Bank of New Zealand v Adsett [2000] NZCA 119; [2000] 3 NZLR 446; (2000) 4 NZ ConvC 193,229 (10 July 2000)

Last Updated: 8 December 2011

IN THE COURT OF APPEAL OF NEW ZEALAND

CA280/99

	BETWEEN	BANK OF NEW ZEALAND
		Appellant

	AND	JOHN GARRY PETER ADSETT AND MAUREEN HILDA ADSETT
		Respondents

Hearing:	14 June 2000
Coram:	Richardson P Gault J Henry J Blanchard J Tipping J
Appearances:	N S Gedye and J A Macgillivray for the Appellant R B Stewart QC for the Respondents
Judgment:	10 July 2000

JUDGMENT OF THE COURT DELIVERED BY HENRY J

[1] In a judgment delivered on 3 November 1999, Master Kennedy-Grant dismissed the appellant Bank’s application to strike out a claim instituted against it by the respondents. The claim is based on an allegation that the Bank wrongfully exercised its power of sale under a mortgage by failing to give the notice required by s92(1) of the Property Law Act 1952. The issue before the Master was whether on the pleaded facts that allegation could be sustained. The Bank applied to review the Master’s judgment, and the review was removed to this Court.

Background

[2] On 22 January 1996 the Bank advised that it had approved two facilities, one to refinance the respondents’ existing mortgage and the second to provide capital for Bedrock Industries Limited, a company in which they held controlling interests. The first facility was a term housing loan to the respondents of $140,000 of 15 years requiring monthly repayments of principal and interest. The second was a business term loan to Bedrock of $250,000, requiring monthly repayments. The security identified by the Bank in the letter was a first registered debenture over the assets and undertaking of Bedrock, a registered chattels security with certain items of plant owned by the company, a guarantee from the respondents to a limit of $280,000, and a first registered mortgage over a residential property owned by the respondents.
[3] A formal offer to Bedrock dated 25 January 1986 stipulated for a debenture, a chattels security, and a guarantee from the respondents, all in accordance with the terms of the earlier letter. There is no reference to a mortgage in the offer, which is expressed as containing the terms and conditions of a term loan to Bedrock. It is now accepted that the respondents are not parties to this loan agreement, and their involvement is only as guarantors. The standard terms and conditions which also apply to the facility do not refer to the respondents. It is common ground that the standard terms and conditions do not make the respondents either parties to the loan agreement or principal debtors.
[4] The guarantee defines Bedrock as principal debtor, and identifies the respondents as guarantors. It is in standard form, and comes into operation in the event of default by Bedrock. The respondents covenanted to pay on demand whatever was owed by Bedrock to the Bank.
[5] The mortgage is given by the respondents. Bedrock is not cited in the document. It too is in standard form. The debenture executed by Bedrock contains no provision of any present relevance.
[6] Bedrock defaulted in its obligations under the facility, and on 15 August 1997 the Bank issued a notice requiring payment of a total sum of $249,318.30. This sum included the principal, liability for which had been accelerated under the terms of the loan following default by Bedrock. On the same day the Bank issued a demand on the respondents seeking the same amount under the guarantee. The demands were not met. Bedrock was placed in receivership, and notices under s92(1) of the Property Law Act 1952 were issued against the respondents based on failure to remedy the demands of 15 August 1997. A mortgagee sale resulted, and the present proceedings followed. The basic issue for determination is whether the Bank was required to issue s92(1) notices to the respondents in respect of the earlier default by Bedrock which gave rise to acceleration of its debt. The only default notices under s92(1) given to the respondents prior to exercise of the power of sale were those demanding payment of the accelerated debt.

The legislation

[7] Two statutory provisions featured in the argument. First, s92(1) of the Property Law Act 1952 which provides:

92. Restriction on exercise by mortgagee of his rights - (1) Subject to the provisions of this section, no power to sell land or to enter into possession of land conferred by any mortgage shall become or be deemed to have become exercisable, and no money secured by any mortgage of land shall become or be deemed to have become payable, by reason of any default (whether made before or after the commencement of this Act) in the payment of any money so secured or in the performance or observance of any other covenant expressed or implied in the mortgage unless and until the mortgagee serves on the owner for the time being of the land subject to the mortgage a notice that complies with the requirements of this section, and (in any case where the default complained of is capable of remedy) the owner fails to remedy the default before the date specified in the notice.

[8] Second, s9 of the Receiverships Act 1993 which provides:

9. Application of section 92 of Property Law Act 1952 to receivers (1) Nothing in section 92 of the Property Law Act 1952 applies to-

(a) The appointment of a receiver by a mortgagee; or

(b) The entering into possession of property by a receiver; or

(c) The payment of money secured by a debenture.

(2) Section 92 of the Property Law Act 1952 applies to the exercise by a receiver appointed by or under a deed or agreement of a power of sale in relation to land.

(3) For the purposes of subsection (2) of this section, section 92(6) of the Property Law Act 1952 applies to a receiver exercising a power of sale under a debenture as if the receiver was a mortgagee exercising a power of sale conferred by a mortgage of land.

[9] We turn to s92(1), which is the key provision. We will in due course refer to authorities which have construed the subsection, but the immediate and essential enquiry must be to consider the particular mortgage document, and any other evidence, whether documentary or oral, properly associated with it and relevant to its meaning in the context of s92(1). Before doing that, it can be noted that the scope of s92(1) as it relates to present issues, appears clear. It does no more than prevent a monetary liability becoming payable by reason of a default in the performance of a covenant, express or implied, under the mortgage. Included in such default is a failure to pay money pursuant to an obligation under the mortgage.
[10] At the heart of the case for the respondents must be the contention that the initial default in payment by Bedrock was a default in payment of money secured under the mortgage. It is therefore necessary to determine what was secured under the mortgage. That is expressed as follows:

AND for the better securing to the Bank and its assigns the payment in manner aforesaid of all moneys hereby secured or intended so to be the Mortgagor/s hereby mortgage(s) to the Bank all the (respective) estate(s) and interest(s) of the Mortgagor/s in the said land(s) hereinbefore described.

[11] Under clause 1 of the memorandum of mortgage, the mortgagors covenanted “on demand...to pay to the Bank...all monies which remain unpaid...in respect of which the mortgagors have become liable on any guarantee...given to the Bank.” That is the only provision governing the mortgagors’ liability to the Bank which could be relevant to the present situation.
[12] It is next necessary to consider what liability has arisen under the deed of guarantee. What is guaranteed under that is payment to the Bank on demand in writing of all sums of money for which the principal debtor (Bedrock) has become liable. The only demand made on the mortgagors was that of 15 August 1997, for the accelerated debt due by Bedrock. We are quite unable to see how it can be said that liability for the accelerated debt has become payable by reason of any default in payment of money secured by the mortgage. The mortgagors have made no such default. The mortgage does not secure money payable by Bedrock; it secures and secures only money payable by the mortgagors. The only money which has become payable by the mortgagors is that demanded in the notices of 15 August 1997. There is nothing in the other documentation to warrant a different conclusion, and no question of acceleration of money payable under the mortgage arises.
[13] Under the terms of its loan agreement Bedrock became liable for the accelerated debt. That acceleration had nothing to do with the mortgage, which covered entirely separate rights and obligations as between the Bank and the mortgagors. It is in our view impossible to argue that the monetary obligations of Bedrock were secured by this mortgage, and that its debt could not be accelerated without the issue of a default notice under s92(1), not to it, but to a separate party. Once it is accepted that the Bedrock debt was accelerated by its earlier default, any further or alternative argument that nevertheless the mortgagors’ liability was for some other lesser debt requiring the issue of a notice, falls away. The debt which the mortgagors have guaranteed is the debt of Bedrock - its liability cannot be accelerated for one purpose, yet not accelerated for another.
[14] In his submissions, Mr Stewart QC for the respondents placed particular reliance on two earlier authorities of this Court as supporting his contention that Bedrock’s liability to the Bank was secured by a mortgage of land. The first was Commodore Pty Limited v Perpetual Trustees Estate & Agency Co of New Zealand Limited [1984] 1 NZLR 324. In that case the principal borrower had granted a mortgage over land as security. The loan was guaranteed, but the guarantors themselves provided no security. The lender was empowered to demand from the guarantors the full amount of the debt in the event of default. The principal borrower had the benefit of s92(1) and there could be no acceleration of its debt without the requisite notice being given. Cooke P took the view that the preferable construction of s92(1) was that an acceleration provision could not take effect against any person contractually liable to the mortgagee without the one month’s notice being given. Somers J reached a similar conclusion, holding that the subsection was not to be read down as applying only in respect of moneys paid by the owner (mortgagor). Bisson J agreed. The case is distinguishable from the present. In Commodore the guarantee was contained in the mortgage document, and covered default of the mortgagor (clause 26). The mortgagee did not call up the principal from the mortgagor, which therefore was not itself in default of payment of the accelerated debt. Clause 26 accordingly could not be relied upon. The separate covenant (clause 25) permitting the mortgagee to accelerate the debt as against the guarantors did not override s92(1), which applied because the principal moneys were claimed against the guarantors as payable by reason of default in payment of interest by the mortgagor. Commodore was based on its particular contractual provisions, and as we read it the only principle it advances is that s92(1) is not confined in its operation to the rights and obligations of mortgagor and mortgagee, but may include those of a guarantor. Putting the point another way, the guarantors could not be required to pay principal moneys not yet due by the mortgagee, because those moneys had not been called up and could not be called up without a s92(1) notice first having been given.
[15] The second case is BNZ Finance Ltd v Smith & Leuchars [1991] 3 NZLR 659. There a loan by the financier to a company was guaranteed by a number of guarantors, three of whom also granted supporting mortgages to the financier. The company gave no mortgage. In substance, the transaction could be described as constituting a number of loans, rolled up into one and channelled through the company. The guarantors effectively undertook primary responsibility under the facility. The financier made demand under the guarantees for the accelerated debt which had become due by the company. As Cooke P noted, the documents were widely drawn to ensure the mortgages given by the guarantors were not merely securities for the guarantees. The dicta relevant to the present issue are strictly obiter, and, in our respectful view importantly, they relate to a quite different factual situation, one where the whole documentation became relevant to a determination as to the application of s92(1). We appreciate that Cooke P expressly said that this did not appear to him to be important to the end result, but clearly the context cannot be ignored. The reasoning in the separate judgments of the majority on the question of the application of s92(1) is not identical, but Mr Stewart helpfully analysed the general substance of the common view that s92(1) did apply. He formulated the resulting proposition as being that if a guarantor of a loan to a borrower provides a mortgage in support of the guarantee, then the loan is secured by a mortgage of land for the purposes of s92(1) notwithstanding the guarantor’s liability is accessory or secondary to the borrower’s liability.
[16] We are unable to accept such a broad proposition, expressed as it is in absolute terms. In our view the words of s92(1) are relatively clear and free from ambiguity. We say “relatively” because we think there is room to argue that it is concerned only with the rights and obligations of mortgagor and mortgagee, not other persons who are not in a contractual sense parties to the mortgage. It is directed to the default in obligations arising under the mortgage, which give a mortgagee rights which the subsection curtails. But more importantly, we do not see how the applicability of the subsection can be determined in the absence of a proper consideration of the relevant documentation. What money is secured under a mortgage of land must be fact dependent in any given case, and requires an examination of the relevant documentation. Thus in the present case, as we have endeavoured earlier to demonstrate, it is not the loan to Bedrock which this mortgage has secured.
[17] This approach is in conformity with that taken by Richardson J in BNZ Finance Ltd. It follows that we are unable to endorse a wider construction of s92(1) of the kind extracted by Mr Stewart.

Section 9(1)(c) Receiverships Act 1993

[18] It is unnecessary to consider in detail the further question whether s9(1)(c) of the Receiverships Act 1993 would operate here to render s92(1) inapplicable, assuming acceptance of Mr Stewart’s submission on the primary issue. Suffice it to observe that we see considerable force in Mr Gedye’s submission for the appellant that where the payment of money is secured by a debenture, s92(1) has no application even if that payment is also secured by a mortgage of land. We find the reasoning of Randerson J in Elders Pastoral Holdings Limited v Raptorial Holdings Limited (in receivership) (CP115/99, Auckland Registry, 17 November 1999), persuasive. It would also be applicable to a situation such as the present, where the borrower company granting the debenture is not the same person as the mortgagor. The result would be consistent with s108 of the draft statute contained in the 1994 Property Law Act report of the Law Commission (A New Property Law Act, NZLC R29).
[19] On review, the Master’s decision is set aside and the appellant’s strike out application is granted on the ground that the respondents have no tenable cause of action. The appellant is entitled to costs in the sum of $5000 together with disbursements including reasonable travelling and accommodation expenses for one counsel to be settled by the Registrar if necessary.

Solicitors
Bell Gully Buddle Weir, Auckland, for Appellant
Shean Singh, Auckland, for Respondents