McKay v 314 Maunganui Road Limited HC Auckland CIV 2007-404-7434

[2008] NZHC 2295

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2007-404-7434

UNDER  the Contractual Remedies Act 1979

BETWEEN  PAUL CRAIG MCKAY Plaintiff

AND314 MAUNGANUI ROAD LIMITED Defendant

Hearing:         19 March 2008

Appearances: K M Quinn for Plaintiff

No appearance by or on behalf of Defendant

Judgment:      30 April 2008

JUDGMENT OF KEANE J

This judgment was delivered by Justice Keane on 30 April 2008 at 4pm pursuant to Rule540(4) of the High Court Rules.

Registrar/ Deputy Registrar

Date:

Solicitors:

Sharp Tudhope, Tauranga for Plaintiff

MCKAY V 314 MAUNGANUI ROAD HC AK CIV 2007-404-7434 30 April 2008

[1]      On 19 April 2005 Paul McKay, a Mt Maunganui company director, entered into an agreement for sale and purchase with 314 Maunganui Road Limited, to purchase an office unit on the first floor of a multi-storey building, the Customhouse, that MRL was to construct at the address from which it derives its name.

[2]      On 8 June 2007 when the Customhouse was largely complete, Mr McKay cancelled the contract and sought the return of his deposit, $86,700. MRL resists that claim and counterclaims for $225,922, the losses it incurred, it says, as a result of Mr McKay cancelling.

[3]      The issue will be, should the action go to trial, whether Mr McKay was entitled to cancel for breach, on the ground that the unit, as constructed, differs so materially from the specification underpinning the agreement for sale and purchase as to reduce substantially the benefit he was to obtain from the contract. The more immediate  question  is  whether  Mr  McKay  is  entitled,  under  HCR  567,  to  a pre-judgment charging order.

[4]      On  29  November  2007  Associate  Judge  Robinson  declined  to  grant  Mr McKay the leave he required under that rule. Mr McKay had, he held, failed to show that, as the rule requires, MRL was making away with its property with intent to defeat its creditors generally or him in particular. MRL’s declared intent to use the deposit paid to meet a demand from its first mortgagee, he held, did not amount to such an intent.

[5]      On this review Mr McKay contends that MRL’s declared intent to apply the deposit paid in that way, instead of returning it to him, is a fully sufficient basis for the protection he requires under the rule and the leave he seeks. Until that issue is resolved on this review he has the benefit of an interim charging order Allan J granted him on 30 November 2007.

[6]      On this review Mr McKay seeks alternatively an interim injunction. There is, he contends, a serious question to be tried and the balance of convenience, and justice overall, favours MRL’s solicitors continuing, as they have done for the past three  years,  to  hold  the  deposit.  I  am  not  inclined  to  entertain  that  alternative

application. It was not before the Associate Judge. It arose without notice on this appeal. If Mr McKay is not entitled to a pre-judgment charging order there has also to be an equally large question whether he is entitled to injunctive relief.

Context

[7]      In December 2004 MRL sought to sell in concept, on the basis of indicative plans and specifications, apartments, offices and shops in a multi-storey building to be constructed at 314 Maunganui Road, Mt Maunganui, to be known as the Customhouse.

[8]      Mr McKay was attracted by the concept advertised. Relying, he says, on the finishes proposed and the prices MRL was canvassing for, what was on offer, he understood, was a ‘high end’ proposal. The apartments offered ranged in price from

$520,000 to $1.345M. The shops offered lay in the range $403,000 - $1.4M. Of the two office units offered, the price for the larger was $2.027M. That for the smaller, which Mr McKay purchased, was $578,000.

[9]      On 19 April 2005 Mr McKay and MRL entered into the agreement for sale and purchase. The price was that advertised. It was later varied to $607,000 when the unit proved larger than anticipated. Mr McKay paid the deposit, $86,700. Settlement was to take place on 11 June 2007. In January 2007, however, Mr McKay gave notice  that  he  was  considering  cancelling.  The  office  unit,  by  then  largely constructed, departed from the specification, he said, in six ways.

[10]     Mr McKay had two concerns principally. One was that the office space was punctuated by large columns not shown in the plans at purchase. The other was that the ceilings were lower than specified and, worse, were not suspended. He estimated the unit to be worth $75,000 - $100,000 less than the price he had agreed to pay. He later  obtained  a  valuation,  dated  24  August  2007,  attributing  to  it  a  value  of

$475,000.

[11]     The resulting impasse was not resolved. On 8 June 2007 Mr McKay had his solicitors cancel the contract and sought the return of his deposit. On 26 June 2007

MRL responded by settlement notice, stating that settlement was to have occurred on

11 June 2007, that MRL was then ready able and willing to settle, and that Mr McKay was in default. MRL reserved the right to resort to its remedies as vendor if Mr McKay did not settle within the next ten days.

[12]     On 9 November 2007 MRL gave notice to Mr McKay that, as a result of his failure to comply with the notice, it cancelled the agreement. It had entered, it said, into an unconditional agreement for sale and purchase of the office unit to another purchaser. (It had sold at auction on 30 October 2007 for $465,000.) MRL retained Mr McKay’s deposit by way of forfeit.

[13]     Mr McKay disputed MRL’s right to retain the deposit and on 29 November

2007  began  this  action,  prompted  by  a  letter  from  MRL’s  solicitors  dated  16

November 2007, on which Mr McKay now relies to obtain a charging order until judgment is entered. That letter to Mr McKay’s solicitors says this:

We have now received a demand from the first mortgagee for the release of the deposit held in our Trust Account. In the absence of a Court Order to the contrary we feel that we have no choice but to release the deposit. We will do so unless a Court order is received before 5 pm on 30 November 2007 requiring us to hold the deposit.

[14]     Mr McKay’s underlying concern is this. Unless the deposit continues to be held  in  MRL’s  solicitor’s  trust  account,  secured  by charging order,  Mr  McKay contends, his claim will be rendered futile. The Customhouse development, he says, has not lived up to expectation and if MRL, incorporated just for this development, is rendered insolvent he can expect nothing.

[15]     Mr McKay’s basis for that fear is that the apartments, shops and offices have not sold at the prices MRL canvassed for and the unit he purchased is illustrative. When sold at auction it had features to which he would not have been entitled, worth in excess of $50,000, and when they are taken into account MRL sold the unit at a price $185,000 less than he had agreed to pay, a reduction in market value of 30.5 percent.

[16]     MRL was incorporated just for this development, he says, and is likely to become insolvent. If then he is to sit with other creditors on a liquidation he can

expect nothing. On this review, however, he relies only on MRL’s declared intent to pay over the deposit to its first mortgagee. That is a payment, he says, completely inconsistent with his interest, extinguishing any likelihood that he will be repaid, and that is enough to entitle him to the protection he seeks.

[17]     MRL, though it has brought a counterclaim well in excess of Mr McKay’s claim for the loss it incurred as a result of Mr McKay cancelling, $225,922, neither consents to nor opposes the order sought on this review.

Jurisdiction on review

[18]     Jurisdiction  on  review  is  conferred  by  s  26P  of  the  Judicature  Act,  as enlarged by HCR 61C. Where there has been argument and recorded reasons, as was the case here, the review proceeds as an appeal by way of rehearing (subclause (4)). Otherwise it is a hearing de novo (subclause (4A)).

[19]     A Judge on review may rehear all or any part of the evidence and receive more, if the interests of justice require; and give the decision under review such weight as seems appropriate (subclause (4B), (5)). Here there is no call for any further evidence. Everything turns finally on what meaning is to be given to HCR

567.

HCR 567: scope and purpose

[20]     Mr McKay’s principal point is that the Associate Judge misconstrued HCR

567. He construed it as requiring proof that MRL was intent on defeating, illegitimately, his claim or that of creditors generally. The rule, Mr McKay contends, does not call for that. It only calls for an intent on MRL’s part to prefer its first mortgagee, by paying the deposit held to it as opposed to him, knowing that the inevitable consequence will be to defeat his claim.

[21]     In this Mr McKay relies on a decision that the Associate Judge distinguished,

Lennox-King v Johnson (1997) 10 PRNZ 664, in which Fisher J, at 666, said this:

If a potential judgment creditor can foresee that a necessary consequence of a cause of action will be to defeat a plaintiff’s claim and goes ahead in that knowledge, while having wholly laudable motives for doing so, it will still amount to a course of action taken with the intention of defeating the claim of the plaintiff.

[22]     Mr McKay is, I accept, entitled to rely on that interpretation of the rule, which stands quite independently of the facts of that case to which I will return briefly later. In that, perhaps, I differ from the Associate Judge. But I am unable myself to read the rule so widely; and in all the other cases that I have been able to discover it has been read more narrowly.

[23]     One must begin with HCR 567, itself, which says this:

Leave to issue a charging order before judgment shall be granted only on proof that the opposite party, with intent to defeat either his creditors or the party applying or both -

(a)       Is making away with his property; or

(b)       Is absent from or about to quit New Zealand.

[24]     This rule serves the same purpose as a Mareva injunction. Once an action is begun it enables a party, usually the plaintiff, to secure from disposal any property in issue before the merits are gone into and any judgment given. To obtain the benefit of the rule a claimant need not show a serious question to be tried or that he or she is favoured by the balance of convenience and justice overall, but must satisfy a test that is equally stringent.

[25]     To obtain an order the claimant must show, obviously enough, that the party who controls the asset is about to do something that will defeat his or her claim. But that this will be the effect is not enough. Not every such disposal qualifies. The one who has the property must be proved to have a particular intent. Not just an intent to dispose of the property but an ‘intent to defeat’ the claim and to do so by ‘making away’ with the property. In short an intent to act illegitimately.

[26]     In Foodstuffs (Auckland) Ltd v Brown HC Ak M 1117/98, 17 August 1998, Giles J was in no doubt, at 13 – 14 that HCR 567 calls for proof of ‘nefarious intent’. Other more recent instances of the rule understood and applied in that way, are

Hieber  v  Commissioner  of  Inland  Revenue  [2000] 3 NZLR 718, Laurenson J;

Commissioner  of  Inland  Revenue  v  Skudder  HC  Ak  CIV    2006-404-5287,  11

October 2007, paras [20] – [21], Courtney J; perhaps also Jawa Decorating Ltd v

Brancikova     HC Ak CIV 2003-404-757, 23 February 2004, Heath J.

[27]     Perhaps the most telling illustration of the rule understood in this narrower, more demanding way, lies in the case on which the Associate Judge did rely, Hammond Land Holdings Ltd v Elders Pastoral Ltd (1989) 2 PRNZ 232, CA. There, in upholding the decision of the Judge under appeal not to give a pre-judgment charging order, the Court took the meaning of the rule for granted; and the lesson to be taken from that case lies in how the Court applied the rule.

[28]     In seeking a charging order Elders sought to forestall Hammond from making one or other of two foreshadowed forms of payment, each inconsistent with its interest. Neither form of payment, the Court of Appeal held, justified the grant of a charging order to Elders and for contrasting reasons.

[29]     The first payment that Elders feared, a payment to a trust, the Court clearly saw as illegitimate, describing it at 237, as a payment ‘in such a way as to put Elders’ proper entitlement out of reach’. Had the evidence shown that Hammond was intent on making that payment the Court would clearly have been sympathetic to the grant of an order. But the evidence was not there. Elders’ concern, the Court held, was ‘no more than surmise’.

[30]     The second payment Elders feared, a payment out to creditors generally, pro rata, if Hammond became insolvent, the Court held, was a distinct possibility. But it did not justify the grant of a charging order either. In intimating to Elders that it might have to make such a payment out, the Court held, Hammond was ‘simply stating the obvious’. The Court must then have seen Elders as entitled to no more than any other creditor on a distribution. If on a distribution Elders obtained little or nothing that remained its entitlement in law.

[31]     In the Lennox-King decision Fisher J may have interpreted HCR 567 more widely than I am able to, or as is to be found in the cases, but on the evidence his

decision  sits  easily  with  the  rule  understood  more  narrowly.  The  properties  he granted leave to be charged belonged to a wife who intended to dispose of one, not to defeat creditors but to keep her family solvent and secure. The husband had already, however, in a strategy to defeat their creditors, disposed of the properties in his name. Fisher J saw the wife’s intent, however innocent in isolation, as not to be divorced from her husband’s wider illegitimate strategy.

[32]     Be that as it may, even if the rule were to be understood in the wider way to which Fisher J was attracted, that would not assist Mr McKay on the evidence. He would still have to show that MRL, in paying over the deposit to its first mortgagee, knows that the necessary consequence will be to defeat his claim. As the Associate Judge held in declining him a charging order, Mr McKay has not been able to bring evidence of that cogency. There is indeed a complete dearth of evidence as to MRL’s actual state. Mr McKay’s concern, presently, is no more than surmise.

Right to deposit

[33]     That conclusion, on the evidence ultimately, means that I need not, strictly, consider Mr McKay’s related point, by which he seeks to distinguish Hammond; and that he advances quite generally. I do so only for completeness. That point is this.

[34]     Mr McKay is not, he contends, to be seen as an unsecured creditor of MRL entitled only to what comes to him in priority. The deposit he paid, he says, has never passed to MRL. It has remained in MRL’s solicitor’s trust account, solely attributable to the agreement for sale and purchase. If he cancelled validly, he contends, he is entitled to have it back in its entirety.

[35]     In advancing that argument, I understand Mr McKay to say that the sum paid in has an undisturbed specific identity. That of course cannot be literally so. In banking law a sum paid in ceases to be the money of the one who pays it. It becomes the money of the banker, who is obliged to return an equivalent sum: Foley v Hill (1948) HL Cas 28, 35. That must be so here.

[36]     More  basically,  MRL’s  solicitors  hold  the  deposit  on  trust  for  MRL  as vendor, not for Mr McKay as purchaser. Mr McKay retains no proprietary interest: Mayall v Weal [1982] 2 NZLR 385, 387. In paying the deposit he made a part payment and held out that he would complete the purchase. If he is in default, as MRL says he is, the deposit is indeed forfeit: Wordale v Polglase [1981] 1 NZLR

722.

[37]     Finally, it does not seem to me that anything turns on the remedy that Mr McKay seeks, an order for recovery of the specific sum under s 9(2)(a) of the Contractual Remedies Act, as opposed to an award of damages. The one does not enjoy any greater status than the other. Both, eventually, are judgment debts, contingent on judgment being given, and nothing more.

Conclusion

[38]     The Associate Judge was right, I consider, to decline to grant Mr McKay a pre-judgment charging order and on this review I uphold his decision. The consequence is that the interim charging order will cease as from the issue of this

judgment.

P.J. Keane  J