Reynolds v Calvert
[2014] NZHC 1603
•9 July 2014
IN THE HIGH COURT OF NEW ZEALAND DUNEDIN REGISTRY
CIV-2012-412-000910 [2014] NZHC 1603
BETWEEN GRANT BRUCE REYNOLDS as
liquidator of JAMES DEVELOPMENTS LIMITED (in liquidation)
Plaintiff
AND
HILARY JANE CALVERT and HGW TRUSTEES LIMITED as Trustees of Frongopolus Trust of Dunedin
First Defendants
AND
CHRIS JAMES Second Defendant
Hearing: 9 July 2014 (On the papers) Appearances:
M J McCartney QC for Plaintiff
Judgment:
9 July 2014
JUDGMENT OF DUNNINGHAM J
[1] The plaintiff, the liquidator of James Developments Limited (“the Company”), has applied, without notice, for a charging order before judgment pursuant to High Court Rule 17.41.
[2] The charging order is sought over land situated at Jacks Point, Queenstown, and which is owned by the first defendants, the trustees of the Frongopolus Trust (“the Trust”). The second defendant, Mr James, is a beneficiary of the Trust and the director of the Company.
[3] The charging order is sought in the context of proceedings where the plaintiff claims that the sum of $740,000 advanced to the Trust by the Company, was not
repaid and thereby made available to the creditors in the Company’s liquidation.
REYNOLDS v CALVERT AND ANOR [2014] NZHC 1603 [9 July 2014]
Instead, the debt was “re-documented” in the relevant accounts so, rather than showing it as an asset of the Company to be repaid by the Trust, it was described as advances from Mr James ($500,000) and from Heriot Holdings Limited ($240,000) respectively and repaid to them. The plaintiff seeks repayment of the $740,000 from the defendants so it can be distributed to the creditors in the liquidation.
When can a charging order be issued before judgment?
[4] High Court Rule 17.41 provides:
17.41 Leave to issue charging order
Leave to issue a charging order before judgment may be granted only on proof that the liable party, with intent to defeat either his or her creditors or the entitled party or both, -
(a) is removing, concealing, or disposing of the liable party's property;
or
(b) is absent from or about to leave New Zealand.
[5] The plaintiff’s submissions summarised the principles which are relevant to
the grant of leave to issue a charging order before judgment. They are as follows:
(a) there is possibly a threshold requirement of an arguable case or seriously arguable case;1
(b)it is sufficient that the liable party is acting in either of the two ways specified in r 17.41, with intent to defeat the entitled party applying or the liable party’s creditors;
(c) the liable party must not just have an intent to dispose the property, but an intent to defeat the claim;2
(d)a high standard of proof is required and conjecture evidence or opinion evidence will not suffice;3
1 Lennox-King v Johnson (1997) 10 PRNZ 664 cf MacKay and 314 Maunganui Road Limited, HC Auckland CIV-2007-404-7434, 30 April 2008.
2 MacKay v 314 Mauganui Road Limited at [25].
(e) the charging order must be necessary. For example, when a caveat already prevents the liable party disposing of real property, a charging order may not be necessary.4
Threshold requirement
[6] While in MacKay v 314 Maunganui Road Limited Keane J preferred the view that a claimant must simply satisfy the express test in r 17.41 and need not show a serious question to be tried, for completeness I record my view that the plaintiff’s claim for recovery of the sum of $740,000 is strongly arguable.
[7] That view is supported by the decision of Associate Judge Osborne dated 21
May 2014 where, among other findings, he held:
It is strongly arguable that the relevant individual intended [in removing the
$740,000 advance as a company asset] to advantage the Frongopolus Trust. It is strongly arguable that there was also an intention … to prejudice JDL’s creditors who, in the liquidation … would potentially lose access to repayment by the Frongopolus Trust.
Is the liable party removing, concealing or disposing of the liable party’s property?
[8] The plaintiff’s application is made on the basis that ground (a) in r 17.41 is satisfied. The plaintiff claims that “the defendants are continuing to dispose of their property to defeat the plaintiff”. The plaintiff’s submissions make reference to a number of actions by the defendants, with a view, I presume, to show a persistent pattern of “concealing or disposing” of property to defeat the plaintiff.
[9] The plaintiff relied on the following assertions:
(a) the defendants removed the $740,000 as an asset of the Company, and made corresponding amendments to the accounts of the Trust, thereby
disposing or concealing property to which the plaintiff was entitled;
3 Aurora Fisheries Ltd v Hozumi HC Nelson, CIV-2010-442-511, 22 December 2010 at [13].
4 Grieve v City Developments Palliser Ltd HC Wellington CIV-2003-485-176 14 November 2007 at [56].
(b)the defendants have appointed Mr Broad to assist them in the litigation. He made an approach to the Central Otago District Council to attempt to get the Council to agree to the defendants’ purchase of the Council’s interest in a contract for sale and purchase with Mana Property Trustee Limited (“Mana”), the Company’s primary creditor. The plaintiff says, had the approach been successful, then Mana could have been forced to perform the contract and then wound up, so preventing Mana pursuing its legitimate claim in this litigation. That would have disadvantaged the plaintiff as it would have thwarted his entitlement to costs;
(c) in early 2013 Mr Broad approached the ASB Bank Limited, which is the mortgagee of the Jacks Point property. The plaintiff lodged a caveat on the title to this property in June 2012. At that time, advances made by the ASB Bank Limited totalled around $3,000,000 and the mortgage registered against the property provided for a priority amount of $9,675,000 plus interest. Non-party discovery from ASB Bank showed that Mr Broad sought to increase the bank’s priority under mortgage 9011716.1 to $17,500,000. The plaintiff notes that there was “no indication that the first defendants were borrowing further monies from the ASB Bank” and “the increase in the priority appeared to be in furtherance of the dishonest purpose of preventing the liquidator from rightfully recovering the asset due to him”.
[10] The question is whether those events either individually, or in totality, constitute evidence to satisfy ground (a) in r 17.41 that the liable party is removing, concealing or disposing of the liable party’s property with intent to defeat its creditors.
[11] I do not consider the initial removal of the $740,000 as an asset of the Company is directly relevant. That is the action which prompted the litigation by the plaintiff and it occurred more than six years ago. While it could be called on as evidence to reinforce an assertion of a pattern of behaviour, r 17.41 requires evidence
of current actions on behalf of the liable party to remove, conceal or dispose of property which a pre-judgment charging order would forestall. The removal of the
$740,000 as an asset of the Company is not such an action, as it is not property of the defendants, and it could not be prevented by the issue of a charging order at this point in time.
[12] The action of Mr Broad in approaching the Central Otago District Council does not involve the removing, concealing or disposing of the liable party’s property. While, had negotiations been successfully concluded, it might have removed the key creditor, and rendered the plaintiff ’s work to date futile, that is quite different from establishing entitlement to a pre-judgment charging order on the basis that the liable party is disposing of its property.
[13] It seems the key ground relied on by the plaintiff to support this application relates to the attempt to increase the mortgage priority amount for the Jacks Point property.
[14] The defendants, through Mr Broad, confirm that an approach was made to the ASB Bank in respect of the bank’s mortgage over the assets of the Trust and says that as the plaintiff had lodged a caveat over the Jacks Point property, “this approach to the ASB was part and parcel of a common and appropriate practice to challenge a disputed caveat with such a dealing”. He goes on to say “further priority in a mortgage document does not give the mortgagee any right to take further money
from the mortgagor unless further money is borrowed”,5 but does not say what the
first defendants’ intentions were in this regard.
[15] Taking a broad view of what might constitute “disposing” of the liable party’s property, an extension of the priority sum under a mortgage could facilitate a disposal in the sense that it allows greater borrowing and so reduces the available equity in the property. However, there would need to be some evidence that further borrowing was planned in reliance on the increased priority sum which could in turn reduce the plaintiff’s chances of recovering from that asset. There is no evidence of
this.
5 Para 12, affidavit of Alistair Evans Broad dated 27 June 2014.
[16] Somewhat surprisingly, the plaintiff ’s affidavit in support of his application does not go on to set out the outcome of the attempt to increase the priority sum amount and remove the caveat. However, on the Court file is a brief of evidence for the plaintiff filed on 5 June 2014, where Mr Reynolds records that when the bank gave instructions to increase the priority sum to the solicitors for the trustees of the Trust, they responded by letter of 20 February 2013 saying “I advise that the dealing for the variation of mortgage has been submitted. However, there is a caveat on the title to the property in question and it has been necessary to lodge a s 145A request for the caveator (JDL – in liquidation) to be required to justify the caveat”. The plaintiff opposed the application for removal of the caveat and the matter was adjourned pending the outcome of the substantive proceedings.
[17] Thus it appears that the caveat the plaintiff has registered against the Jacks Point property successfully prevented there being an increase to the priority sum under the mortgage and, for the next year and a half, matters have proceeded on that basis and there is no evidence that other steps have been taken by the defendants to remove, conceal or dispose of that property.
Is a charging order necessary?
[18] Even if I were satisfied that the plaintiff had established that the defendants were disposing of their Jacks Point property with intent to defeat the plaintiff’s entitlement, I also think the application fails to establish that a charging order is necessary in the circumstances as they currently stand. There is a caveat recorded against the property. It both prevents the defendants from selling the property or, as was demonstrated in early 2013, from taking the steps to further encumber the property. The caveat has held the status quo for the past year and a half. Accordingly, I see no need to issue a pre-judgment charging order now when there is no current evidence of attempts to remove, conceal or dispose of the defendants’ property, and when the substantive proceedings are scheduled to be heard in less than two months.
[19] Accordingly the application is declined. Costs are reserved.
Solicitors:
Jan McCartney, QC, Barrister, Auckland
Matthew Sherwood King, Barrister, Wellington
0
0
0