Merchant Finance Limited v Xu
[2022] NZHC 1111
•19 May 2022
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2019-404-1860
[2022] NZHC 1111
BETWEEN MERCHANT FINANCE LIMITED
Plaintiff
AND
RU XU and KARL EDWARD LITT
Defendants
AND
GDL MORTGAGES LIMITED
First third party
AND
WEIPING GE
Second Third Party
Hearing: On the papers Appearances:
DK Wilson for the Plaintiff
CR Goode and D Oh for the Defendants MJW Lenihan for the Third Parties
Judgment:
19 May 2022
JUDGMENT (No. 2) OF FITZGERALD J
[As to quantum of payment by plaintiff to defendants]
This judgment was delivered by me on 19 May 2022 at 3.00pm, pursuant to Rule 11.5 of the High Court Rules. Registrar/Deputy Registrar Date………………………….
Solicitors:Davenports City Law (G Whiteford), Auckland Loo & Koo (B Lee), Auckland
To:D Wilson, Auckland C Goode, Auckland M Lenihan, Auckland A Kashyap, Auckland
MERCHANT FINANCE LTD v XU [2022] NZHC 1111 [19 May 2022]
Introduction
[1] I delivered my substantive judgment in this proceeding on 21 December 2021.1 The detailed factual background to the claims in this proceeding are fully set out in my substantive judgment and are not repeated here.
[2] By way of very brief summary, the plaintiff (Merchant Finance), a second tier lender, advanced a loan to the defendants, the loan being secured by a mixed use property owned by the defendants (the Property). The defendants defaulted on the loan and Merchant Finance sold the Property at a mortgagee sale. In this proceeding, Merchant Finance sought to recover from the defendants the shortfall after the net sales proceeds from the Property had been applied to the outstanding loan balance. In response, the defendants counterclaimed, alleging Merchant Finance breached various of its disclosure and other obligations under the Credit Contracts and Consumer Finance Act 2003 (the Act), and requesting the Court to reopen the loan contract and grant relief on the basis of oppression. The defendants also brought a third party proceeding against the third parties, the mortgage broker which arranged the loan between Merchant Finance and the defendants.
[3] I found that Merchant Finance had breached a number of its obligations under the Act, namely s 17 (failure to give initial disclosure), s 18 (failure to provide continuing disclosure), s 38 (charging interest in advance) and s 41 (charging an unreasonable establishment fee). I otherwise dismissed the defendants’ counterclaim and its third party claim against the third parties.
[4] As I noted in my substantive judgment, the implication of Merchant Finance failing to give initial disclosure was that s 99(1A) of the Act applied.2 Pursuant to s 99(1A), because Merchant Finance had failed to provide initial disclosure (and at no time did it provide corrected initial disclosure), the defendants were not liable to pay the costs of borrowing during the period of Merchant Finance’s breach (these costs primarily being interest and default interest). As also noted in my substantive judgment, and pursuant to s 99(1C) of the Act, s 99(1A) did not apply to fees paid by
1 Merchant Finance Limited v Xu [2021] NZHC 3589.
2 At [246].
Merchant Finance to third parties (such as real estate agent and lawyers’ fees), so long as the third parties were not associated with Merchant Finance.3 Accordingly, despite the defendants not being liable to pay the costs of borrowing, Merchant Finance was entitled to “pass on” to the defendants certain fees paid by it, pursuant to s 99(1C).
[5] I observed at the conclusion of my judgment that, given the defendants were not liable to pay interest or default interest, and in light of the sale price achieved for the Property, Merchant Finance might in fact be required to pay a sum of money to the defendants, being the “surplus” of net sales proceeds once applied to the outstanding loan balance (excluding the costs of borrowing). I accordingly called for further submissions from the parties on this topic. I rather optimistically observed that “the calculations ought to be relatively straightforward”.4
[6] My optimism was misplaced. In the event, while it was not in dispute that Merchant Finance was obliged to refund monies to the defendants (Merchant Finance’s position being that it would need to pay the defendants $143,189), there is a dispute between the parties about the quantum of the refund.
[7]In the event, the following post-judgment steps have been taken:
(a)the defendants filed submissions on quantum on 11 February 2022;
(b)Merchant Finance filed submissions on quantum on 25 February 2022;
(c)the defendants filed submissions in reply on 4 March 2022;
(d)I convened a telephone conference with counsel on 29 March 2022 and made timetabling orders for the filing of further evidence;
(e)Merchant Finance subsequently filed an affidavit sworn by Bibiana Lee, the solicitor at Loo & Koo acting on the mortgagee sale for Merchant Finance;
3 At [247].
4 At [341(d)].
(f)the defendants filed further submissions in response to Ms Lee’s affidavit on 26 April 2022; and
(g)I convened a further telephone conference with counsel on 5 May 2022 and gave my preliminary indication that I had sufficient material before me to finalise my judgment in this matter. I confirm that having now reviewed the materials in more detail, and subject to the question of interest referred to at [45] below, that remains the position.
[8] Finally by way of background, while the precise date is not clear from the materials before me, Merchant Finance has paid the defendants the sum it says is owing, namely $143,189.
[9] In the next section of this judgment, I summarise the remaining matters in dispute, the parties’ respective submissions and my decision on each.
Remaining areas of dispute
Principal amount of loan
[10] The parties are agreed that the principal loan amount advanced, excluding interest and fees, was $1,629,104.
Broker fee
[11] There is a dispute as to the correct broker fee, and whether it ought to be payable by the defendants at all. Merchant Finance says that this is a third party fee which it is entitled to pass through to the defendants pursuant to s 99(1C) of the Act, despite not otherwise being able to recover interest, default interest and other costs of borrowing.
[12] The defendants submit that the broker fee ought not to be passed on to them, given it represents an agent’s fee that Merchant Finance paid in order to breach, or to assist it to breach, the Act, and therefore recovery would be against public policy.
Alternatively, the defendants say that to permit Merchant Finance to pass on the broker fee would be to permit Merchant Finance to benefit from its own wrong.
[13] In the alternative, if the broker fee is recoverable, the defendants submit it should be calculated at the percentage rate (one percent) of the correct principal loan amount (namely that referred to at [10] above), not the incorrect principal loan amount initially relied on by Merchant Finance.
[14] I have already ruled in my substantive judgment that Merchant Finance is entitled to recover the third parties’ broker fee.5 That is the position pursuant to s 99(1C) of the Act in any event. The defendants do not suggest that the third parties are “associated persons” of Merchant Finance, and in my substantive judgment, I rejected the defendants’ submission that the third parties acted as Merchant Finance’s agent in connection with the loan.6
[15] I do not accept the defendants’ submission that to permit Merchant Finance to pass this fee on to the defendants is contrary to public policy or permits Merchant Finance to benefit from its wrong. Rather, it simply reflects the application of s 99(1C) of the Act. In other words, the legislative scheme is that even where a borrower is not liable to pay the costs of borrowing pursuant to s 99(1A), the lender is nevertheless entitled to pass on to the borrower third party fees paid by it, so long as the third party is not an associated person of the lender.
[16] I accept, however, the defendants’ submission that the third parties’ broker fee should be calculated at the rate of one percent of the correct principal amount set out at [10] above, rather than the slightly higher, but incorrect, principal amount relied on by Merchant Finance at the time of originally calculating and paying the broker fee. The broker fee is accordingly reduced to $16,291, being one percent of $1,629,104.
5 At [341(c)].
6 At [254].
Loo & Koo’s fees
[17] Merchant Finance seeks recovery of its solicitors’ (Loo & Koo’s) fees, both in connection with the establishment of the loan and the conduct of the mortgagee sale. Merchant Finance submits that such costs are payable by the defendants under the loan contract.
[18] The defendants submit that given Loo & Koo acted as Merchant Finance’s “administrator” in relation to the loan, it would be wrong to permit recovery of the legal fees, Merchant Finance’s breaches of the Act essentially being “carried out” by Loo & Koo.
[19] Again, I have already ruled in my substantive judgment that Merchant Finance is entitled to pass through to the defendants Loo & Koo’s fees, to the extent they are payable by the defendants under the loan contract and do not exceed the amount Merchant Finance has paid to Loo &Koo.7
[20] The loan contract expressly provides for payment by the defendants of Loo & Koo’s legal fees associated with establishing the loan, in the sum of $4,125. Further, the loan contract also provides for the payment by the defendants of Merchant Finance’s costs of default (clause 8(f)). This includes legal fees on the mortgagee sale. Merchant Finance seeks to recover $3,432.38 on this basis. A copy of the invoice is before the Court. There is no suggestion that Merchant Finance has not paid Loo & Koo its fees in this amount. The amount charged by Loo & Koo for a mortgagee sale appears on its face to be reasonable and there is no basis to reduce that amount.
[21] Loo & Koo’s fees of $4,125 and $3,432.38 are accordingly payable by the defendants.
Real estate agent’s fees
[22] Like the broker and solicitors’ fees, Merchant Finance says the real estate agent commission is properly payable by the defendants. The defendants submit that as
7 At [341(c)].
enforcement of the loan was prohibited by s 99 of the Act, the real estate commission ought not to be payable by the defendants.
[23]Again, I do not accept the defendants’ position.
[24] As noted in my substantive judgment,8 it would have been open to the defendants to seek interim relief prohibiting the sale of the Property in light of Merchant Finance’s failure to provide initial disclosure. The defendants did not seek such relief. The sale accordingly proceeded, and the real estate agent fees are a cost actually incurred by Merchant Finance in connection with the sale. As a third party cost, Merchant Finance is entitled to pass this on to the borrowers.9
[25] Moreover, a theme of the defendants’ case at trial was that the Merchant Finance loan should never have been advanced to them in the first place. Had that been the case, the Property would have been sold in any event, either at a mortgagee sale conducted by the prior lender (Southern Cross), or through some “managed sale” process agreed between the defendants and Southern Cross. In both those scenarios, real estate agents’ fees would have been paid. That would have also been the case had Ms Xu’s attempts to sell the Property in mid-2018 (through Ray White) been successful.10
[26] Accordingly, Merchant Finance is entitled to charge the defendants the real estate commission on the mortgagee sale.
GST – mortgagee sale price
[27] This issue is the most significant between the parties, at least in terms of quantum.
8 At [245].
9 Credit Contracts and Consumer Finance Act 2003, ss 45 and 99(1C). See also cl 8(f) of the loan contract, the agents’ commission being a cost of default.
10 Discussed in my substantive judgment, at [124] and [128].
[28] Merchant Finance’s position is that it sold the Property for $1,790,000, being the sale price which was recorded as “plus GST if any”. Merchant Finance says and provides evidence that it did not recover any GST on the sale, having formed the view (after taking advice) that the sale was appropriately GST zero-rated.
[29]The defendants say that the sale was at an undervalue, given the sale was for
$1,790,000 “plus GST”. The defendants’ position, prior to the receipt of Ms Lee’s affidavit, was either that Merchant Finance did receive GST on top of the sale price of
$1,790,000, and therefore this should also be accounted for by further reducing the residual amount owed by the defendants, or alternatively, that the additional amount of GST ought to have been recovered, namely that the sale price ought to have been
$2,058,500 inclusive of GST.
[30] Following the filing of Ms Lee’s affidavit, the defendants submit that had a correct approach to GST been adopted, the purchaser might have offered a higher price because of more favourable downstream tax treatment.
[31]I do not accept the defendants’ submissions on this point either.
[32] There are effectively two issues arising from the parties’ memoranda and evidence filed on the GST issue:
(a)First, a question of fact, namely what was the sale price actually received by Merchant Finance?
(b)Second, if the sale price actually received was $1,790,000, should Merchant Finance have obtained a higher price of $2,058,500, with the entirety of that amount being available to offset against the balance of the loan owed by the defendants (that is, Merchant Finance not having to account to the Commissioner of Inland Revenue (the IRD) for any GST portion of that higher sale price)?
[33] On the first issue, the evidence establishes that the sale price actually received by Merchant Finance was $1,790,000. GST was not charged or recovered by Merchant Finance on the sale of the Property.
[34] Turning to the second issue, it is incorrect for the defendants to submit (as they did in their memorandum dated 4 March 2022) that Merchant Finance “clearly sold the property for $1,790,000 plus GST”. The agreement was for a sale price of
$1,790,000 “plus GST (if any)” (emphasis added).
[35] Ms Lee (as noted, the solicitor acting on the mortgagee sale), formed the view that the sale ought to be zero-rated for GST purposes. However, she deposes that an accountant for Merchant Finance was of the view that Merchant Finance was entitled to collect GST on the purchase price and would be entitled to keep that GST (rather than pay it on to the IRD). In light of this, and prior to settlement, Ms Lee sought expert GST advice from a third party, a Mr Brandt. She produces Mr Brandt’s opinion on the GST issue, the essence of which is as follows:11
(a)Mr Brandt was aware that Merchant Finance’s accountant had advised Merchant Finance that it was entitled to collect GST on the sale price and to keep the GST for itself.
(b)Mr Brandt advised that he agreed with Ms Lee that Merchant Finance’s accountant was wrong.
(c)Mr Brandt set out what he considered to be the relevant provisions of the Goods and Services Tax Act 1985 (the GST Act) which applied. Mr Brandt also proceeded on the basis that the purchaser would be GST registered prior to settlement.12
(d)While Merchant Finance itself was not registered for GST (as it carries on business of provision of financial services, an exempt activity),
11 I do not ascribe weight to this opinion for the truth of its contents, given it is hearsay. Rather, the relevance of it for present purposes is the fact that Merchant Finance sought expert advice on GST prior to the settlement of the sale of the Property.
12 As the defendants observe, the purchaser’s settlement statement indicates that the purchaser was registered for GST.
when a mortgagee steps in and sells a secured property, there is a deemed supply under s 5(2) of the GST Act.
(e)If the sale had attracted GST, Merchant Finance would, because of the deemed supply, be required (whether or not registered) to make a special return in the prescribed form and to pay the GST charged on the supply to the IRD.
(f)That although s 5(2) of the GST Act deemed Merchant Finance to be making a taxable supply and required a GST return to be filed, this did not override the remainder of the GST Act, including the compulsory zero-rating rules. Mr Brandt then provided his opinion on what would be required in order for the transaction to be zero-rated, and how the sale price might be apportioned between the commercial part of the Property (zero-rated) and the residential part (exempt if certain evidence held).
[36] As counsel for the defendants notes in her submissions in reply to Ms Lee’s affidavit, there is some complexity around the GST position, including because the Property was of mixed use and being sold by mortgagee sale. Despite this, however, I have concluded that it is not necessary or appropriate to call for further evidence and/or conduct a further hearing on the GST issue. I have reached this conclusion for the following reasons.
[37] First, the fact remains that Merchant Finance did not receive any more than the sum of $1,790,000 from the sale of the Property (net of the costs of sale).
[38] Second, even if Merchant Finance should have charged the purchaser the purchase price plus GST (so that it received a sale price of $2,058,500, inclusive of GST), Merchant Finance would have been required to account to the IRD for the GST component of that price. It would not have been available for Merchant Finance to “keep it for itself”, thus making it available to offset against the remaining balance of the loan.
[39] Third, and as to whether Merchant Finance should have taken a different approach to GST on the sale of the Property, such that a purchaser might have paid a slightly higher price, it is far too late in my view for this matter to be raised now. This is a new and quite different claim to that pursued by the defendants at trial. It was not raised on the pleadings. I accept that in their statement of defence, the defendants suggested that the Property was sold at an undervalue, but that was said to be on the basis that the defendants were not given an opportunity to fix a leak in the Property’s roof before the mortgagee sale. No issue was raised around GST on the sale. Nor was this issue raised at any time in the lead up to trial, or at trial, despite the defendants having a copy of the sale and purchase agreement (which clearly specified the sale price as “$1,790,000 plus GST (if any)”), and Merchant Finance’s position being that it received sales proceeds of only $1,790,000 (net of the costs of sale).
[40] Nor am I persuaded it would be appropriate to grant leave to the defendants to amend their pleadings at this stage, following judgment having been delivered.13 A claim that Merchant Finance, as mortgagee, failed in its duty pursuant to s 176 of the Property Law Act 2007 (the PLA) – a duty of reasonable care to obtain the best price reasonably obtainable at the time – would require the calling of further and potentially substantial evidence, and such a claim is in any event speculative. As to the additional evidence, at the very least, expert evidence on GST, as well as evidence from the purchaser on whether it would have paid a higher price had there been a different tax treatment (if available), would need to be called. Expert evidence on market conditions at the time, and whether a higher price might have been achieved with any available different GST treatment, would also likely be necessary. That evidence would have needed to have been assessed in the context of the obvious difficulties in selling the Property at the time, it not selling in mid-2018, or during the “grace period” following the loan going into default and Merchant Finance taking steps to sell the Property as mortgagee. Further, Merchant Finance took expert advice on GST prior to the settlement of the mortgagee sale, which would also be relevant to any argument that it breached its duties as mortgagee under the PLA.
13 No such application having been filed in any event.
[41] Accordingly the point remains that as a matter of fact, Merchant Finance did not receive a sale price higher than $1,790,000. Even if GST had been payable by the purchaser on the sale, Merchant Finance would have had to pay that GST to the IRD. Any broader claim as to whether a different tax treatment (if available) might have led to a higher purchase price is speculative and too late to raise now.
[42] Accordingly, I am satisfied that the appropriate amount to “net off” in relation to the sales proceeds from the mortgagee sale is the sum of $1,790,000.
[43]The above leads to a refund due to the defendants by Merchant Finance of
$145,878, and I make an order that that amount is payable.
[44] Merchant Finance has, as noted, already paid the large majority of this amount to the defendants, the slight difference being the broker fee of $16,291 rather than
$18,980. There will accordingly need to be a further payment by Merchant Finance to the defendants of $2,689 and I make an order accordingly.
Interest
[45] A final point is interest. The surplus amount of $145,878 ought to have been paid by Merchant Finance to the defendants upon the settlement of the sale of the Property and receipt by Merchant Finance of the net proceeds of sale (on 29 August 2019). That sum14 was not paid to the defendants until very recently. The defendants have not, at least in their post-judgment materials, made a claim for or addressed the question of interest on any amount to be paid by Merchant Finance to them. Nevertheless, my preliminary though not binding view is that it would be appropriate for Merchant Finance to pay interest on the refund amount for the period 29 August 2019 to the date of payment. The interest calculator established by the Interest on Money Claims Act 2016 may be a useful reference point for this purpose.
[46] Despite my misplaced optimism on the residual matters addressed earlier in this judgment, I would hope that the parties can readily agree the interest payable. If
14 Or more accurately, a slightly lesser sum, given the need to refund a further $2,689 in relation to the broker fee.
the parties are not able to agree, memoranda on interest may be filed in accordance with the following timetable orders:
(a)the defendant may file and serve a memorandum within 10 working days of this judgment;
(b)Merchant Finance may file and serve a memorandum within 10 working days of receipt of the defendants’ memorandum; and
(c)the defendants may file and serve a memorandum in reply within five working days of receipt of Merchant Finance’s memorandum.
[47] No memorandum is to be longer than three pages in length (excluding any calculation schedules). Unless I need to hear further from the parties, I will determine the question of interest on the papers.
Costs
[48] There remains the question of costs. Should any party seek costs, they are to file a memorandum on costs within 20 working days of the date of this judgment. The opposing party may file a memorandum in reply within a further 10 working days. No memorandum (excluding any schedules) is to be longer than five pages in length. Unless I need to hear further from counsel, I will also deal with costs on the papers.
Fitzgerald J