FM Custodians Limited v Hannan

[2018] NZHC 3079

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE

CIV-2016-485-0983

[2018] NZHC 3079

BETWEEN

FM CUSTODIANS LIMITED

Applicant

AND

PATRICK BERNARD HANNAN also

known as PATRICK BERNARD CHRISTOPHER HANNAN

Respondent

Hearing:

10 October 2018

Appearances:

F B Barton and M B Couling for the Applicant (by audio visual link)

Mr P B Hannan in person (by audio visual link)

Judgment:

26 November 2018

JUDGMENT OF ASSOCIATE JUDGE SMITH

This judgment was delivered by me on 26 November 2018 at 3.00pm, pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Solicitors / Counsel:

Anderson Lloyd, Dunedin

Copy to:
Mr P B Hannan

FM CUSTODIANS LTD v HANNAN [2018] NZHC 3079 [26 November 2018]

[1]        On 17 May 2018 I issued a judgment (the judgment) in which I dismissed an application by the judgment  creditor  (FM)  to  adjudicate  the  judgment  debtor  (Mr Hannan) bankrupt.1

[2]        FM now applies under r 11.9 of the High Court Rules for an order recalling the judgment. That application is opposed by Mr Hannan.

Applications to recall judgments – legal principles

[3]Rule 11.9 of the High Court Rules 2016 provides:

11.9     Recalling judgment

A Judge may recall a judgment given orally or in writing at any time before a formal record of it is drawn up and sealed.

[4]The leading authority on recalling a judgment remains that of Wild CJ in

Horowhenua County v Nash (No 2), where the learned Judge said:2

Generally speaking, a judgment once delivered must stand for better or worse subject, of course, to appeal. Were it otherwise there would be great inconvenience and uncertainty. There are, I think, three categories of cases in which a judgment not perfected may be recalled – first, where since the hearing there has been an amendment to a relevant statute or regulation or a new judicial decision of relevance and high authority; secondly, where counsel have failed to direct the Court's attention to a legislative provision or authoritative decision of plain relevance; and thirdly, where for some other very special reason justice requires that the judgment be recalled.

[5]        In this case, FM relies on the second and third recall situations identified by the Judge in Horowhenua County. First, FM says that counsel failed to direct the Court's attention to legislative provisions which were plainly relevant. Secondly, it says that the judgment included reasoning that was not put to counsel at or after the hearing (or not sufficiently put3), and that the interests of justice require that the judgment be recalled to enable the parties to be heard on those matters.

1      FM Custodians Ltd v Hannan [2017] NZHC 1097.

2      Horowhenua County v Nash (No 2) [1968] NZLR 632 (HC) at 633, applied by the Supreme Court in Saxmere Co Ltd v Wool Board Disestablishment Co Ltd [2009] NZSC 122, [2010] 1 NZLR 76.

3      In a Minute issued after the hearing, in which I invited further submissions from the parties (referred to at [17] of this judgment).

The application for recall – procedural matters

[6]        In its application, FM sought both an order recalling the judgment and an order adjudicating Mr Hannan bankrupt. The parties addressed both the recall and substantive adjudication issues in their written submissions, and Mr Barton supplemented his written submissions with brief oral submissions, covering both recall and (if the judgment is recalled) adjudication. Mr Hannan elected at the hearing to rely on his written submissions.

[7]        At the hearing, both parties indicated that they were content for me to deliver judgment on the recall application, and in the event of that application being successful, proceed to give judgment immediately on FM's adjudication application, without the need for a further hearing.

Background

[8]        FM obtained summary judgment against Mr Hannan, as the guarantor of certain advances made by FM to companies associated with Mr Hannan (collectively "the group"), on 17 March 2014. The amount for which judgment was entered was

$803,823.19. FM held securities in the form of mortgages registered over various properties  owned  by  group  companies  and  General  Security  Agreements.   On  3 February 2014 it had appointed Mr Kevin  Whitley receiver  and  manager,  and Mr Whitley set about the task of selling group assets.

[9]        The receivership has proved to be long and difficult. FM was required to spend substantial sums of money to obtain appropriate consents or otherwise to get a number of properties owned by the group into a condition where they could be sold. However, sales were achieved between November 2014 and 4 December 2015 which realised (gross) sale proceeds in excess of $900,000.

[10]      The bankruptcy notice relied upon by FM was issued on 14 December 2016, nearly two years and nine months after the judgment on which it was based. Although FM had recovered over $900,000 in gross sale proceeds since the judgment was entered, the amount claimed in the bankruptcy notice was $803,823.19, being the amount said to be due "on" the judgment of 17 March 2014. There was an issue as to

whether Mr Hannan was entitled to have the sale proceeds applied in reduction of the judgment debt and interest thereon. Applying the rule in Clayton's case,4 I found that it was arguable for Mr Hannan that he was, and that nothing was in fact owing on the judgment when the bankruptcy notice was issued. Substantially on that basis, I exercised my discretion under s 37(c) and (d) of the Insolvency Act 2006 (the Act) to refuse FM's adjudication application.

[11]      Beyond that bare introduction, I will not repeat here what was said in the judgment, expect to the extent that may be necessary to explain my decision on the recall application.

[12]      The only updating matters of fact I need to mention are that Mr Hannan provided a further affidavit in support of his opposition to the recall application, and that Mr Barton provided with his written submissions an amended figure for total sale proceeds received. At the hearing of the adjudication application, I took the total sale proceeds figure to be $949,318.27; the figure produced by Mr Barton with his recall submissions was a little higher at $999,541.98.

[13]      Mr Hannan's further affidavit consisted primarily of legal submissions, but he did refer to a further receiver's report dated 5 April 2018, in which the receiver expressed the optimistic view that an initial review deemed likely that, with ongoing cooperation and working with the Hutt City Council, unsecured creditors might get paid. Mr Hannan indicated in his affidavit that enquiries he had made in June of 2018 indicated that a hold-up in getting the landfill operation operating again had been caused by the receiver not giving a go ahead to the greater Wellington Regional Council.

FM's first argument for recall

[14]      The first argument made by FM in support of the recall application was that, in applying the principles of Clayton's case to what I described as a running account between FM on the one hand and Mr Hannan and the group on the other (with the result that the proceeds of sale of certain securities sold after the judgment were treated

4      Devaynes v Noble (Clayton's case) (1816) 1 Mer 572; 35 ER 781.

as having been applied in reduction of the judgment debt, rather than to ongoing expenses incurred by FM or the receiver), I omitted to take into account relevant sections of the Property Law Act 2007 (the PLA).

[15]At paragraphs [107] and [108] of the judgment, I said:

[107] While I accept that FM was entitled under the loan agreement to appropriate any payments or receipts as it saw fit (including to more recently incurred debt), I am not satisfied on the evidence that that is what occurred. It appears to me that the receipts were simply credited to Mr Hannan's running account with FM, without any specific appropriation of the receipts to debts or liabilities incurred by FM after 17 March 2014. For example, on 26 January 2017 FM sent its loan transaction statement to Paddy Hannan Contracting Limited (in receivership), and the statement (consisting of numerous pages) appears to have treated all outgoings, including loan instalment payments, interest, and penalty interest, and all receipts, as part of one running account. For example, I note that the $339,517.12 received on 31 August 2012 on the sale of 88 Viewmont Street resulted in a corresponding reduction in the then- debit balance ($1,868,820 became $1,529,302.88).

[108] There does not appear to have been any specific appropriation of the amounts received by FM on the realisation of the various properties after the judgment to post-judgment costs or expenses incurred by it. In those circumstances, I think it at least arguable for Mr Hannan that the rule in Clayton's case applies, and the amounts received are presumed to have been applied to the earliest of Mr Hannan's and the group's liabilities.

[Footnote omitted].

[16]I went on to say in the judgment:

[114]   In this case there do not appear to be any complicating factors such  as third party claims on the relevant account, or intermingling of  trust monies – the issue appears to be simply one of whether payments received into a running account FM operated for Mr Hannan and the judgment debtors should be presumed to have been intended to reduce or extinguish the earliest indebtedness (i.e. applied in accordance with the rule  in Clayton's case), or whether there is evidence that the parties had some contrary intention. In the end, I can see nothing in the evidence that might suggest that they did.

[115] If that is right, the payments must be considered to have been applied in reduction of the judgment sum (and interest thereon at 5 per cent per annum), and it was arguable for Mr Hannan that nothing was in fact owing on the judgment when FM made its request for the issue of the bankruptcy notice.

[17]      I had earlier recorded in the judgment that I had issued a minute on 29 August 2018, indicating that it was not clear to me why the payments credited to the account

between 17 March 2014 and 14 December 2016 had apparently not been applied in reduction of the judgment. I raised the issue of whether, if any payments should have been credited against the judgment sum but were not, the bankruptcy notice was valid. I invited FM to file a  memorandum  on  that  issue,  and  gave  the  opportunity to Mr Hannan to file a memorandum in reply.

[18]      Mr Couling did file a memorandum in reply, in which he submitted (inter alia) that FM had no contractual obligation to apply the receipts after judgment in reduction of the judgment debt. He submitted that it was entitled to apply the realisations to costs incurred by it after judgment, and that is what it did.

[19]      Counsel did not refer in his memorandum to the sections of the PLA that are now relied upon by FM, and I did not refer to them or take them into account in the judgment.

[20]Among a number of sections of the PLA now relied upon by FM, are ss 87 and

185. Those sections materially provide:

87 Mortgage secures advances for protection and  realisation  of  security

(1)A mortgage over property secures all amounts reasonably paid or advanced at any time by the mortgagee—

(a)for the protection, insurance, maintenance, preservation, or repair of the mortgaged property; or

(b)to remedy any default by the mortgagor in respect of any other mortgage or encumbrance over the property, to the extent that it has priority over the mortgagee’s mortgage; or

(c)for the payment of rates or other outgoings; or

(d)to meet the expenses of the mortgagee in entering into possession, or in doing anything that a mortgagee in possession is required or entitled to do; or

(e)with a view to the realisation of the security (including any additional amount referred to in section 120(2) or 129(2)).

(2)A mortgage over property secures all interest on any amounts paid or advanced for all or any of the purposes referred to in subsection (1) at the agreed rate (if any) at which interest is payable on the principal amount secured by the mortgage.

185     Application of proceeds of sale of mortgaged property

(1)The proceeds arising from the sale by a mortgagee of mortgaged property must be applied—

(a)first, to the payment of all amounts (if any) referred to in subsection (2), together with interest on those amounts at the agreed rate (if any) at which interest is payable on the principal amount secured by the mortgage:

…

(d)fourthly, to the payment of amounts secured by the mortgage (to the extent that those amounts have not been paid under paragraphs (a) to (c)):

(e)fifthly, to the payment of amounts secured by any subsequent mortgage, subsequent encumbrance, or subsequent security interest over the property if—

(i)the subsequent mortgage, subsequent encumbrance, or subsequent security interest is registered; or

(ii)the subsequent mortgage, subsequent encumbrance, or subsequent security interest is unregistered, but the mortgagee has actual notice of it:

(f)sixthly, to the payment of any surplus to the current mortgagor.

(2)The amounts are amounts reasonably paid or advanced at any time by the mortgagee—

(a)for the protection, insurance, maintenance, preservation, or repair of the mortgaged property; or

(b)for the payment of rates or other outgoings; or

(c)to meet the expenses of the mortgagee in entering into possession, or in doing anything that a mortgagee in possession is required or entitled to do; or

(d)with a view to the realisation of the security (including any additional amount referred to in section 120(2) or 129(2)).

…

[21]      Mr Barton referred to a number of other sections from the PLA, including s 95, which provides that every mortgage includes the covenants outlined in Part 1 of Schedule 2 to the PLA. He referred to cls 10, 12 and 14 as allowing for additional costs incurred in respect of the security to be secured under the mortgage.

[22]      Mr Barton submitted that the effect of these PLA sections was essentially to render the rule in Clayton's case inapplicable – nothing could or should have been credited to Mr Hannan in reduction of the judgment debt before the expenses and amounts reasonably incurred by FM and/or the receiver in achieving the various sales had been appropriately taken in to account, as required by s 185 of the PLA. All of the expenses and costs incurred or advanced by FM in maintaining and subsequently putting the mortgaged properties in a position to be realised, had to be deducted from the proceeds of sale. It was only if there was a surplus after that that Mr Hannan would have been entitled to a credit.

[23]      Mr Barton then submitted that my application of the rule in Clayton's case was an essential part of the reasoning leading to my conclusion in the judgment that "it was at least arguable for Mr Hannan that nothing was in fact owing on the judgment when FM made its request for the issue of the bankruptcy notice,"5 and that the decision to decline to make an adjudication order was accordingly made on an incorrect legal and factual basis. Mr Barton pointed out that I had earlier noted in the judgment that the receiver had "had to spend several hundreds of thousands of dollars, at least, to achieve the necessary resource consents and access that were necessary to achieve some of the sales", but those payments were effectively not brought to account in FM's favour.

[24]      Mr Barton submitted that the same result applies under the Receiverships Act 1993. Section 32(9) of that Act grants a receiver an indemnity out of the assets of the company, and that indemnity extends to receiver's fees and is protected by an equitable lien over the charged assets of the company.6 Section 32 of the Receiverships Act materially provides:

32       Liabilities of receiver

(1)Subject to subsections (2) and (3), a receiver is personally liable—

(a)on a contract entered into by the receiver in the exercise of any of the receiver’s powers; and

…

5      Paragraph [115] of the judgment.

6      Blanchard on Receiverships at [6.08], referring to Moodemere Pty Ltd v Waters [1988] VR 215 at 230: a secured creditor is only entitled to the net proceeds of realisation after the discharge of the receiver's lien.

(2)The terms of a contract referred to in paragraph (a) of subsection (1) may exclude or limit the personal liability of a receiver other than a receiver appointed by the court.

…

(9)A receiver is entitled to an indemnity out of the property in receivership in respect of personal liability under this section.

(10)Nothing in this section—

(a)limits any other right of indemnity to which a receiver may be entitled; or

(b)limits the liability of a receiver on a contract entered into without authority; or

(c)confers on a receiver a right to an indemnity in respect of liability on a contract entered into without authority.

[25]      In summary, Mr Barton  submitted  that,  in  exercising  my discretion  under s 37(c) and (d) of the Act, I incorrectly gave the judgment debtor creditor for payments and applied the rule in Clayton's case without taking into account the liabilities and expenses incurred by the receiver and FM, and the statutory priorities of repayment. The relevant provisions of the PLA and the Receiverships Act are legislative provisions of plain relevance, that were not drawn to the Court's attention, and the case thus falls within the second category of recall situations referred to in Horowhenua County.

Mr Hannan's submissions in opposition to the first ground of the recall application

[26]      Mr Hannan submitted that a distinction should be drawn between repayment of the judgment on which the application for adjudication was based on the one hand, and repayment of the mortgage debt on the other. Clearly under the PLA a mortgage and associated expenses have to be repaid to the extent funds allow from a sale, but this application related to a judgment debt, not to repaying a mortgage debt at any one time. He submitted that any failure to refer to the PLA did not render the judgment defective; it was simply not relevant to the decision.

[27]      Mr Hannan also submitted that the sale of one of the properties (the property at 88 Viewmont Drive) was a sale of a property that was not initially subject to a

mortgage to FM, but was the subject of a charging order.  He then contended that  Mr Whitley had no valid authority to sell any properties, and he referred to the prospect of greater prices being achieved in the current market if sales had been delayed because of the receiver's alleged lack of authority to sell.

[28]      Finally, Mr Hannan referred to a "reluctance" of the Courts to recall judgments in cases where the party applying for a recall has also lodged an appeal7 (as is the case here). He submitted that FM has chosen its forum to review the judgment, namely the Court of Appeal, and in those circumstances recall is inappropriate.

Discussion and conclusions on FM's first ground for recall

[29]      I accept Mr Barton's submissions on this issue. The provisions of the PLA referred to were plainly relevant to my reasoning on the application of Clayton's case, and they were not drawn to my attention. There were plainly very substantial expenses incurred by FM and/or the receiver, quite apart from FM's claims for interest and receiver's costs, which, on the face of it, were required by s 185 of the PLA and/or by the Receiverships Act to be paid before any money could be credited to the mortgagors or  to  Mr Hannan  as  guarantor.   For  example,   I  referred  in   the  judgment  to Mr Hutchison's evidence of particular costs associated with the loan recovery and realisation of the assets, including surveying, engineering and landscaping fees to allow access onto 14 Waiu Street totalling $231,871.75, and I noted that those particular fees did not appear to be open to serious challenge by Mr Hannan.8

[30]      In referring to Clayton's case in the judgment, I referred to the decision of the Court of Appeal in Re Registered Securities Ltd, where the Court noted that the rule was founded on presumed intention – it was said to be "in truth a fiction and cannot be allowed to work an injustice".9 And I noted that in International Investment Unit Trust v Waller & Agnew, Williams J concluded that the rule is displaceable by any contrary evidence or inferences as to the parties' intentions.10

7      Citing Erwood v Maxted [2010] NZCA 93 at [23], Robert Erwood v The Official Assignee [2016] NZHC 912 at [7] and [10], and Design & Development Ltd v Cameron Sadler CIV-2006-404-4528 at [15].

8      At [70] of the judgment.

9      Re Registered Securities Ltd [1991] 1 NZLR 545, at 553, referred to at [112] of the judgment.

10     International Investment Unit Trust v Waller & Agnew HC Auckland, CIV-2004-404-1868, at [56], referred to at [111]-[113} of the judgment.

[31]      In this case, I think the statutory requirements to reimburse the mortgagee from the proceeds of sale for the protection, insurance, maintenance, preservation or repair of the mortgaged property, and for expenses incurred with a view to realisation of the security, were plainly relevant to the parties' presumed intentions, and thus relevant to the application or otherwise of the rule in Clayton's case. Accordingly, the PLA provisions referred to by Mr Barton were both relevant and capable of affecting the result of the judgment.

[32]      I do not accept Mr Hannan's submission that the judgment correctly focused on the judgment debt, and not  on the  security.  The relevant  issue  was  whether  Mr Hannan was entitled to have the proceeds of sale of the various securities applied in reduction of the judgment debt, in priority to post-judgment expenses incurred by FM such as the $231,871.75 expended by FM on surveying, engineering and landscaping fees relating to 14 Waiu Street.

[33]      Nor do I consider Mr Hannan's submissions relating to Mr Whitley's alleged lack of authority to sell the properties a matter which can affect the recall application. I am only here concerned with FM's argument that a failure to advert to relevant statutory provisions justifies the recall of the judgment, and I am satisfied that it does.

[34]      Mr Hannan's submission that FM's decision to file an appeal in the Court of Appeal does not preclude it from applying for recall. The appeal was filed as a precaution, to preserve FM's rights, and in my view the relevance of the PLA provisions and the Receiverships Act provisions referred to by FM is sufficiently significant to be capable of undermining a principal foundation for the judgment. In those circumstances I am satisfied that an application to recall the judgment was the appropriate relief to seek.

FM's second ground for recall

[35]      In view of the conclusion I have reached on FM's first ground, there is no need to consider the second, "natural justice", ground for recall advanced by FM.

Result

[36]      I make an order recalling the judgment. Mr Hannan opposed the application, and in the ordinary way FM should be entitled to its costs. I award FM costs on the application to recall the judgment on a 2B basis, with disbursements to be fixed by the Registrar.

Associate Judge Smith