Mudgway v Tetra House Trustee Ltd HC Auckland CIV-2010-404-008421 [2011] NZHC 191 (9 March 2011)

Last Updated: 29 May 2011

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

_{CIV-2010-404-008421}

UNDER SECTION 145 OF THE LAND TRANSFER ACT 1952

IN THE MATTER OF AN APPLICATION THAT CAVEAT NO.

8629521.1 NOT LAPSE

BETWEEN CRAIG JOHN MUDGWAY AND MUDGWAY TRUSTEE LTD Applicants

AND TETRA HOUSE TRUSTEE LTD Respondent

Hearing: 9 March 2011

Appearances: A E Hansen for Applicants

R A Smith for Respondent

Judgment: 9 March 2011

_{ORAL JUDGMENT OF ASSOCIATE JUDGE BELL}

Solicitors:

Heimsath Alexander, PO Box 105884, Auckland

_{Anthony Harper Lawyers, PO Box 2646, Auckland}

CRAIG JOHN MUDGWAY AND MUDGWAY TRUSTEE LTD V TETRA HOUSE TRUSTEE LTD HC AK CIV-2010-404-008421 9 March 2011

[1] On 4 November 2010, Craig John Mudgway and Mudgway Trustee Ltd lodged a caveat 8629521.1 against the land in Identifiers 313460 and 313461 (North Auckland Registry). Those properties are units E and K with associated auxiliary units in Tetra House at 85 Wakefield Street, Auckland. Tetra House was built within the last three years. It is a 12 storey building with 180 residential units. It is in strata title ownership. On the first floor there is space that was originally designed for a gymnasium and common room. That space is in two titles, units E and K. Resource consent has been granted to convert them into 15 residential units.

[2] The caveat describes the interest claimed:

The abovenamed caveator claims a beneficial interest in the land comprised in the above certificates of title pursuant to a constructive trust for which the abovenamed caveator is a beneficiary and the registered proprietor is a trustee.

[3] Tetra House Trustee Ltd, the registered proprietor, began the lapse procedure under s 145A of the Land Transfer Act. The LINZ notice, dated 1 December 2010, was received by the caveator’s solicitors on 6 December 2010. An application to sustain a caveat was filed in this Court on 20 December 2010. Notice of the filing was given to LINZ. The caveator had 28 days from 20 December 2010 to obtain an order that the caveat not lapse and give the sealed order to LINZ. This was the last day for obtaining an order under s 145A of the Land Transfer Act and reg 39 of the Land Transfer Regulations. A sealed order was not available until 18 January 2011. Because the order was presented to LINZ one day late, the caveat lapsed.

[4] The applicants now want to lodge a second caveat in the same terms as the first. They cannot do so without first obtaining an order from the Court under s 148 of the Land Transfer Act. That section says:

148 No second caveat may be entered

(1) If a caveat has been removed under section 143 or has lapsed, no second caveat may be lodged by or on behalf of the same person in respect of the same interest except by order of the High Court.

(2) For the purposes of verifying that a caveat does not contravene the prohibition in subsection (1), the Registrar is not obliged to inquire further than the current folium of the register or computer register for the land.

[5] The respondent opposes an order being made under s 148. It says these are not the circumstances where the Court should allow a second caveat to be lodged. It contests the caveatable interest claimed by the applicants.

[6] In Lowther v Kim [2003] 1 NZLR 327, Randerson J reviewed and described the approach taken by the courts on applications under s 148 of the Land Transfer Act. At [18] and [19] he said:

[18] The Court of Appeal has held that an order under s 148 will not lightly be made. It is an indulgence and the applicant’s claim is ―scrutinised carefully‖: Cotton v Keogh [1996] 3 NZLR 1 at 8. In Muellner v Montagnat [1986] NZHC 19; (1986) 2 NZCPR 520 at 523-524, Thorp J reviewed previous authorities. He determined that the Court is given an unfettered discretion under s 48 but the Court will generally have regard to:

(a) the strength of the case made by the applicant to support the claimed interest in the land;

(b) any explanation for failure to exercise the caveator’s rights under

s 145; and

(c) whether unavoidable prejudice would be suffered by those who have acted in reliance on the register and in the belief that the caveator was not pursuing the claim.

[19] Thorp J, rightly in my view, did not accept the submission made to him that an order under s 148 should only be made in exceptional cases. In considering the strength of the applicant’s claim to an interest in the land, it is appropriate to adopt the standard of a reasonably arguable case as identified in Sims v Lowe [1988] 1 NZLR 656 (CA) at 659-660, but with the reminder that careful scrutiny is required where leave to lodge a second caveat is sought.

[7] I will consider the matter under the three heads identified by Randerson J but in a different order. Before I do so, there is a preliminary matter. Both sides filed late affidavits. The applicants’ late affidavit was in response to an affidavit by the respondent. The respondent’s affidavit exhibited a judgment of the Family Court on matters relating to Mr Mudgway’s family affairs. There was also an order made by the Family Court. It was sought (?) to say that Mr Mudgway’s motivation in bringing the proceeding was somehow related to matters in issue in the Family Court. I can say quite simply that the Family Court litigation really has little to do with what is going on in the Court today and I do not place any weight on it at all. When the Court is considering property rights between commercial parties, issues about one person’s stresses in their personal lives really have no bearing on the matters at all.

[8] The other matter put in that affidavit was a deed of settlement between Mr Mudgway, also acting on behalf of Mudgway Trustee Ltd, and Mr Slack, an Auckland solicitor representing his firm. That deed appears to resolve some issues between the Mudgway interests and Mr Slack and his law firm. While I note that that deed has been entered into, I also record that Mr Mudgway in his last affidavit has claimed that the deed of settlement does not have the meaning which an ordinary reading would at first suggest. That deed of settlement is an arrangement made between Mr Mudgway and someone who is not a party to the present proceeding. I ought to determine the matters in issue between the parties to this application on the merits of the particular matters put in issue here. That deed of settlement has peripheral interest and is not directly relevant. The deed of settlement should not affect my judgment whether the applicants have a caveatable interest in the land, the subject of the caveat.

[9] I now move to the matters identified by Randerson J.

Explanation for failure to exercise rights under s 145A

[10] This is a case of a caveator coming to grief because of the tight time limits under s 145A of the Land Transfer Act and reg 39 of the Land Transfer Regulations

2002. The difficulties arose because of the intervention of the Christmas break. Normal Court sittings had stopped on 17 December 2010. The applicants filed their application on 20 December 2010. The application is clearly the product of some effort. Mr Mudgway’s affidavit and exhibits run to some 296 pages. Even if the application had been lodged earlier, the applicants may not have avoided the problem of the Christmas break coming in the period between the lodging of the application and the lapsing of time for giving LINZ a sealed order.

[11] In this Court, on an application under s 145 or s 145A of the Land Transfer Act, it is normal practice to allocate an early call date before an Associate Judge so that, if the application is opposed, an interim order may be made to sustain the caveat pending determination of an opposed caveat application. That course was not possible here, because there were no Associate Judges sitting during the Christmas break. There were no caveat lists. Initially, the Court gave the matter a date of

27 January 2011 but the caveators’ solicitors pointed out that that was too late and instead obtained a date of 17 January 2011, which is still during the Christmas vacation. The matter came before Potter J as Duty Judge. It is clear from the evidence that the caveators’ solicitors were at all times conscious of the time limits

which had to be complied with and were doing what they could to obtain a hearing date within time to seal an order and give it to LINZ in time. I accept that there is a reasonable explanation for the caveat lapsing. The caveators took reasonable steps to protect their interests. The caveators should not be penalised because of the difficulties caused by the Christmas break. The respondent did not strongly submit against the applicants on this point.

[12] When caveators face the problem whether they can obtain an order on notice in time, they may wish to consider applying without notice and ask the Court to be heard on a Pickwick basis.

Unavoidable prejudice to the registered proprietor

[13] The unavoidable prejudice is not prejudice arising from the caveat being put on the title, but prejudice that might arise from relying on the register in the belief that the caveator was not pursuing a claim for an interest in the property. Tetra House Trustee Ltd has not identified any particular prejudice it has suffered by relying on any belief that the caveators were not pursuing the claim. It could hardly plausibly do so. It became registered proprietor in September 2010. The caveators lodged their caveat in November 2010. Tetra House Ltd responded with its request to LINZ under s 145A and the caveators’ responded reasonably promptly with their application to sustain a caveat. On 18 January 2011, once it had become apparent that the caveat had lapsed, the caveators’ lawyers promptly filed a memorandum in Court seeking an urgent order under s 148. The respondent’s lawyers filed a memorandum in response on the same day. From that time, the respondent knew that the caveators were still trying to maintain a caveat. It cannot plausibly claim that it was not aware that the applicants were not seeking to sustain their claim to a caveatable interest. It cannot claim an avoidable prejudice.

Do the applicants have a caveatable interest?

[14] On an ordinary application to sustain a caveat, the onus is on the caveator to show that he has a caveatable interest. An application to sustain a caveat is a summary procedure which is quite unsuitable for determining disputed questions of fact. Accordingly, there will be a decision not to sustain a caveat only if it is patently clear that the caveat cannot be maintained either because there was no valid ground for lodging the caveat in the first place, or that a valid ground no longer

exists, or that no useful purpose will be served by maintaining the caveat. The patent clarity will not exist where the caveator has a reasonably arguable case in support of the interest claimed. The interest claimed by the caveator must be a proprietary interest in land. The Court has a residual discretion whether to make an order removing the caveat, but that discretion is exercised cautiously. The authorities for that are Sims v Lowe [1988] 1 NZLR 656 (CA) 660, Pacific Homes (in rec) v Consolidated Joineries Ltd [1996] 2 NZLR 652 (CA) at 656.

[15] Randerson J’s reminder about the need for careful scrutiny when leave is sought to lodge a second caveat arises because repeated attempts at lodging a caveat may be abusive and may expose those opposing to unnecessary costs, delay and expense. However, I do not understand that the test to be applied under Sims v Lowe in determining whether there is a caveatable interest is any different when considering whether to grant leave under s 148. In this case, where the caveator has moved promptly to address the problem of the caveat having lapsed under s 145A, any extra vigilance out of concern for abuse is not required.

[16] While this case requires an examination of companies and trusts, at the heart there are three individuals, Leonard John Ross, Craig John Mudgway and Timothy Upton Slack. Mr Ross and Mr Mudgway are property developers and investors. Together, they have been involved in a number of projects, but with the collapse of the New Zealand property market in 2008, they have fallen out. Mr Slack is an Auckland solicitor who formerly acted for both Mr Ross and Mr Mudgway. In this proceeding, Mr Mudgway and Mr Ross have each instructed new lawyers.

[17] On 5 September 2007, Walters Law Properties Ltd became the registered proprietor of the properties in Identifiers 313460 and 313461. At about the same time, it also became the owner of Unit B in the Tetra House. Unit B is an office area in the Tetra building. Walters Law Properties Ltd has since been renamed Athamas Holdings Ltd. That change of name came with Mr John Walters ceasing to act for Walters Law Properties Ltd and his place being taken by Mr Slack. Athamas Holdings Ltd is trustee of the Walters Law Properties Trust. This trust was established by a deed, called a deed of bare trust, dated 20 November 2006. The parties to the deed are Athamas Holdings Ltd, as trustee, then under its original name of Walters Law Properties Ltd, and Leonard John Ross and Timothy Upton Slack, as trustees of the Windsor Trust and as trustees of the Cleveland Trust. Walters Law Properties Ltd is trustee. The trustees of the Windsor Trust and the Cleveland Trust are beneficiaries of the trust created under this deed of bare trust. Mr John Walters

signed as director of Walters Law Properties Ltd. Mr Slack is now the sole director of Athamas Holdings Ltd.

[18] The Windsor Trust is a trust for the interests of Mr Ross. The Cleveland Trust is a trust for the interests of Mr Mudgway. The Cleveland Trust was originally established in 2003, or earlier, but was resettled as the Cleveland Trust No. 2. The reference to the Cleveland Trust in the deed of bare trust of November 2006 is in fact a reference to the Cleveland No. 2 Trust.

[19] At the beginning of 2010, the trustees of the Cleveland No. 2 Trust were Mr Slack and Mr Mudgway, but during 2010, Mr Mudgway, who has the power of appointment, removed Mr Slack as trustee and appointed Mudgway Trustee Ltd as a new trustee. The trustees of the Cleveland Trust who are the beneficiaries of the Walters Law Properties Trust were Mr Slack and Mr Mudgway up until the change of trusteeship, afterwards Mudgway Trustees Ltd and Mr Mudgway.

[20] In this case, the applicants, Mr Mudgway and Mudgway Trustee Ltd, apply in their capacities as trustees of the Cleveland No. 2 Trust and, as such, as beneficiaries of the Walters Law Properties Trust.

[21] On 4 June 2010, Athamas Holdings Ltd, as trustee of the Walters Law Properties Trust, entered into two agreements for sale and purchase as vendor with Tetra House Trustee Ltd as purchaser. Mr Ross is the sole director and shareholder of Tetra House Trustee Ltd.

[22] The first agreement for sale and purchase was for the units in Identifiers

313460 and 313461 for the sum for both units of $300,000, plus GST. Under the agreement, Tetra House Trustee Ltd became registered proprietor in September

2010. A mortgage in favour of the Bank of New Zealand was discharged and there was a new mortgage in favour of the ANZ National Bank.

[23] The second agreement for sale and purchase was for unit B in Tetra House, the office unit. That sale was for $200,000, plus GST, and was subject to an existing tenancy. Mr Mudgway does not take issue with the sale of the office unit in Tetra House. He says that the sale went ahead without his instructions but he says that he has been reluctant to complain about this because it seems to him that the price in that agreement was near enough to market value. Mr Mudgway says that the Walters Law Properties Trust also owned a development site in Queenstown. After

the September agreement, the Queenstown property was sold. Mr Mudgway does not take issue with the sale of the Queenstown property. On that, he says he was consulted and gave his consent.

[24] However, he objects to the sale of units E and K in Tetra House at $300,000 because he maintains this was at a significant under-value, he was not consulted about the sale, he did not give instructions authorising the sale, and the transaction has been to the advantage of Mr Ross and to his disadvantage. He says that Athamas Holdings Ltd acted knowingly in breach of the Walters Law Properties Trust for the sole benefit of Mr Ross’s interests. He says that, as a result, Tetra House Trustee Ltd who was complicit in the breach of trust by Athamas Holdings Ltd, holds its interest in the units on a constructive trust, at least to a half-share, for the trustees of the Cleveland No. 2 Trust as beneficiaries.

[25] The applicants are not saying that the interest they claim in the registered proprietor’s land is derived from the registered proprietor in the sense that it is derived from some transaction they had with the registered proprietor, as for example, the grant of a lease or the grant of an easement. Instead, they say that the way by which Tetra House Trustee Ltd became registered proprietor is tainted and the remedy they have is a claim for a constructive trust.

[26] When there has been a breach of trust in which a third party (not a trustee) is involved, there are two ways by which the law can impose a constructive trusteeship

– on the basis of accessory liability, or knowing assistance, and on the basis of knowing receipt. Since the decision of the Privy Council in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378, the test for accessory liability is that the person concerned must act dishonestly or, as Lord Nichols said, with a lack of probity. So, for Tetra House Trustee Ltd to be liable for knowing assistance in any breach of trust by Athamas Holdings Ltd, Tetra House Trustee Ltd must be shown to have acted dishonestly or with a lack of probity.

[27] The other basis for liability is knowing receipt. Receiving property in a transaction which constitutes a breach of trust gives rise to liability if the recipient has the requisite knowledge. There is debate in the cases as to the requisite degree of knowledge required. The trend of authority in New Zealand is to accept that constructive notice, rather than actual notice, is sufficient to give rise to a constructive trust. The authority normally cited for that proposition is the decision of the Court of Appeal in Westpac Banking Corp v Savin [1985] 2 NZLR 41.

[28] However, this case deals with interests in land registered under the Land Transfer Act 1952. Those interests have the protection of indefeasibility under the Act. Section 62 of the Land Transfer Act says:

62 Estate of registered proprietor paramount

Notwithstanding the existence in any other person of any estate or interest, whether derived by grant from the Crown or otherwise, which but for this Act might be held to be paramount or to have priority, but subject to the provisions of Part 1 of the Land Transfer Amendment Act 1963, the registered proprietor of land or of any estate or interest in land under the provisions of this Act shall, except in case of fraud, hold the same subject to such encumbrances, liens, estates, or interests as may be notified on the folium of the register constituted by the grant or certificate of title of the land, but absolutely free from all other encumbrances, liens, estates, or interests whatsoever,—

(a) Except the estate or interest of a proprietor claiming the same land under a prior certificate of title or under a prior grant registered under the provisions of this Act; and

(b) Except so far as regards the omission or misdescription of any right of way or other easement created in or existing upon any land; and

(c) Except so far as regards any portion of land that may be erroneously included in the grant, certificate of title, lease, or other instrument evidencing the title of the registered proprietor by wrong description of parcels or of boundaries.

[29] Also material to the knowledge requirement is s 182, which makes it clear that knowledge of a trust or the existence of beneficial interests, is not sufficient to impose constructive trusteeship on a registered proprietor, except in the case of fraud:

Purchaser from registered proprietor not affected by notice

Except in the case of fraud, no person contracting or dealing with or taking or proposing to take a transfer from the registered proprietor of any registered estate or interest shall be required or in any manner concerned to inquire into or ascertain the circumstances in or the consideration for which that registered owner or any previous registered owner of the estate or interest in question is or was registered, or to see to the application of the purchase money or of any part thereof, or shall be affected by notice, direct or constructive, of any trust or unregistered interest, any rule of law or equity to the contrary notwithstanding, and the knowledge that any such trust or unregistered interest is in existence shall not of itself be imputed as fraud.

[30] Tetra House Trustee Ltd can claim the benefit of indefeasibility unless it is caught by the recognised exceptions. One of those exceptions is in personam

liability. Accessory liability to a breach of trust gives rise to in personam liability, so Tetra House Trustee Ltd may be found to hold the property on a constructive trust if it is shown to have acted dishonestly under the test laid down by the Privy Council in Royal Brunei Airlines.

[31] On the other hand, knowing receipt does not involve in personam liability. The knowing receipt rule determines priority between competing claims to interests in a property. The knowing receipt rule is a rule in equity. Where the priority rules at common law or in equity conflict with the priority rules under statute, the rules fixed by statute prevail. The well-known decision Fraser v Walker [1967] NZLR

1069 is simply one example of that. The statute regulating priority of interests in this case is the Land Transfer Act. If fraud can be established, a registered proprietor may be found to hold subject to an earlier interest not recorded on the register. The knowledge test applied against a registered proprietor on a knowing receipt test is fraudulent knowledge within the test laid down by the Privy Council in Assets Co v Mere Roihi [1905] AC 176. Effectively, I do not see much difference between the knowledge required for fraud under the Land Transfer Act and knowledge required for dishonesty under Royal Brunei Airlines.

[32] Accordingly, for the applicants to prove that Tetra House Trustee Ltd holds its interest in the land subject to a constructive trust in their favour, on a defended hearing they would have to show actual dishonesty on the part of Tetra House Trustee Ltd, either for accessory liability or land transfer fraud.

[33] The applicants’ case is that Tetra House Trustee Ltd (through Mr Ross) was in collusion with Athamas Holdings Ltd (through Mr Slack). The applicants do not say that Mr Ross acted alone. It is therefore necessary for the applicants to establish that Athamas Holdings Ltd (through its director, Mr Slack) acted fraudulently. It is not enough for the applicants simply to show that Athamas Holdings Ltd acted in breach of trust. Breach of trust may be inadvertent, technical or negligent. Not every breach of trust is dishonest.

[34] Conversely, if the applicants cannot show a breach of trust by Athamas

Holdings Ltd, then any further inquiry about dishonesty or fraud is not necessary.

[35] In an application to sustain a caveat, the applicants need only show an arguable case for a caveatable interest. In considering whether the applicants have shown an arguable case for a caveatable interest, it may not be possible to resolve

conflicts of fact in the evidence, but where there are undisputed matters of fact and where questions of law can be clearly determined, the Court will be failing in its duty if it does not make the appropriate findings. It can be a disservice both to the parties and to the interests of justice to defer making findings when they are reasonably available to the Court on the evidence and the arguments presented.

[36] To establish whether Walters Law Properties Ltd acted in breach of trust, it is necessary to consider the terms of the deed of trust of 20 November 2006. It is also necessary to consider the powers and duties of the trustee generally, as well as the circumstances in which Athamas Holdings Ltd sold the properties to Tetra House Trustee Ltd.

Express terms of trust

[37] The deed of trust is called a deed of bare trust. The recitals include:

[a] The trustee proposes to act as a bare corporate trustee of the Walters Law

Properties Trust;

[b] The trustee has or will settle the purchase of the trust property as defined herein under the sale and purchase agreement and will hold same as bare trustee for the beneficiaries under the terms of this deed.

[38] Under clause 2 there are definitions, as follows:

2. DEFINITIONS:

2.1 ―Beneficiaries‖ means Leonard John Ross and Timothy Upton Slack or their successors in their capacities as trustees of The Windsor Trust and Leonard John Ross and Timothy Upton Slack or their successors in their capacities as trustees of The Cleveland Trust;

2.2 ―Date of Distribution‖ shall be:

(a) The day upon which the period of eighty years from the date of this deed expires, being a date within the perpetuity period permitted to be specified by virtue of section 6 of the Perpetuities Act 1964, and the perpetuity period applicable to the Trust created by this deed is specified accordingly; or

(b) The date of the sale or disposition of the Trust Property.

2.3 ―Property‖ means the property listed in Schedule 1 and any other Trust Property with the prior consent of the Trustee vested in the Trustee from time to time;

2.4 ―Sale and Purchase Agreement‖ means the sale and purchase agreement listed in Schedule 2; and

2.5 ―Trust Property‖ means the Property or the net proceeds of sale

from the Property.

[39] Under 2.3, the property, the subject of this proceeding, is the property in Schedule 1 and the agreement for sale and purchase in 2.4 is the 2007 agreement for the purchase of the property. A copy of the agreement for sale and purchase for units E and K is attached to the deed and shows a purchase price of $300,000, plus GST.

[40] Clause 3 of the deed says:

The Trustee declares and acknowledges that the Trustee shall stand possessed of the Trust Property upon trust for the Beneficiaries, to be held, invested, disposed of and otherwise dealt with in accordance with their instructions from time to time and subject to the provisions contained or implied in this trust.

[41] Clause 4 provides a date of distribution when the trustee will transfer the trust property to the beneficiaries as tenants in common in equal shares.

[42] Clause 5 is an indemnity provision.

[43] Clause 6 is a powers provision. The powers are said to be in addition to all powers conferred under the Trustee Act 1956 have not been excluded. Those powers include the power to sell under s 14 of the Trustee Act. The powers conferred under clause 6 include:

6.7 To do all such things as the Trustee thinks to be in the interests of the Beneficiaries hereunder or any one or more of them including (by way of illustration and not of limitation):

(a) The sale to any Beneficiary or any real or personal property forming part of the Trust Property on such terms as the Trustee considers fair and reasonable;

(b) The granting to any Beneficiary of any favourable terms of purchase of any real or personal property forming part of the Trust Property including the power to allow money to remain owing to the Trustee with or without interest whether secured or unsecured for such period as the Trustee in its absolute discretion thinks fit.

[44] Clause 6.8 confers:

Such other powers and authorities as shall be appropriate to achieve the purpose of this Trust.

[45] The applicants’ case is that this was a bare trust and the trustee held the trust property to be dealt with only in accordance with instructions from time to time given by beneficiaries. In this case, Mr Mudgway did not consent to the sale of the units to Tetra House Trustee Ltd. In the absence of any instruction given by the trustees of the Cleveland No. 2 Trust, Athamas Holdings Ltd, as trustee, did not have authority to dispose of the units. The construction that the applicants press for is that the powers to be exercised under clause 6 can only be exercised on the giving of instructions under clause 3.

[46] Mr Mudgway says that he was not told about the sale to Tetra House Trustee Ltd before it occurred. He said that he would not have consented to it and he says that there were good grounds for not agreeing to the sale of units E and K to Mr Ross or to anyone else at the price of $300,000. He had no prior knowledge of the sale. He says that he and Mr Ross had plans for the development of the units, they had obtained resource consent to allow the development and they had negotiated with the Waldorf chain for an arrangement under which the floor would be managed to provide a rental of over $250,000 p.a. on terms that the owners would finish the fit- out of the floor. The sale price of $300,000 was at an undervalue because there was a valuation of $2.3 million of the units once the fit-out had been completed and construction companies had given quotes to carry out the fit-out for approximately

$900,000. He also refers to rating values for the units given in 2008 of $695,000 for one unit, and $1 million for the other. Since the sale, Barfoot & Thompson, a land agent, has been marketing the property as having a rental of approximately $250,000 per annum, once developed. The marketing material put in evidence describes the investment as comprising 15 residential units, with two of them having private courtyards. Mr Mudgway therefore says that the units had substantial value.

[47] These matters go to the merits of the decision to sell. Whether the sale was authorised also turns on the trustees’ powers and duties. As set out above, the applicants’ case is that, without instructions from both beneficiaries, the trustee had no power to sell.

[48] The applicants derive part of this argument from the trusteeship being labelled a bare trusteeship. In Burns v Steel [2006] 1 NZLR 559, Randerson J considered the nature of a bare trust. At [62] he said:

Although consideration of whether the trustees are ―bare trustees‖ may be helpful in some context, there is a risk of becoming overly concerned with nomenclature to the point where the nature of the duties and discretions of the trustees may be obscured. Where the expression ―bare trustee‖ is used in statute, the courts are of course obliged to give it some meaning to it. But in the absence of a statutory reference of this kind, the real task is to ascertain the nature and extent of the trustees’ obligations and discretions by reference to the terms of the instrument establishing the trust, assessed the context of all the relevant surrounding circumstances and the obligations imposed on trustees by the general law or by statute.

[49] In that case, Randerson J held that a beneficiary entitled to shares under a will could not dictate to the executors and trustees how they should exercise their rights as shareholders under the share pre-emption provisions of a company’s constitution. He recognised (at [38]) that even beneficiaries who are sui juris and who are absolutely entitled to trust property do not have untrammelled rights over the trust property or to control the exercise by the trustees of their duties. His discussion (at [38]–[40]) of the Brockbank1 line of cases is pertinent.

[50] The applicants rely on the necessity for instructions to be given to the trustee under clause 3 as the basis for their argument that without instructions from both trustees the trustee had no authority to sell. This need for ―instructions‖ needs to be considered against the trustee’s general powers and duties.

[51] Clause 3 presupposes that the beneficiaries will give the trustee joint instructions. While Mr Ross and Mr Slack were both trustees of the Windsor Trust and trustees of the Cleveland Trust, that assumption is understandable. When the beneficiaries give joint instructions on which the trustee acts, the trustee has protection and ultimately can have recourse against the beneficiaries themselves for indemnity.

[52] The next step is to consider what is to happen when there is an absence of instructions from beneficiaries. An absence of instructions from beneficiaries does not mean that the trusteeship comes to an end. The trustee continues to hold assets subject to the trust. As a trustee he has duties. Those duties include the particular duties of a trustee, being duties which may be contained in the trust deed but might be imposed in equity generally. They also include duties under the general law that

1 Re Brockbank [1948] Ch 206.

are imposed on property owners. For example, in this case, it would include the duty to pay rates on the units, the duty to pay levies to the body corporate imposed by the constitution of the body corporate under the Unit Titles Act, and to pay any debts incurred by the trust. An absence of instructions from beneficiaries does not relieve the trustee from complying with these duties.

[53] To be able to comply with these duties, the trustee may have resort to powers conferred on it as a trustee. That may include not only the particular powers conferred by the trust deed, but also powers conferred on it under the Trustee Act or by equity generally. In this case, clause 6.8 in the trust deed is wide enough to give the trustee extensive powers to comply with duties falling on it in the exercise of its trusteeship, including duties arising under the general law. If the beneficiaries gave the trustee instructions that he was not to comply with the duties that fell on it as a trustee, the trustee might place itself in jeopardy. For duties owed to third parties, such as creditors, it would be no answer for it that it was following the instructions of the beneficiaries. If it were to follow beneficiaries’ instructions, it might have recourse to them under a trustee’s right of indemnity against beneficiaries, but that may not always be adequate protection.

[54] So the absence of instructions, or instructions directing the trustee not to do its duty, do not relieve it from complying with duties the law imposes on it.

[55] This is a case where there was either a conflict of instructions from beneficiaries or one beneficiary was giving instructions and the other one was not giving instructions. It is clear now that Mr Mudgway did not approve of any sale of the Tetra House units at the price of $300,000. If he had in fact been consulted about the particular sales in June last year, he would not have given his consent. Mr Ross, on the other hand, obviously did consent. The trusteeship did not come to an end simply because the trustee received conflicting instructions or that it knew that it would not get joint instructions from the beneficiaries. It continued to hold the property subject to duties on it, including the duty to pay creditors. It was still required to manage the assets held by the trust, even in the absence of joint instructions. The powers conferred on it as trustee needed to be exercised to allow it to comply with its duties.

[56] This position is the opposite of that contended for by the applicants. Their argument amounts to a claim that the trustee is a mere cypher or nominee for the beneficiaries. They say that if the beneficiaries fall out, then the only course for the

trustee is to apply to the Court for directions. It is, of course, a counsel of prudence for trustees in doubt as to how they should exercise their powers that they can come to Court for directions. However, it does not follow that the failure to come to Court to seek directions exposes them to the claim that they are in breach of trust. It needs to be remembered that this trust deed was set up by commercial parties who intended it to operate commercially. They would appreciate that a trustee acting in a commercial matter would have to operate in a commercial fashion. The time and expense of coming to Court to obtain directions would not always be appropriate when urgent action is required. In this case, I accept that speedy action was required, given the financial position the trust found itself in.

[57] When this trust was set up, the beneficiaries must have intended that where there was an absence of instructions the trust should not be rendered impotent by an absence of instructions or by conflicting instructions. The workable position consistent with commercial sense is that, in the absence of instructions or where there is a conflict of instructions, the trustee should still continue to comply with the duties falling on him and should exercise his powers so as to be able to fulfill the duties the trustee was under. Clause 6.8 should not be read down to prevent the trustee from acting to achieve the purpose of the trust in the absence of joint instructions.

[58] Accordingly, I find that the absence of instructions from Mr Mudgway did not make Athamas Holdings Ltd impotent.

[59] Mr Slack has described the circumstances in which Athamas Holdings Ltd came to sell the units in Tetra House. The Bank of New Zealand held securities, which included a mortgage over all the trust properties and a general security agreement over the assets of Athamas Holdings Ltd. Mr Ross and Mr Mudgway had also given personal guarantees to the Bank of New Zealand. The loans which these securities secured had been in default for a long time. The debt to the Bank was significant - in the order of $1,880,000.

[60] Mr Slack’s evidence is that from late 2009, the Bank of New Zealand had threatened to exercise its rights under the securities and to go to a mortgagee sale. This was made plain in meetings with Mr Slack and Mr Ross. Mr Slack said that Mr Mudgway did not take part in the discussions because he had withdrawn from attending meetings or responding to communications regarding Athamas and the trust. Mr Slack’s evidence is that the Tetra House units were put on the market with

Barfoot & Thompson and advertised the sale for approximately eight weeks. The offers received were paltry. In the case of units E and K, the best was $150,000 plus GST.

[61] Through Tetra House Trustee Ltd, Mr Ross offered $300,000, plus GST. He also bought unit B1 for $200,000, plus GST. Mr Slack said he took the advice from Barfoot & Thompson that those offers were the best which Athamas Holdings Ltd was going to receive.

[62] Mr Slack refers to some of the negotiations with the Bank of New Zealand. Athamas had come close to extending its facilities with the Bank of New Zealand but was unable to do so as Mr Mudgway would not sign a loan document. Apparently, Mr Mudgway is said to have insisted that the Bank of New Zealand should only receive part of the proceeds from asset sales. Mr Slack says that this stance was, to his mind, commercially unreasonable as it was not something the Bank of New Zealand would entertain in light of the securities it held. He was concerned that if the Bank of New Zealand went ahead with its intentions of going to a mortgagee sale, the sales could produce less than market value. There was the risk of a shortfall which could result in the bank looking to Mr Ross and Mr Mudgway under their guarantees. Mr Mudgway had not contributed any funds to Athamas Holdings Ltd for a significant period of time. Mr Ross had been contributing funds but was no longer prepared to do so. The company had no income. It was insolvent. Mr Slack elected to sell to avoid a mortgagee sale. Mr Slack says that Mr Mudgway was aware of efforts being made to sell the units. He attaches to his affidavit an email in May 2010 to Mr Mudgway and to Mr Ross recording offers from Tetra House Trustee Ltd, including one for the recreation area. He also exhibits an email from a finance broker expressing his concerns at the debt to the bank and expressing the need to refinance before the bank made a decision to sell the properties.

[63] In his reply affidavit, Mr Mudgway says that he does not consider there was any need to sell the properties in Tetra House. He says that no Property Law Act notices had been issued and he says the Queenstown property was adequate security for repayment of the entire Bank of New Zealand loan. He says that unless Athamas received a price which he considered reasonable, then there was no need to sell the units to satisfy the bank. He denies any knowledge of the proposals to sell. He says he was not adequately or properly informed at all about the proposed sale to Tetra House Trustee.

[64] For this application, I assume that what Mr Mudgway says is plausible and that he may be believed on a defended hearing.

[65] Even so, there are some matters that are clear. There was a deadlock between Mr Ross and Mr Mudgway. Communication between them and communication between Mr Mudgway and Mr Slack were poor to non-existent. Mr Mudgway was no longer putting money into the trust to meet trust liabilities. Mr Ross had put money into the trust but was no longer willing to do so. The trust had very significant liabilities to the Bank of New Zealand and had been in default for a significant period of time. While the bank had not issued notices under the Property Law Act, if nothing was done, it would only be a matter of time before the bank did. The trustee did not have clear joint instructions from both beneficiaries how to proceed.

[66] I accept that in this situation there was pressure for the trustee to take steps to deal commercially with the problem that the trust found itself in. Applying to the Court to get authority from the Court to undertake a sale or to obtain approval for a sale to a particular person at a particular price may well have tried the patience of the Bank of New Zealand. It may have taken matters into its own hands with a consequent risk to trustee and beneficiaries.

[67] Faced with a deadlock between the beneficiaries and a breakdown in relations between them, the trustee was not powerless. The matter fell to the judgment of the director how to address the liabilities faced by the trust. While there may have been other options open to it, the steps it took were clearly available to it under the powers given under clause 6 and in particular under clause 6.7(a) and 6.8. Under 6.7(a), it was entitled to sell the units to an entity owned by Mr Ross, in effect a sale to a beneficiary, on terms that the trustee considered fair and reasonable. Mr Slack has given evidence showing that he considered the consideration fair and reasonable. It also appears that there was a reasonable basis for him to believe that the trust would not be able to refinance its borrowings – there is evidence of heavy use of a finance broker to try and arrange finance, to no benefit. Mr Mudgway’s objections grounded on the hopes of carrying out a fit out could be set to one side, given the trust’s inability to raise finance. The best offer that had been received, after exposing the properties to the market, was that from Mr Ross.

[68] In these circumstances, I am satisfied that the sale of the units was authorised as being a transaction which the trustee was entitled to enter into to discharge the

trust’s liabilities. As the transaction was authorised, no question of breach can arise, and as no question of breach can arise, there cannot be any question of a fraudulent breach arising. In the absence of any breach by the trustee, there is no basis to impeach the title of Tetra House Trustee Ltd. In making that finding, I indicate that I do not place any reliance on s 182 of the Land Transfer Act. I am simply saying that the trustee was acting within his powers and therefore it is not necessary to consider separately what knowledge Mr Ross had. If Mr Slack and Athamas Holdings Ltd were acting in breach of trust, I think there was arguably enough association between Mr Ross and the trustee that Mr Ross and his company could arguably have knowledge which goes beyond the knowledge which is permissible under the Land Transfer Act.

[69] However, resting my decision on the absence of any breach of trust, I find that in terms of the test in Sims v Lowe, it is patently clear that the applicants can have no basis for arguing that Tetra House Trustee Ltd is liable for having given dishonest assistance to a breach of trust or that it fraudulently became a registered proprietor under a knowing receipt claim. Since the applicants cannot succeed under these heads of claim, there is no basis for them to lodge a caveat against the titles. Accordingly, the application is dismissed.

Costs

[70] Mr Smith has asked for an uplift. I am not clear that I understand his argument for an uplift. The Mudgway interests have acted in an ordinary fashion as litigants. They have brought an unsuccessful case but there is nothing in the way that they have conducted their case that gives any cause for allowing an uplift under the rules. Costs follow the event so that Tetra House Trustee Ltd should have costs but I see no reason for departing from the ordinary scale. Tetra House Trustee Ltd will have costs against the applicants on the 2B scale, plus any disbursements as approved by the Registrar. I expect the parties to be able to agree as to costs but if

_{they are not able to do so, they may file memoranda.}

R M Bell

Associate Judge