Tata Housing Limited v Tata
[2020] NZHC 3495
•23 December 2020
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2020-404-001407
[2020] NZHC 3495
UNDER Part 19 of the High Court Rules, and section 143 of the Land Transfer Act 2017 BETWEEN
TATA HOUSING LIMITED
Applicant
AND
SOMESWARA JAGANNADHA GIRI TATA and SURYA SUDHA TATA
Respondents
Hearing: 29 September 2020 Appearances:
R J Latton for the Applicant
G Thwaite for the Respondents
Judgment:
23 December 2020
Reissued:
24 February 2021
JUDGMENT OF ASSOCIATE JUDGE GARDINER
This judgment was delivered by me on 23 December 2020 at 10.30 a.m. pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar Date.......................................
This judgment was reissued by me on 24 February 2021 at 11.30 a.m. pursuant to Rule 11.5 of the High Court Rules.
Solicitors:
UM Legal, Auckland
R Latton, Auckland G Thwaite, Auckland
Registrar/Deputy Registrar Date.......................................
TATA HOUSING LTD v TATA [2020] NZHC 3495 [23 December 2020]
Introduction
[1] Tata Housing Ltd (“THL”) applies under s 143 of the Land Transfer Act 2017 (“the LTA”) for an order that caveat 11466445.1 not lapse (“the Caveat”). The Caveat is lodged against properties at 23, 25, 25A and 25B Pinebrook Lane (“the Properties”). The respondents, Mr and Mrs Tata, are the registered proprietors of the Properties.
[2] The interest relied on in support of the Caveat arises from a declaration of trust dated 29 November 2016 in favour of THL (“the Declaration”), which states that the respondents hold 23 and 25 Pinebrook Lane as bare trustees for THL, and THL “shall have all rights, benefits and interests in the property as of a registered proprietor”.
[3]There are two issues I need to resolve:
(a)Has THL established that it is reasonably arguable that it has an interest in the Properties that can support the Caveat?
(b)If yes, have the respondents persuaded me that the Caveat can be removed without prejudicing THL’s legitimate interest in the Properties?
Factual background
[4] THL is a property development company. Mr Tata and Mr Penneru are the directors and shareholders of THL, each holding 50 per cent of the shares.
[5]In July 2016, THL agreed to purchase the property at 23 and
25 Pinebrook Lane for $1,000,000 with the intention of subdividing the land. However, THL lacked the funds to purchase the property, so it borrowed some
$690,000 from a trust known as the Lankey Family Trust (“the Loan”). One of the terms of the Loan was that the respondents had to be noted as the registered proprietors on the certificate of title upon purchase.
[6] To secure the Loan and to ensure that THL’s position was protected, on 29 November 2016, the respondents executed the Declaration, which states that:
(a)23 and 25 Pinebrook Lane was purchased with the intention of subdividing the land and erecting and selling houses on the market;
(b)The respondents hold 23 and 25 Pinebrook Lane as bare trustees only;
(c)The respondents have no claim to the proceeds of realisation from any sale or transfer of 23 and 25 Pinebrook Lane;
(d)THL has all the same rights, benefits and interest in 23 and 25 Pinebrook Lane as a registered proprietor;
(e)THL indemnifies the respondents against all claims, demand costs, actions and proceedings arising through any default by THL; and
(f)Apart from the registered first mortgage in favour of the Lankey Family Trust, the respondents are not to further mortgage or charge 23 and 25 Pinebrook Lane.
[7] Settlement of the purchase of 23 and 25 Pinebrook Lane occurred on 7 December 2016. That same day, a mortgage in favour of the Lankey Family Trust was registered on the certificate of title for 23 and 25 Pinebrook Lane. On 8 February 2019, 23 and 25 Pinebrook Lane was subdivided into the Properties (being 23, 25, 25A and 25B Pinebrook Lane).
[8] Sometime in June 2019, THL was facing financial difficulties, and Mr Tata and Mr Penneru had a falling out. Mr Tata says, in his affidavit dated 8 September 2020 at para 14, that “I originally thought that Mr Penneru had expertise in property development. He turned out to be a disappointment.” Mr Penneru says that he became worried that THL’s name did not appear on the certificates of title for the Properties. Accordingly, he instructed Mr Coburn of Hesketh Henry to lodge the Caveat, which he did on 13 June 2019.
[9] Later, Mr Penneru discovered that Mr Tata had attempted to re-mortgage the Properties. Southern Cross Partners made a loan offer to a company called Puppet Masters Interactive Ltd (“PML”). The loan offer had a term requiring security over the Properties. Mr Tata is the sole director and shareholder of PML. Mr Penneru then became concerned that Mr Tata appeared to have transferred funds from THL’s bank accounts to his personal account.
Legal framework
[10] Section 138(1) of the LTA provides that a person may lodge a caveat against dealings with an estate or interest in land on the basis that, inter alia, the person
(a) claims an estate or interest in the land, whether capable of registration or not, or
(b) has a beneficial estate or interest in the land under an express, implied, resulting or constructive trust.
[11] Under s 143(1), the registered owner of the estate or interest affected by the caveat can apply to the Registrar for the lapse of the caveat. However, the caveator can then apply for an order that the caveat not lapse pursuant to s 143(3) and (4)(a).
[12]The following principles apply to applications that a caveat not lapse:1
(a)The onus is on the applicants to demonstrate that they hold an interest in the land that is sufficient to support the caveat, but they need not establish that definitively;
(b)It is enough if the applicants put forward a reasonably arguable case to support the interest they claim;
(c)The summary procedures involved in applications of this nature are not suited to the determination of disputed questions of fact. An order for the removal of a caveat will only be made if it is patently clear that the caveat cannot be maintained — either because there is no valid ground for lodging it in the first place, or because such a ground no longer exists; and
(d)When an applicant has discharged the burden upon it, the Court retains discretion to remove the caveat which it exercises on a cautious basis. Before it does so the Court must be satisfied that the caveator’s legitimate interest would not be prejudiced by removal.
1 Philpott v Noble Investments Ltd [2015] NZCA 342 at [26].
Discussion
[13] THL relies on the terms of the Declaration to support its application for an order that the Caveat not lapse, namely, that the respondents are only the registered proprietors as bare trustees and THL has “all [the] rights, benefits and interests in the property as of a registered proprietor”.
[14]The respondents oppose the order on the following grounds:
(a)The solicitor who filed the Caveat, namely Mr Coburn of Hesketh Henry, did not have THL’s authority to do so; THL has not authorised the current proceeding being brought; and the solicitor purporting to represent THL lacks authority under the High Court Rules 2016.
(b)To the extent that the Caveat results from a dispute between the shareholders of THL, namely Mr Tata and Mr Penneru, the matter should be resolved under the Companies Act 1993, not the LTA.
(c)There is no bare trust, and any trust document is not binding on them.
(d)Removal of the Caveat is necessary to allow refinancing.
(e)Mr Penneru is bringing an application in violation of his duties as a director of THL and/or his fiduciary duty as an “ultimate beneficiary” of a trust document, namely the Declaration (if there is one).
[15] I consider (c) first, because that submission is relevant to the first issue for determination: whether THL has a caveatable interest in the property.
Is there a bare trust; is the Declaration binding?
[16] The respondents assert that the Declaration is not binding on them, and that there is no bare trust, as they did not obtain independent advice before signing the Declaration. Mr Tata, in his affidavit dated 8 September 2020 at para 28, says that
“[w]e had not seen that document before the meeting and had no real opportunity for independent advice.” However, the Declaration provides that:
The parties acknowledge that they have either received independent legal advice about the effect and implications of this Deed or have been advised to do so but have elected not to receive independent legal advice.
[17] The respondents also submit that the Declaration is a contract, not a trust document. Considering THL’s failure to meet its obligations under cl 3 to pay all outgoings relating to the Properties and under cl 5 to repay all monies owed to the respondents, the respondents are entitled to cancel the “contract”.
[18] I find, without too much difficulty, that THL has established at least a reasonably arguable case that the Declaration, which was executed by the respondents, is binding, and that there is a bare trust. The Declaration expressly states that “Mr and Mrs Tata HEREBY ACKNOWLEDGE that they personally have no interest in the Property and are registered as bare trustees only”. It also states that “Tata [H]ousing shall have all rights, benefits and interests in the property of a registered proprietor”. The clear terms of the Declaration are enough to sustain a reasonable argument that THL has an equitable interest in the Properties. An equitable interest is grounds for lodging a caveat against dealings.2
[19] Even if there was a genuine dispute as to whether the Declaration is valid in the absence of independent advice, that is an issue that is not suitable for determination in the present summary proceeding.
Was there authority to lodge the Caveat and commence these proceedings?
[20] The respondents submit that Mr Penneru has effectively seized control of THL and that he had no authority to instruct Mr Coburn to lodge the Caveat. Mr Coburn should not have lodged the Caveat on the authority of one director only. He must have known that there was discord between the directors. In a letter to Mr Tata dated
19 November 2019, Mr Coburn states that he is acting for Mr Penneru. The
2 Land Transfer Act 2017 s 138(1)(b).
respondents submit that by lodging the Caveat, Mr Coburn stepped in and acted in favour of Mr Penneru against Mr Tata.
[21] The respondents also submit that, in the absence of a resolution of the directors of THL under sch 3 of the Companies Act 1993, Mr Penneru had no authority, express or implied, to commence these proceedings in the name of THL. Further, in view of the director’s general duties under the Companies Act 1993 to act in good faith and in the best interests of the company and for a proper purpose, THL had no authority to commence this litigation. Related to that, the respondents assert that the solicitor on the record, Mr Mohammed, was not authorised to file the proceedings.
[22] Mr Penneru says that, as director and shareholder of THL, he had authority to instruct the solicitor to lodge the Caveat. He deposes that he and Mr Tata agreed that he would be responsible for the administrative and financial matters of THL’s business and he had specific authority to undertake any steps necessary to conduct his responsibilities. Mr Penneru accepts that the alleged arrangement was not recorded in writing anywhere. Mr Tata denies that there was any formal division of responsibilities.
[23]Mr Coburn deposes that:
(a)He was first instructed to act for THL in 2017 in relation to a joint venture dispute with an unrelated third party. The letter of engagement dated 21 September 2017 and accompanying standard terms of business was emailed to the two directors of THL, Mr Penneru and Mr Tata. The standard terms provide at cl 1.4(a) that THL agreed Hesketh Henry could accept instructions from any director or officer of the company or any employee or other person authorised by THL.
(b)He specifically recalled “that Mr Tata confirmed that he (Mr Tata) was primarily responsible for undertaking the property development work for THL, whereas Mr Penneru was responsible for the financial side of THL’s business. As such, I was able to refer to Mr Penneru for his day to day instructions in the first instance.”
(c)In June 2019, Mr Penneru contacted him and instructed him to lodge a caveat over the four titles of the Properties for the benefit of THL, on the basis of the Declaration. Mr Coburn says:
I was satisfied that the Bare Trust enable me to proceed to lodge the caveat on behalf of THL because:
a.THL had a caveatable interest in the THL Property as evidenced by the Bare Trust and pursuant to Mr Penneru’s instructions;
b.I had no reason to consider that the nature of Mr Penneru’s authority had changed …
c.Mr Penneru’s instructions were in any event consistent with both the Bare Trust (which had been witnessed and executed by Mr and Mrs Tata) and also with his duty, in his capacity as director of THL, to act in the best interests of the company;
d.It was clearly in THL’s best interests to prevent unauthorised dealings with the THL Property; and
e.as at the time of lodging the caveat on or about 13 June 2019, there was no suggestion whatsoever of any disagreement concerning the Bare Trust of the THL Property (or in any respect).
(d)It was not until early July 2019, when Mr Penneru discussed with Hesketh Henry his concerns about Mr Tata attempting to refinance the Properties and misappropriating funds, that Mr Coburn became aware that there was a disagreement between Mr Penneru and Mr Tata.
[24] There is a dispute between Mr Tata and Mr Penneru as to whether Mr Penneru had authority to instruct Mr Coburn to lodge the Caveat. The Companies Act 1993 contemplates boards delegating powers to directors or employees.3 There is evidence to suggest that Mr Tata had informally delegated certain functions to Mr Penneru; and had previously instructed Mr Coburn to take instructions from him. Mr Penneru was a director of the company and Mr Coburn has attested that he was not aware of any discord between them when he lodged the Caveat for the company that might have caused him to question Mr Penneru’s authority. It was some months later, when he had received further instructions from Mr Penneru, that he wrote to Mr Tata on behalf
3 Companies Act 1993, s 130(1).
of Mr Penneru. The issue cannot be resolved in a summary procedure such as this, but it is certainly reasonably arguable that when Mr Penneru instructed Mr Coburn to lodge the Caveat he had the authority of THL to do so.
[25] In any case, that issue is not relevant to the key issue before me, which is whether THL has an interest in the Properties that justifies a caveat to prevent unauthorised dealings. I have concluded that THL has established a reasonably arguable caveatable interest, based on the Declaration. That interest exists, irrespective of the Caveat and how it came to be lodged, or how these proceedings were commenced. The respondent’s submissions ignore the fact that the Caveat protects THL’s interests, not Mr Penneru’s or Mr Tata’s individually. It may be that, in a practical sense, the presence of the Caveat gives one director a negotiating advantage over the other in their dispute. But legally, the Caveat is in place to protect the legitimate interest of THL and it is blind to their differences.
[26] Mr Thwaite’s submissions challenging Mr Penneru’s authority to commence this proceeding and Mr Mohammed’s authority to file the proceedings with the Court are even more removed from the issues in this proceeding. If Mr Tata wanted to challenge the proceeding on the basis that it should never have been brought, the appropriate course would have been to apply to strike out the application as an abuse of process of the Court.4 That would have put Mr Penneru’s authority to initiate the proceeding, and whether he was acting in the best interests of the company in doing so, squarely in issue. The onus is on the party alleging abuse of process to show that the proceeding is bought for an improper purpose and it is a “heavy onus”.5 Mr Tata would have needed to address the fact that by filing the application, Mr Penneru was purporting to sustain interim protection of THL’s interest in the Properties.
[27] However, this is not an application to strike-out the proceeding as an abuse of process. It is an application that a caveat not lapse, and the applicable principles are well settled. The key question is: does THL have a reasonably arguable interest in the Properties that can support the caveat? I have concluded that it has.
4 As in Paramount Acceptance Co Ltd v Souster [1981] 2 NZLR 38 (CA); McVitty v Bank of New Zealand Ltd HC Wellington CIV-2010-485-1164, 11 November 2010.
5 William v Spautz [1992] HCA 34; (1992) 174 CLR 509.
[28] In terms of Mr Mohammed, Mr Thwaite’s complaint appears to be that he contravened r 5.37 of the High Court Rules 2016, which states that a solicitor warrants to the court and to all parties to the proceeding that he or she is authorised, by the party on whose behalf the document purports to be filed, to file the document. As to the lack of authority aspect, my comments above with respect to Mr Penneru apply. Even if it were established that Mr Penneru, and therefore Mr Mohammed, did not have authority to file the proceedings, I consider that a contravention of r 5.37 amounts to a breach of duty to the Court and any sanction would be against Mr Mohammed, not THL. The case Mr Thwaite refers to concerns a situation where the Court ordered counsel to contribute to a costs award against their client where they were considered to have acted grossly incompetently.6 I do not see how that authority assists here and Mr Thwaite did not explain.
Is this a dispute between directors that should be resolved under the Companies Act, not LTA?
[29] The respondents argue that this is really a dispute between Mr Tata and Mr Penneru in their capacities as directors/shareholders of THL, and therefore should be resolved under the Companies Act 1993. Mr Penneru has rights under the Companies Act 1993 if he believes that he is aggrieved as a director or shareholder, such as the appointment of a third director, a personal action against Mr Tata, or a director’s application for liquidation.
[30] I agree that this dispute between Mr Tata and Mr Penneru should be resolved under the Companies Act 1993, not a summary procedure under the LTA. But that is no reason for not permitting THL to protect its equitable interest in the Properties in the meantime, through the Caveat.
Is the Caveat preventing refinancing?
[31] The respondents submit that the mortgage needs to be refinanced or one or more of the properties need to be sold. The mortgage is in arrears, so the respondents, who are personally liable under the loan agreement with the Lankey Family Trust,
6 Harley v McDonald [1993] 3 NZLR 345 and Harley v McDonald [2001] UKPC 18.
seek to sell one or more of the Properties or refinance. The circumstances are set out in Mr Tata’s first affidavit:
24.The mortgage was due to be repaid in 2018. Repayment has drifted. Since the mortgage is now in default, the mortgagees are able to charge the higher interest rate. …
25.The mortgagees now want the money back. I have been looking for refinancing. The banks have effectively stopped lending, and I have had to go to the secondary mezzanine market. …
26.These lenders require that the borrower be a company, and that that company be the landowner and the principal borrower. My wife and I would be the guarantors. …
…
32. Applicant [THL] is in a difficult financial position. All of its mortgage obligations for the last two years have been paid by me and my wife personally. The money is due to us as a loan, or to me on a shareholder’s loan basis.
…
50. My wife and I want to refinance the mortgage over the properties. The mortgagees have been very patient. I have heard that they may need the capital for a real estate invent. I would be most concerned if the properties came up for a mortgagee sale.
[32] This submission goes to the second issue: despite THL having established a reasonably arguable case for the Caveat, should I exercise my residual discretion and allow the Caveat to lapse? The respondents submit that there is no practical advantage to THL in maintaining the Caveat, rather it is in the interests of THL and the respondents that it lapses to allow refinancing and sale.
[33] The Court of Appeal has made it clear that the Court retains a discretion to remove a caveat even when the applicant has demonstrated a reasonably arguable caveatable interest.7 However, the Court should be cautious in exercising this discretion. Before it does so, it must be “completely satisfied that the legitimate interests of the caveator will not thereby be prejudiced.”8 The respondents have addressed the consequences that they say will follow if the Caveat is not lifted and the
7 Philpott v Noble Investments Ltd, above n 1, at [26](d).
8 Stewart v Kaipara Consultants Ltd [2000] 3 NZLR 55 at [22], citing Pacific Homes Ltd (in rec) v Consolidated Joineries Ltd [1996] 2 NZLR 652 (CA) at 656.
Loan cannot be refinanced and/or properties sold. But they have not proffered any evidence as to what will happen to THL’s equitable interest in the Properties if this course of action is permitted. Nor have they addressed the reconciliation of amounts owed by THL to the respondents against the withdrawals the respondents have made from the company’s accounts. All in all, I am far from “completely satisfied” that the legitimate interests of THL will not be prejudiced if the Caveat is lifted and the respondents are able to refinance or sell the Properties and do what they wish with the proceeds. Particularly as the respondents have rejected the Declaration as binding on them, so cannot be expected to observe THL’s interest in the Properties.
[34] In any event, Mr Penneru proposes to remove the Caveat to allow refinancing and sale on the basis that (a) the Caveat is re-lodged after registering the mortgage or sale of one or more of the Properties and/or (b) the net proceeds of sale are held in a solicitor’s trust account pending resolution of the various THL payment issues. Based on that assurance from Mr Penneru, the Caveat need not impede the necessary refinancing and/or sale.
Is Mr Penneru breaching his duties as a director?
[35] The respondents submit that Mr Penneru is not acting in the best interests of THL. However, such bare assertions are insufficient to displace THL’s reasonably arguable case of a caveatable interest. In any event, the summary procedures involved in an application of this nature is not suited for determination of such allegations of breach of director’s duties/fiduciary duties.
Result
[36] THL has established that it has a reasonably arguable case that it has a caveatable interest in the Properties, arising out of the Declaration. The respondents have not persuaded me that THL’s interests would not be prejudiced if the Caveat lapsed. The application for an order that the Caveat not lapse is allowed.
[37] As the unsuccessful party, the respondents should pay THL’s scale costs on a 2B basis. The parties are to confer and file a joint memorandum if possible, by 18 February 2021. If agreement is not possible, THL is to file a memorandum by 18 February 2021, and the respondents two weeks later.
Associate Judge Gardiner
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