FAI Money Limited v Vujcich
[2021] NZHC 2267
•31 August 2021
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2019-488-0063
[2021] NZHC 2267
UNDER Part 18 of the High Court Rules 2016 IN THE MATTER OF
a proceeding to determine priority of competing equitable interests to the proceeds for the sale of land
BETWEEN
FAI MONEY LIMITED
Plaintiff
AND
CAROLINA CATHARINA MARIA VUJCICH (AS EXECUTOR OF THE
ESTATE OF GERARDUS JOZEF MARIE MARTENS) AND ED JOHNSTON & CO TRUSTEES LTD
First Defendants
Continued over
Hearing: 3 May 2021 Appearances:
A R B Barker QC for Plaintiff
N P Tetzlaff for First Defendants
D E Shortland for Fourth Defendant C Baker for Sixth Defendant
No appearance for Seventh Defendant
Judgment:
31 August 2021
JUDGMENT OF PETERS J
This judgment was delivered by Justice Peters on 31 August 2021 at 2 pm pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Date: ...................................
FAI MONEY LIMITED v VUJCICH [2021] NZHC 2267 [31 August 2021]
AND WENDY RUTH JOHNSTON
Second Defendant (Discontinued)
DONALD ANZAC GEORGE REYLAND, AILSA GLORIA REYLAND AND
EDWARD ERROL JOHNSTON
Third Defendants (Discontinued)WAYNE MATTHEW MCKENNA
Fourth DefendantGRAEME MARK JESPERSEN
Fifth Defendant (Discontinued)
EDWARD ERROL JOHNSTON
Sixth DefendantSECRETARY OF THE TREASURY OF NEW ZEALAND
Seventh Defendant
Solicitors:Glaister Ennor, Auckland Smith & Partners, Auckland Teei & Associates, Auckland
Price Baker Berridge, Auckland
Counsel:A R B Barker QC, Auckland D E Shortland, Auckland
Introduction
[1] This judgment determines applications for orders vesting property disclaimed by the Official Assignee.1
[2] Those seeking a share of the disclaimed property are the plaintiff, the first and fourth defendants, and the sixth defendant, Mr Edward Johnston, in whose bankruptcy the Official Assignee was acting at the date of the disclaimer, being 12 July 2016. I refer to the applicants as “FAI”, “the Trustee”, “Mr McKenna” and “Mr Johnston” respectively.
[3] Mr Johnston was adjudicated bankrupt in November 2012 and was discharged in March 2016.
[4] The disclaimed property was Mr Johnston’s (one-fifth) “interest in the Broadpine No. 1 Partnership ...” (“property”). The partnership was formed in the 1980s, to hold land, and then realise the value in radiata pine growing on that land (“land”).
[5] The Official Assignee disclaimed the property on the basis it was “onerous property” in the sense of s 117 Insolvency Act 2006 (“Act”).
[6] In 2017, several of the partners applied for orders to facilitate a sale of the right to harvest the trees on the land, whether by a sale of the land itself or by a sale of the right only. Fitzgerald J made the orders sought in October 2018, including orders lapsing caveats lodged against the certificate of title to the land, with the proceeds of sale to be held in trust pending further order of the Court.2 The right to harvest the trees was then sold. The land was retained.
[7]As matters stand, the property comprises:
(a)A one-fifth share in the land. In 2019, the assessed value of the land for rating purposes was $170,000. On a pro-rata basis a one-fifth share
1 Insolvency Act 2006, s 119.
2 Jespersen v Secretary of the Treasury [2018] NZHC 2603.
has a value of $34,000, and the parties have proceeded on the basis that this is the value to be attributed to that component of the property.
(b)Mr Johnston’s share of the proceeds of sale of the right to harvest the trees, that share being $754,278.40 as of 15 April 2021.
(c)Mr Johnston’s share of the proceeds of sale of carbon credits attached to the land which were sold in February 2021. Mr Johnston’s share of these proceeds is $54,773.57, also as of 15 April 2021.
[8] The combined value of the land and cash is $843,051.97. The cash is held on interest bearing deposit in the trust account of UHY Haines Norton, a firm of accountants.
Proceedings
[9] This proceeding is a consolidation of proceedings which Mr Johnston issued in late-2017 (“CIV-3038”) and which FAI commenced in 2019 (“CIV-63”), each seeking orders that the property vest in him or it pursuant to s 119 of the Act.
[10] Many of the original defendants to the proceeding have fallen away, whether by disclaiming any interest in the property, hence the discontinuances referred to in the intituling, or by failing to take steps in the proceeding.
[11] A five day fixture was to be held in May 2021. However, shortly before then, FAI, the Trustee and Mr Johnston agreed that FAI and the Trustee would be paid sums that would leave a balance of $100,000, which those parties agreed would be paid to Mr Johnston. Mr McKenna did not agree to that distribution.
[12] Having been informed of the agreement, and of Mr McKenna’s position, on 21 April 2021, Moore J directed the matter proceed by way of a formal proof.
[13] By the time I heard the proceeding, it was common ground between all concerned that I should vest in FAI and the Trustee the sums which had been agreed,
but with Mr Johnston and Mr McKenna each claiming the better entitlement to the balance of $100,000.
[14] Notwithstanding the agreement, I must satisfy myself as to jurisdiction under s 119.
Sections 118 and 119 Insolvency Act 2006
[15]Sections 118 and 119 of the Act provide:
118Effect of disclaimer
A disclaimer by the Assignee—
(a)brings to an end, on and from the date of the disclaimer, the rights, interests, and liabilities of the Assignee and the bankrupt in relation to the property disclaimed:
(b)does not affect the rights, interests, or liabilities of any other person, except in so far as is necessary to release the Assignee or the bankrupt from a liability.
119Position of person who suffers loss as result of disclaimer
(1)A person suffering loss or damage as a result of disclaimer by the Assignee may—
(a)claim as a creditor in the bankruptcy for the amount of the loss or damage, taking account of the effect of an order made by the court under paragraph (b):
(b)apply to the court for an order that the disclaimed property be delivered to, or vested in, that person.
(2)The bankrupt may also apply for an order that the disclaimed property be delivered to, or vested in, the bankrupt.
(3)The court may make an order under subsection (1)(b) or (2) if it is satisfied that it is fair that the property should be delivered to, or vested in, the applicant.
[16] Having regard to these provisions, the issues to be determined are whether each applicant, other than Mr Johnston, has suffered “loss or damage as a result of” the disclaimer and, if so, whether it is fair, in the sense of s 119(3), that the property or part of it should be vested in that applicant or Mr Johnston.
[17] In Goldstone v Goldstone, Toogood J set out relevant considerations in determining whether an order would be fair:3
(a)the applicant’s former interest in it, if any;
(b)how and when such interest was acquired;
(c)if the applicant had no interest in the disclaimed property, what other relationship formerly existed between the applicant and the property;
(d)whether the applicant has maintained or increased the value of the property to be vested or prevented its transfer to a third party;
(e)the circumstances in which the disclaimed property became vested in the Assignee through bankruptcy;
(f)the rights and interests of third parties, if any, and, in particular, whether they consent to the vesting; and
(g)the consequences of any vesting for the applicant and any other persons.
The parties’ claims
FAI
[18] FAI’s claim is put on two grounds. Either it does not require an order under s 119, by virtue of the operation of s 118, or it does require an order in which case the grounds for making one are made out. The background to FAI’s claim is as follows.
[19] In December 2009, FAI advanced $300,000 to Mr Johnston. The advance was secured by, inter alia, a General Security Agreement dated 21 December 2009 (“GSA”). FAI knew of Mr Johnson’s interest in the property because he had included it in a statement of assets and liabilities as at 24 April 2009.
[20] In June 2011, after various defaults, FAI and Mr Johnston executed an amendment deed which recorded the balance then owing as $386,267.96.
[21] Following further default(s), on 14 August 2012 FAI obtained judgment by default against Mr Johnston for $423,517.50, interest of $60,381.96, and costs of
3 Goldstone v Goldstone [2019] NZHC 1649 at [41].
$12,327.50, being a total of $496,226.96.4 Interest continued to accrue at the prescribed rate.
[22] FAI also brought proceedings against guarantors of the indebtedness. After costs, FAI netted a small surplus which it applied in reduction of the debt.
[23] FAI submits that, as at the date of hearing, it was owed a total of $683,028.10, excluding solicitor-client costs in the present proceeding to which FAI is entitled under the GSA.
[24] By cl 1 of the GSA, Mr Johnston charged in favour of FAI the “Secured Property” as security for, amongst other things, repayment of his present and future indebtedness. “Secured Property” is defined as “all the right, title and interest (present and future, legal and equitable) in the undertaking, property, assets and revenues … of the Chargor”, that is, of Mr Johnston.
[25]By cl 3.1 of the GSA, the charge to which I have referred was to constitute:
(a)a Security Interest over all Personal Property of Mr Johnston, including After-Acquired Property (all these terms being defined); and
(b)a fixed charge over any Secured Property other than Personal Property.
[26] FAI referred me to Glover No 2 Ltd v Bank of New Zealand in which the Court of Appeal confirmed that a charge in the nature of [25](b) above creates an equitable mortgage over any real property within the definition of Secured Property.5 I am satisfied the land is within that definition.
[27] Given that, FAI claims an equitable mortgage of the land as at the date of disclaimer. Although the proceeds of sale of the right to harvest the trees and the carbon credits accrued subsequently, the GSA provides for or creates a security interest
4 FAI Money Limited v Johnston HC Auckland CIV-2012-404-1201, 14 August 2012.
5 Glover No 2 Limited v Bank of New Zealand [2016] NZCA 182, (2016) 17 NZCPR 236 at [37(a)]- [37(b)] and [40].
over all after-acquired personal property. Thus the security interest continues in the proceeds of sale of the right to harvest and of the carbon credits.
[28] FAI submits that the effect of s 118(b) is that its proprietary interest in the land is unaffected by the disclaimer. It cites Fish Man Limited (in Liquidation) v Hadfield, a decision of the Court of Appeal, to that effect.6
It is stated expressly in s 118(b) of the Act that a disclaimer by the Assignee does not affect the rights, interests, or liabilities of any other person, except insofar as is necessary to release the Assignee or the bankrupt from a liability. It is plain that any proprietary interest in the land is unaffected by a disclaimer. Therefore if The Fish Man has a proprietary claim in the Property, it has survived the disclaimer. Treating the Property as beneficially owned by the Crown, that beneficial interest is subject to all proprietary claims to the Property, including any interest of The Fish Man. Such a conclusion must inevitably follow from s 118(b).
[29] If, however, FAI’s proprietary interest did not survive the disclaimer, FAI will have suffered loss or damage as a result, and may apply for an order under s 119(1)(b). FAI submits a vesting order under s 119(1)(b) would be fair as FAI had a clear interest in the property, and all other interested parties consent to the making of such an order.
[30] FAI may well be correct as to the effect of the GSA and s 118(b) but in the absence of any party in opposition, the better course is to deal with the matter under s 119(1)(b). I am satisfied it is fair to make the order FAI seeks under s 119(1)(b) and I do so accordingly.
Trustee
[31] On 9 February 2009, Mr Gerard Martens and Ed Johnston Trustees Ltd, as trustees of the Gerard Martens Family Trust, advanced $72,000 to Mr Johnston. The advance was secured by an unregistered mortgage over the land. Ms Vujcich, the first- named first defendant, is now the sole trustee of the trust, that is she is the Trustee.
[32] Mr Johnston defaulted in repaying $70,560 on the due date, being 5 November 2012. He was adjudicated bankrupt two weeks later.
6 Fish Man Limited (in Liquidation) v Hadfield [2017] NZCA 589, [2018] 2 NZLR 428 at [60].
[33] At the date of hearing, Mr Johnston’s indebtedness (principal and interest) to the Trustee was $166,473.93, net of any sum for costs. Regardless, the mortgage secures the principal only, being $72,000.
[34] The Trustee seeks an order that $72,000 of the disclaimed property be vested in her in that capacity. I am satisfied it is fair to make the order sought, and do so.
Mr McKenna
[35] Mr McKenna’s claim is problematic because I do not have any evidence from him.
[36] I have Mr McKenna’s statement of defence and several documents annexed to affidavits sworn by other deponents, to which I refer below, but no affidavit from him verifying the allegations in the statement of defence.
[37] The gist of the statement of defence is that Mr Johnston guaranteed repayment of an advance he, Mr McKenna, made to Sentinel 35 Trustee Company Ltd (“Sentinel”) on 27 January 2012, with repayment due, but not made, on 18 January 2013.
[38] Annexed to Mr Scurrah’s first affidavit, sworn on behalf of FAI, is a copy of a term loan agreement dated 27 January 2012 which does record an advance by Mr McKenna to Sentinel of $212,000 with ordinary interest at 12 percent per annum and default interest at 16 percent per annum. Although there is an indecipherable signature where the guarantor is to sign, the loan agreement has not been executed by the borrower, or at least that is the case on the copy before me.
[39] Then there is an email dated 20 December 2012 (so after Mr Johnston’s adjudication) which is from Mr Johnston to a firm of solicitors. On its face, this records a visit by Mr McKenna to the solicitors’ office in which Mr McKenna had not been sufficiently able to express his instructions. Mr Johnston advised that Mr McKenna had wished to:
... instruct you [the solicitors] on this occasion to register a caveat urgently against my interest in a forestry block. The caveat supports an unregistered
mortgage dated 18.11.09 between [Mr Kenna] as MORTGAGEE (caveator) and EDWARD ERROL JOHNSTON, the registered Proprietor of a one fifth share in the subject property, as MORTGAGOR.
[40] Then, annexed to the affidavit of the Trustee, is a copy of the certificate of title to the land. This shows that Mr McKenna did lodge a caveat against the land on 21 December 2012, which Fitzgerald J lapsed, along with all other caveats, by her orders of 7 November 2018. The caveat itself is also in evidence, in which Mr McKenna claims an interest as mortgagee pursuant to an unregistered mortgage dated 18 November 2009, between Mr McKenna as mortgagee and Mr Johnston as mortgagor.
[41] I am not able to deduce from this evidence, such as it is, that Mr McKenna has suffered loss or damage as a result of the disclaimer. Accordingly, I am unable to make an order in Mr McKenna’s favour. I dismiss his application accordingly.
Mr Johnston
[42] Section 119(2) provides that the bankrupt may also apply for an order that the disclaimed property be vested in him or her. Again, it is necessary that I be satisfied it is fair to do so.
[43]Mr Johnston contends it is fair that I should vest in him the balance of
$100,000. His claim is based principally on the fact that the value of the property derives from his payment of all costs incurred in connection with the property over a 27 year period, these costs being at least $150,000. Mr Johnston also relies on the concessions made by FAI and the Trustee.
[44] In the circumstances, I am satisfied that it is fair to make the order Mr Johnston seeks, for the reasons he submits.
Orders
[45] By memorandum dated 15 April 2021, FAI, the Trustee and Mr Johnston set out the orders they proposed. I shall leave these parties to submit a further draft which provides for UHY Haines Norton’s costs, and which sufficiently reflects the
constraints imposed by the current “Level 4” lockdown in Auckland. The Level 4 restrictions may affect the time by which the parties can implement the various steps required.
[46] The draft orders should be circulated and submitted to the Court through the case officer.
[47] I expect costs and disbursements will lie where they fall but any party who wishes to contend for a different order may do so by brief memorandum, setting out why they should have a different outcome.
[48]I reserve leave to apply.
Peters J
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