Powell v K 2 Investment Group Ltd

[2021] NZHC 2253

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE

CIV-2018-409-191

[2021] NZHC 2253

BETWEEN

RICHARD OWEN POWELL

Plaintiff/Counterclaim Defendant

AND

K 2 INVESTMENT GROUP LIMITED

First Defendant/First Counterclaim Plaintiff

AND

K2 INVESTMENT GROUP AUSTRALIA PTY LIMITED

Second Defendant/Second Counterclaim Plaintiff

AND

GABOR KEMENY

Third Defendant/Third Counterclaim Plaintiff

Hearing:	5-7 July 2021
Appearances:	S D Campbell and J J Anson-Holland for Plaintiff P J Woods and T E Hutchinson for Defendants
Judgment:	30 August 2021

JUDGMENT OF OSBORNE J

This judgment was delivered by me on 30 August 2021 at 4.00 pm pursuant to Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar Date:

POWELL v K 2 INVESTMENT GROUP LIMITED [2021] NZHC 2253 [30 August 2021]

TABLE OF CONTENTS

Introduction[1]

The claims outlined[11]

The issues and the outcome[24]

The facts[25]

Ms Durney and Mr Kemeny structure a business together  [25]

The trust deeds  [27]

The partnership agreements[31]

The acquisition and funding of the property acquisitions and development[39]

The loan agreement — its negotiation, execution and advance[42]

The terms of the loan agreement[56]

K2 New Zealand defaults on loan repayment[62]

What Ms Durney had been doing[69]

Mr Kemeny tries to telephone Mr Powell[71]

The FCA proceedings and interim orders[80]

The final orders of the FCA[94]

Mr Powell’s caveat proceeding[96]

Subsequent dealings in relation to the Napier property[98]

The relevance of the FCA orders and the caveat judgment[101]

Issue 1: authority to represent K2 New Zealand[103]

The issue identified[103]

The Durney email[106]

Mr Kemeny as agent of the partnerships?[114]

The final FCA order[120]

Outcome[124]

Issue 2:  validity of the loan agreement[136]

The issue identified[136]

Submissions - defendants[138]

Submissions – plaintiff[144]

Conclusion[146]

Issue 3: did Mr Powell make the agreed advance?[148]

The issue identified[148]

Submissions[150]

Conclusion — payment of the loan[153]

Issue 4: application of the Credit Contracts and Consumer Finance Act 2003 (CCCFA)[159]

The issue identified[159]

The evidence[160]

Submissions – defendants[164]

Submissions — plaintiff[165]

Discussion[176]

Issue 5: the ownership of an equitable interest[195]

The issue identified[195]

Submissions — defendants[199]

Submissions — plaintiff[208]

Discussion[215]

Issue 6: the priority of competing equitable interests[227]

The issue defined[227]

Pleadings and submissions — plaintiff[228]

Pleadings and submissions — defendants[229]

Discussion[233]

Issue 7: the validity of the caveats[248]

Mr Powell’s caveat over the Hastings property[248]

K2 Australia’s caveats over the two properties[251]

Issue 8: entitlement to the escrow funds[260]

The issue identified[260]

Discussion[267]

Costs and disbursements[273]

K2 New Zealand[274]

K2 Australia and Mr Kemeny[276]

Orders[277]

Introduction

[1]Three people are central to this case. Two of them are parties.

[2]                 First, there is Richard Powell who in 2012 made the loan which gives rise to the proceeding. Mr Powell is the plaintiff.

[3]                 Second, there is Gabor Kemeny, one of two partners in two property development businesses managed by the first defendant, K 2 Investment Group Ltd (K2 New Zealand), as agent. It was to K2 New Zealand that Mr Powell made his loan. Mr Kemeny is the third defendant, also a counterclaim plaintiff.

[4]                 Each of these men gave evidence (being the only witnesses called). In my findings upon the evidence, I find them both to have been honest, credible witnesses, albeit with some discrepancies which related to reliability on particular matters rather than general credibility.

[5]                 The third central player was Mr Kemeny’s former de facto partner, Bronwynne Durney. She and Mr Kemeny were also in business together. Ms Durney was the  sole director and sole shareholder of K2 New Zealand.

[6]                 Ms Durney was not called as a witness by either Mr Powell or the defendants. To the extent I reach conclusions as to her conduct it has necessarily been upon the oral evidence of Mr Powell and Mr Kemeny and upon the documentary record. Any account Ms Durney might have given as to her conduct is not available to the Court. It is, however, important context to this judgment that both Mr Powell and Mr Kemeny have, out of their dealings with Ms Durney, suffered significant financial reversals and are aggrieved at aspects of her behaviour. Mr Kemeny refers to funds which Ms Durney took from K2 New Zealand for her own purposes. Upon the dissolution of the Kemeny/Durney relationship, Mr Kemeny came to distrust Ms Durney, now regarding himself as a victim of her “fraud and embezzlement”. Mr Kemeny said he also considered Mr Powell a victim of Ms Durney’s conduct. In short, this case concerns two men who have lost much through their dealings with Ms Durney.

[7]                 This judgment examines the rights, interests and liabilities which arose out of Mr Kemeny’s and Mr Powell’s dealings with Ms Durney and K2 New Zealand.

[8]                 On 23 December 2011, Mr Kemeny caused his company (the second defendant) K2 Investment Group Australia Pty Ltd (K2 Australia) to lodge caveats over the titles of the two properties at issue, claiming a beneficial interest as cestui que trust (of a trust of which K2 New Zealand was trustee).

[9]                 Mr Powell lodged caveats over some of the titles of the two properties during February and March 2013.

[10]              Mr Powell’s caveats became the subject of an application to sustain caveats which was heard and determined in this Court in November 2013, (the caveat judgment).1 The Napier caveat was ordered lapsed but with leave to Mr Powell to lodge a second caveat.2 The Hastings caveat was sustained.

The claims outlined

[11]              Mr Powell in 2012 agreed to advance to K2 New Zealand on a six month loan a sum of AUD$77,916.20 (the loan agreement).3 He paid that sum to a nominated solicitor’s trust account.

[12]The loan was not repaid by the repayment date.

[13]              Mr Powell sues K2 New Zealand (first cause of action) for NZ$100,000 (the equivalent of AUD$77,916.20) plus interest.

[14]              The loan agreement provided in the event of default in payment, K2 New Zealand would grant and execute in favour of Mr Powell a mortgage over identified properties in Napier and Hastings (the two properties).

[15]K2 New Zealand has not provided such a mortgage.

1      Powell v K 2 Investment Group Ltd [2013] NZHC 3167 [The caveat judgment].

2 At [85].

3      The parties to the loan at the time treated AUD$77,916.20 as equivalent to NZ$100,000.

[16]              Mr Powell sues (second cause of action) for specific performance of the mortgage obligation.

[17]              There are complexities to K2 New Zealand’s legal ownership as registered proprietor of the two properties. As I have stated, K2 New Zealand was the agent to manage each partnership business of property development. But K2 New Zealand was also Ms Durney’s  trustee  company,  being  one  of  the  two  partners  (with  Mr Kemeny’s K2 Australia) in the business. The two companies each held a 50 per cent interest in the profit of the partnership business and in the net proceeds upon dissolution. K2 Australia was effectively the vehicle by which Mr Kemeny had entered into two commercial partnerships with his (personal) partner, Ms Durney, to develop  the  two  properties.  After  the  relationship  between  Mr  Kemeny  and  Ms Durney broke down, the Family Court of Australia (FCA) made a number of orders determining their property interests.

[18]              Mr Powell (third cause of action) seeks declarations that his interests have priority over the interests of K2 Australia and Mr Kemeny (and seeks also related orders as to the caveats lodged by K2 Australia).

[19]              The issues between the parties are further complicated by the fact that, following the making of the FCA’s orders and the caveat judgment, K2 New Zealand’s title in the Napier property was transferred to Mr Kemeny and the Napier property thereafter sold with a portion of the proceeds held in escrow (the escrow fund).

[20]              Mr Powell (fourth cause of action) seeks orders (based on a constructive trust) releasing 50 per cent of the escrow fund to him.

[21]              Defences in relation to each of the causes of action, including affirmative defences and positive allegations, were filed in the names of K2 New Zealand, K2 Australia, and Mr Kemeny himself.

[22]              Additionally, a counterclaim was filed by which it was asserted that Mr Powell did not acquire any interest, whether as mortgagee or otherwise, in the two properties.

Orders are sought that Mr Powell’s caveat over the Hastings property title be removed and that the escrow fund be distributed to Mr Kemeny.

[23]              Mr Powell challenges Mr Kemeny’s authority to represent K2 New Zealand in this proceeding. Mr Kemeny, in response, invokes orders of the FCA, subsequently registered in New Zealand, as having both appointed him agent and ordered the transfer to him ownership of K2 New Zealand itself.

The issues and the outcome

[24]              I will deal with the issues arising in the following order, and with the following outcomes:

(a)Issue 1: Authority to represent K2 New Zealand (at [103]–[135])

Did Mr Kemeny have authority to have K2 New Zealand engage in litigation?

(i)No. Mr Kemeny has not established any lawful delegation or authorisation which permitted him to have pleadings filed on behalf of K2 New Zealand, or to give solicitors instructions as to K2 New Zealand’s defence.

(ii)As a consequence, K2 New Zealand’s defence and counterclaim will be struck out.

(b)Issue 2: validation of the loan agreement (at [136]–[147])

Did K2 New Zealand have authority to enter the loan agreement?

(i)Yes. The indoor management rule applies; s 18(1) Companies Act. Mr Powell was dealing with Ms Durney, as the sole director of K2 New Zealand.

(c)Issue 3: did Mr Powell make the agreed advance (at [148]–[158])

Did Mr Powell make the agreed advance?

(i)Yes.

(d)Issue 4: application of the Credit Contracts and Consumer Finance Act 2003 (CCCFA) (at [159]–[194])

Was the loan agreement as a whole oppressive in terms of the CCCFA?

(i)No.

Was Mr Powell’s conduct of delaying the enforcement of his entitlements oppressive, unjustly burdensome or unconscionable pursuant to the CCCFA?

(ii)Yes. An order re-opening the credit contract will be made. The “delay adjustment” identified by Mr Anson-Holland is the correct approach.

(e)Issue 5: the ownership of an equitable interest (at [195]–[226])

Did K2 New Zealand have an equitable share in the two properties?

(i)Yes. K2 New Zealand held a 50 per cent equitable share in the two properties, with K2 Australia holding the remaining 50 per cent. Consequently, K2 New Zealand had the power to charge the title to the extent of its 50 per cent beneficial interest and, in particular to grant a mortgage for that purpose.

(ii)Mr Powell is entitled to specifically enforce K2 New Zealand’s commitment to provide a mortgage (second cause of action).

(f)Issue 6: the priority of competing equitable interests (at [227]–[247])

What is the priority of the competing equitable interest?

(i)Mr Powell’s equitable mortgage over K2 New Zealand’s interest has priority.

(ii)In equity, Mr Kemeny holds the interest he obtained from K2 New Zealand subject to the prior interest obtained by Mr Powell, subject only to any finding that there are circumstances which would make it inequitable to apply the first in time rule.

(g)Issue 7: the validity of the caveats (at [248]–[259])

Should K2 Australia’s caveats not have been lodged, and should the remaining Hastings caveat be removed (third cause of action)?

1. Mr Powell succeeds in this cause of action.

(h)Issue 8: entitlement to the escrow funds (at [260]–[272])

Does Mr Kemeny hold 50 per cent of the proceeds of the sale of the Napier property as constructive trustee for Mr Powell’s benefit to the extent that K2 New Zealand is unable to satisfy its liability to him?

(i)No.

(ii)However, Mr Powell is entitled to 50 per cent of the escrow fund (with proportionate interest).

The facts

Ms Durney and Mr Kemeny structure a business together

[25]              Mr Kemeny and Ms Durney were in a personal relationship from 2006, residing together in Australia from 2009. In 2007, they went into business together  to develop properties in Napier and Hastings (both to be Quest accommodations).  Mr Kemeny brought to the venture his financing ability, having been managing director of a very substantial liquor business in Australia. Ms Durney, with a

background in property development, was to provide the property development skills and (through an entity) the management.

[26]              The structure decided upon for each venture (Quest Napier and Quest Hastings) involved:

(a)the settlement of a trust upon a corporate trustee (K2 Australia for   Mr Kemeny and K2 New Zealand for Ms Durney);

(b)a partnership agreement between Mr Kemeny, Ms Durney, K2 Australia and K2 New Zealand whereby K2 Australia and K2 New Zealand would carry on a property development business in partnership, with K2 New Zealand appointed as agent to manage and carry on the partnership’s business; and

(c)the development properties were then purchased, partly with bank finance and partly through Mr Kemeny’s finance.

The trust deeds

[27]              The deeds of settlement for the trusts are unexceptional.4 Each was established with minimal ($200) capital. Mr Kemeny’s trust deeds are both dated 7 June 2007. For reasons the parties were unable to explain Ms Durney’s trust deed for Quest Napier is dated 22 October 2010 but the parties to the deed record that the trust was initially declared on 20 June 2007.

[28]              The power of K2 New Zealand to borrow money for Ms Durney’s benefit and to give a mortgage (or other security) for such borrowings is in issue in the proceeding. The trust deed gives K2 New Zealand all the rights, powers and privileges of a natural person in the administration, management and investment of the trust fund and permits the trustee to enter into any obligation (including borrowing money) and to give mortgages or other securities. Reference was made by both counsel to these powers

4      The parties were unable to produce a copy of the Deed of Trust establishing Ms Durney’s Quest Napier Trust, but their evidence was that its terms would have been materially the same as that produced in relation to Ms Durney’s Hastings Trust.

but as I come to (below at [147]), it is not this power of K2 New Zealand in the administration of the trust that is relevant — rather, it is the power of K2 New Zealand under its constitution as a company.

[29]              The discretionary beneficiaries of Ms Durney’s trusts are herself and identified classes of family members (not including Mr Kemeny). The discretionary beneficiaries of Mr Kemeny’s trust are identified persons and classes of his family members, together with Ms Durney.

[30]              K2 New Zealand (that is, K 2 Investment Group Ltd) was incorporated (in New Zealand) on 18 May 2007.5 Ms Durney was and remains the sole shareholder and director.6

The partnership agreements

[31]              The partnership agreements are respectively dated 20 June 2007 (Quest Hastings) and 6 August 2007 (Quest Napier). They are materially identical.

[32]              They identify the business of each partnership as being property development in New Zealand relative to the particular properties (at Hastings and Napier).

[33]              The appointment of K2 New Zealand as agent of the partnership is dealt with thus:

3.APPOINTMENT OF AGENT

3.1The Partners appoint the Agent to act as the undisclosed agent of the Partners to manage and carry on the Partnership’s business subject to the terms of this Agreement.

3.2The Agent accepts its appointment as the undisclosed agent of the Partners to manage and carry on the Partnership’s business subject to the terms of this Agreement.

5      It has, by default, the rights, powers, duties and obligations set out in s 28 Companies Act 1993. That includes “full capacity to carry on or undertake any business or activity, do any act, or enter into any transaction”: Companies Act, s 16(1)(a).

6      K2 New Zealand was for two periods removed from the Companies Register but subsequently restored. Through the restoration, K2 New Zealand is treated as if it had not been removed from the Register: Companies Act, s 330(2).

3.3The Agent must not, without prior written consent of each of the Partners, disclose to any other person, except as required by law, that the Agent is the agent of the Partners.

3.4The Partners will be entitled to terminate the appointment of the Agent as their agent by notice in writing ending on any day.

3.5The Partnership will pay and be responsible for all costs properly incurred by the Agent in relation to the management and conduct of the Partnership’s business.

3.6The Agent agrees with the Partners to:

(a)obey all express directions given by the Partners from time to time, and

(b)be bound by all limitations imposed from time to time by the Partners.

[34]              Each partnership continues until it is dissolved or otherwise ended under the agreement.

[35]              The parties agree on the distribution of profit and a return on Mr Kemeny’s finance in the following terms:

6SHARE OF PROFIT

6.1The Partners will share Partnership profit as set out in this clause 6.

6.2[Mr Kemeny] will receive a notional return on amounts contributed to the Partnership or expended on the business of the Partnership plus any security provided to the Partnership by [Mr Kemeny] (such as bank guarantees) at the Notional Interest Rate.

6.3For the purposes of this clause 6, the Notional Interest Rate is the yield rate for the 90-day Bank Accepted Bills published by the Reserve Bank of Australia for the month of May in the preceding financial year plus 1.5%.

6.4The Partners will share the balance of the profit of the Partnership’s business on the following basis:

K2 Aus – 50 %; and K2 NZ – 50 %;

or as otherwise agreed in writing between the Partners.

For the purpose of this agreement, when used “Share of Profit” is a reference to those percentages.

[36]              By the agreement K2 Australia and K2 New Zealand commit to providing the services of Mr Kemeny and Ms Durney as their “Key Person” respectively. Under “Partner  Obligations  &  Prohibitions”,  the  partners  undertake  to   ensure  that   Mr Kemeny and Ms Durney respectively will carry out identified duties. The parties then agree:

11.      PARTNER OBLIGATIONS & PROHIBITIONS

…

11.2Neither the Partners nor any Key Person will, without the prior consent of the Partners:

(a)disclose to third parties any Partnership information of a confidential nature;

(b)do anything to seriously harm the Partnership’s reputation;

(c)do anything which is in direct conflict with the Partnership’s business interests;

(d)mortgage or charge its share in the Partnership’s business;

(e)do or permit anything by which any Partnership property may be seized, attached or taken in execution of a judgement;

…

(g)incur any debt or liability for which the Partnership may be liable without the agreement of all of the Partners;

(h)use the money, property or credit of the Partnership in any way other than for the benefit of the Partnership.

[37]              There are provisions for a chairman (Mr Kemeny) and for monthly partners’ meetings. These include a requirement for unanimous resolutions on certain matters in these terms:

13.      PARTNERS’ MEETINGS

…

13.6Unless authority for that purpose has previously been delegated to the contrary, all resolutions at meetings of the Partners must be decided by an Ordinary Resolution, except the following, which must be unanimous resolutions (and on which the chairman does not have a casting vote):

…

(i)finance

(i)the raising of any finance by the Partnership; or

(ii)giving financial assistance to any person, other than in the ordinary course of the Partnership’s business;

…

(m) ordinary course of business arrangements or liabilities: the Partnership entering into any arrangement or incurring any liability which is not in the ordinary course of the Partnership’s business;

…

[38]              The above provisions of each partnership agreement were all in place at the time Mr Powell entered into the loan agreement and were unaltered until Mr Kemeny and Ms Durney, in the course of their proceedings in the FCA, sought orders amending the agency arrangement. (The FCA on 1 November 2012 ordered Ms Durney to do all things and sign all documents necessary to appoint Mr Kemeny agent for the partnerships).

The acquisition and funding of the property acquisitions and development

[39]              The intended purchase of the two properties proceeded and the titles were registered in the name of K2 New Zealand in 2007.

[40]              As provided in the partnership agreements, Mr Kemeny funded the acquisitions and development, initially to a principal sum beyond AUD$9 million (from both personal resources and from personal borrowing). Around 2010, the partnerships borrowed $4.4 million from the bank. This allowed Mr Kemeny to be repaid some principal and interest. The bank loan was secured by first mortgage over the two properties.

[41]              Financial statements prepared for the Napier partnership as at 31 March 2011 show the bank debt at $4,351,667 and the debt to Mr Kemeny at $6,463,086. The Hastings partnership is recorded as owing Mr Kemeny $1,217,921.

The loan agreement — its negotiation, execution and advance

[42]              Mr Kemeny and Ms Durney maintained their personal relationship until November 2011. Shortly after their separation, Ms Durney applied to the FCA for orders in relation to property and maintenance. She was represented by a Sydney- based lawyer. She also had representation in New Zealand through a Christchurch- based barrister, Jai Moss.

[43]              In December 2011, Mr Kemeny, to protect the interests of himself and K2 Australia lodged caveats against the titles of the two properties.

[44]              Through 2012, the FCA proceeding progressed through interlocutory steps such as disclosure. By August 2012, Ms Durney appears to have run out of the funds needed to bring the FCA proceeding to a conclusion.

[45]              At this point, an acquaintance of Mr Powell (Max Allfrey), a Christchurch- based businessman, put Mr Powell in touch with Mr Moss. Mr Allfrey had explained that Mr Moss was looking for someone to invest AUD$100,000, as Mr Moss’s client was involved in a relationship dispute, coming close to its end, but had run out of money to complete it.

[46]              It happened that Mr Powell — who describes himself as having been involved in a range of businesses throughout his life, some successful and some unsuccessful

—     had a sum of approximately NZD$100,000 from the recent winding up of a company. Coincidentally, Mr Moss had been assisting Mr Powell over a debt of the wound up company.

[47]              Initially, Mr Powell spoke to Mr Moss by phone, Mr Moss confirmed he was acting for an Australian woman (subsequently identified by name as Bronwynne Durney). Mr Powell and Mr Moss agreed to meet to discuss what was proposed.

[48]              I record at this point that neither party called Mr Moss as a witness at this trial. The conclusions reached in this judgment in relation to the involvement of Mr Moss

are therefore reached upon the basis of the evidence of the witnesses called and the documentary record.7

[49]              Mr Powell gave evidence (which  I  accept)  that  in  his  discussions  with  Mr Moss:

(a)Mr Powell explained to Mr Moss that he could provide NZ$100,000 (not AUD$100,000);

(b)Mr Moss explained the loan was for Ms Durney’s relationship property proceeding in Australia;

(c)Mr Moss explained Mr Powell’s money would be safe, indicating that Mr Powell would be able to caveat the properties to protect his interest and to prevent others dealing with the property and that Ms Durney would personally guarantee the loan;

(d)Mr Moss explained K2 New Zealand was the owner of a number of valuable properties in New Zealand but “for some trusts associated with” Mr Moss’s client, Ms Durney, and with Mr Kemeny (explained to be the other individual involved in the court proceedings in Australia); and

(e)Mr Moss explained Ms Durney’s share in the properties was 50 per cent, which was the proportion which Mr Powell’s caveats would protect.

[50]              Mr Powell also conducted his own searches of the titles of the two properties, identifying that K2 Australia had lodged caveats against the titles in December 2011.

7      In the course of the trial, correspondence was produced and reference made to statements of fact made by Mr Moss in correspondence after the loan agreement was entered into. Those statements, being hearsay, have not been taken into account in the factual conclusions reached in this judgment.

[51]              Mr Powell acknowledged Mr Moss explained to him that he was not able to say too much more about the situation because Ms Durney was his client. Mr Powell perceived Mr Moss to be somewhat uneasy about talking to him. Mr Powell, following his meeting and subsequent discussions with Mr Moss, chose not to take independent legal advice. Mr Powell was sufficiently reassured or “comfortable” by what Mr Moss told him that he confirmed he would provide the NZ$100,000. He provided confirmation through Mr Allfrey on 31 August 2012.

[52]              Mr Powell did not ask to see copies of any trust documents associated with the trusts Mr Moss had referred to.   Nor did he speak at the time to Mr Kemeny or     Ms Durney.8

[53]              Mr Moss then had his instructing solicitor, Peter Richardson, prepare a loan agreement. While that was being done, Mr Powell and Mr Moss agreed that the advance would be made in Australian currency as AUD$77,916.20, which would be paid into the trust account of Ms Durney’s Sydney-based lawyers.

[54]              Mr Moss emailed a draft loan agreement to Mr Powell. Mr Powell signed and dated the document on 7 September 2012 and returned it to Mr Moss. A copy was executed by Ms Durney. Mr Moss emailed the executed version to Mr Powell, with details of the bank account into which the funds were to be deposited.

[55]Mr Powell transferred the funds accordingly on 8 September 2012.

The terms of the loan agreement

[56]              The loan agreement, in its material terms, is set out in Schedule A to this judgment.

[57]              Notably the loan agreement, while referring to Ms Durney as “Guarantor” (as well as Director of K2 New Zealand), did not include a provision stating that Ms Durney was guaranteeing the loan. Equally she did not sign the document as “guarantor”, executing the document only as Director of K2 New Zealand. As a

8      Mr Powell’s first contact with Ms Durney was a communication from her in April 2013.

consequence Ms Durney has not been sued as a guarantor, Mr Powell limiting his claim under the loan agreement itself to that against K2 New Zealand.

[58]              By the terms of the loan agreement, the loan was due to be repaid by 7 March 2013, together with interest of NZD$37,500 (reduceable to NZD$25,000 if the loan were repaid by 7 December 2012).

[59]              In November 2012, Mr Powell took steps towards registering caveats against the titles to the two properties. In the lead-up to the loan agreement Mr Powell, who had previously been unaware of caveats, undertook some research. As a result he understood caveats are like a stop sign that are registered against a piece of land and are a legal mechanism by which someone with an interest in property may prevent that property being dealt with until the person with the interest has been notified and the caveat removed.

[60]              Mr Powell instructed a Kaiapoi law firm, Corcoran French, to prepare caveats. Mr Powell executed the forms that were prepared but, between December and February, Land Information New Zealand repeatedly rejected the applications due to defects in the drafting. On the third occasion (18 February 2013), caveats were registered. It transpired that they only related to the Napier property, the law firm having overlooked the Hastings property. A caveat was successfully registered in relation to that on 12 March 2013.

[61]              In the meantime, Mr Powell was in communication with Ms Durney’s lawyer in Sydney, being informed in February 2013 that Ms Durney and Mr Kemeny were close to settling.

K2 New Zealand defaults on loan repayment

[62]              K2 New Zealand did not effect repayment of the loan by 7 March 2013 (or subsequently).

[63]              Mr Powell on 11 March 2013 emailed Mr Moss to advise that he was now forced to act on his caveats and would start legal proceedings. Mr Moss replied by email indicating that he and Ms Durney wanted Mr Powell to place caveats on the

properties and to then request that Ms Durney execute a mortgage which would be put in place. Mr Moss apparently did not appreciate that caveats were already registered. It happened that the Hastings caveat, having been registered on 12 March 2013, was valid, having been registered after the default (which gave rise under cl 5(a) of the loan agreement to Mr Powell’s entitlement to a mortgage). On the other hand, the caveats over the Napier property were invalid as they had been registered before any entitlement to a mortgage had accrued. These matters were subsequently the subject of this Court’s judgment in the caveat proceeding,9 which led to the orders whereby the Napier caveat lapsed (but with leave to Mr Powell to lodge a second caveat) and the Hastings caveat did not lapse.

[64]              On 20 March  2013,  Mr  Powell’s  solicitor,  Daniel  Beker,  on  behalf  of Mr Powell, caused a notice of demand to be served on K2 New Zealand.

[65]              Having regard to the caveats which K2 Australia had registered over the titles to the two properties, Mr Beker on 22 March 2013 emailed Mr Kemeny’s solicitor, Diana Perla, notice of the fact the demand had been issued, that a second mortgage was to be registered and the debt would be pursued. The email was copied to Mr Moss who promptly replied “Thanks. Fingers crossed that does the trick”.

[66]              On 5 April 2013, Corcoran French received a letter in response from GCA Lawyers, stated to be written on behalf of the K2 Napier Partnership. In the GCA letter, it was explained or asserted:

(a)the K2 Napier partnership owned the Napier property;

(b)K2 New Zealand had acted as agent for the partnership but had now been replaced by Court order;

(c)the partnership agreement prohibited the grant of security over partnership assets and neither K2 New Zealand nor Ms Durney had been authorised to grant such security;

9      The caveat judgment, above n 1.

(d)the K2 Napier partnership denied any liability for payment of the debt;

(e)Mr Powell could not have any interest in the land for various (stated) reasons; and

(f)Mr Powell was required to immediately remove his caveat to enable transfer of the Napier property to the Court-appointed agent.

[67]              This was the first Mr Powell knew of Court orders having been made which affected K2 New Zealand or Ms Durney.

[68]              This led to Corcoran French requesting a copy of the “partnership agreement” and the “Court order” referred to by GCA Lawyers. Corcoran French made that request on 10 April 2013, at the same confirming that Mr Powell’s caveat would be removed upon payment of the sum owing under the loan at that time, NZD$152,557.18.

What Ms Durney had been doing

[69]              Unbeknown to Mr Kemeny at the time, Ms Durney began from the very day of their separation (17 November 2011) to withdraw money from the partnership bank account, to divert partnership income to herself and to “borrow” money from the partnership. The first withdrawal was of NZD$135,035. Rent payments and “partnership payments” equivalent to AUD$170,406.72 were diverted. Additionally, as disclosed in K2 New Zealand’s own financial statements, Ms Durney “borrowed” NZD$1,700,000.

[70]              Mr Kemeny came to be aware of Ms Durney’s activities in the course of 2012 and provided his evidence to the FCA in the course of the FCA proceeding to that year.

Mr Kemeny tries to telephone Mr Powell

[71]              Both Mr Kemeny and Mr Powell gave evidence of an attempt Mr Kemeny made to contact Mr Powell by telephone. It is common ground that Mr Kemeny only

spoke to Mr Powell’s mother. Her recollection of the contact is not available as she has subsequently died.

[72]              Mr Powell’s recollection is Mr  Kemeny  made  a  phone  call  just  before  Mr Powell signed the loan agreement. His mother said to him that she had had an unpleasant conversation with a man called “Gabor”. Mr Powell stated Mr Kemeny had not left contact details for him to call. He took the message as “just a straight threat”. Mrs Powell reported Gabor had told her that if Mr Powell was going to financially support Ms Durney, he (Gabor) would make sure Mr Powell never got to see his money again. Mr Powell stated he found the message quite unsettling but it did not affect his views on the risk associated with the loan agreement.

[73]              In cross-examination it was put to Mr Powell that Mr Kemeny had been courteous at all times during calls made to Mrs Powell and had left his phone number with a request that Mr Powell called him. Mr Powell stated the suggestion was “utterly untrue” as he would have rung back (if contact details had been left). When it was put to Mr Powell that Mr Kemeny had made two calls and was told by Mrs Powell on the second that Mr Powell did not wish to speak with Mr Kemeny, Mr Powell again “totally” disagreed.

[74]              Mr Kemeny stated he did not recall the date on which he had tried to contact Mr Powell. He stated the woman who answered his phone call indicated that Mr Powell was not home at the moment, that she was his mother and asked if she could help Mr Kemeny. Mr Kemeny says he then gave her his contact details and asked that Mr Powell urgently ring him back. He stated a week or so later, her rang back as Mr Powell had not called him. He states the same woman answered, said she had passed the message on to Mr Powell but that Mr Powell did not want to talk to Mr Kemeny.

[75]              In cross-examination as to  his  uncertainty  of  when  he  tried  to  contact  Mr Powell, Mr Kemeny stated it was after he had received the notice that “Mr Powell had put a loan agreement on”. He explained he then googled for Mr Powell’s details, thereby obtaining a phone number. Some questions later, in cross-examination, there was this exchange:

Q:Because it would make sense that if you were trying to warn Mr Powell you would warn him before entering into the agreement, right?

A:       Well not if I didn’t know about it.

Q:       But you did know about it didn’t you?

A:No I didn’t know about it, as far as I remember. I mean Bron [Ms Durney] wouldn’t have told me.

[76]              It is unsurprising that the witnesses, recalling events years later, struggled with some of this detail. What is clear is that it is most unlikely Ms Durney, in the midst of her activities extracting money out of K2 New Zealand or at its expense, would have alerted Mr Kemeny to the loan she was seeking to obtain from Mr Powell. To have done so would have drawn attention to her activities and would likely have led to Mr Kemeny cutting off access to the loan funds which Ms Durney needed to complete her FCA proceeding. Mr Kemeny’s statement that he recollected receiving the notice that Mr Powell “had put a loan agreement on” — which occurred through the filing of Ms Durney’s September 2012 affidavit in the FCA proceeding — makes sense. It accords with Mr Kemeny’s own recognition that Ms Durney would not have told him (before entering the loan agreement). Equally, there is no suggestion in Mr Kemeny’s September FCA affidavit in reply (as one would have expected it had been the case) that he had been aware of the existence of the loan agreement before Ms Durney referred to it in her September 2012 affidavit.

[77]              Notwithstanding the fact Mr Powell has a different recollection as to the timing, I am satisfied Mr Kemeny neither knew of the Powell/Durney loan negotiation before the loan agreement was entered into nor tried to contact Mr Powell in that period. Mr Powell’s recollection as to the timing is explicable by virtue of the time which elapsed before Mr Powell was first called upon through this litigation to recall the event.

[78]              As to the content of the discussion, I find on the evidence that Mr Kemeny cannot have left his contact details for Mr Powell. The documentary record and undisputed narrative evidence indicates Mr Powell assiduously followed up on communications given the level of anxiety he had over his situation. Had he received a message to call Mr Kemeny, he would have done so.

[79]              As it is, once it is established that the call was made by Mr Kemeny after the event of the loan agreement, nothing can turn on the other content of the conversation. It matters not whether Mr Kemeny was cross or courteous.

The FCA proceedings and interim orders

[80]              The management and ultimate dissolution of the partnerships was a central focus of  the  FCA  proceedings  and  the  cross-applications  of  Ms  Durney  and  Mr Kemeny. In that context, Mr Kemeny provided his evidence to the FCA during 2012 as to  partnership  funds  taken  by  Ms  Durney.  Against  that  background,  Mr Kemeny asked the FCA to appoint him as agent of the partnerships in place of K2 New Zealand.

[81]              In her affidavit evidence filed in the FCA in September 2012, Ms Durney deposed that she had obtained a very high interest loan from Mr Powell in August 2012 in order to fund her legal fees, with the loan expiring in “February 2013” (sic) and requiring repayment of NZ$137,000.

[82]              In October 2012, as part of Ms Durney’s disclosure in the FCA proceedings, Mr Kemeny received a copy of the loan agreement.

[83]              In the FCA on 1 November 2012, Rees J delivered an interim judgment, finding Ms Durney could not be relied upon to act in a way which was consistent with the interests of the partnership. The Court ordered Ms Durney forthwith do all things and sign all documents necessary to appoint Mr Kemeny as agent for the partnerships relative to the business property developments at Napier and Hastings.

[84]              On 30 November 2012, Ms Durney and Mr Kemeny signed notices terminating the appointment of K2 New Zealand as the agent of the partnerships and appointing Mr Kemeny in its place.

[85] It was in early-April 2013 (as discussed at [66]–[67] above) that Mr Powell learned of the FCA orders.

[86]              On 10 April 2013, Mr Powell emailed Ms Durney to ask for any update on when repayment would be made. Ms Durney responded that she was doing everything she could to get a settlement.

[87]              On 25 June 2013, Mr Powell received a phone call from Mr Moss. It is clear the phone call was made in the context of negotiations being conducted between the Sydney-based lawyers with a view to settling issues between Ms Durney and Mr Kemeny. Mr Moss indicated he was relaying a message on behalf of Ms Durney’s Sydney lawyer in order to seek agreement regarding the loan. Mr Moss stated Ms Durney might not be receiving enough in settlement “tomorrow” to pay out the loan and suggested (without making an offer) that a figure of $120,000 might resolve the loan. Mr Powell that day emailed a response to Ms Durney and her lawyer, insisting upon full repayment of the loan.

[88]              Mr Moss emailed Mr Powell the same day, referring to the telephone conversation as a “tough call”, and expressing the hope that a mediation scheduled for the next day would result in a good settlement (between Ms Durney and Mr Kemeny) which would enable Ms Durney to discuss settlement of Mr Powell’s loan.

[89]              Mr Powell next received from Ms Middleton a letter dated 27 June 2013 referring to  a  prospective  settlement  to  be  reached  between  Ms  Durney  and  Mr Kemeny. Ms Middleton recorded the amount Ms Durney would receive under the settlement would not be enough to enable the loan to be  repaid  with interest  to    Mr Powell. She attached a draft Deed of Release prepared by Mr Kemeny’s Christchurch solicitors, White Fox & Jones, by which Mr Powell would release his caveats and receive a compromise sum (not identified in the letter).

[90]              Mr Powell was not prepared to compromise and did not engage with the correspondence.

[91]              Mr Kemeny stated (and I accept) that by July 2013 he and Ms Durney had agreed on consent orders to resolve the FCA proceedings. Given Ms Durney had not been able to negotiate terms of settlement with Mr Powell, it is clear that Ms Durney and Mr Kemeny decided to proceed to obtain consent orders notwithstanding Mr

Powell’s insistence upon full repayment under the terms of the loan. The orders upon which Ms Durney and Mr Kemeny had agreed included that they would do all things necessary to transfer the Napier and Hastings titles to Mr Kemeny. For that purpose, on 1 July 2013, Ms Durney signed on behalf of K2 New Zealand a form authorising White Fox & Jones to register a transfer of the Napier and Hastings titles to Mr Kemeny personally.

[92]              On 10 July 2013, White Fox & Jones registered a transfer from K2 New Zealand to Mr Kemeny of 47 titles relating to the Napier property. That was all but two of the Napier titles. The transfer was able to be registered because the caveat registered on behalf of Mr Powell had omitted reference to 47 titles. White Fox & Jones was unable to effect a transfer of the remaining two Napier titles and the Hastings titles because of Mr Powell’s caveats.

[93]              That dealing, however, brought into play the caveat lapsing procedures under s 145 Land Transfer Act.

The final orders of the FCA

[94]              On 24 July 2013, the FCA made final orders by consent in settlement of the issues between Ms Durney and Mr Kemeny and their associated entities. That judgment (incorporating the interim orders) has been registered in this Court and takes effect as a judgment of this Court.10

[95]The final orders include the following provisions:

THE COURT ORDERS:

…

(2) That the orders made on 1 November 2012 in the Family Court of Australia a copy of which is attached hereto and marked “A” appointing [Mr Kemeny] as agent of The Partnership remain in force until The Partnerships are wound up in accordance with Order 4d herein.

…

10 Trans-Tasman Proceedings Act 2010, ss 52(3).

(4)That within 14 days [Ms Durney] and [Mr Kemeny] jointly and severally do all acts and things sign all documents and necessary to:

a.Transfer and assign to [Mr Kemeny] all the assets in the name of each entity listed in Schedule 2 hereof including (but not excluding the generality of this Order) all the interests in the Hastings and Napier properties and any related assets, including rental bonds, security deposits, plant and equipment and cash on hand and in the Bank Accounts in the name of each entity listed in Schedule 2;

b.Ensure that the transfers referred to in Order 4a be treated as full and final settlement of any residual loan account or partner capital or current account between K2 Partners: Quest Napier and K2 Partners: Quest Hastings and entities listed in Schedule 2;

c.Agree to the appointment of K2 Investment Group Australia Pty Limited or [Mr Kemeny] (at [Mr Kemeny’s] election) as Partnership Manager and agent in replacement of the existing manager and agent;

d.Agree to the winding up of the Partnerships (K2 Partners: Quest Napier and K2 Partners: Quest Hastings), effective on the date of transfer of the property interests noted above.

…

(6) That simultaneously with the [Ms Durney]  fully  complying  with Orders 4a herein, [Mr Kemeny] shall:

…

(c) do all acts and things and sign all documents necessary to  procure the release of [Ms Durney] from any and all guarantees and indemnities given by [Ms Durney] to the National Bank of New Zealand loan facility in the name of the Second and Third Respondents [K2 New Zealand] and in particular in respect of the mortgage presently secured on the Napier property and provide to [Ms Durney].

…

(8)That the Respondents to these proceedings and/or any entity in which [Mr Kemeny] has an interest and/or any related parties/entity/entities to the Partnerships including any agent from time to time is hereby permanently restrained by injunction from calling up any remaining loan/liability said to be due to be repaid to them by [Ms Durney] and/or owing by [Ms Durney] and/or restrained by assigning and/transferring such liability to any other person or trust.

…

SCHEDULE 2

1.K2 Investments Group Limited (New Zealand Company Number 1937062)

2.K2 Investment Group Australia Pty Ltd ACN 125578038

3.K2 New Zealand Trust: Quest Napier K2 New Zealand Trust: Quest Hastings

4.K2 Aus Trust: Quest Napier K2 Aus Trust Quest Hastings

Mr Powell’s caveat proceeding

[96]              In July 2013, in response to a notice as to caveats lapsing, Mr Powell filed an application for orders that the caveats not lapse. Although K2 New Zealand was correctly named by Mr Powell as respondent in the proceeding, Mr Kemeny applied to be joined and he then opposed the application. K2 New Zealand entered no appearance.

[97]              As I have noted (above at [10]), Mr Powell’s application was heard and determined in this Court in November 2013; the Hastings caveat was sustained. The Napier caveat was ordered lapsed but with leave to Mr Powell to lodge a second caveat.

Subsequent dealings in relation to the Napier property

[98]              Pursuant to the caveat judgment, the Napier caveat was removed on 3 February 2014. With the e-dealing which had previously been filed, the remaining two Napier titles were transferred on 13 February 2014 into Mr Kemeny’s name personally.

[99]              That transfer occurred seven days before Mr Powell lodged a second caveat over the two Napier titles (pursuant to the leave granted in the caveat judgment).

[100]          Mr Kemeny in early 2017 entered into an unconditional agreement to sell the Napier property to an unrelated third party. By cooperation between Mr Kemeny and Mr Powell, Mr Powell’s second Napier caveat was removed and settlement of the sale of the Napier property occurred in April 2017. Mr Kemeny and Mr Powell agreed that

Mr Kemeny’s solicitors Gifford Devine would hold on trust, from the proceed of sale,

$247,000 being an approximated value of the two identifiers minus the portion of the bank mortgage (the escrow fund). The escrow fund is held, together with interest, pending the order of this Court (or earlier agreement between the parties) and is the subject of Mr Powell’s fourth cause of action.

The relevance of the FCA orders and the caveat judgment

[101]          Counsel understandably agreed that the orders made in the FCA were all orders made in personam, in  the  context  of  a  Family  Court  proceeding,  as  between  Mr Kemeny and Ms Durney.

[102]          Counsel also recognised the nature of the caveat proceeding means that the conclusions reached in caveat judgment as to the arguable claims Mr Powell had as to the interest claimed in his caveat did not determine the substantive rights of the parties in this proceeding.11 The caveat judgment did not alter the extent to which either party had or had not by that date acquired legal or equitable interests or in what priority.

Issue 1: authority to represent K2 New Zealand

The issue identified

[103]          Mr Kemeny caused to be filed on behalf of K2 New Zealand both a statement of defence and a counterclaim.

[104]          Ms Durney has at all times been, and remains, the sole director and sole shareholder of K2 New Zealand. Mr Powell asserts Mr Kemeny had no authority or “standing” to have K2 New Zealand engage in litigation.

[105]In answer, Mr Woods asserts that authority existed through:

(a)an email sent in the name of Ms Durney to Mr Kemeny’s agent, David Reberger;

11     The caveat judgment, above n 1, at [34].

(b)the FCA interim order appointing Mr Kemeny agent of the partnership; and/or

(c)the final FCA order transferring and assigning assets to Mr Kemeny.

The Durney email

[106]          Mr Powell commenced this proceeding on 6 April 2018. A statement of defence was then filed by Gifford Devine purporting to act on behalf of all three defendants, including K2 New Zealand.

[107]          Wynn Williams, for Mr Powell, questioned Mr Kemeny’s authority to act for K2 New Zealand. Gifford Devine referred to the FCA’s orders.

[108] Wynn Williams responded to Gifford Devine by referring to arguments which I will now explore. By the time of this hearing, Mr Woods posited three sources of authority, identified above at [105]. The first relates to an email exchange between Mr Reberger and Ms Durney on 23 May 2018. As follows:

Hi Bron — can you please confirm that:

You do not dispute Gabor Kemeny’s authority to instruct Gifford Devine on behalf of K2 NZ.

to which Ms Durney replies:

Hi David
Yes, this is correct.

[109]          In his brief of evidence, Mr Kemeny concluded by identifying the authority he asserted in relation to K2 New Zealand:

Because I have been appointed agent of K 2 NZ, and because Mr Powell’s claim concerns properties of the Partnerships, I believe that I had authority to cause a defence to be filed by K 2 NZ. However, before filing the defence I checked with Bronwynne (who is still sole director) if she agreed. After Mr Powell’s lawyers raised a question about my authority, I asked Bronwynne to confirm her position in writing, which she did in an email to David Reberger. Mr Reberger assists me in my business.

[110]          Given Ms Durney continues to be the sole director of K2 New Zealand, it was for Mr Kemeny to establish to the satisfaction of the Court that he has been authorised

to give instructions on behalf of K2 New Zealand in this proceeding and, in particular, to have a statement of defence and counterclaim filed.

[111]          The Reberger/Durney email does not identify with any degree of clarity, let alone certainty, that Ms Durney had authorised Mr Kemeny to take steps in relation to a defence and/or counterclaim. The email does not expressly refer to this proceeding. Mr Reberger, on behalf of Mr Kemeny, therefore has not expressly sought Ms Durney’s authority to take steps in this proceeding. It is not for this Court to speculate that Ms Durney understood the request for authorisation to relate to a defence and counterclaim in this proceeding. That is particularly so when Wynn Williams, after the date of this email, put Gifford Devine on notice that Mr Kemeny’s authority was still disputed. A board resolution (signed by Ms Durney as director) specifically dealing with the matter would have been an obvious way of establishing authority. None has been produced. In itself, given that this proceeding was on foot for three years before it came to trial, Mr Kemeny’s failure to obtain and produce a specific resolution from Ms Durney reinforces the unresolvable ambiguity of the email exchange.

[112]          Mr Anson-Holland identified a second shortcoming of the email exchange in that the only reference is to instructing the firm of Gifford Devine (who filed the statement of defence and the counterclaim). That firm ceased to purportedly act for K2 New Zealand on 31 July 2020 when a notice of change of solicitor was filed. Anthony Harper thereafter purportedly acted for all three defendants. It has not been suggested that Ms Durney was approached for authorisation to have Anthony Harper act in any matter.

[113]          I do not find the email exchange of 23 May 2018 to amount to Ms Durney’s authorising Mr Kemeny to have a defence and/or counterclaim filed in this proceeding or to appoint solicitors to act in the proceeding.

Mr Kemeny as agent of the partnerships?

[114]          Mr Kemeny became agent of the partnership in place of K2 New Zealand through the interim FCA order and by Mr Kemeny’s and Ms Durney’s execution of notices in November 2012.

[115]          Mr Kemeny, through being appointed agent of the partnerships, was necessarily agent of the two corporate partners. On that basis he had authority to act on behalf of each company in relation to the partnership business. Mr Woods submitted Mr Kemeny could therefore act as agent on behalf of K2 New Zealand in the defence of this proceeding because the proceeding relates to the partnership business, being the two properties.

[116]          Mr Anson-Holland submitted Mr Kemeny has not been appointed agent of K2 New Zealand in relation to all its affairs. His appointment, pursuant to the Australian orders, was as “agent for the partnerships”.

[117]          Mr Anson-Holland’s submission is plainly correct. The partners by the partnership agreements of 20 June 2007 had instituted the arrangement whereby, under cl 3 of each agreement, they appointed K2 New Zealand to act as the agent of the partners to manage and carry on the partnerships’ businesses. That was expressly “subject to the terms of this Agreement”. The partners did not appoint K2 New Zealand to be the agent of either partner in relation to that partner’s decision-making. Had that been the correct construction of the agency appointment, it would have had the absurd consequence, turning the situation around, that K2 New Zealand would have been entitled to make decisions (in relation to the management and carriage of the partnerships’ businesses) in place of the board of K2 Australia.

[118]          I find that the substitution of Mr Kemeny for K2 New Zealand as agent of the partners was neither intended to nor went any further than, making Mr Kemeny “agent of or for the partnerships”, as recorded in the FCA orders — it did not extend to making Mr Kemeny an agent of K2 New Zealand acting in its own right.

[119]          Accordingly, Mr Kemeny did not acquire, as agent of the partnerships, the authority to give instructions on behalf of K2 New Zealand in relation to litigation it became involved in.

The final FCA order

[120]          By para 4a of the final FCA order, (above at [95]), Mr Kemeny and Ms Durney were required to transfer and assign to Mr Kemeny all the assets in the name of each entity listed in sch 2, one of the entities named being K2 New Zealand.

[121]          While reliance for Mr Kemeny’s authority in relation to this proceeding was not initially placed on this order, the possibility was explored by Mr Woods in oral submissions that through the settlement which the final (consent) orders represent, Mr Kemeny had acquired ownership of K2 New Zealand itself. While nothing was apparently thereafter done to effect or register a change of shareholder (with the right to appoint directors), Mr Woods invited the Court to conclude that the new ownership arrangements created by the final FCA order entitled Mr Kemeny to resolve matters on behalf of K2 New Zealand that are constitutionally the domain of the board (of which Ms Durney remains the sole director).

[122]          For Mr Powell, Mr Campbell identified that under the final FCA orders it was the assets in the name of each identified entity which were transferred and assigned, not the shareholding (or ownership) of the entity.

[123]          I accept that submission. Significantly, Ms Durney has remained the sole shareholder and sole director of K2 New Zealand to this day.

Outcome

[124]          Mr Kemeny has not established any lawful delegation or authorisation which permitted him to have pleadings filed on behalf of K2 New Zealand, or to give solicitors instructions as to K2 New Zealand’s defence.

[125]          Counsel for Mr Powell addressed submissions as to the legal consequence of the lack of authority. They referred first to the judgment of this Court in Yu v Whitford Properties Ltd (Yu).12 In that proceeding, one of two directors filed and served a notice of opposition to an application that certain caveats not lapse.13 A preliminary issue

12     Yu v Whitford Properties Ltd [2013] NZHC 3162.

13 At [1].

arose as to whether one of two directors, acting alone, has authority to file such a document and whether the company is entitled to be heard in relation to the application.14 There was no evidence that the Board had resolved to delegate authority to act on behalf of the company or instruct counsel to do so.15 The notice of opposition (together with an amended notice of opposition) was struck out in the absence of the proper authority of the defendant company.16

[126]          In Yu, Toogood J applied a Queen’s Bench Division judgment in Mitchell & Hobbs (UK) Ltd v Mill (Mitchell & Hobbs).17 There, one of the two directors of a company acting alone purported to sue the company secretary. Anthony Machin QC (sitting as a Deputy Judge) identified that the institution of proceedings in a company’s name is a power to be exercised by its board of directors.18 There was no evidence of any resolution of the Board.19 The Deputy Judge concluded:20

I do not believe that such business, and in particular the institution of such proceedings, can be carried on by a single director acting, as it were, as the board of directors.

[127]          Mr Anson-Holland recognised that both Yu and Mitchell & Hobbs involved the factually different situation of a single director acting as if they had the authority to involve the company in litigation. But, he submitted, the decisions are authority as to the requirement that if someone other than the board is to direct a company’s conduct or litigation, for that person to have actual authority from the board.

[128]          In one sense, as Mr Anson-Holland submitted, the situation of the present case is more egregious than in the two authorities referred to, where the party involved was at least a director on the board of the company. Here, Mr Kemeny does not hold even that status.

[129]Mr Woods did not refer to any authorities on this point.

14 At [15].

15     At [14]–[15].

16 At [15].

17     Mitchell & Hobbs (UK) Ltd v Mill [1996] 2 BCLC 102 (QB).

18     At 108.

19     At 107.

20     At 108.

[130]          I conclude that the decisions in Yu and Mitchell & Hobbs, while turning on different facts, are both good authority for Mr Powell’s contention that the defence and counterclaim of K2 New Zealand in this proceeding have been filed and conducted without the necessary authorisation of the company. Had the matter been dealt with in the context of an interlocutory strike out application the inevitable outcome would have been that the pleadings filed in the name of K2 New Zealand would have been struck out, as befell the notice of opposition in Yu.

[131]          Here, Mr Powell did not pursue an interlocutory application but held the issue over for determination with other issues at trial. Now that Mr Kemeny has failed to establish his authority to have pleadings filed in the name of K2 New Zealand, there is no principled reason to do otherwise than strike out its pleadings.

[132]Such an order will be made.

[133]          The first consequence of that, as an interlocutory outcome, would have been that Mr Powell, as plaintiff, could have proceeded to obtain judgment by default on the liquidated demands under the first cause of action and to seek judgment for specific performance (the second cause of action) through a formal proof hearing.21 The second consequence is that K2 New Zealand’s counterclaim falls away.

[134]          Mr Anson-Holland submitted the Court in the circumstances should proceed without regard to K2 New Zealand’s defences and instead enter judgment by default of the first cause of action.

[135]          Mr Powell elected not to pursue the authority issue by way of a strike out application. Instead he had the proceeding set down for trial. We are no longer at default judgment or formal proof stage — the trial has run its course and all the evidence has been heard.   To  the extent the defendants  called evidence (that  of   Mr Kemeny), that evidence would have been called by the second and third defendants whether or not K2 New Zealand was represented. It would be unjust and artificial to have the Court seek to ignore any part of the evidence when adjudicating on any of

21     Default judgments for liquidated demands being dealt with under r 15.7 High Court Rules and hearing by formal proof for other claims being dealt with under r 15.9 High Court Rules.

the causes of action. Responsibly, Mr Anson-Holland did not submit that the Court in the case against K2 New Zealand should not take into account the entirety of the evidence.

Issue 2: validity of the loan agreement

The issue identified

[136]          The defendants identified this issue in their statement of defence by asserting that K2 New Zealand had no authority to enter into the loan agreement.

[137]The defendants particularised that pleading by asserting:

(a)Under the terms of the partnership agreements K2 New Zealand was prohibited from mortgaging its share in the partnerships’ businesses. Under the loan agreement K2 New Zealand agreed to mortgage its purported 50 per cent equitable share in the Hastings property and the Napier property, which properties formed the businesses of the partnerships; and

(b)K2 New Zealand purported to enter in the loan agreement for both the K2 New Zealand trust: Quest Hastings and the K2 New Zealand trust: Quest Napier. The loan agreement was not authorised by, nor entered into, for the purpose of either trust.

Submissions - defendants

[138]          Mr Woods identified para 11.2(d) of each partnership agreement (above at [36]) as prohibiting the partners (K2 New Zealand and K2 Australia) and Mr Kemeny and Ms Durney from mortgaging or charging their share in the partnership’s business. Despite that, K2 New Zealand in cl 5(a) of the loan agreement (Schedule A to this judgment) agreed to do precisely that, by agreeing to grant and execute a mortgage over its 50 per cent equitable share in the Napier and Hastings properties. Mr Woods referred further to the terms of the Deeds of Settlement of the K2 New Zealand trusts which relate the powers of the trustees, including the powers to raise money and to give mortgages and other securities, to doing so “in the administration, management

and investment of the Trust Fund”. Mr Woods submitted the loan agreement arranged by Ms Durney was not entered into for that purpose and was therefore outside the purposes of the trust. In his submission, the loan was for the benefit of Ms Durney only.

[139]Mr Woods submitted it is material that Mr Powell knew a number of things:

(a)The money was being lent to Ms Durney — he submitted K2 New Zealand was receiving neither consideration nor benefit under the loan agreement;

(b)K2 New Zealand was the only owner of the properties but “for some trusts associated with” Ms Durney and Mr Kemeny;

(c)There was a partnership involved between Ms Durney and Mr Kemeny; and

(d)K2 New Zealand held each property as agent for the two trusts of    Ms Durney and Mr Kemeny.

[140]          Bringing these matters together, Mr Woods submitted Mr Powell thereby had sufficient information to be put on notice that K2 New Zealand’s authority “to act as trustee” was restricted by the relationship between Ms Durney and Mr Kemeny.

[141]          In his opening submissions, Mr Woods had then invoked the proviso to s 18(1) Companies Act, s 18(1) constituting the statutory encapsulation of what is frequently referred to as the “indoor management rule”.22 The purpose of s 18 is to protect outsiders against assertions that a company, or a person the company held out to be acting on its behalf, lacked authority to enter into the relevant transaction.23 The proviso Mr Woods referred to excludes persons with actual or imputed knowledge of the relevant contravention from the protection conferred by s 18(1).

22     Also referred to as the rule in Turquand’s case Royal British Bank v Turquand (1856) 6 E & B 327; (1956) 119 ER 886 (KB).

23     Company Law (online ed, Thomson Reuters) at [CA18.01].

[142] In opening, Mr Woods submitted the proviso to s 18(1) applied to defeat the indoor management rule because Mr Powell had knowledge of the matters summarised at [137] above.

[143]          In closing, however, Mr Woods withdrew the defendant’s reliance on the proviso. Nothing in the limited matters known to Mr Powell at the time or in the circumstances of the transaction generally (without further disclosure) could or should have led Mr Powell to conclude that Ms Durney was acting in breach of some prohibition. She and Mr Kemeny had structured their arrangements (with Ms Durney as sole director and sole shareholder of the land owning company) with an express prohibition on either disclosing to any other person the agency arrangement between K2 New Zealand and the partners.

Submissions – plaintiff

[144]          Mr Campbell, understandably anticipating the defendants would continue to invoke the proviso in s 18, presented detailed written closing submissions on that topic. Given the defendants withdrew reliance on the proviso, I will not rehearse in detail Mr Campbell’s submissions.

[145]          Upon the defendants’ late withdrawal of reliance upon the proviso in s 18(1), Mr Campbell submitted the indoor management rule is the complete answer to the defendants’ plea that K2 New Zealand had no authority to enter into the loan agreement. Mr Campbell referred to the way the matter had been put by the Court of Appeal in Bishop Warden Property Holdings Ltd v Autumn Tree Ltd.24 There, the Court observed s 18 means that “those dealing with a company are entitled to presume the company’s internal procedures have been complied with”.25

Conclusion

[146]          The indoor management rule applies in this case. K2 New Zealand is precluded from asserting a lack of authority on the part of Ms Durney to bind the

24     Bishop Warden Property Holdings Ltd v Autumn Tree Ltd [2018] NZCA 285, [2018] 3 NZLR 809.

25 At [32].

company in such a way or for such a purpose. That flows directly from the fact Mr Powell was dealing with the sole director of K2 New Zealand.

[147]          I add this observation, although the matter was not developed in submissions. The authority with which s 18 Companies Act is primarily concerned is that which derives from the board of directors and/or shareholders who manage the business and affairs of the companies and have all the powers necessary for that purpose.26 Those are the powers Ms Durney possessed through the registration of K2 New Zealand and the provisions of the Companies Act. Mr Kemeny and Ms Durney put in place a company structure for K2 New Zealand (involving a deliberately non-disclosed agency) with nothing to limit the apparent powers of K2 New Zealand’s board. There was to be no public reference to the restricting, private arrangements which the parties had entered into. Just as the defendants are precluded from asserting a lack of authority on the part of Ms Durney in relation to the authority she held as director of K2 New Zealand (s 18(1) Companies Act applying), a fortiori the defendants are not able to assert that commercial arrangements which they entered into when incorporating K2 New Zealand in some way diminished, as between K2 New Zealand and outsiders, the authority which K2 New Zealand’s board had through incorporation.

Issue 3: did Mr Powell make the agreed advance?

The issue identified

[148]          Mr Woods questioned whether Mr Powell had made the advance required under the agreement. In particular it was asserted that the money was paid to Ms Durney personally and not to K2 New Zealand.

[149]          This proposition was identified for the first time in Mr Woods’ opening submissions, it forming no part of the positive allegations contained in the statement of defence or counterclaim.

26     Companies Act, s 128.

Submissions

[150]          In his closing submissions, Mr Woods noted Mr Powell’s claim under the loan agreement relies on the proposition that he advanced the loan funds to K2 New Zealand. In Mr Woods’ submission, the evidence is that no money was advanced to K2 New Zealand, it instead being paid to Ms Durney. Mr Woods submitted the evidence does not establish that Mr Powell was asked by K2 New Zealand to advance the money directly to Ms Durney or that K2 New Zealand authorised Ms Durney to receive the loan money.

[151]          Mr Woods referred to the decisions in Wadsworth Norton Solicitors Nominee Co Ltd v Edmonds (Wadsworth Norton),27 and Haira v Burbery Mortgage Finance & Savings Ltd (in rec): Koya v Haira (Haira).28

[152]          In Wadsworth Norton the respondent, in order to assist a couple purchasing a property, entered into a loan contract with the appellant (a solicitors nominee company).29 The appellant, instead of first advancing the agreed funds to the respondent, advanced those moneys directly to the couple who were purchasing the house. When the loan fell into default, the appellant sought judgment in the District Court. The claim was dismissed, the covenant to repay being found unenforceable for want of consideration. The appeal was unsuccessful. Temm J found there had been no advance made under the loan to the respondent. Since the respondent was not paid the money, there had been no consideration given.

Conclusion — payment of the loan

[153]          The decision in Wadsworth Norton, on which Mr Woods relied for the proposition that Mr Powell’s actions did not amount to an advance to K2 New Zealand, does not apply to the facts of this case.

27     Wadsworth Norton Solicitors Nominee Co Ltd v Edmonds [1992] 1 NZLR 596 (HC).

28     Haira v Burbery Mortgage Finance & Savings Ltd (in rec): Koya v Haira [1995] 3 NZLR 396 (CA).

29     At 598 600.

[154]          The more relevant authority is the second to which Mr Woods made reference, namely, the later judgment of the Court of Appeal in Haira. As Richardson J, giving the judgment of the Court observed:30

What must be established is that the advance was made to the mortgagor. That may be proved in various ways. Where payment is not made directly to the mortgagor but to a solicitor or other agent, specific authority to the mortgagee to pay an agent will obviously suffice.

[155]          On the facts, it was held that consideration was established through Mrs Haira having given a specific authority to Burbery to pay the loan funds to her solicitor.31

[156]          Unsurprisingly, the Court of Appeal in Haira did not refer to its decision three years earlier in Wadsworth Norton — in the earlier case there had been no suggestion of any authority or direction given to the vendor in relation to payment to a third party.

[157]          Here, Mr Powell’s payment to Ms Durney (through her solicitor’s trust account) was made at the direction of the solicitor who acted for both K2 New Zealand and Ms Durney.

[158]Accordingly, it has been established that Mr Powell advanced the agreed funds.

Issue 4: application of the Credit Contracts and Consumer Finance Act 2003 (CCCFA)

The issue identified

[159]          The defendant pleaded the interest rates under the loan agreement were oppressive in terms of s 118 of the CCCFA. The defendants did not challenge, under the CCCFA, the amount of interest ($37,500) payable on the repayment date. Rather they asserted that the default rate (under cl 3(a)) of 15 per cent of the principal sum per month (calculated by the defendants as a minimum rate of 180 per cent per annum) was oppressive.

30     Haira v Burbery (Mortgage Finance & Savings Ltd: Koya v Haira), above n 28, at 402.

31     At 402.

The evidence

[160]            The parties did not call expert evidence in relation to interest rates charges. Mr Woods invited the Court to place some weight upon passages in the evidence of Mr Powell and Mr Kemeny respectively (neither of whom was qualified as an expert).

[161]          Mr Powell stated in correspondence to Ms Durney in June 2013 that he had had to seek out a similar loan which was attracting “a substantial amount of interest in turn”. Mr Woods questioned Mr Powell as to the interest rate charged on that loan. Mr Powell stated the interest rates he could recall were around 15 per cent but, on further questioning, was unsure whether that was 15 per cent per annum.

[162]          Secondly,  Mr  Woods  referred  to  documentary   evidence   provided   by Mr Kemeny as to the interest rates he was charged on the bank finance he obtained for injection into the partnerships. The interest rate was the 90 day bank accepted bill rate of RBA plus 1.5 per cent. Mr Woods identified that the highest rate recorded in the document as charged to Mr Kemeny had been 9.29 per cent.

[163]          There is no basis upon which this Court could reach any reliable conclusion as to what interest rate Mr Powell had been charged — he was unable to give clear evidence on the matter. There is evidence as to what Mr Kemeny was charged but the circumstances in which Mr Kemeny raised his funds were so substantially different from those in which the K2 New Zealand loan was obtained that the rate charged to Mr Kemeny is of no assistance in the absence of expert evidence which might render it relevant. Two significant aspects of Mr Kemeny’s borrowing were that it was in Australia and the borrower was a man whose family business (and one may infer net asset position) appears to have been very substantial by any commercial standards.

Submissions – defendants

[164]          Mr Woods invoked the power of the Court under s 120 CCCFA to reopen the loan agreement as a credit contract. In his submission, the interest rates charged constituted a plain breach of the reasonable standards of commercial practice referred to in s 118 CCCFA. Mr Woods submitted the oppressive aspect of the loan contract in this case, the interest rate, renders the contract oppressive beyond rational dispute.

He relied upon the observation of Tipping J, delivering the judgment of the Court of Appeal in Greenbank New Zealand Ltd v Haas (Greenbank) as establishing there will be cases where expert evidence is not required to establish oppression under the CCCFA.32 In particular, Mr Woods relied upon this passage:33

To determine whether a contract or term is oppressive …, it is necessary to have some basis of comparison. In the context the comparator can only be what would be expected or acceptable in terms of reasonable standards of commercial practice. Something which is in accordance with such reasonable standards could hardly be held to be oppressive. Conversely something which is not in accordance with (i.e. in contravention of) such standards is, by definition, oppressive. It is therefore important, unless the oppressive aspect is beyond rational dispute, for the Court to be properly informed how the contract or term measures up against reasonable standards of commercial practice.

That will usually, indeed almost always, necessitate the calling of evidence on the point, as is contemplated by s 13.

Submissions — plaintiff

[165]          Mr Anson-Holland recognised that s 120 CCCFA is the key provision applying to this case. He identified that the only two available bases for a finding of oppression in this proceeding would be if the Court finds the interest components under s 120(a) oppressive or finds that Mr Powell has exercised his rights and powers under the loan agreement in an oppressive manner (s 120(b)).

[166]          Mr Anson-Holland correctly identified the definition of “oppressive” under   s 118 CCCFA, namely, “oppressive, harsh, unjustly burdensome, unconscionable, or in breach of reasonable standards of commercial practice”. He also referred to s 124 CCCFA for matters to which the Court must have regard, observing that fundamentally the Court must take into account all the relevant circumstances relating to the making of the loan agreement and the exercise of Mr Powell’s rights or powers under it.

[167]          Mr Anson-Holland submitted the following relevant legal principles are established by the case law:

32     Greenbank New Zealand Ltd v Haas [2000] 3 NZLR 341 (CA).

33     At [24]–[25].

(a)The party alleging oppression has the evidential onus to establish oppression.34

(b)The various words that form the definition of the term “oppressive” all contain the underlying idea that a credit contract or some term of it is in contravention of reasonable standards of commercial practice.35

(c)It is not enough to assert that a contract or conduct in issue is in contravention of reasonable standards of commercial practice (i.e. oppressive).36 Evidence to support the assertion is required except in the “clearest of cases”37 or unless the allegedly oppressive aspect is “beyond rational dispute”.38

(d)A credit contract should not be seen as oppressive unless the lender has some basis for knowing that to be so. Even when a lender has knowledge of circumstances that might otherwise cause it to suspect oppression, it will ordinarily be excused from inquiring if it is also aware that the borrower is legally represented.39

(e)A grossly high interest rate will not be oppressive in and of itself.40 There must be an abuse of the underlying debtor/creditor relationship to be determined by the surrounding circumstances.41

(f)A court has the power to reopen a credit contract on its own motion (provided there is an extant proceeding). But it should only exercise that power without relevant evidence before it in the following circumstances:42

(i)It is apparent on the face of the pleading that the claim is oppressive to the extent the court should rely on judicial notice (e.g. only in the “clearest of cases”43 or unless the allegedly oppressive aspect is “beyond rational dispute”).44

(ii)The claim could be found oppressive based on consistent precedent.45

34 ANZ Bank New Zealand Ltd v Erasmus [2013] NZHC 2026 at [22].

Herron v Wallace [2016] NZHC 1129 at [153]; and Greenbank New Zealand Ltd v Haas, above n 32, at [28], citing Autohelp & Towage Ltd v Central Acceptance Ltd CA 144/91, 11 June 1992 at 4.

35 Greenbank New Zealand Ltd v Haas, above n 32, at [24], cited with approval in GE Custodians v Bartle [2010] NZSC 146, [2011] 2 NZLR 31 at [46].

36 Autohelp & Towage Ltd v Central Acceptance Ltd, above n 34, at 4, cited with approval in

Greenbank New Zealand Ltd v Haas, above n 32, at [28].

(b)Mr Powell did not pay K2 New Zealand;

(c)K2 New Zealand and K2 Australia, as partners, had interests in the partnership assets only to the extent that they were entitled to share in the proceeds of sale once all partnership liabilities had been paid from those proceeds; and

(d)K2 New Zealand at no relevant time had a 50 per cent or any equitable interest in the properties.

[230]   Additionally, Mr Woods’ invoked the final FCA orders (dated 24 July 2013). Pursuant to those orders, made by consent and with transfer documents executed for Ms Durney, the transfer of the 47 Napier titles not caveated by Mr Powell was effected either to Mr Kemeny as agent of the partnerships or to him personally (under para 4a of the FCA orders). (Mr Powell’s caveat relating to the two remaining Napier titles was withdrawn as part of the arrangement creating the escrow fund of $247,000).

[231]   In Mr Woods’ submission, once the transfer was effected to Mr Kemeny he became registered proprietor of the Napier property, holding the title to the property, free of all unregistered interest the absence of fraud.

[232]   In Mr Woods’ submission, any equitable interest held by Mr Powell (which the defendants deny) was subsequent to the interest of K2 Australia because of:

(a)the appropriate characterisation of the interest claimed in K2 Australia’s caveats;

(b)the absence of any unconscionability on the part of K2 Australia in registering its caveats given the breakdown of the personal relationship of Mr Kemeny and Ms Durney, and Ms Durney’s control of K2 New Zealand at the time;

(c)Mr Powell’s awareness of K2 Australia’s caveats prior to entering the loan agreement; and

(d)Mr Powell’s choosing not to obtain legal advice on the effect of K2 Australia’s caveats before entering the loan agreement.

Discussion

[233]   The important background to consideration of the competing submissions is that Mr Powell only ever asserted an entitlement to security over K2 New Zealand’s equitable interest in the two properties. As I have found, each of K2 New Zealand and K2 Australia held such an interest in each of the two properties. The defendants’ pleadings and Mr Woods’ initial submissions in response to Mr Campbell’s priority

arguments, as summarised at [222] above, simply adopted the earlier reasoning as to the partners’ not having beneficial interests in the land and, those arguments having been rejected, they take matters no further for the defendants.

[234] That leaves for consideration Mr Woods’ additional submissions, as summarised at [232] above, which place emphasis upon K2 Australia’s prior registration of caveats.

[235]   I will return (below at [251]) to the issue as to the validity of K2 Australia’s caveats, but first consider K2 Australia’s priority upon the assumption that it was validly lodged. Even treating it as validly lodged, K2 Australia thereby obtained no priority ahead of Mr Powell’s equitable mortgage over K2 New Zealand’s interest, as the interest of each was limited to a 50 per cent interest in each of the two properties. K2 Australia held on competing claim over K2 New Zealand’s 50 per cent interest.

[236]   There then arises, through Mr Kemeny’s obtaining the final FCA orders in July 2013, a consequential obstacle to either K2 Australia or Mr Kemeny asserting an interest in priority to Mr Powell’s.

[237]   By the nature of the FCA proceedings between Ms Durney and Mr Kemeny, Mr Powell was not a party to those proceedings. It is common ground that the FCA orders were orders made in personam. When the FCA orders were made and there occurred the consequential vesting of K2 New Zealand’s assets in Mr Kemeny (under para 4a of the FCA orders, above at [95]), any claim of K2 Australia in those assets was extinguished. Mr Kemeny became the owner.

[238]   At that point the question of priority fell to be determined as between Mr Kemeny and Mr Powell.

[239]   The FCA orders, by which Mr Kemeny was to take ownership of the assets of K2 New Zealand, were made in July 2013. By that time:

(a)Mr Kemeny had full knowledge of the loan agreement, as it had been referred to by Ms Durney in September 2012 and a copy provided in October 2012;

(b)Mr Powell made his demand under the loan agreement on 20 March 2013, a demand which was at the time brought to the attention of Mr Kemeny through his solicitor; and

(c)the final FCA orders were subsequently made.

[240]   Accordingly, by the time Mr Kemeny took legal and beneficial ownership of assets previously held by K2 New Zealand, he was fully aware of the loan agreement through which Mr Powell asserts his interests.

[241]   Accordingly, in equity Mr Kemeny holds the interest he obtained from K2 New Zealand subject to the prior interest obtained by Mr Powell, subject only to any finding that there are circumstances which would make it inequitable to apply the first in time rule.90

[242]   As to matters affecting Mr Powell’s conscience, Mr Woods referred specifically to Mr Powell’s awareness of K2 Australia’s caveats at the time he entered the loan agreement and Mr Powell’s choice not to obtain legal advice on the effects of the K2 Australia caveats at the time.

[243]   Neither of those matters renders Mr Powell’s insistence upon the usual priority inequitable. He was aware of K2 Australia’s caveats but the claim of interest made in the caveats was consistent with the explanation provided by Mr Moss (acting for K2 New Zealand and Ms Durney) and the deliberate limiting of Mr Powell’s security to a half interest (with the caveator K2 Australia explained as holding the other half interest).

90     Elizabeth Toomey (ed) New Zealand Land Law (3rd ed, Thomson Reuters, Wellington, 2017) at [4.10.03]; Hinde McMorland & Sim Land Law in New Zealand, above n 79, at [10.005].

[244]   Given the finding that K2 New Zealand could validly grant security over a half interest in the two properties, Mr Powell’s failure to take independent legal advice cannot affect matters of equity between himself and K2 Australia or Mr Kemeny. If the legal advice had accorded with the findings in this judgment, then Mr Powell might appropriately have entered into the loan agreement as he did.

[245]   Furthermore, in the circumstances of this case, any assessment of competing equities as between Mr Powell and the defendants could not ignore the extent to which K2 Australia and Mr Kemeny were responsible for the circumstances in which Mr Powell came to enter the loan agreement without full knowledge of K2 New Zealand’s role. Through the deliberate structuring of the partnership arrangements, and the prohibition on any disclosure of K2 New Zealand’s agency role to third parties, Mr Kemeny and K2 Australia had created a situation where third parties dealing with K2 New Zealand in good faith might later find themselves (as has happened to Mr Powell) facing legal arguments arising from the undisclosed legal structure.

[246]   A similar (but not identical) situation was referred to by Kitto J in Latec Investments Ltd v Hotel Terrigal Pty Ltd.91 His Honour stated:92

… [i]f the merits are equal, priority in time of creation is considered to give the better equity… [b]ut where the merits are unequal, as for instance where conduct on the part of the owner of the earlier interest has led the other to acquire his interest on the supposition that the earlier did not exist, the maxim may be displaced and priority accorded to the later interest.

[247]   Cases such as Latec Investments Ltd simply recognise that the Court, in assessing competing equities, will consider all relevant circumstances. Here, the circumstances involved in the structuring of the K2 Australia/K2 New Zealand partnerships are a relevant circumstance and provide additional, strong grounds for not displacing the first in time priority rule.

91     Latec Investments Ltd v Hotel Terrigal Pty Ltd [1965] HCA 17, (1965) 113 CLR 265.

92     At 276.

Issue 7: the validity of the caveats

Mr Powell’s caveat over the Hastings property

[248]   By their counterclaim, the defendants sought an order under s 143 Land Transfer Act 1952 that Mr Powell’s caveat over the Hastings property be removed.

[249]   That claim was based on the same arguments as I have considered and rejected above (as to K2 New Zealand never having held a 50 per cent equitable share in the two properties).

[250]   This aspect of the counterclaim would have been dismissed had the counterclaim (and defence) not already been struck out.

K2 Australia’s caveats over the two properties

[251]   Mr Powell seeks orders or declarations that K2 Australia’s caveats should not have been lodged and the remaining caveat over the Hastings property be removed.

[252]   The claim which K2 Australia made in each caveat is that it holds a “beneficial interest in [the property] as cestui que trust of which the registered proprietor [K2 New Zealand] is trustee”.

[253]   The governing provision as to the lodging and content of the caveats, which applied at the time, was s 137 Land Transfer Act 1952 which provided:93

137     Caveat against dealings with land under Act

(1)Any person may lodge with the Registrar a caveat in the prescribed form against dealings in any land or estate or interest under this Act if the person—

(a)claims to be entitled to, or to be beneficially interested in, the land or estate or interest by virtue of any unregistered agreement or other instrument or transmission, or of any trust expressed or implied, or otherwise; or

(b)…

93     The Land Transfer Act 1952 was subsequently replaced by the Land Transfer Act 2017. The 1952 Act governs the present issue.

(2)A caveat under this section must contain the following information:

(a)…

(b)the nature of the land or estate or interest claimed by the caveator, which must be stated with sufficient certainty; and

(c)how the land or estate or interest claimed is derived from the registered proprietor; and

(d)whether or not it is intended to forbid the making of all entries that would be prevented by section 141 or a specified subset of them; and

(e)the land subject to the claim, which must be stated with sufficient certainty; and

(f)an address for service for the caveator.

(3)Caveats under this section must be executed by the caveator or the caveator’s attorney or agent.

(4)Caveats under this section must be entered on the register as of the day and hour of their receipt by the Registrar.

[254]   Mr Campbell submitted, in the event the Court ruled (as I have) that K2 Australia’s caveats support only K2 Australia’s 50 per cent interest in the two properties, then the claimed interests are deficient because they are not so limited but are referable to the entirety of the two properties. In other words, the claimed interests are not stated with sufficient certainty in terms of s 137(2)(b) Land Transfer Act.

[255]   Mr Campbell refers to the decision of this Court in Mortimer v Baylis as authority for the proposition that, where a caveator has an interest in only a portion of the land in question, their caveat must clearly identify the particular interest claimed or the particular part of the land affected.94 There, the caveator’s entitlement was to an interest in only 800 m2 of a property comprising more than 10 ha. The caveat did not specify the limited interest. Master Hansen found the caveat lacked the required specificity and ordered its removal.

[256]   Mr Campbell contrasted K2 Australia’s caveats with the specific limiting expressed in Mr Powell’s caveats.

94     Mortimer v Baylis (1991) 1 NZ ConvC 190,846 (HC). See also Toomey, above n 90, at [4.4.04].

[257]   He submitted there should be an order under s 143 Land Transfer Act removing the K2 Australia’s Hastings caveat and a declaration that neither of K2 Australia’s Hastings or Napier caveats should have been lodged.

[258]   Mr Woods’ submissions relevant to the validity and/or removal of caveats were those which he presented (and I have rejected) concerning the parties’ substantive rights.

[259]   It follows from the conclusions I have earlier reached that Mr Powell is entitled to the relief he seeks in relation to the caveats. The appropriate order and declaration will be made.

Issue 8: entitlement to the escrow funds

The issue identified

[260]   As described above at [100], the escrow fund (of $247,000 plus interest) was established as a result of the sale of the Napier property in 2017. Mr Kemeny arranged a sale of the property pursuant to his rights arising from the final FCA orders. Mr Powell cooperated by removing his caveats, subject to the establishment of the escrow fund representing the approximated value of the two caveated identifiers less the proportion of the bank mortgage.

[261]   Mr Kemeny had been able to become registered proprietor of all the titles to the Napier property in two tranches. First, through his registration of the transfer into his name of 47 titles which Mr Powell’s solicitors had omitted from the original caveat. Secondly, the remaining two titles immediately following the removal of Mr Powell’s initial caveat (ordered removed in the caveat judgment because it had been lodged before K2 New Zealand had defaulted on the loan agreement).

[262]   By his fourth and final cause of action, for breach of trust, Mr Powell seeks an order that Mr Kemeny holds 50 per cent of the proceeds of sale of the Napier property as a constructive trustee for Mr Powell’s benefit to the extent that K2 New Zealand is unable to satisfy its liability to him. He seeks consequential orders that the escrow

fund be released to him and that Mr Kemeny satisfy the balance of K2 New Zealand’s liability out of the other proceeds of sale of the Napier property.

[263]   The issue raised by this claim is whether the Court should recognise an in personam claim as an exception to the indefeasibility of title which is protected under ss 62 and 182 Land Transfer Act 1952 (Mr Powell not relying on the fraud exception to indefeasibility). Mr Woods invokes, in particular, the form of in personam claim identified by the Supreme Court in Regal Castings Ltd v Lightbody.95

[264]   The discussion of the various judgments in Regal Castings Ltd stems from the settled recognition (particularly the Privy Council decision in Frazer v Walker) that the principle that the registered proprietor is immune from adverse claims, except as specifically accepted under the statute, “in no way denies the right of a plaintiff to bring against a registered proprietor the claim in personam, founded in law or in equity, for such relief as a court acting in personam may grant.96

[265]   Mr Woods invoked the analysis by Tipping J in Regal Castings Ltd which requires that:

(a)the claimant is pursuing a recognised cause of action;97

(b)the claimant establishes that it would be unconscionable for the registered proprietor to rely on their indefeasible title;98 and

(c)providing the registered proprietor of the protection of indefeasibility would not be contrary to the policy and purposes of the Torrens systems.99 (With the protection of innocent third parties being important in that regard).

95     Regal Castings Ltd v Lightbody [2008] NZSC 87, [2009] 2 NZLR 433 at [157]–[160].

96     Frazer v Walker [1967] 1 All ER 649, [1967] NZLR 1069 (PC) at 1078. See Regal Castings Ltd v Lightbody, above n 95, at [22] (per Elias CJ) and [146] (per Tipping J).

97     Regal Castings Ltd v Lightbody, above n 95, at [157].

98 At [158].

99 At [160].

[266]   For the defendants, Mr Woods submitted it is particularly significant that Mr Powell’s pleading itself does not refer to the creation of a trust or the holding of any interest for Mr Powell as beneficiary.100 Mr Powell pleaded neither that Mr Kemeny owed him a duty of care nor (if such duty existed) that Mr Kemeny had breached the duty.

Discussion

[267]   This case is far removed from the facts in Regal Castings Ltd where Mr Lightbody engaged in alienation with intent to defeat creditors within the meaning of s 60 Property Law Act 1952.101 The judgment of Tipping J (along with that of Elias CJ) represents what might be categorised as the most liberal approach among the judgments to recognising exceptions to indefeasibility. The judgment of Blanchard and Wilson JJ focuses on Mr Lightbody’s unconscionable conduct in transferring the property to put it out of Regal Castings’ reach (and therefore “alienation of property with intent to default creditors” within the meaning of s 60(1) Property Law Act 1952).102 McGrath J agreed with that analysis.103 Those judgments indicate the central importance of the finding that the alienation had been made with dishonest (albeit not fraudulent) intention in relation to the creditor.104

[268]   I consider Mr Woods’ submission based on the inadequacy of the pleading is valid. At its core, the fourth cause of action asserts Mr Kemeny acted unconscionably in taking a transfer of the property (and implicitly in procuring K2 New Zealand to effect the transfer). For the purpose of considering this cause of action, it must be accepted that in that transaction neither Mr Kemeny nor K2 New Zealand owed any established duty to Mr Powell, as Mr Powell has not pleaded such duty existed. On the other hand, Mr Kemeny was at all times acting in accordance with the final FCA judgments, containing orders which the FCA found to be appropriate. It is also clear on the evidence that Mr Kemeny acted upon the genuine view that Mr Powell did not

100 Although there is reference to “breach of trust” in the heading to the fourth cause of action and a reference to Mr Kemeny being a “constructive trustee for the benefit of Mr Powell” in the prayers for relief),

101 At [168].

102 At [78].

103   At [165]–[167] and [170].

104   At [187], per McGrath J.

have an enforceable interest — in assessing Mr Kemeny’s conduct the relevant time is that of the transaction, not subsequently in the light of either the caveat judgment or the findings in this judgment.

[269]   Mr Powell had been in a position, following K2 New Zealand’s default in repayment of the loan, to caveat all titles of the Napier property. It was his failure to do so which meant that Mr Kemeny was able to take a transfer of those titles without having to take Mr Powell’s claimed interest into account.

[270]   Nothing in these circumstances establishes a level of unconscionability, let alone all the elements of a cause of action, such as to preclude Mr Kemeny from asserting the indefeasibility that attached to the titles transferred to him.

[271]   Mr Powell is not entitled to an order that Mr Kemeny holds 50 per cent of the proceeds of the sale of the Napier property as constructive trustee for Mr Powell’s benefit.

[272]   That said, to the extent that the escrow fund exists because Mr Kemeny had to obtain Mr Powell’s agreement in order to effect a sale of all titles to the Napier property, Mr Powell is entitled to relief in relation to the stakeholder funds. As Mr Powell’s caveat is referable to only 50 per cent of the interest, the appropriate order will be that 50 per cent of the escrow fund (with proportionate interest) be released to each of Mr Powell and to Mr Kemeny.

Costs and disbursements

[273]   Mr Powell must be regarded as the successful party in this proceeding. He seeks and is entitled to orders for payment of his costs and disbursements.

K2 New Zealand

[274]   Clause 3(d) of the loan agreement entitles Mr Powell, in the event of default by K2 New Zealand (which there has been) to payment of the actual legal costs he has incurred in recovering the debt.

[275]   Such a contractual provision is one of the circumstances which entitles the Court to award indemnity costs.105 It is for the trial Court to determine the reasonableness of the indemnity costs claimed.106 As between Mr Powell and K2 New Zealand I am satisfied that it is appropriate to order the payment of Mr Powell’s reasonable indemnity costs. I will reserve the amount of costs and disbursements, with Mr Powell (if he wishes to pursue the fixing of such costs and disbursements) to file comprehensive affidavit evidence as to how the costs have been arrived at.

K2 Australia and Mr Kemeny

[276]   As between the plaintiff and the second and third defendants, Mr Powell is to be regarded as the successful party. It is appropriate that K2 Australia and Mr Kemeny be ordered to pay the costs and disbursements of the proceeding to Mr Powell. There is no basis as between those parties to order that the costs be determined otherwise and on 2B basis.107 That will accordingly be the order.

Orders

[277]I order:

(a)the defence and counterclaim of K2 Investment Group Ltd (K2 New Zealand) is struck out;

(b)the credit contract, being the loan agreement dated 7 September 2012 between K 2 Investment Group Ltd (K2 New Zealand) and Richard Owen Powell (Powell), is reopened under the Credit Contracts and Consumer Finance Act 2003;

(c)under the reopened credit contract, there is judgment for Powell against K2 New Zealand in the sum of $1,037,500;

(d)there is a declaration that Powell is entitled to specific performance of K2 New Zealand’s agreement under clause 5(a) of the loan agreement

105   High Court Rules, r 14.6(4)(e).

106   Edel Metals Group Ltd v Geier Ltd [2018] NZCA 494 at [63]–[67].

107   High Court Rules, Category 2 under r 14.3(1) and band B under r 14.5(2).

to execute a mortgage over the secured property in favour of Powell, reserving leave to Powell to apply for the Court’s further assistance if such mortgage is not provided to Powell;

(e)Caveat Instrument 8938294.1 lodged against Identifier HB23/146 shall be removed;

(f)there is a declaration that the caveats of K2 Australia lodged over K2 New Zealand’s Hastings property should not have been lodged;

(g)there is a declaration that Powell is entitled to 50 per cent of the escrow fund (with proportionate accrued interest) established by the parties upon the sale of K2 New Zealand’s Napier property;

(h)K2 New Zealand shall pay to Powell, Powell’s reasonable solicitor/client costs and disbursements incurred in recovery of K2 New Zealand’s indebtedness, whether incurred in relation to this proceeding or to the earlier steps of recovery with the quantum to be fixed as follows:

(i)Powell to file and serve a memorandum as to the costs and disbursements claimed (six page limit) together with affidavit evidence identifying the costs and disbursements and explaining their justification;

(ii)K2 New Zealand to file and serve any memorandum (six page limit) and affidavit in response within 10 working days after service of the plaintiff’s memorandum and affidavit;

(iii)thereafter the costs and disbursements to be determined on the papers unless either party request an oral hearing.

(i)K2 Australia and Kemeny shall pay to Powell the costs and disbursements of the proceeding fixed on a 2B basis; and

(j)leave is reserved to the parties to apply further in the event that any matters of consequential relief have been omitted from these orders.

Osborne J

Solicitors:

Wynn Williams & Co, Christchurch Anthony Harper, Christchurch

SCHEDULE A

EXECUTED by the Lender, Richard Owen Powell

R O Powell

SCHEDULE B

I.     INTERPRETATION

(a)In this contract, unless inconsistent with the context:

(i)     any expression which corresponds to a heading in Schedule A menus and includes the information and particulars inserted against that heading  in Schedule Ai

1. the singular includes the plural and vice versa;

   (iii)   "person" includes a company or otliet body corporate.

   2.PAYI\IENT OF“ PRINCIP›tL SUM AND INTEREST

(a)The Borrower will pay the Principal Sum to the Lender iii one  sum  on  the Repayment Date.

(L) The Bon’ower will pay to the Lender on the Repayment Date interest in the sum of NZDS37,500.00 subject to clause 2(c) below.

(c)The Borrower shall be entitled to t’epay all or any part of the Principal Sum at any  time during  the tems  of  this Loan Agreemeiit.  If all of the Principal Sum is repaid  on or before three (3) months following  the Date of Advance,  the Borrower  shall  only be required to pay to the Lender, conteniporaneously with repayment of the PrinciJaal Sum, interest in the shun of NZDS25,000.00.

To avoid confusion, if all of the Principal Sun is repaid after the date that is three

(3) months following the Date of Advance,  but  on  or before  the  Repapreut  Date, the Bori‘ower shall pay to the Lender, conternporaneously with repayment of the Principal Sum, interest in the sum of h*ZD$37,500.00.

Payment of’ interest in  accordance  with  this  subclause  2(c)  shall  satisfy  the Borrow er’s obligation to pay interest under this Agreement.

3.DEFAULT .4ND LENDER'S RIGHT TO CALL UP

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If the Borrower fails to pay any amount of the Principal Sum or the interest on or beforo• the Repayment Date, the Borrower shall pay to the Lender on demand in writing, default interest at the rate or’ 15% of the Principal sum per month on the amount outstanding.

(b)The parties also agree that it is an event of default of this Agreement and the lender has the right to call up the loan immediately on demand in writing if any of the following occurs:

i.There is a resolution passed or order made for winding up or a receiver, liquidator, provisional liquidator or statutory manager is appointed to the Borrower;

ii.Either of the trusts that the Bon ower is a tt‘ustee for ai‘e wound up or otherwise dissolved;

iii.     There is a material change in the control of the Borrower, and which chanp=e 1s defined as a 25% change in sliateholdinp or removal of the current sore director;

iv.      The Borrower passes a resolution or otherwise agrees to amalgamate with another company (whether existing or to be formed) without the consent of ihe Lender in writing;

V.      The Guarantor is declared bankrupt or dies; and

vi. Otliervvia-e, the Borro«•er makes default iii payment of the Principal Sum and interest or any Part thereof or in the observance or performance of any other covenant expressed or implied in this Agreement.

(all referred to as an Event of Default)

(c)In the Event of Default as defined by clause 3 (a) and (b) the Lender may call up and compel Payment of the Pi’incipal Sum and interest by demand in suiting.

(d)In the Event of Default as defined by clause 3 (a) and (b) the Lender will be entitled to claim against the Borrower actual legal costs incurred by the Lender incurred in recovery of the amount dub under the Agreerrient.

4.SERVICE

(a)Any derriaiid  or notice required  or authorised  to be served on the Borrower nuder or in relation to this contract may be signed by the Lender or by the Lender's agent and may be served in the iiianner authorised by the Companies Act 1993 for service of documents on a Company.

3.     SECURITY'

(a) As seciu’ity for the Pi‘incipa1 Sum, interest and all other ainouiTts payable by the Borrower under this Agreement, the Borrower agrees thatk the event the Borrower defaults in payment of the Principal Sum or interest, or in the observance or performance of any other covenants expressed or implied in this Agreement, the

Borrower will immediately grant and execute Hi favour of the Lender a mortgage over the Borrower’s 50"/« equitable share of the properties described in Schedule C; and the Borrower acknowledges that the Lender shall be entitled to lodge a caveat against the titles to those properties to protect its interest as equitable mortgagee over the Borrower’s share of those properties.

w) The parties acknowledge that the Borrower only owhs a 50% equitable share of the properties described in Schedule C and that the Lender has no rights in respect of the other 50%8 equitable share of those properties, and that if a caveat is reqttired, the Lender will properly describe the interest that the caveat supports.

6.     GUARANTEE

(a)In consideration of th‹r Lender advancing to the Borrower the PrinciJaal Sum at the request of the Guarantor, (as the Guarantor acknowledges) the Guarantor guarantees to the Lender the due and punctual payment of all money payable under this Agreement,‘ and the petfomiance and observance by the Borrower of all covenants to be performed and observed under this Ap’eement and the Security.

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(‹)

lVliereas as betu ecu the Boi iowei and the Guarantor, the Guarantor may be a surety owl y, as between the Guarantor arid the Lender, the Guarantor shall be deeinecl to he a principal contracting patty and liable as principal for the payment of the moneys and the performance and observance of the covenants requii’ed to be paid, perforrried and observed by the Borrower under this Agreement.

No warrer, pant of time, foi’bearance to sue, or any other act, iiiatter or thing which would operate to discharge, prejudice, or reduce the liability of a surety only, shall operate to discharge, prejudice or reduce the liability of the Guarantor under this Agreement.

8.ACKNOWLEDGEMENT

(a)The Borrower agrees and acknowledges that the Borrower has not entered into this Agreement primarily for personal, domestic or household purposes.

9.MISCELLANEOUS

All amounts payable by the Borrower shah be paid in such manner including automatic bank transfer, as the Lender from time to time directs.

(b)If thG Lender delays or does not exercise any right or remedy under this Agreement in relation to any default by the Borrower or in relation to any other event or circumstance, that conduct is not a waiver of any right or remedy that the Lender has under this Agreement or in law.

(c)This .figre•ment may only be amended by written agreement bebveen all of the parties to it. Any actual waiver or consent by the Lender iriust be in writing.

(d)The parties specifically acknoz•1edge that they have entered this Agreement based upon their own judgement aid not in reliance on any representation or warranty made by either party or anyone else.

(e)This Ayeeirent constitutes thC entire unclerstiinding and agreement of the arties and supersedes and extinguishes all prior ogreeiuetits, arrangements and

?(.....*

understandings betweCn the parties relating to the matters contemplated by this

Agreement,

(f)Each party will bC responsible for its own respective legal and other costs incurred in relation to the preparation, review, and completion of this Agreement.

The Boiiower agrees to pay to Maxwell A11frey/ Gen William Atkin the total sum

ofh*ZD$5,000 for brolceragc on arranging this .4greeinent.

y? This Agreement may be entered into by separate counterparts (including  by facsimile and email (in PDF form)) each of ivliicli when executed and delivered will be an original, but all thc counterparts will together constitute one and the same instrument.

(i)    This Agi‘eement will be governed lay the law of New Zealand.

SCHEDULE C

1.Stratuiii Estate in freehold in all Identifiers 454266 to 454314 (Hav•kes Bay

Registry) being iuiit titled units at ihe Quest Hotel, Diclcens Street, h'apier.

2.Estste in fee simple in all Identifier HB23/146 comprising 1024rn2 being property at

Kai‘amu Road/Eastbourne Street, Hastings.