Small (2005) Limited v Mahon

[2024] NZHC 3251

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2020-404-2333

[2024] NZHC 3251

BETWEEN

SMALL (2005) LIMITED

Plaintiff

AND

NEVILLE CHRISTOPHER MAHON

Defendant

Hearing:	29 July 2024 to 8 August 2024
Appearances:	D Chisholm KC and M Lenihan for Plaintiff A Barker KC and R B Hucker for Defendant
Judgment:	5 November 2024

JUDGMENT OF WILKINSON-SMITH J

This judgment was delivered by me on 05/11/2024 at 3 pm.

Pursuant to Rule 11.5 of the High Court Rules.

………………………… Registrar/Deputy Registrar

Solicitors:/Counsel: Brown Partners, Auckland D Chisholm, Auckland Molloy Hucker, Auckland A Barker, Auckland

SMALL (2005) LIMITED v MAHON [2024] NZHC 3251 [5 November 2024]

Introduction  [1]

Background  [9]

The first tender  [24]

CGL’s efforts to refinance  [43]

The second tender  [49]

Pleadings  [59]

Issues  [81]

Was the sale in breach of s 176(1) of the PLA?  [82]

The Empire tender  [106]

The CPL tender  [110]

The sale to GB Ltd  [121]

Sale to self  [127]

The equitable duty of good faith  [131]

Conclusion on counterclaim  [143]

The CCCFA  [145]

Miscellaneous matters  [155]

Appropriation of the $3 million loan  [157]

Interest  [161]

Result  [170]

Costs  [173]

Introduction

[1]                This litigation involves another instalment in what can only be described as an ongoing saga of litigation involving Timothy Edney and Neville Mahon.

[2]                In 2014, a company associated with Mr Edney, Small (2005) Ltd (Small), sold a property at 117 Coronation Road, Māngere Bridge (the property) to Coronation Gardens Ltd (CGL) for $11.6 million.  The  director  of  CGL  was  Saren Loo. Ms Loo’s husband is Mr Mahon.

[3]                   The purchase of the property was funded by vendor finance from Small. In addition to a loan of $11.6 million to fund the purchase of the property, a separate

$3 million liability was added. This related to previous dealings between Mr Mahon and Mr Edney. Mr Mahon signed a guarantee in respect of the $11.6 million loan facility but not in respect of the additional $3 million. The $11.6 million loan from Small was to be repaid in two tranches, with $3 million due to be repaid in March 2016 and the balance in September 2017.

[4]                CGL intended to develop the property into 120 terraced houses with the first stage of the development funded by a separate BNZ facility. CGL’s development of the property failed with the first mortgagee, BNZ, serving a Property Law Act 2007 (PLA) Notice in May 2017. BNZ subsequently assigned its rights under its securities to Small. Small exercised its right as mortgagee to sell the property to recover the debt. On 28 September 2018, CGL was liquidated on the application of the IRD for unpaid GST. The liquidator assigned CGL’s rights to another company associated with Mr Edney, The Golden Belt Mining Co Ltd (GB Ltd).

[5]The mortgagee sale process resulted in the property being sold to GB Ltd for

$11.75 million.

[6]  Small says that this resulted in a loss which it seeks to recover under the guarantee signed by Mr Mahon. Mr Mahon does not dispute the validity of the guarantee but says that the mortgagee sale process was flawed and in breach of duties

Small owed to CGL and to Mr Mahon as guarantor pursuant to s 176 of the PLA and in equity.

[7]  Mr Mahon counterclaims against Small seeking release from the guarantee and damages.

[8]  Mr Mahon also pleads an affirmative defence of breach of s 99B of the Credit Contracts and Consumer Finance Act 2003 (CCCFA). Mr Mahon says that Small was engaged in the business of providing financial services and was required to be registered. In the absence of registration, Mr Mahon says that Small cannot claim for the costs of borrowing.

Background

[9]                Mr Mahon and Mr Edney are long standing business associates and former friends who have known each other for over 30 years. The relationship has completely soured, and in recent years Mr Edney and Mr Mahon have been involved in litigation against each other. Mr Edney describes himself as a property investor.  Mr Mahon is a property developer.

[10]            Mr Edney first raised the potential purchase of the property with Mr Mahon in 2012. Mr Mahon was interested in the development, together with his wife, Ms Loo, and her brother. Initially the suggestion was for a long-term lease of the property with rent to be paid to Small but with an option to purchase for Mr Mahon’s interests.

[11]                In 2012, work was undertaken investigating the potential for a development on the property including obtaining consents. The cost of this initial work was approximately $1.18 million, which was funded by Mr Edney and his interests.

[12]              In December 2013, Auckland Council issued a resource consent for a five-stage 50 lot development (an initial subdivision into three lots, and a further subdivision of Lot 1 into 47 lots). The funding and purchase structure was unresolved. There was a signed Agreement to Lease between Small and a company associated with Mr Mahon but the deposit under it was not paid. After the resource consent was issued, Small cancelled the lease agreement and the parties moved towards a sale of the

property to interests associated with Mr Mahon, funded by vendor finance. The basic framework for the sale was:

(a)a sale of the property to interests associated with Mr Mahon and     Ms Loo for $11.6 million;

(b)vendor finance from Small for the purchase price;

(c)development funding from BNZ; and

(d)repayment of BNZ and Small from the sale of stage one and stage two units.

[13]There was a separate debt between Mr Mahon and Mr Edney in the amount of

$3 million that Mr Edney believed was outstanding. It seems that Mr Edney, as director of Small, was unwilling to provide vendor finance unless the $3 million debt was included in the new arrangement.

[14]            CGL was incorporated on 7 March 2014. Ms Loo was the sole director and shareholder of CGL. This was because at the time it was believed that banks would not lend to a company in which Mr Mahon was involved. The various agreements between Mr Mahon, Ms Loo, CGL and Small were entered into in June 2014. This included Mr Mahon signing a guarantee in the amount of $11.6 million.

[15]              The BNZ funding was finalised in September 2014 and settlement of the sale of the property to CGL occurred in September 2014.

[16]CGL granted Small a mortgage over the property as security for the advances.

[17]            The BNZ funding was secured by a mortgage over the property and a personal guarantee from Ms Loo. A Deed of Priority and Subordination was signed between BNZ and Small. This ensured the priority of the BNZ debt over that of the vendor loan by Small.

[18]            Settlement of the Agreement for Sale and Purchase occurred on 26 September 2014. Small was paid $2.7 million from the BNZ loan as well as repayment of the development funding of $1.18 million. With other associated costs, the initial drawdown on the BNZ facility was $4,764,499.

[19]There were significant delays in the construction process.

[20]            Under the $11.6 million loan facility to Small, the amount of $3 million was due to be repaid on 26 March 2016 (18 months after drawdown). No interest was payable on the loan in the first 18 months. Under the terms of the BNZ facility, CGL was prohibited from making any payments to Small until it had repaid BNZ.   By   26 March 2016, the loan with BNZ had not been repaid. The $3 million loan due to be repaid to Small on 26 March 2016 was unable to be repaid. CGL was in default to Small in the amount of $3 million from 26 March 2016.

[21]            On 17 May 2017, BNZ demanded repayment of CGL’s indebtedness. Payment was not made. On 22 May 2017, BNZ served a notice under s 119 of the PLA on CGL. CGL had until 30 June 2017 to remedy the default.

[22]            On 24 May 2017, Small gave BNZ notice under the Deed of Priority and Subordination exercising a “take out” right which gave Small the right to compel BNZ to assign its loan and securities to Small. On 9 June 2017, Small took assignment of the BNZ loan and its securities over the property. Small made demand for repayment of the $11.6 million and $3 million loans on 21 June 2017. No payment was made. On the same day, Small demanded the amount owed by Mr Mahon under the guarantee. This demand was also not met.

[23]From 21 June 2017, CGL was in default in respect of the unpaid balance of the

$11.6 million loan facility and in respect of the $3 million loan facility. Small prepared to exercise its right as mortgagee to sell the property.

The first tender

[24]            In June 2017, Small engaged real estate agent CBRE to market the property. CBRE recommended sale by tender and gave a likely realisation range of

$18.033 million to $20.708 million. At the time, the property was over five titles including two completed but unsold townhouses assessed as being likely to sell for

$780,000 to $820,000 each.

[25]The PLA Notice expired unremedied on 30 June 2017.

[26]            CRBE commenced marketing the property. On 13 July 2017, CGL applied for an interim injunction to restrain Small’s use of the words “mortgagee sale” in advertising by CBRE. That application was dismissed by Gordon J on 18 July 2017.1

[27]            The initial CBRE plan had been for a four-week marketing campaign commencing on 10 July 2017 and finishing on 10 August 2017 with a further week for submission of tenders. There was some limited marketing of the property between  10 July 2017 and 19 July 2017, but signage and advertising were affected by the interim injunction proceedings. The campaign was shortened to a three-week marketing campaign with tenders closing on 10 August 2017. The first advertising took place on 22 July 2017.

[28]The following offers were received:

(a)A $6 million offer from Waitea Investments Ltd. The offer was conditional on a due diligence period of 15 working days.

(b)A $14 million offer from Grand Equity Investment NZ Ltd (also referred to as Avanda). The offer was conditional on a due diligence period of 15 working days. A 10 per cent deposit was due five working days after the agreement was declared unconditional. This offer was later increased to $16 million with  proposed  settlement  in  December 2017 but final payment not due until September 2018. The offer was withdrawn on 25 August 2017.

(c)A $12 million offer from Mayfair Property Group Ltd. The offer was conditional on a 20-day due diligence period. A 10 per cent deposit was

1      Coronation Gardens Ltd v Small [2017] NZHC 1662.

payable two working days after the agreement was declared unconditional. The offer was subsequently increased to $12.5 million.

(d)A $9 million offer from Prime Property Group Ltd. The offer was unconditional. It was subsequently increased to $13 million and settlement extended to 12 months, and then decreased to $12 million with further conditions including a reduced interest rate for vendor finance and an extension of time for repayment.

(e)A $17.3 million offer from Coronation Project (ULNZ) Ltd (CPL). The offer was conditional on a 10-day due diligence period. It was later amended to an unconditional offer.

[29]There  were  three  further tenders received.    Housing New Zealand offered

$7,652,173.91 with a 40-day due diligence period. CBRE has been unable to find a copy  of  that  tender.  Epsom Holdings Ltd submitted an unconditional offer of

$12 million which the defendant says was increased, but Mr Edney says no increased offer was ever formally received.

[30]            A very late conditional offer of $21.7 million was submitted informally by email just after the tender closed on 10 August 2017. That was made by a Mr Chedid, who was a solicitor from Sydney, purportedly on behalf of a company  called  Empire Property Holdings Ltd (Empire). The Empire bid was subject to three conditions:

(a)Empire was to be satisfied that the property could be used to construct and operate a “place of worship”.

(b)Empire was to arrange finance.

(c)Empire had 20 working days to satisfy the conditions.

[31]            Mr Chedid subsequently submitted a tender dated 14 August 2017 on behalf of Empire. Mr Chedid executed the tender incorrectly by completing the vendor acceptance portion rather than the purchaser portion. It subsequently transpired that

Mr Chedid was not a director or shareholder of Empire at the time he signed the tender and no authority was provided to permit Mr Chedid to sign the tender on behalf of Empire.

[32]            Mr Edney was immediately suspicious of the Empire bid for a number of reasons:

(a)Mr Chedid only downloaded documents relating to the property from the CBRE data room about 48 hours before the tender closed, and he only entered the data room once.

(b)The property was a complex site. Empire had undertaken no apparent due diligence and Mr Chedid had not visited New Zealand or inspected the property.

(c)The Empire tender was $4.4 million higher than the next highest tender.

(d)A resource consent would have been required to build a place of worship. Upon being advised that the condition faced difficulties, it was immediately withdrawn.

[33]            The Empire offer was conditional on finance and a valuation would have been required. Mr Edney and his advisors considered that a valuation at the level necessary would be difficult to obtain in under four weeks given the other tender amounts.

[34]            There was another matter that caused suspicion. Mr Edney was aware that  Mr Mahon had borrowed money from and made investments with an entity called Gleneagle Securities (Gleneagle). Mr Mahon had been attempting to arrange refinancing  for   CGL  through   Gleneagle.   The   office   of   Gleneagle   was   at 25 Bligh Street in Sydney. One of Mr Chedid’s firm’s offices at the relevant time was also in Bligh Street. Mr Edney suspected a connection.

[35]            CBRE sent an email to Empire questioning the bona fides of the tender and asking if there was a connection between Empire and Mr Mahon. Mr Chedid replied

that he was offended at the questions but said that there was no such connection.    Mr Edney was not reassured.

[36]            Apart from the Empire bid, the highest bid was $17.3 million from CPL. That bid came about after Mr Edney raised the sale of the property with a property developer called Mr Chevin who was known to him. Mr Chevin was a bankrupt at the time and not a person to whom banks would lend money. He had been bankrupted four times and was subject to criminal prosecution in respect of previous financial dealings. Mr Chevin was however involved as a property developer in another development funded by Mr Edney’s interests and that development was apparently progressing satisfactorily from  Mr  Edney’s  perspective.  Mr  Edney  encouraged Mr Chevin to form a company to put in a bid for the property. CPL was formed by Mr Chevin’s brother-in-law Jason Harvey.

[37]After the tender process closed, CPL amended its terms so that its offer of

$17.3 million was unconditional. That offer was accepted on 13 September 2017. On the face of the agreement, a deposit of $1 million was payable. The rest of the purchase price was to be funded through vendor finance.

[38]            CBRE was in contact with Mr Mahon and Ms Loo during the tender process. CGL was given the chance to match the offer by CPL by email 28 September 2017. It did not make an offer.

[39]            Mr Harvey gave evidence that he believed that the $1 million deposit payable by CPL was also to be vendor financed. Mr Edney disputed that and said that the

$1 million deposit was required to be paid. He said that it is his practice to ensure that developers have some “skin in the game”. Mr Harvey’s evidence was that his understanding of the financing came via Mr Chevin. Mr Chevin did not give evidence.

[40]            In accepting the CPL offer, Small effectively replaced CGL with CPL. It had provided vendor finance for CGL and was prepared to do the same for CPL. CPL would need to raise separate development finance.

[41]            CPL did not pay the deposit at the time it was due. Small did not cancel the agreement immediately. Mr Edney said that he wanted to give CPL time to perform.

[42]            Under a variation of the agreement dated 25 October 2017, Small permitted CPL to sell the two completed townhouses in October and November 2017. The net proceeds were applied by Small against the BNZ loan that it had taken assignment of. Under the variation agreement the deposit of $1 million had to be paid by 27 October 2017. CPL continued to be unable to pay the deposit. Small’s solicitors gave notice on 21 December 2017  that  the  deposit  was  to  be  paid  immediately.  A Settlement Notice was served on CPL on 2 February 2018. A notice was then sent on 2 March 2018 stating that settlement was required by 5pm on 7 March 2018. CPL failed to settle or pay the deposit. Small gave notice cancelling the CPL agreement on 8 March 2018.

CGL’s efforts to refinance

[43]            On 30 June 2017, CGL’s solicitors wrote to Small’s solicitors advising that an agreement for full refinancing had been obtained and was due to settle on 10 August 2017. A request was made for a short delay in the mortgagee sale process to allow the refinancing to be finalised.  This was followed up by a letter from Gleneagle dated   4 July 2017 confirming a loan agreement with CGL sufficient to repay all existing securities with settlement on 10 August 2017.

[44]                Although this was described on behalf of CGL as an “unconditional loan agreement”, that description overstated the position. CGL was attempting to obtain finance but was not in a position to settle any finance agreement on 10 August 2017. The amount of finance required was $16.4 million. That would have required a valuation in the region of $22 million. Such a valuation was unlikely to be achieved given the tender process and offers that had been received.

[45]            Small refused to deal  with  CGL  or  pause  the  mortgagee  sale  process.  Mr Edney regarded the claim that CGL could refinance as a delaying tactic. He was correct to be suspicious of the claim that CGL had an unconditional finance arrangement in place. Mr Mahon and Ms Loo’s evidence made it clear that the claim of an unconditional agreement with Gleneagle to refinance was not true:

Q.You talked about the briefing a valuer and that depending on the level of valuation you might expect, but as I understand it in order to refinance you at $16 million, you would’ve needed a valuation of around $22 million as at the 10th of August, yes?

A.       Yes, that’s correct.

Q. And by the 10th of August, that had been already marketed as a mortgagee sale since the 19th of July, hadn’t it?

A.       That’s right.

Q.So, how did you expect to get a valuation of $22 million given that it was being marketed in that way?

A. Well, there was various times throughout the process where a valuer could’ve been instructed but if a valuer had have been instructed at that point and it didn’t quite come up to $22 million, if it had have come up to 18 or $19 million, Gleneagle would’ve, because of our relationship, they would’ve lent some higher interest money, maybe two or $3 million of higher interest money or they would’ve taken some equity.

Q.But the letter about refinance says that it was able to settle on the 10th of August?

A.       Yeah.

Q.       I'm struggling to see how that could’ve happened?

A. That was something that Anderson Creigh Lai and Gleneagle were working together on and I'm sorry I can’t give you any update on that.

Q. Alright. Because I mean without a valuation, that refinancing wasn’t going to be possible, was it?

A.       No, it wouldn’t be without a valuation.

[46]            Ms Loo agreed that the claim of an unconditional offer from Gleneagle was overstated:

Q.… you were referred to some letters from CGL lawyers, Mr Shanahan in particular, about the re-financing offer?

A.       Correct, yeah.

Q.And the letter on the thirth [sic] of June says that: “Our client has now agreed re-financing, terms are confidential, not subject to any express conditions. Re-financing is to be settled on the 10th of August 2017.”

A.       Mmm.

Q.       That does slightly overstate the actual position, doesn't it?

A.In a sense I think if we – it does overstate it if we’re not thwarted by  the mortgagee sales, but that was definitely the full intention of Gleneagle at that time.

Q.But Gleneagle at that time didn’t have the valuation that you needed  at the level you needed?

A.No, but they did have the past valuation and they also understood what progress we’d made on the site and I think they also had the Clavell, they would’ve been able to see the information that was put together for the Clavell proposal so [t]hey were relatively comfortable with the value.

Q. Well, the valuation  you’ve talked about  was three years  prior and I mean you know that a three-year-old valuation is not worth anything, is it?

A.It's not worth anything but then the amounts that we achieved for the units and also what was happening with the stage, what they could see was planned for the next stage I think would’ve given them comfort.

[47]            The valuation evidence at trial was agreed between the parties’ respective experts. The agreed market value of the property as at 2017 was $14 million.

[48]            The relationship between Mr Edney and Mr Mahon had largely broken down by 2017. One of the catalysts for the breakdown of the relationship was their involvement in the Station Hotel development which resulted in a judgment of Muir J in Waimauri Ltd v Mahon.2 Waimauri Ltd is a company associated with Mr Edney which is in the business of providing finance and is registered as a provider of financial services. Mr Edney was, however, already unhappy with Mr Mahon over a Fiji development which resulted in Mr Edney believing that the additional $3 million debt was owing. It seems that Mr Edney thought that Mr Mahon had caused a greater loss than $3 million and the involvement in the Coronation Gardens development was an opportunity for Mr Mahon to redeem himself by repaying at least some of the money lost in the Fiji development.

2      Waimauri Ltd v Mahon [2020] NZHC 1170.

The second tender

[49]            Following the cancellation of the agreement with CPL, Small embarked on a second tender campaign. There is no dispute that the property market was declining rapidly at this time.

[50]            Small re-engaged CBRE in respect of the sale of the property in 2018. The plan was for an advertising period of three and a half weeks, although the property was to be marketed immediately giving a total period of five weeks.

[51]            At the end of that process no tenders were received. There were four expressions of interest with due diligence periods of six weeks to five months and a price range of $8 million to $12 million. One of these expressions of interest resulted in an emailed offer of $8 million subject to a 30-day due diligence period. Another eventually yielded a tender of $9 million subject to several conditions and with a proposal for vendor finance of $2 million.

[52]            Small obtained a valuation of the property from Seagars. That valuation was provided on 11 June 2018. A valuation on two different bases was given. First, a valuation on a market value basis of $16.85 million with a forced sale value of

$14.32 million. Secondly, a sale in one line valuation of $13.67 million with a forced sale valuation of $11.62 million. Sale in one line was seen as preferable because one of the lots was less desirable and there were doubts about the viability of developing it. The risk was that it would not sell at all.

[53]            Around the middle of July 2018, Mr Edney, unsatisfied with the level of the tenders, resolved to sell the property to another company of which he was a director, GB Ltd. On 1 August 2018, Mr Edney, on behalf of Small, signed an Agreement for Sale and Purchase to sell the property to GB Ltd for a price of $11.75 million. The sale settled on 3 August 2018. The sale funds were applied by Small against the BNZ loan and the $3 million loan to Small. The remainder of the funds were applied against the $11.6 million loan, first to interest and then to principal.

[54]            On 7 September 2018, CGL applied for an injunction restraining GB Ltd from dealing with the property until further order of the Court. At the same time, CGL filed

and served a statement of claim against Small and GB Ltd alleging breach of the equitable duty of good faith and breach of s 176 of the PLA. An order was sought setting aside the sale to GB Ltd.

[55]            The injunction application was heard by Jagose J on 24 September 2018. On 26 September 2018, a judgment was issued dismissing the application. Sometime before the injunction hearing, the IRD issued a statutory demand against CGL for unpaid GST in the amount of $738,361.68.3

[56]            On 27 September 2018, the day after the judgment was issued by Jagose J, Mr Mahon replaced Ms Loo as the sole director and sole shareholder of CGL. The application by the IRD to liquidate CGL was heard on 28 September 2018 and CGL was placed into liquidation on that date.

[57]            The claim by CGL against Small and GB Ltd remained on foot. On 15 July 2019, the liquidator of CGL assigned the claim and any related claims to GB Ltd in consideration of the sum of $50,000. CGL’s claim was discontinued on 23 July 2019. CGL was struck off the Companies’ Register on 6 October 2021.

[58]            On 8 December 2020, GB Ltd sold the property to Oaks Living Coronation Ltd for $22.7 million.

Pleadings

[59]            On 30 November 2020, Small filed a statement of claim against Mr Mahon. The statement of claim sets out that the sale proceeds of $11.75 million paid by GB Ltd were applied by Small as follows:

(a)The amount of $489,784.21 was applied to discharge the assigned BNZ loan.

(b)The amount of $4,061,506.85 was applied to discharge the $3 million loan.

3      This is described as unpaid GST and PAYE but Ms Loo gave evidence that there was no PAYE owing as there were no employees and the entire amount related to GST.

(c)The amount of $7,198,708.94 was applied to the $11.6 million loan by repaying all outstanding interest and applying the rest to principal.

[60]As at 30 October 2020, the balance of the $11.6 million loan was

$6,518,491.20.

[61]That amount was claimed as “moneys owed” under that term as defined in the

$11.6 million loan agreement.

[62]            It was pleaded that default interest continued to accrue at the rate of 15 per cent per annum on the monies owed under the $11.6 million loan.

[63]Small claimed:

(a)judgment in the amount of $6,518,491.20;

(b)interest under s 22 of the Interest on Money Claims Act 2016 at the rate of 15 per cent from 31 October 2020 until the date of judgment;

(c)interest under s 22 of the Interest on Money Claims Act 2016 at the rate of 15 per cent from the date of judgment until the debt is paid; and

(d)costs on a full indemnity basis under cl 3.1 of the guarantee.

[64]            Mr Mahon filed a statement of defence on 9 February 2021. A second amended statement of defence and counterclaim was filed on 22 July 2024. Mr Mahon did not dispute the validity of the guarantee but counterclaimed against Small under s 176 of the PLA and/or the duty of good faith. Mr Mahon also raised an affirmative defence of breach of s 99B of the CCCFA.

[65]            Mr Mahon initially denied that funds were advanced under the $3 million loan agreement, however this contention was abandoned at trial, and it was accepted that the $3 million loan was owed under the agreement.

[66]              Mr Mahon pleads that Small owed a duty of care to him to take reasonable care to obtain the best price reasonably obtainable at the time of sale and to otherwise exercise the power of sale contained in the mortgage instrument in good faith.

[67]Mr Mahon pleads that in breach of those duties Small:

(a)failed to allow an adequate period of time for the marketing of the property and, in reducing the period of time available for marketing the property, limited the interest in the property and, on Small’s own agent’s report, lost numbers of interested parties who may otherwise have engaged with the sales process;

(b)failed to accept or otherwise treat with the top offer made following the first tender process by Empire and failed to take any steps to allow Empire to obtain the necessary financial approvals where the offer was at a level that would have seen the full indebtedness under the mortgage repaid and a surplus generated for CGL;

(c)in accepting the offer with CPL, failed to assess the liability of CPL to settle and/or in offering vendor finance of $16.3 million should have facilitated the earlier settlement of the Agreement for Sale and Purchase or otherwise treated with other parties that had tendered;

(d)ought to have accepted and facilitated the repayment of the mortgage by CGL at a time when there was refinancing that had been arranged by CGL and of which Small was aware;

(e)ought not to have entered into a variation of the Agreement for Sale and Purchase with CPL to deal with the two townhouses given that the transaction was to be fully funded by Small or entities associated with Small and/or Mr Edney by way of vendor mortgage;

(f)failed to take any action with regards to the non-payment of the deposit by CPL within a reasonable period of time after non-payment of the

deposit and/or otherwise in delaying the completion of  the  Agreement for Sale and Purchase allowed the value of the property to be impacted by a declining property market;

(g)having agreed and procured vendor funding from itself or companies related to Mr Edney, could not have and ought not to have cancelled the Agreement for Sale and Purchase where it had already been agreed that Mr Edney, through his entities would fund the entire partly performed Agreement for Sale and Purchase by CPL;

(h)in the alternative, in failing to make any assessment as to the availability of any alternative interest in the property prior to cancelling the Agreement for Sale and Purchase or otherwise to ascertain the value of the property and the likely realisation from the sale of the property in the event of engaging in the second tender;

(i)sold and/or transferred the property to itself as mortgagee and/or to an entity or related party of the mortgagee;

(j)transferred the property at the consideration it did to itself at a price less than the value of the property and at a level lower than that outlined in the report obtained by the mortgagee;

(k)in selling the property to itself at distressed sale value rather than at market value in circumstances where the transaction was within the effective control of Small in providing vendor finance to the purchaser under the agreement for sale and purchase with CPL;

(l)in transferring the property based on a “sale in one line” basis transferred the property at a value less than its market value;

(m)failed to ensure that there was adequate data available for potential purchasers in both the first and second tender processes; and

(n)otherwise embarked on a “land banking” transaction utilising agents associated with CPL to embark upon a property development venture of the property which had originally been owned by Small with a predetermination to minimise as far as possible the amounts required to be accounted to CGL and its guarantors.

[68]            Mr Mahon claims that he had an interest in the outcome of the successful development of the property and an expectation that he would share in profits from the completion of the successful development or, on the sale of the property, any surplus available. He pleads that he suffered loss because he would have been entitled to and would have shared in the surplus that would have been generated from the sale of the property had Small not breached its obligations.

[69]In addition to those breaches, Mr Mahon pleads that Small:

(a)failed to collect the GST on the sale of the two townhouses and to apply such sale proceeds against the loan amounts claimed as outstanding in the circumstances where a transaction between Small and CPL was zero-rated for GST purposes; and

(b)authorised the payment of a second commission to CBRE where such commission was not properly chargeable to the account of CGL or  Mr Mahon.

[70]            By way of the further affirmative defence, Mr Mahon pleads that the $3 million loan and the $11.6 million loan were credit contracts within the meaning of s 7(1) of the CCCFA and the funds advanced, which are the subject of this proceeding, were funds advanced under the terms of the CCCFA.

[71]In respect of the affirmative defence, Mr Mahon pleads:

(a)Small was required to be registered as it was “in the business of providing a financial service” as that term is defined in the

Financial Service Providers (Registration and Dispute Resolution) Act 2008 (FSP Act).

(b)Small has not and never has been registered under pt 2 of the FSP Act.

(c)Small is therefore precluded under s 99B of the CCCFA, as it stood prior to 13 January 2020, from having exercised any right to enforce any obligation under the loan agreements and mortgages, nor is Small entitled to charge interest under the terms of the loan agreements and mortgages unless and until registered as a financial services provider.

(d)Accordingly, CGL was not indebted to Small for interest, other costs of enforcement or any other costs that were levied under the terms of the loan agreements and mortgages.

(e)Mr Mahon, as a result, is not indebted to Small.

[72]Mr Mahon claims:

(a)a declaration that he is not indebted to Small under the terms of the guarantee and loan agreements which are otherwise unenforceable;

(b)judgment in the amount of $9,139,242 being the surplus that would have been obtained had the duties not been breached;

(c)an inquiry into the further losses that have been suffered as a result of the breaches of s 176 of the PLA by Small;

(d)in the alternative, an accounting and an inquiry into the profit made by Small in the subsequent sale of the property; and

(e)the costs of and incidental to the proceeding.

[73]            In response to the second amended statement of defence and second amended counterclaim, Small pleads:

(a)the $3 million loan was agreed by CGL, Mr Mahon and Ms Loo to be part of the consideration for the purchase by CGL of the property in addition to the $11.6 million loan. The $3 million loan was negotiated and agreed between the parties.  CGL and Mr  Mahon  are bound by  cl 2.1 of the $3 million loan agreement and Mr Mahon is estopped from alleging that no funds were advanced under the $3 million loan.

(b)On 15 July 2019, Small, GB Ltd and CGL entered into a settlement agreement. Under the settlement agreement:

(i)“Related Claims” was defined as claims “... in connection with any aspect of the development of the Property and/or in connection with lending by Small to Coronation in respect of the development of the Property”.

(ii)CGL assigned to GB Ltd all of its rights, remedies, title, powers and obligations in respect of the Related Claims on the payment of the purchase price of $50,000.

(iii)The purchase price was paid by Small to CGL on 22 July 2019.

(iv)From that date CGL ceased to have any rights in respect of the Related Claims which includes the $3 million loan.

[74]            In response to the claim that Small sold the property to itself, Small says that the property was sold to GB Ltd which is a different legal entity and as a result it was not required to conduct the sale through the Registrar of the High Court under ss 176 and 196 of the PLA and it was not required to seek an order of the Court under s 200 of the PLA.

[75]            Small pleads that an account of  profits  cannot  be  awarded  in  favour  of Mr Mahon under s 176 of the PLA nor can this be ordered in equity or in tort, or on any other legal basis.

[76]On the issue of GST on the townhouses, Small pleads:

(a)The sale of the townhouses from Small to CPL was zero-rated for GST purposes.

(b)Small was not obliged to collect and pay any GST payable on an on-sale by CPL.

(c)CPL sold the townhouses to Glenvale Holdings Ltd, which then sold the townhouses to the third-party purchasers.

(d)GST was payable on the sale of the townhouses by Glenvale Holdings Ltd to the third-party purchasers.

(e)Small was ultimately required by the IRD to pay GST on the sale of both townhouses because Glenvale Holdings Ltd failed to pay GST to the IRD in respect of those sales.

(f)Small paid the GST to the IRD.

(g)Payment of GST by Small did not result in a reduction of the liability of CGL or Mr Mahon to Small because:

(i)GST on the sales was never money that CGL or Mr Mahon ever had any right to.

(ii)The sale proceeds net of GST were applied against the balance of the BNZ loan.

[77]            Small pleads that the claim that it paid a double commission to CBRE is factually incorrect.

[78]In respect of the affirmative defence raised, Small pleads:

(a)It has never been in the business of providing a financial service as that term is defined in the FSP Act.

(b)It was the registered proprietor of the property at the time that the

$11.6 million and $3 million loans were made by it to CGL.

(c)The $11.6 million and $3 million loans were made to CGL as vendor finance for the sale of the property to CGL.

(d)The provision of vendor finance by Small to CGL is not a financial service under the CCCFA.

(e)On a proper interpretation of s 99B of the CCCFA as it stood prior to 13 January 2020, it was only intended to apply to consumer credit contracts.

[79]            During the trial, Small acknowledged that the interest component of the claim has been incorrectly calculated. Between 26 March 2016 and 21 June 2017, the overdue amount was $3 million due in respect of the $11.6 million loan facility (and not the entire balance of $8.9 million on the $11.6 million facility; and not the

$3 million on the separate loan facility). Default interest can only be claimed for that period in respect of the $3 million in default. The quantum of the claim was amended to acknowledge that ordinary interest and not default interest was claimable in respect of the $5.9 million balance (not yet in default) of the $11.6 million facility and in respect of the $3 million loan facility for the period from 26 March 2016 and 21 June 2017. In recalculating the interest, Small reviewed the initial calculation which was done on a non-compounding basis. The loan agreement provided for interest to be capitalised monthly.

[80]            Further calculations of quantum were provided on the basis of both compounding and non-compounding interest. The compounding interest calculation exceeds the pleaded damages in the statement of claim. Small accepts that it is unreasonable  for  it  to  recover  more  than  the  amount  of  $6,518,491.20  as  at  27 November 2020 as claimed in the statement of claim dated 30 November 2020 and does not seek to amend the quantum of the claim.

Issues

[81]The issues are:

(1)Did Small discharge the duty under s 176 of the PLA and in particular:

(i)Did Small take reasonable care to obtain the best price reasonably obtainable at the time of sale? (s 176(1))

(ii)Was the sale to GB Ltd a sale to self? (s 176 (2))

(2)Did Small discharge the equitable duty to act in good faith for the primary purpose of recovering its debt?

(3)Is Small prevented from enforcing its claim for interest under s 99B of the CCCFA?

(4)Did Small fail to collect GST on the sale of the townhouses; and

(i)If so, does that affect Mr Mahon’s position?

(5)Did Small pay a double commission to CBRE; and

(a) If so, does that affect Mr Mahon’s position?

Was the sale in breach of s 176(1) of the PLA?

[82]Section 176(1) of the PLA provides:

176 Duty of mortgagee exercising power of sale

(1)A mortgagee who exercises a power to sell mortgaged property, including exercise of the power through the Registrar under section 187, or through a court under section 200, owes a duty of reasonable care to the following persons to obtain the best price reasonably obtainable as at the time of sale:

(a)the current mortgagor:

…

(c)       any covenantor:

[83]            The obligation to take reasonable care to obtain the best price reasonably obtainable was discussed in Westpac New Zealand Ltd v Lamb where Wylie J expanded on the discussion in Public Trust v Ottow:4

I hesitate to supplement [Asher J’s] careful analysis, but would suggest as follows:

(a)The statutory obligation is not to obtain the best price reasonably obtainable, but to take reasonable care to obtain the best price reasonably obtainable;

(b)A property is only worth what somebody is prepared to pay for it at the time of sale;

(c)Valuations lose much of their significance if reasonable care is taken, there has been a properly advertised and conducted auction, and the property has been sold at auction or by negotiation after the auction;

(d)If reasonable care is taken, it does not necessarily follow that the best price reasonably obtainable will, in fact, be achieved;

(e)What constitutes reasonable care will always turn on the facts of the case. The steps taken by the mortgagee in fulfilling the statutory duty have to be looked at in the round;

(f)In considering the reasonableness of the care taken, the courts should be slow to second-guess the actions of a mortgagee acting on apparently sound professional advice.

[84]            It was submitted on behalf of Mr Mahon that the statutory duty in s 176 is a duty founded in negligence.5 Small says this represents a departure from the principles generally  applied  in  New  Zealand  since  the  Privy  Council  authority  Downsview Nominees Ltd v First City Corp Ltd and that the duty is founded in equity.6 The distinction is not entirely academic because Mr Mahon complains that Small (and by extension Mr Edney) should have done more to protect his interests and save him from liability under the guarantee. That obligation arises much more readily if the standard of care imposed by s 176 is tortious rather than equitable in nature. An obligation based on a duty of care founded in negligence would conflict with the settled position in equity that a mortgagee may prioritise its commercial interests

4      Westpac  New Zealand Ltd v Lamb  [2012] NZHC 319 at [34], referring to Public Trust  v Ottow

(2009) 10 NZCPR 879 (HC) (footnotes omitted).

5      Relying on McGrath J in Apple Fields Ltd v Damesh Holdings Ltd [2001] 2 NZLR 586 (CA).

6      Downsview Nominees Ltd v First City Corp Ltd [1993] 1 NZLR 513 (PC).

providing it acts in good faith and for the predominate purpose of securing repayment of the debt.

[85]            There are conflicting Court of Appeal authorities.7 Apple Fields Ltd v Damesh Holdings Ltd was decided eight years after Downsview Nominees Ltd but McGrath J distinguished it and said the duty is founded in negligence.

[86]                In Duell v Bridge Wholesale Acceptance Corp (Australia) Ltd Hardie Boys J said:8

In view of the decision of the Privy Council in Downsview Nominees Ltd v First City Corporation Ltd [1993] 1 NZLR 513 at 524, it is more appropriate to describe it as an equitable and not a tortious duty. It is a duty to exercise the power of sale in good faith and to take reasonable care to obtain a proper price: an expression that may be taken as synonymous with “true market value” …

[87]Duell predated Apple Fields but was apparently not cited to the Court deciding

Apple Fields and was an unreported decision.

[88]In Downsview Nominees Ltd Lord Templeman said:9

The general duty of care said to be owed by a mortgagee to subsequent encumbrancers and the mortgagor in negligence is inconsistent with the right of the mortgagee and the duties which the Courts applying equitable principles have imposed on the mortgagee. If a mortgagee enters into possession he is liable to account for rent on the basis of wilful default; he must keep mortgage premises in repair; he is liable for waste. Those duties were imposed to ensure that a mortgagee is diligent in discharging his mortgage and returning the property to the mortgagor. If a mortgagee exercises his power of sale in good faith for the purpose of protecting his security, he is not liable to the mortgagor even though he might have obtained a higher price and even though the terms might be regarded as disadvantageous to the mortgagor. Cuckmere Brick Co

7       See Duell v Bridge Wholesale Acceptance Corp (Australia) Ltd CA207/92, 28 June 1993; and

Apple Fields Ltd v Damesh Holdings Ltd, above n 5.

8      At 9.

9      At 524.

Ltd v Mutual Finance Ltd [1971] Ch 949 is Court of Appeal authority for the proposition that, if the mortgagee decides to sell, he must take reasonable care to obtain a proper price but is no authority for any wider proposition. … The duties imposed by equity on a mortgagee … would be quite unnecessary if there existed a general duty in negligence to take reasonable care in the exercise of powers and to take reasonable care in dealing with the assets of the mortgagor company.

[89]            The duty in s 176 is a statutory duty subject to the usual rules of statutory interpretation. Applying Downsview Nominees Ltd I have proceeded on the basis that it should not be interpreted in a way that conflicts with the coexisting equitable duty of good faith. Academic writing on the issue seems to support that position. In  Hinde McMorland & Sim Land Law in New Zealand it is said that a tortious standard of care is inappropriate because the power of sale is given to a mortgagee for his or her own benefit.10

[90]            It follows that I do not consider that Small had a duty to protect Mr Mahon’s position at the expense of its own commercial interests providing Small took reasonable care to obtain the best price reasonably obtainable for the property at the time of sale. Whether Small took reasonable care is to be assessed against the equitable standard of care rather than the tortious standard of care.

[91]            Mr Mahon says that the mortgagee sale process depressed the value of the property and breached the obligation in s 176(1). The courts have, however, consistently recognised that when a property is sold in “forced sale” circumstances, such as a mortgagee sale, it is likely to sell at a substantial discount from the market value that the property would achieve in a sale undertaken by an owner not under pressure to sell.11 A mortgagee sale is not a willing buyer/willing seller situation. Lower prices are simply an unremarkable consequence of mortgagee sales.12

10     DW McMorland and others Hinde McMorland and Sim Land Law in New Zealand (online ed, LexisNexis) at [15.134].

11     Long v ANZ National Bank Ltd [2012] NZCA 132 at [21(b)].

12     Mikitasova v ASB Bank Ltd [2016] NZHC 897, (2016) 17 NZCPR 419 at [107].

[92]                Mr Mahon criticises the length of the marketing campaign in the 2017 tender process and says that the shortened marketing period demonstrates a lack of reasonable care on the part of Small and was a breach of the duties owed by Small. Mr Mahon submits that the marketing campaign ran for, at best, three weeks as opposed to the originally planned five weeks.

[93]              CBRE initially proposed a four-week marketing campaign with an additional week to allow for close of tenders. That would have resulted in an overall campaign of five weeks. Marketing commenced on 7 July 2017 with the placement of signage outside the property. The signage was removed shortly after it was placed and CGL filed an application for an injunction to restrain the use of the words “mortgagee sale” in advertising. That process delayed marketing by around a week. Small says that communications with potential purchasers commenced on 10 July 2017. The evidence establishes that there was some limited marketing between 10 July 2017 and 19 July 2017.

[94]                It would have been open to Mr Edney as director of Small to extend the marketing period in light of the delay in commencing the marketing campaign proper. It is also clear that Mr Edney himself made the decision that the 10 August 2017 deadline would remain despite the delay caused by the injunction proceedings. The issue for the Court is whether that represented a failure to take all reasonable steps to obtain the best price obtainable at the time.

[95]                The Court heard evidence  from  three  real  estate  agents,  Mr  Bedford,  Mr Campbell and Mr Aldridge. Mr Bedford worked for CBRE and was involved in marketing the property in 2017 and 2018. Mr Campbell and Mr Aldridge gave evidence as expert witnesses.

[96]            Mr Bedford did not agree that a more extended marketing program would have led to a more favourable outcome. Mr Bedford’s evidence was that prospective bidders were concerned at the state of the property, and this was becoming more of a concern as time went on. Mr Bedford did report that the short timeframe for close of tenders, as well as the difficulty in obtaining information about the existing

development discouraged some prospective buyers, but that must be considered in light of whether an extra week or two would have made a material difference.

[97]            Mr Campbell gave evidence that the marketing period was sufficient. While four weeks would have been preferrable, Mr Campbell’s opinion was that it was immaterial in the circumstances. Mr Campbell’s opined that the marketing by CBRE was detailed and that there was a limited pool of people who could buy such an asset. Mr Campbell said that the number of information memoranda sent out and the applications for access to the data room were “probably double” what he would normally see for such a property.

[98]              Mr Aldridge, who gave evidence for Mr Mahon, was critical of the shortening of the marketing period. He agreed that CBRE had done a good job and had marketed the property thoroughly, but he considered it likely that the shortened timeframe would have made it difficult for potential  purchasers  to  fully  investigate  the  property. Mr Aldridge said in evidence that “the likely outcome would be numbers of tagged tenders, particularly with due diligence requirements given the nature of the property.”

[99]            As it transpired, all but one of the initial offers contained a due diligence clause. The property was, at that stage, partially developed with both above ground and below ground infrastructure.

[100]        Mr Edney gave evidence about why he was content with a shortened marketing campaign:

… the reason why I went to three weeks was that there had been – that was my professional view of buying and selling a little bit of property that what I’ve just said on those two key points, that going out to the market prior is critical, that agents always pitch high and always pitch long, but – so then the next, if I can give you my opinion, the next critical move is after it closes, they go through and follow up diligently. Not only the people who have responded, but also the ones who haven’t. So in this property, I had a target in my mind that if they approached 100, which I could’ve provided the names of potentially 100 people who could’ve been interested, if they had approached less than that and when that’s why they supplied their names, so our staff could look at those and just make sure that the market had been canvassed as much as possible.

[101]        Mr Mahon relies on the third CBRE report, dated 7 August 2017, where it was stated:

Due to the short time frame from construction to close of tenders and the lack of information on infrastructure to accurately assess the build cost, many purchasers have withdrawn their interest.

[102]        The shortened timeframe was not the sole point made by CBRE. The lack of information available about the infrastructure, particularly underground infrastructure, was also a factor. It seems unlikely that an additional week or week and a half of marketing would have substantially altered that situation.

[103]        The underlying implication by Mr Mahon is that Mr Edney was doing the minimum possible in terms of marketing and was not interested in obtaining the best price obtainable. The defendant referenced the decision of Muir J where Mr Edney was described as “rapacious” in his business dealing with Mr Mahon.13 That was not my impression of Mr Edney’s motivation in the 2017 tender process. I accept that it was primarily Mr Edney’s decision not to extend the marketing campaign beyond   10 August 2017, however that decision was not unreasonable given Mr Edney’s significant experience of buying and selling property. I consider that Mr Edney was motivated at that time to get the best possible price and genuinely did not think that a longer marketing campaign would necessarily be favourable. The view I formed of Mr Edney when giving evidence was that, although he had no time for Mr Mahon, he was primarily motivated by commercial considerations. He wished to obtain the best price obtainable and above all he did not want to sell the property to a third party for an amount that he considered did not reflect its value. In this, Mr Mahon’s interests and Mr Edney’s interests were aligned.

[104]        Mr Mahon criticises the decision  of  Mr  Edney  to  accept  the  CPL  bid.  Mr Edney’s evidence was that there was no other viable bid at the time. The next highest bid was $12 million and that had a number of unappealing conditions attached. The CPL tender gave Mr Edney a level of control and certainty that the other tenders did not.

13     Waimauri Ltd v Mahon, above n 2, at [125].

[105]        It is also notable that the level of tender submitted by CPL would have settled CGL’s debts to Small and would have resulted in Mr Mahon being released from his obligations under the guarantee.

The Empire tender

[106]        Mr Edney regarded the late interest by Empire as suspicious. There were multiple red flags including the fact that Mr Chedid had never actually seen the property, had only been into the data room once and there was an unusual condition relating to building a place of worship which was not a permitted activity and would have required a further resource consent.

[107]          There was also evidence that CBRE agents in Sydney made enquiries about Empire and received no reassurance. Empire was unknown to CBRE’s connections in Sydney. It was submitted that Mr Edney’s contention that he thought the Empire bid might be connected with Mr Mahon was illogical. Mr Mahon asks why Mr Edney would think he was involved in a tender of $21.7 million when repayment of

$16 million would resolve the matter. Mr Edney explained his reasons. He did not believe that the Gleneagle refinancing option was reliable. He did consider that there was a possibility that Mr Mahon had persuaded a Sydney connection to bid for the property. If that were the case, there would be no need for due diligence as Mr Mahon would have the necessary information and that might explain why no representative of Empire had visited the property or spent any time investigating it.

[108]          Mr Edney’s evidence was that he would have been delighted if that were the case. It would have secured repayment of the sum owed to Mr Edney and discharged Mr Mahon’s obligations. It would have permitted the development of the property to continue. Having heard Mr Edney’s evidence, I do not think that he was actively trying to disadvantage Mr Mahon and Ms Loo although he was certainly unimpressed with the failure of the Fiji development and then the CGL development and he had no wish to assist Mr Mahon further than required. Above all, Mr Edney, by my assessment, was not willing to lose money or provide what he regarded as a windfall to another purchaser by selling the property for an amount which he regarded as not reflective of its potential value, whatever the current market value was. Mr Edney struck me as a

person who does not like to be involved in or associated with poor commercial outcomes.

[109]        I consider that Mr Edney’s suspicion of the Empire bid was well  founded. Mr Chedid, although apparently a solicitor, did not sign the tender documents correctly. Nor was he authorised to sign the documents on behalf of Empire as he was no longer a director or shareholder of the company and did not provide an authorisation. Mr Chedid was listed as a witness for Mr Mahon, but he did not give evidence after an application for name suppression was declined. I do not draw any conclusion from Mr Chedid’s failure to give evidence. The effect of the failure is that I put to one side any submission based upon the evidence Mr Chedid was expected to give. I agree that the readiness to waive the clause relating to the place of worship was a significant red flag. The unfamiliarity with the property was another red flag and the fact that the amount of the tender was so far above the other bids was a further red flag. Mr Edney knew that CGL was attempting to refinance and that to do so it would need a valuation at or close to $22 million. The potential for the Empire bid to artificially inflate the apparent value of the property cannot be ignored.

The CPL tender

[110]        Mr Mahon contends that the CPL tender was orchestrated by Mr Edney; it was to be financed by Mr Edney and it was within Mr Edney’s control to ensure that it settled. Mr Edney maintains that the CPL tender was entirely independent of him other than in respect of financing. It was clear from the evidence that Mr Edney was the catalyst for Mr Chevin and Mr Harvey’s interest in the property, but Mr Edney did not provide information to CPL after the tender process was underway. He had indicated to Mr Chevin what he thought the property was worth and he was willing to provide vendor finance subject to payment of a deposit. That amount would have cleared Mr Mahon’s obligations as guarantor.

[111]        Mr Mahon submits that the CPL tender provides strong support for the market value of the property at the relevant time. Mr Chevin, who was behind CPL, is a very experienced property developer himself and Mr Mahon says the price was therefore an example of what an experienced developer, familiar with the site, was prepared to

offer for the property. The problem with that submission is that there were seven other bids on the property, none of which were at the level of the CPL tender. All but one were lower. The Empire bid was much higher but not accepted for the reasons discussed above. Had Mr Edney accepted the only other unconditional bid of

$13 million, there was a 12 months’ settlement date and Mr Mahon would have become liable under the guarantee for a sum in excess of $3 million. If the CPL tender had settled, Mr Mahon would have been released from his obligations.

[112]        Mr Mahon submits that the CPL tender relied entirely on Mr Edney’s support as a funder. Mr Chevin and Mr Harvey were not in any position to fund the purchase, including the $1 million  deposit.  Mr  Harvey  said  that  his  understanding  from Mr Chevin was that the entire purchase price, including the deposit, would be subject to vendor finance. Although that was suggested at one point in negotiations, the contemporaneous documents show that Mr Edney did not in the end agree to 100 per cent vendor finance. Whatever Mr Chevin may have told Mr Harvey, the documentary evidence did not support Mr Harvey’s belief.

[113]        Mr Chevin was a four-times bankrupt with a criminal conviction. In the world that Mr Edney moves in that was not as much of a disincentive as might be supposed. Property development is high risk and high return. Mr Edney’s evidence, which was not contested, was that Mr Chevin was performing in a substantial land subdivision at Te Kauwhata. The only other unconditional tender by September 2017 had a 12-month settlement date and was for a much lower amount. Once the Empire bid was discounted there was no tender apart from the CPL offer, that would have released Mr Mahon from his obligations to Small.

[114]        Mr Mahon says that Mr Edney accepted the CPL offer and did not cancel it when the deposit was not paid because of his other commercial interests involving Mr Chevin. It is submitted that Mr Edney prioritised other commercial interests over his obligations to Mr Mahon as guarantor of the loan to CGL. Mr Mahon says that the decision not to cancel the CPL agreement for non-payment of the deposit when the market was deteriorating can only be explained by a desire on Mr Edney’s part not to jeopardise his other commercial interests involving Mr Chevin and Mr Harvey.

[115]        That contention is discussed later in relation to the equitable duty owed but I consider that Mr Edney was entitled to allow CPL some leeway to pay the deposit. In facilitating and then accepting the CPL tender, Mr Edney was attempting to put Small in the position it had been in with CGL. If CPL had been able to secure development finance and pay the deposit, the sale would have proceeded, Mr Mahon would have been released from his obligations and Mr Edney would have been in a similar position that he had been in with CGL. Mr Edney was willing to take a gamble on CPL being able to raise the development finance, but that gamble was not inherently disadvantageous to Mr Mahon. The more obviously disadvantageous action would have been to accept an unconditional offer of $9 million.

[116]        Mr Mahon also criticises the decision of Small to enter into the variation agreement with CPL to allow the sale of the two townhouses. That reduced the indebtedness and therefore reduced Mr Mahon’s liability under the guarantee.

[117]        Applying the factors set out in Public Trust v Ottow, Small appointed a reputable real estate agent to market the property, there was a properly conducted tender process and the sale price to CPL, given all the circumstances, can be reconciled with expert opinion as to value.14 The market value of the property was tested through the tender process. It is true that the marketing period was shorter than usual but not by a great deal and not in a way that I consider would have made a significant difference. There was an extensive promotional campaign which involved contacting potentially interested purchasers. The advertising campaign was not itself extensive but that must be considered in light of the type of property that was being sold. There is some force in Mr Edney’s contention that advertisement in newspapers is not the way that multimillion dollar development sites are sold. Mr Edney clearly regarded newspaper advertising as something that was more useful to advertise the real estate agents than to locate prospective purchasers.

[118]        In respect of the 2017 tender process, I consider that Small took reasonable care to obtain the best price reasonably obtainable at the time of sale. There is no suggestion that the purchase price of $17.3 million was below market value. In fact,

14     Public Trust v Ottow, above n 4, at [31].

it was well in excess of the agreed market value and higher than the other tenders except for the Empire bid.

[119]          Mr Mahon criticises both Small’s decision to cancel the CPL contract and Small’s decision to enter into the contract. It is easy to criticise commercial decisions once the ramifications of those decisions become clear but predicting the ramifications is much harder. It is important that the decisions made by Mr Edney on behalf of Small are examined on the basis of the circumstances at the time, and not with the benefit of hindsight.

[120]          The reality was that in 2017 there was no better offer than the CPL offer. All but one of the other bids were conditional and all of the other bids, except the discounted Empire bid, were at a level that would have resulted in Mr Mahon becoming liable under the guarantee. I consider that Small was justified in discounting the Empire bid. By the time Small cancelled the agreement with CPL, it had become apparent that there was no realistic prospect of CPL meeting its obligations, securing the necessary development finance and paying the deposit.

The sale to GB Ltd

[121]The second tender process resulted in Small selling the property to GB Ltd.

[122]        It is undisputed that the property market had significantly shifted by May 2018. Neither of the expert witnesses were critical of the  process  of the  second  tender. Mr Campbell said that a second tender only eight months after the first tender would not require an extensive marketing campaign.

[123]The total indebtedness of CGL as at 30 June 2018 was approximately

$16 million with yearly interest accrual of approximately $1.8 million. The sale price to GB Ltd was $11.75 million. Mr Edney obtained a valuation dated 11 June 2018. The stated market value was $16.85 million with a forced valuation of $14.32 million. The sale in one line valuation was $13.67 million with a forced sale valuation of

$11.62 million.

[124]        In Long v ANZ National Bank Ltd, it was said that valuations lose much of their significance once the market has been tested.15 The market was tested by the second tender process in May 2018. The highest offer was a conditional offer of $9 million.

[125]The joint report of the valuers at trial resulted in an agreed value of

$13.5 million as at August 2018. That did not include a mortgagee sale discount. The valuers agreed that a mortgagee sale discount of 10 to 15 per cent was appropriate. That would produce a value of between $11.475 million and $12.15 million. The midpoint of 12.5 per cent produces a value of $11,812,500.

[126]        There was dispute between the valuers about whether there should have been an additional infrastructure allowance but that issue, although it took up some time at trial, assumes little actual significance. It does not alter the value of the property to such a level that it could be said that the price paid by GB Ltd was below market value. The value of the infrastructure was clearly open to considerable dispute. There might have been a buyer who saw value in the infrastructure but that needs to be considered against the fact that the market was tested and there was no criticism of either the marketing or the tender process. There was one expression of interest but no offer at, or even very near, the price that GB Ltd eventually paid for the property.

Sale to self

[127]Section 176(2) of the PLA provides:

176 Duty of mortgagee exercising power of sale

…

(2)        A mortgagee who exercises a power to sell mortgaged property may not become the purchaser of the mortgaged property except in accordance with section 196 or an order of a court made under section 200.

[128]        Mr Mahon says the sale to GB Ltd was a sale to self in breach of s 176(2) of the PLA. That is not correct. Small and GB Ltd are separate legal entities although they are related.

15     Long v ANZ National Bank Ltd, above n 11, at [21(c)].

[129]        A mortgagee is not prevented from selling a property to a related party such as a company in which the mortgagee has an interest. The burden shifts to the mortgagee to prove that reasonable care was taken to obtain the best price reasonably obtainable as at the time of sale.16

[130]        For the reasons discussed above, I find that Small has discharged its burden to prove it did take reasonable care to obtain the best price reasonably obtainable at the time of sale to GB Ltd.

The equitable duty of good faith

[131]        The counterclaim is pleaded as one cause of action for breach of s 176 of the PLA and breach of the equitable duty of good faith. While interrelated and often overlapping in terms of evidence, the two are distinct. The statutory duty under s 176 coexists with the equitable duty of good faith.17

[132]          A mortgagee has a duty to act in good faith and for the predominate purpose of obtaining repayment of the debt. Subject to that, the powers conferred on a mortgagee may be exercised to advance its own commercial interests although the consequences may be disadvantageous to the borrower.18 Whether a mortgagee’s actions breach the duty of good faith is to be determined on an objective basis.19 The question of whether a mortgagee has acted primarily for the purpose of recovering its debt is to be answered objectively by examining whether its actions are taken in good faith, bearing in mind its entitlement to prefer its own interests wherever they conflict with the other interested parties.20 A mortgagee is entitled to make its own commercial decision about whether and if so at what time to sell the property. It is under no obligation to wait until a later point in time in the hope that an improving market might yield a better price.21 Purity of purpose is not required, but when exercising its power

16     Apple Fields Ltd v Damesh Holdings Ltd, above n 5, at [51].

17     Apple Fields Ltd v Damesh Holdings Ltd, above n 5, at [47].

18     Downsview Nominee Co Ltd v First City Corp Ltd, above n 6, at 522.

19     Coltart v Lepionka & Co Investments Ltd [2016] NZCA 102, [2016] 3 NZLR 36 at [65].

20     Coltart v Lepionka & Co Investments Ltd, above n 19, at [65].

21     Long v ANZ National Bank Ltd, above n 11, at [18(b)], citing Apple Fields v Damesh Holdings, above n 5.

of sale, a purpose flowing from interests outside the functions of a mortgagee must not prevail.22

[133]        Mr Mahon complains that Mr Edney had other commercial  interests  with Mr Chevin and Mr Harvey and that he prioritised those interests over obtaining repayment of the secured amount. Mr Mahon also complains that Mr Edney could have made the CPL offer work if he had agreed to provide 100 per cent vendor finance.

[134]        The contemporaneous evidence suggests that there was no agreement for the deposit to be funded by vendor finance despite Mr Harvey’s apparent belief. The discussions about finance were not between Mr Harvey and Mr Edney; rather they were between Mr Chevin and Mr Edney. Messages between Mr Edney and Mr Chevin on 15 and 16 January 2018 corroborate Mr Edney’s evidence that he was mainly concerned to ensure that CPL would be able to perform and that this concern motivated his refusal to provide 100 per cent vendor finance.

[135]            There was a connection between two developments, the Te Kauwhata development and the proposed Coronation Road development, but not in any improper way. Mr Edney’s company Waimauri Ltd was the lender in respect of Te Kauwhata. If Mr Chevin had been able to perform in the Te Kauwhata matter, there would have been funds available for the deposit.

[136]On 15 and 16 January 2018 there was the following text exchange:

Mr Chevin: Tim. Assuming that you are in QT now. In terms of your  meeting today go re Coronation. Thanks Peter Chevin

Mr Edney: Going first thing in morning Yes I can manoeuvre TeK surplus into Coro deposit How are you going on your Coro project milestones? Tim

Mr Chevin:     Coro project milestones looking solid. Very solid

Mr Edney:      No changes possible to current contract Can Clark perform?

Tim

Mr Chevin:     yes

22    AFI Management Pty Ltd v Lepionka & Co Investments Ltd [2017] NZHC 3116 at [289(c)].

[137]On 3 March 2018, Mr Chevin sent a text to Mr Edney in which he said:

Obviously we are not going to make settlement for Coronation rd by 7th of March. If this is an issue please text me back.

[138]Mr Edney replied on the same day:

Do you have any of that RMA in writing? Our team could gain comfort that you have been doing something. Any extension without proof is almost impossible.

[139]        There was a further text exchange between Mr Edney and Mr Chevin on 6 and 7 March 2018:

Mr Chevin (6 March 2018):     Will the lawyer get an Indication re loan tomorrow?

Mr Chevin (6 March 2018): Re Coronation

Mr Chevin (7 March 2018): Do we need to meet up today?

Mr Edney (7 March 2018): I guess you will not be in a position to settle?

[140]        The CPL deal was potentially advantageous to Mr Mahon, but Small was not required to pursue it to its own detriment. It was not unreasonable for Mr Edney on behalf of Small to require payment of a deposit. Mr Edney was entitled to pursue the CPL offer to the point that he lost faith in the ability of CPL to perform the contract. By March 2018 that is exactly what appears to have happened. If CPL could not secure development funding, Small could have found itself in exactly the same situation again but without the benefit of the guarantee from Mr Mahon. Mr Edney could have decided to provide 100 per cent vendor finance, but he was not required to do so in order to release Mr Mahon from his liability under the guarantee.

[141]        Mr Mahon also complains that the sale to GB Ltd was unfair because the purchase price was based on the valuation of the property in a forced sale in one line. The corollary of that argument is that GB Ltd was obliged to pay more than any other prospective purchaser was willing to as demonstrated by the tender process that occurred. That cannot be correct. The price paid by GB Ltd was more than any other prospective purchaser offered at the time.

[142]          Mr Mahon is critical of the fact that GB Ltd eventually sold the property for significantly more than it purchased it for. I regard the subsequent sale to Oaks Living Coronation Ltd as irrelevant to the matters that I must decide. Mr Edney’s commercial assessment was that the 2018 offers did not represent the potential long-term value in the property. As it turned out he was correct. However, GB Ltd took the risk. Had the market collapsed further or had GB Ltd been in a position where it had to sell earlier, it could equally have made a loss. Mr Mahon would not be liable for that loss as his liability ended with the sale to GB Ltd. Likewise, he cannot claim a benefit from the fact that GB Ltd made a profit.

Conclusion on counterclaim

[143]        It follows from the above discussion that I find that Small was not in breach of either the statutory obligations under s 176 of the PLA or the equitable obligation to act in good faith. The counterclaim fails.

[144]          As a result, the issue of damages to Mr Mahon for those breaches does not arise. I agree, however, that the claim for damages is fundamentally misconceived. Mr Mahon was not the principal debtor. CGL was. A guarantor can claim the benefit of a set off or counterclaim available to a principal debtor, but that is limited to the extent of the claim against the guarantor.

The CCCFA

[145]Mr Mahon pleads an affirmative defence under s 99B (1) of the CCCFA.

[146]        Prior to 13 January 2020, s 99B (1) of the CCCFA provided that no creditor to a credit contract could enforce any right under the credit contract in relation to the costs of borrowing nor was the debtor liable for the costs of borrowing for any period that the creditor was unregistered in circumstances where the creditor was required to be registered under pt 2 of the FSP Act.

[147]        The FSP Act requires any entity “in the business of providing a financial service” to retail clients in New Zealand to be registered on the Financial Service Providers Register, and to be a member of an approved dispute resolution scheme.23

[148]            Section 99B and the definition of “costs of borrowing” were inserted into the CCCFA on 6 June 2015. On 13 January 2020, s 99B and the definition of “costs of borrowing” were amended to make it clear that s 99B only applies to consumer credit contracts.

[149]        Small submits that s 99B was only ever intended to apply to consumer credit contracts. The definition of “costs of borrowing” prior to 13 January 2020 specifically referred to “a consumer credit contract or a credit contract to which pt 3A applied.” Small submits that the amending legislation corrected an obvious drafting error and that s 99B should be interpreted as only applying to consumer credit contracts.

[150]        The first question is whether Small was required to be registered. Registration is required for an entity “in the business of providing a financial service”. Small submits that it was not in the business of providing finance. The $11.6 million and

$3 million loans were vendor finance to enable CGL to purchase the property. They were subsidiary and collateral to the Agreement for Sale and Purchase. Small was a single purpose entity which carried out no activity other than owning the property and then making the $11.6 million and $3 million loans to enable CGL to purchase the property. The loans are expressly referenced in cl 18.0 of the Agreement for Sale and Purchase dated 4 June 2014 and are part of the same transaction. Further the loans were not on commercial terms. No interest was payable for the first 18 months. The lending occurred before s 99B came into force on 6 June 2015 and the only lending that Small ever undertook was for CGL’s purchase of the property that settled in September 2014. The fact that Small was not in the business of providing financial services is supported by the uncontested evidence from Mr Edney that there was no obligation upon CGL to repay the approximately $1.18 million resource consent costs which Small incurred prior to the sale, had the sale not proceeded.

23     Financial Service Providers (Registration and Dispute Resolution) Act 2008, ss 7A, 11 and 48.

[151]        The evidence supports the contention that the loans by Small to CGL were one off vendor finance loans to facilitate the primary  property  transaction  in  September 2014. They were provided as part of the sale and not as part of carrying on a business to provide financial services. Small carried on no other lending or financial service activity and never lent money to any other party. Small did propose a similar vendor finance arrangement for CPL but that did not eventuate and again was only offered to facilitate the primary property transaction that was contemplated.

[152]        Mr Edney was a director of another business that did provide financial services, but that business was not Small. I agree that Mr Mahon cannot conflate the business of other companies controlled by Mr Edney, in particular the lending business of Waimauri Ltd which is a separate entity.

[153]        Because I have found that Small was not in the business of providing a financial service and therefore was not required to be registered, it is not necessary for me to consider the correct interpretation of s 99B.

[154]The affirmative defence fails.

Miscellaneous matters

[155]        Two matters are pleaded by Mr Mahon as breaches of the duties owed, namely failure to collect GST on the sale of the townhouses and payment of a second commission for the sale to GB Ltd. No loss is pleaded in respect of either alleged breach. I do not regard the alleged failure to collect GST as relevant even if the allegation were correct, which I am not persuaded it is. GST is not money that CGL or Mr Mahon had any right to.

[156]        As to the double commission allegation, Mr Bedford confirmed in evidence that CBRE did not receive separate commissions on the sale to CPL which did not proceed and the sale to GB Ltd which did.

Appropriation of the $3 million loan

[157]The guarantee provided a right to appropriate as follows:

4.6 Other Recoveries

The Lender, at its absolute discretion, may appropriate any amount received or recovered by it from the Borrower, the Guarantor or any other person in or towards payment of other indebtedness of the payer to the Lender, in preference to applying that amount in reduction of the Guaranteed Money (even if the Guarantor is prejudiced as a result).

[158]Clause 6.4 of both the $11.6 million loan and the $3 million loan states:

Application of moneys

The Lender may apply any payment received by the Lender in reduction of the liabilities of the Borrower under this Agreement or any Security Document, to the repayment of the principal, interest, or any other amount due under this Agreement or any Security Document in the order and manner as the Lender may determine from time to time.

[159]        The application of the proceeds first to the BNZ facility and then the $3 million loan with the balance to the $11.6 million loan first as to interest and then principal, in priority to the amount guaranteed by Mr Mahon, was permitted under the terms of the guarantee.

[160]        This is an example of Small putting its own commercial interests first as it is entitled to do both in equity and in terms of the guarantee.

Interest

[161]        The terms of the $11.6 million loan agreement provided for interest to accrue 18 months after the draw down date and for it to be capitalised monthly:

Payment of interest

The Borrower must pay interest on the Loan to the Lender. Interest on the Loan will be calculated from the Interest Commencement Date and will be capitalised and shall form part of the Moneys Owed monthly in arrears at the Interest Rate on the amount outstanding under the Loan for the time being outstanding during the preceding Interest Period.

[162]        The terms of the $3 million loan agreement contained the same provision as to interest.

[163]The guarantee provided:

Interest on Overdue Amounts

If the Lender does not receive, when due, any amount payable to it under this deed, then the Guarantor shall pay interest on the overdue amount (including interest payable under this clause) from the due date to the time of its receipt by the Lender (both before and after judgment) payable and compounded at monthly intervals. The obligation to pay interest is to arise without the need for a notice or demand. The rate of interest shall be the Default Interest Rate. The Guarantor shall not however be liable to pay such interest on amounts of Guaranteed Moneys which bear interest independently of this deed.

[164]        Small  initially  claimed  damages  in  the  amount  of  $6,518,491.20  as  at 27 November 2020 as pleaded in the statement of claim dated 30 November 2020. The evidence given at trial as to the loss claimed by Small was $9,213,109.31 as at 29 July 2024. This was calculated on the basis that default interest was owing on the entire amount outstanding from 26 March 2016 when repayment of $3 million became due under the $11.6 million loan facility. In fact, default interest was payable only on the $3 million amount outstanding from 26 March 2016 until 21 June 2017 when Small made demand for payment of the remainder of the money owing. Mr Penny, for the plaintiff, recalculated the claimed damages to rectify the error. Small claims default interest on the outstanding $3 million from 26 March 2016 and standard interest on the remaining money between 26 March 2016 and 21 June 2017. From 21 June 2017 to payment, Small claims default interest on the entire amount.

[165]Standard interest is defined in the loan agreements:

Interest Rate means BNZ’s current Market Connect Overdraft Base Rate (as that term is defined by BNZ or if such rate is at any time not in use by BNZ then such equivalent BNZ commercial overdraft interest rate) plus 3% per annum.

[166]        Evidence of BNZ’s Market Connect Overdraft Base Rate from March 2016 to July 2017 was provided by Phillip Lowe.

[167]        There is an issue as to whether the interest should be compounded. The damages calculation was originally done on a non-compounding basis despite the loan agreements providing for interest to be compounding. Mr Penny recalculated the damages on alternative bases, both compounding and non-compounding.

[168]        The amount of damages claimed in the calculation on a compounding interest basis exceeds the pleaded damages in the statement of claim. Small accepts that it is unreasonable for it to claim more than $6,518,491.20 being the amount claimed in the statement of claim.

[169]        The contract provides for compounding interest. It would have been open to Small to apply to amend the claim once the error was realised however I agree with the approach taken by Small.

Result

[170]I give judgment in favour of Small and against Mr Mahon in the amount of

$6,518,491.20 plus interest to be calculated in accordance with the loan agreement.

[171]I dismiss the counterclaim.

[172]        I find in favour of Small and against Mr Mahon in respect of the affirmative defence raised.

Costs

[173]Small applies for indemnity costs. I direct the parties to attempt to agree costs.

[174]If the parties are unable to agree on costs, I make the following directions:

(a)any application for costs is to be made by memorandum to be filed and served within 20 working days of the date of this judgment;

(b)any reply from Mr Mahon is to be filed and served by memorandum within a further 10 working days; and

(c)memoranda as to costs are not to exceed five pages.

[175]        I will deal with the issue of costs on the papers unless the parties indicate that hearing time is required.

Wilkinson-Smith J