Heartland Bank Limited v Francis
[2024] NZHC 3788
•13 December 2024
IN THE HIGH COURT OF NEW ZEALAND WHANGAREI REGISTRY
I TE KŌTI MATUA O AOTEAROA WHANGĀREI-TERENGA-PARĀOA ROHE
CIV-2024-488-000066
[2024] NZHC 3788
BETWEEN HEARTLAND BANK LIMITED
Applicant
AND
BENJAMIN BRIAN FRANCIS and GARRY CECIL WHIMP
Respondents
Hearing: 4 December 2024 Appearances:
S Judson for the Applicant
B Gustafson for the Respondents
Judgment:
13 December 2024
JUDGMENT OF ASSOCIATE JUDGE COGSWELL
This judgment was delivered by me on 13 December 2024 at 11.30 a.m. pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar Date.......................................
Solicitors:
Crimson Legal, Auckland
Anthony Harper, Christchurch B Gustafson, Auckland
HEARTLAND BANK LTD v FRANCIS & WHIMP [2024] NZHC 3788 [13 December 2024]
Introduction
[1] Heartland Bank Limited (Heartland) seeks leave by originating application to withdraw its deemed surrender of charge following its failure to respond to a notice issued by the respondent liquidators under s 305 of the Companies Act 1993 (the Act).
Procedure
[2] This proceeding is made by way of originating application and leave is sought by Heartland under r 19.5 to use that procedure.
[3] The liquidators consent to determination of this application by originating application.
[4] This application is suitable for determination by originating application and I grant leave to commence this application by originating application.
Background
[5] This case concerns the liquidation of Yates Forest Harvesters Ltd (in liq) (Yates).
[6] Heartland held security over various assets owned by Yates. This was pursuant to funding made available to Yates by Heartland.
[7]Yates was liquidated by shareholders’ resolution on 28 May 2024.
[8] The next day, the liquidators issued a notice under s 305(1) of the Act. Section 305, as relevant, provides:
(1)A secured creditor may—
(a)realise property subject to a charge, if entitled to do so; or
(b)value the property subject to the charge and claim in the liquidation as an unsecured creditor for the balance due, if any; or
(c)surrender the charge to the liquidator for the general benefit of creditors and claim in the liquidation as an unsecured creditor for the whole debt.
(2)A secured creditor may exercise the power referred to in paragraph (a) of subsection (1) whether or not the secured creditor has exercised the power referred to in paragraph (b) of that subsection.
…
(8)The liquidator may at any time, by notice in writing, require a secured creditor, within 20 working days after receipt of the notice, to—
(a)elect which of the powers referred to in subsection (1) the creditor wishes to exercise; and
(b)if the creditor elects to exercise the power referred to in paragraph (b) or paragraph (c) of that subsection, exercise the power within that period.
(9)A secured creditor on whom notice has been served under subsection (8) who fails to comply with the notice, is to be taken as having surrendered the charge to the liquidator under subsection (1)(c) for the general benefit of creditors, and may claim in the liquidation as an unsecured creditor for the whole debt.
(10)A secured creditor who has surrendered a charge under subsection (1)(c) or who is taken as having surrendered a charge under subsection (9) may, with the leave of the court or the liquidator and subject to such terms and conditions as the court or the liquidator thinks fit, at any time before the liquidator has realised the property charged,—
(a)withdraw the surrender and rely on the charge; or
(b)submit a new claim under this section.
[9] Through inadvertence, Heartland failed to respond to the s 305 notice within the required 20 working days.
[10] The effect of that failure is that Heartland is deemed to have surrendered its charge in favour of the liquidators for the general benefit of creditors.
[11] Heartland, on realising its failure, corresponded with the liquidators, drawing Heartland’s failure to their attention and seeking the liquidators’ consent to withdraw the surrender and rely on the charge. That agreement was not forthcoming.
[12]Heartland then made the present application on 1 August 2024.
[13] The liquidators have realised some of the previously secured assets, and further to an interim agreement between the parties, the net proceeds of that realisation are held pending the outcome of this application.
[14] The sum of $62,674.96 is held by the liquidators pending the outcome of this application. The parties agree that the liquidators’ costs of realisation have been met from the proceeds of sale, including a contribution to the liquidators’ costs and their legal costs in accordance with the interim agreement. The amount of $5,000 was allocated to liquidators’ time in dealing with the assets and the sum of $2,500 was allocated to the liquidators’ legal costs under the interim agreement.
Approach
[15] The issue for determination is whether the Court should exercise its discretion under s 305(10) of the Act to permit the withdrawal of the surrender to enable Heartland to rely on its previously held charge. For the reasons set out below, the Court is of the view that this is an appropriate case to order that the surrender be withdrawn, thereby entitling Heartland to rely on its charge.
[16]The following factors are considered by the Court:1
(a)The reasons why an applicant surrendered security or surrendered the charge.
(b)The reasons why an applicant desires to reassert what they surrendered.
(c)The effect of a decision on the secured creditor.
(d)The effect of a decision on the general body of creditors.
(e)Whether the decision would prejudice any of the creditors.
(f)Whether the decision would cause substantial expense or delay.
[17] The Court has a broad discretion in exercise of the power to grant leave to withdraw the surrender. The discretion is unfettered. It must, nonetheless, be exercised judicially.
1 Consolidated Technologies Development (NZ) Ltd v McCullagh HC Auckland CIV-2005-404- 6112, 15 May 2006; A J Park v Nepri Ltd (in Liq) HC Auckland CIV-2009-404-2629, 15 February 2010.
The considerations
[18] Was the failure to respond to the s 305 notice a mistake? I find that it was. There is uncontroverted evidence from Heartland that its failure to respond was an error. The mistaken failure to respond to the notice is one of the fact situations that the section is intended to cover.
[19] The parties both filed evidence as to whether Heartland as a matter of practice allowed its security to be surrendered or not. The liquidators attempt to cast Heartland as a party that regularly allows its security to lapse. Whether that is the case in relation to other customers is not relevant to the particular circumstances of this case. Each case must turn on its own facts and, in this case, the evidence is that the surrender was in error.
[20] I do not find that the evidence demonstrates a “policy” of Heartland allowing its security to lapse, as the evidence shows that Heartland will on occasion allow that to occur and on occasion elect to enforce its rights as a secured party.
[21] It is clear that Heartland makes its decision on the basis of the facts specific to each lending; there is not a blanket approach as that contended for by the liquidators. In this case, Heartland wished to maintain its security, but it failed to respond to the s 305 notice in time.
[22]There was no undue delay by Heartland in asserting its position.
[23] The following chronology demonstrates that Heartland acted promptly on realising that its security had lapsed:
(a)Section 305 Notice issued — 29 May 2024.
(b)Section 305 Notice expired and security deemed surrendered — 27 June 2024.
(c)Liquidators write to Heartland confirming security surrendered — 28 June 2024.
(d)Heartland advises liquidators that it wished to maintain its security — 10 July 2024.
(e)Heartland seeks liquidators’ consent to withdraw the surrender — 18 July 2024 — there was no response to this letter from the liquidators.
(f)Heartland files this application — 1 August 2024.
[24]Heartland did not sit on its rights, rather, it promptly asserted them.
[25] There is no prejudice to the liquidators or the general body of creditors should the surrender be withdrawn.
[26] Whilst there is an argument that, by necessity, the general body of unsecured creditors are affected by the withdrawal of the surrender, and the consequent unavailability of those assets to unsecured creditors, they are not subject to “significant” prejudice beyond simply the restoration of the previously existing position.
[27]The Court in AJ Park said on this issue:2
It is almost certain that an order under s305(9) will result in that applicant improving his/her position at the expense of other classes of creditor. The fact that such a result is likely to follow from the making of an order suggests that, of itself, the disadvantage to the other creditors ought not to be viewed as a relevant prejudice to be taken into account when deciding the application.
[28] There is no “significant” prejudice to the unsecured creditors in the withdrawal of the surrender, as they previously had no entitlement to realise the assets charged in favour of Heartland.3 Any ability to now realise those assets would only arise from Heartland’s error and would represent an unjustified windfall.
[29] The Inland Revenue has not been prejudiced, as the GST payable on the realisation of the assets has been paid to it.
2 AJ Park, above n 1, at [29].
3 AJ Park, above n 1, at [19].
[30] Counsel for the liquidators properly acknowledged that the liquidators were not able to point to any specific prejudice beyond the inability to access the funds made available by the realisation of the Heartland secured assets.
[31] There is no evidence that it is not possible now to revert to treating Heartland as a secured creditor. The interim agreement protects that position.
[32] Conversely, there is prejudice to Heartland if the surrender was maintained, as it had advanced funds and organised its affairs on the basis that it was a secured creditor.
[33] Effectively, if the surrender is withdrawn all parties are simply restored to the position they were in before the charges were surrendered and the charged property transferred. Their rights and remedies are unaffected.4
[34] On discovering that it had inadvertently failed to respond to the s 305 notice, Heartland acted promptly, advised the liquidators of the error, and sought to have the liquidators agree to withdraw the surrender, such agreement not being forthcoming.
[35] That contact took place before the liquidators had taken any steps or changed their position in any way adverse to them.
[36] The interim agreement to realise some of the charged assets was reached on the basis that the liquidators’ costs of sale were recovered from the proceeds of sale and they were.
[37] The liquidators later costs arise from their refusal to consent to the withdrawal of the surrender and their opposition to this application.
[38] I consider that the liquidators should have consented to the withdrawal of the surrender in response to Heartland’s request for their consent on 18 July 2024. The surrender was clearly in error, the request was made promptly and there was no prejudice in granting the withdrawal of surrender.
4 AJ Park, above n 1, at [17]; McCullagh, above n 1, at [67].
[39] By that date, the liquidators had not incurred legal costs relating to the s 305 issue that was arising. Their direct costs of protecting and realising the assets were met. The liquidators could have avoided the further legal and liquidators’ costs incurred had they granted the consent sought.
[40] There are a number of other factors which are not relevant, and which have not affected the Court’s exercise of its discretion.
[41] The liquidators cannot be criticised for their conduct in promptly issuing notice under s 305. That is a perfectly permissible step for them to have taken and is part of their overriding duty under s 253 of the Act to protect and realise assets for the benefit of creditors.
[42] Similarly, the service of the notice by email was a step permitted by Heartland in its financing arrangements. The liquidators cannot be criticised for using the method of communication prescribed by Heartland. Heartland accepts that service was properly effected.
[43] The Court also does not consider it relevant that Heartland did not take legal advice in relation to the notice. It is an experienced commercial party, being fully aware of the consequence of a s 305 notice, and the steps it should take in response to such a notice.
[44] In the particular circumstances of this case where the failure to respond to the notice was inadvertent, with no significant prejudice to the liquidators or the general body of creditors as the generally accepted state of affairs is restored, I grant leave to Heartland to withdraw the deemed surrender of charge under s 305(9) of the Act and to rely on its charge.
[45]Both parties seek costs.
[46] Given that Heartland is being granted an indulgence arising from its own inadvertence, I do not consider that it is entitled to costs in its favour, notwithstanding that it was the successful party.
[47] I do not consider that the evidence demonstrates any bad faith on the part of the liquidators and Heartland made it clear in argument that their criticism of the liquidators was only that they should have consented to the withdrawal of the surrender when asked.
[48] The liquidators could have avoided the further costs they incurred by consenting to the withdrawal of the surrender. They have had their direct costs incurred on the protection and realisation of the assets met from the proceeds of sale of those assets in accordance with the interim agreement.
[49] The further costs they incurred arose from their refusal to consent to the withdrawal of the surrender.
[50] They had two opportunities to avoid further costs, one when Heartland sought their consent on 18 July 2024 and one when Heartland was forced into filing this application. Both occasions were met with opposition by the liquidators. They should have consented.
[51]I make an order that costs are to lie where they fall.
Outcome
[52] I grant leave under r 19.5 of the High Court Rules 2016 to commence this application by originating application.
[53] I grant leave under s 305(10) of the Companies Act 1993 for Heartland Bank Limited to withdraw the surrender and rely on its charge.
[54]Orders for costs as at [51].
Associate Judge Cogswell
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