Oaks Hotels & Resorts NZ Ltd v Body Corporate 358851

[2013] NZHC 2695

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2013-404-003971 [2013] NZHC 2695

IN THE MATTER             of an application under s 210 of the Unit

Titles Act 2010

UNDER  Parts 19 and 32 of the High Court Rules

BETWEEN  OAKS HOTELS & RESORTS NZ LIMITED

Applicant

AND  BODY CORPORATE 358851

Respondent

Hearing:                   3 October 2013

Counsel:                  C Bryant for Applicant

D Chisholm QC and BM Russell for Respondent

Judgment:                16 October 2013

JUDGMENT OF ASHER J

This judgment was delivered by me on Wednesday, 16 October 2013 at 4:00 pm pursuant to r 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Solicitors/Counsel: Hesketh Henry, Auckland.

Lane Neave Lawyers, Christchurch. D Chisholm QC, Auckland.

OAKS HOTELS & RESORTS NZ LIMITED v BODY CORPORATE 358851 [2013] NZHC 2695 [16 October

2013]

Introduction

[1]      Oaks Hotels and Resorts Ltd (Oaks) as a unit title owner, seeks a freezing order preventing Body Corporate 358851 (the Body Corporate) from disposing of or otherwise dealing with certain insurance proceeds.  The building that is run by the Body Corporate, and in which the units are owned, is the iStay on Cashel hotel in Christchurch.

[2]      The present impasse has arisen out of the second Christchurch earthquake of

22 February 2011 and the damage it caused to buildings in the central business district.  The hotel was damaged in the earthquake, but unlike most buildings in the area remained structurally sound and, it is asserted by the applicant, was and is repairable. The building has not been occupied since the earthquake.

[3]      The building is in the government designated red zone.  In February 2013, the

Crown gave notice pursuant to s 54 of the Canterbury Earthquake Recovery Act

2011 of its intention to acquire the members’ units and interests in the iStay building. It has made offers to purchase the freehold interest in the units, which are conditional on the surrender of the registered leases on the titles. Although the position is not yet finalised and unconditional as a matter of law, it is said to be very likely that the units in the building will be acquired by the Crown whether pursuant to individual conditional offers already made or by compulsory acquisition of the units.

[4]      The difference between Oaks and the Body Corporate arises from the fact that Oaks ran the hotel using the rooms that were leased from the individual unit title owners.  Oaks itself did not own any of the rooms, but through its subsidiary, 187

Cashel Management Ltd (187 CML), was the lessee of the individual rooms owned by the unit title owners.  Oaks was the unit title owner of Lot 101, the reception area. Under the lease, 187 CML paid rent to the unit owners and received income derived from the rooms, which were run as a hotel.  Another subsidiary of Oaks, 187 Cashel Apartments Ltd, had a management contract with the Body Corporate.

[5]      Oaks takes the position in this proceeding that notwithstanding the Crown’s proposed acquisition, the Body Corporate is still obliged to proceed to undertake the reinstatement and repair of the building with the insurance proceeds.  It claims that

the Body Corporate’s resolution to the contrary is ultra vires.  There is presently an arbitration on foot to determine whether the leases between the unit owners and 187

CML are already terminated as a matter of law pursuant to a damage and destruction clause in the lease.

[6]      The primary relief sought by Oaks in this proceeding is orders declaring that the resolutions indemnifying unit owners in respect of legal costs and resolving not to reinstate are unjust or inequitable for Oaks as the minority unit owner, and that they are void ab initio.  An order is also sought restraining the Body Corporate and its committee from any act or omission to act resulting from the resolutions.

[7]      The money that Oaks seeks to freeze in this application is the balance held of a sum of money paid by the Body Corporate’s insurer for interruption of the hotel’s business as a consequence of the earthquake.  The amount is $707,687.  There is also a sum that has been received by the Body Corporate in respect of the hotel’s material damage policy, totaling $5,635,000.  For reasons that are not connected to the issues that arise in this proceeding, the Body Corporate accepts that the $5,635,000 should be retained and not distributed in the meantime, and has provided an undertaking to that effect.  It is not prepared to give any undertaking in relation to the $707,687, and this has given rise to the present application.

[8]      Ms Bryant for Oaks submits that Oaks has a good arguable case against the respondent on these causes of action, as necessary for the purposes of the freezing order jurisdiction.   She asserts that the hotel can be repaired or reinstated and the Body Corporate has the physical ability to enter the property and undertake the repairs.    Such  a  course  of  action,  she  submits,  will  produce  a  better  financial outcome for Oaks than termination of the leases and sale.  Ms Bryant submits that the Body Corporate has a mandatory duty to undertake the repairs, and it does not have  the  power  to  resolve  not  to  reinstate  the  property.    She  claims  that  the resolutions not to reinstate are ultra vires.  She asserts that the Body Corporate has no interest in the leases as they are between 187 CML and the individual owners. She claims that there is a fiduciary relationship between the Body Corporate and its members, and that in breach of those duties the Body Corporate has failed to fulfil its

duty to repair, preferred the interests of certain owners, and acted ultra vires.  She does not accept the Crown acquisition is inevitable.

[9]      Ms  Bryant  states  that  the  insurance  proceeds  are  an  asset  within  the jurisdiction of the Court, and that there is a real risk of the dissipation, disposal or dealing with that $707,687 unless the freezing orders are granted.  She points to a Body Corporate resolution to the effect that the Body Corporate secretary is authorised to distribute the insurance proceeds less certain deductions to owners or mortgagees at the owners’ direction and in accordance with the owners’ interests. Accordingly, she submits there is a risk that if Oaks succeeds in its claim, any judgment in its favour will be wholly or partly unsatisfied because the money will have been passed on from the Body Corporate to the unit owners.  She points out that there is no evidence that any unit owner will suffer hardship if they do not, in the meantime, receive their share of the fund.

[10]     Mr Chisholm QC for the Body Corporate submits that the freezing order jurisdiction does not apply, and that the application is misconceived.   The Body Corporate has a duty to unit owners to pay out the insurance proceeds.   The government offer is above market value and the Body Corporate supported by the unit owners except Oaks should be able to accept it.  He submits that this application has a tactical purpose and is designed to make it more difficult for unit owners to fund the pending arbitration.  He submits that the inevitability of the Crown purchase makes the proceeding futile, and that there is no good arguable case for relief.

The issue

[11]     This  application  raises  issues  as  to  the  nature  of  the  freezing  order jurisdiction.  The Body Corporate has finite funds and limited assets, and if it pays out  the  $707,687  it  will  have  very  limited  immediate  resources  to  meet  any judgment.  However, it does have the ability to obtain payments from individual unit owners so that it can meet its debts.   There can be no doubt that should Oaks ultimately obtain a judgment against the Body Corporate, the debt will ultimately be recoverable, if necessary, by the Body Corporate being placed in liquidation and the liquidator pursuing the individual owners.   The individual owners have not been

shown to be without assets, and it can be assumed, given that they own units, that they would meet such a modest levy.   Ms Bryant pointed to the inconvenience of such a process, and the fact that it would mean that the individual owners would have to be pursued for debts of approximately $5,000 each.  She accepted, however, that Oaks could achieve recovery by going down this route, albeit with cost and delay.

[12]     The  issue  is  whether  the  fact  that  any  judgment  in  Oaks’  favour  will ultimately be recoverable from the Body Corporate is fatal to this freezing order application.

The Mareva jurisdiction

[13]     The Mareva jurisdiction1  was recognised in New Zealand from 1978 in a number of High Court decisions.2   It was formally recognised by r 236B of the High Court Rules in 1989.3    This original rule referred only to restraining a party “from removing from New Zealand, or otherwise dealing with, assets in New Zealand”.  It did not set out the relevant criteria.

[14]     This changed when a new r 32 of the High Court Rules was introduced by a

2008 amendment and came into effect on 1 February 2009.  The 2008 amendment was a far more wide reaching reform.   It called the new type of order a “freezing order”.  Rule 32.2 set out the basis of the jurisdiction, restraining a respondent from “removing any assets located in or  outside New Zealand or from disposing of, dealing with, or diminishing the value of, those assets”.  It is stated at r 32.2(4) that an application for a freezing order can be made by interlocutory application or originating application.  This particular application is in the latter category, in that the freezing order is sought as part of the primary relief claimed in the originating

application.

1      Named after the English case which first recognised the jurisdiction, Mareva Compania Naviera

SA v International Bulkcarriers SA [1975] 2 Lloyds’ Rep 509 (CA).

2      Barker  J  detailed  the  jurisdiction’s early  history in  the  first  case  where  the  High  Court’s jurisdiction to issue Mareva injunctions was challenged, Hunt v BP Exploration Co (Libya) Ltd [1980] NZLR 104 (HC) at 115–118. His Honour considered Mosen v Donselaar (1978) 2 PRNZ

482 (HC) to be the earliest instance of the power being exercised in New Zealand.

3      Rule 236B was revoked and substituted by r 239 by r 5 of the High Court Amendment Rules

2003 (SL 2003/280).

[15]     In  r  32.5,  there  are  detailed  provisions  setting  out  the  ambit  of  the jurisdiction.  The rule applies pre-judgment if the applicant has a good arguable case on an accrued or prospective cause of action.4   Rule 32.5(4) provides:

32.5  Order against judgment debtor or prospective judgment debtor or third party

…

(4)   The court may make a freezing order or an ancillary order or both against a judgment debtor or prospective judgment debtor if the court is satisfied, having regard to all the circumstances, that there is a danger that a judgment or prospective judgment will be wholly or partly unsatisfied because—

(a)   the  judgment  debtor,  prospective  judgment  debtor,  or  another person might abscond; or

(b)   the assets of the judgment debtor, prospective judgment debtor, or another person might be—

(i)    removed from New Zealand or from a place inside or outside

New Zealand; or

(ii)  disposed of, dealt with, or diminished in value (whether the assets are in or outside New Zealand).

(emphasis added)

[16]     Further limitations were placed on the jurisdiction in rr 32.6(2) and (3):

32.6 Form and further terms of freezing order

…

(2)   If the likely maximum amount of the applicant's claim is known, the value of the assets covered by the freezing order must not exceed that amount together with interest on that amount and costs.

(3)   The freezing order must not prohibit the respondent from dealing with the assets covered by the order for the purpose of—

(a)   paying ordinary living expenses; or

(b)   paying legal expenses related to the freezing order; or

(c)   disposing of assets, or making payments, in the ordinary course of the respondent's business, including business expenses incurred in good faith.

4      High Court Rules, r 32.5(1)(b).

[17]     It  was  established  in  Bank  of  New  Zealand  v  Hawkins5   that  a  Mareva injunction could be granted without nefarious intent on the prospective debtor’s part being proven, despite some observations in other common law jurisdictions to the contrary.6   This is reflected in the wording of r 32.5(4)(b)(ii) which does not refer to assets being “dissipated” but rather “disposed of, dealt with or diminished in value

…”.

[18]     There is no doubt that Oaks has shown that an asset (the $707,687) is to be disposed of (paid out to unit owners).  However, assuming for the purposes of the present issue that there is a good arguable case, the fact that an asset is to be disposed of is in itself not enough to invoke the jurisdiction.   The heart of the jurisdiction is a real risk that a judgment or award may go unsatisfied.7   There must be  a  danger  that  the  prospective  judgment  creditor’s  ability  to  recover  will  be defeated because assets have been disposed of.8   In Bank of New Zealand v Hawkins it was observed that there had to be a “... real risk that the defendant will dissipate or dispose of assets so as to render himself ‘judgment proof’”.9   This is now expressly stated at r 32.5(4), which provides that the Court “may” make an order if it is satisfied  having  regard  to  all  the  circumstances  that  there  is  a  danger  that  the judgment or prospective judgment will be wholly or partly unsatisfied because of the removal or disposal.   As Lawton LJ observed in Third Chandris Shipping Corporation v Unimarina SA, there must be facts from which the commercial court, like a prudent sensible commercial person, could properly infer a danger of default if

assets are removed.10   This test is “not unduly exacting”.11

5      Bank of New Zealand v Hawkins (1989) 1 PRNZ 451 (HC) at 454.

6      Z Ltd v A-Z and AA-LL [1982] 1 QB 558 (CA) at 585, where it was suggested by Kerr LJ that the judgment creditor must “take steps designed to ensure that [any assets] are no longer available or traceable”; Derby & Co Ltd v Weldon (Nos 3 and 4) [1990] Ch 65 (CA) at 76. See also Home

Insurance Co v Administration Asigurarilor de Stat, unreported, 29 July 1983 referred to by Kerr

LJ in Ninemia Maritime Corporation v Trave Schiffahrtsgesellschaft mbH & Co KG [1983] 1

WLR 1412 (CA) at 1422.

7      Property Marine Australia Pty Ltd v Condor Yachts (Bermuda) Ltd (1987) 1 PRNZ 251 (HC) at

255.

8      Ninemia Maritime Corporation v Trave Schiffahrtsgesellschaft mbH & Co KG, above n 6, at

1422.

9      Bank of New Zealand v Hawkins, above n 5, at 454, endorsed by the Court of Appeal in Shaw v

Narain [1992] 2 NZLR 544 (CA) at 548.

10     Third Chandris Shipping Corporation v Unimarina SA [1979] QB 645 (CA).

11     Raukura Moana Fisheries Ltd v The Ship “Irina Zharkikh” [2001] 2 NZLR 801(HC) at [122].

[19]     It is the issue of the danger of default, and the question of whether there is a good arguable case, that commonly give rise to argument and have been the subject of submissions in this hearing.  The importance of these two issues is indicated by the fact that in the form of freezing order attached to the schedule in the rules,12 it is required to be stated that the applicant has a good arguable case, and that the Court is satisfied there is a danger that the judgment in favour of the applicant will be wholly

or partly unsatisfied.  These are essential requirements.

[20]     The jurisdiction is not designed to provide an applicant with pre-judgment security.    The  general  rule  that  a  respondent  can  deal  with  its  assets  without constraint, which applied to the original Mareva jurisdiction,13 is still reflected in the new detailed rule, if only indirectly.  Even if the disposal will result in insufficient funds to pay a plaintiff, a Court is unlikely to interfere if the disposition is genuine and in the ordinary course of business.14   That limitation of the common law regime applies under the new rules and  is indicated in r 32.6(3), which states that the freezing order must not prohibit the respondent from dealing with the assets for the purpose of paying ordinary living expenses and legal expenses related to the freezing order, but also “… disposing of assets or payments, in the ordinary course of the respondent’s business, including business expenses incurred in good faith”.   The prospective judgment debtor must be able to continue to trade or carry on business in

the usual way.

[21]     In short, the common law restrictions on the ambit of the remedy remain, and it will not be permitted to be used by an applicant to force a respondent who could ultimately pay the judgment debt to hold funds for the benefit of its opponent.

Assessment

[22]     In my view, Oaks has not shown any real risk that any judgment it may get will go unsatisfied. A prudent sensible commercial person could not properly infer a

12     High Court Rules, sch 1, form G 38.

13     Barclay-Johnson v Yuill [1980] 1 WLR 1259 (HC); Property Marine Australia Pty Ltd v Condor Yachts (Bermuda) Ltd, above n 7, at 253; and Laws of New Zealand Creditors’ Remedies (online ed) at [13].

14     Whitmarsh v A’mon Corporation Ltd (1988) 2 PRNZ 576 (HC) at 582, and High Court Rules, r 32.6(3)(c).

danger of default by the Body Corporate if judgment was entered against it.  There are no indications that it is trying to defeat any judgment.  The payment out that it proposes to make to individual unit owners from the insurance policy proceeds for business interruption is a payment that it could be expected to make in the ordinary conduct of its business (putting to one side the issues of lawfulness now raised in this proceeding).  It has no obligation to hold onto the funds in case there is a judgment against it in the future, and it can be seen as a perfectly normal business step to pay out the money to unit owners for whose ultimate benefit the insurance policy was taken out.

[23]     The parties of course disagree as to whether in terms of ss 134–136 of the Unit Titles Act 2010 the Body Corporate is able to pay the insurance money out to the unit owners.  That is one of the issues to be determined.  The issues of statutory interpretation that arise are not straight forward.   I am satisfied that the Body Corporate holds the genuine view, based on legal advice, that it may make the payment and proposes paying out in good faith.   But I do not need to determine whether there is a good arguable case.  The application can be determined on a more simple point.

[24]     That point is the first issue of whether on an objective assessment there is a genuine danger of default.  Critically, if the Body Corporate is proven to have been wrong in its belief that it can pay out, it will be able to recover the money back from the individual unit owners.   It can be assumed that unit owners who own units in such a building will be well able to each meet a payment in the sum of $5,000. There is no suggestion that they will not be able to meet any such demand to pay, and even if some are unable to make the payment, the funds could be recovered from those who are solvent and available.

[25]     Thus, what is fatal to this application is that it is not at all likely that there will in the long term be any default, should the applicant succeed in obtaining a judgment debt.  That judgment debt can be enforced upon the grounds available by the usual methods.  The payment of the insurance moneys is the sort of payment that it could be expected that a Body Corporate would make in the ordinary course of its

business, subject of course to the conflicting arguments as to the provisions of the

Unit Titles Act and the duty of the Body Corporate in this particular circumstance.

[26]     Consistent with the common law Mareva jurisdiction, r 32.5(4) requires the Court to be satisfied that there is a danger of the prospective judgment being unsatisfied because of the payment.  It is my assessment that there is no appreciable danger that Oaks will be left with an unsatisfied judgment if it succeeds in its current round of proceedings.  It may be left with an inconvenient enforcement procedure, but that is not enough.  For that reason, I am not prepared to grant the freezing order.

Interim injunction

[27]     As I put to counsel during the hearing, it is possible to see this application as an interim injunction application.  The applicant is arguing that the Body Corporate has no legal right to make the proposed disposition.  It could follow that if there was an arguable case that there was no legal right to make the disposition, an interim injunction order should be made preventing it.

[28]     However, even if that position were reached, the applicant would fail to obtain an interim injunction on the balance of convenience.   There is no factor arising that requires the Court’s urgent interim intervention.  There is no risk that if the payment is made, and it was unlawful, that there will be irremediable harm.  The money could be recovered.

[29]     The convenient way to proceed is for the substantive proceeding to continue. If it does and the applicant is successful, it should be able to recover.  There is no practical need for the Court to intervene to ensure that any judgment is not rendered nugatory.

[30]     Mr Chisholm submits that there is a tactical purpose to this application, which is to inhibit the unit owners from accessing their share of the business interruption proceeds, and to thereby create pressure for a settlement in accordance with the applicant’s wishes, and to inhibit unit owners from financing the arbitration.

That could be an abuse of procedure.15   I do not have to reach a view on that issue. Nevertheless, I record that in my view, if the unit owners wish to use the proceeds to finance the arbitration, that is something that they should be permitted to do.  The Court should not intervene.  If the Body Corporate ultimately loses, the unit owners will have to pay the money back.

Conclusion

[31]     In the end the Court should stand back in relation to any freezing order application or interim injunction application, and consider the overall justice of the case.  Given that the Body Corporate is ultimately able to levy its members for any debts that it has, including the cost of reinstatement of the building (if the applicant succeeds and such an order was made ultimately), there is no need for the Court to intervene.  There is nothing to show that the members of the Body Corporate could not pay back any money that they received.  In the meantime, the members should be permitted to access the funds and use those funds as they wish.  The applicant cannot have pre-judgment security.

Result

[32]     The application for a freezing order and ancillary order is declined.

[33]     Counsel were agreed that 2B costs should follow the event.  Oaks is to pay

the Body Corporate’s costs and reasonable disbursements on a 2B basis.

……………………………..

Asher J

15     Z Ltd v A-Z and AA-LL, above n 6, at 585.