Thomas v Harnish
[2021] NZHC 1007
•7 May 2021
IN THE HIGH COURT OF NEW ZEALAND WHANGAREI REGISTRY
I TE KŌTI MATUA O AOTEAROA WHANGĀREI-TERENGA-PARĀOA ROHE
CIV-2021-488-10
[2021] NZHC 1007
BETWEEN DAVID MICHAEL THOMAS and JEANETTE DIANNA THOMAS
Plaintiffs
AND
OWEN CECIL ERIC HARNISH
Defendant
Hearing: 12 April 2021 at 2:15pm Appearances:
Nura Taefi for the Plaintiffs Jeremy Browne for the Defendant
Judgment:
7 May 2021
JUDGMENT OF ASSOCIATE JUDGE R M BELL
This judgment was delivered by me on 7 May 2021 at 11:00am
pursuant to Rule 11.5 of the High Court Rules
…………………………. Registrar/Deputy Registrar
Solicitors:
Duncan King Law Limited (Campbell McGill), Epsom, Auckland, for the Plaintiffs Henderson Reeves (Jeremy Browne), Whangarei, for the Defendant
Copy for:
Nura Taefi, Barrister, Shortland Chambers, Auckland
THOMAS and THOMAS v HARNISH [2021] NZHC 1007 [7 May 2021]
[1] Mr and Mrs Thomas sue Mr Harnish for $291,621.82 under his guarantee of their loan to his company, Harnish Marine Ltd. Mr and Mrs Thomas took security over the assets of Harnish Marine Ltd under a general security agreement. The only significant asset was a vessel. The Thomases appointed receivers who sold it but that was not enough to clear the company’s indebtedness. The Thomases have applied for summary judgment.
[2] In opposition, Mr Harnish denies that his company defaulted under the loan agreement or, if it did, any default was not its fault. He says that the receivership was invalid and that the receivers breached their duties under ss 18 and 19 of the Receiverships Act 1993. The plaintiffs are arguably liable for the receivers’ breach of duty. He also says that this case should not be seen as a standard commercial claim against a guarantor. There is a family relationship. The plaintiffs are his daughter and son-in-law.
[3] There is no dispute that Mr Harnish guaranteed his company’s obligations under the term loan and the general security agreement. He does not raise any defences specific to the law of guarantees. The main questions are:
(a)Did Harnish Marine Ltd default under the loan agreement?
(b)Were the Thomases entitled to call up the principal?
(c)Were the receivers validly appointed?
(d)Are the Thomases responsible for the actions of the receivers?
(e)Did the receivers comply with their duties under ss 18 and 19 of the Receiverships Act 1993?
(f)What is the amount of the Thomases’ claim?
[4] I find for the Thomases on liability. Harnish Marine Ltd defaulted in a payment under the loan. The Thomases validly called up the principal and were entitled to appoint the receivers because of the company’s default. The receivers were agents of the company, not of the Thomases, who are not responsible for their actions. Accordingly, it is not necessary to consider whether the receivers breached their duties to Mr Harnish under s 19 of the Receiverships Act. The Thomases’ evidence as to their losses is insufficient, but I give them the opportunity to file further evidence.
[5] There is no dispute as to the principles applied on plaintiffs’ applications for summary judgment.1
Facts
[6] In 2010, Mr and Mrs Thomas had paid off the mortgage over their family home at Whangaparāoa. Mr Harnish asked them to take out a loan on their existing mortgage facility and to on-lend the funds to him. He was in his sixties and would find it difficult to raise finance from a lending institution. Mr Harnish was waiting on payment from the sale of a property he owned at Whitford. According to Mr Thomas, Mr Harnish said that he would need the loan for only about 12 months, after which the Thomases would be repaid in full. Mr Harnish offered them security over his boat, a 16-metre Alan Wright power catamaran which he told the Thomases was worth more than
$1 million. Mr Harnish says that it was a spec-built boat that cost around $2 million when it was built. It had many special features and only 100 hours on the engines. It was insured for $1.3 million.
[7] Mr Harnish has explained the background to his borrowing funds from Mr and Mrs Thomas and the time it has taken to repay them. He had owned a farmlet at Whitford which he sold in March 2007 with an 18-month settlement. With the global financial crisis, the purchaser, Mr Bruce, could not raise funds to complete the purchase. Mr Harnish accordingly gave Mr Bruce vendor finance of $1.1 million secured by a second mortgage behind Mr Bruce’s first mortgage to a bank. Mr Harnish says that Mr Bruce defaulted under the vendor loan and later also defaulted under the
1 Krukziener v Hanover Finance Ltd [2008] NZCA 187, (2008) 19 PRNZ 162 at [26].
mortgage to the bank which sold the property by mortgagee’s sale. All the proceeds of sale went to the bank.
[8] Mr Harnish took out the loan from the Thomases after he had taken the second mortgage over the Whitford property. The Thomases borrowed $350,000 from the Mortgage Holding Trust Company Ltd (NZHL) with their Whangaparāoa property as security. It was a table loan, repayable over 30 years, with monthly instalments. The Thomases could re-draw against the NZHL loan if, at the relevant time, they had paid more than they were required to pay under the monthly repayments. Mr and Mrs Thomas on-lent the $350,000 to Harnish Marine Ltd under a term loan agreement of 13 October 2010. The Auckland District Law Society’s Term Loan Agreement form was used. It includes these terms:2
2.The Borrower acknowledges that the Lender has borrowed the Principal Sum from Mortgage Holding Trust Company Limited (the Prime Lender).
3.The Borrower and Lender agree that the Principal Sum is advanced to the Borrower on the same terms and conditions contained in the Loan Agreement between the Prime Lender and the Lender dated 6 October 2019 (the Prior Agreement) annexed to this Agreement, and should any term of this Agreement conflict with a term of the Prior Agreement then the terms of the Prime Agreement shall prevail.
[9] Mr Harnish signed the loan agreement as covenantor of Harnish Marine Ltd. Harnish Marine Ltd also signed a general security agreement in favour of Mr and Mrs Thomas, which Mr Harnish also signed as covenantor. The Thomases took security over all the company’s present and after-acquired personal property.
[10] The Thomases’ home was security for the NZHL loan. They faced personal liability under its loan, if Mr Harnish defaulted in paying them. But under the arrangements they got nothing for taking these risks.
[11] Despite Mr Harnish’s hope that he would receive the proceeds of sale of the Whitford property within a year and would be able to repay the Thomases, he could not once the bank had sold the Whitford property. In 2012 he sued Mr Bruce and obtained judgment in 2013 for $1.7 million including costs. It has taken Mr Harnish
2 Table M – Additional items.
time to be paid. He found out that Mr Bruce had a 50 per cent shareholding in Whitford Property Ltd which owned other land suitable for development at Whitford. There was a mortgage to another bank. The 50 per cent shareholding appeared to have significant value. Under a sale order Mr Bruce’s shares were sold by auction. Mr Harnish was the successful bidder. The shares were transferred to him in 2014 and he became a director of Whitford Property Ltd. Mr Harnish had offers for his shares but they were not enough to repay his loss, and he did not accept them. One offer came from a Mr Hayhow, a developer. Whitford Property Ltd defaulted in its mortgage and the bank put the property up for tender. Mr Bruce requested the transfer of the mortgage to him as guarantor and repaid the mortgage. Mr Harnish believes that Mr Hayhow, the developer, provided the funds to pay off the bank.
[12] Mr Bruce, as mortgagee, arranged for the land owned by Whitford Property Ltd to be sold to Coumat Ltd, a company owned by Mr Hayhow. Whitford Property Ltd sued Mr Bruce, Coumat Ltd and Mr Hayhow in relation to the sale. Whitford Property Ltd was put into liquidation. In 2016, Coumat on-sold the Whitford property to a third party for around $22.5 million. In April 2017, judgment was given against the purchaser, Coumat Ltd and Mr Hayhow, for $2.6 million plus interest. An appeal to the Court of Appeal was unsuccessful.3 In February 2018 the judgment sum, which was by now over $4 million, was paid to the liquidator.
[13] There was not, however, an immediate distribution. Creditors’ claims in the liquidation of Whitford Property Ltd came to some $39.8 million. The liquidator examined the claims. Most were rejected. In February 2021, when he swore his affidavit, Mr Harnish had not yet received a distribution from the liquidator of Whitford Properties Ltd. I was advised in the hearing that payment is expected shortly. Mr Harnish’s account does not refer to all the decisions in this litigation. There are others.4
3 Coumat Ltd v Whitford Properties Ltd [2018] NZCA 15; Whitford Properties Ltd (in liq) v Bruce
[2017] NZHC 625.
4 Whitford Properties Ltd (in rec and liq) v Bruce [2015] NZHC 1426; Whitford Properties Ltd v Bruce [2016] NZHC 58; Whitford Properties Ltd v Bruce [2017] NZHC 1674; Whitford Properties Ltd (in liq) v Coumat Ltd [2019] NZHC 1001; Whitford Properties Ltd (in liq) v Coumat Ltd [2019] NZHC 2199.
[14] Mr and Mrs Thomas had nothing to do with all these delays in Mr Harnish realising funds from his Whitford property and the subsequent litigation, insolvencies and liquidations. They were kept waiting much longer than Mr Harnish had led them to believe when they would be repaid. In June 2016 they and Mrs Thomas’s brother and sister and her sister’s husband visited Mr Harnish at his home at Pakaraka to discuss the matter. Up until then, Harnish Marine Ltd had been paying monthly instalments to NZHL directly. It had also made two payments totalling $60,000 to reduce the loan, but later redrew those amounts. It did not make two payments in May and June 2016, but that was by agreement. Because there was room to redraw under the NZHL facility, that did not put the Thomases into default. Aside from the delay in repayment, the Thomases do not say that anything up to 2016 counts against Mr Harnish or his company.
[15] At the meeting at Pakaraka a proposal was put to Mr Harnish that the family would spend $15,000 on repairs and maintenance so that Mr Harnish could sell the boat and repay the loan. If Mr Harnish had not been repaid from Whitford by October 2017, they would take possession of the boat and sell it. Mr Harnish rejected the proposal.
[16] The Thomases say that later in 2016 Mr Harnish defaulted in paying NZHL, although the evidence shows that some of these defaults were later put right. One default was not however remedied. More about this aspect later. In 2017 Mr Harnish kept up payments until the Thomases appointed receivers.
[17]During 2017, the Thomases made written demands:
(a)Their lawyers’ letter of 28 February 2017 asking Mr Harnish for: an update on progress on repairs to the vessel; a time-frame to complete the repairs and begin marketing the boat; and requesting a sale of the vessel, that could be deferred if Mr Harnish succeeded in his litigation and was in a position to repay before sale.
(b)On 9 March 2017, their lawyers wrote to the lawyer who had acted for Mr Harnish in drawing up the term loan agreement and general security
agreement. The letter demanded repayment of $350,000, together with costs and said that there would be further action if payment was not made before 31 March 2017 or a compromise was entered into.
(c)The Thomases’ lawyer wrote again on 16 March 2017 advising that interest payments had been missed. Harnish Marine Ltd owed
$2,180.50 together with collection costs.
(d)On 11 August 2017, a written demand was served on Harnish Marine Ltd. Amongst other things, it said that Harnish Marine Ltd had not kept up with interest payments and the company was in breach. The letter referred to notification of the breach in the letter of 16 March 2017. The letter requested immediate repayment of the principal, interest and costs, totalling $350,769.62. This included a sum of $2,118.50 for a missed interest payment. The letter demanded payment in full by 18 August 2017 or satisfactory arrangements for payment, failing which action would be taken to recover the debt without further notice to Harnish Marine Ltd.
[18] On 21 August 2017 Mr Harnish sent the Thomases an email. It was not constructive.
[19] On 22 August 2017, Mr and Mrs Thomas appointed Ms Finnigan and Mr van Delden, Auckland insolvency practitioners, as receivers of Harnish Marine Ltd.
[20] On 11 September 2017, Mr Harnish’s lawyer wrote to the Thomases’ lawyer denying any knowledge of a demand for repayment made in March 2017 (although that lawyer had received it). The lawyer had instructions to contest the receivership.
[21] Later, Mr Harnish instructed Kerikeri solicitors who maintained that Harnish Marine Ltd was not in default under the loan agreement. At the end of 2017, Mr Harnish instructed a new lawyer in Auckland. In a letter of 6 December 2017, that lawyer contested that Mr Harnish of Harnish Marine Ltd had been at fault, said that the receivership was invalid, advised that there would be a claim for damages and that
Mrs Thomas would be excluded from Mr Harnish’s estate. The lawyer put forward another proposal for repayment within two years but that time would be extended if there was any water damage to the boat. The Thomases would have to pay the costs of the receivership. There was further correspondence between lawyers, but without any agreement being reached.
[22] On 30 May 2018, the Thomases’ lawyer made written demand on Mr Harnish under his guarantee. This letter stated that the amount outstanding under the guarantee was $412,818.26. The letter included a schedule showing how that amount was calculated. Mr Harnish then instructed his present solicitors.
[23] At the start of the receivership, Harnish Marine Ltd’s boat was at the Opua marina. A ship’s broker, who had an office at the marina, gave advice to the receivers on marketing the vessel including giving a price estimate of $550,000. The receivers listed the vessel with the brokers for sale by tender. The vessel was advertised in New Zealand and overseas. There was very little interest. The boat required repairs. The Thomases paid for the repairs.
[24] In May 2018 the receivers received an offer of $370,000 for the vessel but that was not accepted as it was considered the vessel was more valuable. There was another offer, this one for $500,000, conditional on sea trial, but the trial was not successful given the number of defects which became apparent. There was an offer of
$400,000 (GST inclusive) but the receivers rejected that.
[25] In September 2018 it was decided to move the vessel to Auckland as it was thought that would make it easier to sell. But the vessel broke down during the voyage. There were temporary repairs when the vessel got to Auckland. In early November 2018 more repairs were required to get the boat running for sea trials. In December 2018, the receivers had a conditional offer of $200,000 cash (including GST) and trade of a 13-metre McBride vessel, Vixen. The offer was conditional on a sea trial and
$20,000 of the purchase price would be held to deal with any further issues or costs associated with the fuel system. The receivers accepted the offer. There were more breakdowns on the trip to Picton, and the receivers refunded the $20,000 to the
purchaser. The purchaser is understood to have carried out extensive repairs and refurbishment to the vessel. It was advertised for sale in the South Island for $875,000.
[26] Mr Thomas says that he and his wife were not in a position to spend large sums on the vessel to obtain a good sale price. On the sale of the vessel, Mr and Mrs Thomas received a distribution of $90,000. There was a deduction for the commission on the sale and receivers’ fees, and a small amount was retained to cover insurance and berthing costs.
[27] Mr van Delden, one of the receivers, describes the marketing and sale of the 13-metre McBride vessel, Vixen. It was listed with the same brokers who sold the Power Cat and was advertised on websites and hard copy publications. Mr van Delden says that in 2020 there was little interest – which he attributes to COVID-19 and the resulting financial climate. The asking price was steadily reduced in 2019 and 2020. It was eventually sold in March 2021 for $150,000.
[28]The distributions to Mr and Mrs Thomas from the receivership came to
$209,000.5 But against that the Thomases had paid substantial amounts towards the costs of the receivership. In March 2020, Mr and Mrs Thomas repaid the NZHL loan in full. When the receivers were appointed, Mr Harnish and Harnish Marine Ltd made no more payments and the Thomases had to service the NZHL loan themselves. They sold two sections to provide the funds to repay the loan.
[29]The Thomases calculate their claim as follows:
(a)Repayment of the NZHL loan $262,780.00
(b)Monthly loan repayments for which
they have not been reimbursed $37,518.50
(c)Costs of the receivership and costs
of repairs paid by the Thomases $87,459.52
(d)Further costs $5,229.90
(e)Legal costs $14,474.40
(f)Further legal costs $2,392.00
(g)Legal disbursements $767.50
$410,621.82
5 $90,000 from the sale of the Power Cat; $119,000 from the sale of Vixen.
LESS proceeds of sale of Vixen $119,000.00
$291,621.82
The family relationship
[30] It was submitted for Mr Harnish that the family relationship was an important part of the context. Certainly the family relationship provides the explanation for the Thomases mortgaging their home as security to NZHL and on-lending the funds to Mr Harnish. The family goodwill can be seen in the Thomases not receiving anything by way of tangible benefit after mortgaging their home to benefit Mr Harnish. But at the same time, the parties took care to have their arrangements formally documented and put into legally enforceable form. That meant that if differences arose, rules were in place to determine the parties’ respective rights, powers and liabilities. Matters did not run as the parties originally hoped. Mr Harnish could not or would not repay when the family originally believed that the arrangement would be only relatively short- term. Goodwill disappeared. That can be seen in Mr Harnish’s abusive emails to his daughter. The family relationship broke down. The parties were left to the legal arrangements they had put in place in 2010. The family context does not count against the parties being held to the standards they agreed to at the outset.
Did Harnish Marine Ltd default under the loan agreement?
[31] Mr Harnish has always maintained that there were no defaults under the loan agreement and therefore the appointment of the receivers was invalid. But, by the hearing, he accepted that there was one default — a failure to pay one instalment due on 2 November 2016. While that common ground is enough to establish the default, it needs to be put in its setting.
[32] Mr Harnish or his company had been paying NZHL monthly instalments by direct debit and so meeting the Thomases’ obligations under the NZHL loan. But the instalment due on 2 August 2016 was missed. The Thomases paid $1,500 to NZHL on 3 August 2016. During August, the amount of monthly payments went up to
$2,118.50. Mr Thomas says that he told Mr Harnish about this. Harnish Marine Ltd did not pay the monthly instalment due on 2 September 2016. The Thomases paid
$2,138 to NZHL. Mr Thomas says that on 13 September 2016 he sent Mr Harnish an email regarding these missing payments and asking Mr Harnish to reimburse them. Mr Thomas arranged for a new direct debit document to be sent to Mr Harnish. Mr Harnish did not complete and return the document to NZHL. On 29 September, Mr Harnish emailed NZHL saying that he had decided not to reinstate the direct debit because of ongoing family problems. He asked for the bank account details and said that he would pay manually by internet. In reply, NZHL gave him the account number and told him that the monthly payment was $2,118.50 due the second of each month. Mr Harnish made the payment due on 2 October, but he did not make the payment due on 2 November.
[33] On 7 November 2016, Mr and Mrs Thomas paid $2,200 to NZHL for the missed November payment. All up, they had paid NZHL $5,838 for which they had not been reimbursed by Harnish Marine Ltd. On 30 December 2016, Mr Harnish paid
$3,683 into their joint account, still leaving the November payment unreimbursed.
[34] The non-payment of the November 2016 instalment was a default under cl 2.3 of the NZHL Loan Standard Terms and Conditions and similarly, under cls 4 and 7 of the ADLS term loan agreement between the Thomases and Harnish Marine Ltd.
[35] Mr Harnish reimbursed the Thomases for the missed instalments for August and September 2016. As I will explain later, because those defaults were cured, they arguably do not count for the powers the Thomases exercised later.
Did the Thomases effectively call up the principal under the loan?
[36] Contractual provisions allow Mr and Mrs Thomas to call up the principal amount owing under the loan upon default. In the NZHL agreement the loan standard terms and conditions of the NZHL agreement include:
2.3Events of Default: If at any time and for any reason whether or not within your control:
(a)you fail to make a payment when due under any Document;
…
then we may, at any time by notice to you:
…
(ii) declare any or all of the Loan to be due and payable either immediately or at such later date as we may specify whereupon that indebtedness will become so due and payable;
…
13.7 Waivers: No failure to exercise any right under the Agreement or any other Document will operate as a waiver of that right. No waiver by us of our rights under the Agreement or any other Document will be effective unless it is in writing signed by us.
[37]The ADLS term loan has comparable terms.
8.RIGHTS AND POWERS OF LENDER ON DEFAULT
(a)Rights and powers generally: If default occurs, the lender may at any time or times thereafter, in addition to any rights, remedies or powers otherwise conferred upon the lender by law, exercise all or any of the following rights and powers separately or concurrently:
(i)Call up the balance of the moneys owing in accordance with clause 9 …
(b)Delay does not affect exercise of powers: The lender’s rights under this contract will not be affected by any delay in exercising them (whether or not the lender knows that they have become exercisable). The lender may only be held to have acquiesced in or waived any matter in relation to this clause if and to the extent that the acquiescence or waiver is expressed in writing.
(c)When notice required: Except as required by law or the terms of this contract, the lender need not give any notice before exercising all or any of its rights and powers following a default.
…
9.ACCELERATING PAYMENT OF THE MONEYS OWING ON DEFAULT:
If default occurs, the moneys owing will become due and payable upon demand or, to the extent any notice is required by law to be given before the secured moneys become payable, immediately on expiry of the relevant notice period, without the need for any further notice or demand.
[38] There are no statutory requirements for notice to be given before a loan is accelerated for default. Section 128 of the Property Law Act 2007 provides that no amounts secured by mortgage over goods are payable under an acceleration clause unless a notice under s 129 of that Act has been served on the mortgagor and the default
is not remedied. But under s 135, that notice is not required in certain cases including 135(1)(e):
the mortgage over goods arises under a mortgage debenture (whether or not there is a collateral mortgage over those goods securing the same amounts).
The general security agreement in this case is a mortgage debenture as defined in s 4:
mortgage debenture means an instrument creating a charge on property of a body corporate that comprises all, or substantially all, of the assets of the body corporate.
[39]The Thomases rely on these demands:
(a)the letter of 9 March 2017 asking for payment of the principal by 31 March 2017;
(b)the letter of 16 March 20217 asking for payment of the principal under the loan together with the November instalment and legal costs;
(c)the demand of 11 August 2017 served on Harnish Marine Ltd requiring payment of the loan principal, interest and costs.
[40] The first two letters were posted to the lawyer who acted for Harnish Marine Ltd when the loan documentation was prepared. While, as a matter of professional courtesy, it is understandable that the Thomases’ lawyer would write to the lawyer they believed was acting for Harnish Marine Ltd and Mr Harnish, those letters did not comply with the notice requirements under the loan documents. Under the NZHL loan (cl 13.9) notices may be sent to the borrower at the address or facsimile number last known to the lender. That meant the registered office of Harnish Marine Ltd, at Mr Harnish’s home at Pakaraka. It is arguable for Mr Harnish that the demands of 9 and 16 March 2017 were invalid. He denies that he personally received them.
[41] On the other hand, the demand of 11 August 2017 was served personally by a process server, who gave the notice to Mr Harnish at his home (which was also the registered office of Harnish Marine Ltd). That was effective to call up the principal amount under the loan.
[42] It might be said in hindsight that it would have been helpful if the Thomases had adopted a procedure similar to that under ss 128 and 129 of the Property Law Act 2007 by giving notice to Harnish Marine Ltd that the November 2016 instalment was still outstanding and requiring it to be paid within a specified period. Although that was not done, the Thomases were within their rights under the agreement in accelerating the loan, even without any earlier formal demand.
[43] There was a suggestion in the written submissions for the Thomases that the delay in paying the August and September 2016 instalments could also justify accelerating the loan. But those defaults had been remedied when Mr Harnish paid those instalments to Mr and Mrs Thomas, albeit late. It is arguable for Mr Harnish that a remedied default cannot be used to justify accelerating the loan. One basis for that is contractual interpretation. The power to accelerate is a remedy for default, but if the default has already been cured, the reason for the remedy falls away. There is a further basis: s 25 of the Personal Property Securities Act 1999 which provides that rights under a security agreement must be exercised in good faith and in accordance with reasonable standards of commercial practice. It is arguable for Mr Harnish that a secured creditor breaches s 25 when a loan is accelerated after a debtor has brought payments up to date.6
Were the receivers validly appointed?
[44]These provisions of the general security agreement are relevant:
3.COVENANT TO PAY AND TO COMPLY WITH OBLIGATIONS
(a)Pay and comply:
The party granting the security must:
(i)Pay the secured moneys at the times and in the manner provided by any secured agreement and, to the extent that there is no such agreement, then upon demand.
…
6 Robinson v United Building Society HC Dunedin CP 35/87, 7 May 1987; and see Peter Blanchard and Michael Gedye Private Receivers of Companies in New Zealand (LexisNexis, Wellington, 2009) at 58, [3.03].
19.WHEN DEFAULT OCCURS
Default occurs if:
(a)breach of obligation to pay money: any party granting the security fails to pay any part of the secured moneys in accordance with clause 3(a)(i) and 3(b); …
…
20.RIGHTS AND POWERS OF SECURITY HOLDER ON DEFAULT
(a)Rights and powers generally: If default occurs, the security holder may at any time or times thereafter, in addition to any rights, remedies or powers otherwise conferred upon the security holder by law, exercise all or any of the following rights and powers separately, or any two (2) or more of them concurrently:
…
(v)in respect of all collateral, appoint a receiver of all or any part of the collateral in accordance with clause 25;
…
25. RECEIVER
(a)Security holder’s powers: At any time after default, the security holder may:
(i)appoint: appoint in writing any person or persons to be receiver of all or any of the collateral;
…
[45] Harnish Marine Ltd had not paid the November 2016 instalment; the Thomases were entitled to accelerate because of non-payment; and Harnish Marine Ltd did not pay the principal amount upon demand on 11 August 2017. Therefore, the Thomases are entitled to appoint the receivers on 22 August 2017. The deed of appointment between the Thomases and the receivers has appropriate words of appointment. Clause 2.1:
The Secured Creditor appoints the Receivers jointly and severally to be the receivers and managers of the Charged Property with the powers conferred upon a receiver and manager under the provisions of the General Security Agreement and by law.
That reflects a purely contractual approach.
[46] It was submitted for Mr Harnish that that is not the full picture. Section 25(1) of the Personal Property Securities Act 1999 says:
All rights, duties, or obligations that arise under a security agreement or this Act must be exercised or discharged in good faith and in accordance with reasonable standards of commercial practice.
[47] In Compass Capital Ltd v The New Zealand Guardian Trust Company Ltd,7 Cooper J accepted that the power to appoint a receiver arises under a security agreement and accordingly the appointment of a receiver may be caught by s 25(1). After referring to s 6(1) of the Receiverships Act which provides that a receiver may be appointed in respect of property of a person under a power conferred by a deed or agreement to which that person is a party, Cooper J noted that it was uncontroversial that at common law the appointment of a receiver could be challenged if the creditor had acted in bad faith. He would find it difficult to accept that the good faith obligation should remain under s 25(1), but the wider obligations arising from s 25(1) should be somehow precluded by s 6.8 He noted that Blanchard and Geddye’s Private Receivers of Companies in New Zealand accepted that the appointment of a receiver would be caught by s 25.9
[48] As for “reasonable standards of commercial practice” the text quotes Tipping J’s discussion in Greenbank NZ Ltd v Haas of that term in the context of the oppression provisions of the credit contracts legislation:10
…In a sense that phrase [“reasonable standards of commercial practice”] gives the underlying commercial rationale for the earlier words or phrases. Something which is, for example, unjustly burdensome must necessarily be regarded as being in contravention of reasonable standards of commercial practice; similarly with something harsh. To determine whether a contract or term is oppressive within any of the words or phrases in the definition, it is necessary to have some basis of comparison. In the context the comparator can only be what would be expected or acceptable in terms of reasonable standards of commercial practice. Something which is in accordance with such reasonable standards could hardly be held to be oppressive. Conversely, something which is not in accordance (ie in contravention of) such standards is, by definition, oppressive. It is therefore important, unless the oppressive
7 Compass Capital Ltd v The New Zealand Guardian Trust Company Ltd HC Auckland CIV-2009- 404-1500, 19 March 2009, at [31].
8 At [32].
9 Peter Blanchard and Michael Gedye Private Receivers of Companies in New Zealand (LexisNexis, Wellington, 2009) at [3.03], as cited in Compass Capital Ltd v The New Zealand Guardian Trust Company Ltd HC Auckland CIV-2009-404-1500, 19 March 2009, at [33].
10 Greenbank NZ Ltd v Haas [2000] 3 NZLR 341 (CA) at [24].
aspect is beyond rational dispute, for the Court to be properly informed how the contract or term measures up against reasonable standards of commercial practice.
[49] It was submitted for Mr Harnish that appointing receivers in relation to the November 2016 payment was not in accordance with “reasonable standards of commercial practice”. There is no evidence from Mr Harnish as to what “reasonable standards of commercial practice” would require.
[50]The actions of the Thomases are to be understood in the light of these matters:
(a)While the table loan from NZHL was for 30 years, the parties agreed in 2010 that the arrangements were in the nature of bridging finance until Mr Harnish was paid out from the sale of his Whitford property. That was understood to be after about a year.
(b)In 2016, long after the Thomases should have been repaid, the parties discussed selling the vessel with a view to repaying the Thomases, but Mr Harnish rejected that.
(c)Mr Harnish took no steps himself to sell the vessel.
(d)In August 2017, more than five years had passed since Mr Harnish had suggested that they would be repaid.
(e)In August 2017, there was little sign that Mr Harnish would be repaying the Thomases soon. Mr Harnish’s email of 21 August 2017 to his daughter made it clear that he had no intention of repaying them promptly.
(f)The November 2016 payment remained unpaid.
(g)The Thomases were not required to hound Mr Harnish for payment before enforcing their remedies.
(h)Appointing receivers is a standard remedy for a secured creditor under a general security agreement.
(i)If the Thomases did not exercise the remedies available to them under the loan agreement and the general security agreement, they faced an uncertain wait for repayment.
In these circumstances, it is not reasonably arguable that appointing receivers was not in accordance with reasonable standards of commercial practice. They were validly appointed after default by Harnish Marine Ltd.
Are the Thomases responsible for the actions of the receivers?
[51] Mr Harnish is critical of the steps taken by the receiver to sell the Power Cat and later Vixen. He says that they breached their duty to him as guarantor under s 19 of the Receiverships Act 1993 to obtain the best price reasonably obtainable as at the time of sale. That can only be a defence if Mr and Mrs Thomas are liable for the receivers’ actions.
[52]Section 6(3) of the Receiverships Act 1993 says:
A receiver appointed by, or under a power conferred by, a deed or agreement is the agent of the grantor unless it is expressly provided otherwise in the deed or agreement or the instrument by or under which the receiver was appointed.
Under s 2, the grantor is the person in respect of whose property a receiver is, or may be, appointed. In this case, the general security agreement is clear that the receiver is the agent of Harnish Marine Ltd. Clause 25(b) of the general security agreement says:
Receiver agent of party granting the security: Any receiver appointed by the security holder under clause 25(a) will be the agent of the party granting the security and the party granting the security alone is responsible for the receiver’s acts and defaults and for the receiver’s remuneration.
[53] Notwithstanding that, it was submitted for Mr Harnish that there are circumstances where the security holder may be liable for the actions of receivers. Those circumstances include where the secured party participates in acts that are improper and causes loss to the company or unduly interferes in the conduct of the
receivership or, knowing that the receiver is abusing the powers conferred, fails to revoke the appointment and is thereby guilty of bad faith towards the debtor company.11 In Medforth v Blake, Sir Richard Scott V-C said:12
A mortgagee who has appointed a receiver has no general right to instruct the receiver as to how or when to exercise the powers that have been conferred on the receiver. The mortgagee retains his own powers as mortgagee. He does not, for example, lose his power to sell by appointing a receiver with a power of sale. The receiver, on appointment, exercises his powers as agent for the mortgagor. … If a mortgagee establishes a relationship with the receiver he has appointed under which the receiver exercises his powers in accordance with instructions given by the mortgagee, I can see the force of an argument that if the receiver is liable to the mortgagor then so will the mortgagee be liable. … If the mortgagee chooses to instruct the receivers to carry on the business in a manner that is a breach of the receivers’ duty to the mortgagor, it seems to me quite right that the mortgagee, as well as the receivers, should incur liability. This conclusion does not in the least undermine the receivership system. What it might do is to promote caution on the part of a mortgagees in seeking to direct receivers as to the manner in which they (the receivers) should exercise their powers. I would regard that as salutary.
[54]Blanchard and Geddye say:13
Whichever view is taken of the basis of the secured party’s potential liability when the receiver is prima facie the agent of the debtor, it is apparent that the secured party’s intervention will need to be serious before the secured party is found liable for the receiver’s actions. Giving advice to, or holding discussions with, the receiver, or simply making known preferences, will not render the secured party liable.14
And:15
Indeed, it appears that even when a secured party gives instructions to a receiver (appointed as the agent of the company) the actions of the receiver in reliance upon them may be taken, so far as an affected third party is concerned, as the actions of the company, not of the secured party,16 although … this depends upon the extent of the secured party’s interference.
[55] It was submitted that Mr and Mrs Thomas could have intervened in the receivership and therefore this issue should go to trial. That submission was speculative. There is nothing in the evidence to suggest that the Thomases acted in
11 Peter Blanchard and Michael Gedye Private Receivers of Companies in New Zealand (LexisNexis, Wellington, 2009) at [3.20].
12 Medforth v Blake [2000] Ch 86 (CA) at 95.
13 At 39, [2.06].
14 See State Bank of New South Wales v Chia (2000) 50 NSWLR 587 at para [885].
15 At 82, [3.20].
16 R A Price Securities Ltd v Henderson [1989] 2 NZLR 257.
any other way than as secured creditors who had appointed receivers to act as agents of Harnish Marine Ltd. That is borne out by the receivers’ time records, which include entries such as:
(a)updating secured creditor on sale process;
(b)dealing with secured creditor query, director issues;
(c)response to secured creditor and agent with update on progress;
(d)correspondence with secured creditor and agent on offer;
(e)correspondence with solicitor and secured creditor on outstanding invoices.
These entries, and similar ones, show no more than communications that would be expected between receivers and their appointing creditors. They do not support any argument that Mr and Mrs Thomas had taken over the receivership and were directing what the receivers were to do. It is not reasonably arguable that they are personally liable for any breaches of duty by the receivers.
Did the receivers breach their duties to Mr Harnish under s 19 of the Receivership Act?
[56] It is not necessary to address this question in the light of my conclusion that Mr and Mrs Thomas are not liable for the actions of the receivers. It is safer that I do not address this issue as it is no longer relevant. Mr Harnish may wish to pursue the receivers directly. It would not be right for me to comment on the merits of his complaints against them when the receivers have not been heard. Nothing in this decision is meant to indicate whether Mr Harnish’s complaints are well-founded.
What is the amount of the Thomases’ claim?
[57] Normally when a lender sues for repayment of a loan, they prove the amount payable under the loan, including any accrued interest, give credit for any payments made and, where the terms of contract allow, also claim for any costs of enforcement.
In short, the lender sues to be put into the same position as if the borrower had performed their contract. But here, the Thomases have taken a different approach. They have claimed for how much they are out of pocket. They have claimed for repaying the NZHL loan in 2020, the monthly loan repayments they made under the NZHL loan, the costs of the receivership and boat repairs which they paid personally, and their legal costs and legal disbursements. This is more a reliance claim than one based on expectation. That approach is open to them. It may be easier to calculate. There is nothing wrong with their putting the claim on that basis. They have established that these losses were the result of the breach of contract by Harnish Marine Ltd and they are entitled to look to Mr Harnish under his guarantee to make good the losses.
[58] There is, however, a question of proof of the costs they have claimed. They have provided schedules of payments of receivers’ costs, boat repair costs, legal costs and disbursements. But they have not provided any documents, such as invoices, to prove these charges. Nor have they put in evidence any documentary evidence proving the repayment of the NZHL loan.
[59] For Mr Harnish, it was objected that there was no verification of these payments. Until actual evidence of these costs was provided, this part of the claim was not beyond challenge. The point is properly taken. The Thomases should prove their costs.
[60] That does not, however, mean that I should dismiss the summary judgment application. The Thomases have proved their case on liability. The summary judgment hearing will be adjourned to give the Thomases the opportunity to provide evidence of costs they paid. I encourage the parties to exchange information. The parties may be able to agree on the quantum of the claim. Mr Harnish will appreciate that under the terms of the agreement he is liable for the Thomases’ actual and reasonable legal costs. He can reduce those by saving them work on proving their damages.17
17 While I consider this a continuation of the summary judgment application, an alternative basis is that liability has been established, and damages are to be assessed: Senior Courts Act 2016 s 20(1)(f).
Outcome
[61]Accordingly:
(a)I find for the plaintiffs on liability;
(b)I adjourn the summary judgment application to the summary judgment list on Monday, 24 May 2021; and
(c)by 17 May 2021, the plaintiffs are to file and serve an affidavit proving their costs incurred, including exhibiting all invoices for their costs.
…………………………………….
Associate Judge R M Bell
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