Frost v Carr HC Dun CIV 2007-412-507
[2008] NZHC 2366
•30 May 2008
IN THE HIGH COURT OF NEW ZEALAND DUNEDIN REGISTRY
CIV 2007-412-507
BETWEEN MURRAY NEIL FROST AND MICHAEL CRAIG HORNE
Applicants
ANDEWAN ROBERT CARR First Respondent
ANDBROOKSIDE FARM TRUST LIMITED Second Respondent
ANDJARCEL INVESTMENTS LIMITED AND AWATAIERI HOLDINGS LIMITED
Third Respondent
ANDANESYDS LIMITED (IN RECEIVERSHIP)
Fourth Respondent
ANDRODNEY JOHN HUMPHRIES Fifth Respondent
CIV 2007-412-510
AND BETWEEN EWAN CARR First Plaintiff
ANDBROOKSIDE FARM TRUST LIMITED Second Plaintiff
ANDRODNEY JOHN HUMPHRIES First Defendant
ANDBIG SKY DAIRY FARMS LIMITED (IN LIQUIDATION)
Second Defendant
FROST AND HORNE V CARR AND ORS HC DUN CIV 2007-412-507 30 May 2008
ANDCASCADE CAPITAL LIMITED Third Defendant
ANDMAIN FARM LIMITED Fourth Defendant
ANDCONSULTANT MANAGEMENT SERVICES LIMITED (IN RECEIVERSHIP)
Fifth Defendant
ANDANESYDS LIMITED (IN RECEIVERSHIP)
Sixth Defendant
ANDAWATAIERI HOLDINGS LIMITED Seventh Defendant
ANDJARCEL INVESTMENTS LIMITED Eighth Defendant
Hearing: 8 April 2008
Appearances: S P Rennie for the Carr Interests
J G J Toebes for the Receivers of the Big Sky Group of Companies
A R Gilchrist and L M Nicholson for the Humphries InterestsA J L Wedekind for Anesyds Limited (In Receivership) N F Flanagan for South Canterbury Finance Limited
Judgment: 30 May 2008 at 2.00 pm
RESERVED JUDGMENT OF RANDERSON J On Application for Stay
This judgment was delivered by me on 30 May 2008 at 2 pm, pursuant to r 540(4) of the High Court Rules
Registrar/Deputy Registrar
Solicitors: Rhodes & Co, PO Box 13444 Armagh Street, Christchurch
Buddle Findlay, PO Box 2694, Wellington
Dyer Whitechurch, PO Box 6444, Wellesley Street, Auckland
Morgan Coakle, PO Box 114, AucklandMeredith Connell, PO Box 2213, Auckland
Raymond Sullivan McGlashan, PO Box 557, Timaru
Counsel: A R Gilchrist, PO Box 5444, Wellesley Street, Auckland
2
Introduction
[1] The Carr interests seek a stay of proceedings or execution of my judgment issued on 29 February 2008 pending an appeal to the Court of Appeal scheduled for hearing on 27 and 28 August 2008.
[2] The application is opposed by the receivers of the Big Sky Group of companies, the Humphries interests and the receiver of Anesyds Limited.
[3] The substantive proceeding arose from the failed settlement of sale and purchase agreements relating to three substantial dairy farms in the Maniatoto Basin. Also included in the sale were two separate properties known as the Danseys Pass Coach Inn and the historic Styx Hotel.
[4] The most substantial assets are the three dairy farms which, collectively, are said to be one of the largest dairy operations in the South Island. The Big Sky Group of companies owns the dairy farms. The Carr interests own one-third of the shares in the companies and the Humphries interests two-thirds. The major creditors are the Bank of New Zealand (who appointed Messrs Frost and Horne as receivers) and Edgewater Motel Limited, a company owned by the Humphries interests.
[5] The Carr interests were granted an option to purchase the various assets under a document known as the Amended Settlement Agreement executed in May
2007. The option was exercised and the sales were to be completed by 4pm on
31 May 2007, time being of the essence. The sales were not settled by that time and the Amended Settlement Agreement was cancelled.
[6] In the substantive decision, I found that the Amended Settlement Agreement was validly cancelled. It followed that there was no basis for an order for specific performance of the agreement or other equitable relief in favour of the Carr interests.
[7] Caveats lodged by the Carr interests remain on the titles but, subject to the outcome of the stay application, should be discharged.
[8] After the substantive judgment, the receivers of the Big Sky Group commenced a tender process for the sale of the properties. That process has now been put on hold since the Carr interests applied for a stay. The Big Sky Group receivers and the Humphries interests wish to proceed with a sale in order to repay the substantial debts associated with the farms. Mr McLennan, the receiver of Anesyds Limited, similarly wishes to proceed with the sale of the Danseys Pass Coach Inn.
Principles
[9] The application is brought under r 12 Court of Appeal (Civil) 2005. The Court is required to balance the competing right of the successful party to the fruits of the judgment with the need to preserve the appellant’s position pending the appeal: Duncan v Osborne Buildings Ltd (1992) 6 PRNZ 85, 87. The objective is to secure justice between the parties: NZ Insulators Ltd v ABB Ltd (2006) 18 PRNZ
565. Relevant considerations include:
a) Whether the appeal may be rendered nugatory by the lack of a stay (although this factor is not determinative: Cousins v Heslop [2007] NZCA 377).
b) Whether the successful party will be injuriously affected by the stay. c) The bona fides of the appellant as to the prosecution of the appeal.
d) The effect on any third parties.
e) The novelty and importance of the questions involved. f) The public interest in the proceedings.
g) The overall balance of convenience and the status quo.
[10] This list is drawn from the judgment of Hammond J in Dymocks Franchise Systems (NSW) Pty Ltd v Bilgola Enterprises Ltd (1999) 13 PRNZ 48 which was implicitly endorsed on appeal.
The case for the Carr Interests
[11] A number of affidavits have been filed on each side, including additional ones I directed should be filed after the hearing, along with further submissions. Mr Rennie for the Carr interests submitted that Mr Carr and his family had lengthy historical connections with the farms and the Styx Hotel. As well, Mr Carr purchased the Danseys Pass Coach Inn about 20 years ago and continues to live there. Although he does not live on the farms he wishes to have the opportunity to purchase them under the option. That opportunity would be lost if the properties were sold prior to the appeal.
[12] Mr Carr admits he is impecunious and that the company which would purchase the property (Brookside Farm Trust Ltd) is a mere shell. Nevertheless, he submits he has a shareholder’s equity in the farms and has offered valuation evidence showing that the value of the farm exceeds the debts owed.
[13] It is common ground that the value of dairy farms, including the subject properties, is strongly influenced by the price paid by Fonterra in dollars per kilogram of milk solids (“$kg/ms”). It is also common ground that, over the past 12 months, there have been very substantial increases in the Fonterra payouts with the consequence that the subject farms have been increasing in value. Despite a measure of agreement on those issues, there are strong differences between the parties as to the value of the farms and the extent of the debt.
The position of the Blue Sky Group Receivers and the Humphries Interests
[14] The Blue Sky Group Receivers, supported by the Humphries interests, submit that a stay should not be granted. They submit there is no realistic prospect of there being sufficient equity in the farms and point to on-going losses being sustained by reason of the very high penalty interest rates payable to the Bank of New Zealand and Edgewater Motel Ltd as the principal creditors. The Big Sky Group receivers maintain that the debts owing by the Group significantly exceed the present value of
the farms. Mr Humphries says he is effectively funding Mr Carr and that he will have no way of recovering his on-going losses. Both the Big Sky Group receivers and the Humphries interests were willing to retain any surplus after the sale of the assets pending the outcome of the appeal.
[15] If a stay is to be granted, the Big Sky Group receivers and the Humphries interests say Mr Carr should be obliged to pay their monthly interest costs in cash and to pay the costs of the proceedings in this Court.
The valuation of the farms
[16] There are marked variations as to the value of the farms. They have been assessed by two registered valuers, Mr P T Mills on behalf of the Carr interests and Mr J K Orchiston for the Big Sky Group receivers. In each case, the valuations are for the land and buildings, the Fonterra shares owned by the companies and the dairy and irrigation equipment. Stock is excluded although I understand the companies own about 1000 cows.
[17] Mr Mills valued the farms in May 2007 at $29 million and $36 million in
April 2008. The corresponding figures for Mr Orchiston’s valuations are
$25 million and $28.5 million.
[18] The highest of five tenders received for the farms in June 2007 was
$22 million although this excluded farm machinery. Mr Frost has deposed that he considered he could have obtained up to $23 million by negotiation at that time.
[19] The Fonterra payout expressed as $kg/ms has varied as follows:
2006/2007 $4.46 (actual)
2007/2008 $7.30 (actual)
2008/2009 $6.50 (a projection by industry specialists)
[20] The differences in the valuations lie principally in the assumptions made by each valuer as to:
a) The extent of annual production measured in kg/ms;
b) The choice of multipliers to attributed values per kg/ms;
c) A discount factor applied by Mr Orchiston to reflect his view that there are perceived difficulties over water supply.
[21] The Carr interests have produced affidavit evidence from two experienced dairy farmers suggesting that the capacity of the farms is closer to 1.2 million kg/ms rather than the figure of 1 million adopted by Mr Orchiston. To counter that, the Big Sky Group receivers point to the historical actual levels of production, submitting that the production level assumed by Mr Mills in his valuation was some 14 percent higher than the highest level of actual production achieved over the last five years. The receivers of the Big Sky Group also maintain there are risks associated with the water supply which should be allowed for by an appropriate discount.
[22] Without embarking on a full-scale hearing, it is impossible to resolve the valuation differences in the context of this application. It is evident however, that the value of dairy farms has been increasing over the past 12 months and, despite indications that there may be some reduction of the Fonterra payout for the coming season, it is reasonable to assume that there is unlikely to be any significant deterioration in property values over the next 6-12 months. Trends to date have shown the market values of dairy farms have generally been increasing markedly.
The Extent of the Debt and Operating Costs
[23] At March 2007, the Big Sky Group receivers calculated that the indebtedness of the Group was approximately $27 million. The receivers have since recalculated those figures as at 31 May 2008 and have arrived at a figure of $32 million.
[24] These sums include an amount of approximately $15.3 million said to be owed to the Bank of New Zealand and $11.3 million to Edgewater Motel Ltd.
[25] The receivers have advised there are on-going interest costs as follows:
BNZ $169,000
Edgewater Motel $ 93,000
$262,000 per month or ($3.1 million per annum)
[26] In addition, there are annual legal and receivers’ costs of about $150,000 indicating around $3.25 million per annum for interest and costs. (A submission that the monthly costs are $291,000 appears to be in error on my analysis of Mr Frost’s evidence since this figure overstates the receivers’ costs).
[27] It is common ground that the farms have operated at a loss for the past two seasons. The Carr interests blame Mr Humphries and Mr Frost for the poor operation of the farms. Those allegations are denied. For his part, Mr Humphries maintains that when the farms were operated by Mr Carr they were poorly managed and the accounting systems were inadequate.
[28] The Big Sky Group receivers have calculated that the farm should show an operating surplus for the 2007/2008 year of $2.2 million. However, this takes no account of the interest and other costs amounting to $3.25 million per annum. For the 2008/2009 year, the Big Sky Group receivers forecast an operating surplus of
$1.99 million before payment of interest and receivers’ costs based on a Fonterra payout of $6.65 and production of 887,000 kg/ms.
[29] The operating costs are disputed by the Carr interests. They maintain that the annual production should be higher than the figures assumed and that the production costs adopted are too high when compared with industry averages.
[30] The Carr interests also strongly dispute the amount of the debt calculated by the Big Sky Group receivers. They point to the very large difference between Mr Frost’s calculations as at March 2007 and the present time ($27 million compared with $32 million at present). The Carr interests say that the receivers have uncritically accepted claims made by the Humphries interests which they maintain are exaggerated.
[31] Again, it is impossible to assess the true extent of the debt in the context of this application. I note however that Mr Frost explains that his latest calculations have been undertaken on a different basis from those in March 2007. In particular, he has now included all known creditors whereas the March 2007 calculation was intended to establish the level of creditors for the purpose of calculating the purchase price under the option.
Assessment
[32] On the basis of the figures adopted by the Big Sky Group receivers, there would be no or negative shareholders’ equity in the farms and on-going losses after allowing for the high penalty costs being incurred. On the other hand, if the valuation provided by the Carr interests were accepted there would be shareholders’ equity of around $4 million, even assuming that the debts calculated by the Big Sky Group receivers are as high as they state. On that basis, the Carr interests would have an equity of one-third of that sum or about $1.3 million.
[33] I accept that if the Fonterra payout over the next season were to drop significantly, any equity based on Mr Mills’ valuation would likely evaporate. In that event, the Humphries interests (who I accept are carrying the burden of the loss since the Bank of New Zealand has first priority) would not be able to recover their losses.
[34] Doing the best I can, my assessment is that the value of the farms is not likely to deteriorate to any extent over the next say 6 months. The trend is the other way. And, for present purposes, it cannot be said that Mr Mills’ valuation is necessarily unsustainably high although it must be at the very upper level of what might be achieved.
[35] I also take into account that the farms would not have been sold until about now even if there had been no appeal. Farms are customarily (although not inevitably) sold with effect from 1 June and it is unlikely the receivers would have completed the sales process until now. The appeal is only a few months away so that
the period of loss will be from now until the final disposal of the appeal plus a reasonable period for the sale thereafter – say six months from now.
[36] If a stay is refused, then Mr Carr would be deprived of the opportunity (if his appeal is successful) to purchase the farms under the option at a substantially lower price than its current value. It is no answer to say, as the Humphries interests submitted, that Mr Carr would have an opportunity to bid for the farm along with any other interested buyers. If he is right, he is entitled to buy at the option price and is not obliged to line up with other potential buyers and take his chances.
[37] In general, land is regarded as being of unique value so that the remedy of damages is not usually adequate: Foreman v Hazard [1984] 1 NZLR 586 and McLean Tower Limited v Ash Road Investments Limited CA 284/06 23 July 2007 at [27]. Given Mr Carr’s historic interests in the subject land, it is arguable he would be entitled to relief in the form of specific performance should his appeal be successful.
[38] I do not overlook the submission by the Big Sky Group receivers that Mr Carr’s purchase would be 100% financed and that there is no evidence of his ability to raise the funds. But to reach a conclusion on this issue could pre-judge a matter which may need to be dealt with if the appeal is successful. The evidence at trial was that he had sufficient funds available from Hanover Finance to complete the purchase.
[39] In these circumstances, I have decided that a stay should be granted on terms. It would be futile to order the Carr interests to pay the loan interest and other costs since they are admittedly impecunious. But the Carr interests will have to provide security over their only potential asset, their one-third shareholding in the Big Sky Group of companies.
The position of Anesyds Limited (In Receivership)
[40] The receiver of Anesyds Limited, which owns the assets comprising the
Danseys Pass Coach Inn, opposes the application for stay and wishes to be able to
proceed with the sale of the assets. Pending the outcome of the appeal, the receiver is willing to retain any surplus from the nett proceeds from sale above the purchase price for the Danseys Pass assets under the Amended Settlement Agreement ($1.87 million plus GST).
[41] The shares in Anesyds Limited are owned equally between the Humphries and Carr interests. However, the Humphries interests hold a debenture over Anesyds Limited to secure advances made through Edgewater Motel Limited. As well, the shares owned by the Carr interests in Anesyds Limited are mortgaged to the Humphries interests.
[42] The receiver deposes that the Dansey Pass Inn would be trading profitably but for the need to have one of his staff on site. However, the company is not able to meet the interest commitments on the advances made by Edgewater Motels. The receiver calculates that approximately $1.445 million is owed to Edgewater Motels and interest continues to accrue at the rate of $27,000 per month. The receiver wishes to be released from Court orders agreed to in April/May 2007 restraining him on a temporary basis from advertising his appointment or advertising the assets for sale. He also wishes to be released from a caveat lodged by the Carr interests over the title of the land.
[43] Under the orders made in April/May last year the receiver is obliged to provide accommodation to Mr Carr and to remunerate him at up to $1000 per week for services rendered in the operation of the Inn. Negotiations to lease the business to the senior chefs were begun in January this year but have been stalled since the substantive decision was released in February. Mr Carr has however remained in residence at the property and, according to the receiver, has intermittently provided services for which he has been remunerated. The receiver considers it unlikely there would be any surplus after repayment of debt if a sale of the Danseys Pass assets were permitted. In the meantime, the position of the Humphries interests continue to worsen.
[44] If the application for a stay is granted, despite the receiver’s submissions, then the receiver seeks orders freeing him from the obligation to provide
accommodation and remuneration to Mr Carr; an order that Mr Carr make himself available to provide services to the Inn when required by the receiver in return for payment at an appropriate hourly rate; and a further order that the receiver may cease trading the business of the Danseys Pass Coach Inn should he determine that course to be necessary.
[45] Mr Carr’s response is to say that if the Dansey Pass Coach Inn were sold, he would be deprived of his home. He expresses confidence that he and the receiver would be able to reach an early agreement to lease the business to the chefs currently employed at the Inn. The rental return received would provide additional return and the arrangement would remove the need for the receiver to have one of his staff present at the business.
[46] I appreciate the receiver’s concerns and the frustrations he and the Humphries interests (as the secured creditor) have in relation to the Danseys Pass Coach Inn. However, given the relatively short time between now and the fixture for the appeal and the essential inter-relationship between the Carr and Humphries interests across all assets, I do not consider it is appropriate to grant a stay.
[47] However, I am prepared to vary the orders made last year by Stevens J on 12
April 2007 and subsequently varied by Asher J on 3 May 2007 by rescinding the order numbered 1(a)(i) relating to the remuneration of Mr Carr. In substitution, there will be an order that Mr Carr make himself available to work at the Danseys Pass Coach Inn as and when required by the receiver in return for payment for his services at a reasonable hourly rate agreed with the receiver.
[48] I am not willing at this stage to remove the order requiring the receiver to provide accommodation to Mr Carr or to make an order permitting the receiver to cease trading if necessary. Instead, I will reserve leave for the receiver to apply to the Court should any difficulties arise.
Conclusion
[49] The stay is granted on the following terms:
a) None of the assets the subject of these proceedings are to be sold pending the final disposition of the appeal and the further order of the Court.
b)Mr Carr is to arrange or provide to the Big Sky Group receivers, the Humphries interests and the Anesyds Limited receiver an assignment of all the shareholding of the Carr interests in the Big Sky Group in a form satisfactory to the assignees.
c) The Court will determine the terms of the assignment should there be any disagreement by the parties.
d)The assignment is to be completed by 30 June 2008 and, if not provided by that time, the farms may be sold unless the Court orders otherwise.
e) The assignment is to be held as security for any losses which may be sustained by the Big Sky Group receivers, the Humphries interests and the Anesyds Limited receiver from 1 June 2008 until the final disposal of the appeal by the Carr interests, being losses which the Carr interests ought to pay.
Caveats
[50] Mr Rennie accepted that if a stay was granted, the caveats in favour of the Carr interests should be removed. Accordingly, an order is made under s 143 Land Transfer Act 1952 removing Caveat No 7404109.3 from Certificates of Title OT10C/326, OT10D/680, OT10D/989, OT15D/991, OT17A/382, OT18B/470, OT9C/300, OT9C/301 and OT9C/304; for removal of Caveat No 7404109.4 from Certificates of Title OT10A/1499, OT10A/1500, OT10B/1, OT15B/1181, OT15B/1182 and OT9C/319; for removal of Caveat No 7404109.5 from Certificate of title OT10A/274; for removal of Caveat No 7404109.6 from Certificate of Title OT2C/472; and for removal of Caveat 7404109.1 from Certificate of Title OT10A/1310.
Costs and Leave Reserved
[51] The trial costs and the application for costs against South Canterbury Finance Limited (a non-party) will be heard on a date to be fixed at the telephone conference schedule for 3 June 2008 at 9 am.
[52] The costs of the application for stay are reserved.
[53] Leave is reserved for any party to apply further in relation to the stay order or the orders relating to Danseys Pass.
A P Randerson, J Chief High Court Judge
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