Harvey v Gateshead Investments Ltd HC Auckland CIV-2011-404-5909
[2011] NZHC 1839
•25 November 2011
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2011-404-5909
BETWEEN CHRISTOPHER MICHAEL HARVEY First Plaintiff
ANDRACHEL SUSAN HARVEY Second Plaintiff
ANDRICHARD JAMES PARKER Third Plaintiff
ANDGATESHEAD INVESTMENTS LTD First Defendant
ANDPARANUI PROPERTIES LTD Second Defendant
ANDBETA PACIFICA CORPORATION LTD Third Defendant
Hearing: 14 October 2011
Counsel: L Kemp for First Plaintiff
D Connor and J Campion for Second and Third Plaintiffs
G J Toebes for First, Second and Third Defendants
Judgment: 25 November 2011
JUDGMENT OF BREWER J
This judgment was delivered by me on 25 November 2011 at 10:00 am pursuant to Rule 11.5 High Court Rules.
Registrar/Deputy Registrar
SOLICITORS
Kemp Barristers and Solicitors (Kumeu) for First Plaintiff
Glaister Ennor (Auckland) for Second and Third Plaintiffs
JT Law (Wellington) for First, Second and Third Defendants
COUNSEL David Connor
HARVEY V GATESHEAD INVESTMENTS LTD HC AK CIV-2011-404-5909 25 November 2011
Introduction
[1] The plaintiffs seek orders by way of interim relief in their action against the defendants. The plaintiffs sue the defendants under five causes of action relating to the defendants’ realisation of assets securing debts (“the charged assets”) and their subsequent actions to recover alleged shortfalls.
[2] The first plaintiff is the executor of the estate of the late Michael George Harvey. The late Mr Harvey owned a house in Coatesville as a joint tenant with the second plaintiff, his wife. The first and second defendants have obtained a sale order in respect of the second plaintiff’s interest in the house.1 They have also obtained summary judgment against the second and third plaintiffs.2
[3] The first plaintiff claims that the late Mr Harvey was never a debtor of either the first or second defendants and consequently his interest in the Coatesville house (which was either a full interest or a half interest) cannot be sold by them.
[4] The second plaintiff and the third plaintiff guaranteed various debts to the defendants. They claim that the realisation of the charged assets by the defendants was in breach of their obligation to obtain a reasonable price for them, that aspects of their conduct was oppressive, and that the defendants have failed to account for the proceeds.
Substantive relief sought
[5] The plaintiffs in their substantive proceeding seek:
By the first plaintiff:
A permanent injunction restraining the proposed sale of the
Coatesville house.
1 Sale order for the interest of Rachel Susan Harvey in the property at 1033 Coatesville-Riverhead
Highway, dated 21 July 2011.
2 Gateshead Investments Ltd v Parker HC Auckland CIV-2009-404-7720, 28 January 2010, Venning J.
An order removing the charging order absolute over the Coatesville
house.
By the second plaintiff and the third plaintiff:
An inquiry into the level of their indebtedness, if any, to the first and second defendants.
An account for the amounts claimed to be owed by each defendant
(subject to such adjustment as they are entitled).
By the second and third plaintiffs against the third defendant:
An account of the proceeds of sale of various pieces of land (in accordance with s 185 of the Property Law Act 2007).
By the first, second and third plaintiffs:
An account in respect of the proceeds of the sale of shares in a company, Radius Properties Ltd.
By the second and third plaintiffs:
The re-opening of certain credit contracts (namely, the Gateshead- Paranui Loan Agreement and the Portfolio-Beta Loan Agreement).
A permanent injunction restraining any further enforcement action by the defendants against the second and third plaintiffs with respect to the recovery of amounts claimed to be due under those creditcontracts.
An inquiry into the further relief appropriate once the re-opening has occurred.
Interim relief sought
[6] The interim relief sought is as follows:
By the first plaintiff:
Pending further order of the Court, the advertising and sale of
1033 Coatesville-Riverhead Highway, CT NA1071/36 (the
Coatesville house) is to cease.
By the second and third plaintiffs:
Pending further order of the Court, further “enforcement action” (by
which is meant the steps referred to in s 335(2) of the Insolvency Act
2006) against the plaintiffs is to be halted.
[7] There is a general application for costs.
[8] The application for interim relief thus raises two threshold issues:
(a) Whether the Court should stay the sale of the Coatesville house on the basis that there is a seriously arguable case that the property belongs to Mr Harvey’s estate, rather than to the second plaintiff;
(b)Whether the Court should stay the enforcement of the judgment obtained against the second and third plaintiffs on the basis that there is a seriously arguable case that the defendants:
(i) have acted improperly in selling charged assets; and/or
(ii) have failed to account for the proceeds of the asset sales.
Legal principles
[9] In order to gain interim relief under r 7.53, the plaintiffs must establish that there is a serious question to be tried and demonstrate that the balance of convenience favours them.
[10] Whether there is a serious question to be tried is the threshold question. It requires more than establishing a tenable cause of action and a dispute as to the facts.3 There has to be “a tenable combination of arguments on the law and the facts
on which the plaintiff could succeed”.4
[11] “The balance of convenience” is the second stage of the inquiry. The general approach to be taken by the Court is as suggested by Lord Diplock in American Cyanamid.5 The first step is to consider the adequacy of damages as a remedy. If damages would adequately compensate the plaintiff, and the defendant has the means to pay them, then interim relief will not normally be granted. If damages would not adequately compensate the plaintiff, but would adequately compensate the
defendant if the plaintiff did not succeed at trial (and the plaintiff has the means to pay), then interim relief will normally be granted.
[12] If there is no clear answer to the adequacy of damages inquiry then the balancing exercise should be informed by considering the merits of preserving the existing situation, the uncompensatable disadvantages to each party depending on whether interim relief is granted or refused, and the relative strength of the parties’
cases (as well as can be assessed from the affidavits).
3 Ansell v New Zealand Insurance Finance Ltd HC Wellington A434/83, 30 November 1983, Eichelbaum J.
4 Henry Roach (Petroleum) Pty Ltd v Credit House (Vic) Pty Ltd [1976] VR 309 at 311 per Lush J.
5 American Cyanamid Co v Ethicon Ltd [1975] AC 396 (HL), endorsed in Consolidated Traders
Ltd v Downes [1981] 2 NZLR 247 (HC & CA).
Whether the Court should stay the advertising and sale of the Coatesville house on the application of the first plaintiff
Factual position
[13] The late Mr Michael Harvey lived in the Coatesville house with his wife, the second plaintiff, from the time it was purchased on 3 June 2001 until his death on
3 February 2011. They owned the house as joint tenants.
[14] On 16 December 2009, Mr Harvey and the second plaintiff entered into a relationship property agreement.6 It was made in the context of a continuing relationship. The second plaintiff was a businesswoman who had interests in three rest homes and had guaranteed the debts of those rest homes. Mr Harvey had nothing to do with those guarantees. Under the agreement, the second plaintiff transferred her interest in the Coatesville house (together with a parcel of shares in a company) to Mr Harvey. There was no reciprocal transfer of property from Mr Harvey, although under the agreement he gave up any interest in other shares
held by the plaintiff.
[15] On 28 January 2010, the first and second defendants obtained summary judgment against the second plaintiff on her guarantees. On 3 February 2010, a charging order in favour of the first and second defendants was made by this Court. It was registered against the Coatesville house on 9 February 2010.
[16] Pursuant to an agreement for sale and purchase dated 15 February 2010, Mr Harvey purported to sell the Coatesville house to Chrislo Trust. The first plaintiff, in his personal capacity, is a co-trustee and a beneficiary of Chrislo Trust, as is his sister. The sale was unable to be effected, however, due to the presence of the charging order.
[17] On 5 November 2010, Mr Harvey made a will appointing the first plaintiff to be his executor and devised the Coatesville house to Chrislo Trust, reserving a life
6 Under s 21 of the Property (Relationships) Act 1976.
interest therein for the second plaintiff. The second plaintiff did not otherwise benefit under the will.
The first plaintiff ’s submissions
[18] The first plaintiff as executor of the estate of the late Mr Harvey submits that there is a seriously arguable case that:
(a) The estate is the beneficial owner of the Coatesville house. The relationship property agreement severed the joint tenancy and transferred the beneficial ownership of the whole of the property to the late Mr Harvey. The Chrislo Trust being the beneficiary of his estate, the interest in the Coatesville house lies outside the grasp of the first and second defendants.
(b)Alternatively, if the relationship property agreement should be void, at least the intention to sever the joint tenancy survives and so the estate is the beneficial owner of half of the Coatesville house as tenant in common in equal shares.
The first and second defendants’ response
[19] The case for the defendants is that on either view of the facts, the second plaintiff is the beneficial owner of the Coatesville house. The defendants’ charging order was registered prior to the establishment of the Chrislo Trust and the agreement for sale and purchase. Therefore, the rights arising from the registration of the charging order will be the rights arising as against the parties that have an interest in the Coatesville house at that moment. Those parties would be either the late Mr Harvey and the second plaintiff as joint tenants or the late Mr Harvey pursuant to the Relationship Property agreement.
[20] If the former, then the whole of the Coatesville house vested, by survivorship, in the second plaintiff upon the death of the late Mr Harvey.
[21] If the latter, then the submission is that the Relationship Property agreement is void pursuant to s 47(1) or (2) of the Property (Relationships) Act.7 It was a disposition between spouses in respect of their relationship property and was intended to defeat creditors of the second plaintiff or it had that effect. “Void” means void so no vestige of it can be operative against the interests of the defendants.
[22] Under the Relationship Property agreement, the second plaintiff agreed to transfer to the late Mr Harvey:
(a) Shares in a company called Radius Property Ltd (said in her statement of position to have a value of $415,710 but discounted in value because they were said to be “unsaleable for five years”); and
(b) Her half-share in the Coatesville house (said to have a net value of
$120,000).
[23] The Relationship Property agreement was not entered into because of some marital dispute. The parties were happily married and continued to live as spouses until Mr Harvey’s death. At the time that the agreement was entered into it was clear to the second plaintiff that the defendants were claiming against her guarantee. A Property Law Act notice had already been served by the first mortgagee on the rest home companies whose debts she had guaranteed and demand for $1,442,800, plus interest, had been served on her by the first and second defendants at a meeting on
18 November 2009.8 On 19 November 2009, the second plaintiff had provided the
first and second defendants with a statement of position and on 26 November 2009 she had provided to the solicitors for the first and second defendants her proposal
accompanied by a sworn statement of position.
7 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.
8 Venning J entered summary judgment against the second and third plaintiffs for this amount on
28 January 2010.
[24] The first and second defendants submit:9
Ms Harvey gave away all her assets having a value; she didn’t receive anything from her husband. This is simply an asset divestment agreement by Ms Harvey.
[25] The first and second defendants submit that if the Relationship Property agreement is void, and there having been no change to the registered proprietor of the Coatesville house, then the Coatesville house remained vested in the joint names of the late Mr Harvey and the second plaintiff. The second plaintiff took title to the Coatesville house by survivorship and accordingly the sale order obtained by the first and second defendants is valid.
[26] The first and second defendants submit that the interest obtained by them under the charging order is an interest in the land.10 Accordingly, the first and second defendants submit:11
So far as Rachel Harvey’s interest in the property is concerned (whether as registered proprietor; sole beneficial owner; or the holder of a life interest pursuant to the will – that is not possible, but it is mentioned for completeness), her interests are completely defeated by the registered interest under the charging order.
The first plaintiff ’s response
[27] The first plaintiff submits in response that the Relationship Property agreement was not intended to defeat creditors of the second plaintiff nor did it have that effect. The first plaintiff identifies similarities to Official Assignee v Johnson,12 where a husband and wife agreed that she would own the couple’s real estate while he would retain the shares in his companies (resulting in an imbalance in value in favour of the wife). When the Official Assignee brought proceedings to unpick the
Relationship Property agreement, the Court of Appeal upheld the decision at first instance holding that the agreement was not in breach of s 47 of the Property
(Relationships) Act.
9 Synopsis of submissions for first and second defendants, dated 13 October 2011, at [3.6].
10 Gill Construction Co Ltd v Morgan (2009) 10 NZCPR 317 at [41] per Clifford J: “a charging order comprises a charge on the land, and, as such, comprises an “interest” in the land in terms of the definition in s 2 of the Land Transfer Act”.
11 Synopsis of submissions for first and second defendants, dated 13 October 2011, at [4.8].
12 Official Assignee v Johnson [2007] NZCA 348.
[28] The first plaintiff submits that in the present case there is credible evidence that there was no such value imbalance in the Relationship Property agreement. The agreement relied upon a current registered valuation of the Coatesville house and the rest home properties. The known value of the rest home property debt was also taken into account in order to divide the shares in Radius Property Ltd. In other words, it is submitted that, despite the timing of the Relationship Property agreement, the division of property was a fair reflection of the interests of both parties to the agreement and that there was no intention to defeat creditors. In particular, it is submitted that the Relationship Property agreement took into account the second plaintiff ’s personal liability in respect of the rest home companies.
[29] In terms of the s 47(2) test as to whether the effect of the Relationship Property agreement was to defeat creditors, it is submitted that this is simply not known. This submission goes back to the other claims against the third defendant for an account for the value received from the rest home sales. It is submitted that it is not certain whether the defendants have any further recourse against the second and third plaintiffs’ assets.
Decision
[30] In my view, it is clear that the Relationship Property agreement was entered into because of the gathering storm of claims by the defendants against the second plaintiff. The effect of the Relationship Property agreement was to transfer to the late Mr Harvey those assets that clearly had value; in particular, the second plaintiff’s joint interest in the Coatesville house. Whether or not the second plaintiff had that intention, it was certainly the effect. I am not satisfied that there is a seriously arguable case that the agreement was not intended to defeat creditors of the second plaintiff or that it did not have that effect.
[31] Official Assignee v Johnson does not assist the first plaintiff. In that case, at the time of signing the Relationship Property agreement, in contrast to a brewing storm of liabilities, there was no suggestion that the husband might face liability for
the poor performance of his companies.13 In signing the agreement, the parties simply wished to separate out the husband’s business assets from the matrimonial home and other assets, which the wife had brought to the marriage. The conclusion reached on the facts was that they did not intend to defeat the creditors.14
[32] There being no seriously arguable case that the Relationship Property agreement is not void against the second plaintiff’s creditors, the position falls to be regarded as though the Relationship Property agreement never existed. At the time that the charging order was made Mr Harvey was still alive. The order could not attach to his interest. But that has now changed. The situation is now that, upon Mr Harvey’s death, the second plaintiff became the sole beneficial owner of the Coatesville house by virtue of survivorship. It cannot be argued as a serious case that the intention to sever the joint tenancy survives as a shade of the Relationship Property Agreement so that the first plaintiff has an equitable interest in the property as against the defendants.
[33] I rule that there is no serious question to be tried on this point and
accordingly the first plaintiff’s application for interim injunction is declined.
[34] I add that I would also find the balance of convenience to be in favour of the defendants. The first plaintiff’s interest in the Coatesville house is as an executor wishing to give effect to the will of the deceased. If the first plaintiff were to succeed at trial then whatever interest the estate was found to have in the Coatesville house could be readily quantified and paid as damages. On the other hand, the late Mr Harvey’s estate appears to have no assets other than the (disputed) interest in the Coatesville house. If the defendants succeed at trial the first plaintiff would not have the means to pay damages.
Whether the Court should stay further enforcement action against the second and third plaintiffs
The second and third plaintiffs’ submissions
[35] The second and third plaintiffs submit that, in any event, there may be no debt at all owing by the second and third plaintiffs to the defendants. They submit that there is a reasonably arguable case that the charged assets were sold by the defendants to themselves below value, such that the plaintiffs’ indebtedness15 might in fact be extinguished. If that is the case, then the rule against double benefit16 would apply to nullify the charging order notwithstanding the existence of a
judgment of a Court establishing a judgment debt and the charging order having been registered pursuant to the judgment debt. It would also prevent the second and third defendants otherwise enforcing their judgment against the second and third plaintiffs.
[36] Essentially, the second and third plaintiffs wish me to examine the (extensive) evidence they have gathered to support their claims against the defendants, to conclude that there is a serious case to be argued and then, on a balance of convenience basis, direct by way of interim relief that no further enforcement action (by which is meant the steps referred to in s 335(2) of the Insolvency Act 2006) can be taken against them.
The defendants’ response
[37] The defendants’ response to this submission is that there is no serious argument to be made on the evidence. Furthermore, they submit that this is merely a collateral attack on the judgment already obtained by the defendants and the doctrine of res judicata applies.
Decision
[38] In my view this claim for interim relief is misconceived. The first and second defendants have obtained summary judgment against the second and third plaintiffs in the sum of $1,442,800 plus interest.
[39] This Court should not prevent the defendants, as judgment creditors in a separate case, from seeking to enforce their judgment in terms of the Insolvency Act
2006. If such enforcement action is taken then it is up to the Court hearing it to decide whether the existence of this proceeding justifies staying or adjourning the enforcement action.
[40] In other words, where a judgment has been obtained and is not being appealed, it should not be undermined collaterally by an interim order arising out of a separate proceeding. Rather, it is up to the Court hearing an enforcement application to decide whether or not to grant enforcement having regard to the separate proceedings.
The overall situation
[41] There is one further assessment I should make. If, considering the overall situation, I were to conclude that there is a serious case to be argued that the defendants acquired the second and third plaintiffs’ assets17 at an unlawful discount of such size that it would extinguish their indebtedness to the defendants, then I should, if the balance of convenience requires, stay the execution of the sale order on the Coatesville house. The second plaintiff has not specifically pleaded for this, but
she is a party to the first plaintiff’s pleading and the submissions made on her behalf
contemplate it would in any event be fair.
17 Corporate vehicles were used but I will refer to the parties directly rather than through their vehicles.
[42] The second plaintiff and the third plaintiff bought three rest homes in 2006 for $3,422,800.18 The money was all borrowed: $1,750,000 from a company which later assigned the debt to the third defendant (in turn owned by the first defendant and the second defendant); the balance, $1,672,800, from the first defendant and second defendant.
[43] The second plaintiff and the third plaintiff subsequently borrowed more money to renovate the rest homes. By 20 September 2007, the total debt was
$3,602,800, of which $260,000 was owed to Southern Cross (later assigned to
SeniorCare). This borrowing rose to $290,000 by 28 May 2008.
[44] On 28 January 2010, the first defendant and second defendant obtained summary judgment against the second plaintiff and third plaintiff for $1,442,800. At that time the third defendant was claiming a debt of $2,240,990 and the Southern Cross/SeniorCare debt remained at $290,000 – a total of $3,973,790 plus accruing interest.
[45] On 7 May 2010, the third defendant obtained the rest homes real estate for
$2,333,877 from a debt (the quantum of which is disputed) then said to be
$2,523,123. That left nothing for SeniorCare. The third defendant undertook to take no further action against either the second plaintiff or the third plaintiff personally.
[46] Following the sale of shares which yielded $460,000, the debt of the first plaintiff and the second plaintiff was reduced to about $1 million plus accruing interest.
[47] On 30 November 2010, SeniorCare obtained summary judgment against the second plaintiff and the third plaintiff for $490,000. Interest continues to
accumulate.
18 The following figures are taken from the affidavit of the second plaintiff, dated 20 September
2011, although there appears to be some (although immaterial) discrepancies with the figures shown in the appended documents.
[48] Therefore, any claim brought by the second plaintiff and the third plaintiff which would have the effect of preserving the second plaintiff’s share in the Coatesville house would have to yield more than about $1.5 million.
[49] The second plaintiff and the third plaintiff contend that this money could be obtained from judgments to the effect that the third defendant purchased the rest homes for an unjustifiably low value and that the receivers of the companies owning the businesses of the rest homes have failed to account for the chattels and goodwill of those businesses; the link to the first defendant and second defendant being that they appointed the receivers and control the third defendant.
[50] The affidavits filed by and on behalf of the second and third plaintiffs are enough to raise an arguable case. But I do not see a seriously arguable case. The forced sale of assets in hard times is always fraught with difficulty, especially specialised assets such as rest homes. A Court might or might not conclude, having heard expert evidence, that there was an undervalue. I can take it no further than that. Nor could I speculate as to the extent of an undervalue.
[51] The receivers of the business entities are not parties to this proceeding. The second plaintiff and third plaintiff say that they will join them. If I thought that the cogency of the potential claim against them warranted it then I would make interim orders hedged about with contingency requirements. As it is, although I accept that the deficiencies in their reports identified by the second plaintiff and the third plaintiff require explanation, I cannot say that there is a seriously arguable case that they have unlawfully dissipated the goodwill of the businesses (which are by far the most significant figures). There is insufficient evidence to show that for these particular businesses goodwill was a realisable asset.
[52] Against this background, and although I sympathise with the position of the second defendant, I cannot justify making an order staying the execution of a sale order obtained by the first defendant and second defendant through due process of the law.
[53] I am also mindful that even if I were able to stretch the strength of the second and third plaintiffs’ case to the threshold point, I would still have to find for them on the balance of convenience. That I could not do. The emotional attachment that the second defendant has to the Coatesville house cannot stand against the interests of a creditor entitled to sell it. The second defendant is insolvent and should she fail in her case, or indeed fail wholly to succeed, then her undertaking as to damages will be worthless. On the other hand, if she wins, to the extent that her success is for a sum greater than her properly assessed indebtedness to the first and second defendants, that amount is readily quantifiable in money terms and can be claimed.
Conclusion
[54] The interim relief claimed by the plaintiffs is denied. The defendants are entitled to costs on a 2B basis. If the parties cannot agree on the calculation, the defendants should file a memorandum within 28 days of the date of this judgment
and the plaintiffs must file their memoranda within 14 days thereafter.
Brewer J
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