Harvey v Gateshead Investments Ltd
[2013] NZHC 2253
•30 August 2013
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2011-404-5909 [2013] NZHC 2253
BETWEEN CHRISTOPHER MICHAEL HARVEY First Plaintiff/Counterclaim Defendant
ANDRACHEL SUSAN HARVEY Second Plaintiff
ANDRICHARD JAMES PARKER Third Plaintiff
ANDGATESHEAD INVESTMENTS LIMITED
First Defendant/First Counterclaim
Plaintiff
ANDPARANUI PROPERTIES LIMITED Second Defendant/Second Counterclaim Plaintiff
ANDBETA PACIFIC CORPORATION LIMITED
Third Defendant/Third Counterclaim
Plaintiff
Hearing: 6 May 2013
Counsel: J Toebes for Counterclaim Plaintiffs
LAB Kemp for Counterclaim Defendant
Judgment: 30 August 2013
JUDGMENT OF KATZ J
This judgment was delivered by me on 30 August 2013 at 4:30 pm
Pursuant to Rule 11.5 High Court Rules
Registrar/Deputy Registrar
Solicitors:
J Toebes, JT Law, Wellington
L Kemp, Kemp Barristers & Solicitors, Auckland
HARVEY & ORS v GATESHEAD INVESTMENTS LIMITED & ORS [2013] NZHC 2253 [30 August 2013]
Introduction
[1] Mrs Rachel Harvey and her late husband Mr Michael Harvey owned, as joint
tenants, a family home in Coatesville (“Property”). Mr Harvey died in February
2011 and Mrs Harvey was subsequently adjudicated bankrupt, on 19 December
2012.
[2] The issue in these proceedings is whether, prior to Mr Harvey’s death, their joint tenancy of the Property was severed. If it was, then Mr Harvey’s half interest in the Property will pass beneficially to his two children under the terms of his will. If it was not, then Mr Harvey’s interest in the Property will vest in Mrs Harvey by survivorship. In that event, the entire Property will vest in the Official Assignee for the bankrupt estate of Mrs Harvey.
[3] The competing interests in this case are accordingly those of Mr Harvey’s two children and Mrs Harvey’s creditors.
Factual background
[4] Mrs Harvey is a nurse. She also had interests in three rest home businesses and personally guaranteed the debts of those businesses. Defaults occurred under the relevant loan agreements. Demand was served on the guarantors, including Mrs Harvey, on 18 November 2009.
[5] Summary judgment proceedings were issued against Mrs Harvey on
26 November 2009. Those proceedings were not defended. On 28 January 2010 judgment was entered against Mrs Harvey for $1,442,800, plus interest and costs. On 9 February 2010 a charging order in favour of the judgment creditors was registered against the title to the Property.
[6] Meanwhile, in an attempt to remove the matrimonial home from the reach of Mrs Harvey’s creditors, Mr and Mrs Harvey entered into an agreement (“Agreement”) under the Property (Relationships) Act 1976 (“PRA”) on
16 December 2009.
[7] Clause 1.1 of the Agreement provided as follows:
The parties agree that they shall own any Property separately or jointly or in the shares indicated and described or valued or categorised in the schedule on and from the agreement date under the respective name of each party.
[8] Pursuant to the Agreement, Mrs Harvey agreed to transfer her interest in the Property to Mr Harvey as his separate property. In exchange Mr Harvey gave up any interest in the rest home businesses. Any property purchased from the sale proceeds of any separate property would remain separate property, even if the sale proceeds were invested in other future properties or intermingled with relationship properties.
[9] The Agreement was expressed to be binding on the parties in all circumstances including bankruptcy, the taking of property and execution by creditors, marriage, separation and so on. Each party agreed to forthwith execute all transfers, assurances and other documents which were necessary to implement the Agreement.
[10] On 15 February 2010 (without knowledge of the charging order) Mr Harvey agreed to transfer the Property to the Chrislo Trust, the beneficiaries of which are his two children. Due to the charging order, however, neither the legal transfer of the Property into Mr Harvey’s sole name, nor the subsequent transfer to the Chrislo Trust, could be registered under the Land Transfer Act 1952.
[11] Later that year, on 5 November 2010, Mr Harvey made a will appointing his son, Christopher Harvey (the counterclaim defendant) as his executor. I will refer to Christopher Harvey as “the executor” to avoid any confusion with the late Mr Harvey. Mr Harvey was apparently very ill by this time. The only asset of any real value in Mr Harvey’s estate was the Property. He devised it by will to the Chrislo Trust, reserving a life interest for Mrs Harvey, subject to certain conditions.
[12] On 3 February 2011 Mr Harvey died. Two months after his death, the executor registered a notice of claim under the PRA against the title to the Property, in reliance on the Agreement. On 21 July 2011 the judgment creditors sealed a sale order in respect of Mrs Harvey’s interest in the Property.
[13] These proceedings were commenced on 23 September 2011. An injunction application by the executor and a subsequent summary judgment application by the judgment creditors have already been determined. Associate Judge Faire held, on the summary judgment application, that the Agreement was entered into with the intention of, and in any case having the effect of, defeating creditors in terms of s 47
of the PRA.1 It was therefore void as against creditors. The Judge found, however,
that there were arguable defences to the claim that Mr Harvey’s joint interest in the Property had passed to Mrs Harvey by virtue of survivorship. That is, therefore, the only live issue remaining in this proceeding.
Determination of joint tenancies – an overview of the key legal principles
Nature of joint tenancy
[14] Joint tenancy arises where a parcel of land is vested in two or more persons without any indication that they are to take distinct and separate shares.2 Joint tenants do not hold proportionate shares in property in the way that tenants in common do. Joint tenants each have a right, with their co-tenants, to the whole property, but do not have the right to any particular share in it. Joint tenancy regards co-owners of a property as, in effect, a single entity. However, even though joint tenants do not have the right to any particular share in the property, each has a “potential” equal share which can be severed in their lifetime.3
[15] Joint tenancy dates back to feudal times, providing English feudal overlords with an efficient tax collection system. Feudal dues were more easily recoverable where ownership of tracts of land remained unfragmented. Thus, at common law, where a grant was made to two or more persons it was presumed that the grantor intended to create a joint tenancy of the legal interest, in the absence of evidence to
the contrary. In New Zealand that presumption is now statutory.4
1 Harvey v Gateshead Investments Ltd [2012] NZHC 1059.
2 G Hinde and others Hinde, McMorland & Sim Land Law in New Zealand (online ed, Lexis
Nexis) at [13.004].
3 Ibid, at [13.013].
4 Land Transfer Act 1952, s 61.
[16] The two key features of a joint tenancy are the right of survivorship and the existence of the “four unities”,5 namely unity of possession, unity of interest, unity of title, and unity of time. The four unities reflect the concept that joint tenants have interests in the property that are equal in all respects.
[17] The right of survivorship is a critical feature of joint tenancy. On the death of the first joint tenant, their interest accrues by operation of law to the survivor or survivors.6 The right of survivorship is not a right in any legal sense. Nor is there any vesting or transfer of ownership of a deceased joint tenant’s interest. When a joint tenant dies his or her interest simply ceases to exist. In Corin v Patton Deane J expressed the position as follows:7
When one joint tenant dies during the subsistence of the joint tenancy, his interest ceases: the interests of the remaining joint tenants expand by accretion. When there is but one survivor, the joint tenancy has run its course and the survivor becomes the full owner of the whole property.
Severance of joint tenancies
[18] Severance is the process by which either unity of interest or unity of title are destroyed, resulting in the conversion of the joint tenancy into a tenancy in common.8 Severance destroys the right of survivorship.
[19] The judgment of Sir William Page Wood V-C in Williams v Hensman9 has been described as the ‘locus classicus’10 or the starting point for any discussion of the law of severance.11 The key paragraph, cited in numerous authorities, is the
following:12
5 Hinde, above n 2, at [13.004].
6 Ibid, at [13.005].
7 Corin v Patton (1990) 169 CLR 540 (HCA) at 575.
8 Hinde, above n 2, at [13.013].
9 Williams v Hensman (1861) 70 ER 862, 30 LJ Ch 878.
10 S Bridge, M Dixon and C Harpum Megarry & Wade: The Law of Real Property (8th ed, Sweet & Maxwell, London, 2012).
11 Lord Denning in Burgess v Rawnsley [1975] 1 Ch 429 at 438: “nowadays everyone starts with…Williams v Hensman”.
12 This version of the text is from Johnson and Hemming’s Reports and is the version usually quoted. The Law Journal report is generally recognised as being a less reliable record of the
Judge’s actual words. Page Wood V-C, with only one known exception, delivered all of his judgments ex tempore, on the basis that writing judgments was “positively injurious” to his health and would cause more delay to the parties “than could be compensated by any supposed clearness in the judgment”: Peter Luther, Williams v Hensman and the uses of history (1995) 15
Legal Studies 219.
A joint tenancy may be severed in three ways: in the first place, an act of one of the persons interested operating upon his own share may create a severance as to that share. The right of each joint tenant is a right by survivorship only in the event of no severance having taken place of the share which is claimed under the jus accrescendi. Each one is at liberty to dispose of his own interest in such manner as to sever it from the joint fund - losing, of course, at the same time, his own right of survivorship. Secondly, a joint tenancy may be severed by mutual agreement. And, in the third place, there may be a severance by any course of dealing sufficient to intimate that the interests of all were mutually treated as constituting a tenancy in common. When the severance depends on an inference of this kind without any express act of severance, it will not suffice to rely on an intention, with respect to the particular share, declared only behind the backs of the other persons interested. You must find, in this class of cases, a course of dealing by which the shares of all the parties to the contest have been affected, as happened in Wilson v Bell and Jackson v Jackson.
[20] Unfortunately, over 150 years after Williams v Hensman, there is still considerable uncertainty about the scope of Sir William Page Wood VC’s three categories, including in particular his third category (severance by course of dealing).
[21] In New Zealand a joint tenancy may be severed either at law or in equity.13 A legal severance will occur upon registration of the appropriate instrument under the Land Transfer Act 1952. This was not possible in the present case, due to the prior registration of a charging order. The key issue is therefore whether there was an equitable severance of the joint tenancy prior to Mr Harvey’s death. Establishing whether severance has occurred in equity is, unfortunately, not always straightforward.
[22] Five possible methods of severance are now recognised.14 However, the two methods which are relevant in this case are the second and third categories in Williams v Hensman, namely:
(a) Severance by mutual agreement, which will arise where both (or all)
of the joint tenants agree to convert their joint tenancy into a tenancy in common.
13 This can be contrasted with the position in England where it is not possible to have a tenancy in common at law, but only in equity.
14 Hinde, above n 2, at [13.013].
(b)Severance by “any course of dealing sufficient to intimate that the interests of all were mutually treated as constituting a tenancy in common”.
[23] I will consider each in turn.
Was Mr and Mrs Harvey’s joint tenancy severed by mutual agreement?
Submissions
[24] The judgment creditors submitted that neither the Agreement, nor any transactions taken to effect it, resulted in an equitable severance of the joint tenancy.
[25] The authority and instruction form for e-dealing signed by Mr and Mrs Harvey recorded that the intended transfer was from Mr and Mrs Harvey, as joint transferors, to Mr Harvey as sole transferee. The judgment creditors submitted that this particular form of conveyance (the disposition of jointly owned property by both joint owners to one of them) cannot be construed as an act of severance of the joint tenancy. It is an act of the joint tenants acting together. It matters not who the transferee is, whether it is a third party or Mr Harvey. The legal effect is the same.
[26] Counsel for the judgment creditors relied on the case of Re Allingham15 in support of the proposition that a joint sale does not sever a joint tenancy. Rather the joint tenancy converts to joint ownership of sale proceeds. In that case a husband and wife entered into a contract to sell their jointly owned property. The deposit was paid into the husband’s bank account. It was held that no severance of the joint tenancy had occurred. The sale, of itself, had merely converted a joint tenancy in the land into a joint tenancy in the proceeds of sale (following earlier Irish authority that a sale by all joint tenants does not, of itself, sever the joint tenancy in the purchase money).
[27] Counsel for the executor submitted, on the other hand, that Mr and
Mrs Harvey’s joint tenancy of the Property was severed by mutual agreement. A
transfer of a half interest in the Coatesville property by Mrs Harvey to Mr Harvey
15 Re Allingham [1932] VLR 469.
(one joint tenant to another joint tenant) was submitted to be an alienation capable of severing the joint tenancy. The transfer contemplated in the Agreement would have achieved severance of the joint tenancy because it involved a transfer of Mrs Harvey’s undivided one half share to Mr Harvey. Thus, it would have destroyed one of the four unities. Severance of the joint tenancy was said to be something which occurs as a “shadow” to, and concurrently with, the alienation of her interest by Mrs Harvey. “It is an incident of the alienation”.
[28] Counsel for the executor noted that it is possible to register a transfer under the Land Transfer Act 1952 from two joint tenants to the same two parties as tenants in common in equal shares. It is also possible to do this by seeking an order under the PRA. The situation under the Agreement was submitted to be analogous. The Agreement contained the disposition of the entire property into the sole name of Mr Harvey. That disposition constituted a severance of the joint tenancy.
[29] Counsel for the executor also submitted that a factor which should be taken into account in the exercise of the Court’s equitable jurisdiction is that the result which the executor seeks could be achieved by applying for orders under the PRA. In particular counsel relied on the decision of JCB v BJS.16
Discussion
[30] The most straightforward example of severance by mutual agreement in equity is where the co-tenants have entered into a specifically enforceable contract to sever their joint tenancy.
[31] There has been some controversy as to whether an agreement that is not specifically enforceable (for example, because it is an oral agreement for the sale of land) would be sufficient to sever a joint tenancy in equity. However, the weight of authority now appears to support the view that an agreement to sever a joint tenancy does not have to be specifically enforceable to be effective in equity. As Sir John
Pennycuick observed in Burgess v Rawnsley:17
16 JCB v BJS FC New Plymouth FAM-2010-43-818, 10 October 2011.
17 Burgess v Rawnsley [1975] 1 Ch 429 at 446 per Sir John Pennycuick; See also P Butt Land Law
(6th ed, Law Book Co, 2010) at 257 – 258.
The significance of an agreement is not that it binds the parties; but that it serves as an indication of a common intention to sever, something which was indisputably within their power to do.
[32] In Burgess v Rawnsley all three members of the English Court of Appeal were unanimous that an agreement by one joint tenant to sell her interest to her co-tenant for £750 effected a severance in equity, by mutual agreement. This was despite the fact that any agreement was short-lived, as the tenant increased her sale price to £1000 almost immediately after agreeing to sell for £750. The agreement was not specifically enforceable as it was not in writing as required by the Statute of Frauds. Nevertheless, the fact of agreement indicated that the parties no longer intended the tenancy to operate as a joint tenancy. This severed the joint tenancy.
[33] There is relatively limited New Zealand authority on point, although I note that in Bevin v Smith18 the Court of Appeal held that the contract need not be unconditional (and therefore specifically enforceable) before it would regard equitable title as having passed.
[34] The willingness of Judges to find severance to have occurred, sometimes on the basis of evidence that appears to be rather thin, has deep roots in equity. As far back as 1709, Cowper LC in York v Stone commented that “a joint tenancy is an odious thing in equity”.19 Sir William Page Wood VC observed in Williams v Hensman that:20
In these questions of joint tenancy the court has frequently been driven to rely on minute grounds for holding a severance to have taken place, by the unfortunate circumstance that the legislature has not thought fit to interpose by introducing the rule that expressed words shall be required to create a joint tenancy in place of the contrary rule which is established, that words pointing to severalty of interest are necessary to constitute a tenancy in common.
[35] Such an observation appears to be equally applicable to many of the cases that followed Williams v Hensman. Where the right of survivorship potentially gives rise to injustice in a particular case, the Courts have often attempted to avert this by
finding severance to have occurred, provided there is a proper (but often not strong)
18 Bevin v Smith [1994] 3 NZLR 648.
19 York v Stone (1709) 1 Salk 158, 91 ER 146.
20 At 557; 866.
evidential basis for doing so. Burgess v Rawnsley is a clear example. Lord Denning observed in that case that “the thing to remember today is that equity leans against joint tenants and favours tenants in common”.21 The Court concluded that equitable severance had occurred on the basis of evidence that many commentators have noted was particularly thin. Nevertheless, Burgess v Rawnsley remains the leading modern English case on the law of severance.
[36] Unlike the historic cases, many of the modern cases involving severance have arisen in the context of the breakdown of marital or de facto relationships. At the outset of a relationship the parties’ preference is usually to hold property as joint tenants, with the property ultimately vesting by survivorship in the partner who lives the longest. However, as the learned authors of Adams’ Land Transfer22 observe, even when the parties have a conscious intention to register as joint tenants at the outset, the focus of their intention may not have been a breakdown of the relationship. Fisher J similarly observed, in Cossey v Bach, that “the events which have since occurred may fall outside the ambit of the original intention”.23
[37] In Abela v Public Trustee24 Rath J summarised the issue in this way:25
There was a principle that “equity leans against tenancies” because the right of survivorship unduly favoured the person of longevity: cp Meagher, Gummow and Lehane, Equity [1975] par 325 at [69] ... in the case of husband and wife, joint tenancy, in favouring longevity, is usually achieving the object for which it was created; but once the matrimonial relationship has broken down, the original purpose of the joint tenancy is at an end, and a common intention of severance may be more readily be inferred from a course of conduct.
[38] His Honour concluded that the proper inference in that case was that the parties agreed upon an immediate severance of their joint tenancy in the context of Court proceedings for the division of their matrimonial property, leaving to the future only a decision as to their respective shares. His Honour found that this constituted severance by mutual agreement or, if necessary, severance by course of
conduct.
21 At 438.
22 S Scott and others Adams’ Land Transfer (online looseleaf ed, Lexis Nexis) at [61.8.1].
23 Cossey v Bach [1992] 3 NZLR 612 (HC) at 629.
24 Abela v Public Trustee [1983] 1 NSWLR 308.
25 At 315.
[39] In the marital breakdown cases, the principle of survivorship often no longer serves its intended purpose. Against this background, Courts will closely examine all the relevant circumstances to determine if there is evidence of a common intention to sever the joint tenancy. If there is, even if it falls short of constituting a specifically enforceable agreement, Courts will often find severance by mutual
agreement to have occurred.26
[40] In the present case there was no relationship breakdown. However, the circumstances are to some extent analogous. With Mrs Harvey’s debts far exceeding her assets and bankruptcy looming, survivorship would no longer serve the usual purpose within an ongoing marital relationship. It would not provide Mrs Harvey with a home and a degree of financial security in her widowhood. Rather, the operation of survivorship would simply result in a potential “windfall” to Mrs Harvey’s creditors, by giving them recourse to assets they would not have been entitled to had Mr Harvey lived.
[41] Mr and Mrs Harvey’s ultimate goal was to remove Mrs Harvey’s interest in the Property from the reach of her creditors. Such a goal was unlawful and could not be effected, due to s 47 of the PRA. Nevertheless the evidence, viewed “in the round” does, in my view, indicate that the parties had a common intention to sever their joint tenancy (and the associated right of survivorship) in the face of Mrs Harvey’s mounting financial difficulties.
[42] Mrs Harvey’s evidence says so explicitly. She deposes that she was a registered proprietor of a “half share” in the Property, subject to a charging order and a mortgage. She further says that:
I also consider that I have no beneficial interest in the other half interest in the Coatesville property which was owned by my husband, Michael Harvey, now deceased. I had agreed with my husband to terminate the joint tenancy of the property concurrently with a transfer of my interest in an agreement dated 16 December 2009. Registration of that transfer was thwarted by the charging order which I have referred to above.
26 Refer Davis v Smith [2011] EWCA CIV 1603; Wallbank v Price [2007] EWHC 3001 (Ch), [2008] 2 FLR 501; and Abela v Public Trustee [1983] NSWLR 308.
[43] Obviously, to some extent, such evidence is self-serving. However, Mrs Harvey was not cross-examined on it. I take it into account, together with all other relevant evidence, in determining whether the joint tenancy was severed by mutual agreement.
[44] As for Mr Harvey, following the Agreement he entered into a further agreement to sell the (entire) Property to the Chrislo Trust. Mr Harvey could not, however, sell Mrs Harvey’s interest in the Property to the Chrislo Trust, because to do so would infringe s 47(2) of the PRA. He was however, legally entitled to deal with his own interest as he saw fit, including by transferring it to a third party. Any such transfer would have severed the joint tenancy.
[45] Mr Harvey was apparently very ill when he made his final will. He again endeavoured to protect the interests of his children. He devised the Property by will to the Chrislo Trust, for the benefit of his children, with a life interest only to his wife. Such conduct is again inconsistent with any ongoing belief or intention on his part that the Property be held jointly (and pass to his wife by survivorship).
[46] Mr Harvey’s will was made with the benefit of legal advice. Obviously, if Mr and Mrs Harvey held the property as joint tenants at the time when Mr Harvey made his will, Mr Harvey could not devise the Property (either in whole or in part) by will, due to the automatic operation of survivorship. I therefore infer that neither Mr Harvey nor his advisers believed at that time that the Property was held in a joint tenancy. This was despite the fact that they must have realised that the Agreement was vulnerable as a voidable transaction.
[47] Given the lengths to which Mr Harvey went to endeavour to protect the interests of his children in the Property, I have no doubt that if he had believed that the Property may still have been held by him and Mrs Harvey as joint tenants he would have taken steps to formally address this. It would have been relatively straightforward to have signed (but not registered) documents converting the joint tenancy to a tenancy in common. In my view Mr Harvey’s conduct from December
2009 onwards is consistent with the fact that he no longer intended or believed there to be a joint tenancy of the Property. There was therefore a common intention on the
part of Mr and Mrs Harvey that the joint tenancy be severed and the associated right of survivorship be extinguished.
[48] Counsel for the executor placed considerable weight on the form of the proposed conveyance, which was intended to be a transfer from Mr and Mrs Harvey to Mr Harvey solely. However, in my view it would be artificial in cases such as this if the issue of whether there had been a severance of a joint tenancy in equity turned on the particular form of legal conveyance proposed (but ultimately not implemented). Both joint tenants are seized of the whole property, rather than having distinct interests in it. Historically the recognised way for one joint tenant to convey his interest to another joint tenant was by way of deed of release. Such a deed operated to extinguish the releasing tenant’s interest. However, any conveyance or grant by one joint tenant to another has historically been construed as a release. Courts have looked to the substance of what is intended, rather than the form.
[49] The judgment creditors submitted, in effect, that where one joint tenant agrees to release or transfer their interest to the other (as opposed to a third party) this will not sever the joint tenancy. However, in Burgess v Rawnsley an agreement by one co-tenant to sell to the other was sufficient to sever a joint tenancy in equity. Some of the marital breakdown cases have involved similar circumstances. In this case Mrs Harvey agreed to “transfer” her interest to Mr Harvey. As in Burgess v Rawnsley, the transaction was not completed. In Mrs Harvey’s case it was not due to any change of heart, but because it was not legally possible to complete the transfer. I see no basis to distinguish Mrs Harvey’s agreement to sell to Mr Harvey in this case from Mrs Rawnsley’s agreement to sell her interest to her co-tenant in Burgess v Rawnsley.
[50] Taking into account all of the circumstances I have outlined above, it is my view that the joint tenancy between Mr and Mrs Harvey was severed by mutual agreement. The evidence, viewed as a whole, indicates that both parties had a common intention to sever their joint tenancy and its associated right of survivorship. This was not able to be legally effected, but was nevertheless effective in equity.
Was Mr and Mrs Harvey’s joint tenancy severed by a course of dealing?
[51] Given my finding that the tenancy was severed by mutual agreement it is not strictly necessary to consider whether it was also arguably severed by a course of dealing. I will, however, address this issue briefly.
[52] In Williams v Hensman the final method of severance identified was by a course of dealing sufficient to intimate that the interests of all are mutually treated as constituting a tenancy in common:27
...a joint tenancy is a right which any one of the joint tenants may determine when he pleases; and, if all continue to deal on the footing of their interests not being joint, it would be most inequitable to treat it as a joint tenancy when all the parties, whether in ignorance or not, have dealt with their interests as several.
[53] In Burgess v Rawnsley, it was held that a Court may be entitled to infer a common intention to sever a joint tenancy by a course of conduct on the basis of negotiations carried on by the joint tenants even though those negotiations did not result in an agreement. This method of severance was accordingly recognised as distinct.28
[54] The learned authors of Hinde McMorland & Sim suggest29 that the distinction between this method of severance and that of severance by mutual agreement is difficult to draw and that severance by course of dealing may have arisen to circumvent difficulties associated with the writing requirement promulgated by the Statute of Frauds, the course of dealing being an implied or an inferred contract as opposed to an express contract. There is considerable force in that observation.
[55] I have found that Mr and Mrs Harvey severed their joint tenancy by mutual agreement. However, in the alternative, and to the extent that severance by course of
dealing is a distinct method of severance, Mr and Mrs Harvey engaged in a course of
27 At 868.
28 Lord Denning MR observed (at page 439) that in distinguishing between severance by mutual agreement and severance by a course of conduct Page Wood V-C had shown that a course of dealing “need not” amount to an agreement (expressed or implied) for severance. Browne LJ (at page 444) felt that each was “a separate category”. Sir John Pennycuick also viewed course of dealing as not merely being a subheading of mutual agreement (at page 447).
29 Hinde, above n 2, at [13.13].
conduct pursuant to which they treated their interests as several, and acted accordingly. Had it been necessary, I would have found that their joint tenancy was severed in equity by course of conduct.
What is the impact of the Agreement being void against creditors pursuant to s 47(2) of the PRA?
[56] The final issue is whether Associate Judge Faire’s finding that the Agreement is void as against creditors pursuant to s 47(2) of the PRA effectively voids or reverses any severance that would otherwise have occurred.
Section 47(2) PRA
[57] Section 47(2) of the PRA provides relevantly as follows:
47 Agreements to defeat creditors void
(1) Any agreement, disposition, or other transaction between spouses or partners with respect to their relationship property and intended to defeat creditors of either spouse or partner is void against those creditors and the Official Assignee.
(2) Any such agreement, disposition, or other transaction that was not so intended but that has the effect of defeating such creditors is void against such creditors and the Official Assignee during the period of 2 years after it is made, but only to the extent that it has that effect.
(Emphasis added)
[58] Section 47 was considered by the Supreme Court in Felton v Johnson:30
[20] In our view, s 47(1) is properly to be understood as an adaptation of the concepts underlying the Statute of Elizabeth and s 60, as interpreted by the Courts, to the situation of transactions between spouses and de facto partners. A transaction which is intended to defeat creditors of either of them is liable to be set aside by any creditor who can be seen to have been prejudiced by the making of the transaction. In the event of a challenge by such a creditor the transaction is regarded as having been set aside to the extent necessary to satisfy the claim of the creditor but, as was the case with the Statute of Elizabeth, it is not to be treated as having been void ab initio. Only after electing to invoke s 47(1), and subject to the rights of innocent purchasers for value, can the creditor have recourse to the property in question.
30 Felton v Johnson [2006] 3 NZLR 475 (SC).
[21] Subsection (2) is a modification of subs (1), but the underlying concepts are the same. The creditors of which it speaks are the same persons (“such creditors”). It deals with transactions which have unintentionally prejudiced them. Such transactions are “void” against creditors only "during the period of 2 years after [the transaction] is made”. Read against the historical background which we have outlined, where “void” has been understood to mean "void if a creditor elects to treat it as such”, the natural meaning of subs (2) is that the transaction must be challenged by a creditor “within” the two years. It is “void” only “during” that time. Afterwards, it is not void. If, within two years of the transaction, a creditor brings a proceeding under s 47(2) or levies execution of a judgment against the debtor spouse or partner on the property in question, the transaction is avoided, and to the extent necessary to meet the claim the property reinvests in the person who disposed of it.
Submissions
[59] The primary focus of the judgment creditors’ submissions was that the Agreement did not sever the joint tenancy. On the s 47(2) issues, the judgment creditors’ position was essentially that the sole purpose of the Agreement was to prevent Mrs Harvey’s interest in the Property vesting in her bankrupt estate (if she was adjudicated bankrupt) or being available to be the subject of a charging order/writ of sale process. The Agreement must therefore be set aside in its entirety. The intention to sever the joint tenancy cannot survive as some form of adjunct or “shadow” to the Agreement, to enable Mrs Harvey to have an equitable interest in the Property as against the judgment creditors.
[60] The executor submitted, in reliance on Felton v Johnson, that s 47(2) will not reverse or void any severance of the joint tenancy, unless that severance had the effect of depleting the assets available to creditors as at the date of the Agreement. The executor submitted that it did not. He relied on Peldan v Anderson31 in support of his submission.
[61] The executor further submitted that Mr Harvey’s death (and the passing of his interest by survivorship to Mrs Harvey) would otherwise result in the judgment creditors reaping a “windfall” by gaining recourse to assets which they would not otherwise have been entitled to. Prior to Mr Harvey’s death the executor had no legal right to Mr Harvey’s interest in the Property. If Mrs Harvey had been
bankrupted prior to Mr Harvey’s death this would have severed the joint tenancy and
31 Peldan v Anderson (2006) 229 ALR 432.
extinguished any rights of survivorship. Similarly, if a writ of sale (of Mrs Harvey’s interest in the property) had been effected prior to Mr Harvey’s death this would also have severed the joint tenancy and extinguished any rights of survivorship. The most the judgment creditors could have received in such circumstance would have been a half share in the Property.32
[62] The executor submitted that it would be inequitable and contrary to the interests of justice (as well as the intentions of Mr and Mrs Harvey) if Mrs Harvey’s creditors were now able to have recourse to Mr Harvey’s interest in the Property, in preference to Mr Harvey’s children. The Court should give effect to Mr Harvey’s clear intentions, as expressed through his conduct prior to his death.
Discussion
[63] In accordance with the principles set out in Felton v Johnson, there must be a depletion of the bounty available to a creditor before any defeating of the creditors’ interests can arise. The Agreement is not void ab initio (as if it never existed). It is only the transactions which arise from the Agreement that may be voided to the extent necessary to remedy the depletion.
[64] The proposed transfer of Mrs Harvey’s interest in the Property to Mr Harvey was indisputably void as against creditors (and was found to be so) as it depleted the assets available to creditors as at the date of the Agreement.
[65] I have found, however, that, associated with the proposed transfer of Mrs Harvey’s interest to Mr Harvey, the parties had a common intention to sever their joint tenancy and the associated right of survivorship. It seems somewhat artificial to separate out that “common intention” from the specific transactions contemplated by the Agreement. Nevertheless, in my view it is necessary to do so in order to void the transactions contemplated by the Agreement only to the extent to which they depleted the bounty which would have been otherwise available to
creditors.
32 Chambers v Grindley (2007) 26 FRNZ 739 (HC) at 742.
[66] Severance of the joint tenancy did not prejudice creditors as at the date of the Agreement or, indeed, as at any date prior to Mr Harvey’s death. The creditors had no recourse to Mr Harvey’s interest in the Property prior to his death. “Replenishing” Mrs Harvey’s share of the assets is therefore sufficient to rectify any breach of s 47. A reversal or voiding of the associated mutual agreement to sever the joint tenancy is not required.
Result
[67] The application by the judgment creditors (the counterclaim plaintiffs) for an order that the entire estate in fee simple in the Property be vested in the Official Assignee for the bankrupt estate of Mrs Susan Harvey is dismissed.
[68] In relation to costs, my preliminary view is that the executor (the counterclaim defendant) is entitled to costs on a category 2B basis. If costs cannot be agreed based on that indication, then the executor is to file a memorandum within 20 working days of this judgment. Any memorandum in response from the judgment creditors is to be filed within 10 days thereafter.
[69] Leave is reserved to either party to apply for any ancillary directions that may be necessary in order to give legal effect to this judgment.
Katz J
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