Official Assignee in Bankruptcy of the property of Pavan v Pavan

[2012] NZHC 1315

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

CIV-2012-485-000240 [2012] NZHC 1315

UNDER  the Insolvency Act 2006

IN THE MATTER OF     an application pursuant to s 225 of the

Insolvency Act 2006

BETWEEN  THE OFFICIAL ASSIGNEE IN BANKRUPTCY OF THE PROPERTY OF JOHN JOSEPH PAVAN (BANKRUPT ESTATE NO. 846914)

Applicant

ANDJOHN JOSEPH PAVAN First Respondent

ANDBASECORP FINANCE LIMITED Second Respondent

ANDPAULINE NEVILLE BRYANT PAVAN Third Respondent

ANDHELENA AND UFUK GOKCEN Fourth Respondents

Hearing:         28 May 2012

Counsel:         P R W Chisnall for Applicant

First Respondent in Person
D J Taylor for Second Respondent
K P Sullivan for Fourth Respondent

Judgment:      12 June 2012

In accordance with r 11.5 I direct the Registrar to endorse this judgment with the delivery time of 4.30pm on the 12th day of June 2012.

RESERVED JUDGMENT OF COLLINS J

THE OFFICIAL ASSIGNEE V PAVAN HC WN CIV-2012-485-000240 [12 June 2012]

TABLE OF CONTENTS

Introduction .................................................................................................................................. [1] Background ................................................................................................................................... [4] Real estate ..................................................................................................................................... [7] Pavan Lands Ltd ........................................................................................................................ [7]

J J Pavan Trust ........................................................................................................................ [10] Sheridan Trust.......................................................................................................................... [11] Woodland Road........................................................................................................................ [12] Disraeli Street .......................................................................................................................... [13]

5 Neville Street ......................................................................................................................... [14]

2 Cortina Avenue ..................................................................................................................... [15] Personal property ....................................................................................................................... [16] Creditors...................................................................................................................................... [17] Sales of property ......................................................................................................................... [30] Issues............................................................................................................................................ [33] Cortina Avenue .............................................................................................................................. 11

Guardian Trust loan agreement ............................................................................................... [35]

First Basecorp loan agreement................................................................................................ [36] The second Basecorp loan agreement ..................................................................................... [37] Did Mr Pavan agree to mortgage 2 Cortina Avenue? ............................................................. [40] Does the agreement to mortgage 2 Cortina Avenue in the second Basecorp loan now extend to the loan assigned by the Guardian Trust to Basecorp? ........................................................... [42] Loan documentation ................................................................................................................ [45] Trustee liability ........................................................................................................................ [54] Tacking..................................................................................................................................... [59]

Priority ........................................................................................................................................ [69]

5 Neville Street and 86 Wooodland Road.................................................................................. [70] Earthmoving equipment ............................................................................................................ [71] Guardian Trust loan and guarantee......................................................................................... [75] Basecorp loans ........................................................................................................................ [76] Conclusions ................................................................................................................................. [79]

Introduction

[1]      The Official Assignee (OA) has been granted leave to apply for directions from this Court as a result of a number of issues that have arisen from the administration of the bankruptcy of the first respondent (Mr Pavan).   Leave was granted to seek directions pursuant to s 225 of the Insolvency Act 2006 (the Act), on the basis that Mr Pavan’s circumstances raised questions concerning the operation of

the Act.1

1      Section 225(1) Insolvency Act 2006 provides:

“The Assignee  may  apply to  the  Court  for  directions on  any  question  concerning  the
operation of this Act”.

It  is  questionable whether the  directions sought do  in  fact  raise  questions concerning the operation of the Act.   However, as the parties have all asked the Court to give directions the Court will do its best to assist the parties.

[2]      Mr Pavan was adjudged bankrupt on 13 December 2010.   This judgment focuses upon whether the second respondent (Basecorp) has a secured interest in three properties and some earthmoving equipment that were owned by Mr Pavan. This judgment also deals in part with issues relating to the priority of agreements to mortgage held by Basecorp and the fourth respondents (Mr and Mrs Gokcen).

[3]      To understand the specific issues that the Court is required to answer it is necessary to first explain the general background and chronology of events that led to the OA’s application.

Background

[4]      Mr Pavan is now 72 years old.   He has spent his working life developing residential properties around Johnsonville, Wellington.

[5]      Mr Pavan inherited his interest in property development from his parents. They had purchased and developed substantial parcels of land in Johnsonville.

[6]      It is convenient to explain Mr Pavan’s various interests in real estate and earthmoving equipment by reference to his interests in those assets as at the date he was adjudged bankrupt.

Real estate

Pavan Lands Ltd

[7]      In 1967 the Pavan family established Pavan Lands Ltd.   Pavan Lands Ltd acquired a substantial block of land at Silverstream Road, Crofton Downs (Silverstream Road land). The land comprises approximately 25.56 hectares.

[8]      At the time he was adjudged bankrupt Mr Pavan was the registered owner of

1,500  of  the  5,000  shares  in  Pavan  Lands  Ltd.    The  other  shareholders  are Mr Pavan’s sister (Mrs Bryce) who holds 2,000 shares and a trustee of the J J Pavan Trust who holds 1,500 shares in Pavan Lands Ltd.

[9]      There is evidence that Mr Pavan may have acquired his sister’s interest in Pavan Lands Ltd in 1996.  However, as at the date Mr Pavan was adjudged bankrupt his sister was still registered as the owner of two-fifths of the shares in Pavan Lands Ltd.

J J Pavan Trust

[10]     The trust deed for the J J Pavan Trust cannot be located.  There is evidence that this trust was established in 1973 and that the beneficiaries are Mr Pavan’s five children.  One of those children, Mrs Gokcen lives in New York.  I will return to her role in this case later in this judgment.   As at the date Mr Pavan was adjudged bankrupt the J J Pavan Trust appears to have held 1,500 shares in Pavan Lands Ltd.

Sheridan Trust

[11]     In 1991 a second Pavan Family Trust was established.   This trust owned approximately 4.13 hectares in Cresswell Place, Johnsonville.   Cresswell Place adjoins Sheridan Terrace (from where the trust name was derived).   The Sheridan Trust also owned a property at 81 Sheridan Terrace.  Mr Pavan was the settlor of this trust.  He and his wife were the trustees.  Mrs Gokcen and her four siblings are the discretionary beneficiaries of the Sheridan Trust.  It would appear that the Sheridan Trust was the vehicle through which Mr Pavan conducted most of his property development activities.

Woodland Road

[12]     In 1991 Mr Pavan and Mrs Bryce acquired a section at Woodland Road, Johnsonville.   At the date he was adjudged bankrupt Mr Pavan was registered as owning a three-fifths share of that property and his sister the remaining two-fifths share.

[13]     At the time he was adjudged bankrupt Mr Pavan had a registered interest in a commercial  property  at  2  Disraeli  Street,  Johnsonville.    The  exact  extent  of Mr Pavan’s interest in that property is not completely certain.  The OA believes that the registered interests in that property may not be accurate and that Mr Pavan probably owned a 6/20th share in the fee simple and a quarter share in the estate for his life.  The balance of the interests in that property appear to be held by Mrs Bryce and the children of Mr Pavan and the children of Mrs Bryce.

5 Neville Street

[14]     Mr and Mrs Pavan’s family home is at 5 Neville Street, Johnsonville.  It has been their home for approximately 45 years.  Mrs Gokcen described 5 Neville Street as being a “basic home” that was “indicative of the frugal way of life” adopted by her  parents.    The  National  Bank  of  New  Zealand  (National  Bank)  has  a  first mortgage registered on the title to that property.

2 Cortina Avenue

[15]     Mr and Mrs Pavan were also the registered proprietors of a home at 2 Cortina Avenue in Johnsonville. It is very close to their family home and was originally built by Mr Pavan for his parents.   It was used as a rental property after Mr Pavan’s parents passed away. The National Bank had a first mortgage over that property.

Personal property

[16]     Mr Pavan advised the OA that at the time he was adjudged bankrupt he personally owned a number of earthmoving machines.  The Court was informed that all but two machines are on the Silverstream Road land and are now covered in scrub.  There is a dispute about the value of those machines as well as who now has the legal right to them.  I am not being asked to address the question of the value of those machines at this juncture.   Suffice to say Mr Pavan advised the OA that he

estimated the machines to be worth $650,000.  On the other hand, the purchaser of the Silverstream Road land (Mayall Property Trust Ltd) has arranged to have the equipment cut up for scrap metal.   It has been suggested the best price for the equipment will be achieved through it being sold as scrap metal and that the value of the machines as scrap metal is approximately $30,000.

Creditors

[17]     At the time he was adjudged bankrupt Mr Parvan had nine creditors.  Two of those  creditors  claim  competing  securities  in  relation  to  5  Neville  Street  and

2 Cortina Avenue. Those creditors are: (1)     Basecorp, and

(2)       Mrs Gokcen and her husband.

The other creditors are either unsecured or not relevant to the issues before the Court.  Accordingly, this portion of the judgment will focus upon the Basecorp and Mr and Mrs Gokcen’s loans.

[18]     In June 2006 Mr and Mrs Pavan, acting in their capacities as trustees of the Sheridan Trust, borrowed $3.6 million from New Zealand Guardian Trust Company (Guardian Trust).   Mr Pavan and his wife guaranteed that loan.   That loan was secured by way of an all obligations mortgage over the Cresswell Place land and the Silverstream Road land.  Mr and Mrs Pavan did not agree to mortgage other property by way of security for their guarantees for this loan.

[19]     The $3.6 million borrowed in June 2006 did not meet all of Mr Pavan’s requirements.  An approach was made to Basecorp who in February 2007 agreed to lend a total of $1.3 million to:

(1)       Pavan Lands Ltd;  and

(2)       Mr and Mrs Pavan as trustees of the Sheridan Trust.

[20]     The first Basecorp loan was secured by way of an all obligations mortgage over:

(1)       the Silverstream Road land;  and

(2)       the Cresswell Place land

“owned by [Mr and Mrs Pavan] as trustees of the Sheridan Trust”.

[21]     This loan was to be for just 12 months and was to be a second mortgage behind the Guardian Trust mortgage.

[22]     In May 2008 a second loan was granted by Basecorp.   That loan was for

$196,250.  The borrowers were Mr and Mrs Pavan as trustees of the Sheridan Trust. The guarantors were:

(1)       Pavan Lands Ltd;  and

(2)       Mr and Mrs Pavan.

[23]     This  second  Basecorp  loan  was  secured  by  way  of  an  all  obligations mortgage over:

(1)       81   Sheridan   Terrace,   Johnsonville   owned   by   Mr   Pavan   and

Mrs Pavan as trustees of the Sheridan Trust;  and

(2)       “any  other  land  which  ...  the  borrower,  and  Pavan  Lands  Ltd,

[Mr Pavan] and [Mrs Pavan] own now or may own in the future.”

[24]     During the course of 2007 Mr Pavan’s financial affairs, and his relationship with the Guardian Trust became increasingly strained.  The financial pressure that was mounting was caused by poor levels of sales of sections that had been developed by Mr Pavan.  On 27 December 2007 Guardian Trust gave notice that its loan facility

had expired.   By this time the balance of the loan to Guardian Trust was $3.504 million.   Guardian Trust gave Mr Pavan until 28 February 2008 to refinance this loan.

[25]     In an effort to address his rapidly mounting financial problems Mr Pavan arranged for a further loan from a company called New Zealand Consulting Services Ltd (NZCSL).  That loan was agreed to in October 2008.   It was to be for a very short term (three months) and was for a principal sum of $41,500.  This loan was to be secured by way of a second mortgage over 5 Neville Street and 2 Cortina Avenue.

[26]     It transpired that the repayment obligations under the loans to Guardian Trust, Basecorp and NZCSL were not met.

[27]     On  17  February  2009  NZCSL moved  to  protect  its  position  by  lodging caveats against the titles to 5 Neville Street and 2 Cortina Avenue.   Basecorp also lodged caveats against the titles to these properties.   This was done on 13 March

2009.

[28]     In March 2009 Mrs Gokcen and her husband agreed to assist her parents. Mr and Mrs Gokcen agreed that they would pay all moneys owed to NZCSL and in return Mr and Mrs Gokcen would take an assignment of that mortgage, but at a lower interest rate.  The moneys due to NZCSL were paid by Mr and Mrs Gokcen and on 30 March 2009 they received confirmation that NZCSL’s second mortgages over 5 Neville Street and 2 Cortina Avenue had been assigned to them.

[29]     By May 2009 it was clear that Guardian Trust would be taking steps to sell the land that was subject to its first mortgage.   Basecorp became aware that the amount that Guardian Trust was likely to receive for that land was $3.4 million. That  sum  would  not  have  satisfied  Guardian  Trust’s  mortgage  and  would  have caused Basecorp to  lose its  security.    Faced  with  this difficult  reality Basecorp entered into an agreement with Guardian Trust to acquire the Guardian Trust mortgages.  The assignment of the Guardian Trust mortgages to Basecorp in relation to the Cresswell Place and Silverstream Road land took place on 26 May 2009.

[30]     Basecorp attempted to sell the Cresswell Place and Silverstream Road land on the open market.  Those efforts did not produce desired results.  To mitigate its position Basecorp entered into the following transactions:

(1)On 10 August 2009 the Cresswell Place land was sold to Mayall Property  Trust  Ltd.    That  company  is  a  “investment  vehicle”  of Mr Warren Mayall, who is a director and shareholder of Basecorp. Mayall Property Trust Ltd paid $2.5 million for the Cresswell Place land.   Basecorp received $2,485,516.33.   Basecorp have explained that at the time of the sale of the Cresswell Place land the amount outstanding under the first Basecorp loan was $1,915,728.37.   This sum was repaid on 10 August 2009 from the money paid to Basecorp by Mayall Property Trust Ltd.

(2)On 26 March 2011 the Silverstream Road land was sold to Mayall Property Trust Ltd.  That land was sold for $3.5 million.  Settlement was completed on 15 April 2011 by which time the balance outstanding under the Guardian Trust loan in relation to this land stood at $388,777.50.

(3)In mid-July 2011 the OA endeavoured to resolve outstanding issues in relation to the Disraeli Street property.   On 15 July 2011 Basecorp advised the OA that it would discharge its mortgage over the Disraeli Street  property if  it  received  $76,685.89.    That  sum  was  paid  to Basecorp on 15 July 2011.

[31]     Basecorp has calculated that it is still owed close to $400,000.  Mr Rolls, the Finance Manager of Basecorp explained the status of the three loans in the following way:

Loan              Start Date      Start Advance     Interest Rate

(penalty)

Balance as at

30/4/12

First  Basecorp

Loan

5 March 2007     $1,312,000         14% (24%)         Nil

Second

Basecorp Loan

7 May 2008        $1,962,500         15% (28%)         $5,476.12

Guardian Trust

Loan

[Assigned    on

26 May 2009]

$3,602,812.65     12% (16.5%)      $388,777.50

[32]     On  2  September  2011  the  National  Bank  sold  2  Cortina Avenue.    The solicitors for the National Bank are currently holding approximately $45,021.50 in their trust account pending resolution of the dispute concerning the validity and priority of the unregistered mortgage of Mr and Mrs Gokcen and the agreement to mortgage to Basecorp.  It is possible that a further $13,696.50 will be added to the funds held in trust by the solicitors for the National Bank.

Issues

[33]     The application for directions focussed upon four categories of property.   I will explain the issues which the Court is asked to determine in the order in which they are addressed in this judgment.

(1)Who is entitled to the surplus proceeds of the sale and to what amount arising from the sale of 2 Cortina Avenue?

(2)Who has a valid and superior ranking security interest and/or a charge and/or mortgage after the National Bank’s first ranking mortgage security over 5 Neville Street?

(3)Does Basecorp have a valid enforceable mortgage, security or charge over 86 Woodland Road?

(4)Does  Basecorp  have  a  valid  registered  security  interest  in  the bulldozers and  earthmoving equipment  sitting  on  the Silverstream Road property?

Cortina Avenue

[34]     The issues relating to the claims to the surplus from the sale of 2 Cortina

Avenue have much in common with the issues relating to 5 Neville Street and

86 Woodland Road.  For this reason I will fully set out the relevant documentation in relation  to  2  Cortina Avenue  and  spend  comparatively less  time  explaining  the reasons for the Court’s directions in relation to 5 Neville Street and 86 Woodland Road.

Guardian Trust loan agreement

[35]     The Guardian Trust loan agreement of 30 June 2006 was between Mr Pavan and his wife as trustees of the Sheridan Trust. That loan agreement was supported by a guarantee of the same date from Mr and Mrs Pavan.  Under that guarantee Mr and Mrs Pavan guaranteed the obligations of the Sheridan Trust to Guardian Trust.  That guarantee did not provide any security over 2 Cortina Avenue, 5 Neville Street,

2 Disraeli Street, 86 Woodland Road or any other property owned by Mr Pavan in his personal capacity.

First Basecorp loan agreement

[36]     The first Basecorp loan agreement of 28 February 2007 records that:

(1)       The borrowers are Pavan Lands Ltd and the Sheridan Trust. (2)        The guarantors are Mr and Mrs Pavan.

(3)       The land to be mortgaged is the:

(a)     Silverstream Road land;  and

(b)    Cresswell Place land.

It is to be noted that the property to be mortgaged is the land “owned by [Mr and Mrs Pavan] as trustees of the Sheridan Trust”.  The words “... and any other land which you the borrower own now and may own in the future” have been crossed out.

(4)The major terms and conditions of the loan agreement include cls 1 and 3 which provide:

MAJOR TERMS AND CONDITIONS

Grant of security interest in chattels or other personal

property (“Collateral”)

1In  exchange  for  the  lender  lending  you  the  total advances (of which you are acknowledging receipt) you grant to the lender a security interest over any collateral  listed  in  the  schedule  under  Security Interest of which that you are the owner.   That includes a security interest in all your present and after-acquired personal property.    The security interest is to secure payment to the lender of the money secured and also to secure your performance of all other terms of this agreement.  You promise to the lender that there is no security interest in collateral other than that granted by this agreement.

3You agree that the land to be mortgaged shall also include your interest in any other land including land which you may now own or may not yet own and you  hereby  charge  or,  as  the  case  may  be,  will charge such other land accordingly.

(5)The  terms  of  the  guarantee  contain  the  usual  provision  that  the guarantors are liable to repay the loan as if they were the borrowers. The terms of the guarantee also specifically provide:

9        Agreement to grant security interest.

In exchange for the lender lending to the borrowers the amount of credit the guarantor who is owner of collateral shown as owned by the guarantor in the “what could happen if you fail to meet your commitments” section of the disclosure statement in the loan agreement grant to the lender a security interest over that collateral.  The security interest is to  secure  payment  to  the  lender  of  the  money secured and also to secure the performance of all other terms of this agreement and of any collateral loan  agreement.    The  guarantor  promises  to  the lender  that  there  is  no  security  interest  in  the collateral other than that granted by this agreement. The guarantor waives the right to receive a verification statement following registration of any security interest.

10       Agreement to mortgage land.

In exchange for the lender lending to the borrowers the amount of credit the guarantor(s) who own the land to be mortgaged shown as owned by the guarantor in the “what could happen if you fail to meet your commitments” section of the disclosure statement in the loan agreement shall execute in favour of the lender and at the cost of the borrowers a registrable mortgage over that land.   Such a mortgage   shall   be   in   an   all   obligations   form published by the Auckland District Law Society under  number  2002/2103 or,  at  the  option  of  the lender, any replacement or similar form reasonably required by the lender and the priority figure for the purposes of section 80A(2) of the Property Law Act

1952 shall be the total advances from the lender to the  borrower  plus  $20,000  if  the  initial  unpaid balance is less than $20,000 but otherwise will be twice the total advances or such lesser amount as the lender may decide.   The mortgage will secure payment of the guaranteed money and the performance of all other terms of this agreement and of any collateral loan agreement and the guarantor(s) who own the land to be mortgaged hereby charge that land accordingly.  If there is a reference to any other land which the guarantor may own now or may own in future in the “what could happen if you fail to meet your commitments” section of the disclosure statement the land to be mortgaged shall

also include  the  interest of  the  guarantor  in  such other land and the guarantor hereby charges or, as the case may be, will charge such other land accordingly.

11       The lender’s rights and powers and the obligations of the borrowers in the loan agreement are implied into this guarantee as if the guarantor were the borrower.

The second Basecorp loan agreement

[37]     The second Basecorp loan agreement dated 26 May 2008 records that: (1)     The borrower is the Sheridan Trust.

(2)      The guarantors are:

(a)      Pavan Lands Ltd;  and

(b)      Mr and Mrs Pavan.

(3)The land to be mortgaged is a section located at 81 Sheridan Place, owned by the Sheridan Trust and “... any other land which you the borrower, and Pavan Lands Ltd, [Mr Pavan] and [Mrs Pavan] own now and may own in the future”.

(4)The major terms and conditions of the loan agreement are similar to those contained in the first Basecorp loan.  There are, however, some differences.  For convenience, cls 1 and 2 of the second Basecorp loan are set out below:

MAJOR TERMS AND CONDITIONS

Grant of security interest in chattels or other personal property

(“Collateral”)

1In exchange for the lender lending the borrower this initial unpaid balance (of which the borrower is acknowledging receipt) and any subsequent advances, the borrower grants to the lender a security interest over any collateral which the borrower  owns  and  which  is  listed  in  the  “SECURITY

INTEREST”  section  of  the  schedule.    That  includes  a security interest in all the borrower’s present and after- acquired property if there is a reference to such property owned by the borrower in that section.  This agreement also incorporates Auckland District Law Society memorandum of general terms and conditions number 6302 and if the terms of either document conflict those of this agreement  shall prevail.  The security interests are to secure payment to the lender  of  the  money  secured  and  also  to  secure  the borrower’s performance of all other terms of this agreement and any associated loan agreement.  The borrower promises to the lender that the borrower owns the collateral and that there is no security interest in the collateral other than that granted by this agreement which the borrower has not disclosed in writing to the lender.

Agreement to mortgage land

2In exchange for the lender lending you the initial unpaid balance (of which you are acknowledging receipt), and any subsequence advances, you, or such of you, who are shown as  owning  the  land  to  be  mortgaged  in  the  “Security Interests” section of the schedule shall execute in favour of the lender and at the cost of the borrower(s) a registrable mortgage over that land.  Such a mortgage shall be in an all obligations form published by the Auckland District Law Society so as to incorporate memorandum registered number

2007/4240 (ADLS 6302) or, at the lender’s option, any form

to  the  same  or  similar  effect  reasonably  required  by  the lender and the terms of the relevant memorandum shall be incorporated into this agreement and the priority figure for further advances by way of financial accommodation for the purposes of section 92(1) of the Property Law Act 2007 shall be  twice  the  total  amount  of  payments  shown  in  the payments section of the schedule plus interest, or such lesser amount as the lender may decide.  The mortgage will secure payment of the money secured and the performance of all other terms of this agreement and any variation and the borrower(s)  who  own  the  land  to  be  mortgaged  hereby charge that land accordingly.  If there is a reference to any other land which the borrowers may own now or may own in the future in the “Security Interests” section of the schedule the land to be mortgaged shall also include the interests of the borrowers in such other land and the borrowers hereby charge or, as the case may be, will charge such other land accordingly.

The term “money secured” is defined to mean:

... all money, including, but without limitation, the total advance, the initial unpaid balance, any further advance, default or other interest, and default and other fees and charges and disbursements and other money which the borrower must pay to the lender under this agreement or under any collateral or subsequent agreement of any kind.

(5)       The terms of the guarantee are identical to those contained in the first

Basecorp loan (refer [36(5)] above).

[38]     The first issue I have to determine is whether Mr Pavan’s obligations as a guarantor under either the first or second Basecorp loans provides Basecorp with any form of security in relation to 2 Cortina Avenue and, if so, whether Basecorp’s interests take priority over those of Mr and Mrs Gokcen.  This issue is conveniently addressed by focusing upon the following questions:

(1)Did Mr Pavan agree to mortgage 2 Cortina Avenue when he became a guarantor to one or both of the Basecorp loans?

(2)If  Mr  Pavan  did  agree  to  mortgage  2  Cortina Avenue,  does  that agreement to mortgage extend to the loan assigned by the Guardian Trust to Basecorp?

(3)       If the answer to question (2) is “yes”, does Basecorp’s interest in

2 Cortina Avenue have priority over the interest asserted by Mr and

Mrs Gokcen?

The second of these questions involves:

(1)an examination of the terms and conditions of the relevant loan agreements;  and

(2)       the terms of the guarantees.

[39]     The parties submitted that the principles which the Court must follow when interpreting a guarantee are as the same as those which apply to interpreting ordinary contracts.  Those principles have been explained by the House of Lords in Investors Compensation Scheme Ltd v West Bromich Building Society,2  and by the Supreme

Court in Vector Gas Ltd v Bay of Plenty Energy Ltd.3   In Krtolica v Westpac Banking

2      Investors Compensation Scheme Ltd v West Bromich Building Society [1998] 1 WLR 896 (HL).

3      Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444.

Corporation4 Stevens J applied the established principles of contract interpretation to the terms of a guarantee.5   I also propose to interpret the terms of the guarantee as if it were an ordinary contract.  I note, however, that the principle of strict construction may still have a lingering role when interpreting guarantees.6

Did Mr Pavan agree to mortgage 2 Cortina Avenue?

[40]     In my assessment the guarantee which Mr Pavan provided in relation to the first Basecorp loan cannot provide Basecorp with any form of security in relation to

2 Cortina Avenue.  My reasons for reaching this conclusion are:

(1)The plain and ordinary meaning of the words in the schedule “Real Property – land to be Mortgaged” is that the only land which is to be mortgaged  under  the  first  Basecorp  loan  is  land  owned  by  the Sheridan  Trust.   Any land  owned  by Mr  and  Mrs Pavan  in  their personal capacities was excluded from the description of “land to be mortgaged” in the schedule to the first Basecorp loan, when the words “... and any other land which you the borrower own now and may own in the future” were deleted.

(2)The reference to “... any other land ...” in cl 3 of the major terms and conditions of the loan agreement (refer [36(4)] above), can only have been intended to refer to land owned by the Sheridan Trust.

(3)If cl 11 of the terms of guarantee were intended to mean that “all other land” owned by the guarantors could be secured by the terms of the guarantee then that needed to be very clearly explained in the terms of the guarantee.   The fact that the guarantor “stands in the shoes” of the borrower in the event of the borrower’s default does not mean that  cl 11 of the guarantee can  be stretched to support the

proposition  that  the  guarantor  provided  their  personal  property as

4      Krtolica v Westpac Banking Corporation [2008] NZCCLR 24 (HC).

5      See also Egan v Static Control Services [2004] EWCA Civ 392, [2004] 2 Lloyd Rep 429.

6      See S J Whittaker “Suretyship” in H G Beale (gen ed) Chitty on Contracts (30 ed, Sweet & Maxwell, 2008) at [44-059].

security in the event that there was default by the borrower and/or the guarantor.

[41]     Basecorp does not face the same difficulty in relation to its second loan.  In that loan agreement the schedule of “personal property-land to be mortgaged” clearly includes “any other land [which Mr Pavan] and [Mrs Pavan] own now and may own in the future”.   The plain and ordinary meaning of those words is that Mr Pavan agreed to mortgage 2 Cortina Avenue and any other property owned by Mr and Mrs Pavan when he became a guarantor to the second Basecorp loan.

Does the agreement to mortgage 2 Cortina Avenue in the second Basecorp loan now extend to the loan assigned by the Guardian Trust to Basecorp?

[42]     The implications of Basecorp’s submissions on this question are clearly very significant for Mr and Mrs Pavan.  From their perspective, a guarantee secured over their personal property to repay a loan that currently has an outstanding balance of approximately $5,000 should not be able to be amalgamated with another guarantee to pay a separate and much larger debt in relation to properties owned by a third party (Sheridan Trust).   The dilemma faced by Mr and Mrs Pavan was  in part described in the following passage of Re Clark’s Refrigerated Transport Pty Ltd (In

Liquidation):7

It does seem strange that a man may lock up his counting-house and go home for the night, in the comfortable knowledge that his only secured creditor is his banker, to whom he owes a trifling sum secured by the usual boundless bank instrument, and unlock the door in the morning to find that, by virtue of assignments of the large but unsecured debts owed by him his fellow merchants, and indeed to the butcher, the baker and the candlestick maker, all his unsecured debts have gone to feed his banker's insatiable security, so that every one of his debts is now secured.

[43]     On the other hand, Basecorp believes the terms of the loan agreements and Mr  Pavan’s  guarantees  can  be  construed  to  mean  that  Mr  Pavan  provided  his personal property as security for all of the loans he negotiated.

[44]     The  Court’s  task  is  to  interpret  the  loan  documentation,  including  the guarantees objectively and in accordance with common law and statutory principles.

7      Re Clark’s Refrigerated Transport Pty Ltd (In Liquidation) [1982] VR 989 (SC) at 995-996.

Loan documentation

[45]     The guarantee provided by Mr Pavan in relation to the second Basecorp loan provides:

(1)       That as guarantor, Mr Pavan became a principal debtor to Basecorp.

Clause 2 of the guarantee provides:

The guarantor shall be liable for the payment of the guaranteed money and for the performance of the terms of the loan agreement as if he were a principal debtor to the lender ...

(2)       Mr Pavan agreed to mortgage his land when he became a guarantor.

Clause 10 of the guarantee provides:

If there is a reference to any other land which the guarantor may own now or may own in the future in the “what could happen if you fail to meet your commitments” section of the disclosure statement the land to be mortgaged shall also include the interest of the guarantor in such other land and the guarantor hereby charges or, as the case may be, will charge such other land accordingly.

(3)Clause 11 reinforces the conclusion that Mr Pavan agreed to mortgage any land he owned. That clause provides:

The lender’s rights and powers and the obligations of the borrowers in the loan agreement are implied into this guarantee as if the guarantor were the borrower.

[46]     The terms of the schedule to the second Basecorp loan provide:

(1)That Mr Pavan agreed to “an all obligations Auckland Law Society first mortgage (securing without limit payment of all the money secured and performance of all your obligations under this contract to the extent and to the value of the mortgage property) over ...”.

(2)The property is then identified as being 81 Sheridan Terrace and “... any other land which ... [Mr Pavan] and [Mrs Pavan] now own or may own in the future”.

[47]     The Memorandum of Terms and Conditions of the second Basecorp loan confirm that pursuant to cl 2, Mr Pavan agreed that:

If there is a reference to any other land which the borrowers may own or may own in the future in the “Security Interests” section of the schedule the land to be mortgaged shall also include the interest of the borrowers in such other land and the borrowers hereby charge or, as the case may be, will charge such other land accordingly.

[48]     Both cls 1 and 2 of the major terms and conditions identify the Auckland District  Law Society memorandum  of  general  terms  of conditions  No.  6302  as providing terms to be incorporated into the terms of any mortgage.

[49]     The definition of “money secured” means all money “... which the borrower must pay to the lender under this agreement or under any collateral or subsequent agreement of any client”.

[50]     There is no reference to any property in the “security interests” section of the schedule to the loan agreement. All references to any property are in the next section of the schedule, namely “Real Property – land to be mortgaged”.

[51]     In my judgement, when Mr Pavan agreed to guarantee the second Basecorp loan he agreed to:

(1)guarantee that Sheridan Trust would repay all money owed under the terms of the second Basecorp loan.  If the Sheridan Trust failed to pay all moneys due under the second Basecorp loan Mr Pavan agreed to pay that sum personally;

(2)mortgage any property he and his wife owned at that time, or in the future by way of security for the repayment of all moneys owed to Basecorp under the terms of the second Basecorp loan.

[52]     Basecorp submits that the term “... collateral or subsequent agreement of any kind” found in the definition of “money secured” means the Guardian Trust debt became secured with the second Basecorp loan upon the assignment of that debt to Basecorp.

[53]    I cannot accept Basecorp’s submissions.   In my judgement, Mr Pavan’s obligations as guarantor were confined to securing payment of all moneys secured under the contract to the extent and value of 81 Sheridan Terrace and any other property owned by Mr Pavan and his wife.  This interpretation is the most objective construction available when regard is had to the words “... performance of all your obligations  under  this  contract”  (emphasis  added)  in  the  schedule  of  the  Real Property – land to be Mortgaged section of the second Basecorp Loan.  The words “this  contract”  cannot  be  construed  to  extend  to  the  separate  loan  agreement originally entered into between Guardian Trust and the Sheridan Trust, or the assignment of that agreement to Basecorp.  My reasons for reaching this conclusion are:

(1)At the time Mr Pavan agreed to guarantee the Guardian Trust loan he and Guardian Trust understood that Mr Pavan was not agreeing to provide any of his personal property as security for the Guardian Trust loan.  That agreement could not be affected by the terms of the subsequent second Basecorp loan.

(2)When Mr Pavan agreed to become a guarantor to the second Basecorp loan he and Basecorp understood that he was agreeing to provide his personal property as security for the second Basecorp loan.   That agreement did not entail Mr Pavan providing his personal property as security for the prior Guardian Trust loan.   At the time the second Basecorp loan was agreed to Basecorp had not been assigned the Guardian Trust loan.   Accordingly I see no merit in Basecorp’s argument that the definition of “money secured” in the second Basecorp loan can somehow apply to the Guardian Trust loan.   It could not do so because the money owing under the Guardian Trust loan could not possibly be described as money “the borrower must pay to the lender” (in the definition of “money secured” in the second Basecorp loan).  At the time of the second Basecorp loan the moneys in issue were owed to Guardian Trust, not Basecorp.

(3)In De Lisle v Union Bank of Scotland8 the Court of Appeal of England and Wales declared that the Bank of Scotland, as assignee of a mortgage, could not be placed in a better position than the assignor. That principle would be flouted if, in this case, Basecorp as assignee could use the terms of Mr Pavan’s guarantee to the second Basecorp loan to place Basecorp in a far better position than Guardian Trust, as the assignor of the loan in issue.

Trustee liability

[54]     Basecorp placed some reliance on the proposition that Mr Pavan’s liability as a trustee assisted Basecorp.   This proposition was derived from a clause in the Basecorp loans under the hearing “Liability as Trustee”.   The clause in question provides:

bIn enforcing this loan agreement and/or any of the securities, the borrower/guarantor promises that the lender:

(i)        (In addition to any security interest which the lender may also hold) may have full recourse to all of the assets of the trust and will be subrogated to each trustee’s rights to be indemnified from those assets or by another person (including any beneficiary of the trust);

(ii)      may  have  recourse  to  the  personal  assets  of  any trustee other than a limited liability trustee ...

[55]     The terms of this clause are circumscribed in that they apply to “enforcing this loan agreement and/or any of the securities ...”.  Under the second Basecorp loan all Mr Pavan’s property is provided as security, but the clause relating to “liability as a trustee” does not advance resolution of the key issue, namely whether “this loan agreement” applies to earlier sums owing under the Guardian Trust loan.

[56]     The  terms  of  the  Guardian  Trust  loan  contain  a  similar  clause,  namely cl 13(a) which provides:

8      De Lisle v Union Bank of Scotland [1914] 1 Ch 22 (CA).

In the case of any trustee of the trust who is not named in this paragraph, that trustee will have full personal liability, so that the lender may have recourse to his or her personal assets as well as to the assets of the trust.

[57]     Mr Pavan is “not named in this paragraph”.  However the fact that Guardian Trust (and Basecorp on assignment) could have recourse to Mr Pavan’s personal assets does not assist in determining which lenders have security over his personal property.

[58]     Accordingly, I see nothing to assist Basecorp in the fact that Mr Pavan signed the loans as a trustee.

Tacking

[59]     In the present case the OA and Mr and Mrs Gokcen suggested that Basecorp may have been trying to undertake some form of “tacking”.

[60]     Tacking occurs where:

(1)a lender lends a sum, to be secured by way of mortgage over the borrower’s property, and that mortgage also secures further advances; and

(2)another lends a sum to be secured by way of mortgage over the same property;  and

(3)      the original lender makes a further advance to the borrower.

In these circumstances, the principle of “tacking” would apply to allow the original lender’s second advance over the same property to rank higher in priority to the second lender’s security interest.

[61]     The ways in which tacking might occur were greatly limited by the Land

Transfer Act 1952.9

[62]     Since then s 89(3) of the Property Law Act 2007 has abolished all forms of tacking of further advances that would give priority otherwise than in accordance with ss 90-94 of the Property Law Act 2007.10

[63]     The concept of tacking was examined in Kerr v Ducey.11    In that case the plaintiff and her husband had given an “all obligations” mortgage to a bank.  That mortgage was secured over a section which had been subdivided.  After sale of part of the land the mortgage remained in place as security for a term loan and an overdraft facility.

[64]     Judgment was obtained against the plaintiff’s husband by the defendant who registered  a charging order for the judgment sum.   The defendant subsequently purchased the mortgage and immediately demanded repayment of the mortgage and the judgment sum.  The plaintiff endeavoured to redeem the mortgage by tendering the amount outstanding under the mortgage loan.  This was declined.  The defendant then proceeded to arrange for a mortgagee sale.  An injunction was sought.  Thorp J held:

(1)Tacking was permitted in relation to further advances provided for by the mortgage and pursuant to s 80A of the Property Law Act 1952;

(2)      The true construction of the mortgage was that it did not clearly stipulate that the mortgage was intended to cover pre-existing third party indebtedness and accordingly the defendant was not entitled to include  the  judgment  debt  in  the  amount  required  to  redeem  the

mortgage.

9      P T Young Law of Mortgages of Land in New Zealand (Butterworths, Wellington, 1995) at [12.17] and Hinde, McMorland & Sim Land Law in New Zealand (looseleaf ed, LexisNexis) at [15.083].

10     Elizabeth Toomey “Mortgages” in Tom Bennion, David Brown, Rod Thomas and Elizabeth

Toomey (eds) New Zealand Land Law (2nd ed, Brookers Ltd, Wellington, 2009) at [9.17.02].

11     Kerr v Ducey [1994] 1 NZLR 577 (HC).

[65]     His Honour held that the appropriate relief was a declaration that the plaintiff was entitled to redeem the mortgage after paying the sum secured directly by the mortgage.

[66]     The OA and Mr and Mrs Gokcen submit that Basecorp is endeavouring to apply the same strategy as the defendant endeavoured to apply in Kerr v Ducey.

[67]     I am far from convinced that the present case actually fits any recognised form of tacking.  This is not a case where Basecorp is endeavouring to get priority for its second loan by tacking that loan onto the Guardian Trust mortgage.   What Basecorp is endeavouring to do is have the terms and conditions of the Basecorp second loan and Mr Pavan’s guarantee of that loan applied to the Guardian Trust loan, which was assigned to Basecorp on 26 May 2009.   In my view, the issues raised by this part of the case must be dealt with by construing the terms and conditions of the loan documentation.  No assistance can be obtained by considering the principles of tacking.

[68]     My interpretation of the loan agreements means that Basecorp’s registrable mortgage over 2 Cortina Avenue would have been discharged on 30 April 2012 upon the payment of the sum of $5,476.12.  That figure will now have to be adjusted to reflect the amount owing under the second Basecorp loan.  The balance of the sum owing on 30 April 2012 to Basecorp, namely $388,777.50 from the Guardian Trust loan  was  not  secured  by  any  registrable  mortgage  agreed  to  by  Mr Pavan. Accordingly,  aside  from  receiving  approximately  $5,476.12,  Basecorp  cannot receive any of the balance of the moneys held in trust following the sale of 2 Cortina Avenue on the basis that it had security for additional sums against that property.

Priority

[69]     The effect of my judgment should render it unnecessary to provide definitive directions on the priority of Basecorp and the Gokcen agreements to mortgage.  If, however, I have been unduly optimistic in this assessment I will reserve leave to the parties to file a memorandum within 15 days of this judgment inviting me to rule on the priority issue.  No further submissions are required.  It will be apparent however

from my judgment that once Basecorp is paid approximately $5,476.12 that it is owed under the second Basecorp loan, then Mr and Mrs Gokcen should be repaid from the balance of the moneys held from the sale of 2 Cortina Avenue.

5 Neville Street and 86 Wooodland Road

[70]     My conclusions in relation to 2 Cortina Avenue effectively determine the issues relating to 5 Neville Street and 86 Woodland Road.  For the reasons I have explained in the preceding paragraphs, in my judgement, Basecorp does not have any security in relation to 5 Neville Street or 86 Woodland Road.

Earthmoving equipment

[71]     Mr Pavan kept a number of pieces of earthmoving equipment on the vacant land at Silverstream Road, Crofton Downs.  When that land was sold by Basecorp to Mayall Property Trust Ltd on 15 April 2011 arrangements were made to have a scrap metal company cut the equipment up.  It was apparently thought that the best return from  that  equipment  would  be  achieved  if  it  was  sold  as  scrap  metal.    When Mr Pavan learnt of the intentions to cut up this equipment he protested to the OA.  I understand that two pieces of equipment were cut up for scrap metal but that a number remain on the Silverstream Road property, covered in scrub.

[72]     The  issue  for  the  Court  is  whether  Basecorp  had  a  security  over  the earthmoving equipment which enabled them to pass that equipment on to Mayall Property Trust Ltd.  If they did not have any form of security over that equipment then the equipment should always have been under the control of the OA from the date of Mr Pavan’s bankruptcy.

[73]     In Agnew v Commissioner of Inland Revenue12 the Privy Council emphasised that in determining whether or not parties intend to create a lender rights in respect of a borrower’s assets the Court has first to ascertain the intentions of the parties from  the  language  they  have  used  when  creating  their  contractual  relationship.

Whilst that case preceded the commencement of the Personal Property Securities Act

12     Agnew v Commissioner of Inland Revenue [2002] 1 NZLR 30 (PC).

1999 it is nevertheless still sound authority for the basic proposition set out in this paragraph.

[74]     The issue of whether or not Mr Pavan provided his earthmoving equipment as security for any one or more of the Guardian Trust loan, the first Basecorp or the second Basecorp loan involves the Court examining the relevant loan documentation to ascertain the parties’ intentions.

Guardian Trust loan and guarantee

[75]     The securities provided for the Guardian Trust loan were the Cresswell Place land and the Silverstream Road land.  The collateral securities were mortgages over each of those two pieces of land.  There is nothing in the Guardian Trust loan or the guarantee documentation that could be construed as an agreement that Mr Pavan was providing the earthmoving equipment as security for that loan.

Basecorp loans

[76]     Clause 1 of the Memorandum of Terms and Conditions of both the first and second Basecorp loans is headed “Grant of security interest in chattels or other personal property (‘Collateral’)”.  Under that clause the borrower grants the lender a security  interest  in  chattels  or  personal  property  which  “...  is  listed  in  the

‘SECURITY INTEREST’ section of the schedule” to the loan agreement.   It “... includes a security interest in all the borrower’s present and after-acquired property if there is a reference to such property owned by the borrower in that section”.

[77]     The security interests section of the schedules to both the first and second Basecorp loans make provision for the parties to identify motor vehicles or trailers that might be provided as security.   That section of the schedules to the loan agreements could have been easily adapted to  refer to Mr Pavan’s earthmoving equipment if it had been the parties’ intention that his earthmoving equipment was going to be part of the security for those loans.   The fact that this part of the schedules to both the first and second Basecorp loan agreements makes no reference to the earthmoving equipment (or any other vehicles) provides compelling support

for the argument that at the time those loans were agreed to the parties did not intend

to include Mr Pavan’s earthmoving equipment as security for those loans.

[78]     In  these  circumstances  it  is  unnecessary  to  consider  issues  that  might otherwise have arisen under the Personal Property Securities Act  1999.   In my judgement it is clearly apparent from the loan documentation that Mr Pavan’s earthmoving equipment was not provided as security.  That equipment should have been placed under the control of the OA when Mr Pavan was adjudged bankrupt. Neither Basecorp nor Mayall Property Trust Ltd have an overriding legal right to that equipment.

Conclusions

[79]     The Court’s directions are:

(1)       Basecorp’s security in relation to 2 Cortina Avenue is limited to the

balance owing under the second Basecorp loan ($5,476.12 as at 30

April 2012).

(2)       Basecorp does not have any security in relation to 5 Neville Road or

86 Woodland Road.

(3)Basecorp has no security in relation to the earthmoving equipment that is or was at Silverstream Road.

[80]     If the parties are unable to reach agreement as to costs then leave is reserved to enable them to return to the Court for orders on this topic.

D B Collins J

Solicitors:

Official Assignee, Insolvency & Trustee Service, Wellington for Applicant

Evans Bailey, Hamilton for Second Respondent
Peter Brinsley, Wellington for Fourth Respondents