Paugra Holdings Limited (in liquidation) v Harvestfield Holdings Limited [2013] NZHC 2642 (10 October 2013)

Last Updated: 19 November 2013

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2012-404-006336 [2013] NZHC 2642

BETWEEN PAUGRA HOLDINGS LIMITED (In liquidation)

Applicant

AND HARVESTFIELD HOLDINGS LIMITED Respondent

Hearing: 9 October 2013

Appearances: N H Malarao for the Applicant

D G Collecutt for the Respondent

Judgment: 10 October 2013

_{JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSEN}

This judgment was delivered by me on

10.10.13 at 4:30pm, pursuant to

Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

_{Date...............}

PAUGRA HOLDINGS LIMITED (In liquidation) v HARVESTFIELD HOLDINGS LIMITED [2013] NZHC

2642 [10 October 2013]

[1] The applicant, Paugra applies for orders:

(a) That the execution of the judgment of the Court made on 5 June 2013 by Associate Judge Bell be stayed pending determination of the appeal against the judgment.

(b) Alternatively, an order for interim relief that Paugra’s caveat over the

subject property not lapse pending determination of the appeal.

(c) Alternatively, in the event the Court does not grant either order (a) or (b), an interim order for the same relief pending determination of an application by the Court of Appeal of a further application to that Court and the Rule 12.5 of the Court of Appeal Rules 2005.

[2] On 5 June 2013 Associate Judge Bell dismissed Paugra’s application to sustain the caveat and made an order that the caveat lapse on 26 June 2013 unless Paugra sooner obtained an order under Rule 12(3) of the Court of Appeal (Civil) Rules 2005 extending the caveat pending the appeal against the judgment.

[3] On 11 June 2013 Paugra filed a notice of appeal in the Court of Appeal against the judgment. On 4 July 2013 Paugra filed its case on appeal, paid its security for costs and applied for a one day fixture.

[4] No fixture date has been yet allocated. Paugra says it has suggested to respondent, Harvestfield the possibility of making a request by consent to the Court of Appeal for an urgent fixture, but Harvestfield has not responded to this.

Judgment of Associate Judge Bell

[5] The parties’ dispute concerned the sale by Paugra to Harvestfield of a property at Seymour Road, Henderson, Auckland on 20 November 2008 for $10.5M plus GST. On settlement of that sale Harvestfield’s lawyers paid Paugra’s lawyers

$5,019,957.54. Harvestfield maintained that the balance of the purchase price was

paid to Paugra in China. Paugra’s liquidators say they never received the funds.

[6] Paugra has not paid the Inland Revenue the GST payable on its sale. Neither has it paid income tax on the profit from the sale of an associated property.

[7] On the Commissioner’s application Paugra was ordered to be put into liquidation. The Commissioner claims in the liquidation for $3,835,367.87 for unpaid GST and income tax.

[8] The liquidators have not found any assets to meet this claim.

[9] The liquidators made demand on Harvestfield for the alleged outstanding purchase price of $6,792,106.40 but Harvestfield has refused to pay.

[10] The liquidators also said that Paugra had a caveatable interest in the Seymour Road property and on 15 August 2012 lodged a caveat claiming an interest as cestui que trust.

[11] In his judgment Associate Judge Bell dismissed the application that the caveat not lapse. He ordered that the caveat would lapse on 26 June 2013 unless Paugra sooner obtained an order under r 12(3) of the Court of Appeal (Civil) Rules extending the caveat pending any appeal from His Honour’s decision.

[12] Associate Judge Bell considered that while the liquidators had made out a prima face case of fraud on the part of Harvestfield and Mr J Tao, he considered s 67 of the Property Law Act barred the interest the liquidators were claiming in their caveat; that while it had an unsecured claim against Harvestfield for the outstanding amount of the purchase price, Paugra did not have a caveatable interest in the Seymour Road property.

[13] Paugra says if the caveat was to lapse pending determination of the appeal the appeal would be rendered nugatory. Also it says significant prejudice may occur because:

(a) The caveatable interest arises as a result of a substantive claim by

Paugra against Harvestfield.

(b) Associate Judge Bell held that Paugra through its liquidators had established a prima face level of proof that Harvestfield owed Paugra

$6,792,186.40.

(c) The property is Harvestfield’s only known asset in New Zealand.

(d) Apart from the caveat the property is unencumbered.

(e) Mr J Tao spends a significant amount of time residing in China. (f) Apparently there are no travel restrictions against Mr Tao.

(g) Once the caveat lapses, Harvestfield can readily realise the property and remove the sale proceeds from New Zealand or otherwise dissipate those.

(h) Harvestfield’s ability and willingness to defeat its creditor, Paugra, is a realistic possibility given Associate Judge Bell’s prima face findings of fraud and dishonestly on the part of Mr Tao.

(i) Should the property be realised and the sale proceeds removed from New Zealand or otherwise dissipated, the likelihood of Paugra being able to recover on its substantive claim against Harvestfield is very low.

(j) This would be detrimental to Paugra and its creditor the Commissioner, who has filed a claim in the liquidation of Paugra in the sum of $3,835,367.87.

(k) Paugra’s debt to the Commissioner arises from the same transaction

which:

(i) gives rise to Paugra’s substantive claim against Harvestfield;

and

(ii) Judge Bell found a prima face dishonest scheme by Mr Tao enabled Harvestfield to acquire the property in the manner that it did.

[14] The liquidators say Harvestfield will not suffer much if any prejudice from the continuing maintenance of the caveat pending determination of the appeal.

[15] Any prejudice suffered from the continued maintenance of the caveat pending determination of the appeal would be far outweighed by the potential prejudice to Paugra and its creditors if the caveat were to lapse in the meantime.

[16] The liquidators say that immediately after the lodgement of the caveat they offered to withdraw that to allow the sale of any property provided satisfactory arrangements securing the settlement funds pending resolution of Paugra’s claims were entered into. Harvestfield did not respond to this offer.

[17] The liquidators believe their appeal has merit in that despite findings of fraud and dishonestly Judge Bell considered the statute and case law prevented recognition of its interest and in that process disagreed with or distinguished a number of judgments of the High Court, Court of Appeal, Privy Council, and the House of Lords.

[18] The liquidators say the issues on appeal are of importance and in the public interest and that the balance of convenience and overall justice of the case favours the maintenance of the caveat pending determination of the appeal.

[19] Paugra’s stay of execution/interim relief pending appeal application was filed on 10 June 2013. When on 17 June 2013 the matter was called before Keane J the parties consented to an interim order sustaining the caveat.

[20] When the matter was called again on 17 July before Woodhouse J the learned Judge noted that the parties had been unable to reach an agreement on a continuing stay pending determination for the appeal. Over the opposition of the respondent the Learned Judge extended the interim order pending the full hearing.

Opposition to the application

[21] Harvestfield says if the caveat remains on the title and the judgment is upheld then it will suffer material losses; that the usual practice on stay applications is to require the appellant to provide available undertakings for damages. It says these losses are not recoverable under s 146 of the Land Transfer Act whereby compensation may be ordered to be paid by any person lodging a caveat without reasonable cause. It is Harvestfield’s position that if the Court of Appeal decides that the caveat should have been sustained it should only sustain the caveat on the condition that a worthwhile undertaking as to damages will be provided.

[22] The application brought by this proceedings is for the benefit of and is being funded by the IRD but Harvestfield says the liquidators have refused to provide an undertaking as to damages and have failed to seek a guarantee or indemnity in relation to the losses through its litigation funder (IRD) pursuant to 65ZD of the Public Finance Act 1989. Therefore, it says the liquidators and the IRD are seeking to be in an unduly favourable position in relation to the appeal by being able to contest the appeal on a risk free basis and on the basis that the burden of the losses caused by the interim orders will fall solely on Harvestfield.

[23] Harvestfield’s position is supported by the affidavit of Mr J Tao. He deposes:

(a) Harvestfield is practically unable to deal with the property while the caveat remains on the title;

(b) The property value is likely to be detrimentally affected if the current resource consent lapse as it is due to on 28 November 2013.

[24] Harvestfield contends the caveat is preventing further funding being obtained; accordingly there is a material risk that a resource consent will lapse unless the Court’s decision that the caveat should lapse is implemented; but even if the resource consent was not at risk of lapsing it is seriously arguable that it will suffer loss if the caveat remains on the title.

[25] Concern is expressed regarding the fact that it is not known how long it will be before the appeal is heard. Counsel submits it is usual with stay applications that an undertaking as to damages be given and that the issue of quantum of relevant losses is dealt with at a later stage.

[26] In relation to criticisms of Mr Tao’s evidence, Harvestfield responds:

(a) Those criticisms were made in a reply affidavit and there has been a lack of opportunity to file any evidence in response.

(b) A related company Harvest Yik Holdings Limited has advanced some funds to Harvestfield.

(c) Although the property is mortgage free it is reasonable to assume that when an associated company has advanced funds it does so on the basis of a document which grants an equitable security to the lender.

(d) There is an inference that the maturity of the Harvest Yik loan on 12

July 2012 led to the listing of the property for sale on 24 July 2012 and this notwithstanding Harvestfield wishes to examine development options for the property for which it currently has resource consent.

Discussion

[27] On a stay application the Court has to balance the interests of the parties, of the respondent who is entitled to the fruits of its judgment and of the appellant who

does not wish its appeal rights to be rendered nugatory. Harvestfield accepts that if appropriate undertakings (supported by a security provided to protect its position) then a stay or interim orders would be appropriate.

[28] Paugra is in liquidation, and any claim for compensation against it would be worthless. The Court has frequently provided the requirements of undertakings as to damages be given when a stay is granted allowing a caveat to remain in place pending an appeal. Often it will require any costs awarded to be paid into a trust account pending determination of the appeal. Invariably an appellant is required to prosecute the appeal with all due diligence, and to accept an early firm fixture date and to confirm such fixture forthwith.

[29] Usually in those cases an appellant has sufficient assets to meet any undertakings to damages. In this case it can be inferred that Paugra has no assets to meet any order for payment of costs or damages.

[30] In this case Mr Collecutt for Harvestfield submits it is logical that the IRD should provide an undertaking to meet the costs of complying with any order which may be made pursuant to an undertaking as to damages. Counsel submits that if its requirements for undertakings (including an undertaking from the Minister) had been provided then Harvestfield would have consented to the extension of the interim orders pending appeal, on the basis that the matter may be brought back to Court for review on five working days notice. It follows that absent any security being provided then counsel submits that the stay/interim orders should be refused.

[31] Mr Collecutt considers that s 146 may provide a right for recovery of losses but that without the provision of an undertaking there will be an issue as to the liability for those losses. Also because Paugra is assetless then any rights pursuant to s 146 would be valueless.

[32] This case is really about whether or not a valuable undertaking as to damages ought to be provided on behalf of Paugra.

[33] Although s 146 provides scope for a claim, there is some doubt about the extent of recovery available. What is sought in this case is the liability of an undertaking in relation to maintaining the caveat subsequent to its lodging.

[34] If the Court of Appeal rules that Paugra has a caveatable interest it too will decide what conditions should attach to any order that the caveat not lapse. It too might consider including a condition requiring an undertaking as to damages.

[35] Accordingly what is sought by the current applications is some form of interim protection until the appeal is determined.

[36] Therefore in the Court’s present considerations it needs to assess what

damage might in the interim be suffered if the appeal was to fail.

[37] Paugra has advanced its appeal seemingly as quickly as it has been able to. It says any delay has been caused by the unwillingness of Harvestfield to join a request to the Court of Appeal for an urgent fixture. Had a joint request for an urgent fixture been filed then consideration would likely have been given to that request.

[38] Paugra wishes to pursue its appeal without being placed in the position of a caveator required to give an undertaking. It follows that it is saying Harvestfield ought to bear any losses arising from the presence of the caveat meanwhile, even if it should lose the appeal.

[39] Therefore consideration needs to be given to what damage might be caused to

Harvestfield if Paugra fails in its appeal.

[40] On 3 October 2013 Mr J Tao swore a further affidavit in Shanghai addressing issues relating to development concerns. He deposes:

(a) When Harvestfield purchased the property in June 2007 it intended to develop the land [5].

(b) The purchase was partially funded with a loan from Harvest Yik, a company associated with his family which provided:

(i) the loan was for three years;

(ii) it was intended Harvest Yik would take security over the property;

(iii) the purchase was initially funded by a loan from Kiwi Bank;

(iv) Because of Kiwi Bank’s mortgage no mortgage was registered in favour of Harvest Yik.

(c) Because of the global financial crisis development plans were put on hold but in 2012 with property prices rising fresh consideration was given to development [14].

(d) The current resource consent will lapse on 28 November 2013 [15].

The resource consent is a key factor affecting the value of the property. He says if the right to create a large number of residential units contemplated by the resource consent is lost then the value of the property would drop significantly [16]. If the consent lapses there will be a delay to obtain a fresh consent and there is a risk that fewer development units will be permitted [17].

(e) He is yet to determine what will be required to be done, and how much it will cost to obtain and extension of the resource consent [18]. He is concerned to have been told that a consideration for renewal of the consent will concern what progress has been made under the consent already given [19]. Therefore Harvestfield wishes to physically progress its development of the property in the near future [20].

(f) That substantial funds would have to be spent on consultants, earthworks, road works, drainage, installation of services and council fees and legal costs – this even before any construction work

commences [22]. Therefore to develop the property Harvestfield will have to raise a substantial amount of money [23].

(g) Harvestfield does not want to recommence its development project until it knows that it is able to fund it to completion [26].

(h) His family is not prepared to provide substantial additional funding unless sure the project can be completed [27]. He believes the caveat effectively prevents further development [28].

(i) Paugra’s claim against Harvestfield represents approximately 60 per cent of the value of the property as per the original valuation [31]. He believes that in the current environment there is no possibility of Harvestfield raising what would, in substance, be second mortgage funding for an amount which would be above 60 per cent of the value of the property [34]. Although Paugra now agrees to additional funds being raised on the basis that security was provided for those and would have priority over the caveat, he does not believe this is a practical solution [35], [36]. He says Harvest Yik would have to provide consent if Harvestfield is to raise further funds elsewhere [37]; although Harvest Yik is associated with his family it is not a subsidiary of Harvestfield and he does not have the ability to control its decision [39]; that Harvest Yik will only agree to further funds being raised it if obtains a registered mortgage for the amount already advanced [40]; and Harvest Yik is not prepared to agree to Paugra retaining the funds it has already received and retaining priority over Harvest Yik in relation to the property [41].

(j) He does not believe Harvestfield would be able to raise sufficient funds from a new first tier funder to continue with the development even if a first priority mortgage was granted to the new funder [44]. He says he has made enquiries “as to current lending conditions for development funding”, and based on those does not believe a first tier funder would be prepared to fund the development if a $6,000,000

plus caveat to a third party was registered against the title even if the lender obtained a first mortgage which had priority over the caveat. Further, a caveat registered against the title provides risks that the caveator will refuse to consent to additional unbudgeted borrowings being secured against the title in priority to the caveat, or refuse to consent to the sale of some of the units at prices acceptable to the first mortgagee but which would adversely affect the caveator’s position [54].

(k) He says that if an undertaking as to damages supported by adequate securities was provided then Harvestfield will consent to the application for a stay and interim orders.

[41] Mr Collecutt submits that in the circumstances and because the application has been brought for the benefit of and is funded by the IRD it is appropriate that a guarantee or indemnity be provided by the Minister of Finance and says the availability of such is provided by 65ZD of the Public Finance Act 1989. Despite this the applicant has failed to follow the process provided and to make an application to the Minister. Mr Collecutt submits the present case is analogous to situations where the Court deals with freezing orders sought to protect the claimant’s position pending a substantive hearing. In respect of those, r 32.2(5) provides that an applicant must file a signed undertaking to comply with any order for payment of damages to compensate a respondent for any damage sustained in consequence of the freezing order.

[42] In this case, he says, the proceeding having been brought in the name of the company as opposed to the name of the liquidator, there is no prospect of an order being made against the liquidator.

[43] Mr Collecutt submits the Court should not approach the matter as it would otherwise do in cases where security for costs are claimed against liquidators for such applications occur before the evidence has been heard and the substantive issues have been dealt with by the Court. To the contrary, in stay applications the parties have already had their day in Court and the Court has made its substantive

decision. Noteworthy however is the willingness of the Court to order security in cases where creditors are funding the litigation on behalf of an insolvent company.

Considerations

[44] It is not uncommon for the Court to give consideration to the merits of the case being appealed. In this case the applicant considers its prospects of appeal to be strong. To the contrary Mr Collecutt submits in this case the substantive merits of the appeal are not finely balanced. He submits there are material difficulties with the applicant’s appeal, in particular because a caveatable interest cannot exist in relation to a claim for the balance of a purchase price [s 67 Property Law Act 2007].

[45] Although Paugra has been prepared to allow Harvestfield to raise new funding on the basis that the new funding was granted preferential security over the title Paugra is however not prepared to allow Harvest Yik to register a security over the title to the property in relation to the advances it has made – even though Paugra apparently accepts that a substantial portion of the funds it has received from Harvestfield were funded from advances made by Harvest Yik.

[46] The present application concerns an application for stay/interim orders to cover the period from the issue of Judge Bell’s judgment on 25 June 2013 until a decision issues on Paugra’s appeal.

[47] Little purpose is served by giving consideration to the merits of the parties’

respective cases for appeal. Any outcome on those is far from clear.

[48] Nor is any issue raised to suggest that Paugra is not pursuing its appeal diligently. To the contrary while Paugra has encouraged Harvestfield to consent to a request to the Court of Appeal for an urgent hearing, Harvestfield has not agreed to this.

[49] The property was purchased for development but there has been no development in the six years that has elapsed since purchase. The property was initially purchased for resale and not development. It is unclear when the resource

consent was obtained although likely this was in November 2010 for a three yearly review of that consent is due on 23 November 2013.

[50] As earlier noted this case is really about Harvestfield’s requirement of an indemnity or guarantee to be provided on behalf of the IRD, the only creditor of Paugra.

[51] Harvestfield’s counsel has addressed in length the appropriateness of the giving of such a guarantee; of the regularity of the Court practice in requiring such; and of analogous situations where applicants are required to provide an appropriate undertaking to pay damages.

[52] Addressing the issue of potential losses it is claimed on behalf of Harvestfield that Paugra’s caveat will effectively prevent funding that is now required in order to progress the development.

[53] Whilst the Court may take as read a number of Harvestfield’s claims in that respect what appears to be lacking is any evidence at all to show that anything at all has been done for the purpose of redevelopment.

[54] It can be inferred from Mr Tao’s evidence that since the property market has improved consideration has now been given to development of the property. However the improvement in property values is not something which has suddenly happened in 2013 or indeed in 2012. And, there is no evidence at all about anything having been done for the purpose of property development. Mr Collecutt says that in the present circumstances the development issues are obvious regardless.

[55] However, claims of extrinsic consequences need to be balanced in overview by the particular circumstances of this case and because issues involving securities or indemnities are best left for a long term perspective in the outcome of the appeal. Meanwhile, any costs incurred in relation to the appeal are likely to be minimal in the whole frame of matters.

[56] The issue of funding provided by Harvest Yik is significant to the argument of the position on behalf of Harvestfield but not much is known about Harvest Yik. Mr Tao says it is a corporate entity in the control of a family member. But, no corporation details have been provided in evidence. It is not known who the director is or who the shareholders are or even where the company is registered. Also it is not explained by what authority Mr Tao speaks on its behalf. The Court’s feeling is that it is an element of Mr Tao’s family created for the purpose of those very same arrangements which have drawn considerable criticism from Judge Bell. The learned Judge queried why the sale and purchase arrangement was shrouded with the complexities it had. Then he concluded:

The answer is revealing. It is for tax advantages. Paugra had already claimed GST on the purchase... by installing a fresh purchaser, Jun Jie Tao could arrange for a fresh claim for a GST refund, and this time reflecting the higher price. It made sense for Paugra to resell at a higher price to Harvestfield so as to reduce the amount of any gain on resale on which Harvestfield would be taxed. That strategy would work if Paugra was left as an empty shell, unable to meet its tax liabilities. [95]

[57] This case contains suggestions of fraud, endorsed indeed by the view of Associate Judge Bell. The dimensions of the case involve considerations of public importance. At the centre is the plaintiff company the impecuniosity of which has been connected to the actions of Harvestfield and Mr Tao. In those factors are considerations that could discourage a Court from requiring an indemnity in the face of claims that without such the respondent must bear its own costs even if on appeal it should win. In this case the immediately foreseeable costs will be modest until such time as the position is reviewed and a long term perspective can be taken, if needed, concerning future costs and when prospective losses can be considered in the context of resolving matters in connection with Paugra’s newly filed proceeding against Harvestfield and Mr Tao and including allegations of breaches of director’s duties, conspiracy by unlawful needs, and fraud giving rise to a institutional constructive trust.

[58] Viewed in isolation Harvestfield’s concerns about development issues and resource consent concerns being affected by a caveat, will be readily conceded. But, this case presents something of an extreme example of impelling factors for alternative consideration.

[59] It wasn’t until Mr Tao’s affidavit of 12 August 2013 that any evidence at all emerged regarding Harvest Yik’s connection as a funder of the purchase of the property four years earlier.

[60] The resource consent has only recently been raised as an issue for further development notwithstanding its terms would have been known throughout to Harvestfield and Mr Tao. They have in recent times promoted development as a real possibility for the property but it is only in recent times this has happened. It is not clear what evidence is available to support the claim that the possibility of development or enquiries regarding its reality has been pursued. There is no evidence of this.

[61] The position of Harvest Yik notwithstanding, and about which some mystery remains, this case does not involve issues affecting innocent third parties.

[62] Although in the long term there may be some issue about the utility of s 146 to provide Harvestfield with an avenue of recourse should Paugra’s appeal fail, arguably it is still available to assist in connection with the short time period that the stay application is concerned with.

[63] Whether s 65ZD enables a Minister of Finance to provide an undertaking to indemnify Harvestfield against losses it should prove it has suffered due to the delays caused by Paugra’s caveat is a matter that needs to be considered in the context of the proceedings which are to follow and ought not to be administered by a ruling of circumstances affecting an appeal, the early hearing of which may have been affected by Harvestfield’s own reluctance to enjoin a request for an early hearing.

[64] If there is a current trend towards requiring a liquidator on behalf of a creditor effectively running the case, to bear some exposure for costs in that outcome, then in the peculiar circumstances of this case, but particularly because of the short nature of that exposure, this case may provide a sufficient contrast.

Judgment

[65] Execution of the judgment of the Court made on 5 June 2013 by His Honour Associate Judge Bell in this proceeding shall be stayed pending determination of the appeal against the judgment.

_{[66] Costs are awarded to the applicant on a 2B basis.}

Associate Judge Christiansen