Gibson v Robert Burnes Trustee (2009) Limited
[2015] NZHC 1022
•15 May 2015
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2014-404-3165 [2015] NZHC 1022
BETWEEN BRENDON JAMES GIBSON AND
GRANT ROBERT GRAHAM Applicants
AND
ROBERT BURNES TRUSTEE (2009) LIMITED, PAT REDPATH O'CONNOR AND KAY O'CONNOR
Respondents
Hearing: 20, 21 and 22 April 2015 Counsel:
RB Stewart QC and M Arthur for Applicants
J Cox for RespondentsJudgment:
15 May 2015
JUDGMENT OF FOGARTY J
This judgment was delivered by me on 14 May 2015 at 3.00 p.m., pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date: ………………………….
Solicitors: Chapman Trip, Auckland
Rennie Cox, Auckland
GIBSON AND ANOR v ROBERT BURNES TRUSTEE (2009) LTD AND ORS [2015] NZHC 1022 [15 May
2015]
Introduction
[1] The receivers of NZF Money Ltd (NZF) apply to the Court for orders that:
(a) The interest of Covenant Trustee Services Limited (the Trustee), as trustee for the Stockholders of NZF, ranks ahead of the interest of Robert Burnes Trustee (2009) Limited, Pat Redpath O’Connor and Kay O’Connor, as trustees of the Hillview Trust, in relation to:
(i)The sum of $1,844,087.76 (as particularised in the Schedule to the originating application) held in Chapman Tripp’s trust account plus interest;
(ii)Any other recoveries made by NZF under the loans listed in the Schedule.
(together, the Funds).
(b) The respondents pay the costs of this application.
[2] Of the sum of $1,844,087.76, as pleaded in the originating application,
$553,787.72 was in respect of the loan known as the Seaside loan. The parties have settled that issue in favour of the applicants by a consent order dated 16 March 2015 which reads:
ORDERS IN RELATION TO PROCEEDS OF SEASIDE LOAN
To: Robert Burnes Trustee (2009) Limited, Pat Redpath O’Connor and
Kay O’Connor
1The orders sought in the consent memorandum dated 13 March 2015 were granted by the Honourable Justice Asher on 16 March 2015.
2 The following orders were made:
2.1the interest of the Covenant Trustee Services Limited (Covenant), as trustee for the Stockholders of NZF, ranks ahead of the interest of Robert Burnes Trustee (2009)
Limited, Pat Redpath O’Connor and Kay O’Connor as trustees of the Hillview Trust in relation to:
(a) the sum of $553,787.72 held in Chapman Tripp’s trust account, and being recoveries under the Seaside loan (as defined in the originating application), together with all interest that has accrued on that sum; and
(b) any other recoveries made by NZF under the Seaside loan.
[3] Accordingly, I proceed on the basis that the application proceeds, amending the sum in (i) to $1,290,300.04 and removing from the schedule recoveries made by NZF under the Seaside loan.
[4] This is a dispute as to priority of securities. The applicants are the receivers of a failed finance company, NZF. The competing securities are a floating first charge, now fixed, granted by NZF and held now by the Trustee1 pursuant to the trust deed entitled “Trust Deed in respect of secured debenture stock”, on the one hand; and three security sharing arrangements (SSAs) executed between NZF and the respondents as trustees of the Hillview Trust (Hillview), on 11 October 2010, (2)
and on 15 December 2010.
[5] The SSAs allocate the legal and beneficial interests in three assets of NZF being debts and securities that NZF had obtained from borrowers, being property development companies. The loans to them were secured by mortgages registered over land in favour of NZF and General Security Agreements (GSAs) over the personal property/collateral of the borrower. Each SSA assigned a priority to the legal and beneficial interest in the relevant charges to Hillview in priority to NZF and so to the Trustee for the Stockholders.
[6] These Stockholders were subscribers of funds to NZF.2 The debenture secured a floating but first ranking security over all the assets of NZF. The Stockholders, as beneficiaries of the trust participated in the floating first charge
granted to the Trustee. The effect of the SSAs was to postpone the securities from a
1 Covenant Trustee Services Ltd is the successor to Covenant Trustee Company Ltd, the original trustee.
2 Securities Act 1978.
first charge for the Stockholders to a second charge, in respect of three valuable debts/loans, and the assets secured thereby.
[7] The receivers argue that the directors of NZF had no power to enter into the SSAs to create these prior interests in favour of Hillview, postponing the interests of the Stockholders, as the SSAs were not entered into in the ordinary course of business.
[8] The trust deed prevented NZF from issuing any stock other than in accordance with the provisions of the deed.3 Such stock, known as security stock under the deed, could be issued by the company as continuing security for payment of any fluctuated amount of present and future liabilities or contingent liabilities of the company.4 That stock ranked pari passu as to the payment of principal monies and interest notwithstanding it was created or issued at different times or on different terms. Principal monies meant the money owing to the Stockholders, i.e. the members of the public who had invested money in NZF in return for taking up such stock.
[9] Clause 4 of the trust deed is at the core of the dispute. It is set out in full in an annexure to this judgment. Clause 4.1 charged all the assets of NZF as security for the payment of all money payable to the Stockholders:
4.1 Charges
(a) Charges: The Company hereby charges its Assets in favour of the Trustee as continuing security for the payment of all Secured Money:
(b) Nature of charges: Such charge is a floating charge except where the floating charge has become a fixed charge pursuant to any provision of this Deed and accordingly, until the Enforcement Date and subject always to the provisions of this Deed, the Company shall not be hindered or prevented in any way from making distributions to its shareholders or from dealing with, or disposing of, any of its Assets in the ordinary course of business.
[10] “Secured money” was defined in cl 1.1 of the deed:
3 Clause 3.1
4 Clause 3.2
“Secured Money” means all principal, interest and other amounts payable in respect of the Stock and all other money payable to, or at the direction of, the Trustee or any Receiver, or to any Stockholder under or pursuant to this Deed or the terms of issue of any Stock, and a reference to any “Secured Money” includes all or any part of it.5
[11] The respondents contend that the SSAs were entered into in the ordinary course of business so that NZF was entitled to grant priority to the new lenders ahead of the priority of the Trustee for the Stockholders.
The original issues between the parties have reduced to one issue
[12] Hillview opposed the application on the grounds that by the terms of the SSAs, Hillview held in priority to the interest of the Trustee under cl 4 of the trust deed. The Trustee was not a party to the SSAs. The opposition to the application pleaded principally that:
(d) That in each Security Sharing Agreement the Respondents were bonafide purchasers of legal title to the relevant reality without notice of the interest of Covenant (the trustee).
(e) That the three Security Sharing Agreements … were transactions in
the ordinary course of business of [NZF].
[13] In the course of the hearing, the respondents abandoned (d): the proposition that the trustees of the Hillview Trust were bonafide purchasers of the legal estate without notice of the interest of the Trustee. This was a proper concession given that the Hillview Trust trustee, Mr PR O’Connor, was at all material times a director of NZF.
[14] Also abandoned was an argument that there was no legal estate. It was common ground that this dispute involves property (land) issues and personal property issues. The land issues were the funds realised in respect of real property secured by mortgages known as the “escrow funds”.
[15] There was also an argument that the Trustee should have caveated the titles recording the claim based on the floating charge. There being no evidence of
5 Clause 1.1 of the 1999 Deed.
reliance on title, and a contest as to whether or not this was required, this was abandoned.
[16] The personal properties were recoveries from guarantors of the land securities. Claims under the Personal Property Securities Act 1999 (PPSA) were abandoned, given registration by NZF and in the absence of any registration by Hillview of its interest.
[17] That left issue (e) above, of whether or not entry by NZF into the SSAs was
“in the ordinary course of business”.
The respondents’ argument that the SSAs were entered into in the ordinary
course of business within the terms of Clause 4 of the Trust Deed
[18] The Hillview position is that the SSAs were transactions in the ordinary course of business of NZF, and that the Trustee took no steps inconsistent with that position at any stage. Mr Cox submitted that the manner in which the Trustee responded to the notice, by way of draft, of the first SSA transaction which NZF had ever entered into, a transaction variously known as the Reesby or Spinnaker facility is directly relevant to the question of whether the Hillview Trust SSAs were in the ordinary course of business. As both sets of transactions were essentially the same character.
[19] The respondents argue that at about the same time that the Hillview Trust SSAs were being processed, senior personnel of the Trustee were closely involved in reviewing the Spinnaker documentation and came to the conclusion that these transactions were in order.
[20] Mr Cox submitted that the Spinnaker Capital and Hillview Trust SSAs were simply instances of NZF “trading in securities”, as it was entitled to do. That trading in securities was in the ordinary course of business for NZF and so fell within the scope of cl 4.1(b) of the trust deed. He submitted:
NZF business was to trade in securities. The security trading arrangement was a variation on the same theme that NZF had always conducted business on.
[21] As already noted,6 the effect of the Hillview SSA transactions was to enable Hillview to advance funds to NZF, secured by first ranking mortgage securities ahead of NZF, and so the Trustee, and so ahead of the Stockholders.
[22] Mr Cox submitted that the Spinnaker transactions achieved the same outcome (as the Hillview transactions) albeit by a slightly different process. He argued that there was effective, although not written, approval by the Trustee, of the Spinnaker Capital transactions. Therefore as the Hillview Trust SSAs were similar, the Trustee, was satisfied that the Hillview SSAs were in the ordinary course of business.
[23] Mr Cox accepted that no SSA transactions had been conducted by NZF prior to October 2010. He argued, however, that these transactions were ordinary course of the business when responding to the very difficult situation facing NZF in September/October 2010.
The objective test for ordinary course of business
[24] In StockCo Limited v Gibson the Court of Appeal affirmed the use of a two- stage process for determining whether a sale was in the ordinary course of business: 7
(a) determine the ordinary course of business in the seller, here (NZF);
and
(b)determine whether the sale was made in the ordinary course of business.
[25] There are a large number of cases and academic discussion elaborating on this test. The elaboration in the cases often responds to the material facts that are being examined. Many of the cases have their factual setting being businesses on the
brink of insolvency.
6 At [5] above.
7 Stock Co Limited v Gibson [2012] NZCA 330, (2012) 10 NZBLC 99-709.
(a) The ordinary course of business of NZF prior to the Global Financial Crisis
[26] NZF was one of a large number of finance companies in New Zealand, generally known as “second tier lenders”, second after the trading banks. NZF operated by raising money from the public who purchased debenture stock. NZF used the money received from the public to make investments. The repayment of this money to the Stockholders was secured under the trust deed.
[27] In the ordinary course of its business as a finance company, NZF as lender, entered into four loan agreements with property development companies that are relevant to this case: The Brick Street loan, the Flat Bush loan, the LCR loan, and the Seaside loan. As security for each of these loans, the borrowers granted a charge over all their assets and mortgages over the land to which the loans related. These are clearly transactions in the ordinary business of NZF.
[28] The provision of the security stock granting to the Stockholders the benefit of the floating first charge, pari passu, was also the ordinary business of NZF.
(b) Determining whether the assignments by NZF of a share in their charge over all the assets and mortgages of the above four loans were in the ordinary course of business
[29] Under the SSAs, the Hillview Trustees would advance an amount to NZF. In return, NZF, as “financier”, would assign and transfer an equivalent portion of existing assets, the debts from borrowers, called loans, and the security for these loans, to the Hillview Trustees. NZF, as “custodian”, would then hold those assets on trust for itself and the Hillview Trustees.
[30] In October 2010, NZF had run out of funds to meet its maturing liabilities then falling due. It urgently needed several million dollars to meet liabilities falling due in the balance of October. The liabilities of NZF to all the debenture shareholders were covered by the Government Guarantee Scheme (GGS). That was due to expire on 12 October.
[31] During September and October the senior executives of NZF were actively seeking sources of capital funds. On 7 October, senior representatives of NZF met
with senior representatives of the Trustee. NZF submitted for examination a table showing maturing deposits and the dates when they matured and deposits at call, on the one hand, and, on the other hand, available facilities and cash to meet the maturities.
[32] On 7 October it showed cash on hand of $635,900, with cumulative maturities and deposits on call at ($346,039).
[33] On 8 October, however, it showed cumulative facility and cash available of
$3,931,900 and cumulative maturities and deposits on call of ($1,544,486).
[34] For 11 October it showed the same available facilities of $3,936,900 but showed that cumulative maturities and deposits on call at ($3,235,774).
[35] This picture worsened by a further $625,464 on the last day of the GGS,
12 October, going out to ($3,861,238) verses cumulative facilities and cash of
$3,931,900.
[36] The sum of $3,931,900 was achieved by adding to the available cash of
$635,900 two other facilities: being from the Spinnaker transactions, $1,296,000; and, the $2m to be advanced by Hillview: together adding to $3,296,000. Neither facility was in place on 7 October. The first Spinnaker SSAs are dated 8 October, and are the “Suntherland” and “Dunnett” transactions. Mr Miller, the managing director of the Trustee, noted the spreadsheet referring to this facility generally as the “Reesby” Facility. It is common ground that that is also called the “Spinnaker” Facility. Mr Miller also noted the $2m as “pat deb stock”. In other words, he was assuming that Hillview, would purchase $2m of debenture stock. (“Pat” is Pat O’Connor.)
[37] It was expected that the Reesby/Spinnaker transactions would eventually deliver $2.93m. Mr Pat O’Connor was a director of NZF. Through his family trust, Hillview, he was already an investor in NZF in the order of $1.8m, as a Stockholder. He was proud of the company, wanted it to survive and was prepared to advance another $2m, but not as a debenture Stokeholder. He wanted to have a first mortgage
security of quality. To obtain the $2m and avoid receivership, NZF provided
Hillview with first mortgages of quality by way of the SSAs.
[38] On 4 November 2010, the Trustee had another meeting with NZF to discuss liquidity issues and general matters. The Trustee’s executives were advised that if liquidity continued to be an issue, further shareholder support might be available. On 2 December, an expert, Mr Jackson has calculated that NZF needed an additional
$300,000 from Hillview to prevent it running out of cash. Mr Jackson’s analysis shows that but for the $300,000 injected on 2 December, there would have been a shortfall of $51,157.08 on 3 December. His analysis does show that NZF would have returned to a positive cash position on 6 December. However, if they had not received the $300,000, NZF would have had to either avoid or delay making payments totalling $51,157.08. The SSA documentation was done on 15 December, assigning the priorities in a loan known as the LCR loan. NZF later repaid $200,000 under the LCR SSA.
[39] Mr Stewart QC noted that the Court of Appeal in StockCo referred to a number of factors that had been emphasised in Canadian cases when determining whether transactions in the ordinary course of business:8
(a) The reason for the transaction: It ought not to have occurred as a response to financial difficulties or in suspicious circumstances.
(b)The frequency of the type of transaction: An unusual or isolated transaction might be viewed differently from a routine one.
(c) Parties to the sale: Was the buyer an ordinary everyday consumer or a dealer or financial institution?
(d) Nature and significance of transaction: It ought to be one that a
manager might reasonably be expected to carry out on the manager’s
8 Stock Co, above n 7 at [77]-[79]; Fairline Boats Ltd v Leger [1980] 1 PPSAC 218 (Ont HC) at [13]-[17]; 369413 Alberta Ltd v Pocklington (2001) 271 AR 280, [2001] 194 DLR (4th) 109 at [22].
own initiative without making prior reference back, or subsequent report, to superior authorities.
(e) The arm’s length nature of the transaction: A transaction between a company and a party with whom it is related should receive careful scrutiny.
(f) Price.
(g) Quantity of goods/amount of loan. (h) Where the agreement is made.
[40] There is no doubt that the above criteria (a), (b), (d) and (e) are engaged. The Spinnaker SSAs and the Hillview SSAs were being considered while and because the highest level of management of NZF was grappling with the threat of imminent insolvency and receivership.
[41] The most important fact for the ordinary course of business test is that on the eve of the cancellation of the Crown guarantee to depositors, NZF was on the brink of material default, unless it received $1,296,000 from the first Spinnaker facilities and received the $2m from Hillview. Internally NZF executives were in no doubt that if they could not persuade the executives of the Trustee that NZF would not default, the Trustee would appoint a receiver before the expiry of the GGS.
[42] NZF had been considering the prospect of the Reesby transactions from at least Monday, 27 September. In an exchange of emails on that day, there is evidence that NZF had no intention of considering any transaction which might require trustee approval. On the 27th, Mr J Callow of Reesby and Co, who were merchant bankers, emailed Mr Mark Thornton of NZF advising that he could cobble together $5m quite quickly if NZF wanted a quick cash release, saying:
NZF simply assigns part of the loans to us or if you don’t want to get trustee approval for this, we simply advance funds directly to the existing borrowers (or their receiver if applicable). (Emphasis added.)
[43] That led to an NZF email from Mark Thornton to Craig Alexander, NZF’s
external lawyer, on the subject of possible first mortgage funding by Reesby:
Hi Craig, please see below
As the Trustee thing is too hard what are your thoughts on how we can effectively bypass the borrower to keep control of the funds flow? (Emphasis added.)
[44] I am satisfied that email records NZF effectively rejecting the proposition that they would take the Reesby type transactions to the Trustee for approval.
[45] This is confirmed by the reply by Mr Alexander to Mr Thornton, which I
quote in full:
Mark, if the assignment is a realisation in the ordinary course of business trustee consent is not be needed under the debenture trust deed. They may want a security release though to be safe. Only other possible option is NZF use GSA rights to raise funding in the borrower’s name to refinance part of the loan, but that is tricky given the cost of funds.
So only real option is to do the assignment within the ordinary course of business levels where no trustee consent is needed.
[46] The first evidence of the Trustee executives knowing of the Reesby Facility and of the O’Connor/Hillview proposal was at that meeting on 7 October 2010. Mr Richard Spong recorded in his file note “Reesby Facility $2.93 million security sharing deed to get security sharing details from Craig Alexander”. (The $2.93m was the expected total of Spinnaker facilities.) At 5.16 pm, Mr Alexander emailed to Mr Graham Miller, of the Trustee, the “Dunnett” (Reesby/Spinnaker deed of priority) as “an example of a security sharing deed”. With the example was a message saying:
Graham, this is an example security sharing deed as requested. There is no facility agreement with NZF, Spinnaker Capital will have its own loan agreement and securities with the borrower.
This summary is not correct. The Spinnaker structure required NZF as “second charge holder” to execute a deed granting Spinnaker its own separate securities priority over an existing set of NZF securities, in priority to the Trustee’s floating first charge.
[47] There is some evidence that this document was sent on through to the external solicitor of the Trustee, Mr Hanna, and discussed with him. Within the very limited timeframe, there was an opportunity for the Trustee to intervene and scrutinise the Reesby transactions. We need to keep in mind the timeframe. They only learned about it on 7 October 2010 and received the “Dunnett” draft after 5.00 p.m. The “Dunnett” and “Suntherland” Spinnaker deeds are dated 8 October 2010. The Trustee did not challenge the Spinnaker transactions at that time, knowing they were about to be done.
[48] The Trustee gave no scrutiny to the Hillview transaction. This is because at the meeting they held with NZF executives on Thursday, 7 October, two of the Trustee’s executives separately recorded that the funds to be injected by Pat O’Connor were $2m of debenture stock. Mr Spong’s record was: “$2m of debenture stock injected by Pat O’Connor”, and wrote “Pat O’Connor” against the entry for $2 million on the cashflow forecast handed out at the meeting. On his note, as already noted, Mr Miller writes: “Pat deb.” beside entry for $2m on cashflow forecast. These notes were critiqued on the basis that NZF representatives never said the $2m would be secured by debenture stock. Whether or not, it is clear that the Trustee’s executives assumed Mr O’Connor would invest as a Stockholder.
[49] The Trustee did not learn that the $2m Hillview advance had been transacted as SSA until 23 February 2011. The context then being notice from NZF of a related party transaction with the Hillview Trust. The next day the Trustee requested copies of the Hillview loan approvals in order for the Trustee to see whether transactions came under related party exposure. Mr Alexander for NZF advised Mr Lockhart of the Trustee that the related party transaction definition had been amended in December 2010 and the SSAs were no longer caught. He acknowledged that at 12
October 2010 they would have been caught by the definition. The correspondence included an examination of these transactions against the test of related party exposure and the Trustee was satisfied that they did not breach the trust deed. There was no examination of the test of “in the ordinary course of business”.
[50] As explained above, in the week before 12 October, NZF was on the brink of default, and with that, receivership. In its September 2010 prospectus under the heading, “Liquidity Risk”, the prospectus provides, inter alia:
Liquidity risk is the risk that NZF will not have sufficient funds to meet its ongoing obligations. A risk exists that NZF could encounter difficulty in raising funds at short notice to meet its lending and repayment commitments due to NZF principally raising funding from the issue of secured deposits.
NZF controls the liquidity risk by:
•generally lending on short term loans and borrowing (through its secured deposits) for longer terms;
• maintaining monthly cash flow forecasts;
•maintain a liquidity policy to enable NZF to meet its forecasted commitments;
• transferring loans to other members of the group for cash;
• seeking further funding from external providers.
(Emphasis added)
[51] Mr Cox submitted that NZF’s seeking of funds from Reesby/Spinnaker and from Mr Pat O’Connor/Hillview, was just an instance of conduct in the ordinary course of business to control liquidity risk. That is the same time NZF was also selling off its loan book. For example, the trustee had consented to a sale of $6.22m of mortgages and loans to a related party, NZF Mortgages Warehouse, a trust, on
14 September 2010. His submission was:
It follows … that the business of NZF particularly at this period [September/October 2010] was considerably wider than simply raising debenture stock and lending to borrowers. Covenant by its actions appears to have been comfortable with both related party transactions, and NZF seeking alternative funding solutions during the global financial crisis in order to survive. … The Applicants now seek to re-write history, and in particular, NZF’s ordinary course of business, in order to attempt to try to hold onto the SSA proceeds.
If, as the applicants assert, NZF was a finance company that could only be funded by security debenture stock, then Covenant would have “pulled the pin” well in advance of the expiry of the Government Guarantee Scheme on
12 October 2010, especially in the light of what was going on in the finance company sector at the time, and the funding shortfalls highlighted in the
McGrath Nicholl reports.
(The McGrath Nichol reports were prepared for Treasury, which had responsibility for the Government Guarantee Scheme.)
[52] Accordingly, it was in this context that in this Court the Hillview respondents relied on what they said was the Trustee’s approval for this kind of transaction in Spinnaker, as evidence that NZF when embarking on the Hillsview SSAs, was acting in the ordinary course of business; that is, ordinary in the context of the need to address liquidity risk in the state of the market in October 2010. It was agreed that the ordinary course of business issue was the utilisation of existing mortgages, securing existing liabilities to NZF, and deferring the priority of the same, to the detriment of the Stockholders, for the benefit of the new funder. Even though this new priority potentially reduced the value of the existing floating first charge to the Stockholders.
[53] Mr Cox submitted that senior executives of the Trustee, Mr Miller, Mr Spong, Mr Lockhart, and its external legal advisor, Mr Hanna, by not challenging and so inferentially approving the Spinnaker transactions, were agreeing that SSAs were transactions in the ordinary course of business.
[54] The Trustee never gave written approval to the Spinnaker transactions. Nor did it say in writing that approval was not required. The Trustee did have a very short opportunity to intervene on the Spinnaker deals but did not.
[55] There was no evidence, however, by NZF or the Trustee as to whether or not the Spinnaker SSAs were considered by them to be transactions done in the ordinary course of business. Both parties did not materially waive solicitor/client privilege.
[56] The law is clear that what is in the ordinary course of business is an objective standard. To be sure, judgments of professionals in the market place may assist the Court in reaching that judgment, but they are not definitive and such judgments need to be examined in the context of the pressures both of time and outcome if the transactions are not done.
[57] Mr Cox, for Hillview, was not able to cite any authority recognising a transaction done in response to financial difficulties, but never done before, as being a transaction in the ordinary course of business. It was common ground NZF had never entered into SSAs previously.
[58] The effect of NZF entering into a security sharing arrangement was to install a new creditor with priority over a particular set of assets of the company, postponing the interest and rights of the Stockholders until after those prior charges had been satisfied. This is done without the consent of the Stockholders’trustee.
[59] The trust deed provided to the Trustee the power to release any part of NZF’s assets from the operation of the charge. But it imposed a process on the Trustee. Clause 4.4(a) provides:
4.4 Partial releases:
(a) Release by Trustee: At any time before the Enforcement
Date the Trustee may:
(i) upon the request in writing and at the cost of the Company, without any approval by the Stockholders unless in the opinion of the Trustee the interests of the Stockholders would be materially prejudiced; and
(ii) upon being satisfied as a result of receiving such valuations or other evidence as the Trustee may specify that full market or otherwise reasonable value is being received, or that the circumstances otherwise justify such release;
release any part of the Assets from the operation of the charge thereover created by or pursuant to this Deed, upon such terms and conditions (if any) as the Trustee thinks fit and the Trustee may execute all documents which may be necessary to effect any such release; provided that the Trustee shall not concur in the sale and subsequent release of the whole or a part of the Assets whose Value exceeds 25% of Total Tangible Assets without the sanction of an Extraordinary Resolution unless in the opinion of the Trustee the security for the Stockholders following such release will not be materially less favourable to the Shockholders.
[60] Not only was there no request in writing, but there was no evidence by way of valuation or other evidence proffered to justify the release.
[61] Clause 4.4 manifests recognition of the underlying financial expectation that any release or partial release of a security is to the detriment of the Stockholders unless it can be justified in the particular facts.
[62] It is telling that neither the proponents of Spinnaker nor Hillview had the confidence to invoke cl 4.4 at the time the transactions were entered into.
[63] For the applicants, Mr Arthur argued that there was a material distinction between the Spinnaker transactions and those of Hillview. This was that in Spinnaker there was a refinancing.
[64] It is presumed from Mr Callow’s email of 27 September,9 that Spinnaker lent the money directly to the party which was the borrower from NZF. It did not lend the money to NZF. However, in each Spinnaker transaction NZF was a party to and agreed to the first priority of Spinnaker in a Deed of Priority of Mortgage. NZF would not have done that without consideration. On 7 October NZF told the Trustee they anticipated $1,296,000 from the first Spinnaker transactions before 12 October. It is more probable than not that all or the bulk of the money loaned by Spinnaker to the borrower would be passed by the borrower onto NZF in reduction of the debt to NZF. For the borrower, it needs to keep in mind, it was already a borrower from and so debtor to NZF.
[65] The three Hillview SSAs were each in the same form. Each provided that Hillview Trustees would advance a sum directly to NZF, defined as the “Participant’s Interest". Each provided that the Hillview Trustees’ interest would be repaid in priority to NZF from the underlying borrower’s repayments or from realisation of security granted by the underlying borrower. Each SSA provides at cl 2.2 that:
On payment of the Principal Sum Acquired from the [Hillview Trustees] to [NZF], [NZF] hereby assigns and transfers to the [Hillview Trustees] free of encumbrances a proportion of the legal and beneficial interest in the Loan, Loan Agreement and Securities represented by the Interest Acquired with the first ranking priority as specified in clause 3.2.
[66] The Hillview SSAs then go on to provide that NZF, in its capacity as “Custodian” will hold both the legal and beneficial interests in the loans and securities etc “on trust” for each of NZF and The Hillview Trustees, for their respective entitlements.
[67] It will be recalled, the evidence such as we have is that under the Spinnaker transactions the financial advance was to the debtor to NZF, not to NZF. But in terms of examining the impact of the Spinnaker and Hillview transactions upon the value of the securities held by the pre-existing Stockholders, the consequence is the same. In both cases NZF borrowed more. In both cases the lender of the new advances acquires a priority interest ahead of the Stockholders in the personal charges and mortgages taken by NZF to secure the loan advanced to the borrower. The value of the first ranking floating charge was diminished, in both cases.
[68] Also the Hillview facilities directly involved a related party in the contract with NZF and so for that separate reason required the consent of the Trustee. But if neither arrangement, Spinnaker or Hillview, was in the ordinary course of business, they required the consent of the Trustee anyway.
[69] The submissions of Mr Arthur presumed the issue was the application of cl
4.1(b).10 He did not rely on cl 4.3(a). Clause 4.3 reads:
4.3 Other charges:
(a) Restriction on other charges: The Company shall not:
(i) except as provided in clause 4.3(b), create or permit to subsist any charge over its Assets ranking in priority to, or pari passu with, the charges in favour of the Trustee created by or pursuant to this Deed; or
(ii) except as permitted by this Deed, alter the charge created by this Deed.
(b) Trustee’s Consent: The Company may, with the prior written approval of the Trustee (which approval shall not be unreasonably withheld), create a charge over its Assets ranking pari passu with the charge created by or pursuant to this Deed, to secure debenture stock ranking pari passu in point of security with the Stock.
[70] In my preliminary view, this obligation under 4.3(a) is independent of 4.1(b) and is a prior restriction on NZF independent of the issue of disposal in the ordinary course of business. It is arguable that the combined effect of cls 4.1(b) and 4.3 is that where 4.3(a)(i) applies, the Trustee’s consent is required but is likely to be granted if it is the disposal of its assets in the ordinary course of business. And is within the 25% limit in cl 4.4. The matter was not fully argued before me. These comments are intended by me to be obiter. This judgment is given on the issue placed before the Court, whether or not these transactions were in the ordinary course of business, applying cl 4.1(b).
Price: the relevancy of full value given for securities
[71] So far we have been looking at the criteria (a), (b), (d) and (e) set out in [35]
above. I turn to (f) price, and related, (c) and (g).
[72] I note at the outset that these criteria were not relied upon by Mr Cox. His principal argument has already been recorded. It was that the Trustee had adequate notice of the character of the Spinnaker transactions, considered it internally, took advice externally from Mr Hanna, and took no action. That amounted to approval of the Spinnaker transactions and thus an inference that they were in the ordinary course of business.
[73] Mr Stewart was concerned that prior to the Court of Appeal decision in Stock, there were a number of cases which seemed to suggest that provided full consideration was given for a transaction, it would always be in the ordinary course of business. Mr Stewart cited academic commentary and dicta to the contrary.
[74] There is no evidence that the Spinnaker investors or Hillview obtained the first priority over charges and mortgages for anything less than full value. There was no precise evidence on it but that would be highly unlikely. For, after all, these investors were lending to a second tier finance company in an economy where a large number of finance companies had by this staged failed during the course of the GFC.
[75] Giving full value for the priority meant that if the charges or mortgages had to be realised, that full value would likely be recovered, it being in priority to the Stockholders’ claim.
[76] It would be odd then to defend the transactions on the grounds of full value when the obvious mischief of the transaction was the diminishment of the value of the otherwise first ranking floating charge, to the detriment of the Stockholders. It is telling that Mr Pat O’Connor was prepared to inject $2m into the company, but not as a Stockholder, rather only if he could have a quality first mortgage security over land.
[77] For these reasons, it is not necessary to go beyond StockCo’s application of the criteria of price.
[78] StockCo concerned dealings of the Crafar Group that had dairy farming business interests. StockCo had provided financing in various ways to four dairy farming companies owned by interests associated with Mr Allan Crafar, including Plateau Farms Limited (Plateau). Plateau sold four thousand heifers to StockCo and StockCo thereupon leased those heifers to Nugen Farms Limited. White J in the High Court determined that the business of Plateau at the relevant time was that of a substantial dairy farming operation, which involved the production and sale of milk solids and also some buying and selling of cows, heifers, calves and other livestock.
[79] The Court of Appeal made the following finding:
[73] In the High Court, White J highlighted a number of unusual features of the transaction, which he said meant it was not a simple or straightforward stock-yard or farm-yard sale of livestock. In particular, it involved a purchaser that was a financier; it was designed to raise finance for a farm purchase by Nugen; lawyers were involved; the price was discounted; Plateau provided an undocumented loan to Nugen; and the proceeds of the sale did not become subject to the Banks’ security interest.
…
[75] We agree with the High Court Judge that the transaction was highly unusual. The events of 1 August, during which the transaction was restructured to provide a way of avoiding the need to obtain the consent of the Banks, highlighted this.
…
[77] We start with the factors identified as potentially relevant by Linden J in
Fairline Boats Ltd v Leger. These factors are:
...
(d) Price charged: White J mentioned that a discounted price was paid, and that would also indicate against the sale being in the ordinary course of Plateau’s business. This was contested by Mr Cooke on appeal, who argued that despite there being a discount, the price paid was a fair market price. We are prepared to proceed on the basis that the price was a fair market price, in which case this is a neutral factor.
[80] In this case, on the balance of probabilities, the funds received by NZF, directly from Hillview Trustees and indirectly via the Spinnaker transactions likely reflected a fair market price of the value of the outstanding debts to NZF which were being in part repaid and consequential full value for the priority given to secure the repayment of those advances. In that regard, the pricing in this case is again a neutral factor.
Conclusions
[81] Consideration of the relevant criteria points overwhelmingly to a finding that the Hillview transactions were not in the ordinary course of business. The $2m was injected in October when the company was on the brink of receivership. The situation was so urgent that the money was transferred before the documentation was done. There was a later advance of $300,000 in December which similarly was made to maintain liquidity in a less extreme situation, but in order to avoid default in the sense of delaying payment of due liabilities.
[82] The mode of financing had never been done before and was inconsistent with the protection given by the trust deed to the Stockholders. The decision to invest was made by Mr Pat O’Connor and for the benefit of the beneficiaries of his family’s family trust, Hillview.
[83] I have no doubt that the three SSA transactions were not in the ordinary course of business. It follows that the transactions do not fall within the qualification to cl 4.1(b) of the trust deed.
Remedy
[84] The contest has been between two equitable interests. The Trustee’s interest has priority over the Hillview Trust’s interest by being the first in time. The Hillview Trustees no longer dispute that they were on notice of the Trustee’s interest. The trust deed does not permit these transactions as none of them were in the ordinary course of NZF’s business. By cl 4.1(a), NZF has charged all of its assets in favour of the Trustee. In the deed it has limited its ability to create charges in any way diminishing the floating charge.
[85] By cl 4.3(a), the company has bound itself not to create or permit any charge over its assets ranking in priority to or pari passu or except as permitted by the deed. It never obtained the Trustee’s consent to create such a charge under cl 4.3(b). It has not succeeded in persuading the Court that the Hillview Trust transactions were in the ordinary course of business, thereby falling within the exception under cl 4.1(b) of the deed.
[86] It follows that the charge first in time, in favour of the Trustee, prevails against the respondents’ interest. The receivers are accordingly entitled to the orders sought, as amended above11 to reflect the consent order on 15 March.
[87] I reserve the question of costs. If the parties cannot agree on costs, I will receive submissions limited to five pages each, circulated in draft in advance.
11 At [1] and [4]above.
ANNEXURE
4 CHARGES AND DEALINGS WITH ASSETS
4.1 Charges
(a) Charges: The Company hereby charges its Assets in favour of the
Trustee as continuing security for the payment of all Secured Money.
(b)Nature of charges: Such charge is a floating charge except where the floating charge has become a fixed charge pursuant to any provision of this Deed and accordingly, until the Enforcement Date and subject always to the provisions of this Deed, the Company shall not be hindered or prevented in any way from making distributions to its shareholders or from dealing with, or disposing of, any of its Assets in the ordinary course of business.
(c) Ranking of charges: The charge given pursuant to this Deed is a first charge except that the charge may rank pari passu with any charge given in accordance with clause 4.3(b).
(d)Fixing of charge: The Trustee may at any time, by written notice to the Company, convert the floating charge created pursuant to clause 4.1(b) into a fixed charge in respect of the Assets or any Asset, if an Event of Default has occurred or if in the opinion of the Trustee (formed reasonably) those Assets or that Asset is likely to be seized, taken or become subject to any security or is otherwise in jeopardy.
(e) De-Crystallisation: The Trustee may at any time, by written notice to the Company, convert the fixed charge created pursuant to clause 4.1(d) into a floating charge in respect of the Assets or any Asset.
4.2 Charges over offshore assets:
(a) Nature of charge: The Company may from time to time, with the consent of the Trustee, execute in favour of the Trustee a charge over any Asset situate outside New Zealand, as collateral security for the Secured Money. Any such charge may be, at the election of the Company, either unlimited as to amount or for a specific sum, and shall be in such form and contain such provisions, as the Trustee may reasonably require.
(b)Registration: The Company shall at its own cost do all such things, including registering or recording the charge in such manner as may be required by the laws in force in the place where the Asset charged by that charge are situate, to ensure that the charge is a valid binding and effective charge.
4.3 Other charges:
(a) Restriction on other charges: The Company shall not:
(i)except as provided in clause 4.3(b), create or permit to subsist any charge over its Assets ranking in priority to, or pari passu with, the charges in favour of the Trustee created by or pursuant to this Deed; or
(ii)except as permitted by this Deed, alter the charge created by this Deed.
(b)Trustee’s Consent: The Company may, with the prior written approval of the Trustee (which approval shall not be unreasonably withheld), create a charge over its Assets ranking pari passu with the charge created by or pursuant to this Deed, to secure debenture stock ranking pari passu in point of security with the Stock.
4.4 Partial releases:
(a) Release by Trustee: At any time before the Enforcement Date the
Trustee may:
(i)upon the request in writing and at the cost of the Company, without any approval by the Stockholders unless in the opinion of the Trustee the interests of the Stockholders would be materially prejudiced; and
(ii)upon being satisfied as a result of receiving such valuations or other evidence as the Trustee may specify that full market or otherwise reasonable value is being received, or that the circumstances otherwise justify such release;
release any part of the Assets from the operation of the charge thereover created by or pursuant to this Deed, upon such terms and conditions (if any) as the Trustee thinks fit and the Trustee may execute all documents which may be necessary to effect any such release; provided that the Trustee shall not concur in the sale and subsequent release of the whole or a part of the Assets whose Value exceeds 25% of Total Tangible Assets without the sanction of an Extraordinary Resolution unless in the opinion of the Trustee the security for the Stockholders following such release will not be materially less favorable to the Stockholders.
(b)Application of Proceeds: The proceeds of sale of any part of the Assets may until the Enforcement Date, subject to any terms and conditions imposed by the Trustee pursuant to clause 4.4(a), be applied by the Company in such manner as it deems expedient for the purpose of carrying on its business.
4.5 Further assurance: The Company shall deliver to the Trustee any transfer, assignment, security, or other deed or document, and shall do any other thing, which the Trustee reasonably requires to enable it to:
(a) perfect the security created or intended to be created by or pursuant to this Deed; or
(b) facilitate the realisation of any Assets; or
(c) exercise all or any of the rights, powers and remedies conferred on the
Trustee or any Receiver by or pursuant to this Deed or by law,
and for the purposes of this clause a certificate in writing signed by the Trustee to the effect that any particular transfer, assurance or other thing required by it is reasonably required shall be conclusive evidence of that fact.
4.6 Appointment of attorney: For so long as any Event of Default is continuing unremedied the Company appoints the Trustee and any Receiver and any director of the Trustee and any officer of the Trustee nominated by the Trustee and each of them severally to be the attorney or attorneys of the Company (each an “Attorney”) to do anything on behalf of the Company in its name and at its expense, which the Company agrees or is liable to do under the provisions of this Deed or which, in the Attorney’s opinion, is necessary or expedient to give effect to any right, power, or remedy conferred on the Trustee or a Receiver by this Deed or by law (including executing deeds and other instruments and instituting, conducting and defending legal proceedings) and the Company hereby ratifies anything done by any Attorney in accordance with this clause 4.6.
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