Seniorcare Group Limited v Harvey [2012] NZHC 3547 (19 December 2012)

Last Updated: 30 January 2013

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2011-404-008358 [2012] NZHC 3547

BETWEEN SENIORCARE GROUP LIMITED Judgment Creditor

AND RACHEL SUSAN HARVEY Judgment Debtor

Hearing: 31 August 2012

Counsel: L M Kelly for Judgment Creditor

L Kemp for Judgment Debtor

Judgment: 19 December 2012

RESERVED JUDGMENT OF ASSOCIATE JUDGE SARGISSON (Application for Adjudication)

This judgment was delivered by me on 19 December 2012 at 3 pm pursuant to

Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar

Date ..........................

Solicitors:

M Kelly, Barrister, Auckland

L Kemp, Kemp Barristers and Solicitors, Auckland

SENIORCARE GROUP LIMITED V HARVEY HC AK CIV-2011-404-008358 [19 December 2012]

[1] Ms Harvey opposes the bankruptcy application brought against her by

Seniorcare Group Limited.

[2] Ms Harvey acknowledges her debt to Seniorcare is $634,333.99 as at 31

August 2012. She also acknowledges that the jurisdictional requirements for adjudication are met but she relies on the discretionary grounds in s 37 of the Insolvency Act 2006 to oppose adjudication on the grounds that it would be unjust and inequitable for that to occur.1 She wants to be able to pursue a separate claim that she and another person have filed against Gateshead Investments Limited, Paranui Properties Limited and Beta Pacifica Corporation Limited in CIV-2011-404-

5909 (the Gateshead proceeding).

[3] Ms Harvey believes she has reasonable prospects of success in the Gateshead proceeding and says that if successful, there will be funds available to discharge the debt owed to Seniorcare. Ms Harvey acknowledges that she is not otherwise able to satisfy Seniorcare’s debt. She contends however, that the Gateshead proceeding is well advanced and ought to be capable of resolution in the near future. She believes there is no prejudice to Seniorcare if the application is stayed or adjourned in the meantime.

The Law

[4] Key to Ms Harvey’s claim in the Gateshead proceeding is her assertion that Beta Pacifica Corporation Limited failed in its duty to obtain the best price reasonably obtainable as at the time of mortgagee sale under s 176 of the Property Law Act 2007. Where sound evidence demonstrates that a property is sold at gross undervalue, an inference may be drawn that reasonable steps were not taken to achieve a proper price. However, inadequacy of price in relation to expected value

_{would not normally suggest a breach of the duty and in the absence of other}

1 Relevantly, s 37(3) states that the Court may, at its discretion, refuse to adjudicate the debtor bankrupt if “it is just and equitable that the Court does not make an order of adjudication”.

inadequacy something overwhelming would be required to demonstrate a breach of the duty.2

[5] Ms Harvey bears the onus of convincing the Court that an order for adjudication should not be made pending the outcome of the Gateshead proceeding.

[6] The Court is usually reluctant to defer insolvency proceedings to allow time for parallel proceedings that are based on undetermined claims against a third party or against co-guarantors. In Ellis v NZI Finance,3 the Court of Appeal decided there was not a realistic possibility of the third party claim being heard for a long time and therefore there were no good grounds for depriving a creditor of its normal rights.

[7] In Re Smith ex parte Diners Club New Zealand Ltd4 the Court noted it would be at least 6 months before the claim was ready for hearing and that the likely success of the claim was questionable. An order was made for adjudication.

[8] In Kroon v Westpac Banking Corporation Doogue AJ noted: 5

[73] In the first place, an act of bankruptcy having occurred, the creditor is prima face entitled to an order for adjudication.

...

[76] It is relevant to the exercise of the discretion that guarantees must be honoured in the interests of commercial morality.

...

[87] ... the question that I pose for myself is whether the debtor’s claim is one that in a near term has a reasonable chance of success. If that is so, then it is fair that the debtor should be given a chance to pursue the claim. If the Court cannot confidently place the debtor’s claim in this category, then other factors which have to be placed in balance will outweigh the importance of the claim against the third party. Such further factors include that in circumstances in which a debtor has committed an act of bankruptcy it is not in the public interest that there should be significant delays in the Court making orders which will bring his affairs under the control of the Official Assignee.

2 Moritzson Properties v McLachlan (2001) 9 NZCLC 262, 448 at [61].

3 _{CA 253/89, 29 July 1990.}

4 _{HC Tauranga B48/97, 17 November 1997.}

5 HC Auckland CIV 2006-404-4720, 24 April 2007.

Background

Purchase of rest homes

[9] Ms Harvey and others purchased three rest homes in 2006 called Autumn Lodge, Brooklands and Carrington through their shareholdings in several companies.6. A total of $3.4 million was paid for them.

[10] The purchase was financed by loans secured by mortgages over the properties and supported by personal guarantees from Ms Harvey and others.

Mortgagees’ Default Proceedings

[11] The loans went into default as at late 2009. Approximate debts then due included:

(a) $1.9 million owed to Beta as first mortgagee;

(b) $0.3 million owed to Southern Cross Finance Limited (which later assigned the debt to Seniorcare, as second mortgagee); and

(c) $1.4 million owed to Gateshead and Paranui as third mortgagees.

[12] Beta commenced a mortgagee sale process to sell the rest homes in August

2009. A reputable real estate agent was appointed, and a marketing and sale campaign was undertaken. No sales were obtained.

[13] On 16 December 2009 Ms Harvey and her husband executed a relationship property agreement by which she relinquished her half share in their Coatesville residential property as well shares in Radius Properties Limited to her husband, in consideration for which she retained her shareholding in the companies that owned the rest home properties.

[14] On 28 January 2010, Gateshead and Paranui obtained summary judgment against Ms Harvey for $1,442,800 plus interest and costs under her guarantee for their third mortgage.7 This debt was reduced through the sale of the Radius shares but a debt in excess of $1 million is still owed under that third mortgage.

[15] In February 2010, Gateshead and Paranui obtained a charging order over the

Coatesville residential property.

[16] On 7 May 2010, Beta obtained leave from the High Court in its mortgagee sale proceeding to sell the rest home properties to itself under s 200 of the Property Law Act for $2,333,877.8 As was noted at the time, leave was granted by consent and without prejudice to the rights that any party may have under s 176.

[17] None of the proceeds of Beta’s sale were received by Seniorcare, Gateshead or Paranui.

[18] On 17 June 2011, Seniorcare obtained summary judgment against Ms Harvey for $452,207.92 under her guarantee of the second mortgage. As earlier noted that debt now stands at $634,333.99.9

Gateshead proceeding

[19] Ms Harvey and Mr Richard Parker, her son (in his capacity as executor of his

late father’s will), commenced the Gateshead proceeding on 23 September 2011.10

[20] The primary focus of the Gateshead proceeding concerns claims of breach of duty and statutory obligations owed by the mortgagees and the exercise of their rights under the securities they held over the rest homes. In the Gateshead

_{proceeding, Ms Harvey claims:}

7 _{Gateshead Investments Ltd v Parker HC Auckland CIV-2009-404-7720, 28 January 2010.}

8 Re an application by Beta Pacifica Corporation Ltd HC Wellington CIV-2009-485-2353, 7 May

_2010.

9 _{Seniorcare Group Ltd v Parker and Harvey HC Auckland CIV-2011-404-1426, 17 June 2011.}

10 Harvey v Gateshead Investment Ltd HC Auckland CIV-2011-404-5909.

(a) Beta failed to obtain the best possible price on breach of s 176 and that when Beta sold the rest homes to itself it failed properly to account for the proceeds in breach of s 185; and

(b) Gateshead and Paranui failed to account for the proceeds of the sale of

Radius shares that they held as security.

[21] A further part of the proceeding challenges the Gateshead and Paranui charging order over the Coatesville property. Ms Harvey asserts she has no interest in that property by reason of the relationship property agreement.

[22] The proceeding also contains a general allegation against all defendants of oppressive conduct and breach of the Credit Contracts and Consumer Finance Act

2003. Ms Harvey seeks to reopen the relevant securities agreement. [23] All defendants dispute liability.

[24] By way of defence, Gateshead and Paranui also counterclaim that the relationship property agreement is void as having been entered into one month after Ms Harvey had been served with the third mortgagee claims. Gateshead and Paranui applied for summary judgment on the point and on 16 May 2012 Associate Judge Faire agreed. He determined that the relationship property agreement was void as against Gateshead and Paranui and that half of the property was owned by Ms

Harvey.11 Ms Harvey has not appealed that decision.

[25] In the Gateshead proceeding Ms Harvey essentially seeks an account for Beta’s conduct in the purchase of the rest home properties. This includes a challenge to the process by which sale price was determined and how the sale proceeds have been applied.

[26] In the outcome of the challenge to the relationship property agreement, I held a case management conference in the Gateshead proceeding on 22 June 2012. At

that time I scheduled a five day trial commencing on 6 May 2013, and I issued directions:

(a) for the filing of any application for security of costs; and

(b) requiring Gateshead, Paranui and Beta to provide the discovery Ms Harvey’s requests in relation to the rest home sales including details of valuations obtained; this to be completed by 13 July 2012.

[27] An important part of the request for discovery concerns the failure of the defendants to provide copies of valuations of the rest homes at the time of Beta’s sales to itself and any subsequent reassessments of value. By the time of the hearing of the adjudication application that discovery had not been provided. Since the hearing the Registrar has drawn to my attention a memorandum that counsel for Beta has filed setting out details of Beta’s sales of the properties to itself and the position with respect to subsequent valuation reassessments. Essentially the memorandum states that there were no such reassessments. It sheds no further light on valuations of the rest homes at the time of the sales. It advises that two of the three rest homes have now closed.

[28] I issued a memorandum enquiring of counsel whether either side wished to be heard on Beta’s memorandum. Each side has taken the opportunity to file a memorandum. Counsel for Ms Harvey urges that the defendants’ case in the Gateshead proceeding is undermined as Beta’s valuations (obtained in late 2009) were higher than the sale prices and that there are no subsequent evaluations to vindicate the sale prices. Counsel for Seniorcare accepts that the value of the rest homes when the mortgagees stepped in is relevant to Ms Harvey’s claim in the Gateshead proceeding (though not determinative) and that hindsight valuation evidence will likely be called if the case gets to trial. But he submits that such evidence seems likely to detract from Ms Harvey’s claim.

[29] Had discovery in the Gateshead proceeding disclosed valuation reassessments closer in time to the mortgagee sales (either prior or subsequent to the sales) it is conceivable that they may have assisted Mrs Harvey. However, it seems

there are none that Ms Harvey can rely on to strengthen her case in this proceeding. I must proceed on the basis of the evidence such as it is including the valuation evidence that was put before me.

Discussion

[30] Ms Harvey asserts that Gateshead, Paranui and Beta are owned and controlled by a Mr Renwick and that in July 2009 Beta took an assignment of the first mortgage loan and then purported to exercise its powers as a mortgagee to sell the property. It sought approval from the High Court and was granted that under s

200 of the Property Law Act, permitting it to purchase the properties itself.

[31] The total price initially proposed for the purchase of those properties was

$1.7 million. Subsequently this was revised to $2.3 million. That amount was used to clear the first mortgage which, as noted, was $1.9 million as at late 2009. Ms Harvey queries why the sale figure was not also used to repay the Seniorcare mortgage (which was $0.3 million as at late 2009).

[32] Ms Harvey submits that her opposition to the mortgagee sale process was supported by registered valuations of $4.9 million for the three properties, as well as a signed (albeit conditional) sale and purchase agreement of $3.035 million.

[33] Seniorcare joined Ms Harvey in opposition to the mortgagee sales but withdrew that opposition, she claims, at the last minute and in unusual circumstances.

[34] Ultimately Beta’s purchase was approved by the High Court but subject to the question of whether or not fair value had been obtained.

[35] Ms Harvey opposed Seniorcare’s summary judgment application against her on the grounds that it had by its actions contributed to the rest home sales at an under value. Associate Judge Christiansen held that the claim could not constitute a

defence in that case.12 Also, it was raised in the context of Seniorcare having initially opposed Beta’s mortgagee sale action because it had obtained a conditional offer for sale in excess of that which Beta was proposing to pay. The learned Judge held Seniorcare was entitled for commercial reasons to decide not to pursue the conditional sale.

[36] Ms Harvey’s case is that there were registered valuations that suggested the sale was at least $2 million below valuation and that there were offers to purchase the properties for $1 million higher than the actual sale price. These factors are, she contends, strong indications that the claim is one of substance and that it has reasonable prospects of success.

[37] Ms Harvey relies upon the affidavit of a Mr D Basrur, an accountant. He describes himself as a director and shareholder of a boutique advisory firm where he provides advice in commercial, corporate finance and valuation matters. Mr Basrur has a bachelor’s degree in physics and a master’s degree in business administration, specialising in finance.

[38] Mr Basrur describes his experience as follows:

I am regularly requested to prepare independent appraisals, independent opinions and independent advisor reports in compliance with the New Zealand Stock Exchange Listing Rules and provide independent expert advice on mergers and acquisitions.

I have prepared a large number of independent valuations for publicly listed and unlisted companies. These valuations have been prepared for various purposes. I have presented at a large number of senior management development programmes and seminars in New Zealand and overseas, focussing on management accounting and valuation issues.

My areas of expertise include valuation, cost management, regulatory pricing, asset pricing and cost of capital matters and economic and financial implications of transactions.

_{I have extensive experience in commercial, banking and financial matters.}

12 Seniorcare Group Ltd v Parker and Harvey HC Auckland CIV-2011-404-1426.

[39] Mr Basrur noted (in connection with rest home business valuation) economic principles and factors that in his opinion should be considered, in the context of the present case, when the Court attempts to ascertain the best “price” reasonably obtainable for the rest home land.

[40] Mr Basrur states that the values adopted by Beta for the sale to itself appear to be lower than the range deposed to by its own valuer on a forced sale basis. He suggests that the sale by Beta to itself brought into play a markedly different and inappropriate concept of “price” and “reasonably obtainable”, and that there really is no such thing as a “price” in those circumstances. He argues that the “price” in those circumstances may have no relationship to a price that could be obtained if a consideration of the benefits associated with the assets and interests were truly balanced. Mr Basrur likewise questions the concept of “reasonably obtainable” in circumstances where a buyer is treating with itself and without the protections and comparable validation afforded to normal mortgagee sales which he considers provides a truer assessment.

[41] I apprehend that what Mr Basrur is suggesting is that there may be good cause to reconsider the concept of “best price reasonably obtainable” in circumstances where a mortgagee secures the permission of the Court to purchase the security property.

[42] Ms Harvey’s case relies entirely on her desire to pursue claims against Mr Renwick’s companies in connection with the sale of the rest home properties. It is evident that she suspects something was amiss because of:

(a) the price at which Beta acquired those properties. She thinks they were worth much more. She relies upon Mr Basrur’s evidence and the theoretical concerns he has identified whereby the concept of best price reasonably obtainable could be challenged;

(b) a perception of mystery over the reasons why Seniorcare did not pursue its conditional offer of a sale at a higher price than the price

that Beta was, as mortgagee itself able to purchase those properties for; and

(c) the fact that at various times there were valuations in amounts significantly greater than the properties were sold to Beta.

[43] Mr Kemp for Ms Harvey submits that even if it can be established that the properties were sold by at most $500,000 under value, then that would have been sufficient (together with the value in the Radius shares) to satisfy all borrower obligations. Mr Kemp submits this is another reason to show that Ms Harvey has good prospects of success in the Gateshead proceeding.

[44] Also and importantly from Ms Harvey’s point of view, the Gateshead proceeding was filed over a year ago. She suggests that the delay is not due to any default on her part. She suggests that the delays have occurred because of the proceedings brought to challenge her relationship property settlement.

[45] Mr Kemp points out that though in other cases the Court has commented adversely on the position of third party claims where it anticipated that the case would not be ready for hearing for a significant period, in this case the trial fixture for the Gateshead proceeding is relatively soon. It has a trial fixture in May of next year. He also submits that in this case the Gateshead proceeding has a connection to the debt claimed by Seniorcare because the duties in question owed under s 176 were duties owed to Seniorcare (as a subsequent mortgagee) as much as they were owed to Ms Harvey. If Ms Harvey’s claim succeeds and if it is held that Beta purchased the properties at an under value, Seniorcare will have first call on those funds.

[46] Mr Kemp submits, probably correctly, that if Ms Harvey is bankrupted, it is unlikely that the Official Assignee will want to continue the Gateshead proceeding on her behalf. Perhaps in part because of the pressure brought by the bankruptcy application, Ms Harvey claims that she has demonstrated a willingness to advance the Gateshead proceeding to a hearing as soon as possible.

[47] However the Court has previously identified reasons that it will usually consider upon a judgment debtor’s request for time to pursue a third party proceeding; namely the strength of case and nearness of trial. While Ms Harvey’s case is in relative terms close to trial, the immediate concern in this case is the apparent weakness of her case.

[48] The acceptable evidence is that a properly organised and professionally conducted marketing programme was undertaken. There were offers made in sums greater than that which Beta paid but those were heavily conditional. Southern Cross13 would not accept them. Its actions in taking this approach have been approved previously by the Court. There could be no reason other than good purpose for Southern Cross adopting this course. It would have appeared that by doing so it could not rely on receiving any payment from the sum paid by Beta for the properties. As Mr Kelly submitted, the action taken by Southern Cross strongly suggests there were weaknesses in the offers they had obtained. Besides, Ms Harvey

has not put the offers in evidence nor provided any evidence from the prospective purchasers.

[49] Ms Harvey relies on valuation evidence but none of that obtained is from an expert. Comments by Mr Parker and others are hearsay and are unqualified. The valuation details provided were out of date and take no account of the severe economic conditions that later occurred. Clearly those valuations did not anticipate a forced sale situation.

[50] In that context Mr Basrur’s evidence offers little of value. Indeed I do not accept his evidence as that of an expert in the circumstances. He is not a property valuer. He appears to have made assessments about circumstances concerning which he offered no indication of familiarity.

[51] There is nothing in all of these matters that points to an element of the “overwhelming” such that the Court should consider further enquiry into the circumstances of Beta’s purchase of its mortgage securities.

[52] I consider also that the claims of inappropriate accounting under s 185 of the Property Law Act and for reopening the lending contracts under s 125 Credit Contracts and Consumer Finance Act are weak. The former relies upon an assertion that there ought to have been something left over after payment out of the first mortgagee interest. But, the figure of $1.9 million was what was owed by way of principal in December 2009. I agree with Mr Kelly that it can be presumed that by that time given the difficulties being faced, substantial interest was owed because the default rate payable on the loan from Beta was over 21 per cent per annum, and as well there was a liability for all enforcement expenses.

[53] In this claim, as in the Credit Contracts and Consumer Finance Act claim, no particulars of loss have been identified and in the latter claim the pleading is indeed almost entirely lacking in any other particulars at all. Mr Kelly is correct when he submits that the plaintiffs will face real difficulties in satisfying a Court that such lending contracts as these, between commercial parties, who were legally represented, should be reopened.

Conclusion

[54] The marketing and process utilised for the purpose of sale of the properties more than meets the Court’s expectations of fair dealings. Ms Harvey’s case relies too much on unsuitable valuation evidence, and upon suspicion where there is not sufficient evidence to support same.

[55] In a decision issued in the Gateshead proceeding on an application for interim relief from the sale of the Coatesville property, Brewer J stated: 14

[50] The affidavits filed on behalf of the second and third plaintiffs are enough to raise an arguable case, but I do not see a seriously arguable case. The forced sale of assets in hard times is always fraught with difficulty, especially assets such as rest homes.

[56] Ms Harvey’s position is that she needs only to succeed in recovering an

amount sufficient to pay the Seniorcare debt. But, the reality is she needs to succeed

in a sum of greater than $1.5 million (as Brewer J noted) to clear all of her debts including those to Gateshead and Paranui.

[57] It seems clear that if Ms Harvey was to succeed to the extent showing Beta paid an undervalue – and though this must surely be in question it cannot be ruled out – it is certainly very unlikely she would succeed to enable her to clear all of the judgment debts that she has.

[58] Ms Harvey’s claim is not strong enough to warrant displacing Seniorcare’s prima face entitlement to an order for her adjudication. Her claim is one that is more properly pursued by the Official Assignee if considered appropriate.

Result

[59] For the reasons I have discussed I am not satisfied that there is a sufficient case to excuse the discretion not to make an order of adjudication.

[60] I make an order for Mrs Harvey’s adjudication accordingly.

[61] As costs follow the event under the statutory costs regime I make an order for costs on a 2B basis plus disbursements as fixed by the Registrar. These orders are

_{timed at 3 pm on 19 December 2012.}

Associate Judge Sargisson