Reforma Limited v Brown
[2024] NZHC 1349
•27 May 2024
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2023-404-2190
[2024] NZHC 1349
BETWEEN REFORMA LIMITED
Plaintiff
AND
DAVID BROWN
First Defendant
DAVID BROWN as Trustee of the Kairara Trust
Second Defendant
Hearing: 23 April 2024 Counsel:
D M Hughes / N E Jirkowsky for the Plaintiff J T Burley / E Iliev for the Defendants
Judgment:
27 May 2024
INTERIM JUDGMENT OF ASSOCIATE JUDGE BRITTAIN
This judgment was delivered by me on 27 May 2024 at 4 pm Pursuant to r 11.5 of the High Court Rules.
…………………..
Registrar/Deputy Registrar
Solicitors/Counsel:
Anthony Harper, Auckland McVeagh Fleming, Auckland
REFORMA LTD v DAVID BROWN [2024] NZHC 1349 [27 May 2024]
Contents
Introduction................................................................................................................. 2
Summary judgment principles...................................................................................... 5
The alleged overpayment by KVCC to the construction company engaged by KVCC to build the medical centre.............................................................................................................. 6
KVCC’s refusal to allow Mr Brown to purchase two apartments in the development 7 The interest rate under the RC agreement........................................................................................ 7
Reforma’s payments of $105,884.59 to unsecured creditors of KVCC 8
KVCC’s appointment of the receiver........................................................................... 8
The receiver’s sale process......................................................................................... 10
The receiver’s duties when exercising the power of sale...................................... 10
Responsibility of the lender................................................................................... 11
The receiver’s decision to sell the substantial part of the development as a going concern rather than selling separate titles as separate lots............................................................. 16
The failure to complete the medical centre before sale......................................... 17
The treatment of the infrastructure assets included in the development............... 17
The receiver’s failure to engage with an alternative purchaser of the development who was prepared to pay more than Reforma...................................................................... 19
The receiver’s payment of $99,696 to the liquidators of KVCC............................... 22
Payment of the receiver’s own costs and Reforma’s legal costs................................ 23
The exercise of the Court’s discretion........................................................................ 24Costs........................................................................................................................... 25
Introduction
[1] The defendant, David Brown, and Graham Viall established Kaukapakapa Village Centre Company Ltd (in liquidation) (KVCC) to undertake a commercial and residential development in Kaukapakapa, known as the Kaukapakapa Village Center. Mr Brown and Mr Viall were appointed directors of KVCC, together with Mr Hobman.
[2] Mr Viall is a shareholder and the sole director of the plaintiff, Reforma Ltd (Reforma). Reforma provided funding for the development pursuant to a revolving credit facility agreement between Reforma and KVCC. The parties agree that the relevant written agreement is dated 16 February 2021 (the RC agreement).
[3] The RC agreement recorded that Reforma had advanced $6,931,898 to KVCC, due for repayment by 31 October 2021. Reforma’s advance was secured by:
(a)a general security agreement dated 14 December 2017 (GSA) over all present and after acquired property of KVCC, including the development; and
(b)registered mortgages over the development land.
[4] By a written guarantee dated 1 December 2020 (the guarantee), Mr Brown guaranteed KVCC’s obligations to Reforma, limited to 50% of KVCC’s debt. He did so in his personal capacity and as a trustee of the Kairara Trust.
[5] Between 18 March 2021 and 20 September 2021, Reforma advanced an additional $1,214,000 to KVCC. By 31 October 2021, the total amount due, including interest, was $8,348,205.71. KVCC defaulted in its obligations to Reforma, and on 1 June 2022 Reforma appointed Paul Vlasic as receiver of KVCC (the receiver). The development was not completed at the time.
[6] In exercise of his power of sale, the receiver sold the bulk of the development to Reforma for $5,100,000. The purchase price was paid by a cash payment of
$324,263.86 and the balance by set-off against the debt owed by KVCC to Reforma. KVCC was put into liquidation on 15 September 2023.
[7] Reforma claims that there is a shortfall due from KVCC of $4,375,520.54, and that Mr Brown is liable for half of that debt as guarantor. Reforma has applied for summary judgment against Mr Brown.
[8] Mr Brown does not take issue with the form or substance of the security arrangements. Mr Brown takes issue with aspects of the conduct of the development by KVCC, the validity of the appointment of the receiver and the receiver’s sale process.
[9] Mr Brown says that this claim has its genesis in a breakdown in the relationship between Mr Brown and Mr Viall. He says that Reforma appointed the receiver for an ulterior purpose: to gain control of the development and to acquire the assets of the development to the exclusion of Mr Brown’s interests.
[10]In particular, the allegations raised by Mr Brown are:
(a)KVCC overpaid the construction company engaged by KVCC to build the medical centre included in the development;
(b)KVCC refused to allow Mr Brown to purchase two apartments in the development prior to the receivership, which would have led to a greater return from those apartments than achieved by the receiver;
(c)KVCC failed to apply the full sale proceeds from the sale of the liquor store and an apartment in the development to reduce the Reforma debt;
(d)the wrong interest rate has been applied under the RC agreement;
(e)Reforma made payments of $105,884.59 to unsecured creditors of KVCC that should not have been made;
(f)Reforma’s appointment of the receiver was made in bad faith, and was invalid;
(g)the receiver’s sale process for the development was negligent, including:
(i)the receiver’s decision to sell the substantial part of the development as a going concern rather than selling separate titles as separate lots;
(ii)the failure to complete the medical centre that is part of the development before sale;
(iii)the treatment of the infrastructure assets included in the development; and
(iv)the receiver’s failure to engage with an alternative purchaser of the development, who was prepared to pay more than Reforma;
(h)the receiver wrongly paid $99,696 to the liquidators of KVCC; and
(i)payment of the receiver’s own costs and Reforma’s legal costs was unreasonable.
[11]Each of these issues raised by Mr Brown requires a consideration of:
(a)whether Mr Brown has discharged the evidential onus on him to establish that the matters raised are arguable on the facts; and
(b)whether it gives rise to a set-off or defence to the claim by Reforma.
Summary judgment principles
[12] The Court may give judgment against a defendant if satisfied that the defendant has no defence to a cause of action in the statement of claim.
[13] The leading authority on applications for summary judgment is Krukziener v Hanover Finance Ltd.1 The Court of Appeal set out the following principles:2
(a)The question on a summary judgment application is whether the defendant has no defence to the claim; that is, there is no real question to be tried. The Court must be left without any real doubt or uncertainty.
(b)The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated.
(c)The Court will not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not accept uncritically evidence that is inherently lacking in credibility, as, for example, where
1 Krukziener v Hanover Finance Ltd [2008] NZCA 187, (2008) 19 PRNZ 162.
2 At [26].
the evidence is not consistent with undisputed contemporary documents or other statements by the same deponent, or is inherently improbable. In the end the Court’s assessment of the evidence is a matter of judgment. The Court may take a robust and realistic approach where the facts warrant it.
[14] The defendant is under an obligation to lay a proper foundation for the defence in the affidavits filed in support of the notice of opposition.3
[15] The court can give judgment for an amount that is indisputably due and owing but which is only part of a claim and not the whole relief sought in a cause of action.4
[16] The Court retains a residual discretion to decline summary judgment where oppression or injustice may arise if judgment is entered, including injustice arising out of other aspects of the dispute between the parties.5 That may include circumstances that might result in an injustice if judgment is entered before a third-party claim is tried.6
The alleged overpayment by KVCC to the construction company engaged by KVCC to build the medical centre
[17] Mr Brown says that KVCC overpaid the construction company engaged by KVCC to construct the medical centre by at least $700,000, thereby reducing KVCC’s ability to repay Reforma and increasing Mr Brown’s exposure under his guarantee. Mr Brown also complains about delays in the completion of construction.
[18] Mr Brown has not discharged his evidential onus. Mr Brown provides no evidence to support his claim other than bare assertion.
[19] In any event, even if the alleged overpayment was made by KVCC it cannot provide a defence or set-off to Reforma’s claim against Mr Brown. Mr Brown’s complaints relate to the internal management of KVCC.
3 Middleditch v New Zealand Hotel Investments Ltd (1992) 5 PRNZ 392 (CA) at 394.
4 Australian Guarantee Corp (NZ) Ltd v McBeth [1992] 3 NZLR 54 (CA) at 61.
5 Herring v Herring [2010] NZCA 500, [2011] 2 NZLR 433 at [26].
6 Sudfeldt v UDC Finance Ltd (1987) 1 PRNZ 205 (CA) at 209.
KVCC’s refusal to allow Mr Brown to purchase two apartments in the development
[20] Mr Brown says that in about September 2020, he agreed with Mr Viall that he would purchase two apartments from KVCC for a total price of $1,300,000. In his evidence, Mr Brown produced emails between Mr Brown and Mr Viall from October 2020, which record discussion of the terms of the agreements for sale and purchase. Mr Viall says that the negotiations broke down. There is no evidence that written agreements for sale and purchase were finalised or executed.
[21] Mr Brown says that after the certificates of title were issued for the two apartments, Mr Viall “refused to allow settlement of the apartments to me.” On 22 September 2021, Mr Brown’s barrister wrote to Mr Viall’s barrister asserting that the agreements had been concluded. There is no evidence of a response.
[22] These events all took place before Reforma appointed its receiver. In essence, they are allegations of wrongdoing by KVCC and/or its director, Mr Viall. These allegations relate to the internal management of KVCC and cannot give rise to a defence or a set-off to Reforma’s claim against Mr Brown.
KVCC failed to apply the full sale proceeds from the sale of the liquor store and an apartment in the development to Reforma
[23] Mr Brown questions whether all proceeds from KVCC’s sale of the liquor store and one of the apartments have been correctly applied to reduce the Reforma debt. Mr Viall has produced the settlement statements for the transactions, which confirm that both sales were settled before the receivership. After deduction of typical expenses and agreed amounts, the proceeds of sale were used to reduce the Reforma debt.
[24] Mr Brown’s complaints relate to the internal management of KVCC and cannot give rise to a defence or a set-off to Reforma’s claim against Mr Brown.
The interest rate under the RC agreement
[25] Under the RC Agreement, Reforma was entitled to charge interest at ASB’s Prime Housing Interest Rate plus 2.5 per cent. Mr Brown says that Reforma did not
properly apply this interest rate. Mr Brown produced a printout of ASB’s home loan rates which he says are different to the base rates used by Reforma to calculate interest.
[26] In his evidence in reply, Mr Viall confirmed that the ASB rates produced by Mr Brown are not the Prime Housing rates, which are a variable rate. Mr Viall has produced a schedule provided by an ASB commercial manager confirming the applicable ASB variable rates over the course of the facility, which accord with the base rates used by Reforma. I am satisfied that Reforma has correctly calculated interest due under the RC Agreement.
Reforma’s payments of $105,884.59 to unsecured creditors of KVCC
[27] Reforma made payments to suppliers of goods and services to KVCC, including the construction company working on the medical centre, KVCC’s accountants and lawyers, and a gardener, Sue West. Mr Viall says that it was necessary for Reforma to make the payments so that KVCC could advance the development. The fact that Reforma made the payments on KVCC’s behalf is not challenged.
[28] The payments in question by Reforma are drawdowns by KVCC under the RC agreement, made by agreement between KVCC and Reforma. Clause 15.11 of the RC agreement provides that Reforma is entitled to rely on any notice, document or other instrument signed by any director of KVCC. Reforma was entitled to act on the instructions of Mr Viall as a director of KVCC.
[29] The issue raised by Mr Brown is whether Mr Viall was authorised by KVCC to make the drawdowns. This relates to the internal management of KVCC and cannot give rise to a defence or a set-off to Reforma’s claim against Mr Brown.
KVCC’s appointment of the receiver
[30] KVCC’s failure to repay the facility on 31 October 2021 is not disputed and was a default under the RC agreement. Grounds existed for Reforma to appoint a receiver.
[31] However, Mr Brown now argues that Reforma appointed Mr Vlasic as receiver for a collateral purpose, to gain control of the development and to ensure that the development’s assets were acquired by Reforma.
[32] This ground of opposition was not raised in Mr Brown’s notice of opposition or addressed in the oral and written submissions presented at the hearing on 23 April 2024.
[33] At the hearing, counsel for Mr Brown advanced various arguments which relied on alleged breaches of duty by the receiver, but counsel did not address the legal basis for attributing those breaches to Reforma, or any other basis for those alleged breaches to amount to a defence to the claims by Reforma. I called for further submissions.
[34] In the further submissions filed on behalf of Mr Brown, counsel submitted for the first time that Reforma appointed the receiver for a purpose unrelated to recovery of the debt, namely to secure the development assets for itself, which was an exercise of the power of appointment in bad faith.
[35] Rule 7.24 of the High Court Rules 2016 requires notices of opposition to state the grounds of opposition and to refer to any particular enactments or principles of law or judicial decisions on which the respondent relies.
[36] The Court of Appeal has expressed concern regarding the last-minute introduction of further grounds of defence to which a plaintiff, if on notice, could have directed evidence.7 Although “the Court may be willing to hear the new ground in special circumstances, for example where the point is purely one of law…generally new grounds are unlikely to be admitted.”8
[37] In the context of an application for summary judgment, the High Court has confirmed that the “Court must be vigilant not to permit a defendant to pursue grounds which are not articulated as grounds of opposition”.9
7 Quainoo v Breweries [1991] 1 NZLR 161 (CA) at 166.
8 Buxton v Birches Time Share Resort Ltd [1991] 2 NZLR 641 (CA) at 646.
9 LDC Finance Ltd (in rec) v Jenkins (2010) 12 NZCPR 741 (HC) at [141].
[38]The most apposite of Mr Brown’s grounds of opposition is 3.4, which states:
The plaintiff’s director is also a director of Kaukapakapa Village Centre Company Limited (KVCCL), and has acted in his own best interests/those of the plaintiff, and to the detriment of KVCCL, of which the Defendants are guarantors. To the extent that the plaintiff’s losses were caused or contributed to by Mr Viall those losses are not payable by the defendants.
[39] The invalid appointment ground is not purely legal in nature but involves factual questions relating to what actually occurred during the appointment process. The failure to include the ground in KVCC’s notice of opposition breaches r 7.24 and is prejudicial; Reforma could have adduced different evidence on this issue. Accordingly, Mr Brown is barred from raising this ground due to the lack of proper notice.
The receiver’s sale process
The receiver’s duties when exercising the power of sale
[40] Section 18(1) of the Receiverships Act 1993 (the Act) required the receiver to act in good faith and for a proper purpose — namely, to recover as much as possible of the indebtedness owing to the lender who appointed the receiver. Section 18(2) imposed a duty on the receiver to take care of the interests of the lender.
[41] Although the interests of the lender must be put first, the receiver also had a subsidiary duty under s 18(3) not to act in a way which unreasonably prejudiced the interests of KVCC or Mr Brown.10
[42] The receiver owed a duty under s 19 of the Act to obtain the best price reasonably obtainable at the time of sale. This obligation was owed to Mr Brown as a guarantor.11
10 Receiverships Act 1993, s 18(3)(a) and (d); and see Taylor v Bank of New Zealand [2011] 2 NZLR 628 (HC) at [175], citing P Blanchard and M Gedye The Law of Private Receivers of Companies in New Zealand (LexisNexis, Wellington, 2008) at [11.28].
11 Receiverships Act 1993, s 19(d).
[43] In deciding whether a receiver has breached the duty under s 19, the facts must be looked at broadly and allowing some margin for risk assessment by the receiver in the realisation of the security.12
Responsibility of the lender
[44] The general rule is that a receiver is the agent of the grantor of the power of appointment contained in a deed or agreement.13 This is confirmed by cl 25(b) of the guarantee in this case, which states that the receiver is the agent of the grantor (KVCC) who “alone is responsible for the receiver’s acts and defaults and for the receiver’s remuneration.”
[45] Therefore, the lender is usually not responsible for the receiver’s actions.14 However, there are exceptions to this position. In certain circumstances the lender can be held responsible for the conduct of the receiver, including:
(a)Where the receiver’s independence has been sufficiently influenced and undermined by the actions of the lender intervening in the receivership.
(b)Where the lender purchases the secured property and the lender cannot discharge the burden of proving the validity of the purchase by showing that the sale was bona fide with due regard shown for the interests of the grantor and other persons with interests in the grantor’s property.
Intervening in the receivership
[46] In Primary Wool Co-Operative Ltd v Stevens, Associate Judge Matthews drew on a long line of precedent, including Privy Council and Court of Appeal decisions,15 holding that it was reasonably arguable that the lenders caused or connived at the
12 Moritzson Properties Ltd v McLachlan (2001) 9 NZCLC 262,448 (HC) at [58].
13 Receiverships Act 1993, s 6(3).
14 Bank of New Zealand v Davey [2021] NZHC 1854 at [30]; Davey v Bank of New Zealand [2023] NZCA 86 at [16]; and Patrick v Bank of New Zealand [2018] NZCA 122 at [47].
15 Black v The Ottoman Bank (1862) 15 Moo PC 472 at 483; Westpac Securities Ltd v Dickie [1991] 1 NZLR 657 (CA) at 663.
default of the receivers and that this provided a defence to liability under the guarantee.16
[47] This is similar to a line of precedent which holds that a lender may become liable for the receiver’s actions if the lender interferes with or directs the conduct of the receivership.17 Where this occurs, the lender assumes the receiver’s duty of care towards the grantor and the guarantor.18
[48] There is no material difference between the “caused or connived at” and “interfered or directed” tests. Both hold the lender responsible where the receiver’s independence has been sufficiently influenced and undermined by the actions of the lender.
[49] The Court of Appeal has held that whether the actions of the lender in intervening in the receivership are sufficient to make the lender liable will involve questions of fact.19
Lender purchasing the secured property
[50] Section 19 of the Act has been held to impose obligations on a purchasing lender analogous to those owed by a mortgagee exercising their power of sale.20 A mortgagee may not purchase the secured property unless it is by a public auction conducted by the Registrar of the Court. However, the mortgagee may sell the secured property to a company in which the mortgagee has an interest, and the mortgagee then has the burden of proving the validity of the purchase by showing that it acted bona fide and took reasonable precautions to obtain a proper price.21
16 Primary Wool Co-Operative Ltd v Stevens [2016] NZHC 2844 at [48]–[53].
17 Standard Chartered Bank Ltd v Walker [1982] 1 WLR 1410 (CA) at 1416.
18 At 1415–1416.
19 McCollum v Thompson [2017] NZCA 269, [2018] NZCCLR 25 at [45].
20 Crown Finance Ltd v Cronin [2018] NZHC 1289.
21 Crown Finance Ltd v Cronin, above n 20, at [22], citing Apple Fields Ltd v Damesh Holdings Ltd
[2003] UKPC 54, [2004] 1 NZLR 721 at [25].
[51] A sale by a receiver to the lender raises similar issues. The learned authors of Private Receivers of Companies in New Zealand comment:22
It is not to be supposed that such a transaction is necessarily void for it is theoretically the same as a sale by a mortgagor to a mortgagee, not a sale by the mortgagee (through an agent) to itself. However, it is conducted for the debtor company by an agent whose primary duty is to the purchasing secured creditor. This conflict of duty will, at the very least, lead to the sale being most carefully scrutinised by the Court if the sale is challenged, especially if the liability of the company is not entirely satisfied by offsetting the price against the indebtedness to the security holder. The Court will be likely to set the transaction aside if it is not demonstrated by the receiver and the security holder that there has been due regard shown for the interests of the company and other persons with interests in its property, so that there is no unfairness in the transaction.
Are the terms of the guarantee effective to prevent Mr Brown from relying on a breach of duty by the receiver and/or Reforma?
[52]Clause 1.1 of the guarantee provides:
Each Guarantor unconditionally and irrevocably guarantees to the Beneficiary the due performance of and compliance by the Principal Obligor with the guaranteed obligations.
[53] The guarantee defines “the guaranteed indebtedness” as “[a]ll of the Principal Obligor’s obligations under the attached Revolving Credit Facility”.
[54] Under cl 1.4 of the guarantee, Mr Brown indemnified Reforma for any loss suffered by Reforma if the guaranteed indebtedness is not recoverable. This includes any part of the guaranteed indebtedness that is not recoverable by reason of KVCC ceasing to be legally liable to pay the guaranteed indebtedness.
[55] Clause 2.2 of the guarantee provides that Mr Brown is not discharged nor his obligations affected by various prescribed circumstances including:
(8) the illegality, invalidity, unenforceability of, or defect in, a provision of the guaranteed obligations or a party's obligations under any of them for any reason whatsoever, and whether or not known to the Beneficiary; or
(9) any other matter or thing whatsoever.
22 Peter Blanchard and Michael Gedye Private Receivers of Companies in New Zealand (3rd ed, LexisNexis, Wellington, 2008) at 10.12.
[56] By these terms, Reforma sought to limit Mr Brown’s ability to rely on defences, counterclaims and set-offs that would otherwise be available to him as surety of KVCC.
[57] The effect of “no set-off” clauses on guarantors’ claims under s 19 of the Act was considered in Crown Finance Ltd v Cronin.23 Associate Judge Bell found that the duty under s 19 is mandatory and Parliament must have intended that the duty could not be excluded by contract. Accordingly, the “no set-off” provisions in the contracts were ineffective to bar the guarantor from raising breaches of s 19 of the Act.24
[58] Further, Associate Judge Bell noted that “no set-off” clauses do not bar a guarantor from raising affirmative defences that do not involve a countervailing money claim:25
…where the secured creditor has become involved in the sales process to such an extent as to become liable for breach, it should also be liable with the receiver for breach of duty under s 19. There seems to be no reason why a surety should not be able to raise the breach of duty in a claim by the security- holder as an affirmative defence of abatement.
[59] It is arguable that the indemnity clauses in the guarantee in this case are wider in scope than those considered in Crown Finance Ltd v Cronin. Nonetheless, Associate Judge Bell’s reasoning on the mandatory nature of the duty in s 19 and abatement remains applicable.
[60] Alternatively, to avoid the strict operation of the terms of the guarantee, Mr Brown relies on the “prevention principle”, sometimes referred to as the “taking advantage principle”, namely that a party to a contract cannot effectively take advantage of the party’s own wrong.26
23 Crown Finance Ltd v Cronin, above n 20, at [36]–[41].
24 At [39].
25 At [41].
26 Melco Property Holdings (NZ) 2012 Ltd v Hall [2022] NZSC 60, [2022] 1 NZLR 59 at [32]–[55].
[61] In Wallace v Herron, Kós P in the Court of Appeal described the rule as barring a claimant (in the broadest sense) from asserting and taking advantage of its own wrong.27
[62] The principle has been applied in different contractual contexts, including when considering a party’s failure to fulfil a condition,28 and a party’s ability to terminate a contract.29 The principle is manifest in the tests for attribution of a receiver’s breach of duty to the lender discussed in [46]–[48] above.
[63] In Wallace Corporation Ltd v Gross,30 Associate Judge Sussock applied the principle to a guarantee, holding that it was arguable that the lender’s actions had affected the borrower’s ability to perform its repayment obligations under the loan agreement. The guarantor was entitled to assert those circumstances as a defence, despite the guarantee including a clause that prevented the guarantor from raising a set-off. The defence would extinguish liability by establishing that no money was owing under the guarantee, rather than amounting to a set-off.31
[64] In this case, there is no suggestion that the actions of Reforma or the receiver caused KVCC’s failure to complete repayment on 31 October 2021, which was the default under the RC agreement. Accordingly, the “taking advantage” principle cannot prevent Reforma from relying on the default on 31 October 2021 to claim amounts owing under the RC agreement and guarantee.32
[65] Mr Brown’s challenge is to the subsequent conduct of the receiver and Reforma. However, the principle as stated by Kós P33 ought to extend to situations where a lender seeks to take advantage of their own wrong committed after the borrower’s act of default, so as to extinguish the borrower’s liability to the extent of the shortfall resulting from a breach of s 19 of the Act. That is consistent with the
27 Wallace v Herron [2017] NZCA 346 at [52].
28 Wallace v Herron, above n 27.
29 New Zealand Shipping Co Ltd v Société des Ateliers et Chantiers de France [1919] AC 1 (HL).
30 Wallace Corp Ltd v Gross [2023] NZHC 2731.
31 At [45], [46], [57] and [112].
32 See Wallace Corp Ltd v Gross, above n 30, at [57].
33 Wallace v Herron, above n 27, at [52].
reasoning of Associate Judge Bell in Crown Finance Ltd v Cronin discussed above at [57]–[59].34
[66] Accordingly, it is arguable that Mr Brown has not indemnified Reforma for breaches of s 19 of the Act. The application of the principles discussed above requires findings of fact. The first issue is whether the alleged breaches of duty raised by Mr Brown are arguable on the facts?
The receiver’s decision to sell the substantial part of the development as a going concern rather than selling separate titles as separate lots
[67] Mr Brown questions why the receiver offered the development for sale as a “total package”, rather than selling each title separately. Mr Brown points to the capital valuations for rating purposes of the constituent titles, which he says totalled
$8.15 million at the time of the sale.
[68] Mr Vlasic explained the reasons for his approach to the sale in his affidavit. He says that he received advice from the appointed real estate agent, Bayleys, that selling the titles separately would make “site compliance with the granted resource consent more difficult”, thereby making sale of the separate titles challenging. There is no further explanation or direct evidence on behalf of Bayleys.
[69] Mr Vlasic says that the development was initially marketed for sale on the basis that separate titles were available for purchase or the development could be purchased as a package. Mr Vlasic says that given the advice he had received from Bayleys, and the lack of offers for separate titles, he ultimately went with sale of the development as a package.
[70] Mr Brown’s evidence amounts to no more than an assertion that a better result might have been achieved, supported only by reference to capital valuations for rating purposes. There is no independent opinion evidence that the receiver could have achieved a better result by an alternative marketing strategy. Mr Brown did not offer
34 Crown Finance Ltd v Cronin, above n 20.
any independent expert valuation evidence, including valuations of the constituent titles in a forced sale situation.
[71] I find that Mr Brown has not discharged the evidential onus on him in respect of any challenge he might make to the receiver’s decision to sell the bulk of the development as a going concern.
The failure to complete the medical centre before sale
[72] Mr Brown’s evidence is that there were delays in the construction of the medical centre and it was not completed when KVCC was put into receivership. The delays outlined by Mr Brown all occurred before the receivership.
[73] No allegations are made against Reforma or the receiver regarding the receiver’s decision to sell the development as a going concern before the medical centre was completed.
[74] Mr Brown’s complaints relate to the internal management of KVCC and cannot provide grounds for a defence or set-off to Reforma’s claim.
The treatment of the infrastructure assets included in the development
[75] The development includes infrastructure assets, including underground power cables, a wastewater treatment plant, a potable water plant and stormwater and sewerage systems.
[76] Mr Viall says that it was always the intention of KVCC’s directors that the infrastructure assets would be transferred to a separate entity, KVC Utilities Ltd (KVC Utilities). Mr Brown is a director and a shareholder of KVC Utilities.
[77] It was a term of the resource consent for the development that the consent holder provide an undertaking that a deed would be registered pertaining to the supply of utilities at Kaukapakapa Village Centre.
[78] That deed is dated 22 February 2021, between KVCC, Kaukapakapa Village Centre Owners Society Incorporated (the Society) and KVC Utilities. The deed
provides for the infrastructure assets to be transferred to KVC Utilities for no consideration.
[79] Under cl 4.1 of the deed, KVC Utilities is to be a single purpose company for the provision of the utilities. Under cl 4.6 of the deed, KVC Utilities is required to enter into an agreement with the Society granting the Society an option to purchase the infrastructure assets for a price determined by an independent valuer.
[80] Mr Brown complains that Mr Viall and Mr Hobman, presumably in their capacity as directors of KVCC, have “given away” the infrastructure assets. However, it appears that it was always contemplated that KVCC was required to satisfy the condition in the resource consent by entry into the deed. In any event, these are actions by KVCC or its directors which do not give rise to a defence or a set-off to Reforma’s claims.
[81] Mr Viall’s evidence is that the infrastructure assets were not transferred from KVCC to KVC Utilities before the receivership or the sale of the development to Reforma for two reasons:
(a)construction of the infrastructure assets was incomplete; and
(b)Reforma holds a registered mortgage over the titles which contain the infrastructure assets, and the titles would not be transferred to KVC Utilities until KVCC repays its debt to Reforma.
[82] Mr Vlasic’s evidence is that he was aware of the deed and that the infrastructure assets would eventually be transferred to KVC Utilities. He understood that any titles to the infrastructure assets formed part of the development that was for sale, with the eventual purchaser obligated to complete the transfer of the titles to KVC Utilities. Mr Vlasic says that he obtained a valuation of the development including the infrastructure assets. He has not produced a copy of that valuation.
[83] The infrastructure assets were part of the development purchased by Reforma from the receiver. Mr Viall says that Reforma will transfer the infrastructure assets to
KVC Utilities once construction of the assets is completed and Reforma’s debt has been repaid. These circumstances do not give rise to an arguable defence to Reforma’s claim.
The receiver’s failure to engage with an alternative purchaser of the development who was prepared to pay more than Reforma
[84] Prior to the receiver’s sale of the development to Reforma, an unrelated party offered to purchase the business of KVCC as a going concern. Mr Brown has obtained and produced some documents relevant to that offer.
[85] On 14 July 2022, Crow Realty Limited, as agent, submitted an offer by Saint James Ltd (SJL). The principals of SJL were Ken Wimsett and Carl Majurey. The offer was $5,250,000 in respect of eight certificates of title and subject to due diligence.
[86]The covering letter from Mr Crow stated:
Having been involved with this project for more than seven years including having formed the company (KVCC), having negotiated and completed the sale that led to the current shareholding, having negotiated all the leases including drafting the ATL and Deeds, being a tenant, having sold the apartment and effectively sold the Black Bull liquor premises and having assisted with construction matters we have a comprehensive knowledge of the development and many of its intricacies. We have assisted Latitude, where possible and appropriate, to obtain a summary overview of the current stalled development project.
[87] The proposed agreement for sale and purchase that accompanied the letter comprised the terms of the offer, including a clause providing for purchaser’s due diligence.
[88] Clause 26.2 of the proposed agreement confirmed that the purchaser would acquire the land, buildings and business of KVCC as a going concern, including:
For the sake of clarity:
i. this includes, but is not limited to, the Vendor providing/assigning all current signed Agreements to Lease / Deeds of Lease, all Body Corporate documentation, Current Building and Resource Consents, Producer Statements, Sign Offs from all parties in particular in relation to the
incomplete Medical Centre, Warranties and Guarantees for all completed and partly completed works for the total development project…
[89] Clause 26.3 of the proposed agreement provided that the purchaser would acquire the land, buildings and business of KVC Utilities as a going concern.
[90] Plainly, SJL contemplated that it would acquire the infrastructure assets, whether owned by KVCC or KVC Utilities. It is reasonable to infer that Mr Crow and SJL must have been aware of the term of the resource consent relating to utilities and the deed.
[91] SJL subsequently varied the terms of its offer on at least two occasions. The first variation document is not in evidence. The second variation document was attached to an email from Ken Wimsett to Bayleys dated 21 September 2022. The email refers to an attached memorandum of understanding in respect of the “Utilities Company”, but that document does not appear to have been included in the evidence. The price offered by SJL was increased to $6,000,001.
[92] The email records that SJL declined to reduce its due diligence period from 30 working days to 20 working days, which appears to have been a suggestion from Bayleys.
[93] It appears that the receiver was not prepared to engage with the varied offer. Mr Brown produced an email dated 10 November 2022, from Mr Wimsett to the Bayleys’ salespeople including Graeme Perigo, which states:
Hi Graeme, Ben, Stuart, John Paul and Geoff,
Having received an email from Graeme Perigo yesterday advising that our offer was not being considered and that the receiver was dealing with another party, what a total waste of time, money and effort this has been. We initially made an offer on 8-9-22 before 4pm being the deadline for the receivership sales process.
We were subsequently asked to raise our offer which we did from $4,800,001 plus GST if any which we did to $5,200,001 plus GST if any & submitted this on 13-9-22 known as Variation No 1 with adjustment to some other clauses for clarity.
We were then advised to make a further offer with a 6 in it, it was clear that we were being played of against another offer which we believe was over
$6million with a long due diligence period which it would appear had done next to no due diligence. We increased the offer to $6,000,001 plus GST if any & submitted this on 21-9-22 known as Variation No 2 with adjustments to some other clauses for clarity.
We have been advised endlessly thru Bayley’s from the Receiver, that the Receiver was waiting for Reforma’s lawyers to sign our agreement “what an utter lie this was” to be frank.
It now appears that our offer has been used as leverage against another party that not even Bayleys are aware of, which one can only conclude must be from some of the directors of the company in receivership. Given the total mess they have caused (as evidence by the Company being put into Receivership by Reforma Limited
(there is a common director in both companies)
How a Receiver who has control of the Assets can think that they can rectify this failure is beyond us and it will be interesting to see going forward what actually happens.
Our agreement is therefore formally withdrawn from this charade that it has turned into.
…
[94] In response, Mr Vlasic did not produce any documents relevant to his negotiations with SJL. Mr Vlasic says that he did not accept SJL’s offer following advice that he received from his solicitor and Bayleys. Mr Vlasic says that the primary reasons he rejected SJL’s offer is that it did not include a deposit, had a very long due diligence period and was conditional on finance. Mr Vlasic also says that the person behind SJL appeared to have a “chequered past”.
[95] Given that Mr Vlasic elected to sell the development to Reforma, with the obvious potential for a conflict of interests between Reforma as lender and Reforma as purchaser of the development, it is surprising that Mr Vlasic has not provided more information regarding his negotiations with SJL.
[96] I am not satisfied that it is arguable that the treatment of the infrastructure assets reduced the amount offered by SJL. The detailed first offer and the detailed second variation of that offer confirm that SJL was aware of the structure that had been adopted for the development.
[97] However, I am satisfied that Mr Brown has discharged the evidential onus on him to establish that it is arguable that the receiver breached his duty to obtain the best price reasonably obtainable as at the time of sale, by failing to engage further with SJL. A trial is required to determine whether Reforma can be held liable for this breach as a result of intervening in the receivership.
[98] It is also arguable that the receiver failed to exercise his power of sale in good faith, by electing to sell the development to Reforma for a price that was significantly less than the price offered by an arm’s length third party, affording Mr Brown an affirmative defence of abatement for breach of the duty in s 19 of the Act. The application of the legal principles applicable when increased scrutiny of a sale by a receiver to the appointing lender is required is best done after the facts are determined at trial.
[99] If the defence is successful, this could effectively extinguish Reforma’s claim against Mr Brown under his guarantee to the extent of 50% of the undervalue. Accordingly, it is arguable that KVCC’s liability to Reforma is reduced by the difference between SJL’s highest offer and the price paid by Reforma, namely
$6,000,001 less $5,100,000, being $900,001. The flow on effect for the claim against Mr Brown is that it would be reduced by $450,000.50 plus related interest.
The receiver’s payment of $99,696 to the liquidators of KVCC
[100] KVCC was placed into liquidation on 15 September 2023. At the conclusion of the receivership, the receiver paid $99,696 of the recovered funds to the liquidators of KVCC.
[101] The receiver, Mr Vlasic, gave affidavit evidence confirming that the funds paid to the liquidators included recoveries of retentions, GST refunds, and money set aside for preferential creditors. Mr Vlasic confirmed that it is standard procedure for funds of this nature to be transferred to liquidators if the company is put into liquidation while the receivership is still extant.
[102] The funds were not ultimately available to reduce KVCC’s indebtedness to Reforma. There is no basis for Mr Brown to assert that the funds were wrongly applied.
Payment of the receiver’s own costs and Reforma’s legal costs
[103] Mr Brown takes issue with Reforma’s claim for legal costs of $132,243.18 and payment of the receiver’s costs of $251,589.23.
[104] Under cl 10.1 of the RC agreement, KVCC indemnified Reforma from all losses incurred arising from Reforma’s exercise of its rights under the RC agreement. Under cl 20(g) of the GSA, any costs expended by Reforma in the exercise of its rights under the security documents are payable by KVCC upon demand. Under cl 15.1 of the RC agreement and cl 29(a) of the GSA, KVCC is obliged to pay to Reforma all reasonable costs, including legal fees on a solicitor and own client basis, incurred by Reforma in connection with enforcement of the agreements.
[105] Under cl 25(g) of the GSA, the proceeds of sale of KVCC’s assets must be first applied to the payment of all costs, charges and expenses, including legal costs as between solicitor and client, of and incidental to the appointment of the receiver and the exercise by the receiver of the power of sale, including the receiver’s reasonable remuneration.
[106]The issues are:
(a)Whether the fees rendered by Reforma’s solicitors are for services provided to enforce the RC agreement, and are the fees reasonable?
(b)Whether the fees rendered by the receiver are reasonable?
[107] This is an application for summary judgment. The onus is on Reforma to satisfy the Court that these issues do not give rise to an arguable defence. Reforma elected not to produce copies of the invoices rendered by its solicitors, Anthony Harper. The receiver has not produced his invoices or provided any other evidence to support the amount claimed for remuneration.
[108] In those circumstances, I am satisfied that it remains arguable that Reforma’s legal costs and the receiver’s remuneration are not properly incurred or are unreasonable. Reforma has not produced sufficient evidence to discharge the onus on it to obtain summary judgment for these aspects of the claim.
[109] This defence would reduce the quantum recoverable from Mr Brown by 50% of $383,832.41, being $191,916.20 and related interest.
The exercise of the Court’s discretion
[110] As at the date of the hearing on 23 April 2024, the outstanding debt owed by KVCC to Reforma was $4,375,520.54, including $380,929.33 for ordinary interest and $2,137,730.54 for default interest. Reforma’s claim against Mr Brown is for
$2,187,760.27 including interest.
[111] I am satisfied that this is an appropriate case to enter judgment for part of Reforma’s claim, with deductions for:
(a)$125,794.61, being 50% of the receiver’s costs of $251,589.23, which have not been proved to the required standard;
(b)$66,121.59, being 50% of Reforma’s legal costs of $132,243.18, which have not been proved to the required standard;
(c)$450,000.50, being 50% of the potential shortfall on the sale of KVCC’s assets to Reforma, assessed to be $900,001; and
(d)An allowance for interest that has accrued on the potential shortfall on the sale of KVCC’s assets to Reforma.
[112] There is no evidence of the calculation of interest from which a precise allowance can be extrapolated. The loan statement appears to record default interest compounding monthly. Therefore, I direct the plaintiff to file a further affidavit by 4 June 2024 confirming:
(a)That interest has not been charged on the receiver’s costs and the legal costs claimed; and
(b)the total of the default interest that accrued on the sum of $450,000.50 from 26 April 2023 to 23 April 2024 (the date of the hearing).
[113] If the defendant takes issue with the calculation of interest in the affidavit to be filed, then the defendant shall file a memorandum by 11 June 2024.
[114]Therefore, the indisputable part of the claim is calculated as follows:
(a) total claim - $2,187,760.27;
(b)less the total of the amounts at [111](a) to (c) above - $641,916.70;
(c)less an allowance for interest – yet to be fixed.
[115] I will enter judgment for the plaintiff against the defendants once the further evidence as to the calculation of interest is settled.
[116] I do not consider that this is an appropriate case for the Court to exercise its residual discretion to deny Reforma a judgment for the undisputed part of the claim, to enable Mr Brown to bring third party proceedings against KVCC or its directors. Mr Brown adduced no evidence regarding his financial position and ability to meet a judgment to Reforma, and whether that might prejudice his ability to subsequently bring third-party claims.
Costs
[117] My preliminary view is that Reforma is entitled to costs on a contractual basis. If the parties are unable to agree on costs then the following directions apply:
(a)the plaintiff shall file and serve written submissions on costs, of no more than five pages, by 4 June 2024;
(b)the defendants shall file and serve written submissions on costs, of no more than five pages, by 11 June 2024.
Associate Judge Brittain
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