Harvey v New Zealand Association of Credit Unioms t/a Co-Op Money NZ
[2019] NZHC 1174
•27 May 2019
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV 2019-404-000537
[2019] NZHC 1174
UNDER The Friendly Societies and Credit Unions Act 1982 BETWEEN
JOHN ROWLAND HARVEY & ORS as
Trustees of FIRST CREDIT UNION First Applicant
AND
FIRST CREDIT UNION
Second Applicant
AND
NEW ZEALAND ASSOCIATION OF
CREDIT UNIONS (trading as Co-op Money NZ)
First Respondent
AND
RICHARD WESTLAKE & ORS as Trustees of the NEW ZEALAND ASSOCIATION OF CREDIT UNIONS
Second Respondents
Hearing: 29 April 2019 Appearances:
D McLellan QC & H L Quinlan for First & Second Applicants D J Friar & B Ward for First & Second Respondents
Judgment:
27 May 2019
Reissued:
at 12.00noon on 21 June 2019
as a redacted judgment as per minute of van Bohemen J dated 19 June 2019
[Redacted] JUDGMENT OF VAN BOHEMEN J
This judgment of 27 May 2019 was re-delivered by me on 21 June 2019 at 12.00noon.
Pursuant to Rule 11.5 of the High Court Rules
…………………………
Registrar/Deputy Registrar
HARVEY & ORS as Trustees of FIRST CREDIT UNION v NEW ZEALAND ASSOCIATION OF CREDIT UNIONS [2019] NZHC 1174 [27 May 2019]
Introduction
[1] The New Zealand Association of Credit Unions (trading as Co-op Money NZ) (Co-op Money) is an association of credit unions established and incorporated in accordance with the Friendly Societies and Credit Unions Act 1982 (FSCU Act). It provides banking and bureau services and other services to the customer members of the Credit Unions which are members of Co-op Money and which are also registered under the FSCU Act.
[2] First Credit Union (FCU) no longer uses Co-op Money’s banking and bureau services, having made its own separate arrangements to provide those services to its members. However, FCU remains a member of Co-op Money and is a substantial creditor of Co-op Money.
[3] Co-op Money and FCU are in dispute over whether FCU has a right to be involved in arrangements that Co-op Money wishes to put in place to protect customers of the other Credit Union members of Co-op Money that continue to use Co-op Money’s banking and bureau services (User Credit Unions). Those arrangements, known as the Continuity of Service Initiative (Continuity Initiative), have been developed by Co-op Money in response to concerns expressed by the Reserve Bank about the vulnerability of customers of the User Credit Unions if Co-op Money encounters financial difficulties.
[4] The purpose of the Continuity Initiative is to ensure continuity of banking services to customers of the User Credit Unions if Co-op Money becomes insolvent or is otherwise unable to provide banking and bureau services to the User Credit Unions. The essence of the Continuity Initiative is that User Credit Unions will be able to exercise step-in rights to continue the banking services that Co-op Money has been providing to those customers.
[5] FCU says that the Continuity Initiative creates an unfair advantage in favour of the User Credit Unions over FCU, particularly with respect to decisions that may affect its ability to recover the value of the Base Capital Notes (BCNs) that Co-op Money has issued to FCU and the other members of Co-op Money to generate its working capital. The value of FCU’s BCNs is approximately $5,410,000. FCU also
says its exclusion from the Continuity Initiative compromises its ability to access other services it still receives from Co-op Money.
[6] Co-op Money says because FCU does not use its banking services, FCU has no interest in and no right to be involved in the Continuity Initiative which is limited to ensuring the continuity of services that FCU no longer uses. Co-op Money says that the Continuity Initiative does not concern the BCNs which will continue to be dealt with in accordance with Co-op Money’s rules under which FCU will be treated on the same basis as the other members of Co-op Money. It also says that the Continuity Initiative does not relate to the other services that FCU uses, which Co-op Money says are minimal in any event.
[7] On 22 March 2019, the members of Co-op Money adopted a special resolution authorising, as a major transaction, Co-op Money to enter into and give effect to the documents for the implementation of the Continuity Initiative. It was understood that if the resolution was approved by the required 75% majority, the relevant documents would be executed by the Co-op Money Board at its meeting on 29 March 2019.
[8] FCU voted against the special resolution but its vote was received after the time stipulated and was not counted. However, because 90% of the members of Co- op Money voted in favour of the resolution, FCU’s vote could not have prevented the adoption of the resolution.
[9] On 28 March 2019, the applicants, FCU and the FCU Trustees brought the current proceeding against the respondents, Co-op Money and the Co-op Money Trustees, seeking interim and permanent injunctions to prevent the Co-op Money Trustees and the Co-op Money Board from adopting and implementing the Continuity Initiative.
[10] On 28 March 2019, Gordon J granted an interim interim injunction to prevent the relevant documents being executed at the meeting of the Co-op Money Board pending the hearing of the application for an interim injunction.
[11] On 29 April 2019, I heard the application for an interim injunction and reserved my decision. After the hearing, there were further developments that raised a question about whether judgment should be issued on the application.
Proceeding to date
[12] On 28 March 2019, the applicants commenced the present proceeding saying, among other things, that Co-op Money had failed to provide FCU with the key documents it proposed to sign to implement the Continuity Initiative, and alleged:
(a)Breach of the Co-op Money Rules by Co-op Money and the Co-op Money Trustees in relation to the adoption of the 22 March 2019 special resolution;
(b)Breach by Co-op Money of an undertaking said to have been made to FCU in relation to the adoption of the 22 March 2019 special resolution;
(c)Breach of an implied term in the Co-op Money Rules regarding the provision of information to members of Co-op Money, and the time to consider, resolutions concerning a major transaction;
(d)Breach of duty as trustees by the Co-op Money Trustees.
[13]The principal remedies the applicants sought were:
(a)An order invalidating the 22 March 2019 Resolution;
(b)An order for specific performance requiring Co-op Money to disclose all documents Co-op Money intended to enter into relating to the Continuity Initiative;
(c)An order prohibiting the Board of Co-op Money from executing the relevant documents relating to implementation of the Continuity Initiative.
[14]At the same time, the applicants applied for interlocutory orders seeking:
(a)An interim injunction restraining the Co-op Money Trustees and the Board of Co-op Money from authorising or executing any documents to implement the Continuity Initiative;
(b)A mandatory order requiring Co-op Money to provide FCU with a copy of a report that supplemented a report prepared by KPMG in February 2018, all the documents the Co-op Money Board proposed to sign, and all other information relating to the arrangements required to implement the Continuity Initiative.
[15] As noted above, on 28 March 2019, Gordon J made an interim interim injunction restraining the Co-op Money Trustees and the Co-op Money Board from authorising or executing any documents to implement the Continuity Initiative until further notice of the Court. Gordon J also recorded that counsel for the respondents had offered, subject to certain conditions, to provide FCU with a report updating the KPMG Report of February 2018 and with copies of all the documents the Co-op Money Board proposed to sign.
[16] Co-op Money also informed its members that it did not intend to rely on the 22 March 2019 resolution. On 9 April 2019, Co-op Money issued a notice seeking support for a new special resolution on the adoption and implementation of the Continuity Initiative, with voting on that resolution to close by 4pm on 2 May 2019. Subsequently, Co-op Money advised that it had received votes in support of the new special resolution from nine of the 10 members of Co-op Money (that is, all members except FCU) so that the 75 per cent threshold for the adoption of the resolution had been achieved.
[17] On 12 April 2019, the applicants filed an amended statement of claim and an amended application for an interim injunction. In their amended statement of claim, the applicants allege that:
(a)The execution by Co-op Money of documents to implement the Continuity Initiative is a disposition under s 346 of the Property Law Act 2007 (PLA) that will prejudice FCU by giving a blatant preference to the User Credit Unions as creditors of Co-op Money;
(b)In failing to treat FCU on the same basis as the User Credit Unions in developing the Continuity Initiative, the Co-op Money Trustees have breached their duties to act in good faith, to treat beneficiaries in an even-handed manner, and to provide beneficiaries with information regarding the investment of trust property.
[18]The applicants have sought:
(a)A declaration that the 22 March 2019 special resolution approving the Continuity Initiative and execution of the related documents is invalid;
(b)A permanent injunction restraining the Co-op Money Trustees and the Board of Co-op Money from authorising or executing any documents to implement the Continuity Initiative;
(c)An order under s 348 of the PLA that execution of the proposed documents implementing the Continuity Initiative is prejudicial;
(d)An order restraining the Co-op Money Trustees from allowing Co-op Money to enter into the proposed documents implementing the Continuity Initiative without reference to FCU.
[19]In their amended application for an interim injunction, the applicants seek:
(a)An interim injunction restraining the Co-op Money Trustees and the Board of Co-op Money from authorising or executing any documents to implement the Continuity Initiative;
(b)A mandatory order requiring Co-op Money to provide FCU with a copy of a report prepared by KPMG for the Co-op Money Board in October 2018.
Further developments
[20] By affidavit sworn on 2 May 2019 Simon Scott, the General Manager of FCU, said that he had received confirmation from three of the User Credit Unions that they had changed their votes to “No” on the new special resolution approving the Continuity Initiative, on which voting closed that day, that FCU had also voted “No”, and that as a consequence a majority of the now seven members of Co-op Money (following an amalgamation of three User Credit Unions on 30 April 2019) did not approve the Continuity Initiative arrangements that the current proceeding seeks to restrain.
[21] By memorandum dated 2 May 2019, counsel for the respondents confirmed that three members of Co-op Money had changed their votes in relation to the Continuity Initiative. However, the memorandum asked the Court to issue its judgment as soon as possible and said that the judgment would be likely to assist the members of Co-op Money in assessing their next steps.
[22] By minute dated 3 May 2019 I asked counsel to file memoranda on what basis the Court should issue a decision on the application for an interim injunction and related orders.
[23] By memoranda dated 7 and 8 May 2019, counsel for the applicants said that a judgment on the injunction application was not necessary given that the special resolution to proceed with the Continuity Initiative had not passed and that it was not the function of the Court to provide general guidance. Counsel for the applicants informed the Court that FCU had proposed a pragmatic interim solution that postponed further directions of the Court to allow final decisions to be made about the Continuity Initiative and FCU’s involvement in it.
[24] By memoranda dated 7 and 8 May 2019, counsel for the respondents said the Court’s judgment was still sought because the failure of the special resolution did not
mean that the Continuity Initiative would not proceed because the commercial imperatives for the Continuity Initiative remained unchanged and the concerns raised by the Reserve Bank still needed to be addressed, and that a judgment from the Court was likely to materially assist Co-op Money members in their on-going discussions. Counsel for the respondents said that the applicants had not abandoned or discontinued their application and said there was a real risk that FCU would remain opposed to the Continuity Initiative and that if no judgment was issued on the current application it was likely there would be a further application for an injunction which would inevitably have to address many of the issues that were the subject of evidence and argument before me. Counsel for the respondents also said that even if the applicants had formally abandoned their application, the Court could still issue its judgment. They also said that Co-op Money did not agree to FCU’s proposed interim solution because FCU’s application had been fully argued and Co-op Money would remain subject to the interim interim injunction issued by Gordon J pending a further decision of the Court.
[25] During a telephone conference with counsel on 9 May 2019, Mr Friar, counsel for the respondents, confirmed that the special resolution that was to have been adopted on 2 May 2019 had not passed. Mr Friar renewed Co-op Money’s request for the Court to issue its judgment on the applicants’ application and in so doing, address the substantive issues identified in the application and traversed at the hearing on 29 April 2019. Mr McLellan for the applicants, however, said that if the Court were to issue a judgment, it should focus on the changed circumstances that had occurred since the hearing; that is, the non-adoption of the special resolution approving the Continuity Initiative.
[26] Following the telephone conference, by minute dated 9 May 2019 I said that I would issue my judgment as soon as possible. While I had still to reach a final view, it was likely my decision would focus principally on the changed circumstances and would not go into the substantive grounds in FCU’s amended statement of claim. Those would be for determination by the Court that heard FCU’s principal application if and when that claim was argued.
Should an interim injunction be issued?
[27] As stated by Lord Diplock in American Cyanamid Co v Ethicon Ltd, the grant of an interlocutory injunction is a temporary and discretionary remedy with the purpose of protecting the plaintiffs against injury by violation of their rights for which they could not be adequately compensated in damages recoverable in the action if the uncertainty were resolved in their favour at trial.1
[28] The injury against which the applicants seek protection is that which the applicants say would flow if the Co-op Money Trustees and the Board of Co-op Money authorise and execute documents to implement the Continuity Initiative. Because the members of Co-op Money have refused to approve this action by not passing the special resolution, and because there is, at present, no new proposal to that effect, there is not, for the moment, a risk of that injury befalling the applicants. To that extent, therefore, the interim injunction is not necessary or appropriate. That much is straight- forward.
[29] The more difficult issue is whether I should also address the substantive issues put before the Court in the application and at the hearing on 29 April 2019. This raises the questions of whether the issues before the Court are moot and, if they are moot, whether the Court should issue its judgment on those issues regardless.
Are the issues before the Court moot?
[30] As the Supreme Court of Canada said in Borowski v Attorney-General of Canada:2
The doctrine of mootness is part of a general policy that a court may decline to decide a case which raises a merely hypothetical or abstract question. An appeal is moot when a decision will not have the effect of resolving some controversy affecting or potentially affecting the rights of the parties. Such a live controversy must be present not only when the action or proceeding is commenced but also when the court is called upon to reach a decision. The general policy is enforced in moot cases unless the court exercises its discretion to depart from it.
1 American Cyanamid Co v Ethicon Ltd [1975] AC 396, [1975] 1 All ER 504 (HL) at 405-406, 508- 509.
2 Borowski v Attorney-General of Canada [1989] 1 SCR 342 at 354.
The approach with respect to mootness involves a two-step analysis. It is first necessary to determine whether the requisite tangible and concrete dispute has disappeared rendering the issues academic. If so, it is then necessary to decide if the court should exercise its discretion to hear the case.
[31] In R v Gordon-Smith, the Supreme Court of New Zealand said, in relation to appeals:3
[16] … In general, appellate courts do not decide appeals where the decision will have no practical effect on the rights of the parties before the Court, in relation to what has been at issue between them in the lower courts. This is so even when the issue has become abstract only after leave to appeal has been given. But in circumstances warranting an exception to that policy, provided the Court has jurisdiction, it may exercise its discretion and hear an appeal on a moot question.
…
[18] The main reason for the general policy of restraint by appellate courts in addressing moot questions are helpfully identified by the Supreme Court of Canada in Borowski v Attorney-General. They are, first, the importance of the adversarial nature of the appellate process in the determination of appeals secondly, the need for economy in the use of limited resources of the appellate courts and, thirdly, the responsibility of the courts to show proper sensitivity to their role in our system of government. In general, advisory opinions are not appropriate.
…
[20] The value of courts determining appeals in an adversarial context lies in the fact that having a stake in the outcome fosters full argument on the questions before the court. The need for legal principles to be applied to particular facts is also a valuable discipline for the courts in determining those principles. In this respect the issue for a court, in deciding whether to allow a moot appeal to proceed, was aptly expressed by the Court of Appeal in [Attorney-General v] David, as being “whether a general question posed in relation to future conduct permits of a categorical answer or whether the limits and conditions can only be defined adequately and safely by reference to particular facts”.4
[32] The above passages from Gordon Smith apply equally to decisions before first instance courts. They and the passages from Borowski make it clear that the general policy is that courts should not make decisions on issues that have become moot, even after trial, but that there is a discretion to depart from that general policy in appropriate circumstances. Those circumstances are to be assessed in light of the policy considerations identified in Borowski, in particular whether there has been full
3 R v Gordon-Smith [2008] NZSC 56, [2009] 1 NZLR 721.
4 Attorney-General v David [2002] 1 NZLR 501 (CA) at 503.
argument on the questions before the Court and whether a question posed in relation to future conduct permits of a categorical answer or can only be defined adequately and safely by reference to particular facts that may or may not apply in the future.
Assessment of mootness
[33] The question for the Court on the application for an interim injunction is whether an order should be granted to restrain the Co-op Money Trustees and the Board of Co-op Money from authorising or executing any documents to implement the Continuity Initiative. The amended application dated 12 April 2019 does not define or limit the application to the adoption of the special resolution for which notice was given on 9 April 2019 and on which voting was to be completed on 2 May 2019. Furthermore, as counsel for the respondents have made clear, there is still a possibility that Co-op Money will proceed with the Continuity Initiative, notwithstanding the non-adoption of the special resolution. It is also relevant that the applicants have not withdrawn or discontinued their application for an interim injunction or their application for a permanent injunction restraining Co-op Money Trustees and the Board of Co-op Money from authorising or executing any documents to implement the Continuity Initiative.
[34] In these circumstances, I am satisfied that even on this question, the application is not moot. There remain at least two live disputes affecting or potentially affecting the rights of the parties – namely Co-op Money’s right to adopt and implement the Continuity Initiative, and FCU’s right to be involved in the arrangements envisaged in the Continuity Initiative. In that regard, there remain tangible and concrete disputes between the parties that are not merely academic.
[35] In addition, the issues that go to whether an interim injunction should be granted have been the subject of full argument and are likely to apply to any future application for an interim injunction that the applicant may make, at least with respect to the current proceeding. The principal ground advanced in support of the application for a permanent injunction is that the execution of the documents to implement the Continuity Initiative constitutes a disposition under s 346 of PLA. That is a question of law and, while contingent on the content of the Continuity Initiative, is unlikely to
be affected by changed circumstances absent a fundamental change of the Continuity Initiative itself.
[36] For these reasons, and contrary to the indications I gave at the telephone conference on 9 May 2019, I consider that the Court should decide the substantive issues that were addressed at the hearing on 29 April 2019.
Relevant factual background
[37] As noted above, Co-op Money is an association of credit unions established in accordance with FSCU Act. Its members, including FCU, are credit unions which are also registered under the FSCU Act. Co-op Money is not a registered bank and does not provide retail banking services to the public.
[38] At the time this proceeding commenced, Co-op Money had 10 credit union members, including FCU, which was one of the founding members of Co-op Money. The number of members has since reduced to seven following the amalgamation of three members on 30 April 2019.
[39] Co-op Money has a board which, under its rules, is required to perform the duties which are customarily the responsibility of a board of directors.
[40] Until 1 April 2019, s 112 of the FSCU Act required that all property belonging to a credit union must vest in trustees of the credit union and, for that reason, Co-op Money also has trustees which, under its rules, have duties to:
(a)Fulfil all the statutory duties required of trustees;
(b)Hold vested in them property belonging to Co-op Money;
(c)Invest Co-op Money’s funds in accordance with the Rules;
(d)Borrow money subject to the provisions of the FSCU Act; and
(e)Control the funds, property and assets of Co-op Money and to manage those funds, property and assets as approved by the Board.
[41] Section 143(3) and (4) of the FSCU Act provide that the objects of Co-op Money must be or fall within the following:
(a)to promote the interests of the Co-op Money’s members;
(b)as authorised by the Co-op Money’s rules:
(i)to provide its members or other persons with products or services;
(ii)otherwise to carry out activities for the benefit or assistance of its members or other persons.
[42] Rule 3 of Co-op Money’s rules provides that the objects of Co-op Money include:
(a)To promote the interests of and strengthen co-operation among credit unions;
(b)To provide business services which, in accordance with Rule 30 of the Co-op Money Rules, may include:
(i)Providing goods, services and facilities to members;
(ii)Receiving deposits or subscriptions from members for such purposes as may be specified by the Co-op Money Board;
(iii)Making loans to members; and
(iv)Establishing and maintaining a central funding scheme and financial and banking services for the benefit of members.
[43] Consistently with the FSCU Act and its Rules, Co-op Money has provided banking services to its User Credit Union members by purchasing from third party suppliers wholesale banking services which Co-op Money packages and sells to those members.
[44] FCU previously used Co-op Money’s banking services but from September 2017 ceased to do so, having established separate arrangements for banking services with third party suppliers. FCU has remained a member of Co-op Money, however, continues to have a stake in Co-op Money’s financial stability and to use some of Co- op Money’s other services.
[45] Because Co-op Money is not a company, it does not have share capital. However, Co-op Money’s Rules provide that the Board may approve the issue to members of BCNs which are defined in the Co-op Money Rules to mean unsecured capital notes forming the capital of Co-op Money. It is accepted by the parties that BCNs are “deeply subordinated debt” that ranks behind other debts of Co-op Money.
[46] FCU says, and Co-op Money does not dispute, that FCU has subscribed for and Co-op Money has issued BCNs to the value of $5,410,000 and that this amount equates to approximately 40 per cent of the total amount of BCNs issued by Co-op Money. To that extent, FCU is a major creditor of Co-op Money.
[47] As set out in the applicants’ initial statement of claim and application for an interim injunction dated 28 March 2019, and in an affidavit in support sworn by Mr Scott on 27 March 2019, the applicants’ case was initially based on the prejudice that the applicants considered the Continuity Initiative posed to Co-op Money’s ability to recover its investment in the BCNs and not on any other services that it received from Co-op Money. However, in its amended statement of claim and amended application for an interim injunction dated 12 April 2019, and in Mr Scott’s updating affidavit sworn on the same date, FCU says it still uses Co-op Money’s services in two respects:
(a)To access an historical financial platform on Co-op Money’s current banking platform;
(b)To service still active debit cards issued by FCU when it was using Co- op Money’s business services.
[48] The applicants also seek an order requiring Co-op Money to provide them with a copy of a report prepared by KPMG for the Co-op Money Board in October 2018. This report was prepared after the KPMG report prepared in February 2018, which was apparently made available to FCU at some point in 2018, and the updated KPMG report prepared in April 2019, which was made available to FCU following the granting of the interim interim injunction on 28 March 2019.
The Continuity Initiative
[49] In an affidavit sworn on 18 April 2019, Jonathan Lee, the Chief Executive Officer of Co-op Money says that the Continuity Initiative has been initiated at the prompting of the Reserve Bank and Co-op Money’s statutory supervisors in order to ensure continuity of services to members of the User Credit Unions if Co-op Money should encounter financial difficulties. Mr Lee says that the User Credit Unions have over 140,000 members who use the banking services provided by Co-op Money.
[50] Mr Lee says that if Co-op Money were to become insolvent, that could disrupt the services relied on by User Credit Union members in their day to day activities such as use of their debit cards at ATM machines and in making EFTPOS purchases. Mr Lee says that for this reason it is important that the Continuity Initiative is progressed as soon as possible. Mr Lee says that the Continuity Initiative is also important to the on-going success of Co-op Money itself which might otherwise find its members looking elsewhere for banking services – as FCU itself has done.
[51]Under the arrangements proposed for the Continuity Initiative:
(a)If Co-op Money were to experience serious financial difficulty, the User Credit Unions would have the right to appoint Credit Union Baywide (Baywide), one of the User Credit Unions, to step into Co-op Money’s key contractual arrangements with suppliers of banking services to ensure that banking services would still be available to customer members of the User Credit Union. In exercising those step-
in rights, Baywide would be acting as the agent of the User Credit Unions.
(b)Co-op Money and the User Credit Unions would execute a General Security Deed under which Co-op Money would grant Baywide a security interest over certain assets of Co-op Money and, if Co-op Money experienced serious financial difficulty, Baywide could appoint a receiver to carry on Co-op Money’s business and distribute the proceeds of any sale or realisation of the secured assets in accordance with arrangements set out in Clause 10 of the General Security Deed.
[52]Relevant provisions of the General Security Deed are:
1.INTERPRETATION
Definitions: Except to the extent the context requires otherwise, in this Deed:
…
“Obligations” means all covenants, conditions, stipulations, representations, warranties, guarantees, undertakings, assurances, agreements and other obligations of any nature … of [Co-op Money] to or for the benefit of the Secured Parties pursuant to, or contemplated by, any of the Transaction Documents;
“Other property” means all of [Co-op Money’s] present and future interests in, and all of [Co-op Money’s] present and future rights in relation to, any real property and any other property to which the [Personal Property Securities Act 1999 (PPSA)] does not apply;
…
“Personal Property” means all of [Co-op Money’s] present and after- acquired personal property and all of [Co-op Money’s] present and future interests in, and all of [Co-op Money’s] present and future rights in relation to, any personal property … ;
…
“Secured Indebtedness” means all indebtedness … due, owing, payable or remaining unpaid by [Co-op Money] to the Secured Parties or any of them on any account whatever pursuant to the Transaction Documents … and includes any part thereof;
“Secured Obligations” means all obligations for the payment or repayment of the Secured Indebtedness and the performance and observance of all Obligations and includes any parts thereof;
“Secured Parties” means the [User] Credit Unions and [Baywide];
“Secured Property” means the Personal Property and the Other Property, and includes any part thereof;
“Security Interest” has the meaning given to it by section 17 of the PPSA except in respect of any Other Property in which case Security Interest includes a charge over such property and any agreement to mortgage such property;
…
“Transaction Documents” means:
(a)this Deed;
…
(e) each other agreement or document (present or future) that [Baywide] and [Co-op Money] agree in writing is a Transaction Document …
…
2.SECURITY INTEREST
2.1 Continuing Security: As continuing security for compliance with the Secured Obligations, [Co-op Money] grants [Baywide] a Security Interest in the Secured Property.
…
9.APPOINTMENT OF RECEIVER
9.1Appoint Receiver: If an Event of Default occurs and is continuing, [Baywide] may in writing appoint any person or persons … to be a Receiver or all or any of the Secured Property … ;
…
10.APPLICATION OF PROCEEDS
10.1Subject to any statute that overrides this clause 10, the net profits (if any) of carrying on the business of [Co-op Money] and the net proceeds of any sale or realisation of the Secured Property on enforcement received by any Receiver or [Baywide] will be applied:
Firstin discharging all costs and expenses … of and incidental to the appointment of the Receiver and the exercise of all or any of the Receiver’s rights under this Deed or at law;
Secondly in discharging all costs and expenses … of and incidental to the exercise of all or any of [Baywide’s] rights under this Deed or at law;
Thirdlyin or towards payment of all claims ranking in priority to the Secured Indebtedness;
Fourthlyin or towards payment to [Baywide] to satisfy the Secured Obligations … ;
Fifthly(subject to the prior rights of any person …) in payment of any surplus to [Co-op Money].
Positions of parties on the substantive issues
[53] The applicants say that the proposed arrangements to implement the Continuity Initiative prejudice FCU’s rights to access its capital investment of $5,410,000 in the BCNs issued by Co-op Money because, if Co-op Money is put into receivership under the arrangements in the General Security Deed, the User Credit Unions can control the receivership process and sell Co-op Money’s assets, namely its capital as represented in the BCNs, and share in the proceeds. The applicants also say that this process prejudices FCU’s rights to participate in a winding up of Co-op Money as provided for in Co-op Money’s Rules.
[54] Mr McLellan says that the granting of the security under the General Security Deed constitutes a “disposition” under s 346 of the PLA and would be done at a time when Co-op Money was insolvent in terms of s 346(2)(a) of the PLA. He says the granting of the security would be prejudicial to, and would be intended to prejudice, FCU because the User Credit Unions would be able to satisfy their debts from the proceeds of sale of Co-op Money’s assets and FCU would have rights of enforcement only against Co-op Money itself which would be an empty shell with no assets.
[55] In addition, Mr McLellan says that the Continuity Initiative would be prejudicial to FCU in excluding FCU from participation in the step-in arrangements provided for in the Continuity Initiative when it continues to use Co-op Money services, and that FCU should have the benefit of the step-in rights or at least have some certainty about how FCU’s information that is currently held by Co-op Money would be used in the event of Co-op Money’s insolvency.
[56] With regard to the KPMG report, Mr McLellan says that the October KPMG report is important to understanding the significant decline in Co-op Money’s cash position in in 2018 and that non-disclosure of the October report amounts to a breach of the duties that Co-op Money’s trustees owe to FCU and the other members of Co- op Money.
[57] The respondents say that the Court has no jurisdiction to grant relief under s 348 of the PLA. Mr Friar submits that s 384 is a “claw-back” provision that operates only after a disposition has been made and prescribes the relief that may be granted in the circumstances to which the section applies. Therefore, Mr Friar says that the Court that hears the applicants’ substantive claim cannot, as a matter of law, issue a permanent injunction in respect of the asserted disposition and for that reason there is no basis for this court to issue an interim injunction.
[58] Mr Friar also submits that even if s 348 of the PLA were to apply, the granting of a security under the General Security Deed would not prejudice FCU in terms of s 345 of the PLA because the granting of the security is not designed to defeat FCU’s interests but would be made only for the legitimate purpose of protecting the interests of the User Credit Unions in order to secure the implementation of the Continuity Initiative. Mr Friar also says that the security given over Co-op Money’s assets does not prejudice FCU because the security would be limited to debts owing to the User Credit Unions which already rank in priority to the BCNs, and that the rights of all BCN holders, including FCU, would be considered at the same time in a winding up under the Rules if there remained proceeds to distribute following the completion of the procedure set out in Clause 10 of the General Security Deed.
[59] Mr Friar also says that the Continuity Initiative step-in arrangements are not relevant to the services FCU still receives from Co-op Money and submits that these services have been highlighted by FCU in a belated attempt to buttress its objections to the Continuity Initiative. He says that the debit cards dating back to when FCU used Co-op Money’s banking services have been cancelled and FCU’s members have been issued with new cards by FCU. He also that FCU’s access to Co-op Money’s historic banking platform was intended only to apply to August 2018 and that Baywide
has offered to facilitate FCU’s access to the platform if it exercises its step-in rights under the Continuity Initiative.
[60] With regard to the October 2018 KPMG report, Mr Friar says the report was prepared for the Co-op Money Board, that neither the Board nor the Co-op Money Trustees are under any obligation to provide the report to FCU or any of the Co-op Money members, and the substance of the KPMG report has already been provided to FCU through the disclosure of the April 2019 report which updated both the February 2018 and the October 2018 reports and included an explanation of the change in Co- op Money’s cash position in 2018.
Approach to application
[61] It is well settled that in considering an application for an interlocutory injunction, the Court is required to address:5
(a)Whether the applicant has established that there is a serious question to be tried;
(b)Where the balance of convenience lies; and
(c)Where the overall justice lies.
Is there a serious question to be tried?
Disposition under ss 346-348 of PLA
[62] The principal question is whether there is a serious question as to whether the granting of a security interest over assets of Co-op Money under the Continuity Initiative constitutes a disposition under ss 346 - 348 of PLA and, if so, whether an injunction can be granted to restrain the execution of the documents to implement the Continuity Initiative.
5 American Cyanamid Co v Ethicon Ltd [1975] AC 396, [1975] 1 All ER 504 (HL); Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd [1985] 2 NZLR 129 (CA) at 142.
[63] Sections 346-348 of the PLA are key provisions in subpart 6 of Part 6 of the PLA which provides for the setting aside of dispositions that prejudice the interests of creditors.
[64]Sections 345 – 348 of the PLA relevantly provide:
345Interpretation
(1)For the purposes of this subpart,—
(a)a disposition of property prejudices a creditor if it hinders, delays, or defeats the creditor in the exercise of any right of recourse of the creditor in respect of the property; and
(b)a disposition of property is not made with intent to prejudice a creditor if it is made with the intention only of preferring one creditor over another; and
…
(2)In this subpart, unless the context otherwise requires,—
disposition means—
(a)a conveyance, transfer, assignment, settlement, delivery, payment, or other alienation of property, whether at law or in equity:
…
346Dispositions to which this subpart applies
(1)This subpart applies only to dispositions of property made after 31 December 2007—
(a)by a debtor to whom subsection (2) applies; and
(b)with intent to prejudice a creditor, or by way of gift, or without receiving reasonably equivalent value in exchange.
(2)This subsection applies only to a debtor who—
(a)was insolvent at the time, or became insolvent as a result, of making the disposition; or
(b)…
347Application for order under section 348
(1)Only the following may apply for an order under section 348:
(a)a creditor who claims to be prejudiced by a disposition of property to which this subpart applies (whether the
disposition was made before or after the debtor became indebted to the creditor):
…
(2)The application must specify the disposition claimed to be prejudicial, and the property or compensation sought through the application.
(3)The application, together with a notice communicating the effect of sections 348 and 349, must be served on—
(a)the person in whose favour the disposition of property was made; and
(b)any other person from whom property or compensation is sought through the application.
348Court may set aside certain dispositions of property
(1)A court may make an order under this section—
(a)on an application for the purpose (made and served in accordance with section 347); and
(b)if satisfied that the applicant for the order has been prejudiced by a disposition of property to which this subpart applies.
(2)The order must do 1, but not both, of the following:
(a)vest the property that is the subject of the disposition in the person (for any applicable purpose) specified in section 350:
(b)require a person who acquired or received property through the disposition to pay, in respect of that property, reasonable compensation to the person (for any applicable purpose) specified in section 350.
…
[65] I agree that the granting of a security interest to Baywide over the assets of Co- op Money would come within the definition of “disposition” in s 345(2)(c). Under the General Security Deed, “security interest” is defined to have the meaning in s 17 of the Personal Property Securities Act 1999 (PPSA)6 and, in respect of real property
6 Section 17 of the PPSA provides:
(1)In this Act, unless the context otherwise requires, the term security interest—
(a)means an interest in personal property created or provided for by a transaction that in substance secures payment or performance of an obligation, without regard to—
and other property to which the PPSA does not apply, to include a charge over such property.
[66] More important, however, is whether the granting of the security is a disposition to which subpart 6 applies in terms of s 346. From the evidence given in the affidavits of Mr Lee and Mr Scott and the Continuity Initiative documents, I consider it more likely than not that the purpose of the security is to secure the arrangements to give effect to the Continuity Initiative rather than with intent to prejudice FCU. I also consider that on the face of the documents, the security applies only to indebtedness under the “Transaction Documents” that make up the Continuity Initiative and does not extend to indebtedness incurred under pre-existing documents and arrangements such as the BCNs. I do not consider that Co-op Money and Baywide, as the parties to the General Security Deed, could, on a good faith application of the Deed, use paragraph (d) of the definition of “Transaction Documents” to include the BCNs, particularly if FCU is not a party to the Continuity Initiative.
[67] It follows that ss 345(1)(b) and 346(1)(b) would exclude the granting of the security interest from the application of s 348. I am doubtful, therefore, that there is a serious question to be tried as to whether the granting of the security is a disposition to which subpart 6 of Part 6 of the PLA applies, even if that issue is primarily for determination by the Court that hears FCU’s substantive application.
(i)the form of the transaction; and
(ii)the identity of the person who has title to the collateral; and
(b)includes an interest created or provided for by a transfer of an account receivable or chattel paper, a lease for a term of more than 1 year, and a commercial consignment (whether or not the transfer, lease, or consignment secures payment or performance of an obligation).
(2) …
(3)Without limiting subsection (1), and to avoid doubt, this Act applies to a fixed charge, floating charge, chattel mortgage, conditional sale agreement (including an agreement to sell subject to retention of title), hire purchase agreement, pledge, security trust deed, trust receipt, consignment, lease, an assignment, or a flawed asset arrangement, that secures payment or performance of an obligation.
[68] However, even if the granting of the security is a disposition to which subpart 6 applies, I agree with Mr Friar that subpart 6 sets up a regime that is intended to apply after a disposition has been made and specifies the remedies that can be ordered by the Court in that circumstance. Section 347 sets out the categories of persons who may apply for an order under s 348 and the procedures, including notice requirements, to be followed in an application for an order under s 348. The applicants have not complied with those requirements.
[69] More importantly, s 348 provides that where a court is satisfied that an application has been made and served by an applicant who “has been prejudiced” by a disposition of property to which the subpart applies, the Court may grant only one of two remedies. It may either:
(a)Vest the property in the person specified in s 350; or
(b)Require the person who received the property to pay reasonable compensation to the person specified in s 350.
[70] Section 348 does not provide for or envisage the Court making orders that prospectively prevent a disposition from occurring. As Mr Friar says, were the Court to grant such orders prospectively, there would a risk of creditors applying to prevent commercial transactions from proceeding on the grounds that the transaction may prejudice their interests. I am satisfied that subpart 6 of Part 6 of the PLA was not intended to have that result. I am also satisfied that because s 347 specifies the circumstances in which an order may be given under s 348 and because s 348 specifies the orders that can be made under that section, this Court does not have the jurisdiction to grant an injunction to prevent a disposition from occurring on the grounds that the disposition, if made, would be a disposition to which s 348 applies.
[71] In this respect, the situation in this case is the reverse of that in Wilding v Te Mania Livestock Ltd.7 In that decision, Dunningham J declined an application for an interim injunction on the grounds that the section of the Companies Act 1993 relied on to support the application for a permanent injunction provided only for orders to
7 Wilding v Te Mania Livestock Ltd [2015] NZHC 2105.
restrain a company director from engaging in conduct that would contravene the company’s constitution or the Companies Act but did not allow the Court to remove a director for past misconduct. Nonetheless, the logic that Dunningham J applied in that case applies equally to this case. If the legislative provision relied on to support the application for a permanent injunction does not provide for such a remedy, an application for an injunction in reliance on that provision does not raise a serious question to be tried.
[72] For these reasons, I am satisfied that there is not a serious question to be tried with respect to the claim that an injunction can be issued to restrain execution of the Continuity Initiative on the grounds that the granting of a security interests over assets of Co-op Money would amount to a disposition under ss 346-348 of the PLA.
Alleged prejudice to FCU caused by exclusion from Continuity Initiative step-in rights
[73] A secondary question is whether there is a serious question to be tried about whether FCU’s exclusion from the Continuity Initiative results in prejudice to FCU because of FCU’s use of Co-op Money’s services with respect to expired debit cards and Co-op Money’s historic banking platform.
[74] Mr McLellan did not pursue in oral submissions the claim based on expired debit cards and did not contest Mr Friar’s assertion that the cards have been cancelled and replaced by cards issued by FCU. That aspect of FCU’s claim to prejudice cannot succeed. The claim based on the asserted need to access an historic banking platform is also without merit given that the platform is due to be phased out and that Baywide has offered FCU access to the platform if it exercises the step-in rights under the Continuity Initiative.
Disclosure of October 2018 KPMG Report
[75] The applicants’ assertion that access to the report is important to their understanding of how the change in the cash position of Co-op Money is not convincing given that the reasons for the change are stated in the April 2019 report. On the other hand, the respondents’ contentions as to why they should not be required to make the report available, even with redactions to protect commercially sensitive
information, are formalistic and also unconvincing given that Co-op Money has made available both the February 2018 report and the April 2019 report, and the October 2018 report is part of that sequence.
[76] I do not consider the dispute over access to the October report between two parties who obviously struggle to cooperate is a serious issue that warrants the Court’s intervention.
Balance of convenience and overall interests of justice
[77] I consider that the balance of convenience and the overall interests of justice do not favour either side strongly.
[78] The applicants say their interests would be irrevocably prejudiced if the respondents are not restrained and sign up to the Continuity Initiative, whereas the only prejudice to Co-op Money will be delay pending a resolution of the issues with FCU. The respondents say that tens of thousands of “Mum and Dad” investors will be exposed to serious financial inconvenience, if not more, if Co-op Money is prevented from putting in place the arrangements that have been designed at the behest of the Reserve Bank to safeguard their interests. The respondents also say that if FCU has a genuine claim based on ss 346-348 of the PLA, it can make that claim against any party to which Co-op Money’s assets are distributed.
[79] Given FCU’s acceptance that the BCNs are deeply subordinated debt that is likely to rank lower than any other claims to the assets of Co-op Money, FCU’s claim of “irrevocable prejudice” in being excluded from the Continuity Initiative is overstated. Its assertions of prejudice, particularly those based on expired debit cards and access to an historic banking platform, are not convincing.
[80] That said, FCU’s concern that implementation of the Continuity Initiative may prejudice its interests has some substance. Under the General Security Deed, the security applies only to indebtedness under the “Transaction Documents” that make up the Continuity Initiative and the application of proceeds under Clause 10 of the Deed is limited to discharging the costs of the receiver, the costs of Baywide in exercising its rights, payment of claims having priority over the Secured Indebtedness,
and satisfaction of the Secured Obligations. Even so, a receiver appointed by Baywide under clause 9 may deal with all of Co-op Money’s property given the breadth of the definitions of “Other Property”, “Personal Property” and “Secured Property”. That would appear to include a right to deal with the BCNs and to make decisions that would impact on FCU’s ability to redeem its BCNs. It is understandable, therefore, that FCU is concerned that it will have no right to be involved in decisions appointing the receiver.
[81] On the other hand, the Continuity Initiative is an important undertaking that Co-op Money is pursuing at the behest of the Reserve Bank and with the objective of safeguarding the interests of the customers of the User Credit Union. I accept, therefore, that implementation of the Continuity Initiative should not be unreasonably delayed or derailed by FCU, which has no direct interest in the services that the Continuity Initiative seeks to protect. That said, Co-op Money appears to have taken an aggressive stance towards FCU in its pursuit of the Continuity Initiative. For example, it refused, until court action was taken, to share the base documents with FCU which, even if FCU is no longer a user of Co-op Money’s banking services, is still a major member of Co-op Money and clearly has an interest in the future of Co- op Money. That interest must include an interest in the Continuity Initiative which is likely to play a large part in the future of Co-op Money.
[82] For these reasons, I consider that the balance of convenience and the overall interests of justice do not lie strongly in either direction, particularly now that there is no longer a majority of Co-op Money members in favour of the Continuity Initiative. Even so, given the wider public interest in the purposes of the Continuity Initiative, I consider that these factors still favour the position of Co-op Money, even if by a narrow margin.
Conclusion
[83] There is not a serious question to be tried about whether an injunction can be granted to restrain the execution of the documents to implement the Continuity Initiative on the basis that the granting of a security interest over assets of Co-op Money under the Continuity Initiative constitutes a disposition under ss 346 - 348 of
Property Law Act 2007 or as to whether exclusion from the Continuity Initiative results in prejudice to the FCU because of FCU’s continued use of services with respect to expired debit cards and an historic banking platform.
[84] There is not a serious question to be tried about whether Co-op Money should provide FCU with a copy of the report prepared by KPMG for the Co-op Money Board in October 2018.
[85] The balance of convenience and the overall interests of justice do not favour the granting of an interim injunction restraining the Co-op Money Trustees and the Board of Co-op Money from authorising or executing any documents to implement the Continuity Initiative.
Result
[86]The application for an interim injunction is dismissed.
Costs
[87] Co-op Money is entitled to costs on a 2B basis. If the parties cannot agree costs, Co-op Money may apply by memorandum of no more than four pages filed and served no later than 24 June 2019. FCU may reply by memorandum of no more than four pages filed and served no later than 15 July 2019.
G J van Bohemen J
Solicitors:
Anthony Harper, Auckland Bell Gully, Auckland
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