust, and allowed it to secure the financing from FMC. He is also critical of the absence of any other evidence confirming the alleged arrangement.
[147] Despite the significant gaps in the evidence, I am satisfied that Mr Schramm’s evidence of the arrangement is enough to conclude that the variation to the loan was for Camray’s accommodation. I accept that the accommodation was indirect, in that GMT’s agreement to extend the term of the loan allowed Nature Sunshine Trust to
38 NOE p102, lines 23–30.
obtain the funding that was then advanced to Camray to allow the purchase of the Original Properties to go ahead. But I consider the meaning of “accommodation of the party granting the security” is wide enough to encompass such an indirect accommodation.
[148] In reaching this conclusion I have not placed any reliance on the Deed of Understanding. For the reasons set out above (at [125]), I consider evidence of that Deed to be inadmissible. For the same reasons, I have not addressed the argument put forward by Mr Pyke on behalf of GMT that this Deed constituted a promissory note within the meaning of another sub-clause (cl 2(a)(v)) of the definition of “secured monies” in the memorandum of mortgage 2007/4240.
[149] To conclude, I am satisfied that the variation to the GMT-Nature Sunshine Trust loan was for the accommodation of Camray as that phrase is defined in the memorandum of mortgage 2007/4240. That means the mortgage secured the “secured moneys” as defined, namely the monies secured in the GMT – Nature Sunshine Trust loan. The mortgage is therefore valid and takes priority over Camray’s equitable lien. Camray’s claim to priority must therefore be dismissed.
Other issues
[150] My dismissal of Camray’s claim makes it unnecessary for me to consider the marshalling by apportionment claim, and the method by which the funds should be apportioned.
[151] Nevertheless, I record for completeness that had I found in favour of Camray on the mortgage issue, I would have declined to rule on this aspect of the claim until the value of Camray’s equitable lien (that is, the quantification of liquidators’ costs) had been established. It seems to me that this information would be required before determining whether there was any justification for departing from the usual approach which is to apportion on the basis of the relative values of the properties.
Result
[152]Camray’s claim is dismissed.
[153] GMT is entitled to an award of costs. I encourage the parties to confer with a view to reaching agreement on costs. If agreement cannot be reached, then GMT may submit a memorandum (no longer than five pages in length) in support of costs within 20 working days of receipt of this judgment. Camray may submit a memorandum (no longer than five pages in length) 10 working days thereafter.
Edwards J
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