Cummins v Body Corporate 172108
[2022] NZCA 658
•21 December 2022 at 3.00 pm
| IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA |
| CA305/2022 [2022] NZCA 658 |
| BETWEEN | ROBERT JAMES CUMMINS |
| AND | BODY CORPORATE 172108 |
| Hearing: | 27 September 2022 |
Court: | Goddard, Ellis and Dunningham JJ |
Counsel: | K P Sullivan for Appellant |
Judgment: | 21 December 2022 at 3.00 pm |
JUDGMENT OF THE COURT
AThe appeal is dismissed.
BThe appellant must pay the respondent costs for a standard appeal on a band A basis with usual disbursements.
____________________________________________________________________
REASONS OF THE COURT
(Given by Goddard J)
Background
This appeal arises out of a long-running dispute concerning the repair of a leaky unit title apartment building, Hobson Apartments. The respondent (the body corporate) is the body corporate for that building.
The dispute has come before this Court on five previous occasions.[1] The issue before the Court on this appeal is however relatively confined, and the relevant facts can be briefly stated.
[1]Manchester Securities Ltd v Body Corporate 172108 [2017] NZCA 527, (2017) 19 NZCPR 65; Manchester Securities Ltd v Body Corporate 172108 [2018] NZCA 190, [2018] 3 NZLR 455; Manchester Securities Ltd v Body Corporate 172108 [2019] NZCA 408 [Stay appeal]; Cummins v Body Corporate 172108 [2021] NZCA 145, [2021] 3 NZLR 17; and Cummins v Body Corporate 172108 [2022] NZCA 68 [Joinder appeal].
Manchester Securities Ltd (Manchester) is, and was at all relevant times, the registered owner of Unit 12A in Hobson Apartments. Manchester was the sole trustee of the Manchester Securities Trust (the Trust). In that capacity it incurred liabilities to the body corporate which have not been discharged. The body corporate applied to put Manchester into liquidation. That application was opposed by Manchester and by Mr Cummins. The High Court made an order putting Manchester into liquidation.[2] The High Court subsequently awarded costs of $32,818.45 in favour of the body corporate against Manchester and Mr Cummins (the judgment debt).[3]
[2]Body Corporate 172108 v Manchester Securities Ltd [2020] NZHC 198.
[3]Body Corporate 172108 v Manchester Securities Ltd (in liq) [2021] NZHC 1852.
Meanwhile, Mr Cummins had arranged for himself to be appointed as a trustee of the Trust, and for the retirement of Manchester as a trustee. So he is now the sole trustee of the Trust. But title to the unit remains in the name of Manchester, for reasons that need not be canvased here.
The body corporate is a creditor of Manchester not only in respect of the judgment debt, but also in respect of large amounts of unpaid levies. The body corporate claims that it is entitled to be subrogated to Manchester’s right of indemnity as a (former) trustee out of the Trust assets in respect of debts incurred by Manchester in its capacity as a trustee, and to Manchester’s lien over the Trust assets to protect that right of indemnity. The body corporate has lodged a caveat over the title to Unit 12A, founded on that claim.
The body corporate served a bankruptcy notice on Mr Cummins in respect of the judgment debt. Mr Cummins applied to set that notice aside. That application was unsuccessful.[4] Mr Cummins appeals from that decision.
The issue: is the body corporate a secured creditor of Mr Cummins?
[4]Body Corporate 172108 v Cummins [2022] NZHC 211.
Section 14 of the Insolvency Act 2006 provides that the court must not make an order of adjudication on the application of a secured creditor unless the creditor has established that the amount of the debt exceeds the value of the charge by at least $1,000. Mr Cummins contends that the body corporate is a secured creditor for the purposes of s 14, so is not entitled to seek an order adjudicating him bankrupt.
Mr Cummins says that the body corporate has security for the judgment debt against both Manchester and himself as a result of its claim to be subrogated to Manchester’s lien over the Trust assets. He says this is also a charge over his property because, as sole trustee of the Trust, he is the beneficial owner of the Trust’s assets including Unit 12A. And he says that the body corporate has priority over his other creditors because the body corporate’s claim to an indemnity out of the Trust assets through Manchester, the former trustee, has priority over his equitable interest in the Trust assets as a successor trustee.
It is helpful to address this argument in stages. We begin by considering the simple scenario where a creditor of a trustee may be entitled to be subrogated to a right of indemnity out of trust assets and to the supporting lien over those assets. Does that mean the creditor is a secured creditor for the purposes of the Insolvency Act? We then consider the more complex scenario that arises in this case, involving an original trustee, a successor trustee, and a claim by the creditor against both trustees.
Is a creditor of a trustee a secured creditor for the purposes of the Insolvency Act?
Where a trustee incurs a debt for the purposes of the trust, the trustee is personally liable for that debt.[5] If the trustee meets the debt out of their own resources, they are entitled to an indemnity out of the assets of the trust.[6] The trustee has a lien (also sometimes described as a charge) over the trust property to protect that right of indemnity.[7]
[5]Trusts Act 2019, s 81(1).
[6]Section 81(2)(a); and Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 at 367.
[7]Andrew Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington, 2009) at [5.3.1(6)(g)], [16.6.6] and see [16.6.6], n 133.
The trustee’s lien does not equate to beneficial ownership of the trust assets, as Nettle J explained in Karingal 2 Holdings Pty Ltd v Commissioner of State Revenue:[8]
A trustee whose only claim in respect of trust assets is a right of indemnity does not in that sense hold trust assets on trust for himself beneficially. He holds the assets on trust beneficially for the beneficiaries, albeit subject to a right, which is treated in equity as proprietary, to satisfy obligations out of the trust fund. The existence of the right of indemnity, proprietary though it may be, is not sufficient to change the essential nature of the beneficial interests which are held for the beneficiaries.
[8]Karingal 2 Holdings Pty Ltd v Commissioner of State Revenue [2002] VSC 431, (2002) 51 ATR 190 at [73].
A creditor of the trustee may in some circumstances be entitled to be subrogated to the trustee’s right of indemnity, and to the lien.[9] But the primary remedy of the creditor is to claim the debt from the trustee. If it is not paid, the creditor may bankrupt the trustee.[10] The creditor can prove in the trustee’s bankruptcy, and is entitled to be paid out of the trustee’s general assets, ranking equally with all other unsecured creditors. The trustee’s right of indemnity out of the trust assets, and supporting lien, are assets that form part of the estate of the bankrupt trustee. All of this is elementary, and was not disputed before us.
[9]Trusts Act, s 86; and Octavo Investments Pty Ltd v Knight, above n 6, at 367.
[10]Levin v Ikiua [2010] 1 NZLR 400 (HC) at [121].
Under the Insolvency Act, “secured creditor” is defined to mean a person entitled to a charge on or over property owned by a debtor.[11] A charge is defined to include a right or interest in relation to property owned by a debtor, by virtue of which a creditor of the debtor is entitled to claim payment in priority to other creditors. It does not include a charge under a charging order issued by a court in favour of a judgment creditor.[12]
[11]Insolvency Act 2006, s 3.
[12]Section 3.
The entitlement of a creditor of a trustee to be subrogated to the trustee’s right to indemnity out of the trust assets does not amount to a charge for the purposes of the Insolvency Act, for two reasons. First, it is not a right or interest in property owned by the debtor trustee: a claim to be subrogated to the trustee’s rights in relation to trust property is a claim to exercise a right of the trustee against the trust property, not a right in property owned by the trustee. Second, it does not entitle that creditor to payment in priority to other creditors. All creditors of the trustee in respect of trust debts have the same entitlement to subrogation; none has priority over the others. They are in an analogous position to an unsecured creditor with a right of recourse to property under a charging order made by a court: it is precisely because a charging order does not confer any priority over other creditors that it does not qualify as a charge for the purposes of the Insolvency Act.
It follows that a creditor of a trustee in respect of a trust debt is not a secured creditor for the purposes of the Insolvency Act.
Although there is no New Zealand authority on this point — perhaps because the argument to the contrary is so plainly misconceived — there is some Australian authority. In Aluma-Lite Products Pty Ltd v Simpson, Kiefel J gave short shrift to an argument that the ability to subrogate to a trustee’s right of indemnity makes a trust creditor a secured creditor:[13]
… in the event of a trustee’s bankruptcy, creditors are subrogated to the trustee’s right to indemnity from the trust estate … That does not, in my view, equate a creditor of a trust to a secured creditor ... All creditors may have resort to the assets of the trust, though they may not know what they are, and what the other creditors of the trust are, at the time the trustee is sued. That is not, however, a mortgage, charge or lien securing their individual debts, which security would have enabled them to take steps against the property offered as security without the benefit or requirement of a judgment.
[13]Aluma-Lite Products Pty Ltd v Simpson [1999] FCA 1105 at [5].
That argument was also rejected by the Queensland Supreme Court in Lerinda Pty Ltd v Laertes Investments Pty Ltd.[14]
[14]Lerinda Pty Ltd v Laertes Investments Pty Ltd [2009] QSC 251, [2010] 2 Qd R 312 at [8] and [14].
Mr Sullivan, who appeared for Mr Cummins, was not able to identify any authority to support the proposition that a creditor of a trustee is a secured creditor by virtue of their ability to subrogate to the trustee’s right of indemnity. In the course of argument he accepted that in this straightforward scenario the creditor is not a secured creditor of the trustee.
It follows that even if Mr Cummins is right that he incurred the judgment debt in a capacity that entitles him to indemnity out of the Trust assets, a proposition on which we express no view, that would not of itself mean that the body corporate is a secured creditor of Mr Cummins. Nor did Mr Sullivan contend that this was the case. Rather, he says that:
(a)The body corporate is entitled to be subrogated to Manchester’s claim to indemnity and to a lien in respect of the Trust assets.
(b)Because Mr Cummins has now been appointed sole trustee of the Trust, Manchester holds the legal title to Unit 12A on a bare trust for Mr Cummins. He is the equitable owner of the Trust assets. He then holds that equitable interest on trust for the Trust’s beneficiaries.
(c)Manchester’s right of indemnity out of the Trust assets takes priority over Mr Cummins’ equitable interest in those assets. The former trustee is entitled to be indemnified before the current trustee can have recourse to the assets, and before the beneficiaries have any claim to those assets.
(d)The body corporate’s prior right of access to the Trust assets (via Manchester) ahead of Mr Cummins’ right of access to those assets in his capacity as successor trustee amounts to a charge over Mr Cummins’ equitable interest in the Trust assets. That is a charge over property owned by Mr Cummins for the purposes of the Insolvency Act. So the body corporate is a secured creditor of Mr Cummins.
We turn to consider this elaborate argument.
The scenario involving original and successor trustees
If Manchester had continued as a trustee of the Trust, the body corporate’s claim to be subrogated to Manchester’s right of indemnity and lien over the Trust assets would not mean that the body corporate held a charge over any property of Manchester. As explained above, it would not be a secured creditor of Manchester for the purposes of the Insolvency Act.
That position would not change merely because Manchester retired as a trustee and was replaced by some other person. The appointment of a successor trustee does not by some mysterious alchemy convert a right that did not amount to a charge over property of Manchester into such a charge. That is because nothing material changes: it remains the case that the body corporate’s claim to be subrogated to the trustee’s right of indemnity and lien (a) does not amount to a right or interest in property owned by Manchester, and (b) does not confer priority over other creditors of Manchester in its capacity as trustee.
If the body corporate’s claim to subrogation vis-à-vis Manchester does not render the body corporate a secured creditor of Manchester for the purposes of the Insolvency Act, it is difficult to see how it could be suggested that this claim renders the body corporate a secured creditor of the successor trustee, whether or not that successor trustee is jointly liable for the relevant debt. To the contrary, the argument for secured creditor status is if anything weaker.
The priority that Manchester’s claim to an indemnity has over any claim Mr Cummins may have to indemnity out of the Trust assets is a red herring. That priority as between successive trustees is quite different from the concept of priority as between creditors. The body corporate does not have a charge over any property owned by Mr Cummins; rather it has a (competing) prior claim to be indemnified out of assets to which Mr Cummins may also be entitled to have recourse, after Manchester. The Trust assets are not assets owned by Mr Cummins in the relevant sense any more than they were owned by Manchester when it was a trustee.
Mr Sullivan relied on two Australian decisions to support his argument to the contrary. In Harvey v Commercial Bank of Australia,[15] the registered owner of land executed a declaration of trust in respect of that land in favour of a company of which he was a director. The landowner was also a guarantor of the company’s obligations to its bank. He gave a mortgage of the land to a bank to secure the debt owed by the company to the bank. The bank did not know of the declaration of trust. The company went into liquidation. The bank lodged a proof of debt in the company’s liquidation. That proof was rejected on the basis that the bank was a secured creditor of the company that had not surrendered its security.
[15]Harvey v Commercial Bank of Australia Ltd (1937) 58 CLR 382.
As Dixon J explained, the mortgage operated to confer upon the bank the means of satisfying the debt owing by the company out of what was in fact the property of the company.[16] The bank had a right of prior recourse to property beneficially owned by the company to satisfy the debt owed to it by the company. It would be unfair for the company to prove in the liquidation for the whole of its debt, receive a dividend, and then make good any deficit out of its security. Rather, if it wished to prove in the liquidation, it would have to surrender its security over the property beneficially owned by the company for the benefit of all creditors.[17]
[16]At 389.
[17]At 392–393.
That case is very different from the case before us. Mr Cummins and Manchester are joint obligors in respect of the judgment debt, as were the landowner and the company in Harvey. But there the similarity ends. The body corporate does not hold any security granted by Manchester over property beneficially owned by Mr Cummins. Mr Cummins is not the beneficial owner of the Trust assets. The Trust assets would not form part of his bankrupt estate. As already explained, there are no assets beneficially owned by Mr Cummins to which the body corporate is entitled to have recourse to meet Mr Cummins’ obligations in priority to other creditors.
Second, Mr Sullivan relied on Re Florance, a decision of the Federal Court of Australia.[18] In that case a vendor agreed to sell a property to a company. The company executed a declaration of trust in respect of the land declaring that it held the land for three beneficiaries, including Mr Florance, in equal shares as tenants in common. The company subsequently granted a mortgage over the property in favour of the vendor as mortgagee (it appears, to secure part of the purchase price). The obligations of the company were guaranteed by Mr Florance and another guarantor. The company failed to meet its obligations to the vendor. The vendor brought proceedings against the company, Mr Florance and the other guarantor, and obtained judgment for outstanding amounts of principal and interest. The vendor then issued a bankruptcy notice against Mr Florance. The notice was challenged on the basis that the vendor was a secured creditor of Mr Florance.
[18]Re Florance, ex parte Turimetta Properties Pty Ltd (1979) 28 ALR 403 (FCA).
Lockhart J considered that the case was indistinguishable from Harvey. He said:[19]
The [vendor] holds its mortgage over the land which is in law the property of [the company] but in equity the property of [Mr Florance and the other guarantor], thus satisfying the first part of the definition of “secured creditor” … namely that the [vendor] holds a mortgage on property of [Mr Florance]. It is true that the [vendor] took the mortgage from [the company] as security for its debt without knowledge of the declaration of trust; but as both [the company] and [Mr Florance] have defaulted in their respective obligations to the [vendor], it holds the mortgage as security for the debt due by [Mr Florance] as well as the debt due by [the company], the former being the ancillary and the latter the principal obligation. If the [vendor] were, for example, to exercise its power of sale, sell the land and recover the whole of the principal and interest due under the mortgage, the debt of both [the company and Mr Florance] would be discharged.
[19]At 414.
So, Lockhart J said, the critical fact was that the mortgage had conferred on the vendor the means of satisfying the debt owed by Mr Florance out of what was in truth Mr Florance’s property.[20]
[20]At 415.
That case is distinguishable from the present case for essentially the same reason that Harvey is distinguishable. Mr Florance was a (joint) beneficial owner of the land. That land was subject to a charge in favour of the vendor which enabled the vendor to have recourse to that land to satisfy its claim against Mr Florance in priority to all his unsecured creditors. It was immaterial that the mortgage had been executed by the company, not by Mr Florance, to secure the debt in respect of which the company was the principal obligor and Mr Florance was a guarantor. Here, by contrast, the body corporate does not have a charge over any property that entitles it to have recourse to that property ahead of all the unsecured creditors of Mr Cummins. The Trust assets, to which the body corporate may be able to obtain access through Manchester, are not property beneficially owned by Mr Cummins: his right of indemnity and lien is not a relevant ownership right, as explained above.
The answer in this case is clear as a matter of first principles. Nothing in the authorities relied on by Mr Sullivan persuades us otherwise.
Other issues raised by the parties
The body corporate sought to advance other arguments in opposition to Mr Cummins’ appeal. In particular, the body corporate argued that Mr Cummins does not have a right of indemnity out of the Trust assets for the judgment debt, as his liability for costs was not incurred in his capacity as a trustee of the Trust. That is not an issue that we need to determine, as Mr Cummins’ argument has failed at an earlier hurdle.
Nor need we determine Mr Cummins’ argument that it would follow that Manchester’s liability for costs under the judgment debt was not incurred for the benefit of the Trust, so that it did not come within the scope of any right of indemnity to which the body corporate could be subrogated. As Mr Orpin-Dowell, counsel for the body corporate, acknowledged, there is some force in that argument. But the issue is not relevant to this appeal, and we need not decide it.
Costs
Costs should follow the event in the ordinary way.
The body corporate sought indemnity or increased costs on the basis that this appeal is a continuation of Mr Cummins’ attempts to take the rights associated with being a trustee while avoiding the associated obligations. The body corporate notes that indemnity costs have been awarded by this Court on previous occasions and in particular in the joinder appeal.[21]
[21]Stay appeal, above n 1, at [39]–[40]; and Joinder appeal, above n 1, at [69]–[70].
Although this appeal represents a further attempt by Mr Cummins to defend claims by the body corporate, it raises distinct issues relating to his individual position and whether he is liable to be adjudicated bankrupt in reliance on the judgment debt. Although the arguments presented on appeal were misconceived, and involved an element of artifice, we do not consider that it could fairly be said that the appeal was an abuse of process.
We therefore award costs for a standard appeal on a band A basis with usual disbursements.
Result
The appeal is dismissed.
Mr Cummins must pay the body corporate costs for a standard appeal on a band A basis with usual disbursements.
Solicitors:
Core Legal Ltd, Masterton for Appellant
Grove Darlow & Partners, Auckland for Respondent
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