Commissioner of Police v Baylis

[2023] NZHC 3014

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE

CIV-2017-409-393

[2023] NZHC 3014

BETWEEN

COMMISSIONER OF POLICE

Applicant

AND

DARRIN STEPHEN BAYLIS

First Respondent

AND

DARRIN STEPHEN BAYLIS and CAMBRIDGE TRUSTEES NO. 2 LTD

Second Respondents

AND

MORTGAGE HOLDING TRUST COMPANY LIMITED

First Interested Party

AND

KATHY EMILY CRIBBET

Second Interested Party

Hearing:	10 October 2023
Appearances:	K South and K A Courteney for the Applicant J D Lucas for the Respondent
Interim Judgment:	27 October 2023
Reissued:	10 November 2023

JUDGMENT OF HARLAND J

Application for early sale orders

Introduction

[1]                 The Commissioner of Police (the Commissioner) applies for early sale orders in relation to two properties owned by the first respondent, Mr Baylis, situated at 76 and 76A Frankleigh Street, Somerfield, Christchurch. The application also sought an

COMMISSIONER OF POLICE v BAYLIS [2023] NZHC 3014 [10 November 2023]

order for sale in respect of another property owned by the second respondents who are the trustees of the Baylis Family Trust. This property is situated at 77 Ensign Street, Halswell, Christchurch, but the application for an early sale order in respect of it was not pursued at the hearing.

[2]                 The application for early sale orders in respect of the Frankleigh Street properties is opposed by Mr Baylis because he contends they are not justified or required.

[3]                 The first interested party, Mortgage Holding Trust Company Ltd (MHTCL), a subsidiary of ASB Bank Ltd (ASB) which holds a mortgage over the three properties, provided certain information to the Court by way of memorandum.1 MHTCL abides the decision of the Court but submits that any orders for sale should provide that the proceeds of sale will first be applied in satisfaction of the total debt owing to it; that is the debt owed over all three properties.

[4]                 The second interested party and the previous partner of the first respondent, Ms Cribbett, supports the application for early sale orders but did not appear at the hearing.

Background

[5]                 On 27 April 2022, the Commissioner applied for assets and profit forfeiture orders against the first and second respondents. This application is due to be heard in the Christchurch High Court on 4 December 2023 as it is opposed.

[6]                 The assets forfeiture order is sought in relation to all property owned by the first and second respondents on the basis that it is tainted property. The basis for the profit forfeiture order is that Mr Baylis, on his own admission, has derived an unlawful benefit of not less than $1,034,177.30 from significant criminal activity undertaken by him between 2010 and October 2023.

[7]The alleged significant criminal activity comprises:

1      Dated 22 June 2022 and 17 July 2023 (tabs 5 and 9 of the common bundle).

(a)  trading in motor vehicles while an unlicensed dealer in breach of s 95(1)(a) of the Motor Vehicle Sales Act 2003, to the value of at least $291,068.49;

(b)  selling methamphetamine, in breach of s 6 of the Misuse of Drugs Act 1975, to the value of at least $496,899;

(c)  carrying out repossession activities while unlicensed to do so in breach of s 23(2) of the Private Security Personnel and Private Investigators Act 2010 to the value of at least $65,589.04;

(d)  using a document to obtain a pecuniary advantage in breach of s 228 of the Crimes Act 1961 and/or obtaining by deception in breach of s 240 of the Crimes Act 1961 in relation to eligibility for an unemployment benefit during 2018 and 2019 in the sum of $15,620.77; and

(e)  engaging in otherwise lawful activities in respect of which no income tax was paid resulting in income tax evasion of at least $165,000 in breach of s 143B of the Tax Administration Act 1994.

The application for early sale orders and opposition to it

[8]The following properties are the subject of the present application:

(a)  76 Frankleigh Street, registered in the name of Mr Baylis;

(b)  76A Frankleigh Street, registered in the name of Mr Baylis; and

(c)  a jet ski and trailer found in the possession of Mr Baylis on 6 December 2016 and which he claims ownership of. The Commissioner cannot identify any transactions from Mr Baylis’ bank accounts that support the legitimate acquisition of these items and contends they must be the result of cash purchases funded by significant criminal activity.

The real estate

[9]                 The Frankleigh Street properties, together with the property at Ensign Street, are subject to cross-collateralised mortgages with the first interested party MHTCL.

All of the properties are tenanted with the second interested party, Ms Cribbett, occupying a granny flat attached to 76A Frankleigh Street.

[10]            The evidence establishes that the Ensign and Frankleigh Street properties were together valued at $1,320,000 at the date of restraint in August 2017. Valuations of these properties obtained in early 2022 by the Official Assignee established their value at $2,165,000. The increase in value is due to market forces. However, a very recent valuation shows a slight decrease in value. These properties are now valued at

$1,945,000. The capital gain accumulated since the properties became allegedly tainted amounts to $910,000.

[11]Currently the properties are estimated to have the following values: (a) 76 Frankleigh Street - $645,000-$685,000;

(b) 76A Frankleigh Street - $645,000-$685,000; and

(c) 77 Ensign Street - $625,000-$645,000.

[12]The total estimated value of all three properties is therefore $1,915,000 to

$2,015,000.

[13]            Mr Lucas advised that he received the updated valuations on Friday 6 October 2023 and, as a result, he had had insufficient time to consider them and discuss them with Mr Baylis. He submitted that the evidence about the current value of the properties should be put to one side for this reason and because it is not provided in an affidavit sworn by a person who has the expertise to provide that evidence. Despite this, Mr Lucas accepted as a general proposition that property prices have recently decreased as a result of market forces.

[14]            For the purposes of this hearing, I do not consider this evidence should be put to one side. The critical issue relates to the arrears, not the value of the properties, and the earlier evidence about the value of the properties establishes that there is sufficient equity to repay the debt owing and the arrears.

[15]            The rental income received in respect of all properties does not cover the mortgage. For some time, Mr Baylis has been topping up the mortgage with additional funds but, when Mr Baylis was remanded in custody between March and November 2021, the mortgage fell into arrears.

[16]            Ms South presented a spreadsheet as part of her submissions which outlined that the mortgage balance in respect of all properties (including Ensign Street) is

$682,070.26. She also advised that the mortgage arrears as at 19 September 2023 amount to $52,686.06. The affidavit of Mr Forrest, filed in support of the Commissioner’s application, was that, at 26 July 2023, the mortgage arrears amounted to $45,598.68 whereas, on 26 August 2022, the arrears were $33,744.25. The arrears have no doubt increased as a result of the increased cost of borrowing, due again to market forces.

[17]            The Commissioner submits that orders for sale are required not only because the property values are declining but, more particularly, because the mortgage arrears are increasing.

[18]            Ms South referred to two Property Law Act 2007 notices which have been issued by MHTCL in respect of the properties and the additional interest, including penalty interest, and the legal costs that will be associated with them. MHTCL has taken no steps under the Property Law Act notices, largely because, as counsel for MHTCL outlined in their memorandum of 13 July 2023, ordinarily, MHTCL would not proceed with a mortgagee sale if another appropriate sale process, which accounts to it as mortgagee, is being progressed. That is the situation in this case. Ms South’s point is that this does not prevent further expenses being incurred in relation to them, thereby diminishing the potential value of the assets.

[19]            Further, Ms South submitted that, as Mr Baylis is not employed, there is no prospect of him raising the kind of funds necessary to reduce the arrears. She highlighted that the Commissioner has been prepared to adjourn these proceedings on several occasions to allow Mr Baylis time to pay, but the mortgage arrears have not been reduced, rather, they have increased.

[20]            The argument for Mr Baylis was succinctly put by Mr Lucas. He submitted it is not necessary to grant the application because the substantive hearing is a very short time away and it is unlikely that the assets concerned will depreciate significantly between now and then. Mr Baylis wishes to preserve the properties for the benefit of his family in the future. He is also concerned about what will happen to the tenants should the properties be sold.

[21]            Mr Lucas submitted that there can be no finding that the property is tainted until the hearing in eight weeks time.

[22]            Tainted property is property that has, wholly or in part, been acquired or directly or indirectly derived from significant criminal activity.2 To determine whether an assets forfeiture order should be granted, as is the purpose of the hearing set for 4 December 2023, the Judge must be satisfied on the balance of probabilities that the asset is tainted property.3

[23]            Mr Lucas is correct that a definitive finding cannot be made prior to that hearing. However, for the reasons I outline later in this judgment, I do not think that is necessary.

The jet ski and trailer

[24]            As well as this, the Commissioner seeks an order that the Yamaha jet ski and trailer, referred to above, be sold. When the initial restraining order was made in 2016, the jet ski and trailer were valued at $13,500 by Turners Auctions. However, a subsequent valuation on 26 August 2022 assessed them to be worth $12,000. The advice given to the Official Assignee at the time of the 2022 valuation by Turners Auctions was that further depreciation on this asset would be minimal, approximately

$250 per year.

[25]            Mr Lucas submitted that there is no necessity for an early sale order to be made in respect of the jet ski and trailer.

2      Criminal Proceeds (Recovery) Act 2009, s 5.

3      Section 50(1).

Discussion

[26]            The jurisdiction for an early sale order is found in s 35 of the Criminal Proceeds (Recovery) Act 2009 (the Act). It provides:

35   Types of further order

Without limiting the generality of section 34(1), a court may, on an application under section 33(1), make 1 or more of the following further orders in relation to restrained property:

…

(e) an order relating to the Official Assignee that—

…

(v) directs the Official Assignee to sell restrained property (including, without limitation, a business) in order to preserve the value of the restrained property:

(emphasis added)

[27]            Although the making of an early sale order is discretionary, s 35(e)(v) requires such an order to be for the purpose of preserving the value of the restrained property.

[28]            I agree with the following observations by Cull J in Commissioner of Police v Siloata where she said:4

[25]      Dealing with early sale orders in general, the Court in Commissioner of Police v Chen observed:5

The underlying purpose of the restraining order is to preserve the subject property because it represents a monetary value of the parties concerned. The legislature can be taken to have appreciated that property may be subject to a restraining order for a considerable time and that circumstances may change over the life of the order so as to put the property at risk. Some risks may be of a kind that action including disposition of the property itself, may be needed to preserve the value that the property represents. If there were no mechanism for responding to such risks the rational for the scheme would be significantly undermined.

Section 35(e)(v) specifically recognises the need to preserve the value of the restrained property through the sale of it. There are many foreseeable circumstances that might justify such an order. These include a significant drop in the property market, the risk of a mortgagee

4      Commissioner of Police v Siloata [2022] NZHC 1830 at [25]-[26].

5      Commissioner of Police v Chen [2013] NZHC 2259 at [30]-[31].

sale and the reduction in value cause by a lack of funds to maintain the property.

[26]      However, sale orders will not automatically be made where restrained assets are depreciating in value. This Court must consider the nature and value of the asset(s), the length of time before the substantive proceeding will be determined, the extent to which the asset(s) may depreciate during that period and the wishes of the owner of the asset(s) and any other person who may have an interest in it.6

[29]            I also refer to the observations of Venning J in Commissioner of Police v Cavanagh where he noted that sale orders are typically pursued where the restrained assets are likely to have a high depreciation rate combined with costs of storage and insurance, which ultimately decrease the potential return to the Commissioner and/or the parties who claim an interest in the asset.7 That is not the situation here.

[30]            The Commissioner’s case is that all of the real estate properties are tainted properties because Mr Baylis made cash deposits (derived from significant criminal activity) to bank accounts which had then partially funded the purchase of the properties or contributed to the mortgage repayments and/or property expenses. I am not persuaded that I need to finally determine whether all or any of the properties are tainted. First, because, as a prerequisite to the making of the restraining order over the properties, the Court was satisfied that there was sufficient evidence to establish a reasonable belief that it is tainted. Second, the issue I need to address is whether it is necessary for me to grant the application to preserve the value of the properties in issue. In other words, the argument that the property is not tainted is still one open to the respondents. All that would change if this application is granted is that the property concerned will have been converted to cash and held in an interest-bearing deposit rather than presenting itself as an asset in the form of real estate.

[31]            Despite this observation, Mr Lucas’ point is a powerful one, namely that Mr Baylis’ objective is to try to retain the real properties for the benefit of his family in the future, hoping no doubt that property prices will further increase as the spreadsheet would seem to indicate they have so far. If, for example, the Court was to accept that tainted funds were not used to purchase and/or increase the value of all or any of the

6      Commissioner of Police v Drummond [2018] NZHC 1730. See also Commissioner of Police v Farrell [2022] NZHC 310.

7      Commissioner of Police v Cavanagh [2014] NZHC 2978 at [7].

properties, Mr Baylis’ mortgage arrears would still remain but he would have more choice about how to address them. For example, he may choose to sell one of the properties to reduce the mortgage but not others, which would enable him to retain two properties rather than one.

[32]            On the other hand, the arrears are increasing and there seems little prospect that they can be reduced without the sale of at least one of the properties. If Mr Baylis continues to do nothing and the arrears increase, there is every likelihood that the bank will act on their Property Law Act notices. My understanding is that this has been held in abeyance by the bank until the outcome of the application for civil forfeiture orders is known.

[33]            Ms South submitted that waiting until the outcome of the application for civil forfeiture orders will simply delay the inevitable and will cause further arrears to accrue, including the further costs by way of penalty interest and the like, which I have referred to above. This does not affect the value of the properties in question but it does affect the equity in them, which is likely the same thing for the purposes of these proceedings.

[34]            I am persuaded on balance that there is justification for one of the properties to be sold to reduce the mortgage arrears. There is nothing to suggest Mr Baylis is able to pay the arrears or penalty interest and other costs in any other way. I invite the parties to consider which property that ought to be in light of the fact that there will need to be a discussion with the bank about this.

[35]            I am not persuaded an order for sale is necessary for the jet ski and trailer to preserve its value.

Result

[36]            I am inclined to make an order for early sale for one of the properties, either 76 or 76A Frankleigh Street. Counsel are to confer and file a joint memorandum, or separate memoranda if that is not possible, no later than 3 November 2023, advising the Court which property is to be sold and suggesting the conditions that should attach to the order.

[37]            I will require confirmation from MHTCL about any orders they seek but my intention would be for the entire proceeds to be applied to the cross-collateral mortgages and the bank’s costs. Should there be a shortfall, the bank’s view will also be required. For example, any shortfall may be resolved by retaining a mortgage for that amount over one of the other properties which would then be able to be met by rental income.

[38]I direct a copy of this judgment be served on MHTCL and Ms Cribbett.

[39]            Any memorandum by MHTCL is also to be filed and served no later than 3 November 2023.

Addendum

[40]            Following memoranda being filed from counsel for the applicant, first respondent and first interested party, I am persuaded that an order for early sale should be made in relation to 76A Frankleigh Street, Christchurch. Accordingly, I make the following orders:

(a)  the Official Assignee is directed to sell 76A Frankleigh Street, Somerfield, Christchurch with a legal description of Lot 2 Deposited Plan 350452 and title of 206385 (the property);

(b)  the Official Assignee is appointed to execute any deed or instrument in the name of the first respondent being the registered proprietor of the property, for the purpose of effecting the sale of the property, if required; and

(c)  the Official Assignee is directed to apply the proceeds of the sale of the property as follows:

(i)payment of the costs of, and associated with, the sale of the property by the Official Assignee, or persons nominated by the Official Assignee, including any real estate agent fees, marketing and conveyancing fees;

(ii)repayment of the loans owed to MHTCL (now, following amalgamation, ASB Bank Ltd) secured by a mortgage registered in

respect of the property and the properties at 76 Frankleigh Street and 77 Ensign Street or, if repayment of such loans in full is not possible, from the net sale proceeds, all remaining net sale proceeds after the deduction of costs specified in (c)(i) above; and

(iii)any remaining net proceeds of the sale of the property are to be held in the custody and control of the Official Assignee in an interest- bearing deposit account under the existing restraining order until further order of the Court.

[41]            Nothing in this order affects the rights, title and interest of MHTCL (now ASB Bank Ltd) under the registered mortgage number 9956928.3 over the property or its rights under the now expired notices issued to the first respondent on or around 1 June 2023, under s 119 of the Property Law Act 2007, including to exercise its rights to sell any of the properties subject to the mortgage as mortgagee.

[42]            Costs should follow the event. Counsel are invited to submit memoranda in relation to costs sequentially, with any memorandum on behalf of the applicant to be filed and served by 17 November 2023 and any response by the first respondent to be filed by 24 November 2023. Thereafter, costs will be dealt with on the papers.

Harland J

Solicitors:

Crown Solicitor, Christchurch

Tavendale and Partners, Christchurch.