Re Body Corporate 201036
[2016] NZHC 2035
•31 August 2016
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2016-404-1235 [2016] NZHC 2035
UNDER Section 119 of the Insolvency Act 2006 IN THE MATTER
of an order vesting property in Body
Corporate 201036AND
BODY CORPORATE 201036
Applicant
Hearing: 18 August 2016 Appearances:
J P Wood for the Applicant
Judgment:
31 August 2016
JUDGMENT OF THOMAS J
This judgment was delivered by me on 31 August 2016 at 3pm pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date:………………………….
Solicitors:
Rainey Law, Auckland.
BODY CORPORATE 201036 [2016] NZHC 2035 [31 August 2016]
Introduction
[1] The complex of buildings known as Parnell Terraces (“Parnell Terraces”) is a leaky building. The applicant, its body corporate (Body Corporate), seeks an order that one of the units within the complex, which has been abandoned by its bankrupt owner and disclaimed by the Official Assignee, be vested in the name of the Body Corporate. The Body Corporate intends to either sell the unit to someone willing to pay for the repairs, or to repair the unit itself and then sell it to recoup the costs.
Facts
[2] The registered proprietor of unit C3 in Parnell Terraces (the unit), which is a stratum estate in leasehold, is Ms Weina Chen. On 4 August 2014, Ms Chen was adjudicated bankrupt on her own petition. On 10 October 2014, the Official Assignee disclaimed its interest in the unit. The effect of this was that the unit became, according to the applicant, ownerless.
[3] A letter from Treasury has been provided which confirms that:
(a) Following Ms Chen’s bankruptcy and the subsequent disclaimer, the
ownership interest passed to the Crown;
(b)The Crown has no interest in claiming or exercising any ownership interest in the unit;
(c) The Crown does not object to the Court vesting the ownership interest in the Body Corporate; and
(d)The Crown does not wish to be served or further involved with the application and will abide the decision of the Court.
[4] Westpac had a registered mortgage over the unit, which it discharged on
9 November 2015.
[5] Parnell Terraces is currently subject to a scheme (the scheme) pursuant to s
74 of the Unit Titles Act (the Act), under which owners are to pay for repairs on the basis of each unit’s utility interest. Given its utility interest of 1.24 per cent, the share apportioned to the unit (which is unpaid) is approximately $170,000.
[6] The last known address for Ms Chen was the address provided in her application for bankruptcy, but she had also provided an email address for service to the Body Corporate secretary. The Body Corporate has sent her notice of the proceedings, including the Crown’s lack of objection to the vesting, and has filed affidavit evidence of their emails to her. There has been no response.
Analysis of proposed approach
[7] On bankruptcy, all property (in or outside of New Zealand) either belonging to the bankrupt or vested in the bankrupt, vests in the Assignee automatically and any rights of the bankrupt in the property are extinguished.1 The Insolvency Act
2006 allows the Official Assignee to disclaim onerous property, which is relevantly defined as including “property of the bankrupt that is unsaleable, or not readily saleable, or that may give rise to a liability to pay money or perform an onerous act”.2
[8] Property is defined in s 2 of the Insolvency Act as follows:
property means property of every kind, whether tangible or intangible, real or personal, corporeal or incorporeal, and includes rights, interests, and claims of every kind in relation to property however they arise
[9] The Official Assignee has expressly exercised the power of disclaimer in respect of Ms Chen’s interest in the unit.
[10] The effect of disclaiming property is described under s 118 of the Insolvency
Act, which provides that a disclaimer:
(a) brings to an end, on and from the date of the disclaimer, the rights, interests, and liabilities of the Assignee and the bankrupt in relation to the property disclaimed:
1 Insolvency Act, s 101.
2 Section 117(4)(a)(ii).
(b) does not affect the rights, interests, or liabilities of any other person, except in so far as is necessary to release the Assignee or the bankrupt from a liability.
[11] The effect is that there is no residual claim by the bankrupt to the property. It is not automatically clear on the wording of the statute, however, who takes charge of the property following a disclaimer.
[12] In Rural Banking and Finance Corporation of New Zealand Ltd v Official Assignee, the plaintiff mortgagee applied to have two properties which had been disclaimed vested in it.3 This was unopposed by the Official Assignee but opposed by the second mortgagee. The main issue was as to who owned the land, once disclaimed by the Official Assignee. The Court held that mortgaged land could be disclaimed, and noted that the Insolvency Act only specified that the rights and liabilities of the bankrupt and the Official Assignee in relation to the property claimed were extinguished. Turning to the question of who became the owner of the land, the Court held that it reverted to the Crown:4
Both properties in the present case had been held by the bankrupt as the registered proprietor of “an estate in fee simple” in the land. Historically, an estate in fee simple was no more than a grant from the Crown, with or without intermediate mesne lords, allowing the owner of that estate to use the land until the owner died intestate without heirs. Once the estate terminated in that way, there was nothing to inhibit the Crown from resuming the use of the land which, in theory, had remained that of the Crown throughout. The land thus reverted to the Crown by a process known as “escheat”. In the meantime it could also be forfeited to the Crown in various ways.
…
Because the doctrine of tenure governs the ownership and use of land in New Zealand, there can be no room for allodial interests, that is to say estates held in absolute ownership without acknowledgment to a superior (ibid). In the case of New Zealand fee simple interests, that superior is always the Crown. It follows that in New Zealand, the Crown must always be the proprietor of any land for which no subject can show title …
In the present case, the interest of the bankrupt and the Assignee has been brought to an end by a combination of the adjudication in bankruptcy (Insolvency Act s 42) and the subsequent disclaimer by the Assignee (s
75(2)). Since no other person can be identified as the transferee of, or successor to, that estate the historic principles that I have outlined suggest
3 Rural Banking and Finance Corporation of New Zealand Ltd v Official Assignee [1991] 2
NZLR 351 (HC).
4 At 356 – 357.
that this is one of those rare cases in which the land has reverted to the Crown. The terminology for that process is immaterial but it seems that in this situation there has been a special form of “escheat” rather than acquisition by the Crown as “bona vacantia” …
[13] In Panther v Panther, Heath J considered a similar application, albeit not in the context of a body corporate. In that case, the applicant’s partner had been adjudicated bankrupt and the Official Assignee disclaimed her two half shares in two properties co-owned by her ex-husband. He then applied for the half-shares to be vested in him. Heath J referred to ss 118 and 119 and stated:
[8] Mr Panther applies under s 119(1)(b) for an order vesting the one half share of his former wife in each property in him. He does so in order to regularise the title and to enable sales to be made. As things present stand, the remaining one half interest in each property continues to be registered in the name of Ms Panther. The Official Assignee did not take transmission of title after bankruptcy intervened.
[9] There is no opposition to the application from either the Crown (in which disclaimed land would vest as bona vacantia)5 or the mortgagee of either property. The mortgagee, New Zealand Home Loan Co Ltd, has security over each property to cover the totality of the debt owed by Mr and Ms Panther to it. As the Official Assignee has disclaimed the property there is no need for him to be heard on the application.
[14] After analysing the losses being caused to Mr Panther, Heath J held that the vesting order should be made. Panther v Panther was followed by Hodder v Official Assignee, in which Associate Judge Smith also followed Rural Banking and Finance Corporation of New Zealand, in saying that the disclaimed property (the rights to a cause of action) had vested in the Crown as bona vacantia.6 In that case, the cause of action was reassigned to the bankrupt.
[15] In the usual course, therefore, ownership of disclaimed land vests in the Crown. However, there is an issue as to whether there is a distinction between an ownership interest in a fee simple estate and an ownership interest in a stratum estate. The Treasury has taken the view that unit titles can revert to the Crown in escheat, given the development of that concept into a general common law rule, but
says, from a practical perspective, whether passing in escheat or as common law
5 Rural Banking and Finance Corporation of New Zealand Ltd v Official Assignee [1991] 2
NZLR 351 (HC) at 355–357.
6 Hodder v Official Assignee [2016] NZHC 981 at [10].
bona vacantia there is “little difference, as the Crown’s position is that we do not take actions in relation to such property.”
[16] In Body Corporate 198245 v Wong, Ellis J gave judgment for the plaintiff body corporate for unpaid levies.7 The owner of the unit that had accrued the levies was in liquidation, so her Honour had made an order that the liquidators were to admit the plaintiff’s claim for unpaid levies and the plaintiff’s costs were to be a cost of the liquidation. The plaintiff brought an application to alter the order to give judgment against the company in liquidation, rather than the liquidators for various
tactical reasons.
[17] However, the liquidators had disclaimed the unit titled property. Although that was under the Companies Act not the Insolvency Act, similar principles apply with respect to disclaimers. Ellis J said:
[14] The legal effect of this disclaimer (the validity of which has not yet been formally or directly challenged) is that it brought to an end the rights, interests and liabilities of CIL in relation to the very property over which Mr Allan wishes to place a charge. The stratum estate in the Unit has now vested by escheat in the Crown, subject to any order made by the Court under s
269(5)(b) of the Act. While it is somewhat strange that the liquidators have nonetheless continued to pay the mortgage on the Unit (out of the rental proceeds) and to meet routine Body Corporate levies, the reality remains that no challenge or other application in relation to the disclaimer (whether under s 269(5)(b) or under s 284) has been made.
[15] While I continue to have every sympathy for the position that the Body Corporate finds itself in, I consider that I am not able to make the further order sought.
[18] Although this demonstrates some acceptance of the view that disclaimed stratum estates do vest by escheat in the Crown, it is unclear whether the issue was argued.
[19] I accept Mr Woods’ submission that there is at least an issue in this regard when it comes to considering strata titles. There is a clear and logical basis for the position whereby a disclaimed fee simple estate would vest in the Crown by a special form of escheat. A strata title is, however, different from an estate in fee
simple. It is a creature of statute and the rationale for escheat based on the concept
7 Body Corporate 198245 v Wong [2013] NZHC 1322.
that an estate in fee simple was obtained by way of a grant from the Crown, does not apply.
[20] However, the concept of bona vacantia can still apply to a strata title. That term refers to property having “no apparent owner” and at common law, referred specifically to the principle that the Crown is entitled to all personal property which has no identifiable owner.8 In Body Corporate 207715 v McNish, the freehold estate of a unit title (after the owner company was struck off the Companies Register) vested in the Crown as bona vacantia.9
[21] The unit has vested in the Crown as bona vacantia.
The Insolvency Act
[22] As the unit has been disclaimed, s 119 of the Insolvency Act allows a person who suffers loss as a result of the disclaimer of onerous property to apply for the property to be vested in that person.
[23] Section 119 of the Insolvency Act provides:
119 Position of person who suffers loss as result of disclaimer
(1) A person suffering loss or damage as a result of disclaimer by the
Assignee may—
(a) claim as a creditor in the bankruptcy for the amount of the loss or damage, taking account of the effect of an order made by the Court under paragraph (b):
(b) apply to the Court for an order that the disclaimed property be delivered to, or vested in, that person.
(2) The bankrupt may also apply for an order that the disclaimed property be delivered to, or vested in, the bankrupt.
(3) The Court may make an order under subsection (1)(b) or (2) if it is satisfied that it is fair that the property should be delivered to, or vested in, the applicant.
8 Laws of New Zealand Constitutional Law (online ed) at [181].
9 Body Corporate 207715 v McNish [2015] NZHC 2848, [2016] 2 NZLR 429.
[24] Mr Wood, counsel for the Body Corporate, says this is the first case of which he is aware of a body corporate applying for a vesting order. Mr Wood acknowledges that the vesting power has been used infrequently, describing very few cases where this power has been exercised, most of which were primarily unopposed applications.10 He says that what can be derived from these cases is that the Court should look to, first, whether there has been a disclaimer, and secondly, whether there has been any loss or damage, or disadvantage caused by the disclaimer.
[25] If those jurisdictional thresholds are met, the Court has an overall discretion as to whether it is fair to vest the property in the applicant.11
[26] In this case, there has clearly been a disclaimer. The signed notice of disclaimer signed and sealed by the Official Assignee has been provided to the Court.
[27] The Body Corporate has the obligation to repair and maintain common property and any building elements and infrastructure which relate to or serve more than one unit, under s 138 of the Act. The unit is affected by weathertightness issues relating to its deck, roof and cladding. The cladding to the front of the unit borders common property. The scheme has empowered the Body Corporate to repair the common property and all units. The scheme involves repair of the exterior and interior elements of the complex. This will be paid for by levying unit owners, the cost being distributed based on the size of the owner’s utility or ownership interest.
[28] The effect of the disclaimer is that the Body Corporate has no person to levy for the cost of repairs to the unit which are approximately $170,000. There is, therefore a financial loss to the Body Corporate. Furthermore, there is no one who
can give Body Corporate access to the unit for the purpose of effecting repairs.
10 Hodder v Official Assignee [2016] NZHC 981; Re Julius [2016] NZHC 588; Re Henderson
[2014] NZHC 3160; Re Marlow (2013) 13 NZCPR 639 (HC); Re Shallish HC Invercargill CIV-
2010-425-000439, 16 September 2010, Burrows v Container Sales & Leasing Ltd HC Christchurch CIV-2009-409-001712, 22 June 2010; Williams v Cameron [2016] NZHC 264; Goodwin v Copland [2015] NZHC 2124. I also identify Panther v Panther [2016] NZHC 809 and a number of other recent unopposed applications including Re Julius [2016] NZHC 588, Re Watson [2015] NZHC 2728, Re Hansen [2013] NZHC 1104 and Re Beaton [2015] NZHC 1304.
11 See, for example, Williams v Cameron [2016] NZHC 264.
[29] Ms Chen remains the only “owner” for the purposes of the Act,12 and the only person who can be called upon to pay the levies for the repair of the unit. Due to the disclaimer, there is now no person on whom the Body Corporate can call to meet the levy. Although the Body Corporate could levy the remaining owners with the difference, I accept that, since the Body Corporate is a collective of the owners, this does not lessen the disadvantage to the Body Corporate.
[30] The question of whether there has been loss requires a factual assessment of the position. I consider that the loss caused to the Body Corporate, through having an owner who cannot be levied to contribute to the remediation works, is a sufficient loss. The unit, if left in the current position, will never be remediated and (given the Treasury position) the Crown has no interest in being involved with the unit. This is clearly unsatisfactory for the Body Corporate and the individual unit owners, both now and into the future when they have a permanently vacant unit with no one to levy for ongoing Body Corporate expenses, even after the complex is repaired.
[31] I am satisfied there is no other person with a better interest in the unit who is willing and capable of assuming responsibilities for the unit. The order sought is fair because:
(a) It will provide the Body Corporate with a way of selling the unit to relieve it of the potential burden of shouldering the obligations in regard to the unit;
(b)If it is unable to sell the unit prior to repairs commencing, the Body Corporate will take on the obligations in respect of the unit and should have a corresponding interest in the unit;
(c) The Body Corporate can authorise access to the unit for the repair of common property;
(d)The Treasury has been consulted and has no interest in any involvement with the unit;
12 See Unit Titles Act 2010, s 3 which defines owner as “registered proprietor”.
(e) There is no other registered interest such as a mortgage;
(f) The owner of the reversionary interest in the base land of Parnell Terraces has been served and taken no steps and in any case the Act prohibits the surrender of a unit holder’s stratum estate to the lessor;13 and
(g)Ms Chen has no interest in the unit and has taken no steps to have the unit vested in her. She is an undischarged bankrupt and can be presumed to lack the means to pay the outstanding levies.
Are there any issues relating to body corporates specifically which make this procedure inappropriate?
[32] Under the previous Unit Titles Act, a body corporate could not own an interest in land. That restriction has now been removed, and s 77 specifically allows a body corporate to do either anything authorised by the Act or any other Act, and anything that a natural person of full age and capacity may do, except as provided for in the Act. Section 78 specifically limits s 77 by providing that a body corporate may do any act under that section only for the purpose of performing its duties or exercising its powers.
[33] The proposed ownership of the unit is within the Body Corporate’s powers as the reason the Body Corporate seeks to have the unit vested in it is to fulfil its duties under the Act and under the scheme.
Alternative procedures
[34] When dealing with a defaulting owner, a body corporate must follow the usual procedures for debt recovery.14 However, in this case, the judgment debt procedure cannot be used because Ms Chen is bankrupt, and no longer “owns” the
unit despite being the registered proprietor.
13 Section 162.
14 Body Corporate 201036 v Westpac Banking Corporation [2015] NZHC 1524, (2015) 16 NZCPR
494 at [46].
[35] Under s 124 of the Act, unpaid levies can be recovered as a debt due to the body corporate, from the person who was the unit owner at the time the levy became payable or the person who is the unit owner at the time the proceedings are instituted. This implies that “the person who is the unit holder”, for example the Crown, could become liable for unpaid levies which accrue or which have been unpaid.
[36] However, the definition of “owner” under s 3 in relation to any unit,
specifically:
(a) means the person or persons for the time being registered as proprietor of the stratum estate in the unit under the Land Transfer Act 1952; and
(b) in sections 105, 124, 126, 127, and 163, includes a person in actual occupation of a unit under a binding and unconditional agreement for sale and purchase
[37] The Crown is not the registered proprietor of the unit. Fisher J in Rural Banking discussed the position of the Crown as owner despite the registered title, and the difficulties in putting the Crown or the Queen on the title. He concluded that there was:15
… no statutory requirement or common law principle which would invalidate an existing certificate of title under the Land Transfer Act, and the various legal interests recorded upon that title, simply upon the ground that the beneficial interest in the land had reverted to the Crown by escheat.
[38] This suggests that the registered proprietor does not change simply through the workings of the Insolvency Act, or bona vacantia.
[39] Thus, the definition of owner appears to preclude obtaining levies directly under s 124 from those who, like receivers, or the Official Assignee, or the Crown become the owner without the legal title transferring. In practice, if the Official Assignee or Crown wished to hold a unit until remediated and then sell it, they
would be obliged to pay body corporate levies until it was sold.
15 Rural Banking and Finance Corporation of New Zealand Ltd v Official Assignee, above n 3, at
358.
[40] The Supreme Court (in a 2-2 split) has recently affirmed the Court of Appeal decision in Gilbert v Body Corporate 162791,16 that receivers can become personally liable under s 32(5) of the Receiverships Act 1993 for body corporate levies accrued during a receivership, on the basis that they are debts “due under an agreement subsisting at the date of the appointment of the receiver relating to the use, possession, or occupation by the grantor of property in receivership,” in terms of the
Receiverships Act. The relationship was one of deemed implied agreement. In relation to the general position as to payment of levies, William Young J and Glazebrook J said:17
Section 124 imposes the liability for unpaid levies on the person “who is the unit owner at the time the proceedings are instituted”. In ordinary circumstances, unpaid levies will be priced into the purchase price of a unit. In this practical sense, unpaid levies have priority over:
(a) the general indebtedness of a unit owner who is bankrupt or in liquidation; and
(b) the amount secured by a mortgage over a unit where the mortgagee is selling the unit.
[41] This highlights the unique position in this case as generally the bankrupted party’s property will be sold by the mortgagee and the levies recouped from the new owners. It is not clear (apart perhaps from the absence of any market interest) why the mortgagee discharged the mortgage over the unit.
[42] The purpose of this analysis is to investigate whether there are any other options available to the Body Corporate. There are not. It appears there is no better procedure to fit the unusual circumstance in which the Body Corporate finds itself.
Result
[43] I am satisfied it is fair to vest the unit in the Body Corporate and there is no person prejudiced by the order, in the circumstances.
16 Gilbert v Body Corporate 162791 [2016] NZSC 61, affirming Body Corporate 162791 v Gilbert
[2015] NZCA 185, [2015] 3 NZLR 601.
17 At [13].
[44] For the reasons given, the application is granted.
Thomas J
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