Harris v Bank of New Zealand

[2018] NZHC 2386

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV 2017-404-1338

[2018] NZHC 2386

UNDER

the Receiverships Act 1993

IN THE MATTER

of an application for directions under section 34 of the Act and agency approval under section 31 of the Act

UNDER

the Land Transfer Act 1952

IN THE MATTER

of an application for removal of a caveat

BETWEEN

KEITH VINCENT HARRIS and IAIN ANDREW NELLIES

Applicants

AND

THE BANK OF NEW ZEALAND

First Respondent

contd: …/2

Hearing:

On the papers

Appearances:

M J Tingey for Ninth Respondent

S Sparks, Tenth Respondent, in person

Judgment:

11 September 2018

JUDGMENT OF JAGOSE J

This judgment is delivered by me on 11 September 2018 at 3.00 pm pursuant to r 11.5 of the High Court Rules.

Solicitors:
Bell Gully, Auckland

And to:
Tenth Respondent

.....................................................

Registrar / Deputy Registrar

HARRIS v BNZ & Ors [2018] NZHC 2386 [11 September 2018]

THE BANKHOUSE TRUST LIMITED

Second Respondent

THE COMMISSIONER OF INLAND REVENUE

Third Respondent

GLOVER NO 2 LIMITED
Fourth Respondent

IGNITE ARCHITECTS LIMITED

Fifth Respondent

URBAN LIVING LIMITED
Sixth Respondent

MINTER ELLISON RUDD WATTS
Seventh Respondent

BBG HOLDINGS LIMITED
Eighth Respondent

VIVIAN FATUPAITO and ANDREW HAWKES of KPMG

Ninth Respondents

SARAH SPARKS
Tenth Respondent

[1]    The ninth respondents, liquidators of CIT Holdings Limited (the “Company”), seek directions under s 284 of the Companies Act 1993 as to the correct characterisation – as debt, or equity – of a sum claimed in the liquidation by the fourth respondent, Glover No 2 Limited (“Glover No 2”), a company associated with the tenth respondent, Ms Sparks.

[2]    The general context of the present application is outlined in my judgment of 29 September 2017, determining another of the liquidators’ applications.1 For present purposes, it is enough to note the Company appeared to hold property as bare trustee through principal and supplementary joint venture agreements, entered with trusts associated respectively with Ms Sparks, and with her former husband, Mr Olliver.

[3]    No other party takes any formal position in relation to the liquidators’ application for directions – despite the liquidators’ direct request for at least Mr Olliver’s and Ms Sparks’ input, “as their interests are primarily affected and it is likely that they have evidence not available to the liquidators which would be relevant to determination of the issues” – although Ms Sparks reasserts Glover No 2 “remains” an ‘unsecured creditor’ of the Company in the amount claimed.2

Background

[4]    Under the joint venture agreements, Ms Sparks’ Waimarie Trust was to contribute capital to the joint venture, to enable it (through the Company, with substantial funding also from the Bank of New Zealand) to acquire nine unit-titled properties in Glover and Waimarie Streets in Auckland’s St Heliers.

[5]    Mr Olliver’s Glover Trust would contribute property to the joint venture. The properties were formerly owned by another entity associated with Mr Olliver, but securing that entity’s very significant indebtedness by mortgage to New Zealand

1      Harris v Bank of New Zealand [2017] NZHC 2374.

2      The receivers’ opposition dated 13 July 2017 related only to the liquidators’ priority recovery of their costs and expenses on the present application, and has since been overtaken by events, including the receivers’ retirement from their appointment: Harris v Bank of New Zealand, above n 1, at [50].

Guardian Trust (“NZGT”).3 NZGT sold its debt and mortgage to another entity, which immediately sold the properties to the Company at a price substantially less than the book value of the debt.4

[6]    The joint venture’s overall objective is said by the Company’s former accountant, Ann Dew, to have been to settle one of the properties as the family home on Waimarie Trust, leaving the other development properties under the control of Glover Trust. However, only interests associated with Ms Sparks contributed any funds to achieve that end; Mr Olliver’s interests were relieved of indebtedness formerly secured over the properties, but contributed no funds to their acquisition by the Company. Relevantly, Mr Olliver was subject at the time to a court-approved proposal under the Insolvency Act 2006, by which Mr Olliver divested himself of all his assets, including any that may otherwise have been open to being clawed back into his estate.5

[7]    The Company ultimately was put into liquidation on application of the Commissioner of Inland Revenue, in reliance on the Company’s outstanding tax debts.6 The Company’s assets have now been realised, and the liquidators hold approximately $3.8m for distribution. The materiality of the sought characterisation is, if debt, Glover No 2 will receive a substantial distribution as an unsecured creditor; if equity, distribution to Waimarie Trust will be residual (as with to Glover Trust).

Context

[8]    Glover No 2 claims $3,675,050 in the liquidation. That appears more precisely to refer to funding totalling $3,645,690.03, comprising payments of $1,961,949.27 and

$1,683,740.76 provided by it to the Company in March and April 2009, and undisputed costs awards in Glover No 2’s favour in the amount of $25,330.00.

[9]    The joint venture agreement and supplementary agreement refer to the two (then,  anticipated)  payments  respectively  as  Waimarie  Trust’s  ‘contributions’  of

3      Harris v Bank of New Zealand, above n 1, at [12]-[13].

4      At [35]-[37].

5      St Laurence Lending Ltd v Olliver HC Auckland CIV-2008-404-7417, 13 May 2009.

6      Commissioner of Inland Revenue v CIT Holdings Ltd [2015] NZHC 3207.

“initial capital of $2,000,000.00” and “further capital of $1,675,000.00”. The payments from Glover No 2 are referable to those contributions.

[10]   The former agreement records at 3.1 the funding requirements of the joint venture will be met “[b]y the initial capital contribution and borrowing by the parties”, which ‘borrowing’ “shall include the initial loan advances received by [the Company] for the purchase of the [p]roperty”. At 3.2, the agreement provides “[a]ny future amounts advanced to the Joint Venture by a party shall become repayable by the Joint Venture to each Joint Venturer upon the termination of this agreement”. Further, at 3.3, the agreement provides any excess in funds “shall be refunded to the parties in proportion to their respective percentage interests”. Those ‘percentage interests’ were 60 per cent Waimarie Trust (and 40 per cent Glover Trust): their definition in the Waimarie joint venture agreement explained Waimarie’s percentage interest “yet having contributed to be cash equity to the Joint Venture”. The latter agreement requires the joint venture to apply the further capital to the purchase of further property: in the event, the nine unit-titled properties were acquired by the Company in those two tranches.

[11]   The Company’s financial statements for the years ending 31 March 2009 to 2012 record the sum of $3,655,000 as a liability, attributed to “Advance – Waimarie Trust”. At that same time, when Ms Sparks had control of the Company, Waimarie Trust’s financial statements record that sum as an asset, being “[i]nvestments”. During that period, the Company’s financial statements also recorded an approximate $24,000 advance to Waimarie Trust, which increased to approximately $106,000 in 2011 and

$182,000 in 2012. Ms Dew gave evidence in other proceedings “[d]uring 2012 a part repayment of $342,100 was made in respect of the Waimarie advances”.

[12]   Subsequently, then under Mr Olliver’s control, the Company’s draft financial statement for the nine months to 31 March 2014 identifies the sum of $3,655,000 as “JV Partners’ Contributed Equity”, and records advances to related parties, including

$542,657 to Waimarie Trust. A note to the ‘equity’ entry records:

CIT Holdings Ltd trades as bare trustee for assets owned by Waimarie Joint Venture. Funds contributed by the Joint Venture Partners were used to enable to enable the purchase of the properties in Waimarie Street. These properties

have provided security for bank finance to support the company’s continued operations.

[13]   Both entry and note may have been incentivised by an opinion obtained by Mr Olliver from PricewaterhouseCoopers (“PwC”), on instructions to advise “the correct accounting treatment in the Waimarie Trust of its capital contributions to the Waimarie Joint Venture (the JV) of $3,675,000”. PwC advised:

Under both [GAPP and NZ IFRS] the trust would recognise its share of the assets, liabilities, income and expenses of the JV. Under this treatment the capital contributed by the Waimarie Trust of $3,675,000 is not a loan or advance to either [the Company] or the JV but its cost of its share in the underlying assets and liabilities of the JV as determined under the JV agreement. The net difference between the partner’s [sic] share of the assets and the liabilities will equate to the partners [sic] investment in the JV.

Analysis

[14]   Waimarie Trust’s contribution of “capital”’ does not of itself assist in construing what is meant by references to it in the joint venture and supplementary agreements, because “in the abstract [capital] can refer to equity capital, debt capital or capital as a whole”.7

[15]   The correct characterisation of Glover No 2’s ‘contributions’ falls instead to be determined from construction of the agreements:8

… what a reasonable and properly informed third party would consider the parties intended the words of their contract to mean[,] … aware of the commercial or other context in which the contract was made and of all the facts and circumstances known to and likely to be operating on the parties’ minds.

[16]   The literal wording of the agreements is conflictual. On the one hand, “any future amounts advanced to the Joint Venture by a party”, Waimarie Trust “yet having contributed”, is repayable to that party on termination.9 But the termination provision itself provides “any remaining cash assets shall be divided between the parties in

7      Commerce Commission v Fonterra Co-operative Group Limited [2007] NZSC 36, [2007] 3 NZLR 767 at [21].

8      Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC, [2010] 2 NZLR 444 5 at [19].

9      By “repayable to each Joint Venturer” must mean ‘to that party’; the alternative construction – the amount of the advance must be paid twice (or even in equal shares), once “to each Joint Venturer”

– is illogical.

proportion to their respective percentage interests in completion of the termination of the Joint Venture”. On the other, Waimarie Trust’s contribution of “cash equity”, if ‘excess’ (for example, if the property was not contributed, in whole or in part, or acquired for less), is open to being refunded 60 per cent to Waimarie Trust and      40 per cent to Glover Trust.

[17]   Yet there is no apparent justification for such enrichment of Glover Trust, particularly if it had failed to contribute the anticipated property, or secured it more cheaply. And such would be in conflict with the Court-approved insolvency scheme, which was grounded in the proposition Mr Olliver had no present or contingent assets.

[18]   The better construction of the agreements is they make provision for contributions of capital as advances to the Company, repayable to the contributor on termination, while allowing also for the joint venture’s operation to give rise to funds and cash assets, for proportionate distribution if in excess or at termination.

[19]   I am reinforced in that view by what may be a typographical error in the former agreement’s definition of ‘percentage interests’. There, Waimarie Trust’s percentage interest is explained “yet having contributed to be cash equity to the Joint Venture”. That is the only basis for construing Waimarie Trust’s contributions as contributions of equity, rather than of credit. But the explanation would make better linguistic sense if it read “yet having contributed to the cash equity to the Joint Venture”. The best linguistic sense would be “not having contributed to the cash equity to the Joint Venture”. In other words, Waimarie Trust’s percentage interest is exclusively to be defined by the residential and development division of the properties, and is not informed by its contributions of capital. That would be more in keeping with genesis of the joint venture, and recognising the agreements’ objective explained by Ms Dew.

Directions

[20]Under s 284 of the Companies Act 1993, I direct:

(a)Waimarie Trust’s payments of capital under the principal and supplementary joint venture agreements are loan advances to the

Company, establishing the Company’s debt to Waimarie Trust in that amount;

(b)in determining the quantum of Waimarie Trust’s proof of its claim in the Company’s liquidation, the liquidators are entitled to deduct from that amount:

(i)the sum of $342,100 evidenced by Ms Dew in partial repayment of the Company’s debt to Waimarie Trust;10 and

(ii)the sum of $26,846.48 in net costs awarded in favour of the Company;11 and

(c)in distributing any amount to Waimarie Trust, the liquidators are to withhold $200,557 (being the additional partial repayment contended in other proceedings to have been made by the Company to Waimarie Trust).12

Costs

[21]   Given the absence of any opposition to the liquidators’ successful application, they are entitled to their 2B costs in the amount of $9,812.00 from the Company.

—Jagose J

10 See [11] above.

11     Costs of $14,486.88 and $37,689.60 being claimed against Glover No 2 in Glover No 2 Ltd v CIT Holdings Ltd [2014] NZHC 2786 at [1] and [7].

12     CIV 2014-404-2077.